UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

þ		ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 000-51957

FGBC BANCSHARES, INC.

Georgia (State or Other Jurisdiction of Incorporation or Organization)		20-02743161 (I.R.S. Employer Identification Number)

101 Main Street
Franklin, Georgia 30217
(Address of Principal Executive Offices)

(678) 839-4510
(Issuer’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

     Indicate by check mark whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-X is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

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

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

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     The aggregate market value of the registrant’s outstanding common equity held by non-affiliates of the registrant on June 30, 2009 was zero (the registrant’s common stock is not traded in any public trading market and therefore the market value by reference to public market quotes is zero.)

     There were 13,993,233 shares of common stock outstanding as of March 1, 2010.

     Portions of the registrant’s 2010 proxy statement for the annual meeting of shareholders scheduled to be held on June 7, 2009 are incorporated by reference into Part III of this report.

 

 

Table of Contents

Page

PART I					3
ITEM 1.		Business			3
ITEM 1A.		Risk Factors			24
ITEM 1B.		Unresolved Staff Comments			24
ITEM 2.		Properties			24
ITEM 3.		Legal Proceedings			25
PART II					25
ITEM 4.		Market For Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchasers of Equity Securities			25
ITEM 5.		Selected Financial Data			25
ITEM 6.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			26
ITEM 6A.		Quantitative and Qualitative Disclosures About Market Risk			48
ITEM 7.		Financial Statements and Supplementary Data			49
ITEM 8.		Changes and Disagreements with Accountants on Accounting and Financial Disclosure			50
ITEM 8A.		Controls and Procedures			50
ITEM 8B.		Other Information			50
PART III					50
ITEM 9.		Directors, Executive Officers and Corporate Governance			50
ITEM 10.		Executive Compensation			51
ITEM 11.		Securities Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			51
ITEM 12.		Certain Relationships and Related Transactions, and Director Independence			51
ITEM 13.		Principal Accountant Fees and Services			51
PART IV					51
ITEM 14.		Exhibits and Financial Statement Schedules			51
EX-13
EX-23
EX-31.1
EX-31.2
EX-32

Forward-Looking Statements

     This Annual Report on Form 10-K contains or incorporates by reference statements that are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Statements made in this report, other than those concerning historical information, should be considered forward-looking and subject to various risks and uncertainties. Such forward-looking statements are made based upon management’s belief as well as assumptions made by, and information currently available to, management. Our actual results may differ materially from the results anticipated in forward-looking statements due to a variety of factors, including governmental monetary and fiscal policies, deposit levels, loan demand, loan collateral values, securities portfolio values, interest rate risk management, the effects of competition in the banking business from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market funds and other financial institutions operating in our market area and elsewhere, including institutions operating through the Internet, changes in governmental regulation relating to the banking industry, including regulations relating to branching and acquisitions, failure of assumptions underlying the establishment of reserves for loan losses, including the value of collateral underlying delinquent loans, and other factors. We caution that such factors are not exclusive. We do not undertake to update any forward-looking statement that may be made from time to time by, or on behalf of, us.

PART I

ITEM 1. Business.

Overview

     FGBC Bancshares, Inc. (the “Company”, “we” or “us”) was organized in 2004 as a Georgia corporation for the purpose of acquiring all of the common stock of First Georgia Banking Company (the “Bank”), a Georgia bank that opened for business on November 3, 2003. On March 10, 2005 the Company became the sole shareholder of the Bank by virtue of a share exchange whereby each shareholder of the Bank exchanged their Bank stock for an equal number of shares in the Company (by virtue of the share exchange stock certificates that previously represented Bank Stock were automatically deemed to represent Company stock). The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956 and the Georgia Bank Holding Company Act.

     The Company was organized to facilitate the Bank’s ability to serve its customers’ requirements for financial services. The holding company structure provides flexibility for expansion of our banking business through the possible acquisition of other financial institutions and the provision of additional banking-related services which a traditional commercial bank may not provide under present laws. We have no present plans to acquire any operating subsidiaries; however, we may make acquisitions in the future if such acquisitions are deemed to be in the best interest of our shareholders. Any acquisitions would be subject to certain regulatory approvals and requirements.

     The Bank is a full service commercial bank headquartered at 101 Main Street, Franklin, Georgia 30217 (Heard County). In addition to the Franklin location the Bank currently has eleven full-service branches and an Operations Center. The Bank’s full-service branches are located in Homer (Banks County), Carrollton and Villa Rica (Carroll County), Lake Oconee (Greene County), Cornelia (Habersham County), Bremen (Haralson County), Commerce and Jefferson (Jackson County), Columbus (Muscogee County), Athens (Oconee County) and Dalton (Whitfield County), Georgia. The Bank’s Operations Center is located in Carrollton (Carroll County), Georgia. The Bank has delayed plans to construct a branch in Lake Oconee (Greene County), Georgia. We will continue to operate out of leased space at this location. The Bank’s primary service area includes Banks, Carroll, Greene, Habersham, Haralson, Heard, Jackson, Muscogee, Oconee and Whitfield County, Georgia. The Bank also serves the adjacent areas or parts thereof. The principal business of the Bank is to accept deposits from the public and to make loans and other investments. The principal source of funds for the Bank’s loans and investments are checking (both interest and non-interest bearing), money market, savings and time deposits, amortization and prepayments of loans and borrowings. The principal sources of income for the Bank are interest and fees collected on loans, interest and dividends collected on other investments and service charges. The principal expenses of the Bank are interest

paid on savings and deposits accounts, interest paid on other borrowings by the Bank, employee compensation, office expenses and other overhead expenses.

Recent Developments

     Effective July 7, 2009, the Company adopted a board resolution proposed by the Federal Reserve Bank of Atlanta to not incur additional indebtedness, pay cash dividends or repurchase outstanding stock without prior regulatory approval. We also agreed to provide financial statements and written confirmation of our compliance with the resolution periodically to the Federal Reserve.

     In addition, the Bank has recently been examined by the Georgia Department of Banking and Finance (GDBF) and the FDIC (the “Agencies”). The examiners have completed their field work but have not yet delivered the Report of Examination. Applicable law prohibits our disclosure of specific exam findings, but the examiners have preliminarily indicated that, based on the level of the bank’s capital and classified loans, we should expect to become subject to a formal enforcement action in the near future. These actions typically require certain corrective steps, impose limits on activities (such as lending, deposit taking, acquisitions or branching), prescribe lending parameters (such as loan types, volumes and terms) and require additional capital to be raised. In many cases, policies must be revised and submitted to the Agencies for approval within mandated time frames. As with other similarly situated banks, we anticipate that the Bank will be restricted from paying any dividends to the Company without the prior written consent of the Agencies. We further anticipate that we will be required to send periodic written progress reports to the Agencies to show our progress in complying with the restrictions imposed. Once a formal enforcement action has been issued it would remain in place until terminated by the Agencies.

     In conjunction with any order placed on the Bank, we anticipate that the Federal Reserve would impose a similar order on the Company. The restrictions and requirements contained in such order would remain in place until terminated by the Federal Reserve.

     In anticipation of the enforcement actions discussed above, the Company has hired a consulting firm to assist with complying with the expected restrictions and requirements.

     On March 19, 2010 Jackie L. Reed resigned as President and Chief Executive Officer of both the Company and Bank. Mr. Reed also resigned from his position as a director of the Company. The Board of Directors appointed Mr. W. Brett Morgan as Interim Chief Executive Officer of both entities, effective March 19, 2010. Mr. Morgan joined the Bank as the Senior Lending Officer in March 2008 and became EVP/Chief Credit Officer in October 2008. Before joining the Bank Mr. Morgan served for 33 years in various capacities for Regions Bank, including as City President over the Dothan and Enterprise, Alabama markets from 2000 through the end of 2007.

Types of Loans

     Below is a description of the principal categories and relative risks involved for loans made through the Bank. As of December 31, 2009, our loan portfolio consisted of 65.11% in real estate — mortgage loans, 24.13% in real estate — construction loans, 7.19% in commercial and industrial loans and 3.57% in installment loans to individuals.

     Real Estate — Mortgage Loans. The Bank grants loans to borrowers secured by commercial real estate mortgages and residential mortgages located in our market area. Commercial real estate presents risks not found in consumer residential real estate lending. The repayment of these loans is dependent upon successful management and marketing of properties and on the level of expense necessary to maintain the property. The repayment of these loans may be adversely affected by conditions in the real estate market or the general economy. In underwriting commercial real estate loans the Bank considers the historic and projected future cash flows of the real estate and/or owner occupied business supporting the real estate along with obtaining qualified appraisals to help gauge the physical condition and general location of the property and the effect these factors will have on its future desirability from a tenant perspective. These loans are subject to our real estate lending policies which provide guidelines such as maximum loan-to-values acceptable on loans. The commercial real estate loans in this category typically involve relatively large loan balances to a single borrower. In order to mitigate these risks, the Bank monitors its overall loan concentration mix and individual loans are reviewed both internally and by external loan review consultants. This type loan generally has a shorter maturity than other loan types giving the Bank an opportunity to reprice,

restructure or decline to renew the credit. As with other loans, all commercial real estate loans are graded depending upon strength of credit and performance. A lower grade will bring increased scrutiny by management and the Board of Directors.

     The consumer real estate portion of this category includes consumer home mortgages and home equity lines of credit. These loans traditionally have had less risk compared to the consumer installment loans which are dependant on depreciable collateral such as vehicles, boats, etc. but do carry some additional risk because of the increased difficulty and holding costs that would occur when converting real estate to cash in the event of a default. This is even more pronounced in the especially difficult current economic environment with declining real estate values. This risk is mitigated through our loan policy guidelines which detail acceptable loan-to-value guidelines, debt-to-income levels and consumer credit score guidelines.

     Real Estate — Construction Loans. The real estate — construction loan category includes commercial and consumer residential construction and commercial construction for general non-residential commercial buildings. The loans to commercial builders who build homes for resale are subject to market and industry risk of supply and demand as well as the potential for speculative house inventory to grow stale in times of economic slow downs. To mitigate this risk, each loan goes through an evaluation process to identify local market trends along with the history of the borrower. Management regularly reviews construction loan reports, which identify key components in the Bank’s construction loan portfolio. This report also identifies the level of speculative loans in the Bank’s total portfolio to monitor concentrations of this loan type.

     With construction loans to individual consumers the risk is somewhat different. These loans are evaluated by the officer based on consumer credit factors such as personal income, debt levels and traditional consumer credit scores. These factors are tied to the local economy, which provides jobs, standard-of-living and other factors in the communities involved. These loans are considered on an individual basis with risk mitigated by the adherence to loan policy.

     The Bank also makes loans for commercial construction for non-residential buildings, which can be owner occupied or potential leased income space. These loans present different risks including the risk of completing the project as well as repayment through successful management and marketing of properties. The mitigation of risk comes through underwriting the credit to determine the proper loan policy guidelines are maintained. After completion of construction these loans are typically moved to the real estate — mortgage loan category as either owner or non-owner occupied commercial real estate.

     The federal banking agencies, including the FDIC, restrict concentrations in commercial real estate lending and have noted that recent increases in banks’ commercial real estate concentrations have created safety and soundness concerns in the current economic downturn. The regulatory guidance mandates certain minimal risk management practices and categorizes banks with defined levels of such concentrations as banks requiring elevated examiner scrutiny. We have concentrations in commercial real estate loans in excess of the levels identified by regulatory guidance. Although management believes that our credit processes and procedures meet the risk management standards dictated by this guidance, our regulators could impose further restrictions upon the Bank that could adversely affect our operations.

     Commercial and Industrial Loans. We make loans to commercial and industrial businesses in our primary market areas for purposes such as new or upgrades to plant and equipment, inventory acquisition and various working capital purposes. All commercial loans are made to borrowers based on cash flow, collateral strength, ability to repay and degree of management expertise. Loans in this category are subject to many different types of risk, which will differ depending on the particular industry a borrower is engaged in. These risks are to an industry, or sector of an industry, and are monitored by management on an ongoing basis. Each loan is underwritten and evaluated based on individual merit with financial data reviewed by a Bank loan officer and/or credit administration. In addition, large credits are subject to internal loan review annually and may also be reviewed by an external loan review team. Based on analysis by Bank officers, each loan is assigned a grade that is based on overall credit risk to the Bank and the loan may receive an increased degree of scrutiny by management up to and including additional loss reserves being required.

     Commercial loans are usually collateralized with assets of the business, which typically include accounts receivable, inventory and equipment. Collateral is subject to risk relative to conversion to a liquid asset if necessary

as well as risks associated with degree of specialization, mobility and general collectability in a default situation. In order to mitigate risk the collateral is underwritten to loan policy standards, which determines the amount of margin or equity required in each asset taken as collateral with the values monitored by the loan officer and credit personnel on a regular basis.

     Installment Loans to Individuals. The Bank makes several types of consumer loans all of which carry varying degrees of risk. Loans in this category are generally more risky than traditional residential real estate but less risky than commercial loans. The risk of default is generally determined by the well-being of the local economy, which in times of economic stress will affect the consumer’s ability to repay. Loans in this category include vehicle notes, loans secured by deposits and other loans of a consumer nature. Vehicle financing carries additional risks over loans secured by real estate in that the collateral naturally declines in value over the life of the loan and is mobile. These risks are managed by matching the amortization period (the age and remaining useful life of the collateral) with the loan term to ensure the customer always has an equity position and is never “upside down.” Loans secured by deposits present less risk with the liquidity of collateral available in case of default. Other types of secured personal loans carry a wide range of risks depending on the type of collateral with varying degrees of marketability in the event of default. The risk on these types of loans is managed primarily at the underwriting level with loan policy setting standards on evaluation characteristics such as debt-to-income ratio limitations and margin collateral requirements. Other unsecured personal loans carry the greatest degree of risk in the consumer portfolio. With the absence of collateral the Bank is completely dependent on the stability of the borrower’s income stream and commitment to repay. This risk is mitigated through the Bank’s loan underwriting with strict adherence to debt-to-income ratios, time at the present job and industry and policy guidelines relative to loan size as a percentage of net worth and liquid assets.

Mortgage Originations

     We engage in secondary-market mortgage activities by obtaining commitments from secondary-market mortgage purchasers for primarily 1-4 family conforming loans brokered by our Bank. Based on these commitments, we originate mortgage loans on comparable terms and generate fee income and commissions to supplement our non-interest income. These loans are pre-sold in the secondary market and are never closed or funded in the Bank’s name because they are pre-approved by the secondary-market investor. There is generally no recourse or contingent liability associated with these loans.

Loan Participations

     Traditionally, we have not opted to sell or purchase loan participations. In 2008 and 2009, however, we sold a limited number of loans to other financial institutions without recourse. In the future, we may sell more loans either to provide liquidity or lower our total assets thus increasing our capital ratios.

Management’s Policy for Determining the Loan Loss Allowance

     The allowance for loan losses represents management’s assessment of the risk associated with extending credit and its evaluation of the quality of the loan portfolio. In calculating the adequacy of the loan loss allowance, management evaluates the following factors:

	•		the asset quality of individual loans;
	•		changes in the national and local economy and business conditions/development, including underwriting standards, collections, charge-off and recovery practices;
	•		changes in the nature, volume and mix of the loan portfolio;
	•		changes in the experience, ability and depth of our lending staff and management;
	•		changes in the trend of the volume and severity of past dues and classified loans; and trends in the volume of non-accrual loans, troubled debt restructurings and other modifications;
	•		possible deterioration in collateral segments or other portfolio concentrations;

	•		historical loss experience for pools of loans (i.e. collateral types, borrowers, purposes, etc.);
	•		changes in the quality of our loan review system; and
	•		the effect of external factors such as competition and the legal and regulatory requirement on the level of estimated credit losses in our current loan portfolio.

These factors are evaluated monthly and changes in the asset quality of individual loans are evaluated as needed.

     All of our loans are assigned individual loan grades when underwritten and these grades are substantiated by the loan committee and/or loan review process. After a loan is underwritten and booked, loans are monitored or reviewed by the account officer, management, internal loan review personnel and external loan review personnel during the life of the loan. Payment performance is monitored monthly for the entire loan portfolio, banking officers contact customers during the course of business and may be able to ascertain if weaknesses are developing with the borrower, external loan personnel perform an independent review annually and federal and state banking regulators perform periodic reviews of the loan portfolio. If weaknesses develop in an individual loan relationship and are detected, the loan is downgraded and higher reserves are assigned based upon management’s assessment to what extent the weaknesses may affect full collection of the debt. If the principal and interest for a loan does not appear to be fully collectible the loan is recorded as a non-accruing loan and further accrual of interest is discontinued while previously accrued but uncollected interest is reversed against income. Impaired loans are individually evaluated under accounting guidance, to determine potential loss based on collateral and specific reserves are allocated based on this analysis.

     Our net loan charge-offs to average total loans were 4.65% for the year ended December 31, 2009 as compared to 0.66% for the year ended December 31, 2008. Historical performance, however, is not an indicator of future performance and future results could differ materially. Management believes that based upon historical performance, known factors, management’s judgment, and regulatory guidance that the current methodology used to determine the adequacy of the allowance for loan losses is reasonable.

     Our allowance for loan losses is also subject to regulatory examinations and determinations as to adequacy, which takes into account such factors as the methodology used to estimate the allowance for loan losses. During their routine examinations of banks, regulatory agencies may require a bank to make additional provisions to its allowance for loan losses when their credit evaluations and resulting allowance for loan loss estimations differ materially from those of management.

     While it is our policy to charge-off in the current period loans for which a loss is considered probable, there are additional risks of future losses that cannot be quantified precisely or attributed to particular loans or classes of loans. Because these risks include the state of the economy, management’s judgment as to the adequacy of the allowance is necessarily approximate and imprecise.

Management’s Policy for Investing in Securities

     Funds that are not otherwise needed to meet our loan demand may be invested in accordance with our investment policy. The purpose of the investment policy is to provide a guideline by which these funds can best be invested to earn the maximum return, yet still maintain sufficient liquidity to meet fluctuations in our loan demand and deposit structure. The investment policy adheres to the following objectives:

	•		provide an investment medium for funds which are not needed to meet loan demand or deposit withdrawal;
	•		provide an investment medium for funds which may be needed for liquidity purposes;
	•		provide an investment medium which will balance market and credit risk for other assets and our liability structure;
	•		optimize income generated from the investment account consistent with the stated objectives for liquidity and quality standards;

	•		meet regulatory standards; and
	•		provide collateral which we are required to pledge against public monies.

Industry and Competition

     Our primary service area covers various counties located primarily in the Western and Northeastern parts of Georgia. These counties include Banks, Carroll, Greene, Habersham, Haralson, Heard, Jackson, Muscogee, Oconee and Whitfield. Our marketing strategy emphasizes our local nature and involvement in the communities located in our primary service area.

     The Bank encounters vigorous competition from other commercial banks, savings and loan associations and other financial institutions and intermediaries in its primary service areas. The Bank competes with other banks in its primary service area in obtaining new deposits accounts, making loans and providing other banking services. The Bank also competes with savings and loan associations and credit unions for savings and transaction deposits, time deposits and various types of retail and commercial loans.

     The Bank must compete with other financial intermediaries, including mortgage banking firms and real estate investment trusts, small loan and finance companies, insurance companies, credit unions, leasing companies and certain government agencies. Competition exists for time deposits and, to a more limited extent, demand and transaction deposits offered by a number of other financial intermediaries and investment alternatives, including money market mutual funds, brokerage firms, government and corporate bonds and other securities.

     Competition for banking services in the State of Georgia is not limited to institutions headquartered in the State. A number of large interstate banks, bank holding companies and other financial institutions and intermediaries have established loan production offices, small loan companies and other offices and affiliates in the State of Georgia. Many of the interstate financial organizations that compete in the Georgia market engage in regional, national or international operations and have substantially greater financial resources than we do.

Employees

     As of December 31, 2009, the Bank had 167 full-time equivalent employees compared to 191 full-time equivalent employees as of December 31, 2008. We believe that the Bank enjoys satisfactory relations with its employees.

Risk Factors

     The following paragraphs describe material risks that we face.

     Our independent registered public accountants have expressed substantial doubt about our ability to continue as a going concern.

     Our independent registered public accountants in their audit report for the year ended December 31, 2009 have expressed substantial doubt about our ability to continue as a going concern. Among the factors cited by our accountants were our significant recent losses and declining capital levels. Continued operations depend on our ability reverse these trends. Our audited financial statements were prepared under the assumption that we will continue our operations on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business. Our financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern. If we cannot continue as a going concern, our shareholders will likely lose their investment in the Company. See Note 2 of Notes to Consolidated Financial Statements.

     We expect to become subject to a formal enforcement action in the near future, which will place significant restrictions on our operations.

     Under applicable laws the Federal Reserve Board, the FDIC as our bank’s deposit insurer, and the Georgia Department of Banking and Finance, as our bank’s chartering authority, have the ability to impose substantial sanctions, restrictions, and requirement on us if they determine upon examination or otherwise, violations of laws with which we must comply, or weaknesses or failures with respect to general standards of safety and soundness. Applicable law prohibits our disclosures of specific examination findings, but formal enforcement actions are generally disclosed by the regulatory authorities after these actions become effective. These actions typically require certain corrective steps, impose limits on activities (such as lending, deposit taking, acquisitions or branching), prescribe lending parameters (such as loan types, volumes and terms) and require additional capital to be raised. In addition, for the duration of such action, the Bank may not pay dividends to the Company without the prior written consent of the FDIC and the Georgia Department of Banking and Finance. In many cases, policies must be revised and submitted to the regulatory agencies for approval within time frames mandated by them. Failure to adhere to the requirements of any action, once issued, can result in more severe penalties and could eventually allow the banking regulators to appoint a receiver or conservator of the Bank’s net assets. Generally, these enforcement actions can be lifted only after a subsequent examination substantiates complete correction of the underlying issues. We expect to become subject to a formal enforcement action in the near future, which will negatively affect our operations.

     An inability to improve our regulatory capital position could adversely affect our operations and future prospects.

     Our success as a financial institution is dependent on our ability to raise sufficient capital or reduce our assets to improve our regulatory capital position. At December 31, 2009, we were classified as “undercapitalized”, which restricts our operations. As a result of our capital levels, we are subject to various restrictions including: (1) our loans to one borrower limit may be reduced, which affects the size of the loans that we can originate and may also requires us to sell, participate, or refuse to renew loans that exceed our lower loans to one borrower limit, any of which could negatively impact our earnings; (2) we cannot renew, accept or rollover brokered deposits; (3) we must obtain prior regulatory approval to undertake any branch expansion activities; (4) we will pay higher insurance premiums to the FDIC, which will reduce our earnings; (5) we are subject to growth restrictions and limits on capital distributions; and (6) we are required to file a capital restoration plan with the FDIC and Georgia Department of Banking and Finance. Our ability to raise additional capital will depend to some degree on conditions in the capital markets which are outside of our control. Furthermore, the sale of common or preferred stock to raise additional capital could be highly dilutive to our existing shareholders. If we are unable to improve our capital position, our financial condition and future prospects will be materially and adversely affected.

     We hold in our portfolio a significant number of land acquisition and development and construction loans, which concentration poses credit and regulatory risk.

     Our loan portfolio contains a significant level of land acquisition and development, and construction (“ADC”) loans for builders and developers. As of December 31, 2009, approximately 24% of our total loan portfolio fell into this category. These loans are considered more risky than other types of loans. The primary credit risks associated with ADC lending are underwriting, project risks, and market risks. Project risks include cost overruns, borrower credit risk, project completion risk, general contractor credit risk, and environmental and other hazard risks. Market risks are risks associated with the sale of the completed residential units. They include

affordability risk, which means the risk that borrowers cannot obtain affordable financing, product design risk, and risks posed by competing projects.

     Although the aggregate balance of our ADC loans declined during 2009, the balance of these loans as a percentage of our capital increased due to the reduction in our capital base caused by our net loss. There can be no assurance that losses in our ADC loan portfolio will not exceed our reserves, which could adversely impact our earnings. Given the current environment, the non-performing loans in our ADC portfolio may increase substantially in 2010, and these non-performing loans could result in a material level of charge-offs, which will negatively impact our capital and earnings.

     In addition to the general credit risk associated with our ADC loans, we face regulatory risk given that banking regulators apply greater scrutiny to these types of loans and may require us to implement improved underwriting, internal controls, risk management policies and portfolio stress testing, as well as possibly requiring higher levels of allowances for possible loan losses and capital levels as a result of ADC lending exposures. Additionally the banking regulators have determined that our exposure to ADC is excessive and could impose further restrictions on us that could adversely affect our results of operation, financial condition and future prospects.

     Ongoing deterioration in the housing market and the homebuilding industry have led to increased losses and may cause further worsening of delinquencies and nonperforming assets in our loan portfolio. Consequently, our results of operations have been and may continue to be adversely impacted.

     There has been substantial industry concern and national publicity over asset quality among financial institutions due in large part to issues related to subprime mortgage lending, declining real estate values and the general economic downturn. Furthermore, the housing and the residential mortgage markets have experienced, and continue to experience, a variety of difficulties and deteriorating economic conditions. These conditions are particularly prevalent in our market and contributed in large part to an increase in our non-accrual loans from almost $37 million at December 31, 2008 to $48.7 million at December 31, 2009. If market conditions in our market areas continue to deteriorate, this could lead to additional valuation adjustments on our loan portfolios and real estate owned as we continue to reassess the market value of our loan portfolio, the losses associated with loans in default and the net realizable value of real estate owned.

     Difficult economic conditions have adversely affected the banking industry.

     The capital, credit and financial markets have experienced significant volatility and disruption for the past few years. These conditions have had significant adverse effects on our national and local economies, including declining real estate values, a widespread tightening of available credit, illiquidity in certain securities markets, increasing loan delinquencies, mortgage foreclosures, personal and business bankruptcies and unemployment rates, declining consumer confidence and spending, significant write-downs of asset values by financial institutions and government-sponsored entities, and a reduction of manufacturing and service business activity and international trade. These conditions have also adversely affected the stock market generally, and have contributed to significant declines in the trading prices of financial institution stocks. We do not expect these difficult market conditions to improve over the short term, and a continuation or worsening of these conditions could exacerbate their adverse effects. The adverse effects of these condition could include increases in loan delinquencies and charge-offs, increases to the portion of our loan loss reserve that we base on economic factors, increases to our specific loan loss reserves due to the impact of these conditions on specific borrowers or the collateral for their loans, declines in the value of our investment securities, increases in our cost of funds due continued aggressive deposit pricing by local and national competitors with liquidity needs, increases in regulatory and compliance costs, core deposit attrition due to this aggressive deposit pricing and/or consumer concerns about the safety of their deposits.

     Our access to additional short term funding to meet our liquidity needs is limited.

     We must maintain, on a daily basis, sufficient funds to cover withdrawals from depositors’ accounts and to supply new borrowers with funds. We routinely monitor asset and liability maturities in an attempt to match maturities to meet liquidity needs. To meet our cash obligations, we rely on repayments as asset mature, keep cash on hand, maintain account balances with correspondent banks, purchase and sell federal funds, and maintain a line of credit with correspondent banks, the Federal Home Loan Bank and the Federal Reserve Bank. If we are unable to

meet our liquidity needs through loan and other asset repayments and our cash on hand, we may need to borrow additional funds. Currently, our access to additional borrowed funds is limited and we may be required to pay above market rates for additional borrowed funds, which may adversely our results of operations. We may face a severe liquidity deficiency if any of our traditional funding sources become unavailable.

     Negative publicity about financial institutions, generally, or about the Company or Bank specifically, could damage the Company’s reputation and adversely impact its business operations and financial results.

     Reputation risk, or the risk to our business from negative publicity, is inherent in our business. Negative publicity can result from the actual or alleged conduct of financial institutions, generally, or the Company or Bank specifically, in any number of activities, including corporate governance and actions taken by government regulators in response to those activities. Negative publicity can adversely affect our ability to keep and attract customers and can expose us to litigation and regulatory action, any of which could negatively affect our business operations or financial results.

     Our net interest income and liquidity could be negatively affected if we are unable to retain maturing time deposits at competitive rates.

     We rely heavily on time deposits. As of December 31, 2009, we had approximately $320 million in time deposits scheduled to mature within one year, which represented approximately 44% of our total deposits. We expect to continue to rely on short-term time deposits as a primary source of funding for the foreseeable future. Time deposits are generally not as stable as other types of deposits and therefore may be lost if we are unable to offer competitive interest rates upon their renewal.

     Because we are undercapitalized according to applicable regulatory standards, we are no longer able to accept, renew or roll over brokered deposits and have been forced to find other sources of liquidity, limit our growth and/or sell assets, which could materially and adversely affect our financial condition and results of operation.

     As of December 31, 2009, we had brokered deposits of $73.3 million, of which $27.2 million are scheduled to mature prior to December 31, 2010. Because of the limitations on brokered deposits imposed by our regulators due to our undercapitalized status, we must find other sources of liquidity to replace these deposits as they mature. In addition, we may be compelled to limit our growth and/or sell assets, which could materially and adversely affect our financial condition and results of operations.

     Current and future restrictions on the conduct of our business could adversely impact our ability to attract deposits.

          Because the Bank is not longer considered “well capitalized” for regulatory purposes, it is, among other restrictions, prohibited from paying rates in excess of 75 basis points above the local market average on deposits of comparable maturity. Effective January 1, 2010, financial institutions that are not “well capitalized” are prohibited from paying yields for deposits in excess of 75 basis points above a national average rate for deposits of comparable maturity, as calculated by the FDIC, except in very limited circumstances where the FDIC permits use of a higher local market rate. The national rate may be lower than the prevailing rates in our local markets, and the Bank may not be able to secure the permission of the FDIC to use a local market rate. If restrictions on the rates our Bank is able to pay on deposit accounts negatively impacts its ability to compete for deposits in our market area, the Bank may be unable to attract or maintain core deposits, and its liquidity and ability to support demand for loans could be adversely affected.

     If our allowance for loan losses is not adequate to cover actual losses, our net income may decrease.

     Our success depends to a significant extent upon the quality of our assets, particularly loans. In originating loans, there is a substantial likelihood that credit losses will be experienced. The risk of loss will vary with, among other things, general economic conditions, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a collateralized loan, the quality of the collateral for the loan.

     Our loan customers may not repay their loans according to the terms of these loans, and the collateral securing the payment of these loans may be insufficient to assure repayment. As a result, we may experience significant loan losses, which could have a material adverse effect on our operating results. Management makes various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. We maintain an allowance for loan losses in an attempt to cover any loan losses that may occur. In determining the size of the allowance, we rely on an analysis of our loan portfolio based on historical loss experience, volume and types of loans, trends in classification, volume and trends in delinquencies and non-accruals, national and local economic conditions and other pertinent information.

     If our assumptions are wrong, our current allowance may not be sufficient to cover future loan losses, and adjustments may be necessary to allow for different economic conditions or adverse developments in our loan portfolio. Material additions to our allowance would materially decrease our net income. We can make no assurance that our allowance will be adequate to cover future loan losses given current and future market conditions.

     In addition, federal and state regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs, based on judgments different than those of our management. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory agencies would have a negative effect on our operating results.

     Because a significant portion of our loan portfolio is secured by real estate, any negative developments affecting real estate, such as the current market downturn, may harm our business.

     A significant portion of our loan portfolio consists of commercial loans that are secured by various types of real estate as collateral, as well as real estate loans on commercial properties. As of December 31, 2009 our loan portfolio consisted of approximately 65% real estate mortgage loans and 24% real estate construction loans (commercial and consumer.) Because these loans rely on real estate as collateral, they are sensitive to economic conditions and interest rates. Real estate lending also presents additional credit related risks, including a borrower’s inability to pay and deterioration in the value of real estate held as collateral. If a borrower is unable to repay its loan and the value of the underlying real estate collateral declines to a point that is below the amount of our loan then we will suffer a loss.

     The amount of our foreclosed assets has increased significantly and may continue to increase, resulting in additional losses, and costs and expenses that have and will continue to negatively affect our operations.

     At December 31, 2009, we had a total of $13.74 million of foreclosed assets, reflecting a $7.7 million, or 127%, increase from December 31, 2008. This increase in foreclosed assets is due to the continued deterioration of the residential real estate market and the overall tightening of the credit market. As the amount of foreclosed assets increases, our losses, and the costs and expenses to maintain the assets likewise increase. Due to the on-going economic crisis, the amount of our foreclosed assets may continue to increase. Any additional increase in losses, and maintenance costs and expenses due to foreclosed assets may have material adverse effects on our business, financial condition and results of operations. Such effects may be particularly pronounced in a market of reduced real estate values and excess inventory, which may make the disposition of foreclosed assets more difficult, increase maintenance costs and expenses, and may reduce our ultimate realization from any sales.

     Environmental liability associated with lending activities could result in losses.

     In the course of our business, we may foreclose on and take title to properties securing our loans. If hazardous substances are discovered on any of these properties, we may be liable to governmental entities or third parties for the costs of remediation of the hazard, as well as for personal injury and property damage. Many environmental laws can impose liability regardless of whether we knew of, or were responsible for, the contamination. In addition, if we arrange for the disposal of hazardous or toxic substances at another site, we may be liable for the costs of cleaning up and removing those substances from the site, even if we neither own nor operate the disposal site. Environmental laws may require us to incur substantial expenses and may materially limit the use of properties that we acquire through foreclosure, reduce their value or limit our ability to sell them in the event of a default on the loans they secure. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability.

     FDIC Deposit Insurance premiums have increased and may increase further in the future.

     The Federal Deposit Insurance Act, as amended, requires the FDIC to maintain a reserve ratio between 1.15 and 1.50 percent. The FDIC’s board of directors must establish a designated reserve ratio within that range and sets assessment rates to meet that target within a time-frame that the board deems appropriate. If the reserve ratio falls below 1.15 percent, the FDIC’s board is required to establish a restoration plan to bring the reserve ratio back to 1.15 percent within five years. The FDIC’s reserve ratio has declined over the past year due to costs associated with bank failures and FDIC-assisted transactions, and the reserve ratio is expected to continue to decline due to future bank failures and FDIC-assisted transactions. In addition, the FDIC basic insurance coverage limit was temporarily

increased to $250,000 through December 31, 2013, and certain types of deposit accounts will have unlimited deposit insurance coverage through December 31, 2010. These increases have increased the aggregate amount of deposits that the FDIC insures and thus have exposed the FDIC’s deposit insurance fund to potentially greater losses. The FDIC has adopted a plan to restore the reserve ratio to the required level by increasing the deposit insurance assessment rates that it currently charges to insured depository institutions. This increase will have an adverse impact on our results of operations in 2010 and in future years, and if the FDIC is required to increase its deposit insurance assessment rate beyond the levels currently contemplated, the adverse impact will be exacerbated.

     For the year ended December 31, 2009, we paid $2,229,052 of deposit insurance assessments. Due to the large number of unaffiliated FDIC insured depository institution failures, the corresponding increase in assessments and our institutional risk profile degradation, we will be required to pay additional amounts to the Deposit Insurance Fund throughout 2010, which will have an adverse effect on our earnings. If the deposit insurance premium assessment rate applicable to us increases again, either because of our risk classification or because of another uniform increase, our earnings would be further adversely impacted.

     Future impairment losses could be required on various investment securities, which may materially reduce the Company’s and the Bank’s regulatory capital levels.

     The Company establishes fair value estimates of securities available for sale in accordance with generally accepted accounting principles. The Company’s estimates can change from reporting period to reporting period, and we cannot provide any assurance that the fair value estimates of our investment securities would be the realizable value in the event of a sale of the securities.

     A number of factors could cause us to conclude in one or more future reporting periods that any difference between the fair value and the amortized cost of one or more of the securities that we own constitutes an other-than-temporary impairment. These factors include, but are not limited to, an increase in the severity of the unrealized loss on a particular security, an increase in the length of time unrealized losses continue without an improvement in value, a change in our intent or ability to hold the security for a period of time sufficient to allow for the forecasted recovery, or changes in market conditions or industry or issuer specific factors that would render us unable to forecast a full recovery in value, including adverse developments concerning the financial condition of the companies in which we have invested.

     The Company may be required to take other-than-temporary impairment charges on various securities in its investment portfolio. Any other-than-temporary impairment charges would negatively affect our regulatory capital levels, and may result in a change to our capitalization category, which could limit certain corporate practices and could compel us to take specific actions.

     Changes in market interest rates could adversely affect our financial condition and results of operations.

     Our financial condition and results of operations are significantly affected by changes in market interest rates because our assets, primarily loans, and our liabilities, primarily deposits, are monetary in nature. Our results of operations depend substantially on our net interest income, which is the difference between the interest income that we earn on our interest-earning assets and the interest expense that we pay on our interest-bearing liabilities. We are unable to predict changes in market interest rates that are affected by many factors beyond our control, including inflation, recession, unemployment, money supply, domestic and international events and changes in the United States and other financial markets. Our net interest income is affected not only by the level and direction of interest rates, but also by the shape of the yield curve and relationships between interest sensitive instruments and key driver rates, and by balance sheet growth, customer loan and deposit preferences and the timing of changes in these variables which themselves are impacted by changes in market interest rates. As a result, changes in market interest rates can significantly impact our net interest income as well as the fair market valuation of our assets and liabilities.

     The failure of other financial institutions could adversely affect us.

     Our ability to engage in routine transactions, including for example funding transactions, could be adversely affected by the actions and potential failures of other financial institutions. We have exposure to many different industries and counterparties, and we routinely execute transactions with a variety of counterparties in the

financial services industry. As a result, defaults by, or even rumors or concerns about, one or more financial institutions with which we do business, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral we hold cannot be sold at prices that are sufficient for us to recover the full amount of our exposure. Any such losses could materially and adversely affect our financial condition or results of operations.

     The markets for our services are highly competitive and we face substantial competition.

     The banking business is highly competitive. We compete as a financial intermediary with other commercial banks, savings and loan associations, credit unions, finance companies, mutual funds, insurance companies and brokerage and investment banking firms soliciting business from residents of and businesses located in our market areas, many of which have greater resources than we have. Many of our competitors enjoy competitive advantages, including greater financial resources, a wider geographic presence, the ability to offer additional services, more favorable pricing alternatives and lower origination and operating costs. This competition could result in a decrease in loans we originate and could negatively affect our results of operations.

     In attracting deposits, we compete with insured depository institutions such as banks, savings institutions and credit unions, as well as institutions offering uninsured investment alternatives, including money market funds. Traditional banking institutions, as well as entities intending to transact business solely online, are increasingly using the Internet to attract deposits without geographic or physical limitations. In addition, many non-bank competitors are not subject to the same extensive regulations that govern us. These competitors may offer higher interest rates than we offer, which could result in either attracting fewer deposits or increasing our interest rates in order to attract deposits. Increased deposit competition could increase our cost of funds and could affect adversely our ability to generate the funds necessary for our lending operations, which would negatively affect our results of operations.

     Our business is subject to the success of the local economies where we operate.

     Our success significantly depends on the growth in population, income levels, deposits and housing starts in our primary and surrounding markets. If the communities in which we operate do not grow or if prevailing economic conditions locally or nationally continue to be unfavorable, our business may not succeed. We are currently experiencing economic conditions in our market areas that have negatively affected the ability of our customers to repay their loans to us and generally negatively affected our financial condition and results of operations. We are less able than a larger institution to spread the risks of unfavorable local economic conditions across a large number of diversified economies and are thus disproportionately impacted. Moreover, we cannot give any assurance that we will benefit from any market growth or favorable economic conditions in our primary and surrounding market areas if they do materialize in the future.

     Our business may be adversely affected by the highly regulated environment in which we operate.

     We are subject to extensive federal and state legislation, regulation, examination and supervision. Recently enacted, proposed and future legislation and regulations could have a substantial and unpredictable adverse effect on our business and operations. Our success depends on our continued ability to comply with these laws and regulations. Some of these regulations may increase our costs. For example, the Sarbanes-Oxley Act of 2002, and the related rules and regulations promulgated by the SEC that currently apply to us have increased the scope, complexity and cost of corporate governance, reporting and disclosure practices. As a result, we may experience greater compliance costs. While we cannot predict what effect any future changes in these laws or regulations or their interpretations would have on us, these changes or interpretations may adversely affect our future operations. With the current economic environment, the nature and extent of future legislative and regulatory changes affecting financial institutions is very unpredictable.

     Non-compliance with USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions, and curtail expansion opportunities.

     Financial institutions are required under the USA PATRIOT and the Bank Secrecy Act to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. Financial institutions are also obligated to file suspicious activity reports with the U.S. Treasury Department’s Office of Financial Crimes Enforcement Network if such activities are detected. These rules also require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure or the inability to comply with these regulations could result in fines or penalties, curtailment of expansion opportunities, intervention or sanctions by regulators and costly litigation or expensive additional controls and systems. During the last few years, several banking institutions have received large fines for non-compliance with these laws and regulations. We have developed policies and continue to augment procedures and systems designed to assist in compliance with these laws and regulations. However, we cannot be assured that such policies will effectively protect us.

     Losing key personnel will negatively affect us.

     We may not be able to attract or retain the personnel we require to compete successfully. We currently depend heavily on the services of our executive officers and other members of our senior management team. While our executive officers and the majority of our market presidents have employment contracts, nothing in these contracts prevents these individuals from leaving the Company or the Bank at any time they choose. Losing the services of these or other members of senior management could affect us in a material and adverse way. Our success will also depend on attracting and retaining additional qualified management personnel. Additionally, the scope and content of banking regulators’ policies on executive compensation are continuing to develop and are likely to continue evolving in the near future. It cannot be determined at this time whether compliance with such policies will adversely affect our ability to hire, retain and motivate key employees.

     There are limitations on your ability to transfer our common stock.

     There is no public trading market for the shares of our common stock, and we do not anticipate that a market for our common stock will develop in the near future. As a result, shareholders who may wish or need to dispose of all or a part of their investment in our common stock may not be able to do so except by private direct negotiations with third parties, assuming that third parties are willing to purchase our common stock.

     We do not intend to pay dividends on our common stock.

     We have never declared or paid cash dividends on our common stock. We are under regulatory prohibition from paying dividends now and for the foreseeable future.

     We encounter technological change continually and have fewer resources than many of our competitors to invest in technological improvements.

     The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. In addition to serving customers better, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our success will depend in part on our ability to address our customers’ needs by using technology to provide products and services that will satisfy customer demands for convenience, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements than we have. We may not be able to implement new technology-driven products and services effectively or be successful in marketing these products and services to our customers.

Supervision and Regulation

     Both the Company and the Bank are subject to extensive state and federal banking regulations that impose restrictions on and provide for general regulatory oversight of their operations. These laws generally are intended to protect depositors and not shareholders. The following discussions describe the material elements of the regulatory framework that applies to us.

     FGBC Bancshares

     Since we own all of the capital stock of the Bank, we are a bank holding company under the Federal Bank Holding Company Act of 1956 (the “BHC Act”). As a result, we are primarily subject to the supervision, examination, and reporting requirements of the BHC Act and the regulations of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). As a bank holding company located in Georgia, the Georgia Department of Banking and Finance (the “GDBF”) also regulates and monitors all significant aspects of our operations.

     Acquisition of Banks

     The BHC Act requires every bank holding company to obtain the Federal Reserve’s prior approval before:

	•		acquiring direct or indirect ownership or control of any voting shares of any bank if, after the acquisition, the bank holding company will directly or indirectly own or control more than 5% of the bank’s voting shares;
	•		acquiring all or substantially all of the assets of any bank; or
	•		merging or consolidating with any other bank holding company.

     Additionally, the BHC Act provides that the Federal Reserve may not approve any of these transactions if it would result in or tend to create a monopoly or substantially lessen competition or otherwise function as a restraint of trade, unless the anti-competitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the community to be served. The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks concerned and the convenience and needs of the community to be served. The Federal Reserve’s consideration of financial resources generally focuses on capital adequacy, which is discussed below.

     Under the BHC Act, if adequately capitalized and adequately managed, we or any other bank holding company located in Georgia may purchase a bank located outside of Georgia. Conversely, an adequately capitalized and adequately managed bank holding company located outside of Georgia may purchase a bank located inside Georgia. In each case, however, restrictions may be placed on the acquisition of a bank that has only been in existence for a limited amount of time or will result in specified concentrations of deposits. Currently, Georgia law prohibits acquisitions of banks that have been chartered for less than three years.

     Change in Bank Control

     Subject to various exceptions, the BHC Act and the Change in Bank Control Act, together with related regulations, require Federal Reserve approval prior to any person or company acquiring “control” of a bank holding company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities. In addition, a rebuttable presumption of control exists if, immediately following the acquisition of voting securities, the holder controls more than 10% of any class of voting securities and either:

	•		the bank holding company has registered securities under Section 12 of the Exchange Act; or
	•		no other person owns a greater percentage of that class of voting securities immediately after the transaction.

     Our common stock is registered under Section 12 of the Exchange Act. The regulations set forth certain a procedure for challenging the rebuttable presumption of control.

     Permitted Activities

     A bank holding company is generally permitted under the BHC Act to engage in or acquire direct or indirect control of more than 5% of the voting shares of any company engaged in the following activities:

•

banking or managing or controlling banks; and

•

any activity that the Federal Reserve determines to be so closely related to banking as to be a proper incident to the business of banking.

     Activities that the Federal Reserve has found to be so closely related to banking as to be a proper incident to the business of banking include:

	•		factoring accounts receivable;
	•		making, acquiring, brokering or servicing loans and usual related activities;
	•		leasing personal or real property;
	•		operating a non-bank depository institution, such as a savings association;
	•		trust company functions;
	•		financial and investment advisory activities;
	•		conducting discount securities brokerage activities;
	•		underwriting and dealing in government obligations and money market instruments;
	•		providing specified management consulting and counseling activities;
	•		performing selected data processing services and support services;
	•		acting as agent or broker in selling credit life insurance and other types of insurance in connection with credit transactions; and
	•		performing selected insurance underwriting activities.

     Despite prior approval, the Federal Reserve may order a bank holding company or its subsidiaries to terminate any of these activities or to terminate its ownership or control of any subsidiary when it has reasonable cause to believe that the bank holding company’s continued ownership, activity or control constitutes a serious risk to the financial safety, soundness, or stability of it or any of its bank subsidiaries.

     In addition to the permissible bank holding company activities listed above, a bank holding company may qualify and elect to become a financial holding company, permitting the bank holding company to engage in activities that are financial in nature or incidental or complementary to financial activity. The BHC Act expressly lists the following activities as financial in nature:

	•		lending, trust and other banking activities;
	•		insuring, guaranteeing, or indemnifying against loss or harm, or providing and issuing annuities, and acting as principal, agent, or broker for these purposes, in any state;
	•		providing financial, investment, or advisory services;
	•		issuing or selling instruments representing interests in pools of assets permissible for a bank to hold directly;
	•		underwriting, dealing in or making a market in securities;
	•		other activities that the Federal Reserve may determine to be so closely related to banking or managing or controlling banks as to be a proper incident to managing or controlling banks;
	•		foreign activities permitted outside of the United States if the Federal Reserve has determined them to be usual in connection with banking operations abroad;
	•		merchant banking through securities or insurance affiliates; and
	•		insurance company portfolio investments.

     To qualify to become a financial holding company, the Bank and any other depository institution subsidiary of ours must be well capitalized and well managed and must have a Community Reinvestment Act rating of at least

“satisfactory.” Additionally, a bank holding company must file an election with the Federal Reserve to become a financial holding company and must provide the Federal Reserve within 30 days’ written notice prior to engaging in a permitted financial activity. We are not currently eligible to become a financial holding company at this time. If we become eligible in the future we may decide to make this election.

     Support of Subsidiary Institutions

     Under Federal Reserve policy, bank holding companies are expected to act as a source of financial strength for their bank subsidiaries and to commit resources to support their bank subsidiaries. As a result, a bank holding company may be required to loan money to its subsidiaries in the form of capital notes or other instruments that qualify as capital of the subsidiary bank under regulatory rules. However, any loans from the bank holding company to those subsidiary banks will likely be unsecured and subordinated to that bank’s depositors and perhaps to other creditors of that bank. In the event of the Company’s bankruptcy, any commitment by the Company to a bank regulatory agency to maintain the capital of a subsidiary bank at a certain level would be assumed by the bankruptcy trustee and entitled to priority of payment.

     First Georgia Banking Company

     The Bank is subject to extensive state and federal banking regulations that impose restrictions on and provide for general regulatory oversight of our operations. These laws are generally intended to protect depositors and not shareholders. The following discussion describes the material elements of the regulatory framework that applies to the Bank.

     Since the Bank is a commercial bank chartered under the laws of the State of Georgia, it is primarily subject to the supervision, examination and reporting requirements of the FDIC and the GDBF. The FDIC and the GDBF regularly examine the Bank’s operations and have the authority to approve or disapprove mergers, the establishment of branches and similar corporate actions. Both regulatory agencies have the power to prevent the continuance or development of unsafe or unsound banking practices or other violations of law. Additionally, the Bank’s deposits are insured by the FDIC to the maximum extent provided by law. The Bank is also subject to numerous state and federal statutes and regulations that affect its business, activities and operations.

     Branching

     Under current Georgia law, the Bank may open branch offices throughout Georgia with the prior approval of the GDBF. In addition, with prior regulatory approval, the Bank may acquire branches of existing banks located in Georgia. The Bank and any other national or state-chartered bank generally may branch across state lines by merging with banks in other states if allowed by the laws of the applicable state (the foreign state). Georgia law, with limited exceptions, currently permits branching across state lines through interstate mergers.

     Under the Federal Deposit Insurance Act, states may “opt-in” and allow out-of-state banks to branch into their state by establishing a new start-up branch in the state. Currently, Georgia has not opted-in to this provision. Therefore, interstate merger is the only method through which a bank located outside of Georgia may branch into Georgia. This provides a limited barrier of entry into the Georgia banking market, which protects us from an important segment of potential competition. However, because Georgia has elected not to opt-in, our ability to establish a new start-up branch in another state may be limited. Many states that have elected to opt-in have done so on a reciprocal basis, meaning that an out-of-state bank may establish a new start-up branch only if their home state has also elected to opt-in. Consequently, unless Georgia changes its election, the only way we will be able to branch into states that have elected to opt-in on a reciprocal basis will be through interstate merger.

     Prompt Corrective Action

     The FDIC Improvement Act of 1991 established a system of prompt corrective action to resolve the problems of undercapitalized financial institutions. Under this system, the federal banking regulators have established five capital categories (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) in which all institutions are placed. The federal banking agencies have also specified by regulation the relevant capital levels for each of these categories. At December 31, 2009, the Bank was undercapitalized.

     Federal banking regulators are required to take various mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the capital category in which the institution is placed. Generally, subject to a narrow exception, the banking regulator must appoint a receiver or conservator for an institution that is critically undercapitalized.

     An institution that is categorized as undercapitalized, significantly undercapitalized, or critically undercapitalized is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. A bank holding company must guarantee that a subsidiary depository institution meets its capital restoration plan, subject to various limitations. The controlling holding company’s obligation to fund a capital restoration plan is limited to the lesser of 5% of an undercapitalized subsidiary’s assets at the time it became undercapitalized or the amount required to meet regulatory capital requirements. An undercapitalized institution is also generally subject to restrictions on asset growth, capital distributions, management fees, acquisitions, establishing any branches or engaging in any new line of business, except under an accepted capital restoration plan or with FDIC approval. The regulations also establish procedures for downgrading an institution to a lower capital category based on supervisory factors other than capital.

     Insurance of Deposit Accounts and Regulation by the FDIC

     The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. The Deposit Insurance Fund is the successor to the Bank Insurance Fund and the Savings Association Insurance Fund, which were merged effective March 31, 2006. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC insured institutions. It also may prohibit any FDIC insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the insurance fund. The FDIC also has the authority to initiate enforcement actions against institutions, and may terminate deposit insurance if it determines that the institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition.

     On October 3, 2008, President George W. Bush signed the EESA, which temporarily raised the basic limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor. The temporary increase in deposit insurance coverage became effective immediately upon the President’s signature. The legislation provides that the basic deposit insurance limit will return to $100,000 after December 31, 2013.

     Under regulations effective January 1, 2007, the FDIC adopted a new risk-based premium system that provides for quarterly assessments based on an insured institution’s ranking in one of four risk categories based upon supervisory and capital evaluations. For deposits held as of March 31, 2009, institutions were assessed at annual rates ranging from 12 to 50 basis points, depending on each institution’s risk of default as measured by regulatory capital ratios and other supervisory measures. Effective April 1, 2009, assessments also took into account each institution’s reliance on secured liabilities and brokered deposits. This resulted in assessments ranging from 7 to 77.5 basis points. In May 2009, the FDIC issued a final rule which levied a special assessment applicable to all insured depository institutions totaling 5 basis points of each institution’s total assets less Tier 1 capital as of June 30, 2009, not to exceed 10 basis points of domestic deposits. This special assessment was part of the FDIC’s efforts to rebuild the Deposit Insurance Fund. We paid this one-time special assessment in the amount of $367,050 to the FDIC on September 30, 2009.

     In November 2009, the FDIC issued a rule that required all insured depository institutions, with limited exceptions, to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC also adopted a uniform three-basis point increase in assessment rates effective on January 1, 2011. We were required to prepay $6.1 million for the FDIC insurance assessment. We incurred increased deposit insurance costs during 2009 over previous periods due to our increased risk profile.

     FDIC insured institutions are required to pay a Financing Corporation assessment to fund the interest on bonds issued to resolve thrift failures in the 1980s. For the first quarter of 2009, the Financing Corporation assessment equaled 1.14 basis points for domestic deposits. These assessments, which may be revised based upon the level of deposits, will continue until the bonds mature in the years 2017 through 2019.

     The FDIC may terminate the deposit insurance of any insured depository institution, including the Bank, if it determines after a hearing that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. Management of the Bank is not aware of any practice, condition or violation that might lead to termination of the bank’s deposit insurance.

     Temporary Liquidity Guarantee Program

     On November 21, 2008, the Board of Directors of the FDIC adopted a final rule relating to the Temporary Liquidity Guarantee Program (“TLG Program”). The TLG Program was announced by the FDIC on October 14, 2008, preceded by the determination of systemic risk by Treasury, as an initiative to counter the system-wide crisis in the nation’s financial sector. Under the TLG Program the FDIC will (i) guarantee, through the earlier of maturity or June 30, 2012, certain newly issued senior unsecured debt issued by participating institutions and (ii) provide full FDIC deposit insurance coverage for non-interest bearing transaction deposit accounts, certain accounts on which the bank has guaranteed it will pay less than 0.5% interest per annum and interest on Lawyers Trust Accounts held at participating FDIC-insured institutions. Coverage under the TLG Program was available for the first 30 days without charge. The fee assessment for coverage of senior unsecured debt ranges from 50 basis points to 100 basis points per annum, depending on the initial maturity of the debt. The fee assessment for deposit insurance coverage is 10 basis points per quarter on amounts in covered accounts exceeding $250,000 through December 31, 2009. We elected to participate in both guarantee programs. On April 13, 2010, the FDIC extended the Transaction Account Guarantee (“TAG”) portion of the TLG Program through December 31, 2010 at a cost of 25 basis points per annum. As of December 31, 2009, we had issued no debt has been issued under the TLG Program.

     Community Reinvestment Act

     The Community Reinvestment Act requires that, in connection with examinations of financial institutions within their respective jurisdictions, the Federal Reserve or the FDIC will evaluate the record of each financial institution in meeting the credit needs of its local community, including low and moderate-income neighborhoods. These facts are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility. Failure to adequately meet these criteria could impose additional requirements and limitations on the Bank. Additionally, we must publicly disclose the terms of various Community Reinvestment Act-related agreements.

     The USA PATRIOT Act and the Bank Secrecy Act

     The USA PATRIOT Act and the Bank Secrecy Act require financial institutions to develop programs to detect and report money-laundering and terrorist activities, as well as suspicious activities. The USA PATRIOT Act also gives the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. The federal banking agencies are required to take into consideration the effectiveness of controls designed to combat money-laundering activities in determining whether to approve a merger or other acquisition application of a member institution. Accordingly, if we engage in a merger or other acquisition, our controls designed to combat money laundering would be considered as part of the application process. In addition, non-compliance with these laws and regulations could result in fines, penalties and other enforcement measures. We have developed policies and continue to augment procedures and systems designed to comply with these laws and regulations.

     Sarbanes-Oxley Act of 2002

     The Sarbanes-Oxley Act of 2002 was enacted in response to public concerns regarding corporate accountability in connection with certain accounting scandals. The stated goals of the Sarbanes-Oxley Act are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies, and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. The Sarbanes-Oxley Act generally applies to all companies that file or

are required to file periodic reports with the Securities and Exchange Commission, under the Securities Exchange Act of 1934.

     The Sarbanes-Oxley Act includes specific additional disclosure requirements, requires the Securities and Exchange Commission and national securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules, and mandates further studies of certain issues by the Securities and Exchange Commission. The Sarbanes-Oxley Act represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees.

     Other Regulations

     Interest and other charges collected or contracted for by the Bank are subject to state usury laws, and federal laws concerning interest rates. The Bank’s loan operations are also subject to federal laws applicable to credit transactions, such as the:

	•		federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
	•		Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
	•		Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
	•		Fair Credit Reporting Act of 1978, governing the use and provisions of information to credit reporting agencies;
	•		Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;
	•		Soldiers’ and Sailors’ Civil Relief Act of 1940, governing the repayment terms of, and property rights underlying, secured obligations of persons in military service; and
	•		rules and regulations of the various federal agencies charged with the responsibility of implementing these federal laws.

     The deposit operations of the Bank are subject to laws and regulations such as:

•

the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve to implement that act, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.

     All areas of the Bank are subject to:

•

the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records.

     Capital Adequacy

     The Company and the Bank are required to comply with the capital adequacy standards established by the Federal Reserve (in the case of the Company) and the FDIC (in the case of the Bank). The Federal Reserve has established a risk-based and a leverage measure of capital adequacy for bank holding companies. The Bank is also subject to risk-based and leverage capital requirements adopted by the FDIC, which are substantially similar to those adopted by the Federal Reserve for bank holding companies.

     The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance-sheet exposure,

and to minimize disincentives for holding liquid assets. Assets and off-balance-sheet items, such as letters of credit and unfunded loan commitments, are assigned to broad risk categories, each with appropriate risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance-sheet items.

     The minimum guideline for the ratio of total capital to risk-weighted assets is 8%. Total capital consists of two components, Tier 1 Capital and Tier 2 Capital. Tier 1 Capital generally consists of common stock, minority interests in the equity accounts of consolidated subsidiaries, noncumulative perpetual preferred stock, and a limited amount of qualifying cumulative perpetual preferred stock, less goodwill and other specified intangible assets. Tier 1 Capital must equal at least 4% of risk-weighted assets. Tier 2 Capital generally consists of subordinated debt, other preferred stock, and a limited amount of loan loss reserves. The total amount of Tier 2 Capital is limited to 100% of Tier 1 Capital. At December 31, 2009 our consolidated ratio of total capital to risk-weighted assets was 7.01%, which is a decrease of 3.66% from 10.67% at December 31, 2008. Our ratio of Tier 1 Capital to risk-weighted assets was 5.75% as of December 31, 2009, which is a decrease of 3.67% from 9.42% at December 31, 2008. Our capital ratios declined in 2009 due to losses incurred during the year.

     In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum ratio of Tier 1 Capital to average assets, less goodwill and other specified intangible assets, of 3% for bank holding companies that meet specified criteria, including having the highest regulatory rating and implementing the Federal Reserve’s risk-based capital measure for market risk. All other banking holding companies generally are required to maintain a leverage ratio of at least 4%. At December 31, 2009, our leverage ratio was 4.37%, which is a 3.28% decrease from 7.65% at December 31, 2008. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without reliance on intangible assets. Because of our recent deterioration and risk exposure, our regulators expect us to maintain capital ratios substantially above the regulatory minimums. The Federal Reserve considers the leverage ratio and other indicators of capital strength in evaluating proposals for expansion or new activities.

     As of December 31, 2009, the Company and the Bank were categorized as undercapitalized. As a result, we are prohibited from directly or indirectly accepting, renewing or rolling over any brokered deposits. In addition, as an undercapitalized Bank we may be required to comply with additional operating restrictions, including having to submit a plan to restore the Bank to an acceptable capital category. Failure to adequately comply could eventually allow the banking regulators to appoint a receiver or conservator of our net assets. These matters are a major focus of the attention and efforts of the Board of Directors and management. Significant additional restrictions can be imposed on FDIC-insured depository institutions that fail to meet applicable capital requirements.

     Payment of Dividends

     We are a legal entity separate and distinct from the Bank, which is our subsidiary. The principal sources of our cash flow, including cash flow to pay dividends to our shareholders, are dividends that the Bank pays to us. Statutory and regulatory limitations apply to the Bank’s payment of dividends. If, in the opinion of its federal banking regulator, the Bank were engaged in or about to engage in an unsafe or unsound practice, the federal banking regulator could require, after notice and a hearing, that it stop or refrain from engaging in the questioned practice. The federal banking agencies have indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe and unsound banking practice. Under the FDIC Improvement Act of 1991, a depository institution may not pay any dividends if payment would cause it to become undercapitalized or if it already is undercapitalized. Moreover, the federal agencies have issued policy statements that provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings.

     The GDBF also regulates the Bank’s dividend payments. Under the provisions of the Financial Institutions Code of Georgia, the Bank may declare and pay cash dividends only out of our retained earnings, and dividends may not be declared or paid at any time at which the Bank’s paid-in capital and retained earnings do not, in combination, equal at least 20% of our capital stock account. In addition, under the current rules and regulations of the GDBF, cash dividends may only be declared or paid on the Bank’s outstanding capital stock, without any requirement to notify the GDBF or request the approval of the GDBF, under the following conditions:

	•		total classified assets at the Bank’s most recent examination do not exceed 80% of Tier 1 Capital plus the allowance for loan losses as reflected at such examination;
	•		the aggregate amount of dividends declared or anticipated to be declared in the calendar year does not exceed 50% of the Bank’s net profits, after taxes but before dividends, for the previous calendar year; and
	•		the ratio of Tier 1 Capital to adjusted total assets is not less than 6%.

     Any dividend to be declared by the Bank at the time when each of the conditions provided above does not exist must be approved, in writing, by the GDBF prior to the payment of the dividend pursuant to the provisions of Section 7-1-460(a)(3) of the Financial Institutions Code of Georgia. (Section 7-1-460(a)(3) of the Financial Institutions Code of Georgia provides that “[d]ividends may not be paid without the prior approval of the [D]epartment in excess of specified amounts as may be fixed by regulations of the [D]epartment to assure that banks and trust companies maintain an adequate capital structure.”)

     The payment of dividends may also be affected or limited by other factors, such as the requirement to maintain adequate capital above regulatory guidelines. In addition, if, in the opinion of the applicable regulatory authority, a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending upon the financial condition of the bank, could include the payment of dividends), such authority may require, after notice and hearing, that such bank cease and desist from such practice. In addition to the formal statutes and regulations, regulatory authorities consider the adequacy of a bank’s total capital in relation to its assets, deposits and other such items.

     Restrictions on Transactions with Affiliates

     We are subject to the provisions of Section 23A of the Federal Reserve Act. Section 23A places limits on the amount of:

	•		a bank’s loans or extensions of credit to affiliates;
	•		a bank’s investment in affiliates;
	•		assets a bank may purchase from affiliates, except for real and personal property exempted by the Federal Reserve;
	•		loans or extensions of credit made by a bank to third parties collateralized by the securities or obligations of affiliates; and
	•		a bank’s guarantee, acceptance or letter of credit issued on behalf of an affiliate.

     The total amount of the above transactions is limited in amount, as to any one affiliate, to 10% of a bank’s capital and surplus and, as to all affiliates combined, to 20% of a bank’s capital and surplus. In addition to the limitation on the amount of these transactions, each of the above transactions must also meet specified collateral requirements. The Bank must also comply with other provisions designed to avoid the taking of low-quality assets.

     We are also subject to the provisions of Section 23B of the Federal Reserve Act which, among other things, prohibit an institution from engaging in transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to the institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.

     The Bank is also subject to restrictions on extensions of credit to its executive officers, directors, principal shareholders and their related interests. These extensions of credit (1) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties and (2) must not involve more than the normal risk of repayment or present other unfavorable features.

     Privacy

     Financial institutions are required to disclose their policies for collecting and protecting confidential information. Customers generally may prevent financial institutions from sharing nonpublic personal financial

information with nonaffiliated third parties except under narrow circumstances, such as the processing of transactions requested by the consumer or when the financial institution is jointly sponsoring a product or service with a nonaffiliated third party. Additionally, financial institutions generally may not disclose consumer account numbers to any nonaffiliated third party for use in telemarketing, direct mail marketing or other marketing to consumers.

     Consumer Credit Reporting

     On December 4, 2003, President Bush signed the Fair and Accurate Credit Transactions Act (the “FAIR Act”), amending the federal Fair Credit Reporting Act (the “FCRA”). These amendments to the FCRA (the “FCRA Amendments”) became effective in 2004.

     The FCRA Amendments include, among other things:

	•		requirements for financial institutions to develop policies and procedures to identify potential identity theft and, upon the request of a consumer, place a fraud alert in the consumer’s credit file stating that the consumer may be the victim of identity theft or other fraud.
	•		for entities that furnish information to consumer reporting agencies (which would include the Bank), requirements to implement procedures and policies regarding the accuracy and integrity of the furnished information and regarding the correction of previously furnished information that is later determined to be inaccurate; and
	•		a requirement for mortgage lenders to disclose credit scores to consumers.

     Proposed Legislation and Regulatory Action

     New regulations and statutes are regularly proposed that contain wide-ranging proposals for altering the structures, regulations and competitive relationships of financial institutions operating or doing business in the United States. We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our business may be affected by any new regulation or statute.

ITEM 1A.		Risk Factors.

     Our business faces risks. The material risk factors that we face are described under the heading “Risk Factors” within Item 1 of this report and incorporated into this Item 1A. by reference.

ITEM 1B.  Unresolved Staff Comments.

                  None.

ITEM 2.		Properties.

     We own all of our branches except for our Commerce (Jackson County) location, in which we have a five-year lease. Our owned properties are listed below:

	•		1989 Historic Homer Highway, Commerce, Georgia 30529 (Banks County)
	•		100 Tom Reeve Drive, Carrollton, Georgia 30117 (Carroll County) — also Operations Center
	•		908 South Carroll Road, Villa Rica, Georgia 30180 (Carroll County)
	•		920 Level Grove Road, Cornelia, Georgia 30531 (Habersham County)
	•		102 Stockbridge Boulevard, Bremen, GA 30110 (Haralson County)
	•		101 Main Street, Franklin, Georgia 30217 (Heard County)
	•		1465 Old Swimming Pool Road, Jefferson, Georgia 30549 (Jackson County)
	•		7320 Veterans Parkway, Columbus, Georgia 31909 (Muscogee County)
	•		1251 Virgil Langford Road, Bogart, Georgia 30622 (Oconee County)
	•		1378 Dug Gap Road, Dalton, Georgia 30720 (Whitfield County)

     We currently operate out of rental space in our Lake Oconee (Greene County) branch. We believe that our properties are in good condition and suitable for our operations.

ITEM 3.		Legal Proceedings.

     There are no material pending legal proceedings to which the Company is a party or of which any of its properties are subject, nor are there material proceedings known to the Company to be contemplated by any governmental authority. Additionally, the Company is unaware of any material proceedings, pending or contemplated, in which any existing director, officer or affiliate of the Company or any associate of any of the foregoing, is a party or has an interest adverse to the Company.

PART II

ITEM 4.		Market For Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchasers of Equity Securities.

     No public market exists for our common stock, and there can be no assurance that a public trading market for our common stock will develop. As of March 1, 2010, there were approximately 1,540 holders of record of our common stock who collectively held 13,993,233 shares of our common stock. As of December 31, 2009, there were 1,182,420 options and 365,590 warrants presently subject to purchase such common shares.

     We have not paid dividends since inception and are currently prohibited from doing so pursuant to regulatory restrictions. For a complete discussion on the restrictions on dividends, see “Part I, Item 1, Supervision and Regulation — Payment of Dividends.”

ITEM 5.		Selected Financial Data.

     The following table presents selected financial data for years ended December 31, 2009, 2008, 2007, 2006, and 2005.

		Year ended December 31,
		2009				2008				2007				2006				2005
EARNINGS
Interest income		$	39,199,664			$	44,734,948			$	46,997,687			$	33,106,902			$	14,437,231
Interest expense			18,090,629				24,007,875				25,193,386				15,836,438				6,292,607
Provision for loan loss			32,170,357				8,914,368				2,353,244				2,740,843				1,814,746
Net interest income (expense) (after provision)			(11,061,322	)			11,812,705				19,451,057				14,529,621				6,329,878
Non-interest income			4,205,035				4,625,591				3,437,606				2,557,536				1,693,746
Non-interest expense			26,547,583				24,472,995				21,413,101				16,821,026				8,888,651
Net income (loss)			(37,049,267	)			(5,074,935	)			2,055,068				266,131				(865,027	)
SELECTED AVERAGE BALANCES
Assets		$	798,800,000			$	768,800,000			$	630,034,000			$	449,611,000			$	238,615,000
Earning assets			733,656,000				720,266,000				590,797,000				425,222,000				225,955,000
Loans			651,316,000				633,201,000				485,631,000				348,869,000				178,332,000
Total deposits			725,674,000				684,010,000				563,598,000				374,283,000				208,480,000
Shareholders’ equity			62,731,000				67,432,000				65,004,000				61,252,000				36,945,000
Common shares outstanding — diluted			13,482,241				13,020,215				12,889,153				12,282,832				7,095,891

		Year ended December 31,
		2009				2008				2007				2006				2005
YEAR-END BALANCES
Assets		$	792,200,607			$	821,385,621			$	684,633,510			$	579,410,303			$	326,690,446
Earning assets			679,689,392				731,898,700				641,553,971				544,695,656				310,873,458
Loans (net of allowance)			599,333,982				672,163,689				533,441,960				403,397,896				260,870,361
Total deposits			734,789,120				737,091,694				615,236,359				496,692,502				258,791,577
Other liabilities			1,033,892				1,730,132				2,607,209				19,158,514				10,957,201
Shareholders’ equity			34,377,595				65,813,795				66,789,942				63,559,287				56,941,668
Common shares outstanding			13,993,233				12,492,206				12,185,144				12,062,331				11,229,851
PER COMMON SHARE
Earnings (loss) per share — basic		$	(2.82	)		$	(0.41	)		$	.17			$	.02			$	(0.12	)
Earnings (loss) per share — diluted		$	(2.82	)		$	(0.41	)			.16				.02				(0.12	)
Book value			2.46				5.27				5.48				5.27				5.07
Cash dividend paid			—				—				—				—				—
FINANCIAL RATIOS
Return on average assets			(4.64	%)			(0.66	%)			.33	%			.06	%			(0.36	%)
Return on average equity			(59.06	%)			(7.53	%)			3.16	%			.43	%			(2.34	%)
Average equity to average assets			7.85	%			8.77	%			10.32	%			13.62	%			15.48	%
Dividend payout ratio			n/a				n/a				n/a				n/a				n/a
NON-FINANCIAL
Employees			167				191				192				185				130
Banking offices			12				12				11				10				3
ATMs			12				12				12				10				3

ITEM 6.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

     Our 2009 results were highlighted by substantial deterioration in our loan portfolio. The communities that we serve continue to experience significant economic weakness, especially related to the real estate markets. This downturn has negatively affected borrowers such as builders who are unable to sell their inventory, retail and other commercial businesses, and consumers who have lost equity in their homes do to declining values. Additionally, increased unemployment rates have led to customers encountering difficulties making loan payments. These factors produced a net loss of approximately $37.0 million for the year ended December 31, 2009, or $2.82 per share. This compares to a net loss of approximately $5.1 million for the year ended December 31, 2008, or $0.41 per share.

     The following is a more detailed summary of our 2009 financial performance:

	•		Total loans decreased to approximately $612 million at December 31, 2009, down from approximately $683 million at December 31, 2008. This represents a 10.4% decrease for the year. We intentionally reduced the size of our loan portfolio, and therefore our overall assets, in an effort to positively impact our capital ratios in the wake of the severe decline these ratios have sustained due to recent losses.
	•		Total deposits were approximately $735 million at December 31, 2009, a slight decline from approximately $737 million at December 31, 2008. Approximately 59% of our deposits at December 31, 2009 consisted of time deposits.
	•		Our provision for loan losses, which was by far the largest single contributor to our overall loss, was $32.1 million in 2009, up from $8.9 million in 2008. The increase was primarily the result of the weakening real estate markets in the communities we serve, especially as it relates to our portfolio or commercial real estate loans. Net charge offs totaled $30.3 million during 2009 compared to $4.2

			million in 2008. Our allowance for loan losses as a percentage of total loans stood at 2.10% as of December 31, 2009, up from 1.61% at December 31, 2008.
	•		Nonaccrual loans increased to $48.7 million at December 31, 2009 from $36.7 at December 31, 2008. Approximately 35% of these nonaccrual loans consisted of commercial real estate loans. Increasing levels of non-performing loans negatively impacted our net interest income as the accrual of interest was discontinued and previously accrued but uncollected interest was reserved against income.
	•		Foreclosed assets (primarily real estate) increased to $13.7 million at December 31, 2009 from $6.0 million at December 31, 2008 as we foreclosed on properties and other assets that had served as collateral for delinquent loans. Related to this increase, foreclosed asset expense increased by approximately $1.4 million as compared to 2008 as we incurred expenses for the upkeep of properties, legal fees, taxes and other holding costs. Write-downs of foreclosed properties totaled approximately $2.0 million in 2009 as compared to approximately $1.2 million for 2008. During 2009 we sold approximately $8.8 million of foreclosed property at a loss of approximately $800,000. At December 31, 2009 we had nine properties under contract to sell for an aggregate agreed upon price of $771,600.
	•		Net interest income before the provision for loan losses increased marginally to $21.1 million for 2009 compared to $20.7 million for 2008. Our net interest margin remained at 2.88% during 2009, unchanged from 2008. The negative impact of lost interest income from nonaccrual loans was offset by a declining costs of funds as deposits re-priced to lower rates during the course of the year.
	•		Noninterest income was approximately $4.2 million for the year ended December 31, 2009, down from approximately $4.6 million during 2008.
	•		Noninterest expense increased to approximately $26.5 million in 2009 compared to approximately $24.5 million in 2008, which represents an 8.2% increase. Increased expenses associated with foreclosed assets, as detailed above, and increases in FDIC insurance premiums offset reductions in salary and employee benefits expenses.
	•		Due to our significant losses, we are unable to conclude that we will generate sufficient net income in the foreseeable future to realize the full value of our deferred tax assets. Therefore, we established a $16.3 million deferred tax asset valuation allowance as of December 31, 2009, bringing our net deferred tax asset to approximately $197,000, which equals the portion of our deferred tax asset that is related to our net unrealized losses on our securities portfolio. As a result, any further losses will not have an associated tax benefit unless and until we can show that it is more likely than not that we will realize those tax benefits.
	•		Shareholders’ equity decreased to approximately $34.4 million at December 31, 2009 from approximately $65.8 million at December 31, 2008. The reduction was primarily a result of our net loss, although it was mitigated to a small degree by net proceeds of approximately $5.1 million from the sale of common stock and warrants in a private placement that commenced in June 2009. Our book value per common share at December 31, 2009 was $2.46, down from $5.27 at December 31, 2008.

     We expect to continue to experience pressure on our earnings, liquidity and regulatory capital over the foreseeable future. Our current focus, therefore, is to improve our capital position. We intend to accomplish this objective at least in part through moderate contraction of our balance sheet. We are also exploring alternatives to raise additional capital. Because of the liquidity pressures we may face due to the unavailability of traditions funding sources we intend to maintain a high level of liquid assets until such time as we can improve our capital position. We believe this strategy is prudent in the short run even though liquid assets tend to provide lower yields and thus produce less income.

     The following tables set forth selected measures of our financial performance and condition for the years and dates indicated.

		Year Ended				Year Ended				Year Ended
		December 31,				December 31,				December 31,
		2009				2008				2007
Total revenues (1)		$	43,404,699			$	49,360,539			$	50,435,293
Net income (loss)		$	(37,049,267	)		$	(5,074,935	)		$	2,055,068

		At December 31,				At December 31,				At December 31,
		2009				2008				2007
Total assets		$	792,200,607			$	821,385,621			$	684,633,510
Total loans (2)		$	599,333,982			$	672,163,689			$	533,441,960
Total deposits		$	734,789,120			$	737,091,694			$	615,236,359

     The following is a more detailed discussion of our financial condition at December 31, 2009, 2008 and 2007 and the results of operations for the years then ended. The purpose of this discussion is to focus on information about our financial condition and results of operations that is not otherwise apparent from the audited financial statements. Analysis of the results presented should be made with an understanding of our relatively short history. The following discussion should also be read in conjunction with our financial statements and related notes and the other financial data included elsewhere in this report.

Critical Accounting Policies

     We have adopted various accounting policies which govern the application of accounting principles generally accepted in the United States of America in the preparation of our consolidated financial statements. Our significant accounting policies are described in the footnotes to the consolidated financial statements at December 31, 2009 which are made a part of this annual report. Certain accounting policies involve significant judgments and assumptions by us which have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgments and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgments and assumptions we make, actual results could differ from these judgments and estimates which could have a material impact on our carrying values of assets and liabilities and our results of operations.

     Allowance for Loan Losses

     We believe the allowance for loan losses is a critical accounting estimate that requires the most significant judgments and assumptions used in the preparation of our consolidated financial statements. Because the allowance for loan losses is replenished through a provision for loan losses that is charged against earnings, our subjective determinations regarding the allowance affect our earnings directly. Refer to the portion of this discussion that addresses our allowance for loan losses for a description of our processes and methodology for determining our allowance for loan losses.

     Estimates of Fair Value

     The estimation of fair value is significant to a number of the Company’s assets, including, but not limited to, investment securities, impaired loans and foreclosed assets. Investment securities are recorded at fair value while impaired loans and foreclosed assets are recorded at either cost or fair value, whichever is lower.

     Fair values for investment securities are based on quoted market prices, and if not available, quoted prices on similar instruments. The fair values of foreclosed assets are often determined based upon the lowest of the following three methods: (1) independently observed market prices; (2) appraised values or (3) management’s estimation of the value of the property. Write-downs based on the fair value of the asset at acquisition is charged to the allowance for loan losses. In the event that foreclosed real estate is incomplete at the time of foreclosure, it is held for sale and initially recorded at fair value as obtained from a current appraisal less estimated costs to complete

and sell. We will obtain an “as-completed” appraisal and capitalize costs associated with completion up to this value, less selling costs, in accordance with generally accepted accounting procedures. For the year ended December 31, 2009 we charged down $293,223 at the time of foreclosure. After foreclosure, valuations are periodically performed and the assets are carried at the lower of the carrying or fair value, less estimated cost to sell. Costs incurred in maintaining foreclosed assets and subsequent write-downs based on updated valuations of the property are included in other operating expenses. In response to the slowing economy and general decline in real estate values, we incurred $2,029,695 in subsequent write-downs on previously foreclosed assets and realized net losses of on sales of foreclosed assets of $798,840 for the year ended December 31, 2009. The carrying amount of foreclosed assets at December 31, 2009 and 2008 was $13,740,602 and $6,041,163, respectively. Based on our assumptions, we believe that the carrying value of our foreclosed assets at December 31, 2009 is reasonable. However, if our assumptions prove incorrect, or if market conditions deteriorate further, we may have to take further write downs on our foreclosed properties. Because of the lack of stability in our markets for the past few years, we believe that the range of possible outcomes relating to our foreclosed property is greater than usual.

     Income taxes

     The determination of our overall income tax provision is complex and requires careful analysis. This analysis includes evaluating the amount and timing of the realization of income tax liabilities or benefits. Management continually monitors tax developments as they affect our overall tax position. Deferred income tax assets and liabilities are determined using the balance sheet method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. A valuation allowance for deferred tax assets is required when it more likely than not that some portion or all of the deferred tax assets will not be realized in the near term. In assessing the realization of the deferred tax assets, we consider the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies. During 2007, we assessed the continuing need for a valuation allowance against deferred tax assets and concluded that an allowance was no longer necessary under accounting guidance. As a result, we eliminated the valuation allowance that was recorded as of December 31, 2006. However, due to our recent significant losses, we were unable to conclude that we will generate sufficient net income in the near term to realize the full value of our deferred tax assets. Therefore, we established a $16.3 million deferred tax asset valuation allowance in 2009 bringing our net deferred tax asset to approximately $197,000, which is the deferred tax for the net unrealized losses on our securities portfolio. As a result, any further losses will not have an associated tax benefit until we can show that it is more likely than not that we will realize those tax benefits.

     Stock-based compensation

     The assumptions used in the determination of the fair value of stock options granted ultimately determine the recognition of stock-based compensation expense. The short-cut method was used to determine the expected life of the options. This method calculates the expected term based on the midpoint between the vesting date of the option and the end of the contractual term. Expected volatility was based upon the volatility of similar entities. Risk-free interest rates for periods within the contractual life of the option are based upon the U.S. Treasury yield curve in effect at the time of the grant. Because of the need to retain capital and past history, the expected dividend rate is 0%. These assumptions have a significant impact on the amount of expense recognized for stock-based compensation.

Results of operations for the years ended December 31, 2009, 2008 and 2007

Net Income (Loss)

     2009 Compared to 2008. For the year ended December 31, 2009, we recorded a net loss of $37,049,267, which compares to a net loss of $5,074,935 for the year ended December 31, 2008. Basic and diluted loss per share amounted to $2.82 and $.41 for the years ended December 31, 2009 and 2008, respectively. The net decrease in income of $31,974,332 was primarily due to a $23,255,989 increase in the provision for loan losses compared to 2008 as a result of the continued asset quality deterioration in our loan portfolio. Establishing a deferred tax asset valuation allowance, as noted above, further negatively impacted our earnings as we recorded tax expense of $3,645,397 for the year ended December 31, 2009, which is an increase of $6,605,161 as compared to the same period in 2008.

     2008 Compared to 2007. For the year ended December 31, 2008, we recorded a net loss of ($5,074,935), which compares to net income of $2,055,068 for the year ended December 31, 2007. Basic and diluted losses per share amounted to ($.41) for the year ended December 31, 2008, compared to basic earnings per share of $.17 and diluted earnings per shares of $.16 for the year ended December 31, 2007. The net decrease in income of $7,130,003 was primarily due to a $6,561,124 increase in the provision for loan losses as a result of a general decline in the real estate markets that we serve, as well as the overall economy, and the negative effect that these trends had on our loan portfolio.

     Net Interest Income

     Table 1: Average balances, interest income, and interest expense

     The following table contains condensed average balance sheets for the years indicated. In addition, the amount of our interest income and interest expense for each category of interest-earning assets and interest-bearing liabilities and the related average interest rates, net interest spread and net yield on average interest earning assets are included.

														Analysis of net interest income
														for the years ended December 31, 2009, 2008 and 2007
						2009												2008												2007
		Average				Income/				Yield/				Average				Income/				Yield/				Average				Income/				Yield/
		Balance				Expense				Rate				Balance				Expense				Rate				Balance				Expense				Rate
														(Dollars in thousands)
Assets:
Taxable investment securities		$	40,352			$	1,901				4.71	%		$	61,432			$	3,136				5.10	%		$	67,247			$	3,219				4.79	%
Non-taxable investment securities (1)			13,157				529				4.02	%			15,501				618				3.99	%			10,556				417				3.95	%
Interest-bearing deposits			20,711				165				.80	%			2,249				67				2.98	%			2,749				131				4.76	%
FHLB stock			2,349				58				2.47	%			1,753				58				3.31	%			980				58				5.92	%
Federal funds sold			5,772				16				.27	%			6,131				127				2.07	%			23,810				1,203				5.05	%
Loans (2) (3)			651,316				36,531				5.61	%			633,201				40,729				6.43	%			485,631				41,970				8.64	%
Allowance for loan losses			(11,253	)											(7,815	)											(5,729	)
Cash and due from banks			15,948												8,595												7,315
Other assets			60,906												47,753												37,475
Total assets		$	798,258											$	768,800											$	630,034
Total interest-earning assets		$	733,657			$	39,200				5.34	%		$	720,267			$	44,735				6.21	%		$	590,973			$	46,998				7.95	%
Liabilities:
Noninterest-bearing demand		$	40,997											$	38,822											$	32,281
Interest bearing demand and savings			257,482				3,981				1.55	%			186,544			$	4,014				2.15	%			147,356			$	4,772				3.24	%
Time			426,576				13,590				3.19	%			458,644				19,516				4.26	%			382,061				20,364				5.33	%
Total deposits			725,055												684,010												561,698
Other borrowings			9,824				519				5.28	%			12,466				427				3.43	%			658				52				7.87	%
Federal funds purchased			15				—				.60	%			2,280				51				2.24	%
Securities sold under repurchase agreement			—				—				—	%			—				—				—	%			126				6				4.95	%
Other liabilities			1,173												2,612												2,548
Shareholders’ equity			62,731												67,432												65,004
Total liabilities and shareholders’ equity		$	798,798											$	768,800											$	630,034
Total interest-bearing liabilities		$	693,897			$	18,091				2.61	%		$	659,934			$	24,008				3.64	%		$	530,201			$	25,194				4.75	%
Net interest income						$	21,109											$	20,727											$	21,804
Net interest margin (4)											2.88	%											2.88	%											3.69	%
Net interest spread (5)											2.74	%											2.57	%											3.20	%

     Table 2: Rate and volume analysis

     The following table describes the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities have affected our interest income and expense during the years indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) change in volume (change in volume multiplied by previous year rate); (2) change in rate (change in rate multiplied by previous year volume) and (3) a combination of change in rate and change in volume. The changes in interest income and interest expense attributable to both volume and rate have been allocated proportionately to the change due to volume and the change due to rate.

Analysis of changes in net interest income
for the years ended December 31, 2009, 2008 and 2007
(Dollars in thousands)

		2009 Compared to 2008												2008 Compared to 2007
		Increase (decrease)												Increase (decrease)
		Due to change in												Due to change in
		Rate				Volume				Change				Rate				Volume				Change
Income from interest-earning assets:
Interest and fees on loans		$	(5,213	)		$	1,016			$	(4,198	)		$	(10,731	)		$	9,490			$	(1,241	)
Interest on taxable securities			(241	)			(994	)			(1,235	)			214				(297	)			(83	)
Interest on non-taxable securities			5				(94	)			(89	)			4				197				201
Interest on FHLB stock			(15	)			15				—				(26	)			26				—
Interest on Federal funds sold			(110	)			(1	)			(111	)			(711	)			(365	)			(1,076	)
Interest on deposits in banks			(49	)			147				98				(50	)			(14	)			(64	)
Total interest income		$	(5,623	)		$	89			$	(5,535	)		$	(11,300	)		$	9,037			$	(2,263	)
Expense from interest-bearing liabilities
Interest on interest-bearing demand deposits		$	(1,129	)		$	1,097			$	(32	)		$	(1,602	)		$	844			$	(758	)
Interest on time deposits			(4,904	)			(1,022	)			(5,926	)			(4,107	)			3,259				(848	)
Interest on borrowings			232				(140	)			92				(30	)			405				375
Interest on Federal funds purchased			(37	)			(14	)			(51	)			—				51				51
Interest on securities sold under repurchase agreement			—				—				—				(3	)			(3	)			(6	)
Total interest expense			(5,838	)			(79	)			(5,917	)			(5,742	)			4,556				(1,186	)
Net interest income		$	215			$	168			$	382			$	(5,558	)		$	4,481			$	(1,077	)

     2009 Compared to 2008. Net interest income increased by $381,962 (or 1.84%) for the year ended December 31, 2009 due to interest expense decreasing by a larger amount than interest income. Total interest income decreased by $5,535,284 (or 12.37%) primarily due to discontinuing accrual of interest on a growing balance of non-performing loans and previously accrued but uncollected interest reversed against income. Interest and fees on loans decreased $4,198,397 (or 10.31%) from $40,729,021 for the year ended December 31, 2008 as compared to $36,530,624 for the same period in 2009. Additionally, interest income on our securities portfolio decreased by $1,324,392 from $3,754,519 for the year ended December 31, 2008 as compared to $2,430,127 for the same period in 2009. While the yield on our securities portfolio decreased, the decline in securities income is mainly due to our portfolio shrinking from $71,764,629 at December 31, 2008 to $44,955,347 at December 31,

2009, as part of management’s plan to increase liquidity. The decreases in our loan and securities income was offset by lower interest expense for our deposits, which decreased $5,957,945 (or 25.32%) from $23,529,667 at December 31, 2008 to $17,571,722 at December 31, 2009, and an slight increase in other borrowings expense of $40,699 (or 8.51%) from $478,208 at December 31, 2008 to $518,907 at December 31, 2009.

     Average interest-earnings assets increased by $13.3 million from 2008 to 2009 with a decrease in the average rates earned of .87%. From 2008 to 2009 our average loans increased by $18 million, with a .82% decrease in yield, and average interest-bearing deposits increased by $18 million, with a 2.18% decrease in yield. From 2008 to 2009 our average balances for our securities portfolio (including restricted equities) decreased by $22.8 million, with a .39% decrease in yield.

     Average interest-bearing liabilities increased by $34 million from 2008 to 2009 with a decrease in the average rates paid of 1.03%. From 2008 to 2009 our average interest-bearing demand and savings deposits grew $70.9 million, with a .60% decrease in average rates paid. From 2008 to 2009 our average time deposits decreased by $32 million, with a 1.07% decrease in average rates paid, average other borrowings decreased by $2.6 million, with a 1.85% increase in average rates paid, and average federal funds purchased decreased by $2.3 million, with a 1.64% decrease in average rates paid.

     2008 Compared to 2007. Net interest income decreased by $1,077,228 (or 4.94%) for the year ended December 31, 2008 compared to 2007. The decrease in net interest income was due to compression in our net interest margin from 3.69% to 2.88% as we were negatively affected by a falling interest rate environment for our interest-earning assets, which typically reprice faster than our interest-earning liabilities (along with reversed interest income for non-accrual loans), combined with stiff competition for loans and deposits. Additionally, non-performing loans negatively impacted our net interest income because accrued interest is backed out of income when the loan becomes non-accrual. Our non-accrual loans increased by $34,577,090 from December 31, 2007 to December 31, 2008.

     The most significant increase in average interest-earning assets consisted of an increase of $147.6 million in total loans for the year ended December 31, 2008 compared to the year ended December 31, 2007. The average rates earned on our loan portfolio decreased 2.21% to 6.43% for the year ended December 31, 2008 from 8.64% for the year ended December 31, 2007.

     Average interest-bearing demand and savings deposits grew by $39.2 million and average time deposits grew by $76.67 million for the year ended December 31, 2008 compared to 2007. The average rate paid on these deposits in 2008 was 2.15% and 4.26%, down from 3.24% and 5.33%, respectively, in 2007. The decrease in the average rates paid for interest-bearing deposits of approximately 1% does not correspond to the interest rate cuts initiated by the Federal Reserve, which triggered a reduction in the prime rate from 7.25% in December 2007 to 3.25% in December 2008. Our average deposit rate paid is a reflection of the intense competition for deposits in 2008, particularly in markets where our competition is forced to raise funds, often at a premium, to remain liquid.

Other Income

     2009 Compared to 2008. Other income decreased by $420,556 (or 9.09%) for the year ended December 31, 2009 as compared to the same period in 2008. We experienced a decrease in mortgage origination fees of $219,161 (or 17.22%) as compared to the same period in 2008 due to a continued decline in applications for secondary-market mortgage loans that are pre-sold in the secondary market, from which our mortgage origination fees are driven. This fee income does not carry a corresponding asset on our balance sheet. We also saw a decrease in service charges on deposit accounts of $113,163 (or 5.11%) for the year ended December 31, 2009 as compared to the same period in 2008 mainly due to a decrease in NSF fees as we believe more customers are closely monitoring their account balances with the weakened economy. In 2008 we had a net gain on the sale of premises and equipment of $182,305 but did not have any sales in 2009 so this category shows a decrease of $182,305 (or 100%). We had a net increase of $56,022 (or 7.71%) on the sale of securities available-for-sale for the year ended December 31, 2009 as compared to the same period in 2008 and an increase in other operating income of $38,051 (or 16.43%) from 2008 to 2009.

     2008 Compared to 2007. Other income increased by $1,187,985 in 2008 (or 34.6%) as compared to 2007. This increase was due to net gains of $692,568 on the sale of securities, an increase of $342,807 in service charges on deposit accounts (attributable to an increased volume of transactions, as our deposit base increased from

approximately $615 million to $737 million during 2008), net gains of $182,305 on the sale of premises and equipment and an increase in other operating income of $41,063. We experienced a decrease in mortgage origination fees of $70,758 in 2008 as compared to the same period in 2007 due to fewer applications for secondary-market mortgage loans that are pre-sold in the secondary market. Our mortgage origination fees are the result of mortgage loans pre-sold in the secondary market, which do not carry a corresponding asset on our balance sheet.

     Other Expenses

     2009 Compared to 2008. Other expenses increased by $2,074,588 (or 8.48%) for the year ended December 31, 2009 as compared to the same period in 2008 primarily related to expenses associated with foreclosed assets and an increase in our FDIC insurance premiums. The net increase for expenses associated with foreclosed assets for 2009 as compared to 2008 is $2,808,089, which includes the following categories: foreclosed asset expense increased $1,381,922 (or 566.2%), net loss on the sale of foreclosed assets increased $582,000 (or 268.4%) and write-down on foreclosed assets increased $844,167 (or 71.21%.) At December 31, 2009, we had a total of $13.7 million of foreclosed assets, reflecting a $7.7 million (or 127.45%) increase from December 31, 2008. This increase is due to, among other things, the continued deterioration of the residential real estate market and the tightening of the credit market. As the amount of foreclosed assets increased, our losses and the costs and expenses to maintain the assets likewise increased. Our FDIC insurance premiums increased by $1,727,892 (or 344.78%) for the year ended December 31, 2009 as compared to the same period in 2008 because of the large number of unaffiliated FDIC insurance depository institution failures and the corresponding increase in assessments along with an increase in the rates specific to our institution’s risk profile. Salaries and employee benefits expenses decreased by $1,963,317 (or 14.67%) for the year. During the fourth quarter of 2008 and the first and fourth quarters of 2009, the Bank conducted a reduction-in-force eliminating a total of 34 positions across the company and reducing salaries for several other positions. Additionally, we suspended our incentive program during 2008 (for which bonuses would have been paid in the first quarter of 2009) and the program remains suspended. The number of full-time equivalent employees decreased from 191 at December 31, 2008 to 167 at December 31, 2009. Lastly, our other operating expenses decreased by $421,827 (or 7.52%) and our equipment and occupancy expenses decreased by $76,249 (or 2.29%) as management has aggressively worked to eliminate all “non-essential” expenses during this difficult economic period.

     2008 Compared to 2007. Other expenses increased by $3,059,894 in 2008 compared to the same period in 2007. Other operating expenses increased by $2,033,469 during 2008 with the largest increases occurring in write downs on foreclosed assets ($1,037,253), data processing expenses ($313,630), FDIC insurance assessments ($201,148), foreclosed asset expenses ($179,174), directors’ fees ($57,199), supplies and printing ($45,299) and audit, tax and accounting fees ($41,127). These expenses, as well as other miscellaneous operating expenses, have increased primarily as a result of growth and market expansion, while increases in write downs on our foreclosed assets were related to the rapid deterioration of the real estate market in the latter part of 2008. Salaries and employee benefits increased by $552,337 for the year due to normal increases in salaries that took effect in early 2008 and group insurance and payroll taxes. Employee incentive pay was suspended for 2008 due to management’s plan to aggressively cut all “non-essential” costs. The number of full-time equivalent employees decreased by one from 192 at December 31, 2007 to 191 at December 31, 2008. Equipment and occupancy expenses increased by $474,088 in 2008 and are primarily the result of additional depreciation expense for permanent banking facilities put into service during the period.

     Balance Sheet Review

     2009 Compared to 2008. Total assets decreased by $29,185,014 (or 3.55%) in 2009 with the most significant decreases occurring in the loan portfolio, which decreased by $70,964,622 (or 10.39%) and our securities portfolio, which decreased by 26,809,282 (or 37.36%). Cash and due from banks and interest-bearing deposits in banks increased by $64,399,118 (323.6%) during the year. Total interest-earning assets decreased by $52,209,308 (or 7.13%) as compared to 2008. We have written-off substantial problem assets during the year and invested loan payoffs and securities sales, calls and maturities into interest-bearing deposits in banks to increase our liquidity as previously discussed.

     Total deposits decreased by $2,302,574 (or .31%). Non-interest-bearing demand deposits increased by $2,704,277 (or 7.74%), interest-bearing demand and savings increased by $56,543,764 (or 26.98%) and time deposits decreased by $61,550,615 (or 12.5%). Included in our deposits on December 31, 2009 were $73,288,882 in

brokered time deposits (including $5,153,575 of deposits placed in the Certificate of Deposit Account Registry Service “CDARS” reciprocal program), which comprised approximately 17% of our total time deposits and 10% of our overall deposits. Our ability to use brokered deposits has been restricted as we fell below well capitalized status.

     Stockholders’ equity decreased by $31,436,200 (or 47.77%) during 2009 primarily due to our $37,049,267 loss. This decrease was slightly offset by the net issuance of common stock and exercise of stock options of $5,265,680 and stock compensation expense of $267,351. Accumulated other comprehensive loss represents the net unrealized loss on securities available-for-sale, which decreased during 2009 by $80,035 to $321,726.

     2008 Compared to 2007. Total assets increased by $136.7 million (or 20%) in 2008 with the most significant increase occurring in the loan portfolio, which grew 26.6% or $143.5 million. Total interest-earning assets increased by $90.3 million, or 14% in 2008 as compared to 2007. We invested excess funds not deployed in loans in interest-bearing deposits with other banks, which yielded a higher rate of return than the federal funds rate. We intend to keep a high ratio of interest-bearing assets to total assets to maximize profitability.

     Total deposits increased by 19.8% or $121.9 million, which funded a large part of our asset growth. Non-interest-bearing demand deposits increased by $3.4 million, or 10.9%, interest-bearing demand and savings increased by $45.4 million, or 27%, and time deposits increased by $73 million, or 17.4%. Included in our deposits on December 31, 2008 was $88.1 million in brokered time deposits (including $34,578,804 of deposits placed in the Certificate of Deposit Account Registry Service (CDARS) reciprocal program), which comprised approximately 17.9% of our total time deposits and 12% of our overall deposits. Until recently, brokered time deposits have been considered more risky than core deposits because they are a less stable source of funding on a long-term basis. Our market, however, has become increasingly more competitive with respect to deposit funding. We do not believe that the risk associated with brokered deposits is significantly larger than risks associated with time deposits generally. We believe that our use of brokered deposits is on a level that is consistent with similarly situated financial institutions in our market but expect that our percentage of brokered time deposits to total time deposits and overall deposits will decrease from present levels.

     Stockholders’ equity decreased by $976,147 or 1.5% during 2008. This decrease was a result of a net loss of $5,074,935, net issuance of common stock and exercise of stock options of $4,071,686 and stock compensation expense of $357,980. Accumulated other comprehensive loss represents the net unrealized loss on securities available-for-sale, which increased during 2008 by $330,878 to $401,761.

     Securities Portfolio

     We have a portfolio of various investment securities for liquidity and interest income. The portfolio is currently comprised of U.S Government-sponsored enterprises (GSEs), mortgage-backed securities (GSE residential), state, county and municipal securities and financial-sector single issuer trust-preferred (corporate) securities. The mortgage-backed securities have stated maturities of up to thirty years. However, the portfolio balance reduces monthly as the underlying mortgages are paid down. Most will have an effective life that is much shorter than the stated maturity of the security. Although the exact maturity date is uncertain, the portfolio is predicted to have an effective maturity of approximately eleven years. Decreases in interest rates will generally cause an acceleration of prepayment levels. In a declining interest rate environment, we may not be able to reinvest the proceeds from these prepayments in assets that have comparable yields. In a rising rate environment, the opposite occurs. Prepayments tend to slow and the weighted average life extends. This is referred to as extension risk, which can lead to lower levels of liquidity due to the delay of cash receipts, and can result in the holding of an asset that yields a below-market rate for a longer period of time.

     The entire portfolio is classified as available-for-sale and thus carried at fair value. See Note 16, Fair Value of Assets and Liabilities for additional information on the determination of fair value. The carrying amounts of securities at the dates indicated are summarized as follows:

		December 31
		2009				2008				2007
		(Dollars in Thousands)
U.S. Government-sponsored enterprises (GSEs)		$	1,484			$	21,127			$	30,490
Mortgage-backed securities (GSE residential)			34,964				34,819				32,633
State, county and municipals			6,099				13,541				15,040
Corporate securities			2,408				2,277				2,568
		$	44,955			$	71,764			$	80,731

     Temporarily Impaired Securities

     The following table shows the gross unrealized losses and fair value of our available-for-sale investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2009.

		December 31, 2009
		Less Than 12 Months								12 Months or More								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
Description of Securities		Value				Losses				Value				Losses				Value				Losses
U.S. Government-sponsored enterprises (GSEs)		$	1,483,594			$	(16,406	)		$	—			$	—			$	1,483,594			$	(16,406	)
Mortgage-backed securities GSE residential			24,022,030				(294,669	)			—				—				24,022,030				(294,669	)
State, county and municipals			1,236,523				(22,342	)			2,445,005				(286,710	)			3,681,528				(309,052	)
Corporate securities			930,000				(70,000	)			1,478,502				(63,222	)			2,408,502				(133,222	)
Total temporarily impaired securities		$	27,672,147			$	(403,417	)		$	3,923,507			$	(349,932	)		$	31,595,654			$	(753,349	)

     We have evaluated and considered the following factors in determining the carrying amount of our securities portfolio:

     U.S. Government-sponsored enterprises (GSEs) — The unrealized loss on our one investment in U.S. Government-sponsored enterprises (GSEs) was caused by interest rate increases. The contractual terms of this investment do not permit the issuer to settle the security at a price less than the amortized cost basis of the investment. Because we do not intend to sell the investment and it is not more likely than not that we will be required to sell the investment before recovery of its amortized cost basis, which may be maturity, we do not consider this investment to be other-than-temporarily impaired at December 31, 2009.

     Mortgage-backed securities: GSE residential — The unrealized losses on our investment in eleven GSE mortgage-backed securities were caused by interest rate increases. We purchased those investments at a premium relative to their face amount, and the contractual cash flows of those investments are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the par value of these investments. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because we do not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, we do not consider those investments to be other-than-temporarily impaired at December 31, 2009.

     State, county and municipals — The unrealized losses on the seven investments were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. In addition all of these securities are guaranteed against default by third-party insurers. Because we do not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, we do not consider those investments to be other-than-temporarily impaired at December 31, 2009.

     Corporate securities — We currently own trust-preferred securities of United Community Capital Trust (United Community Bank) with a book value of $1,000,000 with an unrealized loss of $70,000 as of December 31, 2009. We also own trust-preferred securities for which Wells Fargo is now the ultimate guarantor at a book value of $1,541,724 with an unrealized loss of $63,222 at December 31, 2009. The unrealized losses are primarily caused by recent decreases in profitability and profit forecasts by industry analysts resulting from the sub-prime mortgage market and a recent sector downgrade by several industry analysts. The contractual terms of those investments do not permit the issuer to settle the security at a price less than the amortized cost basis of the investment. Each of these issuers has made all contractual interest payments on schedule. We currently do not believe it is probable that we will be unable to collect all amounts due according to the contractual terms of the investments. Fourth quarter 2009 financial reports were reviewed as part of management’s other-than-temporary-impairment analysis. Because we do not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, we do not consider these investments to be other-than-temporarily impaired at December 31, 2009.

     For the reasons above, we have concluded that our holdings of U.S. Government-sponsored enterprises (GSEs), Mortgage-backed securities, corporate securities and state, county and municipals are not other than temporarily impaired as of December 31, 2009 and ultimate recoverability of these investments is probable. If we determine that any impairment becomes other than temporary we will recognize an appropriate impairment loss.

     The carrying amounts of securities in each category as of December 31, 2009 are shown in the following table according to contractual maturity classifications. The yields for each range of securities are weighted-average yields.

		U.S. Government-
		sponsored enterprises								Mortgage-backed								State, county and								Corporate
		(GSEs)								securities								municipals								securities
		Carrying								Carrying								Carrying								Carrying
		Amount				Yield				Amount				Yield				Amount				Yield				Amount				Yield
		(Dollars in Thousands)
In one year or less		$	—				—	%		$	—				—	%		$	—				—	%		$	—				—	%
After one year through two years			—				—	%			1,069				5.23	%			—				—	%			—				—	%
After two year through five years			—				—	%			12,508				4.04	%			—				—	%			—				—	%
After five years through ten years			—				—	%			11,120				3.89	%			—				—	%			—				—	%
After ten years			1,484				3.00	%			10,268				3.94	%			6,099				4.08	%			2,408				7.40	%
Total		$	1,484				3.00	%		$	34,964				4.00	%		$	6,099				4.08	%		$	2,408				7.40	%

     We also maintain certain nonmarketable equity investments required by law which are reflected on our balance sheet. The carrying amounts for certain of these investments as of December 31, 2009 and 2008 consisted of the following (dollars in thousands):

		As of December 31,
		2009				2008
Federal Home Loan Bank stock		$	2,694			$	2,053

     The following factors have been evaluated and considered in determining the carrying amount of the FHLB stock:

	•		We evaluated the ultimate recoverability of the par value.
	•		All of the various Federal Home Loan Banks are meeting their debt obligations.
	•		We believe that we currently have sufficient liquidity or have access to other sources of liquidity to meet all operational needs in the foreseeable future, and would not have the need to dispose of this stock below the recorded amount.

	•		Historically, the FHLB does not allow for discretionary purchases or sales of this stock. Redemptions of the stock occur at the discretion of the FHLB, subsequent to the maturity of outstanding advances held by the member institutions.
	•		We have reviewed the assessments by rating agencies, which have concluded that debt ratings are likely to remain unchanged and the FHLB has the ability to absorb economic losses, given the expectation that the various FHLBanks have a very high degree of government support.
	•		The unrealized losses related to the securities owned by the FHLBanks are manageable given the capital levels of these organizations.
	•		In the first and second quarter of 2009, we considered the fact that the FHLB did not make any dividend payments (distributions) in the fourth quarter of 2008 and would not make any dividend determinations until after the end of each quarter when quarterly results were known; however, our holdings of FHLB stock are not intended for the receipt of dividends or stock growth, but for the purpose and right to receive advances, or funding. Further, we deem the FHLB’s process of determining after each quarter end whether it will pay a dividend and, if so, the amount, as essentially similar to standard practice by most dividend-paying companies. Based on the FHLB’s second and third quarter results, the FHLB announced on August 12, 2009 and October 30, 2009 a dividend payment for the second quarter and third quarter, respectively.

     For the reasons above, we have concluded that our holdings of FHLB stock are not other than temporarily impaired as of December 31, 2009 and ultimate recoverability of the par value of this investment is probable.

     Loan Portfolio

     Types of Loans

     We offer a variety of lending services, including real estate, commercial, and consumer loans, including home equity lines of credit, primarily to individuals and small- to mid-size businesses that are located, or conducting a substantial portion of their business in the Homer (Banks County), Carrollton and Villa Rica (Carroll County), Lake Oconee (Greene County), Cornelia (Habersham County), Bremen (Haralson County), Commerce and Jefferson (Jackson County), Columbus (Muscogee County), Athens (Oconee County) and Dalton (Whitfield County), Georgia markets. The Bank’s Operations Center is located in Carrollton (Carroll County), Georgia markets. We emphasize a strong credit culture based on traditional credit measures and our knowledge of our markets through experienced relationship managers. Since loans typically provide higher interest yields than do other types of interest-earning assets, we have historically invested a substantial percentage of our earning assets in our loan portfolio. During 2009 we reduced the size of the loan portfolio as part of our strategy to increase our capital ratios and liquidity. As a result, our loan balances decreased from $683 million at December 31, 2008 to $612 million at December 31, 2009.

     Although we are reducing the size of our loan portfolio, we plan to continue to originate loans which meet our loan underwriting criteria and are priced appropriately for the credit risk. However, we are focused on continuing to decrease the concentration of commercial real estate and construction loans in our portfolio.

     Our underwriting standards vary for each type of loan. While we have generally underwritten the loans in our portfolio in accordance with the loan-to-value levels in our internal underwriting guidelines and regulatory supervisory guidelines, in certain circumstances we have made loans that exceed either our internal underwriting guidelines, regulatory supervisory guidelines, or both. We are generally permitted to hold real estate loans whose loan-to-value levels exceed regulatory guidelines totaling up to 100% of our capital of which up to 30% may be in non-residential real estate. We have made loans that exceed our internal guidelines to a limited number of our customers who have significant liquid assets, net worth, and deposit balances with the Bank. As of December 31, 2009, $22.7 million in loans, representing approximately 3.7% of our loans and 66.6% of our Bank’s regulatory capital, had loan-to-value ratios that exceeded regulatory supervisory guidelines. Most of these were centered in our Lake Oconee market. We generally consider making such loans only after taking into account the financial strength of the borrower. The number of loans in our portfolio with loan-to-value ratios in excess of supervisory limits, our

internal guidelines, or both could increase the risk of delinquencies or defaults in our portfolio. Any such delinquencies or defaults could have an adverse effect on our results of operations and financial condition.

     The amount of loans outstanding at the indicated dates is shown in the following table according to the type of loan.

		December 31,
		2009				2008				2007				2006				2005
		(Dollars in Thousands)
Commercial and industrial		$	43,998			$	49,641			$	47,363			$	42,405			$	35,761
Real estate — construction			147,714				202,523				163,206				114,528				60,967
Real estate — mortgage			398,714				402,843				299,219				225,119				142,520
Installment loans to individuals			21,890				28,368				30,136				26,859				24,997
			612,316				683,375				539,924				408,911				264,245
Deferred loan fees and costs			(103	)			(198	)			(215	)			(269	)			(181	)
Less allowance for loan losses			(12,879	)			(11,013	)			(6,267	)			(5,244	)			(3,194	)
Loans, net		$	599,334			$	672,164			$	533,442			$	403,398			$	260,870

     Maturities and sensitivities to changes in interest rates

     The following table presents the expected maturities for commercial and industrial loans and real estate construction loans at December 31, 2009. The table also presents the rate structure for these loans that mature after one year.

																		Rate Structure for
																		Loans with
																		Maturities Over
		Maturity in Months(1)																One Year
		(Dollars in Thousands)																(Dollars in Thousands)
		Less than																Variable				Fixed
		12(2)				13-60				Over 60				Total				Rates				Rates
Commercial and industrial		$	21,387			$	15,844			$	6,767			$	43,998			$	8,085			$	14,526
Real estate — construction			97,534				49,864				316				147,714				7,196				42,984
Total		$	118,921			$	65,708			$	7,083			$	191,712			$	15,281			$	57,510

     Risk Elements

     The following table presents, at the dates indicated, the aggregate nonperforming loans for the following categories:

		December 31,
		2009				2008				2007				2006				2005
		(Dollars in Thousands)
Non-accrual loans
Commercial and industrial		$	3,690			$	1,048			$	94			$	—			$	—
Real estate — construction			17,003				23,859				1,110				—				—
Real estate — mortgage			27,734				11,631				883				269				219
Installment loans to individuals			293				323				197				84				33
Total non-accrual loans		$	48,720			$	36,861			$	2,284			$	353			$	252
Loans contractually past due ninety days or more as to interest or principal payments and still accruing			—				—				—				—				—
Loans, the terms of which have been renegotiated to provide a reduction or deferral of interest or principal because of deterioration in the financial position of the borrower
Commercial and industrial		$	89			$	—			$	—			$	—			$	—
Real estate — construction			—				4,640				—				—				—
Real estate — mortgage			464				215				—				—				—
Installment loans to individuals			—				—				—				—				—
Total restructured loans		$	553			$	4,855			$	—			$	—			$	—
Loans now current about which there are serious doubts as to the ability of the borrower to comply with present loan repayment terms (potential problem loans)
Commercial and industrial		$	—			$	—			$	—			$	—			$	—
Real estate — construction			—				—				—				—				—
Real estate — mortgage			—				—				—				—				—
Installment loans to individuals			—				—				—				—				—
Total potential problem loans		$	—			$	—			$	—			$	—			$	—

     The reduction in interest income associated with non-accrual loans as of December 31, 2009 is as follows:

Interest income that would have been recorded on non-accrual loans under original terms		$	4,520,577
Interest income that was recorded on non-accrual loans			2,081,934
Reduction in interest income		$	2,438,643

     Our non-accrual loans by geographic market are shown in the following table as of December 31, 2009 and 2008.

		December 31,
		2009				2008
Dalton		$	13,775			$	5,218
Carrollton			8,553				4,593
Bremen			8,050				7,590
Villa Rica			7,399				11,368
Other (8 markets)			10,943				8,092
Total		$	48,720			$	36,861