FGBI 10-Q Quarterly Report Sept. 30, 2012

FIRST GUARANTY BANCSHARES, INC.

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10-Q 1 form10q93012.htm FIRST GUARANTY BANCSHARES SEPTEMBER 30, 2012 FORM 10-Q form10q93012.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, 2012

Commission File Number 000-52748

FIRST GUARANTY BANCSHARES , INC.

(Exact name of registrant as specified in its charter)

Louisiana	26-0513559
(State or other jurisdiction incorporation or organization)	(I.R.S. Employer Identification Number)

400 East Thomas Street
Hammond, Louisiana	70401
(Address of principal executive 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 x 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 o Smaller reporting company x

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 9, 2012 the registrant had 6,291,332 shares of $1 par value common stock outstanding.

Table of Contents

		Page
Part I.	Financial Information

Item 1.	Financial Statements (unaudited)

	Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011	3

	Consolidated Statements of Income for the Nine months and Three months ended September 30, 2012 and 2011	4

	Consolidated Statements of Shareholders' Equity for the Nine months ended September 30, 2012 and 2011	5

	Consolidated Statements of Cash Flows for the Nine months ended September 30, 2012 and 2011	6

	Notes to Unaudited Consolidated Financial Statements	7

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34

Item 4.	Controls and Procedures	36

Part II.	Other Information	36

Item 1.	Legal Proceedings	36

Item 1A.	Risk Factors	36

Item 2.	Exhibits	36

Signatures		37

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial

FIRST GUARANTY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (unaudited)

(in thousands, except share data)	September 30, 2012			December 31, 2011
Assets
Cash and cash equivalents:
Cash and due from banks	$	71,942		$	43,810
Interest-earning demand deposits with banks		20			2
Federal funds sold		4,931			68,630
Cash and cash equivalents		76,893			112,442

Interest-earning time deposits with banks		754			-

Investment securities:
Available for sale, at fair value		619,762			520,497
Held to maturity, at cost ( estimated fair value of $25,222 and $113,197, respectively )		24,976			112,666
Investment securities		644,738			633,163

Federal Home Loan Bank stock, at cost		1,143			643
Loans held for sale		80			-

Loans, net of unearned income		606,162			573,100
Less: allowance for loan losses		9,507			8,879
Net loans		596,655			564,221

Premises and equipment, net		19,664			19,921
Goodwill		1,999			1,999
Intangible assets, net		2,511			2,811
Other real estate, net		4,435			5,709
Accrued interest receivable		6,895			8,128
Other assets		5,467			4,829
Total Assets	$	1,361,234		$	1,353,866

Liabilities and Stockholders' Equity
Deposits:
Noninterest-bearing demand		192,282			167,925
Interest-bearing demand		297,579			289,408
Savings		60,135			57,452
Time		656,174			692,517
Total deposits		1,206,170			1,207,302

Short-term borrowings		11,774			12,223
Accrued interest payable		3,135			3,509
Long-term borrowing		1,250			3,200
Other liabilities		4,449			1,030
Total Liabilities		1,226,778			1,227,264

Stockholders' Equity
Preferred stock:
Series C - $1,000 par value - authorized 39,435 shares; issued and outstanding 39,435 shares		39,435			39,435
Common stock:
$1 par value - authorized 100,600,000 shares; issued 6,294,227 [*]		6,294			6,294
Surplus		39,387			39,387
Treasury stock, at cost, 2,895 and 0 shares, respectively		(54	)		-
Retained earnings		41,560			37,019
Accumulated other comprehensive income (loss)		7,834			4,467
Total Stockholders' Equity		134,456			126,602
Total Liabilities and Stockholders' Equity	$	1,361,234		$	1,353,866
See Notes to the Consolidated Financial Statements.
[*] 2011 common share amounts have been retroactively adjusted to reflect the ten percent stock dividend paid February 24, 2012 to stockholders of record as of February 17, 2012

FIRST GUARANTY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (unaudited)

	Nine Months Ended September 30,						Three Months Ended September 30,
(in thousands, except share data)	2012			2011			2012			2011
Interest Income:
Loans (including fees)	$	26,537		$	25,930		$	8,903		$	9,230
Loans held for sale		1			8			-			2
Deposits with other banks		56			35			20			13
Securities (including FHLB stock)		15,110			14,504			4,172			4,707
Federal funds sold		10			14			2			5
Total Interest Income		41,714			40,491			13,097			13,957

Interest Expense:
Demand deposits		1,050			644			349			239
Savings deposits		40			37			14			15
Time deposits		8,905			10,637			2,782			3,607
Borrowings		98			50			25			36
Total Interest Expense		10,093			11,368			3,170			3,897

Net Interest Income		31,621			29,123			9,927			10,060
Less: Provision for loan losses		3,014			6,855			909			3,504
Net Interest Income after Provision for Loan Losses		28,607			22,268			9,018			6,556

Noninterest Income:
Service charges, commissions and fees		3,565			3,352			1,180			1,235
Net gains on securities		3,230			3,102			1,747			885
Loss on securities impairment		-			(97	)		-			-
Net gains (losses) on sale of loans		(47	)		106			(20	)		10
Gain on acquisition		-			1,391			-			1,391
Other		1,234			1,081			424			443
Total Noninterest Income		7,982			8,935			3,331			3,964

Noninterest Expense:
Salaries and employee benefits		10,125			9,363			3,394			3,380
Occupancy and equipment expense		2,818			2,552			963			942
Other		9,995			9,263			3,454			3,533
Total Noninterest Expense		22,938			21,178			7,811			7,855

Income Before Income Taxes		13,651			10,025			4,538			2,665
Less: Provision for income taxes		4,603			3,071			1,505			500
Net Income		9,048			6,954			3,033			2,165
Preferred Stock Dividends		(1,479	)		(1,433	)		(493	)		(768	)
Income Available to Common Shareholders	$	7,569		$	5,521		$	2,540		$	1,397

Per Common Share: [*]
Earnings	$	1.20		$	0.89		$	0.40		$	0.22
Cash dividends paid	$	0.48		$	0.44		$	0.16		$	0.15

Weighted Average Common Shares Outstanding [*]		6,293,367			6,175,802			6,292,479			6,294,227
See Notes to Consolidated Financial Statements
[*] 2011 common share amounts have been retroactively adjusted to reflect the ten percent stock dividend paid February 24, 2012 to stockholders of record as of February 17, 2012

FIRST GUARANTY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)

	Series A			Series B			Series C												Accumulated
	Preferred			Preferred			Preferred		Common										Other
	Stock			Stock			Stock		Stock				Treasury			Retained			Comprehensive
(in thousands, except per share data)	$1,000 Par			$1,000 Par			$1,000 Par		$1 Par [*]		Surplus		Stock			Earnings			Income/(Loss)			Total
Balance December 31, 2010	$	19,859		$	1,116		$	-	$	6,116	$	36,240	$	-		$	34,866		$	(259	)	$	97,938
Net income		-			-			-		-				-			6,954			-			6,954
Change in unrealized loss on AFS securities, net of reclassification adjustments and taxes		-			-			-		-				-			-			4,091			4,091
Total Comprehensive Income		-			-					-				-			-			-			11,045
Common stock issued in acquisition, with retrospective stock dividend adjustment, 178,619 shares [*]		-			-			-		178		3,147		-			(295	)		-			3,030
Preferred stock issued, Series C		-			-			39,435		-		-		-			-			-			39,435
Cash dividends on common stock ($0.44 per share)		-			-			-		-				-			(2,695	)		-			(2,695	)
Preferred stock repurchase, Series A & B		(20,030	)		(1,098	)		-		-		-		-			-			-			(21,128	)
Preferred stock dividends, amortization and accretion		171			(18	)		-		-		-		-			(1,433	)		-			(1,280	)
Balance September 30, 2011 (unaudited)	$	-		$	-		$	39,435	$	6,294	$	39,387	$	-		$	37,397		$	3,832		$	126,345

Balance December 31, 2011	$	-		$	-		$	39,435	$	6,294	$	39,387	$	-		$	37,019		$	4,467		$	126,602
Net Income		-			-			-		-		-		-			9,048			-			9,048
Change in unrealized gain on AFS securities, net of reclassification adjustments and taxes		-			-			-		-		-		-			-			3,367			3,367
Total Comprehensive Income		-			-			-		-		-		-			-			-			12,415
Treasury shares purchased, at cost, 2,895 shares		-			-			-		-		-		(54	)		-			-			(54	)
Cash dividends on common stock ($0.48 per share)		-			-			-		-		-		-			(3,028	)		-			(3,028	)
Preferred stock dividends		-			-			-		-		-		-			(1,479	)		-			(1,479	)
Balance September 30, 2012 (unaudited)	$	-		$	-		$	39,435	$	6,294	$	39,387	$	(54	)	$	41,560		$	7,834		$	134,456
See Notes to Consolidated Financial Statements
[*] 2011 common share amounts have been retroactively adjusted to reflect the ten percent stock dividend paid February 24, 2012 to stockholders of record as of February 17, 2012

FIRST GUARANTY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

	Nine Months Ended September 30,
(in thousands)	2012			2011
Cash Flows From Operating Activities
Net income	$	9,048		$	6,954
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		3,014			6,855
Depreciation and amortization		1,561			1,240
Amortization/(accretion) of investments		1,419			703
Gain on acquisition		-			(1,391	)
Net gains on securities		(3,230	)		(3,102	)
Net losses (gains) on sale of assets		138			(112	)
Other than temporary impairment charge on securities		-			97
ORE writedowns and losses on disposition		937			287
FHLB stock dividends		(1	)		(3	)
Net increase in loans held for sale		(80	)		(156	)
Change in other assets and liabilities, net		1,809			3,518
Net Cash Provided By Operating Activities		14,615			14,890

Cash Flows From Investing Activities
Funds invested in certificates of deposit		(747	)		-
Proceeds from maturities and calls of HTM securities		128,640			151,474
Proceeds from maturities, calls and sales of AFS securities		621,340			369,196
Funds invested in HTM securities		(40,901	)		(165,268	)
Funds invested in AFS securities		(713,748	)		(442,166	)
Proceeds from sale/redemption of Federal Home Loan Bank stock		3,441			1,796
Funds invested in Federal Home Loan Bank stock		(3,940	)		(1,440	)
Net (increase) decrease in loans		(39,666	)		19,875
Purchase of premises and equipment		(1,214	)		(1,812	)
Proceeds from sales of premises and equipment		168			-
Proceeds from sales of other real estate owned		4,555			445
Cash received in excess of cash paid in acquisition		-			4,992
Net Cash Used In Investing Activities		(42,072	)		(62,908	)

Cash Flows From Financing Activities
Net (decrease) increase in deposits		(1,132	)		86,682
Net decrease in federal funds purchased and short-term borrowings		(449	)		(8,387	)
Proceeds from long-term borrowings		-			3,500
Repayment of long-term borrowings		(1,950	)		(3,650	)
Repurchase of preferred stock		-			(21,128	)
Proceeds from issuance of preferred stock		-			39,435
Purchase of treasury stock		(54	)		-
Dividends paid		(4,507	)		(4,257	)
Net Cash (Used In) Provided By Financing Activities		(8,092	)		92,195

Net (Decrease) Increase In Cash and Cash Equivalents		(35,549	)		44,177
Cash and Cash Equivalents at the Beginning of the Period		112,442			44,837
Cash and Cash Equivalents at the End of the Period	$	76,893		$	89,014

Noncash Activities:
Loans transferred to foreclosed assets	$	4,218		$	4,797
Common stock issued in acquisition	$	-		$	3,030

Cash Paid During The Period:
Interest on deposits and borrowed funds	$	10,467		$	11,235
Income taxes	$	4,900		$	2,850
See Notes to the Consolidated Financial Statements.

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, 2011.

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, 2012 and 2011 are not necessarily indicative of the results expected for the full year. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Material estimates that are susceptible to significant change in the near term are the allowance for loan losses, valuation of goodwill, intangible assets and other purchase accounting adjustments.

Note 2. Recent Accounting Pronouncements

In July 2012, the Financial Accounting Standards Board (“FASB”) issued ASU No 2012-02, Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment, which permits an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with the FASB Accounting Standards Codification (“ASC”) Subtopic 350-30. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. The Company adopted this standard in the fourth quarter of 2011. Adoption of this guidance did not have a material impact on the Company’s statements of income and financial condition.

Note 3. Securities

A summary comparison of securities by type at September 30, 2012 and December 31, 2011 is shown below.

	September 30, 2012									December 31, 2011
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for sale:
U.S. Treasury Bills	$	12,000	$	-	$	-		$	12,000	$	-	$	-	$	-		$	-
U.S. Government Agencies		402,125		1,571		(57	)		403,639		319,113		1,422		(328	)		320,207
Corporate debt securities		172,661		9,485		(285	)		181,861		171,927		6,250		(1,222	)		176,955
Mutual funds or other equity securities		2,564		47		-			2,611		2,773		38		-			2,811
Municipal bonds		18,548		1,103		-			19,651		19,916		609		(1	)		20,524
Total available for sale securities	$	607,898	$	12,206	$	( 342	)	$	619,762	$	513,729	$	8,319	$	(1,551	)	$	520,497

Held to maturity:
U.S. Government Agencies	$	24,976	$	246	$	-		$	25,222	$	112,666	$	535	$	(4	)	$	113,197
Total held to maturity securities	$	24,976	$	246	$	-		$	25,222	$	112,666	$	535	$	(4	)	$	113,197

The scheduled maturities of securities at September 30, 2012 and December 31, 2011, by contractual maturity, are shown below. As evidenced by the following table, the Company has substantially decreased the contractual maturity of its securities investment portfolio in 2012. 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, 2012				December 31, 2011
(in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Available For Sale:
Due in one year or less	$	30,543	$	30,863	$	13,267	$	13,505
Due after one year through five years		132,852		135,765		59,897		61,320
Due after five years through 10 years		332,965		339,828		214,467		218,280
Over 10 years		111,538		113,306		226,098		227,392
Total available for sale securities	$	607,898	$	619,762	$	513,729	$	520,497

Held to Maturity:
Due in one year or less	$	-	$	-	$	-	$	-
Due after one year through five years		4,004		4,010		10,015		10,157
Due after five years through 10 years		20,972		21,212		50,535		50,828
Over 10 years		-		-		52,116		52,212
Total held to maturity securities	$	24,976	$	25,222	$	112,666	$	113,197

At September 30, 2012 approximately $ 440.8 million in securities were pledged to secure public funds deposits, and for other purposes required or permitted by law.

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, 2012.

	Less Than 12 Months					12 Months or More					Total
(in thousands)	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Available for sale:
U.S. Government Agencies	$	38,083	$	(57	)	$	-	$	-		$	38,083	$	(57	)
Corporate debt securities		6,201		(78	)		2,487		(207	)		8,688		(285	)
Mutual funds or other equity securities		-		-			-		-			-		-
Municipals		-		-			-		-			-		-
Total available for sale securities	$	44,284	$	(135	)	$	2,487	$	(207	)	$	46,771	$	(342	)

Held to maturity:
U.S. Government Agencies	$	-	$	-		$	-	$	-		$	-	$	-
Total held to maturity securities	$	-	$	-		$	-	$	-		$	-	$	-

At September 30, 2012, 52 debt securities have gross unrealized losses of $0.3 million or 0.7% of amortized cost. All securities with unrealized losses were classified as available for sale at September 30, 2012 . 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 13 U.S. Government agency securities and 30 corporate debt securities that had gross unrealized losses for less than 12 months. The Company had 8 corporate debt securities which have been in a continuous unrealized loss position for 12 months or longer. Securities with unrealized losses greater than 12 months had a total amortized cost of $2.7 million. Securities with unrealized losses less than 12 months had a total amortized cost of $44.4 million.

If an equity security has an impairment that is other than temporary, then an impairment loss shall be recognized in earnings equal to the entire difference between the investment's cost and its fair value at the balance sheet date of the reporting period for which the assessment is made. The fair value of the investment would then become the new amortized cost basis of the investment and is not adjusted for subsequent recoveries in fair value. For debt securities, other than temporary impairment loss is recognized in earnings if the Company is required to sell or is more likely than not to sell the security before recovery of its amortized cost. If the Company is not required to sell the security or does intend to sell the security, the other-than-temporary impairment is separated into the amount representing credit loss and the amount related to all other factors. The amount related to credit loss is recognized in earnings and the amount related to all other factors is recognized in other comprehensive income. The previous amortized cost basis less the other-than-temporary impairment recognized in earnings shall become the new amortized cost basis of the investment. 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 number of investment securities issued by U.S. government and government agencies with unrealized losses and the amount of unrealized losses on those investment securities are primarily the result of market interest rates. At September 30, 2012 the Company had the ability and intent to hold these securities in its current portfolio until recovery, which may be until maturity.

The corporate debt securities consist primarily of corporate bonds issued by the following types of organizations: financial, insurance, utilities, manufacturing, industrial, consumer products and oil and gas. Also included in corporate debt securities are trust preferred capital securities, many issued by national and global financial services firms. The Company believes that the each of the issuers will be able to fulfill the obligations of these securities. At September 30, 2012 the Company had the ability and intent to hold these securities until they recover, which could be at their maturity dates.

The held to maturity portfolio is comprised of government sponsored enterprise securities such as FHLB, FNMA, FHLMC, and FFCB. The securities have maturities of 15 years or less and the securities are used to collateralize public funds. As of September 30, 2012 public funds deposits totaled $433.2 million. The Company has maintained public funds in excess of $175.0 million since December 2007. Management believes that public funds will continue to be a significant part of the Company's deposit base and will need to be collateralized by securities in the investment portfolio.

Securities with unrealized losses 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 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.

The Company did not record an impairment write-down on its securities for the first nine months of 2012. During the first quarter of 2011, the Company recorded an impairment write-down on securities from one issuer of $0.1 million. This write-down was partially offset by a subsequent gain on sale of the securities of $45,000 in the third quarter of 2011.

At September 30, 2012, the Company's exposure to investment securities issuers that exceeded 10% of stockholders’ equity as follows:

	At September 30, 2012
(in thousands)	Amortized Cost		Fair Value
Federal Home Loan Bank (FHLB)	$	108,002	$	108,247
Federal Home Loan Mortgage Corporation (Freddie Mac-FHLMC)		86,849		87,488
Federal National Mortgage Association (Fannie Mae-FNMA)		118,323		118,600
Federal Farm Credit Bank (FFCB)		113,926		114,525
Total	$	427,100	$	428,860

Note 4. Loans

The following table summarizes the components of the Company's loan portfolio as of September 30, 2012 and December 31, 2011:

	September 30, 2012					December 31, 2011
(in thousands)	Balance			As % of Category		Balance			As % of Category
Real Estate:
Construction & land development	$	55,380		9.1	%	$	78,614		13.7	%
Farmland		10,643		1.8	%		11,577		2.0	%
1- 4 Family		88,771		14.6	%		89,202		15.6	%
Multifamily		15,495		2.6	%		16,914		2.9	%
Non-farm non-residential		298,469		49.1	%		268,618		46.8	%
Total Real Estate		468,758		77.2	%		464,925		81.0	%
Non-real Estate:
Agricultural		26,281		4.3	%		17,338		3.0	%
Commercial and industrial		87,758		14.5	%		68,025		11.9	%
Consumer and other		24,445		4.0	%		23,455		4.1	%
Total Non-real Estate		138,484		22.8	%		108,818		19.0	%
Total loans before unearned income		607,242		100.0	%		573,743		100.0	%
Less: Unearned income		(1,080	)				(643	)
Total loans net of unearned income	$	606,162				$	573,100

The following table summarizes fixed and floating rate loans by contractual maturity as of September 30, 2012 and December 31, 2011 unadjusted for scheduled principal payments, prepayments, or repricing opportunities. The average life of the loan portfolio may be substantially less than the contractual terms when these adjustments are considered.

	September 30, 2012							December 31, 2011
(in thousands)	Fixed		Floating		Total			Fixed		Floating		Total
One year or less	$	29,544	$	143,729	$	173,273		$	108,276	$	124,052	$	232,328
One to five years		208,689		121,511		330,200			160,191		98,972		259,163
Five to 15 years		22,422		44,409		66,831			8,393		36,891		45,284
Over 15 years		7,273		6,077		13,350			8,464		6,054		14,518
Total (excluding nonaccrual loans)	$	267,928	$	315,726		583,654		$	285,324	$	265,969		551,293
Nonaccrual loans						23,588							22,450
Total loans before unearned income						607,242							573,743
Less: Unearned income						(1,080	)						(643	)
Total loans net of unearned income					$	606,162						$	573,100

The majority of floating rate loans have interest rate floors. Of the floating rate loans, $225.5 million were at the floor rate as of September 30, 2012. Nonaccrual loans have been excluded.

The following tables present the age analysis of past due loans at September 30, 2012 and December 31, 2011:

	September 30, 2012
(in thousands)	30-89 Days Past Due		90 Days or Greater		Total Past Due		Current		Total Loans			Recorded Investment 90 Days Accruing
Real Estate:
Construction & land development	$	141	$	1,735	$	1,876	$	53,504	$	55,380		$	-
Farmland		120		781		901		9,742		10,643			-
1 - 4 family		2,837		5,439		8,276		80,495		88,771			376
Multifamily		742		-		742		14,753		15,495			-
Non-farm non-residential		2,023		12,641		14,664		283,805		298,469			678
Total Real Estate		5,863		20,596		26,459		442,299		468,758			1,054
Non-Real Estate:
Agricultural		-		785		785		25,496		26,281			-
Commercial and industrial		279		3,239		3,518		84,240		87,758			-
Consumer and other		117		22		139		24,306		24,445			-
Total Non-Real Estate		396		4,046		4,442		134,042		138,484			-
Total loans before unearned income	$	6,259	$	24,642	$	30,901	$	576,341		607,242		$	1,054
Less: unearned income										(1,080	)
Total loans net of unearned income									$	606,162

	December 31, 2011
(in thousands)	30-89 Days Past Due		90 Days or Greater		Total Past Due		Current		Total Loans			Recorded Investment 90 Days Accruing
Real estate:
Construction & land development	$	240	$	1,520	$	1,760	$	76,854	$	78,614		$	-
Farmland		45		562		607		10,970		11,577			-
1 - 4 family		2,812		5,957		8,769		80,433		89,202			309
Multifamily		617		-		617		16,297		16,914			-
Non-farm non-residential		878		12,818		13,696		254,922		268,618			419
Total Real Estate		4,592		20,857		25,449		439,476		464,925			728
Non-Real Estate:
Agricultural		90		315		405		16,933		17,338			-
Commercial and industrial		147		1,986		2,133		65,892		68,025			-
Consumer and other		389		28		417		23,038		23,455			8
Total Non-Real Estate		626		2,329		2,955		105,863		108,818			8
Total loans before unearned income	$	5,218	$	23,186	$	28,404	$	545,339		573,743		$	736
Less: unearned income										(643	)
Total loans net of unearned income									$	573,100

The Company's management monitors the credit quality of its loans on an ongoing basis. Measurement of delinquency and past due status are based on the contractual terms of each loan.

For all loan classes, past due loans are reviewed on a monthly basis to identify loans for nonaccrual status. Generally, when collection in full of the principal and interest is jeopardized, the loan is placed on nonaccrual. The accrual of interest income on commercial and most consumer loans generally is discontinued when a loan becomes 90 to 120 days past due as to principal or interest. When interest accruals are discontinued, unpaid interest recognized in income is reversed. The Company's method of income recognition for loans that are classified as nonaccrual is to recognize interest income on a cash basis or apply the cash receipt to principal when the ultimate collectability of principal is in doubt. Nonaccrual loans will not normally be returned to accrual status unless all past due principal and interest has been paid.

The following is a summary of nonaccrual loans by class at September 30, 2012 and December 31, 2011:

(in thousands)	September 30, 2012		December 31, 2011
Real Estate:
Construction & land development	$	1,735	$	1,520
Farmland		781		562
1 - 4 family		5,063		5,647
Multifamily		-		-
Non-farm non-residential		11,963		12,400
Total Real Estate		19,542		20,129
Non-real Estate:
Agricultural		785		315
Commercial and industrial		3,239		1,986
Consumer and other		22		20
Total Non-Real Estate		4,046		2,321
Total Nonaccrual Loans	$	23,588	$	22,450

The Company assigns credit quality indicators of pass, special mention, substandard, and doubtful to its loans. For the Company's loans with a commercial and consumer credit exposure, the Company internally assigns a grade based on the creditworthiness of the borrower. For loans with a consumer credit exposure, the Bank internally assigns a grade based upon an individual loan’s delinquency status. Loans included in the Pass category are performing loans with satisfactory debt coverage ratios, collateral, payment history, and documentation.

Special mention loans have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loans or in the Company's credit position at some future date. Borrowers may be experiencing adverse operating trends (declining revenues or margins) or an ill proportioned balance sheet (e.g., increasing inventory without an increase in sales, high leverage, tight liquidity). Adverse economic or market conditions, such as interest rate increases or the entry of a new competitor, may also support a special mention rating. Nonfinancial reasons for rating a credit exposure special mention include management problems, pending litigation, an ineffective loan agreement or other material structural weakness, and any other significant deviation from prudent lending practices.

A substandard loan with a commercial and consumer credit exposure is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt by the borrower. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. These loans require more intensive supervision by management. Substandard loans are generally characterized by current or expected unprofitable operations, inadequate debt service coverage, inadequate liquidity, or marginal capitalization. Repayment may depend on collateral or other credit risk mitigates. For some substandard loans, the likelihood of full collection of interest and principal may be in doubt and thus, placed on nonaccrual. For loans with a consumer credit exposure, loans that are 90 days or more past due or that have been placed on nonaccrual are considered substandard.

Doubtful loans have the weaknesses of substandard loans with the additional characteristic that the weaknesses make collection or liquidation in full questionable and there is a high probability of loss based on currently existing facts, conditions and values.

The Company periodically reassesses its credit quality indicators and has revised its methodology in 2012 contributing to the increase in special mention credits over the previous periods. As of September 30, 2012, $29.4 million of the loans in the special mention category had a current status, $3.9 million were between 30 and 89 days past due, and $0.1 million were 90 days or greater past due.

The following table identifies the commercial and consumer credit exposure of the loan portfolio by specific credit ratings at September 30, 2012 and December 31, 2011:

	September 30, 2012											December 31, 2011
(in thousands)	Pass		Special Mention		Substandard		Doubtful		Total			Pass		Special Mention		Substandard		Doubtful		Total
Real Estate:
Construction & land development	$	40,169	$	4,757	$	10,454	$	-	$	55,380		$	67,602	$	82	$	10,930	$	-	$	78,614
Farmland		10,099		75		469		-		10,643			11,485		-		92		-		11,577
1 - 4 family		72,510		8,425		7,836		-		88,771			80,053		1,770		7,379		-		89,202
Multifamily		8,173		-		7,322		-		15,495			9,545		-		7,369		-		16,914
Non-farm non-residential		253,285		16,712		28,472		-		298,469			235,448		372		32,798		-		268,618
Total real estate		384,236		29,969		54,553		-		468,758			404,133		2,224		58,568		-		464,925
Non-Real Estate:
Agricultural		25,800		56		425		-		26,281			17,304		-		34		-		17,338
Commercial and industrial		79,238		3,273		5,247		-		87,758			65,553		93		2,379		-		68,025
Consumer and other		24,275		104		66		-		24,445			23,345		43		67		-		23,455
Total Non-Real Estate		129,313		3,433		5,738		-		138,484			106,202		136		2,480		-		108,818
Total loans before unearned income	$	513,549	$	33,402	$	60,291	$	-		607,242		$	510,335	$	2,360	$	61,048	$	-		573,743
Less: unearned income										(1,080	)										(643	)
Total loans net of unearned income									$	606,162										$	573,100

ASC 310-30 Loans

The Company has loans that were acquired in the acquisition of Greensburg Bancshares, for which there was, at acquisition, evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that all contractually required payments would not be collected. These loans are subject to ASC Topic 310-30. The carrying amount of those loans is included in the balance sheet amounts of loans receivable at September 30 , 2012. The amounts of loans subject to ASC Topic 310-30 at September 30, 2012 and December 31, 2011 are as follows:

	September 30, 2012				December 31, 2011
(in thousands)	Contractual Amount		Carrying Value		Contractual Amount		Carrying Value
Real Estate:
Construction & land development	$	-	$	-	$	536	$	301
Farmland		-		-		-		-
1 - 4 family		190		190		704		573
Multifamily		-		-		-		-
Non-farm non-residential		130		130		352		352
Total real estate		320	$	320		1,592		1,226
Non-real Estate:
Agricultural		-		-		-		-
Commercial and industrial		-		-		-		-
Consumer and other		-		-		-		-
Total Non-Real Estate		-		-		-		-
Total	$	320	$	320	$	1,592	$	1,226

There have been no additional provisions made to the allowance for loan losses subsequent to acquisition of these loans. The loans acquired in the acquisition of Greensburg Bancshares, that are within the scope of Topic ASC 310-30, are not accounted for using the income recognition model of the Topic because the Company cannot reasonably estimate cash flows expected to be collected.

Note 5. Allowance for Loan Losses

The allowance for loan losses is reviewed by the Company's management on a monthly basis and additions thereto are recorded pursuant to the results of such reviews. In assessing the allowance, several internal and external factors that might impact the performance of individual loans are considered. 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 the assessment of each loan and its overall impact on the allowance for loan losses.

The monitoring of credit risk also extends to unfunded credit commitments, such as unused commercial credit lines and letters of credit. A reserve is established as needed for estimates of probable losses on such commitments.

A summary of changes in the allowance for loan losses, by portfolio type, for the nine months ended September 30, 2012 and 2011 is as follows:

	As of September 30, 2012
	Real Estate Loans:														Non-Real Estate Loans:
(in thousands)	Construction and Land Development			Farmland		1-4 Family			Multi-family			Non-farm non-residential			Agricultural			Commercial and Industrial			Consumer and other			Unallocated			Total
Allowance for Credit Losses:
Beginning balance (12/31/11)	$	1,002		$	65	$	1,917		$	780		$	2,980		$	125		$	1,407		$	314		$	289		$	8,879
Charge-offs		(58	)		-		(1,409	)		(187	)		(459	)		(27	)		(455	)		(356	)		-			(2,951	)
Recoveries		13			1		27			-			106			1			212			205			-			565
Provision		228			15		1,547			(162	)		818			(40	)		508			137			(37	)		3,014
Ending Balance	$	1,185		$	81	$	2,082		$	431		$	3,445		$	59		$	1,672		$	300		$	252		$	9,507

	As of September 30, 2011
	Real Estate Loans:													Non-Real Estate Loans:
(in thousands)	Construction and Land Development			Farmland		1-4 Family			Multi-family		Non-farm non-residential			Agricultural			Commercial and Industrial			Consumer and other			Unallocated			Total
Allowance for Credit Losses:
Beginning balance (12/31/10)	$	977		$	46	$	1,891		$	487	$	3,423		$	80		$	510		$	390		$	513		$	8,317
Charge-offs		(935	)		-		(1,233	)		-		(3,790	)		(20	)		(1,596	)		(486	)		-			(8,060	)
Recoveries		1			-		95			-		12			3			319			145			17			592
Provision		410			15		815			47		2,833			126			2,790			220			(401	)		6,855
Ending Balance	$	453		$	61	$	1,568		$	534	$	2,478		$	189		$	2,023		$	269		$	129		$	7,704

The following is a breakdown of loans individually and collectively evaluated for impairment and the corresponding allowance by loan category at September 30, 2012 and December 31, 2011.

	September 30, 2012
	Real Estate Loans:										Non-Real Estate Loans:
(in thousands)	Construction and Land Development		Farmland		1-4 Family		Multi-family		Non-farm non-residential		Agricultural		Commercial and Industrial		Consumer and other		Unallocated		Total
Allowance individually evaluated for impairment	$	512	$	-	$	279	$	426	$	1,182	$	-	$	20	$	-	$	-	$	2,419
Allowance collectively evaluated for impairment		673		81		1,803		5		2,263		59		1,652		300		252		7,088
Allowance at September 30, 2012	$	1,185	$	81	$	2,082	$	431	$	3,445	$	59	$	1,672	$	300	$	252	$	9,507

Loans individually evaluated for impairment	$	7,396	$	-	$	2,149	$	7,322	$	25,416	$	-	$	4,431	$	-	$	-	$	46,714
Loans collectively evaluated for impairment		47,984		10,643		86,622		8,173		273,053		26,281		83,327		24,445		-		560,528
Loans at September 30, 2012 (before unearned income)	$	55,380	$	10,643	$	88,771	$	15,495	$	298,469	$	26,281	$	87,758	$	24,445	$	-	$	607,242
Unearned income																				(1,080	)
Total loans net of unearned income																			$	606,162

	December 31, 2011
	Real Estate Loans:										Non-Real Estate Loans:
(in thousands)	Construction and Land Development		Farmland		1-4 Family		Multi-family		Non-farm non-residential		Agricultural		Commercial and Industrial		Consumer and other		Unallocated		Total
Allowance individually evaluated for impairment	$	139	$	-	$	392	$	701	$	1,224	$	-	$	-	$	-	$	-	$	2,456
Allowance collectively evaluated for impairment		863		65		1,525		79		1,756		125		1,407		314		289		6,423
Allowance at December 31, 2011	$	1,002	$	65	$	1,917	$	780	$	2,980	$	125	$	1,407	$	314	$	289	$	8,879

Loans individually evaluated for impairment	$	7,998	$	-	$	3,591	$	7,369	$	31,397	$	-	$	738	$	-	$	-	$	51,093
Loans collectively evaluated for impairment		70,616		11,577		85,611		9,545		237,221		17,338		67,287		23,455		-		522,650
Loans at December 31, 2011 (before unearned income)	$	78,614	$	11,577	$	89,202	$	16,914	$	268,618	$	17,338	$	68,025	$	23,455	$	-	$	573,743
Unearned income																				(643	)
Total loans net of unearned income																			$	573,100

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by Management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. As an administrative matter, this process is only applied to impaired loans or relationships in excess of $250,000.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, individual consumer and residential loans are not separately identified for impairment disclosures, unless such loans are the subject of a restructuring agreement.

The following is a summary of impaired loans by class at September 30, 2012:

	At September 30, 2012
(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Interest Income Cash Basis
Impaired Loans with no related allowance:
Real estate:
Construction & land development	$	900	$	949	$	-	$	923	$	50	$	26
Farmland		-		-		-		-		-		-
1 - 4 family		1,074		1,734		-		1,905		124		48
Multifamily		-		-		-		-		-		-
Non-farm non-residential		7,228		7,426		-		9,643		1,395		1,335
Total Real Estate		9,202		10,109		-		12,471		1,569		1,409
Non-Real Estate:
Agricultural		-		-		-		-		-		-
Commercial and industrial		3,935		3,935		-		165		31		23
Consumer and other		-		-		-		-		-		-
Total Non-Real Estate		3,935		3,935		-		165		31		23
Total Impaired Loans with no related allowance	$	13,137	$	14,044	$	-	$	12,636	$	1,600	$	1,432

Impaired Loans with an allowance recorded:
Real estate:
Construction & land development	$	6,496	$	6,496	$	512	$	6,601	$	604	$	609
Farmland		-		-		-		-		-		-
1 - 4 family		1,075		1,234		279		1,161		80		77
Multifamily		7,322		7,322		426		7,367		618		627
Non-farm non-residential		18,188		20,902		1,182		20,866		1,232		1,363
Total real estate		33,081		35,954		2,399		35,995		2,534		2,676
Non-Real Estate:
Agricultural		-		-		-		-		-		-
Commercial and industrial		496		496		20		743		19		-
Consumer and other		-		-		-		-		-		-
Total Non-Real Estate		496		496		20		743		19		-
Total Impaired Loans with an allowance recorded	$	33,577	$	36,450	$	2,419	$	36,738	$	2,553	$	2,676

Total Impaired Loans	$	46,714	$	50,494	$	2,419	$	49,374	$	4,153	$	4,108

The following is a summary of impaired loans by class at December 31, 2011:

	At December 31, 2011
(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Interest Income Cash Basis
Impaired Loans with no related allowance:
Real estate:
Construction & land development	$	937	$	960	$	-	$	634	$	91	$	64
Farmland		-		-		-		-		-		-
1 - 4 family		858		1,192		-		2,388		218		32
Multifamily		-		-		-		-		-		-
Non-farm non-residential		8,710		10,708		-		11,549		824		409
Total Real Estate		10,505		12,860		-		14,571		1,133		505
Non-Real Estate:
Agricultural		-		-		-		-		-		-
Commercial and industrial		738		1,737		-		2,986		238		102
Consumer and other		-		-		-		-		-		-
Total Non-Real Estate		738		1,737		-		2,986		238		102
Total Impaired Loans with no related allowance	$	11,243	$	14,597	$	-	$	17,557	$	1,371	$	607

Impaired Loans with an allowance recorded:
Real estate:
Construction & land development	$	7,061	$	7,061	$	139	$	7,243	$	477	$	376
Farmland		-		-		-		-		-		-
1 - 4 family		2,733		2,870		392		1,127		57		56
Multifamily		7,369		7,369		701		6,347		288		333
Non-farm non-residential		22,687		23,637		1,224		21,180		1,261		815
Total real estate		39,850		40,937		2,456		35,897		2,083		1,580
Non-Real Estate:
Agricultural		-		-		-		-		-		-
Commercial and industrial		-		-		-		-		-		-
Consumer and other		-		-		-		-		-		-
Total Non-Real Estate		-		-		-		-		-		-
Total Impaired Loans with an allowance recorded	$	39,850	$	40,937	$	2,456	$	35,897	$	2,083	$	1,580

Total Impaired Loans	$	51,093	$	55,534	$	2,456	$	53,454	$	3,454	$	2,187

Troubled Debt Restructurings

A Troubled Debt Restructuring ("TDR") is considered such if the creditor for economic or legal reasons related to the debtor's financial difficulties grants a concession to the debtor that it would not otherwise consider. The modifications to the Company's TDRs were concessions on the interest rate charged. The effect of the modifications to the Company was a reduction in interest income. These loans have an allocated reserve in the Company's reserve for loan losses. For the first nine months of 2012, there were no loans restructured in a troubled debt restructuring.

The following table identifies the Troubled Debt Restructurings as of September 30, 2012 and September 30, 2011:

Troubled Debt Restructurings	September 30, 2012								September 30, 2011
	Accruing Loans								Accruing Loans
(in thousands)	Current		30-89 Days Past Due		Nonaccrual		Total TDRs		Current		30-89 Days Past Due		Nonaccrual		Total TDRs
Real Estate:
Construction & land development	$	2,601	$	-	$	-	$	2,601	$	2,602	$	235	$	-	$	2,837
Farmland		-		-		-		-		-		-		-		-
1-4 Family		-		-		1,323		1,323		1,693		-		-		1,693
Multifamily		5,965		-		-		5,965		6,018		-		-		6,018
Non-farm non residential		6,106		679		-		6,785		6,939		-		-		6,939
Total Real Estate		14,672		679		1,323		16,674		17,252		235		-		17,487
Non-Real Estate:
Agricultural		-		-		-		-		-		-		-		-
Commercial and industrial		-		-		-		-		-		-		-		-
Consumer and other		-		-		-		-		-		-		-		-
Total Non-Real Estate		-		-		-		-		-		-		-		-
Total	$	14,672	$	679	$	1,323	$	16,674	$	17,252	$	235	$	-	$	17,487

The Company did not restructure any loans considered to be a troubled debt restructuring in the first nine months of 2012. Information about the Company's TDRs occurring in the nine month period ended September 30, 2011 is presented in the following table.

Troubled Debt Restructurings	September 30, 2012					September 30, 2011
(in thousands)	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Real Estate:
Construction & land development	-	$	-	$	-	5	$	2,837	$	2,837
Farmland	-		-		-	-		-		-
1-4 Family	-		-		-	1		1,693		1,693
Multifamily	-		-		-	1		6,018		6,018
Non-farm non residential	-		-		-	4		6,939		6,939
Total real estate	-		-		-	11		17,487		17,487
Non-Real Estate:
Agricultural	-		-		-	-		-		-
Commercial and industrial	-		-		-	-		-		-
Consumer and other	-		-		-	-		-		-
Total Non-Real Estate	-		-		-	-		-		-
Total	-	$	-	$	-	11	$	17,487	$	17,487

The following is a summary of the TDRs that subsequently defaulted after restructuring during the previous twelve months.

Troubled Debt Restructurings that subsequently defaulted
(in thousands)	Number of Contracts	Recorded Investment
Real Estate:
Construction & land development	-	$	-
Farmland	-		-
1-4 Family	3		1,322
Multifamily	-		-
Non-farm non residential	-		-
Total real estate	3		1,322
Non-Real Estate:
Agricultural	-		-
Commercial and industrial	-		-
Consumer and other	-		-
Total Non-Real Estate	-		-
Total	3	$	1,322

The following table discloses TDR activity for the nine months ended September 30, 2012.

	Real Estate Loans:														Non-Real Estate Loans:
(in thousands)	Construction and Land Development			Farmland		1-4 family			Multi-family			Non-farm non-residential			Agricultural		Commercial and Industrial		Consumer and other		Total
Beginning balance of TDRs (12/31/2011)	$	2,840		$	-	$	1,694		$	6,015		$	6,998		$	-	$	-	$	-	$	17,547
New TDRs		-			-		-			-			-			-		-		-		-
Charge-offs post-modification		-			-		(619	)		-			-			-		-		-		(619	)
Paydowns		-			-		-			(50	)		(380	)		-		-		-		(430	)
Construction to permanent financing		(239	)		-		239			-			-			-		-		-		-
Other [1]		-			-		9			-			167			-		-		-		176
Ending balance of TDRs (9/30/2012)	$	2,601		$	-	$	1,323		$	5,965		$	6,785		$	-	$	-	$	-	$	16,674
(1) Other includes additions to the balances of TDRs to account for the expenses incurred by the Company for items such as insurance and taxes in protecting the Company's interest.

Note 6. Goodwill and Other Intangible Assets

Goodwill and intangible assets deemed to have indefinite lives are no longer amortized, but are subject to annual impairment tests. Other intangible assets continue to be amortized over their useful lives. Goodwill at September 30, 2012 was $2.0 million and resulted from the Homestead Bancorp acquisition in 2007. No impairment charges have been recognized since the acquisition. Mortgage servicing rights were relatively unchanged since December 31, 2011, totaling $0.2 million at September 30, 2012. Other intangible assets recorded include core deposit intangibles, which are subject to amortization. The core deposits reflect the value of deposit relationships, including the beneficial rates, which arose from the purchase of other financial institutions and the purchase of various banking center locations from other financial institutions. At September 30, 2012 and December 31, 2011, core deposit intangibles totaled $2.3 million and $2.6 million, respectively.

Note 7. Borrowings

The Company's senior long-term debt totaled $1.3 million at September 30, 2012. Long-term debt at December 31, 2011 totaled $3.2 million. The Company pays $50,000 principal plus interest on a monthly basis. In addition to its monthly principal payments, the Company has made additional principal payments totaling $1.5 million. At September 30, 2012 the Company's long-term debt was priced at Wall Street Journal Prime plus 75 basis points (4.00%) and has a contractual maturity of April 2017. It is secured by a pledge of 13.2% (735,745 shares) of First Guaranty Bank, a wholly owned subsidiary of the Company, under a Commercial Pledge Agreement dated June 22, 2011.

Note 8. Commitments and Contingencies

Off-balance sheet commitments

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby and commercial letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheets. The contract or notional amounts of those instruments reflect the extent of the involvement in particular classes of financial instruments.

The exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby and commercial letters of credit is represented by the contractual notional amount of those instruments. The same credit policies are used in making commitments and conditional obligations as it does for on-balance sheet instruments. Unless otherwise noted, collateral or other security is not required to support financial instruments with credit risk.

Set forth below is a summary of the notional amounts of the financial instruments with off-balance sheet risk at September 30, 2012 and December 31, 2011:

Contract Amount
(in thousands)	September 30, 2012		December 31, 2011
Commitments to Extend Credit	$	22,634	$	13,264
Unfunded Commitments under lines of credit	$	76,554	$	69,522
Commercial and Standby letters of credit	$	6,462	$	6,745

Litigation

The nature of the Company’s business ordinarily results in a certain amount of claims, litigation and legal and administrative cases, all of which are considered incidental to the normal conduct of business. When the Company’s management and counsel determine it has defenses to the claims asserted, it defends itself. The Company will consider settlement of cases when, in Management’s and counsel’s judgment, it is in the best interests of both the Company and its shareholders.

While the final outcome of legal proceedings is inherently uncertain, based on information currently available, advice of counsel, and available insurance coverage, Management believes that any incremental liability arising from the Company’s legal proceedings will not have a material adverse effect on the Company’s financial position.

Note 9. Fair Value

The fair value of a financial instrument is the current amount 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. The Company uses a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1 Inputs – Unadjusted quoted market prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds or credit risks) or inputs that are derived principally from or corroborated by market data by correlation or other means.

Level 3 Inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

A description of the valuation methodologies used for instruments measured at fair value follows, as well as the classification of such instruments within the valuation hierarchy.

Securities available for sale. Securities are classified within Level 1 where quoted market prices are available in an active market. Inputs include securities that have quoted prices in active markets for identical assets. If quoted market prices are unavailable, fair value is estimated using quoted prices of securities with similar characteristics, at which point the securities would be classified within Level 2 of the hierarchy. Securities classified Level 3 in the Company's portfolio as of September 30, 2012 includes municipal bonds and one preferred equity security.

Impaired loans. Loans are measured for impairment using the methods permitted by ASC Topic 310. Fair value of impaired loans is measured by either the loans obtainable market price, if available (Level 1), the fair value of the collateral if the loan is collateral dependent (Level 2), or the present value of expected future cash flows, discounted at the loan's effective interest rate (Level 3). Fair value of the collateral is determined by appraisals or by independent valuation.

Other real estate owned. 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 other real estate owned ("OREO") at September 30, 2012 are determined by sales agreement or appraisal, and costs to sell are based on estimation per the terms and conditions of the sales agreement or amounts commonly used in real estate transactions. 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.

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 measured at fair value on a recurring basis as of September 30, 2012 and December 31, 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

(in thousands)	September 30, 2012		December 31, 2011
Securities available for sale measured at fair value	$	619,762	$	520,497
Fair Value Measurements Using:
Quoted Prices in Active Markets For Identical Assets (Level 1)	$	12,000	$	3,203
Significant Other Observable Inputs (Level 2)	$	599,119	$	509,778
Significant Unobservable Inputs (Level 3)	$	8,643	$	7,516

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. The change in level 3 securities available for sale from December 31, 2011 was the addition of a $2.0 million preferred security that was transferred from level 2 to level 3. This addition was partially offset by $0.9 million in municipal bond principal repayments.

Gains and losses on securities (realized and unrealized) included in earnings (or changes in net assets) for the first nine months of 2012 measured at fair value on a recurring basis are reported in noninterest income or other comprehensive income as follows:

(in thousands)	Noninterest Income		Other Comprehensive Income
Total gains included in earnings (or changes in net assets)	$	3,230	$	-
Impairment loss	$	-	$	-
Changes in unrealized gains (losses) relating to assets still held at September 30, 2012	$	-	$	3,367

The following table measures financial assets and financial liabilities measured at fair value on a non-recurring basis as of September 30, 2012 and December 31, 2011, segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value:

(in thousands)	At September 30, 2012		At December 31, 2011
Impaired loans measured at fair value	$	33,577	$	39,850
Fair Value Measurements Using:
Quoted Prices in Active Markets For Identical Assets (Level 1)	$	-	$	-
Significant Other Observable Inputs (Level 2)	$	6,795	$	8,113
Significant Unoberservable Inputs (Level 3)	$	26,782	$	31,737

Other real estate owned measured at fair value	$	4,435	$	5,709
Fair Value Measurements Using:
Quoted Prices in Active Markets For Identical Assets (Level 1)	$	-	$	-
Significant Other Observable Inputs (Level 2)	$	4,435	$	5,709
Significant Unoberservable Inputs (Level 3)	$	-	$	-

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, 2012 or 2011.

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 at September 30, 2012 and for the three and nine months that ended September 30, 2012 and 2011 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.

First Guaranty Bancshares, Inc. is a bank holding company headquartered in Hammond, LA with one wholly owned subsidiary, First Guaranty Bank. First Guaranty Bank is a Louisiana state chartered commercial bank with 21 banking facilities including one drive-up only facility, located throughout southeast, southwest and north Louisiana. The Company emphasizes personal relationships and localized decision making to ensure that products and services are matched to customer needs. The Company competes for business principally on the basis of personal service to customers, customer access to officers and directors and competitive interest rates and fees.

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.

Three and Nine months Financial Overview 2012

Financial highlights for the three and nine months of 2012 and 2011 are as follows:

●	First Guaranty Bancshares issued a ten percent stock dividend on February 24, 2012 to stockholders of record as of February 17, 2012.

●	Net income for the third quarter of 2012 and 2011 was $3.0 million and $2.2 million, respectively. Net income for the nine months ending September 30, 2012 was $9.0 million compared to $7.0 million for the nine months ended September 30, 2011.

●	Net income to common shareholders after preferred stock dividends was $2.5 million and $1.4 million for the third quarter of 2012 and 2011. Net income to common shareholders after preferred stock dividends was $7.6 million and $5.5 million for the nine months ending 2012 and 2011. The increase in net income for 2012 was the result of several factors including a higher volume of investments, decreases in incremental and absolute interest expense, and a decrease in provisions for loan losses.

●	The Company's cost of time deposits for the first nine months of 2012 decreased 0.3% to 1.8% from 2.1% for the same period in 2011.

●	Earnings per common share for the three months ended September 30, 2012 and 2011 were $0.40 and $0.22, respectively. For the nine months ended September 30, 2012 and 2011 earnings per common share were $1.20 and $0.89, respectively.

●	The net loan portfolio at September 30, 2012 totaled $596.7 million, a net increase of $32.4 million from the December 31, 2011 net loan portfolio of $564.2 million. Net loans are reduced by the allowance for loan losses which totaled $9.5 million for September 30, 2012 and $8.9 million for December 31, 2011. Total loans net of unearned income were $606.2 million for September 30, 2012 compared to $573.1 million for December 31, 2011.

●	During the first nine months of 2012 the Company's management shortened the contractual maturity of the Company's securities portfolio to reduce interest rate risk.

●	Return on average assets for the three months ending September 30, 2012 and September 30, 2011 was 0.89% and 0.67%, respectively. Return on average assets for the nine months ended September 30, 2012 and September 30, 2011 was 0.89% and 0.77%, respectively. Return on average assets is calculated by dividing annualized net income before preferred dividends by average assets.

●	Return on average common equity for the three months ending September 30, 2012 and September 30, 2011 was 10.72% and 6.40%, respectively. Return on average common shareholders’ equity for the nine months ended September 30, 2012 and September 30, 2011 was 11.07% and 9.16% respectively. Return on common shareholders’ equity is calculated by dividing net earnings applicable to common shareholders by average common shareholders’ equity.

●	Book value per common share was $15.10 as of September 30, 2012 compared to $13.81 as of September 30, 2011. Book value per share was $13.85 as of December 31, 2011. [2]

●	The Company's Board of Directors declared cash dividends of $0.16 per common share in the third quarter of 2012 and $0.15 per common share for the third quarter of 2011. Declared cash dividends for the nine months ended September 30, 2012 and 2011 were $0.48 and $0.44 per common share, respectively. [2]

●	On September 22, 2011, the Company received $39.4 million in funds under the U.S. Treasury's Small Business Lending Fund ("SBLF") program. A portion of the funds from the SBLF were used to redeem the Company's Series A Preferred Stock issued to the Treasury under the CPP. The dividend rate on the shares of the preferred stock issued in connection with the SBLF will be dependent on the Company's volume of qualified small business loans.

	[2] 2011 common share amounts have been retroactively adjusted to reflect the ten percent stock dividend paid February 24, 2012 to stockholders of record as of February 17, 2012

Financial Condition

Changes in Financial Condition from December 31, 2011 to September 30, 2012

The Company completed the acquisition of Greensburg Bancshares and its wholly owned subsidiary Bank of Greensburg on July 1, 2011. This acquisition added 4 branches, $78.0 million in deposits, and $63.0 million in loans. The results of operations since the date of acquisition reflect the impact of the transaction.

General .

Total assets increased $7.4 million to $1.4 billion at September 30, 2012 and was relatively unchanged from December 31, 2011.

Investment Securities.

Investment securities at September 30, 2012 totaled $644.7 million, an increase of $11.6 million compared to $633.2 million at December 31, 2011. The investment portfolio consisted of available for sale securities at their fair market value total of $619.8 million and held to maturity securities at an amortized cost total of $25.0 million. At December 31, 2011 held to maturity securities, at their amortized cost, total $112.7 million. The decrease from December 31, 2011 to September 30, 2012 in the Company’s held to maturity portfolio was mainly attributable to decreases in market interest rates that prompted bond issuers to redeem the bonds prior to maturity. The Company also had bonds that were classified as held to maturity that matured in the first nine months of 2012.

The securities portfolio consisted principally of U.S. Government agency securities, corporate debt securities and municipal bonds. The securities portfolio provides the Company with a relatively stable source of income and provides a balance to credit risk when compared to other categories of assets. Management 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 10 years or less. Government agency securities generally have maturities of 15 years or less. Corporate securities held at fair value totaled $181.9 million at September 30, 2012. U.S. Government Agency securities that were held at fair value totaled $403.6 million at September 30, 2012. Agency securities that were held for maturity and carried at amortized cost totaled $25.0 million at September 30, 2012. The fair value of held to maturity agency securities was $25.2 million at September 30, 2012.

At September 30, 2012, $30.5 million or 4.7% of the securities portfolio was scheduled to mature in less than one year. Securities with contractual maturity dates over 10 years totaled $111.5 million or 17.3% of the total portfolio. The weighted average contractual maturity of the securities portfolio was 7.7 years. The average maturity of the securities portfolio is affected by issuer call options which are influenced by market interest rates.

During 2012 the Company has substantially shortened the contractual maturity of its securities portfolio mainly through redeployment of funds from securities called during the course of 2012 into shorter term securities. This is an effort by management to reduce the inherent interest rate risk in the portfolio. The Company's securities contractually maturing in greater than ten years at December 31, 2011 totaled $279.5 million. At September 30, 2012, securities maturing in greater than ten years totaled $113.3 million, a decrease of $162.2 million from December 31, 2011. In this same time period the Company's securities contractually maturing in five through ten years increased $92.0 million, maturing in one through five years increased $68.4 million, and securities contractually maturing in less than one year increased $17.4 million while the total securities portfolio increased $11.6 million.

As of September 30, 2012, certain investment securities totaling $2.5 million, all of which were corporate debt securities, had continuous unrealized loss positions for more than 12 months with unrealized losses totaling $0.2 million. At September 30, 2012, 20 securities from 13 issuers were graded below investment grade with a total book value of $4.8 million. Non-investment grade securities represent approximately 0.7% of the Company's total investment portfolio. All of the Company’s non-investment grade securities referenced above were initially investment grade and have been downgraded since purchase. The non-investment grade securities are monitored by management.

Year to date 2012 and 2011 average securities as a percentage of average interest-earning assets were 50.7% and 46.2%, respectively. At September 30, 2012, the U.S. Government agency securities and municipal bonds qualified as securities pledge-able to collateralize repurchase agreements and public funds. Securities pledged totaled $440.8 million at September 30, 2012 and $428.6 million at December 31, 2011. See Note 3 of the Notes to Consolidated Financial Statements for more information on investment securities.

Loans .

Net loans accounted for 43.8% of total assets at September 30, 2012, compared to 41.7% at December 31, 2011. As of September 30, 2012, 77.2% of our loan portfolio was secured primarily or secondarily by real estate. The largest portion of our loan portfolio, at 49.1%, is non-farm, non-residential loans secured by real estate.

The net loan portfolio at September 30, 2012 totaled $596.7 million, a net increase of $32.4 million from the December 31, 2011 net loan portfolio of $564.2 million. Net loans are reduced by the allowance for loan losses which totaled $9.5 million for September 30, 2012 and $8.9 million for December 31, 2011. Total loans include $39.5 million in syndicated loans. Purchased syndicated loans must meet the same underwriting criteria used when originating loans.

Loan charge-offs totaled $3.0 million during the first nine months of 2012, compared to $8.1 million during the same period of 2011. Recoveries totaled $0.6 million during the first nine months of 2012 and $0.6 million for the same period in 2011. See Note 4 of the Notes to Consolidated Financial Statements for more information on loans and Note 5 for information on the allowance for loan losses.

The high level of charge-offs in 2011 is attributable in part to Management's decision to aggressively address non-performing assets by partial charge-offs to conservative estimates of realizable amounts. The lower level of 2012 charge-offs is indicative of the lack of further deterioration in anticipated realizable values.

The Company revised and enhanced its credit risk rating system during 2012. The changes included increased weighting to cash flow analysis and less weighting to collateral valuation. The methodology changes along with the identification of potential weaknesses in several credits resulted in an overall increase in special mention credits from December 31, 2011 to September 30, 2012. The Company believes this enhanced methodology will contribute to earlier detection of problem credits and better monitoring of the loan portfolio.

Nonperforming Assets .

Nonperforming assets consist of loans on which interest is no longer accrued, certain restructured loans where the interest rate or other terms have been renegotiated and real estate acquired through foreclosure (other real estate). The accrual of interest is discontinued on loans when management believes there is reasonable uncertainty about the full collection of principal and interest or when the loan is contractually past due 90 days or more and not fully secured. If the principal amount of the loan is adequately secured, then interest income on such loans is recognized only in periods in which actual payments are received.

The table below sets forth the amounts and categories of our nonperforming assets at the dates indicated.

(in thousands)	September 30, 2012		December 31, 2011
Non-accrual loans:
Real Estate:
Construction and land development	$	1,735	$	1,520
Farmland		781		562
1 - 4 family residential		5,063		5,647
Multifamily		-		-
Non-farm non-residential		11,963		12,400
Total Real Estate	$	19,542	$	20,129
Non-Real Estate:
Agricultural	$	785	$	315
Commercial and industrial		3,239		1,986
Consumer and other		22		20
Total Non-Real Estate	$	4,046	$	2,321
Total non-accrual loans	$	23,588	$	22,450

Loans 90 days and greater delinquent & accruing:
Real Estate:
Construction and land development	$	-	$	-
Farmland		-		-
1 - 4 family residential		376		309
Multifamily		-		-
Non-farm non-residential		678		419
Total Real Estate	$	1,054	$	728
Non-Real Estate:
Agricultural	$	-	$	-
Commercial and industrial		-		-
Consumer and other		-		8
Total Non-Real Estate	$	-	$	8
Total loans 90 days and greater delinquent & accruing	$	1,054	$	736

Total non-performing loans	$	24,642	$	23,186

Real Estate Owned:
Real Estate Loans:
Construction and land development	$	800	$	1,161
Farmland		-		-
1 - 4 family residential		1,414		1,342
Multifamily		-		-
Non-farm non-residential		2,221		3,206
Total Real Estate	$	4,435	$	5,709
Non-Real Estate Loans:
Agricultural	$	-	$	-
Commercial and industrial		-		-
Consumer and other		-		-
Total Non-Real Estate	$	-	$	-
Total Real Estate Owned	$	4,435	$	5,709

Total non-performing assets	$	29,077	$	28,895
				-
Restructured Loans:
In compliance with modified terms	$	14,672	$	17,547
Past due 30 through 89 days and still accruing		679		-
Subsequently defaulted		1,323		-
Total restructured loans	$	16,674	$	17,547

Nonperforming assets totaled $29.1 million or 2.1% of total assets at September 30, 2012, an increase of $0.2 million from December 31, 2011. Management has not identified additional information on any loans not already included in impaired loans or the nonperforming asset total that indicates possible credit problems that could cause doubt as to the ability of borrowers to comply with the loan repayment terms in the future.

Nonaccrual loans totaled $23.6 million as of September 30, 2012. The nonaccrual loans are concentrated in six credit relationships that total approximately $13.8 million or 58.4% of the nonaccrual balance. The nonaccrual loan total includes approximately $3.7 million in a participation loan secured by a hotel, $3.8 million secured by two motels, $1.1 million secured by a personal residence, $1.9 million secured by equipment, $2.5 million secured by real estate, equipment, and accounts receivable, and $0.9 million secured by real estate .

Nonaccrual loans increased in aggregate $1.1 million from December 31, 2011 to September 30, 2012. The increase represents $10.2 million in loans placed on nonaccrual status during the first nine months of 2012. This was partially offset by nonaccrual loans that were charged-off, foreclosed upon and the collateral was transferred to other real estate, was returned to performing status, or principal repayed totaling $9.0 million.

Other Real Estate Owned (OREO) totaled $4.4 million as of September 30, 2012 compared to $5.7 million at December 31, 2011. OREO is composed of several 1-4 family residential properties totaling $1.4 million, construction and land development lots of approximately $0.8 million, and commercial properties totaling $2.2 million. The decrease in OREO from December 31, 2011 was due to the sale of $4.2 million of other real estate in the first nine months of 2012. In addition the Company had write-downs of $1.3 million. The decreases in other real estate were partially offset by additions of $4.2 million during 2012.

Impaired loans totaled $46.7 million as of September 30, 2012. Impaired loans with a valuation allowance totaled $33.6 million and impaired loans without a valuation allowance totaled $13.1 million. Included in the impaired loan total were $14.7 million in restructured loans that are performing under their new terms. For more information, see Note 5 to Consolidated Financial Statements.

Allowance for Loan Losses.

The allowance for loan losses is maintained at a level considered sufficient to absorb potential losses embedded in the loan portfolio. The allowance is increased by the provision for anticipated loan losses as well as recoveries of previously charged off loans and is decreased by loan charge-offs. The provision is the necessary charge to current expense to provide for current loan losses and to maintain the allowance at a level commensurate with Management’s evaluation of the risks inherent in the loan portfolio. Various factors are taken into consideration when determining the amount of the provision and the adequacy of the allowance. These factors include but are not limited to:

●	past due and nonperforming assets;
●	specific internal analysis of loans requiring special attention;
●	the current level of regulatory classified and criticized assets and the associated risk factors with each;
●	changes in underwriting standards or lending procedures and policies;
●	charge-off and recovery practices;
●	national and local economic and business conditions;
●	nature and volume of loans;
●	overall portfolio quality;
●	adequacy of loan collateral;
●	quality of loan review system and degree of oversight by its Board of Directors;
●	competition and legal and regulatory requirements on borrowers;
●	examinations of the loan portfolio by federal and state regulatory agencies and examinations; and
●	review by our internal loan review department and independent accountants.

The data collected from all sources in determining the allowance for loan losses 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 $3.0 million in the first nine months of 2012 compared to $6.9 million for the same period in 2011. Total charge-offs were $3.0 million for first nine months of 2012 as compared to $8.1 million for the same period in 2011. Recoveries totaled $0.6 million during the first nine months of 2012 and $0.6 million during the first nine months of 2011.

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, 2012 and December 31, 2011 the Company had loans totaling $23.6 million and $22.5 million, respectively, on which the accrual of interest had been discontinued. The allowance for loan losses at September 30, 2012 was $9.5 million or 40.3% of nonperforming loans. At September 30, 2012 loans classified as TDRs totaled $16.7 million. The portion of the allowance for loan losses associated with TDRs was $0.7 million or 7.7% of total reserve. See Note 4 and 5 of the Notes to Consolidated Financial Statements for more information on loans and the allowance for loan losses.

Other information relating to loans, the allowance for loan losses and other pertinent statistics follows.

(in thousands)	September 30, 2012			September 30, 2011
Loans:
Average outstanding balance	$	583,046		$	580,478
Balance at end of period	$	606,162		$	606,501

Allowance for Loan Losses:
Balance at beginning of year	$	8,879		$	8,317
Provision charged to expense		3,014			6,855
Loans charged-off		(2,951	)		(8,060	)
Recoveries		565			592
Balance at end of period	$	9,507		$	7,704

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, 2011 to September 30, 2012, total deposits decreased by $1.1 million to $1.2 billion at September 30, 2012. Noninterest-bearing demand deposits increased $24.4 million from December 31, 2011 to September 30, 2012. Interest-bearing demand deposits increased by $8.2 million when comparing September 30, 2012 to December 31, 2011. Time deposits decreased $36.3 million, or 5.2% to $656.2 million at September 30, 2012, compared to $692.5 million at December 31, 2011.

At September 30, 2012, public fund deposits totaled $433.2 million. The Company has developed a program for the development and management of public fund deposits. Since 2007, the Company has maintained public fund deposits in excess of $175.0 million. These deposits are with local government entities such as school districts, hospital districts, sheriff departments and other municipalities. Several of these accounts are under contracts with terms up to three years. Public funds deposit accounts are collateralized by FHLB letters of credit, U.S. Government securities, and by eligible U.S. Government agency securities such as those issued by the FHLB, FFCB, FNMA, and FHLMC. Management believes that public funds provide a low cost and stable source of funding for the Company.

As of September 30, 2012, the aggregate amount of outstanding time deposits in amounts greater than or equal to $100,000 was approximately $429.8 million. At September 30, 2012, $280.0 million or 42.7% of the Company's time deposits had a remaining term greater than one year.

As we seek to maintain a strong net interest margin and improve our earnings, attracting core noninterest-bearing deposits will remain a key element of the Company’s strategy. 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 emphasis on core deposits.

The following table sets forth the distribution of our total deposit accounts, by account type, for the periods indicated.

					Increase/(Decrease)
(in thousands except for %)	September 30, 2012		December 31, 2011		Amount			Percent
Noninterest-bearing demand	$	192,282	$	167,925	$	24,357		14.5	%
Interest-bearing demand		297,579		289,408		8,171		2.8	%
Savings		60,135		57,452		2,683		4.7	%
Time		656,174		692,517		(36,343	)	-5.2	%
Total deposits	$	1,206,170	$	1,207,302	$	(1,132	)	-0.1	%

The following table sets forth the distribution of our time deposit accounts.

(in thousands)	September 30, 2012
Time deposits of less than $100,000	$	226,348
Time deposits of $100,000 through $250,000		158,445
Time deposits of more than $250,000		271,381
Total Time Deposits	$	656,174

The following table sets forth public funds as a percent of total deposits.

(in thousands except for %)	September 30, 2012			December 31, 2011			December 31, 2010			December 31, 2009			December 31, 2008
Total Public Funds	$	433,167		$	431,905		$	356,153		$	268,474		$	225,766
Total Deposits	$	1,206,170		$	1,207,302		$	1,007,383		$	799,746		$	780,382
Total Public Funds as a percent of Total Deposits		35.9	%		35.8	%		35.4	%		33.6	%		28.9	%

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, 2012, short-term borrowings totaled $11.8 million compared to $12.2 million at December 31, 2011, and consisted of repurchase agreements and federal funds purchased. Overnight repurchase agreement balances are monitored daily for sufficient collateralization. The Company had long-term borrowings totaling $1.3 million as of September 30, 2012 and $3.2 million at December 31, 2011. The Company pays $50,000 principal per month on its long-term debt that is priced at WSJ prime plus 75 basis points (4.0%). In addition to the $0.5 million in monthly principal payments for the first nine months of 2012, the Company also made principal reductions totaling $1.5 million. The accelerated repayment of the Company’s long-term debt is a strategy by Management to reduce interest costs while yields on securities remain low.

The average amount of total short-term borrowings for the first nine months of 2012 and 2011 totaled $15.1 million. At September 30, 2012, the Company had $50.0 million in Federal Home Loan Bank letters of credit outstanding obtained solely for collateralizing public deposits.

The Company also maintains a $2.5 million revolving line of credit. There was no balance on this credit facility at September 30, 2012 or December 31, 2011. This credit facility and the $1.3 million in long-term debt are secured by a portion of the Company's ownership in its subsidiary First Guaranty Bank.

Equity .

Stockholders’ equity provides a source of permanent funding, allows for future growth and the ability to absorb unforeseen adverse developments. Of total stockholders' equity, $39.4 million is in the form of preferred stock Series C. The Company is a participant in the United States Treasury's Small Business Lending Fund and the preferred stock series C was issued pursuant to participation. Total equity increased to $134.5 million as of September 30, 2012 from $126.6 million at December 31, 2011. The increase in stockholders' equity was the result of the increase in retained earnings totaling $4.5 million and an increase in accumulated other comprehensive income totaling $3.4 million. The increase in retained earnings was attributable to year to date earnings of $9.0 million which was partially offset by dividends paid to common shareholders totaling $3.0 million and dividends paid on preferred stock totaling $1.5 million. The increase in accumulated other comprehensive income was solely from increases in unrealized gains on available for sale securities. Stockholders’ equity was slightly decreased by the purchase of 2,895 shares of the Company’s common stock totaling $54,000.

Results of Operations for the Three Months and Nine Months Ended September 30, 2012 and 2011

Net Income.

Net income for the quarter ended September 30, 2012 was $3.0 million, an increase of $0.9 million from $2.2 million for the quarter ended September 30, 2011. Net income for the nine months ended September 30, 2012 was $9.0 million, an increase of $2.1 million or 30.1% from $7.0 million for the nine months ended September 30, 2011. For the quarter ended September 30, 2012, the Company had net income available to common shareholders of $2.5 million, an increase of $1.1 million from $1.4 million for the same quarter in 2011. Net income available to common shareholders for the nine months ended September 30, 2012 was $7.6 million, an increase of $2.0 million from $5.5 million for the same period in 2011. The increase in income can be attributed to decreased provisions to the allowance for loan losses when compared year over year as well as decreased interest expense. Net gains on securities for the third quarter of 2012 and 2011 were $1.7 million and $0.9 million, respectively. Net gains on securities for the first nine months of 2012 and 2011 were $3.2 million and $3.1 million. Earnings per common share for the third quarter ended September 30, 2012 was $0.40 per common share, an increase of 81.8% or $0.18 per common share from $0.22 per common share for the third quarter ended September 30, 2011. Earnings per common share for the nine months ended September 30, 2012 was $1.20 per common share, an increase of 34.8% or $0.31 per common share from $0.89 per common share for the nine months ended September 30, 2011.

Net Interest Income.

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

A financial institution’s asset and liability structure is substantially different from that of a non-financial company, in that virtually all assets and liabilities are monetary in nature. Accordingly, changes in interest rates, which are generally impacted by inflation rates, may have a significant impact on a financial institutions performance. The impact of interest rate changes depends on the sensitivity to the change of our interest-earning assets and interest-bearing liabilities. The effects of the varying interest rate environment in recent years and our interest sensitivity position will be discussed below.

Net interest income in the third quarter of 2012 was $9.9 million, when compared to the same period in 2011 of $10.1 million. Net interest income for the first nine months of 2012 and 2011 was $31.6 million and $29.1 million, respectively. Loans represent the largest portion of the Company's interest-earning assets, and at September 30, 2012, 52.1% of our total loans were floating rate loans which are primarily tied to the prime lending rate. After the prime rate dropped 400 basis points in 2008, management began adding interest rate floors to floating rate loans. The interest rate floors helped stabilize the Company's net interest income. The Company has also improved it net interest income in 2012 by increasing its investment portfolio. The cost of our interest-bearing liabilities reflects a lower cost of funds paid on interest-bearing liabilities. As of September 30, 2012, time deposits represented 54.4% of total deposits, which is a decrease from 57.4% of total deposits at December 31, 2011.

The average yield on interest-earning assets decreased from 4.64% for the nine months ended September 30, 2011 to 4.26% for the nine months ended September 30, 2012. The interest-bearing liabilities average yield decreased to 1.28% for the nine months ended September 30, 2012, compared to 1.60% for the same period in 2011. The net yield on interest-earning assets was 2.98% for the nine months ended September 30, 2012, compared to 3.04% for the same period in 2011.

The net interest income yield shown below in the average balance sheet is calculated by dividing net interest income by average interest-earning assets outstanding for 2012 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.

The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Non-accrual 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.

	September 30, 2012						September 30, 2011
(in thousands)	Average Balance		Interest		Yield/Rate		Average Balance		Interest		Yield/Rate
Assets
Interest-earning assets:
Interest-earning deposits with banks [3]	$	29,887	$	56	0.25	%	$	28,563	$	35	0.16	%
Securities (including FHLB stock)		666,707		15,110	3.02	%		539,272		14,504	3.60	%
Federal funds sold		25,263		10	0.05	%		18,235		14	0.10	%
Loans, net of unearned income		583,046		26,538	6.06	%		580,478		25,938	5.97	%
Total interest-earning assets		1,304,903		41,714	4.26	%		1,166,548		40,491	4.64	%

Noninterest-earning assets:
Cash and due from banks		10,442						9,602
Premises and equipment, net		19,827						17,229
Other assets		22,342						10,695
Total Assets		1,357,514						1,204,074

Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Demand deposits		305,547		1,050	0.46	%		209,279		644	0.41	%
Savings deposits		58,806		40	0.09	%		51,535		37	0.10	%
Time deposits		667,103		8,905	1.78	%		675,915		10,637	2.10	%
Borrowings		17,406		98	0.74	%		13,304		50	0.50	%
Total interest-bearing liabilities		1,048,862		10,093	1.28	%		950,033		11,368	1.60	%

Noninterest-bearing liabilities:
Demand deposits		171,854						145,548
Other		6,027						6,234
Total Liabilities		1,226,743						1,101,815

Stockholders' equity		130,771						102,259
Total Liabilities and Stockholders'		1,357,514						1,204,074
Net interest income			$	31,621					$	29,123

Net interest rate spread [4]					2.98	%					3.04	%
Net interest-earning assets [5]	$	256,041					$	216,515
Net interest margin [6]					3.23	%					3.34	%

Average interest-earning assets to interest-bearing liabilities					124.41	%					122.79	%

[3]	Interest-earning deposits with banks include interest earning portion of reserves kept with the Federal Reserve Bank that are classified on the balance sheet as "cash and due from banks". The reserves are not classified as interest-earning demand deposits on the balance sheet because interest is only paid on amounts in excess of minimum reserve requirements.
[4]	Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
[5]	Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
[6]	Net interest margin represents net interest income divided by average total interest-earning assets.

Provision for Loan Losses.

The provision for loan losses was $0.9 million and $3.5 million for the third quarter of 2012 and 2011, respectively. For the nine months ending September 30, 2012, the provision for loan loss was $3.0 million, a decrease from $6.9 million for the first nine months of 2011. The lower provision in 2012 was based on the current condition of the loan portfolio as well as other quantitative and qualitative factors considered by the Company's management team. Of the loan charge-offs for the year to date 2012, approximately $2.1 million were loans secured by real estate and $0.8 million were loans secured by non-real estate. The allowance for loan losses at September 30, 2012 was $9.5 million, compared to $8.9 million at December 31, 2011, and was 1.57% and 1.55% of total loans, at the respective dates. Management believes that the current allowance will cover losses that may currently exist in the loan portfolio given certain qualitative information (i.e. economic conditions, expected charge-offs, and nonperforming assets).

Noninterest Income.

For the quarter ending September 30, 2012 and 2011, noninterest income totaled $3.3 million and $4.0 million, respectively. Noninterest income totaled $8.0 million for the nine months ended September 30, 2012, a decrease of $0.9 million when compared to $8.9 million for the nine months ended September 30, 2011. The noninterest income for the quarter and nine months ended September 30, 2011 included a gain on acquisition of $1.4 million. Service charges, commissions and fees totaled $1.2 million for the third quarter ended September 30, 2012 and 2011. Service charges, commissions and fees totaled $3.6 million for the nine months ended September 30, 2012 and $3.4 million for the same period of 2011. Net securities gains were $1.7 million for the third quarter of 2012 compared to $0.9 million in 2011. Net securities gains were $3.2 million for the first nine months of 2012 compared to $3.1 million in 2011. Net losses on the sale of loans were $47,000 for the nine months ended September 30, 2012 and net gains on the sale of loans were $0.1 million for the same period in 2011. Other noninterest income remained relatively unchanged at $0.4 million for the third quarter ending September 30, 2012 and 2011. The Company’s other noninterest income increased by $0.2 million to $1.2 million in the first nine months of 2012 from $1.1 million for the same period in 2011.

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 totaled $7.8 million in the third quarter of 2012 and $7.9 million in 2011. Noninterest expense increased to $22.9 million for the first nine months of 2012 from $21.2 million for the first nine months of 2011. Salaries and benefits totaled $3.4 million for the third quarter of 2012 and 2011. Salaries and benefits totaled $10.1 million for the first nine months of 2012 compared to $9.4 million for the same period in 2011. Occupancy and equipment expense totaled $1.0 million for the third quarter of 2012 and $0.9 million for the same period in 2011. Occupancy and equipment expense totaled $2.8 million for the first nine months of 2012 and $2.6 million for the same period in 2011. Net costs from other real estate and repossession includes expenses to maintain properties (taxes, legal fees, and insurance) as well as write-downs of the carrying value of the Company's other real estate owned. The increase in net costs from other real estate and repossession is largely attributable to write-downs of $1.3 million for the first nine months of 2012 compared to $0.3 million for the same period in 2011. Other noninterest expense totaled $3.5 million in the third quarter of 2012 and 2011. Other noninterest expense increased by $0.7 million to $10.0 million for the nine months ended September 30, 2012 from $9.3 million for the nine months ended September 30, 2011.

The following is a summary of the significant components of other noninterest expense:

	Nine Months Ended September 30,				Three Months Ended September 30,
(in thousands)	2012		2011		2012		2011
Other noninterest expense:
Legal and professional fees	$	1,527	$	1,691	$	438	$	730
Data processing		2,086		1,803		721		684
Marketing and public relations		657		746		237		217
Taxes - sales, capital, and franchise		541		403		182		17
Operating supplies		425		735		150		170
Travel and lodging		409		345		118		151
Net costs from other real estate and repossessions		1,838		520		739		324
Regulatory assessment		792		1,361		295		413
Other		1,720		1,659		574		827
Total other expense	$	9,995	$	9,263	$	3,454	$	3,533

Income Taxes.

The provision for income taxes was $1.5 million and $0.5 million for the quarters ending September 30, 2012 and 2011. The provision for the nine months ended September 30, 2012 and 2011 was $4.6 million and $3.1 million, respectively. The higher provision for income taxes for 2012 was a result of higher income for 2012 when compared to 2011 as well as the non-taxable nature of the Gain on Acquisition in 2011.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Asset/Liability Management and Market Risk

Asset/Liability Management.

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

The majority of our assets and liabilities are monetary in nature. Consequently, one of our most significant forms of market risk is interest rate risk. Our assets, consisting primarily of loans secured by real estate, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage interest rate risk and reduce the exposure of our net interest income to changes in market interest rates. Accordingly, our Board of Directors has established an Asset/Liability Committee which is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors. Senior Management monitors the level of interest rate risk on a regular basis and the Asset/Liability Committee, which consists of executive Management and other bank personnel operating under a policy adopted by the Board of Directors, meets as needed to review our asset/liability policies and interest rate risk position.

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

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, 2012 shown below reflects a liability-sensitive position with a negative cumulative gap on a one-year basis.

	September 30, 2012
	Interest Sensitivity Within
(in thousands)	3 Months Or Less			Over 3 Months thru 12 Months			Total One Year			Over One Year		Total
Earning Assets:
Loans (including loans held for sale)	$	72,378		$	117,461		$	189,839		$	416,403	$	606,242
Securities (including FHLB stock)		30,483			72,772			103,255			542,626		645,881
Federal Funds Sold		4,931			-			4,931			-		4,931
Other earning assets		20			-			20			747		767
Total earning assets	$	107,812		$	190,233		$	298,045		$	959,776	$	1,257,821

Source of Funds:
Interest-bearing accounts:
Demand deposits	$	148,790		$	-		$	148,790		$	148,789	$	297,579
Savings deposits		15,034			-			15,034			45,101		60,135
Time deposits		154,390			221,770			376,160			280,014		656,174
Short-term borrowings		11,774			-			11,774			-		11,774
Long-term borrowings		-			-			-			1,250		1,250
Noninterest-bearing, net		-			-			-			230,909		230,909
Total source of funds	$	329,988		$	221,770		$	551,758		$	706,063	$	1,257,821

Period gap	$	(222,176	)	$	(31,537	)	$	(253,713	)	$	253,713
Cumulative gap	$	(222,176	)	$	(253,713	)	$	(253,713	)	$	-

Cumulative gap as a percent of earning assets		-17.66	%		-20.17	%		-20.17	%

Liquidity and Capital Resources

On September 22, 2011, the Company received $39.4 million in funds from the U.S. Treasury's Small Business Lending Fund ("SBLF") program. $21.1 million of the funds from the SBLF program were used to refinance the Company's Series A and B Preferred Stock issued to the Treasury under the Capital Purchase Program. The dividend rate on the shares of the preferred stock issued in connection with the SBLF is dependent on the Company's volume of qualified small business loans. In the third quarter of 2012 the Company’s estimated growth in its qualified loans exceeded ten percent of its base line qualified loan portfolio. This increase should reduce the Company’s rate on its preferred equity from 5.00% on the total $39.4 million to 1.00% on the amount equal to the growth in qualified loans and 5.00% on the residual. Pursuant to the agreement with the Treasury, this rate reduction is anticipated to be recognized in the first quarter of 2013.

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, interest-earning time deposits, federal funds sold and unpledged available-for-sale investment securities. These assets represent 60.5% and 63.5% of the unpledged liquidity base at September 30, 2012 and December 31, 2011, respectively. The residual liquidity base is comprised of available lines of credit that are discussed in further detail below.

Loans maturing within one year or less at September 30, 2012 totaled $173.3 million. At September 30, 2012, time deposits maturing within one year or less totaled $376.1 million.

The Company maintained a net borrowing capacity at the Federal Home Loan Bank totaling $125.8 million and $125.5 million at September 30, 2012 and December 31, 2011, respectively. The Company also maintain federal funds lines of credit at three correspondent banks with borrowing capacity of $55.5 million and a revolving line of credit for $2.5 million as of September 30, 2012. The Company did not have an outstanding balance on these lines of credit as of September 30, 2012. 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 $134.5 million as of September 30, 2012 from $126.6 million at December 31, 2011. The increase in stockholders' equity was the result of the increase in retained earnings totaling $4.5 million and an increase in accumulated other comprehensive income totaling $3.4 million. The increase in retained earnings was attributable to year to date earnings of $9.0 million which was partially offset by dividends paid to common shareholders totaling $3.0 million and dividends paid on preferred stock totaling $1.5 million. The increase in accumulated other comprehensive income was solely from increases in unrealized gains on available for sale securities. Stockholders’ equity was slightly decreased by the purchase of 2,895 shares of the Company’s common stock totaling $54,000.

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.

	As of September 30, 2012
	"Well Capitalized Minimums"		Actual
Tier 1 Leverage Ratio
Consolidated	5.00	%	9.15	%
Bank	5.00	%	9.14	%

Tier 1 Risk-based Capital Ratio
Consolidated	6.00	%	14.16	%
Bank	6.00	%	14.14	%

Total Risk-based Capital Ratio
Consolidated	10.00	%	15.26	%
Bank	10.00	%	15.24	%

At September 30, 2012, the Company and its subsidiary satisfied the minimum regulatory capital requirements and were well capitalized within the meaning of federal regulatory requirements.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As defined by the Securities and Exchange Commission in Exchange Act Rules 13a-15(e) and 15d-15(e), 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.

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.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

14.3	Code of Ethics for Senior Financial Officers

14.4	Code of conduct and Ethics for Employees, Officers, and Directors

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.

101.INS	XBRL Instance Document.

101.SCH	XBRL Taxonomy Extension Schema.

101.CAL	XBRL Taxonomy Extension Calculation Linkbase.

101.DEF	XBRL Taxonomy Extension Definition Linkbase.

101.LAB	XBRL Taxonomy Extension Label Linkbase.

101.PRE	XBRL Taxonomy Extension Presentation Linkbase.

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 13, 2012		By: /s/ Alton B. Lewis
		Alton B. Lewis
		Principal Executive Officer


Date: November 13, 2012		By: /s/ Eric J. Dosch
		Eric J. Dosch
		Principal Financial Officer
		Secretary and Treasurer

TABLE OF CONTENTS

Part I. Financial Information Item 1. Consolidated Financial Note 1. Basis Of Presentation Note 2. Recent Accounting Pronouncements Note 3. Securities Note 4. Loans Note 5. Allowance For Loan Losses Note 6. Goodwill and Other Intangible Assets Note 7. Borrowings Note 8. Commitments and Contingencies Note 9. Fair Value Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part II. Other Information Item 1. Legal Proceedings Item 1A. Risk Factors

FGBI 10-Q Quarter ended Sept. 30, 2012