**Exhibit 99.1**

#### ** **

#### **FIRST CENTURY BANCORP, INC.AND SUBSIDIARY**

#### **GAINESVILLE, GEORGIA**

#### ** **

**CONSOLIDATED FINANCIAL STATEMENTS AS OF**

**DECEMBER 31, 2008 AND 2007 AND**

**REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

 

----

 

**FIRST CENTURY BANCORP, INC. AND SUBSIDIARY**

 

**CONTENTS**

 
| Report of Independent Registered Public Accounting Firm         |   | 1      |
|-----------------------------------------------------------------|--------|--------|
|                                                            |   |   |
| Consolidated Balance Sheets                                     |   | 2      |
|                                                            |   |   |
| Consolidated Statements of Operations                           |   | 4      |
|                                                            |   |   |
| Consolidated Statements of Comprehensive Income (Loss)          |   | 5      |
|                                                            |   |   |
| Consolidated Statements of Changes in Stockholders’ Equity |   | 6      |
|                                                            |   |   |
| Consolidated Statements of Cash Flows                           |   | 7      |
|                                                            |   |   |
| Notes to Consolidated Financial Statements                      |   | 8      |

 

----

 

MCNAIR, MCLEMORE, MIDDLEBROOKS & CO., LLP

CERTIFIED PUBLIC ACCOUNTANTS

389 Mulberry Street · Post Office Box One · Macon, GA 31202

Telephone (478) 746-6277 · Facsimile (478) 743-6858

*www.mmmcpa.com*

 
| RALPH  S. McLEMORE, SR., CPA (1902-1981) |   |                           |
|------------------------------------------|--------|--------------------------------|
| SIDNEY  B. McNAIR, CPA (1913-1992)       |   |                           |
|                                     |   |                           |
|                                     |   | RICHARD  A. WHITTEN, JR., CPA  |
| SIDNEY  E. MIDDLEBROOKS, CPA, PC         |   | ELIZABETH  WARE HARDIN, CPA    |
| RAY  C. PEARSON, CPA                     |   | CAROLINE  E. GRIFFIN, CPA      |
| J.  RANDOLPH NICHOLS, CPA                |   | RONNIE  K. GILBERT, CPA        |
| WILLIAM  H. EPPS, JR., CPA               |   | RON  C. DOUTHIT, CPA           |
| RAYMOND  A. PIPPIN, JR., CPA             |   | CHARLES  A. FLETCHER, CPA      |
| JERRY  A. WOLFE, CPA                     |   | MARJORIE  HUCKABEE CARTER, CPA |
| W.  E. BARFIELD, JR., CPA                |   | BRYAN  A. ISGETT, CPA          |
| HOWARD  S. HOLLEMAN, CPA                 |   | DAVID  PASCHAL MUSE, JR., CPA  |
| F.  GAY McMICHAEL, CPA                   |   | KATHY  W. FLETCHER, CPA        |

 

March 31, 2009

 

**REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

 

The Board of Directors and Stockholders

First Century Bancorp.

 

We have audited the accompanying consolidated balance sheets of FirstCentury Bancorp. and Subsidiary as of December 31, 2008, and 2007 and therelated consolidated statements of operations, comprehensive income (loss),changes in stockholders’ equity and cash flows for the years then ended.  These consolidated financial statements arethe responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

 

We conducted our audits in accordance with standards of the PublicCompany Accounting Oversight Board (United States).  Those standards require that we plan andperform the audits to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements.  An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of FirstCentury Bancorp. and Subsidiary as of December 31, 2008 and 2007, and theresults of its operations and its cash flows for the years then ended, inconformity with accounting principles generally accepted in the United Statesof America.

 

We were not engaged to examine management’s assertion about theeffectiveness of First Century Bancorp’s internal control over financialreporting as of December 31, 2008 included in the Management’s Report onInternal Control Over Financial Reporting and, accordingly, we do not expressan opinion thereon.

 
|   | /s/ McNair, McLemore, Middlebrooks & Co., LLP |
|--------|--------------------------------------------------------|
|   | McNAIR, McLEMORE, MIDDLEBROOKS & CO., LLP     |

 

1

----

 

**FIRST CENTURY BANCORP. AND SUBSIDIARY**

#### **CONSOLIDATED BALANCE SHEETS**

**DECEMBER 31**

** **

**ASSETS**

** **
| ** **                                                                                                      | ** ** | **2008**       | ** **     | **2007**   | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|----------------|----------------|------------|------------|
|                                                                                                            |       |           |           |       |       |
| **Cash and Cash Equivalents**                                                                                   |       |           |           |       |       |
| Cash and Due from Banks                                                                                         | ** ** | **$**          | **1,525,027**  |       | $          | 2,111,446 |   |
| Federal Funds Sold                                                                                              | ** ** | **700,000**    |           | 6,238,000  |       |
|                                                                                                            |       |           |           |       |       |
| ** **                                                                                                      |       | **2,225,027**  |           | 8,349,446  |       |
|                                                                                                            |       |           |           |       |       |
| **Investment Securities**                                                                                       |       |           |           |       |       |
| Available for Sale, at Fair Value                                                                               | ** ** | **11,100,067** |           | 8,404,238  |       |
| Held to Maturity, at Cost (Fair Value of  $7,129,889 and $0 as of December 31, 2008 and 2007, Respectively | ** ** | **7,178,040**  |           | —     |       |
|                                                                                                            |       |           |           |       |       |
| ** **                                                                                                      |       | **18,278,107** |           | 8,404,238  |       |
|                                                                                                            |       |           |           |       |       |
| **Other Investments**                                                                                           | ** ** | **427,170**    |           | 402,770    |       |
|                                                                                                            |       |           |           |       |       |
| **Loans Held for Sale**                                                                                         | ** ** | **1,863,750**  |           | —     |       |
|                                                                                                            |       |           |           |       |       |
| **Loans**                                                                                                       | ** ** | **37,943,602** |           | 19,305,101 |       |
| Allowance for Loan Losses                                                                                       | ** ** | **(838,234**   | **)**          | (275,920   | )          |
| Net deferred loan costs                                                                                         | ** ** | **157,468**    |           | —     |       |
|                                                                                                            |       |           |           |       |       |
| ** **                                                                                                      |       | **37,262,836** |           | 19,029,181 |       |
|                                                                                                            |       |           |           |       |       |
| **Premises and Equipment**                                                                                      | ** ** | **2,425,568**  |           | 2,122,763  |       |
|                                                                                                            |       |           |           |       |       |
| **Other Real Estate**                                                                                           | ** ** | **—**     |           | 98,343     |       |
|                                                                                                            |       |           |           |       |       |
| **Other Assets**                                                                                                | ** ** | **396,053**    |           | 244,721    |       |
|                                                                                                            |       |           |           |       |       |
| **Total Assets**                                                                                                | ** ** | **$**          | **62,878,510** |       | $          | 38,651,462 |   |

 

The accompanying notes are an integral part of these consolidatedbalance sheets.

 

2

----

 

**FIRST CENTURY BANCORP. AND SUBSIDIARY**

**CONSOLIDATED BALANCE SHEETS**

**DECEMBER 31**

 

#### **LIABILITIES ANDSTOCKHOLDERS’ EQUITY**

 
| ** **                                                                                                                                       | ** ** | **2008**        | ** **     | **2007**   | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|----------------|------------|------------|
|                                                                                                                                             |       |            |           |       |       |
| **Deposits**                                                                                                                                     |       |            |           |       |       |
| Noninterest-Bearing                                                                                                                              | ** ** | **$**           | **3,036,337**  |       | $          | 1,566,488 |   |
| Interest-Bearing                                                                                                                                 | ** ** | **54,084,517**  |           | 29,439,470 |       |
|                                                                                                                                             |       |            |           |       |       |
| ** **                                                                                                                                       |       | **57,120,854**  |           | 31,005,958 |       |
|                                                                                                                                             |       |            |           |       |       |
| **Borrowings**                                                                                                                                   | ** ** | **2,000,000**   |           | 4,000,000  |       |
|                                                                                                                                             |       |            |           |       |       |
| **Other Liabilities**                                                                                                                            | ** ** | **593,755**     |           | 151,816    |       |
|                                                                                                                                             |       |            |           |       |       |
| **Stockholders’ Equity**                                                                                                                    |       |            |           |       |       |
| Preferred Stock, No Par Value; 10,000,000  Shares Authorized; 75,000 and 75,000 Shares Issued and Outstanding in 2008  and 2007, Respectively    | ** ** | **750,000**     |           | 750,000    |       |
| Common Stock, No Par Value; 50,000,000  Shares Authorized; 3,979,127 and 1,732,458 Shares Issued and Outstanding in  2008 and 2007, Respectively | ** ** | **13,572,151**  |           | 10,311,206 |       |
| Accumulated Deficit                                                                                                                              | ** ** | **(11,075,145** | **)**          | (7,559,873 | )          |
| Accumulated Other Comprehensive Loss                                                                                                             | ** ** | **(83,105**     | **)**          | (7,645     | )          |
|                                                                                                                                             |       |            |           |       |       |
| ** **                                                                                                                                       |       | **3,163,901**   |           | 3,493,688  |       |
|                                                                                                                                             |       |            |           |       |       |
| **Total Liabilities and Stockholders’ Equity**                                                                                              | ** ** | **$**           | **62,878,510** |       | $          | 38,651,462 |   |

 

The accompanying notes are an integral partof these consolidated balance sheets.

 

3

----

 

**FIRST CENTURY BANCORP. AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**FOR THE YEARS ENDED DECEMBER 31**

** **
| ** **                                               | ** ** | **2008**       | ** **     | **2007**   | ** ** |
|----------------------------------------------------------|------------|----------------|----------------|------------|------------|
| **Interest Income**                                      |       |           |           |       |       |
| Loans, Including Fees                                    | ** ** | **$**          | **1,722,303**  |       | $          | 1,634,711 |   |
| Investments                                              | ** ** | **562,050**    |           | 416,533    |       |
| Federal Funds Sold                                       | ** ** | **99,156**     |           | 143,398    |       |
| Interest Bearing Deposits                                | ** ** | **39,167**     |           | 22,636     |       |
|                                                     |       |           |           |       |       |
| ** **                                               |       | **2,422,676**  |           | 2,217,278  |       |
|                                                     |       |           |           |       |       |
| **Interest Expense**                                     |       |           |           |       |       |
| Deposits                                                 | ** ** | **1,482,529**  |           | 1,301,153  |       |
| Borrowings                                               | ** ** | **103,092**    |           | 143,024    |       |
| Federal Funds Purchased                                  | ** ** | **328**        |           | 9,139      |       |
|                                                     |       |           |           |       |       |
| ** **                                               |       | **1,585,949**  |           | 1,453,316  |       |
|                                                     |       |           |           |       |       |
| **Net Interest Income**                                  | ** ** | **836,726**    |           | 763,962    |       |
|                                                     |       |           |           |       |       |
| Provision for Loan Losses                                | ** ** | **639,760**    |           | 115,199    |       |
|                                                     |       |           |           |       |       |
| **Net Interest Income After Provision for Loan  Losses** | ** ** | **196,966**    |           | 648,763    |       |
|                                                     |       |           |           |       |       |
| **Noninterest Income**                                   |       |           |           |       |       |
| Service Charges on Deposits                              | ** ** | **55,312**     |           | 21,664     |       |
| Mortgage Origination and Processing Fees                 | ** ** | **543,679**    |           | —     |       |
| Securities Gains                                         | ** ** | **3,507**      |           | —     |       |
| Other                                                    | ** ** | **6,569**      |           | 38,501     |       |
|                                                     |       |           |           |       |       |
| ** **                                               |       | **609,067**    |           | 60,165     |       |
|                                                     |       |           |           |       |       |
| **Noninterest Expenses**                                 |       |           |           |       |       |
| Salaries and Employee Benefits                           | ** ** | **2,006,318**  |           | 1,161,072  |       |
| Occupancy and Equipment                                  | ** ** | **485,775**    |           | 356,737    |       |
| Professional Fees                                        | ** ** | **274,953**    |           | 195,745    |       |
| Other                                                    | ** ** | **1,554,259**  |           | 741,400    |       |
|                                                     |       |           |           |       |       |
| ** **                                               |       | **4,321,305**  |           | 2,454,954  |       |
|                                                     |       |           |           |       |       |
| **Loss Before Income Taxes**                             | ** ** | **(3,515,272** | **)**          | (1,746,026 | )          |
|                                                     |       |           |           |       |       |
| Income Taxes                                             | ** ** | **—**     |           | —     |       |
|                                                     |       |           |           |       |       |
| **Net Loss**                                             | ** ** | **$**          | **(3,515,272** | **)**      | $          | (1,746,026 | ) |
|                                                     |       |           |           |       |       |
| **Basic Loss Per Share**                                 | ** ** | **$**          | **(1.47**      | **)**      | $          | (1.16 | ) |
|                                                     |       |           |           |       |       |
| **Weighted Average Shares Outstanding**                  | ** ** | **2,391,229**  |           | 1,503,383  |       |

 

Theaccompanying notes are an integral part of these consolidated statements.

 

4

----

 

**FIRST CENTURY BANCORP. AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OF COMPREHENSIVEINCOME (LOSS)**

**DECEMBER 31**

 
| ** **                                                       | ** ** | **2008**    | ** **     | **2007** | ** ** |
|------------------------------------------------------------------|------------|-------------|----------------|----------|------------|
|                                                             |       |        |           |     |       |
| **Net Loss**                                                     | ** ** | **$**       | **(3,515,272** | **)**    | $          | (1,746,027 | ) |
|                                                             |       |        |           |     |       |
| **Other Comprehensive Income (Loss)**                            |       |        |           |     |       |
| Unrealized Gains (Losses) on Securities  Arising During the Year | ** ** | **(71,953** | **)**          | 125,504  |       |
| Reclassification Adjustment                                      | ** ** | **(3,507**  | **)**          | —   |       |
|                                                             |       |        |           |     |       |
| Net Change in Unrealized Gains (Losses) on  Securities           | ** ** | **(75,460** | **)**          | 125,504  |       |
|                                                             |       |        |           |     |       |
| **Comprehensive Loss**                                           | ** ** | **$**       | **(3,590,732** | **)**    | $          | (1,620,523 | ) |

 

The accompanying notes are an integral part of these consolidatedstatements.

 

5

----

 

F**IRST CENTURY BANCORP. ANDSUBSIDIARY**

**CONSOLIDATED STATEMENTS OF CHANGES INSTOCKHOLDERS’ EQUITY**

**FOR THE YEARS ENDED DECEMBER 31, 2008 AND2007**

 
| ** **                                                      | ** ** | ** **               | ** ** | ** **            | ** ** | ** **      | ** ** | ** **        | ** ** | ** **  | ** ** | **Accumulated**        | ** **  | ** ** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------|------------|-----------------------|------------|-----------------|------------|-------------------|------------|-------------|------------|------------------------|-------------|------------|------------|
| ** **                                                      | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | **Accumulated** | ** ** | **Comprehensive** | ** ** | ** **  | ** ** |
| ** **                                                      | ** ** | **Shares**               | ** ** | **Amount**            | ** ** | **Shares**      | ** ** | **Amount**        | ** ** | **Deficit** | ** ** | **Income (Loss)** | ** **  | **Total**  | ** ** |
|                                                            |       |                     |       |                  |       |            |       |              |       |        |       |                   |        |       |       |
| **Balance, December 31, 2006**                             |       | 35,000                   |       | $                     | 350,000    |            | 993,560    |              | $          | 8,450,049   |       | $                      | (5,813,847  | )          | $          | (133,149 | ) | $ | 2,853,053 |   |
|                                                            |       |                     |       |                  |       |            |       |              |       |        |       |                   |        |       |       |
| Issuance of Common Stock                                        |       | —                   |       | —                |       | 738,898         |       | 2,002,002         |       | —      |       | —                 |        | 2,002,002  |       |
| Issuance of Preferred Stock                                     |       | 75,000                   |       | 750,000               |       | —          |       | —            |       | —      |       | —                 |        | 750,000    |       |
| Redemption of Preferred Stock                                   |       | (35,000                  | )          | (350,000              | )          | —          |       | —            |       | —      |       | —                 |        | (350,000   | )          |
| Common Stock Issuance Costs                                     |       | —                   |       | —                |       |            |       | (169,045          | )          | —      |       | —                 |        | (169,045   | )          |
| Stock Compensation Costs                                        |       | —                   |       | —                |       | —          |       | 28,200            |       | —      |       | —                 |        | 28,200     |       |
| Net Change in Unrealized Gain on Securities  Available for Sale |       | —                   |       | —                |       | —          |       | —            |       | —      |       | 125,504                |        | 125,504    |       |
| Net Loss                                                        |       | —                   |       | —                |       | —          |       | —            |       | (1,746,026  | )          | —                 |        | (1,746,026 | )          |
|                                                            |       |                     |       |                  |       |            |       |              |       |        |       |                   |        |       |       |
| **Balance, December 31, 2007**                             |       | 75,000                   |       | 750,000               |       | 1,732,458       |       | 10,311,206        |       | (7,559,873  | )          | (7,645                 | )           | 3,493,688  |       |
|                                                            |       |                     |       |                  |       |            |       |              |       |        |       |                   |        |       |       |
| Issuance of Common Stock                                        |       | —                   |       | —                |       | 2,246,669       |       | 3,370,006         |       | —      |       | —                 |        | 3,370,006  |       |
| Issuance of Preferred Stock                                     |       | —                   |       | —                |       | —          |       | —            |       | —      |       | —                 |        | —     |       |
|                                                            |       |                     |       |                  |       |            |       |              |       |        |       |                   |        | —     |       |
| Redemption of Preferred Stock                                   |       | —                   |       | —                |       | —          |       | —            |       | —      |       | —                 |        | —     |       |
| Common Stock Issuance Costs                                     |       | —                   |       | —                |       | —          |       | (140,333          | )          | —      |       | —                 |        | (140,333   | )          |
| Stock Compensation Costs                                        |       | —                   |       | —                |       | —          |       | 31,272            |       | —      |       | —                 |        | 31,272     |       |
| Net Change in Unrealized Gain on Securities  Available for Sale |       | —                   |       | —                |       | —          |       | —            |       | —      |       | (75,460                | )           | (75,460    | )          |
| Net Loss                                                        |       | —                   |       | —                |       | —          |       | —            |       | (3,515,272  | )          | —                 |        | (3,515,272 | )          |
|                                                            |       |                     |       |                  |       |            |       |              |       |        |       |                   |        |       |       |
| **Balance, December 31, 2008**                             |       | 75,000                   |       | $                     | 750,000    |            | 3,979,127  |              | $          | 13,572,151  |       | $                      | (11,075,145 | )          | $          | (83,105 | ) | $ | 3,163,901 |   |

 

The accompanying notes are anintegral part of these consolidated statements

 

6

----

 

**FIRST CENTURY BANCORP. AND SUBSIDIARY**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**FOR THEYEARS ENDED DECEMBER 31**

 
| ** **                                                                                       | ** ** | **2008**        | ** **     | **2007**   | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-----------------|----------------|------------|------------|
| **Cash Flows from Operating Activities**                                                         |       |            |           |       |       |
| Net Loss                                                                                         | ** ** | **$**           | **(3,515,272** | **)**      | $          | (1,746,026 | ) |
| Adjustments to Reconcile Net Loss to Net  Cash Used by Operating Activities                      |       |            |           |       |       |
| Provision for Loan Losses                                                                        | ** ** | **639,760**     |           | 115,199    |       |
| Depreciation, Amortization and Accretion                                                         | ** ** | **147,225**     |           | 164,783    |       |
| Loss on Sale of Other Assets                                                                     | ** ** | **20,897**      |           | 23,514     |       |
| Loss on Sale of Other Real Estate                                                                | ** ** | **24,832**      |           | 25,725     |       |
| Gain on Sale of Investment Securities                                                            | ** ** | **(3,507**      | **)**          | —     |       |
| Stock Compensation Expense                                                                       | ** ** | **31,272**      |           | 28,200     |       |
| Change In                                                                                        |       |            |           |       |       |
| Other Assets                                                                                     | ** ** | **(172,229**    | **)**          | 37,244     |       |
| Other Liabilities                                                                                | ** ** | **441,938**     |           | (17,178    | )          |
|                                                                                             |       |            |           |       |       |
|                                                                                             | ** ** | **(2,385,084**  | **)**          | (1,368,539 | )          |
|                                                                                             |       |            |           |       |       |
| **Cash Flows from Investing Activities**                                                         |       |            |           |       |       |
| Purchases of Investment Securities  Available for Sale                                           | ** ** | **(8,287,843**  | **)**          | (971,061   | )          |
| Proceeds from Sales, Maturities, Calls and  Paydowns of Investment Securities Available for Sale |       | **5,538,398**   |           | 1,765,706  |       |
| Purchases of Investment Securities Held to  Maturity                                             | ** ** | **(7,166,192**  | **)**          | —     |       |
| Proceeds from Maturities, Calls and  Paydowns of Investment Securities Held to Maturity          |       | **12,869**      |           | —     |       |
| Purchases of Other Investments                                                                   | ** ** | **(311,850**    | **)**          | (119,150   | )          |
| Proceeds from the Sale of Other Investments                                                      | ** ** | **287,450**     |           | 37,700     |       |
| Net Change in Loans                                                                              | ** ** | **(18,958,672** | **)**          | 609,136    |       |
| Net Change in Loans Held for Sale                                                                | ** ** | **(1,863,750**  | **)**          | —     |       |
| Proceeds from the Sale of Other Real Estate                                                      | ** ** | **158,768**     |           | 137,006    |       |
| Purchases of Premises and Equipment                                                              | ** ** | **(493,082**    | **)**          | (95,637    | )          |
|                                                                                             |       |            |           |       |       |
|                                                                                             | ** ** | **(31,083,904** | **)**          | 1,363,700  |       |
|                                                                                             |       |            |           |       |       |
| **Cash Flows from Financing Activities**                                                         |       |            |           |       |       |
| Net Change in Deposits                                                                           | ** ** | **26,114,896**  |           | 2,783,852  |       |
| Payment of Stock Issuance Costs                                                                  | ** ** | **(140,333**    | **)**          | (169,045   | )          |
| Proceeds from Borrowings                                                                         | ** ** | **—**      |           | 2,000,000  |       |
| Repayments of Borrowings                                                                         | ** ** | **(2,000,000**  | **)**          | —     |       |
| Redemption of Preferred Stock                                                                    | ** ** | **—**      |           | (350,000   | )          |
| Proceeds from Issuance of Preferred Stock                                                        | ** ** | **—**      |           | 750,000    |       |
| Proceeds from the Issuance of Common Stock                                                       | ** ** | **3,370,006**   |           | 2,002,002  |       |
|                                                                                             |       |            |           |       |       |
|                                                                                             | ** ** | **27,344,569**  |           | 7,016,809  |       |
|                                                                                             |       |            |           |       |       |
| **Net Increase (Decrease) in Cash and Cash  Equivalents**                                        | ** ** | **(6,124,419**  | **)**          | 7,011,970  |       |
|                                                                                             |       |            |           |       |       |
| **Cash and Cash Equivalents, Beginning**                                                         | ** ** | **8,349,446**   |           | 1,337,476  |       |
|                                                                                             |       |            |           |       |       |
| **Cash and Cash Equivalents, Ending**                                                            | ** ** | **$**           | **2,225,027**  |       | $          | 8,349,446 |   |

 

The accompanying notes are an integral part of these consolidatedstatements.

 

7

----

 

**FIRST CENTURY BANCORP. AND SUBSIDIARY**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**(1)  Summary of Significant Accounting Policies**

 

**Principles of Consolidation**

 

The consolidated financial statements include the accounts of FirstCentury Bancorp. (the Company) and its wholly-owned subsidiary, First CenturyBank, National Association (the Bank). On September 20, 2007, the Companychanged its name from NBOG Bancorporation, Inc. to First Century Bancorp.The Bank’s name was also changed from The National Bank of Gainesville to FirstCentury Bank, National Association.  Allsignificant intercompany balances and transactions have been eliminated inconsolidation.

 

**Nature of Operations**

 

The Bank provides a variety of retail andcommercial banking services for consumers and small businesses located in keylocations in the northern Georgia market, with its main branch office locatedin Gainesville, Georgia.  In 2008, theBank opened an Oakwood loan and deposit production (LP/DP) office in south HallCounty, Georgia, and an Athens LP/DP office in Athens-Clarke County, Georgia.Lending and investing activities are funded primarily by deposits gatheredthrough its banking offices.  The Bankcommenced operations on March 25, 2002.

 

**Use of Estimates**

 

In preparing the consolidated financial statements in conformity withgenerally accepted accounting principles, management is required to makeestimates and assumptions that affect the reported amounts of assets andliabilities as of the date of the balance sheet and reported amounts ofrevenues and expenses during the reporting period.  Actual results could differ from thoseestimates.  Material estimates that areparticularly susceptible to significant change in the near term relate to thedetermination of the allowance for loan losses, the valuation of real estateacquired in connection with foreclosures or in satisfaction of loans and thevaluation of deferred tax assets.

 

**Concentrations of Credit Risk**

 

Lending is concentrated in mortgage, commercial and consumer loans tolocal borrowers. In management’s opinion, although the Bank has a highconcentration of real estate loans, these loans are well collateralized and donot pose an adverse credit risk.  Inaddition, the balance of the loan portfolio is sufficiently diversified toavoid significant concentration of credit risk.

 

The success of the Bank is dependent, to a certain extent, upon theeconomic conditions in the geographic markets it serves.  No assurance can be given that the currenteconomic conditions will continue. Adverse changes in the economic conditions in these geographic marketswould likely have a material detrimental effect on the Bank’s results ofoperations and financial condition. The operating results of the Bank dependprimarily on its net interest income. Accordingly, operations are subject to risks and uncertaintiessurrounding the exposure to changes in the interest rate environment.

 

At times, the Bank may have cash and cash equivalents at financialinstitutions in excess of insured limits. The Bank places its cash and cash equivalents with high credit qualityfinancial institutions whose credit rating is monitored by management tominimize credit risk.

 

8

----

 

**(1)  Summary of Significant Accounting Policies (Continued)**

 

**Investment Securities**

 

Investment securities are recorded under the provisions of Statement ofFinancial Accounting Standards (SFAS) No. 115, whereby the Bank mayclassify its securities as trading, available for sale or held tomaturity.  Trading securities arepurchased and held for sale in the near term. Securities held to maturity are those which the Bank has the ability andintent to hold until maturity.  All othersecurities not classified as trading or held to maturity are consideredavailable for sale.

 

Securities available for sale are reported at estimated fairvalue.  Unrealized gains and losses onsecurities available for sale are excluded from earnings and are reported inaccumulated other comprehensive income (loss), a component of stockholders’equity.  Gains and losses from sales ofsecurities available for sale are computed using the specific identificationmethod.  Securities available for salemay be sold to meet liquidity needs arising from unanticipated deposit and loanfluctuations, changes in regulatory capital requirements or unforeseen changesin market conditions.  Premiums anddiscounts are recognized in interest income using the interest method over theperiod to maturity.

 

Declines in the fair value of individual securities available for salebelow their cost that are deemed to be other than temporary are reflected inearnings as realized losses.  Inestimating other than temporary impairment losses, management considers (1) thelength of time and the extent to which the fair value has been less than cost, (2) thefinancial condition and near-term prospects of the issuer and (3) theintent and ability of the Bank to retain its investment in the issuer for aperiod of time sufficient to allow for any anticipated recovery in fair value.

 

**Other Investments**

 

Other investments include equity securities with no readilydeterminable fair value.  Theseinvestments are carried at cost. Dividends are recorded when earned.

 

**Loans Held For Sale**

 

Loans held for sale are reported at the lower of cost or market valuein the aggregate.  Net unrealized losses,if any, are recognized in a valuation allowance through charges to earnings.  Gains and losses on the sale of loans heldfor sale are determined using the specific identification method.  The cost of loans held for sale approximatedfair value at December 31, 2008.

 

9

----

 

**(1)  Summary of Significant Accounting Policies (Continued)**

 

**Loans**

 

Loans that the Bank has the ability and intent to hold for theforeseeable future or until maturity are recorded at their principal amountoutstanding, net of unearned interest and fees. Interest income on loans is recognized using the effective interestmethod.

 

A loan is considered to be delinquent when payments have not been madeaccording to contractual terms, typically evidenced by nonpayment of a monthlyinstallment by the due date.

 

When management believes there is sufficient doubt as to thecollectibility of principal or interest on any loan, the accrual of applicableinterest is discontinued and the loan is designated as nonaccrual, unless theloan is well secured and in the process of collection.  Interest payments received on nonaccrualloans are either applied against principal or reported as income, according tomanagement’s judgment as to the collectibility of principal.  Loans are returned to an accrual status whenfactors indicating doubtful collectibility on a timely basis no longer exist.

 

**Allowance for Loan Losses**

 

The allowance for loan losses is established as losses are estimated tohave occurred through a provision for loan losses charged to earnings.  Loan losses are charged against the allowancewhen management believes the uncollectibility of a loan balance isconfirmed.  Subsequent recoveries, ifany, are credited to the allowance.

 

The allowance for loan losses is evaluated on a regular basis bymanagement and is based upon management’s periodic review of the collectibilityof the loans in light of historical experience, the nature and volume of theloan portfolio, adverse situations that may affect the borrower’s ability torepay, estimated value of any underlying collateral and prevailing economicconditions.  This evaluation isinherently subjective, as it requires estimates that are susceptible tosignificant revisions as more information becomes available.

 

The allowance consists of specific, general and unallocatedcomponents.  The specific componentrelates to specific individual loans that are classified as impaired.  Specific allowances on impaired loans aremeasured by either the present value of expected future cash flows discountedat the loan’s effective interest rate, the loan’s observable market price orthe fair value of the collateral if the loan is collateral dependent.  The general component covers nonclassifiedloans and is based on historical loss experience adjusted for qualitativefactors.  An unallocated component ismaintained to cover uncertainties that could affect management’s estimate ofprobable losses.  The unallocatedcomponent of the allowance reflects the margin of imprecision inherent in theunderlying assumptions used in the methodologies for estimating specific andgeneral losses in the portfolio.

 

10

----

 

**(1)  Summary of Significant Accounting Policies (Continued)**

 

A loan is considered impaired when, based on current information andevents, it is probable that the Bank will be unable to collect the scheduledpayments of principal or interest when due according to the contractual termsof the loan agreement.  Factorsconsidered by management in determining impairment include payment status,collateral value and the probability of collecting scheduled principal andinterest payments when due.  Loans thatexperience insignificant payment delays and payment shortfalls generally arenot classified as impaired.  Managementdetermines the significance of payment delays and payment shortfalls on a case-by-casebasis, taking into consideration all of the circumstances surrounding the loanand the borrower, including the length of the delay, the reasons for the delay,the borrower’s prior payment record and the amount of the shortfall in relationto the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the presentvalue of expected future cash flows discounted at the loan’s effective interestrate, the loan’s obtainable market price or the fair value of the collateral ifthe loan is collateral dependent.

 

**Off-Balance Sheet Credit Related Financial Instruments**

 

In the ordinary course of business, the Bank has entered intocommitments to extend credit, including commitments under standby letters ofcredit.  Such financial instruments arerecorded when they are funded.

 

**Premises and Equipment**

 

Premises and equipment are carried at cost less accumulateddepreciation.  Depreciation of premisesand equipment is provided over the estimated useful lives of the respectiveassets utilizing the straight-line method. Premises and equipment that are still undergoing development and havenot been placed in service are classified as construction in process and arenot depreciated.  Expenditures for majorrenewals and betterments are capitalized and those for maintenance and repairsare charged to income as incurred.  Whenpremises and equipment are retired or sold, the cost and accumulateddepreciation are removed from their respective accounts and any gain or loss isreflected in other income or expense.

 

**Other Real Estate**

 

Other real estate owned represents property acquired throughforeclosure.  Properties are carried atthe lower of cost or current appraisal values. Losses from the acquisition of property in full or partial satisfactionof debt are recorded as loan losses. Subsequent declines in value, routine holding costs and gains or lossesupon disposition are included in other expense.

 

**Transfers of Financial Assets**

 

Transfers of financial assets are accounted for as sales, when controlover the asset has been surrendered. Control over transferred assets is deemed to be surrendered when (1) theassets have been isolated from the Company, (2) the transferee obtains theright (free of conditions that constrain it from taking advantage of thatright) to pledge or exchange the transferred assets, and (3) the Companydoes not maintain effective control over the transferred assets through anagreement to repurchase them before their maturity.

 

**Advertising Costs**

 

The Company expenses the costs of advertising in the periods in whichthose costs are incurred.

 

11

----

 

**(1)  Summary of Significant Accounting Policies (Continued)**

 

**Income Taxes**

 

The Company accounts for income taxes under the liability method.  Accordingly, deferred tax assets andliabilities are recognized for the future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases and operating loss and taxcredit carryforwards.  Deferred taxassets and liabilities are measured using enacted tax rates expected to applyto taxable income in the years in which those temporary differences are expectedto be recovered or settled.  The effecton deferred tax assets and liabilities of a change in tax rates is recognizedin earnings in the period that includes the enactment date.

 

In the event the future tax consequences of differences between thefinancial reporting bases and the tax bases of the assets and liabilitiesresult in deferred tax assets, an evaluation of the probability of being ableto realize the future benefits indicated by such asset is required.  A valuation allowance is provided for theportion of the deferred tax asset when it is more likely than not that someportion or all of the deferred tax asset will not be realized.  In assessing the realizability of thedeferred tax assets, management considers the scheduled reversals of deferredtax liabilities, projected future taxable income and tax planning strategies.

 

12

----

 

**(1)  Summary of Significant Accounting Policies (Continued)**

 

**Comprehensive Income**

 

Accounting principles generally require that recognized revenue,expenses, gains and losses be included in net income.  Certain changes in assets and liabilities,such as unrealized gains and losses on securities available for sale, representequity changes from economic events of the period other than transactions withowners and are not reported in the consolidated statements of operations but asa separate component of the equity section of the consolidated balancesheets.  Such items are consideredcomponents of other comprehensive income. SFAS No. 130, Reporting Comprehensive Income, requires thepresentation in the consolidated financial statements of net income and allitems of other comprehensive income as total comprehensive income.

 

**Net Loss Per Share**

 

Net loss per common share is based on the weighted average number ofcommon shares outstanding during the period. The effects of potential common shares outstanding are included indiluted earnings (loss) per share.  Nocommon stock equivalents were considered in 2008 or 2007 as the effects of suchwould be antidilutive to the loss per share calculation.

 

**Stock Compensation Plans**

 

The Company adopted Statement of Financial Accounting Standards No. 123(revised 2004), *Share-Based Payment* (FAS 123R) onJanuary 1, 2006 using the modified prospective transition method.  Under the modified prospective transitionmethod, awards that are granted, modified or settled beginning at the date ofadoption will be measured and accounted for in accordance with FAS 123R.  FAS 123R requires public companies torecognize compensation expense related to stock-based compensation awards intheir statements of operations over the period during which an employee isrequired to provide service in exchange for the award.

 

**Statements of Cash Flows**

 

For reporting cash flows, cash and cash equivalents include cash onhand, noninterest-bearing amounts due from banks and federal funds sold.  Cash flows from demand deposits, NOWaccounts, savings accounts, loans and certificates of deposit are reported net.

 
| **Supplementary Cash Flow Information:**     | ** ** | **2008**   | ** **    | **2007** | ** ** |
|-------------------------------------------------------------|------------|------------|---------------|----------|------------|
|                                                        |       |       |          |     |       |
| Cash Paid During the Year for Interest                      | ** ** | **$**      | **1,493,325** |     | $          | 1,448,076 |   |
| ** **                                                  | ** ** | ** ** |          |     |       |
| Noncash Investing and Financing Activities:                 | ** ** | ** ** |          |     |       |
| ** **                                                  | ** ** | ** ** |          |     |       |
| Transfer of Loans to Other Real Estate                      | ** ** | **$**      | **98,000**    |     | $          | 164,574 |   |
|                                                        |       |       |          |     |       |
| Change in Unrealized Loss on Securities  Available for Sale | ** ** | **$**      | **75,460**    |     | $          | 125,504 |   |

 

13

----

 

**(1)  Summary of Significant Accounting Policies (Continued)**

 

**Changes in Accounting Principles and Effects of New AccountingPronouncements**

 

In September 2006, the FASB issued Statement No. 157, *Fair Value Measurements*. This statementdefines fair value, establishes a framework for measuring fair value andexpands disclosures about fair value measurements. This statement establishes afair value hierarchy about the assumptions used to measure fair value andclarifies assumptions about risk and the effect of a restriction on the sale oruse of an asset. The standard is effective for fiscal years beginning after November 15,2007. In February 2008, the FASB issued Staff Position (FSP) 157-2, *Effective Date of FASB Statement No. 157*.This FSP delays the effective date of FAS 157 for all non-financial assets andnon-financial liabilities, except those that are recognized or disclosed atfair value on a recurring basis (at least annually) to fiscal years beginningafter November 15, 2008, and interim periods within those fiscal years.The Company adopted Statement No. 157 effective January 1, 2008 whichhad no effect on the consolidated balance sheets or consolidated statements ofoperations.

 

In February 2007, the FASBissued Statement No. 159, *The FairValue Option for Financial Assets and Financial Liabilities*. Thestandard provides companies with an option to report selected financial assetsand liabilities at fair value and establishes presentation and disclosurerequirements designed to facilitate comparisons between companies that choosedifferent measurement attributes for similar types of assets and liabilities.The Company did not elect the fair value option for any financial assets orfinancial liabilities as of January 1, 2008, the effective date of thestandard.

 

In December 2007, the FASBissued SFAS No. 141 (revised 2007), *BusinessCombinations*(FAS 141R).The statement establishes principles and requirements for how the acquirer of abusiness recognizes and measures in its financial statements the identifiableassets acquired, the liabilities assumed, and any non-controlling interest inthe acquiree. The statement also provides guidance for recognizing andmeasuring the goodwill acquired in the business combination and determines whatinformation to disclose to enable users of the financial statement to evaluatethe nature and financial effects of the business combination. SFAS No. 141Ris effective for financial statements issued for fiscal years beginning after December 15,2008. Accordingly, any business combinations the Company engages in will berecorded and disclosed following existing generally accepted accountingprinciples until January 1, 2009. The Company expects SFAS No. 141Rwould have an impact on its consolidated financial statements when effective ifit acquires another company, but the nature and magnitude of the specificeffects will depend upon the nature, terms and size of the acquisitions theCompany consummates after the effective date.

 

In December 2007, the FASBissued SFAS No. 160, “*Non-controllingInterests in Consolidated Financial Statements,”*which providesguidance for accounting and reporting of non-controlling (minority) interestsin consolidated financial statements. The statement is effective for fiscalyears and interim periods within fiscal years beginning on or after December 15,2008.  The Company does not hold minority interests in subsidiaries,therefore it is expected that SFAS No. 160 will have no impact on itsfinancial condition or results of operations.

 

14

----

 

**(2)  Investment Securities**

 

Investment securities as of December 31, 2008 are summarized asfollows:

 
| ** **                        | ** ** | **Amortized  Cost** | ** **     | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** **   |
|-----------------------------------|------------|---------------------|----------------|------------------------------|------------|-------------------------------|------------|-----------------|--------------|
| **Securities Available for Sale** | ** ** | ** **          | ** **     | ** **                   | ** ** | ** **                    | ** ** | ** **      | ** **   |
| U.S. Government Agencies          | ** ** | **$**               | **2,381,588**  | ** **                   | **$**      | **57,950**                    | ** ** | **$**           | **—**   | ** ** | **$** | **2,439,538** | ** ** |
| Mortgage Backed Securities        | ** ** | **7,927,904**       | ** **     | **27,436**                   | ** ** | **(29,611**                   | **)**      | **7,925,729**   | ** **   |
| Equity Securities                 | ** ** | **873,680**         | ** **     | **1,100**                    | ** ** | **(139,980**                  | **)**      | **734,800**     | ** **   |
| ** **                        | ** ** | ** **          | ** **     | ** **                   | ** ** | ** **                    | ** ** | ** **      | ** **   |
| ** **                        | ** ** | **$**               | **11,183,172** | ** **                   | **$**      | **86,486**                    | ** ** | **$**           | **(169,591** | **)** | **$** | **11,100,067** | ** ** |
| ** **                        | ** ** | ** **          | ** **     | ** **                   | ** ** | ** **                    | ** ** | ** **      | ** **   |
| **Securities Held to Maturity**   | ** ** | ** **          | ** **     | ** **                   | ** ** | ** **                    | ** ** | ** **      | ** **   |
| Mortgage Backed Securities        | ** ** | **$**               | **7,178,040**  | ** **                   | **$**      | **—**                    | ** ** | **$**           | **(48,151**  | **)** | **$** | **7,129,889** | ** ** |

 

Investment securities as of December 31, 2007 are summarized asfollows:

 
| ** **                                       | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
|--------------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|-----------------|------------|
| **Securities Available for Sale** | ** ** | ** **          | ** ** | ** **                   | ** ** | ** **                    | ** ** | ** **      | ** ** |
| U.S. Government Agencies                         |       | $                   | 4,898,448  |                         | $          | 12,744                        |       | $               | (2,942     | ) | $ | 4,908,250 |   |
| Mortgage Backed Securities                       |       | 3,513,435           |       | 4,086                        |       | (21,533                       | )          | 3,495,988       |       |
|                                             |       |                |       |                         |       |                          |       |            |       |
|                                             |       | $                   | 8,411,883  |                         | $          | 16,830                        |       | $               | (24,475    | ) | $ | 8,404,238 |   |

 

15

----

 

**(2)  Investment Securities (Continued)**

 

The following outlines the unrealized losses and fair value byinvestment category and length of time that individual securities have been ina continuous unrealized loss position at December 31:

 
| ** **                        | ** ** | **Less Than 12 Months** | ** **          | **12 Months or Greater** | ** ** | **Total**           | ** ** |
|-----------------------------------|------------|----------------------------------------|---------------------|-----------------------------------------|------------|---------------------|------------|
| ** **                        | ** ** | **Fair  Value**                        | ** **          | **Gross  Unrealized  Losses**           | ** ** | **Fair  Value**     | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Gross  Unrealized  Losses** | ** ** |
| **2008**                          |       |                                   |                |                                    |       |                |       |   |   |   |   |   |   |
| **Securities Available for Sale** |       |                                   |                |                                    |       |                |       |   |   |   |   |   |   |
| Mortgage Backed Securities        | ** ** | **$**                                  | **1,690,457**       | ** **                              | **$**      | **(21,160**         | **)**      | **$** | **200,222** | ** ** | **$** | **(8,451** | **)** | **$** | **1,890,679** | ** ** | **$** | **(29,611** | **)** |
| Equity Securities                 | ** ** | **483,700**                            | ** **          | **(139,980**                            | **)**      | **—**          | ** ** | **—** | ** ** | **483,700** | ** ** | **(139,980** | **)** |
| ** **                        | ** ** | ** **                             | ** **          | ** **                              | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                              |       | **$**                                  | ** 2,174,157** | ** **                              | **$**      | ** (161,140)** | ** ** | **$** | ** 200,222** | ** ** | **$** | ** (8,451)** | ** ** | **$** | ** 2,374,379** | ** ** | **$** | ** (169,591)** | ** ** |
|                              |       |                                   |                |                                    |       |                |       |   |   |   |   |   |   |
| **Securities Held to Maturity**   |       |                                   |                |                                    |       |                |       |   |   |   |   |   |   |
| Mortgage Backed Securities        | ** ** | **$**                                  | **7,129,889**       | ** **                              | **$**      | **(48,151**         | **)**      | **$** | **—** | ** ** | **$** | **—** | ** ** | **$** | **7,129,889** | ** ** | **$** | **(48,151** | **)** |
| ** **                        | ** ** | ** **                             | ** **          | ** **                              | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| 2007                              |       |                                   |                |                                    |       |                |       |   |   |   |   |   |   |
| **Securities Available for Sale** |       |                                   |                |                                    |       |                |       |   |   |   |   |   |   |
| U.S. Government Agencies          |       | $                                      | —              |                                    | $          | —              |       | $ | 1,996,750 |   | $ | (2,942 | ) | $ | 1,996,750 |   | $ | (2,942 | ) |
| Mortgage Backed Securities        |       | 435,579                                |                | (4,575                                  | )          | 1,521,421           |       | (16,958 | ) | 1,957,000 |   | (21,533 | ) |
|                              |       |                                   |                |                                    |       |                |       |   |   |   |   |   |   |
|                              |       | $                                      | 435,579             |                                    | $          | (4,575              | )          | $ | 3,518,171 |   | $ | (19,900 | ) | $ | 3,953,750 |   | $ | (24,475 | ) |

 

Management evaluates securities for other than temporary impairmentquarterly, and more frequently when economic or market concerns warrant suchevaluation.  Consideration is given to the length of time and theextent to which the fair value has been less than cost, the financial conditionand near-term prospects of the issuer, and the intent and ability of theCompany to retain its investment in the issuer for a period of time sufficientto allow for anticipated recovery in fair value.  At December 31, 2008, 9 of the 25securities issued by U.S. Government agencies and Government sponsoredcorporations, including mortgage backed securities, and 2 of the 3 equity andother securities contained unrealized losses. Because the declines in marketvalue of investments are attributable to changes in interest rates and notcredit quality and because the Company has the ability and intent to hold theseinvestments until a recovery of fair value, which may be until maturity, theCompany does not consider these investments to be other than temporarilyimpaired at December 31, 2008.

 

16

----

 

**(2)  Investment Securities (Continued)**

 

The amortized cost and estimated fair value of investments insecurities at December 31, 2008, by contractual maturity, are shown in thefollowing table.  Expected maturities will differ from contractualmaturities because borrowers may have the right to call or prepay obligationswith or without call or prepayment penalties.  Becausemortgage-backed securities have both known principal repayment terms as well asunknown principal repayments due to potential borrower pre-payments, it isdifficult to accurately predict the final maturity of theseinvestments.  Mortgage-backed securities are shown separately.

 
| ** **                 | ** ** | **Securities**                   | ** ** |
|----------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | **Available for Sale** | ** ** | **Held to Maturity** | ** ** |
| ** **                 | ** ** | **Amortized  Cost**              | ** ** | **Fair  Value** | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** |
|                       |       |                             |       |   |   |   |   |   |   |
| Within 1 Year              |       | $                                | 500,000    |   | $ | 501,470 | ** ** | **$** | — | ** ** | **$** | — | ** ** |
| 1 to 5 Years               |       | 1,273,680                        |       | 1,137,688 |   | — |   | — |   |
| 5 to 10 Years              |       | 981,588                          |       | 1,035,180 |   | — |   |   |   |
| Over 10 Years              |       | 500,000                          |       | 500,000 |   | — |   | — |   |
| Mortgage Backed Securities |       | 7,927,904                        |       | 7,925,729 |   | 7,178,040 |   | 7,129,889 |   |
|                       |       |                             |       |   |   |   |   |   |   |
|                       |       | $                                | 11,183,172 |   | $ | 11,100,067 |   | $ | 7,178,040 |   | $ | 7,129,889 |   |

 

Proceeds from called investments available for sale were $3,896,493 in2008 and $0 in 2007.  Gross realizedgains totaled $3,507 in 2008 and $0 in 2007.

 

At December 31, 2008 and 2007, there were no securities requiredto be pledged to secure public deposits.

 

17

----

 

**(3)  Loans**

 

The composition of loans as of December 31 are:

 
| ** **                             | ** ** | **2008**       | ** **     | **2007**   | ** ** |
|----------------------------------------|------------|----------------|----------------|------------|------------|
|                                   |       |           |           |       |       |
| Commercial, Financial and Agricultural | ** ** | **$**          | **4,495,355**  |       | $          | 3,339,020 |   |
| Real Estate-Mortgage                   | ** ** | **26,411,116** |           | 13,865,088 |       |
| Real Estate-Construction               | ** ** | **5,236,464**  |           | 508,577    |       |
| Consumer                               | ** ** | **1,800,667**  |           | 1,592,416  |       |
|                                   |       |           |           |       |       |
| ** **                             |       | **$**          | **37,943,602** |       | $          | 19,305,101 |   |

 

The Bank grants loans and extensions of credit to individuals and avariety of businesses and corporations located primarily in its general tradearea of Hall County and Clarke County, Georgia. Although the Bank has adiversified loan portfolio, a substantial portion of the loan portfolio is collateralizedby improved and unimproved real estate and is dependent upon the real estatemarket.

 

**(4)  Allowance for Loan Losses**

 

Transactions in the allowance for loan losses are summarized for theyears ended December 31 as follows:

 
| ** **                              | ** ** | **2008**     | ** **  | **2007** | ** ** |
|-----------------------------------------|------------|--------------|-------------|----------|------------|
|                                    |       |         |        |     |       |
| **Balance, Beginning**                  | ** ** | **$**        | **275,920** |     | $          | 445,629 |   |
| Provision Charged to Operating Expenses | ** ** | **639,760**  |        | 115,199  |       |
| Loans Charged Off                       | ** ** | **(127,311** | **)**       | (335,175 | )          |
| Loan Recoveries                         | ** ** | **49,865**   |        | 50,267   |       |
|                                    |       |         |        |     |       |
| **Balance, Ending**                     | ** ** | **$**        | **838,234** |     | $          | 275,920 |   |

 

At December 31, 2008 and 2007, the total loans past due 90 days ormore and still accruing interest approximated $662,000 and $0,respectively.  At December 31, 2008and 2007, the total recorded investment in loans on nonaccrual statusapproximated $957,000 and $851,000, respectively.  Interest income that would have beenrecognized on nonaccrual loans approximated $53,800 and $34,200 in 2008 and2007, respectively.  Impaired loansapproximated $1,631,000 and $1,140,000 as of December 31, 2008 and 2007,respectively.  The allowance for loanloss included a specific allowance of $488,631 and $102,960 for impaired loansas of December 31, 2008 and 2007, respectively.  Impaired loans with no specific allowanceincluded in the allowance for loan losses approximated $598,000 and $650,000 asof December 31, 2008 and 2007, respectively.  The average investment in impaired loansduring 2008 and 2007 approximated $940,000 and $490,000, respectively.  Interest income recognized on impaired loansapproximated $15,900 and $97,000 in 2008 and 2007, respectively.  The cash basis interest income recognized onimpaired loans was $0 and $90,000 as of December 31, 2008 and 2007,respectively.  No additional funds arecommitted to be advanced in connection with impaired loans. 

 

18

----

 

**(5)  Premises and Equipment**

 

Premises and equipment are comprised of the following as of December 31:

 
| ** **                 | ** ** | **2008**      | ** **    | **2007**  | ** ** |
|----------------------------|------------|---------------|---------------|-----------|------------|
|                       |       |          |          |      |       |
| Land and Land Improvements | ** ** | **$**         | **409,442**   |      | $          | 409,442 |   |
| Building                   | ** ** | **1,693,776** |          | 1,693,776 |       |
| Leasehold Improvements     | ** ** | **18,820**    |          | —    |       |
| Furniture and Equipment    | ** ** | **1,212,604** |          | 752,728   |       |
| Bank Vehicles              | ** ** | **88,904**    |          | 1,175     |       |
|                       |       |          |          |      |       |
|                       | ** ** | **3,423,546** |          | 2,857,120 |       |
|                       |       |          |          |      |       |
| Accumulated Depreciation   | ** ** | **(997,978**  | **)**         | (734,358  | )          |
|                       |       |          |          |      |       |
|                       | ** ** | **$**         | **2,425,568** |      | $          | 2,122,763 |   |

 

Depreciation charged to operations totaled $190,280 and $154,199 for2008 and 2007, respectively.

 

Certain bank facilities are leased under various short-term operatingleases.  Lease expense was $82,532 and$22,140 for the years ended December 31, 2008 and 2007, respectively.

 

**(6)  Deposits**

 

The aggregate amount of overdrawn deposit accounts reclassified as loanbalances totaled $4,323 and $2,350 as of December 31, 2008 and 2007,respectively.

 

Components of interest-bearing deposits as of December 31 are as follows:

 
| ** **              | ** ** | **2008**       | ** **     | **2007**   | ** ** |
|-------------------------|------------|----------------|----------------|------------|------------|
|                    |       |           |           |       |       |
| Interest-Bearing Demand | ** ** | **$**          | **1,081,609**  |       | $          | 1,296,161 |   |
| Savings                 | ** ** | **5,644,624**  |           | 1,185,383  |       |
| Time, $100,000 and Over | ** ** | **11,414,255** |           | 2,866,927  |       |
| Other Time              | ** ** | **35,944,028** |           | 24,090,998 |       |
|                    |       |           |           |       |       |
| ** **              |       | **$**          | **54,084,517** |       | $          | 29,439,469 |   |

 

The aggregate amount of short-term jumbo certificates of deposit, eachwith a minimum denomination of $100,000, was approximately $10,875,000 and$2,644,000 as of December 31, 2008 and 2007, respectively.

 

19

----

 

**(6)  Deposits (Continued)**

 

As of December 31, 2008, the scheduled maturities of certificatesof deposit are as follows:

 
| **Year** | ** ** | **Amount** | ** ** |
|----------|------------|------------|------------|
|     |       |       |       |
| 2009     |       | $          | 40,749,235 |   |
| 2010     |       | 6,438,389  |       |
| 2011     |       | —     |       |
| 2012     |       | 170,660    |       |
|     |       |       |       |
|     |       | $          | 47,358,284 |   |

 

Brokered deposits are third-party deposits placed by or through theassistance of a deposit broker.  As of December 31,2008 and 2007, the Bank had $18,446,000 and $0, respectively, in brokereddeposits.

 

**(7)  Income Taxes**

 

The components of the income tax expense for the years ended December 31are as follows:

 
| ** **                    | ** ** | **2008**       | ** **    | **2007** | ** ** |
|-------------------------------|------------|----------------|---------------|----------|------------|
|                          |       |           |          |     |       |
| Deferred Expense              | ** ** | **$**          | **1,194,044** |     | $          | 594,774 |   |
| Change in Valuation Allowance | ** ** | **(1,194,044** | **)**         | (594,774 | )          |
|                          |       |           |          |     |       |
| ** **                    |       | **$**          | **—**    |     | $          | — |   |

 

The difference between income tax expense and the amount computed by applyingthe statutory federal income tax rate to the earnings before income taxes forthe years ended December 31, 2008 and 2007 relates primarily to the changein the valuation allowance.

 

The following summarizes the components of deferred taxes at December 31:

 
| ** **                     | ** ** | **2008**       | ** ** | **2007**   | ** ** |
|--------------------------------|------------|----------------|------------|------------|------------|
| **Deferred Income Tax Assets** |       |           |       |       |       |
| Allowance for Loan Losses      | ** ** | **$**          | **44,876** |       | $          | — |   |
| Operating Loss Carryforwards   | ** ** | **3,889,749**  |       | 2,741,251  |       |
| Other                          | ** ** | **22,601**     |       | 13,594     |       |
|                           |       |           |       |       |       |
|                           | ** ** | **3,957,226**  |       | 2,754,845  |       |
| **Deferred Tax Liabilities**   |       |           |       |       |       |
| Premises and Equipment         | ** ** | **12,079**     |       | 1,090      |       |
|                           |       |           |       |       |       |
|                           | ** ** | **3,945,147**  |       | 2,753,755  |       |
| Less Valuation Allowance       | ** ** | **(3,945,147** | **)**      | (2,753,755 | )          |
|                           |       |           |       |       |       |
| **Net Deferred Tax Asset**     | ** ** | **$**          | **—** |       | $          | — |   |

 

20

----

 

**(7)  Income Taxes (Continued)**

 

The future tax consequences of the differences between the financialreporting and tax bases of the Company’s assets and liabilities resulted in anet deferred tax asset. The ultimate realization of deferred tax assets is dependentupon the generation of future taxable income during the periods in which thosetemporary differences become deductible.

 

At December 31, 2008, the Company had federal and state netoperating loss carryforwards for tax purposes of approximately $11,440,000 and$11,916,000, respectively, which will expire beginning in 2022 if notpreviously utilized. The utilization of the net operating loss carryforward hasbeen limited as to its use pursuant to the Internal Revenue Code Section 382due to the recent change in ownership of the Company.

 

The Company has analyzed the tax positions taken or expected to betaken in its tax returns and concluded it has no liability related to uncertaintax positions in accordance with FASB Interpretation No. 48, *Accounting for Uncertain Tax Positions*.  The Company is no longer subject to U.S.federal, state and local income tax examinations by tax authorities for yearsprior to 2005.

 

**(8)  Borrowings**

 

The Bank has a line of credit totaling $9,783,000, representing 20% ofthe Bank’s total assets at September 30, 2008.  At December 31, 2008, the Bank has oneadvance from the Federal Home Loan Bank of Atlanta (FHLB) in the amount of$2,000,000.  The advance bears interestat a fixed interest rate of 2.497 percent and matures on May 1, 2013.  The Bank has pledged as collateral investmentsecurities with a carrying amount of $10,135,777, and eligible residential andcommercial real estate loans with a carrying amount of $8,271,517 at December 31,2008.

 

At December 31, 2007, the Bank had two advances from the FHLB inthe amount of $4,000,000.  The advancesmatured during 2008.  The Bank hadpledged as collateral investment securities available for sale with a carryingamount of $7,009,675 at December 31, 2007.

 

The Bank has lines of credit available with correspondent banks whichrepresent available credit for overnight borrowing from financialinstitutions.  As of December 31,2008 and 2007, these secured lines of credit totaled $1,000,000 and $2,000,000,respectively, of which no balances were outstanding.  The Bank has pledged investment securitieswith a carrying amount of $1,428,000 as collateral for the one line availableat December 31, 2008.

 

In December 2008, the Bank was approved to borrow from the FederalReserve Bank discount window program.  Asof December 31, 2008 the Bank’s primary borrowing capacity was $5,442,000,based on pledged investment securities with a carrying amount of $5,815,000.

 

21

----

 

**(9)  Contingencies, Commitments and Going Concern**

 

**Financial Instruments with Off-Balance Sheet Risk**

 

The Bank is a party to financial instruments with off-balance sheetrisk in the normal course of business to meet the financing needs of itscustomers.  These financial instrumentsinclude commitments to extend credit and standby letters of credit.  Those instruments involve, to varyingdegrees, elements of credit risk in excess of the amount recognized on theconsolidated balance sheets.  Thecontractual amounts of those instruments reflect the extent of involvement theBank has in particular classes of financial instruments.

 

The Bank’s exposure to credit loss in the event of nonperformance bythe other party to the financial instrument for commitments to extend creditand standby letters of credit is represented by the contractual amount of thoseinstruments.  The Bank uses the samecredit policies in making commitments and conditional obligations as it doesfor on-balance sheet instruments.  Inmost cases, the Bank requires collateral to support financial instruments withcredit risk.

 

The following summarizes commitments as of December 31:

 
| ** **                                                          | ** ** | **Approximate  Contract Amount** | ** **    |
|---------------------------------------------------------------------|------------|---------------------------------------|---------------|
| ** **                                                          | ** ** | **2008**                              | ** **    | **2007** | ** ** |
| Financial Instruments Whose Contract  Amounts Represent Credit Risk |       |                                  |          |   |   |
| Commitments to Extend Credit                                        |       | **$**                                 | **3,093,000** |   | $ | 2,442,000 |   |
| Standby Letters of Credit                                           | ** ** | **261,000**                           |          | 294,000 |   |
|                                                                     |            |                                       |               |  |  |  |  |

 

Commitments to extend credit are agreements to lend to a customer aslong as there is no violation of any condition established in thecontract.  Commitments generally havefixed expiration dates or other termination clauses and may require payment ofa fee.  Since many of the commitments mayexpire without being drawn upon, the total commitment amounts do notnecessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-casebasis.  The amount of collateralobtained, if deemed necessary by the Bank, upon extension of credit is based onmanagement’s credit evaluation. Collateral held varies but may include unimproved and improved realestate, certificates of deposit or personal property.

 

Standby letters of credit are conditional commitments issued by theBank to guarantee the performance of a customer to a third party.  The credit risk involved in issuing lettersof credit is essentially the same as that involved in extending loan facilitiesto customers.

 

22

----

 

**(9)  Contingencies, Commitments and Going Concern**

 

**Going Concern**

 

As shown in the accompanying consolidated financial statements, theCompany has incurred net losses of $3,515,272 and $1,746,026 from operationsfor the years ended December 31, 2008 and 2007, respectively, and has anaccumulated deficit of $11,075,145 as of December 31, 2008.  These conditions create an uncertainty aboutthe Company’s ability to continue as a going concern.  Management of the company has developed acapital plan to maintain minimum capital levels equal to or above thosedetermined by regulatory authorities through the issuance of additionalstock.  During 2008, the Companyinitiated a private placement offering and received gross proceeds of$3,370,006 through the sale of common stock. The private placement offering has been extended through April 2009with gross proceeds of $790,000 received during 2009.  The ability of the Company to continue as agoing concern is dependant on the success of the capital plan.  The financial statements do not include anyadjustment that might be necessary if the Company is unable to continue as a goingconcern.

 

23

----

 

**(10) Stockholders’ Equity**

 

Shares of preferred stock may be issued from time to time in one ormore series as established by resolution of the board of directors of theCompany, up to a maximum of 10,000,000 shares. Each resolution shall include the number of shares issued, preferences,special rights and limitations as determined by the board.

 

During 2006, First Century Bancorp (First Century) issued 35,000 sharesof Series A Preferred Stock, no par value (the Series A PreferredStock), for $10.00 per share.  The Series APreferred Stock is noncumulative perpetual preferred stock and will be treatedas Tier 1 capital under existing Federal Reserve regulations.  The Series A Preferred Stock isgenerally nonvoting and cannot be converted into common stock of FirstCentury.  First Century has the right,subject to Federal Reserve approval, to redeem the shares for their purchaseprice plus accrued dividends, if any. The Bank is currently not allowed to pay dividends to the Company untilit becomes cumulatively profitable.  On May 4,2007, the Company redeemed the 35,000 shares of Series A Preferred Stockat $10.00 per share.

 

On December 31, 2007, First Century issued 75,000 shares of Series BPreferred Stock, no par value (the Series B Preferred Stock), for $10.00per share in a private placement.  The Series BPreferred Stock is cumulative perpetual preferred stock and will be treated asTier 1 capital under existing Federal Reserve regulations.  The Series B Preferred Stock isgenerally nonvoting and cannot be converted into common stock of FirstCentury.  First Century has the right,subject to Federal Reserve approval, to redeem the shares for their purchaseprice plus accrued dividends, if any. Dividends accrue on the Series B Preferred Stock at a rate perannum initially equal to the prime rate in effect on the date of issuance,adjusted semi-annually on the first date of January and the first day of July eachyear to be equal to the prime rate in effect on such date.  The investors also received a warrant toacquire one share of common stock for each share of Series B PreferredStock purchased in the offering at an exercise price of $1.50 per share, whichwas the fair market value of the common stock on the date of the issuance ofthe warrants.  The warrants have noexpiration date.  Cumulative dividends inarrears at December 31, 2008 were $45,891.

 

In July 2008, First Century commenced a private offering of shares of our common stock to a limited number of accredited investors.   First Century anticipates using the net proceeds for working capital purposes, including the possible redemption of preferred stock.  There is no minimum number of shares which must be sold in order for us to accept subscriptions in the offering, and no assurance can be given as to whether, or on what terms we will be able to consummate the proposed offering.  As of December 31, 2008 proceeds of $3,370,006 have been received from the sale of 2,246,669 shares at $1.50 per share in the offering.  The common stock to be sold in the offering has not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

 

Dividends paid by the Bank are the primary source of funds available tothe Company.  Banking regulations limitthe amount of dividends that may be paid without prior approval of theregulatory authorities.  Theserestrictions are based on the level of regulatory classified assets, the prioryears’ net earnings and the ratio of equity capital to total assets.

 

24

----

 

**(11) Related Party Transactions**

 

It is the Bank’s policy to make loans to directors and officers,including companies in which they have a beneficial interest, in the normalcourse of business.  It is also the Bank’spolicy to comply with federal regulations that require that loan and deposittransactions with directors and executive officers be made on substantially thesame terms as those prevailing at the time made for comparable loans anddeposits to other persons.

 

In September 2008,the Bank entered into a data processing contract and master services agreementto move its processing from Fidelity Information Systems to Providence, theinternal data processing system provided by First Covenant Bank,  an entity in which William R. Blanton is aprincipal owner.  Pursuant to theagreements, First Covenant will provide services to implement and service hostsystem computer software which will provide the Bank with the essential bankingprocessing and accounting functions for deposit products, loans and generalledger accounting.  The term of eachcontract is 12 months, with the option to renew for additional 12 monthperiods.  For the year ended December 31,2008 the total paid to for these services was $78,000.

 

The Bank is affiliated with CINC Systems (“CINC”), a software servicescompany.  The Bank and CINC areaffiliated through common management.  The Bank has contracted with CINC to provideweb and server hosting facilities.  Forthe year ended December 31, 2008 the total paid to CINC for these serviceswas $10,000.

 

The Bank has certain mortgage loans with a carrying amount of$2,742,062 and $2,895,901 as of December 31, 2008 and 2007, respectively,which were purchased from United Americas Bank, an entity in which William R.Blanton is a principal owner.

 

The Bank has certain loans with a carrying amount of $1,741,760 and $0as of December 31, 2008 and 2007, respectively, which were purchased fromFirst Covenant Bank, an entity in which William R. Blanton is a principalowner.

 

The Bank sold certain loans with a carrying amount of $10,113,232 and$0 as of December 31, 2008 and 2007, respectively, to First Covenant Bank,an entity in which William R. Blanton is a principal owner.

 

The following summary reflects activities for related party loans:

 
| ** **             | ** ** | **2008**     | ** **  | **2007** | ** ** |
|------------------------|------------|--------------|-------------|----------|------------|
|                   |       |         |        |     |       |
| **Balance, Beginning** | ** ** | **$**        | **547,427** |     | $          | 604,348 |   |
| New Loans              | ** ** | **124,050**  |        | 487,038  |       |
| Principal Repayments   | ** ** | **(350,137** | **)**       | (543,959 | )          |
|                   |       |         |        |     |       |
| **Balance, Ending**    | ** ** | **$**        | **321,340** |     | $          | 547,427 |   |

 

As of December 31, 2008 and 2007, deposit accounts for relatedparties totaled approximately $1,170,000 and $696,000, respectively.

 

25

----

 

**(12) Employee Benefit Plan**

 

The Company has a qualified retirement plan pursuant to InternalRevenue Code Section 401(K) covering substantially all employeessubject to minimum age and service requirements.  Contribution to the plan by employees isvoluntary.  The Company made nocontributions to the plan in 2008 or 2007.

 

**(13) Stock Option Plan**

 

During 2003, the stockholders approved a stock option plan (the OptionPlan) whereby the Company may grant options to acquire shares of common stockof the Company at the then fair value.  Atotal of 125,000 shares of common stock were reserved for possible issuanceunder this plan.  At the 2008 AnnualMeeting of shareholders, the shareholders approved an amendment to increase thenumber of shares of our common stock authorized to be reserved for issuanceunder the Option Plan from 125,000 to 750,000. Vesting periods are established by the board at the date of grant andexpire on the tenth anniversary of the grant date.

 

A summary of activity related to the stock options, for the years endedDecember 31, 2008 and 2007 is presented below:

 
| ** **                                            | ** ** | **Shares** | ** ** | **Weighted Average  Exercise Price** | ** ** |
|-------------------------------------------------------|------------|------------|------------|------------------------------------------------|------------|
|                                                  |       |       |       |                                           |       |
| **Outstanding, December 31, 2006**               |       | 144,834    |       | $                                              | 5.66       |   |
|                                                  |       |       |       |                                           |       |
| Granted                                               |       | 7,500      |       | $                                              | 2.01       |   |
| Exercised                                             |       | —     |       | —                                         |       |
| Forfeited                                             |       | (28,500    | )          | $                                              | 4.21       |   |
|                                                  |       |       |       |                                           |       |
| **Outstanding, December 31, 2007**               |       | 123,834    |       | $                                              | 5.77       |   |
|                                                  |       |       |       |                                           |       |
| Granted                                               |       | 421,000    |       | $                                              | 2.00       |   |
| Exercised                                             |       | —     |       | —                                         |       |
| Forfeited                                             |       | (6,500     | )          | $                                              | 5.00       |   |
|                                                  |       |       |       |                                           |       |
| **Outstanding, December 31, 2008**               |       | 538,334    |       | $                                              | 2.78       |   |
|                                                  |       |       |       |                                           |       |
| **Eligible to be Exercised, December 31,  2008** |       | 117,001    |       | $                                              | 5.58       |   |

 

The options outstanding and exercisable at December 31, 2008 hadno aggregate intrinsic value.  At December 31,2008, there was $272,557 of total unrecognized compensation expense related tononvested share-based compensation arrangements.  The cost is expected to be recognized over aweighted average period of 4.5 years.

 

26

----

 

**(13) Stock Option Plan**(Continued)

 

Information pertaining to options outstanding at December 31, 2008is as follows:

 
| **Exercise Prices** | ** ** | **Number Outstanding** | ** ** | **Weighted Average Remaining  Contractual Life** | ** ** | **Number Exercisable** | ** ** |
|--------------------------|------------|-----------------------------|------------|-----------------------------------------------------------------|------------|-----------------------------|------------|
|                     |       |                        |       |                                                            |       |                        |       |
| $                        | 10.00      |                        | 13,334     |                                                            | 4.4        |                        | 13,334     |   |
| 5.00                     |       | 104,000                     |       | 6.8                                                             |       | 103,667                     |       |
| 2.00                     |       | 421,000                     |       | 9.3                                                             |       | —                      |       |
|                     |       |                        |       |                                                            |       |                        |       |
|                     |       | 538,334                     |       | 8.3                                                             |       | 117,001                     |       |
|                          |            |                             |            |                                                                 |            |                             |            |  |

 

Thefair value of options granted during 2008 was $307,220.  The fair value of each option grant wasestimated on the date of the grant using the Black-Scholes optionvaluation model that uses the assumptions noted in the following table for theyear ended December 31, 2008.

 
| ** **                                      | ** ** | **2008** | ** ** |
|-------------------------------------------------|------------|----------|------------|
|                                            |       |     |       |
| Dividend Yield                                  |       | 0.00     | %          |
| Risk Free Interest Rate                         |       | 3.98     | %          |
| Expected Life (in Years)                        |       | 10       |       |
| Expected Volatility                             |       | 29       | %          |
| Weighted average fair value per option  granted |       | $        | 0.77       |   |
|                                                 |            |          |            |  |

 

The risk-free interest rates for periodswithin the contractual life of the awards are based on the U.S. Treasury yieldcurve in effect at the time of grant. The expected life of options represents the period of time that optionsgranted are expected to be outstanding. The dividend yield assumption is based on the Company’s history andexpectation of dividend payouts.

 

27

----

 

**(14) Stock Warrants**

 

On March 25, 2002, the Company issued warrants to its directors topurchase an aggregate of 199,736 shares of the Company’s common stock at anexercise price of $10.00 per share.  Thewarrants become exercisable in one-third annual increments beginning on thefirst anniversary of the issuance date, provided that throughout the periodbeginning on the date of the initial issuance of the warrants and ending on theparticular anniversary, the warrant holder has served continuously as a directorof the Company and the Bank and has attended at least 75% of the meetings ofthe relevant boards of directors. Warrants which fail to vest as provided in the previous sentence willexpire and no longer be exercisable. Exercisable warrants will generally remain exercisable for the 10-yearperiod following the date of issuance. The exercise price of each warrant is subject to adjustment for stocksplits, recapitalizations or other similar events.  As of December 31, 2008, 153,393 ofthese warrants remained outstanding of which all were exercisable.

 

In April 2007, Mr. Blanton purchased 738,008 shares of theCompany’s common stock in a private placement at $2.71 per share.  The Company also issued Mr. Blanton awarrant (the “Original Warrant”) to purchase up to 738,008 shares at $2.71 pershare. The Original Warrant has no expiration date and contains provisionswhich provide for automatic adjustments in price and shares purchasable underthe Original Warrants in the event additional securities are issued below orhave a conversion or exercise price below the current Original Warrant exerciseprice.  The Company received proceeds ofapproximately $2,000,000 less fees and expenses related to the sale of theshares, which was used for working capital purposes.

 

In September 2007, Mr. Blanton transferred a portion of theOriginal Warrant to purchase 184,502 shares to Silver Hill Enterprises, LP, anentity controlled by William Evans, one of the Company’s directors.

 

In December 2007, the Company completed a private placement of Series BPreferred Stock, no par value, for $10.00 per share, selling a total of$750,000 worth of shares.  The investorsin that offering also received warrants (the “B Warrants”) to acquire 75,000shares of common stock at an exercise price of $1.50 per share, which webelieve was the fair market value of the common stock on the date of issuanceof the B Warrants.  As with the OriginalWarrant, the B Warrants have no expiration date and contain provisions whichprovide for automatic adjustments in price and shares purchasable under thewarrants in the event additional shares or warrants are issued below thecurrent warrant exercise price.

 

As a result of the issuance of the B Warrants with an exercise pricebelow the $2.71 exercise price, the exercise price and number of shares ofcommon stock purchasable under the Original Warrant adjusted as follows: (a) withrespect to Mr. Blanton, from 553,506 shares at $2.71 per share to1,000,001 shares at $1.50 per share; and (b) with respect to Silver HillEnterprises, LP, from 184,502 shares at $2.71 per share to 333,333 shares at$1.50 per share.

 

In June 2008, Mr. Blanton and Silver Hill Enterprises, LPtransferred a portion of the Original Warrant to purchase shares to John AllenNivens, Jr. and Richard Kramer Whitehead, III, each a director of theCompany and to Homestead Investment, LLC, which is controlled by the father ofCompany director, William A. Bagwell, Jr.

 

Following the transfers and the adjustments to the Original Warrant,the following persons hold rights to purchase shares of common stock at theexercise price of $1.50 under the Original Warrant and the B Warrants:  (i) Mr. Blanton holds rights topurchase 850,254 shares; (ii) Silver Hill Enterprises, LP holds rights topurchase 283,418 shares; (iii) Mr. Nivens holds rights to purchase69,165 shares; (iv) Mr. Whitehead holds rights to purchase 69,165shares; and (v) Homestead Investment, LLC and Mr. Bagwellcollectively hold rights to purchase 136,332 shares.

 

28

----

 

**(15) Fair Value of Financial Instruments**

 

SFAS No. 107, Disclosures about Fair Value of FinancialInstruments, requires disclosure of fair value information about financialinstruments, whether or not recognized on the face of the balance sheet, forwhich it is practicable to estimate that value. The assumptions used in the estimation of the fair value of FirstCentury Bank’s financial instruments are detailed below.  Where quoted prices are not available, fairvalues are based on estimates using discounted cash flows and other valuationtechniques.  The use of discounted cashflows can be significantly affected by the assumptions used, including thediscount rate and estimates of future cash flows.  The following disclosures should not beconsidered a surrogate of the liquidation value of the Bank, but rather agood-faith estimate of the increase or decrease in value of financialinstruments held by the Bank since purchase, origination or issuance.

 

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

 

**Investment Securities Available for Sale** –Fair values for investment securities are based on quoted market prices.

 

**Other Investments** - The fair value of otherinvestments approximates carrying value.

 

**Loans** - The fair value of fixed rate loans isestimated by discounting the future cash flows using the current rates at whichsimilar loans would be made to borrowers with similar credit ratings.  For variable rate loans, the carrying amountis a reasonable estimate of fair value.

 

29

----

 

**15) Fair Value of Financial Instruments (Continued)**

 

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

 

**Borrowings** – Due to their short-term nature,the fair value of FHLB advances approximates carrying amount.

 

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

 

The carrying amount and estimated fair values of the Bank’s financialinstruments as of December 31 are presented hereafter:

 
| ** **                               | ** ** | **2008**                | ** ** | **2007**            | ** ** |
|------------------------------------------|------------|-------------------------|------------|---------------------|------------|
| ** **                               | ** ** | **Carrying**            | ** ** | **Estimated**       | ** ** | **Carrying** | ** ** | **Estimated** | ** ** |
| ** **                               | ** ** | **Amount**              | ** ** | **Fair Value** | ** ** | **Amount** | ** ** | **Fair Value** | ** ** |
| ** **                               | ** ** | **(in Thousands)** | ** ** |
| **Assets**                               |       |                    |       |                |       |   |   |   |   |
| Cash and Short-Term Investments          | ** ** | **$**                   | **2,225**  | ** **          | **$**      | **2,225** |   | $ | 8,349 |   | $ | 8,349 |   |
| Investment Securities Available for Sale | ** ** | **11,183**              | ** ** | **11,100**          |       | 8,404 |   | 8,404 |   |
| Investment Securities Held to Maturity   | ** ** | **7,178**               | ** ** | **7,130**           |       | — |   | — |   |
| Other Investments                        | ** ** | **427**                 | ** ** | **427**             |       | 403 |   | 403 |   |
| Loans Held for Sale                      | ** ** | **1,864**               | ** ** | **1,864**           |       | — |   | — |   |
| Loans                                    | ** ** | **37,944**              | ** ** | **38,437**          |       | 19,305 |   | 19,476 |   |
|                                     |       |                    |       |                |       |   |   |   |   |
| **Liabilities**                          |       |                    |       |                |       |   |   |   |   |
| Deposits                                 | ** ** | **57,121**              | ** ** | **57,008**          |       | 31,006 |   | 31,417 |   |
| Borrowings                               | ** ** | **2,000**               | ** ** | **2,071**           |       | 4,000 |   | 4,000 |   |
|                                          |            |                         |            |                     |            |  |  |  |  |  |  |  |  |

 

Fair value estimates are made at a specific point in time, based onrelevant market information and information about the financialinstrument.  These estimates do notreflect any premium or discount that could result from offering for sale at onetime the entire holdings of a particular financial instrument.  Because no market exists for a significantportion of the Bank’s financial instruments, fair value estimates are based onmany judgments.  These estimates aresubjective in nature and involve uncertainties and matters of significantjudgment and therefore cannot be determined with precision.  Changes in assumptions could significantlyaffect the estimates.

 

Fair value estimates are based on existing on-and off-balance sheetfinancial instruments without attempting to estimate the value of anticipatedfuture business and the value of assets and liabilities that are not consideredfinancial instruments.  Significantassets and liabilities that are not considered financial instruments includethe deferred income taxes and premises and equipment.  In addition, the tax ramifications related tothe realization of the unrealized gains and losses can have a significanteffect on fair value estimates and have not been considered in the estimates.

 

30

----

 

**15) Fair Value of Financial Instruments (Continued)**

 

**Fair Value Hierarchy**

 

SFAS No. 157, *Fair Value Measurements,*definesfair value, establishes a framework for measuring fair value, establishes athree-level valuation hierarchy for disclosure of fair value measurement andenhances disclosure requirements for fair value measurements.  The valuation hierarchy is based upon thetransparency of inputs to the valuation of an asset or liability as of themeasurement date.  The three levels aredefined as follows:

 

·                  Level 1 inputsto the valuation methodology are quoted prices (unadjusted) for identicalassets or liabilities in active markets.

 

·                  Level 2 inputsto the valuation methodology include quoted prices for similar assets andliabilities in active markets, and inputs that are observable for the asset orliability, either directly or indirectly, for substantially the full term ofthe financial instrument.

 

·                  Level 3 inputsto the valuation methodology are unobservable and significant to the fair valuemeasurement.

 

Following is a description of the valuation methodologies used forinstruments measured at fair value, as well as the general classification ofsuch instruments pursuant to the valuation hierarchy:

 

*Investment Securities Available for Sale*

 

Where quoted prices are available in an active market, investmentsecurities are classified within level 1 of the valuation hierarchy.  Level 1 securities would include highlyliquid government bonds, mortgage products and exchange traded equities.  If quoted market prices are not availablethen fair values are estimated by using pricing models, quoted prices ofsecurities with similar characteristics or discounted cash flows.  Level 2 securities include U.S. agencysecurities, mortgage-backed agency securities, obligations of states andpolitical subdivisions and certain corporate, asset backed and othersecurities.  In certain cases where Level1 and Level 2 inputs are not available, securities are classified within Level3 of the hierarchy.

 

*Impaired loans*

 

SFAS No. 157 applies to loans measured for impairment using thepractical expedients permitted by SFAS No. 114, *Accountingby Creditors for Impairment of a Loan,*including impaired loansmeasured at an observable market price (if available), or at the fair value ofthe loan’s collateral (if the loan is collateral dependent).  Fair value of the loan’s collateral, when theloan is dependent on collateral, is determined by appraisals or independentvaluation which is then adjusted for the cost related to liquidation of thecollateral.

 

Additionally, from time to time, the Company may be required to recordat fair value other assets on a nonrecurring basis, such as loans held forsale, other real estate, and certain other assets.  These nonrecurring fair value adjustmentstypically involve application of lower of cost or market accounting orwrite-downs of individual assets.

 

31

----

 

**15) Fair Value of Financial Instruments (Continued)**

 

*Assets and Liabilities Measured at Fair Value on a Recurring Basis asof December 31, 2008*

 
| ** **                               | ** ** | ** ** | ** ** | **Fair Value Measurements at Reporting Date Using** | ** ** |
|------------------------------------------|------------|------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                               | ** ** | **Total**  | ** ** | **Level 1**                                                                  | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|                                     |       |       |       |                                                                              |       |   |   |   |   |
| Investment Securities Available for Sale |       | $          | 11,100,067 |                                                                              | —     |   | $ | 11,100,067 |   | — |   |
|                                          |            |            |            |                                                                                   |            |  |  |  |  |  |  |

 

The Company did not identify any liabilities that are required to bepresented at fair value.

 

*Assets and Liabilities Measured at Fair Value on a Nonrecurring Basisas of December 31, 2008*

 
| ** **          | ** ** | ** ** | ** ** | **Fair Value Measurements at Reporting Date Using** | ** ** |
|---------------------|------------|------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **          | ** ** | **Total**  | ** ** | **Level 1**                                                                  | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|                |       |       |       |                                                                              |       |   |   |   |   |
| Loans Held for Sale |       | $          | 1,863,500  |                                                                              | $          | 1,863,500 |   | — |   | — |   |
| Impaired Loans      |       | $          | 1,142,558  |                                                                              | —     |   | $ | 1,142,558 |   | — |   |
|                     |            |            |            |                                                                                   |            |  |  |  |  |  |  |  |

 

**(16) Regulatory Matters**

 

The Company and the Bank are subject to various regulatory capitalrequirements administered by the federal banking agencies.  Failure to meet minimum capital requirementscan initiate certain mandatory and possibly additional discretionary actions byregulators that, if undertaken, could have a direct material effect on theconsolidated financial statements.  Undercertain adequacy guidelines and the regulatory framework for prompt correctiveaction, specific capital guidelines that involve quantitative measures of theassets, liabilities and certain off-balance sheet items, as calculated underregulatory accounting practices, must be met. The capital amounts and classification are also subject to qualitativejudgments by the regulators about components, risk weightings and otherfactors.

 

Quantitative measures established by regulation to ensure capitaladequacy require the Company and the Bank to maintain minimum amounts andratios (set forth in the following table) of Total and Tier 1 Capital torisk-weighted assets and of Tier 1 Capital to average assets.

 

As of December 31, 2008, the most recent notification from theFederal Deposit Insurance Corporation categorized the Bank as adequatelycapitalized under the regulatory framework for prompt corrective action.  As a result, the Bank is prohibited fromdirectly or indirectly accepting, renewing, or rolling over any brokereddeposits, absent receiving a waiver from the FDIC.  To be categorized as well capitalized, theBank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1leverage ratios as set forth in the following table.  The actual capital amounts and ratios for theBank are also presented in the following table. In the opinion of management, there are no conditions or events sinceprior notification of capital adequacy from the regulators that have changedthe Bank’s classification.  Disclosuresrelated to the Company have been excluded as they did not significantly deviatefrom the disclosure herein.

 

32

----

 

**(16) Regulatory Matters (Continued)**

 
| ** **                              | ** ** | ** **              | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                 | ** ** | **To Be Well**   | ** ** |
|-----------------------------------------|------------|-------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                              | ** ** | ** **              | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                 | ** ** | **Capitalized Under** | ** ** |
| ** **                              | ** ** | ** **              | ** ** | ** **                 | ** ** | **For Capital**       | ** ** | **Prompt Corrective** | ** ** |
| ** **                              | ** ** | **Actual**              | ** ** | **Adequacy Purposes** | ** ** | **Action Provisions** | ** ** |
| ** **                              | ** ** | **Amount**              | ** ** | **Ratio**                  | ** ** | **Amount**                 | ** ** | **Ratio**                  | ** ** | **Amount**                 | ** ** | **Ratio** | ** ** |
| ** **                              | ** ** | **(In Thousands)** | ** ** |
| **December 31, 2008**              |       |                    |       |                       |       |                       |       |                       |       |                       |       |   |   |
|                                    |       |                    |       |                       |       |                       |       |                       |       |                       |       |   |   |
| Total  Capital to Risk-Weighted  Assets | ** ** | **$**                   | **3,793**  | ** **                 | **9.29**   | **%**                      | **$**      | **3,265**                  | ** ** | 8.00                       | %          | **$** | **4,081** | ** ** | 10.00 | % |
| Tier I Capital to Risk-Weighted Assets  |       | **3,279**               |       | **8.04**                   |       | **1,632**                  |       | 4.00                       |       | **2,449**                  |       | 6.00 |   |
| Tier I Capital to Average Assets        |       | **3,279**               |       | **6.07**                   |       | **2,160**                  |       | 4.00                       |       | **2,701**                  |       | 5.00 |   |
|                                    |       |                    |       |                       |       |                       |       |                       |       |                       |       |   |   |
| December 31, 2007                  |       |                    |       |                       |       |                       |       |                       |       |                       |       |   |   |
|                                    |       |                    |       |                       |       |                       |       |                       |       |                       |       |   |   |
| Total Capital to Risk-Weighted Assets   |       | $                       | 3,770      |                       | 16.62      |                       | 1,814      |                       | 8.00       |                       | 2,268      |   | 10.00 |   |
| Tier I Capital to Risk-Weighted Assets  |       | 3,487                   |       | 15.38                      |       | 907                        |       | 4.00                       |       | 1,361                      |       | 6.00 |   |
| Tier I Capital to Average Assets        |       | 3,487                   |       | 9.41                       |       | 1,482                      |       | 4.00                       |       | 1,853                      |       | 5.00 |   |
|                                         |            |                         |            |                            |            |                            |            |                            |            |                            |            |  |  |  |  |  |

 

**(17) Other Operating Expenses**

 

Components of other operating expenses which are greater than 1 percentof interest income and other operating income for the years ended December 31are as follows:

 
| ** **                          | ** ** | **2008**    | ** **  | **2007**   | ** ** |
|-------------------------------------|------------|-------------|-------------|------------|------------|
| ** **                          | ** ** | ** **  | ** **  | ** ** | ** ** |
| Data Processing Fees                | ** ** | **$**       | **546,596** |       | $          | 134,028 |   |
| Advertising and Marketing           | ** ** | **274,953** |        | 58,937     |       |
| Insurance and Assessments           | ** ** | **131,931** |        | 119,060    |       |
| Office Supplies                     | ** ** | **70,231**  |        | 34,881     |       |
| Telephone                           | ** ** | **69,148**  |        | 33,494     |       |
| Postage and Courier                 | ** ** | **42,407**  |        | 30,796     |       |
| Other Loan Related and Repossession | ** ** | **206,221** |        | 76,545     |       |
|                                     |            |             |             |            |            |  |  |

 

33

----

 

**(18) Financial Information of First Century Bancorp. (Parent Only)**

 

**FIRST CENTURY BANCORP. (PARENT ONLY)**

**CONDENSED BALANCE SHEETS**

**DECEMBER 31**

** **
| ** **                                          | ** ** | **2008**      | ** **    | **2007**   | ** ** |
|-----------------------------------------------------|------------|---------------|---------------|------------|------------|
| ** **                                          |       |          |          |       |       |
| **ASSETS**                                          |       |          |          |       |       |
| ** **                                          |
| Cash and Interest-Bearing Deposits                  | ** ** | **$**         | **33,010**    |       | $          | 25,516 |   |
| Investment in Subsidiary                            | ** ** | **3,316,508** |          | 3,480,244  |       |
| Other Assets                                        | ** ** | **2,829**     |          | 3,408      |       |
|                                                |       |          |          |       |       |
| **Total Assets**                                    | ** ** | **$**         | **3,352,347** |       | $          | 3,509,168 |   |
|                                                |       |          |          |       |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**      | ** ** | ** **    | ** **    | ** ** | ** ** |
| ** **                                          | ** ** | ** **    | ** **    | ** ** | ** ** |
| **Other Liabilities**                               | ** ** | **$**         | **188,446**   |       | $          | 15,480 |   |
|                                                |       |          |          |       |       |
| **Stockholders’ Equity**                       | ** ** | **3,163,901** |          | 3,493,688  |       |
|                                                |       |          |          |       |       |
| **Total Liabilities and Stockholders’ Equity** | ** ** | **$**         | **3,352,347** |       | $          | 3,509,168 |   |

 

34

----

 

**(18) Financial Information of First Century Bancorp. (Parent Only)(Continued)**

 

**FIRST CENTURY BANCORP. (PARENT ONLY)**

**CONDENSED STATEMENTS OF OPERATIONS**

**FOR THE YEARS ENDED DECEMBER 31**

 
| ** **                                                  | ** ** | **2008**       | ** **     | **2007**   | ** ** |
|-------------------------------------------------------------|------------|----------------|----------------|------------|------------|
|                                                        |       |           |           |       |       |
| **Interest Income**                                         | ** ** | **$**          | **347**        |       | $          | 1,684 |   |
|                                                        |       |           |           |       |       |
| **Expenses**                                                |       |           |           |       |       |
| Salaries and Employee Benefits                              | ** ** | **—**     |           | 24,000     |       |
| Professional Fees                                           | ** ** | **165,698**    |           | 135,429    |       |
| Other                                                       | ** ** | **30,373**     |           | 25,767     |       |
|                                                        |       |           |           |       |       |
| ** **                                                  |       | **196,071**    |           | 185,196    |       |
|                                                        |       |           |           |       |       |
| **Loss Before Equity in Undistributed Loss of  Subsidiary** | ** ** | **(195,724**   | )              | (183,512   | )          |
|                                                        |       |           |           |       |       |
| **Equity in Undistributed Loss of Subsidiary**              | ** ** | **(3,319,548** | )              | (1,562,514 | )          |
|                                                        |       |           |           |       |       |
| **Net Loss**                                                | ** ** | **$**          | **(3,515,272** | )          | $          | (1,746,026 | ) |

 

35

----

 

**(18) Financial Information of First Century Bancorp. (Parent Only)(Continued)**

 

**FIRST CENTURY BANCORP. (PARENT ONLY)**

**CONDENSED STATEMENTS OF CASH FLOWS**

**FOR THE YEARS ENDED DECEMBER 31**

 
| ** **                                                                 | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|----------------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                       |       |       |       |       |       |
| **Cash Flows from Operating Activities**                                   |       |       |       |       |       |
| Net Loss                                                                   |       | $          | (3,515,272 | )          | $          | (1,746,026 | ) |
| Adjustments to Reconcile Net Loss to Net Cash Used by Operating Activities |       |       |       |       |       |
| Equity in Undistributed Loss of Subsidiary                            |       | 3,319,548  |       | 1,562,514  |       |
| Stock Compensation Expense                                                 |       | —     |       | 24,000     |       |
| **Change In**                                                              |       |       |       |       |       |
| Other Assets                                                               |       | 581        |       | 1,680      |       |
| Other Liabilities                                                          |       | 172,966    |       | —     |       |
|                                                                       |       |       |       |       |       |
|                                                                       |       | (22,177    | )          | (157,832   | )          |
|                                                                       |       |       |       |       |       |
| **Cash Flows from Investing Activities**                                   |       |       |       |       |       |
| Capital Infusion in Subsidiary                                             |       | (3,200,002 | )          | (2,050,000 | )          |
|                                                                       |       |       |       |       |       |
| **Cash Flows from Financing Activities**                                   |       |       |       |       |       |
| Exercise of Stock Options and Warrants                                     |       | —     |       | 2,002,002  |       |
| Proceeds from Issuance of Common Stock                                     |       | 3,370,006  |       | 750,000    |       |
| Proceeds from Redemption of Preferred Stock                                |       | —     |       | (350,000   | )          |
| Payments of Stock Issuance Costs                                           |       | (140,333   | )          | (169,045   | )          |
|                                                                       |       |       |       |       |       |
|                                                                       |       | 3,229,673  |       | 2,232,957  |       |
|                                                                       |       |       |       |       |       |
| **Net Decrease in Cash**                                                   |       | 7,494      |       | 25,125     |       |
|                                                                       |       |       |       |       |       |
| **Cash and Interest-Bearing Deposits,  Beginning**                         |       | 25,516     |       | 391        |       |
|                                                                       |       |       |       |       |       |
| **Cash and Interest-Bearing Deposits, Ending**                             |       | $          | 33,010     |       | $          | 25,516 |   |

 

**(19) Subsequent Events**

 

During 2009, the Company has received $790,000 from accreditedinvestors in connection with the private offering of the Company’s commonstock.

 

During 2009, the Company increased its borrowing capacity with the FHLBand Federal Reserve Bank as additional sources of liquidity.  As of March 31,2009, the borrowing capacity with the FHLB was $12,580,000 of which $10,555,000is available.  Borrowing capacity through the Federal Reserve Bank’s discountwindow was $21,855,000 of which $17,156,000 was available as of March 25,2009.

 

36

----