**UNITEDSTATES**

**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, 2008.**                                                                                                                                                                                                                                                                    |
| ** ** | ** **                                                                                                                                                                                                                                                                                                                      |
| **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**

** **

**FIRST CENTURY BANCORP.**

(Exact name of registrant as specified in itscharter)

 

| **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)

** **

Securities registeredpursuant to Section 12(b) of the Act: **None**

** **

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

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.

Yeso    No x

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Exchange Act.

Yeso    No x

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months(or for such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.

Yesx    No o

** **

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K orany amendment to this Form 10-K.  x

** **

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of “largeaccelerated filer,” “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 |
|----------------------------|---------------------|-------------------------|-----------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

Yeso    No x

 

The aggregate marketvalue of the voting common stock held by non-affiliates of the registrant(computed by reference to the price****atwhich the common stock was recently sold) was $2,216,571 as of the lastbusiness day of the****registrant’smost recently completed second fiscal quarter.

 

4,505,797 shares of the registrant’s common stock were outstanding as of March 23,2009.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

 

 

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**CAUTIONARY STATEMENT FOR PURPOSES OF THE PRIVATE SECURITIES LITIGATION****REFORM ACT OF 1995**

 

Thisreport contains “forward-looking statements” relating to, without limitation,future economic performance, plans and objectives of management for futureoperations, and projections of revenues and other financial items that arebased on the beliefs of management, as well as assumptions made by andinformation currently available to management. The words “may,” “will,” “anticipate,” “should,” “would,” “believe,” “contemplate,”“expect,” “estimate,” “continue,” and “intend,” as well as other similar wordsand expressions of the future, are intended to identify forward-lookingstatements.  Our actual results maydiffer materially from the results discussed in the forward-looking statements,and our operating performance each quarter is subject to various risks anduncertainties that are discussed in detail in our filings with the Securitiesand Exchange Commission, including, without limitation:

 

·                  significant increases in competitivepressure in the banking and financial services industries;

 

·                  changes in the interest ratesand their effects on the level of composition of deposits, loan demands, andthe value of loan collateral, securities and other interest-sensitive assets andliabilities;

 

·                  the effects of the current globaleconomic crisis, including, without limitation, the recent and dramaticdeterioration of real estate values and credit and liquidity markets, as wellas the Federal Reserve Board’s actions with respect to interest rates, may leadto a further deterioration in credit quality, thereby requiring increases inour provision for loan losses, or a reduced demand for credit, which wouldreduce earning assets; the U.S. government’s proposed plan to purchase large amounts ofilliquid mortgage-backed and other securities from financial institutions maynot have the desired impact on the financial markets;

 

·                  governmental monetary andfiscal policies, as well as legislative and regulatory changes, including changes in accounting standardsand banking, securities and tax laws and regulations and governmentalintervention in the U.S. financial system, as well as changes affectingfinancial institutions’ ability to lend and otherwise do business withconsumers;

 

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

 

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

 

·                  changes occurring in businessconditions and inflation;

 

·                  changes in technology;

 

·                  changes in deposit flow;

 

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

 

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

 

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

 

·                  the rate of delinquencies andamounts of charge-offs;

 

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

 

·                  loss of consumer confidenceand economic disruptions resulting from terrorist activities;

 

·                  the effects of competitionfrom other commercial banks, thrifts, mortgage banking firms, consumer financecompanies, credit unions, securities brokerage firms, insurance companies,money market and other mutual funds and other financial institutions operatingin our market area and elsewhere, 

 

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including institutions operating regionally,nationally, and internationally, together with such competitors offeringbanking products and services by mail, telephone, computer and the Internet;

 

·                  changes in the securitiesmarkets; and

 

·                  other risks and uncertaintiesdetailed from time to time in our filings with the Securities and ExchangeCommission.

 

Weundertake no obligation to publicly update or otherwise revise anyforward-looking statements, whether as a result of new information, futureevents, or otherwise.

 

*Unless the contextindicates otherwise, all references to “FCB,” “the Company,” “we,” “us” and “our”in this Annual Report on Form 10-K refer to First Century Bancorp. and ourwholly owned subsidiary, First Century Bank, National Association (the “Bank”).*

 

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**PART I**

 

**Item 1.                    Business**

** **

**FirstCentury Bancorp.**

** **

We are a Georgiacorporation organized in 2000 to serve as the holding company for First CenturyBank, National Association, with its principal executive offices inGainesville, Georgia.  We opened FirstCentury Bank in March 2002.  TheBank is chartered and regulated by the Office of the Comptroller of theCurrency (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 31,2008, on a consolidated basis, our total assets were $62.9 million, our totalloans were $37.9 million, our total deposits were $57.1 million, and our totalshareholders’ equity was approximately $3.2 million.

 

**First CenturyBank**

** **

Since the Bank’sopening in March 2002, the Bank has been primarily engaged in the businessof accepting deposits insured by the FDIC and providing commercial, consumerand mortgage loans to the general public. We operate under a traditional banking model, with a particular focus onreal estate and small business lending.

 

Our net income isdependent primarily on our net interest income, which is the difference betweenthe interest income earned on loans, investments, and other interest-earningassets and the interest paid on deposits and other interest-bearingliabilities.  To a lesser extent, our netincome also is affected by our noninterest income derived principally fromservice charges and fees and income from the sale and/or servicing of financialassets such as loans and investments, as well as the level of noninterestexpenses such as salaries, employee benefits and occupancy costs.

 

Our operations are significantly affected byprevailing economic conditions, competition, and the monetary, fiscal, andregulatory policies of governmental agencies. Lending activities are influencedby a number of factors, including the general credit needs of individuals andsmall and medium-sized businesses in our market areas, competition amonglenders, the level of interest rates, and the availability of funds. Depositflows and costs of funds are influenced by prevailing market rates of interest,primarily the rates paid on competing investments, account maturities, and thelevels of personal income and savings in our market areas.

 

Pursuant to the terms ofa formal agreement with the OCC, dated August 18, 2004, we committed toundertake certain actions, including the maintenance of specified capitallevels, retention of senior management and the formulation of strategic andcapital plans. Following discussions with the OCC, on January 26, 2006,our Board of Directors passed a resolution to identify, and enter into anagreement with, a strategic partner who would either purchase the entireinstitution or a significant interest in the institution, and the OCC agreed toa ninety day waiver of certain commitments contained in the formal agreement.

 

On May 5, 2006, weentered into a merger agreement with El Banco Financial Corporation (“El Banco”),previously known as Nuestra Tarjeta de Servicios, Inc., that provided,among other things, for us to be merged into El Banco in a two-stepmerger.  On October, 25, 2006, theparties mutually agreed to terminate the pending merger agreement afterconcluding that receipt of regulatory approval would not be forthcoming on atimely enough basis to satisfy each party’s business requirements.

 

After a search ofpotential investors and third party acquirers in late 2006 and early 2007, weselected a proposal from William R. Blanton, to invest in the Company.  Mr. Blanton has 35 years of bankingexperience, with significant experience in the North Atlanta market.  Most recently he was with First Capital Bankwhere he served in various capacities including President from 1989 until itssale in 2005.  During his time with FirstCapital Bank, the bank’s assets grew from $30 million to $700 million.

 

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In April 2007, Mr. Blantonpurchased 738,008 shares of our common stock in a private placement at $2.71per share.  We also issued Mr. Blantona warrant (the “Original Warrant”) to purchase up to 738,008 shares at $2.71per share. The Original Warrant has no expiration date and contains provisionswhich provide for automatic adjustments in price and shares purchasable underthe Original Warrant in the event additional securities are issued below orhave a conversion or exercise price below the current Original Warrant exerciseprice.  We received proceeds ofapproximately $2,000,000 less fees and expenses related to the sale of theshares, which we used for working capital purposes. There were no brokerages orunderwriting commissions paid in connection with the sale of the shares.

 

In December 2007, wecompleted a private placement of Series B Preferred Stock, no par value,for $10.00 per share, selling a total of $750,000 of shares.  The investors in that offering also receivedwarrants (the “B Warrants”) to acquire 75,000 shares of common stock at anexercise price of $1.50 per share, which we believe was the fair market valueof the common stock on the date of issuance of the B Warrants.  As with the Original Warrant, the B Warrantshave no expiration date and contain provisions which provide for automaticadjustments in price and shares purchasable under the warrants in the eventadditional shares or warrants are issued below the current warrant exerciseprice.

 

As a result of theissuance of the B Warrants with an exercise price below the $2.71 exerciseprice, the exercise price and number of shares of common stock purchasableunder the Original Warrant adjusted as follows: (a) with respect to Mr. Blanton,from 553,506 shares at $2.71 per share to 1,000,001 shares at $1.50 per share;and (b) with respect to Silver Hill Enterprises, LP, from 184,502 sharesat $2.71 per share to 333,334 shares at $1.50 per share.

 

On February 5, 2008, the OCC issued a terminationof our formal agreement.

 

In June 2008, Mr. Blantonand Silver Hill Enterprises, LP transferred a portion of the Original Warrantto purchase shares to John Allen Nivens, Jr. and Richard Kramer Whitehead, III,each a director of the Company and to Homestead Investment, LLC, which iscontrolled by the father of one of our directors, William A. Bagwell, Jr.

 

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

 

**Products and Services**

** **

***                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.

 

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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, 2008, loans secured by first or second mortgages on real estate made up approximately $30.9 million, or 82% 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. *AtDecember 31, 2008, our individual commercial real estate loans ranged insize from $9,300 to $1,666,000, with an average commercial real estate loansize of approximately $318,000.  Loanterms generally are limited to five years or less, although payments may bestructured on a longer amortization basis. Interest rates may be fixed or adjustable, and will more likely be fixedin the case of shorter term loans. We also make a concerted effort to establishrate floors to mitigate 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 31,2008, commercial real estate loans (other than construction loans) totaled$12.4 million, or approximately 33% 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, 2008, owner occupiedloans totaled $9.8 million, and non-owner occupied loans totaled $2.7 million.

 

·                  *Residential Real Estate Loans and Home Equity Loans. *At December 31, 2008, ourindividual residential real estate loans ranged in size from $10,000 to$875,000, with an average loan size of approximately $346,000.  Generally, we limit the loan-to-value ratioon our residential real estate loans to 85%. We also offer home equity lines of credit.  At December 31, 2008, our individualhome equity lines of credit ranged in size from $4,000 to $476,000, with anaverage loan size of approximately $142,000. Our underwriting criteria for, and the risks associated with, homeequity loans and lines of credit are generally the same as those for firstmortgage loans.  Home equity lines ofcredit 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, 2008, residential real estate loans (other thanconstruction loans) totaled $14.0 million, or 37% of our loan portfolio.  Included in the residential real estate loanswas $11.7 million, or 83% of our residential loan portfolio, in first and secondmortgages on individuals’ homes, and $2.3 million, or 17% of our residentialloan portfolio, in home equity loans.

 

·                  *Construction and Development Real Estate Loans. *We offer adjustable and fixed rateresidential and commercial construction loans to builders and developers and toconsumers who wish to build their own homes. At December 31, 2008, our construction and development real estateloans ranged in size from approximately $4,300 to $476,000, with an averageloan size of approximately $141,175.  At December 31,2008, our individual residential construction and development real estate loansranged in size from approximately $60,000 to $70,000, with an average loan sizeof approximately $64,000.  The durationof our construction and development loans generally is limited to 12 months,although payments may be structured on a longer amortization basis.  Construction and development loans generallycarry a higher degree of risk than long-term financing of existing propertiesbecause repayment depends on the ultimate completion of the project and usuallyon the sale of the property.  Specificrisks include:

* *

·                  cost overruns;

·                  mismanaged construction;

·                  inferioror improper construction techniques;

·                  economicchanges or downturns during construction;

·                  adownturn in the real estate market;

·                  risinginterest rates which may prevent sale of the property; and

·                  failureto sell completed projects in a timely manner.

 

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We attempt to reduce therisk associated with construction and development loans by obtaining personalguarantees and by keeping the loan-to-value ratio of the completed project ator below 80%, as well as analyzing global cash flow of each builder ordeveloper and their personal liquidity. At December 31, 2008, total construction loans amounted to $5.2million, or 14% 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, 2008, our individual consumer loans ranged in size from $1,000 to $200,000, with an average loan size of approximately $12,100.  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, 2008, consumer loans amounted to $1.8 million, or 5% of our loan portfolio.

 

Commercial Loans.  We make loans for commercial purposes in various lines of businesses.  At December 31, 2008, our individual commercial business loans ranged in size from approximately $1,000 to $800,000, with an average loan size of approximately $74,000.  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, 2008, commercial loans amounted to $4.5 million, or 12% of our loan portfolio.

 

Small Business Administration (“SBA”).  The SBA allows terms up to 25 years with no calls or balloons, depending upon the use of the proceeds, thus giving the borrower the ability to repay the loan over a longer term than offered under our normal guidelines and to make loans which may not meet all of our normal underwriting criteria.  These loans typically are partially guaranteed by the government, which helps to reduce their risk.  Government guarantees of SBA loans do not exceed, and are generally less than, 80% of the loan.  As of December 31, 2008, we had not originated any SBA loans.

 

Online Mortgage Division.  On January 29, 2008 we launched our online lending division, Century Point Mortgage (“Century Point”).  Century Point is an Internet-based lender with offices located in Atlanta, Georgia.  We anticipate that Century Point will serve 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 Century Point and intend to generally limit our mortgage originations to conforming Fannie Mae and Freddie Mac loans.  We do not anticipate originating any subprime mortgages.  Prior to closing on these loans, we will have commitments to sell these loans.  At December 31, 2008, the Bank had loans held for sale of $1.9 million.

 

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 committee of the board of directors that mustapprove any loan that exceeds the lending limit of the Officer’s 

 

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Loan Committeewhich consists of the chief executive officer, chief lending officer and threemarket 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.

 

***OtherServices. ***In addition to deposit and loan services, the Bankoffers banking, travelers’ checks, direct deposit of payroll and socialsecurity checks, and automatic drafts for various accounts.  The Bank is amember of a network of automated teller machines that may be used by customersin major cities throughout Georgia, the United States, and in various citiesworldwide.  The Bank offers VISA andMasterCard credit cards and merchant credit card processing to the Bank’scustomers through third party vendors.  In May 2007, the Bank began offeringinternet banking services through a third party vendor relationship.  Cash management, bill pay services ande-Statements were introduced in October 2008.  The Bank currently offers telephone bankingand online item images as well which allows the customer to view images oftheir 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, 2008, our legal lending limit to one borrower was approximately $569,000.  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.

 

Theinteragency guidelines adopted by federal bank regulators, including the OCC,mandate that financial institutions establish real estate lending policies andestablishing particular minimum real estate loan-to-value standards.  The Bank has adopted these federal standardsas its minimum standards.  Thesestandards require maximum loan-to-value ratios for various types of real estateloans, although the Bank may make exceptions to the maximum guidelines, suchexceptions must be accounted for and tracked.

 

**Asset Management Policies**

** **

Acommittee composed of the senior officers****of the Bank ischarged with managing the Bank’s assets and liabilities pursuant to policiesestablished by the Asset/Liability and Investment Committee of the Board ofDirectors (the “Asset/Liability Committee”). The Asset/Liability Committee attempts to manage asset growth, liquidityand capital in order to optimize income and reduce interest-rate risk.  The Asset/Liability Committee directs theBank’s overall acquisition and allocation of funds.  The Management Committee meets with theAsset/Liability Committee on a quarterly basis. The Asset/Liability Committee reviews and discusses the monthly assetand liability funds budget in relation to the actual flow of funds, as well aspeer group comparisons; the ratio of the amount of rate-sensitive assets to theamount of rate-sensitive liabilities; local market rates and rate forecasts;and other variables, such as expected loan demand, expected loan and depositmaturities, investment opportunities, core deposit growth within specifiedcategories, regulatory changes, monetary policy adjustments and the overallstate of the economy.

 

TheBank’s investment policy is to optimize income, consistent with liquidity,asset quality and regulatory constraints. The policy is reviewed from time to time by the Board of Directors ofthe Bank.  Individual transactions,portfolio composition and performance are reviewed and approved monthly by theBoard of Directors 

 

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ora committee thereof.  Management of theBank implements the policy and reports to the full Board of Directors on aquarterly basis information concerning sales, purchases, resultant gains orlosses, average maturity, federal taxable equivalent yields, and appreciationor depreciation by investment categories.

 

Correspondent bankinginvolves the provision of services by one bank to another bank which cannotprovide that service for itself from an economic or practical standpoint.  The Bank has purchased correspondent servicesoffered by larger banks, including check collections, services relating to thepurchase of Federal Funds, security safekeeping, investment services, coin andcurrency supplies, overline and liquidity loan participations and sales ofloans to or participations with correspondent banks.  The Bank sells loan participations tocorrespondent banks with respect to loans that exceed the Bank’s lendinglimit.  As compensation for servicesprovided by a correspondent, the Bank may maintain balances with suchcorrespondents in noninterest-bearing accounts.

 

**Market Opportunities and Competition**

 

TheBank primarily serves the northern Georgia market of Hall County, includingGainesville and five smaller municipalities. Hall County has a population of approximately 139,000 and encompasses394 square miles.  Lake Lanier, a manmadelake with 607 miles of shoreline, forms the county’s western boundary.  Gainesville, the county seat, is situatedapproximately 50 miles northeast of Atlanta and 100 miles southwest ofGreenville, South Carolina.  According tothe 2000 Census, the median income for a family in Hall County was $50,100.

 

In addition, we haveidentified growth markets throughout northern Georgia, including expansion intoSouth Hall County, Oconee County and Athens-Clarke County.  In May 2008, we opened a loan productionoffice in Oakwood, Georgia.  In June 2008,we also opened an additional loan production office in Athens, Georgia.  Subject to regulatory approval, we intend toopen branch offices in these locations within the next six months.

 

TheBank competes as a financial intermediary with other lenders anddeposit-takers, including other commercial banks, thrift institutions, creditunions, finance companies, mutual funds, insurance companies, and brokeragecompanies and investment banking firms. According to information provided by the FDIC, as of June 30, 2008,there were 60 offices of 18 banks operating in Hall County with a total ofapproximately $2.6 billion in deposits. As of June 30, 2008, the Bank had approximately 1.55% 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 Gainesville Bank &Trust, United Community Bank and Peach State Bank.

 

**Employees**

 

As of December 31,2008, we had 26 full-time employees.  Weconsider the relationship with our employees to be good.

 

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**SUPERVISIONAND REGULATION**

 

Both the Company and the Bank are subject to extensivestate and federal banking laws and regulations that impose specificrequirements or restrictions on and provide for general regulatory oversight ofvirtually all aspects of our operations. These laws and regulations are generally intended to protect depositors,not shareholders.  The following summaryis not an exhaustive list of applicable laws and regulations and is qualifiedby reference to the statutory and regulatory provisions discussed.  Changes in applicable laws or regulations mayhave a material effect on our business and prospects.  Our operations may be affected by legislativechanges and the policies of various regulatory authorities.  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.

 

The following discussionis not intended to be a complete list of all the activities regulated by thebanking laws or of the impact of such laws and regulations on ouroperations.  It is intended only tobriefly summarize some material provisions.

 

**First Century Bancorp.**

* *

We own 100% of theoutstanding capital stock of the Bank, and therefore we are a bank holding companyunder the federal Bank Holding Company Act of 1956 (the “Bank Holding CompanyAct”). As a result, we are primarily subject to the supervision, examinationand reporting requirements of the Board of Governors of the Federal Reserve(the “Federal Reserve Board”) under the Bank Holding Company Act and itsregulations promulgated thereunder. Moreover, because we control a national bank located in Georgia, we area bank holding company for purposes of the Georgia Bank Holding Company Act aswell.

 

***Permitted Activities***. ** **Under the Bank Holding Company Act,a bank holding company is generally permitted to engage in, or acquire director indirect control of more than 5% of the voting shares of any company engagedin the following activities:

 

·                  bankingor managing or controlling banks;

 

·                  furnishingservices to or performing services for our subsidiaries; and

 

·                  anyactivity that the Federal Reserve Board determines to be so closely related tobanking as to be a proper incident to the business of banking.

 

Activities that theFederal Reserve Board has found by regulation to be so closely related tobanking as to be a proper incident to the business of banking include:

 

·                  factoringaccounts receivable;

 

·                  making,acquiring, brokering or servicing loans and related activities;

 

·                  leasingpersonal or real property;

 

·                  operatinga non-bank depository institution;

 

·                  trustcompany functions;

 

·                  financialand investment advisory activities;

 

·                  conductingagency and riskless principal securities brokerage activities;

 

·                  underwritingand dealing in government obligations and money market instruments;

 

·                  foreignexchange activities;

 

·                  engagingin certain derivative and similar contracts as principal;

 

·                  providingspecified management consulting and counseling activities;

 

·                  performingselected data processing, courier and other support services;

 

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·                  actingas agent or broker, and in some cases principal, in selling credit lifeinsurance and other types of insurance in connection with credit transactions;

 

·                  performingselected insurance underwriting activities;

 

·                  performingcommunity development activities; and

 

·                  issuingand selling money orders, savings bonds and traveler’s checks.

 

As a bank holding company, we also can elect to be treated as a “financialholding company,” which would allow us to engage in a broader array ofactivities.  In sum, a financial holdingcompany can engage 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 companystatus, but may elect 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.***  Inaddition, and subject to certain exceptions, the Bank Holding Company Act andthe Change in Bank Control Act, together with regulations promulgatedthereunder, require Federal Reserve Board approval prior to any person orcompany acquiring “control” of a bank holding company.  Control is conclusively presumed to exist ifan individual or company acquires 25% or more of any class of voting securitiesof a bank holding company.  Following therelaxing of these restrictions by the Federal Reserve Board in September 2008,control will be rebuttably presumed to exist if a person acquires 33% of thetotal equity of a bank or bank holding company, of which it may own, contol orhave the power to vote not more than 15% of any class of voting securities.

 

***Sourceof Strength.***  Inaccordance with Federal Reserve Board policy, we are expected to act as asource of financial strength to the Bank and to commit resources to support theBank in circumstances in which we might not otherwise do so.  Under the Bank Holding Company Act, theFederal Reserve Board may require a bank holding company to terminate anyactivity or relinquish control of a non-bank subsidiary, other than a non-banksubsidiary of a bank, upon the Federal Reserve Board’s determination that suchactivity or control constitutes a serious risk to the financial soundness orstability of any depository institution subsidiary of a bank holdingcompany.  Further, federal bankregulatory authorities have additional discretion to require a bank holdingcompany to divest itself of any bank or non-bank subsidiaries if the agencydetermines that divestiture may aid the depository institution’s financialcondition.  Further, any loans by a bankholding company to a subsidiary bank are subordinate in right of payment todeposits 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.***  TheFederal Reserve Board imposes certain capital requirements on the bank holdingcompany under the Bank Holding Company Act, including a minimum leverage ratioand a minimum ratio of “qualifying” capital to risk-weighted assets.  These requirements are essentially the sameas those that apply to the Bank and are described below under “First CenturyBank.”  Under the Federal Reserve Board’sSmall Bank Holding Company Policy Statement, our ability to take on debt, thusincreasing our leverage ratios, is less strictly applied as compared to largerbank holding companies, and we are not held to the specific capital guidelinesapplicable to those larger bank holding companies.  Nonetheless, we are required to serve as asource of strength to the Bank.  We areable to borrow money to make a capital contribution to the Bank, and theseloans may be repaid from dividends paid from the Bank to the Company.  We are also able to raise capital forcontribution to the Bank 

 

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by issuing securitieswithout having to receive regulatory approval, subject to compliance withfederal and state securities laws.

 

Our ability to pay dividends is subject to regulatoryrestrictions as described below in “First Century Bank — Dividends.”

 

**First Century 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-retirement depositorthrough December 31, 2009, and the Bank is participating in the FDIC’sTemporary Liquidity Guarantee Program (discussed below in greater detail)which, in part, fully insures non-interest bearing transaction accounts.  The OCC and the FDIC regulate or monitorvirtually all areas of the Bank’s operations, including:

 

·                  securitydevices and procedures;

 

·                  adequacyof capitalization and loss reserves;

 

·                  loans;

 

·                  investments;

 

·                  borrowings;

 

·                  deposits;

 

·                  mergers;

 

·                  issuancesof securities;

 

·                  paymentof dividends;

 

·                  interestrates payable on deposits;

 

·                  interestrates or fees chargeable on loans;

 

·                  establishmentof branches;

 

·                  corporatereorganizations;

 

·                  maintenanceof books and records; and

 

·                  adequacyof staff training to carry on safe 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 to calculate three capitalratios:  the ratio of Tier 1 capital torisk-weighted assets, the ratio of total capital to risk-weighted assets, andthe “leverage ratio,” which is the ratio of Tier 1 capital to average assets ona non-risk-adjusted basis. For the two ratios of capital to risk-weightedassets, certain assets, such as cash and U.S. Treasury securities, have a zerorisk weighting. Others, such as commercial and consumer loans, have a 100% riskweighting. Some assets, notably purchase-money loans secured by first-liens onresidential real property, are risk-weighted at 50%. Assets also includeamounts that represent the potential funding of off-balance sheet obligationssuch as loan commitments and letters of credit. These potential assets areassigned to risk categories in 

 

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the same manner as funded assets. The total assets ineach category are multiplied by the appropriate risk weighting to determinerisk-adjusted assets for the capital calculations.

 

Underthe terms of the formal agreement, which was terminated by the OCC on February 5,2008, the Bank was required to maintain a total capital ratio to risk-weightedassets of at least 14% and a Tier 1 Capital to average assets of at least9%.  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 beeligible to be classified as “well-capitalized,” the Bank must generallymaintain a total capital ratio of 10% or more, a Tier 1 capital ratio of 6% ormore, and a leverage ratio of 5% or more. At December 31, 2008, our ratioof total capital to risk-weighted assets was 9.29%, our ratio of Tier 1Capital to risk-weighted assets was 8.04% and our ratio of Tier 1 Capitalto average assets was 6.07%.

 

Inaddition, the Federal Reserve Board has established minimum leverage ratioguidelines for bank holding companies. These guidelines provide for a minimum ratio of Tier 1 Capital tototal assets, less goodwill and other specified intangible assets, of 3% forbank holding companies that meet specified criteria, including having thehighest regulatory rating and implementing the Federal Reserve Board’srisk-based capital measure for market risk. All other bank holding companies generally are required to maintain aleverage ratio of at least 4%.  Theguidelines also provide that bank holding companies experiencing internalgrowth or making acquisitions will be expected to maintain strong capitalpositions substantially above the minimum supervisory levels without relianceon intangible assets.  The FederalReserve Board considers the leverage ratio and other indicators of capitalstrength in evaluating proposals for expansion or new activities.

 

Failureto meet capital guidelines could subject a bank or bank holding company to avariety of enforcement 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—PromptCorrective Action.”

 

 ***Prompt Corrective Action.***  The Federal Deposit Insurance CorporationImprovement Act of 1991 (“FDICIA”) established a “prompt corrective action”program under which every bank is placed in one of five regulatory categories,depending primarily on its regulatory capital levels.  The OCC and the other federal bankingregulators are permitted to take increasingly severe action as a bank’s capitalposition or financial condition declines below the “Adequately Capitalized”level described below.  Regulators arealso empowered to place in receivership or require the sale of a bank toanother depository institution when a bank’s leverage ratio reaches 2%. Bettercapitalized institutions are generally subject to less onerous regulation andsupervision than banks with lesser amounts of capital.  The OCC’s regulations set forth five capitalcategories, each with specific regulatory consequences.  The categories are:

 

·                  Well Capitalized — The institution exceedsthe required minimum level for each relevant capital measure.  A well capitalized institution is one (i) havinga total capital ratio of 10% or greater, (ii) having a Tier 1 capitalratio of 6% or greater, (iii) having a leverage capital ratio of 5% orgreater and (iv) that is not subject to any order or written directive tomeet and maintain a specific capital level for any capital measure.

 

·                  Adequately Capitalized — The institutionmeets the required minimum level for each relevant capital measure.  No capital distribution may be made thatwould result in the institution becoming undercapitalized.  An adequately capitalized institution is one (i) havinga total capital ratio of 8% or greater, (ii) having a Tier 1 capital ratioof 4% or greater and (iii) having a leverage capital ratio of 4% orgreater or a leverage capital ratio of 3% or greater if the institution israted composite 1 under the CAMELS (Capital, Assets, Management, Earnings,Liquidity and Sensitivity to market risk) rating system.

 

·                  Undercapitalized — The institution fails tomeet the required minimum level for any relevant capital measure.  An undercapitalized institution is one (i) havinga total capital ratio of less than 8%, (ii) having a Tier 1 capital ratioof less than 4% or (iii) having a leverage capital ratio of less 

 

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than 4%, or if theinstitution is rated a composite 1 under the CAMELS rating system, a leveragecapital ratio of less than 3%.

 

·                  Significantly Undercapitalized — Theinstitution is significantly below the required minimum level for any relevantcapital measure.  A significantlyundercapitalized institution is one (i) having a total capital ratio ofless than 6%, (ii) having a Tier 1 capital ratio of less than 3% or (iii) havinga leverage capital ratio of less than 3%.

 

·                  Critically Undercapitalized — The institutionfails to meet a critical capital level set by the appropriate federal bankingagency.  A critically undercapitalizedinstitution is one having a ratio of tangible equity to total assets that isequal to or less than 2%.

 

If the OCC determines, after notice and an opportunity for hearing,that the Bank is in an unsafe or unsound condition, the regulator is authorizedto reclassify the Bank to the next lower capital category (other thancritically undercapitalized) and require the submission of a plan to correctthe unsafe or unsound condition.

 

If a bank is not well capitalized, it cannot accept brokered timedeposits without prior FDIC approval and, if approval is granted, cannot offeran effective yield in excess of 75 basis points on interests paid on depositsof comparable size and maturity in such institution’s normal market area fordeposits accepted from within its normal market area, or national rate paid ondeposits of comparable size and maturity for deposits accepted outside the bank’snormal market area.  Moreover, if a bankbecomes less than adequately capitalized, it must adopt a capital restorationplan acceptable to its primary federal regulator that is subject to a limitedperformance guarantee by its holding company. The bank also would become subject to increased regulatory oversight,and would be increasingly restricted in the scope of its permissible activities.  Except under limited circumstances consistentwith an accepted capital restoration plan, an undercapitalized institution maynot grow.  An undercapitalizedinstitution may not acquire another institution, establish additional branchoffices or engage in any new line of business unless determined by theappropriate Federal banking agency to be consistent with an accepted capitalrestoration plan, or unless the FDIC determines that the proposed action willfurther the purpose of prompt corrective action.  The appropriate federal banking agency maytake any action authorized for a significantly undercapitalized institution ifan undercapitalized institution fails to submit an acceptable capitalrestoration plan or fails in any material respect to implement a plan acceptedby the agency.  A criticallyundercapitalized institution is subject to having a receiver or conservatorappointed to manage its affairs and for loss of its charter to conduct bankingactivities.

 

An insured depository institution may not pay a management fee to abank holding company controlling that institution or any other person havingcontrol of the institution if, after making the payment, the institution, wouldbe undercapitalized.  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 31,2008, the Bank was “adequately capitalized.”

 

***Standards for Safety andSoundness.    *** The Federal DepositInsurance 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. The agencies also must prescribe standardsfor asset quality, earnings, and stock valuation, as well as standards forcompensation, fees and benefits.  Thefederal banking agencies have adopted regulations and Interagency GuidelinesPrescribing Standards for Safety and Soundness to implement these requiredstandards. These guidelines set forth the safety and soundness standards thatthe federal banking agencies use to identify and address problems at insureddepository institutions before capital becomes impaired.  Under the regulations, if the OCC determinesthat the Bank fails to meet any standards prescribed by the guidelines, theagency may require the Bank to submit to the agency an acceptable plan toachieve compliance with the standard. The final regulations establish deadlines for the submission and reviewof such safety and soundness compliance plans.

 

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***RecentLegislative and Regulatory Initiatives to Address Financial and EconomicCrises. ***TheCongress, Treasury Department and the federal banking regulators, including theFDIC, have taken broad action since early September 2008 to addressvolatility in the U.S. banking system.

 

In October 2008, theEmergency Economic Stabilization Act of 2008 (“EESA”) was enacted. The EESAauthorizes the Treasury Department to purchase from financial institutions andtheir holding companies up to $700 billion in mortgage loans, mortgage-relatedsecurities and certain other financial instruments, including debt and equitysecurities issued by financial institutions and their holding companies in thetroubled asset relief program (“TARP”).  Thepurpose of TARP is to restore confidence and stability to the U.S. bankingsystem and to encourage financial institutions to increase their lending tocustomers and to each other.  TheTreasury Department has allocated $250 billion towards the TARP CapitalPurchase Program (“CPP”).  Under the CPP,Treasury will purchase debt or equity securities from participatinginstitutions.  The TARP also will includedirect purchases or guarantees of troubled assets of financial institutions. Participantsin the CPP are subject to executive compensation limits and are encouraged toexpand their lending and mortgage loan modifications.

 

EESA also increased FDICdeposit insurance on most accounts from $100,000 to $250,000.  This increase is in place until the end of2009 and is not covered by deposit insurance premiums paid by the bankingindustry.

 

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.  Institutions participating in the TLGP pay a10 basis points fee (annualized) on the balance of each covered account inexcess of $250,000, while the extra deposit insurance is in place.  The TLGP also includes the Debt GuaranteeProgram (“DGP”), under which the FDIC guarantees certain senior unsecured debtof 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 FDIC adopted aninterim rule that extends the DGP and imposes surcharges on existing ratesfor certain debt issuances.  Thisextension allows institutions that have issued guaranteed debt before April 1,2009 to issue guaranteed debt during the extended issuance period that ends 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 coveragelimit is generally 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 debt maturity,the nonrefundable DGP fee ranges from 60 to 110 basis points (annualized) forcovered debt outstanding until the earlier of maturity or June 30, 2012and 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.

 

***Insurance of Accounts and Regulation by the FDIC.***** TheBank’s deposits are insured up to applicable limits by the Deposit InsuranceFund of the FDIC.  The Deposit InsuranceFund is the successor to the Bank Insurance Fund and the Savings AssociationInsurance Fund, 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.  Italso may prohibit any FDIC insured institution from engaging in any activitythe FDIC determines by regulation or order to pose a serious risk to theinsurance fund.  The FDIC also has theauthority to initiate enforcement actions against savings institutions, aftergiving the Office of Thrift Supervision an opportunity to take such action, andmay terminate the deposit insurance if it determines that the institution hasengaged in unsafe or unsound practices or is in an unsafe or unsound 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 

 

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7 to 77.5 basispoints.  We anticipate our futureinsurance costs to be higher than in previous periods.  However, we are not currently able toaccurately determine the amount of additional 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.

 

***RegulatoryExamination.    *** The OCC requires theBank to prepare quarterly and annual reports on the Bank’s financial conditionand to conduct an annual audit of its financial affairs in compliance with itsminimum 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:

 

·                  internalcontrols;

 

·                  informationsystems and audit systems;

 

·                  loandocumentation;

 

·                  creditunderwriting;

 

·                  interestrate risk exposure; and

 

·                  assetquality.

 

***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 theforegoing limitations as to amount, each covered transaction must meetspecified collateral requirements of between 100 and 130% depending on the typeof collateral.  The Bank is forbidden topurchase low quality assets 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 

 

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favorable to suchinstitution or its subsidiaries, as those prevailing at the time for comparabletransactions 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 lendingoperations may be subject to enhanced scrutiny by the OCC based on its concentrationof commercial 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 reportedloans for construction, land development and other land represent 100% or moreof the institution’s total capital; or

 

·                  total CRE loansrepresent 300% or more of the institution’s total capital, and the outstandingbalance of the institution’s commercial real estate loan portfolio hasincreased by 50% or more during the prior 36 months.

 

***Branching.***  National banks are required by the NationalBank Act to adhere to branch office banking laws applicable to state banks inthe states in which they are located. Under current Georgia law, the Bank may open branch offices throughoutGeorgia with the prior approval of the OCC. In addition, with prior regulatory approval, the Bank is able to acquireexisting banking operations in Georgia.  Furthermore, federal legislation permits interstate branching, includingout-of-state acquisitions by bank holding companies, interstate branching bybanks if allowed by state law, and interstate merging by banks.  Georgia law, with limited exceptions,currently permits branching across state lines only through interstate mergers.

 

***Anti-Tying Restrictions. ***Under amendments to theBank Holding Company Act and Federal Reserve Board regulations, a bank isprohibited from engaging in certain tying or reciprocity arrangements with itscustomers.  In general, a bank may not extendcredit, lease, sell property, or furnish any services or fix or vary theconsideration for these on the condition that (i) the customer obtain orprovide some additional credit, property, or services from or to the bank, thebank holding company or subsidiaries thereof or (ii) the customer may notobtain some other credit, property, or services from a competitor, except tothe extent reasonable conditions are imposed to assure the soundness of thecredit extended.  Certain arrangementsare permissible: a bank may offer combined-balance products and may otherwiseoffer more 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 Community Reinvestment Act requires thatthe OCC evaluate the record of the Bank in meeting the credit needs of itslocal community, including low and moderate income neighborhoods.  These factors are also considered inevaluating mergers, acquisitions, and applications to open a branch orfacility.  Failure to adequately meetthese criteria could impose additional requirements and limitations on the Bank.

 

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***Finance Subsidiaries.*** Under the Gramm-Leach-Bliley Act (the “GLBA”),subject to certain conditions imposed by their respective banking regulators,national and state-chartered banks are permitted to form “financialsubsidiaries” that may conduct financial or incidental activities, therebypermitting bank subsidiaries to engage in certain activities that previouslywere impermissible.  The GLBA imposesseveral safeguards and restrictions on financial subsidiaries, including thatthe parent bank’s equity investment in the financial subsidiary be deductedfrom the bank’s assets and tangible equity for purposes of calculating the bank’scapital adequacy.   In addition, the GLBAimposes new restrictions on transactions between a bank and its financialsubsidiaries similar to restrictions applicable to transactions between banksand non-bank affiliates.

 

***Consumer Protection Regulations.*** Activities of the Bank are subject to avariety of statutes and regulations designed to protect consumers.  Interest and other charges collected orcontracted for by the Bank are subject to state usury laws and federal lawsconcerning interest rates.  The Bank’sloan operations are also subject to federal laws applicable to credittransactions, such as:

 

·                  thefederal Truth-In-Lending Act, governing disclosures of credit terms to consumerborrowers;

 

·                  theHome Mortgage Disclosure Act of 1975, requiring financial institutions toprovide information to enable the public and public officials to determinewhether a financial institution is fulfilling its obligation to help meet thehousing needs of the community it serves;

 

·                  theEqual Credit Opportunity Act, prohibiting discrimination on the basis of race,creed or other prohibited factors in extending credit;

 

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

 

·                  theFair Debt Collection Act, governing the manner in which consumer debts may becollected by collection agencies; and

 

·                  therules and regulations of the various federal agencies charged with theresponsibility of implementing such federal laws.

 

The deposit operations of the Bank also are subjectto:

 

·                  theTruth-in-Savings Act, which establishes uniformity in the disclosure of termsand conditions regarding interest and fees on savings accounts;

 

·                  theRight to Financial Privacy Act, which imposes a duty to maintainconfidentiality of consumer financial records and prescribes procedures forcomplying with administrative subpoenas of financial records; and

 

·                  theElectronic Funds Transfer Act and Regulation E issued by the Federal ReserveBoard to implement that Act, which governs automatic deposits to andwithdrawals from deposit accounts and customers’ rights and liabilities arisingfrom the use of automated teller machines and other electronic bankingservices.

 

***EnforcementPowers.***  The Bankand its “institution-affiliated parties,” including its management, employees,agents, independent contractors and consultants, such as attorneys andaccountants and others who participate in the conduct of the financialinstitution’s affairs, are subject to potential civil and criminal penaltiesfor violations of law, regulations or written orders of a government agency.These practices can include the failure of an institution to timely filerequired reports or the filing of false or misleading information or thesubmission of inaccurate reports.  Civilpenalties may be as high as $1,000,000 a day for such violations.  Criminal penalties for some financialinstitution crimes have been increased to 20 years imprisonment.  Possible enforcement actions include thetermination of deposit insurance. Furthermore, banking agencies have authority to issue cease-and-desist orders,memoranda of understanding and other agreements.  Such orders may, among other things, requireaffirmative action to correct any harm resulting from a violation or practice,including restitution, reimbursement, indemnifications or guarantees againstloss.  A financial institution may alsobe ordered to restrict its growth, dispose of certain assets, rescindagreements or contracts, or take other actions as determined by the orderingagency to be appropriate.

 

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***Anti-Money Laundering. ***Financial institutionsmust maintain anti-money laundering programs that include established internalpolicies, procedures, and controls; a designated compliance officer; an ongoingemployee training program; and testing of the program by an independent auditfunction. Financial institutions are also prohibited from entering intospecified financial transactions and account relationships and must meetenhanced standards for due diligence and “knowing your customer” in theirdealings with foreign financial institutions and foreign customers. Financialinstitutions must 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 andOFAC. ***The USAPATRIOT Act, amended, in part, the Bank Secrecy Act and provides for thefacilitation of information sharing among governmental entities and financialinstitutions for the purpose of combating terrorism and money laundering byenhancing anti-money laundering and financial transparency laws, as well asenhanced information collection tools and enforcement mechanics for the U.S.government, including: (i) requiring standards for verifying customeridentification at account opening; (ii) rules to promote cooperationamong financial institutions, regulators, and law enforcement entities inidentifying parties that may be involved in terrorism or money laundering; (iii) reportsby nonfinancial trades and businesses filed with the Treasury’s FinancialCrimes Enforcement Network for transactions exceeding $10,000; and (iv) filingsuspicious activities reports if a bank believes a customer may be violatingU.S. laws and regulations.  These lawsrequire enhanced due diligence for financial institutions that administer,maintain, or manage private bank accounts or correspondent accounts fornon-U.S. persons.  Bank regulatorsroutinely examine institutions for compliance with these obligations and arerequired to consider compliance in connection with the regulatory review ofapplications.

 

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 institutionsare required to disclose their policies for collecting and protectingconfidential information.  Customersgenerally may prevent financial institutions from sharing nonpublic personalfinancial information with nonaffiliated third parties except under narrowcircumstances, such as the processing of transactions requested by theconsumer.  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

 

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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 CheckClearing for the 21st Century Act gives “substitute checks,” such as a digitalimage of a check and copies made from that image, the same legal standing asthe original paper check.  Some of themajor provisions include:

 

·                  allowingcheck truncation without making it mandatory;

 

·                  demandingthat every financial institution communicate to accountholders in writing adescription of its substitute check processing program and their rights underthe law;

 

·                  legalizingsubstitutions for and replacements of paper checks without agreement fromconsumers;

 

·                  retainingin place the previously mandated electronic collection and return of checksbetween financial institutions only when individual agreements are in place;

 

·                  requiringthat when accountholders request verification, financial institutions producethe original check (or a copy that accurately represents the original) anddemonstrate that the account debit was accurate and valid; and

 

·                  requiringthe re-crediting of funds to an individual’s account on the next business dayafter a consumer proves that the financial 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,among other 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 governmentsecurities and through its regulation of the discount rate on borrowings ofmember banks and 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.

 

**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 by and between the Bank and the Comptroller of the Currencypursuant to which the OCC determined that the protection of the depositors,other customers and shareholders of the Bank as well as the Bank’s safe andsound operation do not require the continued existence of the agreement.

 

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**Federal Reserve Resolutions**

 

On October 21, 2004, pursuant to the request ofthe Federal Reserve Bank of Atlanta, the Company’s Board of Directors adoptedresolutions (the “Resolutions”) that provide that the Company shall not(without the prior written approval of the Federal Reserve 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.

 

The payment of dividends by the Company and the Bank mayalso be affected by other factors, such as the requirement to maintain adequatecapital above regulatory guidelines.  If,in the opinion of the OCC, the Bank were engaged in or about to engage in anunsafe or unsound practice, the OCC could require, after notice and a hearing,that the Bank stop or 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.                 RiskFactors.**

** **

*Our business, financialcondition, and results of operations could be harmed by any of the followingrisks, or other risks that have not been identified or which we believe areimmaterial or unlikely. Shareholders should carefully consider the risksdescribed below in conjunction with the other information in this Form 10-Kand the information incorporated by reference in this Form 10-K, includingour 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.*

* *

***Wehave experienced significant losses since our inception and have a significantaccumulated deficit.***

 

We experienced losses of$3.5 million in 2008, $1.7 million in 2007, and $1.2 million in 2006.  We also had an accumulated deficit of $7.6million and $11.1 million at December 31, 2007 and December 31, 2008,respectively.  In the last several years,we have experienced a significant amount of management turn-over, been subjectto a formal order with the OCC, and devoted a substantial amount of our timeand attention to seeking a merger partner. In late 2006, we terminated our merger agreement with El Banco FinancialCorporation.  In many respects, the Bankwas essentially reorganized with the investment and leadership of Mr. Blanton,our Chief Executive Officer.  We raisedcapital in two private placements in 2007, and the OCC terminated our formalagreement in February 2008.  Weexpect to become profitable beginning in the first quarter of 2009.  To become profitable, we must increase ournet interest income and non-interest income above existing levels.  To accomplish this, we need to attract morecustomers and make more loans.  Althoughwe believe we are taking the appropriate steps to accomplish these goals, thereis a risk that we will not be successful and that we will never becomeprofitable.

 

***Wehave only recently adopted our new business plan and may not be able toimplement it effectively.***

 

Our futureperformance will depend on our ability to implement our new business plansuccessfully.  This implementation willinvolve a variety of complex tasks, including identifying and expanding intonew geographic areas through branch expansion in the northern Georgia market,recruiting qualified executives and employees at all levels and integratingthem within our organization, managing significant influx of capital anddeveloping new services for our anticipated customers.  Any failure or delay in executing theseinitiatives, whether due to regulatory delays or for other reasons, which maybe beyond our control, is likely to impede, and could ultimately preclude, oursuccessful implementation of our business plan and could materially adverselyaffect our business, financial condition, and results of operations.

 

***Wemay need to raise additional capital, which may not be available or may only beavailable on unfavorable terms***.

 

Our strategic plancontemplates the infusion of significant capital.  If we are unable to raise significantcapital, we will be required to modify our business plan.  If we proceed with our strategic plan withless than optimal capital, this shortage of capital may adversely affect ourability to implement our business plan and generate revenue.  Specifically, we are required by regulatoryauthorities to maintain adequate levels of capital to support our operations.We are limited in the amount we can loan a single borrower by the amount of theBank’s capital.  Our legal lending limitis 15% of the Bank’s capital and surplus, or $569,000 at December 31,2008.

 

In the future, ifadditional capital is needed, there can be no assurance that it will beavailable when desired or on such terms as we may find acceptable.  If we cannot raise additional capital whenneeded, our operations could be materially impaired.  In addition, future efforts to raise capitalthrough the sale of securities could reduce the proportionate interest of ourshareholders.

 

***Our ability toestimate our loan loss reserves accurately may have an adverse effect on ourfinancial 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 

 

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being made, thecreditworthiness of the borrower over the term of the loan and, in the case ofa 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 ourloan portfolio.  In determining theamount of the allowance, we consider several factors, including:

 

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

·                                          ourhistorical loan loss experience;

·                                          evaluationof economic conditions;

·                                          regularreviews of loan delinquencies and loan portfolio quality; and

·                                          theamount 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, 2008, ourallowance for probable loan losses represented 2.2% of our total loans, 62.4%of our total non-performing assets, and 114.3% of our total non-performing loans.  If our loan losses exceed our allowance forprobable loan losses, our business, financial condition and profitability willsuffer.

 

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 our provisionfor loan losses, which would adversely affect our results of operations andfinancial condition.  Excessive loanlosses could have a material impact on our financial performance. Consistentwith our loan loss reserve methodology, we expect to make additions to our loanloss reserve levels as a result of our loan growth, which may affect ourshort-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.

 

***We will face risks with respectto future expansion and acquisitions or mergers.***

*** ***

We may seek to acquire other financial institutions orparts of those institutions.  We are inthe early stage of discussions to combine operations with First Covenant Bank,a bank with $190 million in assets as of December 31, 2008, headquarteredin Norcross, Georgia.  Any combination oracquisition would require the approval of the federal and state regulatoryauthorities.  In addition, the Bank hasopened several new offices and we may also expand into new lines of business oroffer new products or services. Specifically, we have opened new loan production offices in Oakwood andAthens, Georgia.  Subject to regulatoryapproval, we intend to open branch offices in these and other cities in ourtarget markets.

 

These activities would involve a number of risks,including:

 

·                  takingadditional time and creating expense associated with identifying and evaluatingpotential acquisitions and merger partners;

 

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·                  usinginaccurate estimates and judgments to evaluate credit, operations, management,and market risks with respect to the target institution or assets;

·                  dilutingour existing shareholders in an acquisition;

·                  takingadditional time and creating expense associated with evaluating new markets forexpansion, hiring experienced local management, and opening new offices, asthere may be a substantial time lag between these activities before we generatesufficient assets and deposits to support the costs of the expansion;

·                  takinga significant amount of time negotiating a transaction or working on expansionplans, resulting in management’s attention being diverted from the operation ofour existing business;

·                  takingtime and creating expense integrating the operations and personnel of thecombined businesses;

·                  creatingan adverse short-term effect on our results of operations; and

·                  losingkey employees and customers as a result of an acquisition that is poorlyreceived.

 

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.  Recently, the Bank hired three new MarketPresidents, Chris England, Kurt Hansen, and Michael Harris, to serve themarkets of South Hall County (Oakwood), Gainesville, Oconee and Athens-ClarkeCounties, respectively.  If these new officersfail to perform their duties satisfactorily or are unable to obtain loan anddeposit market share, our investment in these new markets will generateunsatisfactory or even negative returns and could materially adversely affectour 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 the market,we may be unable to recruit these individuals away from more establishedbanks.  In addition, the process ofidentifying and recruiting individuals with the combination of skills andattributes required to carry out our strategy is often lengthy.  Our inability to identify, recruit, and retaintalented personnel would limit our growth and could materially adversely affectour 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, Professional Bank Services, Inc.,to perform a major review of the Bank’s loan portfolio.  The purpose of the review was to identifyproblem loans and ensure proper reserves were allocated and/or the problemloans were charged-off.  Significant workwas done to reduce loan exceptions which totaled over 1,400 at that time toless than a hundred at the completion of this effort.  The Bank’s policy for maximum loan exceptionstoday is 30.  A substantial number ofloans were charged off during the 2003 and 2004 time frame based on thefindings 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 Reserve Board.Our compliance with these regulations is costly and restricts certain of ouractivities, including payment of dividends, mergers and acquisitions,investments, making loans, charging interest rates, paying interest rates ondeposits, and locations of branches. We must also meet regulatory capitalrequirements. If we fail to meet these capital and other regulatoryrequirements, our financial condition, liquidity, and results of operationswould be materially and adversely affected. Our current status as “adequatelycapitalized,” rather than “well capitalized” and any failure to remain “wellmanaged” for regulatory purposes could affect customer confidence, our abilityto grow, our cost of funds and FDIC insurance, our ability to pay dividends onour capital 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. Forexample, new legislation or regulation could limit the manner in which we mayconduct our business, including our ability to obtain financing, attractdeposits, make loans and expand our business through opening new branch offices.Many of these regulations are intended to protect depositors, the public, andthe FDIC, not shareholders. In addition, the burden imposed by theseregulations may place us at a competitive disadvantage compared to competitorswho are less regulated. The laws, regulations, interpretations, and enforcementpolicies that apply to us have been subject to significant change in recentyears, sometimes retroactively applied, and may change significantly in thefuture. Our cost of compliance with these laws and regulations could adverselyaffect our ability to operate profitably. See “Supervision and 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 haveaddressed areas of regulatory concern, including interest rate risk, throughthe adoption of board resolutions and improved policies and procedures.

 

Moreover, changes in federal laws regarding theoversight of mortgage brokers and lenders could adversely affect our ability tooriginate, finance, and sell our residential mortgage loans. The enactment offederal laws, such as licensing requirements for mortgage bankers, applicableto the types of mortgage loans we originate could increase our costs ofoperations and adversely affect our origination volume, which would negativelyimpact our business, financial condition, and results of operation.

 

***Therecan be no assurance that recently enacted legislation will help stabilize theU.S. financial system.***

*** ***

The capital and credit markets have been experiencingvolatility and disruption for more than a year. In recent months, the volatility and disruption has reachedunprecedented levels.  In some cases, themarkets have produced downward pressure on stock prices and credit availabilityfor certain issuers without regard to those issuers’ underlying financialstrength.

 

In response to financialconditions affecting the banking system and financial markets and the potentialthreats to the solvency of investment banks and other financial institutions,the United States government has taken unprecedented actions. On October 3,2008, President Bush signed into law the EESA. Pursuant to the EESA, the Treasury has the authority to, among otherthings, purchase mortgages, mortgage-backed securities, and other financialinstruments from financial institutions for the purpose of stabilizing andproviding liquidity to the U.S. financial markets. The Treasury announced theCapital Purchase Program under the EESA pursuant to which it has purchased andmay continue to purchase senior preferred stock in participating financialinstitutions.  We do not know what actualimpact the EESA will have on the financial markets, including the extremelevels of volatility and limited credit availability currently beingexperienced.  The failure of the EESA tohelp stabilize the financial markets and a continuation or worsening of currentfinancial market conditions could materially adversely affect our business,financial condition, and results of operation.

 

In addition, theFDIC created the Temporary Liquidity Guarantee Program (“TGLP”) as part of alarger government effort to strengthen confidence and encourage liquidity inthe nation’s banking system.  The TLGPhas two components.  First, the TLGPincludes the Transaction Account Guarantee Program (“TAGP”), which providesunlimited deposit insurance coverage through December 31, 2009 fornon-interest-bearing transaction accounts 

 

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(typically businesschecking accounts) and certain funds swept into noninterest-bearing savingsaccounts.  Institutions participating inthe TLGP pay a basis point fee (annualized) on the balance of each covered accountin excess of $250,000, while the extra deposit insurance is in place.  Second, the TLGP includes the Debt GuaranteeProgram (“DGP”), under which the FDIC guarantees certain senior unsecured debtof 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 on existingrates for certain debt issuances.  Thisextension allows institutions that have issued guaranteed debt before April 1,2009 to issue guaranteed debt during the extended issuance period that ends on October 31,2009.  For such institutions, the guaranteeon debt issued on or after April 1, 2009, will expire no later than 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.  Wedid not opt out of the TAGP and the DGP.

 

On February 17,2009, the American Recovery and Reinvestment Act (the “Recovery Act”) wassigned into law in an effort to, among other things, create jobs and stimulategrowth in the United States economy.  TheRecovery Act specifies appropriations of approximately $787 billion for a widerange of Federal programs and will increase or extend certain benefits payableunder the Medicaid, unemployment compensation, and nutrition assistanceprograms.  The Recovery Act also reducesindividual and corporate income tax collections and makes a variety of otherchanges to tax laws.  The Recovery Actalso imposes certain limitations on compensation paid by participants in theTreasury’s Troubled Asset Relief Program (“TARP”), which includes programsunder TARP such as the Capital Purchase Program.

 

There can be no assurancethat these government actions 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, our common stock tradingprice, as well as our ability to access credit. It could also result in declines in our investment portfolio which couldbe “other-than-temporary impairments.”

 

***If weparticipate in the Capital Purchase Program our shareholders ownershipinterests and voting powers will be diluted and other rights of shareholderscould be adversely affected.***

*** ***

Based on the standard documentation for the CapitalPurchase Program, if we participate in the Capital Purchase Program, theeffects on the rights of our shareholders would include: (i) restrictionson the payment of dividends to holders of our common stock and (ii) restrictionson distributions of assets to our shareholders upon a liquidation ordissolution and until satisfaction of any liquidation preference granted topreferred shares issued in connection with the Capital Purchase Program.  In addition, if we participate in the CapitalPurchase Program, our shareholders may suffer dilution of their equityinterests and voting power upon exercise of any warrants granted to theTreasury.

* *

***Our regulatory capitalratios meet the guidelines established by our regulators for “adequatelycapitalized” financial institutions but do not meet the guidelines establishedby our regulators for “well-capitalized” institutions.***

*** ***

As a result of the operating losses we haveexperienced, our regulatory capital ratios fell below thresholds established byour regulators for “well-capitalized” institutions.  While our capital ratios remain in excess oflevels established for “adequately capitalized” financial institutions, as aresult of falling below the “well-capitalized” level, we will be required,among other things, to obtain the approval of the FDIC before participatingfurther in the brokered deposit market, which could materially adversely affectour business, financial condition, liquidity and results of operations.

 

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***Currentadverse market conditions have resulted in a lack of liquidity and reducedbusiness activity.***

*** ***

Dramatic declines in the housing market, with fallinghome prices and increasing foreclosures and unemployment, have resulted insignificant write-downs of asset values by financial institutions.  These write-downs have caused many financialinstitutions to seek additional capital, to merge with larger and stronger institutionsand, in some cases, to fail.  To theextent a weak institution in our market merges with or is acquired by astronger institution, the competition within the market may increase.  Reflecting concern about the stability of thefinancial markets generally and the strength of counterparties, many lendersand institutional investors have reduced, and in some cases, ceased to providefunding to borrowers including other financial institutions.  A prolonged lack of available credit withresulting reduced business activity could materially adversely affect ourbusiness, financial condition, and results of operations.

 

***Recent negative developments inthe financial industry and the domestic and international credit markets mayresult in more legislation and regulatory oversight.***

*** ***

Negative developments in the latter half of 2007 andduring 2008 in the global credit and securitization markets have resulted inuncertainty in the financial markets in general with the expectation of thegeneral economic downturn continuing well into 2009.  A continued recession could reduce theprofitability and therefore the credit worthiness of the Bank’s customers andprospective customers.  As a result ofthe “credit crunch,” commercial as well as consumer loan portfolio performanceshave deteriorated at many institutions and the competition for deposits(including through interest rate wars) and quality loans has increasedsignificantly.  In addition, the valuesof real estate collateral supporting many commercial loans and home mortgageshave declined and may continue to decline. Bank and bank holding company stock prices have been negativelyaffected, as has the ability of banks and bank holding companies to raisecapital or borrow in the debt markets. As a result, significant new federal laws and regulations relating tofinancial institutions, including, without limitation, the EESA and the U.S.Treasury Department’s Capital Purchase Program have been adopted.  Furthermore, the potential exists for newfederal or state laws and regulations regarding lending and funding practicesand liquidity standards, and bank regulatory agencies are expected to be activein responding to concerns and trends identified in examinations, including theexpected issuance of formal enforcement orders. Negative developments in the financial industry and the domestic andinternational credit markets, and the impact of new legislation in response tothose developments, may negatively impact our operations by restricting ourbusiness operations, including our ability to obtain deposits or originateloans, and could materially adversely affect our business, financial condition,and results of operations.

 

***Theeconomic downturn, especially in Northern Georgia, has had an adverse effect onthe quality of our loan portfolio and our financial performance.***

 

The principalfocus of the Bank and its lending officers has been, and continues to be, thefinancing of growth and management of the deposits of small businesses withinthe target market of the Bank.  Thesebusinesses generally have fewer financial resources in terms of capitalborrowing capacity than larger entities. The economic downturn has adversely affected these small businesses to agreater degree than more highly capitalized and larger corporations.  The negative impact of the general economicconditions on these businesses in the markets in which we operate has adverselyaffected our business, financial condition, and results of operations.

 

Economic recession over aprolonged period or other economic problems in Hall, Oconee and Athens-ClarkeCounties, Georgia or in our state or nation generally have had, and maycontinue to have, a material adverse impact on the quality of our loanportfolio and the demand for our products and services.  For example, the downturn in the local economyhas made it more difficult for borrowers to repay their loans and this couldlead to loan losses, which could in turn reduce our net income andprofitability.

 

The value and liquidity of real estate or othercollateral that secures our loans in our market area has been, and may continueto be, adversely affected by the economic downturn.  Unlike many larger institutions, we are notable to spread the risks of unfavorable local economic conditions across alarge number of diversified economies or markets. We often secure loans withreal estate collateral. As of December 31, 2008, approximately 81 %, ofour loans had real estate as a primary or secondary component of collateral.The real estate collateral in each case provides an alternate source of repaymentin the event of default by the borrower and may deteriorate in value during thetime the credit is extended. If we are required to liquidate the collateralsecuring a loan to satisfy the debt 

 

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during this period of reduced real estate values, ourbusiness, financial condition, and results of operations could be negativelyaffected.

 

***The FDIC Deposit Insuranceassessments that we are required to pay may materially increase in the future,which would have an adverse effect on our earnings and our ability to pay ourliabilities as they come due.***

*** ***

As a member institution of the FDIC, we are requiredto pay semi-annual deposit insurance premium assessments to the FDIC.  During the year ended December 31, 2008,we paid $35,711 in deposit insurance assessments.  Due to the recent failure of severalunaffiliated FDIC insurance depository institutions, the FDIC’s new TemporaryLiquidity Guarantee Program, the deposit insurance premium assessments paid byall banks will likely increase.  Inaddition, new FDIC requirements shift a greater share of any increase in suchassessments onto institutions with higher risk profiles, including banks whichuse brokered deposits, such as our Bank.

 

***Weakness in the real estate market, including the secondaryresidential mortgage loan markets, has adversely affected us and may continueto 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, 2008, we heldapproximately $2.7 million of loans that were not eligible for purchase bythese agencies but which may be eligible for purchase in the future. The effectsof ongoing mortgage market challenges, combined with the ongoing correction inresidential real estate market prices and reduced levels of home sales, couldresult in further price reductions in single family home values, adverselyaffecting the value of collateral securing mortgage loans held, mortgage loanoriginations and gains on sale of mortgage loans. Declining real estate pricesand higher interest rates have caused higher delinquencies and losses oncertain mortgage loans, particularly second lien mortgages and home equitylines of credit. These trends could continue. These conditions have resulted inlosses, write downs and impairment charges in the mortgage business, which havecontinued through the fourth quarter of 2008, and we have curtailed variousproduct offerings and limited our mortgage originations generally to Fannie Maeand Freddie Mac eligible mortgages. Continued declines in real estate values,home sales volumes and financial stress on borrowers as a result of job losses,interest rate resets on adjustable rate mortgage loans or other factors couldhave further adverse effects on borrowers that result in higher delinquenciesand greater charge-offs in future periods, which would adversely affect ourfinancial condition and results of operations. In the event the allowance forloan losses is insufficient to cover such losses, earnings, capital and parentcompany liquidity could be adversely affected.

*** ***

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

** **

Our results of operationsdepend in large part upon the level of our net interest income, which is thedifference between interest income from interest-earning assets, such as loansand investment securities, and interest expense on interest-bearingliabilities, 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.

 

Because of the differences in maturities and repricingcharacteristics of our interest-earning assets and interest-bearingliabilities, changes in interest rates do not produce equivalent changes ininterest income earned on interest-earning assets and interest paid oninterest-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 couldadversely affect our net interest income and, in turn, our profitability. Inaddition, loan volumes are affected by market 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 rising interest rate environments, loan repaymentrates will generally decline and in falling interest rate environments, loanrepayment rates will likely increase. Interest rates also affect how much moneywe can lend. When interest rates rise, the cost of borrowing increases.  Accordingly, changes in market 

 

27

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interest rates could materially and adversely affectour net interest income, asset quality, and loan origination volume.

 

***Industrycompetition may have an adverse effect on our profitability***.

 

Competition in thebanking and financial services industry is intense, and our profitabilitydepends upon our continued ability to compete in our market area.  We compete with commercial banks, creditunions, savings and loan associations, mortgage banking firms, consumer financecompanies, securities brokerage firms, insurance companies, money market funds,and other mutual funds, as well as other super-regional, national, andinternational financial institutions that operate offices in our primary marketareas and elsewhere.

 

We compete with theseinstitutions both in attracting deposits and in making loans.  In addition, we have to attract our customerbase from other existing financial institutions and from new residents.  Many of our competitors are well-established,larger financial institutions, such as Regions Bank, Wachovia Bank, N.A.,SunTrust Bank and Bank of America, N.A. These institutions offer some services, such as extensive andestablished branch networks and trust services that we do not provide.  We also compete with local community banks inour market, such as Peach State Bank and Hamilton Bank.  There is a risk that we will not be able tocompete successfully with other financial institutions in our market, and thatwe may have to pay higher interest rates to attract deposits, resulting inreduced profitability.

 

In addition, because theGramm-Leach-Bliley Act now permits banks, securities firms and insurancecompanies to affiliate, a number of larger financial institutions and othercorporations offering wider variety of financial services than we currentlyoffer could enter and aggressively compete in the markets we currentlyserve.  Many of these competitors havesubstantially greater resources, lending limits and operating histories than wedo and may offer services that we do not or cannot provide.  In addition, competitors that are notdepository institutions are generally not subject to the extensive regulationsthat apply to us.

 

Moreover, we may not be able to compete with ourlarger competitors for larger customers because our lending limits are lowerthan theirs.  We are limited in theamount we can loan a single borrower by the amount of the Bank’s capital.  Our legal lending limit is 15% of the Bank’scapital and surplus, or $569,000, at December 31, 2008.  These limits are significantly less than thelimits for most of our competitors, and as a result we will have difficulty inobtaining business from the larger customers in our market area.  We seek to sell loan participations to other financialinstitutions to meet the needs of customers requiring loans above theselimits.  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.

 

***Effortsto comply with Sarbanes-Oxley Act involve significant expenditures, andnon-compliance with the 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 now applicable to us, have increased thescope, complexity, and cost of corporate governance, reporting, and disclosurepractices.  We have experienced, and weexpect to continue to experience, greater compliance costs, including costsrelated to internal controls, as a result of the Sarbanes-Oxley Act.  We expect these rules and regulations tocontinue to increase our accounting, legal, and other costs, and to make someactivities 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.

 

We are evaluating ourinternal control systems in order to allow management to report on, and ourindependent registered public accounting firm to attest to, our internalcontrol over financial reporting, as required by Section 404 of theSarbanes-Oxley Act.  If we identifysignificant deficiencies or material weaknesses in our internal control overfinancial reporting that we cannot remediate in a timely manner, or if we areunable to receive a positive attestation from our independent registered publicaccounting firm with respect to our internal control over financial reporting,the value of our common stock could decline, or our ability to obtain anynecessary equity or debt financing could suffer. In this event, the liquidityof our common stock would be severely limited and the market price of ourcommon stock would likely decline significantly.

 

28

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In addition, the rules adoptedas a result of the Sarbanes-Oxley Act could make it more difficult or morecostly for us to obtain certain types of insurance, including directors’ andofficers’ liability insurance, which could make it more difficult for us toattract and retain qualified persons to serve on our Board of Directors or asexecutive officers.

 

***Ourdirectors and executive officers own a significant portion of our common stockand can influence shareholder decisions and may vote to take actions adverse toour interests.***

*** ***

Our directors andexecutive officers, as a group, beneficially owned approximately 51% of ouroutstanding common stock as of December 31, 2008.  One of our directors, William R. Blanton, whois also our Chief Executive Officer, owns approximately 26.8% of ouroutstanding common stock as of December 31, 2008.  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.

 

***Oneof our directors and major shareholders, William R. Blanton, holds an executiveposition, serves on the board of directors of two other banks and holdssignificant shares of banks within our target market and could vote to takeactions adverse to our interests.***

*** ***

William R.Blanton, our Chief Executive Officer and a director of the Company and theBank, who owns approximately 26.8% of our common stock, has 35 years of bankingexperience and holds interest in various banks across North Georgia.  As a result of his interest in other banks, Mr. Blantonmay vote to cause the Company to take actions with which the shareholders donot agree or that are not beneficial to its shareholders.

 

Mr. Blantonspends a portion of his time as the Chief Executive Officer, Vice-Chairman and asa director of First Covenant Bank, a bank with $190 million in assets as of December 31,2008, headquartered in Norcross, Georgia. Mr. Blanton currently owns approximately 16.6% of the outstandingshares of First Covenant Bank.  Wecurrently have a data processing agreement and master services agreement withFirst Covenant Bank and we may enter into additional agreements with FirstCovenant Bank in the future.  See “Transactionsby Directors, Officers and Ten Percent Shareholders.”  We also are currently exploring theopportunity of combining operations with First Covenant Bank.  Any transaction would be subject to theapproval of our independent directors and require the approval of federal andstate regulatory authorities.

 

Mr. Blantonalso serves on the board of directors of United Americas Bankshares, Inc.and its subsidiary bank, United Americas Bank, a bank with $240 million inassets as of December 31, 2008, in Atlanta, Georgia.  Mr. Blanton is the largest shareholderof United Americas Bankshares, Inc. and owns approximately 17.1% of UnitedAmericas Bankshares, Inc., which consists of 120,000 of outstanding sharesand warrants to purchase an additional 100,000 shares which are immediatelyexercisable.  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.

 

***Weare exposed to the possibility of technology failure.***

*** ***

We rely on our computer systems and the technology ofoutside service providers. Our daily operations depend on the operationaleffectiveness of their technology. We rely on our systems to accurately trackand record our assets and liabilities. If our computer systems or outsidetechnology sources become unreliable, fail, or experience a breach of security,our ability to maintain accurate financial records may be impaired, which couldmaterially affect our business operations and financial condition.

 

29

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**Item 2.                    Descriptionof Property.**

 

The Bank began operationsin a modular temporary office of approximately 2,200 square feet on propertylocated at the corner of Pearl Nix Extension and Dorsey Street in Gainesville,Georgia.  In August 2004 the Companycompleted construction of its permanent main office at 807 Dorsey Street,Gainesville, Georgia.  The main officeprovides 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.

 

In January 2008, theBank opened an online mortgage division in Atlanta doing business as CenturyPoint Mortgage. The Bank has subleased 3,477 square feet of space at 1455Lincoln Parkway, Suite 250, Atlanta, Georgia for this division.

 

In May 2008, the Bank opened a loan productionoffice in Oakwood, Georgia.  The Bank hasleased approximately 1,800 square feet of office space located at 3715 MundyMill Road, Suite A, Oakwood, Georgia for 12 months at $2,175 per month forthis office.

 

In July 2008, the Bank opened a loan productionoffice in Athens, Georgia.  The Bank hasleased approximately 1,400 square feet of office space at located at 1551Jennings Mill Road, Suite 1600A, Bogart, Georgia for 12 months at $1,100per month for this office.

 

**Item 3.                    LegalProceedings.**

 

There are no materiallegal proceedings to which the Company is a party or of which any of itsproperties are subject, nor are there material proceedings known to the Companyto be contemplated by any governmental authority.

 

**Item 4.                    Submissionof Matters to a Vote of Security-Holders.**

 

No matter wassubmitted to a vote of security holders during the fourth quarter of the fiscalyear covered by this annual report.

 

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**PART II**

** **

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

** **

Asof March 23, 2009, the Company had 4,505,797 shares of common stock outstanding andapproximately 921 shareholders of record. ** **Thereis currently no market for our shares of common stock, and it is not likelythat an active trading market will develop for the shares in the future.  In 2008, we were aware of a few trades at$1.50 per share.  There are no presentplans for the common stock to be traded on any stock exchange orover-the-counter-market.  There is onlyincomplete information about trades of our shares and the prices at which anyshares have traded.

 

During 2008, we issued 2,246,669 shares of ourcommon stock, of which 1,305,001 were issued in the fourth quarter, inconsideration of $3,370,006 before expenses to accredited investors intransactions exempt from registration under Section 4(2) of the SecuritiesAct and Regulation D under the Securities Act relating to sales not involvingany public offering.  The shares weresold by our officers and directors with the assistance of our sales agents,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 nocompensation in connection with the 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 Bank of Atlanta, our Boardof Director’s adopted resolutions that provide that we shall not, without theprior written approval of the Federal Reserve Bank of Atlanta, declare or paydividends to our shareholders.  Theapproval of the OCC is required if the total of all dividends declared by anational bank in any calendar year exceeds the total of its net profits forthat year combined with its retained net profits for the preceding two years,less any required transfers to surplus.

 

**Item 6.     Selected FinancialData.**

** **

Not applicable.

 

**Item 7.     Management’s Discussion and Analysis of Financial Condition andResults of Operations.**

 

This discussion andanalysis is intended to assist you in understanding our financial condition andresults of operations.  You should readthis commentary in conjunction with the financial statements and the relatednotes and the other statistical information included elsewhere in this annualreport, as well as with an understanding of our short operating history.

 

**General**

 

First CenturyBancorp. 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.

 

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The followingdiscussion describes our results of operations and assesses our financial condition.  Our discussion and analysis for the yearsended December 31, 2008 and 2007 is based on our audited financialstatements for such periods.  Like mostcommunity banks, we derive a significant portion of our income from interest wereceive on our loans and investments. Our primary sources of funds for making these loans and investments areour deposits 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.

 

We have included anumber of tables to assist in our description of these measures.  For example, the “Average Balances” tableshows the average balance during the years ended December 31, 2008 and2007 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 thesensitivity of our various categories of assets and liabilities to changes ininterest rates, and we have included a “Sensitivity Analysis Table” to helpexplain this.  Finally, we have includeda number of tables that provide detail about our investment securities, ourloans, and our deposits.

 

There are risksinherent in all loans, so we maintain an allowance for loan losses to absorbprobable losses 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 toearning interest on our loans and investments, we earn income through fees andother expenses we charge to our customers. We describe the various components of this non-interest income, as wellas our non-interest expense, in the following discussion.

 

In response tofinancial conditions affecting the banking system and financial markets and thepotential threats to the solvency of investment banks and other financialinstitutions, the United States government has taken unprecedented actions. On October 3,2008, President Bush signed into law the EESA. Pursuant to the EESA, the Treasury has the authority to, among otherthings, purchase mortgages, mortgage-backed securities, and other financialinstruments from financial institutions for the purpose of stabilizing andproviding liquidity to the U.S. financial markets. On October 14, 2008,the Treasury announced the Capital Purchase Program under the EESA, pursuant towhich the Treasury intends to make senior preferred stock investments inparticipating financial institutions. Regardless of whether we are approved forparticipation in the Capital Purchase Program and choose to participate,governmental intervention and new regulations under these programs couldmaterially and adversely affect our business, financial condition and resultsof operations.

 

The followingdiscussion and analysis also identifies significant factors that have affectedour financial position and operating results during the periods included in theaccompanying consolidated financial statements. We encourage you to read this discussion and analysis in conjunctionwith the consolidated financial statements and the related notes and the otherstatistical information also included in this annual report.

 

**CriticalAccounting Policies**

 

We have adoptedvarious accounting policies, which govern the application of accountingprinciples generally accepted in the United States of America, in thepreparation of our consolidated financial statements.  Our significant accounting policies aredescribed in note 1 in the footnotes to the consolidated financial statementsat December 31, 2008 included elsewhere in this annual report.

 

32

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We believe thatthe allowance for loan losses is a critical accounting policy that requires themost significant judgments and estimates used in preparation of ourconsolidated 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.

 

**Formal Agreement**

** **

On August 18,2004, the Bank entered a formal written agreement with the OCC, which set fortha series of actions necessary to correct identified weaknesses.  On February 5, 2008, the OCC determinedthat the protection of the depositors, other customers and shareholders of theBank as well as the Bank’s safe and sound operation did not require thecontinued existence of the agreement, and the OCC terminated the formalagreement.

 

Pursuant to theterms of the formal agreement, we committed to undertake certain actions,including the maintenance of specified capital levels, retention of seniormanagement and the formulation of strategic and capital plans. Followingdiscussions with the OCC, on January 26, 2006, our Board of Directorspassed a resolution to identify, and enter into an agreement with, a strategicpartner who would either purchase the entire institution or a significantinterest in the institution, and the OCC agreed to a 90 day waiver of certaincommitments contained in the formal agreement.

 

On May 5, 2006, weentered into a merger agreement with El Banco Financial Corporation (“El Banco”),previously known as Nuestra Tarjeta de Servicios, Inc., that provided,among other things, for us to be merged into El Banco in a two-stepmerger.  On October, 25, 2006, theparties mutually agreed to terminate the pending merger agreement afterconcluding that receipt of regulatory approval would not be forthcoming on atimely enough basis to satisfy each party’s business requirements.

 

In April 2007, Mr. Blantonpurchased 738,008 shares of our common stock at $2.71 per share in a privateplacement.  We also issued Mr. Blantona warrant (the “Original Warrant”) to purchase up to 738,008 shares at $2.71per share. The Original Warrant has no expiration date and contains provisionswhich provide for automatic adjustments in price and shares purchasable underthe Original Warrants in the event additional securities are issued below orhave a conversion or exercise price below the current Original Warrant exerciseprice.  We received proceeds ofapproximately $2,000,000 less fees and expenses related to the sale of the shares,which we used for working capital purposes.

 

In September 2007, Mr. Blantontransferred a portion of the Original Warrant to purchase 184,502 shares toSilver Hill Enterprises, LP, an entity controlled by William Evans, one of ourdirectors.

 

In December 2007, wecompleted a private placement of Series B Preferred Stock, no par value,for $10.00 per share, selling a total of $750,000 of shares.  The investors in that offering also receivedwarrants (the “B Warrants”) to acquire 75,000 shares of common stock at anexercise price of $1.50 per share, which we believe was the fair market valueof the common stock on the date of issuance of the B Warrants.  As with the Original Warrant, the B Warrantshave no expiration date and contain provisions which provide for automaticadjustments in price and shares purchasable under the warrants in the eventadditional shares or warrants are issued below the current warrant exerciseprice.

 

As a result of theissuance of the B Warrants with an exercise price below the $2.71 exerciseprice, the exercise price and number of shares of common stock purchasableunder the Original Warrant adjusted as follows: (a) with respect to Mr. Blanton,from 553,506 shares at $2.71 per share to 1,000,001 shares at $1.50 per share;and (b) with respect to Silver Hill Enterprises, LP, from 184,502 sharesat $2.71 per share to 333,334 shares at $1.50 per share.

 

In June 2008, Mr. Blantonand Silver Hill Enterprises, LP transferred a portion of the Original Warrantto purchase shares to John Allen Nivens, Jr. and Richard Kramer Whitehead, III,each a director of the Company and to Homestead Investment, LLC, which iscontrolled by the father of one of our directors, William A. Bagwell, Jr.

 

33

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

 

In July 2008,we commenced a private offering of shares of our common stock to a limitednumber of accredited investors.   We are using the net proceeds for workingcapital purposes, including the possible redemption of preferred stock.  There is no minimum number of shares whichmust be sold in order for us to accept subscriptions in the offering, and noassurance can be given as to whether we will sell any additional shares in theoffering.  During 2008, we had receivedproceeds of $3,370,006 from the sale of 2,246,669 shares in the offering.  The common stock to be sold in the offeringhas not been registered under the Securities Act and may not be offered or soldin the United States absent registration or an applicable exemption fromregistration requirements.

 

This discussion andanalysis is intended to assist you in understanding our financial condition andresults of operations.  You should readthis commentary in conjunction with the financial statements and the relatednotes and the other statistical information included elsewhere in this report,as well as with an understanding of our short operating history.

 

**Resultsof Operations**

** **

A net loss of$3,515,000 was incurred for 2008, up $1,769,000, from the net loss of$1,746,000 that was incurred during 2007. Our operational results depend to a large degree on three factors: ournet interest income, our provision for loan losses, and our non-interestexpenses.  Net interest income is thedifference between the interest income received on investments (such as loans,investment securities, and federal funds sold) and the interest expense ondeposit liabilities and borrowings.  Netinterest income grew 10%, to $837,000, for the year ended December 31,2008, compared to $764,000 for the year ended December 31, 2007.

 

The provision for loan losses grew $525,000, or 455%,to $640,000 for the year ended December 31, 2008, compared to $115,000 forthe year ended December 31, 2007. This increase was due to a $18.8 million increase in our loan portfolioand our response to deteriorating economic conditions, which caused us to applyhigher risk weightings to the qualitative factors utilized in determiningappropriate levels of reserves. Management considers the current allowance for loan losses to beadequate to sustain any estimated or potential losses based on the Bank’sinternal analysis and on external credit review examinations conducted byregulatory authorities and by third-party review services.  The Bank continues to demonstrate theimprovement in the credit quality of the Bank’s loan portfolio and ofmanagement’s efforts to identify and reduce criticized and classified loans.

 

Total non-interest income for the year ended December 31,2008 was $609,000, compared to $60,000 for the year ended December 31,2007.  Non-interest income includesservice charges on deposit accounts, customer service fees, mortgageorigination fee income and investment security gains (losses).  The increase in non-interest income for 2008was primarily due to an increase in fees earned on mortgage originations, dueto the establishment of the mortgage division. Non-interest expenses in 2008were $4,321,000, compared to $2,455,000 in 2007.  The largest component of non-interest expensesis salaries and employee benefits, which totaled $2,006,000 for the year ended December 31,2008, compared to $1,161,000 for the year ended December 31, 2007.

 

**NetInterest Income**

** **

For the yearsended December 31, 2008 and 2007, net interest income totaled $837,000 and$764,000, respectively.  Interest incomefrom loans, including fees, was $1,722,000, which represented a lower yield of7.53% in 2008, compared to the 8.64% yield earned in 2007.  The falling interest rate environment of 2008had a negative impact on the Bank’s adjustable rate loans.  Interest expense totaled $1,586,000 for theyear ended December 31, 2008, compared to $1,453,000 in 2007.  The net interest margin realized on earningassets and the interest rate spread were 2.20% and 2.11%, respectively, for theyear ended December 31, 2008, as compared to an interest rate margin of2.47% and interest rate spread of 2.07% in 2007.

 

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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 2008 and 2007 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,  2008** | ** ** | **For the Year Ended December 31,  2007** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                           | ** ** | **(Amounts presented in thousands)**                | ** ** |
| ** **                                                           | ** ** | **Average**                                                        | ** ** | ** **                                                         | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** |
| ** **                                                           | ** ** | **Balance**                                                        | ** ** | **Interest**                                                       | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| Assets:                                                              |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Interest earning  assets:                                            |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Loans (including  loan fees)                                         |       | $                                                                  | 22,865     |                                                               | $          | 1,723 |   | 7.53 | % | $ | 18,446 |   | $ | 1,635 |   | 8.64 | % |
| Investment  securities and other investments                         |       | 9,481                                                              |       | 562                                                                |       | 5.93 | % | 9,077 |   | 416 |   | 4.59 | % |
| Interest bearing  deposits                                           |       | 1,522                                                              |       | 39                                                                 |       | 2.57 | % | 426 |   | 23 |   | 5.25 | % |
| Federal funds  sold                                                  |       | 4,154                                                              |       | 99                                                                 |       | 2.39 | % | 2,969 |   | 143 |   | 4.76 | % |
| Total interest  earning assets                                       |       | 38,021                                                             |       | 2,423                                                              |       | 6.37 | % | 30,918 |   | 2,217 |   | 7.04 | % |
|                                                                 |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Other  non-interest earnings assets                                  |       | 4,873                                                              |       |                                                               |       |   |   | 3,520 |   |   |   |   |   |
|                                                                 |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Total assets                                                         |       | $                                                                  | 42,894     |                                                               |       |   |   |   | $ | 34,438 |   |   |   |   |   |
|                                                                 |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Liabilities and  shareholders’ equity:                          |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                                       |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Deposits:                                                            |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Interest-bearing  demand                                             |       | $                                                                  | 1,096      |                                                               | $          | 23 |   | 2.08 | % | $ | 1,518 |   | $ | 44 |   | 2.93 | % |
| Savings and  money market                                            |       | 3,818                                                              |       | 106                                                                |       | 2.77 | % | 916 |   | 18 |   | 1.92 | % |
| Time                                                                 |       | 29,072                                                             |       | 1,354                                                              |       | 4.66 | % | 23,731 |   | 1,239 |   | 5.23 | % |
| Federal funds  purchased                                             |       | 21                                                                 |       | 1                                                                  |       | 1.58 | % | 180 |   | 9 |   | 2.08 | % |
| Borrowings                                                           |       | 3,214                                                              |       | 103                                                                |       | 3.21 | % | 2,882 |   | 143 |   | 4.99 | % |
| Total  interest-bearing liabilities                                  |       | 37,221                                                             |       | 1,586                                                              |       | 4.26 | % | 29,227 |   | 1,453 |   | 4.97 | % |
| Other  non-interest bearing liabilities                              |       | 2,797                                                              |       |                                                               |       |   |   | 1,987 |   |   |   |   |   |
| Shareholders’  equity                                           |       | 2,876                                                              |       |                                                               |       |   |   | 3,224 |   |   |   |   |   |
|                                                                 |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Total  liabilities and shareholders’ equity                     |       | $                                                                  | 42,894     |                                                               |       |   |   |   | $ | 34,438 |   |   |   |   |   |
|                                                                 |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Excess of  interest-earning assets over interest-bearing liabilities |       | $                                                                  | 800        |                                                               |       |   |   |   | $ | 1,691 |   |   |   |   |   |
|                                                                 |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Ratio of  interest-earning assts to interest-bearing liabilities     |       | 102.15                                                             | %          |                                                               |       |   |   | 105.79 | % |   |   |   |   |
|                                                                 |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Net interest  income                                                 |       |                                                               |       | $                                                                  | 836        |   |   |   |   |   | $ | 764 |   |   |   |
|                                                                 |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Net interest  spread                                                 |       |                                                               |       |                                                               |       | 2.11 | % |   |   |   |   | 2.07 | % |
|                                                                 |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Net interest  margin                                                 |       |                                                               |       |                                                               |       | 2.20 | % |   |   |   |   | 2.47 | % |

 

Non-accrual loans are included in average loanbalances during the periods presented.

 

35

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**Volume/RateAnalysis**

** **

Net interestincome can also be analyzed in terms of the impact of changing rates andchanging volume.  The following tabledescribes the extent to which changes in interest rates and changes in thevolume of interest-earning assets and interest-bearing liabilities haveaffected our interest income and interest expense during the periodsindicated.  Changes attributed to bothrate and volume have been allocated on a pro rata basis.

 
| ** **                   | ** ** | **2008 Compared to 2007**                           | ** ** |
|------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                   | ** ** | **Increase (decrease) due to changes in** | ** ** |
| ** **                   | ** ** | **Volume**                                                         | ** ** | **Rate** | ** ** | **Net** | ** ** |
| ** **                   | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Change**                   | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest income  on:         | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Loans (including  loan fees) | ** ** | $                                                                  | 333        |   | $ | (246 | ) | $ | 87 |   |
| Investment  securities       |       | 24                                                                 |       | 122 |   | 146 |   |
| Interest bearing  deposits   |       | 28                                                                 |       | (12 | ) | 16 |   |
| Federal funds  sold          |       | 28                                                                 |       | (72 | ) | (44 | ) |
|                         |       | 413                                                                |       | (208 | ) | (205 | ) |
|                         |       |                                                               |       |   |   |   |   |
| Interest expense  on:        |       |                                                               |       |   |   |   |   |
| Deposits:                    |       |                                                               |       |   |   |   |   |
| Interest-bearing  demand     |       | (9                                                                 | )          | (12 | ) | (21 | ) |
| Savings and  money market    |       | 81                                                                 |       | 7 |   | 88 |   |
| Time                         |       | 249                                                                |       | (134 | ) | 115 |   |
| Borrowings                   |       | 11                                                                 |       | (51 | ) | (40 | ) |
| Federal funds  purchased     |       | (3                                                                 | )          | (6 | ) | (9 | ) |
|                         |       | 329                                                                |       | (196 | ) | 133 |   |
| ** **                   | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
|                         |       | $                                                                  | 84         |   | $ | (12 | ) | $ | 72 |   |

 

**Interest Rate Sensitivity and Asset LiabilityManagement**

** **

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

 

Net interestincome is the 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 the 

 

36

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contractually designated time.  At December 31, 2008, the Bank, asmeasured by Gap, is in a liability sensitive position within one year.  Management has several tools available to itto evaluate and affect interest rate risk, including deposit pricing policiesand changes in the mix of various types of assets and liabilities.

** **

We also measurethe actual effects that repricing opportunities have on earnings throughsimulation modeling, referred to as earnings at risk.  For short-term interest rate risk, the Bank’smodel simulates the impact of balance sheet strategies on net interest income,pre-tax income, and net income.  Themodel includes interest rate simulations to test the impact of rising andfalling interest rates on projected earnings. The Bank determines the assumptions that are used in the model.

 

The followingtable summarizes the amounts of interest-earning assets and interest-bearingliabilities outstanding at December 31, 2008, 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 terms of the asset or liability.  Adjustable rate loans are included in theperiod in which interest rates are next scheduled to adjust rather than in theperiod in which they are due, and fixed rate loans and mortgage-backed securitiesare included in the periods in which they are anticipated to be repaid based onscheduled maturities. The Bank’s savings accounts and interest-bearing demandaccounts, which are generally subject to immediate withdrawal, are included inthe “Three Months or Less” category, although historical experience has proventhese deposits to be more stable over the course of a year.

 
| ** **                                              | ** ** | **At December 31, 2008**     | ** **   |
|---------------------------------------------------------|------------|---------------------------------------------|--------------|
| ** **                                              | ** ** | **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                                  |       | $                                           | 2,937        |   | $ | — |   | $ | 6,595 |   | $ | 9,173 |   | $ | 18,705 |   |
| Federal funds  sold                                     |       | 700                                         |         | — |   | — |   | — |   | 700 |   |
| Loans                                                   |       | 5,433                                       |         | 8,915 |   | 20,758 |   | 4,859 |   | 39,965 |   |
|                                                    |       |                                        |         |   |   |   |   |   |   |   |   |
| Total  interest-bearing assets                          |       | 9,070                                       |         | 8,915 |   | 27,353 |   | 14,032 |   | 59,370 |   |
|                                                    |       |                                        |         |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                          |       |                                        |         |   |   |   |   |   |   |   |   |
| Deposits:                                               |       |                                        |         |   |   |   |   |   |   |   |   |
| Savings and  demand                                     |       | 6,726                                       |         | — |   | — |   | — |   | 6,726 |   |
| Time deposits                                           |       | 10,411                                      |         | 30,338 |   | 6,609 |   | — |   | 47,358 |   |
| Other Borrowings                                        |       | —                                      |         | 2,000 |   | — |   | — |   | 2,000 |   |
|                                                    |       |                                        |         |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities                     |       | 17,137                                      |         | 32,338 |   | 6,609 |   | — |   | 56,085 |   |
|                                                    |       |                                        |         |   |   |   |   |   |   |   |   |
| Interest  sensitive difference per period               |       | $                                           |  (8,068 | ) | $ | (31,490 | ) | $ | (10,746 | ) | $ | 3,286 |   | $ | 3,286 |   |
| Cumulative  interest sensitivity difference             |       | $                                           | (8,068       | ) | $ | (23,422 | ) | $ | 20,744 |   | $ | 14,032 |   |   |   |
| Cumulative  difference to total interest earning assets |       | (13.59                                      | )%           | (53.04 | )% | (18,10 | )% | 5.53 | % |   |   |

 

At December 31, 2008, the difference between theBank’s liabilities and assets repricing within one year was $23,422,000,therefore the Bank’s balance sheet was liability-sensitive in a rising rateenvironment.  A liability-sensitiveposition means that, for cumulative gap measurement periods of one year orless, there are more liabilities than assets subject to immediate repricing asmarket rates change.  Becauserate-sensitive interest-bearing liabilities exceed rate sensitive assets, in arising rate environment the Bank’s earnings position is exposed to decliningearnings.  Included in interest-bearingliabilities subject to rate changes within 90 days is a portion of theinterest-bearing demand, savings and money market deposits.  These types of deposits historically have notrepriced coincidentally with or in the same proportion as general marketindicators.

 

37

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Certainshortcomings are inherent in the method of analysis presented in the foregoingtable.  For example, although particularassets and liabilities may have similar maturities or periods of repricing,they may reflect 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.

 

**Provision and Allowance for Loan Losses**

** **

Theprovision for loan losses is the charge to operating earnings that managementbelieves is necessary to maintain the allowance for loan losses at an adequatelevel.  The provision charged to expensewas $640,000 for the year ended December 31, 2008, as compared to the$115,000 that was charged against earnings in 2007.  The loan portfolio increased by approximately$18.8 million during the year ended December 31, 2008.  The allowance for loan losses was $838,000, or2.20%, of gross loans at December 31, 2008, compared to $276,000, or1.43%, of gross loans at December 31, 2007.  Management considers the current allowancefor loan losses to be adequate to sustain any estimated or potential lossesbased on the Bank’s internal analysis and on external credit reviewexaminations conducted by regulatory authorities and by third-party reviewservices.

 

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 ineconomic and industry conditions, risks inherent in dealing with individualborrowers, and, in the case of a collateralized loan, risks resulting fromuncertainties 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 about future events,which we believe to be reasonable, but which may not prove to be accurate.  Thus, there is a risk that charge-offs infuture periods could exceed the allowance for loan losses or that substantialadditional increases in the allowance for loan losses could be required.  Our loan loss reserve methodologyincorporates any anticipated write-downs and charge-offs in all problem loansidentified by management, credit review services and regulatory authorities.  We consider the current allowance for loanlosses to be adequate to sustain any estimated or potential losses based on theBank’s internal analysis and on credit review examinations conducted byregulatory 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.

 

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

 

| ** **                              | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2008**              | ** ** | **2007** | ** ** |
| ** **                              | ** ** | **Amount**            | ** ** | **Percent of loans in  each category to total  loans** | ** ** | **Amount** | ** ** | **Percent of loans in  each category to  total loans** | ** ** |
|                                    |       |                  |       |   |   |   |   |   |   |
| Commercial,  financial and agricultural |       | $                     | 215        |   | 26 | % | $ | 77 |   | 10 | % |
| Real estate -  mortgage                 |       | 301                   |       | 36 | % | 95 |   | 46 | % |
| Real estate -  construction             |       | 282                   |       | 33 | % | 40 |   | 36 | % |
| Consumer                                |       | 40                    |       | 5 | % | 64 |   | 8 | % |
|                                    |       | $                     | 838        |   | 100 | % | $ | 276 |   | 100 | % |

 

38

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The followingtable presents a summary of changes in the allowance for loan losses for thepast two years (dollar amounts are presented in thousands):

 
| ** **                                     | ** ** | **For the years ended December 31,** | ** ** |
|------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                     | ** ** | **2008**                                                      | ** ** | **2007** | ** ** |
|                                           |       |                                                          |       |   |   |
| Balance at the  beginning of period            |       | $                                                             | 276        |   | $ | 446 |   |
| Charge-offs:                                   |       |                                                          |       |   |   |
| Commercial,  financial and agricultural        |       | —                                                        |       | 106 |   |
| Real estate -  mortgage                        |       | 48                                                            |       | 136 |   |
| Real estate -  construction                    |       | —                                                        |       | — |   |
| Consumer                                       |       | 79                                                            |       | 93 |   |
| Total  Charged-off                             |       | 127                                                           |       | 335 |   |
|                                           |       |                                                          |       |   |   |
| Recoveries:                                    |       |                                                          |       |   |   |
| Commercial,  financial and agricultural        |       | 2                                                             |       | 2 |   |
| Real estate -  mortgage                        |       | —                                                        |       | 4 |   |
| Consumer                                       |       | 47                                                            |       | 44 |   |
| Total Recoveries                               |       | 49                                                            |       | 50 |   |
|                                           |       |                                                          |       |   |   |
| Net Charge-offs                                |       | 78                                                            |       | 285 |   |
|                                           |       |                                                          |       |   |   |
| Provision for  Loan Loss                       |       | 640                                                           |       | 115 |   |
|                                           |       |                                                          |       |   |   |
| Balance at end  of period                      |       | $                                                             | 838        |   | $ | 276 |   |
|                                           |       |                                                          |       |   |   |
| Total loans at  end of period                  |       | $                                                             | 38,101     |   | $ | 19,305 |   |
|                                           |       |                                                          |       |   |   |
| Average loans  outstanding                     |       | $                                                             | 21,749     |   | $ | 19,632 |   |
|                                           |       |                                                          |       |   |   |
| As a percentage  of average loans:             |       |                                                          |       |   |   |
| Net loans  charged-off                         |       | 0.58                                                          | %          | 1.45 | % |
| Provision for  loan losses                     |       | 2.94                                                          | %          | .59 | % |
| Allowance for  loan losses as a percentage of: |       |                                                          |       |   |   |
| Year end loans                                 |       | 2.20                                                          | %          | 1.43 | % |

 

**Non-PerformingAssets**

** **

A loan is placedon non-accrual status when, in management’s judgment, the collection ofinterest appears 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 31,2008, there were $957,000 in loans outstanding, which were accounted for asnon-accrual loans whereas there were $851,000 in outstanding loans accountedfor as non-accrual loans at December 31, 2007, an increase of $106,000, or12%.  Non-performing assets increased$670,000, or 71%, from December 31, 2007 to December 31, 2008.  Interest income that would have been reportedon the non-accrual loans in 2008 approximated $53,800 and in 2007 totaled$34,200.  Interest income recognized onimpaired loans approximated $15,900 and $97,000 in 2008 and 2007, respectively.

 

At December 31,2008, the allowance for loan losses represented 52%  of the amount of non-performing loans,compared to 32% at December 31, 2007. The coverage level of the allowance at December 31, 2008 increasedfrom the coverage level at December 31, 2007 due to an increase in theprovision for loan losses.  A 

 

39

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significantportion, or 79%, of nonperforming loans at December 31, 2008 are secured byreal estate.  We have evaluated theunderlying collateral on these loans and believe that the collateral on theseloans is sufficient to minimize future losses. However, the recent downturn in the realestate market has resulted in increased loan delinquencies, defaults andforeclosures, 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 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 real estatevalues continue to decline, it is also more likely that we would be required toincrease our allowance for loan losses. If during a period of reduced real estate values we are required toliquidate the property collateralizing a loan to satisfy the debt or toincrease the allowance for loan losses, this could materially reduce ourprofitability and adversely affect our financial condition.

 

The followingtable summarizes non-performing assets and the income that would have beenreported on non-accrual loans as of December 31, 2008 and 2007 (amountsare presented in thousands):

 
| ** **                               | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **2008**              | ** ** | **2007** | ** ** |
|                                     |       |                  |       |   |   |
| Other real  estate and repossessions     |       | $                     | —     |   | $ | 98 |   |
|                                     |       |                  |       |   |   |
| Non-accrual  loans                       |       | 957                   |       | 851 |   |
|                                     |       |                  |       |   |   |
| Accruing loans  90 days or more past due |       | 662                   |       | — |   |
| Total  non-performing assets             |       | $                     | 1,619      |   | $ | 949 |   |
| As a percentage  of gross loans:         |       | 4.25                  | %          | 4.92 | % |

 

**Non-interestIncome and Expense**

** **

The Bank has experienced significant growth in 2008due to the implementation of several key initiatives, including the opening ofCentury Point Mortgage, a division of the Bank, and the two loan productionoffices in Oakwood, Georgia and Athens, Georgia.  All these divisions were initiated due tofavorable market conditions and the Bank’s ability to attract and hireexperienced bankers to lead these new divisions.

 

Non-interest income includes service charges ondeposit accounts, customer service fees, mortgage origination fee income andinvestment security gains (losses). Total non-interest income for the year ended December 31, 2008 grewto $609,067, compared to $60,165 for the year ended December 31, 2007, anincrease of $548,902, or 912%.  Theincrease in non-interest income in 2008 was primarily due to an increase infees earned on mortgage origination, due to the establishment of the mortgagedivision near the end of 2007.

 

In furtherance ofthe growth initiatives the Bank hired a team of talented individuals in theBank’s respective markets based on mergers and acquisitions occurring withinthe banking industry in the spring of 2008. The Bank has hired four Divisional Presidents, six key lendingpersonnel, and seven Mortgage origination/support staff since September 30,2007.  The salary and benefit expense ofthis additional staff hired to drive our growth initiatives constitutes themajority of the increase of the non-interest expense from 2007 to 2008.  Total non-interest expense for the year endedDecember 31, 2008 was $4,321,305, as compared to $2,454,955 for the yearended December 31, 2007, an increase of $1,866,350, or 76%.  Salariesand benefits, the largest component of non-interest expense, was $2,006,318 forthe year ended December 31, 2008, compared to $1,161,072 for the yearended December 31, 2007.

 

The Bank’s growth initiative has included the openingof two strategic locations in 2008 as well as our online mortgage division,Century Point.  Total occupancy andequipment expense was $485,775 for the year ended December 31, 2008,compared to $356,737 for the year ended December 31, 2007.  Total occupancy expense for 2008 was higherthan 2007 due to the addition of the online mortgage division and the two loanproduction offices.  The portion of theincrease in occupancy expense attributable to the online mortgage division was$56,259, for the year ended December 31, 2008.  The portion of the increase in occupancyexpense attributable to the Oakwood and 

 

40

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Athens, Georgia loan production offices was $55,656and $19,371, respectively, for the year ended December 31, 2008.  Telephone expense and office supply expensealso increased during the respective time periods due to the establishment ofthese new locations.

 

Professional fees totaled $274,953 for the year ended December 31,2008, compared to $195,745 for the year ended December 31, 2007.  The $79,207 increase was attributable to$55,000 in legal expenses and $24,000 in audit fees.

 

Marketing expense totaled $430,260 for the year ended December 31,2008, compared to $83,827 for the year ended December 31, 2007.  Of the $346,433 increase, $230,000 wasattributable to the Century Point Mortgage Internet advertising.  As a national, Internet-based lender, themortgage division’s business model depends on online lead generation to drive ahigh volume of leads with a lower cost of customer acquisition than traditionalmortgage lenders. Key elements of the division’s web-based demand generationprogram are advertising on mortgage rate websites, paid search advertising,search engine optimization and social media tools.  An additional $104,000 in advertisingexpenses was attributable to a marketing campaign that included billboards andvarious other media advertisements targeted at the Gainesville, Oakwood andAthens, Georgia markets.

 

The Bank entered into a data processing contract tomove its processing from Fidelity Information Systems to Providence, theinternal data processing system provided by First Covenant Bank.  We believe this change, which was completedin September 2008, will enable the Bank to decrease its costs and increaseits flexibility in data processing.  Dataprocessing expense totaled $546,596 for the year ended December 31, 2008,compared to $319,411 for the year ended December 31, 2007.  The increase was primarily due to dataprocessing conversion expenses.  Acontract termination fee of $207,000 was assessed by the Fidelity InformationSystems, the Bank’s old data processing host.

 

Other loan related expenses totaled $206,221 for theyear ended December 31, 2008, compared to $76,546 for the year ended December 31,2007.  A portion of the increase,$27,000, is due to losses from the sale of repossessed assets and foreclosedproperties.  The remaining portion wasattributable to higher loan origination costs related to increase in volume ofloan production.

 

Other expenses totaled $57,466 for the year ended December 31,2008, compared to $19,693 for the year ended December 31, 2007.  The increase is primarily due to theamortization of sofware costs associated with the Century Point Mortgagedivision.

 

41

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The following table shows the components ofnoninterest expense incurred for year ended December 31, 2008 attributableto the growth of the Company:

 
| ** **                            | ** ** | ** **            | ** **    | ** **            | ** ** | ** **              | ** ** | **Bank &** | ** ** | ** **   | ** ** | ** **  | ** ** | ** **                                           | ** **  | ** ** | ** ** | ** **       | ** ** |
|---------------------------------------|------------|-----------------------|---------------|-----------------------|------------|-------------------------|------------|---------------------|------------|--------------|------------|-------------|------------|------------------------------------------------------|-------------|------------|------------|------------------|------------|
| ** **                            | ** ** | ** **            | ** **    | ** **            | ** ** | ** **              | ** ** | **Parent**          | ** ** | **Century**  | ** ** | ** **  | ** ** | ** **                                           | ** **  | ** ** | ** ** | ** **       | ** ** |
| ** **                            | ** ** | **December 31,** | ** **    | **December 31,** | ** ** | **Increase** **/** | ** ** | **Increase /** | ** ** | **Point**    | ** ** | ** **  | ** ** | **New Locations Opened in 2008** | ** **  |
| ** **                            | ** ** | **2008**              | ** **    | **2007**              | ** ** | **(Decrease)**          | ** ** | **(Decrease)**      | ** ** | **Mortgage** | ** ** | **SBA**     | ** ** | **Oakwood**                                          | ** **  | **Athens** | ** ** | **Consolidated** | ** ** |
| ** **                            | ** ** | ** **            | ** **    | ** **            | ** ** | ** **              | ** ** | ** **          | ** ** | ** **   | ** ** | ** **  | ** ** | ** **                                           | ** **  | ** ** | ** ** | ** **       | ** ** |
| Salaries and  employee benefits       | ** ** | **$**                 | **2,006,318** |                  | $          | 1,161,072               |       | $                   | 845,247    | ** **   | **$**      | **34,745**  | ** ** | **$**                                                | **416,595** | ** ** | **$**      | **7,882**        | ** ** | **$** | **255,911** | ** ** | **$** | **130,113** | ** ** | **$** | **845,247** | ** ** |
| Occupancy  expenses                   | ** ** | **485,775**           |          | 356,737               |       | 129,039                 | ** ** | **(30,543**         | **)**      | **56,259**   | ** ** | **28,296**  | ** ** | **56,656**                                           | ** **  | **19,371** | ** ** | **129,039**      | ** ** |
| Professional  fees                    | ** ** | **274,953**           |          | 195,745               |       | 79,207                  | ** ** | **56,954**          | ** ** | **19,678**   | ** ** | **911**     | ** ** | **1,665**                                            | ** **  | **—** | ** ** | **79,207**       | ** ** |
| Marketing                             | ** ** | **430,260**           |          | 83,827                |       | 346,433                 | ** ** | **104,243**         | ** ** | **231,733**  | ** ** | **188**     | ** ** | **8,320**                                            | ** **  | **1,948**  | ** ** | **346,433**      | ** ** |
| Data Processing                       | ** ** | **546,596**           |          | 319,411               |       | 227,185                 | ** ** | **195,213**         | ** ** | **25,631**   | ** ** | **0**       | ** ** | **4,645**                                            | ** **  | **1,697**  | ** ** | **227,185**      | ** ** |
| Telephone                             | ** ** | **69,148**            |          | 33,494                |       | 35,654                  | ** ** | **4,522**           | ** ** | **11,085**   | ** ** | **7,604**   | ** ** | **9,978**                                            | ** **  | **2,465**  | ** ** | **35,654**       | ** ** |
| Postage/Freight                       | ** ** | **42,407**            |          | 32,111                |       | 10,296                  | ** ** | **5,039**           | ** ** | **4,569**    | ** ** | **126**     | ** ** | **544**                                              | ** **  | **17**     | ** ** | **10,296**       | ** ** |
| Insurance,  Tax & Assessment | ** ** | **131,931**           |          | 121,320               |       | 10,610                  | ** ** | **7,718**           | ** ** | **1,754**    | ** ** | **752**     | ** ** | **350**                                              | ** **  | **36**     | ** ** | **10,610**       | ** ** |
| Office Supplies                       | ** ** | **70,231**            |          | 55,000                |       | 15,231                  | ** ** | **156**             | ** ** | **4,983**    | ** ** | **2,613**   | ** ** | **4,841**                                            | ** **  | **2,639**  | ** ** | **15,231**       | ** ** |
| Other Loan  Related Expense           | ** ** | **206,221**           |          | 76,546                |       | 129,675                 | ** ** | **39,775**          | ** ** | **70,528**   | ** ** | **27**      | ** ** | **17,785**                                           | ** **  | **1,560**  | ** ** | **129,675**      | ** ** |
| Other                                 | ** ** | **57,466**            |          | 19,693                |       | 37,773                  | ** ** | **10,144**          | ** ** | **17,384**   | ** ** | **3,950**   | ** ** | **5,932**                                            | ** **  | **363**    | ** ** | **37,773**       | ** ** |
| ** **                            | ** ** | ** **            | ** **    | ** **            | ** ** | ** **              | ** ** | ** **          | ** ** | ** **   | ** ** | ** **  | ** ** | ** **                                           | ** **  | ** ** | ** ** | ** **       | ** ** |
| **Total  noninterest expense**        | ** ** | **$**                 | **4,321,305** |                  | $          | 2,454,955               |       | $                   | 1,866,350  | ** **   | **$**      | **427,966** | ** ** | **$**                                                | **860,199** | ** ** | **$**      | **52,349**       | ** ** | **$** | **365,628** | ** ** | **$** | **160,208** | ** ** | **$** | **1,866,350** | ** ** |

 

42

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**IncomeTaxes**

 

At December 31,2008, the Company had federal and state net operating loss carryforwards fortax purposes of approximately $11,440,000 and $11,916,000, respectively, whichwill expire beginning in 2022 if not previously utilized.  The utilization of the net operating losscarry forward has been limited as to its use pursuant to the Internal RevenueCode Section 382 due to the recent change in ownership of the Company.

 

**FinancialCondition**

** **

Total assets increased$24,227,000, or 63%, from December 31, 2007 to December 31,2008.  The primary sources of theincrease were in gross loans, which increased $18,796,000, or 97%, andinvestment securities, which increased $9,874,000, or 117%, during the yearended December 31, 2008. Federal funds sold were reduced $5,538,000, or89%, during 2008, and shifted into higher yielding earning assets.

 

Total deposits increased$26,115,000, or 84%, from December 31, 2007 to December 31, 2008. This increase was planned by management to provide funds for anticipatedloan growth.  In addition, the economic uncertainty and falling depositrates during the late third and fourth quarters of 2008 resulted in the Bank’scustomer base preferring certificate of deposit accounts over transactionaccounts as many individuals diversified deposits between several financialinstitutions.  The Bank’s local depositmarket is very competitive, and the Bank will at times lose deposits tofinancial institutions paying higher interest rates.  The Bank usesbrokered deposits and deposits from institutional investors to mitigate therisk within the certificate of deposit portfolio subject to local high ratecompetition.  Management has also focusedon increasing transaction deposits and is having early success with thiseffort.  Management expects most of theresults from these efforts will be reflected in early 2009 and beyond as thenew management team continues to acquire customers from the local community.

 

Total shareholders’equity decreased $330,000, from $3,494,000, at December 31, 2007, to$3,164,000, at December 31, 2008. During 2008, we raised $3,370,006 in additional capital through the saleof common stock in a private placement. The capital was used to fund $3,515,000 in net operating losses for theyear ended December 31, 2008.

 

**Loans**

** **

Gross loans totaledapproximately $37,944,000 at December 31, 2008, an increase of$18,639,000, or 97%, since December 31, 2007.  This increase was due to the addition of twoloan production offices in Oakwood and Athens, Georgia.  Management is continuously investigatingopportunities to generate loan growth and diversify its loan portfolio.  Balances within the major loans receivablecategories as of December 31, 2008 and December 31, 2007 are asfollows (amounts are presented in thousands):

 
| ** **                              | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|
|                                    |       |     |       |     |       |   |   |   |   |
| Commercial,  financial and agricultural |       | $        | 4,495      |     | 12         | % | $ | 3,339 |   | 17 | % |
| Real estate —  mortgage            |       | 26,411   |       | 70       | %          | 13,865 |   | 72 | % |
| Real estate —  construction        |       | 5,236    |       | 14       | %          | 509 |   | 3 | % |
| Consumer                                |       | 1,801    |       | 5        | %          | 1,592 |   | 8 | % |
|                                    |       |     |       |     |       |   |   |   |   |
|                                    |       | $        | 37,944     |     | 100        | % | $ | 19,305 |   | 100 | % |

 

As of December 31,2008, maturities of loans in the indicated classifications were as follows(amounts are presented in thousands):

 
| ** **    | ** ** | **Commercial** | ** ** | **Real Estate  Mortgage** | ** ** | **Real Estate  Construction** | ** ** | **Consumer** | ** ** | **Total** | ** ** |
|---------------|------------|----------------|------------|--------------------------------|------------|------------------------------------|------------|--------------|------------|-----------|------------|
| Within 1 year |       | $              | 2,572      |                           | $          | 5,257                              |       | $            | 3,860      |      | $          | 638 |   | $ | 12,327 |   |
| 1 to 5 years  |       | 1,924          |       | 16,580                         |       | 1,376                              |       | 878          |       | 20,758    |       |
| Over 5 years  |       | —         |       | 4,574                          |       | —                             |       | 285          |       | 4,859     |       |
|          |       |           |       |                           |       |                               |       |         |       |      |       |
| Totals        |       | $              | 4,495      |                           | $          | 26,411                             |       | $            | 5,236      |      | $          | 1,801 |   | $ | 37,944 |   |

 

43

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As of December 31,2008, the interest terms of loans in the indicated classification for theindicated maturity ranges are as follows (amounts are presented in thousands):

 
| ** **                              | ** ** | **Fixed Interest  Rates** | ** ** | **Variable  Interest  Rates** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|-----------|------------|
| Commercial,  financial and agricultural |       |                           |       |                          |       |      |       |
| Within 1 year                           |       | $                              | 1,572      |                          | $          | 1,000     |       | $ | 2,572 |   |
| 1 to 5 years                            |       | 1,585                          |       | 339                           |       | 1,924     |       |
| Over 5 years                            |       | —                         |       | —                        |       | —    |       |
|                                    |       |                           |       |                          |       |      |       |
| Real estate —  Mortgage            |       |                           |       |                          |       |      |       |
| Within 1 year                           |       | $                              | 3,784      |                          | $          | 1,473     |       | $ | 5,257 |   |
| 1 to 5 years                            |       | 14,371                         |       | 2,208                         |       | 16,580    |       |
| Over 5 years                            |       | 3,570                          |       | 1,005                         |       | 4,574     |       |
|                                    |       |                           |       |                          |       |      |       |
| Real estate —  Construction        |       |                           |       |                          |       |      |       |
| Within 1 year                           |       | $                              | 881        |                          | $          | 2,979     |       | $ | 3,860 |   |
| 1 to 5 years                            |       | 691                            |       | 685                           |       | 1,376     |       |
| Over 5 years                            |       | —                         |       | —                        |       | —    |       |
|                                    |       |                           |       |                          |       |      |       |
| Consumer                                |       |                           |       |                          |       |      |       |
| Within 1 year                           |       | $                              | 397        |                          | 241        |      | $          | 638 |   |
| 1 to 5 years                            |       | 849                            |       | 29                            |       | 878       |       |
| Over 5 years                            |       | 285                            |       | —                        |       | 285       |       |

 

**InvestmentSecurities**

** **

Investmentsecurities available-for-sale increased $2,696,000, from $8,404,000, at December 31,2007, to $11,100,000, at December 31, 2008. Investment securitiesheld-to-maturity increased $7,178,000, from $0, at December 31, 2007, to$7,178,000, at December 31, 2008.

 

Investmentsecurities as of December 31, 2008 are summarized as follows (amounts arepresented in thousands):

 
| ** **                           | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair Value** | ** ** |
|--------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------------|------------|
| ***Securities  Available for Sale*** |       |                |       |                         |       |                          |       |                      |       |
| U.S. Government  agencies            |       | $                   | 2,382      |                         | $          | 58                            |       | $                         | —     |   | $ | 2,440 |   |
| Mortgage-backed securities           |       | 7,928               |       | 27                           |       | (30                           | )          | 7,926                     |       |
| Equity Securities                    |       | 874                 |       | 1                            |       | (140                          | )          | 735                       |       |
|                                 |       |                |       |                         |       |                          |       |                      |       |
|                                 |       | $                   | 11,183     |                         | 86         |                          | (170       | )                         | $          | 11,100 |   |
| ***Securities  Held to Maturity***   |       |                |       |                         |       |                          |       |                      |       |
| Mortgage-backed  securities          |       | $                   | 7,178      |                         | —     |                          | $          | (48                       | )          | $ | 7,130 |   |
|                                      |            |                     |            |                              |            |                               |            |                           |            |  |  |  |  |

 

44

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Investments securities as of December 31, 2007 are summarized asfollows (amounts are presented in thousands):

 
| ** **                           | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair Value** | ** ** |
|--------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|--------------------------------|------------|
| ***Securities  Available for Sale*** |       |                |       |                         |       |                          |       |                           |       |
| U.S. Government  agencies            |       | $                   | 4,898      |                         | $          | 13                            |       | $                              | (3         | ) | $ | 4,908 |   |
| Mortgage-backed securities           |       | 3,513               |       | 4                            |       | (22                           | )          | 3,495                          |       |
|                                 |       |                |       |                         |       |                          |       |                           |       |
|                                 |       | $                   | 8,412      |                         | $          | 17                            |       | $                              | (24        | ) | $ | 8,404 |   |

 

The following outlines the unrealized losses and fair value by (amountsare presented in thousands):

 
| ** **                           | ** ** | **Less than 12 Months** | ** ** | **12 Months or Greater** | ** ** | **Total**       | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|-----------------------------------------|------------|-----------------|------------|
| ** **                           | ** ** | **Fair  Value**                        | ** ** | **Gross  Unrealized  Losses**           | ** ** | **Fair  Value** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Gross  Unrealized  Losses** | ** ** |
| **2008**                             |       |                                   |       |                                    |       |            |       |   |   |   |   |   |   |
| ***Securities  Available for Sale*** |       |                                   |       |                                    |       |            |       |   |   |   |   |   |   |
| U.S. Government  agencies            |       | $                                      | —     |                                    | $          | —          |       | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Mortgage-backed  securities          |       | 1,690                                  |       | (21                                     | )          | 200             |       | (8 | ) | 1,891 |   | (30 | ) |
| Other Securities  - Equity           |       | 484                                    |       | (140                                    | )          | —          |       | — |   | 484 |   | (140 | ) |
|                                 |       |                                   |       |                                    |       |            |       |   |   |   |   |   |   |
|                                 |       | 2,174                                  |       | (161                                    | )          | 200             |       | (8 | ) | 2,374 |   | (170 | ) |
|                                 |       |                                   |       |                                    |       |            |       |   |   |   |   |   |   |
| ***Securities  Held to Maturity***   |       |                                   |       |                                    |       |            |       |   |   |   |   |   |   |
| Mortgage-backed  securities          |       | 7,130                                  |       | (48                                     | )          | —          |       | — |   | 7,130 |   | (48 | ) |
|                                 |       |                                   |       |                                    |       |            |       |   |   |   |   |   |   |
| **2007**                             |       |                                   |       |                                    |       |            |       |   |   |   |   |   |   |
| ***Securities  Available for Sale*** |       |                                   |       |                                    |       |            |       |   |   |   |   |   |   |
| U.S. Government  agencies            |       | $                                      | —     |                                    | $          | —          |       | $ | 1,997 |   | $ | (3 | ) | $ | 1,997 |   | $ | (3 | ) |
| Mortgage-backed  securities          |       | 436                                    |       | (5                                      | )          | 1,521           |       | (17 | ) | 1,957 |   | (22 | ) |
|                                 |       |                                   |       |                                    |       |            |       |   |   |   |   |   |   |
|                                 |       | $                                      | 436        |                                    | $          | (5              | )          | $ | 3,518 |   | $ | (20 | ) | $ | 3,594 |   | $ | (24 | ) |

 

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

 

The amortized cost and estimated fair value of investment securities at December 31,2008, by contractual maturity, are shown below (amounts are presented inthousands).  Expected maturities willdiffer from contractual maturities because borrowers have the right to call orprepay obligations with or without call or prepayment penalties.

 

45

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| ** **                  | ** ** | **Available for Sale** | ** ** | **Held to Maturity** | ** ** |
|-----------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                  | ** ** | **Amortized  Cost**              | ** ** | **Fair  Value**                | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** |
| U.S Government  Agencies    |       |                             |       |                           |       |   |   |   |   |
| Within 1 Year               |       | $                                | 500        |                           | $          | 501 |   | $ | — |   | $ | — |   |
| 1 to 5 Years                |       | 400                              |       | 403                            |       | — |   | — |   |
| 5 to 10 Years               |       | 982                              |       | 1,035                          |       | — |   | — |   |
| Over 10 Years               |       | 500                              |       | 500                            |       | — |   | — |   |
| Equity  Securities          |       |                             |       |                           |       |   |   |   |   |
| 1 to 5 Years                |       | 874                              |       | 735                            |       | — |   | — |   |
| Mortgage Backed  Securities |       | 7,928                            |       | 7,926                          |       | 7,178 |   | 7,130 |   |
|                        |       |                             |       |                           |       |   |   |   |   |
|                        |       | $                                | 11,183     |                           | $          | 11,100 |   | $ | 7,178 |   | $ | 7,130 |   |

** **

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

 

The followingtable presents the maturities of investment securities at carrying value andthe weighted average yields for each range of maturities presented as of December 31,2008 (amounts are presented in thousands):

 
| ** **                     | ** ** | **U.S.  Government  Agencies** | ** ** | **Weighted  Average  Yields** | ** ** | **Mortgage  Backed  Securities** | ** ** | **Weighted  Average  Yields** | ** ** | **Equity  Securities** | ** ** | **Weighted  Average  Yields** | ** ** |
|--------------------------------|------------|--------------------------------|------------|-------------------------------|------------|----------------------------------|------------|-------------------------------|------------|------------------------|------------|-------------------------------|------------|
| 3 Months or Less               |       | $                              | 500        |                          | 3.63       | %                                | $          | 1,383                         |       | 5.99                   | %          | $                             | —     |   | — | % |
| After 3 Months  through 1 Year |       | 400                            |       | 4.15                          |       | 951                              |       | 8.93                          |       | —                 |       | —                        |       |
| After 1 through  5 years       |       | —                         |       | N/A                           |       | 6,929                            |       | 6.99                          |       | 874                    |       | 7.87                          |       |
| Over 5 years                   |       | 1,482                          |       | 5.58                          |       | 5,842                            |       | 6.90                          |       | —                 |       | —                        |       |
|                                |            |                                |            |                               |            |                                  |            |                               |            |                        |            |                               |            |  |  |  |

 

**Deposits**

** **

At December 31,2008, total deposits were $57,121,000 an increase of $26,115,000, or 84%, from December 31,2007. Demand deposits (interest bearing and non-interest bearing) totaled$4,118,000, and increase of $1,255,000, or 44%, during 2008.  Money Market Deposit Accounts and savingsdeposits increased $4,460,000, or 376%, and time deposits increased $20,402,000,or 76%, during the same time period.

 

Balances withinthe major deposit categories as of December 31, 2008 and December 31,2007 are as follows (amounts are presented in thousands):

 
| ** **                            | ** ** | **2008**   | ** ** | **2007** | ** ** |
|---------------------------------------|------------|------------|------------|----------|------------|
| ** **                            | ** ** | **Amount** | ** ** | **Rate** | ** ** | **Amount** | ** ** | **Rate** | ** ** |
| Non-interest-bearing  demand deposits |       | $          | 3,036      |     | N/A        |   | $ | 1,567 |   | N/A |   |
| Interest-bearing  demand deposits     |       | 1,082      |       | 2.08     | %          | 1,296 |   | 3.01 | % |
| MMDA and Savings  deposits            |       | 5,645      |       | 2.77     | %          | 1,185 |   | 1.24 | % |
| Time deposits  less than $100,000     |       | 35,944     |       | 4.67     | %          | 26,152 |   | 5.16 | % |
| Time deposits over  $100,000          |       | 11,414     |       | 4.54     | %          | 806 |   | 5.32 | % |
|                                  |       | $          | 57,121     |     |       |   | $ | 31,006 |   |   |   |

 

46

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Maturities of timecertificates of deposit of $100,000 or more outstanding at December 31,2008 are summarized as follows (amounts are presented in thousands):

 
| Within 3 months            |   | $      | 955    |   |
|----------------------------|--------|--------|--------|--------|
| After 3 through  6 months  |   | 2,512  |   |
| After 6 through  12 months |   | 7,408  |   |
| After 12 months            |   | 539    |   |
|                       |   |   |   |
| Total                      |   | $      | 11,414 |   |

 

**CapitalResources**

** **

Total shareholders’equity decreased from $3,494,000 at December 31, 2007, to $3,164,000, at December 31,2008.  During 2008, we raised $3,370,006in additional capital through the sale of common stock in a privateplacement.  The capital was used to fund$3,515,000 in net operating losses for the year ended December 31, 2008.

 

Bank holdingcompanies and their banking subsidiaries are required by banking regulators tomeet specific minimum levels of capital adequacy, which are expressed in theform of ratios.  Capital is separatedinto Tier 1 capital (essentially common stockholders’ equity less intangibleassets) and Tier 2 capital (essentially the allowance for loan losses limitedto 1.25% of risk-weighted assets).  Thefirst two ratios, which are based on the degree of credit risk in our assets,provide for the weighting of assets based on assigned risk factors and includeoff-balance sheet items such as loan commitments and stand-by letters ofcredit.  The ratio of Tier 1 capital torisk-weighted assets must be at least 4.0% and the ratio of Total capital (Tier1 capital plus Tier 2 capital) to risk-weighted assets must be at least 8.0%.

 

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

 

The followingtable summarizes the Bank’s risk-based capital ratios at December 31,2008:

 
| Tier 1 capital  (to risk-weighted assets) |   | 8.04 | % |
|-------------------------------------------|--------|------|---|
| Total capital  (to risk-weighted assets)  |   | 9.29 | % |
| Tier 1 capital  (to total average assets) |   | 6.07 | % |

 

In July 2008,we commenced a private offering of shares of our common stock to a limited numberof accredited investors.  We are using the net proceeds for workingcapital purposes, including the possible redemption of preferred stock. There is no minimum number of shares which must be sold in order for us toaccept subscriptions in the offering, and no assurance can be given as towhether we will sell any additional shares in the offering.  During 2008,we had received proceeds of $3,370,006 from the sale of 2,246,669 shares in theoffering.  The common stock to be sold in the offering has not beenregistered under the Securities Act and may not be offered or sold in theUnited States absent registration or an applicable exemption from registrationrequirements.

 

**Liquidity**

** **

The Bank mustmaintain, on a daily basis, sufficient funds to cover the withdrawals fromdepositors’ 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.  As of December 31, 2008, the Bank was “adequatelycapitalized” but was not “well-capitalized” and as a result the Bank will berequired, among other things, to obtain approval of the FDIC before furtherparticipating in 

 

47

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the brokereddeposit market which may adversely affect the Bank’s liquidity.  It is the policy of the Bank to monitor itsliquidity to meet regulatory requirements and our local funding requirements.

 

Although the Bank’sloan portfolio is diversified, a substantial portion of its borrowers’ abilityto honor the terms of their loans depends on the economic conditions in theBank’s market areas.

 

The Bank maintainsrelationships with correspondent banks that can provide funds to it on shortnotice, if needed.  The Bank has a lineof credit totaling $9,783,000, representing 20% of the Bank’s total assets at September 30,2008.  At December 31, 2008, theBank has one advance from the Federal Home Loan Bank of Atlanta (FHLB) in theamount of $2,000,000.  The advance bearsinterest at a fixed interest rate of 2.497 percent and matures on May 1,2013.  The Bank has pledged as collateralinvestment securities with a carrying amount of $10,135,777 and eligibleresidential and commercial real estate loans with a carrying amount of$8,271,517 at December 31, 2008 .

 

At December 31,2007, the Bank had two advances from the FHLB in the amount of $4,000,000.  The advances matured during 2008.  The Bank had pledged as collateral investmentsecurities available for sale with a carrying amount of $7,009,675 at December 31,2007.

 

The Bank has linesof credit available with correspondent banks which represent available creditfor overnight borrowing from financial institutions.  As of December 31, 2008 and 2007, thesesecured lines of credit totaled $1,000,000 and $2,000,000, respectively, ofwhich no balances were outstanding.  TheBank has pledged investment securities with a carrying amount of$1,428,000 as collateral for the one line available at December 31,2008.

 

In December 2008,the Bank was approved to borrow from the Federal Reserve Bank discount windowprogram.  As of December 31,2008 theBank’s primary borrowing capacity was $5,442,000, based on pledged investmentsecurities with a carrying amount of $5,815,000.

 

Cash and cashequivalents as of December 31, 2008 decreased $6,124,000 from December 31,2007.  Net cash used by operatingactivities totaled $2,385,000 in 2008. Inflows from financing activities totaled $27,345,000, which wereattributable to net increase in deposits of $26,115,000, while financingactivities resulting from the issuance of common stock provided the Companycash proceeds in the amount of $3,370,006.

 

During 2008, netcash used by investing activities totaled $31,084,000.  Maturities, calls and principal pay-downs ofinvestment securities provided $5,839,000. Also, proceeds from the sale of Other Real Estate provided an additional$159,000 to cash and cash equivalents. Cash from investing activities was used for increased lending of$20,822,000 and for purchases of investment securities available-for-sale of$8,288,000, purchases of securities held-to-maturity of $7,166,000, and equitysecurities with no readily available market value of $312,000.

 

**OffBalance 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 certaincommitments are expected to expire without being drawn upon, the totalcommitment amounts do 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.

 

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The followingtable summarizes our off-balance-sheet financial instruments whose contractamounts represent credit risk as of December 31, 2008:

 
| Commitments to  extend credit |   | $ | 3,093,000 |   |
|-------------------------------|--------|---|-----------|--------|
| Standby letters  of credit    |   | $ | 261,000   |   |

 

**Inflation**

 

Inflation impactsthe growth in total assets in the banking industry and causes a need toincrease equity capital at higher than normal rates to meet capital adequacyrequirements.  We cope with the effectsof inflation through the management of interest rate sensitivity gap position,by periodically reviewing and adjusting our pricing of services to considercurrent costs and through managing our level of net income relative to ourdividend payout policy.

 

**SelectedRatios**

** **

The followingtable sets out specified ratios of the Company for the years indicated.

 
| ** **                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
|                               |       |     |       |     |       |
| Net loss to:                       |       |     |       |     |       |
| Average  shareholders’ equity |       | (121.19  | )%         | (36.51   | )%         |
| Average assets                     |       | (7.68    | )%         | (3.17    | )%         |
| Dividends to net  loss             |       | —   |       | —   |       |
| Average equity  to average assets  |       | 6.33     | %          | 8.68     | %          |

 

**RecentAccounting Pronouncements**

** **

Accountingstandards that have been issued or proposed by the Financial AccountingStandards Board and other standard setting entities that do not requireadoption until a future date are not expected to have a material impact on ourconsolidated financial statements upon adoption.

 

In September 2006,the FASB issued Statement No. 157, *FairValue Measurements*. This statement defines fair value, establishes aframework for measuring fair value and expands disclosures about fair valuemeasurements. This statement establishes a fair value hierarchy about theassumptions used to measure fair value and clarifies assumptions about risk andthe effect of a restriction on the sale or use of an asset. The standard iseffective for fiscal years beginning after November 15, 2007. In February 2008,the FASB issued Staff Position (FSP) 157-2, *EffectiveDate of FASB Statement No. 157*. This FSP delays the effectivedate of FAS 157 for all non-financial assets and non-financial liabilities,except those that are recognized or disclosed at fair value on a recurringbasis (at least annually) to fiscal years beginning after November 15,2008, and interim periods within those fiscal years. The Company adoptedStatement No. 157 effective January 1, 2008 which had no effect onthe consolidated balance sheets or consolidated statements of operations.

 

In February 2007, the FASB issued Statement No. 159,*The Fair Value Option for Financial Assetsand Financial Liabilities*. The standard provides companies with anoption to report selected financial assets and liabilities at fair value andestablishes presentation and disclosure requirements designed to facilitatecomparisons between companies that choose different measurement attributes forsimilar types of assets and liabilities. The Company did not elect the fairvalue option for any financial assets or financial liabilities as of January 1,2008, the effective date of the standard.

 

In December 2007, the FASB issued SFAS No. 141(revised 2007), *Business Combinations*(FAS 141R). The statement establishesprinciples and requirements for how the acquirer of a business recognizes andmeasures in its financial statements the identifiable assets acquired, theliabilities assumed, and any non-controlling interest in 

 

49

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the acquiree. The statement also provides guidance for recognizing andmeasuring the goodwill acquired in the business combination and determines whatinformation to disclose to enable users of the financial statement to evaluatethe nature and financial effects of the business combination. SFAS No. 141Ris effective for financial statements issued for fiscal years beginning after December 15,2008. Accordingly, any business combinations the Company engages in will berecorded and disclosed following existing generally accepted accountingprinciples until January 1, 2009. The Company expects SFAS No. 141Rwould have an impact on its consolidated financial statements when effective ifit acquires another company, but the nature and magnitude of the specificeffects will depend upon the nature, terms and size of the acquisitions theCompany consummates after the effective date.

 

In December 2007, the FASB issued SFAS No. 160,“*Non-controlling Interests in ConsolidatedFinancial Statements,”*which provides guidance for accounting andreporting of non-controlling (minority) interests in consolidated financialstatements. The statement is effective for fiscal years and interim periodswithin fiscal years beginning on or after December 15,2008.  The Company does not hold minority interests in subsidiaries,therefore it is expected that SFAS No. 160 will have no impact on itsfinancial condition or results of operations.

 

**Item 8.****                                                          ****Financial Statements.**

** **

The following financial statements are included as Exhibit 99.1,and are incorporated herein by reference:

 

·                  Report of Independent Registered PublicAccounting Firm;

 

·                  Consolidated Balance Sheets;

 

·                  Consolidated Statements of Operations;

 

·                  Consolidated Statements of Comprehensive Income(Loss);

 

·                  Consolidated Statements of Changes inShareholders’ Equity;

 

·                  Consolidated Statements of Cash Flows; and

 

·                  Notes to Consolidated Financial Statements.

 

**Item 9.****                                                          ****Changes In and Disagreements withAccountants on Accounting and Financial Disclosure.**

 

None.

 

**Item 9A(T).****          ****Controlsand Procedures.**

** **

**Evaluation of Disclosure Controls and Procedures**

 

As ofthe end of the period covered by this report, we carried out an evaluation,under the supervision and with the participation of our management, includingour Chief Executive Officer and Chief Financial Officer, of the effectivenessof our disclosure 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 31,2008.  There have been no significantchanges in our internal controls over financial reporting during the fourthfiscal quarter ended December 31, 2008 that have materially affected, orare reasonably likely to materially affect, our internal controls overfinancial reporting.

 

Thedesign of any system of controls and procedures is based in part upon certainassumptions about the likelihood of future events.  There can be no assurance that any designwill succeed in achieving its stated 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.

 

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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 31,2008 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 31,2008.

 

The Company iscontinuously seeking to improve the efficiency and effectiveness of itsoperations and of its internal controls. This results in modifications to itsprocesses throughout the Company. However, there has been no change in itsinternal control over financial reporting that occurred during the Company’smost recent fiscal quarter that has materially affected, or is reasonablylikely to materially affect, the Company’s internal control over financialreporting.

 

This annual report doesnot include an attestation report of the Company’s registered public accountingfirm regarding internal control over financial reporting. Management’s reportwas not subject to attestation by the Company’s registered public accountingfirm pursuant to temporary rules of the Securities and Exchange Commissionthat permit the Company to provide only management’s report in this annualreport.

 

**Changes in Internal Controls**

** **

There was no change inour internal control over financial reporting that occurred during the quarterended December 31, 2008 that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

 

The design of any system of controls and procedures isbased in part upon certain assumptions about the likelihood of futureevents.  There can be no assurance thatany design will succeed in achieving its stated goals under all potentialfuture conditions, regardless of how remote.

 

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

** **

During 2008, we issued 2,246,669 shares of ourcommon stock, of which 1,305,001 were issued in the fourth quarter, inconsideration of $3,370,006 before expenses to accredited investors intransactions exempt from registration under Section 4(2) of theSecurities Act and Regulation D under the Securities Act relating to sales notinvolving any public offering.  The shares were sold by our officers anddirectors with the assistance of our sales agents, Commerce Street Capital, LLCand FIG Partners, L.L.C.  Our common stock was sold only to investors thatwe believed were accredited investors.  Our directors and officersreceived no compensation in connection with the sale of shares.

 

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**PART III**

 

**Item 10.****                                                   ****Directors, Executive Officer,Promoters, Corporate Governance.**

** **

**Directors**

** **

The Company’s Board ofDirectors consists of eight members. Each director serves a one-year term, expiring at the annual meeting ofshareholders, upon the election and qualification of the director’ssuccessor.  The following table shows foreach director:  (a) his or her name;(b) his or her age at December 31, 2008; (c) how long he or shehas been a director of the Company; and (d) his or her position(s) withthe Company.

 
| **Name (Age)**                     | ** ** | **Director  Since** | ** ** | **Position  with the Company**    |
|------------------------------------|------------|---------------------|------------|-----------------------------------|
| ** **                         | ** ** | ** **          | ** ** | ** **                        |
| William A.  Bagwell, Jr. (37) |       | 2007                |       | Director of the Company  and Bank |
|                               |       |                |       |                              |
| William R. Blanton (61)            |       | 2007                |       | Director of the Company  and Bank |
|                               |       |                |       |                              |
| Lanny W. Dunagan (57)              |       | 2002                |       | Director of the Company  and Bank |
|                               |       |                |       |                              |
| William M.  Evans, Jr. (57)   |       | 2007                |       | Director of the Company  and Bank |
|                               |       |                |       |                              |
| Gilbert T.  Jones, Sr. (72)   |       | 2000                |       | Director of the Company  and Bank |
|                               |       |                |       |                              |
| J. Allen  Nivens, Jr. (33)    |       | 2007                |       | Director of the Company  and Bank |
|                               |       |                |       |                              |
| Dr. Wendell A.  Turner (51)   |       | 2001                |       | Director of the Company  and Bank |
|                               |       |                |       |                              |
| R.K. Whitehead III (43)            |       | 2007                |       | Director of the Company  and Bank |

** **

**Background of Directors**

** **

*WilliamA. Bagwell, Jr.*  Mr. Bagwellhas been employed by Homestead Investments, LLC, a real estate investment company,since 2005.  Prior to that employment, 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.

 

*WilliamR. Blanton*.  Mr. Blantonhas over 35 years of banking experience and serves as the Chairman of our Boardof Directors and our Chief Executive Officer. Mr. Blanton currently serves as Chief Executive Officer of FirstCovenant Bank.  Mr. Blanton is alsoPresident of CINC Systems, LLC, a software company specializing in software forthe banking and non-profit industries, and Accounting Integrators’, LLC asoftware company specializing in integrating non-profit organizationsdepository accounts with banks.  In addition,he is the managing member of Terrazza Realty Advisors, LLC and Terrazza RealtyInvestments, LLC, real estate investment companies.  Mr. Blanton served as President of FirstCapital Bank from August 1989 through November 2005.  Mr. Blanton has also held executivepositions with Investors Bank & Trust in Duluth, Georgia and severalother community banks.  In addition, Mr. Blantonpreviously served as President of Bank Analysts, a bank consulting firm and asan examiner for the Georgia Department of Banking and Finance.  Mr. Blanton serves on the board ofdirectors of First Covenant Bank, United Americas Bankshares, Inc., andits subsidiary United Americas Bank, and Kings Ridge Christian School.  Mr. Blanton holds a degree in accountingfrom Georgia State University.

 

*Lanny W.Dunagan*.  Mr. Dunaganis a Hall County native and is the sole owner of Lanny Dunagan’s WeldingService, a company he founded in 1984. He is a member and trustee of Hopewell Baptist Church in Gainesville,Georgia.

 

*WilliamM. Evans, Jr.*  Mr. Evansis the President of Fox Creek Properties, Inc., a land developmentbusiness, a position he has held since 1993. He is also a Vice-President with Piedmont Investments.  Mr. Evans has been a founding member ofthree banks:  Heritage Bank, PremierBankshares and Piedmont Bank.  He mostrecently

 

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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.

 

*GilbertT. Jones, Sr.*  Mr. Jonesretired in 2008.  Prior to his retirementhe was the sole owner and President of Great Southern Resource and InvestmentInc., a development and construction company. Mr. Jones is a graduate of the Woodrow Wilson College of Law.

 

*J. AllenNivens, Jr.*  Mr. Nivensengages in commercial and acreage sales with The Norton Agency, a real estateand insurance firm in North Georgia, a position he has held since 2005.  From 2003 through 2005, Mr. Nivensserved as the Vice President of Commercial Lending at Hamilton State Bank.  Prior to that position, he served as acommercial lender for Regions Bank from 1998 through 2003.  In the community, Mr. Nivens is Chairmanof the John Jarrard Foundation, on the Gainesville State College FoundationExecutive Board, on the Greater Hall Chamber of Commerce Board and the 2006Hall County Young Man of the Year.  Mr. Nivensholds a degree in management from the Georgia Institute of Technology.

 

*Dr. WendellA. Turner*.  Dr. Turneris a medical doctor and has been practicing with Gainesville Gynecology, LLCsince 2007.  Prior to opening GainesvilleGynecology, LLC, he practiced with Lanier OB/GYN Associates LLC from 2003 until2007.  Dr. Turner holds anassociates degree in art from Clayton State College and a bachelor of sciencedegree in chemistry from the Georgia Institute of Technology.  He received his M.D. degree from the MedicalCollege of Georgia in 1982.

 

*R.K.Whitehead III*.  Mr. Whiteheadhas served as the President of Whitehead Die Casting Co., an aluminum and zincdie casting manufacturer, since 1990.  Mr. Whiteheadis also the President of WDI Company, a real estate business located inGainesville, Georgia.  In addition, hecurrently serves as Chairman of the Greater Hall Chamber of Commerce and asChairman of the Finance Committee of the Northeast Georgia Health System.  Mr. Whitehead holds a bachelor ofmechanical engineering from the Georgia Institute of Technology.

 

**Executive Officers**

 

The table below shows thefollowing information for the Company’s and the Bank’s executive officers as ofMarch 30, 2009:  (a) his or hername; (b) his or her age at December 31, 2008; (c) how long heor she has been an executive officer of the Company; and (d) his or herpositions with the Company and the Bank:

 
| **Name (Age)**          | ** ** | **Executive  Officer  Since** | ** ** | **Position  with the Company  and Business Experience**                      |
|-------------------------|------------|-------------------------------|------------|------------------------------------------------------------------------------|
|                    |       |                          |       |                                                                         |
| William R. Blanton (61) |       | 2008                          |       | Chairman, President and  Chief Executive Officer of the Company and the Bank |
|                    |       |                          |       |                                                                         |
| Denise Smyth (45)       |       | 2008                          |       | Principal Financial and  Accounting Officer of the Company and the Bank      |
|                    |       |                          |       |                                                                         |
| Chris England (50)      |       | 2008                          |       | President of the South  Hall division of the Bank                            |
|                    |       |                          |       |                                                                         |
| Kurt A. Hansen (41)     |       | 2008                          |       | President of the  Gainesville division of the Bank                           |
|                    |       |                          |       |                                                                         |
| Michael A. Harris (43)  |       | 2008                          |       | President of the Athens  division of the Bank                                |

** **

**Background of Executive Officers of the Company**

** **

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

 

*DeniseSmyth*.  Ms. Smythwas appointed the Principal Financial and Accounting 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 

 

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Covenant Bank, a positionshe has 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.

 

**Background of Executive Officersof the Bank**

** **

*ChrisEngland*.  Mr. Englandwas appointed as the President of the South Hall division of the Bank in April 2008.  Prior to joining us, from 1998 until 2008, Mr. Englandheld various banking positions with Southern Heritage Bank, including SeniorVice President, Executive Vice President and Division President.  Mr. England holds a B.S.I.M. degree fromthe Georgia Institute of Technology.

 

*Kurt A.Hansen*.  Mr. Hansenwas appointed as the President of the Gainesville division of the Bank in May 2008.  Prior to joining the Bank, from October 2005until May 2008, Mr. Hansen served as Senior Vice President of theretail division of Gainesville Bank & Trust, where he managed theretail staff and helped develop the strategic direction for the bank.  From October 2002 until October 2005,Mr. Hansen served as Senior Vice President and Wealth Management Directorfor BB&T, for both the banking and investment and financial planningdivisions.

 

*MichaelA. Harris.* Mr. Harris was appointed as the President ofthe Athens division of the Bank in May 2008.  Prior to joining the Bank, from August 2004until May 2008, Mr. Harris served as Senior Vice President ofCommercial Lending at Bank of Athens, a division of Gainesville Bank &Trust.   From April 1999 until August 2004,Mr. Harris worked for Wachovia Bank, N.A., where he served as Vice Presidentof Community Banking, and then as City President.  Prior to joining Wachovia Bank, Mr. Harrisheld various positions with Bank of America, N.A. from December 1983 untilApril 1999, including Vice President of Professional and ExecutiveBanking.

 

**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 theirownership of the Company’s common stock. The directors, its executive officer, and greater than 10% shareholdersare required 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:

 

Mr. Blanton failedto timely file a Form 4 for his sale of 55,350 shares of common stock and99,999 warrants on June 30, 2008.  Mr. Blantonhas filed a late Form 4 to report these sales.

 

Mr. Whitehead failedto timely file a Form 4 for his purchase of  36,900 shares of common stock and 66,665warrants on June 30, 2008.  Mr. Whiteheadhas filed a late Form 4 to report these sales.

 

Mr. Nivens failed totimely file a Form 4 for his purchase of 36,900 shares of common stock and66,665 warrants on June 30, 2008.  Mr. Nivenshas filed a late Form 4 to report these sales.

 

Mr. Evans failed totimely file a Form 4 for his sale of 18,450 shares of common stock and33,333 warrants on June 30, 2008, and the purchase of 333,333 commonshares by his wife, on December 31, 2008. Mr. Evans has filed a late Form 4 to report thesetransactions.

 

Golden Isles ReinsuranceCo. LTD, a beneficial owner of more than ten percent of the Company’s commonstock, failed to timely file a Form 3 upon becoming a beneficial owner on January 15,2009.  Golden Isles Reinsurance Co. LTDhas filed a late Form 3 to report its beneficial ownership.

 

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Joe McCart, a beneficial owner of more than tenpercent of the Company’s common stock, failed to timely file a Form 3 uponbecoming a beneficial owner on January 15, 2009.  Mr. McCart has filed a late Form 3to report his beneficial ownership.

 

**Code ofEthics**

** **

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.

 

**AuditCommittee**

 

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 2008 were William R. Blanton, Chairman;Lanny W. Dunagan; Dr. Wendell A. Turner; Gilbert Jones, Sr., WilliamM. Evans, Jr., William A. Bagwell, Jr. J. Allen Nivens and R.K.Whitehead, III.  Each of thesemembers, except our Chief Executive Officer, Mr. Blanton, meets therequirement for independence under applicable NASDAQ listing standards.  Our Board of Directors has determinedthat Mr. Blanton and Mr. Whitehead qualify as audit committeefinancial experts under the SEC rules.

 

**Item 11.****                ****Executive Compensation.**

 

The following table setsforth the annual compensation for certain of our executive officers, forservices in all capacities to the Company or our Bank subsidiary for fiscalyear 2008.

 

**SummaryCompensation Table**

 
| **Name and Principal Position**                  | ** ** | **Year**            | ** ** | **Salary  ($)** | ** ** | **Bonus  ($)** | ** ** | **Stock  Awards  ($)** | ** ** | **Option  Awards(1)($)** | ** ** | **Non-  Equity  Incentive  Plan  Comp.  ($)** | ** ** | **Nonqualified  Deferred  Comp.  Earnings  ($)** | ** ** | **All Other  Comp.(2) ($)** | ** ** | **Total  ($)** | ** ** |
|-----------------------------------------------------------------|------------|---------------------|------------|-----------------|------------|----------------|------------|------------------------|------------|--------------------------|------------|-----------------------------------------------|------------|--------------------------------------------------|------------|---------------------------------------|------------|----------------|------------|
| ** **                                                      | ** ** | **(in  thousands)** | ** ** |
| William R. Blanton  Chief Executive Officer                     |       | 2008                |       | $               | 0          |           | —     |                   | —     |                     | $          | 0                                             |       | —                                           |       | —                                |       | —         |       | $ | 0 |   |
| R. Allen Smith,  Former Principal Executive Officer             |       | 2008                |       | $               | 82         |           |       |                   |       |                     |       |                                          |       |                                             |       |                                  |       |           | $          | 82 |   |
|                                                            | 2007       |                | $          | 212             |       | —         |       | —                 |       | $                        | 24         |                                          | —     |                                             | —     |                                  | —     |           | $          | 236 |   |
| Chris England  President of the South Hall Division of the Bank |       | 2008                |       | $               | 107        |           | —     |                   | $          | 7                        |       | —                                        |       | $                                                | 8          |                                  | —     |           | —     |   | $ | 122 |   |
|                                                                 |            |                     |            |                 |            |                |            |                        |            |                          |            |                                               |            |                                                  |            |                                       |            |                |            |  |  |  |  |  |

 

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(1) Represents theFAS 123R expense related to the options held by each individual.

 

(2) We have omittedinformation on perquisites and other personal benefits because the aggregateamount of these items does not meet the minimum amount required for disclosureunder the SEC’s regulations.

 

On October 25, 2006,Allen Smith, was named President of the Bank and Principal Executive Officer ofthe Company.  Prior to this appointment, Mr. Smithhad served as a consultant to the Company and its Board of 

 

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Directors. Mr. Smithalso previously served as Interim Chief Executive and Financial Officer of theCompany.  Pursuant to the terms of theconsulting arrangement with the Company, Mr. Smith will continue to bepaid $125 per hour for his services. Mr. Smith resigned from the positioneffective May 31, 2008, however, he will continue to be a member of theBoard of Directors of First Century Bank.

 

**Change ofControl Agreements**

** **

We entered into anagreement with Chris England which provides that upon a “Change of Control,” Mr. Englandwould be entitled to receive an amount equal to two times his then current basesalary.  “Change of Control” is definedas the exercise of power, directly or indirectly, to direct management orpolicies of the Company by any person that does not own or control 25% of thecommon stock or other voting securities of the Company as of the date of theagreement or the acquisition by any person of 25% or more of any class ofvoting securities.

 

**OutstandingEquity Awards at December 31, 2008**

 
| ** **     | ** ** | **Option Awards**                                                                 | ** ** |
|----------------|------------|----------------------------------------------------------------------------------------|------------|
| **Name**       | ** ** | **Number of  Securities  Underlying  Unexercised Options  (#)  Exercisable** | ** ** | **Number of  Securities  Underlying  Unexercised Options  (#)  Unexercisable** | ** ** | **Option Exercise  Price  ($)** | ** ** | **Option Expiration  Date** | ** ** |
|           |       |                                                                                   |       |   |   |   |   |   |   |
| R. Allen Smith |       | 100,000                                                                                |       | — |   | $ | 5.00 |   | September 20, 2015 |   |
|           |       |                                                                                   |       |   |   |   |   |   |   |
| Chris England  |       | —                                                                                 |       | 90,000 |   | $ | 2.00 |   | April 30, 2018 |   |

 

**Director Compensation**

 

Thedirectors of the Company were not compensated separately for their services asdirectors for fiscal year 2008.

 

**EquityCompensation Plan Information**

** **

The table below setsforth information regarding shares of the Company’s common stock authorized forissuance as of December 31, 2008 under the following the Company equitycompensation plans or agreements:

 

·      FirstCentury Bancorp., Inc. 2003 Stock Incentive Plan;

 

·      FirstCentury Bancorp., Inc. Non-Qualified Stock Option Agreement with R. AllenSmith; and

 

·      FirstCentury Bancorp. Warrant Agreements with 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.

 

56

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| ** **                                                  | ** ** | **Number of  securities to be  issued upon exercise  of outstanding  options** | ** ** | **Weighted-average  exercise price of  outstanding options** | ** ** | **Number of securities  remaining available for  future issuance under the  equity compensation plans  (excluding shares subject  to outstanding options)** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                        |       |                                                                                                         |       |                                                                        |       |                                                                                                                                                                                                                         |       |
| Equity  compensation plans approved by security holders     |       | 438,334                                                                                                      |       | $                                                                           | 2.27       |                                                                                                                                                                                                                         | 311,666    |   |
| Equity  compensation plans not approved by security holders |       | 253,393                                                                                                      |       | $                                                                           | 8.03       |                                                                                                                                                                                                                         | —     |   |
|                                                        |       |                                                                                                         |       |                                                                        |       |                                                                                                                                                                                                                         |       |
| **Total**                                                   |       | 691,727                                                                                                      |       | $                                                                           | 4.38       |                                                                                                                                                                                                                         | 311,166    |   |

*** ***

***Non-QualifiedStock Option Agreement with R. Allen Smith.* **On September 20, 2005 the Companyentered a consulting agreement with Mr. Smith, pursuant to which theCompany issued a warrant to Mr. Smith to purchase 100,000 shares of theCompany’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 issuedwarrants to its directors to purchase an aggregate of 199,736 shares of theCompany’s common stock at an exercise price of $10.00 per share.  The warrants become exercisable in one-thirdannual increments beginning on the first anniversary of the issuance date,provided that throughout the period beginning on the date of the initialissuance of the warrants and ending on the particular anniversary, the warrantholder has served continuously as a director of the Company and the Bank andhas attended at least 75% of the meetings of the relevant boards of directors.  Warrants which fail to vest as provided inthe previous sentence will expire and no longer be exercisable.  Exercisable warrants will generally remainexercisable for the 10-year period following the date of issuance.  The exercise price of each warrant is subjectto adjustment for stock splits, recapitalizations or other similar events.  As of December 31, 2008, 153,393warrants remained outstanding of which 153,393 are exercisable.

 

**Item 12.****                ****Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters.**

 

The following table setsforth the number of shares of the Company’s common stock beneficially owned asof December 31, 2008 by (a) each director and the executive officersnamed in the Summary Compensation Table and (b) the executive officers andall directors, as a group.  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 December 31, 2008.

 

57

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| **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                          |       | 5.2                       | %          | Includes warrants to purchase 136,332 shares held by  Homestead Investment, LLC                                                         |       |
| William R.  Blanton                                               |       | 442,806                    |       | 850,254                                          |       | 1,293,060                        |       | 26.8                      | %          |                                                                                                                                    |       |
| William M.  Evans, Jr.                                       |       | 484,129                    |       | 283,418                                          |       | 767,547                          |       | 18.0                      | %          | 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                           |       | 1.4                       | %          | Includes 500 shares held jointly with  Mr. Dunagan’s son                                                                      |       |
| Gilbert  Jones, Sr.                                          |       | 48,926                     |       | 20,534                                           |       | 69,460                           |       | 1.7                       | %          | Includes 500 shares held as joint custodian for  Mr. Jones’ grandchildren                                                     |       |
| J. Allen  Nivens, Jr.                                        |       | 37,345                     |       | 69,165                                           |       | 106,510                          |       | 2.6                       | %          |                                                                                                                                    |       |
| Dr. Wendell  Turner                                          |       | 77,327                     |       | 27,067                                           |       | 104,394                          |       | 2.6                       | %          |                                                                                                                                    |       |
| R. K.  Whitehead, III                                        |       | 37,345                     |       | 69,165                                           |       | 106,510                          |       | 2.6                       | %          |                                                                                                                                    |       |
| R. Allen Smith                                                    |       | 11,631                     |       | 100,000                                          |       | 111,631                          |       | 2.7                       | %          |                                                                                                                                    |       |
|                                                              |       |                       |       |                                             |       |                             |       |                      |       |                                                                                                                                    |       |
| **All  Directors and Executive Officers as a Group (9 persons):** |       |
|                                                              |       | 1,258,545                  |       | 1,569,269                                        |       | 2,827,814                        |       | 51.0                      | %          |                                                                                                                                    |       |
|                                                              |       |                       |       |                                             |       |                             |       |                      |       |                                                                                                                                    |       |
| **5  Percent Shareholders:**                                      |       |
|                                                              |       |                       |       |                                             |       |                             |       |                      |       |                                                                                                                                    |       |
| Richard T. Smith                                                  |       | 333,334                    |       | 0                                                |       | 0                                |       | 8.4                       | %          |                                                                                                                                    |       |
|                                                              |       |                       |       |                                             |       |                             |       |                      |       |                                                                                                                                    |       |
| Golden Isles  Reinsurance Co. Ltd.                                |       | 666,668                    |       | 0                                                |       | 0                                |       | 16.8                      | %          |                                                                                                                                    |       |
| Joe E. McCart                                                     |       | 500,000                    |       | 0                                                |       | 0                                |       | 16.3                      | %          |                                                                                                                                    |       |

 

----

(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 on3,979,127 shares of common stock of the company outstanding as of December 31,2008, 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.

 

58

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** **

**Item 13.****                ****Certain Relationships and Related Transactions, and DirectorIndependence**

** **

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:

 

·      mustbe evidenced by a promissory note naming the Bank as payee and must contain anannual percentage rate which is reasonably comparable to that normally chargedto non-affiliates by other commercial lenders for similar loans made in theBank’s locale;

 

·      mustbe repaid according to appropriate amortization schedules and contain defaultprovisions comparable to those normally used by other commercial lenders forsimilar loans made to non-affiliates in the Bank’s locale;

 

·      mustbe made only if credit reports and financial statements, or other reasonableinvestigation appropriate in light of the nature and terms of the loan andwhich meet the loan policies normally used by other commercial lenders forsimilar loans made to non-affiliates in the Bank’s locale, show the loan to becollectible and the borrower a satisfactory credit risk; and

 

·      thepurpose of the loan and the disbursement of proceeds are reviewed and monitoredin a manner comparable to that normally used by other commercial lenders forsimilar loans made in the Bank’s locale.

 

In April 2007, Mr. Blantonpurchased 738,008 shares of our common stock in a private placement at $2.71per share.  We also issued Mr. Blantonwarrants to purchase up to 738,008 shares at $2.71 per share.  The warrant has no expiration date andcontains provisions which provide for automatic adjustments in price and sharespurchasable under the warrant in the event additional securities are issuedbelow or have a conversion or exercise price below the current warrant exerciseprice.  We received proceeds ofapproximately $2,000,000 less fees and expenses related to the sale of theshares, which we used for working capital purposes.  There were no brokerages or underwritingcommissions paid in connection with the sale of the shares.

 

On May 4, 2007, weredeemed 35,000 shares of preferred stock at $10.00 per share that it hadissued at the same price per share in 2006 to each of its directors.

 

In December 2007, wecompleted a private placement of Series B Preferred Stock, no par value,for $10.00 per share, selling a total of $750,000 of shares.  The investors in that offering also receivedwarrants to acquire 75,000 shares of common stock at an exercise price of $1.50per share, which we believe was the fair market value of the common stock onthe date of issuance of the warrants. The warrants have no expiration date and contain provisions whichprovide for automatic adjustments in price and shares purchasable under thewarrants in the event additional shares or warrants are issued below thecurrent warrant exercise price.  As aresult of the issuance of the warrants with an exercise price below the $2.71exercises price, the exercise price and the number of shares of common stockpurchasable under the warrant issued to Mr. Blanton adjusted asfollows:  (a) with respect to Mr. Blanton,from 553,506 shares at $2.71 per share to 1,000,001 shares at $1.50 per share;and (b) with respect to Silver Hill Enterprises, LP, from 184,502 sharesat $2.71 per share to 333,334 shares at $1.50 per share.

 

In September 2008, the Bank entered into a dataprocessing contract and master services agreement to move its processing fromFidelity Information Systems to Providence, the internal data processing systemprovided by First Covenant Bank. Pursuant to the agreements, First Covenant will provide services toimplement and service 

 

59

----

 

host system computer software which will provide theBank with the essential banking processing and accounting functions for depositproducts, loans and general ledger accounting. The term of each contract is 12 months, with the option to renew foradditional 12 month periods.  We believethis change will enable the Bank to decrease its costs and increase itsflexibility in data processing.  Mr. Blantonserves as a director and as the Chief Executive Officer of First CovenantBank.  Ms. Smyth serves as the ChiefFinancial Officer for First Covenant Bank.

 

The Bank has contractedwith CINC Systems, LLC (“CINC”) to provide web and server hostingfacilities.  For the year ended December 31,2008 the total paid to CINC for these services was $10,000.  Mr. Blanton is President of CINC.

 

The Bank has certainmortgage loans with a carrying amount of $2,742,062 and $2,895,901 as of December 31,2008 and 2007, respectively, which were purchased from United Americas Bank, anentity in which Mr. Blanton owns approximately 17.1%

 

The Bank has certainloans with a carrying amount of $1,741,760 and $0 as of December 31, 2008and 2007, 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 $10,113,232 and $0 as of December 31, 2008and 2007, respectively, to First Covenant Bank, an entity in which William R.Blanton is a principal owner.

 

During 2008, we raised$3,370,006 in additional capital throught he sale of common stock in a privateplacement.  The capital was used to fund$3,515,000 in net operating losses for the year ended December 31,2008.  In connection with this privateplacement, Olivia Evans, the wife of one of our directors, William M. Evans, Jr.purchased 333,333 shares.  The followingpersons also purchased shares in the private placement and became owners ofover 5% of our oustanding common stock: (a) Richard T. Smith purchased333,334 shares; (b) Golden Isles Reinsurance Co. LTD. Purchased 666,668shares; and (c) Joe E. McCart purchased 500,000 shares.

 

**Director Independence**

** **

The Board of Directors determines the independence ofeach director in accordance with guidelines it has adopted, which include allelements of independence set forth in the NASDAQ Global Market listingstandards.  The Board of Directorsdetermined that each of the following non-employee directors is independent andhas no material relationship with the Company, except as a director andshareholder of the Company:  William Bagwell, Jr.,William Evans, Jr., Lanny W. Dunagan, Gilbert T. Jones, Sr., J. AllenNivens, Jr., Dr. Wendell A. Turner and R.K. Whitehead, III.  In addition, based on such standards,William R. Blanton is not independent because he serves as our Chief ExecutiveOfficer.

 

**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 31,2008 and 2007 by McNair, McLemore, Middlebrooks & Co., LLP.

 
| ** **            | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|
| Audit Fees (1)        |       | $        | 44,501     |     | $          | 48,203 |   |
|                  |       |     |       |     |       |
| Audit-Related Fees(2) |       | 12,942   |       | —   |       |
|                  |       |     |       |     |       |
| Tax Fees (3)          |       | 3,691    |       | 3,407    |       |
|                  |       |     |       |     |       |
| All Other Fees        |       | —   |       | —   |       |
|                  |       |     |       |     |       |
| Total Fees            |       | $        | 61,134     |     | $          | 51,610 |   |

 

----

(1)    Represents fees related to the audit and quarterly reviews ofconsolidated financial statements of the Company and review of regulatoryfilings.

 

60

----

 

(2)    Represents fees related to consents and comfortletter related to Private Placement Memorandum.

 

(3)    Represents fees related to tax compliance, tax advice and tax planningservice.

 

Allof the services provided by the independent accountants were pre-approved bythe Audit 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.

 

**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.                                                                                                                                                                                                                     |
|        |       |                                                                                                                                                                                                                                                                                            |
| 3.5         |       | Amended  and Restated Bylaws of First Century Bancorp.                                                                                                                                                                                                                                          |
|        |       |                                                                                                                                                                                                                                                                                            |
| 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.                                                                                                                                                                                                                         |
|        |       |                                                                                                                                                                                                                                                                                            |
| 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        |       | Agreement  by and between First Century Bank and the Office of the Comptroller of the  Currency, dated August 18, 2004. Incorporated by reference to  Exhibit 10.6 of the Annual Report on Form 10-KSB for the year ended  December 30, 2004, filed on March 31, 2005. |
|        |       |                                                                                                                                                                                                                                                                                            |
| 10.6        |       | 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.                                                    |
|        |       |                                                                                                                                                                                                                                                                                            |
| 10.7        |       | Agreement  Concerning Severance Compensation and Benefits Upon a Change of Control by  and between First Century Bank and Chris England dated as of August 29,  2008.                                                                                                                      |

 

61

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| 21.1   |   | 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.                         |
|   |   |                                                                                                                                   |
| 32.1   |   | 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                                                                                                          |

 

----

*Indicates management contractor compensatory plan or arrangement.

 

62

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**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
| ** ** | **FIRST  CENTURY BANCORP.** |
|------------|-----------------------------|
|       |                        |
|       | By:                         | /s/  William R. Blanton |
|       | William  R. Blanton,        |
|       | Chief  Executive Officer    |
|       |                        |
|       | Date:  March 31, 2009  |

 

----

 

**KNOW ALL MEN BY THESE PRESENTS**, that each person whose signature appears below constitutes andappoints William R. Blanton, his or her true and lawful attorney-in-fact andagent, with full power of substitution and resubstitution, for him or her andin his or her name, place, and stead, in any and all capacities, to sign anyand all amendments to this Annual Report of Form 10-K, and to file thesame, with all exhibits hereto, and other documents in connection herewith withthe Securities 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.

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant in thecapacities and on the dates indicated.

 
| **Signature**                   | ** ** | **Title**                                  | ** ** | **Date**            |
|---------------------------------|------------|--------------------------------------------|------------|---------------------|
|                            |       |                                       |       |                |
| /s/  William R. Blanton         |       | Chairman and Principal Executive Officer   |       | March 31, 2009 |
| William  R. Blanton             |       |                                       |       |                |
|                            |       |                                       |       |                |
|                            |       |                                       |       |                |
| /s/  Denise Smyth               |       | Principal Financial and Accounting Officer |       | March 31, 2009 |
| Denise  Smyth                   |       |                                       |       |                |
|                            |       |                                       |       |                |
| /s/  William A. Bagwell         |       | Director                                   |       | March 31, 2009 |
| William  A. Bagwell             |       |                                       |       |                |
|                            |       |                                       |       |                |
| /s/  William M. Evans, Jr. |       | Director                                   |       | March 31, 2009 |
| William  M. Evans, Jr.     |       |                                       |       |                |
|                            |       |                                       |       |                |
| /s/  J. Allen Nivens, Jr.  |       | Director                                   |       | March 31, 2009 |
| J.  Allen Nivens, Jr.      |       |                                       |       |                |
|                            |       |                                       |       |                |
| /s/  Lanny W. Dunagan           |       | Director                                   |       | March 31, 2009 |
| Lanny  W. Dunagan               |       |                                       |       |                |
|                            |       |                                       |       |                |
| /s/  Gilbert T. Jones, Sr. |       | Director                                   |       | March 31, 2009 |
| Gilbert  T. Jones, Sr.     |       |                                       |       |                |
|                            |       |                                       |       |                |
| /s/  Wendell A Turner           |       | Director                                   |       | March 31, 2009 |
| Dr. Wendell  A. Turner     |       |                                       |       |                |
|                            |       |                                       |       |                |
| /s/  R. K. Whitehead, III  |       | Director                                   |       | March 31, 2009 |
| R.  K. Whitehead, III      |       |                                       |       |                |

 

----

 

**EXHIBIT INDEX**

** **
| **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.                                                                                                                                                                                                                     |
|        |       |                                                                                                                                                                                                                                                                                            |
| 3.5         |       | Amended  and Restated Bylaws of First Century Bancorp.                                                                                                                                                                                                                                          |
|        |       |                                                                                                                                                                                                                                                                                            |
| 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.                                                                                                                                                                                                                         |
|        |       |                                                                                                                                                                                                                                                                                            |
| 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        |       | Agreement  by and between First Century Bank and the Office of the Comptroller of the  Currency, dated August 18, 2004. Incorporated by reference to  Exhibit 10.6 of the Annual Report on Form 10-KSB for the year ended  December 30, 2004, filed on March 31, 2005. |
|        |       |                                                                                                                                                                                                                                                                                            |
| 10.6        |       | 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.                                                    |
|        |       |                                                                                                                                                                                                                                                                                            |
| 10.7        |       | Agreement  Concerning Severance Compensation and Benefits Upon a Change of Control by  and between First Century Bank and Chris England dated as of August 29, 2008.                                                                                                                       |
|        |       |                                                                                                                                                                                                                                                                                            |
| 21.1        |       | 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.                                                                                                                                                                                  |

 

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| 31.2   |   | Certification  of Principal Financial Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                         |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                   |
| 32.1   |   | 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 contractor compensatory plan or arrangement.

 

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