Mcintosh Bancshares (MITB) 8-K Results of Operations and Financial Condition

CONSOLIDATED STATEMENTS OF OPERATIONS
McIntosh Bancshares, Inc. and Subsidiaries
For Each of the Three Months and Nine Months Ended September 30, 2008 and 2007
(Unaudited)
	Three Months						Nine Months
	2008			2007			2008			2007
Interest income:
Loans, including fees	$	5,239,285		$	7,701,086		$	17,317,248		$	22,879,389
Interest on investment securities:
U.S. Treasury, U.S. Government agency and mortgage-backed securities		775,295			826,264			2,340,840			2,600,377
State, county and municipal		24,803			105,881			233,884			319,826
Other investments		22,718			42,826			80,776			119,050
Federal funds sold and other short-term investments		90,999			53,456			212,405			334,644
Total interest income		6,153,100			8,729,513			20,185,153			26,253,286
Interest expense:
Interest-bearing demand and money market		320,433			894,203			1,159,432			2,691,877
Savings		79,772			52,142			169,533			139,813
Time deposits of $100,000 or more		1,237,111			1,522,740			4,055,101			4,588,786
Other time deposits		1,381,787			1,574,413			4,234,428			4,329,909
Other		149,245			193,337			392,963			566,618
Total interest expense		3,168,348			4,236,835			10,011,457			12,317,003
Net interest income		2,984,752			4,492,678			10,173,696			13,936,283
Provision for loan losses		6,346,804			866,621			11,204,912			1,059,295
Net interest income after provision for loan losses		(3,362,052	)		3,626,057			(1,031,216	)		12,876,988
Other Income:
Service charges		646,714			590,723			1,851,548			1,685,308
Investment securities gains		-			4,000			2,184,140			8,200
Increase in cash surrender value of life insurance		62,880			68,784			188,640			206,352
Other real estate owned gains (losses)		(269,220	)		36,472			(430,335	)		100,175
Fixed and repossessed asset gains (losses)		(5,761	)		(2,463	)		(15,015	)		(7,772	)
Other income		317,943			380,012			981,436			1,150,819
Total other income		752,556			1,077,528			4,760,414			3,143,082
Other expenses:
Salaries and employee benefits		2,286,478			2,481,785			6,999,929			7,658,840
Occupancy and equipment		451,459			459,612			1,354,841			1,339,856
Other operating		1,124,974			849,614			3,232,104			2,634,447
Total other expenses		3,862,911			3,791,011			11,586,874			11,633,143
Earnings (loss) before income taxes		(6,472,407	)		912,574			(7,857,676	)		4,386,927
Income tax expense (benefit)		(2,738,505	)		297,936			(3,201,775	)		1,461,130
Net earnings (loss)	$	(3,733,902	)	$	614,638		$	(4,655,901	)	$	2,925,797
Basic earnings (loss) per common share based on average outstanding
shares of 2,810,976 in 2008 and 2,810,976 in 2007	$	(1.33	)	$	0.22		$	(1.66	)	$	1.04
Diluted net earnings (loss) per common share based on average outstanding
shares for the three months of 2,810,976 in 2008 and 2,888,559
in 2007 and for the nine months of 2,810,976 in 2008 and 2,875,170 in 2007	$	(1.33	)	$	0.21		$	(1.66	)	$	1.02
Dividends declared per share of common stock	$	-		$	0.09		$	0.09		$	0.27

CONSOLIDATED BALANCE SHEETS
McIntosh Bancshares, Inc. and Subsidiaries
Septembere 30, 2008 and 2007	2008			2007
(Unaudited)
Assets
Cash and due from banks	$	5,845,028		$	6,758,829
Interest bearing deposits		5,913,274			237,491
Federal funds sold		11,472,000			1,442,000
Investment securities held to maturity		-			332,288
Investment securities available for sale		70,441,585			72,237,143
Other investments		3,257,979			1,760,865
Loans		330,455,778			356,530,039
Less: Allowance for loan losses		(12,895,948	)		(5,708,526	)
Loans, net		317,559,830			350,821,513
Premises and equipment, net		6,936,727			7,169,420
Other real estate		13,419,272			2,063,548
Accrued interest receivable		2,749,471			4,114,221
Bank owned life insurance		6,677,140			6,467,438
Other assets		7,669,288			3,500,528
Total assets	$	451,941,594		$	456,905,284
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Demand	$	32,641,539		$	33,973,681
Money market and NOW accounts		90,613,156			114,875,006
Savings		20,655,367			12,496,375
Time deposits of $100,000 or more		110,011,892			116,537,877
Time deposits		143,447,270			123,201,784
Total deposits		397,369,224			401,084,723
Borrowed funds		16,640,109			12,329,850
Accrued interest payable and other liabilities		4,896,860			5,335,608
Total liabilities		418,906,193			418,750,181
Commitments
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		5,756,399			5,663,782
Retained earnings		20,263,405			25,763,190
Accumulated other comprehensive loss		(11,843	)		(299,309	)
Total stockholders' equity		33,035,401			38,155,103
Total liabilities and stockholders' equity	$	451,941,594		$	456,905,284

Dear Shareholders,

We continue to underestimate the length and severity of the current economic contraction.  The credit freeze that started over a year ago with sub-prime mortgages and spilled over to the housing market has now migrated into the broader capital markets.  Who could have imagined the downfall of well known companies like AIG, Freddie Mac, Fannie Mae, Lehman Brothers, Wachovia, and Washington Mutual?  Receiving no federal support, Lehman was allowed to fail.  The bond and stock markets have responded with more volatility and a bent to the downside.

Needless to say, our performance has been a reflection of the economy in general and the markets we serve.  As compared to the third quarter of 2007, net income decreased $4.3 million to a loss of $3.7 million.  Fully diluted net earnings per common share decreased $1.54 per share to a loss of $1.33 per share for the same period.

As we have discussed in our previous letters, non-performing assets (foreclosed property, non-accrual loans, and loans that are 90 days or more past due and not on non-accrual) continue to be our biggest concern.  Non-performing assets increased $5.4 million or 13.39% to $46.0 million since June 30, 2008.  This amounts to 13.4% of total loans plus other real estate owned.  Non-performing assets could increase further if the economy continues to worsen.

We continue to aggressively market all foreclosed property, devoting two seasoned construction lenders to this process.  Since year-end 2007, they have sold 63 properties with balances totaling $6.6 million at a cumulative loss of $430,335 from the values we booked at foreclosure.  Despite the losses that we have been required to recognize, we believe this process is in the best interests of the bank and its shareholders, as it reduces our levels of non-performing assets and allows us to focus increasingly on core banking, as opposed to property management activities.

We have made good progress in reducing our concentration of acquisition, development, and construction (AD&C) loans.  As of September 30, 2008, AD&C loans represent 27.6% of gross loans and commitments versus 39.8% as of September 30, 2007.

Our allowance for loan losses increased $7.2 million or 125.9% from its level of one year ago to $12.9 million.  As of September 30, 2008 our loan loss reserve represents 3.90% of gross loans as compared to 1.60% last year.  We believe these increases are prudent in view of the asset quality issues described above and the general state of the economy.  Since September 30, 2007 net charge-offs have totaled $6.3 million with a cumulative provision for loan loss expense of $13.5 million.

Your company’s September 30, 2008 tax equivalent net interest margin of 2.84% declined 129 basis points from the year-ago period.  The decline was due to a $215,634 or 49.2% decline in loan fee income, increases of $109,259 in the reversal of accrued interest on non-accrual loans, $27.3 million in average non-accrual loans, and $9.6 million in average other real estate, and a 275 basis point drop in the prime lending rate as compared to September 30, 2007.

An increase in total other expenses of $71,900 or 1.9% from September 30, 2007 disguised the progress made in expense reduction.  The $195,307 or 7.9% reduction in salary and employee benefits was more than offset by additional collection expense of $65,442 and other real estate expense of $154,672 versus last year.  As of September 30, 2008, full-time equivalent employees for the company had fallen by attrition from 146 on September 30, 2007 to 138.5.  Attrition alone did not reduce our employment force enough to adapt to the new operating environment.  This necessitated a reduction in force of an additional 12 employees in October.  Our number of employees is now down approximately 15% from its high of last year.

In other cost cutting measures your Board has suspended payment of all Director fees.  Chairman Malone and President Willis have taken a 5% reduction in salary in addition to no raises for 2008.  Incentive plans for all employees, except for a modest mortgage plan, have been suspended.

There is some good news out of Washington.  In October 2008, the FDIC approved a program to strengthen market stability for financial institutions called the Temporary Liquidity Guaranty Program (TLGP).  One provision raises the FDIC insurance level for all deposit accounts to $250,000 through December 31, 2009.  Another provision allows FDIC to insure all non-interest bearing deposits of the bank through December 31, 2009.  We have opted to take part in both programs.  Also in October of 2008, Congress passed the Emergency Economic Stabilization Act (EESA) of 2008 which in general authorizes the U.S. Treasury to take certain measures to contain the credit and real estate crises facing the country.  The Troubled Asset Relief Program (TARP), a provision of EESA, permits the U.S. Treasury to purchase preferred stock in certain financial institutions up to 3% of the institution’s risk-weighted assets.  If we are deemed eligible to participate in the Capital Purchase Program (CPP) the maximum amount of additional capital we could obtain is approximately $10.7 million.  Management presently plans to apply for the CPP, but cannot yet predict whether the U.S. Treasury will ultimately approve our participation.  Since our Articles of Incorporation do not allow for the sale of preferred shares, if approved, we will have to conduct a special shareholder meeting to authorize the issuance of the shares.  In addition to the CPP, our management and board have been discussing a variety of ways to strengthen our capital position and increase shareholder value.  We will keep you and the market apprised of material developments in this regard.

We have much to do before year end.  Thank you for your encouragement and support as we attempt to deal with market conditions that we have not experienced in our lifetime.

Sincerely,

William K. Malone                                                                                     Thurman L. Willis, Jr.

Chairman & Chief Executive Officer                                                        President & Chief Operating Officer

McIntosh Bancshares, Inc.                                                                      McIntosh Bancshares, Inc.