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| CONSOLIDATED BALANCE SHEETS | | | | | | |
| McIntosh Bancshares, Inc. and Subsidiaries | | | | | | |
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| June 30, 2008 and 2007 | | 2008 | | | 2007 | |
| (Unaudited) | | | | | | |
| Assets | | | | | | |
| Cash and due from banks | | $ | 7,879,644 | | | $ | 9,591,930 | |
| Interest bearing deposits | | | 5,185,651 | | | | 262,087 | |
| Federal funds sold | | | 4,102,000 | | | | 6,037,000 | |
| Investment securities held to maturity | | | 235,000 | | | | 328,849 | |
| Investment securities available for sale | | | 66,867,457 | | | | 79,418,001 | |
| Other investments | | | 3,482,979 | | | | 2,255,865 | |
| Loans | | | 343,731,355 | | | | 348,725,401 | |
| Less: Allowance for loan losses | | | (9,481,528 | ) | | | (4,944,879 | ) |
| Loans, net | | | 334,249,827 | | | | 343,780,522 | |
| Premises and equipment, net | | | 7,015,494 | | | | 6,707,061 | |
| Other real estate | | | 8,200,044 | | | | 1,706,748 | |
| Accrued interest receivable | | | 3,102,301 | | | | 4,124,784 | |
| Bank owned life insurance | | | 6,623,479 | | | | 6,386,846 | |
| Other assets | | | 4,954,351 | | | | 3,852,682 | |
| Total assets | | $ | 451,898,227 | | | $ | 464,452,375 | |
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| Liabilities and Stockholders' Equity | | | | | | | | |
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| Liabilities: | | | | | | | | |
| Deposits: | | | | | | | | |
| Demand | | $ | 35,921,468 | | | $ | 35,638,067 | |
| Money market and NOW accounts | | | 99,195,859 | | | | 118,562,052 | |
| Savings | | | 16,781,547 | | | | 11,952,591 | |
| Time deposits of $100,000 or more | | | 116,327,072 | | | | 113,935,765 | |
| Time deposits | | | 121,492,526 | | | | 120,643,082 | |
| Total deposits | | | 389,718,472 | | | | 400,731,557 | |
| Borrowed funds | | | 21,479,836 | | | | 21,562,445 | |
| Accrued interest payable and other liabilities | | | 4,459,788 | | | | 5,033,816 | |
| Total liabilities | | | 415,658,096 | | | | 427,327,818 | |
| Commitments | | | | | | | | |
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| Stockholders' equity: | | | | | | | | |
| Common stock, par value $2.50; 10,000,000 shares authorized, | | | | | | | | |
| 2,810,976 shares issued and outstanding | | | 7,027,440 | | | | 7,027,440 | |
| Surplus | | | 5,733,129 | | | | 5,640,048 | |
| Retained earnings | | | 23,997,307 | | | | 25,401,541 | |
| Accumulated other comprehensive loss | | | (517,745 | ) | | | (944,472 | ) |
| Total stockholders' equity | | | 36,240,131 | | | | 37,124,557 | |
| Total liabilities and stockholders' equity | | $ | 451,898,227 | | | $ | 464,452,375 | |
Dear Shareholders,
As you know, the banking industry is facing unusually turbulent times. The environment, especially concerning residential real estate, seems to change weekly. As a result, we waited until closer to when we file our June 30, 2008 10Q with the Securities and Exchange Commission (SEC) before finalizing our letter to shareholders. We wanted to make sure our letter reflected the most up to date information, and from a timing standpoint, was consistent with what we disclosed to the SEC. Unfortunately, this led to a delay in shareholder communication versus past quarters.
Your company continues to be challenged by the weak housing market, elevated gas prices, increasing unemployment, and tight credit conditions. As compared to the second quarter of 2007, net income decreased $2.4 million to a loss of $1,305,929. Fully diluted net earnings per common share decreased $0.86 per share to a loss of $0.46 per share for the same period.
A big determinant in our sub-par performance was the continued increase in non-performing assets. Non-performing assets (foreclosed property, non-accrual loans, and loans that are 90 days or more past due and not on non-accrual) increased $6.1 million or 17.8% to $40.6 million since March 31, 2008. This amounts to 11.4% of total loans plus other real estate owned.
Terry Ellington and Al Cook continue to aggressively manage our non-performing loans and foreclosed property. Foreclosed real estate sold in 2008 amounted to $3.7 million at a cumulative loss of $161,115 from the values we booked at foreclosure. We have now sold over $6.6 million in other real estate in 2007 and 2008.
We continue to make good progress in reducing our concentration of acquisition, development and construction (AD&C) loans. As of June 30, 2008, AD&C loans represent 32.2% of gross loans and commitments versus 42.8% as of June 30, 2007.
In the second quarter of 2008 net charge-offs were $324,262 as compared to net recoveries of $29,700 in the second quarter of 2007. Although this represented a substantial increase, charge-offs were down significantly from the first quarter of 2008 when they were $2,008,482. Because of an increase in impaired loans and further reductions in property values, loan loss provision increased $3.7 million to $4 million in the quarter. Our loan loss reserve is now $9.5 million and represents 2.76% of gross loans as compared to $4.9 million or 1.42% last year.
Your company’s June 30, 2008 tax equivalent net interest margin of 3.40% declined 108 basis points from the year-ago period. As discussed last quarter, there were four major factors contributing to this decline. First, carrying $34.3 million in average non-accrual loans and other real estate drastically reduced interest income on loans. Second, as an asset sensitive bank, the 325 basis point drop in the prime lending rate reduced interest income more rapidly than we could reduce our cost of money. Third, as additional loans were placed on non-accrual we had to reverse $458,581 in accrued interest as compared to $23,529 for the same period last year. Fourth, loan fees declined $133,415 as compared to last year.
We continue to shrink our balance sheet as we attempt to manage capital. For June 30, 2008 as compared to June 30, 2007 total assets decreased $12.5 million or 2.7% to $451.9 million. Deposits decreased $11.0 million or 2.7% to $389.7 million. Gross loans decreased $5.0 million or 1.4% to $343.7 million. The deposit decrease was predominantly attributable to the run-off of SPLOST money in Jackson as local infrastructure projects were completed and in Jasper County the yearly rotation out of public funds.
During the quarter other capital generating measures were employed. We realized $1,466,725 in investment securities gains primarily from the sale of 527 shares of Class A common stock of Silverton Financial Services, Inc. We also liquidated $9.5 million of our municipal bond portfolio at a gain of $23,625 to redeploy these assets in taxable investments.
Other non-interest expense for the second quarter declined $178,479 or 4.6% from the year-ago period. This decrease was primarily due to lower salary and employee benefit expenses. Salary and personnel expense has fallen $351,954 or 13.6% as full-time equivalent employees have decreased from 146.5 to 141.5 and certain benefit accruals have been discontinued.
There was some good news from Washington where Congress passed and the President has signed the “Housing and Economic Recovery Act of 2008”. Under the act, first-time home buyers, within certain income guidelines, can qualify for a tax credit of $7,500 or 10% of a home’s purchase price, whichever is less. It is estimated that up to 3 million buyers could be eligible for the credit. We hope that this and other provisions of the bill will stimulate home sales and help move some of the stagnant home inventory.
We have embarked on several new deposit campaigns that are designed to grow our core deposits. Our Prime Savings account and Certificate of Deposit specials have been very well received in our markets.
As you are now well aware, we have temporarily suspended the payment of cash dividends. This will preserve over $1 million in capital over the next 12 months.
In summary, these are very unusual times for your company. We are concentrating even more on delivering the best possible service to our customers in a relaxed but professional environment. We are thankful for our strong relationships in the communities we serve and know that our core business will sustain us as we deal with the current economic environment.
Thank you for your continued support and encouragement. You are an integral part of our team and your influence and business referrals are more important now than ever.
Sincerely,
William K. Malone Thurman L. Willis, Jr.
Chairman & Chief Executive Officer President & Chief Operating Officer
McIntosh Bancshares, Inc. McIntosh Bancshares, Inc.
