Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q

(MARK ONE)

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

For the Quarterly Period ended June 30, 2010

OR

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


(MARK ONE)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2010
OR
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from to           

_________to_________


Commission File No. 001-16413


FIRST CENTURY BANCORP.

(Exact name of registrant as specified in its charter)


Georgia

58-2554464

(State or other jurisdiction

of incorporation)

(I.R.S. Employer

of incorporation)

Identification No.)


807 Dorsey Street

Gainesville, Georgia 30501

(Address of principal executive offices)


(770) 297-8060

(Registrant’s telephone number, including area code)



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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨o   No  ¨o


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filero

¨

Accelerated filero

¨

Non-accelerated o

filer

¨

Smaller reporting companyx

(do

Do not check if smaller reporting company)

company


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨o   No  x


Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 8,090,7728,121,293 shares of common stock, no par value per share, were issued and outstanding as of AugustNovember 11, 2010.


Page No.

3

September 30, 2010 (Unaudited) and December 31, 2009

3

Three and SixNine Months Ended JuneSeptember 30, 2010 and 2009

5

Three and SixNine Months Ended JuneSeptember 30, 2010 and 2009

6

For the SixNine Months Ended JuneSeptember 30, 2010 (Unaudited)

7

For the Nine Months Ended JuneSeptember 30, 2010 and 2009

8

9

18

32

30

32

30

32

30

32

30

32

30

32

30

32

30

32

30

32

31

33

32

2



Table of ContentsPART I.  FINANCIAL INFORMATION

Item 1. Financial Statements

FIRST CENTURY BANCORP. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

ASSETS

 

 

June 30,

 

 

 

 

 

2010

 

December 31,

 

 

 

(Unaudited)

 

2009

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

 

 

 

 

Cash and Due from Banks

 

$

4,635,458

 

$

2,531,126

 

Federal Funds Sold

 

 

 

 

 

 

 

 

 

Total Cash and Cash Equivalents

 

4,635,458

 

2,531,126

 

 

 

 

 

 

 

Investment Securities

 

 

 

 

 

Available for Sale, at Fair Value

 

4,380,713

 

7,594,425

 

Held to Maturity, at Cost (Fair Value of $13,644,867, and $18,048,359 as of June 30, 2010 and December 31, 2009, respectively)

 

12,582,382

 

16,794,363

 

 

 

 

 

 

 

 

 

16,963,095

 

24,388,788

 

 

 

 

 

 

 

Other Investments

 

476,600

 

400,800

 

 

 

 

 

 

 

Loans Held for Sale

 

9,510,819

 

9,637,123

 

 

 

 

 

 

 

Loans

 

33,446,473

 

36,630,587

 

Allowance for Loan Losses

 

(545,094

)

(414,670

)

 

 

 

 

 

 

Loans, Net

 

32,901,379

 

36,215,917

 

 

 

 

 

 

 

Premises and Equipment

 

2,175,880

 

2,276,681

 

 

 

 

 

 

 

Other Real Estate

 

556,501

 

653,501

 

 

 

 

 

 

 

Other Assets

 

661,990

 

462,021

 

 

 

 

 

 

 

Total Assets

 

$

67,881,722

 

$

76,565,957

 



ASSETS 
  September 30,    
  2010  December 31, 
  (Unaudited)  2009 
       
Cash and Cash Equivalents      
Cash and Due from Banks $3,684,391  $2,531,126 
         
Investment Securities        
Available for Sale, at Fair Value  3,306,196   7,594,425 
Held to Maturity, at Cost (Fair Value of $12,938,753, and $18,048,359 as of         
September 30, 2010 and December 31, 2009, respectively)  11,977,807   16,794,363 
         
   15,284,003   24,388,788 
         
Other Investments  553,400   400,800 
         
Loans Held for Sale  17,684,983   9,637,123 
         
Loans  34,340,392   36,630,587 
Allowance for Loan Losses  (644,722)  (414,670)
         
Loans, Net  33,695,670   36,215,917 
         
Premises and Equipment  2,118,927   2,276,681 
         
Other Real Estate  556,501   653,501 
         
Other Assets  644,147   462,021 
         
Total Assets $74,222,022  $76,565,957 

The accompanying notes are an integral part of these consolidated balance sheets.


3



Table of Contents

FIRST CENTURY BANCORP. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

June 30,

 

 

 

 

 

2010

 

December 31,

 

 

 

(Unaudited)

 

2009

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

Non-interest-Bearing

 

$

2,973,503

 

$

3,076,222

 

Interest-Bearing

 

56,573,746

 

66,490,456

 

 

 

 

 

 

 

Total Deposits

 

59,547,249

 

69,566,678

 

 

 

 

 

 

 

Borrowings

 

2,000,000

 

2,000,000

 

 

 

 

 

 

 

Other Liabilities

 

641,185

 

600,370

 

 

 

 

 

 

 

Total Liabilities

 

62,188,434

 

72,167,048

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

Preferred Stock, Non-voting; Non-participating; Variable Rate Cumulative; No Par Value; 10,000,000 Shares Authorized; -0- and 75,000 Shares Issued and Outstanding at June 30, 2010 and December 31, 2009, Respectively; Liquidation Preference of $10 Per Share Plus Accumulated Undeclared Dividends;

 

 

750,000

 

Common Stock, No Par Value; 50,000,000 Shares Authorized; 7,697,475 and 4,998,820, Shares Issued at June 30, 2010 and December 31, 2009, Respectively

 

16,747,684

 

14,948,028

 

Accumulated Deficit

 

(10,970,989

)

(11,031,585

)

Treasury Stock, 670 shares, at cost

 

(1,005

)

(1,005

)

Accumulated Other Comprehensive (Loss)

 

(82,402

)

(266,529

)

 

 

 

 

 

 

Total Shareholders’ Equity

 

5,693,288

 

4,398,909

 

 

 

 

 

 

 

Total Liabilities and Shareholders’ Equity

 

$

67,881,722

 

$

76,565,957

 

FIRST CENTURY BANCORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS’ EQUITY



  September 30,    
  2010  December 31, 
  (Unaudited)  2009 
       
Deposits      
Non-interest-Bearing $2,950,015  $3,076,222 
Interest-Bearing  58,616,200   66,490,456 
         
Total Deposits  61,566,215   69,566,678 
         
Borrowings  5,500,000   2,000,000 
         
Other Liabilities  683,166   600,370 
         
Total Liabilities  67,749,381   72,167,048 
         
Shareholders’ Equity        
Preferred Stock, Non-voting; Non-participating; Variable Rate Cumulative; No Par Value; 10,000,000 Shares Authorized; -0- and 75,000 Shares Issued and Outstanding at September 30, 2010 and December 31, 2009, Respectively; Liquidation Preference of $10 Per Share Plus Accumulated Undeclared Dividends;  -   750,000 
Common Stock, No Par Value; 50,000,000 Shares Authorized; 8,121,293 and 4,998,820, Shares Issued at September 30, 2010 and December 31, 2009, Respectively  17,021,823   14,948,028 
Accumulated Deficit  (10,620,168)  (11,031,585)
Treasury Stock, 670 shares, at cost  (1,005)  (1,005)
Accumulated Other Comprehensive Income (Loss)  71,991   (266,529)
         
Total Shareholders’ Equity  6,472,641   4,398,909 
         
Total Liabilities and Shareholders’ Equity $74,222,022  $76,565,957 

The accompanying notes are an integral part of these consolidated balance sheets.


4



Table of ContentsFIRST

FIRST CENTURY BANCORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND SIXNINE MONTHS ENDED JUNESEPTEMBER 30

(UNAUDITED)

 

 

Three Months Ended

 

Six Months Ended

 

 

 

2010

 

2009

 

2010

 

2009

 

Interest Income

 

 

 

 

 

 

 

 

 

Loans, Including Fees

 

$

559,423

 

$

590,446

 

$

1,202,646

 

$

1,166,144

 

Investments

 

463,501

 

737,588

 

995,937

 

1,302,080

 

Interest Bearing Deposits

 

2,307

 

24

 

4,471

 

51

 

Federal Funds Sold

 

 

 

 

166

 

 

 

 

 

 

 

 

 

 

 

Total Interest Income

 

1,025,231

 

1,328,058

 

2,203,054

 

2,468,441

 

 

 

 

 

 

 

 

 

 

 

Interest Expense

 

 

 

 

 

 

 

 

 

Deposits

 

269,200

 

444,875

 

562,524

 

930,275

 

Borrowings

 

12,701

 

17,683

 

25,553

 

33,443

 

Total Interest Expense

 

281,901

 

462,558

 

588,077

 

963,718

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income

 

743,330

 

865,500

 

1,614,977

 

1,504,723

 

 

 

 

 

 

 

 

 

 

 

Provision for Loan Losses

 

235,739

 

70,000

 

310,739

 

70,000

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income After Provision for Loan Losses

 

507,591

 

795,500

 

1,304,238

 

1,434,723

 

 

 

 

 

 

 

 

 

 

 

Non-interest Income

 

 

 

 

 

 

 

 

 

Service Charges and Fees on Deposits

 

22,411

 

17,196

 

41,462

 

31,341

 

Gain (Loss) on Investment Securities, net

 

112,273

 

(37,436

)

145,602

 

(37,436

)

Mortgage Banking Income

 

1,019,608

 

674,818

 

1,905,639

 

1,008,934

 

Other

 

35,108

 

133

 

45,782

 

251

 

 

 

 

 

 

 

 

 

 

 

Total Non-interest Income

 

1,189,400

 

654,711

 

2,138,485

 

1,003,090

 

 

 

 

 

 

 

 

 

 

 

Non-interest Expense

 

 

 

 

 

 

 

 

 

Salaries and Employee Benefits

 

907,851

 

604,764

 

1,830,063

 

1,095,889

 

Occupancy and Equipment

 

106,744

 

104,851

 

238,930

 

214,475

 

Professional Fees

 

99,407

 

85,275

 

179,026

 

137,371

 

Advertising and Marketing

 

62,002

 

52,290

 

113,333

 

108,073

 

Data Processing

 

172,682

 

127,517

 

341,052

 

247,302

 

Telephone

 

19,789

 

13,074

 

45,810

 

24,517

 

Postage and Delivery Services

 

20,923

 

5,887

 

39,291

 

11,552

 

Insurance, Tax, and Regulatory Assessments

 

99,065

 

46,155

 

170,478

 

92,448

 

Office Supplies

 

8,679

 

6,155

 

15,881

 

11,611

 

Lending Related Expense

 

102,167

 

103,585

 

264,603

 

186,262

 

Other Non-interest Expense

 

39,006

 

48,804

 

63,311

 

79,894

 

 

 

 

 

 

 

 

 

 

 

Total Non-interest Expense

 

1,638,315

 

1,198,357

 

3,301,778

 

2,209,394

 

 

 

 

 

 

 

 

 

 

 

Income Before Income Taxes

 

58,676

 

251,854

 

140,945

 

228,419

 

Provision for Income Taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

58,676

 

$

251,854

 

$

140,945

 

$

228,419

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Share

 

$

.01

 

$

.05

 

$

.03

 

$

.05

 

Fully Diluted Earnings Per Share

 

$

.01

 

$

.04

 

$

.03

 

$

.05

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Shares Outstanding

 

5,253,206

 

4,893,409

 

5,126,716

 

4,485,921

 



  Three Months Ended  Nine Months Ended 
  2010  2009  2010  2009 
Interest Income            
Loans, Including Fees $646,838  $570,555  $1,849,485  $1,736,699 
Investments  372,731   634,926   1,368,668   1,937,006 
Interest Bearing Deposits  3,230   500   7,700   552 
Federal Funds Sold  -   11   -   176 
                 
Total Interest Income  1,022,799   1,205,992   3,225,853   3,674,433 
                 
Interest Expense                
Deposits  245,217   367,800   807,741   1,298,075 
Borrowings  14,510   15,468   40,063   48,911 
Total Interest Expense  259,727   383,268   847,804   1,346,986 
                 
Net Interest Income  763,072   822,724   2,378,049   2,327,447 
                 
Provision for Loan Losses  127,880   136,080   438,619   206,080 
                 
Net Interest Income After Provision for Loan Losses  635,192   686,644   1,939,430   2,121,367 
                 
Non-interest Income                
Service Charges and Fees on Deposits  14,906   15,396   56,368   46,737 
Gain (Loss) on Sale of Investment Securities, net  -   -   145,602   (37,436)
Mortgage Banking Income  1,511,062   322,062   3,416,702   1,330,996 
Other  4,621   17,323   50,403   17,574 
                 
Total Non-interest Income  1,530,589   354,781   3,669,075   1,357,871 
                 
Non-interest Expense                
Salaries and Employee Benefits  1,046,492   522,278   2,876,554   1,618,167 
Occupancy and Equipment  107,229   95,149   346,160   309,624 
Professional Fees  98,724   69,952   277,749   207,323 
Advertising and Marketing  60,381   76,999   173,714   185,072 
Data Processing  173,265   140,162   514,316   387,464 
Telephone  20,546   13,167   66,355   37,684 
Postage and Delivery Services  17,006   7,110   56,297   18,662 
Insurance, Tax, and Regulatory Assessments  83,038   96,160   253,517   188,608 
Office Supplies  8,704   7,736   24,586   17,347 
Lending Related Expense  159,660   61,632   424,263   247,894 
Other Non-interest Expense  39,915   102,928   103,228   182,822 
                 
Total Non-interest Expense  1,814,960   1,191,273   5,116,739   3,400,667 
                 
Income (Loss) Before Income Taxes  350,821   (149,848)  491,766   78,571 
Provision for Income Taxes  -   -   -   - 
                 
Net Income (Loss) $350,821  $(149,848) $491,766  $78,571 
                 
Basic Earnings (Loss) Per Share $.04  $(.03) $.08  $.02 
Fully Diluted Earnings (Loss) Per Share $.04  $(.04) $.08  $.00 
                 
Weighted Average Shares Outstanding  8,039,734   4,998,820   6,107,948   4,658,766 

The accompanying notes are an integral part of these consolidated statements of operations.


5



Table of ContentsFIRST

FIRST CENTURY BANCORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE AND SIXNINE MONTHS ENDED JUNESEPTEMBER 30

(UNAUDITED)

 

 

Three Months Ended

 

Six Months Ended

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

58,676

 

$

251,854

 

$

140,945

 

$

228,419

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income (Loss), Net of Tax

 

 

 

 

 

 

 

 

 

Unrealized Gains (Losses) on Securities Available for Sale Arising During the period

 

297,400

 

(5,510

)

329,729

 

(92,534

)

Reclassification Adjustments for (gains) losses included in net income

 

(112,273

)

37,436

 

(145,602

)

37,436

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

185,127

 

31,926

 

184,127

 

(55,098

)

 

 

 

 

 

 

 

 

 

 

Comprehensive Income

 

$

243,803

 

$

283,780

 

$

325,072

 

$

173,321

 



  Three Months Ended  Nine Months Ended 
  2010  2009  2010  2009 
             
Net Income (Loss) $350,821  $(149,848) $491,766  $78,571 
                 
Other Comprehensive Income (Loss)                
Unrealized Gains (Losses) on Securities Available for Sale Arising During the period  154,393   40,160   484,122   (52,374)
Reclassification Adjustments for (gains) losses included in net income (loss)  -   -   (145,602)  37,436 
                 
Other comprehensive income (loss)  154,393   40,160   338,520   (14,938)
                 
Comprehensive Income (Loss) $505,214  $(109,688) $830,286  $63,633 

The accompanying notes are an integral part of these consolidated statements.


6



Table of ContentsF

FIRST CENTURY BANCORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

Preferred Stock

 

Common Stock

 

Accumulated

 

Treasury

 

Other
Comprehensive

 

 

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Deficit

 

Stock

 

Loss

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2009

 

75,000

 

$

750,000

 

4,998,820

 

$

14,948,028

 

$

(11,031,585

)

$

(1,005

)

$

(266,529

)

$

4,398,909

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exchange of Preferred Stock plus accrued dividends for Common Stock

 

(75,000

)

$

(750,000

)

1,239,328

 

830,349

 

(80,349

)

 

 

 

Issuance of Common Stock

 

 

 

1,459,327

 

977,749

 

 

 

 

977,749

 

Stock Compensation Costs

 

 

 

 

(8,442

)

 

 

 

(8,442

)

Net Change in Unrealized Gain on Securities Available for Sale

 

 

 

 

 

 

 

184,127

 

184,127

 

Net Income

 

 

 

 

 

140,945

 

 

 

140,945

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2010

 

 

$

 

7,697,475

 

$

16,747,684

 

$

(10,970,989

)

$

(1,005

)

$

(82,402

)

$

5,693,288

 



              Accumulated Other   
  Preferred Stock  Common Stock  Accumulated  Treasury  Comprehensive   
  Shares  Amount  Shares  Amount  Deficit  Stock  (Income) Loss  Total
                        
Balance, December 31, 2009  75,000  $750,000   4,998,820  $14,948,028  $(11,031,585) $(1,005) $(266,529) $4,398,909 
                                 
Exchange of Preferred Stock plus accrued dividends for Common Stock  (75,000) $(750,000)  1,239,328   830,349   (80,349)  -   -   - 
Issuance of Common Stock, net of    stock issuance costs  -   -   1,883,145   1,243,038   -   -   -   1,243,038 
Stock Compensation Costs  -   -   -   408   -   -   -   408 
Net Change in Unrealized Gain on Securities Available for Sale  -   -   -   -   -   -   338,520   338,520 
Net Income  -   -   -   -   491,766   -   -   491,766 
                                 
Balance, September 30, 2010  -  $-   8,121,293  $17,021,823  $(10,620,168) $(1,005) $71,991  $6,472,641 

The accompanying notes are an integral part of these consolidated statements


7



Table of ContentsFIRST

FIRST CENTURY BANCORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIXNINE MONTHS ENDED JUNESEPTEMBER 30

(UNAUDITED)

 

 

2010

 

2009

 

Cash Flows from Operating Activities

 

 

 

 

 

Net Income

 

$

140,945

 

$

228,419

 

Adjustments to Reconcile Net Income to Net Cash Used by Operating Activities

 

 

 

 

 

Depreciation

 

97,939

 

102,173

 

Amortization and Accretion

 

(421,631

)

(475,455

)

Provision for Loan Losses

 

310,739

 

70,000

 

Write-down of Other Real Estate

 

34,500

 

 

Loss on Sale of Other Assets

 

12,175

 

7,263

 

(Gains) Losses on Investment Securities

 

(145,602

)

37,436

 

Stock Compensation Expense (Recovery)

 

(8,442

)

35,506

 

Change In

 

 

 

 

 

Loans Held for Sale

 

126,304

 

(938,250

)

Other Assets

 

(230,657

)

(10,332

)

Other Liabilities

 

40,815

 

185,828

 

 

 

 

 

 

 

Net Cash Used by Operating Activities

 

(42,915

)

(757,412

)

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

Purchases of Investment Securities Available for Sale

 

(1,000,000

)

(8,251,158

)

Proceeds from Sales of Investment Securities Available for Sale

 

3,524,842

 

6,642,492

 

Proceeds from Maturities, Calls and Paydowns of Investment Securities Available for Sale

 

2,735,471

 

4,269,480

 

Purchases of Investment Securities Held to Maturity

 

 

(11,599,251

)

Proceeds from Sales of Investment Securities Held to Maturity

 

2,014,129

 

 

Proceeds from Maturities, Calls and Paydowns of Investment Securities Held to Maturity

 

902,610

 

1,450,860

 

Net Purchases of Other Investments

 

(75,800

)

(21,850

)

Net Change in Loans

 

3,003,800

 

(767,844

)

Proceeds from Sale of Other Real Estate

 

62,356

 

 

Proceeds from Sale of Other Assets

 

24,107

 

25,000

 

Net Purchases of Premises and Equipment

 

(2,587

)

(23,225

)

 

 

 

 

 

 

Net Cash Provided (Used) by Investing Activities

 

11,188,928

 

(8,275,496

)

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

Net Change in Deposits

 

(10,019,430

)

3,961,362

 

Proceeds from Borrowings

 

 

2,900,000

 

Proceeds from the Issuance of Common Stock

 

977,749

 

1,529,541

 

Payment of Stock Issuance Costs

 

 

(224,158

)

 

 

 

 

 

 

Net Cash Provided (Used) by Financing Activities

 

(9,041,681

)

8,166,745

 

 

 

 

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

 

2,104,332

 

(866,163

)

 

 

 

 

 

 

Cash and Cash Equivalents, Beginning

 

2,531,126

 

2,225,027

 

 

 

 

 

 

 

Cash and Cash Equivalents, Ending

 

$

4,635,458

 

$

1,358,864

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

Interest Paid

 

$

513,060

 

$

831,104

 

Change in Unrealized Gains (Losses) on Securities Available for Sale

 

$

184,127

 

$

(55,098

)

Loans transferred to other real estate

 

$

 

$

653,501

 



  2010  2009 
Cash Flows from Operating Activities      
Net Income $491,766  $78,571 
Adjustments to Reconcile Net Income to        
Net Cash Used by Operating Activities        
Depreciation  143,587   152,561 
Amortization and Accretion  (586,986)  (735,875)
Provision for Loan Losses  438,619   206,080 
Write-down of Other Real Estate  34,644   - 
Loss on Sale of Other Assets  10,544   7,263 
(Gains) Losses on Investment Securities  (145,602)  37,436 
Stock Compensation Expense  408   53,206 
Change In        
Loans Held for Sale  (8,047,860)  (197,123)
Other Assets  (212,815)  (98,634)
Other Liabilities  82,796   58,821 
         
Net Cash Used  by Operating Activities  (7,790,899)  (437,694)
         
Cash Flows from Investing Activities        
Purchases of Investment Securities Available for Sale  (1,000,000)  (9,691,104)
Proceeds from Sales of Investment Securities Available for Sale  3,524,842   6,642,492 
Proceeds from Maturities, Calls and Paydowns of        
Investment Securities Available for Sale  2,148,056   5,801,011 
Purchases of Investment Securities Held to Maturity  -   (11,599,250)
Proceeds from Sales of Investment Securities Held to Maturity  2,014,129   - 
Proceeds from Maturities, Calls and Paydowns of        
Investment Securities Held to Maturity  3,488,866   2,144,055 
Net Purchases of Other Investments  (152,600)  (21,850)
Net Change in Loans  2,081,629   (1,511,056)
Proceeds from Sale of Other Real Estate  62,356   - 
Proceeds from Sale of Other Assets  24,107   25,000 
Proceed from sale (purchases) of Premises and Equipment  10,206   (37,121)
         
Net Cash Provided (Used) by Investing Activities  12,201,591   (8,247,823)
         
Cash Flows from Financing Activities        
Net Change in Deposits  (8,000,463)  3,021,219 
Proceeds from Borrowings  3,500,000   3,500,000 
Proceeds from the Issuance of Common Stock  1,261,706   1,529,541 
Payment of Stock Issuance Costs  (18,670)  (231,570)
         
 Net Cash Provided (Used) by Financing Activities  (3,257,427)  7,819,190 
         
Net Increase (Decrease) in Cash and Cash Equivalents  1,153,265   (866,327)
         
Cash and Cash Equivalents, Beginning  2,531,126   2,225,027 
         
Cash and Cash Equivalents, Ending $3,684,391  $1,358,700 
         
Supplemental Disclosure of Cash Flow Information:        
Interest Paid $834,223  $1,262,457 
Change in Unrealized Gains (Losses) on Securities Available for Sale $338,520  $(14,938)
Loans transferred to other real estate $-  $653,501 
Preferred stock exchanged for Common Stock $830,349  $- 

See accompanying notes to consolidated financial statements.


8



Table of ContentsNotes

Notes to Consolidated Financial Statements

(Unaudited)

(Unaudited)

NOTE 1 BASIS OF PRESENTATION


First Century Bancorp. (the “Company”), a bank holding company, owns 100% of the outstanding common stock of First Century Bank, National Association (the “Bank”), which is headquartered in the Gainesville, Georgia.


The consolidated financial statements include the accounts of the Company and the Bank. All inter-company accounts and transactions have been eliminated in consolidation.


The accompanying financial statements have been prepared in accordance with the requirements for interim financial statements and, accordingly, they omit disclosures, which would substantially duplicate those contained in the most recent annual report to shareholders on Form 10-K.  The financial statements as of JuneSeptember 30, 2010 and 2009 are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation.  The results of operations for the quarter and sixnine months ended JuneSeptember 30, 2010 are not necessarily indicative of the results of a full year’s operations. The financial information as of December 31, 2009 has been derived from the audited financial statements as of that date.  For further information, referr efer to the financial statements and the notes included in the Company’s 2009 Form 10-K.


RECENT ACCOUNTING PRONOUNCEMENTS

In July 2010, the FASB issued 2010-20 Accounting Standards Update (ASU) No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.  This ASU amends the guidance in the FASB Accounting Standards CodificationTM (Codification) to improve the disclosures that an entity provides about the credit quality of its financing receivables and the related allowance for credit losses. As a result of these amendments, an entity is required to disaggregate, by portfolio segment or class of financing receivable, certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses.  The ASU is effective for interim and annual reporting periods ending on or after December 15, 2010.


NOTE 2 CRITICAL ACCOUNTING POLICIES AND ESTIMATES


The Company has adopted various accounting policies, which govern the application of accounting principles generally accepted in the United States of America in the preparation of our financial statements.  The Company’s significant accounting policies are described in the footnotes to the consolidated financial statements at December 31, 2009 as filed on its annual report on Form 10-K.


Certain accounting policies involve significant estimates and assumptions by the Company, which have a material impact on the carrying value of certain assets and liabilities.  The Company considers these accounting policies to be critical accounting policies.  The estimates and assumptions used are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the estimates and assumptions made, actual results could differ from these estimates and assumptions which could have a material impact on carrying values of assets and liabilities and results of operations.


The Company believes that the provision and allowance for loan losses, income taxes, and valuation of investment securities for other-than- temporaryother-than-temporary impairment are critical accounting policies that require the most significant judgments and estimates used in preparation of its consolidated financial statements.  Refer to the portion of management’s discussion and analysis of financial condition and results of operations that addresses the provision for allowance for loan losses and income taxes for a description of the Company’s processes and methodology for determining the allowance for loan losses and income taxes.


NOTE 3 STOCK COMPENSATION PLANS


The Company did not grant any options and no options were exercised during the quarter or sixnine month period ended JuneSeptember 30, 2010.


NOTE 4 NET INCOME (LOSS) PER SHARE


Net income (loss) per common share is based on the weighted average number of common shares outstanding during the period.  The effects of potential common shares outstanding, including warrants and options, are included in diluted earnings per share.  No common stock equivalents were considered in 2010 and 2009 as the effects of such would be anti-dilutive to the income (loss) per share calculation.  Dividends accumulated on cumulative preferred stock totaled $0 and $57,979$64,123 at JuneSeptember 30, 2010, and JuneSeptember 30, 2009, respectively, and reduced the earnings available to common stockholders in the computation.


9



Table of Contents

NOTE 5 INVESTMENT SECURITIES


Investment securities as of JuneSeptember 30, 2010 and December 31, 2009 are summarized as follows.

 

 

June 30, 2010

 

Securities Available for Sale

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Obligations of U.S. Government Agencies

 

$

1,000,000

 

$

4,727

 

$

 

$

1,004,727

 

Obligations of States and Political Subdivisions

 

329,596

 

 

(31,616

)

297,980

 

Mortgage Backed Securities-GNMA

 

402,483

 

11,924

 

 

414,407

 

Mortgage Backed Securities-FNMA and FHLMC

 

594,487

 

9,898

 

(2,620

)

601,765

 

Private Label Residential Mortgage Backed Securities

 

1,448,442

 

 

(84,950

)

1,363,492

 

Private Label Commercial Mortgage Backed Securities

 

688,107

 

10,235

 

 

698,342

 

 

 

$

4,463,115

 

$

36,784

 

$

(119,186

)

$

4,380,713

 

Securities Held to Maturity

 

 

 

 

 

 

 

 

 

Private Label Residential Mortgage Backed Securities

 

$

885,916

 

$

53,660

 

$

 

$

939,576

 

Private Label Commercial Mortgage Backed Securities

 

11,696,466

 

1,008,825

 

 

12,705,291

 

 

 

$

12,582,382

 

$

1,062,485

 

$

 

$

13,644,867

 

 

 

December 31, 2009

 

Securities Available for Sale

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Obligations of U.S. Government Agencies

 

$

983,146

 

$

28,888

 

$

 

$

1,012,034

 

Obligations of States and Political Subdivisions

 

326,855

 

 

(87,693

)

239,162

 

Mortgage Backed Securities-GNMA

 

1,435,829

 

71,850

 

 

1,507,679

 

Mortgage Backed Securities-FNMA and FHLMC

 

794,697

 

9,750

 

(1,928

)

802,519

 

Private Label Residential Mortgage Backed Securities

 

2,720,521

 

4,331

 

(288,440

)

2,436,412

 

Private Label Commercial Mortgage Backed Securities

 

726,226

 

12,223

 

 

738,449

 

Corporate Debt Securities

 

575,000

 

6,700

 

(9,490

)

572,210

 

Equity Securities

 

298,680

 

 

(12,720

)

285,960

 

 

 

$

7,860,954

 

$

133,742

 

$

(400,271

)

$

7,594,425

 

Securities Held to Maturity

 

 

 

 

 

 

 

 

 

Private Label Residential Mortgage Backed Securities

 

$

1,963,140

 

$

255,583

 

$

 

$

2,218,723

 

Private Label Commercial Mortgage Backed Securities

 

14,831,223

 

1,056,040

 

(57,627

)

15,829,636

 

 

 

$

16,764,363

 

$

1,311,623

 

$

(57,627

)

$

18,048,359

 

  September 30, 2010 
Securities Available for Sale 
Amortized
Cost
  Gross Unrealized  Gross Unrealized  
Fair
Value
 
    Gains  Losses    
Obligations of States and Political Subdivisions $331,031  $-  $(15,996) $315,035 
Mortgage Backed Securities-GNMA  368,666   11,804   -   380,470 
Mortgage Backed Securities-FNMA and FHLMC  483,478   8,907   (2,886)  489,499 
Private Label Residential Mortgage Backed Securities  1,378,289   84,144   (14,426)  1,448,007 
Private Label Commercial Mortgage Backed Securities  672,741   444   -   673,185 
  $3,234,205  $105,299  $(33,308) $3,306,196 
Securities Held to Maturity                
Private Label Residential Mortgage Backed Securities $868,848  $100,995  $-  $969,843 
Private Label Commercial Mortgage Backed Securities  11,108,959   859,951   -   11,968,910 
  $11,977,807  $960,946  $-  $12,938,753 
  December 31, 2009 
Securities Available for Sale 
Amortized
Cost
  Gross Unrealized  Gross Unrealized  
Fair
Value
 
    Gains  Losses    
Obligations of U.S. Government Agencies   $983,146  $28,888  $-  $1,012,034 
Obligations of States and Political Subdivisions  326,855   -   (87,693)  239,162 
Mortgage Backed Securities-GNMA  1,435,829   71,850   -   1,507,679 
Mortgage Backed Securities-FNMA and FHLMC  794,697   9,750   (1,928)  802,519 
Private Label Residential Mortgage Backed Securities  2,720,521   4,331   (288,440)  2,436,412 
Private Label Commercial Mortgage Backed Securities  726,226   12,223   -   738,449 
Corporate Debt Securities  575,000   6,700   (9,490)  572,210 
Equity Securities  298,680   -   (12,720)  285,960 
  $7,860,954  $133,742  $(400,271) $7,594,425 
Securities Held to Maturity                
Private Label Residential Mortgage Backed Securities $1,963,140  $255,583  $-  $2,218,723 
Private Label Commercial Mortgage Backed Securities  14,831,223   1,056,040   (57,627)  15,829,636 
  $16,764,363  $1,311,623  $(57,627) $18,048,359 

Securities with a carrying value of $15,589,367$13,609,930 and $20,150,917 at JuneSeptember 30, 2010, and December 31, 2009, respectively, were pledged to institutions with which the Company has available lines of credit outstanding.


10



Table of Contents

The following outlines the unrealized losses and fair value by investment category and length of time that individual securities have been in a continuous unrealized loss position at JuneSeptember 30, 2010 and December 31, 2009:

 

 

June 30, 2010

 

 

 

Less than 12 Months

 

12 Months or Greater

 

Total

 

 

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Total
Unrealized
Losses

 

Securities Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of States and Political Subdivisions

 

$

 

$

 

$

297,980

 

$

(31,616

)

$

297,980

 

$

(31,616

)

Mortgage Backed Securities-FNMA and FHLMC

 

 

 

348,285

 

(2,620

)

348,285

 

(2,620

)

Private Label Residential Mortgage Backed Securities

 

1,125,030

 

(67,357

)

238,461

 

(17,593

)

1,363,491

 

(84,950

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,125,030

 

$

(67,357

)

$

884,726

 

$

(51,829

)

$

2,009,756

 

$

(119,186

)

 

 

December 31, 2009

 

 

 

Less than 12 Months

 

12 Months or Greater

 

Total

 

 

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Total
Unrealized
Losses

 

Securities Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of States and Political Subdivisions

 

$

239,162

 

$

(87,693

)

$

 

$

 

$

239,162

 

$

(87,693

)

Mortgage Backed Securities-FNMA and FHLMC

 

 

 

492,889

 

(1,928

)

492,889

 

(1,928

)

Private Label Residential Mortgage Backed Securities

 

1,463,016

 

(117,778

)

416,654

 

(170,662

)

1,879,670

 

(288,440

)

Corporate Debt Securities

 

315,510

 

(9,490

)

 

 

315,510

 

(9,490

)

Equity Securities

 

 

 

285,960

 

(12,720

)

285,960

 

(12,720

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

2,017,688

 

$

(214,961

)

$

1,195,503

 

$

(185,310

)

$

3,213,191

 

$

(400,271

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities Held to Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

Private Label Commercial Mortgage Backed Securities

 

$

887,578

 

$

(57,627

)

$

 

$

 

$

887,578

 

$

(57,627

)


  September 30, 2010 
  Less than 12 Months  12 Months or Greater  Total 
  Fair Value  Gross Unrealized Losses  Fair Value  Gross Unrealized Losses  Fair Value  
Total
Unrealized Losses
 
Securities Available for Sale                  
Obligations of  States and Political Subdivisions $-  $-  $315,035  $(15,996) $315,035  $(15,996)
Mortgage Backed Securities-FNMA and FHLMC  -   -   264,039   (2,886)  264,039   (2,886)
Private Label Residential Mortgage Backed Securities  -   -   216,902   (14,426)  216,902   (14,426)
                         
  $-  $-  $795,976  $(33,308) $795,976  $(33,308)


  December 31, 2009 
  Less than 12 Months  12 Months or Greater  Total 
  Fair Value  Gross Unrealized Losses  Fair Value  Gross Unrealized Losses  Fair Value  
Total
Unrealized Losses
 
Securities Available for Sale                  
Obligations of  States and Political Subdivisions $239,162  $(87,693) $-  $-  $239,162  $(87,693)
Mortgage Backed Securities-FNMA and FHLMC  -   -   492,889   (1,928)  492,889   (1,928)
Private Label Residential Mortgage Backed Securities  1,463,016   (117,778)  416,654   (170,662)  1,879,670   (288,440)
Corporate Debt Securities  315,510   (9,490)  -   -   315,510   (9,490)
Equity Securities  -   -   285,960   (12,720)  285,960   (12,720)
                         
  $2,017,688  $(214,961) $1,195,503  $(185,310) $3,213,191  $(400,271)
                         
Securities Held to Maturity                        
Private Label Commercial Mortgage Backed Securities $887,578  $(57,627) $-  $-  $887,578  $(57,627)

Management evaluates investment securities for other-than-temporary impairment on a quarterly basis.


At JuneSeptember 30, 2010, 43 of the 108 debt securities available for sale, and none of the 1615 debt securities held to maturity contained unrealized losses with an aggregate depreciation of 5.60%4.02% from the Company’s amortized cost basis.


In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports.  Although the issuers may have shown declines in earnings and a weakened financial condition as a result of the weakened economy, no credit issues have been identified that cause management to believe the declines in market value are other than temporary.  As management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available for sale, no declines are deemed to be other than temporary.


Obligations of States and Political Subdivisions.  The unrealized loss on the one investment in obligations of states and political subdivisions was caused by interest rate increases.  The contractual terms of this investment dodoes not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments.  Because the Company does not intend to sell the investment and it is not more likely than not that the Company will be required to sell the investment before recovery of theirits amortized cost bases,basis, which may be maturity, the Company does not consider this investment to be other-than-temporarily impaired at JuneSeptember 30, 2010.


11


GSE Residential Mortgage-backed Securities.  The unrealized loss on the Company’s investment in one GSE mortgage-backed security was caused by interest rate increases.  The Company purchased this investment at a discount relative to its face amount, and the contractual cash flows of this investment isare guaranteed by an agency of the U.S. Government.  Accordingly, it is expected that the security would not be settled at a price less than the amortized cost basesbasis of the Company’s investment.

11



Table of Contents

Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investment and it is not more likely than not that the Company will be required to sellse ll the investment before recovery of their amortized cost bases,basis, which may be maturity, the Company does not consider this investment to be other-than-temporarily impaired at JuneSeptember 30, 2010.


Private Label Residential Mortgage-backed Securities.  The unrealized losses associated with twoone private label residential mortgage-backed securities areis primarily driven by higher projected collateral losses, wider credit spreads, and changes in interest rates.  The Company assesses for credit impairment using a cash flow model.  Based upon our assessment of the expected credit losses of the securitiessecurity given the performance of the underlying collateral compared to our credit enhancement, the Company expects to recover the entire amortized cost basis of these securities.this security.  Because the Company does not intend to sell the investment and it is not more likely than not that the Company will be required to sell the investment before recovery of their a mortized cost basis, which may be maturity, the Company does not consider this investment to be other-than-temporarily impaired at September 30, 2010.


Gross realized gains on securities totaled $228,899 and $49,177$24,984 for the sixnine months ended JuneSeptember 30, 2010 and 2009, respectively.  Gross realized losses, including impairment losses, on securities totaled $83,297 and $86,612$62,420 for the sixnine months ended JuneSeptember 30, 2010 and 2009, respectively.  Gains and losses from sales of securities are computed using the specific identification method and recorded on the trade date.

Other investments on the balance sheet at June 30, 2010 and December 31, 2009 include restricted equity securities consisting of Federal Reserve Bank stock of $134,900 and $137,300, respectively, and Federal Home Loan Bank stock of $341,700 and $263,500, respectively. These securities are carried at cost since they do not have readily determinable fair values due to their restricted nature and the Bank does not exercise significant influence.

The amortized cost, estimated fair value, and weighted average yield of investment securities at June 30, 2010, by contractual maturity, are shown below.  Expected maturities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

 

 

Available for Sale

 

Held to Maturity

 

 

 

Amortized
Cost

 

Fair
Value

 

Weighted
Average
Yield

 

Amortized
Cost

 

Fair Value

 

Weighted
Average
Yield

 

Obligations of U.S. Government Agencies

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 1 Year

 

$

1,000,000

 

$

1,004,727

 

3.68

%

$

 

$

 

 

Obligations of States and Political Subdivisions

 

 

 

 

 

 

 

 

 

 

 

 

 

1 to 5 Years

 

329,596

 

297,980

 

8.71

%

 

 

 

Mortgage Backed Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 1 Year

 

1,779,886

 

1,788,105

 

7.03

%

349,650

 

359,864

 

10.35

%

1 to 5 Years

 

1,192,387

 

1,125,030

 

7.14

%

11,992,727

 

12,998,913

 

10.31

%

5 to 10 Years

 

161,246

 

164,871

 

1.86

%

240,005

 

286,090

 

9.58

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

4,463,115

 

$

4,380,713

 

6.27

%

$

12,582,382

 

$

13,644,867

 

10.30

%


Three investment securities that were categorized as Heldheld to Maturitymaturity were sold during the second quarter 2010. These securities were sold because they experienced significant credit deterioration and were downgraded by nationally recognized rating agencies.  Since these securities were purchased at a substantial discount during the market disruption that occurred in late 2008 and early 2009, they were sold for a gain of $159,329.


Other investments on the balance sheet at September 30, 2010 and December 31, 2009 include restricted equity securities consisting of Federal Reserve Bank stock of $168,400 and $137,300, respectively, and Federal Home Loan Bank stock of $385,000 and $263,500, respectively. These securities are carried at cost since they do not have readily determinable fair values due to their restricted nature and the Bank does not exercise significant influence.

The amortized cost, estimated fair value, and weighted average contractual yields of investment securities held at September 30, 2010, by contractual maturity, are shown below.  Expected maturities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

  Available for Sale  Held to Maturity 
  Amortized Cost  Fair Value  Weighted Average Yield  Amortized Cost  Fair Value  Weighted Average Yield 
Obligations of States and Political Subdivisions                  
1 to 5 Years $331,031  315,035   8.71% $-  -   - 
Mortgage Backed Securities                        
Less than 1 Year  266,926   264,039   5.65%  236,639   245,351   10.35%
1 to 5 Years  1,489,288   1,496,017   6.92%  11,498,802   12,401,043   10.04%
5 to 10 Years  1,146,960   1,231,105   7.33%  242,366   292,359   9.58%
  $3,234,205  $3,306,196   6.27% $11,977,807  $12,938,753   10.03%

NOTE 6 - LOANS


The composition of loans as of JuneSeptember 30, 2010 and December 31, 2009 are:

 

 

June 30, 2010

 

December 31, 2009

 

 

 

 

 

 

 

Commercial, Financial and Agricultural

 

$

3,190,374

 

$

3,698,597

 

Real Estate-Mortgage

 

24,083,090

 

26,564,533

 

Real Estate-Construction

 

4,935,234

 

4,744,401

 

Consumer

 

1,176,082

 

1,526,295

 

Net deferred costs

 

61,693

 

96,761

 

 

 

 

 

 

 

 

 

$

33,446,473

 

$

36,630,587

 


  September 30, 2010  December 31, 2009 
       
Commercial, Financial and Agricultural $2,783,878  $3,698,597 
Real Estate-Mortgage  24,636,065   26,564,533 
Real Estate-Construction  5,843,944   4,744,401 
Consumer  1,027,856   1,526,295 
Net deferred costs  48,649   96,761 
         
  $34,340,392  $36,630,587 

12



Table of Contents

Activity in the allowance for loan losses for the sixnine month periods ended JuneSeptember 30 is summarized as follows:

 

 

2010

 

2009

 

 

 

 

 

 

 

Beginning Balance

 

$

414,670

 

$

838,234

 

Provision Charged to Operations

 

310,739

 

70,000

 

Loan Charge-Offs

 

(183,011

)

(507,379

)

Loan Recoveries

 

2,696

 

16,422

 

 

 

 

 

 

 

Ending Balance

 

$

545,094

 

$

417,277

 


  2010  2009 
       
Beginning Balance $414,670  $838,234 
Provision Charged to Operations  438,619   206,080 
Loan Charge-Offs  (211,892)  (555,946)
Loan Recoveries  3,325   21,078 
         
Ending Balance $644,722  $509,446 

NOTE 7 SHAREHOLDERS’ EQUITY


In June 2010, the Company commenced a private offering of up to 2,000,000 shares of its common stock at of price of $0.67 per share to a limited number of accredited investors.investors.  The private offering is scheduled to closeclosed August 13, 2010. During the secondthird quarter of 2010 the Company has received net proceeds of $977,749$265,289 from the sale of 1,459,327423,818 shares in the offering.  Total net proceeds raised in the offering were $1,243,038 from the sale of 1,883,145 shares.  For each share issued, a warrant to purchase one share of common stock at a price of $0.67 was also granted, resulting in the issuance of 1,459,327 warrants.1,883,145 warrants .  The Company is using the net proceeds from the private offering for working capital purposes.  purposes.  The common stock that was sold in the offering has not been registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.


In June 2010, the holders of Series B Preferred Stock exchanged their shares of preferred stock for shares of common stock at an exchange rate of $0.67 per share.  The Company redeemed 75,000 shares of Series B Preferred Stock and issued an aggregate of 1,239,328 shares of common stock, which included the payment of accrued dividends, to accredited investors in transactions exempt from registration under Section 4(2) of the Securities Act.


NOTE 8 INCOME TAXES


The Company accounts for income taxes under the liability method.  Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards.  Deferred tax assets are subject to management’s judgment based upon available evidence that future realization is more likely than not.  For financial reporting purposes, a valuation allowance of 100 percent of the deferred tax assets as of JuneSeptember 30, 2010 and December 31, 2009 has been recognized to offset the deferred tax assets related to cumulative temporary differences and tax loss carry-forwards.   If management determines that the Company maym ay be able to realize all or part of the deferred tax asset in the future, a credit to income tax expense may be required to increase the recorded value of net deferred tax assetassets to thetheir expected realizable amount.

amounts. 


NOTE 9 REGULATORY MATTERS


The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the consolidated financial statements.  Under certain adequacy guidelines and the regulatory framework for prompt corrective action, specific capital guidelines that involve quantitative measures of the assets, liabilities and certain off-balance sheet items, as calculated under regulatory accounting practices, must be met.  The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.


13



Table of Contents

The Bank’s actual ratios as of JuneSeptember 30, 2010 are as follows:

 

 

 

 

 

 

 

 

 

 

To Be Well

 

 

 

 

 

 

 

 

 

 

 

Capitalized Under

 

 

 

 

 

 

 

For Capital

 

Prompt Corrective

 

 

 

Actual

 

Adequacy Purposes

 

Action Provisions

 

 

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

 

 

 

 

 

 

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital to

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk-Weighted Assets

 

$

6,219

 

14.81

%

$

3,359

 

8.00

%

$

4,199

 

10.00

%

Tier I Capital to

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk-Weighted Assets

 

5,694

 

13.56

 

1,680

 

4.00

 

2,519

 

6.00

 

Tier I Capital to

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Assets

 

5,694

 

8.37

 

2,722

 

4.00

 

3,402

 

5.00

 


              To Be Well 
              Capitalized Under 
        For Capital  Prompt Corrective 
  Actual  Adequacy Purposes  Action Provisions 
  Amount  Ratio  Amount  Ratio  Amount  Ratio 
  (In Thousands) 
                   
Total Capital to                  
Risk-Weighted Assets $6,670   14.40% $3,705   8.00%% $4,631   10.00%
Tier I Capital to                        
Risk-Weighted Assets  6,090   13.15   1,852   4.00   2,778   6.00 
Tier I Capital to                        
Average Assets  6,090   8.69   2,802   4.00   3,502   5.00 

NOTE 10 FAIR VALUE DISCLOSURES


Fair Value of Financial Instruments


ASC Topic 825, Disclosures about Fair Value of Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized on the face of the balance sheet, for which it is practicable to estimate that value.  The assumptions used in the estimation of the fair value of the Company’s financial instruments are detailed below.  Where quoted prices are not available, fair values are based on estimates using discounted cash flows and other valuation techniques.  The use of discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows.  The following disclosures should not be considered a surrogate of the liquidation value of the Company, but rather a good-faith estimate ofo f the increase or decrease in value of financial instruments held by the Company since purchase, origination or issuance.


Cash and Short-Term Investments - For cash, due from banks and federal funds sold, the carrying amount is a reasonable estimate of fair value.


Investment Securities - Fair values for investment securities are based on quoted market prices.


Other Investments - The fair value of other investments approximates carrying value.


Loans Held for Sale - The fair value of loans held for sale are based on third party quotes.


Loans - The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings.  For variable rate loans, the carrying amount is a reasonable estimate of fair value.  Fair values of nonperforming loans are estimated using discounted cash flow analysis or underlying collateral values, where applicable.


Deposit Liabilities - The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date.  The fair value of fixed maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities.


Borrowings - Due to their short-term nature, the fair value of FRB advances approximates carrying amount.  The fair value of FHLB advances are provided by the FHLB and approximate fair value derived from their proprietary models.


Accrued Interest - The carrying amounts of accrued interest approximate fair value.


Standby Letters of Credit and Unfulfilled Loan Commitments - Fair values are based on fees currently charged to enter into similar agreements taking into account the remaining terms of the agreements and the counterparties’ credit standing.  The fees associated with these instruments are not considered material.


14



Table of Contents

The carrying amount and estimated fair values of the Company’s financial instruments as of JuneSeptember 30, 2010 and December 31, 2009 are presented hereafter:

 

 

June 30, 2010

 

December 31, 2009

 

 

 

Carrying

 

Estimated

 

Carrying

 

Estimated

 

 

 

Amount

 

Fair Value

 

Amount

 

Fair Value

 

 

 

(in Thousands)

 

Assets

 

 

 

 

 

 

 

 

 

Cash and Short-Term Investments

 

$

4,635

 

$

4,635

 

$

2,531

 

$

2,531

 

Investment Securities Available for Sale

 

4,381

 

4,381

 

7,594

 

7,594

 

Investment Securities Held to Maturity

 

12,582

 

13,645

 

16,794

 

18,048

 

Other Investments

 

477

 

477

 

401

 

401

 

Loans Held for Sale

 

9,511

 

9,511

 

9,637

 

9,637

 

Loans, Net

 

32,901

 

33,026

 

36,215

 

36,572

 

Accrued Interest Receivable

 

217

 

217

 

279

 

279

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Deposits

 

59,547

 

59,556

 

69,567

 

69,596

 

Borrowings

 

2,000

 

2,078

 

2,000

 

2,062

 

Accrued Interest Payable

 

354

 

354

 

279

 

279

 


  September 30, 2010  December 31, 2009 
  Carrying  Estimated  Carrying  Estimated 
  Amount  Fair Value  Amount  Fair Value 
  (in Thousands) 
Assets            
Cash and Short-Term Investments $3,684  $3,684  $2,531  $2,531 
Investment Securities Available for Sale  3,306   3,306   7,594   7,594 
Investment Securities Held to Maturity  11,978   12,939   16,794   18,048 
Other Investments  553   553   401   401 
Loans Held for Sale  17,685   17,685   9,637   9,637 
Loans, Net  33,696   33,610   36,215   36,572 
Accrued Interest Receivable  178   178   279   279 
                 
Liabilities                
Deposits  61,566   61,505   69,567   69,596 
Borrowings  5,500   5,591   2,000   2,062 
Accrued Interest Payable  292   292   279   279 

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument.  These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument.  Because no market exists for a significant portion of the Company’sCompany's financial instruments, fair value estimates are based on many judgments.  These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in assumptions could significantly affect the estimates.


Fair value estimates are based on existing on-and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.  Significant assets and liabilities that are not considered financial instruments include the deferred income taxes, other real estate, and premises and equipment.  In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.


Determination of Fair Value


The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.  In accordance with the Fair Value Measurements and Disclosures topic (FASB ASC 820), the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Fair value is best determined based upon quoted market prices.  However, in many instances, there are no quoted market prices for the Company’s various financial instruments.  In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuationvaluatio n techniques.  Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows.  Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.


The recent fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions.  If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate.  In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment.  The fair value is a reasonable point within the range that is most representative of fair value under currentcurr ent market conditions.


15



Table of Contents

Fair Value Hierarchy


ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements.  The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.  The three levels are defined as follows:


Level 1 - Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.  Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market.  Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.


Level 2 - Valuation is based on inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly.  The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.


Level 3 - Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.  Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.


A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.


Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such instruments pursuant to the valuation hierarchy:


Investment Securities Available for Sale


Where quoted prices are available in an active market, investment securities are classified within level 1 of the valuation hierarchy.  Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities.  If quoted market prices are not available then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows.  Level 2 securities include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities.  In certain cases where Level 1 and Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.


Loans Held for Sale


Loans held for sale are reported at the lower of cost or fair value.  Fair Value is determined based on the expected proceeds based on sales contracts and commitments and are considered Level 2 inputs.


Following is a description of the valuation methodologies used for instruments measured at fair value on a non-recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such instruments pursuant to the valuation hierarchy:


Impaired loans


ASC Topic 820 applies to loans measured for impairment using the practical expedients permitted by ASC Section 310-30-30,including impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent).  Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation which is then adjusted for the cost related to liquidation of the collateral.


Other Real Estate


Other real estate is reported at fair value less selling costs.  Fair value is based on third party or internally developed appraisals considering the assumptions in the valuation and is considered Level 2 or Level 3 inputs.


16



Table of Contents

Assets and Liabilities Measured at Fair Value on a Recurring Basis as of JuneSeptember 30, 2010 and December 31, 2009

 

 

 

 

Fair Value Measurements at
June 30, 2010 Using

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

Investment Securities Available for Sale

 

$

4,380,713

 

 

$

4,380,713

 

 

Loans Held for Sale

 

9,510,819

 

 

9,510,819

 

 

 

 

 

 

Fair Value Measurements at
December 31, 2009 Using

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

Investment Securities Available for Sale

 

$

7,594,425

 

 

$

7,594,425

 

 

Loans Held for Sale

 

9,637,123

 

 

9,637,123

 

 


     
Fair Value Measurements at
September 30, 2010 Using
 
  Total  Level 1  Level 2  Level 3 
             
Investment Securities Available for Sale $3,306,196   -  $3,306,196   - 
Loans Held for Sale  17,684,983   -   17,684,983   - 


     
Fair Value Measurements at
December 31, 2009 Using
 
  Total  Level 1  Level 2  Level 3 
             
Investment Securities Available for Sale $7,594,425   -  $7,594,425   - 
Loans Held for Sale  9,637,123   -   9,637,123   - 

The following table presents the financial instruments carried on the consolidated balance sheets by caption and by level in the fair value hierarchy at JuneSeptember 30, 2010 and December 31, 2009, for which a nonrecurring change in fair value has been recorded:


Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis as of JuneSeptember 30, 2010 and December 31, 2009

 

 

Fair Value Measurements at
June 30, 2010 Using

 

Total

 

 

 

Level 1

 

Level 2

 

Level 3

 

(Losses)

 

 

 

 

 

 

 

 

 

 

 

Impaired Loans

 

 

 

$

667,864

 

$

(318,610

)

 

 

Fair Value Measurements at
December 31, 2009 Using

 

Total

 

 

 

Level 1

 

Level 2

 

Level 3

 

(Losses)

 

 

 

 

 

 

 

 

 

 

 

Impaired Loans

 

 

 

$

935,284

 

$

(299,427

)


  
Fair Value Measurements at
September 30, 2010 Using
    
  Level 1  Level 2  Level 3  
Total
 (Losses)
 
             
Impaired Loans  -   -  $988,407  $(420,254)
Other Real Estate  -   -   556,501   - 

  
Fair Value Measurements at
December 31, 2009 Using
    
  Level 1  Level 2  Level 3  
Total
 (Losses)
 
             
Impaired Loans  -   -  $935,284  $(299,427)
Other Real Estate  -   -   653,501   (34,644)

17



Table of ContentsItem

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation


This discussion and analysis is intended to assist you in understanding our financial condition and results of operations.  You should read this commentary in conjunction with the financial statements and the related notes and the other statistical information included elsewhere in this report and in our 2009 Form 10-K.


Discussion of Forward-Looking Statements


This reportForm 10-Q contains “forward-looking statements” relatingforward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements are intended to without limitation, future economic performance, plansbe covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995.  Forward-looking statements are not statements of historical fact, and objectivescan be identified by the use of management for future operations, and projections of revenues and other financial items that are based on the beliefs of management,forward-looking terminology such as well as assumptions made by and information currently available to management.  The words“believes,” “expects,” “may,” “will,” “anticipate,“could,” “should,” “would,“projects,“believe,“plans,“contemplate,“goal,“expect,“targets,“estimate,“potential,“continue,“estimates,R 20;pro forma,” “seeks,” “intends,” or “anticipates” or the negative thereof or comparable terminology.  We caution our shareholders and “intend,” as well as other similar wordsreaders not to place undue reliance on such statements.  Our businesses and expressionsoperations are and will be subject to a variety of the future, are intended to identifyrisks, uncertainties and other factors. Consequently, actual results and experience may materially differ from those contained in any forward-looking statements. OurSuch risks, uncertainties and other factors that could cause actual results mayand experience to differ materially from those projected include, but are not limited to, the results discussed in the forward-looking statements, and our operating performance each quarter is subject to various risks and uncertainties that are discussed in detailrisk factors set forth in our filings withAnnual Report on Form 10-K for the Securities and Exchange Commission, including, without limitation:

·significant increases in competitive pressure in the banking and financial services industries;

·changes in interest rates and their effect on the level and composition of deposits, loan demand, and the values of loan collateral, securities and other interest-sensitive assets and liabilities;

·the effects of the current global economic crisis, including, without limitation, the recent and dramatic deterioration of real estate values and credit and liquidity markets,year ended December 31, 2009, as well as the Federal Reserve Board’s actions with respect to interest rates, may lead to a further deterioration in credit quality, thereby requiring increases in our provision for loan losses, or a reduced demand for credit, which would reduce earning assets;

·the U.S. government’s proposed plan to purchase large amounts of illiquid mortgage-backed and other securities from financial institutions may not have the desired impact on the financial markets;

·governmental monetary and fiscal policies, as well as legislative and regulatory changes, including changes in accounting standards and banking, securities and tax laws and regulations and governmental intervention in the U.S. financial system, as well as changes affecting financial institutions’ ability to lend and otherwise do business with consumers;

·the effect of final rules amending Regulation E that prohibit financial institutions from charging consumer fees for paying overdrafts on ATM and one-time debit card transactions, unless the consumer consents or opts-in to the overdraft service for those types of transactions;

·our ability to control costs, expenses, and loan delinquency rates;

·general economic conditions, either nationally or regionally and especially in our primary service area, becoming less favorable than expected resulting in, among other things, a deterioration in credit quality;

·changes occurring in business conditions and inflation;

·changes in technology;

·changes in deposit flow;

·the failure of our 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;

·the anticipated rate of loan growth and the lack of seasoning of our loan portfolio;

·the amount of real estate-based loans, and the weakness in the commercial real estate market;

·the rate of delinquencies and amounts of charge-offs;

·adverse changes in asset quality and resulting credit risk-related losses and expenses;

·loss of consumer confidence and economic disruptions resulting from terrorist activities;

·the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in our market area and elsewhere, including institutions operating regionally, nationally, and internationally, together with such competitors offering banking products and services by mail, telephone, computer and the Internet;

·changes in securities markets; and

·other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission.

following:


our ability to successfully implement our business plan;
our ability to raise capital;
the failure of our 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;
our ability to identify and retain experienced management and other employees;
the strength of our overall credit risk management process;
general economic conditions, either nationally or regionally and especially in our primary service areas, becoming less favorable than expected resulting in, among other things, a deterioration in credit quality;
the effects of the current global economic crisis, including, without limitation, the recent and dramatic deterioration of real estate values and credit and liquidity markets, as well as the Federal Reserve Board’s actions with respect to interest rates, may lead to a further deterioration in credit quality, thereby requiring increases in our provision for loan losses, or a reduced demand for credit, which would reduce earning assets;
governmental monetary and fiscal policies, the impact of the Dodd-Frank Act and related regulations and other changes in financial services laws and regulations, including changes in accounting standards and banking, securities and tax laws and regulations and governmental intervention in the U.S. financial system, as well as changes affecting financial institutions’ ability to lend and otherwise do business with consumers;
the effect of any regulatory or judicial proceedings, board resolutions, informal memorandums of understanding or formal enforcement actions imposed by;
our ability to maintain liquidity or access other sources of funding and control costs, expenses, and loan delinquency rates;
changes in interest rates and their effect on the level and composition of deposits, loan demand, and the values of loan collateral, securities and other interest-sensitive assets and liabilities;
changes occurring in business conditions and inflation;

the anticipated rate of loan growth and the lack of seasoning of our loan portfolio;
the amount of residential and commercial construction and development loans and commercial real estate loans, and the weakness in the residential and commercial real estate markets;
risks with respect to future expansion and acquisitions;
losses due to fraudulent and negligent conduct of our loan customers, third party service providers or employees;
adverse changes in asset quality and resulting credit risk-related losses and expenses;
loss of consumer confidence and economic disruptions resulting from terrorist activities;
the effects of competition from financial institutions and other financial service providers;
changes in the banking system and financial markets; and
other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission.

All forward-looking statements in this report are based on information available to us as of the date of this report.  Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee you that these expectations will be achieved.  We undertake no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events, or otherwise.


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These risks are exacerbated by the recent developments in national and international financial markets, and we are

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unable to predict what effect these uncertain market conditions will have on our Company.  For more than two years, the capital and credit markets have experienced extended volatility and disruption. There can be no assurance that these unprecedented recent developments will not materially and adversely affect our business, financial condition and results of operations.


General


First Century Bancorp (the “Company”) was incorporated in 2000 for the purpose of becoming a bank holding company.  We are subject to extensive federal and state banking laws and regulations, including the Bank Holding Company Act, and the bank holding company laws of Georgia.  We have one bank subsidiary, First Century Bank, National Association (the “Bank”), which opened for business on March 25, 2002.  The Bank is also subject to various federal banking laws and regulations.


The following discussion describes our results of operations for the three and sixnine months ended JuneSeptember 30, 2010 as compared to the same periods in 2009 and also analyzes our financial condition at JuneSeptember 30, 2010 compared to December 31, 2009.  Like most community banks, we derive a significant portion of our income from interest we receive on our loans and investments.  Our primary sources of funds for making these loans and investments are our deposits and borrowings, on which we pay interest.  Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits and borrowings.  Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities.


Of course, there are risks inherent in all loans, so we maintain an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible.  We establish and maintain this allowance by charging a provision for loan losses against our operating earnings.  In the “Provision and Allowance for Loan Losses” section we have included a detailed discussion of this process.


In addition to earning interest on our loans and investments, we earn income through fees and other expenses we charge to our customers.  Specifically, our growing mortgage division is a substantial source of this non-interest income.  We describe the various components of thisour non-interest income, as well as our non-interest expense, in the following discussion.


The following discussion and analysis also identifies significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements.  We encourage you to read this discussion and analysis in conjunction with the financial statements and the related notes and the other statistical information also included herein.


Critical Accounting Policies


We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States and with general practices within the banking industry in the preparation of our financial statements.  Our significant accounting policies are described in the footnotes to our audited consolidated financial statements as of December 31, 2009 included in the Company’s 2009, as filed in our Annual Report on Form 10-K.


Certain accounting policies involve significant judgments and assumptions by us that have a material impact on the carrying value of certain assets and liabilities.  We consider these accounting policies to be critical accounting policies.  The judgment and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances.  Because of the nature of the judgment and assumptions we make, actual results could differ from these judgments and estimates that could have a material impact on the carrying values of our assets and liabilities and our results of operations.


Allowance for Loan Losses


The allowance for loan losses represents management’s best estimate of the losses known and inherent in the loan portfolio that are both probable and reasonable to estimate, based on, among other factors, prior loss experience, volume and type of lending conducted, estimated value of any underlying collateral, economic conditions (particularly as such conditions relate to the Bank’s market area), regulatory guidance, peer statistics, management’s judgment, past due loans in the loan portfolio, loan charge off experience and concentrations of risk.  Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant estimates, assumptions, and judgments.  The loan portfolio also represents the largest asset type on theour consolidated balanceba lance sheets.


19


The evaluation of the adequacy of the allowance for loan losses is based upon loan categories except for delinquentimpaired loans and loans for which management has knowledge about possible credit problems of the borrower or knowledge of problems with loan collateral, which are evaluated separately and assigned loss amounts based upon the evaluation.  Loss ratios

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Estimated losses are applieddetermined by applying risk ratings, and historical loss experience to each category of loan other than commercial loans, where the loans are further divided by risk rating, and loss ratios are applied by risk rating, to determine estimated loss amounts.  Categories of loans are real estate loans (including mortgage and construction), consumer loans, and commercial loans.


Management has significant discretion in making the judgments inherent in the determination of the provision and allowance for loan losses, including in connection with the valuation of collateral and the financial condition of the borrower, and in establishing loss ratios and risk ratings.  The establishment of allowance factors is a continuing exercise and allowance factors may change over time, resulting in an increase or decrease in the amount of the provision or allowance based upon the same volume and classification of loans.


Changes in allowance factors or in management’s interpretation of those factors will have a direct impact on the amount of the provision, and a corresponding effect on income and assets. Also, errors in management’s perception and assessment of the allowance factors could result in the allowance not being adequate to cover losses in the portfolio and may result in additional provisions or charge-offs, which would adversely affect income and capital. For additional information regarding the allowance for loan losses, see the “Provision and Allowance for Loan Losses” section below.

Income Taxes

Accounting for income taxes is another critical accounting policy because it requires significant estimates, assumptions, and judgments. Income taxes are accounted for using the asset and liability method.  Under this method, deferred tax assets or liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  The determination of current and deferred taxes is based on complex analyses of many factors including interpretation of federal and state income tax laws, the difference between tax and financial reporting basis assets and liabilities (temporary differences), estimates of amounts due or owed such as the reversals of temporary differences, and current financial accounting standards.  Actual results could differ significantly from the estimates and interpretations used in determining current and deferred taxes.

Our ability to realize a deferred tax benefit as a result of net operating losses will depend upon whether we have sufficient taxable income of an appropriate character in the carry-forward periods.  We then establish a valuation allowance to reduce the deferred tax asset to the level that it is “more likely than not” that we will realize the tax benefit.


Recent Legislative and Regulatory Initiatives to Address Financial and Economic Crisis


Markets in the United States and elsewhere have been experienced extreme volatility and disruption for more than 24 months.2 years.  These circumstances have exerted significant downward pressure on prices of equity securities and virtually all other asset classes, and have resulted in substantially increased market volatility, severely constrained credit and capital markets, particularly for financial institutions, and an overall loss of investor confidence.  Loan portfolio performances haveCredit quality has deteriorated at many institutions resulting from, among other factors, a weak economy and a decline in the value of the collateral supporting their loans.  Dramatic slowdowns in the housing industry, due in part to falling home prices and increasing foreclosures and unemployment, have negatively affected the performance of residential const ruction and development loans and created other strains on financial institutions.  The economic recession has also lowered commercial and residential real estate values and substantially reduced general business activity and investment.  Many borrowers are now unable to repay their loans, and the collateral securing these loans has, in some cases, declined below the loan balance.  In response to the challenges facing the financial services sector, several regulatory and governmental actions have recently been announced including:


·The Emergency Economic Stabilization Act, approved by Congress and signed by President Bush on October 3, 2008, which, among other provisions, allowed the U.S. Treasury to purchase troubled assets from banks, authorized the SEC to suspend the application of marked-to-market accounting, and raised the basic limit of FDIC deposit insurance from $100,000 to $250,000 through December 31, 2013.

·On October 7, 2008, the FDIC approved a plan to increase the rates banks pay for deposit insurance.

·On October 14, 2008, the U.S. Treasury announced the creation of a new program, the Capital Purchase Program, that encourages and allowsLike many financial institutions to build capital through the sale of senior preferred shares to the U.S. Treasury on terms that are non-negotiable.

·On October 14, 2008, the FDIC announced the creation of the Temporary Liquidity Guarantee Program (“TLGP”), which seeks to strengthen confidence and encourage liquidity in the banking system.  The TLGP has two primary components that are available on a voluntary basis to financial institutions:

·Guarantee of newly-issued senior unsecured debt; the guarantee would apply to new debt issued on

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or before October 31, 2009 and would provide protection until December 31, 2012; issuers electing to participate would pay a 75 basis point fee for the guarantee; and

·Unlimited deposit insurance for non-interest bearing deposit transaction accounts; financial institutions electing to participate will pay a 10 basis point premium in addition to the insurance premiums paid for standard deposit insurance.

·On February 10, 2009, the U.S. Treasury announced the Financial Stability Plan, which earmarked $350 billion of the TARP funds authorized under EESA. Among other things, the Financial Stability Plan includes:

·A capital assistance program that will invest in mandatory convertible preferred stock of certain qualifying institutions determined on a basis and through a process similar to the Capital Purchase Program;

·A consumer and business lending initiative to fund new consumer loans, small business loans and commercial mortgage asset-backed securities issuances;

·A new public-private investment fund that will leverage public and private capital with public financing to purchase up to $500 billion to $1 trillion of legacy “toxic assets” from financial institutions; and

·Assistance for homeowners by providing up to $75 billion to reduce mortgage payments and interest rates and establishing loan modification guidelines for government and private programs.

·On February 17, 2009, the American Recovery and Reinvestment Act (the “Recovery Act”) was signed into law in an effort to, among other things, create jobs and stimulate growth inacross the United States, economy.  The Recovery Act specifies appropriations of approximately $787 billion for a wide range of Federal programs and will increase or extend certain benefits payable underour operations have been negatively affected by this current economic crisis.   Combined, the Medicaid, unemployment compensation, and nutrition assistance programs.  The Recovery Act also reduces individual and corporate income tax collections and makes a variety of other changes to tax laws.  The Recovery Act also imposes certain limitations on compensation paid by participantsdeterioration in the U.S. Treasury’s Troubled Asset Relief Program (“TARP”).

·On March 23, 2009, the U.S. Treasury, in conjunction with the FDICresidential and the Federal Reserve, announcedcommercial real estate markets has materially increased our level of nonperforming assets and charge-offs of problem loans over the Public-Private Partnership Investment Program for Legacy Assets which consists ofpast two separate plans, addressing two distinct asset groups:

·The first plan is the Legacy Loan Program, which has a primary purpose to facilitate the sale of troubled mortgage loans by eligible institutions, including FDIC-insured federal or state banks and savings associations.  Eligible assets are not strictly limited to loans; however, what constitutes an eligible asset will be determined by participating banks, their primary regulators, the FDICyears.   These market conditions and the Treasury.

·The second plan is the Securities Program, which is administered by the Treasurytightening of credit have led to increased delinquencies in our loan portfolio, increased market volatility, and involves the creation of public-private investment funds to target investments in eligible residential mortgage-backed securitiesincreased pressure on our capital and commercial mortgage-backed securities issued before 2009 that originally were rated AAA or the equivalent by two or more nationally recognized statistical rating organizations, without regard to rating enhancements (collectively, “Legacy Securities”).  Legacy Securities must be directly secured by actual mortgage loans, leases or other assets, and may be purchased only from financial institutions that meet TARP eligibility requirements.  Treasury received over 100 unique applications to participate in the Legacy Securities PPIP and in July 2009 selected nine public-private investment fund managers.  As of December 31, 2009, public-private investment funds have completed initial and subsequent closings on approximately $6.2 billion of private sector equity capital, which was matched 100% by Treasury, representing $12.4 billion of total equity capital.  Treasury has also provided $12.4 billion of debt capital, representing $24.8 billion of total purchasing power. As of December 31, 2009, public-private investment funds have drawn-down approximately $4.3 billion of total capital which has been invested in certain non-agency residential mortgage backed securities and commercial mortgage backed securities and cash equivalents pending investment.

net-interest margin.  ·On May 22, 2009, the FDIC levied a one-time special assessment on all banks due on September 30, 2009.

·On November 12, 2009, the FDIC issued a final rule to require banks to prepay their estimated quarterly risk-

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based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012 and to increase assessment rates effective on January 1, 2011.

·On February 2, 2010, the U.S. President called on the U.S. Congress to create a new Small Business Lending Fund.  Under this proposal, $30 billion in TARP funds would be transferred to a new program outside of TARP to support small business lending.  As proposed, only small- and medium-sized banks would qualify to participate in the program.

·On July 21, 2010, the U.S. President signed into a law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, a comprehensive regulatory framework that will affect every financial institution in the U.S.  U.S. financial regulators will begin the rulemaking process over the next 6 to 18 months which will set the parameters of the new regulatory framework and provide a clearer understanding of the legislation’s effect on banks.

We are participating in the unlimited deposit insurance component of the TLGP; however, we did not issue unsecured debt before the termination of that component of the TLGP.  On April 13, 2010, the FDIC approved an interim rule that extends the Transaction Account Guarantee Program to December 31, 2010.  We have elected to continue our voluntary participation in the program.  Coverage under the program is in addition to and separate from the basic coverage available under the FDIC’s general deposit insurance rules.  We believe participation in the program is enhancing our ability to retain customer deposits.  As a result of the enhancements to deposit insurance protection and the expectation that there will be demands on the FDIC’s deposit insurance fund, our deposit insurance costs increased significantly.  We have elected not to participate in the TARP Capital Purchase Program, but will consider participating in similar programs, if any, announced in the future.

It is likely that further regulatory actions may arise as the Federal government continues to attempt to address the economic situation.  Governmental intervention and new regulations under these programs could materially and adversely affect our business, financial condition and results of operations.  The following discussion and analysis describes our performance in this challenging economic environment.  We encourage you to read this discussion and analysis in conjunction with our financial statements and the other statisticalst atistical information included in this report.


Results of Operations


Three and SixNine Months Ended JuneSeptember 30, 2010 and 2009


Net income for the secondthird quarter of 2010 was $58,676$351,000 as compared to net incomeloss of $251,854$150,000 for the same period in 2009.  Net income for the sixnine months ended JuneSeptember 30, 2010 was $140,945$492,000 as compared to a net income of $228,419$79,000 for the same period in 2009.  Our operational results depend to a large degree on threeseveral components: net interest income, provision for loan losses, income from mortgage banking activities, and non-interest income and expenses.


There are several factors, described in the discussion below, which have contributed towards reducedincreased earnings in 2010 as compared to the same period in 2009.  The Bank had previously purchased high yield securities which produced significant interest income in 2009.  The principal balances have paid down since the first halfprimary driver of 2009 resulting in less volume of interest income.  In addition to the reduction of securities, the Bank increased its provision for loan losses within the same time period.   The Bank has also established and changed its allocation of resources from expanding its banking office network to investing inearnings is the expansion of itsthe Bank’s mortgage division.  The expansion and corresponding integration of the mortgage division into the Bank has resulted in an increase in non-interest income as well aspartially offset by an increase in non-interest expense.

expense for the nine month period ended September 30, 2010 over the same period in 2009.


20


Net Interest Income


Net interest income is the difference between the interest income received on earning assets (such as loans, investment securities, and federal funds sold) and the interest expense on deposit liabilities and borrowings.  For the three months ended JuneSeptember 30, 2010 and 2009, net interest income totaled $743,000$763,000 and $866,000,$823,000, respectively.  For the sixnine months ended JuneSeptember 30, 2010 and 2009, net interest income totaled $1,615,000$2,378,000 and $1,505,000,$2,327,000, respectively.  Interest income from loans, including fees, was $559,000$647,000 and $590,000$571,000 for the three months ended JuneSeptember 30, 2010 and 2009, respectively.  Interest income from loans, including fees, was $1,203,000$1,849,000 and $1,166,000$1,737,000 for the sixnine months ended JuneSeptember 30, 2010 and 2009, respectively.  The loan yield increased to 5.84%6.04% during the sixth e nine months ended JuneSeptember 30, 2010, compared to the 5.69%5.74% loan yield earned during the same period in 2009.  Interest income from investment securities was $464,000$373,000 and $738,000$635,000 for the three months ended JuneSeptember 30, 2010 and 2009, respectively. Interest income from investment securities was $996,000$1,369,000 and $1,302,000$1,937,000 for the sixnine months ended JuneSeptember 30, 2010 and 2009, respectively. The Bank had previously purchased high yield securities which produced significant interest income in 2009.  The principal balances have been paid down since the first half of 2009 resulting in less volume of interest income, which was the primary reason for the quarterly and nine-month year-over-year declines in interest income from investment securities.  In addition, the investment yield increaseddecreased slightly to 9.20%9.13% during the sixnine months ended JuneSeptember 30, 2010, compared to the 9.03%9.14% yield earned during the same period in 2009.

Interest expense totaled $282,000$260,000 for the three months ended JuneSeptember 30, 2010, compared to $463,000$383,000 for the same period in 2009.  Interest expense totaled $588,000$848,000 for the sixnine months ended JuneSeptember 30, 2010, compared to $964,000$1,347,000 for the same period in 2009.  OurThe primary reason for the decline in our interest expense is that our cost of funds decreased to 1.90%1.83% during the sixnine months ended JuneSeptember 30, 2010, compared to the 2.99%2.81% during the same period in 2009, as we were able to reduce higher cost time deposits with lower cost core deposits.

The net interest margin we realized on our earning assets climbed to 4.75% for the nine months ended September 30, 2010 from 4.55% for the same period in 2009.

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The Bank’s ability to maintain a high net interest margin and recent growth in net interest margin has been supported by the dual strategy of increasing lower cost wholesale funding in the short-term to allow time for a build up of low cost core funding to be developed over the longer-term. Since JuneSeptember 30, 2009, core deposits have grown approximately $11.8$10.4 million, or 89%73%. The Bank has been successful implementing this strategy resulting in an increase in net interest margin of 0.41%0.20%. The net interest margin realized on earning assets was 4.83% for the six months ended June 30, 2010, as compared to 4.42% for the same period in 2009.

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Average Balances and Interest Rates


The table below details the average balances outstanding for each category of interest earning assets and interest-bearing liabilities for the sixnine months ended JuneSeptember 30, 2010 and 2009 and the average rate of interest earned or paid thereon.  Average balances have been derived from the daily balances throughout the period indicated.

 

 

For the Six Months Ended
June 30, 2010

 

For the Six Months Ended
June 30, 2009

 

 

 

(Amounts presented in thousands)

 

 

 

Average

 

 

 

Yield/

 

Average

 

 

 

Yield/

 

 

 

Balance

 

Interest

 

Rate

 

Balance

 

Interest

 

Rate

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (including loan fees)

 

$

41,533

 

$

1,203

 

5.84

%

$

39,279

 

$

1,166

 

5.69

%

Investment securities and other investments

 

21,839

 

996

 

9.20

%

29,085

 

1,302

 

9.03

%

Interest bearing deposits

 

4,102

 

4

 

0.22

%

92

 

 

0.11

%

Federal funds sold

 

 

 

%

260

 

 

0.13

%

Total interest earning assets

 

67,474

 

2,203

 

6.58

%

68,716

 

2,468

 

7.24

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other non-interest earnings assets

 

3,271

 

 

 

 

 

4,487

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

70,745

 

 

 

 

 

$

73,203

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand

 

$

7,060

 

$

21

 

0.61

%

$

1,045

 

$

5

 

1.03

%

Savings and money market

 

13,026

 

115

 

1.78

%

7,791

 

90

 

2.32

%

Time

 

40,211

 

426

 

2.14

%

50,683

 

835

 

3.32

%

Federal funds purchased

 

 

 

%

81

 

 

0.97

%

Borrowings

 

2,200

 

26

 

2.34

%

5,441

 

33

 

1.22

%

Total interest-bearing liabilities

 

62,497

 

588

 

1.90

%

65,041

 

963

 

2.99

%

Other non-interest bearing liabilities

 

3,629

 

 

 

 

 

4,271

 

 

 

 

 

Shareholders’ equity

 

4,619

 

 

 

 

 

3,891

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

70,745

 

 

 

 

 

$

73,203

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Excess of interest-earning assets over interest-bearing liabilities

 

$

4,977

 

 

 

 

 

$

3,675

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ratio of interest-earning assets to interest-bearing liabilities

 

108

%

 

 

 

 

106

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

$

1,615

 

 

 

 

 

$

1,505

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest spread

 

 

 

 

 

4.68

%

 

 

 

 

4.25

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin

 

 

 

 

 

4.83

%

 

 

 

 

4.42

%

  
For the Nine Months Ended
September 30, 2010
 
For the Nine Months Ended
September 30, 2009
 
  (Amounts presented in thousands) 
                    
  Average     Yield/   Average     Yield/ 
  Balance  Interest  Rate   Balance  Interest  Rate 
Assets:                   
Interest earning assets:                   
Loans (including loan fees) $34,893  $1,576   6.04%  $36,811  $1,581   5.74%
Loans held for sale  8,328   273   4.39%   2,433   156   8.57%
Investment securities and other investments  20,047   1,369   9.13%   28,322   1,937   9.14%
Interest bearing deposits  3,798   8   0.28%   888   -   0.15%
Total interest earning assets  67,065   3,226   6.43%   68,454   3,674   7.18%
                          
Other non-interest earnings assets  3,484            4,010         
                          
Total assets $70,549           $72,464         
                          
Liabilities and shareholders’ equity:                         
Interest-bearing liabilities:                         
Deposits:                         
Interest-bearing demand $6,572  $27   0.55%  $1,059  $8   0.98%
Savings and money market  13,924   186   1.79%   8,470   138   2.18%
Time  38,718   595   2.05%   49,585   1,152   3.11%
Borrowings  2,616   40   2.05%   4,992   49   1.31%
Total interest-bearing liabilities  61,830   848   1.83%   64,106   1,347   2.81%
Other non-interest bearing liabilities
  3,693            4,184         
Shareholders’ equity  5,026            4,174         
                          
Total liabilities and shareholders’ equity
 $70,549           $72,464         
                          
Excess of interest-earning assets over interest-bearing liabilities $5,235           $4,348         
                          
Ratio of interest-earning assets to interest-bearing liabilities  108%           107%        
                          
Net interest income     $2,378           $2,327     
                          
Net interest spread          4.60%           4.38%
                          
Net interest margin          4.74%           4.55%
Non-accrual loans are excluded from average loan balances and totaled $282,000$495,000 and $834,000$650,000 for the sixnine months ended JuneSeptember 30, 2010 and 2009, respectively.


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Non-interest Income and Expense


We look for business opportunities that will enable us to grow and increase our value for all itsof our stakeholders.  Regulatory changes have been a major factor in the remaking of the mortgage delivery system. Some of the changes that are working to channel more of the mortgage business to banks are:

FHA has discontinued the correspondent designation in favor of full delegation authority along with an increase in the net worth to $2,500,000 from $25,000.00.
Licensing laws have been strengthened creating an elevated threshold that brokers cannot afford to meet.
Increased disclosure requirements have encouraged movement to the more regulated banking structure.
Wholesale lenders have moved away from the broker community.
Losses in the third party origination market have caused conduits to require increased net worth and accountability standards.
Due to thethese regulatory changes in the mortgage industry, the Bank expanded its mortgage operations to take advantage of the new benefitsopportunities that now exist when partnering a bank with a mortgage operation.  During the second quarter 2010, the Bank added a new retail mortgage call center in Norcross, Georgia.  Our mortgage division was previously comprised of the Gainesville mortgage location, thea retail production / production/operations hub located in Roswell, Georgia, and thean online Mortgage division,

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mortgage business, Century Point Mortgage. It isRetail sales personnel have been added in the Gainesville and Roswell, Georgia locations to expand presence. Century Point Mortgage has been streamlined to enhance profitability and to allow for sustained growth. We anticipate that the partnership of the banking and mortgage worlds which we anticipate will drive higher earningsearnin gs and greater shareholder value for the Bank in the upcoming year.  Revenues from the mortgage divisionsdivision are primarily non-interest income of fees, and gains on salesales of the loans.  Interest income is earned on the loans from the time they are closed to the time they are sold, which is typically two weeks.  Expenses are primarily salaries and commissions, occupancy, and loan origination expenses such as appraisals.


Non-interest income includes service charges on deposit accounts, customer service fees, mortgage origination feebanking income and investment security gains (losses).  For the quarter ended JuneSeptember 30, 2010, non-interest income grew to $1,189,000$1,531,000 from $655,000$355,000 for the quarter ended JuneSeptember 30, 2009, an increase of $534,000,$1,176,000, or 82%331%.  For the sixnine months ended JuneSeptember 30, 2010 non-interest income grew to $2,138,000$3,669,000 from $1,003,000$1,358,000 for the sixnine months ended JuneSeptember 30, 2009, an increase of $1,135,000,$2,311,000, or 113%170%.  The increase in non-interest income was primarily due to an increase in fees earned on mortgage originations, due to the growth of the mortgage divisions.division.  The fees earned are related to the origination of mortgage loans that are sold within 30 days, which investors have committed to purchase beforebe fore they are funded.  The Bank funded $81.1$142.0 million in mortgage loans during the first half ofnine month period ended September 30, 2010, an increase of $10.8$55.7 million, or 15%65%, from the same period a year ago.   NetThere were no securities sales during the third quarter of 2010 and 2009 so net gains (losses) on sales of securities were $112,000 and $(37,000) for the three months ended June 30, 2010 and 2009, respectively. Net gains (losses) on sales of securities wereremained unchanged at $146,000 and $(37,000) for the sixnine months ended JuneSeptember 30, 2010 and 2009, respectively.


With increased resources being directed towards the business areas providing the highest return on investment, management reviewed all the other areas of resource allocation.  As a part of this process, management decided to close the loan production offices in Oakwood and Athens, Georgia in the first quarter of 2010.  The office closures resulted in the reduction of seven lending and administrative or support personnel beginning in the fourth quarter of 2009 through the second quarter of 2010.  The Bank will continue to service its customers out of the Gainesville, Georgia headquarters and will continue to utilize technology to enable its customers to access many of the Bank’s services remotely.


Total non-interest expense for the quarter ended JuneSeptember 30, 2010 was $1,638,000$1,815,000 compared to $1,198,000$1,191,000 for the quarter ended JuneSeptember 30, 2009, an increase of $440,000,$624,000, or 37%52%.  For the sixnine months ended JuneSeptember 30, 2010, non-interest expense was $3,302,000$5,117,000 as compared to $2,209,000$3,401,000 for the sixnine months ended JuneSeptember 30, 2009, an increase of $1,093,000,$1,716,000, or 49%50%.


Salaries and benefits, the largest component of non-interest expense, were $908,000$1,046,000 for the quarter ended JuneSeptember 30, 2010, as compared to $605,000$522,000 for the quarter ended JuneSeptember 30, 2009, an increase of $303,000,$524,000, or 50%100%.  Salaries and benefits, for the sixnine months ended JuneSeptember 30, 2010 were $1,830,000,$2,877,000, as compared to $1,096,000$1,618,000 for the sixnine months ended JuneSeptember 30, 2009, an increase of $734,000,$1,259,000, or 67%78%.  The increase in salaries and benefits is primarily attributable to the growth in the mortgage divisionsdivision in which salaries and benefits increased $901,000.$1,720,000 for the nine month period ended September 30, 2010 compared to the same period in 2009.  This increase was offset by the reduction in staff and a decrease of $167,000$461,000 in salaries and benefits during the first halfnine months of 2010 due to the closures of the Oakwood and Athens, Georgia offices.  We have added 4140 full time equivalent employees since June 30,mid 2009.


Total occupancy and equipment expenses for the quarter ended JuneSeptember 30, 2010, were $107,000 as compared to $105,000$95,000 for the quarter ended JuneSeptember 30, 2009, an increase of $2,000,$12,000, or 2%13%. Total occupancy and equipment expenses for the sixnine months ended JuneSeptember 30, 2010, were $239,000$346,000 as compared to $214,000$310,000 for the sixnine months ended JuneSeptember 30, 2009, an increase of $25,000,$36,000, or 11%12%.   Occupancy expenses attributable to the mortgage divisionsdivision increased $80,000$117,000 for the first nine months of 2010 compared to the same period in 2009, while Bank expenseexpenses decreased by $55,000 as a result$81,000 due to the closures of management’s cost cutting initiatives,the Oakwood and office closures.

Athens offices that occurred in the first nine months of 2010.


23


Professional fees were $99,000 for the quarter ended JuneSeptember 30, 2010, compared to $85,000$70,000 for the quarter ended JuneSeptember 30, 2009, an increase of $29,000, or 41%.  For the nine months ended September 30, 2010 professional fees were $278,000 compared to $207,000 for the nine months ended September 30, 2009, an increase of $14,000,$71,000, or 17%.  For the six months ended June 30, 2010 professional fees were $179,000 compared to $137,000 for the six months ended June 30, 2009, an increase of $42,000, or 30%34%.  The increase in professional fees is attributable to management consulting fees for the mortgage division, increased compliance and quality control reviews, and audit fees.


Marketing expenses for the quarter ended JuneSeptember 30, 2010, were $62,000$60,000 compared to $52,000$77,000 for the quarter ended JuneSeptember 30, 2009, an increasea decrease of $10,000,$17,000, or 19%22%.  Marketing expenses for the sixnine months ended JuneSeptember 30, 2010, were $113,000$174,000 compared to $108,000$185,000 for the sixnine months ended JuneSeptember 30, 2009, an increasea decrease of $5,000,$11,000, or 5%6%.  For the first halfnine months of 2010 Bank marketing expenses decreased approximately $17,000$26,000 over the same period in 2009, which was attributable to the discontinuance of a multimedia marketing campaign that included billboards and various other media advertisements targeted at the Gainesville, Oakwood and Athens, Georgia markets.  The Century Point Mortgage division has heavily invested in internet advertising and increasedbut decreased marketing expense infor the first half ofnine months o f 2010 by approximately $7,000$22,000 over the same period in 2009.  As2009 due to a national, internet-based lender, the Century Point Mortgage division’s business model depends on lead generation to drive a highlarge increase in volume of leads with a lower cost of customer acquisition than traditional mortgage lenders.  Key elements of the division’s web-based demand generation program are advertising on mortgage rate websites, paid search advertising, search engines optimizations and social media tools.refinance activity.  As the division is maturing, the marketing budget is being analyzed and directed to the most successful techniques. For the first halfnine months of 2010 the retail mortgage divisionsdivision increased marketing expense by $16,000$37,000 over the same period in 2009.


Data processing expense for the quarter ended JuneSeptember 30, 2010, werewas $173,000, compared to $128,000$140,000 for the quarter

25



Table of Contents

ended JuneSeptember 30, 2009, an increase of $45,000,$33,000, or 35%24%.  Data processing expense for the sixnine months ended JuneSeptember 30, 2010, were $341,000,was $514,000, compared to $247,000$387,000 for the sixnine months ended JuneSeptember 30, 2009, an increase of $94,000,$127,000, or 38%33%.  Fees for core data processing were $120,000$186,000 and $87,000$129,000 for the sixnine month periods ended JuneSeptember 30, 2010 and 2009, respectively.  Fees paid for management and advisory services under thea master services agreement with First Covenant Bank were $166,000$242,000 and $91,000$148,000 for the sixnine month periods ended JuneSeptember 30, 2010 and 2009, respectively,  The fees for core processing have a base component which is adjusted quarterly based on asset size andan d a variable component based on transactional activity.  Management and advisory services are adjusted quarterly based on asset size.  Additional services were retained for the mortgage division in the second half of 2009.

Telephone


Telecommunication expense, postage and delivery services, and office supply expenses for the quarter ended JuneSeptember 30, 2010 totaled $49,000$46,000 compared to $25,000$28,000 for the quarter ended JuneSeptember 30, 2009, an increase of $24,000,$18,000, or 97%64%.  TelephoneTelecommunication expense, postage and delivery services, and office supply expenses for the sixnine months ended JuneSeptember 30, 2010 totaled $101,000$147,000 compared to $48,000$74,000 for the sixnine months ended JuneSeptember 30, 2009, an increase of $53,000,$73,000, or 111%99%.  The increase is primarily attributable to the growth in the mortgage divisions.

division.


Insurance, taxes, and regulatory assessment expenses totaled $99,000$83,000 for the quarter ended JuneSeptember 30, 2010 compared to $46,000$96,000 for the quarter ended JuneSeptember 30, 2009, an increasea decrease of $53,000,$13,000, or 115%14%.  Insurance, taxes, and regulatory assessment expenses totaled $170,000$254,000 for the sixnine months ended JuneSeptember 30, 2010 compared to $92,000$189,000 for the sixnine months ended JuneSeptember 30, 2009, an increase of $78,000,$65,000, or 84%34%.  The Bank’s insurance expense increased $41,000$35,000 due to an increase in directors’ and officers’ liability insurance premiums upon renewal in JuneSeptember 2009.   FDIC insurance assessments increased $21,000$5,000 for 2010 over 2009. OCC supervision assessment increased $13,000$19,000 for 2010 over 2009.


Lending related expenses were $102,000$160,000 for the quarter ended JuneSeptember 30, 2010 compared to $103,000$62,000 for the quarter ended JuneSeptember 30, 2009, a decreasean increase of $1,000,$98,000, or 1%158%.  Lending related expenses were $264,000$424,000 for the sixnine months ended JuneSeptember 30, 2010 compared to $186,000$248,000 for the sixnine months ended JuneSeptember 30, 2009, an increase of $78,000,$176,000, or 42%71%.  The increase is primarily related to appraisal and other loan origination expenses generated by the mortgage divisions.division.  As production fluctuates, so do these types of variable expenses.


Other non-interest expenses were $39,000$40,000 for the quarter ended JuneSeptember 30, 2010 compared to $49,000$103,000 for the quarter ended JuneSeptember 30, 2009, a decrease of $10,000,$63,000, or 20%61%. Other non-interest expenses were $63,000$103,000 for the sixnine months ended JuneSeptember 30, 2010 compared to $80,000$183,000 for the sixnine months ended JuneSeptember 30, 2009, a decrease of $17,000,$80,000, or 21%44%.  The decrease was primarily due to changes being made to software licenses in the mortgage division.

26


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Table of Contents

The following table shows the components of non-interest expense incurred for sixnine months ended JuneSeptember 30, 2010 and 2009 and changes attributable to the growth of the Company:

 

 

2010

 

2009

 

Increase /
(Decrease)

 

Main Office
Bank &
Parent

 

Century
Point
Mortgage
Division

 

Gainesville
Retail
Mortgage
Division

 

Roswell
Retail
Mortgage
Division

 

Norcross
Retail Call
Center
Mortgage
Division

 

Salaries and employee benefits

 

$

1,830,063

 

$

1,095,889

 

$

734,174

 

$

(167,377

)

$

(187,681

)

$

314,980

 

$

766,399

 

$

7,853

 

Occupancy expenses

 

238,930

 

214,475

 

24,455

 

(55,397

)

13,409

 

239

 

66,204

 

 

Professional fees

 

179,026

 

137,371

 

41,655

 

40,862

 

(17,593

)

11,681

 

6,705

 

 

Marketing

 

113,333

 

108,073

 

5,260

 

(17,196

)

6,817

 

906

 

9,446

 

5,287

 

Data Processing

 

341,052

 

247,302

 

93,750

 

58,993

 

76,326

 

13,380

 

(58,399

)

3,450

 

Telephone

 

45,810

 

24,517

 

21,293

 

7,723

 

2,982

 

343

 

10,245

 

 

Postage and Delivery Services

 

39,291

 

11,552

 

27,739

 

4,676

 

5,324

 

1,348

 

16,391

 

 

Insurance, Tax, and Assessment

 

170,478

 

92,448

 

78,030

 

78,004

 

26

 

 

 

 

Office Supplies

 

15,881

 

11,611

 

4,270

 

(2,061

)

(1,289

)

839

 

6,781

 

 

Lending Related Expense

 

264,603

 

186,262

 

78,341

 

26,189

 

(76,958

)

16,879

 

112,231

 

 

Other Non-Interest Expense

 

63,311

 

79,894

 

(16,583

)

17,225

 

(43,465

)

1,508

 

8,149

 

 

Total Non-Interest Expense

 

$

3,301,778

 

$

2,209,394

 

$

1,092,384

 

$

(8,359

)

$

(222,102

)

$

362,103

 

$

944,152

 

$

16,590

 


  2010  2009  
Increase / (Decrease)
  
Main Office Bank & Parent
  
Century Point Mortgage Division
  
Gainesville Retail Mortgage Division
  
Roswell Retail Mortgage Division
  
Norcross Retail Call Center Mortgage Division
 
Salaries and employee benefits $2,876,554  $1,618,167  $1,258,387  $(461,410) $(221,279) $412,703  $1,457,438  $70,935 
Occupancy expenses  346,160   309,624   36,536   (80,739)  17,127   309   96,174   3,665 
Professional fees  277,749   207,323   70,426   40,072   9,717   6,605   10,522   3,510 
Marketing  173,714   185,072   (11,358)  (26,459)  (22,251)  847   10,453   26,052 
 
Data Processing
  514,316   387,464   126,852   65,533   150,728   23,590   (134,360)  21,361 
Telecommunication  66,355   37,684   28,671   7,700   3,759   544   16,581   87 
Postage and Delivery Services  56,297   18,662   37,635   3,504   4,337   792   28,935   67 
Insurance, Tax, and Assessment  253,517   188,608   64,909   65,046   (137)  -   -   - 
Office Supplies  24,586   17,347   7,239   (3,214)  (874)  603   10,479   245 
Lending Related Expense  424,263   247,894   176,369   14,985   (66,248)  11,098   199,142   17,392 
Other Non-Interest   Expense  103,228   182,822   (79,594)  (42,230)  (55,270)  2,463   14,087   1,356 
Total Non-Interest  Expense $5,116,739  $3,400,667  $1,716,072  $(417,212) $(180,391) $459,554  $1,709,451  $144,670 

Interest Rate Sensitivity and Asset Liability Management


Interest rate sensitivity measures the timing and magnitude of the repricing of assets compared with the repricing of liabilities and is an important part of asset/liability management of a financial institution.  The objective of interest rate sensitivity management is to generate stable growth in net interest income, and to control the risks associated with interest rate movements.  Management constantly reviews interest rate risk exposure and the expected interest rate environment so that adjustments in interest rate sensitivity can be timely made.  Since the assets and liabilities of a bank are primarily monetary in nature (payable in fixed, determinable amounts), the performance of a bank is affected more by changes in interest rates than by inflation.  Interest rates generally increase as the rate of inflation increases, but the magnitude of the change in rates may not be the same.


Net interest income is the primary component of net income for financial institutions.  Net interest income is affected by the timing and magnitude of repricing of as well as the mix of interest sensitive and non-interest sensitive assets and liabilities.  “Gap”One method to measure interest rate sensitivity is through a static measurement of the difference between the contractual maturitiesrepricing gap.  The gap is calculated by taking all assets that reprice or mature within a given time frame and subtracting all liabilities that reprice or mature during that time frame.  A negative gap (more liabilities repricing dates of interest sensitive assets and interest sensitive liabilities within the following twelve months.  Gap is an attempt to predict the behavior ofthan assets) generally indicates that the Bank’s net interest income in general terms during periods of movement in interest rates.  In general,will decrease if the Bank is liability sensitive, more of its interest sensitive liabilities are expected to reprice within twelve months than its interest sensitive assets over the same period.  In a rising interest rate environment, liabilities repricing more quickly is expected to decrease net interest income.  Alternatively, decreasing interest rates would be expected to haverise and will increase if interest rates fall.  A positive gap generally indicates that the opposite effect onBank’s net interest income since liabilities would theoretically be repricing at lower interestwill decrease i f rates more quickly than interest sensitive assets.fall and will increase if rates rise. Although it can be used as a general predictor, Gapgap analysis as a predictor of movements in net interest income has limitations due to the static nature of its definition and due to its inherent assumption that all assets will reprice immediately and fully at the contractually designated time.  At JuneSeptember 30, 2010, the Bank, as measured by Gap,such gap analysis, is in a liability sensitive position within one year.  Management has several tools available to it to evaluate and affect interest rate risk, including deposit pricing policies and changes in the mix of various types of assets and liabilities.


We also measure the actual effects that repricing opportunities have on earnings through simulation modeling, referred to as earnings at risk.  For short-term interest rate risk, the Bank’s model simulates the impact of balance sheet strategies on net interest income, pre-tax income, and net income.  The model includes interest rate simulations to test the impact of rising and falling interest rates on projected earnings.  The Bank determinesThis information is used to monitor interest rate exposure risk relative to anticipated interest rate trends.  Our most recent data shows that the Bank’s net interest income would  decrease $33,000 on an annual basis if rates increased 100 basis points, and would increase $47,000 on an annual basis if rates decreased 100 basis points.

25


Certain shortcomings are inherent in the method of analysis presented in the foregoing paragraphs.  For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees or at different points in time to changes in market interest rates.  Additionally, certain assets, such as adjustable-rate mortgages, have features that restrict changes in interest rates, both on a short-term basis and over the life of the asset.  Changes in interest rates, prepayment rates, early withdrawal levels and the ability of borrowers to service their debt, among other factors, may change significantly from the assumptions that are usedmade above.  In addition, significant rate decreases would not likely be reflected in liability repricing and therefore would m ake the Bank more sensitive in a falling rate environment.  Management has several tools available to it to evaluate and affect interest rate risk, including deposit pricing policies and changes in the model.

27



Tablemix of Contents

various types of assets and liabilities.


Provision and Allowance for Loan Losses


There are risks inherent in making all loans, including risks with respect to the period of time over which loans may be repaid, risks resulting from changes in economic and industry conditions, risks inherent in dealing with individual borrowers, and, in the case of a collateralized loan,loans, risks resulting from uncertainties about the future value of the collateral.  We anticipate maintaining an allowance for loan losses basedlossesbased on, among other things, historical experience, an evaluation of economic conditions, and regular reviews of delinquencies and loan portfolio quality.  Our judgment about the adequacy of the allowance is based upon a number of assumptions about future events, which we believe to be reasonable, but which may not prove to be accurate.�� The downturn in the real estate market has resulted in an increase in loan delinquencies, defaults and foreclosures,for eclosures, and we believe these trends are likely to continue.  In some cases, this downturn has resulted in a significant impairment to the value of our collateral and our ability to sell the collateral upon foreclosure, and there is a risk that this trend will continue.  The real estate collateral in each case provides alternate sources of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended.  If real estate values continue to decline, it is also more likely that we would be required to increase our allowance for loan losses.  Thus, there is a risk that charge-offs in future periods could exceed the allowance for loan losses or that substantial additional increases in the allowance for loan losses could be required.  Additions to the allowance for loan losses would result in a decrease ofto our net income and capital.


The allowance for loan loss was $545,000 (1.63%$645,000 (1.88% of total gross loans) at JuneSeptember 30, 2010, compared to $415,000 (1.13% of total gross loans) at December 31, 2009.  DuringThe increase in the second quarter 2010 a new appraisal was obtained on an impairedallowance for loan that resulted in partial charge-offlosses and the related provisions for loan losses are directly related to the increased volume of $179,859.net loan charge-offs and increased levels of nonaccrual loans.   Management considers the current allowance for loan losses to be adequate to sustain any estimated or potential losses.  Our loan loss methodology incorporates any anticipated write-downs and charge-offs in all problem loans identified by management, and credit review examinations conducted by regulatory authorities and by third-party review services.  We believe our efforts to identify and reduce criticized and classified loans have resulted in an improvement in the overall credit quality of the Bank’s loan portfolio.


The allocation of the allowance for loan losses by loan category at the date indicated is presented below (dollar amounts are presented in thousands):

 

 

June 30, 2010

 

December 31, 2009

 

 

 

Amount

 

Percent of loans in
each category to total
loans

 

Amount

 

Percent of loans in
each category to
total loans

 

 

 

 

 

 

 

 

 

 

 

Commercial, financial and agricultural

 

$

60

 

11

%

$

84

 

20

%

Real estate - mortgage

 

343

 

63

%

199

 

48

%

Real estate - construction

 

119

 

22

%

85

 

21

%

Consumer

 

23

 

4

%

47

 

11

%

 

 

$

545

 

100

%

$

415

 

100

%

28


  
September 30, 2010
  
December 31, 2009
 
  
Amount
  
Percent of loans in each category to total loans
  
Amount
  
Percent of loans in each category to total loans
 
             
Commercial, financial and agricultural $59   9% $84   20%
Real estate - mortgage  406   63%  199   48%
Real estate - construction  152   24%  85   21%
Consumer  28   4%  47   11%
  $645   100% $415   100%

26


Table of Contents

The following table presents a summary of changes in the allowance for loan losses for the three and sixnine month periods ended JuneSeptember 30, 2010 and 2009:

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Balance beginning of period

 

$

488,494

 

$

391,909

 

$

414,670

 

$

838,234

 

Provision for loan losses

 

235,739

 

70,000

 

310,739

 

70,000

 

Loan Charge-Offs:

 

 

 

 

 

 

 

 

 

Commercial, Financial and Agricultural

 

 

 

 

(148,296

)

Real Estate-Mortgage

 

 

(57,137

)

 

(57,137

)

Real Estate-Construction

 

(179,859

)

 

(179,859

)

(275,000

)

Consumer

 

 

 

(3,152

)

(26,946

)

Total Charge-offs

 

(179,859

)

(57,137

)

(183,011

)

(507,379

)

 

 

 

 

 

 

 

 

 

 

Loan Recoveries:

 

 

 

 

 

 

 

 

 

Consumer

 

720

 

12,505

 

2,696

 

16,422

 

Total Recoveries

 

720

 

12,505

 

2,696

 

16,422

 

Net (Charge-offs) Recoveries

 

(179,139

)

(44,632

)

(180,315

)

(490,957

)

 

 

 

 

 

 

 

 

 

 

Balance end of period

 

$

545,094

 

$

417,277

 

$

545,094

 

$

417,277

 

 

 

 

 

 

 

 

 

 

 

Total loans at end of period

 

$

33,446

 

$

37,724

 

$

33,446

 

$

37,724

 

 

 

 

 

 

 

 

 

 

 

Average loans outstanding

 

35,221

 

37,701

 

$

35,980

 

$

37,516

 

As a percentage of average loans:

 

 

 

 

 

 

 

 

 

Net loans charged-off

 

0.51

%

0.12

%

0.50

%

1.31

%

Provision for loan losses

 

0.67

%

0.19

%

0.86

%

0.19

%

Allowance for loan losses as a percentage of:

 

 

 

 

 

 

 

 

 

Gross loans

 

1.63

%

1.11

%

1.63

%

1.11

%


  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2010  2009  2010  2009 
             
Balance beginning of period $545,094  $417,277  $414,670  $838,234 
Provision for loan losses  127,880   136,080   438,619   206,080 
Loan Charge-Offs:                
Commercial, Financial and Agricultural  -   (26,866)  -   (175,162)
Real Estate-Mortgage  -   -   -   (57,137)
Real Estate-Construction  (1,500)  -   (181,359)  (275,000)
Consumer  (27,382)  (21,701)  (30,534)  (48,647)
Total Charge-offs  (28,882)  (48,567)  (211,893)  (555,946)
                 
Loan Recoveries:                
  Consumer  630   4,656   3,326   21,078 
Total Recoveries  630   4,656   3,326   21,078 
Net (Charge-offs) Recoveries  (28,252)  (43,911)  (208,567)  (534,868)
                 
Balance end of period $644,722  $509,446  $644,722  $509,446 
                 
Total loans at end of period (in thousands) $34,340  $38,424  $34,340  $38,424 
                 
Average loans outstanding, excluding LHFS (in thousands)  34,042   38,082  $35,317  $37,460 
As a percentage of average loans:                
Net loans charged-off  0.08%  0.12%  0.59%  1.43%
Provision for loan losses  0.38%  0.36%  1.24%  0.55%
Allowance for loan losses as a percentage of:                
Gross loans  1.88%  1.33%  1.88%  1.33%


The following is a summary of risk elements in the loan portfolio at JuneSeptember 30, 2010 and at December 31, 2009:

 

 

June 30, 2010

 

December 31, 2009

 

 

 

 

 

 

 

Loans on Nonaccrual

 

$

1,048,000

 

$

122,000

 

Loans Past Due 90 Days and Still Accruing

 

500,000

 

3,200

 

Other Real Estate Owned and Repossessions

 

556,500

 

654,000

 

 

 

 

 

 

 

Total Nonperforming Assets

 

$

2,104,500

 

$

799,200

 

 

 

 

 

 

 

Total Nonperforming Assets as a Percentage of Gross Loans

 

6.29

%

2.13

%


  September 30, 2010  December 31, 2009 
       
Loans on Nonaccrual $1,863,100  $122,000 
Loans Past Due 90 Days and Still Accruing  100,100   3,200 
Other Real Estate Owned and Repossessions  556,500   654,000 
         
Total Nonperforming Assets $2,519,700  $799,200 
         
Total Nonperforming Assets as a Percentage of Gross Loans and ORE  7.22%  2.09%

27


A loan is placed on non-accrual status when, in management’s judgment, the collection of interest appears doubtful. As a result of management’s ongoing review of the loan portfolio, loans are classified as non-accrual when management believes, after considering economic and business conditions and collection efforts, the borrower’s financial condition is such that collection of interest is doubtful.  Generally, loans are placed on non-accrual status when principal or interest payments are past due for more than 90 days.  Exceptions are allowed for loans past due greater than 90 days when such loans are well secured and in process of collection.  One loan was past due greater than 90 days at JuneSeptember 30, 2010.  Management is in the process of workingworki ng on a plan for this loan and expects to collect all contractual payments.  Several loans, totaling $752,000, placed$456,000, on non accrual status at JuneSeptember 30, 2010, were not currently past due, but collection of all contractual payments remains uncertain.  These loans have specific reserves of $14,000 allocated to them.  We are in negotiations to sell one of theseThese loans and two are collateralized by leased property with rent being collected monthly.  The remaining loans totaling $296,000, placed$1,407,100, held on nonaccrual status in 2010, have specific reserves of $140,000$240,000 allocated to them.


Financial Condition


Total assets decreased $8,684,000,$2,344,000, or 11.3%3%, from $76,566,000 at December 31, 2009 to $67,882,000$74,222,000 at JuneSeptember 30, 2010.  There was a reduction of investment securities through a combination of scheduled and unscheduled prepayments of principal and the sale of certain securities totaling $7,426,000,$9,105,000, or 30%37%.  Total deposits decreased by $10,019,000,$8,000,000, or 14.4%12%, from December 31, 2009 to JuneSeptember 30, 2010, including a $4,504,000,$7,240,000, or 25.0%56%, decrease in non core time deposits greater than $100,000.

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Table of Contents

deposits.  Total shareholders’ equity increased $1,294,000$2,074,000 from $4,399,000 at December 31, 2009 to $5,693,000$6,473,000 at JuneSeptember 30, 2010.  During the second quarter of 2010, we received proceeds of $977,749$1,243,038 from the sale of 1,459,3271,883,145 shares in thea private offering.

  The remaining increase in shareholders’ equity consisted of net income of $492,000 and net increases in other comprehensive income of $339,000.  The increase in comprehensive income is reflective of the improvement in the value of our available for sale securities portfolio.


Loans


Gross loans totaled approximately $33,446,000$34,340,000 at JuneSeptember 30, 2010, a decrease of $3,185,000,$2,291,000, or 8.7%6.25%, from $36,631,000 at December 31, 2009.  Balances within the major loans receivable categories as of JuneSeptember 30, 2010 and December 31, 2009 are as follows (amounts presented in thousands). The reduction in the loan portfolio is consistent with the Bank’s current strategy of shrinking the balance sheet to preserve and improve its capital position.

 

 

June 30, 2010

 

December 31, 2009

 

Commercial, financial and agricultural

 

$

3,202

 

10

%

$

3,716

 

10

%

Real estate — mortgage

 

24,130

 

72

%

26,643

 

73

%

Real estate — construction

 

4,938

 

15

%

4,746

 

13

%

Consumer

 

1,176

 

3

%

1,526

 

4

%

Total

 

$

33,446

 

100

%

$

36,631

 

100

%


  September 30, 2010  December 31, 2009 
Commercial, financial and agricultural $2,788   8% $3,716   10%
Real estate – mortgage  24,678   72%  26,643   73%
Real estate – construction  5,846   17%  4,746   13%
Consumer  1,028   3%  1,526   4%
Total $34,340   100% $36,631   100%

Deposits


Total deposits as of JuneSeptember 30, 2010 and December 31, 2009 were $59,547,000$61,566,000 and $69,567,000, respectively. Balances and average rates paid for interest within the major deposit categories as of JuneSeptember 30, 2010 and December 31, 2009 are as follows (amounts presented in thousands):

 

 

June 30, 2010

 

December 31, 2009

 

 

 

Amount

 

Rate

 

Amount

 

Rate

 

 

 

 

 

 

 

 

 

 

 

Non-interest-bearing demand deposits

 

$

2,974

 

N/A

 

$

3,076

 

N/A

 

Interest-bearing demand deposits

 

6,626

 

0.61

%

8,443

 

0.85

%

MMDA and Savings deposits

 

15,317

 

1.78

%

11,950

 

2.06

%

Time deposits less than $100,000

 

21,108

 

2.71

%

28,072

 

2.81

%

Time deposits $100,000 and over

 

13,522

 

1.31

%

18,026

 

3.27

%

 

 

 

 

 

 

 

 

 

 

 

 

$

59,547

 

 

 

$

69,567

 

 

 


  September 30, 2010  December 31, 2009 
  Amount  Rate  Amount  Rate 
             
Non-interest-bearing demand deposits $2,950   N/A  $3,076   N/A 
Interest-bearing demand deposits  5,857   0.62%  8,443   0.85%
MMDA and Savings deposits  15,786   1.76%  11,950   2.06%
Time deposits less than $100,000  20,465   2.87%  28,072   2.81%
Time deposits $100,000 and over  16,508   1.17%  18,026   3.27%
                 
  $61,566      $69,567     

At June,September, 2010 the Bank had time deposits of $100,000 or more of $13,522,000.equal to $16,508,000.  Approximately $1,320,000,$394,000, or 10%2.4%, of these deposits, would not be covered under the new FDIC insurance coverage.

Capital Resources

Total shareholders’ equity increased from $4,399,000 at December 31, 2009 to $5,693,000 at June 30, 2010.  In June 2010, the Company commenced a private offering of up to 2,000,000 shares of its common stock at of price of $0.67 per share to a limited number of accredited investors.  The private offering is scheduled to close August 13, 2010.  During the second quarter of 2010 the Company received net proceeds of $977,749 from the sale of 1,459,327 shares in the offering.  For each share issued, a warrant to purchase one share of common stock at a price of $0.67 was also granted, resulting in the issuance of 1,459,327 warrants.  The Company is using the net proceeds from the private offering for working capital purposes.  The common stock that was sold in the offering has not been registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

In June 2010, the holders of Series B Preferred Stock exchanged their shares of preferred stock for shares of common stock at an exchange rate of $0.67 per share.  We redeemed all of the shares of Series B Preferred Stock and issued 1,239,328 shares of common stock.

Bank holding companies and their banking subsidiaries are required by banking regulators to meet specific minimum levels of capital adequacy, which are expressed in the form of ratios.  The Federal Reserve guidelines contain an exemption from the capital requirements for “small bank holding companies,” which in 2006 was amended to cover most bank holding companies with less than $500 million in total assets that do not have a material amount of debt or equity securities outstanding registered with the SEC.  Although our class of common stock is registered under Section 12 of the Securities Exchange Act, we believe that because our stock is not listed on any exchange or otherwise actively traded, the Federal Reserve Board will interpret its new guidelines to mean that we qualify as a small bank holding company.  Nevertheless, the Bank remains subject to capital requirements.  Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on the bank’s financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices.  The Bank’s capital amounts and classifications are also subject to qualitative judgments

30


28


Table of Contents

by the regulators about components, risk weightings, and other factors.

Capital is separated into Tier 1 Capital (essentially common shareholders’ equity less intangible assets) and Tier 2 Capital (essentially the allowance for loan losses limited to 1.25% of risk-weighted assets).  The first two ratios, which are based on the degree of credit risk in our assets, provide for the weighting of assets based on assigned risk factors and include off-balance sheet items such as loan commitments and stand-by letters of credit.  The ratio of Tier 1 Capital to risk-weighted assets must be at least 4.0% and the ratio of Total Capital (Tier 1 Capital plus Tier 2 Capital) to risk-weighted assets must be at least 8.0%.

Banks and bank holding companies are also required to maintain a minimum ratio of Tier 1 Capital to adjusted quarterly average total assets of 4.0%.

Resources


The following table summarizes the Bank’s risk-based capital ratios at JuneSeptember 30, 2010 and December 31, 2009:

 

 

June 30, 2010

 

December 31, 2009

 

Tier 1 Capital (to risk-weighted assets)

 

13.56

%

9.94

%

Total Capital (to risk-weighted assets)

 

14.81

%

10.82

%

Tier 1 Capital (to total average assets)

 

8.37

%

6.22

%


  September 30, 2010  December 31, 2009 
Risk-Based Capital Ratios:      
Tier 1 Capital (to risk-weighted assets)  13.15%  9.94%
Total Capital (to risk-weighted assets)  14.40%  10.82%
         
Leverage Ratio:        
Tier 1 Capital (to total average assets)  8.69%  6.22%

The Bank was considered “well capitalized” at JuneSeptember 30, 2010.


Liquidity


The Bank must maintain, on a daily basis, sufficient funds to cover the withdrawals from depositors’ accounts and to supply new borrowers with funds.  To meet these obligations, the Bank keeps cash on hand, maintains account balances with its correspondent banks, and purchases and sells federal funds and other short-term investments.  Asset and liability maturities are monitored in an attempt to match the maturities to meet liquidity needs.  It is the policy of the Bank to monitor its liquidity to meet regulatory requirements and our local funding requirements.

As of JuneSeptember 30, 2010 the Bank has $4,635,000$3,684,000 in cash and cash equivalents as well as $4,381,000$3,306,000 in investment securities available-for-sale to fund its operations and loan growth.  The Bank also maintains relationships with correspondent banks that can provide funds to it on short notice, if needed.  Presently, the Bank has arrangements with a correspondent bank for short-term unsecured advances of up to $1,000,000.  At JuneSeptember 30, 2010 there were no advances on these lines.this line.  The Bank has borrowing capacity through its membership in the Federal Home Loan Bank of Atlanta (“FHLB”) subject to the availabilityavailabilit y of investment securities to pledge as collateral.  As of JuneSeptember 30, 2010, the Bank had advances outstanding of $2,000,000.$5,500,000.  The Bank has primary borrowing capacity through the Federal Reserve Bank discount window program subject to the availability of loans and investment securities to pledge as collateral.  As of JuneSeptember 30, 2010, the Bank had no advances outstanding.


Off-Balance Sheet Arrangements


We are a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of our customers.  These financial instruments consist of commitments to extend credit and standby letters of credit.  Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Standby letters of credit are written conditional commitments issued by the Bank to guarantee the performance of a customer to a third party.  Those guarantees are primarily issued to support public and private borrowing arrangements.  Most letters of credit extend for less than one year.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extendingext ending loan facilities to customers.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  A commitment involves, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets.  Our exposure to credit loss in the event of nonperformance by the other party to the instrument is represented by the contractual notional amount of the instrument.


Since certain commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  We use the same credit policies in making commitments to extend credit as we do for on-balance-sheet instruments.  Collateral held for commitments to extend credit varies but may include unimproved and improved real estate, certificates of deposit or personal property.


The following table summarizes our off-balance-sheet financial instruments whose contract amounts represent credit risk as of JuneSeptember 30, 2010:

Commitments to extend credit

 

$

1,861,000

 

Stand-by letters of credit

 

$

761,000

 

31


Commitments to extend credit $1,582,000
Stand-by letters of credit $690,000

29


Table of ContentsItem

Item 3. Quantitative and Qualitative Disclosure About Market Risk


Not applicable.


Item 4. Controls and Procedures


As of the end of the period covered by this report we carried out an evaluation, under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e).


Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our current disclosure controls and procedures are effective as of JuneSeptember 30, 2010.2010 to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.  There have been no significant changes in our internal controls over financial reporting during the fiscal quarter ended JuneSeptember 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.


PART II.  OTHER INFORMATION

Item

Item 1.        Legal Proceedings

We are, from time to time, a party to litigation arising in the normal course of our business.  In the opinion of management, we are not a party to any other material legal proceedings, nor are there any other material proceedings known to us to be contemplated by any governmental authority.  Additionally, we are not aware of any material proceedings, pending or contemplated, in which any of our directors, officers or affiliates, or any principal security holder or any associate of any of the foregoing, is a party or has an interest adverse to us.


Item 1A.     Risk Factors


Not Applicable


Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds

On


In June 18,2010, the Company commenced a private offering of up to 2,000,000 shares of its common stock at of price of $0.67 per share to a limited number of accredited investors.  The private offering closed August 13, 2010. During the third quarter of 2010 the holdersCompany has received net proceeds of Series B Preferred Stock exchanged their$265,289 from the sale of 423,818 shares in the offering.  Total net proceeds raised in the offering were $1,243,038 from the sale of preferred stock for shares1,883,145 shares.  For each share issued, a warrant to purchase one share of common stock at an exchange ratea price of $0.67 per share.  We redeemed 75,000 shareswas also granted, resulting in the issuance of Series B Preferred Stock and issued an aggregate of 1,239,328 shares of1,883,145 warrants.  The Company is using the net proceeds from the private offering for working capital purposes.  The common stock which includedthat was sold in the paymentoffering has not been registered under the Securities Act of accrued dividends, to accredited investors1933 and may not be offered or sold in transactions exemptthe United States absent registration or an applicable exemption from registration under Section 4(2) of the Securities Act.

requirements.


Item 3.        Defaults Upon Senior Securities

None.

Item

None.

Item 4.        (Removed and Reserved)


None.

Item

None.

Item 5.        Other Information


None.

30


Item

None.

Item 6.        Exhibits

31.1             Rule 13a-14(a) Certification of the Principal Executive Officer.

31.2             Rule 13a-14(a) Certification of the Principal Financial Officer.

32                Section 1350 Certifications.

32



31



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



Date: August 12,November 15, 2010

By:

By:

/s/ William R. Blanton

Name:

William R. Blanton

Title:

Principal Executive Officer



Date: November 15, 2010

By:

Date: August 12, 2010

By:

/s/ Denise Smyth

Name:

Denise Smyth

Title:

Principal Financial and Accounting Officer

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Table of Contents

FIRST CENTURY BANCORP.


EXHIBIT INDEX




33