Index to Financial Statements

Exhibit 13.1

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Crescent Banking Company 2009 Annual Report

Index to Financial Statements

CRESCENT BANKING COMPANY

AND SUBSIDIARIES

FINANCIAL OVERVIEW


Selected Financial Data		2

Quarterly Financial Information		4

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

Market Information and Dividends		41

Index to Financial Statements

CRESCENT BANKING COMPANY

Selected Financial Data


	For the Year Ended December 31,
	2009			2008			2007			2006			2005
Earnings data		(in thousands)

Interest income	$	44,903		$	54,656		$	65,675		$	55,012		$	38,536
Interest expense		33,335			37,535			36,229			28,134			18,193
Net interest income		11,568			17,121			29,446			26,878			20,343
Provision for loan losses		26,201			25,848			2,676			2,083			2,224
Net interest income (loss) after provision for loan losses		(14,633	)		(8,727	)		26,770			24,795			18,119
Noninterest income		3,765			3,710			4,174			4,368			4,638
Noninterest expenses		28,272			28,475			21,177			17,711			16,130
Income (loss) from continuing operations before income taxes		(39,140	)		(33,492	)		9,767			11,452			6,627
Income tax expense (benefit)		(3,596	)		(2,446	)		3,442			4,138			2,526
Income (loss) from continuing operations		(35,544	)		(31,046	)		6,325			7,314			4,101
Income (loss) from discontinued operations		-			(658	)		75			-			-
Net income (loss)		(35,544	)		(31,704	)		6,400			7,314			4,101

Segment information

Continuing Operations – Commercial Banking
Commercial Banking total revenue	$	48,668		$	58,366		$	69,849		$	59,380		$	43,174
Commercial Banking pretax income (loss)		(39,140	)		(33,492	)		9,767			11,452			6,627
Commercial Banking revenue as % total revenue		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%
Commercial Banking pretax income as % total pretax segment income		100.0	%		100.0	%		98.8	%		100.0	%		100.0	%
Discontinued Operations – Mortgage Banking
Mortgage Banking total revenue	$	-		$	-		$	-		$	-		$	-
Mortgage Banking pretax income (loss)		-			-			118			-			-
Mortgage Banking revenue as % of total revenue		-			-			-			-			-
Mortgage Banking pretax income as % of total pretax segment income (loss)		-			-			1.2	%		-			-

(1)	Reflects reduction in pre-tax loss due to positive pre-tax income in commercial banking segment.

(2)	Reflects mortgage banking percentage of pre-tax loss.

Index to Financial Statements

Selected Financial Data (continued)


	For the Year Ended December 31,
	2009			2008			2007			2006			2005
	(In thousands, except per share data)
Per share data
Continued Operations – Commercial Banking
Net income (loss) – basic earnings (losses)	$	(6.73	)	$	(5.93	)	$	1.22		$	1.42		$	0.81
Net income (loss) – diluted earnings (losses)	$	(6.73	)	$	(5.93	)	$	1.12		$	1.37		$	0.79
Discontinued Operations – Mortgage Banking
Net income (loss) – basic earnings (losses)	$	-		$	(0.13	)	$	0.01		$	-		$	-
Net income (loss) – diluted earnings (losses)	$	-		$	(0.13	)	$	0.01		$	-		$	-
Consolidated
Net income (loss) – basic earnings (losses)	$	(6.73	)	$	(6.06	)	$	1.24		$	1.42		$	0.81
Net income (loss) – diluted earnings (losses)	$	(6.73	)	$	(6.06	)	$	1.14		$	1.37		$	0.79
Period end book value	$	0.14		$	6.87		$	12.82		$	11.91		$	10.76
Cash dividends	$	0.000		$	0.180		$	0.320		$	0.258		$	0.178
Weighted average number of shares outstanding		5,282			5,231			5,164			5,152			5,064
Selected Average Balances
Total assets	$	1,043,649		$	998,721		$	862,568		$	749,891		$	639,167
Loans		768,179			816,877			760,007			636,676			539,522
Total deposits		956,757			865,242			732,719			625,806			522,714
Stockholders’ equity		22,253			61,289			64,747			58,701			53,260
Selected Period End Balances
Total assets		993,855			1,038,969			920,269			779,671			704,102
Loans (net)		703,637			763,109			805,412			689,264			586,992
Allowance for loan losses		27,935			22,280			9,826			8,024			6,712
Mortgage loans held for sale		380			979			323			546			1,512
Total deposits		931,451			935,862			784,251			658,855			580,499
Other borrowings		54,086			58,186			58,167			49,857			60,853
Stockholders’ equity		728			36,752			67,435			61,778			55,180
Financial ratios
Return on average assets		(3.41	)%		(3.17	)%		0.74	%		0.98	%		0.64	%
Return on average equity		(159.73	)%		(51.73	)%		9.88	%		12.46	%		7.70	%
Average earning assets to average total assets		92.82	%		92.76	%		92.77	%		92.99	%		92.02	%
Average loans to average deposits		80.29	%		94.41	%		103.72	%		101.74	%		103.22	%
Average equity to average total assets		2.13	%		6.14	%		7.51	%		7.83	%		8.33	%
Net interest margin		1.19	%		1.85	%		3.68	%		3.85	%		3.46	%
Net charge offs to average loans		2.67	%		1.64	%		0.11	%		0.12	%		0.41	%
Non-performing assets to period ending loans and other real estate		17.00	%		7.72	%		1.34	%		0.61	%		0.58	%
Allowance for loan losses to period end loans		3.82	%		2.84	%		1.21	%		1.15	%		1.13	%
Tier 1 leverage ratio		0.03	%		4.32	%		8.69	%		8.83	%		9.08	%
Risk based capital:
Tier 1 capital		0.03	%		5.30	%		9.22	%		9.37	%		9.77	%
Total capital		0.07	%		8.01	%		10.92	%		10.45	%		10.81	%
Dividend payout ratio		N/M			N/M			26.09	%		18.15	%		22.00	%

N/M – Not meaningful because of net loss for the year

Index to Financial Statements

CRESCENT BANKING COMPANY

Quarterly Financial Information


	December 2009			September 2009			June 2009			March 2009			December 2008			September 2008			June 2008			March 2008
Quarter end
Interest income	$	10,797,202		$	10,989,384		$	11,410,025		$	11,706,573		$	12,941,245		$	13,614,418		$	13,372,097		$	14,728,486
Interest expense		7,082,657			8,166,302			8,812,169			9,273,580			9,559,956			9,197,435			9,228,167			9,549,254
Net interest income		3,714,545			2,823,082			2,597,856			2,432,993			3,381,289			4,416,983			4,143,930			5,179,232
Provision for loan losses		11,121,187			7,200,000			5,200,000			2,680,000			14,150,000			1,972,354			6,122,000			3,604,000
Net interest income after provision for loan losses		(7,406,642	)		(4,376,918	)		(2,602,144	)		(247,007	)		(10,768,711	)		2,444,629			(1,978,070	)		1,575,232
Noninterest income		1,037,732			867,247			1,004,742			854,896			862,674			953,937			937,414			955,767
Noninterest expenses		8,917,597			5,478,329			7,307,503			6,568,793			11,570,319			5,493,344			5,637,451			5,774,347
Income (loss) from continuing operations before income tax		(15,286,507	)		(8,988,000	)		(8,904,905	)		(5,960,904	)		(21,476,356	)		(2,094,778	)		(6,678,107	)		(3,243,348	)
Provision for income taxes		(3,595,843	)		-			821,857			(821,857	)		2,195,918			(735,937	)		(2,589,469	)		(1,317,048	)

Income (loss) from continuing operations		(11,690,664	)		(8,988,000	)		(9,726,762	)		(5,139,047	)		(23,672,274	)		(1,358,841	)		(4,088,638	)		(1,926,300	)
Income from discontinuing operations, net of tax		-			-			-			-			(658,415	)		-			-			-

Net income (loss)	$	(11,690,664	)	$	(8,988,000	)	$	(9,726,762	)	$	(5,139,047	)	$	(24,330,689	)	$	(1,358,841	)	$	(4,088,638	)	$	(1,926,300	)

Per share data
Continuing Operations
Net income (loss) basic	$	(2.21	)	$	(1.70	)	$	(1.84	)	$	(0.97	)	$	(4.50	)	$	(0.26	)	$	(0.78	)	$	(0.37	)
Net income (loss) diluted	$	(2.21	)	$	(1.70	)	$	(1.84	)	$	(0.97	)	$	(4.50	)	$	(0.26	)	$	(0.78	)	$	(0.37	)
Discontinuing Operations
Net income basic	$	-		$	-		$	-		$	-		$	(0.13	)	$	-		$	-		$	-
Net income diluted	$	-		$	-		$	-		$	-		$	(0.13	)	$	-		$	-		$	-
Period-end book value	$	0.14		$	2.34		$	4.14		$	5.96		$	6.87		$	11.35		$	11.58		$	12.46
Cash dividends		N/A			N/A			N/A			N/A		$	0.0200		$	0.0400		$	0.0400		$	0.0800
Balances as of quarter end
Loans, net	$	703,636,915		$	728,214,794		$	746,169,042		$	754,598,269		$	763,109,199		$	792,666,884		$	806,360,749		$	810,972,929
Allowance for loan losses		27,934,813			25,134,806			25,080,453			21,510,698			22,280,041			12,561,296			12,324,568			12,966,874
Mortgage loans held for sale		379,531			1,008,696			1,257,951			680,302			979,130			427,304			320,344			706,487
Total assets		993,854,746			1,030,472,281			1,037,721,420			1,064,873,461			1,038,969,220			1,042,759,526			978,962,606			954,074,369
Total deposits		931,450,850			954,209,495			947,698,293			965,815,096			935,861,681			916,318,848			849,149,772			821,634,410
Stockholders’ equity		727,810			12,403,596			22,218,721			31,935,906			36,751,530			60,682,761			61,658,976			65,784,022

Index to Financial Statements

SPECIAL CAUTIONARY NOTICE

REGARDING FORWARD-LOOKING STATEMENTS

Certain of the statements made or incorporated by reference in this Annual Report, including those under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this report, may constitute “forward-looking statements” within the meaning of, and subject to the safe harbor protections of, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, targets, expectations, anticipations, assumptions, estimates, intentions and future performance, and involve known and unknown risks, uncertainties and other factors, many of which may be beyond our control, and which may cause the actual results, performance or achievements of Crescent Banking Company (“Crescent” or the “Company”), or the commercial banking industry or economy generally, to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.

All statements other than statements of historical fact are statements that may be forward-looking statements. You can identify these forward-looking statements through our use of words such as “may,” “will,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “plan,” “target,” “point to,” “project,” “predict,” “could,” “intend,” “target,” “potential,” and other similar words and expressions of the future or otherwise regarding the outlook for the Company’s future business and financial performance and/or the performance of the commercial banking industry and economy generally. These forward-looking statements may not be realized due to a variety of factors, including, without limitation:

•

the effects of the current economic crisis and general business conditions, including, without limitation, the continuing dramatic deterioration of the subprime, mortgage, credit and liquidity markets, as well as the Federal Reserve’s actions with respect to interest rates, all of which have contributed to the continued compression in the Company’s net interest margin and may cause further compression in future periods;

•

the imposition of enforcement orders, capital directives or other enforcement actions by the Company’s regulators, including restrictions and limitations contained in the order issued by the Federal Deposit Insurance Corporation (the “FDIC”) and the Georgia Department of Banking and Finance (the “Georgia Department”) requiring Crescent Bank and Trust Company (“Crescent Bank” or the “Bank”) to cease and desist from certain unsafe and unsound practices (the “Order”) and the Written Agreement (the “Agreement”) with the Federal Reserve Bank of Atlanta (the “FRB Atlanta”) and the Banking Commissioner of the State of Georgia (the “Georgia Commissioner”) limiting the Company’s ability to directly or indirectly receive dividends from the Bank;

•

governmental monetary and fiscal policies, as well as legislative and regulatory changes, including changes in banking, securities and tax laws and regulations, including interest rate polices of the Federal Reserve Board (the “Federal Reserve”) and pending limitations on service charges, as well as changes affecting financial institutions’ ability to lend and otherwise do business with consumers;

•

the risks of changes in interest rates and the yield curve on the levels, composition and costs of deposits, loan demand, and the values of loan collateral, securities, and interest rate sensitive assets and liabilities;

•

credit risks of borrowers, including, without limitation, an increase in those risks as a result of changing economic conditions;

•

the risk that one or more of a small number of borrowers to whom we have made substantial loans are unable to make payments on those loans;

•

risks related to loans secured by real estate, including further adverse developments in the real estate markets that would decrease the value and marketability of collateral and may result in further write-downs of assets and in the liquidation of non-performing assets at less than the fair value of such assets;

•

the Company’s ability to originate loans, to build and manage its assets with a tolerable level of credit risk, and to adopt, maintain and implement policies and procedures designed to identify, address and protect against losses resulting from any such risks;

•

management’s ability to develop and execute plans to effectively respond to the Order and the Agreement and any additional unexpected regulatory enforcement actions;

Index to Financial Statements

•

increases in the Company’s non-performing assets (whether as part of non-accrual loans or other real estate owned), or the Company’s inability to recover or absorb losses created by such non-performing assets or to create adequate reserves to protect against such losses;

•

the effects of competition from a wide variety of local, regional, national, and other providers of financial, investment, mortgage and insurance services, including, without limitation, the effects of interest rates, products and services that the Company may elect to provide in the face of such competition, which could negatively affect net interest margin, liquidity and other important financial measures at the Company;

•

the failure of assumptions underlying the establishment of allowances for loan losses and other estimates, or dramatic changes in those underlying assumptions or judgments in future periods, that, in either case, render the allowance for loan losses inadequate or require that further provisions for loan losses be made, or that render the Company unable to timely and favorably identify and resolve credit quality issues as they arise;

•

the increased expenses associated with the Company’s efforts to address credit quality issues, including expenses related to hiring additional personnel or retaining third party firms to perform credit quality reviews;

•

the Company’s ability to maintain adequate liquidity to fund its operations, especially in light of competition from other institutions, its inability to originate brokered deposits and/or potential regulatory limitations;

•

the inability of the Company to raise additional capital or pursue other strategic initiatives;

•

an increase in regulatory capital requirements for banking organizations generally;

•

changes in accounting policies, rules and practices and determinations made thereunder;

•

changes in technology and/or products affecting the nature or delivery of financial products or services which may be more difficult, costly, or less effective, than anticipated;

•

the effects of war or other conflict, acts of terrorism or other catastrophic events that affect general economic conditions;

•

the effectiveness of the Emergency Economic Stabilization Act of 2008 (“EESA”), the American Recovery and Reinvestment Act (“ARRA”) and other legislative and regulatory efforts to help stabilize the U.S. financial markets;

•

the impact of the EESA and the ARRA and related rules and regulations on the Company’s business operations and competitiveness; and

•

other factors and other information contained in this report and in other reports that the Company files with the Securities and Exchange Commission (the “Commission”) under the Exchange Act.

All written or oral forward-looking statements that are made by or are attributable to us are expressly qualified in their entirety by this cautionary notice. You should not place undue reliance on any forward-looking statements, since those statements speak only as of the date that they are made. We have no obligation and do not undertake to publicly update, revise or correct any of the forward-looking statements after the date of this report, or after the respective dates on which such statements otherwise are made, whether as a result of new information, future events or otherwise, except as may otherwise be required by law.

Index to Financial Statements

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Recent Developments

During 2008 and 2009, turmoil within the financial services industry, the economy and the effect on real estate generally contributed to a substantial increase in the Company’s non-performing assets and a substantial decrease in the Company’s earnings. In response, the Company has taken what it believes to be a disciplined approach to determine the probability of losses in its loan portfolio. The Company has attempted to strengthen its credit structure to assure sound operating practices during these challenging times. The Company and its wholly owned subsidiary, Crescent Bank, were not adequately capitalized under all applicable regulatory capital measurements as of December 31, 2009.

In addition, Dixon Hughes PLLC, the Company’s independent registered public accounting firm, has issued a report with respect to the Company’s audited financial statements for the fiscal years ended December 31, 2008 and 2009 that contains an explanatory paragraph indicating that there is substantial doubt about the Company’s ability to continue as a going concern. Continued operations depend on our ability to raise additional capital, which we may be unable to accomplish in this weakened economic environment. The potential lack of sources of liquidity raises substantial doubt about our ability to continue as a going concern for the foreseeable future.

Also, the FDIC, as the Bank’s primary federal regulator and deposit insurer, and the Georgia Department, as the Bank’s chartering authority, have issued the Order, as described more fully below, requiring the Bank to cease and desist from certain unsafe and unsound practices and to adopt a program of corrective action as a means to address the identified deficiencies. Finally, the Company entered into the Agreement with the FRB Atlanta and the Georgia Commissioner, as described more fully below, restricting the Company’s ability to receive dividends from the Bank and requiring the Company to adopt and maintain a written capital plan to maintain sufficient capital at the Company on a consolidated basis and at the Bank on a stand-alone basis.

In light of the foregoing, the Company is making all efforts to increase its capital ratios and improve its liquidity. As part of those efforts, the Company has retained the services of investment bankers to review all strategic opportunities available to the Company and the Bank. In addition, during the second quarter of 2009, we exercised our rights under our trust preferred securities agreements for Crescent Capital Trust II, Crescent Capital Trust III and Crescent Capital Trust IV to defer, for up to 20 consecutive quarters, payment of interest and principal on these securities. We currently anticipate that we will continue to exercise this deferral right for all of the interest payments that would otherwise be due in 2010 and into 2011.

The Company is continuing to pursue a variety of capital-raising and other strategic alternatives; however, there is no assurance that the Company’s efforts will be successful, particularly in the current economic environment. In the event we are unable to raise additional capital, our ability to continue to operate may be significantly impacted. In addition, we must continue to generate sufficient liquidity to fund our operations, which may be difficult in light of the intense competition, our inability to originate brokered deposits and/or as a result of other potential regulatory limitations.

Cease and Desist Order

On April 29, 2009, the Bank’s board of directors, the FDIC and the Georgia Department entered into the Order, requiring the Bank to cease and desist from certain unsafe and unsound practices and to adopt a program of corrective action as a means of addressing the identified deficiencies. The Order became effective on May 11, 2009. The Order alleged that the Bank is: operating with a board of directors that has failed to provide adequate supervision over and direction to the management of the Bank; operating with management whose policies and practices are detrimental to the Bank and jeopardize the safety of its deposits; operating with marginally adequate equity capital and reserves in relation to the volume and quality of assets held by the Bank; operating with an excessive level of adversely classified items; operating with inadequate provisions for liquidity and funds management; operating with hazardous loan underwriting and administration practices; operating in such a manner as to produce operating losses; and operating in apparent violation of certain laws, regulations and/or statements of policy.

The Order requires that the Bank implement a number of actions, including developing a written analysis and assessment of our management and staffing needs; increasing our board of directors’ participation in our affairs; and having and retaining qualified management, including a chief executive officer responsible for the supervision of the lending function and a senior lending officer with experience in upgrading a low quality loan portfolio. The Order further requires us to increase our capital so that we have a minimum Tier 1 Capital Ratio of 8.0% and a minimum Total Risk Based Capital Ratio of at least 10.0% within 120 days of the effective date of the Order; eliminate certain classified assets not previously collected or charged-off; reduce risk exposure with respect to certain problem assets; cease the extension of additional credit to certain borrowers; implement a plan to improve our lending practices; implement a plan for reducing credit concentration; establish and maintain a policy to ensure the adequacy of the allowance for loan losses; formulate and implement a plan to improve earnings; implement an asset/liability management policy; develop and implement a written liquidity contingency funding plan; obtain a waiver from the FDIC prior to accepting, renewing or rolling over brokered deposits; review and implement Bank Secrecy Act compliance; and eliminate or correct all apparent violations of law. The Bank’s board of directors consented to the Order without admitting to or denying any of these allegations.

Index to Financial Statements

These findings were the result of a regulatory examination of our Bank that was completed in July 2008 and are based upon the Bank’s June 30, 2008 financial information. Prior to receiving the Report of Examination from the FDIC and the related Order in April 2009, our management had already begun to undertake a process to address many of the deficiencies that were cited in the Order. In October 2008, the board of directors of the Company and the Bank proactively adopted a self-imposed “Action Plan” to address many of the challenges that the Company and the Bank are facing. Under the Action Plan, the Bank has improved its liquidity position, aggressively recognized and reserved for troubled assets, reduced its concentrations in development and construction loans, reduced overhead, started strategic initiatives to increase transaction deposits, implemented a plan to reduce wholesale and broker deposits and conducted an outside assessment of management and staffing levels.

In addition, the Bank’s board of directors has created a Directors Committee to ensure that all of the deficiencies noted in the Order are being addressed in a timely and effective manner. Pursuant to the Order, we are required to provide a quarterly report to the Georgia Department and the FDIC reflecting our then current progress status towards full compliance with the Order.

The Order does not affect the Bank’s ability to continue to conduct its banking business with customers in a normal fashion. Bank products and services, hours of operation, Internet banking and ATM usage will all be unaffected, and the Bank’s deposits will remain insured by the FDIC to the maximum allowed by law.

Written Agreement with Federal Reserve and Georgia Commissioner

Effective July 16, 2009, the Company entered into the Agreement with the FRB Atlanta and the Georgia Commissioner. The Agreement limits the Company’s ability to directly or indirectly receive from the Bank dividends or any form of payment representing a reduction in the Bank’s capital without the prior written approval of the FRB Atlanta and the Georgia Commissioner. The Agreement also limits the Company’s ability to declare or pay any dividends unless: (i) such declaration or payment is consistent with the Federal Reserve’s Policy Statement on the Payment of Cash Dividends by State Member Banks and Bank Holding Companies, dated November 14, 1985, and the Georgia Department of Banking and Finance’s Statement of Policies; and (ii) the Company has received the prior written approval of the FRB Atlanta, the Director of the Division of Banking Supervision and Regulation of the Federal Reserve (the “Director”) and the Georgia Commissioner. The Agreement further limits the Company’s and its nonbank subsidiaries’ ability to make any distributions of interest, principal or other sums on subordinated debentures or trust preferred securities without the prior written approval of the FRB Atlanta, the Director and the Georgia Commissioner. All requests for prior approval must be received by the FRB Atlanta and the Georgia Commissioner at least 30 days prior to the proposed dividend declaration date, the date of any proposed distribution on subordinated debentures and/or the date of any required notice of deferral on trust preferred securities, as applicable. Any such notice must contain certain current and projected financial information, including the Company’s capital, earnings and cash flow and the Bank’s capital, asset quality, earnings and allowance for loan and lease losses, and also must identify the sources of funds for the proposed payment or distribution.

The Agreement prohibits the Company and any nonbank subsidiary from directly or indirectly: (i) incurring, increasing or guaranteeing any debt; and (ii) purchasing or redeeming any shares of its common stock, in each case, without the prior written approval of the FRB Atlanta and the Georgia Commissioner.

Within 60 days of the Agreement, the Company must submit to the FRB Atlanta and the Georgia Commissioner a written capital plan to maintain sufficient capital at the Company on a consolidated basis, and at the Bank on a stand-alone basis. The Company must adopt the capital plan within 10 days of the approval of such plan by the FRB Atlanta and the Georgia Commissioner, and subsequently implement and comply with the provisions of the approved plan. During the term of the Agreement, the approved capital plan may not be amended or rescinded without the prior written approval of the FRB Atlanta and the Georgia Commissioner. Further, the Company must provide the FRB Atlanta and the Georgia Commissioner with written notice no more than 30 days after the end of any quarter in which the consolidated entity’s or the Bank’s capital ratio falls below the capital plan’s minimum ratios, along with a capital plan to increase such ratios above the plan’s minimum.

The Company’s board of directors must, within 30 days after the end of each calendar quarter, submit a written progress report to the FRB Atlanta and the Georgia Commissioner detailing the form and manner of all actions taken to secure the Company’s compliance with the Agreement and the results of such actions, as well as a the Company’s balance sheet, income statement, and, as applicable, report of changes in stockholders’ equity.

The Agreement also requires the Company to provide written notice to the Georgia Commissioner prior to the appointment of any new director or senior executive officer and prior to changing the responsibilities of any senior executive officer so that the officer would assume a different senior executive position. The Company must comply with the notice provisions of Section 32 of the Federal Deposit Insurance Act, as amended (the “FDI Act”) and Subpart H of the Federal Reserve’s Regulation Y, and further comply with the restrictions on indemnification and severance payments set forth in Section 18(k) of the FDI Act and Part 359 of the Federal Deposit Insurance Corporation’s (the “FDIC”) regulations.

Index to Financial Statements

General Overview

As of December 31, 2009, the Company was made up of the following entities:

•

Crescent Banking Company, which is the parent holding company of Crescent Bank & Trust Company and Crescent Mortgage Services, Inc. (“CMS”);

•

Crescent Bank, a community-focused commercial bank;

•

CMS, a mortgage banking company;

•

Crescent Capital Trust II, a Delaware statutory business trust;

•

Crescent Capital Trust III, a Delaware statutory business trust; and

•

Crescent Capital Trust IV, a Delaware statutory business trust.

For purposes of the discussion contained in this Item 2, the words the “Company,” “we,” “us” and “our” refer to the combined entities of Crescent Banking Company and its wholly owned subsidiaries, Crescent Bank and CMS. The words “Crescent,” “Crescent Bank” or the “Bank,” and “CMS” refer to the individual entities of Crescent Banking Company, Crescent Bank & Trust Company and Crescent Mortgage Services, Inc., respectively.

In accordance with Financial Accounting Standards Board guidance regarding consolidation (ASC 810, Consolidation), Crescent Capital Trust II, Crescent Capital Trust III and Crescent Capital Trust IV (together, the “Trusts”) are not consolidated with the Company. Accordingly, the Company does not report the securities issued by the Trusts as liabilities, and instead reports as liabilities the junior subordinated debentures issued by the Company and held by the Trusts. The Company further reports its investment in the common shares of the Trusts as other assets. The Company has fully and unconditionally guaranteed the payment of interest and principal on the trust preferred securities to the extent that the Trusts have sufficient assets to make such payments but fail to do so. Of the $21.5 million in trust preferred securities currently outstanding, approximately $87,000 qualifies as tier 1 capital for regulatory capital purposes. During the second quarter of 2009, as part of the Company’s efforts to retain and increase its liquidity, we exercised our rights under the trust preferred securities agreements to defer our interest payments, and therefore, did not make any payments on the three Trusts that were due after May 2009. We currently anticipate that we will continue to exercise this right for our interest payments in 2010 and 2011.

The Company’s principal executive offices, including the principal executive offices of Crescent Bank and CMS, are located at 7 Caring Way, Jasper, Georgia 30143, and the telephone number at that address is (678) 454-2266. The Company maintains an Internet website at www.crescentbank.com. The Company is not incorporating the information on that website into this report, and the website and the information appearing on the website are not included in, and are not part of, this report.

As of December 31, 2009, the Company had total consolidated assets of approximately $993.9 million, total deposits of approximately $931.5 million, total consolidated liabilities, including deposits, of $993.1 million and consolidated stockholders’ equity of approximately $700,000. The Company’s operations are discussed below under the section captioned “Results of Operations.”

The following discussion and analysis of our financial condition and results of operations is incorporated by reference into our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, or “SEC,” and should be read in conjunction with our Consolidated Financial Report and Notes to Consolidated Financial Report included herein. Certain prior period amounts presented in this discussion and analysis have been reclassified to conform to current period classifications.

On October 26, 2007, the Company effected a two-for-one split of the common stock in the form of a 100% stock dividend. Accordingly, all references to numbers of common shares and per share data in the accompanying financial statements have been adjusted to reflect the stock split on a retroactive basis. The par value of the additional shares of common stock issued in connection with the stock split was credited to “Common stock” and a like amount charged to “Capital surplus” in 2007.

Index to Financial Statements

Crescent

Crescent is a Georgia corporation that is registered as a bank holding company with the Board of Governors of the Federal Reserve System (the “Federal Reserve”) under the Federal Bank Holding Company Act of 1956, as amended (the “BHC Act”), and with the Georgia Department of Banking and Finance (the “Georgia Department”) under the Financial Institutions Code of Georgia, as amended. Crescent was incorporated on November 19, 1991 to become the parent holding company of the Bank. Crescent also owns 100% of CMS.

Commercial Banking Business

The Company currently conducts its traditional commercial banking operations through Crescent Bank. The Bank is a Georgia banking corporation that was founded in August 1989. The Bank is a member of the FDIC. The Bank’s deposits are insured by the FDIC’s Deposit Insurance Fund (“DIF”). The Bank is also a member of the Federal Home Loan Bank of Atlanta.

Through the Bank, the Company provides a broad range of banking and financial services to those areas surrounding Jasper, Georgia. As its primary market area, the Bank focuses on Pickens, Bartow, Forsyth, Cherokee and north Fulton Counties, Georgia and nearby Dawson, Cobb, Walton and Gilmer Counties, Georgia, which are situated to the north of Atlanta, Georgia. The Bank’s commercial banking operations are primarily retail-oriented and focused on individuals and small- to medium-sized businesses located within its primary market area. While the Bank provides most traditional banking services, its principal activities as a community bank are the taking of demand and time deposits and the making of secured and unsecured consumer loans and commercial loans to its target customers. The retail nature of the Bank’s commercial banking operations allows for diversification of depositors and borrowers. As a result, the Bank’s management does not believe that it is dependent upon a single or a few customers. The Bank does not have a significant portion of commercial banking loans concentrated within a single industry or group of related industries. However, approximately 94% of the Bank’s loan portfolio is secured by commercial and residential real estate in its primary market area. The real estate markets in our market area have experienced significant weakening during 2008 and 2009, in particular with respect to real estate related to acquisition, development and construction, and we anticipate that such markets will continue to weaken in 2010. Acquisition, development and construction loans, or “ADC” loans, are cyclical and pose risks of possible loss due to concentration levels and other similar risks. As of December 31, 2009, we had approximately $273.3 million in ADC loans, or approximately 37% of our loan portfolio. The Bank limited ADC loan originations in 2008 and 2009 due to the declining real estate market. As a result, the Bank’s ADC loans declined approximately 31% since December 31, 2007. The Bank’s criticized loans (excluding non-performing loans), non-performing loans and foreclosed properties related to its ADC loan portfolio increased $81.9 million from December 31, 2007, or 1653%, to $86.8 million at December 31, 2009, increased $54.7 million, or 1685% from December 31, 2007, to $58.0 million at December 31, 2009 and increased $34.6 million, or 10906% from December 31, 2007, to $34.9 million at December 31, 2009. The deterioration in our ADC loan portfolio is due to the unprecedented slowing of home and land sales, and subsequent decline in the prices of homes and land in our market area beginning in the last quarter of 2007. This decline in home and land prices prohibits many of our borrowers who develop and construct real estate properties from servicing their loans because they are unable to generate sufficient revenue.

For the year ended December 31, 2009, the Company had revenues from continuing operations from its commercial banking business of approximately $48.7 million and pretax loss from continued operations from its commercial banking business of approximately $(39.1) million. Pretax loss from continuing operations represented 100% of the Company’s total pretax income (loss) for the year ended December 31, 2009. During the fiscal years 2008 and 2007, the Company had revenues from its continuing operations in its commercial banking business of approximately $58.4 million and $69.8 million, respectively, and pretax income (loss) from its continuing operations in the commercial banking business of approximately $(33.5) million and $9.8 million, respectively. Pretax loss from continuing operations represented approximately 100% of the Company’s total pretax income (loss) for the year ended December 31, 2008 and pretax income from continuing operations represented 98.8% of the Company’s total pretax income (loss) for the year ended December 31, 2007. The Company’s commercial loan portfolio, which declined during 2009 and 2008, represents the largest earning asset for the Company’s commercial banking operations. The Company’s commercial loan portfolio declined 7% and 4% in 2009 and 2008, respectively, while it grew 17% in 2007. At December 31, 2009, the Company had total commercial loans of approximately $731.6 million. At December 31, 2009, 2008 and 2007, the Company’s total commercial banking assets from continuing operations were approximately $993.9 million, $1,039.0 million and $920.3 million, respectively.

The Company does not consider its commercial banking operations to be seasonal in nature. Real estate activity and values tend to be cyclical and vary over time with interest rate fluctuations and general economic conditions.

Challenges for the Commercial Banking Business

Our commercial banking business has four primary challenges for the future: interest rate risk, a competitive marketplace, liquidity and credit risk. The Bank’s principal source of income is its net interest income. Net interest income is the difference between the interest income we receive on our interest-earning assets, such as investment securities and loans, and the interest expense paid on our interest-bearing liabilities, such as deposits and borrowings. The greatest risk to our net interest margin is interest rate risk

Index to Financial Statements

from interest rate fluctuation, which, if not anticipated and managed, can result in a decrease in earnings or earnings volatility. The Company manages interest rate risk by maintaining what it believes to be the proper balance of rate sensitive assets and rate sensitive liabilities. Rate sensitive assets and rate sensitive liabilities are those that can be repriced to current rates within a relatively short time period. The Federal Reserve decreased interest rates 500 basis points from September 2007 through the first quarter of 2009. Our net interest margin declined from 3.68% for 2007 to 1.85% during 2008, mainly as a result of the decreases in interest rates. Our net interest margin additionally declined to 1.19% during 2009. The further decline in our net interest margin during 2009 was due to the increase in non-performing assets and the subsequent write-off of approximately $3.0 million in accrued interest on these assets and the Company’s strategic decision to increase its liquidity by increasing its short-term liquid assets that have lower yields. As a result, any change in general market interest rates, including changes in the Federal Reserve Board’s fiscal and monetary policies, can have a significant impact on our net interest income. As of December 31, 2009, approximately 21% of our commercial banking loan portfolio has a variable rate without a floor and adjusts with changes in the prime rate, while 79% of our commercial banking loan portfolio has either a fixed rate or a variable rate with a floor, which means that the interest rate associated with such loans will not change until the fixed rate loans mature or until prime rates increase to a rate that is higher than the variable rate loan floors. Most of the floors on our variable rate loans are between 5.00% and 7.50%. In addition, approximately $207.3 million of our deposits are in interest bearing checking accounts that could reprice immediately in the event of any changes in interest rates, while approximately $573.9 million of our certificates of deposit mature and reprice within one year. In total, approximately 87% of our deposits could reprice within one year. More of the Bank’s interest bearing liabilities have the potential to reprice over the next year than the Bank’s interest earning assets, making the Bank liability sensitive. As a result, in the event that interest rates increase, the Bank’s net interest margin could correspondingly decline. Further action by the Federal Reserve with respect to interest rates will depend on many factors that are not known at this time, are beyond our control and could impact our net interest margin.

The second challenge for the Company’s commercial banking business is that it operates in highly competitive markets. The Bank competes directly for deposits in its primary market area with local, regional and national commercial banks, savings and loan associations, credit unions, mutual funds, securities brokers and insurance companies, some of which compete by offering products and services by mail, telephone and the Internet. In its commercial bank lending activities, the Bank competes with other financial institutions as well as consumer finance companies, mortgage companies and other lenders engaged in the business of extending credit to customers located in its primary market area. Interest rates, both on loans and deposits, and prices of services are significant competitive factors among financial institutions generally. Important competitive factors, such as office location, types and quality of services and products, office hours, customer service, a local presence, community reputation and continuity of personnel, among others, are and continue to be a source of strength for the Bank. Many of the largest banks operating in Georgia, including some of the largest banks in the country, also have offices within the Bank’s primary market area. Virtually every type of competitor offering products and services of the type offered by the Bank has offices in Atlanta, Georgia, which is approximately 60 miles away from Jasper. Many of these institutions have greater resources, broader geographic markets and higher lending limits than the Company, may offer various services that the Company does not offer, and may be able to better afford and make broader use of media advertising, support services and electronic technology. In addition, as a result of recent developments in the credit and liquidity markets, many of our competitors in our primary market area, in order to attract deposits, have offered interest rates on certificates of deposit and other products that we are unable to offer. To offset these competitive disadvantages, the Bank depends on its reputation as an independent and locally-owned community bank, its personal service, its greater community involvement and its ability to make credit and other business decisions quickly and locally. If we cannot effectively compete for deposits in our primary market area, our liquidity could come under further pressure and we may be unable to fund our operations.

The third challenge for the Company’s commercial banking business is liquidity, or our ability to raise funds to support asset growth, meet deposit withdrawals and other borrowing needs, maintain adequate reserves and sustain our operations. Due to competitive pricing by competitors in our primary market area, the Bank’s liquidity has, and will likely continue to, come under critical pressure. In addition, due to the decline in the confidence in the financial services industry, the Bank could see customers withdrawing their deposits, which would put additional pressure on the Bank’s liquidity. The Bank has had the ability to acquire out-of-market deposits that are not considered brokered deposits to supplement deposit growth in its market areas and can borrow an additional $1.8 million through the Federal Reserve Bank, if necessary. However, if access to these funds is limited in any way, then our liquidity could be adversely affected. Currently, because the Bank is below the well capitalized requirements of the Federal Deposit Insurance Corporation Improvement Act of 1991 (the “FDICIA”), the Bank cannot originate any deposits that qualify as brokered deposits, and is limited in the rates that it can offer on deposits generally. From April 2010 through December 2010, the Bank has approximately $120 million in brokered and out-of market deposits maturing, and, if the Bank does not return to a well capitalized position, then it will not be able to renew these deposits. As a result, the Bank may have to increase deposit rates in its local markets in the future, which would adversely affect its net interest margin and net income. However, there are regulatory and other limitations on the Bank’s ability to raise interest rates in its local markets. If the Bank is unable to offer competitive rates to generate deposits in local markets, then its liquidity would be adversely affected. In addition, although the Company is currently considering a variety of capital-raising and other strategic alternatives intended to bring the Company back into a well-capitalized position, the Company may be unable to consummate any such transactions and therefore, may be unable to continue to generate sufficient liquidity. Finally, if the deterioration in the credit and real estate markets continues and causes additional borrowers to default on their loans or causes a further decline in the realizable value of underlying real estate collateral, we may continue to experience an increase in non-performing assets and loan charge-offs and may have to make additional provisions for loan losses, which could reduce our available capital and liquidity and negatively impact our ability to fund and continue our operations.

Index to Financial Statements

The fourth challenge for the Company’s commercial banking business is maintaining sound credit quality. During 2008 and 2009, the Bank’s loan portfolio declined 4% and 7%, respectively. However, the Bank’s loan portfolio grew 17% during 2007, 17% during 2006 and 37% during 2005. From 2005 to 2007, the Bank added approximately 26 new loan officers, which were mainly related to the addition of five full service branches and two loan production offices. The weakening of the real estate market had a significant effect on the Bank’s loan portfolio in 2008 and 2009, which led the Bank to limit loan production in order to focus on asset quality. Approximately 94% of the Bank’s loan portfolio was secured by real estate at December 31, 2009. From December 31, 2007 to December 31, 2009, our non-performing assets increased from $11.0 million to $131.7 million, or 1,094%. Of the $131.7 million in non-performing assets at December 31, 2009, $92.8 million, or 70%, was related to ADC loans and $22.6 million, or 17%, was related to residential real estate. Our entire market area has experienced a significant weakening in the real estate markets during 2008 and 2009, in particular with respect to real estate related to ADC. As of December 31, 2009, ADC loans totaled approximately $273.3 million and represented approximately 37% of our loan portfolio. The Bank’s criticized loans (excluding non-performing loans), non-performing loans and foreclosed properties related to its ADC loan portfolio increased $81.9 million from December 31, 2007, or 1653%, to $86.8 million at December 31, 2009, increased $54.7 million, or 1685%, from December 31, 2007, to $58.0 million at December 31, 2009 and increased $34.6 million, or 10906%, from December 31, 2007, to $34.9 million at December 31, 2009. The deterioration in our ADC loan portfolio is due to an increased inability of some borrowers to make loan payments and the decrease in sales activity and property values within the residential real estate market in our market area during 2008 and 2009. The Bank has adopted and implemented procedures and policies in order to maintain and monitor loan growth, including the quality of the loans and its concentration in real estate secured loans. The Bank has limited any new ADC loans in 2008 and 2009 due to the declining real estate market. Our ADC loans have declined by approximately 31% since December 31, 2007. Given the current condition of the credit, liquidity and real estate markets, we may experience further increases in non-performing assets. If this occurs, we may have to make additional provision for loan losses and experience an increase in charge-offs, either of which would adversely impact our capital and liquidity and our ability to pursue strategic alternatives.

Recent Accounting Developments

In March 2008, the FASB issued a standard that expands quarterly disclosure requirements for an entity’s derivative instruments and hedging activities. This standard became effective for the Company on January 1, 2009 and did not have a material impact on the consolidated financial statements.

In April 2008, the FASB issued a standard which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The objective of this standard is to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset under generally accepted accounting principles (“GAAP”). This standard applies to all intangible assets, whether acquired in a business combination or otherwise and was effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years and applied prospectively to intangible assets acquired after the effective date. Early adoption was prohibited. The adoption of this standard did not have a material impact on the financial statements taken as a whole.

The FASB issued a standard on April 9, 2009, that affirms that the objective of fair value when the market for an asset is not active is the price that would be received to sell the asset in an orderly transaction, and clarifies and includes additional factors for determining whether there has been a significant decrease in market activity for an asset when the market for that asset is not active. This standard requires an entity to base its conclusion about whether a transaction was not orderly on the weight of the evidence and also amended previous standards to expand certain disclosure requirements. This standard is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company adopted the provisions of this standard for the quarter ended June 30, 2009, as required, and adoption did not have a material impact on the financial statements taken as a whole.

The FASB issued certain standards on April 9, 2009 that (i) change existing guidance for determining whether an impairment is other than temporary to debt securities and (ii) replace the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert: (a) it does not have the intent to sell the security; and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis. Under these standards, declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. These standards are effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company adopted the provisions of these standards for the quarter ended June 30, 2009, as required, and adoption did not have a material impact on the financial statements taken as a whole.

Index to Financial Statements

The FASB issued certain standards on April 9, 2009 that amend previous standards to require an entity to provide disclosures about fair value of financial instruments in interim financial information and to require those disclosures in summarized financial information at interim reporting periods. Under these standards, a publicly traded company shall include disclosures about the fair value of its financial instruments whenever it issues summarized financial information for interim reporting periods. In addition, entities must disclose, in the body or in the accompanying notes of its summarized financial information for interim reporting periods and in its financial statements for annual reporting periods, the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position. The new interim disclosures required by these standards are included in the Company’s interim financial statements beginning with the second quarter of 2009.

In January 2009, the FASB finalized a standard that conforms the guidance in GAAP by removing the requirement that management consider a market participant’s assumptions about cash flows in assessing whether or not an adverse change in previously anticipated cash flows has occurred. The standard is effective for interim and annual periods ending after December 15, 2008, applied prospectively. The adoption of the new standard did not have a significant impact on the determination or reporting of our financial results.

On May 28, 2009, the FASB issued a standard pursuant to which companies are required to evaluate events and transactions that occur after the balance sheet date but before the date the financial statements are issued, or available to be issued in the case of non-public entities. This standard requires entities to recognize in the financial statements the effect of all events or transactions that provide additional evidence of conditions that existed at the balance sheet date, including the estimates inherent in the financial preparation process. Entities shall not recognize the impact of events or transactions that provide evidence about conditions that did not exist at the balance sheet date but arose after that date. This standard was effective for interim and annual reporting periods ending after June 15, 2009. The Company adopted the provisions of this standard for the quarter ended June 30, 2009, as required, and adoption did not have a material impact on the financial statements taken as a whole.

On June 12, 2009, the FASB issued a standard to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. This standard eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. This standard also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. This standard was effective January 1, 2010 and did not have a significant impact on the Company’s financial statements.

On June 12, 2009, the FASB issued a standard that amends previous standards to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. This standard requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity’s financial statements. This standard was effective January 1, 2010 and its adoption did not have a significant impact on the Company’s financial statements.

On June 29, 2009, the FASB issued a standard that establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with US GAAP. This standard was effective for interim and annual reporting periods ending after September 15, 2009, for most entities. On the effective date, all non-SEC accounting and reporting standards were superseded. The Company adopted this standard for the quarter ended September 30, 2009, as required, and adoption did not have a material impact on the financial statements taken as a whole.

In August 2009, the FASB issued a standard that provides further guidance on how to measure the fair value of a liability. The standard was effective for the first reporting period after August 26, 2009 and its adoption did not have a material impact on the Company’s financial statements.

In September 2009, the FASB a standard that permits the use of net asset value per share to estimate the fair value of these investments as a practical expedient. The standard also requires disclosure, by major category of investment, of the attributes of the investments, such as the nature of any restrictions on the investor’s ability to redeem its investments at the measurement date, any unfunded commitments, and the investment strategies of the investees. The standard was effective for interim and annual reporting periods ending after December 15, 2009 and its adoption did not have a material impact on the Company’s financial statements.

In January 2010, the FASB issued a standard that requires additional disclosures related to the transfers in and out of fair value hierarchy and the activity of Level 3 financial instruments and also provides clarification for the classification of financial instruments and the discussion of inputs and valuation techniques. The new disclosures and clarification are effective for interim and annual reporting periods after December 15, 2009, except for the disclosures related to the activity of Level 3 financial instruments. Those disclosures are effective for periods after December 15, 2010 and for interim periods within those years. The Company is in the process of reviewing the potential impact of the standard; however, the adoption of this standard is not expected to have a material impact to the Company’s financial statements.

Index to Financial Statements

Critical Accounting Policies and Estimates

The Company’s consolidated financial statements are prepared in accordance with GAAP, including prevailing practices within the financial services industry. The preparation of consolidated financial statements requires management to make judgments, involving significant estimates and assumptions, in the application of certain of its accounting policies about the effects of matters that are inherently uncertain. These estimates and assumptions, which may materially affect the reported amounts of certain assets, liabilities, revenues and expenses, are based on information available as of the date of the financial statements, and changes in this information over time could materially impact amounts reported in subsequent financial statements as a result of the use of revised estimates and assumptions. Certain accounting policies, by their nature, involve a greater reliance on the use of estimates and assumptions, and could produce results materially different from those originally reported. Based on the sensitivity of financial statement amounts to the policies, estimates and assumptions underlying reported amounts, the more significant accounting policies applied by the Company have been identified by management as:

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the valuation of other real estate owned;

•

the allowance for loan losses; and

•

the recourse obligation reserve.

These policies require the most subjective and complex judgments, and related estimates and assumptions could be most subject to revision as new information becomes available.

The following is a brief discussion of the above-mentioned critical accounting policies. An understanding of the judgments, estimates and assumptions underlying these accounting policies is essential in order to understand our reported financial condition and results of operations.

Valuation of Other Real Estate Owned

Other real estate owned represents properties acquired through foreclosure and repossession. Other real estate owned is held for sale and is carried at fair value, less estimated costs to sell. Any write-down to fair value at the time of transfer to other real estate owned is charged to the allowance for loan losses. Revenue and expenses from operations and changes in the valuation allowances are included in other operating expenses. The fair value of other real estate owned is based upon our assessment of information available to us at the time of determination, and depends upon a number of factors, including our historical experience, economic conditions and issues with respect to individual properties. Properties acquired through foreclosure are appraised by independent appraisers at the time of foreclosure, and each year thereafter that such property is held by the Company as other real estate owned. The Company’s evaluation of these factors involves subjective estimates and judgments that may change. In addition, when we take collateral in foreclosures and similar proceedings, we are required to mark the related loan to the then fair market value of the collateral, which is referred to as “mark-to-market” accounting.

Allowance for Loan Losses

The establishment of our allowance for loan losses is based upon our assessment of information available to us at the time of determination, and depends upon a number of factors, including our historical experience, the economies in which we and our borrowers operate, estimates and expectations with respect to individual borrowers, as well as the judgments of our regulators. The Company’s evaluation of these factors involves subjective estimates and judgments that may change, especially in light of the recent deterioration in the real estate markets which may result in certain loans in our portfolio becoming under-collateralized. When we evaluate collateral-dependent impaired loans for loan loss reserves, we base the valuation allowance, if needed, on the updated appraised value of the underlying collateral less estimated selling costs. In the current economic environment, the ability to receive an appraised value upon the final sale of the underlying collateral may be challenging. Please see “Financial Condition of Our Commercial Banking Business—Loan Loss Allowance.”

Recourse Obligation Reserve

In the wholesale mortgage business that we operated prior to December 31, 2003, we regularly made representations and warranties to purchasers of our mortgage loans and insurers that, if breached, would require us to indemnify the purchaser for losses or to repurchase the loans, and we considered this practice to be customary and routine. The Company records a specific reserve for the recourse liability for the loans on which the Company has already become obligated to make indemnification payments to the purchaser and an estimated reserve for the recourse liability for probable future losses from loans that the Company may have to

Index to Financial Statements

indemnify. Given the current economy and limited historical information available to management with respect to the Company’s potential obligations to make indemnification payments, the evaluation of these factors involves subjective estimates and judgments that may change.

Results of Operations

General Discussion of Our Results of Operations

The principal source of our revenue comes from net interest income, which is the difference between:

•

income we receive on our interest-earning assets, such as investment securities and loans; and

•

monies we pay on our interest-bearing sources of funds, such as deposits and borrowings.

The level of net interest income is determined primarily by the average balances, or volume, of interest-earning assets and the various rate spreads between the interest-earning assets and our funding sources, primarily through the Bank. Changes in our net interest income from period to period result from, among other things:

•

increases or decreases in the volume of interest-earning assets and interest-bearing liabilities;

•

increases or decreases in the average rates earned and paid on those assets and liabilities;

•

our ability to manage the interest-earning asset portfolio, which includes loans; and

•

the availability and costs of particular sources of funds, such as noninterest-bearing deposits, and our ability to “match” our liabilities to fund our assets.

The following table sets forth for the periods indicated a summary of the changes in interest earned and interest paid resulting from changes in volume and changes in rate:


	2009 Compared to 2008(1)								2008 Compared to 2007(1)									2007 Compared to 2006(1)
	Volume		Rate			Net			Volume			Rate			Net			Volume			Rate			Net
	(in thousands)
Interest earned on:
Loans	$	5,628	$	(15,528	)	$	(9,900	)	$	3,598		$	(15,450	)	$	(11,852	)	$	10,325		$	1,242		$	11,567
Mortgages held for sale		19		(3	)		16			(4	)		(6	)		(10	)		2			(3	)		(1	)
Securities		298		(252	)		46			317			(131	)		186			40			82			122
Federal funds sold		953		(1,894	)		(941	)		763			(462	)		301			(1,112	)		32			(1,080	)
Deposits in other banks		1,509		(483	)		1,026			406			(50	)		356			54			1			55

Total interest income	$	8,407	$	(18,160	)	$	(9,753	)	$	5,080		$	(16,099	)	$	(11,019	)	$	9,309		$	1,354		$	10,663

Interest paid on:
Demand deposits	$	1,907	$	(110	)	$	1,797		$	(179	)	$	(854	)	$	(1,033	)	$	(278	)	$	(164	)	$	(442	)
Savings deposits		384		(730	)		(346	)		301			(618	)		(317	)		675			399			1,074
Time deposits		3,356		(8,450	)		(5,094	)		6,352			(3,787	)		2,565			5,018			2,563			7,581
Borrowings		132		(689	)		(557	)		335			(244	)		91			(400	)		281			(119	)

Total interest expense	$	5,779	$	(9,979	)	$	(4,200	)	$	6,809		$	(5,503	)	$	1,306		$	5,015		$	3,079		$	8,094

(1)

Changes in interest due to both volume and rate have been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

Index to Financial Statements

Results of Our Commercial Banking Business

During the year ended December 31, 2009, our commercial banking business experienced a net loss of approximately $(35.5) million as compared with a net loss of approximately $(31.0) million for the year ended December 31, 2008. The increase in net loss for 2009 compared to 2008 was primarily due to a decrease in net interest income. During the year ended December 31, 2007, the Company experienced net income of approximately $6.3 million. The net loss from 2008 compared to the net income in 2007 was due to a decrease in net interest income, an increase in the loan loss provision, the write-off of goodwill and a valuation allowance for our deferred tax assets.

Interest Income

Our interest income related to our commercial banking was down 18% to $44.9 million for the year ended December 31, 2009 from $54.7 million for the year ended December 31, 2008. Interest income was down 17% in 2008 from $65.7 million for the year ended December 31, 2007. The decrease in interest income during 2009 compared to 2008 was the result of a decline in yield from commercial banking interest-earning assets, in particular from commercial banking loans, impacted by the current declining interest rate environment. The yield from commercial banking loans decreased from 6.34% for 2008 to 5.45% for 2009. This decrease in yield was mainly due to the repricing of our commercial banking loan portfolio in response to the Federal Reserve decreasing interest rates 500 basis points from September 2007 through the end of 2008. At June 30, 2008, approximately 60% of our commercial banking loan portfolio was variable rate without a floor, which adjusted with changes in the prime rate. During the third and fourth quarter of 2008, the Bank began requiring floors on most of its new and renewed loans. As a result, the percentage of variable rate loans without a floor declined to 42% of the loan portfolio at September 30, 2008, 28% at December 31, 2008 and 21% at December 31, 2009. The decrease in yield on the commercial banking loan portfolio was also due to an increase in the Bank’s non-performing assets from $62.6 million at December 31, 2008 to $131.7 million at December 31, 2009 and the subsequent write-off of approximately $3.0 million in accrued interest, or 39 basis points, for 2009 on loans that were placed on non-accrual status during 2009. The decline in interest income was also due to a decrease in average commercial banking loans. Average commercial banking loans decreased $48.7 million, or 6%, during 2009 compared to 2008. The decrease in average commercial banking loans from 2008 to 2009 was the result of the foreclosure of approximately $33.3 million in commercial banking loans during 2009, as well as the Company’s strategic decision to slow loan growth in 2008 and 2009 to focus on asset quality and core deposit growth.

The decrease in interest income during 2008 compared to 2007 was the result of a decline in yield from commercial banking interest-earning assets, in particular from commercial banking loans, during the declining interest rate environment. The yield from commercial banking loans decreased from 8.37% for the year ended December 31, 2007 to 6.34% for the year ended December 31, 2008. This decrease in yield was mainly due to the repricing of the commercial banking loan portfolio in reaction to the Federal Reserve decreasing interest rates 500 basis points from September 2007 through the end of 2008. During the six months ended June 30, 2008, approximately 60% of our commercial banking loan portfolio was variable rate without a floor and adjusted with changes in the prime rate. During the third and fourth quarter of 2008, the Bank began requiring floors on most of its new and renewed loans. As a result, the percentage of variable rate loans without a floor declined to 42% of the loan portfolio at September 30, 2008 and then to 28% at December 31, 2008. The decrease in yield on the commercial banking loan portfolio was also due to an increase in the Bank’s non-performing assets from $11.0 million at December 31, 2007 to $62.6 million at December 31, 2008 and the subsequent write-off of approximately $1.4 million, or 17 basis points, in accrued interest on these assets that were placed on non-accrual status and foreclosed upon during 2008. The decline in interest income from the decrease in the yield on the commercial banking loan portfolio was partially offset by an increase in average commercial banking loans. During 2008, commercial banking loans declined by $29.8 million, or about 4%, however, average commercial banking loans increased $56.9 million, or 7%, during 2008 when compared to 2007. This growth in average commercial banking loans was the result of higher loan demand during the last three quarters of 2007 in our primary market area.

Interest Expense

Our interest expense related to commercial banking business was approximately $33.3 million for 2009, $37.5 million for 2008 and $36.2 million for 2007. Interest expense related to commercial banking deposits was $31.1 million for 2009, $34.7 million for 2008 and $33.5 million for 2007.

The decrease in interest expense from interest-bearing deposits for 2009 compared to 2008 resulted from a decrease in the cost of funds from commercial banking deposits. The cost of funds of commercial banking deposits decreased from 4.23% during 2008 to 3.39% during 2009. The cost of savings accounts (including money market accounts), and time deposits decreased 51 basis points and 89 basis points during 2009 compared to 2008. These decreases in average cost were due to the falling rate environment during which the Federal Reserve decreased interest rates 500 basis points from September 2007 through the first quarter of 2009. The decrease in interest expense related to the decrease in the cost of funds of commercial banking deposits was partially offset by an increase in the average balance of commercial banking deposits during 2009 compared to 2008. Average interest-bearing deposits increased approximately $96.0 million, or 12%, from $821.1 million during 2008 compared to $917.1 million during 2009. The increase in average deposits during 2009 and 2008 is mainly due to an increase in interest-bearing checking accounts. The Bank

Index to Financial Statements

offered an interest-bearing checking account special from September 2008 through March 2009 that guaranteed a rate of 3.75% until March 31, 2009, 3.00% until June 30, 2009, 2.75% until August 31, 2009 and 2.25% until December 31, 2009. As of December 31, 2009, this special generated deposit balances totaling $91.4 million, of which $40.0 million was generated in 2009. The Bank also promoted a high yield money market account in 2009 that generated deposits of $24.5 million. These increases in deposits from our interest-bearing checking accounts and money market accounts were partially offset by the Bank’s non-renewal of its brokered deposits and most of its out-of-market deposits. Since the end of 2008, we have let most of our maturing brokered and out-of market deposits run out of the Bank. We have reduced our out-of-market and brokered deposits by $57.6 million from $240.1 at December 31, 2008 to $182.5 million as of December 31, 2009. The Bank made the strategic decision to increase short-term liquidity in 2008 and 2009 through deposit growth because of the tightening in the credit and liquidity markets and the deterioration in the real estate market. The decrease in interest expense from borrowings for 2009 compared to 2008 resulted from a decrease in the cost of borrowings. The cost of borrowings decreased from 4.80% during 2008 to 3.85% in 2009. This decline is mainly related to the drop in interest rates on our trust preferred securities of $22.2 million, which are either tied to the Wall Street prime rate or the three month LIBOR and reprice quarterly.

The increase in interest expense from 2007 to 2008 mainly resulted from an increase in the average balance of interest-bearing deposits. Average interest-bearing deposits increased approximately $138.4 million, or 20%, from $682.7 million for the year ended December 31, 2007 to $821.1 million for the year ended December 31, 2008. The Company made the strategic decision to increase short-term liquidity through the growth in deposits during 2008 due to the tightening in the credit and liquidity markets and the deterioration in the real estate market. The Bank mainly used out-of-market and brokered deposits during the first and second quarters of 2008 because these funds were approximately 15 to 30 basis points below the cost of deposits of similar maturity in our local markets. During the last two quarters of 2008, the cost of out-of-market and brokered deposits increased to levels equal to or exceeding the costs in our local market. In response, we offered several certificate of deposit promotions in our local markets to raise deposits during the last two quarters of 2008, which increased our in-market certificates of deposit by approximately $84.2 million during 2008. Our out-of-market and brokered deposits increased $62.6 million, or 35%, from $177.5 million at December 31, 2007 to $240.1 million at December 31, 2008. The increase in interest expense related to the increase in the average balance of commercial banking deposits was partially offset by a decrease in the cost of funds of commercial banking deposits. The cost of funds from commercial banking deposits decreased from 4.91% during 2007 to 4.23% during 2008. These decreases in cost of funds were due to the falling rate environment during which the Federal Reserve decreased interest rates 500 basis points from September 2007 through the end of 2008. Our cost of funds on time deposits has decreased from 5.31% during 2007 to 4.61% during 2008, the cost of funds on our interest-bearing checking accounts decreased from 2.98% during 2007 to 1.88% during 2008 and the cost of funds on our savings accounts decreased from 3.85% during 2007 to 2.84% during 2008.

Net Interest Income

Our net interest income, net interest margin and interest spread for commercial banking for 2009 were $11.6 million, 1.19%, and 1.22%, respectively. Our net interest income, net interest margin and interest spread for commercial banking for 2008 were $17.1 million, 1.85%, and 1.63%, respectively. Our net interest income, net interest margin and interest spread for commercial banking for 2007 were $29.4 million, 3.68%, and 3.27%, respectively.

The decrease in net interest income, net interest margin and interest spread from 2008 to 2009 was mainly due to the decrease in the yield on commercial banking loans. The yield from commercial banking loans decreased from 6.34% during 2008 to 5.45% during 2009. This decrease in yield was mainly due to the repricing of the commercial banking loan portfolio in response to the Federal Reserve decreasing interest rates 500 basis points from September 2007 through the end of 2008. At June 30, 2008, approximately 60% of our commercial banking loan portfolio was variable rate without a floor, which adjusted with changes in the prime rate. During the third and fourth quarter of 2008, the Bank began requiring floors on most of its new and renewed loans. As a result, the percentage of variable rate loans without a floor declined to 42% of the loan portfolio at September 30, 2008, 28% at December 31, 2008 and 21% at December 31, 2009. The decrease in yield on the commercial banking loan portfolio was also due to an increase in the Bank’s non-performing assets from $62.6 million at December 31, 2008 to $131.7 million at December 31, 2009 and the subsequent write-off of approximately $3.0 million in accrued interest, or 39 basis points, for 2009 on loans that were placed on non-accrual status during 2009. The decrease in net interest income, net interest margin and interest spread during 2009 was also due to the Bank holding more short-term liquid assets, which provide a lower yield than investments and loans. During 2009, in comparison to 2008, the Bank held on average $85.2 million, or 109% more in interest-bearing deposits and federal funds sold. The Company made the strategic decision to increase short-term liquidity to address the tightening in the credit and liquidity markets, as well as the deterioration in the real estate market. The yield on commercial banking assets decreased 126 basis points while the cost of interest-bearing liabilities decreased only 85 basis points in 2009 compared to 2008. Even with the Federal Reserve decreasing interest rates 500 basis points from September 2007 through the end of 2008, the average cost of time deposits only decreased 89 basis points from 2009 compared to 2008 due to strong competition in the market area for local deposits and due to the fact that time deposits are slower to reprice than the loan portfolio.

The decrease in net interest income, net interest margin and interest spread from 2007 to 2008 was mainly due to the decrease in the yield on commercial banking loans. The yield from commercial banking loans decreased from 8.37% during 2007 to 6.34%

Index to Financial Statements

during 2008. This decrease in yield was mainly due to the repricing of the commercial banking loan portfolio in reaction to the Federal Reserve decreasing interest rates 500 basis points from September 2007 through the end of 2008. During the six months ended June 30, 2008, approximately 60% of our commercial banking loan portfolio was variable rate without a floor and adjusted downward with changes in the prime rate. During the third and fourth quarter of 2008, the Bank began requiring floors on most of its new and renewed loans and the percentage of variable rate loans without a floor declined to 42% of the loan portfolio at September 30, 2008 and further declined to 28% at December 31, 2008. The decrease in yield on the commercial banking loan portfolio was also due to an increase in the Bank’s non-performing assets from $11.0 million at December 31, 2007 to $62.6 million at December 31, 2008 and the subsequent write-off of approximately $1.4 million, or 17 basis points, in accrued interest on these assets that were placed on non-accrual status and foreclosed upon during 2008. The decrease in net interest income, net interest margin and interest spread during 2008 was also due to the Bank holding more short-term liquid assets, which provide a lower yield than investments and loans. For the year ended December 31, 2008, in comparison to the year ended December 31, 2007, the Bank held on average $62.5 million, or 393%, more in interest-bearing deposits and federal funds sold. The Company made the strategic decision to increase short-term liquidity to address the tightening in the credit and liquidity markets, as well as the deterioration in the real estate market. In comparing 2008 to 2007, the yield on commercial banking assets decreased 231 basis points while the cost of interest-bearing liabilities decreased only 67 basis points. Even with the Federal Reserve decreasing interest rates 500 basis points from September 2007 through the end of 2008, the average cost of time deposits has only decreased 70 basis points during 2008 in comparison to 2007. The limited decrease in the average cost of time deposits was due to strong competition in the market area for local deposits, the effects that the deterioration in the credit and liquidity markets had upon the cost of out-of-market time deposits in the fourth quarter of 2007 and in 2008, and the fact that time deposits are slower to reprice than the loan portfolio.

Loan Loss Provisions

In 2009, we made provisions for loan losses of $26.2 million and incurred net charge-offs of $20.5 million of loans. We made provisions for loan losses of approximately $25.8 million and incurred net charge-offs of $13.4 million of loans in 2008 and we made provisions for loan losses of approximately $2.7 million and incurred net charge-offs of $873,654 of loans in 2007. The ratios of net charge offs to average loans outstanding were 2.67%, 1.64%, and 0.11% for 2009, 2008, and 2007, respectively. During the second quarter of 2007, the Bank had a recovery of $200,000 from a commercial real estate loan that was charged-off during 2005. If this recovery was not included in the totals for 2007, the Bank would have incurred net charge-offs of approximately $1.1 million for 2007 and the ratio of net charge-offs to average commercial banking loans outstanding during the period would have been 0.14% rather than 0.11%.

The Bank’s charge-offs in 2009 consisted of ten commercial real estate loan charge-offs of $960,000, fifty commercial loan charge-offs of approximately $2.1 million, sixty-six ADC loan charge-offs of approximately $14.3 million, fifty-one residential real estate charge-offs of approximately $2.9 million and various installment and other consumer loans charge-offs. Out of the sixty-six ADC loan charge-offs totaling approximately $14.3 million, four of the ADC loan charge-offs totaled approximately $10.9 million and were related to three large residential and one commercial development projects. The Bank’s charge-offs in 2008 consisted of nine commercial real estate loan charge-offs of approximately $810,000, thirty-eight commercial loan charge-offs of approximately $1.2 million, twenty residential real estate loan charge-offs of approximately $843,000, sixty-one construction and acquisition and development loan charge-offs of $10.3 million and various installment and other consumer loans charge-offs. The Bank’s charge-offs in 2007 consisted of one construction and acquisition and development loan charge-off of $25,000, two commercial real estate loan charge-offs totaling $403,185, four residential real estate loan charge-offs of $365,927, six commercial loan charge-offs totaling $109,363 and various installment and other consumer loans charge-offs. We may make additional provisions for loan losses and may experience an increase in charge-offs if the deterioration in the credit, liquidity and real estate markets causes more borrowers to default and the realizable value of real estate collateral to decline. If actual losses exceed our estimates and we increase our provision for loan losses, our net income would decrease.

The increase in net charge-offs of $7.1 million, or 53%, from 2008 to 2009 and the significant provision for loan losses was due to the continued and dramatic deterioration in our loan portfolio during 2009. We continued to see unprecedented deterioration in real estate values during 2009, which led to increases in our potential problem loans (loans that are considered impaired and are still accounted for on an accrual basis and are not considered restructured), non-performing loans and foreclosed properties in 2009 compared to 2008. This, in turn, led to increases in our charge-offs, specific reserves on our impaired loans and our general reserves during 2009. During 2009, the Bank’s potential problem loans increased $123.5 million, or 428%, from $28.8 million at December 31, 2008 to $152.3 million at December 31, 2009, non-performing loans increased $51.7 million, or 140%, from $36.8 million at December 31, 2008 to $88.5 million at December 31, 2009 and foreclosed properties increased $17.3 million, or 67%, from $25.8 million at December 31, 2008 to $43.1 million at December 31, 2009. The main sector of the Bank’s loan portfolio that experienced this deterioration was its acquisition, development and construction loan portfolio, or ADC loans. The Bank’s potential problem loans, non-performing loans and foreclosed properties related to its ADC loans increased $73.0 million, $30.9 million and $16.9 million, respectively, for the year ended December 31, 2009. The deterioration in our ADC loans is due to the increase in the inability of some borrowers to make payments and the decrease in sales activity and property values in the real estate market in our market area since the end of 2007. With this continued deterioration in the loan portfolio during 2009, the Bank continued to see significant provisions for loan losses and net loan charge-offs. The Bank’s net charge-offs increased from $13.4 million in 2008 to $20.5 million

Index to Financial Statements

in 2009. Historical charge-offs are an important factor in calculating our allowance for loan losses on our general portfolio. As a result, our general reserves increased from 1.81% of the general loan portfolio in 2008 to 2.35% in 2009. Also, the Bank’s specific reserves on impaired loans increased approximately $5.4 million from $11.0 million at December 31, 2008 to $16.4 million at December 31, 2009. These reserves do not include partial charge-offs on impaired loans that have not been taken into foreclosure. The Bank determined that the losses related to certain loans were uncollectible and charged-off the balances based upon the current downturn in the economy and deteriorating real estate market. The Bank had partial charge-offs of approximately $10.2 million at December 31, 2009 compared to $4.0 million at December 31, 2008. If these amounts were included, then our specific reserves in impaired loans would have increased approximately $11.6 million to $26.6 million at December 31, 2009 from $15.0 million at December 31, 2008.

During 2008, the Bank charged-off $13.6 million in loans, which was a $12.3 million, or 945%, increase from 2007. Of the total amount charged-off during 2008, $8.2 million was related to impaired loans that the Bank had not taken into foreclosure at the time of charge-off. During 2008, the Bank determined that the losses related to these loans were uncollectible. The Bank took an aggressive approach and charged-off the balances based upon the downturn in the economy and real estate market. Of the total amount of $6.3 million in charge-offs related to impaired loans recognized during the second and third quarters of 2008, loans related to $4.8 million of these charge-offs were foreclosed upon during the third and fourth quarters of 2008. Of the total amount of charge-offs during 2008, $10.3 million was related to ADC loans, where the Bank has seen significant deterioration in asset quality, including an increase in the inability of some borrowers to make payments and declines in the value and marketability of the underlying collateral. The increase in the provision for loan losses was due to the continued deterioration in our loan portfolio during 2008 and management’s assumptions about general economic conditions. During 2008, the Bank’s criticized loans increased $61.9 million, or 469%, from $13.2 million at December 31, 2007 to $75.1 million at December 31, 2008, non-performing loans increased $31.2 million, or 555%, from $5.6 million at December 31, 2007 to $36.8 million at December 31, 2008 and foreclosed properties increased $20.4 million, or 377%, from $5.4 million at December 31, 2007 to $25.8 million at December 31, 2008. The main sector of the Bank’s loan portfolio that experienced this deterioration was its ADC loans. The Bank’s criticized loans, non-performing loans and foreclosed properties related to its ADC loans increased $40.7 million, $23.8 million and $17.7 million, respectively, for the year ended December 31, 2008 compared to the same period in 2007. The deterioration in our ADC loan portfolio is due to the increase in the inability of some borrowers to make payments and the decrease in sales activity and property values within the residential real estate market in our market area during the last quarter of 2007 and 2008.

The allowance for loan losses as a percentage of total commercial banking loans was 3.82%, 2.84% and 1.21% as of December 31, 2009, 2008 and 2007, respectively. The increase in the allowance for loan losses as a percentage of total commercial banking loans from 2008 to 2009 and from 2007 to 2008 was due to management’s concerns with respect to the deterioration in the economy and the residential real estate market in 2008 and 2009 and due to the increase in criticized loans and non-performing assets.

Noninterest Income

Our noninterest income related to our commercial banking business was approximately $3.8 million for 2009, $3.7 million for 2008 and $4.2 million for 2007. The increase in noninterest income during 2009 compared to 2008 was primarily due to an increase in our mortgage loan origination fees of approximately $47,000, an increase in gains on sale of SBA loans of approximately $37,000 and an increase in the Bank’s other operating income of approximately $39,000. During the same period service charges on deposit accounts declined approximately $68,000. The increase in the Bank’s mortgage loan origination fees was due to the Bank closing more mortgage loans in this low mortgage interest rate environment. The increase in gains on sale of SBA loans was due to the government increasing its guarantee to 90% from 75% on the sold portion of the loans during the third quarter of 2009 which improved the market for selling the loans. This increased the premiums that we earned in the fourth quarter of 2009 which totaled $198,000. The increase in the Bank’s other operating income was mainly related to an increase in ATM transaction fees of $60,000. The increase in ATM transaction fees was due an increase in non-Bank customer use of the Bank’s ATM network in 2009 compared to 2008. The decrease in deposit service charges was mainly related to a $84,000 decrease in overdraft charges which is due to fewer overdrawn accounts and insufficient fund items because customers are being more diligent with their accounts.

The decrease in noninterest income during 2008 compared to the same period in 2007 was primarily due to a decrease in our service charges on deposit accounts of approximately $113,000, a decrease in the income from the sale of SBA loans of approximately $244,000, and a decline in mortgage origination fees of approximately $105,000. The decrease in our service charges on deposit accounts in 2008 compared to 2007 was due to a decline in overdraft and insufficient funds charges as a result of fewer overdrawn accounts and insufficient fund items because customers are being more diligent with their accounts. The decrease in the gains on sale of SBA loans was due to the Bank selling fewer loans in 2008 than in 2007 and also due to a decline in premiums paid on the sale of SBA loans in 2008 due to the tightening in the credit markets. The decrease in mortgage origination fees was due to the Bank closing fewer mortgage loans in 2008 than in 2007 as a result of the tightening in the credit markets.

Index to Financial Statements

Noninterest Expense

Our noninterest expenses related to our commercial banking business (other than income tax expenses) were $28.3 million for 2009, $28.5 million for 2008 and $21.2 million for 2007. The slight decrease in noninterest expense during 2009 compared to 2008 was attributable to a decrease in salaries and employee benefits of approximately $3,595,000. The decrease in salaries and employee benefits was due to a reduction of 21 employees from June 30, 2008 to December 31, 2009, including six officers, a 10% to 15% reduction in salaries for executive officers and other select officers, the suspension of the Bank’s matching contribution to its 401(k) plan and the Bank’s suspension of its accruals on its supplemental retirement plan which was effective April 1, 2009. In addition, during the third quarter of 2009, certain Bank officers waived their rights to their accrued benefits related to their defined benefit retirement plan and to their restricted stock awards. These waivers allowed the Bank to reverse previous retirement plan benefit accruals of approximately $1,093,000 and to reverse previous stock compensation expense on these unvested stock awards of approximately $994,000 at September 30, 2009. (See further discussion in Note 9 – Employee Benefit Plans). These expense reversals were recorded as a reduction in Salaries and Employee Benefits in our statement of operations.

This decrease in noninterest expense related to salaries and employee benefits was offset by an increase in other operating expenses of approximately $1.9 million, which included an increase in legal and professional expense of approximately $724,000, an increase in insurance expense of approximately $4.8 million and the recording of an other than temporary impairment in investments of approximately $342,000. The increases in other operating expenses were offset somewhat by the recording of impairment of goodwill of approximately $3.4 million during 2008. This decrease in noninterest expense was also offset by an increase in foreclosed asset expense, net of approximately $1.6 million. The increase in legal and professional fees expense during 2009 compared to 2008 was mainly attributable to the increased regulatory and disclosure requirements for a public company, an increase in legal and consulting fees related to regulatory and capital issues, and an increase in legal fees related to the collection of loans. The increase in insurance expense of $4.8 million during 2009 compared to 2008 was mainly attributable to increases in our FDIC insurance assessments. During the second quarter of 2009, the FDIC assessed all banks a special assessment in order to replenish the deposit insurance fund. Our special assessment was approximately $500,000. The FDIC also increased our regular quarterly assessment based upon the capital levels and financial condition of the Bank. The increase in other operating expense during 2009 compared to 2008 was also attributable to the Company recording an other than temporary impairment of approximately $342,000 in two investments. One of the impairments recorded was for $176,000 on an investment consisting of trust preferred securities in various community bank holding companies, representing the entire balance, and the other impairment recorded was for $165,975 in an investment in Community Financial Services, Inc. common stock which was the holding company for Silverton Bank, which was closed on May 1, 2009 by the Office of the Comptroller of the Currency. These increases in other operating expenses during 2009 were offset somewhat by the Bank recording a impairment of goodwill of $3.4 million during 2008. The increase in foreclosed asset expense during 2009 in comparison to 2008 was attributable to foreclosed asset expense, outside of the specific write-downs of individual properties, increasing approximately $1.8 million in 2009 from 2008. The Bank has seen its foreclosed properties increase from $6.0 million at June 30, 2008 to $44.1 million at December 31, 2009, which has directly impacted our foreclosed asset expense related to maintaining these properties. These increases in foreclosed asset expense were slightly offset by a decline in the write-downs on foreclosed properties to approximately $3.2 million in 2009 from approximately $3.4 million in 2008.

The increase in noninterest expense for 2008 compared to 2007 was attributable to an increase in foreclosed asset expense, net of $3.1 million and an increase in other operating expenses of $4.2 million. Included in this increase in other operating expenses is an increase in legal and professional expense of approximately $463,000, an increase in insurance expense of approximately $282,000 and the recording of impairment of goodwill of $3.4 million. These increases were offset by a decrease in salaries and employee benefits of approximately $192,000. The increase in foreclosed asset expense during 2008 compared to 2007 was mainly due to various write-downs on foreclosed properties totaling approximately $3.1 million during 2008 compared to only $310,000 during 2007. The write-downs on foreclosed assets during 2008 consisted of $544,000 on two automobile service centers, $1.1 million on one residential home, $400,000 on a commercial shopping center and $857,000 on various construction and acquisition and development projects. Of the $3.1 million in write-downs on foreclosed properties, $2.3 million occurred in the fourth quarter of 2008, as a result of the stagnation in the credit markets and the extreme decline in valuations in the residential real estate market. The Bank has also seen its foreclosed properties increase from $5.4 million at December 31, 2007 to $25.8 million at December 31, 2008, which has directly impacted our foreclosed asset expense.

The increase in legal and professional fees expense during 2008 compared to 2007 was mainly attributable to the increased regulatory and disclosure requirements for a public company, an increase in legal and consulting fees related to regulatory and capital issues, and an increase in legal fees related to the collection of loans. The increase in insurance expense during 2008 compared to 2007 was due to an increase in FDIC assessments. The FDIC changed its method of calculating its assessments, which led to higher insurance costs for the Bank. The increase in FDIC assessments is also related to the fact that deposits grew $151.6 million in 2008 compared to 2007. The Company also did its annual impairment test on its goodwill in the fourth quarter of 2008. It was determined that the full amount of goodwill totaling approximately $3.4 million was impaired, and therefore, the full amount was written-off. The decrease in salaries and other payroll expenses for 2008 compared to 2007 was due to the Bank having no bonus accruals in 2008 while it had $1.1 million in bonus accruals in 2007. This reduction was due to the fact that the Company suspended its bonus plan during 2008 in reaction to the Company’s net losses for 2008. This decrease was offset by two increases related to salaries and

Index to Financial Statements

employee benefits. One factor was an increase in salaries, including payroll taxes, of approximately $348,000 for 2008 compared to the 2007. These increases were due to the addition of several new employees during the third and fourth quarters of 2007, and due to regular annual raises at the end of 2007. Another factor was an increase in the expense related to the supplemental retirement plan of approximately $363,000 during 2008 compared to 2007. This increase was due to the Company making an adjustment of approximately $350,000 during 2007, which reduced expense related to changes in the projections of the former supplement retirement plan, and restating the supplemental retirement plan in the third quarter of 2007, which increased the monthly accruals after the restatement of the plan.

Pretax Net Income (Loss)

During 2009, our commercial banking pre-tax loss was approximately $(39.1) million compared to pre-tax loss of approximately $(33.5) million for 2008. Pre-tax loss for 2009 increased approximately $5.6 million, or 17%, compared to 2008. The increase in pretax loss for 2009 compared to 2008 was due to a decrease in net interest income of approximately $5.6 million. The decrease in the net interest income was due to both the Federal Reserve decreasing interest rates 500 basis points from September 2007 through the first quarter of 2009, and due to non-performing assets increasing from $62.6 million at December 31, 2008 to $131.7 million at December 31, 2009 and the subsequent write-off of approximately $3.0 million in accrued interest or 39 basis points for 2009 on loans that were placed on non-accrual status during 2009. See further discussion above under “—Net Interest Income.”

During 2008, our commercial banking pre-tax loss was approximately $(33.5) million compared to pre-tax income of approximately $9.8 million for 2007. Pre-tax income (loss) for 2008 decreased approximately $43.3 million, or 443%, compared to 2007. The decrease in pre-tax income (loss) for 2008 compared to 2007 was due to an increase in the provision for loan losses of approximately $23.2 million, a decrease in net interest income of approximately $12.3 million, and an increase in noninterest expense of $7.3 million. The increase in the provision for loan losses was due to the deterioration in the loan portfolio with the increase in criticized loans, nonaccrual loans and charge-offs during 2008. The decrease in the net interest income was due to both the Federal Reserve decreasing interest rates 500 basis points from September 2007 through the end of 2008, and to non-performing assets increasing from $11.0 million at December 31, 2007 to $62.6 million at December 31, 2008 and the subsequent write-off of $1.4 million in accrued interest on loans that were placed on non-accrual during 2008. The increase in noninterest expense during 2008 compared to 2007 was mainly due to an increase in insurance expense, legal and professional expenses, foreclosed asset expense, net and the recording of impairment on our goodwill. See further discussion above under “—Provision for Loan Losses,” “—Net Interest Income,” and “—Noninterest Expense.”

Income Taxes

The effective income tax rate for our commercial banking business for 2009, 2008 and 2007 was 9.19%, 5.34% and 35.24%, respectively. The primary reason for the increase in the effective tax rate during 2009 compared to 2008 was due to a new law that expanded the five-year net operating loss (NOLs) carryback period to allow all businesses to carryback NOLs for up to five years for losses incurred in either 2008 or 2009, but not for both years. This new legislation allowed the Company to recognize an additional benefit of approximately $3.6 million which was reflected in our fourth quarter 2009 income tax analysis. The primary reason for the decrease in the effective tax rate during 2008 compared to 2007 was due to fact that the Company recorded a valuation allowance of $9.2 million related to its deferred tax asset which was recorded as income tax expense during 2008. The decrease was also due to the fact that the Company did not receive a tax benefit from the recording of the impairment of goodwill of $3.4 million.

Results of Our Mortgage Banking Business

In 2007, 2008 and 2009, the mortgage banking business operations mainly consisted of activity from the servicing portfolio and the costs associated with winding down the wholesale mortgage business. During 2009, the mortgage banking business had no revenues or expenses related to the wholesale mortgage banking business. During 2008, the mortgage banking business did record a valuation allowance of approximately $658,000 related to its deferred tax asset, which was recorded as income tax expense. During the 2007, the results from our mortgage banking operations consisted of an adjustment to our allowance for recourse liability. During the second quarter of 2007, we evaluated our allowance for recourse liability for indemnified loans based upon the number of loans indemnified and the average loss on an indemnified loan. Based upon this evaluation, we determined that we had made an overaccrual in the allowance for recourse liability because we have indemnified fewer loans than we had previously estimated and had several indemnified loans pay-off without any losses during 2007. Therefore, based upon this analysis, we reduced the allowance for recourse liability by $118,394 during the second quarter of 2007.

Index to Financial Statements

Financial Condition

General Discussion of Our Financial Condition

Total Assets

Our total assets decreased $45.1 million, or 4%, from $1.039 billion as of December 31, 2008 to $993.9 million as of December 31, 2009. The decrease in total assets was mainly the result of a $59.5 million, or 8%, decrease in our commercial banking loans, net a $7.2 million, or 22%, decrease in investment securities available for sale and a $2.4 million, or 100%, decrease in our deferred tax asset. The decrease in commercial banking loans was mainly due to property foreclosures totaling approximately $33.3 million during 2009. The decrease in investment securities available for sale was due to several agency bonds being called and due to pay downs on our mortgage-backed securities during 2009. The decrease in the deferred tax asset was a result of the implementation of an impairment reserve against the remaining balance in reaction to the cumulative losses sustained in 2009. These decreases were offset by a $10.3 million, or 7%, increase in cash and due from banks, federal funds sold and interest-bearing deposits in banks. This increase was a result of the Bank’s strategic decision to increase short-term liquidity in response to the tightening in the credit and liquidity markets, along with the deterioration in the real estate market. In addition, other real estate owned increased $17.3 million, or 67%, during 2009. Our decrease in total assets corresponded with a $36.0 million, or 98%, decrease in shareholders’ equity. This decrease was mostly related to our net loss of $35.5 million for 2009.

Our total assets increased $118.4 million, or 13%, from $920.3 million as of December 31, 2007 to $1.0 billion as of December 31, 2008. The increase in total assets was mainly comprised of a $125.1 million, or 588%, increase in federal funds sold and interest-bearing deposits in banks, a $20.4 million, or 377%, increase in the Bank’s other real estate owned and a $15.2 million, or 60%, increase in investment securities. The growth in federal funds sold and interest-bearing deposits in banks was due to the Company’s strategic decision to increase short-term liquidity because of the tightening in the credit and liquidity markets and the deterioration in the real estate market. The growth in other real estate owned resulted from the Bank’s foreclose on several large construction and acquisition and development projects, with the continued deterioration in the real estate market causing declines in the value and marketability of underlying collateral during 2008. The growth in investment securities was due to the Bank purchasing a local municipal bond for $4.0 million and purchasing government-backed agency and mortgage-backed securities in order to increase our yield on our liquid funds. These increases in total assets were offset by a decrease in our loan portfolio of $29.8 million. The decrease in total commercial banking loans compared to December 31, 2007 is the result of foreclosing upon $28.2 million in commercial banking loans during 2008 and of our strategic decision to slow loan growth in 2008 and focus on asset quality and core deposit growth. The increase in our total assets corresponded with a $151.6 million, or 19%, increase in deposits.

Interest-Earning Assets

Our interest-earning assets during 2009 were comprised of:

•

commercial banking loans;

•

mortgage loans held for sale;

•

investment securities;

•

interest-bearing balances in other banks; and

•

temporary investments.

At December 31, 2009, interest-earning assets totaled $926.9 million and represented 93% of total assets. This represents a $46.7 million, or 5%, decrease from December 31, 2008, when interest-earning assets totaled $973.5 million and represented 94% of total assets. This decrease was mainly related to a $53.8 million, or 7%, decrease in the Bank’s commercial banking loan portfolio and a $7.2 million, or 22%, decrease in investment securities available for sale. The decrease in total commercial banking loans from December 31, 2008 is mainly the result of foreclosing upon $33.3 million in commercial banking loans during 2009. The decrease in investment securities available for sale was due to several agency bonds being called and due to pay downs on our mortgage-backed securities during 2009. These decreases in interest-earning assets were partially offset by a $14.5 million, or 10%, increase in federal funds sold and interest-bearing deposits in banks. This increase was due to the Bank making the strategic decision to increase short-term liquidity with the tightening in the credit and liquidity markets along with the deterioration in the real estate market.

At December 31, 2008, interest-earning assets totaled $973.5 million and represented 94% of total assets. This represents a $111.1 million, or 13%, increase from December 31, 2007, when interest-earning assets totaled $862.4 million and represented 94% of total assets. This increase was mainly related to a $125.1 million increase in federal funds sold and interest-bearing deposits in banks and a $15.2 million increase in investment securities. The growth in federal funds sold and interest-bearing deposits in banks was due

Index to Financial Statements

to the Company’s strategic decision to increase short-term liquidity because of the tightening in the credit and liquidity markets and the deterioration in the real estate market. The growth in investment securities is due to the Bank purchasing a local municipal bond for $4.0 million and purchasing government-backed agency and mortgage-backed securities in order to increase our yield on our liquid funds. These increases in interest-earning assets were offset by a decrease in our commercial banking loans of approximately $29.8 million from December 31, 2007 to December 31, 2008. The decrease in total commercial banking loans from December 31, 2007 is mainly the result of foreclosing upon $19.8 million in commercial banking loans during the first nine months of 2008. See “—Financial Condition of Our Commercial Banking Business—Total Commercial Banking Loans.”

The following table sets forth a distribution of the assets, liabilities and stockholders’ equity for the periods indicated:

Distribution of Assets, Liabilities and Stockholders’ Equity


	2009 Daily Average		2008 Daily Average		2007 Daily Average		2006 Daily Average		2005 Daily Average
	Balances		Balances		Balances		Balances		Balances
	(in thousands)
ASSETS
Interest-earning assets:
Loans (1)	$	768,179	$	816,877	$	760,007	$	636,676	$	539,522
Mortgage loans held for sale		675		184		289		252		350
Securities		36,263		30,962		24,045		23,295		20,304
Federal funds sold		35,020		59,883		13,948		36,264		25,369
Deposits in other banks		128,627		18,544		1,907		855		2,623

Total interest-earning assets		968,764		926,450		800,196		697,342		588,168

Other assets		74,885		72,271		62,372		52,549		50,999

Total assets	$	1,043,649	$	998,721	$	862,568	$	749,891	$	639,167

LIABILITIES & STOCKHOLDERS’ EQUITY
Interest-bearing liabilities
Demand deposits	$	135,892	$	68,129	$	77,668	$	87,034	$	55,261
Savings deposits		72,946		71,818		61,231		43,726		67,991
Time deposits		708,274		681,124		543,755		449,302		356,719
Other borrowings		57,827		58,033		51,061		58,645		53,647

Total interest-bearing liabilities	$	974,939	$	879,104	$	733,715	$	638,707	$	533,618
Noninterest-bearing deposits		39,645		44,171		50,065		45,745		42,743
Other liabilities		6,812		14,157		14,041		6,738		9,546
Stockholders’ equity		22,253		61,289		64,747		58,701		53,260

Total liabilities & stockholders’ equity	$	1,043,649	$	998,721	$	862,568	$	749,891	$	639,167

(1)	For the purpose of these computations, non-accruing loans are included in the daily average loan amounts outstanding.

Index to Financial Statements

The following table sets forth our average yield and rates as they relate to our interest income and expenses for the periods indicated.

Average Yields and Rates


	2009 Income/ Expense		2009 Average Yield/ Rates		2008 Income/ Expense		2008 Average Yield/ Rates		2007 Income/ Expense		2007 Average Yield/ Rates		2006 Income/ Expense		2006 Average Yield/ Rates		2005 Income/ Expense		2005 Average Yield/ Rates
	(dollars in thousands)
Interest income/yields:
Loans (1)	$	41,875	5.45	%	$	51,775	6.34	%	$	63,627	8.37	%	$	52,060	8.18	%	$	36,774	6.82	%
Mortgage loans held for sale		22	3.30	%		7	3.61			17	5.83			18	7.06			24	6.86
Securities		1,473	4.06	%		1,426	4.61			1,239	5.15			1,117	4.80			831	4.09
Federal funds sold		54	.15	%		995	1.66			695	4.98			1,775	4.89			841	3.32
Deposit in other banks		1,479	1.15	%		453	2.44			97	5.09			42	4.94			66	2.52

Total interest income/yield	$	44,903	4.64	%	$	54,656	5.90	%	$	65,675	8.21	%	$	55,012	7.89	%	$	38,536	6.55	%

Interest expense/rates:
Demand deposits	$	3,078	2.26	%	$	1,281	1.88	%	$	2,314	2.98	%	$	2,755	3.17	%	$	1,318	2.39	%
Savings deposits		1,697	2.33	%		2,043	2.84	%		2,360	3.85	%		1,286	2.94	%		1,851	2.72	%
Time deposits		26,332	3.72	%		31,426	4.61	%		28,861	5.31	%		21,280	4.74	%		13,053	3.66	%
Other borrowings		2,228	3.85	%		2,785	4.80	%		2,694	5.28	%		2,813	4.80	%		1,971	3.67	%

Total interest expense/rates		33,335	3.42	%		37,535	4.27	%		36,229	4.94	%		28,134	4.40	%		18,193	3.41	%

Net interest income	$	11,568			$	17,121			$	29,446			$	26,878			$	20,343

Net yield on interest-earning assets			1.19	%			1.85	%			3.68	%			3.85	%			3.46	%

(1)	For the purpose of these computations, non-accruing loans are included in the daily average loan amounts outstanding.

(2)	Information is not presented on a taxable equivalent basis because such adjustments are insignificant.

Allowance for Losses

Our assessment of the risks associated with extending credit and our evaluation of the quality of our loan portfolio is reflected in the allowance for loan losses. We maintain an allowance for our commercial banking loan portfolio, as detailed below under “—Financial Condition of Our Commercial Banking Business—Loan Loss Allowance.”

Premises and Equipment

We had premises and equipment of $21.4 million at December 31, 2009, $22.8 million at December 31, 2008 and $21.0 million at December 31, 2007. Premises and equipment decreased $1.4 million from December 31, 2008 to December 31, 2009. The decrease in premises and equipment of $1.4 million was due to depreciation expense from the premises and equipment of approximately $1.5 million. This decrease in premises and equipment from depreciation was partially offset by the normal purchase and replacement of technology and equipment throughout the period. The increase in premises and equipment of $1.8 million from December 31, 2007 was mainly due to the Bank purchasing a parcel of land for future branch development for $1.4 million in the third quarter of 2008. The Bank has also incurred costs of approximately $1.1 million in 2008 related to expanding its current Cartersville branch located in Bartow County, Georgia. The remaining increase in premises and equipment was related to the normal purchasing and replacement of technology and equipment throughout the period. These increases were offset by depreciation expense from the premises and equipment of approximately $1.5 million.

Cash Surrender Value of Life Insurance

In 1999, the Bank provided a supplemental retirement plan to its banking officers funded with life insurance. In the first quarter of 2000, we added our directors to the supplemental retirement plan. At December 31, 2009, the total cash value of the life insurance was $14.7 million. At December 31, 2008 and December 31, 2007, the total cash value of the life insurance was $14.1 million and $13.6 million, respectively. The increase of approximately $0.6 million from December 31, 2008 to December 31, 2009 was due to policy earnings. The increase of approximately $0.5 million from December 31, 2007 to December 31, 2008 was also due to policy earnings.

Index to Financial Statements

Financial Condition of Our Commercial Banking Business

Total Commercial Banking Loans

Commercial banking loans at December 31, 2009, 2008 and 2007 were $731.6 million, $785.4 million and $815.2 million, respectively. During 2009, our average commercial banking loans were $768.2 million and constituted 79% of our average consolidated earning assets and 74% of our average consolidated total assets. During 2008, our average commercial banking loans were $816.9 million and constituted 88% of our average consolidated earning assets and 82% of our average consolidated total assets. During 2007, our average commercial banking loans were $760.0 million and constituted 95% of our average consolidated earning assets and 88% of our average consolidated total assets. The $48.7 million, or 6%, decrease in average commercial banking loans and the $53.8 million, or 7%, decrease in period end commercial banking loans from December 31, 2008 to December 31, 2009 was the result of the foreclosure on approximately $33.3 million in commercial banking loans, as well as the Company’s strategic decision to slow loan growth in 2008 and 2009 to focus on asset quality and core deposit growth. The 4% decrease in total commercial banking loans from December 31, 2007 to December 31, 2008 is the result of the foreclosure on $28.2 million in commercial banking loans during 2008 and the Company’s strategic decision to slow loan growth in 2008 and to focus on asset quality and core deposit growth. The 7% increase in average commercial banking loans from the year ended December 31, 2007 to the year ended December 31, 2008 was the result of higher loan demand in our service area during the last two quarters of 2007 and the first quarter of 2008. The Bank did not begin to reduce its loan balances until the second quarter of 2008.

Loan Loss Allowance

The allowance for loan losses represents management’s assessment of the risks associated with extending credit and its evaluation of the quality of the commercial loan portfolio. We attempt to maintain our allowance for loan losses at a level that we believe is adequate to absorb the risk of loan losses in the loan portfolio. In determining the appropriate level of the allowance for loan losses, we apply a methodology that has both a specific component and a general component. Under the specific component of the methodology, each loan is graded:

(1)

at the time of the loan’s origination;

(2)

at each of the Bank’s loan committee meetings; and

(3)

at any point in time when payments due under the loan are delinquent or events occur which may affect the customer’s ability to repay loans.

The Bank’s grading system is similar to the grading systems used by bank regulators in analyzing loans. To grade a loan the Bank considers:

(1)

the value of underlying collateral;

(2)

the relative risk of the loan, based upon the financial strength and creditworthiness of the borrower;

(3)

prevailing and forecasted economic conditions; and

(4)

the Bank’s historical experience with similar loans.

The actual grading is performed by loan officers and reviewed and approved by the loan committee. After grading each of the loans, we review the overall grades assigned to the portfolio as a whole, and we attempt to identify and determine the effect of potential problem loans.

The general component of the methodology involves an analysis of actual loan loss experience, a comparison of the actual loss experience of banks in the Bank’s peer group, and carefully developed assumptions about the economy generally. We also follow the regulatory guidance provided by the Federal Financial Institution Examination Council’s Interagency Policy Statement on Allowance for Loan Losses Methodologies, as well as other widely accepted guidelines for banks and savings institutions generally.

We apply both the specific and general components of the methodology, together with regulatory guidance, to determine an appropriate level for the allowance for loan losses. We also hire independent loan review consultants on an annual basis to review the quality of the loan portfolio and the adequacy of the allowance for loan losses. The provision for loan losses during a particular period is a charge to earnings in that period in order to maintain the allowance for loan losses at a level that is estimated to be adequate to cover probable losses inherent in the loan portfolio.

The Bank’s allowance for loan losses is also subject to regulatory examinations and determinations as to adequacy, which may take into account such factors as the methodology used to calculate the allowance for loan losses and the size of the allowance for loan losses compared to a group of peer banks identified by the regulators. During their routine examinations of banks, the FDIC and the Georgia Department may require a bank to make additional provisions to its allowance for loan losses when, in their opinion, their credit evaluations and allowance for loan loss methodology differ materially from ours.

Index to Financial Statements

While it is the Bank’s policy to charge-off, in the current period, loans for which a loss is considered probable, there are additional risks of loss that cannot be quantified precisely or attributed to particular loans or classes of loans. Because these risks include the state of the economy and other factors over which management has no control and which management cannot accurately predict, management’s judgment as to the adequacy of the allowance is necessarily approximate and imprecise.

The allowance for loan losses totaled $27.9 million, or 3.82% of total commercial banking loans, at December 31, 2009, compared to $22.3 million, or 2.84% of total commercial banking loans, at December 31, 2008 and $9.8 million, or 1.21% of total commercial banking loans, at December 31, 2007. The Bank incurred net charge-offs of approximately $20.5 million, or 2.67% of average loans outstanding during 2009. The Bank incurred net charge-offs of approximately $13.4 million, or 1.64% of average loans outstanding during 2008 and net charge-offs for 2007 were $873,654, or 0.11% of average loans outstanding.

During 2009, we made a provision for loan losses of approximately $26.2 million and had net charge-offs of approximately $20.5 million or 2.67% of average loans outstanding during 2009. The increase in the ratio of the allowance for loan losses to total commercial banking loans compared to 2008 and the significant provision for loan losses was due to the continued and significant deterioration in our loan portfolio during 2009. We continued to see deterioration in real estate values during 2009, which led to increases in our potential problem loans (loans that are considered impaired and are still accounted for on an accrual basis and are not considered restructured), non-performing loans and foreclosed properties from 2008. This, in turn, led to increases in our charge-offs, our specific reserves on our impaired loans and our general reserves during 2009. During 2009, the Bank’s potential problem loans increased $123.5 million, or 428%, from $28.8 million at December 31, 2008 to $152.3 million at December 31, 2009, non-performing loans increased $51.7 million, or 140%, from $36.8 million at December 31, 2008 to $88.5 million at December 31, 2009 and foreclosed properties increased $17.3 million, or 67%, from $25.8 million at December 31, 2008 to $43.1 million at December 31, 2009. The main sector of the Bank’s loan portfolio that experienced this deterioration was its ADC loans. The Bank’s potential problem loans, non-performing loans and foreclosed properties related to its ADC loan portfolio increased $73.0 million, $30.9 million and $16.9 million, respectively, for the year ended December 31, 2009. The deterioration in our ADC loan portfolio is due to the increased inability of some borrowers to make payments and the decrease in sales activity and property values in the real estate market in our market area since the end of 2007. With this continued deterioration in the loan portfolio during 2009, the Bank continued to see significant provisions for loan losses and net loan charge-offs. The Bank’s net charge-offs increased from $13.4 million in 2008 to $20.5 million in 2009. Historical charge-offs are an important factor in calculating our allowance for loan losses on our general portfolio. As a result, our general reserves increased from 1.81% of the general loan portfolio in 2008 to 2.35% in 2009. Also, the Bank’s specific reserves on impaired loans increased approximately $5.4 million from $11.0 million at December 31, 2008 to $16.4 million at December 31, 2009. These reserves do not include partial charge-offs on impaired loans that have not been taken into foreclosure. The Bank determined that the losses related to certain loans were uncollectible and charged-off the balances based upon the current downturn in the economy and deteriorating real estate market. The Bank had partial charge-offs of approximately $10.2 million at December 31, 2009 compared to $4.0 million at December 31, 2008. If these amounts were included, then our specific reserves in impaired loans would have increased approximately $11.6 million to $26.6 million at December 31, 2009 from $15.0 million at December 31, 2008. Also, with these partial charge-offs included, our ratio of allowance for loan losses to total commercial banking loans would be 5.21% at December 31, 2009 compared to 3.35% at December 31, 2008. Based upon management’s analysis of its individual classified and non-performing loans, including any additions to non-performing loans since the December 31, 2009, and our analysis of the remaining loan portfolio including historical charge-offs and the composition of our loan portfolio, we adjusted our allowance for loan losses accordingly.

During 2008, we made a provision for loan losses of approximately $25.8 million. The increase in the ratio of the allowance for loan losses to total commercial banking loans and the significant provision for loan losses was due to the continued deterioration in our loan portfolio during 2008 and management’s assumptions about general economic conditions. During 2008, the Bank’s criticized loans increased $61.9 million, or 469%, from $13.2 million at December 31, 2007 to $75.1 million at December 31, 2008, non-performing loans increased $31.2 million, or 555%, from $5.6 million at December 31, 2007 to $36.8 million at December 31, 2008 and foreclosed properties increased $20.4 million, or 377%, from $5.4 million at December 31, 2007 to $25.8 million at December 31, 2008. The main sector of the Bank’s loan portfolio that experienced this deterioration was its ADC loans. The Bank’s criticized loans, non-performing loans and foreclosed properties related to its ADC loan portfolio increased $40.7 million, $23.8 million and $17.7 million, respectively, for the year ended December 31, 2008. The deterioration in our ADC loan portfolio is due to an increased inability of some borrowers to make payments and the decrease in sales activity and property values within the residential real estate market in our market area during the last quarter of 2007 and 2008.

During the last nine months of 2008, the Bank charged-off $13.1 million in loans, which was a significant increase from 2007 and the first quarter of 2008. Of the total amount charged-off during the last nine months of 2008, $8.2 million was related to impaired loans that the Bank had not taken into foreclosure at the time of charge-off. During the last nine months of 2008, the Bank determined that the losses related to these loans were uncollectible. Of the total amount of $6.3 million in charge-offs related to impaired loans recognized during the second and third quarters of 2008, loans related to $4.8 million of these charge-offs were

Index to Financial Statements

foreclosed upon during the third and fourth quarters of 2008. Of the total amount of charge-offs during 2008, $10.3 million, or 76%, are related to our ADC loan portfolio where the Bank has seen significant deterioration in asset quality, including an increase in the inability of some borrowers to make payments and declines in the value and marketability of underlying collateral.

The Bank’s charge-offs in 2009 consisted of ten commercial real estate loan charge-offs of $960,000, fifty commercial loan charge-offs of $2,117,000, sixty-six ADC loan charge-offs of $14,305,000, fifty-one residential real estate charge-offs of $2,919,000 and various installment and other consumer loans charge-offs. Out of the sixty-six ADC loan charge-offs totaling $14,305,000, four of the ADC loan charge-offs totaled $10,971,000 and were related three large residential and one commercial development projects. The Bank’s charge-offs in 2008 consisted of nine commercial real estate loan charge-offs of approximately $810,000, thirty-eight commercial loan charge-offs of approximately $1.2 million, twenty residential real estate loan charge-offs of approximately $843,000, sixty-one construction and acquisition and development loan charge-offs of $10.3 million and various installment and other consumer loans charge-offs. The Bank’s charge-offs in 2007 consisted of one construction and acquisition and development loan charge-off of $25,000, two commercial real estate loan charge-offs totaling $403,185, four residential real estate loan charge-offs totaling $365,927, six commercial loan charge-off totaling $109,363 and various installment and other consumer loans charge-offs.

In order to address the weakening of the real estate market, and in particular real estate related to ADC, the Bank increased its monitoring of its loan portfolio in 2007, 2008 and 2009 in an effort to identify and attempt to resolve potential loan problems (loans that are considered impaired and are still accounted for on an accrual basis and are not considered restructured) more quickly. The Bank added one full time employee in 2007 and two full time employees in 2008 to aid in this increased monitoring of asset quality and in the management of problem loans. In addition to the normal quarterly monitoring and reporting of our ADC loan portfolio, including any industry, borrower and geographic concentrations, the Bank initiated quarterly problem loan meetings in 2007 and during the third quarter of 2008 increased these problem loan meetings to twice a quarter. During these meetings, senior management and collections personnel discuss the other real estate owned and each classified and past due credit over $50,000 with our county presidents and loan officers. During these meetings, senior management, collections personnel, county presidents and loan officers discuss and document the current status of the classified and past due credit, the potential problems with such credit, action plans for such credit and estimated losses with respect to such credit. During the third quarter of 2008, executive management also began meeting weekly with collection personnel to discuss the status of all foreclosed properties and any new developments with our non-accrual and classified credits. During the last quarter of 2007 and continuing into 2008 and 2009, our asset quality department also began conducting site visits to the properties securing the criticized ADC loans in excess of $50,000 to allow us to better assess the most recent developments and trends with respect to these projects. Beginning in 2007 and continuing into 2008 and 2009, our asset quality personnel also began conducting quarterly site visits with respect to all construction projects over 12 months old. These visits allow us to assess the percent completion of the project and the marketability of the project. These visits are documented by photographs and written reports and are reviewed by senior management. In order to assess our ADC portfolio and determine whether those loans are appropriately graded, in the fourth quarter of 2007 we also initiated an internal review of all of the Bank’s acquisition and development projects, which was completed during the second quarter of 2008. The Bank believes all of these measures will help to identify and favorably resolve any potential problem credits more quickly, which should help to limit our losses in the loan portfolio. Given the current condition of the credit, liquidity and real estate markets, we expect our asset quality to continue to come under significant pressure in 2010.

The increase in the provision for loan losses and the determination of the allowance for loan losses as a percentage of commercial banking loans since the end of 2007 was based on our analysis and judgment of loan quality and our determination of what level of reserves were reasonable to cover the risk of loss in the loan portfolio. The determination of the reserve level is based upon our assessment of the factors affecting loan quality, assumptions about the economy and historical experience. Our assessment as to the adequacy of the allowance for loan losses is evaluated periodically based on a review of all significant loans, which include all classified loans greater than $50,000 with a particular focus on loans that are past due and other loans that we believe require attention based upon the type of loan collateral, the terms of the loan and the location of loan collateral. We believe that the allowance at December 31, 2009 is adequate to cover risk of losses in our loan portfolio; however, our judgment is based upon a number of assumptions which we believed at that time to be reasonable and that may or may not actually be realized. There is no assurance that charge-offs will not exceed the allowance for loan losses or that additional increases in the allowance for loan loss will not be required at any time in the future. As a result of uncertainties in the economy and the slowdown in the real estate market, additions to the allowance for loan losses and additional charge-offs may become necessary. Also, regulatory authorities in the ordinary course of their examinations may require the Bank to increase its allowance for loan losses based on circumstances existing at the time of their review.

Index to Financial Statements

The following table shows the composition of the loan portfolio as of December 31, 2009, 2008, 2007, 2006 and 2005.

Total Loan Portfolio


	As of December 31,
	2009		2008		2007		2006		2005
	(in thousands)
Commercial, financial and agricultural	$	33,268	$	36,185	$	30,750	$	32,633	$	29,515
Real estate-construction and land development		273,309		347,117		417,820		348,429		273,199
Real estate-commercial real estate		243,740		243,204		229,573		197,062		168,652
Real estate-residential real estate		168,498		143,969		118,789		98,506		101,229
Installment and other		12,757		14,914		18,306		20,658		21,109

Total	$	731,572	$	785,389	$	815,238	$	697,288	$	593,704

The following table shows the amount of loans outstanding as of December 31, 2009, which, based on remaining scheduled repayments of principal, are due in the periods indicated.


	Loans Maturing
	Within One Year		After One Year but Within Five Years		After Five Years		Total
	(in thousands)
Commercial, financial and agricultural	$	15,447	$	13,656	$	4,165	$	33,268
Real estate-construction and land development		203,895		68,256		1,158		273,309
Real estate-commercial real estate		101,131		115,119		27,490		243,740
Real estate-residential real estate		86,505		78,968		3,025		168,498
Installment and other		5,588		7,095		74		12,757

Total	$	412,566	$	283,094	$	35,912	$	731,572

The following table sets forth the amounts of loans due after one year as of December 31, 2009, classified according to the sensitivity to changes in interest rates.


	After One Year but Within Five Years		After Five Years
	(in thousands)
Fixed interest rates	$	180,186	$	20,338
Variable interest rates		102,908		15,574

Total	$	283,094	$	35,912

The following table summarizes the Bank’s non-accrual, past due and restructured commercial banking loans:


	December 31,
	2009		2008		2007		2006		2005
	(in thousands)
Non-accrual loans	$	79,839	$	18,882	$	5,614	$	3,977	$	2,848

Accruing loans past due 90 days or more	$	124	$	-	$	307	$	29	$	160

Restructured loans	$	8,698	$	17,897	$	—	$	—	$	—

Index to Financial Statements

The following table summarizes activity in the allowance for commercial banking loan losses for the dates indicated:


	Years Ended December 31,
	2009			2008			2007			2006			2005
Balance, beginning of period	$	22,280,041		$	9,825,911		$	8,023,565		$	6,711,974		$	5,828,027
Loans charged off:
Commercial, financial and agricultural		(2,117,072	)		(1,186,251	)		(437,548	)		(262,459	)		(57,855	)
Real estate-construction and land development		(14,305,257	)		(10,253,768	)		(25,375	)		(73,048	)		(1,013,127	)
Real estate-commercial real estate		(959,778	)		(809,571	)		(75,000	)		(176,524	)		(288,981	)
Real estate-residential real estate		(2,919,240	)		(843,474	)		(365,927	)		(117,427	)		(350,699	)
Installment and other consumer		(410,570	)		(472,424	)		(394,690	)		(399,927	)		(527,442	)

Total loans charged off		(20,711,917	)		(13,565,488	)		(1,298,540	)		(1,029,385	)		(2,238,104	)
Recoveries:
Installment and other consumer		95,235			57,171			106,626			48,626			19,869
Real estate-construction and land development		7,364			9,945			53,000			12,000			15,376
Real estate-commercial real estate		15,541			29,650			222,783			124			—
Real estate-residential real estate		24,254			10,688			5,862			191,192			—
Commercial, financial and agricultural		23,108			63,810			36,615			6,034			2,100

Total loans recovered		165,502			171,264			424,886			257,976			37,345
Net loans charged off		(20,546,415	)		(13,394,224	)		(873,654	)		(771,409	)		(2,200,759	)
Provision for loan losses		26,201,187			25,848,354			2,676,000			2,083,000			2,224,000
Allowance for loan loss acquired		-			-			-			-			860,706

Balance, end of period	$	27,934,813		$	22,280,041		$	9,825,911		$	8,023,565		$	6,711,974

Loans outstanding at end of period, excluding loans held for sale (In thousands)	$	731,572		$	785,389		$	815,237		$	697,288		$	593,704
Ratio of allowance to loans outstanding at end of period, excluding loans held for sale		3.82	%		2.84	%		1.21	%		1.15	%		1.13	%
Average loans outstanding during the period, excluding loans held for sale (In thousands)	$	768,179		$	816,877		$	760,007		$	636,676		$	539,522
Ratio of net charge offs during the period to average loans outstanding		2.67	%		1.64	%		0.11	%		0.12	%		0.41	%

The following table sets forth, with respect to each category of banking loans, the total amount of the allocation of the allowance for loan losses and the percentage of banking loans in each category of our total banking loans as of the end of the periods indicated:


	Years Ended December 31,
	2009				2008				2007				2006				2005
	Amt		%		Amt		%		Amt		%		Amt		%		Amt		%
	(dollars in thousands)
Commercial, financial and agricultural	$	2,456	4.6	%	$	2,181	4.6	%	$	1,075	3.8	%	$	575	4.7	%	$	271	5.0	%
Real estate-commercial real estate₍₁₎		2,009	33.3	%		1,801	31.0	%		866	28.2	%		1,869	28.3	%		1,434	28.4	%
Real estate-residential real estate₍₁₎		4,772	23.0	%		2,862	18.3	%		1,287	14.6	%		1,280	14.1	%		860	17.1	%
Real estate-construction and land development		18,197	37.4	%		14,844	44.2	%		5,875	51.2	%		3,682	50.0	%		3,415	46.0	%
Consumer		501	1.7	%		592	1.9	%		723	2.2	%		618	2.9	%		633	3.5	%
Unallocated		-				-				-				-				99

Total	$	27,935	100.0	%	$	22,280	100.0	%	$	9,826	100.0	%	$	8,024	100.0	%	$	6,712	100.0	%

(1)	Includes any loans secured in whole or in part by real estate.

Index to Financial Statements

Total Non-Performing Commercial Banking Assets

Non-performing commercial assets totaled $131.7 million at December 31, 2009, compared to total non-performing commercial assets of approximately $62.6 million at December 31, 2008 and $11.0 million at December 31, 2007. Total non-performing assets increased approximately 110% from 2008 to 2009 and approximately 469% from 2007 to 2008. The following table shows the Bank’s commercial banking assets that we believe warrant special attention due to the potential for loss, in addition to the non-performing commercial banking loans and foreclosed properties related to the commercial banking loans.


	Years Ended December 31,
	2009			2008			2007
Non-performing loans₍₁₎	$	88,537,072		$	36,778,482		$	5,613,772
Foreclosed properties		43,124,334			25,815,072			5,410,905

Total non-performing assets	$	131,661,406		$	62,593,554		$	11,024,677

Loans 90 days or more past due on accrual status		123,791			389			306,747
Renegotiated loans		8,698,195			17,896,747			-
Potential problem loans₍₂₎		152,335,150			28,842,408			7,570,577
Potential problem loans/total loans		20.82	%		3.67	%		0.93	%
Non-performing assets/total loans and foreclosed properties		17.00	%		7.72	%		1.34	%
Non-performing assets and loans 90 days or more past due on accrual status/total loans and foreclosed properties		17.01	%		7.72	%		1.38	%

(1)	Defined as non-accrual loans and renegotiated loans.

(2)

Loans identified by management as potential problem loans are impaired loans that are still accounted for on an accrual basis and are not considered restructured. Based upon further deterioration in these loans since December 31, 2008, management now considers it probable that these loans will not perform according to their original contractual terms and now evaluates these loans as impaired loans.

We define non-performing commercial banking loans as non-accrual and renegotiated commercial banking loans. The Bank’s policy is to discontinue the accrual of interest on loans that are 90 days past due unless they are well secured and in the process of collection. Total non-performing commercial banking loans increased $51.7 million from $36.8 million at December 31, 2008 to $88.5 million at December 31, 2009. The increase in non-performing commercial banking loans from December 31, 2008 to December 31, 2009 was mainly related to nine loan relationships totaling approximately $54.6 million. Six of the nine loan relationships totaling approximately $49.6 million are classified as non-accrual loans and three of the nine loan relationships totaling approximately $5.0 million are classified as renegotiated loans. One of the seven non-accrual loan relationships totaling approximately $6.8 million is related to 26 acres of land for residential development located in Cherokee County, Georgia on which eleven residential townhomes and four residential homes have been built to date. Fifty lots remain undeveloped on this land, which is being held to build residential homes and townhomes. This loan relationship also includes a 23 acre tract of land located in Pickens County, Georgia, which is being held for commercial development and a residential home located in Fulton County, Georgia. The second of the non-accrual loan relationships totaling approximately $2.6 million is related to ten residential home lots, five of which are completed residential homes currently rented and one of which is a completed residential home currently for sale. All of these properties are located in Bartow County, Georgia. The third of the non-accrual loan relationships totaling approximately $1.6 million is related to two residential rental properties located in East Point, Florida which is located in Franklin County on the Gulf Coast. The fourth of the non-accrual loan relationships totaling approximately $3.7 million is related to three retail shopping centers located in Bartow County, Georgia. Construction of one of the shopping centers is complete while construction of the other two is approximately 95% complete. The fifth of the non-accrual loan relationships totaling approximately $11.1 million is related to 78 acre tract of land located in Forsyth County, Georgia, which has been divided into 228 improved residential lots. The last of the non-accrual relationships totaling approximately $23.8 million is related to one developer with several loan relationships. These loan relationships are secured by a retail shopping center located in Gwinnett County, Georgia which is approximately 45% leased, two tracts of raw land totaling 110 acres located in Forsyth County, Georgia that is being held for residential development, 98 acre tract of land located in Forsyth County, Georgia which has been divided into 139 improved residential lots, one tract of raw land totaling 20 acres located in Cherokee County, Georgia that is being held for residential development and another 14 developed residential loans and a tract of raw land totaling approximately 12 acres located in Cherokee County, Georgia that is being held for residential development.

One of the three renegotiated loan relationships totaling approximately $1.5 million is related to a commercial office/retail property located in Bartow County, Georgia. The second of the renegotiated loan relationships totaling approximately $1.6 million is secured by two office condos located in Canton in Cherokee County, Georgia, one commercial/retail building located in Woodstock in Cherokee County, Georgia, one commercial /retail building located in Lithonia in DeKalb County, Georgia and 0.78 acre commercial lot located in Canton in Cherokee County, Georgia. The third of the renegotiated loan relationships totaling approximately $1.9 million is related to 18 residential rental properties located in Bartow County, Georgia. Currently, fourteen of these properties are

Index to Financial Statements

being rented, however several of the properties are being rented at below market rates due to the current economic environment. With respect to these three loan relationships, the Company has either reduced interest rates or deferred interest payments to provide the borrowers time to reorganize their finances in order to satisfy their loan obligations. We have evaluated these loan relationships and based on available information, we presently believe that any losses that may come from these loan relationships have been considered in our determination of the loan loss allowance.

The Bank has seen a significant deterioration in its ADC loan portfolio during 2008 and 2009. Our entire market area has experienced a significant weakening in the real estate markets during 2008 and 2009, in particular with respect to real estate related to ADC. As of December 31, 2009, we had approximately $273.3 million in ADC loans, or approximately 37% of our loan portfolio. The Bank’s non-performing loans related to its ADC loan portfolio increased $54.7 million to $58.0 million from December 31, 2007 compared to December 31, 2009. The deterioration in our ADC loan portfolio was mainly due to a decline in sales activity and property values within the real estate market in our market area during the last quarter of 2007, 2008 and 2009. The Bank has also seen a deterioration in its residential real estate portfolio during 2009, which totals $168.5 million, or 23%, of our total loan portfolio. Non-performing loans in the Bank’s residential real estate portfolio increased from $308,000 at December 31, 2007 to $17.4 million at December 31, 2009. With the current high unemployment rate in Georgia, along with the deterioration in the real estate market, our non-performing loans in this portfolio will continue to increase. We continue to see a significant migration of these loans to nonperforming.

Foreclosed properties totaled approximately $43.1 million at December 31, 2009, compared to approximately $25.8 million at December 31, 2008 and approximately $5.4 million at December 31, 2007. Foreclosed properties increased approximately $17.3 million, or 67%, from 2008 to 2009 and approximately $20.4 million, or 377%, from 2007 to 2008. The Bank foreclosed on eighty-two properties, totaling approximately $33.3 million during 2009. This amount mainly consists of thirteen loan relationships, totaling approximately $24.5 million. The first of these thirteen loan relationships, totaling approximately $3.3 million, is secured by two properties which consist of 85 acres of undeveloped land being held for residential development located in Forsyth County, Georgia. The second of these thirteen loan relationships, totaling approximately $1.5 million, is secured by 24 developed residential home lots located in Fannin County, Georgia. The third of these thirteen loan relationships, totaling approximately $1.1 million, is secured by 74 acres of undeveloped land being held for residential development located in Cherokee County, Georgia. This property was written down an additional $195,000 to approximately $916,000 during 2009 based upon new valuations received during the year. The fourth of these thirteen loan relationships, totaling approximately $920,000, is secured by four completed residential homes being held for sale and a residential home lot all located in Cherokee County, Georgia. The fifth of these thirteen loan relationships is secured by a residential home located in DeKalb County, Georgia, totaling approximately $514,000. This property was written down an additional $63,000 to approximately $451,000 during 2009 based upon new valuations received during the year. The sixth of these thirteen loan relationships, totaling approximately $871,000, is secured by 3.48 acres of commercial raw land located in Cherokee County, Georgia. The seventh of these thirteen loan relationships, totaling approximately $986,000, is secured by a residential condo located in DeKalb County, Georgia and two residential homes located in Forsyth County, Georgia. The eighth of these thirteen loan relationships, totaling approximately $1.5 million, is secured by seven completed residential homes and three residential home lots located in Cherokee County, Georgia. The ninth of these thirteen loan relationships, totaling approximately $1.7 million, is secured by a residential home under construction. This residential home is approximately 90% complete and is located in Dawson County, Georgia. The tenth of these thirteen loan relationships, totaling approximately $3.7 million, is related to a participation bought from another financial institution that is secured by a commercial/retail/entertainment property that is under construction in Pigeon Forge, Tennessee. The eleventh of these thirteen loan relationships, totaling approximately $6.7 million, is secured by 142 acres of undeveloped land located in Forsyth County, Georgia that is being held for residential development. This property was written down an additional $201,000 to approximately $6.5 million during 2009 based upon new valuations received during the year. The twelfth of these thirteen loan relationships, totaling approximately $918,000 is secured by a commercial building located in Forsyth County, Georgia. The last of these thirteen loan relationships totaling approximately $829,000 is secured by a residential home under construction that is approximately 90% complete and is located in Fulton County, Georgia. Of the remaining properties that were foreclosed upon in 2009, twenty of the properties, totaling $2.5 million, were related to residential home lots, ten of the properties, totaling $1.7 million, were related to residential homes under construction, four of the properties, totaling $665,000, were related to residential homes with construction completed, twelve of the properties, totaling $1.7 million, was related to residential homes, one of the properties totaling approximately $400,000 was related to a commercial lot for development and eight of the properties, totaling $1.9 million, were related to commercial real estate. During the 2009, the Bank sold twenty-four properties that were foreclosed upon in 2008, totaling approximately $8.4 million, for an aggregate gain of approximately $134,000. The Bank sold twenty-three properties that were foreclosed upon in 2009, totaling approximately $4.6 million, for an aggregate loss of approximately $26,000. Of the forty-seven properties sold in 2009, twelve were residential homes that sold at an aggregate loss of approximately $51,000, five were commercial real estate properties that sold at a gain of approximately $39,000 and thirty were related to residential home construction and land lots that sold at an aggregate gain of approximately $120,000.

At December 31, 2009, the Bank held twenty-three properties totaling approximately $15.0 million that were foreclosed on prior to 2009. Of these properties, sixteen of the properties, totaling approximately $8.6 million, were related to residential home lots and raw land, two of the properties totaling approximately $1.8 million were related to residential homes, two of the properties totaling approximately $472,000 were related to commercial real estate, two of the properties totaling approximately $4.0 million were

Index to Financial Statements

related to commercial land lots and raw land and one of the properties totaling approximately $70,000 was related to residential homes under construction. The Bank is currently holding the foreclosed properties for sale. The foreclosed properties have been recorded at the lower of cost or market less the estimated costs to sell the properties. The Bank presently does not expect any further material losses from these loans and properties.

Potential problem loans represent commercial banking loans that are presently accounted for on an accrual basis, and the borrowers are not expected to perform according to the original contractual repayment terms. Potential problem commercial loans increased approximately $123.5 million, or 428%, from $28.8 million at December 31, 2008 to $152.3 million at December 31, 2009. The increase in potential problem commercial loans from December 31, 2008 to December 31, 2009 was mainly related to the deterioration of our ADC loan portfolio. At December 31, 2008, $24.2 million of the Bank’s commercial potential problem loans were related to the ADC loan portfolio, $23.5 million of which was related to residential real estate projects and $700,000 of which was related to commercial real estate projects. At December 31, 2009, $97.2 million of the Bank’s commercial potential problem loans were related to the ADC loan portfolio, $56.4 million of which was related to residential real estate projects and $40.8 million of which was related to commercial real estate projects. Of the $123.5 million increase in potential problem loans from December 31, 2008 to December 31, 2009, $92.0 million, or 75%, is related to twelve loan relationships, of which $72.2 million is related to ADC loans. All of these loans are currently performing; however, because of the current deterioration in the real estate market and the economy, management has concerns about the ability of the borrowers to meet their contractual repayment terms if current market conditions continue for a prolonged period. These loans could be reclassified as non-performing assets in the future. Management believes that the loans categorized as potential problem loans at December 31, 2009 are adequately collateralized and that any losses that may result from these loan relationships have been considered in our determination of the loan loss allowance. However, there is no guarantee that such loans will remain adequately collateralized in the future in the event of continued deterioration in the real estate market and the economy generally.

Total Investment Securities

The Bank invests in U.S. government and government agency obligations, mortgage-backed securities, corporate securities, restricted equity securities, federal funds sold, and interest-bearing deposits with other banks. The Bank’s investments are managed in relation to loan demand and deposit growth, and are generally used to provide for the investment of funds not needed to make loans, while providing liquidity to fund increases in loan demand or to offset fluctuations in deposits. Investment securities, federal funds sold, restricted equity securities and interest-bearing deposits with other banks totaled $194.9 million at December 31, 2009, compared to $187.2 million at December 31, 2008 and $46.8 million at December 31, 2007. At December 31, 2009, the Bank had federal funds sold and interest-bearing deposits in banks of $160.8 million, compared to $146.3 million at December 31, 2008 and $21.3 million at December 31, 2007. During the years ended December 31, 2009, 2008 and 2007 the Bank held, on average, federal funds sold and interest-bearing deposits in banks of $163.6 million, $78.4 million and $15.9 million, respectively. The increase in the average balance of our federal funds sold and interest-bearing deposits with other banks during 2009 and 2008 is due to the Company’s strategic decision to increase short-term liquidity because of the tightening in the credit and liquidity markets and the deterioration in the real estate market. During 2007, the Bank tried to reduce its balances in federal funds sold and interest-bearing deposits with other banks in an increased effort to improve its net interest margin, which had the effect of reducing the Bank’s liquidity. The Bank then began to increase its liquidity during the third and fourth quarters of 2008 due to the tightening in the credit and liquidity markets as the real estate market deteriorated. Investment securities and restricted equity securities totaled $34.1 million at December 31, 2009, compared to $40.8 million at December 31, 2008 and $25.6 million at December 31, 2007. The decrease of $6.7 million in investment securities and restricted equity securities from December 31, 2008 was mainly due to the Bank having $5.5 million in government-backed agency bonds called during 2009 in this low interest rate environment. The Bank has also had $8.1 million in pay downs on its mortgage-backed securities in 2009. The Bank purchased approximately $7.2 million in investment securities during 2009 to reinvest these called and maturing funds from its investment securities portfolio. The increase in investment securities and restricted equity securities from the end of 2007 to 2008 was due to the Bank purchasing a $4.0 million Pickens County School Bond and purchasing government-backed agency and mortgage-backed securities in order to increase our yield on our liquid funds. The restricted equity securities consist of shares held in the Federal Home Loan Bank of Atlanta in the amount of approximately $3.3 million.

The Company had an investment of $165,975 in Community Financial Services, Inc. which was the holding company for Silverton Bank. On May 1, 2009, the Office of the Comptroller of Currency closed Silverton Bank and appointed the Federal Deposit Insurance Corporation as receiver. Therefore, our 300 shares held in Community Financial Services, Inc., valued at $165,975, were written-off during the second quarter of 2009.

Unrealized losses on securities available for sale amounted to $(11,790) at December 31, 2009, and $(31,766) and $(111,688) at December 31, 2008 and December 31, 2007, respectively. We have not specifically identified any securities for sale in future periods, which, if so designated, would require a charge to operations if the market value would not be reasonably expected to recover prior to the time of sale. The Bank’s management believes that the unrealized losses on particular securities have resulted from temporary changes in the interest rate market and not as a result of credit deterioration and that therefore all unrealized losses represent, and in the future will represent, temporary impairment. In addition, total impairment represents less than 1% of amortized cost. All bonds held at December 31, 2009 that have unrealized losses are backed by the U.S. Government or one of its agencies or quasi-agencies.

Index to Financial Statements

Composition of Investment Securities Portfolio

The following table provides information regarding the composition of our investment securities portfolio for the years presented, excluding equity securities:


	December 31,
	2009		2008		2007
	(In thousands)
Investment securities held to maturity (at amortized cost):
State and municipal securities	$	4,450	$	4,000	$	-

Total investment securities held to maturity		4,450		4,000		-


Investment securities available for sale (at estimated fair value):
U.S. government and agency obligations		4,617		9,163		10,077
Mortgage-backed agency securities		18,363		20,380		9,950
Mortgage-backed CMO agency securities		3,376		4,051		2,369

Total investment securities available for sale		26,356		33,594		22,396


Total investment securities	$	30,806	$	37,594	$	22,396

The following table sets forth the maturities of securities held as of December 31, 2009 and the weighted average yields of such securities, calculated on the basis of the cost and effective yields weighted for the scheduled maturity of each security. Equity securities, consisting of shares held in the Federal Home Loan Bank of Atlanta in the amount of approximately $3.3 million are not presented in the table below as they lack a contractual maturity.


					Maturing
	Within One				After One But Within Five				After Five but Within Ten				After Ten Years
	Year				Years				Years				After Ten Years
	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield
	(dollars in thousands)
Mortgage-backed agency securities	$	2,351	2.70	%	$	13,395	4.88	%	$	1,516	2.44	%	$	1,101	4.57	%
Mortgage-backed CMO agency securities		1,025	3.36	%		2,351	4.61	%		—	—			—	—
State and municipal securities		750	2.35	%		2,750	2.35	%		—	—			950	3.25	%
U.S. government agency securities		2,031	5.33	%		502	4.08	%		1,068	4.11	%		1,016	4.31	%

Total	$	6,157	3.64	%	$	18,998	4.46	%	$	2,584	3.13	%	$	3,067	4.08	%

The following table sets forth the fair value of securities with unrealized losses at December 31, 2009:


	Less than a year				More than a year
	Estimated Fair		Unrealized		Estimated Fair		Unrealized
	Value		Losses		Value		Losses
	(in thousands)				(in thousands)
Mortgage-backed agency securities	$	445	$	1	$	145	$	1
U.S. government agency securities		1,016		10		-		-

Total	$	1,461	$	11	$	145	$	1

Total Commercial Deposits

Our commercial deposits totaled $931.5 million and $935.9 million at December 31, 2009 and December 31, 2008, respectively, representing a decrease of $4.4 million, or a less than 1%, decrease during 2009. During 2008, commercial deposits increased by $151.6 million, or 19%, from $784.3 million at December 31, 2007. Commercial deposits averaged $956.8 million, $865.2 million and $732.7 million during each of the twelve month periods ended December 31, 2009, 2008 and 2007, respectively. The Bank made the strategic decision to increase short-term liquidity in 2009 and 2008 through growth in deposits because of the tightening in the credit and liquidity markets and the deterioration in the real estate market. The increase in average deposits during

Index to Financial Statements

2009 and 2008 is due to an increase in interest-bearing checking accounts. The Bank offered an interest-bearing checking account special from September 2008 through March 2009 that guaranteed a rate of 3.75% until March 31, 2009, 3.00% until June 30, 2009, 2.75% until August 31, 2009 and 2.25% until December 31, 2009. As of December 31, 2009, this special generated deposit balances totaling $91.4 million of which $40.0 million was generated in 2009. The Bank also promoted a high yield money market account in 2009 that generated deposits of $24.5 million. These increases in deposits from our interest-bearing checking accounts and money market accounts was partially offset by the Bank not renewing its brokered deposits and most of its out-of-market deposits.

During 2007 and 2008, we attempted to offset potential decreases in our share of local deposits by accepting out-of-market and brokered deposits. During 2007 and 2008, the Bank’s out-of-market and brokered deposits increased $161.7 million to $240.1 million at December 31, 2008. Since the end of 2008, we have let most of our maturing brokered and out-of market deposits run out of the Bank. We have reduced our out-of-market and brokered deposits by $57.6 million from $240.1 at December 31, 2008 to $182.5 million as of December 31, 2009. The costs of out-of-market and brokered deposits can be volatile, and if our access to these markets is limited in any way, then our liquidity would be adversely affected. Currently, because the Bank’s capital levels are below the regulatory requirements for “well capitalized” institutions, the Bank cannot originate or renew brokered deposits and is limited in the rates that it can offer on other deposits generally. From April 2010 through December 2010, the Bank has approximately $120 million in brokered and out-of market deposits maturing, and, if the Bank does not return to a well capitalized position, then it will most likely not be able to renew these deposits. Therefore, the Bank may have to seek to increase deposit rates in its local markets in the future to generate liquidity, which it may be unable to do as a result of competition and/or potential regulatory limitations. Even if the Bank was able to generate deposits through an increase in deposit rates, such rate increase would adversely affect its net interest margin and net income. Interest-bearing deposits represented 96% of total deposits at December 31, 2009, compared to 96% at December 31, 2008 and 95% at December 31, 2007. Certificate of deposits comprised 77% of total interest-bearing deposits for December 31, 2009, compared to 83% at December 31, 2008 and 76% at December 31, 2007. The composition of these deposits is indicative of the interest rate-sensitive market in which the Bank operates. We cannot provide any assurance that the Bank can maintain or increase its market share of deposits in its highly competitive service area.

The following table summarizes average daily balances of deposits and rates paid on our deposits for the periods indicated:


	Years ended December 31,
	2009 Amount			2008 Amount			2007 Amount
	(in thousands)
Noninterest-bearing demand deposits	$	39,645		$	44,171		$	50,065
Interest-bearing demand deposits		135,892			68,129			77,668
Savings deposits		72,946			71,818			61,231
Time deposits		708,274			681,124			543,755

Total	$	956,757		$	865,242		$	732,719


	Years ended December 31,
	2009 Rate			2008 Rate			2007 Rate
Interest-bearing demand deposits		2.26	%		1.88	%		2.98	%
Savings deposits		2.33	%		2.84	%		3.85	%
Time deposits		3.72	%		4.61	%		5.31	%

Maturities of time certificates of deposit of $100,000 or more outstanding at December 31, 2009 are summarized as follows:


	(in thousands)
Under 3 months	$	40,866
3 to 6 months		58,189
6 to 12 months		139,505
Over 12 months		58,003

Total Total	$	296,563

Commercial Banking Borrowings

At December 31, 2009, the Bank had borrowed $28.0 million in FHLB advances at maturity terms ranging from three months to ten years and with an average interest rate of 3.49%. These advances were borrowed for use by the commercial banking business and are secured by a blanket lien on the Bank’s 1—4 family first lien mortgage loans, a blanket lien on the Bank’s commercial real estate loans, investment securities and FHLB stock. During the second quarter of 2009, the FHLB suspended our line of credit due to the financial condition of the Bank. The Bank can renew its current advances as they mature; however, we cannot borrow additional advances at this time. There were $31.0 million in Federal Home Loan Bank advances outstanding at December 31, 2008.

Index to Financial Statements

At December 31, 2009, the Bank had approximately $14.5 million of federal funds lines of credit available from correspondent institutions. There were no amounts outstanding on these federal funds lines of credit during 2009. Based upon the Company’s weakened financial condition and capital levels, the Company’s access to these federal funds will likely be restricted in 2010 and may not be available at all. In addition, pursuant to the Agreement, the Company cannot incur, increase or guarantee any debt without the prior written approval of the FRB Atlanta and the Georgia Commissioner.

Financial Condition of Our Mortgage Banking Business

Prior to the sale of our wholesale residential mortgage business on December 31, 2003, the Company sold loans that it originated. The Company’s consolidated balance sheets at both December 31, 2009 and December 31, 2008 include no assets and include liabilities of $1,352,846 and $1,694,496, respectively, related to discontinued operations. The Company typically made representations and warranties to the purchasers and insurers that the Company had properly originated and serviced the loans under state laws, investor guidelines and program eligibility standards. The Company could be obligated to indemnify the purchaser for unpaid principal and interest on defaulted loans if the Company breached its representations and warranties with respect to the loans that it sold. These liabilities consist of the allowance for recourse liability. This reserve remained with the Company after the sale of the wholesale mortgage operation, as did the risk and the liability from the indemnified loans. At December 31, 2009 and December 31, 2008, the Company had approximately $1.9 million and $1.5 million, respectively, of mortgage loans for which it had agreed to indemnify the purchaser for losses suffered by the purchaser. In the event that the purchaser of these loans experiences any losses with respect to the loans, the Company will be required to indemnify the purchaser for its losses or to repurchase the loans from the purchaser. The Company has established a specific allowance for recourse liability for the loans on which the Company has already become obligated to make indemnification payments to the purchaser and an estimated allowance for recourse liability for probable future losses from loans that the Company may have to indemnify. The estimated recourse liability for future losses at both December 31, 2009 and December 31, 2008 was approximately $1.4 million and $1.7 million, respectively, and is based upon historical information on the number of loans indemnified and the average loss on an indemnified loan. During the second quarter of 2007, we evaluated our allowance for the recourse obligation reserve. Based on this evaluation, we determined that we had made an overaccrual in the recourse obligation reserve because we have indemnified fewer loans than we had previously estimated and had several indemnified loans pay-off without any losses. Therefore, based upon this analysis, we reduced the recourse obligation reserve by $118,394 during the second quarter of 2007. We evaluated the allowance for recourse liability during 2008 and 2009 and determined that no further adjustments were needed at that time.

Capital

Our capital adequacy is measured by risk-based and leverage capital guidelines. Developed by regulatory authorities to establish capital requirements, the risk-based capital guidelines assign weighted levels of risk to various asset categories. Among other things, these guidelines currently require us to maintain a minimum ratio of 8.0% of total capital to risk-adjusted assets. Under the guidelines, one-half of our required capital must consist of tier 1 capital, which includes common equity, retained earnings and a limited amount of qualifying perpetual preferred stock and trust preferred securities, less goodwill and intangibles. The remainder may consist of tier 2 capital, which includes non-qualifying preferred stock, qualifying subordinated, perpetual or mandatory convertible debt, term subordinated debt and intermediate term preferred stock and up to 45% of the pre-tax unrealized holding gains on available-for-sale equity securities with readily determinable market values that are prudently valued, and a limited amount of any loan loss allowance. Tier 1 and tier 2 capital are together referred to as “total capital.”

The leverage guidelines provide for a minimum ratio of tier 1 capital to total assets of 3.0% if we meet certain requirements, including having the highest regulatory rating, and require us to cushion the ratio by an additional 1.0% to 2.0% if we do not meet those requirements. The guidelines also specify that bank holding companies that are experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Higher capital ratios also may be required depending upon the organization’s risk profile. Furthermore, the guidelines indicate that the Federal Reserve will continue to consider a “tangible tier 1 leverage ratio,” calculated without the inclusion of intangible assets, in evaluating proposals for expansion or new activity.

For additional information regarding our capital position, and the capital regulatory scheme to which we are subject, please refer to that section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 entitled “Business—Supervision and Regulation.”

Index to Financial Statements

The Company and Bank’s actual capital amounts and ratios for December 31, 2009 and December 31, 2008 are presented in the following table.


									To Be Well
									Capitalized
					For Capital				Under Prompt
					Adequacy				Corrective Action
	Actual				Purposes				Provisions
(Dollars in Thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio

As of December 31, 2009:

Total Capital to Risk Weighted Assets:
Company	$	518	0.07	%	$	63,477	8	%	$	N/A	N/A
Bank	$	35,130	4.44	%	$	63,321	8	%	$	79,151	10	%

Tier I Capital to Risk Weighted Assets:
Company	$	259	0.03	%	$	31,739	4	%	$	N/A	N/A
Bank	$	25,013	3.16	%	$	31,660	4	%	$	47,490	6	%

Tier I Capital to Average Assets:
Company	$	259	0.03	%	$	40,844	4	%	$	N/A	N/A
Bank	$	25,013	2.45	%	$	40,772	4	%	$	50,965	5	%

									To Be Well
									Capitalized
					For Capital				Under Prompt
					Adequacy				Corrective Action
	Actual				Purposes				Provisions
(Dollars in Thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio

As of December 31, 2008:

Total Capital to Risk Weighted Assets:
Company	$	68,548	8.01	%	$	68,434	8	%	$	N/A	N/A
Bank	$	70,788	8.31	%	$	68,144	8	%	$	85,179	10	%

Tier I Capital to Risk-Weighted Assets:
Company	$	45,357	5.30	%	$	34,217	4	%	$	N/A	N/A
Bank	$	59,997	7.04	%	$	34,072	4	%	$	51,108	6	%

Tier I Capital to Average Assets:
Company	$	45,357	4.32	%	$	41,949	4	%	$	N/A	N/A
Bank	$	59,997	5.72	%	$	41,943	4	%	$	52,429	5	%

The Company and the Bank were significantly undercapitalized under all applicable regulatory capital measurements as of December 31, 2009. As noted above, the Company’s and the Bank’s Tier 1 Capital to Average Assets Ratios were 0.03% and 2.45%, respectively, and Total Risk Based Capital Ratios were 0.07% and 4.44%, respectively, as of December 31, 2009. Pursuant to the Order, we are required to increase our capital so that the Bank has a minimum tier 1 capital to total assets ratio of 8.0% and a minimum total risk-based capital to total risk-weighted assets ratio of at least 10.0% within 120 days of the effective date of the Order. As of December 31, 2009, we were not in compliance with this provision of the Order.

Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, to be acquired by a bank or thrift holding company or to be combined with another insured depository institution, to limit certain affiliate transactions, to restrict interest rates paid on deposits, to restrict asset growth or reduce total assets, to alter or eliminate any activities that pose excessive risk, to improve management through a new election of the board of directors, dismissals, or the hiring of new executives, to cease accepting deposits from correspondent banks, to prohibit capital distributions by the institution’s holding company, to require divestitures by the holding company, and to require other appropriate action. The appropriate federal banking agency is expected by statute to require the sale of voting shares or to become acquired or combined, to limit affiliate transactions, and to restrict interest rates on deposits.

Index to Financial Statements

A critically undercapitalized institution is subject to the appointment by the appropriate federal banking agency of a receiver or conservator, generally within 90 days of the date on which it becomes critically undercapitalized, unless the agency determines in writing (with the concurrence of the FDIC, if the FDIC is not already the appropriate federal banking agency) that other action would resolve the institution at the least possible long-term loss to the deposit insurance fund. If a conservator or receiver is not appointed, the agency must redetermine every 90 days whether to appoint a conservator or receiver or whether to take alternative action. If the insured depository institution is, on average, critically undercapitalized for 270 days, then a receiver must be appointed unless the agency determines that such institution has positive net worth, has been in substantial compliance with an approved capital restoration plan which requires consistent improvement in the institution’s capital since the date of the approval of the plan, is profitable or has an upward trend in earnings that the agency projects as sustainable, is reducing its ratio of nonperforming loans to total loans, and the head of the agency (as well as the Chairman of the FDIC, if different from the agency) certifies that the institution is both viable and not expected to fail. After 60 days of becoming critically undercapitalized, an insured depository institution is prohibited from paying principal or interest on subordinated debt without FDIC approval. In addition, several other restrictions, much like the discretionary limitations described above for significantly undercapitalized institutions, automatically take effect. FDIC approval is required for a critically undercapitalized institution to engage in certain activities, including but not limited to, entering into any material transaction other than in the usual course of business, extending credit for any highly leveraged transaction, making any material change in accounting methods, amending its articles or bylaws, engaging in any “covered transaction” with an affiliate (as defined in section 23A of the Federal Reserve Act), paying excessive compensation or bonuses, and paying interest on deposits in excess of the prevailing rate in the institution’s market area. Additional restrictions may be imposed on significantly or critically undercapitalized institutions at the regulators’ discretion, including but not limited to, terminating, reducing or altering activities that pose excessive risk to the institution, requiring the institution to elect a new board of directors, to dismiss any director or senior executive officer or to employ new senior executive officers, and prohibiting any controlling bank holding company from making any capital distributions without prior approval.

At December 31, 2009, the Company’s and the Bank’s leverage ratio was 0.03% and 2.45%, respectively, compared to 4.32% and 5.72%, respectively, at December 31, 2008. The Company’s and the Bank’s leverage ratio was 8.69% and 8.83%, respectively, at December 31, 2007.

On June 27, 2008, the Company entered into an agreement with another financial institution for a $6.0 million line of credit. This line of credit matured on June 27, 2009 and paid interest quarterly at prime rate, as reported in The Wall Street Journal, floating with a 6.00% floor. On June 27, 2009, the Company was granted a 90 day extension on the line of credit until September 27, 2009. On November 12, 2009, the Company received notice from the financial institution that an event of default exists under the agreement and demanded payment of the amount outstanding. On December 28, 2009, the Company negotiated a renewal on the line of credit for six months until June 27, 2010. During this period, interest will be paid monthly at prime rate, as reported in the Wall Street Journal, floating with a 6.00% floor. In connection with this renewal, the Company paid down $1,650,000 of the line of credit with funds contributed by CMS to the Company and from funds received through an income tax refund in 2009. This line of credit is secured by all of the issued and outstanding shares of the common stock of the Bank. In the event of an uncured default under this line of credit, the lender could foreclose upon the common stock of the Bank and deprive Crescent of its principal source of income. The Company is currently in default related to its minimum capital ratios covenants and its minimum book value covenant and has not received a waiver from the lender related to falling below these minimum covenant levels.

On the same day that the Company entered into the line of credit discussed above, it drew $2.5 million on the line of credit and contributed that $2.5 million to the Bank. On September 30, 2008, the Company drew an additional $2.5 million on the line of credit and contributed that amount to the Bank. The Company drew an additional $550,000 on the line of credit in the first quarter of 2009 and contributed such capital to the Bank. During the fourth quarter of 2009, the Company paid down the line of credit $1.7 million in order to renew the borrowing. Also, in June 2008, CMS distributed $1.3 million in available capital to the Company and the Company subsequently contributed the $1.3 million to the Bank. In the fourth quarter of 2009, CMS distributed $350,000 in available capital to the Company and the Company used those funds to pay down the line of credit discussed above. The Company contributed this $6.3 million in capital to the Bank in an effort to keep the Bank adequately-capitalized in light of the Bank’s net loss and deterioration in asset quality during 2008 and 2009.

Our total consolidated stockholders’ equity was approximately $700,000, or 0.07% of total consolidated assets, at December 31, 2009, compared to $36.8 million, or 3.54% of total consolidated assets, at December 31, 2008 and $67.4 million, or 7.33% of total consolidated assets, at December 31, 2007. The decrease in the consolidated shareholders’ equity to total consolidated assets ratio in 2009 was due to the Company’s consolidated net loss of approximately $35.5 million in 2009. The decrease in the ratio of consolidated shareholders’ equity to total consolidated assets during 2008 was due to the Company’s consolidated net loss of approximately $31.7 million in 2008 and due to the growth of total consolidated assets of approximately $118.7 million, or 13%, during 2008.

As of December 31, 2009, the Company’s ratio of total consolidated capital to risk-adjusted assets was 0.07%, 0.03% of which consisted of tier 1 capital, and as of December 31, 2008, the Company’s ratio of total consolidated capital to risk-adjusted assets was 8.01%, 5.30% of which consisted of tier 1 capital. As of December 31, 2009, the Bank’s ratio of total capital to risk-adjusted

Index to Financial Statements

assets was 4.44%, 3.16% of which consisted of tier 1 capital, and as of December 31, 2008, the Bank’s ratio of total capital to risk-adjusted assets was 8.31%, 7.04% of which consisted of tier 1 capital. As of December 31, 2007, the Company’s ratio of total capital to risk-adjusted assets was 10.92%, 9.22% of which consisted of tier 1 capital, and the Bank’s ratio of total capital to risk-adjusted assets was 10.41%, 9.27% of which consisted of tier 1 capital. We paid no dividends to our shareholders during 2009. During 2008, we paid $953,362 of dividends, or $0.180 per share, compared to $1,669,947, or $0.320 per share, during 2007

Currently, the Company is considering a variety of means to increase its capital ratios. As part of those efforts, the Company has retained the services of investment bankers to review any number of strategic opportunities available to the Company and the Bank. However, there is no assurance that the Company’s strategic efforts will be successful, particularly in the current economic environment. In the event we are unable to successfully identify and pursue a strategic alternative and/or raise additional capital or generate sufficient liquidity, then the Company may not be able to continue to operate.

In prior years, the Company maintained sufficient cash to inject into the Bank if its assets grew faster than its capital and such an injection was needed to maintain well-capitalized status. Due to the operating losses we incurred in 2008 and 2009, the Company did not have sufficient cash to keep the Bank at the adequately capitalized level. If the Company cannot raise additional capital either through private or public equity raising efforts, then there will be no further capital injections into the Bank. Due to its capital levels and operating losses in 2008 and 2009, the Bank is unable to pay dividends to the Company. If the Company or the Bank is not able to raise additional capital, the Company may not have sufficient capital to fund its operations. The Company’s ability to preserve and increase its capital will depend on various factors, including general economic and real estate market conditions in our service areas, our ability to raise additional capital, regulatory considerations, the level of consumer confidence in our institution and the banking sector generally, and the Company’s ability to manage and limit the adverse effects of losses on existing loans.

Liquidity

Liquidity involves our ability to raise funds to support asset growth, meet deposit withdrawals and other borrowing needs, maintain reserve requirements, and otherwise sustain our operations. This is accomplished through maturities and repayments of our loans and investments, our deposit growth, and our access to sources of funds other than deposits, such as the federal funds market and borrowings from the FHLB and other lenders.

Our average liquid assets consist of cash and amounts due from banks, interest-bearing deposits in other banks, federal funds sold, mortgage loans held for sale net of borrowings, investment securities held for maturity and securities held for sale. These average liquid assets totaled $213.4 million, $116.7 million and $47.3 million during 2009, 2008 and 2007, representing 22%, 13% and 6% of average deposits and borrowings, respectively, for those periods. Average liquid assets increased by approximately $96.7 million, or 83%, from the twelve months ended December 31, 2008 to the twelve months ended December 31, 2009 and average liquid assets as a percentage of average deposits and borrowings increased approximately 9% from the same time frame. Our average liquid assets and the percentage of average liquid assets as a percentage of average deposits and borrowings increased due to the Company’s strategic decision to increase short-term liquidity because of the tightening in the credit and liquidity markets and the deterioration in the real estate market. The Company, on average, held $41.9 million more in federal funds sold, interest-bearing deposits in other banks and due from banks during 2009 compared to 2008. Average liquid assets increased by approximately $69.4 million, or 147%, from December 31, 2007 to December 31, 2008 and average liquid assets as a percentage of average deposits and borrowings increased approximately 7% from December 31, 2007 to December 31, 2008. Our average liquid assets and the percentage of average liquid assets as a percentage of average deposits and borrowings increased due to the Company’s strategic decision to increase short-term liquidity because of the tightening in the credit and liquidity markets and the deterioration in the real estate market. The Company, on average, held $62.7 million more in federal funds sold, interest-bearing deposits in other banks and due from banks during 2008 compared to 2007.

Average commercial banking loans were 78%, 91% and 99% of average commercial bank deposits and borrowings during 2009, 2008 and 2007, respectively. The ratio of average commercial banking loans to average commercial banking deposits and borrowings decreased during 2009 when compared to 2008 and during 2008 when compared to 2007. The decrease in the ratio of average commercial banking loans to average commercial banking deposits and borrowings during 2009 and 2008 was due to the Company’s strategic decision to increase short-term liquidity in response to the tightening in the credit and liquidity markets and the deterioration in the real estate market. The Bank grew average deposits approximately $91.3 million during 2009 compared to 2008 while average commercial banking loans decreased by $48.7 million during the same time frame. The Bank grew average deposits approximately $139.5 million during 2008 compared to 2007 while average commercial banking loans increased by $56.9 million during the same time frame. The Company’s decision to increase short-term liquidity and the growth of deposits resulted in the Bank holding, on average, approximately $41.9 million and $62.7 million, respectively, more in federal funds sold, interest-bearing deposits and due from banks during 2009 compared to 2008 and during 2008 compared to 2007.

Index to Financial Statements

The following table shows operating and capital ratios for each of the last three years:


	Year ended December 31,
	2009		2008		2007
Percentage of net income (loss) to:
Average stockholders’ equity	(159.73	)%	(51.73	)%	9.88	%
Average total assets	(3.41	)%	(3.17	)%	0.74	%
Percentage of average stockholders’ equity to average total assets	2.13	%	6.14	%	7.51	%
Percentage of dividends paid to net income	N/M		N/M		26.09	%

N/M – Not meaningful due to net loss for the year

The Bank actively manages the levels, types and maturities of interest-earning assets in relation to the sources available to fund current and future needs. The Bank maintained a line of credit up to approximately $41.5 million at the FHLB at March 31, 2009. However, based upon the Company’s weakened financial condition and capital levels, the FHLB suspended our line of credit due to the financial condition of the Bank during the second quarter of 2009. The Bank can renew its current advances as they mature, but cannot borrow additional advances at this time. Additionally, during the first quarter of 2009, the FHLB required the Bank to have 125% of collateral to total advances outstanding. The Bank also maintains federal funds lines of credit with correspondent institutions, totaling $14.5 million at December 31, 2009. However, based upon the Company’s weakened financial condition and capital levels, the Company’s access to these federal funds will be restricted in 2010 and may not be available at all. At December 31, 2009, we had $28.0 million in the FHLB advances outstanding and no amounts outstanding on our federal funds lines of credit. During 2009, the average balance in FHLB advances was $30.2 million and the Bank had no amounts outstanding on its federal funds purchased lines during 2009. All of the $28.0 million in advances outstanding are secured by the Bank’s 1 – 4 family first lien mortgage loans, commercial real estate loans and multi-family mortgage loans, investment securities and FHLB Stock. The Bank has an additional $1.7 million in unpledged securities that could be used to borrow additional funds at the Federal Reserve Bank.

The Bank’s liquidity is under critical pressure due to the tightening in the liquidity and credit markets, regulatory limits on brokered and out-of-market deposits, the competitive pricing for deposits in the Bank’s market and other potential regulatory limitations. The Bank is likely to experience increased liquidity pressure during 2010. During 2007 and 2008, we attempted to offset potential decreases in our share of local deposits by accepting out-of-market and brokered deposits. The cost of these brokered and out-of-market deposits were approximately 15 to 30 basis points less than our local deposits during the same period. During 2007 and 2008, the Bank’s out-of-market and brokered deposits increased $161.6 million to $240.1 million at December 31, 2008. We have since reduced our out-of-market and brokered deposits to $182.5 million as of December 31, 2009.

Currently, because the Bank’s capital levels are below the regulatory requirements for “adequately capitalized” institutions, the Bank cannot originate or renew brokered deposits and is limited in the rates that it can offer on deposits generally. From April 2010 through December 2010, the Bank has approximately $120 million in brokered and out-of market deposits maturing, and, if the Bank does not return to a well capitalized position, it will most likely be unable to renew these deposits, which will adversely affect the Bank’s liquidity position. Paying off all of these deposits will greatly diminish the liquidity position of the Company, and we may be unable to fund our business operations. Even if we become eligible to receive a waiver from the FDIC on brokered deposits, we cannot guarantee that we will be granted such waiver. Management has found that most non-relationship oriented retail certificates of deposit are interchangeable with wholesale funding sources such as brokered deposits and wholesale certificates of deposit and as a result, the Company alternates between these funding sources depending on the relative costs. However, our access to brokered deposits as a funding source may be limited in the future.

There can be no assurance that our liquidity level will be sufficient to fund the repayment of all of our maturing brokered deposits and out-of-market deposits in 2010. As a result of our inability to accept, renew or rollover brokered deposits and the potential repayment obligation related to maturing brokered deposits and out-of-market deposits, we have explored alternative sources to increase our liquidity. Access to these alternative sources may be hampered by the current negative publicity surrounding both the banking industry and the Company. The banking industry has come under significant scrutiny due to government funding through the Emergency Economic Stabilization Act of 2008 and the U.S. Treasury’s Troubled Asset Relief Program. In addition, the Company has endured adverse publicity due to its increasing levels of nonperforming assets, goodwill impairment, decreasing stock price during 2009 and net losses in 2009. Additionally, the current volatility and disruptions in the capital markets could impact the Company’s ability to access alternative liquidity sources in the same manner as in the past. Finally, our entry into the Order with the Georgia Department and the FDIC, as well as our independent registered public accountant’s inclusion in their audit report for fiscal year 2008 and 2009 of their doubt about our ability to continue as a going concern, could impact our ability to access alternative liquidity sources or raise additional capital. As a result, our liquidity could be adversely and significantly affected, and we may not be able to fund our operations or continue as a going concern.

Index to Financial Statements

Contractual Obligations and Commercial Commitments

Contractual Obligations

The following table presents our contractual obligations at December 31, 2009. The table does not include obligations which will be settled in cash, primarily in less than one year, such as deposits, federal funds purchased, securities sold under repurchase agreements and short term borrowings, which are included in our consolidated balance sheet at December 31, 2009. Additional information concerning contractual cash obligations is provided in Note 16 of the “Notes to Consolidated Financial Statements” included with this Annual Report to Shareholders.


	Payments Due by Period
	Total		Under 1 Year		1-3 Years		3-5 Years		After 5 Years
	(in thousands)

Borrowings	$	54,086	$	12,919	$	11,000	$	8,000	$	22,167
Operating Leases _{(1) (2)}		1,730		399		782		541		8
Purchase Obligations ₍₃₎		1,191		741		413		37		-
Employment Compensation Obligations ₍₄₎		1,335		53		347		215		720


Total contractual cash obligations	$	58,342	$	14,112	$	12,542	$	8,793	$	22,895

(1)	Represents minimum annual rental commitments exclusive of taxes and other charges.

(2)

Certain operating leases contain escalation clauses, which correspond with increased real estate taxes and other operating expenses, and renewal options calling for increased rents as the leases are renewed. No restrictions are imposed by any lease agreement regarding the payment of dividends, additional debt financing, or entering into further lease agreements.

(3)

These obligations relate to services provided for information technology and other outsourcing of operating activities. Amounts presented in the table reflect minimum legally enforceable contractual obligations of $20,000 or greater as of December 31, 2009. The minimum obligation for any notification period is presented in the table.

(4)	This obligation relates to amounts under post retirement benefit plans, which are more fully described in Note 10 of the “Notes to Consolidated Financial Statements” included with this Annual Report to Shareholders.

Commercial Commitments

The following table presents our other commercial commitments at December 31, 2008. These commitments are not included in our consolidated balance sheet.


	Amount of Commitment Expiration Per Period
	Total		Under 1 Year		1-3 Years		4-5 Years		After 5 Years
	(in thousands)

Commitments to Extend Credit ₍₁₎	$	44,689	$	36,984	$	6,481	$	876	$	348
Letters of Credit ₍₂₎		2,463		2,095		363		5		-


Total Commercial Commitments	$	47,152	$	39,079	$	6,844	$	881	$	348

(1)

Commitments to extend credit are agreements to lend to customers in accordance with contractual provisions. These commitments usually are for specific periods or contain termination clauses and may require the payment of a fee. The total amounts of unused commitments do not necessarily represent future cash requirements, in that commitments often expire without being drawn upon.

(2)	Letters of credit and financial guarantees are agreements whereby we guarantee the performance of a customer to a third party. Collateral may be required to support letters of credit in accordance with management’s evaluation.

Off-Balance Sheet Arrangements

In order to manage its interest rate sensitivity, the Company uses off-balance sheet contracts that are considered derivative financial instruments. Derivative financial instruments can be a cost-effective and capital-effective means of modifying the repricing characteristics of on-balance sheet assets and liabilities. At December 31, 2009 and December 31, 2008, the Company was a party to interest rate swap contracts (back-end derivatives) under which it pays a fixed rate of interest and receives a variable rate of interest.

Index to Financial Statements

The notional amount of the interest rate swaps was approximately $8,239,000 with a fair value of approximately $(956,000) at December 31, 2009 and approximately $8,764,000 with a fair value of approximately $(1,407,000) at December 31, 2008. The Company also has an embedded derivative in each of the loan agreements (front-end derivative) that would require the borrower to pay or receive from the Bank an amount equal to and offsetting the value of the interest rate swaps. These front-end and back-end derivatives are recorded in other assets and other liabilities. The net effect of recording the derivatives at fair value through earnings was immaterial to the Company’s financial condition and results of operations as of and for the year ended December 31, 2009. If a counterparty, in particular our borrower, fails to perform and the market value of the financial derivative is negative, the Company would be obligated to pay the settlement amount for the financial derivative. If the market value is positive, the Company would receive a payment for the settlement amount for the financial derivative. The settlement amount of the financial derivative could be material to the Company and is determined by the fluctuation of interest rates.

The Company’s policy requires all derivative financial instruments be used only for asset/liability management through the hedging of specific transactions or positions, and not for trading or speculative purposes. The Company is subject to the risk that a counterparty, in particular our borrower, will fail to perform; however, management believes that the risk associated with using derivative financial instruments to mitigate interest rate risk sensitivity is minimal and should not have any material unintended impact on the financial condition or results of operations.

Effects of Inflation

Inflation generally increases the cost of funds and operating overhead, and, to the extent loans and other assets bear variable rates, the yields on such assets. Unlike most industrial companies, virtually all of our assets and liabilities are monetary in nature. As a result, interest rates generally have a more significant impact on our performance than the effects of general levels of inflation. Although interest rates do not necessarily move in the same direction, or to the same extent, as the prices of goods and services, low inflation or deflation generally results in decreased interest rates while high inflation generally results in increased interest rates. From September 2007 through the first quarter of 2009, the Federal Reserve reduced interest rates by 500 basis points. The Federal Reserve has indicated that further changes in interest rates would be dependent on economic data. The decrease in interest rates has had a negative impact on our net interest income during 2009.

In addition, inflation results in the increased cost of goods and services purchased, cost of salaries and benefits, occupancy expense and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely affect the liquidity and earnings of our commercial banking and mortgage banking businesses, and our stockholders’ equity.

MARKET INFORMATION AND DIVIDENDS

Market Information

The following table sets forth the high and low sales price of the Company’s common stock on the Nasdaq Capital Market for the indicated periods. On March 22, 2010, the price of the Company’s common stock, as quoted on the Nasdaq Capital Market, was $0.49. As of March 22, 2010, there were approximately 1,480 holders of the Company’s common stock.


Period	Sales Price per share of the Company’s Common Stock
Period	High		Low
2009
Fourth Quarter	$	1.55	$	.40
Third Quarter	$	2.25	$	1.47
Second Quarter	$	3.43	$	1.55
First Quarter	$	5.00	$	2.51

2008
Fourth Quarter	$	7.60	$	3.88
Third Quarter	$	9.75	$	5.65
Second Quarter	$	11.51	$	8.57
First Quarter	$	14.90	$	10.50

Index to Financial Statements

Dividends

The primary source of income to pay dividends on the Company’s common stock is dividends received from the Bank. Due to its capital levels and operating losses in 2008 and 2009, the Bank is unable to pay dividends to the Company. Cash dividends on the Bank’s common stock may only be declared and paid out of its retained earnings, and dividends may not be declared at any time at which the Bank’s paid-in capital and appropriated retained earnings do not, in combination, equal at least 20% of its capital stock account. In addition, the Georgia Department’s current rules and regulations require prior approval before cash dividends may be declared and paid if: (i) the Bank’s ratio of tier 1 capital to adjusted total assets is less than 8%; (ii) the aggregate amount of dividends declared or anticipated to be declared in that calendar year exceeds 50% of the Bank’s net profits, after taxes but before dividends, for the previous calendar year; or (iii) the percentage of the Bank’s loans classified as adverse as to repayment or recovery by the Georgia Department at the most recent regulatory examination of the Bank exceeds 80% of the Bank’s tier 1 capital plus the allowance for loan losses as reflected at such examination.

The following table sets forth, for the Company’s last two fiscal years, the dividends per share declared and paid by the Company:


2009	Dividend Per Share	2008	Dividend Per Share

Fourth Quarter	N/A	Fourth Quarter	$ 0.0200
Third Quarter	N/A	Third Quarter	$ 0.0400
Second Quarter	N/A	Second Quarter	$ 0.0400
First Quarter	N/A	First Quarter	$ 0.0800

Future dividends on the Company’s common stock will depend upon the earnings, financial condition and capital adequacy of the Company and its subsidiaries and their need for funds, as well as other relevant factors, including applicable restrictions and governmental policies and regulations. The ability of the Company to pay dividends is subject to statutory restrictions on cash dividends applicable to Georgia business corporations, in particular the requirements that after giving effect to the dividends, the corporation be able to pay its debts as they become due in the usual course of business and that the corporation’s assets not be less than the sum of its total liabilities. The Company does not expect to have any substantial sources of income other than dividends it may receive from the Bank. Due to its capital levels and operating losses in 2008 and 2009, the Bank is unable to pay dividends to the Company.

Index to Financial Statements

CRESCENT BANKING COMPANY

AND SUBSIDIARIES

CONSOLIDATED

FINANCIAL REPORT

December 31, 2009


Report of Independent Registered Public Accounting Firm		F-1

Consolidated Balance Sheets		F-2

Consolidated Statements of Operations		F-3

Consolidated Statements of Comprehensive Income (Loss)		F-5

Consolidated Statements of Stockholders’ Equity		F-6

Consolidated Statements of Cash Flows		F-7

Notes to Consolidated Financial Statements		F-9

Index to Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

BOARD OF DIRECTORS AND STOCKHOLDERS

CRESCENT BANKING COMPANY

We have audited the accompanying consolidated balance sheets of Crescent Banking Company and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the years in the three year period ended December 31, 2009. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Crescent Banking Company and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that Crescent Banking Company and subsidiaries will continue as a going concern. As discussed in Note 18 to the consolidated financial statements, the Company is operating under regulatory orders to, among other items, increase capital and maintain certain levels of minimum capital. As of December 31, 2009, the Company was not in compliance with these capital requirements. In addition to its deteriorating capital position, the Company has suffered significant losses from operations for the years ended December 31, 2009 and 2008, and heightened levels of nonperforming assets. These matters raise substantial doubt about the ability of Crescent Banking Company to continue as a going concern. Management’s plans with regard to these matters are discussed in Note 18. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Dixon Hughes PLLC

Atlanta Georgia

April 1, 2010

F-1

Index to Financial Statements

CRESCENT BANKING COMPANY

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2009 AND 2008


	2009			2008
Assets
Cash and due from banks	$	2,471,541		$	6,680,289
Federal funds sold		17,050,000			83,269,000
Interest-bearing deposits in banks		143,778,479			63,078,645
Investment securities available-for-sale		26,356,387			33,593,627
Investment securities held-to-maturity, at cost (fair value approximates $4,472,250 and $3,874,400, respectively)		4,450,000			4,000,000
Restricted equity securities		3,275,000			3,210,675
Mortgage loans held for sale		379,531			979,130
Loans		731,571,728			785,389,240
Less allowance for loan losses		(27,934,813	)		(22,280,041	)

Loans, net		703,636,915			763,109,199
Premises and equipment, net		21,370,479			22,756,531
Other real estate owned		43,124,334			25,815,072
Cash surrender value of life insurance		14,674,470			14,133,412
Deposit intangibles		90,342			179,030
Deferred tax asset, net of valuation allowance		-			2,435,074
Other assets (Note 20)		13,197,268			15,729,536


Total assets	$	993,854,746		$	1,038,969,220

Liabilities and Stockholders’ Equity
Deposits
Noninterest-bearing	$	33,469,518		$	40,637,774
Interest-bearing		897,981,332			895,223,907

Total deposits		931,450,850			935,861,681
Short-term borrowings		12,918,509			10,018,509
Long-term borrowings		41,167,000			48,167,000
Accrued interest and other liabilities (Note 20)		6,237,731			6,476,004
Liabilities related to discontinued operations		1,352,846			1,694,496

Total liabilities		993,126,936			1,002,217,690

Stockholders’ equity
Preferred stock, par value $1.00 (1,000,000 shares authorized; no shares issued or outstanding)		-			-
Common stock, par value $1.00 (50,000,000 shares authorized; 5,334,401 and 5,384,547 shares issued respectively)		5,334,401			5,384,547
Capital surplus		18,601,190			19,180,530
Retained earnings (Deficit)		(23,377,555	)		12,166,918
Treasury stock, 33,336 shares		(296,091	)		(296,091	)
Accumulated other comprehensive income		465,865			315,626

Total stockholders’ equity		727,810			36,751,530


Total liabilities and stockholders’ equity	$	993,854,746		$	1,038,969,220

F-2

Index to Financial Statements

CRESCENT BANKING COMPANY

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007


	2009			2008			2007
Interest income
Loans including fees	$	41,875,158		$	51,774,951		$	63,626,994
Mortgage loans held for sale		22,272			6,630			16,841
Taxable securities		1,387,515			1,349,159			1,239,512
Tax-exempt securities		85,188			77,028			-
Deposits in banks		1,478,910			452,997			96,992
Federal funds sold		54,141			995,481			694,593

Total interest income		44,903,184			54,656,246			65,674,932

Interest expense
Deposits		31,106,708			34,749,215			33,534,634
Short-term borrowings		625,652			538,840			627,760
Long-term borrowings		1,602,348			2,246,757			2,066,536

Total interest expense		33,334,708			37,534,812			36,228,930

Net interest income		11,568,476			17,121,434			29,446,002
Provision for loan losses		26,201,187			25,848,354			2,676,000

Net interest income (loss) after provision for loan losses		(14,632,711	)		(8,726,920	)		26,770,002

Noninterest income
Service charges on deposit accounts		1,374,280			1,442,403			1,555,702
Mortgage loan origination fees		474,136			427,522			532,913
Gains on sales of SBA loans		313,999			276,635			520,267
Other operating income		1,602,202			1,563,232			1,564,937

Total other income		3,764,617			3,709,792			4,173,819

Noninterest expenses
Salaries and employee benefits		7,821,892			11,416,713			11,608,833
Occupancy and equipment expenses		3,212,402			3,288,778			3,172,082
Foreclosed asset expense, net		5,326,807			3,746,643			608,946
Other operating expenses (Note 20)		11,911,121			10,023,327			5,786,832

Total other expenses		28,272,222			28,475,461			21,176,693

Income (loss) from continuing operations before income taxes		(39,140,316	)		(33,492,589	)		9,767,128
Income tax expense (benefit)		(3,595,843	)		(2,446,536	)		3,441,790

Income (loss) from continuing operations		(35,544,473	)		(31,046,053	)		6,325,338
Income from operation of discontinued mortgage subsidiary, net of tax expense of $0, $0, and $43,799, respectively		-			-			74,595
Valuation of deferred tax asset allowance from discontinued mortgage subsidiary		-			(658,415	)		-

Net income (loss)	$	(35,544,473	)	$	(31,704,468	)	$	6,399,933

F-3

Index to Financial Statements

CRESCENT BANKING COMPANY

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

(Continued)


	2009			2008			2007
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share	$	(6.73	)	$	(6.06	)	$	1.24

Diluted earnings (loss) per share	$	(6.73	)	$	(6.06	)	$	1.14

EARNINGS (LOSS) PER SHARE FROM CONTINUING OPERATIONS
Basic earnings (loss) per share	$	(6.73	)	$	(5.93	)	$	1.22

Diluted earnings (loss) per share	$	(6.73	)	$	(5.93	)	$	1.12

EARNINGS (LOSS) PER SHARE FROM DISCONTINUED OPERATIONS
Basic earnings (loss) per share	$	0.00		$	(0.13	)	$	0.01

Diluted earnings (loss) per share	$	0.00		$	(0.13	)	$	0.01

F-4

Index to Financial Statements

CRESCENT BANKING COMPANY

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007


	2009			2008			2007
Net income (loss)	$	(35,544,473	)	$	(31,704,468	)	$	6,399,933

Other comprehensive income:
Unrealized gains on securities available-for-sale:
Unrealized holding gains arising during period, net of tax of $100,160, $194,205 and $131,894, respectively		150,239			291,307			197,841

Other comprehensive income		150,239			291,307			197,841

Comprehensive income (loss)	$	(35,394,234	)	$	(31,413,161	)	$	6,597,774

F-5

Index to Financial Statements

CRESCENT BANKING COMPANY

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007


	Common Stock					Capital Surplus			Retained Earnings (Deficit)			Total Treasury Stock				Accumulated Other Comprehensive Income (Loss)			Stockholders’ Equity
	Shares		Par Value			Capital Surplus			Retained Earnings (Deficit)			Shares	Cost			Accumulated Other Comprehensive Income (Loss)			Stockholders’ Equity
Balance, December 31, 2006	5,218,146			5,218,146			16,934,569			40,094,762		33,336		(296,091	)		(173,522	)		61,777,864
Net income	-			-			-			6,399,933		-		-			-			6,399,933
Cash dividends declared, $0.32 per share	-			-			-			(1,669,947	)	-		-			-			(1,669,947	)
Exercise of stock options	9,000			9,000			33,673			-		-		-			-			42,673
Issuance of common stock – Restricted Shares	61,000			61,000			(61,000	)		-		-		-			-			-
Issuance of common stock – DRIP	3,626			3,626			45,793			-		-		-			-			49,419
Stock based compensation expense	-			-			637,495			-		-		-			-			637,495
Other comprehensive income	-			-			-			-		-		-			197,841			197,841

Balance, December 31, 2007	5,291,772			5,291,772			17,590,530			44,824,748		33,336		(296,091	)		24,319			67,435,278
Net income (loss)	-			-			-			(31,704,468	)	-		-			-			(31,704,468	)
Cash dividends declared, $0.18 per share	-			-			-			(953,362	)	-		-			-			(953,362	)
Exercise of stock options	41,666			41,666			498,111			-		-		-			-			539,777
Issuance of common stock – Restricted Shares	500			500			(500	)		-		-		-			-			-
Forfeit of common stock – Restricted Shares	(2,000	)		(2,000	)		(15,734	)		-		-		-			-			(17,734	)
Issuance of common stock – DRIP	42,132			42,132			380,186			-		-		-			-			422,318
Issuance of common stock – Stock Purchase Plan	10,477			10,477			58,653			-		-		-			-			69,130
Stock based compensation expense	-			-			669,284			-		-		-			-			669,284
Other comprehensive income	-			-			-			-		-		-			291,307			291,307

Balance, December 31, 2008	5,384,547		$	5,384,547		$	19,180,530		$	12,166,918		33,336	$	(296,091	)	$	315,626		$	36,751,530

Net income (loss)	-			-			-			(35,544,473	)	-		-			-			(35,544,473	)
Forfeit of common stock – Restricted Shares	(81,500	)		(81,500	)		(990,013	)		-		-		-			-			(1,071,513	)
Issuance of common stock – Stock Purchase Plan	31,354			31,354			30,125			-		-		-			-			61,479
Stock based compensation expense	-			-			380,548			-		-		-			-			380,548
Other comprehensive income	-			-			-			-		-		-			150,239			150,239

Balance, December 31, 2009	5,334,401		$	5,334,401		$	18,601,190		$	(23,377,555	)	33,336	$	(296,091	)	$	465,865		$	727,810

F-6

Index to Financial Statements

CRESCENT BANKING COMPANY

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007


	2009			2008			2007
OPERATING ACTIVITIES
Net income (loss)	$	(35,544,473	)	$	(31,704,468	)	$	6,399,933
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Income from discontinued operations		-			-			(74,595	)
Accretion on securities		109,944			2,735			11,031
Impairment of goodwill		-			3,442,714			-
Impairment of trust preferred securities		176,000			176,000			-
Impairment of other investments		165,975			-			-
Depreciation		1,512,568			1,546,844			1,553,659
Amortization of deposit intangibles		88,688			125,751			125,751
Provision for loan losses		26,201,187			25,848,354			2,676,000
Gain on sale of other real estate owned		(108,599	)		(25,581	)		(20,464	)
Gain on sale of credit cards		-			-			(57,795	)
Loss on disposal of premises and equipment		-			14,477			21,078
Income on life insurance policies		(541,058	)		(545,826	)		(445,260	)
Deferred tax		(19,362,535	)		(6,365,292	)		(887,610	)
Impairment of deferred tax benefit		22,008,026			9,870,218			-
Proceeds from sales of mortgage loans held for sale		34,773,642			30,487,890			37,359,377
Originations of mortgage loans held for sale		(34,174,043	)		(31,143,867	)		(37,136,761	)
Stock based compensation expense		(690,965	)		651,550			637,495
(Increase) decrease in interest receivable		576,720			1,213,655			(1,236,968	)
Decrease in interest payable		(205,828	)		(560,586	)		(640,460	)
Net cash used in discontinued operations		(341,650	)		(258,529	)		(291,276	)
Net change in other assets, liabilities and other operating activities		4,458,633			(5,017,499	)		1,560,643

Net cash provided by (used in) operating activities		(897,768	)		(2,241,460	)		9,553,778

INVESTING ACTIVITIES
Purchase of securities available-for-sale		(7,236,010	)		(17,096,716	)		(8,294,210	)
Proceeds from maturities/calls of securities available-for-sale		14,613,705			6,382,115			3,710,943
Purchase of securities held-to-maturity		(950,000	)		(4,000,000	)		-
Proceeds from maturities/call of securities held-to-maturity		500,000			-			1,728,241
Proceeds from maturities of other securities		-			225,000			541,500
Purchase of other securities		(230,300	)		(251,400	)		(360,000	)
Net (increase) decrease in federal funds sold		66,219,000			(62,678,000	)		(8,623,000	)
Net (increase) decrease in interest-bearing deposits in banks		(80,699,834	)		(62,403,313	)		352,438
Net increase in loans		(42,984	)		(11,740,188	)		(125,439,019	)
Proceeds from sale of other real estate owned		13,091,311			4,373,066			526,220
Purchase of premises and equipment		(126,516	)		(3,296,051	)		(1,455,781	)
Purchase of life insurance policies		-			-			(4,900,000	)
Proceeds from sale of credit cards		-			-			649,842

Net cash provided by (used in) investing activities		5,138,372			(150,485,487	)		(141,562,826	)

F-7

Index to Financial Statements

CRESCENT BANKING COMPANY

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

(Continued)


	2009			2008			2007
FINANCING ACTIVITIES
Net increase (decrease) in deposits	$	(4,410,831	)	$	151,610,519		$	125,395,798
Net increase (decrease) in borrowings		(4,100,000	)		18,509			8,310,000
Dividends paid		-			(953,362	)		(1,669,947	)
Excess tax benefits from share-based payment arrangements		-			299,244			(24,500	)
Issuance of common stock for dividend reinvestment plan		-			422,318			49,419
Issuance of common stock for share purchase plan		61,479			69,130			-
Proceeds from exercise of stock options		-			240,533			67,173

Net cash provided by (used by) financing activities		(8,449,352	)		151,706,891			132,127,943

Net increase (decrease) in cash and due from banks		(4,208,748	)		(1,020,056	)		118,895
Cash and due from banks at beginning of year		6,680,289			7,700,345			7,581,450

Cash and due from banks at end of year	$	2,471,541		$	6,680,289		$	7,700,345


SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest	$	33,540,536		$	38,095,398		$	36,869,390
Income taxes	$	-		$	1,766,000		$	3,929,000
Principal balances of loans transferred to other real estate owned	$	33,314,081		$	28,194,270		$	6,023,832
Unrealized gain on securities available for sale, net	$	150,239		$	291,307		$	197,841

F-8

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Crescent Banking Company (the “Company”) provides a full range of banking services to individual and corporate customers through its subsidiary, Crescent Bank and Trust Company (the “Bank”) in Jasper, Pickens County, Georgia and the surrounding areas. Through its subsidiaries Crescent Capital Trust II, Crescent Capital Trust III, and Crescent Capital Trust IV the Company issued trust-preferred securities that are included in long-term borrowings. See Note 18 regarding the Company’s capital and regulatory matters.

Basis of Presentation and Accounting Estimates

The consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany transactions and balances are eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current financial statement presentation with no effect to net income or stockholders’ equity as previously reported.

On September 20, 2007, the Board of directors of the Company approved a two-for-one stock split, in the form of a stock dividend, of our common stock payable on October 26, 2007 to stockholders of record as of October 15, 2007. Share and per share data, for all periods presented, have been adjusted to give effect to this stock split.

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of derivative instruments, the valuation of foreclosed real estate, the deferred tax valuation analysis and the determination of the allowance for recourse obligations.

Cash, Due from Banks and Cash Flows

For purposes of reporting cash flows, cash and due from banks include cash on hand, cash items in process of collection and amounts due from banks. Cash flows from loans, federal funds sold, interest-bearing deposits in banks, deposits, and other borrowings are reported net.

The Bank was not required to maintain any reserve balances in cash or on deposit with the Federal Reserve Bank based upon its deposit mix at December 31, 2008 and 2009.

Investment Securities

Debt securities that management has the positive intent and ability to hold to maturity are classified as held-to-maturity and recorded at amortized cost. Debt securities not classified as held-to-maturity are classified as available-for-sale and recorded at fair value with unrealized gains and losses excluded from earnings and reported in other comprehensive income, net of the related deferred tax effect.

Purchased premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sale of securities are determined using the specific identification method and are recognized on a trade date basis. Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses.

Restricted Equity Securities

Investment in Federal Home Loan Bank (“FHLB”) stock is carried at cost because it can only be redeemed at par value. It is a required investment based on the Bank’s borrowings from the FHLB.

F-9

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Loans

Loans are recorded at their principal amount outstanding, net of deferred loan fees and costs and the allowance for loan losses. Interest is accrued and recognized in operating income based upon the principal amount outstanding. Loan origination fees and direct loan origination costs are deferred and amortized over the estimated lives of the related loans as an adjustment to yield.

The accrual of interest on loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due, unless the loan is well-secured and in the process of collection. Interest income on nonaccrual loans is subsequently recognized only to the extent cash payments are received until the loans are returned to accrual status.

The allowance for loan losses is established through a provision for loan losses charged to expense. Loan losses are charged against the allowance when management believes the collectibility of the principal is unlikely. Subsequent recoveries are credited to the allowance.

The allowance is an amount that management believes will be adequate to absorb probable losses inherent in the loan portfolio. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and may require the Bank to make adjustments to the allowance based on their judgment about information available to them at the time of their examinations.

A loan is considered impaired when it is probable the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. Impaired loans are measured by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogenous loans are evaluated collectively for impairment. The amount of impairment, if any, and any subsequent changes are included in the allowance for loan losses.

F-10

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Premises and Equipment

Land is carried at cost. Premises and equipment are carried at cost less accumulated depreciation. Depreciation is computed principally by the straight-line method over the estimated useful lives of the assets. The range of estimated useful lives for premises and equipment are:


Buildings and improvements		20 – 40 years
Furniture and equipment		5 – 10 years
Computer equipment and software		3 years

Other Real Estate Owned

Other real estate owned represents properties acquired through foreclosure. Other real estate owned is held for sale and is carried at fair value less estimated costs to sell. Any write-down to fair value at the time of transfer to other real estate owned is charged to the allowance for loan losses. Revenue and expenses from operations and changes in the valuation allowance are included in other operating expenses.

Transfers of Financial Assets and Mortgage Loans Held for Sale

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Mortgage Servicing Fees and Costs

Mortgage servicing fees are based on a contractual percentage of the unpaid principal balance of the loans serviced and are recorded as income when received. Mortgage servicing costs are charged to expense when incurred.

Income Taxes

Deferred income tax assets and liabilities are determined using the balance sheet method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. A deferred tax asset valuation allowance has been determined pursuant to accounting guidance.

Deposit Intangibles

Deposit intangibles represent the premiums paid for the acquisition of core deposits. These assets are being amortized using the straight-line method over periods ranging from 6.5 years to 10 years. The deposit intangibles are tested at least annually for impairment.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. Goodwill is tested at least annually for impairment. During our impairment test for 2008, we determined that the entire balance of goodwill of $3,442,714 was impaired and this goodwill was subsequently written-off.

Segments

Internal financial reporting is primarily reported and aggregated in two business lines. Banking accounts for substantially all of the revenues and expenses.

F-11

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Accounting Standards

The FASB issued certain standards on April 9, 2009 that (i) changes existing guidance for determining whether an impairment is other than temporary to debt securities and (ii) replaces the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert: (a) it does not have the intent to sell the security; and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis. Under these standards, declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. These standards are effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company adopted the provisions of these standards for the quarter ended June 30, 2009, as required, and adoption did not have a material impact on the financial statements taken as a whole.

The FASB issued certain standards on April 9, 2009 that amends previous standards to require an entity to provide disclosures about fair value of financial instruments in interim financial information and to require those disclosures in summarized financial information at interim reporting periods. Under these standards, a publicly traded company shall include disclosures about the fair value of its financial instruments whenever it issues summarized financial information for interim reporting periods. In addition, entities must disclose, in the body or in the accompanying notes of its summarized financial information for interim reporting periods and in its financial statements for annual reporting periods, the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position. The new interim disclosures required by these standards are included in the Company’s interim financial statements beginning with the second quarter of 2009.

In January 2009, the FASB finalized a standard that conforms the guidance in GAAP by removing the requirement of management to consider a market participant’s assumptions about cash flows in assessing whether or not an adverse change in previously anticipated cash flows has occurred. The standard is effective for interim and annual periods ending after December 15, 2008, applied prospectively. The adoption of the new standard did not have a significant impact on the determination or reporting of our financial results.

F-12

Index to Financial Statements

CRESCENT BANKING COMPANY

AND SUBSIDIARIES

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

effect of all events or transactions that provide additional evidence of conditions that existed at the balance sheet date, including the estimates inherent in the financial preparation process. Entities shall not recognize the impact of events or transactions that provide evidence about conditions that did not exist at the balance sheet date but arose after that date. This standard was effective for interim and annual reporting periods ending after June 15, 2009. The Company adopted the provisions of this standard for the quarter ended June 30, 2009, as required, and adoption did not have a material impact on the financial statements taken as a whole.

On June 12, 2009, the FASB issued a standard to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. This standard eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. This standard also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. This standard will be effective January 1, 2010 and is not expected to have a significant impact on the Company’s financial statements.

On June 12, 2009, the FASB issued a standard that amends previous standards to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. This standard requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity’s financial statements. This standard will be effective January 1, 2010 and is not expected to have a significant impact on the Company’s financial statements.

On June 29, 2009, the FASB issued a standard that establishes the FASB Accounting Standards Codification (ASC) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with US GAAP. This standard will be effective for financial statements issued for interim and annual periods ending after September 15, 2009, for most entities. On the effective date, all non-SEC accounting and reporting standards will be superseded. The Company adopted this standard for the quarterly period ended September 30, 2009, as required, and adoption did not have a material impact on the financial statements taken as a whole.

Derivatives Instruments and Hedging Activities

The Company is a party to interest rate swap contracts which are a cash flow derivative under ASC 815. All derivative financial instruments are recognized on the balance sheet at fair value.

Stock Based Compensation Plans

Compensation cost for stock-based payments is measured based on the fair value of the award, which includes restricted stock (i.e., unvested common stock) and stock options, at the grant date and is recognized in the consolidated financial statements on a straight-line basis over the requisite service period for service-based awards. The fair value of restricted stock is determined based on the price of Company’s common stock on the date of grant. The fair value of stock options is estimated at the date of grant using the Black-Scholes option pricing model and related assumptions.

Earnings Per Share

Basic earnings per share are computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding. Diluted earnings per share are computed by dividing net income by the sum of the weighted-average number of shares of common stock outstanding and potential common shares. Potential common shares consist of stock options and unvested restricted stock. The Company has issued restricted stock to certain officers and these shares are included in basic earnings per share upon vesting.

F-13

Index to Financial Statements

CRESCENT BANKING COMPANY

AND SUBSIDIARIES

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Comprehensive Income

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. The Company’s sole component of accumulated other comprehensive income is unrealized losses on investment securities available for sale.

NOTE 2. DISCONTINUED OPERATIONS

On December 31, 2003, the Company completed the sale of its wholesale residential mortgage business conducted by Crescent Mortgage Services, Inc. (“CMS”) to Carolina Financial Corporation (“Carolina Financial”) and its subsidiary Crescent Mortgage Corporation (“CMC”). Carolina Financial and CMC are not affiliated with the Company or its subsidiaries. Carolina purchased all of CMS’s mortgage loans, pipeline mortgage loans, premises and equipment and assumed all leases and liabilities related to the transferred assets. The Company’s consolidated balance sheets at December 31, 2009 and December 31, 2008 include no assets and include liabilities of $1,352,846 and $1,694,496, respectively, related to discontinued operations. These liabilities consist of the allowance for recourse liability. This reserve remained with the Company after the sale of the wholesale mortgage operation, as did the risk and the liability from the indemnified loans. When the Company sold loans in the course of its wholesale residential mortgage business, the Company typically made representations and warranties to the purchasers and insurers that the Company had properly originated and serviced the loans under state laws, investor guidelines and program eligibility standards. The Company could be obligated to indemnify the purchaser for unpaid principal and interest on defaulted loans if the Company had breached its representations and warranties with respect to the loans that it sold. At December 31, 2009 and December 31, 2008, the Company had approximately $1.9 million and $1.5 million, respectively, of mortgage loans for which it had agreed to indemnify the purchaser for losses suffered by the purchaser. In the event that the purchaser of these loans experiences any losses with respect to the loans, the Company will be required to indemnify the purchaser for its losses or to repurchase the loans from the purchaser. The Company has established a specific allowance for recourse liability for the loans on which the Company has already become obligated to make indemnification payments to the purchaser and an estimated allowance for recourse liability for probable future losses from loans that the Company may have to indemnify. The estimated recourse liability at both December 31, 2009 and December 31, 2008 for future losses was approximately $1.4 million and $1.7 million, respectively, and is based upon historical information on the number of loans indemnified and the average loss on an indemnified loan. During 2007, 2008 and 2009, our losses related to indemnified loans gradually decreased. During 2007, we evaluated our allowance for the recourse obligation reserve and our analysis showed an overaccrual. This overaccrual was due to the fact that we have indemnified fewer loans than we had previously estimated and had several indemnified loans pay-off without any losses. Therefore, based upon this analysis, we reduced the recourse obligation reserve by $118,394 during 2007. We have evaluated the allowance for recourse liability during 2008 and 2009 and determined that no adjustment was needed.

During 2008 and 2009, the mortgage banking business had no revenues or expenses related to the wholesale mortgage banking business. The mortgage banking business did record a valuation allowance of approximately $658,000 related to its deferred tax asset which was recorded as income tax expense during 2008.

Summarized information for the discontinued operations of the mortgage subsidiary is as follows:


	2009		2008			2007
Revenues	$	-	$	-		$	118,394
Expenses		-		-			-

Pretax income from discontinued operations		-		-			118,394

Income tax expense		-		658,415			43,799

Net income (loss) from discontinued operations	$	-	$	(658,415	)	$	74,595

F-14

Index to Financial Statements

CRESCENT BANKING COMPANY

AND SUBSIDIARIES

NOTE 2. DISCONTINUED OPERATIONS (Continued)


	2009			2008			2007
Balance at beginning of year	$	1,694,496		$	1,953,025		$	2,318,896
Reduction in estimated recourse obligations		-			-			(118,394	)
Losses indemnified		(341,650	)		(258,259	)		(247,477	)

Balance at end of year	$	1,352,846		$	1,694,496		$	1,953,025

NOTE 3. INVESTMENT SECURITIES

The carrying value and fair value of investment securities are summarized as follows:


Securities Available-for-Sale	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value

December 31, 2009
U. S. Government agencies	$	4,592,941	$	34,376	$	(9,922	)	$	4,617,395
Mortgage-backed agency securities		17,660,922		703,366		(1,289	)		18,362,999
Mortgage-backed CMO agency securities		3,326,082		50,490		(579	)		3,375,993


	$	25,579,945	$	788,232	$	(11,790	)	$	26,356,387

December 31, 2008
U. S. Government agencies	$	8,999,090	$	163,421	$	-		$	9,162,511
Mortgage-backed agency securities		20,002,443		389,342		(11,512	)		20,380,273
Mortgage-backed CMO agency securities		4,066,051		5,046		(20,254	)		4,050,843


	$	33,067,584	$	557,809	$	(31,766	)	$	33,593,627

Securities Held-to-Maturity

December 31, 2009
State and municipal securities	$	4,450,000	$	22,250	$	-		$	4,472,250


	$	4,450,000	$	22,250	$	-		$	4,472,250

December 31, 2008
State and municipal securities	$	4,000,000	$	-	$	(125,600	)	$	3,874,400

	$	4,000,000	$	-	$	(125,600	)	$	3,874,400

F-15

Index to Financial Statements

CRESCENT BANKING COMPANY

AND SUBSIDIARIES

NOTE 3. INVESTMENT SECURITIES (Continued)

The amortized cost and estimated fair value of debt securities at December 31, 2009, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity, primarily mortgage-backed securities, are shown separately.


	December 31, 2009
	Amortized Cost		Estimated Fair Value
Due in one year or less	$	2,750,000	$	2,783,983
Due after one year through five years		3,249,282		3,266,734
Due after five years through ten years		1,067,307		1,067,498
Due after ten years		1,976,352		1,971,430
Mortgage-backed securities		20,987,004		21,738,992

	$	30,029,945	$	30,828,637

Securities with an approximate carrying value of $24,589,645 and $18,207,299 at December 31, 2009 and 2008, respectively, were pledged to secure public funds as required by law, and for other purposes.

The fair value of securities with unrealized losses at December 31, 2009 is shown below:


	Less Than 12 Months					More Than 12 Months
	Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses
U. S. Government agencies	$	1,016,430	$	(9,922	)		-		-
State and municipal securities		-		-			-		-
Mortgage backed agency securities		445,259		(1,289	)		-		-
Mortgage backed CMO agency securities		-		-			145,102		(579	)

Total	$	1,461,689	$	(11,211	)	$	145,102	$	(579	)

The fair value of securities with unrealized losses at December 31, 2008 is shown below:


	Less Than 12 Months					More Than 12 Months
	Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses
State and municipal securities		3,874,400		(125,600	)		-		-
Mortgage backed agency securities		851,507		(6,618	)		322,307		(4,893	)
Mortgage backed CMO agency securities		1,278,605		(13,724	)		687,389		(6,531	)

Total	$	6,004,512	$	(145,942	)	$	1,009,696	$	(11,424	)

F-16

Index to Financial Statements

CRESCENT BANKING COMPANY

AND SUBSIDIARIES

NOTE 3. INVESTMENT SECURITIES (Continued)

Management of the Company believes all unrealized losses as of December 31, 2009 and 2008 represent temporary impairment. The unrealized losses have resulted from temporary changes in the interest rate market and not as a result of credit deterioration. Total impairment represents less than 1% of amortized cost. In addition, all of the securities are backed by the U.S. Government or one of its agencies/quasi-agencies.

The Company had an investment of $352,000, which was recorded in other assets on the balance sheet and held at the holding company. This investment consisted of trust preferred securities in various community bank holding companies. The Company recorded an other than temporary impairment on this investment of $176,000 during the fourth quarter of 2008, which brought down the carrying value of this investment to $176,000 at December 31, 2008. During the second quarter of 2009, the Company recorded an additional other than temporary impairment on the investment of $176,000, which brought down the carrying value of this investment to $0 from its original basis of $352,000.

The Company also had an investment of $165,975 in Community Financial Services, Inc., which was the holding company for Silverton Bank. On May 1, 2009, the Office of the Comptroller of The Currency closed Silverton Bank and appointed the Federal Deposit Insurance Corporation as receiver. As a result, our 300 shares held in Community Financial Services, Inc., valued at $165,975, were written-off during the second quarter of 2009.

NOTE 4. LOANS

The composition of loans is summarized as follows:


	December 31,
	2009			2008

Commercial	$	33,268,217		$	36,184,933
Real estate – construction and land development		273,309,313			347,117,835
Real estate – commercial real estate – owner occupied		135,623,250			141,566,654
Real estate – commercial real estate – non owner occupied		108,116,338			101,637,601
Real estate – residential		168,497,316			143,968,720
Consumer installment and other		12,757,294			14,913,497

		731,571,728			785,389,240
Allowance for loan losses		(27,934,813	)		(22,280,041	)

Loans, net	$	703,636,915		$	763,109,199

Changes in the allowance for loan losses are as follows:


	Years Ended December 31,
	2009			2008			2007

Balance, beginning of year	$	22,280,041		$	9,825,911		$	8,023,565
Provision for loan losses		26,201,187			25,848,354			2,676,000
Loans charged off		(20,711,917	)		(13,565,488	)		(1,298,540	)
Recoveries of loans previously charged off		165,502			171,264			424,886

Balance, end of year	$	27,934,813		$	22,280,041		$	9,825,911

F-17

Index to Financial Statements

CRESCENT BANKING COMPANY

AND SUBSIDIARIES

NOTE 4. LOANS (Continued)

Nonperforming loans were as follows:


	2009		2008
Nonaccrual loans	$	79,840,877	$	18,881,735
Renegotiated loans		8,698,195		17,896,747
Loans past due 90 days still on accrual		123,791		389

Total	$	88,662,863	$	36,778,871

Average investment in nonperforming loans	$	55,599,671	$	25,756,124

Nonperforming loans with allowance allocated	$	47,664,794	$	21,994,274
Amount of allowance allocated	$	7,115,514	$	4,680,388

At December 31, 2009 and 2008, nonperforming loans are shown net of $10,153,841 and $3,999,382, respectively, in previously charged-off amounts.

Impaired loans, which include nonperforming loans, are loans that based on current information and events are loans where it is considered probable that the Company will be unable to collect all amounts of contractual principal and interest as scheduled in the loan agreement.

Impaired loans were as follows:


	2009		2008
Loans with no allowance allocated or specific charge-off	$	108,151,810	$	4,743,037
Loans with allowance allocated		114,959,452		50,836,682
Loans with specific charge-off only		17,760,961		10,041,171

Total Impaired Loans	$	240,872,223	$	65,620,890

Amount of allowance allocated	$	16,038,968	$	10,562,000

At December 31, 2009 and 2009, impaired loans are shown net of $10,153,841 and $3,999,382, respectively, in previously charged-off amounts. Of the $240,872,223 in impaired loans at December 31, 2009, $108,151,810 did not require a specific allowance or specific charge-off. Of this $108,151,810, $63,199,620 was related to construction and land development loans, $26,165,354 was related to residential and multi-family real estate loans and $8,660,885 was related to commercial real estate loans. The significant increase in impaired loans is due to loans we previously disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as potential problem loans that have migrated to impaired loans. Based upon further deterioration in these loans since December 31, 2008, management now considers it probable that these loans will not perform to their original contractual terms and has evaluated these loans as impaired loans under the requisite accounting guidance. The significant amount of impaired loans remaining on an accrual basis is due to our analysis that these loans have sufficient collateral value to cover the current loan amount. Interest payments on these loans in large part are being paid from other sources of funds by the borrower or guarantor. While at year-end these performing impaired loans were substantially current or in the 0-30 days past due category, they continue to deteriorate and migrate to nonperforming. As of the date of this Report, nonaccrual loans have increased to a total of $120,282,140.

In the ordinary course of business, the Company has granted loans to certain related parties, including directors, executive officers, and their affiliates. The interest rates on these loans were substantially the same as rates prevailing at the time of the transaction and repayment terms are customary for the type of loan. Changes in related party loans for the year ended December 31, 2009 are as follows:


Balance, beginning of year	$	7,899,365
Advances		799,785
Repayments		(1,010,388	)
Change in directors and executive officers		-

Balance, end of year	$	7,688,762

F-18

Index to Financial Statements

CRESCENT BANKING COMPANY

AND SUBSIDIARIES

NOTE 5. PREMISES AND EQUIPMENT

Premises and equipment are summarized as follows:


		December 31,
		2009				2008

CRESCENT BANKING CO 10-K