Table of Contents

 

 

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x	QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

OR

 

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

For the transition period from              to             

Commission file number 000-51843

 

 

ALARION FINANCIAL SERVICES, INC.

(Exact Name of Small Business Issuer as Specified in Its Charter)

 

 

 

Florida		20-3851373
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

 

One Northeast First Avenue, Ocala, Florida		34470
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s Telephone Number, Including Area Code (352) 237-4500

 

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report.

 

 

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:    Yes  x    No  ¨

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

*The registrant has not yet been phased into the interactive data requirements.

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

 

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		¨  (Do not check if a smaller reporting company)		Smaller reporting company		x

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Common stock, par value $.01 per share		2,653,208 shares outstanding at November 12, 2009

 

 

 

---

Table of Contents

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

INDEX

 

						Page
Part I. FINANCIAL INFORMATION
		Item 1.		Financial Statements
		Condensed Consolidated Balance Sheets - at September 30, 2009 (Unaudited) and at December 31, 2008				2
		Condensed Consolidated Statements of Operations (Unaudited) - Three and Nine Months ended September 30, 2009 and 2008				3
		Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) - Nine Months ended September 30, 2009 and 2008				4-5
		Condensed Consolidated Statements of Cash Flows (Unaudited) - Nine Months ended September 30, 2009 and 2008				6
		Notes to Condensed Consolidated Financial Statements (Unaudited)				7-13
		Review by Independent Registered Public Accounting Firm				14
		Report of Independent Registered Public Accounting Firm				15
		Item 2.		Management’s Discussion and Analysis		16-23
		Item 4.		Controls and Procedures		24
Part II. OTHER INFORMATION
		Item 1.		Legal Proceedings		24
		Item 1.A.		Risk Factors		24
		Item 2.		Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities		24
		Item 3.		Defaults upon Senior Securities		24
		Item 4.		Submission of Matters to a Vote of Security Holders		24
		Item 5.		Other Information		24
		Item 6.		Exhibits		25
SIGNATURES						26

 

1

---

Table of Contents

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Part I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

Condensed Consolidated Balance Sheets

($ in thousands, except per share amounts)

 

		At September 30, 2009				At December 31, 2008
		(unaudited)
Assets
Cash and due from banks		$	5,840			1,666
Interest-earning time deposits in banks			—			2,097
Interest-earning deposits and federal funds sold			10,136			5,708
Cash and cash equivalents			15,976			9,471
Interest-earning time deposits in banks			10,717			12,410
Securities available for sale			28,244			13,123
Loans, net of allowance for loan losses of $2,881 and $2,714			228,507			205,307
Accrued interest receivable			877			731
Premises and equipment, net			13,409			13,604
Other real estate owned			1,651			651
Federal Home Loan Bank stock, at cost			1,499			1,356
Deferred income taxes			1,205			1,103
Other assets			326			883
Total assets		$	302,411			258,639
Liabilities and Stockholders’ Equity
Liabilities:
Noninterest-bearing demand deposits			19,879			15,161
NOW, money-market and savings deposits			62,509			43,109
Time deposits < $100,000			109,787			94,547
Time deposits > = $100,000			48,070			50,097
Total deposits			240,245			202,914
Federal Home Loan Bank advances			21,000			22,000
Other borrowings			8,485			7,584
Accrued interest payable			752			1,118
Accrued expenses and other liabilities			1,242			387
Total liabilities			271,724			234,003
Stockholders’ equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized
Preferred stock, series A, $.01 par value; $1,000 liquidation value; 6,514 shares outstanding in 2009			—			—
Preferred stock, series B, $.01 par value; $1,000 liquidation value; 326 shares outstanding in 2009			—			—
Additional paid-in capital, preferred			6,840			—
Preferred stock discount			(280	)		—
Common stock, $.01 par value; 4,000,000 shares authorized, 2,653,208 shares issued and outstanding in 2009 and 2008			27			27
Additional paid-in capital, common			26,674			26,613
Accumulated deficit			(2,864	)		(2,142	)
Accumulated other comprehensive income			290			138
Total stockholders’ equity			30,687			24,636
Total liabilities and stockholders’ equity		$	302,411			258,639

See accompanying Notes to Condensed Consolidated Financial Statements.

 

2

---

Table of Contents

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

($ in thousands, except per share amounts)

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2009			2008			2009			2008
Interest income:
Loans		$	3,312		3,004			9,577			8,718
Securities			234		143			564			566
Other			125		83			419			260
Total interest income			3,671		3,230			10,560			9,544
Interest expense:
Deposits			1,417		1,623			4,655			4,969
Borrowings			205		162			616			469
Total interest expense			1,622		1,785			5,271			5,438
Net interest income			2,049		1,445			5,289			4,106
Provision for loan losses			295		170			682			411
Net interest income after provision for loan losses			1,754		1,275			4,607			3,695
Noninterest income:
Deposit account fees			95		88			277			244
Loan brokerage fees			241		192			649			622
Other			—		6			20			16
Total noninterest income			336		286			946			882
Noninterest expense:
Salaries and employee benefits			943		885			2,761			2,512
Occupancy and equipment			299		201			833			575
Data processing			150		120			430			345
Professional services			96		55			258			160
Advertising and promotion			39		34			101			122
Office supplies and printing			32		36			94			97
Impairment of Silverton Bank stock			—		—			625			—
Other			339		257			1,075			709
Total noninterest expense			1,898		1,588			6,177			4,520
Earnings (loss) before income tax expense (benefit)			192		(27	)		(624	)		57
Income tax expense (benefit)			84		(4	)		(193	)		41
Net earnings (loss)			108		(23	)		(431	)		16
Preferred stock dividend requirements and accretion of preferred stock to par			106		—			291			—
Net earnings (loss) available to common shareholders		$	2		(23	)		(722	)		16
Earnings (loss) per share – basic		$	—		(.01	)		(0.27	)		0.01
Earnings (loss) per share – diluted		$	—		(.01	)		(0.27	)		0.01
Weighted-average number of common shares outstanding, basic			2,653,208		2,653,208			2,653,208			2,578,967
Weighted-average number of common shares outstanding, diluted			2,653,208		2,653,208			2,653,208			2,578,967
Dividends per common share		$	—		—			—			—

See accompanying Notes to Condensed Consolidated Financial Statements.

 

3

---

Table of Contents

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

Nine Months Ended September 30, 2009 and 2008

($ in thousands)

 

		Preferred Stock														Common Stock							Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
		Series A					Series B					Additional Paid-in Capital		Discount		Shares		Amount			Additional Paid-In Capital
		Shares		Amount			Shares		Amount
Balance at December 31, 2007		—		$	—		—		$	—		—		—		2,183,485		$	22		21,856		(1,657	)		30			20,251
Comprehensive loss:
Net earnings (unaudited)		—			—		—			—		—		—		—			—		—		16			—			16
Net change in unrealized gain on securities available for sale, net of taxes of $27 (unaudited)		—			—		—			—		—		—		—			—		—		—			(46	)		(46	)
Comprehensive loss (unaudited)																													(30	)
Share-based compensation (unaudited)		—			—		—			—		—		—		—			—		21		—			—			21
Common stock options and warrants exercised (unaudited)		—			—		—			—		—		—		469,723			5		4,692		—			—			4,697
Balance at September 30, 2008 (unaudited)		—		$	—		—		$	—		—		—		2,653,208		$	27		26,569		(1,641	)		(16	)		24,939

(continued)

 

4

---

Table of Contents

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited), Continued

Nine Months Ended September 30, 2009 and 2008

($ in thousands)

 

		Preferred Stock															Common Stock							Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)		Total Stockholders’ Equity
		Series A					Series B					Additional Paid-in Capital		Discount			Shares		Amount			Additional Paid-In Capital
		Shares		Amount			Shares		Amount
Balance at December 31, 2008		—		$	—		—		$	—		—		—			2,653,208		$	27		26,613		(2,142	)		138		24,636
Comprehensive loss:
Net loss (unaudited)		—			—		—			—		—		—			—			—		—		(431	)		—		(431	)
Net change in unrealized gain on securities available for sale, net of taxes of $(91) (unaudited)		—			—		—			—		—		—			—			—		—		—			152		152
Comprehensive loss (unaudited)																													(279	)
Share-based compensation (unaudited)		—			—		—			—		—		—			—			—		61		—			—		61
Proceeds from issuance of 6,514 shares of Series A preferred stock to U.S. Treasury (unaudited)		6,514			—		—			—		6,514		—			—			—		—		—			—		6,514
Preferred stock warrants exercised by U.S. Treasury (unaudited)		—			—		326			—		326		(326	)		—			—		—		—			—		—
Preferred stock dividend requirements and Series B preferred stock accretion (unaudited)		—			—		—			—		—		46			—			—		—		(291	)		—		(245	)
Balance at September 30, 2009 (unaudited)		6,514		$	—		326		$	—		6,840		(280	)		2,653,208		$	27		26,674		(2,864	)		290		30,687

See accompanying Notes to Condensed Consolidated Financial Statements.

 

5

---

Table of Contents

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

		Nine Months Ended September 30,
		2009				2008
Cash flows from operating activities:
Net (loss) earnings		$	(431	)		16
Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:
Provision for loan losses			682			411
Share-based compensation			61			21
Depreciation and amortization			469			293
Deferred income tax (benefit) expense			(193	)		40
Net amortization of deferred loan fees and costs			38			105
Loss on sale of other real estate owned			20			—
Net (decrease) increase in accrued interest payable			(366	)		270
Net (increase) decrease in accrued interest receivable			(146	)		280
Net increase in other assets			(68	)		(89	)
Impairment of Silverton Bank stock			625			—
Net increase in accrued expenses and other liabilities			855			606
Net cash provided by operating activities			1,546			1,953
Cash flows from investing activities:
Proceeds from principal repayments and maturities on securities available for sale			6,920			15,868
Purchase of securities available for sale			(21,798	)		(6,998	)
Net decrease (increase) in time deposits			1,693			(915	)
Loan disbursements, net of repayments			(25,002	)		(33,964	)
Purchases of premises and equipment			(274	)		(4,163	)
Proceeds from sale of other real estate owned			62			—
Proceeds from sale of premises and equipment			—			446
Purchase of Federal Home Loan Bank stock			(143	)		(475	)
Net cash used in investing activities			(38,542	)		(30,201	)
Cash flows from financing activities:
Net increase in deposits			37,331			35,857
Net increase in other borrowings			901			751
Net (decrease) increase in advances from Federal Home Loan Bank			(1,000	)		8,000
Proceeds from common stock options and warrants exercised			—			4,697
Proceeds from preferred stock issued			6,514			—
Preferred stock dividend requirements and series B stock accretion			(245	)		—
Net cash provided by financing activities			43,501			49,305
Net increase in cash and cash equivalents			6,505			21,057
Cash and cash equivalents at beginning of period			9,471			3,638
Cash and cash equivalents at end of period		$	15,976			24,695
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest, net of capitalized interest of $157 in 2008		$	5,637			5,168
Income taxes		$	—			—
Noncash transactions:
Accumulated other comprehensive income (loss), net change in unrealized gain (loss) on securities available for sale, net of taxes		$	152			(46	)
Transfer of loans to other real estate owned		$	1,146			—
Transfer of other real estate owned to loans		$	64			—

See accompanying Notes to Condensed Consolidated Financial Statements.

 

6

---

Table of Contents

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Basis of Presentation. In the opinion of the management of Alarion Financial Services, Inc. (the “Holding Company”), the accompanying condensed consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position at September 30, 2009 and the results of operations for the three- and nine-month periods ended September 30, 2009 and 2008 and cash flows for the nine-month periods ended September 30, 2009 and 2008. The results of operations for the three- and nine-month periods ended September 30, 2009, are not necessarily indicative of results that may be expected for the year ending December 31, 2009.

The Holding Company owns 100% of the common stock of Alarion Bank (the “Bank”) and North Central Florida Developers Corporation (“NCFDC”) (together the “Company”). The Holding Company’s primary activity is the operation of the Bank and NCFDC. The Bank is a state (Florida)-chartered commercial bank. The Bank offers a variety of banking and financial services to individual and corporate customers through its six banking offices located in Ocala and Gainesville, Florida. The deposit accounts of the Bank are insured up to the applicable limits by the Federal Deposit Insurance Corporation. NCFDC holds loans or assets that might require a longer term hold to realize full economic value.

Management has evaluated events occurring subsequent to the balance sheet date through November 16, 2009 (the financial statement issuance date), determining no events require additional disclosure in these consolidated condensed financial statements.

2. Loans. The components of loans are summarized as follows (in thousands):

 

				At September 30, 2009				At December 31, 2008
Commercial real estate				$	113,927			102,788
Residential real estate and home equity					48,929			36,801
Construction					43,460			45,569
Commercial					21,564			19,635
Consumer					3,141			2,928
Total loans					231,021			207,721
Add/Deduct:		Allowance for loan losses			(2,881	)		(2,714	)
		Deferred loan costs, net			367			300
Loans, net				$	228,507			205,307

(continued)

 

7

---

Table of Contents

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

 

3. Loan Impairment and Loan Losses. An analysis of the change in the allowance for loan losses follows (in thousands):

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2009				2008		2009			2008
Balance at beginning of period		$	2,686			2,287		2,714			2,046
Provision for loan losses			295			170		682			411
Charge-offs			(100	)		—		(515	)		—
Balance at September 30		$	2,881			2,457		2,881			2,457

The following is a summary of information regarding nonaccrual and impaired loans (in thousands):

 

		At September 30, 2009				At December 31, 2008
Nonaccrual loans		$	345			1,497
Accruing loans past due ninety days or more		$	—			—
Gross impaired loans with no related allowance for losses			2,907			644
Gross impaired loans with related allowance for losses			1,798			2,964
Less: Allowance on these loans			(588	)		(588	)
Net investment in impaired loans		$	4,117			3,020

 

		Three Months Ended September 30,					Nine Months Ended September 30,
		2009			2008		2009		2008
Interest income recognized on impaired loans		$	54		—		115		—
Interest income received on impaired loans		$	54		—		115		—
Average net recorded investment in impaired loans		$	4,705		371		3,750		423

(continued)

 

8

---

Table of Contents

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

 

4. (Loss) Earnings Per Common Share. (Loss) earnings per share (“EPS”) of common stock has been computed on the basis of the weighted-average number of shares of common stock outstanding. Outstanding stock options and warrants are not considered dilutive securities for the nine month period ended September 30, 2009 and for the three month period ended September 30, 2008 due to the net loss incurred by the Company. Outstanding stock options and warrants are considered dilutive securities for the three month period ended September 30, 2009 and for the nine month period ended September 30, 2008 for the purposes of calculating diluted EPS, which is computed using the treasury stock method. The following table represents the calculations of the weighted-average number of shares for EPS (in thousands, except per share amounts):

 

		2009										2008
		Earnings				Weighted- Average Shares		Per Share Amount				Earnings (Loss)				Weighted- Average Shares		Per Share Amount
Three Months Ended September 30:
Basic EPS:
Net earnings (loss) available to common stockholders		$	2			2,653		$	—			$	(23	)		2,653		$	(0.01	)
Effect of dilutive securities-
Incremental shares from assumed conversion of options						—										—
Diluted EPS:
Net earnings (loss) available to common stockholders and assumed conversions		$	2			2,653		$	—			$	(23	)		2,653		$	(0.01	)
Nine Months Ended September 30:
Basic EPS:
Net (loss) earnings available to common stockholders		$	(722	)		2,653		$	(0.27	)		$	16			2,579		$	0.01
Effect of dilutive securities-
Incremental shares from assumed conversion of options and warrants						—										—
Diluted EPS:
Net (loss) earnings available to common stockholders and assumed conversions		$	(722	)		2,653		$	(0.27	)		$	16			2,579		$	0.01

For the three month period ended September 30, 2009 and the nine month period ended September 30, 2008, the following options were excluded from the calculation of earnings per share due to the exercise price exceeding the average market price for the period.

 

Number of Outstanding Options		Exercise Price			Expiration Date
60,084		$	10.50		2017
10,000		$	10.50		2018

(continued)

 

9

---

Table of Contents

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

 

4. (Loss) Earnings Per Common Share, Continued. The remaining options outstanding had exercise prices equal to the average fair market value of the Company’s common stock during the three month period ended September 30, 2009 and the nine month period ended September 30, 2008.

5. Share Based Compensation. The Company adopted a stock option plan for its employees and directors (the “Plan”). Fifteen percent of the total amount of common shares outstanding, up to 450,000 shares (currently 397,981 shares), have been reserved under the Plan. Stock options are granted at an exercise price equal to or greater than the fair market value of the common stock on the date of grant. Options granted to directors vest immediately and for employees, the options primarily vest over two years starting with the date of grant and ending on the second anniversary thereof. At September 30, 2009, there were 97,995 options available for future grants under the Plan. A summary of stock option transactions under the Plan for the nine-month period ended September 30, 2009, follows:

 

		Number of Options			Weighted- Average Exercise Price			Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
Options outstanding at December 31, 2008		261,970			$	10.14
Options forfeited		(10,100	)			10.16
Options granted		24,600				10.00
Options outstanding at September 30, 2009		276,470			$	10.13		7.15 years		$	—
Options exercisable at September 30, 2009		252,427			$	10.13		6.96 years		$	—

(continued)

 

10

---

Table of Contents

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

 

5. Share Based Compensation, Continued. There were no options granted during the three-month periods ended September 30, 2009 and 2008. The fair value of each option granted for the nine-month periods ended September 30, 2009 and 2008 is estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions:

 

		Nine Months Ended September 30,
		2009				2008
Risk-free interest rate			1.46	%		4.04-4.58	%
Dividend yield			—	%		—	%
Expected stock volatility			10.00	%		6.92	%
Expected life in years			5.50			5.50
Per share grant-date fair value of options issued during the period		$	1.29			2.02-2.22

The Company has examined its historical pattern of option exercises in an effort to determine if there were any patterns based on certain employee populations. From this analysis, the Company could not identify any patterns in the exercise of options. As such, the Company used the guidance in Staff Accounting Bulletin No. 107 issued by the Securities and Exchange Commission to determine the estimated life of options. Expected volatility is based on historical volatility of similar size financial institutions. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield assumption is based on the Company’s history and expectation of dividend payments.

There were no options exercised during the nine-month period ended September 30, 2009. There were 17,486 options exercised during the nine-month period ended September 30, 2008. There was no intrinsic value or tax benefit related to these options exercised. At September 30, 2009, there was approximately $18,000 of total unrecognized compensation expense related to the nonvested share-based compensation arrangement granted under the plan. The cost is expected to be recognized over a weighted-average period of six months. The total fair value of shares vesting and recognized as compensation expense was approximately $61,000 and $21,000 for the nine-month periods ended September 30, 2009 and 2008, respectively.

(continued)

 

11

---

Table of Contents

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

 

6. Fair Value Measurements. Our listing of financial assets subject to fair value measurements on a recurring basis is as follows (in thousands):

 

		Fair Value Measurements at September 30, 2009 Using
		Fair Value as of September 30, 2009			Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available for sale securities		$	28,244		—		28,244		—

Assets measured at fair value on a nonrecurring basis are summarized below (in thousands):

 

		Net Carrying Value at September 30, 2009											Total Losses Recorded In Operations For the Nine Month
		Total			Level 1		Level 2		Level 3		Total Losses		Period Ended September 30, 2009
Impaired loans (1)		$	1,210		—		—		1,210		588		120
Other real estate owned		$	1,651		—		—		1,651		20		20

 

(1)	In addition, loans with a carrying value of $2,907 at September 30, 2009 were measured for impairment using Level 3 inputs and had a fair value in excess of carrying value.

(continued)

 

12

---

Table of Contents

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

 

7. Fair Value of Financial Instruments. The estimated fair values of the Company’s financial instruments are as follows (in thousands):

 

		At September 30, 2009					At December 31, 2008
		Carrying Amount			Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents		$	15,976		15,976		9,471		9,471
Interest bearing time deposits in banks			10,717		10,717		12,410		12,410
Securities available for sale			28,244		28,244		13,123		13,123
Loans, net			228,507		231,865		205,307		206,369
Accrued interest receivable			877		877		731		731
Federal Home Loan Bank stock			1,499		1,499		1,356		1,356
Financial liabilities:
Deposits			240,245		245,072		202,914		204,654
Other borrowings			8,485		8,485		7,584		7,584
Federal Home Loan Bank advances			21,000		19,536		22,000		20,018
Accrued interest payable			752		752		1,118		1,118
Off-balance-sheet financial instruments			—		—		—		—

 

13

---

Table of Contents

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Review by Independent Registered Public Accounting Firm

Hacker, Johnson & Smith PA, the Company’s independent registered public accounting firm, has made a limited review of the financial data as of September 30, 2009, and for the three- and nine-month periods ended September 30, 2009 and 2008 presented in this document, in accordance with standards established by the Public Company Accounting Oversight Board (United States).

Their report furnished pursuant to Article 10 of Regulation S-X is included herein.

 

14

---

Table of Contents

Report of Independent Registered Public Accounting Firm

Alarion Financial Services, Inc.

Ocala, Florida:

We have reviewed the accompanying condensed consolidated balance sheet of Alarion Financial Services, Inc. and Subsidiaries (the “Company”) as of September 30, 2009, the related condensed consolidated statements of operations for the three- and nine-month periods ended September 30, 2009 and 2008, and the related condensed consolidated statements of cash flows and changes in stockholders’ equity for the nine-month periods ended September 30, 2009 and 2008. These interim condensed financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2008, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated March 23, 2009, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2008, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Hacker, Johnson & Smith PA

HACKER, JOHNSON & SMITH PA

Tampa, Florida

November 16, 2009

 

15

---

Table of Contents

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

 

Item 2.

Management’s Discussion and Analysis

General

Alarion Financial Services, Inc. (the “Holding Company”) owns 100% of the common stock of Alarion Bank (the “Bank”) and North Central Florida Developers Corporation (collectively the “Company”). The Holding Company’s primary activity is the operation of the Bank and North Central Florida Developers Corporation. The Bank is a state (Florida)-chartered commercial bank. The Company offers a variety of banking and financial services to individual and corporate customers through its six banking offices located in Ocala and Gainesville, Florida. North Central Florida Developers Corporation holds loans or assets that might require a longer term hold to realize full economic value.

The Bank’s deposits are insured by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation (“FDIC”) up to applicable limits. The Holding Company’s operations are subject to supervision and regulation of the Federal Reserve Board. The operations of the Bank are subject to the supervision and regulation of the FDIC and the Florida Office of Financial Regulation.

The Bank provides a variety of consumer and commercial banking services to individuals, businesses and industries. The basic services offered by the Bank include: demand interest-bearing and noninterest-bearing accounts, money market deposit accounts, NOW accounts, time deposits, credit cards, cash management, direct deposits, notary services, money orders, night depository, travelers’ checks, cashier’s checks, domestic collections, savings bonds, bank drafts, automated teller services, drive-in tellers, and banking by mail. In addition, the Bank makes secured and unsecured commercial, consumer, and real estate loans and issues stand-by letters of credit. The Bank provides automated teller machine (ATM) cards and is a member of the Star ATM network, thereby permitting customers to utilize the convenience of larger ATM networks. In addition to the foregoing services, the offices of the Company provide customers with extended banking hours. The Company does not have trust powers and, accordingly, no trust services are provided.

 

16

---

Table of Contents

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

 

The revenues of the Bank are primarily derived from interest on, and fees received in connection with real estate and other loans, and from interest and dividends from investment and mortgage-backed securities, and short-term investments. The principal sources of funds for the Bank’s lending activities are its deposits and borrowings, repayment of loans, and the sale and maturity of investment securities. The principal expenses of the Bank are the interest paid on deposits, and operating and general administrative expenses.

As is the case with banking institutions generally, the Company’s operations are materially and significantly influenced by general economic conditions and by related monetary and fiscal policies of financial institution regulatory agencies, including the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and the FDIC. Deposit flows and costs of funds are influenced by interest rates on competing investments and general market rates of interest. Lending activities are affected by the demand for financing of real estate and other types of loans, which in turn is affected by the interest rates at which such financing may be offered and other factors affecting local demand and availability of funds. The Company faces strong competition in the attraction of deposits (its primary source of lendable funds) and in the origination of loans.

Capital Resources, Commitments and Capital Requirements

The Bank’s principal sources of funds are those generated by the Bank, including net increases in deposits and borrowings, principal and interest payments on loans, and proceeds from maturities of investment securities.

The Bank uses its capital resources principally to fund existing and continuing loan commitments and to purchase investment securities. Off-balance-sheet commitments to extend credit represent legally binding agreements to lend to customers with fixed expiration dates or other termination clauses. Since many commitments are expected to expire without being funded, committed amounts do not necessarily represent future cash requirements.

The following table summarizes the Bank’s contractual obligations, including certain on-balance sheet and off-balance sheet obligations, at September 30, 2009 (in thousands):

 

Contractual Obligations		Total
Time deposit maturities		$	157,857
Advances from Federal Home Loan Bank			21,000
Other borrowings			8,485
Commitments to extend credit			11,650
Unused lines of credit			25,993
Standby letters of credit			403
Total		$	225,388

Management believes that the Bank has adequate resources to fund all its commitments, that a majority of all of its existing commitments will be funded within 12 months and, if so desired, that the Bank can adjust the rates and terms on time deposits and other deposit accounts to retain or obtain new deposits in a changing interest rate environment.

 

17

---

Table of Contents

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

 

Regulatory Capital Requirements

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

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and percentages of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. If such minimum amounts and percentages are met, the Bank is considered “adequately capitalized.” If the actual amounts exceed the requirements of “adequately capitalized,” and meet even more stringent minimum standards, they are considered “well capitalized.” Management believes as of September 30, 2009, the Bank meets the capital requirements for a “well capitalized” financial institution.

The table below shows the total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios of the Bank at September 30, 2009 and December 31, 2008, and the minimum required amounts and percentages ($ in thousands).

 

		Actual						For Capital Adequacy Purposes						For Well Capitalized Purposes
		Amount			Percent			Amount			Percent			Amount			Percent
As of September 30, 2009:
Total capital (to Risk-Weighted Assets)		$	27,503		11.45	%		$	19,216		8.00	%		$	24,020		10.00	%
Tier I Capital (to Risk-Weighted Assets)			24,622		10.25				9,609		4.00				14,413		6.00
Tier I Capital (to Average Assets)			24,622		8.42				11,697		4.00				14,621		5.00
As of December 31, 2008:
Total capital (to Risk-Weighted Assets)			23,852		10.74				17,767		8.00				22,209		10.00
Tier I Capital (to Risk-Weighted Assets)			21,138		9.52				8,882		4.00				13,322		6.00
Tier I Capital (to Average Assets)			21,138		8.37				10,102		4.00				12,627		5.00

 

18

---

Table of Contents

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

 

Results of Operations

The following table shows selected ratios for the periods ended or at the dates indicated:

 

		Nine Months Ended September 30, 2009			Year Ended December 31, 2008			Nine Months Ended September 30, 2008
Average equity as a percentage of average assets		10.57	%		10.49	%		10.60	%
Total equity to total assets at end of period		10.15	%		9.53	%		9.83	%
Return on average assets (1)		(.21	)%		(.21	)%		0.01	%
Return on average equity (1)		(1.92	)%		(1.99	)%		0.09	%
Noninterest expense to average assets (1)		2.90	%		2.71	%		2.69	%
Nonperforming loans to total loans at end of period (2)		.15	%		.72	%		0.59	%

 

(1)	Annualized for the nine-months ended September 30, 2009 and 2008.

(2)	Nonperforming loans consist of nonaccrual loans and accruing loans contractually past due ninety days or more.

Changes in Financial Condition

Total assets increased $44 million or 17%, from $259 million at December 31, 2008 to $302 million at September 30, 2009, primarily as a result of a $23 million increase in net loans, and a $15 million increase in securities. Deposits increased $37 million from $203 million at December 31, 2008 to $240 million at September 30, 2009 and Federal Home Loan Bank advances decreased $1 million.

 

19

---

Table of Contents

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

 

Net Interest Margin and Interest Rate Spread

The following table sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest and dividend income of the Company from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average costs; (iii) net interest/dividend income; (iv) interest-rate spread; and (v) net interest margin. Yields and costs were derived by dividing annualized income or expense by the average balance of assets or liabilities, respectively, for the periods shown. The yields and costs include certain fees which are considered to constitute adjustments to yields.

 

		Three Months Ended September 30,
		2009									2008
		Average Balance			Interest and Dividends			Average Yield/ Rate			Average Balance			Interest and Dividends				Average Yield/ Rate
		($ in thousands)
Interest-earning assets:
Loans		$	224,112			3,312		5.86	%		$	191,538			3,004			6.22	%
Securities			24,513			234		3.79				11,128			143			5.10
Other (1)			20,839			125		2.38				15,584			83			2.11
Total interest-earning assets			269,464			3,671		5.40				218,250			3,230			5.87
Noninterest-earning assets			24,126									18,116
Total assets		$	293,590								$	236,366
Interest-bearing liabilities:
Deposits			215,411			1,417		2.61				168,339			1,623			3.82
FHLB advances and other borrowings			28,426			205		2.86				25,308			220			3.45
Total interest-bearing liabilities			243,837			1,622		2.64				193,647			1,843			3.78
Capitalized interest						—									(58	)
Net interest expense						1,622									1,785
Noninterest-bearing deposits			18,347									16,217
Noninterest-bearing liabilities			1,024									1,542
Stockholders’ equity			30,382									24,960
Total liabilities and stockholders’ equity		$	293,590								$	236,366
Net interest income					$	2,049								$	1,445
Interest-rate spread								2.76	%									2.09	%
Net interest margin (2)								3.02	%									2.63	%
Ratio of interest-earning assets to interest-bearing liabilities			1.11									1.13

 

(1)	Includes interest-earning deposits, federal funds sold, time deposits and Federal Home Loan Bank stock.

(2)	Net interest margin is annualized net interest income divided by average interest-earning assets.

 

20

---

Table of Contents

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

 

The following table sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest and dividend income of the Company from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average costs; (iii) net interest/dividend income; (iv) interest-rate spread; and (v) net interest margin. Yields and costs were derived by dividing annualized income or expense by the average balance of assets or liabilities, respectively, for the periods shown. The yields and costs include certain fees which are considered to constitute adjustments to yields.

 

		Nine Months Ended September 30,
		2009									2008
		Average Balance			Interest and Dividends			Average Yield/ Rate			Average Balance			Interest and Dividends				Average Yield/ Rate
		($ in thousands)
Interest-earning assets:
Loans		$	216,943			9,577		5.90	%		$	180,020			8,718			6.45	%
Securities			19,672			564		3.83				13,969			566			5.40
Other (1)			25,587			419		2.19				14,320			260			2.42
Total interest-earning assets			262,202			10,560		5.38				208,309			9,544			6.10
Noninterest-earning assets			22,288									16,693
Total assets		$	284,490								$	225,002
Interest-bearing liabilities:
Deposits			207,385			4,655		3.00				161,629			4,969			4.10
FHLB advances and other borrowings			28,325			616		2.91				23,048			626			3.62
Total interest-bearing liabilities			235,710			5,271		2.99				184,677			5,595			4.04
Capitalized interest						—									(157	)
Net interest expense						5,271									5,438
Noninterest-bearing deposits			17,871									15,106
Noninterest-bearing liabilities			852									1,380
Stockholders’ equity			30,057									23,839
Total liabilities and stockholders’ equity		$	284,490								$	225,002
Net interest income					$	5,289								$	4,106
Interest-rate spread								2.39	%									2.06	%
Net interest margin (2)								2.70	%									2.63	%
Ratio of interest-earning assets to interest-bearing liabilities			1.11									1.13

 

(1)	Includes interest-earning deposits, federal funds sold, time deposits and Federal Home Loan Bank stock.

(2)	Net interest margin is annualized net interest income divided by average interest-earning assets.

 

21

---

Table of Contents

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Comparison of the Three-Month Periods Ended September 30, 2009 and 2008

General Operating Results. Net earnings for the three-month period ended September 30, 2009 was $108,000, or $0.00 per basic and diluted common share, compared to net loss of $23,000, or $(0.01) per basic and diluted share, for the comparable period in 2008. The $131,000 increase in net earnings resulted primarily from a $604,000 increase in net interest income, partially offset by an increase in noninterest expense of $310,000, and a $125,000 increase in the provision for loan losses.

Interest Income. Interest income increased $441,000 to $3.7 million for the three-month period ended September 30, 2009, when compared to the three-month period ended September 30, 2008. The increase was due to a $51.2 million increase in average interest-earning assets outstanding for the three months ended September 30, 2009 compared to the 2008 period, partially offset by a decrease in the average yield earned on interest-earning assets from 5.87% for the three months ended September 30, 2008 to 5.40% for the three months ended September 30, 2009.

Interest Expense. Interest expense decreased $163,000 from $1.8 million for the three-month period ended September 30, 2008 to $1.6 million for the three-month period ended September 30, 2009. The decrease was primarily due to a decrease in the average cost of interest-bearing liabilities from 3.78% for the three months ended September 30, 2008 to 2.64% for the comparable 2009 period partially offset by an increase of $50.2 million in average interest-bearing liabilities outstanding.

Provision for Loan Losses. The provision for loan losses is charged to operations to increase the total loan loss allowance to a level deemed appropriate by management. The provision is based upon the volume and type of lending conducted by the Company, industry standards, general economic conditions, particularly as they relate to the Company’s market area, and other factors related to the collectibility of the Company’s loan portfolio. The Company recorded provisions for loan losses for the three-month periods ended September 30, 2009 and 2008 of $295,000 and $170,000, respectively. Management believes that the allowance for loan losses, which was $2.9 million or 1.25% of gross loans at September 30, 2009 is adequate.

Noninterest Income. Noninterest income increased $50,000 during the 2009 period. The increase was primarily due to a $49,000 increase in loan brokerage fees when compared to the three-month period ended September 30, 2008.

Noninterest Expense. Noninterest expense increased by $310,000 from $1.6 million for the three-month period ended September 30, 2008 to $1.9 million for the three-month period ended September 30, 2009. The increase was primarily due to increases of $58,000 in salaries and employee benefits, $98,000 in occupancy and equipment expense, $30,000 in data processing expense, and $82,000 in other noninterest expense, all related to the overall growth of the Company.

Income Taxes The income tax expense was $84,000 for the three-month period ended September 30, 2009, as compared to an income tax benefit of $4,000 for the corresponding period in 2008.

 

22

---

Table of Contents

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Comparison of the Nine-Month Periods Ended September 30, 2009 and 2008

 

General Operating Results. Net loss for the nine-month period ended September 30, 2009 was $722,000, or $(0.27) per basic and diluted common share, compared to net earnings of $16,000, or $0.01 per basic and diluted share, for the comparable period in 2008. The $738,000 decrease in net earnings resulted primarily from an increase in noninterest expense of $1.7 million and a $271,000 increase in provision for loan losses, partially offset by a $1.2 million increase in net interest income, and a $64,000 increase in noninterest income.

Interest Income. Interest income increased $1 million to $10.6 million for the nine-month period ended September 30, 2009, when compared to the nine-month period ended September 30, 2008. The increase was due to a $53.9 million increase in average interest earning assets outstanding for the nine months ended September 30, 2009 compared to the 2008 period, partially offset by a decrease in the average yield earned on interest earning assets from 6.10% for the nine months ended September 30, 2008 to 5.38% for the nine months ended September 30, 2009.

Interest Expense. Interest expense decreased $167,000 from $5.4 million for the nine-month period ended September 30, 2008 to $5.3 million for the nine-month period ended September 30, 2009. The decrease was primarily due to a decrease in the average cost of interest-bearing liabilities from 4.04% for the nine months ended September 30, 2008 to 2.99% for the comparable 2009 period, partially offset by an increase of $51 million in average interest-bearing liabilities.

Provision for Loan Losses. The provision for loan losses is charged to operations to increase the total loan loss allowance to a level deemed appropriate by management. The provision is based upon the volume and type of lending conducted by the Company, industry standards, general economic conditions, particularly as they relate to the Company’s market area, and other factors related to the collectibility of the Company’s loan portfolio. The Company recorded provisions for loan losses for the nine-month periods ended September 30, 2009 and 2008 of $682,000 and $411,000, respectively. Management believes that the allowance for loan losses, which was $2.9 million or 1.25% of gross loans at September 30, 2009 is adequate.

Noninterest Income. Noninterest income increased $64,000 during the 2009 period. The increase was primarily due to a $27,000 increase in loan brokerage fees and a $33,000 increase in deposit account fees when compared to the nine-month period ended September 30, 2008.

Noninterest Expense. Noninterest expense increased by $1.7 million from $4.5 million for the nine-month period ended September 30, 2008 to $6.2 million for the nine-month period ended September 30, 2009. The increase was primarily due to increases of $249,000 in salaries and employee benefits, $258,000 in occupancy and equipment expense, $85,000 in data processing expense, $625,000 for impairment of Silverton Bank stock, and $366,000 in other noninterest expense, all related to the overall growth of the Company.

Income Taxes The income tax benefit was $193,000 for the nine-month period ended September 30, 2009. The income tax expense was $41,000 for the corresponding period in 2008.

 

23

---

Table of Contents

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

 

Item 4.

Controls and Procedures

 

a.

Evaluation of disclosure controls and procedures. The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon their evaluation of those controls and procedures performed within 90 days of the filing date of this report, the Principal Executive and Principal Financial officers of the Company concluded that the Company’s disclosure controls and procedures were adequate.

 

b.	Changes in internal controls. The Company made no significant changes in its internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation of those controls by the Principal Executive and Principal Financial officers.

Part II - OTHER INFORMATION

 

Item 1.

Legal Proceedings

There are no material pending legal proceedings to which Alarion Financial Services, Inc. or its subsidiaries is a party or to which any of their property is subject.

 

Item 1.A.

Risk Factors

Not applicable

 

Item 2.

Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities

Not applicable

 

Item 3.

Defaults upon Senior Securities

Not applicable

 

Item 4.

Submission of Matters to a Vote of Security Holders

Not applicable

 

Item 5.

Other Information

Not applicable

 

24

---

Table of Contents

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

 

Item 6.

Exhibits

Exhibits marked with an (a) were filed in the Holding Company’s Annual Report on Form 10-KSB, filed with the Securities and Exchange Commission on March 15, 2006. The Exhibits marked with a (b) were filed in the Holding Company’s Form 10-Q, filed with the Securities and Exchange Commission on May 15, 2008. Exhibit (c) was filed in the Annual Report on Form 10-KSB/A filed with the Commission on July 17, 2006. The Exhibits marked with a (d) were filed in Form 8-K filed with the Commission on January 27, 2009.

 

Exhibit No.		Description of Exhibit
3.1 (a)		Articles of Incorporation
3.2 (a)		Bylaws
3.3 (d)		Articles of Amendment to the Articles of Incorporation authorizing the Series A Preferred Shares
3.3 (d)		Articles of Amendment to the Articles of Incorporation authorizing the Series B Preferred Shares
4.1 (a)		Specimen Common Stock Certificate
4.2 (d)		Form of Certificate for Series A Preferred Stock
4.3 (c)		2005 Stock Plan
4.4 (d)		Form of Certificate for Series B Preferred Stock
4.5 (d)		Warrant to Purchase up to 327 shares of Series B Preferred Stock
10.1 (a)		Employment Agreement with Jon M. Kurtz
10.2 (a)		Lease for Main Office
10.3 (b)		Employment Agreement with Walter R. Czuryla
10.4 (b)		Employment Agreement with Robert L. Page
10.5 (d)		Letter Agreement between the Company and the UST
10.6 (d)		Form of Compliance Letter Agreement
10.7 (d)		Securities Purchase Agreement – Standard Terms between the Company and the United States Department of the Treasury
10.8 (d)		Side Letter Agreement between the Company and the UST
21.1 (a)		Schedule of Subsidiaries
31.1		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – President and Principal Executive Officer
31.2		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – Principal Financial and Accounting Officer
32.1		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – President and Principal Executive Officer
32.2		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Principal Financial and Accounting Officer

 

25

---

Table of Contents

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

 

SIGNATURES

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

Date: November 16, 2009

 

 

26