UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

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

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

Commission File No. 0-22981

GEORGIA-CAROLINA BANCSHARES, INC.

Georgia		58-2326075
(State of Incorporation)		(I.R.S. Employer Identification Number)

3527 Wheeler Road
Augusta, Georgia		30909
(Address of Principal Executive Offices)		(Zip Code)

(706) 731-6600

Securities registered under Section 12(b) of the Act:

Title of Each Class		Name of each exchange on which registered
None		None

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, $0.001 Par Value
(Title of class)

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

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

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

Indicate by check mark whether the registrant has submitted electronically and has 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 o NO o

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

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

Large accelerated filer o		Accelerated filer o		Non-Accelerated filer o		Smaller reporting company þ

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

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant (2,626,506 shares), on June 30, 2010 was $18,385,542 based on the closing price of the registrant’s common stock as reported on the Over-the-Counter Bulletin Board on June 30, 2010. For purposes of this response, officers, directors and holders of 5% or more of the registrant’s common stock are considered affiliates of the registrant at that date. As of March 21, 2011, 3,546,125 shares of the registrant’s common stock were outstanding.

Portions of the registrant’s definitive proxy statement to be delivered to shareholders in connection with the 2011 Annual Meeting of Shareholders scheduled to be held on May 23, 2011 are incorporated herein by reference in response to Part III of this Report.

 

 

GEORGIA-CAROLINA BANCSHARES, INC.
2010 Form 10-K Annual Report

TABLE OF CONTENTS

Item Number				Page or
In Form 10-K		Description		Location
PART I
Item 1.		Business			1
Item 1A.		Risk Factors			16
Item 1B.		Unresolved Staff Comments			24
Item 2.		Properties			24
Item 3.		Legal Proceedings			25
Item 4.		[Removed and Reserved]			25
PART II
Item 5.		Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			26
Item 6.		Selected Financial Data			28
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			29
Item 7A.		Quantitative and Qualitative Disclosures About Market Risk			47
Item 8.		Financial Statements and Supplementary Data			47
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			47
Item 9A.		Controls and Procedures			47
Item 9B.		Other Information			48
PART III
Item 10.		Directors, Executive Officers and Corporate Governance			49
Item 11.		Executive Compensation			49
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			49
Item 13.		Certain Relationships and Related Transactions, and Director Independence			49
Item 14.		Principal Accountant Fees and Services			49
PART IV
Item 15.		Exhibits and Financial Statement Schedules			50
Signatures					53
Exhibit 10.1.1
Exhibit 10.6
Exhibit 10.7
Exhibit 10.8
Exhibit 21.1
Exhibit 23.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 99.1

Special Note Regarding Forward-Looking Statements

Certain statements in this Annual Report on Form 10-K contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, which represent the expectations or beliefs of our management, including, but not limited to, statements concerning the banking industry and our operations, performance, financial condition and growth. For this purpose, any statements contained in this Report that are not statements of historical fact may be deemed forward-looking statements. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “can,” “estimate,” or “continue” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, certain of which are beyond our control, and actual results may differ materially depending on a variety of important factors, including competition, general economic and market conditions, changes in interest rates, changes in the value of real estate and other collateral securing loans, interest rate sensitivity and exposure to regulatory and legislative changes, and other risks and uncertainties described in our periodic reports filed with the Securities and Exchange Commission, including this Annual Report, and particularly the sections “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Although we believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove to be inaccurate. Therefore, we can give no assurance that the results contemplated in the forward-looking statements will be realized. The inclusion of this forward-looking information should not be construed as a representation by us or any person that the future events, plans, or expectations contemplated by us will be achieved. We undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

PART I

Item 1.		Business

General

Georgia-Carolina Bancshares, Inc. (the “Company” or “we,” “us,” “our”) is a one-bank holding company and owns 100% of the issued and outstanding stock of First Bank of Georgia (the “Bank”), an independent, locally owned, state-chartered commercial bank which opened for business in 1989. The Bank operates three branch offices in Augusta, Georgia, two branch offices in Martinez, Georgia and one branch office in Thomson, Georgia. The Bank is also the parent company of Willhaven Holdings, LLC, which holds certain other real estate of the Bank.

The Bank operates as a locally owned bank that targets the banking needs of individuals and small to medium-sized businesses by emphasizing personal service. The Bank offers a full range of deposit and lending services and is a member of an electronic banking network that enables its customers to use the automated teller machines of other financial institutions. In addition, the Bank offers commercial and business credit services, as well as various consumer credit services, including home mortgage loans, automobile loans, lines of credit, home equity loans and home improvement loans. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”).

The Company was incorporated under the laws of the State of Georgia in January 1997 at the direction of the Board of Directors of the Bank based on a plan of reorganization developed by the Board to substantially strengthen the Bank’s competitive position. The reorganization, in which the Bank became a wholly owned subsidiary of the Company, was completed in June 1997.

In September 1999, the Bank established a mortgage division which operates as First Bank Mortgage (the “Mortgage Division”). The Mortgage Division originates mortgage loans and offers a variety of other mortgage products. As of December 31, 2010, First Bank Mortgage had locations in the Augusta and Savannah, Georgia markets as well as the Jacksonville, Florida market.

In December 2003, the Bank established a financial services division which operates as FB Financial Services. FB Financial Services offers financial planning and investment services through its relationship with Linsco/Private Ledger (Member NASD/SIPC), one of the nation’s leading independent brokerage firms. A joint office of FB Financial Services and Linsco/Private Ledger is located in the Bank’s Main Office location on Wheeler Road in Augusta.

For further information responsive to this item, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this report.

Market Area and Competition

The primary service area of the Bank includes the counties of Richmond, Columbia and McDuffie, Georgia, the communities of Augusta, Martinez, Evans and Thomson, Georgia, and Aiken County, South Carolina, which are within a 40-mile radius of the Bank’s main office. The Bank encounters competition from other commercial banks, which offer a full range of banking services and compete for all types of services, especially deposits. In addition, in certain aspects of its banking business, the Bank also competes with credit unions, small loan companies, consumer finance companies, brokerage houses, insurance companies, money market funds and other financial service companies which attract customers that have traditionally been served by banks.

The extent to which other types of financial service companies compete with commercial banks has increased significantly over the past several years as a result of federal and state legislation which has permitted these organizations to compete for customers and offer products that have historically been offered by banks. The impact of this legislation and other subsequent legislation on the financial services industry cannot be predicted. See the “Supervision and Regulation” section that begins on the next page.

Asset/Liability Management

It is the objective of the Bank to manage assets and liabilities to provide a satisfactory, consistent level of profitability within the framework of established cash, loan investment, borrowing and capital policies. An investment committee is responsible for monitoring policies and procedures that are designed to ensure acceptable composition of the asset/liability mix, stability and leverage of all sources of funds while adhering to prudent banking practices. It is the overall philosophy of management to support asset growth primarily through growth of core deposits, which include deposits of all categories made by individuals, partnerships and corporations. Management of the Bank seeks to invest the largest portion of the Bank’s assets in commercial, consumer and real estate loans.

The Bank’s asset/liability mix is monitored on a daily basis and further evaluated with a quarterly report that reflects interest-sensitive assets and interest-sensitive liabilities. This report is prepared and presented to the Bank’s Investment Committee and Board of Directors. The objective of this policy is to control interest-sensitive assets and liabilities so as to minimize the impact of substantial movements in interest rates on the Company’s earnings.

Correspondent Banking

Correspondent banking involves the delivery of services by one bank to another bank which cannot provide that service from an economic or practical standpoint. The Bank purchases correspondent services offered by larger banks, including check collections, purchase and sale of federal funds, wire transfers, security safekeeping, investment services, coin and currency supplies, foreign exchange (currency and check collection), over line and liquidity loan participations, and sales of loans to or participations with correspondent banks. The Bank has established correspondent relationships with First National Bankers Bank, Federal Home Loan Bank of Atlanta and SunTrust Bank. As compensation for services provided by a correspondent, the Bank maintains certain balances with such correspondents in both non-interest bearing and interest bearing accounts. The Bank may also buy or sell loan participations with other non-correspondent banks.

Data Processing

In 2010 the Bank renewed its data processing servicing agreement with Fidelity Information Services, under which the Bank receives a full range of data processing services, including an automated general ledger, deposit accounting, commercial, real estate and installment lending data processing, remote deposit capture, central information file and ATM processing, and internet banking services, including bill pay and cash management services.

Employees

At December 31, 2010, the Company and the Bank employed 160 persons on a full-time basis and 6 persons on a part-time basis, including 53 officers.

Monetary Policies

The results of operations of the Bank are affected by credit policies of monetary authorities, particularly the Federal Reserve Board. The instruments of monetary policy employed by the Federal Reserve Board include open market operations in U.S. Government securities, changes in the discount rate on member bank borrowings, changes in reserve requirements against member bank deposits and limitations on interest rates which member banks may pay on time and savings deposits. In view of changing conditions in the national economy and in the money markets, as well as the effect of action by monetary and fiscal authorities, including the Federal Reserve Board, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or the business and earnings of the Bank.

SUPERVISION AND REGULATION

The following discussion sets forth the material elements of the regulatory framework applicable to bank holding companies and their subsidiaries and provides certain specific information relative to the Company and the Bank. The regulatory framework is intended primarily for the protection of depositors and the Deposit Insurance Fund and not for the protection of security holders and creditors. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions.

Recent Federal Legislation

Emergency Economic Stabilization Act of 2008. On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (the “EESA”) became law. Under the Troubled Asset Relief Program (“TARP”) authorized by EESA, the U.S. Treasury established a Capital Purchase Program (“CPP”) providing for the purchase of senior preferred shares of qualifying U.S. controlled banks, savings associations and certain bank and savings and loan holding companies. The Board of Directors of the Bank decided not to participate in the CPP. The EESA also established a Temporary Liquidity Guarantee Program (“TLGP”) that gives the FDIC the ability to provide a guarantee for newly-issued senior unsecured debt and non-interest bearing transaction deposit accounts at eligible insured institutions. The Board of Directors of the Bank elected to participate in the TLGP.

On February 17, 2009, the American Recovery and Reinvestment Act (“ARRA”) became law. The ARRA is a broad economic stimulus package that included additional restrictions on, and potential additional regulation of, financial institutions. The largest impact that the ARRA has on financial institutions is on those institutions that participated in the CPP program under TARP. Because the Board of Directors of the Bank decided not to participate in the CPP, the ARRA has little direct impact on the Bank at this time.

On March 23, 2009, the U.S. Treasury, in conjunction with the FDIC and Federal Reserve, announced the Public-Private Investment Program (the “PPIP”). Targeting illiquid real estate loans held on the books of financial institutions, referred to as legacy loans, and securities backed by loan portfolios, referred to as legacy securities, the PPIP is designed to open lending channels by facilitating a market for distressed assets. The PPIP has been structured to combine $75 to $100 billion in capital from TARP with capital from the private sector to generate $500 billion in purchasing power that will be used to buy legacy loans and legacy securities.

Effective January 1, 2010, all mortgagees who participate in FHA/VA programs of the U.S. Department of Housing and Urban Development (HUD) are subject to additional requirements. First Bank of Georgia’s Mortgage Division falls under the requirement of Section 203(b)(1) of the new “Helping Families Save Their Homes Act of 2009 (HFSH Act)” which requires that the Mortgage Division submit annual audited financial statements to HUD prepared and audited in accordance with HUD’s Consolidated Audit Guide for Audits of HUD Programs. The new requirements are a prudent safeguard that permits the FHA to ensure that those entities with which it does business are adequately capitalized to meet potential needs. The following reports are required to be submitted as part of that audit: an audit report on the basic consolidated financial statements, an audit report on internal controls as it relates to reporting and administering HUD-assisted programs and an audit report on compliance with applicable laws and regulations related to HUD-assisted programs. The required audit was completed in early 2011.

The Dodd-Frank Act. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law July 21, 2010 and results in sweeping changes in the regulation of financial institutions. Many provisions of the Dodd-Frank Act apply to, and are more likely to affect, larger financial institutions. However, the Dodd-Frank Act contains numerous other provisions that will affect community banks.

Certain of these provisions may have the consequence of increasing expenses and decreasing revenues of all community banking organizations. Further, the environment in which community banking organizations will operate in the future, including legislative and regulatory changes affecting, among other things, their capital, liquidity, and supervision, may have long-term effects on the business model and profitability of community banking organizations, which effects cannot, now, be predicted. The specific impact of the Dodd-Frank Act on the current and future financial performance of the bank, will, in large part, depend on the terms of the required regulations and policies to be developed and implemented by the appropriate regulatory agencies, pursuant to the Dodd-Frank Act.

The Dodd-Frank Act affects a number of statutory changes that are, together with the regulations to be promulgated thereunder, likely to affect community banks. Certain of these changes are discussed below, as follows:

•

Assessment Base for Deposit Insurance. The Dodd-Frank Act changes the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital, eliminates the ceiling on the size of the Deposit Insurance Fund, and increases the floor applicable to the size of the Deposit Insurance Fund, which may require an increase in the level of assessments for institutions such as the bank.

•

Deposit Insurance Limits. The Dodd-Frank Act makes permanent the $250,000 limit on federal deposit insurance. Further, the Dodd-Frank Act provides unlimited federal deposit insurance, until December 31, 2012, for noninterest-bearing transaction accounts at all insured depository institutions. Noninterest-bearing transaction accounts, as defined in the Dodd-Frank Act, include only traditional, noninterest-bearing demand deposit (or checking) accounts that allow for an unlimited number of transfers and withdrawals at any time, whether held by a business, individual, or other type of depositor.

•

Interest on Demand Deposits. The Dodd-Frank Act repeals the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts. This will increase community banks’ cost of funds as they may need to pay interest on demand deposits of business entities to retain such customers.

•

Consumer Financial Protection Bureau. The Dodd-Frank Act centralizes responsibility for consumer financial protection by creating a new agency responsible for implementing, examining, and enforcing compliance with federal consumer financial laws. The new Consumer Financial Protection Bureau (“CFPB”) will be created under the Federal Reserve and will have rule-making, enforcement and investigative authority over consumer financial protection statutes. Many new consumer protection regulations are expected to be promulgated over the next few years. Many of those regulations will increase compliance costs for depository institutions or limit the fees they can charge. Community banks may find it more difficult than larger institutions to absorb the increased compliance costs and reduction in income. The new CFPB is specifically authorized to take action and promulgate rules to prohibit unfair, deceptive or abusive acts or practices in connection with any transaction with a consumer for a consumer financial product. Unfair and deceptive acts are already prohibited by the Federal Trade Commission Act and many state laws. However, the Dodd-Frank Act provides minimal guidance as to what activities will be considered “abusive.” This will likely be an area of significant consumer litigation in the future. State attorneys general are specifically granted the authority to enforce the regulations promulgated by the CFPB against national banks, which will likely result in increased enforcement of the new consumer regulations.

•

Holding Company Capital Requirements. The Dodd-Frank Act applies the same leverage and risk-based capital requirements that apply to insured depository institutions to most bank holding companies, which, among other things, will preclude holding companies from including in Tier 1 Capital trust preferred securities or cumulative preferred stock, if any, issued on or after May 19, 2010.

•

Source of Financial Strength. The Dodd-Frank Act codifies the existing policy of the Federal Reserve, whereunder a bank holding company serves as the “source of financial strength” for its subsidiary banks. This provision of the Dodd-Frank Act becomes effective on July 21, 2011, and clarifies ambiguities that might exist with respect to the requirements of a “policy”, as compared to the requirements of a “statute”. Presumably, the regulations promulgated under the statutory requirements will further clarify these source-of-financial-strength requirements for bank holding companies, together with the enforcement powers of the Federal Reserve relating thereto.

•

Loss of Federal Preemption. The Dodd-Frank Act restricts the preemption of state law by federal law and disallows subsidiaries and affiliates of national banks from availing themselves of such preemption.

•

Interstate Branching. The Dodd-Frank Act, subject to a state’s restrictions on intra-state branching, now permits interstate branching. Therefore a bank may enter a new state by acquiring a branch of an existing institution or by establishing a new branch office. As a result, there will be no need for the entering bank to acquire or merge with an existing institution in the target state. This ability to establish a de novo branch across state lines will have the effect of increasing competition within a community bank’s existing markets and will create a downward pressure on the franchise value for existing community banks.

•

Requirement for Mortgage Loans. The Dodd-Frank Act creates additional requirements for residential mortgage loans made by community banks and other mortgage lenders, including restrictions on prepayment penalties and yield-spread premiums, requirements for verification of a borrower’s ability to repay the mortgage loan, and other requirements and restrictions. The likely result of these provisions of the Dodd-Frank Act will be an increase in the compliance and management costs of community banks associated with the origination of residential mortgage loans.

•

Interchange Fees. The Dodd-Frank Act amends the Electronic Funds Transfer Act to, among other things, give the Federal Reserve, on and after July 21, 2010, the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer. Although community banks will be exempt from a cap on interchange fees, the cap on the fees of large banks, will create market forces that force all fees downward. Therefore, community banks should expect lower interchange revenues in the future.

The Company

Bank Holding Company Regulation. The Company is a bank holding company and a member of the Federal Reserve System under the Bank Holding Company Act of 1956 (the “BHC Act”). As such, the Company is subject to the supervision, examination and reporting requirements of the BHC Act, as well as other federal and state laws governing the banking business. The Federal Reserve Board is the primary regulator of the Company, and supervises the Company’s activities on a continual basis. The Company is required to furnish to the Federal Reserve an annual report of its operations at the end of each fiscal year, and such additional information as the Federal Reserve may require pursuant to the BHC Act. In general, the BHC Act limits bank holding company business to owning or controlling banks and engaging in other banking-related activities. The BHC Act requires that a bank holding company obtain the prior approval of the Federal Reserve before:

•

acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank;

•

taking any action that causes a bank to become a subsidiary of a bank holding company;

•

merging or consolidating with another bank holding company; or

•

acquiring most other operating companies.

Subject to certain state laws, a bank holding company that is adequately capitalized and adequately managed may acquire the assets of both in-state and out-of-state banks. Under the Gramm-Leach-Bliley Act (described below), a bank holding company meeting certain qualifications may apply to the Federal Reserve Board to become a financial holding company, and thereby engage (directly or through a subsidiary) in certain activities deemed financial in nature, such as securities brokerage and insurance underwriting. With certain exceptions, the BHC Act prohibits bank holding companies from acquiring direct or indirect ownership or control of voting shares in any company that is not a bank or a bank holding company unless the Federal Reserve Board determines such activities are incidental or closely related to the business of banking.

The Change in Bank Control Act of 1978 requires a person (or a group of persons acting in concert) acquiring “control” of a bank holding company to provide the Federal Reserve Board with 60 days’ prior written notice of the proposed acquisition. Following receipt of this notice, the Federal Reserve Board has 60 days (or up to 90 days if extended) within which to issue a notice disapproving the proposed acquisition. In addition, any “company” must obtain the Federal Reserve Board’s approval before acquiring 25% (5% if the “company” is a bank holding company) or more of the outstanding shares or otherwise obtaining control over the Company.

Financial Services Modernization. The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (the “Modernization Act”), enacted on November 12, 1999, amended the BHC Act and:

•

allows bank holding companies that qualify as “financial holding companies” to engage in a substantially broader range of non-banking activities than was permissible under prior law;

•

allows insurers and other financial services companies to acquire banks;

•

allows national banks, and some state banks, either directly or through operating subsidiaries, to engage in certain non-banking financial activities;

•

removes various restrictions that applied to bank holding company ownership of securities firms and mutual fund advisory companies; and

•

establishes the overall regulatory structure applicable to bank holding companies that also engage in insurance and securities operations.

If the Company, which has not obtained qualification as a “financial holding company,” were to do so in the future, the Company would be eligible to engage in, or acquire companies engaged in, the broader range of activities that are permitted by the Modernization Act, provided that if any of the Company’s banking subsidiaries were to cease to be “well capitalized” or “well managed” under applicable regulatory standards, the Federal Reserve Board could, among other things, place limitations on the Company’s ability to conduct these broader financial activities or, if the deficiencies persisted, require the Company to divest the banking subsidiary. In addition, if the Company were to be qualified as a financial holding company and any of its banking subsidiaries were to receive a rating of less than satisfactory under the Community Reinvestment Act of 1977 (the “CRA”), the Company would be prohibited from engaging in any additional activities other than those permissible for bank holding companies that are not financial holding companies. The broader range of activities in which financial holding companies are eligible to engage include activities that are determined to be “financial in nature,” including insurance underwriting, securities underwriting and dealing, and making merchant banking investments in commercial and financial companies.

Transactions with Affiliates. The Company and the Bank are deemed to be affiliates within the meaning of the Federal Reserve Act, and transactions between affiliates are subject to certain restrictions. Generally, the Federal Reserve Act limits the extent to which a financial institution or its subsidiaries may engage in “covered transactions” with an affiliate. It also requires all transactions with an affiliate, whether or not “covered transactions,” to be on terms substantially the same, or at least as favorable to the institution or subsidiary, as those provided to a non-affiliate. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and other similar types of transactions.

Tie-In Arrangements. The Company and the Bank cannot engage in certain tie-in arrangements in connection with any extension of credit, sale or lease of property or furnishing of services. For example, with certain exceptions, neither the Company nor the Bank may condition an extension of credit on either a requirement that the customer obtain additional services provided by either the Company or the Bank, or an agreement by the customer to refrain from obtaining other services from a competitor. The Federal Reserve Board has adopted exceptions to its anti-tying rules that allow banks greater flexibility to package products with their affiliates. These exceptions were designed to enhance competition in banking and non-banking products and to allow banks and their affiliates to provide more efficient, lower cost service to their customers.

Source of Strength; Cross-Guarantee. Under former Federal Reserve Board policy and now codified by the Dodd-Frank Act, the Company is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank. This support may be required at times when, absent such rule, the Company may not find itself able to provide it. Capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.

Under the Bank Holding Company Act, the Federal Reserve Board may require a bank holding company to terminate any activity or relinquish control of a non-bank subsidiary, other than a non-bank subsidiary of a bank, upon the Federal Reserve Board’s determination that such activity or control constitutes a serious risk to the financial soundness or stability of any subsidiary depository institution of the bank’s holding company. Further, federal bank regulatory authorities have additional discretion to require a bank holding company to divest itself of any bank or non-bank subsidiary if the agency determines that divestiture may aid the depository institution’s financial condition.

Subsidiary Dividends. The Company is a legal entity separate and distinct from the Bank. A major portion of the Company’s revenues results from amounts paid as dividends to the Company by the Bank. The Georgia Department of Banking and Finance’s approval must be obtained before the Bank may pay cash dividends out of retained earnings if (i) the total classified assets at the most recent examination of the Bank exceeded 80% of the equity capital, (ii) the aggregate amount of dividends declared or anticipated to be declared in the calendar year exceeds 50% of the net profits, after taxes but before dividends for the previous calendar year, or (iii) the ratio of equity capital to adjusted assets is less than 6%.

In addition, the Company and the Bank are subject to various general regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The appropriate federal regulatory authority is authorized to determine under certain circumstances relating to the financial condition of a bank or bank holding company that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. The appropriate federal regulatory authorities have indicated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsound and unsafe banking practice and that banking organizations should generally pay dividends only out of current operating earnings.

Incentive Compensation. On June 21, 2010, the Federal Reserve, along with the OCC, OTS, and FDIC issued final guidance on incentive compensation policies. The guidance is intended to ensure that the incentive compensation policies of financial institutions do not undermine the safety and soundness of such institutions by encouraging excessive risk-taking.

The agencies are working to incorporate oversight of incentive compensation policies as part of the regular, risk-focused examination process, of financial institutions that are not “large, complex banking organizations.” These reviews will be tailored to each financial institution based on the scope and complexity of the institution’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the financial institution’s supervisory ratings, which can affect the institution’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a financial institution if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the institution’s safety and soundness and the institution is not taking prompt and effective measures to correct the deficiencies.

The guidance is designed to ensure that incentive compensation arrangements at banking organizations appropriately tie rewards to longer-term performance and do not undermine the safety and soundness of the firm or create undue risks to the financial system. Because improperly structured compensation arrangements for both executive and non-executive employees may pose safety and soundness risks, the guidance applies not only to top-level managers, but also to other employees who have the ability to materially affect the risk profile of an organization, either individually or as part of a group.

The guidance is based upon the key principles that a financial institution’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the institution’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the institution’s board of directors.

The scope and content of banking regulators’ policies on executive compensation are continuing to develop and are likely to continue evolving in the near future. It cannot be determined at this time whether compliance with such policies will adversely affect the Company’s ability to hire, retain and motivate its key employees.

The Federal Reserve Board and the Dodd-Frank Act addressed loan officer origination compensation practices with new rules in 2010. See the discussion under “Other Regulations.”

State Law Restrictions. As a Georgia business corporation, the Company may be subject to certain limitations and restrictions under applicable Georgia corporate law.

The Bank

General. The Bank, as a Georgia state-chartered bank, is subject to regulation and examination by the State of Georgia Department of Banking and Finance, as well as the FDIC. Georgia state laws regulate, among other things, the scope of the Bank’s business, its investments, its payment of dividends to the Company, its required legal reserves and the nature, lending limit, maximum interest charged and amount of and collateral for loans. The laws and regulations governing the Bank generally have been promulgated by the Georgia Legislature to protect depositors and not to protect shareholders of the Company or the Bank.

Bank Lending Limit. In September 2009, the Bank became subject to revised regulations from the State of Georgia Department of Banking and Finance regarding its total aggregate lending limit to a single customer and that customer’s related entities. The new regulation revised the definition of how a single customer is defined. As a result, the Board of Directors approved an increase in the Bank’s statutory capital base in October 2009 by appropriating a portion of retained earnings. At December 31, 2010, the Bank’s statutory capital base totaled $40.0 million and consisted of $3.18 million in capital stock, $16.32 million of surplus and $20.50 million in appropriated retained earnings, allowing for a $10.0 million lending limit (25%).

Commercial Real Estate Lending. Lending operations that involve concentration of commercial real estate loans are subject to enhanced scrutiny by federal banking regulators. The regulators have issued guidance with respect to the risks posed by commercial real estate lending concentrations. Real estate loans generally include land development, construction loans, loans secured by multi-family property and nonfarm nonresidential real property where the primary source of repayment is derived from rental income associated with the property. The guidance prescribes the following guidelines for examiners to help identify institutions that are potentially exposed to concentration risk and may warrant greater supervisory scrutiny:

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total reported loans for construction, land development and other land represent 100 percent or more of the institutions total capital, or

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total commercial real estate loans as defined in the guidance represent 300 percent or more of the institution’s total capital and the outstanding balance of the institution’s commercial real estate loan portfolio has increased by 50 percent or more during the prior 36 months.

In October 2009, the federal banking agencies issued additional guidance on real estate lending that emphasizes these considerations.

Insider Credit Transactions. Banks are also subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to executive officers, directors, principal shareholders, or any related interests of such persons. Extensions of credit must be made on substantially the same terms, including interest rates and collateral, and follow credit underwriting procedures that are not less stringent than those prevailing at the time for comparable transactions with persons not covered above and who are not employees. Also, such extensions of credit must not involve more than the normal risk of repayment or present other unfavorable features.

Regulation W. The Federal Reserve Board has issued Regulation W, which codifies prior regulations under Sections 23A and 23B of the Federal Reserve Act and interpretative guidance with respect to affiliate transactions. Regulation W incorporates the exemption from the affiliate transaction rules but expands the exemption to cover the purchase of any type of loan or extension of credit from an affiliate. In addition, under Regulation W:

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a bank and its subsidiaries may not purchase a low-quality asset from an affiliate;

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covered transactions and other specified transactions between a bank or its subsidiaries and an affiliate must be on terms and conditions that are consistent with safe and sound banking practices; and

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with some exceptions, each loan or extension of credit by a bank to an affiliate must be secured by collateral with a market value ranging from 100% to 130%, depending on the type of collateral, of the amount of the loan or extension of credit.

Regulation W generally excludes all non-bank and non-savings association subsidiaries of banks from treatment as affiliates, except to the extent that the Federal Reserve Board decides to treat these subsidiaries as affiliates. Concurrently, with the adoption of Regulation W, the Federal Reserve Board has proposed a regulation which would further limit the amount of loans that could be purchased by a bank from an affiliate to not more than 100% of the bank’s capital and surplus. This regulation has not yet been adopted.

Federal Deposit Insurance Corporation Improvement Act. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (the “FDICIA”), all insured institutions must undergo regular on-site examinations by their appropriate banking agency. The cost of examinations of insured depository institutions and any affiliates may be assessed by the appropriate agency against each institution or affiliate as it deems necessary or appropriate. Insured institutions are required to submit annual reports to the FDIC, their federal regulatory agency, and their state supervisor when applicable. The FDICIA directs the FDIC to develop a method for insured depository institutions to provide supplemental disclosure of the estimated fair market value of assets and liabilities, to the extent feasible and practicable, in any balance sheet, financial statement, report of condition, or any other report of any insured depository institution. Each federal banking agency has prescribed, by regulation, non-capital safety and soundness standards for institutions under its authority. These standards cover internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, such other operational and managerial standards as the agency determines to be appropriate, and standards for asset quality, earnings and stock valuation.

Interstate Banking and Branching. The Dodd-Frank Act modified the federal statute governing de novo interstate branching by state member banks. As a result, as of July 22, 2010, a state member bank is authorized to open its initial branch in a host state by establishing a de novo branch at any location at which a bank chartered by that host state could be established as a branch. A host state is defined as a state, other than a bank’s home state, in which the bank seeks to establish and maintain a branch. A state member bank seeking to open a de novo interstate branch must file an application with the Federal Reserve in addition to adherence to state filing requirements and to capital, management, and community reinvestment standards.

Deposit Insurance and Assessments. The deposits of the Bank are currently insured to a maximum of $250,000 per depositor for substantially all depository accounts. The FDIC insurance also temporarily provides unlimited coverage for certain qualifying and participating non-interest bearing transaction accounts. The increased coverage is in effect until December 31, 2012.

In February 2011, the FDIC board of directors approved a final plan to impose parity in the deposit-insurance system by basing the assessment base on average total consolidated assets minus average tangible equity instead of domestic deposits. The proposed new initial base rate schedule will be substantially lower than the current one. Institutions in Risk Category I, which includes more than 90 percent of community banks, will be paying 5-9 basis points instead of the current base rate schedule of 12-16 basis points. Institutions in Risk Categories II, III and IV will pay 14, 23 and 35 basis points, respectively, compared to the current rates of 22, 32 and 45 basis points, respectively. In addition, the secured liability adjustment will be eliminated under the final rule (although secured liabilities will likely be reflected in a bank’s new assessment base), and the unsecured debt adjustment and the broker deposit adjustment will also stay but with some modifications. The new rate schedule would go into effect during the second quarter of 2011. Under the final rule, institutions with less than $1 billion in assets can report average weekly balances of their consolidated total assets rather than reporting average daily balances. The final rule will also allow institutions with less than $1 billion in average consolidated total assets to report the end-of-quarter amount of Tier 1 capital as a proxy for average tangible equity.

In February 2009, the FDIC had adopted a long-term DIF restoration plan, as well as an additional emergency assessment for 2009. The restoration plan increased base assessment rates for banks in all risk categories with the goal of raising the DIF reserve ratio from 0.40% to 1.15% within seven years. Banks in the best risk category paid initial base rates ranging from 12 to 16 basis points of assessable deposits beginning April 1, 2009, partially up from the initial base rate range of 12 to 14 basis points. Additionally, the FDIC adopted a final rule imposing a special emergency assessment on all financial institutions of 5 basis points of insured deposits as of June 30, 2009. The FDIC also adopted an interim rule that permitted an emergency special assessment after June 30, 2009 of up to ten basis points. Our special emergency assessment was collected on September 30, 2009. Currently, initial base rate assessments for all FDIC-insured institutions range from 12 to 45 basis points, with assessment rates of 12 to 16 basis points for banks in the best risk category.

On November 12, 2009, the FDIC adopted a final rule requiring insured depository institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009, and for all quarters of 2010, 2011, and 2012. The estimates were based on a 5% annual growth rate in its assessment rate and were included on each institution’s third quarter 2009 certified statement invoice. This three-year assessment prepayment was made on December 30, 2009 in addition to the regularly scheduled payment of the third quarter 2009 assessment. The Bank prepaid a total of approximately $2,313,000 for 2010, 2011 and 2012 under the new rule.

Community Reinvestment Act. The Community Reinvestment Act requires that, in connection with examinations of financial institutions within their respective jurisdictions, the Federal Reserve, the FDIC, or the Office of the Comptroller of the Currency, shall evaluate the record of each financial institution in meeting the credit needs of its local community, including low and moderate income neighborhoods. These factors are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility. Failure to adequately meet these criteria could impose additional requirements and limitations on the Bank. Under the Modernization Act, banks with aggregate assets of not more than $250 million will be subject to a Community Reinvestment Act examination only once every sixty months if the bank receives an outstanding rating, once every forty-eight months if it receives a satisfactory rating, and as needed if the rating is less that satisfactory. Additionally, under the Modernization Act, banks are required to publicly disclose the terms of various Community Reinvestment Act-related agreements.

The Modernization Act-Consumer Privacy. The Modernization Act also contains provisions regarding consumer privacy. These provisions require financial institutions to disclose their policy for collecting and protecting confidential information. Customers generally may prevent financial institutions from sharing personal financial information with nonaffiliated third parties except for third parties that market an institution’s own products and services. Additionally, financial institutions generally may not disclose consumer account numbers to any nonaffiliated third party for use in telemarketing, direct mail marketing, or other marketing to the consumer.

Capital Adequacy

Federal bank regulatory agencies use capital adequacy guidelines in the examination and regulation of bank holding companies and banks. If capital falls below minimum guideline levels, the holding company or bank may be denied approval to acquire or establish additional banks or non-bank businesses or to open new facilities.

The FDIC and Federal Reserve Board use risk-based capital guidelines for banks and bank holding companies. These are designed to make such capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. The guidelines are minimums, and the Federal Reserve Board has noted that bank holding companies contemplating significant expansion programs should not allow expansion to diminish their capital ratios and should maintain ratios well in excess of the minimum. The current guidelines require all bank holding companies and federally-regulated banks to maintain a minimum risk-based total capital ratio equal to 8%, of which at least 4% must be Tier 1 capital. Tier 1 capital for bank holding companies includes common shareholders’ equity, certain qualifying perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries, but excludes goodwill and most other intangibles and excludes the allowance for loan and lease losses. Tier 2 capital includes the excess of any preferred stock not included in Tier 1 capital, mandatory convertible securities, hybrid capital instruments, subordinated debt and intermediate term-preferred stock, and general reserves for loan and lease losses up to 1.25% of risk-weighted assets.

The FDIC and Federal Reserve Board also employ a leverage ratio, which is Tier 1 capital as a percentage of total assets less intangibles, to be used as a supplement to risk-based guidelines. The principal objective of the leverage ratio is to constrain the maximum degree to which a bank holding company or bank may leverage its equity capital base. A minimum leverage ratio of 3% is required for the most highly rated bank holding companies and banks. Other bank holding companies, banks and bank holding companies seeking to expand, however, are required to maintain minimum leverage ratios of at least 4% to 5%.

The FDICIA created a statutory framework of supervisory actions indexed to the capital level of the individual institution. Under the “prompt corrective action” regulations adopted by the FDIC and the Federal Reserve Board, an institution is assigned to one of five capital categories, ranging from “well-capitalized” to “critically undercapitalized”, depending on its total risk-based capital ratio, Tier 1 risk-based capital ratio, and leverage ratio, together with certain subjective factors. Institutions which are deemed to be “significantly undercapitalized” or “critically undercapitalized” are subject to certain mandatory supervisory corrective actions.

Increases in regulatory capital requirements appear to be likely, but the federal regulators have not identified specific increases. In September 2009, the U.S. Treasury Department released a set of principles for financial regulatory reform, including a general recommendation for increased capital for banks and bank holding companies across the board (with even higher requirements for systemically risky banking organizations). In December 2009, the Basel Committee on Board Supervision issued proposals for regulatory capital changes, including greater emphasis on common equity as a component of Tier 1 capital. On September 12, 2010, the Basel Committee announced the calibration of its revised capital framework for major financial institutions. The increased capital requirements will be phased into national laws and regulations by January 1, 2013. Both sets of proposals also recommend enhanced leverage and liquidity requirements.

Other Laws and Regulations

International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001. On October 26, 2001, the USA PATRIOT Act was enacted. It includes the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001 (the “IMLAFA”) and strong measures to prevent, detect and prosecute terrorism and international money laundering. As required by the IMLAFA, the federal banking agencies, in cooperation with the U.S. Treasury Department, established rules that generally apply to insured depository institutions and U.S. branches and agencies of foreign banks.

Among other things, the new rules require that financial institutions implement reasonable procedures to (1) verify the identity of any person opening an account; (2) maintain records of the information used to verify the person’s identity; and (3) determine whether the person appears on any list of known or suspected terrorists or terrorist organizations. The rules also prohibit banks from establishing correspondent accounts with foreign shell banks with no physical presence and encourage cooperation among financial institutions, their regulators and law enforcement to share information regarding individuals, entities and organizations engaged in terrorist acts or money laundering activities. The rules also limit a financial institution’s liability for submitting a report of suspicious activity and for voluntarily disclosing a possible violation of law to law enforcement.

Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 (the “SOX”) was enacted to address corporate and accounting fraud. It established a new accounting oversight board that enforces auditing standards and restricts the scope of services that accounting firms may provide to their public company audit clients. Among other things, it also; (i) requires chief executive officers and chief financial officers to certify to the accuracy of periodic reports filed with the Securities and Exchange Commission (the “SEC”); (ii) imposes new disclosure requirements regarding internal controls, off-balance-sheet transactions, and pro forma (non-GAAP) disclosures; (iii) accelerates the time frame for reporting of insider transactions and periodic disclosures by certain public companies; and (iv) requires companies to disclose whether or not they have adopted a code of ethics for senior financial officers and whether the audit committee includes at least one “audit committee financial expert.”

The SOX requires the SEC, based on certain enumerated factors, to regularly and systematically review corporate filings. To deter wrongdoing, it: (i) subjects bonuses issued to top executives to disgorgement if a restatement of a company’s financial statements was due to corporate misconduct; (ii) prohibits an officer or director from misleading or coercing an auditor; (iii) prohibits insider trades during pension fund “blackout periods”; (iv) imposes new criminal penalties for fraud and other wrongful acts; and (v) extends the period during which certain securities fraud lawsuits can be brought against a company or its officers.

Effective September 21, 2010, the Securities and Exchange Commission (SEC) adopted amendments to its rules to conform to Section 404(c) of the SOX, as added by Section 989G of the Dodd-Frank Act. Section 404(c) provides that the SOX shall not apply to any audit report prepared by an issuer that is neither an accelerated filer nor a large accelerated filer as defined in Rule 12b-2 under the Securities Exchange Act of 1934.

With market value of its common equity less than $75 million, the Company does not qualify as an accelerated filer or large accelerated filer and therefore is not presently subject to Section 404(c) of the SOX for the year ended December 31, 2010. Prior to the enactment of the Dodd-Frank Act, the Company, as a non-accelerated filer, would have been required to include an attestation report from its public accounting firm on internal control over financial reporting in this year’s annual report filed with the SEC.

The Company’s management continues to be responsible for establishing and maintaining adequate internal control over financial reporting as detailed in Item 9A.

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

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effective April 1, 2011, the Federal Reserve Board will implement new rules regarding all persons who originate loans, including mortgage loan officers and brokers. The new rules include, among other things, prohibition of compensation to loan originators based on the terms or conditions of a loan, prohibiting dual payment of a mortgage originator from both the consumer and the creditor, prohibiting a loan officer from steering a consumer to a lender with less favorable terms that increase the loan officer or broker’s compensation. The Dodd-Frank Act also addressed loan originator compensation in a similar manner but with additional provisions. The Bank’s Mortgage Division has addressed these new rules and is prepared for the April 1, 2011 implementation date;

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the federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

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the Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

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the Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

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the Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies;

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the Fair Debt Collection Practices Act, governing the manner in which consumer debts may be collected by collection agencies; and

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the rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.

The deposit operations of the Bank are also subject to:

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

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

Financial Institutions Reform Recovery and Enforcement Act. This act expanded and increased the enforcement powers of the regulators in terms of both civil and criminal penalties available for use by the federal regulatory agencies against depository institutions and certain “institution-affiliated parties.” Institution-affiliated parties primarily include management, employees, and agents of a financial institution, as well as independent contractors and consultants such as attorneys and accountants and others who participate in the conduct of the financial institution’s affairs. These practices can include the failure of an institution to timely file required reports or the filing of false or misleading information or the submission of inaccurate reports. Civil penalties may be as high as $1,000,000 a day for such violations. Criminal penalties for some financial institution crimes have been increased to twenty years. In addition, regulators are provided with greater flexibility to commence enforcement actions against institutions and institution-affiliated parties. Possible enforcement actions include the termination of deposit insurance. Furthermore, banking agencies’ power to issue cease-and-desist orders were expanded. Such orders may, among other things, require affirmative action to correct any harm resulting from a violation or practice, including restitution, reimbursement, indemnification or guarantees against loss. A financial institution may also be ordered to restrict its growth, dispose of certain assets, rescind agreements or contracts, or take other actions as determined by the ordering agency to be appropriate.

Privacy and Credit Reporting. Financial institutions are required to disclose their policies for collecting and protecting confidential information. Customers generally may prevent financial institutions from sharing nonpublic personal financial information with nonaffiliated third parties except under narrow circumstances, such as the processing of transactions requested by the consumer. Additionally, financial institutions generally may not disclose consumer account numbers to any nonaffiliated third party for use in telemarketing, direct mail marketing or other marketing to consumers. It is the Bank’s policy not to disclose any personal information unless required by law.

Like other lending institutions, the Bank utilizes credit bureau data in its underwriting activities. Use of such data is regulated under the Federal Credit Reporting Act on a uniform, nationwide basis, including credit reporting, prescreening, sharing of information between affiliates, and the use of credit data. The Fair and Accurate Credit Transactions Act of 2003 (the “FACT Act”) authorizes states to enact identity theft laws that are not inconsistent with the conduct required by the provisions of the FACT Act.

Check 21. The Check Clearing for the 21st Century Act gives “substitute checks,” such as a digital image of a check and copies made from that image, the same legal standing as the original paper check. Some of the major provisions include:

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allowing check truncation without making it mandatory;

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demanding that every financial institution communicate to accountholders in writing a description of its substitute check processing program and their rights under the law;

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legalizing substitutions for and replacements of paper checks without agreement from consumers;

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retaining in place the previously mandated electronic collection and return of checks between financial institutions only when individual agreements are in place;

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requiring that when accountholders request verification, financial institutions produce the original check (or a copy that accurately represents the original) and demonstrate that the account debit was accurate and valid; and

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requiring the re-crediting of funds to an individual’s account on the next business day after a consumer proves that the financial institution has erred.

Effect of Governmental Monetary Policies. Our earnings will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve Bank’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve Board have major effects upon the levels of bank loans, investments and deposits through its open market operations in United States government securities and through its regulation of the discount rate on borrowings of member banks and the reserve requirements against member bank deposits. It is not possible to predict the nature or impact of future changes in monetary and fiscal policies.

Future Legislation. Various other legislative and regulatory initiatives affecting the banking regulatory system are from time to time introduced in Congress and state legislatures, as well as regulatory agencies. Currently, the United States Congress is actively considering further significant changes to the manner of regulating financial institutions. The current legislation being considered and other future legislation regarding financial institutions may change banking statutes and the operating environment of the Company in substantial and unpredictable ways, and could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance depending upon whether any of this potential legislation will be enacted, and if enacted, the effect that it or any implementing regulations, would have on the financial condition or results of operations of the Company. The nature and extent of future legislative and regulatory changes affecting financial institutions is very unpredictable at this time. The Company cannot determine the ultimate effect that such potential legislation, if enacted, would have upon its financial condition or operations.

Item 1A.		Risk Factors

The following are certain significant risks that our management believes are specific to our business. This should not be viewed as an all-inclusive list.

Recent Market, Legislative and Regulatory Events

The banking crisis that began in 2008 has adversely affected our industry, including our business, and may continue to have an adverse effect on our business in the future.

Dramatic declines in the housing market over the past three years, with falling home prices and increasing foreclosures, unemployment and under-employment, have negatively impacted the credit performance of real estate related loans and resulted in significant write-downs of asset values by financial institutions. These write-downs, initially of asset-backed securities (“ABS”) but spreading to other securities and loans, have caused many financial institutions to seek additional capital, to reduce or eliminate dividends, to merge with larger and stronger institutions and, in some cases, to fail. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced or ceased providing funding to borrowers, including to other financial institutions. This economic turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally. The resulting economic pressure on consumers and the lack of confidence in the financial markets have adversely affected our business, financial condition and results of operations. Market developments may affect consumer confidence levels and may cause adverse changes in payment patterns, causing increases in delinquencies and default rates, which may impact our charge-offs and provision for credit losses. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial institutions industry.

Market volatility may have an adverse effect on us.

The capital and credit markets have been experiencing volatility and disruption for more than 36 months. From time to time, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength. If market disruption and volatility continue or worsen, there can be no assurance that we will not experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and results of operations.

The financial distress of other financial institutions could have a material adverse impact on us.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have in the past led, and could in the future lead, to market-wide liquidity problems and thereafter losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure due us. There is no assurance that any such losses would not materially and adversely affect our business, financial condition, and results of operations.

There can be no assurance that legislation and federal programs enacted in response to the financial crisis that began in 2008 will fully stabilize the U.S. financial system, and such legislation and programs may adversely affect us.

In response to the financial issues affecting the banking system and financial markets and going concern threats to investment banks and other financial institutions, the U.S. Congress enacted the Emergency Economic Stabilization Act of 2008 (“EESA”). The EESA provides the U.S. Secretary of the Treasury with the authority to establish a Troubled Asset Relief Program (“TARP”) with up to $700 billion of residential or commercial mortgages and any securities, obligations or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, as well as any other financial instrument that the U.S. Secretary of the Treasury, after consultation with the Chairman of the Federal Reserve, determines the purchase of which is necessary to promote financial market stability, which include capital injections into financial institutions.

As part of the EESA, the Treasury Department developed a Capital Purchase Program to purchase up to $250 billion in senior preferred stock from qualifying financial institutions. The Capital Purchase Program was designed to strengthen the capital and liquidity positions of viable institutions and to encourage banks and thrifts to increase lending to creditworthy borrowers. Following the passage of the EESA and pursuant to its powers under the Federal Deposit Insurance Act (FDIA), the FDIC established the Temporary Liquidity Guarantee Program (“TLGP”) that gave the FDIC the ability to provide a guarantee for newly-issued senior unsecured debt and non-interest bearing transaction deposit accounts at eligible insured institutions. For non-interest bearing transaction deposit accounts, a 10 basis point annual rate surcharge was applied to deposit amounts in excess of $250,000. This program expired on December 31, 2010.

The U.S. Congress or federal banking regulatory agencies could adopt additional regulatory requirements or restrictions in response to threats to the financial system and such changes may adversely affect our operations. To the extent the market does not respond favorably to the existing or new programs or if they do not function as intended, our business and results of operations could be adversely affected.

Contemplated and proposed legislation, state and federal programs, and increased government control or influence may adversely affect us by increasing the uncertainty in our lending operations and exposing us to increased losses. Statutes and regulations may be altered that may potentially increase our costs to service and underwrite mortgage loans.

Similarly, any other program established by the FDIC under the systemic risk exception of the FDIA may adversely affect us whether we participate or not. Our participation in the TLGP requires we pay additional insurance premiums to the FDIC. Additionally, the FDIC has increased premiums on insured accounts, levied special assessments and required banks to prepay their deposit assessments in response to market developments. The increase of failures in the banking industry have significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured deposits. These FDIC requirements adversely affect the results of operations of the Bank.

Recent legislative reforms could result in our business becoming subject to significant and extensive additional regulations and/or could adversely affect our results of operations and financial condition.

The Dodd-Frank Act will result in sweeping changes in the regulation of financial institutions aimed at strengthening the sound operation of the financial services sector. The Dodd-Frank Act’s provisions that have received the most public attention generally have been those applying to or more likely to affect larger institutions. However, it contains numerous other provisions that will affect all banks and bank holding companies, and will fundamentally change the system of oversight described in the section entitled “Supervision and Regulation”, above.

Some of these provisions may have the consequence of increasing our expenses, decreasing our revenues, and changing the activities in which we choose to engage. The environment in which banking organizations will operate after the financial crisis, including legislative and regulatory changes affecting capital, liquidity, supervision, permissible activities, corporate governance and compensation, changes in fiscal policy and steps to eliminate government support for banking organizations, may have long-term effects on the business model and profitability of banking organizations that cannot now be foreseen. The specific impact of the Dodd-Frank Act on our current activities or new financial activities we may consider in the future, our financial performance, and the markets in which we operate, will depend on the manner in which the relevant agencies develop and implement the required rules and the reaction of market participants to these regulatory developments.

Our Material Business Risks

An economic downturn, especially one affecting Richmond, Columbia and McDuffie counties, could adversely affect our business.

Our success significantly depends upon the growth in population, income levels, deposits, and housing in our primary market areas of Richmond, Columbia and McDuffie counties in the State of Georgia. If these communities do not grow or if prevailing local or national economic conditions are unfavorable, our business may be adversely affected. An economic downturn would likely harm the quality of our loan portfolio and reduce the level of our deposits, which in turn would hurt our business. If the strength of the U.S. economy in general and the strength of the local economies in which the Company conducts operations declines, or continues to decline, this could result in, among other things, a deterioration in credit quality, increased loan charge-offs and delinquencies or a reduced demand for credit, including a resultant effect on the Bank’s loan portfolio and allowance for loan losses. These factors could materially adversely affect the Company’s financial condition and results of operations. Unlike many larger institutions, we are not able to spread the risks of unfavorable local economic conditions across a large number of diversified economies. The Bank is a community bank and as such, is mandated by the Community Reinvestment Act and other regulations to conduct most of its lending activities within the geographic area where it is located. As a result, the Bank and its borrowers may be especially vulnerable to the consequences of changes in the local economy.

Weakness in the real estate market, including the secondary residential mortgage loan markets, has adversely affected us and may continue to adversely affect us.

Significant ongoing disruptions in the secondary market for residential mortgage loans have reduced the demand for and impaired the liquidity of many mortgage loans. The effects of ongoing mortgage market challenges, combined with the ongoing correction in residential real estate market prices and reduced levels of home sales, could result in further price reductions in single family home values, adversely affecting the value of collateral securing mortgage loans that we hold, mortgage loan originations and profits on sale of mortgage loans. Declining real estate prices and higher interest rates have also caused higher delinquencies and losses on certain mortgage loans. These trends could continue. Continued declines in real estate values, home sales volumes and financial stress on borrowers as a result of job losses, interest rate resets on adjustable rate mortgage loans or other factors could have further adverse effects on borrowers, resulting in higher delinquencies and greater charge-offs in future periods, which could adversely affect our financial condition or results of operations. Additionally, decreases in real estate values might adversely affect the creditworthiness of state and local governments, and this might result in decreased profitability or credit losses from loans made to such governments.

Our loan portfolio includes a substantial amount of commercial real estate and construction and development loans, which may have more risks than residential or consumer loans.

Our commercial real estate loans and construction and development loans account for a substantial portion of our total loan portfolio. These loans generally carry larger loan balances and usually involve a greater degree of financial and credit risk than home equity, residential or consumer loans. The increased financial and credit risk associated with these types of loans is a result of several factors, including the concentration of principal in a limited number of loans and to borrowers in similar lines of business, the size of loan balances, the effects of general economic conditions on income-producing properties and the increased difficulty of evaluating and monitoring these types of loans.

Furthermore, the repayment of loans secured by commercial real estate in some cases is dependent upon the successful operation, development or sale of the related real estate or commercial project. If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired. This cash flow shortage may result in the failure to make loan payments. In these cases, we may be compelled to modify the terms of the loan. As a result, repayment of these loans may, to a greater extent than other types of loans, be subject to adverse conditions in the real estate market or economy.

Many of our borrowers have more than one loan or credit relationship with us.

Many of our borrowers have more than one commercial real estate or commercial business loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to, for example, a one-to-four family residential mortgage loan.

Our decisions regarding credit risk and reserves for loan losses may materially and adversely affect our business.

Making loans and other extensions of credit is an essential element of our business. Although we seek to mitigate risks inherent in lending by adhering to specific underwriting practices, our loans and other extensions of credit may not be repaid. The risk of nonpayment is affected by a number of factors, including:

•

the duration of the credit;

•

credit risks of a particular customer;

•

changes in economic and industry conditions; and

•

in the case of a collateralized loan, risks resulting from uncertainties about the future value of the collateral.

We attempt to maintain an appropriate allowance for loan losses to provide for potential losses in our loan portfolio. However, there is no precise method of predicting credit losses, since any estimate of loan losses is necessarily subjective and the accuracy depends on the outcome of future events. Therefore, we face the risk that charge-offs in future periods will exceed our allowance for loan losses and that additional increases in the allowance for loan losses will be required. Additions to the allowance for loan losses would result in a decrease of our net income, and possibly our capital.

We face strong competition for customers, which could prevent us from obtaining customers and may cause us to pay higher interest rates to attract deposits.

The banking business is highly competitive and we experience competition in each of our markets from many other financial institutions. We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds and other mutual funds, as well as super-regional, national and international financial institutions that operate offices in our primary market areas and elsewhere. We compete with these institutions both in attracting deposits and in making loans. In addition, in order to grow we have to attract customers from other existing financial institutions or from new residents. Many of our competitors are well-established, larger financial institutions. These institutions offer some services, such as extensive and established branch networks and trust services, which we currently do not provide. In addition, competitors that are not depository institutions are generally not subject to the extensive regulations that apply to us. There is a risk that we will have a competitive disadvantage with these other financial institutions in our markets, and that we may have to pay higher interest rates to attract deposits, resulting in reduced profitability. In new markets that we may enter, we will also compete against well-established community banks that have developed relationships within the community.

Changes in monetary policies and interest rates could reduce our profitability and adversely affect our business.

Our profitability is affected by credit policies of monetary authorities, particularly the Federal Reserve, and depends in large part on our net interest income, which is the difference between interest earned from interest-earning assets, such as loans and investment securities, and interest paid on interest-bearing liabilities, such as deposits and borrowings. Our net interest income will be adversely affected if market interest rates change such that the interest we pay on deposits and borrowings increases faster than the interest we earn on loans and investments. Many factors cause changes in interest rates, including governmental monetary policies and domestic and international economic and political conditions. While we intend to manage the effects of changes in interest rates by adjusting the terms, maturities, and pricing of our assets and liabilities, our efforts may not be effective and our financial condition and results of operations may suffer.

Our recent operating results may not be indicative of our future operating results.

In 2010 we experienced a decline in loan demand, but were able to see an increase in total assets due to strong deposit growth. We may not be able to sustain our historical rate of growth from prior years and may not even be able to grow our business at all. Consequently, our historical results of operations are not necessarily indicative of our future operations. Various factors, such as economic conditions, regulatory and legislative considerations and competition may also impede our ability to expand our market presence. If we experience a significant decrease in our rate of growth, our results of operations and financial condition may be adversely affected because a high percentage of our operating costs are fixed expenses.

We could be adversely affected by the loss of one or more key personnel or by an inability to attract and retain employees.

We believe that our growth and future success will depend in large part on the skills of our executive and other senior officers. The loss of the services of one or more of these officers could impair our ability to continue to implement our business strategy. Our executive and other senior officers have extensive and long-standing ties within our primary market areas and substantial experience with our operations, and have contributed significantly to our growth. If we lose the services of any one of them, he or she may be difficult to replace and our business could be materially and adversely affected.

Our success also depends, in part, on our continued ability to attract and retain experienced and qualified employees. The competition for such employees is intense, and our inability to continue to attract, retain and motivate employees could adversely affect our business.

The success of our growth strategy depends on our ability to identify and recruit individuals with experience and relationships in the markets in which we intend to expand.

We intend to expand our banking network over the next several years into both new and existing markets in and around our current market areas. We believe that to expand into new markets successfully, we must identify and recruit experienced key management members with local expertise and relationships in these markets. We expect that competition for qualified management in the markets in which we may expand will be intense and that there will be a limited number of qualified persons with knowledge of and experience in the community banking industry in these markets. Even if we identify individuals that we believe could assist us in establishing a presence in a new market, we may be unable to recruit these individuals away from their current employers. In addition, the process of identifying and recruiting individuals with the combination of skills and attributes required to carry out our strategy is often lengthy. Our inability to identify, recruit and retain talented personnel to manage new offices effectively and in a timely manner would limit our growth and could materially adversely affect our business, financial condition and results of operations.

We will face risks with respect to future expansion and acquisitions or mergers.

We may expand into new lines of business or offer new products or services. Any expansion plans we undertake may also divert the attention of our management from the operation of our core business, which could have an adverse effect on our results of operations. We may also seek to acquire other financial institutions or assets of those institutions. Any of these activities would involve a number of risks such as the time and expense associated with evaluating new lines of business or new markets for expansion, hiring or retaining local management and integrating new acquisitions. Even if we acquire new lines of business or new products or services, they may not be profitable. Nor can we say with certainty that we will be able to consummate, or if consummated, successfully integrate, future acquisitions, if any, or that we will not incur disruptions or unexpected expense in integrating such acquisitions. Any given acquisition, if and when consummated, may adversely affect our results of operations and financial condition.

Our growth may require us to raise additional capital that may not be available when it is needed or may not be available on terms acceptable to us.

We are required by regulatory authorities to maintain adequate levels of capital to support our operations. To support our continued growth, we may need to raise additional capital. Our 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. Accordingly, we cannot be assured of our ability to raise additional capital, if needed, on terms acceptable to us. If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth and acquisitions could be materially impaired.

We are subject to extensive regulation that could limit or restrict our activities.

We operate in a highly regulated industry and are subject to examination, supervision and comprehensive regulation by various regulatory agencies. Our compliance with these regulations is costly and restricts certain of our activities, including payment of dividends, mergers and acquisitions, purchase and sale of investments, origination and sale of loans, interest rates charged on loans, interest rates paid on deposits and locations of offices. We are also subject to regulatory capital requirements established by our regulators, which require us to maintain adequate capital to support our growth. If we fail to meet these capital and other regulatory requirements, our ability to grow, our cost of funds and FDIC insurance, our ability to borrow funds, our ability to pay dividends on common stock, and our ability to make acquisitions, could be materially and adversely affected.

The laws and regulations applicable to the banking industry could change at any time, and we cannot predict the effects of these changes on our business and profitability. Because government regulation greatly affects the business and financial results of all banks and bank holding companies, our cost of compliance could adversely affect our profitability. In addition, the purpose of these laws and regulations is to protect and insure the interests and deposits of our depositors, and are not for the protection of our investors.

Efforts to comply with the Sarbanes-Oxley Act have involved significant expenditures, and non-compliance with the Sarbanes-Oxley Act may adversely affect us.

The Sarbanes-Oxley Act of 2002, and the related rules and regulations promulgated by the Securities and Exchange Commission, have increased the scope, complexity and cost of corporate governance, reporting and disclosure practices. We have experienced, and we expect to continue to experience, greater compliance costs, including costs related to internal controls, as a result of the Sarbanes-Oxley Act.

Effective September 21, 2010, the SEC adopted amendments to its rules and forms to implement revised Section 404(c) to exclude smaller, non-accelerated filers. We are a non-accelerated filer and have market value of common equity less than $75 million, and therefore are not presently subject to the SOX Section 404 as it relates to certain internal control requirements. However, management continues to be responsible for establishing and maintaining adequate internal control over financial reporting. For further discussion see “Other Laws and Regulations.”

We may be required to pay significantly higher FDIC premiums in the future.

Recent insured institution failures, as well as deterioration in banking and economic conditions, have significantly increased the loss provisions of the FDIC, resulting in a decline in the designated reserve ratio to historical lows. The FDIC expects a higher rate of insured institution failures in the next few years compared to recent years. Therefore, the reserve ratio may continue to decline. Additionally, the EESA temporarily increased the limit on FDIC coverage to $250,000 through December 31, 2009, which was extended to December 31, 2013 on May 20, 2009. On July 21, 2010, the $250,000 FDIC coverage limit was made permanent by the enactment of the Dodd-Frank Act.

These developments have caused the premiums assessed by the FDIC to increase. Specifically, beginning April 1, 2009, the deposit insurance base assessment increased and may be decreased or increased in the future based on unsecured debt, secured liabilities, and brokered deposits held by the institution, for a resulting assessment range of 17 to 43 basis points per $100 for “well capitalized” institutions that are not “New Institutions”. The FDIC is allowed to impose special emergency assessments on or after September 30, 2009, of up to 10 basis points per quarter, if necessary, to maintain public confidence in FDIC insurance. Additionally, on November 12, 2009, the FDIC announced that it would require insured institutions to prepay slightly over three years of estimated insurance assessments. Payment of the prepaid assessment, along with our regular fourth quarter assessment, was due on December 31, 2009, and was based on our total base assessment rate in effect on September 30, 2009. Since we book such payments at the end of each quarter, the prepayment does not affect our reporting of net income; however, the prepayment does have a negative effect on our cash flow. These higher FDIC base assessment rates and special assessments have an adverse impact on our results of operations and financial condition.

We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. If there are additional bank or financial institution failures, we may be required to pay even higher FDIC premiums than the recently increased levels. These announced increases and any future increases in FDIC insurance premiums may materially and adversely affect our results of operations. Additionally, the Dodd-Frank Act changed the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital. Although we may see a decline in premium as a result of this change, there is still risk that future assessments could increase again.

Changes in accounting policies and practices, as may be adopted by the regulatory agencies, the Financial Accounting Standards Board, or other authoritative bodies, could materially impact our financial statements.

Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time, the regulatory agencies, the Financial Accounting Standards Board, and other authoritative bodies change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be difficult to predict and can materially impact how we record and report our financial condition and results of operations.

We must respond to rapid technological changes, and these changes may be more difficult to implement or more expensive than anticipated.

We will have to respond to future technological changes. Specifically, if our competitors introduce new products and services embodying new technologies, or if new industry standards and practices emerge, then our existing product and service offerings, technology and systems may be impaired or become obsolete. Further, if we fail to adopt or develop new technologies or to adapt our products and services to emerging industry standards, then we may lose current and future customers, which could have a material adverse effect on our business, financial condition and results of operations. The financial services industry is changing rapidly and in order to remain competitive, we must continue to enhance and improve the functionality and features of our products, services and technologies. These changes may be more difficult to implement or more expensive than we anticipate.

Risks Related to Investing in Our Common Stock

There is not an active trading market for our common stock and an active trading market may never develop or be maintained.

There is not an active trading market for our common stock and, as none should be expected to develop in the foreseeable future, an investor may be unable to liquidate his or its investment and should be prepared to bear the economic risk of an investment in our common stock for an indefinite period. We cannot predict the extent to which an active public market for our common stock may develop or be sustained.

We do not anticipate declaring cash dividends in the foreseeable future for both regulatory and business reasons.

Holders of our common stock are not entitled to receive dividends unless declared by our board of directors. Since our inception, we have not paid any cash dividends on our common stock and do not intend to pay cash dividends in the foreseeable future. Even if we decide to pay dividends, our ability to do so will be limited by regulatory restrictions, our financial condition, results of operations, capital requirements, level of indebtedness and such other factors as our board of directors deems relevant. Our ability to pay dividends is limited by our obligations to maintain sufficient capital and by other restrictions on the payment of dividends that are applicable to us. Investors should not purchase our common stock if they require dividend income.

Our securities are not FDIC insured.

Our securities, including our common stock, are not savings or deposit accounts or our other obligations, and are not insured by the Deposit Insurance Fund, the FDIC or any other governmental agency and are subject to investment risk, including the possible loss of the entire investment.

We may issue additional shares of our common stock that could result in dilution of an investor’s investment.

Our board of directors may determine from time to time that there is a need to obtain additional capital through the issuance of additional shares of common stock or other securities. These issuances would likely dilute the ownership interests of our investors and may dilute the per share book value of our common stock. In addition, the issuance of additional shares of common stock under our stock option and equity incentive plans will further dilute each investor’s ownership of our common stock.

Item 1B.		Unresolved Staff Comments

Not Applicable

Item 2.		Properties

The Company’s and the Bank’s main office is located at 3527 Wheeler Road in Augusta, Georgia. This office was opened in September 2005. The Bank operates three banking offices in Augusta, Georgia, two banking offices in Martinez, Georgia and one banking office in Thomson, Georgia. All of these offices are owned by the Bank. The following table sets forth the location of each of the Bank’s branch offices and the date each branch opened for business:

Branch		Date Opened
Hill Street Office, Thomson, Georgia		January 1989
Daniel Village Office, Augusta, Georgia		March 1999
West Town Office, Martinez, Georgia		October 1999
Medical Center Office, Augusta, Georgia		January 2001
Fury’s Ferry Road Office, Martinez, Georgia		April 2002
Main Office, Augusta, Georgia		September 2005

In January 2002, the Bank purchased a site located in Evans, Georgia. In March 2005, the Bank entered into a contract to purchase another site in Evans, Georgia and finalized that purchase in February 2006. The Bank will continue to evaluate the possibility of constructing a full service banking facility on one of the two sites in Evans, Georgia.

The Bank also leases office space at one location in Augusta to house the Mortgage Division. The Mortgage Division also operates offices in Savannah, Georgia and Jacksonville, Florida out of leased office space. However, the Bank will be closing the Jacksonville, Florida office as of April 1, 2011.

Item 3.		Legal Proceedings

There are no material pending legal proceedings to which the Company or the Bank is a party or of which any of their properties are the subject; nor are there material proceedings known to the Company or the Bank to be contemplated by any governmental authority; nor are there material proceedings known to the Company or the Bank, pending or contemplated, in which any director, officer or affiliate or any principal security holder of the Company or the Bank, or any associate of any of the foregoing is a party or has an interest adverse to the Company or the Bank.

Item 4.		[Removed and Reserved]

PART II

Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

The Company’s common stock trades on the Over-The-Counter Bulletin Board under the symbol “GECR”. The market for the Company’s common stock must be characterized as a limited market due to its relatively low trading volume and lack of analyst coverage. The following table sets forth for the periods indicated the quarterly high and low sales prices per share as reported by the Over-The-Counter Bulletin Board. These quotations also reflect inter-dealer prices without retail mark-ups, mark-downs, or commissions and may not necessarily represent actual transactions. The share prices below reflect all stock splits.

		High				Low
Fiscal year ended December 31, 2010
First Quarter		$	8.00			$	6.25
Second Quarter		$	8.00			$	6.55
Third Quarter		$	8.00			$	5.15
Fourth Quarter		$	8.00			$	5.36
Fiscal year ended December 31, 2009
First Quarter		$	10.00			$	5.75
Second Quarter		$	9.98			$	5.25
Third Quarter		$	8.00			$	6.25
Fourth Quarter		$	8.00			$	6.25

Holders of Common Stock

As of March 21, 2011, the number of holders of record of the Company’s common stock was approximately 572.

Dividends

No cash dividends were paid by the Company during the years ended December 31, 2010 or 2009. Future dividends will be determined by the Board of Directors of the Company in light of circumstances existing from time to time, including the Company’s growth, financial condition and results of operations, the continued existence of the restrictions described below on the Bank’s ability to pay dividends and other factors that the Board of Directors of the Company considers relevant. In addition, the Board of Directors of the Company may determine, from time to time, that it is prudent to pay special nonrecurring cash dividends in addition to or in lieu of regular cash dividends. Such special dividends will depend upon the financial performance of the Company and will take into account its capital position. No special dividend is presently contemplated.

Because the Company’s principal operations are conducted through the Bank, the Company generates cash to pay dividends primarily through dividends paid to it by the Bank. Accordingly, any dividends paid by the Company will depend on the Bank’s earnings, capital requirements, financial condition and other factors. Under Georgia law, the Bank may pay dividends only when and if the Bank is not insolvent. In addition, dividends may not be declared or paid at any time when the Bank does not have combined paid-in capital and appropriated retained earnings equal to at least 20% of the Bank’s capital stock. Moreover, dividends may not be paid by the Bank without the prior approval of the Georgia Banking Department, if the dividends are in excess of specified amounts fixed by the Georgia Banking Department.

Equity Compensation Plan Information

The Company currently has three equity compensation plans: (i) the 1997 Stock Option Plan, which was approved by shareholders; (ii) the 2004 Incentive Plan, which was approved by shareholders; and (iii) the Directors Equity Incentive Plan, which has not been approved by shareholders. The following table provides information as of December 31, 2010 regarding the Company’s then existing compensation plans and arrangements:

Number of securities

to be issued upon

Weighted-average

Number of securities remaining

exercise of

exercise price of

available for future issuance

outstanding

outstanding

under equity compensation

options, warrants and

options, warrants

plans (excluding securities

rights

and rights

reflected in column (a))

Plan category

(a)

(b)

(c)

Equity compensation plans approved by security holders:

1997 Stock Option Plan

159,038

$

9.60

—

2004 Incentive Plan

124,251

$

10.38

200,874

Equity compensation plans not approved by security holders

—

—

54,539

Total

283,289

$

9.94

255,413

Directors Equity Incentive Plan

The Directors Equity Incentive Plan provides that non-employee directors of the Company and the Bank may elect to purchase shares of the Company’s common stock in lieu of receiving cash for director fees earned in each calendar quarter. The purchase price for shares acquired under the plan is $2.00 less than the average closing market price of the Company’s common stock for the last ten trading days of each quarter as reported on the Over-the-Counter Bulletin Board. A non-employee director may join the plan at any time during the last seven days of each calendar quarter. The Directors Equity Incentive Plan also provides non-employee directors of the Company and the Bank annual retainer shares in the form of 1) base award shares, plus 2) bonus shares for service as Board chairman, plus 3) bonus shares for service on various committees. Non-employee advisory board members also qualify to receive annual award shares from the Directors Equity Incentive Plan provided they meet an agreed upon annual attendance requirement.

Item 6.		Selected Financial Data

Our selected consolidated financial data presented below as of and for the years ended December 31, 2006 through 2010 is derived from our audited consolidated financial statements. Our audited consolidated financial statements as of December 31, 2010 and 2009 and for each of the years in the three year period ended December 31, 2010 are included elsewhere in this report. All years have been restated as necessary for stock dividends and stock splits.

		At and for the Years Ended December 31,
		($ in thousands, except per share data)
		2010				2009				2008				2007				2006
Selected Balance Sheet Data:
Assets		$	495,311			$	484,013			$	460,828			$	447,869			$	417,471
Investment securities and FHLB stock			79,431				47,289				59,795				60,393				55,404
Loans, held for investment			316,809				336,849				336,293				322,201				280,883
Loans, held for sale			46,570				58,135				28,402				39,547				56,758
Allowance for loan losses			7,866				5,072				4,284				5,059				4,386
Deposits			414,749				405,240				377,009				379,966				341,342
Short-term borrowings			3,469				7,297				15,859				17,473				38,661
Long-term debt			25,000				25,000				25,400				10,500				600
Other liabilities			7,119				3,203				3,476				3,959				4,742
Shareholders’ equity			44,976				43,273				39,084				35,971				32,126
Selected Results of Operations Data:
Interest income			24,409				24,604				26,371				29,019				25,335
Interest expense			7,290				9,722				13,038				15,706				11,969
Net interest income			17,119				14,882				13,333				13,313				13,366
Provision for loan losses			8,355				3,082				1,456				909				898
Net interest income after provision for provision for loan losses			8,764				11,800				11,877				12,404				12,468
Non-interest income			13,246				14,157				9,920				9,932				9,800
Non-interest expense			20,543				20,902				17,745				17,816				17,911
Income before taxes			1,467				5,055				4,052				4,520				4,357
Income tax expense (benefit)			(66	)			1,303				1,252				1,619				1,460
Net income		$	1,533			$	3,752			$	2,800			$	2,901			$	2,897
Per Share Data
Net income — basic		$	0.44			$	1.08			$	0.82			$	0.85			$	0.86
Net income — diluted		$	0.44			$	1.07			$	0.80			$	0.83			$	0.83
Book value		$	12.72			$	12.37			$	11.31			$	10.58			$	9.51
Weighted average number of shares outstanding:
Basic			3,519,408				3,484,309				3,426,860				3,393,224				3,370,277
Diluted			3,519,408				3,492,871				3,503,856				3,508,606				3,489,564

		At and for the Years Ended December 31,
		2010				2009				2008				2007				2006
Performance Ratios:
Return on average assets			0.32	%			0.79	%			0.62	%			0.69	%			0.78	%
Return on average equity			3.41	%			8.93	%			7.36	%			8.39	%			9.57	%
Net interest margin (1)			3.83	%			3.37	%			3.15	%			3.36	%			3.81	%
Efficiency ratio (2)			67.65	%			71.98	%			76.31	%			76.64	%			77.39	%
Loan (excl LHFS) to deposit ratio			76.39	%			83.12	%			89.20	%			84.80	%			82.29	%
Asset Quality Ratios:
Nonperforming loans to total loans			1.72	%			1.57	%			1.39	%			3.20	%			0.68	%
Nonperforming assets to total loans (excl LHFS + OREO)			2.82	%			3.12	%			3.57	%			3.73	%			1.03	%
Allowance for loan losses to nonperforming loans			125.71	%			81.94	%			84.65	%			43.77	%			191.86	%
Allowance for loan losses to total loans (excl LHFS)			2.48	%			1.51	%			1.27	%			1.57	%			1.56	%
Capital Ratios:
Average equity to average assets			9.36	%			8.81	%			8.41	%			8.16	%			8.11	%
Leverage ratio			9.32	%			8.96	%			8.59	%			8.18	%			7.85	%
Tier 1 risk-based capital ratio			11.75	%			10.50	%			9.82	%			9.39	%			9.25	%
Total risk-based capital ratio			13.01	%			11.74	%			10.91	%			10.72	%			10.50	%

Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion provides information about the major components of the results of operations and financial condition, liquidity and capital resources of the Company and Bank and should be read in conjunction with the “Business” and “Financial Statements” sections included elsewhere in this report. Information given in response to Item 6 of this report, “Selected Financial Data,” is incorporated by reference in response to this Item 7.

Critical Accounting Policies

The accounting and reporting policies of the Company and Bank are in accordance with accounting principles generally accepted in the United States and conform to general practices within the banking industry. Application of these principles requires management to make estimates or judgments that affect the amounts reported in the financial statements and the accompanying notes. These estimates are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates or judgments. Certain policies inherently have a greater reliance on the use of estimates, and as such have a greater possibility of producing results that could be materially different than originally reported.

Estimates or judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record the valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available. When third-party information is not available, valuation adjustments are estimated in good faith by management primarily through the use of internal cash flow modeling techniques.

The most significant accounting policies for the Company and Bank are presented in Note 1 to the consolidated financial statements. These policies, along with the disclosures presented in the other financial statement notes, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Management views critical accounting policies to be those that are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial statements. Management currently views the determination of the allowance for loan losses to be the only critical accounting policy.

The allowance for loan losses represents management’s estimate of probable credit losses inherent in the loan portfolio. Estimating the amount of the allowance for loan losses requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on non-impaired loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the consolidated balance sheet. Loan losses are charged off against the allowance, while recoveries of amounts previously charged off are credited to the allowance. A provision for loan losses is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors.

The allowance for loan losses consists of an allocated component and an unallocated component. The components of the allowance for loan losses represent an estimation made pursuant to either ASC 450-20, “Contingencies: Loss Contingencies,” or ASC 310-10-35, “Receivables: Subsequent Measurement.” The allocated component of the allowance for loan losses reflects expected losses resulting from analyses developed through specific credit allocations for individual loans and historical loss experience for each loan category. The specific credit allocations are based on regular analyses of all loans over a fixed-dollar amount where the internal credit rating is at or below a predetermined classification. These analyses involve a high degree of judgment in estimating the amount of loss associated with specific loans, including estimating the amount and timing of future cash flows and collateral values. The historical loss element is determined using the average of actual losses incurred over prior years for each type of loan. The historical loss experience is adjusted for known changes in economic conditions and credit quality trends such as changes in the amount of past due and nonperforming loans. The resulting loss allocation factors are applied to the balance of each type of loan after removing the balance of impaired loans from each category.

There are many factors affecting the allowance for loan losses; some are quantitative while others require qualitative judgment. Although management believes its process for determining the allowance adequately considers all the potential factors that could potentially result in credit losses, the process includes subjective elements and may be susceptible to significant change. To the extent actual outcomes differ from management’s estimates, additional provisions for loan losses could be required that could adversely affect the Bank’s earnings or financial position in future periods.

Additional information on the Bank’s loan portfolio and allowance for loan losses can be found in the “Loan Portfolio” section of this Item 7. Note 1 to the consolidated financial statements also includes additional information on the Bank’s accounting policies related to the allowance for loan losses.

Consolidated Financial Information

Certain consolidated financial information for the Company and Bank as of and for the years ended December 31, 2010, 2009 and 2008 is presented below:

		2010								2009								2008
		Total Assets				Net Income				Total Assets				Net Income				Total Assets				Net Income
		(Dollar amounts in thousands)
GECR consolidated		$	495,311			$	1,533			$	484,013			$	3,752			$	460,828			$	2,800
The Bank		$	495,223				1,665			$	483,916				3,919			$	460,726				2,983
The Company						$	(132	)						$	(167	)						$	(183	)

The Company incurred $200,418, $253,524 and $269,108 in operational costs for the years ended December 31, 2010, 2009 and 2008, respectively. These costs were partially offset by income tax benefits of $68,142, $86,198 and $86,497 for 2010, 2009 and 2008, respectively. In total, the net losses for the Company were $132,276, $167,326, and $182,611 for the years ended December 31, 2010, 2009 and 2008, respectively. The Company’s operational costs are primarily funded by proceeds from the exercise of stock options.

The Company’s line of credit issued in June 2009 with its correspondent bank, First National Bankers Bank, which provided the Company the ability to draw a principal sum of $1.0 million in periodic advances matured on June 5, 2010. The Company did not renew the line of credit. The outstanding principal balance at December 31, 2009 was $0.

Results of Operations — Comparison of 2010 and 2009

Balance Sheet

For the year ended December 31, 2010, the consolidated Company and Bank experienced an increase in total assets. Total assets increased $11.3 million or 2.3%, to $495.3 million at December 31, 2010 from $484.0 million at December 31, 2009. Average total assets were $480.2 million in 2010 and $476.5 million in 2009, an increase of $3.7 million or 0.8%. Loans held for sale decreased from $58.1 million at December 31, 2009 to $46.6 million at December 31, 2010, a decrease of $11.5 million or 19.8%. All other loans decreased with a portfolio balance, net of allowance for loan losses, of $309.0 million at December 31, 2010 compared to $331.8 million at December 31, 2009, a decrease of $22.8 million or 6.9%. Commercial and industrial loans decreased $2.6 million or 11.4%, from $22.9 million at December 31, 2009 to $20.3 million at December 31, 2010. Real estate mortgage loans increased $4.4 million or 2.2%, from $199.2 million at December 31, 2009 to $203.6 million at December 31, 2010, and real estate construction loans decreased $21.0 million or 19.6%, from $107.4 million at December 31, 2009 to $86.4 million at December 31, 2010. Installment and consumer loans decreased $0.9 million or 12.0%, from $7.5 million at December 31, 2009 to $6.6 million at December 31, 2010. The decreases in most categories are primarily the result of weaker demand during the economic recession experienced over the past two years. Construction loans declined primarily as a result of borrower pay downs and charge offs in our Savannah market. However, the increase in real estate mortgage loans is the result of the overall stability of the Richmond, McDuffie, and Columbia County, Georgia market areas. The decline in loan demand coupled with strong deposit growth, created abundant liquidity, resulting in significant increases in cash and due from banks as well as securities available-for-sale. Cash and due from banks grew $18.6 million or 142.8% to $31.7 million at December 31, 2010 from $13.1 million at December 31, 2009. At December 31, 2010 and 2009 interest bearing balances with correspondent banks comprised $25.5 million and $2.1 million, respectively, of cash and due from banks. Securities available-for-sale increased $32.4 million or 73.0% to $76.9 million at December, 31, 2010 compared to $44.5 million at December 31, 2009.

The allowance for loan losses was $7.9 million at December 31, 2010 and $5.1 million at December 31, 2009. This represents an increase of $2.8 million or 55.1%. The increase in the allowance is based upon management’s rating and assessment of the loan portfolio and the credit risk inherent in the portfolio, and reflects the state of the economy and an increase in loan charge-offs during 2010. The Bank’s ratio of allowance for loan losses to gross loans was 2.16% at December 31, 2010 and 1.28% at December 31, 2009. Substantially all loans held for sale originated by the Bank consist of well-secured single family residential mortgage loans which are originated with a sales commitment and are sold in the secondary market shortly after origination, thus greatly reducing the Bank’s credit risk. The Bank’s ratio of allowance for loan losses to gross loans, excluding loans held for sale, was 2.48% at December 31, 2010, compared to 1.51% at December 31, 2009.

Foreclosed real estate decreased $1.7 million or 38.4% to $2.8 million at December 31, 2010 compared to $4.5 million at December 31, 2009.

The asset growth of the Bank during 2010 was primarily funded through deposit account activity within the Bank’s existing market. Total deposit accounts at December 31, 2010 were $414.7 million, an increase of $9.5 million or 2.3%, from $405.2 million at December 31, 2009. Brokered deposits totaled $30.4 million at December 31, 2010, a decrease of $32.1 million or 51.3%, compared to $62.5 million at December 31, 2009. The Bank utilizes Promontory Interfinancial Network (CDARS) to obtain and retain large time deposits of customers seeking full FDIC insurance coverage. Through network member institutions the CDARS deposits are broken into smaller deposits in order to receive insurance coverage beyond the FDIC’s $250,000 limit. CDARS deposits decreased $27.7 million or 67.2% to $13.5 million at December 31, 2010 from $41.2 million at December 31, 2009. This decline in brokered and CDARS deposits is a direct result of the Bank’s increased reliance on core deposits. Deposits excluding brokered and CDARs increased $69.5 million or 23.0% to $371.1 million at December 31, 2010 compared to $301.7 million at December 31, 2009. Total other borrowings by the Bank were $32.1 million at December 31, 2010, a slight decrease of $0.2 million or 0.6%, from the balance of $32.3 million at December 31, 2009. However, due to a change to ASC 860-10 “Transfers and Servicing” regarding loan participations, $3.6 million of participated loans were classified as “other borrowings” at December 31, 2010.

The Bank’s loan to deposit ratio was 87.6% at December 31, 2010 and 97.5% at December 31, 2009. Excluding mortgage loans held for sale, this ratio was 76.4% for 2010 and 83.1% for 2009.

Income Statement

Interest income was $24.4 million for 2010 compared to $24.6 million for 2009, a slight decrease of $0.2 million or 0.8%. This decrease was primarily the result of declining interest rates and weakened loan demand during the economic recession experienced over the past two years. Interest expense decreased $2.4 million or 25.0%, from $9.7 million for 2009 to $7.3 million for 2010. This decrease in interest expense was primarily due to the lower cost of funds resulting from the falling interest rate environment since 2008. In an effort to obtain growth in deposit accounts to maintain steady borrowing levels and reduce the need for brokered deposits, the Bank focuses its marketing efforts in the local markets served by the Bank. As a result of these efforts, the Bank experienced growth in interest bearing deposits in 2010. Interest bearing deposits increased $9.6 million or 2.6%, from $363.5 million at December 31, 2009 to $373.1 million at December 31, 2010. This increase in interest bearing deposits was primarily the result of an increase in money market accounts. Non-interest bearing deposits decreased slightly by $0.2 million or 0.5%, from $41.8 million at December 31, 2009 to $41.6 million at December 31, 2010. Net interest income was $17.1 million for 2010 compared to $14.9 million for 2009, an increase of $2.2 million or 14.8%. Net interest margin increased to 3.83% for the year ended December 31, 2010 from 3.37% for 2009.

The provision for loan losses was $8.4 million for 2010 compared to $3.1 million for 2009, an increase of $5.3 million or 171.0%. This increase is the result of management’s detailed review of the Bank’s loan portfolio and adequacy of the allowance for loan losses, the level of the Bank’s non-performing assets, charge-offs and loan delinquencies, and the overall weakness in the economy. The majority of the increase in the provision for loan losses was due to a provision of $4,706,000 in the second quarter of 2010. As a result of the increase in the provision for loan losses, the ratio of the allowance for loan losses to total loans, excluding loans held for sale, increased to 2.48% at December 31, 2010 from 1.51% at December 31, 2009. Net charge-offs were $5.6 million in 2010, up from the $2.3 million in 2009, resulting in annual charge-off to average loans ratios of 1.49% and 0.67%, respectively. Management considers the current allowance for loan losses to be appropriate based upon its detailed analysis of the potential risk in the portfolio; however, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional provisions will not be required.

Non-interest income for 2010 was $13.2 million compared to $14.2 million for 2009, a decrease of $1.0 million or 7.0%. This decrease in 2010 is primarily due to the $1.7 million gain on sale of 183 lots and another parcel of land in the Willhaven Subdivision in Augusta, Georgia in 2009, partially offset by a higher 2010 gain on sale of mortgage loans. Gain on sale of mortgage loans increased from $9.7 million in 2009 to $10.8 million in 2010, an increase of $1.1 million or 11.3%. However, the mortgage origination volume sold in 2010 was $553.2 million compared to $606.5 million in 2009, a decrease of $53.3 million or 8.8%.

Non-interest expense decreased from $20.9 million in 2009 to $20.5 million in 2010, a decrease of $0.4 million or 1.7%. This decrease is primarily the result of reduced incentive expense, FDIC assessment cost, and control of other expenses, offset by higher salaries and other real estate expenses.

In total, net income decreased in 2010 by $2.2 million or 59.1%, from $3.7 million in 2009 to $1.5 million in 2010 as a result of each of the above factors.

CONSOLIDATED AVERAGE BALANCE SHEETS
(Dollar amounts in thousands)

Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential

The following table presents the average balance sheet of the consolidated Company for the years ended December 31, 2010, 2009 and 2008. Also presented is the consolidated Company’s actual interest income and expense from each asset and liability, the average yield of each interest-earning asset and the average cost of each interest-bearing liability. This table includes all major categories of interest-earning assets and interest-bearing liabilities:

		Year Ended December 31,
		2010												2009												2008
						Interest				Average								Interest				Average								Interest				Average
		Average				Income/				Yield /				Average				Income/				Yield /				Average				Income/				Yield /
		Balance				Expense				Rate				Balance				Expense				Rate				Balance				Expense				Rate
ASSETS
INTEREST-EARNING ASSETS
Loans, net of unearned income		$	373,779			$	22,379				5.99	%		$	386,961			$	22,260				5.75	%		$	360,689			$	23,186				6.43	%
Investment securities			54,978				1,989				3.62	%			52,672				2,337				4.44	%			61,375				3,100				5.05	%
Fed funds sold & cash in banks			18,202				41				0.23	%			4,051				7				0.17	%			3,996				85				2.13	%
Total interest-earning assets			446,959				24,409				5.46	%			443,684				24,604				5.55	%			426,060				26,371				6.19	%
NON-INTEREST-EARNING ASSETS
Cash and due from banks			8,226												8,686												6,296
Bank premises and fixed assets			9,476												9,877												10,260
Accrued interest receivable			1,657												1,748												1,956
Other assets			20,019												17,506												12,978
Allowance for loan losses			(6,158	)											(5,026	)											(5,190	)
Total assets		$	480,179											$	476,475											$	452,360
LIABILITIES AND SHAREHOLDERS’ EQUITY
INTEREST-BEARING DEPOSITS
NOW accounts		$	38,473			$	226				0.59	%		$	35,300			$	211				0.60	%		$	31,674			$	376				1.19	%
Savings accounts			52,102				570				1.09	%			52,515				587				1.12	%			67,259				1,408				2.09	%
Money market accounts			24,826				309				1.24	%			11,945				139				1.16	%			8,773				167				1.90	%
Time accounts			246,359				5,232				2.12	%			256,146				7,808				3.05	%			231,736				9,999				4.31	%
Total interest-bearing deposits			361,760				6,337				1.75	%			355,906				8,745				2.46	%			339,442				11,950				3.52	%
OTHER INTEREST-BEARING LIABILITIES
Borrowed funds			29,190				953				3.26	%			38,614				977				2.53	%			37,390				1,088				2.91	%
Total interest-bearing liabilities			390,950				7,290				1.86	%			394,520				9,722				2.46	%			376,832				13,038				3.46	%
NON-INTEREST-BEARING LIABILITIES AND SHAREHOLDERS’ EQUITY
Demand deposits			42,066												36,439												33,501
Other liabilities			2,202												3,519												3,971
Shareholders’ equity			44,961												41,997												38,056
Total liabilities and shareholders’ equity		$	480,179											$	476,475											$	452,360
Net interest income						$	17,119											$	14,882											$	13,333
Interest rate spread											3.60	%											3.08	%											2.73	%
Net interest margin											3.83	%											3.37	%											3.15	%
Average loans (excl LHFS) to average deposits											81.52	%											86.73	%											88.67	%

Rate/Volume Analysis of Net Interest Income

The following table sets forth information regarding changes in net interest income attributable to changes in average balances and changes in rates for the periods indicated. The effect of a change in average balance has been determined by applying the average rate in the earlier period to the change in average balance in the later period, as compared with the earlier period. The balance of the change in interest income or expense and net interest income has been attributed to a change in average rate. Non-accruing loans have been included in the category “Net loans and loans held for sale.”

		Comparison of Years Ended												Comparison of Years Ended
		December 31, 2010 and 2009												December 31, 2009 and 2008
		(in thousands)
		Increase (Decrease) Due to
		Balance				Rate				Total				Balance				Rate				Total
Interest earned on:
Tax-exempt securities		$	(38	)		$	(5	)		$	(43	)		$	82			$	(7	)		$	75
Taxable securities			148				(453	)			(305	)			(558	)			(280	)			(838	)
Federal funds sold and cash in banks			23				11				34				2				(80	)			(78	)
Net loans and loans held for sale			(758	)			877				119				1,689				(2,615	)			(926	)
Total interest income		$	(625	)		$	430			$	(195	)		$	1,215			$	(2,982	)		$	(1,767	)
Interest paid on:
NOW deposits			19				(4	)			15				43				(208	)			(165	)
Money market deposits			150				20				170				60				(88	)			(28	)
Savings deposits			(5	)			(12	)			(17	)			(309	)			(512	)			(821	)
Time deposits			(298	)			(2,278	)			(2,576	)			1,053				(3,244	)			(2,191	)
Borrowed funds			(238	)			214				(24	)			36				(147	)			(111	)
Total interest expense		$	(372	)		$	(2,060	)		$	(2,432	)		$	883			$	(4,199	)		$	(3,316	)
Increase (decrease) in net interest income		$	(253	)		$	2,490			$	2,237			$	332			$	1,217			$	1,549

Loan Portfolio

The Bank engages in a full complement of lending activities, including commercial, consumer/installment and real estate loans. As of December 31, 2010, the Bank’s loan portfolio, excluding loans held for sale, consisted of 64.2% real estate mortgage loans, 27.3% real estate construction loans, 6.4% commercial loans and 2.1% consumer/installment loans.

The Bank’s real estate mortgage loans include commercial mortgage lending and residential mortgage lending. The Bank’s commercial mortgage loans are generally secured by office buildings, retail establishments and other types of property. The Bank’s residential mortgage loans are primarily single-family residential loans secured by the residential property.

The Bank’s real estate construction loans consist of residential and commercial construction loans as well as land development loans. These loans are primarily construction and development loans to builders in the Augusta and Savannah, Georgia areas and the Jacksonville, Florida area.

Commercial lending is directed principally towards businesses whose demands for funds fall within the Bank’s legal lending limits and which are potential deposit customers of the Bank. This category of loans includes loans made to individual, partnership or corporate borrowers, for a variety of business purposes. These loans include short-term lines of credit, short- to medium-term plant and equipment loans, loans for general working capital and letters of credit.

The Bank’s consumer loans consist primarily of installment loans to individuals for personal, family or household purposes, including automobile loans to individuals and pre-approved lines of credit.

While risk of loss in the Bank’s loan portfolio is primarily tied to the credit quality of the various borrowers, risk of loss may also increase due to factors beyond the Bank’s control, such as local, regional and/or national economic downturns. General conditions in the real estate market may also impact the relative risk in the Bank’s real estate portfolio.

With respect to loans which exceed the Bank’s lending limits or established credit criteria, the Bank may originate such loans and sell them to another bank. The Bank may also purchase loans originated by other banks. Management of the Bank does not believe that its loan purchase participations will necessarily pose any greater risk of loss than loans which the Bank originates.

The following table presents the categories of loans contained in the Bank’s loan portfolio as of the end of the five most recent fiscal years and the total amount of all loans for such periods:

		December 31,
Type of Loan		2010				2009				2008				2007				2006
		(in thousands)
Commercial and industrial		$	20,298			$	22,906			$	31,173			$	29,582			$	27,692
Real estate — construction			86,418				107,429				105,032				89,580				73,502
Real estate — residential			61,194				66,050				65,958				53,557				47,319
Real estate — commercial			142,351				133,140				125,194				139,111				121,822
Consumer			6,606				7,468				9,092				10,487				10,609
Subtotal		$	316,867			$	336,993			$	336,449			$	322,317			$	280,944
Less:
Unearned income and deferred loan fees			(58	)			(144	)			(156	)			(116	)			(61	)
Allowance for possible loan losses			(7,866	)			(5,072	)			(4,284	)			(5,059	)			(4,386	)
Total (net of allowance)		$	308,943			$	331,777			$	332,009			$	317,142			$	276,497

In addition to the above, the Bank also had $46.6 million and $58.1 million of single family residential mortgage loans held for sale that were originated by the Bank’s Mortgage Division at December 31, 2010 and 2009, respectively.

The table below presents an analysis of maturities of certain categories of loans as of December 31, 2010:

		Due in 1
		Year or				Due in 1 to				Due After
Type of Loan		Less				5 Years				5 Years				Total
		(In thousands)
Commercial and industrial		$	10,962			$	9,336			$	—			$	20,298
Real estate — construction			77,342				8,994				82				86,418
Total		$	88,304			$	18,330			$	82			$	106,716

The following is a presentation of an analysis of sensitivities of certain loans (those presented in the maturity table above) to changes in interest rates as of December 31, 2010 (in thousands):

Loans due after 1 year with predetermined interest rates		$	17,037
Loans due after 1 year with floating interest rates		$	1,375
Total loans due after 1 year		$	18,412

The following table presents information regarding non-accrual and past due loans at the dates indicated:

		December 31,
		2010				2009				2008				2007				2006
		(Dollars in thousands)
Loans accounted for on a non-accrual basis
Number			50				63				56				65				49
Amount		$	6,257			$	6,190			$	5,061			$	11,558			$	2,286
Accruing loans which are contractually past due 90 days or more as to principal and interest payments
Number			—				—				3				4				2
Amount		$	—			$	—			$	1			$	18			$	71

Accrual of interest is discontinued when a loan becomes 90 days past due as to principal and interest or when, in management’s judgment, the interest will not be collectible in the normal course of business. Additional interest income of approximately $179,000 in 2010 would have been recorded if all loans accounted for on a non-accrual basis had been current in accordance with their original terms. No interest income has been recognized in 2010 on loans that have been accounted for on a non-accrual basis.

The following table presents loans classified as “troubled debt restructurings” as defined in ASC 310-40:

		December 31,
		2010				2009				2008				2007				2006
		(Dollars in thousands)
Troubled debt restructurings		$	9,250			$	4,188			$	—			$	—			$	—

At December 31, 2010, there were no loans classified for regulatory purposes as doubtful, substandard or special mention that have not been disclosed above which (i) represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity or capital resources, or (ii) represent material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms.

Summary of Loan Loss Experience

An analysis of the Bank’s loss experience is furnished in the following table for the periods indicated.

		Years Ended December 31,
		2010				2009				2008				2007				2006
		(Dollar amounts in thousands)
Allowance for loan losses, beginning of year		$	5,072			$	4,284			$	5,059			$	4,386			$	3,756
Charge-offs:
Real estate — construction			3,663				1,382				1,107				—				—
Real estate — residential			980				553				798				28				98
Real estate — commercial			850				—				26				—				—
Commercial and industrial			139				208				223				163				106
Consumer			147				199				110				97				95
			5,779				2,342				2,264				288				299
Recoveries:
Real estate — construction			16				—				—				—				—
Real estate — residential			13				4				3				11				8
Real estate — commercial			22				1				—				—				—
Commercial and industrial			63				14				5				10				16
Consumer			104				29				25				31				7
			218				48				33				52				31
Net (charge-offs) recoveries			(5,561	)			(2,294	)			(2,231	)			(236	)			(268	)
Provision charged to operations			8,355				3,082				1,456				909				898
Allowance for loan losses, end of year		$	7,866			$	5,072			$	4,284			$	5,059			$	4,386
Ratio of net (charge-offs) recoveries during the period to average loans outstanding during the period			(1.49	%)			(.67	%)			(.67	%)			(.08	%)			(.10	%)