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Share Name | Share Symbol | Market | Type |
---|---|---|---|
AB and T Financial Corp (CE) | USOTC:ABTO | OTCMarkets | Common Stock |
Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|---|---|
0.00 | 0.00% | 0.69 | 0.00 | 01:00:00 |
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, 2009
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _________to_________
Commission File Number: 000-53249
AB&T FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
North Carolina |
84-1653729 |
(State or other jurisdiction |
(I.R.S. Employer |
of incorporation or organization) |
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 preceeding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES NO
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 acc e lerated 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 13, 2009
AB&T FINANCIAL CORPORATION
INDEX
PART I – FINANCIAL INFORMATION |
Page No. |
Item 1. Financial Statements (Unaudited) |
|
Consolidated Balance Sheets – September 30, 2009 and December 31, 2008 |
4 |
Consolidated Statements of Operations – Nine
months ended September 30, 2009 and 2008
|
5 |
Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss) - |
|
Nine months ended September 30, 2009 and 2008 |
6 |
Consolidated Statements of Cash Flows – Nine months ended September 30 , 2009 and 2008 |
7 |
Notes to Consolidated Financial Statements |
8-16 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
17-22 |
Item 4T. Controls and Procedures |
23 |
PART II – OTHER INFORMATION |
|
|
|
Item 4. Submission of Matters to a Vote of Security Holders |
23 |
|
|
Item 6. Exhibits |
23 |
AB&T FINANCIAL CORPORATION
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets
September 30
,
|
December 31,
|
||
(Unaudited) |
(Audited) |
||
Assets |
|||
Cash and cash equivalents |
|||
Cash and due from banks |
$ 17,578,269 |
$ 8,159,812 |
|
Federal funds sold |
622,369 |
9,008,817 |
|
Total cash and cash equivalents |
18,200,638 |
17,168,629 |
|
Time deposits with other banks |
1,295,335 |
1,260,199 |
|
Securities available for sale at fair value |
5,268,599 |
4,638,214 |
|
Nonmarketable equity securities |
1,413,180 |
1,371,280 |
|
Total investments |
7,977,114 |
7,269,693 |
|
Loans receivable |
140,881,088 |
139,670,266 |
|
Less allowance for loan losses |
(3,639,839) |
(1,935,702) |
|
Loans, net |
137,241,249 |
137,734,564 |
|
Premises, furniture and equipment, net |
3,995,521 |
4,157,724 |
|
Accrued interest receivable |
562,631 |
518,504 |
|
Other real estate owned |
1,876,997 |
2,296,290 |
|
Deferred tax asset |
3,053,104 |
924,187 |
|
Other assets |
216,891 |
240,714 |
|
Total assets |
$ 173,124,145 |
$ 170,310,305 |
|
Liabilities |
|||
Deposits |
|||
Noninterest-bearing transaction accounts |
$ 5,328,908 |
$ 5,235,742 |
|
Interest-bearing transaction accounts |
5,077,826 |
4,593,973 |
|
Savings and money market |
20,820,492 |
22,233,022 |
|
Time deposits $100,000 and over |
7,336,129 |
10,263,589 |
|
Other time deposits |
80,296,697 |
78,991,692 |
|
Total deposits |
118,860,052 |
121,318,018 |
|
Borrowed funds |
14,783,069 |
1,068,339 |
|
FHLB advances |
13,000,000 |
23,570,000 |
|
Accrued interest payable |
75,094 |
109,043 |
|
Other liabilities |
152,998 |
50,804 |
|
Total liabilities |
146,871,213 |
146,116,204 |
|
Shareholders’ equity |
|||
Preferred stock, no par value, 1,000,000 shares authorized, issued and outstanding – 3,500 at September 30, 2009. None at December 31, 2008 |
3,379,830 |
- |
|
Common stock, $1.00 par value; 11,000,000 shares authorized, issued and outstanding – 2,678,205 at September 30, 2009 and December 31, 2008 |
2,678,205 |
2,678,205 |
|
Treasury stock, at cost (10,000 shares at September 30, 2009 and no shares in 2008) |
(55,600) |
- |
|
Warrants |
136,850 |
- |
|
Capital surplus |
21,709,848 |
21,607,455 |
|
Retained deficit |
(1,701,459) |
(157,424) |
|
Accumulated other comprehensive income |
105,258 |
65,865 |
|
Total shareholders’ equity |
26,252,932 |
24,194,101 |
|
Total liabilities and shareholders’ equity |
$ 173,124,145 |
$ 170,310,305 |
See notes to consolidated financial statements
AB&T FINANCIAL CORPORATION
Consolidated Statements of Operations
(Unaudited)
For the three months ended
|
For the nine months ended
|
||||||
2009 |
2008 |
2009 |
2008 |
||||
Interest income: |
|||||||
Loans, including fees |
$ 1,740,062 |
$ 2,134,935 |
$ 5,099,541 |
$ 6,438,592 |
|||
Investment securities, taxable |
59,535 |
48,953 |
189,466 |
152,882 |
|||
FHLB, interest and dividends |
2,865 |
19,105 |
2,865 |
49,273 |
|||
Federal funds sold |
119 |
42,780 |
4,623 |
175,328 |
|||
Time deposits with other banks |
19,112 |
21,778 |
56,640 |
57,969 |
|||
Total |
1,821,693 |
2,267,551 |
5,353,135 |
6,874,044 |
|||
Interest expense: |
|||||||
Time deposits $100,000 and over |
204,211 |
606,891 |
439,064 |
1,855,106 |
|||
Other deposits |
398,279 |
254,408 |
1,601,892 |
992,666 |
|||
Other interest expense |
153,062 |
214,962 |
560,120 |
550,999 |
|||
Total |
755,552 |
1,076,261 |
2,601,076 |
3,398,771 |
|||
Net interest income |
1,066,141 |
1,191,290 |
2,752,059 |
3,475,273 |
|||
Provision for loan losses |
1,711,572 |
330,629 |
2,358,646 |
652,870 |
|||
Net interest income after provision |
|||||||
for loan losses |
(645,431) |
860,661 |
393,413 |
2,822,403 |
|||
Other operating income: |
|||||||
Service charges on deposit accounts |
106,452 |
66,422 |
288,192 |
183,029 |
|||
Residential mortgage application fees |
- |
- |
12,405 |
3,395 |
|||
Rental income |
1,225 |
- |
3,475 |
2,400 |
|||
Other service charges, commission and fees |
7,848 |
17,339 |
39,198 |
65,116 |
|||
Total |
115,525 |
83,761 |
343,270 |
253,940 |
|||
Other operating expenses: |
|||||||
Salaries and employee benefits |
529,063 |
556,980 |
1,648,935 |
1,652,904 |
|||
Occupancy expense |
46,194 |
55,662 |
146,258 |
141,576 |
|||
Furniture and equipment expense |
51,023 |
52,083 |
147,090 |
155,533 |
|||
Loss on sale of other real estate |
- |
61,984 |
51,783 |
94,968 |
|||
Other operating expenses |
405,668 |
315,147 |
1,222,757 |
821,454 |
|||
Total |
1,031,948 |
1,041,856 |
3,216,823 |
2,866,435 |
|||
Income (loss) before income taxes |
(1,561,854) |
(97,434) |
(2,480,140) |
209,908 |
|||
Income tax expense (benefit) |
(605,599) |
(36,401) |
(952,785) |
84,370 |
|||
Net income (loss) |
$ (956,255) |
$ (61,033) |
$ (1,527,355) |
$ 125,538 |
|||
Accretion of preferred stock to redemption value |
6,078 |
- |
16,680 |
- |
|||
Preferred stock dividends |
43,750 |
- |
131,250 |
- |
|||
Net income (loss) available to |
|||||||
common shareholders |
$ (1,006,083) |
$ (61,033) |
$ (1,675,285) |
$ 125,538 |
|||
Income (loss) per common share |
|||||||
Basic income (loss) per common share |
$ (0.38) |
$ (0.02) |
$ (0.63) |
$ 0.05 |
|||
Diluted income (loss) per common share |
$ (0.38) |
$ (0.02) |
$ (0.63) |
$ 0.05 |
See notes to consolidated financial statements
AB&T FINANCIAL CORPORATION
Consolidated Statements of Shareholders' Equity and Comprehensive Income (Loss)
For the nine months ended September 30, 2009 and 2008
(dollars in thousands except for share data)
(Unaudited)
Common Stock |
P referred Stock |
Accumu -
lated
|
||||||||
Shares |
Amount |
Shares |
Amount |
Treasury Stock |
Warrants |
Capital
|
Compre -
hensive
|
Retained
Earnings
|
Total |
|
Balance,
|
2,678,205 |
$ 13,391 |
- |
$ - |
$ - |
$ - |
$ 10,713 |
$ 14 |
$ 356 |
$ 24,474 |
Net income |
126 |
126 |
||||||||
Other comprehensive loss, net of tax |
15 |
15 |
||||||||
Comprehensive income |
141 |
|||||||||
Stock-based employee compensation |
105 |
105 |
||||||||
Balance |
||||||||||
September 30, 2008 |
2,678,205 |
$ 13,391 |
- |
$ - |
$ - |
$ - |
$ 10,818 |
$ 29 |
$ 482 |
$ 24 720 |
Balance,
|
2,678,205 |
$ 2,678 |
- |
$ - |
$ - |
$ - |
$ 21,607 |
$ 66 |
$ (157) |
$ 24,194 |
Net loss |
(1,527) |
(1,527) |
||||||||
Other comprehensive income, net of tax |
39 |
39 |
||||||||
Comprehensive loss |
(1,488) |
|||||||||
Issuance of
|
3,500 |
3,363 |
3,363 |
|||||||
Issuance of common stock warrants |
137 |
137 |
||||||||
Accretion of
|
17 |
(17) |
- |
|||||||
Dividends, preferred |
(98) |
(98) |
||||||||
Purchase of Treasury
|
(56) |
(56) |
||||||||
Stock-based employee compensation expense |
201 |
201 |
||||||||
Balance |
||||||||||
September 30, 2009 |
2,678,205 |
$ 2,678 |
3,500 |
$ 3,380 |
$ (56) |
$ 137 |
$ 21,710 |
$ 105 |
$ (1,701) |
$26,253 |
See notes to consolidated financial statements
Consolidated Statements of Cash Flows
For the nine months ended September 30, 2009 and 2008
(Unaudited)
|
For the
nine
months
|
||
2009 |
2008 |
||
Cash flows from operating activities: |
|||
Net income (loss) |
$ (1,527,355) |
$ 125,538 |
|
Adjustments to reconcile net income to net
|
|||
Provision for loan losses |
2,358,646 |
652,870 |
|
Depreciation and amortization expense |
162,166 |
138,206 |
|
Discount accretion and premium amortization |
406,871 |
(1,864) |
|
Deferred income tax benefit |
(977,942) |
(132,681) |
|
(Increase) decrease in interest receivable |
(44,127) |
45,640 |
|
(Decrease) increase in interest payable |
(33,949) |
84,332 |
|
Decrease (increase) in other assets |
23,823 |
(162,109) |
|
Increase (decrease) in other liabilities |
102,194 |
(200,002) |
|
Loss on sale of other real estate |
51,783 |
94,968 |
|
Gain on sale of other assets |
(13,656) |
- |
|
Stock based compensation expense |
200,587 |
105,804 |
|
Net cash provided by operating activities |
709,041 |
750,702 |
|
Cash flows from investing activities: |
|||
Purchase of securities available for sale |
(1,045,600) |
- |
|
Purchase of nonmarketable equity securities |
(41,900) |
(809,100) |
|
Sale of nonmarketable equity securities |
- |
270,000 |
|
Purchase of certificates of deposit from other banks |
(35,136) |
- |
|
Calls and maturities of securities available for sale |
72,870 |
344,468 |
|
Net increase in loans receivable |
(3,107,747) |
(25,153,012) |
|
Proceeds from sale of other real estate |
433,819 |
293,695 |
|
Proceeds from sale of premises, furniture and equipment |
37,656 |
- |
|
Purchases of premises, furniture, and equipment |
(23,963) |
(567,186) |
|
Net cash used by investing activities |
(3,710,001) |
(25,621,135) |
|
Cash flows from financing activities: |
|||
Net decrease
in demand deposits, interest-bearing
|
(835,511) |
(7,829,604) |
|
Net increase
(decrease) in certificates of deposit
|
(1,622,455) |
23,049,528 |
|
Net increase in borrowed funds |
13,714,730 |
909,367 |
|
Proceeds from issuance of preferred stock, net |
3,363,150 |
- |
|
Net (decrease) increase in advances from FHLB |
(10,570,000) |
10,570,000 |
|
Dividends paid |
(98,195) |
- |
|
Purchase of treasury stock |
(55,600) |
- |
|
Proceeds from issuance of stock warrants |
136,850 |
- |
|
Net cash provided by financing activities |
4,032,969 |
26,699,291 |
|
Net increase in cash and cash equivalents |
$ 1,032,009 |
$ 1,828,858 |
|
Cash and cash equivalents, beginning of period |
$ 17,168,629 |
$ 18,460,616 |
|
Cash and cash equivalents, end of period |
$ 18,200,638 |
$ 20,289,474 |
|
See notes to consolidated financial statements
Notes to Con solidated Financial Statements
(Unaudited)
Note 1 - Merger
On February 16, 2009, AB&T Financial Corporation (the “Company”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with 1st Financial Services Corporation (“1st Financial”) pursuant to which the Company would have merged with and into 1st Financial (the “Merger”). The merger agreement was terminated on October 1, 2009.
Note
2 -
Organization
The Company is a North Carolina business corporation incorporated in 2007. On May 14, 2008, pursuant to a plan of share exchange approved by the shareholders of Alliance Bank & Trust Company (the “Bank”), all of the outstanding shares of common stock of the Bank were exchanged for shares of common stock of the Company. The Company has no operations other than ownership of the Bank. The Bank was incorporated in North Carolina and commenced business on September 8, 2004. The principal business activity of the Bank is to provide commercial banking services to domestic markets, principally in Gaston and Cleveland counties in North Carolina. The Bank is a state-chartered bank, and its deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”). 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 3 - 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
2008
Annual Report on Form 10-K. The financial statements as of September 30, 2009
and for the interim periods ended
September 30, 2009 and 2008
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, 2008
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
2008 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2009.
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 November 13, 2009, the date the financial statements were available to be issued.
Note
4 -
Recently Issued Accounting Pronouncements
The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting, and / or disclosure of financial information by the Company.
In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162,” (“SFAS 168”). SFAS 168 establishes the FASB Accounting Standards Codification TM (“Codification”) as the source of authoritative generally accepted accounting principles (“GAAP”) for nongovernmental entities. The Codification does not change GAAP. Instead, it takes the thousands of individual pronouncements that currently comprise GAAP and reorganizes them into approximately 90 accounting Topics, and displays all Topics using a consistent structure. Contents in each Topic are further organized first by Subtopic, then Section and finally Paragraph. The Paragraph level is the only level that contains substantive content. Citing particular content in the Codification involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure. FASB suggests that all citations begin with “FASB ASC,” where ASC stands for Accounting Standards Codification. Changes to the ASC subsequent to June 30, 2009 are referred to as Accounting Standards Updates (“ASU”).
Notes to Con solidated Financial Statements
(Unaudited)
FSP EITF 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20,” (FASB ASC 325-40-65) (“FSP EITF 99-20-1”) was issued in January 2009. Prior to the FSP, other-than-temporary impairment was determined by using either Emerging Issues Task Force (“EITF”) Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests
and Beneficial Interests that Continue to be Held by a Transferor in Securitized Financial Assets,” (“EITF 99-20”) or SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” (“SFAS 115”) depending on the type of security. EITF 99-20 required the use of market participant assumptions regarding future cash flows regarding the probability of collecting all cash flows previously projected. SFAS 115 determined impairment to
be other than temporary if it was probable that the holder would be unable to collect all amounts due according to the contractual terms. To achieve a more consistent determination of other-than-temporary impairment, the FSP amended EITF 99-20 to determine any other-than-temporary impairment based on the guidance in SFAS 115, allowing management to use more judgment in determining any other-than-temporary impairment. The FSP was effective for reporting periods ending after December 15,
2008. Management has reviewed the Company’s security portfolio and evaluated the portfolio for any other-than-temporary impairments.
In conjunction with the issuance of SFAS 168, the FASB also issued its first Accounting Standards Update No. 2009-1, “Topic 105 –Generally Accepted Accounting Principles” (“ASU 2009-1”) which includes SFAS 168 in its entirety as a transition to the ASC. ASU 2009-1 is effective for interim and annual periods ending after September 15, 2009 and will not have an impact
on the Company’s financial position or results of operations but will change the referencing system for accounting standards. Certain of the following pronouncements were issued prior to the issuance of the ASC and adoption of the ASUs. For such pronouncements, citations to the applicable Codification by Topic, Subtopic and Section are provided where applicable
in addition to the original standard type and number.
On April 9, 2009, the FASB issued three staff positions related to fair value which are discussed below .
FSP SFAS 115-2 and SFAS 124-2 (FASB ASC 320-10-65), “Recognition and Presentation of Other-Than-Temporary Impairments,” (“FSP SFAS 115-2 and SFAS 124-2”) categorizes losses on debt securities available-for-sale or held-to-maturity determined by management to be other-than-temporarily impaired into losses due to credit issues and losses related to all other factors. Other-than-temporary impairment (OTTI) exists when it is more likely than not that the security will mature or be sold before its amortized cost basis can be recovered. An OTTI related to credit losses should be recognized through earnings. An OTTI related to other factors should be recognized in other comprehensive income. The FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. Annual disclosures required in SFAS 115 and FSP SFAS 115-1 and SFAS 124-1 are also required for interim periods (including the aging of securities with unrealized losses).
FSP SFAS 157-4 (FASB ASC 820-10-65), “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That are Not Orderly” recognizes that quoted prices may not be determinative of fair value when the volume and level of trading activity has significantly decreased. The evaluation of certain factors may necessitate that fair value be determined using a different valuation technique. Fair value should be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction, not a forced liquidation or distressed sale. If a transaction is considered to not be orderly, little, if any, weight should be placed on the transaction price. If there is not sufficient information to conclude as to whether or not the transaction is orderly, the transaction price should be considered when estimating fair value. An entity’s intention to hold an asset or liability is not relevant in determining fair value. Quoted prices provided by pricing services may still be used when estimating fair value in accordance with SFAS 157; however, the entity should evaluate whether the quoted prices are based on current information and orderly transactions. Inputs and valuation techniques are required to be disclosed in addition to any changes in valuation techniques.
FSP SFAS 107-1 and APB 28-1 (FASB ASC 825-10-65), “Interim Disclosures about Fair Value of Financial Instruments” requires disclosures about the fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual
financial statements and also requires those disclosures in summarized financial information at interim reporting periods A publicly traded company includes any company whose securities trade in a public market on either a stock exchange or in the over-the-counter market, or any company that is a conduit bond obligor. Additionally, when a company makes a filing with a regulatory agency in preparation for sale of its securities in a public market it is considered a publicly traded
company for this purpose.
The three staff positions are effective for periods ending after June 15, 2009, with early adoption of all three permitted for periods ending after March 15, 2009. The Company adopted the staff positions for its second quarter 10-Q. The staff positions had no material impact on the financial statements. Additional disclosures have been provided where applicable.
Notes to Consolidated Financial Statements
(Unaudited)
Also on April 1, 2009, the FASB issued FSP SFAS 141(R)-1 (FASB ASC 805-20-25, 30, 35, 50), “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.” The FSP requires that assets acquired and liabilities assumed
in a business combination that arise from a contingency be recognized at fair value. If fair value cannot be determined during the measurement period as determined in SFAS 141 (R), the asset or liability can still be recognized if it can be determined that it is probable that the asset existed or the liability had been incurred as of the measurement date and if the amount of the asset or liability can be reasonably estimated. If it is not determined to be probable that the
asset/liability existed/was incurred or no reasonable amount can be determined, no asset or liability is recognized. The entity should determine a rational basis for subsequently measuring the acquired assets and assumed liabilities. Contingent consideration agreements should be recognized initially at fair value and subsequently reevaluated in accordance with guidance found in paragraph 65 of SFAS 141 (R). The FSP is effective for business combinations with an acquisition date on or
after the beginning of the Company’s first annual reporting period beginning on or after December 15, 2008. The Company will assess the impact of the FSP if and when a future acquisition occurs.
The Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 111 (FASB ASC 320-10-S99-1) on April 9, 2009 to amend Topic 5.M., “Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities” and to supplement FSP SFAS 115-2 and SFAS 124-2. SAB 111 maintains the staff’s previous views related to equity securities; however debt securities are excluded from its scope. The SAB provides that
“other-than-temporary” impairment is not necessarily the same as “permanent” impairment and unless evidence exists to support a value equal to or greater than the carrying value of the equity security investment, a write-down to fair value should be recorded and accounted for as a realized loss. The SAB was effective upon issuance and had no impact on the Company’s financial position.
SFAS 165 (FASB ASC 855-10-05, 15, 25, 45, 50, 55), “Subsequent Events,” (“SFAS 165”) was issued in May 2009 and provides guidance on when a subsequent event should be recognized in the financial statements. Subsequent events that provide additional
evidence about conditions that existed at the date of the balance sheet should be recognized at the balance sheet date. Subsequent events that provide evidence about conditions that arose after the balance sheet date but before financial statements are issued, or are available to be issued, are not required to be recognized. The date through which subsequent events have been evaluated must be disclosed as well as whether it is the date the financial statements were issued or the date
the financial statements were available to be issued. For nonrecognized subsequent events which should be disclosed to keep the financial statements from being misleading, the nature of the event and an estimate of its financial effect, or a statement that such an estimate cannot be made, should be disclosed. The standard is effective for interim or annual periods ending after June 15, 2009. Subsequent events are discussed in Note 10.
The FASB issued SFAS 166 (not yet reflected in FASB ASC), “Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140,” (“SFAS 166”) in June 2009. SFAS 166 limits the circumstances in which a financial asset should be derecognized when the transferor has not transferred the entire financial asset by taking into consideration the transferor’s continuing involvement. The standard requires that a transferor recognize and
initially measure at fair value all assets obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of a transfer of financial assets accounted for as a sale. The concept of a qualifying special-purpose entity is removed from SFAS 140 along with the exception from applying FIN 46(R). The standard is effective for the first annual reporting period that begins after November 15, 2009, for interim periods within the first annual reporting period,
and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Company does not expect the standard to have any impact on the Company’s financial position.
SFAS 167 (not yet reflected in FASB ASC), “Amendments to FASB Interpretation No. 46(R),” (“SFAS 167”) was also issued in June 2009. The standard amends FIN 46(R) to require a company to analyze whether its interest in a variable interest entity
(“VIE”) gives it a controlling financial interest. A company must assess whether it has an implicit financial responsibility to ensure that the VIE operates as designed when determining whether it has the power to direct the activities of the VIE that significantly impact its economic performance. Ongoing reassessments of whether a company is the primary beneficiary is also required by the standard. SFAS 167 amends the criteria to qualify as a primary beneficiary as well as
how to determine the existence of a VIE. The standard also eliminates certain exceptions that were available under FIN 46(R). SFAS 167 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. Comparative disclosures will be required for periods after the
effective date. The Company does not expect the standard to have any impact on the Company’s financial position.
The FASB issued ASU 2009–05, “Fair Value Measurements and Disclosures (Topic 820) – Measuring Liabilities at Fair Value” in August, 2009 to provide guidance when estimating the fair value of a liability. When a quoted price in an active market for the identical liability is not available, fair value should be measured using (a) the quoted price of an identical liability when traded as an asset; (b) quoted prices for similar liabilities or similar liabilities when traded as assets; or (c) another valuation technique consistent with the principles of Topic 820 such as an income approach or a market approach. If a restriction exists that prevents the transfer of the liability, a separate adjustment related to the restriction is not required when estimating fair value. The ASU was effective October 1, 2009 for the Company and will have no impact on financial position or operations.
Notes to Consolidated Financial Statements
(Unaudited)
ASU 2009-12, “Fair Value Measurements and Disclosures (Topic 820) - Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent),” issued in September, 2009, allows a company to measure the fair value of an investment that has no readily determinable fair market value on the basis of the investee’s net asset value per share as provided by the investee. This allowance assumes that the investee has calculated net asset value in accordance with the GAAP measurement principles of Topic 946 as of the reporting entity’s measurement date. Examples of such investments include investments in hedge funds, private equity funds, real estate funds and venture capital funds. The update also provides guidance on how the investment should be classified within the fair value hierarchy based on the value for which the investment can be redeemed. The amendment is effective for interim and annual periods ending after December 15, 2009 with early adoption permitted. The Company does not have investments in such entities and, therefore, there will be no impact to our financial statements.
ASU 2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements – a consensus of the FASB Emerging Issues Task Force” was issued in October, 2009 and provides guidance on accounting for products or services (deliverables) separately rather than as a combined unit utilizing a selling price hierarchy to determine the selling price of a deliverable. The selling price is based on vendor-specific evidence, third-party evidence or estimated selling price. The amendments in the Update are effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 with early adoption permitted. The Company does not expect the update to have an impact on its financial statements.
Issued October, 2009, ASU 2009-15, “Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing” amends ASC Topic 470 and provides guidance for accounting and reporting for own-share lending arrangements issued in contemplation of a convertible debt issuance. At the date of issuance, a share-lending arrangement entered into on an entity’s own shares should be measured at fair value in accordance with Topic 820 and recognized as an issuance cost, with an offset to additional paid-in capital. Loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs. The amendments also require several disclosures including a description and the terms of the arrangement and the reason for entering into the arrangement. The effective dates of the amendments are dependent upon the date the share-lending arrangement was entered into and include retrospective application for arrangements outstanding as of the beginning of fiscal years beginning on or after December 15, 2009. The Company has no plans to issue convertible debt and, therefore, does not expect the update to have an impact on its financial statements.
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 5 – Comprehensive Income
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, 2009 and September 30, 2008:
Three months ended September 30, |
Nine months ended September 30, |
||||||
2009 |
2008 |
2009 |
2008 |
||||
Unrealized gains on securities available for sale |
$ 96,429 |
$ 71,896 |
$ 64,526 |
$ 24,356 |
|||
Reclassification of (gains) losses recognized in net income |
- |
- |
- |
- |
|||
Income tax expense |
(37,559) |
(28,003) |
(25,133) |
(9,487) |
|||
Other comprehensive income |
$ 58,870 |
$ 43,893 |
$39,393 |
$ 14,869 |
Notes to Consolidated Financial Statements
(Unaudited)
Note 6 – Income per share
Basic income per share is computed by dividing net income by the weighted-average number of common shares outstanding. Diluted income per share is computed by dividing net income by the weighted-average number of common shares outstanding and dilutive common share equivalents using the treasury stock method.
Three months ended
September 30, 2009
Income
|
|
|
Shares
|
|
|
Per Share
|
|
|
Basic loss per share |
|
|||||||
Loss available to common shareholders |
$ (1,006,083) |
|
2,668,205 |
|
$ (0.38) |
|
||
Effect of dilutive securities |
||||||||
Stock options |
- |
|
|
- |
|
|
||
Dilutive loss per share |
||||||||
L
oss available to common shareholders
|
$ (1,006,083) |
|
2,668,205 |
|
$ (0.38) |
|
Three months ended September 30, 2008
Income
|
|
|
Shares
|
|
|
Per Share
|
|
Basic loss per share |
|
||||||
Loss available to common shareholders |
$ (61,033) |
|
2,678,205 |
|
$ (0.02) |
||
Effect of dilutive securities |
|||||||
Stock options |
- |
|
|
- |
|
|
|
Dilutive loss per share |
|||||||
Loss available to common shareholders
|
$ (61,033) |
|
2,678,205 |
|
$ (0.02) |
Nine months ended September 30, 2009
Income
|
|
|
Shares
|
|
|
Per Share
|
|
|
Basic earnings per share |
|
|||||||
Loss available to common shareholders |
( $1,675,285) |
|
2,668,205 |
|
($ 0.63) |
|
||
Effect of dilutive securities |
||||||||
Stock options |
- |
|
|
- |
|
|
||
Dilutive earnings per share |
||||||||
Loss available to common shareholders
|
( $1,675,285) |
|
2,668,205 |
|
($ 0.63) |
|
Nine months ended September 30, 2008
Income
|
|
|
Shares
|
|
|
Per Share
|
|
|
Basic earnings per share |
|
|
||||||
Income available to common shareholders |
$ 125,538 |
|
2,678,205 |
|
$ 0.05 |
|
||
Effect of dilutive securities |
||||||||
Stock options |
- |
|
|
- |
|
|
|
|
Dilutive earnings per share |
||||||||
Income available to common shareholders
|
$ 125,538 |
|
2,678,205 |
|
$ 0.05 |
|
Notes to Consolidated Financial Statements
(Unaudited)
Note 7 – Fair Value Measurements
Effective January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”) which provides a framework for measuring and disclosing fair value under generally accepted accounting principles. SFAS 157 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).
SFAS 157 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. SFAS 157 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.
|
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. |
The following is a description of the valuation methodologies used for assets and liabilities recorded at fair value.
Investment securities held as available-for-sale are recorded at fair value on a recurring basis. Available-for-sale investment securities ($5,268,599
at September
30, 2009) are
the only assets whose fair values are measured on a recurring basis using level 2 inputs. The Company has no assets or liabilities whose fair values are
measured on a recurring basis using level 1 or level 3 inputs.
Loans are not recorded at fair value on a recurring basis but are subject to a fair value adjustment in certain circumstances. When it is probable that the payment of interest and principal will not be repaid in accordance with the contractual terms of the loan agreement, it is considered to be impaired and an allowance for loan
losses is established. The fair value of loans which are deemed to be impaired are estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value, and discounted cash flows. At September 30, 2009, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. Collateral
fair values are obtained using independent appraisals,
which the Company considers to be level 2 inputs.
The Company is predominantly an asset-based lender with real estate serving as collateral on a substantial majority of loans.
The following table presents the assets and liabilities carried on the balance sheet by caption and by level within the SFAS No. 157 valuation hierarchy (as described above) as of September 30, 2009 for which a nonrecurring change in fair value has been recorded during the period ending September 30, 2009.
Carrying Value at September 30, 2009 |
|||||||
Total |
Level 1 |
Level 2 |
Level 3 |
||||
Impaired Loans |
$ 4,987,036 |
$ 4,987,036 |
|||||
Other Real Estate Owned |
$ 1,876,997 |
$ 1,876,997 |
The Company has no other assets or liabilities whose fair values are measured using level 3 inputs.
Notes to Consolidated Financial Statements
(Unaudited)
The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instruments. Because no market value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors.
The following methods and assumptions were used to estimate the fair value of significant financial instruments:
Cash and Due from Banks - The carrying amount is a reasonable estimate of fair value.
Federal Funds Sold - Federal funds sold are for a term of one day, and the carrying amount approximates the fair value.
Time Deposits with Other Banks – The carrying amount approximates the fair value.
Investment Securities - The fair values of securities available-for-sale equal the carrying amounts, which are the quoted market prices. If quoted market prices are not available, fair values are based on quoted market prices of comparable securities. The carrying value of nonmarketable equity securities approximates the fair value since no ready market exists for the stocks.
Loans Receivable - For certain categories of loans, such as variable rate loans which are repriced frequently and have no significant change in credit risk, fair values are based on the carrying amounts. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
Deposits - The fair value of demand deposits, savings, and money market accounts is the amount payable on demand at the reporting date. The fair values of certificates of deposit are estimated using a discounted cash flow calculation that applies current interest rates to a schedule of aggregated expected maturities.
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase - The carrying amount is a reasonable estimate of fair value because these instruments typically have terms of one day.
Advances from the Federal Home Loan Bank – The carrying amounts of variable rate borrowings are reasonable estimates of fair value because they can be repriced frequently. The fair values of fixed rate borrowings are estimated using a discounted cash flow calculation that applies the Company’s current borrowing rate from the Federal Home Loan Bank.
Accrued Interest Receivable and Payable - The carrying value of these instruments is a reasonable estimate of fair value.
Off-Balance-Sheet Financial Instruments - In the ordinary course of business, the Company enters into off-balance-sheet financial instruments consisting of commitments to extend credit and letters of credit. These financial instruments are recorded in the financial statements when they become payable by the customer.
Notes to Consolidated Financial Statements
(Unaudited)
The carrying values and estimated fair values of the Company's financial instruments are as follows:
September 30, 2009 |
December 31, 2008 |
||||||
Carrying
|
Estimated
|
Carrying
|
Estimated
|
||||
Financial Assets: |
|||||||
Cash and due from banks |
$ 17,578,269 |
$ 17,578,269 |
$ 8,159,812 |
$ 8,159,812 |
|||
Federal funds sold |
622,369 |
622,369 |
9,008,817 |
9,008,817 |
|||
Time deposits with other banks |
1,295,335 |
1,295,335 |
1,260,199 |
1,260,199 |
|||
Securities available-for-sale |
5,268,599 |
5,268,599 |
4,638,214 |
4,638,214 |
|||
Nonmarketable equity securities |
1,413,180 |
1,413,180 |
1,371,280 |
1,371,280 |
|||
Loans receivable, net |
140,881,088 |
140,331,839 |
139,670,266 |
139,675,381 |
|||
Accrued interest receivable |
562,631 |
562,631 |
518,504 |
518,504 |
|||
Financial Liabilities: |
|||||||
Demand deposit, interest-bearing |
|||||||
transaction, and savings accounts |
31,227,226 |
31,227,226 |
32,062,737 |
32,062,737 |
|||
Certificates of deposit and other |
|||||||
time deposits |
87,632,826 |
87,657,000 |
89,255,281 |
89,387,773 |
|||
Federal funds purchased and |
|||||||
securities sold under agreements to repurchase |
14,783,069 |
14,783,069 |
1,068,339 |
1,068,339 |
|||
Federal Home Loan Bank advances |
13,000,000 |
13,000,000 |
23,750,000 |
23,570,000 |
|||
Accrued interest payable |
75,094 |
75,094 |
109,043 |
109,043 |
Notional
|
Estimated
|
Notional
|
Estimated
|
|
Off-Balance Sheet Financial Instruments: |
||||
Commitments to extend credit |
$ 12,063,845 |
$ - |
$ 12,131,000 |
$ - |
Financial standby letters of credit |
179,695 |
- |
179,695 |
- |
N
ote 8 -
I
nvestment Securities
The amortized cost and estimated fair values of securities available-for-sale were:
Gross Unrealized |
||||
Amortized
|
Gains |
Losses |
Estimated
|
|
September 30, 2009 |
||||
Mortgage-backed securities |
$ 4,052,705 |
$ 166,232 |
$ - |
$ 4,218,937 |
Agencies |
1,043,480 |
6,182 |
- |
1,049,662 |
Total |
$ 5, 096 , 185 |
$ 172,414 |
$ - |
$ 5, 268 , 599 |
December 31, 2008 |
||||
Mortgage-backed securities |
$ 4,530,327 |
$ 107,932 |
$ 45 |
$ 4,638,214 |
Total |
$ 4,530,327 |
$ 107,932 |
$ 45 |
$ 4,638,214 |
Notes to Consolidated Financial Statements
(Unaudited)
The following is a summary of maturities of securities available-for-sale as of September 30, 2009. 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
|
||
Amortized
|
Estimated
|
|
Due in one year or less |
$ - |
$ - |
Due after one year but within five years |
114,873 |
119,216 |
Due after five years but within ten years |
2,981,273 |
3,033,753 |
Due after ten years |
2,000,040 |
2,115,630 |
$ 5, 096 , 186 |
$ 5, 268,599 |
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 December 31, 2008. There were no unrealized losses at September 30,
2009
:
Less than
|
Twelve months
|
Total |
|||||||||
Fair Value |
Unrealized losses |
Fair Value |
Unrealized losses |
Fair Value |
Unrealized losses |
||||||
December 31, 2008 |
|||||||||||
Mortgage-backed securities |
$ - |
$ - |
$1,360,449 |
$ 45 |
$ 1,360,449 |
$ 45 |
|||||
Total |
$ - |
$ - |
$1,360,449 |
$ 45 |
$ 1,360,449 |
$ 45 |
|||||
N ote 9 - United States Department of the Treasury Capital Purchase Program
On January 23, 2009, the Company entered into a Letter Agreement, with the United States Department of the Treasury (the “Treasury”), pursuant to which the Company issued and sold to the Treasury (1) 3,500 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Preferred
Stock”) and (2) a warrant to purchase 80,153 shares of the Company’s common stock, $1.00 par value per share, for an aggregate purchase price of $3,500,000 in cash. The Preferred Stock will qualify as Tier 1 capital and will pay cumulative dividends at a rate of 5% per annum for the first five years, and 9% per annum thereafter. The Company may redeem the Preferred Stock subject to consultation with the appropriate federal banking agency. The Preferred Stock
is generally nonvoting. The warrant has a 10-year term and is immediately exercisable upon its issuance, with an initial per share exercise price of $6.55. The warrant has anti-dilution protections, registration rights, and certain other protections for the holder. If the Company receives aggregate gross cash proceeds of not less than $3,500,000 from Qualified Equity Offerings on or prior to December 31, 2009, the number of shares of common stock issuable pursuant to the
Treasury’s exercise of the warrant will be reduced by one-half of the original number of shares, taking into account all adjustments, underlying the warrant. Pursuant to the Purchase Agreement, the Treasury has agreed not to exercise voting power with respect to any shares of common stock issued upon exercise of the Warrant.
I tem 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, 2009
compared to December 31, 2008, and the results of operations for the three and nine
month periods ended September 30, 2009
and 2008. 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 2008
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.
Results of Operations
Net Interest Income
For the three months ended September 30, 2009, net interest income was $1,066,141
as compared to $1,191,290
for the same period in 2008. The average rate paid on
interest-bearing liabilities for the three months ended September 30, 2009 and 2008 was 2.22% and 3.24%, respectively. The average rate realized on interest-earning assets was 4.71% and 5.84% for the three months ended September
30, 2009 and 2008, respectively.
This decrease in the net interest income was primarily due to the reduction in interest rates by the Federal Reserve Board
during the current economic recession. As a result, this led to decreases in prevailing interest rates that reduced the yields on the Bank’s loans and other interest-earning assets.
The net interest spread was 2.49% and 2.60% for the three month periods
ended September 30, 2009 and 2008, respectively.
For the nine
months ended September 30, 2009, net interest income was $2,752,059
as compared to $3,475,273
for the
same period in 2008. The average rate paid on interest-bearing liabilities for the nine
months ended September 30, 2009 and 2008 was 2.56% and 3.34%, respectively. The average rate realized on interest-earning assets was 4.63% and 6.17% for the nine
months ended September
30, 2009 and 2008, respectively.
This decrease in the net interest income was partly due to the reduction in interest rates by the Federal Reserve Board during the economic downturn. As a result, this led to decreases in prevailing interest rates that reduced the yields on the Bank’s loans and other interest-earning assets.
The net interest spread was 2.07% and 2.83% for the nine
month periods
ended September 30, 2009 and 2008, respectively.
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, 2009 and 2008 the provision was $1,711,572 and $330,629, respectively. For the nine month periods ended September 30, 2009 and 2008 the provision was $2,358,646 and $652,870, respectively. On September 30, 2009, there were $4,987,036 in loans in nonaccrual status. On September 30, 2008, there were $1,594,204 in loans in nonaccrual status. Based on present information, management believes the allowance for loan losses is adequate at September 30, 2009 to meet presently known and inherent risks in the loan portfolio. The allowance for loan losses is 2.58% and 1.16% of total loans at September 30, 2009 and 2008, respectively. 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 increase of the Company’s net loss and, possibly, a reduction of its capital.
Noninterest Income
Total noninterest income for the three months ended September 30, 2009
was $115,525
or 37.92%
more
than total noninterest
income for the same period last year. The largest component of noninterest income for the three month period ended September 30, 2009
was service charges on deposit accounts, which totaled $106,452 or 60.27% higher than those for the three month period ended September 30, 2008.
This increase was driven largely by the Company’s expanded efforts in the acquisition of retail demand
deposit accounts.
Rental income for the three months ended September 30, 2009 was $1,225. There was no rental income for the three months ended September 30, 2008.
Item 2 - Management's Discussion And Analysis of Financial Condition and Results of Operations – continued
Total noninterest income for the nine
months ended September 30, 2009
was $343,270
or 35.18%
more
than total noninterest income for the same period last year. The largest component of noninterest income for the nine month period ended September 30, 2009
was service charges on deposit accounts, which totaled $288,192
or 57.46% higher than those for the nine
month period ended September
30, 2008.
This increase was driven largely by the Company’s expanded efforts in the acquisition of retail demand deposit accounts. Residential mortgage application fees for the nine months ended September 30, 2009 were $12,405 or 265.39% more than residential mortgage application fees for the nine months ended September 30, 2008.
Noninterest Expense
Total noninterest expense for the three months ended September 30, 2009
was $1,031,948 or 0.95% less
than total noninterest expense for the same period last year. The primary component of noninterest expense is salaries and
benefits, which were $529,063
and $556,980 for the three months ended September 30, 2009
and 2008, respectively. Salaries and benefits decreased due to the decrease in the number of active employees and the reduction in the expense of accrued bonuses and other benefits. Other operating
expenses were $405,668
and $315,147
for the three months ended September 30, 2009
and 2008, respectively.
The increase in other operating expense for the three months ended September 30, 2009 was primarily the result of higher legal and accounting fees related to the merger with 1st Financial,
and the one-time additional assessment imposed by the FDIC.
Total noninterest expense for the nine months ended September 30, 2009 was $3,216,823 or 12.22% higher than total noninterest expense for the same period last year. The primary component of noninterest expense is salaries and benefits, which were $1,648,935 and $1,652,904 for the nine months ended September 30, 2009 and 2008, respectively. Other operating expenses were $1,222,757 and $821,454 for the nine months ended September 30, 2009 and 2008, respectively. The increase in other operating expense for the nine months ended September 30, 2009 was primarily the result of higher legal and accounting fees related to the merger with 1st Financial and the one-time additional assessment imposed by the FDIC.
Income Taxes
For the three months ended September 30, 2009 and 2008, the effective income tax rate was 38.77% and 37.36%, respectively. The income tax benefit was $605,599, for the three months ended September 30, 2009 compared to an income tax benefit of $36,401 for the three months ended September 30, 2008.
For the nine
months ended September 30, 2009 and 2008,
the effective income tax rate was 38.42% and 40.19%, respectively. The income tax benefit
was $952,785, for the
nine
months ended September 30, 2009
compared to an income tax provision of $84,370
for the nine
months ended September 30, 2008
.
Net Income (loss)
The combination of the above factors resulted in net loss of $956,255
for the three
months ended September 30, 2009
compared to net loss
of $61,033
for the comparable period in 2008, a increase of 1,466.78%.
For the nine months ended September 30, 2009 and 2008, there was a net loss of $1,527,355 and net income of $125,538, respectively.
Assets and Liabilities
During the first nine months of 2009, total assets increased $2,813,840 or 1.65% when compared to December 31, 2008. The increase is primarily due to the Company’s participation in the “TARP” Capital Purchase Program in which the Company sold to the Treasury 3,500 shares of Fixed Rate Cumulative Perpetual Preferred Stock and a warrant to purchase 80,153 shares of the Company’s common stock for an aggregate purchase price of $3.5 million in cash. In addition, we experienced a slight increase in loans of $1,210,822, or 0.87% during the nine months ended September 30, 2009, however this was offset by an increase in the allowance for loan losses to $3,639,839 at September 30, 2009 up from $1,935,702 at December 31, 2008.
Investment Securities
Investment securities totaled $7,977,114 as of September 30, 2009 as compared to $7,269,693 at December 31, 2008. Of this amount, $5,268,599 was designated as available-for-sale as of September 30, 2009. The other investments were nonmarketable equity securities consisting of $1,368,000 in Federal Home Loan Bank stock and a $45,180 investment in Community Bankers Bank stock, and time deposits with other banks totaling $1,295,335 at September 30, 2009 .
Item 2 - Management's Discussion And Analysis of Financial Condition and Results of Operations – continued
Loans
Loans increased $1,210,822, or 0.87%, during the period. As shown below, the largest increase was in real estate – mortgage loans which increased $2,035,000 or 2.22%, to $93,743,000 at September 30, 2009. Real estate - construction loans increased $953,000, or 3.33%, to $29,547,000. Commercial and industrial loans decreased $1,609,000 or 8.78% to $16,711,000 at September 30, 2009. Consumer and other loans decreased $168,178 or 16.04%, to $880,088. Balances within the major loans receivable categories as of September 30, 2009 and December 31, 2008 are as follows:
September 30,
|
December 31,
|
||
Real estate – construction |
$ 29,547,000 |
$ 28,594,000 |
|
Real estate – mortgage |
93,743,000 |
91,708,000 |
|
Commercial and industrial |
16,711,000 |
18,320,000 |
|
Consumer and other |
880,088 |
1,048,266 |
|
Total gross loans |
$ 140,881,088 |
$ 139,670,266 |
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, 2009 and December 31, 2008, the Company had criticized loans totaling $2,790,518
and
$1,722,862, respectively. At September 30,
2009 and December 31, 2008, the Company had classified loans totaling $8,640,066
and
$5,569,588, respectively. At September 30, 2009, the Company had $4,987,035
or
3.54% of total gross loans in nonaccrual status
and $2,117,116 in loans that were 90 days or more past due and still accruing.
The following table depicts the activity in the allowance for loan losses for the nine
months ended
September 30, 2009
and 2008
:
September 30 , 2009 |
September 30 , 2008 |
||
Balance, January 1 |
$ 1,935,702 |
$ 1,370,235 |
|
Provision for loan losses for the period |
2,358,646 |
652,870 |
|
Net loans (charged-off) recovered during the period |
(654,509) |
(376,599) |
|
Balance, September 30, |
$ 3,639,839 |
$ 1,646,506 |
|
Gross loans outstanding, September 30, |
$ 140,881,088 |
$ 142,193,513 |
|
Allowance for loan losses to loans outstanding |
2.58% |
1.16% |
Deposits
Total deposits decreased $2,457,966 or 2.03%, from December 31, 2008 to $118,860,052 at September 30, 2009. The largest increase was in Interest-bearing transaction accounts which increased $483,853 or 10.53% to $5,077,826 at September 30, 2009. Total time deposits decreased $1,622,455, or 1.82% to $87,632,826 at September 30, 2009. This decrease was due to the decision of management to decrease the concentration of brokered deposits. There was a slight decrease in savings and money market accounts, which decreased $1,412,530 or 6.35%, to $20,820,492 at September 30, 2009. This decrease in savings and money market accounts is a combination of the Bank instituting a market pricing strategy and reducing the premium paid on certain deposits in order to maintain the long term improvement of its net interest margin. These decreases were partially offset by increases in interest-bearing and non-interest bearing transaction accounts which, in total, increased $577,019, or 5.87% since December 31, 2008. 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. Expressed in percentages, noninterest-bearing deposits increased 1.78% and interest-bearing deposits decreased 2.20%.
Item 2 - Management's Discussion And Analysis of Financial Condition and Results of Operations – continued
Balances within the major deposit categories as of September 30, 2009 and December 31, 2008
are as follows:
September 30,
|
December 31,
|
||
Noninterest-bearing transaction accounts |
$ 5,328,908 |
$ 5,235,742 |
|
Interest-bearing transaction accounts |
5,077,826 |
4,593,973 |
|
Savings and money market |
20,820,492 |
22,233,022 |
|
Time deposits $100,000 and over |
7,336,129 |
10,263,589 |
|
Other time deposits |
80,296,697 |
78,991,692 |
|
Total deposits |
$ 118,860,052 |
$ 121,318,018 |
Advances from Federal Home Loan Bank
The Bank did not borrow additional funds from the Federal Home Loan Bank of Atlanta (FHLB) during the first nine months of 2009. The advances from the FHLB total $13,000,000
as of September 30, 2009 and $23,570,000 as of December 31, 2008. The Bank utilizes the advances to fund
loans and general liquidity purposes.
Advances from the Federal Home Loan Bank consisted of the following at September 30, 2009:
Description |
Interest Rate |
Amount |
||
Convertible rate advances maturing: |
||||
September 20, 2012 |
3.86% |
$ 8,000,000 |
||
December 17, 2009 |
3.71% |
5,000,000 |
||
$ 13,000,000 |
Scheduled principal reductions of Federal Home Loan Bank advances are as follows:
2009 |
$ 5,000,000 |
|
2010 |
- |
|
2011 |
- |
|
2012 |
8,000,000 |
|
$13,000,000 |
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, 2009, the Company’s primary sources of liquidity included
cash and equivalents of $17,578,269,
federal funds sold totaling
$622,369
and securities available-for-sale totaling $5,268,599, credit availability
with the Federal Home Loan Bank of $1,367,398, unused lines of credit with correspondent banks to purchase federal funds totaled $4,000,000 at September
30, 2009
.
In response to financial conditions affecting the banking system and financial markets and the potential threats to the solvency of investment banks and other financial institutions, the United States government has taken unprecedented actions. On October 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act of 2008 (the “EESA”). Pursuant to the EESA, the U.S. Treasury will have the authority to, among other things, purchase mortgages, mortgage-backed securities, and other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. On October 14, 2008, the U.S. Department of Treasury announced the Capital Purchase Program under the EESA, pursuant to which the Treasury intends to make senior preferred stock investments in participating financial institutions that will qualify as Tier 1 capital. Based on our risk-weighted assets as of September 30, 2008, we were eligible to issue up to $4.2 million in new senior preferred stock under the program. We were approved for participation in the Capital Purchase Program and, on January 23, 2009, we issued and sold to the Treasury 3,500 shares of preferred stock and a warrant to purchase 80,153 shares of common stock for an aggregate purchase price of $3,500,000 in cash. As a result of our participation in the program, we are required to have in place certain limitations on the compensation of our senior executive officers, applicable in certain situations. On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 into law. This law includes additional restrictions on executive compensation applicable to the Company as a participant in the Capital Purchase Program. Further governmental intervention and new regulations under these programs could materially and adversely affect our business, financial condition and results of operations.
Item 2 - Management's Discussion And Analysis of Financial Condition and Results of Operations – continued
Capital Resources
Total shareholders' equity increased $2,058,831 to $26,252,932 for the nine month period ended September 30, 2009. This is primarily the result of the money the Bank received from the U.S. Department of Treasury Capital Purchase Program during the first quarter of $3,500,000, netted with the net loss for the period of $1,527,355 an unrealized gain, net of taxes, in securities available-for-sale of $39,393 and stock based compensation expense of $200,587.
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, 2009
as well as the ratios to be considered "well capitalized."
The following table summarizes the Bank’s risk-based capital at September 30, 2009
Shareholders' equity |
$ 26,252,932 |
|
Plus – unrealized (gain) loss on available-for-sale securities |
(105,258) |
|
Tier 1 capital |
$ 26,147,674 |
|
Plus - allowance for loan losses (1) |
1,744,000 |
|
Total capital |
$ 27,891,674 |
|
Risk-weighted assets |
$ 137,656,000 |
|
Risk-based capital ratios: |
|
|
Tier 1 capital (to risk-weighted assets) |
|
19.00% |
Total capital (to risk-weighted assets) |
|
20.26% |
Leverage ratio |
|
15.58% |
(1) Limited to 1.25% of risk-weighted assets
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, 2009, the Company had issued commitments to extend credit of $12,243,540 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, 2009.
Within
|
After One
|
After Three
|
Greater
|
Total |
|||||
Unused commitments to extend credit |
$ 21,827 |
$ 1,145,154 |
$ 3,990,153 |
$ 6,906,711 |
$ 12,063,845 |
||||
Standby letters of credit |
179,695 |
- |
- |
- |
179,695 |
||||
Totals |
$ 201,522 |
$ 1,145,154 |
$ 3,990,153 |
$ 6,906,711 |
$ 12,243,540 |
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,
2008
as contained in our 2008
Annual Report to Shareholders. 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 2008
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.
Item 4T. 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, 2009, 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 I I - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held a special meeting of shareholders on September 9, 2009.
The holders of the Company's common stock voted to approve the Agreement and Plan of Merger, dated as of February 16, 2009, between the Company and 1st Financial Services Corporation, and to approve the transactions contemplated by the merger agreement, including the merger of the Company into 1st Financial and the conversion of (1) outstanding shares of the Company's common stock into the right to receive shares of 1st Financial's common stock and (2) the conversion of each outstanding share of the Company's preferred stock into the right to receive a share of 1st Financial's preferred stock. 1,708,942 shares were voted in favor of this proposal, 106,028 shares were voted against this proposal, and 933 shares abstained. There were no broker non-votes.
The holders of the Company's common stock also approved a proposal to authorize the Company's management to adjourn the special meeting for up to 120 days, if necessary, to allow additional time to solicit votes needed to approve the merger agreement. 1,692,254 shares were voted in favor of the proposal, 120,841 shares were voted against this proposal, and 2,808 shares abstained. There were no broker non-votes.
The sole shareholder of the Company's fixed rate cumulative perpetual preferred stock, series A, approved the merger agreement by written consent.
The merger agreement was subsequently terminated by the Company's board of directors on October 1, 2009.
Item 6. Exhibits
Exhibit
|
Description of Exhibit |
31 |
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a-14(a) |
32 |
Certification pursuant to 18 USC 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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 F INANCIAL C ORPORATION
(Registrant)
By: /s/ Daniel C. Ayscue
Daniel C. Ayscue
President and Chief Executive Officer
(Principal Executive Officer and Principal Financial Officer)
Date:
November 13, 2009
EXHIBIT INDEX
Exhibit
Number
Description of Exhibit
31 Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a-14(a)
32 Certification pursuant to 18 USC 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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