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Table of Contents

 

 

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

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

For the quarterly period ended September 30, 2011

OR

 

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

For the transition period from              to             

Commission file number 000-51843

 

 

ALARION FINANCIAL SERVICES, INC.

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

 

 

 

Florida   20-3851373

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

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

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

 

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

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). *    Yes  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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

 

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

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

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

 

Common stock, par value $.01 per share

 

2,633,208 shares outstanding at November 14, 2011

 

 

 


Table of Contents

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

INDEX

Part I. FINANCIAL INFORMATION

 

         Page  

Item 1. Financial Statements

  

Condensed Consolidated Balance Sheets - at September  30, 2011 (Unaudited) and at December 31, 2010

     2   

Condensed Consolidated Statements of Operations (Unaudited) - Three and Nine Months ended September 30, 2011 and 2010

     3   

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) - Nine Months ended September 30, 2011 and 2010

     4-5   

Condensed Consolidated Statements of Cash Flows (Unaudited) - Nine Months ended September  30, 2011 and 2010

     6-7   

Notes to Condensed Consolidated Financial Statements (Unaudited)

     8-22   

Item 2.

 

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

     23-30   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     31   

Item 4.

 

Controls and Procedures

     31   

Part II. OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     32   

Item 1.A.

 

Risk Factors

     32   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     32   

Item 3.

 

Defaults upon Senior Securities

     32   

Item 4.

 

(Removed and Reserved)

     32   

Item 5.

 

Other Information

     32   

Item 6.

 

Exhibits

     33   

SIGNATURES

     34   

 

1


Table of Contents

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets

($ in thousands, except per share amounts)

 

     At     At  
     September 30,     December 31,  
     2011     2010  
     (unaudited)        

Assets

    

Cash and due from banks

   $ 4,496        3,127   

Interest-earning deposits

     233        262   

Federal funds sold

     18,769        3,015   
  

 

 

   

 

 

 

Cash and cash equivalents

     23,498        6,404   

Securities available for sale

     47,519        49,304   

Loans, net of allowance for loan losses of $5,405 and $4,115

     194,770        213,069   

Loans held for sale

     7,293        7,395   

Accrued interest receivable

     843        903   

Premises and equipment, net

     13,197        13,418   

Other real estate owned, net

     7,762        6,359   

Federal Home Loan Bank stock, at cost

     1,402        1,409   

Deferred income taxes

     3,790        3,347   

Other assets

     843        1,382   
  

 

 

   

 

 

 

Total assets

   $ 300,917        302,990   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Liabilities:

    

Noninterest-bearing demand deposits

     29,752        26,778   

NOW, money-market and savings deposits

     89,951        76,476   

Time deposits less than $100,000

     95,371        89,016   

Time deposits greater than $100,000

     42,504        59,074   
  

 

 

   

 

 

 

Total deposits

     257,578        251,344   

Federal Home Loan Bank advances

     13,000        21,000   

Other borrowings

     3,032        3,054   

Accrued interest payable

     345        436   

Accrued expenses and other liabilities

     1,454        522   
  

 

 

   

 

 

 

Total liabilities

     275,409        276,356   
  

 

 

   

 

 

 

Stockholders’ equity:

    

Preferred stock, $.01 par value; 1,000,000 shares authorized:

    

Preferred stock, Series A, $.01 par value; $1,000 liquidation value; 6,514 shares outstanding

     —          —     

Preferred stock, Series B, $.01 par value; $1,000 liquidation value; 326 shares outstanding

     —          —     

Additional paid-in capital, preferred

     6,840        6,840   

Preferred stock discount

     (151     (200

Common stock, $.01 par value; 4,000,000 shares authorized, 2,633,208 and 2,653,208 shares issued and outstanding at September 30, 2011 and December 31, 2010

     26        27   

Additional paid-in capital, common

     26,595        26,693   

Accumulated deficit

     (8,068     (6,111

Accumulated other comprehensive loss (income)

     266        (615
  

 

 

   

 

 

 

Total stockholders’ equity

     25,508        26,634   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 300,917        302,990   
  

 

 

   

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

2


Table of Contents

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

($ in thousands, except per share amounts)

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2011     2010      2011     2010  

Interest income:

         

Loans

   $ 2,759        3,185         8,488        9,646   

Securities

     314        258         995        909   

Other

     7        13         17        55   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest income

     3,080        3,456         9,500        10,610   
  

 

 

   

 

 

    

 

 

   

 

 

 

Interest expense:

         

Deposits

     738        1,066         2,386        3,390   

Borrowings

     160        174         491        524   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest expense

     898        1,240         2,877        3,914   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income

     2,182        2,216         6,623        6,696   

Provision for loan losses

     525        600         3,450        5,894   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income after provision for loan losses

     1,657        1,616         3,173        802   
  

 

 

   

 

 

    

 

 

   

 

 

 

Noninterest income:

         

Deposit account fees

     90        86         277        284   

Net gain on sales of loans held for sale

     511        324         1,144        968   

Net gain on sale of securities

     —          478         —          478   

Other

     106        61         225        192   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total noninterest income

     707        949         1,646        1,922   
  

 

 

   

 

 

    

 

 

   

 

 

 

Noninterest expense:

         

Salaries and employee benefits

     1,149        943         3,318        3,011   

Occupancy and equipment

     345        309         952        899   

Data processing

     148        151         431        446   

Professional services

     169        128         487        333   

Advertising and promotion

     57        51         145        124   

Office supplies and printing

     37        38         109        101   

OREO expense

     248        219         762        477   

FDIC assessment

     79        128         382        337   

Other

     308        159         847        895   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total noninterest expense

     2,540        2,126         7,433        6,623   
  

 

 

   

 

 

    

 

 

   

 

 

 

(Loss) earnings before income tax (benefit) expense

     (176     439         (2,614     (3,899

Income tax (benefit) expense

     (64     169         (972     (1,438
  

 

 

   

 

 

    

 

 

   

 

 

 

Net (loss) earnings

     (112     270         (1,642     (2,461

Preferred stock dividend requirements and accretion of preferred stock to par

     105        105         315        315   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net (loss) earnings available to common shareholders

   $ (217     165         (1,957     (2,776
  

 

 

   

 

 

    

 

 

   

 

 

 

(Loss) earnings per share – basic

   $ (.08     0.06         (.74     (1.05
  

 

 

   

 

 

    

 

 

   

 

 

 

(Loss) earnings per share – diluted

   $ (.08     0.06         (.74     (1.05
  

 

 

   

 

 

    

 

 

   

 

 

 

Weighted-average number of common shares outstanding, basic

     2,633,208        2,653,208         2,644,270        2,653,208   
  

 

 

   

 

 

    

 

 

   

 

 

 

Weighted-average number of common shares outstanding, diluted

     2,633,208        2,653,208         2,644,270        2,653,208   
  

 

 

   

 

 

    

 

 

   

 

 

 

Dividends per common share

   $ —          —           —          —     
  

 

 

   

 

 

    

 

 

   

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

3


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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

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

Nine Months Ended September 30, 2011 and 2010

($ in thousands)

 

    Preferred Stock     Common Stock    

Accumulated

   

Accumulated

Other

Comprehensive

   

Total

Stockholders’

 
    Series A     Series B    

Additional

Paid-in

    Discount     Shares     Amount    

Additional

Paid-In

       
    Shares     Amount     Shares     Amount     Capital           Capital     Deficit     Loss     Equity  

Balance at December 31, 2009

    6,514      $ —          326      $ —          6,840        (265     2,653,208      $ 27        26,680        (2,531     (45     30,706   
                       

 

 

 

Comprehensive loss:

                       

Net loss (unaudited)

    —          —          —          —          —          —          —          —          —          (2,461     —          (2,461

Net change in unrealized loss on securities available for sale, net of taxes of $(25) (unaudited)

    —          —          —          —          —          —          —          —          —          —          (43     (43
                       

 

 

 

Comprehensive loss (unaudited)

                          (2,504
                       

 

 

 

Share-based compensation (unaudited)

    —          —          —          —          —          —          —          —          9        —          —          9   

Preferred stock dividend requirements and Series B preferred stock accretion (unaudited)

    —          —          —          —          —          49        —          —          —          (315     —          (266
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2010 (unaudited)

    6,514      $ —          326      $ —          6,840        (216     2,653,208      $ 27        26,689        (5,307     (88     27,945   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(continued)

4


Table of Contents

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

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

Nine Months Ended September 30, 2011 and 2010

($ in thousands)

 

    Preferred Stock     Common Stock     Accumulated    

Accumulated

Other

    Total
Stockholders’
Equity
 
    Series A     Series B    

Additional

Paid-in

                     

Additional

Paid-In

     

Comprehensive

Income

   
    Shares     Amount     Shares     Amount     Capital     Discount     Shares     Amount     Capital     Deficit     (Loss)    

Balance at December 31, 2010

    6,514      $ —          326      $ —          6,840        (200     2,653,208      $ 27        26,693        (6,111     (615     26,634   
                       

 

 

 

Comprehensive loss:

                       

Net loss (unaudited)

    —          —          —          —          —          —          —          —          —          (1,642     —          (1,642

Net change in unrealized loss on securities available for sale, net of taxes of $530 (unaudited)

    —          —          —          —          —          —          —          —          —          —          881        881   
                       

 

 

 

Comprehensive loss (unaudited)

                          (761
                       

 

 

 

Share-based compensation (unaudited)

    —          —          —          —          —          —          —          —          1        —          —          1   

Retirement of stock (unaudited)

    —          —          —          —          —          —          (20,000     (1     (99     —          —          (100

Preferred stock dividend requirements and Series B preferred stock accretion (unaudited)

    —          —          —          —          —          49        —          —          —          (315     —          (266
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011 (unaudited)

    6,514      $ —          326      $ —          6,840        (151     2,633,208      $ 26        26,595        (8,068     266        25,508   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

5


Table of Contents

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

     Nine Months Ended  
     September 30,  
     2011     2010  

Cash flows from operating activities:

    

Net loss

   $ (1,642     (2,461

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Provision for loan losses

     3,450        5,894   

Share-based compensation

     1        9   

Depreciation and amortization

     424        437   

Gain on sale of loans held for sale

     (1,144     (968

Loans originated for sale

     (49,450     (49,887

Proceeds from loans sold

     50,696        51,691   

Net amortization of premiums and discounts on securities available for sale

     516        321   

Deferred income tax benefit

     (973     (1,438

Net amortization of deferred loan fees and costs

     83        74   

Loss on sale of other real estate owned

     72        5   

Provision for other real estate loan losses

     662        247   

Gain on sale of securities available for sale

     —          (478

Net decrease in accrued interest payable

     (91     (203

Net decrease (increase) in accrued interest receivable

     60        (57

Net decrease in other assets

     439        289   

Net increase in accrued expenses and other liabilities

     932        1,158   
  

 

 

   

 

 

 

Net cash provided by operating activities

     4,035        4,633   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Proceeds from sales, principal repayments and maturities on securities available for sale

     7,486        30,035   

Purchase of securities available for sale

     (4,806     (52,310

Net decrease in time deposits

     —          2,287   

Net decrease in loans

     11,479        2,108   

Purchases of premises and equipment

     (203     (545

Proceeds from sale of other real estate owned

     1,150        11   

Redemption of Federal Home Loan Bank stock

     7        90   
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     15,113        (18,324
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net increase in deposits

     6,234        10,761   

Net decrease in other borrowings

     (22     (3,318

Net decrease in advances from Federal Home Loan Bank

     (8,000     —     

Preferred stock dividend requirements and Series B stock accretion

     (266     (266
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (2,054     7,177   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     17,094        (6,514

Cash and cash equivalents at beginning of period

     6,404        22,098   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 23,498        15,584   
  

 

 

   

 

 

 

 

(continued)

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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited), Continued

(In thousands)

 

     Nine Months Ended  
     September 30,  
     2011      2010  

Supplemental disclosure of cash flow information:

     

Cash paid during the period for:

     

Interest

   $ 2,968         4,117   
  

 

 

    

 

 

 

Income taxes

   $ —           —     
  

 

 

    

 

 

 

Noncash transactions:

     

Accumulated other comprehensive (loss) income, net change in unrealized (loss) gain on securities available for sale, net of taxes

   $ 881         (43
  

 

 

    

 

 

 

Transfer of loans to other real estate owned

   $ 3,287         3,354   
  

 

 

    

 

 

 

Transfer of other real estate owned to loans

   $ —           189   
  

 

 

    

 

 

 

Retirement of common stock from other assets

   $ 100         —     
  

 

 

    

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Basis of Presentation. In the opinion of the management of Alarion Financial Services, Inc. (the “Holding Company”), the accompanying condensed consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position at September 30, 2011 and the results of operations for the three- and nine-month periods ended September 30, 2011 and 2010 and cash flows for the nine-month periods ended September 30, 2011 and 2010. The results of operations for the three- and nine-month periods ended September 30, 2011, are not necessarily indicative of results that may be expected for the year ending December 31, 2011.

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

Recent Accounting Standards Update. In January 2011, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2011-01, Receivables (Topic 310) Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. The amendments in this Update delayed the effective date of the disclosures about troubled debt restructurings in Update 2010-20 for public entities. For public entities, the amendments are effective for the first interim or annual period beginning on or after June 15, 2011 and should be applied retrospectively to the beginning of the annual period of adoption. The adoption of the ASU did not have a material impact on the Company’s consolidated financial statements.

In April 2011, the FASB issued ASU No. 2011-02, Receivables (Topic 310) A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. This amends the guidance for troubled debt restructurings. The guidance clarifies the guidance on a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. For public entities, the amendments are effective for the first interim or annual period beginning on or after June 15, 2011 and should be applied retrospectively to the beginning of the annual period of adoption. The adoption of the ASU did not have a material impact on the Company’s consolidated financial statements.

 

(continued)

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Table of Contents

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

 

1. Basis of Presentation, Continued.

 

Recent Accounting Standards Update, Continued. In April 2011, the FASB issued ASU 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreement, which applies to all public entities. It affects all entities that enter into agreements to transfer financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity. The amendments do not affect other transfers of financial assets. ASU 2011-03 removes the assessment of effective control the criterion relating to the transferor’s ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee. Consequently, it also eliminates the requirement to demonstrate that the transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets. Eliminating the transferor’s ability criterion and related implementation guidance from an entity’s assessment of effective control should improve the accounting for repos and other similar transactions. ASU 2011-03 is effective for the first interim or annual period beginning on or after December 15, 2011 and is to be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. We do not expect the adoption of ASU 2011-03 to have a material impact on our consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU 2011-04 applies to all reporting entities that are required or permitted to measure or disclose the fair value of an asset, a liability, or an instrument classified in a reporting entity’s shareholders’ equity in the financial statements. ASU 2011-04 is expected to result in common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards (“IFRSs”). Consequently, it changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. For many of the requirements of ASU 2011-04, it is not intended for the amendments to result in a change in the application of the requirements in Topic 820. Some of the amendments clarify the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements, including the following: (1) measuring the fair value of financial instruments that are managed within a portfolio; (2) application of premiums and discounts in a fair value measurement; and (3) additional disclosures about fair value measurements.

ASU 2011-04 is effective during interim and annual periods beginning after December 15, 2011 and is to be applied prospectively. Early application is not permitted. We are currently evaluating the impact of ASU 2011-04 on our consolidated financial statements, but we do not expect its adoption to have a material impact on our consolidated statements, other than to further increase the amount of financial disclosures already provided.

 

(continued)

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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

 

1. Basis of Presentation, Continued.

 

Recent Accounting Standards Update, Continued. In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220). The amendments in this update remove the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The effective date of this update is for fiscal years, and interim periods within those years, beginning after December 15, 2011. We do not expect its adoption to have a material impact on our consolidated financial statements, other than to further increase the amount of financial disclosures already provided.

In September 2011, the FASB issued ASU No. 2011-08, “Testing Goodwill for Impairment.” The provisions of ASU No. 2011-08 permits an entity an option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity believes, as a result of its qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further impairment testing is required. ASU No. 2011-08 includes examples of events and circumstances that may indicate that a reporting unit’s fair value is less than its carrying amount. The provisions of ASU No. 2011-08 are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted provided that the entity has not yet performed its annual impairment test for goodwill. The adoption of ASU No. 2011-08 will not have any impact on our financial statements since we do not have any goodwill.

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

 

            Gross      Gross        
     Amortized      Unrealized      Unrealized     Fair  
     Cost      Gains      Losses     Value  

At September 30, 2011:

          

U.S. Government agency securities

   $ 1,089         —           (5     1,084   

Mortgage-backed securities

     44,401         498         (4     44,895   

Corporate bonds

     1,602         —           (62     1,540   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 47,092         498         (71     47,519   
  

 

 

    

 

 

    

 

 

   

 

 

 

At December 31, 2010-

          

Mortgage-backed securities

   $ 50,288         77         (1,061     49,304   
  

 

 

    

 

 

    

 

 

   

 

 

 

At September 30, 2011 and December 31, 2010, securities with a carrying value of approximately $13.5 million and $10.5 million, respectively, were pledged for other borrowings and public funds.

There were no sales of securities during the nine months ended September 30, 2011.

 

(continued)

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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

 

2. Securities, Continued. Securities sold during the nine months ended September 30, 2010 are summarized as follows (in thousands):

 

Principal received from sales

   $ 22,600   
  

 

 

 

Gross gains

     478   

Gross losses

     —     
  

 

 

 

Net gain

   $ 478   
  

 

 

 

Securities with gross unrealized losses at September 30, 2011, aggregated by investment category and length of time that individual securities have been in a continuous loss position, is as follows (in thousands):

 

     Less Than Twelve Months  
     Gross        
     Unrealized     Fair  
     Losses     Value  

Securities Available for Sale:

    

U.S. government agency securities

   $ (5     528   

Mortgage-backed securities

     (4     2,433   

Corporate bonds

     (62     1,540   
  

 

 

   

 

 

 

Total securities available for sale

   $ (71     4,501   
  

 

 

   

 

 

 

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

 

(continued)

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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

 

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

 

     At     At  
     September 30,     December 31,  
     2011     2010  

Real estate loans:

    

Office/retail/other

   $ 62,043        63,357   

Multi-family

     9,777        9,518   

Land

     16,032        23,345   

Commercial real estate

     14,515        16,927   

Residential non-owner

     15,748        18,356   

Residential owner

     32,404        32,667   

Construction

     4,776        4,819   

Home equity & line of credit

     17,240        19,764   

Commercial

     19,660        20,587   

Consumer

     7,625        7,471   
  

 

 

   

 

 

 

Total loans

     199,820        216,811   

Allowance for loan losses

     (5,405     (4,115

Deferred loan costs, net

     355        373   
  

 

 

   

 

 

 

Loans, net

   $ 194,770        213,069   
  

 

 

   

 

 

 

The Company has divided the loan portfolio into three portfolio segments, each with different risk characteristics and methodologies for assessing risk. The portfolio segments identified by the Company are as follows:

 

(continued)

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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

 

3. Loans, Continued.

 

Real Estate Mortgage Loans. Real estate mortgage loans are typically segmented into eight classes: Office/Retail/Other, Multi-Family, Land, Commercial Real Estate, Residential Non-Owner, Residential Owner, Construction and Home Equity & Line of Credit. Commercial real estate loans are secured by the subject property and are underwritten based upon standards set forth in the policies approved by the Company’s board of directors (the “Board”). Such standards include, among other factors, loan to value limits, cash flow coverage and general creditworthiness of the obligors. Residential real estate loans are underwritten in accordance with policies set forth and approved by the Board, including repayment capacity and source, value of the underlying property, credit history and stability. Construction loans to borrowers are to finance the construction of owner occupied and lease properties. These loans are categorized as construction loans during the construction period, later converting to commercial or residential real estate loans after the construction is complete and amortization of the loan begins. Real estate development and construction loans are approved based on an analysis of the borrower and guarantor, the viability of the project and on an acceptable percentage of the appraised value of the property securing the loan. Real estate development and construction loan funds are disbursed periodically based on the percentage of construction completed. The Company carefully monitors these loans with on-site inspections and requires the receipt of lien waivers on funds advanced. Development and construction loans are typically secured by the properties under development or construction, and personal guarantees are typically obtained. Further, to assure that reliance is not placed solely on the value of the underlying property, the Company considers the market conditions and feasibility of proposed projects, the financial condition and reputation of the borrower and guarantors, the amount of the borrower’s equity in the project, independent appraisals, costs estimates and pre-construction sale information. The Company also makes loans on occasion for the purchase of land for future development by the borrower. Land loans are extended for the future development for either commercial or residential use by the borrower. The Company carefully analyzes the intended use of the property and the viability thereof.

Commercial Loans. Commercial loans are primarily underwritten on the basis of the borrowers’ ability to service such debt from income. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. As a general practice, we take as collateral a security interest in any available real estate, equipment, or other chattel, although loans may also be made on an unsecured basis. Collateralized working capital loans typically are secured by short-term assets whereas long-term loans are primarily secured by long-term assets.

 

(continued)

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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

 

3. Loans, Continued.

 

Consumer and Other Loans. Consumer and other loans are extended for various purposes, including purchases of automobiles, recreational vehicles, and boats. We also offer home improvement loans, lines of credit, personal loans, and deposit account collateralized loans. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Loans to consumers are extended after a credit evaluation, including the creditworthiness of the borrower(s), the purpose of the credit, and the secondary source of repayment. Consumer loans are made at fixed and variable interest rates and may be made on terms of up to ten years. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

An analysis of the change in the allowance for loan losses follows (in thousands):

 

0000000 0000000 0000000 0000000 0000000 0000000 0000000 0000000 0000000 0000000 0000000 0000000
    Three Months Ended September 30,  
    2011        
    Office/
Retail/
Other
    Multi-
Family
    Land     Commercial
Real
Estate
    Resid.
Non-
Owner
    Resid.
Owner
    Construction     Home
Equity
& LOC
    Commercial     Consumer     Total     2010  

Beginning balance

  $ 1,818        10        1,146        284        281        550        52        423        465        251        5,280        4,452   

Provision for loan losses

    255        —          (149     (30     5        217        2        161        —          64        525        600   

Recoveries

    —          —          —          —          4        2        —          —          —          —          6        6   

Charge-offs

    —          —          (119     (159     —          (33     —          —          —          (95     (406     (91
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $   2,073               10            878              95            290             736              54            584            465            220          5,405          4,967   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

0000000 0000000 0000000 0000000 0000000 0000000 0000000 0000000 0000000 0000000 0000000 0000000
    Nine Months Ended September 30,  
    2011        
    Office/
Retail/
Other
    Multi-
Family
    Land     Commercial
Real
Estate
    Resid.
Non-
Owner
    Resid.
Owner
    Construction     Home
Equity
& LOC
    Commercial     Consumer     Total     2010  

Beginning balance

  $ 1,075        9        583        259        441        350        23        744        427        204        4,115        3,035   

Provision for loan losses

    1,196        1        555        (5     (158     792        31        557        147        334        3,450        5,894   

Recoveries

    —          —          —          —          7        7        —          —          —          2        16        60   

Charge-offs

    (198     —          (260     (159     —          (413     —          (717     (109     (320     (2,176     (4,022
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 2,073        10        878        95        290        736        54        584        465        220        5,405        4,967   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Individually evaluated for impairment:

                       

Recorded investment

  $ 3,734        —          5,056        1,020        2,571        1,369        831        1,369        135        91        16,176     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Balance in allowance for loan losses

  $ 1,160        —          719        —          99        371        47        293        20        91        2,800     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Collectively evaluated for impairment:

                       

Recorded investment

  $ 58,309        9,777        10,976        13,495        13,177        31,035        3,945        15,871        19,525        7,534        183,644     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Balance in allowance for loan losses

  $ 913        10        159        95        191        365        7        291        445        129        2,605     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

(continued)

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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

 

3. Loans, Continued. The following summarizes the loan credit quality (in thousands):

 

Credit Risk
Profile by
Internally
Assigned Grade:

   Office/
Retail/
Other
     Multi-
Family
     Land      Commercial
Real

Estate
     Resid.
Non-
Owner
     Resid.
Owner
     Construction      Home
Equity &
Line of
Credit
     Commercial      Consumer      Total  

September 30, 2011:

                                

Grade:

                                

Pass

   $ 52,072         9,777         9,314         13,303         11,678         30,476         3,946         15,013         18,177         7,179         170,935   

Special mention

     4,982         —           1,662         150         1,223         559         —           859         377         104         9,916   

Substandard

     4,989         —           5,056         1,062         2,847         1,369         830         1,368         1,106         342         18,969   

Doubtful

     —           —           —           —           —           —           —           —           —           —           —     

Loss

     —           —           —           —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 62,043         9,777         16,032         14,515         15,748         32,404         4,776         17,240         19,660         7,625         199,820   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010:

                                

Grade:

                                

Pass

     57,974         9,518         13,812         15,699         14,492         30,908         3,895         15,992         18,450         6,769         187,509   

Special mention

     408         —           1,371         —           3,277         594         —           2,060         897         352         8,959   

Substandard

     4,975         —           8,162         1,228         587         1,165         924         1,712         1,240         350         20,343   

Doubtful

     —           —           —           —           —           —           —           —           —           —           —     

Loss

     —           —           —           —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 63,357         9,518         23,345         16,927         18,356         32,667         4,819         19,764         20,587         7,471         216,811   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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. Loans classified as substandard or special mention are reviewed quarterly by the Company for further deterioration or improvement to determine if they are appropriately classified and whether there is any impairment. All loans are graded upon initial issuance. Further, commercial loans are typically reviewed at least annually to determine the appropriate loan grading. In addition, during the renewal process of any loan, as well as if a loan becomes past due, the Company will determine the appropriate loan grade.

Loans excluded from the review process above are generally classified as pass credits until: (a) they become past due; (b) management becomes aware of a deterioration in the credit worthiness of the borrower; or (c) the customer contacts the Company for a modification. In these circumstances, the loan is specifically evaluated for potential classification as to special mention, substandard or even charged off. The Company uses the following definitions for risk ratings:

Internally assigned loan grades are defined as follows:

Pass – A Pass loan’s primary source of loan repayment is satisfactory, with secondary sources very likely to be realized if necessary.

 

(continued)

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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

 

3. Loans, Continued.

 

Special Mention – A Special Mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or the Company’s credit position at some future date. Special Mention loans are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

Substandard – A Substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful – A loan classified Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loss – A loan classified Loss is considered uncollectible and of such little value that continuance as a bankable asset is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future.

Age analysis of past-due loans is as follows (in thousands):

 

     Accruing Loans                
     30-59
Days
Past Due
     60-89
Days
Past Due
     Greater
Than 90
Days
Past Due
     Total
Past
Due
     Current      Nonaccrual
Loans
     Total
Loans
 

At September 30, 2011:

                    

Real estate loans:

                    

Office/retail/other

   $ —           3,115         —           3,115         57,912         1,016         62,043   

Multi-family

     —           —           —           —           9,777         —           9,777   

Land

     56         —           —           56         13,846         2,130         16,032   

Commercial real estate

     —           —           —           —           13,495         1,020         14,515   

Residential non-owner

     —           —           —           —           15,445         303         15,748   

Residential owner

     —           322         —           322         30,713         1,369         32,404   

Construction

     113         —           —           113         4,663         —           4,776   

Home equity & line of credit

     250         —           —           250         15,622         1,368         17,240   

Commercial

     —           65         —           65         19,525         70         19,660   

Consumer

     153         166         —           319         7,306         —           7,625   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 572         3,668         —           4,240         188,304         7,276         199,820   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(continued)

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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

 

3. Loans, Continued.

 

     Accruing Loans                
     30-59
Days
Past Due
     60-89
Days
Past Due
     Greater
Than 90
Days
Past Due
     Total
Past
Due
     Current      Nonaccrual
Loans
     Total
Loans
 

At December 31, 2010:

                    

Real estate loans:

                    

Office/retail/other

   $ 392         2,620         —           3,012         59,876         469         63,357   

Multi-family

     —           —           —           —           9,518         —           9,518   

Land

     3,109         5         —           3,114         17,533         2,698         23,345   

Commercial real estate

     —           —           —           —           15,699         1,228         16,927   

Residential non-owner

     —           —           —           —           18,048         308         18,356   

Residential owner

     496         358         —           854         31,031         782         32,667   

Construction

     —           —           —           —           4,819         —           4,819   

Home equity & line of credit

     —           —           —           —           19,764         —           19,764   

Commercial

     91         —           —           91         20,338         158         20,587   

Consumer

     144         194         —           338         6,944         189         7,471   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,232         3,177         —           7,409         203,570         5,832         216,811   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following summarizes the amount of impaired loans (in thousands):

 

     With No Related
Allowance Recorded
     With an Allowance Recorded      Total  
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
 

September 30, 2011:

                          

Real estate loans:

                          

Office/retail/other

   $ —           —           —           3,734         3,734         1,160         3,734         3,734         1,160   

Multi-family

     —           —           —           —           —           —           —           —           —     

Land

     761         761         —           4,295         5,592         719         5,056         6,353         719   

Commercial real estate

     1,020         1,020         —           —           —           —           1,020         1,020         —     

Residential non-owner

     2,269         2,269         —           302         302         99         2,571         2,571         99   

Residential owner

     381         381         —           988         988         371         1,369         1,369         371   

Construction

     —           —           —           831         831         47         831         831         47   

Home equity & line of credit

     —           —           —           1,369         1,369         293         1,369         1,369         293   

Commercial

     70         70         —           65         65         20         135         135         20   

Consumer

     —           —           —           91         91         91         91         91         91   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 4,501         4,501         —           11,675         12,972         2,800         16,176         17,473         2,800   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(continued)

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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

 

3. Loans, Continued.

 

     With No Related
Allowance Recorded
     With an Allowance Recorded      Total  
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
 

December 31, 2010:

                          

Real estate loans:

                          

Office/retail/other

   $ —           —           —           2,858         3,681         667         2,858         3,681         667   

Multi-family

     —           —           —           —           —           —           —           —           —     

Land

     4,625         5,936         —           3,200         3,652         337         7,825         9,588         337   

Commercial real estate

     1,020         1,020         —           42         277         166         1,062         1,297         166   

Residential non-owner

     208         208         —           74         100         26         282         308         26   

Residential owner

     621         707         —           127         161         34         748         868         34   

Construction

     923         923         —           —           —           —           923         923         —     

Home equity & line of credit

     —           —           —           912         1,388         476         912         1,388         476   

Commercial

     —           —           —           164         240         76         164         240         76   

Consumer

     92         146         —           116         260         145         208         406         145   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 7,489         8,940         —           7,493         9,759         1,927         14,982         18,699         1,927   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     For the Three Months Ended
September 30,
     For the Nine Months Ended
September 30,
 
     2011      2011  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Interest
Income
Received
     Average
Recorded
Investment
     Interest
Income
Recognized
     Interest
Income
Received
 

Real estate loans:

                 

Office/retail/other

   $ 3,964         49         49         3,752         148         148   

Multi-family

     —           —           —           —           —           —     

Land

     6,239         45         45         7,251         143         143   

Commercial real estate

     1,122         —           —           1,174         —           —     

Residential non-owner

     2,578         17         17         1,445         28         28   

Residential owner

     1,110         —           —           934         1         1   

Construction

     842         8         8         876         25         25   

Home equity & line of credit

     1,368         —           —           1,378         15         15   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 17,223         119         119         16,810         360         360   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Comparative totals for September 30, 2010

   $ 17,193         64         64         13,397         180         180   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(continued)

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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

 

3. Loans, Continued. Troubled debt restructurings entered during the period are as follows (dollars in thousands):

 

     Three Months Ended September 30, 2011      Nine Months Ended September 30, 2011         
     Outstanding Recorded Investment      Outstanding Recorded Investment      At  
     Number
of
Contracts
     Pre-
Modification
     Post-
Modification
     Number
of
Contracts
     Pre-
Modification
     Post-
Modification
     September 30,
2011
Nonaccrual
 

Troubled Debt Restructurings:

                    

Real estate mortgage loans:

                    

Office/retail/other:

                    

Modified interest rate and amortization

     —         $ —           —           1         2,718         2,718         —     

Land:

                    

Modified interest rate and amortization

     —           —           —           3         3,078         3,078         1,632   

Residential non-owner:

                    

Modified interest rate and amortization

     —           —           —           1         2,269         2,269         —     

Residential owner:

                    

Modified interest rates

     1         135         135         1         135         135         135   

Modified interest rate and amortization

     1         191         191         2         346         346         346   

Construction:

                    

Modified interest rates

     —           —           —           1         830         830         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     2       $ 326         326         9         9,376         9,376         2,113   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The allowance for loan losses on commercial real estate and residential real estate loans that have been restructured and are considered trouble debt restructurings (“TDR”) is included in the Company’s specific reserve. The specific reserve is determined on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral if the loan is collateral dependent. TDR’s that have subsequently defaulted are considered collateral-dependent.

The allowance for loan losses on commercial and consumer loans that have been restructured and are considered TDR’s is included in the Company’s specific reserve. The specific reserve is determined on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral if the loan is collateral-dependent. TDR’s that have subsequently defaulted are considered collateral-dependent. There were no TDR’s that subsequently defaulted during the three- and nine-month periods ended September 30, 2011, which were restructured during the last twelve months.

 

(continued)

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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

 

4. Loss Per Share. Basic loss per share has been computed on the basis of the weighted-average number of shares of common stock outstanding during the periods, which was 2,644,270 and 2,653,208 shares during the nine-month periods ended September 30, 2011 and 2010, respectively and 2,633,208 and 2,653,208 during the three-month periods ended September 30, 2011 and 2010, respectively. All outstanding stock options are not dilutive securities for the three month periods ended September 30, 2011 and for the nine month periods ended September 30, 2011 and 2010 due to the net losses of the Company. All outstanding stock options and warrants are not considered dilutive securities for the three month periods ended September 30, 2010 due to the exercise price exceeding the average market price for the purposes of calculating diluted EPS, which is computed using the treasury stock method.

5. Share-Based Compensation. The Company adopted a stock option plan for its employees and directors (the “Plan”). Fifteen percent of the total amount of common shares outstanding, up to 450,000 shares (currently 394,981 shares), have been reserved under the Plan. Stock options are granted at an exercise price equal to or greater than the fair market value of the common stock on the date of grant. Options granted to directors vest immediately and for employees, the options primarily vest over two years starting with the date of grant and ending on the second anniversary thereof. At September 30, 2011, there were 125,462 options available for future grants under the Plan. A summary of stock option transactions under the Plan for the nine-month period ended September 30, 2011, follows:

 

     Number
of
Options
    Weighted-
Average
Exercise
Price
     Weighted-
Average
Remaining
Contractual
Term
     Aggregate
Intrinsic
Value
 

Options outstanding at December 31, 2010

     246,203      $ 10.12         

Options forfeited

     (200     10.00         
  

 

 

         

Options outstanding at September 30, 2011

     246,003      $ 10.12         5.11 years       $ —     
  

 

 

   

 

 

    

 

 

    

 

 

 

Options exercisable at September 30, 2011

     246,003      $ 10.12         5.11 years       $ —     
  

 

 

   

 

 

    

 

 

    

 

 

 

There were no options exercised during the nine month periods ended September 30, 2011 and 2010. At September 30, 2011, there was no unrecognized compensation expense related to the nonvested share-based compensation arrangement granted under the plan. The total fair value of shares vesting and recognized as compensation was approximately $1,000 and $9,000 for the nine month periods ended September 30, 2011 and 2010, respectively.

 

(continued)

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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

 

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

 

            Fair Value Measurements at Reporting Date Using  
     Fair
Value
     Quoted Prices
In Active
Markets for
Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

As of September 30, 2011:

           

U.S. government agency securities

   $ 1,084         —           1,084         —     

Mortgage-backed securities

     44,895         —           44,895         —     

Corporate bonds

     1,540         —           1,540         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 47,519         —           47,519         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2010-

           

Mortgage-backed securities

   $ 49,304         —           49,304         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no transfers of securities between levels of inputs during the nine months ended September 30, 2011.

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

 

                                       

Total

Losses
Recorded in
Operations for
the Nine-Month

 
     Net Carrying Value at September 30, 2011             Period Ended  
                                 Total      September 30,  
     Total      Level 1      Level 2      Level 3      Losses      2011  

As of September 30, 2011:

                 

Impaired loans

   $ 10,508         —           —           10,508         4,097         2,336   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other real estate owned

   $ 7,762         —           —           7,762         1,352         663   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

                                       

Total

Losses
Recorded in
Operations for

 
     Net Carrying Value at December 31, 2010             the Year Ended  
                                 Total      December 31,  
     Total      Level 1      Level 2      Level 3      Losses      2010  

As of December 31, 2010:

                 

Impaired loans

   $ 9,088         —           —           9,088         3,717         3,493   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other real estate owned

   $ 6,359         —           —           6,359         1,134         1,107   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(continued)

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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

 

6. Fair Value Measurements, Continued. In addition, loans with a carrying value of $2,868,000 at September 30, 2011 were measured for impairment using Level 3 inputs and had a fair value in excess of carrying value.

In addition, loans with a carrying value of $5,894,000 at December 31, 2010 were measured for impairment using Level 3 inputs and had a fair value in excess of carrying value.

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

 

     At September 30, 2011      At December 31, 2010  
     Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
 

Financial assets:

           

Cash and cash equivalents

   $ 23,498         23,498         6,404         6,404   

Securities available for sale

     47,519         47,519         49,304         49,304   

Loans, net

     194,770         194,421         213,069         214,080   

Loans held for sale

     7,293         7,293         7,395         7,395   

Accrued interest receivable

     843         843         903         903   

Federal Home Loan Bank stock

     1,402         1,402         1,409         1,409   

Financial liabilities:

           

Deposits

     257,578         259,448         251,344         253,656   

Federal Home Loan Bank advances

     13,000         10,970         21,000         19,404   

Other borrowings

     3,032         3,032         3,054         3,054   

Accrued interest payable

     345         345         436         436   

Off-balance-sheet financial instruments

     —           —           —           —     

 

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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

 

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

General

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

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

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

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

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

 

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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

 

Capital Resources, Commitments and Capital Requirements

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

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

The following table summarizes the Bank’s contractual obligations, including certain on-balance sheet and off-balance sheet obligations, at September 30, 2011 (in thousands):

 

Contractual Obligations    Total  

Time deposit maturities

   $ 137,875   

Advances from Federal Home Loan Bank

     13,000   

Other borrowings

     3,032   

Commitments to extend credit

     871   

Unused lines of credit

     13,458   

Standby letters of credit

     97   
  

 

 

 

Total

   $ 168,333   
  

 

 

 

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

The Bank has agreed with its regulators to undertake a program of corrective and proactive actions as contained in a memorandum of understanding. The memorandum of understanding imposes no penalties on the Bank and as of September 30, 2011, the Bank was in compliance with all of its provisions. Specifically, the Bank has agreed to maintain its “well capitalized” position, to establish and maintain an adequate allowance for loan and lease losses, to reduce adversely classified assets, to submit to the regulators a strategic plan and a commercial real estate loan risk monitoring and reduction plan, to ensure compliance with laws, regulations and policy statements, to not pay dividends, to notify the regulators of any changes in directors or executive officers and to provide periodic reports as to the Bank’s compliance with the memorandum. We believe we are in substantive compliance at this time.

 

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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

 

Regulatory Capital Requirements

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

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and percentages of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. If such minimum amounts and percentages are met, the Bank is considered “adequately capitalized.” If the actual amounts exceed the requirements of “adequately capitalized,” and meet even more stringent minimum standards, they are considered “well capitalized.” Management believes as of September 30, 2011, the Bank meets the capital requirements for a “well capitalized” financial institution.

The table below shows the total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios of the Bank at September 30, 2011 and December 31, 2010, and the minimum required amounts and percentages ($ in thousands).

 

                               For Well  
                  For Capital     Capitalized  
     Actual     Adequacy Purposes     Purposes  
     Amount      Percent     Amount      Percent     Amount      Percent  

As of September 30, 2011:

               

Total capital to Risk- Weighted Assets

   $ 23,328         10.77   $ 17,328         8.00   $ 21,660         10.00

Tier I Capital to Risk- Weighted Assets

     20,586         9.50        8,668         4.00        13,002         6.00   

Tier I Capital to Average Assets

     20,586         6.83        12,056         4.00        15,070         5.00   

As of December 31, 2010:

               

Total capital to Risk- Weighted Assets

     26,170         11.47        18,253         8.00        22,816         10.00   

Tier I Capital to Risk- Weighted Assets

     23,303         10.22        9,121         4.00        13,681         6.00   

Tier I Capital to Average Assets

     23,303         7.62        12,233         4.00        15,291         5.00   

 

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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

 

Results of Operations

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

 

     Nine Months           Nine Months  
     Ended     Year Ended     Ended  
     September 30,     December 31,     September 30,  
     2011     2010     2010  

Average equity as a percentage of average assets

     8.63     9.16     9.21

Total equity to total assets at end of period

     8.48     8.79     8.84

Return on average assets (1)

     (0.72 )%      (1.01 )%      (1.04 )% 

Return on average equity (1)

     (8.31 )%      (10.98 )%      (11.26 )% 

Noninterest expense to average assets (1)

     3.24     3.12     2.80

Nonperforming loans to total loans at end of period (2)

     3.74     2.74     2.42

 

(1) Annualized for the nine-months ended September 30, 2011 and 2010.
(2) Nonperforming loans consist of nonaccrual loans and accruing loans contractually past due ninety days or more.

Changes in Financial Condition

Total assets decreased $2 million or 1%, from $303 million at December 31, 2010 to $301 million at September 30, 2011, primarily as a result of a $17 million increase in cash and cash equivalents somewhat offset by a decrease in net loans of $18 million. Deposits increased $6 million from $251.3 million at December 31, 2010 to $257.5 million at September 30, 2011.

 

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Net Interest Margin and Interest-Rate Spread

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

 

     Three Months Ended September 30,  
     2011     2010  
     Average
Balance
     Interest
and
Dividends
     Average
Yield/

Rate
    Average
Balance
     Interest
and
Dividends
     Average
Yield/
Rate
 
     ($ in thousands)  

Interest-earning assets:

                

Loans

   $ 203,441         2,759         5.38   $ 223,451         3,185         5.65

Securities

     46,641         314         2.67        34,670         258         2.95   

Other (1)

     24,612         7         0.11        32,530         13         0.16   
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-earning assets

     274,694         3,080         4.45        290,651         3,456         4.72   
     

 

 

         

 

 

    

Noninterest-earning assets

     30,127              26,363         
  

 

 

         

 

 

       

Total assets

   $ 304,821            $ 317,014         
  

 

 

         

 

 

       

Interest-bearing liabilities:

                

Deposits

     230,155         738         1.27        238,063         1,066         1.78   

FHLB advances and other borrowings

     19,474         160         3.26        24,787         174         2.79   
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing liabilities

     249,629         898         1.43        262,850         1,240         1.87   
     

 

 

         

 

 

    

Noninterest-bearing deposits

     28,658              24,236         

Noninterest-bearing liabilities

     1,190              1,956         

Stockholders’ equity

     25,344              27,972         
  

 

 

         

 

 

       

Total liabilities and stockholders’ equity

   $ 304,821            $ 317,014         
  

 

 

         

 

 

       

Net interest income

      $ 2,182            $ 2,216      
     

 

 

         

 

 

    

Interest-rate spread

           3.02           2.85
        

 

 

         

 

 

 

Net interest margin (2)

           3.15           3.02
        

 

 

         

 

 

 

Ratio of interest-earning assets to interest-bearing liabilities

     1.10              1.11         
  

 

 

         

 

 

       

 

(1) Includes interest-earning deposits, federal funds sold, time deposits and Federal Home Loan Bank stock.
(2) Net interest margin is annualized net interest income divided by average interest-earning assets.

 

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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

 

     Nine Months Ended September 30,  
     2011     2010  
     Average
Balance
     Interest
and
Dividends
     Average
Yield/
Rate
    Average
Balance
     Interest
and
Dividends
     Average
Yield/
Rate
 
     ($ in thousands)  

Interest-earning assets:

                

Loans

   $ 209,425         8,488         5.42   $ 228,663         9,646         5.64

Securities

     47,804         995         2.78        36,990         909         3.29   

Other (1)

     18,625         17         0.12        24,673         55         0.30   
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-earning assets

     275,854         9,500         4.60        290,326         10,610         4.89   
     

 

 

         

 

 

    

Noninterest-earning assets

     30,411              25,936         
  

 

 

         

 

 

       

Total assets

   $ 306,265            $ 316,262         
  

 

 

         

 

 

       

Interest-bearing liabilities:

                

Deposits

     228,252         2,386         1.40        237,574         3,390         1.91   

FHLB advances and other borrowings

     22,215         491         2.96        25,597         524         2.74   
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing liabilities

     250,467         2,877         1.54        263,171         3,914         1.99   
     

 

 

         

 

 

    

Noninterest-bearing deposits

     28,509              22,302         

Noninterest-bearing liabilities

     864              1,652         

Stockholders’ equity

     26,425              29,137         
  

 

 

         

 

 

       

Total liabilities and stockholders’ equity

   $ 306,265            $ 316,262         
  

 

 

         

 

 

       

Net interest income

      $ 6,623            $ 6,696      
     

 

 

         

 

 

    

Interest-rate spread

           3.07           2.90
        

 

 

         

 

 

 

Net interest margin (2)

           3.21           3.08
        

 

 

         

 

 

 

Ratio of interest-earning assets to interest-bearing liabilities

     1.10              1.10         
  

 

 

         

 

 

       

 

(1) Includes interest-earning deposits, federal funds sold, time deposits and Federal Home Loan Bank stock.
(2) Net interest margin is annualized net interest income divided by average interest-earning assets.

 

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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

 

Comparison of the Three-Month Periods Ended September 30, 2011 and 2010

General Operating Results. Net loss available to common shareholders for the three-month period ended September 30, 2011 was $217,000, or $(0.08) per basic and diluted common share, compared to a net earnings of $165,000, or $0.06 per basic and diluted share, for the comparable period in 2010. The $382,000 change resulted primarily from a $414,000 increase in noninterest expense and a $242,000 decrease in noninterest income, partially offset by a $75,000 decrease in provision for loan losses.

Interest Income. Interest income decreased $376,000 to $3.1 million for the three-month period ended September 30, 2011, compared to the three-month period ended September 30, 2010. The decrease was due to a decrease in the average yield earned on interest-earning assets from 4.72% for the three months ended September 30, 2010 to 4.45% for the three months ended September 30, 2011 and a $15.9 million decrease in average interest-earning assets outstanding for the three months ended September 30, 2011 compared to the 2010 period.

Interest Expense. Interest expense decreased $342,000 from $1.2 million for the three-month period ended September 30, 2010 to $898,000 for the three-month period ended September 30, 2011. The decrease was primarily due to a decrease in the average cost of interest-bearing liabilities from 1.87% for the three months ended September 30, 2010 to 1.43% for the comparable 2011 period and decrease of $13.2 million in average interest-bearing liabilities outstanding.

Provision for Loan Losses. The provision for loan losses is charged to operations to increase the total loan loss allowance to a level deemed appropriate by management. The provision is based upon the volume and type of lending conducted by the Company, industry standards, general economic conditions, particularly as they relate to the Company’s market area, and other factors related to the collectability of the Company’s loan portfolio. The Company recorded provisions for loan losses for the three-month periods ended September 30, 2011 and 2010 of $525,000 and $600,000, respectively. Management believes that the allowance for loan losses, which was $5.4 million or 2.70% of gross loans at September 30, 2011 is adequate.

Noninterest Income. Noninterest income decreased $242,000 during the 2011 period. The decrease was primarily due to a $478,000 decrease in gain on sale of securities, partially offset with an $187,000 increase in net gain on sale of loans and a $45,000 increase in other income compared to the three month period ended September 30, 2010.

Noninterest Expense. Noninterest expense increased by $414,000 from $2.1 million for the three-month period ended September 30, 2010 to $2.5 million for the three-month period ended September 30, 2011. The increase was primarily due to increases of $206,000 in salaries and employee benefits, $36,000 in occupancy and equipment expense, $41,000 in professional services, $29,000 in OREO expense, $149,000 in other expenses, all related to the overall growth of the Company.

Income Taxes. The income tax benefit was $64,000 for the three-month period ended September 30, 2011, compared to an income tax expense of $169,000 for the corresponding period in 2010.

 

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Comparison of the Nine-Month Periods Ended September 30, 2011 and 2010

General Operating Results. Net loss available to common shareholders for the nine month period ended September 30, 2011 was $1.9 million, or $(.74) per basic and diluted common share, compared to $2.8 million, or $(1.05) per basic and diluted share, for the comparable period in 2010. The $819,000 change resulted primarily from a $2.4 million decrease in provision for loan losses, partially offset by a $276,000 decrease in noninterest income and an increase of $810,000 in noninterest expense.

Interest Income. Interest income decreased $1.1 million to $9.5 million for the nine-month period ended September 30, 2011, compared to the nine-month period ended September 30, 2010. The decrease was due to a $14.5 million decrease in average interest earning assets outstanding for the nine months ended September 30, 2011 compared to the 2010 period and a decrease in the average yield earned on interest earning assets from 4.89% for the nine months ended September 30, 2010 to 4.60% for the nine months ended September 30, 2011.

Interest Expense. Interest expense decreased $1 million from $3.9 million for the nine-month period ended September 30, 2010 to $2.9 million for the nine-month period ended September 30, 2011. The decrease was primarily due to a decrease in the average cost of interest-bearing liabilities from 1.99% for the nine months ended September 30, 2010 to 1.54% for the comparable 2011 period and a decrease of $12.7 million in average interest-bearing liabilities.

Provision for Loan Losses. The provision for loan losses is charged to operations to increase the total loan loss allowance to a level deemed appropriate by management. The provision is based upon the volume and type of lending conducted by the Company, industry standards, general economic conditions, particularly as they relate to the Company’s market area, and other factors related to the collectability of the Company’s loan portfolio. The Company recorded provisions for loan losses for the nine-month periods ended September 30, 2011 and 2010 of $3.5 million and $5.9 million, respectively. Management believes that the allowance for loan losses, which was $5.4 million or 2.70% of gross loans at September 30, 2011 is adequate.

Noninterest Income. Noninterest income decreased $276,000 during the 2011 period. The decrease was primarily due to a $478,000 decrease in net gain on sale of securities and $7,000 in deposit account fees, partially offset by increases of $176,000 in gain on sale of loans and $33,000 in other income when compared to the nine-month period ended September 30, 2010.

Noninterest Expense. Noninterest expense increased by $810,000 from $6.6 million for the nine-month period ended September 30, 2010 to $7.4 million for the nine-month period ended September 30, 2011. The increase was primarily due to increases of $307,000 in salaries and employee benefits, $53,000 in occupancy and equipment expense, $154,000 in professional services, and $285,000 in OREO expense, all related to the overall growth of the Company.

Income Taxes. The income tax benefit was $972,000 for the nine-month period ended September 30, 2011, compared to an income tax benefit of $1.4 million for the corresponding period in 2010.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable

 

Item 4. Controls and Procedures

 

  a. Evaluation of disclosure controls and procedures. The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon their evaluation of those controls and procedures performed as of September 30, 2011, the Principal Executive and Principal Financial Officer of the Company concluded that the Company’s disclosure controls and procedures were adequate.

 

  b. Changes in internal controls. The Company made no significant changes in its internal controls over financial reporting during the quarter ended September 30, 2011 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

  c. Limitations on Effectiveness of Controls. The Company, including its Principal Executive Officer and Principal Financial Officer, does not expect that our disclosure controls and internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

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Part II - OTHER INFORMATION

 

Item 1. Legal Proceedings

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

 

Item 1.A. Risk Factors

Not applicable

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the quarter ended June 30, 2011, the Company repurchased 20,000 shares of its common stock from the Bank. The Bank had taken title to the shares when it foreclosed on a lien on such shares which secured a loan made by the Bank.

 

Period

   Total Number
of Shares
Purchased
     Average Price
Paid Per
Share
     Total Number
of Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs
     Maximum
Number
of Shares
That May
Yet Be
Purchased
Under the
Plans or
Programs
 

April 30, 2011

     0         N/A         N/A         N/A   

May 31, 2011

     0         N/A         N/A         N/A   

June 30, 2011

     20,000       $ 5.00         N/A         N/A   

Total

     20,000       $ 5.00         N/A         N/A   

 

Item 3. Defaults upon Senior Securities

Not applicable

 

Item 4. (Removed and Reserved)

 

Item 5. Other Information

Not applicable

 

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Item 6. Exhibits

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

 

Exhibit No.

  

Description of Exhibit

(a)

     3.1    Articles of Incorporation

(a)

     3.2    Bylaws

(b)

     3.3    Articles of Amendment to the Articles of Incorporation authorizing the Series A Preferred Shares

(b)

     3.4    Articles of Amendment to the Articles of Incorporation authorizing the Series B Preferred Shares

(a)

     4.1    Specimen Common Stock Certificate

(a)

     4.2    Warrant Plan and Specimen Warrant Plan

(b)

     4.3    Form of Certificate for Series A Preferred Stock

(b)

     4.4    Form of Certificate for Series B Preferred Stock

(c)

     4.5    2005 Stock Plan

(a)

   10.1    Employment Agreement with Jon M. Kurtz

(a)

   10.2    Lease for Main Office

(b)

   10.3    Letter Agreement, dated January 23, 2009 between AFSI and the United States Department of the Treasury

(b)

   10.4    Form of Waiver

(b)

   10.5    Form of Compliance Agreement

(b)

   10.6    Securities Purchase Agreement – Standard Terms between the Company and the United States Department of the Treasury

(d)

   10.8    Employment Agreement with Robert L. Page

(a)

   14.1    Code of Ethics

(a)

   21.1    Schedule of Subsidiaries

31.1

      Certification of Chief Executive Officer required by Rule 13a-14(a)/15d-14(a) under the Exchange Act

31.2

      Certification of Principal Financial Officer required by Rule 13a-14(a)/15d-14(a) under the Exchange Act

32.1

      Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

      Certification of Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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SIGNATURES

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

Date: November 14, 2011

 

Alarion Financial Services, Inc.
By:  

/s/ Jon M. Kurtz

Name:   Jon M. Kurtz, President and
  Principal Executive Officer
By:  

/s/ Matthew Ivers

Name:   Matthew Ivers, Senior Vice President
  and Principal Financial and Accounting
  Officer

 

34