Tableof Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**(MARK ONE)**

 

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

 

**For the Quarterly Period ended****September**** 30, 2009**

 

**OR**

 

**o****        ****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the Transition Period from             to             **

 

**Commission File No. 333-127242**

 

**AtlanticBancshares, Inc.**

(Exact name of registrant as specified in its charter)

 

| **South Carolina**           | ** ** | **20-3047433**      |
|------------------------------|------------|---------------------|
| (State or other jurisdiction |       | (I.R.S. Employer    |
| of incorporation)            |       | Identification No.) |

 

**One Sheridan Park Circle, PO Box 3077**

**Bluffton, South Carolina 29910**

(Address of principal executive offices)

 

(**843**) **815-7111**

(Registrant’s telephone number, including area code)

 

**1 Sheridan Drive, Suite J Bluffton, South Carolina 29910**

(Address of former principal executive offices)

 

----

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes x  No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). o Yes  o No

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer or a smaller reportingcompany.  See the definitions of “large accelerated filer,” “acceleratedfiler” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

| Large accelerated filer o                   |   | Accelerated filer o         |
|---------------------------------------------|--------|-----------------------------|
|                                        |   |                        |
| Non-accelerated o                           |   | Smaller reporting company x |
| (do not check if smaller reporting company) |   |                        |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).Yes o  No x

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date: 1,403,147 shares of common stock, no par value pershare, were issued and outstanding as of November 13, 2009.

 

 

 

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Table of Contents

 

**INDEX**

 
| ** **                              | ** **                                                                                                                                        | ** ** | **Page No.** |
|-----------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------|
| **PART I - FINANCIAL INFORMATION** |                                                                                                                                              | 3          |
|                                    |                                                                                                                                              |       |         |
| Item 1.                                 | Financial  Statements (Unaudited)                                                                                                                 |       | 3            |
|                                    |                                                                                                                                              |       |         |
|                                    | Condensed Balance Sheets — September 30, 2009 and  December 31, 2008                                                               |       | 3            |
|                                    |                                                                                                                                              |       |         |
|                                    | Condensed Statements of Operations - Nine months ended  September 30, 2009 and 2008 and Three months ended September 30,  2009 and 2008 |       | 4            |
|                                    |                                                                                                                                              |       |         |
|                                    | Condensed Statement of Shareholders’ Equity (Deficit)  - Nine months ended September 30, 2009 and 2008                                  |       | 5            |
|                                    |                                                                                                                                              |       |         |
|                                    | Condensed Statement of Cash Flows - Nine months ended  September 30, 2009 and 2008                                                           |       | 6            |
|                                    |                                                                                                                                              |       |         |
|                                    | Notes to Condensed Financial Statements                                                                                                           |       | 7            |
|                                    |                                                                                                                                              |       |         |
| Item 2.                                 | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                       |       | 14           |
|                                    |                                                                                                                                              |       |         |
| Item 3.                                 | Quantitative  and Qualitative Disclosures About Market Risk                                                                                       |       | 25           |
|                                    |                                                                                                                                              |       |         |
| Item 4.                                 | Controls and  Procedures                                                                                                                          |       | 25           |
|                                    |                                                                                                                                              |       |         |
| **PART II  - OTHER INFORMATION**   |                                                                                                                                              | 26         |
|                                    |                                                                                                                                              |       |         |
| Item 1.                                 | Legal Proceedings                                                                                                                                 |       | 26           |
|                                    |                                                                                                                                              |       |         |
| Item 2.                                 | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                      |       | 26           |
|                                    |                                                                                                                                              |       |         |
| Item 3.                                 | Defaults  Upon Senior Securities                                                                                                                  |       | 26           |
|                                    |                                                                                                                                              |       |         |
| Item 4.                                 | Submission  of Matters to a Vote of Security Holders                                                                                              |       | 26           |
|                                    |                                                                                                                                              |       |         |
| Item 5.                                 | Other Information                                                                                                                                 |       | 26           |
|                                    |                                                                                                                                              |       |         |
| Item 6.                                 | Exhibits                                                                                                                                          |       | 26           |

 

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Table of Contents

 

**ATLANTIC BANCSHARES, INC.**

 

**Consolidated Balance Sheets**

 

**PART I - FINANCIAL INFORMATION**

**Item 1 - Financial Statements****.**

 
| ** **                                                                                                        | ** ** | **September 30,** | ** **     | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|------------------------|----------------|-----------------------|------------|
| ** **                                                                                                        | ** ** | **2009**               | ** **     | **2008**              | ** ** |
| ** **                                                                                                        | ** ** | **(Unaudited)**        | ** **     | **(Audited)**         | ** ** |
| **Assets:**                                                                                                       | ** ** | ** **             | ** **     | ** **            | ** ** |
| Cash and cash equivalents:                                                                                        |       |                   |           |                  |       |
| Cash and due from banks                                                                                           |       | $                      | 2,084,871      |                  | $          | 577,915 |   |
| Total cash and cash equivalents                                                                                   |       | 2,084,871              |           | 577,915               |       |
|                                                                                                              |       |                   |           |                  |       |
| Securities available for sale                                                                                     |       | 13,641,862             |           | 16,388,747            |       |
| Nonmarketable equity securities                                                                                   |       | 1,003,600              |           | 891,200               |       |
|                                                                                                              |       |                   |           |                  |       |
| Loans receivable                                                                                                  |       | 73,666,989             |           | 75,363,221            |       |
| Less allowance for loan losses                                                                                    |       | (795,064               | )              | (1,075,776            | )          |
| Loans, net                                                                                                        |       | 72,871,925             |           | 74,287,445            |       |
|                                                                                                              |       |                   |           |                  |       |
| Accrued interest receivable                                                                                       |       | 290,193                |           | 319,048               |       |
| Premises, furniture and  equipment, net                                                                           |       | 1,022,846              |           | 1,177,974             |       |
| Deferred tax asset                                                                                                |       | 66,372                 |           | 1,335,678             |       |
| Other assets                                                                                                      |       | 343,725                |           | 365,190               |       |
| Total assets                                                                                                      | ** ** | **$**                  | **91,325,394** | ** **            | **$**      | **95,343,197** | ** ** |
|                                                                                                              |       |                   |           |                  |       |
| **Liabilities:**                                                                                                  | ** ** | ** **             | ** **     | ** **            | ** ** |
| Deposits:                                                                                                         |       |                   |           |                  |       |
| Noninterest bearing transaction  accounts                                                                         |       | $                      | 8,934,554      |                  | $          | 5,722,426 |   |
| Interest-bearing transaction  accounts                                                                            |       | 2,386,660              |           | 3,023,016             |       |
| Savings and money market                                                                                          |       | 16,873,933             |           | 20,285,985            |       |
| Time deposits $100,000 and over                                                                                   |       | 20,170,348             |           | 20,195,037            |       |
| Other time deposits                                                                                               |       | 15,299,056             |           | 18,740,770            |       |
| Total deposits                                                                                                    |       | 63,664,551             |           | 67,967,234            |       |
|                                                                                                              |       |                   |           |                  |       |
| Advances from Federal Home Loan  Bank                                                                             |       | 18,500,000             |           | 16,500,000            |       |
| Federal funds purchased                                                                                           |       | —                 |           | 236,500               |       |
| Accrued interest payable                                                                                          |       | 239,156                |           | 290,791               |       |
| Deferred tax payable on  unrealized investment gains                                                              |       | 232,752                |           | 198,366               |       |
| Other liabilities                                                                                                 |       | 196,293                |           | 180,302               |       |
| Total liabilities                                                                                                 |       | 82,832,752             |           | 85,373,193            |       |
|                                                                                                              |       |                   |           |                  |       |
| Commitments and contingencies                                                                                     |       |                   |           |                  |       |
|                                                                                                              |       |                   |           |                  |       |
| **Shareholders’  equity:**                                                                                   | ** ** | ** **             | ** **     | ** **            | ** ** |
| Preferred stock, no par value;  10,000,000 shares authorized; no shares issued and outstanding                    |       | —                 |           | —                |       |
| Common stock, no par value;  10,000,000 shares authorized; 1,403,150 and 1,251,577 shares issued and  outstanding |       | 12,863,986             |           | 11,982,122            |       |
| Capital surplus                                                                                                   |       | 356,794                |           | 271,806               |       |
| Accumulated other comprehensive  income                                                                           |       | 451,814                |           | 385,065               |       |
| Deficit                                                                                                           |       | (5,179,952             | )              | (2,668,989            | )          |
| Total shareholders’ equity                                                                                   |       | 8,492,642              |           | 9,970,004             |       |
| Total liabilities and  shareholders’ equity                                                                  | ** ** | **$**                  | **91,325,394** | ** **            | **$**      | **95,343,197** | ** ** |

 

See notes to consolidated financial statements.

 

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Table ofContents

 

**ATLANTIC BANCSHARES, INC.**

 

**Condensed Statements of Operations**

**(Unaudited)**

** **
| ** **                                                         | ** ** | **For the nine months ended** | ** ** | **For the three months ended** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------|------------|--------------------------------|------------|
| ** **                                                         | ** ** | **September 30,**        | ** ** | **September 30,**         | ** ** |
| ** **                                                         | ** ** | **2009**                      | ** ** | **2008**                       | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                         | ** ** | ** **                    | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Interest income:**                                               | ** ** | ** **                    | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Loans, including fees                                              |       | $                             | 3,388,171  |                           | $          | 3,657,855 |   | $ | 1,134,109 |   | $ | 1,223,503 |   |
| Securities, available for sale, taxable                            |       | 556,660                       |       | 686,136                        |       | 173,502 |   | 220,079 |   |
| Nonmarketable equity securities                                    |       | 977                           |       | 23,721                         |       | 977 |   | 6,085 |   |
| Federal funds sold                                                 |       | 118                           |       | 335                            |       | — |   | 212 |   |
| Interest bearing deposits with other banks                         |       | 68                            |       | 4,508                          |       | 29 |   | 786 |   |
| Total                                                              |       | 3,945,994                     |       | 4,372,555                      |       | 1,308,617 |   | 1,450,665 |   |
|                                                               |       |                          |       |                           |       |   |   |   |   |
| **Interest expense:**                                              |       |                          |       |                           |       |   |   |   |   |
| Time deposits $100,000 and over                                    |       | 505,957                       |       | 481,519                        |       | 150,172 |   | 165,807 |   |
| Other deposits                                                     |       | 630,366                       |       | 1,322,557                      |       | 196,508 |   | 370,726 |   |
| Other borrowings                                                   |       | 430,145                       |       | 348,981                        |       | 144,977 |   | 136,486 |   |
| Total                                                              |       | 1,566,468                     |       | 2,153,057                      |       | 491,657 |   | 673,019 |   |
| ** **                                                         |       |                          |       |                           |       |   |   |   |   |
| **Net interest income**                                            |       | 2,379,526                     |       | 2,219,498                      |       | 816,960 |   | 777,646 |   |
|                                                               |       |                          |       |                           |       |   |   |   |   |
| Provision for loan losses                                          |       | 1,304,300                     |       | 523,500                        |       | 836,000 |   | 95,550 |   |
| **Net interest income (loss)  after provision for loan****losses** |       | 1,075,226                     |       | 1,695,998                      |       | (19,040 | ) | 682,096 |   |
| ** **                                                         |       |                          |       |                           |       |   |   |   |   |
| **Other operating income:**                                        |       |                          |       |                           |       |   |   |   |   |
| Service fees on deposit accounts                                   |       | 101,357                       |       | 71,543                         |       | 35,690 |   | 28,425 |   |
| Residential mortgage origination fees                              |       | 19,887                        |       | 27,725                         |       | 1,749 |   | 2,201 |   |
| Other income                                                       |       | 74,309                        |       | 81,592                         |       | 29,252 |   | 31,724 |   |
| Total                                                              |       | 195,553                       |       | 180,860                        |       | 66,691 |   | 62,350 |   |
| ** **                                                         |       |                          |       |                           |       |   |   |   |   |
| **Noninterest expense:**                                           |       |                          |       |                           |       |   |   |   |   |
| Salaries and employee benefits                                     |       | 1,197,353                     |       | 1,276,212                      |       | 401,371 |   | 438,108 |   |
| Net occupancy                                                      |       | 296,525                       |       | 237,136                        |       | 101,143 |   | 100,917 |   |
| Professional fees                                                  |       | 153,572                       |       | 149,780                        |       | 59,271 |   | 62,381 |   |
| Marketing                                                          |       | 118,500                       |       | 122,871                        |       | 37,607 |   | 45,494 |   |
| Furniture and equipment                                            |       | 126,892                       |       | 162,963                        |       | 34,668 |   | 67,539 |   |
| Data processing and related costs                                  |       | 228,314                       |       | 215,386                        |       | 73,089 |   | 74,932 |   |
| Other operating                                                    |       | 391,281                       |       | 346,728                        |       | 168,799 |   | 138,061 |   |
| Total                                                              |       | 2,512,437                     |       | 2,511,076                      |       | 875,948 |   | 927,432 |   |
| ** **                                                         |       |                          |       |                           |       |   |   |   |   |
| **Loss before income tax  (expense) benefit**                      |       | (1,241,658                    | )          | (634,218                       | )          | (828,297 | ) | (182,986 | ) |
| ** **                                                         |       |                          |       |                           |       |   |   |   |   |
| Income tax (expense) benefit                                       |       | (1,269,305                    | )          | 215,618                        |       | (1,409,870 | ) | 62,198 |   |
|                                                               |       |                          |       |                           |       |   |   |   |   |
| **Net loss**                                                       |       | $                             | (2,510,963 | )                              | $          | (418,600 | ) | $ | (2,238,167 | ) | $ | (120,788 | ) |
| ** **                                                         |       |                          |       |                           |       |   |   |   |   |
| **Losses per share**                                               |       |                          |       |                           |       |   |   |   |   |
| Basic loss per share                                               |       | $                             | (2.01      | )                              | $          | (.33 | ) | $ | (1.79 | ) | $ | (.10 | ) |

 

See notes to consolidated financial statements.

 

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Table of Contents

 

**ATLANTIC BANCSHARES, INC.**

 

**Consolidated Statements of Changes in Shareholders’ Equity andComprehensive Income**

**For the nine months ended September 30, 2009 and 2008**

**(Unaudited)**

** **
| ** **                                                                | ** ** | ** **            | ** ** | ** **  | ** **     | ** **        | ** ** | **Accumulated** | ** ** | ** **             | ** **  | ** **                | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------|------------|-------------|----------------|-------------------|------------|-----------------|------------|------------------------|-------------|---------------------------|------------|
| ** **                                                                | ** ** | ** **            | ** ** | ** **  | ** **     | **Additional**    | ** ** | **other**       | ** ** | ** **             | ** **  | **Total**                 | ** ** |
| ** **                                                                | ** ** | **Common stock** | ** ** | **Paid-in** | ** **     | **comprehensive** | ** ** | ** **      | ** ** | **Shareholders’** | ** **  |
| ** **                                                                | ** ** | **Shares**            | ** ** | **Amount**  | ** **     | **Capital**       | ** ** | **income**      | ** ** | **Deficit**            | ** **  | **Equity (deficit)** | ** ** |
|                                                                      |       |                  |       |        |           |              |       |            |       |                   |        |                      |       |
| **December 31,  2007**                                               |       | 1,251,577             |       | $           | 11,982,122     |              | $          | 159,781         |       | $                      | 20,518      |                      | $          | (2,180,163 | ) | $ | 9,982,258 |   |
|                                                                      |       |                  |       |        |           |              |       |            |       |                   |        |                      |       |
| Net loss                                                                  |       | —                |       | —      |           | —            |       | —          |       | (418,600               | )           | (418,600                  | )          |
|                                                                      |       |                  |       |        |           |              |       |            |       |                   |        |                      |       |
| Other comprehensive loss, net of tax of $38,472                           |       | —                |       | —      |           | —            |       | (74,681         | )          | —                 |        | (74,681                   | )          |
|                                                                      |       |                  |       |        |           |              |       |            |       |                   |        |                      |       |
| Total comprehensive loss                                                  |       | —                |       | —      |           | —            |       | —          |       | —                 |        | (493,281                  | )          |
|                                                                      |       |                  |       |        |           |              |       |            |       |                   |        |                      |       |
| Stock based compensation                                                  |       | —                |       | —      |           | 84,333            |       | —          |       | —                 |        | 84,333                    |       |
|                                                                      |       |                  |       |        |           |              |       |            |       |                   |        |                      |       |
| **September 30,  2008**                                              | ** ** | **1,251,577**         | ** ** | **$**       | **11,982,122** | ** **        | **$**      | **244,114**     | ** ** | **$**                  | **(54,163** | **)**                     | **$**      | **(2,598,763** | **)** | **$** | **9,573,310** | ** ** |
|                                                                      |       |                  |       |        |           |              |       |            |       |                   |        |                      |       |
| **December 31,  2008**                                               |       | 1,251,577             |       | $           | 11,982,122     |              | $          | 271,806         |       | $                      | 385,065     |                      | $          | (2,668,989 | ) | $ | 9,970,004 |   |
|                                                                      |       |                  |       |        |           |              |       |            |       |                   |        |                      |       |
| Proceeds from issuance of common stock, net of offering  costs of $27,556 |       | 151,573               |       | 881,882     |           | —            |       | —          |       | —                 |        | 881,882                   |       |
|                                                                      |       |                  |       |        |           |              |       |            |       |                   |        |                      |       |
| Cash paid for fractional shares                                           |       | (3                    | )          | (18         | )              | —            |       | —          |       | —                 |        | (18                       | )          |
|                                                                      |       |                  |       |        |           |              |       |            |       |                   |        |                      |       |
| Net loss                                                                  |       | —                |       | —      |           | —            |       | —          |       | (2,510,963             | )           | (2,510,963                | )          |
|                                                                      |       |                  |       |        |           |              |       |            |       |                   |        |                      |       |
| Other comprehensive income, net of tax of $34,386                         |       | —                |       | —      |           | —            |       | 66,749          |       | —                 |        | 66,749                    |       |
|                                                                      |       |                  |       |        |           |              |       |            |       |                   |        |                      |       |
| Total comprehensive loss                                                  |       | —                |       | —      |           | —            |       | —          |       | —                 |        | (2,444,214                | )          |
|                                                                      |       |                  |       |        |           |              |       |            |       |                   |        |                      |       |
| Stock based compensation                                                  |       | —                |       | —      |           | 84,988            |       | —          |       | —                 |        | 84,988                    |       |
|                                                                      |       |                  |       |        |           |              |       |            |       |                   |        |                      |       |
| **September 30,  2009**                                              | ** ** | **1,403,147**         | ** ** | **$**       | **12,863,986** | ** **        | **$**      | **356,794**     | ** ** | **$**                  | **451,814** | ** **                | **$**      | **(5,179,952** | **)** | **$** | **8,492,642** | ** ** |

 

See notes to consolidated financial statements.

 

5

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Table ofContents

 

**ATLANTIC BANCSHARES, INC.**

 

**Consolidated Statements of Cash Flows**

**(Unaudited)**

** **
| ** **                                                                                   | ** ** | **Nine months ended**       | ** **     |
|----------------------------------------------------------------------------------------------|------------|-----------------------------|----------------|
| ** **                                                                                   | ** ** | **September 30, 2009** | ** **     | **September 30, 2008** | ** ** |
| **Cash flows from  operating activities:**                                                   |       |                        |           |   |   |
| Net loss                                                                                     |       | $                           | (2,510,963     | ) | $ | (418,600 | ) |
| Adjustments to reconcile net loss  to net cash provided by operating activities:             |       |                        |           |   |   |
| Provision for loan losses                                                                    |       | 1,304,300                   |           | 523,500 |   |
| Gain on sale of repossessed  assets                                                          |       | (600                        | )              | — |   |
| Write off of other real estate  owned                                                        |       | 41,100                      |           | 29,287 |   |
| Depreciation and amortization  expense                                                       |       | 157,280                     |           | 131,785 |   |
| Loss on sale of fixed assets                                                                 |       | —                      |           | 12,110 |   |
| Accretion on securities available  for sale                                                  |       | (40,640                     | )              | (76,293 | ) |
| Stock-based compensation expense                                                             |       | 84,988                      |           | 84,333 |   |
| Deferred income tax benefit                                                                  |       | (414,036                    | )              | (215,619 | ) |
| Deferred tax valuation allowance                                                             |       | 1,683,342                   |           | — |   |
| Decrease in interest receivable                                                              |       | 28,855                      |           | 46,707 |   |
| (Decrease) increase in interest  payable                                                     |       | (51,635                     | )              | 109,130 |   |
| Increase in other assets                                                                     |       | (19,635                     | )              | (67,163 | ) |
| Increase in other liabilities                                                                |       | 15,991                      |           | 12,752 |   |
| Net cash provided by operating  activities                                                   |       | 278,347                     |           | 171,929 |   |
|                                                                                         |       |                        |           |   |   |
| **Cash flows from  investing activities:**                                                   | ** ** | ** **                  | ** **     | ** ** | ** ** |
| Net decrease (increase) in loans  receivable                                                 |       | 107,120                     |           | (7,022,814 | ) |
| Purchase of premises, furniture  and equipment                                               |       | (2,152                      | )              | (978,237 | ) |
| Proceeds from sales of fixed  assets                                                         |       | —                      |           | 325 |   |
| Proceeds from sales of  repossessed assets                                                   |       | 4,700                       |           | — |   |
| Purchase of securities available  for sale                                                   |       | —                      |           | (8,436,871 | ) |
| Purchase of nonmarketable equity  securities                                                 |       | (112,400                    | )              | (730,300 | ) |
| Repayments, maturities and calls  of securities available for sale                           |       | 2,888,660                   |           | 5,227,008 |   |
| Proceeds from sales of nonmarketable  equity securities                                      |       | —                      |           | 157,500 |   |
| Net cash provided (used) by  investing activities                                            |       | 2,885,928                   |           | (11,783,389 | ) |
|                                                                                         |       |                        |           |   |   |
| **Cash flows from  financing activities:**                                                   | ** ** | ** **                  | ** **     | ** ** | ** ** |
| Net decrease in demand deposits,  interest-bearing transaction accounts and savings accounts |       | (836,280                    | )              | (3,559 | ) |
| Net (decrease) increase in  certificate of deposit and other time deposits                   |       | (3,466,403                  | )              | 2,257,426 |   |
| Net decrease in federal funds  purchased                                                     |       | (236,500                    | )              | (2,013,300 | ) |
| Net increase in FHLB advances                                                                |       | 2,000,000                   |           | 11,500,000 |   |
| Proceeds from sale of common  stock, net of stock issuance costs                             |       | 881,864                     |           | — |   |
| Net cash (used) provided by  financing activities                                            |       | (1,657,319                  | )              | 11,740,567 |   |
|                                                                                         |       |                        |           |   |   |
| **Net increase  in cash and cash equivalents**                                               |       | 1,506,956                   |           | 129,107 |   |
|                                                                                         |       |                        |           |   |   |
| **Cash and cash  equivalents, beginning of the period**                                      |       | 577,915                     |           | 1,630,198 |   |
|                                                                                         |       |                        |           |   |   |
| **Cash and cash  equivalents, end of the period**                                            | ** ** | **$**                       | **2 ,084,871** | ** ** | **$** | **1,759,305** | ** ** |
|                                                                                         |       |                        |           |   |   |
| **Cash paid for:**                                                                           |       |                        |           |   |   |
| Interest                                                                                     |       | $                           | 1,618,103      |   | $ | 2,043,927 |   |
|                                                                                         |       |                        |           |   |   |
| Income taxes                                                                                 |       | $                           | —         |   | $ | — |   |
|                                                                                         |       |                        |           |   |   |
| **Supplemental  disclosures of noncash activities:**                                         |       |                        |           |   |   |
| Other assets acquired in  settlement of loans                                                |       | $                           | 4,100          |   | $ | 582,427 |   |

 

See notes to consolidated financial statements.

 

6

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Table of Contents

 

**ATLANTIC BANCSHARES, INC.**

 

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

**Note 1 - Basis of Presentation**

 

Theaccompanying unaudited consolidated condensed financial statements for AtlanticBancshares, Inc. (“Company”) were prepared in accordance with instructionsfor Form 10-Q and, therefore, do not include all disclosures necessary fora complete presentation of financial condition, results of operations, and cashflows in conformity with generally accepted accounting principles.  All adjustments, consisting only of normalrecurring accruals, which are, in the opinion of management, necessary for fairpresentation of the interim consolidated financial statements have beenincluded.  The results of operations forthe nine month period ended September 30, 2009 are not necessarilyindicative of the results that may be expected for the entire year.  These consolidated financial statements donot include all disclosures required by generally accepted accountingprinciples and should be read in conjunction with the Company’s auditedconsolidated financial statements and related notes for the year ended December 31,2008.

 

**Note 2 - Recently Issued Accounting Pronouncements**

 

Thefollowing is a summary of recent authoritative pronouncements that could impactthe accounting, reporting, and / or disclosure of financial information by theCompany.

 

FSP EITF 99-20-1, “Amendments to the ImpairmentGuidance of EITF Issue No. 99-20,” (FASB ASC 325-40-65) (“FSP EITF 99-20-1”)was issued in January 2009.  Priorto the FSP, other-than-temporary impairment was determined by using eitherEmerging Issues Task Force (“EITF”) Issue No. 99-20, “Recognition ofInterest Income and Impairment on Purchased Beneficial Interests and BeneficialInterests that Continue to be Held by a Transferor in Securitized FinancialAssets,” (“EITF 99-20”) or SFAS No. 115, “Accounting for CertainInvestments in Debt and Equity Securities,” (“SFAS 115”) depending on the typeof security.  EITF 99-20 required the useof market participant assumptions regarding future cash flows regarding theprobability of collecting all cash flows previously projected.  SFAS 115 determined impairment to be otherthan temporary if it was probable that the holder would be unable to collectall amounts due according to the contractual terms. To achieve a moreconsistent determination of other-than-temporary impairment, the FSP amendsEITF 99-20 to determine any other-than-temporary impairment based on theguidance in SFAS 115, allowing management to use more judgment in determiningany other-than-temporary impairment.  TheFSP was effective for reporting periods ending after December 15,2008.  Management has reviewed the Company’ssecurity portfolio and evaluated the portfolio for any other-than-temporaryimpairments.

 

On April 9, 2009, the FASB issued threestaff positions related to fair value which are discussed below.

 

FSP SFAS 115-2 and SFAS 124-2 (FASB ASC320-10-65), “Recognition and Presentation of Other-Than-Temporary Impairments,”(“FSP SFAS 115-2 and SFAS 124-2”) categorizes losses on debt securitiesavailable-for-sale or held-to-maturity determined by management to beother-than-temporarily impaired into losses due to credit issues and lossesrelated to all other factors. Other-than-temporary impairment (OTTI) exists when it is more likelythan not that the security will mature or be sold before its amortized costbasis can be recovered.  An OTTI relatedto credit losses should be recognized through earnings.  An OTTI related to other factors should berecognized in other comprehensive income. The FSP does not amend existing recognition and measurement guidancerelated to other-than-temporary impairments of equity securities.  Annual disclosures required in SFAS 115 andFSP SFAS 115-1 and SFAS 124-1 are also required for interim periods (includingthe aging of securities with unrealized losses).

 

FSP SFAS 157-4 (FASB ASC 820-10-65), “DeterminingFair Value When the Volume and Level of Activity for the Asset or LiabilityHave Significantly Decreased and Identifying Transactions That are Not Orderly”recognizes that quoted prices may not be determinative of fair value when thevolume and level of trading activity has significantly decreased.  The evaluation of certain factors maynecessitate that fair value be determined using a different valuationtechnique.  Fair value should be theprice that would be received to sell an asset or paid to transfer a liabilityin an orderly transaction, not a forced liquidation or distressed sale.  If a transaction is considered to not beorderly, little, if any, weight should be placed on the transaction price.  If there is not sufficient information toconclude as to whether or not the transaction is orderly, the transaction priceshould be considered when estimating fair value.  An entity’s intention to hold an asset orliability is not relevant in determining fair value.  Quoted prices provided by pricing servicesmay still be used when estimating fair value in accordance with SFAS 157;however, the entity should evaluate whether the quoted prices are based oncurrent information and orderly transactions. Inputs and valuation techniques are required to be disclosed in additionto any changes in valuation techniques.

 

FSP SFAS 107-1 and APB 28-1 (FASB ASC825-10-65), “Interim Disclosures about Fair Value of Financial Instruments”requires disclosures about the fair value of financial instruments for interimreporting periods of publicly traded companies as well as in annual financialstatements and also requires those disclosures in summarized financialinformation at interim reporting periods A publicly traded company includes anycompany whose securities trade in a public market on either a stock exchange orin the over-

 

7

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Table of Contents

 

**ATLANTIC BANCSHARES, INC.**

 

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

the-counter market, or any company that is aconduit bond obligor.  Additionally, whena company makes a filing with a regulatory agency in preparation for sale ofits securities in a public market it is considered a publicly traded companyfor this purpose.

 

The three staff positions are effective forperiods ending after June 15, 2009, with early adoption of all threepermitted for periods ending after March 15, 2009.  The Company adopted the staff positions forits second quarter 10-Q.  The staffpositions had no material impact on the financial statements.  Additional disclosures have been providedwhere applicable.

 

Also on April 1, 2009, the FASB issued FSPSFAS 141(R)-1 (FASB ASC 805-20-25, 30, 35, 50), “Accounting for Assets Acquiredand Liabilities Assumed in a Business Combination That Arise fromContingencies.”  The FSP requires thatassets acquired and liabilities assumed in a business combination that arisefrom a contingency be recognized at fair value. If fair value cannot be determined during the measurement period asdetermined in SFAS 141 (R), the asset or liability can still be recognized ifit can be determined that it is probable that the asset existed or theliability had been incurred as of the measurement date and if the amount of theasset or liability can be reasonably estimated. If it is not determined to be probable that the asset/liabilityexisted/was incurred or no reasonable amount can be determined, no asset orliability is recognized. The entity should determine a rational basis forsubsequently measuring the acquired assets and assumed liabilities.  Contingent consideration agreements should berecognized initially at fair value and subsequently reevaluated in accordancewith guidance found in paragraph 65 of SFAS 141 (R).  The FSP is effective for businesscombinations with an acquisition date on or after the beginning of the Company’sfirst annual reporting period beginning on or after December 15,2008.  The Company will assess the impactof the FSP if and when a future acquisition occurs.

 

The Securities and Exchange Commission (“SEC”)issued Staff Accounting Bulletin (“SAB”) No. 111 (FASB ASC 320-10-S99-1)on April 9, 2009 to amend Topic 5.M., “Other Than Temporary Impairment ofCertain Investments in Debt and Equity Securities” and to supplement FSP SFAS115-2 and SFAS 124-2.  SAB 111 maintainsthe staff’s previous views related to equity securities; however debtsecurities are excluded from its scope. The SAB provides that “other-than-temporary” impairment is notnecessarily the same as “permanent” impairment and unless evidence exists tosupport a value equal to or greater than the carrying value of the equitysecurity investment, a write-down to fair value should be recorded andaccounted for as a realized loss.  TheSAB was effective upon issuance and had no impact on the Company’s financialposition.

 

SFAS 165 (FASB ASC 855-10-05, 15, 25, 45, 50,55), “Subsequent Events,” (“SFAS 165”) was issued in May 2009 and providesguidance on when a subsequent event should be recognized in the financialstatements.  Subsequent events thatprovide additional evidence about conditions that existed at the date of thebalance sheet should be recognized at the balance sheet date. Subsequent eventsthat provide evidence about conditions that arose after the balance sheet datebut before financial statements are issued, or are available to be issued, arenot required to be recognized. The date through which subsequent events havebeen evaluated must be disclosed as well as whether it is the date thefinancial statements were issued or the date the financial statements wereavailable to be issued.  Fornonrecognized subsequent events which should be disclosed to keep the financialstatements from being misleading, the nature of the event and an estimate ofits financial effect, or a statement that such an estimate cannot be made,should be disclosed.  The standard iseffective for interim or annual periods ending after June 15, 2009.  See Note 5 for Management’s evaluation ofsubsequent events.

 

The FASB issued SFAS 166 (not yet reflected inFASB ASC), “Accounting for Transfers of Financial Assets — an amendment of FASBStatement No. 140,” (“SFAS 166”) in June 2009.  SFAS 166 limits the circumstances in which afinancial asset should be derecognized when the transferor has not transferredthe entire financial asset by taking into consideration the transferor’scontinuing involvement.  The standardrequires that a transferor recognize and initially measure at fair value allassets obtained (including a transferor’s beneficial interest) and liabilitiesincurred as a result of a transfer of financial assets accounted for as asale.  The concept of a qualifyingspecial-purpose entity is removed from SFAS 140 along with the exception from applyingFIN 46(R).  The standard is effective forthe first annual reporting period that begins after November 15, 2009, forinterim periods within the first annual reporting period, and for interim andannual reporting periods thereafter. Earlier application is prohibited. The Company does not expect the standard to have any impact on theCompany’s financial position.

 

In June 2009, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”)No. 168, “The *FASB Accounting StandardsCodification*TM and the Hierarchy of Generally AcceptedAccounting Principles — a replacement of FASB Statement No. 162,” (“SFAS168”).  SFAS 168 establishes the *FASB Accounting Standards Codification*TM (“Codification”) as the source ofauthoritative generally accepted accounting principles (“GAAP”) fornongovernmental entities.  TheCodification does not change GAAP. Instead, it takes the thousands ofindividual pronouncements that currently comprise GAAP and reorganizes them intoapproximately 90 accounting Topics, and displays all Topics using a consistentstructure.  Contents in each Topic arefurther organized first by Subtopic, then Section and finally Paragraph.The Paragraph level is the only level that contains substantive content. Citingparticular content in the Codification involves specifying the unique numericpath to the content through the Topic, Subtopic, Section and Paragraphstructure. FASB suggests that all citations begin with “FASB 

 

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Table of Contents

 

**ATLANTIC BANCSHARES, INC.**

 

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

ASC,” where ASC stands for *AccountingStandards Codification*. Changes to the ASC subsequent to June 30,2009 are referred to as Accounting Standards Updates (“ASU”).

 

In conjunction with the issuance of SFAS 168,the FASB also issued its first Accounting Standards Update No. 2009-1, “Topic105 —Generally Accepted Accounting Principles” (“ASU 2009-1”) which includesSFAS 168 in its entirety as a transition to the ASC.  ASU 2009-1 is effective for interim andannual periods ending after September 15, 2009 and will not have an impacton the Company’s financial position or results of operations but will changethe referencing system for accounting standards.  Certain of the following pronouncements wereissued prior to the issuance of the ASC and adoption of the ASUs. For suchpronouncements, citations to the applicable Codification by Topic, Subtopic andSection are provided where applicable in addition to the original standardtype and number.

 

SFAS 167 (not yet reflected in FASB ASC), “Amendmentsto FASB Interpretation No. 46(R),” (“SFAS 167”) was also issued in June 2009.  The standard amends FIN 46(R) to requirea company to analyze whether its interest in a variable interest entity (“VIE”)gives it a controlling financial interest. A company must assess whether it has an implicit financialresponsibility to ensure that the VIE operates as designed when determiningwhether it has the power to direct the activities of the VIE that significantlyimpact its economic performance.  Ongoingreassessments of whether a company is the primary beneficiary is also required bythe standard.  SFAS 167 amends thecriteria to qualify as a primary beneficiary as well as how to determine theexistence of a VIE.  The standard alsoeliminates certain exceptions that were available under FIN 46(R).  SFAS 167 is effective as of the beginning ofeach reporting entity’s first annual reporting period that begins after November 15,2009, for interim periods within that first annual reporting period, and forinterim and annual reporting periods thereafter.  Earlier application is prohibited.  Comparative disclosures will be required forperiods after the effective date.  TheCompany does not expect the standard to have any impact on the Company’sfinancial position.

 

The FASB issued ASU 2009—05,“Fair Value Measurements and Disclosures (Topic 820) — Measuring Liabilities atFair Value” in August, 2009 to provide guidance when estimating the fair valueof a liability.  When a quoted price inan active market for the identical liability is not available, fair valueshould be measured using (a) the quoted price of an identical liabilitywhen traded as an asset; (b) quoted prices for similar liabilities orsimilar liabilities when traded as assets; or (c) another valuationtechnique consistent with the principles of Topic 820 such as an income approachor a market approach.  If a restrictionexists that prevents the transfer of the liability, a separate adjustmentrelated to the restriction is not required when estimating fair value.  The ASU was effective October 1, 2009for the Company and will have no impact on financial position or operations.

 

ASU 2009-12, “Fair ValueMeasurements and Disclosures (Topic 820) - Investments in Certain Entities ThatCalculate Net Asset Value per Share (or Its Equivalent),” issued in September,2009, allows a company to measure the fair value of an investment that has noreadily determinable fair market value on the basis of the investee’s net assetvalue per share as provided by the investee. This allowance assumes that theinvestee has calculated net asset value in accordance with the GAAP measurementprinciples of Topic 946 as of the reporting entity’s measurement date.   Examples of such investments includeinvestments in hedge funds, private equity funds, real estate funds and venturecapital funds. The update also provides guidance on how the investment shouldbe classified within the fair value hierarchy based on the value for which theinvestment can be redeemed.  Theamendment is effective for interim and annual periods ending after December 15,2009 with early adoption permitted.  TheCompany does not have investments in such entities and, therefore, there willbe no impact to our financial statements.

 

ASU 2009-13, “RevenueRecognition (Topic 605): Multiple-Deliverable Revenue Arrangements — aconsensus of the FASB Emerging Issues Task Force” was issued in October, 2009and provides guidance on accounting for products or services (deliverables)separately rather than as a combined unit utilizing a selling price hierarchyto determine the selling price of a deliverable.  The selling price is based on vendor-specificevidence, third-party evidence or estimated selling price.  The amendments in the Update are effectiveprospectively for revenue arrangements entered into or materially modified infiscal years beginning on or after June 15, 2010 with early adoptionpermitted.  The Company does not expectthe update to have an impact on its financial statements.

 

9

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# **Table ofContents**

 

**ATLANTIC BANCSHARES, INC.**

 

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

# **IssuedOctober, 2009, ASU 2009-15, “Accounting for Own-Share Lending Arrangements inContemplation of Convertible Debt Issuance or Other Financing” amends ASC Topic470 and provides guidance for accounting and reporting for own-share lendingarrangements issued in contemplation of a convertible debt issuance.  At the date of issuance, a share-lendingarrangement entered into on an entity’s own shares should be measured at fairvalue in accordance with Topic 820 and recognized as an issuance cost, with anoffset to additional paid-in capital. Loaned shares are excluded from basic and diluted earnings per shareunless default of the share-lending arrangement occurs.  The amendments also require severaldisclosures including a description and the terms of the arrangement and thereason for entering into the arrangement. The effective dates of the amendments are dependent upon the date the share-lendingarrangement was entered into and include retrospective application forarrangements outstanding as of the beginning of fiscal years beginning on orafter December 15, 2009.   TheCompany has no plans to issue convertible debt and, therefore, does not expectthe update to have an impact on its financial statements.**

# ** **

# **Otheraccounting standards that have been issued or proposed by the FASB or otherstandards-setting bodies are not expected to have a material impact on theCompany’s financial position, results of operations or cash flows.**

# ** **

**Note 3 — Fair Value Measurements**

 

# **Thefair value of a financial instrument is the amount at which the asset orobligation could be exchanged in a current transaction between willing parties,other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based onrelevant market information and information about the financialinstruments.  Because no market valueexists for a significant portion of the financial instruments, fair valueestimates are based on judgments regarding future expected loss experience,current economic conditions, risk characteristics of various financialinstruments, and other factors.**

# ** **

The following methods andassumptions were used to estimate the fair value of significant financialinstruments:

 

**Cash and Due from Banks** - The carrying amount is a reasonableestimate of fair value.

 

**Securities Available for Sale** - Investment securities available forsale are recorded at fair value on a recurring basis.  Fair value measurement is based upon quotedprices, if available.  If quoted pricesare not available, fair values are measured using independent pricing models orother model-based valuation techniques such as the present value of future cashflows, adjusted for the security’s credit rating, prepayment assumptions andother factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such asthe New York Stock Exchange, U.S. Treasury securities that are traded bydealers or brokers in active over-the-counter markets and money marketfunds.  Level 2 securities includemortgage-backed securities issued by government entities, municipal bonds andcorporate debt securities.  Securitiesclassified as Level 3 include asset-backed securities in less liquid markets.

 

**Nonmarketable Equity Securities** - The carrying value of nonmarketableequity securities approximates the fair value since no ready market exists forthe stocks.

 

# **Loans Receivable** - Loans receivable are not recordedat fair value on a recurring basis. However, form time to time, a loan is considered impaired and anallowance for loan losses is established. Loans for which it is probable that payment of interest and principalwill not be made in accordance with the contractual terms of the loan agreementare considered impaired.  Once a loan isidentified as individually impaired, management measures impairment inaccordance with SFAS No. 114, Accounting by Creditors for Impairment of aLoan.  The fair value of impaired loansis estimated using one of several methods, including collateral value, marketvalue of similar debt, enterprise value, liquidation value and discounted cashflows.  Those impaired loans notrequiring an allowance represent loans for which the fair value of the expectedrepayments of collateral exceed the recorded investment in such loans.  At September 30, 2009, substantially allof the total impaired loans were evaluated based on the fair value ofcollateral.  In accordance with SFAS 157(FASB ASC 820), impaired loans where an allowance is established based on thefair value of the collateral require classification in the fair valuehierarchy.  When the fair value of thecollateral is based on an observable market price or a current appraised value,management records the impaired loan as nonrecurring Level 2.  When an appraised value is not available ormanagement determines the fair value of the collateral is further impairedbelow the appraised value and there is no observable market price, managementrecords the impaired loan as nonrecurring Level 3.

# ** **

**Foreclosed Assets**- Foreclosed assets are adjusted to fairvalue upon transfer of the loans to foreclosed assets.  Subsequently, foreclosed assets are carriedat the lower of carrying value or fair value. Fair value is based upon individual market prices, appraised values ofthe collateral or management’s estimation of the value of the collateral.  When the fair value of the collateral isbased on an observable market price or a current appraised value, managementrecords the foreclosed asset as nonrecurring Level 2.  When an appraised value is not available ormanagement determines the fair value of the collateral is further impairedbelow the appraised value and there is no observable market price, managementrecords the foreclosed asset as nonrecurring Level 3.

 

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Table of Contents

 

**ATLANTIC BANCSHARES, INC.**

 

**Notes to ConsolidatedFinancial Statements**

**(Unaudited)**

 

**Deposits** - The fair value of demand deposits,savings, and money market accounts is the amount payable on demand at thereporting date.  The fair values ofcertificates of deposit are estimated using a discounted cash flow calculationthat applies current interest rates to a schedule of aggregated expectedmaturities.

 

**Advancesfrom Federal Home Loan Bank** - The fair value of fixed rate borrowings areestimated using a discounted cash flow calculation that applies the Company’scurrent borrowing rate from the Federal Home Loan Bank.  The carrying amounts of variable rateborrowings are reasonable estimates of fair value because they can be repricedfrequently.

 

**Federal Funds Purchased** - Federal funds purchased are for a termof one day, and the carrying amount approximates the fair value.

 

**Accrued Interest Receivable andPayable** - Thecarrying value of these instruments is a reasonable estimate of fair value.

 

**Off-Balance-Sheet FinancialInstruments** - Thecarrying amount for loan commitments and standby letters of credit which areoff-balance-sheet financial instruments approximates the fair value since theobligations are typically based on current market rates.

 

The Company has usedmanagement’s best estimate of fair value based on the above assumptions.  Thus, the fair values presented may not bethe amounts that could be realized in an immediate sale or settlement of theinstrument.  In addition, any incometaxes or other expenses, which would be incurred in an actual sale orsettlement, are not taken into consideration in the fair value presented.

 

The estimated fairvalues of the Company’s financial instruments at September 30, 2009 and December 31,2008 are as follows:

 
| ** **                                                          | ** ** | **September 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                                                          | ** ** | **Carrying**                | ** ** | **Fair**                   | ** ** | **Carrying** | ** ** | **Fair** | ** ** |
| ** **                                                          | ** ** | **Amount**                  | ** ** | **Value**                  | ** ** | **Amount** | ** ** | **Value** | ** ** |
| **Financial Assets:**                                               | ** ** | ** **                  |       |                       |       |   |   |   |   |
| Cash  and due from banks                                            |       | $                           | 2,084,871  |                       | $          | 2,084,871 |   | $ | 577,915 |   | $ | 577,915 |   |
| Securities  available for sale                                      |       | 13,641,862                  |       | 13,641,862                 |       | 16,388,747 |   | 16,388,747 |   |
| Nonmarketable  equity securities                                    |       | 1,003,600                   |       | 1,003,600                  |       | 891,200 |   | 891,200 |   |
| Loans  receivable                                                   |       | 73,666,989                  |       | 73,242,000                 |       | 75,363,221 |   | 74,841,000 |   |
| Accrued  interest receivable                                        |       | 290,193                     |       | 290,193                    |       | 319,048 |   | 319,048 |   |
|                                                                |       |                        |       |                       |       |   |   |   |   |
| **Financial Liabilities:**                                          | ** ** | ** **                  |       |                       | ** ** | ** ** |   |   |   |
| Demand  deposits, interest-bearing transaction and savings accounts |       | 28,195,147                  |       | 28,195,147                 |       | 29,031,427 |   | 29,031,427 |   |
| Time  deposits                                                      |       | 35,469,404                  |       | 35,986,000                 |       | 38,935,807 |   | 39,448,000 |   |
| Advances  from Federal Home Loan Bank                               |       | 18,500,000                  |       | 18,942,000                 |       | 16,500,000 |   | 17,365,000 |   |
| Federal  funds purchased                                            |       | —                      |       | —                     |       | 236,500 |   | 236,500 |   |
| Accrued  interest payable                                           |       | 239,156                     |       | 239,156                    |       | 290,791 |   | 290,791 |   |
|                                                                     |            |                             |            |                            |            |  |  |  |  |  |  |  |  |

 
| ** **                    | ** ** | **Notional** | ** ** | **Fair**  | ** ** | **Notional** | ** ** | **Fair**  | ** ** |
|-------------------------------|------------|--------------|------------|-----------|------------|--------------|------------|-----------|------------|
| ** **                    | ** ** | **Amount**   | ** ** | **Value** | ** ** | **Amount**   | ** ** | **Value** | ** ** |
| Commitments  to extend credit |       | $            | 9,806,687  |      | $          | —       |       | $         | 11,500,006 |   | $ | — |   |
| Standby  letters of credit    |       | 212,073      |       | —    |       | 360,073      |       | —    |       |
|                               |            |              |            |           |            |              |            |           |            |  |  |  |  |

 

Effective January 1,2008, the Company adopted SFAS No. 157 (FASB ASC 820), “Fair ValueMeasurements” (“SFAS 157 (FASB ASC 820)”) which provides a framework formeasuring and disclosing fair value under generally accepted accountingprinciples. SFAS 157 (FASB ASC 820) requires disclosures about the fair valueof assets and liabilities recognized in the balance sheet in periods subsequentto initial recognition, whether the measurements are made on a recurring basis(for example, available-for-sale investment securities) or on a nonrecurringbasis (for example, impaired loans).

 

SFAS 157 (FASB ASC 820)defines fair value as the exchange price that would be received for an asset orpaid to transfer a liability (an exit price) in the principal or mostadvantageous market for the asset or liability in an orderly transactionbetween market participants on the measurement date. SFAS 157 (FASB ASC 820)also establishes a fair value hierarchy which requires an entity to maximizethe use of observable inputs and minimize the use of unobservable inputs whenmeasuring fair value. The standard describes three levels of inputs that may beused to measure fair value:

 

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Table of Contents

 

**ATLANTIC BANCSHARES, INC.**

 

**Notes toConsolidated Financial Statements**

**(Unaudited)**

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

 

Assets and liabilitiesmeasured at fair value on a recurring basis at September 30, 2009 are asfollows:

 
| ** **                    | ** ** | **Quoted  Market Price  in active  markets********(Level 1)** | ** ** | **Significant  Other  Observable  Inputs********(Level 2)** | ** ** | **Significant  Unobservable  Inputs********(Level 3)** | ** ** |
|-------------------------------|------------|---------------------------------------------------------------|------------|-------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| Available for Sale Securities |       | $                                                             | —     |                                                        | $          | 13,641,862                                             |       | $ | — |   |
| Total                         |       | $                                                             | —     |                                                        | $          | 13,641,862                                             |       | $ | — |   |

 

Repossessed assetsacquired in the settlement of loans are carried at the lower of cost ofcarrying value or fair value on a nonrecurring basis.  The fair value is dependent primarily uponindependent appraisals, which the Company considers level 2 inputs.  The aggregate carrying amount of repossessedassets acquired in the settlement of loans at September 30, 2009 was$120,900.

 

The Company ispredominantly a cash flow lender with real estate serving as collateral on asubstantial majority of loans. Loans which are deemed to be impaired areprimarily valued on a nonrecurring basis at the fair values of the underlyingreal estate collateral. Such fair values are obtained using independentappraisals, which the Company considers to be level 2 inputs. The aggregatecarrying amount of impaired loans at September 30, 2009 was $2,786,978.

 

The Company has no assetsor liabilities whose fair values are measured using level 3 inputs.

 

**Note 4 -Loss Per Share**

 

Basic loss pershare is computed by dividing net loss by the weighted-average number of commonshares outstanding.  Diluted loss pershare is computed by dividing net loss by the weighted-average number of commonshares outstanding and dilutive common share equivalents using the treasurystock method.  There were no dilutivecommon share equivalents outstanding during the first nine months of 2009 and2008 due to the net loss.  As a result,basic and dilutive loss per share and diluted earnings per share were the same.

 

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**ATLANTIC BANCSHARES, INC.**

 

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

**Net loss per share-basic computation:**

 
| ** **                                 | ** ** | **Nine months ended**       | ** **     |
|--------------------------------------------|------------|-----------------------------|----------------|
| ** **                                 | ** ** | **September 30, 2009** | ** **     | **September 30, 2008** | ** ** |
| **Net loss per share-basic  computation:** |       |                        |           |   |   |
| ** **                                 |       |                        |           |   |   |
| Net loss to common shareholders            | ** ** | **$**                       | **(2,510,963** | **)** | **$** | **(418,600** | **)** |
|                                       | ** ** | ** **                  | ** **     | ** ** | ** ** |
| Average common shares outstanding - basic  | ** ** | **1,252,132**               | ** **     | **1,251,577** | ** ** |
|                                       | ** ** | ** **                  | ** **     | ** ** | ** ** |
| Basic loss per share                       | ** ** | **$**                       | **(2.01**      | **)** | **$** | **(.33** | **)** |

** **
| ** **                                 | ** ** | **Three months ended**      | ** **     |
|--------------------------------------------|------------|-----------------------------|----------------|
| ** **                                 | ** ** | **September 30, 2009** | ** **     | **September 30, 2008** | ** ** |
| **Net loss per share-basic  computation:** |       |                        |           |   |   |
| ** **                                 |       |                        |           |   |   |
| Net loss to common shareholders            | ** ** | **$**                       | **(2,238,167** | **)** | **$** | **(120,788** | **)** |
|                                       | ** ** | ** **                  | ** **     | ** ** | ** ** |
| Average common shares outstanding - basic  | ** ** | **1,253,225**               | ** **     | **1,251,577** | ** ** |
|                                       | ** ** | ** **                  | ** **     | ** ** | ** ** |
| Basic loss per share                       | ** ** | **$**                       | **(1.79**      | **)** | **$** | **(.10** | **)** |

 

**Note 5 —Subsequent Events**

 

In preparing these financialstatements, the Company has evaluated events and transactions for potentialrecognition or disclosure through November 13, 2009, the date thefinancial statements were issued, and have determined to disclose the followingevents and transactions.

 

During the third quarter of 2009, the Company commenced a privateplacement offering of shares of its common stock to certain accreditedinvestors, including members of the Company’s board of directors. In theoffering, which concluded on October 19, 2009, the Company sold 151,570shares of common stock and received gross proceeds of $909,420, which will beused to support the growth of the Company.  The private placement offeringwas exempt from registration pursuant to Section 4(2) of theSecurities Act and the regulations promulgated thereunder.  No sales commissions were paid in theoffering and costs associated with the offering totaling $27,556 were nettedagainst the proceeds.

 

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**Item 2 -Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

Thefollowing is our discussion and analysis of certain significant factors thathave affected our financial position and operating results and those of oursubsidiary, Atlantic Community Bank (the “Bank”), during the periods includedin the accompanying financial statements. This commentary should be read in conjunction with the financialstatements and the related notes and the other statistical information includedin this report.

 

This report contains statements which constitute “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933 and Section 21E of the Securities Exchange Act of 1934.  Forward-looking statements relate to thefinancial condition, results of operations, plans, objectives, futureperformance, and business of our Company. Forward-looking statements are based on many assumptions and estimatesand are not guarantees of future performance. Our actual results may differmaterially from those anticipated in any forward-looking statements, as theywill depend on many factors about which we are unsure, including many factorswhich are beyond our control. The words “may,” “would,” “could,” “should,” “will,”“expect,” “anticipate,” “predict,” “project,” “potential,” “continue,” “assume,”“believe,” “intend,” “plan,” “forecast,” “goal,” and “estimate,” as well assimilar expressions, are meant to identify such forward-lookingstatements.  Potential risks anduncertainties that could cause our actual results to differ materially fromthose anticipated in our forward-looking statements include, withoutlimitation, those described under the heading “Risk Factors” in our AnnualReport on Form 10-K for the year ended December 31, 2008 as filedwith the Securities and Exchange Commission (the “SEC”) and the following:

 

·                  our rapid growthto date and short operating history;

·                  reduced earningsdue to higher credit losses generally and specifically because losses in thesectors of our loan portfolio secured by real estate are greater than expecteddue to economic factors, including declining real estate values, increasinginterest rates, increasing unemployment, or changes in payment behavior orother factors;

·                  reduced earningsdue to higher credit losses because our loans are concentrated by loan type,industry segment, borrower type, or location of the borrower or collateral;

·                  the amount ofour real estate-based loan portfolio collateralized by real estate, and theweakness in the commercial real estate market;

·                  our reliance onavailable secondary funding sources such as Federal Home Loan Bank advances,Federal Reserve Bank discount window borrowings, sales of securities and loans,federal funds lines of credit from correspondent banks, and out-of-market timedeposits, including brokered deposits, to meet our liquidity needs;

·                  significantincreases in competitive pressure in the banking and financial servicesindustries;

·                  changes in theinterest rate environment which could reduce anticipated or actual margins;

·                  changes inpolitical conditions or the legislative or regulatory environment;

·                  general economicconditions, either nationally or regionally and especially in our primaryservice area, continuing to be weak resulting in, among other things, adeterioration in credit quality;

·                  changesoccurring in business conditions and inflation;

·                  changes intechnology;

·                  changes indeposit flows;

·                  the adequacy ofthe level of our allowance for loan loss;

·                  the rate ofdelinquencies and amounts of loans charged-off;

·                  the rates ofloan growth;

·                  increasedfunding costs due to market illiquidity, increased competition for funding,and/or regulatory requirements;

·                  our ability toretain our existing customers, including our deposit relationships;

·                  changes inmonetary and tax policies;

·                  loss of consumerconfidence and economic disruptions resulting from terrorist activities orother military actions;

·                  changes in thesecurities markets; and

·                  other risks anduncertainties detailed from time to time in our filings with the SEC.

 

Wehave based our forward-looking statements on our current expectations aboutfuture events. Although we believe that the expectations reflected in ourforward-looking statements are reasonable, we cannot guarantee you that theseexpectations will be achieved. We undertake no obligation to publicly update orotherwise revise any forward-looking statements, whether as a result of newinformation, future events, or otherwise.

 

Theserisks are exacerbated by the recent developments in national and internationalfinancial markets, and we are unable to predict what effect these uncertainmarket conditions will have on our Company. During 2008 and through the third quarter of 2009, the capital andcredit markets have experienced extended volatility and disruption.  There can be no assurance that theseunprecedented recent developments will not continue to materially and adverselyaffect our business, financial condition, and results of operations, as well asour ability to raise capital or other funding for liquidity and businesspurposes.

 

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# **Overview**

# ** **

The following discussion describes our resultsof operations for the quarter ended September 30, 2009 as compared to thequarter ended September 30, 2008, and also analyzes our financialcondition as of September 30, 2009 as compared to December 31, 2008.

 

Like most community banks, we derive most of ourincome from interest we receive on our loans and investments. Our primary sourceof funds for making these loans and investments is our deposits, on which wepay interest.  Consequently, one of thekey measures of our success is our amount of net interest income, or thedifference between the income on our interest-earning assets, such as loans andinvestments, and the expense on our interest-bearing liabilities, such asdeposits. Another key measure is the spread between the yield we earn on theseinterest-earning assets and the rate we pay on our interest-bearingliabilities.

 

There are risks inherent in all loans, so wemaintain an allowance for loan losses to absorb probable losses on existingloans that may become uncollectible.  Weestablish and maintain this allowance by charging a provision for loan lossesagainst our operating earnings. In the following section we have included adetailed discussion of this process.   Inaddition to earning interest on our loans and investments, we earn incomethrough fees and other expenses we charge to our customers. We describe thevarious components of this non-interest income, as well as our non-interestexpense, in the following discussion.

 

**Effectof Economic Trends**

 

Followingan economic decline and historically low interest rates that ended in the firstsix months of 2004, the Federal Reserve began increasing short-term rates asthe economy showed signs of strengthening. Between July 2004 and July 2006, the Federal Reserve increasedrates at 17 of their meetings for a total of 425 basis points. Between July 2006 and September 18, 2007, theFederal Reserve allowed short-term rates to remain unchanged.  Beginning in July 2004 and continuinguntil September 18, 2007, our rates on both short-term or variable rateinterest-earning assets and interest-bearing liabilities increased.  The momentum of the 17 rate increasesresulted in higher rates on interest-earning assets and higher interest-bearingliabilities during the first nine months of 2007; subsequently, as fixed rateloans, deposits, and borrowings have matured they have repriced at higherinterest rates.  In late September 2007,the Federal Reserve reversed their position and has since lowered theshort-term rates by 500 basis points through December 2008, causing therates on our short-term or variable rate assets and liabilities to decline.  The majority of economic analysts predictlittle to no change in short-term rates throughout the remainder of 2009.  The following discussion includes ouranalysis of the effect that we anticipate changes in interest rates will haveon our financial condition.  However, wecan give no assurances as to the future actions of the Federal Reserve or tothe anticipated results that will actually occur.

 

**Recent Legislative and Regulatory Initiatives to Address Financial andEconomic Crises**

 

Markets in the United States and elsewhere have experiencedextreme volatility and disruption for more than 12 months.  These circumstances have exerted significantdownward pressure on prices of equity securities and virtually all other assetclasses, and have resulted in substantially increased market volatility,severely constrained credit and capital markets, particularly for financialinstitutions, and an overall loss of investor confidence.  Loan portfolio performances have deterioratedat many institutions resulting from, among other factors, a weak economy and adecline in the value of the collateral supporting their loans.  Dramatic slowdowns in the housing industry,due in part to falling home prices and increasing foreclosures andunemployment, have created strains on financial institutions.  Many borrowers are now unable to repay theirloans, and the collateral securing these loans has, in some cases, declinedbelow the loan balance.   In response to the challenges facing thefinancial services sector, several regulatory and governmental actions haverecently been announced including:

 

·                  The EmergencyEconomic Stabilization Act, approved by Congress and signed by President Bushon October 3, 2008, which, among other provisions, allowed the U.S.Treasury to purchase troubled assets from banks, authorized the Securities andExchange Commission to suspend the application of marked-to-market accounting,and temporarily raised the basic limit of Federal Deposit Insurance Corporation(the “FDIC”) deposit insurance from $100,000 to $250,000 until December 31,2013;

 

·                  On October 7,2008, the FDIC approved a plan to increase the rates banks pay for depositinsurance;

 

·                  On October 14,2008, the U.S. Treasury announced the creation of a new program, the CapitalPurchase Program, that encourages and allows financial institutions to buildcapital through the sale of senior preferred shares to the U.S. Treasury onterms that are non-negotiable;

 

·                  On October 14,2008, the FDIC announced the creation of the Temporary Liquidity GuaranteeProgram (“TLGP”), which seeks to strengthen confidence and encourage liquidityin the banking system.  The TLGP has twoprimary components that are available on a voluntary basis to financialinstitutions:

 

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·                  Guarantee ofnewly-issued senior unsecured debt; the guarantee would apply to new debtissued on or before June 30, 2009 and would provide protection until June 30,2012; issuers electing to participate would pay a 75 basis point fee for theguarantee;

 

·                  Unlimiteddeposit insurance for non-interest bearing deposit transaction accounts throughJune 30, 2010; financial institutions electing to participate will payincreased insurance premiums over standard deposit insurance.

 

·                  On February 17,2009, the American Recovery and Reinvestment Act (the “Recovery Act”) wassigned into law in an effort to, among other things, create jobs and stimulategrowth in the United States economy.  TheRecovery Act specifies appropriations of approximately $787 billion for a widerange of Federal programs and will increase or extend certain benefits payableunder the Medicaid, unemployment compensation, and nutrition assistanceprograms.  The Recovery Act also reducesindividual and corporate income tax collections and makes a variety of otherchanges to tax laws.  The Recovery Actalso imposes certain limitations on compensation paid by participants in theU.S. Treasury’s Troubled Asset Relief Program (“TARP”).

 

·                  On March 23,2009, the U.S. Treasury, in conjunction with the FDIC and the Federal Reserve,announced the Public-Private Partnership Investment Program for Legacy Assetswhich consists of two separate plans, addressing two distinct asset groups:

 

·                  The Legacy Loan Program,which the primary purpose will be to facilitate the sale of troubled mortgageloans by eligible institutions, which include FDIC-insured federal or statebanks and savings associations. Eligible assets may not be strictly limited toloans; however, what constitutes an eligible asset will be determined byparticipating banks, their primary regulators, the FDIC and the U.S. Treasury.Additionally, the Loan Program’s requirements and structure will be subject tonotice and comment rulemaking, which may take some time to complete.

 

·                  The Securities Program, whichwill be administered by the U.S. Treasury, involves the creation ofpublic-private investment funds to target investments in eligible residentialmortgage-backed securities and commercial mortgage-backed securities issuedbefore 2009 that originally were rated AAA or the equivalent by two or morenationally recognized statistical rating organizations, without regard torating enhancements (collectively, “Legacy Securities”). Legacy Securities mustbe directly secured by actual mortgage loans, leases or other assets, and maybe purchased only from financial institutions that meet TARP eligibilityrequirements.

 

We are participating inthe unlimited deposit insurance component of the TLGP.  As a result of the enhancements to depositinsurance protection and the expectation that there will be demands on the FDIC’sdeposit insurance fund, our deposit insurance costs have increased and willcontinue to increase significantly through the remainder of 2009 and possiblyinto 2010 and beyond.

 

In April 2009, weelected not to participate in the TARP Capital Purchase Program.  However, in September 2009, we decidedto reapply for this program.  We have notbeen notified by the Treasury whether our application for participation in theprogram has been approved.  In addition,we have not made a final decision to participate in the Capital PurchaseProgram if our application is approved by the Treasury.  Regardless of our participation, governmentalintervention and new regulations under these programs could materially andadversely affect our business, financial condition and results of operations.The following discussion and analysis describes our performance in thischallenging economic environment.

 

**Resultsof Operations**

 

**NetInterest Income**

 

Forthe nine months ended September 30, 2009, net interest income, the majorcomponent of our net income, was $2,379,526 as compared to $2,219,498 for thesame period in 2008.  The average ratepaid on interest-bearing liabilities for the nine months ended September 30,2009 and 2008 was 2.71% and 3.86%, respectively, while the average raterealized on interest-earning assets was 5.82% and 6.64% for the sameperiods.  The net interest spread was3.11% and 2.79% for the nine-month period ended September 30, 2009 and 2008,respectively.   Decreases in the FederalReserve short-term rates and the resulting decrease in the yields we generatedon our earning assets (from variable rate loan repricing and new loans at lowerrates), has been offset by benefits we received from the repricing of our ratesensitive liabilities for the nine-month period ended September 30,2009.  The net result was an increase innet interest spread of 32 basis points during the nine-month period ended September 30,2009, as compared to the nine-month period ended September 30, 2008.

 

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For the three months ended September 30, 2009, net interest incomewas $816,960 as compared to $777,646 for the same period in 2008.  The average rate paid on interest-bearingliabilities for the three months ended September 30, 2009 and 2008 was2.56% and 3.49%, respectively, while the average rate realized oninterest-earning assets was 5.82% and 6.41% for the same periods.  The net interest spread was 3.26% and 2.92%for the three-month period ended September 30, 2009 and 2008,respectively.

 

**Provisionand Allowance for Loan Losses**

 

We have established anallowance for loan losses through a provision for loan losses charged toexpense on our consolidated statement of operations.  The allowance for loan losses was $795,064and $983,216, or 1.08% and 1.36% of total loans, as of September 30, 2009and 2008, respectively.  The allowancefor loan losses as a percentage of total loans has decreased mainlyattributable to $1,585,012 charged off as loss against the allowance for loanlosses on predominately collateral dependent impaired loans during thenine-month period ended September 30, 2009.  For the nine months ended September 30,2009 and 2008, the provision was $1,304,300 and $523,500, respectively.  As of September 30, 2009, 20 loans to 18borrowers totaling $2,786,978 were impaired and loans totaling $3,696,253 wereconsidered criticized loans.  Included inthe impaired loans at September 30, 2009 were nonperforming loans totaling$1,471,192.

 

Charge-offs include a$470,046 loss on a loan secured by real estate for which management believed arecovery was possible due to legal actions which we are pursuing.  During the quarter ended September 30,2009, the likelihood of complete legal restitution appears uncertain;therefore, management elected to recognize the deficit, to the extent it can bedetermined, pending the conclusion of the legal process.  No principal payments have been received onthis loan during the quarter ended September 30, 2009, resulting in a netprincipal balance totaling $238,000.  Theimpaired loans also include a collateral dependent participation loan we holdon a commercial real estate development on the South Carolina coast.  The amount of the impairment on this loan isnot easily determinable.  Based uponcalculations of the present value of the collateral supporting this loan, webelieve our loan on this development is impaired by approximately $378,248, andwe have charged $331,609 of this amount as loss against our reserves during thequarter ended March 31, 2009 and $46,639 of this amount as loss againstour reserves for the quarter ended September 30, 2009.  Principal payments on this loan totaling$18,777 have been received during the quarter ended September 30, 2009resulting in a net principal balance totaling $447,078.  However, the actual impairment on these loansmay be greater than these amounts and additional charge-offs may occur.

 

The allowance for loan losses represents an amount which we believe willbe adequate to absorb probable losses on existing loans that may becomeuncollectible.  Assessing the adequacy ofthe allowance for loan losses is a process that requires considerable judgment.  Our judgment as to the adequacy of theallowance for loan losses is based on a number of assumptions about futureevents, which we believe to be reasonable, but which may or may not prove to beaccurate.  Our determination of theallowance for loan losses is established on evaluations of the collectabilityof loans, including consideration of factors such as the balance of impairedloans, the quality, mix, and size of our overall loan portfolio, economicconditions that may affect the borrower’s ability to repay, the amount andquality of collateral securing the loans, our historical loan loss experience,and a review of specific problem loans. We also consider subjective issues such as changes in the lendingpolicies and procedures, changes in the local/national economy, changes involume or type of credits, changes in volume/severity of problem loans, qualityof loan review and board of director oversight, concentrations of credit, andpeer group comparisons.  We strive tofollow a comprehensive, well-documented, and consistently applied analysis ofour loan portfolio in determining an appropriate level for the loan lossallowance.   We adjust the amount of theloan allowance periodically based on changing circumstances through an expenserecorded to the provision for loan losses. We charge recognized losses to the allowance and add subsequentrecoveries back to the allowance for loan losses.

 

We calculate the allowance for loan losses forspecific types of loans and evaluate the adequacy on an overall portfolio basisutilizing our credit grading system which we apply to each loan.  We combine our estimates of the reservesneeded for each component of the portfolio, including loans analyzed on a poolbasis and loans analyzed individually. The allowance is divided into two portions: (1) an amount forspecific allocations on significant individual credits and (2) a generalreserve amount.

 

*Specific Reserve*

 

We analyze individual loans within the portfolio andmake allocations to the allowance based on each individual loan’s specificfactors and other circumstances that affect the collectability of the credit inaccordance with the criteria defined in the Receivables Topic of the FASBAccounting Standards Codification, which was originally issued under SFAS No. 114,“Accounting by Creditors for Impairment of a Loan.”  Significant individual credits classified asdoubtful or substandard/special mention within our credit grading system thatare determined to be impaired require both individual analysis and specificallocation.  Management has determinedthat impaired loans totaled $2,786,978 and $2,462,246 at September 30,2009 and December 31, 2008, respectively. Specific valuation allowance related to these impaired loans totaled$100,204 and $456,657 at September 30, 2009 and December 31, 2008, respectively.

 

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Loans in thesubstandard/special mention category are characterized by deterioration inquality exhibited by any number of well-defined weaknesses requiring correctiveaction such as declining or negative earnings trends and declining orinadequate liquidity.  Loans in thedoubtful category exhibit the same weaknesses found in the substandard/specialmention loan; however, the weaknesses are more pronounced.  These loans, however, are not yet rated asimpaired because certain events may occur which could salvage the debt such asinjection of capital, alternative financing, or liquidation of assets.

 

The loans with specificreserves are typically identified though our process of reviewing and assessingthe ratings on loans, which is performed by personnel, in our creditadministration area, which includes a special assets manager.  Loans on our watch list (criticized assets)are considered potentially impaired loans. These loans are evaluated in determining whether all outstandingprincipal and interest are expected to be collected.  The accuracy of the loan ratings is validatedby a third party review which is performed semi-annually and covers asubstantial amount of the loan portfolio. Loans are not considered impaired if a minimal payment delay occurs andall amounts due, including accrued interest at the contractual interest ratefor the period of delay, are expected to be collected.

 

In situations where a loan is determined to beimpaired (primarily because it is probable that all principal and interest dueaccording to the terms of the loan agreement will not be collected asscheduled), the loan is excluded from the general reserve calculationsdescribed below and is assigned a specific reserve.  These reserves are based on a thoroughanalysis of the most probable source of repayment which is usually the liquidationof the underlying collateral, but may also include discounted future cash flowsor, in rare cases, the market value of the loan itself.  The credit administration area periodicallyreviews the fair value assigned to each impaired loan and adjusts the specificreserve accordingly.

 

For collateral dependent loans (repayment of the loanis expected to be provided solely by the underlying collateral), current marketappraisals are ordered to estimate the current fair value of thecollateral.  However, in situations wherea current market appraisal is not available, management uses the best availableinformation (including recent appraisals for similar properties, communicationswith qualified real estate professionals, information contained in reputabletrade publications and other observable market data) to estimate the currentfair value.  The estimated costs to sellthe subject property are then deducted from the estimated fair value to arriveat the “net realizable value” of the loan and to determine the specific reserveon each impaired loan reviewed.  Ingeneral, any portion of the recorded investment in a collateral dependent loanin excess of the fair value of the collateral that can be identified asuncollectible, and is therefore deemed a confirmed loss, is promptly chargedoff against the loan loss allowance.

 

*General Reserve*

 

Our general reserve was $694,860 as of September 30,2009, as compared to $619,109 as of December 31, 2008.  We calculate our general reserve based on apercentage allocation for each of the effective categories of unclassified loantypes.  Due to our short operatinghistory, our historical loss rate may not represent realistic loss factors forpools of loans.  Therefore, FDIC statisticsfor our peer group are used to estimate a historical loss percentage.  In addition, qualitative and environmentalfactors, as discussed below, are considered. The general estimate is then addedto the specific reserves made to determine the amount of the total allowancefor loan losses.

 

We maintain the general reserve in accordance with December 2006regulatory interagency guidance in our assessment of the loan lossallowance.  The general reserve considersqualitative or environmental factors that are likely to cause estimated creditlosses including, but not limited to: changes in delinquent loan trends, trends in risk grades and netchargeoffs, concentrations of credit, trends in the nature and volume of theloan portfolio, general and local economic trends, collateral valuations, theexperience and depth of lending management and staff, lending policies andprocedures, the quality of loan review systems, and other external factors.

 

The recent downturn in the real estate markethas resulted in an increase in loan delinquencies, defaults and foreclosures,and we believe these trends are likely to continue.  In some cases, this downturn has resulted ina significant impairment to the value of our collateral and our ability to sellthe collateral upon foreclosure, and there is a risk that this trend willcontinue.  The real estate collateral ineach case provides an alternate source of repayment in the event of default bythe borrower and may deteriorate in value during the time the credit isextended.  If real estate values continueto decline, it is also more likely that we would be required to increase ourallowance for loan losses.  Based onpresent information and an ongoing evaluation, management considers theallowance for loan losses to be adequate to meet presently known and inherentlosses in the loan portfolio.  Management’sjudgment about the adequacy of the allowance is based upon a number ofassumptions about future events which it believes to be reasonable but whichmay or may not be accurate.  Thus, therecan be no assurance that charge-offs in future periods will not exceed theallowance for loan losses or that additional increases in the allowance forloan losses will not be required, especially considering the overall weaknessin the commercial real estate market in our market areas.  Management believes estimates of the level ofallowance for loan losses required have been appropriate and expectation isthat the primary factors considered in the provision calculation will continueto be consistent with prior trends.  Noassurances can be given in this regard, however, especially considering theoverall weakness in the real estate market.

 

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**Noninterest Income**

 

Totalnoninterest income for the nine months ended September 30, 2009 and 2008was $195,553 and $180,860, respectively.  Decreased mortgage loan sale volume caused mortgage origination feeincome to decrease $7,838 to $19,887 for the nine months ended September 30,2009 as compared to $27,725 for the nine months ended September 30,2008.  This decrease was offset byservice fees on deposit accounts which totaled $101,357 for the nine monthsended September 30, 2009 as compared to $71,543 for the nine months ended September 30,2008 driven mainly by non-sufficient funds/overdraft fees. Non-sufficientfunds/overdraft fees on deposit accounts increased $28,403 to $88,498 for thenine months ended September 30, 2009 as compared to $60,095 for the ninemonths ended September 30, 2008. This fee increase was mainly attributable to weak economic conditions.

 

Totalnoninterest income for the three months ended September 30, 2009 and 2008was $66,691 and $62,350, respectively. Service charges on deposit accounts totaled $35,690 for the three monthsended September 30, 2009 as compared to $28,425 for the three months endedSeptember 30, 2008.  This increasewas mainly attributable to increased non-sufficient funds/overdraft fees ondeposit accounts due to weak economic conditions.

 

**Noninterest Expense**

 

Totalnoninterest expense for the nine months ended September 30, 2009 and 2008was $2,512,437 and $2,511,076, respectively. The primary component ofnoninterest expense was salaries and benefits which decreased $78,859 to$1,197,353 for the nine months ended September 30, 2009, as compared to$1,276,212 for the nine months ended September 30, 2008, chiefly driven bypersonnel reductions.   Net occupancyexpense increased $59,389 to $296,525 for the nine months ended September 30,2009, as compared to $237,136 for the nine months ended September 30,2008.  Increased leasehold depreciationexpense for the nine months ended September 30, 2009, as compared to thenine months ended September 30, 2008, resulted from the consolidation andrelocation of our original main branch and the original operations center tothe renovated new main branch facility in the same commercial subdivision in July 2008.  Leasehold depreciation expense totaled$81,904 and $34,833 for the nine months ending September 30, 2009 and2008, respectively.

 

Otheroperating expenses increased to $391,281 for the nine months ended September 30,2009, as compared to $346,728 for the nine months ended September 30,2008.  FDIC deposit insurance increased$81,078 to $126,216 for the nine months ending September 30, 2009, ascompared to $45,138 for the nine months ended September 30, 2008.  This increase is due to the FDIC InsuranceReform Legislation that allows the FDIC to price deposit insurance according torisk for all insured institutions regardless of the level of the reserveratio.  In addition, $42,968 wascollected for a special assessment required by the FDIC.  This assessment was calculated using 5.0basis points of the special assessment base (total assets less tier onecapital) at June 30, 2009.  Also, anupdated appraisal obtained in August 2009 on the Bank’s other real estateowned (OREO) lot resulted in a $41,100 charge to increase OREO valuationallowance.  Increased FDIC assessmentsand the OREO valuation allowance charge were somewhat offset by decreased duesand subscription costs, decreased telephone/communication expense, decreasedtravel expense and decreased office supply expense. The FDIC continues toevaluate the insurance fund level and may impose further special assessments infuture quarters.  The FDIC currently hassubmitted a proposal that would require us to prepay the deposit insurancepremiums for a period of three years at our current assessment rate.  In the event this proposal is finalized wewould recognize the expense over the three year prepayment period.

 

Totalnoninterest expense for the three months ended September 30, 2009 and 2008was $875,948 and $927,432, respectively. The primary component of noninterest expense was salaries and benefits,which were $401,371 and $438,108 for the three months ended September 30,2009 and 2008, respectively.  FDICdeposit insurance increased $17,854 to $35,173 for the three months ending September 30,2009, as compared to $17,319 for the three months ended September 30,2008.

 

**Income Taxes**

 

Managementevaluated the likelihood of recognizing the deferred tax asset totaling$1,749,714 at September 30, 2009. Based on the evidence supporting this asset, it was decided to record afull valuation allowance against the asset on the Bank’s books.  A deferred tax asset is created from thedifference between book income using GAAP and tax earnings.  Deferred tax assets represent the future taxbenefit of deductible items.  TheCompany, under the current Federal tax code, is allowed an up to five yearcarryback and a twenty year carryforward of these timing items. A valuationallowance is established, if it is more likely than not that a tax asset willnot be realized.  The valuation allowancereduces the recorded deferred tax assets to net realizable value.  As of September 30, 2009, we set up avaluation allowance of $1,683,342 to reflect the portion of the deferred incometax asset that is not able to be offset against net operating loss carrybacksand reversals of net future taxable temporary differences projected to occur in2009.  This resulted in income taxexpense of $1,269,305 for the nine months ended September 30, 2009 and$1,409,870 for the three months ended September 30, 2009.  When the Company generates future taxableincome, it will be able to adjust the valuation allowance.

 

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**Net Loss**

 

Thecombination of the above factors resulted in a net loss for the nine monthsended September 30, 2009 of $2,510,963, or $2.01 per share, afterrecognition of an income tax benefit of $414,037 for the period offset by$1,683,342 for the creation of a deferred tax valuation allowance.  For the nine-month period ended September 30,2008, the net loss was $418,600, or $0.33 per share, after the recognition ofan income tax benefit of $215,168 for the period.

 

Netloss for the three months ended September 30, 2009 was $2,238,167, or $1.79per share, after recognition of an income tax benefit of $273,472 for thequarter offset by $1,683,342 for the creation of a deferred tax valuationallowance.   Net loss for the threemonths ended September 30, 2008 was $120,788, or $.10 per share, afterrecognition of an income tax benefit of $62,198 for the quarter.

 

**Assets and Liabilities**

 

During the first nine months of 2009, total assets have decreased$4,017,803, or 4.2%, to $91,325,394 at September 30, 2009 when compared toDecember 31, 2008.  As of September 30,2009, a deferred tax valuation allowance totaling $1,683,342 was recognizedcorresponding to the Bank’s cumulative income tax benefit.  Securities available for sale decreased$2,746,885 to $13,641,862 when compared to December 31, 2008 due toprincipal repayments on mortgage backed securities.  Loans receivable decreased $1,696,232 to$73,666,989 as of September 30, 2009 when compared to December 31,2008.  The decrease in securitiesavailable for sale and loans receivable was partially offset by the $1,506,956increase in cash and cash equivalents to $2,084,871 as of September 30,2009 when compared to $577,915 as of December 31, 2008.

 

**Investment Securities available forsale**

 

The Company uses the investment securities portfoliofor several purposes.  It serves as a vehicle to manage interest rateand prepayment risk, to generate interest and dividend income from investmentof funds, to provide liquidity to meet funding requirements, and to providecollateral for pledges on public funds and ascollateral for lines of credit and advances with correspondent banks.    Investments are classifiedinto three categories (1) Held to Maturity (2) Trading and (3) Availablefor Sale. Management believes that maintaining its securities in the Availablefor Sale category provides greater flexibility in the management of the overallinvestment portfolio.  The average yield on investments at September 30,2009 was 4.98% compared to 5.41% at September 30, 2008.  Thecarrying values of the investments available for sale at September 30,2009 and 2008 and percentage of each category to total investments are asfollows:

 

INVESTMENT PORTFOLIO

 
| ** **                 | ** ** | **September 30,** | ** **       |
|----------------------------|------------|------------------------|------------------|
| ** **                 | ** ** | **2009**               | ** **       | **2008** | ** ** |
| Mortgage-backed securities |       | $                      |  13,641,862 |   | $ |  16,772,118 |   |
|                       |       | $                      |  13,641,862 |   | $ |  16,772,118 |   |
| ** **                 | ** ** | ** **             | ** **       | ** ** | ** ** |
| ** **                 | ** ** | **September 30,** | ** **       |
| ** **                 | ** ** | **2009**               | ** **       | **2008** | ** ** |
| Mortgage-backed securities |       | 100                    | %                | 100 | % |
|                       |       | 100                    | %                | 100 | % |

 

The Company accounts for its investment securities inaccordance with FASB ASC Topic 320: Investments - Debt and EquitySecurities.  All securities were classified as Available for Sale(debt and equity securities that may be sold under certain conditions), at September 30,2009 and September 30, 2008.  The securities were reported atfair value, with unrealized gains and losses excluded from earnings and reportedas a separate component of shareholders’ equity, net of incometaxes.  Unrealized losses on securities due to fluctuations in fairvalue are recognized when it is determined that an other than temporary declinein value has occurred. Gains or losses on the sale of securities are recognizedon a specific identification, trade date basis.

 

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The amortized cost and fair value of investment securities available forsale are summarized as follows:

 
| ** **                  | ** ** | **September 30, 2009** | ** **           |
|-----------------------------|------------|-----------------------------|----------------------|
| ** **                  | ** ** | **Amortized**               | ** **           | **Gross Unrealized** | ** ** | **Fair** | ** ** |
| ** **                  | ** ** | **Cost**                    | ** **           | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| Mortgage-backed securities  |       | $                           |  12,957,296     |   | $ |  684,566 |   | $ |  — |   | $ |  13,641,862 |   |
| Total investment securities | ** ** | **$**                       | ** 12,957,296** | ** ** | **$** | ** 684,566** |   | $ |  — | ** ** | **$** | ** 13,641,862** | ** ** |

 

The amortized cost and fair value of investment securities available forsale at September 30, 2009, by contractual maturity, are as follows:

 
| ** **                     | ** ** | **Amortized  Cost** | ** **       | **Estimated  Fair Value** | ** ** |
|--------------------------------|------------|---------------------|------------------|---------------------------|------------|
| Due in one year or less        |       | $                   |  —     |                      | $          |  — |   |
| Due in one year to five years  |       | —              |             | —                    |       |
| Due in five years to ten years |       | 1,763,069           |             | 1,871,766                 |       |
| Due in ten years and over      |       | 11,194,227          |             | 11,770,096                |       |
| Total                          |       | $                   |  12,957,296 |                      | $          |  13,641,862 |   |

 

The Company had nounrealized losses as of September 30, 2009 or December 31, 2008.  The Company had no sales of investmentsecurities for the nine months ended September 30, 2009 or for the yearended December 31, 2008.

 

**Loans**

 

We experienced a decrease in loans during the first nine months of 2009due to loan payoffs paired with continued soft loan demand from qualifiedapplicants.  Net loans decreased by$1,415,520 to $72,871,925 during the period. As shown below, the largest category of loans was real estate mortgageloans which increased $213,277 to $51,020,175 from December 31, 2008 to September 30,2009.  Balances within the major loansreceivable categories as of September 30, 2009 and December 31, 2008are as follows:

 
| ** **                              | ** ** | **September 30, 2009** | ** **           | **December 31, 2008** | ** ** |
|-----------------------------------------|------------|-----------------------------|----------------------|----------------------------|------------|
| Real estate:                            | ** ** | ** **                  | ** **           | ** **                 | ** ** |
| Mortgage                                |       | $                           |  51,020,175     |                       | $          |  50,806,898 |   |
| Construction, land and land development |       | 17,583,389                  |                 | 17,995,142                 |       |
| Total real estate loans                 |       | 68,603,564                  |                 | 68,802,040                 |       |
| Commercial and industrial               |       | 3,972,713                   |                 | 4,793,257                  |       |
| Consumer and other                      |       | 718,368                     |                 | 984,411                    |       |
| Agriculture and other farm              |       | 404,831                     |                 | 850,000                    |       |
| Deferred origination fees, net          |       | (32,487                     | )                    | (66,487                    | )          |
| Gross loans                             |       | 73,666,989                  |                 | 75,363,221                 |       |
| Less allowance for loan losses          |       | (795,064                    | )                    | (1,075,776                 | )          |
| Loans, net                              | ** ** | **$**                       | ** 72,871,925** | ** **                 | **$**      | ** 74,287,445** | ** ** |

 

**Risk Elements in the Loan Portfolio**

 

Criticizedloans are loans that have potential weaknesses that deserve close attention andwhich could, if uncorrected, result in deterioration of the prospects forrepayment or our credit position at a future date.  Classified loans are loans that areinadequately protected by the sound worth and paying capacity of the borroweror any collateral and as to which there is a distinct possibility orprobability that we will sustain a loss if the deficiencies are not corrected.  At September 30,2009, we had 20 loans totaling $2,786,978 that were impaired.  Twelve of these loans totaling $2,212,122 aresecured by real estate, three loans totaling $52,429 are secured byautomobiles, two loans totaling $483,969 are secured by business assets includingaccounts receivable, inventory, furniture, fixtures and equipment and threeloans totaling $38,458 are unsecured.  Included in the allowance for loan losses at September 30, 2009 was$100,204 related to impaired loans.

 

Nonaccrualloans totaled $1,471,192 and $1,050,662 at September 30, 2009 and 2008,respectively.   Additionally, the Bankhad no loans 90 days or more past due and still accruing interest at September 30,2009 and 2008.   Generally, a loan will be placed onnonaccrual status when it becomes 90 days past due as to principal or interest,or when management believes, after considering economic and business conditionsand collection efforts, that the borrower’s financial condition is such thatcollection of the loan is doubtful. A payment of interest on a loan that isclassified as nonaccrual will be recognized as income when received.

 

Duringthe quarter ended September 30, 2009, $921,875 was charged off as lossagainst allowance for loan and lease losses predominately on collateraldependent impaired loans.   As a result,the allowance for loan losses to loans outstanding decreased to

 

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1.08%from 1.36% as of September 30, 2009 and 2008, respectively.  The following table depicts the activity inthe allowance for loan losses for the periods ended September 30, 2009 and****2008:

 
| ** **                                          | ** ** | **September 30,** | ** **     |
|-----------------------------------------------------|------------|------------------------|----------------|
| ** **                                          | ** ** | **2009**               | ** **     | **2008** | ** ** |
| Balance, January 1,                            |       | $                      | 1,075,776      |   | $ | 677,850 |   |
| Provision for loan losses for the period            |       | 1,304,300              |           | 523,500 |   |
| Net loans (charged-off) recovered during the period |       | (1,585,012             | )              | (218,134 | ) |
|                                                |       |                   |           |   |   |
| Balance, end of period                              | ** ** | **$**                  | **(795,064**   | **)** | **$** | **(983,216** | **)** |
|                                                | ** ** | ** **             | ** **     | ** ** | ** ** |
| Gross loans outstanding, end of period              | ** ** | **$**                  | **73,666,989** | ** ** | **$** | **72,233,353** | ** ** |
|                                                | ** ** | ** **             | ** **     | ** ** | ** ** |
| Allowance for loan losses to loans outstanding      | ** ** | **1.08**               | **%**          | **1.36** | **%** |

 

**Deposits**

 

Totaldeposits were $63,664,551 at September 30, 2009, as compared to$67,967,234 at December 31, 2008. Noninterest bearing transaction accounts have increased $3,212,128 to$8,934,554 at September 30, 2009, as compared to $5,722,426 at December 31,2008, attributable to noninterest bearing commercial account depositvolume.   Savings and money marketaccounts totaled $16,873,933 at September 30, 2009, as compared to$20,285,985 at December 31, 2008. Brokered money market accounts represent $101,390 and $2,503,376 ofthese savings and money market accounts at September 30, 2009 and December 31,2008, respectively.

 

Thelargest category of deposits was time deposits $100,000 and over which were$20,170,348 at September 30, 2009, as compared to $20,195,037 at December 31,2008.  Other time deposits decreased$3,441,714 to $15,299,056 at September 30, 2009, as compared to$18,740,770 at December 31, 2008. Brokered certificates of deposits represent $5,424,000 and $10,426,000of these other time deposits accounts at September 30, 2009 and December 31,2008, respectively.

 

Balanceswithin the major deposit categories as of September 30, 2009 and December 31,2008 are as follows:

 
| ** **                                | ** ** | **September 30, 2009** | ** **     | **December 31, 2008** | ** ** |
|-------------------------------------------|------------|-----------------------------|----------------|----------------------------|------------|
| Non-interest bearing transaction accounts |       | $                           | 8,934,554      |                       | $          | 5,722,426 |   |
| Interest-bearing transaction accounts     |       | 2,386,660                   |           | 3,023,016                  |       |
| Savings and money market                  |       | 16,873,933                  |           | 20,285,985                 |       |
| Time deposit $100,000 and over            |       | 20,170,348                  |           | 20,195,037                 |       |
| Other time deposits                       |       | 15,299,056                  |           | 18,740,770                 |       |
|                                      |       |                        |           |                       |       |
| Total deposits                            | ** ** | **$**                       | **63,664,551** | ** **                 | **$**      | **67,967,234** | ** ** |

 

**OtherBorrowings**

 

Otherborrowings are comprised of Federal Home Loan Bank of Atlanta (“FHLBA”)advances, advances from the Federal Reserve Bank and federal fundspurchased.  FHLBA advances arecollateralized by pledged FHLBA stock, certain commercial and residentialloans, including home equity lines of credit, and by a portion of ourinvestment portfolio.   FHLBA advancesincreased $2,000,000 to $18,500,000 at September 30, 2009, as compared to December 31,2008.  During the quarter ended March 31,2009, we replaced a portion of maturing brokered certificates of deposittotaling $3,000,000 with a $2,000,000 FHLBA advance.

 

FHLBAadvances as of September 30, 2009 and December 31, 2008 are asfollows:

 
| **Maturity**              | ** ** | ******Rate** | ** ** | **September 30, 2009********Balance** | ** **     | **December 31, 2008********Balance** | ** ** |
|---------------------------|------------|--------------|------------|--------------------------------------------|----------------|-------------------------------------------|------------|
| 11/30/2009                |       | 3.3400       | %          | $                                          | 1,000,000      |                                      | $          | 1,000,000 |   |
| 01/28/2010                |       | 1.1200       | %          | 2,000,000                                  |           | —                                    |       |
| 03/12/2010                |       | 2.6400       | %          | 5,000,000                                  |           | 5,000,000                                 |       |
| 05/28/2010                |       | 3.5800       | %          | 1,000,000                                  |           | 1,000,000                                 |       |
| 05/31/2011                |       | 3.9300       | %          | 1,000,000                                  |           | 1,000,000                                 |       |
| 07/11/2011                |       | 3.6675       | %          | 1,000,000                                  |           | 1,000,000                                 |       |
| 07/10/2012                |       | 3.8990       | %          | 1,000,000                                  |           | 1,000,000                                 |       |
| 09/12/2012                |       | 3.7000       | %          | 750,000                                    |           | 750,000                                   |       |
| 09/12/2013                |       | 3.8500       | %          | 750,000                                    |           | 750,000                                   |       |
| 11/29/2017                |       | 3.4840       | %          | 5,000,000                                  |           | 5,000,000                                 |       |
|                      |       |         |       |                                       |           |                                      |       |
| Total advances from FHLBA | ** ** | ** **   | ** ** | **$**                                      | **18,500,000** | ** **                                | **$**      | **16,500,000** | ** ** |

 

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**Liquidity**

 

Liquidity represents theability of a company to convert assets into cash or cash equivalents withoutsignificant loss, and the ability to raise additional funds by increasingliabilities.  Liquidity managementinvolves monitoring our sources and uses of funds in order to meet ourday-to-day cash flow requirements while maximizing profits.  Liquidity management is made more complicatedbecause different balance sheet components are subject to varying degrees ofmanagement control.  For example, thetiming of maturities of our investment portfolio is fairly predictable andsubject to a high degree of control at the time investment decisions aremade.  However, net deposit inflows andoutflows are far less predictable and are not subject to the same degree ofcontrol.

 

Our primary sources of liquidity are deposits, scheduled repayments onour loans, and interest on and maturities of our investments.  We plan to meet our future cash needs throughthe liquidation of temporary investments and the generation of deposits.  Occasionally, we might sell investmentsecurities in connection with the management of our interest sensitivity gap orto manage cash availability.  We may alsoutilize our cash and due from banks, security repurchase agreements, federalfunds sold, and other borrowings to meet liquidity requirements as needed.  In addition, we have the ability, on ashort-term basis, to purchase federal funds from other financialinstitutions.  As of September 30,2009, we had unsecured lines of credit to purchase federal funds from unrelatedbanks totaling $3,770,000.  As of September 30,2009, there was no balance outstanding any line of credit. ** **The lenders have reserved the rightto withdraw the unsecured lines at their option.  These lines of credit are available onvarious structures for general corporate purposes.

 

AtSeptember 30, 2009, we had remaining available credit from FHLBA totaling$364,007 based upon existing pledged investment and loan collateral.  At September 30, 2009, an additional$4,910,000 of credit was also available to the Bank upon the receipt ofadditional collateral pledged to FHLBA.

 

Asof September 30, 2009, we had $12,642,418 of lendable collateral availablefor short-term advances at the Discount Window.   Lot loans totaling $10,274,495 were pledgedto Federal Reserve Bank of Richmond which produced lendable collateral valuetotaling $6,678,422 and $5,827,979 of securities was in safekeeping at theFederal Reserve Bank of Richmond which produced lendable collateral valuetotaling $5,963,996.  For advances withmaturities of 28 days or less, the total lendable collateral value was availableto the Bank.  Seventy-five percent of theBank’s lendable collateral value was available for advances with maturitiesfrom 29 to 90 days.  The rate on theadvances from the Discount Window is the Federal Reserve Discount Window rate.   Advances from the Federal Reserve DiscountWindow are not subject to prepayment penalties. As of September 30, 2009, there were no outstanding advances fromthe Federal Reserve Bank of Richmond.

 

**Capital Resources**

 

Totalshareholders’ equity decreased $1,477,362 during the first nine months of 2009to $8,492,642.  The decrease isattributable to the net loss for the period of $2,510,963 offset by $881,864 incapital proceeds, net of offering costs and refund of fractional shares, by$66,749 related to net unrealized gains on securities offset and by $84,988 forstock-based compensation expense.

 

TheFederal Reserve and bank regulatory agencies require bank holding companies andfinancial institutions to maintain capital at adequate levels based on apercentage of assets and off-balance sheet exposures, adjusted for risk weightsranging from 0% to 100%.  The FederalReserve guidelines contain an exemption from the capital requirements for “smallbank holding companies,” which in 2006 were amended to cover most bank holdingcompanies with less than $500 million in total assets that do not have amaterial amount of debt or equity securities outstanding registered with theSEC.  Although our class of common stockis registered under Section 12 of the Securities Exchange Act, we believethat because our stock is not listed on any exchange or otherwise activelytraded, the Federal Reserve Board will interpret its new guidelines to meanthat we qualify as a small bank holding company.  Nevertheless, our Bank remains subject to thesecapital requirements.  Failure to meetminimum capital requirements can initiate certain mandatory and possiblyadditional discretionary actions by regulators that, if undertaken, could havea direct material effect on the Bank’s financial statements.  Under capital adequacy guidelines and theregulatory framework for prompt corrective action, the Bank must meet specificcapital guidelines that involve quantitative measures of the Bank’s assets,liabilities and certain off-balance sheet items as calculated under regulatoryaccounting practices.  The Bank’s capitalamounts and classifications are also subject to qualitative judgments by theregulators about components, risk weightings, and 

 

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otherfactors.  Regardless, our Bank is “wellcapitalized” under these minimum capital requirements as set per bankregulatory agencies.

 

Under the capital adequacyguidelines, regulatory capital is classified into two tiers. These guidelinesrequire an institution to maintain a certain level of Tier 1 and Tier 2 capitalto risk-weighted assets. Tier 1 capital consists of common shareholders’equity, excluding the unrealized gain or loss on securities available for sale,minus certain intangible assets. In determining the amount of risk-weightedassets, all assets, including certain off-balance sheet assets, are multipliedby a risk-weight factor of 0% to 100% based on the risks believed to beinherent in the type of asset. Tier 2 capital consists of Tier 1 capital plusthe general reserve for loan losses, subject to certain limitations. We arealso required to maintain capital at a minimum level based on total averageassets, which is known as the Tier 1 leverage ratio.  To be considered “adequately capitalized”under these capital guidelines, we must maintain a minimum total risk-basedcapital of 8%, with at least 4% being Tier 1 capital.  In addition, we must maintain a minimum Tier1 leverage ratio of at least 4%.  To beconsidered “well capitalized,” we must maintain total risk-based capital of atleast 10%, Tier 1 capital of at least 6%, and a leverage ratio of at least 5%.

 

The Bank is also required tomaintain capital at a minimum level based on quarterly average assets, which isknown as the leverage ratio.  Only thestrongest banks are allowed to maintain capital at the minimum requirement of3%.  All others are subject tomaintaining ratios 1% to 2% above the minimum. The Bank exceeded its minimum regulatory capital ratios as of September 30,2009, as well as the ratios to be considered “well capitalized.”

 

The following tablesummarizes the Bank’s risk-based capital at September 30, 2009:

 
| Shareholders’ equity                                  |   | $        | 7,831,057  |   |
|------------------------------------------------------------|--------|----------|------------|--------|
| Less-unrealized net gain on available-for-sale  securities |   | (451,814 | )          |
|                                                       |   |     |       |
| Tier 1 capital                                             |   | $        | 7,379,243  |   |
|                                                       |   |     |       |
| Plus - allowance for loan losses(1)                        |   | 795,064  |       |
|                                                       |   |     |       |
| Total capital                                              |   | $        | 8,174,307  |   |
|                                                       |   |     |       |
| Risk-weighted assets                                       |   | $        | 65,513,000 |   |
|                                                       |   |     |       |
| Risk-based capital ratios:                                 |   |     |       |
| Tier 1 capital (to risk-weighted assets)                   |   | 11.26    | %          |
| Total capital (to risk-weighted assets)                    |   | 12.48    | %          |
| Tier 1 capital (to total average assets)                   |   | 7.92     | %          |

 

----

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

 

**Off-Balance Sheet Risk**

 

Through the operations of our Bank, we make contractual commitments toextend credit in the ordinary course of our business activities.  These commitments are legally bindingagreements to lend money to our customers at predetermined interest rates for aspecified period of time.  At September 30,2009, we had issued commitments to extend credit of $9,567,445 through varioustypes of lending arrangements.  We had$239,242 of unused credit under pre-arranged overdraft plans and overdraftprotection plans offered on deposit accounts. There were also $212,073 outstanding commercial letters of credit at September 30,2009.

 

The following table sets forth the length of time until maturity forunused commitments to extend credit and standby letters of credit at September 30,2009.

 
| *** ***                         | ** ** | **Within********Three********Months** | ** **    | **After Three********Through  Twelve Months** | ** ** | **One********Through********Five Years** | ** ** | **Greater********Than********Five Years** | ** **    | ******Total** | ** ** |
|--------------------------------------|------------|---------------------------------------|---------------|-----------------------------------------------|------------|------------------------------------------|------------|-------------------------------------------|---------------|---------------|------------|
| Unused commitments to extend credit  |       | $                                     | 1,038,908     |                                          | $          | 4,365,907                                |       | $                                         | 1,362,420     |          | $          | 3,039,452 |   | $ | 9,806,687 |   |
| Standby commercial letters of credit |       | 25,000                                |          | 187,073                                       |       | —                                   |       | —                                    |          | 212,073       |       |
| Totals                               | ** ** | **$**                                 | **1,063,908** | ** **                                    | **$**      | **4,552,980**                            | ** ** | **$**                                     | **1,362,420** | ** **    | **$**      | **3,039,452** | ** ** | **$** | **10,018,760** | ** ** |

 

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Based on historical experience, many of the commitments and letters ofcredit will expire unfunded. Accordingly, the amounts shown in the table above do not necessarilyreflect our need for funds in the periods shown.

 

We evaluate each customer’s credit worthiness on a case-by-casebasis.  The amount of collateralobtained, if deemed necessary by us upon extension of credit, is based on ourcredit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property,plant and equipment, commercial and residential real estate.

 

##### **Critical Accounting Policies**

##### ** **

We have adopted various accounting policieswhich govern the application of accounting principles generally accepted in theUnited States in the preparation of our financial statements.  Our significant accounting policies aredescribed in the notes to the financial statements at December 31, 2008,as filed on our annual report on Form 10-K.  Certain accounting policies involvesignificant judgments and assumptions by us which have a material impact on thecarrying value of certain assets and liabilities.  We consider these accounting policies to becritical accounting policies.  The judgmentsand assumptions we use are based on historical experience and other factors,which we believe to be reasonable under the circumstances.  Because of the nature of the judgments andassumptions we make, actual results could differ from these judgments andestimates which could have a material impact on our carrying values of assetsand liabilities and our results of operations.

 

Webelieve the allowance for loan losses is a critical accounting policy thatrequires the most significant judgments and estimates used in preparation ofour financial statements.  Refer to theportions of the discussion in this report on Form 10-Q and in our Form 10-Kthat address our allowance for loan losses for a description of our processesand methodology for determining our allowance for loan losses.

 

**OtherEvents**

 

As previouslydisclosed, due to the disproportionately higher compliance costs associatedwith being a smaller public company, we are currently considering deregisteringour common stock under the Securities Exchange Act.  Deregistration will allow us to savesignificant costs related to the preparation, review and filing of our periodicreports.  We expect printing and mailingcosts to be lower also because the periodic reports that we deliver toshareholders after the deregistration will not include many of the disclosuresrequired under the periodic reporting rules, such as disclosures regardingexecutive compensation, corporate governance and management ownership, andmanagement’s discussion and analysis of our financial results.  Further, in light of the limited market forour common stock and the availability of capital from sources other than publicmarkets, we believe the termination of our status as an SEC-registered companyis not likely to have a significant impact on any future efforts to raiseadditional capital.  If we need to raiseadditional capital to support growth in the future, we have other financingalternatives that will not be affected by our status as a private company,including raising additional equity through private offerings.  Finally, we expect our business andoperations to continue as they are currently being conducted and thederegistration is not anticipated to have any material effect upon the conductof our business.

 

**Item 3. Quantitative and Qualitative Disclosures About Market Risk.**

 

Notapplicable.

 

**Item 4. Controls and Procedures**

 

Asof the end of the period covered by this report, we carried out an evaluation,under the supervision and with the participation of our management, includingour Chief Executive Officer and Chief Financial Officer, of the effectivenessof our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e).  Based upon that evaluation, our ChiefExecutive Officer and Chief Financial Officer have concluded that our currentdisclosure controls and procedures are effective as of September 30,2009.  There have been no significantchanges in our internal controls over financial reporting during the fiscalquarter ended September 30, 2009 that have materially affected, or arereasonably likely to materially affect, our internal controls over financialreporting.

 

Thedesign of any system of controls and procedures is based in part upon certainassumptions about the likelihood of future events.  There can be no assurance that any designwill succeed in achieving its stated goals under all potential futureconditions, regardless of how remote.

 

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**PART II — OTHER INFORMATION**

 

**Item 1.Legal Proceedings**

 

There are no pending legalproceedings to which we are a party or of which any of our property is thesubject.

 

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

 

During the third quarter of 2009, the Company commenced a privateplacement offering of shares of its common stock to certain accreditedinvestors, including members of the Company’s board of directors. In theoffering, which concluded on October 19, 2009, the Company sold 151,570shares of common stock and received gross proceeds of $909,420, which will beused to support the growth of the Company.  The private placement offeringwas exempt from registration pursuant to Section 4(2) of theSecurities Act and the regulations promulgated thereunder.  No sales commissions were paid in theoffering and costs associated with the offering totaling $27,556 were nettedagainst the proceeds.

 

**Item 3.Default Upon Senior Securities**

 

Not applicable.

 

**Item 4.Submission of Matters to a Vote of Security Holders**

 

Not applicable

 

**Item 5.Other Information**

 

Not applicable.

 

**Item 6.Exhibits**

 

31.1         Rule 15d-14(a) Certificationof the Principal Executive Officer.

 

31.2                           Rule 15d-14(a) Certificationof the Principal Financial Officer.

 

32            Section 1350Certifications.

 

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# **SIGNATURES**

# ** **

In accordance with the requirements of the Securities Exchange Act of1934, the Registrant caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
| Date:  November 13, 2009 | By:    | /s/  Robert P. Trask                   |
|-------------------------------|--------|----------------------------------------|
|                          |   | Robert  P. Trask                       |
|                          |   | President  and Chief Executive Officer |
|                          |   |                                   |
|                          |   |                                   |
| Date:  November 13, 2009 | By:    | /s/  Michelle M. Pennell               |
|                          |   | Michelle  M. Pennell                   |
|                          |   | Principal  Financial Officer           |

 

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**EXHIBIT INDEX**

 
| **Exhibit** | ** ** | ** **                                                                  |
|-------------|------------|-----------------------------------------------------------------------------|
| **Number**  | ** ** | **Description**                                                             |
|        |       |                                                                        |
| 31.1        |       | Rule 15d-14(a) Certification  of the Principal Executive Officer. |
|        |       |                                                                        |
| 31.2        |       | Rule 15d-14(a) Certification  of the Principal Financial Officer. |
|        |       |                                                                        |
| 32          |       | Section 1350  Certifications.                                          |

 

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