UNITED STATES
_________to_________ Georgia 58-2554464 (State or other jurisdiction (I.R.S. Employer Identification No.) Page No. 3 5 6 7 8 9 18 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 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 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 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 Accumulated Preferred Stock Common Stock Accumulated Treasury Other 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 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 NOTE 5 June 30, 2010 Securities Available for Sale Amortized Gross Gross Fair 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 Gross Gross Fair 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 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 June 30, 2010 Less than 12 Months 12 Months or Greater Total Fair Gross Fair Gross Fair Total 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 Gross Fair Gross Fair Total 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 ) 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 Available for Sale Held to Maturity Amortized Fair Weighted Amortized Fair Value Weighted 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 % 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 Activity in the allowance for loan losses for the 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 amounts. The Bank’s actual ratios as of 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 The carrying amount and estimated fair values of the Company’s financial instruments as of 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 Fair Value Hierarchy Assets and Liabilities Measured at Fair Value on a Recurring Basis as of Fair Value Measurements at 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 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 Total Level 1 Level 2 Level 3 (Losses) Impaired Loans — — $ 667,864 $ (318,610 ) Fair Value Measurements at Total Level 1 Level 2 Level 3 (Losses) Impaired Loans — — $ 935,284 $ (299,427 ) following: 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. Estimated losses are net-interest margin. expense for the nine month period ended September 30, 2010 over the same period in 2009. 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 Average Balances and Interest Rates For the Six Months Ended For the Six Months Ended (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 % mortgage business, Century Point Mortgage. Athens offices that occurred in the first nine months of 2010. ended division. The following table shows the components of non-interest expense incurred for 2010 2009 Increase / Main Office Century Gainesville Roswell Norcross 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 various types of assets and liabilities. June 30, 2010 December 31, 2009 Amount Percent of loans in Amount Percent of loans in 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 % The following table presents a summary of changes in the allowance for loan losses for the three and 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 % 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 % deposits. Total shareholders’ equity increased 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. 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 % 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 Capital Resources 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 % Commitments to extend credit $ 1,861,000 Stand-by letters of credit $ 761,000 requirements. Date: By: Name: Title: Name: Title: Description(MARK ONE)x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Quarterly Period ended June 30, 2010ORo TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934(MARK ONE) x QUARTERLY 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 to of incorporation)oo No ¨oLarge accelerated filer o¨ Accelerated filer o¨ Non-accelerated ofiler¨ Smaller reporting company x (doDo not check if smaller reporting company)companyo No x8,090,7728,121,293 shares of common stock, no par value per share, were issued and outstanding as of AugustNovember 11, 2010.3 September 30, 2010 (Unaudited) and December 31, 2009 Three and SixNine Months Ended JuneSeptember 30, 2010 and 2009Three and SixNine Months Ended JuneSeptember 30, 2010 and 2009For the SixNine Months Ended JuneSeptember 30, 2010 (Unaudited)For the Nine Months Ended JuneSeptember 30, 2010 and 200932323232323232323233Table of ContentsPART I. FINANCIAL INFORMATIONASSETSASSETS 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 FIRST CENTURY BANCORP. AND SUBSIDIARYCONSOLIDATED BALANCE SHEETSLIABILITIES AND SHAREHOLDERS’ EQUITYCONSOLIDATED 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 SIXNINE MONTHS ENDED JUNESEPTEMBER 30 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 SIXNINE MONTHS ENDED JUNESEPTEMBER 30 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 SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 2010
Comprehensive 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 SIXNINE MONTHS ENDED JUNESEPTEMBER 30 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 $ - —– BASIS OF PRESENTATIONthe Gainesville, Georgia.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.—– CRITICAL ACCOUNTING POLICIES AND ESTIMATESother-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.—– STOCK COMPENSATION PLANSsixnine month period ended JuneSeptember 30, 2010.—– NET INCOME (LOSS) PER SHARE$57,979$64,123 at JuneSeptember 30, 2010, and JuneSeptember 30, 2009, respectively, and reduced the earnings available to common stockholders in the computation.—– INVESTMENT SECURITIESJuneSeptember 30, 2010 and December 31, 2009 are summarized as follows.
Cost
Unrealized
Gains
Unrealized
Losses
Value
Cost
Unrealized
Gains
Unrealized
Losses
Value September 30, 2010 Securities Available for Sale Gross Unrealized Gross Unrealized 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 Gross Unrealized Gross Unrealized 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 $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.JuneSeptember 30, 2010 and December 31, 2009:
Value
Unrealized
Losses
Value
Unrealized
Losses
Value
Unrealized
Losses
Value
Unrealized
Losses
Value
Unrealized
Losses
Value
Unrealized
Losses September 30, 2010 Less than 12 Months 12 Months or Greater Total Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value 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 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 ) 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.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.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.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.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.$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.
Cost
Value
Average
Yield
Cost
Average
YieldHeldheld 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. 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 % JuneSeptember 30, 2010 and December 31, 2009 are: 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 sixnine month periods ended JuneSeptember 30 is summarized as follows: 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 —– SHAREHOLDERS’ EQUITYinvestors.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.—– INCOME TAXESJuneSeptember 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.—– REGULATORY MATTERSJuneSeptember 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 $ 6,670 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 —– FAIR VALUE DISCLOSURESofo f the increase or decrease in value of financial instruments held by the Company since purchase, origination or issuance.JuneSeptember 30, 2010 and December 31, 2009 are presented hereafter: 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 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.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.currentcurr ent market conditions.JuneSeptember 30, 2010 and December 31, 2009
June 30, 2010 Using
December 31, 2009 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 - 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 - JuneSeptember 30, 2010 and December 31, 2009, for which a nonrecurring change in fair value has been recorded:JuneSeptember 30, 2010 and December 31, 2009
June 30, 2010 Using
December 31, 2009 Using Level 1 Level 2 Level 3 Impaired Loans - - $ 988,407 $ (420,254 ) Other Real Estate - - 556,501 - Level 1 Level 2 Level 3 Impaired Loans - - $ 935,284 $ (299,427 ) Other Real Estate - - 653,501 (34,644 ) 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.● 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. 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.thisour non-interest income, as well as our non-interest expense, in the following discussion.theour consolidated balanceba lance sheets.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 ratiosapplieddetermined 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. 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.Income TaxesAccounting 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.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 onor 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.·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-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.SixNine Months Ended JuneSeptember 30, 2010 and 2009secondthird 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.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.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.$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.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.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.
June 30, 2010
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) $ 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 % 3,693 4,184 Shareholders’ equity 5,026 4,174 $ 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 % $282,000$495,000 and $834,000$650,000 for the sixnine months ended JuneSeptember 30, 2010 and 2009, respectively.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. 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,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.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.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%.$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.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.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.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.JuneSeptember 30, 2010, werewas $173,000, compared to $128,000$140,000 for the quarterJuneSeptember 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.TelephoneJuneSeptember 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.$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.$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.$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.sixnine months ended JuneSeptember 30, 2010 and 2009 and changes attributable to the growth of the Company:
(Decrease)
Bank &
Parent
Point
Mortgage
Division
Retail
Mortgage
Division
Retail
Mortgage
Division
Retail Call
Center
Mortgage
Division 2010 2009 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 26,052 514,316 387,464 126,852 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 “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.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.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.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.$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.
each category to total
loans
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 % sixnine month periods ended JuneSeptember 30, 2010 and 2009: 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 % JuneSeptember 30, 2010 and at December 31, 2009: 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 % 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.$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.$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.$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. 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 % 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): 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 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 ResourcesTotal 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 judgmentsby the regulators about components, risk weightings, and other factors.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%.JuneSeptember 30, 2010 and December 31, 2009: 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 % JuneSeptember 30, 2010.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.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.JuneSeptember 30, 2010:Commitments to extend credit $ 1,582,000 Stand-by letters of credit $ 690,000 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.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.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.None.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.August 12,November 15, 2010By:William R. Blanton Principal Executive Officer Date: November 15, 2010 By: Date: August 12, 2010By:Denise Smyth Principal Financial and Accounting Officer NumberDescription31.1