UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 

FORM 10-Q

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

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

Commission File Number: 000-51957

FGBC BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

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

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

(678) 839-4510
(Issuer’s telephone number)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

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

Yes o No o

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

Large accelerated filer o		Accelerated filer o		Non-accelerated filer 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

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

 

 

INDEX

		Page
Part I. FINANCIAL INFORMATION			4
Item 1. Financial Statements			4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			14
Item 3. Quantitative and Qualitative Disclosures About Market Risk			22
Item 4. Controls and Procedures			24
Part II. OTHER INFORMATION			24
Item 1. Legal Proceedings			24
Item 1A. Risk Factors			24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			24
Item 3. Defaults Upon Senior Securities			24
Item 4. (Removed and Reserved)			25
Item 5. Other Information			25
Item 6. Exhibits			26
EX-31.1
EX-32.1
EX-32

CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS

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

     The forward-looking statements that we make in this Report, as well as other statements that are not historical facts, are based largely on management’s current expectations and assumptions and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those contemplated by forward-looking statements. These risks and uncertainties include, among other things, the risks and uncertainties described in Item 1A of our Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 15, 2010.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

FGBC BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
JUNE 30, 2010 AND DECEMBER 31, 2009

		June 30,				December 31,
		2010				2009
		(unaudited)				(audited)
Assets
Cash and due from banks		$	17,942,048			$	15,752,900
Interest-bearing deposits in banks			112,878,227				68,547,359
Federal funds sold			—				—
Securities available-for-sale, at fair value			48,276,601				44,955,347
Restricted equity securities, at cost			2,694,000				2,694,000
Loans			560,300,984				612,213,063
Less allowance for loan losses			14,180,964				12,879,081
Loans, net			546,120,020				599,333,982
Premises and equipment			36,215,523				37,045,578
Foreclosed assets			30,012,263				13,740,602
Accrued interest receivable			2,672,585				2,929,608
Other assets			4,719,540				7,201,231
Total assets		$	801,530,807			$	792,200,607
Liabilities and Stockholders’ Equity
Liabilities
Deposits:
Noninterest-bearing		$	46,473,926			$	37,663,983
Interest-bearing			702,837,398				697,125,137
Total deposits			749,311,324				734,789,120
Other borrowings			22,000,000				22,000,000
Accrued interest payable			570,159				531,655
Other liabilities			858,050				502,237
Total liabilities			772,739,533				757,823,012
Stockholders’ equity
Preferred stock, par value $0; 10,000,000 shares authorized; 0 shares issued and outstanding			—				—
Common stock, par value $0; 100,000,000 shares authorized; 13,993,233 shares issued and outstanding			77,535,569				77,440,952
Accumulated deficit			(48,684,798	)			(42,741,631	)
Accumulated other comprehensive income (loss)			93,543				(321,726	)
Treasury stock, 66,251 shares			(153,040	)			—
Total stockholders’ equity			28,791,274				34,377,595
Total liabilities and stockholders’ equity		$	801,530,807			$	792,200,607

See notes to consolidated financial statements.

FGBC BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2010 AND 2009
AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(Unaudited)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Interest income:
Loans, including fees		$	8,323,704			$	9,399,340			$	16,896,284			$	18,816,636
Taxable securities			388,681				452,922				762,308				1,076,069
Nontaxable securities			55,496				141,693				118,943				288,702
Federal funds sold			35,401				2,805				35,401				13,831
Other interest income			65,882				46,021				152,613				94,716
Total interest income			8,869,164				10,042,781				17,965,549				20,289,954
Interest expense:
Deposits			3,268,581				4,759,980				6,593,492				10,142,879
Other borrowings			115,880				1,567				230,486				437,764
Total interest expense			3,384,461				4,761,547				6,823,978				10,580,643
Net interest income			5,484,703				5,281,234				11,141,571				9,709,311
Provision for loan losses			4,348,173				4,332,170				6,619,495				6,251,177
Net interest income after provision for loan losses			1,136,530				949,064				4,522,076				3,458,134
Other income:
Service charges on deposit accounts			528,406				534,232				1,025,891				992,771
Mortgage origination fees			220,425				311,597				349,269				636,583
Net gain on sale of securities available for sale			145,623				10,739				371,941				721,331
Net gain on sale of premises and equipment			10,340				—				19,340				—
Other operating income			135,236				65,599				264,152				144,802
Total other income			1,040,030				922,167				2,030,593				2,495,487
Other expenses:
Salaries and employee benefits			2,382,165				2,882,676				4,828,353				6,027,152
Equipment and occupancy expenses			739,880				849,244				1,503,896				1,686,401
Net loss on sale of foreclosed assets			186,461				199,489				282,343				291,656
Write down on foreclosed assets			580,785				557,247				652,484				557,247
Foreclosed asset expenses			632,640				444,525				1,179,135				587,474
FDIC insurance premiums			719,259				700,445				1,614,348				1,168,217
Other operating expenses			1,298,261				1,322,909				2,435,277				2,624,323
Total other expenses			6,539,451				6,956,535				12,495,836				12,942,470
Loss before income taxes			(4,362,891	)			(5,085,304	)			(5,943,167	)			(6,988,849	)
Income tax benefit			—				(1,929,562	)			—				(2,657,218	)
Net loss			(4,362,891	)			(3,155,742	)			(5,943,167	)			(4,331,631	)
Basic losses per share		$	(0.31	)		$	(0.25	)		$	(0.42	)		$	(0.35	)
Diluted losses per share		$	(0.31	)		$	(0.25	)		$	(0.42	)		$	(0.35	)
Cash dividends per share		$	—			$	—			$	—			$	—

See Notes to Consolidated Financial Statements.

FGBC BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
THREE MONTHS ENDED JUNE 30, 2010 AND 2009
AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(Unaudited)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Net loss		$	(4,362,891	)		$	(3,155,742	)		$	(5,943,167	)		$	(4,331,631	)
Other comprehensive income (loss):
Reclassification adjustment for net gains on sales of securities included in net income, net of tax of $0 and $4,081 for (three months) and $0 and $274,106 for (six months)			(145,623	)			(6,658	)			(371,941	)			(447,225	)
Net unrealized holding gains on securities available for sale arising during period, net of tax benefit of $0 and $178,980 for (three months) and $0 and $155,222 for (six months)			605,718				(292,021	)			787,210				(253,258	)
Other comprehensive income (loss)			460,095				(298,679	)			415,269				(700,483	)
Comprehensive income (loss)		$	(3,902,796	)		$	(3,454,421	)		$	(5,527,898	)		$	(5,032,114	)

See Notes to Consolidated Financial Statements.

FGBC BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(Unaudited)

		2010				2009
OPERATING ACTIVITIES
Net loss		$	(5,943,167	)		$	(4,331,631	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation			864,868				984,437
Provision for loan losses			6,619,495				6,251,177
Amortization and accretion of securities			166,407				84,392
Writedowns of foreclosed assets			652,484				557,247
Stock compensation expense			94,617				155,884
Deferred taxes			—				1,012,421
Net gain on sale of securities available-for-sale			(370,326	)			(721,331	)
Net loss on sale of foreclosed assets			348,074				339,710
Gain on sale of premises and equipment			(19,340	)			—
Decrease in income taxes payable			—				(1,684,597	)
Decrease in interest receivable			257,023				228,873
Increase (decrease) in interest payable			38,504				(263,106	)
Net other operating activities			2,837,504				710,302
Net cash provided by operating activities			5,195,916				3,323,778
INVESTING ACTIVITIES
(Increase) decrease in interest-bearing deposits in banks			(44,033,398	)			6,746,697
Purchases of securities available for sale			(29,618,741	)			(24,151,260	)
Proceeds from maturities of securities available for sale			2,396,014				11,007,608
Proceeds from sales of securities available for sale			24,717,848				35,832,302
Purchases of restricted equity securities			—				(640,600	)
Decrease in federal funds sold			—				722,000
Net decrease in loans			25,515,802				17,896,905
Purchase of premises and equipment			(34,813	)			(959,672	)
Proceeds from sale of foreclosed assets			3,839,944				3,433,500
Proceeds from sale of premises and equipment			19,340				—
Additions to other real estate owned			(33,498	)			(133,548	)
Net cash provided by (used in) investing activities			(17,231,502	)			49,753,932
FINANCING ACTIVITIES
Net increase (decrease) in deposits			14,522,204				(34,502,752	)
Net proceeds from other borrowings			—				10,250,000
Proceeds from sale of common stock			—				1,721,531
Proceeds from exercise of stock options			—				142,013
Purchase of fractional shares of common stock			—				—
Net cash provided by (used in) financing activities			14,522,204				(22,389,208	)
Net increase in cash and due from banks			2,486,618				30,688,502
Cash and due from banks, beginning of period			15,752,900				8,858,796
Cash and due from banks, end of period		$	18,239,518			$	39,547,298
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during period for:
Interest		$	6,785,473			$	10,861,286
Income taxes		$	—			$	—
NONCASH TRANSACTIONS
Financed sales of foreclosed assets		$	915,088			$	1,522,002
Loans transferred to foreclosed assets		$	21,993,753			$	13,817,509
Treasury stock acquired in collection of loan		$	153,041			$	—

See notes to consolidated financial statements.

FGBC BANCSHARES, INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(Unaudited)

NOTE 1. BASIS OF PRESENTATION

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

          Operating results for the three and six-month period ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. These statements should be read in conjunction with the financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2009.

NOTE 2. REGULATORY OVERSIGHT, CAPITAL ADEQUACY AND MANAGEMENT’S PLANS

          The Consolidated Financial Statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future. However, due to the Company’s recent financial results, the substantial uncertainty throughout the U.S. banking industry and other matters discussed below, a substantial doubt exists regarding the Company’s ability to continue as a going concern.

          Effective August 11, 2010 the Bank entered into a Stipulation and Consent Agreement with the Georgia Department of Banking and Financing (the “DBF”), and acknowledged by the FDIC, agreeing to the issuance of a Consent Order (the “Order”). Our future viability is subject to our ability to successfully operate under the terms of the Order, which requires the Bank to take a number of affirmative steps including, among other things, achieving and maintaining a tier 1 capital to total assets ratio of at least 8.0%. In order to comply with these regulatory requirements, we need to raise substantial additional capital or significantly reduce our asset size. There is no guarantee that sufficient capital will be available at acceptable terms, if at all, when needed, or that the Company would be able to sell assets at terms favorable enough to accomplish our regulatory capital needs. In such event, we may be subject to increased regulatory enforcement actions and operating restrictions.

          As of June 30, 2010, the Company was considered “undercapitalized,” under regulatory guidelines. In light of the requirement to improve the capital ratios of the Bank and further reduce the level of classified assets, management is pursuing a number of strategic alternatives. Current market conditions for banking institutions, the overall uncertainty in financial markets and the Company’s high level of non-performing assets are potential barriers to the success of these strategies. Ongoing failure to adequately address regulatory concerns could ultimately result in the eventual appointment of a receiver or conservator of the Bank’s assets. If current adverse market factors continue for a prolonged period of time, new adverse market factors emerge, and/or the Company is unable to successfully execute its plans or adequately address regulatory concerns in a sufficiently timely manner, it could have a material adverse effect on the Company’s business, results of operations and financial position.

NOTE 3. EARNINGS (LOSSES) PER SHARE

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Basic losses per share:
Weighted average common shares outstanding			13,993,233				12,533,357				13,993,233				12,521,148
Net loss		$	(4,362,891	)		$	(3,155,742	)		$	(5,822,413	)		$	(4,331,631	)
Basic losses per share		$	(0.31	)		$	(0.25	)		$	(0.42	)		$	(0.35	)
Diluted losses per share:
Weighted average common shares outstanding			13,993,233				12,533,357				13,993,233				12,521,148
Net effect of the assumed exercise of stock options based on the treasury stock method using average market prices for the year			—				—				—				—
Total weighted average common shares and common stock equivalents outstanding			13,993,233				12,533,357				13,993,233				12,521,148
Net loss		$	(4,362,891	)		$	(3,155,742	)		$	(5,822,413	)		$	(4,331,631	)
Diluted losses per share		$	(0.31	)		$	(0.25	)		$	(0.42	)		$	(0.35	)

          Potential common shares of 1,428,625 and 1,428,625 for the three and six- months ended June 30, 2010 and 2009, respectively, were anti-dilutive and not included in the computation of diluted earnings per share.

NOTE 4. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS

          On July 21, 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, which requires significant new disclosures about the allowance for credit losses and the credit quality of financing receivables. The requirements are intended to enhance transparency regarding credit losses and the credit quality of loan and lease receivables. Under this statement, allowance for credit losses and fair value are to be disclosed by portfolio segment, while credit quality information, impaired financing receivables and nonaccrual status are to be presented by class of financing receivable. Disclosure of the nature and extent, the financial impact and segment information of troubled debt restructurings will also be required. The disclosures are to be presented at the level of disaggregation that management uses when assessing and monitoring the portfolio’s risk and performance. This ASU is effective for interim and annual reporting periods after December 15, 2010 and the related disclosures will be included in the Company’s notes to the consolidated financial statements beginning in the fourth quarter of 2010.

          In January 2010, the FASB amended existing guidance for fair value measurements and disclosures which requires disclosures for transfers in and out of Levels 1 and 2 fair value measurements and activity in Level 3 fair value measurements. The amendments in the guidance also clarify existing disclosures for the level of disaggregation and disclosures about inputs and valuation techniques. The amendments in the guidance also include conforming amendments to the guidance on employers’ disclosures about postretirement benefit plan assets. The guidance was effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The effect of adopting this new guidance did not have any material effect on the Company’s operating results or financial condition.

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

NOTE 5. FAIR VALUE DISCLOSURES

Determination of Fair Value

          The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the Fair Value Measurements and Disclosures guidance, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

          The recent fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

Fair Value Hierarchy

          In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

          Level 1 — Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

          Level 2 — Valuation is based on inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

          Level 3 — Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.

          A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

          The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:

          Cash and cash equivalents and interest-bearing deposits in banks: The carrying amounts of cash and short-term instruments approximate fair values based on the short-term nature of the assets. Fair values of other interest-bearing deposits are estimated using discounted cash flow analyses based on current rates for similar types of deposits.

          Securities Available for Sale: Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

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

          Loans: The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan’s observable market price, or the fair value of the collateral if repayment of the loan is dependent upon the sale of the underlying collateral. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At June 30, 2010, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. In accordance with generally accepted accounting principles, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

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

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

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

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

          Assets measured at fair value on a recurring basis are summarized below:

						(Dollars In Thousands)
		Quoted Prices in
		Active Markets for				Significant Other				Significant
		Identical Assets				Observable Inputs				Unobservable Inputs
June 30, 2010		(Level 1)				(Level 2)				(Level 3)				Fair Value
Available for sale securities		$	—			$	48,277			$	—			$	48,277
Total assets at fair value		$	—			$	48,277			$	—			$	48,277
December 31, 2009
Available for sale securities		$	—			$	44,955			$	—			$	44,955
Total assets at fair value		$	—			$	44,955			$	—			$	44,955

          Assets measured at fair value on a nonrecurring basis are summarized below:

						(Dollars In Thousands)
		Quoted Prices in
		Active Markets for				Significant Other				Significant
		Identical Assets				Observable Inputs				Unobservable Inputs
June 30, 2010		(Level 1)				(Level 2)				(Level 3)				Total Gains (Losses)
Impaired loans		$	—			$	21,799			$	18,267			$	(2,551	)
Foreclosed assets			—				12,471				17,501				(652	)
Total		$	—			$	34,270			$	35,768			$	(3,203	)
December 31, 2009
Impaired loans		$	—			$	24,665			$	24,452			$	(19,256	)
Foreclosed assets			—				5,165				8,575				(1,251	)
Total		$	—			$	29,830			$	33,027			$	(20,507	)

          In accordance with the provisions of the loan impairment guidance, individual loans with a carrying amount of $40,544,740 were written down to their fair value of $37,993,313 resulting in an impairment charge of $2,551,427 which was included in earnings for the period. Write downs of impaired loans are estimated using the present value of expected cash flows or the appraised value of the underlying collateral discounted as necessary due to reflect management’s estimates of changes in economic conditions.

          The carrying amount and estimated fair value of the Company’s financial instruments at June 30, 2010 and December 31, 2009 were as follows:

		June 30, 2010								December 31, 2009
		Carrying								Carrying
		Amount				Fair Value				Amount				Fair Value
						(Dollars In Thousands)
Financial Assets:
Cash and cash equivalents		$	130,820			$	130,820			$	84,300			$	84,300
Securities available-for-sale			48,277				48,277				44,955				44,955
Restricted equity securities			2,694				2,694				2,694				2,694
Loans, net			546,120				544,794				599,334				596,516
Accrued interest receivable			2,673				2,673				3,104				3,104
Financial Liabilities:
Deposits		$	749,311			$	753,484			$	734,789			$	739,833
Other borrowings			22,000				22,145				22,000				21,243
Accrued interest payable			570				570				532				532

NOTE 5. SECURITIES AVAILABLE-FOR-SALE

          The amortized cost and fair value of securities available-for-sale with gross unrealized gains and losses are summarized below:

						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
June 30, 2010:
U.S. Government-sponsored Enterprises (GSEs)		$	14,795,058			$	104,269			$	—			$	14,899,327
Mortgage-backed securities GSE residential			25,625,250				319,586				—				25,944,836
State, county and municipals			5,224,004				8,568				(246,229	)			4,986,343
Corporate securities			2,538,746				—				(92,651	)			2,446,095
		$	48,183,058			$	432,423			$	(338,880	)		$	48,276,601
December 31, 2009:
U.S. Government-sponsored Enterprises (GSEs)		$	1,500,000			$	—			$	(16,406	)		$	1,483,594
Mortgage-backed securities GSE residential			35,043,311				215,528				(294,669	)			34,964,170
State, county and municipals			6,389,224				18,909				(309,052	)			6,099,081
Corporate securities			2,541,724				—				(133,222	)			2,408,502
		$	45,474,259			$	234,437			$	(753,349	)		$	44,955,347

          Securities with a carrying value of $10,554,028 and $7,760,242 as of June 30, 2010 and December 31, 2009, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

Temporarily Impaired Securities

          The following table shows the gross unrealized losses and fair value of the Company’s 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.

		June 30, 2010
		Less Than 12 Months								12 Months or More								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
Description of Securities
U.S. Government-sponsored enterprises (GSEs)		$	—			$	—			$	—			$	—			$	—			$	—
Mortgage-backed securities GSE residential			—				—				—				—				—				—
State, county and municipals			1,027,547				(12,285	)			1,998,849				(233,944	)			3,026,396				(246,229	)
Corporate securities			1,516,095				(22,651	)			930,000				(70,000	)			2,446,095				(92,651	)
Total temporarily impaired securities		$	2,543,642			$	(34,936	)		$	2,928,849			$	(303,944	)		$	5,472,491			$	(338,880	)

		December 31, 2009
		Less Than 12 Months								12 Months or More								Total
		Fair				Unrealized				Fair								Fair				Unrealized
		Value				Losses				Value				Unrealized Losses				Value				Losses
Description of Securities
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	)

          The amortized cost and fair value of debt securities as of June 30, 2010 by contractual maturity are shown on the following page. Actual maturities may differ from contractual maturities of mortgage-backed securities because the mortgages underlying the securities may be called or repaid without penalty. Therefore, these securities are not included in the maturity categories in the following summary.

		Amortized				Fair
		Cost				Value
Five to Ten Years		$	7,550,000			$	7,600,456
After ten years			15,007,808				14,731,309
Mortgage-backed securities			25,625,250				25,944,836
		$	48,183,058			$	48,276,601

          The gross gains and losses realized by the Company from sales of available-for-sale securities for the three and six-months ended June 30, 2010 and 2009, respectively, were as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Gross gains realized		$	145,623			$	10,739			$	371,942			$	721,331
Gross losses realized			—				—				—				—
Net realized gains		$	145,623			$	10,739			$	371,942			$	721,331

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

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

Overview

          We experienced a net loss for the six-months ended June 30, 2010 of $5,943,167, or $0.42 per share. This compares to a net loss of $4,331,631 for the second quarter of 2009, or $0.35 per share. The net loss for the first six months of 2009 was mitigated by an income tax benefit of $2,657,218. Due to our recent significant losses, we will not be able to record any further tax benefits unless and until we can show that it is more likely than not that we will realize such benefits.

          Our net loss for the three months ended June 30, 2010 was $4.4 million, or $0.31 per share, compared to a net loss of $3.2 million, or $0.25 per share, for the three months ended June 30, 2009. Our second quarter results reflect continued weak economic conditions, although we believe that the pace of asset deterioration has slowed considerably when compared to the pace of decline that we experienced during the last half of 2009.

          Our provision for loan losses was $6.6 million for the six months ended June 30, 2010, compared to $6.3 million for the corresponding period in 2009. Net charge-offs for the first six months quarter of 2010 totaled $5.3 million compared to $6.4 million for the first six months of 2009. Nonperforming assets of $66.2 million were 8.26% of total assets at June 30, 2010, compared to 7.88% at December 31, 2009 and 4.62% at June 30, 2009. Our allowance for loan losses was $14.2 million at June 30, 2010, or 2.53% of total loans, compared to $12.9 million at December 31, 2009, or 2.10% of total loans.

          Our net interest margin was 2.96% for the six months ended June 30, 2010 compared to 2.61% for the corresponding period in 2009. Our net interest income, even after increased provisions, increased from $3.5 million for the first six months of 2009 to $4.5 million for the first six months of 2010. Non-interest income dropped from $2.5 million for the first six months of 2009 to $2.0 million for the first six months of 2010 due largely to a decline in mortgage origination income and lower gains on sales of securities. Other expenses were relatively stable from the first six months of 2009 to the first six months of 2010. Over the last year management has focused on the reduction or elimination of any “non-essential” expenses such as directors’ fees, social club dues, marketing and certain employee related expenses. As part of that effort, management eliminated 34 positions and reduced salaries for several executive positions. The savings achieved from this effort, however, have been offset by increased expenses relating to foreclosed assets and higher levels of FDIC insurance premiums. Our recent loses ad resulting declines in capital were primary contributors to our entry into a Consent Order with our regulators, effective August 11, 2010 (see “Consent Order” under Item 5 in Part II to this report).

          Total assets increased from $792 million at December 31, 2009 to $801 million at June 30, 2010. The increase was primarily attributable to an increase of approximately $46 million in cash and cash equivalents, funded largely by an increase in deposits, which offset a marginal decline in loans. This change in the composition of our balance sheet reflects management’s intent to increase liquidity in light of the Bank’s undercapitalized regulatory status, which among other things prohibits the Bank from accepting, renewing or rolling over brokered deposits without a regulatory waiver and also restricts the level of interest rates that the Bank may pay on deposits. We intend to maintain a high level of liquidity until the economies in the communities we serve stabilize and our capital position improves.

          We believe that our most significant challenges over the foreseeable future are to improve our capital position, which has been decreased significantly over the last year due to our losses, and to maintain liquidity. As of June 30, 2010 the Bank’s tier one leverage ratio stood at 3.51%, down from 7.71% at June 30, 2009 and 4.29% at December 31, 2009. Our viability depends in large part upon our ability to reverse the trend on declining capital and otherwise comply with our

regulatory requirements. Accordingly, we are actively exploring all strategic options to improve our capital, including the potential sale of equity securities.

Critical Accounting Policies

     The accounting and financial policies of the Company conform to accounting principles generally accepted in the United States and to general practices within the banking industry. To prepare consolidated financial statements in conformity with accounting principles generally accepted in the United States, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ. The allowance for loan losses, valuation of foreclosed real estate and fair value of financial instruments are particularly significant to us and subject to change. Information concerning our accounting policies with respect to these items is available in Item 6, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 as filed with the SEC on April 15, 2010.

Liquidity and Capital Resources

     Our primary sources of liquidity are our deposits, the scheduled repayments on our loans, and interest and maturities of our investments. All securities have been classified as available for sale, which means they are carried at fair value with unrealized gains and losses excluded from earnings and reported as a separate component of other comprehensive income (loss). If necessary, we have the ability to sell a portion of our unpledged investment securities to manage interest sensitivity gap or liquidity. Our pledged securities totaled $10.6 million at June 30, 2010 as compared to $7.8 million at December 31, 2009. Cash and due from banks and interest-bearing deposits in banks may also be utilized to meet liquidity needs. Due to our undercapitalized status, we are unable to accept, rollover, or renew any brokered deposits. The Company has $36.5 million of brokered deposits maturing in the next twelve months and as these brokered deposits mature it could create a strain on liquidity. We are also currently prohibited from paying yields for deposits in excess of 75 basis points above a published national average rate for deposits of comparable maturity unless the FDIC permits the use of a higher local market rate. Banks in the state of Georgia are currently deemed by the FDIC to be in a high interest rate market. As a result we are allowed to analyze the average interest rate in each of our markets and are limited to offering rates no more than 75 basis points above this average. This analysis occurs on a weekly basis and the FDIC may at anytime revoke their high rate designation for any or all of our markets. Such rate restrictions could negatively impact our ability to attract or maintain deposits and therefore may negatively affect our liquidity. Based on current and expected liquidity needs and sources, however, management expects to be able to meet obligations at least for the foreseeable future.

     We are subject to minimum capital standards as set forth by federal bank regulatory agencies. Our capital for regulatory purposes differs from our equity as determined under generally accepted accounting principles. Generally, “Tier 1” regulatory capital will equal capital as determined under generally accepted accounting principles less any unrealized gains or losses on securities available for sale while “Tier 2” capital includes the allowance for loan losses up to certain limitations. Total risk based capital is the sum of Tier 1 and Tier 2 capital. Our capital ratios at June 30, 2010 and the required minimums (including the requirements under the Bank’s consent order) are shown below.

		Tier 1 Leverage				Tier 1 Risk-based				Total Risk-based
Minimum regulatory requirement			4.00	%			4.00	%			8.00	%
Minimum regulatory requirement for well capitalized status			5.00	%			6.00	%			10.00	%
Minimum regulatory requirement under consent order			8.00	%			6.00	%			10.00	%
Actual ratios at June 30, 2010
FGBC Bancshares, Inc.			3.50	%			5.09	%			6.35	%
First Georgia Banking Company			3.51	%			5.10	%			6.36	%

     As of June 30, 2010, the Company and the Bank were undercapitalized, primarily due to the net loss recorded for the year ended December 31, 2009 and for the first six months of 2010. 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 are 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. Our total capital also has an important effect on the amount of FDIC insurance premiums paid as institutions considered undercapitalized are subject to higher rates for FDIC insurance. Significant additional restrictions can be imposed on FDIC-insured depository institutions that fail to meet applicable capital requirements. These matters are a major focus of the attention and efforts of the Board of Directors and management. Please see “Supervision and Regulation — Capital Adequacy” within Item 1 of our Annual Report on Form 10-K filed with

the Securities and Exchange Commission on April 15, 2010 for a more complete discussion of regulatory capital requirements.

Off-Balance Sheet Risk

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

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

		June 30, 2010
		(Dollars in Thousands)
Commitments to extend credit		$	26,519
Letters of credit			868
		$	27,387

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

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

Financial Condition

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

		June 30,				December 31,
		2010				2009
		(Dollars in Thousands)
Cash and due from banks		$	17,942			$	15,753
Interest-bearing deposits in banks			112,878				68,547
Securities, available-for-sale			48,277				44,955
Restricted equity securities, at cost			2,694				2,694
Loans, net			546,120				599,334
Premises and equipment			36,216				37,046
Foreclosed assets			30,012				13,741
Accrued interest receivable			2,673				2,930
Other assets			4,719				7,201
		$	801,531			$	792,201
Deposits		$	749,312			$	734,789
Other borrowings			22,000				22,000
Accrued interest payable			570				532
Other liabilities			858				502
Stockholders’ equity			28,791				34,378
		$	801,531			$	792,201

     Our total assets increased by $9,330,200, or 1.18%, to $801,530,807 for the first six months of 2010 as compared to December 31, 2009, which is due primarily to an increase of $46,520,016 in cash and interest-bearing deposits in banks, $16,271,661 in foreclosed assets and $3,321,254 in securities available-for-sale combined with a decrease in net loans of $53,213,962. These changes reflect management’s intent to increase liquidity due to our undercapitalized regulatory status

and shrink the loan portfolio. Changes to premises and equipment, accrued interest receivable and other assets were not significant for these same periods.

     For the first six months of 2010 as compared to December 31, 2009, total liabilities increased by $14,916,521, or 1.97%, primarily due to a $5,712,260 increase in interest-bearing deposits and a $8,809,943 increase in non-interest bearing deposits. The balance in FHLB borrowed funds did not change from December 31, 2009 and changes to other liabilities and accrued interest payable were not significant. Stockholders’ equity decreased by $5,586,321 due to a $5,943,167 loss for the first six months of 2010, an increase in other comprehensive gain of $415,269, treasury stock of $153,041 and an increase to common stock of $94,617 as we recognized stock compensation expense.

Results of Operations for the Three and Six Months Ended June 30, 2010 and 2009

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
		(Dollars in Thousands)
Interest income		$	8,869			$	10,043			$	17,965			$	20,290
Interest expense			(3,384	)			(4,762	)			(6,824	)			(10,581	)
Net interest income			5,485				5,281				11,141				9,709
Provision for loan losses			(4,348	)			(4,332	)			(6,619	)			(6,251	)
Other income			1,040				922				2,031				2,495
Other expense			(6,540	)			(6,957	)			(12,496	)			(12,942	)
Pretax income (loss)			(4,363	)			(5,086	)			(5,943	)			(6,989	)
Income tax expense (benefit)			—				(1,930	)			—				(2,657	)
Net income (loss)		$	(4,363	)		$	(3,156	)		$	(5,943	)		$	(4,332	)

     Our net interest income for the six months ended June 30, 2010 was $11,141,571, which is an increase of $1,432,260, or 14.75%, as compared to the same period for 2009. Between the fourth quarter of 2007 and the first quarter of 2009 we experienced compression in our net interest margin due to a falling interest rate environment and stiff competition for deposits. Since the first quarter of 2009, however, we have seen general improvement in our net interest margin, due to a combination of our loan yields increasing and deposits repricing to lower rates. Our quarterly net interest margins for the last two years are as follows:

Period		Net interest margin
June, 2010			2.96	%
March, 2010			3.01	%
December, 2009			2.88	%
September, 2009			2.83	%
June, 2009			2.61	%
March, 2009			2.32	%
December, 2008			2.88	%
September, 2008			3.08	%

Provision and Allowance for Loan Losses

     The allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. When a loan or portion of a loan is determined to be uncollectible, the amount deemed uncollectible is charged against the allowance and subsequent recoveries, if any, are credited to the allowance.

     The allowance is an amount that we believe will be adequate to absorb estimated losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio, based on a periodic evaluation. While we use the best information available to make our evaluation, future adjustments to the allowance may be necessary if there are any significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses, and may require us to make additions to the allowance based on their judgment about information available to them at the time of their examinations.

     We determine the allowance for loan loss by first dividing the loan portfolio into two major categories: (1) satisfactory and past due loans plus loans classified substandard, but not impaired and (2) impaired loans. For purposes of

evaluation, satisfactory and past due loans are further segmented into the following categories: 1-4 family residential construction, other construction, farmland, 1-4 residential - revolving, 1-4 residential — 1st liens, 1-4 residential — Jr. liens, multifamily, owner-occupied non-farm non-residential, other non-farm non-residential, commercial and industrial, consumer installment, and other. A percentage allocation is also assigned to the loans classified as substandard and doubtful that are not impaired or are under $200,000 and impaired. We apply our historical trend loss factors to each category and adjust these percentages for qualitative or environmental factors, as discussed below. Because of the deterioration in the economy and real estate markets over the past several years, we use a two-year internal trending analysis in calculating our general reserve, versus the three-year internal and peer-based averages we had relied on in the past. Loan loss reserves are calculated primarily based upon this historical loss experience by segment and adjusted for qualitative factors including changes in the nature and volume of the loan portfolio, overall portfolio quality, changes in levels of non-performing loans, significant shifts in real estate values, changes in levels of collateralization, trends in staff lending experience and turnover, loan concentrations and current economic conditions that may affect the borrower’s ability to pay.

     A loan is generally classified as impaired, based on current information and events, if it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Impaired loans are measured by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. A substantial portion of our impaired loans are collateral dependent, which in the past was included in our allowance for loan losses. New appraisals continue to show declining real estate values as compared to previous levels thus we have experienced losses upon disposal of these assets. The process of updating appraisals on collateral dependent troubled debt restructurings (“TDRs”) and nonaccrual loans previously included in our calculations have confirmed losses and accelerated charge-offs into 2009 through subsequent events. Significant individual credits classified as substandard within our credit grading system that are determined to be impaired require both individual analysis and specific allocation. Loans in the substandard category are characterized by deterioration in quality exhibited by any number of well-defined weaknesses requiring corrective action, such as declining or negative earnings trends and declining or inadequate liquidity. Impaired loans with balances in excess of $200,000 are evaluated individually, while impaired loans with balances of $200,000 or less are evaluated as a group. No additional funds are committed to be advanced in connection with impaired loans.

     Generally, for collateral-dependent loans, current market appraisals are ordered to estimate the current fair value of the collateral. During our most recent regulatory examination, we had appraisals prepared and reviewed on a large number of our residential and commercial collateral-dependent loans. However, in situations where a current market appraisal is not available, management uses the best available information (including recent appraisals for similar properties, communications with qualified real estate professionals, information contained in reputable trade publications and other observable market data) to estimate the current fair value. In these situations, valuations based on our internal calculations have generally been consistent with the valuations determined by appraisals on similar properties and as such, management believes the internal valuations can be reasonably relied upon for valuation purposes. The estimated costs to sell the subject property, if any, are then deducted from the estimated fair value to arrive at the “net realizable value” of the loan and to determine the specific reserve on each impaired loan reviewed.

     Our analysis of impaired loans and their underlying collateral values has revealed the continued deterioration in the level of property values, as well as reduced borrower ability to make regularly scheduled payments. Loans in our residential land development and construction portfolios are secured by unimproved and improved land, residential lots, and single-family and multi-family homes. Generally, current lot sales by the developers and/or borrowers are taking place at a greatly reduced pace and at reduced prices. As home sales volumes have declined, income of residential developers, contractors and other real estate-dependent borrowers has also been reduced. This difficult operating environment, along with the additional loan carrying time, has caused some borrowers to exhaust payment sources. Within the last several months, several of our clients have reached the point where payment sources have been exhausted.

     The general reserve estimate is then added to the specific allocations made to determine the amount of the total allowance for loan losses. The allocation of the allowance to the respective loan categories is an approximation and not necessarily indicative of future losses. The entire allowance is available to absorb losses occurring in the loan portfolio. We regularly monitor trends with respect to non-accrual, restructured and potential problems loans. We have been in the current economic cycle for an extended period thus allowing for current negative environmental factors and market-driven trends inherent in the economy to be reflected in our historical net charge off ratio. In management’s opinion, the loan loss allowance is considered adequate at June 30, 2010.

     When a loan first shows signs of weakness we will, if warranted, place the loan on non-accrual status pending a more complete investigation of the underlying credit quality of the loan and its collateral. After this investigation, which may include steps such as obtaining an updated appraisal and a review of the financial condition of the guarantor(s), we will charge-off the portions of the loans that we deem uncollectible or confirmed through updated appraisals on collateral dependent loans.

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

		June 30, 2010								December 31, 2009
						Percentage of loans								Percentage of loans
		Amount				in each category				Amount				in each category
		(Dollars in Thousands)
Commercial and industrial		$	1,301				7.06	%		$	1,281				7.19	%
Real estate — construction			5,026				22.54	%			4,700				24.13	%
Real estate — mortgage			7,398				66.79	%			6,460				65.11	%
Installment loans to individuals			456				3.61	%			438				3.57	%
		$	14,181				100	%		$	12,879				100	%

     Information with respect to non-accrual, past due and restructured loans at June 30, 2010 and December 31, 2009 is as follows:

		June 30,				December 31,
		2010				2009
		(Dollars in Thousands)
Non-accrual loans
Commercial and industrial		$	3,603			$	3,690
Real estate — construction			11,118				17,003
Real estate — mortgage			20,898				27,734
Installment loans to individual			599				293
Total non-accrual loans		$	36,218			$	48,720
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			—				—
Real estate — mortgage			—				464
Installment loans to individual			—				—
Total restructured loans		$	—			$	553
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 individual			—				—
Total potential problem loans		$	—			$	—
Interest income that would have been recorded on non-accrual loans under original terms		$	1,278
Interest income that was recorded on non-accrual loans			388
Reduction in interest income		$	890

     The economic downturn, and particularly the weak real estate markets, have led to increased delinquencies and charge-offs. The weakened real estate market affects several segments of borrowers: 1) builders and acquisition / development customers who are not able to sell their inventory and thus cannot generate cash flow to make loan payments; 2) owners of commercial property who are unable to lease or rent their properties and thus suffer from a lack of cash flow and 3) consumers who have lost equity in their residences related to foreclosures and are unable to access this liquidity source or refinance into lower rate mortgages. Increased unemployment rates in our market areas have increased our non-performing loans because borrowers no longer have the necessary cash flow to pay their loan obligations. Current economic forecasts indicate a weak recovery for 2010 thus no substantial improvement in non-accrual, past due and potential problem loans is expected for the foreseeable future.

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

     At June 30, 2010, we had $36,217,700 of non-accrual loans, which is a decrease of $12,502,677 from December 31, 2009. The decrease is primarily the result of loans being charged-off or collateral related to these loans being foreclosed upon and moving into other real estate. Our level of foreclosed assets increased from $13.7 million at December 31, 2009 to $30.0 million at June 30, 2010. This process caused the level of our non-accrual real estate — mortgage and real estate — construction loans to decrease by approximately $6.8 million and $5.8 million, respectively, while our non-accrual installment loans increased by $306,000 during the first six months of 2010. Non-accrual commercial and industrial loans also decreased by $87,000. At June 30, 2010, no accrued interest on non-accrual loans had been recognized.

     Our non-accrual loans by geographic market are shown in the following table as of June 30, 2010 and December 31, 2009.

		June 30,				December 31,
		2010				2009
		(Dollars in Thousands)
Bremen		$	9,784			$	8,050
Carrollton			8,630				8,553
Villa Rica			4,653				7,399
Dalton			4,386				13,775
Other (8 markets)			8,765				10,943
Total		$	36,218				48,720

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

     Restructured loans are loans for which the terms have been negotiated to provide a reduction or deferral of interest or principal because of deterioration in the financial position of the borrower. All such loans are now in non-accrual status.

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

Information regarding certain loans and allowance for loan
loss data through June 30, 2010 and 2009 is as follows:

		Six Months Ended
		June 30,
		2010				2009
		(Dollars in Thousands)
Average amount of loans outstanding		$	593,149			$	666,254
Balance of allowance for loan losses at beginning of period		$	12,879			$	11,013
Loans charged off
Commercial and industrial			(94	)			(383	)
Real estate — construction			(1,371	)			(3,395	)
Real estate — mortgage			(3,848	)			(2,380	)
Installment loans to individuals			(272	)			(311	)
			(5,585	)			(6,469	)
Loans recovered
Commercial and industrial			35				5
Real estate — construction			97				5
Real estate — mortgage			96				2
Installment loans to individuals			40				12
			268				24
Net charge-offs			(5,317	)			(6,445	)
Additions to allowance charged to operating expense during period			6,619				6,251
Balance of allowance for loan losses at end of period		$	14,181			$	10,819
Ratio of net loans charged off during the period to average loans outstanding			.90	%			.97	%