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EX-32.1 - EXHIBIT 32.1 CEO-CFO CERTIFICATION - MCINTOSH BANCSHARES INC /GA/dex32.htm
EX-31.1 - EXHIBIT 31.1 CEO CERTIFICATION - MCINTOSH BANCSHARES INC /GA/dex311.htm
EX-31.2 - EXHIBIT 31.2 CFO CERTIFICATION - MCINTOSH BANCSHARES INC /GA/dex312.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2010
or
[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______

Commission File No. 000-49766

McINTOSH BANCSHARES, INC.
(Exact name of registrant as specified in its charter)

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


210 South Oak Street
Jackson, Georgia 30233
(Address of principal executive offices)

(770) 775-8300
(Registrant’s telephone number, including area code)

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

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

    Large accelerated filer [  ]                                                                              Accelerated filer                  [  ]         
    Non-accelerated filer   [  ] (Do not check if a smaller reporting company)  Smaller reporting company [X]

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

 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  No 

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

 

McIntosh Bancshares, Inc. and Subsidiaries


INDEX
 
 
PART I:
FINANCIAL INFORMATION
 
 
ITEM 1
FINANCIAL STATEMENTS
 
Page
                            The following consolidated financial statements are provided for McIntosh Bankshares, Inc.
 
 
Consolidated Balance Sheets – June 30, 2010 (unaudited) and December 31, 2009 (audited).
 
2
 
Consolidated Statements of Operations (unaudited) – For the Three Months and Six Months Ended June 30, 2010 and 2009.
 
3
 
Consolidated Statements of Comprehensive Income (unaudited) – For the Three Months and Six Months Ended June 30, 2010 and 2009.
 
4
 
Consolidated Statements of Cash Flows (unaudited) – For the Six Months Ended June 30, 2010 and 2009.
 
5
 
Notes to Consolidated Financial Statements (unaudited)
 
6
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
19
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
 
33
ITEM 4T.
Controls and Procedures
 
33
PART II:
OTHER INFORMATION
34
 
 

 
PART 1.  FINANCIAL INFORMATION
           
             
Item 1.  Financial Statements
           
             
             
MCINTOSH BANCSHARES, INC. AND SUBSIDIARIES
           
Consolidated Balance Sheets
           
             
 June 30, 2010 and December 31, 2009
           
   
June 30,
   
December 31,
 
Assets
 
2010
   
2009
 
   
(Unaudited)
   
(Audited)
 
Cash and due from banks
  $ 1,760,016     $ 2,152,039  
Interest-bearing deposits
    40,435,187       31,714,865  
Investment securities available for sale
    53,820,577       62,682,700  
Other investments
    1,441,700       1,441,700  
Loans
    250,695,046       277,017,008  
Less: Allowance for loan losses
    (11,922,025 )     (7,644,583 )
Loans, net
    238,773,021       269,372,425  
Premises and equipment, net
    5,720,995       5,933,648  
Other real estate
    27,388,085       22,827,955  
Accrued interest receivable
    1,202,554       1,511,334  
Bank owned life insurance
    4,313,542       7,043,534  
Other assets
    4,308,808       4,788,441  
Total assets
  $ 379,164,485     $ 409,468,641  
                 
Liabilities and Stockholders' Equity
               
                 
Liabilities:
               
  Deposits:
               
    Demand
  $ 32,578,365     $ 29,725,480  
    Money market and NOW accounts
    91,330,720       104,988,658  
    Savings
    19,459,739       17,645,103  
    Time deposits of $100,000 or more
    107,671,639       107,804,523  
    Time deposits
    102,388,056       111,539,934  
Total deposits
    353,428,519       371,703,698  
Borrowed funds
    12,453,373       14,894,243  
Accrued interest payable and other liabilities
    4,099,001       4,962,883  
Total liabilities
    369,980,893       391,560,824  
                 
Commitments and contingencies
               
Stockholders' equity:
               
  Preferred stock, no par value, 10,000,000 shares authorized
               
  no shares issued or outstanding
    -       -  
  Common stock, par value $1.00; 25,000,000 shares authorized,
               
  3,252,581 shares  issued and outstanding
    3,252,581       3,252,581  
  Surplus
    12,653,972       12,614,383  
  Retained earnings (accumulated deficit)
    (6,424,914 )     2,613,544  
  Accumulated other comprehensive (loss)
    (298,047 )     (572,691 )
Total stockholders' equity
    9,183,592       17,907,817  
Total liabilities and stockholders' equity
  $ 379,164,485     $ 409,468,641  
                 
See accompanying notes to consolidated financial statements.
               
 
-2-

 
Item 1.  Financial Statements (continued)
                       
                         
MCINTOSH BANCSHARES, INC. AND SUBSIDIARIES
                       
Consolidated Statements of Operations
                       
                         
For the Three Months and Six Months Ended June 30, 2010 and 2009
                   
 (Unaudited)            
   
Three Months
   
Six Months
 
   
2010
   
2009
   
2010
   
2009
 
Interest income:
                       
Loans, including fees
  $ 3,326,791     $ 4,422,872     $ 6,931,715     $ 9,177,504  
Interest on investment securities:
                               
  U.S. Treasury, U.S. Government agency and mortgage-backed securities
    264,640       678,536       556,573       1,466,649  
  State, county and municipal
    9,711       19,189       27,146       42,749  
  Other investments
    6,852       7,813       15,625       8,809  
Federal funds sold and other short-term investments
    28,040       15,476       51,256       21,203  
Total interest income
    3,636,034       5,143,886       7,582,315       10,716,914  
                                 
Interest expense:
                               
Interest-bearing demand and money market
    114,945       78,339       230,596       164,954  
Savings
    30,403       67,488       58,335       147,951  
Time deposits of $100,000 or more
    774,294       1,021,464       1,554,584       2,123,453  
Other time deposits
    705,978       1,339,818       1,475,944       2,704,411  
Other
    91,615       122,885       191,386       249,790  
Total interest expense
    1,717,235       2,629,994       3,510,845       5,390,559  
Net interest income
    1,918,799       2,513,892       4,071,470       5,326,355  
Provision for loan losses
    820,518       2,170,039       7,550,068       2,725,704  
Net interest income (loss) after provision for loan losses
    1,098,281       343,853       (3,478,598 )     2,600,651  
                                 
Other income:
                               
Service charges
    585,393       590,819       1,143,421       1,155,823  
Investment securities gains (losses)
    572,100       1,500       572,100       (1,705,179 )
Increase in cash surrender value of life insurance
    51,979       75,915       127,894       151,830  
Other real estate losses
    (46,979 )     (373,652 )     (567,846 )     (444,781 )
Fixed and repossessed asset gains (losses)
    82,176       (986 )     (48,818 )     (501 )
Other income
    235,658       291,649       509,731       570,462  
Total other income
    1,480,327       585,245       1,736,482       (272,346 )
                                 
Other expenses:
                               
Salaries and employee benefits
    1,644,079       1,919,422       3,426,012       2,929,541  
Occupancy and equipment
    369,195       387,676       721,845       818,220  
Other operating
    1,687,672       1,358,413       3,148,485       2,573,348  
Total other expenses
    3,700,946       3,665,511       7,296,342       6,321,109  
Loss before income taxes
    (1,122,338 )     (2,736,413 )     (9,038,458 )     (3,992,804 )
Income tax benefit
    -       1,042,905       -       887,862  
Net loss
  $ (1,122,338 )   $ (1,693,508 )   $ (9,038,458 )   $ (3,104,942 )
                                 
Basic loss and diluted loss per common
                         
share based on average outstanding shares of 3,252,581
  $ (0.35 )   $ (0.52 )   $ (2.78 )   $ (0.95 )
                                 
Dividends declared per share of common stock
  $ -     $ -     $ -     $ -  
                                 
See accompanying notes to consolidated financial statements.
                               
 
-3-

 
Item 1.  Financial Statements (continued)
                       
                         
MCINTOSH BANCSHARES, INC. AND SUBSIDIARIES
                       
Consolidated Statements of Comprehensive Income
                       
                         
For the Three Months and Six Months Ended June 30, 2010 and 2009
                       
(Unaudited)
     
Three Months
       
Six Months
 
   
2010
   
2009
   
2010
   
2009
 
Net earnings (loss)
  $ (1,122,338 )   $ (1,693,508 )   $ (9,038,458 )   $ (3,104,942 )
Other comprehensive income, net of income tax:
                               
Unrealized gains on securities available for sale:
                               
Holding gains arising during period, net of tax of  ($1,440), ($157,924), $10,968, and ( $96,476)
    (2,795 )     (306,558 )     21,290       (187,277 )
Less: Reclassification adjustment for gains on sale of securities, net of tax of ($194,514)
    (377,586 )     -       (377,586 )     -  
Change in unfunded pension liability, net of tax $325,030
    630,940       -       630,940       -  
Total other comprehensive income (loss)
    250,559       (306,558 )     274,644       (187,277 )
Comprehensive income (loss)
  $ (871,779 )   $ (2,000,066 )   $ (8,763,814 )   $ (3,292,219 )
                                 
See accompanying notes to consolidated financial statements.
                               
 
-4-

 
Item 1.  Financial Statements (continued)
           
             
MCINTOSH BANCSHARES, INC. AND SUBSIDIARIES
           
Consolidated Statements of Cash Flows
           
             
For the Six Months Ended June 30, 2010 and 2009
           
(Unaudited)
           
   
2010
   
2009
 
Cash flows from operating activities:
           
Net loss
  $ (9,038,458 )   $ (3,104,942 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
  Depreciation, accretion and amortization
    440,947       428,635  
  Gain on sale of securities available for sale
    (572,100 )     -  
  Loss on write-off of other investments
    -       1,706,679  
  Provision for loan losses
    7,550,068       2,725,704  
  Stock-based compensation
    39,589       39,590  
  Provision for deferred income tax benefit
    -       808,615  
  Loss on sale and impairment of other real estate
    567,846       444,781  
  (Gain) loss on fixed and repossessed asset
    48,818       501  
  Change in:
               
    Accrued interest receivable and other assets
    485,029       3,155,301  
    Accrued interest payable and other liabilities
    92,088       (459,411 )
Net cash provided by operating activities
    (386,173 )     5,745,453  
                 
Cash flows from investing activities:
               
Proceeds from calls, maturities and paydowns of securities available for sale
    9,301,237       18,017,450  
Proceeds from sales of securities available for sale
    15,525,437       -  
Proceeds from sales of other real estate
    2,715,207       2,754,137  
Purchases of securities available for sale
    (16,082,467 )     (9,790,099 )
Proceeds from sales of other investments
    -       199,600  
Proceeds from cash surrender value of bank owned life insurance
      2,840,642       -  
Additions to other real estate
    (158,627 )     (348,189 )
Net change in loans
    15,364,780       9,197,419  
Sale of premises and equipment
    (75,688 )     -  
Purchases of premises and equipment
    -       30,741  
Net cash provided by investing activities
    29,430,521       20,061,059  
                 
Cash flows from financing activities:
               
Net change in deposits
    (18,275,179 )     (18,619,591 )
Proceeds from borrowed funds
    559,130       480,842  
Repayment of borrowed funds
    (3,000,000 )     (2,000,000 )
Net cash used by financing activities
    (20,716,049 )     (20,138,749 )
Net change in cash and cash equivalents
    8,328,299       5,667,763  
Cash and cash equivalents at beginning of period
    33,866,904       20,885,224  
Cash and cash equivalents at end of period
  $ 42,195,203     $ 26,552,987  
                 
Supplemental schedule of noncash investing and financing activities:
               
Change in net unrealized gain/loss on investment securities available-for-sale, net of tax
  $ (356,296 )   $ (187,277 )
Change in unfunded pension liability
  $ 630,940     $ -  
Transfer of loans to other real estate
  $ 8,145,556     $ 5,667,763  
Financed sales of other real estate
  $ 461,000     $ 996,733  
Supplemental disclosures of cash flow information:
               
Cash paid during the period for:
               
  Interest
  $ 3,541,937     $ 5,262,557  
                 
See accompanying notes to consolidated financial statements.
               
 
-5-

 
Item 1. Financial Statements (continued)

McIntosh Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
 
(1)  
Basis of Presentation
The financial statements include the accounts of McIntosh Bancshares, Inc. (the “Company”) and its wholly-owned subsidiaries, McIntosh State Bank (the “Bank”) and McIntosh Financial Services, Inc.  All significant intercompany accounts and transactions have been eliminated in the consolidation.

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

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

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

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

(2)  
Regulatory Oversight, Capital Adequacy, Operating Losses, Liquidity and Management Plans
The financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future. However, due to the Company’s financial results, the uncertainty throughout the U.S. banking industry and other matters discussed below, a substantial doubt exists regarding the Company’s ability to continue as a going concern.  Management’s plans in addressing the issues that raise substantial doubt regarding the Company’s ability to continue as a going concern are as follows:

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

The Bank has submitted reports to the DBF and FDIC as required per the Order.  All aspects of the Order have been adhered to or a plan is in place to reach compliance within a reasonable time frame.  The Bank has formed a Directors Committee to oversee compliance with the Order as well as a Capital Sub-Committee. The Bank has a detailed process in place for monitoring liquidity and capital as well as contingency plans for short term capital needs if they arise.

 
-6-

 
Item 1. Financial Statements (continued)

McIntosh Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
 
Capital Adequacy
As of December 31, 2009, the Bank did not meet the requirements of an “adequately capitalized” institution under the capital adequacy guidelines and the regulatory framework for prompt corrective action. To be categorized as “adequately capitalized”, the Bank must maintain minimum Total Risk - based, Tier 1 Risk-based and Tier 1 Leveraged capital ratios of 8%, 4% and 4%, respectively. At December 31, 2009, the Bank’s Total Risk-based, Tier 1 Risk-based and Tier 1 Leveraged capital ratios were 7.8%, 6.6% and 4.6%, respectively, and as a result the Bank became classified as “undercapitalized”.  As of June 30, 2010, the Bank is classified as “significantly undercapitalized” under the regulatory framework for prompt corrective action.  In light of the requirement to improve the capital ratios of the Bank, management is pursuing a number of strategic alternatives. Current market conditions for banking institutions, the overall uncertainty in financial markets and the Bank’s high level of non-performing assets are potential barriers to the success of these strategies. Failure to adequately address the regulatory concerns may result in actions by the banking regulators. If current adverse market factors continue for a prolonged period of time, new further severe adverse market factors emerge, and/or the Bank is unable to successfully execute its plans or adequately address regulatory concerns in a sufficiently timely manner, it could have a material adverse effect on the Bank’s business, results of operations and financial position.  As of June 30, 2010, the Bank has been unable to obtain the capital ratios required as part of the Order.  Management continues to work towards implementing the strategies outlined in the capital plan submitted to the DBF and FDIC.

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

Operating Losses
The Company incurred a net loss of $9.0 million as of June 30, 2010 and $14.1 million for the year ended December 31, 2009.  Management has made efforts to reduce expenses, including a reduction in workforce, salary reductions, termination of the Senior Executive Retirement Plan, cessation of director fees, curtailment of the Company’s pension plan and other general cost-cutting measures and continues to examine areas where further reductions in cost are possible.
 
Interest reversals on non-performing loans and increases to non-performing and foreclosed assets could continue in 2010 and hinder the Company’s ability to improve net interest income.  While excess liquidity brings comfort to depositors, the Bank earns approximately 25 basis points on the liquidity but pays more on the deposits generating the liquidity causing a negative spread.  Also, increases to the provision for loan losses and further write-down or loss on the sale of other real estate could continue in 2010, which will negatively impact the Company’s ability to generate net income during the year.

Liquidity
The Bank’s primary sources of liquidity are deposits, the scheduled repayments on loans, and interest and maturities of investments. The majority of the Bank’s securities have been classified as available for sale, which means they are carried at fair value with unrealized gains and losses excluded from earnings and reported as a separate component of other comprehensive loss.  If necessary, the Bank has the ability to sell these investment securities to manage interest sensitivity gap or liquidity. Cash and due from banks and federal funds sold may also be utilized to meet liquidity needs. Due to the Bank’s significantly undercapitalized status, the Bank is unable to accept, rollover, or renew any brokered deposits. As the existing brokered deposits mature over the next year, it will create a minor strain on liquidity; therefore, management has initiated several strategies to help alleviate this pressure. The strategies include a local core deposit campaign that has raised over $21 million in new deposits, sale of other real estate, liquidation of our bank owned life insurance, and a reduction in pledging requirements of investment securities.  Based on current and expected liquidity needs and sources, management expects to be able to meet obligations at least through December 31, 2010.

(3)  
Cash and Cash Equivalents
For the presentation in the financial statements, cash and cash equivalents include cash on hand, amounts due from banks, and Federal Funds sold.
 
-7-

 
Item 1. Financial Statements (continued)

McIntosh Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
 
(4)  
Investment Securities
Investment securities at June 30, 2010 and December 31, 2009 are as follows:

   
June 30, 2010
 
   
Amortized
Cost
   
Gross Unrealized
Gains
   
Gross
Unrealized
Losses
   
Market
Value
 
U. S. Treasury securities
  $ 28,068,097       58,309       -       28,126,406  
Mortgage-backed securities
    25,185,077       146,402       (51,188 )     25,280,291  
Corporate debt securities
    500,000       -       (86,120 )     413,880  
    $ 53,753,174       204,711       (137,308 )     53,820,577  
       
   
December 31, 2009
 
U. S. Treasury securities
  $ 32,160,258       29,776       (6,438 )     32,183,596  
U. S. Government-sponsored agencies
    2,453,498       10,215       -       2,463,713  
Mortgage-backed securities
    25,254,067       662,414       (47,097 )     25,869,384  
States and political subdivisions
    1,707,632       88,416       -       1,796,048  
Corporate debt securities
    500,000       -       (130,041 )     369,959  
    $ 62,075,455       790,821       (183,576 )     62,682,700  

Other investments are comprised of the following:
  
 
June 30, 2010
   
December 31, 2009
 
Federal Home Loan Bank – Common Stock
  $ 1,441,700       1,441,700  
 
For the six months and three months ending June 30, 2010, ($356,296) and ($380,381) reflects the change in net unrealized gains (net of tax benefit) in other comprehensive income, respectively.

The amortized cost and estimated market value of investment securities available for sale at June 30, 2010, by contractual maturity, are shown below.  Actual maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid with or without penalty.  Therefore, these securities are not included in the maturity categories in the following summary.
 
             
   
Amortized Cost
   
Market
Value
 
Due in one year or less
  $ 28,068,097       28,126,406  
Due from one to five years
    -       -  
Due from five to ten years
    500,000       413,880  
Due after ten years
    -       -  
Mortgage-backed securities
    25,185,077       25,280,291  
    $ 53,753,174       53,820,577  
 
-8-

 
Item 1. Financial Statements (continued)

McIntosh Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)

Gross gains and losses on calls and sales of securities for the three months ended June 30, 2010 and June 30, 2009 consist of the following:
 
   
June 30, 2010
   
June 30, 2009
   
Gross proceeds on calls of securities
  $ -       7,150,000  
Gross gains on calls of securities       -        -  
Gross proceeds on sales of securities     15,525,437        -  
Gross gains on sales of securities          572,100        -  

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

The following table shows the gross unrealized losses and fair value of securities, aggregated by category and length of time that securities have been in a continuous unrealized loss position for the periods ending June 30, 2010 and December 31, 2009, respectively

   
Less Than Twelve Months
   
Twelve Months or More
 
   
Gross
Unrealized
Losses
   
Fair
Value
   
Gross
Unrealized
Losses
   
Fair
Value
 
June 30,  2010
                       
Mortgage-backed securities
  (44,849 )     4,962,890       (6,339 )     642,853  
Corporate debt securities
    -       -       (86,120 )     413,880  
Total
  $ (44,849 )     4,962,890       (92,459 )     1,056,733  
December 31, 2009
                               
U.S. Treasury securities
  $ (6,438 )     7,027,813       -       -  
Mortgage-backed securities
    (47,097 )     5,804,885       -       -  
Corporate debt securities
    -       -       (130,041 )     369,959  
Total
  $ (53,535 )     12,832,698       (130,041 )     369,959  

In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports. As management has the ability and intent to hold debt securities until maturity, or for the foreseeable future if classified as available for sale, no declines are deemed to be other than temporary as of June 30, 2010 and December 31, 2009.  As of June 30, 2010, $48,867,363 of investment securities were pledged to secure public deposits, customer repurchase agreements, Treasury Tax and Loan account, and a federal funds account.

 
-9-

 
Item 1. Financial Statements (continued)

McIntosh Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)

(5)  
Loans
Major classifications of loans are summarized as follows:
   
June 30,
2010
   
December 31, 2009
 
Commercial, financial and agricultural
  $ 28,566,887     $ 38,933,418  
Real estate - mortgage
    179,961,447       183,766,583  
Real estate - construction
    29,268,266       39,534,312  
Consumer and other
    9,978,552       11,666,527  
Tax-exempt
    2,919,894       3,116,168  
      250,695,046       277,017,008  
Less:  Allowance for loan losses
    (11,922,025 )     (7,644,583 )
    $ 238,773,021     $ 269,372,425  

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

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

   
June 30, 2010
   
June 30, 2009
 
Balance at beginning of year
  $ 7,644,583     $ 8,517,479  
Provision charged to expense
    7,550,068       2,725,704  
Loans charged off
    (3,310,702 )     (3,096,607 )
Recoveries of loans previously charged off
    38,076       54,205  
    $ 11,922,025     $ 8,200,781  

Impairment loans totaled $50,653,048 and $35,439,381 at June 30, 2010 and December 31, 2009, respectively.  Allocations of the allowance for loan losses related to impaired loans totaled $6,021,385 and $1,461,276 at June 30, 2010 and December 31, 2009, respectively.  There were no significant amounts of interest income recognized on impaired loans for the quarter ended June 30, 2010 or year ended December 31, 2009.

Loans on nonaccrual status totaled $49,983,303 and $35,234,856 at June 30, 2010 and December 31, 2009, respectively.  Loans past due ninety days or more and still accruing interest totaled $3,804,961 and $751,168 at June 30, 2010 and December 31, 2009, respectively.
 
-10-

 
Item 1. Financial Statements (continued)

McIntosh Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
 
(6)  
Other Real Estate Owned
The following is an inventory of other real estate as of June 30, 2010 compared to December 31, 2009:
 
   
June 30, 2010
   
December 31, 2009
 
         
Carrying
         
Carrying
 
   
Number
   
Amount
   
Number
   
Amount
 
1-4 family residences
    53     $ 8,991,329       60     $ 10,261,960  
Residential lots
    148       3,473,622       151       3,562,316  
Unimproved acres
    370       3,175,469       191       1,864,135  
Commercial property
    23       11,747,665       15       7,139,544  
Total other real estate
          $ 27,388,085             $ 22,827,955  
 
(7)  
Pension Plan
Effective June 5, 2010, the Company froze the McIntosh Bancshares, Inc. Defined Benefit Pension Plan (the Plan).  Freezing the Plan means that employees will not receive any additional service credit or accrue any additional benefits under the Plan on or after the freeze date, and no additional employees of the Company will be permitted to become participants in the Plan on or after the freeze date. 
 
The Company’s consulting actuaries re-measured the projected benefit obligation to determine the effect that curtailment had on the accrued pension liability which is recognized in other comprehensive income.  The curtailment of the plan reduced the unfunded pension liability by approximately $955,000 and increased other comprehensive income by approximately $631,000, net of deferred income taxes.
 
The following sets forth the funded status of the Plan and the amounts included in the accompanying balance sheet:

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

 
-11-

 
Item 1. Financial Statements (continued)

McIntosh Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
 
(8)  
Shareholders Equity
On June 10, 2010 the Company filed an 8-K related to the amendment of the Atricles of Incorporation.  On June 7, 2010, the Company filed with the Secretary of State of Georgia, Articles of Amendment to the Company’s Articles of Incorporation which authorized additional capital stock, increasing the number of authorized common stock from ten million shares to twenty-five million shares.  The amendment also changed  the par value of the common stock from $2.50 per share to $1.00 per share.  The amendment was approved by the shareholders of the Company by a greater than two-thirds affirmative vote at the annual meeting held on May 20, 2010.
 
(9) 
Capital Adequacy
The Federal Reserve and the Federal Deposit Insurance Corporation (“FDIC”) have implemented substantially identical rules for assessing bank and bank holding company capital adequacy.  These regulations establish minimum capital standards in relation to assets and off-balance sheet exposures for credit risk.  Banks and bank holding companies are required to have (i) a minimum ratio of Total capital (as defined) to risk-weighted assets of 8%; (ii) a minimum ratio of Tier One capital (as defined) to risk-weighted assets of 4%; and (iii) a minimum ratio of stockholder’s equity to risk-weighted assets of 4%. The Federal Reserve and the FDIC also require a minimum leverage capital ratio of Tier One capital to total assets of 3% for the most highly rated banks and bank holding companies. Tier One capital generally consists of common equity, minority interests in equity accounts of consolidated subsidiaries, and noncumulative perpetual preferred stock and generally excludes unrealized gains or losses on investment securities, certain intangible assets, and certain deferred tax assets. The Federal Reserve or the FDIC will require a bank or bank holding company to maintain a leverage ratio greater than 3% if either is experiencing or anticipating significant growth, is operating with less than well-diversified risks, or is experiencing financial, operational, or managerial weaknesses.
 
In addition, the FDIC Improvement Act of 1991 provides for prompt corrective action (“PCA”) if a bank’s leverage capital ratio reaches 2%. PCA may call for the bank to be placed in receivership or sold to another depository institution.  The FDIC has adopted regulations implementing PCA which place financial institutions in the following four categories based on capitalization ratios: (i) a well capitalized institution has a total risked-based capital ratio of at least 10%, a Tier One risked-based ratio of at least 6%, and leverage capital ratio of at least 5%; (ii) an adequately capitalized institution has a total risked-based capital ratio of at least 8%, a Tier One risked-based ratio of at least 4%, and leverage capital ratio of at least 4%; (iii) an undercapitalized institution has a total risked-based capital ratio under 8%, a Tier One risked-based ratio under 4%, and leverage capital ratio under 4%; and (iv) a critically undercapitalized institution has a leverage capital ratio under 2%.  Institutions deemed adequately capitalized are not permitted to accept brokered deposits (unless waived by the FDIC) and have limitations on the interest rates paid on deposit accounts.  Institutions in any of the three undercapitalized categories would be prohibited from declaring and paying dividends or making capital distributions.  The FDIC regulations also establish procedures for downgrading an institution to a lower capital category based on supervisory factors other than capital.
 
-12-

 
Item 1. Financial Statements (continued)

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

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

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

As of June 30, 2010, the Bank is considered significantly undercapitalized under the regulatory framework for PCA.  As of June 30, 2010 and December 31, 2009 the capital ratios for the Company and the Bank are as follows:
 
   
June 30, 2010
   
December 31, 2009
 
   
Company
   
                       Bank
   
Company
   
                    Bank
 
Leverage Capital
    2.5 %     2.7 %     4.3 %     4.6 %
Tier One Risk-Based
    3.6 %     3.9 %     6.1 %     6.6 %
Total Risk-Based
    4.9 %     5.2 %     7.3 %     7.8 %

 
(10)  
Fair Value of Financial Instruments
The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.  These levels are:

Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.
 
Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
 
-13-

 
Item 1. Financial Statements (continued)

McIntosh Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)

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

The Company utilizes fair value measures to record fair value adjustments on certain assets and liabilities and to complete fair value disclosures.  Securities available-for-sale are recorded at fair value on a recurring basis. Other asset categories that are affected by periodic adjustments to fair value include: goodwill; impaired loans; and other real estate.  The Company is required to disclose, but not record, the fair value of other financial instruments.
 
Following is a description of valuation methodologies used by the Company for assets and liabilities, which are either recorded or disclosed at fair value:
 
Cash and Cash Equivalents
For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value.

Investment Securities Available-for-Sale
Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions, and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, U.S. Treasury securities that are traded by dealers and brokers in active over-the-counter markets, and money market funds. Level 2 securities include U. S. Agency securities, mortgage-backed securities issued by government sponsored entities, municipals bonds, and corporate debt securities. Level 3 securities include asset-backed securities in less liquid markets.
 
Other Investments
The carrying value of other investments is estimated to approximate fair value.
 
Loans
The Company does not record loans at fair value on a recurring basis.  However, from time to time, a loan is considered impaired and an allowance for loan losses is established.  Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are judged for impairment.  Once a loan is identified as individually impaired, management measures impairment using one of three methods, including, discounted cash flows, market value of similar debt, and or fair value of collateral if repayment of the loan is dependent upon the sale of the underlying collateral.  Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At June 30, 2010, substantially all of the Company’s impaired loans were evaluated based on the fair value of the collateral.  Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy.  When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2.  When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

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

 
-14-

 
Item 1. Financial Statements (continued)

McIntosh Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
 
Other Real Estate
Foreclosed assets are adjusted to fair value upon transfer of the loans to other real estate. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral.  When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2.  When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3.
 
Bank Owned Life Insurance
The carrying value of cash surrender value of life insurance approximates fair value.
 
Deposits
The fair value of demand deposits, savings accounts, NOW accounts, and certain money market deposits are estimated by discounting the future cash flows using the rates currently offered for funding of similar maturities to the estimated average life for each type of deposit.  The fair value of fixed maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities.
 
Borrowed Funds
The fair value of fixed rate and convertible FHLB advances is estimated by discounting the future cash flows using the current rates at which similar advances would be drawn by the Bank. For variable rate FHLB advances, the carrying value approximates fair value. The carrying amounts of borrowings under repurchase agreements and other short-term borrowings approximate their fair value.
 
Commitments to Extend Credit and Standby Letters of Credit
Off-balance-sheet financial instruments (commitments to extend credit and standby letters of credit) are generally short-term and at variable interest rates. Therefore, both the carrying value and the fair value associated with these instruments are immaterial.
 
Assets Recorded At Fair Value on a Recurring Basis
The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis at June 30, 2010 and December 31, 2009.

   
June 30, 2010
 
(Amounts in thousands)
 
Total
   
Level 1
   
Level 2
   
Level 3
 
U.S Treasury Securities
  $ 28,126       28,126       -       -  
Mortgage-backed securities
    25,280       -       25,280       -  
Corporate debt securities
    414       -       414       -  
Investment securities available for sale
  $ 53,820       28,126       25,694       -  
 
-15-

Item 1. Financial Statements (continued)

McIntosh Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)

   
December 31, 2009
 
(Amounts in thousands)
 
Total
   
Level 1
   
Level 2
   
Level 3
 
U.S. Treasury securities
  $ 32,184       32,184       -       -  
Mortgage-backed securities
    28,333       -       28,333       -  
States and political subdivisions
    1,796       -       1,796       -  
Corporate debt securities
    370       -       370       -  
Investment securities available for sale
  $ 62,683       32,184       30,499       -  
 
The U.S. Treasury securities are individually priced and should have been classified as Level 1 at December 31, 2009.  The table above reflects the change. 

Assets Recorded At Fair Value on a Nonrecurring Basis
The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles.  These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period.  Assets measured at fair value on a nonrecurring basis are included in the table below at June 30, 2010 and December 31, 2009.
 
   
June 30, 2010
 
(Amounts in thousands)
 
Total
   
Level 1
   
Level 2
   
Level 3
 
Impaired loans
  $ 44,632      -       13,960       30,672  
Other real estate
    27,388       -       27,388       -  
Total nonrecurring
  $ 72,020        -       41,348       30,672  
   
December 31, 2009
 
(Amounts in thousands)
 
Total
   
Level 1
   
Level 2
   
Level 3
 
Impaired loans
  $ 33,978       -       2,853       31,125  
Other real estate
    22,828       -       22,828       -  
Total nonrecurring
  $ 56,806       -       25,681       31,125  

The carrying amount and estimated fair values of the Company’s financial instruments at June 30, 2010 and December 31, 2009 are as follows:
 
   
June 30, 2010
   
December 31, 2009
 
(Amounts in thousands)
 
Carrying
Value
   
Estimated
Fair Value
   
Carrying
Value
   
Estimated
Fair Value
 
Financial assets:
                       
Cash and cash equivalents
  $ 42,195       42,195       33,867       33,867  
Investment securities
    53,821       53,821       62,683       62,683  
Other investments
    1,442       1,442       1,442       1,442  
Loans (net)
    238,773       243,484       269,372       273,722  
Bank owned life insurance
    4,314       4,314       7,043       7,043  
Financial liabilities:
                               
Deposits
  $ 353,429       351,157       371,704       367,195  
Other borrowed funds
    12,453       12,764       14,894       14,993  
                                 
Limitations
 
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument.  These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument.  Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on many judgments.  These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in assumptions could significantly affect the estimates.
-16-

 
Item 1. Financial Statements (continued)

McIntosh Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
 
Fair value estimates are based on existing on and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.  Significant assets and liabilities that are not considered financial instruments include deferred income taxes and premises and equipment.  In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
 
(11)  
Recent Accounting Pronouncements
In February 2010, the FASB issued Accounting Standards Update No. 2010-09, Subsequent Events: Amendments to Certain Recognition and Disclosure Requirements (“ASC No. 2010-09”). ASU No. 2010-09 removes some contradictions between the requirements of GAAP and the filing rules of the Securities and Exchange Commission (“SEC”). SEC filers are required to evaluate subsequent events through the date the financial statements are issued, and they are no longer required to disclose the date through which subsequent events have been evaluated. This guidance was effective upon issuance except for the use of the issued date for conduit debt obligors, and it is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

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

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

In April 2010, the FASB issued Accounting Standards Update No. 2010-18, Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset ("ASU No. 2010-18).  ASU No. 2010-18 provides guidance on the accounting for loan modifications when the loan is part of a pool of loans accounted for as a single asset such as acquired loans that have evidence of credit deterioration upon acquisition that are accounted for under the guidance in ASC 310-30.  ASU No. 2010-18 addresses diversity in practice on whether a loan that is part of a pool of loans accounted for as a single asset should be removed from that pool upon a modification that would constitute a troubled debt restructuring or remain in the pool after modification.  ASU No. 2010-18 clarifies that modifications of loans that are accounted for within a pool under ASC 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring.  An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if the expected cash flows for the pool change.  The amendments in this update do not require any additional disclosures and are effective for modifications of loans accounted for within pools under ASC 310-30 occurring in the first interim or annual period ending on or after July 15, 2010.  ASU 2010-18 is not expected to have a material impact on the Company's results of operations, financial position or disclosures.
 
-17-

 
Item 1. Financial Statements (continued)

McIntosh Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
 
FASB ASU 2010-20, Receivables (Topic 310): Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This ASU requires additional disclosures that facilitate financial statement users' evaluation of the nature of credit risk inherent in the entity's portfolio of financing receivables, how that risk is analyzed and assessed in arriving at the allowance for credit losses and the changes and reasons for those changes in the allowance for credit losses. The ASU makes changes to existing disclosure requirements and includes additional disclosure requirements about financing receivables, including credit quality indicators of financing receivables at the end of the reporting period by class of financing receivables, the aging of past due financing receivables at the end of the reporting period by class of financing receivables, and the nature and extent of troubled debt restructurings that occurred during the period by class of financing receivables and their effect on the allowance for credit losses. These disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. We do not expect ASU 2010-20 to have a material effect on our consolidated financial statements other than the new disclosures required by the ASU.
 
 
-18-

 
Item 2-Management's Disussion and Analysis
 
McIntosh Bancshares, Inc. and Subsidiaries
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
For Each of the Three Months and the Six Months in the Period Ended
June 30, 2010
 
Forward Looking Statement Disclosure
 
Statements in this report regarding future events or performance are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “PSLRA”) and are made pursuant to the safe harbors of the PSLRA. Actual results of the Company could be quite different from those expressed or implied by the forward-looking statements. Any statements containing the words “could,” “may,” “will,” “should,” “plan,” “believes,” “anticipates,” “estimates,” “predicts,” “expects,” “projections,” “potential,” “continue,” or words of similar import, constitute “forward-looking statements,” as do any other statements that expressly or implicitly predict future events, results, or performance. Factors that could cause results to differ from results expressed or implied by our forward-looking statements include, among others, risks discussed in the text of this report as well as the following specific items:
 
·  
General economic conditions, whether national or regional, that could affect the demand for loans or lead to increased loan losses;
·  
Competitive factors, including increased competition with community, regional, and national financial institutions, that may lead to pricing pressures that reduce yields the Company achieves on loans and increase rates the Company pays on deposits, loss of the Company’s most valued customers, defection of key employees or groups of employees, or other losses;
·  
Increasing or decreasing interest rate environments, including the shape and level of the yield curve, that could lead to decreases in net interest margin, lower net interest and fee income, including lower gains on sales of loans, and changes in the value of the Company’s investment securities;
·  
Changing business or regulatory conditions or new legislation, affecting the financial services industry that could lead to increased costs, changes in the competitive balance among financial institutions, or revisions to our strategic focus;
·  
Changes or failures in technology or third party vendor relationships in important revenue production or service areas, or increases in required investments in technology that could reduce our revenues, increase our costs or lead to disruptions in our business.
·  
The imposition of enforcement orders, capital directives, or other enforcement actions by our regulators, including restrictions and limitations placed on the Bank pursuant to the Cease and Desist Order (“Order”).
·  
The ability of the Company to increase capital levels to meet the requirements of the Order.
·  
The ability of the Company to maintain adequate liquidity levels to fund its operations

Readers are cautioned not to place undue reliance on our forward-looking statements, which reflect management’s analysis only as of the date of the statements. The Company does not intend to publicly revise or update forward-looking statements to reflect events or circumstances that arise after the date of this report. Readers should carefully review all disclosures we file from time to time with the Securities and Exchange Commission.
 
Critical Accounting Policies
Critical accounting policies are dependent on estimates that are particularly susceptible to significant changes. Determination of the Bank’s allowance for loan losses, the valuation of real estate acquired in connection with foreclosures, or in satisfaction of loans, and the valuation of deferred taxes as critical accounting policies.
 
The allowance for loan losses is maintained at a level believed to be appropriate by management to provide for probable loan losses inherent in the portfolio as of each quarter-end. Management’s judgment as to the amount of the allowance for loan losses, including the allocated and unallocated elements, is a result of ongoing review of lending relationships, the overall risk characteristics of the portfolio segments, changes in the character or size of the portfolio segments, the level of impaired or nonperforming loans, historical net charge-off experience, prevailing economic conditions and other relevant factors. Loans are charged off to the extent they are deemed to be uncollectible. The allowance for loan losses level is highly dependent upon management’s estimates of variables affecting valuation, appraisals of collateral, evaluations of performance and status, and the timing of collecting nonperforming loans. Such estimates may be subject to frequent adjustments by management and reflected in the provision for loan losses in the periods in which they become known.
 
-19-

 
Item 2-Management's Disussion and Analysis
 
McIntosh Bancshares, Inc. and Subsidiaries
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
For Each of the Three Months and the Six Months in the Period Ended
June 30, 2010
 
Other real estate represents properties acquired through or in lieu of loan foreclosure.  Other real estate is initially recorded at the lower of cost or fair value less estimated disposal costs.  Any write-down to fair value up to 90 days after transfer to other real estate is charged to the allowance for loan losses.  Costs of improvements are capitalized, whereas costs relating to holding other real estate and valuation adjustments subsequent to 90 days of transfer are expensed.  Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets.
 
Income taxes are accounted for using the asset and liability method. Under this method, deferred tax assets or liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The determination of current and deferred taxes is based on complex analyses of many factors including interpretation of Federal and state income tax laws, the difference between tax and financial reporting basis of assets and liabilities (temporary differences), estimates of amounts due or owed such as the reversals of temporary differences, and current financial accounting standards. Actual results could differ significantly from the estimates and interpretations used in determining current and deferred taxes.

Executive Summary
The Company’s total assets at June 30, 2010, were approximately $379.2 million, a decrease of $30.3 million or 7.4% from December 31, 2009.   Net loss for the six months ended June 30, 2010 was $9.0 million, an increase of $5.9 million or 191.1% compared to the loss of $3.1 million for the six months ended June 30, 2009.  For the three months ended June 30, 2010 and 2009 the loss was $1.1 million or a decrease of $571,000 or 33.7% compared to a loss of $1.7 million, respectively.   Loss per share was $2.78 and $0.95 for the six months and $0.35 and $0.52 for the three months ended June 30, 2010 and 2009, respectively.

On October 23, 2009, the Directors of the Company and Bank entered into formal agreements with the FDIC, and DBF.  These regulatory agreements are designed to help the Company and Bank return to profitability and capital adequacy by improving asset quality.  Specifically, the agreements provide for:  Increase board participation in the affairs of the Bank, which includes holding meetings at least monthly and establishing a Directors’ Committee made up of a majority of members who are not officers, to receive reports from management and report to the board; Assess management’s qualifications and ability to comply with the Order and applicable laws and regulations and to operate the Bank in a safe and sound manner; File a capital plan with the FDIC and DBF; Maintain (a) Tier 1 Capital at or above 8% of total assets and (b) total risk-based capital at or above 10% of total risk-weighted assets; Refrain from paying dividends, directors’ fees or bonuses without prior regulatory approval; Perform a risk segmentation analysis on credit concentrations; Charge-off all assets classified as “Loss” and 50% of assets classified as “Doubtful” in any official Report of Exam from the FDIC or the DBF; Maintain an adequate allowance for loan losses, review the adequacy of the allowance for loan losses and ensure that its policy for determining the adequacy is comprehensive; Formulate a plan to reduce risk exposure for any lines of credit which are adversely classified by the FDIC or the DBF and in the aggregate are $1,000,000 or more as of the date of the examination; Reduce the aggregate balance of assets classified as “Substandard” or “Doubtful” in accordance with a schedule provided in the Order; Restrict extensions of credit to any borrower whose extension of credit has been, in whole or in part, charged-off or adversely classified; Correct all cited violations of regulations and contraventions of policy cited in the Bank’s Report of Examination; Review and, if applicable, revise its written liquidity, contingent funding and asset/liability management plans; Enhance the Bank’s internal loan review program; Obtain a waiver from the FDIC prior to accepting, renewing or rolling over any brokered deposits; Review and, if necessary, revise its written plan detailing appropriate strategies for managing acquisition, development and construction (ADC) and commercial real estate concentration levels; File a long-term strategic plan with the FDIC and the DBF; and, File progress reports with the FDIC and the DBF.  The order will remain in effect until modified or terminated by the DBF and FDIC.
 
-20-

 
Item 2-Management's Disussion and Analysis - (continued)
 
McIntosh Bancshares, Inc. and Subsidiaries
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
For Each of the Three Months and the Six Months in the Period Ended
June 30, 2010
 
On January 21, 2010, the board of directors of the Company, appointed Darren M. Cantlay to serve as Chief Financial Officer and Secretary of the Company. 
 
On May 26, 2010, the Company released the results of the actions taken at the annual shareholders meeting that took place on May 20, 2010.                                                                                                             
                                                                                         
On June 10, 2010 the Company filed an 8-K related to the amendment of the Atricles of Incorporation.  On June 7, 2010, the Company filed with the Secretary of State of Georgia Articles of Amendment to the Company’s Articles of Incorporation which authorized additional capital stock, increasing the number of authorized common stock from ten million shares to twenty-five million shares.  The amendment also changed  the par value of the common stock from $2.50 per share to $1.00 per share.  The amendment was approved by the shareholders of the Company by a greater than two-thirds affirmative vote at the annual meeting held on May 20, 2010.

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

   
June 30,
2010
   
December 31, 2009
   
$ Change
   
% Change
 
Assets:
                       
Total cash and cash equivalents
  $ 42,195,203       33,866,904       8,328,299       24.59 %
Securities available for sale
    53,820,577       62,682,700       (8,862,123 )     -14.14 %
Loans, net
    238,773,021       269,372,425       (30,599,404 )     -11.36 %
Cash surrender value of life insurance
    4,313,542       7,043,534       (2,729,992 )     -38.76 %
Other real estate owned
    27,388,085       22,827,955       4,560,130       19.98 %
Total assets
    379,164,485       409,468,641       (30,304,156 )     -7.40 %
                                 
Liabilities:
                               
Deposits
  $ 353,428,519       371,703,698       (18,275,179 )     -4.92 %
Borrowed funds
    12,453,373       14,894,243       (2,440,870 )     -16.39 %
Accrued expenses and other liabilities
    4,099,001       4,962,883       (863,882 )     -17.41 %
Stockholders’ equity
    9,183,592       17,907,817       (8,724,225 )     -48.72 %
Total Liabilities and Stockholder’s equity
    379,164,485       409,468,641       (30,304,156 )     -7.40 %

 
-21-

 
 
Item 2-Management's Disussion and Analysis - (continued)
 
McIntosh Bancshares, Inc. and Subsidiaries
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
For Each of the Three Months and the Six Months in the Period Ended
June 30, 2010
 
The financial condition of the Company as of June 30, 2010 shows assets declined $30.3 million or 7.4% and $48.1 million or 11.3% from year-end and the year-ago periods, respectively.  Liquid assets (cash, federal funds sold, interest bearing depository balances, and investment securities), decreased $0.5 million or 0.6% and increased $7.4 million or 8.3% from year-end and year-ago periods, respectively.  The decrease in liquid assets from year-end is due to a $26.3 million decline in gross loans offset by a $18.3 million decline in deposits, a $2.4 million decrease in borrowed funds, and $4.6 million increase in other real estate at June 30, 2010.  The increase in liquid assets from the year-ago period is due to a $53.5 million decline in gross loans partially offset by a $23.6 million decline in total deposits, a $2.7 million decrease in borrowed funds, and a $7.6 million increase in other real estate.  In an effort to preserve capital and reduce wholesale funding, management is actively reducing the balance sheet by shrinking gross loans and using those funds to retire wholesale funding.
 
Loans
Gross loans decreased $26.3 million or 9.5% from December 31, 2009.  Declining loan balances are due to the following:   (1) efforts by management to exit certain borrowing relationships that have become outside the bank’s acceptable risk profile and lowering the level of commercial real estate exposure; (2) foreclosure activity; and (3) loan charge-offs.  For the six months ending June 30, 2010, the Bank foreclosed $8.1 million in other real estate and charged-off $3.3 million in loans.  With the ongoing deterioration of the economy combined with persistent residential real estate market weakness, management expects loan balances to decline further in coming quarters.

The allowance for loan losses increased $4.3 million or 56.0% from the year-end.  The change in allowance for loan losses from year-end results from provision expense totaling $7.6 million and $3.3 million in net charge-offs.  As of June 30, 2010, the allowance for loan losses as a percentage of gross loans (reserve ratio) is 4.76% versus 2.76% as of year-end.   Loan loss provision for the six months 2010 was $4.8 million more than the same period last year.  The primary reasons for the increased provision are the number of loans on nonaccrual that have been reviewed for impairment and weakness in the real estate market.

The following table outlines impaired loans:
 
(In Thousands)
     
Impaired loans by loan type:
 
June 30, 2010
   
December 31, 2009
 
 
 
Commercial, financial & agricultural
  $ 2,778       1,788      
Real estate-mortgage
    24,204       15,583      
Real estate-construction
    23,332       17,928      
Consumer loans
    339       140      
Total impaired loans
  $ 50,653       35,439      
Impaired loans in total with no allowance
  $ 30,672       31,125      
Allowance for impaired loans
  $ 6,021       1,461      

The Bank’s delinquency ratio (loans past due 30 days or more and loans on nonaccrual as a percentage of gross loans) was 22.55% at June 30, 2010 versus 15.66% as of year-end.  The increased delinquency ratio from the year-end period is principally due to $14.7 million more loans on nonaccrual and $26.3 million reduction in loans.  Higher delinquency ratios are reflective of the difficulty Bank borrowers face making timely payments and renewing loans in the current economic environment.  Unfortunately, management expects these circumstances to exist over the next several quarters.
 
-22-

 
Item 2-Management's Disussion and Analysis - (continued)
 
McIntosh Bancshares, Inc. and Subsidiaries
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
For Each of the Three Months and the Six Months in the Period Ended
June 30, 2010
 
As of June 30, 2010, 90 relationships were on nonaccrual.  The following table outlines nonaccrual loans (in thousands):
 
 (In Thousands)  
June 30,
2010
   
December 31, 2009
       
Total nonaccrual loans
  $ 49,983     $ 35,235        
Nonaccrual loans to gross loans
    19.9 %     12.7 %      
 
Management has identified $12.2 million in loans restructured from their original terms.  The result of these trouble debt restructurings is the Bank agreed to forbear on collecting $73.2 thousand in accrued but unpaid interest when the notes matured and were renewed. Of the $12.2 of loans that were restructured, $4.6 million of the troubled debt restructurings are in compliance with the terms of the agreement.  All troubled debt restructurings graded substandard and lower are reviewed for impairment.
 
The Bank historically attempts to meet the housing needs of its markets.  Following is a table outlining the Bank’s loans on 1-4 family properties (in thousands):
 
   
June 30, 2010
   
December 31, 2009
       
1-4 family construction loans
    11,316       12,231        
1-4 family mortgages – first lien
    59,926       66,662        
1-4 family mortgages – junior lien
    16.884       18,049        
Total
    88,126       96,942        
Percentage of total loans
    35 %     35 %      

As of June 30, 2010, the Company continued to have a concentration in acquisition, development, and construction (AD&C) loans.  Management has established a maximum limit where total AD&C loans may not exceed 20% of the Company’s loan portfolio including unfunded commitments.  As of June 30, 2010, AD&C loans represented 12% of gross loans and commitments versus 15% and 18% as of the prior year-end and the year-ago periods, respectively.  The primary risks of AD&C lending are:

a)  
Loans are dependent upon continued strength in demand for residential real estate.  Demand for residential real estate is dependent on favorable real estate mortgage rates and population growth from expanding industry services in the metropolitan Atlanta area;
 
b)  
Loans are concentrated to a limited number of borrowers; and
 
c)  
Loans may be less predictable and more difficult to evaluate and monitor.

Federal Bank Regulatory Agencies issued guidance on Concentration in Commercial Real Estate Lending.  This guidance defines commercial real estate (CRE) loans as loans secured by raw land, land development and construction (including 1-4 family residential construction), multi-family property, and non-farm nonresidential property where the primary or a significant source of repayment is derived from rental income associated with the property (that is, loans for which 50% or more of the source of repayment comes from third party, non-affiliated, rental income) or the proceeds of the sale, refinancing, or permanent financing of the property.  Loans for owner occupied CRE are generally excluded from the CRE guidance.
 
 
-23-

 
Item 2-Management's Disussion and Analysis - (continued)
 
McIntosh Bancshares, Inc. and Subsidiaries
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
For Each of the Three Months and the Six Months in the Period Ended
June 30, 2010
 
The CRE guidance is triggered where either:
 
a)  
Total loans for construction, land development, and other land represent 100% or more of a Bank’s total risked based capital; or
 
b)  
Total loans secured by multifamily and nonfarm nonresidential properties and loans for construction, land development, and other land represent 300% or more of a Bank’s total risked based capital.

Banks that are subject to the CRE guidance’s triggers, need to implement enhanced strategic planning, CRE underwriting policies, risk management and internal controls, portfolio stress testing, risk exposure limits, and other policies, including management compensation and incentives, to address the CRE risks.  Higher allowances for loan losses and capital levels may also be appropriate.
 
The following table outlines the Bank’s CRE loans by category and CRE loans as a percent of total risked based capital as of June 30, 2010 and December 31, 2009 (in thousands).
 
   
June 30, 2010
   
December 31, 2009
 
   
Aggregate
   
Percent
   
Aggregate
   
Percent
 
Loan Types:
 
Balance
   
of Total
   
Balance
   
of Total
 
Construction & development
  $ 29,268       31 %   $ 39,534       38 %
Land
    29,671       31 %     33,082       32 %
Sub total
    58,939       62 %     72,616       70 %
Multi-family
    4,545       5 %     4,271       4 %
Non-farm, non-residential, non-owner occupied
    30,810       33 %     27,658       26 %
Total
  $ 94,294       100 %   $ 104,545       100 %
Percent of Total Risk Based Capital:
 
Bank Limit
   
Actual
   
Bank Limit
   
Actual
 
Construction, development & land
    250 %     429 %     250 %     299 %
Construction, development & land, multi-family and non-farm non-residential
    375 %     672 %     375 %     431 %


Other Real Estate
The following is a recap of other real estate activity from December 31, 2009 to June 30, 2010:
 
Balance as of December 31, 2009
  $ 22,827,955  
Improvements
    158,627  
Write-down
    (482,000 )
Sale of 11 residential lots and 25 acres of unimproved land
    (302,023 )
Sale of 19 residential construction properties
    (2,726,030 )
Sale of 1 commercial property
    (234,000 )
Foreclosure on 8 commercial properties
    4,842,121  
Foreclosure on 8 residential lots and 209 unimproved acres
    2,050,265  
Foreclosure on 11 residential construction properties
    1,253,170  
Balance as of June 30, 2010
  $ 27,388,085  

 
-24-

 
Item 2-Management's Disussion and Analysis - (continued)
 
McIntosh Bancshares, Inc. and Subsidiaries
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
For Each of the Three Months and the Six Months in the Period Ended
June 30, 2010
 
The following is an inventory of other real estate as of June 30, 2010:

         
Carrying
 
   
Number
   
Amount
 
1-4 family residences
    53     $ 8,991,329  
Residential lots
    148       3,473,622  
Unimproved acres
    370       3,175,469  
Commercial property
    23       11,747,665  
Total other real estate
          $ 27,388,085  

The Bank foreclosed 27 properties with carrying balances totaling $8.1 million and sold 31 properties with carrying balances totaling $3.3 million from December 31, 2009 to June 30, 2010.  The Bank devotes two seasoned construction lenders to marketing its other real estate holdings.  Despite these efforts, management believes liquidation of unimproved real estate and residential lot inventory will be protracted until the residential real estate market improves.  Additions to the base amount reflect improvements made to finish foreclosed residences.

Deposits
Total deposits decreased $18.3 million or 4.9% from year-end.  The decline in deposits is principally attributable to the decline in time deposits less than $100,000 totaling $9.2 million or 8.2% versus year-end, as well as a reduction in brokered deposits and a reduction in NOW accounts of $12.0 million from year-end.  The current period reduction in deposits was partially offset by a core deposit campaign to increase the Demand, Money Market, and Savings accounts.
 

As of June 30, 2010, brokered deposits totaled $13.1 million and decreased $4.5 million from year-end.  The Bank is classified as significantly undercapitalized by its regulators, so it cannot accept or renew brokered deposits.  Therefore, management will continue to reduce the level of brokered deposits and thus total assets over the next several quarters.  See Liquidity section for further discussion.

Capital Adequacy
The Federal Reserve and the Federal Deposit Insurance Corporation (“FDIC”) have implemented substantially identical rules for assessing bank and bank holding company capital adequacy.  These regulations establish minimum capital standards in relation to assets and off-balance sheet exposures for credit risk.  Banks and bank holding companies are required to have (i) a minimum ratio of Total capital (as defined) to risk-weighted assets of 8%; (ii) a minimum ratio of Tier One capital (as defined) to risk-weighted assets of 4%; and (iii) a minimum ratio of stockholder’s equity to risk-weighted assets of 4%. The Federal Reserve and the FDIC also require a minimum leverage capital ratio of Tier One capital to total assets of 3% for the most highly rated banks and bank holding companies. Tier One capital generally consists of common equity, minority interests in equity accounts of consolidated subsidiaries, and noncumulative perpetual preferred stock and generally excludes unrealized gains or losses on investment securities, certain intangible assets, and certain deferred tax assets. The Federal Reserve or the FDIC will require a bank or bank holding company to maintain a leverage ratio greater than 3% if either is experiencing or anticipating significant growth, is operating with less than well-diversified risks, or is experiencing financial, operational, or managerial weaknesses.
 
-25-

Item 2-Management's Disussion and Analysis - (continued)
 
McIntosh Bancshares, Inc. and Subsidiaries
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
For Each of the Three Months and the Six Months in the Period Ended
June 30, 2010
 
In addition, the FDIC Improvement Act of 1991 provides for prompt corrective action (“PCA”) if a bank’s leverage capital ratio reaches 2%. PCA may call for the bank to be placed in receivership or sold to another depository institution.  The FDIC has adopted regulations implementing PCA which place financial institutions in the following four categories based on capitalization ratios: (i) a well capitalized institution has a total risked-based capital ratio of at least 10%, a Tier One risked-based ratio of at least 6%, and leverage capital ratio of at least 5%; (ii) an adequately capitalized institution has a total risked-based capital ratio of at least 8%, a Tier One risked-based ratio of at least 4%, and leverage capital ratio of at least 4%; (iii) an undercapitalized institution has a total risked-based capital ratio under 8%, a Tier One risked-based ratio under 4%, and leverage capital ratio under 4%; and (iv) a critically undercapitalized institution has a leverage capital ratio under 2%.  Institutions deemed adequately capitalized are not permitted to accept brokered deposits (unless waived by the FDIC) and have limitations on the interest rates paid on deposit accounts.  Institutions in any of the three undercapitalized categories would be prohibited from declaring and paying dividends or making capital distributions.  The FDIC regulations also establish procedures for downgrading an institution to a lower capital category based on supervisory factors other than capital.
 
Due to its current condition and results of operation, the Directors of the Company and Bank entered into an informal agreement with the Federal Reserve in the third quarter of 2008, and formal agreements, the Order, with the FDIC, and Department of Banking and Finance (“DBF”) in the fourth quarter of 2009. These regulatory agreements are designed to help the Company and Bank return to profitability and capital adequacy by improving asset quality. Specifically, the agreements provide for reducing troubled assets; limiting credit to troubled borrowers; maintaining an adequate allowance for loans losses; revising policies to more comprehensively address commercial real estate lending; maintaining a Tier One leverage capital ratio of 8% or more, a Tier One risked-based capital ratio of 6% or more, and a Total risked-based capital ratio of 10% or more; prohibiting the Bank from paying dividends to the Company without prior approval; prohibiting the Company from paying dividends to shareholders without prior approval; prohibiting the Company from incurring debt without prior approval; and prohibiting the Company from repurchasing stock without prior approval. The Bank is presently unable to achieve the Tier One leverage and Total risked-based capital provisions of the agreements but is negotiating for additional capital.

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

A Capital Restoration Plan has been written that addresses the Bank’s commitment to increase its capital position to a Tier One level that would be equal or exceed required capital standards.  The Plan includes the following: balance sheet shrinkage, sale of other real estate, the Capital Sub-Committee offering potential solutions, including several means of raising capital, potential closure and sale of existing branches and other asset reduction options.  The Plan also provides projections for capital levels through 2011.
 
-26-

Item 2-Management's Disussion and Analysis - (continued)
 
McIntosh Bancshares, Inc. and Subsidiaries
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
For Each of the Three Months and the Six Months in the Period Ended
June 30, 2010
 
As of June 30, 2010, the Bank is considered significantly undercapitalized under the regulatory framework for PCA.  As of June 30, 2010 the capital ratios for the Company and the Bank are as follows:
 
   
June 30, 2010
   
December 31, 2009
 
   
Company
   
Bank
   
Company
   
Bank
 
Leverage Capital
    2.5 %     2.7 %     4.3 %     4.6 %
Tier One Risk-Based
    3.6 %     3.9 %     6.1 %     6.6 %
Total Risk-Based
    4.9 %     5.2 %     7.3 %     7.8 %

Payment of Dividends
The Company is a legal entity separate and distinct from the Bank.  Most of the revenues of the Company result from dividends paid to it by the Bank.  There are statutory and regulatory requirements applicable to the payment of dividends by the Bank to the Company, its shareholder.  Under DBF regulations, the Bank may not declare and pay dividends out of retained earnings without first obtaining the written permission of the DBF unless it meets the following requirements:  (i) total classified assets as of the most recent examination of the bank does not exceed 80% of equity capital (as defined by the regulation); (ii) the aggregate amount of dividends declared or anticipated to be declared in the calendar year does not exceed 50% of the net profits after taxes but before dividends for the previous calendar year; and (iii) the ratio of equity capital to adjusted assets is not less than 6%.
 
The payment of dividends by the Company and the Bank may also be affected or limited by other factors, such as the requirement to maintain adequate capital above regulatory guidelines.  The Federal Reserve maintains that a bank holding company must serve as source of financial strength to its subsidiary banks.  As a result, the Company may be required to provide financial support to the Bank at a time when, absent such Federal Reserve requirement, the Company may not deem it advisable to provide such assistance. Similarly, the FDIC maintains that insured banks should generally only pay dividends out of current operating earnings and dividends should only be declared and paid after consideration of the bank’s capital adequacy in relation to its assets, deposits, and such other items.  For 2010, dividends paid to the Company from the Bank are not permissible.

Results of Operations – Six and three months ended June 30, 2010 and 2009

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

The following table shows the significant components of our operations:

   
For the three months ended June 30,
             
   
2010
   
2009
   
Change
   
% change
 
Interest and dividend income
  $ 3,636,034       5,143,886       (1,507,852 )     -29.31 %
Interest expense
    1,717,235       2,629,994       (912,759 )     -34.71 %
Net interest income
    1,918,799       2,513,892       (595,093 )     -23.67 %
Provision for loan losses
    820,518       2,170,039       (1,349,521 )     -62.19 %
Noninterest income
    1,480,327       585,245       895,082       152.94 %
Noninterest expense
    3,700,946       3,665,511       35,435       0.97 %
Net loss, before income tax benefit
    1,122,338       2,736,413       (1,614,075     -58.99 %
Net loss      1,122,338        1,693,508        (571,170      -33.73
Net loss per share
    0.35       0.52       (0.17 )     -32.69 %
 
-27-

Item 2-Management's Disussion and Analysis - (continued)
 
McIntosh Bancshares, Inc. and Subsidiaries
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
For Each of the Three Months and the Six Months in the Period Ended
June 30, 2010
 
   
For the six months ended June 30,
             
   
2010
   
2009
   
Change
   
% change
 
Interest and dividend income
  $ 7,582,315       10,716,914       (3,134,599 )     -29.25 %
Interest expense
    3,510,845       5,390,559       (1,879,714 )     -34.87 %
Net interest income
    4,071,470       5,326,355       (1,254,885 )     -23.56 %
Provision for loan losses
    7,550,068       2,725,704       4,824,364       177.00 %
Noninterest income (loss)
    1,736,482       (272,346 )     2,008,828       -737.60 %
Noninterest expense
    7,296,342       6,321,109       975,233       15.43 %
Net loss, before income tax benefit
    9,038,458       3,992,804       5,045,654       126.37 %
Net loss       9,038,458        3,104,942        5,933,516        191.10
Net loss per share
    2.78       0.95       1.83       191.58 %
 
Net Interest Income
For the three months ended June 30, 2010 and 2009, our tax equivalent interest ratios are as follows:

   
June 30, 2010
   
June 30, 2009
 
Net Interest Margin
    2.49 %     2.57 %
Net Interest Spread
    2.72 %     2.32 %
Yield on Loans
    5.28 %     5.78 %
Yield on Investment Securities
    2.00 %     4.66 %
Cost of Interest Bearing Deposits
    1.99 %     2.83 %
Cost of Borrowed Money
    3.09 %     3.27 %
Cost of Funds
    2.03 %     2.84 %

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

   
June 30, 2010
   
June 30, 2009
 
Net Interest Margin
    2.58 %     2.74 %
Net Interest Spread
    2.91 %     2.49 %
Yield on Loans
    5.37 %     5.92 %
Yield on Investment Securities
    2.07 %     4.80 %
Cost of Interest Bearing Deposits
    2.02 %     2.89 %
Cost of Borrowed Money
    3.01 %     3.32 %
Cost of Funds
    2.04 %     2.88 %

Net interest income for the three months declined approximately $595,000 million or 23.7% from the year-ago period.  This decline is due to carrying $14.7 million more in average nonaccrual loans and $6.6 million more in average other real estate as of June 30, 2010 versus the year-ago period and loans declining $8.9 million or 3.4% in current three month period versus declining $6.8 million or 2.2% in the prior year period.  Also contributing to the net interest income change during three month period versus the year-ago period was reversing $38,000 less in interest income from placing loans on nonaccrual status during the period.
 
Net interest income for the six months declined approximately $1.3 million or 23.6% from the year-ago period.  This decline is due to carrying $13.2 million more in average nonaccrual loans and $8.1 million more in average other real estate as of June 30, 2010 versus the year-ago period and loans declining $26.3 million or 9.5% in current six month period versus declining $20.1 million or 6.2% in the prior year period.  Also contributing to the net interest income decrease during six month period versus the year-ago period was reversing $144,000 more in interest income from placing loans on nonaccrual status during the period.
 
-28-

 
Item 2-Management's Disussion and Analysis - (continued)
 
McIntosh Bancshares, Inc. and Subsidiaries
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
For Each of the Three Months and the Six Months in the Period Ended
June 30, 2010

For the three months ended June 30, 2010, the Company’s tax equivalent net interest margin of 2.49% decreased 8 basis points from the year-ago period.  The decrease was attributable to lower yield on loans from carrying $50.0 million in nonaccrual loans and $27.4 million in other real estate as well as the yield on investment securities decreasing 266 basis points.  The decrease in investment security yield was the result of bond sales that took place during 2009 to recognize securities gains and reinvestment at shorter term U.S. Treasury securities to position the portfolio for a rising rate environment.

For the six months ended June 30, 2010, the Company’s tax equivalent net interest margin of 2.58% decreased 16 basis points from the year-ago period.  The decrease was attributable to lower yield on loans from carrying $50.0 million in nonaccrual loans and $27.4 million in other real estate as well as the yield on investment securities decreasing 273 basis points.  The decrease in investment security yield was the result of bond sales that took place during 2009 to recognize securities gains and reinvestment at shorter term U.S. Treasury securities to position the portfolio for a rising rate environment.

Total interest income for the three months declined $1.5 million or 29.3% from the year-ago period.  The yield on earning assets for the quarter ended June 30, 2010 was 4.78% and declined 41 basis points from the year-ago period.  The decrease in the yield on earning assets from the year-ago period results from a 50 basis point drop in loan yield, a 266 basis point decrease in investment portfolio yield, and a 9 basis point increase in yield on federal funds sold and interest bearing deposits. Also contributing to the decline in the yield on earning assets is the increase in loans on nonaccrual of $50.0 million as well as the increase in loans transferred to other real estate.

Total interest income for the six months declined $3.1 million or 29.3% from the year-ago period.  The yield on earning assets for the six months ended June 30, 2010 was 4.98% and declined 43 basis points from the year-ago period.  The decrease in the yield on earning assets from the year-ago period results from a 55 basis point drop in loan yield, a 273 basis point decrease in investment portfolio yield, and a 9 basis point increase in yield on federal funds sold and interest bearing deposits. Also contributing to the decline in the yield on earning assets is the increase in loans on nonaccrual of $50.0 million as well as the increase in loans transferred to other real estate.

Total interest expense for the three months fell approximately $913,000 or 34.7% from the year-ago period.  The cost of funds for the quarter ended June 30, 2010 was 2.03% and decreased 81 basis points from the year-ago period.  The decline in the cost of funds from the year-ago period results from a 84 basis point decline in the cost of funds on interest bearing deposits and a 18 basis point decline in borrowed money.  The overall decline in the cost of funds from the year-ago period versus the three months ended June 30, 2010 results from the Bank repricing both its nonmaturing and maturing time deposits at lower rates.  The Bank has focused on utilizing lower cost local deposits to replace the wholesale deposits as they have matured.

Total interest expense for the six months fell approximately $1.9 million or 34.9% from the year-ago period.  The cost of funds as of June 30, 2010 was 2.04% and decreased 84 basis points from the year-ago period.  The decline in the cost of funds from the year-ago period results from a 87 basis point decline in the cost of funds on interest bearing deposits and a 31 basis point decline in borrowed money.  The overall decline in the cost of funds from the year-ago period versus the six months ended June 30, 2010 results from the Bank repricing both its nonmaturing and maturing time deposits at lower rates as well as a reduction in wholesale funding of $27.1 million.

Provision for Loan Losses
Provision for loan losses decreased for the three months $1.3 million or 62.2% and increased for the six months $4.8 million or 177.0% from the year-ago period.  Refer to comments on allowance for loan losses adequacy regarding management’s assessment for the provision.
 
-29-

 
Item 2-Management's Disussion and Analysis - (continued)
 
McIntosh Bancshares, Inc. and Subsidiaries
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
For Each of the Three Months and the Six Months in the Period Ended
June 30, 2010

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


   
For the Three Months Ended June 30,
             
   
2010
   
2009
   
Change
   
% Change
 
Service charges
  $ 585,393       590,819       (5,426 )     -0.92 %
Investment securities gains (losses)
    572,100       1,500       570,600       38040.00 %
Increase in cash surrender value of life insurance
    51,979       75,915       (23,936 )     -31.53 %
Other real estate losses
    (46,979 )     (373,652 )     326,673       -87.43 %
Fixed and repossessed asset (losses) gains
    82,176       (986 )     83,162       8434.28 %
Other income
    235,658       291,649       (55,991 )     -19.2 %
Total other income
  $ 1,480,327       585,245       895,082       152.94 %

   
For the Six Months Ended June 30,
             
   
2010
   
2009
   
Change
   
% Change
 
Service charges
  $ 1,143,421       1,155,823       (12,402 )     -1.07 %
Investment securities gains (losses)
    572,100       (1,705,179 )     2,277,279       133.55 %
Increase in cash surrender value of life insurance
    127,894       151,830       (23,936 )     -15.77 %
Other real estate losses
    (567,846 )     (444,781 )     (123,065 )     27.67 %
Fixed and repossessed asset (losses) gains
    (48,818 )     (501 )     (48,317 )     9644.11 %
Other income
    509,731       570,462       (60,731 )     -10.65 %
Total other income
  $ 1,736,482       (272,346 )     2,008,828       737.60 %

Other income for the three months increased $895,000 or 152.9% from the year-ago period.  This increase is principally due to the $572,000 gain on sale of investment securities that occurred in the second quarter of 2010.  Losses on the disposal of other real estate decreased approximately $327,000 or 87.4% from $374,000 to $47,000 from the year ago period.   Secondary Market Fees on mortgage originations declined $98,000, or 75.9%, due to lower mortgage origination volume as demand for mortgage loans declined and underwriting standards became more stringent.

Other income for the six months increased $2.0 million or 737.6% from the year-ago period.  This increase is principally due to the $1.7 million write-off in stock of Silverton Bank, N.A. that occurred in the first quarter of 2009 and the $572,000 gain on sale of investment securities in 2010.  Losses on the disposal of other real estate increased approximately $123,000 or 27.67% from $445,000 to $568,000 from the year ago period.   Secondary Market Fees on mortgage originations declined $138,000, or 68.2%, due to lower mortgage origination volume as demand for mortgage loans declined and underwriting standards became more stringent.

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

   
For the Three Months Ended June 30,
             
   
2010
   
2009
   
Change
   
% Change
 
Salaries and employee benefits
  $ 1,644,079       1,919,422       (275,343 )     -14.35 %
Occupancy and equipment
    369,195       387,676       (18,481 )     -4.77 %
Other operating
    1,687,672       1,358,413       329,259       24.24 %
Total other expense
  $ 3,700,946       3,665,511       35,435       0.97 %
 
-30-

Item 2-Management's Disussion and Analysis - (continued)
 
McIntosh Bancshares, Inc. and Subsidiaries
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
For Each of the Three Months and the Six Months in the Period Ended
June 30, 2010
 
 
   
For the Six Months Ended June 30,
             
   
2010
   
2009
   
Change
   
% Change
 
Salaries and employee benefits
  $ 3,426,012       2,929,541       496,471       16.95 %
Occupancy and equipment
    721,845       818,220       (96,375 )     -11.78 %
Other operating
    3,148,485       2,573,348       575,137       22.35 %
Total other expense
  $ 7,296,342       6,321,109       975,233       15.43 %

Other noninterest expense for the three months increased approximately $35,000 or 0.97% from the year-ago period.  The increase is predominantly attributable to an increase in FDIC insurance premiums of $116,000 or 36.8% to $431,000 for the current quarter, and an increase in other real estate and collection expense of $303,000 or 116.0%.  Salaries and personnel expense has fallen $275,000 or 14.4%, as full-time equivalent employees for the Company have fallen from 117 to 113.5 or 3.0%.  Occupancy expense is down $18,000 due to the closure of the Lake Oconee location in September of 2009.  
 
Other noninterest expense for the six months increased approximately $975,000 or 15.4% from the year-ago period.  The increase is predominantly attributable to the reversal of accrued deferred compensation totaling $1 million in the first quarter of 2009.  Salaries and personnel expense has fallen $504,000 or 17.2%, excluding the reversal of $1 million in accrued deferred compensation.  Occupancy expense is down $96,000 due to the closure of the Lake Oconee location in September 2009. FDIC insurance premium expense has increased $300,000 or 70.5% to $727,000, due to higher FDIC assessments.  Expenses related to other real estate and collections have increased $461,000 or 75.1% to $1.1 million compared to the year-ago period.

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

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

Liquidity is monitored daily and formally measured on a monthly basis.  As of June 30, 2010, the Bank’s liquidity ratio was 17.43% versus 13.27% as of year-end.  Management continues to build liquidity as loans repay in anticipation of certificate of deposit maturities.

Since year-end, a $3 million advance matured and was repaid.  As of June 30, 2010, the weighted average rate and weighted average maturity of the Bank’s $11 million in outstanding FHLB advances is 3.28% and 58 months, respectively.  FHLB advances are drawn under an $11 million line of credit with FHLB.

The Bank has pledged $37.2 million in eligible commercial real estate mortgages to the Federal Reserve Bank of Atlanta (FRB).  The availability on this line is $14.9 million.  The line was tested overnight in March 2010.  No advances occurred during the quarter.
 
-31-

 
Item 2-Management's Disussion and Analysis - (continued)
 
McIntosh Bancshares, Inc. and Subsidiaries
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
For Each of the Three Months and the Six Months in the Period Ended
June 30, 2010
 
In October 2008, the FDIC approved a program to strengthen market stability for financial institutions called the Temporary Liquidity Guaranty Program (TLGP).  Provision one of the TLGP allows the FDIC to guaranty the debt issued by financial institutions for liabilities outstanding as of September 30, 2008.  The debt guaranty amount for the Bank is $8.4 million.  Management did not opt out of the debt guarantee program, but decided not to utilize it.  Provision two of the TLGP raises the FDIC insurance level for all deposit accounts to $250,000 through December 31, 2009.  Management has determined this provision would be beneficial to the Bank and its customers and has opted to take part.  On September 2, 2009, the FDIC approved a rule to finalize the extension of the temporary increase of $250,000 until December 31, 2013.  Provision three of the TLGP allows the FDIC to insure all the Bank’s noninterest bearing and interest bearing deposits paying no more than 0.5% through December 31, 2009.  Management determined this provision would be beneficial to the Bank and its customers and has opted to take part.  The Bank will pay 10 basis points per annum for this deposit coverage above the $250,000 temporary limit outlined in provision two.  In March 2010, the FDIC extended the coverage until December 31, 2010.  As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act signed July 20, 2010 by President Obama, the FDIC insurance limits were permanently raised to $250,000 for all deposit accounts except for noninterest bearing which will not have a limit on the insurance beginning January 1, 2011.
 
-32-

 
 
McIntosh Bancshares, Inc. and Subsidiaries
Item 3 – Quantitative and Qualitative Disclosures about Market Risk
Item 4T – Controls and Procedures
For the Period Ended June 30, 2010
 
Item 3.  Quantitative and Qualitative Disclosures About Market Risk
As of June 30, 2010, there were no substantial changes in the composition of the Company’s market-sensitive assets and liabilities or their related market values from that reported as of December 31, 2009.  The foregoing disclosures related to market risk of the Company should be read in conjunction with the Company’s audited consolidated financial statements, related notes, and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2009 included in the Company’s 2009 Form 10-K.

Item 4T.  Controls and Procedures
The management of McIntosh Bancshares, Inc. and subsidiaries is responsible for establishing and maintaining adequate internal control over financial reporting.  This internal control system has been designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of the Company’s published financial statements.

All internal control systems, no matter how well designed, have inherent limitations.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
    
Management of the Company and subsidiaries has assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2010.  To make this assessment, we used the criteria for effective internal control over financial reporting described in Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission.  There were no significant changes in the internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.  Based on our assessment, we believe that, as of June 30, 2010, the Company’s internal control over financial reporting met those criteria and is effective.

 
-33-

 
McIntosh Bancshares, Inc. and Subsidiaries
PART II - OTHER INFORMATION
For the Period Ended June 30, 2010

Item 1.  Legal Proceedings
 
The Bank is from time to time involved in various legal actions arising from normal business activities. Management believes that the liability, if any, arising from such actions will not have a material adverse effect on the Company’s financial condition.  Neither the Bank nor the Company is a party to any proceeding to which any director, officer or affiliate of the issuer, any owner of more than five percent (5%) of its voting securities is a party adverse to the Bank or the Company.

Item 1A.  Risk Factors
 
Due to our current noncompliance with the Order and risk of future noncompliance we may be subject to certain additional operational and financial restrictions that will require us to take specific actions.
 
The Bank is currently categorized as “significantly undercapitalized” and, pursuant to the prompt corrective action provisions of the Federal Deposit Insurance Act and the prompt corrective action regulations of the FDIC promulgated thereunder (collectively, the “PCA Provisions”), the Bank received Notification of Prompt Corrective Action from the FDIC on April 6, 2010, which required that the Bank file a capital restoration plan within 45 days of receiving the Notification. In addition, because of the Bank’s “significantly-undercapitalized” status, the Bank is automatically subject to, among other things, restrictions on dividends, management fees, and asset growth, and is prohibited from opening new branches, making acquisitions or engaging in new lines of business without the approval of the FDIC.
 
Significantly undercapitalized depository institutions may also be subject to any of the following requirements and restrictions, including: (i) selling sufficient voting stock to become adequately capitalized; (ii) directing the Bank to merge or be acquired: (iii) limiting certain affiliate transactions; (iv) restricting interest rates paid on deposits; (v) restricting asset growth or reducing total assets, (vi) altering or eliminating any activities that pose excessive risk to the Bank; (vii) improving management through an election of a new board of directors, dismissals, or the hiring of new executives, (viii) ceasing the acceptance of deposits from correspondent banks, (ix) divesting the holding company; and (x) performing any other appropriate action.
 
If the capital at the Bank further deteriorates, and the Bank is categorized as critically undercapitalized, subject to limited exceptions, it will be subject to the appointment, by the appropriate federal banking agency, of a receiver or conservator within 90 days of the date on which it becomes critically undercapitalized. In addition, critically-undercapitalized banks are prohibited from paying principal or interest on subordinated debt without FDIC approval. FDIC approval is also required for a critically- undercapitalized institution to engage in certain activities, including, but not limited to, entering into any material transaction other than in the usual course of business, extending credit for any highly leveraged transaction, making any material change in accounting methods, amending its articles or bylaws, engaging in any “covered transaction” with an affiliate (as defined in section 23A of the Federal Reserve Act), paying excessive compensation or bonuses, and paying interest on deposits in excess of the prevailing rate in the institution’s market area.
 
In addition, because the Bank is not in compliance with the Order, it could also be subject to enforcement actions by the FDIC and Georgia Department. The various enforcement measures available to the FDIC and Georgia Department, include the imposition of a conservator or receiver (which would likely result in a substantial diminution or a total loss of the Company’s investment in the Bank), the judicial enforcement of the Order, the termination of insurance of deposits, the imposition of civil money penalties, and the issuance of removal and prohibition orders against institution-affiliated parties and the imposition of restrictions and sanctions under the prompt corrective action provisions discussed above.
 
Further noncompliance with the Order, the failure to comply with our capital restoration plan, or further deterioration of our capital, could impact our ability to continue operations and, in such a scenario, it is unlikely that our shareholders would realize any value for their common stock.
 
 
-34-

 
McIntosh Bancshares, Inc. and Subsidiaries
PART II - OTHER INFORMATION
For the Period Ended June 30, 2010
 
We need to raise additional capital that may not be available to us.
 
Regulatory authorities require us to maintain adequate levels of capital to support our operations. As described above, we are significantly-undercapitalized and have an immediate need to raise capital. In addition, even if we succeed in raising this capital, we may need to raise additional capital in the future due to additional losses or regulatory mandates. The ability to raise additional capital, if needed, will depend in part on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, additional capital may not be raised, if and when needed, on terms acceptable to us, or at all. If we cannot raise additional capital when needed, our ability to increase our capital ratios could be materially impaired and we could face additional regulatory challenges. In addition, if we issue additional equity capital, it may be at a lower price and in all cases our existing shareholders’ interest would be diluted.
 
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009, which could materially affect our business, financial condition or future results.  The risks described in our Annual Report on form 10-K are not the only risks facing us.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
 
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  (Removed and Reserved)
 
Item 5.  Other Information

None

Item 6.  Exhibits
EXHIBIT INDEX
 
31.1
Certifications of the Registrant’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certifications of the Registrant’s Chief Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
18 U.S.C. Section 1350 Certifications of the Registrant’s Chief Executive Officer and Chief Financial and Accounting Officer
 
-35-

 
Signatures

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

McIntosh Bancshares, Inc.



Date:  August 25, 2010

By ________________________________
William K. Malone, Chairman and C.E.O.
(Principal Executive Officer)



Date:  August 25, 2010

By _______________________________
Darren M. Cantlay, Chief Financial Officer
(Principal Financial and Accounting Officer)
   
 
 
-36-