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** **

 

** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

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

** **

**For the Quarterly Period Ended March 31, 2011**

** **

**o****         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the Transition Period from                    to                    **

 

**Commission file number 000-53655**

 

**TOUCHMARK BANCSHARES, INC.**

(Exact name of registrant as specified in its charter)

 

| **Georgia**                  | ** ** | **20-8746061**      |
|------------------------------|------------|---------------------|
| (State or other jurisdiction |       | (I.R.S. Employer    |
| of incorporation)            |       | Identification No.) |

 

**3651 Old Milton Parkway**

**Alpharetta, Georgia 30005**

(Address of principal executive offices)

 

**(770) 407-6700**

(Registrant’s telephone number)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o YES o NO

 

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

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o YES  x NO

 

Indicate the number of shares outstanding of each of the registrant’s classes of common equity, as of the latest practicable date: **3,465,391** shares of common stock, par value $.01 per share, outstanding as of May 13, 2011.

 

 

 

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**INDEX**

 
| ** **                           | ** **                                                                                             | **Page**                                                                                                                         |
|--------------------------------------|--------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------|
|                                 |                                                                                                   |                                                                                                                             |
| Part I.   Financial Information |                                                                                                   |
|                                 |                                                                                                   |                                                                                                                             |
|                                 | Item 1.   Financial Statements (unaudited)                                                             | 3                                                                                                                                |
|                                 |                                                                                                   |                                                                                                                             |
|                                 |                                                                                                   | Condensed   Consolidated Balance Sheets as of March 31, 2011 and December 31,   2010                                   | 3 |
|                                 |                                                                                                   |                                                                                                                             |   |
|                                 |                                                                                                   | Condensed   Consolidated Statements of Income and Comprehensive Income for the Three   Months Ended March 31, 2011 and 2010 | 4 |
|                                 |                                                                                                   |                                                                                                                             |   |
|                                 |                                                                                                   | Condensed   Consolidated Statements of Cash Flows For The Three Months Ended   March 31, 2011 and 2010                      | 5 |
|                                 |                                                                                                   |                                                                                                                             |   |
|                                 |                                                                                                   | Notes   to Condensed Consolidated Financial Statements                                                                           | 6 |
|                                 |                                                                                                   |                                                                                                                             |
|                                 | Item   2. Management’s Discussion and Analysis of Financial Condition and Results of   Operations | 22                                                                                                                               |
|                                 |                                                                                                   |                                                                                                                             |
|                                 | Item   3. Quantitative and Qualitative Disclosures About Market Risk                                   | 29                                                                                                                               |
|                                 |                                                                                                   |                                                                                                                             |
|                                 | Item 4   Controls and Procedures                                                                       | 29                                                                                                                               |
|                                 |                                                                                                   |                                                                                                                             |
| Part II. Other   Information    | 30                                                                                                     |
|                                 |                                                                                                   |                                                                                                                             |
|                                 | Item 6. Exhibits                                                                                       | 30                                                                                                                               |
|                                 |                                                                                                   |                                                                                                                             |
|                                 | SIGNATURES                                                                                             | 31                                                                                                                               |
|                                 |                                                                                                   |                                                                                                                             |
|                                 | EXHIBIT INDEX                                                                                     | 32                                                                                                                               |
|                                      |                                                                                                        |                                                                                                                                  |  |  |  |

 

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**PART I — FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

**TOUCHMARK BANCSHARES, INC.**

**AND SUBSIDIARY**

 

**Condensed Consolidated Balance Sheets**

**March 31, 2011 and December 31, 2010**

 
| ** **                                                                                     | ** ** | **(Unaudited)**    | ** **  | ** **            | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------------|-------------|-----------------------|------------|
| ** **                                                                                     | ** ** | **March 31,** | ** **  | **December 31,** | ** ** |
| ** **                                                                                     | ** ** | **2011**           | ** **  | **2010**              | ** ** |
| ASSETS                                                                                         |       |               |        |                  |       |
|                                                                                           |       |               |        |                  |       |
| Cash and due from banks                                                                        |       | $                  | 3,570,105   |                  | $          | 1,220,785 |   |
| Federal funds sold                                                                             |       | 54,000             |        | —                |       |
| Interest-bearing accounts with other banks                                                     |       | 5,530,214          |        | 2,560,287             |       |
| Investment securities available for sale                                                       |       | 39,460,182         |        | 49,135,140            |       |
| Restricted stock                                                                               |       | 1,386,650          |        | 1,439,900             |       |
| Loans held for sale                                                                            |       | 518,995            |        | 518,995               |       |
| Loans, less allowance for loan losses of   $3,462,375 and $3,462,375                           |       | 81,964,446         |        | 83,280,219            |       |
| Accrued interest receivable                                                                    |       | 436,806            |        | 638,703               |       |
| Premises and equipment                                                                         |       | 2,677,252          |        | 2,739,929             |       |
| Foreclosed real estate                                                                         |       | 273,664            |        | 291,377               |       |
| Land held for sale                                                                             |       | 2,409,023          |        | 2,409,023             |       |
| Other assets                                                                                   |       | 654,032            |        | 762,401               |       |
| Total assets                                                                                   |       | $                  | 138,935,369 |                  | $          | 144,996,759 |   |
|                                                                                           |       |               |        |                  |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                      |       |               |        |                  |       |
|                                                                                           |       |               |        |                  |       |
| Liabilities:                                                                                   |       |               |        |                  |       |
| Deposits:                                                                                      |       |               |        |                  |       |
| Non-interest bearing demand                                                                    |       | $                  | 10,669,346  |                  | $          | 7,769,952 |   |
| Interest-bearing                                                                               |       | 90,854,214         |        | 99,364,788            |       |
| Total deposits                                                                                 |       | 101,523,560        |        | 107,134,740           |       |
| Accrued interest payable                                                                       |       | 69,401             |        | 81,747                |       |
| Federal funds purchased                                                                        |       | 575,000            |        | —                |       |
| Federal Home Loan Bank advances                                                                |       | 11,400,000         |        | 11,400,000            |       |
| Secured borrowings                                                                             |       | 850,728            |        | 2,027,311             |       |
| Other liabilities                                                                              |       | 234,021            |        | 222,687               |       |
| Total liabilities                                                                              |       | 114,652,710        |        | 120,866,485           |       |
|                                                                                           |       |               |        |                  |       |
| Shareholders’ Equity                                                                      |       |               |        |                  |       |
| Preferred stock, no par value, 10,000,000 shares   authorized, none issued                     |       | —             |        | —                |       |
| Common stock, $.01 par value, 50,000,000 shares   authorized, 3,465,391 issued and outstanding |       | 34,654             |        | 34,654                |       |
| Paid in capital                                                                                |       | 36,117,122         |        | 36,091,663            |       |
| Accumulated deficit                                                                            |       | (11,305,402        | )           | (11,496,478           | )          |
| Accumulated other comprehensive loss                                                           |       | (563,715           | )           | (499,565              | )          |
| Total shareholders’ equity                                                                |       | 24,282,659         |        | 24,130,274            |       |
|                                                                                           |       |               |        |                  |       |
| Total liabilities and shareholders’ equity                                                |       | $                  | 138,935,369 |                  | $          | 144,996,759 |   |

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

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**TOUCHMARK BANCSHARES, INC.**

**AND SUBSIDIARY**

 

**Condensed Consolidated Statements of Income and Comprehensive Income**

**Three Months Ended March 31, 2011 and 2010**

**(Unaudited)**

 
| ** **                                                  | ** ** | **Three**          | ** ** | **Three**          | ** ** |
|-------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                                  | ** ** | **Months**         | ** ** | **Months**         | ** ** |
| ** **                                                  | ** ** | **Ended**          | ** ** | **Ended**          | ** ** |
| ** **                                                  | ** ** | **March 31,** | ** ** | **March 31,** | ** ** |
| ** **                                                  | ** ** | **2011**           | ** ** | **2010**           | ** ** |
| Interest income:                                            |       |               |       |               |       |
| Loans, including fees                                       |       | $                  | 1,187,798  |               | $          | 1,126,848 |   |
| Investment income                                           |       | 390,497            |       | 541,013            |       |
| Federal funds sold                                          |       | 257                |       | 484                |       |
| Total interest income                                       |       | 1,578,552          |       | 1,668,345          |       |
|                                                        |       |               |       |               |       |
| Interest expense:                                           |       |               |       |               |       |
| Deposits                                                    |       | 357,509            |       | 442,390            |       |
| Federal Home Loan Bank advances                             |       | 69,862             |       | 69,862             |       |
| Other borrowings                                            |       | 3,615              |       | 8,101              |       |
| Total interest expense                                      |       | 430,986            |       | 520,353            |       |
|                                                        |       |               |       |               |       |
| Net interest income                                         |       | 1,147,566          |       | 1,147,992          |       |
| Provision for loan losses                                   |       | —             |       | 197,356            |       |
| Net interest income after provision for loan   losses       |       | 1,147,566          |       | 950,636            |       |
|                                                        |       |               |       |               |       |
| Noninterest income:                                         |       |               |       |               |       |
| Service charges on deposit accounts and other fees          |       | 13,922             |       | 25,518             |       |
| Gain on sale of securities available for sale               |       | 63,558             |       | 65,351             |       |
| Gain on sale of loans held for sale                         |       | —             |       | 414,830            |       |
| Gain on sale of SBA loans                                   |       | 288,214            |       | —             |       |
| Gain (loss) on derivative instrument                        |       | 9,056              |       | (44,493            | )          |
| Other noninterest income                                    |       | 10,891             |       | 7,817              |       |
| Total noninterest income                                    |       | 385,641            |       | 469,023            |       |
|                                                        |       |               |       |               |       |
| Noninterest expense:                                        |       |               |       |               |       |
| Salaries and employee benefits                              |       | 702,907            |       | 729,475            |       |
| Occupancy and equipment                                     |       | 152,501            |       | 185,004            |       |
| Other operating expense                                     |       | 486,723            |       | 425,569            |       |
| Total noninterest expense                                   |       | 1,342,131          |       | 1,340,048          |       |
|                                                        |       |               |       |               |       |
| Net income                                                  |       | $                  | 191,076    |               | $          | 79,611 |   |
| Other comprehensive income (loss):                          |       |               |       |               |       |
| Unrealized holding gains arising during the period          |       | (32,188            | )          | 355,145            |       |
| Reclassification adjustment for gain realized in   net loss |       | (63,558            | )          | (65,351            | )          |
| Tax effect                                                  |       | 31,596             |       | (95,632            | )          |
| Other comprehensive income (loss)                           |       | (64,150            | )          | 194,162            |       |
| Comprehensive income                                        |       | $                  | 126,926    |               | $          | 273,773 |   |
| Basic earnings per share                                    |       | $                  | 0.06       |               | $          | 0.02 |   |
| Diluted earnings per share                                  |       | $                  | 0.06       |               | $          | 0.02 |   |
| Dividends per share                                         |       | $                  | —     |               | $          | — |   |

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

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**TOUCHMARK BANCSHARES, INC.**

**AND SUBSIDIARY**

 

**Condensed Consolidated Statements of Cash Flows**

**Three Months Ended March 31, 2011 and 2010**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Three Months** | ** ** | **Three Months** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                         | ** ** | **Ended**             | ** ** | **Ended**             | ** ** |
| ** **                                                                         | ** ** | **March 31,**    | ** ** | **March 31,**    | ** ** |
| ** **                                                                         | ** ** | **2011**              | ** ** | **2010**              | ** ** |
| Cash flow from operating activities:                                               |       |                  |       |                  |       |
| Net income                                                                         |       | $                     | 191,076    |                  | $          | 79,611 |   |
| Adjustments to reconcile net income to net cash   provided by operating activities |       |                  |       |                  |       |
| Depreciation                                                                       |       | 71,639                |       | 73,364                |       |
| Net amortization (accretion)                                                       |       | 78,651                |       | (1,042                | )          |
| Provision for loan losses                                                          |       | —                |       | 197,356               |       |
| Gain on sale of securities available for sale                                      |       | (63,558               | )          | (65,351               | )          |
| Gain on sale of SBA loans                                                          |       | (288,214              | )          | —                |       |
| Proceeds from sale of loans held for sale                                          |       | —                |       | 1,163,068             |       |
| Gain on sale of loans held for sale                                                |       | —                |       | (414,830              | )          |
| Stock compensation expense                                                         |       | 25,459                |       | 60,537                |       |
| Decrease (increase) in interest receivable                                         |       | 201,897               |       | (191,215              | )          |
| Increase (decrease) in interest payable                                            |       | (12,346               | )          | 28,223                |       |
| Decrease in other assets                                                           |       | 140,121               |       | 73,219                |       |
| Increase in other liabilities                                                      |       | 11,334                |       | 403,261               |       |
|                                                                               |       |                  |       |                  |       |
| Net cash provided by operating activities                                          |       | 356,059               |       | 1,406,201             |       |
|                                                                               |       |                  |       |                  |       |
| Cash flow from investing activities:                                               |       |                  |       |                  |       |
| Purchase of federal funds sold                                                     |       | (54,000               | )          | (2,425,000            | )          |
| Increase in interest bearing deposits                                              |       | (2,969,927            | )          | (811,193              | )          |
| Purchase of securities held to maturity                                            |       | —                |       | (2,201,465            | )          |
| Purchase of securities available for sale                                          |       | (1,010,469            | )          | (12,202,425           | )          |
| Proceeds from paydowns, calls and maturities of   securities available for sale    |       | 3,287,526             |       | 982,362               |       |
| Proceeds from sales of securities available for   sale                             |       | 7,286,906             |       | 2,538,000             |       |
| Redemption (purchase) of restricted stock                                          |       | 53,250                |       | (31,600               | )          |
| Proceeds from sale of foreclosed real estate                                       |       | 17,713                |       | —                |       |
| Net decrease (increase) in loans                                                   |       | 1,603,987             |       | (5,393,117            | )          |
| Purchase of premises and equipment                                                 |       | (8,962                | )          | (1,324                | )          |
|                                                                               |       |                  |       |                  |       |
| Net cash provided (used) by investing activities                                   |       | 8,206,024             |       | (19,545,762           | )          |
|                                                                               |       |                  |       |                  |       |
| Cash flow from financing activities:                                               |       |                  |       |                  |       |
| Net increase (decrease) in deposits                                                |       | (5,611,180            | )          | 20,906,043            |       |
| Net decrease in secured borrowings                                                 |       | (1,176,583            | )          | —                |       |
| Proceeds from federal funds purchased                                              |       | 575,000               |       | —                |       |
| Repayment of line of credit                                                        |       | —                |       | (2,525,000            | )          |
|                                                                               |       | .                     |       |                  |       |
| Net cash provided (used) by financing activities                                   |       | (6,212,763            | )          | 18,381,043            |       |
|                                                                               |       |                  |       |                  |       |
| Net change in cash                                                                 |       | 2,349,320             |       | 241,482               |       |
|                                                                               |       |                  |       |                  |       |
| Cash at the beginning of the period                                                |       | 1,220,785             |       | 1,695,884             |       |
|                                                                               |       |                  |       |                  |       |
| Cash at the end of the period                                                      |       | $                     | 3,570,105  |                  | $          | 1,937,366 |   |
|                                                                               |       |                  |       |                  |       |
| Supplemental disclosures of cash flow information   -                              |       |                  |       |                  |       |
| Interest paid                                                                      |       | $                     | 443,332    |                  | $          | 492,130 |   |
| Transfer of loan principal to foreclosed real   estate                             |       | $                     | —     |                  | $          | (291,377 | ) |

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

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**TOUCHMARK BANCSHARES, INC.**

**AND SUBSIDIARY**

 

**Notes to Condensed Consolidated Financial Statements**

**March 31, 2011**

**(unaudited)**

 

1.             BASIS OF PRESENTATION

 

The consolidated financial information included for Touchmark Bancshares, Inc. herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods.  These statements should be read in conjunction with the financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

 

The results of operations for the three month period ended March 31, 2011 are not necessarily indicative of the results to be expected for the full year.

 

2.             ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Touchmark Bancshares, Inc. (the “Company”, “we”, “us” or “ours”), a Georgia corporation, was established on April 3, 2007 for the purpose of organizing and managing Touchmark National Bank (the “Bank”). The Company is a one-bank holding company with respect to its subsidiary, Touchmark National Bank.  The Bank is a national bank, which began operations on January 28, 2008, headquartered in Fulton County, Georgia with the purpose of providing community banking services to Gwinnett, Dekalb, north Fulton and south Forsyth counties and surrounding areas in Georgia.

 

*Basis of Accounting:*The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, shareholders’ equity and net income. Actual results may differ significantly from those estimates. The Company uses the accrual basis of accounting by recognizing revenues when they are earned and expenses in the period incurred, without regard to the time of receipt or payment of cash.

 

*Allowance for Loan Losses**:*Arriving at an appropriate level of allowance for loan losses involves a high degree of judgment. The Company’s allowance for loan losses provides for probable losses based upon evaluations of known and inherent risks in the loan portfolio. Due to our limited operating history, the loans in our loan portfolio and our lending relationships are of recent origin. In general, loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process known as seasoning. As a result, a portfolio of older loans will usually behave more predictably than a newer portfolio. Because our loan portfolio is new, the current level of delinquencies and defaults may not be representative of the level that will prevail when the portfolio becomes more seasoned, which may be higher or lower than current levels. If delinquencies and defaults increase, we may be required to increase our provision for loan losses, which would adversely affect our results of operations and financial condition. The allowance for loan losses is increased by provisions for loan losses and by recoveries of loans previously charged-off and reduced by loans charged-off.

 

The process of reviewing the adequacy of the allowance for loan losses requires management to make numerous judgments and assumptions about current events and subjective judgments, including the likelihood of loan repayment, risk evaluation, historical losses, extrapolation of historical losses of similar banks, and similar judgments and assumptions. If these assumptions prove to be incorrect, charge-offs in future periods could exceed the allowance for loan losses.

 

The allowance for loan losses may consist of specific, general, and unallocated components.  The specific component relates to loans that are classified as impaired.  For loans that are classified as impaired, an allowance is established when the collateral value, discounted cash flows or the observable market price of the impaired loan is lower than the carrying value of the loan. General allowances are established for non-

 

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impaired loans.  These loans are assigned a loan category, and the allocated allowance for loan losses is determined based upon the loss percentage factors that correspond to each loan category.

 

The general reserves are determined based on consideration of historic and peer loss data, and the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:

 

Construction and development loans — Loans in this segment primarily include real estate development loans for which payment is derived from sale of the property as well as construction projects in which the property will ultimately be used by the borrower. Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions.

 

Real estate - mortgage — The Company generally does not originate loans with a loan-to-value ratio greater than 85 percent and does not grant subprime loans. Loans in this segment are dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates will have an effect on the credit quality in the segment.

 

Commercial real estate — Loans in this segment are primarily income-producing properties. The underlying cash flows generated by the properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment. Management monitors the cash flows of these loans.

 

Commercial and industrial loans — Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment.

 

*Stock Based Compensation:* The Company has adopted the fair value recognition provisions of Financial Accounting Standards Board Accounting Standards Codification (FASB ASC) 718, *Stock Compensation*. Upon issuance of the Director and Organizer warrants, compensation cost was recognized in the consolidated financial statements of the Company for all share-based payments granted, based on the grant date fair value as estimated in accordance with the provisions of FASB ASC 718, which requires recognition of expense equal to the fair value of the warrant over the vesting period of the warrant. There were no options or warrants granted in the first quarter 2011.

 

The fair value of each warrant grant is estimated on the date of grant using the Black-Scholes option-pricing model. Expected volatility for the period has been determined based on expected volatility of similar entities. The expected term of warrants granted is based on the short-cut method and represents the period of time that the warrants granted are expected to be outstanding. Expected dividends are based on dividend trends and the market price of the Company’s stock at grant date. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

 

The Company recorded compensation expense related to the warrants of $0 and $8,900 for the three months ended March 31, 2011 and 2010, respectively.

 

At March 31, 2011, there was no unrecognized compensation cost related to warrants. The weighted average remaining contractual life of the warrants outstanding as of March 31, 2011 was approximately 6.78 years. The Company had 469,167 warrants exercisable as of March 31, 2011.

 

Through March 31, 2011, the Company issued 203,322 options to purchase common stock to employees of the Company or the Bank and the Company issued 10,000 options to purchase common stock to a new director.  There were no options issued during the first three months of 2011. Upon issuance of options, compensation cost is recognized in the consolidated financial statements of the Company for all options granted, based on the grant date fair value as estimated in accordance with the provisions of FASB ASC 718, which requires recognition of expense equal to the fair value of the options over the vesting period of the options.

 

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The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. Expected volatility for the period has been determined based on expected volatility of similar entities. The expected term of options granted is based on the short-cut method and represents the period of time that the options granted are expected to be outstanding. Expected dividends are based on dividend trends and the market price of the Company’s stock at grant date. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

 

The Company recorded stock-based compensation expense related to the options of $25,459 and $51,637 during the three months ended March 31, 2011 and 2010, respectively.

 

At March 31, 2011, there was $79,745 of unrecognized compensation cost related to options outstanding, which is expected to be recognized over a weighted-average period of 0.29 years. The weighted average remaining contractual life of the options outstanding as of March 31, 2011 was approximately 7.8 years. The Company had 102,217 options exercisable as of March 31, 2011.

 

*Income Taxes:*Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method.  Under this method, the net deferred tax asset or liability is determined based on the tax effects of the differences between the book and tax bases of the various balance sheet assets and liabilities, and gives current recognition to changes in tax rates and laws.  A valuation allowance for deferred tax assets is required when it is more likely than not that some portion or all of the deferred tax asset will not be realized.  In assessing the realization of the deferred tax assets, management considers the scheduled reversals of deferred tax liabilities, projected future taxable income (in the near-term based on current projections), and tax planning strategies.

 

*Statement of Cash Flows:*The statement of cash flows was prepared using the indirect method. Under this method, net income was reconciled to net cash flows provided by operating activities by adjusting for the effects of operating activities.

 

*Cash and Cash Equivalents:*For purposes of presentation in the statement of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet caption “cash and due from banks.” Cash flows from deposits, federal funds purchased and sold, secured borrowings, and originations, renewals and extensions of loans are reported net.

 

3.             SECURITIES

 

The amortized cost, gross unrealized gains and losses, and estimated fair value of available for sale securities at March 31, 2011, are summarized as follows:

 
| ** **                                  | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | **Estimated** | ** ** |
|---------------------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|---------------|------------|
| ** **                                  | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair**      | ** ** |
| ** **                                  | ** ** | **Cost**      | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Value**     | ** ** |
|                                        |       |          |       |           |       |           |       |          |       |
| U.S Government-sponsored enterprises (GSEs) |       | $             | 9,990,055  |           | $          | 15,698         |       | $             | (287,996   | ) | $ | 9,717,757 |   |
| Municipal bonds                             |       | 7,553,529     |       | —         |       | (354,661       | )          | 7,198,868     |       |
| Mortgage-backed GSE residential             |       | 22,757,963    |       | 70,552         |       | (284,958       | )          | 22,543,557    |       |
|                                        |       | $             | 40,301,547 |           | $          | 86,250         |       | $             | (927,615   | ) | $ | 39,460,182 |   |

 

The amortized cost, gross unrealized gains and losses, and estimated fair value of securities available for sale at December 31, 2010, are summarized as follows:

 
| ** **                                   | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | **Estimated** | ** ** |
|----------------------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|---------------|------------|
| ** **                                   | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair**      | ** ** |
| ** **                                   | ** ** | **Cost**      | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Value**     | ** ** |
|                                         |       |          |       |           |       |           |       |          |       |
| U.S. Government-sponsored enterprises (GSEs) |       | $             | 15,988,874 |           | $          | 17,624         |       | $             | (228,952   | ) | $ | 15,777,546 |   |
| Municipal bonds                              |       | 10,783,782    |       | 6,349          |       | (374,200       | )          | 10,415,931    |       |
| Mortgage-backed GSE residential              |       | 23,108,103    |       | 76,008         |       | (242,448       | )          | 22,941,663    |       |
|                                         |       | $             | 49,880,759 |           | $          | 99,981         |       | $             | (845,600   | ) | $ | 49,135,140 |   |

 

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The amortized cost and estimated fair value of investment securities available for sale at March 31, 2011, by contractual maturity are shown below.  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 
| ** **                                   | ** ** | **Securities Available** | ** ** |
|----------------------------------------------|------------|-------------------------------|------------|
| ** **                                   | ** ** | **For Sale**             | ** ** |
| ** **                                   | ** ** | ** **                    | ** ** | **Estimated** | ** ** |
| ** **                                   | ** ** | **Amortized**                 | ** ** | **Fair** | ** ** |
| ** **                                   | ** ** | **Cost**                      | ** ** | **Value** | ** ** |
|                                         |       |                          |       |   |   |
| Due in one year or less                      |       | $                             | 3,820,305  |   | $ | 3,798,968 |   |
| Due after one year but less than five years  |       | 18,755,294                    |       | 18,457,843 |   |
| Due after five years but less than ten years |       | 12,146,959                    |       | 11,888,092 |   |
| Due after ten years                          |       | 5,578,989                     |       | 5,315,279 |   |
|                                         |       | $                             | 40,301,547 |   | $ | 39,460,182 |   |

 

For the purpose of the maturity table, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the weighted-average contractual maturities of underlying collateral.  The mortgage-backed securities may mature earlier than their weighted-average contractual maturities because of principal prepayments.

 

During the first quarter of 2011, the Company had gross gains on sales of securities of $90,312 and gross losses on sales of securities of $26,754. The Company had gross gains on sales of securities of $65,351 and no losses on sales of securities during the first quarter of 2010.

 

Information pertaining to securities with gross unrealized losses at March 31, 2011 aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

 
| ** **                                 | ** ** | **Less than**     | ** ** | **More than**     | ** ** | ** **     | ** ** | ** **    | ** ** |
|--------------------------------------------|------------|------------------------|------------|------------------------|------------|----------------|------------|---------------|------------|
| ** **                                 | ** ** | **Twelve Months** | ** ** | **Twelve Months** | ** ** | **Total**      | ** ** |
| ** **                                 | ** ** | **Gross**              | ** ** | **Estimated**          | ** ** | **Gross**      | ** ** | **Estimated** | ** ** | **Gross** | ** ** | **Estimated** | ** ** |
| ** **                                 | ** ** | **Unrealized**         | ** ** | **Fair**               | ** ** | **Unrealized** | ** ** | **Fair**      | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| ** **                                 | ** ** | **Losses**             | ** ** | **Value**              | ** ** | **Losses**     | ** ** | **Value**     | ** ** | **Losses** | ** ** | **Value** | ** ** |
| GSEs                                       |       | $                      | (287,996   | )                      | $          | 7,710,817      |       | $             | —     |   | $ | — |   | $ | (287,996 | ) | $ | 7,710,817 |   |
| Municipal bonds                            |       | (354,661               | )          | 7,198,868              |       | —         |       | —        |       | (354,661 | ) | 7,198,868 |   |
| Mortgage-backed securities GSE residential |       | (284,958               | )          | 12,950,208             |       | —         |       | —        |       | (284,958 | ) | 12,950,208 |   |
|                                       |       | $                      | (927,615   | )                      | $          | 27,859,893     |       | $             | —     |   | $ | — |   | $ | (927,615 | ) | $ | 27,859,893 |   |

 

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Information pertaining to securities with gross unrealized losses at December 31, 2010 aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

 
| ** **                                 | ** ** | **Less than**     | ** ** | **More than**     | ** ** | ** **     | ** ** | ** **    | ** ** |
|--------------------------------------------|------------|------------------------|------------|------------------------|------------|----------------|------------|---------------|------------|
| ** **                                 | ** ** | **Twelve Months** | ** ** | **Twelve Months** | ** ** | **Total**      | ** ** |
| ** **                                 | ** ** | **Gross**              | ** ** | **Estimated**          | ** ** | **Gross**      | ** ** | **Estimated** | ** ** | **Gross** | ** ** | **Estimated** | ** ** |
| ** **                                 | ** ** | **Unrealized**         | ** ** | **Fair**               | ** ** | **Unrealized** | ** ** | **Fair**      | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| ** **                                 | ** ** | **Losses**             | ** ** | **Value**              | ** ** | **Losses**     | ** ** | **Value**     | ** ** | **Losses** | ** ** | **Value** | ** ** |
| GSEs                                       |       | $                      | (228,952   | )                      | $          | 13,769,799     |       | $             | —     |   | $ | — |   | $ | (228,952 | ) | $ | 3,769,799 |   |
| Municipal bonds                            |       | (374,200               | )          | 8,793,759              |       | —         |       | —        |       | (374,200 | ) | 8,793,759 |   |
| Mortgage-backed securities GSE residential |       | (241,751               | )          | 14,911,044             |       | (697           | )          | 117,839       |       | (242,448 | ) | 15,028,883 |   |
|                                       |       | $                      | (844,903   | )                      | $          | 37,474,602     |       | $             | (697       | ) | $ | 117,839 |   | $ | 845,600 | ) | $ | 37,592,441 |   |

 

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.

 

At March 31, 2011, thirty-four debt securities have unrealized losses with aggregate depreciation of 3.22% from the Company’s amortized cost basis. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports. Although some of the issuers have shown declines in earnings and/or a weakened financial condition as a result of the weakened economy, no credit issues have been identified that cause management to believe the declines in market value are other than temporary. As management has the ability to hold debt securities until maturity, or for the foreseeable future, no declines are deemed to be other than temporary.

 

*GSE debt securities.*The unrealized losses on the eight investments in GSEs were caused by interest rate increases. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2011.

 

*Municipal bonds.*  The Company’s unrealized loss on eleven investments in municipal bonds relates to interest rate increases. Management currently does not believe it is probable that it will be unable to collect all amounts due according to the contractual terms of the investments. Because the Company does not plan to sell the investments, and because it is not more likely than not that the Company will be required to sell the investments before recovery of their par value, which may be maturity, management does not consider these investments to be other-than-temporarily impaired at March 31, 2011.

 

*Mortgage-backed GSE residential.*  The unrealized losses on the Company’s investment in fifteen residential GSE mortgage-backed securities were caused by interest rate increases. The contractual cash flows of those investments are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost bases of the Company’s investments. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has no immediate plans to sell the investments, and because it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, management does not consider those investments to be other-than-temporarily impaired at March 31, 2011.

 

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4.             LOANS AND ALLOWANCE FOR LOAN LOSSES

 

The composition of loans as of March 31, 2011 and December 31, 2010 is summarized as follows:

 
| ** **                   | ** ** | **March 31, 2011** | ** ** | **December 31, 2010** | ** ** |
|------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Construction and development |       | $                            | 15,055,020 |                            | $          | 16,976,039 |   |
| Real estate - mortgage       |       | 8,459,896                    |       | 7,592,015                       |       |
| Commercial real estate       |       | 52,936,202                   |       | 54,127,557                      |       |
| Commercial and industrial    |       | 8,608,155                    |       | 7,716,180                       |       |
| Other                        |       | 581,905                      |       | 556,802                         |       |
| Unearned fees                |       | 85,641,178                   |       | 86,968,593                      |       |
| Allowance for loan losses    |       | (214,357                     | )          | (225,999                        | )          |
|                         |       | (3,462,375                   | )          | (3,462,375                      | )          |
| Loans, net                   |       | $                            | 81,964,446 |                            | $          | 83,280,219 |   |

 

For purposes of the disclosures required pursuant to the adoption of amendments to ASC 310, the loan portfolio was disaggregated into segments. A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for loan losses. There are five loan portfolio segments that include construction and development, real estate — mortgage, commercial real estate, commercial and industrial, and other.

 

*Construction and Development*

 

Loans in this segment include real estate development loans for which the source of repayment is the sale of the property as well as construction projects in which the property will ultimately be used by the borrower. Total construction and development loans as of March 31, 2011 were 17.6% of the total loan portfolio.

 

*Real Estate - Mortgage*

 

These are loans secured by real estate mortgages.  Total real estate mortgage loans as of March 31, 2011 were 9.9% of the total loan portfolio.

 

*Commercial Real Estate*

 

The commercial real estate portfolio represents the largest category of the Company’s loan portfolio.  These loans are primarily income-producing properties and are dependent upon the borrower’s cash flow.  Total commercial real estate loans as of March 31, 2011 were 61.8% of the total loan portfolio.

 

*Commercial and Industrial*

 

Loans in this segment are made to businesses and are generally secured by business assets.  Total commercial and industrial loans as of March 31, 2011 were 10.1% of the total loan portfolio.

 

*Other*

 

Loans in this segment are made to individuals and are secured by personal assets or unsecured.  Total other loans as of March 31, 2011 were 0.6% of the total loan portfolio.

 

Changes in the allowance for loan losses for the period ending March 31, 2011 and  March  31, 2010 are as follows

 
| ** **                      | ** ** | **March 31, 2011** | ** ** | **March 31, 2010** | ** ** |
|---------------------------------|------------|------------------------------|------------|------------------------------|------------|
| Balance, beginning of year      |       | $                            | 3,462,375  |                         | $          | 1,445,522 |   |
| Provision charged to operations |       | —                       |       | $                            | 197,356    |   |
| Loans charged off               |       | —                       |       | —                       |       |
| Recoveries                      |       | —                       |       | —                       |       |
| Balance, end of period          |       | $                            | 3,462,375  |                         | $          | 1,642,878 |   |

 

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The allowance for loan losses for the three months ended March 31, 2011, by portfolio segment, is as follows (in thousands):

 

Loans reported on the balance sheet are reported net of deferred loan fees of $214,357.

 
| ** **                                                         | ** ** | **Construction   and   Development** | ** ** | **Real Estate -   Mortgage** | ** ** | **Commercial    Real   Estate** | ** ** | **Commercial   and   Industrial** | ** ** | **Other** | ** ** | **Total** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|-----------------------------------|------------|-----------|------------|-----------|------------|
|                                                               |       |                                 |       |                                   |       |                                 |       |                              |       |      |       |      |       |
| **Allowance for loan losses:**                                     |       |                                 |       |                                   |       |                                 |       |                              |       |      |       |      |       |
| Beginning balance                                                  |       | $                                    | 1,259,996  |                                   | $          | 68,905                               |       | $                                 | 1,933,810  |      | $          | 156,457   |       | $ | 43,207 |   | $ | 3,462,375 |   |
| Charge-offs                                                        |       | —                               |       | —                                 |       | —                               |       | —                            |       | —    |       | —    |       |
| Recoveries                                                         |       | —                               |       | —                                 |       | —                               |       | —                            |       | —    |       | —    |       |
| Provision                                                          |       | —                               |       | —                                 |       | —                               |       | —                            |       | —    |       | —    |       |
| Reallocation                                                       |       | (81,645                              | )          | (41,111                                | )          | (464,226                             | )          | 583,967                           |       | 3,315     |       | —    |       |
| Ending balance                                                     |       | $                                    | 1,178,351  |                                   | $          | 27,494                               |       | $                                 | 1,469,584  |      | $          | 740,424   |       | $ | 46,522 |   | $ | 3,462,375 |   |
|                                                               |       |                                 |       |                                   |       |                                 |       |                              |       |      |       |      |       |
| Ending balance - individually evaluated for   impairment           |       | $                                    | —     |                                   | $          | —                               |       | $                                 | 932,951    |      | $          | —    |       | $ | — |   | $ | 932,951 |   |
|                                                               |       |                                 |       |                                   |       |                                 |       |                              |       |      |       |      |       |
| Ending balance - loans acquired with deteriorated   credit quality |       | $                                    | —     |                                   | $          | —                               |       | $                                 | —     |      | $          | —    |       | $ | — |   | $ | — |   |
|                                                               |       |                                 |       |                                   |       |                                 |       |                              |       |      |       |      |       |
| **Gross Loans:**                                                   |       |                                 |       |                                   |       |                                 |       |                              |       |      |       |      |       |
|                                                               |       |                                 |       |                                   |       |                                 |       |                              |       |      |       |      |       |
| Ending Balance                                                     |       | $                                    | 15,055,020 |                                   | $          | 8,459,896                            |       | $                                 | 52,936,202 |      | $          | 8,608,155 |       | $ | 581,905 |   | $ | 85,641,178 |   |
|                                                               |       |                                 |       |                                   |       |                                 |       |                              |       |      |       |      |       |
| Ending balance - individually evaluated for   impairment           |       | $                                    | 2,043,300  |                                   | $          | —                               |       | $                                 | 5,920,765  |      | $          | —    |       | $ | — |   | $ | 7,964,065 |   |
|                                                               |       |                                 |       |                                   |       |                                 |       |                              |       |      |       |      |       |
| Ending balance - loans acquired with deteriorated   credit quality |       | $                                    | —     |                                   | $          | —                               |       | $                                 | 518,995    |      | $          | —    |       | $ | — |   | $ | 518,995 |   |

 

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The allowance for loan losses for the twelve months ended December 31, 2010, by portfolio segment, is as follows (in thousands):

 

Loans reported on the balance sheet are reported net of deferred loan fees of $225,999.

 
| ** **                                                         | ** ** | **Construction   and   Development** | ** ** | **Real Estate -   Mortgage** | ** ** | **Commercial    Real   Estate** | ** ** | **Commercial   and   Industrial** | ** ** | **Other** | ** ** | **Total**  | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|-----------------------------------|------------|-----------|------------|------------|------------|
|                                                               |       |                                 |       |                                   |       |                                 |       |                              |       |      |       |       |       |
| **Allowance for loan losses:**                                     |       |                                 |       |                                   |       |                                 |       |                              |       |      |       |       |       |
| Beginning balance                                                  |       | $                                    | 411,549    |                                   | $          | 71,875                               |       | $                                 | 876,826    |      | $          | 61,947     |       | $ | 23,325 |   | $ | 1,445,522 |   |
| Charge-offs                                                        |       | (1,476,700                           | )          | —                                 |       | (1,517,235                           | )          | —                            |       | (99,929   | )          | (3,093,864 | )          |
| Recoveries                                                         |       | —                               |       | —                                 |       | —                               |       | —                            |       | —    |       | —     |       |
| Provision                                                          |       | 2,325,147                            |       | (2,970                                 | )          | 2,574,219                            |       | 94,510                            |       | 119,811   |       | 5,110,717  |       |
| Ending balance                                                     |       | $                                    | 1,259,996  |                                   | $          | 68,905                               |       | $                                 | 1,933,810  |      | $          | 156,457    |       | $ | 43,207 |   | $ | 3,462,375 |   |
|                                                               |       |                                 |       |                                   |       |                                 |       |                              |       |      |       |       |       |
| Ending balance - individually evaluated for   impairment           |       | $                                    | —     |                                   | $          | —                               |       | $                                 | 950,176    |      | $          | —     |       | $ | — |   | $ | 950,176 |   |
|                                                               |       |                                 |       |                                   |       |                                 |       |                              |       |      |       |       |       |
| Ending balance - loans acquired with deteriorated   credit quality |       | $                                    | —     |                                   | $          | —                               |       | $                                 | —     |      | $          | —     |       | $ | — |   | $ | — |   |
|                                                               |       |                                 |       |                                   |       |                                 |       |                              |       |      |       |       |       |
| **Loans:**                                                         |       |                                 |       |                                   |       |                                 |       |                              |       |      |       |       |       |
|                                                               |       |                                 |       |                                   |       |                                 |       |                              |       |      |       |       |       |
| Ending Balance                                                     |       | $                                    | 16,976,039 |                                   | $          | 7,592,015                            |       | $                                 | 54,127,557 |      | $          | 7,716,180  |       | $ | 556,802 |   | $ | 86,968,593 |   |
|                                                               |       |                                 |       |                                   |       |                                 |       |                              |       |      |       |       |       |
| Ending balance - individually evaluated for   impairment           |       | $                                    | 2,043,300  |                                   | $          | —                               |       | $                                 | 6,133,014  |      | $          | —     |       | $ | — |   | $ | 8,176,314 |   |
|                                                               |       |                                 |       |                                   |       |                                 |       |                              |       |      |       |       |       |
| Ending balance - loans acquired with deteriorated   credit quality |       | $                                    | —     |                                   | $          | —                               |       | $                                 | 518,995    |      | $          | —     |       | $ | — |   | $ | 518,995 |   |

 

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Impaired loans as of March 31, 2011 and December 31, 2010, by portfolio segment, are as follows:

 
| **March 31, 2011**        | ** ** | **Recorded   Investment** | ** ** | **Unpaid   Principal   Balance** | ** ** | **Related   Allowance** | ** ** | **Average   Recorded   Investment** | ** ** | **Interest   Income   Recognized** | ** ** |
|-------------------------------------|------------|---------------------------|------------|----------------------------------|------------|-------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
|                                |       |                      |       |                             |       |                    |       |                                |       |                               |       |
| With no related allowance recorded: |       |                      |       |                             |       |                    |       |                                |       |                               |       |
| Construction and development        |       | $                         | 2,043,300  |                             | $          | 3,520,000               |       | $                                   | —     |                               | $          | 2,043,300 |   | $ | — |   |
| Real estate - mortgage              |       | —                    |       | —                           |       | —                  |       | —                              |       | —                             |       |
| Commercial real estate              |       | 1,347,862                 |       | 1,449,360                        |       | —                  |       | 1,347,862                           |       | —                             |       |
| Commercial and industrial           |       | —                    |       | —                           |       | —                  |       | —                              |       | —                             |       |
| Other                               |       | —                    |       | —                           |       | —                  |       | —                              |       | —                             |       |
|                                |       |                      |       |                             |       |                    |       |                                |       |                               |       |
| With a related allowance recorded:  |       |                      |       |                             |       |                    |       |                                |       |                               |       |
| Construction and development        |       | —                    |       | —                           |       | —                  |       | —                              |       | —                             |       |
| Real estate - mortgage              |       | —                    |       | —                           |       | —                  |       | —                              |       | —                             |       |
| Commercial real estate              |       | 4,572,903                 |       | 6,742,903                        |       | 932,951                 |       | 4,679,028                           |       | —                             |       |
| Commercial and industrial           |       | —                    |       | —                           |       | —                  |       | —                              |       | —                             |       |
| Other                               |       | —                    |       | —                           |       | —                  |       | —                              |       | —                             |       |
|                                     |            |                           |            |                                  |            |                         |            |                                     |            |                                    |            |  |  |  |  |  |

 
| **December 31, 2010**     | ** ** | **Recorded   Investment** | ** ** | **Unpaid   Principal   Balance** | ** ** | **Related   Allowance** | ** ** | **Average   Recorded   Investment** | ** ** | **Interest   Income   Recognized** | ** ** |
|-------------------------------------|------------|---------------------------|------------|----------------------------------|------------|-------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
|                                |       |                      |       |                             |       |                    |       |                                |       |                               |       |
| With no related allowance recorded: |       |                      |       |                             |       |                    |       |                                |       |                               |       |
| Construction and development        |       | $                         | 2,043,300  |                             | $          | 2,043,300               |       | $                                   | —     |                               | $          | 1,871,650 |   | $ | — |   |
| Real estate - mortgage              |       | —                    |       | —                           |       | —                  |       | —                              |       | —                             |       |
| Commercial real estate              |       | 1,347,862                 |       | 1,347,862                        |       | —                  |       | 2,772,549                           |       | —                             |       |
| Commercial and industrial           |       | —                    |       | —                           |       | —                  |       | —                              |       | —                             |       |
| Other                               |       | —                    |       | —                           |       | —                  |       | —                              |       | —                             |       |
|                                |       |                      |       |                             |       |                    |       |                                |       |                               |       |
| With a related allowance recorded:  |       |                      |       |                             |       |                    |       |                                |       |                               |       |
| Construction and development        |       | —                    |       | —                           |       | —                  |       | —                              |       | —                             |       |
| Real estate - mortgage              |       | —                    |       | —                           |       | —                  |       | —                              |       | —                             |       |
| Commercial real estate              |       | 4,785,152                 |       | 4,785,152                        |       | 950,176                 |       | 2,392,576                           |       | —                             |       |
| Commercial and industrial           |       | —                    |       | —                           |       | —                  |       | —                              |       | —                             |       |
| Other                               |       | —                    |       | —                           |       | —                  |       | —                              |       | —                             |       |
|                                     |            |                           |            |                                  |            |                         |            |                                     |            |                                    |            |  |  |  |  |  |

 

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A primary credit quality indicator for financial institutions is delinquent balances.  Following are the delinquent amounts, by portfolio segment, as of March 31, 2011and December 31, 2010:

 
| **March 31, 2011**   | ** ** | **Current** | ** ** | **30 - 89 Days** | ** ** | **Accruing   Greater   Than 90   Days** | ** ** | **Total Accruing   Past Due** | ** ** | **Non-accrual** | ** ** | **Total   Financing   Receivables** | ** ** |
|--------------------------------|------------|-------------|------------|---------------------------------|------------|----------------------------------------------|------------|-----------------------------------------|------------|-----------------|------------|-------------------------------------|------------|
|                           |       |        |       |                            |       |                                         |       |                                    |       |            |       |                                |       |
| Construction   and development |       | $           | 13,011,720 |                            | $          | —                                       |       | $                                       | —     |            | $          | —                              |       | $ | 2,043,300 |   | $ | 15,055,020 |   |
| Real   estate - mortgage       |       | 8,459,896   |       | —                          |       | —                                       |       | —                                  |       | —          |       | 8,459,896                           |       |
| Commercial   real estate       |       | 47,015,437  |       | —                          |       | —                                       |       | —                                  |       | 5,920,765       |       | 52,936,202                          |       |
| Commercial   and industrial    |       | 8,608,155   |       | —                          |       | —                                       |       | —                                  |       | —          |       | 8,608,155                           |       |
| Other                          |       | 581,905     |       | —                          |       | —                                       |       | —                                  |       | —          |       | 581,905                             |       |
|                                |            |             |            |                                 |            |                                              |            |                                         |            |                 |            |                                     |            |  |  |  |  |  |  |

 
| **December 31, 2010** | ** ** | **Current** | ** ** | **30 - 89 Days** | ** ** | **Accruing   Greater   Than 90   Days** | ** ** | **Total Accruing   Past Due** | ** ** | **Non-accrual** | ** ** | **Total**  | ** ** |
|---------------------------------|------------|-------------|------------|---------------------------------|------------|----------------------------------------------|------------|-----------------------------------------|------------|-----------------|------------|------------|------------|
|                            |       |        |       |                            |       |                                         |       |                                    |       |            |       |       |       |
| Construction and development    |       | $           | 13,585,248 |                            | $          | 1,347,491                                    |       | $                                       | —     |            | $          | 1,347,491  |       | $ | 2,043,300 |   | $ | 16,976,039 |   |
| Real estate - mortgage          |       | 7,592,015   |       | —                          |       | —                                       |       | —                                  |       |            |       | 7,592,015  |       |
| Commercial real estate          |       | 47,994,543  |       | —                          |       | —                                       |       | —                                  |       | 6,133,014       |       | 54,127,557 |       |
| Commercial and industrial       |       | 7,716,180   |       | —                          |       | —                                       |       | —                                  |       |            |       | 7,716,180  |       |
| Other                           |       | 556,802     |       | —                          |       | —                                       |       | —                                  |       |            |       | 556,802    |       |
|                                 |            |             |            |                                 |            |                                              |            |                                         |            |                 |            |            |            |  |  |  |  |  |  |

 

The Company utilizes a nine grade internal loan rating system for its loan portfolio as follows:

 

·                  Loans rated 1-4 (Pass) — Loans in these categories have low to average risk.

·                  Loans rated 5 (Internal Watch List) - These assets raise some concern due to either prior financial or collateral problems, or recent developing conditions, and thus warrant closer monitoring and review than “pass” assets.

·                  Loans rated 6 (Special Mention) - These assets constitute an undue and unwarranted credit risk but not to the point of justifying a substandard classification.

·                  Loans rated 7 (Substandard) - A substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.

·                  Loans rated 8 (Doubtful) - An asset classified as doubtful has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

·                  Loans rated 9 (Loss) - Assets classified loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted.

 

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The following table presents the Company’s loans by risk rating at March 31, 2011 and December 31, 2010:

 
| **March 31, 2011** | ** ** | **Construction   and   Development** | ** ** | **Real Estate -   Mortgage** | ** ** | **Commercial   Real Estate** | ** ** | **Commercial   and Industrial** | ** ** | **Other** | ** ** | **Total**  | ** ** |
|------------------------------|------------|--------------------------------------|------------|----------------------------------------|------------|-----------------------------------|------------|--------------------------------------|------------|-----------|------------|------------|------------|
| Rating:                      |       |                                 |       |                                   |       |                              |       |                                 |       |      |       |       |       |
| 1-4 (Pass)                   |       | $                                    | 8,664,229  |                                   | $          | 8,267,135                         |       | $                                    | 47,015,437 |      | $          | 8,608,155  |       | $ | 522,627 |   | $ | 73,077,583 |   |
| 5 (Internal Watch List)      |       | 1,347,491                            |       | 192,761                                |       | —                            |       | —                               |       | 59,278    |       | 1,599,530  |       |
| 6 (Special Mention)          |       | —                               |       | —                                 |       | —                            |       | —                               |       | —    |       | —     |       |
| 7 (Substandard)              |       | 5,043,300                            |       | —                                 |       | 5,920,765                         |       | —                               |       | —    |       | 10,964,065 |       |
| 8 (Doubtful)                 |       | —                               |       | —                                 |       | —                            |       | —                               |       | —    |       | —     |       |
| 9 (Loss)                     |       | —                               |       | —                                 |       | —                            |       | —                               |       | —    |       | —     |       |
| Total                        |       | $                                    | 15,055,020 |                                   | $          | 8,459,896                         |       | $                                    | 52,936,202 |      | $          | 8,608,155  |       | $ | 581,905 |   | $ | 85,641,178 |   |

 
| **December 31, 2010** | ** ** | **Construction   and   Development** | ** ** | **Real Estate -   Mortgage** | ** ** | **Commercial   Real Estate** | ** ** | **Commercial   and Industrial** | ** ** | **Other** | ** ** | **Total**  | ** ** |
|---------------------------------|------------|--------------------------------------|------------|----------------------------------------|------------|-----------------------------------|------------|--------------------------------------|------------|-----------|------------|------------|------------|
|                            |       |                                 |       |                                   |       |                              |       |                                 |       |      |       |       |       |
| Rating:                         |       |                                 |       |                                   |       |                              |       |                                 |       |      |       |       |       |
| 1-4 (Pass)                      |       | $                                    | 10,585,248 |                                   | $          | 7,386,492                         |       | $                                    | 47,994,543 |      | $          | 7,716,180  |       | $ | 491,797 |   | $ | 74,174,260 |   |
| 5 (Internal Watch List)         |       | —                               |       | 205,523                                |       | —                            |       | —                               |       | 65,005    |       | 270,528    |       |
| 6 (Special Mention)             |       | —                               |       | —                                 |       | —                            |       | —                               |       | —    |       | —     |       |
| 7 (Substandard)                 |       | 6,390,791                            |       | —                                 |       | 6,133,014                         |       | —                               |       | —    |       | 12,523,805 |       |
| 8 (Doubtful)                    |       | —                               |       | —                                 |       | —                            |       | —                               |       |      |       |       |       |
| 9 (Loss)                        |       | —                               |       | —                                 |       | —                            |       | —                               |       | —    |       | —     |       |
| Total                           |       | $                                    | 16,976,039 |                                   | $          | 7,592,015                         |       | $                                    | 54,127,557 |      | $          | 7,716,180  |       | $ | 556,802 |   | $ | 86,968,593 |   |

 

5.             FAIR VALUE MEASUREMENTS

 

ASC Topic 820, *Fair Value Measurements,* defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. FASB ASC 820-10 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances.

 

FASB ASC 820-10 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, GAAP establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

 

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Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

 

The tables below presents the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2011 and December 31, 2010, aggregated by the level in the fair value hierarchy within which those measurements fall.

 
| **Assets as of**               | ** ** | **Quoted Prices in   Active Markets for   Identical Assets** | ** ** | **Significant Other   Observable Inputs** | ** ** | **Significant   Unobservable   Inputs** | ** ** | ** ** | ** ** |
|------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------|------------|------------|------------|
| **March 31, 2011**             | ** ** | **(Level 1)**                                                                    | ** ** | **(Level 2)**                                  | ** ** | **(Level 3)**                      | ** ** | **Total**  | ** ** |
| Investment securities available-for-sale |       | $                                                                                     | —     |                                                | $          | 39,460,182                              |       | $          | —     |   | $ | 39,460,182 |   |
| Derivative instruments                   |       | —                                                                                |       | —                                              |       | 85,209                                  |       | 85,209     |       |
| Loans held for sale                      |       | —                                                                                |       | —                                              |       | 518,995                                 |       | 518,995    |       |
| Total assets at fair value               |       | $                                                                                     | —     |                                                | $          | 39,460,182                              |       | $          | 604,204    |   | $ | 40,064,386 |   |

 
| **Assets as of  **   | ** ** | **Quoted Prices in   Active Markets for   Identical Assets** | ** ** | **Significant Other   Observable Inputs** | ** ** | **Significant   Unobservable   Inputs** | ** ** | ** ** | ** ** |
|------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------|------------|------------|------------|
| **December 31, 2010**          | ** ** | **(Level 1)**                                                                    | ** ** | **(Level 2)**                                  | ** ** | **(Level 3)**                      | ** ** | **Total**  | ** ** |
| Investment securities available-for-sale |       | $                                                                                     | —     |                                                | $          | 49,135,140                              |       | $          | —     |   | $ | 49,135,140 |   |
| Derivative instruments                   |       | —                                                                                |       | —                                              |       | 76,153                                  |       | 76,153     |       |
| Loans held for sale                      |       | —                                                                                |       | —                                              |       | 518,995                                 |       | 518,995    |       |
| Total assets at fair value               |       | $                                                                                     | —     |                                                | $          | 49,135,140                              |       | $          | 595,148    |   | $ | 49,730,288 |   |

 

Securities classified as available-for-sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. The investments in the Company’s portfolio are generally not quoted on an exchange but are actively traded in the secondary institutional markets.

 

The derivative instrument held by the Company is reported at fair value utilizing Level 3 inputs. The valuation of this instrument is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual term of the derivative, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate options are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates fell below (rise above) the strike rate of the floors (caps). The variable interest rates used in the calculation of projected receipts on the floor (cap) are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities. To comply with the provisions of ASC 820, the Company incorporates credit valuation adjustments to reflect appropriately both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.

 

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In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

 

Loans held-for-sale are measured at the lower of cost or fair value. Fair value is currently based on the purchase price of the loan held for sale. On loans held for sale, collateral includes commercial real estate. The fair value of loans held for sale are evaluated on an on-going basis by monitoring what secondary markets are offering for loans and portfolios with similar characteristics.

 

The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying balance sheet using significant unobservable (Level 3) inputs.

 
| ** **                    | ** ** | **Loans Held** | ** ** | **Derivative**  | ** ** |
|-------------------------------|------------|---------------------|------------|-----------------|------------|
| ** **                    | ** ** | **For Sale**   | ** ** | **Instruments** | ** ** |
| Balance, January 1, 2011 |       | $                   | 518,995    |            | $          | 76,153 |   |
| Sales of loans held for sale  |       | —              |       | —          |       |
| Loan foreclosure              |       | —              |       | —          |       |
| Mark to market gain           |       | —              |       | 9,056           |       |
| Balance, March 31, 2011  |       | $                   | 518,995    |            | $          | 85,209 |   |

 

The following table presents the assets that are measured at fair value on a non-recurring basis by level within the fair value hierarchy as reported in the consolidated statements of financial position at March 31, 2011 and December 31, 2010.

 
| **As of March 31, 2011** | ** ** | **Quoted Prices in Active   Markets for Identical   Assets (Level 1)** | ** ** | **Significant Other   Observable Inputs   (Level 2)** | ** ** | **Significant   Unobservable   Inputs   (Level 3)** | ** ** | **Total** | ** ** |
|----------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------|------------|-----------|------------|
| Impaired loans                               |       | $                                                                                                         | —     |                                                                 | $          | —                                                   |       | $         | 3,639,952  |   | $ | 3,639,952 |   |
| Foreclosed real estate                       |       | $                                                                                                         | —     |                                                                 | $          | —                                                   |       | $         | 273,664    |   | $ | 273,664 |   |

 
| **As of December 31, 2010** | ** ** | **Quoted Prices in Active   Markets for Identical   Assets (Level 1)** | ** ** | **Significant Other   Observable Inputs   (Level 2)** | ** ** | **Significant   Unobservable   Inputs   (Level 3)** | ** ** | **Total** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------|------------|-----------|------------|
| Impaired loans                                  |       | $                                                                                                         | —     |                                                                 | $          | —                                                   |       | $         | 4,721,162  |   | $ | 4,721,162 |   |
| Foreclosed real estate                          |       | $                                                                                                         | —     |                                                                 | $          | —                                                   |       | $         | 291,377    |   | $ | 291,377 |   |

 

At March 31, 2011 and December 31, 2010, in accordance with the provisions of the loan impairment guidance (FASB ASC 310-10-35), individual loans with a carrying amount of $3,639,952 and $4,721,162, net of partial charge-offs of $3,746,060 and $3,746,060, respectively, were considered impaired. No fair value adjustments occurred in the first quarter 2011in impaired loans and foreclosed real estate. Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or fair value. Fair value is measured based on the value of the collateral securing these loans and is classified as Level 3 in the fair value hierarchy. Collateral may include real estate, or business assets including equipment, inventory and accounts receivable. The value of real estate collateral is determined based on an appraisal by qualified licensed appraisers hired by the Company. The value of business equipment is based on an appraisal by qualified licensed appraisers hired by the Company if significant, or the equipment’s net book value on the business’ financial statements. Inventory and accounts receivable collateral are valued based on independent field examiner review or aging reports. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business. Impaired loans are evaluated on at least a quarterly basis for additional impairment and adjusted accordingly.

 

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Fair Value of Financial Instruments

 

The following methods and assumptions that were used by the Company in estimating fair values of financial instruments are disclosed herein:

 

*Cash, federal funds sold, and interest bearing deposits with other banks.*  The carrying amounts of cash and short-term instruments approximate their fair value due to the relatively short period to maturity of the instruments.

 

*Investment securities available-for-sale*.  Fair values for securities, excluding restricted equity securities, are based predominately on quoted market prices. If quoted market prices are not available, fair values are based on quoted market prices of similar instruments.

 

*Restricted stock.* The carrying values of restricted equity securities approximate fair values.

 

*Loans Held for Sale.* Loans held for sale are carried at the lower of cost or fair value. Fair value is currently based on what secondary markets are offering for loans and portfolios with similar characteristics.

 

*Loans receivable.*  For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. Fair values for fixed rate loans are estimated using discounted cash flow analyses and using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

 

*Deposit liabilities.*  The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date.  Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

 

*Federal Home Loan Bank (“FHLB”) advances and Federal funds purchased.* Fair values of fixed rate FHLB advances and Federal funds purchased are estimated using discounted cash flow analyses based on the Bank’s current incremental borrowing rates for similar types of borrowing arrangements.  The carrying values of variable rate FHLB advances and Federal funds purchased approximate fair value.

 

*Secured borrowings.*The carrying amounts of secured borrowings approximate their fair values.

 

*Accrued interest.*  The carrying amounts of accrued interest approximate their fair values.

 

*Derivative instruments.*  The fair values of these instruments are determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities.

 

*Off-balance-sheet instruments.*  Fair values for off-balance-sheet lending commitments are based on the current carrying value and adjusted, if appropriate, for material changes in pricing currently charged to enter into similar agreements. Remaining terms of the agreements and counter parties’ credit standings are taken into account when making this evaluation.

 

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The Company’s carrying amounts and estimated fair values of financial instruments as of March 31, 2011 and December 31, 2010 (in thousands) were as follows:

 
| ** **                                 | ** ** | **March 31** | ** ** | **December 31** | ** ** |
|--------------------------------------------|------------|-------------------|------------|----------------------|------------|
| ** **                                 | ** ** | **2011**          | ** ** | **2010**             | ** ** |
| ** **                                 | ** ** | **Carrying**      | ** ** | **Estimated**        | ** ** | **Carrying** | ** ** | **Estimated** | ** ** |
| ** **                                 | ** ** | **Amount**        | ** ** | **Fair Value**  | ** ** | **Amount** | ** ** | **Fair Value** | ** ** |
| Assets:                                    |       |              |       |                 |       |   |   |   |   |
| Cash and due from banks                    |       | $                 | 3,570      |                 | $          | 3,570 |   | $ | 1,221 |   | $ | 1,221 |   |
| Federal funds sold                         |       | 54                |       | 54                   |       | — |   | — |   |
| Interest-bearing accounts with other banks |       | 5,530             |       | 5,530                |       | 2,560 |   | 2,560 |   |
| Securities available for sale              |       | 39,460            |       | 39,460               |       | 49,135 |   | 49,135 |   |
| Restricted stock                           |       | 1,387             |       | 1,387                |       | 1,440 |   | 1,440 |   |
| Loan held for sale                         |       | 519               |       | 519                  |       | 519 |   | 519 |   |
| Loans receivable                           |       | 81,964            |       | 83,371               |       | 83,280 |   | 83,481 |   |
| Accrued interest receivable                |       | 437               |       | 437                  |       | 639 |   | 639 |   |
| Derivative instruments                     |       | 85                |       | 85                   |       | 76 |   | 76 |   |
|                                       |       |              |       |                 |       |   |   |   |   |
| Liabilities:                               |       |              |       |                 |       |   |   |   |   |
| Deposits                                   |       | 101,524           |       | 101,780              |       | 107,135 |   | 107,429 |   |
| Accrued interest payable                   |       | 69                |       | 69                   |       | 82 |   | 82 |   |
| Federal funds purchased                    |       | 575               |       | 575                  |       | — |   | — |   |
| FHLB advances                              |       | 11,400            |       | 11,435               |       | 11,400 |   | 11,436 |   |
| Secured borrowings                         |       | 851               |       | 851                  |       | 2,027 |   | 2,027 |   |
|                                            |            |                   |            |                      |            |  |  |  |  |  |  |  |  |

 

6.             EARNINGS PER SHARE

 

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding. Diluted earnings per share is computed by dividing net income by the sum of the weighted average number of shares of common stock outstanding and potential common shares. Potential common shares consist of stock options and warrants. Weighted average shares outstanding for the three months ended March 31, 2011 and 2010 were 3,465,391. Basic earnings per share for the three months ended March 31, 2011 and 2010 was $0.06 and $0.02, respectively. Diluted earnings per share does not vary from basic earnings per share due to the exercise prices exceeding the current share price.

 

7.             DERIVATIVE INSTRUMENT

 

In September 2009, the Company entered into an interest rate corridor transaction. An interest rate corridor is composed of a long interest rate cap position and a short interest rate cap position. The buyer of the corridor purchases a cap with a lower strike while selling a second cap with a higher strike. The premium earned on the second cap then reduces the cost of the structure as a whole. The buyer of the corridor is then protected from rates rising above the first cap’s strike, but exposed again if they rise past the second cap’s strike.

 

In this transaction, the Company purchased an interest rate cap at 0.75% based on the 1 month LIBOR rate.  Additionally, the Company sold an interest rate cap with the strike at 2.50% based on the 1 month LIBOR rate. Each of these transactions are forward start transactions with an effective date of July 1, 2010 and a termination date of July 1, 2013.  The notional amount for each is $10,000,000.  The interest rate corridor transaction is considered a stand alone derivative instrument, and as such will be recorded in the financial statements at fair value, with changes in fair value included in net income.  Additionally, this transaction has a net settlement feature, and the effects of the net settlement will be included in interest income or expense as appropriate.  The fair values as of March 31, 2011 and December 31, 2010 were $85,209 and $76,153, respectively, and were included in other assets.

 

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8.             ACCOUNTING STANDARDS UPDATES

 

The FASB issued Accounting Standards Update No. 2011-01, *Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20* (“ASU No. 2011-01”), during January 2011. ASU 2011-01 temporarily delays the effective date of troubled debt restructuring disclosures required by ASU 2010-20 for public companies.  The disclosures regarding troubled debt restructurings will be effective for interim and annual periods ending after June 15, 2011.   ASU No. 2011-01 will have an impact on the Company’s disclosures, but not its financial position or results of operations.

 

In April 2011, the FASB issued Accounting Standards Update No. 2011-02, *A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring*(“ASU No. 2011-02”). ASU 2011-02 provides additional clarification for creditors in evaluating whether or not a debt restructuring involves a concession and whether a debtor is experiencing financial difficulties, both of which are the basis for determining whether a restructuring constitutes a troubled debt restructuring.  The amendments will be effective for the first interim or annual period beginning on or after June 15, 2011. ASU 2011-02 also requires disclosure of those items deferred in ASU 2011-01 for interim and annual periods beginning on or after June 15, 2011. ASU No. 2011-02 is not expected to have a significant impact on the Company’s disclosures, financial position or results of operations.

 

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

 

The following discussion reviews our results of operations and assesses our financial condition. You should read the following discussion and analysis in conjunction with the accompanying condensed consolidated financial statements. The commentary should be read in conjunction with the discussion of forward-looking statements, the consolidated financial statements, and the related notes and the other statistical information included in this report.

 

**DISCUSSION OF FORWARD-LOOKING STATEMENTS**

 

This report contains “forward-looking statements” relating to, without limitation, future economic performance, plans and objectives of management for future operations, and projections of revenues and other financial items that are based on the beliefs of our management, as well as assumptions made by and information currently available to management. The words “expect,” “estimate,” “anticipate,” and “believe,” as well as similar expressions, are intended to identify forward-looking statements. Our actual results may differ materially from the results discussed in the forward-looking statements, and our operating performance each quarter is subject to various risks and uncertainties that are discussed in detail in our filings with the Securities and Exchange Commission (the “SEC”), including, without limitation:

 

· reduced earnings due to higher credit losses generally, and specifically because losses in the sectors of our loan portfolio secured by real estate are greater than expected due to economic factors, including declining real estate values, increasing interest rates, increasing unemployment, or changes in payment behavior or other factors;

 

· reduced earnings due 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 of our real estate-based loan portfolio collateralized by real estate, and the weakness in the commercial real estate market;

 

· significant increases in competitive pressure in the banking and financial services industries;

 

· changes in the interest rate environment which could reduce anticipated margins;

 

· changes in political conditions or the legislative or regulatory environment;

 

· general economic conditions, either nationally or regionally and especially in our primary service area, becoming less favorable than expected, resulting in, among other things, a deterioration in credit quality;

 

· changes occurring in business conditions and inflation;

 

· changes in deposit flows;

 

· changes in technology;

 

· changes in monetary and tax policies;

 

· adequacy of the level of our allowance for loan losses;

 

· the rate of delinquencies and amount of loans charged-off;

 

· the rate of loan growth;

 

· adverse changes in asset quality and resulting credit risk-related losses and expenses;

 

· loss of consumer confidence and economic disruptions resulting from terrorist activities;

 

· changes in the securities markets; and/or

 

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· other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission.

 

**Company Overview**

 

The following describes our results of operations for the three months ended March 31, 2011 and 2010, and also analyzes our financial condition as of March 31, 2011 and December 31, 2010.  Like most community banks, we expect to derive most of our income from interest that we receive on our loans and investments. Our primary source of funds for making these loans and investments is our deposits, on the majority of which we pay interest. Consequently, one of the key measures of our success is our level of net interest income, which is the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits and borrowings. The company has experienced weak loan demand due to the current economic climate.  This weakened economy has forced us to curtail our growth and deleverage our balance sheet by 4.1% in an effort to preserve our interest spread, which is the difference between the yield we earn on interest-earning assets and the rate we pay on interest-bearing liabilities.

 

There are risks inherent in all loans, so we maintain an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible. We establish and maintain this allowance by charging a provision for loan losses against our earnings. We have included a detailed discussion of this process.

 

In addition to earning interest on our loans and investments, we earn income through fees and other charges to our customers and sales of SBA loans. We have also included a discussion of the various components of this noninterest income, as well as of our noninterest expense.

 

**Industry Overview**

 

Despite limited signs of economic improvement, the first three months of 2011 reflect continued economic instability which has negatively impacted liquidity and credit quality. Concerns regarding increased credit losses from the weakening economy have negatively affected capital and earnings of most financial institutions. Financial institutions have experienced significant declines in the value of collateral for real estate loans and serious deterioration in the credit quality of their loan portfolios.  These factors have resulted in record levels of non-performing assets, charge-offs and foreclosures.  The State of Georgia and the Atlanta metropolitan area in particular have gained the unfortunate distinction of experiencing among the highest incidences of bank closures nationwide since the onset of the 2007 financial crisis.

 

Due to credit quality concerns, liquidity in the debt markets remains low in spite of enormous efforts by the U.S. Department of the Treasury (“Treasury”) and the Federal Reserve Bank (“Federal Reserve”) to inject capital into financial institutions. The federal funds rate set by the Federal Reserve has remained at historically low levels since December 2008, following a decline from 4.25% to 0.25% during 2008 through a series of seven rate reductions.

 

Treasury, the Federal Deposit Insurance Corporation (The “FDIC”) and other governmental agencies continue to evolve rules and regulations to implement the Emergency Economic Stabilization Act of 2008 (“EESA”), the Troubled Asset Relief Program (“TARP”), the Financial Stability Plan, the American Recovery and Reinvestment Act (“ARRA”) and related economic recovery programs, many of which curtail the activities of financial institutions.  In February of this year, we applied to the U.S. Treasury for the Small Business Lending Fund (SBLF), a new form of government-provided capital that was authorized under the Small Business Jobs Act (The “Jobs Act”), which was signed into law on September 27, 2010.  The SBLF doesn’t require the issuance of warrants and the Jobs Act includes specific assurance that recipients of SBLF are not considered TARP recipients (and therefore also not subject to the executive compensation restrictions that come with TARP).  SBLF draws from a source of funding separate from TARP and is administered by a separate organization in Treasury. Although we believe that our capital levels are substantial, the SBLF will enhance our growth opportunities for qualified small business commercial and industrial loans and loans secured by owner-occupied nonfarm, nonresidential real estate.   As of May 12, 2011, a decision regarding our application has not been received.

 

Difficult economic conditions are expected to prevail through the remainder of 2011. Reduced levels of commercial activity will continue to challenge prospects for stable balance sheet growth and earning asset yields at a time when the market for profitable commercial banking relationships is intensely competitive. As a result, financial institutions in general will continue to experience pressure on earning asset yields, funding costs, operating expenses, liquidity and capital.

 

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**Results of Operations for the Three Months Ended March 31, 2011 and 2010**

 

Net earnings for the first quarter of 2011 were $191,076, or $0.06 per share compared to $79,611 or $0.02 per share for the first quarter 2010, an improvement of 140%. Earnings improved in the first quarter comparing year over year primarily due to no loan loss provision expense during the first quarter of 2011 based on management’s determination that the allowance for loan loss was deemed appropriate to support the risk inherent in the loan portfolio coupled with premiums recognized from SBA loan sales. Operating expenses remained at similar levels in the first quarter 2011 compared to the same time period last year.

 

Net interest income for the first quarter of 2011 was $1,147,566 compared to $1,147,992 for the same period last year. Declines in interest income of $89,793 quarter over quarter were offset by a reduction in interest expense of $89,367.  Our yield on earning assets was 4.99% for the first quarter compared to 5.49% for the same quarter last year.  Due to competitive pressure, loans have been originated at lower rates in 2011 versus 2010. Additionally, the yield on the investment portfolio declined due to the sale of corporate bonds during the later part of 2010, for the purpose of reducing the credit risk in the investment portfolio.

 

The cost of interest bearing liabilities declined to 1.61% in the first quarter of 2011 from 2.01% in the first quarter of 2010. This decrease was partially attributed to ending a promotional rate campaign on time deposits during the fourth quarter 2009 and the first quarter of 2010. Furthermore, rates offered on interest bearing deposits were reduced in 2010 to be in line with the local Atlanta market. The increase in noninterest bearing deposits helped offset the deposit roll off from the interest rate reductions. The overall impact on the net interest margin was minimal at 15 basis points year over year.  The Bank is targeting owner managed businesses and related operating accounts in order to bring account relationships to the Bank and thereby reducing the overall cost of funds.

 

As a result of our analysis of credit and lending conditions during the first three months of 2011, we have not identified any increased deterioration in our loan portfolio and have therefore held the allowance constant and is 4.04% of total loans. A provision of $197,356 was made in the first quarter of 2010 resulting in an allowance for loan loss of 2.24% of total loans as of March 31, 2010.

 

**Noninterest Income**

 

Total noninterest income decreased $83,382 in the first quarter of 2011 compared to the same period in 2010. The decline is attributable to the decrease in gains on loans held for sale recognized year to date 2011 versus $414,830 year to date 2010.  SBA premiums of $288,214 were recognized in the first quarter of 2011 and mitigated the decline in gains on loans held for sale.  Security gains remained relatively unchanged for the year to date period in 2011 versus year to date 2010. The interest rate corridor reflected a mark to market gain of $9,056 as of March 31, 2011 compared to a loss of $44,493 as of March 31, 2010. Service charges on deposit accounts and other non interest income have declined $8,522 or 25% for the period ended March 31, 2011 due to lower overdraft fees and fees related to SBA loans.

 

**Noninterest Expenses**

 

Total noninterest expenses increased slightly by $2,083 during the first quarter of 2011 compared to the same period in 2010. Stock based compensation expense was $35,078 less during the first quarter 2011 compared to the first quarter 2010 due to stock option forfeitures occurring in the third quarter of 2010. Also, occupancy expense, in particular rental expense, has declined $24,105 comparing YTD 2011versus YTD 2010 due to the cancellation of the leases at a former bank location.  Lease termination fees of $79,400 associated with this transaction were recognized in 2010. The aforementioned cost savings were offset by $37,532 in increased expenses related to nonperforming loans and a $52,012 increase in supervisory assessments.

 

The primary components in the other operating expense category for the three months ended March 31, 2011 were $119,919 in data processing and IT related services, $92,772 in regulatory assessments, and $72,857 in professional fees. In comparison, the primary components in the other operating expense category for the three months ended March 31, 2010 were,$76,387 in data processing and IT related services, $69,315 in professional fees, and $50,989 in loan collection expenses.

 

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The following tables calculate the net yield on earning assets as of March 31, 2011 and 2010, respectively. Net yield on earning assets, defined as net interest income annualized, divided by average interest earning assets, was at 3.63% for the three months ended March 31, 2011, a decrease of 15 basis points from 3.78% at March 31, 2010.

 

For the three months ended March 31, 2011

(Dollars in thousands)

 
| **Description**                  | ** ** | **Average   Assets/Liabilities** | ** ** | **Interest   Income/Expense** | ** ** | **Yield/Cost** | ** ** |
|----------------------------------|------------|----------------------------------|------------|-------------------------------|------------|----------------|------------|
| Interest Earning Assets          |       |                             |       |                          |       |           |       |
| Federal Funds Sold               |       | $                                | 707        |                          | $          | —         |       | 0.15 | % |
| Securities                       |       | 49,435                           |       | 391                           |       | 3.16           | %          |
| Loans (1)                        |       | 76,496                           |       | 1,188                         |       | 6.21           | %          |
| Total                            |       | $                                | 126,638    |                          | 1,579      |           | 4.99       | % |
|                             |       |                             |       |                          |       |           |       |
| Interest Bearing Liabilities     |       |                             |       |                          |       |           |       |
| Interest Bearing Demand Deposits |       | $                                | 39,496     |                          | 106        |           | 1.07       | % |
| Time Deposits                    |       | 54,503                           |       | 252                           |       | 1.85           | %          |
| Other Borrowings                 |       | 12,900                           |       | 73                            |       | 2.26           | %          |
| Total                            |       | $                                | 106,899    |                          | 431        |           | 1.61       | % |
| Net interest income              |       |                             |       | $                             | 1,148      |           |       |   |
| Net yield on earning assets      |       |                             |       |                          |       | 3.63           | %          |

 

----

(1) Average nonaccrual loans of $8,291,190 were deducted from average loans

 

For the three months ended March 31, 2010

(Dollars in thousands)

 
| **Description**                  | ** ** | **Average   Assets/Liabilities** | ** ** | **Interest   Income/Expense** | ** ** | **Yield/Cost** | ** ** |
|----------------------------------|------------|----------------------------------|------------|-------------------------------|------------|----------------|------------|
| Interest Earning Assets          |       |                             |       |                          |       |           |       |
| Federal Funds Sold               |       | $                                | 1,291      |                          | $          | 1              |       | 0.31 | % |
| Securities                       |       | 55,176                           |       | 541                           |       | 3.92           | %          |
| Loans (1)                        |       | 65,096                           |       | 1,126                         |       | 6.92           | %          |
| Total                            |       | $                                | 121,563    |                          | 1,668      |           | 5.49       | % |
| Interest Bearing Liabilities     |       |                             |       |                          |       |           |       |
| Interest Bearing Demand Deposits |       | $                                | 31,565     |                          | 156        |           | 1.98       | % |
| Time Deposits                    |       | 50,473                           |       | 286                           |       | 2.27           | %          |
| Other Borrowings                 |       | 21,570                           |       | 78                            |       | 1.45           | %          |
| Total                            |       | $                                | 103,608    |                          | 520        |           | 2.01       | % |
| Net interest income              |       |                             |       | $                             | 1,148      |           |       |   |
| Net yield on earning assets      |       |                             |       |                          |       | 3.78           | %          |

 

----

(1) Average nonaccrual loans of $7,566,133 were deducted from average loans

 

**Assets and Liabilities**

 

*General*

 

Total assets were $138,935,369 at March 31, 2011 a decrease of $6,061,390 or 4.18% from December 31, 2010. Earning assets likewise declined 5.86% from December 31, 2010 to end the quarter at $128,914,487. Net loans were $81,964,446 at March 31, 2011, a decrease of $1,315,773 from December 31, 2010. The most significant decline in earning assets was the $9,674,958 (19.69%) decrease in the investment portfolio.  This decrease is a result of investment strategies to sell the Company’s $3,243,278 tax free municipal bond portfolio, along with a $4,000,000 callable “Step Up” bond coupled with the call of a $2,000,000 “Step Up” bond.  The proceeds were used to repay maturing brokered funds during the first quarter 2011 which accounted for the majority of the deposit decline of

 

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$5,611,180 or 5.24%. Management will continue to monitor and manage the level of brokered funds with the intent on becoming less reliant on them if loan demand remains weak.  Noninterest bearing deposits grew 37% or $2,899,394 during the first quarter 2011. Secured borrowings, related to SBA loan sales, declined by $1,176,583 from $2,027,311 at December 31, 2010.

 

*Investments*

 

At March 31, 2011, the carrying value of our securities and restricted stock amounted to $40,846,832. This included $22,543,557 in mortgage-backed securities, $9,717,757 in government agencies, $7,198,868 in municipals and $1,386,650 in restricted equity securities. The restricted equity securities are comprised of stock in the Federal Reserve Bank of Atlanta, the Federal Home Loan Bank of Atlanta, and the Independent Bankers Bank of Florida. As of December 31, 2010, the carrying value of our securities and restricted stock amounted to $50,575,040.

 

*Loans*

 

Since loans typically provide higher interest yields than other types of interest earning assets, we intend to invest a substantial percentage of our earning assets in our loan portfolio. At March 31, 2011, our loan portfolio consisted of $15,055,020 in construction and development loans, $8,459,896 in real estate mortgage loans, $52,936,202 in commercial real estate loans, $8,608,155 in commercial and industrial loans, and $581,905 in other loans. The Bank had $7,964,065 in nonaccrual loans at March 31, 2011. Additionally, the Bank has had no charge-offs or recoveries during the three months ended March 31, 2011.

 

We had no loans more than 90 days past due that were still accruing interest and we had one troubled debt restructuring at March 31, 2011 of $3,242,903. Total non-performing loans at March 31, 2011 amounted to $8,483,060; of which $518,995 are loans purchased with intent to sell and are characterized as loans held for sale on our balance sheet.  Included in non-performing loans at March 31, 2011 are $7,964,065 of impaired loans, which are comprised of six loans.  Total non-performing loans at December 31, 2010 amounted to $8,695,309, of which $518,995 were loans purchased with intent to sell.

 

The following table summarizes average loan balances for the three months ended March 31, 2011 and 2010 determined using the daily average balance, changes in the allowance for loan losses and the ratio of net charge-offs to period average loans.

 
| ** **                                                                      | ** ** | **Three Months   Ended   March 31,   2011** | ** ** | **Three Months   Ended   March 31,   2010** | ** ** |
|---------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|
|                                                                            |       |                                                  |       |                                                  |       |
| Average amount of loans outstanding                                             |       | $                                                     | 84,787,046 |                                                  | $          | 71,869,458 |   |
| Balance of allowance for loan losses at beginning   of period                   |       | 3,462,375                                             |       | 1,445,522                                             |       |
| Loans recovered                                                                 |       | —                                                |       | —                                                |       |
| Loans charged-off                                                               |       | —                                                |       | —                                                |       |
| Additions to the allowance during the period                                    |       | —                                                |       | 197,356                                               |       |
| Balance of allowance for loan losses at the end of   the period                 |       | 3,462,375                                             |       | 1,642,878                                             |       |
|                                                                            |       |                                                  |       |                                                  |       |
| Ratio of net loans charged off during the period   to average loans outstanding |       | 0.00                                                  | %          | 0.00                                                  | %          |
|                                                                                 |            |                                                       |            |                                                       |            |  |  |

 

*Provision and Allowance for Loan Losses*

 

We have established an allowance for loan losses through a provision for loan losses charged to expense in our consolidated statement of income. The allowance for loan losses was $3,462,375 as of March 31, 2011, which is unchanged from December 31, 2010.  Our allowance for loan loss amounted to 4.04% of our loan portfolio at March 31, 2011 and 3.98% of the loan portfolio at December 31, 2010.  Our allowance for loan loss as a percentage of the total portfolio has risen due to contraction in our portfolio.  As a result of our analysis of credit and lending conditions during the first three months of 2011, we have not identified increased deterioration in our loan portfolio

 

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and have therefore held the allowance constant.  The allowance for loan losses represents an amount which we believe will be adequate to absorb probable losses on existing loans that management has identified and may become uncollectible. Our judgment as to the adequacy of the allowance for loan losses is based on a number of assumptions regarding current portfolio and economic conditions, which we believe to be reasonable, but which may or may not prove to be accurate. We periodically determine the amount of the allowance based on our consideration of several factors, including an ongoing review of the quality, mix and size of our overall loan portfolio, our historical loan loss experience, evaluation of economic conditions and other qualitative factors, specific problem loans and commitments that may affect the borrower’s ability to pay.

 

Interest on loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. Loans are returned to accrual status when all principal and interest amounts contractually due are reasonably assured of repayment within a reasonable time frame.

 

Following is a category detail of our allowance percentage and reserve balance by loan type (gross of unearned loan fees) at March 31, 2011 and December 31, 2010.

 
| ** **                           | ** ** | **March 31,   2011** | ** ** | **March 31, 2011** | ** ** | **December 31, 2010** | ** ** | **December 31, 2010** | ** ** |
|--------------------------------------|------------|---------------------------|------------|------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **Calculated**            | ** ** | **Reserve**                  | ** ** | **Calculated**                  | ** ** | **Reserve**                     | ** ** |
| **Loan Group Description** | ** ** | **Reserves**              | ** ** | **%**                        | ** ** | **Reserves**                    | ** ** | **%**                           | ** ** |
| Construction and development         |       | 1,178,351                 |       | 7.83                         | %          | 1,259,996                       |       | 7.42                            | %          |
| Real estate – mortgage          |       | 27,494                    |       | 0.32                         | %          | 68,905                          |       | 0.91                            | %          |
| Commercial real estate               |       | 1,469,584                 |       | 2.78                         | %          | 1,933,810                       |       | 3.57                            | %          |
| Commercial and industrial            |       | 740,424                   |       | 8.60                         | %          | 156,457                         |       | 2.03                            | %          |
| Other                                |       | 46,522                    |       | 7.99                         | %          | 43,207                          |       | 7.75                            | %          |
| Total Allowance for Loan Loss        |       | $                         | 3,462,375  |                         | 4.04       | %                               | 3,462,375  |                            | 3.98       | % |
|                                      |            |                           |            |                              |            |                                 |            |                                 |            |  |

 

Periodically, we will adjust the amount of the allowance based on changing circumstances. We will charge recognized losses to the allowance and add subsequent recoveries back to the allowance for loan losses. There can be no assurance that charge-offs of loans in future periods will not exceed the allowance for loan losses as estimated at any point in time or that provisions for loan losses will not be significant to a particular accounting period.

 

*Deposits*

 

Our primary source of funds for loans and securities is deposits and Federal Home Loan Bank advances. At March 31, 2011, we had $101,523,560 in deposits, which consisted primarily of $10,669,346 in non-interest bearing demand deposit accounts, $49,949,276 in time deposits, and $40,904,938 of other interest bearing accounts. The deposit mix as of December 31, 2010 was $7,769,952 in non-interest bearing demand deposit accounts, $59,648,559 in time deposits, and $39,716,229 of other interest bearing accounts.

 

*Secured Borrowings*

 

Secured borrowings are derived from the transfer of financial assets, specifically SBA loan sales.  These liabilities present credit risk as they are related to corresponding loans receivable.  At March 31, 2011, the total outstanding balance of loans related to these secured borrowings were $850,728.

 

**Liquidity**

 

Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss, and the ability to raise additional funds by increasing liabilities. For an operating bank, liquidity represents the ability to provide steady sources of funds for loan commitments and investment activities, as well as to maintain sufficient funds to cover deposit withdrawals and payment of debt and operating obligations. Liquidity management involves monitoring our sources and uses of funds in order to meet our day-to-day cash flow requirements, while maximizing profits. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of our investment 

 

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portfolio is fairly predictable and subject to a high degree of control at the time investment decisions are made. However, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control.

 

Our primary sources of liquidity are deposits, borrowings, scheduled repayments on our loans, and interest on and maturities of our securities. We plan to meet our future cash needs through the liquidation of temporary investments and the generation of deposits. Occasionally, we might sell securities in connection with the management of our interest sensitivity gap or to manage cash availability. We may also utilize our cash and due from banks, security repurchase agreements, and federal funds sold to meet liquidity requirements as needed. In addition, we have the ability, on a short-term basis, to purchase federal funds from other financial institutions. As of March 31, 2011, our primary source of liquidity included our securities portfolio, lines of credit available with correspondent banks totaling $17,200,000, and a line of credit with the Federal Home Loan Bank of Atlanta. We believe our liquidity levels are adequate to meet our operating needs.

 

**Off-Balance Sheet Risk**

 

Through the operations of the Bank, we have made contractual commitments to extend credit in the ordinary course of our business activities. These commitments are legally binding agreements to lend money to our customers at predetermined interest rates for a specified period of time. At March 31, 2011, we had issued commitments to extend credit of $10,669,323 through various types of lending arrangements. We evaluate each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate. We manage the credit risk on these commitments by subjecting them to normal underwriting and risk management processes.

 

**Capital Resources**

 

Total shareholders’ equity increased from $24.1 million at December 31, 2010 to $24.3 million at March 31, 2011, primarily as a result of net income.

 

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

 

Under the capital adequacy guidelines, regulatory capital is classified into two tiers. These guidelines require an institution to maintain a certain level of Tier 1 and Tier 2 capital to 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-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100% based on the risks believed to be inherent in the type of asset. Tier 2 capital consists of Tier 1 capital plus the general reserve for loan losses, subject to certain limitations. We are also required to maintain capital at a minimum level based on total average assets, which is known as the Tier 1 leverage ratio.

 

At the bank level, we are subject to various regulatory capital requirements administered by the federal banking agencies. To be considered “adequately capitalized” under these capital guidelines, we must maintain a minimum total risk-based capital of 8%, with at least 4% being Tier 1 capital. In addition, we must maintain a minimum Tier 1 leverage ratio of at least 4%. To be considered “well-capitalized,” we must maintain total risk-based capital of at least 10%, Tier 1 capital of at least 6%, and a leverage ratio of at least 5%. For the first years of operation, during the Bank’s “de novo” period, the Bank will be required to maintain a leverage ratio of at least 8%. The Bank exceeded its minimum regulatory capital ratios as of March 31, 2011, as well as the ratios to be considered “well capitalized.”

 

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The following table sets forth the Bank’s various capital ratios at March 31, 2011.

 
| ** **                | ** ** | **Bank** | ** ** |
|---------------------------|------------|----------|------------|
| Total risk-based capital  |       | 21.15    | %          |
|                      |       |     |       |
| Tier 1 risk-based capital |       | 19.87    | %          |
|                      |       |     |       |
| Leverage capital          |       | 14.41    | %          |

 

We believe that our capital is sufficient to fund the activities of the Bank in its early years of operation and that the rate of asset growth will not negatively impact the capital base. As of March 31, 2011, there were no significant firm commitments outstanding for capital expenditures.

 

**Critical Accounting Policies**

 

We have adopted various accounting policies, which govern the application of accounting principles generally accepted in the United States of America in the preparation of our financial statements.

 

Certain accounting policies involve significant judgments and assumptions by us that may have a material impact on the carrying value of certain assets and liabilities. We consider such accounting policies to be critical accounting policies. The judgments and assumptions we use are based on historical experience and other factors, which we believe are reasonable under the circumstances. Because of the nature of the judgments and assumptions we make, actual results could differ from these judgments and estimates that could have a material impact on the carrying values of our assets and liabilities and our results of operations.

 

*Allowance for Loan Losses*. We believe that the determination of the allowance for loan losses is the critical accounting policy that requires the most significant judgments and estimates used in preparation of our consolidated financial statements. Refer to the section titled “Allowance for Loan Losses” in Note 2 to the consolidated financial statements contained in this report on Form 10-Q for a more detailed description of the methodology related to the allowance for loan losses.

 

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

 

There have been no material changes in the Company’s quantitative and qualitative disclosures about market risk as of March 31, 2011 from that presented under the heading “Liquidity and Interest Rate Sensitivity” and the Market Risk in Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

 

**Item 4. Controls and Procedures**

 

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e).  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our current disclosure controls and procedures are effective as of March 31, 2011.

 

There have been no changes in our internal control over financial reporting during the fiscal quarter ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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**Part II — Other Information**

 

**Item 6.  Exhibits**

 
| **Exhibit No.** | ** ** | **Description of Exhibits**                                                                                                                                                                                         |
|----------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                          |
| 3.1                  |       | Articles   of Incorporation (incorporated by reference to the Registration Statement on   Form SB-2, filed with the SEC on June 18, 2007).                                                                          |
|                 |       |                                                                                                                                                                                                                          |
| 3.2                  |       | Articles   of Amendment to Articles of Incorporation (incorporated by reference to the   Post-Effective Amendment No. 1 to the Registration Statement on   Form SB-2, filed with the SEC on February 1, 2008). |
|                 |       |                                                                                                                                                                                                                          |
| 3.3                  |       | Bylaws   (incorporated by reference to the Registration Statement on Form SB-2,   filed with the SEC on June 18, 2007).                                                                                             |
|                 |       |                                                                                                                                                                                                                          |
| 31.1                 |       | Rule 13a-14(a)/15d   — 14(a) Certification of the Chief Executive Officer.*                                                                                                                                    |
|                 |       |                                                                                                                                                                                                                          |
| 31.2                 |       | Rule 13a-14(a)/15d   — 14(a) Certification of the Chief Financial Officer.*                                                                                                                                    |
|                 |       |                                                                                                                                                                                                                          |
| 32.1                 |       | Section 1350   Certifications.*                                                                                                                                                                                          |

 

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*Filed Herewith

 

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**SIGNATURES**

 

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

 
|   |                           | **Touchmark Bancshares, Inc.** |
|--------|--------------------------------|-------------------------------------|
|   |                           |                                |   |
|   | Date: May 13,   2011 | By:                                 | /s/   Pin Pin Chau |
|   |                           |                                | Pin   Pin Chau |
|   |                           |                                | President   and Chief Executive Officer |
|   |                           |                                | (principal   executive officer) |
|   |                           |                                |   |
|   | Date: May 13,   2011 | By:                                 | /s/   Jorge L. Forment |
|   |                           |                                | Jorge   L. Forment |
|   |                           |                                | Chief   Financial Officer |
|   |                           |                                | (principal   financial officer and principal accounting officer) |

 

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**EXHIBIT INDEX**

 
| **Exhibit No.** | ** ** | **Description of Exhibits**                                                     |
|----------------------|------------|-------------------------------------------------------------------------------------------|
|                 |       |                                                                                      |
| 31.1                 |       | Rule 13a-14(a)/15d   — 14(a) Certification of the Chief Executive Officer. |
|                 |       |                                                                                      |
| 31.2                 |       | Rule 13a-14(a)/15d   — 14(a) Certification of the Chief Financial Officer. |
|                 |       |                                                                                      |
| 32.1                 |       | Section 1350   Certifications.                                                       |

 

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