UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

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

For the quarterly period ended: June 30, 2009

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

For the transition period from                      to                     

Commission File Number: 000-51957

FGBC BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Georgia	20 - 02743161
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

101 Main Street, Franklin, Georgia 30217
(Address of principal executive office)

(678) 839-4510

(Issuer’s telephone number)

N/A

(Former name, former address and former fiscal year, if changed since last report)

     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 þ No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

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

Large accelerated filer o Accelerated filer o Non-accelerated filer o
(Do not check if a smaller reporting company) Smaller reporting company þ

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

     There were 13,776,167 shares of common stock outstanding as of July 31, 2009.

INDEX

	Page
Part I. FINANCIAL INFORMATION		4
Item 1. Financial Statements		4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3. Quantitative and Qualitative Disclosures About Market Risk		21
Item 4. Controls and Procedures		22
Part II. OTHER INFORMATION		23
Item 1. Legal Proceedings		23
Item 1A. Risk Factors		23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		23
Item 3. Defaults Upon Senior Securities		23
Item 4. Submission of Matters to a Vote of Security Holders		23
Item 5. Other Information		23
Item 6. Exhibits		23
EX-31.1
EX-31.2
EX-32

CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS

     This Quarterly Report on Form 10-Q (this “Report”) contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements include or relate to our future results, including certain projections and business trends. Assumptions relating to forward-looking statements involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. When used in this Report, the words “estimate,” “project,” “intend,” “believe” and “expect” and similar expressions identify forward-looking statements. Although we believe that assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate, and we may not realize the results contemplated by the forward-looking statement. Management decisions are subjective in many respects and susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause us to alter our business strategy that may, in turn, affect our results of operations. In light of the significant uncertainties inherent in the forward-looking information included in this Report, you should not regard the inclusion of this information as our representation that we will achieve any strategy, objectives or other plans. The forward-looking statements contained in this Report speak only as of the date of the Report and we undertake no obligation to update or revise any of these forward-looking statements.

     The forward-looking statements that we make in this Report, as well as other statements that are not historical facts, are based largely on management’s current expectations and assumptions and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those contemplated by forward-looking statements. These risks and uncertainties include, among other things, the risks and uncertainties described in Item 1A of our Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 2, 2009.

3

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

FGBC BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
JUNE 30, 2009 AND DECEMBER 31, 2008

	June 30,			December 31,
	2009			2008
	(unaudited)			(audited)
Assets
Cash and due from banks	$	22,475,865		$	8,858,796
Interest-bearing deposits in banks		21,367,081			11,042,345
Federal funds sold		—			722,000
Securities available-for-sale, at fair value		48,583,105			71,764,629
Restricted equity securities, at cost		2,694,000			2,053,400
Loans		646,539,254			683,177,685
Less allowance for loan losses		10,819,154			11,013,996
Loans, net		635,720,100			672,163,689
Premises and equipment		37,873,357			37,898,122
Foreclosed assets		14,139,762			6,041,163
Other assets		12,053,990			10,841,477
Total assets	$	794,907,260		$	821,385,621
Liabilities and Stockholders’ Equity
Liabilities
Deposits:
Noninterest-bearing	$	40,788,027		$	34,959,706
Interest-bearing		661,800,915			702,131,988
Total deposits		702,588,942			737,091,694
Other borrowings		27,000,000			16,750,000
Other liabilities		2,517,208			1,730,132
Total liabilities		732,106,150			755,571,826
Stockholders’ equity
Preferred stock, par value $0; 10,000,000 shares authorized; 0 shares issued and outstanding		—			—
Common stock, par value $0; 100,000,000 shares authorized; 13,021,194 and 12,492,206 shares issued and outstanding, respectively		73,927,349			71,907,920
Accumulated deficit		(10,023,995	)		(5,692,364	)
Accumulated other comprehensive loss		(1,102,244	)		(401,761	)
Total stockholders’ equity		62,801,110			65,813,795
Total liabilities and stockholders’ equity	$	794,907,260		$	821,385,621

See Notes to Consolidated Financial Statements.

4

FGBC BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2009 AND 2008
AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008
(Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2009			2008			2009			2008
Interest income:
Loans, including fees	$	9,399,340		$	10,031,672		$	18,816,636		$	20,547,561
Taxable securities		452,922			768,111			1,076,069			1,642,317
Nontaxable securities		141,693			155,052			288,702			314,626
Federal funds sold		2,805			47,186			13,831			78,622
Other interest income		46,021			27,268			94,716			46,272
Total interest income		10,042,781			11,029,289			20,289,954			22,629,398
Interest expense:
Deposits		4,759,980			5,625,336			10,142,879			11,825,987
Other borrowings		1,567			135,531			437,764			162,266
Total interest expense		4,761,547			5,760,867			10,580,643			11,988,253
Net interest income		5,281,234			5,268,422			9,709,311			10,641,145
Provision for loan losses		4,332,170			1,566,267			6,251,177			2,425,079
Net interest income after provision for loan losses		949,064			3,702,155			3,458,134			8,216,066
Other income:
Service charges on deposit accounts		534,232			569,756			992,771			1,086,968
Mortgage origination fees		311,597			348,549			636,583			719,104
Net gain on sale of securities available for sale		10,739			20,955			721,331			629,987
Net gain on sale of premises and equipment		—			(3,732	)		—			170,138
Other operating income		65,599			51,349			144,802			135,256
Total other income		922,167			986,877			2,495,487			2,741,453
Other expenses:
Salaries and employee benefits		2,882,676			3,465,584			6,027,152			6,958,043
Equipment and occupancy expenses		849,244			828,766			1,686,401			1,640,802
Other operating expenses		3,224,615			1,662,071			5,228,917			3,208,086
Total other expenses		6,956,535			5,956,421			12,942,470			11,806,931
Loss before income taxes		(5,085,304	)		(1,267,389	)		(6,988,849	)		(849,412	)
Income tax benefit		(1,929,562	)		(503,764	)		(2,657,218	)		(375,601	)
Net loss		(3,155,742	)		(763,625	)		(4,331,631	)		(473,811	)
Basic losses per share	$	(0.25	)	$	(0.06	)	$	(0.35	)	$	(0.04	)
Diluted losses per share	$	(0.25	)	$	(0.06	)	$	(0.35	)	$	(0.04	)
Cash dividends per share	$	—		$	—		$	—		$	—

See Notes to Consolidated Financial Statements.

5

FGBC BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
THREE MONTHS ENDED JUNE 30, 2009 AND 2008
AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008
(Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2009			2008			2009			2008
Net loss	$	(3,155,742	)	$	(763,625	)	$	(4,331,631	)	$	(473,811	)
Other comprehensive income (loss):
Reclassification adjustment for net gains on sales of securities included in net income, net of tax of $4,081 and $7,963 for (three months) and $274,106 and $239,394 for (six months)		(6,658	)		(12,992	)		(447,225	)		(390,593	)
Net unrealized holding gains on securities available for sale arising during period, net of tax benefit of $178,980 and $586,382 for (three months) and $155,222 and $499,856 for (six months)		(292,021	)		(956,729	)		(253,258	)		(815,552	)
Other comprehensive income (loss)		(298,679	)		(969,721	)		(700,483	)		(1,206,145	)
Comprehensive loss	$	(3,454,421	)	$	(1,733,346	)	$	(5,032,114	)	$	(1,679,956	)

See Notes to Consolidated Financial Statements.

6

FGBC BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2009 AND 2008
(Unaudited)

	2009			2008
OPERATING ACTIVITIES
Net loss	$	(4,331,631	)	$	(473,811	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		984,437			945,017
Amortization and accretion of securities		84,392			17,421
Provision for loan losses		6,251,177			2,425,079
Writedown of foreclosed assets		557,247			—
Stock compensation expense		155,884			172,998
Deferred taxes		1,012,421			(731,365	)
Net gain on sale of securities available for sale		(721,331	)		(629,987	)
Net loss on sale of foreclosed assets		339,710			175,741
Net gain on sale of premises and equipment		—			(170,138	)
Decrease in income taxes payable		(1,684,597	)		(165,765	)
Decrease in interest receivable		228,873			377,270
Decrease in interest payable		(263,106	)		(90,480	)
Net other operating activities		710,302			(34,276	)
Net cash provided by operating activities		3,323,778			1,817,704
INVESTING ACTIVITIES
(Increase) decrease in interest bearing deposits in banks		6,746,697			(13,325	)
Purchases of securities available for sale		(24,151,260	)		(42,954,149	)
Proceeds from maturities of securities available for sale		11,007,608			8,434,160
Proceeds from sales of securities available for sale		35,832,302			42,197,663
Purchases of restricted equity securities		(640,600	)		(865,300	)
Net decrease in federal funds sold		722,000			11,423,000
Net (increase) decrease in loans		17,896,905			(111,630,815	)
Purchase of premises and equipment		(959,672	)		(3,505,670	)
Proceeds from sale of foreclosed assets		3,433,500			1,024,856
Proceeds from sale of premises and equipment		—			1,005,997
Additions to other real estate owned		(133,548	)		(188,150	)
Net cash (used in) provided by investing activities		49,753,932			(95,071,733	)
FINANCING ACTIVITIES
Net increase (decrease) deposits		(34,502,752	)		80,254,412
Net increase in other borrowings		10,250,000			15,000,000
Proceeds from sale of common stock		1,721,531			2,306,040
Proceeds from exercise of stock options		142,013			149,018
Purchase of fractional shares of common stock		—			(7,944	)
Net cash (used in) provided by financing activities		(22,389,208	)		97,701,526
Net increase in cash and due from banks		30,688,502			4,447,497
Cash and due from banks, beginning of period		8,858,796			6,112,287
Cash and due from banks, end of period	$	39,547,298		$	10,559,784
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during period for:
Interest	$	10,861,286		$	12,142,561
Income taxes	$	—		$	200,000
NONCASH TRANSACTIONS
Financed sales of foreclosed assets	$	1,522,002		$	—
Loans transferred to foreclosed assets	$	13,817,509		$	3,432,739

See Notes to Consolidated Financial Statements.

7

FGBC BANCSHARES, INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
(Unaudited)

NOTE 1. BASIS OF PRESENTATION

     The financial information contained herein is unaudited. Accordingly, the information does not include all the information and footnotes required by generally accepted accounting principles for complete financial statements, however, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for a fair statement of results for the interim periods

     Operating results for the three and six-month periods ended June 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. These statements should be read in conjunction with the financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2008.

NOTE 2. LOSSES PER COMMON SHARE

     The Company is required to report earnings (losses) per common share with and without the dilutive effects of potential common stock issuances from instruments such as options, convertible securities and warrants on the face of the statements of operations. Earnings (losses) per common share are based on the weighted average number of common shares outstanding during the period while the effects of potential common shares outstanding during the period are included in diluted earnings (losses) per share. Presented below is a summary of the components used to calculate basic and diluted earnings (losses) per common share.

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2009			2008			2009			2008
Basic losses per share:
Weighted average common shares outstanding		12,533,357			12,198,712			12,521,148			12,194,416
Net loss	$	(3,155,742	)	$	(763,625	)	$	(4,331,631	)	$	(473,811	)
Basic losses per share	$	(0.25	)	$	(0.06	)	$	(0.35	)	$	(0.04	)
Diluted losses per share:
Weighted average common shares outstanding		12,533,357			12,198,712			12,521,148			12,194,416
Net effect of the assumed exercise of stock options based on the treasury stock method using average market prices for the year		—			—			—			—
Total weighted average common shares and common stock equivalents outstanding		12,533,357			12,198,712			12,521,148			12,194,416
Net loss	$	(3,155,742	)	$	(763,625	)	$	(4,331,631	)	$	(473,811	)
Diluted losses per share	$	(0.25	)	$	(0.06	)	$	(0.35	)	$	(0.04	)

Potential common shares totaling 608,009 and 639,887 for the three and six-months ended June 30, 2009 respectively were anti-dilutive and not included in the computation of diluted earnings per share.

8

NOTE 3. FAIR VALUE MEASUREMENTS

In September 2006 the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This statement does not require any new fair value measurements, but applies under other accounting pronouncements. FASB previously concluded in such accounting pronouncements that fair value is the relevant measurement attribute.

The Company adopted the provisions of SFAS No. 157 on January 1, 2008. In February 2008 the FASB issued Staff Position No. FAS 157-2, which permits delayed application of the provisions of SFAS 157 to nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis to fiscal years beginning after November 15, 2008. Since the Company has elected to delay application of the provisions of SFAS No. 157 to nonfinancial assets and liabilities in scope of this staff position, the information disclosed below does not consider the impact that SFAS No. 157 would have on such nonfinancial assets and liabilities. The major categories of assets and liabilities that are recognized or disclosed at fair value, for which the provisions of SFAS No. 157 have not been applied, include reporting units measured at fair value in the first step of a goodwill impairment test under SFAS No. 142 and nonfinancial long-lived assets measured at fair value for an impairment assessment under SFAS No. 144.

SFAS No. 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1 — Quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 — Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.

Level 3 — Generated from model-based techniques that use at least one significant assumption based on unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

In February, 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115. SFAS No. 159 allows companies to report selected financial assets and liabilities at fair value. The changes in fair value are recognized in earnings and the assets and liabilities measured under this methodology are required to be displayed separately on the balance sheet. While SFAS No. 159 became effective for the Company beginning January 1, 2008, the Company has not elected the fair value option that is offered by this statement.

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair value is based on discounted cash flows or other valuation techniques. These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Securities Available for Sale: Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1

9

securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

Impaired Loans: Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with SFAS No. 114, Accounting by Creditors for Impairment of a Loan, (SFAS No. 114). The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At December 31, 2008, substantially all of the impaired loans were evaluated based on the fair value of the collateral. In accordance with SFAS No. 157, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

Foreclosed Assets: Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price, the Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3.

The table below presents the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2009 and December 31, 2008, aggregated by the level in the fair value hierarchy within which those measurements fall.

	June 30, 2009
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
(Dollars in Thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
Assets
Available for sale investment securities	$	48,583	$	—	$	48,583	$	—
Total assets at fair value	$	48,583	$	—	$	48,583	$	—

	December 31, 2008
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
(Dollars in Thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
Assets
Available for sale investment securities	$	71,765	$	—	$	71,765	$	—
Total assets at fair value	$	71,765	$	—	$	71,765	$	—

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. Generally Accepted Accounting Principles. These include assets that are measured at the lower of cost or fair value. The table below presents the Company’s assets measured at fair value on a nonrecurring basis as of June 30, 2009 and December 31, 2008, aggregated by the level in the fair value hierarchy within which those measurements fall.

10

	June 30, 2009
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
(Dollars in Thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
Assets
Impaired loans	$	23,788	$	—	$	7,274	$	16,514
Foreclosed assets		14,140		—		5,597		8,543
Total assets at fair value	$	37,928	$	—	$	12,871	$	25,057

	December 31, 2008
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
(Dollars in Thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
Assets
Impaired loans	$	38,625	$	—	$	6,765	$	31,860
Foreclosed assets		6,041		—		841		5,200
Total assets at fair value	$	44,666	$	—	$	7,606	$	37,060

The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments.

Cash and cash equivalents: The carrying amounts of cash, due from banks, interest bearing deposits in banks and federal funds sold approximate fair values.

Securities: Fair values for securities are based on available quoted market prices.

Restricted Equity Securities: The carrying value of restricted equity securities with no readily determinable fair value approximates fair value.

Loans: The carrying amount of variable-rate loans that reprice frequently and have no significant change in credit risk approximates fair value. The fair value of fixed-rate loans is estimated based on discounted contractual cash flows, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. The fair value of impaired loans is estimated based on discounted contractual cash flows or underlying collateral values, where applicable.

Deposits: The carrying amount of demand deposits, savings deposits, and variable-rate certificates of deposit approximates fair value. The fair value of fixed-rate certificates of deposit is estimated based on discounted contractual cash flows using interest rates currently being offered for certificates of similar maturities.

Other Borrowings: The fair value of fixed rate borrowings is based on discounted contractual cash flows using interest rates currently offered for debt with similar terms.

Accrued Interest: The carrying amount of accrued interest approximates fair value.

The carrying amount and estimated fair value of the Company’s financial instruments were as follows:

	June 30, 2009				December 31, 2008
	Carrying				Carrying
(Dollars in Thousands)	Amount		Fair Value		Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	43,843	$	43,843	$	20,623	$	20,623
Securities available-for-sale		48,583		48,583		71,764		71,764
Restricted equity securities		2,694		2,694		2,053		2,053
Loans		635,720		633,728		672,164		667,130
Accrued interest receivable		3,651		3,651		3,880		3,880
Financial liabilities:
Deposits	$	702,589	$	706,930	$	737,092	$	741,079
Other borrowings		27,000		27,000		16,750		17,010
Accrued interest payable		690		690		953		953

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NOTE 4. SECURITIES AVAILABLE-FOR-SALE

The amortized cost and fair value of securities available with gross unrealized gains and losses for sale are summarized as follows and on the following page:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
June 30, 2009:
U.S. Government sponsored agency securities	$	14,542,710	$	4,190	$	(119,099	)	$	14,427,801
Mortgage-backed securities		19,086,415		93,604		(149,862	)		19,030,157
State, county and municipals		14,187,072		16,210		(753,215	)		13,450,067
Corporate securities		2,544,723		—		(869,643	)		1,675,080
	$	50,360,920	$	114,004	$	(1,891,819	)	$	48,583,105
December 31, 2008:
U.S. Government sponsored agency securities	$	20,478,647	$	647,993	$	—		$	21,126,640
Mortgage-backed securities		34,199,020		696,568		(76,228	)		34,819,360
State, county and municipals		15,187,226		2,170		(1,648,137	)		13,541,259
Corporate securities		2,547,738		7,500		(277,868	)		2,277,370
	$	72,412,631	$	1,354,231	$	(2,002,233	)	$	71,764,629

Securities with a carrying value of $7,500,369 and $20,744,709 as of June 30, 2009 and December 31, 2008, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

The tables below show the gross unrealized losses and fair value of securities, aggregated by category and length of time that securities have been in a continuous unrealized loss position.

	June 30, 2009
	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Description of Securities	Value		Losses			Value		Losses			Value		Losses
U.S. Government sponsored agencies	$	12,219,551	$	(119,099	)	$	—	$	—		$	12,219,551	$	(119,099	)
Mortgage-backed securities		9,471,521		(149,862	)		—		—			9,471,521		(149,862	)
State, county and municipals		10,550,711		(518,235	)		1,972,985		(234,980	)		12,523,696		(753,215	)
Corporate securities		450,000		(550,000	)		1,225,080		(319,643	)		1,675,080		(869,643	)
Total temporarily impaired securities	$	32,691,783	$	(1,337,196	)	$	3,198,065	$	(554,623	)	$	35,889,848	$	(1,891,819	)

	December 31, 2008
	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Description of Securities	Value		Losses			Value		Losses			Value		Losses
U.S. Government sponsored agencies	$	—	$	—		$	—	$	—		$	—	$	—
Mortgage-backed securities		6,336,827		(73,011	)		971,055		(3,217	)		7,307,882		(76,228	)
State, county and municipals		12,365,148		(1,492,817	)		888,316		(155,320	)		13,253,464		(1,648,137	)
Corporate securities		1,269,870		(277,868	)		—		—			1,269,870		(277,868	)
Total temporarily impaired securities	$	19,971,845	$	(1,843,696	)	$	1,859,371	$	(158,537	)	$	21,831,216	$	(2,002,233	)

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Unrealized gains and losses within the investment portfolio are determined to be temporary. The Company has performed an evaluation of its investments for other than temporary impairment and at June 30, 2009 no impairment was identified. Our corporate securities consist solely of two trust preferred securities of financial institution holding companies and continue to make their contractual interest payments. Management has no specific intent to sell any securities and it is more likely than not that the Company will not have to sell any security before recovery of its cost basis.

The amortized cost and fair value of debt securities as of June 30, 2009 by contractual maturity are shown on the following page. Actual maturities may differ from contractual maturities of mortgage-backed securities because the mortgages underlying the securities may be called or repaid without penalty. Therefore, these securities are not included in the maturity categories in the following summary.

	Amortized		Fair
	Cost		Value
Due in less than one year	$	—	$	—
Due from one to five years		285,564		294,567
Due from five to ten years		6,826,737		6,801,154
After ten years		24,162,204		22,457,227
Mortgage-backed securities		19,086,415		19,030,157
	$	50,360,920	$	48,583,105

The gross gains and losses realized by the Company from sales of available-for-sale securities for the three and six months ended June 30, 2009 and 2008 respectively were as follows:

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2009		2008			2009		2008
Gross gains realized	$	10,739	$	33,828		$	721,331	$	655,643
Gross losses realized		—		(12,873	)		—		(25,656	)
Net realized gain	$	10,739	$	20,955		$	721,331	$	629,987

NOTE 5. SUBSEQUENT EVENTS

   Management has evaluated all significant events and transactions that occurred after June 30, 2009, but prior to August 14, 2009, the date these consolidated financial statements were issued, for potential recognition or disclosure in these financial statements.

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

     The following is management’s discussion and analysis of certain significant factors which have affected our financial position and operating results during the periods included in the accompanying consolidated financial statements.

Overview

     We experienced a decrease in federal funds sold, securities, loans, premises and equipment and total assets and an increase in cash, interest-bearing deposits in banks, restricted equity securities, foreclosed assets and other assets as of June 30, 2009 as compared to December 31, 2008. These changes reflect management’s intent to reduce the bank’s asset size in order to improve its capital ratios and increase liquidity during the current difficult economic environment. We recorded a net loss of $4,331,631 for the six months ended June 30, 2009 compared to net loss of $473,811 for the corresponding period in 2008. The most significant item contributing to our net loss was a provision for loan losses of $6,251,777 for the six months ended June 30, 2009 as compared to $2,425,079 for the same period in 2008. Foreclosed assets increased from $3,211,234 at June 30, 2008 to $14,139,761 at June 30, 2009, which is a result of moving loans from non-performing to actual foreclosure. Related to this increase, we incurred $573,580 of foreclosed asset expense for the upkeep of properties, legal fees and taxes for the six months ended June 30, 2009 with no expense recorded for the same period in 2008. Additionally write-downs of foreclosed properties (related to three banking relationships) totaled $557,247 for the six months ended June 30, 2009. By comparison, we incurred no expense relating to these items for the same period in 2008. Non-performing loans also negatively impacted our net interest income as accrued interest is backed out of income when loans become non-accrual. Our non-accrual loans increased from $2,134,045 at June 30, 2008 to $25,900,939 at June 30, 2009.

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     We expect that our loan portfolio will slightly contract for the remainder of 2009 due to management’s intentional tightening of underwriting guidelines. Additionally, management has shifted its focus towards attracting loans that are collateralized by assets other than commercial real estate in an effort to lessen our current concentration in this collateral type. The real estate markets in the communities we serve have weakened overall but appear to have stabilized from the tumultuous decline in the fourth quarter of 2008.

     To help reduce the effects of the net loss, management has made a conscious effort to aggressively identify and reduce any “non-essential” expense such as social club dues, marketing and employee-related expenses. During the fourth quarter of 2008 and again in the first quarter of 2009, the bank conducted a reduction-in-force eliminating a total of 24 positions across the company and reduced salaries for several other positions. Salaries and employee benefits have decreased $930,891 for the six months ended June 30, 2009 as compared to the same period in 2008. Management, with the approval of the board of directors, also suspended our incentive program during 2008 (for which bonuses would have been paid in the first quarter of 2009). The program remains suspended for 2009. Additionally, the board of directors voted to reduce board fees beginning in 2009. We expect to see the effect of all these efforts more fully as the year progresses.

Critical Accounting Policies

     We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States in the preparation of our financial statements. Our significant accounting policies are described in the footnotes to the consolidated financial statements at December 31, 2008, which were included as part of our Form 10-K filed with the SEC on April 2, 2009.

     Certain accounting policies involve significant judgments and assumptions by us which have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgments and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgments and assumptions we make, actual results could differ from these judgments and estimates, which could have a material impact on our carrying values of assets and liabilities and our results of operations.

     We believe the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in the preparation of our consolidated financial statements. Refer to the portion of this discussion that addresses our allowance for loan losses for a description of our processes and methodology for determining our allowance for loan losses.

     Another of our critical accounting policies involves stock-based compensation. The assumptions used in the determination of the fair value of stock options granted ultimately determine the recognition of stock-based compensation expense. The short-cut method was used to determine the expected life of the options. This method, as prescribed by Staff Accounting Bulletin (“SAB”) Topic 14.D.2, calculates the expected term based on the midpoint between the vesting date of the option and the end of the contractual term. Expected volatility was based upon the volatility of similar entities. Risk-free interest rates for periods within the contractual life of the option are based upon the U.S. Treasury yield curve in effect at the time of the grant. Because of the need to retain capital for expected growth and past history, the expected dividend rate is 0%. These assumptions have a significant impact on the amount of expense recognized for stock-based compensation.

     The recognition of deferred income tax assets is another of our critical accounting policies. Deferred income tax assets and liabilities are determined using the balance sheet method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. A valuation allowance for deferred tax assets is required when it more likely than not that some portion or all of the deferred tax assets will not be realized in the near term. In assessing the realization of the deferred tax assets, we consider the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies. As of June 30, 2009 we did not record a valuation allowance based upon projections that indicate our ability to realize the net deferred tax asset within three years. Our projections are updated no less frequently than quarterly and there is no guarantee that a valuation allowance will not be required in the future.

     Another of our critical accounting policies involves assets acquired through loan foreclosure or repossession (primarily real estate and vehicles.) These assets are initially recorded at fair value less estimated cost to sell at the date of foreclosure. We determine fair value based upon the lowest of the following three methods: (1) independently observed market prices; (2) appraised values; or (3) management’s estimation of the value of the property. Any write-downs based on the asset’s fair value on the date of acquisition is charged to the allowance for loan losses. In the event that foreclosed

14

real estate is incomplete at the time of foreclosure, it is held for sale and initially recorded at fair value as obtained from a current appraisal less estimated costs to complete and sell. We will obtain an “as-completed” appraisal and capitalize costs associated with completion up to this value, less selling costs, in accordance with generally accepted accounting standards. For the six months ended June 30, 2009 we charged down $250,348 at the time of foreclosure. After foreclosure, valuations are periodically performed and the assets are carried at the lower of the carrying or fair value, less estimated cost to sell. Costs incurred in maintaining foreclosed assets and subsequent write-downs based on updated valuations of the property are included in other operating expenses. In response to the slowing economy and general decline in real estate values, we incurred $339,611 realized net losses on sales of foreclosed assets for the six months ended June 30, 2009. The carrying amount of foreclosed assets at June 30, 2009 and 2008 was $14,139,762 and $3,211,234, respectively. In determining the carrying amount at June 30, 2009, we have taken into account the recent trend of declining real estate values. Although this trend has not reversed, we believe that the pace of the decline is slowing. Based on our assumptions, we believe that the carrying value of our foreclosed assets at June 30, 2009 is reasonable; however, if our assumptions prove incorrect, we may have to take further write downs on our foreclosed properties. We believe that the real estate markets in the communities we serve have begun to stabilize since the fourth quarter of 2008. However, a significant level of instability continues to exist. Therefore, we believe that the range of possible outcomes relating to our foreclosed property is greater than usual.

Liquidity and Capital Resources

     We consider our liquidity to be adequate to meet operating and loan funding requirements at June 30, 2009. Our bank’s liquidity ratio at June 30, 2009 (i.e. cash, short-term assets, marketable assets and available lines of credit divided by deposits and other borrowings) was approximately 12.5% and the loan to deposit ratio was approximately 92%. We will continue to monitor our liquidity and make adjustments as deemed necessary. Investing our available funds in loans and other higher yielding securities should increase earnings potential.

     Requirements by banking regulators include the monitoring of risk-based capital guidelines for banks and holding companies that are designed to make capital requirements more sensitive to differences in risk profiles and account for off-balance sheet items. Management monitors these ratios on a continuous basis. As of June 30, 2009, we disallowed approximately $2,973,000 of deferred tax assets for our regulatory capital computations. For these regulatory capital calculations, guidelines limit the recognition of deferred tax assets to amounts that can be recovered in open carry-back years and taxes that are expected to be paid in the next twelve months. The standard minimum capital requirements and the actual capital ratios on a consolidated and bank-only basis as of June 30, 2009 were as follows:

										Regulatory
										Minimum
							Regulatory			Requirement for
	Actual						Minimum			Well Capitalized
	Consolidated			Bank			Requirement			Status
Leverage capital ratio		7.74	%		7.71	%		4.00	%		5.00	%
Risk-based capital ratios:
Tier I capital		9.46	%		9.46	%		4.00	%		6.00	%
Total capital		10.75	%		10.71	%		8.00	%		10.00	%

     On June 25, 2009, we began a campaign to raise capital by issuing common stock through a private placement offering. We raised aggregate proceeds of approximately $1.7 million in this offering prior to June 30, 2009 and raised additional aggregate proceeds of approximately $2.6 million during July 2009.

Off-Balance Sheet Risk

     We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized in the balance sheets.

     Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. A summary of our commitments is as follows:

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	June 30, 2009
	(Dollars in Thousands)
Commitments to extend credit	$	51,316
Letters of credit		1,179
	$	52,495

     Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the customer.

     Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Collateral is required in instances which we deem necessary.

Financial Condition

     The following is a summary of our balance sheets at the dates indicated:

	June 30,		December 31,
	2009		2008
	(Dollars in Thousands)
Cash and due from banks	$	22,476	$	8,859
Interest-bearing deposits in banks		21,367		11,042
Federal funds sold		—		722
Securities		51,277		73,818
Loans, net		635,720		672,164
Premises and equipment		37,873		37,898
Foreclosed assets		14,140		6,041
Other assets		12,054		10,842
	$	794,907	$	821,386
Deposits	$	702,589	$	737,092
Other borrowings		27,000		16,750
Other liabilities		2,517		1,730
Stockholders’ equity		62,801		65,814
	$	794,907	$	821,386

     Our total assets decreased by $26,478,361, or 3.22%, to $794,907,260 for the first six months of 2009, which is due to a combination of a decrease in gross loans of $36,638,431, securities available for sale of $23,181,524, and federal funds sold of $722,000. These declines were partially offset by increases of $30,688,502 in cash and due from banks, interest-bearing deposits of $10,325,000, foreclosed assets of $8,098,599 and a $1,212,513 increase in other assets as compared to December 31, 2008. These changes reflect management’s intent to reduce the bank’s asset size in order to improve its capital ratios and increase liquidity during challenging economic times. Changes to premises and equipment were not significant for these same periods. For the first six months of 2009 as compared to December 31, 2008, total liabilities decreased by $23,465,676 and deposits decreased by $34,502,752. Additionally, we borrowed $27,000,000 of daily rate credit funds with a cost of 44 basis points during the second quarter after prepaying $16,750,000 of fixed-rate FHLB borrowings with an average cost of 348 basis points and an average maturity of 57 months with a $324,300 prepayment penalty during the first quarter. Changes to other liabilities were not significant. Stockholders’ equity decreased by $3,012,685 due to our loss of $4,331,631 for the first six months of 2009, an increase in other comprehensive loss of $700,483 and an increase to common stock from common stock sold of $1,721,531, stock options exercised and a tax refund related to stock options of $140,013 and $155,885 for FAS No. 123R expense for these same periods. On June 30, 2009 our contractual purchase obligations totaled $30,000 for premises and equipment. Our loan to deposit ratio decreased to 92% at June 30, 2009 from 93% at December 31, 2008.

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Results of Operations for the Three and Six Months Ended June 30, 2009 and 2008

     The following is a summary of our operations for the periods indicated:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2009			2008			2009			2008
	(Dollars in Thousands)
Interest income	$	10,043		$	11,029		$	20,290		$	22,629
Interest expense		(4,762	)		(5,761	)		(10,581	)		(11,988	)
Net interest income		5,281			5,268			9,709			10,641
Provision for loan losses		(4,332	)		(1,566	)		(6,251	)		(2,425	)
Other income		922			986			2,495			2,741
Other expense		(6,957	)		(5,955	)		(12,942	)		(11,806	)
Pretax income (loss)		(5,086	)		(1,267	)		(6,989	)		(849	)
Income tax expense (benefit)		(1,930	)		(504	)		(2,657	)		(375	)
Net income (loss)	$	(3,156	)	$	(763	)	$	(4,332	)	$	(474	)

     Our net interest income for the three months ended June 30, 2009 was $5,281,234, which is an increase of $12,812 as compared to the same period for 2008. We have experienced compression in our net interest margin due to a falling interest rate environment and stiff competition for deposits for several quarters as noted in the table below:

Period	Net interest margin
June, 2009		2.61	%
March, 2009		2.32	%
December, 2008		2.88	%
September, 2008		3.08	%
June, 2008		3.17	%
March, 2008		3.32	%
December, 2007		3.69	%

     Our net interest margin has also been negatively impacted by lost interest income on increased non-performing assets. However, we have begun to see an improvement in our net interest margin as our loan yields are increasing and our cost of funds are decreasing, thus widening our margins.

     Our net interest income for the six months ended June 30, 2009 was $9,709,311, which represented a decrease of $931,834 as compared to the same period in 2008. The decrease in net interest income for the six months ended June 30, 2009 versus the same period in 2008 is due to a combination of a declining rate environment and an increase in non-performing loans, which negatively impact our net interest income. Our non-accrual loans increased from $2,134,045 at June 30, 2008 to $25,900,939 at June 30, 2009.

     Provision and Allowance for Loan Losses

     The allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. Increases and decreases in the allowance due to changes in the measurement of the impaired loans are included in the provision for loan losses. Once a loan is classified as impaired, it continues to be classified as impaired unless it is brought fully current and the collection of scheduled interest and principal is considered probable. When a loan or portion of a loan is determined to be uncollectible, the portion deemed uncollectible is charged against the allowance and subsequent recoveries, if any, are credited to the allowance.

     Management determines the allowance for loan loss by first dividing the loan portfolio into two major categories: (1) satisfactory and past due loans, which are accounted for under Statement of Financial Accounting Standard (“SFAS”) No. 5, Accounting for Contingencies, and (2) impaired loans, which are accounted for under SFAS No. 114, Accounting by Creditors for Impairment of a Loan. For purposes of evaluation, satisfactory and past due loans are further segmented into the following categories: commercial and government guaranteed loans, commercial 1-4 family construction and acquisition and development projects, consumer residential real estate and other consumer loans. Pursuant to guidance set forth in SFAS No. 5, management uses a moving average three year net loan charge-off/recovery experience rate (net charge-off percentage of total loans) with more weight given to the most recent year for these segments in the loan portfolio. Loan loss reserves are calculated primarily based upon this historical loss experience by segment and adjusted for qualitative factors including changes in the nature and volume of the loan portfolio, overall portfolio quality, changes in levels of non-performing loans, significant shifts in real estate values, changes in levels of collateralization, trends in

17

staff lending experience and turnover, loan concentrations and current economic conditions that may affect the borrower’s ability to pay. For example, because of the recent increase in the level of our non-performing loans and general decline in real estate values, management has increased its qualitative economic and environmental factors in our SFAS No. 5 calculation.

     Under SFAS No. 114 guidance, a loan is generally classified as impaired, based on current information and events, if it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Impaired loans are measured 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. A large part of our loans are collateral dependent, which has caused larger impairment amounts to be included in our allowance for loan losses due to recent declines in real estate values. Loans continue to be classified as impaired until they are brought fully current and the collection of scheduled interest and principal is reasonably assured. Impaired loans with balances in excess of $50,000 are evaluated individually, while impaired loans with balances of $50,000 or less are evaluated as a group. No additional funds are committed to be advanced in connection with impaired loans.

     The allocation of the allowance to the respective loan categories is an approximation and not necessarily indicative of future losses. The entire allowance is available to absorb losses occurring in the loan portfolio. Management regularly monitors trends with respect to non-accrual, restructured and potential problems loans. Subsequent negative changes in these loans have led management to increase its qualitative adjustment in the allowance for loan loss to accommodate these trends. In management’s opinion, the loan loss allowance is considered adequate at June 30, 2009.

     The following table summarizes the allocation of the allowance for loan losses to types of loans as of the indicated dates. The allowance for loan loss allocation is based on a subjective judgment and estimates and therefore is not necessarily indicative of the specific amounts or loan categories in which charge-offs may ultimately occur. In addition, there will be allowance amounts that are allocated based on evaluation of individual loans considered to be impaired by management.

	June 30, 2009					December 31, 2008
			Percentage					Percentage
			of loans in					of loans in
			each					each
	Amount		category			Amount		category
	(Dollars in Thousands)
Commercial and industrial	$	629		7.11	%	$	632		7.26	%
Real estate — construction		4,809		27.07	%		5,452		29.64	%
Real estate — mortgage		5,055		61.86	%		4,578		58.95	%
Installment loans to individuals		326		3.96	%		351		4.15	%
	$	10,819		100	%	$	11,013		100	%

Information with respect to non-accrual, past due and restructured loans at June 30, 2009 and 2008 is as follows:

18

	June 30,
	2009		2008
	(Dollars in Thousands)
Non-accrual loans:
Commercial and industrial	$	752	$	344
Real estate — construction		17,072		739
Real estate — mortgage		7,893		942
Installment loans to individuals		183		109
Total non-accrual loans	$	25,900	$	2,134
Loans contractually past due ninety days or more as to interest or principal payments and still accruing	$	—	$	—
Restructured loans in compliance with terms:
Commercial and industrial	$	3,894	$	—
Real estate — construction		—		—
Real estate — mortgage		1,271		—
Installment loans to individuals		—		—
Total restructured loans in compliance with terms	$	5,165	$	—
Potential problem loans:
Commercial and industrial	$	133	$	49
Real estate — construction		1,553		24
Real estate — mortgage		1,595		561
Installment loans to individuals		69		8
Total potential problem loans	$	3,350	$	642
Interest income that would have been recorded on non-accrual loans under original terms	$	2,867
Interest income that was recorded on non-accrual loans		2,475
Reduction in interest income	$	392

     Our levels of non-performing loans have increased due to a combination of the declining real estate market and increased unemployment in our market areas. The declining real estate market primarily affects two segments of borrowers: 1) builders and acquisition/development customers who are not able to sell their inventory and thus cannot generate cash flow and make loan payments; and 2) consumers who have lost equity in their residences related to foreclosures and are unable to access this liquidity source or refinance into lower rate mortgages. Increased unemployment rates in our market areas have increased our non-performing loans because borrowers no longer have the necessary cash flow to pay their loan obligations. The downturn may be exacerbated if energy and food prices increase, equity markets decrease, credit tightens and the economy further weakens. We do not anticipate recovery in these sectors during 2009 thus no substantial improvement in non-accrual, past due and potential problem loans is expected for the foreseeable future.

     Loans greater than 90 days past due are automatically placed on non-accrual status. Additionally, we may place loans that are not greater than 90 days past due on non-accrual status if we determine that the full collection of principal and interest comes into doubt. In making that determination we consider all of the relevant facts and circumstances and take into consideration the judgment of responsible lending officers, our loan committee and the regulatory agencies that review the loans as part of their regular examination process. If we determine that a larger allowance to loan losses is necessary then we will make an increase to the allowance through a provision.

     At June 30, 2009, we had $25,900,939 of non-accrual loans, which is a decrease of $10,960,420 from December 31, 2008. The decrease is primarily the result of real estate construction loans being charged-off or collateral related to these loans being foreclosed upon and moving into other real estate. This process caused the level of our non-accrual real estate construction loans to decrease by $6.8 million. The level of our non-accrual commercial loans and non-accrual real estate mortgage loans increased by approximately $296,000 and $3.7 million during the first half of 2009, respectively. At June 30, 2009, no accrued interest on non-accrual loans had been recognized.

     In the opinion of management, any loans classified by regulatory authorities as doubtful, substandard or special mention that have not been disclosed above do not (1) represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity, or capital resources, or (2) represent material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms. In the event of non-performance by the borrower, these loans have collateral pledged which we believe would prevent the recognition of substantial losses. Any loans classified by regulatory authorities as loss have been charged off.

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     Restructured loans are loans for which the terms have been negotiated to provide a reduction or deferral of interest or principal because of deterioration in the financial position of the borrower. Restructured loans identified in the table above consist of a single commercial and industrial loan to one borrower that we are actively managing.

     Potential problem loans are defined as loans about which we have serious doubts as to the ability of the borrower to comply with the present loan repayment terms and which may cause the loan to be placed on non-accrual status, to become past due more than ninety days, or to be restructured.

     Information regarding certain loans and allowance for loan loss data through June 30, 2009 and 2008 is as follows:

	Six Months Ended
	June 30,
	2009			2008
	(Dollars in Thousands)
Average amount of loans outstanding	$	666,254		$	582,165
Balance of allowance for loan losses at beginning of period	$	11,013		$	6,267
Loans charged off
Commercial and industrial		(383	)		(459	)
Real estate — construction		(3,395	)		(220	)
Real estate — mortgage		(2,380	)		(254	)
Installment loans to individuals		(311	)		(157	)
		(6,469	)		(1,090	)
Loans recovered
Commercial and industrial		5			1
Real estate — construction		5			—
Real estate — mortgage		2			4
Installment loans to individuals		12			28
		24			33
Net charge-offs		(6,445	)		(1,057	)
Additions to allowance charged to operating expense during period		6,251			2,425
Balance of allowance for loan losses at end of period	$	10,819		$	7,635
Ratio of net loans charged off during the period to average loans outstanding		.97	%		.18	%

     We expect that the level of charge-offs may increase in the near future as we more closely analyze our delinquent loans. When a loan first shows signs of weakness we will, if warranted, place the loan on non-accrual status pending a more complete investigation of the underlying credit quality of the loan and its collateral. After a more complete investigation, which may include steps such as obtaining an updated appraisal and a review of the financial condition of the guarantor(s), we will charge-off the portions of the loans that we deem uncollectible. An increase in the level of charge-offs, therefore, will generally trail an increase in the level of non-performing loans because of the time involved with the process of completing a more detailed investigation of the delinquent loans. For this reason, we believe that the recent increase in the level of our non-performing loans is a leading indicator for a subsequent increase in charge-offs, which we expect over the near future.

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     Other Income and Expenses

     Other income decreased by $64,710 and $245,966 during the second quarter and first six months of 2009 as compared to the corresponding period in 2008. We experienced a $35,524 and $94,197 decrease in service charges on deposits accounts, primarily from a reduction in the quantity of NSF fees as it appears consumers are more carefully monitoring their account balances due to the tightening economy for the second quarter and first six months of 2009 as compared to the same period for 2008. We also had a $36,952 and $82,521 decrease in secondary-market mortgage origination fees due to the slowing real estate market for the second quarter and first six months of 2009 as compared to the same period in 2008. During the three months ended June 30, 2009, quarter we had a decrease of $10,216 in the net gain on the sale of securities available for sale when compared to the same period in 2008, while we had a $91,344 increase in net gain on the sale of securities available for sale for the first six months of 2009 as compared to the corresponding period in 2008. These sales resulted from management’s desire to improve liquidity and restructure maturities. In addition, our other income in the first six months of 2009 was lower (when compared to the corresponding period in 2008) due to a $170,138 gain on the sale of premises and equipment that was recorded in the first quarter of 2008.

     Other expenses increased by $1,000,114 and $1,135,539 during the second quarter and first six months of 2009 as compared to the corresponding periods in 2008. Other operating expenses increased by $1,562,544 and $2,020,831 for the second quarter and first six months of 2009 as compared to the corresponding periods in 2008 with the largest component being FDIC insurance assessments, which increased $587,594 and $945,578 for the second quarter and first six months of 2009 compared to the same periods of 2008. We expect to continue incurring large levels of FDIC insurance premiums resulting from the need to replenish the insurance fund due to recent economic events. Expenses for foreclosed assets totaled $138,953 for the first half of 2009, which is an increase of $113,784 over the respective period for 2008. Occupancy and equipment expenses increased by $20,478 and $45,599 for the second quarter and first six months of 2009 as compared to the same periods in 2008 due to our market expansion into Athens and Lake Oconee. Salaries and employee benefits have decreased by $582,908 and $930,891 for the second quarter and first six months of 2009 as compared to the same periods in 2008 due to the previously mentioned reduction-in-force and management’s decision to eliminate the employee bonus program for 2009 as a result of worsening economic conditions.

     We recorded income tax benefits of $1,929,562 and $2,657,218 during the second quarter and first six months of 2009 as compared to tax benefits of $503,764 and $375,601 for the comparable periods in 2008. Going forward, we will continue to record income tax provisions (or benefits) based upon our pre-tax income or loss as long as we estimate future taxable income.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     It is our objective to manage assets and liabilities to provide a satisfactory, consistent level of profitability within the framework of established cash, loan, investment, borrowing, and capital policies. Certain of our officers are charged with the responsibility for monitoring policies and procedures that are designed to ensure acceptable composition of the asset/liability mix.

     Our asset/liability mix is monitored on a regular basis with a report reflecting the interest rate sensitive assets and interest rate sensitive liabilities being prepared and presented to the board of directors and management’s asset/liability committee on a quarterly basis. The objective is to monitor interest rate sensitive assets and liabilities so as to minimize the impact of substantial movements in interest rates on earnings. An asset or liability is considered to be interest rate sensitive if it will reprice or mature within the time period analyzed, usually one year or less. The interest rate-sensitivity gap is the difference between the interest-earning assets and interest-bearing liabilities scheduled to mature or reprice within such time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. Conversely, during a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to adversely affect net interest income. If our assets and liabilities were equally flexible and moved concurrently, the impact of any increase or decrease in interest rates on net interest income would be minimal.

     A simple interest rate “gap” analysis by itself may not be an accurate indicator of how net interest income will be affected by changes in interest rates. Accordingly, we also evaluate how the repayment of particular assets and liabilities is impacted by changes in interest rates. Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest rates may have a significant impact on net interest income. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Interest rates on certain types of assets and liabilities fluctuate in advance of changes in general market rates, while interest rates on other types may lag behind changes in general market rates. Prepayment and early withdrawal levels also could deviate significantly from those assumed in calculating the interest rate gap. The ability of many borrowers to service their debts also may decrease in the event of an interest rate increase.

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     The table that follows summarizes our interest sensitive assets and liabilities as of June 30, 2009. Adjustable rate loans are included in the period in which their interest rates are scheduled to adjust. Fixed rate loans are included in the periods in which they are anticipated to be repaid based on scheduled maturities and anticipated prepayments. Investment securities are included in their period of maturity while mortgage backed securities are included according to expected repayment. Certificates of deposit are presented according to contractual maturity.

Analysis of Interest Sensitivity
As of June 30, 2009
(Dollars in Thousands)

	0–3			3–12			Over 1
	Months			Months			Year		Total
Interest-earning assets:
Interest-bearing deposits in banks		21,367			—			—		21,367
Securities		—			—			48,583		48,583
Restricted equity securities (1)		2,694			—			—		2,694
Federal funds sold		—			—			—		—
Loans (2)		203,601			139,525			277,676		620,802
Total interest-earning assets		227,662			139,525			326,259		693,446
Interest-bearing liabilities:
Interest-bearing demand deposits		85,993			—			—		85,993
Savings and money markets		188,534			—			—		188,534
Time deposits		113,862			216,033			57,379		387,274
Federal Home loan Bank borrowings		27,000			—			—		27,000
Total interest-bearing liabilities		415,389			216,033			57,379		688,801
Interest rate sensitivity gap		(187,727	)		(76,508	)		268,880		4,645
Cumulative interest rate sensitivity gap		(187,727	)		(264,235	)		4,645
Interest rate sensitivity gap ratio		.55			0.65			5.69
Cumulative interest rate sensitivity gap ratio		.55			0.58			1.01

(1)	Restricted equity securities have not paid dividends in 2009.
(2)	Excludes non-accrual loans totaling approximately $25,901,000.

     At June 30, 2009 our cumulative one-year interest rate sensitivity gap ratio was .58. Our targeted ratio is 0.8 to 1.2. This indicates that the interest-earning assets will reprice during this period at a rate slower than the interest-bearing liabilities. Our experience, however, has been that not all liabilities shown as being subject to repricing will in fact reprice with changes in market rates. We have a base of core deposits consisting of interest-bearing checking accounts and savings accounts whose average balances and rates paid thereon will not fluctuate with changes in the levels of market interest rates.

Item 4. Controls and Procedures

     Our Chief Executive Officer and Chief Financial Officer have evaluated our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the quarterly period covered by this Form 10-Q and have concluded that our disclosure controls and procedures are effective. There were no changes in our internal control over financial reporting during the second quarter of 2009 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

     We are not a party to any material legal proceedings other than ordinary routine litigation that is incidental to our business.

Item 1A. Risk Factors

     Please refer to the risk factors as previously disclosed in our Form 10-K filed with the SEC on April 2, 2009.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     We commenced a private placement of up to 1,428,572 shares of common stock on June 25, 2009. The price per share in the offering is $3.50. The total offering price is $5,000,002. The shares are being sold on our behalf on a “best efforts” basis by our directors and executive officers to selected accredited investors. No commissions are being paid. The shares that are being offered have not been and will not be registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements. The offering is being conducted in a manner designed to be exempt from the registration requirements of the Securities Act by virtue of Section 4(2) of the Act and Rule 506 promulgated thereunder. We had sold 1,246,879 shares pursuant to this offering through July 31, 2009.

Item 3. Defaults Upon Senior Securities

     None.

Item 4. Submission of Matters to a Vote of Security Holders

     Our annual meeting of shareholders was held on June 8, 2009. At the meeting, the following matters were submitted to a vote:

     (1)   Proposal One — Election of Five Class II Directors

Name	Votes For		Votes Against/Abstain
Wyche T. Green, III		6,933,388		46,666
Dennis H. McDowell		6,933,388		46,666
Jackie L. Reed		6,933,388		46,666
Carl R. Sewell, Jr.		6,933,388		46,666
Gleamer L. Smith, Jr.		6,933,388		46,666

     (2)   Proposal Two — To ratify the selection of Mauldin & Jenkins, LLC as the Company’s independent auditors for 2009.

Votes For	Votes Against	Abstain
7,000,412	3,333	34,072

Item 5. Other Information

     None.

Item 6. Exhibits

     The following exhibits are included with this report:

31.1	Certificate of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certificate of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	Certificate of CEO and CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURES

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

	FGBC BANCSHARES, INC.
Date: August 14, 2009	/s/ Jackie L. Reed
	Jackie L. Reed
	President and CEO
Date: August 14, 2009	/s/ Teresa L. Martin
	Teresa L. Martin
	Chief Financial Officer

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