** **

**UNITED STATES**

**SECURITIESAND****EXCHANGE****COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-K**

** **
| **x** | **Annual  Report Pursuant to Section 13 or 15(d) of The Securities Exchange  Act of 1934** |
|-------|------------------------------------------------------------------------------------------------------|

 

**For The Fiscal Year December 31, 2009.**

 

**or**

 
| **o** | **Transition  Report Pursuant to Section 13 or 15 (d) of The Securities Exchange  Act of 1934** |
|-------|-----------------------------------------------------------------------------------------------------------|

 

**For the Transition Period from                      to                      **

 

**Commission file number: 001-16413**

 

**FIRSTCENTURY BANCORP.**

(Exact name of registrant as specified in its charter)

** **

| **Georgia**                                 | ** ** | **58-2554464**                       |
|---------------------------------------------|------------|--------------------------------------|
| (State of Incorporation)                    |       | (I.R.S. Employer Identification No.) |
|                                        |       |                                 |
| **807 Dorsey Street, Gainesville, Georgia** | ** ** | **30501**                            |
| (Address of principal executive offices)    |       | (Zip Code)                           |

 

**(770) 297-8060**

(Telephone Number)

 

Securitiesregistered pursuant to Section 12(b) of the Act:  **None**

 

Securitiesregistered pursuant to Section 12(g) of the Act:  **Common Stock**

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act. Yes o  No x

 

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Exchange Act. Yes o  No x

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes x  No o

 

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

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of  “larege acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

| Large accelerated filer o |   | Accelerated filer o        |
|---------------------------|--------|----------------------------|
|                      |   |                       |
| Non-accelerated filer o   |   | Smaller reporing company x |

 

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

 

Theaggregate market value of the voting common stock held by non-affiliates of theregistrant (computed by reference to the price at which the common stock wasrecently sold) was $3,528,401 as of the last business day of the****registrant’s most recently completed second fiscal quarter.

** **

4,998,150shares of the registrant’s common stock were outstanding as of March 25,2010

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

 

 

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**CAUTIONARY STATEMENT FOR PURPOSES OF THE PRIVATESECURITIES LITIGATION****REFORM ACTOF 1995**

 

This report contains “forward-looking statements” relating to,without limitation, future economic performance, plans and objectives ofmanagement for future operations, and projections of revenues and otherfinancial items that are based on the beliefs of management, as well asassumptions made by and information currently available to management.  The words “may,” “will,” “anticipate,” “should,”“would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” and “intend,”as well as other similar words and expressions of the future, are intended toidentify forward-looking statements.  Ouractual results may differ materially from the results discussed in the forward-lookingstatements, and our operating performance each quarter is subject to variousrisks and uncertainties that are discussed in detail in our filings with theSecurities and Exchange Commission, including, without limitation:

 

·                  significant increases in competitive pressure in the banking and financialservices industries;

 

·                  changes in the interest rates and their effects on the level of compositionof deposits, loan demands, and the value of loan collateral, securities and otherinterest-sensitive assets and liabilities;

 

·                  the effects of the current global economiccrisis, including, without limitation, the recent and dramatic deterioration ofreal estate values and credit and liquidity markets, as well as the FederalReserve Board’s actions with respect to interest rates, may lead to a furtherdeterioration in credit quality, thereby requiring increases in our provisionfor loan losses, or a reduced demand for credit, which would reduce earningassets; the U.S. government’s proposed plan topurchase large amounts of illiquid mortgage-backed and other securities fromfinancial institutions may not have the desired impact on the financialmarkets;

 

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

 

·                  restrictionsor conditions imposed by our regulators on our operations may make it moredifficult for us to achieve our goals;

 

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

 

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

 

·                  changes occurring in business conditions and inflation;

 

·                  changes in technology;

 

·                  changes in deposit flow;

 

·                  the failure ofour assumptions underlying the establishment of allowances for loan losses andother estimates, or dramatic changes in those underlying assumptions orjudgments in future periods, that, in either case, render the allowance forloan losses inadequate or require that further provisions for loan losses bemade;

 

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

 

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

 

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

 

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

 

·                  loss of consumer confidence and economic disruptions resulting fromterrorist activities;

 

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

 

·                  changes in the securities markets; and

 

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

 

We have based our forward-looking statements on our currentexpectations about future events.  Although we believe that the expectationsreflected in our forward-looking statements are reasonable, we cannot guaranteeyou that these expectations will be achieved. We undertake no obligation to publicly update or otherwise revise anyforward-looking statements, whether as a result of new information, futureevents, or otherwise.

 

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These risks areexacerbated by the recent developments in national and international financialmarkets, and we are unable to predict what impact these uncertain marketconditions will have on us.  During 2008and 2009, the capital and credit markets experienced extended volatility anddisruption.  There can be no assurancethat these unprecedented recent developments will not continue to materiallyand adversely impact our business, financial condition, and results ofoperations

 

*Unless the context indicates otherwise, all referencesto “FCB,” “the Company,” “we,” “us” and “our” in this Annual Report on Form 10-Krefer to First Century Bancorp. and our wholly owned subsidiary, First CenturyBank, National Association (the “Bank”).*

 

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**PART I**

 
| **Item 1.** | **Business** |
|-------------|--------------|

 

**First Century Bancorp.**

 

Weare a Georgia corporation organized in 2000 to serve as the holding company forFirst Century Bank, National Association, with its principal executive officesin Gainesville, Georgia.  We opened theBank in March 2002.  The Bank ischartered and regulated by the Office of the Comptroller of the Currency (the “OCC”)and the Federal Deposit Insurance Corporation (the “FDIC”).  On September 20, 2007, we changed ourname from NBOG Bancorporation, Inc. to First Century Bancorp.  The Bank’s name was also changed from TheNational Bank of Gainesville to First Century Bank, National Association.  Since our inception, we have focused onserving the banking needs of individuals and businesses that prefercommunity-oriented banking in the Gainesville and Hall County markets.  We currently engage in no business other thanowning and managing the Bank.  As of December 31,2009, on a consolidated basis, our total assets were $76.6 million, our totalloans were $36.7 million, our total deposits were $69.6  million, and our total shareholders’ equitywas $4.4 million.

 

**First Century Bank**

 

Since the Bank’s opening in March 2002, the Bank has beenprimarily engaged in the business of accepting deposits insured by the FDIC andproviding commercial, consumer and mortgage loans to the general public.  We operate under a traditional banking model,with a particular focus on real estate and small business lending.

 

Ournet income is dependent primarily on our net interest income, which is thedifference between the interest income earned on loans, investments, and otherinterest-earning assets and the interest paid on deposits and otherinterest-bearing liabilities.  Inaddition, our net income also is affected by our noninterest income derivedprincipally from service charges and fees and income from the sale and/orservicing of financial assets such as loans and investments, as well as thelevel of noninterest expenses such as salaries, employee benefits and occupancycosts.

 

Ouroperations are significantly affected by prevailing economic conditions,competition, and the monetary, fiscal, and regulatory policies of governmentalagencies. Lending activities are influenced by a number of factors, includingthe general credit needs of individuals and small and medium-sized businessesin our market areas, competition among lenders, the level of interest rates,and the availability of funds. Deposit flows and costs of funds are influencedby prevailing market rates of interest, primarily the rates paid on competinginvestments, account maturities, and the levels of personal income and savingsin our market areas.

 

OnAugust 18, 2004, the Bank entered a formal written agreement with the OCC,which set forth a series of actions necessary to correct identifiedweaknesses.  On February 5, 2008,the OCC determined that the protection of the depositors, other customers andshareholders of the Bank as well as the Bank’s safe and sound operation did notrequire the continued existence of the agreement, and the OCC terminated theformal agreement.

 

Pursuantto the terms of a formal agreement with the OCC, we committed to undertakecertain actions, including the maintenance of specified capital levels,retention of senior management and the formulation of strategic and capitalplans.  Following discussions with theOCC, on January 26, 2006, our Board of Directors passed a resolution toidentify, and enter into an agreement with, a strategic partner who wouldeither purchase the entire institution or a significant interest in theinstitution, and the OCC agreed to a 90 day waiver of certain commitmentscontained in the formal agreement.

 

InApril 2007, Mr. Blanton purchased 738,008 shares of our common stockin a private placement at $2.71 per share. We also issued Mr. Blanton a warrant (the “Original Warrant”) topurchase up to 738,008 shares at $2.71 per share. The Original Warrant has noexpiration date and contains provisions which provide for automatic adjustmentsin price and shares purchasable under the Original Warrant in the eventadditional securities are issued below or have a conversion or exercise pricebelow the current Original Warrant exercise price.  We received proceeds of approximately$2,000,000 less fees and expenses related to the sale of the shares, which weused for working capital purposes. There were no brokerages or underwritingcommissions paid in connection with the sale of the shares.

 

InSeptember 2007, Mr. Blanton transferred a portion of the OriginalWarrant to purchase 184,502 shares to Silver Hill Enterprises, LP, an entitycontrolled by William Evans, one of our directors.

 

InDecember 2007, we completed a private placement of Series B PreferredStock, no par value, for $10.00 per share, selling a total of $750,000 ofshares.  The investors in that offeringalso received warrants (the “B Warrants”) to acquire 75,000 shares of commonstock at an exercise price of $1.50 per share, which we believe was the fairmarket value of the common stock on the date of issuance of the BWarrants.  As with the Original Warrant,the B Warrants have no expiration date and contain provisions which provide forautomatic adjustments in price and shares purchasable under the warrants in theevent additional shares or warrants are issued below the current warrantexercise price.

 

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Asa result of the issuance of the B Warrants with an exercise price below the$2.71 exercise price, the exercise price and number of shares of common stockpurchasable 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 333,334 shares at$1.50 per share.

 

InJune 2008, Mr. Blanton and Silver Hill Enterprises, LP transferred aportion of the Original Warrant to purchase shares to John Allen Nivens, Jr.and Richard Kramer Whitehead, III, each a director of the Company and toHomestead Investment, LLC, which is controlled by the father of one of ourdirectors, William A. Bagwell, Jr.

 

Followingthe transfers and the adjustments to the Original Warrant, the followingpersons hold rights to purchase shares of common stock at the exercise 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.

 

**Products andServices**

 

***Deposit Services***.  We offer a full range of interest-bearing and non-interest-bearing accounts, including commercial and retail checking accounts, money market accounts, individual retirement accounts, regular interest-bearing statement savings accounts and certificates of deposit with fixed rates along with a range of maturity date options.  The sources of deposits are residents, businesses, and employees of businesses within our market area, obtained through the personal solicitation of its officers and directors, direct mail solicitation, and advertisements published in the local media.  In addition, at times when needed, we may obtain deposits from other financial institutions through a nation-wide deposit network.  We pay competitive interest rates on time and savings deposits up to the maximum permitted by law or regulation.  In addition, we offer a service charge fee schedule competitive with other financial institutions in our market area, covering such matters as maintenance fees on checking accounts, per item processing fees on checking accounts, returned check charges and the like.

 

***Credit Services. ***We emphasize a range of lending services, including real estate, commercial and consumer loans, to individuals and small-to medium-sized businesses and professional concerns that are located in or conduct a substantial portion of their business in our market area.  The principal economic risk associated with each category of loans that the Bank makes is the creditworthiness of the borrower.  Borrower creditworthiness is affected by general economic conditions and the strength of the relevant business market segment.  General economic factors affecting a borrower’s ability to repay include interest, inflation and employment rates, as well as other factors affecting a borrower’s customers, suppliers and employees.

 

Real Estate Loans.  One of the primary components of our loan portfolio is loans secured by first or second mortgages on real estate.  As of December 31, 2009, loans secured by first or second mortgages on real estate made up approximately $31.4 million, or 86% of our loan portfolio.  These loans generally consist of commercial real estate loans, construction and development loans, and residential real estate loans.

 

·                  *Commercial Real Estate Loans. *At December 31, 2009,our individual commercial real estate loans ranged in size from $13,000 to$769,000, with an average commercial real estate loan size of approximately$240,000.  Loan terms generally arelimited to five years or less, although payments may be structured on a longeramortization basis.  Interest rates maybe fixed or adjustable, and will more likely be fixed in the case of shorterterm loans. We also make a concerted effort to establish rate floors tomitigate interest rate risk and improve margins.  We attempt to reduce credit risk in thecommercial real estate portfolio by emphasizing loans on owner-occupied officeand retail buildings where the loan-to-value ratio, established by independentappraisals, does not exceed 80%.  Inaddition, we typically require personal guarantees of the principal owners ofthe collateral property, combined with our review of the personal financialstatements of the principal owners.  At December 31,2009, commercial real estate loans (other than construction loans) totaled$13.0 million, or approximately 36% of our loan portfolio.  Some specific risks associated withcommercial real estate loans include tenant vacancy rates and the quality ofthe borrower’s management.  As such, weplace a heavy emphasis on owner occupied commercial real estate.  As of December 31, 2009, owner occupiedloans totaled $11.0 million, and non-owner occupied loans totaled $2.0 million.

 

·                  *Residential Real Estate Loans and Home EquityLoans. *At December 31, 2009,our individual residential real estate loans ranged in size from $10,000 to$769,000, with an average loan size of approximately $98,000.  Generally, we limit the loan-to-value ratioon our residential real estate loans to 85%. We also offer home equity lines of credit.  Our underwriting criteria for, and the risksassociated with, home equity loans and lines of credit are generally the sameas those for first mortgage loans.  Homeequity lines of credit typically have terms of 10 years or less.  We limit the extension of credit to 85% ofthe available equity of each property. At December 31, 2009, residential real estate loans (other thanconstruction loans) totaled $13.6 million, or 37% of our loan portfolio.

 

·                  *Construction and Development Real Estate Loans. *We offeradjustable and fixed rate residential and commercial construction loans tobuilders and developers and to consumers who wish to build their ownhomes.  At December 31, 2009, ourconstruction and development real estate loans ranged in size fromapproximately $2,000 to $769,000, with an 

 

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average loan size of approximately $140,000.    The duration of our construction anddevelopment loans generally is limited to 12 months, although payments may bestructured on a longer amortization basis. Construction and development loans generally carry a higher degree ofrisk than long-term financing of existing properties because repayment dependson the ultimate completion of the project and usually on the sale of theproperty.  Specific risks include:

 

·                  cost overruns;

·                  mismanaged construction;

·                  inferior or improper construction techniques;

·                  economic changes or downturns duringconstruction;

·                  a downturn in the real estate market;

·                  rising interest rates which may prevent saleof the property; and

·                  failure to sell completed projects in atimely manner.

 

Weattempt to reduce the risk associated with construction and development loansby obtaining personal guarantees and by keeping the loan-to-value ratio of thecompleted project at or below 80%, as well as analyzing global cash flow ofeach builder or developer and their personal liquidity.  At December 31, 2009, total constructionloans amounted to $4.7 million, or 13% of our total loan portfolio.

 

Consumer Loans.  We make a variety of loans to individuals for personal and household purposes, including secured and unsecured installment and term loans and lines of credit. At December 31, 2009, our individual consumer loans ranged in size from $1,000 to $250,000, with an average loan size of approximately $14,000.  These loans typically carry balances of less than $25,000 and, in the case of non-revolving loans, are amortized over a period not to exceed 60 months.  The revolving loans typically bear interest at a fixed rate and require monthly payments of interest and a portion of the principal balance.  Consumer loans generally involve more risks than residential mortgage loans because the collateral for defaulted loans may not provide an adequate source of repayment of the principal due to damage to the collateral or other loss of value.  In addition, consumer loan performance depends upon the borrower’s continued financial stability and is therefore more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.  At December 31, 2009, consumer loans amounted to $1.5 million, or 4% of our loan portfolio.

 

Commercial Loans.  We make loans for commercial purposes in various lines of businesses.  At December 31, 2009, our individual commercial business loans ranged in size from approximately $1,000 to $750,000, with an average loan size of approximately $60,000.  Equipment loans are typically for a term of five years or less at fixed or variable rates, with the loan fully amortized over the term and secured by the financed equipment and with a loan-to-value ratio of 80% or less.  Working capital loans typically have terms not exceeding one year and are usually secured by accounts receivable, inventory, or personal guarantees of the principals of the business.  For loans secured by accounts receivable or inventory, principal is typically repaid as the assets securing the loan are converted into cash, and in other cases principal is typically due at maturity.  Margining on accounts receivable is done based on those accounts that are current (60 days or less).  The quality of the commercial borrower’s management and its ability to both evaluate properly changes in the supply and demand characteristics affecting its markets for products and services and to respond effectively to such changes are significant factors in a commercial borrower’s creditworthiness.  At December 31, 2009, commercial loans amounted to $3.7 million, or 10% of our loan portfolio.

 

Online Mortgage Channel.  In January 2008 we launched our online lending division, Century Point Mortgage (“CPM”).  CPM is an internet-based lender with offices located in Atlanta, Georgia.  CPM serves borrowers in all fifty states and the District of Columbia, offering a full line of mortgage products, including loans for purchase or refinancing of primary residences, second homes and investment property, as well as home equity loans.  We offer traditional mortgage services through CPM and generally limit our mortgage originations to conforming Fannie Mae and Freddie Mac loans.  CPM does not originate any subprime mortgages.  Prior to closing on the loans, which we originate, the Bank has commitments to sell them to various mortgage investors.  For the year ended December 31, 2009, CPM originated $104 million in loans.

 

Retail Mortgage Channel*.*  Beginning in October, 2009 First Century Bank, NA began originating mortgages through retail loan officers located in a Loan Production Office (LPO) located in Roswell, Georgia and the bank facility located in Gainesville, Georgia.  The individual loan officers facilitate these loans by personal interview or phone conversation with the customer to obtain application information.  The location of the properties securing the loan is primarily in the north Georgia area and is primarily single family 1-4 family owner occupied.  These loans are conforming Fannie Mae and Freddie Mac loans.  Prior to the closing of the loans, the Bank has commitments to sell them to various investors.  For the three months of origination activity ended December 31, 2009, the Retail Mortgage channel originated $26.4 million in loans.

 

Loan Approval and Review.  Certain credit risks are inherent in makingloans.  These include prepayment risks,risks resulting from uncertainties in the future value of collateral, risksresulting from changes in economic and industry conditions, and risks inherentin dealing with individual borrowers.  Weattempt to mitigate repayment risks by adhering to internal credit policies andprocedures.  These policies andprocedures include officer and customer lending limits, a multi-layeredapproval process for larger loans, documentation examination, and follow-upprocedures for any exceptions to credit policies.  Our loan approval policies provide forvarious levels of officer lending authority. When the amount of aggregate loans to a single borrower exceeds anindividual officer’s lending authority, the loan request will be reviewed by anofficer with a higher lending authority. We have established a loan 

 

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committee of the board of directors that mustapprove any loan that exceeds the lending limit of the Officer’s Loan Committeewhich consists of the chief executive officer, chief lending officer and themarket presidents.  We will not make anyloans to any director, officer, or employee on terms more favorable to suchperson than would be available to an unaffiliated person.

 

***Other Services. ***In addition to depositand loan services, the Bank offers banking, direct deposit of payroll andsocial security checks, and automatic drafts for various accounts.  TheBank is a member of a network of automated teller machines that may be used bycustomers in major cities throughout Georgia, the United States, and in variouscities worldwide.  The Bank offers merchant credit card processing to theBank’s customers through third party vendors.  The Bank offers telephonebanking and internet banking services through a third party vendorrelationship.  These services include cash management, bill pay services,e-Statements, and online item images which allows the customer to view imagesof their cleared checks via connection to the internet through a secure link inthe Bank’s website.

 

**Lending Policies**

 

The Bank’s lending activities are subject to a variety of lending limits imposed by federal law.  Differing limits apply based on the type of loan and the nature of the borrower, including the borrower’s relationship to the Bank.  In general, however, the Bank is able to loan any one borrower a maximum amount equal to either:

 

·                  15% of the Bank’s capital and surplus; or

 

·                  25% of its capital and surplus if the excess over 15% is within federal guidelines, which provides an exception to the 15% limit for debt secured by readily marketable collateral, as defined by OCC regulations.

 

The Bank complies with the statutory lending limits, as described above.  As of December 31, 2009, our legal lending limit to one borrower was approximately $769,000.  We seek to sell loan participations to other financial institutions to meet the needs of customers requiring loans above these limits.  Nevertheless, because this amount is substantially lower than the lending limit for most of our competitors, it is difficult for us to compete for many loan relationships.  The Bank’s legal lending limits will increase or decrease as the Bank’s capital increases or decreases as a result of, among other reasons, its earnings or losses.

 

The interagency guidelines adopted by federal bank regulators,including the OCC, mandate that financial institutions establish real estatelending policies and establishing particular minimum real estate loan-to-valuestandards.  The Bank has adopted thesefederal standards as its minimum standards. These standards require maximum loan-to-value ratios for various typesof real estate loans, although the Bank may make exceptions to the maximumguidelines, such exceptions must be accounted for and tracked.

 

**Asset ManagementPolicies**

 

A committee composed of the senior officers****of the Bank is charged with managing the Bank’s assets andliabilities pursuant to policies established by the Asset/Liability andInvestment Committee of the Board of Directors (the “Asset/Liability Committee”).  The Asset/Liability Committee attempts tomanage asset growth, liquidity and capital in order to optimize income andreduce interest-rate risk.  TheAsset/Liability Committee directs the Bank’s overall acquisition and allocationof funds.  The Management Committee meetswith the Asset/Liability Committee on a quarterly basis.  The Asset/Liability Committee reviews anddiscusses the monthly asset and liability funds budget in relation to theactual flow of funds, as well as peer group comparisons; the ratio of theamount of rate-sensitive assets to the amount of rate-sensitive liabilities;local market rates and rate forecasts; and other variables, such as expectedloan demand, expected loan and deposit maturities, investment opportunities,core deposit growth within specified categories, regulatory changes, monetarypolicy adjustments and the overall state of the economy.

 

The Bank’s investment policy is to optimize income, consistentwith liquidity, asset quality and regulatory constraints.  The policy is reviewed from time to time bythe Board of Directors of the Bank. Individual transactions, portfolio composition and performance arereviewed and approved monthly by the Board of Directors or a committeethereof.  Management of the Bankimplements the policy and reports to the full Board of Directors on a quarterlybasis information concerning sales, purchases, resultant gains or losses,average maturity, federal taxable equivalent yields, and appreciation ordepreciation by investment categories.

 

Correspondentbanking involves the provision of services by one bank to another bank whichcannot provide that service for itself from an economic or practicalstandpoint.  The Bank has purchasedcorrespondent services offered by larger banks, including check collections,services relating to the purchase of Federal Funds, security safekeeping,investment services, coin and currency supplies, overline and liquidity loanparticipations and sales of loans to or participations with correspondentbanks.  The Bank sells loanparticipations to correspondent banks with respect to loans that exceed theBank’s lending limit.  As compensationfor services provided by a correspondent, the Bank may maintain balances withsuch correspondents in noninterest-bearing accounts.

 

**Competition**

 

The Bank primarily serves the northern Georgia market of HallCounty.  Hall County is located in Northeast Georgiaand encompasses 392 square miles. Gainesville, the county seat, is situated 50 miles northeast of Atlantaand 40 miles northwest of 

 

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Athens.  Bordered on the west by Lake Sidney Lanier,Hall County lies at the southern edge of the Chattahoochee Natural Forest andthe foothills of the Blue Ridge Mountains. According to 2008 Census Bureau estimates, the population in Hall Countywas approximately 185,000 with a median income for a family in Hall County of$53,083.

 

The banking business ishighly competitive.  We compete as a financial intermediary with other lenders and deposit-takers,including other commercial banks, thrift institutions, credit unions, financecompanies, mutual funds, insurance companies, and brokerage companies andinvestment banking firms.  The competition among the variousfinancial institutions is based upon a variety of factors, including interestrates offered on deposit accounts, interest rates charged on loans, credit andservice charges, the quality of services rendered, the convenience of bankingfacilities and, in the case of loans to large commercial borrowers, relativelending limits.  According to information provided by the FDIC, as of June 30, 2009,there were 56 offices of 18 banks operating in Hall County with a total ofapproximately $2.5 billion in deposits. As of June 30, 2009, the Bank had approximately 2.45% of thedeposit market share.  In addition tocompetition from large national and regional banks, including Regions Bank,Wachovia Bank, N.A., SunTrust Bank and Bank of America, N.A., the Bank alsocompetes with a number of local competitors, including Community Bank andTrust, United Community Bank and Peach State Bank.  Size gives larger banks certain advantages incompeting for business from large corporations. These advantages include higher lending limits and the ability to offerservices in other areas of Georgia.  As aresult, we do not generally attempt to compete for the banking relationships oflarge corporations, but concentrate our efforts on small- to medium-sizedbusinesses and individuals.

 

**Employees**

 

Asof December 31, 2009, we had 57 full-time employees.  We consider the relationship with ouremployees to be good.

 

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**SUPERVISION AND REGULATION**

 

Both the Company and theBank are subject to extensive state and federal banking laws and regulationsthat impose specific requirements or restrictions on and provide for general regulatoryoversight of virtually all aspects of our operations.  These laws and regulations are generallyintended to protect depositors, not shareholders.  The following summary is not an exhaustivelist of applicable laws and regulations and is qualified by reference to thestatutory and regulatory provisions discussed. Changes in applicable laws or regulations may have a material effect onour business and prospects.  Our operationsmay be affected by legislative changes and the policies of various regulatoryauthorities.  We cannot predict theeffect that fiscal or monetary policies, economic control, or new federal orstate legislation may have on our business and earnings in the future.

 

Thefollowing discussion is not intended to be a complete list of all theactivities regulated by the banking laws or of the impact of such laws andregulations on our operations.  It isintended only to briefly summarize some material provisions.

 

**First Century Bancorp.**

 

Weown 100% of the outstanding capital stock of the Bank, and therefore we are abank holding company under the federal Bank Holding Company Act of 1956 (the “BankHolding Company Act”).  As a result, weare primarily subject to the supervision, examination and reportingrequirements of the Board of Governors of the Federal Reserve (the “FederalReserve Board”) under the Bank Holding Company Act and its regulationspromulgated thereunder.  Moreover,because we control a national bank located in Georgia, we are a bank holdingcompany for purposes of the Georgia Bank Holding Company Act as well.

 

***Permitted Activities***. ** **Under the BankHolding Company Act, a bank holding company is generally permitted to engagein, or acquire direct or indirect control of more than 5% of the voting sharesof any company engaged in the following activities:

 

·                  banking or managing or controlling banks;

 

·                  furnishing services to or performing servicesfor our subsidiaries; and

 

·                  any activity that the Federal Reserve Boarddetermines to be so closely related to banking as to be a proper incident tothe business of banking.

 

Activitiesthat the Federal Reserve Board has found by regulation to be so closely relatedto banking as to be a proper incident to the business of banking include:

 

·                  factoring accounts receivable;

 

·                  making, acquiring, brokering or servicingloans and related activities;

 

·                  leasing personal or real property;

 

·                  operating a non-bank depository institution;

 

·                  trust company functions;

 

·                  financial and investment advisory activities;

 

·                  conducting agency and riskless principalsecurities brokerage activities;

 

·                  underwriting and dealing in governmentobligations and money market instruments;

 

·                  foreign exchange activities;

 

·                  engaging in certain derivative and similarcontracts as principal;

 

·                  providing specified management consulting andcounseling activities;

 

·                  performing selected data processing, courierand other support services;

 

·                  acting as agent or broker, and in some casesprincipal, in selling credit life insurance and other types of insurance inconnection with credit transactions;

 

·                  performing selected insurance underwritingactivities;

 

·                  performing community development activities;and

 

·                  issuing and selling money orders, savingsbonds and traveler’s checks.

 

As a bank holdingcompany, we also can elect to be treated as a “financial holding company,”which would allow us to engage in a broader array of activities.  In sum, a financial holding company canengage in activities that are financial in nature or incidental orcomplementary to financial activities, including expanded insuranceunderwriting, sales and brokerage activities, expanded securities brokerageactivities and certain merchant banking activities.  We have not sought financial holding company 

 

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status, but mayelect such status in the future as our business matures.  If we were to elect financial holding companystatus, each insured depository institution we control would have to have andmaintain well capitalized and well managed status, and a satisfactory ratingunder the Community Reinvestment Act (discussed below).

 

The Federal Reserve Boardhas the authority to order a bank holding company or its subsidiaries toterminate any of these activities or to terminate its ownership or control ofany subsidiary when it has reasonable cause to believe that the bank holdingcompany’s continued ownership, activity or control constitutes a serious riskto the financial safety, soundness or stability of it or any of its banksubsidiaries.  Further, federal bankregulatory authorities have discretion to require a bank holding company todivest itself of any bank or non-bank subsidiary if the agency determines thatdivestiture may aid the depository institution’s financial condition.

 

***Changein Control.***  In addition, and subject to certainexceptions, the Bank Holding Company Act and the Change in Bank Control Act,together with regulations promulgated thereunder, require Federal Reserve Boardapproval prior to any person or company acquiring “control” of a bank holdingcompany.  Control is conclusivelypresumed to exist if an individual or company acquires 25% or more of any classof voting securities of a bank holding company. Following the relaxing of these restrictions by the Federal ReserveBoard in September 2008, control will be rebuttably presumed to exist if aperson acquires 33% of the total equity of a bank or bank holding company, ofwhich it may own, contol or have the power to vote not more than 15% of anyclass of voting securities.

 

***Sourceof Strength.***  In accordance with Federal Reserve Boardpolicy, we are expected to act as a source of financial strength to the Bankand to commit resources to support the Bank in circumstances in which we mightnot otherwise do so.  Under the Bank HoldingCompany Act, the Federal Reserve Board may require a bank holding company toterminate any activity or relinquish control of a non-bank subsidiary, otherthan a non-bank subsidiary of a bank, upon the Federal Reserve Board’sdetermination that such activity or control constitutes a serious risk to thefinancial soundness or stability of any depository institution subsidiary of abank holding company.  Further, federalbank regulatory authorities have additional discretion to require a bankholding company to divest itself of any bank or non-bank subsidiaries if theagency determines that divestiture may aid the depository institution’sfinancial condition.  Further, any loansby a bank holding company to a subsidiary bank are subordinate in right of paymentto deposits and certain other indebtedness of the subsidiary bank.  In the event of a bank holding company’sbankruptcy, any commitment by the bank holding company to a federal bankregulatory agency to maintain the capital of a subsidiary bank at a certainlevel would be assumed by the bankruptcy trustee and entitled to prioritypayment.

 

***CapitalRequirements.***  The Federal Reserve Board imposes certaincapital requirements on the bank holding company under the Bank Holding CompanyAct, including a minimum leverage ratio and a minimum ratio of “qualifying”capital to risk-weighted assets.  Theserequirements are essentially the same as those that apply to the Bank and aredescribed below under “First Century Bank.” Under the Federal Reserve Board’s Small Bank Holding Company PolicyStatement, our ability to take on debt, thus increasing our leverage ratios, isless strictly applied as compared to larger bank holding companies, and we arenot held to the specific capital guidelines applicable to those larger bankholding companies.  Nonetheless, we arerequired to serve as a source of strength to the Bank.  We are able to borrow money to make a capitalcontribution to the Bank, and these loans may be repaid from dividends paidfrom the Bank to the Company.  We arealso able to raise capital for contribution to the Bank by issuing securitieswithout having to receive regulatory approval, subject to compliance withfederal and state securities laws.

 

Our ability to paydividends is subject to regulatory restrictions as described below in “FirstCentury Bank — Dividends.”

 

**FirstCentury Bank**

 

The Bank operates as anational banking association incorporated under the laws of the United Statesand subject to examination by the OCC. Deposits in the Bank are insured by the FDIC up to a maximum amountwhich is $100,000 for each non-retirement depositor and $250,000 for certainretirement-account depositors.  However,the FDIC has increased the coverage up to $250,000 for each non-retirementdepositor through December 31, 2013, and the Bank is participating in theFDIC’s Temporary Liquidity Guarantee Program (discussed below in greaterdetail) which, in part, fully insures non-interest bearing transactionaccounts.  The OCC and the FDIC regulateor monitor virtually all areas of the Bank’s operations, including:

 

·                  security devices and procedures;

 

·                  adequacy of capitalization and lossreserves;

 

·                  loans;

 

·                  investments;

 

·                  borrowings;

 

·                  deposits;

 

·                  mergers;

 

·                  issuances of securities;

 

·                  payment of dividends;

 

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·                  interest rates payable on deposits;

 

·                  interest rates or fees chargeable onloans;

 

·                  establishment of branches;

 

·                  corporate reorganizations;

 

·                  maintenance of books and records; and

 

·                  adequacy of staff training to carry onsafe lending and deposit gathering practices.

 

The OCC requiresthat the Bank maintain specified ratios of capital to assets and imposeslimitations on the Bank’s aggregate investment in real estate, bank premises,and furniture and fixtures.  Twocategories of regulatory capital are used in calculating these ratios—Tier 1capital and total capital.  Tier 1capital generally includes common equity, retained earnings, a limited amountof qualifying preferred stock, and qualifying minority interests inconsolidated subsidiaries, reduced by goodwill and certain other intangibleassets, such as core deposit intangibles, and certain other assets.  Total capital generally consists of Tier 1capital plus Tier 2 capital, which includes the allowance for loan losses,preferred stock that did not qualify as Tier 1 capital, certain types ofsubordinated debt and a limited amount of other items.

 

The Bank is required tocalculate three capital ratios:  theratio of Tier 1 capital to risk-weighted assets, the ratio of total capital torisk-weighted assets, and the “leverage ratio,” which is the ratio of Tier 1capital to average assets on a non-risk-adjusted basis.  For the two ratios of capital torisk-weighted assets, certain assets, such as cash and U.S. Treasurysecurities, have a zero risk weighting. Others, such as commercial and consumer loans, have a 100% riskweighting.  Some assets, notablypurchase-money loans secured by first-liens on residential real property, arerisk-weighted at 50%.  Assets alsoinclude amounts that represent the potential funding of off-balance sheetobligations such as loan commitments and letters of credit.  These potential assets are assigned to riskcategories in the same manner as funded assets. The total assets in each category are multiplied by the appropriate riskweighting to determine risk-adjusted assets for the capital calculations.

 

Under the terms of theformal agreement, which was terminated by the OCC on February 5, 2008, theBank was required to maintain a total capital ratio to risk-weighted assets ofat least 14% and a Tier 1 Capital to average assets of at least 9%.  Since the formal agreement has beenterminated, the minimum guideline for the ratio of total capital torisk-weighted assets is 8% and Tier 1 Capital must equal at least 4% ofrisk-weighted assets.  To be eligible tobe classified as “well-capitalized,” the Bank must generally maintain a totalcapital ratio of 10% or more, a Tier 1 capital ratio of 6% or more, and aleverage ratio of 5% or more.  At December 31,2009, our ratio of total capital to risk-weighted assets was 10.82%, our ratioof Tier 1 Capital to risk-weighted assets was 9.94% and our ratio of Tier 1Capital to average assets was 6.22%.

 

In addition, the FederalReserve Board has established minimum leverage ratio guidelines for bankholding companies.  These guidelinesprovide for a minimum ratio of Tier 1 Capital to total assets, less goodwilland other specified intangible assets, of 3% for bank holding companies thatmeet specified criteria, including having the highest regulatory rating andimplementing the Federal Reserve Board’s risk-based capital measure for marketrisk.  All other bank holding companiesgenerally are required to maintain a leverage ratio of at least 4%.  The guidelines also provide that bank holdingcompanies experiencing internal growth or making acquisitions will be expectedto maintain strong capital positions substantially above the minimumsupervisory levels without reliance on intangible assets.  The Federal Reserve Board considers theleverage ratio and other indicators of capital strength in evaluating proposalsfor expansion or new activities.

 

Failure to meet capitalguidelines could subject a bank or bank holding company to a variety ofenforcement remedies, including issuance of a capital directive, thetermination of deposit insurance by the FDIC, a prohibition on acceptingbrokered deposits, and other restrictions on its business.  As described below, significant additionalrestrictions can be imposed on FDIC-insured depository institutions that failto meet applicable capital requirements. See “First Century Bank—Prompt Corrective Action.”

 

***Prompt Corrective Action.*** The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”)established a “prompt corrective action” program under which every bank isplaced in one of five regulatory categories, depending primarily on itsregulatory capital levels.  The OCC andthe other federal banking regulators are permitted to take increasingly severeaction as a bank’s capital position or financial condition declines below the “AdequatelyCapitalized” level described below. Regulators are also empowered to place in receivership or require thesale of a bank to another depository institution when a bank’s leverage ratioreaches 2%.  Better capitalizedinstitutions are generally subject to less onerous regulation and supervisionthan banks with lesser amounts of capital. The OCC’s regulations set forth five capital categories, each withspecific regulatory consequences.  Thecategories are:

 

·                  Well Capitalized — The institution exceeds the required minimum levelfor each relevant capital measure.  Awell capitalized institution is one (i) having a total capital ratio of10% or greater, (ii) having a Tier 1 capital ratio of 6% or greater, (iii) havinga leverage capital ratio of 5% or greater and (iv) that is not subject toany order or written directive to meet and maintain a specific capital levelfor any capital measure.

 

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·                  Adequately Capitalized — The institution meets the required minimumlevel for each relevant capital measure. No capital distribution may be made that would result in the institutionbecoming undercapitalized.  An adequatelycapitalized institution is one (i) having a total capital ratio of 8% orgreater, (ii) having a Tier 1 capital ratio of 4% or greater and (iii) havinga leverage capital ratio of 4% or greater or a leverage capital ratio of 3% orgreater if the institution is rated composite 1 under the CAMELS (Capital,Assets, Management, Earnings, Liquidity and Sensitivity to market risk) ratingsystem.

 

·                  Undercapitalized — The institution fails to meet the required minimumlevel for any relevant capital measure. An undercapitalized institution is one (i) having a total capitalratio of less than 8%, (ii) having a Tier 1 capital ratio of less than 4%or (iii) having a leverage capital ratio of less than 4%, or if theinstitution is rated a composite 1 under the CAMELS rating system, a leveragecapital ratio of less than 3%.

 

·                  Significantly Undercapitalized — The institution is significantly belowthe required minimum level for any relevant capital measure.  A significantly undercapitalized institutionis one (i) having a total capital ratio of less than 6%, (ii) havinga Tier 1 capital ratio of less than 3% or (iii) having a leverage capitalratio of less than 3%.

 

·                  Critically Undercapitalized — The institution fails to meet a criticalcapital level set by the appropriate federal banking agency.  A critically undercapitalized institution isone having a ratio of tangible equity to total assets that is equal to or lessthan 2%.

 

If the OCCdetermines, after notice and an opportunity for hearing, that the Bank is in anunsafe or unsound condition, the regulator is authorized to reclassify the Bankto the next lower capital category (other than critically undercapitalized) andrequire the submission of a plan to correct the unsafe or unsound condition.

 

If the bank is notwell capitalized, it cannot accept brokered deposits without prior FDICapproval.  In addition, a bank that isundercapitalized cannot offer an effective yield in excess of 75 basis pointson interest paid on deposits (including brokered deposits, if approval isgranted for the bank to accept them) of comparable size and maturity in eithersuch institution’s normal market area or in the market area in which suchdeposits would otherwise be accepted. Thus, for deposits in its own normal market area, an undercapitalizedinstitution must offer rates that are not in excess of 75 basis points over theaverage local rates.  For non-localdeposits, the institution must offer rates that are not in excess of 75 basispoints over either (1) the institution’s own local rates or (2) theapplicable non-local rates.  In otherwords, the institution must adhere to the prevailing rates in its own normalmarket area for all deposits (whether local or non-local) and also must adhereto the prevailing rates in the non-local area for any non-local deposits.  Thus, the institution will be unable tooutbid non-local institutions for non-local deposits even if the non-local ratesare lower than the rates in the institution’s own normal market area.

 

Moreover, if thebank becomes less than adequately capitalized, it must adopt a capitalrestoration plan acceptable to the regulator. The bank also would become subject to increased regulatory oversight,and would be increasingly restricted in the scope of its permissibleactivities.  Each company having controlover an undercapitalized institution also must provide a limited guarantee thatthe institution will comply with its capital restoration plan.  Except under limited circumstances consistentwith an accepted capital restoration plan, an undercapitalized institution maynot grow.  An undercapitalized institutionmay not acquire another institution, establish additional branch offices orengage in any new line of business unless determined by the appropriate Federalbanking agency to be consistent with an accepted capital restoration plan, orunless the FDIC determines that the proposed action will further the purpose ofprompt corrective action.  Theappropriate federal banking agency may take any action authorized for asignificantly undercapitalized institution if an undercapitalized institutionfails to submit an acceptable capital restoration plan or fails in any materialrespect to implement a plan accepted by the agency.  A critically undercapitalized institution issubject to having a receiver or conservator appointed to manage its affairs andfor loss of its charter to conduct banking activities.

 

An insureddepository institution may not pay a management fee to a bank holding companycontrolling that institution or any other person having control of theinstitution if, after making the payment, the institution, would beundercapitalized.  In addition, aninstitution cannot make a capital distribution, such as a dividend or otherdistribution that is in substance a distribution of capital to the owners ofthe institution if following such a distribution the institution would beundercapitalized.  Thus, if payment ofsuch a management fee or the making of such would cause the Bank to becomeundercapitalized, it could not pay a management fee or dividend to us.

 

As of December 31,2009, the Bank was “well capitalized.”

 

***Standards for Safety and Soundness.*** The FederalDeposit Insurance Act (the “FDIA”) also requires the federal banking regulatoryagencies to prescribe, by regulation or guideline, operational and managerialstandards for all insured depository institutions relating to: (i) internalcontrols, information systems and internal audit systems; (ii) loandocumentation; (iii) credit underwriting; (iv) interest rate riskexposure; and (v) asset growth.  Theagencies also must prescribe standards for asset quality, earnings, and stockvaluation, as well as standards for compensation, fees and benefits.  The federal banking agencies have adoptedregulations and Interagency Guidelines Prescribing Standards for Safety andSoundness to implement these required standards.  These guidelines set forth the safety andsoundness standards that the federal banking agencies use to identify andaddress problems at insured depository institutions before capital becomesimpaired.  Under the regulations, if theOCC determines that the Bank fails to 

 

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meet any standardsprescribed by the guidelines, the agency may require the Bank to submit to theagency an acceptable plan to achieve compliance with the standard.  The final regulations establish deadlines forthe submission and review of such safety and soundness compliance plans.

 

***Insuranceof Accounts and Regulation by the FDIC.***** The Bank’sdeposits are insured up to applicable limits by the Deposit Insurance Fund ofthe FDIC.  The Deposit Insurance Fund isthe successor to the Bank Insurance Fund and the Savings Association InsuranceFund, which were merged effective March 31, 2006.  As insurer, the FDIC imposes depositinsurance premiums and is authorized to conduct examinations of and to requirereporting by FDIC insured institutions. It also may prohibit any FDIC insured institution from engaging in anyactivity the FDIC determines by regulation or order to pose a serious risk tothe insurance fund.  The FDIC also hasthe authority to initiate enforcement actions against savings institutions,after giving the Office of Thrift Supervision an opportunity to take suchaction, and may terminate the deposit insurance if it determines that theinstitution has engaged in unsafe or unsound practices or is in an unsafe orunsound condition.

 

Under regulationseffective January 1, 2007, the FDIC adopted a new risk-based premiumsystem that provides for quarterly assessments based on an insured institution’sranking in one of four risk categories based upon supervisory and capitalevaluations.  For deposits held as of March 31,2009, institutions are assessed at annual rates ranging from 12 to 50 basispoints, respectively, depending on each institution’s risk of default asmeasured by regulatory capital ratios and other supervisory measures.  Effective April 1, 2009, assessmentswill take into account each institution’s reliance on secured liabilities andbrokered deposits.  This will result inassessments ranging from 7 to 77.5 basis points.  We anticipate our future insurance costs tobe higher than in previous periods. However, we are not currently able to accurately determine the amount ofadditional costs.

 

FDIC insured institutionsare required to pay a Financing Corporation assessment, in order to fund theinterest on bonds issued to resolve thrift failures in the 1980s.  For the first quarter of 2009, the FinancingCorporation assessment equaled 1.14 basis points for each $100 in domesticdeposits.  These assessments, which maybe revised based upon the level of deposits, will continue until the bondsmature in the years 2017 through 2019.

 

The FDIC may terminatethe deposit insurance of any insured depository institution, including thebank, if it determines after a hearing that the institution has engaged inunsafe or unsound practices, is in an unsafe or unsound condition to continueoperations or has violated any applicable law, regulation, rule, order orcondition imposed by the FDIC or the OCC. It also may suspend deposit insurance temporarily during the hearingprocess for the permanent termination of insurance, if the institution has notangible capital.  If insurance ofaccounts is terminated, the accounts at the institution at the time of thetermination, less subsequent withdrawals, shall continue to be insured for aperiod of six months to two years, as determined by the FDIC.  Management of the bank is not aware of anypractice, condition or violation that might lead to termination of the bank’sdeposit insurance.

 

***Regulatory Examination.*** The OCCrequires the Bank to prepare quarterly and annual reports on the Bank’sfinancial condition and to conduct an annual audit of its financial affairs incompliance with its minimum standards and procedures.

 

Allinsured institutions must undergo regular on-site examinations by theirappropriate banking agency.  The cost ofexaminations of insured depository institutions and any affiliates may beassessed by the appropriate federal banking agency against each institution oraffiliate as it deems necessary or appropriate. Insured institutions are required to submit quarterly and annual reportsto the FDIC, their federal regulatory agency, and state supervisor whenapplicable.  The FDIC has developed amethod for insured depository institutions to provide supplemental disclosureof the estimated fair market value of assets and liabilities, to the extentfeasible and practicable, in any balance sheet, financial statement, report ofcondition or any other report of any insured depository institution.  The federal banking regulatory agenciesprescribe, by regulation, standards for all insured depository institutions anddepository institution holding companies relating, among other things, to thefollowing:

 

·                  internal controls;

 

·                  information systems and audit systems;

 

·                  loan documentation;

 

·                  credit underwriting;

 

·                  interest rate risk exposure; and

 

·                  asset quality.

 

***Transactions with Affiliates and Insiders.*** The Company is a legal entity separate anddistinct from the Bank and its other subsidiaries.  Various legal limitations restrict the Bankfrom lending or otherwise supplying funds to the Company or its non-banksubsidiaries.  The Company and the Bankare subject to Sections 23A and 23B of the Federal Reserve Act and FederalReserve Regulation W.

 

Section 23Aof the Federal Reserve Act places limits on the amount of loans or extensionsof credit to, of for the benefit of, or investments in, or certain othertransactions with, affiliates and on the amount of advances to third partiescollateralized by the securities or obligations of affiliates.  The aggregate of all covered transactions islimited in amount, as to any one affiliate, to 10% of the Bank’s capital andsurplus and, as to all affiliates combined, to 20% of the Bank’s capital andsurplus.  Furthermore, within the 

 

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foregoing limitations asto amount, each covered transaction must meet specified collateral requirementsof between 100 and 130% depending on the type of collateral.  The Bank is forbidden to purchase low qualityassets from an affiliate.

 

Section 23Bof the Federal Reserve Act, among other things, prohibits an institution fromengaging in certain transactions with certain affiliates unless thetransactions are on terms substantially the same, or at least as favorable tosuch institution or its subsidiaries, as those prevailing at the time forcomparable transactions with nonaffiliated companies.

 

RegulationW generally excludes all non-bank and non-savings association subsidiaries ofbanks from treatment as affiliates, except to the extent that the FederalReserve Board decides to treat these subsidiaries as affiliates. The regulationalso limits the amount of loans that can be purchased by a bank from anaffiliate to not more than 10% of the bank’s capital and surplus for any oneaffiliate or 20% of the bank’s capital and surplus for all affiliates.

 

TheBank is also subject to certain restrictions on extensions of credit toexecutive officers, directors, certain principal shareholders, and theirrelated interests.  Such extensions ofcredit (i) must be made on substantially the same terms, includinginterest rates and collateral, as those prevailing at the time for comparabletransactions with third parties and (ii) must not involve more than thenormal risk of repayment or present other unfavorable features.

 

***Commercial Real Estate Lending. ***The Bank’s lending operations may besubject to enhanced scrutiny by the OCC based on its concentration ofcommercial real estate loans.  On December 6,2006, the federal banking regulators issued final guidance to remind financialinstitutions of the risk posed by commercial real estate (“CRE”) lendingconcentrations.  CRE loans generallyinclude land development, construction loans and loans secured by multifamilyproperty, and nonfarm, nonresidential real property where the primary source ofrepayment is derived from rental income associated with the property.  The guidance prescribes the followingguidelines for its examiners to help identify institutions that are potentiallyexposed to significant CRE risk and may warrant greater supervisory scrutiny:

 

·                  total reported loans for construction,land development and other land represent 100% or more of the institution’stotal capital; or

 

·                  total CRE loans represent 300% or more ofthe institution’s total capital, and the outstanding balance of the institution’scommercial real estate loan portfolio has increased by 50% or more during theprior 36 months.

 

***Branching.***  National banks are required bythe National Bank Act to adhere to branch office banking laws applicable tostate banks in the states in which they are located.  Under current Georgia law, the Bank may openbranch offices throughout Georgia with the prior approval of the OCC.  In addition, with prior regulatory approval,the Bank is able to acquire existing banking operations in Georgia.  Furthermore, federal legislation permitsinterstate branching, including out-of-state acquisitions by bank holdingcompanies, interstate branching by banks if allowed by state law, andinterstate merging by banks.  Georgialaw, with limited exceptions, currently permits branching across state linesonly through interstate mergers.

 

***Anti-Tying Restrictions. ***Under amendments to the Bank HoldingCompany Act and Federal Reserve Board regulations, a bank is prohibited fromengaging in certain tying or reciprocity arrangements with its customers.  In general, a bank may not extend credit,lease, sell property, or furnish any services or fix or vary the considerationfor these on the condition that (i) the customer obtain or provide someadditional credit, property, or services from or to the bank, the bank holdingcompany or subsidiaries thereof or (ii) the customer may not obtain someother credit, property, or services from a competitor, except to the extentreasonable conditions are imposed to assure the soundness of the creditextended.  Certain arrangements arepermissible: a bank may offer combined-balance products and may otherwise offermore favorable terms if a customer obtains two or more traditional bankproducts; and certain foreign transactions are exempt from the generalrule.  A bank holding company or any bankaffiliate also is subject to anti-tying requirements in connection withelectronic benefit transfer services.

 

***Community Reinvestment Act.***  The CommunityReinvestment Act requires that the OCC evaluate the record of the Bank inmeeting the credit needs of its local community, including low and moderateincome neighborhoods.  These factors arealso considered in evaluating mergers, acquisitions, and applications to open abranch or facility.  Failure toadequately meet these criteria could impose additional requirements andlimitations on the Bank.

 

***Finance Subsidiaries.*** Under theGramm-Leach-Bliley Act (the “GLBA”), subject to certain conditions imposed bytheir respective banking regulators, national and state-chartered banks arepermitted to form “financial subsidiaries” that may conduct financial orincidental activities, thereby permitting bank subsidiaries to engage incertain activities that previously were impermissible.  The GLBA imposes several safeguards andrestrictions on financial subsidiaries, including that the parent bank’s equityinvestment in the financial subsidiary be deducted from the bank’s assets andtangible equity for purposes of calculating the bank’s capital adequacy.   In addition, the GLBA imposes newrestrictions on transactions between a bank and its financial subsidiariessimilar to restrictions applicable to transactions between banks and non-bankaffiliates.

 

***Consumer Protection Regulations.*** Activities ofthe Bank are subject to a variety of statutes and regulations designed toprotect consumers.  Interest and othercharges collected or contracted for by the Bank are subject to state usury lawsand federal laws concerning interest rates. The Bank’s loan operations are also subject to federal laws applicableto credit transactions, such as:

 

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·                  the federal Truth-In-Lending Act,governing disclosures of credit terms to consumer borrowers;

 

·                  the Home Mortgage Disclosure Act of 1975,requiring financial institutions to provide information to enable the publicand public officials to determine whether a financial institution is fulfillingits obligation to help meet the housing needs of the community it serves;

 

·                  the Equal Credit Opportunity Act,prohibiting discrimination on the basis of race, creed or other prohibitedfactors in extending credit;

 

·                  the Fair Credit Reporting Act of 1978,governing the use and provision of information to credit reporting agencies;

 

·                  the Fair Debt Collection Act, governingthe manner in which consumer debts may be collected by collection agencies; and

 

·                  the rules and regulations of thevarious federal agencies charged with the responsibility of implementing suchfederal laws.

 

The deposit operations of the Bank also are subjectto:

 

·                  the Truth-in-Savings Act, whichestablishes uniformity in the disclosure of terms and conditions regardinginterest and fees on savings accounts;

 

·                  the Right to Financial Privacy Act, whichimposes a duty to maintain confidentiality of consumer financial records andprescribes procedures for complying with administrative subpoenas of financialrecords; and

 

·                  the Electronic Funds Transfer Act andRegulation E issued by the Federal Reserve Board to implement that Act, whichgoverns automatic deposits to and withdrawals from deposit accounts andcustomers’ rights and liabilities arising from the use of automated tellermachines and other electronic banking services.

 

***EnforcementPowers.***  The Bank and its “institution-affiliatedparties,” including its management, employees, agents, independent contractorsand consultants, such as attorneys and accountants and others who participatein the conduct of the financial institution’s affairs, are subject to potentialcivil and criminal penalties for violations of law, regulations or writtenorders of a government agency. These practices can include the failure of aninstitution to timely file required reports or the filing of false ormisleading information or the submission of inaccurate reports.  Civil penalties may be as high as $1,375,000a day for such violations.  Criminalpenalties for some financial institution crimes have been increased to 20 yearsimprisonment.  Possible enforcementactions include the termination of deposit insurance.  Furthermore, banking agencies have authorityto issue cease-and-desist orders, memoranda of understanding and otheragreements.  Such orders may, among otherthings, require affirmative action to correct any harm resulting from aviolation or practice, including restitution, reimbursement, indemnificationsor guarantees against loss.  A financialinstitution may also be ordered to restrict its growth, dispose of certainassets, rescind agreements or contracts, or take other actions as determined bythe ordering agency to be appropriate.

 

***Anti-Money Laundering. ***Financial institutions must maintainanti-money laundering programs that include established internal policies,procedures, and controls; a designated compliance officer; an ongoing employeetraining program; and testing of the program by an independent audit function.Financial institutions are also prohibited from entering into specifiedfinancial transactions and account relationships and must meet enhancedstandards for due diligence and “knowing your customer” in their dealings withforeign financial institutions and foreign customers. Financial institutionsmust take reasonable steps to conduct enhanced scrutiny of accountrelationships to guard against money laundering and to report any suspicioustransactions, and these laws provide law enforcement authorities with increasedaccess to financial information maintained by banks. Anti-money launderingobligations have been substantially strengthened as a result of the USA PATRIOTAct, enacted in 2001 and renewed in 2006. Bank regulators routinely examineinstitutions for compliance with these obligations and are required to considercompliance in connection with the regulatory review of applications. Theregulatory authorities have been active in imposing “cease and desist” ordersand money penalty sanctions against institutions found to be violating theseobligations.

 

***USA PATRIOT Act/Bank Secrecy Act and OFAC. ***The USA PATRIOT Act, amended, in part, the BankSecrecy Act and provides for the facilitation of information sharing amonggovernmental entities and financial institutions for the purpose of combatingterrorism and money laundering by enhancing anti-money laundering and financialtransparency laws, as well as enhanced information collection tools andenforcement mechanics for the U.S. government, including: (i) requiringstandards for verifying customer identification at account opening; (ii) rules topromote cooperation among financial institutions, regulators, and lawenforcement entities in identifying parties that may be involved in terrorismor money laundering; (iii) reports by nonfinancial trades and businessesfiled with the Treasury’s Financial Crimes Enforcement Network for transactionsexceeding $10,000; and (iv) filing suspicious activities reports if a bankbelieves a customer may be violating U.S. laws and regulations.  These laws require enhanced due diligence forfinancial institutions that administer, maintain, or manage private bankaccounts or correspondent accounts for non-U.S. persons.  Bank regulators routinely examineinstitutions for compliance with these obligations and are required to considercompliance in connection with the regulatory review of applications.

 

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Underthe USA PATRIOT Act, the FBI can send to the banking regulatory agencies listsof the names of persons suspected of involvement in terrorist activities.  The Bank can be requested to search itsrecords for any relationships or transactions with persons on those lists.  If the Bank finds any relationships ortransactions, it must file a suspicious activity report and contact the FBI.

 

TheOffice of Foreign Assets Control (“OFAC”), which is a division of the Treasury,is responsible for helping to insure that U.S. entities do not engage intransactions with known or suspected criminals or terrorists, as defined byvarious Executive Orders and Acts of Congress. OFAC maintains a public list of persons and organizations suspected ofaiding, harboring or engaging in terrorist or criminal acts.  If the Bank finds a name on any transaction,account or wire transfer that is on an OFAC list, it must confirm thelegitimacy of the match, freeze such account, file a suspicious activity reportand notify law enforcement.  The Bank hasappointed an OFAC compliance officer to oversee the inspection of its accountsand the filing of any notifications.  TheBank performs checks of customer names utilizing software, which is updatedeach time a modification is made to the lists provided by OFAC and otheragencies of Specially Designated Nationals and Blocked Persons.

 

***Privacy and Credit Reporting. ***Financial institutions are required todisclose their policies for collecting and protecting confidentialinformation.  Customers generally mayprevent financial institutions from sharing nonpublic personal financialinformation with nonaffiliated third parties except under narrow circumstances,such as the processing of transactions requested by the consumer.  Additionally, financial institutionsgenerally may not disclose consumer account numbers to any nonaffiliated thirdparty for use in telemarketing, direct mail marketing or other marketing toconsumers.  It is the Bank’s policy notto disclose any personal information unless required by law.  The OCC and the federal banking agencies haveprescribed standards for maintaining the security and confidentiality ofconsumer information.  The Bank issubject to such standards, as well as certain state laws and OCC guidance thatrequire notification to consumers in the event of a security breach.

 

Likeother lending institutions, the Bank utilizes credit bureau data in itsunderwriting activities.  Use of suchdata is regulated under the Federal Credit Reporting Act on a uniform,nationwide basis, including credit reporting, prescreening, sharing ofinformation between affiliates, and the use of credit data.  The Fair and Accurate Credit Transactions Actof 2003 (the “FACT Act”) permits states to enact identity theft laws that arenot inconsistent with the conduct required by the provisions of the FACT Act.

 

***Check21.***  The Check Clearing for the 21st Century Actgives “substitute checks,” such as a digital image of a check and copies madefrom that image, the same legal standing as the original paper check.  Some of the major provisions include:

 

·                  allowing check truncation without makingit mandatory;

 

·                  demanding that every financialinstitution communicate to accountholders in writing a description of itssubstitute check processing program and their rights under the law;

 

·                  legalizing substitutions for andreplacements of paper checks without agreement from consumers;

 

·                  retaining in place the previouslymandated electronic collection and return of checks between financialinstitutions only when individual agreements are in place;

 

·                  requiring that when accountholdersrequest verification, financial institutions produce the original check (or acopy that accurately represents the original) and demonstrate that the accountdebit was accurate and valid; and

 

·                  requiring the re-crediting of funds to anindividual’s account on the next business day after a consumer proves that thefinancial institution has erred.

 

***Effectof Governmental Monetary Policies*****.**  Our earnings are affected by domesticeconomic conditions and the monetary and fiscal policies of the United Statesgovernment and its agencies.  The FederalReserve Board’s monetary policies have had, and are likely to continue to have,an important impact on the operating results of commercial banks through theFederal Reserve Board’s power to implement national monetary policy in order, amongother things, to curb inflation or combat a recession.  The monetary policies of the Federal ReserveBoard have major effects upon the levels of bank loans, investments anddeposits through its open market operations in United States government securitiesand through its regulation of the discount rate on borrowings of member banksand the reserve requirements against member bank deposits.  It is not possible to predict the nature orimpact of future changes in monetary and fiscal policies.

 

***ProposedLegislation and Regulatory Action*****.**  New regulations and statutes are regularlyproposed that contain wide-ranging proposals for altering the structures,regulations, and competitive relationships of the nation’s financialinstitutions.  We cannot predict whetheror in what form any proposed regulation or statute will be adopted or theextent to which our business may be affected by any new regulation or statute.

 

***RecentLegislative and Regulatory Initiatives to Address Financial and EconomicCrises. ***The Congress, Treasury Department and thefederal banking regulators, including the FDIC, have taken broad action sinceearly September 2008 to address volatility in the U.S. banking system.

 

In October 2008, theEmergency Economic Stabilization Act of 2008 (“EESA”) was enacted. TheEESA authorizes the Treasury Department to purchase from financial institutionsand their holding companies up to $700 billion in mortgage loans,mortgage-related securities and certain other financial instruments, includingdebt and equity securities issued by financial institutions 

 

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and their holdingcompanies in a troubled asset relief program (“TARP”).  The purpose of TARP is to restore confidenceand stability to the U.S. banking system and to encourage financialinstitutions to increase their lending to customers and to each other.  The Treasury Department has allocated $250billion towards the TARP Capital Purchase Program (“CPP”).  Under the CPP, Treasury will purchase debt orequity securities from participating institutions.  The TARP also will include direct purchasesor guarantees of troubled assets of financial institutions.  Participants in the CPP are subject toexecutive compensation limits and are encouraged to expand their lending andmortgage loan modifications.

 

EESA also increased FDICdeposit insurance on most accounts from $100,000 to $250,000.  This increase is in place until the end of2013 and is not covered by deposit insurance premiums paid by the banking industry.

 

Following a systemic riskdetermination, the FDIC established the Temporary Liquidity Guarantee Program (“TLGP”)on October 14, 2008.  The TLGPincludes the Transaction Account Guarantee Program (“TAGP”), which providesunlimited deposit insurance coverage through December 31, 2009 fornoninterest-bearing transaction accounts (typically business checking accounts)and certain funds swept into noninterest-bearing savings accounts.  This has been extended until June 30,2010.  Institutions participating in theTLGP pay a 10 basis points fee (annualized) on the balance of each coveredaccount in excess of $250,000, while the extra deposit insurance is inplace.  The TLGP also includes the DebtGuarantee Program (“DGP”), under which the FDIC guarantees certain seniorunsecured debt of FDIC-insured institutions and their holding companies.  The unsecured debt must be issued on or afterOctober 14, 2008 and not later than June 30, 2009, and the guaranteeis effective through the earlier of the maturity date or June 30,2012.  On March 17, 2009, the FDICadopted an interim rule that extends the DGP and imposes surcharges onexisting rates for certain debt issuances. This extension allowed institutions that had issued guaranteed debtbefore April 1, 2009 to issue guaranteed debt during the extended issuanceperiod that ended on October 31, 2009. For such institutions, theguarantee on debt issued on or after April 1, 2009, will expire no laterthan December 31, 2012.*** ***The DGP coverage limit isgenerally 125% of the eligible entity’s eligible debt outstanding on September 30,2008 and scheduled to mature on or before June 30, 2009 or, for certaininsured institutions, 2% of their liabilities as of September 30,2008.  Depending on the term of the debtmaturity, the nonrefundable DGP fee ranges from 60 to 110 basis points(annualized) for covered debt outstanding until the earlier of maturity or June 30,2012 and 75 to 125 basis points (annualized) for covered debt outstanding untilafter June 30, 2012.  The TAGP andDGP are in effect for all eligible entities, unless the entity opted out on orbefore December 5, 2008.  We did notopt out of the TAGP and the DGP.

 

On February 17, 2009President Obama signed into law The American Recovery and Reinvestment Act of2009 (the “Recovery Act”), more commonly known as the economic stimulus oreconomic recovery package.  The RecoveryAct includes a wide variety of programs intended to stimulate the economy andprovide for extensive infrastructure, energy, health, and education needs.  In addition, the Recovery Act imposes certainnew executive compensation and corporate expenditure limits on all current andfuture TARP recipients that are in addition to those previously announced bythe Treasury Department, until the TARP recipient has repaid the TreasuryDepartment, which is now permitted under the Recovery Act without penalty andwithout the need to raise new capital, subject to the Treasury Department’sconsultation with the recipient’s appropriate regulatory agency.

 

On March 23, 2009,the Treasury Department, in conjunction with the FDIC and the Federal Reserve,announced the Public-Private Partnership Investment Program for Legacy Assetswhich consists of the following two separate plans, addressing two distinctasset groups.

 

The first plan is theLegacy Loan Program, which has a primary purpose to facilitate the sale oftroubled mortgage loans by eligible institutions, including FDIC-insuredfederal or state banks and savings associations. Eligible assets are notstrictly limited to loans; however, what constitutes an eligible asset will bedetermined by participating banks, their primary regulators, the FDIC and theTreasury Department.  Under the LegacyLoan Program, the FDIC has sold certain troubled assets out of an FDICreceivership in two separate transactions relating to the failed Illinois bank,Corus Bank, NA, and the failed Texas bank, Franklin Bank, S.S.B.  These transactions were completed in September 2009and October 2009, respectively.

 

The second plan is theSecurities Program, which is administered by the Treasury Department andinvolves the creation of public-private investment funds to target investmentsin eligible residential mortgage-backed securities and commercialmortgage-backed securities issued before 2009 that originally were rated AAA orthe equivalent by two or more nationally recognized statistical ratingorganizations, without regard to rating enhancements (collectively, “LegacySecurities”).  Legacy Securities must bedirectly secured by actual mortgage loans, leases or other assets, and may bepurchased only from financial institutions that meet TARP eligibilityrequirements.  The Treasury Departmentreceived over 100 unique applications to participate in the Legacy SecuritiesPPIP and in July 2009 selected nine public-private investment fundmanagers.  As of December 31, 2009,public-private investment funds have completed initial and subsequent closingson approximately $6.2 billion of private sector equity capital, which wasmatched 100% by the Treasury Department, representing $12.4 billion of totalequity capital.  The Treasury Departmenthas also provided $12.4 billion of debt capital, representing $24.8 billion oftotal purchasing power.  As of December 31,2009, public-private investment funds have drawn-down approximately $4.3billion of total capital which has been invested in certain non-agencyresidential mortgage backed securities and commercial mortgage backedsecurities and cash equivalents pending investment.

 

On May 22, 2009, theFDIC levied a one-time special assessment on all banks due on September 30,2009.  In addition, on November 12,2009, the FDIC issued a final rule to require banks to prepay theirestimated quarterly risk-based assessments for the fourth quarter of 2009 andfor all of 2010, 2011 and 2012 and to increase assessment rates effective on January 1,2011.

 

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Although it is likelythat further regulatory actions will arise as the federal government attemptsto address the economic situation, we cannot predict the effect that fiscal ormonetary policies, economic control, or new federal or state legislation mayhave on our business and earnings in the future.

 

**Formal Agreement**

 

On August 18, 2004, the Bank entered a formal agreement with the OCC.  The formal agreement required specific actions to strengthen or correct identified weaknesses.  The Bank agreed to maintain a Total Capital to risk-weighted assets ratio of at least 14% and a Tier 1 Capital to adjusted total assets ratio of at least 9%.

 

In addition, the Bank committed to:

 

·                  adopt a written strategic plan covering at least a three-year period;

 

·                  review and revise its written loan policy;

 

·                  obtain an independent review of its loan program; and

 

·                  review the adequacy, and establish a program to maintain the adequacy of, its allowance for loan losses.

 

On February 5, 2008, the OCC issued a Terminationof the Agreement pursuant to which the OCC determined that the protection ofthe depositors, other customers and shareholders of the Bank as well as theBank’s safe and sound operation do not require the continued existence of theagreement.

 

**Federal Reserve Resolutions**

 

On October 21, 2004,pursuant to the request of the Federal Reserve Bank of Atlanta, the Company’sBoard of Directors adopted resolutions (the “Resolutions”) that provide thatthe Company shall not (without the prior written approval of the FederalReserve Bank of Atlanta):

 

·                  incur debt (or take any action, such as refinancing) that would cause a change in debt instruments or a change in any of the terms of any existing debt instruments;

 

·                  declare or pay dividends to its shareholders; or

 

·                  reduce its capital position by purchasing or redeeming treasury stock.

 

TheResolutions also require quarterly financial information on the parent company,the subsidiary bank and written progress on the financial condition of theorganization be provided to the Federal Reserve Bank of Atlanta.

 

## **Dividends**

##  

The Company is a legalentity separate and distinct from the Bank. The principal sources of the Company’s cash flow, including cash flow topay dividends to its shareholders, are dividends that the Bank pays to its soleshareholder, the Company.  Statutory andregulatory limitations apply to the Bank’s payment of dividends to the Companyas well as to the Company’s payment of dividends to its shareholders.  The Bank is precluded from paying dividendsuntil it is cumulatively profitable.  TheCompany is currently prohibited from paying dividends without Federal ReserveBank of Atlanta approval pursuant to the Resolutions.

 

The Bank is required byfederal law to obtain prior approval of OCC for payments of dividends if thetotal of all dividends declared by our Board of Directors in any year willexceed (1) the total of the Bank’s net profits for that year, plus (2) theBank’s retained net profits of the preceding two years, less any requiredtransfers to surplus.

 

Thepayment of dividends by the Company and the Bank may also be affected by otherfactors, such as the requirement to maintain adequate capital above regulatoryguidelines.  If, in the opinion of theOCC, the Bank were engaged in or about to engage in an unsafe or unsoundpractice, the OCC could require, after notice and a hearing, that the Bank stopor refrain engaging in the practice.  Thefederal banking agencies have indicated that paying dividends that deplete adepository institution’s capital base to an inadequate level would be an unsafeand unsound banking practice.  Under theFDICIA, a depository institution may not pay any dividend if payment wouldcause it to become undercapitalized or if it already is undercapitalized.  Moreover, the federal agencies have issuedpolicy statements that provide that bank holding companies and insured banksshould generally only pay dividends out of current operating earnings.  See “First Century Bank—Prompt CorrectiveAction” above.

 

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| **Item 1A.** | **Risk Factors.** |
|--------------|-------------------|

 

*Our business, financial condition, and results of operationscould be harmed by any of the following risks, or other risks that have notbeen identified or which we believe are immaterial or unlikely.  Shareholders should carefully consider therisks described below in conjunction with the other information in this Form 10-K,including our consolidated financial statements and related notes.  The risks discussed below includeforward-looking statements, and our actual results may differ substantiallyfrom those discussed in these forward-looking statements.*

 

***We have only recently adopted our newbusiness plan and may not be able to implement it effectively.***

 

Ourfuture performance will depend on our ability to implement our new businessplan successfully.  We established our online mortgage division, Century PointMortgage, in the beginning of 2008 and expanded our mortgage division in 2009to include a significant retail presence in the North Georgiamarket.   The implementation of our new business plan, which moreheavily focuses on mortgage operations, will involve a variety of complextasks, including implementation of new production, operational and reportingsystems and recruiting and integrating qualified originators and support staffto adequately handle and manage these operations.  Any failure or delay inexecuting these initiatives, whether due to regulatory delays or for otherreasons, which may be beyond our control, is likely to impede, and couldultimately preclude, our successful implementation of our business plan andcould materially adversely affect our business, financial condition, andresults of operations.

 

***Our continued operations andfuture growth may require us to raise additional capital in the future, butthat capital may not be available when it is needed.***

 

We are required byregulatory authorities to maintain adequate levels of capital to support ouroperations.  To support our continuedoperations, including any additional growth, we may need to raise additionalcapital.  Our ability to raise additionalcapital will depend in part on conditions in the capital markets at that time,which are outside our control, and our financial performance.  Accordingly, we may be unable to raiseadditional capital, if and when needed, on terms acceptable to us, or atall.  If we cannot raise additionalcapital when needed, our ability to continue our current operations or furtherexpand our operations through internal growth and acquisitions could bematerially impaired.  In addition, if wedecide to raise additional equity capital, your interest could be diluted.  We are limited in the amount we canloan a single borrower by the amount of the Bank’s capital.  Our legal lending limit is 15% of the Bank’scapital and surplus, or $769,000 at December 31, 2009.

 

***Ourability to estimate our loan loss reserves accurately may have an adverseeffect on our financial performance.***

 

Lending money is ourprimary business.  Our success depends toa significant extent upon the quality of our assets, particularly loans.  In originating loans, there is a substantiallikelihood that credit losses will be experienced. The risk of loss will varywith, among other things, general economic conditions, the type of loan beingmade, the creditworthiness of the borrower over the term of the loan and, inthe case of a collateralized loan, the quality of the collateral for the loan.

 

Our loan customers maynot repay their loans according to the terms of these loans, and the collateralsecuring the payment of these loans may be insufficient to assure repayment. Asa result, we may experience significant loan losses, which could have amaterial adverse effect on our operating results. Our management makes variousassumptions and judgments about the collectibility of our loan portfolio,including the creditworthiness of our borrowers and the value of the realestate and other assets serving as collateral for the repayment of many of ourloans.  We attempt to maintain anappropriate allowance for loan losses to provide for potential losses in our loanportfolio.  In determining the amount ofthe allowance, we consider several factors, including:

 

·                  an ongoing review of the quality, mix,and size of our overall loan portfolio;

·                  our historical loan loss experience;

·                  evaluation of economic conditions;

·                  regular reviews of loan delinquencies andloan portfolio quality; and

·                  the amount and quality of collateral,including guarantees, securing the loans.

 

However, there is noprecise method of predicting credit losses, since any estimate of loan lossesis necessarily subjective and the accuracy depends on the outcome of futureevents. Although we believe the allowance for loan losses is a reasonableestimate of known and inherent losses in our loan portfolio, we cannot fullypredict such losses or that our loan loss allowance will be adequate in thefuture.  At December 31, 2009, ourallowance for probable loan losses represented 1.13% of our total loans, 53% ofour total non-performing assets, and 329% of our total non-performingloans.  If our loan losses exceed ourallowance for probable loan losses, our business, financial condition andprofitability will suffer.

 

In general, loans do notbegin to show signs of credit deterioration or default until they have beenoutstanding for some period of time, a process we refer to as “seasoning.”  As a result, a portfolio of older loans willusually behave more predictably than a newer portfolio.  Because our loan portfolio is relatively new,the current level of delinquencies and defaults may not be representative ofthe level that will prevail when the portfolio becomes more seasoned, which maybe higher than current levels.  Ifdelinquencies and defaults increase, we may be required to increase ourprovision for loan losses, which would adversely affect our results ofoperations and financial condition. Excessive loan losses could have a material impact on our financialperformance. Consistent with 

 

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our loan loss reservemethodology, we expect to make additions to our loan loss reserve levels as aresult of our loan growth, which may affect our short-term earnings.

 

Federal regulatorsperiodically review our allowance for loan losses and may require us toincrease our provision for loan losses or recognize further loan charge-offs,based on judgments different than those of our management. Any increase in theamount of our provision or loans charged-off as required by these regulatoryagencies could have a negative effect on our results of operations.

 

***Wewill face risks with respect to future expansion and acquisitions or mergers.***

 

We may seek to acquireother financial institutions or parts of those institutions.  Any combination or acquisition would requirethe approval of the federal and state regulatory authorities.  In addition, the Bank may also opened newoffices or expand into new lines of business or offer new products or services.

 

These activities wouldinvolve a number of risks, including:

 

·                  taking additional time and creatingexpense associated with identifying and evaluating potential acquisitions andmerger partners;

·                  using inaccurate estimates and judgmentsto evaluate credit, operations, management, and market risks with respect tothe target institution or assets;

·                  diluting our existing shareholders in anacquisition;

·                  taking additional time and creatingexpense associated with evaluating new markets for expansion, hiringexperienced local management, and opening new offices, as there may be asubstantial time lag between these activities before we generate sufficientassets and deposits to support the costs of the expansion;

·                  taking a significant amount of timenegotiating a transaction or working on expansion plans, resulting inmanagement’s attention being diverted from the operation of our existingbusiness;

·                  taking time and creating expenseintegrating the operations and personnel of the combined businesses;

·                  creating an adverse short-term effect onour results of operations; and

·                  losing key employees and customers as aresult of an acquisition that is poorly received.

 

We have not acquiredanother institution and we lack experience in handling any of these risks.  In addition, there is also a risk that anyexpansion effort will not be successful. Once opened, if these new branches are not able to increase or generateloan and deposit portfolios to a point where net interest income covers theirstart-up and operating costs, then our investment in these new markets willgenerate unsatisfactory or even negative returns and could materially adverselyaffect our business, financial condition, and results of operations.

 

***Oursuccess depends on our ability to identify and retain individuals withexperience and relationships in the markets in which we compete.***

 

Our success depends, inpart, on our ability to identify and retain experienced key management memberswith local expertise and relationships in our market.  If any of the market presidents fail toperform their duties satisfactorily or are unable to obtain loan and depositmarket share, any investment in these new markets will generate unsatisfactoryor even negative returns and could materially adversely affect our business,financial condition, and results of operations.

 

If any of the Bank’ssenior officers were to leave the employ of the Bank or become unable toperform their duties for any reason, we would have to replace them.  We expect that competition for qualifiedmanagement will be intense and that there will be a limited number of qualifiedpersons with knowledge of and experience in the community banking industry inour markets.  Even if we identifyindividuals that we believe could assist us in growing our presence in themarket, we may be unable to recruit these individuals away from moreestablished banks.  In addition, theprocess of identifying and recruiting individuals with the combination ofskills and attributes required to carry out our strategy is often lengthy.  Our inability to identify, recruit, andretain talented personnel would limit our growth and could materially adverselyaffect our business, financial condition, and results of operations.

 

***Wehave previously identified weaknesses in our overall credit risk managementprocess.***

 

In a series of auditsconducted during the last quarter of 2003 and first quarter of 2004 by the Bank’sinternal and external auditors and the OCC, several weaknesses were identifiedin the overall credit risk management process of the Bank.  To address these weaknesses, bank managementcontracted with an independent loan review company to perform a major review ofthe Bank’s loan portfolio.  The purposeof the review was to identify problem loans and ensure proper reserves wereallocated and/or the problem loans were charged-off.  Significant work was done to reduce loanexceptions which totaled over 1,400 at that time to less than a hundred at thecompletion of this effort.  A substantialnumber of loans were charged off during the 2003 and 2004 time frame based onthe findings of the independent loan audit company and the Bank’s internal loanreview.  The Bank continues to use theservices of an external, independent loan review company.

 

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***Weare subject to extensive regulation that could limit or restrict ouractivities.***

 

We operate in a highlyregulated industry and are subject to examination, supervision, andcomprehensive regulation by the OCC, the FDIC, and the Federal ReserveBoard.  Our compliance with theseregulations is costly and restricts certain of our activities, includingpayment of dividends, mergers and acquisitions, investments, making loans,charging interest rates, paying interest rates on deposits, and locations ofbranches.  We must also meet regulatorycapital requirements.  If we fail to meetthese capital and other regulatory requirements, our financial condition,liquidity, and results of operations would be materially and adverselyaffected.  If our status changes to “adequatelycapitalized” rather than “well capitalized” and we fail to remain “well managed”for regulatory purposes, it could affect customer confidence, our ability togrow, our cost of funds and FDIC insurance, our ability to pay dividends on ourcapital stock, and our ability to make acquisitions.

 

The laws and regulationsapplicable to the banking industry could change at any time, and we cannotpredict the effects of these changes on our business and profitability.  For example, new legislation or regulationcould limit the manner in which we may conduct our business, including ourability to obtain financing, attract deposits, make loans and expand our businessthrough opening new branch offices.  Manyof these regulations are intended to protect depositors, the public, and theFDIC, not shareholders.  In addition, theburden imposed by these regulations may place us at a competitive disadvantagecompared to competitors who are less regulated. The laws, regulations, interpretations, and enforcement policies thatapply to us have been subject to significant change in recent years, sometimesretroactively applied, and may change significantly in the future.  Our cost of compliance with these laws andregulations could adversely affect our ability to operate profitably. See “Supervisionand Regulation.”

 

In addition, as aregulated entity, we are subject to examination and supervision and can berequested by our regulators to implement changes to our operations.  We have addressed areas of regulatoryconcern, including interest rate risk, through the adoption of boardresolutions and improved policies and procedures.

 

Moreover, changes infederal laws regarding the oversight of mortgage brokers and lenders couldadversely affect our ability to originate, finance, and sell our residentialmortgage loans.  The enactment of federallaws, such as licensing requirements for mortgage bankers, applicable to thetypes of mortgage loans we originate could increase our costs of operations andadversely affect our origination volume, which would negatively impact ourbusiness, financial condition, and results of operation.

 

***Recentnegative developments in the financial industry and the domestic andinternational credit markets may adversely affect our operations and results.***

 

Negative developmentsover the last two and a half years in the global credit and securitizationmarkets have resulted in uncertainty in the financial markets in general withthe expectation of the general economic downturn continuing into 2010.  As a result of this “credit crunch,”commercial as well as consumer loan portfolio performances have deteriorated atmany institutions and the competition for deposits and quality loans hasincreased significantly.  In addition,the values of real estate collateral supporting many commercial loans and homemortgages have declined and may continue to decline.  Global securities markets, and bank holdingcompany stock prices in particular, have been negatively affected, as has theability of banks and bank holding companies to raise capital or borrow in thedebt markets.  As a result, significantnew federal laws and regulations relating to financial institutions, including,without limitation, the EESA and the Treasury Department’s CPP, have beenadopted.  Furthermore, the potentialexists for additional federal or state laws and regulations regarding, amongother matters, lending and funding practices and liquidity standards, and bankregulatory agencies are expected to be active in responding to concerns andtrends identified in examinations, including the expected issuance of manyformal enforcement orders.  Negativedevelopments in the financial industry and the domestic and internationalcredit markets, and the impact of new legislation in response to thosedevelopments, may negatively impact our operations by restricting our businessoperations, including our ability to originate or sell loans, and adverselyimpact our financial performance.  We canprovide no assurance regarding the manner in which any new laws and regulationswill affect us.

 

***There can be no assurance that recentlyenacted legislation will help stabilize the U.S. financial system.***

 

There can be no assurancethat the government actions that have been taken over the last 18 months,including EESA and the Recovery Act, will achieve their purpose.  The failure of the financial markets tostabilize, or a continuation or worsening of the current financial marketconditions, could have a material adverse affect on our business, our financialcondition, the financial condition of our customers, as well as our ability toaccess credit.

 

***Current adverse market conditionshave resulted in a lack of liquidity and reduced business activity.***

 

Dramaticdeclines in the housing market, with falling home prices and increasingforeclosures and unemployment, have resulted in significant write-downs ofasset values by financial institutions. These write-downs have caused many financial institutions to seek additionalcapital, to merge with larger and stronger institutions and, in some cases, tofail.  To the extent a weak institutionin our market merges with or is acquired by a stronger institution, thecompetition within the market may increase. Reflecting concern about the stability of the financial marketsgenerally and the strength of counterparties, many lenders and institutionalinvestors have reduced, and in some cases, ceased to provide funding toborrowers including other financial institutions.

 

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Aprolonged lack of available credit with resulting reduced business activitycould materially adversely affect our business, financial condition, andresults of operations.

 

***The economic downturn, especially in NorthernGeorgia, has had an adverse effect on the quality of our loan portfolio and ourfinancial performance.***

 

The principal focus of the Bank and its lending officers has been, andcontinues to be, the financing of growth and management of the deposits ofsmall businesses within the target market of the Bank.  These businesses generally have fewerfinancial resources in terms of capital borrowing capacity than largerentities.  The economic downturn hasadversely affected these small businesses to a greater degree than more highlycapitalized and larger corporations.  Thenegative impact of the general economic conditions on these businesses in themarkets in which we operate has adversely affected our business, financialcondition, and results of operations.

 

Economicrecession over a prolonged period or other economic problems in Hall, Oconeeand Athens-Clarke Counties, Georgia or in our state or nation generally havehad, and may continue to have, a material adverse impact on the quality of ourloan portfolio and the demand for our products and services.  For example, the downturn in the localeconomy has made it more difficult for borrowers to repay their loans and thiscould lead to loan losses, which could in turn reduce our net income and profitability.

 

Thevalue and liquidity of real estate or other collateral that secures our loansin our market area has been, and may continue to be, adversely affected by theeconomic downturn.  Unlike many largerinstitutions, we are not able to spread the risks of unfavorable local economicconditions across a large number of diversified economies or markets.  We often secure loans with real estatecollateral.  As of December 31,2009, approximately 86%, of our loans had real estate as a primary or secondarycomponent of collateral.  The real estatecollateral in each case provides an alternate source of repayment in the eventof default by the borrower and may deteriorate in value during the time thecredit is extended.  If we are requiredto liquidate the collateral securing a loan to satisfy the debt during thisperiod of reduced real estate values, our business, financial condition, andresults of operations could be negatively affected.

 

***The FDIC Deposit Insurance assessments that we are required to pay maymaterially increase in the future, which would have an adverse effect on ourearnings and our ability to pay our liabilities as they come due.***

 

As a member institution of the FDIC, we are required to pay semi-annualdeposit insurance premium assessments to the FDIC.  Due to the recent failure of severalunaffiliated FDIC insurance depository institutions, and the FDIC’s newTemporary Liquidity Guarantee Program, the FDIC adopted a revised risk-baseddeposit insurance assessment schedule in February 2009, which raiseddeposit insurance premiums.  The FDIC also implementeda five basis point special assessment of each insured depository institution’sassets minus Tier 1 capital as of June 30, 2009, which special assessmentamount was capped at 10 basis points times the institution’s assessment basefor the second quarter of 2009.  Inaddition, the FDIC recently announced a rule that requires financialinstitutions like us to prepay their estimated quarterly risk-based assessmentsfor the fourth quarter of 2009 and for all of 2010 through and including 2012to re-capitalize the Deposit Insurance Fund. The FDIC may exercise its discretion as supervisor and insurer to exemptan institution from the prepayment requirement if the FDIC determines that theprepayment would adversely affect the safety and soundness of theinstitution.  We were granted an exemption from the prepaymentrequirement.  During 2009, we paid $125,365 in deposit insurance, whichincluded regular premiums and the special assessment.  The rule also provides for increasingthe FDIC-assessment rates by three basis points effective January 1,2011.  If FDIC deposit insurance premiumsand assessments continue to increase, these higher payments could adverselyaffect our financial condition.

 

***Weakness in the real estate market, including thesecondary residential mortgage loan markets, has adversely affected us and maycontinue to do so.***

 

Significant ongoingdisruptions in the secondary market for residential mortgage loans have limitedthe market for and liquidity of most mortgage loans other than conformingFannie Mae and Freddie Mac loans.  At December 31,2009, we held 22 loans for approximately $2.3 million of loans that were noteligible for purchase by these agencies. These loans were purchased by the bank from the portfolio of anothernational bank as part of a community outreach program and not originated by theFirst Century Mortgage Division.  Due tothe characteristics of these loans it is doubtful that these loans will beeligible for purchase in the future, however they will continue to be held inour loan portfolio as performing loans. The effects of ongoing mortgage market challenges, combined with theongoing correction in residential real estate market prices and reduced levelsof home sales, could result in further price reductions in single family homevalues, adversely affecting the value of collateral securing mortgage loansheld for investment.  Declining realestate values have caused higher delinquencies and losses on certain mortgageloans, particularly second lien mortgages and home equity lines of credit.  These trends could continue.  These conditions have resulted in losses,write downs and impairment charges in the mortgage business, which havecontinued through the fourth quarter of 2009. In response to this trend, we have curtailed various product offeringsand limited our mortgage originations generally to Fannie Mae and Freddie Maceligible mortgages.  Continued declinesin real estate values, home sales volumes and financial stress on borrowers asa result of job losses, interest rate resets on adjustable rate mortgage loansor other factors could have further adverse effects on borrowers that result inhigher delinquencies and greater charge-offs in future periods, which wouldadversely affect our financial condition and results of operations.  In the event the allowance for loan losses isinsufficient to cover such losses, earnings, capital and parent companyliquidity could be adversely affected.

 

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***Changes in interest rates and our ability to successfully manageinterest rate fluctuations may reduce our profitability.***

 

Ourresults of operations depend in large part upon the level of our net interestincome, which is the difference between interest income from interest-earningassets, such as loans and investment securities, and interest expense oninterest-bearing liabilities, such as deposits and other borrowings.  Depending on the terms and maturities of ourassets and liabilities, a significant change in interest rates could have amaterial adverse effect on our profitability. Many factors cause changes in interest rates, including governmentalmonetary policies and domestic and international economic and politicalconditions.  While we intend to managethe effects of changes in interest rates by adjusting the terms, maturities,and pricing of our assets and liabilities, our efforts may not be effective andour financial condition and results of operations could suffer.

 

Becauseof the differences in maturities and repricing characteristics of ourinterest-earning assets and interest-bearing liabilities, changes in interestrates do not produce equivalent changes in interest income earned oninterest-earning assets and interest paid on interest-bearing liabilities.  Fluctuations in interest rates are notpredictable or controllable and therefore, there can be no assurances of ourability to continue to maintain a consistent positive spread between theinterest earned on our interest-earning assets and the interest paid on ourinterest-bearing liabilities. Accordingly, fluctuations in interest rates could adversely affect ournet interest income and, in turn, our profitability.  In addition, loan volumes are affected bymarket interest rates on loans.  Risinginterest rates generally are associated with a lower volume of loanoriginations while lower interest rates are usually associated with higher loanoriginations.  Conversely, in risinginterest rate environments, loan repayment rates will generally decline and infalling interest rate environments, loan repayment rates will likelyincrease.  Interest rates also affect howmuch money we can lend.  When interestrates rise, the cost of borrowing increases. Accordingly, changes in market interest rates could materially andadversely affect our net interest income, asset quality, and loan originationvolume.

 

***Industry competition may have an adverse effect onour profitability***.

 

Competitionin the banking and financial services industry is intense, and ourprofitability depends upon our continued ability to compete in our marketarea.  We compete with commercial banks,credit unions, savings and loan associations, mortgage banking firms, consumerfinance companies, securities brokerage firms, insurance companies, moneymarket funds, and other mutual funds, as well as other super-regional,national, and international financial institutions that operate offices in ourprimary market areas and elsewhere.

 

Wecompete with these institutions both in attracting deposits and in makingloans.  In addition, we have to attractour customer base from other existing financial institutions and from newresidents.  Many of our competitors arewell-established, larger financial institutions, such as Regions Bank, WachoviaBank, N.A., SunTrust Bank and Bank of America, N.A.  These institutions offer some services, suchas extensive and established branch networks and trust services that we do notprovide.  We also compete with localcommunity banks in our market, such as Peach State Bank and Hamilton StateBank.  There is a risk that we will notbe able to compete successfully with other financial institutions in ourmarket, and that we may have to pay higher interest rates to attract deposits,resulting in reduced profitability.

 

Inaddition, because the Gramm-Leach-Bliley Act now permits banks, securitiesfirms and insurance companies to affiliate, a number of larger financialinstitutions and other corporations offering wider variety of financialservices than we currently offer could enter and aggressively compete in themarkets we currently serve.  Many ofthese competitors have substantially greater resources, lending limits andoperating histories than we do and may offer services that we do not or cannotprovide.  In addition, competitors thatare not depository institutions are generally not subject to the extensiveregulations that apply to us.

 

Moreover,we may not be able to compete with our larger competitors for larger customers becauseour lending limits are lower than theirs. We are limited in the amount we can loan a single borrower by the amountof the Bank’s capital.  Our legal lendinglimit is 15% of the Bank’s capital and surplus, or $769,000, at December 31,2009.  These limits are significantlyless than the limits for most of our competitors, and as a result we will havedifficulty in obtaining business from the larger customers in our marketarea.  We seek to sell loan participations to otherfinancial institutions to meet the needs of customers requiring loans abovethese limits.  Nevertheless, because thisamount is substantially lower than the lending limit for most of ourcompetitors, it is difficult for us to compete for many loan relationships.

 

***Efforts to comply withSarbanes-Oxley Act involve significant expenditures, and non-compliance withthe Sarbanes-Oxley Act may adversely affect us.***

 

The Sarbanes-Oxley Act of2002, and the related rules and regulations promulgated by the Securitiesand Exchange Commission that are scheduled to be applicable to us in 2010, haveincreased the scope, complexity, and cost of corporate governance, reporting,and disclosure practices.  We haveexperienced, and we expect to continue to experience, greater compliance costs,including costs related to internal controls, as a result of the Sarbanes-OxleyAct.  We expect these rules andregulations to continue to increase our accounting, legal, and other costs, andto make some activities more difficult, time consuming, and costly.  In the event that we are unable to maintainor achieve compliance with the Sarbanes-Oxley Act and related rules, we may beadversely affected.

 

23

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Weare evaluating our internal control systems in order to allow management toreport on our internal control over financial reporting, as required by Section 404of the Sarbanes-Oxley Act.  If weidentify significant deficiencies or material weaknesses in our internalcontrol over financial reporting that we cannot remediate in a timely manner,or if we are unable to receive a positive attestation from our independentregistered public accounting firm with respect to our internal control overfinancial reporting, the value of our common stock could decline, or our abilityto obtain any necessary equity or debt financing could suffer.  In this event, the liquidity of our commonstock would be severely limited and the market price of our common stock wouldlikely decline significantly.

 

Inaddition, the rules adopted as a result of the Sarbanes-Oxley Act couldmake it more difficult or more costly for us to obtain certain types ofinsurance, including directors’ and officers’ liability insurance, which couldmake it more difficult for us to attract and retain qualified persons to serveon our Board of Directors or as executive officers.

 

***Our directors and executive officers own asignificant portion of our common stock and can influence shareholder decisionsand may vote to take actions adverse to our interests.***

 

Our directors and executive officers, as a group, beneficially ownedapproximately 42% of our outstanding common stock as of December 31,2009.  One of our directors, William R.Blanton, who is also our Chief Executive Officer, owns approximately 22% of ouroutstanding common stock as of December 31, 2009.  The directors and executive officers, as aresult of their ownership, have the ability, by voting their shares in concert,to influence the outcome of any matter submitted to our shareholders forapproval, including the election of directors. The directors and executive officers may vote to cause the company totake actions with which shareholders do not agree or that are not beneficial toour shareholders.

 

***One of our directors and major shareholders,William R. Blanton, holds an executive position, serves on the board ofdirectors of two other banks and holds significant shares of banks within ourtarget market and could vote to take actions adverse to our interests.***

 

William R. Blanton, our Chief Executive Officer, Chairman, and adirector of the Company and the Bank, who owns approximately 22% of our commonstock, has 35 years of banking experience and holds interest in various banksacross North Georgia.  As a result of hisinterest in other banks, Mr. Blanton may vote to cause the Company to takeactions with which the shareholders do not agree or that are not beneficial toits shareholders.

 

Mr. Blanton spends a portion of his time as the Chief ExecutiveOfficer, Vice-Chairman and as a director of First Covenant Bank, a bank with$168 million in assets as of December 31, 2009, headquartered in Commerce,Georgia.  Mr. Blanton currently ownsapproximately 16.6% of the outstanding shares of First Covenant Bank.  We currently have a data processing agreementand master services agreement with First Covenant Bank and we may enter intoadditional agreements with First Covenant Bank in the future.  See “Transactions by Directors, Officers andTen Percent Shareholders.”

 

Mr. Blanton also serves on the board of directors of UnitedAmericas Bankshares, Inc. and its subsidiary bank, United Americas Bank, abank with $267 million in assets as of December 31, 2009, in Atlanta,Georgia.  Mr. Blanton is the largestshareholder of United Americas Bankshares, Inc. and owns approximately17.4% of United Americas Bankshares, Inc., which consists of 124,500 ofoutstanding shares and warrants to purchase an additional 100,000 shares whichare immediately exercisable.  Mr. Blanton’sapplication for a change of control was approved and allows Mr. Blanton toacquire up to 100% of the outstanding shares of United Americas Bankshares, Inc.

 

***We are exposed to the possibility of technologyfailure.***

 

Werely on our computer systems and the technology of outside serviceproviders.  Our daily operations dependon the operational effectiveness of their technology.  We rely on our systems to accurately trackand record our assets and liabilities. If our computer systems or outside technology sources become unreliable,fail, or experience a breach of security, our ability to maintain accuratefinancial records may be impaired, which could materially affect our businessoperations and financial condition.

 
| **Item 1B.** | **Unresolved Staff Comments.** |
|--------------|--------------------------------|

 

Not applicable.

 
| **Item 2.** | **Description of Property.** |
|-------------|------------------------------|

 

TheBank began operations in a modular temporary office of approximately 2,200square feet on property located at the corner of Pearl Nix Extension and DorseyStreet in Gainesville, Georgia.  In August 2004the Company completed construction of its permanent main office at 807 DorseyStreet, Gainesville, Georgia.  The mainoffice provides approximately 12,000 square feet and also serves as the Company’sheadquarters.  The main office facilitiesinclude a teller line, customer service area, offices for the Bank’s lendersand officers, a vault with safe deposit boxes, drive-in teller lanes and adrive-up automated teller machine.

 

24

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| **Item 3.** | **Legal Proceedings.** |
|-------------|------------------------|

 

Thereare no material legal proceedings to which the Company is a party or of whichany of its properties are subject, nor are there material proceedings known tothe Company to be contemplated by any governmental authority.

 
| **Item 4.** | **(Removed and Reserved).** |
|-------------|-----------------------------|

 

25

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**PART II**

 
| **Item 5.** | **Market for Registrant’s Common Equity, Related Stockholder  Matters and Issuer Purchases of Equity Securities.** |
|-------------|-------------------------------------------------------------------------------------------------------------------------|

 

As of March 25, 2010, the Company had 4,998,150 shares of common stock outstanding and approximately 940 shareholders ofrecord.  There is currently no market forour shares of common stock, and it is not likely that an active trading marketwill develop for the shares in the future. There are no present plans for the common stock to be traded on anystock exchange or over-the-counter-market. In 2008 and 2009, shares were sold in a private placement at $1.50 pershare.  With the exception of the privateplacement, there is only incomplete information about trades of our shares andthe prices at which any shares have traded.

 

During 2009 and 2008, we issued 1,019,693, and 2,246,669shares of our common stock, respectively, in consideration of proceeds of$1,529,541, and $3,370,006, respectively, before expenses to accreditedinvestors in transactions exempt from registration under Section 4(2) ofthe Securities Act and Regulation D under the Securities Act relating to salesnot involving any public offering.  Theshares were sold by our officers and directors with the assistance of our salesagents, Commerce Street Capital, LLC and FIG Partners, L.L.C.  Our common stock was sold only to investorsthat we believed were accredited investors. Our directors and officers received no compensation in connection withthe sale of shares.

 

We have not declared or paid any cash dividends on our common or preferred stock since our inception.  For the foreseeable future, we do not intend to declare cash dividends.  If we decide to pay cash dividends in the future, it will be at the discretion of our Board of Directors and will be dependent upon any regulatory restrictions, our financial condition, results of operation, capital requirements, level of indebtedness and such other factors as our Board of Directors deems relevant.  The principal source of our cash revenues is dividends from the Bank.  However, certain restrictions exist regarding the ability of the Bank to transfer funds to us in the form of cash dividends.  All dividends must be paid out of undivided profits then on hand, after deducting expenses, including reserves for losses and bad debts.  In addition, a national bank is prohibited from declaring a dividend on its shares of common stock until its surplus equals its stated capital, unless there has been transferred to surplus no less than one-tenth of the bank’s net profits of the preceding two consecutive half-year periods (in the case of an annual dividend).

 

Moreover,on October 21, 2004, pursuant to the request of the Federal Reserve Bankof Atlanta, our Board of Director’s adopted resolutions that provide that weshall not, without the prior written approval of the Federal Reserve Bank ofAtlanta, declare or pay dividends to our shareholders.  The approval of the OCC is required if thetotal of all dividends declared by a national bank in any calendar year exceedsthe total of its net profits for that year combined with its retained netprofits for the preceding two years, less any required transfers to surplus.

 

See Item 11 for information with respect to our equitycompensation plans.

 

**Item 6.****          ****Selected Financial Data.**

 

Not applicable.

 

**Item 7.****          ****Management’s Discussion and Analysis of Financial Conditionand Results of Operations.**

 

Thisdiscussion and analysis is intended to assist you in understanding ourfinancial condition and results of operations. You should read this commentary in conjunction with the financialstatements and the related notes and the other statistical information included elsewhere inthis annual report, as well as with an understanding of our operating history.

 

**Overview**

 

First Century Bancorp.was incorporated in 2000 for the purpose of becoming a bank holdingcompany.  We are subject to extensivefederal and state banking laws and regulations, including the Bank HoldingCompany Act, and the bank holding company laws of Georgia.  We have one bank subsidiary, First CenturyBank, National Association, which opened for business on March 25,2002.  The Bank is also subject tovarious federal banking laws and regulations. See the section entitled “First Century Bank” in Item 1 - Business for adescription of the history of our Formal Agreement with the OCC.

 

The following discussiondescribes our results of operations and assesses our financial condition.  Our discussion and analysis for the yearsended December 31, 2009 and 2008 is based on our audited financial statementsfor such periods.  Like most communitybanks, we derive a significant portion of our income from interest we receiveon our loans and investments.  Ourprimary sources of funds for making these loans and investments are ourdeposits and borrowings, on which we pay interest.  Consequently, one of the key measures of oursuccess is our amount of net interest income, or the difference between theincome on our interest-earning assets, such as loans and investments, and theexpense on our interest-bearing liabilities, such as deposits andborrowings.  Another key measure is thespread between the yield we earn on these interest-earning assets and the ratewe pay on our interest-bearing liabilities.

 

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We have included a numberof tables to assist in our description of these measures.  For example, the “Average Balances” tableshows the average balance during the years ended December 31, 2009 and2008 of each category of our assets and liabilities, as well as the yield weearned or the rate we paid with respect to each category.  A review of this table shows that our loanstypically provide higher interest yields than do other types of interestearning assets, which is why we intend to channel a substantial percentage ofour earning assets into our loan portfolio. Similarly, the “Rate/Volume Analysis” table helps demonstrate the impactof changing interest rates and changing volume of assets and liabilities duringthe years shown.  We also track the sensitivityof our various categories of assets and liabilities to changes in interestrates, and we have included a “Sensitivity Analysis Table” to help explainthis.  Finally, we have included a numberof tables that provide detail about our investment securities, our loans, andour deposits.

 

There are risks inherentin all loans, so we maintain an allowance for loan losses to absorb probablelosses on existing loans that may become uncollectible.  We establish and maintain this allowance bycharging a provision for loan losses against our operating earnings.  In the “Provision and Allowance for LoanLosses” section we have included a detailed discussion of this process.

 

In addition to earninginterest on our loans and investments, we earn income through fees and otherexpenses we charge to our customers.  Wedescribe the various components of this non-interest income, as well as ournon-interest expense, in the following discussion.

 

**Recent Legislative and Regulatory Initiatives to AddressFinancial and Economic Crises**

 

Marketsin the United States and elsewhere have experienced extreme volatility anddisruption for more than 18 months.  These circumstances have exertedsignificant downward pressure on prices of equity securities and virtually allother asset classes, and have resulted in substantially increased marketvolatility, severely constrained credit and capital markets, particularly forfinancial institutions, and an overall loss of investor confidence.  Loan portfolio performances have deterioratedat many institutions resulting from, among other factors, a weak economy and adecline in the value of the collateral supporting their loans.  Dramatic slowdowns in the housing industry,due in part to falling home prices and increasing foreclosures and unemployment,have created strains on financial institutions. Many borrowers are now unable to repay their loans, and the collateralsecuring these loans has, in some cases, declined below the loan balance.  In response to the challenges facing thefinancial services sector, several regulatory and governmental actions haverecently been announced including:

 

·                  The Emergency EconomicStabilization Act of 2008 (“EESA”), approved by Congress and signed byPresident Bush on October 3, 2008, which, among other provisions, allowedthe U.S. Treasury to purchase up to $700 billion of mortgages, mortgage-backedsecurities and certain other financial instruments from financial institutionsfor the purpose of stabilizing and providing liquidity to the U.S. financialmarkets.  EESA also temporarily raised the basic limit of FDIC depositinsurance from $100,000 to $250,000 through December 31, 2013.

 

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

 

·                  On October 14, 2008,the U.S. Treasury announced the creation of a new program, the Troubled AssetRelief Program (the “TARP”) Capital Purchase Program (the “CPP”) thatencourages and allows financial institutions to build capital through the saleof senior preferred shares to the U.S. Treasury on terms that arenon-negotiable.

 

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

 

·                  The Transaction AccountGuarantee Program (“TAGP”), which provides unlimited deposit insurance coveragethrough June 30, 2010 for noninterest-bearing transaction accounts(typically business checking accounts) and certain funds swept intononinterest-bearing savings accounts.  Institutions participating in theTAGP pay a 15 to 25 basis points fee (annualized), according to the institution’srisk category on the balance of each covered account in excess of $250,000,while the extra deposit insurance is in place; and

 

·                  The Debt GuaranteeProgram (“DGP”), under which the FDIC guarantees certain senior unsecured debtof FDIC-insured institutions and their holding companies.  The unsecureddebt must be issued on or after October 14, 2008 and not later than June 30,2009, and the guarantee is effective through the earlier of the maturity dateor June 30, 2012.  The DGP coverage limit is generally 125% of theeligible entity’s eligible debt outstanding on September 30, 2008 andscheduled to mature on or before June 30, 2009 or, for certain insuredinstitutions, 2% of their liabilities as of September 30, 2008. Depending on the term of the debt maturity, the nonrefundable DGP fee rangesfrom 50 to 100 basis points (annualized) for covered debt outstanding until theearlier of maturity or June 30, 2012.  The TAGP and DGP are in effectfor all eligible entities, unless the entity opted out on or before December 5,2008.

 

·                  On February 17, 2009President Obama signed into law The American Recovery and Reinvestment Act of2009 (“ARRA”), more commonly known as the economic stimulus or economicrecovery package.  ARRA includes a wide 

 

27

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varietyof programs intended to stimulate the economy and provide for extensiveinfrastructure, energy, health, and education needs.  In addition, ARRAimposes certain executive compensation and corporate expenditure limits on allcurrent and future TARP recipients that are in addition to those previouslyannounced by the U.S. Treasury. These new limits are in place until theinstitution has repaid the Treasury, which is now permitted under ARRA withoutpenalty and without the need to raise new capital, subject to the Treasury’sconsultation with the recipient institution’s appropriate regulatory agency.

 

·                  On March 23, 2009,the U.S. Treasury, in conjunction with the FDIC and the Federal Reserve,announced the Public-Private Partnership Investment Program for Legacy Assetswhich consists of two separate plans, addressing two distinct asset groups:

 

·                  The first plan is theLegacy Loan Program, which has a primary purpose to facilitate the sale oftroubled mortgage loans by eligible institutions, including FDIC-insuredfederal or state banks and savings associations.  Eligible assets are notstrictly limited to loans; however, what constitutes an eligible asset will bedetermined by participating banks, their primary regulators, the FDIC and theTreasury.  Under the Legacy Loan Program, the FDIC has sold certaintroubled assets out of an FDIC receivership in two separate transactionsrelating to the failed Illinois bank, Corus Bank, NA, and the failed Texasbank, Franklin Bank, S.S.B.  These transactions were completed in September 2009and October 2009, respectively.

 

·                  The second plan is theSecurities Program, which is administered by the Treasury and involves thecreation of public-private investment funds to target investments in eligibleresidential mortgage-backed securities and commercial mortgage-backedsecurities issued before 2009 that originally were rated AAA or the equivalentby two or more nationally recognized statistical rating organizations, withoutregard to rating enhancements (collectively, “Legacy Securities”).  LegacySecurities must be directly secured by actual mortgage loans, leases or otherassets, and may be purchased only from financial institutions that meet TARPeligibility requirements.  Treasury received over 100 unique applicationsto participate in the Legacy Securities PPIP and in July 2009 selectednine public-private investment fund managers.   As of December 31,2009, public-private investment funds have completed initial and subsequentclosings on approximately $6.2 billion of private sector equity capital, whichwas matched 100% by Treasury, representing $12.4 billion of total equitycapital.  Treasury has also provided $12.4 billion of debt capital,representing $24.8 billion of total purchasing power.  As of December 31,2009, public-private investment funds have drawn-down approximately $4.3billion of total capital which has been invested in certain non-agencyresidential mortgage backed securities and commercial mortgage backedsecurities and cash equivalents pending investment.

 

·             On May 22, 2009, the FDIC levied a one-timespecial assessment on all banks due on September 30, 2009.

 

·                  On November 12, 2009, the FDIC issued a final rule torequire banks to prepay their estimated quarterly risk-based assessments forthe fourth quarter of 2009 and for all of 2010, 2011 and 2012 and to increaseassessment rates effective on January 1, 2011.

 

We areparticipating in the TAGP component of the TLGP.  We have not opted out of the DGP.  As a result of the enhancements to depositinsurance protection and the expectation that there will be demands on the FDIC’sdeposit insurance fund, our deposit insurance costs have increased and willcontinue to increase during 2010.

 

It islikely that further regulatory actions may arise as the Federal governmentcontinues to attempt to address the economic situation.  Governmental intervention and new regulationsunder these programs could materially and adversely affect our business,financial condition and results of operations. The following discussion and analysis describes our performance in thischallenging economic environment.  Weencourage you to read this discussion and analysis in conjunction with ourfinancial statements and the other statistical information included in thisreport.

 

**Critical Accounting Policies**

 

Wehave adopted various accounting policies, which govern the application ofaccounting principles generally accepted in the United States of America, inthe preparation of our consolidated financial statements.  Our significant accounting policies aredescribed in note 1 in the footnotes to the consolidated financial statementsat December 31, 2009 included elsewhere in this annual report.  Management has discussed these critical accountingpolicies with the audit committee.

 

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

 

28

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Webelieve that the allowance for loan losses is a critical accounting policy thatrequires the most significant judgments and estimates used in preparation ofour consolidated financial statements. Please refer to the portion of management’s discussion and analysis offinancial condition and results of operations that addresses the allowance forloan losses for a description of our processes and methodology for determiningthe allowance for loan losses.

 

**Resultsof Operations**

 

Net income (loss) for theyear ended December 31, 2009 improved $3.6 million over the same period in2008.  The Company earned $44,000 for theyear ended December 31, 2009 as compared to a net loss of $3,515,000 forthe same period in 2008.  Our operationalresults depend to a large degree on three factors: our net interest income, ourprovision for loan losses, and our non-interest income and expenses.

 

Net interest income isthe difference between the interest income received on investments (such asloans, investment securities, and federal funds sold) and the interest expenseon deposit liabilities and borrowings. Net interest income grew 281%, to $3,184,000 for the year ended December 31,2009, compared to $837,000 for the year ended December 31, 2008.

 

The provision for loanlosses was $334,000 for the year ended December 31, 2009, compared to$640,000 for the year ended December 31, 2008.  In 2008, the provision for loan losses waslarger than 2009 due to significant growth in 2008 of $18.8 million in our loanportfolio and our response to deteriorating economic conditions, which causedus to apply higher risk weightings to the qualitative factors utilized indetermining appropriate levels of reserves.  In 2009, we did not have continued loan growthand therefore, the provision for loan losses was maintained at a level thatmanagement considers to be adequate to sustain any estimated or potentiallosses based on the Bank’s internal analysis and on external credit reviewexaminations conducted by regulatory authorities and by third-party reviewservices.  The Bank continues todemonstrate the improvement in the credit quality of the Bank’s loan portfolioand of management’s efforts to identify and reduce criticized and classifiedloans.

 

Total non-interest incomefor the year ended December 31, 2009 was $2,227,000, compared to $609,000for the year ended December 31, 2008. Non-interest income includes service charges on deposit accounts,customer service fees, mortgage origination fee income and investment securitygains (losses).  The increase innon-interest income for 2009 was primarily due to an increase in fees earned onmortgage originations due to the establishment of the mortgage divisions.  Non-interest expenses in 2009 were $5,034,000,compared to $4,321,000 in 2008.  The largestcomponent of non-interest expenses is salaries and employee benefits, whichtotaled $2,481,000 for the year ended December 31, 2009, compared to$2,006,000 for the year ended December 31, 2007.

 

**NetInterest Income**

 

For the years ended December 31,2009 and 2008, net interest income totaled $3,184,000 and $837,000,respectively.  Interest income fromloans, including fees, was $2,368,000 and $1,722,000 for 2009 and 2008,respectively, or an increase of $646,000. The yield decreased to 5.91% in 2009 from 7.53% in 2008.  The falling interest rate environment in 2008had an immediate negative impact on the Bank’s adjustable rate loans, andcontinued to impact the Bank’s loan yield as loans matured and repriced, andnew loans were made at the lower current market rates.  Management redirected cash resources tohigher yielding investment securities in late 2008 and early 2009 takingadvantage of market dislocations that occurred during that time period.  Interest income from investment securitieswas $2,529,000 and $562,000 for 2009 and 2008, respectively, which representeda higher yield of 9.15% in 2009, compared to the 5.93% yield earned in2008.  Interest expense totaled$1,715,000 for the year ended December 31, 2009, compared to $1,586,000 in2008.  The net interest margin realizedon earning assets and the interest rate spread were 4.61% and 4.45%,respectively, for the year ended December 31, 2009, as compared 2.20% and2.11%, respectively, for the year ended December 31, 2008.

 

The Bank’s growth has been supported by the dualstrategy of increasing lower cost wholesale funding in the short-term to allowtime for a build up of low cost core funding to be developed over thelonger-term. Since December 31, 2008, core deposits have grownapproximately $13.4 million, or 137%. The Bank has been successful implementingthis strategy resulting in an increase in net interest margin of 110%. The netinterest margin realized on earning assets was 4.61% for the year ended December 31,2009, as compared to 2.20% for the same period in 2008.

 

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**AverageBalances and Interest Rates**

 

The table below detailsthe average balances outstanding for each category of interest earning assetsand interest-bearing liabilities for 2009 and 2008 and the average rate ofinterest earned or paid thereon.  Averagebalances have been derived from the daily balances throughout the periodindicated.

 
| ** **                                                           | ** ** | **For the Year Ended  December 31, 2009** | ** ** | **For the Year Ended  December 31, 2008** | ** ** |
|----------------------------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                           | ** ** | **(Amounts presented in thousands)**           | ** ** |
| ** **                                                           | ** ** | **Average**                                    | ** ** | ** **                                     | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** |
| ** **                                                           | ** ** | **Balance**                                    | ** ** | **Interest**                                   | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| Assets:                                                              |       |                                           |       |                                           |       |   |   |   |   |   |   |   |   |
| Interest  earning assets:                                            |       |                                           |       |                                           |       |   |   |   |   |   |   |   |   |
| Loans  (including loan fees)                                         |       | $                                              | 40,096     |                                           | $          | 2,368 |   | 5.91 | % | $ | 22,865 |   | $ | 1,723 |   | 7.53 | % |
| Investment  securities and other investments                         |       | 27,642                                         |       | 2,529                                          |       | 9.15 | % | 9,481 |   | 562 |   | 5.93 | % |
| Interest  bearing deposits                                           |       | 1,150                                          |       | 2                                              |       | 0.13 | % | 1,522 |   | 39 |   | 2.57 | % |
| Federal  funds sold                                                  |       | 129                                            |       | —                                         |       | 0.14 | % | 4,154 |   | 99 |   | 2.39 | % |
| Total  interest earning assets                                       |       | 69,017                                         |       | 4,899                                          |       | 7.10 | % | 38,021 |   | 2,423 |   | 6.37 | % |
|                                                                 |       |                                           |       |                                           |       |   |   |   |   |   |   |   |   |
| Other  non-interest earnings assets                                  |       | 4,025                                          |       |                                           |       |   |   | 4,873 |   |   |   |   |   |
|                                                                 |       |                                           |       |                                           |       |   |   |   |   |   |   |   |   |
| Total  assets                                                        |       | $                                              | 73,042     |                                           |       |   |   |   | $ | 42,894 |   |   |   |   |   |
|                                                                 |       |                                           |       |                                           |       |   |   |   |   |   |   |   |   |
| Liabilities  and shareholders’ equity:                          |       |                                           |       |                                           |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                                       |       |                                           |       |                                           |       |   |   |   |   |   |   |   |   |
| Deposits:                                                            |       |                                           |       |                                           |       |   |   |   |   |   |   |   |   |
| Interest-bearing  demand                                             |       | $                                              | 1,356      |                                           | $          | 12 |   | 0.85 | % | $ | 1,096 |   | $ | 23 |   | 2.08 | % |
| Savings  and money market                                            |       | 9,130                                          |       | 188                                            |       | 2.06 | % | 3,818 |   | 106 |   | 2.77 | % |
| Time                                                                 |       | 49,317                                         |       | 1,450                                          |       | 2.94 | % | 29,072 |   | 1,354 |   | 4.66 | % |
| Federal  funds purchased                                             |       | 43                                             |       | —                                         |       | 0.97 | % | 21 |   | 1 |   | 1.58 | % |
| Borrowings                                                           |       | 4,916                                          |       | 65                                             |       | 1.33 | % | 3,214 |   | 103 |   | 3.21 | % |
| Total  interest-bearing liabilities                                  |       | 64,762                                         |       | 1,715                                          |       | 2.65 | % | 37,221 |   | 1,586 |   | 4.26 | % |
| Other  non-interest bearing liabilities                              |       | 4,036                                          |       |                                           |       |   |   | 2,797 |   |   |   |   |   |
| Shareholders’  equity                                           |       | 4,244                                          |       |                                           |       |   |   | 2,876 |   |   |   |   |   |
|                                                                 |       |                                           |       |                                           |       |   |   |   |   |   |   |   |   |
| Total  liabilities and shareholders’ equity                     |       | $                                              | 73,042     |                                           |       |   |   |   | $ | 42,894 |   |   |   |   |   |
|                                                                 |       |                                           |       |                                           |       |   |   |   |   |   |   |   |   |
| Excess  of interest-earning assets over interest-bearing liabilities |       | $                                              | 4,255      |                                           |       |   |   |   | $ | 800 |   |   |   |   |   |
|                                                                 |       |                                           |       |                                           |       |   |   |   |   |   |   |   |   |
| Ratio  of interest-earning assets to interest-bearing liabilities    |       | 106.57                                         | %          |                                           |       |   |   | 102.15 | % |   |   |   |   |
|                                                                 |       |                                           |       |                                           |       |   |   |   |   |   |   |   |   |
| Net  interest income                                                 |       |                                           |       | $                                              | 3,184      |   |   |   |   |   | $ | 836 |   |   |   |
|                                                                 |       |                                           |       |                                           |       |   |   |   |   |   |   |   |   |
| Net  interest spread                                                 |       |                                           |       |                                           |       | 4.45 | % |   |   |   |   | 2.11 | % |
|                                                                 |       |                                           |       |                                           |       |   |   |   |   |   |   |   |   |
| Net  interest margin                                                 |       |                                           |       |                                           |       | 4.61 | % |   |   |   |   | 2.20 | % |

 

Non-accrual loans areincluded in average loan balances and totaled $637,000 and $729,000 for 2009and 2008 respectively.

 

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**Volume/Rate Analysis**

 

Net interest income canalso be analyzed in terms of the impact of changing rates and changingvolume.  The following table describesthe extent to which changes in interest rates and changes in the volume ofinterest-earning assets and interest-bearing liabilities have affected our interestincome and interest expense during the periods indicated.  Changes attributed to both rate and volumehave been allocated on a pro rata basis.

 
| ** **                   | ** ** | **2009 Compared to 2008**                 | ** ** |
|------------------------------|------------|-------------------------------------------|------------|
| ** **                   | ** ** | **(Dollars in thousands)**                | ** ** |
| ** **                   | ** ** | **Increase (decrease) due to changes in** | ** ** |
| ** **                   | ** ** | **Volume**                                | ** ** | **Rate** | ** ** | **Net** | ** ** |
| ** **                   | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Change**                   | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest  income on:         | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Loans  (including loan fees) |       | $                                         | 1,018      |   | $ | (372 | ) | $ | 646 |   |
| Investment  securities       |       | 1,663                                     |       | 305 |   | 1,968 |   |
| Interest  bearing deposits   |       | (1                                        | )          | (37 | ) | (38 | ) |
| Federal  funds sold          |       | (6                                        | )          | (93 | ) | (99 | ) |
| ** **                   |       | 2,674                                     |       | (197 | ) | 2,477 |   |
| ** **                   | ** ** | ** **                                |       |   |   |   |   |
| Interest  expense on:        | ** ** | ** **                                |       |   |   |   |   |
| Deposits:                    | ** ** | ** **                                |       |   |   |   |   |
| Interest-bearing  demand     |       | 2                                         |       | (13 | ) | (11 | ) |
| Savings  and money market    |       | 109                                       |       | (27 | ) | 82 |   |
| Time                         |       | 595                                       |       | (499 | ) | 96 |   |
| Borrowings                   |       | 22                                        |       | (60 | ) | (38 | ) |
| Federal  funds purchased     |       | —                                    |       | — |   | — |   |
|                         |       | 728                                       |       | (599 | ) | 129 |   |
| ** **                   |       |                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
|                         |       | $                                         | 1,946      |   | $ | 402 |   | $ | 2,348 |   |

 

**InterestRate Sensitivity and Asset Liability Management**

 

Interest rate sensitivitymeasures the timing and magnitude of the repricing of assets compared with therepricing of liabilities and is an important part of asset/liability managementof a financial institution.  Theobjective of interest rate sensitivity management is to generate stable growthin net interest income, and to control the risks associated with interest ratemovements.  Management constantly reviewsinterest rate risk exposure and the expected interest rate environment so thatadjustments in interest rate sensitivity can be timely made.  Since the assets and liabilities of a bankare primarily monetary in nature (payable in fixed, determinable amounts), theperformance of a bank is affected more by changes in interest rates than byinflation.  Interest rates generallyincrease as the rate of inflation increases, but the magnitude of the change inrates may not be the same.

 

Net interest income isthe primary component of net income for financial institutions.  Net interest income is affected by the timingand magnitude of repricing of as well as the mix of interest sensitive andnon-interest sensitive assets and liabilities. “Gap” is a static measurement of the difference between the contractualmaturities or repricing dates of interest sensitive assets and interestsensitive liabilities within the following twelve months.  Gap is an attempt to predict the behavior ofthe Bank’s net interest income in general terms during periods of movement ininterest rates.  In general, if the Bankis liability sensitive, more of its interest sensitive liabilities are expectedto reprice within twelve months than its interest sensitive assets over thesame period.  In a rising interest rateenvironment, liabilities repricing more quickly is expected to decrease netinterest income.  Alternatively,decreasing interest rates would be expected to have the opposite effect on netinterest income since liabilities would theoretically be repricing at lowerinterest rates more quickly than interest sensitive assets.  Although it can be used as a generalpredictor, Gap as a predictor of movements in net interest income haslimitations due to the static nature of its definition and due to its inherentassumption that all assets will reprice immediately and fully at thecontractually designated time.  At December 31,2009, the Bank, as measured by Gap, is in a liability sensitive position withinone year.  Management has several toolsavailable to it to evaluate and affect interest rate risk, including depositpricing policies and changes in the mix of various types of assets andliabilities.

 

We also measure theactual effects that repricing opportunities have on earnings through simulationmodeling, referred to as earnings at risk. For short-term interest rate risk, the Bank’s model simulates the impactof balance sheet strategies on net interest income, pre-tax income, and netincome.  The model includes interest ratesimulations to test the impact of rising and falling interest rates onprojected earnings.  The Bank determinesthe assumptions that are used in the model.

 

The following tablesummarizes the amounts of interest-earning assets and interest-bearingliabilities outstanding at December 31, 2009, that are expected to mature,prepay, or reprice in each of the future time periods shown.  Except as stated below, the amount of assetsor liabilities that mature or reprice during a particular period was determinedin accordance with the contractual

 

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terms of the asset orliability.  Adjustable rate loans areincluded in the period in which interest rates are next scheduled to adjustrather than in the period in which they are due, and fixed rate loans andmortgage-backed securities are included in the periods in which they areanticipated to be repaid based on scheduled maturities. The Bank’s savingsaccounts and interest-bearing demand accounts, which are generally subject toimmediate withdrawal, are included in the “Three Months or Less” category,although historical experience has proven these deposits to be more stable overthe course of a year.

 
| ** **                                              | ** ** | **At December 31, 2009  Maturing or Repricing in  (dollars in thousands)** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **Three****Months**                                                        | ** ** | **Four Months** | ** ** | **1 to 5** | ** ** | **Over 5** | ** ** | ** ** | ** ** |
| ** **                                              | ** ** | **or Less**                                                                | ** ** | **to 12 Months** | ** ** | **Years** | ** ** | **Years** | ** ** | **Total** | ** ** |
| Interest-earning  assets:                               |       |                                                                       |       |   |   |   |   |   |   |   |   |
| Investment  securities                                  |       | $                                                                          | 401        |   | $ | 2,625 |   | $ | 18,534 |   | $ | 3,230 |   | $ | 24,790 |   |
| Loans                                                   |       | 4,996                                                                      |       | 7,987 |   | 18,988 |   | 4,537 |   | 36,508 |   |
|                                                    |       |                                                                       |       |   |   |   |   |   |   |   |   |
| Total  interest-bearing assets                          |       | 5,397                                                                      |       | 10,612 |   | 37,522 |   | 7,767 |   | 61,298 |   |
|                                                    |       |                                                                       |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                          |       |                                                                       |       |   |   |   |   |   |   |   |   |
| Deposits:                                               |       |                                                                       |       |   |   |   |   |   |   |   |   |
| Savings  and demand                                     |       | 20,393                                                                     |       | — |   | — |   | — |   | 20,393 |   |
| Time  deposits                                          |       | 8,515                                                                      |       | 36,262 |   | 1,320 |   | — |   | 46,097 |   |
| Other  Borrowings                                       |       | —                                                                     |       | 2,000 |   | — |   | — |   | 2,000 |   |
|                                                    |       |                                                                       |       |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities                     |       | 28,908                                                                     |       | 38,262 |   | 1,320 |   | — |   | 68,490 |   |
|                                                    |       |                                                                       |       |   |   |   |   |   |   |   |   |
| Interest  sensitive difference per period               |       | $                                                                          | (23,511    | ) | $ | (27,650 | ) | $ | 36,202 |   | $ | 7,767 |   | $ | (7,192 | ) |
| Cumulative  interest sensitivity difference             |       | $                                                                          | (23,511    | ) | $ | (51,161 | ) | $ | (14,959 | ) | $ | (7,192 | ) |   |   |
| Cumulative  difference to total interest earning assets |       | (38.36                                                                     | )%         | (83.46 | )% | (24.40 | )% | (11.73 | )% |   |   |

 

At December 31,2009, the difference between the Bank’s liabilities and assets repricing withinone year was $51,161,000, therefore the Bank’s balance sheet wasliability-sensitive in a rising rate environment.  A liability-sensitive position means that,for cumulative gap measurement periods of one year or less, there are moreliabilities than assets subject to immediate repricing as market rateschange.  Because rate-sensitiveinterest-bearing liabilities exceed rate sensitive assets, in a rising rateenvironment the Bank’s earnings position is exposed to declining earnings.  Included in interest-bearing liabilities subjectto rate changes within 90 days is a portion of the interest-bearing demand,savings and money market deposits.  Thesetypes of deposits historically have not repriced coincidentally with or in thesame proportion as general market indicators.

 

Certain shortcomings areinherent in the method of analysis presented in the foregoing table.  For example, although particular assets andliabilities may have similar maturities or periods of repricing, they mayreflect changes in market interest rates differently.  Additionally, some assets, such asadjustable-rate mortgages, have features that restrict changes in interestrates, both on a short-term basis and over the life of the asset.  Other factors which may affect theassumptions made in the table include changes in interest rates, pre-paymentrates, early withdrawal levels, and the ability of borrowers to service theirdebt.

 

**Provisionand Allowance for Loan Losses**

 

The provision for loanlosses is the charge to operating earnings that management believes isnecessary to maintain the allowance for loan losses at an adequate level.  The provision charged to expense was $334,000for the year ended December 31, 2009, as compared to the $640,000 that wascharged against earnings in 2008.  Theloan portfolio decreased by approximately $1.4 million during the year ended December 31,2009.  The allowance for loan losses was$415,000, or 1.13%, of gross loans at December 31, 2009, compared to$838,000, or 2.20%, of gross loans at December 31, 2008.  The primary reason for the decrease in ourallowance for loan losses is the result of the Bank recording specific reserves on certain impaired loans with abalance of $1,143,000 in 2008.  In 2009,three of these impaired loans were partially or fully charged off which reducedthe allowance for loan losses by $450,000.

 

In general, loans do notbegin to show signs of credit deterioration or default until they have beenoutstanding for some period of time, a process we refer to as “seasoning.”  As a result, a portfolio of older loans willusually behave more predictably than a newer portfolio.  Because our loan portfolio is relatively new,the current level of delinquencies and defaults may not be representative ofthe level that will prevail when the portfolio becomes more seasoned, which maybe higher than current levels.  There arerisks inherent in making all loans, including risks with respect to the periodof time over which loans may be repaid, risks resulting from changes in economicand industry conditions, risks inherent in dealing with individual borrowers,and, in the case of a collateralized

 

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loan, risks resultingfrom uncertainties about the future value of the collateral.  We anticipate maintaining an allowance forloan losses based on, among other things, historical experience, an evaluationof economic conditions, and regular reviews of delinquencies and loan portfolioquality.  Our judgment about the adequacyof the allowance is based upon a number of assumptions, which we believe to bereasonable, but which may not prove to be accurate.  Some of the assumptions or estimates made inthe determination of the allowance for loan losses consist of the risk ratingsfor loans, the valuation of the collateral for loans that are classified asimpaired loans, the qualitative loss factors, and management’s plan fordisposition of non-performing loans.  Indetermining an adequate allowance for loan losses, management makes numerousassumptions, estimates, and assessments which are inherently subjective andsubject to change.  The use of differentestimates or assumptions could produce different provisions for losses onloans.  We consider the current allowancefor loan losses to be adequate to sustain any estimated or potential lossesbased on the Bank’s internal analysis and on credit review examinationsconducted by regulatory authorities and third-party review services.  There can be no assurance that charge-offs ofloans in future periods will not exceed the allowance for loan losses asestimated at any point in time or that provisions for loan losses will not besignificant to a particular accounting period, especially considering theoverall weakness in the commercial real estate market in our market area.

 

Theallocation of the allowance for loan losses by loan category at the dateindicated is presented below (dollar amounts are presented in thousands):

 
| ** **                             | ** ** | **December 31,** | ** ** |
|----------------------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **2009**              | ** ** | **2008** | ** ** |
| ** **                             | ** ** | **Amount**            | ** ** | **Percent of loans in  each category to total  loans** | ** ** | **Amount** | ** ** | **Percent of loans in  each category to  total loans** | ** ** |
|                                   |       |                  |       |   |   |   |   |   |   |
| Commercial, financial and agricultural |       | $                     | 84         |   | 20 | % | $ | 215 |   | 26 | % |
| Real estate - mortgage                 |       | 199                   |       | 48 | % | 301 |   | 36 | % |
| Real estate - construction             |       | 85                    |       | 21 | % | 282 |   | 33 | % |
| Consumer                               |       | 47                    |       | 11 | % | 40 |   | 5 | % |
|                                   |       | $                     | 415        |   | 100 | % | $ | 838 |   | 100 | % |

 

The following tablepresents a summary of changes in the allowance for loan losses for the past twoyears (dollar amounts are presented in thousands):

 
| ** **                                     | ** ** | **For the years ended December 31,** | ** ** |
|------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                     | ** ** | **2009**                                  | ** ** | **2008** | ** ** |
| ** **                                     |       |                                      |       |   |   |
| Balance  at the beginning of period            |       | $                                         | 838        |   | $ | 276 |   |
| Charge-offs:                                   |       |                                      |       |   |   |
| Commercial,  financial and agricultural        |       | 176                                       |       | — |   |
| Real  estate - mortgage                        |       | 236                                       |       | 48 |   |
| Real  estate - construction                    |       | 275                                       |       | — |   |
| Consumer                                       |       | 93                                        |       | 79 |   |
| Total  Charged-off                             |       | 780                                       |       | 127 |   |
|                                           |       |                                      |       |   |   |
| Recoveries:                                    |       |                                      |       |   |   |
| Commercial,  financial and agricultural        |       | —                                    |       | 2 |   |
| Consumer                                       |       | 23                                        |       | 47 |   |
| Total  Recoveries                              |       | 23                                        |       | 49 |   |
|                                           |       |                                      |       |   |   |
| Net  Charge-offs                               |       | 757                                       |       | 78 |   |
|                                           |       |                                      |       |   |   |
| Provision  for Loan Loss                       |       | 334                                       |       | 640 |   |
|                                           |       |                                      |       |   |   |
| Balance  at end of period                      |       | $                                         | 415        |   | $ | 838 |   |
|                                           |       |                                      |       |   |   |
| Total  loans at end of period                  |       | $                                         | 36,631     |   | $ | 38,101 |   |
|                                           |       |                                      |       |   |   |
| Average  loans outstanding                     |       | $                                         | 37,388     |   | $ | 21,749 |   |
|                                           |       |                                      |       |   |   |
| As a  percentage of average loans:             |       |                                      |       |   |   |
| Net  loans charged-off                         |       | 2.02                                      | %          | 0.36 | % |
| Provision  for loan losses                     |       | 0.89                                      | %          | 2.94 | % |
|                                           |       |                                      |       |   |   |
| Allowance  for loan losses as a percentage of: |       |                                      |       |   |   |
| Year  end loans                                |       | 1.13                                      | %          | 2.20 | % |

 

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**Non-Performing Assets**

 

A loan is placed onnon-accrual status when, in management’s judgment, the collection of interestappears doubtful. As a result of management’s ongoing review of the loanportfolio, loans are classified as non-accrual when management believes that,after considering economic and business conditions and collection efforts, theborrower’s financial condition is such that collection of interest is doubtful.Generally, loans are placed on non-accrual status when principal or interestpayments are past due for more than 90 days. Exceptions are allowed for loans past due greater than 90 days when suchloans are well secured and in process of collection.

 

At December 31,2009, there were $122,000 in loans outstanding, which were accounted for asnon-accrual loans compared to $957,000 in outstanding loans accounted for asnon-accrual loans at December 31, 2008, a decrease of $835,000, or87%.  Total non-performing assets were$779,000 at December 31, 2009, compared to $1,619,000 at December 31,2008, a decrease of $840,000, or 52%. Interest income that would have been reported on the non-accrual loansin 2009 and 2008 was approximately $70,000 and $54,000 respectively.  Impaired loans approximated $960,000 and$1,631,000 as of December 31, 2009 and 2008, respectively.  The allowance for loan loss included a specificallowance of $24,000 and $489,000 for impaired loans as of December 31,2009 and 2008, respectively.  In 2009,$450,000 was partially or fully charged off on three impaired loans that held specific reserves at December 31,2008. In addition, in 2009, one impaired loan, in the amount of $598,000, thatwas outstanding at 2008 year end, was foreclosed and is now classified as otherreal estate owned.

 

At December 31,2009, the allowance for loan losses represented 329%  of the amount of non-performing loans,compared to 53% at December 31, 2008.  All of the  nonperforming loans atDecember 31, 2009 are secured by real estate with the exception $3,000which is a unsecured consumer loan.  Wehave evaluated the underlying collateral on these loans and believe that suchcollateral is sufficient to minimize future losses.  However, the downturn in the real estatemarket has resulted in increased loan delinquencies, defaults and foreclosures,and we believe that these trends are likely to continue.  In some cases, this downturn has resulted ina significant impairment to the value of the collateral used to secure theseloans and the ability to sell the collateral upon foreclosure.  These conditions have adversely affected ourloan portfolio.  The real estate collateralin each case provides an alternate source of repayment in the event of defaultby the borrower and may deteriorate in value during the time the credit isextended.  If real estate values continueto decline, it is also more likely that we would be required to increase ourallowance for loan losses.  If during aperiod of reduced real estate values we are required to liquidate the propertycollateralizing a loan to satisfy the debt or to increase the allowance forloan losses, this could materially reduce our profitability and adverselyaffect our financial condition.

 

Thefollowing table summarizes non-performing assets as of December 31, 2009and 2008 (amounts are presented in thousands):

 
| ** **                               | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **2009**              | ** ** | **2008** | ** ** |
| ** **                               |       |                  |       |   |   |
| Other real estate and repossessions      |       | $                     | 654        |   | $ | — |   |
|                                     |       |                  |       |   |   |
| Non-accrual  loans                       |       | 122                   |       | 957 |   |
|                                     |       |                  |       |   |   |
| Accruing  loans 90 days or more past due |       | 3                     |       | 662 |   |
| Total  non-performing assets             |       | $                     | 779        |   | $ | 1,619 |   |
| As a  percentage of gross loans:         |       | 2.13                  | %          | 4.25 | % |

 

**Non-interestIncome and Expense**

 

First Century Bank looksfor business opportunities which will enable it to grow and increase its valuefor all its stakeholders.  Due to theregulatory changes in the mortgage industry, First Century Bank has expandedits mortgage operations, to take advantage of the new benefits which now existwhen partnering a bank with a mortgage operation.  In the last six months, First Century hasadded a new Retail Production / Operations hub, located in Roswell, Georgia, toour mortgage division previously comprised of the Gainesville mortgage locationand the online Mortgage division, Century Point Mortgage.  The combined Mortgage Divisions have achievedsignificant production and growth in 2009.  It is the partnership of the banking and mortgage worlds which weanticipate will drive higher earnings and greater shareholder value for thebank in the upcoming year.  Revenues fromthe mortgage divisions are primarily considered non-interest income of fees,and gains on sale of the loans.  Interestincome is earned on the loans from the time they are closed to the time theyare sold which is typically two weeks. Expenses are primarily salaries and commissions, occupancy, and loanorigination expenses such as appraisals.

 

Non-interest incomeincludes service charges on deposit accounts, customer service fees, mortgageorigination fee income and investment security gains (losses).  For the year ended December 31, 2009,non-interest income grew to $2,227,000 compared to $609,000 for the year ended December 31,2008, an increase of $1,618,000, or 266%. The increase in non-interest income was primarily due to an increase infees earned on mortgage originations, due to the establishment of the mortgagedivisions.  The fees earned are relatedto the origination of mortgage loans that are sold within 30 days, whichinvestors have committed to purchase before they are funded.  The Bank funded $130.4 million in mortgageloans during 2009, an increase of $88.7 million, or 213%, from

 

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the same period a yearago.   Net gains (losses) on sales ofsecurities were $(24,984) and $3,507 for the years ended December 31, 2009and 2008, respectively. In 2009, we recorded an other-than-temporary impairmentcharge of $62,420 with respect to a restricted security, reducing the carryingvalue of our investment to $0.

 

With increased resourcesbeing directed towards the business areas providing the highest return oninvestment, the management reviewed all the other areas of resourceallocation.  As a part of this process,management decided to close the loan production offices in Oakwood andAthens.  This is is scheduled to takeplace in first quarter of 2010.  Theoffice closures have also resulted in the reduction of six lending andadministrative or support personnel in the fourth quarter of 2009 and firstquarter of 2010.  The Bank will continueto service its customers out of the Gainesville headquarters and will continueto utilize technology to enable its customers to access many of the bank servicesremotely.

 

Total non-interestexpense for the year ended December 31, 2009 was $5,034,000 compared$4,321,000 for the year ended December 31, 2008, an increase of $713,000,or 16%.

 

Salaries and benefits,the largest component of non-interest expense, were $2,481,000 for the yearended December 31, 1009,  ascompared to $2,006,000 for the year ended December 31, 2008, an increaseof $475,000, or 24%.  While salaries andbenefits attributable to the growth initiatives increased expenses by$1,159,000 for the year, the Bank was concurrently creating efficienciesattributable to the data processing and master services agreement initiated in September 2008,which reduced salaries and benefits expense during 2009 by approximately$685,000, resulting in an overall increase of $475,000.  A portion of this savings is replaced by themaster services agreement expenses that are currently reflected in dataprocessing expense below.

 

Total occupancy and equipment expenses for the yearended December 31, 2009, were $437,000 as compared to $486,000 for theyear ended December 31, 2008, a decrease of $49,000, or 10%.  Totaloccupancy expenses for the year ended December 31, 2009 were lower thanthe same period in 2008, even with the addition of the mortgage divisions and thetwo LP/DP offices, as a result of management’s cost cutting initiatives, whichincluded savings on building maintenance.

 

Professional fees for the year ended December 31,2009, were $286,000 compared to $275,000 for the year ended December 31,2008, an increase of $11,000, or 4%.  Theincrease in professional fees is primarily attributable to managementconsulting fees for the mortgage division.

 

Marketing expenses forthe year ended December 31, 2009, were $260,000 compared to $430,000 forthe year ended December 31, 2008, a decrease of $170,000, or 40%.  The marketing expense decrease ofapproximately $225,000 was attributable to the discontinuance of a multimediamarketing campaign that included billboards and various other mediaadvertisements targeted at the Gainesville, Oakwood and Athens, Georgiamarkets.  In addition, the Century PointMortgage division has heavily invested in internet advertising during itsstartup phase and increased marketing expense in 2009 by approximately$50,000.  As a national, internet-basedlender, the Century Point Mortgage division’s business model depends on leadgeneration to drive a high volume of leads with a lower cost of customeracquisition than traditional mortgage lenders. Key elements of the division’s web-based demand generation program areadvertising on mortgage rate websites, paid search advertising, search enginesoptimizations and social media tools.  Asthe division is maturing, the marketing budget is being analyzed and directedto the most successful techniques.

 

In 2008, the Bank entered into a data processingcontract to move its processing from Fidelity Information Systems toProvidence, the internal data processing system provided by First CovenantBank.  This change, which was completedin September 2008, has enabled the Bank to decrease its overall costs andincrease its flexibility in data processing. Data processing expense for the year ended December 31, 2009, were$561,000, compared to $547,000 for the year ended December 31, 2008, anincrease of $14,000, or 3%.  The year todate increase includes approximately $228,000 of master services agreementcosts noted under salaries and benefits mentioned above resulting in savingsfor core data processing expense of approximately $214,000 for the year ended December 31,2009.

 

Telephone expense, postage and delivery services, andoffice supply expenses for the year ended December 31, 2009 totaled$112,000, compared to $182,000 for the year ended December 31, 2008, adecrease of $70,000, or 38%.  Theseexpenses were reduced as a result of management’s cost cutting initiatives,eliminating excess capacity and centralized operations.

 

Insurance, taxes, and regulatory assessment expensestotaled $253,000 for the year ended December 31, 2009,  compared to $132,000 for the year ended December 31,2008, an increase of $121,000, or 92%. During the year ended December 31, 2009, the Bank’s FDIC expenseincreased $85,000 over the same period in 2008 due to the growth in depositsand the FDIC imposed special assessment. Directors’ and officers’ liability insurance premiums increased $33,295during the year ended December 31, 2009.

 

Lending related expenses were $426,000 for the yearended December 31, 2009 compared to $206,000 for the year ended December 31,2008, an increase of $220,000, or 107%. The increase is primarily related to appraisal expenses generated by themortgage division.

 

Other non-interest expenses were $218,000 for the yearended December 31, 2009, compared to $57,000 for the year ended December 31,2008, an increase of $161,000, or 282%. Software licensing fees increased in 2009 approximately $67,000 due tospecialized needs in the mortgage division. In the second quarter 2009 the bank recorded a $25,000 legal settlementrelated to

 

35

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circumstances surrounding the departure of one of ourCentury Point Mortgage employees from their previous employer.  Neither the Company nor the Bank were a partyto the lawsuit, however, in the interests of eliminating the tangible andintangible costs involved in the continuing litigation, we decided it was inour best interests to contribute to a settlement amount in order to resolve thepending matter.  In the third quarterof  2009, the Bank experienced a loss ofapproximately $59,000 due to a check fraud scheme, which was recorded as othernon-interest expense.

 

The following table shows the components ofnon-interest expense incurred for years ended December 31, 2009 and 2008and changes attributable to the growth of the Company:

** **
| ** **                         | ** ** | **2009**    | ** **    | **2008** | ** ** | **Increase /  (Decrease)** | ** ** | **Main  Office  Bank &  Parent** | ** ** | **Oakwood** | ** ** | **Athens**     | ** ** | **Century  Point  Mortgage  Division** | ** **  | **Retail  Mortgage  Division** | ** ** |
|------------------------------------|------------|-------------|---------------|----------|------------|----------------------------|------------|-------------------------------------------|------------|-------------|------------|----------------|------------|----------------------------------------|-------------|--------------------------------|------------|
| **Salaries and employee benefits** | ** ** | **$**       | **2,480,962** |     | $          | 2,006,318                  |       | $                                         | 474,644    | ** **  | **$**      | **(684,725**   | **)**      | **$**                                  | **294,069** | ** **                     | **$**      | **113,291** | ** ** | **$** | **292,778** | ** ** | **$** | **459,231** | ** ** |
| **Occupancy****expenses**          | ** ** | **436,669** |          | 485,775  |       | (49,106                    | )          | **(150,204**                              | **)**      | **34,684**  | ** ** | **17,903**     | ** ** | **13,789**                             | ** **  | **34,722**                     | ** ** |
| **Professional fees**              | ** ** | **285,627** |          | 274,953  |       | 10,674                     | ** ** | **(36,435**                               | **)**      | **(1,665**  | **)**      | **800**        | ** ** | **(723**                               | **)**       | **48,697**                     | ** ** |
| **Marketing**                      | ** ** | **259,696** |          | 430,260  |       | (170,564                   | )          | **(225,240**                              | **)**      | **1,347**   | ** ** | **(629**       | **)**      | **49,822**                             | ** **  | **4,136**                      | ** ** |
| **Data Processing**                | ** ** | **560,775** |          | 546,596  |       | 14,179                     | ** ** | **(4,352**                                | **)**      | **3,870**   | ** ** | **6,040**      | ** ** | **4,377**                              | ** **  | **4,244**                      | ** ** |
| **Telephone**                      | ** ** | **55,201**  |          | 69,148   |       | (13,947                    | )          | **(22,659**                               | **)**      | **1,492**   | ** ** | **2,270**      | ** ** | **903**                                | ** **  | **4,047**                      | ** ** |
| **Postage and DeliveryServices**   | ** ** | **29,338**  |          | 42,407   |       | (13,069                    | )          | **(20,505**                               | **)**      | **(6**      | **)**      | **97**         | ** ** | **268**                                | ** **  | **7,077**                      | ** ** |
| **Insurance, Tax, and Assessment** | ** ** | **253,229** |          | 131,931  |       | 121,298                    | ** ** | **120,715**                               | ** ** | **(185**    | **)**      | **60**         | ** ** | **(699**                               | **)**       | **1,407**                      | ** ** |
| **Office Supplies**                | ** ** | **27,586**  |          | 70,231   |       | (42,645                    | )          | **(45,378**                               | **)**      | **(2,651**  | **)**      | **(516**       | **)**      | **(725**                               | **)**       | **6,625**                      | ** ** |
| **Lending Related Expense**        | ** ** | **426,456** |          | 206,221  |       | 220,235                    | ** ** | **(114,439**                              | **)**      | **(3,064**  | **)**      | **1,049**      | ** ** | **246,827**                            | ** **  | **89,862**                     | ** ** |
| **Other Non-Interest Expense**     | ** ** | **218,257** |          | 57,465   |       | 160,792                    | ** ** | **73,623**                                | ** ** | **15,084**  | ** ** | **2,155**      | ** ** | **64,881**                             | ** **  | **5,049**                      | ** ** |
| ** **                         | ** ** | ** **  |          |     |       |                       | ** ** | ** **                                | ** ** | ** **  | ** ** | ** **     | ** ** | ** **                             | ** **  | ** **                     | ** ** |
| **Total  Non-Interest Expense**    | ** ** | **$**       | **5,033,796** |     | $          | 4,321,305                  |       | $                                         | 712,491    | ** **  | **$**      | **(1,109,599** | **)**      | **$**                                  | **342,975** | ** **                     | **$**      | **142,520** | ** ** | **$** | **671,498** | ** ** | **$** | **665,097** | ** ** |

 

**Income Taxes**

 

AtDecember 31, 2009, the Company had federal and state net operating losscarryforwards for tax purposes of approximately $11,527,000 and $11,310,000,respectively, which will expire beginning in 2022 if not previouslyutilized.  The utilization of the netoperating loss carry forward has been limited as to its use pursuant to theInternal Revenue Code Section 382 due to the recent change in ownership ofthe Company.

 

**Financial Condition**

 

Total assets increased $13,687,000, or 22%, from$62,879,000 December 31, 2008 to $76,566,000 at December 31, 2009. The primary sources of the increase was in investment securities, whichincreased by $6,111,000, or 33%, and loans held for sale which increased by$7,773,000, or 417%.  Total depositsincreased by $12,446,000, or 22%, from December 31, 2008 to December 31,2009 with a $13,408,000, or 137%, increase in core deposits.  Total shareholders’ equity increased$1,235,00 from $3,164,000 at December 31, 2008 to $4,399,000 at December 31,2009.  During 2009, we received proceedsof $1,529,541 less stock issuance costs of $206,211 from the sale of 1,019,693shares in a private placement.

 

36

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**Loans**

 

Grossloans totaled $36,631,000 at December 31, 2009, a decrease of $1,470,000,or 3.9%, since December 31, 2008. Management is continuously investigating opportunities to generate loangrowth and diversify its loan portfolio. Balances within the major loans receivable categories as of December 31,2009 and December 31, 2008 are as follows (amounts are presented inthousands):

 
| ** **                             | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
| Commercial, financial and agricultural |       | $        | 3,716      |     | 10         | % | $ | 4,528 |   | 12 | % |
| Real estate — mortgage            |       | 26,643   |       | 73       | %          | 26,521 |   | 70 | % |
| Real estate — construction        |       | 4,746    |       | 13       | %          | 5,239 |   | 14 | % |
| Consumer                               |       | 1,526    |       | 4        | %          | 1,813 |   | 5 | % |
|                                   |       |     |       |     |       |   |   |   |   |
| Total                                  |       | $        | 36,631     |     | 100        | % | $ | 38,101 |   | 100 | % |

 

As of December 31, 2009, maturities of loans inthe indicated classifications were as follows (amounts are presented inthousands):

 
| ** **    | ** ** | **Commercial** | ** ** | **Real Estate********Mortgage** | ** ** | **Real Estate********Construction** | ** ** | **Consumer** | ** ** | **Total** | ** ** |
|---------------|------------|----------------|------------|---------------------------------|------------|-------------------------------------|------------|--------------|------------|-----------|------------|
| Within 1 year |       | $              | 2 1,465    |                            | $          | 7,172                               |       | $            | 3,903      |      | $          | 438 |   | $ | 12,978 |   |
| 1 to 5 years  |       | 1,463          |       | 15,721                          |       | 843                                 |       | 1,088        |       | 19,115    |       |
| Over 5 years  |       | 788            |       | 3,750                           |       | —                              |       | —       |       | 4,538     |       |
|          |       |           |       |                            |       |                                |       |         |       |      |       |
| Totals        |       | $              | 3,716      |                            | $          | 26,643                              |       | $            | 4,746      |      | $          | 1,526 |   | $ | 36,631 |   |

 

Asof December 31, 2009, the interest terms of loans in the indicatedclassification for the indicated maturity ranges are as follows (amounts arepresented in thousands):

 
| ** **                             | ** ** | **Fixed Interest********Rates** | ** ** | **Variable  Interest********Rates** | ** ** | **Total** | ** ** |
|----------------------------------------|------------|---------------------------------|------------|-------------------------------------|------------|-----------|------------|
| Commercial, financial and agricultural |       |                            |       |                                |       |      |       |
| Within 1 year                          |       | $                               | 398        |                                | $          | 1,067     |       | $ | 1,465 |   |
| 1 to 5 years                           |       | 1,234                           |       | 229                                 |       | 1,463     |       |
| Over 5 years                           |       | 788                             |       | —                              |       | 788       |       |
|                                   |       |                            |       |                                |       |      |       |
| Real estate — Mortgage            |       |                            |       |                                |       |      |       |
| Within 1 year                          |       | $                               | 6,822      |                                | $          | 350       |       | $ | 7,172 |   |
| 1 to 5 years                           |       | 14,033                          |       | 1,688                               |       | 15,721    |       |
| Over 5 years                           |       | 2,958                           |       | 792                                 |       | 3,750     |       |
|                                   |       |                            |       |                                |       |      |       |
| Real estate — Construction        |       |                            |       |                                |       |      |       |
| Within 1 year                          |       | $                               | 2,973      |                                | $          | 930       |       | $ | 3,903 |   |
| 1 to 5 years                           |       | 416                             |       | 427                                 |       | 843       |       |
| Over 5 years                           |       | —                          |       | —                              |       | —    |       |
|                                   |       |                            |       |                                |       |      |       |
| Consumer                               |       |                            |       |                                |       |      |       |
| Within 1 year                          |       | $                               | 438        |                                | —     |      | $          | 438 |   |
| 1 to 5 years                           |       | 1,069                           |       | 19                                  |       | 1,088     |       |
| Over 5 years                           |       | —                          |       | —                              |       | —    |       |

 

37

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**Investment Securities**

 

Investment securities asof December 31, 2009 and December 31, 2008 are summarized as follows.

 
| ** **                                           | ** ** | **December 31, 2009** | ** ** |
|------------------------------------------------------|------------|----------------------------|------------|
| **Securities  Available for Sale**                   | ** ** | **Amortized********Cost**  | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
| Obligations of U.S. Government Agencies              |       | $                          | 983,146    |   | $ | 28,888 |   | $ | — |   | $ | 1,012,034 |   |
| Obligations of States and Political Subdivisions     |       | 326,855                    |       | — |   | (87,693 | ) | 239,162 |   |
| Mortgage Backed Securities-GNMA                      |       | 1,435,829                  |       | 71,850 |   | — |   | 1,507,679 |   |
| Mortgage Backed Securities-FNMA and FHLMC            |       | 794,697                    |       | 9,750 |   | (1, 928) |   | 802,519 |   |
| Private Label Residential Mortgage Backed Securities |       | 2,720,521                  |       | 4,331 |   | (288,440 | ) | 2,436,412 |   |
| Private Label Commercial Mortgage Backed Securities  |       | 726,226                    |       | 12,223 |   | — |   | 738,449 |   |
| Corporate Debt Securities                            |       | 575,000                    |       | 6,700 |   | (9,490 | ) | 572,210 |   |
| Equity Securities                                    |       | 298,680                    |       | — |   | (12,720 | ) | 285,960 |   |
|                                                 |       | $                          | 7,860,954  |   | $ | 133,742 |   | $ | (400,271 | ) | $ | 7,594,425 |   |

 
| ** **                                           | ** ** | **December 31, 2009** | ** ** |
|------------------------------------------------------|------------|----------------------------|------------|
| **Securities  Held to Maturity**                     | ** ** | **Amortized********Cost**  | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
| Private Label Residential Mortgage Backed Securities |       | $                          | 1,963,140  |   | $ | 255,583 |   | $ | — |   | $ | 2,218,723 |   |
| Private Label Commercial Mortgage Backed Securities  |       | 14,831,223                 |       | 1,056,040 |   | (57,627 | ) | 15,826,636 |   |
|                                                 |       | $                          | 16,764,363 |   | $ | 1,311,623 |   | $ | (57,627 | ) | $ | 18,048,359 |   |

 
| ** **                                           | ** ** | **December 31, 2008** | ** ** |
|------------------------------------------------------|------------|----------------------------|------------|
| **Securities  Available for Sale**                   | ** ** | **Amortized********Cost**  | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
| Obligations of U.S. Government Agencies              |       | $                          | 2,381,588  |   | $ | 57,950 |   | $ | — |   | $ | 2,439,538 |   |
| Mortgage Backed Securities-GNMA                      |       | 3,033,535                  |       | — |   | (11,564 | ) | 3,021,971 |   |
| Mortgage Backed Securities-FNMA and FHLMC            |       | 1,216,275                  |       | 1,963 |   | (196 | ) | 1,218,042 |   |
| Private Label Collateralized Mortgage Securities     |       | 1,788,390                  |       | 7,182 |   | — |   | 1,795,572 |   |
| Private Label Residential Mortgage Backed Securities |       | 1,889,704                  |       | 18,291 |   | (17,851 | ) | 1,890,144 |   |
| Corporate Debt Securities                            |       | 575,000                    |       | 1,100 |   | (19,500 | ) | 556,600 |   |
| Equity Securities                                    |       | 298,680                    |       | — |   | (120,480 | ) | 178,200 |   |
|                                                 |       | $                          | 11,183,172 |   | $ | 86,486 |   | $ | (169,591 | ) | $ | 11,100,067 |   |

 
| ** **                                           | ** ** | **December 31, 2008** | ** ** |
|------------------------------------------------------|------------|----------------------------|------------|
| **Securities  Held to Maturity**                     | ** ** | **Amortized********Cost**  | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
| Private Label Residential Mortgage Backed Securities |       | $                          | 1,770,035  |   | $ | — |   | $ | (5,257 | ) | $ | 1,764,778 |   |
| Private Label Commercial Mortgage Backed Securities  |       | 5,408,005                  |       | — |   | (42,894 | ) | 5,365,111 |   |
|                                                 |       | $                          | 7,178,040  |   | $ | — |   | $ | (48,151 | ) | $ | 7,129,889 |   |

 

38

----

 

The following outlines theunrealized losses and fair value by investment category and length of time thatindividual securities have been in a continuous unrealized loss position at December 31,2009 and December 31, 2008:

 
| ** **                                            | ** ** | **December 31, 2009** | ** ** |
|-------------------------------------------------------|------------|----------------------------|------------|
| ** **                                            | ** ** | **Less than 12 Months**    | ** ** | **12 Months or Greater** | ** ** | **Total** | ** ** |
| ** **                                            | ** ** | **Fair Value**             | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Gross  Unrealized  Losses** | ** ** |
| **Securities Available for Sale**                     |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Obligations  of States and Political Subdivisions     |       | $                          | 239,162    |   | $ | (87,693 | ) | $ | — |   | $ | — |   | $ | 239,162 |   | $ | (87,693 | ) |
| Mortgage  Backed Securities-FNMA and FHLMC            |       | —                     |       | — |   | 492,889 |   | (1,928 | ) | 492,889 |   | (1,928 | ) |
| Private  Label Residential Mortgage Backed Securities |       | 1,463,016                  |       | (117,777 | ) | 416,654 |   | (170,662 | ) | 1,879,670 |   | (288,439 | ) |
| Corporate  Debt Securities                            |       | 315,510                    |       | (9,490 | ) | — |   | — |   | 315,510 |   | (9,490 | ) |
| Equity  Securities                                    |       | —                     |       | — |   | 285,960 |   | (12,720 | ) | 285,960 |   | (12,720 | ) |
|                                                  |       |                       |       |   |   |   |   |   |   |   |   |   |   |
|                                                  |       | $                          | 2,017,688  |   | $ | (214,960 | ) | $ | 1,195,503 |   | $ | (185,310 | ) | $ | 3,213,191 |   | $ | (400,270 | ) |
|                                                  |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| **Securities Held to Maturity**                       |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| ** **                                            |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Private  Label Commercial Mortgage Backed Securities  |       | $                          | 887,578    |   | $ | (57,627 | ) | $ | — |   | $ | — |   | $ | 887,578 |   | $ | (57,627 | ) |

 
| ** **                                            | ** ** | **December 31, 2008** | ** ** |
|-------------------------------------------------------|------------|----------------------------|------------|
| ** **                                            | ** ** | **Less than 12 Months**    | ** ** | **12 Months or Greater** | ** ** | **Total** | ** ** |
| ** **                                            | ** ** | **Fair Value**             | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Gross  Unrealized  Losses** | ** ** |
| **Securities Available for Sale**                     |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Mortgage  Backed Securities-GNMA                      |       | $                          | 346,339    |   | $ | (3,112 | ) | $ | 200,222 |   | $ | (8,452 | ) | $ | 546,561 |   | $ | (11,564 | ) |
| Mortgage  Backed Securities-FNMA and FHLMC            |       | 786,687                    |       | (196 | ) | — |   | — |   | 786,687 |   | (196 | ) |
| Private  Label Residential Mortgage Backed Securities |       | 557,431                    |       | (17,851 | ) | — |   | — |   | 557,431 |   | (17,851 | ) |
| Corporate  Debt Securities                            |       | 305,500                    |       | (19,500 | ) | — |   | — |   | 305,500 |   | (19,500 | ) |
| Equity  Securities                                    |       | 178,200                    |       | (120,480 | ) | — |   | — |   | 178,200 |   | (120,480 | ) |
|                                                  |       |                       |       |   |   |   |   |   |   |   |   |   |   |
|                                                  |       | $                          | 2,174,157  |   | $ | (161,139 | ) | $ | 200,222 |   | $ | (8,452 | ) | $ | 2,374,379 |   | $ | (169,591 | ) |
|                                                  |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| **Securities Held to Maturity**                       |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Private  Label Residential Mortgage Backed Securities |       | 1,764,778                  |       | (5,257 | ) | — |   | — |   | 1,764,778 |   | (5,257 | ) |
| Private  Label Commercial Mortgage Backed Securities  |       | 5,365,111                  |       | (42,894 | ) | — |   | — |   | 5,365,111 |   | (42,894 | ) |
|                                                  |       |                       |       |   |   |   |   |   |   |   |   |   |   |
|                                                  |       | $                          | 7,129,889  |   | $ | (48,151 | ) | $ | — |   | $ | — |   | $ | 7,129,889 |   | $ | (48,151 | ) |

 

39

----

 

AtDecember 31, 2009, 6 of the 14 debt securities available for sale, 1 ofthe 1 equity securities available for sale, and 1 of the 20 debt securitiesheld to maturity contained unrealized losses. Because the declines in market value of investments are attributable tochanges in interest rates and not credit quality and because the Company hasthe ability and intent to hold these investments until a recovery of fairvalue, which may be until maturity, the Company does not consider theseinvestments to be other than temporarily impaired at December 31, 2009.

 

Management evaluatesinvestment securities for other-than-temporary impairment on a quarterlybasis.  The Company’s unrealized lossesat December 31, 2009 were attributable to changes in market interest ratessince the securities were purchased and not in the credit quality of the issuerand, therefore, these losses are not considered other-than-temporary.  Management has no specific intent to sell anysecurities, and it is more likely than not that the Bank will not have to sellany security before recovery of its cost basis.

 

Grossrealized gains on securities totaled $49,176 and $3,507 for the years ending December 31,2009 and 2008, respectively.  Grossrealized losses on securities totaled $24,192 and $0 for the years ending December 31,2009 and 2008, respectively.

 

Other investments on thebalance sheet at December 31, 2009 and December 31, 2008,respectively include restricted securities consisting of Federal Reserve Bankstock of $137,300 and $107,250, Federal Home Loan Bank stock of $263,500 and$257,500, and Silverton Bank stock of $0 and $62,420.  These securities are carried at cost sincethey do not have readily determinable fair values due to their restrictednature and the Bank does not exercise significant influence.  On May 1, 2009, Silverton Bank, acorrespondent bank based in Atlanta, Georgia, was closed by the OCC and theFDIC was named Receiver.  The FDICcreated a bridge bank to take over the operations of Silverton Bank.  The creation of the bridge bank allowedSilverton Bank’s financial institution clients to transition theircorrespondent banking needs to other providers with the least amount ofdisruptions.  The bridge bank continuedto operate business as usual through July 29, 2009.  As a result of this development, we believedthat it is highly unlikely that we would recover any portion of our investmentin the restricted stock of Silverton Bank’s holding company, SilvertonFinancial Services, Inc. Accordingly, in the second quarter of 2009, we recorded another-than-temporary impairment charge of $62,420 with respect to thisrestricted security, reducing the carrying value of our investment to $0.

 

There were no securitiesrequired to be pledged to secure public deposits at December 31, 2009 and December 31,2008.   There were $20,151,000 securitiespledged as collateral for lines of credit with the Federal Reserve BankDiscount Window and the Federal Home Loan Bank, see note 9 to the financialstatements.

 

The amortized cost andestimated fair value of investment securities at December 31, 2009, bycontractual maturity, are shown below. Expected maturities will differ from contractual maturities becauseborrowers have the right to call or prepay obligations with or without call orprepayment penalties.

 
| ** **                                        | ** ** | **Available for Sale** | ** ** | **Held to Maturity** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                        | ** ** | **Amortized  Cost**    | ** ** | **Fair  Value**      | ** ** | **Weighted  Average  Yield** | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** | **Weighted  Average  Yield** | ** ** |
| Obligations of U.S Government Agencies            |       |                   |       |                 |       |   |   |   |   |   |   |   |   |
| 5 to 10 Years                                     |       | $                      | 983,146    |                 | 1,012,034  |   | 5.25 | % | $ | — |   | — |   | — |   |
| Obligations of States and Political  Subdivisions |       |                   |       |                 |       |   |   |   |   |   |   |   |   |
| 1 to 5 Years                                      |       | 326,855                |       | 239,162              |       | 8.71 | % | — |   | — |   | — |   |
| Corporate Debt Securities                         |       |                   |       |                 |       |   |   |   |   |   |   |   |   |
| 1 to 5 Years                                      |       | 575,000                |       | 572,210              |       | 7.88 | % | — |   | — |   | — |   |
| Equity Securities                                 |       |                   |       |                 |       |   |   |   |   |   |   |   |   |
| 1 to 5 Years                                      |       | 298,680                |       | 285,960              |       | 7.91 | % | — |   | — |   | — |   |
| Mortgage Backed Securities                        |       |                   |       |                 |       |   |   |   |   |   |   |   |   |
| Less than 1 Year                                  |       | 2,020,103              |       | 2,086,176            |       | 6.66 | % | 538,587 |   | 548,882 |   | 10.62 | % |
| 1 to 5 Years                                      |       | 3,194,215              |       | 2,927,749            |       | 9.25 | % | 14,509,031 |   | 15,540,677 |   | 10.40 | % |
| 5 to 10 Years                                     |       | 462,955                |       | 471,134              |       | 2.95 | % | 1,746,745 |   | 1,958,800 |   | 9.31 | % |
|                                              |       |                   |       |                 |       |   |   |   |   |   |   |   |   |
|                                              |       | $                      | 7,860,954  |                 | 7,594,425  |   | 7.62 | % | $ | 16,794,363 |   | 18,048,359 |   | 10.28 | % |

 

40

----

 

**Deposits**

 

AtDecember 31, 2009, total deposits were $69,567,000, an increase of$12,446,000, or 22%, from December 31, 2008.  Demand deposits (interest bearing andnon-interest bearing) totaled $11,220,000, an increase of $7,401,000, or 178%,during 2009.  Money Market DepositAccounts and savings deposits increased $6,305,000, or 112%, and time depositsdecreased $1,261,000, or 3%, during the same time period.  Our success in raising retail time depositshas enabled us to reduce brokered deposits, which are considered less desirableby regulators due to their volatile nature, to $1,357,000 at December 31,2009 from $18,446,000, a decrease of by $17,089,000, or 93%.

 

Balanceswithin the major deposit categories as of December 31, 2009 and December 31,2008 are as follows (amounts are presented in thousands):

 
| ** **                           | ** ** | **2009**   | ** ** | **2008** | ** ** |
|--------------------------------------|------------|------------|------------|----------|------------|
| ** **                           | ** ** | **Amount** | ** ** | **Rate** | ** ** | **Amount** | ** ** | **Rate** | ** ** |
| Non-interest-bearing demand deposits |       | $          | 3,076      |     | N/A        |   | $ | 3,036 |   | N/A |   |
| Interest-bearing demand deposits     |       | 8,443      |       | 0.85     | %          | 1,082 |   | 2.08 | % |
| MMDA and Savings deposits            |       | 11,950     |       | 2.06     | %          | 5,645 |   | 2.77 | % |
| Time deposits less than $100,000     |       | 28,072     |       | 2.81     | %          | 35,944 |   | 4.67 | % |
| Time deposits over $100,000          |       | 18,026     |       | 3.27     | %          | 11,414 |   | 4.54 | % |
|                                 |       | $          | 69,567     |     |       |   | $ | 57,121 |   |   |   |

 

Maturitiesof time certificates of deposit of $100,000 or more outstanding at December 31,2009 are summarized as follows (amounts are presented in thousands):

 
| Within 3 months           |   | $      | 3,648  |   |
|---------------------------|--------|--------|--------|--------|
| After 3 through 6 months  |   | 4,804  |   |
| After 6 through 12 months |   | 9,330  |   |
| After 12 months           |   | 244    |   |
|                      |   |   |   |
| Total                     |   | $      | 18,026 |   |

 

41

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**Capital Resources**

 

Totalshareholders’ equity increased from $3,164,000 at December 31, 2008, to$4,399,000 at December 31, 2009.  In July 2008, we commenced a privateoffering of shares of our common stock. The private offering closed on May 14, 2009.  The Company received total net proceeds fromthe offering of $4,899,547, from the sale of 3,266,362 shares.  During the first and second quarters of 2009,the Company received proceeds of $1,529,541 from the sale of 1,019,693 shares inthe offering, less stock issuance costs of $206,211.  We have used and will continue to use the netproceeds for working capital purposes. The common stock that was sold in the offering has not been registeredunder the Securities Act of 1933, as amended, and may not be offered or sold inthe United States absent registration or an applicable exemption fromregistration requirements.

 

Bankholding companies and their banking subsidiaries are required by bankingregulators to meet specific minimum levels of capital adequacy, which areexpressed in the form of ratios.  Capitalis separated into Tier 1 capital (essentially common stockholders’ equity lessintangible assets) and Tier 2 capital (essentially the allowance for loanlosses limited to 1.25% of risk-weighted assets).  The first two ratios, which are based on thedegree of credit risk in our assets, provide for the weighting of assets basedon assigned risk factors and include off-balance sheet items such as loancommitments and stand-by letters of credit. The ratio of Tier 1 capital to risk-weighted assets must be at least4.0% and the ratio of Total capital (Tier 1 capital plus Tier 2 capital) torisk-weighted assets must be at least 8.0%.

 

Banks and bank holding companies are also required to maintain a minimum ratio of Tier 1 capital to adjusted quarterly average total assets of 4.0%.  The Bank was considered “well capitalized” at December 31, 2009.

 
| ** **                              | ** ** | ** **              | ** ** | ** **            | ** ** | ** **            | ** ** | ** **            | ** ** | **To Be Well**        | ** ** |
|-----------------------------------------|------------|-------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                              | ** ** | ** **              | ** ** | ** **            | ** ** | ** **            | ** ** | ** **            | ** ** | **Capitalized Under** | ** ** |
| ** **                              | ** ** | ** **              | ** ** | ** **            | ** ** | **For Capital**       | ** ** | **Prompt Corrective** | ** ** |
| ** **                              | ** ** | **Actual**              | ** ** | **Adequacy Purposes** | ** ** | **Action Provisions** | ** ** |
| ** **                              | ** ** | **Amount**              | ** ** | **Ratio**             | ** ** | **Amount**            | ** ** | **Ratio**             | ** ** | **Amount**            | ** ** | **Ratio** | ** ** |
| ** **                              | ** ** | **(In Thousands)** | ** ** |
| **December 31, 2009**              |       |                    |       |                  |       |                  |       |                  |       |                  |       |   |   |
|                                    |       |                    |       |                  |       |                  |       |                  |       |                  |       |   |   |
| Total  Capital to Risk-Weighted Assets  | ** ** | **$**                   | **5,062**  | ** **            | **10.82**  | **%**                 | **$**      | **3,748**             | ** ** | 8.00                  | %          | **$** | **4,685** | ** ** | 10.00 | % |
| Tier  I Capital to Risk-Weighted Assets | ** ** | **4,647**               | ** ** | **9.94**              | ** ** | **1,874**             |       | 4.00                  | ** ** | **2,811**             |       | 6.00 |   |
| Tier  I Capital to Average Assets       | ** ** | **4,647**               | ** ** | **6.22**              | ** ** | **2,991**             |       | 4.00                  | ** ** | **3,739**             |       | 5.00 |   |
|                                    |       |                    |       |                  |       |                  |       |                  |       |                  |       |   |   |
| 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 |   |

 

**Liquidity**

 

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

 

Although the Bank’s loanportfolio is diversified, a substantial portion of its borrowers’ ability tohonor the terms of their loans depends on the economic conditions in the Bank’smarket areas.

 

The Bank maintainsrelationships with correspondent banks that can provide funds to it on shortnotice, if needed.  The Bank has a lineof credit totaling $14,170,000, representing 20% of the Bank’s total assets at September 30,2009.  At December 31, 2009, and 2008,the Bank has one advance from the Federal Home Loan Bank of Atlanta (FHLB) inthe amount of $2,000,000.  The advancebears interest at a fixed interest rate of 2.497% and matures on May 1,2013.  The Bank has pledged as collateralinvestment securities and loans with a carrying amount of $4,342,000, andeligible residential and commercial real estate loans with a carrying amount of$12,349,000 at December 31, 2009.

 

42

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The Bank has a $1,000,000unsecured federal fund line of credit available with Centerstate Bank ofFlorida  As of December 31, 2009there were no balances were outstanding. As of December 31, 2008 the Bank had a $2,000,000 secured federalfunds line of credit with Silverton Bank, of which no balances wereoutstanding, but the Bank had pledged investment securities with a carryingamount of $1,428,000.

 

The Bank is approved toborrow from the Federal Reserve Bank discount window program.  As of December 31, 2009 the Bank’sprimary borrowing capacity was $20,530,000, based on pledged investmentsecurities with a carrying amount of $15,809,000, and eligible commercial realestate loans with a carrying amount of $8,310,000 at December 31,2009.  There were $0 advances outstandingat December 31, 2009 and 2008.

 

As disclosed in theCompany’s consolidated statement of cash flows, net cash used by operatingactivities totaled $8,187,000 in 2009. The major uses of cash used by operating activities was the originationof $7,773,000 loans held for sale, and non cash items; depreciation,amortization and accretion, provision for loan losses which totaled$510,000.  Net cash used by investingactivities totaled $5,275,000 in 2009, consisting primarily of purchases ofinvestment securities available-for-sale of $9,691,000, purchases of securitiesheld-to-maturity of $11,599,000, offset by principal paydowns, maturities,calls, and sales of investment securities available-for-sale of $13,220,000,and investment securities held-to-maturity of $2,769,000.  Net cash inflows from financing activitiestotaled $13,768,000, which were mainly attributable to net increase in depositsof $12,446,000, and from the issuance of common stock issuance cash proceeds of$1,530,000.

 

The following table outlines our various sources ofborrowed funds during the years ended December 31, 2009 and 2008, theamounts outstanding at the end of each period and the weighted-average interestrates paid for each borrowing source.

 
| ** **                                  | ** ** | ** **  | ** ** | **Period-** | ** ** | ** **  | ** ** | **Weighted-  Average** | ** ** | **Maximum  Outstanding** | ** ** |
|---------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|------------------------|------------|--------------------------|------------|
| ** **                                  | ** ** | **Ending**  | ** ** | **End**     | ** ** | **Average** | ** ** | **Rate for**           | ** ** | **at any**               | ** ** |
| **(Dollars in thousands)**                  | ** ** | **Balance** | ** ** | **Rate**    | ** ** | **Balance** | ** ** | **Year**               | ** ** | **Month End**            | ** ** |
| **December 31,  2009**                 |       |        |       |        |       |        |       |                   |       |                     |       |
| Federal Home  Loan Bank daily rate advances |       | $           | —     |        | —     | %           | $          | 25                     |       | 0.58                     | %          | $ | — |   |
| Federal Home  Loan Bank fixed rate advances |       | 2,000       |       | 2.50        | %          | 2,000       |       | 2.50                   | %          | 2,000                    |       |
| Federal funds  purchased                    |       | —      |       | —      | %          | 43          |       | 0.95                   | %          | —                   |       |
| Federal reserve  discount window            |       | —      |       | —      | %          | 2,891       |       | 0.50                   | %          | 8,000                    |       |
| ** **                                  |       |        |       |        |       |        |       |                   |       |                     |       |
| **December 31,  2008**                 |       |        |       |        |       |        |       |                   |       |                     |       |
| Federal Home  Loan Bank daily rate advances |       | $           | —     |        | —     | %           | $          | 268                    |       | 1.28                     | %          | $ | 2,525 |   |
| Federal Home  Loan Bank fixed rate advances |       | 2,000       |       | 2.50        | %          | 2,945       |       | 2.50                   | %          | 2,000                    |       |
| Federal funds  purchased                    |       | —      |       | —      | %          | 21          |       | 1.58                   | %          | 140                      |       |

 

**Off Balance Sheet Arrangements**

 

We are a party tofinancial instruments with off-balance-sheet risk in the normal course ofbusiness to meet the financing needs of our customers.  These financial instruments consist ofcommitments to extend credit and standby letters of credit.  Commitments to extend credit are agreementsto lend to a customer as long as there is no violation of any conditionestablished in the contract.  Standbyletters of credit are written conditional commitments issued by the bank toguarantee the performance of a customer to a third party.  Those guarantees are primarily issued tosupport public and private borrowing arrangements.  Most letters of credit extend for less thanone year.  The credit risk involved inissuing letters of credit is essentially the same as that involved in extendingloan facilities to customers. Commitments generally have fixed expiration dates or other terminationclauses and may require payment of a fee. A commitment involves, to varying degrees, elements of credit andinterest rate risk in excess of the amount recognized in the balancesheets.  Our exposure to credit loss inthe event of non-performance by the other party to the instrument isrepresented by the contractual notional amount of the instrument.

 

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

 

The following tablesummarizes our off-balance-sheet financial instruments whose contract amountsrepresent credit risk as of December 31, 2009:

 
| Commitments  to extend credit |   | $ | 3,238,000 |   |
|-------------------------------|--------|---|-----------|--------|
| Standby  letters of credit    |   | $ | 276,000   |   |

 

43

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**Inflation**

 

Inflation has animportant effect on the growth in total assets in the banking industry andcauses a need to increase equity capital at higher than normal rates to meetcapital adequacy requirements.  We dealwith the effects of inflation through the management of interest ratesensitivit position, by periodically reviewing and adjusting our pricing ofservices to consider current costs and through managing our level of net incomerelative to our dividend payout policy.

 

**Selected Ratios**

 

Thefollowing table sets out specified ratios of the Company for the yearsindicated.

 
| ** **                         | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
|                               |       |     |       |     |       |
| Net  income (loss) to:             |       |     |       |     |       |
| Average  shareholders’ equity |       | 1.01     | %          | (121.19  | )%         |
| Average  assets                    |       | 0.06     | %          | (7.68    | )%         |
| Dividends  to net income (loss)    |       | —   |       | —   |       |
| Average  equity to average assets  |       | 5.58     | %          | 6.33     | %          |

 

**Item 7A. Quantitative and Qualitative DisclosuresAbout Market Risk.**

Not applicable.

 

44

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**Item 8.****                                                          ****FinancialStatements.**

 

The following financialstatements are included as Exhibit 99.1, and are incorporated herein byreference:

 

·                  Reports of Independent RegisteredPublic Accounting Firms;

 

·                  Consolidated Balance Sheets;

 

·                  Consolidated Statements of Operations;

 

·                  Consolidated Statements ofComprehensive Income (Loss);

 

·                  Consolidated Statements of Changes inShareholders’ Equity;

 

·                  Consolidated Statements of Cash Flows;and

 

·                  Notes to Consolidated FinancialStatements.

 

**Item 9.****                                                          ****Changes In andDisagreements with Accountants on Accounting and Financial Disclosure.**

 

None.

 

**Item 9A.****                                                 ****Controls andProcedures.**

 

**Evaluationof Disclosure Controls and Procedures**

 

As of the end ofthe period covered by this report, we carried out an evaluation, under thesupervision and with the participation of our management, including our ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of ourdisclosure controls and procedures as defined in Exchange Act Rule 13a-15(e).  Based upon that evaluation, our ChiefExecutive Officer and Chief Financial Officer have concluded that our currentdisclosure controls and procedures are effective as of December 31,2009.  There have been no significantchanges in our internal controls over financial reporting during the fourthfiscal quarter ended December 31, 2009 that have materially affected, orare reasonably likely to materially affect, our internal controls overfinancial reporting.

 

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

 

**Management’sAnnual Report on Internal Controls Over Financial Reporting**

 

Management is responsiblefor establishing and maintaining adequate internal control over financialreporting, as such term is defined in the Exchange Act Rules 13a-15(f).  A system of internal control over financialreporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples.

 

Under the supervision andwith the participation of management, including the principal executive officerand the principal financial officer, the Company’s management has evaluated theeffectiveness of its internal control over financial reporting as of December 31,2009 based on the criteria established in a report entitled “Internal Control -Integrated Framework issued by the Committee of Sponsoring Organizations of theTreadway Commission” and the interpretive guidance issued by the Commission inRelease No. 34-55929.  Based on thisevaluation, the Company’s management has evaluated and concluded that theCompany’s internal control over financial reporting was effective as of December 31,2009.

 

The Company iscontinuously seeking to improve the efficiency and effectiveness of itsoperations and of its internal controls. This results in modifications to its processes throughout theCompany.  However, there has been nochange in its internal control over financial reporting that occurred duringthe Company’s most recent fiscal quarter that has materially affected, or isreasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

This annual report doesnot include an attestation report of the Company’s registered public accountingfirm regarding internal control over financial reporting.  Management’s report was not subject toattestation by the Company’s registered public accounting firm pursuant totemporary rules of the Securities and Exchange Commission that permit theCompany to provide only management’s report in this annual report.

 

45

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**Changesin Internal Controls**

 

There was no change inour internal control over financial reporting that occurred during the quarterended December 31, 2009 that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

 

The design of any systemof controls and procedures is based in part upon certain assumptions about thelikelihood of future events.  There canbe no assurance that any design will succeed in achieving its stated goalsunder all potential future conditions, regardless of how remote.

 

**Item 9B.****                                                 ****OtherInformation.**

 

Not applicable.

 

**PART III**

 

**Item 10.****                                                   ****Directors,Executive Officers and Corporate Governance.**

 

**Directors**

 

The Company’s Board ofDirectors currently consists of seven members. Each director serves a one-year term, expiring at the annual meeting ofshareholders, upon the election and qualification of the director’s successor.  The following table shows for eachdirector:  (a) his or her name; (b) hisor her age at December 31, 2009; (c) how long he or she has been adirector of the Company; and (d) his or her position with the Company andthe Bank.

** **
| **Name  (Age)**                      | ** ** | **Director Since** | ** ** | **Position with the Company**                                                       |
|--------------------------------------|------------|--------------------|------------|-------------------------------------------------------------------------------------|
|                                 |       |               |       |                                                                                |
| William A.  Bagwell, Jr. (38)   |       | 2007               |       | Director of the Company  and Bank                                                   |
| William R. Blanton (62)              |       | 2007               |       | Chairman, President,  Chief Executive Officer, and Director of the Company and Bank |
| Lanny W. Dunagan (58)                |       | 2002               |       | Director of the Company  and Bank                                                   |
| William M.  Evans, Jr. (58)     |       | 2007               |       | Director of the Company  and Bank                                                   |
| Gilbert T.  Jones, Sr. (72) (1) |       | 2000               |       | Director of the Company  and Bank                                                   |
| J. Allen  Nivens, Jr. (34)      |       | 2007               |       | Director of the Company  and Bank                                                   |
| Dr. Wendell A. Turner  (52)     |       | 2001               |       | Director of the Company  and Bank                                                   |
| R.K. Whitehead III (44)              |       | 2007               |       | Director of the Company  and Bank                                                   |

 

----

(1) Mr. Jonesretired in Janaury 2010

 

**Background of Directors**

 

Each individual directorhas qualifications and skills that together as a whole create a strong andwell-balanced board. The experiences and qualifications of our directorsinclude the following:

 

*WilliamA. Bagwell, Jr.*  Mr. Bagwell is the manager of HomesteadInvestments, LLC, a real estate investment company, since 2005.  Mr. Bagwell has served as a director ofthe Hall County Farm Bureau since 2007.  Mr. Bagwellserved from 1999 to 2005 as the Vice President of the Greater Hall Chamber ofCommerce.  Mr. Bagwell holds abachelor of science degree in political science from Presbyterian College.  His extensive personal understanding of themarkets that we serve and his professional experience in various real estatedevelopment projects are valuable assets to the board.

 

*WilliamR. Blanton*. Mr. Blanton has over 40 years of banking experience and serves as theChairman of our Board of Directors and our Chief Executive Officer.  Mr. Blantoncurrently serves as the Vice Chairman and Chief Executive Officer of FirstCovenant Bank, and the Vice Chairman of United Americas Bankshares, Inc. Mr. Blanton is also President of CINC Systems, LLC, a software companyspecializing in software for the banking and non-profit industries, andAccounting Integrators’, LLC a software company specializing in integratingnon-profit organizations depository accounts with banks.  In addition, heis the managing member of Terrazza Realty Advisors, LLC and Terrazza RealtyInvestments, LLC, real estate investment companies.  Prior to his currentpositions, Mr. Blanton held several positions at First Capital Bankincluding President and Chief Financial Officer from August 1989 through November 2005. Mr. Blanton has also held executive positions with Investors Bank &Trust in Duluth, Georgia and several other community banks.  In addition, Mr. Blantonpreviously served as President of Bank Analysts, a bank consulting firm, as anexaminer for the Georgia Department of Banking and Finance, as a member of theNational Advisory Committee for the Small Business Administration, and as aDirector of the Federal Home Loan Bank of Atlanta.  Mr. Blantonserves on the board of directors of First Covenant Bank, United AmericasBankshares, Inc., and its subsidiary United Americas Bank.  Mr. Blantonholds a degree in 

 

46

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accounting from GeorgiaState University.  Mr. Blanton hasextensive banking experience.  Thebreadth of experience and institutional knowledge of the Company is critical tolead the board through the current challenging economic climate.

 

*Lanny W.Dunagan*.  Mr. Dunagan is a Hall County native andis the sole owner of Lanny Dunagan’s Welding Service, a company he founded in1984.  He is a member and trustee ofHopewell Baptist Church in Gainesville, Georgia.  As a native of Hall County, he has personalcontacts and an awareness of the market in which the Company operates.  His business experience also provides theboard with insight into the challenges facing small business owners in ourmarket.

 

*WilliamM. Evans, Jr.*  Mr. Evans is the President of Fox CreekProperties, Inc., a land development business, a position he has heldsince 1993.  He is also a Vice-Presidentwith Piedmont Investments.  Mr. Evanshas been a founding member of three banks: Heritage Bank, Premier Bankshares and Piedmont Bank.  He most recently served as chairman ofPiedmont Bank from 2001 until its sale in 2006 to PrivateBancorp, Inc.,which is publicly traded under the symbol PVTB. Mr. Evans holds a degree in accounting and finance from WestGeorgia College and an M.B.A. from the University of Georgia.  Mr. Evans’ extensive banking experienceis valuable to the board as it manages the Company’s affairs in this difficulteconomic environment.  He also hasextensive experience in various land development projects, which providesunique knowledge of the market in which we operate.

 

*J. Allen Nivens, Jr.* Mr. Nivens is Director of Corporate Sales for Indigo Energy, awholesale fuel distributor.  Prior toIndigo, he was a commercial real estate broker with The Norton Agency inGainesville for four years.  Prior toNorton, he was VP of Commercial Lending with Hamilton State Bank and RegionsBank for eight years.  In the community, Mr. Nivensis Chairman of the John Jarrard Foundation, on the Gainesville State CollegeFoundation Executive Board, on the Greater Hall Chamber of Commerce ExecutiveBoard, on the board of Riverside Military Academy and the 2006 Hall CountyYoung Man of the Year.  Mr. Nivensholds a degree in management from the Georgia Institute of Technology.  Mr. Nivens’ significant banking experience andties to the community provide him with an awareness of both the business andsocial environment within which the Company operates.  His professional experience in commercialacreage sales also is a valuable asset to the board.

 

*Dr. WendellA. Turner*.  Dr. Turneris a medical doctor and has been practicing with Gainesville Gynecology, LLCsince 2007.  Prior to opening Gainesville Gynecology, LLC, he practicedwith Lanier OB/GYN Associates LLC from 1986 until 2007.  Dr. Turnerholds an associates degree in art from Clayton State College and a bachelor ofscience degree in chemistry from the Georgia Institute of Technology.  Hereceived his M.D. degree from the Medical College of Georgia in 1982.  Dr. Turner’s ties to the local communityand analytical skills are useful assets to the board.

 

*R.K.Whitehead III*. Mr. Whitehead has served as the President of Whitehead Die Casting Co., analuminum and zinc die casting manufacturer, since 1990.  Mr. Whiteheadis also the President of WDI Company, a real estate business located inGainesville, Georgia.  In addition, he holds several committeepositions with the Northeast Georgia Health System:  FinanceCommittee (Chairman), Treasury Sub-Committee, Executive Committee, CompensationCommittee, Real Estate Committee, and Strategic Planning Committee.  Inaddition, he is currently the Chairman of Elachee Nature Science Centerand serves as Treasurer of North House.  He is a past Chairman of theGreater Hall Chamber of Commerce.  Mr. Whitehead holds a bachelor ofmechanical engineering from the Georgia Institute of Technology.  Mr. Whiteheads’s professional experienceas a successful local business executive provides the board with businessinsight and a unique knowledge of the markets we serve.

 

47

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**ExecutiveOfficers**

 

The table below shows thefollowing information for the Company’s and the Bank’s executive officers:  (a) his or her name; (b) his or herage at December 31, 2009; (c) how long he or she has been anexecutive officer of the Company; and (d) his or her positions with theCompany and the Bank:

 
| **Name (Age)**          | ** ** | **Executive Officer  Since** | ** ** | **Position with the Company  and Business Experience**                       |
|-------------------------|------------|------------------------------|------------|------------------------------------------------------------------------------|
| ** **              |       |                         |       |                                                                         |
| William R. Blanton (62) |       | 2008                         |       | Chairman, President and  Chief Executive Officer of the Company and the Bank |
| Denise Smyth (46)       |       | 2008                         |       | Chief Financial Officer  of the Company and the Bank                         |

 

**Backgroundof Executive Officers of the Company**

 

The backgroundinformation for William R. Blanton is provided above under the heading “Backgroundof Directors.”

 

*DeniseSmyth*.  Ms. Smyth was appointed the ChiefFinancial Officer of the Company in October 2008.  Ms. Smyth has over 20 years of bankingindustry, accounting and financial reporting experience working for bothregional and community banks.  Ms. Smythalso serves as Chief Financial Officer for First Covenant Bank, a position shehas held since July 2006.  Ms. Smythserved as the Regulatory Reporting Manager at Flag Bank in Atlanta from November 2005until July 2006.  Prior to FlagBank, Ms. Smyth was the Assistant Controller at First Capital Bank from October 2003until October 2005.  From 1984through 1999 she held Accounting Management positions at First Union NationalBank, First Fidelity Bank, NA, Village Bank and Union State Bank.  She holds a bachelor of science degree inaccounting from St. Thomas Aquinas College and is a certified publicaccountant.

 

**Section 16(a) BeneficialOwnership Reporting Compliance**

 

Section 16(a) ofthe Securities Exchange Act of 1934 requires the Company’s directors, itsexecutive officer, and persons who own beneficially more than 10% of theCompany’s outstanding common stock to file with the Securities and ExchangeCommission initial reports of ownership and reports of changes in their ownershipof the Company’s common stock.  Thedirectors, its executive officer, and greater than 10% shareholders arerequired to furnish the Company with copies of the forms they file.

 

Based on a review of Section 16(a) reportsand written representations from our directors and executive officers, webelieve that all of our directors, executive officers and 10% shareholders havemade all filings required under Section 16(a) in a timely manner withthe exception of the following:

 

Dr. Wendell Turnerfailed to timely file a Form 4 for his purchase of 70,000 share of commonstock on April 1, 2009.

 

**Code of Ethics**

 

The Company has adopted a Code of Ethics that applies to the Company’s Chief Executive Officer and Chief Financial and Accounting Officer.  The Company will provide a copy of the Code of Ethics free of charge to any person upon written request to the Company.  Any such request should be addressed to our principal executive office at 807 Dorsey Street, Gainesville, Georgia 30501.

 

**Audit Committee**

 

TheBoards of Directors of the Company and the Bank have established a joint AuditCommittee for the purpose of reviewing the Company’s annual report and internalaudit report of independent public accountants. The Audit Committee members for 2009 were Chairman; William M. Evans, Jr.,Lanny W. Dunagan; William A. Bagwell, Jr., and J. Allen Nivens.  Each of these members meets the requirementfor independence setforth in the NASDAQ Global Market listing standards. Our Board ofDirectors has determined that Mr. Evans qualifies as audit committeefinancial experts under the SEC rules.

 

48

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**Item 11.****                                                   ****ExecutiveCompensation.**

 

Ourprinciple executive officer, William R. Blanton, did not receive anycompensation from us in 2008 or 2009.  Noother executive officer earned total compensation in excess of $100,000 in2009.

 

**OutstandingEquity Awards at December 31, 2009**

 
| ** **        | ** ** | **Option Awards**                                                              | ** ** |
|-------------------|------------|--------------------------------------------------------------------------------|------------|
| **Name**          | ** ** | **Number of  Securities  Underlying  Unexercised  Warrants  (#)  Exercisable** | ** ** | **Number of  Securities  Underlying  Unexercised  Warrants  (#)  Unexercisable** | ** ** | **Warrant Exercise  Price  ($)** | ** ** | **Warrant Expiration  Date** | ** ** |
| Willam R. Blanton |       | 850,254                                                                        |       | — |   | $ | 1.50 |   | No expiration |   |
|                   |            |                                                                                |            |  |  |  |  |  |  |  |

 

**DirectorCompensation**

 

Thedirectors of the Company were not compensated for their services as directorsfor fiscal year 2009.

 

**Equity Compensation Plan Information**

 

The following table setsforth the equity compensation plans information at December 31, 2009 forthe following equity compensation plans or agreements:

 

·                  First Century Bancorp. 2003 StockIncentive Plan;

 

·                  First Century Bancorp. Non-QualifiedStock Option Agreement with R. Allen Smith; and

 

·                  First Century Bancorp. Warrant Agreementswith certain directors of the Company.

 

The Stock Incentive Planwas approved by shareholders on May 29, 2003.  At the 2008 Annual Meeting of shareholders,the shareholders approved an amendment to increase the number of shares of ourcommon stock authorized to be reserved for issuance under the Stock IncentivePlan from 125,000 to 750,000.  None ofthe other equity compensation plans or agreements listed above have beenapproved by the Company’s shareholders. Each of those plans or agreements is described below.

 
| ** **                                                  | ** ** | **Number of  securities to be  issued upon exercise  of outstanding  options, warrants  and rights  (a)** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights  (b)** | ** ** | **Number of securities  remaining available for  future issuance under the  equity compensation plans  (excluding securities  reflected in column (a))** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders     |       | 349,834                                                                                                   |       | $                                                                                       | 1.83       |                                                                                                                                                     | 400,166    |   |
| Equity  compensation plans not approved by security holders |       | 253,393                                                                                                   |       | $                                                                                       | 8.03       |                                                                                                                                                     | —     |   |
|                                                        |       |                                                                                                      |       |                                                                                    |       |                                                                                                                                                     |       |
| **Total**                                                   |       | 603.227                                                                                                   |       | $                                                                                       | 4.43       |                                                                                                                                                     | 400,166    |   |

 

***Non-QualifiedStock Option Agreement with R. Allen Smith.***** **On September 20,2005 the Company entered a consulting agreement with Mr. Smith, pursuantto which the Company granted Mr. Smith an option to purchase 100,000shares of the Company’s common stock at an exercise price of $5.00 per share.  One-third of the option was vested andexercisable upon grant, with the remaining thirds vesting on an annual basis.

 

***WarrantAgreements with Certain of the Company’s Directors.*** 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 adirector of the Company and the Bank and has attended at least 75% of themeetings of the 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 

 

49

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each warrant is subjectto adjustment for stock splits, recapitalizations or other similar events.  As of December 31, 2009, 153,393warrants remained outstanding of which 153,393 are exercisable.

 

**Item 12.****                                                   ****SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters.**

 

The following table setsforth the number of shares of the Company’s common stock beneficially owned asof March 25, 2010 by (a) each director and the executive officersnamed in the Summary Compensation Table; (b) the executive officers andall directors, as a group; and (c) owners of more than 5% of ouroutstanding common stock,.  Theinformation shown below is based upon information furnished to the Company bythe named persons.  Other than thedirectors, executive officers, and shareholders listed below, we are unaware ofany holder of more than 5% of the Company’s common stock.

 

Information relating tobeneficial ownership of the Company is based upon “beneficial ownership”concepts set forth in the rules promulgated under the Exchange Act.  Under these rules a person is deemed tobe a “beneficial owner” of a security if that person has or shares “votingpower,” which includes the power to vote or to direct the voting of a security,or “investment power,” which includes the power to dispose or to direct thedisposition of a security.  Under therules, more than one person may be deemed to be a beneficial owner of the samesecurities.  A person is also deemed tobe a beneficial owner of any security as to which that person has the right toacquire beneficial ownership within 60 days of March 25, 2010.

 
| **Name**                                                          | ** ** | **Number  of  Shares** | ** ** | **Exercisable  Warrants  &  Options(1)** | ** ** | **Total  Beneficial  Ownership** | ** ** | **% of  Class  (2)** | ** ** | **Nature of Beneficial  Ownership**                                                                                                      | ** ** |
|-------------------------------------------------------------------|------------|------------------------|------------|----------------------------------------------|------------|----------------------------------|------------|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Directors:**                                                    |       |                   |       |                                         |       |                             |       |                 |       |                                                                                                                                     |       |
| William A. Bagwell, Jr.                                      |       | 76,994                 |       | 136,332                                      |       | 213,326                          |       | 4.2                  | %          | Includes  warrants to purchase 136,332 shares held by Homestead Investment, LLC                                                          |       |
| William R. Blanton                                                |       | 442,806                |       | 850,254                                      |       | 1,293,060                        |       | 22.1                 | %          |                                                                                                                                     |       |
| William M. Evans, Jr.                                        |       | 484,129                |       | 283,418                                      |       | 767,547                          |       | 14.5                 | %          | Includes  warrants to purchase 147,602 shares held by Silver Hill Enterprises LP and  333,333 shares held by Mr. Evan’s spouse |       |
| Lanny Dunagan                                                     |       | 42,042                 |       | 13,334                                       |       | 55,376                           |       | 1.1                  | %          | Includes  500 shares held jointly with Mr. Dunagan’s son                                                                       |       |
| J. Allen Nivens, Jr.                                         |       | 37,345                 |       | 69,165                                       |       | 106,510                          |       | 2.1                  | %          |                                                                                                                                     |       |
| Dr. Wendell Turner                                           |       | 147,327                |       | 27,067                                       |       | 174,394                          |       | 3.5                  | %          |                                                                                                                                     |       |
| R. K. Whitehead, III                                         |       | 37,345                 |       | 69,165                                       |       | 106,510                          |       | 2.1                  | %          |                                                                                                                                     |       |
| **All Directors and Executive  Officers as a Group (7 persons):** |       |
| ** **                                                        |       |                   |       |                                         |       |                             |       |                 |       |                                                                                                                                     |       |
| ** **                                                        |       | 1,267,988              |       | 1,448,735                                    |       | 2,716,723                        |       | 42.1                 | %          |                                                                                                                                     |       |
| **5 Percent Shareholders:**                                       |       |                   |       |                                         |       |                             |       |                 |       |                                                                                                                                     |       |
| Golden Isles Reinsurance Co. Ltd. (3)                             |       | 666,668                |       | 0                                            |       | 666,668                          |       | 13.3                 | %          |                                                                                                                                     |       |
| Joe E. McCart (4)                                                 |       | 650,000                |       | 0                                            |       | 650,000                          |       | 13.0                 | %          |                                                                                                                                     |       |
| J. Clay Newman (5)                                                |       | 333,334                |       | 0                                            |       | 333,334                          |       | 6.7                  | %          |                                                                                                                                     |       |
| Richard T. Smith (6)                                              |       | 333,334                |       | 0                                            |       | 333,334                          |       | 6.7                  | %          |                                                                                                                                     |       |

 

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(1)  Certaindirectors hold warrants which contain provisions for automatic adjustments ofthe exercise price for shares and the number of shares purchasable under thewarrants if subsequent shares or warrants are issued at a price less than thecurrent exercise price.  The numbersincluded in the table include the automatic adjustments to such warrants as aresult of the warrants issued in connection with the private placement of Series BPreferred Stock.

 

(2) Based on4,998,150 shares of common stock of the company outstanding as of December 31,2009, plus the number of shares which the named person exercising all optionsor warrants has the right to acquire within 60 days, but that no other personsexercise any options or warrants.

 

(3) Golden Isles Reinsurance Co. address is 4800 River Green Parkway, Duluth,GA  30096.

 

50

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(4) Joe E.  McCart’s address is 5719 LegendsClub Circle, Braselton, GA  30517.

 

(5) J. Clay Newman’s address is 5102 Park St. SW, Covington, GA  30014.

 

(6) Richard T. Smith’s address is 1850 Brandson Hall Drive, Atlanta GA  30530.

 

Theinformation with respect to our equity compensation plans is included in Item11.

 

**Item 13.****                                                   ****CertainRelationships and Related Transactions, and Director Independence**

 

The Company’s directorsand officers, and the businesses and other organizations with which they areassociated, from time to time may have banking transactions in the ordinarycourse of business with the Bank.  TheBank’s policy is that any loans or other commitments to those persons orentities be made in accordance with applicable law and on substantially thesame terms, including interest rates and collateral, as those prevailing at thetime for comparable transactions with other persons or entities of similarstanding.  All transactions withaffiliates must be on terms no less favorable than could be obtained from anunaffiliated third party and must be approved by a majority of directorsincluding a majority of disinterested directors.

 

In addition, each loan bythe Bank to any officer, director or controlling person of the Bank or any ofits affiliates may be made only in compliance with the following conditions:

 

The loan:

 

·                  must be evidenced by a promissory notenaming the Bank as payee and must contain an annual percentage rate which isreasonably comparable to that normally charged to non-affiliates by othercommercial lenders for similar loans made in the Bank’s locale;

 

·                  must be repaid according to appropriateamortization schedules and contain default provisions comparable to thosenormally used by other commercial lenders for similar loans made tonon-affiliates in the Bank’s locale;

 

·                  must be made only if credit reports andfinancial statements, or other reasonable investigation appropriate in light ofthe nature and terms of the loan and which meet the loan policies normally usedby other commercial lenders for similar loans made to non-affiliates in theBank’s locale, show the loan to be collectible and the borrower a satisfactorycredit risk; and

 

·                  the purpose of the loan and thedisbursement of proceeds are reviewed and monitored in a manner comparable tothat normally used by other commercial lenders for similar loans made in theBank’s locale.

 

In September 2008,the Bank entered into a master service agreement and data processing agreementto move its processing from Fidelity Information Systems to Providence, theinternal data processing system provided by First Covenant Bank, an entity inwhich William R. Blanton is a principal owner. For the year ended December 31, 2009 and 2008 the total billedunder the data processing agreement with First Covenant Bank was $186,145 and$38,865, respectively.  For the yearended December 31, 2009 and 2008 the total billed under the masterservices agreement with First Covenant Bank was $228,150 and $39,579,respectively.

 

The Bank is affiliatedwith CINC Systems (“CINC”), a software services company.  The Bank and CINC are affiliated throughcommon management.  The Bank hascontracted with CINC to provide them with web and server hostingfacilities.  For the years ended December 31,2009 and 2008 the total expense incurred for these services was $19,200 and$10,000, respectively.

 

The Bank has certainmortgage loans with a carrying amount of $2,268,983 and $2,742,062 as of December 31,2009 and 2008, respectively, which were purchased from The Company AmericasBank, an entity in which William R. Blanton is a principal owner..

 

The Bank has certainloans with a carrying amount of $842,072 and $1,741,760 as of December 31,2009 and 2008, respectively, which were purchased from First Covenant Bank, anentity in which William R. Blanton is a principal owner.

 

The Bank sold certainloans with a carrying amount of $7,324,121 and $10,113,232 as of December 31,2009 and 2008, respectively, to First Covenant Bank, an entity in which WilliamR. Blanton is a principal owner.

 

**Director Independence**

 

The Board of Directorsdetermines the independence of each director in accordance with guidelines ithas adopted, which include all elements of independence set forth in the NASDAQGlobal Market listing standards.  TheBoard of Directors determined that each of the following non-employee directorsis independent and has no material relationship with the Company, except as adirector and shareholder of the Company: William Bagwell, Jr., William Evans, Jr., Lanny W. Dunagan,Gilbert T. Jones, Sr., J. Allen Nivens, Jr., Dr. Wendell A.Turner and R.K. Whitehead, III.  Inaddition, based onsuch standards, William R. Blanton is not

 

51

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independent because heserves as our Chief Executive Officer. All of the members of our audit, nominating and compensation committeesare independent with the exception of William R. Blanton, who serves on ournominating committee.

 

**Item 14.****                                                   ****PrincipalAccounting Fees and Services**

 

Thefollowing table sets forth the fees billed and, as to audit and audit-relatedfees, expected to be billed to the Company for the fiscal years ended December 31,2009 by Mauldin and Jenkins, Certified Public Accountants, LLC and 2008 byMcNair, McLemore, Middlebrooks & Co., LLP.

 
| ** **            | ** ** | **2009** | ** ** | **2008** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|
| Audit Fees (1)        |       | $        | 64,698     |     | $          | 44,501 |   |
| Audit-Related Fees(2) |       | —   |       | 12,942   |       |
| Tax Fees (3)          |       | 6,100    |       | 3,691    |       |
| All Other Fees        |       | —   |       | —   |       |
| Total Fees            |       | $        | 70,798     |     | $          | 61,134 |   |

 

----

(1)           Represents fees relatedto the audit and quarterly reviews of consolidated financial statements of theCompany and review of regulatory filings.

(2)           Represents fees relatedto consents and comfort letter related to Private Placement Memorandum.

(3)           Represents fees relatedto tax compliance, tax advice and tax planning service.

 

All ofthe services provided by the independent accountants were pre-approved by theAudit Committee.  The Audit Committeepre-approves all audit and non-audit services provided by the Company’sindependent accountants and may not engage them to perform any prohibitednon-audit services.  The Audit Committeehas determined that the rendering of non-audit professional services, asidentified above, is compatible with maintaining the independence of theCompany’s auditors.

 

52

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** **

**PART IV**

 

**Item 15.                 Exhibits List.**

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                                         |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description**                                                                                                                                                                                                                                    |
|        |       |                                                                                                                                                                                                                                               |
| 3.1         |       | Articles of Incorporation of NBOG  Bancorporation, Inc.  Incorporated  by reference to Exhibit 3(i) of the Registration Statement on  Form SB-2, File No. 333-47280, filed on October 4, 2000.                  |
|        |       |                                                                                                                                                                                                                                               |
| 3.2         |       | Amendment to Articles of Incorporation of NBOG  Bancorporation, Inc.  Incorporated  by reference to Exhibit 3.1 of the Current Report on Form 8-K,  filed October 5, 2006.                                                |
|        |       |                                                                                                                                                                                                                                               |
| 3.3         |       | Second Amendment to the Articles of Incorporation of NBOG Bancorporation, Inc.  Incorporated by reference to  Exhibit 3.1 of the Current Report on Form 8-K, filed  October 2, 2007.                                      |
|        |       |                                                                                                                                                                                                                                               |
| 3.4         |       | Third Amendment to the Articles of Incorporation of First  Century Bancorp.  Incorporated by  reference to Exhibit 3.4 of the Form 10-K filed on March 31,  2009.                                                              |
|        |       |                                                                                                                                                                                                                                               |
| 3.5         |       | Amended and Restated Bylaws of First Century Bancorp.  Incorporated by reference to  Exhibit 3.5 of the Form 10-K filed on March 31, 2009.                                                                                     |
|        |       |                                                                                                                                                                                                                                               |
| 4.1         |       | See Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5 for provisions of  the Articles of Incorporation and Bylaws defining the rights of shareholders.                                                                                                           |
|        |       |                                                                                                                                                                                                                                               |
| 4.2         |       | Form of common stock certificate of First Century  Bancorp.  Incorporated by reference to  Exhibit 4(ii) of the Registration Statement on Form SB-2, File  No. 333-47280, filed on October 4, 2000.             |
|        |       |                                                                                                                                                                                                                                               |
| 10.1*       |       | First Century Bancorp. Amended and Restated 2003 Stock  Incentive Plan.  Incorporated by  reference to Exhibit 10.1 of the Form 10-K filed on March 31,  2009.                                                                 |
|        |       |                                                                                                                                                                                                                                               |
| 10.2*       |       | Form of Incentive Stock Option Award.  Incorporated by reference to  Exhibit 10.3 of the Registration Statement on Form SB-2, File  No. 333-122567, filed on February 4, 2005.                                       |
|        |       |                                                                                                                                                                                                                                               |
| 10.3*       |       | Form of Nonqualified Stock Option Award.  Incorporated by reference to  Exhibit 10.4 of the Registration Statement on Form SB-2, File  No. 333-122567, filed on February 4, 2005.                                    |
|        |       |                                                                                                                                                                                                                                               |
| 10.4*       |       | Form of First Century Bancorp. Organizer’s Warrant  Agreement.  Incorporated by reference  to Exhibit 10(iv) of the Registration Statement on Form SB-2,  File No. 333-47280, filed on October 4, 2000.    |
|        |       |                                                                                                                                                                                                                                               |
| 10.5*       |       | Stock Purchase Agreement, by and between FCB, First Century  Bank and William R. Blanton, dated January 23, 2007.  Incorporated by reference to  Exhibit 10.1 to the Current Report on Form 8-K, filed January 29,  2007. |
|        |       |                                                                                                                                                                                                                                               |
| 10.6        |       | Master  Services Agreement between First Covenant Bank and First Century Bank dated  September 12, 2008.                                                                                                                                      |
|        |       |                                                                                                                                                                                                                                               |
| 21          |       | Subsidiaries of First Century Bancorp.                                                                                                                                                                                                             |
|        |       |                                                                                                                                                                                                                                               |
| 24          |       | Power  of Attorney (contained in Signature Page).                                                                                                                                                                                                  |
|        |       |                                                                                                                                                                                                                                               |
| 31.1        |       | Certification  of Principal Executive Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                     |
|        |       |                                                                                                                                                                                                                                               |
| 31.2        |       | Certification  of Principal Financial Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                     |
|        |       |                                                                                                                                                                                                                                               |
| 32          |       | Certifications pursuant to 18 U.S.C. Section 1350 as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.1.                                                                                                             |
|        |       |                                                                                                                                                                                                                                               |
| 99.1        |       | Audited  Financial Statements.                                                                                                                                                                                                                     |

 

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*Indicates management contract orcompensatory plan or arrangement.

 

Copies ofexhibits are available upon written request to Corporate Secretary, FirstCentury Bancorp., 807 Dorsey Street, Gainesville, Georgia 30501.

 

53

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**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 
|                            | **FIRST CENTURY BANCORP.** |
|---------------------------------|----------------------------|
|                            |                       |
| Date:  March 31, 2010 | By:                        | /s/ William R. Blanton |
|                            | William R. Blanton,        |
|                            | Chief Executive Officer    |

 

**KNOW ALL MEN BY THESE PRESENTS**, that each person whose signature appears below constitutes and appointsWilliam R. Blanton, his or her true and lawful attorney-in-fact and agent, withfull power of substitution and resubstitution, for him or her and in his or hername, place, and stead, in any and all capacities, to sign any and allamendments to this Annual Report of Form 10-K, and to file the same, withall exhibits hereto, and other documents in connection herewith with theSecurities and Exchange Commission, granting unto the attorney-in-fact andagent, full power and authority to do and perform each and every act and thingrequisite and necessary to be done in and about the premises, as fully to allintents and purposes as they might or could do in person, hereby ratifying andconfirming all that these attorneys-in-fact and agents or their substitute orsubstitutes, may lawfully do or cause to be done by virtue hereof.

 

Pursuant to the requirements of the Securities Exchange Act of1934, this report has been signed below by the following persons on behalf of theregistrant in the capacities and on the dates indicated.

 
| **Signature**                  | ** ** | **Title**                                  | ** ** | **Date**            |
|--------------------------------|------------|--------------------------------------------|------------|---------------------|
| ** **                     | ** ** | ** **                                 | ** ** | ** **          |
| /s/ William R. Blanton         |       | Chairman and Principal Executive Officer   |       | March 31, 2010 |
| William R. Blanton             |       |                                       |       |                |
|                           |       |                                       |       |                |
|                           |       |                                       |       |                |
| /s/ Denise Smyth               |       | Principal Financial and Accounting Officer |       | March 31, 2010 |
| Denise Smyth                   |       |                                       |       |                |
|                           |       |                                       |       |                |
| /s/ William A. Bagwell         |       |                                       |       |                |
| William A. Bagwell             |       | Director                                   |       | March 31, 2010 |
|                           |       |                                       |       |                |
| /s/ William M. Evans, Jr. |       |                                       |       |                |
| William M. Evans, Jr.     |       | Director                                   |       | March 31, 2010 |
|                           |       |                                       |       |                |
| /s/ J. Allen Nivens, Jr.  |       |                                       |       |                |
| J. Allen Nivens, Jr.      |       | Director                                   |       | March 31, 2010 |
|                           |       |                                       |       |                |
| /s/ Lanny W. Dunagan           |       |                                       |       |                |
| Lanny W. Dunagan               |       | Director                                   |       | March 31, 2010 |
|                           |       |                                       |       |                |
| /s/ Wendell A Turner           |       |                                       |       |                |
| Dr. Wendell A. Turner     |       | Director                                   |       | March 31, 2010 |
|                           |       |                                       |       |                |
| /s/ R. K. Whitehead, III  |       |                                       |       |                |
| R. K. Whitehead, III      |       | Director                                   |       | March 31, 2010 |

 

54

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**EXHIBIT INDEX**

 
| **Exhibit** | ** ** | ** **                                                                                                                             |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description**                                                                                                                        |
|        |       |                                                                                                                                   |
| 10.6        |       | Master Services  Agreement between First Covenant Bank and First Century Bank dated  September 12, 2008.                          |
|        |       |                                                                                                                                   |
| 21          |       | Subsidiaries  of First Century Bancorp.                                                                                                |
|        |       |                                                                                                                                   |
| 24          |       | Power  of Attorney (contained in Signature Page).                                                                                      |
|        |       |                                                                                                                                   |
| 31.1        |       | Certification  of Principal Executive Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                         |
|        |       |                                                                                                                                   |
| 31.2        |       | Certification  of Principal Financial Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                         |
|        |       |                                                                                                                                   |
| 32          |       | Certifications pursuant to 18 U.S.C. Section 1350 as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.1. |
|        |       |                                                                                                                                   |
| 99.1        |       | Audited  Financial Statements.                                                                                                         |

 

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