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Table of Contents

 

 

AB&T FINANCIAL CORPORATION

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarterly Period Ended September 30, 2011

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: 000-53249

 

 

AB&T FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

North Carolina   26-2588442

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

292 W. Main Avenue

Gastonia, North Carolina 28052

(Address of principal executive offices and zip code)

(704) 867-5828

(Registrant’s telephone number, including area code)

NA

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    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  x    NO  ¨


Table of Contents

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

State the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

2,668,205 shares of common stock, $1.00 par value, as of November 14, 2011

 

 

 


Table of Contents

AB&T FINANCIAL CORPORATION

INDEX

 

         Page No.

PART I – FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements (Unaudited)

  
 

Consolidated Balance Sheets – September 30, 2011 and December 31, 2010

   4
 

Consolidated Statements of Operations – Nine and three months ended September  30, 2011 and 2010

   5
 

Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income (Loss) – Nine months ended September 30, 2011 and 2010

   6
 

Consolidated Statements of Cash Flows – Nine months ended September 30, 2011 and 2010

   7
 

Notes to Consolidated Financial Statements

   8-23

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   23-30

Item 4.

 

Controls and Procedures

   31

PART II – OTHER INFORMATION

  

Item 3.

 

Defaults Upon Senior Securities

   31

Item 6.

 

Exhibits

   31


Table of Contents

PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements

AB&T FINANCIAL CORPORATION

Consolidated Balance Sheets

 

     September 30,
2011
    December 31,
2010
 
     (Unaudited)     (Audited)  

Assets

    

Cash and cash equivalents

    

Cash and due from banks

   $ 3,347,080      $ 3,924,571   

Federal funds sold

     3,242,967        4,150,670   

Time deposits with other banks

     3,297,829        789,721   
  

 

 

   

 

 

 

Total cash and cash equivalents

     9,887,876        8,864,962   
  

 

 

   

 

 

 

Securities available for sale at fair value

     29,381,244        17,756,616   

Nonmarketable equity securities

     1,014,780        1,267,280   
  

 

 

   

 

 

 

Total investments

     30,396,024        19,023,896   
  

 

 

   

 

 

 

Loans receivable

     165,358,902        148,289,512   

Less allowance for loan losses

     (3,450,759     (5,225,914
  

 

 

   

 

 

 

Loans, net

     161,908,143        143,063,598   
  

 

 

   

 

 

 

Premises, furniture and equipment, net

     3,780,006        3,861,622   

Accrued interest receivable

     645,346        676,898   

Deferred tax asset

     1,958,123        2,059,926   

Other real estate owned

     6,309,706        6,402,263   

Other assets

     462,445        535,664   
  

 

 

   

 

 

 

Total assets

   $ 215,347,669      $ 184,488,829   
  

 

 

   

 

 

 

Liabilities

    

Deposits

    

Noninterest-bearing transaction accounts

   $ 12,025,721      $ 7,225,888   

Interest-bearing transaction accounts

     7,934,474        6,773,623   

Savings and money market

     66,544,475        41,551,912   

Time deposits $100,000 and over

     10,798,406        7,742,179   

Other time deposits

     89,125,800        85,690,137   
  

 

 

   

 

 

 

Total deposits

   $ 186,428,876      $ 148,983,739   
  

 

 

   

 

 

 

Borrowed funds

     —          360,143   

FHLB advances

     9,500,000        13,500,000   

Accrued interest payable

     55,842        66,787   

Other liabilities

     173,218        223,258   
  

 

 

   

 

 

 

Total liabilities

     196,132,934        163,133,927   
  

 

 

   

 

 

 

Shareholders’ equity

    

Preferred stock, no par value, 1,000,000 shares authorized, issued and outstanding – 3,500 at September 30, 2011 and at December 31, 2010

     3,428,454        3,410,220   

Common stock, $1.00 par value; 11,000,000 shares authorized, 2,678,205 issued at September 30, 2011 and December 31, 2010

     2,678,205        2,678,205   

Treasury stock, at cost (10,000 shares at September 30, 2011 and December 31, 2010)

     (55,600     (55,600

Warrants

     136,850        136,850   

Capital surplus

     21,871,532        21,787,729   

Retained deficit

     (8,966,893     (6,540,739

Accumulated other comprehensive income (loss)

     97,185        (61,763
  

 

 

   

 

 

 

Total shareholders’ equity

     19,189,733        21,354,902   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 215,347,669      $ 184,488,829   
  

 

 

   

 

 

 

See notes to consolidated financial statements

 

-4-


Table of Contents

Consolidated Statements of Operations

(Unaudited)

 

     For the three months ended
September 30
    For the nine months ended
September 30
 
     2011     2010     2011     2010  

Interest income:

        

Loans, including fees

   $ 1,994,278      $ 1,582,034      $ 5,717,502      $ 4,920,922   

Investment securities, taxable

     126,342        104,652        309,308        294,467   

FHLB, interest and dividends

     2,098        1,501        7,019        3,309   

Federal funds sold

     3,850        4,568        16,059        20,043   

Time deposits with other banks

     5,095        5,132        10,910        13,283   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     2,131,663        1,697,887        6,060,798        5,252,024   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

        

Time deposits $100,000 and over

     33,118        55,711        101,889        147,799   

Other deposits

     442,416        366,481        1,249,220        1,213,868   

Other interest expense

     58,730        80,006        178,411        237,746   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     534,264        502,198        1,529,520        1,599,413   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     1,597,399        1,195,689        4,531,278        3,652,611   

Provision for loan losses

     1,451,998        105,199        1,689,858        541,727   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     145,401        1,090,490        2,841,420        3,110,884   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other operating income:

        

Service charges on deposit accounts

     114,101        94,773        289,715        282,461   

Rental income

     7,573        3,000        20,633        6,000   

Gain on sale of investment securities

     —          134,975        29,117        410,187   

Other service charges, commissions and fees

     20,816        12,998        60,247        35,955   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     142,490        245,746        399,712        734,603   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other operating expenses:

        

Salaries and employee benefits

     667,869        619,290        2,011,093        1,761,892   

Occupancy expense

     48,440        51,759        147,014        142,226   

Furniture and equipment expense

     55,955        42,883        117,498        133,659   

Discount on purchased loans

     —          —          1,002,136        —     

Other real estate expense

     354,642        250,864        770,991        312,123   

Loss on sale of loans

     79,395        —          79,395        —     

Deposit insurance premium

     81,566        109,231        243,569        350,566   

Other operating expenses

     389,107        348,094        1,259,564        1,022,149   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     1,676,974        1,422,121        5,631,260        3,722,615   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (1,389,083     (85,885     (2,390,128     122,872   

Income tax expense (benefit)

     —          (35,962     17,792        40,548   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (1,389,083   $ (49,923   $ (2,407,920   $ 82,324   
  

 

 

   

 

 

   

 

 

   

 

 

 

Accretion of preferred stock to redemption value

     6,078        6,078        18,234        18,234   

Preferred stock dividends (accrued)

     43,750        43,750        131,250        131,250   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss available to common shareholders

   $ (1,438,911   $ (99,751   $ (2,557,404   $ (67,160
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss per common share

        

Basic loss per common share

   $ (0.54   $ (0.04   $ (0.96   $ (0.03

Diluted loss per common share

   $ (0.54   $ (0.04   $ (0.96   $ (0.03

See notes to consolidated financial statements

 

-5-


Table of Contents

Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income (Loss)

For the nine months ended September 30, 2011 and 2010

(dollars in thousands except for share data)

(Unaudited)

 

    Common Stock     Preferred
Stock
    Treasury           Capital    

Accumulated

Other

Comprehensive
Income

    Retained        
    Shares     Amount     Shares     Amount     Stock     Warrants     Surplus     (Loss)     Deficit     Total  

Balance, December 31, 2009

    2,678,205      $ 2,678        3,500      $ 3,386      $ (56   $ 137      $ 21,734      $ 80      $ (3,067   $ 24,893   

Net income

                    82        82   

Other comprehensive loss, net of tax

                  (61       (61
                   

 

 

 

Comprehensive income

                      21   

Accretion of preferred stock to redemption value

          18                (18     —     

Dividends paid, preferred

                (131         (131

Stock-based employee compensation

                171            171   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance September 30, 2010

    2,678,205      $ 2,678        3,500      $ 3,404      $ (56   $ 137      $ 21,774      $ 19      $ (3,003   $ 24,954   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2010

    2,678,205      $ 2,678        3,500      $ 3,410      $ (56   $ 137      $ 21,787      $ (62   $ (6,540   $ 21,355   

Net loss

                    (2,408     (2,408

Other comprehensive income, net of tax

                  159          159   
                   

 

 

 

Comprehensive loss

                      (2,249

Accretion of preferred stock to redemption value

          18                (18     —     

Dividends paid, preferred

                (43         (43

Stock-based employee compensation expense

                128            128   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance September 30, 2011

    2,678,205      $ 2,678        3,500      $ 3,428      $ (56   $ 137      $ 21,872      $ 97      $ (8,966   $ 19,190   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements

 

-6-


Table of Contents

Consolidated Statements of Cash Flows

For the nine months ended September 30, 2011 and 2010

(Unaudited)

 

     For the nine months ended
September 30,
 
     2011     2010  

Cash flows from operating activities:

    

Net income (loss)

   $ (2,407,920   $ 82,234   

Adjustments to reconcile net income (loss) to net cash provided by operating activities

    

Provision for loan losses

     1,689,858        541,727   

Loss on sale of other real estate

     76,000        9,016   

Loss on write-down of other real estate

     233,711        143,236   

Gain on sale of investment securities

     (29,117     (410,187

Loss on sale of loans

     79,395        —     

Depreciation and amortization expense

     125,209        131,699   

Discount accretion and premium amortization

     174,176        11,398   

Deferred income tax benefit

     —          (68,201

Increase (decrease) in interest receivable

     31,552        (98,234

Increase (decrease) in interest payable

     (10,945     4,554   

Decrease in other assets

     73,219        424,208   

Increase (decrease) in other liabilities

     (50,040     66,074   

Discount on purchased loans

     1,002,136        —     

Stock based compensation expense

     127,553        171,184   
  

 

 

   

 

 

 

Net cash provided by operating activities

     1,114,787        1,008,708   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchase of securities available for sale

     (17,974,457     (22,758,233

Calls and maturities of securities available for sale

     1,451,768        1,091,244   

Net decrease (increase) in loans receivable

     (26,736,786     2,575,842   

Proceeds from sale of loans

     4,283,458        —     

Proceeds from sale of available for sale securities

     5,013,753        11,051,541   

Proceeds from sale of equity securities

     252,500        98,100   

Proceeds from sale of other real estate

     993,056        320,841   

Capitalized other real estate expenses

     (372,816     —     

Purchases of premises, furniture, and equipment

     (43,593     (65,657
  

 

 

   

 

 

 

Net cash used in investing activities

     (33,133,117     (7,686,322
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net increase in demand deposits, interest- bearing transaction accounts and savings accounts

     30,953,247        10,704,998   

Net increase (decrease) in certificates of deposit and other time deposits

     6,491,890        (18,298,352

Net (increase) decrease in borrowed funds and FHLB advances

     (4,360,143     3,077,097   

Dividends paid

     (43,750     (131,250
  

 

 

   

 

 

 

Net cash provided (used) by financing activities

     33,041,244        (4,647,507
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ 1,022,914      $ (11,325,121

Cash and cash equivalents, beginning of period

   $ 8,864,962      $ 22,728,132   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 9,887,876      $ 11,403,011   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Transfer of loans to real estate acquired in settlement of loans

   $ 837,394      $ 3,098,311   
  

 

 

   

 

 

 

Interest paid

   $ 1,540,465      $ 1,594,859   
  

 

 

   

 

 

 

Taxes paid

   $ —        $ —     
  

 

 

   

 

 

 

See notes to consolidated financial statements

 

-7-


Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

Note 1 – Organization

AB&T Financial Corporation (the “Company”), was incorporated under the laws of the State of North Carolina on June 25, 2007. On May 14, 2008, the Company became the sole owner of all the shares of the capital stock of Alliance Bank & Trust Company (the “Bank”). Alliance Bank & Trust Company is a state-chartered bank which was organized and incorporated under the laws of the State of North Carolina in September 2004. The Bank is not a member of the Federal Reserve System. The Bank commenced operations on September 8, 2004.

The Bank is headquartered in Gastonia, North Carolina and currently conducts business in two North Carolina counties through four full service branch offices. The principal business activity of the Bank is to provide commercial banking services to domestic markets, principally in Gaston and Cleveland counties. As a state-chartered bank, the Bank is subject to regulation by the North Carolina Office of the Commissioner of Banks and the Federal Deposit Insurance Corporation. The Company is also regulated, supervised and examined by the Federal Reserve. The consolidated financial statements include the accounts of the parent company and its wholly-owned subsidiary after elimination of all significant intercompany balances and transactions.

Note 2 – Basis of Presentation

The accompanying financial statements have been prepared in accordance with the requirements for interim financial statements and, accordingly, they are consolidated to omit disclosures, which would substantially duplicate those contained in the Company’s 2010 Annual Report on Form 10-K. The financial statements as of September 30, 2011 and for the interim periods ended September 30, 2011 and 2010 are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation. The financial information as of December 31, 2010 has been derived from the audited financial statements as of that date. For further information, refer to the financial statements and the notes included in the Company’s 2010 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2011.

The preparation of the consolidated financial statements are in conformity with accounting principles generally accepted in the United States of America (GAAP) which requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. In addition, they affect the reported amounts of income and expense during the reporting period. Actual results could differ from these estimates and assumptions.

In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued.

Note 3 – Recently Issued Accounting Pronouncements

The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting, and disclosure of financial information by the Company.

In July 2010, the Receivables topic of the Accounting Standards Codification (“ASC”) was amended by Accounting Standards Update (“ASU”) 2010-20 to require expanded disclosures related to a company’s allowance for credit losses and the credit quality of its financing receivables. The amendments require the allowance disclosures to be provided on a disaggregated basis. The Company is required to include these disclosures in their interim and annual financial statements. See Note. 8.

Disclosures about Troubled Debt Restructurings (“TDRs”) required by ASU 2010-20 were deferred by the Financial Accounting Standards Board (“FASB”) in ASU 2011-01 issued in January 2011. In April 2011 FASB issued ASU 2011-02 to assist creditors with their determination of when a restructuring is a TDR.

 

-8-


Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 3 – Recently Issued Accounting Pronouncementscontinued

 

The determination is based on whether the restructuring constitutes a concession and whether the debtor is experiencing financial difficulties as both events must be present.

Disclosures related to TDRs under ASU 2010-20 have been presented in Note 9.

In April 2011, the criteria used to determine effective control of transferred assets in the Transfers and Servicing topic of the ASC was amended by ASU 2011-03. The requirement for the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms and the collateral maintenance implementation guidance related to that criterion were removed from the assessment of effective control. The other criteria to assess effective control were not changed. The amendments are effective for the Company beginning January 1, 2012 but are not expected to have a material effect on the financial statements.

ASU 2011-04 was issued in May 2011 to amend the Fair Value Measurement topic of the ASC by clarifying the application of existing fair value measurement and disclosure requirements and by changing particular principles or requirements for measuring fair value or for disclosing information about fair value measurements. The amendments will be effective for the Company beginning January 1, 2012 but are not expected to have a material effect on the financial statements.

The Comprehensive Income topic of the ASC was amended in June 2011. The amendment eliminates the option to present other comprehensive income as a part of the statement of changes in stockholders’ equity. The amendment requires consecutive presentation of the statement of net income and other comprehensive income and requires an entity to present reclassification adjustments from other comprehensive income to net income on the face of the financial statements. The amendments will be applicable to the Company on January 1, 2012 and will be applied retrospectively.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

Note 4 – Comprehensive Income (Loss)

Comprehensive income includes net income and other comprehensive income, which is defined as nonowner related transactions in equity. The following table sets forth the amounts of other comprehensive income included in equity along with the related tax effect for the three and nine month periods ended September 30, 2011 and 2010:

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2011     2010     2011     2010  

Unrealized gains (losses) on securities available for sale

   $ 162,748      $ 115,051      $ 289,863      $ 309,590   

Reclassification of (gains) losses recognized in net income

     —          (134,975     (29,117     (410,187

Income tax benefit (expense)

     (63,631     (16,394     (101,801     39,182   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

   $ 99,117      $ 3,530        158,945      $ (61,415
  

 

 

   

 

 

   

 

 

   

 

 

 

 

-9-


Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 5 – Income (loss) per common share

 

Basic income per common share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding. Diluted income per common share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding and dilutive common share equivalents using the treasury stock method. No dilutive common share equivalents were included in the calculation because their effect would be anti-dilutive for the three and nine month periods ended September 30, 2011 and 2010.

 

000000000 000000000 000000000
     Three months ended September 30, 2011  
     Income
(Numerator)
    Shares
(Denominator)
     Per Share
Amount
 

Basic loss per share

       

Loss available to common shareholders

   $ (1,438,911     2,668,205       $ (0.54
       

 

 

 

Effect of dilutive securities

       

Stock options

     —          —        
  

 

 

   

 

 

    

Dilutive loss per share

       

Loss available to common shareholders plus assumed conversions

   $ (1,438,911     2,668,205       $ (0.54
  

 

 

   

 

 

    

 

 

 

 

000000000 000000000 000000000
     Three months ended September 30, 2010  
     Income
(Numerator)
     Shares
(Denominator)
     Per Share
Amount
 

Basic loss per share

        

Loss available to common shareholders

   $ (99,751)         2,668,205       $ (0.04)   
        

 

 

 

Effect of dilutive securities

        

Stock options

     —           —        
  

 

 

    

 

 

    

Dilutive loss per share

        

Loss available to common shareholders plus assumed conversions

   $ (99,751)         2,668,205       $ (0.04)   
  

 

 

    

 

 

    

 

 

 

 

000000000 000000000 000000000
     Nine months ended September 30, 2011  
     Income
(Numerator)
    Shares
(Denominator)
     Per Share
Amount
 

Basic loss per share

       

Loss available to common shareholders

   $ (2,557,404     2,668,205       $ (0.96
       

 

 

 

Effect of dilutive securities

       

Stock options

     —          —        
  

 

 

   

 

 

    

Dilutive loss per share

       

Loss available to common shareholders plus assumed conversions

   $ (2,557,404     2,668,205       $ (0.96
  

 

 

   

 

 

    

 

 

 

 

000000000 000000000 000000000
     Nine months ended September 30, 2010  
     Income
(Numerator)
     Shares
(Denominator)
     Per Share
Amount
 

Basic income per share

        

Loss available to common shareholders

   $ (67,160)         2,668,205       $ (0.03)   
        

 

 

 

Effect of dilutive securities

        

Stock options

     —           —        
  

 

 

    

 

 

    

Dilutive income per share

        

Loss available to common shareholders plus assumed conversions

   $ (67,160)         2,668,205       $ (0.03)   
  

 

 

    

 

 

    

 

 

 

 

-10-


Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 6 – Fair Value Measurements

Effective January 1, 2008, the Company adopted ASC Topic 820, Fair Value Measurements and Disclosures, which provides a framework for measuring and disclosing fair value under generally accepted accounting principles. ASC Topic 820 requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis (for example, available for sale investment securities) or on a nonrecurring basis (for example, impaired loans).

ASC Topic 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC Topic 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

 

Level 1    Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as U.S. Treasuries, other securities that are highly liquid and are actively traded in over-the-counter markets and money market funds.
Level 2    Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments, mortgage-backed securities, municipal bonds, corporate debt securities, and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes certain derivative contracts and impaired loans. Our available for sale investments are valued using a pricing service through our bond record keeper, which we have verified with a third party.
Level 3    Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. For example, this category generally includes certain private equity investments, retained residual interests in securitizations, residential mortgage servicing rights, and highly-structured or long-term derivative contracts.

Assets measured at fair value on a recurring basis are as follows as of September 30, 2011:

 

     Quoted
market price
in active
markets

(Level 1)
     Significant
other
observable
inputs

(Level 2)
     Significant
unobservable
inputs

(Level 3)
 

Available for sale investments:

        

Mortgage-backed securities

   $ —         $ 29,381,244       $ —     
  

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 29,381,244       $ —     
  

 

 

    

 

 

    

 

 

 

 

-11-


Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 6 – Fair Value Measurements (continued)

 

Assets measured at fair value on a recurring basis are as follows as of December 31, 2010:

 

     Quoted
market price
in active
markets

(Level 1)
     Significant
other
observable
inputs

(Level 2)
     Significant
unobservable
inputs

(Level 3)
 

Available for sale investments:

        

Mortgage-backed securities

   $ —         $ 17,756,616       $ —     
  

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 17,756,616       $ —     
  

 

 

    

 

 

    

 

 

 

The Company had no liabilities carried at fair value or measured at fair value on a recurring basis at September 30, 2011 or December 31, 2010.

Assets measured at fair value on a non-recurring basis are as follows as of September 30, 2011:

 

     Quoted
market price
in active
markets

(Level 1)
     Significant
other
observable
inputs

(Level 2)
     Significant
unobservable
inputs

(Level 3)
 

Impaired loans

   $ —         $ 25,295,479       $ —     

Other real estate owned

     —           6,309,706         —     
  

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 31,605,185       $ —     
  

 

 

    

 

 

    

 

 

 

Assets measured at fair value on a non-recurring basis are as follows as of December 31, 2010:

 

     Quoted
market price
in active
markets

(Level 1)
     Significant
other
observable
inputs

(Level 2)
     Significant
unobservable
inputs

(Level 3)
 

Impaired loans

   $ —         $ 14,338,761       $ —     

Other real estate owned

     —           6,402,263         —     
  

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 20,741,024       $ —     
  

 

 

    

 

 

    

 

 

 

The Company had no liabilities carried at fair value or measured at fair value on a non-recurring basis at September 30, 2011 or December 31, 2010.

The Company is predominantly an asset based lender with real estate serving as collateral on a substantial majority of loans. Loans which are deemed to be impaired are primarily valued on a nonrecurring basis at the fair values of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which the Company considers to be Level 2 inputs. Appraisals are updated annually, and adjusted downward for estimated selling costs.

 

-12-


Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 6 – Fair Value Measurements (continued)

 

Other real estate owned is adjusted to fair value upon transfer of the loans at foreclosure. Subsequently, the assets are carried at the lower of carrying value or fair value less costs to sell. Fair value is based upon independent market prices, fair values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or current appraised value, the Company records the asset as nonrecurring Level 2 inputs.

The Company has no assets or liabilities whose fair values are measured using Level 3 inputs.

The following table summarizes fair value estimates as of September 30, 2011 and December 31, 2010 for financial instruments, as defined by ASC Topic 825, excluding short-term financial assets and liabilities, for which carrying amounts approximate fair value, and financial instruments recorded at fair value on a recurring basis at September 30, 2011 and December 31, 2010.

In accordance with ASC Topic 825, the Company has not included assets and liabilities that are not financial instruments in its disclosure, such as the value of the long-term relationships with the Company’s deposit, net premises and equipment, net core deposit intangibles, deferred taxes and other assets and liabilities. Additionally, the amounts in the table have not been updated since the date indicated; therefore the valuations may have changed since that point in time. For these reasons, the total of the fair value calculations presented does not represent, and should not be construed to represent, the underlying value of the Company.

The following disclosures represent financial instruments in which the ending balance at September 30, 2011, and December 31, 2010 are not carried at fair value in its entirety on the Company’s Consolidated Balance Sheet.

Short-term Financial Instruments - The carrying value of short-term financial instruments, including cash and cash equivalents, time deposits placed, federal funds purchased, repurchase agreements, and other short-term investments and borrowings, approximates the fair value of these instruments. These financial instruments generally expose the Company to limited credit risk and have no stated maturities or have short-term maturities and carry interest rates that approximate market.

Loans - Fair values were generally determined by discounting both principal and interest cash flows expected to be collected using an observable discount rate for similar instruments with adjustments that the Company believes a market participant would consider in determining fair value. The Company estimates the cash flows expected to be collected using internal credit risk, interest rate and prepayment risk models that incorporate the Company’s best estimate of current key assumptions, such as default rates, loss severity and prepayment speeds for the life of the loan.

Deposits - The fair value for certain deposits with stated maturities was calculated by discounting contractual cash flows using current market rates for instruments with similar maturities. For deposits with no stated maturities, the carrying amount was considered to approximate fair value and does not take into account the significant value of the cost advantage and stability of the Company’s long-term relationships with depositors.

FHLB Advances - The Company uses quoted market prices for its long-term debt when available. When quoted market prices are not available, fair value is estimated based on current market interest rates and credit spreads for debt with similar maturities.

 

-13-


Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 6 – Fair Value Measurements (continued)

 

The carrying and fair values of certain financial instruments at September 30, 2011 and December 31, 2010 were as follows:

 

     September 30, 2011      December 31, 2010  
Dollars in thousands    Carrying
Amount
     Estimated
Fair Value
     Carrying
Amount
     Estimated
Fair Value
 

Financial Assets:

           

Loans receivable, net

   $ 161,908       $ 142,520       $ 143,064       $ 143,375   

Financial Liabilities:

           

Total deposits

   $ 186,429       $ 183,215       $ 148,984       $ 145,952   

FHLB advances

   $ 9,500       $ 9,424       $ 13,500       $ 14,007   

Note 7 – Investment Securities

The amortized cost and estimated fair values of securities available for sale were:

 

     Amortized
Cost
     Gross Unrealized      Estimated
Fair Value
 
        Gains      Losses     

September 30, 2011

           

Mortgage-backed securities

   $ 29,221,660       $ 178,303       $ 18,719       $ 29,381,244   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 29,221,660       $ 178,303       $ 18,719       $ 29,381,244   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010

           

Mortgage-backed securities

   $ 17,857,784       $ 40,753       $ 141,921       $ 17,756,616   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 17,857,784       $ 40,753       $ 141,921       $ 17,756,616   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following is a summary of maturities of securities available for sale as of September 30, 2011. The amortized cost and estimated fair values are based on the contractual maturity dates. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalty.

 

     Securities
Available-for-Sale
 
     Amortized
Cost
     Estimated
Fair Value
 

Due in one year or less

   $ 27,553       $ 28,617   

Due after one year but within five years

     6,944,757         6,972,187   

Due after five years but within ten years

     9,871,929         9,923,976   

Due after ten years

     12,377,421         12,456,464   
  

 

 

    

 

 

 
   $ 29,221,660       $ 29,381,244   
  

 

 

    

 

 

 

 

-14-


Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 7 – Investment Securities (continued)

 

The following table shows gross unrealized losses and fair value, aggregated by investment category, and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2011 and December 31, 2010.

 

     Less than
twelve months
     Twelve months
or more
     Total  
     Fair Value      Unrealized
losses
     Fair Value      Unrealized
losses
     Fair Value      Unrealized
losses
 

September 30, 2011

                 

Mortgage-backed securities

   $   4,464,932       $   12,540       $ 2,169,941       $ 6,179       $   6,634,873       $   18,719   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $   4,464,932       $   12,540       $ 2,169,941       $ 6,179       $   6,634,873       $   18,719   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Less than
twelve months
     Twelve months
or more
     Total  
     Fair Value      Unrealized
losses
     Fair Value      Unrealized
losses
     Fair Value      Unrealized
losses
 

December 31, 2010

                 

Mortgage-backed securities

   $ 12,247,383       $ 141,921       $             —         $   —         $ 12,247,383       $ 141,921   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 12,247,383       $ 141,921       $ —         $ —         $ 12,247,383       $ 141,921   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Proceeds from available for sale securities totaled $5,013,753 for the nine months ended September 30, 2011, resulting in gross gains of $29,117. There were no sales of securities for the three months ended September 30, 2011.

Securities classified as available-for-sale are recorded at fair market value. Securities in a continuous loss position for twelve months or more at September 30, 2011, consisted of two securities. Of the securities in an unrealized loss position as of September 30, 2011, the Company does not intend to sell the securities and it is more likely than not that the Company will not be required to sell these securities before recovery of their amortized cost. The Company believes, based on industry analyst reports and credit ratings, that the deterioration in value is attributable to changes in market interest rates and is not in the credit quality of the issuer and therefore, these losses are not considered other-than-temporary.

Note 8 – Loans Receivable

Major classifications of loans receivable at September 30, 2011 and December 31, 2010 are summarized as follows:

 

     2011      2010  

Real estate – construction

   $ 15,733,524       $ 23,068,291   

Real estate – commercial

     62,363,518         61,412,742   

Real estate – residential

     66,949,030         43,561,911   

Commercial and industrial

     18,216,125         19,350,893   

Consumer and other

     2,096,705         895,675   
  

 

 

    

 

 

 

Total gross loans

   $ 165,358,902       $ 148,289,512   
  

 

 

    

 

 

 

 

-15-


Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 8 – Loans Receivable (continued)

 

As of September 30, 2011 and December 31, 2010, loans individually evaluated and considered impaired were as follows:

 

     2011      2010  

Total loans considered impaired at period end

   $ 25,295,479       $ 14,338,761   

Loans considered impaired for which there is a related allowance for loan loss:

     

Outstanding loan balance

     10,454,851         11,489,267   

Related allowance established

     1,826,371         2,783,404   

Loans considered impaired for which no related allowance for loan loss was established

     14,840,628         2,849,495   

Average annual investment in impaired loans

     30,275,176         14,370,750   

Interest income recognized on impaired loans

     

During the period of impairment

     

Cash basis

     682,942         219,029   

The following table represents the balance in the allowance for loan losses and recorded investment in loans by portfolio segment on impairment method as of September 30, 2011:

 

     Real Estate     

Commercial

& Industrial

    

Consumer

& Other

    

Total

 
     Construction      Commercial      Residential           

Allowance for loan and lease losses:

                 

Ending balance attributable to loans:

                 

Individually evaluated for impairment

   $ 452,477       $ 714,447       $ 607,473       $ 51,974       $ —         $ 1,826,371   

Loans:

                 

Loans individually evaluated for impairment

   $ 6,086,847       $ 12,845,288       $ 5,484,292       $ 856,289       $ 22,763       $ 25,295,479   

Loans collectively evaluated for impairment

   $ 9,646,677       $ 49,518,230       $ 61,464,738       $ 17,359,836       $ 2,073,942       $ 140,063,423   

 

-16-


Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 8 – Loans Receivable (continued)

 

The following table represents the balance in the allowance for loan losses and recorded investment in loans by portfolio segment on impairment method as of December 31, 2010:

 

     Real Estate     

Commercial

& Industrial

    

Consumer

& Other

    

Total

 
     Construction      Commercial      Residential           

Allowance for loan and lease losses:

                 

Ending balance attributable to loans:

                 

Individually evaluated for impairment

   $ 823,975       $ 637,723       $ 878,725       $ 442,981       $ —         $ 2,783,404   

Loans:

                 

Loans individually evaluated for impairment

   $ 5,048,519       $ 3,540,487       $ 4,331,447       $ 1,418,308       $ —         $ 14,338,761   

Loans collectively evaluated for impairment

   $ 18,019,772       $ 57,872,255       $ 39,230,464       $ 17,932,585       $ 895,675       $ 133,950,751   

As of September 30, 2011 and December 31, 2010, loans in nonaccrual status were approximately $13,256,000 and $10,257,000, respectively. Loans ninety days or more past due, and still accruing interest, as of September 30, 2011 and December 31, 2010 were approximately $1,736,000 and $1,869,000 respectively.

The following table presents loans individually evaluated for impairment as of September 30, 2011:

 

     Unpaid
Principal
Balance
     Recorded
Investment
     Allowance
Allocated
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

              

Commercial and industrial

   $ 266,800       $ 246,800       $ —         $ 279,618       $ 5,038   

Consumer and other

     22,763         22,763         —           26,538         1,399   

Real estate:

              

Construction

     3,855,568         3,855,568         —           3,874,226         98,133   

Mortgage – residential

     3,157,722         1,732,001         —           2,671,792         43,258   

Mortgage – commercial

     9,407,502         8,635,422         —           11,539,618         330,331   

With an allowance recorded:

              

Commercial, and industrial

     609,489         609,489         51,974         621,274         22,386   

Real estate:

              

Construction

     2,231,279         2,231,279         452,477         2,508,520         24,448   

Mortgage – residential

     3,752,291         3,752,291         607,473         4,526,063         45,972   

Mortgage – commercial

     4,209,866         4,209,866         714,447         4,227,527         111,977   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 27,513,280       $ 25,295,479       $ 1,826,371       $ 30,275,176       $ 682,942   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

-17-


Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 8 – Loans Receivable (continued)

 

Transactions in the allowance for loan losses for the nine months ended September 30, 2011 are summarized as follows:

 

     Real Estate                          
     Construction     Commercial     Residential     Commercial
and

Industrial
    Consumer
& Other
    Unallocated     Total  

Balance, beginning of year

   $ 1,133,180      $ 1,532,386      $ 1,690,850      $ 636,627      $ 6,676      $ 226,195      $ 5,225,914   

Provision (recovery) charged to operations

     (613,062     565,605        690,557        1,038,568        52,282        (44,092     1,689,858   

Recoveries

     —          —          —          19,789        71,562        —          91,351   

Charge-offs

     —          (899,477     (1,284,709     (1,246,774     (125,404     —          (3,556,364
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of year

   $ 520,118      $ 1,198,514      $ 1,096,698      $ 448,210      $ 5,116      $ 182,103      $ 3,450,759   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Transactions in the allowance for loan losses for the three months ended September 30, 2011 are summarized as follows:

 

     Real Estate                           
     Construction      Commercial     Residential     Commercial
and

Industrial
    Consumer
& Other
    Unallocated      Total  

Balance, beginning of year

   $ 498,684       $ 1,349,373      $ 1,508,838      $ 596,859      $ 6,057      $ 166,330       $ 4,126,141   

Provision (recovery) charged to operations

     21,434         696,221        813,022        (132,643     38,191        15,773         1,451,998   

Recoveries

     —           —          —          4,000        14,092        —           18,092   

Charge-offs

     —           (847,080     (1,225,162     (20,006     (53,224     —           (2,145,472
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, end of year

   $ 520,118       $ 1,198,514      $ 1,096,698      $ 448,210      $ 5,116      $ 182,103       $ 3,450,759   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

The following table depicts the activity in the allowance for loan losses for the nine months ended September 30, 2011:

 

     September 30,
2011
    September 30,
2010
 

Balance, January 1

   $ 5,225,914      $ 2,408,990   

Provision for loan losses for the period

     1,689,858        541,727   

Net loans (charged-off) recovered during the period

     (3,465,013     (499,402
  

 

 

   

 

 

 

Balance, September 30,

   $ 3,450,759      $ 2,451,315   
  

 

 

   

 

 

 

Gross loans outstanding, September 30,

   $ 165,358,902      $ 133,801,358   
  

 

 

   

 

 

 

Allowance for loan losses to loans outstanding

     2.09     1.83

The following table presents the investment in nonaccrual and accruing loans delinquent for 90 days or more as of September 30, 2011:

 

     Nonaccrual      Accruing loans
delinquent for
90 days or more
 

Commercial and industrial

   $ 286,718       $ —     

Real estate:

     

Construction

     4,440,810         152,110   

Mortgage – residential

     3,846,519         471,689   

Mortgage – commercial

     4,632,504         1,111,708   

Consumer

     49,465         901   
  

 

 

    

 

 

 

Total

   $ 13,256,016       $ 1,736,408   
  

 

 

    

 

 

 

 

-18-


Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 8 – Loans Receivable (continued)

 

The following table presents the investment in nonaccrual and accruing loans delinquent for 90 days or more as of December 31, 2010:

 

     Nonaccrual      Accruing loans
delinquent for
90 days or more
 

Commercial and industrial

   $ 1,207,596       $ 433,325   

Real estate:

     

Construction

     1,285,564         24,575   

Mortgage – residential

     4,223,726         1,056,621   

Mortgage – commercial

     3,540,488         349,867   

Consumer

     —           4,963   
  

 

 

    

 

 

 

Total

   $ 10,257,374       $ 1,869,351   
  

 

 

    

 

 

 

The following table presents the aging of the recorded investment in past due loans and leases as of September 30, 2011:

 

     30 – 89
Days Past
Due
     Greater
than 90
Days Past
Due & Still
Accruing
     Nonaccrual
Loans
     Total Past
Due
     Loans Not
Past Due
     Total  

Commercial and industrial

   $ 1,281,290       $ —         $ 286,718       $ 1,568,008       $ 16,648,117       $ 18,216,125   

Real estate:

                 

Construction

     474,321         152,110         4,440,810         5,067,241         10,666,283         15,733,524   

Mortgage - residential

     1,312,840         471,689         3,846,519         5,631,048         61,317,982         66,949,030   

Mortgage - commercial

     2,099,497         1,111,708         4,632,504         7,843,709         54,519,809         62,363,518   

Consumer

     37,095         901         49,465         87,461         2,009,244         2,096,705   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,205,043       $ 1,736,408       $ 13,256,016       $ 20,197,467       $ 145,161,435       $ 165,358,902   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the aging of the recorded investment in past due loans and leases as of December 31, 2010:

 

     30 – 89
Days Past
Due
     Greater
than 90
Days Past
Due & Still
Accruing
     Nonaccrual
Loans
     Total Past
Due
     Loans Not
Past Due
     Total  

Commercial and industrial

   $ 148,926       $ 433,325       $ 1,207,596       $ 1,789,847       $ 17,561,046       $ 19,350,893   

Real estate:

                 

Construction

     2,469,828         24,575         1,285,564         3,779,967         19,288,324         23,068,291   

Mortgage - residential

     837,087         1,056,621         4,223,726         6,117,434         37,444,477         43,561,911   

Mortgage - commercial

     642,994         349,867         3,540,488         4,533,349         56,879,393         61,412,742   

Consumer

     22,326         4,963         —           27,289         868,386         895,675   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,121,161       $ 1,869,351       $ 10,257,374       $ 16,247,886       $ 132,041,626       $ 148,289,512   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

-19-


Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 8 – Loans Receivablecontinued

 

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes loans with an outstanding balance greater than $0.5 million or $1.0 million, depending on loan type, and non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a quarterly basis with the most recent analysis performed at September 30, 2011. The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention, while still adequately protected by the borrower’s capital adequacy and payment capability, exhibit distinct weakening trends and/or elevated levels of exposure to external conditions. If left unchecked or uncorrected, these potential weaknesses may result in deteriorated prospects of repayment. These exposures require management’s close attention so as to avoid becoming undue or unwarranted credit exposures.

Substandard. Loans classified as substandard are inadequately protected by the borrower’s current financial condition and payment capability or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the orderly repayment of debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or orderly repayment in full, on the basis of current existing facts, conditions and values, highly questionable and improbable. Possibility of loss is extremely high, but because of certain important and reasonably specific factors that may work to the advantage and strengthening of the exposure, its classification as an estimated loss is deferred until its more exact status may be determined.

Loss. Loans classified as loss are considered to be non-collectible and of such little value that their continuance as bankable assets is not warranted. This does not mean the loan has absolutely no recovery value, but rather it is neither practical nor desirable to defer writing off the loan, even though partial recovery may be obtained in the future. Losses are taken in the period in which they surface as uncollectible.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans and leases. As of September 30, 2011 and December 31, 2010, the risk category of loans and leases is as follows:

 

-20-


Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 8 – Loans Receivable (continued)

 

September 30, 2011

 

     Pass      Special
Mention
     Substandard      Doubtful      Loss      Total  

Commercial and industrial

   $ 14,726,662       $ 2,633,174       $ 856,289       $ —         $ —         $ 18,216,125   

Real estate:

                 

Construction

     8,622,523         1,021,154         5,828,350         261,497            15,733,524   

Mortgage - residential

     56,182,317         5,630,496         5,136,217         —              66,949,030   

Mortgage - commercial

     46,284,987         3,233,243         12,845,288         —              62,363,518   

Consumer and other

     2,049,297         24,653         22,755         —              2,096,705   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 127,865,786       $ 12,542,720       $ 24,688,899       $ 261,497       $ —         $ 165,358,902   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010

 

     Pass      Special
Mention
     Substandard      Doubtful      Loss      Total  

Commercial and industrial

   $ 17,317,162       $ 624,237       $ 524,303       $ 885,191       $ —         $ 19,350,893   

Real estate:

                 

Construction

     16,578,691         2,395,478         3,618,125         475,997         —           23,068,291   

Mortgage - residential

     33,862,736         2,269,002         6,269,672         1,160,501         —           43,561,911   

Mortgage - commercial

     49,470,261         3,367,398         8,575,083         —           —           61,412,742   

Consumer

     871,691         15,138         8,846         —           —           895,675   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 118,100,541       $ 8,671,253       $ 18,996,029       $ 2,521,689       $ —         $ 148,289,512   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At September 30, 2011, the Company does not have any loans defined as subprime.

Note 9 – Troubled Debt Restructures

As a result of adopting the amendments in ASU 2011-02, the Bank reassessed all restructurings that occurred on or after the beginning of the fiscal year of adoption (January 1, 2011) to determine whether they are considered troubled debt restructurings (TDRs) under the amended guidance. The Bank identified as TDRs certain loans for which the allowance for loan losses had previously been measured under a general allowance methodology. Upon identifying those loans as TDRs, the Bank identified them as impaired under the guidance in ASC 310-10-35. The amendments in ASU 2011-02 require prospective application of the impairment measurement guidance in ASC 310-10-35 for those loans newly identified as impaired. At the end of the first interim period of adoption (September 30, 2011), the recorded investment in loans for which the allowance was previously measured under a general allowance methodology and are now impaired under ASC 310-10-35 was $9,964,635, and the allowance for loan losses associated with those loans, on the basis of a current evaluation of loss was $218,663. During the third quarter, the Bank charged $468,997 to the allowance relating to impairment charges on restructured loans.

 

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Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 9 – Troubled Debt Restructures continued

 

     For the nine months ended
September 30, 2011
 
     Number
of  Contracts
     Pre-Modification
Recorded
Investment
     Post-Modification
Recorded
Investment
 

Troubled Debt Restructurings

        

Commercial and industrial

     1       $ 82,748       $ 82,748   

Consumer and other

     —           —           —     

Real estate:

        

Construction

     —           —           —     

Mortgage - residential

     —           —           —     

Mortgage - commercial

     1         1,161,576         1,161,576   

There were no loans modified during the three months ended September 30, 2011 classified as troubled debt restructurings. The Bank only modifies loans that are considered troubled debt restructurings, as no such loans were modified during the three months ended September 30, 2011. Restructured loans must perform for six months prior to being returned to accrual status.

During the nine months ended September 30, 2011, we modified two loans that were considered to be troubled debt restructurings. We shortened the terms for both of these loans and the interest rate was lowered for one of these loans.

The following table by loan category, presents loans determined to be troubled debt restructurings in the last twelve months during the nine months ended September 30, 2011, none of which defaulted during the quarter ended September 30, 2011.

 

     Nine months ended
September 30, 2011
 
     Number
of Contracts
     Recorded Investment  

Troubled Debt Restructurings

     

That Subsequently Defaulted

     

During the Period:

     

Commercial and industrial

     1       $ 28,464   

Consumer and other

     —           —     

Real estate:

     

Construction

     1         258,991   

Mortgage - residential

     5         2,670,482   

Mortgage - commercial

     —           —     

In the determination of the allowance for loan losses, all TDRs are reviewed to ensure that one of the three proper valuation methods (fair market value of the collateral, present value of cash flows, or observable market price) is adhered to. All nonaccrual loans are written down to their corresponding collateral value. All TDR accruing loans where the loan balance exceeds the present value of cash flow will have a specific allocation. All TDR loans are considered impaired. Under ASC 310-10, a loan is impaired when it is probable that the bank will be unable to collect all amounts due including both principal and interest according to the contractual terms of the loan agreement.

 

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Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 10 – Loan Portfolio Acquisition

On March 25, 2011, the Company completed a loan “swap” transaction accounted for as a transfer of financial assets, which included the purchase of a pool of residential mortgage home equity loans with a par value of $27,095,572 (an estimated fair value of $26,093,437). The residential mortgage home equity loan portfolio (portfolio) was purchased from a private equity firm in exchange for a combination of $4,058,458 in carrying value of certain non-performing loans and cash of $20,328,049. The non-performing loans were transferred without recourse and were carried at fair value prior to the exchange, in accordance with accounting standards. The Company will amortize approximately $850,000 in loan purchase adjustment (as a result of the fair value measurement) as a yield adjustment over the expected life of the loans. As a result of the transaction, the Company recorded a discount on the purchased loans of $1,002,136 and was able to recover $1,046,479 in recorded loan loss reserves.

Note 11 – Dividends on Series A Preferred Stock Issued to the U.S. Treasury

At the request of the Federal Reserve Bank of Richmond, the Company deferred the quarterly dividend payment on the shares of Series A Preferred Stock issued to the U.S. Treasury pursuant to the Capital Purchase Program (the “CPP”) commencing with the payment due May 15, 2011. This payment was the first dividend payment deferred. As part of the CPP, the Company entered into a letter agreement with the Treasury on January 23, 2009, which includes a Securities Purchase Agreement-Standard Terms. The Company also amended its articles of incorporation to set forth the terms of the Series A Preferred Stock. Under the Company’s amended articles of incorporation, dividends compound if they accrue and are not paid. A failure to pay a total of six such dividends, whether or not consecutive, gives the Treasury the right to elect two directors to the Company’s Board of Directors. That right would continue until the Company pays all dividends in arrears. As of the date of this report, the total arrearage was $87,500. The Company anticipates paying the accrued dividends in the future to avoid triggering the Treasury’s ability to elect directors to the Company’s Board of Directors

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is a discussion of the Company’s financial condition as of September 30, 2011 compared to December 31, 2010, and the results of operations for the three and nine month periods ended September 30, 2011 and 2010. This discussion should be read in conjunction with the Company’s consolidated financial statements and accompanying notes appearing in this report and in conjunction with the financial statements and related notes and disclosures in the Company’s 2010 Annual Report on Form 10-K. This report contains “forward-looking statements” relating to, without limitation, future economic performance, plans and objectives of management for future operations, and projections of revenues and other financial items that are based on the beliefs of the Company’s management, as well as assumptions made by and information currently available to the Company’s management. The words “expect,” “estimate,” “anticipate,” “plan,” and “believe,” as well as similar expressions, are intended to identify forward-looking statements. The Company’s actual results may differ materially from the results discussed in the forward-looking statements, and the Company’s operating performance each quarter is subject to various risks and uncertainties that are discussed in detail in the Company’s filings with the Securities and Exchange Commission.

Impact of Dodd-Frank Act

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) into law. The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry in the United States. The Dodd-Frank Act includes, among other things:

 

   

the creation of a Financial Stability Oversight Council to identify emerging systemic risks posed by financial firms, activities and practices, and to improve cooperation between federal agencies;

 

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Table of Contents

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations continued

 

   

the creation of a Bureau of Consumer Financial Protection authorized to promulgate and enforce consumer protection regulations relating to financial products, which would affect both banks and non-bank financial companies;

 

   

the establishment of strengthened capital and prudential standards for banks and bank holding companies;

 

   

enhanced regulation of financial markets, including derivatives and securitization markets;

 

   

the elimination of certain trading activities by banks;

 

   

a permanent increase of the previously implemented temporary increase of FDIC deposit insurance to $250,000 per account, an extension of unlimited deposit insurance on qualifying noninterest-bearing transaction accounts, and an increase in the minimum deposit insurance fund reserve requirement from 1.15% to 1.35%, with assessments to be based on assets as opposed to deposits;

 

   

amendments to the Truth in Lending Act aimed at improving consumer protections with respect to mortgage originations, including originator compensation, minimum repayment standards, and prepayment considerations; and

 

   

new disclosure and other requirements relating to executive compensation and corporate governance.

The Company is unable to predict the extent to which the Dodd-Frank Act or the forthcoming rules and regulations will impact the Company’s business. However, the Company believes that certain aspects of the legislation, including, without limitation, the additional cost of higher deposit insurance coverage and the costs of compliance with disclosure and reporting requirements and examinations could have a significant impact on the Company’s business, financial condition, and results of operations. Additionally, the Company cannot predict whether there will be additional proposed laws or reforms that would affect the U.S. financial system or financial institutions, whether or when such changes may be adopted, how such changes may be interpreted and enforced, or how such changes may affect the Company.

Results of Operations

Net Interest Income

For the three months ended September 30, 2011, net interest income was $1,597,399 as compared to $1,195,689 for the same period in 2010. The average rate paid on interest-bearing liabilities for the three months ended September 30, 2011 and 2010 was 1.15% and 1.43%, respectively. The average rate realized on interest-earning assets was 4.17% and 4.24% for the three months ended September 30, 2011 and 2010, respectively.

The net interest margin was 3.13% and 2.99% for the three month periods ended September 30, 2011 and 2010, respectively.

For the nine months ended September 30, 2011, net interest income was $4,531,278 as compared to $3,652,611 for the same period in 2010. The average rate paid on interest-bearing liabilities for the nine months ended September 30, 2011 and 2010 was 1.16% and 1.50%, respectively. The average rate realized on interest-earning assets was 4.11% and 4.30% for the nine months ended September 30, 2011 and 2010, respectively.

The net interest margin was 3.07% and 3.00% for the nine month periods ended September 30, 2011 and 2010, respectively. The increase is due to the decrease in the average rate paid on interest-bearing liabilities.

 

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Table of Contents

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations continued

 

Provision and Allowance for Loan Losses

The provision for loan losses is the charge to operating earnings that in management’s judgment is necessary to maintain the allowance for loan losses at an adequate level in relation to the risk of future losses inherent in the loan portfolio. For the three month periods ended September 30, 2011 and 2010 the provision was $1,451,998 and $105,199 respectively. For the nine month periods ended September 30, 2011 and 2010 the provision was $1,689,858 and $541,727 respectively. On September 30, 2011, there were $13,256,016 in loans in nonaccrual status. On September 30, 2010, there were $9,374,955 in loans in nonaccrual status. Based on present information, management believes the allowance for loan losses is adequate at September 30, 2011 to meet presently known and inherent risks in the loan portfolio. The allowance for loan losses was 2.09% and 1.83% of total loans at September 30, 2011 and 2010, respectively. The increase in the allowance from prior year (as a percentage of total loans) is a result of the increase in nonaccrual and classified loans over prior year. There are risks inherent in making all loans, including risks with respect to the period of time over which loans may be repaid, risks resulting from changes in economic and industry conditions, risks inherent in dealing with individual borrowers, and, in the case of a collateralized loan, risks resulting from uncertainties about the future value of the collateral. The Company maintains an allowance for loan losses based on, among other things, historical experience, including management’s experience at other institutions, an evaluation of economic conditions, and regular reviews of delinquencies and loan portfolio quality. Management’s judgment about the adequacy of the allowance is based upon a number of assumptions about future events, which it believes to be reasonable, but which may not prove to be accurate. Thus, there is a risk that charge-offs in future periods could exceed the allowance for loan losses or that substantial additional increases in the allowance for loan losses could be required. Additions to the allowance for loan losses would result in a decrease in the Company’s net income and, possibly, a reduction of its capital.

Noninterest Income

Total noninterest income for the three months ended September 30, 2011 was $142,490 or 42.02% less than total noninterest income for the same period last year. The largest component of noninterest income for the three month period ended September 30, 2011 was service charges on deposit accounts which were $114,101 for the three month period ended September 30, 2011 or 20.39% higher than the same period last year. Rental income for the three months ended September 30, 2011 was $7,573 or 152.43% more than the three month period ended September 30, 2010. Other service charges, commissions and fees for the three months ended September 30, 2011 were $20,816 or 60.15% more than the same period last year.

Total noninterest income for the nine months ended September 30, 2011 was $399,712 or 45.59% less than total noninterest income for the same period last year. The largest component of noninterest income for the nine month period ended September 30, 2011 was service charges on deposit accounts which were $289,715 for the nine month period ended September 30, 2011 or 2.57% higher than the same period last year. Rental income for the nine months ended September 30, 2011 was $20,633 or 243.88% more than the nine month period ended September 30, 2011. Other service charges, commissions and fees for the nine months ended September 30, 2011 was $60,247 or 67.56% more than the same period last year.

Noninterest Expense

Total noninterest expense for the three months ended September 30, 2011 was $1,674,974 or 17.92% less than total noninterest expense for the same period last year. The primary recurring component of noninterest expense is salaries and benefits, which were $667,869 and $619,290 for the three months ended September 30, 2011 and 2010, respectively. Salaries and benefits increased due to the increase in the number of active employees. Other real estate expenses were $354,642 and $250,864 for the three months ended September 30, 2011 and 2010, respectively. Other operating expenses were $389,107 and $348,094 for the three months ended September 30, 2011 and 2010, respectively.

 

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Table of Contents

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations continued

 

Total noninterest expense for the nine months ended September 30, 2011 was $5,631,260 or 51.27% more than total noninterest expense for the same period last year. The main component of the increase over prior year is a $1,002,136 nonrecurring charge to operations related to the discount on the purchased loan portfolio relating to our asset swap (See Note 10 of the notes to consolidated financial statements included with Item 1 above). The primary recurring component of noninterest expense is salaries and benefits, which were $2,011,093 and $1,761,892 for the nine months ended September 30, 2011 and 2010, respectively. Salaries and benefits increased due to the increase in the number of active employees. Other operating expenses were $1,259,564 and $1,022,149 for the nine months ended September 30, 2011 and 2010, respectively

Income Taxes

For the three months ended September 30, 2011 and 2010, the effective income tax rate was .00% and 41.87%, respectively. The income tax expense was $0, for the three months ended September 30, 2011 compared to an income tax benefit of $35,962 for the three months ended September 30, 2010.

For the nine months ended September 30, 2011 and 2010, the effective income tax rate was .74% and 33.00%, respectively. The income tax expense was $17,792, for the nine months ended September 30, 2011 compared to an income tax expense of $40,548 for the nine months ended September 30, 2010.

Net Income (loss)

The combination of the above factors resulted in net loss of $1,389,083 for the three months ended September 30, 2011 compared to net loss of $49,923 for the comparable period in 2010.

For the nine months ended September 30, 2011 and 2010, there was a net loss of $2,407,920 and net income of $82,324, respectively.

Assets and Liabilities

During the first nine months of 2011, total assets increased $30,858,840 or 16.73% when compared to December 31, 2010. The increase is primarily due to an increase in loans outstanding due to the loan portfolio acquisition. Total investments increased $11,372,128, or 59.78% during the nine months ended September 30, 2011. In addition, we experienced an increase in time deposits with other banks of $2,508,108, or 317.59% during the nine months ended September 30, 2011.

Investment Securities

Investment securities totaled $30,396,024 as of September 30, 2011 as compared to $19,023,896 at December 31, 2010. Of this amount, $29,381,244 was designated as available for sale as of September 30, 2011. The other investments were nonmarketable equity securities consisting of $969,600 in Federal Home Loan Bank stock and a $45,180 investment in Community Bankers Bank stock as of September 30, 2011.

 

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Table of Contents

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations continued

 

Loans

Loans increased $17,069,390, or 11.51%, during the period. As shown below, the largest increase was in residential real estate loans which increased $23,387,119 or 53.69%, to $66,949,030 at September 30, 2011, due to our loan portfolio acquisition in the first quarter of 2011. Real estate – construction loans decreased $7,334,767 or 31.80% to $15,733,524. Real estate – commercial loans increased $950,776, or 1.55%, to $62,363,518. Consumer and other loans which increased $1,201,030 or 134.09%, to $2,096,705 at September 30, 2011. Commercial and industrial loans decreased $1,134,768 or 5.86% to $18,216,125 at September 30, 2011. Balances within the major loans receivable categories as of September 30, 2011 and December 31, 2010 are as follows:

 

     September 30,
2011
     December 31,
2010
 

Real estate – construction

   $ 15,733,524       $ 23,068,291   

Real estate – commercial

     62,363,518         61,412,742   

Real estate – residential

     66,949,030         43,561,911   

Commercial and industrial

     18,216,125         19,350,893   

Consumer and other

     2,096,705         895,675   
  

 

 

    

 

 

 

Total gross loans

   $ 165,358,902       $ 148,289,512   
  

 

 

    

 

 

 

Risk Elements in the Loan Portfolio

Criticized loans are loans that have potential weaknesses that deserve close attention and which could, if uncorrected, result in deterioration of the prospects for repayment of the Company’s credit position at a future date. Classified loans are loans that are inadequately protected by the sound worth and paying capacity of the borrower or any collateral and as to which there is a distinct possibility or probability that we will sustain a loss if the deficiencies are not corrected. At September 30, 2011 and December 31, 2010, the Company had criticized loans totaling $12,542,720 and $8,671,253, respectively. At September 30, 2011 and December 31, 2010, the Company had classified loans totaling $24,950,396 and $21,517,718, respectively. At September 30, 2011, the Company had $13,256,016 or 8.02% of total gross loans in nonaccrual status and $1,736,408 in loans that were 90 days or more past due and still accruing. Based upon the increase in impaired loans in the portfolio from December 31, 2010 to September 30, 2011 the Bank increased the provision for loan losses to $1,689,858 for the nine months ended September 30, 2011. This is an increase over the same period last year of $1,148,131 or 211.94%. In the same period, the Bank charged $2,207,168 of specific reserves in the allowance related to impairment charges on impaired loans. In addition, loans with specific reserves of approximately $1,040,000 were sold at par during the first quarter, In the determination of the allowance for loan losses, all significant (typically greater than $100,000) criticized and classified loans are reviewed for impairment to ensure that one of the three proper valuation methods (fair market value of the collateral, present value of cash flows, or observable market price) is adhered to.

The following table depicts the activity in the allowance for loan losses for the nine months ended September 30, 2011 and 2010:

 

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Table of Contents

Item 2 – Management’s Discussion And Analysis of Financial Condition and Results of Operations continued

 

     September 30,
2011
    September 30,
2010
 

Balance, January 1

   $ 5,225,914      $ 2,408,990   

Provision (recovery) for loan losses for the period

     1,689,858        541,727   

Net loans (charged-off) recovered during the period

     (3,465,013     (499,402
  

 

 

   

 

 

 

Balance, September 30,

     3,450,759        2,451,315   
  

 

 

   

 

 

 

Gross loans outstanding, September 30,

   $ 165,358,902      $ 133,801,358   
  

 

 

   

 

 

 

Allowance for loan losses to loans outstanding

     2.09     1.83

Deposits

Total deposits increased $37,445,137 or 25.13%, from December 31, 2010 to $186,428,876 at September 30, 2011. Total time deposits increased $6,491,890, or 6.95% to $99,924,206 at September 30, 2011. This increase was due to the decision of management to increase the concentration of brokered deposits to fund the HELOC purchase. Total interest-bearing and non-interest bearing transaction accounts increased $5,960,684 or 42.58% since December 31, 2010. There was an increase in savings and money market accounts as well, which increased $24,992,563 or 60.15%, to $66,544,475 at September 30, 2011. This increase in non time deposit accounts is a combination of the Bank instituting a revised market pricing strategy to attract new deposit accounts and implementing a retail initiative focusing on growing the core deposits of the Bank. Brokered deposits represent a source of fixed rate funds priced competitively with Federal Home Loan Bank (“FHLB”) but do not require collateralization like FHLB borrowings.

Balances within the major deposit categories as of September 30, 2011 and December 31, 2010 are as follows:

 

     September 30,
2011
     December 31,
2010
 

Noninterest-bearing transaction accounts

   $ 12,025,721       $ 7,225,888   

Interest-bearing transaction accounts

     7,734,474         6,773,623   

Savings and money market

     66,544,475         41,551,912   

Time deposits $100,000 and over

     10,798,406         7,742,179   

Other time deposits

     89,125,800         85,690,137   
  

 

 

    

 

 

 

Total deposits

   $ 186,428,876       $ 148,983,739   
  

 

 

    

 

 

 

Advances from Federal Home Loan Bank

The Bank repaid $4,000,000 in funds borrowed from the Federal Home Loan Bank of Atlanta (FHLB) during the first nine months of 2011. Advances from the FHLB total $9,500,000 as of September 30, 2011 and $13,500,000 at December 31, 2010. The Bank utilizes the advances to fund loans and for general liquidity purposes. Advances from the Federal Home Loan Bank consisted of the following at September 30, 2011:

 

Description    Interest Rate     Amount  

Convertible rate advances maturing:

    

August 22, 2012

     Variable      $ 1,500,000   

November 3, 2014

     3.86     8,000,000   
    

 

 

 
     $ 9,500,000   
    

 

 

 

Scheduled principal reductions of Federal Home Loan Bank advances are as follows:

 

2012

   $ 1,500,000   

2014

     8,000,000   
  

 

 

 

Total

   $ 9,500,000   
  

 

 

 

 

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Item 2 – Management’s Discussion And Analysis of Financial Condition and Results of Operations continued

 

Liquidity

Liquidity needs are met by the Company through cash and short-term investments, and scheduled maturities of loans on the asset side and through pricing policies on the liability side for interest-bearing deposit accounts. The Company also has the capacity to pledge certain loans as collateral for additional borrowings from FHLB during times when the comparable interest rate is favorable to the interest rate on deposit products. As of September 30, 2011, the Company’s primary sources of liquidity included cash and due from banks of $3,347,080, federal funds sold totaling $3,242,967, time deposits with other banks of $3,297,829 and securities available-for-sale totaling $29,381,244, credit availability with the Federal Home Loan Bank of $20,600,000 and unused lines of credit with correspondent banks to purchase federal funds totaling $6,500,000 at September 30, 2011.

Capital Resources

Total shareholders’ equity decreased $2,165,169 to $19,189,733 for the nine month period ended September 30, 2011. This is primarily the result of the net loss for the period of $2,407,920, and stock based compensation expense of $127,553 offset by $43,750 in dividends paid on preferred stock.

The Federal Reserve Board and bank regulatory agencies require bank holding companies and financial institutions to maintain capital at adequate levels based on a percentage of assets and off-balance sheet exposures, adjusted for risk-weights ranging from 0% to 100%. Under the risk-based standard, capital is classified into two tiers. Tier 1 capital consists of common shareholders’ equity, excluding the unrealized gain (loss) on available-for-sale securities, minus certain intangible assets. Tier 2 capital consists of the general reserve for loan losses subject to certain limitations. An institution’s qualifying capital base for purposes of its risk-based capital ratio consists of the sum of its Tier 1 and Tier 2 capital. The regulatory minimum requirements are 4% for Tier 1 and 8% for total risk-based capital.

Banks and bank holding companies are also required to maintain capital at a minimum level based on total assets, which is known as the leverage ratio. The minimum requirement for the leverage ratio is 3%; however all but the highest rated institutions are required to maintain ratios 100 to 200 basis points above the minimum. Both the Company and the Bank exceeded their minimum regulatory capital ratios as of September 30, 2011 as well as the ratios to be considered “well capitalized.”

The following table summarizes the Company’s risk-based capital at September 30, 2011:

 

Shareholders’ equity

   $ 19,189,733   

Plus – unrealized (gain) loss on available-for-sale securities

     (97,185

Less – disallowed deferred tax assets

     (1,579,000
  

 

 

 

Tier 1 capital

   $ 17,513,548   

Plus – allowance for loan losses(1)

     1,989,000   
  

 

 

 

Total capital

   $ 19,502,548   
  

 

 

 

Risk-weighted assets

   $ 157,644,000   
  

 

 

 

Risk-based capital ratios:

  

Tier 1 capital (to risk-weighted assets)

     11.11

Total capital (to risk-weighted assets)

     12.37

Leverage ratio

     8.13

 

(1) Limited to 1.25% of risk-weighted assets

 

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Item 2 – Management’s Discussion And Analysis of Financial Condition and Results of Operations continued

 

Off-Balance Sheet Risk

Through its operations, the Company has made contractual commitments to extend credit in the ordinary course of its business activities. These commitments are legally binding agreements to lend money to the Company’s customers at predetermined interest rates for a specified period of time. At September 30, 2011, the Company had issued commitments to extend credit of $9,418,976 through various types of commercial lending arrangements. All of these commitments to extend credit had variable rates.

The following table sets forth the length of time until maturity for unused commitments to extend credit and standby letters of credit at September 30, 2011 (amounts in thousands):

 

     Within
One
Month
     After One
Through
Three
Months
     After Three
Through
Twelve
Months
     Greater
Than
One Year
     Total  

Unused commitments to extend credit

   $ 685       $ 2,215       $ 1,351       $ 9,516       $ 13,767   

Standby letters of credit

     —           —           14         —           14   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 685       $ 2,215       $ 1,365       $ 9,516       $ 13,781   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Based on historical experience, many of the commitments and letters of credit will expire unfunded.

Accordingly, the amounts shown in the table above do not necessarily reflect the Company’s need for funds in the periods shown.

The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on its credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, commercial and residential real estate.

Critical Accounting Policies

We have adopted various accounting policies which govern the application of accounting principles generally accepted in the United States in the preparation of our financial statements. Our significant accounting policies are described in the notes to the financial statements at December 31, 2010 as contained in our 2010 Annual Report on Form 10-K. Certain accounting policies involve significant judgments and assumptions by us which have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgments and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgments and assumptions we make, actual results could differ from these judgments and estimates which could have a material impact on our carrying values of assets and liabilities and our results of operations.

We believe the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in preparation of our financial statements. Refer to the portions of the discussion in this report on Form 10-Q and in our 2010 Annual Report on Form 10-K that address our allowance for loan losses for a description of our processes and methodology for determining our allowance for loan losses.

 

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Item 4. Controls and Procedures

 

(a) Based on their evaluation of the Company’s disclosure controls and procedures (as defined in 17 C.F.R. Sections 240.13a-15(e) and 240.15d-15(e)) as of September 30, 2011, our chief executive officer and chief financial officer concluded that such controls and procedures were effective.

 

(b) There was no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting subsequent to the date of its evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

PART II - OTHER INFORMATION

Item 3. Default Upon Senior Securities

As discussed in Note 11 of the Notes to Consolidated Financial Statements included with Part 1, Item 1, the Company deferred the payment of its regular quarterly cash dividends on its fixed rate cumulative perpetual preferred stock, series A, issued to the United States Department of the Treasury in connection with the Company’s participation in the Treasury’s Capital Purchase Program. Therefore, the Company is currently in arrears with the dividend payments on the series A preferred stock. As of September  30, 2011, the amount of the arrearage on the dividend payments for the series A preferred stock was $87,500.

Item 6. Exhibits

 

Exhibit

Number

  

Description of Exhibit

31.1    Certification of Principal Executive Officer pursuant to Rule 13a-14(a)
31.2    Certification of Principal Financial Officer pursuant to Rule 13a-14(a)
32    Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 USC 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101    Interactive data files providing financial information from the Quarterly Report on Form 10-Q of AB&T Financial Corporation for the quarterly period ended September 30, 2011, in XBRL (eXtensible Business Reporting Language)*

 

* Pursuant to Regulation 406T of Regulation S-T, these interactive data files are furnished and not filed or part of a registration statement or prospectus for purposes of section 11 or 12 of the Securities Act of 1933, as amended, or section 18 of the Securities Exchange Act of 1934, as amended, and are otherwise not subject to liability.

 

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Table of Contents

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 thereunto duly authorized.

AB&T FINANCIAL CORPORATION

(Registrant)

 

By:  

/s/ Daniel C. Ayscue

  Daniel C. Ayscue
  President and Chief Executive Officer
  (Principal Executive Officer)

Date: November 14, 2011

EXHIBIT INDEX

 

Exhibit
Number

  

Description of Exhibit

31.1    Certification of Principal Executive Officer pursuant to Rule 13a-14(a)
31.2    Certification of Principal Financial Officer pursuant to Rule 13a-14(a)
32    Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 USC 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101    Interactive data files providing financial information from the Quarterly Report on Form 10-Q of AB&T Financial Corporation for the quarterly period ended September 30, 2011, in XBRL (eXtensible Business Reporting Language)*

 

* Pursuant to Regulation 406T of Regulation S-T, these interactive data files are furnished and not filed or part of a registration statement or prospectus for purposes of section 11 or 12 of the Securities Act of 1933, as amended, or section 18 of the Securities Exchange Act of 1934, as amended, and are otherwise not subject to liability.

 

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