mcq910.htm

10-Q 1 mcq910.htm MCINTOSH BANCSHARES, INC SEPTEMBER 30, 2010 mcq910.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended September 30, 2010

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

For the transition period from _______ to _______

Commission File No. 000-49766

McINTOSH BANCSHARES, INC.

(Exact name of registrant as specified in its charter)


	Georgia	58-1922861
	(State or other jurisdiction	(I.R.S. Employer
	of incorporation or organization)	Identification No.)

210 South Oak Street

Jackson, Georgia 30233

(Address of principal executive offices)

(770) 775-8300

(Registrant’s 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 past 90 days. Yes [X] No [ ]

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 definition of “large accelerated filer,” “accelerated filer and “smaller reporting company” in Rule 12b-2 of Exchange Act.

Large accelerated filer [ ] Accelerated filer [ ]

Non-accelerated filer [ ] (Do not check if a smaller reporting company) 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 [ ] No [X]

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 (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  No 

As of November 4, 2010, 3,252,581 shares of common stock, $1.00 par value, were issued and outstanding.

McIntosh Bancshares, Inc. and Subsidiaries

INDEX

PART I:	FINANCIAL INFORMATION

ITEM 1	FINANCIAL STATEMENTS	Page

The following consolidated financial statements are provided for McIntosh Bancshares, Inc.

	Consolidated Balance Sheets – September 30, 2010 (unaudited) and December 31, 2009 (audited).	2

	Consolidated Statements of Operations (unaudited) – For the Three Months and the Nine Months Ended September 30, 2010 and 2009.	3

	Consolidated Statements of Comprehensive Income (unaudited) – For the Three Months and the Nine Months Ended September 30, 2010 and 2009.	4

	Consolidated Statements of Cash Flows (unaudited) – For the Nine Months Ended September 30, 2010 and 2009.	5

	Notes to Consolidated Financial Statements (unaudited)	6

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	35

ITEM 4T.	Controls and Procedures	35

PART II:	OTHER INFORMATION	36

MCINTOSH BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 2010 and December 31, 2009

Assets	September 30,			December 31,
	2010			2009
	(Unaudited)			(Audited)
Cash and due from banks	$	2,375,540		$	2,152,039
Interest-bearing deposits		33,825,828			31,714,865
Investment securities available for sale		44,150,372			62,682,700
Other investments		1,338,300			1,441,700
Loans		242,773,202			277,017,008
Less: Allowance for loan losses		(10,103,692	)		(7,644,583	)
Loans, net		232,669,510			269,372,425
Premises and equipment, net		5,569,151			5,933,648
Other real estate		26,301,960			22,827,955
Accrued interest receivable		956,146			1,511,334
Bank owned life insurance		-			6,815,225
Other assets		1,662,391			5,016,750
Total assets	$	348,849,198		$	409,468,641

Liabilities and Stockholders' Equity

Liabilities:
Deposits:
Demand	$	30,484,298		$	29,725,480
Money market and NOW accounts		84,217,318			104,988,658
Savings		19,483,070			17,645,103
Time deposits of $100,000 or more		93,830,616			107,804,523
Time deposits		97,349,869			111,539,934
Total deposits		325,365,171			371,703,698
Borrowed funds		11,780,899			14,894,243
Accrued interest payable and other liabilities		3,929,265			4,962,883
Total liabilities		341,075,335			391,560,824

Commitments and contingencies

Stockholders' equity:
Preferred stock, no par value, 10,000,000 shares authorized
no shares issued or outstanding		-			-
Common stock, par value $1.00; 25,000,000 shares authorized,
3,252,581 shares issued and outstanding		3,252,581			3,252,581
Surplus		12,673,766			12,614,383
Retained earnings (accumulated deficit)		(8,068,514	)		2,613,544
Accumulated other comprehensive (loss)		(83,970	)		(572,691	)
Total stockholders' equity		7,773,863			17,907,817
Total liabilities and stockholders' equity	$	348,849,198		$	409,468,641

See accompanying notes to consolidated financial statements.

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Item 1. Financial Statements (continued)

MCINTOSH BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Three Months and Nine Months Ended September 30, 2010 and 2009
(Unaudited)
	Three Months						Nine Months
	2010			2009			2010			2009
Interest income:
Loans, including fees	$	3,225,084		$	4,387,835		$	10,156,799		$	13,565,339
Interest on investment securities:
U.S. Treasury, U.S. Government agency and mortgage-backed securities		255,077			593,632			811,650			2,060,281
State, county and municipal		-			18,019			26,539			60,768
Other investments		7,223			13,557			23,455			22,366
Federal funds sold and other short-term investments		38,137			17,392			89,393			38,595
Total interest income		3,525,521			5,030,435			11,107,836			15,747,349

Interest expense:
Interest-bearing demand and money market		106,008			82,513			336,604			247,467
Savings		31,626			52,767			89,961			200,718
Time deposits of $100,000 or more		681,939			932,041			2,236,523			3,055,494
Other time deposits		642,825			1,056,646			2,118,769			3,761,057
Other		92,743			124,420			284,129			374,210
Total interest expense		1,555,141			2,248,387			5,065,986			7,638,946
Net interest income		1,970,380			2,782,048			6,041,850			8,108,403
Provision for loan losses		702,000			2,955,786			8,252,068			5,681,490
Net interest income (loss) after provision for loan losses		1,268,380			(173,738	)		(2,210,218	)		2,426,913

Other income:
Service charges		609,973			611,833			1,753,394			1,767,656
Investment securities gains (losses)		24,108			1,080,661			596,208			(624,518	)
Increase in cash surrender value of life insurance		18,783			75,915			146,677			227,745
Other real estate losses		(25,289	)		(1,568,201	)		(593,135	)		(2,012,982	)
Fixed and repossessed asset gains (losses)		(5,696	)		(15,144	)		(54,514	)		(15,645	)
Other income		230,908			241,184			740,639			811,646
Total other income		852,787			426,248			2,589,269			153,902

Other expenses:
Salaries and employee benefits		1,514,054			1,815,628			4,940,066			4,745,169
Occupancy and equipment		393,752			353,743			1,115,597			1,171,963
Other operating		1,856,962			1,100,187			5,005,447			3,673,535
Total other expenses		3,764,768			3,269,558			11,061,110			9,590,667
Loss before income taxes		(1,643,601	)		(3,017,048	)		(10,682,059	)		(7,009,852	)
Income tax benefit		-			1,347,795			-			2,235,657
Net loss	$	(1,643,601	)	$	(1,669,253	)	$	(10,682,059	)	$	(4,774,195	)

Basic loss and diluted loss per common share based
on average outstanding shares of 3,252,581	$	(0.51	)	$	(0.51	)	$	(3.28	)	$	(1.47	)

See accompanying notes to consolidated financial statements.

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Item 1. Financial Statements (continued)

MCINTOSH BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Three Months and Nine Months Ended September 30, 2010 and 2009
(Unaudited)
	Three Months						Nine Months
	2010			2009			2010			2009
Net loss	$	(1,643,601	)	$	(1,669,253	)	$	(10,682,059	)	$	(4,774,195	)
Other comprehensive income, net of income tax:
Unrealized gains on securities available for sale:
Holding gains arising during period, net of tax of $118,479, $46,460, $129,448 and ($50,016)		229,989			90,188			251,278			(97,089	)
Less: Reclassification adjustment for gains on sale of securities,
net of tax of ($8,197), ($367,424), ($202,711) and ($367,424)		(15,911	)		(713,236	)		(393,497	)		(713,236	)
Change in unfunded pension liability, net of tax $325,030		-			-			630,940			-
Total other comprehensive income (loss)		214,078			(623,048	)		488,721			(810,325	)
Comprehensive loss	$	(1,429,523	)	$	(2,292,301	)	$	(10,193,338	)	$	(5,584,520	)

See accompanying notes to consolidated financial statements.

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Item 1. Financial Statements (continued)

MCINTOSH BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2010 and 2009
(Unaudited)
	2010			2009
Cash flows from operating activities:
Net loss	$	(10,682,059	)	$	(4,774,195	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation, accretion and amortization		680,105			650,391
Gain on sale of securities available for sale		(596,208	)		(1,079,161	)
Loss on write-off of other investments		-			1,706,679
Provision for loan losses		8,252,068			5,681,490
Stock-based compensation		59,384			59,384
Loss on sale and impairment of other real estate		593,135			2,012,982
(Gain) loss on fixed and repossessed asset		54,514			15,645
Change in:
Accrued interest receivable and other assets		3,496,337			2,500,810
Accrued interest payable and other liabilities		(77,648	)		(1,146,844	)
Net cash provided/used by operating activities		1,779,628			5,627,181

Cash flows from investing activities:
Proceeds from calls, maturities and paydowns of securities available for sale		13,876,120			24,903,691
Proceeds from sales of securities available for sale		23,563,561			23,492,586
Proceeds from sales of other real estate		3,934,164			6,885,249
Purchases of securities available for sale		(18,754,697	)		(33,956,137	)
Proceed from sales of other investments		103,400			199,600
Proceeds from surrender of bank owned life insurance		6,919,723			-
Additions to other real estate		(97,248	)		(390,690	)
Net change in loans		20,546,791			11,297,125
Proceeds from sale of premises and equipment		(85,107	)		-
Purchases of premises and equipment		-			36,601
Net cash provided by investing activities		50,006,707			32,468,025

Cash flows from financing activities:
Net change in deposits		(46,338,527	)		(22,395,389	)
Proceeds from borrowed funds		-			388,058
Repayment of borrowed funds		(3,113,344	)		(2,000,000	)
Net cash used by financing activities		(49,451,871	)		(24,007,331	)
Net change in cash and cash equivalents		2,334,464			14,087,875
Cash and cash equivalents at beginning of period		33,866,904			20,885,224
Cash and cash equivalents at end of period	$	36,201,368		$	34,973,099

Supplemental schedule of noncash investing and financing activities:
Change in net unrealized gain/loss on investment securities available-for-sale, net of tax	$	(142,218	)	$	(810,325	)
Change in unfunded pension liability, net of tax	$	630,940		$	-
Transfer of loans to other real estate	$	8,573,056		$	10,685,752
Financed sales of other real estate	$	669,000		$	-
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	5,313,459		$	8,026,623

See accompanying notes to consolidated financial statements.

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Item 1. Financial Statements (continued)

McIntosh Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

(1)	Basis of Presentation

The financial statements include the accounts of McIntosh Bancshares, Inc. (the “Company”) and its wholly-owned subsidiaries, McIntosh State Bank (the “Bank”) and McIntosh Financial Services, Inc. All significant intercompany accounts and transactions have been eliminated in the consolidation.

The Company’s accounting policies are fundamental to management’s discussion and analysis of financial condition and results of operations. Some of the Company’s accounting policies require significant judgment regarding valuation of assets and liabilities and/or significant interpretation of the specific accounting guidance. A description of the Company’s significant accounting policies can be found in Note 1 of the Notes to Consolidated Financial Statements in the Company’s 2009 Annual Report to Shareholders.

Many of the Company’s assets and liabilities are recorded using various valuation techniques that require significant judgment as to recoverability. The collectibility of loans is reflected through the Company’s estimate of the allowance for loan losses. The Company performs periodic detailed reviews of its loan portfolio in order to assess the adequacy of the allowance for loan losses in light of anticipated risks and loan losses. In addition, investment securities available for sale are reflected at their estimated fair value in the consolidated financial statements. Such amounts are based on either quoted market prices or estimated values derived by the Company using dealer quotes or market comparisons.

The consolidated financial information furnished herein reflects all adjustments which are, in the opinion of management, necessary to present a fair statement of the results of operations and financial position for the periods covered herein. All such adjustments are of a normal, recurring nature.

The Company has prepared these consolidated financial statements assuming that it will be able to continue as a going concern. However, the Company has not shown a profit since the first quarter of 2008. In addition, as of June 30, 2010, the Bank has been classified as “significantly undercapitalized”, pursuant to applicable regulatory guidelines. As a result of these losses, as well as uncertainties associated with the Company’s ability to increase its capital levels to meet regulatory requirements, the Company’s independent registered public accountants expressed, in their opinion on the Company’s consolidated financial statements as of December 31, 2009, that a substantial doubt exists regarding the Company’s ability to continue as a going concern. Although management is committed to developing strategies to address these uncertainties, the outcome of these developments cannot be predicted at this time.

Certain 2009 amounts have been reclassified to conform with the 2010 presentation.

(2)	Regulatory Oversight, Capital Adequacy, Operating Losses, Liquidity and Management Plans

The financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future. However, due to the Company’s financial results, the uncertainty throughout the U.S. banking industry and other matters discussed below, a substantial doubt exists regarding the Company’s ability to continue as a going concern. Management’s plans in addressing the issues that raise substantial doubt regarding the Company’s ability to continue as a going concern are as follows:

Regulatory Oversight

The Bank is currently operating under heightened regulatory scrutiny and has entered into a Cease and Desist Order (the “Order”) with the Georgia Department of Banking and Finance (the “DBF”) and the Federal Deposit Insurance Corporation (the “FDIC”).

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Item 1. Financial Statements (continued)

McIntosh Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

The Bank has submitted reports to the DBF and FDIC as required per the Order. All aspects of the Order have been adhered to or a plan is in place to reach compliance within a reasonable time frame with the exception of maintaining (a) Tier 1 capital at or above 8% of total assets and (b) Total risk-based capital at or above 10% of total risk-weighted assets. Management has offiered two proposals which would have achieved the specified capital requirements, but they were not approved by the regulators. Management is actively pursuing other capital transactions, some of which include a contemporaneous sale of problem assets. None of the current proposals contemplate bringing the capital to that specified in the Order; rather, the proposals contemplate bringing the Bank to an aedquately capitalized level. Management cannot say when the transactions may be proposed and accepted by the regulators as indicated, or when the contemplated transactions may be consummated. The Bank has formed a Directors Committee to oversee compliance with the Order as well as a Capital Sub-Committee. The Bank has a detailed process in place for monitoring liquidity and capital as well as contingency plans for short term capital needs if they arise.

Capital Adequacy

As of December 31, 2009, the Bank did not meet the requirements of an “adequately capitalized” institution under the capital adequacy guidelines and the regulatory framework for prompt corrective action. To be categorized as “adequately capitalized”, the Bank must maintain minimum Total Risk-based, Tier 1 Risk-based and Tier 1 Leverage capital ratios of 8%, 4% and 4%, respectively. At December 31, 2009, the Bank’s Total Risk-based, Tier 1 Risk-based and Tier 1 Leverage capital ratios were 7.8%, 6.6% and 4.6%, respectively, and as a result the Bank became classified as “undercapitalized”. As of September 30, 2010, the Bank is classified as “significantly undercapitalized” under the regulatory framework for prompt corrective action. To be categorized as "significantly undercapitalized", the Bank must have Total Risk-based capital ratio of less than 6%, Tier 1 Risk-based capital ratio of less that 3%, or Tier 1 Leverage capital ratio of less than 3%. As of September 30, 2010, Total Risk-based, Tier 1 Risk-based, and Tier 1 Leverage capital ratios were 4.8%, 3.5% and 2.4% respectively.

In light of the requirement to improve the capital ratios of the Bank, management is pursuing a number of strategic alternatives. Current market conditions for banking institutions, the overall uncertainty in financial markets and the Bank’s high level of non-performing assets are potential barriers to the success of these strategies. Failure to adequately address the regulatory concerns may result in actions by the banking regulators. If current adverse market factors continue for a prolonged period of time, new more severe adverse market factors emerge, and/or the Bank is unable to successfully execute its plans or adequately address regulatory concerns in a timely manner, it could have a material adverse effect on the Bank’s business, results of operations and financial position. As of September 30, 2010, the Bank has been unable to obtain the capital ratios required as part of the Order. Management continues to work towards implementing the strategies outlined in the capital plan submitted to the DBF and FDIC.

A Capital Restoration Plan has been written that addresses the Bank’s commitment to increase its capital position to a Tier 1 level that would be equal or exceed required capital standards. The Plan includes the following: balance sheet shrinkage, sale of other real estate, the Capital Sub-Committee offering potential solutions, including several means of raising capital, potential closure and sale of existing branches and other asset reduction options. The Plan also provides projections for capital levels through 2011.

Operating Losses

The Company incurred a net loss of $10.7 million for the nine months ended September 30, 2010 and $14.1 million for the year ended December 31, 2009. Management has made efforts to reduce expenses, including a reduction in workforce, salary reductions, termination of the Senior Executive Retirement Plan, cessation of director fees, curtailment of the Company’s pension plan and other general cost-cutting measures and continues to examine areas where further reductions in cost are possible.

Interest reversals on non-performing loans and increases to non-performing and foreclosed assets could continue in 2010 and hinder the Company’s ability to improve net interest income. While excess liquidity brings comfort to depositors, the Bank earns approximately 25 basis points on the liquidity but pays more on the deposits generating the liquidity causing a negative spread. Also, increases to the provision for loan losses and further write-downs or losses on the sale of other real estate could continue in 2010, which will negatively impact the Company’s ability to generate net income during the year.

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Item 1. Financial Statements (continued)

McIntosh Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Liquidity

The Bank’s primary sources of liquidity are deposits, the scheduled repayments on loans, and interest and maturities of investments. All of the Bank’s securities have been classified as available for sale, which means they are carried at fair value with unrealized gains and losses excluded from earnings and reported as a separate component of other comprehensive loss. If necessary, the Bank has the ability to sell these investment securities to manage interest sensitivity gap or liquidity. Cash and due from banks and federal funds sold may also be utilized to meet liquidity needs. Due to the Bank’s significantly undercapitalized status, the Bank is unable to accept, rollover, or renew any brokered deposits. As of September 30, 2010, the Bank holds no brokered deposits and holds only $1.8 million in CDARs deposits. Strategies to maintain or improve include a local core deposit campaign that has raised over $29 million in new deposits, sale of other real estate, and a reduction in pledging requirements of investment securities. Based on current and expected liquidity needs and sources, management expects to be able to meet obligations at least through March 31, 2011.

The Bank has a $15.4 million facility at the Federal Reserve Bank of Atlanta secured by certain commercial loans in the Bank's portfolio. Additionally, the Bank has a $6.5 million federal funds line of credit with First National Bankers Bank secured by investment securities. Neither of the lines had a balance as of September 30, 2010. Finally, the Bank has had access to internet CDs thorugh a facility with QwickRate since 2005. Average funding through QwickRate for the last 12 months was $32 million; the balance as of September 30, 2010 was $25.9 million.

(3)	Recent Accounting Pronouncements

In February 2010, the FASB issued Accounting Standards Update No. 2010-09, Subsequent Events: Amendments to Certain Recognition and Disclosure Requirements (“ASC No. 2010-09”). ASU No. 2010-09 removes some contradictions between the requirements of GAAP and the filing rules of the Securities and Exchange Commission (“SEC”). SEC filers are required to evaluate subsequent events through the date the financial statements are issued, and they are no longer required to disclose the date through which subsequent events have been evaluated. This guidance was effective upon issuance except for the use of the issued date for conduit debt obligors, and it is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

In February 2010, the FASB issued Accounting Standards Update No. 2010-10, Consolidation: Amendments for Certain Investment Funds (“ASU No. 2010-10”). ASU No. 2010-10 indefinitely defers the effective date for certain investment funds, the amendments made to FASB ASC 810-10 related to variable interest entities by Statement of Financial Accounting Standard (SFAS”) No. 167, however this deferral does not apply to the disclosure requirements of SFAS No. 167. ASU No. 2010-10 also clarifies that (1) interests of related parties must be considered in determining whether fees paid to decision makers or service providers constitute a variable interest, and (2) a quantitative calculation should not be the only basis on which such determination is made. This guidance is effective as of the beginning of the first annual period beginning after November 15, 2009, and for interim periods within that first annual reporting period. It is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

In March 2010, the FASB issued Accounting Standards Update No. 2010-11, Derivatives and Hedging: Scope Exception Related to Embedded Credit Derivatives (“ASU No. 2010-11”). ASU No. 2010-11 clarifies the type of embedded credit derivative that is exempt from embedded derivative bifurcation requirements, by resolving a potential ambiguity about the breadth of the embedded credit derivative scope exception with regard to some types of contracts, such as collateralized debt obligations (“CDO’s”) and synthetic CDO’s. The scope exception will no longer apply to some contracts that contain an embedded credit derivative feature that transfers credit risk. The ASU is effective for fiscal quarters beginning after June 15, 2010, and is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

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Item 1. Financial Statements (continued)

McIntosh Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

In April 2010, the FASB issued Accounting Standards Update No. 2010-18, Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset ("ASU No. 2010-18"). ASU No. 2010-18 provides guidance on the accounting for loan modifications when the loan is part of a pool of loans accounted for as a single asset such as acquired loans that have evidence of credit deterioration upon acquisition that are accounted for under the guidance in ASC 310-30. ASU No. 2010-18 addresses diversity in practice on whether a loan that is part of a pool of loans accounted for as a single asset should be removed from that pool upon a modification that would constitute a troubled debt restructuring or remain in the pool after modification. ASU No. 2010-18 clarifies that modifications of loans that are accounted for within a pool under ASC 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if the expected cash flows for the pool change. The amendments in this update do not require any additional disclosures and are effective for modifications of loans accounted for within pools under ASC 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. ASU 2010-18 is not expected to have a material impact on the Company's results of operations, financial position or disclosures.

In July 2010, the FASB issued Accounting Standard Update No. 2010-20: Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses ("ASU 2010-20"). ASU 2010-20 requires additional disclosures that facilitate financial statement users' evaluation of the nature of credit risk inherent in the entity's portfolio of financing receivables, how that risk is analyzed and assessed in arriving at the allowance for credit losses and the changes and reasons for those changes in the allowance for credit losses. The ASU makes changes to existing disclosure requirements and includes additional disclosure requirements about financing receivables, including credit quality indicators of financing receivables at the end of the reporting period by class of financing receivables, the aging of past due financing receivables at the end of the reporting period by class of financing receivables, and the nature and extent of troubled debt restructurings that occurred during the period by class of financing receivables and their effect on the allowance for credit losses. These disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. ASU 2010-20 will have an impact on the Company's disclosures, but not on its financial position or results of operations.

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Item 1. Financial Statements (continued)

McIntosh Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

In August 2010, the FASB issued Accounting Standards Update No. 2010-11, Accounting for Technical Amendments to Various SEC Rules and Schedules (“ASU No. 2010-11”). ASU No. 2010-11 codified amendments to SEC paragraphs pursuant to Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules and Codification of Financial Reporting Policies. This guidance was effective upon issuance and is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

In August 2010, the FASB issued Accounting Standards Update No. 2010-22, Accounting for Various Topics – Technical Corrections to SEC Paragraphs (“ASU No. 2010-22”). ASU No. 2010-22 codified amendments to various SEC paragraphs based on external comment received and the issuance of Staff Accounting Bulletin No. 112, which primarily related to Business Combinations and Noncontrolling Interests in Consolidated Financial Statements. This guidance was effective upon issuance and is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

In September 2010, the FASB issued Accounting Standards Update No. 2010-25, Reporting Loans to Participants by Defined Contribution Pension Plans (“ASU No. 2010-25”). ASU No. 2010-25 requires that participant loans be classified as notes receivable from participants, which are segregated from plan investments and measured at their unpaid principal balance plus any accrued by unpaid interest. This guidance is effective for fiscal years ending after December 31, 2010 and should be applied retrospectively to all prior periods presented. This standard is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

In October 2010, the FASB issued Accounting Standards Update No. 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts (“ASU No. 2010-26”). ASU No. 2010-26 clarifies which costs relating to the acquisition of new or renewal insurance qualify for deferral (deferred acquisition costs), and which should be expensed as incurred. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. This standard is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

(4)	Cash and Cash Equivalents

For the presentation in the financial statements, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold.

-10-

Item 1. Financial Statements (continued)

McIntosh Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

(5)	Investment Securities

Investment securities at September 30, 2010 and December 31, 2009 are as follows:

	September 30, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Market Value
U. S. Treasury securities	$	16,021,259		24,600		-			16,045,859
Mortgage-backed securities		27,237,351		450,998		(14,232	)		27,674,117
Corporate debt securities		500,000		-		(69,604	)		430,396
	$	43,758,610		475,598		(83,836	)		44,150,372

	December 31, 2009
U. S. Treasury securities	$	32,160,258		29,776		(6,438	)		32,183,596
U. S. Government-sponsored agencies		2,453,498		10,215		-			2,463,713
Mortgage-backed securities		25,254,067		662,414		(47,097	)		25,869,384
States and political subdivisions		1,707,632		88,416		-			1,796,048
Corporate debt securities		500,000		-		(130,041	)		369,959
	$	62,075,455		790,821		(183,576	)		62,682,700

Other investments were comprised of Federal Home Loan Bank Stock of $1,338,300 at September 30, 2010 and $1,441,700 at December 31, 2009.

For the nine months and three months ending September 30, 2010, ($142,218) and $214,078 reflects the change in net unrealized gains (net of tax benefit/expense) in other comprehensive income, respectively.

The amortized cost and estimated market value of investment securities available for sale at September 30, 2010, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid with or without penalty. Therefore, these securities are not included in the maturity categories in the following summary.


	Amortized Cost		Market Value
Due in one year or less	$	16,021,259		16,045,859
Due from one to five years		500,000		430,396
Due from five to ten years		-		-
Due after ten years		-		-
Mortgage-backed securities		27,237,351		27,674,117
	$	43,758,610		44,150,372

-11-

Item 1. Financial Statements (continued)

McIntosh Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Gross gains and losses on calls and sales of securities for the nine months nine September 30, 2010 and September 30, 2009 consist of the following:

	September 30, 2010		September 30, 2009
Gross proceeds on calls of securities	$	2,450,000		2,000,000
Gross proceeds on sales of securities		23,563,561		23,492,586
Gross gains on sales of securities		596,208		1,079,161
Gross losses on impairment of other investments		-		(1,706,679	)

For the periods presented, the cost of securities sold or the amount reclassified out of accumulated other comprehensive income into earnings was determined based on the specific identification method for debt securities and average cost for equity (other investment) securities.

The following table shows 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 for the periods ending September 30, 2010 and December 31, 2009, respectively.

	Less Than Twelve Months					Twelve Months or More
	Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value
September 30, 2010
Mortgage-backed securities		(12,854	)		2,612,118		(1,378	)		614,810
Corporate debt securities		-			-		(69,604	)		430,396
Total	$	(12,854	)		2,612,118		(70,982	)		1,045,206

December 31, 2009
U.S. Treasury securities	$	(6,438	)		7,027,813		-			-
Mortgage-backed securities		(47,097	)		5,804,885		-			-
Corporate debt securities		-			-		(130,041	)		369,959
Total	$	(53,535	)		12,832,698		(130,041	)		369,959

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 has occurred, and industry analysts’ reports. As management has the ability and intent to hold debt securities until maturity, or for the foreseeable future if classified as available for sale. The Bank reviewed the financial statements and the regulatory schedules of the issuer of the corporate debt security as of June 30, 2010. The corporation is well capitalized; earnings appear to be stabilizing; and management believes there is no undue credit risk in the security. No declines are deemed to be other than temporary as of September 30, 2010 and December 31, 2009. As of September 30, 2010, $43,205,997 of investment securities were pledged to secure public deposits, customer repurchase agreements, a Treasury Tax and Loan account, a federal funds account and Federal Home Loan Bank advances.

-12-

Item 1. Financial Statements (continued)

McIntosh Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

(6)

Loans

Major classifications of loans are summarized as follows:

	September 30, 2010			December 31, 2009
Commercial, financial and agricultural	$	26,903,601		$	38,933,418
Real estate - mortgage		178,725,456			183,766,583
Real estate - construction		25,510,955			39,534,312
Consumer and other		9,281,852			11,666,527
Tax-exempt		2,351,338			3,116,168
		242,773,202			277,017,008
Less: Allowance for loan losses		(10,103,692	)		(7,644,583	)
	$	232,669,510		$	269,372,425

The Bank grants loans and extensions of credit to individuals and a variety of businesses and corporations located in its general trade area of Butts, Jasper and Henry counties as well as other adjoining counties in Georgia. Although the Bank has a diversified portfolio, a substantial portion is secured by improved and unimproved real estate and is dependent on the real estate market.

The following is a summary of activity in the allowance for loan losses:

	September 30, 2010			September 30, 2009
Balance at beginning of year	$	7,644,583		$	8,517,479
Provision charged to expense		8,252,068			5,681,490
Loans charged off		(5,858,440	)		(4,574,458	)
Recoveries of loans previously charged off		65,481			76,309
	$	10,103,692		$	9,700,820

Loans reviewed for impairment totaled $80,374,774 and $35,439,381 at September 30, 2010 and December 31, 2009, respectively. Allocations of the allowance for loan losses related to impaired loans totaled $4,345,331 and $1,461,276 at September 30, 2010 and December 31, 2009, respectively. There were no significant amounts of interest income recognized on impaired loans for the quarter ended September 30, 2010 or year ended December 31, 2009.

Loans on nonaccrual status totaled $52,550,792 and $35,234,856 at September 30, 2010 and December 31, 2009, respectively. Loans past due ninety days or more and still accruing interest totaled $1,081,456 and $751,168 at September 30, 2010 and December 31, 2009, respectively.

-13-

Item 1. Financial Statements (continued)

McIntosh Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

(7)	Other Real Estate Owned

The following is an inventory of other real estate as of September 30, 2010 compared to December 31, 2009:

	September 30, 2010				December 31, 2009
			Carrying				Carrying
	Number		Amount		Number		Amount
1-4 family residences		47	$	8,417,433		60	$	10,261,960
Residential lots		148		3,473,622		151		3,562,316
Unimproved acres		370		3,175,469		191		1,864,135
Commercial property		21		11,235,436		15		7,139,544
Total other real estate			$	26,301,960			$	22,827,955

(8)	Pension Plan

Effective June 5, 2010 the Company froze the McIntosh Bancshares, Inc. Defined Benefit Pension Plan (the "Plan"). Freezing the Plan means that employees will not receive any additional service credit or accrue any additional benefits under the Plan on or after the freeze date, and no additional employees of the Company will be permitted to become participants in the Plan on or after the freeze date.

The Company’s consulting actuaries re-measured the projected benefit obligation to determine the effect that curtailment had on the accrued pension liability which is recognized in other comprehensive income. The curtailment of the plan reduced the unfunded pension liability by approximately $955,000 and increased other comprehensive income by approximately $631,000 net of deferred income taxes.

The following sets forth the funded status of the Plan and the amounts included in the accompanying balance sheet:

	September 30, 2010			December 31, 2009
Actuarial present value of projected benefit obligation	$	3,294,127		$	4,238,009
Fair value of assets held in the plan	$	1,670,758		$	1,658,671
Unfunded excess of projected benefit obligation over plan assets		1,623,369			2,579,339
Less accrued pension costs		(1,104,380	)		(1,104,380	)
Accrued pension liability recognized in other comprehensive income	$	518,989		$	1,474,959

-14-

Item 1. Financial Statements (continued)

McIntosh Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

(9)	Stockholders' Equity

On June 10, 2010, the Company filed an 8-K related to the amendment of the Articles of Incorporation. On June 7, 2010, the Company filed with the Secretary of State of Georgia, Articles of Amendment to the Company’s Articles of Incorporation which authorized additional capital stock, increasing the number of authorized common stock from ten million shares to twenty-five million shares. The amendment also changed the par value of the common stock from $2.50 per share to $1.00 per share. The amendment was approved by the shareholders of the Company by a greater than two-thirds affirmative vote at the annual meeting held on May 20, 2010.

(10)	Capital Adequacy

The Federal Reserve and the Federal Deposit Insurance Corporation (“FDIC”) have implemented substantially identical rules for assessing bank and bank holding company capital adequacy. These regulations establish minimum capital standards in relation to assets and off-balance sheet exposures for credit risk. Banks and bank holding companies are required to have (i) a minimum ratio of Total capital (as defined) to risk-weighted assets of 8%; (ii) a minimum ratio of Tier 1 capital (as defined) to risk-weighted assets of 4%; and (iii) a minimum ratio of stockholder’s equity to risk-weighted assets of 4%. The Federal Reserve and the FDIC also require a minimum leverage capital ratio of Tier 1 capital to total assets of 3% for the most highly rated banks and bank holding companies. Tier 1 capital generally consists of common equity, minority interests in equity accounts of consolidated subsidiaries, and noncumulative perpetual preferred stock and generally excludes unrealized gains or losses on investment securities, certain intangible assets, and certain deferred tax assets. The Federal Reserve or the FDIC will require a bank or bank holding company to maintain a leverage ratio greater than 3% if either is experiencing or anticipating significant growth, is operating with less than well-diversified risks, or is experiencing financial, operational, or managerial weaknesses.

In addition, the FDIC Improvement Act of 1991 provides for prompt corrective action (“PCA”) if a bank’s leverage capital ratio reaches 2%. PCA may call for the bank to be placed in receivership or sold to another depository institution. The FDIC has adopted regulations implementing PCA which place financial institutions in the following four categories based on capitalization ratios: (i) a well capitalized institution has a total risk-based capital ratio of at least 10%, a Tier 1 risk-based ratio of at least 6%, and leverage capital ratio of at least 5%; (ii) an adequately capitalized institution has a total risk-based capital ratio of at least 8%, a Tier 1 risk-based ratio of at least 4%, and leverage capital ratio of at least 4%; (iii) an undercapitalized institution has a total risk-based capital ratio under 8%, a Tier 1 risk-based ratio under 4%, and leverage capital ratio under 4%; (iv) a "significantly undercapitalized" institution has a total risk-based capital ratio under 6%, or a Tier 1 risk-based capital ratio under 3%, or a leverage capital ratio less than 3%; and (v) a critically undercapitalized institution has a leverage capital ratio under 2%. Institutions deemed adequately capitalized are not permitted to accept brokered deposits (unless waived by the FDIC) and have limitations on the interest rates paid on deposit accounts. Institutions in any of the three undercapitalized categories would be prohibited from declaring and paying dividends or making capital distributions. The FDIC regulations also establish procedures for downgrading an institution to a lower capital category based on supervisory factors other than capital.

-15-

Item 1. Financial Statements (continued)

McIntosh Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Due to its current condition and results of operation, the Directors of the Company and Bank entered into an informal agreement with the Federal Reserve in the third quarter of 2008, and formal agreements, the Order, with the FDIC, and DBF in the fourth quarter of 2009. These regulatory agreements are designed to help the Company and Bank return to profitability and capital adequacy by improving asset quality. Specifically, the agreements provide for reducing troubled assets; limiting credit to troubled borrowers; maintaining an adequate allowance for loan losses; revising policies to more comprehensively address commercial real estate lending; maintaining a Tier 1 leverage capital ratio of 8% or more, a Tier 1 risk-based capital ratio of 6% or more, and a Total risk-based capital ratio of 10% or more; prohibiting the Bank from paying dividends to the Company without prior approval; prohibiting the Company from paying dividends to shareholders without prior approval; prohibiting the Company from incurring debt without prior approval; and prohibiting the Company from repurchasing stock without prior approval. The Bank is presently unable to achieve the Tier 1 leverage and Total risk-based capital provisions of the agreements but is negotiating for additional capital. All other provisions of the order have been achieved.

As of June 30, 2010, the Bank did not meet the requirements of an “adequately capitalized” institution under the capital adequacy guidelines and the regulatory framework for prompt corrective action and the Company is considered “significantly undercapitalized.” In light of the requirement to improve the capital ratios of the Bank, management is pursuing a number of strategic alternatives. Current market conditions for banking institutions, the overall uncertainty in financial markets and the Bank’s high level of non-performing assets are potential barriers to the success of these strategies. Failure to adequately address the regulatory concerns may result in actions by the banking regulators. If current adverse market factors continue for a prolonged period of time, new further severe adverse market factors emerge, and/or the Bank is unable to successfully execute its plans or adequately address regulatory concerns in a sufficiently timely manner, it could have a material adverse effect on the Bank’s business, results of operations and financial position.

As of September 30, 2010, the Bank is considered significantly undercapitalized under the regulatory framework for PCA. As of September 30, 2010 and December 31, 2009 the capital ratios for the Company and the Bank are as follows:

	September 30, 2010						December 31, 2009
	Company			Bank			Company			Bank
Leverage Capital		2.2	%		2.4	%		4.3	%		4.6	%
Tier 1 Risk-Based		3.1	%		3.5	%		6.1	%		6.6	%
Total Risk-Based		4.4	%		4.8	%		7.3	%		7.8	%

(11)	Fair Value of Financial Instruments

The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.

Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

-16-

Item 1. Financial Statements (continued)

McIntosh Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

The Company utilizes fair value measures to record fair value adjustments on certain assets and liabilities and to complete fair value disclosures. Securities available-for-sale are recorded at fair value on a recurring basis. Other asset categories that are affected by periodic adjustments to fair value include: impaired loans and other real estate. The Company is required to disclose, but not record, the fair value of other financial instruments.

Following is a description of valuation methodologies used by the Company for assets and liabilities, which are either recorded or disclosed at fair value:

Cash and Cash Equivalents

For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value.

Investment Securities Available-for-Sale

Investment 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 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 securities include those traded on an active exchange, U.S. Treasury securities that are traded by dealers and brokers in active over-the-counter markets, and money market funds. Level 2 securities include U. S. Agency securities, mortgage-backed securities issued by government sponsored entities, municipals bonds, and corporate debt securities. Level 3 securities include asset-backed securities in less liquid markets.

Other Investments

The carrying value of other investments is estimated to approximate fair value.

Loans

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. 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 judged for impairment. Once a loan is identified as individually impaired, management measures impairment using one of three methods, including; discounted cash flows, market value of similar debt, and/or fair value of collateral if repayment of the loan is dependent upon the sale of the underlying collateral. 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 September 30, 2010, substantially all of the Company’s impaired loans were evaluated based on the fair value of the collateral. 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.

For disclosure purposes, the fair value of fixed rate loans which are not considered impaired, is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings. For unimpaired variable rate loans, the carrying amount is a reasonable estimate of fair value.

-17-

Item 1. Financial Statements (continued)

McIntosh Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Other Real Estate

Foreclosed assets are adjusted to fair value upon transfer of the loans to other real estate. 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 or a current appraised value, 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.

Bank Owned Life Insurance

The carrying value of cash surrender value of life insurance approximates fair value. The Bank’s bank owned life insurance policies were liquidated in July 2010.

Deposits

The fair value of demand deposits, savings accounts, NOW accounts, and certain money market deposits are estimated by discounting the future cash flows using the rates currently offered for funding of similar maturities to the estimated average life for each type of deposit. The fair value of fixed maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities.

Borrowed Funds

The fair value of fixed rate and convertible FHLB advances is estimated by discounting the future cash flows using the current rates at which similar advances would be drawn by the Bank. For variable rate FHLB advances, the carrying value approximates fair value. The carrying amounts of borrowings under repurchase agreements and other short-term borrowings approximate their fair value.

Commitments to Extend Credit and Standby Letters of Credit

Off-balance-sheet financial instruments (commitments to extend credit and standby letters of credit) are generally short-term and at variable interest rates. Therefore, both the carrying value and the fair value associated with these instruments are immaterial.

Assets Recorded At Fair Value on a Recurring Basis

The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis at September 30, 2010 and December 31, 2009.

	September 30, 2010
(Amounts in thousands)	Total		Level 1		Level 2		Level 3
U.S Treasury securities	$	16,046		16,046		-		-
Mortgage-backed securities		27,674		-		27,674		-
Corporate debt securities		430		-		430		-
Investment securities available for sale	$	44,150		16,046		28,104		-

-18-

Item 1. Financial Statements (continued)

McIntosh Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

	December 31, 2009
(Amounts in thousands)	Total		Level 1		Level 2		Level 3
U.S. Treasury securities	$	32,184	$	32,184		-		-
Mortgage-backed securities		28,333		-		28,333		-
States and political subdivisions		1,796		-		1,796		-
Corporate debt securities		370		-		370		-
Investment securities available for sale	$	62,683		32,184		30,499		-

Assets Recorded At Fair Value on a Nonrecurring Basis

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 market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below at September 30, 2010 and December 31, 2009.

		September 30, 2010
(Amounts in thousands)		Total		Level 1		Level 2		Level 3
Impaired loans	$	49,612		-		17,645		31,967
Other real estate			26,302		-		26,302		-
Total nonrecurring	$	75,914			-	43,947		31,967

		December 31, 2009
(Amounts in thousands)		Total		Level 1		Level 2		Level 3
Impaired loans		$	33,978		-		2,853		31,125
Other real estate			22,828		-		22,828		-
Total nonrecurring		$	56,806		-		25,681		31,125

The carrying amount and estimated fair values of the Company’s financial instruments at September 30, 2010 and December 31, 2009 are as follows:

	September 30, 2010				December 31, 2009
(Amounts in thousands)	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Financial assets:
Cash and cash equivalents	$	36,201		36,201		33,867		33,867
Investment securities		44,150		44,150		62,683		62,683
Other investments		1,338		1,338		1,442		1,442
Loans (net)		232,670		237,923		269,372		273,722
Bank owned life insurance		-		-		6,815		6,815
Financial liabilities:
Deposits	$	325,365		327,844		371,704		367,195
Other borrowed funds		11,781		12,394		14,894		14,993

-19-

Item 1. Financial Statements (continued)

McIntosh Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Limitations

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on many judgments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial instruments include deferred income taxes and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

Forward Looking Statement Disclosure

Statements in this report regarding future events or performance are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “PSLRA”) and are made pursuant to the safe harbors of the PSLRA. Actual results of the Company could be quite different from those expressed or implied by the forward-looking statements. Any statements containing the words “could,” “may,” “will,” “should,” “plan,” “believes,” “anticipates,” “estimates,” “predicts,” “expects,” “projections,” “potential,” “continue,” or words of similar import, constitute “forward-looking statements,” as do any other statements that expressly or implicitly predict future events, results, or performance. Factors that could cause results to differ from results expressed or implied by our forward-looking statements include, among others, risks discussed in the text of this report as well as the following specific items:

·	General economic conditions, whether national or regional, that could affect the demand for loans or lead to increased loan losses;

Competitive factors, including increased competition with community, regional, and national financial institutions, that may lead to pricing pressures that reduce yields the Company achieves on loans and increase rates the Company pays on deposits, loss of the Company’s most valued customers, defection of key employees or groups of employees, or other losses;

·	Increasing or decreasing interest rate environments, including the shape and level of the yield curve, that could lead to decreases in net interest margin, lower net interest and fee income, including lower gains on sales of loans, and changes in the value of the Company’s investment securities;

·	Changing business or regulatory conditions or new legislation, affecting the financial services industry that could lead to increased costs, changes in the competitive balance among financial institutions, or revisions to our strategic focus;

·	Changes or failures in technology or third party vendor relationships in important revenue production or service areas, or increases in required investments in technology that could reduce our revenues, increase our costs or lead to disruptions in our business;

·	The imposition of enforcement orders, capital directives, or other enforcement actions by our regulators, including restrictions and limitations placed on the Bank pursuant to the Cease and Desist Order (“Order”);

·	The ability of the Company to increase capital levels to meet the requirements of the Order;

·	The ability of the Company to maintain adequate liquidity levels to fund its operations.

Readers are cautioned not to place undue reliance on our forward-looking statements, which reflect management’s analysis only as of the date of the statements. The Company does not intend to publicly revise or update forward-looking statements to reflect events or circumstances that arise after the date of this report. Readers should carefully review all disclosures we file from time to time with the Securities and Exchange Commission.

-20-

Item 2. Management’s Discussion and Analysis (continued)

Critical Accounting Policies

Critical accounting policies are dependent on estimates that are particularly susceptible to significant changes. Determination of the Bank’s allowance for loan losses, the valuation of real estate acquired in connection with foreclosures, or in satisfaction of loans, and the valuation of deferred taxes are considered to be critical accounting policies of the Company.

The allowance for loan losses is maintained at a level believed to be appropriate by management to provide for probable loan losses inherent in the portfolio as of each quarter-end. Management’s judgment as to the amount of the allowance for loan losses, including the allocated and unallocated elements, is a result of ongoing review of lending relationships, the overall risk characteristics of the portfolio segments, changes in the character or size of the portfolio segments, the level of impaired or nonperforming loans, historical net charge-off experience, prevailing economic conditions and other relevant factors. Loans are charged off to the extent they are deemed to be uncollectible. The allowance for loan losses level is highly dependent upon management’s estimates of variables affecting valuation, appraisals of collateral, evaluations of performance and status, and the timing of collecting nonperforming loans. Such estimates may be subject to frequent adjustments by management and reflected in the provision for loan losses in the periods in which they become known.

Other real estate represents properties acquired through or in lieu of loan foreclosure. Other real estate is initially recorded at the lower of cost or fair value less estimated disposal costs. Any write-down to fair value up to 90 days after transfer to other real estate is charged to the allowance for loan losses. Costs of improvements are capitalized, whereas costs

relating to holding other real estate and valuation adjustments subsequent to 90 days of transfer are expensed. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets.

Income taxes are accounted for using the asset and liability method. Under this method, deferred tax assets or liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The determination of current and deferred taxes is based on complex analyses of many factors including interpretation of Federal and state income tax laws, the difference between tax and financial reporting basis of assets and liabilities (temporary differences), estimates of amounts due or owed such as the reversals of temporary differences, and current financial accounting standards. Actual results could differ significantly from the estimates and interpretations used in determining current and deferred taxes.

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Item 2. Management’s Discussion and Analysis (continued)

Executive Summary

The Company’s total assets at September 30, 2010, were approximately $348.8 million, a decrease of $60.6 million or 14.8% from December 31, 2009. Net loss for the nine months ended September 30, 2010 was $10.7 million, an increase of $5.9 million or 123.8% compared to the loss of $4.8 million for the nine months ended September 30, 2009. For the three months ended September 30, 2010 and 2009 the loss was $1.6 million or a decrease of approximately $25,000 or 1.5% compared to a loss of $1.7 million. Loss per share was $3.28 and $1.47 for the nine months and remained stable at $0.51 for the three months ended September 30, 2010 and 2009, respectively.

On October 23, 2009, the Directors of the Company and Bank entered into formal agreements with the FDIC, and DBF. These regulatory agreements are designed to help the Company and Bank return to profitability and capital adequacy by improving asset quality. Specifically, the agreements provide for:

Increase board participation in the affairs of the Bank, which includes holding meetings at least monthly and establishing a Directors’ Committee made up of a majority of members who are not officers, to receive reports from management and report to the board;
Assess management’s qualifications and ability to comply with the Order and applicable laws and regulations and to operate the Bank in a safe and sound manner;
File a capital plan with the FDIC and DBF;
Maintain (a) Tier 1 Capital at or above 8% of total assets and (b) total risk-based capital at or above 10% of total risk-weighted assets;
Refrain from paying dividends, directors’ fees or bonuses without prior regulatory approval;
Perform a risk segmentation analysis on credit concentrations;
Charge-off all assets classified as “Loss” and 50% of assets classified as “Doubtful” in any official Report of Exam from the FDIC or the DBF;
Maintain an adequate allowance for loan losses, review the adequacy of the allowance for loan losses and ensure that its policy for determining the adequacy is comprehensive;
Formulate a plan to reduce risk exposure for any lines of credit which are adversely classified by the FDIC or the DBF and in the aggregate are $1,000,000 or more as of the date of the examination;
Reduce the aggregate balance of assets classified as “Substandard” or “Doubtful” in accordance with a schedule provided in the Order;
Restrict extensions of credit to any borrower whose extension of credit has been, in whole or in part, charged-off or adversely classified;
Correct all cited violations of regulations and contraventions of policy cited in the Bank’s Report of Examination;
Review and, if applicable, revise its written liquidity, contingent funding and asset/liability management plans;
Enhance the Bank’s internal loan review program;
Obtain a waiver from the FDIC prior to accepting, renewing or rolling over any brokered deposits;
Review and, if necessary, revise its written plan detailing appropriate strategies for managing acquisition, development and construction (ADC) and commercial real estate concentration levels;
File a long-term strategic plan with the FDIC and the DBF; and
File progress reports with the FDIC and the DBF.

The Order will remain in effect until modified or terminated by the DBF and FDIC.

On January 21, 2010, the board of directors of the Company, appointed Darren M. Cantlay to serve as Chief Financial Officer and Secretary of the Company.

On May 26, 2010, the Company released the results of the actions taken at the annual shareholders meeting that took place on May 20, 2010.

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Item 2. Management’s Discussion and Analysis (continued)

On June 10, 2010 the Company filed an 8-K related to the amendment of the Articles of Incorporation. On June 7, 2010, the Company filed with the Secretary of State of Georgia Articles of Amendment to the Company’s Articles of Incorporation which authorized additional capital stock, increasing the number of authorized common stock from ten million shares to twenty five million shares. The amendment also changed the par value of the common stock from $2.50 per share to $1.00 per share. The amendment was approved by the shareholders of the Company by a greater than two-thirds affirmative vote at the annual meeting held on May 20, 2010.

On August 31, 2010, Darren M. Cantlay, Executive Vice President, Chief Financial Officer and Secretary of the Bank and of the Company resigned from all positions held with the Bank and the Company. The Board has named Jesse M. Roberts, Jr., age 54, to replace Mr. Cantlay, pending approval from the regulatory authorities. In the interim, Mr. Roberts will serve as Interim Chief Financial Officer and Secretary of the Bank and of the Company. Mr. Roberts served as Senior Operations Officer from 2001 until accepting these appointments.

Financial Condition

The composition of assets and liabilities for the Company is as follows:

	September 30, 2010		December 31, 2009		$ Change			% Change
Assets:
Total cash and cash equivalents	$	36,201,368		33,866,904		2,334,464			6.9	%
Securities available for sale		44,150,372		62,682,700		(18,532,328	)		-29.6
Loans, net		232,669,510		269,372,425		(36,702,915	)		-13.6
Cash surrender value of life insurance		237,048		7,043,534		(6,806,486	)		-96.6
Other real estate owned		26,301,960		22,827,955		3,474,005			15.2
Total assets		348,849,198		409,468,641		(60,619,443	)		-14.8

Liabilities:
Deposits	$	325,365,171		371,703,698		(46,338,527	)		-12.5
Borrowed funds		11,780,899		14,894,243		(3,113,344	)		-20.9
Accrued expenses and other liabilities		3,929,265		4,962,883		(1,033,618	)		-20.8
Stockholders’ equity		7,773,863		17,907,817		(10,133,954	)		-56.6
Total Liabilities and Stockholder’s equity		348,849,198		409,468,641		(60,619,443	)		-14.8

The financial condition of the Company as of September 30, 2010 shows assets declined $60.6 million or 14.8% from year-end. Liquid assets (cash, federal funds sold, interest bearing depository balances, and investment securities), decreased $16.2 million or 16.9% from year-end. The decrease in liquid assets from year-end is due to a $34.2 million decline in gross loans offset by a $46.3 million decline in deposits, a $3.1 million decrease in borrowed funds, and $3.5 million increase in other real estate at September 30, 2010.

-23-

Item 2. Management’s Discussion and Analysis (continued)

Loans

Gross loans decreased $34.2 million or 12.4% from December 31, 2009. Declining loan balances are due to the following: (1) efforts by management to exit certain borrowing relationships that have become outside the bank’s acceptable risk profile and lowering the level of commercial real estate exposure; (2) foreclosure activity; and (3) loan charge-offs. For the nine months ending September 30, 2010, the Bank foreclosed $8.6 million in other real estate and charged-off $5.8 million in loans. With the ongoing deterioration of the economy combined with persistent residential real estate market weakness, management expects loan balances to decline further in coming quarters.

The allowance for loan losses increased $2.5 million or 32.2% from the year-end. The change in allowance for loan losses from year-end results from provision expense totaling $8.3 million and $5.8 million in net charge-offs. As of September 30, 2010, the allowance for loan losses as a percentage of gross loans (reserve ratio) is 4.16% versus 2.76% as of the year-end. The primary reasons for the increased provision are the number of loans on nonaccrual that have been reviewed for impairment and weakness in the real estate market.

The following table outlines impaired loans:

(In thousands)
Impaired loans by loan type:		September 30, 2010	December 31, 2009
Commercial, financial & agricultural	$	3,777	1,788
Real estate-mortgage		26,855	18,189
Real estate-construction		23,014	17,928
Consumer loans		311	141
Total impaired loans	$	53,957	38,046
Impaired loans in total with no allowance	$	37,119	31,125
Allowance for impaired loans	$	4,345	1,475

The Bank’s delinquency ratio (loans past due 30 days or more and loans on nonaccrual as a percentage of gross loans) was 24.9% at September 30, 2010 versus 15.7% as of year-end. The increased delinquency ratio from the year-end period is principally due to $17.3 million more loans on nonaccrual and a $34.2 million reduction in loans. Higher delinquency ratios are reflective of the difficulty Bank borrowers face making timely payments and renewing loans in the current economic environment. Unfortunately, management expects these circumstances to exist over the next several quarters.

As of September 30, 2010, 91 relationships were on nonaccrual. The following table outlines nonaccrual loans (in thousands):

	September 30, 2010			December 31, 2009
Total nonaccrual loans	$	52,551		$	35,235
Nonaccrual loans to gross loans		21.7	%		12.7	%

Management has identified $20.8 million in loans restructured from their original terms. The result of these trouble debt restructurings is the Bank agreed to forbear on collecting $73,000 in accrued but unpaid interest when the notes matured and were renewed. Of the $20.8 million of loans that were restructured, $10.1 million of the troubled debt restructurings are in compliance with the terms of the agreement. All troubled debt restructurings graded substandard and lower are reviewed for impairment.

-24-

Item 2. Management’s Discussion and Analysis (continued)

The Bank historically attempts to meet the housing needs of its markets. Following is a table outlining the Bank’s loans on 1-4 family properties (in thousands):

	September 30, 2010			December 31, 2009
1-4 family construction loans	$	10,856			12,231
1-4 family mortgages – first lien		58,137			66,662
1-4 family mortgages – junior lien		16,527			18,049
Total	$	85,520			96,942
Percentage of total loans		35.2	%		35.0	%

As of September 30, 2010, the Company continued to have a concentration in acquisition, development, and construction (AD&C) loans. Management has established a maximum limit where total AD&C loans may not exceed 20% of the Company’s loan portfolio including unfunded commitments. As of September 30, 2010, AD&C loans represented 17% of gross loans and commitments versus 19% and 21% as of the prior year-end and the year-ago periods, respectively. The primary risks of AD&C lending are:

a)	Loans are dependent upon continued strength in demand for residential real estate. Demand for residential real estate is dependent on favorable real estate mortgage rates and population growth from expanding industry services in the metropolitan Atlanta area;

b)	Loans are concentrated to a limited number of borrowers; and

c)	Loans may be less predictable and more difficult to evaluate and monitor.

Federal Bank Regulatory Agencies issued guidance on Concentration in Commercial Real Estate Lending. This guidance defines commercial real estate ("CRE") loans as loans secured by raw land, land development and construction (including 1-4 family residential construction), multi-family property, and non-farm nonresidential property where the primary or a significant source of repayment is derived from rental income associated with the property (that is, loans for which 50% or more of the source of repayment comes from third party, non-affiliated, rental income) or the proceeds of the sale, refinancing, or permanent financing of the property. Loans for owner occupied CRE are generally excluded from the CRE guidance.

The CRE guidance is triggered where either:

a)	Total loans for construction, land development, and other land represent 100% or more of a Bank’s total risked based capital; or

b)	Total loans secured by multifamily and nonfarm nonresidential properties and loans for construction, land development, and other land represent 300% or more of a Bank’s total risked based capital.

Banks that are subject to the CRE guidance’s triggers, need to implement enhanced strategic planning, CRE underwriting policies, risk management and internal controls, portfolio stress testing, risk exposure limits, and other policies, including management compensation and incentives, to address the CRE risks. Higher allowances for loan losses and capital levels may also be appropriate.

-25-

Item 2. Management’s Discussion and Analysis (continued)

The following table outlines the Bank’s CRE loans by category and CRE loans as a percent of total risked based capital as of September 30, 2010 and December 31, 2009 (in thousands).

	September 30, 2010						December 31, 2009
	Aggregate			Percent			Aggregate			Percent
Loan Types:	Balance			of Total			Balance			of Total
Construction & development	$	25,511			28	%	$	39,534			38	%
Land		29,216			31			33,082			32
Sub-total		54,727			59			72,616			70
Multi-family		4,510			5			4,271			4
Non-farm, non-residential, non-owner occupied		32,773			36			27,658			26
Total	$	92,010			100		$	104,545			100

Percent of Total Risk Based Capital:	Bank Limit			Actual			Bank Limit			Actual
Construction, development & land		250	%		458	%		250	%		299	%
Construction, development & land, multi-family and non-farm non-residential		375	%		769	%		375	%		431	%

Other Real Estate

The following is a recap of other real estate activity from December 31, 2009 to September 30, 2010:

Balance as of December 31, 2009	$	22,827,955
Improvements and principal reductions (excluding write-downs)		97,248
Write-down		(482,000	)
Sale of 11 residential lots and 25 acres of unimproved land		(302,023	)
Sale of 26 residential construction properties		(3,818,276	)
Sale of 3 commercial properties		(594,000	)
Foreclosure on 8 commercial properties		4,842,121
Foreclosure on 8 residential lots and 209 unimproved acres		2,050,265
Foreclosure on 12 residential construction properties		1,680,670
Balance as of September 30, 2010	$	26,301,960

The following is an inventory of other real estate as of September 30, 2010:

			Carrying
	Number		Amount
1-4 family residences		47	$	8,417,433
Residential lots		148		3,473,622
Unimproved acres		370		3,175,469
Commercial property		21		11,235,436
Total other real estate			$	26,301,960

-26-

Item 2. Management’s Discussion and Analysis (continued)

The Bank foreclosed 28 properties with carrying balances totaling $8.6 million and sold 40 properties with carrying balances totaling $4.7 million from December 31, 2009 to September 30, 2010. The Bank devotes one seasoned construction lender to marketing its other real estate holdings. Despite these efforts, management believes liquidation of unimproved real estate and residential lot inventory will be protracted until the residential real estate market improves. Additions to the base amount reflect improvements made to finish foreclosed residences.

Deposits

Total deposits decreased $46.3 million or 12.5% from the year-end. The decline in deposits is principally attributable to the decline in time deposits less than $100,000 totaling $14.2 million or 12.7% versus year-end, as well as a reduction in brokered deposits and a reduction in NOW accounts of $17.4 million from year-end. The current period reduction in deposits was partially offset by a core deposit campaign to increase the Demand, Money Market, and Savings accounts.

As of September 30, 2010, brokered deposits totaled $1.8 million and decreased $15.8 million from year-end. The Bank is classified as significantly undercapitalized by its regulators, so it cannot accept or renew brokered deposits. Therefore, management will continue to reduce the level of brokered deposits and thus total assets over the next several quarters. See Liquidity section for further discussion.

Capital Adequacy

The Federal Reserve and the FDIC have implemented substantially identical rules for assessing bank and bank holding company capital adequacy. These regulations establish minimum capital standards in relation to assets and off-balance sheet exposures for credit risk. Banks and bank holding companies are required to have (i) a minimum ratio of Total capital (as defined) to risk-weighted assets of 8%; (ii) a minimum ratio of Tier 1 capital (as defined) to risk-weighted assets of 4%; and (iii) a minimum ratio of stockholder’s equity to risk-weighted assets of 4%. The Federal Reserve and the FDIC also require a minimum leverage capital ratio of Tier 1 capital to total assets of 3% for the most highly rated banks and bank holding companies. Tier 1 capital generally consists of common equity, minority interests in equity accounts of consolidated subsidiaries, and noncumulative perpetual preferred stock and generally excludes unrealized gains or losses on investment securities, certain intangible assets, and certain deferred tax assets. The Federal Reserve or the FDIC will require a bank or bank holding company to maintain a leverage ratio greater than 3% if either is experiencing or anticipating significant growth, is operating with less than well-diversified risks, or is experiencing financial, operational, or managerial weaknesses.

In addition, the FDIC Improvement Act of 1991 provides for PCA if a bank’s leverage capital ratio reaches 2%. PCA may call for the bank to be placed in receivership or sold to another depository institution. The FDIC has adopted regulations implementing PCA which place financial institutions in the following four categories based on capitalization ratios: (i) a well capitalized institution has a total risked-based capital ratio of at least 10%, a Tier 1 risked-based ratio of at least 6%, and leverage capital ratio of at least 5%; (ii) an adequately capitalized institution has a total risked-based capital ratio of at least 8%, a Tier 1 risked-based ratio of at least 4%, and leverage capital ratio of at least 4%; (iii) an undercapitalized institution has a total risked-based capital ratio under 8%, a Tier 1 risked-based ratio under 4%, and leverage capital ratio under 4%; and (iv) a critically undercapitalized institution has a leverage capital ratio under 2%. Institutions deemed adequately capitalized are not permitted to accept brokered deposits (unless waived by the FDIC) and have limitations on the interest rates paid on deposit accounts. Institutions in any of the three undercapitalized categories would be prohibited from declaring and paying dividends or making capital distributions. The FDIC regulations also establish procedures for downgrading an institution to a lower capital category based on supervisory factors other than capital.

-27-

Item 2. Management’s Discussion and Analysis (continued)

Due to its current condition and results of operation, the Directors of the Company and Bank entered into an informal agreement with the Federal Reserve in the third quarter of 2008, and formal agreements, the Order, with the FDIC, and DBF in the fourth quarter of 2009. These regulatory agreements are designed to help the Company and Bank return to profitability and capital adequacy by improving asset quality. Specifically, the agreements provide for reducing troubled assets; limiting credit to troubled borrowers; maintaining an adequate allowance for loans losses; revising policies to more comprehensively address commercial real estate lending; maintaining a Tier 1 leverage capital ratio of 8% or more, a Tier 1 risked-based capital ratio of 6% or more, and a Total risked-based capital ratio of 10% or more; prohibiting the Bank from paying dividends to the Company without prior approval; prohibiting the Company from paying dividends to shareholders without prior approval; prohibiting the Company from incurring debt without prior approval; and prohibiting the Company from repurchasing stock without prior approval. The Bank is presently unable to achieve the capital provisions of the agreements but is negotiating for additional capital.

As of June 30, 2010, the Bank did not meet the requirements of an “adequately capitalized” institution under the capital adequacy guidelines and the regulatory framework for prompt corrective action and the Company is considered “significantly undercapitalized”. In light of the requirement to improve the capital ratios of the Bank, management is pursuing a number of strategic alternatives. Current market conditions for banking institutions, the overall uncertainty in financial markets and the Bank’s high level of non-performing assets are potential barriers to the success of these strategies. Failure to adequately address the regulatory concerns may result in actions by the banking regulators. If current adverse market factors continue for a prolonged period of time, new further severe adverse market factors emerge, and/or the Bank is unable to successfully execute its plans or adequately address regulatory concerns in a sufficiently timely manner, it could have a material adverse effect on the Bank’s business, results of operations and financial position.

As of September 30, 2010, the Bank is considered significantly undercapitalized under the regulatory framework for PCA. As of September 30, 2010 the capital ratios for the Company and the Bank are as follows:

	September 30, 2010						December 31, 2009
	Company			Bank			Company			Bank
Leverage Capital		2.2	%		2.4	%		4.3	%		4.6	%
Tier 1 Risk-Based		3.1	%		3.5	%		6.1	%		6.6	%
Total Risk-Based		4.4	%		4.8	%		7.3	%		7.8	%

Payment of Dividends

The Company is a legal entity separate and distinct from the Bank. Most of the revenues of the Company result from dividends paid to it by the Bank. There are statutory and regulatory requirements applicable to the payment of dividends by the Bank to the Company, its shareholder. Under DBF regulations, the Bank may not declare and pay dividends out of retained earnings without first obtaining the written permission of the DBF unless it meets the following requirements: (i) total classified assets as of the most recent examination of the bank does not exceed 80% of equity capital (as defined by the regulation); (ii) the aggregate amount of dividends declared or anticipated to be declared in the calendar year does not exceed 50% of the net profits after taxes but before dividends for the previous calendar year; and (iii) the ratio of equity capital to adjusted assets is not less than 6%.

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Item 2. Management’s Discussion and Analysis (continued)

The payment of dividends by the Company and the Bank may also be affected or limited by other factors, such as the requirement to maintain adequate capital above regulatory guidelines. The Federal Reserve maintains that a bank holding company must serve as source of financial strength to its subsidiary banks. As a result, the Company may be required to provide financial support to the Bank at a time when, absent such Federal Reserve requirement, the Company may not deem it advisable to provide such assistance. Similarly, the FDIC maintains that insured banks should generally only pay dividends out of current operating earnings and dividends should only be declared and paid after consideration of the bank’s capital adequacy in relation to its assets, deposits, and such other items. For 2010, dividends paid to the Company from the Bank are not permissible.

Results of Operations – Nine and three months ended September 30, 2010 and 2009

General

The Company’s results of operations are determined by its ability to effectively manage interest income and expense, to minimize loan and investment losses, to generate noninterest income and to control noninterest expense. Since interest rates are determined by market forces and economic conditions beyond the control of the Company, the ability to generate interest income is dependent upon the Bank’s ability to obtain an adequate spread between the rate earned on earning assets and the rate paid on interest-bearing liabilities.

The following table shows the significant components of our operations:

	For the three months ended September 30,
	2010		2009		$ Change			% Change
Interest and dividend income	$	3,525,521		5,030,435		(1,504,914	)		-29.9	%
Interest expense		1,555,141		2,248,387		(693,246	)		-30.8
Net interest income		1,970,380		2,782,048		(811,668	)		-29.2
Provision for loan losses		702,000		2,955,786		(2,253,786	)		-76.3
Noninterest income		852,787		426,248		426,539			100.1
Noninterest expense		3,764,768		3,269,558		495,210			15.2
Net loss, before income tax benefit		1,643,601		3,017,048		(1,373,447	)		-45.5

Net loss per share		0.51		0.51

	For the nine months ended September 30,
	2010		2009		$ Change			% Change
Interest and dividend income	$	11,107,836		15,747,349		(4,639,513	)		-29.5	%
Interest expense		5,065,986		7,638,946		(2,572,960	)		-33.7
Net interest income		6,041,850		8,108,403		(2,066,553	)		-25.5
Provision for loan losses		8,252,068		5,681,490		2,570,578			45.2
Noninterest income (loss)		2,589,269		153,902		2,435,367			1582.4
Noninterest expense		11,061,110		9,590,667		1,470,443			15.3
Net loss, before income tax benefit		10,682,059		7,009,852		3,672,207			52.4

Net loss per share		3.28		1.47		1.81			123.1

-29-

Item 2. Management’s Discussion and Analysis (continued)

Net Interest Income

For the three months ended September 30, 2010 and 2009, our tax equivalent interest ratios are as follows:

	September 30, 2010			September 30, 2009
Net Interest Margin		2.64	%		2.91	%
Net Interest Spread		2.75			2.71
Yield on Loans		5.19			5.78
Yield on Investment Securities		2.06			4.23
Cost of Interest Bearing Deposits		1.90			2.47
Cost of Borrowed Money		3.04			3.30
Cost of Funds		1.96			2.53

For the nine months ended September 30, 2010 and 2009, our tax equivalent interest ratios are as follows:

	September 30, 2010			September 30, 2009
Net Interest Margin		2.60	%		2.81	%
Net Interest Spread		2.70			2.60
Yield on Loans		5.31			5.87
Yield on Investment Securities		2.07			4.51
Cost of Interest Bearing Deposits		1.98			2.75
Cost of Borrowed Money		3.02			3.31
Cost of Funds		2.01			2.77

Net interest income for the three months declined approximately $812,000 or 29% from the year-ago period. This decline is due to carrying $14.4 million more in average nonaccrual loans and $8.6 million more in average other real estate as of September 30, 2010 versus the year-ago period and loans declining $7.9 million or 3% in current three month period versus declining $6.4 million or 2.0% in the prior year period. Another contributor to the net interest income change during three month period versus the year-ago period was the reversal of $8,000 less in interest income from loans placed on nonaccrual status during the period.

Net interest income for the nine months declined approximately $2.1 million or 25% from the year-ago period. This decline is due to carrying $13.6 million more in average nonaccrual loans and $8.5 million more in average other real estate as of September 30, 2010 versus the year-ago period and loans declining $34.2 million or 12% in current nine month period versus declining $26 million or 8% in the prior year period. Another contributor to the net interest income decrease during nine month period versus the year-ago period was the reversal of $136,000 more in interest income from loans placed on nonaccrual status during the period.

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Item 2. Management’s Discussion and Analysis (continued)

For the three months ended September 30, 2010, the Company’s tax equivalent net interest margin of 2.64% decreased 27 basis points from the year-ago period. The decrease was attributable to lower yield on loans from carrying $52.5 million in nonaccrual loans and $26.3 million in other real estate as well as the yield on investment securities decreasing 217 basis points. The decrease in investment security yield was the result of bond sales that took place during 2009 to recognize securities gains and reinvestment at shorter term U.S. Treasury securities to position the portfolio for a rising rate environment and an additional sale of securities in July 2010 to re-invest in higher-yielding securities.

For the nine months ended September 30, 2010, the Company’s tax equivalent net interest margin of 2.60% decreased 21 basis points from the year-ago period. The decrease was attributable to lower yield on loans from carrying $52.5 million in nonaccrual loans and $26.3 million in other real estate as well as the yield on investment securities decreasing 244 basis points. The decrease in investment security yield was the result of bond sales that took place during 2009 to recognize securities gains and reinvestment at shorter term U.S. Treasury securities to position the portfolio for a rising rate environment.

Total interest income for the three months declined $1.5 million or 30% from the year-ago period. The yield on earning assets for the quarter ended September 30, 2010 was 4.73% and declined 53 basis points from the year-ago period. The decrease in the yield on earning assets from the year-ago period results from a 59 basis point drop in loan yield, a 217 basis point decrease in investment portfolio yield, partially offset by a 16 basis point increase in yield on federal funds sold and interest bearing deposits. Also contributing to the decline in the yield on earning assets is the increase in loans on nonaccrual of $2.6 million as well as the increase in loans transferred to other real estate.

Total interest income for the nine months declined $4.6 million or 29% from the year-ago period. The yield on earning assets for the nine months ended September 30, 2010 was 4.74% and declined 65 basis points from the year-ago period. The decrease in the yield on earning assets from the year-ago period results from a 56 basis point drop in loan yield, a 244 basis point decrease in investment portfolio yield, partially offset by a 4 basis point increase in yield on federal funds sold and interest bearing deposits. Also contributing to the decline in the yield on earning assets is the increase in loans on nonaccrual of $14.4 million as well as the increase in loans transferred to other real estate.

Total interest expense for the three months fell approximately $693,000 or 31% from the year-ago period. The cost of funds for the quarter ended September 30, 2010 was 1.96% and decreased 57 basis points from the year-ago period. The decline in the cost of funds from the year-ago period results from a 57 basis point decline in the cost of funds on interest bearing deposits and a 26 basis point decline in borrowed money. The overall decline in the cost of funds from the year-ago period versus the three months ended September 30, 2010 results from the Bank repricing both its nonmaturing and maturing time deposits at lower rates. The Bank has focused on utilizing lower cost local deposits to replace the wholesale deposits as they have matured.

Total interest expense for the nine months fell approximately $2.6 million or 34% from the year-ago period. The cost of funds as of September 30, 2010 was 2.01% and decreased 76 basis points from the year-ago period. The decline in the cost of funds from the year-ago period results from a 77 basis point decline in the cost of funds on interest bearing deposits and a 29 basis point decline in borrowed money. The overall decline in the cost of funds from the year-ago period versus the nine months ended September 30, 2010 results from the Bank repricing both its nonmaturing and maturing time deposits at lower rates as well as a reduction in wholesale funding of $35.7 million.

Provision for Loan Losses

Provision for loan losses decreased for the three months $2.3 million or 76.3% and increased for the nine months $2.6 million or 45.2% from the year-ago period. Refer to comments on allowance for loan loss adequacy regarding management’s assessment for the provision.

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Item 2. Management’s Discussion and Analysis (continued)

Non-Interest Income

The composition of other non-interest income is as follows:

	For the Three Months Ended September 30,
		2010		2009		$ Change		% Change
Service charges	$	609,973		611,833		(1,860	)	-0.3	%
Investment securities gains		24,108		1,080,661		(1,056,553	)	-97.8
Increase in cash surrender value of life insurance		18,783		75,915		(57,132	)	-75.3
Other real estate losses		(25,289	)	(1,568,201	)	1,542,912		-98.4
Fixed and repossessed asset losses		(5,696	)	(15,144	)	9,448		-62.4
Other income		230,908		241,184		(10,276	)	-4.3
Total other income	$	852,787		426,248		426,539		100.0	%

	For the Nine Months Ended September 30,
		2010		2009		$ Change		% Change
Service charges	$	1,753,394		1,767,656		(14,262	)	-0.8	%
Investment securities gains (losses)		596,208		(624,518	)	1,220,726		-195.5
Increase in cash surrender value of life insurance		146,677		227,745		(81,068	)	-35.6
Other real estate losses		(593,135	)	(2,012,982	)	1,419,847		-70.5
Fixed and repossessed asset losses		(54,514	)	(15,645	)	(38,869	)	248.4
Other income		740,639		811,646		(71,007	)	-8.8
Total other income	$	2,589,269		153,902		2,435,367		1,582.41	%

Other income for the three months increased $427,000 or 100% from the year-ago period. This increase is principally due to a reduction of $1.5 million or 98% in other real estate losses offset by a reduction in the gain on sale of investment securities of $1.1 million or 98% from the year-ago period. Secondary market fees on mortgage originations declined $34,000 or 52%, due to lower mortgage origination volume as demand for mortgage loans declined and underwriting standards became more stringent.

Other income for the nine months increased $2.4 million or 1,582% from the year-ago period. This increase is principally due to the $1.7 million write-off in stock of Silverton Bank, N.A. that occurred in the first quarter of 2009 and the $596,000 gain on sale of investment securities in 2010. Losses on the disposal of other real estate decreased approximately $1.4 million or 71% from $2.0 million to $593,000 from the year ago period. Secondary market fees on mortgage originations declined $172,000 or 64%, due to lower mortgage origination volume as demand for mortgage loans declined and underwriting standards became more stringent.

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Item 2. Management’s Discussion and Analysis (continued)

Non-Interest Expense

The composition of other non-interest expense is as follows:

	For the Three Months Ended September 30,
	2010		2009		$ Change			% Change
Salaries and employee benefits	$	1,514,054		1,815,628		(301,574	)		-16.6	%
Occupancy and equipment		393,752		353,743		40,009			11.3
Other operating		1,856,962		1,100,187		756,775			68.8
Total other expense	$	3,764,768		3,269,558		495,210			15.2	%

	For the Nine Months Ended September 30,
	2010		2009		$ Change			% Change
Salaries and employee benefits	$	4,940,066		4,745,169		194,897			4.1	%
Occupancy and equipment		1,115,597		1,171,963		(56,366	)		-4.8
Other operating		5,005,447		3,673,535		1,331,912			36.3
Total other expense	$	11,061,110		9,590,667		1,470,443			15.3	%

Other noninterest expense for the three months increased approximately $495,000 or 15% from the year-ago period. The increase is predominantly attributable to an increase in FDIC insurance premiums of $256,000 or 148 %, an increase in other real estate and collection expense of $95,000 or 38% and an increase in professional fees of $292,000 or 331% from the year ago period. Salaries and personnel expense has fallen $302,000 or 17 %, as full-time equivalent employees for the Company have fallen from 117 to 84 or 29%. Occupancy expense is up by $40,000 or 11% from the year-ago period due to a reduction in the 2009 accrual for property taxes made in September 2009.

Other noninterest expense for the nine months increased approximately $1.5 million or 15% from the year-ago period. The increase is predominantly attributable to the reversal of accrued deferred compensation totaling $1 million in the first quarter of 2009. Salaries and personnel expense has fallen $805,000 or 14%, excluding the reversal of $1 million in accrued deferred compensation. Occupancy expense is down $56,000 due to the closure of the Lake Oconee location in September 2009. FDIC insurance premium expense has increased $557,000 or 93% to $1.6 million due to higher FDIC assessments. Expenses related to other real estate and collections have increased $556,000 or 64 % to $1.4 million compared to the year-ago period.

Income Taxes

There was no income tax benefit at September 30, 2010 due to the valuation allowance that was established for the net deferred tax asset, as the realization of these deferred tax assets is dependent on future taxable income. Due to substantial losses incurred during 2009 and 2008 and substantial doubt as to the Company’s ability to utilize the losses to offset taxable income prior to their expiration, no tax benefit was accrued during the quarter.

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Item 2. Management’s Discussion and Analysis (continued)

Liquidity

The Bank must maintain, on a daily basis, sufficient funds to cover depositor withdrawals and to supply new borrowers with funds. To meet these obligations, the Bank keeps cash on hand, maintains account balances with its correspondent banks, and purchases and sells Federal funds and other short-term investments. Asset and liability maturities are monitored in order to avoid significant mismatches which could adversely impact liquidity. It is the policy of the Bank to monitor its liquidity to achieve earnings enhancements and meet regulatory requirements while funding its obligations.

Liquidity is monitored daily and formally measured on a monthly basis. As of September 30, 2010, the Bank’s liquidity ratio was 15.69% versus 13.27% as of December 31, 2009. Management continues to build liquidity as loans repay in anticipation of certificate of deposit maturities.

Since year-end, a $3 million advance matured and was repaid. As of September 30, 2010, the weighted average rate and weighted average maturity of the Bank’s $11 million in outstanding FHLB advances is 3.28% and 55 months, respectively. FHLB advances are drawn under an $11 million line of credit with FHLB.

The Bank has pledged $38.4 million in eligible commercial real estate mortgages to the FRB. The availability on this line is $15.3 million. The line was tested overnight in March 2010. No advances occurred during the quarter.

In October 2008, the FDIC approved a program to strengthen market stability for financial institutions called the Temporary Liquidity Guaranty Program ("TLGP"). Provision one of the TLGP allows the FDIC to guaranty the debt issued by financial institutions for liabilities outstanding as of September 30, 2008. The debt guaranty amount for the Bank is $8.4 million. Management did not opt out of the debt guarantee program, but decided not to utilize it. Provision two of the TLGP raises the FDIC insurance level for all deposit accounts to $250,000 through December 31, 2009. Management has determined this provision would be beneficial to the Bank and its customers and has opted to take part. On September 2, 2009, the FDIC approved a rule to finalize the extension of the temporary increase of $250,000 until December 31, 2013. Provision three of the TLGP allows the FDIC to insure all the Bank’s noninterest bearing and interest bearing deposits paying no more than 0.5% through December 31, 2009. Management determined this provision would be beneficial to the Bank and its customers and has opted to take part. The Bank will pay 10 basis points per annum for this deposit coverage above the $250,000 temporary limit outlined in provision two. In March 2010, the FDIC extended the coverage until December 31, 2010. As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act signed July 20, 2010 by President Obama, the FDIC insurance limits were permanently raised to $250,000 for all deposit accounts except for noninterest bearing accounts which will not have a limit on the insurance beginning January 1, 2011.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

As of September 30, 2010, there were no substantial changes in the composition of the Company’s market-sensitive assets and liabilities or their related market values from that reported as of December 31, 2009. The foregoing disclosures related to market risk of the Company should be read in conjunction with the Company’s audited consolidated financial statements, related notes, and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2009 included in the Company’s 2009 Form 10-K.

Item 4T. Controls and Procedures

The management of McIntosh Bancshares, Inc. and subsidiaries is responsible for establishing and maintaining adequate internal control over financial reporting. This internal control system has been designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of the Company’s published financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Management of the Company and subsidiaries has assessed the effectiveness of the Company’s internal control over financial reporting as of September 30, 2010. To make this assessment, we used the criteria for effective internal control over financial reporting described in Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. There were no significant changes in the internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. Based on our assessment, we believe that, as of September 30, 2010, the Company’s internal control over financial reporting met those criteria and is effective.

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McIntosh Bancshares, Inc. and Subsidiaries

PART II - OTHER INFORMATION

For the Period Ended June 30, 2010

Item 1. Legal Proceedings

The Bank is from time to time involved in various legal actions arising from normal business activities. Management believes that the liability, if any, arising from such actions will not have a material adverse effect on the Company’s financial condition. Neither the Bank nor the Company is a party to any proceeding to which any director, officer or affiliate of the issuer, any owner of more than five percent (5%) of its voting securities is a party adverse to the Bank or the Company.

Item 1A. Risk Factors

Due to our current noncompliance with the Order and risk of future noncompliance we may be subject to certain additional operational and financial restrictions that will require us to take specific actions.

The Bank is currently categorized as “significantly undercapitalized” and, pursuant to the prompt corrective action provisions of the Federal Deposit Insurance Act and the prompt corrective action regulations of the FDIC promulgated thereunder (collectively, the “PCA Provisions”), the Bank received Notification of Prompt Corrective Action from the FDIC on April 6, 2010, which required that the Bank file a capital restoration plan within 45 days of receiving the Notification. In addition, because of the Bank’s “significantly-undercapitalized” status, the Bank is automatically subject to, among other things, restrictions on dividends, management fees, and asset growth, and is prohibited from opening new branches, making acquisitions or engaging in new lines of business without the approval of the FDIC.

Significantly undercapitalized depository institutions may also be subject to any of the following requirements and restrictions, including: (i) selling sufficient voting stock to become adequately capitalized; (ii) directing the Bank to merge or be acquired: (iii) limiting certain affiliate transactions; (iv) restricting interest rates paid on deposits; (v) restricting asset growth or reducing total assets, (vi) altering or eliminating any activities that pose excessive risk to the Bank; (vii) improving management through an election of a new board of directors, dismissals, or the hiring of new executives, (viii) ceasing the acceptance of deposits from correspondent banks, (ix) divesting the holding company; and (x) performing any other appropriate action.

If the capital at the Bank further deteriorates, and the Bank is categorized as critically undercapitalized, subject to limited exceptions, it will be subject to the appointment, by the appropriate federal banking agency, of a receiver or conservator within 90 days of the date on which it becomes critically undercapitalized. In addition, critically-undercapitalized banks are prohibited from paying principal or interest on subordinated debt without FDIC approval. FDIC approval is also required for a critically- undercapitalized institution to engage in certain activities, including, but not limited to, entering into any material transaction other than in the usual course of business, extending credit for any highly leveraged transaction, making any material change in accounting methods, amending its articles or bylaws, engaging in any “covered transaction” with an affiliate (as defined in section 23A of the Federal Reserve Act), paying excessive compensation or bonuses, and paying interest on deposits in excess of the prevailing rate in the institution’s market area.

In addition, because the Bank is not in compliance with the Order, it could also be subject to enforcement actions by the FDIC and Georgia Department. The various enforcement measures available to the FDIC and Georgia Department, include the imposition of a conservator or receiver (which would likely result in a substantial diminution or a total loss of the Company’s investment in the Bank), the judicial enforcement of the Order, the termination of insurance of deposits, the imposition of civil money penalties, and the issuance of removal and prohibition orders against institution-affiliated parties and the imposition of restrictions and sanctions under the prompt corrective action provisions discussed above.

Further noncompliance with the Order, the failure to comply with our capital restoration plan, or further deterioration of our capital, could impact our ability to continue operations and, in such a scenario, it is unlikely that our shareholders would realize any value for their common stock.

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We need to raise additional capital that may not be available to us.

Regulatory authorities require us to maintain adequate levels of capital to support our operations. As described above, we are significantly-undercapitalized and have an immediate need to raise capital. In addition, even if we succeed in raising this capital, we may need to raise additional capital in the future due to additional losses or regulatory mandates. The ability to raise additional capital, if needed, will depend in part on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, additional capital may not be raised, if and when needed, on terms acceptable to us, or at all. If we cannot raise additional capital when needed, our ability to increase our capital ratios could be materially impaired and we could face additional regulatory challenges. In addition, if we issue additional equity capital, it may be at a lower price and in all cases our existing shareholders’ interest would be diluted.

Financial Reform Act of 2010

On July 21, 2010, President Obama signed the Financial Reform Act of 2010 into law. Among other items, the law provides for a Consumer Protection Agency, studies by various regulatory agencies on debit and credit card transactions, and makes the $250,000 FDIC deposit insurance coverage permanent. The Bank, cannot at this time, measure the risks, both favorable and unfavorable, which may result from the passage of this bill.

Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. (Remove and Reserved)

Item 5. Other Information

None

Item 6. Exhibits

EXHIBIT INDEX

31.1	Certifications of the Registrant’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certifications of the Registrant’s Chief Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	18 U.S.C. Section 1350 Certifications of the Registrant’s Chief Executive Officer and Chief Financial and Accounting Officer

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Signatures

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

McIntosh Bancshares, Inc.

Date: November 15, 2010

By: /s/William K. Malone _____________

WILLIAM K. MALONE, Chairman and C.E.O.

(Principal Executive Officer)

Date: November 15, 2010

By: /s/Jesse M. Roberts, Jr.____________

JESSE M. ROBERTS, JR., Interim Chief Financial Officer

(Principal Financial and Accounting Officer)

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