PINX:ABTO Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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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 March 31, 2012

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  ¨

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 May 14, 2012

 

 

 


Table of Contents

AB&T FINANCIAL CORPORATION

INDEX

 

          Page No.  
PART I – FINANCIAL INFORMATION   

Item 1.

  

Financial Statements (Unaudited)

  
  

Consolidated Balance Sheets – March 31, 2012 and December 31, 2011

     3   
  

Consolidated Statements of Operations – Three months ended March 31, 2012 and 2011

     4   
  

Consolidated Statements of Comprehensive Income (Loss) – Three months ended March 31, 2012 and 2011

     5   
  

Consolidated Statements of Changes in Shareholders’ Equity – Three months ended March 31, 2012 and 2011

     6   
  

Consolidated Statements of Cash Flows – Three months ended March 31, 2012 and 2011

     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

 

     March 31,
2012
    December 31,
2011
 
     (Unaudited)     (Audited)  

Assets

    

Cash and cash equivalents

    

Cash and due from banks

   $ 9,738,824      $ 4,890,563   

Federal funds sold

     1,138,498        5,944,001   
  

 

 

   

 

 

 

Total cash and cash equivalents

     10,877,322        10,834,564   
  

 

 

   

 

 

 

Time deposits with other banks

     3,302,847        3,300,572   

Securities available for sale at fair value

     36,219,909        36,583,896   

Nonmarketable equity securities

     1,238,280        1,187,180   
  

 

 

   

 

 

 

Total investments

     37,458,189        37,771,076   
  

 

 

   

 

 

 

Loans receivable

     158,513,230        163,039,560   

Less allowance for loan losses

     (3,338,430 )     (3,272,645 )
  

 

 

   

 

 

 

Loans, net

     155,174,800        159,766,915   

Premises, furniture and equipment, net

     3,704,563        3,741,759   

Accrued interest receivable

     629,048        686,389   

Other real estate owned

     5,423,750        5,605,042   

Other assets

     2,457,607        2,423,592   
  

 

 

   

 

 

 

Total assets

   $ 219,028,126      $ 224,129,909   
  

 

 

   

 

 

 

Liabilities

    

Deposits

    

Noninterest-bearing transaction accounts

   $ 12,420,281      $ 11,015,012   

Interest-bearing transaction accounts

     8,080,127        8,612,889   

Savings and money market

     69,257,159        72,594,258   

Time deposits $100,000 and over

     33,250,410        22,735,464   

Other time deposits

     58,183,382        71,493,309   
  

 

 

   

 

 

 

Total deposits

   $ 181,191,359      $ 186,450,932   
  

 

 

   

 

 

 

FHLB advances

     19,000,000        19,000,000   

Accrued interest payable

     82,700        77,580   

Other liabilities

     201,680        284,017   
  

 

 

   

 

 

 

Total liabilities

     200,475,739        205,812,529   
  

 

 

   

 

 

 

Shareholders’ equity

    

Preferred stock, no par value, 1,000,000 shares authorized, issued and outstanding – 3,500 at March 31, 2012 and at December 31, 2011

     3,440,610        3,434,532   

Common stock, $1.00 par value; 11,000,000 shares authorized, 2,678,205 issued at March 31, 2012 and December 31, 2011

     2,678,205        2,678,205   

Treasury stock, at cost (10,000 shares at March 31, 2012 and December 31, 2011)

     (55,600 )     (55,600 )

Warrants

     136,850        136,850   

Capital surplus

     21,940,640        21,912,257   

Retained deficit

     (9,619,304 )     (9,820,211 )

Accumulated other comprehensive income

     30,986        31,347   
  

 

 

   

 

 

 

Total shareholders’ equity

     18,552,387        18,317,380   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 219,028,126      $ 224,129,909   
  

 

 

   

 

 

 

See notes to consolidated financial statements

 

-3-


Table of Contents

AB&T FINANCIAL CORPORATION

Consolidated Statements of Operations

(Unaudited)

 

     For the three months ended
March 31
 
     2012      2011  

Interest income:

     

Loans, including fees

   $ 1,848,490       $ 1,806,883   

Investment securities, taxable

     175,020         84,865   

FHLB, interest and dividends

     3,387         2,480   

Federal funds sold

     4,108         6,452   

Time deposits with other banks

     5,694         3,098   
  

 

 

    

 

 

 

Total

     2,036,699         1,903,778   
  

 

 

    

 

 

 

Interest expense:

     

Time deposits $100,000 and over

     147,995         115,581   

Other deposits

     276,669         305,471   

Other interest expense

     83,786         61,960   
  

 

 

    

 

 

 

Total

     508,450         483,012   
  

 

 

    

 

 

 

Net interest income

     1,528,249         1,420,766   

Provision (recovery) for loan losses

     184,998         (877,138
  

 

 

    

 

 

 

Net interest income after provision (recovery) for loan losses

     1,343,251         2,297,904   
  

 

 

    

 

 

 

Other operating income:

     

Service charges on deposit accounts

     120,483         81,595   

Gain on sale of loans

     9,870         —     

Gain on sale of investment securities

     38,841         —     

Other service charges, commissions and fees

     92,375         14,796   
  

 

 

    

 

 

 

Total

     261,569         96,391   
  

 

 

    

 

 

 

Other operating expenses:

     

Salaries and employee benefits

     697,614         661,664   

Occupancy expense

     45,783         52,983   

Furniture and equipment expense

     54,724         13,452   

HELOC pool purchase discount

     —           1,002,136   

Other real estate expenses

     79,967         166,293   

Loss on sale and write down of other real estate

     31,309         —     

Deposit insurance premium

     105,000         108,780   

Other operating expenses

     383,436         361,461   
  

 

 

    

 

 

 

Total

     1,397,833         2,366,769   
  

 

 

    

 

 

 

Income before income taxes

     206,987         27,526   

Income tax expense

     —           10,844   

Net income

   $ 206,987       $ 16,682   
  

 

 

    

 

 

 

Accretion of preferred stock to redemption value

     6,078         6,078   

Preferred stock dividends (accrued)

     43,750         43,750   
  

 

 

    

 

 

 

Net income (loss) available to common shareholders

   $ 157,159       $ (33,146 )
  

 

 

    

 

 

 

Income (Loss) per common share

     

Basic income (loss) per common share

   $ 0.06       $ (0.01 )
  

 

 

    

 

 

 

Diluted income (loss) per common share

   $ 0.06       $ (0.01 )
  

 

 

    

 

 

 

See notes to consolidated financial statements

 

-4-


Table of Contents

AB&T FINANCIAL CORPORATION

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

 

     For the three months
ended

March 31
 
     2012     2011  

Net Income

   $ 206,987      $ 16,682   

Other comprehensive income (loss):

    

Unrealized holding gains (losses) on securities available for sale

     38,480        (27,929 )

Reclassification of (gains) losses recognized in net income

     (38,841 )     —     

Income tax benefit (expense)

     —          10,878   
  

 

 

   

 

 

 

Total other comprehensive income (loss)

     (361 )     (17,051 )
  

 

 

   

 

 

 

Comprehensive income (loss)

   $ 206,626      $ (369 )
  

 

 

   

 

 

 

 

-5-


Table of Contents

AB&T FINANCIAL CORPORATION

Consolidated Statements of Changes in Shareholders’ Equity

For the three months ended March 31, 2012 and 2011

(dollars in thousands except for share data)

(Unaudited)

 

    Common Stock     Preferred
Stock
    Treasury
Stock
          Capital
Surplus
    Accumulated
Other
Comprehensive
Income
(Loss)
    Retained
Deficit
       
    Shares     Amount     Shares     Amount       Warrants           Total  

Balance, December 31, 2010

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

Net income

                    16        16   

Other comprehensive loss, net of tax

                  (17       (17

Accretion of preferred stock to redemption value

          6                (6     —     

Dividends paid, preferred

                (43         (43

Stock-based employee compensation

                46            46   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance March 31, 2011

    2,678,205      $ 2,678        3,500      $ 3,416      $ (56   $ 137      $ 21,790      $ (79   $ (6,530   $ 21,356   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2011

    2,678,205      $ 2,678        3,500      $ 3,435      $ (56   $ 137      $ 21,912      $ 31      $ (9,820   $ 18,317   

Net income

                    207        207   

Other comprehensive income, net of tax

                  (1       (1

Accretion of preferred stock to redemption value

          6                (6     —     

Stock-based employee compensation

                29            29   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance March 31, 2012

    2,678,205      $ 2,678        3,500      $ 3,441      $ (56   $ 137      $ 21,941      $ 30      $ (9,619   $ 18,552   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements

 

-6-


Table of Contents

AB&T FINANCIAL CORPORATION

Consolidated Statements of Cash Flows

For the three months ended March 31, 2012 and 2011

(Unaudited)

 

     For the three months ended
March 31,
 
     2012     2011  

Cash flows from operating activities:

    

Net income

   $ 206,987      $ 16,682   

Adjustments to reconcile net income to net cash provided by operating activities

    

Provision (recovery) for loan losses

     184,998        (877,138 )

Loss (gain) on sale of other real estate

     31,309        (3,158 )

Gain on sale of investment securities

     (38,841 )     —     

Gain on sale of loans

     (9,870 )     —     

Depreciation and amortization expense

     46,372        44,175   

Discount accretion and premium amortization

     104,953        57,048   

(Increase) decrease in interest receivable

     57,341        (133,656 )

Increase in interest payable

     5,120        8,921   

(Increase) decrease in other assets

     (33,786 )     64,665   

Decrease in other liabilities

     (82,337 )     (167,668 )

Discount on purchased loans

     —          1,002,136   

Stock based compensation expense

     28,383        46,104   
  

 

 

   

 

 

 

Net cash provided by operating activities

     500,629        58,111   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchase of securities available for sale

     (4,990,085 )     (1,107,865 )

Calls and maturities of securities available for sale

     1,111,103        751,880   

Net decrease (increase) in loans receivable

     3,822,245        (29,132,425 )

Proceeds from sale of loans

     465,550        4,058,458  

Proceeds from sale of available for sale securities

     4,176,265        514,943   

Purchase of time deposits in other banks

     (2,275     (2,683

Purchase of equity securities

     (51,100     —     

Proceeds from sale of other real estate

     294,145        725,353   

Capitalized other real estate expenses

     (14,970 )     (375,823 )

Purchases of premises, furniture, and equipment

     (9,176 )     (9,114 )
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     4,801,702        (24,577,276 )
  

 

 

   

 

 

 

Cash flows from financing activities:

    

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

     (2,464,592     11,496,348   

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

     (2,794,981 )     25,863,822   

Repayment of borrowed funds and FHLB advances

     —          (5,640,597 )

Dividends paid

     —          (43,750 )
  

 

 

   

 

 

 

Net cash (used) provided by financing activities

     (5,259,573 )     31,675,823   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     42,758        7,161,036   

Cash and cash equivalents, beginning of period

     10,834,564        8,075,241   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 10,877,322      $ 15,236,277   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Transfer of loans to real estate acquired in settlement of loans

   $ 129,192      $ —     
  

 

 

   

 

 

 

Interest paid

   $ 503,330      $ 474,091   
  

 

 

   

 

 

 

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 – Enforcement Action

Effective February 1, 2012, the Bank stipulated to the issuance of a Consent Order (the “Order”) issued by the Federal Deposit Insurance Corporation (FDIC) and the North Carolina Commissioner of Banks (the “Commissioner”). Although the Bank neither admitted nor denied any unsafe or unsound banking practices or violations of law or regulation, it agreed to the Order, which under the terms of the Order, the Bank is required, among other things, to do the following: increase Board participation in the affairs of the Bank and establish a program to oversee compliance with the Order; ensure that the Bank has and retains qualified management and develop a written management plan based upon the findings of an independent third party management assessment; achieve and maintain (i) a total risk based capital ratio of at least 11%, and (ii) a Tier 1 leverage ratio of at least 8%; charge off all assets classified as “Loss” and 50% of those assets classified as “Doubtful;” develop a comprehensive policy for determining the adequacy of the Bank’s ALLL; formulate a plan to reduce the risk exposure for each asset or relationship in excess of $250,000 classified as “Substandard” or “Doubtful;” refrain from extending credit to any borrower whose extension of credit has been, in whole or in part, charged-off or classified as “Loss” or “Doubtful” and is uncollected; refrain from extending credit to any borrower who has a loan or other extension of credit from the Bank that has been classified as “Substandard;” perform a risk segmentation analysis on and develop a written plan to systematically reduce and monitor the Bank’s concentration of credit in revolving 1–4 family residential property loans; review and revise its loan review and grading system; review and revise the Bank’s strategic plan and comprehensive budget; review and revise its liquidity, contingent funding and asset liability management plan; develop and implement a written policy for interest rate management; and eliminate and/or correct all violations of rules and regulations noted by the Bank’s regulators.

The Order further prohibits the Bank from declaring or paying dividends or bonuses without prior regulatory approval. The Bank may not accept, renew, or roll over any brokered deposits unless it is in compliance with FDIC regulations governing brokered deposits. Furthermore, while the Consent Order is in effect, the Bank must notify its regulators at least sixty days prior to undertaking asset growth that exceeds 10% or more per year.

The Company intends to take all actions necessary to enable the Bank to comply with the requirements of the Consent Order. There can be no assurance that the Bank will be able to comply fully with the provisions of the Consent Order, and the determination of our compliance will be made by the FDIC and the Commissioner. Failure to meet the requirements of the Consent Order could result in additional regulatory action.

Quarterly written progress reports to the FDIC and Commissioner are required by the Order.

Due to the Bank’s recent receipt of the Consent Order, the Bank is not in compliance with its terms as of the filing date of these financial statements. However management and the Board are aggressively working to fulfill the terms of the agreement.

On May 7, 2012 as a follow on the Order, the Company entered into a formal agreement with the Federal Reserve Bank of Richmond. A form 8-K was filed on May 11, 2012, with a copy of the formal agreement.

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 2011 Annual Report on Form 10-K. The financial statements as of March 31, 2012 and for the interim periods ended March 31, 2012 and 2011 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, 2011 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 2011 Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 9, 2012.

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.

Certain amounts in the 2011 consolidated financial statements were reclassified to conform to the 2012 presentation. These reclassifications had no effect on shareholders’ equity or results of operations as previously presented.

Note 4 – 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 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 were effective for the Company on January 1, 2012 and had no effect on the financial statements.

 

-8-


Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 4 – Recently Issued Accounting Pronouncements continued

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 were effective for the Company beginning January 1, 2012 and the additional disclosures are reflected in Note 6 of the consolidated 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 were effective for the Company on January 1, 2012 and are 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.

 

-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 month periods ended March 31, 2012 and 2011.

 

     Three months ended March 31, 2012  
     Income
(Numerator)
    Shares
(Denominator)
     Per Share
Amount
 

Basic income per share

       

Income available to common shareholders

   $ 157,159        2,668,205       $ 0.06   

Effect of dilutive securities

       

Stock options

     —          —        
  

 

 

   

 

 

    

 

 

 

Dilutive income per share

       

Income available to common shareholders plus assumed conversions

   $ 157,159        2,668,205       $ 0.06   
  

 

 

   

 

 

    

 

 

 
     Three months ended March 31, 2011  
     Income
(Numerator)
    Shares
(Denominator)
     Per Share
Amount
 

Basic loss per share

       

Loss available to common shareholders

   $ (33,146     2,668,205       $ (0.01

Effect of dilutive securities

       

Stock options

     —          —        
  

 

 

   

 

 

    

 

 

 

Dilutive loss per share

       

Loss available to common shareholders plus assumed conversions

   $ (33,146     2,668,205       $ (0.01
  

 

 

   

 

 

    

 

 

 

 

-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 March 31, 2012:

 

     Quoted
market price
in active
markets
(Level 1)
     Significant
other
observable
inputs
(Level 2)
     Significant
unobservable
inputs
(Level 3)
 

Available for sale investments:

        

U.S. Agency securities

   $ —         $ 19,020,302       $ —     

Mortgage-backed securities

        17,199,607      
  

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 36,219,909       $ —     
  

 

 

    

 

 

    

 

 

 

Assets measured at fair value on a recurring basis are as follows as of December 31, 2011:

 

     Quoted
market price
in active
markets
(Level 1)
     Significant
other
observable
inputs
(Level 2)
     Significant
unobservable
inputs
(Level 3)
 

Available for sale investments:

        

U.S. Agency securities

   $ —         $ 14,447,699       $ —     

Mortgage-backed securities

     —           22,136,197         —     
  

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 36,583,896       $ —     
  

 

 

    

 

 

    

 

 

 

The Company had no liabilities carried at fair value or measured at fair value on a recurring basis at March 31, 2012 or December 31, 2011.

 

-11-


Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 6 – Fair Value Measurements (continued)

 

The Company had no liabilities carried at fair value or measured at fair value on a non-recurring basis at March 31, 2012 or December 31, 2011.

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 3 inputs. Appraisals are updated annually, and adjusted downward for estimated selling costs.

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of March 31, 2012, the significant unobservable inputs used in the fair value measurements were as follows:

 

     Fair Value at
March 31, 2012
     Valuation
Technique
   Significant
Unobservable
Inputs
   Significant
Unobservable
Input Value

Impaired Loans

   $  24,674,847       Appraised Value/
Discounted Cash Flows/
   Appraisals and/or sales of
comparable properties/
Independent quotes
   n/a

OREO

   $ 5,423,750       Appraised Value/
Comparable Sales/
Other Estimates from
Independent Sources
   Appraisals and/or sales of
comparable properties/
Independent quotes/bids
   n/a

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of December 31, 2011, the significant unobservable inputs used in the fair value measurements were as follows:

 

     Fair Value at
December 31, 2011
     Valuation
Technique
   Significant
Unobservable
Inputs
   Significant
Unobservable
Input Value

Impaired Loans

   $ 24,312,809       Appraised Value/
Discounted Cash Flows/
   Appraisals and/or sales of
comparable properties/
Independent quotes
   n/a

OREO

   $ 5,605,042       Appraised Value/
Comparable Sales/
Other Estimates from
Independent Sources
   Appraisals and/or sales of
comparable properties/
Independent quotes/bids
   n/a

 

-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 3 inputs.

Level 3 Valuation Methodologies

Impaired loans are loans recorded at fair value less estimated selling costs. Once a loan is identified as individually impaired, the Company measures impairment. The fair value of impaired loans is estimated using one of several methods, including collateral value and discounted cash flows and, in rare cases, the market value of the note. Those impaired loans not requiring an allowance represent loans for which the net present value of the expected cash flows or fair value of the collateral less costs to sell exceed the recorded investments in such loans. At March 31, 2012 and December 31, 2011, a majority of the total impaired loans were evaluated based on the fair value of the collateral. When the fair value of the collateral is based on an executed sales contract with an independent third party, the Company records the impaired loans as nonrecurring Level 1. If the collateral is based on another observable market price or a current appraised value, the Company records the impaired loans as nonrecurring Level 2. When an appraised value is not available or the Company determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3. Impaired loans can also be evaluated for impairment using the present value of expected future cash flows discounted at the loan’s effective interest rate. The measurement of impaired loans using future cash flows discounted at the loan’s effective interest rate rather than the market rate of interest is not a fair value measurement and is therefore excluded from fair value disclosure requirements. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly.

Foreclosed real estate and repossessed personal property. Foreclosed real estate and repossessed personal property is carried at the lower of carrying value or fair value less estimated selling costs. Fair value is generally based upon current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, adjusted for selling costs. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the asset as nonrecurring Level 2. However, the Company also considers other factors or recent developments which could result in adjustments to the collateral value estimates indicated in the appraisals such as changed in absorption rates or market conditions from the time of valuation. In situations where management adjustments are significant to the fair value measurements in its entirety, such measurements are classified as Level 3 within the valuation hierarchy.

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of March 31, 2012 and December 31, 2011. This table excludes financial instruments for which the carrying amount approximates fair value. For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization. For financial liabilities such as noninterest-bearing demand, interest-bearing demand, and savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity.

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 March 31, 2012, and December 31, 2011 are not carried at fair value in its entirety on the Company’s Consolidated Balance Sheet.

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 March 31, 2012 and December 31, 2011 were as follows:

 

                   Fair Value Measurements  
(dollars in thousands)    Carrying
Amount
     Fair Value      Quoted
Prices in
Active Markets
for Identical
Assets or
Liabilities
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

March 31, 2012

              

Financial Instruments - Assets

              

Loans

   $ 155,175       $ 148,492       $ —         $ —         $ 148,492   

Financial Instruments – Liabilities

              

Total Deposits

     181,191         181,003         —           181,003         —     

FHLB advances

     19,000         19,198         —           19,198         —     

December 31, 2011

              

Financial Instruments - Assets

              

Loans

   $ 159,767       $ 157,293       $         $ —         $ 157,293   

Financial Instruments – Liabilities

              

Total Deposits

     186,451         186,086         —           186,086         —     

FHLB advances

     19,000         19,338         —           19,338         —     

Note 8 – Investment Securities

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

 

     Amortized
Cost
     Gross Unrealized      Estimated
Fair Value
 
        Gains      Losses     

March 31, 2012

           

U.S. Government agency securities

   $ 17,221,730       $ 13,532       $ 35,655       $ 17,199,607   

Mortgage-backed securities

     18,947,031         138,894         65,623         19,020,302   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 36,168,761       $ 152,426       $ 101,278       $ 36,219,909   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

           

U.S. Government agency securities

   $ 14,459,782       $ 15,842       $ 27,925       $ 14,447,699   

Mortgage-backed securities

     22,072,375         98,033         34,211         22,136,197   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 36,532,157       $ 113,875       $ 62,136       $ 36,583,896   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following is a summary of maturities of securities available for sale as of March 31, 2012. 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

   $ 130,537       $ 130,917   

Due after one year but within five years

     9,767,705         9,784,908   

Due after five years but within ten years

     12,570,432         12,589,464   

Due after ten years

     13,700,087         13,714,620   
  

 

 

    

 

 

 
   $ 36,168,761       $ 36,219,909   
  

 

 

    

 

 

 

 

-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 March 31, 2012 and December 31, 2011.

 

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

March 31, 2012

                 

U.S. Government agency securities

   $ 7,919,493       $ 35,655       $ —         $ —         $ 7,919,493       $ 35,655   

Mortgage-backed securities

     5,820,281         60,752         550,137         4,871         6,370,418         65,623   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 13,739,774       $ 96,407       $ 550,137       $ 4,871       $ 14,289,911       $ 101,278   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

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

December 31, 2011

                 

U.S. Government agency securities

   $ 6,364,844       $ 27,925       $ 240,914       $ 2,241       $ 6,605,758       $ 30,166   

Mortgage-backed securities

     5,204,043         31,970         —           —           5,204,043         31,970   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 11,568,887       $ 59,895       $ 240,914      $ 2,241       $ 11,809,801       $ 62,136   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Securities classified as available-for-sale are recorded at fair market value. Securities in a continuous loss position for twelve months or more at March 31, 2012, consisted of two securities. Of the securities in an unrealized loss position as of March 31, 2012, 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.

Proceeds from sales of available for sale securities totaled $4,176,265 for the three months ended March 31, 2012, resulting in gross gains of $38,841. Proceeds from sales of available for sale securities totaled $514,943 for the three months ended March 31, 2011.

Note 8 – Loans Receivable

Major classifications of loans receivable at March 31, 2012 and December 31, 2011 are summarized as follows:

 

     2012      2011  

Real estate – construction

   $ 13,998,775       $ 14,388,838   

Real estate – commercial

     59,221,710         61,432,346   

Real estate – residential

     64,284,547         65,843,085   

Commercial and industrial

     20,178,709         20,827,193   

Consumer and other

     829,489         548,098   
  

 

 

    

 

 

 

Total gross loans

   $ 158,513,230       $ 163,039,560   
  

 

 

    

 

 

 

 

-15-


Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 8 – Loans Receivable (continued)

 

As of March 31, 2012 and December 31, 2011, loans individually evaluated and considered impaired were as follows:

 

     2012      2011  

Total loans considered impaired at period end

   $ 24,674,847       $ 24,312,809   

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

     

Outstanding loan balance

     11,294,205         11,549,090   

Related allowance established

     1,588,526         1,524,967   

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

     13,380,642         12,763,719   

Average annual investment in impaired loans

     28,862,561         29,156,825   

Interest income recognized on impaired loans

     

During the period of impairment

     

Cash basis

     916,945         757,680   

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 March 31, 2012:

 

     Real Estate     

Commercial and

Industrial

    

Consumer

and Other

               
     Construction      Commercial      Residential            Unallocated      Total  

Allowance for loan and lease losses:

                    

Ending balance attributable to loans:

                    

Individually evaluated for impairment

   $ 394,043       $ 596,117       $ 501,312       $ 97,054       $ —         $ —         $ 1,588,526   

Collectively evaluated for impairment

     180,800         477,913         490,367         424,931         5,616         170,277         1,749,904   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 574,843       $ 1,074,030       $ 991,679       $ 521,985       $ 5,616       $ 170,277       $ 3,338,430   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                    

Loans individually evaluated for impairment

   $ 4,959,234       $ 12,753,807       $ 6,266,857       $ 677,684       $ 17,265       $ —         $ 24,674,847   

Loans collectively evaluated for impairment

     9,039,541         46,467,903         35,034,517         19,501,025         812,224         —           110,855,210   

Loans acquired with deteriorated credit quality

     —           —           22,983,173         —           —           —           22,983,173   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 13,998,775       $ 59,221,710       $ 64,284,547       $ 20,178,709       $ 829,489       $ —         $ 158,513,230   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

-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, 2011:

 

     Real Estate      Commercial      Consumer                
     Construction      Commercial      Residential      and Industrial      and Other      Unallocated      Total  

Allowance for loan and lease losses:

                    

Ending balance attributable to loans:

                    

Individually evaluated for impairment

   $ 237,212       $ 623,884       $ 566,818       $ 97,053       $ —         $ —         $ 1,524,967   

Collectively evaluated for impairment

     190,831         375,375         537,799         455,406         6,266         182,001         1,747,678   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 428,043       $ 999,259       $ 1,104,617       $ 552,459       $ 6,266       $ 182,001       $ 3,272,645   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                    

Loans individually evaluated for impairment

   $ 5,151,906       $ 12,559,956       $ 5,865,347       $ 716,852       $ 18,748       $ —         $ 24,312,809   

Loans collectively evaluated for impairment

     9,236,932         48,872,390         36,449,125         20,110,341         529,350         —           115,198,138   

Loans acquired with deteriorated credit quality

     —           —           23,528,613         —           —           —           23,528,613   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 14,388,838       $ 61,432,346       $ 65,843,085       $ 20,827,193       $ 548,098       $ —         $ 163,039,560   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents loans individually evaluated for impairment as of March 31, 2012:

 

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

With no related allowance recorded:

              

Commercial and industrial

   $ 121,941       $ 121,941       $ —         $ 129,737       $ 3,262   

Consumer & other

     17,265         17,265         —           18,394         121   

Real estate:

              

Construction

     2,523,735         2,523,735         —           2,820,258         63,417   

Mortgage – residential

     4,951,199         3,784,281         —           4,915,441         142,299   

Mortgage – commercial

     8,077,500         6,933,420         —           9,152,747         156,666   

With an allowance recorded:

              

Commercial and industrial

     555,743         555,743         97,054         573,713         11,060   

Real estate:

              

Construction

     2,435,499         2,435,499         394,043         2,439,767         67,137   

Mortgage – residential

     2,482,576         2,482,576         501,312         2,579,673         254,551   

Mortgage – commercial

     5,820,387         5,820,387         596,117         6,232,831         218,432   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 26,985,845       $ 24,674,847       $ 1,588,526       $ 28,862,561       $ 916,945   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents loans individually evaluated for impairment as of December 31, 2011:

 

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

With no related allowance recorded:

              

Commercial and industrial

   $ 132,854       $ 132,854       $ —         $ 164,197       $ 7,155   

Consumer & other

     18,748         18,748         —           21,603         1,379   

Real estate:

              

Construction

     2,470,326         2,470,327         —           2,752,629         118,664   

Mortgage – residential

     4,481,501         3,314,583         —           4,461,693         105,621   

Mortgage – commercial

     7,971,288         6,827,208         —           9,427,284         323,105   

With an allowance recorded:

              

Commercial and industrial

     583,998         583,998         97,053         600,966         9,032   

Real estate:

              

Construction

     2,681,579         2,681,579         237,212         2,689,031         44,557   

Mortgage – residential

     2,550,764         2,550,764         566,818         2,646,315         10,757   

Mortgage – commercial

     5,732,748         5,732,748         623,884         6,393,107         137,410   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 26,623,806       $ 24,312,809         1,524,967       $ 29,156,825       $ 757,680   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

-17-


Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 8 – Loans Receivable (continued)

 

Transactions in the allowance for loan losses for the three months ended March 31, 2012 are summarized as follows:

 

     Real Estate                          
     Construction      Commercial     Residential     Commercial
and
Industrial
    Consumer
and Other
    Unallocated     Total  

Balance, beginning of year

   $ 428,043       $ 999,259      $ 1,104,617      $ 552,459      $ 6,266      $ 182,001      $ 3,272,645   

Provision charged to operations

     144,582         87,858        (6,584 )     (30,473     1,340        (11,725     184,998   

Recoveries

     2,218        —          1,319        —          25,194        —          28,731   

Charge-offs

     —           (13,087 )     (107,673 )     —          (27,184 )     —          (147,944 )
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of year

   $ 574,843       $ 1,074,030      $ 991,679      $ 521,986      $ 5,616      $ 170,276      $ 3,338,430   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Transactions in the allowance for loan losses for the three months ended March 31, 2011 are summarized as follows:

 

     Real Estate                           
     Construction     Commercial     Residential     Commercial
and
Industrial
     Consumer
and 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 (1)

     (480,910 )     (7,894 )     (373,696 )     59,569         25,468        (99,675 )     (877,138 )

Recoveries

     —          —          —          1,166         22,008        —          23,174   

Charge-offs

     —          —          (10,639 )     —           (34,152 )     —          (44,791 )
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance, end of year

   $ 652,270      $ 1,524,492      $ 1,306,515      $ 697,362       $ 20,000      $ 126,520      $ 4,327,159   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

(1) Amount is net of the reversal of $1,046,479 specific reserves which were recorded on loans sold in conjunction with the HELOC portfolio acquisition. Of the total amount $777,246 related to real estate construction loans and $269,233 related to residential real estate loans.

 

-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 March 31, 2012 and December 31, 2011:

 

     March 31, 2012      December 31, 2011  
     Nonaccrual      Accruing loans
delinquent  for 90
days or more
     Nonaccrual      Accruing loans
delinquent  for 90
days or more
 

Commercial and industrial

   $ 206,703       $ —         $ 218,676       $ —     

Real estate:

           

Construction

     4,398,655         —           3,485,061         —     

Mortgage – residential

     4,066,767         138,787         4,164,644         —     

Mortgage – commercial

     6,848,863         —           4,339,334         —     

Consumer & other

     6,384         —           6,895         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15,527,372       $ 138,787       $ 12,214,610       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the aging of the recorded investment in past due loans and leases as of March 31, 2012:

 

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

Commercial and industrial

   $ 107,074       $ —         $ 206,703       $ 313,777       $ 19,864,932       $ 20,178,709   

Real estate:

                 

Construction

     —           —           4,398,655         4,398,655         9,600,120         13,998,775   

Mortgage – residential

     808,076         138,787         4,066,767         5,013,630         59,270,917         64,284,547   

Mortgage – commercial

     336,252         —           6,848,863         7,185,115         52,036,595         59,221,710   

Consumer & other

     —           —           6,384         6,384         823,105         829,489   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,251,402       $ 138,787       $ 15,527,372       $ 16,917,561       $ 141,595,669       $ 158,513,230   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the aging of the recorded investment in past due loans and leases as of December 31, 2011:

 

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

Commercial and industrial

   $ 27,499       $ —         $ 218,676       $ 246,175       $ 20,581,018       $ 20,827,193   

Real estate:

                 

Construction

     470,688         —           3,485,061         3,955,749         10,433,089         14,388,838   

Mortgage – residential

     249,040         —           4,164,644         4,413,684         61,429,401         65,843,085   

Mortgage – commercial

     654,801         —           4,339,334         4,994,135         56,438,211         61,432,346   

Consumer & other

     3,799         —           6,895         10,694         537,404         548,098   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,405,827       $ —         $ 12,214,610       $ 13,620,437       $ 149,419,123       $ 163,039,560   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

-19-


Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 8 – Loans Receivable continued

 

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 March 31, 2012 and December 31, 2011, the risk category of loans and leases is as follows:

March 31, 2012

 

     Pass      Special
Mention
     Substandard      Doubtful      Loss      Total  

Commercial and industrial

   $ 15,908,245       $ 3,893,505       $ 376,959       $ —         $ —         $ 20,178,709   

Real estate:

                 

Construction

     7,997,411         1,136,916         4,864,448         —           —           13,998,775   

Mortgage – residential

     54,569,672         3,928,459         5,786,416         —           —           64,284,547   

Mortgage – commercial

     40,306,051         9,017,171         9,898,488         —           —           59,221,710   

Consumer & other

     802,309         9,915         17,265         —           —           829,489   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 119,583,688       $ 17,985,966       $ 20,943,576       $ —         $ —         $ 158,513,230   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

 

     Pass      Special
Mention
     Substandard      Doubtful      Loss      Total  

Commercial and industrial

   $ 16,442,783       $ 3,992,117       $ 392,293       $ —         $ —         $ 20,827,193   

Real estate:

                 

Construction

     6,661,777         2,671,055         5,056,006         —           —           14,388,838   

Mortgage – residential

     55,509,327         4,952,469         5,381,288         —           —           65,843,084   

Mortgage – commercial

     45,775,112         5,955,956         9,701,279         —           —           61,432,347   

Consumer & other

     518,579         10,771         18,748         —           —           548,098   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 124,907,578       $ 17,582,368       $ 20,549,614       $ —         $ —         $ 163,039,560   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At March 31, 2012 and December 31, 2011, the Company does not have loans defined as subprime.

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 unpaid principal balance 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 obtained a third party valuation of the assets and 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 eliminate $1,046,479 in recorded specific loan loss reserves. As of March 31, 2012 the bank held $986,981 in cash reserves against any future loan defaults. As such, there is no additional allowance provided for the HELOC portfolio. The Bank reviews the sufficiency of the cash reserves on a quarterly basis to determine if an additional provision for loan loss should be recorded for probable losses in the portfolio.

 

-20-


Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

 

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 year of adoption (December 31, 2011), the recorded investment in loans for which the allowance was previously measured under a general allowance methodology and were then impaired under ASC 310-10-35 was $9,892,503, and the allowance for loan losses associated with those loans, on the basis of a current evaluation of loss was $381,039. During the year ended December 31, 2011, the Bank charged $494,997 to the allowance relating to impairment charges on restructured loans. No additional impairment charges were incurred during the three months ended March 31, 2012.

There were no loans modified during the twelve months preceding March 31, 2012 classified as troubled debt restructurings. The Bank only modifies loans that are considered troubled debt restructurings, as no such loans were modified during the stated time period. Restructured loans must perform for six months prior to being returned to accrual status.

The following table, by loan category, presents loans determined to be troubled debt restructurings as of December 31, 2011 which defaulted during the quarter ended March 31, 2012.

 

     Three months ended
March 31, 2012
 
     Number
of Contracts
     Recorded Investment  

Troubled Debt Restructurings

     

That Subsequently Defaulted

     

During the Period:

     

Commercial and industrial

     —         $ —     

Consumer and other

     —           —     

Real estate:

     

Construction

     1         872,581   

Mortgage - residential

     2         2,415,920   

Mortgage - commercial

     —           —     
  

 

 

    

 

 

 
     3       $ 3,288,501   
  

 

 

    

 

 

 

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 original contractual terms of the loan agreement.

 

     As of March 31, 2012  
    

Number of

Contracts

    

Recorded

Investment

 

Troubled Debt Restructurings at Period End:

     

Accruing:

     

Commercial and industrial

     2       $ 381,583   

Consumer and other

     —           —     

Real estate:

     

Construction

     —           —     

Mortgage - residential

     1         254,115   

Mortgage - commercial

     2         2,855,319   
  

 

 

    

 

 

 

Total

     5         3,491,017   
  

 

 

    

 

 

 

Nonaccruing:

     

Commercial and industrial

     1         27,264   

Consumer and other

     1         6,384   

Real estate:

     

Construction

     2         1,131,573   

Mortgage - residential

     3         810,698   

Mortgage - commercial

     6         4,633,121   
  

 

 

    

 

 

 

Total

     13         6,609,040   
  

 

 

    

 

 

 

Total Troubled Debt Restructurings

     18       $ 10,100,057   
  

 

 

    

 

 

 

 

-21-


Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 9 – Troubled Debt Restructures continued

 

     As of December 31, 2011  
    

Number of

Contracts

    

Recorded

Investment

 

Troubled Debt Restructurings at Period End:

     

Accruing:

     

Commercial and industrial

     3       $ 406,567   

Consumer other

     —           —     

Real estate:

     

Construction

     1         872,581   

Mortgage - residential

     1         254,115   

Mortgage - commercial

     4         5,274,597   
  

 

 

    

 

 

 

Total

     9         6,807,860   
  

 

 

    

 

 

 

Nonaccruing:

     

Commercial & Industrial

     1         27,984   

Consumer & other

     1         6,895   

Real estate:

     

Construction

     1         258,991   

Mortgage - residential

     3         811,929   

Mortgage - commercial

     4         1,978,844   

Total

     10       $ 3,084,643   
  

 

 

    

 

 

 

Total Troubled Debt Restructurings

     19       $ 9,892,503   
  

 

 

    

 

 

 

 

-22-


Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 10 – 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 $175,000. 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 March 31, 2012 compared to December 31, 2011, and the results of operations for the three month periods ended March 31, 2012 and 2011. 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 2011 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.

Because the Company has no separate operations and conducts no business on its own other than owning Alliance Bank & Trust Company (the “Bank”), the discussion contained in this Management’s Discussion and Analysis concerns primarily the business of the Bank. However, for ease of reading and because the financial statements are presented on a consolidated basis, the Company and the Bank are collectively referred to herein as “the Company” unless otherwise noted.

The Company’s wholly owned subsidiary, Alliance Bank & Trust Company (the “Bank”), entered into a Stipulation to the Issuance of a Consent Order (the “Stipulation”) with the Federal Deposit Insurance Corporation (the “FDIC”) and the North Carolina Office of the Commissioner of Banks (the “Commissioner”) and the FDIC and the Commissioner issued the related Consent Order (the “Order”), effective February 1, 2012. The description of the Stipulation and the Order set forth below is qualified in its entirety by reference to the Stipulation and the Order, copies of which are filed herewith as exhibits 10.1 and 10.2, respectively, and incorporated herein by reference.

Management. The Bank is required to assess management’s ability to (1) comply with the requirements of the Order; (2) operate the Bank in a safe and sound manner; (3) comply with all applicable laws and regulations; and (4) improve the Bank’s asset quality, capital adequacy, earnings, management effectiveness, risk management, liquidity, and sensitivity to market risk. To assist with this assessment, the Bank must retain a consultant to develop a written analysis and assessment of the Bank’s management needs within 30 days of the effective date of the Order. The consultant’s management report must be developed within 60 days from the effective date of the Order. Within 30 days from receipt of the management report, the Bank must formulate a written management plan that incorporates the findings of the management report, a plan of action in response to each recommendation contained in the management report, and a time frame for completing each action.

Capital Requirements. While the Order is in effect, the Bank must maintain a leverage ratio (the ratio of Tier 1 capital to total assets) of at least 8% and a total risk-based capital ratio (the ratio of qualifying total capital to risk-weighted assets) of at least 11%. If either of these capital ratios is below the required levels as of the date of any call report or regulatory examination, the Bank must, within 30 days from receipt of a written notice of capital deficiency from its regulators, present a plan to increase capital to meet the requirements of the Order.

Charge-Offs, Credits. The Order requires that the Bank eliminate from its books, by charge-off or collection, all assets or portions of assets classified “loss” and 50% of those assets classified “doubtful.” If an asset is classified “doubtful,” the Bank may alternatively charge off the amount that is considered uncollectible in accordance with the Bank’s written analysis of loan or lease impairment. The Order also prevents the Bank from extending, directly or indirectly, any additional credit to, or for the benefit of, any borrower who has a loan or other extension of credit from the Bank that has been charged off or classified, in whole or in part, “loss” or “doubtful” and is uncollected. The Bank may not extend, directly or indirectly, any additional credit to any borrower who has a loan or other extension of credit from the Bank that has been classified “substandard.” These limitations do not apply if the Bank’s failure to extend further credit to a particular borrower would be detrimental to the best interests of the Bank.

Allowance for Loan and Lease Losses. Within 60 days of the effective date of the Order, the board of directors must review the adequacy of the allowance for loan and lease losses (the “ALLL”) and establish a policy for determining the adequacy of the ALLL.

Concentrations of Credit. Within 90 days from the effective date of the Order, the Bank must perform a risk segmentation analysis with respect to its concentrations of credit and must develop a written plan for systematically reducing and monitoring the Bank’s concentration of credit in revolving 1–4 family residential property loans to an amount commensurate with the Bank’s business strategy, management, expertise, size, and location.

Asset Growth. While the Order is in effect, the Bank must notify its regulators at least 60 days prior to undertaking asset growth that exceeds 10% or more per year or initiating material changes in asset or liability composition. The Bank’s asset growth cannot result in noncompliance with the capital maintenance provisions of the Order unless the Bank receives prior written approval from its regulators.

Restriction on Dividends and Other Payments. While the Order is in effect, the Bank cannot declare or pay dividends, pay bonuses, or pay any form of payment outside the ordinary course of business resulting in a reduction of capital without the prior written approval of its regulators. In addition, the Bank cannot make any distributions of interest, principal, or other sums on subordinated debentures without prior regulatory approval.

Brokered Deposits. The Order provides that the Bank may not accept, renew, or roll over any brokered deposits unless it is in compliance with the requirements of the FDIC regulations governing brokered deposits.

Loan Review. Within 60 days from the effective date of the Order, the Bank must review and revise its internal loan review and grading system to provide for the effective periodic review of the Bank’s loan portfolio in order to identify and categorize the Bank’s loans and other extensions of credit on the basis of credit quality. Within 90 days from the effective date of the Order, the Bank must contract for an external loan review to assess the accuracy of the Bank’s loan grading system and the quality of credit underwriting and administrative practices.

HELOC Portfolio. Within 60 days from the effective date of the Order, the Bank must perform a comprehensive assessment of the risk posed by its home equity line of credit (“HELOC”) portfolio. The Bank must also develop and implement a plan to reduce the risk in the HELOC portfolio.

Agreement with Federal Reserve. On May 7, 2012 as a follow on to the Order, the Company entered into a formal agreement with the Federal Reserve Bank of Richmond. A form 8-K was filed on May 11, 2012, with a copy of the formal agreement.

 

-23-


Table of Contents

Call Reports. As required by the Order, the Bank has filed amended call reports regarding the financial condition of the Bank as of March 31, 2011.

Written Plans and Other Material Terms. Under the terms of the Order, the Bank is required to prepare and submit the following written plans or reports to the FDIC and the Commissioner:

 

   

Plan to reduce assets of $250,000 or greater classified as “doubtful” or “substandard”

 

   

Plan and comprehensive budget for all categories of income and expense for the year 2012

 

   

Business/strategic plan covering the overall operation of the Bank

 

   

Plan to improve liquidity, contingency funding, interest rate risk, and asset liability management

 

   

Assessment of the Bank’s information technology function

 

   

Enterprise-wide disaster recovery/business continuity plan

 

   

Policy to provide adequate internal routines and controls within the Bank consistent with safe and sound banking practices

 

   

Independent testing of the Bank’s compliance with the Bank Secrecy Act and associated regulations

Under the Order, the Bank’s board of directors has agreed to increase its participation in the affairs of the Bank, including assuming full responsibility for the approval of policies and objectives for the supervision of all of the Bank’s activities. The Bank must also establish a board committee to monitor and coordinate compliance with the Order.

The Order will remain in effect until modified or terminated by the FDIC and the Commissioner.

Results of Operations

Net Interest Income

For the three months ended March 31, 2012, net interest income was $1,528,249 as compared to $1,420,766 for the same period in 2011. The average rate paid on interest-bearing liabilities for the three months ended March 31, 2012 and 2011 was 1.06% and 1.19%, respectively. The average rate realized on interest-earning assets was 3.93% and 4.23% for the three months ended March 31, 2012 and 2011, respectively.

The net interest margin was 2.95% and 3.17% for the three month periods ended March 31, 2012 and 2011, respectively. The decrease is primarily due to the reversal of a significant accrued interest amount relating to one individual loan relationship that moved to nonaccrual during the quarter ended March 31, 2012.

The following table illustrates the Company’s yield on earning assets and cost of funds for the three-month periods ended March 31, 2012 and 2011.

 

     Three Months Ended March 31  
     2012     2011  
     Average
Daily
Balance
    Interest
Income/
Expense
     Average
Rate
    Average
Daily
Balance
    Interest
Income/
Expense
     Average
Rate
 

Interest-earning assets

              

Loans

   $ 161,066      $ 1,848         4.62   $ 150,008      $ 1,807         4.89

Investment securities

     36,774        175         1.86     17,678        85         1.83

Federal funds sold

     7,083        4         .23     11,550        6         0.23

Interest-bearing bank deposits

     4,888        6         1.28     2,372        3         0.54

Nonmarketable equity securities

     1,187        4         1.17     1,267        3         0.81
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-earning assets

     210,998        2,037         3.93     182,875        1,904         4.23

Noninterest-earning assets:

              

Cash and due from banks

     3,465             3,758        

Property and equipment

     3,729             3,848        

Other assets

     9,037             9,977        

Allowance for loan losses

     (3,282          (5,267     
  

 

 

        

 

 

      

Total noninterest-earning assets

     12,949             12,316        
  

 

 

        

 

 

      

Total assets

   $ 223,947           $ 195,191        
  

 

 

        

 

 

      

Interest-bearing liabilities

              

NOW accounts

   $ 8,106        13         .64   $ 7,199        13         0.72

Savings and money markets

     72,216        198         1.11     44,158        163         1.49

Time deposits

     92,944        213         2.37     100,712        245         2.66

Federal Home Loan Bank advances

     19,000        84         1.74     12,322        61         2.00

Other borrowings

     5        —           0.72     202        1         1.25
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     192,271        508         1.06     164,593        483         1.19

Noninterest-bearing liabilities:

              

Demand deposits

     12,789             8,903        

Interest payable and other

     330             218        
  

 

 

        

 

 

      

Total noninterest-bearing liabilities

     13,119             9,121        
  

 

 

        

 

 

      

Total liabilities

     205,390             173,714        

Stockholders’ equity

     18,557             21,477        
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 223,947           $ 195,191        
  

 

 

        

 

 

      

Net interest income and interest rate spread

     $ 1,529         2.87     $ 1,421         3.04
    

 

 

    

 

 

     

 

 

    

 

 

 

Net yield on average interest-earning assets

          2.95          3.17
       

 

 

        

 

 

 

Ratio of average interest-earning assets to average interest-bearing liabilities

     109.74          111.11     
  

 

 

        

 

 

      

 

-24-


Table of Contents

The following table shows changes in interest income, interest expense, and net interest income arising from volume and rate changes for major categories of earning assets and interest-bearing liabilities. The change in interest not solely due to changes in either volume or rates has been allocated in proportion to the absolute dollar change in both.

 

Volume and Rate Variance Analysis

(in thousands)

                                    
     Three Months Ended March 31
2012 vs 2011
    Three Months Ended March 31
2011 vs 2010
 
     Increase (Decrease) Due to     Increase (Decrease) Due to  
     Volume     Rate     Total     Volume     Rate     Total  

Interest income:

            

Loans

   $ (872   $ 869      $ (3   $ 160      $ (17   $ 143   

Investment securities

     89        1        90        69        (45 )     24   

Federal funds sold

     2        (4 )     (2     (5 )     —          (5

Interest-bearing bank deposits

     (1     3        2        2        (2 )     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     (782     869        87        226        (64     162   

Interest expense:

            

Interest bearing transaction accounts

   $ 1      $ (1   $ —        $ 4      $ (2 )   $ 2   

Savings and money market

     85        (51     34        64        4        68   

Time deposits

     (17     (18     (35     (67     (71 )     (138

Federal home loan bank advances

     57       (35 )     22       —          (15 )     (15

Other borrowings

     —          —          —          1        —          1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     126        (105     21        2        (84 )     (82
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in net interest income

   $ (908   $ 974      $ 66      $ 224      $ 20      $ 244   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

-25-


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 March 31, 2012 and 2011 the provision was $184,998 and $(877,138) respectively. The negative provision in the first quarter of 2011 is due to recapturing amounts that were specifically reserved relating to loans sold. On March 31, 2012, there were $15,527,372 in loans in nonaccrual status. On March 31, 2011, there were $10,905,872 in loans in nonaccrual status. Based on present information, management believes the allowance for loan losses is adequate at March 31, 2012 to meet presently known and inherent risks in the loan portfolio. The allowance for loan losses was 2.11% and 2.51% of total loans at March 31, 2012 and 2011, respectively. The allowance decreased from prior year (as a percentage of total loans) even with an increase in nonaccrual and classified loans over prior year primarily due to the stabilization of real estate values surrounding the collateral pledged to secure loans. 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 March 31, 2012 was $261,569 or 171.36% greater than total noninterest income for the same period last year. The largest component of noninterest income for the three month period ended March 31, 2012, was service charges on deposit accounts which were $120,483 for the three month period ended March 31, 2012 or 47.66% higher than the same period last year. Other service charges, commissions and fees for the three months ended March 31, 2012 were $92,375 or 524.32% more than the same period last year. This increase was due to a management fee received by the Company relating to management of a real estate project under a forbearance agreement. In addition, the Bank had $38,841 in securities gains for the three month period ended March 31, 2012 compared to no gains in the prior year.

Noninterest Expense

Total noninterest expense for the three months ended March 31, 2012 was $1,397,833 or 41.10% less than total noninterest expense for the same period last year. The decrease is due to the one-time charge relating to the HELOC purchase discount of $1,002,136 recognized in the prior year. The primary recurring component of noninterest expense is salaries and benefits, which were $697,614 and $661,664 for the three months ended March 31, 2012 and 2011, respectively. Salaries and benefits increased due to the increase in the number of active employees. Other real estate expenses were $79,967 and $166,293 for the three months ended March 31, 2012 and 2011, respectively. The decrease from prior year is primarily due to the payment of past due property taxes on a large piece of property taken into other real estate owned. Other operating expenses were $383,436 and $376,777 for the three months ended March 31, 2012 and 2011, respectively.

Income Taxes

For the three months ended March 31, 2012 and 2011, the effective income tax rate was 0.00% and 39.39%, respectively. The income tax expense was $0, for the three months ended March 31, 2012 due to the Company having significant unused net operating loss carry forwards. The income tax expense for the three months ended March 31, 2011 was $10,844.

Net Income (loss)

The combination of the above factors resulted in net income available to common shareholders of $157,159 for the three months ended March 31, 2012 compared to net loss available to common shareholders of $33,146 for the comparable period in 2011.

Assets and Liabilities

During the first three months of 2012, total assets decreased $5,101,783 or 2.28% when compared to December 31, 2011. The decrease is primarily due to decrease in loans outstanding. Total investments decreased $312,887, or 0.83% during the three months ended March 31, 2012. Total deposits decreased $5,259,573 or 2.82% when compared to December 31, 2011. Of the total change in deposits over the same period, brokered deposits decreased $10,868,000 to $34,360,000 as of March 31, 2012. The decrease in brokered deposits was due to maturities of the underlying certificates of deposit. In order to comply with the consent agreement, management did not issue any additional brokered deposits during the three months ended March 31, 2012.

The Bank is under the Tier 1 leverage ratio required as a stipulation under the Consent Order as of March 31, 2012. In order the meet the required Tier 1 leverage ratio, the Bank is in the process of gradually shrinking its total assets in order to more promptly comply with the Consent Order stipulations.

Investment Securities

Investment securities totaled $37,458,189 as of March 31, 2012 as compared to $37,771,076 at December 31, 2011. Of this amount, $36,219,909 was designated as available for sale as of March 31, 2012. The other investments were nonmarketable equity securities consisting of $1,193,100 in Federal Home Loan Bank stock and a $45,180 investment in Community Bankers Bank stock as of March 31, 2012.

 

-26-


Table of Contents

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

 

Loans

In an effort to decrease total assets, loans were permitted to decrease $4,526,330, or 2.78%, during the period. As shown below, the largest decrease was in real estate – commercial loans which decreased $2,210,636 or 3.60%, to $59,221,710 at March 31, 2012. Real estate – construction loans decreased $390,063 or 2.71% to $13,998,775. Real estate – residential loans decreased $1,558,538, or 2.37%, to $64,284,547. Consumer and other loans increased $281,391 or 51.34%, to $829,489 at March 31, 2012. Commercial and industrial loans decreased $648,484 or 3.11% to $20,178,709 at March 31, 2012. Balances within the major loans receivable categories as of March 31, 2012 and December 31, 2011 are as follows:

 

     March 31,
2012
     December 31,
2011
 

Real estate – construction

   $ 13,998,775       $ 14,388,838   

Real estate – commercial

     59,221,710         61,432,346   

Real estate – residential

     64,284,547         65,843,085   

Commercial and industrial

     20,178,709         20,827,193   

Consumer and other

     829,489         548,098   
  

 

 

    

 

 

 

Total gross loans

   $ 158,513,230       $ 163,039,560   
  

 

 

    

 

 

 

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 March 31, 2012 and December 31, 2011, the Company had criticized loans totaling $17,985,965 and $17,582,368, respectively. At March 31, 2012 and December 31, 2011, the Company had classified loans totaling $20,943,576 and $20,549,614, respectively. At March 31, 2011, the Company had $15,527,372 or 9.80% of total gross loans in nonaccrual status and $138,787 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, 2011 to March 31, 2012 the Bank increased the provision for loan losses to $184,998 for the three months ended March 31, 2012. This is an increase over the same period last year. In the determination of the allowance for loan losses, all significant (typically greater than $250,000) 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 tables depict the activity in the allowance for loan losses for the three months ended March 31, 2012 and 2011:

Transactions in the allowance for loan losses for the three months ended March 31, 2012 are summarized as follows:

 

     Real Estate                          
     Construction      Commercial     Residential     Commercial
and
Industrial
    Consumer
& Other
    Unallocated     Total  

Balance, beginning of year

   $ 428,043       $ 999,259      $ 1,104,617      $ 552,459      $ 6,266      $ 182,001      $ 3,272,645   

Provision charged to operations

     144,582         87,858        (6,584 )     (30,473     1,340        (11,725     184,998   

Recoveries

     2,218        —          1,319        —          25,194        —          28,731   

Charge-offs

     —           (13,087 )     (107,673 )     —          (27,184 )     —          (147,944 )
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of year

   $ 574,843       $ 1,074,030      $ 991,679      $ 521,986      $ 5,616      $ 170,276      $ 3,338,430   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Transactions in the allowance for loan losses for the three months ended March 31, 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 (1)

     (480,910 )     (7,894 )     (373,696 )     59,569         25,468        (99,675 )     (877,138 )

Recoveries

     —          —          —          1166         22,008        —          23,174   

Charge-offs

     —          —          (10,639 )     —           (34,152 )     —          (44,791 )
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance, end of year

   $ 652,270      $ 1,524,492      $ 1,306,515      $ 697,362       $ 20,000      $ 126,520      $ 4,327,159   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

(1) Amount is net of the reversal of $1,046,479 specific reserves which were recorded on loans sold in conjunction with the HELOC portfolio acquisition. Of the total amount $777,246 related to real estate construction loans and $269,233 related to residential real estate loans.

 

-27-


Table of Contents

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

 

     March 31,
2012
    March 31,
2011
 

Balance, January 1

   $ 3,272,645      $ 5,225,914   

Provision (recovery) for loan losses for the period

     184,998        (877,138 )

Net loans (charged-off) recovered during the period

     (119,213 )     (21,617 )
  

 

 

   

 

 

 

Balance, March 31,

   $ 3,338,430      $ 4,327,159   
  

 

 

   

 

 

 

Gross loans outstanding, March 31,

   $ 158,513,230      $ 172,339,726   

Allowance for loan losses to loans outstanding

     2.11 %     2.51 %

Deposits

Total deposits decreased $5,259,573 or 2.82%, from December 31, 2011 to $181,191,359 at March 31, 2012. Total time deposits decreased $2,794,981, or 2.97% to $91,433,792 at March 31, 2012. Total interest-bearing and non-interest bearing transaction accounts increased $872,507 or 4.44% since December 31, 2011. There was a decrease in savings and money market accounts as well, which decreased $3,337,099 or 4.60%, to $69,257,159 at March 31, 2012. This decrease in non time deposit accounts is a combination of the Bank instituting a revised market pricing strategy to emphasize certificates of 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 March 31, 2012 and December 31, 2011 are as follows:

 

     March 31, 2012      December 31, 2011  

Noninterest-bearing transaction accounts

   $ 12,420,281       $ 11,015,012   

Interest-bearing transaction accounts

     8,080,127         8,612,889   

Savings and money market

     69,257,159         72,594,258   

Time deposits $100,000 and over

     33,250,410         22,735,464   

Other time deposits

     58,183,382         71,493,309   
  

 

 

    

 

 

 

Total deposits

   $ 181,191,359       $ 186,450,932   
  

 

 

    

 

 

 

Advances from Federal Home Loan Bank

Advances from the FHLB total $19,000,000 as of March 31, 2012 and December 31, 2011. 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 March 31, 2012:

 

Description

   Interest
Rate
    2011  

Fixed rate advances maturing:

    

October 28, 2014

     .9475 %   $ 11,000,000   

November 3, 2014

     2.84 %   $ 8,000,000   
    

 

 

 
     $ 19,000,000   
    

 

 

 

 

-28-


Table of Contents

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 March 31, 2012, the Company’s primary sources of liquidity included cash and due from banks of $9,738,824, federal funds sold totaling $1,138,498, time deposits with other banks of $3,302,847 and securities available for sale totaling $36,219,909, credit availability with the Federal Home Loan Bank of $14,800,000 and unused lines of credit with correspondent banks to purchase federal funds totaling $2,500,000 at March 31, 2012.

Capital Resources

Total shareholders’ equity increased $235,007 to $18,552,387 for the three month period ended March 31, 2012. This is primarily the result of the net income for the period of $206,987, and stock based compensation expense of $28,383.

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. In order to be considered “adequately capitalized” under federal regulations, a bank generally must have a total risk-based ratio of at least 8%, a Tier 1 capital to risk-weighted assets ratio of at least 4%, and a Tier 1 capital to average total assets ratio (referred to as the “leverage ratio”) of at least 4%. As such the Bank is under the required leverage ratio as of March 31, 2012. In order the meet the required leverage ratio, the Bank is in the process of gradually shrinking its total assets in order to more promptly comply with the requirements of the Consent Order.

Both the Company and the Bank exceeded their minimum regulatory capital ratios as of March 31, 2012, but due to the additional capital requirements under the Consent Order, the Bank is considered “adequately capitalized.”

The following table summarizes the Company’s risk-based capital at March 31, 2012:

 

Shareholders’ equity

   $ 18,552,387   

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

     (51,148 )

Less – disallowed deferred tax assets

     (1,234,000 )
  

 

 

 

Tier 1 capital

   $ 17,267,239   

Plus – allowance for loan losses(1)

     2,020,000   
  

 

 

 

Total capital

   $ 19,287,239   
  

 

 

 

Risk-weighted assets

   $ 160,293,000   

Risk-based capital ratios:

  

Tier 1 capital (to risk-weighted assets)

     10.77 %

Total capital (to risk-weighted assets)

     12.03 %

Leverage ratio

     7.78 %

 

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

 

-29-


Table of Contents

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 March 31, 2012, the Company had issued commitments to extend credit of approximately $11,273,000 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 March 31, 2012 (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

   $ 483       $ —         $ 1,934       $ 8,842       $ 11,259   

Standby letters of credit

     —           —           14         —           14   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 483       $ —         $ 1,948       $ 8,842       $ 11,273   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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, 2011 as contained in our 2011 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 2011 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.

 

-30-


Table of Contents

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 March 31, 2012, 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 10 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 March  31, 2012, the amount of the arrearage on the dividend payments for the series A preferred stock was $175,000.

Item 6. Exhibits

 

Exhibit

Number

  

Description of Exhibit

  10.1    Stipulation to the Issuance of a Consent Order (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on form 8-K, filed with the Securities and Exchange Commission on February 7, 2012)
  10.2    Consent Order issued by the Federal Deposit Insurance Corporation and the North Carolina Office of the Commissioner of Banks (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on form 8-K, filed with the Securities and Exchange Commission on February 7, 2012)
  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 March 31, 2012, 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: May 15, 2012

 

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Table of Contents

EXHIBIT INDEX

 

Exhibit

Number

  

Description of Exhibit

  10.1    Stipulation to the Issuance of a Consent Order *
  10.2    Consent Order issued by the Federal Deposit Insurance Corporation and the North Carolina Office of the Commissioner of Banks *
  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 March 31, 2012, in XBRL (eXtensible Business Reporting Language)**

 

* Incorporated by reference
** 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.

 

-33-

PINX:ABTO Quarterly Report 10-Q Filling

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PINX:ABTO Quarterly Report 10-Q Filing - 3/31/2012
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