Forward-Looking Statements
This report on Form 10-Q may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, that reflect our current expectations relating to present or future trends or factors generally affecting the banking industry and specifically affecting our operations, markets and products. Without limiting the foregoing, the words "believes", "expects", "anticipates", "estimates", "projects", "intends", and similar expressions are intended to identify forward-looking statements. These forward-looking statements are based upon assumptions we believe are reasonable and may relate to, among other things, the deteriorating economy and its impact on operating results and credit quality, the adequacy of the allowance for loan losses, changes in interest rates, and litigation results. These forward-looking statements are subject to risks and uncertainties. Actual results could differ materially from those projected for many reasons, including without limitation, changing events and trends that have influenced our assumptions. Actual results could differ materially from those projected for many reasons, including without limitation, changing events and trends that have influenced our assumptions. These trends and events include (1) changes in real estate values and economic conditions in the Atlanta, Georgia, metropolitan area and in eastern and northern Florida markets; (2) changes in political, legislative, general business and economic conditions; (3) conditions in the financial markets and economic conditions generally and the impact of recent efforts to address difficult market and economic conditions; (4) our liquidity and sources of liquidity; (5) the terms of the U.S. Treasury Department's (the "Treasury") equity investment in us through the TARP Capital Purchase Program and its ability to unilaterally amend any provision of the agreement we entered into with it; (6) a deteriorating economy and its impact on operations and credit quality; (7) unique risks associated with our construction and land development loans; (8) our ability to raise capital; (9) the impact of a recession on our consumer loan portfolio and its potential impact on our commercial portfolio;
(10) our ability to maintain and service relationships with automobile dealers and indirect automobile loan purchasers and our ability to profitably manage changes in our indirect automobile lending operations; (11) the accuracy and completeness of information from customers and our counterparties; (12) changes in the interest rate environment and their impact on our net interest margin;
(13) difficulties in maintaining quality loan growth; (14) less favorable than anticipated changes in the national and local business environment, particularly in regard to the housing market in general and residential construction and new home sales in particular; (15) the impact of and adverse changes in the governmental regulatory requirements affecting us; (16) the effectiveness of our controls and procedures; (17) our ability to hire and retain skilled people;
(18) greater competitive pressures among financial institutions in our market;
(19) greater loan losses than historic levels and sufficiency of allowance for loan losses; (20) failure to achieve the revenue increases expected to result from our investments in our growth strategies, including our branch additions, and in our transaction deposit and lending businesses; (21) the volatility and limited trading of our common stock; (22) and the impact of dilution on our common stock. This list is intended to identify some of the principal factors that could cause actual results to differ materially from those described in the forward-looking statements included herein and are not intended to represent a complete list of all risks and uncertainties in our business. Investors are encouraged to read the related section in our 2008 Annual Report on Form 10-K, including the "Risk Factors" set forth therein. Additional information and other factors that could affect future financial results are included in our filings with the Securities and Exchange Commission. Critical Accounting Policies
Our accounting and reporting policies are in accordance with U.S. generally accepted accounting principles and conform to general practices within the financial services industry. Our financial position and results of operations are affected by management's application of accounting policies, including estimates, assumptions and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses and related disclosures. Different assumptions in the application of these policies, or

conditions significantly different from certain assumptions, could result in material changes in our consolidated financial position or consolidated results of operations. Critical accounting and reporting policies include those related to the allowance for loan losses, fair value of mortgage loans held-for-sale, the capitalization of servicing assets and liabilities and the related amortization, loan related revenue recognition, and income taxes. Our accounting policies are fundamental to understanding our consolidated financial position and consolidated results of operations. Significant accounting policies have been periodically discussed and reviewed with and approved by the Board of Directors.
Our critical accounting policies that are highly dependent on estimates, assumptions and judgment are substantially unchanged from the descriptions included in the notes to consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2008. Results of Operations
Earnings
For the second quarter of 2009, the Company recorded a net loss of $2.8 million compared to net loss of $902,000 for the second quarter of 2008. Net loss available for common equity was $3.6 million for the quarter ended June 30, 2009. Per share losses (basic and diluted) for the second quarter of 2009 and 2008 were $.37 and $.09, respectively. Net (loss) income for the six months ended June 30, 2009 was $(6.2) million compared to $208,000 for the same period in 2008. Earnings (loss) per share (basic and diluted) for the first six months of 2009 and 2008 were $(.79) and $.02, respectively. The decrease in net income for the second quarter and first six months of 2009 when compared to the same periods in 2008 was primarily due to a $1.4 million and $6.4 million increase in the provision for loan losses to $7.2 million and $16.8 million, respectively. The increase in the provision for loan losses was due to increased nonperforming assets and loan charge-offs caused by the continued recession and slow housing market.
The Company benefited in the first six months of 2008 from a pretax gain of $1,252,000 on the mandatory redemption of 29,267 shares of Visa, Inc. common stock upon Visa's successful initial public offering. In addition, the Company reversed a pretax $567,000 litigation expense accrual recorded in the fourth quarter of 2007 to recognize the Company's proportional share of Visa litigation settlements and litigation reserves.
Net Interest Income
Net interest income for the second quarter of 2009 remained relatively stable when compared to the same period in 2008. The average balance of interest-earning assets increased by $132.4 million or 8.0% to $1.794 billion for the second quarter of 2009, when compared to the same period in 2008. The yield on interest-earning assets for the second quarter of 2009 was 5.55%, a decrease of 81 basis points when compared to the yield on interest-earning assets for the same period in 2008. The average balance of loans outstanding for the second quarter of 2009 decreased $26.9 million or 1.8% to $1.463 billion when compared to the same period in 2008. Consumer installment and construction lending had the largest decrease from June 2008 to June 2009 as a result of the recession and rising unemployment. The yield on average loans outstanding for the period decreased 58 basis points to 5.95% when compared to the same period in 2008 as a result of a 241 basis point decrease in the average prime lending rate and the effects of an increase in the level of nonperforming loans from $57.3 million at June 30, 2008 to $118.1 million at June 30, 2009.
The average balance of interest-bearing liabilities increased $99.4 million or 6.6% to $1.607 billion for the second quarter of 2009 and the rate on this average balance decreased 60 basis points to 3.16% when compared to the same period in 2008. The 60 basis point decrease in the cost of interest-bearing liabilities was lower than the 81 basis point decrease in the yield on interest earning assets, resulting in a 21 basis point

decrease in net interest spread. Net interest margin decreased 23 basis points to 2.72% for the second quarter of 2009 compared to 2.95% for the same period in 2008. The Bank manages its net interest spread and net interest margin based primarily on its loan and deposit pricing. To maintain its deposit market share and to assist in liquidity management, during the first six months of 2009 as compared to 2008, the Bank did not decrease its deposit pricing as much as it lowered its loan rates, which fluctuate with the change in the prime interest rate. Management will continue to review its deposit pricing in 2009 and forecasts a decrease to cost of funds as higher priced certificates of deposit mature and reset to lower interest rates.
Net interest income decreased $738,000 or 3.1% in the first six months of 2009 to $23.0 million compared to $23.8 million for the same period in 2008 resulting primarily from a decrease in loan interest income due to lower interest rates on loans, and an increase in nonperforming assets.
The average balance of interest-earning assets increased by $101.1 million or 6.2% to $1.740 billion for the first six months of 2009, when compared to the same period in 2008. The yield on interest-earning assets for the first six months of 2009 was 5.59%, a decrease of 102 basis points when compared to the yield on interest-earning assets for the same period in 2008. The average balance of loans outstanding for the first six months of 2009 decreased $24.7 million or 1.7% to $1.456 billion when compared to the same period in 2008. In addition to the negative impact of the recession on lending activity, prior to receiving $48.2 million in TARP capital, management actively worked to constrain lending in an effort to preserve capital ratios. The yield on average loans outstanding for the period decreased 83 basis points to 5.95% when compared to the same period in 2008 as a result of a 183 basis point decrease in the average prime lending rate and the effects of an increase in the level of nonperforming loans.
The average balance of interest-bearing liabilities increased $62.5 million or 4.2% to $1.546 billion for the first six months of 2009 and the rate on this average balance decreased 79 basis points to 3.26% when compared to the same period in 2008. The 79 basis point decrease in the cost of interest-bearing liabilities was lower than the 102 basis point decrease in the yield on interest-earning assets, resulting in a 23 basis point decrease in net interest spread. Net interest margin decreased 25 basis points to 2.70% for the first six months of 2009 compared to 2.95% for the same period in 2008. The Bank manages its net interest spread and net interest margin based primarily on its loan and deposit pricing. Management offered competitive interest rates on select savings and money market accounts in 2009 to grow its market share and assist in liquidity management.
Provision for Loan Losses
The allowance for loan losses is established and maintained through provisions charged to operations. Such provisions are based on management's evaluation of the loan portfolio including loan portfolio concentrations, current economic conditions, past loan loss experience, adequacy of underlying collateral, and such other factors which, in management's judgment, require consideration in estimating loan losses. Loans are charged off or charged down when, in the opinion of management, such loans are deemed to be uncollectible or not fully collectible. Subsequent recoveries are added to the allowance.
For all loan categories, historical loan loss experience, adjusted for changes in the risk characteristics of each loan category, current trends, and other factors, is used to determine the level of allowance required. Additional amounts are allocated based on the probable losses of individual impaired loans and the effect of economic conditions on both individual loans and loan categories. Since the allocation is based on estimates and subjective judgment, it is not necessarily indicative of the specific amounts of losses that may ultimately occur.
The allowance for loan losses for homogenous pools is allocated to loan types based on historical net charge-off rates adjusted for any current or anticipated changes in these trends. The specific allowance for

individually reviewed nonperforming loans and loans having greater than normal risk characteristics is based on a specific loan impairment analysis.
In determining the appropriate level for the allowance, management ensures that the overall allowance appropriately reflects a margin for the imprecision inherent in most estimates of the range of probable credit losses. This additional amount, if any, is reflected in the overall allowance. Management believes the allowance for loan losses is adequate to provide for losses inherent in the loan portfolio at June 30, 2009 (see "Asset Quality").
The provision for loan losses for the second quarter and first six months of 2009 was $7.2 million and $16.8 million, respectively, compared to $5.9 million and $10.5 million for the same periods in 2008. The allowance for loan losses as a percentage of loans at June 30, 2009, was 2.79% compared to 2.43% at December 31, 2008, and to 1.56% at June 30, 2008. The increase in the provision in the second quarter and first six months of 2009 as compared to the same periods in 2008 and the increase in the allowance as a percentage of loans at June 30, 2009, was due to management's assessment of the continued recession and slow housing market, as well as increased charge-offs in both the residential construction and consumer loan portfolios. The ratio of net charge-offs to average loans on an annualized basis for the first six months of 2009 increased to 2.08% compared to .63% for the same period in 2008. The ratio of net charge-offs to average loans for the year ended December 31, 2008 was 1.36%. The following schedule summarizes changes in the allowance for loan losses for the periods indicated (dollars in thousands):

                                                            Six Months Ended             Year Ended
                                                                June 30,                December 31,
                                                          2009            2008              2008
Balance at beginning of period                          $ 33,691        $ 16,557        $      16,557
Charge-offs:
Commercial, financial and agricultural                       301              14                   99
SBA                                                          519               -                  220
Real estate-construction                                   6,651             850                9,083
Real estate-mortgage                                         190             124                  332
Consumer installment                                       6,600           4,013               10,841

Total charge-offs                                         14,261           5,001               20,575


Recoveries:
Commercial, financial and agricultural                         8               1                    5
SBA                                                            5              56                  215
Real estate-construction                                      22               5                   43
Real estate-mortgage                                           -              13                   14
Consumer installment                                         398             440                  882

Total recoveries                                             433             515                1,159


Net charge-offs                                           13,828           4,486               19,416
Provision for loan losses                                 16,800          10,450               36,550

Balance at end of period                                $ 36,663        $ 22,521        $      33,691


Annualized ratio of net charge-offs to average
loans                                                       2.08 %           .63 %               1.36 %

Allowance for loan losses as a percentage of loans
at end of period                                            2.79 %          1.56 %               2.43 %

Substantially all of the consumer installment loan net charge-offs in the first six months of 2009 and 2008 were from the indirect automobile loan portfolio. Consumer installment loan net charge-offs increased $2.6 million to $6.2 million for the six months ended June 30, 2009, compared to the same period in 2008. The national and Atlanta economies continued to decline in the first six months of 2009, as the continuing economic

recession impacted our consumer lending portfolio. The annualized ratio of net charge-offs to average consumer loans outstanding was 1.84% and .96% during the first six months of 2009 and 2008, respectively.
Construction loan net charge-offs were $6.6 million in the first six months of 2009 compared to $845,000 in the same period of 2008. The residential construction markets continued to show the effects of the recession and slow housing market, directly contributing to the increase in non-performing and charged-off real estate construction loans. Management will continue to monitor closely and aggressively address credit quality and trends in the residential construction loan portfolio.
Noninterest Income
Noninterest income for the second quarter and first six months of 2009 was $7.8 million and $14.6 million, respectively, compared to $4.4 million and $10.0 million for the same periods in 2008, an increase of $3.4 million for the quarter and $4.5 million for the six month period. The increases were a result of the Bank's expansion of its mortgage banking division partially offset by decreases in indirect lending activities, SBA lending activities, gain on sale of securities, and other operating income.
Income from mortgage banking activities increased $4.5 million and $8.1 million to $4.6 million and $8.3 million for the second quarter and first six months of 2009, respectively, compared to the same periods in 2008. In the first quarter of 2009, management made the strategic decision to expand the mortgage banking operation by hiring over 60 former employees of an Atlanta based mortgage company which closed down operations. As a result of this expansion and favorable mortgage interest rates, the Bank originated approximately $371 million and $456 million in mortgage loans during the second quarter and first six months of 2009, respectively, compared to $6.0 million and $11.6 million for the same periods in 2008. Origination fee income for the second quarter and first six months of 2009 was $2.3 million and $3.5 million, respectively, compared to $69,000 and $100,000 for the same periods in 2008. Gain on loans sold increased from $41,000 for the quarter ended June 30, 2008 to $2.7 million for the same quarter in 2009 and $70,000 to $3.5 million for the first six months of 2008 compared to 2009. In addition, on January 1, 2009 the Bank elected under SFAS No. 159 to value its loans held-for-sale at fair value. This valuation along with the mark to market on the derivatives associated with interest rate lock commitments and related hedges resulted in the recognition of a mark to market gain of $1.3 million during the first six months of 2009 (See Note 7).
Income from indirect lending activities, which includes both net gains from the sale of indirect automobile loans and servicing and ancillary loan fees on loans sold, decreased $459,000 and $901,000 in the second quarter and first six months of 2009, respectively, compared to the same periods in 2008. The decreases were a result of a reduction in gain on sales due to lower sales and lower indirect automobile loans serviced for others. With the continued liquidity and credit crisis, automobile sales have been down and the secondary markets continued to show little activity during 2009 though management did begin to see some signs of improvement in the second quarter of 2009. Through June 30, 2009, there were servicing retained sales of $27.8 million of indirect automobile loans, $13.1 million of which occurred in the second quarter. In 2008 there were servicing retained sales of $55.6 million during the first six months, $28.1 million in the second quarter, and a servicing released sale of $24.0 million in the first quarter of 2008. The average amount of loans serviced for others decreased from $278 million for the first six months of 2008 to $225 million for the same period in 2009, a decrease of $54 million or 19.4% due to monthly principal payments which exceeded the additional loans serviced for others added because of fewer servicing retained loan sales.
For the second quarter and first six months of 2009 compared to the same period in 2008, income from SBA lending activities decreased $104,000 and $340,000, respectively, due to a reduction in the gain on loans sold and a reduction in the volume of loans sold. SBA loans sold totaled $4.1 million and $8.9 million for the second quarter and first six months of 2009, respectively, compared to $5.8 million and $12.5 million sold in the second quarter and first six months of 2008. With the continuing volatility in credit markets, demand for

loan sales and therefore the market price and profit on loan sales have been less than they have been for us historically.
Securities gains decreased $1.3 million for the first six months of 2009 compared to the same period in 2008 because of the 2008 mandatory redemption of 29,267 shares of Visa, Inc. common stock which resulted in the gain of $1.3 million. Other operating income decreased $144,000 and $377,000 for the second quarter and first six months of 2009, respectively, compared to 2008 because of lower brokerage fee income, and lower insurance sales commissions. Noninterest Expense
Noninterest expense was $17.5 million for the second quarter of 2009, compared to $12.5 million for the same period in 2008, an increase of $5.0 million. The increase was a result of higher salaries and benefits expense which increased $2.5 million as a result of the expansion of the mortgage division and the associated commission expense. ORE related expenses, which were $1.9 million in the second quarter of 2009, increased $849,000 compared to the same period in 2008. The increase was a result of higher foreclosed assets held by the Bank during 2009. The average ORE balance increased to $23.0 million for the second quarter of 2009 compared to $12.9 million for the same period in 2008. The ORE expense is made up of $1.5 million in provision for other real estate losses and $483,000 in maintenance, real estate taxes, and other related expenses. In addition, total FDIC insurance expense increased $1.3 million primarily related to a FDIC special assessment of five basis points on total assets as of June 30, 2009 and an increase in our regular assessment of $405,000.
Noninterest expense was $31.5 million for the first six months of 2009, compared to $23.8 million for the same period in 2008, an increase of $7.7 million. The increase was a result of higher salaries and benefits expense which increased $3.5 million as a result of the expansion of the mortgage division and the associated commission expense. ORE related expenses, which were $2.7 million for the first six months of 2009, increased $1.5 million compared to the same period in 2008. The increase was a result of higher foreclosed assets held by the Bank during 2009. The average ORE balance increased 99.2% to $20.7 million for the first six months of 2009 compared to $10.4 million for the same period in 2008. The ORE expense is made up of $2.0 million in provision for other real estate losses and $710,000 in maintenance, real estate taxes, and other related expenses.
Other significant variances include the reversal of a $567,000 accrual in the first quarter of 2008 related to the reserve for Fidelity's estimated proportional share of a settlement of the Visa litigation with Discover Financial Services which did not reoccur in 2009, and an increase of $1.5 million primarily related to a higher FDIC special assessment discussed previously.
Provision for Income Taxes
The provision for income taxes for the second quarter and first six months of 2009 was a benefit of $2.1 million and $4.5 million, respectively, compared to a benefit of $976,000 and $681,000 for the same periods in 2008. The income tax benefit recorded in the second quarter and first six months of 2009 was primarily the result of a pretax loss as well as the recognition of state income tax credits earned.

Financial Condition
Assets
Total assets were $1.895 billion at June 30, 2009, compared to $1.763 billion at December 31, 2008, an increase of $131.8 million, or 7.5%. This increase was due to a $107.9 million increase in investment securities available-for-sale, and a $113.3 million increase in loans held-for-sale offset in part by a decrease of $73.3 million in loans and a decrease of $26.1 million in cash and cash equivalents.
Investment securities available-for-sale increased $107.9 million or 83.8% to $236.7 million at June 30, 2009 compared to December 31, 2008. A leveraged purchase transaction allowed the Bank to quickly and prudently increase earning assets to generate interest income. In March, the Bank purchased $127.7 million in FNMA and GNMA mortgage backed securities and funded the purchases with $30.0 million in fixed rate wholesale borrowings and the remainder from increased deposit balances and excess liquidity. These transactions are part of our earnings strategy permitted by our strong capital levels. There were no investment sales during the six months ended June 30, 2009.
Loans held-for-sale increased $113.3 million or 202.9% to $169.1 million at . . .