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First Guaranty Bancshares, Inc. - Quarter Report: 2010 September (Form 10-Q)

t69255_10q.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 September 30, 2010
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 o

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 o No o

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 o    Accelerated filer o    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 o   No x

As of  November 10, 2010, the registrant had 5,559,644 shares of $1 par value common stock which were issued and outstanding.
 

 
1

 


Table of Contents
 
Part I.
Financial Information
Page
Item 1.
Financial Statements (unaudited)
3
 
Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009
3
 
Consolidated Statements of Income for the three and nine months ended September 30, 2010 and 2009
4
 
Consolidated Statements of Shareholders' Equity for the nine months ended September 20, 2010 and 2009
5
 
Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009
6
 
Notes to Unaudited Consolidated Financial Statements
7
     
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
18
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
28
Item 4T.
Controls and Procedures
30
Part II.
Other Information
 
Item 1.
Legal Proceedings
31
Item 1A.
Risk Factors
31
Item 2.
Exhibits
31
Signatures
 

 
2

 
PART I.   FINANCIAL INFORMATION
Item 1.   Consolidated Financial
 
FIRST GUARANTY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
 
   
September 30,
 
December 31,
 
   
2010
   
2009
 
Assets
         (unaudited)
 
 
Cash and cash equivalents:
           
  Cash and due from banks
  $ 34,265     $ 33,425  
  Interest-earning demand deposits with banks
    43       14  
  Federal funds sold
    569       13,279  
    Cash and cash equivalents
    34,877       46,718  
                 
Interest-earning time deposits with banks
    -       -  
                 
Investment securities:
               
 Available for sale, at fair value
    386,523       249,480  
Held to maturity, at cost (estimated fair value
 
   of $12,462)
    -       12,349  
  Investment securities
    386,523       261,829  
                 
Federal Home Loan Bank stock, at cost
    2,293       2,547  
Loans held for sale
    40       -  
                 
Loans, net of unearned income
    607,516       589,902  
Less: allowance for loan losses
    7,574       7,919  
  Net loans
    599,942       581,983  
                 
Premises and equipment, net
    16,185       16,704  
Goodwill
    1,999       1,999  
Intangible assets, net
    1,784       1,893  
Other real estate, net
    3,531       658  
Accrued interest receivable
    6,391       5,807  
Other assets
    6,927       10,709  
  Total Assets
  $ 1,060,492     $ 930,847  
                 
Liabilities and Stockholders' Equity
         
Deposits:
               
  Noninterest-bearing demand
  $ 126,447     $ 131,818  
  Interest-bearing demand
    169,006       188,252  
  Savings
    44,831       40,272  
  Time
    585,653       439,404  
    Total deposits
    925,937       799,746  
                 
Short-term borrowings
    12,409       11,929  
Accrued interest payable
    3,116       2,519  
Long-term borrowings
    12,508       20,000  
Other liabilities
    2,876       1,718  
  Total Liabilities
    956,846       835,912  
                 
Stockholders' Equity
               
Preferred stock:
               
Series A - $1,000 par value - authorized 5,000 shares; issued
 
   and outstanding 2,069.9 shares
    19,801       19,630  
Series B - $1,000 par value - authorized 5,000 shares; issued
 
   and outstanding 103 shares
    1,123       1,140  
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
    45,229       40,069  
Accumulated other comprehensive income
    5,474       2,077  
  Total Stockholders' Equity
    103,646       94,935  
    Total Liabilities and Stockholders' Equity
  $ 1,060,492     $ 930,847  
                 
See Notes to Consolidated Financial Statements.
 
 
 
3

 
 
                 
FIRST GUARANTY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
(dollars in thousands, except per share data)
 
                         
   
Nine Months
   
Three Months
 
   
Ended September 30,
   
Ended September 30,
 
   
2010
      2009*       2010       2009*  
Interest Income:
                             
  Loans (including fees)
  $ 27,209     $ 26,605     $ 9,221     $ 9,075  
  Loans held for sale
    5       5       1       2  
  Deposits with other banks
    31       372       12       63  
  Securities (including FHLB stock)
    10,723       7,581       3,779       3,039  
  Federal funds sold
    8       33       3       6  
    Total Interest Income
    37,976       34,596       13,016       12,185  
                                 
Interest Expense:
                               
  Demand deposits
    639       1,022       209       268  
  Savings deposits
    32       89       11       12  
  Time deposits
    8,760       10,381       3,231       3,286  
  Borrowings
    97       228       27       68  
    Total Interest Expense
    9,528       11,720       3,478       3,634  
                                 
Net Interest Income
    28,448       22,876       9,538       8,551  
Provision for loan losses
    2,506       2,091       1,204       742  
Net Interest Income after Provision for Loan Losses
    25,942       20,785       8,334       7,809  
                                 
Noninterest Income:
                               
  Service charges, commissions and fees
    3,070       3,093       1,072       1,073  
  Net gains on sale of securities
    2,367       43       1,001       33  
  Loss on securities impairment
    0       (242 )     0       (242 )
  Net gains on sale of loans
    173       345       22       74  
  Other
    1,171       852       465       331  
    Total Noninterest Income
    6,781       4,091       2,560       1,269  
                                 
Noninterest Expense:
                               
  Salaries and employee benefits
    8,789       8,184       2,945       2,691  
  Occupancy and equipment expense
    2,323       2,116       815       705  
  Net cost from other real estate & repossessions
    302       266       138       86  
  Regulatory assessment
    1,119       1,720       374       355  
  Other
    6,624       6,014       2,183       2,130  
    Total Noninterest Expense
    19,157       18,300       6,455       5,967  
                                 
Income Before Income Taxes
    13,566       6,576       4,439       3,111  
Provision for income taxes
    4,737       2,282       1,572       1,083  
Net Income
    8,829       4,294       2,867       2,028  
Preferred stock dividends
    (1,000 )     (228 )     (334 )     (228 )
Income Available to Common Shareholders
  $ 7,829     $ 4,066     $ 2,533     $ 1,800  
                                 
Per Common Share:
                               
  Earnings
  $ 1.41     $ 0.73     $ 0.46     $ 0.32  
  Cash dividends paid
  $ 0.48     $ 0.48     $ 0.16     $ 0.16  
                                 
Average Common Shares Outstanding
    5,559,644       5,559,644       5,559,644       5,559,644  
                                 
*Restated
                               
See Notes to Consolidated Financial Statements
         
 
 
4

 
FIRST GUARANTY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (unaudited)
(dollars in thousands, except per share data)
               
 
   
Series A
   
Series B
                     
Accumulated
       
   
Preferred
   
Preferred
   
Common
               
Other
       
   
Stock
   
Stock
   
Stock
         
Retained
   
Comprehensive
       
   
$1,000 Par
   
$1,000 Par
   
$1 Par
   
Surplus
   
Earnings
   
Income / (Loss)
   
Total
 
                                           
Balance December 31, 2008 as previously reported
  $ -     $ -     $ 5,560     $ 26,459     $ 37,769     $ (3,158 )   $ 66,630  
 Correction of an error
    -       -       -       -       (1,143 )     -       (1,143 )
Balance December 31, 2008 as restated
    -       -       5,560       26,459       36,626       (3,158 )     65,487  
Preferred Stock Issued
    19,551       1,148                                       20,699  
Net income
    -       -       -       -       4,294       -       4,294  
Change in unrealized loss
                                                       
  on available for sale securities,
                                                       
  net of reclassification adjustments and taxes
    -       -       -       -       -       5,718       5,718  
Total income
                                                    10,012  
Cash dividends on common stock ($0.48 per share)
                    -       -       (2,669 )     -       (2,669 )
Preferred stock dividend, amortization and accretion
    (22 )     3                       (228 )             (247 )
Balance September 30, 2009 as restated
  $ 19,529     $ 1,151     $ 5,560     $ 26,459     $ 38,023     $ 2,560     $ 93,282  
                                                         
                                                         
Balance December 31, 2009
  $ 19,630     $ 1,140     $ 5,560     $ 26,459     $ 40,069     $ 2,077     $ 94,935  
Net income
    -       -       -       -       8,829       -       8,829  
Change in unrealized gain
                                                       
  on available for sale securities,
                                                       
  net of reclassification adjustments and taxes
    -       -       -       -       -       3,397       3,397  
Total income
                                                    12,226  
Cash dividends on common stock ($0.48 per share)
    -       -       -       -       (2,669 )     -       (2,669 )
Preferred stock dividend, amortization and accretion
    171       (17 )     -       -       (1,000 )     -       (846 )
Balance September 30, 2010
  $ 19,801     $ 1,123     $ 5,560     $ 26,459     $ 45,229     $ 5,474     $ 103,646  
                                                         
                                                         
 
See Notes to Consolidated Financial Statements
                     
 
 
5

 
 
FIRST GUARANTY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands)
 
             
   
Nine Months Ended September 30,
 
   
2010
      2009*  
Cash Flows From Operating Activities
             
Net income
  $ 8,829     $ 4,294  
Adjustments to reconcile net income to net cash
               
  provided by operating activities:
               
    Provision for loan losses
    2,506       2,091  
    Depreciation and amortization
    1,086       1,070  
    Amortization of discount on investments
    (35 )     (631 )
    Gain on call or sale of securities
    (2,367 )     (43 )
    Gain on sale of assets
    (220 )     (313 )
    Other than temporary impairment charge on securities
    -       243  
    OREO write-downs and loss on disposition
    177       174  
    FHLB stock dividends
    (4 )     (4 )
    Net increase in loans held for sale
    (40 )     -  
    Change in other assets and liabilities, net
    3,683       (1,613 )
Net Cash Provided By Operating Activities
    13,615       5,268  
                 
Cash Flows From Investing Activities
               
Proceeds from sales, maturities and calls of HTM securities
    12,726       22,097  
Proceeds from sales, maturities and calls of AFS securities
    721,087       1,213,555  
Funds invested in HTM securities
    -       -  
Funds invested in AFS securities
    (851,856 )     (1,336,004 )
Proceeds from sale of Federal Home Loan Bank stock
    1,766       -  
Funds invested in Federal Home Loan Bank stock
    (1,508 )     -  
Funds invested in time deposits with banks
    -       (13,613 )
Proceeds from maturities of time deposits with banks
    -       21,971  
Net (increase) decrease in loans
    (23,730 )     8,465  
Purchases of premises and equipment
    (1,202 )     (905 )
Proceeds from sales of premises and equipment
    1,099       24  
Proceeds from sales of other real estate owned
    216       328  
Net Cash Used In Investing Activities
    (141,402 )     (84,082 )
                 
Cash Flows From Financing Activities
               
Net increase in deposits
    126,191       40,273  
Net increase in federal funds purchased and short-term borrowings
    480       1,728  
Proceeds from long-term borrowings
    -       -  
Repayment of long-term borrowings
    (7,492 )     (7,510 )
Proceeds from issuance of preferred stock
    -       20,699  
Dividends paid
    (3,233 )     (1,780 )
Net Cash Provided By Financing Activities
    115,946       53,410  
                 
Net Decrease In Cash and Cash Equivalents
    (11,841 )     (25,404 )
Cash and Cash Equivalents at the Beginning of the Period
    46,718       78,017  
Cash and Cash Equivalents at the End of the Period
  $ 34,877     $ 52,613  
                 
Noncash Activities:
               
  Loans transferred to foreclosed assets
  $ 3,265     $ 1,074  
                 
Cash Paid During The Period:
               
  Interest on deposits and borrowed funds
  $ 8,931     $ 10,964  
  Income taxes
  $ 5,400     $ 3,100  
                 
*Restated
               
See Notes to Consolidated Financial Statements
               
 
 
6

 
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, 2009.

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 and nine-month periods ended September 30, 2010 and 2009 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. The presentation does not take into effect the impact, if any, of the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act.

Note 2.  Correction of an Error

During 2009, the Company discovered errors related to the calculation of interest expense and prepaid assets for the years ending 2008, 2007 and 2006.  The errors were reported and corrected in the financial statements for the year ended 2009.Net income previously reported for the three month period ended September 30, 2009 totaled $1.9 million compared to restated net income which totaled $2.0 million, a net increase of $0.1 million.  Net Income for the nine month period ending September 30, 2009 totaled $4.328 million compared to a restated net income which totaled $4.294 million, a net decrease of $34,000.  Earnings per common share were previously reported as $0.31 for the three months ending September 30, 2009 compared to a restated earnings per common share of $0.32.  For the nine months ending September 30, 2009, earnings per common share were previously reported as $0.74 compared to a restated earnings per common share of $0.73.

Note 3. Fair Value

Effective January 1, 2008, the Company adopted the provisions of FASB ASC 820-10-65, Fair Value Measurements and Disclosures (SFAS No. 157), for financial assets and liabilities. FASB ASC 820-10-65 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. FASB ASC 820-10-65 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.

 
7

 
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 $26.0 million at September 30, 2010, net of the allowance for loan losses of $2.7 million. The fair value of impaired loans is measured by either 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).

Other Real Estate Owned (OREO). As of September 30, 2010, the Company has $3.5 million in OREO and foreclosed property, which includes all real estate, other than bank premises used in bank operations, owned or controlled by the Company, including real estate acquired in settlement of loans. Properties are recorded at the balance of the loan or at estimated fair value less estimated selling costs, whichever is less, at the date acquired. Fair values of OREO at September 30, 2010 are determined by sales agreement or appraisal, and costs to sell are estimated based on the terms and conditions of the sales agreement. Inputs include appraisal values on the properties or recent sales activity for similar assets in the property’s market, and thus OREO measured at fair value would be classified within Level 2 of the hierarchy. The amount of OREO measured at fair value on a non-recurring basis as of September 30, 2010 was $1.8 million.  In accordance with the OREO treatment described, the Company included property write-downs of $102,000 and $56,000 for the three months ended September 30, 2010 and 2009, respectively.  For the nine months ended September 30, 2010, the company had write-downs of $184,000 compared to $75,000 for the nine months ended September 30, 2009.

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 September 30, 2010, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 
       Fair Value Measurements at
          September 30, 2010, Using
     
Quoted
   
     
Prices In
   
     
Active
   
     
Markets
Significant
 
 
Assets/Liabilities
 
For
Other
Significant
 
Measured at Fair
 
Identical
Observable
Unobservable
 
Value
 
Assets
Inputs
Inputs
 
September 30, 2010
 
(Level 1)
(Level 2)
(Level 3)
           
           
Securities available for sale            
 $                  386,523     
 
 $           62,140    
 $      315,994 
 $         8,389    
 
The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values.  While management believes the methodologies used are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value.  

 
8

 

 
Gains and losses (realized and unrealized) included in earnings (or changes in net assets) for the first nine months of 2010 on a recurring basis are reported in noninterest income or other comprehensive income as follows:
 
         
Other
 
   
Noninterest
   
Comprehensive
 
   
Income
   
Income
 
             
             
Total gains included in earnings
    2,367        
  (or changes in net assets)
             
               
Increase in unrealized gains relating to assets
            5,021  
  still held at September 30, 2010
               
                 
 
The gain above included $0.4 million in gains associated with the sale of held to maturity securities during the second quarter of 2010.  The Company had no securities categorized as held to maturity at September 30, 2010.

The following table summarizes financial assets and financial liabilities measured at fair value on a non-recurring basis as of September 30, 2010, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

     
Fair Value Measurements at
 
     
September 30, 2010, Using
 
     
Quoted
           
     
Prices In
           
     
Active
           
     
Markets
 
Significant
       
 
Assets/Liabilities
 
For
 
Other
   
Significant
 
 
Measured at Fair
 
Identical
 
Observable
   
Unobservable
 
 
Value
 
Assets
 
Inputs
   
Inputs
 
 
September 30, 2010
 
(Level 1)
 
(Level 2)
   
(Level 3)
 
                   
                   
Impaired Loans      
 
      $ 1,461     $ 24,598  
Other Real Estate Owned      
 
      $ 1,835          
                       
 
ASC 825-10 provides the Company with an option to report selected financial assets and liabilities at fair value. The fair value option established by this statement permits the Company to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each reporting date subsequent to implementation.

The Company has chosen not to elect the fair value option for any items that are not already required to be measured at fair value in accordance with accounting principles generally accepted in the United States, and as such has not included any gains or losses in earnings for the nine months ended September 30, 2010.

 
9

 
 
Note 4. Securities

A summary comparison of securities by type at September 30, 2010 and December 31, 2009 is shown below.

                                                 
   
September 30, 2010
   
December 31, 2009
 
         
Gross
   
Gross
               
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
   
Cost
   
Gains
   
Losses
   
Value
 
   
(in thousands)
   
(in thousands)
 
Available for sale:
                                               
U.S. Government Agencies
  $ 240,619     $ 1,462     $ (38 )     242,043     $ 140,843     $ 382     $ (1,562 )   $ 139,663  
Mortgage-backed obligations
    -       -       -       -       1,472       104       -       1,576  
Asset-backed securities
    -       -       -       -       -       8       -       8  
Corporate debt securities
    122,994       7,169       (323 )     129,840       87,238       5,627       (776 )     92,089  
Mutual funds or other equity securities
    5,170       146       (108 )     5,208       6,556       83       (495 )     6,144  
Municipal bonds
    9,388       44               9,432       10,000       -       -       10,000  
 Total available for sale securities
  $ 378,171     $ 8,821     $ (469 )   $ 386,523     $ 246,109     $ 6,204     $ (2,833 )   $ 249,480  
                                                                 
                                                                 
Held to maturity:
                                                               
U.S. Government Agencies
    -       -       -       -     $ 10,721     $ 52       -     $ 10,773  
Mortgage-backed obligations
    -       -       -       -       1,628       61       -       1,689  
  Total held to maturity securities
  $ 0     $ 0     $ 0     $ 0     $ 12,349     $ 113     $ 0     $ 12,462  
                                                                 

The scheduled maturities of securities at September 30, 2010, by contractual maturity, are shown below.  Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
   
September 30, 2010
 
   
Amortized
   
Fair
 
   
Cost
   
Value
 
   
(in thousands)
 
Available For Sale:
           
Due in one year or less
  $ 12,602     $ 12,926  
Due after one year through five years
    67,358       71,980  
Due after five years through ten years
    198,187       209,259  
Over ten years
    100,024       92,358  
  Total available for sale securities
  $ 378,171     $ 386,523  
                 
 
At September 30, 2010 approximately $213.8 million in securities were pledged to secure public fund deposits and approximately $15.5 million were pledged to secure other deposit accounts required or permitted by law.

 
10

 
 
The following is a summary of the fair value of securities with gross unrealized losses and an aging of those gross unrealized losses at September 30, 2010.
 
   
Less Than 12 Months
   
12 Months or More
   
Total
 
         
Gross
         
Gross
         
Gross
 
          Unrealized
 
 
   
Unrealized
         
Unrealized
 
   
Fair Value
   
Losses
   
Fair Value
   
Losses
   
Fair Value
   
Losses
 
   
(in thousands)
 
Available for sale:
                                   
U.S. Treasury and U.S.
                                   
 Government agencies
  $ 28,661     $ 38       -       -     $ 28,661     $ 38  
Preferred securities
    -       -       1,561       108       1,561       108  
Mortgage-backed obligations
    -       -       -       -       -       -  
Asset-backed securities
    -       -       -       -       -       -  
Corporate debt securities
    4,228       66       1,593       257       5,821       323  
 
Mutual funds or other equity securites
         
 
                      -       -  
  Total available for sale securities
  $ 32,889     $ 104     $ 3,154     $ 365     $ 36,043     $ 469  
                                                 

At September 30, 2010, 27 debt securities and 12 equity securities have unrealized losses of $0.5 million or 1.3% of amortized cost. The gross unrealized losses in the portfolio resulted from increases in market interest rates, illiquidity, and declines in net income and other financial indicators caused by the national economy in the market and not from deterioration in the creditworthiness of the issuer. The Company believes that it will collect all amounts contractually due and has the intent and the ability to hold these securities until the fair value is at least equal to the carrying value. The Company had 7 U.S. Government agency securities and 16 corporate debt securities that had gross unrealized losses for less than 12 months. The Company had 4 corporate debt securities and 12 equity securities which have been in a continuous unrealized loss position for 12 months or longer. All securities with unrealized losses, greater than 12 months, were classified as available for sale. All securities with unrealized losses, less than 12 months, were classified as available for sale. These securities with unrealized losses resulted from increases in interest rates and illiquidity in the market and not from deterioration in the creditworthiness of the issuer.

Irrespective of the classification, accounting and reporting treatment as AFS or HTM securities, if any decline in the market value of a security is deemed to be other than temporary, then the security’s carrying value shall be written down to fair value and the amount of the write down reflected in earnings. Management evaluates securities for other-than-temporary impairment at least quarterly and more frequently when economic or market conditions warrant such evaluation. Consideration is given to (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, (iii) the recovery of contractual principal and interest and (iv) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, Management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred and industry reports.

The amount of investment securities issued by government agencies, mortgage-backed and asset-backed securities with unrealized losses and the amount of unrealized losses on those investment securities are primarily the result of market interest rates and illiquidity in the market. The company has the ability and intent to hold these securities until recovery, which may be until maturity.

The corporate debt securities consist primarily of corporate bonds issued by financial institutions, insurance and real estate companies. Also included in corporate debt securities are trust preferred capital securities, many issued by national and global financial services firms. The market values of corporate bonds have declined over the last several months due to larger credit spreads on financial sector debt as well as the real estate markets. The Company believes that the each of the issuers will be able to fulfill the obligations of these securities. The Company has the ability and intent to hold these securities until they recover, which could be at their maturity dates.

Other than the corporate debt securities, the Company attributes the unrealized losses mainly to increases in market interest rates over the yield available at the time the underlying securities were purchased and does not expect to incur a loss unless the securities are sold prior to maturity.

 
11

 

Overall market declines, particularly in the banking and financial institutions, as well as the real estate market, are a result of significant stress throughout the regional and national economy. Securities with unrealized losses, in which the Company has not already taken an OTTI charge, are currently performing according to their contractual terms. Management has the intent and ability to hold these securities for the foreseeable future. The fair value is expected to recover as the securities approach their maturity or repricing date or if market yields for such investments decline. As a result of uncertainties in the market place affecting companies in the financial services industry, it is at least reasonably possible that a change in the estimate will occur in the near term.

Securities that are other-than-temporarily impaired are evaluated at least quarterly. The evaluation includes performance indications of the underlying assets in the security, loan to collateral value, third-party guarantees, current levels of subordination, geographic concentrations, industry analysts reports, sector credit ratings, volatility of the securities fair value, liquidity, leverage and capital ratios, the company’s ability to continue as a going concern. If the company is in bankruptcy, the status and potential outcome is also considered.
 
 
The Company believes that the securities with unrealized losses reflect impairment that is temporary and that there are currently no securities with other-than-temporary impairment.

At September 30, 2010, the Company’s exposure to four investment security issuers exceeded 10% of stockholders’ equity as follows:

   
Amortized
   
Fair
 
   
Cost
   
Value
 
   
(in thousands)
       
             
Federal Home Loan Bank (FHLB)
  $ 121,617     $ 122,158  
Federal Home Loan Mortgage Corporation (Freddie Mac)
    11,998       12,161  
Federal National Mortgage Association (Fannie Mae)
    32,000       32,094  
Federal Farm Credit Bank (FFCB)
    75,004       75,630  
 Total
  $ 240,619     $ 242,043  
                 
 
12

 


Note 5. Loans and Allowance for Loan Losses

Loans, net of unearned income, totaled $607.5 million at September 30, 2010 and $589.9 million at December 31, 2009. At September 30, 2010, $40,000 in loans were held for sale and no loans were held for sale at December 31, 2009.  The loan portfolio consists solely of domestic loans.
 

Total loans at September 30, 2010 and December 31, 2009 were as follows:

   
September 30,
   
December 31,
 
   
2010
   
2009
 
         
As % of
         
As % of
 
   
Balance
   
Category
   
Balance
   
Category
 
   
(dollars in thousands)
 
Real estate
                       
   Construction & land development
  $ 70,795       11.6 %   $ 78,686       13.3 %
   Farmland
    12,420       2.0 %     11,352       1.9 %
   1-4 Family
    75,370       12.4 %     77,470       13.1 %
   Multifamily
    15,499       2.6 %     8,927       1.5 %
   Non-farm non-residential
    293,030       48.2 %     300,673       51.0 %
      Total real estate
    467,114       76.8 %     477,108       80.8 %
                                 
Agricultural
    24,034       4.0 %     14,017       2.4 %
Commercial and industrial
    93,442       15.3 %     82,348       13.9 %
Consumer and other
    23,720       3.9 %     17,226       2.9 %
        Total loans before unearned income
    608,310       100.0 %     590,699       100.0 %
Less: unearned income
    (794 )             (797 )        
        Total loans after unearned income
  $ 607,516             $ 589,902          

 
The following table sets forth the maturity and repricing of the loan portfolio and the allocation of fixed and floating rate loans:
 
                   
   
September 30, 2010
 
   
Fixed
   
Floating
   
Total
 
                   
                   
One year or less
  $ 84,516     $ 169,158     $ 253,674  
Over one to five years
    163,669       122,941       286,610  
Over five to fifteen years
    2,737       27,520       30,257  
Over fifteen years
    10,758       4,073       14,831  
  Subtotal
    261,680       323,692       585,372  
                         
Non-Accrual Loans
                    22,144  
                         
    $ 261,680     $ 323,692     $ 607,516  
                         
Percent of Loan Portfolio Fixed Loans
    44.70 %                
Percent of Loan Portfolio Floating Loans
    55.30 %                

 
           The majority of floating rate loans have interest rate floors.  As of September 30th, 2010, $279.6 million of these loans were at the floor rate.  Nonaccrual loans have been excluded from the calculation.

 
13

 


The allowance for loan losses is reviewed by Management on a monthly basis and additions are recorded in order to maintain the allowance at an adequate level.  In assessing the adequacy of the allowance, Management considers a variety of 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 $7.6 million or 1.25% of total loans at September 30, 2010 and $7.9 million or 1.34% of total loans at December 31, 2009.  Changes in the allowance for loan losses for the nine months ended September 30, 2010 and the year ended December 31, 2009 are as follows:

             
   
September 30,
   
December 31,
 
   
2010
   
2009
 
             
             
Balance beginning of period
  $ 7,919     $ 6,482  
Provision charged to expense
    2,506       4,155  
Loans charged-off
    (3,086 )     (2,879 )
Recoveries
    235       161  
  Allowance for loan losses
  $ 7,574     $ 7,919  
 
           The following table sets forth, for the periods indicated, the allowance for loan losses, amounts charged-off and recoveries of loans previously charged-off:
 
   
Nine Months Ended
 
   
September 30,
 
   
2010
   
2009
 
             
             
Balance at beginning of period
  $ 7,919     $ 6,482  
                 
Charge-offs:
               
   Real estate loans:
               
      Construction and land development
    (5 )     (273 )
      Farmland
    -       -  
      One- to four- family residential
    (1,062 )     (364 )
      Multifamily
    -       -  
      Non-farm non-residential
    (138 )     (547 )
   Commercial and industrial loans
    (1,525 )     (207 )
   Consumer and other
    (356 )     (421 )
      Total charge-offs
    (3,086 )     (1,812 )
                 
Recoveries:
               
   Real estate loans:
               
      Construction and land development
    1       1  
      Farmland
    -       1  
      One- to four- family residential
    10       14  
      Multifamily
    -       -  
      Non-farm non-residential
    1       -  
   Commercial and industrial loans
    114       18  
   Consumer and other
    109       100  
      Total recoveries
    235       134  
                 
Net charge-offs
    (2,851 )     (1,678 )
Provision for loan losses
    2,506       2,091  
                 
Balance at end of period
  $ 7,574     $ 6,895  
 

 
14

 

Note 6. Goodwill and Other Intangible Assets

The Company accounts for goodwill and intangible assets in accordance with ASC 350, Intangibles – Goodwill and Other (ASC 350).  Under ASC 350, 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 ASC 350. The Company’s goodwill is tested for impairment on an annual basis, or more often if events or circumstances indicate that there may be impairment. Adverse changes in the economic environment, declining operations, or other factors could result in a decline in the implied fair value of goodwill. If the implied fair value is less than the carrying amount, a loss would be recognized in other non-interest expense to reduce the carrying amount to implied fair value of goodwill. A goodwill impairment test includes two steps. Step one, used to identify potential impairment, compares the estimated fair value of a reporting unit with its carrying amount, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its estimated fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. Step two of the goodwill impairment test compares the implied estimated fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of goodwill for that reporting unit exceeds the implied fair value of that unit’s goodwill, an impairment loss is recognized in an amount equal to that excess. Other intangible assets continue to be amortized over their useful lives. Goodwill was $2.0 million at September 30, 2010 and December 31, 2009.

Note 7. Borrowings

At September 30, 2010, short-term borrowings totaled $12.4 million, consisting of $4.4 million in repurchase agreements and $8.0 million in federal funds purchased.

Long term borrowings decreased during the first nine months of 2010 and totaled $12.5 million compared to $20.0 million at December 31, 2009. At September 30, 2010, long-term debt consisted of two advances from the Federal Home Loan Bank. On November 20, 2009, the Company obtained an original $10.0 million amortizing advance at a rate of 0.861% with maturity in December 1, 2010. The Company makes monthly principal and interest payments. On December 18, 2009, the Company obtained a $10.0 million interest only advance with a rate of 0.480%. The Company makes monthly interest payments with the balloon note due on December 20, 2010.

Note 8.  Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” ASU 2010-06 amends Topic 820 by requiring more robust disclosures about (i) the different classes of assets and liabilities measured at fair value, (ii) the valuation techniques and inputs used, (iii) the activity in Level 3 fair value measurements, and (iv) the transfers between Levels 1, 2, and 3. Among other things, ASU 2010-06 requires separate disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements as opposed to presenting such activity on a net basis. The new disclosures required by ASU 2010-06 are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about the roll forward of activity in Level 3 fair value measurements which are effective for interim and annual periods beginning after December 15, 2010. The provisions of ASU 2010-06 did not have a material impact on the Company’s financial position, results of operations or liquidity, but it will require expansion of the Company’s future disclosures about fair value measurements.

In December 2009, the FASB issued ASU 2009-16, “Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets.” ASU 2009-16 amends Topic 860 and is intended to improve financial reporting by eliminating the exceptions for qualifying special-purpose entities from the consolidation guidance and the exception that permitted sale accounting for certain mortgage securitizations when a transferor has not surrendered control over the transferred financial assets. In addition, ASU 2009-16 requires enhanced disclosures about the risks to which a transferor continues to be exposed because of its continuing involvement in transferred financial assets. The provisions of ASU 2009-16 were effective for interim and annual reporting periods beginning after November 15, 2009. The adoption of ASU 2009-16 did not have a material impact on the Company’s financial position, results of operations or liquidity.

ASU - Accounting Standards Update No. 2010-20, Receivables (Topic 310): Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The objective of this ASU is for an entity to provide disclosures that facilitate financial statement users’ evaluation of the following:
 
●    
The nature of credit risk inherent in the entity’s portfolio of financing receivables;
●    
How that risk is analyzed and assessed in arriving at the allowance for credit losses; and
●    
The changes and reasons for those changes in the allowance for credit losses.

 
15

 

To achieve these objectives, an entity should provide disclosures on a disaggregated basis on two defined levels: (1) portfolio segment; and (2) class of financing receivable. The ASU makes changes to existing disclosure requirements and includes additional disclosure requirements about financing receivables, including:

●    
Credit quality indicators of financing receivables at the end of the reporting period by class of financing receivables;
●    
The aging of past due financing receivables at the end of the reporting period by class of financing receivables; and
●    
The nature and extent of troubled debt restructurings that occurred during the period by class of financing receivables and their effect on the allowance for credit losses.

For public entities, the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010.   The adoption of this standard will require additional disclosures.
 
ASU - Accounting Standards Update No. 2010-18, Receivables (Topic 310): Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset. This ASU codifies the consensus reached in EITF Issue No. 09-I, “Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset.” The amendments to the FASB Accounting Standards Codification™ (Codification) provide that modifications of loans that are accounted for within a pool under Subtopic 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. ASU 2010-18 does not affect the accounting for loans under the scope of Subtopic 310-30 that are not accounted for within pools. Loans accounted for individually under Subtopic 310-30 continue to be subject to the troubled debt restructuring accounting provisions within Subtopic 310-40.

ASU 2010-18 is effective prospectively for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. Early application is permitted. Upon initial adoption of ASU 2010-18, an entity may make a one-time election to terminate accounting for loans as a pool under Subtopic 310-30. This election may be applied on a pool-by-pool basis and does not preclude an entity from applying pool accounting to subsequent acquisitions of loans with credit deterioration.  The adoption of this update is not expected to have an impact on the consolidated financial statements.
 
ASU - Accounting Standards Update (ASU) No. 2010-11, Derivatives and Hedging (Topic 815): Scope Exception Related to Embedded Credit Derivatives. The FASB believes this ASU clarifies the type of embedded credit derivative that is exempt from embedded derivative bifurcation requirements. Specifically, only one form of embedded credit derivative qualifies for the exemption - one that is related only to the subordination of one financial instrument to another. As a result, entities that have contracts containing an embedded credit derivative feature in a form other than such subordination may need to separately account for the embedded credit derivative feature.

The amendments in the ASU are effective for each reporting entity at the beginning of its first fiscal quarter beginning after June 15, 2010. Early adoption is permitted at the beginning of each entity’s first fiscal quarter beginning after March 5, 2010.  The adoption of this update is not expected to have an impact on the consolidated financial statements.

Note 9.  Subsequent Events

New Federal Legislation

Congress has recently enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act which will significantly change the current bank regulatory structure and affect the lending, investment, trading and operating activities of financial institutions and their holding companies.  The Dodd-Frank Act will eliminate the Office of Thrift Supervision.  The Dodd-Frank Act also authorizes the Board of Governors of the Federal Reserve System to supervise and regulate all savings and loan holding companies, in addition to bank holding companies which it currently regulates.  As a result, the Federal Reserve Board’s current regulations applicable to bank holding companies, including holding company capital requirements, will apply to savings and loan holding companies.  The Dodd-Frank Act also requires the Federal Reserve Board to set minimum capital levels for bank holding companies that are as stringent as those required for the insured depository subsidiaries, and the components of Tier 1 capital would be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions.  Bank holding companies with assets of less than $500 million are exempt from these capital requirements.  Under the Dodd-Frank Act, the proceeds of trust preferred securities are excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010 by bank or savings and loan holding companies with less than $15 billion of assets.  The Company does not have trust preferred securities.  The legislation also establishes a floor for capital of insured depository institutions that cannot be lower than the standards in effect today, and directs the federal banking regulators to implement new leverage and capital requirements within 18 months that take into account off-balance sheet activities and other risks, including risks relating to securitized products and derivatives.
 
 
16

 
The Dodd-Frank Act also creates a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws.  The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions such as the Bank, including the authority to prohibit “unfair, deceptive or abusive” acts and practices.  The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets.  Banks and savings institutions with $10 billion or less in assets will be examined by their applicable bank regulators.  The new legislation also weakens the federal preemption available for national banks and federal savings associations, and gives state attorneys general the ability to enforce applicable federal consumer protection laws.
 
The legislation also broadens the base for Federal Deposit Insurance Corporation insurance assessments.  Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution.  The Dodd-Frank Act also permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2009, and non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2013.  Lastly, the Dodd-Frank Act will increase stockholder influence over boards of directors by requiring companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and authorizing the Securities and Exchange Commission to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials.  The legislation also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not.

Entry into Material Definitive Agreement

On October 21, 2010, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Greensburg Bancshares, Inc. (“Greensburg Bancshares”) and its wholly-owned subsidiary, Bank of Greensburg (“Greensburg”).

The Merger Agreement provides for the acquisition of Greensburg Bancshares in a merger (the “Merger”).  At the effective time of the Merger, each share of common stock of Greensburg Bancshares (other than shares owned by Greensburg Bancshares and First Guaranty Bancshares), at the election of the holder thereof, will be converted into the right to receive either 13.26 shares of common stock of First Guaranty Bancshares, $247 in cash, or a combination of cash and common stock of First Guaranty Bancshares (the “Merger Consideration”).  The final structure of the Merger will depend upon the election by Greensburg Bancshares of the form of the Merger Consideration.  The total consideration is valued at approximately $5.3 million.

At September 30, 2010, Greensburg Bancshares had total assets of approximately $91.0 million, including loans of $71.1 million.  Total deposits were $80.6 million.

The Merger is subject to the approval by the stockholders of Greensburg Bancshares by such vote as is required under its articles of incorporation and Louisiana Business Corporation Law, and other customary closing conditions.  The Merger Agreement contains customary representations, warranties and covenants of First Guaranty Bancshares, First Guaranty Bank, Merger Subsidiary, Greensburg Bancshares and Greensburg.

It is expected that the Merger will be completed during the first quarter of 2011 following receipt of all regulatory and shareholder approvals.

 
17

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

The following management discussion and analysis is intended to highlight the significant factors affecting the Company's financial condition and results of operations presented in the consolidated financial statements included in this Form 10-Q. This discussion is designed to provide readers with a more comprehensive view of the operating results and financial position than would be obtained from reading the consolidated financial statements alone. Reference should be made to those statements for an understanding of the following review and analysis. The financial data for the three and nine months ended September 30 ,2010 and 2009 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, including, changes in general economic conditions, either nationally or in our market areas, that are worse than expected; competition among depository and other financial institutions; inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments; adverse changes in the securities markets; changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements; our ability to enter new markets successfully and capitalize on growth opportunities; our ability to successfully integrate acquired entities, if any; changes in consumer spending, borrowing and savings habits; changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board; changes in our organization, compensation and benefit plans; changes in our financial condition or results of operations that reduce capital available to pay dividends; and changes in the financial condition or future prospects of issuers of securities that we own, which could cause our actual results and experience to differ from the anticipated results and expectations, expressed in such forward-looking statements.

New Federal Legislation

Congress has recently enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act which will significantly change the current bank regulatory structure and affect the lending, investment, trading and operating activities of financial institutions and their holding companies.  The Dodd-Frank Act will eliminate the Office of Thrift Supervision.  The Dodd-Frank Act also authorizes the Board of Governors of the Federal Reserve System to supervise and regulate all savings and loan holding companies, in addition to bank holding companies which it currently regulates.  As a result, the Federal Reserve Board’s current regulations applicable to bank holding companies, including holding company capital requirements, will apply to savings and loan holding companies.  The Dodd-Frank Act also requires the Federal Reserve Board to set minimum capital levels for bank holding companies that are as stringent as those required for the insured depository subsidiaries, and the components of Tier 1 capital would be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions.  Bank holding companies with assets of less than $500 million are exempt from these capital requirements.  Under the Dodd-Frank Act, the proceeds of trust preferred securities are excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010 by bank or savings and loan holding companies with less than $15 billion of assets.  The Company does not have trust preferred securities.  The legislation also establishes a floor for capital of insured depository institutions that cannot be lower than the standards in effect today, and directs the federal banking regulators to implement new leverage and capital requirements within 18 months that take into account off-balance sheet activities and other risks, including risks relating to securitized products and derivatives.
 
The Dodd-Frank Act also creates a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws.  The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions such as the Bank, including the authority to prohibit “unfair, deceptive or abusive” acts and practices.  The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets.  Banks and savings institutions with $10 billion or less in assets will be examined by their applicable bank regulators.  The new legislation also weakens the federal preemption available for national banks and federal savings associations, and gives state attorneys general the ability to enforce applicable federal consumer protection laws.
 
 
18

 
 
The legislation also broadens the base for Federal Deposit Insurance Corporation insurance assessments.  Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution.  The Dodd-Frank Act also permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2009, and non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2013.  Lastly, the Dodd-Frank Act will increase stockholder influence over boards of directors by requiring companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and authorizing the Securities and Exchange Commission to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials.  The legislation also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not.


Third Quarter Overview

Financial highlights for the third quarter of 2010 and 2009 restated are as follows:
●     
Net income for the third quarter of 2010 and 2009 was $2.9 million and $2.0 million respectively.  Net income to common shareholders after preferred stock dividends was $2.5 million and $1.8 million for the third quarter of 2010 and 2009, with earnings per common share of $0.46 and $0.32 respectively. Net income for the nine months ending September 30, 2010 was $8.8 million compared to $4.3 million for the nine months ended September 30, 2009.  Net income to common shareholders after preferred stock dividends was $7.8 million and $4.1 million with earnings per common share of $1.41 and $0.73 respectively.  The increase in net income was primarily the result of an increase in net interest income due to a larger investment portfolio and higher loan pricing.  The Company also recognized gains from sales of securities.
●     
Net interest income for the third quarter of 2010 and 2009 was $9.5 million and $8.6 million, respectively. Net interest income for the nine months ending September 30, 2010 was $28.4 million compared to $22.9 million for the same period in 2009.  The net interest margin for the Company was 4.09% at the end of the third quarter 2010 and 3.45% at the end of the third quarter 2009.
●     
The provision for loan losses for the third quarter of 2010 was $1.2 million compared to $0.7 million for the third quarter of 2009.  The provision for loan loss for the nine months ending September 30, 2010 was $2.5 million compared to $2.1 million for the nine months ended September 30, 2009.
●     
Total assets at September 30, 2010 were $1.1 billion, an increase of $129.7 million or 13.9% when compared to $930.8 million at December 31, 2009. The increase in assets primarily resulted from excess cash received from deposit growth which was ultimately invested in loans and securities investments.
●     
Investment securities totaled $386.5 million at September 30, 2010, an increase of $124.7 million when compared to $261.8 million at December 31, 2009. At September 30, 2010, available for sale securities, at fair value, totaled $386.5 million, an increase of $137.0 million when compared to December 31, 2009. The Company did not have any securities in the held to maturity category as of September 30, 2010.  Our securities in the held to maturity category totaled $12.3 million at December 31, 2009.
●     
The net loan portfolio at September 30, 2010 totaled $599.9 million, an increase of $17.9 million from the December 31, 2009 level of $582.0 million. Net loans are reduced by the allowance for loan losses which totaled $7.6 million for September 30, 2010 and $7.9 million for December 31, 2009.
●     
Non-performing assets at September 30, 2010 were $27.1 million, an increase of $11.4 million compared to December 31, 2009.
●     
Total deposits increased $126.2 million or 15.8% in the first nine months of 2010 compared to the year ended December 31, 2009. Of this increase, individual and business deposits increased by $80.2 million and public fund deposits increased by $46.0 million.
●     
Return on average assets for the three months ending September 30, 2010 and September 30, 2009 was 1.16% and 0.86% respectively. Return on average assets for the nine months ended September 30, 2010 and September 30, 2009 were 1.19% and 0.60%, respectively.  Return on average common shareholders’ equity for the three months ending September 30, 2010 and September 30, 2009 were 12.84% and 9.14% respectively.  Return on average common shareholders’ equity for the nine month period ending September 30, 2010 and September 30, 2009 was 13.37% and 7.70%, respectively.  Return on average assets is calculated by dividing annualized net income before preferred dividends by average assets.  Return on common shareholders’ equity is calculated by dividing net earnings applicable to common shareholders by average common shareholders’ equity.
●     
The Company’s Board of Directors declared cash dividends of $0.16 per common share in the third quarter of 2010 and 2009.

 
19

 
Financial Condition

Changes in Financial Condition from December 31, 2009 to September 30, 2010

General. Total assets as of September 30, 2010 were $1.1 billion, an increase of 129.7 million or 13.9% when compared to $930.8 million at December 31, 2009. The increase in assets resulted primarily from cash received from increased deposits. This excess cash was ultimately used to fund loans and purchase investments.

Investment Securities.  Investment securities at September 30, 2010 totaled $386.5 million, an increase of $124.7 million when compared to $261.8 million at December 31, 2009.

The securities portfolio consisted principally of U.S. Government agency securities, corporate debt securities and municipal bonds. The securities portfolio provides us with a relatively stable source of income and provides a balance to interest rate and credit risks as compared to other categories of assets.  The Company has expanded its holding of securities as loan demand has decreased.  The Company monitors the securities portfolio for both credit and interest rate risk.  The Company generally limits the purchase of corporate securities to individual issuers to manage concentration and credit risk. Corporate securities generally have a maturity of ten years or less.  Government agency securities generally have maturities of 15 years or less.  Total corporate securities held at fair value totaled $129.8 million at September 30, 2010.  U.S. Government Agency securities held at fair value were $242.0 million.

At September 30, 2010, $12.9 million or 3.3% of the securities portfolio was scheduled to mature in less than one year. Securities with maturity dates over 10 years totaled $92.4 million or 23.9% of the total portfolio. The average maturity of the securities portfolio was 3.97 years.  The average maturity of the securities portfolio is affected by call options that are influenced by market interest rates.

At September 30, 2010, securities totaling $386.5 million were classified as available for sale and no securities were classified as held to maturity, compared to $249.5 million classified as available for sale and $12.3 million classified as held to maturity at December 31, 2009.  The Company sold all securities classified for held to maturity as part of its strategy to manage interest rate risk.  The proceeds from the sale of these securities were used to fund loans and other investments.  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.

On September 30, 2010, certain investment securities had continuous unrealized loss positions for more than 12 months. As of September 30, 2010, the unrealized losses on these securities totaled $0.5 million. Substantially all of these losses were in corporate securities and preferred securities. At September 30, 2010, 37 securities were graded below investment grade with a total book value of $9.6 million, and two securities had no rating with a total book value of $0.2 million. All of the non-investment grade securities referenced above were initially investment grade and have been downgraded since purchase. As of September 30, 2010, the evaluation of securities with continuous unrealized losses indicated that no investments were other-than-temporarily impaired.

Average securities as a percentage of average interest-earning assets were 34.1% for the nine-month period ended September 30, 2010 and 27.0% for the same period in 2009. At September 30, 2010, the U.S Government agency securities and municipal bonds qualified as securities pledgeable to collateralize repurchase agreements and public funds. Securities pledged at September 30, 2010 totaled $213.8 million.  See Note 4 of the Notes to Consolidated Financial Statements for more information on investment securities.

Loans. The origination of loans is the primary use of our financial resources and represents the largest component of earning assets. Net total loans accounted for 56.6% of total assets at September 30, 2010, a decrease when compared to 62.5% at December 31, 2009. There are no significant concentrations of credit to any borrower. As of September 30, 2010, 76.8% of our loan portfolio was secured primarily or secondarily by real estate. The largest portion of our loan portfolio consists of non-farm non-residential loans secured by real estate, which accounts for 48.2% of our total portfolio.

Our loan portfolio at September 30, 2010 totaled $599.9 million, an increase of approximately $17.9 million from the December 31, 2009 level of $582.0 million. Total loans include $45.5 million in syndicated loans acquired by assignment. Syndicated loans meet the same underwriting criteria used when making in-house loans.  The allowance for loan losses totaled $7.6 million at September 30, 2010 and $7.9 million at December 31, 2009.  Loan charge-offs totaled $3.1 million during the first nine months of 2010, compared to $1.8 million during the same period of 2009. Recoveries totaled $235,000 and $134,000 during the first nine months of 2010 and 2009, respectively.  See Note 5 of the Notes to Consolidated Financial Statements for more information on loans and the allowance for loan losses.

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).
 
 
20

 
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 September 30, 2010 and December 31, 2009.
 
             
   
September 30,
   
December 31,
 
   
2010
   
2009
 
   
(in thousands)
 
Non-accrual loans:
           
   Real estate loans:
           
      Construction and land development
  $ 3,340     $ 2,841  
      Farmland
    37       54  
      One- to four- family residential
    3,630       2,814  
      Multifamily
               
      Non-farm non-residential
    14,182       7,439  
   Non-real estate loans:
               
      Agricultural
               
      Commercial and industrial
    926       830  
      Consumer and other
    29       205  
         Total non-accrual loans
    22,144       14,183  
                 
Loans 90 days and greater delinquent
               
and still accruing:
               
   Real estate loans:
               
      Construction and land development
    -       -  
      Farmland
    -       -  
      One- to four- family residential
    1,384       757  
      Multifamily
    -       -  
      Non-farm non-residential
    -       -  
   Non-real estate loans:
               
   Agricultural
    -       -  
   Commercial and industrial
    -       -  
   Consumer and other
    -       28  
      Total loans 90 days greater
               
         delinquent and still accruing
    1,384       785  
                 
   Restructured loans
    -       -  
                 
   Total nonperforming loans
    23,528       14,968  
                 
Real estate owned:
               
   Real estate loans:
               
      Construction and land development
    236       -  
      Farmland
    -       -  
      One- to four- family residential
    2,966       292  
      Multifamily
    -       -  
   Non-farm non-residential
    329       366  
      Non-real estate loans:
               
      Agricultural
    -       -  
      Commercial and industrial
    -       -  
      Consumer and other
    -       -  
         Total real estate owned
    3,531       658  
                 
      Total nonperforming assets
    27,059       15,626  
                 
      Performing troubled debt restructing
    11,652       -  
                 
      Total nonperforming assets and troubled debt restructing
  $ 38,711     $ 15,626  
 
Nonperforming assets totaled $27.1 million or 2.5% of total assets at September 30, 2010, an increase of $11.4 million from December 31, 2009. 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.  Management believes that the increase in nonperforming assets is limited to specific identified loans and is not indicative of an overall decline in the credit quality of the loan portfolio.
 
 
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Nonaccrual loans increased $8.0 million from December 31, 2009 to September 30, 2010. There were increases in construction and land development nonaccrual loans, one- to four- family nonaccrual loans, non-farm non-residential nonaccrual loans and commercial and industrial nonaccrual loans, which were partially offset with decreases in construction and land development nonaccrual loans.
 
During the first nine months of 2010, there was a $0.5 million increase in construction and land development nonaccrual loans. The increase in nonaccrual is mostly due to a loan in the amount of $1.9 million that is secured by acreage in Northern Louisiana. The property is currently in foreclosure and a loss is expected and we have reserved accordingly for the credit.  In addition we were able to remove some loans from non-accrual since December 2009. Two of the loans were townhome developments, consisting of six units, totaling $0.6 million that were foreclosed on and booked into other real estate. Also, we recorded additional properties as other real estate owned in the amount of $0.3 million.  The properties are lots in a subdivision. We also received payment in full on another loan in the amount of $0.5 million that was secured by lots in a subdivision.
 
There was a $0.8 million increase in one- to four- family residential nonaccrual loans during the first nine months of 2010. The increase in nonaccrual one- to four- family residential loans resulted from one loan, which has a balance of $1.8 million and is currently in bankruptcy. The house is located in a gated community and we anticipate no loss exposure on this property. This loan paid down from $3.0 million in the last 15 months from the liquidation of other assets of the borrower.
 
Non-farm non-residential nonaccrual loans increased $6.7 million from December 31, 2009 to September 30, 2010. This category comprises of primarily two loans. One loan totaling $1.1 million is currently in foreclosure. It is secured by a commercial building. In addition to this, a loan in the amount of $3.7 million secured by a hotel property also went into nonaccrual. We are a participant with 6 other banks and we are currently negotiating terms of a possible restructure. A loan in the amount of $2.6 million secured by a church as well as other properties also went into nonaccrual status during this time. The properties are currently in the process of foreclosure.
 
Non-real estate commercial and industrial nonaccrual loans increased $0.1 million from December 31, 2009 to September 30, 2010. The largest loan addition to this category totals $0.4 million and is secured by oil well equipment. The Bank is currently assisting the borrower with liquidation of the equipment. The small increase is also due to the Bank’s aggressive action to write off some of these bad debts.
 
Other real estate increased during the first nine months of 2010 by $2.9 million. This increase is primarily from the addition of six properties in a townhome development mentioned in the nonaccrual construction and land development section above as well as five lots in a subdivision that were also referred to in the construction and land development section. In addition we booked one house to other real estate owned in the amount of $1.6 million. We expect the house to be sold by December 31, 2010.  The townhome development was subsequently sold in October 2010 for approximately $565,000, with a loss to the bank of approximately $260,000.
 
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.
 
 
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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.
 
Provisions made pursuant to these processes totaled $2.5 million in the first nine months of 2010 as compared to $2.1 million for the same period in 2009. The provisions made in the first nine months of 2010 were taken to provide for current loan losses and to maintain the allowance at an adequate level commensurate with Management’s evaluation of the risks inherent in the loan portfolio. Total charge-offs were $3.1 million for first nine months of 2010 as compared to total charge-offs of $1.8 million for the same period in 2009. Recoveries were $235,000 for the first nine months of 2010 as compared to recoveries of $134,000 for the same period in 2009.
 
Charged-off real estate loans totaled $1.2 million for the first nine months of 2010. The majority of this category is comprised of a few loans. One loan was made to a contractor to complete a project for one of our mortgage loan customers. The Bank took a second mortgage on the borrower’s house. The borrower was able to refinance the house and the Bank was able to cash out on a portion of our loan, however we did have to charge-off approximately $75,000. The second loan is in the amount of $560,000 secured by rental property. The borrower is in bankruptcy and the plan calls for a lower amount of principal to be paid because of decreased property. We wrote the loan down $106,000 to the amount of the bankruptcy plan. In addition, the Bank wrote off $74,000 on a building that was formerly a car dealership. There were some possible environmental concerns and we only had a second mortgage. The property sold for enough at the foreclosure sale to pay off the first mortgage to another bank and to allow some proceeds to be applied toward the Bank’s debt. Another $67,000 was charged off, in which the Bank foreclosed upon five lots in a subdivision. After the property was appraised it resulted in the write-off of a portion of the debt.  Also we charged off $0.3 million upon foreclosure of a loan secured by several rental properties and another $0.3 million on two loans secured by property that was destroyed during Hurricane Katrina.
 
Charged-off commercial and industrial loans totaled $1.5 million for the first nine months of 2010. The majority of the charged-off loans were concentrated in two loans. The first charged-off loan was approximately $830,000 and this was to a consumer finance company. The second charged-off loan was approximately $462,000 and it was secured by medical receivables. The remaining charged-off loans were comprised of smaller credits.
 
        Charged-off consumer loans and credit cards totaled $356,000 for the first nine months of 2010. This category is comprised of smaller consumer loans and credit cards.
 
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 September 30, 2010 and December 31, 2009 the Company had loans totaling $22.1 million and $14.2 million, respectively, on which the accrual of interest had been discontinued.
 
The allowance for loan losses at September 30, 2010 was $7.6 million or 1.25% of total loans and 32.2% of nonperforming loans. 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.  See Note 5 of the Notes to Consolidated Financial Statements for more information on loans and the allowance for loan losses.
 
 
23

 
 
Other information relating to loans, the allowance for loan losses and other pertinent statistics follows.
 
             
   
September 30,
 
   
2010
   
2009
 
             
Loans:
           
  Average outstanding balance
  $ 606,163     $ 601,572  
  Balance at end of period
  $ 607,516       595,152  
                 
Allowance for Loan Losses:
               
  Balance at beginning of year
  $ 7,919     $ 6,482  
  Provision charged to expense
    2,506       2,091  
  Loans charged-off
    (3,086 )     (1,812 )
  Recoveries
    235       134  
  Balance at end of period
  $ 7,574     $ 6,895  
                 

 
Deposits.  Managing the mix and pricing the maturities of deposit liabilities is an important factor affecting our ability to maximize our 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, 2009 to September 30, 2010, total deposits increased $126.2 million, or 15.8%, to $925.9 million at September 30, 2010 from $799.7 million at December 31, 2009.  During 2010, consumer and business deposits increased $80.2 million and public fund deposits increased $46.0 million.  Noninterest-bearing demand deposits decreased $5.4 million while interest-bearing demand deposits decreased by $19.2 million when comparing September 30, 2010 to December 31, 2009.  Time deposits increased $146.2 million, or 33.2% to $585.6 million at September 30, 2010, compared to $439.4 million at December 31, 2009.
 
At September 30, 2010, consumer deposits totaled $481 million, business deposits totaled $126.6 million and public fund deposits totaled $314.5 million. As of September 30, 2010, the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $100,000 was approximately $385.5 million. The significant increase in time deposits in 2010 is the result of the Company’s decision to offer attractive longer term certificate of deposit rates in an effort to lengthen the average CD term and lock in at current rates. At September 30, 2010, approximately 52% of the Company’s certificates of deposit had a remaining term greater than one year.
 
Average noninterest-bearing deposits increased to $123.4 million for the nine-month period ended September 30, 2010 from $117.5 million for the nine-month period ended September 30, 2009. Average noninterest-bearing deposits represented 14.4% and 13.7% of average total deposits for the nine-month periods ended September 30, 2010 and 2009, respectively.

As we seek to maintain a strong net interest margin and improve our earnings, attracting core noninterest-bearing deposits will remain a primary emphasis. Management will continue to evaluate and update our product mix in its efforts to attract additional core customers.  We currently offer a number of noninterest-bearing deposit products that are competitively priced and designed to attract and retain customers with primary emphasis on core deposits. We have also offered several different time deposit promotions in an effort to increase our core deposits and to increase liquidity.

The following table sets forth the composition of the Company’s deposits at September 30, 2010 and December 31, 2009.
 
   
September 30,
   
December 31,
   
Increase/(Decrease)
 
   
2010
   
2009
   
Amount
   
Percent
 
   
(dollars in thousands)
             
Deposits:
                       
  Noninterest-bearing demand
  $ 126,447     $ 131,818     $ (5,371 )     -4.1 %
  Interest-bearing demand
    169,006       188,252       (19,246 )     -10.2 %
  Savings
    44,831       40,272       4,559       11.3 %
  Time
    585,653       439,404       146,249       33.3 %
    Total deposits
  $ 925,937     $ 799,746     $ 126,191       15.8 %

 
24

 
 

Borrowings. The Company maintains borrowing relationships with other financial institutions as well as the Federal Home Loan Bank on a short- and long-term basis to meet liquidity needs. At September 30, 2010, short-term borrowings totaled $12.4 million compared to $11.9 million at December 31, 2009.  At September 30, 2010, short-term borrowings consisted of $4.4 million repurchase agreements and $8.0 million in federal funds purchased.  At December 31, 2009, short term borrowings consisted solely of $11.9 million of repurchase agreements.  Overnight repurchase agreement balances are monitored daily for sufficient collateralization.

Long-term borrowings totaled $12.5 million at September 30, 2010 compared to $20.0 million at December 31, 2009. At September 30, 2010 long-term borrowings consisted of two Federal Home Loan Bank advances. See Note 7 of the Notes to Consolidated Financial Statements for more information.
 
The average amount of total borrowings for the nine months ended September 30, 2010 totaled $28.3 million, compared to $21.8 million for the nine months ended September 30, 2009. At September 30, 2010, the Company had $145.0 million in Federal Home Loan Bank letters of credit outstanding obtained solely for collateralizing public deposits.
 
Equity. Total equity increased to $103.6 million as of September 30, 2010 from $94.9 million as of December 31, 2009. The increase in stockholders’ equity resulted from net income of $8.8 million and the change in accumulated other comprehensive income of $3.4 million, partially offset by dividends paid to common stockholders totaling $2.7 million and preferred stock dividends totaling $1.0 million. Cash dividends paid to common shareholders were $0.48 per share for the nine-month periods ending September 30, 2010 and 2009.  The preferred stock equity consists of $20.9 million issued to the U.S. Treasury Department under its Capital Purchase Program in August 2009.  Cash dividends paid to preferred stockholders totaled $1.0 million for the nine months ending September 30, 2010.
 
Results of Operations for the Nine Months and Three Months Ended September 30, 2010 and September 30, 2009

Net income. For the quarter ending September 30, 2010, First Guaranty Bancshares, Inc. had consolidated net income of $2.9 million, a $0.9 million increase from the $2.0 million of net income reported for the third quarter of 2009.  Net income for the nine months ended September 30, 2010 was $8.8 million, an increase of $4.5 million from $4.3 million for the nine months ended September 30, 2009.  Net income to common shareholders after preferred stock dividends was $2.5 million and $1.8 million for the third quarter of 2010 and 2009, with earnings per common share of $0.46 and $0.32 respectively. Net income to common shareholders after preferred stock dividends was $7.8 million and $4.1 million with earnings per common share of $1.41 and $0.73 for the nine months ending September 30, 2010 and September 30, 2009 respectively.  The increase in net income was primarily the result of an increase in net interest income and gains from sales of securities.

Net interest income. Net interest income is the largest component of our earnings. It is calculated by subtracting the cost of interest-bearing liabilities from the income earned on interest-earning assets and represents the earnings from our primary business of gathering deposits and making loans and investments.  Our long-term objective is to manage this income to provide the largest possible amount of income while balancing interest rate, credit and liquidity risks.

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

Net interest income for the quarter ended September 30, 2010 was $9.5 million, an increase of $0.9 million when compared to $8.6 million for the third quarter in 2009. Net interest income for the nine-month period ended September 30, 2010 totaled $28.4 million compared to net interest income of $22.9 for the same period in 2009. This reflects an increase of $5.5 million when compared to the nine-month period ended September 30, 2009.  The increase in net interest income for both the three month and nine month periods reflected an increase in net interest spread and net interest margin as the yield on our interest-earning assets increased more than the cost of our interest-bearing liabilities.  The increase in net interest income is also the result of an increase in our total interest earning assets.

The net interest income yield shown below in the average balance sheet is calculated by dividing net interest income by average interest-earning assets and is a measure of the efficiency of the earnings from balance sheet activities. It is affected by changes in the difference between interest on interest-earning assets and interest-bearing liabilities and the percentage of interest-earning assets funded by interest-bearing liabilities (leverage). The leverage for the nine months ending September 30, 2010 was 82.1%, compared to 85.8% for the same period in 2009.

 
25

 


The following table sets forth average balance sheets, average yields and costs, and certain other information for the nine months ended September 30, 2010 and 2009, respectively. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Nonaccrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.

                                     
     
Nine Months Ended September 30,
 
   
2010
   
2009
   
Average
         
Yield/
   
Average
         
Yield/
 
   
Balance
   
Interest
   
Rate
   
Balance
   
Interest
   
Rate
 
   
(dollars in thousands)
                   
Assets
                                   
Interest-earning assets:
                                   
  Interest-earning deposits with banks
  $ 69     $ 31       0.25 %   $ 16,555     $ 372       3.00 %
  Securities (including FHLB stock)
    314,553       10,723       4.56 %     237,778       7,581       4.26 %
  Federal funds sold
    9,105       8       0.12 %     31,760       33       0.14 %
Loans, net of unearned income
 
including loans held for sale
    606,163       27,214       6.00 %     601,572       26,610       5.91 %
    Total interest-earning assets
    929,890       37,976       5.46 %     887,665       34,596       5.21 %
                                                 
Noninterest-earning assets:
 
  Cash and due from banks
    35,163                       43,161                  
  Premises and equipment, net
    16,842                       16,067                  
  Other assets
    9,323                       9,059                  
    Total
  $ 991,218                     $ 955,952                  
                                                 
Liabilities and Stockholders' Equity
 
Interest-bearing liabilities:
                                               
  Demand deposits
  $ 193,554       639       0.44 %   $ 212,569       1,022       0.64 %
  Savings deposits
    42,927       32       0.10 %     41,624       89       0.29 %
  Time deposits
    498,173       8,760       2.35 %     485,629       10,381       2.85 %
  Borrowings
    28,353       97       0.46 %     21,799       228       1.39 %
    Total interest-bearing liabilities
    763,007       9,528       1.67 %     761,621       11,720       1.48 %
                                                 
Noninterest-bearing liabilities:
 
  Demand deposits
    123,420                       117,471                  
  Other
    5,221                       6,236                  
    Total liabilities
    891,648                       885,328                  
  Stockholders' equity
    99,570                       70,624                  
    Total
  $ 991,218                     $ 955,952                  
Net interest income
          $ 28,448                     $ 22,876          
Net interest rate spread (1)
      3.79 %                     3.73 %
Net interest-earning assets (2)
  $ 166,883                     $ 126,044                  
Net interest margin (3)
                    4.09 %                     3.45 %
                                                 
Average interest-earning assets to
 
interest-bearing liabilities
      121.87 %                     116.55 %
                                                 

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

 
26

 


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 for loan losses totaled $1.2 million for the quarter ended September 30, 2010, an increase of $0.5 million when compared to the same quarter in 2009. Year-to-date provisions totaled $2.5 million for the first nine months of 2010 as compared to $2.1 million for the same period in 2009. Provisions are necessary to maintain the allowance at an adequate level based on loan risk factors and the levels of net loan charge-offs. The provisions made in the first nine months of 2010 and 2009 were taken to provide for current loan losses and to maintain the allowance at an adequate level commensurate with Management’s evaluation of the risks inherent in the loan portfolio. Total charge-offs were $3.1 million for the first nine months of 2010 as compared to $1.8 million for the same period in 2009. Recoveries were $235,000 for the first nine months of 2010 as compared to $134,000 for the same period in 2009.

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 quarter ended September 30, 2010 totaled $2.6 million, an increase of $1.3 million when compared to the same period in 2009. This increase in noninterest income resulted primarily from realized gains on sales of securities totaling $1.0 million.

Noninterest income for the first nine months of 2010 totaled $6.8 million, an increase of $2.7 million when compared to the same period in 2009 which had total non-interest income of $4.1 million. The increase was due primarily to a $2.3 million increase in the gain on the sale of investment securities.

Noninterest Expense.  Noninterest expense includes salaries and employee benefits, occupancy and equipment expense, net cost from other real estate and repossessions, regulatory assessments and other types of expenses. Noninterest expense for the third quarter in 2010 totaled $6.5 million, an increase of $0.5 million from the same period in 2009 which totaled $6.0 million.  Noninterest expense for the first nine months of 2010 totaled $19.2 million which is an increase of $0.9 million from the first nine months of 2009 which totaled $18.3 million.

Salaries and benefits totaled $8.8 million for the nine month period ending September 30, 2010 and $8.2 million at September 30, 2009 respectively. Salaries and benefits totaled $2.9 million for the third quarter 2010 and $2.7 million for the third quarter of 2009, an increase of $0.2 million.  At September 30, 2010, our full-time equivalent employees totaled 235 compared to 226 full-time equivalent employees during the same period of 2009.  Occupancy and equipment expense reflects an increase of $0.2 million when comparing the nine-month periods ended September 30, 2010 which totaled $2.3 million and 2009 which totaled 2.1 million. Occupancy and equipment expense for third quarter of 2010 and 2009 was $0.8 million and $0.7 million respectively.  Net cost from other real estate and repossessions totaled $0.3 million at September 30, 2010 compared to $0.3 million at September 30, 2009.  For the third quarter 2010, net cost from other real estate and repossessions totaled $0.1 million compared to $0.1 million for the third quarter of 2009.  Regulatory assessments totaled $1.1 million for the nine months ending September 30, 2010 compared to $1.7 million for the same period ending September 30, 2009. Regulatory assessments were $0.4 million in the third quarter 2010 compared to $0.4 million for the third quarter 2009.  Other noninterest expense reflects an increase of $0.6 million when comparing the nine-month periods ended September 30, 2010 which totaled $6.6 million and 2009 which totaled $6.0 million.  Other noninterest expense totaled $2.2 million for the third quarter 2010 and $2.1 million for the third quarter 2009. The table below presents selected components of noninterest expense as of the nine months and three months ended September 30, 2010 and 2009.
 
   
Nine Months Ended September 30,
   
Three Months Ended September 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Other noninterest expense:
                       
Legal and professional fees
  $ 1,177     $ 942     $ 490     $ 352  
Data processing
    1,468       1,352       485       464  
Marketing and public relations
    697       821       114       354  
Taxes - sales, capital and franchise
    555       702       177       166  
Operating supplies
    475       389       129       141  
Travel and lodging
    319       284       128       85  
Other
    1,933       1,524       660       568  
  Total other expense
  $ 6,624     $ 6,014     $ 2,183     $ 2,130  
                                 
 
27

 
 
Income Taxes.  The provision for income taxes totaled $1.6 million and $1.1 million for the quarters ended September 30, 2010 and 2009, respectively. The provision for income taxes for the nine months ended September 30, 2010 increased $2.5 million to $4.7 million from $2.3 million for the same period in 2009. The increase in the provision for income taxes reflected increased income during both the three-month and nine-month periods in 2010. In each of the nine months ended September 30, 2010 and 2009, the income tax provision approximated the normal statutory rate.  The effective rates were 34.9% and 34.8%, 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 principle 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.

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.  In addition, the level of interest rate risk is also discussed and reviewed in the monthly Investment Committee meetings, which consists of executive Management, other bank personnel and six Bank Directors.

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

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

We monitor interest rate risk using an interest sensitivity analysis set forth on the following table. This analysis, which we prepare monthly, reflects the maturity and repricing characteristics of assets and liabilities over various time periods. The gap indicates whether more assets or liabilities are subject to repricing over a given time period. The interest sensitivity analysis at September 30, 2010 reflects a liability-sensitive position with a negative cumulative gap on a one-year basis.

 
28

 
 
   
Interest Sensitivity Within
 
   
3 Months
   
Over 3 Months
   
Total
   
Over
       
   
Or Less
   
thru 12 Months
   
One Year
   
One Year
   
Total
 
   
(unaudited, dollars in thousands)
       
Earning Assets:
                             
  Loans (including loans held for sale)
  $ 240,608     $ 103,919     $ 344,527       262,989     $ 607,516  
  Securities (including FHLB stock)
    1,810       11,116       12,926       373,597       386,523  
  Federal funds sold
    569       -       569       -       569  
  Other earning assets
    43       -       43               43  
    Total earning assets
    243,030       115,035       358,065       636,586     $ 994,651  
                                         
Source of Funds:
                                       
Interest-bearing accounts:
                                       
    Demand deposits
    42,251       -       42,251       126,755       169,006  
    Savings
    11,208       -       11,208       33,623       44,831  
    Time deposits
    116,683       165,006       281,689       303,966       585,655  
    Short-term borrowings
    12,409       -       12,409       -       12,409  
    Long-term borrowings
    -       12,508       12,508       -       12,508  
Noninterest-bearing, net
    -       -       -       170,242       170,242  
    Total source of funds
    182,551       177,514       360,065       634,586     $ 994,651  
Period gap
    60,479       (62,479 )     (2,000 )     2,000          
Cumulative gap
  $ 60,479     $ (2,000 )   $ (2,000 )     -          
                                         
Cumulative gap as a
                                       
 percent of earning assets
    6.08 %     -0.20 %     -0.20 %                
                                         
 
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 39.7% and 31.8% of the total liquidity base at September 30, 2010 and December 31, 2009, respectively.

Loans maturing or repricing within one year or less at September 30, 2010 totaled $344.5 million. At September 30, 2010, time deposits maturing or within one year or less totaled $281.7 million.  Loan commitments maturing within one year or less at September 30, 2010 totaled $36.6 million.

The Company maintained a net borrowing availability capacity at the Federal Home Loan Bank totaling $96.2 million and $92.9 million at September 30, 2010 and December 31, 2009, respectively.  This increase in availability at Federal Home Loan Bank during 2010 primarily resulted from adjustments to the borrowing base. Subsequent to September 30, 2010, the Federal Home Loan Bank adjusted the Company’s borrowing base.  The availability would have been $36.9 million had the adjustment to the borrowing base occurred on September 30, 2010.  We also maintain federal funds lines of credit at three correspondent banks with borrowing capacity of $25.5 million as of September 30, 2010. At September 30, 2010, the Company did not have an outstanding balance on these lines of credit. Management believes there is sufficient liquidity to satisfy current operating needs.

Capital Resources.  The Company’s capital position is reflected in stockholders’ equity, subject to certain adjustments for regulatory purposes. Further, our capital base allows us to take advantage of business opportunities while maintaining the level of resources we deem appropriate to address business risks inherent in daily operations.

Total equity increased to $103.6 million as of September 30, 2010 from $94.9 million as of December 31, 2009. The increase in stockholders’ equity resulted from net income of $8.8 million and the change in accumulated other comprehensive income of $3.4 million, partially offset by dividends paid to common stockholders totaling $2.7 million and preferred stock dividends totaling $1.0 million. Cash dividends paid to common shareholders were $0.48 per share for the nine-month periods ending September 30, 2010 and 2009.
 
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.

 
29

 
The calculated ratios for the Bank are as follows at September 30, 2010: Tier 1 leverage ratio of 8.39% (compared to a “well capitalized” threshold of 5.0%); Tier 1 risk-based capital ratio of 11.04% (compared to a “well capitalized threshold of 6.00%); and total risk based capital ratio of 11.99% (compared to a “well capitalized threshold of 10.00%).

At September 30, 2010, 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.

 
30

 

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 material changes in the risk factors disclosed by the Company in its Annual Report on Form 10-K with the Securities and Exchange Commission.

Exhibit
 
Number
 Exhibit
   14.0
  Code of Ethics
   
   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.
 
 
31

 

SIGNATURES
 

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

       
   
FIRST GUARANTY BANCSHARES, INC.
 
       
 
     
       
Date:
November 15, 2010
By: /s/ Alton B. Lewis
 
   
Alton B. Lewis
 
   
Chief Executive Officer
 
       
       
Date:
November 15, 2010
By: /s/ Eric J. Dosch
 
   
Eric J. Dosch
 
   
Chief Financial Officer
 
   
Secretary and Treasurer
 
 
 
32