UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
(MARK ONE)

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

For the Quarterly Period ended March 31, 2011

OR

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

For the Transition Period from _________to_________

Commission File No. 001-16413

FIRST CENTURY BANCORP.
(Exact name of registrant as specified in its charter)

Georgia58-2554464
(State or other jurisdiction of incorporation)(I.R.S. Employer
of incorporation)Identification No.)

807 Dorsey Street
Gainesville, Georgia 30501
(Address of principal executive offices)

(770) 297-8060
(Registrant’s telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.   Yes x      No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ¨x      No ¨

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

 Large accelerated filer¨Accelerated filer¨
 
 Non-accelerated filer¨Smaller reporting companyx
 Do(do not check if smaller reporting companycompany)   

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 8,121,2938,120,623 shares of common stock, no par value per share, were issued and outstanding as of November 11, 2010.May 13, 2011.

 
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Page No.
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 September 30, 2010
  
Three and Nine Months Ended September 30, 2010 and 2009
  
Three and Nine Months Ended September 30, 2010 and 2009
  
For the Nine Months Ended September 30, 2010 (Unaudited)
  
For the Nine Months Ended September 30, 2010 and 2009
  
  
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30
  
30
  
30
  
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PART I. FINANCIAL INFORMATION

ItemItem 1. Financial Statements

FIRST CENTURY BANCORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS

ASSETS

ASSETS 
 September 30,     March 31,    
 2010  December 31,  2011  December 31, 
 (Unaudited)  2009  (Unaudited)  2010 
            
Cash and Cash Equivalents      
Cash and Due from Banks $3,684,391  $2,531,126 
Total Cash and Cash Equivalents $16,388,818  $5,961,826 
                
Investment Securities                
Available for Sale, at Fair Value  3,306,196   7,594,425   8,629,890   5,204,594 
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 
Held to Maturity, at Cost (Fair Value of $9,860,473, and $11,580,363 as of March 31, 2011 and December 31, 2010, respectively)  9,251,088   10,800,469 
                
  15,284,003   24,388,788 
Total Investment Securities  17,880,978   16,005,063 
                
Other Investments  553,400   400,800   620,100   620,100 
                
Loans Held for Sale  17,684,983   9,637,123   3,690,573   13,908,172 
                
Loans  34,340,392   36,630,587   30,061,743   31,895,912 
Allowance for Loan Losses  (644,722)  (414,670)  (469,414)  (478,039)
                
Loans, Net  33,695,670   36,215,917 
Loans, Net
  29,592,329   31,417,873 
                
Premises and Equipment  2,118,927   2,276,681   3,039,193   3,076,825 
                
Other Real Estate  556,501   653,501   522,061   522,061 
                
Other Assets  644,147   462,021   452,321   539,480 
                
Total Assets $74,222,022  $76,565,957  $72,186,373  $72,051,400 

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

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

LIABILITIES AND STOCKHOLDERS’ EQUITY

 September 30,     March 31,    
 2010  December 31,  2011  December 31, 
 (Unaudited)  2009  (Unaudited)  2010 
            
Deposits            
Non-interest-Bearing $2,950,015  $3,076,222  $5,230,001  $3,905,003 
Interest-Bearing  58,616,200   66,490,456   58,083,184   58,757,378 
                
Total Deposits  61,566,215   69,566,678   63,313,185   62,662,381 
                
Borrowings  5,500,000   2,000,000   2,000,000   2,000,000 
                
Other Liabilities  683,166   600,370   567,960   744,224 
                
Total Liabilities  67,749,381   72,167,048   65,881,145   65,406,605 
                
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 
Commitments and Contingencies  -   - 
        
Stockholders’ Equity        
Preferred Stock, Non-voting; Non-participating; Variable Rate Cumulative; No Par Value; 10,000,000 Shares Authorized; No Shares Issued and Outstanding; Liquidation Preference of $10 Per Share Plus Accumulated Undeclared Dividends;  -   - 
Common Stock, No Par Value; 300,000,000 Shares Authorized; 8,121,293 Shares Issued at March 31, 2011 and December 31, 2010   17,035,536    17,030,466 
Accumulated Deficit  (10,620,168)  (11,031,585)  (10,777,252)  (10,445,022)
Treasury Stock, 670 shares, at cost  (1,005)  (1,005)  (1,005)  (1,005)
Accumulated Other Comprehensive Income (Loss)  71,991   (266,529)
Accumulated Other Comprehensive Income  47,949   60,356 
                
Total Shareholders’ Equity  6,472,641   4,398,909 
Total Stockholders’ Equity  6,305,228   6,644,795 
                
Total Liabilities and Shareholders’ Equity $74,222,022  $76,565,957 
Total Liabilities and Stockholders’ Equity $72,186,373  $72,051,400 

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

 
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FIRST CENTURY BANCORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30MARCH 31
(UNAUDITED)


 Three Months Ended  Nine Months Ended  Three Months Ended 
 2010  2009  2010  2009  2011  2010 
Interest Income                  
Loans, Including Fees $646,838  $570,555  $1,849,485  $1,736,699  $498,125  $643,224 
Investments  372,731   634,926   1,368,668   1,937,006   325,513   532,435 
Interest Bearing Deposits  3,230   500   7,700   552   8,406   2,163 
Federal Funds Sold  -   11   -   176 
                        
Total Interest Income  1,022,799   1,205,992   3,225,853   3,674,433   832,044   1,177,822 
                        
Interest Expense                        
Deposits  245,217   367,800   807,741   1,298,075   205,520   293,324 
Borrowings  14,510   15,468   40,063   48,911   12,485   12,852 
        
Total Interest Expense  259,727   383,268   847,804   1,346,986   218,005   306,176 
                        
Net Interest Income  763,072   822,724   2,378,049   2,327,447   614,039   871,646 
                        
Provision for Loan Losses  127,880   136,080   438,619   206,080   179,761   75,000 
                        
Net Interest Income After Provision for Loan Losses  635,192   686,644   1,939,430   2,121,367   434,278   796,646 
                        
Non-interest Income                        
Service Charges and Fees on Deposits  14,906   15,396   56,368   46,737   3,823   19,051 
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 
Gains on Sale of Investment Securities  -   33,329 
Mortgage Origination and Processing Fees  787,623   886,032 
Other  4,621   17,323   50,403   17,574   11,950   10,674 
                        
Total Non-interest Income  1,530,589   354,781   3,669,075   1,357,871   803,396   949,086 
                        
Non-interest Expense                        
Salaries and Employee Benefits  1,046,492   522,278   2,876,554   1,618,167   817,690   922,212 
Occupancy and Equipment  107,229   95,149   346,160   309,624   104,449   132,187 
Professional Fees  98,724   69,952   277,749   207,323   85,459   79,619 
Advertising and Marketing  60,381   76,999   173,714   185,072   83,157   51,331 
Data Processing  173,265   140,162   514,316   387,464   231,089   168,369 
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   83,217   71,413 
Office Supplies  8,704   7,736   24,586   17,347 
Lending Related Expense  159,660   61,632   424,263   247,894   91,439   162,436 
Other Non-interest Expense  39,915   102,928   103,228   182,822   73,404   75,896 
                        
Total Non-interest Expense  1,814,960   1,191,273   5,116,739   3,400,667   1,569,904   1,663,463 
                        
Income (Loss) Before Income Taxes  350,821   (149,848)  491,766   78,571   (332,230)  82,269 
        
Provision for Income Taxes  -   -   -   -   -   - 
                        
Net Income (Loss) $350,821  $(149,848) $491,766  $78,571  $(332,230) $82,269 
Earnings (Loss) Per Common Share        
Basic $(0.04) $0.02 
Diluted $(0.04) $0.02 
                        
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 
Weighted Average Common Shares Outstanding  8,120,623   4,998,150 

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

 
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FIRST CENTURY BANCORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE  AND NINE MONTHS ENDED SEPTEMBER 30MARCH 31
(UNAUDITED)


 Three Months Ended  Nine Months Ended  Three Months Ended 
 2010  2009  2010  2009  2011  2010 
                  
Net Income (Loss) $350,821  $(149,848) $491,766  $78,571 
Net Income (Loss)
 $(332,230) $82,269 
                        
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 
Unrealized Gains (Losses) on Securities Arising During the Quarter  (12,407)  32,328 
Reclassification Adjustment  -   (33,329)
                        
Other comprehensive income (loss)  154,393   40,160   338,520   (14,938)
Net Change in Unrealized Losses on Securities  (12,407)  (1,001)
                        
Comprehensive Income (Loss) $505,214  $(109,688) $830,286  $63,633  $(344,637) $81,268 

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

 
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FIRST CENTURY BANCORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE NINETHREE MONTHS ENDED SEPTEMBER 30, 2010MARCH 31, 2011


              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 
                    Accumulated   
  Preferred Stock  Common Stock  Accumulated  Treasury  Comprehensive   
  Shares  Amount  Shares  Amount  Deficit  Stock  Income (Loss)  Total
                        
Balance, December 31, 2010  -  $-   8,121,293  $17,030,466  $(10,445,022) $(1,005) $60,356  $6,644,795 
                                 
  Stock Compensation Costs  -   -   -   5,070   -   -   -   5,070 
  Net Change in Unrealized    Losses on Securities Available for Sale  -   -   -   -   -   -   (12,407)  (12,407)
  Net Loss  -   -   -   -   (332,230)  -   -   (332,230)
                                 
Balance, March 31, 2011  -  $-   8,121,293  $17,035,536  $(10,777,252) $(1,005) $47,949  $6,305,228 

The accompanying notes are an integral part of these consolidated statements

 
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FIRST CENTURY BANCORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINETHREE MONTHS ENDED SEPTEMBER 30MARCH 31
(UNAUDITED)


 2010  2009  2011  2010 
Cash Flows from Operating Activities            
Net Income $491,766  $78,571 
Adjustments to Reconcile Net Income to        
Net Cash Used by Operating Activities        
Net Income (Loss) $(332,230) $82,269 
Adjustments to Reconcile Net Income (Loss) to        
Net Cash Provided by Operating Activities        
Depreciation  143,587   152,561   43,305   48,289 
Amortization and Accretion  (586,986)  (735,875)  (129,220)  (224,452)
Provision for Loan Losses  438,619   206,080   179,761   75,000 
Write-down of Other Real Estate  34,644   -   -   34,500 
Loss on Sale of Other Assets  10,544   7,263   -   12,214 
(Gains) Losses on Investment Securities  (145,602)  37,436 
Gains on Sale of Investment Securities  -   (33,329)
Stock Compensation Expense  408   53,206   5,070   12,000 
Change In                
Loans Held for Sale  (8,047,860)  (197,123)  10,217,599   5,476,072 
Other Assets  (212,815)  (98,634)  87,159   (39,178)
Other Liabilities  82,796   58,821   (176,264)  180,708 
                
Net Cash Used by Operating Activities  (7,790,899)  (437,694)
Net Cash Provided by Operating Activities  9,895,180   5,624,093 
                
Cash Flows from Investing Activities                
Purchases of Investment Securities Available for Sale  (1,000,000)  (9,691,104)  (4,167,644)  (1,000,000)
Proceeds from Sales of Investment Securities Available for Sale  3,524,842   6,642,492   -   1,890,300 
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)
Proceeds from Maturities, Calls and Paydowns of Investment Securities Available for Sale  734,632   544,476 
Proceeds from Maturities, Calls and Paydowns of Investment Securities Held to Maturity  1,673,910   1,392,307 
Purchases of Other Investments  -   (78,200)
Net Change in Loans  2,081,629   (1,511,056)  1,645,783   (550,223)
Proceeds from Sale of Other Real Estate  62,356   - 
Proceeds from Sale of Other Assets  24,107   25,000   -   24,107 
Proceed from sale (purchases) of Premises and Equipment  10,206   (37,121)
Net (Purchases) Disposals of Premises and Equipment  (5,673)  685 
                
Net Cash Provided (Used) by Investing Activities  12,201,591   (8,247,823)  (118,992)  2,223,452 
                
Cash Flows from Financing Activities                
Net Change in Deposits  (8,000,463)  3,021,219   650,804   (4,831,374)
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   650,804   (4,831,374)
                
Net Increase (Decrease) in Cash and Cash Equivalents  1,153,265   (866,327)
Net Increase in Cash and Cash Equivalents  10,426,992   3,016,171 
                
Cash and Cash Equivalents, Beginning  2,531,126   2,225,027   5,961,826   2,531,126 
                
Cash and Cash Equivalents, Ending $3,684,391  $1,358,700  $16,388,818  $5,547,297 
                
Supplemental Disclosure of Cash Flow Information:                
        
Interest Paid $834,223  $1,262,457  $159,549  $249,301 
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  $- 
Change in Unrealized Loss on Securities Available for Sale $12,407  $1,001 

See accompanying notes to consolidated financial statements.

 
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Notes to Consolidated Financial Statements
(Unaudited)

NOTE 1 – BASIS OF PRESENTATION

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

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

The accompanying financial statements have been prepared in accordance with the requirements for interim financial statements and, accordingly, they omit disclosures, which would substantially duplicate those contained in the most recent annual report to shareholdersstockholders on Form 10-K.  The financial statements as of September 30,March 31, 2011 and 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 nine months ended September 30, 2010March 31, 2011 are not necessarily indicative of the results of a full year’s operations. The financial information as of December 31, 20092010 has been derived from the audited financial statements as of that date.  For further information, r eferrefer to the financial statements and the notes included in the Company’s 20092010 Form 10-K.

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2010,April 2011, the FASB issued 2010-20 Accounting Standards Update (ASU) No. 2010-20, ASU 2011-02 Receivables (Topic 310): Disclosures about“A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring”. The amendments in this update apply to all creditors, such as us, that restructure receivables that fall within the Credit Qualityscope of Financing ReceivablesSubtopic 310-40, Receivables-Troubled Debt Restructurings by Creditors. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist: (a) the restructuring constitutes a concession by the creditor and (b) the Allowance for Credit Losses.  This ASU amendsdebtor is experiencing financial difficulties. The amendments to Topic 310 clarify the guidance on a creditor’s evaluation of whether it has granted a concession as follows:

1. If a debtor does not otherwise have access to funds at a market rate for debt with similar risk characteristics as the restructured debt, the restructuring would be considered to be at a below-market rate, which may indicate that the creditor has granted a concession. In that circumstance, a creditor should consider all aspects of the restructuring in determining whether it has granted a concession. If a creditor determines that it has granted a concession, the creditor must make a separate assessment about whether the debtor is experiencing financial difficulties to determine whether the restructuring constitutes a troubled debt restructuring.

2. A temporary or permanent increase in the FASB Accounting Standards CodificationTM (Codification)contractual interest rate as a result of a restructuring does not preclude the restructuring from being considered a concession because the new contractual interest rate on the restructured debt could still be below the market interest rate for new debt with similar risk characteristics. In such situations, a creditor should consider all aspects of the restructuring in determining whether it has granted a concession. If a creditor determines that it has granted a concession, the creditor must make a separate assessment about whether the debtor is experiencing financial difficulties to improvedetermine whether the disclosuresrestructuring constitutes a troubled debt restructuring.

3. A restructuring that results in a delay in payment that is insignificant is not a concession. However, an entity provides aboutshould consider various factors in assessing whether a restructuring resulting in a delay in payment is insignificant. The amendments to Topic 310 clarify the credit qualityguidance on a creditor’s evaluation of whether a debtor is experiencing financial difficulties as follows: A creditor may conclude that a debtor is experiencing financial difficulties, even though the debtor is not currently in payment default. A creditor should evaluate whether it is probable that the debtor would be in payment default on any of its financing receivablesdebt in the foreseeable future without the modification. In addition, the amendments to Topic 310 clarify that a creditor is precluded from using the effective interest rate test in the debtor’s guidance on restructuring of payables (paragraph 470-60-55-10) when evaluating whether a restructuring constitutes a troubled debt restructuring.

ASU 2011-02 is effective for our first interim or annual period beginning on or after June 15, 2011, and is to be applied retrospectively to the related allowance for credit losses.beginning of the annual period of adoption. As a result of these amendments,applying this ASU, an entity is required to disaggregate, by portfolio segmentmay identify receivables that are newly considered impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or class of financing receivable, certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses.  The ASU is effective for interim and annual reporting periods endingperiod beginning on or after DecemberJune 15, 2010.2011. We do not expect that the adoption of this new ASU to have a material impact on our consolidated financial statements.

9


NOTE 2 – CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company has adopted various accounting policies, which govern the application of accounting principles generally accepted in the United States of America in the preparation of our financial statements.  The Company’s significant accounting policies are described in the footnotes to the consolidated financial statements at December 31, 20092010 as filed on itsour annual report on Form 10-K.

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

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

NOTE 3 – STOCK COMPENSATION PLANS

The Company did not grant any options and no options were exercised during the quarter or nine month period ended September 30, 2010.March 31, 2011.

NOTE 4 – NET INCOME (LOSS) PER SHARE

Net income (loss) per common share is based on the weighted average number of common shares outstanding during the period.  The effects of potential common shares outstanding, including warrants and options, are included in diluted earnings per share.  No common stock equivalents were considered in 20102011 and 20092010 as the effects of such would be anti-dilutive to the income (loss) per share calculation.  Dividends accumulated on cumulative preferred stock totaled $0 and $64,123 at September 30, 2010, and September 30, 2009, respectively, and reduced the earnings available to common stockholders in the computation.

 
910

 

NOTE 5 – INVESTMENT SECURITIES

Investment securities as of September 30, 2010March 31, 2011 and December 31, 20092010 are summarized as follows.
 
  September 30, 2010 
Securities Available for Sale 
Amortized
Cost
  Gross Unrealized  Gross Unrealized  
Fair
Value
 
    Gains  Losses    
Obligations of States and Political Subdivisions $331,031  $-  $(15,996) $315,035 
Mortgage Backed Securities-GNMA  368,666   11,804   -   380,470 
Mortgage Backed Securities-FNMA and FHLMC  483,478   8,907   (2,886)  489,499 
Private Label Residential Mortgage Backed Securities  1,378,289   84,144   (14,426)  1,448,007 
Private Label Commercial Mortgage Backed Securities  672,741   444   -   673,185 
  $3,234,205  $105,299  $(33,308) $3,306,196 
Securities Held to Maturity                
Private Label Residential Mortgage Backed Securities $868,848  $100,995  $-  $969,843 
Private Label Commercial Mortgage Backed Securities  11,108,959   859,951   -   11,968,910 
  $11,977,807  $960,946  $-  $12,938,753 
 December 31, 2009  March 31, 2011 
Securities Available for Sale 
Amortized
Cost
  Gross Unrealized  Gross Unrealized  
Fair
Value
  
Amortized
Cost
  Gross Unrealized  Gross Unrealized  
Fair
Value
 
   Gains  Losses        Gains  Losses    
Obligations of U.S. Government Agencies  $983,146  $28,888  $-  $1,012,034  $3,595,208  $6,174  $(78,015) $3,523,367 
Obligations of States and Political Subdivisions  326,855   -   (87,693)  239,162   333,952   9,048   -   343,000 
Mortgage Backed Securities-GNMA  1,435,829   71,850   -   1,507,679   356,591   11,412   -   368,003 
Mortgage Backed Securities-FNMA and FHLMC  794,697   9,750   (1,928)  802,519   1,913,888   5,037   (33,320)  1,885,605 
Private Label Residential Mortgage Backed Securities  2,720,521   4,331   (288,440)  2,436,412   2,382,302   140,453   (12,840)  2,509,915 
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  $8,581,941  $172,124  $(124,175) $8,629,890 
Securities Held to Maturity                                
Private Label Residential Mortgage Backed Securities $1,963,140  $255,583  $-  $2,218,723  $644,679  $70,771  $-  $715,450 
Private Label Commercial Mortgage Backed Securities  14,831,223   1,056,040   (57,627)  15,829,636   8,606,409   538,988   (374)  9,145,023 
 $16,764,363  $1,311,623  $(57,627) $18,048,359  $9,251,088  $609,759  $(374) $9,860,473 

  December 31, 2010 
Securities Available for Sale 
Amortized
Cost
  Gross Unrealized  Gross Unrealized  
Fair
Value
 
    Gains  Losses    
Obligations of U.S. Government Agencies   $2,000,000  $-  $(82,562) $1,917,438 
Obligations of States and Political Subdivisions  332,455   -   (6,955)  325,500 
Mortgage Backed Securities-GNMA  365,670   16,221   -   381,891 
Mortgage Backed Securities-FNMA and FHLMC  457,571   6,312   (3,493)  460,390 
Private Label Residential Mortgage Backed Securities  1,337,633   141,334   (12,879)  1,466,088 
Private Label Commercial Mortgage Backed Securities  652,752   535   -   653,287 
  $5,146,081  $164,402  $(105,889) $5,204,594 
Securities Held to Maturity                
Private Label Residential Mortgage Backed Securities $766,732  $87,519  $-  $854,251 
Private Label Commercial Mortgage Backed Securities  10,033,737   692,605   (230)  10,726,112 
  $10,800,469  $780,124  $(230) $11,580,363 

Securities with a carrying value of $13,609,930$13,554,835 and $20,150,917$14,312,954 at September 30, 2010,March 31, 2011, and December 31, 2009,2010, respectively, were pledged to institutions with which the Company has available lines of credit outstanding.

 
1011

 

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 September 30, 2010March 31, 2011 and December 31, 2009:2010:

 September 30, 2010  March 31, 2011 
 Less than 12 Months  12 Months or Greater  Total  Less than 12 Months  12 Months or Greater  Total 
 Fair Value  Gross Unrealized Losses  Fair Value  Gross Unrealized Losses  Fair Value  
Total
Unrealized Losses
  Fair
Value
  Gross
Unrealized
Losses
  Fair
Value
  Gross
Unrealized
Losses
  Fair
Value
  
Total
Unrealized
Losses
 
Securities Available for Sale                                    
Obligations of States and Political Subdivisions $-  $-  $315,035  $(15,996) $315,035  $(15,996)
Obligations of U.S. Government Agencies  $1,921,985  $(78,015) $-  $-  $1,921,985  $(78,015)
Mortgage Backed Securities-FNMA and FHLMC  -   -   264,039   (2,886)  264,039   (2,886)  1,453,614   (29,322)  261,158   (3,998)  1,714,772   (33,320)
Private Label Residential Mortgage Backed Securities  -   -   216,902   (14,426)  216,902   (14,426)  1,065,706   (12,840)  -   -   1,065,706   (12,840)
                                                
 $-  $-  $795,976  $(33,308) $795,976  $(33,308) $4,441,305  $(120,177) $261,158  $(3,998) $4,702,463  $(124,175)
                        
Securities Held to Maturity                        
Private Label Commercial Mortgage Backed Securities $239,301  $(374) $-  $-  $239,301  $(374)
                        


 December 31, 2009  December 31, 2010 
 Less than 12 Months  12 Months or Greater  Total  Less than 12 Months  12 Months or Greater  Total 
 Fair Value  Gross Unrealized Losses  Fair Value  Gross Unrealized Losses  Fair Value  
Total
Unrealized Losses
  Fair
Value
  Gross
Unrealized
Losses
  Fair
Value
  Gross
Unrealized
Losses
  Fair
Value
  
Total
Unrealized
Losses
 
Securities Available for Sale                                    
Obligations of U.S. Government Agencies  $1,917,438  $(82,562) $-  $-  $1,917,438  $(82,562)
Obligations of States and Political Subdivisions $239,162  $(87,693) $-  $-  $239,162  $(87,693)          325,500   (6,955)  325,500   (6,955)
Mortgage Backed Securities-FNMA and FHLMC  -   -   492,889   (1,928)  492,889   (1,928)  -   -   262,607   (3,493)  262,607   (3,493)
Private Label Residential Mortgage Backed Securities  1,463,016   (117,778)  416,654   (170,662)  1,879,670   (288,440)  -   -   196,830   (12,879)  196,830   (12,879)
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) $1,917,438  $(82,562) $784,937  $(23,327) $2,702,375  $(105,889)
                                                
Securities Held to Maturity                                                
Private Label Commercial Mortgage Backed Securities $887,578  $(57,627) $-  $-  $887,578  $(57,627) $327,692  $(230) $-  $-  $327,692  $(230)

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

At September 30, 2010, 3March 31, 2011, 5 of the 814 debt securities available for sale, and none1 of the 1514 debt securities held to maturity contained unrealized losses with an aggregate depreciation of 4.02%2.467% from the Company’s amortized cost basis.

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

Obligations of States and Political Subdivisions.U.S. Government Agencies.  The unrealized losslosses on the one investmenttwo investments in obligations of states and political subdivisions wasU.S. Government agencies were caused by interest rate increases.  The contractual terms of this investment does 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 investmentinvestments and it is not more likely than not that the Company will be required to sell the investmentinvestments before recovery of itstheir amortized cost basis,bases, which may be maturity, the Company does not consider this investmentthese investments to be other-than-temporarily impaired at September 30, 2010.

11

March 31, 2011.

GSE Residential Mortgage-backed Securities. - FNMA and FHLMC.  The unrealized losslosses on the Company’s investmenttwo investments in one GSE mortgage-backed security wassecurities were caused by interest rate increases.  The Company purchased this investmentinvestments at a discount relative to its face amount, and the contractual cash flows of this investment areis guaranteed by an agency of the U.S. Government.  Accordingly, it is expected that

12


the security would not be settled at a price less than the amortized cost basisbases of the Company’s investment.  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 investmentinvestments and it is not more likely than not that the Company will be required to se llsell the investmentinvestments before recovery of their amortized cost basis,bases, which may be maturity, the Company does not consider this investmentthese investments to be other-than-temporarily impaired at September 30, 2010.March 31, 2011.

Private Label Residential Mortgage-backed Securities.Securities.  The unrealized lossesloss associated with one private label residential mortgage-backed securitiessecurity is primarily driven by higher projected collateral losses, wider credit spreads, and changes in interest rates.  The Company assessesWe assess for credit impairment using a cash flow model.  Based upon our assessment of the expected credit losses of the security given the performance of the underlying collateral compared to our credit enhancement, we expect to recover the entire amortized cost basis of this security.

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

Gross realized gains on securities totaled $228,899$0 and $24,984$33,329 for the nine monthsperiods ended September 30,March 31, 2011 and 2010, and 2009, respectively.  Gross realized losses, including impairment losses, on securities totaled $83,297 and $62,420 for the nine months ended September 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.

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

Other investments on the consolidated balance sheetsheets at September 30, 2010March 31, 2011 and December 31, 20092010 include restricted equity securities consisting of Federal Reserve Bank stock of $168,400 and $137,300, respectively,$184,900, and Federal Home Loan Bank stock of $385,000 and $263,500, respectively.$435,200. These securities are carried at cost since they do not have readily determinable fair values due to their restricted nature and the Bank does not exercise significant influence.

The amortized cost, estimated fair value, and weighted average contractual yieldsyield of investment securities held at September 30, 2010,March 31, 2011, by contractual maturity, are shown below.  Expected maturities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

 Available for Sale  Held to Maturity  Available for Sale  Held to Maturity 
 Amortized Cost  Fair Value  Weighted Average Yield  Amortized Cost  Fair Value  Weighted Average Yield  Amortized
Cost
  Fair
Value
  Weighted
Average
Yield
  Amortized
Cost
  Fair
Value
  Weighted
Average
Yield
 
Obligations of U.S. Government Agencies                  
Less than 1 Year $3,000,000   2,924,703   2.29% $-   -   - 
1 to 6 Years  595,208   598,663   2.62%            
Obligations of States and Political Subdivisions                                          
1 to 5 Years $331,031  315,035   8.71% $-  -   -   333,952   343,000   8.71%  -   -   - 
Mortgage Backed Securities                                                
Less than 1 Year  266,926   264,039   5.65%  236,639   245,351   10.35%  265,156   261,158   4.78%  204,350   208,980   10.35%
1 to 5 Years  1,489,288   1,496,017   6.92%  11,498,802   12,401,043   10.04%  1,441,413   1,437,669   3.69%  8,799,477   9,358,087   10.50%
5 to 10 Years  1,146,960   1,231,105   7.33%  242,366   292,359   9.58%  2,795,613   2,911,540   5.05%  247,261   293,406   9.58%
Over 10 Years  150,599   153,157   1.86%  -   -   - 
 $3,234,205  $3,306,196   6.27% $11,977,807  $12,938,753   10.03% $8,581,941   8,629,890   3.75% $9,251,088   9,860,473   10.46%


13


NOTE 6 -  LOANSLoans and Allowance for Loan Losses

The composition of loans as of September 30, 2010March 31, 2011 and December 31, 20092010 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 
  March 31, 2011  December 31, 2010 
       
Commercial and Financial $2,638,181  $2,946,664 
         
Commercial Real Estate -Owner Occupied  8,421,722   8,549,938 
Commercial Real Estate -Other  1,911,635   1,933,797 
  Total Commercial Real Estate  10,333,357   10,483,735 
         
1-4 Family Residential Construction  714,514   995,760 
Other Construction, land development, and other land loans  3,593,212   4,165,571 
  Total Construction and Land  4,307,726   5,161,331 
         
Farmland  1,153,927   1,172,500 
Residential Real Estate  10,609,909   11,032,850 
Multifamily Real Estate  235,021   236,213 
  All Other Real Estate  11,998,857   12,441,763 
         
Consumer  767,791   838,343 
         
Total Loans  30,045,912   31,871,836 
Unamortized costs  15,831   24,076 
         
Total Loans plus unamortized costs $30,061,743  $31,895,912 


 
1214

 

ActivityCommercial and Financial
The Bank’s commercial loans include working capital loans, accounts receivable and inventory and equipment financing.  The terms of these loans vary by purpose and by type of underlying collateral.  The Bank typically makes equipment loans for a term of five years or less at fixed or variable rates, with most loans fully amortized over the term.  Equipment loans generally are secured by the financed equipment, and the ratio of the loan principal to the value of the financed equipment or other collateral will generally be 70% or less.  Loans to support working capital typically have terms not exceeding one year and usually are secured by accounts receivable, inventory and/or personal guarantees of the principals of the business.  For loans secured by accounts receivable or inventory, principal is typically repaid as the assets securing the loan are converted into cash.   For loans secured with other types of collateral, principal is typically due at maturity.  The quality of the commercial borrower’s management and its ability both to properly evaluate changes in the supply and demand characteristics affecting its markets for products and services and to respond effectively to such changes are significant factors in a commercial borrower’s creditworthiness.

Commercial Real Estate Loans
The Bank strives to diversify this portfolio across different property types.  Accordingly, the commercial real estate portfolio includes loans secured by warehouses, office buildings, land, extended stay properties, assisted living properties, retail office and service properties, self storage properties, apartments, condominiums, industrial properties, and restaurants.   Commercial real estate loan terms generally are limited to five years or less, although payments may be structured on a longer amortization basis.  Interest rates may be fixed or adjustable, but generally are not fixed for a period exceeding 60 months.  The Bank normally charges an origination fee on these loans.  Risks associated with commercial real estate loans include fluctuations in the value of real estate, new job creation trends, tenant vacancy rates and the quality of the borrower’s management.  The Bank attempts to limit its risk by analyzing borrowers’ cash position, global cash flow, value of assets, payment record to all creditors, needs of proposed market area and collateral value of pledged property on an ongoing basis.

Construction and Land Loans
The Bank strives to diversify this portfolio across a mix of commercial, single family and multi-family developments.  Construction loans are generally made with a term of approximately 12 months and interest is typically paid monthly.  Acquisition and Development loans are generally made with a term of approximately 24 months and interest is typically paid monthly.  The ratio of the loan principal to the value of the collateral as established by independent appraisal and generally does not exceed regulatory requirements.

Loans on developments or properties that have not been pre-sold by the builder are also based on the builder/borrower’s financial strength and cash flow position, as well as the financial strength and reputation of the developer in case of an Acquisition and Development loan.  Loan proceeds are disbursed based on the percentage of completion and only after an experienced construction lender or engineer has inspected the project.  Risks associated with construction loans include fluctuations in the value of real estate, the time required to bring a project to market, changes in land use surrounding the project location, governmental restrictions and new job creation trends.

The Bank continues to strive to diversify its entire portfolio and has established goals that de-emphasize reliance upon any single class of loans.   To that end, the Bank’s goal is to have total outstanding acquisition, development, and construction loans (AD&C) less than 100% of capital.

Other Real Estate Loans
The Bank’s residential real estate loans consist primarily of residential first and second mortgage loans and home equity lines of credit.  The majority of the bank’s residential real estate loans are variable rate, balloon or short term amortized loans.  As a result, the Bank limits its exposure to long-term interest rate risks, which are typically associated with residential real estate loans.  Residential real estate loans are consistent with the Bank’s loan policy and with the ratio of the loan principal to the value of collateral as established by independent appraisal not to exceed regulatory restrictions of the pledged collateral.  We believe the loan to value ratios together with the requirements for satisfactory credit, income and residence stability are sufficient to compensate for fluctuations in real estate market value and reduces losses that may result from the downturn in the residential real estate market.

Consumer Loans
The Bank makes a variety of loans to individuals for personal, family and household purposes, including secured and unsecured installment and term loans and lines of credit.  The approval of these loans is determined by the length and breadth of the consumer’s credit record, employment and residence stability and an evaluation of the continuation of these factors.  Consumer loan repayments depend upon the borrower’s financial stability and are more likely to be adversely affected by divorce, job loss, illness and personal hardships.  Generally, consumer loans are secured by depreciable assets such as boats, cars, and trailers therefore these types of loans would most likely be amortized over the useful life of the asset.  For those

15


clients who demonstrate excellent credit records, the bank offers unsecured and secured (based on the equity in a personal residence) lines of credit.  These lines of credit are subject to an annual review for continuation of the relationship.  Deterioration in payment record, reported activity from a credit reporting agency or decreasing value in the pledged equity of the real estate may cause the line to be reduced or closed.

The Bank grants loans and extensions of credit to individuals and a variety of businesses and corporations located primarily in its general trade area of Hall County and Clarke County, Georgia. Although the Bank has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by improved and unimproved real estate and is dependent upon the real estate market.

Included in loans above are $8,053,994 and $8,659,611 of interest only loans at March 31, 2011 and December 31, 2010.  These loans present greater risk to the Company, especially considering the current decline in the real estate markets in and around the Metro Atlanta area.

The following is a summary of current, accruing past due, and nonaccrual loans by portfolio class as of March 31, 2011 and December 31, 2010.

March 31, 2011 Current  
Accruing
30-89 Days
Past Due
  
Accruing
Greater
than 90
Days Past
Due
  Nonaccrual  Total 
                
Commercial and Financial $2,329,507  $308,674  $-  $-  $2,638,181 
Commercial Real Estate -Owner Occupied  8,421,722   -   -   -   8,421,722 
Commercial Real Estate -Other  1,798,483   113,152   -   -   1,911,635 
Total Commercial Real Estate  10,220,205   113,152   -   -   10,333,357 
                     
1-4 Family Residential Construction  714,514   -   -   -   714,514 
Other Construction, land development, and other land loans  2,419,962   769,000   -   404,250   3,593,212 
Total Construction and Land  3,134,476   769,000   -   404,250   4,307,726 
                     
Farmland  759,867   -   -   394,060   1,153,927 
Residential Real Estate  9,569,016   409,468   -   631,425   10,609,909 
Multifamily Real Estate  235,021   -   -   -   235,021 
All Other Real Estate  10,563,904   409,468   -   1,025,485   11,998,857 
                     
Consumer  731,264   26,349   525   9,653   767,791 
                     
Total Loans $26,979,356  $1,626,643  $525  $1,439,388  $30,045,912 


16



December  31, 2010 Current  
Accruing
30-89 Days Past Due
  Nonaccrual  Total 
             
Commercial and Financial $2,909,725  $36,939  $-  $2,946,664 
Commercial Real Estate -Owner Occupied  8,549,938   -   -   8,549,938 
Commercial Real Estate -Other  1,933,797   -   -   1,933,797 
Total Commercial Real Estate  10,483,735   -   -   10,483,735 
                 
1-4 Family Residential Construction  918,952   76,808   -   995,760 
Other Construction, land development, and other land loans  3,761,320   -   404,250   4,165,571 
Total Construction and Land  4,680,272   76,808   404,250   5,161,331 
                 
Farmland  778,440   -   394,060   1,172,500 
Residential Real Estate  10,176,610   162,167   694,072   11,032,849 
Mulitfamily Real Estate  236,414   -   -   236,414 
All Other Real Estate  11,191,464   162,167   1,088,132   12,441,763 
                 
Consumer  828,133   557   9,653   838,343 
                 
Total Loans $30,093,329  $276,471  $1,502,035  $31,871,836 

Nonaccrual loans as of March 31, 2011 and December 31, 2010 were $1,439,388 and $1,502,035, respectively.  Interest income on nonaccrual loans outstanding at March 31, 2011 and December 31, 2010 that would have been recorded if the loans had been current and performed in accordance with their original terms was $20,337 for the three months ended March 31, 2011 and $40,862 for the year ended December 31, 2010.
The credit quality of the loan portfolio is summarized no less frequently than quarterly using the standard asset classification system utilized by the federal banking agencies. These classifications are divided into three groups - Not Classified (Pass), Special Mention, and Classified or Adverse rating (Substandard, Doubtful, and Loss) and are defined as follows:
Pass - loans which are well protected by the current net worth and paying capacity of the obligor (or guarantors, if any) or by the fair value, less cost to acquire and sell, of any underlying collateral in a timely manner.
Special Mention - loans which have potential weaknesses that deserve management's close attention. These loans are not adversely classified and do not expose an institution to sufficient risk to warrant an adverse classification.
Substandard - loans which are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any. Loans with this classification are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful - loans which have all the weaknesses inherent in loans classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable on the basis of currently known facts, conditions, and values.
Loss - loans which are considered by management to be uncollectible and of such little value that its continuance on the institution's books as an asset, without establishment of a specific valuation allowance or charge-off is not warranted.
When a retail loan reaches 90 days past due, it is downgraded to substandard, and upon reaching 120 days past due, it is

17


downgraded to loss and charged off.
The following is a summary of the loan portfolio credit exposure by risk grade as of March 31, 2011 and December 31, 2010.

March 31, 2011 Pass  Special Mention  Substandard  Total 
Commercial and Financial $2,575,469  $62,712  $-  $2,638,181 
                 
Commercial Real Estate -Owner Occupied  8,421,722   -   -   8,421,722 
Commercial Real Estate -Other  1,848,494   63,141   -   1,911,635 
Total Commercial Real Estate  10,270,216   63,141   -   10,333,358 
                 
1-4 Family Residential Construction  310,264   -   404,250   714,514 
Other Construction, land development, and other land loans  3,547,947   45,265   -   3,593,212 
Total Construction and Land  3,858,211   45,265   404,250   4,307,725 
                 
Farmland  759,867   -   394,060   1,153,927 
Residential Real Estate  8,962,144   771,288   876,477   10,609,909 
Multifamily Real Estate  235,021   -   -   235,021 
All Other Real Estate  9,957,032   771,288   1,270,537   11,998,857 
                 
Consumer  745,625   2,735   19,431   767,791 
                 
Total Loans $27,406,553  $945,141  $1,694,218  $30,045,912 

December 31, 2010 Pass  Special Mention  Substandard  Total 
Commercial and Financial $2,875,652  $71,012  $-  $2,946,664 
                 
Commercial Real Estate -Owner Occupied  8,549,938   -   -   8,549,938 
Commercial Real Estate -Other  1,869,881   63,916   -   1,933,797 
Total Commercial Real Estate  10,419,819   63,916   -   10,483,735 
                 
1-4 Family Residential Construction  948,986   46,774   -   995,760 
Other Construction, land development, and other land loans  3,761,321   -   404,250   4,165,571 
Total Construction and Land  4,710,307   46,774   404,250   5,161,331 
                 
Farmland  778,440   -   394,060   1,172,500 
Residential Real Estate  9,306,999   1,031,176   694,675   11,032,850 
Multifamily Real Estate  236,413   -   -   236,413 
All Other Real Estate  10,321,852   1,031,176   1,088,735   12,441,763 
                 
Consumer  812,853   5,492   19,998   838,343 
                 
Total Loans $29,140,483  $1,218,370  $1,512,983  $31,871,836 


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Transactions in the allowance for loan losses are summarized for the ninethree month periods ended September 30 is summarizedMarch 31 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 
  2011  2010 
       
Balance, Beginning $478,039  $414,670 
Provision Charged to Operating Expenses  179,761   75,000 
Loans Charged Off  (192,604)  (3,152)
Loan Recoveries  4,218   1,976 
         
Balance, Ending $469,414  $488,494 

The following table details the change in the allowance for loan losses from December 31, 2010 to March 31, 2011 by loan segment.

  Commercial  Commercial Real Estate  Construction and Land  All Other Real Estate  Consumer  Total 
Allowance for loan losses                  
Beginning balance $45,456  $17,043  $191,655  $196,760  $27,125  $478,039 
Charge-offs  -   -   -   (192,604)  -   (192,604)
Recoveries  -   -   -   -   4,218   4,218 
Provision  (4,653)  (263)  (47,083)  241,760   (10,000)  179,761 
                         
Ending balance $40,803  $16,780  $144,572  $245,916  $21,343  $469,414 
                         
Ending balance: individually evaluated for impairment $-  $-  $-  $-  $-  $- 
                         
Loans                        
Ending balance $2,638,181  $10,333,357  $4,307,726  $11,998,857  $767,791  $30,045,912 
                         
Ending balance: individually evaluated for impairment $-  $-  $404,250  $1,025,485  $-  $1,429,735 
                         


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The following is a summary of information pertaining to impaired loans.

Impaired Loans For the Period Ended March 31, 2011 and December 31, 2010

  Recorded Investment  Unpaid
Principal
Balance
  Related
Allowance
  Average
Recorded Investment
  Interest
Income
recognized
 
March 31, 2011               
With no related allowance recorded:               
Other Construction, land development, and other land loans $404,250  $518,788  $-  $404,250  $- 
Farmland  394,060   525,000   -   394,060   - 
Residential Real Estate  631,425   797,980   -   631,425   - 
Total $1,429,735  $1,841,768  $-  $1,429,735  $- 
December 31, 2010                    
With no related allowance recorded:                    
Other Construction, land development, and other land loans $404,250  $518,788  $-  $331,385  $- 
Farmland  394,060   525,000   -   32,838   - 
Residential Real Estate  694,675   759,052   -   639,968   10,070 
Total $1,492,985  $1,802,840  $-  $1,004,191  $10,070 

Impaired loans include loans modified in troubled debt restructuring where concessions have been granted to borrowers experiencing financial difficulties.  These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

For the periods ended March 31, 2011 and December 31, 2010, troubled debt restructurings were $127,000 and $132,000.  At March 31, 2011 and December 31, 2010, the Company had no loans that were modified in troubled debt restructuring and impaired.  The Company had troubled debt restructurings that were performing in accordance with their modified terms of $127,000 and $132,000 at March 31, 2011 and December 31, 2010.  In years subsequent to a modification, loans that are performing in accordance with their modified terms are not reported as impaired loans.

NOTE 7 – SHAREHOLDERS’ EQUITY

In June 2010, the Company commenced a private offering of up to 2,000,000 shares of its common stock at of price of $0.67 per share to a limited number of accredited investors.  The private offering closed August 13, 2010. During the third quarter of 2010 the Company received net proceeds of $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 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 1,883,145 warrants .  The Company is using the net proceeds from the private offering for working capital purposes.  The common stock sold in the offering has not been registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

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

NOTE 8 – INCOME TAXES

The Company accounts for income taxes under the liability method.  Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards.  Deferred tax assets are subject to management’s judgment based upon available evidence that future realization is more likely than not.  For financial reporting purposes, a valuation allowance of 100 percent of the deferred tax assets as of September 30, 2010March 31, 2011 and December 31, 20092010 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 m aymay 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 assetsasset to theirthe expected realizable amounts.amount. 

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NOTE 98 – REGULATORY MATTERS

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

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The Bank’s actual ratios as of September 30, 2010March 31, 2011 are as follows:

             To Be Well 
             Capitalized Under              To Be Well 
       For Capital  Prompt Corrective              Capitalized Under 
 Actual  Adequacy Purposes  Action Provisions        For Capital  Prompt Corrective 
 Amount  Ratio  Amount  Ratio  Amount  Ratio  Actual  Adequacy Purposes  Action Provisions 
 (In Thousands)  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% $6,455   17.98% $2,872   8.00%% $3,590   10.00%
Tier I Capital to                                                
Risk-Weighted Assets  6,090   13.15   1,852   4.00   2,778   6.00   6,006   16.73   1,436   4.00   2,154   6.00 
Tier I Capital to                                                
Average Assets  6,090   8.69   2,802   4.00   3,502   5.00   6,006   8.23   2,918   4.00   3,648   5.00 

NOTE 109 – FAIR VALUE DISCLOSURES

Fair Value of Financial Instruments

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

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

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

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

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

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

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

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

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

Standby Letters of Credit and Unfulfilled Loan Commitments - Fair values are based on fees currently charged to enter

21


into similar agreements taking into account the remaining terms of the agreements and the counterparties’ credit standing.  The fees associated with these instruments are not considered material.

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The carrying amount and estimated fair values of the Company’s financial instruments as of September 30, 2010March 31 2011 and December 31, 20092010 are presented hereafter:

 September 30, 2010  December 31, 2009  March 31, 2011  December 31, 2010 
 Carrying  Estimated  Carrying  Estimated  Carrying  Estimated  Carrying  Estimated 
 Amount  Fair Value  Amount  Fair Value  Amount  Fair Value  Amount  Fair Value 
 (in Thousands)  (in Thousands) 
Assets                        
Cash and Short-Term Investments $3,684  $3,684  $2,531  $2,531  $16,389  $16,389  $5,962  $5,962 
Investment Securities Available for Sale  3,306   3,306   7,594   7,594   8,630   8,630   5,205   5,205 
Investment Securities Held to Maturity  11,978   12,939   16,794   18,048   9,251   9,860   10,800   11,580 
Other Investments  553   553   401   401   620   620   620   620 
Loans Held for Sale  17,685   17,685   9,637   9,637   3,691   3,691   13,908   13,908 
Loans, Net  33,696   33,610   36,215   36,572   29,592   29,696   31,418   31,664 
Accrued Interest Receivable  178   178   279   279   192   192   221   221 
                                
Liabilities                                
Deposits  61,566   61,505   69,567   69,596   63,313   63,380   62,662   62,582 
Borrowings  5,500   5,591   2,000   2,062   2,000   2,067   2,000   2,077 
Accrued Interest Payable  292   292   279   279   259   259   200   200 

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

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

Determination of Fair Value

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

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


 
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Fair Value Hierarchy

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

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

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

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

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

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

Investment Securities Available for Sale

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

Loans Held for Sale

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

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

Impaired loans

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

Other Real Estate

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

 
1623

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis as of September 30, 2010 andMarch 31, 2011and December 31, 20092010

    
Fair Value Measurements at
September 30, 2010 Using
     
Fair Value Measurements at
March 31, 2011 Using
 
 Total  Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3 
                        
Investment Securities Available for Sale $3,306,196   -  $3,306,196   -  $8,629,890  $500,000  $8,129,890   - 
Loans Held for Sale  17,684,983   -   17,684,983   -   3,690,573   -   3,690,573   - 


    
Fair Value Measurements at
December 31, 2009 Using
     
Fair Value Measurements at
December 31, 2010 Using
 
 Total  Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3 
                        
Investment Securities Available for Sale $7,594,425   -  $7,594,425   -  $5,204,594   -  $5,204,594   - 
Loans Held for Sale  9,637,123   -   9,637,123   -   13,908,172   -   13,908,172   - 

The following table presents the financial instruments carried on the consolidated balance sheets by caption and by level in the fair value hierarchy at September 30, 2010March 31, 2011 and December 31, 2009,2010, for which a nonrecurring change in fair value has been recorded:

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis as of September 30, 2010March 31, 2011 and December 31, 20092010

 
Fair Value Measurements at
September 30, 2010 Using
     
Fair Value Measurements at
March 31, 2011 Using
    
 Level 1  Level 2  Level 3  
Total
 (Losses)
  Level 1  Level 2  Level 3  
Total
Gains
(Losses)
 
                        
Impaired Loans  -   -  $988,407  $(420,254)  -   -  $181,830  $(152,440)
Other Real Estate  -   -   556,501   -   -   -   -   - 

 
Fair Value Measurements at
December 31, 2009 Using
     
Fair Value Measurements at
December 31, 2010 Using
    
 Level 1  Level 2  Level 3  
Total
 (Losses)
  Level 1  Level 2  Level 3  
Total
Gains
(Losses)
 
                        
Impaired Loans  -   -  $935,284  $(299,427)  -   -  $1,284,851  $(309,855)
Other Real Estate  -   -   653,501   (34,644)  -   -   522,061   (67,512)


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

This discussion and analysis is intended to assist you in understanding our financial condition and results of operations.  You should read this commentary in conjunction with the financial statements and the related notes and the other statistical information included elsewhere in this report and in our 20092010 Form 10-K.10-K,  as well as with an understanding of our short operating history.

Discussion of Forward-Looking Statements

This Form 10-Q contains forward-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 be 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 can be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “could,” “should,” “projects,” “plans,” “goal,” “targets,” “potential,” “estimates,” R 20;pro“pro forma,” “seeks,” “intends,” or “anticipates” or the negative thereof or comparable terminology.  We caution our shareholdersstockholders and other readers not to place undue reliance on such statements.  Our businesses and operations are and will be subject to a variety of risks, uncertainties and other factors.  Consequently, actual results and experience may materially differ from those contained in any forward-looking statements.  Such risks, uncertainties and other factors that could cause actual results and experience to differ from those projected include, but are not limited to, the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2009,2010, as well as the following:

 ·our ability to successfully implement our business plan;

 ·our ability to raise capital;

 ·the failure of our assumptions underlying the establishment of allowances for loan losses and other estimates, or dramatic changes in those underlying assumptions or judgments in future periods, that, in either case, render the allowance for loan losses inadequate or require that further provisions for loan losses be made;

 ·our ability to identify and retain experienced management and other employees;

 ·the strength of our overall credit risk management process;

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

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

 ·governmental monetary and fiscal policies, the impact of the Dodd-Frank Act and related regulations and other changes in financial services laws and regulations, including changes in accounting standards and banking, securities and tax laws and regulations and governmental intervention in the U.S. financial system, as well as changes affecting financial institutions’ ability to lend and otherwise do business with consumers;

 ·the effect of any regulatory or judicial proceedings, board resolutions, informal memorandums of understanding or formal enforcement actions imposed by;on us;

 ·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;
 
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 ·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;

 ·our ability to sell residential mortgage loans that we originate;

·our required repurchase of residential mortgage loans we have sold or indemnity of institutional loan purchasers;

·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.Commission (the “SEC”).

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

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These risks are exacerbated by the recent developments in national and international financial markets, and we are unable to predict what effectimpact these uncertain market conditions will have on our Company.  For more than two years,us.  Since 2008, the capital and credit markets have experienced extended volatility and disruption.  There can be no assurance that these unprecedented recent developmentsconditions will not continue to materially and adversely affectimpact our business, financial condition, and results of operations.operations

Unless the context indicates otherwise, all references to “FCB,” “the Company,” “we,” “us” and “our” in this Quarterly Report on Form 10-Q refer to First Century Bancorp. and our wholly owned subsidiary, First Century Bank, National Association (the “Bank”).

General

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

The following discussion describes our results of operations for the three and nine months ended September 30, 2010March 31, 2011 as compared to the same periodsperiod in 20092010 and also analyzes our financial condition at September 30, 2010March 31, 2011 compared to December 31, 2009.2010.  Like most community banks, we derive a significant portion of our income from interest we receive on our loans and investments.  Our primary sources of funds for making these loans and investments are our deposits and borrowings, on which we pay interest.  Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits and borrowings.  Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities.

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

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

The following discussion and analysis also identifies significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements.  We encourage you to read this
26

discussion and analysis in conjunction with the financial statements and the related notes and the other statistical information also included herein.

Critical Accounting Policies

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

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

Allowance for Loan Losses

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

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The evaluation of the adequacy of the allowance for loan losses is based upon loan categories except for impaired 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.  Estimated losses are determined by applying risk ratings, and historical loss experience to each category of loans.

Management has significant discretion in making the judgments inherent in the determination of the provision and allowance for loan losses, including 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 volume and classification of loans.

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

Recent Legislative and Regulatory Initiatives to Address Financial and Economic Crisis

Markets in the United States and elsewhere have been experienced extreme volatility and disruption for more than 2three 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.  Credit 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.

Like many financial institutions across the United States, our operations have been negatively affected by this current economic crisis.   Combined, the deterioration in the residential and the commercial real estate markets has materially increased our level of nonperforming assets and charge-offs of problem loans over the past two years.   These market conditions and the tightening of credit have led to increased delinquencies in our loan portfolio, increased market volatility, and increased pressure on our capital and net-interest margin.  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 st atisticalstatistical information included in this report.

Critical Accounting Policies

We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States and with general practices within the banking industry in the preparation of our financial statements.  Our significant accounting policies are described in the footnotes to our audited consolidated financial statements as of December 31, 2010 included in the Company’s 2010, as filed in our Annual Report on Form 10-K.

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

Allowance for Loan Losses

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

The evaluation of the adequacy of the allowance for loan losses is based upon loan categories except for impaired 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.  Estimated losses are determined by applying risk ratings, and historical loss experience to each category of loans.

Management has significant discretion in making the judgments inherent in the determination of the provision and allowance for loan losses, including 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 volume and classification of loans.
27

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

Income Taxes

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

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

Results of Operations

Three and Nine Months Ended September 30,March 31, 2011 and 2010 and 2009

Net incomeResults from operations was a net loss of $322,230 for the third quarterfirst three months of 2010 was $351,000 as2011 compared to net lossincome of $150,000$82,269 for the same period in 2009.  Net income for the ninefirst three months ended September 30, 2010 was $492,000 as compared to a net income of $79,000 for the same period in 2009.  2010.  Our operational results depend to a large degree on several components:three factors: our net interest income, our provision for loan losses, income from mortgage banking activities, and our non-interest income and expenses.

There are several factors, described inexpenses.  Non-interest income, primarily composed of mortgage banking income, was approximately 56% of our total revenues (net interest income plus non-interest income) for the discussion below, which have contributed towards increased earnings in 2010period ended March 31, 2011 as compared to 49% of our total revenues for the same period in 2009.  The primary driver of increased earnings is the expansion of the 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 partially offset by an increase in non-interest expense for the nine month period ended September 30, 2010 over the same period in 2009.

2010.
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Net Interest Income

Net interest income is the difference between the interest income received on earning assets (such as loans, investment securities, and federal funds sold) and the interest expense on deposit liabilities and borrowings.  For the three monthsquarter ended September 30,March 31, 2011 and 2010, and 2009, net interest income totaled $763,000$614,000 and $823,000, respectively.  For the nine months ended September 30, 2010 and 2009, net interest income totaled $2,378,000 and $2,327,000,$872,000, respectively.  Interest income from loans, including fees, was $647,000$498,000 and $571,000$643,000 for the three monthsquarters ended September 30,March 31, 2011 and 2010, and 2009, respectively.  Interest income from loans, including fees, was $1,849,000 and $1,737,000 for the nine months ended September 30, 2010 and 2009, respectively.respectively, a decrease of $145,000.  The loan yield increaseddecreased to 6.04% during th e nine months5.93% in 2011 from 6.14% for the quarters ended September 30,March 31, 2011, and 2010, comparedrespectively. The yield on loans held for sale decreased to 4.10% for the 5.74% loan yield duringquarter ended March 31, 2011 from 4.75% for the same period in 2009.2010 due to declining mortgage interest rates in 2010.  Interest income from investment securities was $373,000$326,000 and $635,000$532,000 for the quarters ended March 31, 2011 and 2010, respectively, which represented a lower yield of 7.17% in 2011, compared to the 9.11% yield earned in 2010. Management redirected cash resources to higher yielding investment securities in late 2008 and early 2009 taking advantage of market dislocations that occurred during that time period. These investments had an average life of approximately two years and are paying down as expected resulting in less interest income.  Interest expense totaled $218,000 for the quarter ended March 31, 2011, compared to $306,000 for the comparable period in 2010.  The rate on interest-bearing liabilities decreased 45 basis points to 1.45% for the quarter ended March 31 2011, compared to 1.90% for the comparable period in 2010.  The net interest margin realized on earning assets and the interest rate spread were 3.68% and 3.53%, respectively, for the three months ended September 30, 2010March 31, 2011, compared to 5.04% and 2009, respectively. Interest income from investment securities was $1,369,000 and $1,937,0004.92%, respectively, for the nine months ended September 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 decreased slightly to 9.13% during the nine months ended September 30, 2010, compared to the 9.14% yield earned during the samecomparable period in 2009.

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

The net interest margin we realized on our earning assets climbed to 4.75% for the nine months ended September 30, 2010 from 4.55% for the same period in 2009.  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 September 30, 2009,March 31, 2010, core deposits have grown approximately $10.4$7.8 million, or 73%34%. The Bank has been successful implementing this strategy resultinglowering our cost of funds by 0.12% for the three month period ended March 31, 2011 over the comparable period in an increase in net interest margin of 0.20%.2010.

 
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Average Balances and Interest Rates

The table below details the average balances outstanding for each category of interest earning assets and interest-bearing liabilities for the ninethree months ended September 30,March 31, 2011 and 2010 and 2009 and the average rate of interest earned or paid thereon.  Average balances have been derived from the daily balances throughout the period indicated.

  
For the Three Months Ended
March 31, 2011
  
For the Three Months Ended
March 31, 2010
 
  (Amounts presented in thousands) 
                   
  Average     Yield/  Average     Yield/ 
  Balance  Interest  Rate  Balance  Interest  Rate 
Assets:                  
Interest earning assets:                  
Loans (including loans held for sale and loan fees) $34,089  $498   5.93% $42,476  $643   6.14%
Investment securities and other investments  18,402   326   7.17%  23,695   533   9.11%
Interest bearing deposits  15,257   8   0.22%  3,909   2   0.22%
Total interest earning assets  67,748   832   4.98%  70,080   1,178   6.82%
                         
Other non-interest earnings assets  5,210           3,399         
                         
Total assets $72,958          $73,479         
                         
Liabilities and stockholders’ equity:                        
Interest-bearing liabilities:                        
Deposits:                        
Interest-bearing demand $7,351  $18   0.98% $7,721  $12   0.62%
Savings and money market  17,997   59   1.32%  12,174   53   1.76%
Time  33,536   129   1.56%  43,262   229   2.14%
Borrowings  2,000   12   2.53%  2,340   12   2.23%
Total interest-bearing liabilities  60,884   218   1.45%  65,497   306   1.90%
Other non-interest bearing liabilities  5,692           3,453         
Stockholders’ equity  6,382           4,529         
                         
Total liabilities and stockholders’ equity $72,958          $73,479         
                         
Excess of interest-earning assets over interest-bearing liabilities $6,864          $4,583         
                         
Ratio of interest-earning assets to interest-bearing liabilities  111%          107%        
                         
Net interest income     $614          $872     
                         
Net interest spread          3.53%          4.92%
                         
Net interest margin          3.68%          5.04%
  
For the Nine Months Ended
September 30, 2010
 
For the Nine Months Ended
September 30, 2009
 
  (Amounts presented in thousands) 
                    
  Average     Yield/   Average     Yield/ 
  Balance  Interest  Rate   Balance  Interest  Rate 
Assets:                   
Interest earning assets:                   
Loans (including loan fees) $34,893  $1,576   6.04%  $36,811  $1,581   5.74%
Loans held for sale  8,328   273   4.39%   2,433   156   8.57%
Investment securities and other investments  20,047   1,369   9.13%   28,322   1,937   9.14%
Interest bearing deposits  3,798   8   0.28%   888   -   0.15%
Total interest earning assets  67,065   3,226   6.43%   68,454   3,674   7.18%
                          
Other non-interest earnings assets  3,484            4,010         
                          
Total assets $70,549           $72,464         
                          
Liabilities and shareholders’ equity:                         
Interest-bearing liabilities:                         
Deposits:                         
Interest-bearing demand $6,572  $27   0.55%  $1,059  $8   0.98%
Savings and money market  13,924   186   1.79%   8,470   138   2.18%
Time  38,718   595   2.05%   49,585   1,152   3.11%
Borrowings  2,616   40   2.05%   4,992   49   1.31%
Total interest-bearing liabilities  61,830   848   1.83%   64,106   1,347   2.81%
Other non-interest bearing liabilities
  3,693            4,184         
Shareholders’ equity  5,026            4,174         
                          
Total liabilities and shareholders’ equity
 $70,549           $72,464         
                          
Excess of interest-earning assets over interest-bearing liabilities $5,235           $4,348         
                          
Ratio of interest-earning assets to interest-bearing liabilities  108%           107%        
                          
Net interest income     $2,378           $2,327     
                          
Net interest spread          4.60%           4.38%
                          
Net interest margin          4.74%           4.55%

Non-accrual loans are excluded from average loan balances and totaled $495,000$1,378,000 and $650,000$353,000 for the ninethree months ended September 30,March 31, 2011 and 2010, and 2009, respectively.

 
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Non-interest Income and Expense

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

FHA has discontinued the correspondent designation in favor of full delegation authority along with an increase in the net worth to $2,500,000 from $25,000.00.
Licensing laws have been strengthened creating an elevated threshold that brokers cannot afford to meet.
Increased disclosure requirements have encouraged movement to the more regulated banking structure.
Wholesale lenders have moved away from the broker community.
Losses in the third party origination market have caused conduits to require increased net worth and accountability standards.
Due to these regulatory changes in the mortgage industry, the Bank expanded its mortgage operations to take advantage of the new opportunities 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, a retail production/operations hub located in Roswell, Georgia, and an online mortgage business, Century Point Mortgage. Retail 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 will drive higher earnin gsearnings and greater shareholderstockholder value for the Bank in the upcoming year.  Revenues from the mortgage division are primarily non-interest income of fees, and gains on sales of the loans.  Interest income is earned on the loans from the time they are closed to the time they are sold, which is typically two weeks.  Expenses are primarily salaries and commissions, occupancy, and loan origination expenses such as appraisals.

Non-interest income includes service charges on deposit accounts, customer service fees, mortgage banking income and investment security gains (losses).  Because fees from the origination of loans, which make up a majority of our non-interest income, often reflect market conditions, our non-interest income may tend to have more fluctuations on a period to period basis than does net interest income.

For the quarter ended September 30, 2010,March 31, 2011, non-interest income grewwas $803,000 compared to $1,531,000 from $355,000$949,000 for the quarter ended September 30, 2009, an increasecomparable period in 2010, a decrease of $1,176,000,$146,000, or 331%.  For the nine months ended September 30, 2010 non-interest income grew to $3,669,000 from $1,358,000 for the nine months ended September 30, 2009, an increase of $2,311,000, or 170%15%.  The increasedecrease in non-interest income was primarily due to an increasea decrease in fees earned on mortgage originations,banking income, due to the growth ofa slowdown in production in the mortgage division.divisions following a refinance wave in 2010.  The fees earned are related to the origination of mortgage loans that are sold within 30 days, which investors have committed to purchase be forebefore they are funded.  The Bank funded $142.0$20.5 million in mortgage loans during the nine month period ended September 30, 2010, an increasefirst quarter of $55.72011, a decrease of $15.8 million, or 65%43%, from the same period a year ago.   There were no securities sales during the third quarter of 2010 and 2009 so netNet gains (losses) on sales of securities remained unchanged at $146,000were $0 and $(37,000)$33,329 for the nine monthsquarters ended September 30,March 31, 2011 and 2010, and 2009, respectively.

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

Total non-interest expense for the quarter ended September 30, 2010March 31, 2011 was $1,815,000$1,569,000 compared to $1,191,000$1,663,000 for the quarter ended September 30, 2009, an increaseMarch 31, 2010, a decrease of $624,000,$94,000, or 52%.  For the nine months ended September 30, 2010, non-interest expense was $5,117,000 as compared to $3,401,000 for the nine months ended September 30, 2009, an increase of $1,716,000, or 50%6%

Salaries and benefits, the largest component of non-interest expense, were $1,046,000$818,000 for the quarterthree months ended September 30, 2010,March 31, 2011, as compared to $522,000$922,000 for the quarter ended September 30, 2009, an increase of $524,000, or 100%.  Salaries and benefits, for the ninethree months ended September 30,March 31, 2010, were $2,877,000, as compared to $1,618,000 for the nine months ended September 30, 2009, an increasea decrease of $1,259,000,$104,000, or 78%11%.  The increasedecrease in salaries and benefits is primarily attributable to the growthdecrease in thevariable pay based on  mortgage division in which salaries and benefits increased $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 $461,000 in salaries and benefits during the first nine months of 2010 due to the closures of the Oakwood and Athens, Georgia offices.  We have added 40 full time equivalent employees since mid 2009.production.

Total occupancy and equipment expenses for the quarterthree months ended September 30, 2010,March 31, 2011, were $107,000$104,000 as compared to $95,000$132,000 for the quarterthree months ended September 30, 2009,March 31, 2010, a decrease of $28,000, or 21%.  The decrease in expense is primarily attributable to the closure of the loan production offices in March and April of 2010

Professional fees for the three months ended March 31, 2011, were $85,000 compared to $80,000 for the three months ended March 31, 2010, an increase of $12,000,$5,000, or 13%. Total occupancy and equipment expenses for the nine months ended September 30, 2010, were $346,000 as compared to $310,000 for the nine months ended September 30, 2009, an increase of $36,000, or 12%.   Occupancy expenses attributable to the mortgage division increased $117,000 for the first nine months of 2010 compared to the same period in 2009, while Bank expenses decreased by $81,000 due to the closures of the Oakwood and Athens offices that occurred in the first nine months of 2010.

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Professional fees were $99,000 for the quarter ended September 30, 2010, compared to $70,000 for the quarter ended September 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 $71,000, or 34%7%.  The increase in professional fees is primarily attributable to audit and management consulting fees for the mortgage division, increased compliance and quality control reviews, and audit fees.division.

Marketing expenses for the quarterthree months ended September 30, 2010,March 31, 2011, were $60,000$83,000 compared to $77,000$51,000 for the quarter ended September 30, 2009, a decrease of $17,000, or 22%.  Marketing expenses for the ninethree months ended September 30,March 31, 2010, were $174,000 compared to $185,000 foran increase of $32,000, or 62%.  As a national, internet-based lender, the nine months ended September 30, 2009, a decrease of $11,000, or 6%.  For the first nine months of 2010 Bank marketing expenses decreased approximately $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 but decreased marketing expense for the first nine months o f 2010 by $22,000 over the same period in 2009 duedivision’s business model depends on lead generation to drive a large increase inhigh volume of refinance activity.leads with a lower cost of customer acquisition than traditional mortgage lenders.  Key elements of Century Point’s web-based demand generation program are advertising on mortgage rate websites, paid search advertising, search engines optimizations and social media tools.  In 2011, marketing expenses of $39,000 were directed to the Mortgage Call Center in the form of direct mail.  As the division ismortgage divisions are evolving and maturing, the marketing budget is being analyzed and directed to the most successful techniques. For the first nine months of 2010 the retail mortgage division increased marketing expense by $37,000 over the same period in 2009.

Data processing expense for the quarter ended September 30, 2010, was $173,000, compared to $140,000 for the quarter ended September 30, 2009, an increase of $33,000, or 24%.  Data processing expense for the nine months ended September 30, 2010, was $514,000, compared to $387,000 for the nine months ended September 30, 2009, an increase of $127,000, or 33%.  Fees for coreThe Bank has entered into a master service agreement and data processing were $186,000 and $129,000 for the nine month periods ended September 30, 2010 and 2009, respectively.  Fees paid for management and advisory services under a master services agreement with First Covenant Bank, were $242,000an entity in which William R. Blanton, a director and $148,000Chief Executive Officer of the Company, is a principal owner.  For the three months ended March 31, 2011 and 2010 the total billed for data processing services was $51,000 and $57,000, respectively, a decrease of 6,000, or 11%.  For the three months ended March 31, 2011 and 2010 the total billed under the master services agreement was $149,000 and $85,000, respectively, and increase of $64,000, or 75%.  The primary drivers for the nine month periods ended September changes are

30 2010


decreased volume for transactional data processing costs and 2009, respectively,  The feesadditional management services under the master services agreement for core processing have a base component which is adjusted quarterly based on asset size an 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.

Telecommunication expense, postage and delivery services, and office supply expenses for the quarter ended September 30, 2010 totaled $46,000 compared to $28,000 for the quarter ended September 30, 2009, an increase of $18,000, or 64%.  Telecommunication expense, postage and delivery services, and office supply expenses for the nine months ended September 30, 2010 totaled $147,000 compared to $74,000 for the nine months ended September 30, 2009, an increase of $73,000, or 99%.  The increase is primarily attributable to the growth in the mortgage division.

Insurance, taxes, and regulatory assessment expenses totaled $83,000 for the quarterthree months ended September 30, 2010March 31, 2011 compared to $96,000$71,000 for the quarter ended September 30, 2009, a decrease of $13,000, or 14%.  Insurance, taxes, and regulatory assessment expenses totaled $254,000 for the ninethree months ended September 30,March 31, 2010, compared to $189,000 for the nine months ended September 30, 2009, an increase of $65,000,$12,000, or 34%17%.  The Bank’s insuranceInsurance expense increased $35,000 due to an increase in directors’ and officers’ liability insurance premiums upon renewal in September 2009.   decreased $2,000, the FDIC insurance assessments increased $5,000 for 2010 over 2009. OCC supervision assessment increased $19,000 for 2010$8,000,  the OCC assessment decreased $2,000, and business occupation tax decreased $8,000 over 2009.the same period in 2010.

Lending related expenses were $160,000$91,000 for the quarterthree months ended September 30, 2010March 31, 2011 compared to $62,000$162,000 for the quarter ended September 30, 2009, an increase of $98,000, or 158%.  Lending related expenses were $424,000 for the ninethree months ended September 30,March 31, 2010, compared to $248,000 for the nine months ended September 30, 2009, an increasea decrease of $176,000,$71,000, or 71%44%.  The increasedecrease is primarily related to appraisalthe reduced volume of appraisals and other loan origination expenses generated by the mortgage division.divisions.  As production fluctuates,varies, so do these types of variable expenses.

Other non-interest expenses were $40,000$73,000 for the quarterthree months ended September 30, 2010March 31, 2011 compared to $103,000$76,000 for the quarterthree months ended September 30, 2009,March 31, 2010, a decrease of $63,000,$3,000, or 61%3%. Other non-interest expenses were $103,000 for the nine months ended September 30, 2010 compared to $183,000 for the nine months ended September 30, 2009, a decrease of $80,000, or 44%.  The decrease was primarily due to changes being made to software licenses in the mortgage division.

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

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

Interest Rate Sensitivity and Asset Liability Management

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

Net interest income is the primary component of net income for financial institutions.  Net interest income is affected by the timing and magnitude of repricing of as well as the mix of interest sensitive and non-interest sensitive assets and liabilities.  One method to measure interest rate sensitivity is through a repricing 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 than assets) generally indicates thatGap analysis is an attempt to predict the behavior of the Bank’s net interest income willin general terms during periods of movement in interest rates.  In general, 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 ifnet interest income.  Alternatively, decreasing interest rates rise and will increase if interest rates fall.  A positive gap generally indicates thatwould be expected to have the Bank’sopposite effect on net interest income will decrease i fsince liabilities would theoretically be repricing at lower interest rates fall and will increase if rates rise.more quickly than interest sensitive assets.  Although it can be used as a general predictor, gap 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 September 30, 2010,March 31, 2011, the Bank, as measured by such gap analysis, is in a liability sensitive position within one year.

We also measure the actual effects that repricing opportunities have on earnings through simulation modeling, referred to as earnings at risk.  For short-term interest rate risk, the Bank’s model simulates the impact of balance sheet strategies on net interest income, pre-tax income, and net income.  The model includes interest rate simulations to test the impact of rising and falling interest rates on projected earnings.  This 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 $33,000increase $17,000 on an annual basis if rates increased 100 basis points, and would increase $47,000decrease $5,000 on an annual basis if rates decreased 100 basis points.

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Certain shortcomings are inherent in the method of analysis presented in the foregoing paragraphs.  For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees or at different points in time to changes in market interest rates.  Additionally, certain assets, such as adjustable-rateadjustable rate mortgages, have features that restrict changes in interest rates, both on a short-term basis and over the life of the asset.  Changes in interest rates, prepayment rates, early withdrawal levels and the ability of borrowers to service their debt, among other factors, may change significantly from the assumptions made above.  In addition, significant rate decreases would not likely be reflected in liability repricing and therefore would m akemake 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 mix of various types of assets and liabilities.

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Provision and Allowance for Loan Losses

There are risks inherent in making all loans, including risks with respect to the period of time over which loans may be repaid, risks resulting from changes in economic and industry conditions, risks inherent in dealing with individual borrowers, and, in the case of collateralized loans, risks resulting from uncertainties about the future value of the collateral.  We anticipate maintaining an allowanceThe provision for loan lossesbased on, among other things, historical experience, an evaluation of economic conditions, and regular reviews of delinquencies and loan portfolio quality.  Our judgment aboutlosses is the adequacy of the allowancecharge to operations that management believes is based upon a number of assumptions about future events, which we believenecessary 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 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 exceedmaintain the allowance for loan losses orat an adequate level.  Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.  Subsequent recoveries are credited to the allowance.  The provision charged to expense was $180,000 for the three months ended March 31, 2011, as compared to the $75,000 that substantial additional increaseswas charged against earnings in the comparable period in 2010.  Through the normal course of internal loan review, impairment of $152,440 was determined to exist which was charged off and a related provision recorded. The allowance for loan losses could be required.  Additions to the allowance for loan losses would result in a decrease to our net income and capital.

The allowance for loan loss was $645,000 (1.88%$469,000, or 1.56%, of total gross loans)loans at September 30, 2010,March 31, 2011, compared to $415,000 (1.13%$478,000, or 1.50%, of total gross loans)loans at December 31, 2009.  The increase in the allowance for loan losses and the related provisions for loan losses are directly related to the increased volume of 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.2010.

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

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

  
March 31, 2011
  
December 31, 2010
 
  
Amount
  
Percent of loans in each category to total loans
  
Amount
  
Percent of loans in each category to total loans
 
             
Commercial, financial and    agricultural $41   9% $45   10%
Real estate - mortgage  263   56%  214   45%
Real estate - construction  144   31%  192   40%
Consumer  21   4%  27   5%
  $469   100% $478   100%
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The following table presents a summary of changes in the allowance for loan losses for the three and nine month periods ended September 30,March 31, 2011 and  2010 (dollar amounts are presented in thousands):
  
March 31, 2011
  
March 31, 2010
 
       
Balance at the beginning of period $478  $415 
Charge-offs:        
Real estate - mortgage  193   - 
Consumer  -   3 
Total Charged-off  193   3 
 
Recoveries:
        
Consumer  4   2 
Total Recoveries  4   2 
         
Net Charge-offs  189   1 
Provision for Loan Loss  180   75 
Balance at end of period $469  $488 
 
Total loans at end of period
 $ 30,062  $ 37,180 
         
Average loans outstanding $31,414  $36,747 
 
As a percentage of average loans:
        
Net loans charged-off  0.60%  -%
Provision for loan losses  0.57%  0.20%
 
Allowance for loan losses as a percentage of:
        
Year end loans  1.56%  1.31%
The allowance consists of general and 2009:specific reserves.  The general reserve applies to groups of loans with similar risk characteristics and is based on historical loss experience, adjusted for environmental and qualitative factors.  The specific reserves relate to individual loans that are identified as impaired.  A loan is considered impaired when, based on current

32


information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The need for specific reserves is evaluated on impaired loans greater than $100,000.  The specific reserves are determined on an individual loan basis based on management’s evaluation of the circumstances and the value of any underlying collateral.  All impaired loans less than $100,000 are evaluated for specific impairment in aggregate.  Impaired loans are measured based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent.  Loans that have been identified as impaired are excluded from the calculation of general reserves.  Specific reserves are charged off when losses are confirmed.

  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%
Management believes the allowance for loan losses is adequate to absorb estimated losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio.  While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions.  In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses.  Such agencies may require the Company to recognize additions or charge-offs to the allowance based on their judgment and information available to them at the time of their examination.

Credit Quality

Loans are assigned a risk rating on a nine point scale. For loans that are not considered impaired, the allocated allowance for loan losses is determined based upon the expected loss percentage factors that correspond to each risk rating.

The risk ratings are based on the borrowers' credit risk profile considering factors such as debt service history and capacity, inherent risk in the credit (e.g., based on industry type and source of repayment), and collateral position. Ratings 5 through 8 are modeled after the bank regulatory classifications of special mention, substandard, doubtful, and loss, and rating 9 indicates a classification of impaired substandard loan subject to specific reserve analysis. Each loan is assigned a risk rating during the approval process. This process begins with a rating recommendation from the loan officer responsible for originating the loan. The rating recommendation is subject to approvals from loan committees depending on the size and type of credit. Ratings are revaluated in connection with the credit review process. For larger credits, ratings are re-evaluated no less frequently than annually and more frequently when there is an indication of potential deterioration of a specific credit relationship. Additionally, an independent loan review function evaluates the bank's risk rating process on an on-going basis. Expected loss percentage factors are based on the probable loss including qualitative factors. The probable loss considers certain qualitative factors as determined by loan type and risk rating.

The qualitative factors consider, among others, credit concentrations, recent levels and trends in delinquencies and nonaccrual loans, and growth in the loan portfolio.  The occurrence of certain events could result in changes to the expected loss factors. Accordingly, these expected loss factors are reviewed periodically and updated as necessary

The following is a summary of risk elements in the loan portfolio at September 30, 2010March 31, 2011 and at December 31, 2009:2010:

  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%

  March 31, 2011  December 31, 2010 
       
Loans on Nonaccrual $1,439,388  $1,502,035 
Loans Past Due 90 Days and Still Accruing  525   - 
Other Real Estate Owned and Repossessions  522,061   522,061 
         
Total Nonperforming Assets $1,961,974  $2,024,096 
         
Total Nonperforming Assets as a Percentage of Total Assets  2.72%  2.81%
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A loan is placed on non-accrual status when, in management’s judgment, the collection of interest appears doubtful. As a result of management’s ongoing review of the loan portfolio, loans are classified as non-accrual when management believes, after considering economic and business conditions and collection efforts, the borrower’s financial condition is such that collection of interest is doubtful. Generally, loans are placed on non-accrual status when principal or interest payments are past due for more than 90 days.  Exceptions are allowed for loans past due greater than 90 days when such loans are well secured and in process of collection.  OneInterest income that would have been reported on the non-accrual loans was approximately $20,337 for the three months ended March 31, 2011 and $40,862 for the twelve months ended December 31, 2010.

In general loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process we refer to as “seasoning.”  As a result, a portfolio of older loans will usually behave more

33


predictably than a newer portfolio.  Because our loan was past due greaterportfolio is relatively new, the current level of delinquencies and defaults may not be representative of the level that will prevail when the portfolio becomes more seasoned, which may be higher than 90 days at September 30, 2010.  Management iscurrent levels.  There are risks inherent in making all loans, including risks with respect to the period of time over which loans may be repaid, risks resulting from changes in economic and industry conditions, risks inherent in dealing with individual borrowers, and, in the processcase of worki ng on a plan for thiscollateralized loan, and expects to collect all contractual payments.  Several loans, totaling $456,000, on non accrual status at September 30, 2010, were not currently past due, but collectionrisks resulting from uncertainties about the future value of all contractual payments remains uncertain.  These loans have specific reserves of $14,000 allocated to them.  These loans are collateralized by leased property with rent being collected monthly.  The remaining loans totaling $1,407,100, held on nonaccrual status in 2010, have specific reserves of $240,000 allocated to them.the collateral

Financial Condition

Total assets decreased $2,344,000,increased $135,000, or 3%,2% from $76,566,000$72,051,000 at December 31, 20092010 to $74,222,000$72,186,000 at September 30, 2010.  There was a reduction ofMarch 31, 2011.  Total investment securities through a combination of scheduled and unscheduled prepayments of principal and the sale of certain securities totaling $9,105,000,increased $1,876,000, or 37%.12%, from $16,005,000 at December 31, 2010 to $17,881,000 at March 31, 2011.  Total deposits decreasedincreased by $8,000,000,$651,000, or 12%1%, from December 31, 20092010 to September 30, 2010, including a $7,240,000, or 56%, decrease in non core time deposits.March 31, 2011.  Total shareholders’stockholders’ equity increased $2,074,000decreased $340,000 from $4,399,000$6,645,000 at December 31, 20092010 to $6,473,000$6,305,000 at September 30, 2010.  During 2010, we received proceeds of $1,243,038 from the sale of 1,883,145 shares in a private offering.  The remaining increase in shareholders’ equity consisted of net income of $492,000 and net increases in other comprehensive income of $339,000.  The increase in comprehensive income is reflective of the improvement in the value of our available for sale securities portfolio.March 31, 2011.

Loans

Gross loans totaled approximately $34,340,000$30,062,000 at September 30, 2010,March 31, 2011, a decrease of $2,291,000,$1,834,000, or 6.25%6%, from $36,631,000$31,896,000 at December 31, 2009.2010.  Balances within the major loans receivable categories as of September 30, 2010March 31, 2011 and December 31, 20092010 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%
  March 31, 2011  December 31, 2010 
Commercial, financial and agricultural $2,638   9%  2,947   9%
Real estate – mortgage  22,332   74% $22,926   72%
Real estate – construction  4,308   14%  5,161   16%
Consumer  768   3%  8,38   3%
Unamortized costs  16   -   24   - 
     Total $30,062   100% $31,896   100%

Deposits

Total deposits as of September 30, 2010March 31, 2011 and December 31, 20092010 were $61,566,000$63,313,000 and $69,567,000,$62,662,000, respectively. Balances and average rates paid for interest within the major deposit categories as of September 30, 2010March 31, 2011 and December 31, 20092010 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     
  March 31, 2011  December 31, 2010 
  Amount  Rate  Amount  Rate 
Non-interest-bearing demand deposits $5,230   N/A  $3,905   N/A 
Interest-bearing demand deposits  7,443   0.98%  8,506   0.65%
MMDA and Savings deposits  18,238   1.32%  15,926   1.78%
Time deposits less than $100,000  17,946   1.81%  15,459   2.44%
Time deposits $100,000 and over  14,456   1.31%  18,866   1.29%
                 
  $63,313      $62,662     

At September, 2010Capital Resources

Total stockholders’ equity was $6,305,000 at March 31, 2011 compared to $6,645,000 at December 31, 2010.

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.  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 had time depositsmust meet specific capital guidelines that involve quantitative measures of $100,000 or more equalthe 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 $16,508,000.  Approximately $394,000, or 2.4%,qualitative judgments by the regulators about components, risk weightings, and other factors.

Capital is separated into Tier 1 Capital (essentially common stockholders’ equity less intangible assets) and Tier 2 Capital (essentially the allowance for loan losses limited to 1.25% of these deposits, would not be covered underrisk-weighted assets).  The first two ratios, which are based on the new FDIC insurance coverage.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

 
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assets must be at least 4.0% and the ratio of Total Capital Resources(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%.

The following table summarizes the Bank’s risk-based capital ratios at September 30, 2010 and DecemberMarch 31, 2009:2011:

  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%
Tier 1 Capital (to risk-weighted assets)16.73%
Total Capital (to risk-weighted assets)17.98%
Tier 1 Capital (to total average assets)8.23%

The Bank was considered “well capitalized” at September 30, 2010.March 31, 2011.

Liquidity

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

As of September 30, 2010March 31, 2011 the Bank has $3,684,000$16,388,818 in cash and cash equivalents as well as $3,306,000$8,629,890 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 September 30, 2010March 31, 2011 there were no advances on this line.these lines. The Bank has borrowing capacity through its membership in the Federal Home Loan Bank of Atlanta (“FHLB”) subject to the availabilit yavailability of investment securities to pledge as collateral.  As of September 30, 2010,March 31, 2011, the Bank had advances outstanding of $5,500,000.$2,000,000.   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 September 30, 2010,March 31, 2011, the Bank had no advances outstanding.outstanding .

Off-Balance Sheet Arrangements

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

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

The following table summarizes our off-balance-sheet financial instruments whose contract amounts represent credit risk as of September 30, 2010:March 31, 2011:

Commitments to extend credit $1,582,000 $1,969,000 
Stand-by letters of credit $690,000 $550,000 

 
2935

 

Item 3. Quantitative and Qualitative Disclosure About Market Risk

Not applicable.

Item 4. Controls and Procedures

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

Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our current disclosure controls and procedures are effective as of September 30, 2010March 31, 2011 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 September 30, 2010March 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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

PART II.  OTHER INFORMATION

Item 1. Legal Proceedings
 
We are, from time to time, a party to litigation arising in the normal course of our business.  In the opinion of management, we are not a party to any other material legal proceedings, nor are there any other material proceedings known to us to be contemplated by any governmental authority.  Additionally, we are not aware of any material proceedings, pending or contemplated, in which any of our directors, officers or affiliates, or any principal security holder or any associate of any of the foregoing, is a party or has an interest adverse to us.

Item 1A. Risk Factors

Not Applicable

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

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 closed August 13, 2010. During the third quarter of 2010 the Company has received net proceeds of $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 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 1,883,145 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.None

Item 3. Defaults Upon Senior Securities

None.

Item 4. (Removed and Reserved)

None

Item 5. Other Information

None.

Item 5.        Other Information

None.

30


Item 6. Exhibits



 
3136

 


SIGNATURES

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


Date: November 15, 2010May 16, 2011 By:
/s/ William R. Blanton
  Name:William R. Blanton
  Title:Principal Executive Officer


Date: November 15, 2010May 16, 2011 By:
/s/ Denise Smyth
  Name:Denise Smyth
  Title:Principal Financial and Accounting Officer




 
3237

 

FIRST CENTURY BANCORP.

EXHIBIT INDEX


Exhibit
Number
Description
  
  
  

 
3338