**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

 

**FORM10-QSB**

 

**ý****  QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the Quarterly Period Ended September 30, 2004**

 

**OR**

 

**o****  TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15 (d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the Transition Period from                 to                **

 

**Commission file number 000-30297**

 

**FirstCapital Bank Holding Corporation**

(Exact name ofregistrant as specified in its charter)

 
| **Florida**                                                                          | ** ** | **59-3532208**                       |
|--------------------------------------------------------------------------------------|------------|--------------------------------------|
| (State of Incorporation)                                                             |       | (I.R.S. Employer Identification No.) |
|                                                                                 |       |                                 |
| **1891 South 14th Street  Fernandina Beach, Florida**                                | ** ** | **32034**                            |
| (Address of principal executive offices)                                             |       | (Zip Code)                           |
|                                                                                 |       |                                 |
| **904-321-0400**                                                                     |
| (Telephone Number)                                                                   |
| ** **                                                                           |
| **Not Applicable**                                                                   |
| (Former name, former address  and former fiscal year,  if changed since last report) |

 

Check whether the issuer(1) has filed all reports required to be filed by Section 13 of 15(d)during the past 12 months (or such shorter period that the registrant wasrequited to file such report), and (2) has been subject to such filingrequirements for the past 90 days.  YES ý  NO o

 

APPLICABLEONLY TO CORPORATE ISSUERS

 

State thenumber of shares outstanding of each of the issuer’s classes of common equity,as of the latest practicable date: 1,182,200 shares of common stock, $.01 parvalue per share, issued and outstanding as of November 5, 2004.

 

Transitional Small Business Disclosure Format(check one):  YES o  NO ý

 

 

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**FIRST CAPITAL BANK HOLDING CORPORATION**

 

**PART I.  FINANCIAL INFORMATION**

 

**Item 1.****           FinancialStatements**

 

The financialstatements of First Capital Bank Holding Corporation (the “Company”) are setforth in the following pages.

 

2

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**FIRST CAPITAL BANK HOLDING CORPORATION**

 

**Consolidated Balance Sheets**

 
| ** **                                                                                        | ** ** | **September 30,  2004** | ** **  | **December 31,  2003** | ** **  |
|---------------------------------------------------------------------------------------------------|------------|------------------------------|-------------|-----------------------------|-------------|
| ** **                                                                                        | ** ** | **(unaudited)**              | ** **  | **(audited)**               | ** **  |
| Assets                                                                                            |       |                         |        |                        |        |
|                                                                                              |       |                         |        |                        |        |
| Cash and due from banks                                                                           |       | $                            | 2,487,290   |                        | 5,617,823   |   |
| Federal funds sold                                                                                |       | 5,472,638                    |        | 237,118                     |        |
| Interest bearing deposits in other banks                                                          |       | 800,059                      |        | 597,612                     |        |
|                                                                                              |       |                         |        |                        |        |
| Cash and cash equivalents                                                                         |       | 8,759,987                    |        | 6,452,553                   |        |
|                                                                                              |       |                         |        |                        |        |
| Certificates of Deposits in other Banks                                                           |       | 500,000                      |        | —                      |        |
| Investment securities available-for-sale                                                          |       | 27,492,915                   |        | 26,341,621                  |        |
| Investment securities held to maturity                                                            |       | 14,575,719                   |        | —                      |        |
| Other investments                                                                                 |       | 1,140,000                    |        | 827,000                     |        |
| Loans, net                                                                                        |       | 78,209,991                   |        | 53,851,376                  |        |
| Loans available-for-sale                                                                          |       | 2,818,938                    |        | 15,920,143                  |        |
| Premises and equipment, net                                                                       |       | 3,302,043                    |        | 2,181,229                   |        |
| Accrued interest receivable and other assets                                                      |       | 1,195,453                    |        | 935,459                     |        |
|                                                                                              |       |                         |        |                        |        |
| Total assets                                                                                      |       | $                            | 137,995,046 |                        | 106,509,381 |   |
|                                                                                              |       |                         |        |                        |        |
| Liabilities and Shareholders’ Equity                                                         |       |                         |        |                        |        |
| Deposits:                                                                                         |       |                         |        |                        |        |
| Non interest bearing demand                                                                       |       | $                            | 10,353,375  |                        | 11,521,127  |   |
| Interest bearing demand                                                                           |       | 15,669,782                   |        | 10,938,389                  |        |
| Savings                                                                                           |       | 28,716,658                   |        | 25,613,032                  |        |
| Time                                                                                              |       | 22,738,735                   |        | 17,815,462                  |        |
| Time over $100,000                                                                                |       | 25,658,402                   |        | 17,958,328                  |        |
|                                                                                              |       |                         |        |                        |        |
| Total deposits                                                                                    |       | 103,136,952                  |        | 83,846,338                  |        |
|                                                                                              |       |                         |        |                        |        |
| Warehouse line of credit                                                                          |       | —                       |        | 5,075,593                   |        |
| Federal Home Loan Bank advances                                                                   |       | 18,000,000                   |        | 3,000,000                   |        |
| Accrued interest payable and other liabilities                                                    |       | 530,071                      |        | 595,737                     |        |
|                                                                                              |       |                         |        |                        |        |
| Total liabilities                                                                                 |       | 121,667,023                  |        | 92,517,668                  |        |
|                                                                                              |       |                         |        |                        |        |
| Commitments                                                                                       |       |                         |        |                        |        |
|                                                                                              |       |                         |        |                        |        |
| Shareholders’ equity:                                                                        |       |                         |        |                        |        |
| Preferred stock, par value $.01, 10,000,000 shares authorized, no  shares issued and outstanding. |       |                         |        |                        |        |
|                                                                                              |       | —                       |        | —                      |        |
| Common stock, par value $.01; 10,000,000 shares authorized;                                       |       |                         |        |                        |        |
| 1,182,200 issued and outstanding September 30, 2004                                          |       |                         |        |                        |        |
| 1,008,000 issued and outstanding December 31, 2003                                           |       | 11,822                       |        | 10,080                      |        |
| Additional paid-in capital                                                                        |       | 11,538,986                   |        | 9,789,578                   |        |
| Retained earnings                                                                                 |       | 4,766,608                    |        | 4,085,003                   |        |
| Accumulated other comprehensive income                                                            |       | 10,607                       |        | 107,052                     |        |
|                                                                                              |       |                         |        |                        |        |
| Total shareholders’ equity                                                                   |       | 16,328,023                   |        | 13,991,713                  |        |
|                                                                                              |       |                         |        |                        |        |
|                                                                                              |       | $                            | 137,995,046 |                        | 106,509,381 |   |

 

See accompanying notes to financial statements.

 

3

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**FIRST CAPITALBANK HOLDING CORPORATION**

**Statements ofEarnings**

 

**For the ThreeMonths and the Nine Months Ended September 30, 2004 and 2003 (Unaudited)**

 
| ** **                                           | ** ** | **Three  Months Ended  September 30,** | ** ** | **Nine  Months Ended  September 30,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                           | ** ** | **2004**                                    | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Interest income:                                     |       |                                        |       |                                       |       |   |   |   |   |
| Interest and fees on loans                           |       | $                                           | 1,285,658  |                                       | 1,431,953  |   | 3,742,358 |   | 3,963,979 |   |
| Interest income on investment securities             |       | 425,608                                     |       | 69,694                                     |       | 968,679 |   | 299,320 |   |
| Interest income on federal funds sold                |       | 23,044                                      |       | 12,604                                     |       | 31,006 |   | 31,999 |   |
| Interest income on deposits in other banks           |       | 1,902                                       |       | 5,060                                      |       | 5,748 |   | 17,778 |   |
|                                                 |       |                                        |       |                                       |       |   |   |   |   |
| Total interest income                                |       | 1,736,212                                   |       | 1,519,311                                  |       | 4,747,791 |   | 4,313,076 |   |
|                                                 |       |                                        |       |                                       |       |   |   |   |   |
| Interest expense:                                    |       |                                        |       |                                       |       |   |   |   |   |
| Interest bearing deposits                            |       | 415,831                                     |       | 322,610                                    |       | 1,059,263 |   | 1,123,783 |   |
| Interest on FHLB borrowings                          |       | 158,646                                     |       | 77,626                                     |       | 303,713 |   | 178,527 |   |
| Interest on other borrowings                         |       | 54                                          |       | 2,278                                      |       | 20,125 |   | 2,652 |   |
|                                                 |       |                                        |       |                                       |       |   |   |   |   |
| Total interest expense                               |       | 574,531                                     |       | 402,514                                    |       | 1,383,101 |   | 1,304,962 |   |
|                                                 |       |                                        |       |                                       |       |   |   |   |   |
| Net interest income                                  |       | 1,161,681                                   |       | 1,116,797                                  |       | 3,364,690 |   | 3,008,114 |   |
| Provision for loan losses                            |       | 44,000                                      |       | —                                     |       | 232,000 |   | 33,000 |   |
|                                                 |       |                                        |       |                                       |       |   |   |   |   |
| Net interest  income after provision for loan losses |       | 1,117,681                                   |       | 1,116,797                                  |       | 3,132,690 |   | 2,975,114 |   |
|                                                 |       |                                        |       |                                       |       |   |   |   |   |
| Noninterest income:                                  |       |                                        |       |                                       |       |   |   |   |   |
| Service charges on deposit accounts                  |       | 62,604                                      |       | 72,704                                     |       | 176,584 |   | 167,873 |   |
| Mortgage and SBA related fees and income             |       | 35,561                                      |       | 330,861                                    |       | 247,913 |   | 825,641 |   |
| Gain on sales of loans                               |       | 103,011                                     |       | 1,716,348                                  |       | 797,170 |   | 4,656,528 |   |
| Gain on sales of securities                          |       | —                                      |       | —                                     |       | 115,326 |   | — |   |
| Other                                                |       | 9,684                                       |       | 11,486                                     |       | 26,238 |   | 29,513 |   |
|                                                 |       |                                        |       |                                       |       |   |   |   |   |
| Total noninterest income                             |       | 210,860                                     |       | 2,131,399                                  |       | 1,363,231 |   | 5,679,555 |   |
|                                                 |       |                                        |       |                                       |       |   |   |   |   |
| Noninterest expense:                                 |       |                                        |       |                                       |       |   |   |   |   |
| Salaries and employee benefits                       |       | 558,339                                     |       | 1,663,421                                  |       | 2,003,760 |   | 4,038,685 |   |
| Occupancy                                            |       | 97,239                                      |       | 122,909                                    |       | 351,142 |   | 382,180 |   |
| Other                                                |       | 320,748                                     |       | 541,438                                    |       | 1,078,414 |   | 1,521,125 |   |
|                                                 |       |                                        |       |                                       |       |   |   |   |   |
| Total noninterest expense                            |       | 976,326                                     |       | 2,327,768                                  |       | 3,433,316 |   | 5,941,990 |   |
|                                                 |       |                                        |       |                                       |       |   |   |   |   |
| Net earnings before provision for income taxes       |       | 352,215                                     |       | 920,428                                    |       | 1,062,605 |   | 2,712,679 |   |
|                                                 |       |                                        |       |                                       |       |   |   |   |   |
| Provision for income taxes:                          |       | 118,000                                     |       | 343,000                                    |       | 381,000 |   | 1,006,000 |   |
|                                                 |       |                                        |       |                                       |       |   |   |   |   |
| Net income:                                          |       | $                                           | 234,215    |                                       | 577,428    |   | 681,605 |   | 1,706,679 |   |
|                                                 |       |                                        |       |                                       |       |   |   |   |   |
| Earnings Per Share:                                  |       |                                        |       |                                       |       |   |   |   |   |
| Basic                                                |       | $                                           | .21        |                                       | .57        |   | .65 |   | 1.69 |   |
| Diluted                                              |       | $                                           | .20        |                                       | .54        |   | .61 |   | 1.58 |   |

 

See accompanying notes to financialstatements.

 

4

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**Statements ofComprehensive Income (Loss)**

 

**For the Three andNine Months Ended September 30, 2004 and 2003 (Unaudited)**

 
| ** **                                          | ** ** | **Three  Months Ended  September 30,** | ** ** | **Nine  Months Ended  September 30,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                          | ** ** | **2004**                                    | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                |       |                                        |       |                                       |       |   |   |   |   |
| Net earnings                                        |       | $                                           | 234,215    |                                       | 577,428    |   | 681,605 |   | 1,706,679 |   |
|                                                |       |                                        |       |                                       |       |   |   |   |   |
| Other comprehensive income, net of tax:             |       |                                        |       |                                       |       |   |   |   |   |
| Unrealized gains (losses) on investment             |       |                                        |       |                                       |       |   |   |   |   |
| Securities available for sale:                      |       | 347,089                                     |       | (74,389                                    | )          | (33,051 | ) | (193,967 | ) |
| Unrealized gains (losses) arising during the period |       | (121,481                                    | )          | 25,292                                     |       | 11,568 |   | 65,949 |   |
| Associated (taxes) benefit                          |       |                                        |       |                                       |       |   |   |   |   |
|                                                |       |                                        |       |                                       |       |   |   |   |   |
| Reclassification adjustment for gains on sale       |       | —                                      |       | —                                     |       | (115,326 | ) | — |   |
| Associated benefit                                  |       | —                                      |       | —                                     |       | 40,364 |   | — |   |
|                                                |       |                                        |       |                                       |       |   |   |   |   |
| Other comprehensive income (loss)                   |       | 225,608                                     |       | (49,097                                    | )          | (96,445 | ) | (128,018 | ) |
|                                                |       |                                        |       |                                       |       |   |   |   |   |
| Comprehensive income                                |       | $                                           | 459,823    |                                       | 528,331    |   | 585,160 |   | 1,578,661 |   |

 

5

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**FIRST CAPITALBANK HOLDING CORPORATION**

 

**Statements ofCash Flows**

 

**For the NineMonths Ended September 30, 2004 and 2003**

**(Unaudited)**

 
| ** **                                                                      | ** ** | **2004**    | ** ** | **2003**    | ** ** |
|---------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
|                                                                            |       |        |       |        |       |
| Cash flows from operating activities:                                           |       |        |       |        |       |
| Net income                                                                      |       | $           | 681,605    |        | 1,706,679  |   |
| Adjustments to reconcile net income to net cash:                                |       |        |       |        |       |
| Operating activities:                                                           |       |        |       |        |       |
| Depreciation, amortization and accretion                                        |       | 222,608     |       | 177,028     |       |
| Provision for loan losses                                                       |       | 232,000     |       | 33,000      |       |
| Gain on sale of securities                                                      |       | (115,326    | )          | —      |       |
| Net change in loans held for sale                                               |       | 13,101,205  |       | 18,073,838  |       |
| Change in other assets                                                          |       | (203,353    | )          | (505,388    | )          |
| Change in other liabilities                                                     |       | (65,666     | )          | 360,151     |       |
|                                                                            |       |        |       |        |       |
| Net cash provided by operating activities                                       |       | 13,853,073  |       | 19,845,308  |       |
|                                                                            |       |        |       |        |       |
| Cash flows from investing activities:                                           |       |        |       |        |       |
| Proceeds from maturities, calls, and paydowns of securities available  for sale |       | 2,757,447   |       | 6,585,963   |       |
| Proceeds from maturities, calls, and paydowns of securities held to  maturity   |       | 508,383     |       | —      |       |
| Purchase of investment securities available for sale                            |       | (4,023,941  | )          | (5,041,317  | )          |
| Purchase of investment securities held to maturity                              |       | (15,091,862 | )          | —      |       |
| Purchase (redemption) of other investments                                      |       | (313,000    | )          | 548,700     |       |
| Net change in portfolio loans                                                   |       | (24,590,615 | )          | (2,977,222  | )          |
| Purchase of premises and equipment                                              |       | (1,258,222  | )          | (245,678    | )          |
|                                                                            |       |        |       |        |       |
| Net cash (used) by investing activities                                         |       | (42,011,810 | )          | (1,129,554  | )          |
|                                                                            |       |        |       |        |       |
| Cash flows provided by financing activities                                     |       |        |       |        |       |
| Net change in deposits                                                          |       | 19,290,614  |       | 10,790,318  |       |
| Net change in warehouse line of credit                                          |       | (5,075,593  | )          | (18,291,793 | )          |
| Net change in Federal Home Loan Bank advances                                   |       | 15,000,000  |       | 1,000,000   |       |
| Proceeds from stock options exercised                                           |       | 1,751,150   |       | —      |       |
|                                                                            |       |        |       |        |       |
| Net cash provided (used) by financing activities                                |       | 30,966,171  |       | (6,501,475  | )          |
|                                                                            |       |        |       |        |       |
| Net increase in cash                                                            |       | 2,807,434   |       | 12,214,279  |       |
|                                                                            |       |        |       |        |       |
| Cash and cash equivalents at the beginning of the period                        |       | 6,452,553   |       | 5,987,514   |       |
|                                                                            |       |        |       |        |       |
| Cash and cash equivalents at the end of the period                              |       | $           | 9,259,987  |        | 18,201,793 |   |
|                                                                            |       |        |       |        |       |
| Supplemental cash flow information:                                             |       |        |       |        |       |
| Interest paid                                                                   |       | $           | 1,302,769  |        | 1,344,751  |   |
| Taxes paid                                                                      |       | $           | 378,850    |        | 1,231,000  |   |

 

See accompanying notes to financialstatements.

 

6

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**FIRST CAPITALBANK HOLDING CORPORATION**

 

**Notes toFinancial Statements**

**(Unaudited)**

 

**Note 1 – Critical Accounting Policies**

 

We have adopted various accountingpolicies, which govern the application of accounting principles generallyaccepted in the United States in the preparation of our financialstatements.  Our significant accountingpolicies are described in the footnotes to the consolidated financialstatements at December 31, 2003 as filed on our annual report on Form10-KSB.

 

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

 

Many of our assets and liabilities arerecorded using various valuation techniques that require significant judgmentas to recoverability. We believe the allowance for loan losses is a criticalaccounting policy that requires the most significant judgments and estimatesused in preparation of our consolidated financial statements. Some of the morecritical judgments supporting the amount of our allowance for loan lossesinclude judgments about the credit worthiness of borrowers, the estimated valueof the underlying collateral, the assumptions about cash flow, determination ofloss factors for estimating credit losses, the impact of current events, andconditions, and other factors impacting the level of probable inherentlosses.  Under different conditions orusing different assumptions, the actual amount of credit losses incurred by usmay be different from management’s estimates provided in our consolidatedfinancial statements.  Refer to theportion of this discussion that addresses our allowance for loan losses for amore complete discussion of our processes and methodology for determining ourallowance for loan losses. In addition, investment securities and mortgageloans held for sale are reflected at their estimated fair value in theconsolidated financial statements. Such amounts are based on either quotedmarket prices or estimated values derived by using dealer quotes or marketcomparisons.

 

In our opinion, all accountingadjustments necessary to accurately reflect the financial position and resultsof operations on the accompanying financial statements have been made.  These adjustments are considered normal andrecurring accruals are considered necessary for a fair and accuratepresentation.  The results for interimperiods are not necessarily indicative of results for the full year or anyother interim periods.

 

**Stock Compensation Plans**

 

We have elected not to expense stock options and, as such,have provided pro forma disclosures of net earnings and earnings per share, asif the fair value method of accounting had been applied. Had compensation costfor the plan been determined based upon the fair value of the options at thegrant dates, our net earnings and net earnings per share for the quarter andnine months ended September 30, 2004 and 2003, would have been reduced tothe pro forma amounts indicated below:

 
| ** **                 | ** ** | ** **  | ** ** | **Quarter  Ended  September 30,** | ** ** | **Nine  Months  Ended****  September 30,** | ** ** |
|----------------------------|------------|-------------|------------|----------------------------------------|------------|------------------------------------------------------|------------|
| ** **                 | ** ** | ** **  | ** ** | **2004**                               | ** ** | **2003**                                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|                       |       |        |       |                                   |       |                                                 |       |   |   |   |   |
| Net earnings               |       | As reported |       | $                                      | 234,215    |                                                 | 577,428    |   | 681,605 |   | 1,706,679 |   |
|                       |       | Pro forma   |       | $                                      | 228,173    |                                                 | 543,505    |   | 663,478 |   | 1,604,911 |   |
|                       |       |        |       |                                   |       |                                                 |       |   |   |   |   |
| Basic earnings per share   |       | As reported |       | $                                      | .21        |                                                 | .57        |   | .65 |   | 1.69 |   |
|                       |       | Pro forma   |       | $                                      | .20        |                                                 | .54        |   | .63 |   | 1.59 |   |
|                       |       |        |       |                                   |       |                                                 |       |   |   |   |   |
| Diluted earnings per share |       | As reported |       | $                                      | .20        |                                                 | .54        |   | .61 |   | 1.58 |   |
|                       |       | Pro forma   |       | $                                      | .20        |                                                 | .50        |   | .59 |   | 1.49 |   |

 

The fair value of each option isestimated on the date of grant using the Minimum Value pricing model with thefollowing assumptions used for grants in 2004: no dividend yield; a risk freeinterest rate of 4.35%; and an expected life of

 

7

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10 years.  The difference between the net earnings asreported and pro forma is the expense associated with the grants, which wouldhave been earned in the period.

 

**Significant accounting policies continued**

 

**Note 2 – Earnings per share**

 

Basic earnings per share is based onthe weighted average number of common shares outstanding during the periodwhile the effects of potential common shares outstanding during the period areincluded in diluted earnings per share. The average market price during theyear is used to compute equivalent shares. Reconciliation of the amounts usedin the computation of both “basic earnings per share” and “diluted earnings pershare” for the quarter and the nine month period ended September 30, 2004and 2003 are as follows:

 
| ** **                                                 | ** ** | **For  the nine months ended September 30, 2004** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                 | ** ** | **Net  Earnings**                                      | ** ** | **Common  Shares** | ** ** | **Earnings  Per share** | ** ** |
|                                                       |       |                                                   |       |   |   |   |   |
| Basic earnings per share                                   |       | $                                                      | 681,605    |   | 1,052,977 |   | $ | 0.65 |   |
| Effect of dilutive securities - Stock Options and Warrants |       | —                                                 |       | 66,680 |   | $ | 0.04 |   |
|                                                       |       |                                                   |       |   |   |   |   |
| Diluted earnings per share                                 |       | $                                                      | 681,605    |   | 1,119,657 |   | $ | 0.61 |   |

 
| ** **                                    | ** ** | **For  the Quarter ended September 30, 2004** | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                    | ** ** | **Net  Earnings**                                  | ** ** | **Common  Shares** | ** ** | **Earnings  Per share** | ** ** |
|                                          |       |                                               |       |   |   |   |   |
| Basic earnings per share                      |       | $                                                  | 234,215    |   | 1,137,689 |   | $ | 0.21 |   |
| Effect of dilutive securities - Stock Options |       | —                                             |       | 33,514 |   | $ | 0.01 |   |
|                                          |       |                                               |       |   |   |   |   |
| Diluted earnings per share                    |       | $                                                  | 234,215    |   | 1,171,203 |   | $ | 0.20 |   |

 
| ** **                                                 | ** ** | **For  the nine months ended September 30, 2003** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                 | ** ** | **Net  Earnings**                                      | ** ** | **Common  Shares** | ** ** | **Earnings  Per share** | ** ** |
|                                                       |       |                                                   |       |   |   |   |   |
| Basic earnings per share                                   |       | $                                                      | 1,706,679  |   | 1,008,000 |   | $ | 1.69 |   |
| Effect of dilutive securities - Stock Options and Warrants |       | —                                                 |       | 69,709 |   | $ | 0.09 |   |
|                                                       |       |                                                   |       |   |   |   |   |
| Diluted earnings per share                                 |       | $                                                      | 1,706,679  |   | 1,077,709 |   | $ | 1.58 |   |

 
| ** **                                                 | ** ** | **For  the Quarter ended September 30, 2003** | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                 | ** ** | **Net  Earnings**                                  | ** ** | **Common  Shares** | ** ** | **Earnings  Per share** | ** ** |
|                                                       |       |                                               |       |   |   |   |   |
| Basic earnings per share                                   |       | $                                                  | 577,428    |   | 1,008,000 |   | $ | 0.57 |   |
| Effect of dilutive securities - Stock Options and Warrants |       | —                                             |       | 69,709 |   | $ | 0.03 |   |
|                                                       |       |                                               |       |   |   |   |   |
| Diluted earnings per share                                 |       | $                                                  | 577,428    |   | 1,077,709 |   | $ | 0.54 |   |

 

8

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**Item 2.****                                                          ****Management’s Discussion and Analysis of Financial Conditionand Results of Operations For the Quarters Ended and Nine Month Periods Ended September 30,2004 and 2003**

 

# **FORWARD-LOOKING STATEMENTS**

 

The following is our discussion and analysis of certainsignificant factors that have affected our financial position and operatingresults and those of our subsidiary, First National Bank of Nassau County,during the periods included in the accompanying financial statements.  This commentary should be read in conjunctionwith the financial statements and the related notes and the other statisticalinformation included in this report.

 

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

 

•                  significantincreases in competitive pressure in the banking and financial servicesindustries;

 

•                  changesin the interest rate environment which could reduce anticipated or actual margins;

 

•                  changesin political conditions or the legislative or regulatory environment;

 

•                  generaleconomic conditions, either nationally or regionally and especially in ourprimary service area, becoming less favorable than expected resulting in, amongother things, a deterioration in credit quality;

 

•                  changesoccurring in business conditions and inflation;

 

•                  changesin technology;

 

•                  thelevel of allowance for loan loss;

 

•                  therate of delinquencies and amounts of charge-offs;

 

•                  therates of loan growth;

 

•                  adversechanges in asset quality and resulting credit risk-related losses and expenses;

 

•                  changesin monetary and tax policies;

 

•                  lossof consumer confidence and economic disruptions resulting from terroristactivities;

 

•                  changesin the securities markets; and

 

•                  otherrisks and uncertainties detailed from time to time in our filings with theSecurities and Exchange Commission

 

9

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**Overview**

 

Thefollowing discussion describes our results of operations for the quarter ended September 30,2004 as compared to the quarter ended September 30, 2003 as well asresults for the nine months ended September 30, 2004 and 2003, and alsoanalyzes our financial condition as of September 30, 2004 as compared to December 31,2003.  Like most community banks, wederive most of our income from interest we receive on our loans andinvestments.  Our primary source of fundsfor making these loans and investments is our deposits, on which we payinterest.  Consequently, one of the keymeasures of our success is our amount of net interest income, or the differencebetween the income on our interest-earning assets, such as loans andinvestments, and the expense on our interest-bearing liabilities, such asdeposits.  Another key measure is thespread between the yield we earn on these interest-earning assets and the ratewe pay on our interest-bearing liabilities.

 

Of course,there are risks inherent in all loans, so we maintain an allowance for loanlosses to absorb probable losses on existing loans that may becomeuncollectible.  We establish and maintainthis allowance by charging a provision for loan losses against our operatingearnings.  In the following section wehave included a detailed discussion of this process.

 

In additionto earning interest on our loans and investments, we earn income through feesand other 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.

 

The following discussion and analysis also identifies significant factorsthat have affected our financial position and operating results during theperiods included in the accompanying financial statements.  We encourage you to read this discussion andanalysis in conjunction with the financial statements and the related notes andthe other statistical information also included in this report.

 

**Financial Condition**

 

We continue toconcentrate our focus on expanding our core banking activities and attractingquality loans in the rapidly growing markets of Nassau County, Florida andSavannah, Georgia. Additionally, we continued our geographic expansion byopening a loan production office in Jacksonville, Florida in June 2004.

 

As of September 30, 2004, we had total assets of $138million, an increase of 30% when compared to December 31, 2003.  The significant factors were increases inportfolio loans of $24.4 million, or 45%, and investment securities of $15.7million, or 60%. The increase is indicative of our commitment to focus on corebanking activities. New loan demand and production was strong at our Fernandinalocation and our recently expanded loan production office in Savannah, Georgia.Our portfolio loan to deposit ratios were 78% and 63%, as of September 30,2004 and 2003, respectively.  We aremaking a concerted effort to develop a quality portfolio loan business in thelocal market and to manage the deposit growth consistent with expected loandemand. As a result of the sale of the assets of the wholesale division,mortgage loans held for sale were funded by investors and liquidated. Mortgageloans held for sale were primarily funded through short-term bank deposits andalternative sources such as FHLB advances and warehouse lines of credit.

 

When compared to December 31, 2003, deposits as of September 30,2004 increased $19.3 million, or 23%, warehouse line advances of $5.1 millionwere repaid, and FHLB advances increased to $18.0 million from $3.0million.  No overnight bank advances orrepurchase agreements were outstanding at September 30, 2004. Repurchaseagreements and warehouse line advances are short-term borrowings and fluctuateaccording to loan demand.

 

The deposit mix at September 30, 2004 was as follows:$10.4 million (10% of total deposits) in noninterest bearing demand deposits;$15.7 million  (15% of total deposits) ininterest checking accounts; $28.7 million (28% of total deposits) in savings accounts; and  $48.4 million (47% of total deposits) in timedeposits.  The deposit mix remainsweighted towards higher costing time deposits. We expect this trend to continuewith emphasis on time deposits, thus increasing the average cost of funds andpotentially reducing the bank’s net interest margin.

 

10

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At September 30, 2004, total investment securities were$42.1 million, $27.5 million in securities classified as available for sale,and $14.6 million in securities classified as held to maturity.  In the second quarter, we determined that liquiditywas sufficient to support the current operating needs and growth opportunitiesof the bank. As a result, purchases of investments in the second quarter wereclassified as held to maturity. The current investment portfolio strategy isprimarily to provide liquidity for funding loans and earnings enhancement.  Accordingly, all investment securitiesavailable for sale are pledgeable to raise funding through public deposits,secured borrowing, or repurchase agreements. Investment securities classifiedas held to maturity are pledged to the FHLB.

 

At September 30, 2004, retained earnings totaled $4.8million, including $681,605 net earnings for the nine months ended September 30,2004.

 

**Results of Operations**

 

Net income for the nine months ended September 30, 2004was $681,605, as compared to $1.7 million for the same period in 2003.  For the quarters ended September 30,2004 and 2003, net income was $234,215 and $577,428, respectively. The decreasein our results was due to decreases in noninterest income derived from the saleof mortgage loans generated by the wholesale mortgage division. Core bank earningsfor the nine months ended September 30, 2004 were $828,412, compared to$384,407 for the same period in 2003, an increase of 115%.  Core bank earnings exclude earnings or lossesrelated to our wholesale residential mortgage operations.  As described above, we discontinued ourwholesale residential mortgage operations in April 2004.  The residential mortgage division wasprimarily a wholesale operation and the division relied heavily on therefinancing market.  During the ninemonths ended September 30, 2004, we incurred a loss of $49,278 related tothe wholesale mortgage operations, as compared to net income during the ninemonths ended September 30, 2003 of $787,834 related to the operation ofthe wholesale mortgage division.

 

11

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**Net Interest Income**

 

Net interest income for the nine months ended September 30,2004 was $3.4 million, compared to $3.0 million for the nine months ended September 30,2003.  Total interest income for thefirst nine months of 2004 was $4.7 million, compared to $4.3 million for thesame period in 2003.  Included ininterest income is interest and fees on loans totaling $3.7 and 4.0 million forthe nine months ended September 30, 2004 and 2003.  Interest income also included interest incomeon investments of $968,679 and $299,320 for the nine months ended September 30,2004 and 2003, respectively. The growth in interest income in core bankingactivities reflects the growth in our core interest-earning assets. Interestincome on loans as a percentage of total interest income decreased to 79% at September 30,2004, as compared to 92% for the same period last year. The decrease is due tothe increase in average investment securities and lower yields in the loanportfolio. We incurred interest expense on interest bearing deposits of $1.1million for the nine months ended September 30, 2004 and 2003.  Additionally, we recognized $303,713 and$178,527 of interest expense from FHLB term and warehouse advances for the ninemonths ended September 30, 2004 and 2003, respectively.

 

Our earningassets are principally floating rate while the funding sources are primarilymoney market and short-term time deposits. The net interest margins as of September 30, 2004 and 2003 were3.85% and 4.05%, respectively. Our margins have decreased due tothe increased investments as a percentage of earning assets, repricing of shortterm certificates of deposit and money markets, and increased usage of FHLBterm advances. We expect interest margins to remain consistent or decreaseslightly as our funding sources increase our cost of funds.

 

The following tabledetails the relationship between interest income and expense and the averagebalances of interest-earning assets and interest-bearing liabilities for thethree months ended September 30, 2004 and 2003.

 
| ** **                                 | ** ** | **2004**              | ** ** | **2003**                       | ** ** |
|--------------------------------------------|------------|-----------------------|------------|--------------------------------|------------|
| ** **                                 | ** ** | **Average  Balances** | ** ** | **Interest  Income/  Expense** | ** ** | **Rate/Yield** | ** ** | **Average  Balances** | ** ** | **Interest  Income  Expense** | ** ** | **Rate/Yield** | ** ** |
|                                       |       |                  |       |                           |       |   |   |   |   |   |   |   |   |
| Loans                                      |       | $                     | 80,180,815 |                           | 3,742,358  |   | 6.23 | % | $ | 84,073,646 |   | 3,963,979 |   | 6.30 | % |
| Federal funds sold and deposits with banks |       | 3,625,732             |       | 36,754                         |       | 1.35 | % | 5,784,131 |   | 49,777 |   | 1.15 | % |
| Investments                                |       | 32,915,627            |       | 968,679                        |       | 3.93 | % | 9,555,647 |   | 299,320 |   | 4.19 | % |
|                                       |       |                  |       |                           |       |   |   |   |   |   |   |   |   |
| Interest earning assets                    |       | 116,722,174           |       | 4,747,791                      |       | 5.43 | % | 99,413,424 |   | 4,313,076 |   | 5.80 | % |
|                                       |       |                  |       |                           |       |   |   |   |   |   |   |   |   |
| Interest bearing deposits                  |       | 81,277,484            |       | 1,059,263                      |       | 1.74 | % | 71,843,854 |   | 1,123,783 |   | 2.09 | % |
| FHLB borrowings                            |       | 12,599,701            |       | 303,713                        |       | 3.22 | % | 7,977,883 |   | 178,527 |   | 2.99 | % |
| Other borrowings                           |       | 1,953,429             |       | 20,125                         |       | 1.38 | % | 243,125 |   | 2,652 |   | 1.45 | % |
|                                       |       |                  |       |                           |       |   |   |   |   |   |   |   |   |
| Interest bearing liabilities               |       | 95,830,614            |       | 1,383,101                      |       | 1.93 | % | 80,064,862 |   | 1,304,962 |   | 2.18 | % |
|                                       |       |                  |       |                           |       |   |   |   |   |   |   |   |   |
| Net interest income                        |       |                  |       | 3,364,690                      |       |   |   |   |   | 3,008,114 |   |   |   |
| Net interest spread                        |       |                  |       |                           |       | 3.50 | % |   |   |   |   | 3.62 | % |
| Net interest margin                        |       |                  |       |                           |       | 3.85 | % |   |   |   |   | 4.05 | % |
|                                            |            |                       |            |                                |            |  |  |  |  |  |  |  |  |  |  |

 

For the quarters ending September 30, 2004 and 2003,respectively, net income was $234,215 and $577,428, while net interest incomeafter provision for loan losses was $1.1 million for both periods.

 

12

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**Allowance and Provision for Loan Losses**

 

There are risks inherent in making allloans, including risks with respect to the period of time over which loans maybe repaid, risks resulting from changes in economic and industry conditions,risks inherent in dealing with individual borrowers, and, in the case of acollateralized loan, risks resulting from uncertainties about the future valueof the collateral.  To address theserisks, we have developed policies and procedures to evaluate the overallquality of our credit portfolio and the timely identification of potentialproblem loans.  We maintain an allowancefor possible loan losses which we establish through charges in the form of aprovision for loan losses.  We chargeloan losses and credit recoveries directly to this allowance.

 

We attemptto maintain the allowance at a level that will be adequate to provide forpotential losses in our loan portfolio. To maintain the allowance at an adequate level, we periodically makeadditions to the allowance by charging an expense to the provision for loanlosses on our statement of income.

 

The provision for loan losses was$232,000 and $33,000 for the nine months ended September 30, 2004 and2003, respectively.  Our judgment indetermining the adequacy of the allowance is based on evaluations of thecollectibility of loans. These evaluations take into consideration such factorsas changes in the nature and volume of the loan portfolio, current economicconditions that may affect the borrower’s ability to pay, overall portfolioquality, and review of specific problem loans. In determining the adequacy of the allowance for loan losses, we use aloan grading system that rates loans in different categories.  Certain grades representing criticized orclassified loans are assigned allocations of loss based on our estimate ofpotential loss that is generally based on historical losses and/or collateraldeficiencies.  Other loans are graded bytype and allocated loss ranges based on our perceived inherent loss for theloan type.  The combination of theseresults are compared monthly to the recorded allowance for loan losses andmaterial differences are adjusted by increasing or decreasing the provision forloan losses.  We use an independent thirdparty loan reviewer to challenge and corroborate the loan grading system andprovide additional analysis in determining the adequacy of the allowance forloan losses and the future provisions for estimated loans.

 

At September 30, 2004, theallowance for loan losses was $1,009,403 compared to $789,344 at December 31,2003, which represented 1.27% and 1.49% of outstanding portfolio loans,respectively. The decrease in the percentage of allowance to portfolio loans isreflective of the lower level of adversely rated credits.   We believe that the allowance for loanlosses is adequate, based on internal reviews and external reviews of thequality of the loan portfolio and bank peer group data.  Our evaluation is inherently subjective as itrequires estimates that are susceptible to significant change.  Our losses will undoubtedly vary from ourestimates, and there is a possibility that charge-offs in future periods willexceed the allowance for loan losses as estimated at any point in time.  Due to the rapid growth of our bank overthe past several years and our short operating history, a large portion of theloans in our loan portfolio and of our lending relationships are of relativelyrecent origin.  In general, loans do notbegin to show signs of credit deterioration or default until they have beenoutstanding for some period of time, a process we refer to as “seasoning.”  As a result, a portfolio of older loans willusually behave more predictably than a newer portfolio.  Because our loan portfolio is relatively new,the current level of delinquencies and defaults may not be representative ofthe level that will prevail when the portfolio becomes more seasoned, which maybe higher than current levels.  Ifdelinquencies and defaults increase, we may be required to increase ourprovision for loan losses, which would adversely affect our results ofoperations and financial condition.   While we do use available information to recognizelosses on loans, future additions to the allowance may be necessary based onchanges in economic conditions. In addition, various regulatory agencies, as anintegral part of their examination process, periodically review the bank’sallowance for loan losses.  Theseagencies may require the bank to recognize additions to the allowance based onjudgments different than those of management.

 

The following is a summary of our loan loss history:

 
| ** **                              | ** ** | **September 30, 2004** | ** ** | **September 30, 2003** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                              | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Balance January 1,                 |       | $                           | 789,344    |                        | $          | 765,000 |   |
| Year to date  provision for loan losses |       | 232,000                     |       | 33,000                      |       |
| Charged off  loans                      |       | (65,703                     | )          | (1,291                      | )          |
| Recoveries                              |       | 53,762                      |       | 104                         |       |
|                                    |       |                        |       |                        |       |
| Balance, end  of period                 |       | $                           | 1,009,403  |                        | $          | 796,813 |   |

 

13

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As of September 30, 2004, we hadone non-accrual loan totaling 34,000, which was fully guaranteed by the SmallBusiness Administration. At December 31, 2003, we had one non-accrual loantotaling $550,000, which was partially guaranteed by the Small BusinessAdministration. We have no loans past due 90 days or more accruing interest.

 

**Noninterest Incomeand Expense**

 

Noninterest income was $1.4 millionand $5.7 million for the nine month periods ended September 30, 2004 and2003, respectively, and $211,000 and $2.1 million for the quarters ended September 30,2004 and 2003, respectively.  Thisdecrease consists primarily from decreases in gains on sales of mortgage loansas a result of the discontinuation of our wholesale residential mortgage operations in April 2004.  Through the third quarter of 2003, mortgagecustomers had taken advantage of low interest rates, driving mortgage loanvolume and revenues. Mortgage volumes decreased in the fourth quarter of 2003and first two quarters of 2004, reflecting recent changes in the interest rateenvironment and ultimately our decision to discontinue our wholesale mortgageoperations.  As we noted in previousfilings, we expected noninterest income to decrease significantly compared to2003 as a result of the discontinuation of our wholesale mortgage activities. 

 

Noninterest expense was $3.4 million and $5.9 million for thenine month periods ended September 30, 2004 and 2003, respectively, and$976,000 and $2.3 million for the quarters ended September 30, 2004 and2003, respectively.  Salaries andbenefits for the nine months ended September 30, 2004 and 2003 totaled$2.0 million and $4.0 million, respectively. The decrease in salary andbenefits is primarily due to reduction in incentive compensation at ourwholesale mortgage operations related to mortgage production.

 

14

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**Segment Information**

 

Until we discontinued our wholesaleresidential mortgage operations in April 2004, our company operatedtwo business segments:  community bankingand mortgage banking.  These segments areprimarily identified by the products or services offered and the channelsthrough which they are offered.  The communitybanking segment consists of our full-service bank that offers customerstraditional banking products and services through various deliverychannels.  The mortgage banking segmentconsisted of mortgage brokerage facilities that originate, acquire, and sellmortgage products.  Information as of September 30,2004, for each of the segments is included below:

 
| **Nine months ended  September 30, 2004**       | ** ** | **Community  Banking** | ** **  | **Mortgage  Banking** | ** ** | **Parent** | ** **  | **Eliminations** | ** **   | **Total** | ** **  |
|------------------------------------------------------|------------|------------------------|-------------|-----------------------|------------|------------|-------------|------------------|--------------|-----------|-------------|
|                                                 |       |                   |        |                  |       |       |        |             |         |      |        |
| Net interest  income                                 |       | $                      | 3,221,391   |                  | 127,278    |       | 16,021      |             | —       |      | 3,364,690   |   |
| Provision  for loan losses                           |       | (232,000               | )           | —                |       | —     |        | —           |         | (232,000  | )           |
|                                                 |       |                   |        |                  |       |       |        |             |         |      |        |
| Net interest  income after provision for loan losses |       | 2,989,391              |        | 127,278               |       | 16,021     |        | —           |         | 3,132,690 |        |
|                                                 |       |                   |        |                  |       |       |        |             |         |      |        |
| Noninterest  income                                  |       | 782,392                |        | 580,839               |       | —     |        | —           |         | 1,363,231 |        |
| Noninterest  expense                                 |       | 2,486,370              |        | 779,395               |       | 167,551    |        | —           |         | 3,433,316 |        |
|                                                 |       |                   |        |                  |       |       |        |             |         |      |        |
| Income  (loss) before income taxes                   |       | 1,285,413              |        | (71,278               | )          | (151,530   | )           | —           |         | 1,062,605 |        |
| Income tax  expense (benefit)                        |       | 457,000                |        | (22,000               | )          | (54,000    | )           | —           |         | 381,000   |        |
|                                                 |       |                   |        |                  |       |       |        |             |         |      |        |
| Net income  (loss)                                   |       | $                      | 828,413     |                  | (49,278    | )          | (97,530     | )                | —       |      | 681,605     |   |
|                                                 |       |                   |        |                  |       |       |        |             |         |      |        |
| Average  assets                                      |       | $                      | 115,958,512 |                  | 5,880,736  |       | 121,839,248 |             | (121,839,248 | )         | 121,839,248 |   |

 
| **Nine months ended  September 30, 2003**       | ** ** | **Community  Banking** | ** ** | **Mortgage  Banking** | ** ** | **Parent** | ** **  | **Eliminations** | ** **   | **Total** | ** **  |
|------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|------------|-------------|------------------|--------------|-----------|-------------|
|                                                 |       |                   |       |                  |       |       |        |             |         |      |        |
| Net interest  income                                 |       | $                      | 1,575,922  |                  | 302,158    |       | 13,237      |             | —       |      | 1,891,317   |   |
| Provision  for loan losses                           |       | (33,000                | )          | —                |       | —     |        | —           |         | (33,000   | )           |
|                                                 |       |                   |       |                  |       |       |        |             |         |      |        |
| Net interest  income after provision for loan losses |       | 1,542,922              |       | 302,158               |       | 13,237     |        | —           |         | 1,858,317 |        |
|                                                 |       |                   |       |                  |       |       |        |             |         |      |        |
| Noninterest  income                                  |       | 457,813                |       | 3,090,343             |       | —     |        | —           |         | 3,548,156 |        |
| Noninterest  expense                                 |       | 1,391,328              |       | 2,141,667             |       | 81,226     |        | —           |         | 3,614,221 |        |
|                                                 |       |                   |       |                  |       |       |        |             |         |      |        |
| Income  (loss) before income taxes                   |       | 609,407                |       | 1,250,834             |       | (67,989    | )           | —           |         | 1,792,252 |        |
| Income tax  expense (benefit)                        |       | 225,000                |       | 463,000               |       | (25,000    | )           | —           |         | 663,000   |        |
|                                                 |       |                   |       |                  |       |       |        |             |         |      |        |
| Net income  (loss)                                   |       | $                      | 384,407    |                  | 787,834    |       | (42,989     | )                | —       |      | 1,129,252   |   |
|                                                 |       |                   |       |                  |       |       |        |             |         |      |        |
| Average  assets                                      |       | $                      | 76,289,623 |                  | 24,400,625 |       | 100,690,248 |             | (100,690,248 | )         | 100,690,248 |   |

 

15

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**Liquidity and Capital**

 

Liquidity represents the ability of a company to convert assets into cashor cash equivalents without significant loss, and the ability to raiseadditional funds by increasing liabilities. Liquidity management involves monitoring our sources and uses of fundsin order to meet our day-to-day cash flow requirements while maximizingprofits.  Liquidity management is mademore complicated because different balance sheet components are subject tovarying degrees of management control. For example, the timing of maturities of our investment portfolio isfairly predictable and subject to a high degree of control at the timeinvestment decisions are made.  However,net deposit inflows and outflows are far less predictable and are not subjectto the same degree of control.

 

The bank has established short-termfederal funds purchase lines of credit with its correspondent banks, whichtotal $7.2 million.  These lines areunsecured and are designed to provide the bank with short-term liquidity.  These lines may be revoked at any time by thecorrespondent banks and are available to the bank simply as an accommodationfor short-term (two weeks or less) liquidity needs. Additionally, the bank hascash and cash equivalents of $9.2 million and investments available for sale of$27.5 million to fund operations and loan growth.

 

Currently, we limit investments tohighly liquid overnight investments in correspondent banks and bank-qualifiedsecurities.  In May 2004, we purchased$15 million of securities classified as held to maturity to employ capital,adding to the amount of our earning assets. The purchase was funded by FederalHome Loan Bank advances structured to compliment the current cash flows of theinvestment portfolio.  For theforeseeable future, we will consider our investment portfolio primarily as asource for liquidity and a source for earnings.

 

Common stock and paid in capitalincreased by $1,574,994 in the third quarter of 2004 related to 157,500warrants  exercised on July 26, 2004at $10.00 per share by organizers of the company.

 

Bank holding companies and their banking subsidiaries arerequired by banking regulators to meet certain minimum levels of capitaladequacy, which are expressed in the form of certain ratios.  The Federal Reserve guidelines also containan exemption from the capital requirements for bank holding companies with lessthan $150 million in consolidated assets. Because we have less than $150 million in assets, our holding company isnot currently subject to these guidelines.  However, the bank falls under these rules as set by bank regulatoryagencies.  Capital is separated into Tier1 capital (essentially common shareholders’ equity less intangible assets) andTier 2 capital (essentially the allowance for loan losses limited to 1.25% ofrisk-weighted assets).  The first tworatios, which are based on the degree of credit risk in our assets, provide theweighting of assets based on assigned risk factors and include off-balancesheet items such as loan commitments and stand-by letters of credit.  The ratio of Tier 1 capital to risk-weightedassets must be at least 4.0% and the ratio of total capital (Tier 1 capitalplus Tier 2 capital) to risk-weighted assets must be at least 8.0%.  The capital leverage ratio supplements therisk-based capital guidelines.

 

Banks and bank holding companies are required to maintain a minimumratio of Tier 1 capital to adjusted quarterly average total assets of 3.0%.

 

The following tablesummarizes the bank’s risk-based capital ratios at September 30, 2004:

 
| ** **                                | ** ** | **Amount** | ** ** | **%**  | ** ** |
|-------------------------------------------|------------|------------|------------|--------|------------|
|                                      |       |       |       |   |       |
| Total  capital (to risk weighted assets)  |       | $          | 13,277,937 |   | 13.81      |   |
|                                      |       |       |       |   |       |
| Tier 1  capital (to risk weighted assets) |       | $          | 13,267,330 |   | 12.73      |   |
|                                      |       |       |       |   |       |
| Tier 1  capital (to average assets)       |       | $          | 13,267,330 |   | 9.86       |   |

 

**Off Balance Sheet Risk**

 

Through the operations of our bank, we have made contractualcommitments to extend credit in the ordinary course of our businessactivities.  These commitments arelegally binding agreements to lend money to our customers at predeterminedinterest rates for a specified period of time. At September 30, 2004, wehad issued commitments to extend credit of $20.3 million through various typesof commercial lending arrangements, of which $1.9 million was at fixed rates

 

16

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and$18.4 million was at variable rates.  Weevaluate each customer’s credit worthiness on a case-by-case basis.  The amount of collateral obtained, if deemednecessary by us upon extension of credit, is based on our credit evaluation ofthe borrower.  Collateral varies but mayinclude accounts receivable, inventory, property, plant and equipment,commercial and residential real estate.

 

**Item 3. Controls and Procedures**

 

As of the end of theperiod covered by this report, we carried out an evaluation, under thesupervision and with the participation of our management, including our ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of ourdisclosure controls and procedures as defined in Exchange Act Rule13a-15(e).  Based upon that evaluation,our Chief Executive Officer and Chief Financial Officer have concluded that ourcurrent disclosure controls and procedures are effective as of September 30,2004.  There have been no significant changes in our internalcontrols over financial reporting during the fiscal quarter ended September 30,2004 that have materially affected, or are reasonably likely to materiallyaffect, our internal controls over financial reporting.

 

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

 

17

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**PART II.  OTHERINFORMATION**

 

**Item 1.****          ****Legal Proceedings**

 

There are no material pending legalproceedings to which we are a party or of which any of our property is thesubject.

 

**Item 2.****          ****Unregistered Sales of Equity Securities and Use ofProceeds**

 

None

 

**Item 3.****          ****Defaults Upon Senior Securities and Use of Proceeds**

 

None

 

**Item 4.****          ****Submission of Matters to a Vote of Security Holders**

 

None

 

**Item 5.****          ****Other Information**

 

**ExecutiveSupplemental Retirement Income Agreement**

 

On October 20,2004, the board of directors of our subsidiary, First National Bank of NassauCounty, approved the Executive Supplemental Retirement Income Agreement forMichael Sanchez, our president and chief executive officer.  Under the plan, the bank is required to makeannual contributions on behalf of Mr. Sanchez to a retirement income trustfund.  The amount of the annualcontributions have been actuarially determined and are based on the annualincremental accounting accruals which would be required of the bank through theearlier of Mr. Sanchez’s death or benefit age (i) pursuant to APB Opinion No.12, as amended by FAS 106 and (ii) assuming a discount rate equal to 6% perannum.  If Mr. Sanchez does not exercisewithdrawal rights, the contributions shall continue until the earlier of 2014or the termination of his employment.  IfMr. Sanchez exercises his withdrawal rights, the bank is obligated to recordphantom contributions until the earlier of 2014 or the termination ofemployment.

 

If Mr. Sanchezis employed until reaching age 65 and has not elected to receive a lump sumpayment, the retirement income trust fund and accrued benefit account (ifapplicable) will be annuitized into monthly installments payable for 180months.  At anytime during the payoutperiod, Mr. Sanchez may elect to receive the unpaid balance in a lump sumpayment.  The agreement also provides forthe payment of benefits under a variety of circumstances, includingpre-retirement death benefits, benefits in the event of termination prior toage 65, disability benefits, and additional death benefits.

 

The agreementalso provides that during his employment and for a period of 12 monthsfollowing termination, Mr. Sanchez may not compete with the bank or any of itsaffiliates by, directly or indirectly, serving as a director, officer,employee, or consultant for, or acquiring or maintaining more than a 1% passiveinvestment in, any business or enterprise that competes with the bank within aradius of 35 miles from the bank’s main office or any other office.

 

The foregoingdescription of the Executive Supplemental Retirement Income Agreement does notpurport to be complete and is qualified in its entirety by reference to thecomplete text of the agreement, which is set forth below as Exhibit 10.1 heretoand is incorporated herein by reference.

 

**PhantomStock Appreciation Rights Plan**

 

On October 20,2004, our board of directors and the board of directors of the bank adopted thePhantom Stock Appreciation Rights Plan effective October 20, 2004.  The plan provides for the grant of 21,500phantom stock appreciation rights to members of management and other highlycompensated employees designated by the board of directors of the bank.  The board of directors of the bank may alsogrant additional awards on terms established by the board.  All awards must be evidenced by separatelyexecuted agreements that state the number of stock appreciation rights awardedto the participant and the measurement period for determining the accruedbenefit.  A copy of agreement is setforth as Exhibit 10.3 hereto and is incorporated herein by reference.

 

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If aparticipant is employed by the bank until reaching the expiration of themeasurement period, a participant’s accrued benefit will be annuitized intomonthly installments payable for the payout period specified in suchparticipant’s agreement.  The plan alsoprovides for the payment of benefits under a variety of circumstances,including death prior to the expiration of the measurement period, terminationprior to the expiration of the measurement period, and additional deathbenefits.

 

The foregoingdescription of the Phantom Stock Appreciation Rights Plan does not purport tobe complete and is qualified in its entirety by reference to the complete textof the plan, which is set forth below as Exhibit 10.2 hereto and isincorporated herein by reference.

 

**Item 6.****          ****Exhibits**

 
| **Exhibit** | ** ** | **Description**                                                                              |   |
|-------------|------------|----------------------------------------------------------------------------------------------|--------|
|        |       |                                                                                         |   |
| 10.1        |       | Executive Supplemental Retirement Income  Agreement for Michael Sanchez.                     |   |
|        |       |                                                                                         |   |
| 10.2        |       | Phantom Stock Appreciation Rights Plan.                                                      |   |
|        |       |                                                                                         |   |
| 10.3        |       | Form of First Capital Bank Holding  Corporation Phantom Stock Appreciation Rights Agreement. |   |
|        |       |                                                                                         |   |
| 31.1        |       | Rule 13a-14(a) Certification of the Chief  Executive Officer.                                |   |
|        |       |                                                                                         |   |
| 31.2        |       | Rule 13a-14(a) Certification of the Chief  Financial Officer.                                |   |
|        |       |                                                                                         |   |
| 32          |       | Section 1350 Certifications.                                                            |   |

 

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SIGNATURES

 

In accordance with the requirements of theExchange Act, the registrant caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
|   | FIRST CAPITAL BANK HOLDING COMPANY                |   |
|--------|---------------------------------------------------|--------|
|   | (Registrant)                                      |
|   |                                              |
|   |                                              |
| Date:  | November 12, 2004                            | By:    |  /s/  Michael G. Sanchez |   |
|   | Michael G. Sanchez                                |
|   | President and Chief Executive Officer             |
|   |                                              |
|   |                                              |
| Date:  | November 12, 2004                            | By:    |  /s/  Timothy S. Ayers |   |
|   | Timothy S. Ayers                                  |
|   | Principal Accounting and Chief Financial  Officer |
|        |                                                   |        |  |  |  |

 

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INDEX TO EXHIBITS

 
| **Exhibit  Number** | ** ** | **Description**                                                                              |   |
|---------------------|------------|----------------------------------------------------------------------------------------------|--------|
|                |       |                                                                                         |   |
| 10.1                |       | Executive Supplemental Retirement Income  Agreement for Michael Sanchez.                     |   |
|                |       |                                                                                         |   |
| 10.2                |       | Phantom Stock Appreciation Rights Plan.                                                      |   |
|                |       |                                                                                         |   |
| 10.3                |       | Form of First Capital Bank Holding  Corporation Phantom Stock Appreciation Rights Agreement. |   |
|                |       |                                                                                         |   |
| 31.1                |       | Rule 13a-14(a) Certification of the Chief  Executive Officer.                                |   |
|                |       |                                                                                         |   |
| 31.2                |       | Rule 13a-14(a) Certification of the Chief  Financial Officer.                                |   |
|                |       |                                                                                         |   |
| 32                  |       | Section 1350 Certifications.                                                            |   |

 

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