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 March 31, 2010

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 May 14, 2010

 

 

 

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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

INDEX

 

				Page
Part I. FINANCIAL INFORMATION
Item 1.		Financial Statements
		Condensed Consolidated Balance Sheets - at March 31, 2010 (Unaudited) and at December  31, 2009		2
		Condensed Consolidated Statements of Operations (Unaudited) - Three Months ended March  31, 2010 and 2009		3
		Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) - Three Months ended March 31, 2010 and 2009		4-5
		Condensed Consolidated Statements of Cash Flows (Unaudited) - Three Months ended March  31, 2010 and 2009		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		16-21
Item 4.		Controls and Procedures		22
Part II. OTHER INFORMATION
Item 1.		Legal Proceedings		22
Item 1.A.		Risk Factors		22
Item 2.		Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities		22
Item 3.		Defaults upon Senior Securities		22
Item 5.		Other Information		22
Item 6.		Exhibits		23
SIGNATURES				24

 

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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 March 31, 2010				At December 31, 2009
		(unaudited)
Assets
Cash and due from banks		$	3,495			3,993
Interest bearing time deposits in banks			5,148			5,895
Interest-earning deposits and federal funds sold			11,262			12,210
Cash and cash equivalents			19,905			22,098
Interest bearing time deposits in banks			1,297			2,287
Securities available for sale			41,846			31,282
Loans, net of allowance for loan losses of $3,825 and $3,035			235,026			234,680
Accrued interest receivable			957			939
Premises and equipment, net			13,203			13,310
Other real estate owned			1,583			1,583
Federal Home Loan Bank stock, at cost			1,499			1,499
Deferred income taxes			1,171			1,156
Other assets			1,598			1,749
Total assets		$	318,085			310,583
Liabilities and Stockholders’ Equity
Liabilities:
Noninterest-bearing demand deposits			21,504			18,136
NOW, money-market and savings deposits			68,303			73,537
Time deposits < $100,000			96,557			97,322
Time deposits > = $100,000			73,630			60,994
Total deposits			259,994			249,989
Federal Home Loan Bank advances			21,000			21,000
Other borrowings			4,673			7,633
Accrued interest payable			636			640
Accrued expenses and other liabilities			1,201			615
Total liabilities			287,504			279,877
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			—			—
Preferred stock, Series B, $.01 par value; $1,000 liquidation value; 326 shares outstanding			—			—
Additional paid-in capital, preferred			6,840			6,840
Preferred stock discount			(248	)		(265	)
Common stock, $.01 par value; 4,000,000 shares authorized, 2,653,208 shares issued and outstanding			27			27
Additional paid-in capital, common			26,684			26,680
Accumulated deficit			(2,712	)		(2,531	)
Accumulated other comprehensive loss			(10	)		(45	)
Total stockholders’ equity			30,581			30,706
Total liabilities and stockholders’ equity		$	318,085			310,583

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

($ in thousands, except per share amounts)

 

		Three Months Ended March 31,
		2010				2009
Interest income:
Loans		$	3,286			3,040
Securities			311			133
Other			33			139
Total interest income			3,630			3,312
Interest expense:
Deposits			1,176			1,635
Borrowings			177			203
Total interest expense			1,353			1,838
Net interest income			2,277			1,474
Provision for loan losses			790			94
Net interest income after provision for loan losses			1,487			1,380
Noninterest income:
Deposit account fees			95			91
Gain on sales of loans held for sale			175			197
Other			38			15
Total noninterest income			308			303
Noninterest expense:
Salaries and employee benefits			945			931
Occupancy and equipment			292			262
Data processing			135			136
Professional services			99			81
Advertising and promotion			39			34
Office supplies and printing			31			30
Other			367			289
Total noninterest expense			1,908			1,763
Loss before income tax benefit			(113	)		(80	)
Income tax benefit			(36	)		(14	)
Net loss			(77	)		(66	)
Preferred stock dividend requirements and accretion of preferred stock to par			104			81
Net loss available to common shareholders		$	(181	)		(147	)
Loss per common share – basic		$	(0.07	)		(0.06	)
Loss per common share – diluted		$	(0.07	)		(0.06	)
Weighted-average number of common shares outstanding, basic			2,653,208			2,653,208
Weighted-average number of common shares outstanding, diluted			2,653,208			2,653,208
Dividends per common share		$	—			—

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

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

Three Months Ended March 31, 2010 and 2009

($ in thousands)

 

		Preferred Stock															Common Stock							Accumulated Deficit			Accumulated Other Comprehensive Income			Total Stockholders’ Equity
		Series A					Series B					Additional Paid-in Capital										Additional Paid-In Capital
		Shares		Amount			Shares		Amount					Discount			Shares		Amount
Balance at December 31, 2008		—		$	—		—		$	—		—		—			2,653,208		$	27		26,613		(2,142	)		138			24,636
Comprehensive loss:
Net loss (unaudited)		—			—		—			—		—		—			—			—		—		(66	)		—			(66	)
Net change in unrealized gain on securities available for sale, net of taxes of $(3) (unaudited)		—			—		—			—		—		—			—			—		—		—			(5	)		(5	)
Comprehensive loss (unaudited)																														(71	)
Share-based compensation (unaudited)		—			—		—			—		—		—			—			—		34		—			—			34
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)		—			—		—			—		—		13			—			—		—		(81	)		—			(68	)
Balance at March 31, 2009 (unaudited)		6,514		$	—		326		$	—		6,840		(313	)		2,653,208		$	27		26,647		(2,289	)		133			31,045

(continued)

 

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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

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

Three Months Ended March 31, 2010 and 2009

($ in thousands)

 

		Preferred Stock															Common Stock							Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
		Series A					Series B					Additional Paid-in Capital										Additional Paid-In Capital
		Shares		Amount			Shares		Amount					Discount			Shares		Amount
Balance at December 31, 2009		6,514		$	—		326		$	—		6,840		(265	)		2,653,208		$	27		26,680		(2,531	)		(45	)		30,706
Comprehensive loss:
Net loss (unaudited)		—			—		—			—		—		—			—			—		—		(77	)		—			(77	)
Net change in unrealized loss on securities available for sale, net of taxes of $22 (unaudited)		—			—		—			—		—		—			—			—		—		—			35			35
Comprehensive loss (unaudited)																														(42	)
Share-based compensation (unaudited)		—			—		—			—		—		—			—			—		4		—			—			4
Preferred stock dividend requirements and Series B preferred stock accretion (unaudited)		—			—		—			—		—		17			—			—		—		(104	)		—			(87	)
Balance at March 31, 2010 (unaudited)		6,514		$	—		326		$	—		6,840		(248	)		2,653,208		$	27		26,684		(2,712	)		(10	)		30,581

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

		Three Months Ended March 31,
		2010				2009
Cash flows from operating activities:
Net loss		$	(77	)		(66	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Provision for loan losses			790			94
Share-based compensation			4			34
Depreciation and amortization			155			156
Net decrease (increase) in loans held for sale			1,417			(7	)
Deferred income tax benefit			(37	)		(14	)
Net amortization of deferred loan fees and costs			20			8
Net decrease in accrued interest payable			(4	)		(36	)
Net (increase) decrease in accrued interest receivable			(18	)		19
Net decrease (increase) in other assets			151			(91	)
Net increase in accrued expenses and other liabilities			586			103
Net cash provided by operating activities			2,987			200
Cash flows from investing activities:
Proceeds from principal repayments and maturities on securities available for sale			2,111			3,706
Purchase of securities available for sale			(12,618	)		(9,311	)
Net decrease (increase) in time deposits			990			(8,784	)
Loan disbursements, net of repayments			(2,573	)		(7,402	)
Purchase of premises and equipment			(48	)		(113	)
Proceeds from sale of other real estate owned			—			51
Purchase of Federal Home Loan Bank stock			—			(98	)
Net cash used in investing activities			(12,138	)		(21,951	)
Cash flows from financing activities:
Net increase in deposits			10,005			21,090
Net decrease in other borrowings			(2,960	)		(1,803	)
Net decrease in advances from Federal Home Loan Bank			—			(1,000	)
Proceeds from preferred stock issued			—			6,514
Preferred stock dividend requirements and Series B stock accretion			(87	)		(68	)
Net cash provided by financing activities			6,958			24,733
Net (decrease) increase in cash and cash equivalents			(2,193	)		2,982
Cash and cash equivalents at beginning of period			22,098			9,471
Cash and cash equivalents at end of period		$	19,905			12,453
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest		$	1,357			1,874
Income taxes		$	—			—
Noncash transactions:
Accumulated other comprehensive income, net change in unrealized gain (loss) on securities available for sale, net of taxes		$	35			(5	)
Transfer of loans to other real estate owned		$	—			329

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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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 March 31, 2010 and the results of operations and cash flows for the three-month periods ended March 31, 2010 and 2009. The results of operations for the three-month period ended March 31, 2010, are not necessarily indicative of results that may be expected for the year ending December 31, 2010.

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.

2. Securities. Securities have been classified according to management’s intent. The carrying amount of securities available for sale and their approximate fair values are as follows (in thousands):

 

		Amortized Cost			Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
At March 31, 2010:
U.S. Government agency securities		$	5,108		—		(125	)		4,983
Mortgage-backed securities			36,752		265		(154	)		36,863
		$	41,860		265		(279	)		41,846
At December 31, 2009:
U.S. Government agency securities			1,029		—		(24	)		1,005
Mortgage-backed securities			30,325		150		(198	)		30,277
		$	31,354		150		(222	)		31,282

(continued)

 

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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

2. Securities, Continued. Information pertaining to securities with gross unrealized losses at March 31, 2010, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows (in thousands):

 

		Less Than Twelve Months					More than Twelve Months
		Gross Unrealized Losses			Approximate Fair Value		Gross Unrealized Losses		Approximate Fair Value
U.S. Government agency securities		$	125		4,983		—		—
Mortgage-backed securities			154		15,066		—		—
		$	279		20,049		—		—

The unrealized losses on thirteen securities were caused by market conditions and not credit quality. It is expected that the securities would not be settled at a price less than the par value of the investments. Because the decline in fair value is attributable to changes in market conditions and not credit quality, and because the Company has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.

The scheduled maturities of securities at March 31, 2010 are as follows (in thousands):

 

		Amortized Cost			Fair Value
Due from five to ten years		$	3,026		2,948
Due after ten years			2,082		2,035
Mortgage-backed securities			36,752		36,863
		$	41,860		41,846

At March 31, 2010 and December 31, 2009, securities with a carrying value of approximately $13.5 million and $18.2 million, respectively, were pledged for other borrowings and public funds.

(continued)

 

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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

 

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

 

		At March 31, 2010				At December 31, 2009
Commercial real estate		$	148,778			144,234
Residential real estate and home equity			47,206			45,877
Residential mortgages held for sale			4,908			6,325
Construction			12,122			15,400
Commercial			22,606			22,362
Consumer			2,863			3,130
Total loans			238,483			237,328
Add/Deduct: Allowance for loan losses			(3,825	)		(3,035	)
Deferred loan costs, net			368			387
Loans, net		$	235,026			234,680

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

 

		Three Months Ended March 31,
		2010			2009
Balance at January 1		$	3,035		2,714
Provision for loan losses			790		94
Charge-offs			—		(351	)
Balance at March 31		$	3,825		2,457

With the Federal Deposit Insurance Corporation’s concurrence, in April 2010, the Bank recorded additional provisions for loan losses of approximately $2 million.

(continued)

 

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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

 

4. Loan Impairment and Loan Losses, Continued. The following is a summary of information regarding nonaccrual and impaired loans (in thousands):

 

		At March 31, 2010				At December 31, 2009
Nonaccrual loans		$	5,358			2,842
Accruing loans past due ninety days or more		$	83			—
Collateral dependent loans identified as impaired:
Gross loans with no related allowance for losses			4,789			1,932
Gross loans with related allowance for losses recorded			4,559			1,667
Less allowances on these loans			(932	)		(246	)
Net loans with related allowance			3,627			1,421
Net investment in collateral dependent impaired loans			8,416			3,353
Noncollateral dependent loans identified as impaired:
Gross loans with no related allowance for losses			1,034			1,034
Gross loans with related allowance for losses recorded			2,092			2,094
Less allowance on these loans			(293	)		(513	)
Net loans with related allowance			1,799			1,581
Net investment in noncollateral dependent impaired loans			2,833			2,615
Net investment in impaired loans		$	11,249			5,968

The average net investment in impaired loans and interest income recognized and received on impaired loans are as follows (in thousands):

 

		Three Months Ended March 31,
		2010			2009
Interest income recognized on impaired loans		$	72		—
Interest income received on impaired loans		$	72		—
Average net recorded investment in impaired loans		$	9,601		1,656

(continued)

 

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Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

 

5. Loss Per Share. Basic loss per share has been computed on the basis of the weighted-average number of shares of common stock outstanding during the periods, which was 2,653,208 shares during the three-month periods ended March 31, 2010 and 2009, respectively. All outstanding stock options are not dilutive due to the net losses of the Company.

6. 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 March 31, 2010, there were 99,662 options available for future grants under the Plan. A summary of stock option transactions under the Plan for the three-month period ended March 31, 2010, follows:

 

		Number of Options			Weighted- Average Exercise Price			Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
Options outstanding at December 31, 2009		276,069			$	10.13
Options forfeited		(1,266	)			10.39
Options outstanding at March 31, 2010		274,803			$	10.13		6.64 years		$	—
Options exercisable at March 31, 2010		267,128			$	10.13		6.58 years		$	—

No options have been granted during 2010. The fair value of each option granted for the three-month period ended March 31, 2009 are estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions:

 

Risk-free interest rate			1.46	%
Dividend yield			—	%
Expected stock volatility			10.00	%
Expected life in years			5.50
Per share grant-date fair value of options issued during the period		$	1.29

(continued)

 

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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

 

6. Share-Based Compensation, Continued. 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 three month periods ended March 31, 2010 and 2009. At March 31, 2010, there was approximately $9,000 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 ten months. The total fair value of shares vesting and recognized as compensation was approximately $4,000 and $34,000 for the three month periods ended March 31, 2010 and 2009, respectively.

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

 

		Fair Value Measurements at Reporting Date Using
		Fair Value as of March 31, 2010			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		$	41,846		—		41,846		—

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

 

		Net Carrying Value at March 31, 2010									Total Losses		Total Losses Recorded In Operations For the Period Ended March 31,
		Total			Level 1		Level 2		Level 3				2010
Impaired loans		$	3,627		—		—		3,627		932		686
Other real estate owned		$	1,583		—		—		1,583		76		—

In addition, loans with a carrying value of $4,789,000 at March 31, 2010 were measured for impairment using Level 3 inputs and had a fair value in excess of carrying value.

(continued)

 

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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

 

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

 

		At March 31, 2010					At December 31, 2009
		Carrying Amount			Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents		$	19,905		19,905		22,098		22,098
Interest bearing time deposits in banks			1,297		1,297		2,287		2,287
Securities available for sale			41,846		41,846		31,282		31,282
Loans, net			235,026		237,401		234,680		237,399
Accrued interest receivable			957		957		939		939
Federal Home Loan Bank stock			1,499		1,499		1,499		1,499
Financial liabilities:
Deposits			259,994		263,705		249,989		253,975
Other borrowings			4,673		4,673		7,633		7,633
Federal Home Loan Bank advances			21,000		19,713		21,000		19,788
Accrued interest payable			636		636		640		640
Off-balance-sheet financial instruments			—		—		—		—

 

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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 March 31, 2010 and for the three-month periods ended March 31, 2010 and 2009 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.

 

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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 March 31, 2010, and the related condensed consolidated statements of operations, changes in stockholders’ equity and cash flows for the three-month periods ended March 31, 2010 and 2009. These interim 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, 2009, 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 30, 2010, 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, 2009, 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

May 14, 2010

 

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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.

 

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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 March 31, 2010 (in thousands):

 

Contractual Obligations		Total
Time deposit maturities		$	170,187
Advances from Federal Home Loan Bank			21,000
Other borrowings			4,673
Commitments to extend credit			7,700
Unused lines of credit			21,856
Standby letters of credit			396
Total		$	225,812

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.

 

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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 March 31, 2010, 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 March 31, 2010 and December 31, 2009, 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 March 31, 2010:
Total capital (to Risk-Weighted Assets)		$	28,291		11.50	%		$	19,681		8.00	%		$	24,601		10.00	%
Tier I Capital (to Risk-Weighted Assets)			25,206		10.24				9,846		4.00				14,769		6.00
Tier I Capital (to Average Assets)			25,206		8.10				12,447		4.00				15,559		5.00
As of December 31, 2009:
Total capital (to Risk-Weighted Assets)			28,332		11.49				19,726		8.00				24,658		10.00
Tier I Capital (to Risk-Weighted Assets)			25,297		10.26				9,862		4.00				14,794		6.00
Tier I Capital (to Average Assets)			25,297		8.37				12,089		4.00				15,112		5.00

 

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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Results of Operations

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

 

		Three Months Ended March 31, 2010			Year Ended December 31, 2009			Three Months Ended March 31, 2009
Average equity as a percentage of average assets		9.80	%		10.56	%		10.89	%
Total equity to total assets at end of period		9.61	%		9.89	%		10.95	%
Return on average assets (1)		(.10	)%		—	%		(.10	)%
Return on average equity (1)		(1.02	)%		0.02	%		(.91	)%
Noninterest expense to average assets (1)		2.47	%		2.75	%		2.66	%
Nonperforming loans to total loans at end of period (2)		2.32	%		1.21	%		.41	%

 

(1)	Annualized for the three-months ended March 31, 2010 and 2009.

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

Changes in Financial Condition

Total assets increased $7 million or 2%, from $311 million at December 31, 2009 to $318 million at March 31, 2010, primarily as a result of a $11 million increase in securities. Deposits increased $10 million from $250 million at December 31, 2009 to $260 million at March 31, 2010.

 

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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 March 31,
		2010									2009
		Average Balance			Interest and Dividends			Average Yield/ Rate			Average Balance			Interest and Dividends			Average Yield/ Rate
		($ in thousands)
Interest-earning assets:
Loans		$	232,962			3,286		5.72	%		$	209,249			3,040		5.89	%
Securities			35,140			311		3.59				13,607			133		3.96
Other (1)			20,906			33		0.64				26,470			139		2.13
Total interest-earning assets			289,008			3,630		5.09				249,326			3,312		5.39
Noninterest-earning assets			24,179									19,876
Total assets		$	313,187								$	269,202
Interest-bearing liabilities:
Deposits			234,050			1,176		2.04				196,022			1,635		3.38
Federal Home Loan Bank advances and other borrowings			26,378			177		2.72				26,982			203		3.05
Total interest-bearing liabilities			260,428			1,353		2.11				223,004			1,838		3.34
Noninterest-bearing deposits			20,683									16,650
Noninterest-bearing liabilities			1,385									221
Stockholders’ equity			30,691									29,327
Total liabilities and stockholders’ equity		$	313,187								$	269,202
Net interest income					$	2,277								$	1,474
Interest-rate spread								2.98	%								2.05	%
Net interest margin (2)								3.20	%								2.40	%
Ratio of interest-earning assets to interest-bearing liabilities			1.11									1.12

 

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

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

 

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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Comparison of the Three-Month Periods Ended March 31, 2010 and 2009

General Operating Results. Net loss for the three-month period ended March 31, 2010 was $77,000, or $(0.07) per basic and diluted common share, compared to a net loss of $66,000, or $(.06) per basic and diluted common share, for the comparable period in 2009. The $11,000 increase in net loss resulted primarily from a $145,000 increase in noninterest expense and a $696,000 increase in provision for loan losses, partially offset by an $803,000 increase in net interest income and a $5,000 increase in noninterest income.

Interest Income. Interest income increased $318,000 to $3.6 million for the three-month period ended March 31, 2010, when compared to the three-month period ended March 31, 2009. The increase was due to a $39.7 million increase in average interest-earning assets outstanding for the three months ended March 31, 2010 compared to the 2009 period, partially offset by a decrease in the average yield earned on interest-earning assets from 5.39% for the three months ended March 31, 2009 to 5.09% for the three months ended March 31, 2010.

Interest Expense. Interest expense decreased $485,000 for the three-month period ended March 31, 2010 when compared to the comparable 2009 period. The decrease was primarily due to decrease in the average cost of interest-bearing liabilities from 3.34% for the three months ended March 31, 2009 to 2.11% for the comparable 2010 period, partially offset by a $37.4 million increase in average interest bearing liabilities. Average interest-bearing liabilities increased from $223.0 million outstanding during the three months ended March 31, 2009 to $260.4 million outstanding during the comparable period for 2010.

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 March 31, 2010 and 2009 of $790,000 and $94,000, respectively. Management believes that the allowance for loan losses, which was $3.8 million or 1.60% of gross loans at March 31, 2010 is adequate.

Noninterest Income. Noninterest income increased $5,000 during the 2010 period. The increase was primarily due to a $4,000 increase in deposit account fees when compared to the three-month period ended March 31, 2009.

Noninterest Expense. Noninterest expense increased by $145,000 from $1.8 million for the three-month period ended March 31, 2009 to $1.9 million for the three-month period ended March 31, 2010. The increase was primarily due to increases of $14,000 in salaries and employee benefits, $30,000 in occupancy and equipment expense, and $78,000 in other noninterest expense, all related to the overall growth of the Company.

Income Taxes. The income tax benefit was $14,000 for the three-month period ended March 31, 2009. The income tax benefit was $36,000 for the corresponding period in 2010.

 

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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 5.

Other Information

Not applicable

 

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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
3.4    (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
10.9    (d)		Form of Waiver
21.1		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

 

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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: May 17, 2010

 

 

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