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EX-21 - EX-21 - BANK OF GRANITE CORP | g22694exv21.htm |
EX-32.1 - EX-32.1 - BANK OF GRANITE CORP | g22694exv32w1.htm |
EX-10.2 - BANK OF GRANITE CORP | g22694exv10w2.htm |
EX-23.1 - EX-23.1 - BANK OF GRANITE CORP | g22694exv23w1.htm |
EX-31.1 - EX-31.1 - BANK OF GRANITE CORP | g22694exv31w1.htm |
EX-10.3 - EX-10.3 - BANK OF GRANITE CORP | g22694exv10w3.htm |
EX-10.6 - EX-10.6 - BANK OF GRANITE CORP | g22694exv10w6.htm |
EX-31.2 - EX-31.2 - BANK OF GRANITE CORP | g22694exv31w2.htm |
EX-32.2 - EX-32.2 - BANK OF GRANITE CORP | g22694exv32w2.htm |
EX-10.10 - EX-10.10 - BANK OF GRANITE CORP | g22694exv10w10.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OF THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2009
Commission
file number 0-15956
Bank of Granite Corporation
(Exact name of registrant as specified in its charter)
Delaware | 56-1550545 | |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
incorporation or organization) | ||
P.O. Box 128, Granite Falls, N.C. | 28630 | |
(Address of principal executive offices) | (Zip Code) |
Registrants
telephone number, including area code (828) 496-2000
Securities registered pursuant to Section 12(b) of the Act:
(Title of each class) | Name of each exchange on which registered | |
Common Stock, $1.00 Par Value Per Share | The NASDAQ Stock Market, LLC |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files). Yes o No
o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
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. (Check One):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(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 Act). Yes o No þ
As of March 8, 2010, 15,454,000 shares of common stock, $1.00 par value, were outstanding.
As of June 30, 2009, the aggregate market value of the registrants common stock held by
non-affiliates of the registrant was $45,683,000 based on the closing sales price as reported on
the NASDAQ Global Select Market.
DOCUMENTS INCORPORATED BY REFERENCE
PART III: Portions of the Definitive Proxy Statement to be filed pursuant to
Regulation 14A of the Securities Exchange Act of 1934 in connection with the 2010 Annual Meeting
of Stockholders.
Exhibit Index begins on page 68
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Table of Contents
FORWARD LOOKING STATEMENTS
The discussions included in this annual report contain statements that may be deemed forward
looking statements within the meaning of the Private Securities Litigation Act of 1995, including
Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933.
Such statements involve known and unknown risks, uncertainties and other factors that may cause
actual results to differ materially from these statements. For the purposes of these discussions,
any statements that are not statements of historical fact may be deemed to be forward looking
statements. Such statements are often characterized by the use of qualifying words such as
expects, anticipates, believes, estimates, plans, projects, or other statements
concerning opinions or judgments of the Company and its management about future events. The
accuracy of such forward looking statements could be affected by certain factors, including but not
limited to, the financial success or changing conditions or strategies of the Companys customers
or vendors, fluctuations in interest rates, actions of government regulators, the availability of
capital and personnel, failure to comply with regulatory orders, and general economic conditions.
PART I
ITEM 1 BUSINESS
Bank of Granite Corporation (the Company) is a Delaware corporation that was organized June 1,
1987 as a bank holding company. The Companys only businesses are the ownership and operation of
Bank of Granite (the Bank), a state bank chartered under the laws of North Carolina on August 2,
1906, and Granite Mortgage, Inc. (Granite Mortgage), a mortgage bank chartered under the laws of
North Carolina on June 24, 1985.
We conduct our business through three reportable business segments: Community Banking, Mortgage
Banking and Other. The Community Banking segment offers a variety of loan and deposit products and
other financial services. The Mortgage Banking segment previously originated and sold mortgage
loans. During the third quarter of 2009 Granite Mortgage discontinued all loan origination
activity. The current activity is related to the resolution of a small loan held for investment
portfolio and settling existing contractual obligations. The Other segment includes activities at
the holding company level such as corporate and stockholder relations and funding from the issuance
of commercial paper and trust preferred securities. For financial information on our three business
segments, see Note 20, Operating Segments, of the Notes to Consolidated Financial Statements.
We conduct our community banking business operations from 20 full-service offices located in Burke,
Caldwell, Catawba, Forsyth, Iredell, Mecklenburg, Watauga, and Wilkes counties in North Carolina.
According to the Federal Deposit Insurance Corporation (the FDIC), as of December 31, 2009, the
Bank ranked 19th in assets and 17th in deposits among North Carolina banking institutions.
GENERAL BUSINESS
The Banks principal community banking activities include the taking of demand and time deposits
and the making of loans, secured and unsecured, to individuals, associations, partnerships and
corporations. The majority of the Banks customers are individuals and small businesses. No
material part of its business is dependent upon a single customer or a few customers whose loss
would have a material adverse effect on the business of the Bank. No material portion of the
business of the Bank is seasonal.
GENERAL DESCRIPTION OF ECONOMIC AREAS
We conduct our community banking operations primarily in eight counties in the western part of
North Carolina. The three counties we served prior to 2003 (Caldwell, Catawba and Burke) were
historically known as a center for the manufacture of fiber optic and coaxial cable, furniture, and
apparel. When the economy began to weaken in 2001, there were massive layoffs in these industries,
and these counties were significantly impacted with a sudden rise in their unemployment rates.
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Table of Contents
Since 2003, we have expanded our business by opening branch offices in counties where the local
economies had been more diversified and growing. In 2003, we opened new offices in Watauga County
(Boone), Wilkes County (Wilkesboro), and Mecklenburg County (Matthews), and acquired First Commerce
Bank and its three banking offices in Mecklenburg County (Charlotte and Cornelius). We opened
banking offices in Forsyth County (Winston-Salem) in 2004 and in Iredell County (Statesville) in
2006.
Since 2008, economic conditions in our market area declined significantly, as they have in the U.S.
in general. The economic slowdown grew more intense as 2009 proceeded. These economic difficulties
negatively affected many of the Companys customers, including businesses and individuals.
Unemployment rates in our market area increased significantly during 2009. Our operations are
significantly influenced by economic conditions in our market area, including the state of the real
estate market.
TERRITORY SERVED AND COMPETITION
Commercial banking in North Carolina is extremely competitive in large part due to a long history
of statewide branching. We compete in our market area with some of the largest banking
organizations in the state and the country and other financial institutions, such as federally and
state-chartered savings and loan institutions and credit unions, as well as consumer finance
companies, mortgage companies and other lenders engaged in the business of extending credit. Many
of our competitors have broader geographic markets and higher lending limits than us and are also
able to provide more services and make greater use of media advertising.
Despite the competition in our market area, we believe that we have certain competitive advantages
that distinguish us from our competition. We believe that our primary competitive advantages are
our strong local identity and affiliation with the community and our emphasis on providing
specialized services to small and medium-sized business enterprises, as well as professional and
upper-income individuals. We are locally managed and are able to make credit and other decisions in
a manner that has a direct bearing on faster service and more efficiently obtained credit. We offer
customers modern, high-tech banking without forsaking community values such as prompt, personal
service and friendliness. We offer many personalized services and attract customers by being
responsive and sensitive to their individualized needs. We also rely on goodwill and referrals from
shareholders and satisfied customers, as well as traditional newspaper and radio media to attract
new customers. To enhance a positive image in the community, we support and participate in local
events, and our officers and directors serve on boards of civic and charitable organizations.
Our community banking operations are required to compete based on rates in order to conduct loan
business in each of our markets. Our community bank also competes for deposits in each of its
markets. However, we believe that our focus on and commitment to providing superior customer
service is what distinguishes us from our competitors.
EMPLOYEES
As of December 31, 2009, the Bank had 200 full-time equivalent employees. The Bank considers its
relationship with its employees to be excellent.
SUPERVISION AND REGULATION
The Company is extensively regulated under both federal and state law. Generally, these laws and
regulations are intended to protect depositors and borrowers, not shareholders. To the extent that
the following information describes statutory and regulatory provisions, it is qualified in its
entirety by reference to the particular statutory and regulatory provisions. Any change in
applicable law or regulation may have a material effect on our business.
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The Bank Holding Company Act
Our Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956,
as amended (the Bank Holding Company Act), and is required to register as such with the Board of
Governors of the Federal Reserve System (the Federal Reserve Board or FRB). A bank holding
company is required to file with the FRB annual reports and other information regarding its
business operations and those of its subsidiaries. It is also subject to examination by the Federal
Reserve Board and is required to obtain Federal Reserve Board approval prior to acquiring, directly
or indirectly, more than 5% of the voting stock of any bank, unless it already owns a majority of
the voting stock of such bank. Furthermore, a bank holding company must engage, with limited
exceptions, in the business of banking or managing or controlling banks or furnishing services to
or performing services for its subsidiary banks. One of the exceptions to this prohibition is the
ownership of shares of a company the activities of which the FRB has determined to be so closely
related to banking or managing or controlling banks as to be a proper incident thereto.
State Law
Our Bank is subject to extensive supervision and regulation by the North Carolina Commissioner of
Banks (the Commissioner). The Commissioner oversees state laws that set specific requirements for
bank capital and regulate deposits in, and loans and investments by, banks, including the amounts,
types, and in some cases, rates. The Commissioner supervises and performs periodic examinations of
North Carolina - chartered banks to assure compliance with state banking statutes and regulations,
and the Bank is required to make regular reports to the Commissioner describing in detail its
resources, assets, liabilities and financial condition. Among other things, the Commissioner
regulates mergers and acquisitions of state - chartered banks, the payment of dividends, loans to
officers and directors, record keeping, types and amounts of loans and investments, and the
establishment of branches.
Deposit Insurance
As a member institution of the Federal Deposit Insurance Corporation (FDIC), the Banks deposits
are insured up to a maximum of $250,000 per depositor through the deposit insurance fund (DIF),
administered by the FDIC. An increase in basic federal deposit insurance coverage from $100,000 to
$250,000 per depositor became effective on October 3, 2008, as part of the Emergency Economic
Stabilization Act of 2008. The legislation, as amended, provides that the basic deposit insurance
limit will return to $100,000 per depositor after December 31, 2013.
Each member institution is required to pay quarterly deposit insurance premium assessments to the
FDIC. During 2009, a large number of bank failures put pressure on the DIF. In an effort to
replenish the DIF, the FDIC implemented a special assessment of five basis points of each insured
institutions assets minus Tier 1 capital as of June 30, 2009. In addition, the FDIC required
insured institutions to prepay their estimated quarterly risk-based deposit insurance assessments
for the fourth quarter of 2009, as well as all of 2010, 2011, and 2012. Although the prepayment of
these assessments is mandatory for all insured depository institutions, the FDIC retains the
discretion as supervisor and insurer to exempt any institution from the prepayment requirement
under certain circumstances as set forth in its regulations. In accordance with the discretion
provided to the FDIC under 12 C.F.R. § 327.12(i)(1), the FDIC has exempted the Bank from prepaying
its quarterly risk-based assessment for the fourth quarter of 2009, and all of 2010, 2011, and
2012. This action did not impact our third quarter 2009 assessment, which was paid on December 30,
2009. Our assessments for 2010, 2011, and 2012 will continue to be payable quarterly.
The Bank has chosen to participate in the transaction guarantee component of the FDIC Temporary
Liquidity Guarantee Program. As of October 14, 2008, all noninterest-bearing transaction deposit
accounts at our participating FDIC - Insured Institution, including all personal and business
checking deposit accounts that do not earn interest, are fully insured for the entire amount in the
deposit account. This unlimited insurance coverage, as amended, is temporary and will remain in
effect until June 30, 2010.
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Table of Contents
Capital Requirements
The federal banking regulators have adopted certain risk-based capital guidelines to assist in the
assessment of the capital adequacy of a banking organizations operations for both transactions
reported on the balance sheet as assets and transactions, such as letters of credit, and recourse
arrangements, which are recorded as off balance sheet items. Under these guidelines, nominal dollar
amounts of assets and credit equivalent amounts of off balance sheet items are multiplied by one of
several risk adjustment percentages which range from 0% for assets with low credit risk, such as
certain U.S. Treasury securities, to 100% for assets with relatively high credit risk, such as
business loans.
A banking organizations risk-based capital ratios are obtained by dividing its qualifying capital
by its total risk adjusted assets. The regulators measure risk-adjusted assets, which include off
balance sheet items, against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. Tier 1, or core capital, includes common equity,
qualifying noncumulative perpetual preferred stock, minority interests in certain equity accounts
of consolidated subsidiaries, less goodwill and other intangibles, subject to certain exceptions
and restricted core capital elements, including trust preferred securities. Tier 2, or
supplementary capital, includes among other things, limited-life preferred stock, hybrid capital
instruments, mandatory convertible securities, qualifying subordinated debt, and the allowance for
loan and lease losses, subject to certain limitations and less required deductions. The inclusion
of elements of Tier 2 capital is subject to certain other requirements and limitations of the
federal banking agencies. Banks and bank holding companies subject to the risk-based capital
guidelines are required to maintain a ratio of Tier 1 capital to risk-weighted assets of at least
4% and a ratio of total capital to risk-weighted assets of at least 8%. The appropriate regulatory
authority may set higher capital requirements when particular circumstances warrant.
The federal banking agencies have adopted regulations specifying that they will include, in their
evaluations of a banks capital adequacy, an assessment of the banks interest rate risk (IRR)
exposure. The standards for measuring the adequacy and effectiveness of a banking organizations
IRR management include a measurement of board of directors and senior management oversight, and a
determination of whether a banking organizations procedures for comprehensive risk management are
appropriate for the circumstances of the specific banking organization.
Failure to meet applicable capital guidelines could subject a banking organization to a variety of
enforcement actions, including limitations on its ability to pay dividends, the issuance by the
applicable regulatory authority of a capital directive to increase capital and, in the case of
depository institutions, the termination of deposit insurance by the FDIC. See Federal Deposit
Insurance Corporation Improvement Act of 1991 below for more discussion of enforcement actions
applicable to undercapitalized institutions. In addition, future changes in regulations or
practices could further reduce the amount of capital recognized for purposes of capital adequacy.
Such a change could affect our ability to grow and could restrict the amount of profits, if any,
available for the payment of dividends to the shareholders.
At December 31, 2009, our Tier I ratio, total capital ratio to risk-adjusted assets, and leverage
ratio were 6.44%, 7.73% and 4.84%, respectively. We met the regulatory capital requirements to be
well capitalized for our Tier I capital ratio, adequately capitalized for our leverage ratio
and were undercapitalized for total capital.
As we reported in our Form 8-K filed with the SEC on September 4, 2009, the Bank entered into a
Stipulation and Consent (Consent) to the issuance of an Order to Cease and Desist (Order) by
the Federal Deposit Insurance Corporation (FDIC) and the North Carolina Commissioner of Banks
(The Commissioner). Based on our Consent, the FDIC and the Commissioner jointly issued the Order
on August 27, 2009.
The Order is a formal corrective action pursuant to which the Bank has agreed to address specific
issues set forth below, through the adoption and implementation of procedures, plan and policies
designed to enhance the safety and soundness of the Bank.
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Among other things, the Order requires the Bank to:
| Assure the on-going participation of the Banks Board of Directors in the affairs of the Bank; | ||
| Have and retain qualified management of the Bank, and assess management and staffing needs, qualifications and performance; | ||
| Present a written capital plan to the FDIC and the Commissioner within 30 days of the Order by which the Bank would achieve a Tier 1 Leverage Capital Ratio of not less than 8 percent and Total Risk-Based Capital Ratio of not less than 12 percent during the life of the Order; | ||
| Formulate and implement a plan to reduce the Banks risk exposure in assets classified Substandard or Doubtful in the FDICs most recent report of examination by 20 percent in 180 days; 40 percent in 360 days; 65 percent in 540 days and by 75 percent in 720 days; | ||
| Analyze and reduce credit concentrations in the Banks loan portfolio; | ||
| Within 60 days, ensure full implementation of effective lending and collection policies; | ||
| Cease to extend additional credit to any borrower who has a loan or extension of credit with the Bank that is classified as Loss or Doubtful; | ||
| Within 45 days, adopt and implement a plan regarding the Banks liquidity, contingent funding and asset liability management, and review and revise the plan on a quarterly basis; | ||
| Not pay cash dividends without the prior written consent of the FDIC and the Commissioner; | ||
| Neither renew, roll-over nor increase the amount of brokered deposits above the amount outstanding at the date of the Order without obtaining a waiver from the FDIC. |
The Order, as set forth above, requires the Bank to achieve and maintain Tier 1 Leverage Capital
Ratio of not less than 8 percent and a Total Risk-Based Capital of not less than 12 percent for
the life of the Order.
See Note 2, Regulatory Matters and Going Concern Considerations, and Note 15, Regulation and
Regulatory Restrictions, in the Notes to Consolidated Financial Statements for additional
discussion of our regulatory actions.
Federal Deposit Insurance Corporation Improvement Act of 1991
In December, 1991, Congress enacted the Federal Deposit Insurance Corporation Improvement Act of
1991 (FDICIA), which substantially revised the bank regulatory and funding provisions of the
Federal Deposit Insurance Act and made significant revisions to several other federal banking
statutes. FDICIA provides for, among other things:
| Publicly available annual financial condition and management reports for certain financial institutions, including audits by independent accountants, | ||
| The establishment of uniform accounting standards by federal banking agencies, | ||
| The establishment of a prompt corrective action system of regulatory supervision and intervention, based on capitalization levels, with greater scrutiny and restrictions placed on depository institutions with lower levels of capital, | ||
| Additional grounds for the appointment of a conservator or receiver, and | ||
| Restrictions or prohibitions on accepting brokered deposits, except for institutions which significantly exceed minimum capital requirements. |
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FDICIA also provides for increased funding of the FDIC insurance funds and the implementation of
risk-based premiums.
A central feature of FDICIA is the requirement that the federal banking agencies take prompt
corrective action with respect to depository institutions that do not meet minimum capital
requirements. Pursuant to FDICIA, the federal bank regulatory authorities have adopted regulations
setting forth a five-tiered system for measuring the capital adequacy of the depository
institutions that they supervise. Under these regulations, a depository institution is classified
in one of the following capital categories: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically undercapitalized. An
institution may be deemed by the regulators to be in a capitalization category that is lower than
is indicated by its actual capital position if, among other things, it receives an unsatisfactory
examination rating with respect to asset quality, management, earnings or liquidity.
FDICIA provides the federal banking agencies with significantly expanded powers to take enforcement
action against institutions which fail to comply with capital or other standards. Such action may
include the termination of deposit insurance by the FDIC or the appointment of a receiver or
conservator for the institution. FDICIA also limits the circumstances under which the FDIC is
permitted to provide financial assistance to an insured institution before appointment of a
conservator or receiver.
Miscellaneous
The dividends that may be paid by the Company are subject to legal limitations. The Bank is the
only source of dividends that may be paid by the Company. In accordance with North Carolina banking
law, dividends may not be paid by the Bank unless its capital surplus is at least 50% of its
paid-in capital.
The earnings of the Company will be affected significantly by the policies of the Federal Reserve
Board, which is responsible for regulating the United States money supply in order to mitigate
recessionary and inflationary pressures. Among the techniques used to implement these objectives
are open market transactions in United States government securities, changes in the rate paid by
banks on bank borrowings, and changes in reserve requirements against bank deposits. These
techniques are used in varying combinations to influence overall growth and distribution of bank
loans, investments, and deposits, and their use may also affect interest rates charged on loans or
paid for deposits.
The monetary policies of the Federal Reserve Board have had a significant effect on the operating
results of commercial banks in the past and are expected to continue to do so in the future. In
view of changing conditions in the national economy and money markets, as well as the effect of
actions by monetary and fiscal authorities, no prediction can be made as to possible future changes
in interest rates, deposit levels, loan demand or the business and our earnings.
Effective March 11, 2000, the Gramm-Leach-Bliley Act of 1999 allows a bank holding company to
qualify as a financial holding company and, as a result, be permitted to engage in a broader
range of activities that are financial in nature and in activities that are determined to be
incidental or complementary to activities that are financial in nature. The Gramm-Leach-Bliley Act
amends the Bank Holding Company Act to include a list of activities that are financial in nature,
and the list includes activities such as underwriting, dealing in and making a market in
securities, insurance underwriting and agency activities and merchant banking. The Federal Reserve
Board is authorized to determine other activities that are financial in nature or incidental or
complementary to such activities. The Gramm-Leach-Bliley Act also authorizes banks to engage
through financial subsidiaries in certain of the activities permitted for financial holding
companies. The Company has elected not to register as a financial holding company.
We cannot predict what legislation might be enacted or what regulations might be adopted, or if
enacted or adopted, the effect thereof on our operations.
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On October 26, 2001, the USA PATRIOT Act of 2001 was enacted. This act contains the International
Money Laundering Abatement and Financial Anti-Terrorism Act of 2001, which sets forth anti-money
laundering measures affecting insured depository institutions, broker-dealers and other financial
institutions. The Act requires U.S. financial institutions to adopt new policies and procedures to
combat money laundering and grants the Secretary of the Treasury broad authority to establish
regulations and to impose requirements and restrictions on the operation of financial institutions.
This act has increased the overall cost of our regulatory compliance activities.
We cannot predict what other legislation might be enacted or what other regulation might be
adopted or, if enacted or adopted, the effect thereof.
INVESTMENT POLICIES
For a discussion of our investment policies, see Investment Securities in the Managements
Discussion and Analysis of Financial Condition and Results of Operations section of this annual
report.
LOAN PORTFOLIO
For a discussion of our loan portfolio, see Loans and Provisions and Allowances for Loan
Losses in the Managements Discussion and Analysis of Financial Condition and Results of
Operations section of this annual report.
AVAILABLE INFORMATION
Additional information about our company and business is available at our website, at
www.bankofgranite.com. Our filings with the Securities and Exchange Commission, including annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments
to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act of 1934,
are available, free of charge, on our website at www.bankofgranite.com under the heading Investor
Relations SEC Filings. These reports are available as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the Securities and Exchange Commission.
In addition, copies of these filings are available at the Securities and Exchange Commissions
Public Reference Room located at 100 F Street, NE, Washington, DC 20549. Information on the
operation of the Public Reference Room may be obtained by calling the Securities and Exchange
Commission at 1-800-SEC-0330. The Securities and Exchange Commissions website, www.sec.gov, is
another source of this information. Information included on our website is not incorporated by
reference into this annual report.
ITEM 1A RISK FACTORS
There is substantial doubt about our ability to continue as a going concern.
As discussed in Note 2 of the Notes to Consolidated Financial Statements we are under an Order
from the FDIC and the North Carolina Commissioner of Banks to increase our leverage and total risk
based capital ratios to at least 8% and 12%. We are not in compliance at December 31, 2009. Failure
to increase our capital ratios or further declines in our capital ratios exposes us to additional
restrictions and regulatory actions, including potential regulatory receivership. This uncertainty as
to our ability to meet existing or future regulatory requirements raises substantial doubt about
our ability to continue as a going concern. We do not expect to meet the capital ratio requirements
in the near term future. Our audited financial statements were prepared under the assumption that
we will continue our operations on a going concern basis, which contemplates the realization of
assets and the discharge of liabilities in the normal course of business. Our financial statements
do not include any adjustments that might be necessary if we are unable to continue as a going
concern. If we cannot continue as a going concern, our shareholders will lose some or all of their
investment in the Company. In addition, our customers, employees, vendors, correspondent
institutions, and others with whom we do business may react negatively to the substantial doubt
about our ability to continue as a going concern. This negative reaction may lead to heightened
concerns regarding our financial condition that could result in a significant loss in deposits and
customer relationships, key employees, vendor relationships and our ability to do business with
correspondent institutions upon which we rely.
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Failure to comply with regulatory orders is likely to result in adverse actions and restrictions.
Effective August 27, 2009, the Company is operating under an Order to Cease and Desist with the
Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks. The Order
requires the Bank to report to the regulators at least quarterly to address, among other things,
the ongoing management and oversight of the Bank, an increase in the Banks capital levels, a
reduction in the Banks classified assets, a reduction in concentrations of credit and improvement
in the Banks earnings. The Bank is currently not in compliance with the capital levels required in
the Order, and we do not expect to meet the capital ratio requirements in the near-term future.
Continued failure to comply with the Order is likely to result in further adverse regulatory
actions and restrictions upon our activities.
Continued losses will further erode our capital levels.
Our capital level at December 31, 2009 are at a level that is below the well capitalized level
under regulatory definitions, and our total risk-based capital ratio is below the adequately
capitalized level. Failure to maintain well capitalized status is a violation of the Banks
Order with our regulators, which could result in adverse regulatory actions against us. Additional
significant increases in our allowance for loan losses, significant write-downs of foreclosed real estate and other assets, or other
operating losses would decrease our capital levels further.
Our business has been and may be adversely affected by conditions in the financial markets and
economic conditions generally.
In 2009 and continuing into 2010, economic conditions in our market area declined significantly, as
they have in the U.S. in general. The economic slowdown grew more intense as 2009 proceeded. These
economic difficulties negatively affected many of our customers, including businesses and
individuals. Unemployment rates in our market area have increased significantly. Our financial
performance generally, and in particular the ability of borrowers to pay interest on and repay
principal of outstanding loans and the value of collateral securing those loans, is highly
dependent upon the business environment in the market where we operate. In addition, further
negative economic developments may affect consumer confidence levels and may cause adverse changes
in payment patterns, causing increases in delinquencies and default rates, which may impact our
charge-offs and provision for loan losses. A worsening of these conditions would likely exacerbate
the adverse effects of these difficult economic conditions on us and others in the financial
services industry.
As a result of the difficult economic environment, many lending institutions, including us, have
experienced declines in the performance of their loans. Moreover, competition among depository
institutions for deposits and quality loans has increased significantly. In addition, the value of
real estate collateral supporting many commercial loans and home mortgages has declined and may
continue to decline. Bank and bank holding company stock prices have been negatively affected, as
has the ability of banks and bank holding companies to raise capital or borrow in the debt markets.
As a result, there is a potential for additional federal or state laws and regulations regarding
lending and funding practices and liquidity standards, and bank regulatory agencies are expected to
be aggressive in responding to concerns and trends identified in examinations. The impact of these
conditions and any new legislation may negatively impact our operations by restricting our
business, which could adversely impact our financial performance and our stock price.
Overall, during the past year, the general business environment has had an adverse effect on our
business, and we can not predict whether the environment will improve in the near term. Until
conditions improve, we expect our business, financial condition, and results of operations to be
adversely affected.
Economic difficulties could impair the ability of our customers, both individuals and
businesses, to repay their loans.
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Our largest source of revenue is payments on loans that we make to our customers. During times of
economic downturns, our customers sources of funds to repay loans are adversely affected, and
delinquencies on loans increase. Weakness in the economy in general, and especially weakness in
real estate markets, adversely affects our collections and the strength of our loan portfolio.
Declines in the ability of our customers to repay loans causes loss of revenue and increased levels
of nonperforming loans, which results in higher loan losses, higher provisions for loan losses, and
lower earnings.
Changes in interest rates could cause our earnings to decline.
Our balance sheet is currently asset sensitive, which means that when market interest rates
change, interest rates on our interest rate sensitive assets, such as loans and investment
securities, change more rapidly than interest rates on our interest rate sensitive liabilities,
such as deposits and borrowings. Therefore, there are more assets than liabilities subject to
immediate repricing as market interest rates change. In a decreasing interest rate environment,
our net interest income will tend to fall, and in a rising rate environment, the reverse holds.
Strong competition within our market areas may limit our growth and profitability. Larger banks
and numerous other financial institutions with greater resources may be able to compete more
effectively than we can.
We face numerous competitors in our community banking operations in all parts of our market area.
In addition to competing with larger and smaller banks, which tend to be numerous, we compete with
credit unions, brokerage and insurance firms, and other nonbank businesses, such as manufacturers
and retailers, that engage in consumer financing activities. Price competition for loans and
deposits might result in earning less on our loans and paying more on our deposits, which would
reduce our net interest income. Competition also makes it more challenging to grow loans and
deposits and to hire and retain experienced employees. Some of the institutions with which we
compete have substantially greater resources and lending limits than we do and may offer services
that we do not provide. We expect competition to continue to increase in the future as a result of
legislative, regulatory, and technological changes and the continuing trend of consolidation in the
financial services industry.
If significant increases are required to our allowance for loan losses, our earnings would
decrease.
We make various assumptions and judgments about the collectibility of our loan portfolio, including
the creditworthiness of our borrowers and the value of the real estate and other assets serving as
collateral for the repayment of many of our loans. In determining the amount of allowance for loan
losses, we review our loans and our loss and delinquency experience, and we evaluate economic
conditions. If one or more conditions or events causes our prior assumptions to be incorrect, our
allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio,
resulting in increases to our allowance and loss provision. Material additions to our allowance
would materially decrease our net income.
In addition, bank regulators periodically review our allowance for loan losses and may require us
to increase our provision for loan losses or recognize additional loan charge-offs. Any increase in
our allowance for loan losses or loan charge-offs required by regulatory authorities could have a
material adverse effect on our financial condition and results of operations.
We may be required to raise additional capital in the future, but that capital may not be
available or may not be available on terms acceptable to us when it is needed.
We are required to maintain adequate capital levels to support our operations and to comply with
the existing regulatory agreements. The current need for the Company to raise capital and the
depressed or almost nonexistent availability of such capital, increases the uncertainty about our
ability to raise additional capital in the future on terms acceptable to us. If we can not raise
additional capital our ability to conduct our operations could be materially impaired.
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We operate in a highly regulated environment and may be adversely affected by changes in laws
and regulations.
Our holding company and community banking businesses are highly regulated. Our holding company is
regulated by the FRB, the Banking Commission, and the Securities and Exchange Commission. Our
community banking subsidiary is regulated by the FDIC and the Banking Commission. Such regulation
and supervision govern the activities in which we may engage and are intended primarily for the
protection of the deposit insurance fund and depositors. Regulatory authorities have extensive
discretion in connection with their supervisory and enforcement activities, including the
imposition of restrictions on the operation of an institution, the classification of assets by the
institution and the adequacy of an institutions allowance for loan losses. Any change in such
regulation and oversight, whether in the form of regulatory policy, regulations or legislation, may
have a material impact on our operations. In addition to the risks of noncompliance, we are
required to dedicate considerable time and monetary resources in our efforts to comply with the
numerous laws and regulations that govern the ways in which we conduct our community banking
activities.
The FDIC Deposit Insurance assessments that we are required to pay will increase, possibly
materially, in the future, which would have an adverse effect on our earnings.
As a member institution of the FDIC, we are required to pay quarterly deposit insurance premium
assessments to the FDIC. Due to the recent turmoil in the financial system, including the failure
of several unaffiliated FDIC-insured depository institutions, the deposit insurance premium
assessments paid by all banks have increased. Continued increases in the assessments would
adversely impact our earnings, perhaps materially.
If investment securities we own suffer a decline in value that we determine to be other than
temporary, we may be required to record a significant charge to earnings.
We evaluate our investment securities that have declined in value to determine whether we believe
the decline was due to reasons other than temporary market fluctuations. For example, securities
may decline in value if the issuer is experiencing difficulties that may jeopardize our ability to
recover in a reasonable time the amount we invested. Should we determine that a decline in security
value is other than temporary, we are required to record a charge to earnings in our financial
statements during the period in which we made that determination. In times of economic stress,
declines in the value of securities become more prevalent, increasing the likelihood of charges to
our earnings.
Changes in accounting may affect our reported earnings and operating income.
Generally accepted accounting principles and accompanying accounting pronouncements, implementation
guidelines, and interpretations for many aspects of our business, such as accounting for
investments and loans, are highly complex and involve subjective judgments. Changes in these rules
or their interpretation could significantly change our reported earnings. See Note 1, Summary of
Significant Accounting Policies, of the Notes to Consolidated Financial Statements.
A concentration of real estate development and commercial real estate loans in our portfolio could result in additional
increases in our allowance for loan losses, and corresponding decreases in our earnings, if the
general economy or real estate markets continue to experience a downward trend.
The
volatility of the real estate development and commercial real estate markets could affect our assumptions about the
collectibility of our loan portfolio, and the value of the real estate serving as collateral for
the repayment of these loans. If our assumptions are incorrect, our allowance for loan losses may
not be sufficient to cover losses inherent in our loan portfolio, and could materially decrease
our net income.
Losing key personnel could negatively affect us.
None of the current members of the Banks executive management team are under employment contracts,
and the loss of additional key personnel could have a negative impact on us and our future results
of operations.
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Further decline in market value of Company stock could trigger delisting on the stock exchange.
The market value of the Companys stock traded on the NASDAQ Global Select Market declined below
$1.00 per share during 2009, and the Company received notice in November 2009 that it had a 180 day
grace period for the bid price to exceed $1.00 per share for 10 consecutive days to prevent the
Companys stock from being delisted. The Company regained compliance with the NASDAQ listing rules
in January 2010; however, if the Companys stock price does not continue to meet this criteria, the
stock could be delisted.
ITEM 1B UNRESOLVED STAFF COMMENTS
None
ITEM 2 PROPERTIES
We indirectly own and operate real estate through our ownership of the Bank. The Bank owns its
headquarters, operations and information technology center offices located in Granite Falls, North
Carolina. The Bank also owns banking offices in the North Carolina cities and communities of
Conover, Granite Falls, Hickory, Hudson, Lenoir, Matthews, Morganton, Newton, Winston-Salem and
Wilkesboro. The Bank leases banking offices in the North Carolina cities and communities of Boone,
Charlotte, Cornelius, Granite Falls and Statesville. We believe that the premises occupied by the
Bank are well located and suitably equipped to serve and support our community banking business. We
do not currently anticipate any problems with the renewal of our leases. See also Note 6, Premises
and Equipment, of the Notes to Consolidated Financial Statements.
The Bank both owns and leases its facilities as indicated in the table below. The Banks management
considers its facilities well maintained and sufficiently suitable for present operations.
Approximate | ||||||||||||
Facility Size | Lot Size | Owned | ||||||||||
Location | Principal Use | (square feet) | (acres) | or Leased | ||||||||
Granite Falls, North Carolina |
||||||||||||
23 North Main Street
|
Home office | 8,735 | 1.2 | owned | ||||||||
Storage building | 735 | 0.5 | owned | |||||||||
56 North Main Street
|
Operations center | 11,769 | 1.1 | owned | ||||||||
2630 Connelly Springs Road (Baton) |
Banking office in
Ingles
Supermarket |
430 | none | leased | ||||||||
Boone, North Carolina |
||||||||||||
230 Wilson Drive
|
Banking office | 5,705 | none | leased | ||||||||
Charlotte, North Carolina |
||||||||||||
301 South McDowell Street
|
Banking office | 6,096 | none | leased | ||||||||
3920 Sharon Road (SouthPark) |
Banking office | 1,955 | none | leased | ||||||||
Conover, North Carolina |
||||||||||||
1109 Conover Blvd, East
|
Banking office | 4,421 | 1.4 | owned | ||||||||
Cornelius, North Carolina |
||||||||||||
18825 West Catawba Avenue
|
Banking office | 3,409 | none | leased |
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Approximate | ||||||||||||
Facility Size | Lot Size | Owned | ||||||||||
Location | Principal Use | (square feet) | (acres) | or Leased | ||||||||
Hickory, North Carolina |
||||||||||||
25 3rd Street NW
|
Banking office | 9,515 | 0.5 | owned | ||||||||
315 1st Avenue NW (Bank of Granite Plaza) |
Support offices | 15,092 | 0.5 | owned | ||||||||
2220 12th Avenue NE (Springs Road) |
Banking office | 3,612 | 1.6 | owned | ||||||||
281 14th Avenue NE (Viewmont) |
Banking office | 4,200 | 2.0 | owned | ||||||||
2900 Highway 127 South (Mountain View) |
Banking office | 2,480 | 1.8 | owned | ||||||||
Hudson, North Carolina |
||||||||||||
537 Main Street
|
Banking office | 4,235 | 4.1 | owned | ||||||||
707 College Avenue SW
|
Banking office | 7,400 | 1.2 | owned | ||||||||
1351 Norwood Street SW (Whitnel) |
Banking office | 2,530 | 1.0 | owned | ||||||||
701 Wilkesboro Boulevard NE (Hibriten) |
Banking office closed in 2009 | 2,480 | 2.1 | owned | ||||||||
Matthews, North Carolina |
||||||||||||
2432 McKee Road
|
Banking office | 4,941 | 1.5 | owned | ||||||||
Morganton, North Carolina |
||||||||||||
201 East Meeting Street
|
Banking office | 5,400 | 0.8 | owned | ||||||||
Newton, North Carolina |
||||||||||||
311 North Main Avenue
|
Banking office | 3,612 | 0.9 | owned | ||||||||
Statesville, North Carolina |
||||||||||||
207 South Center Street
|
Banking office | 5,000 | none | leased | ||||||||
Wilkesboro, North Carolina |
||||||||||||
1305A S. Collegiate Drive
|
Banking office | 1,600 | none | owned | ||||||||
Winston-Salem, North Carolina |
||||||||||||
791 Jonestown Road, Ste 100
|
Banking office | 5,000 | none | owned |
ITEM 3 LEGAL PROCEEDINGS
There were no material legal proceedings pending as of December 31, 2009. During the year ended
December 31, 2009, we were not required to pay any penalties for failure to disclose certain
reportable transactions under Section 6707A of the Internal Revenue Code.
ITEM 4 REMOVED AND RESERVED
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PART II
ITEM 5 MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock, $1.00 par value, trades on The NASDAQ Global Select Market of The NASDAQ Stock
Market® under the symbol GRAN. Price and volume information is contained in The Wall
Street Journal® and many other major daily newspapers in the NASDAQ section under the National
Market Market System listings.
During 2009, the market participants making a market in our common stock with the highest volumes
of our shares traded were Knight Equity Markets, L.P., Direct Edge ECN LLC, UBS Securities LLC,
Citadel Securities LLC and Automated Trading Desk. There were no issuances of unregistered
securities by us during the year ended December 31, 2009.
As of December 31, 2009, there were 15,454,000 shares of our common stock outstanding, owned by
approximately 2,000 stockholders of record and an estimated 4,000 holders of shares registered
in street name or as beneficial owners. The following table presents the quarterly market sales
prices and dividend information for the two years in the period ended December 31, 2009.
Quarterly Common Stock Market Price Ranges and Dividends
2009 | Quarter 1 | Quarter 2 | Quarter 3 | Quarter 4 | ||||||||||||
Price Range |
||||||||||||||||
High |
$ | 3.61 | $ | 3.50 | $ | 3.12 | $ | 1.04 | ||||||||
Low |
1.10 | 1.50 | 1.02 | 0.40 | ||||||||||||
Close |
1.71 | 3.01 | 1.03 | 0.51 | ||||||||||||
Dividends* |
n/a | n/a | n/a | n/a |
2008 | Quarter 1 | Quarter 2 | Quarter 3 | Quarter 4 | ||||||||||||
Price Range |
||||||||||||||||
High |
$ | 12.99 | $ | 11.85 | $ | 8.58 | $ | 5.00 | ||||||||
Low |
9.75 | 6.66 | 2.29 | 2.15 | ||||||||||||
Close |
10.98 | 7.11 | 2.38 | 2.45 | ||||||||||||
Dividends* |
0.13 | 0.13 | n/a | n/a |
* | The Company suspended its cash dividend in the third quarter of 2008. |
See also Item 12 Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters for information about securities authorized for issuance under equity
compensation plans and share repurchases.
ITEM 6 SELECTED FINANCIAL DATA
This item is not applicable.
15
Table of Contents
ITEM 7 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Managements Discussion and Analysis is provided to assist in understanding and evaluating our
results of operations and financial condition. The following discussion is intended to provide a
general overview of our performance for the year ended December 31, 2009. Readers seeking more
in-depth information should read the more detailed discussions that follow as well as the
consolidated financial statements and related notes included under Item 8 of this annual report.
All information presented is consolidated data unless otherwise specified.
EXECUTIVE OVERVIEW
The Company reported a loss of $25.6 million, or $1.66 per share for 2009, compared to a loss of
$36.3 million, or $2.35 per share for 2008. The 2009 loss reflects a continuation of very elevated
levels of credit costs for loan losses and losses on the disposal of real estate obtained in the
settlement of loans. Those costs were approximately $39.0 million for 2009, compared to $31.1
million for 2008.
The depressed economic environment in our markets continues to affect the values of all collateral
which underlie our loans. The loss severity on new home construction, development lots and raw land
has been the most significant component of our losses. Additionally, we have experienced weakness
in our small business portfolio, which in combination with the depressed real estate market reduces
the collateral value of the buildings housing the business operations of these customers. These
conditions are the primary reasons for the continuing elevated levels of loan charge-offs and
related loss provisioning, and the level of non-performing loans.
The 2009 loss includes a $2.1 million loss related to our mortgage subsidiary. Funding and
operational issues resulted in attempting to restructure the operating model and eventually
discontinuing all loan origination activity in the third quarter of 2009. All further comments
relate solely to the operations and financial condition of the Bank.
The Company was able to recognize a $5.8 million tax benefit in the fourth quarter as a result
of favorable tax legislation for small companies, including banks that had not received TARP
assistance.
As discussed more completely in the footnotes to the financial statements, the Bank consented to
the regulatory issuance of a Cease and Desist Order (the Order) in August of 2009. The Banks
inadequate capital levels; continuing operating losses; and continuing loan asset quality
challenges were the primary issues noted in the Order for correction. In response, the Bank has
restructured the balance sheet mix of assets, curtailed lending activities (although loan demand in
our markets is consistent with other cited evidence of very weak loan demand in general), and
aggressively reduced core operating costs. However, increased FDIC insurance costs, and the legal
and other costs of resolving the problem loans significantly outweighs the cost reductions.
Our balance sheet restructuring and loan resolution efforts have combined to result in a $160.0
million reduction in the Banks loans year over year. Other restructuring activities and aggressive
fourth quarter deposit acquisition activity has resulted in our deposit levels remaining
essentially level on a comparative year basis, with liquidity improving significantly year over
year.
In the fourth quarter we saw a surge in borrowers indicating, through notice or lack of
performance, an inability to meet existing loan terms. As a result, nonperforming loans increased
significantly on a consecutive quarter basis, and the degradation of the portfolio has continued
into 2010. Unless the economy improves significantly, these asset quality issues and related costs
are likely to continue to depress the Banks operating performance in 2010.
The erosion of regulatory capital because of the operating loss, net of the benefits of the balance
sheet restructuring and the tax benefit, results in the Bank being undercapitalized under
regulatory definitions on a total risk basis at December 31, 2009. The uncertainties related to the
Banks ability to meet the capital levels set forth in the Order and the possible regulatory
response to the continuing capital level deficiencies, raises substantial doubt as to the
Companys ability to continue as a going concern.
The following sections of this discussion provide more detail regarding current and prior year
matters. Additionally, Note 2, Regulatory Matters and Going Concern Considerations, in the Notes
to Consolidated Financial Statements discusses the regulatory and capital levels in significantly
more detail.
16
Table of Contents
CRITICAL ACCOUNTING POLICIES
Information included in our audited financial statements and managements discussion and analysis
is derived from our accounting records, which are maintained in accordance with accounting
principles generally accepted in the United States of America (US GAAP) and general practices
within the banking industry. While much of the information is definitive, certain accounting issues
are highly dependent upon estimates and assumptions made by management. An understanding of these
estimates and assumptions is vital to understanding the Companys financial statements. Critical
accounting policies are those policies that are most important to the determination of our
financial condition and results of operations, or that require management to make assumptions and
estimates that are subjective or complex.
We periodically evaluate our critical accounting policies, including those related to the allowance
for loan losses and fair value estimates. While we base our estimates on historical experience and
on various other assumptions that we believe to be reasonable under the circumstances, actual
results may differ from these estimates under different assumptions or outcomes.
ALLOWANCE FOR LOAN LOSSES The allowance for loan losses reflects the estimated losses resulting
from the inability of our customers to make required loan payments. The allowance reflects
managements evaluation of the risk characteristics of the loan portfolio under current economic
conditions and considers such factors as the financial condition of the borrower, fair market value
of collateral and other items that, in our opinion, deserve current recognition in estimating
possible loan losses. Our evaluation process is based on historical evidence and current trends
among delinquencies, defaults and nonperforming assets.
The methodology for determining the allowance for loan losses is based on historical loss rates,
current credit grades, specific allocation for impaired loans and an unallocated amount. The
allowance for loan losses is created by direct charges to operations. Losses on loans are charged
against the allowance for loan losses in the accounting period in which they are determined by
management to be uncollectible. We periodically revise historical loss factors for different
segments of the portfolio to be more reflective of current market conditions.
Large commercial loans that exhibit probable or observed credit weaknesses are subject to
individual review for impairment. When individual loans are impaired, the impairment allowance is
measured in accordance with the accounting standard entitled Accounting by Creditors for Impairment
of a Loan. The predominant measurement method for the Bank is the evaluation of the fair value of
the underlying collateral. Our policy for the recognition of interest income on impaired loans is
the same as our interest recognition policy for all non-accrual loans. Accrued interest is reversed
to income to the extent it relates to the current year and charged off otherwise.
The evaluations described above are inherently subjective, as they require the use of material
estimates. Unanticipated future adverse changes in borrower or economic conditions could result in
material adjustments to our allowance for loan losses that could adversely impact our earnings in
future periods.
FAIR VALUE ESTIMATES The Company reports investment securities available for sale, and certain
impaired loans and other assets at fair value. At December 31, 2009, the percentage of total assets
measured at fair value on a recurring basis was 18.0%. The majority of assets and liabilities
reported at fair value are based on quoted market prices or market prices for similar instruments.
Other financial assets are reported at fair value on a nonrecurring basis, as
impaired loans and other real estate. See Note 19, Fair Value of Financial Instruments, in the
Notes to Consolidated Financial Statements for additional disclosures regarding the fair value of
financial instruments.
RESULTS OF OPERATIONS
Performance Summary for 2009 and 2008
The following table includes significant elements of the Companys 2009 and 2008 operations. The
most significant change in the 2009 loss of $25.6 million versus the 2008 amount of $36.3 million
is $10.4 million related to federal income taxes. In 2009, the Company was able to carry back $5.8
million of the operating loss to previously closed years. In 2008, the net result of the Company
realizing the operating loss through carryback, and providing a valuation reserve against existing
deferred tax assets, was the recognition of a $4.6 million tax expense.
In 2008 the Company determined that the value of its goodwill was impaired in the amount of $10.8
million and the goodwill was written off.
The net interest income decreased $5.7 million when comparing 2009 to 2008. Both years reflect the
effect of historically low market interest rates that continue to exist. The competition for
deposits creates a floor for deposits that continues to compress net interest margin. See the
separate section Net Interest Income of this discussion for details of the net interest income
components.
17
Table of Contents
Other expenses decreased $6.0 million. The salaries and employee benefits decreased $5.5 million
and resulted from headcount reduction in the Bank, substantially all personnel eliminated in the
mortgage company, and the curtailment of pension benefits. These amounts were partially offset by
payment of termination benefits. In 2009, the Company incurred losses on disposal and write-down of
existing other real estate of $10.3 million versus $0.9 million in 2008. FDIC insurance cost
increased by $2.5 million from 2008, primarily due to the Banks risk ratings declining
substantially, and the FDIC imposing a special assessment that related to all banks of $1.0 million
as a measure to attempt to stabilize the insurance fund. The 2008 amount had increased by
approximately $1.0 million from recent prior years.
Other income was $1.5 million less in 2009 than 2008, as the mortgage banking income decreased by
$2.8 million. Our mortgage company ceased originating new loans in early 2009. In 2008 the Company
incurred securities losses of $1.9 million as a result of the decision to sell a portfolio of
securities in the holding company that were deemed to be at risk of high losses in the future.
The following table highlights differences in operations for the year ended December 31, 2009
compared to the year ended December 31, 2008.
2009 | 2008 | $ Change | % Change | |||||||||||||
(Table dollars in thousands except per share amounts) | ||||||||||||||||
Net loss |
$ | (25,620 | ) | $ | (36,251 | ) | $ | 10,631 | -29.3 | % | ||||||
Net loss per share |
(1.66 | ) | (2.35 | ) | 0.69 | -29.4 | % | |||||||||
Interest income |
52,646 | 66,923 | (14,277 | ) | -21.3 | % | ||||||||||
Interest expense |
21,224 | 29,753 | (8,529 | ) | -28.7 | % | ||||||||||
Net interest income |
31,422 | 37,170 | (5,748 | ) | -15.5 | % | ||||||||||
Interest and fees from loans |
46,948 | 57,953 | (11,005 | ) | -19.0 | % | ||||||||||
Average gross loans |
877,432 | 971,560 | (94,128 | ) | -9.7 | % | ||||||||||
Provision for loan losses |
28,733 | 30,228 | (1,495 | ) | -4.9 | % | ||||||||||
Charge-offs, net of recoveries |
25,702 | 23,095 | 2,607 | 11.3 | % | |||||||||||
Nonperforming loans |
53,140 | 50,591 | 2,549 | 5.0 | % | |||||||||||
Interest on securities and overnight investments |
4,032 | 4,634 | (602 | ) | -13.0 | % | ||||||||||
Total other income |
8,887 | 10,378 | (1,491 | ) | -14.4 | % | ||||||||||
Total other expenses |
42,996 | 48,974 | (5,978 | ) | -12.2 | % | ||||||||||
Personnel expenses |
16,010 | 21,497 | (5,487 | ) | -25.5 | % | ||||||||||
Goodwill impairment |
| 10,763 | (10,763 | ) | -100.0 | % | ||||||||||
Other noninterest expenses |
26,986 | 16,714 | 10,272 | 61.5 | % | |||||||||||
Income tax expense (benefit) |
(5,800 | ) | 4,597 | (10,397 | ) | -226.2 | % | |||||||||
Net interest margin |
3.11 | % | 3.48 | % | ||||||||||||
Average prime rate |
3.25 | % | 5.09 | % | ||||||||||||
Yield on loans |
5.54 | % | 6.41 | % | ||||||||||||
Yield on securities and overnight investments |
3.03 | % | 4.51 | % | ||||||||||||
Cost of interest-bearing deposits |
2.32 | % | 3.13 | % |
NET INTEREST INCOME
Net interest income (the difference between interest earned on interest-earning assets, primarily
loans in the Bank, and interest paid on interest-bearing liabilities, primarily deposits in the
Bank) normally represents the most significant component of our revenue. Net interest income was
approximately $31.4 million and $37.2 million for 2009 and 2008, respectively, representing a
decrease of 15.5% for 2009 over 2008. The decrease in net interest income reflects the continued
effect of low market interest rates and approximately $160.0 million decrease in the Banks loan
portfolio. A result of the balance sheet restructuring has been to increase the securities
investment portfolio and reduce loans; however, rates on investments within the Banks pricing and
risk tolerances are substantially below replaced loan rates. The Bank has implemented a more
rigorous risk based pricing protocol for loans in the second half of 2009, including the
utilization of rate floors, and as a result, net interest income has increased on a linked quarter
basis in each of the last two quarters.
The Banks cost of funds continues to decline as maturing certificates of deposit generally
reflect rates in existence prior to the dramatic decrease in market rates in late 2008.
18
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The following table presents our daily average balances, interest income and expense and average
rates earned and paid on interest-earning assets and interest-bearing liabilities for the last
three years.
AVERAGE BALANCES AND INTEREST INCOME ANALYSIS
for the years ended December 31,
for the years ended December 31,
2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||
Average | Interest | Average | Interest | Average | Interest | |||||||||||||||||||||||||||||||
Average | Yield/ | Income/ | Average | Yield/ | Income/ | Average | Yield/ | Income/ | ||||||||||||||||||||||||||||
(Table dollars in thousands) | Balance | Cost | Expense | Balance | Cost | Expense | Balance | Cost | Expense | |||||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||||||||||||||
Loans (1) |
$ | 877,432 | 5.54 | % | $ | 48,614 | $ | 971,560 | 6.41 | % | $ | 62,289 | $ | 949,574 | 8.63 | % | $ | 81,906 | ||||||||||||||||||
Taxable securities |
126,253 | 2.90 | % | 3,660 | 83,166 | 3.89 | % | 3,236 | 128,848 | 4.44 | % | 5,726 | ||||||||||||||||||||||||
Nontaxable securities (2) |
8,270 | 6.77 | % | 560 | 30,839 | 6.66 | % | 2,054 | 36,861 | 6.64 | % | 2,449 | ||||||||||||||||||||||||
Federal funds sold |
5,116 | 0.16 | % | 8 | 4,667 | 1.35 | % | 63 | 1,748 | 5.21 | % | 91 | ||||||||||||||||||||||||
Total interest-earning assets |
1,017,071 | 5.20 | % | 52,842 | 1,090,232 | 6.20 | % | 67,642 | 1,117,031 | 8.07 | % | 90,172 | ||||||||||||||||||||||||
Cash and due from banks |
39,091 | 23,919 | 25,779 | |||||||||||||||||||||||||||||||||
All other assets |
45,497 | 75,549 | 63,101 | |||||||||||||||||||||||||||||||||
Total assets |
$ | 1,101,659 | $ | 1,189,700 | $ | 1,205,911 | ||||||||||||||||||||||||||||||
Liabilities and
stockholders equity |
||||||||||||||||||||||||||||||||||||
NOW deposits |
$ | 140,022 | 0.96 | % | 1,348 | $ | 134,919 | 1.14 | % | 1,533 | $ | 122,345 | 1.28 | % | 1,572 | |||||||||||||||||||||
Money market deposits |
197,416 | 1.51 | % | 2,981 | 233,782 | 2.89 | % | 6,755 | 244,361 | 4.25 | % | 10,381 | ||||||||||||||||||||||||
Savings deposits |
20,303 | 0.20 | % | 40 | 21,567 | 0.24 | % | 52 | 22,677 | 0.39 | % | 89 | ||||||||||||||||||||||||
Time deposits of $100 or more |
209,525 | 3.16 | % | 6,630 | 214,208 | 4.07 | % | 8,724 | 204,249 | 4.91 | % | 10,036 | ||||||||||||||||||||||||
Other time deposits |
282,971 | 3.07 | % | 8,699 | 246,424 | 3.89 | % | 9,580 | 229,716 | 4.67 | % | 10,734 | ||||||||||||||||||||||||
Interest-bearing deposits |
850,237 | 2.32 | % | 19,698 | 850,900 | 3.13 | % | 26,644 | 823,348 | 3.99 | % | 32,812 | ||||||||||||||||||||||||
Overnight borrowings |
11,240 | 1.09 | % | 123 | 28,305 | 2.48 | % | 703 | 36,357 | 3.87 | % | 1,407 | ||||||||||||||||||||||||
Other borrowings |
45,569 | 3.08 | % | 1,403 | 52,857 | 4.55 | % | 2,406 | 48,503 | 5.42 | % | 2,629 | ||||||||||||||||||||||||
Total interest-bearing liabilities |
907,046 | 2.34 | % | 21,224 | 932,062 | 3.19 | % | 29,753 | 908,208 | 4.06 | % | 36,848 | ||||||||||||||||||||||||
Noninterest-bearing deposits |
111,614 | 131,563 | 146,563 | |||||||||||||||||||||||||||||||||
Other liabilities |
15,134 | 12,820 | 11,376 | |||||||||||||||||||||||||||||||||
Stockholders equity |
67,865 | 113,255 | 139,764 | |||||||||||||||||||||||||||||||||
Total liabilities
and stockholders equity |
$ | 1,101,659 | $ | 1,189,700 | $ | 1,205,911 | ||||||||||||||||||||||||||||||
Net yield on earning assets and
|
||||||||||||||||||||||||||||||||||||
net interest income (2)(3) |
3.11 | % | $ | 31,618 | 3.48 | % | $ | 37,889 | 4.77 | % | $ | 53,324 | ||||||||||||||||||||||||
Interest rate spread (4) |
2.86 | % | 3.01 | % | 4.01 | % |
(1) | Nonaccrual loans have been included. | |
(2) | Yields and interest income on tax-exempt investments have been adjusted to tax equivalent basis using a 35% tax rate for 2009, 2008 and 2007. The taxable equivalent adjustments were approximately $196 thousand, $719 thousand and $857 thousand for 2009, 2008 and 2007, respectively. | |
(3) | Net yield on earning assets is computed by dividing net interest earned by average earning assets. | |
(4) | The interest rate spread is the interest-earning assets rate less the interest-bearing liabilities rate. |
Changes in interest income and interest expense can result from changes in both volume and rates.
The following table sets forth the dollar amount of increase (decrease) in interest income and
interest expense resulting from changes in the volume of interest-earning assets and interest-bearing
liabilities and from changes in yields and rates.
INTEREST RATE AND VOLUME VARIANCE ANALYSIS
for the years ended December 31,
for the years ended December 31,
2009 compared to 2008 | 2008 compared to 2007 | |||||||||||||||||||||||
Change | Change | |||||||||||||||||||||||
Attributable to | Attributable to | |||||||||||||||||||||||
(Table in thousands) | Volume(1) | Rate(1) | Total | Volume(1) | Rate(1) | Total | ||||||||||||||||||
Loans |
$ | (5,625 | ) | $ | (8,050 | ) | $ | (13,675 | ) | $ | 1,653 | $ | (21,270 | ) | $ | (19,617 | ) | |||||||
Taxable securities |
1,463 | (1,039 | ) | 424 | (1,904 | ) | (586 | ) | (2,490 | ) | ||||||||||||||
Nontaxable securities |
(1,516 | ) | 22 | (1,494 | ) | (401 | ) | 6 | (395 | ) | ||||||||||||||
Federal funds sold |
3 | (58 | ) | (55 | ) | 96 | (124 | ) | (28 | ) | ||||||||||||||
Interest-earning assets |
$ | (5,675 | ) | $ | (9,125 | ) | $ | (14,800 | ) | $ | (556 | ) | $ | (21,974 | ) | $ | (22,530 | ) | ||||||
NOW deposits |
$ | 54 | $ | (239 | ) | $ | (185 | ) | $ | 152 | $ | (191 | ) | $ | (39 | ) | ||||||||
Money market deposits |
(800 | ) | (2,974 | ) | (3,774 | ) | (378 | ) | (3,248 | ) | (3,626 | ) | ||||||||||||
Savings deposits |
(3 | ) | (9 | ) | (12 | ) | (4 | ) | (33 | ) | (37 | ) | ||||||||||||
Time deposits of $100 or more |
(169 | ) | (1,925 | ) | (2,094 | ) | 447 | (1,759 | ) | (1,312 | ) | |||||||||||||
Other time deposits |
1,272 | (2,153 | ) | (881 | ) | 715 | (1,869 | ) | (1,154 | ) | ||||||||||||||
Interest-bearing deposits |
354 | (7,300 | ) | (6,946 | ) | 932 | (7,100 | ) | (6,168 | ) | ||||||||||||||
Overnight borrowings |
(305 | ) | (275 | ) | (580 | ) | (256 | ) | (448 | ) | (704 | ) | ||||||||||||
Other borrowings |
(278 | ) | (725 | ) | (1,003 | ) | 217 | (440 | ) | (223 | ) | |||||||||||||
Interest-bearing liabilities |
$ | (229 | ) | $ | (8,300 | ) | $ | (8,529 | ) | $ | 893 | $ | (7,988 | ) | $ | (7,095 | ) | |||||||
(1) | The rate/volume variance for each category has been allocated equally on a consistent basis between rate and volume variances. |
19
Table of Contents
LIQUIDITY AND ASSET/LIABILITY MANAGEMENT
The Companys historical liquidity management process included anticipating operating cash
requirements, evaluating time deposit maturities, monitoring loan to deposit ratios, and
correlating these activities to an overall periodic internal liquidity measure. In evaluating our
asset mix, we have sought to maintain a securities portfolio sufficient to provide short-term
liquidity in periods of unusual fluctuations. The activity also included the Granite Mortgage
operations, which were always separately funded and have now been largely discontinued.
As outside funding sources have been withdrawn or restricted to current levels of outstandings, our
liquidity management has focused on insuring adequate internal funding by the Bank.
The Banks primary internal sources of liquidity are customer deposits, cash and balances due from
other Banks, and unencumbered investment securities. These funds, together with loan repayments,
are used to make loans and to fund continuing operations. Additionally, retail and commercial
deposit balances fluctuate significantly, and we target liquidity levels to meet those periodic
declines. The Banks liquidity (cash + unencumbered securities / total deposits) was approximately
$180.0 million, or 19% of total deposits at December 31, 2009.
As of December 31, 2009, the Banks core deposits, defined as total deposits, excluding time
deposits of $100 thousand or more, totaled $719.0 million, or 74.4%, of the Banks total deposits
versus $783.8 million, or 79.0%, at December 31, 2008.
The regulatory Order limits the Banks participation in the national markets for deposits and
requires that local rates conform to rates that are not more than 75 basis points above the average
local market rates for all products (effective March 1, 2010 the Bank cannot offer rates in excess
of 75 basis points over National market rates). This restriction does not currently prevent the
Bank from offering competitive rates.
Certificates of deposit of $100 thousand or more represented 25.6% and 21.0%, respectively, of the
Banks total deposits at December 31, 2009 and 2008. Management believes that a sizeable portion of
the Banks time deposits are relationship-oriented. Brokered certificates of deposit totaled $8.2
million and $52.8 million at December 31, 2009 and 2008, respectively. While the Bank appreciates
the need to pay competitive rates to retain these deposits, other subjective factors also influence
deposit retention. Based upon prior experience, the Bank anticipates that a substantial portion of
outstanding certificates of deposit will renew upon maturity.
The objective of the Banks asset/liability management process is focused to providing relative
stability and reduction of volatility for the Banks net interest income through various scenarios
of changes in interest rates. The process attempts to balance the need for stability and
predictability of net interest income against competing needs such as balance sheet mix
constraints, overall earnings targets and the risk/return relationships between liquidity, interest
rate risk, market risk and capital adequacy. The Bank maintains an asset/liability management
policy approved by the Banks Board of Directors. This policy and the analysis process undertaken
by management and the Boards Asset/Liability Management Committee (ALCO) provides guidelines to
control the exposure of its earnings to changing interest rates by generally endeavoring to
maintain a position within a range around an earnings neutral position, which is defined as the
mix of assets and liabilities that generate a net interest margin that is least affected by
interest rate changes.
When suitable lending opportunities are not sufficient to utilize available funds, the Bank has
generally invested such funds in securities, primarily securities issued by U.S. governmental
agencies, and in accordance with the balance sheet restructuring to limit any credit risk and risk
based asset allocation. The securities portfolio contributes to the Banks earnings and plays an
important part in overall interest rate management.
The analysis of an institutions interest rate gap (the difference between the repricing of
interest-earning assets and interest-bearing liabilities during a given period of time) is a
standard tool for the measurement of the exposure to interest rate risk. Management believes that
because interest rate gap analysis does not address all factors that can affect earnings
performance, its practical usefulness in managing the Banks interest rate risk is limited, and it
should be used in conjunction with other methods managing expected net interest income.
The Banks gap analysis at December 31, 2009 indicates that its balance sheet is generally asset
sensitive, meaning that in a given period there will be more assets than liabilities subject to
immediate repricing as market rates change. This would indicate that in a decreasing rate
environment, hypothetical net interest income would tend to fall. However, the results of computer
simulation modeling at that date suggest minimal interest rate exposure under moderately increasing
or decreasing interest rate scenarios. Under the moderate rising rate environment, the Banks net
interest income would be expected to increase by approximately 9%.
The management of interest rate risk and the overall asset/liability position is integrated with
the liquidity management process. Currently less than 10% of the Banks loans are directly related
to market interest rates. The remaining loans are fixed rate or relate to the Banks independent
index, which relates more directly to the Banks operating footprint.
20
Table of Contents
The following table presents interest rate sensitivity of our interest-earning assets and
interest-bearing liabilities.
INTEREST RATE SENSITIVITY (GAP ANALYSIS)
As of December 31, 2009
As of December 31, 2009
Non-sensitive | |||||||||||||||||||||||||
Interest Sensitive Within | Total | or Sensitive | |||||||||||||||||||||||
1 to | 91 to | 181 to | Within | Beyond | |||||||||||||||||||||
(Table dollars in thousands) | 90 Days | 180 Days | 365 Days | 1 Year | 1 Year | Total | |||||||||||||||||||
Interest-earning Assets |
|||||||||||||||||||||||||
Interest-bearing due from banks |
$ | 1,763 | $ | | $ | | $ | 1,763 | $ | | $ | 1,763 | |||||||||||||
Securities (at amortized cost) (1): |
|||||||||||||||||||||||||
U.S. Government agencies |
| | 1,539 | 1,539 | 42,172 | 43,711 | |||||||||||||||||||
Mortgage-backed securities |
| | | | 150,738 | 150,738 | |||||||||||||||||||
Other (including equity securities) |
| | | | 853 | 853 | |||||||||||||||||||
Loans (gross): |
|||||||||||||||||||||||||
Real estate Construction |
38,874 | 1,092 | 361 | 40,327 | 19,374 | 59,701 | |||||||||||||||||||
Real estate Mortgage |
334,356 | 5,338 | 10,221 | 349,915 | 216,082 | 565,997 | |||||||||||||||||||
Commercial, financial and agricultural |
108,757 | 1,155 | 2,110 | 112,022 | 31,596 | 143,618 | |||||||||||||||||||
Consumer |
1,355 | 229 | 636 | 2,220 | 3,986 | 6,206 | |||||||||||||||||||
All other |
147 | | | 147 | | 147 | |||||||||||||||||||
Total interest-earning assets |
$ | 485,252 | $ | 7,814 | $ | 14,867 | $ | 507,933 | $ | 464,801 | $ | 972,734 | |||||||||||||
Interest-bearing Liabilities |
|||||||||||||||||||||||||
Interest-bearing deposits: |
|||||||||||||||||||||||||
Savings and NOW accounts |
$ | 164,627 | $ | | $ | | $ | 164,627 | $ | | $ | 164,627 | |||||||||||||
Money market accounts |
155,745 | | | 155,745 | | 155,745 | |||||||||||||||||||
Time deposits of $100 or more |
42,043 | 29,359 | 123,878 | 195,280 | 52,359 | 247,639 | |||||||||||||||||||
Other time deposits |
56,349 | 40,738 | 139,672 | 236,759 | 52,162 | 288,921 | |||||||||||||||||||
Overnight and short-term borrowings |
3,000 | 2,000 | 15,000 | 20,000 | | 20,000 | |||||||||||||||||||
Long-term borrowings |
| | | | 20,000 | 20,000 | |||||||||||||||||||
Total interest-bearing liabilities |
$ | 421,764 | $ | 72,097 | $ | 278,550 | $ | 772,411 | $ | 124,521 | $ | 896,932 | |||||||||||||
Interest sensitivity gap |
$ | 63,488 | $ | (64,283 | ) | $ | (263,683 | ) | $ | (264,478 | ) | ||||||||||||||
Cumulative interest sensitivity gap |
63,488 | (795 | ) | (264,478 | ) | (264,478 | ) | ||||||||||||||||||
Interest earning-assets as a percentage
of interest-bearing liabilities |
115 | % | 11 | % | 5 | % | 66 | % | |||||||||||||||||
(1) | Interest sensitivity periods for debt securities are based on contractual maturities. |
The following table presents the maturity distribution of our loans by type, including fixed rate
loans.
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
As of December 31, 2009
As of December 31, 2009
Within | One to | Five | ||||||||||||||
One | Five | Years or | ||||||||||||||
(Table in thousands) | Year | Years | More | Total | ||||||||||||
Real estate Construction |
$ | 34,625 | $ | 17,790 | $ | 7,286 | $ | 59,701 | ||||||||
Real estate Mortgage |
129,679 | 302,771 | 133,547 | 565,997 | ||||||||||||
Commercial, financial and agricultural |
65,915 | 62,801 | 14,902 | 143,618 | ||||||||||||
Consumer |
1,436 | 4,687 | 83 | 6,206 | ||||||||||||
All other |
147 | | | 147 | ||||||||||||
Total |
$ | 231,802 | $ | 388,049 | $ | 155,818 | $ | 775,669 | ||||||||
Predetermined rate, maturity
greater than one year |
$ | | $ | 182,433 | $ | 53,690 | $ | 236,123 | ||||||||
Variable rate or maturing within
one year |
231,802 | 205,616 | 102,128 | 539,546 | ||||||||||||
Total |
$ | 231,802 | $ | 388,049 | $ | 155,818 | $ | 775,669 | ||||||||
Our average rate paid on interest-bearing deposits declined to 2.32% in 2009 compared to 3.13% in
2008. Our decline in average deposits was primarily in demand deposits. The daily average amounts
of deposits of the Bank are summarized below.
AVERAGE DEPOSITS
for the years ended December 31,
for the years ended December 31,
(Table in thousands) | 2009 | 2008 | 2007 | |||||||||
Non-interest-bearing demand deposits |
$ | 111,614 | $ | 131,563 | $ | 146,563 | ||||||
Interest-bearing demand deposits |
337,438 | 368,701 | 366,706 | |||||||||
Savings deposits |
20,303 | 21,567 | 22,677 | |||||||||
Time deposits |
492,496 | 460,632 | 433,965 | |||||||||
Total |
$ | 961,851 | $ | 982,463 | $ | 969,911 | ||||||
21
Table of Contents
The preceding table includes certificates of deposits $100 thousand and over, which at December
31, 2009 totaled $247.6 million. The following table presents the maturities of these time
deposits of $100 thousand or more.
MATURITIES OF TIME DEPOSITS OF $100 THOUSAND OR MORE
As of December 31, 2009
As of December 31, 2009
Within | Three to | Six to | Within | One to | ||||||||||||||||||||
Three | Six | Twelve | One | Five | ||||||||||||||||||||
(In thousands) | Months | Months | Months | Year | Years | Total | ||||||||||||||||||
Time deposits of $100 thousand or more |
$ | 42,043 | $ | 29,359 | $ | 123,878 | $ | 195,280 | $ | 52,359 | $ | 247,639 | ||||||||||||
CAPITAL RESOURCES
The levels of capital resources and related regulatory matters are discussed in detail in Note 2,
Regulatory Matters and Going Concern Considerations, and Note 15, Regulation and Regulatory
Restrictions, in the Notes to Consolidated Financial Statements. As set forth therein, the
Banks capital levels are significantly below the capital levels set forth in the regulatory Order.
As a result the Bank is precluded from paying dividends to the parent company for the duration of
the Order.
LOANS
The Companys lending activities have been concentrated in real estate related loans and commercial
loans to small and medium sized businesses. We have a diversified loan portfolio with no
concentrations to any one borrower. The amounts and types of loans outstanding for the past five
years are shown in the following table.
LOANS
As of December 31,
As of December 31,
(Table dollars in thousands)
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||||||||||||||||
% of | % of | % of | % of | % of | ||||||||||||||||||||||||||||||||||||
Total | Total | Total | Total | Total | ||||||||||||||||||||||||||||||||||||
Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | |||||||||||||||||||||||||||||||
Loans |
||||||||||||||||||||||||||||||||||||||||
Real estate - |
||||||||||||||||||||||||||||||||||||||||
Construction |
$ | 59,701 | 7.7 | % | $ | 146,167 | 15.4 | % | $ | 182,457 | 19.2 | % | $ | 161,072 | 17.6 | % | $ | 125,555 | 15.1 | % | ||||||||||||||||||||
Mortgage |
565,997 | 73.0 | % | 593,233 | 62.5 | % | 513,140 | 54.1 | % | 488,347 | 53.4 | % | 455,322 | 54.6 | % | |||||||||||||||||||||||||
Commercial,
financial and
agricultural |
143,618 | 18.5 | % | 199,370 | 21.0 | % | 238,469 | 25.2 | % | 248,691 | 27.2 | % | 231,229 | 27.7 | % | |||||||||||||||||||||||||
Consumer |
6,206 | 0.8 | % | 10,713 | 1.1 | % | 13,481 | 1.4 | % | 15,317 | 1.7 | % | 20,911 | 2.5 | % | |||||||||||||||||||||||||
All other |
147 | 0.0 | % | 258 | 0.0 | % | 567 | 0.1 | % | 742 | 0.1 | % | 915 | 0.1 | % | |||||||||||||||||||||||||
Total loans |
775,669 | 100.0 | % | 949,741 | 100.0 | % | 948,114 | 100.0 | % | 914,169 | 100.0 | % | 833,932 | 100.0 | % | |||||||||||||||||||||||||
Deferred origination
fees, net |
(650 | ) | (1,592 | ) | (1,788 | ) | (1,677 | ) | (1,485 | ) | ||||||||||||||||||||||||||||||
Total loans, net of
deferred fees |
$ | 775,019 | $ | 948,149 | $ | 946,326 | $ | 912,492 | $ | 832,447 | ||||||||||||||||||||||||||||||
For commercial, financial and agricultural loans, the Bank is generally collateralized by all
business assets, including the related real estate where applicable. Also see Note 19, Fair Value
of Financial Instruments in the Notes to Consolidated Financial Statements.
22
Table of Contents
NONPERFORMING LOANS AND NONPERFORMING ASSETS
As of December 31,
As of December 31,
(Table dollars in thousands) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
Nonperforming assets |
||||||||||||||||||||
Nonaccrual loans |
$ | 40,736 | $ | 50,591 | $ | 36,450 | $ | 9,289 | $ | 6,424 | ||||||||||
Restructured loans nonaccrual |
12,404 | | | | | |||||||||||||||
Total nonperforming loans |
53,140 | 50,591 | 36,450 | 9,289 | 6,424 | |||||||||||||||
Foreclosed properties |
13,235 | 6,805 | 2,491 | 1,162 | 926 | |||||||||||||||
Total nonperforming assets |
$ | 66,375 | $ | 57,396 | $ | 38,941 | $ | 10,451 | $ | 7,350 | ||||||||||
Restructured loans accruing |
$ | 13,284 | $ | | $ | | $ | | $ | | ||||||||||
Loans past due 90 days or more and still accruing interest |
1,195 | 114 | 162 | 5,074 | 4,208 | |||||||||||||||
Nonperforming loans to total loans |
6.86 | % | 5.34 | % | 3.85 | % | 1.02 | % | 0.77 | % | ||||||||||
Allowance for loan losses to nonperforming loans |
52.38 | % | 49.03 | % | 48.49 | % | 169.95 | % | 216.75 | % | ||||||||||
Nonperforming loans to total assets |
5.01 | % | 4.41 | % | 2.99 | % | 0.77 | % | 0.58 | % | ||||||||||
Nonperforming assets to total assets |
6.26 | % | 5.00 | % | 3.19 | % | 0.87 | % | 0.66 | % |
We classify loans as nonaccrual when the loan is 90 days past due, or we believe the loan may be
impaired, and the accrual of interest on such loans is discontinued. The recorded accrued interest
receivable deemed uncollectible is reversed to the extent it was accrued in the current year or
charged-off to the extent it was accrued in previous years. A loan classified as nonaccrual is
returned to accrual status when the obligation has been brought current, it has performed in
accordance with its contractual terms for a sufficient period of time, and the ultimate collection
of principal and interest is no longer considered doubtful. Of the Banks $53.1 million
nonperforming loans at December 31, 2009, approximately $12.4 million is single family homes,
unimproved land or residential lots in various stages of development. The remaining population
consists of loans to a variety of small business operations that are in default and are generally
secured by commercial real estate. The increase in nonperforming assets as of December 31, 2009 is
primarily related to the increase in foreclosed properties.
All of our investment in impaired loans, $38.9 million at December 31, 2009, is included in
nonaccrual loans in the table above, and the related loan loss allowance for these loans was $7.7
million. At December 31, 2008 our investment in impaired loans was $42.6 million, and the related
loan loss allowance was $5.4 million. The average recorded balance of impaired loans was $34.0
million for 2009 and $29.0 million for 2008.
In addition to the nonaccrual loans, the Bank has potential problem loans of approximately $86.5
million at December 31, 2009. Potential problem loans are loans as to which management has serious doubts as
to the ability of the borrowers to comply with present repayment terms. These loans do not meet the
criteria for, and are therefore not included in, nonperforming assets. Management defines potential
problem loans as those loans graded substandard in the Banks grading system. These loans were
considered in determining the adequacy of the allowance for loan losses and are closely and
regularly monitored to protect the Banks interests.
Our investment in impaired loans for the past five years ended December 31, was as follows:
IMPAIRED LOANS
As of December 31,
As of December 31,
(Table in thousands) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
Total investment in impaired loans |
$ | 38,912 | $ | 42,615 | $ | 27,017 | $ | 15,516 | $ | 11,046 | ||||||||||
Loan loss allowance related to impaired loans |
$ | 7,715 | $ | 5,400 | $ | 3,029 | $ | 3,926 | $ | 3,249 | ||||||||||
The Bank classifies a loan as impaired when, based on current information and events, management
believes it is probable that the Bank will be unable to collect all amounts due according to the
contractual terms of the loan agreement. Impaired loans are measured primarily based on the fair
value of the collateral supporting the loan. The total balance of impaired loans decreased $3.7
million, or 8.7% in 2009 compared to 2008, and the loan loss allowance related to impaired loans
increased $2.3 million. The loan loss allowance related to impaired loans was 19.83% as of December
31, 2009 compared to 12.67% as of December 31, 2008.
For the years ended December 31, 2009 and 2008, the estimated gross interest income that would have
been recorded had the nonaccruing loans been current in accordance with their original terms was
$2.8 million, and $2.0 million, respectively, while the interest recognized on such loans was
approximately $1.5 million and $1.0 million, respectively.
23
Table of Contents
PROVISIONS AND ALLOWANCES FOR LOAN LOSSES
The risks inherent in our loan portfolio, including the adequacy of the allowance or reserve for
loan losses, are significant estimates that are based on assumptions by our management regarding,
among other factors, general and local economic conditions, which are difficult to predict. In
estimating these risks and the related loss reserve levels, we also consider the financial
conditions of specific borrowers and credit concentrations with specific borrowers, groups of
borrowers, and industries.
We use several measures to assess and monitor the credit risks in our loan portfolio, including a
loan grading system that begins upon loan origination and continues until the loan is collected or
collectibility becomes doubtful. When originated or renewed, all loans over a certain dollar amount
receive in-depth reviews and risk assessments by the Banks Credit Administration. Furthermore,
loans and commitments of $500 thousand or more made during the month, as well as commercial loans
past due 30 days or more, are reviewed monthly by the Loan Committee of the Banks Board of
Directors.
Large commercial loans that exhibit probable or observed credit weaknesses are subject to
individual review for impairment. When individual loans are impaired, the impairment allowance is
measured in accordance with the accounting standard entitled Accounting By Creditors for Impairment
of a Loan. The predominant measurement method for the Bank is the evaluation of the fair value of
the underlying collateral. Allowance levels are estimated for other commercial loans in the
portfolio based on their assigned credit risk grade, type of loan and other matters related to
credit risk. The Bank aggregates non-graded retail type loans into pools of similar credits and
reviews the historical loss experience associated with these pools as the criteria to allocate the
allowance to each category.
The allowance for loan losses is comprised of three components: specific reserves, general reserves
and unallocated reserves. Generally, all loans with outstanding balances of $250 thousand or
greater that have been identified as impaired are reviewed periodically in order to determine
whether a specific allowance is required. When the value of the impaired loan is less than the
recorded investment in the loan, the amount of the impairment is recorded as a specific reserve.
Loans for which specific reserves are provided are excluded from the general allowance calculations
as described below.
The general allowance reflects the best estimate of probable losses that exist within the
portfolios of loans that have not been specifically identified. The general allowance for the
commercial loan portfolio is established considering several factors including: current loan
grades, historical loss rates, estimated future cash flows available to service the loan, and the
results of individual loan reviews and analyses. The allowance for loan losses for consumer loans,
mortgage loans, and leases is determined based on past due levels and historical projected loss
rates relative to each portfolio.
The unallocated allowance is determined through our assessment of probable losses that are in the
portfolio but are not adequately captured by the other two components of the allowance, including
consideration of current economic and business conditions and regulatory requirements. The
unallocated allowance also reflects our acknowledgement of the imprecision and subjectivity that
underlie the assessment of credit risk.
The allowance for loan losses is created by direct charges to operations. Losses on loans are
charged against the allowance for loan losses in the accounting period in which they are determined
by us to be uncollectible. Recoveries during the period are credited to the allowance for loan
losses.
Management is continuing to closely monitor the value of real estate serving as collateral for our
loans, especially lots and land under development, due to continued concern that the low level of
real estate sales activity will continue to have a negative impact on the value of real estate
collateral. In addition, depressed market conditions have adversely impacted, and may continue to
adversely impact, the financial condition and liquidity position of
certain of our borrowers. Additionally, the value of commercial real estate collateral may come under further pressure from
weak economic conditions and prevailing unemployment levels.
We believe that the Companys allowance is an adequate estimation of probable losses incurred in
our loan portfolio at December 31, 2009. No assurance can be given, however, that adverse economic
circumstances or other events, including additional and continued loan review, future regulatory
examination findings or changes in borrowers financial conditions, will not result in increased
losses in the loan portfolio or in the need for increases in the allowance for loan losses.
24
Table of Contents
The following table presents an analysis of changes in the allowance for loan losses for years
indicated.
CHANGES IN THE ALLOWANCE FOR LOAN LOSSES
for the years ended December 31,
for the years ended December 31,
(Table dollars in thousands) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
Balance at beginning of year |
$ | 24,806 | $ | 17,673 | $ | 15,787 | $ | 13,924 | $ | 13,665 | ||||||||||
Loans charged off: |
||||||||||||||||||||
Real estate |
23,435 | 15,550 | 14,850 | 1,708 | 919 | |||||||||||||||
Commercial, financial and agricultural |
5,003 | 10,557 | 30,955 | 2,808 | 3,484 | |||||||||||||||
Credit cards and related plans |
54 | 16 | 15 | 26 | 45 | |||||||||||||||
Installment loans to individuals |
78 | 396 | 177 | 410 | 540 | |||||||||||||||
Demand deposit overdraft program |
159 | 195 | 233 | 251 | 262 | |||||||||||||||
Asset-based lending |
| | 7,433 | | | |||||||||||||||
Total charge-offs |
28,729 | 26,714 | 53,663 | 5,203 | 5,250 | |||||||||||||||
Recoveries of loans previously charged off: |
||||||||||||||||||||
Real estate |
738 | 1,340 | 233 | 84 | 63 | |||||||||||||||
Commercial, financial and agricultural |
2,176 | 2,041 | 19 | 282 | 29 | |||||||||||||||
Credit cards and related plans |
7 | 1 | 4 | 10 | 3 | |||||||||||||||
Installment loans to individuals |
36 | 145 | 47 | 138 | 42 | |||||||||||||||
Demand deposit overdraft program |
70 | 92 | 115 | 138 | 178 | |||||||||||||||
Total recoveries |
3,027 | 3,619 | 418 | 652 | 315 | |||||||||||||||
Net charge-offs |
25,702 | 23,095 | 53,245 | 4,551 | 4,935 | |||||||||||||||
Provision for loan losses |
28,733 | 30,228 | 55,131 | 6,414 | 5,194 | |||||||||||||||
Balance at end of year |
$ | 27,837 | $ | 24,806 | $ | 17,673 | $ | 15,787 | $ | 13,924 | ||||||||||
Ratio of net charge-offs during the year to
average loans outstanding during the year |
2.95 | % | 2.42 | % | 5.70 | % | 0.52 | % | 0.61 | % | ||||||||||
Allowance coverage of net charge-offs |
108.31 | % | 107.41 | % | 33.19 | % | 346.95 | % | 282.14 | % | ||||||||||
Allowance as a percentage of gross loans |
3.59 | % | 2.62 | % | 1.87 | % | 1.73 | % | 1.67 | % |
The following table presents the allocation of the allowance for loan losses by category; however,
the total allowance is available for charging off losses from any category of the entire portfolio.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
As of December 31,
As of December 31,
(Table dollars in thousands)
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||||||||||||||||
% of | % of | % of | % of | % of | ||||||||||||||||||||||||||||||||||||
Total | Total | Total | Total | Total | ||||||||||||||||||||||||||||||||||||
Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | |||||||||||||||||||||||||||||||
Real estate |
$ | 24,065 | 80.7 | % | $ | 20,164 | 77.9 | % | $ | 12,421 | 73.3 | % | $ | 5,091 | 71.0 | % | $ | 4,448 | 69.7 | % | ||||||||||||||||||||
Commercial,
financial,
and agricultural |
3,217 | 18.5 | % | 3,965 | 21.0 | % | 3,899 | 25.2 | % | 9,891 | 27.2 | % | 8,401 | 27.7 | % | |||||||||||||||||||||||||
Consumer |
126 | 0.8 | % | 211 | 1.1 | % | 281 | 1.4 | % | 443 | 1.7 | % | 577 | 2.5 | % | |||||||||||||||||||||||||
All other loans |
39 | 0.0 | % | 34 | 0.0 | % | 310 | 0.1 | % | | 0.1 | % | | 0.1 | % | |||||||||||||||||||||||||
Unallocated |
390 | n/a | 432 | n/a | 762 | n/a | 362 | n/a | 498 | n/a | ||||||||||||||||||||||||||||||
Total loans |
$ | 27,837 | 100.0 | % | $ | 24,806 | 100.0 | % | $ | 17,673 | 100.0 | % | $ | 15,787 | 100.0 | % | $ | 13,924 | 100.0 | % | ||||||||||||||||||||
The allowance for loan losses was 3.59%, 2.62% and 1.87% of loans outstanding at December 31, 2009,
2008 and 2007, respectively, which was consistent with our assessment of the credit quality of the
loan portfolio. The allowance for loan losses for real estate loans was 3.79%, 2.73% and 1.79% of
loans outstanding at December 31, 2009, 2008 and 2007, respectively. The ratios of net charge-offs
during the year to average loans outstanding during the period were 2.95%, 2.42% and 5.70% at
December 31, 2009, 2008 and 2007, respectively.
INVESTMENT SECURITIES
We invest in securities as permitted under bank regulations. These securities include all
obligations of the U.S. Treasury, agencies of the U.S. government, including mortgage-backed
securities and certain derivatives, bank eligible obligations of any state or political
subdivision, bank eligible corporate obligations, including commercial paper, negotiable
certificates of deposit, bankers acceptances, mutual funds and limited types of equity securities.
As noted above, our investments in marketable securities increased substantially during 2009 as
part of our balance sheet restructuring.
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Our investment activities are governed internally by a written, Board-approved policy. Investment
strategies are established in consideration of the interest rate environment, balance sheet mix,
actual and anticipated loan demand, funding opportunities and our overall interest rate
sensitivity. In general, the investment portfolio is managed with a focus on the following goals:
(i) to provide a sufficient margin of liquid assets to meet unanticipated deposit and loan
fluctuations and overall funds management objectives; (ii) to provide eligible securities to secure
public funds, trust deposits as prescribed by law and other borrowings; and (iii) to earn the
maximum return on funds invested that is commensurate with meeting goals (i) and (ii).
At December 31, 2009, the securities classified as available for sale, which are carried at market
value, totaled $190.9 million, with an amortized cost of $195.3 million, compared to a December 31,
2008 total market value of $58.6 million with an amortized cost of $57.8 million. Securities
available for sale are securities that will be held for an indefinite period of time, including
securities that we intend to use as a part of our asset/liability strategy, or that may be sold in
response to changes in interest rates, changes in prepayment risk or the need to increase
regulatory capital or other similar factors. Securities available for sale consist of securities of
U.S. Government agencies with an average life of 9.4 years, and mortgage-backed securities with an
average life of 23.9 years. During 2009, $78.5 million in securities matured and approximately
$173.7 million in proceeds were received from securities sold.
CONTRACTUAL MATURITIES AND YIELDS OF DEBT SECURITIES
As of December 31, 2009
As of December 31, 2009
After One Year but | After Five Years but | |||||||||||||||||||||||||||||||
Within One Year | Within Five Years | Within Ten Years | After Ten Years | |||||||||||||||||||||||||||||
(Table dollars in thousands) | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | ||||||||||||||||||||||||
Available for sale: (1) |
||||||||||||||||||||||||||||||||
U.S. government agency |
$ | 1,539 | 1.05 | % | $ | 38,172 | 4.15 | % | $ | 4,000 | 3.13 | % | $ | | | |||||||||||||||||
Mortgage-backed securities |
| | | | | | 150,738 | 3.79 | % | |||||||||||||||||||||||
Total |
$ | 1,539 | 1.05 | % | $ | 38,172 | 4.15 | % | $ | 4,000 | 3.13 | % | $ | 150,738 | 3.79 | % | ||||||||||||||||
(1) | Securities available for sale are stated at amortized cost. |
The following table provides information regarding the composition of our investment securities
portfolio at the end of each of the past three years.
COMPOSITION OF INVESTMENT SECURITIES PORTFOLIO
As of December 31,
As of December 31,
(Table in thousands) | 2009 | 2008 | 2007 | |||||||||
Available for sale (at estimated fair value): |
||||||||||||
U.S. Treasury |
$ | | $ | | $ | 5,055 | ||||||
U.S. government agency |
42,051 | 46,063 | 93,763 | |||||||||
State and political subdivisions |
| 5,416 | 5,520 | |||||||||
Mortgage-backed securities |
147,831 | | | |||||||||
Other |
1,039 | 7,097 | 8,628 | |||||||||
Total |
$ | 190,921 | $ | 58,576 | $ | 112,966 | ||||||
Held to maturity (at amortized cost): |
||||||||||||
State and political subdivisions |
$ | | $ | 23,627 | $ | 29,656 | ||||||
Total |
$ | | $ | 23,627 | $ | 29,656 | ||||||
CONTRACTUAL OBLIGATIONS
Our contractual obligations and other commitments are summarized in the table below. Other
commitments include commitments to extend credit. Because not all of these commitments to extend
credit will be drawn upon, the actual cash requirements are likely to be significantly less than
the amounts reported for other commitments below.
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CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
As of December 31, 2009
As of December 31, 2009
Within | One to | Three to | Five | |||||||||||||||||
One | Three | Five | Years or | |||||||||||||||||
(Table in thousands) | Year | Years | Years | More | Total | |||||||||||||||
Contractual Cash Obligations |
||||||||||||||||||||
Short-term borrowings |
$ | 20,000 | $ | | $ | | $ | | $ | 20,000 | ||||||||||
Long-term borrowings |
| 20,000 | | | 20,000 | |||||||||||||||
Capitalized lease obligations |
444 | 886 | 671 | 1,455 | 3,456 | |||||||||||||||
Operating lease obligations |
95 | 149 | | | 244 | |||||||||||||||
Total |
$ | 20,539 | $ | 21,035 | $ | 671 | $ | 1,455 | $ | 43,700 | ||||||||||
Other Commitments |
||||||||||||||||||||
Commitments to extend credit |
$ | 46,044 | $ | 7,680 | $ | 4,370 | $ | 48,028 | $ | 106,122 | ||||||||||
Standby letters of credit |
2,917 | 50 | | | 2,967 | |||||||||||||||
Total |
$ | 48,961 | $ | 7,730 | $ | 4,370 | $ | 48,028 | $ | 109,089 | ||||||||||
PERFORMANCE RATIOS
For the Years Ended December 31, | ||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
Return on average assets |
-2.33 | % | -3.05 | % | -1.27 | % | 1.56 | % | 1.41 | % | ||||||||||
Return on average equity |
-37.75 | % | -32.01 | % | -10.95 | % | 12.57 | % | 10.70 | % | ||||||||||
Average equity to average assets |
6.16 | % | 9.52 | % | 11.59 | % | 12.42 | % | 13.14 | % | ||||||||||
Dividend payout |
0.00 | % | -11.08 | % | -53.38 | % | 43.04 | % | 46.50 | % | ||||||||||
Efficiency ratio |
106.15 | % | 101.46 | % | 55.64 | % | 48.26 | % | 52.11 | % |
OFF-BALANCE SHEET ARRANGEMENTS
We have off-balance sheet commitments to lend in the forms of unfunded commitments to extend credit
and standby letters of credit. As of December 31, 2009 and 2008, such unfunded commitments to
extend credit were approximately $106.1 million and $163.0 million, respectively, while commitments
in the form of standby letters of credit totaled approximately $3.0 million and $5.0 million,
respectively.
RELATED PARTY TRANSACTIONS
We have no material related party transactions. We may extend credit to certain directors and
officers in the ordinary course of business. These extensions of credit are made under
substantially the same terms as comparable third-party lending arrangements and are made in
compliance with applicable banking regulations and federal securities laws. We purchased a facility
and terminated related party operating leases in 2008 that we had with Salem Investors, LLC.
Further discussions of related party transactions are included under Note 4, Loans, and Note 10,
Leases, in the Notes to Consolidated Financial Statements.
SEGMENT RESULTS
Our operations are divided into three reportable business segments: Community Banking, Mortgage
Banking, and Other. These operating segments have been identified based primarily on our existing
organizational structure. See Note 20, Operating Segments, in the Notes to Consolidated
Financial Statements herein, for a full discussion of the segments, the internal accounting and
our reporting practices utilized to manage these segments and financial disclosures by segment as
required by the accounting standard entitled Disclosures about Segments of an Enterprise and
Related Information. Fluctuations in noninterest income and expense earned and incurred related to
external customers are more fully discussed in the Noninterest Income and Noninterest Expense
sections of this discussion and analysis.
27
Table of Contents
Community Banking
The changes in 2009 compared to 2008 are as follows:
2009 | 2008 | $ Change | % Change | |||||||||||||
(Table dollars in thousands) | ||||||||||||||||
Net interest income |
$ | 30,071 | $ | 34,345 | $ | (4,274 | ) | -12.4 | % | |||||||
Provision for loan losses |
28,644 | 30,143 | (1,499 | ) | -5.0 | % | ||||||||||
Securities gains (losses) |
383 | (754 | ) | 1,137 | -150.8 | % | ||||||||||
Total other income |
8,452 | 7,988 | 464 | 5.8 | % | |||||||||||
Salaries and wages |
11,422 | 13,480 | (2,058 | ) | -15.3 | % | ||||||||||
Employee benefits |
1,964 | 3,401 | (1,437 | ) | -42.3 | % | ||||||||||
Goodwill impairment |
| 10,763 | (10,763 | ) | -100.0 | % | ||||||||||
Other |
21,363 | 9,984 | 11,379 | 114.0 | % | |||||||||||
Total other expenses |
38,627 | 41,773 | (3,146 | ) | -7.5 | % | ||||||||||
Income tax expense (benefit) |
(5,800 | ) | 4,842 | (10,642 | ) | -219.8 | % | |||||||||
Net loss |
(22,948 | ) | (34,425 | ) | 11,477 | -33.3 | % | |||||||||
Identifiable segment assets |
1,058,522 | 1,112,029 | (53,507 | ) | -4.8 | % |
The Community Banking segment was comprised of 20 banking offices at the end of 2009 and 22 in
2008. Charge-offs for 2009 increased $2.0 million compared to 2008. As discussed above under
Provisions and Allowance for Loan Losses, deterioration in our loan portfolio resulted in
significant increases in our charge-offs for both 2009 and 2008 compared to our levels of
charge-offs for years prior to 2007.
Securities gains (losses) include losses of $518 thousand and $821 thousand in 2009 and 2008,
respectively, for other-than-temporary-impairment that are included in total other income.
The Banks other expenses included goodwill impairment in 2008, which primarily caused the decrease
in other expenses in 2009, as well as decreases in personnel costs caused by staff reductions and
benefit plan revisions, that were partially offset by increases in 2009 in FDIC deposit insurance
premiums and expenses related to foreclosed properties.
The Bank recognized income tax benefits relating to net operating loss carrybacks of $5.8 million
in 2009 compared to income tax expense of $4.6 million in 2008.
Mortgage Banking
The changes in 2009 compared to 2008 are as follows:
2009 | 2008 | $ Change | % Change | |||||||||||||
(Table dollars in thousands) | ||||||||||||||||
Net interest income |
$ | 1,389 | $ | 3,158 | $ | (1,769 | ) | -56.0 | % | |||||||
Mortgage banking income |
748 | 3,573 | (2,825 | ) | -79.1 | % | ||||||||||
Salaries and wages |
2,474 | 4,221 | (1,747 | ) | -41.4 | % | ||||||||||
Employee benefits |
145 | 380 | (235 | ) | -61.8 | % | ||||||||||
Total other expenses |
4,167 | 6,870 | (2,703 | ) | -39.3 | % | ||||||||||
Net income (loss) |
(2,120 | ) | 8 | (2,128 | ) | n/m | ||||||||||
Identifiable segment assets |
1,562 | 31,885 | (30,323 | ) | -95.1 | % |
As discussed above, during the first quarter of 2009 Granite Mortgage changed its business model
from lender/seller to a broker operation, and the origination activity in the segment ceased in the
third quarter. The segments activity for the remainder of 2009 was related to the resolution of a
small loan held for investment portfolio and settling existing contractual obligations. Granite
Mortgage had no employees as of December 31, 2009.
Other
Our Other segment historically represented certain treasury and administration activities that have
been discontinued during 2009. Included in this segment are certain investments, commercial paper
issued to the Banks commercial sweep account customers, debt, and stockholder communications,
reporting, and record keeping.
28
Table of Contents
NEW ACCOUNTING PRONOUNCEMENTS
Note 1,Summary of Significant Accounting Policies, to the Notes to Consolidated Financial
Statements in Item 8 discusses new accounting policies adopted by the Company during 2009 and the
expected impact of accounting policies recently issued but not yet required to be adopted. To the
extent the adoption of new accounting standards materially affects financial condition, results of
operations, or liquidity, the impacts are discussed in the applicable portions of this section and
Notes to the Consolidated Financial Statements.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This item is not applicable.
29
Table of Contents
ITEM 8 FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
Begins on | ||||
Page | ||||
31 | ||||
Financial Statements: |
||||
32 | ||||
33 | ||||
34 | ||||
35 | ||||
36 | ||||
38 |
30
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors
Bank of Granite Corporation
Granite Falls, North Carolina
Bank of Granite Corporation
Granite Falls, North Carolina
We have audited the accompanying consolidated balance sheets of Bank of Granite Corporation and
subsidiaries (the Company) as of December 31, 2009 and 2008 and the related consolidated
statements of income, comprehensive income, stockholders equity and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Bank of Granite Corporation and subsidiaries at
December 31, 2009 and 2008, and the results of their operations and their cash flows for the years
then ended, in conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared assuming that Bank of Granite
Corporation and subsidiaries will continue as a going concern. The Company incurred net losses in
2009 and 2008, primarily from higher provisions for loan losses. As discussed in Note 2 to the
consolidated financial statements, Bank of Granite Corporations wholly-owned bank subsidiary (the
Bank) is under a regulatory order that requires, among other provisions, higher regulatory
capital requirements. The Bank did not meet the higher capital requirements as of December 31, 2009
and is not in compliance with the regulatory agreement. Failure to comply with the regulatory
agreement may result in additional regulatory enforcement actions. These events raise substantial
doubt about the ability of the Company to continue as a going concern. Management plans with regard
to these matters are discussed in Note 2. The accompanying consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ Dixon Hughes PLLC |
DIXON HUGHES PLLC |
Charlotte, North Carolina |
March 31, 2010 |
31
Table of Contents
(In thousands except per share data) | 2009 | 2008 | ||||||
ASSETS: |
||||||||
Cash and cash equivalents |
||||||||
Cash and due from banks |
$ | 71,611 | $ | 26,164 | ||||
Interest-bearing deposits |
1,763 | 6,819 | ||||||
Federal funds sold |
| 16,000 | ||||||
Total cash and cash equivalents |
73,374 | 48,983 | ||||||
Investment securities |
||||||||
Available for sale, at fair value (amortized cost of $195,302 and
$57,840 at December 31, 2009 and 2008, respectively) |
190,921 | 58,576 | ||||||
Held to maturity, at amortized cost (fair value of $0 and
$24,292 at December 31, 2009 and 2008, respectively) |
| 23,627 | ||||||
Loans |
775,019 | 948,149 | ||||||
Allowance for loan losses |
(27,837 | ) | (24,806 | ) | ||||
Net loans |
747,182 | 923,343 | ||||||
Mortgage loans held for sale |
| 16,770 | ||||||
Premises and equipment, net |
15,556 | 19,079 | ||||||
Accrued interest receivable |
3,917 | 3,979 | ||||||
Investment in bank owned life insurance |
4,106 | 31,278 | ||||||
Intangible assets |
| 143 | ||||||
Other assets |
25,028 | 21,177 | ||||||
Total assets |
$ | 1,060,084 | $ | 1,146,955 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY: |
||||||||
Deposits |
||||||||
Demand |
$ | 109,673 | $ | 117,168 | ||||
NOW accounts |
145,833 | 153,444 | ||||||
Money market accounts |
155,745 | 204,108 | ||||||
Savings |
18,794 | 19,674 | ||||||
Time deposits of $100 or more |
247,639 | 208,002 | ||||||
Other time deposits |
288,921 | 289,426 | ||||||
Total deposits |
966,605 | 991,822 | ||||||
Overnight and short-term borrowings |
20,000 | 48,947 | ||||||
Long-term borrowings |
20,000 | 14,075 | ||||||
Accrued interest payable |
1,701 | 2,750 | ||||||
Other liabilities |
4,692 | 15,191 | ||||||
Total liabilities |
1,012,998 | 1,072,785 | ||||||
STOCKHOLDERS EQUITY: |
||||||||
Common stock, $1.00 par value, Authorized - 25,000 shares; |
||||||||
Issued - 18,981 shares in 2009 and 2008; |
||||||||
Outstanding - 15,454 shares in 2009 and 2008 |
18,981 | 18,981 | ||||||
Additional paid-in capital |
30,195 | 30,190 | ||||||
Retained earnings |
52,308 | 77,928 | ||||||
Accumulated other comprehensive loss, net of
deferred income taxes of $1,837 and $714 at
December 31, 2009 and 2008, respectively |
(2,546 | ) | (1,077 | ) | ||||
Less: Cost of common stock in treasury; |
||||||||
3,527 shares in 2009 and 2008 |
(51,852 | ) | (51,852 | ) | ||||
Total stockholders equity |
47,086 | 74,170 | ||||||
Total liabilities and stockholders equity |
$ | 1,060,084 | $ | 1,146,955 | ||||
See notes to consolidated financial statements.
32
Table of Contents
BANK OF GRANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2009 AND 2008
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2009 AND 2008
(In thousands except per share data) | 2009 | 2008 | ||||||
INTEREST INCOME: |
||||||||
Interest and fees from loans |
$ | 46,948 | $ | 57,953 | ||||
Interest and fees from mortgage banking |
1,666 | 4,336 | ||||||
Federal funds sold |
8 | 63 | ||||||
Interest-bearing deposits |
67 | 339 | ||||||
Investments: |
||||||||
U.S. Treasury |
18 | 150 | ||||||
U.S. Government agencies |
3,233 | 2,129 | ||||||
States and political subdivisions |
364 | 1,335 | ||||||
Other |
342 | 618 | ||||||
Total interest income |
52,646 | 66,923 | ||||||
INTEREST EXPENSE: |
||||||||
Time deposits of $100 or more |
6,630 | 8,724 | ||||||
Other time and savings deposits |
13,068 | 17,920 | ||||||
Overnight and short-term borrowings |
631 | 2,431 | ||||||
Long-term borrowings |
895 | 678 | ||||||
Total interest expense |
21,224 | 29,753 | ||||||
NET INTEREST INCOME |
31,422 | 37,170 | ||||||
PROVISION FOR LOAN LOSSES |
28,733 | 30,228 | ||||||
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES |
2,689 | 6,942 | ||||||
OTHER INCOME: |
||||||||
Service charges on deposit accounts |
5,423 | 5,664 | ||||||
Other service charges, fees and commissions |
429 | 703 | ||||||
Mortgage banking income |
748 | 3,573 | ||||||
Securities gains (losses) |
1,074 | (1 | ) | |||||
Other-than-temporary impairment losses |
(996 | ) | (1,937 | ) | ||||
Other |
2,209 | 2,376 | ||||||
Total other income |
8,887 | 10,378 | ||||||
OTHER EXPENSES: |
||||||||
Salaries and wages |
13,896 | 17,701 | ||||||
Employee benefits |
2,114 | 3,796 | ||||||
Occupancy expense, net |
2,032 | 2,443 | ||||||
Equipment rentals, depreciation and
maintenance |
2,317 | 2,568 | ||||||
FDIC assessments |
3,704 | 1,176 | ||||||
Other real estate owned |
10,254 | 876 | ||||||
Goodwill impairment |
| 10,763 | ||||||
Other |
8,679 | 9,651 | ||||||
Total other expenses |
42,996 | 48,974 | ||||||
LOSS BEFORE INCOME
TAX EXPENSE (BENEFIT) |
(31,420 | ) | (31,654 | ) | ||||
INCOME TAX EXPENSE (BENEFIT) |
(5,800 | ) | 4,597 | |||||
NET LOSS |
$ | (25,620 | ) | $ | (36,251 | ) | ||
Net (loss) Basic |
$ | (1.66 | ) | $ | (2.35 | ) |
See notes to consolidated financial statements.
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BANK OF GRANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2009 AND 2008
(In thousands) | 2009 | 2008 | ||||||
NET LOSS |
$ | (25,620 | ) | $ | (36,251 | ) | ||
ITEMS OF OTHER COMPREHENSIVE
LOSS: |
||||||||
Unrealized gains (losses) on securities
available for sale |
(4,713 | ) | 2,839 | |||||
Reclassification adjustment for
available for sale securities
losses included in net income |
(404 | ) | (1,943 | ) | ||||
Prior service cost and net actuarial
income (loss) SERP |
2,526 | (2,526 | ) | |||||
Other comprehensive loss, before tax |
(2,591 | ) | (1,630 | ) | ||||
Change in deferred income taxes
related to change in unrealized gains
or losses on securities available for sale |
2,129 | (357 | ) | |||||
Change in deferred income taxes related to prior
service cost and net actuarial income (loss) SERP |
(1,007 | ) | 1,007 | |||||
COMPREHENSIVE LOSS |
$ | (27,089 | ) | $ | (37,231 | ) | ||
See notes to consolidated financial statements.
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BANK OF GRANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 2009 AND 2008
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 2009 AND 2008
(In thousands except per share data) | 2009 | 2008 | ||||||
COMMON STOCK, $1.00 par value |
||||||||
At beginning of year |
$ | 18,981 | $ | 18,965 | ||||
Par value of shares issued under stock option plan |
| 16 | ||||||
At end of year |
18,981 | 18,981 | ||||||
ADDITIONAL PAID-IN CAPITAL |
||||||||
At beginning of year |
30,190 | 30,053 | ||||||
Surplus of shares issued under stock option plan |
| 112 | ||||||
Tax benefit from nonqualifying dispositions
of stock options |
| 10 | ||||||
Stock-based compensation expense |
5 | 15 | ||||||
At end of year |
30,195 | 30,190 | ||||||
RETAINED EARNINGS |
||||||||
At beginning of year |
77,928 | 118,196 | ||||||
Net loss |
(25,620 | ) | (36,251 | ) | ||||
Dividends |
| (4,017 | ) | |||||
At end of year |
52,308 | 77,928 | ||||||
ACCUMULATED OTHER
COMPREHENSIVE LOSS,
NET OF DEFERRED INCOME TAXES |
||||||||
At beginning of year |
(1,077 | ) | (97 | ) | ||||
Net change in unrealized gains or losses on securities
available for sale, net of deferred income taxes |
(2,988 | ) | 539 | |||||
Net change in prior service cost and net actuarial
loss SERP, net of deferred income taxes |
1,519 | (1,519 | ) | |||||
At end of year |
(2,546 | ) | (1,077 | ) | ||||
COST OF COMMON STOCK
IN TREASURY |
||||||||
At beginning of year |
(51,852 | ) | (51,852 | ) | ||||
Cost of common stock repurchased |
| | ||||||
At end of year |
(51,852 | ) | (51,852 | ) | ||||
Total stockholders equity |
$ | 47,086 | $ | 74,170 | ||||
Shares issued |
||||||||
At beginning of year |
18,981 | 18,965 | ||||||
Shares issued under incentive stock option plans |
| 16 | ||||||
At end of year |
18,981 | 18,981 | ||||||
Common shares in treasury |
||||||||
At beginning of year |
(3,527 | ) | (3,527 | ) | ||||
Common shares repurchased |
| | ||||||
At end of year |
(3,527 | ) | (3,527 | ) | ||||
Total shares outstanding |
15,454 | 15,454 | ||||||
See notes to consolidated financial statements.
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BANK OF GRANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2009 AND 2008
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2009 AND 2008
(In thousands) | 2009 | 2008 | ||||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS: |
||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net loss |
$ | (25,620 | ) | $ | (36,251 | ) | ||
Adjustments to reconcile net loss to net cash
provided by operating activities: |
||||||||
Depreciation |
1,753 | 1,946 | ||||||
Provision for loan losses |
28,733 | 30,228 | ||||||
Goodwill impairment |
| 10,763 | ||||||
Investment security premium amortization, net |
1,160 | 192 | ||||||
Acquisition premium amortization, net |
143 | 46 | ||||||
Deferred income taxes |
| 9,507 | ||||||
Losses (gains) on sales or calls of securities
available for sale |
(592 | ) | 6 | |||||
Gains on calls of securities
held to maturity |
(482 | ) | (5 | ) | ||||
Impairment losses on securities |
996 | 1,937 | ||||||
Originations of loans held for sale |
(82,177 | ) | (254,684 | ) | ||||
Proceeds from loans held for sale |
99,924 | 256,538 | ||||||
Gains on loans held for sale |
(977 | ) | (3,305 | ) | ||||
Loss on disposal or sale of premises |
1,267 | 39 | ||||||
Losses (gains) on disposal or sale of equipment |
129 | (10 | ) | |||||
Loss on sale of other real estate |
7,816 | 681 | ||||||
Decrease in accrued interest receivable |
62 | 2,970 | ||||||
Decrease in accrued interest payable |
(1,049 | ) | (462 | ) | ||||
Increase in cash surrender value of bank
owned life insurance |
(977 | ) | (1,188 | ) | ||||
Decrease in other assets |
743 | 4,017 | ||||||
Increase (decrease) in other liabilities |
(5,866 | ) | 3,802 | |||||
Net cash provided by
operating activities |
24,986 | 26,767 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Proceeds from maturities, calls and paydowns of
securities available for sale |
54,370 | 68,152 | ||||||
Proceeds from sales, maturities, calls and paydowns
of securities held to maturity |
24,103 | 6,010 | ||||||
Proceeds from sales of securities available for sale |
173,748 | 275 | ||||||
Purchases of securities available for sale |
(366,274 | ) | (15,251 | ) | ||||
Net decrease (increase) in loans |
125,443 | (24,933 | ) | |||||
Proceeds from sale of bank owned life insurance |
28,149 | | ||||||
Capital expenditures |
| (5,602 | ) | |||||
Proceeds from sales of fixed assets |
374 | 10 | ||||||
Proceeds from sales of other real estate |
7,731 | 1,027 | ||||||
Net cash provided by investing activities |
47,644 | 29,688 | ||||||
See notes to consolidated financial statements.
(continued on next page)
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BANK OF GRANITE CORPORATION AND SUBSIDIARIES | ||
CONSOLIDATED STATEMENTS OF CASH FLOWS | (concluded from previous page) | |
YEARS ENDED DECEMBER 31, 2009 AND 2008 |
(In thousands) | 2009 | 2008 | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Net decrease in demand deposits, NOW
and savings deposits |
$ | (64,349 | ) | $ | (43,946 | ) | ||
Net increase in time deposits |
39,132 | 63,779 | ||||||
Net decrease in overnight and
short-term borrowings |
(28,947 | ) | (51,243 | ) | ||||
Net increase (decrease) in long-term borrowings |
5,925 | (3,500 | ) | |||||
Proceeds from shares issued under stock option plan |
| 128 | ||||||
Tax benefit on shares issued under stock option plan |
| 10 | ||||||
Dividends paid |
| (6,024 | ) | |||||
Net cash used by financing activities |
(48,239 | ) | (40,796 | ) | ||||
NET INCREASE IN
CASH EQUIVALENTS |
24,391 | 15,659 | ||||||
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR |
48,983 | 33,324 | ||||||
CASH AND CASH EQUIVALENTS
AT END OF YEAR |
$ | 73,374 | $ | 48,983 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
||||||||
Cash paid (refunded) during the year for: |
||||||||
Interest |
$ | 22,273 | $ | 30,215 | ||||
Income tax refunded |
(7,841 | ) | (13,662 | ) | ||||
Noncash investing and financing activities: |
||||||||
Transfer from loans to other real
estate owned |
21,977 | 6,022 |
See notes to consolidated financial statements.
37
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BANK OF GRANITE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009 AND 2008
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION Bank of Granite Corporation is a bank holding company with two wholly owned
subsidiaries, Bank of Granite (the Bank), a state chartered commercial bank incorporated in North
Carolina on August 2, 1906 and Granite Mortgage, Inc., a mortgage banking company incorporated in
North Carolina on June 24, 1985. Bank of Granite Corporation and its two subsidiaries, Bank of
Granite and Granite Mortgage, Inc. are referred to herein collectively as the Company.
BASIS OF PRESENTATION The consolidated financial statements include the accounts of Bank of
Granite Corporation and its wholly owned subsidiaries, Bank of Granite and Granite Mortgage, Inc.
All significant intercompany accounts and transactions have been eliminated. Certain amounts for
periods prior to December 31, 2009 have been reclassified to conform to the presentation for the
period ended December 31, 2009.
USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates.
The generally depressed economic environment, which affects values of all asset classes, could
affect the Companys assumptions about the collectibility of its loan portfolio, and the values
assigned to the collateral for repayment of these loans. If the Companys assumptions are
incorrect, its allowance for loan losses may not be sufficient to cover losses inherent in its loan
portfolio.
CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand, amounts due from banks,
short-term interest bearing deposits, and federal funds sold. Generally, federal funds are
purchased and sold for one-day periods.
INVESTMENT SECURITIES Debt securities that the Company has the positive intent and ability to
hold to maturity are classified as held to maturity securities and reported at amortized cost.
Debt and equity securities that are bought and held principally for the purpose of selling in the
near term are classified as trading securities and reported at fair value, with unrealized gains
and losses included in consolidated earnings. Debt securities not classified as either held to
maturity securities or trading securities, and equity securities not classified as trading
securities, are classified as available for sale securities and reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate component of
consolidated stockholders equity and as an item of other comprehensive income. Gains and losses on
held for investment securities are recognized at the time of sale based upon the specific
identification method. Declines in the fair value of individual held to maturity and available for
sale securities below their cost that are other than temporary result in write-downs of the
individual securities to their fair value. The related write-downs are included in consolidated
earnings as realized losses. Premiums and discounts are recognized in interest income using the
interest method over the period to maturity. Transfers of securities between classifications are
accounted for at fair value. All held to maturity investments were sold in 2009 as part of the
balance sheet restructuring.
LOANS Loans that management has the intent and ability to hold for the foreseeable future are
reported at their outstanding principal balances adjusted for any deferred fees or costs.
Substantially all loans earn interest on the level yield method based on the daily outstanding
balance.
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Loans that are deemed to be impaired (i.e., probable that the Company will be unable to collect all
amounts due according to the terms of the loan agreement) are measured based on the present value
of expected future cash flows discounted at the loans effective interest rate at the loans
observable market value or fair value of the collateral if the loan is collateral dependent. An
impairment allowance is established to record the difference between the stated loan amount and the
present value or market value of the impaired loan. Impaired loans may be valued on a loan-by-loan
basis (e.g., loans with risk characteristics unique to an individual borrower) or on an aggregate
basis (e.g., loans with similar risk characteristics). The Companys policy for recognition of
interest income on impaired loans is the same as its interest income recognition policy for
nonaccrual loans. The Company discontinues the accrual of interest when the collectibility of such
interest becomes doubtful. The total of impaired loans, the related allowance for loan losses and
interest income recognized on impaired loans is disclosed in Note 4,Loans, and Note 5,Allowance
for Loan Losses, below.
ALLOWANCE FOR LOAN LOSSES The provision for loan losses charged to operations is an amount
sufficient to bring the allowance for loan losses to an estimated balance considered adequate to
absorb probable losses in the portfolio at the date of the financial statements. Managements
determination of a reasonable loan loss allowance is based on ongoing quarterly assessments of the
collectibility and historical loss experience of the loan portfolio. The Company also evaluates
other factors and trends in the economy related to specific loan groups in the portfolio, trends in
delinquencies and results of periodic loan reviews. Recovery of the carrying value of loans is
dependent to some extent on future economic, operating and other conditions that may be beyond the
Companys control. Unanticipated future adverse changes in such conditions could result in
material adjustments to the allowance for loan losses. Also see Note 5, Allowance for Loan
Losses.
REAL ESTATE ACQUIRED BY FORECLOSURE Real estate acquired by foreclosure is stated at the lower of
cost or fair value. Any initial losses at the time of foreclosure are charged against the
allowance for loan losses with any subsequent losses or write-downs included in the consolidated
statements of income as a component of other expenses.
PREMISES AND EQUIPMENT AND OTHER LONG-LIVED ASSETS Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization, computed by the
straight-line method, are charged to operations over the properties estimated useful lives, which
range from 25 to 50 years for buildings and 5 to 15 years for furniture and equipment or, in the
case of leasehold improvements, the term of the lease if shorter. Maintenance and repairs are
charged to operations in the year incurred. Gains and losses on dispositions are included in
current operations.
The Company reviews long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amounts of such assets may not be recoverable. If the sum of the
expected future cash flows is less than the stated amount of the asset, an impairment loss is
recognized for the difference between the fair value of the asset and its carrying amount.
GOODWILL AND OTHER INTANGIBLES The Companys 2003 acquisition of First Commerce generated
goodwill of $10.8 million and core deposit intangible assets of $630 thousand. Accounting standard
Intangibles-Goodwill and Other requires a company to perform an impairment test on goodwill
annually. If the carrying amount of the goodwill exceeds the fair value, an impairment charge must
be recorded in an amount equal to the excess. In 2008 the Company determined that the value of its
goodwill was impaired in the amount of $10.8 million and the goodwill was written off.
The carrying value of the core deposit intangible asset totaled $143 thousand, net of accumulated
amortization of $487 thousand, as of December 31, 2008. Management determined the value of its
core deposit intangible asset to be impaired and was written off during 2009.
39
Table of Contents
INCOME TAXES Provisions for income taxes are based on amounts reported in the consolidated
statements of income (after exclusion of non-taxable income such as interest on state and municipal
securities) and include changes in deferred income taxes. The Company uses the asset and liability
method of accounting for income taxes pursuant to the accounting standard Income Taxes. Under this
method, deferred tax assets and liabilities are recognized based upon the expected future tax
consequences of existing temporary differences between the financial reporting and the tax
reporting basis of assets and liabilities using enacted statutory tax rates. (Valuation allowances
are recorded to reduce net deferred tax assets when it is more likely than not that a tax benefit
will not be realized.) The realization of net deferred tax assets is dependent upon the generation
of sufficient taxable income; the availability of prior year carry back of taxes previously paid;
or the previous implementation of tax strategies to increase the likelihood of realization.
The Company has adopted the provisions of Income Taxes relative to uncertain tax positions. It is
the Companys policy to recognize interest and penalties associated with uncertain tax positions as
components of other expenses in the income statement; however, if interest becomes a material
amount, it would be reclassified as interest expense.
PER SHARE AMOUNTS Per share amounts are computed using both the weighted average number of shares
outstanding of common stock for the purposes of computing basic earnings per share and the weighted
average number of shares outstanding of common stock plus dilutive common stock equivalents for the
purpose of computing diluted earnings per share.
STOCK-BASED COMPENSATION The Company complies with the accounting standard Stock Compensation to
account for share-based compensation to employees, recognizing in the income statement the
grant-date fair value of stock options and other equity-based compensation. The Company plan
stipulates that option prices are established at market value on the grant date. Options generally
vest and become exerciseable over a five year period at the rate of 20%, beginning one year from
the date of the grant.
NEW ACCOUNTING STANDARDS In April 2009, the FASB issued an update to the accounting standards for
Financial Instruments to require disclosures about fair value of financial instruments for interim
reporting periods of publicly traded companies as well as in annual financial statements. This
update for Financial Instruments also requires those disclosures in summarized financial
information at interim reporting periods. The Company adopted this update during the second
quarter of 2009.
In April 2009, the FASB issued an update to the accounting standards for Investment in Debt and
Equity Securities to amend the other-than-temporary impairment guidance for debt securities to
make the guidance more operational and to improve the presentation and disclosure of
other-than-temporary impairments on debt and equity securities in the financial statements. This
update for Investment in Debt and Equity Securities does not amend existing recognition and
measurement guidance related to other-than-temporary impairments of equity securities. The
Company adopted this update during the second quarter of 2009.
Also in April 2009, the FASB issued an update to the accounting standards for Fair Value
Measurements and Disclosures to provide additional guidance for estimating fair value when the
volume and level of activity for the asset or liability have significantly decreased. This update
for Fair Value Measurements and Disclosures also includes guidance on identifying circumstances
that indicate a transaction is not orderly. The Company adopted this update during the second
quarter of 2009, and the adoption did not have a material effect on its consolidated financial
statements.
In June 2009, the FASB issued Accounting Standards Update (ASU) 2009-01, an update to the
accounting standards for Generally Accepted Accounting Principles amendments based on The FASB
Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting
Principles. The Codification became the source of authoritative U.S. GAAP recognized by the FASB
to be applied by nongovernmental entities and supersedes all non-SEC accounting and reporting
standards. This update is effective for financial statements issued for interim and annual
financial statements ending after September 15, 2009. The Company adopted this update during the
third quarter of 2009, and the adoption did not have a material effect on its consolidated
financial statements.
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Table of Contents
2. REGULATORY MATTERS AND GOING CONCERN CONSIDERATIONS
Regulatory Actions
The Company reported on Form 8-K filed with the SEC on September 4, 2009, that the Bank entered
into a Stipulation and Consent (Consent) to the issuance of an Order to Cease and Desist
(Order) by the Federal Deposit Insurance Corporation (FDIC) and the North Carolina
Commissioner of Banks (The Commissioner). Based on the Companys Consent, the FDIC and the
Commissioner jointly issued the Order on August 27, 2009.
On November 11, 2009, the Company entered into a Memorandum of Understanding (FRB Memorandum)
with the Federal Reserve Bank of Richmond (FRB).
The Order is a formal corrective action pursuant to which the Bank has agreed to address specific
issues set forth below, through the adoption and implementation of procedures, plan and policies
designed to enhance the safety and soundness of the Bank.
Among other things, the Order requires the Bank to:
| Assure the on-going participation of the Banks Board of Directors in the affairs of the Bank; | ||
| Have and retain qualified management of the Bank, and assess management and staffing needs, qualifications and performance; | ||
| Present a written capital plan to the FDIC and the Commissioner within 30 days of the Order by which the Bank would achieve a Tier 1 Leverage Capital Ratio of not less than 8 percent and Total Risk-Based Capital Ratio of not less than 12 percent during the life of the Order; | ||
| Formulate and implement a plan to reduce the Banks risk exposure in assets classified Substandard or Doubtful in the FDICs most recent report of examination by 20 percent in 180 days; 40 percent in 360 days; 65 percent in 540 days and by 75 percent in 720 days; | ||
| Analyze and reduce credit concentrations in the Banks loan portfolio; | ||
| Within 60 days, ensure full implementation of effective lending and collection policies; | ||
| Cease to extend additional credit to any borrower who has a loan or extension of credit with the Bank that is classified as Loss or Doubtful; | ||
| Within 45 days, adopt and implement a plan regarding the Banks liquidity, contingent funding and asset liability management, and review and revise the plan on a quarterly basis; | ||
| Not pay cash dividends without the prior written consent of the FDIC and the Commissioner; | ||
| Neither renew, roll-over nor increase the amount of brokered deposits above the amount outstanding at the date of the Order without obtaining a waiver from the FDIC. |
The FRB Memorandum requires the Company to obtain FRB approval before paying dividends, taking
dividends from its Bank, incurring debt or purchasing/redeeming Company stock. The FRB Memorandum
requires the submission of a capital plan to maintain adequate capital on a consolidated basis and
at its Bank. The Company must furnish periodic progress reports to the FRB regarding its
compliance with the FRB Memorandum. The FRB Memorandum will remain in effect until modified or
terminated by the FRB.
The Bank has reported to its regulators on matters requiring current response in the Order, and the
progress made to comply with the Order. The Board is monitoring compliance activities and the
development of information for impending submissions required by the Order.
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Going Concern Considerations
The consolidated financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in the normal course of
business for the foreseeable future. However, the events and circumstances described herein create
a substantial doubt about the Companys ability to continue as a going concern.
The Bank has not achieved the required capital levels mandated by the Order. To date the Banks
capital preservation activities have included balance sheet restructuring that has included
curtailed lending activity; surrendering bank owned life insurance policies; reorganizing the
securities portfolio to minimize the risk and related capital requirements; and curtailing the
SERP pension obligation to reduce future expenses. The Company has engaged external advisors and
has pursued various capital enhancing transactions and strategies throughout 2009. To meet the
Risk Based Capital level of 12%, the Bank would have to have a capital injection of approximately
$45.0 million or further deleverage to require a smaller infusion. Upon continued operating
losses, the capital injection requirement would increase further. There can be no assurance that
any capital raising activities or other measures will allow the Bank to meet the capital levels
required in the Order. Non-compliance with the capital requirements of the Order may cause the
Bank to be subject to further enforcement actions by the FDIC or the Commissioner.
The financial statements do not include any adjustments that might be necessary if the Company is
unable to continue as a going concern.
Capital Matters
The Order, as set forth above, requires the Bank to achieve and maintain Tier 1 Leverage Capital
Ratio of not less than 8 percent and a Total Risk-Based Capital of not less than 12 percent for
the life of the Order.
The minimum capital requirements to be characterized as well capitalized and adequately
capitalized, as defined by regulatory guidelines, and the Companys actual capital ratios on a
consolidated and Bank-only basis were as follows as of December 31, 2009:
Actual | Minimum Regulatory Requirement | |||||||||||||||||||
Adequately | Well | Pursuant to | ||||||||||||||||||
Consolidated | Bank | Capitalized | Capitalized | Order | ||||||||||||||||
Leverage capital |
4.85 | % | 4.66 | % | 4.00 | % | 5.00 | % | 8.00 | % | ||||||||||
Risk-based capital: |
||||||||||||||||||||
Tier 1 capital |
6.44 | % | 6.19 | % | 4.00 | % | 6.00 | % | 8.00 | % | ||||||||||
Total capital |
7.73 | % | 7.47 | % | 8.00 | % | 10.00 | % | 12.00 | % |
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Table of Contents
3. INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses and fair values of investment securities at
December 31, 2009 and 2008 are as follows:
(Table in thousands) | ||||||||||||||||
Amortized | Gross Unrealized | Fair | ||||||||||||||
Type and Contractual Maturity | Cost | Gains | Losses | Value | ||||||||||||
AVAILABLE FOR SALE |
||||||||||||||||
At December 31, 2009: |
||||||||||||||||
U. S. Government agencies due: |
||||||||||||||||
Within 1 year |
$ | 1,539 | $ | 9 | $ | | $ | 1,548 | ||||||||
After 1 year but within 5 years |
38,172 | | 1,434 | 36,738 | ||||||||||||
After 5 years but within 10 years |
4,000 | | 235 | 3,765 | ||||||||||||
Total U.S. Government agencies |
43,711 | 9 | 1,669 | 42,051 | ||||||||||||
GNMA Mortgage-backed
securities due: |
||||||||||||||||
After 10 years |
150,738 | 192 | 3,099 | 147,831 | ||||||||||||
Total mortgage-backed securities |
150,738 | 192 | 3,099 | 147,831 | ||||||||||||
Others*: |
||||||||||||||||
Common stocks and
mutual funds |
853 | 186 | | 1,039 | ||||||||||||
Total others |
853 | 186 | | 1,039 | ||||||||||||
Total available for sale |
$ | 195,302 | $ | 387 | $ | 4,768 | $ | 190,921 | ||||||||
* | Others include investments in common stocks, preferred stocks and mutual funds. |
Sales and calls of securities available for sale for the year ended December 31, 2009 resulted in
$957 thousand realized gains and $541 thousand realized losses. Calls of securities held to
maturity resulted in no gains or losses in 2009. The amortized costs of certain equity securities
were written down $582 thousand in 2009, and certain debt securities were written down $414
thousand in 2009, for credit related declines in value deemed to be other than temporary,
resulting in a charge to earnings. At December 31, 2009, the Company only had one security held
on which previous other than temporary impairment was taken in the amount of $288 thousand.
As of December 31, 2009, accumulated other comprehensive losses, net of deferred income taxes,
included unrealized net losses of $4.4 million, net of deferred income tax benefit of $1.8
million, related to securities available for sale.
43
Table of Contents
(Table in thousands) | ||||||||||||||||
Amortized | Gross Unrealized | Fair | ||||||||||||||
Type and Contractual Maturity | Cost | Gains | Losses | Value | ||||||||||||
AVAILABLE FOR SALE |
||||||||||||||||
At December 31, 2008: |
||||||||||||||||
U. S. Government agencies due: |
||||||||||||||||
Within 1 year |
$ | 20,899 | $ | 340 | $ | | $ | 21,239 | ||||||||
After 1 year but within 5 years |
24,611 | 218 | 5 | 24,824 | ||||||||||||
Total U.S. Government agencies |
45,510 | 558 | 5 | 46,063 | ||||||||||||
State and local due: |
||||||||||||||||
After 1 year but within 5 years |
1,847 | 37 | | 1,884 | ||||||||||||
After 5 years but within 10 years |
847 | 4 | 4 | 847 | ||||||||||||
After 10 years |
2,788 | | 103 | 2,685 | ||||||||||||
Total state and local |
5,482 | 41 | 107 | 5,416 | ||||||||||||
Others* due: |
||||||||||||||||
After 10 years |
2,693 | 210 | | 2,903 | ||||||||||||
Equity securities |
4,155 | 39 | | 4,194 | ||||||||||||
Total others |
6,848 | 249 | | 7,097 | ||||||||||||
Total available for sale |
$ | 57,840 | $ | 848 | $ | 112 | $ | 58,576 | ||||||||
HELD TO MATURITY |
||||||||||||||||
At December 31, 2008: |
||||||||||||||||
State and local due: |
||||||||||||||||
Within 1 year |
$ | 6,454 | $ | 50 | $ | | $ | 6,504 | ||||||||
After 1 year but within 5 years |
12,654 | 404 | | 13,058 | ||||||||||||
After 5 years but within 10 years |
2,938 | 133 | | 3,071 | ||||||||||||
After 10 years |
1,581 | 78 | | 1,659 | ||||||||||||
Total state and local |
23,627 | 665 | | 24,292 | ||||||||||||
Total held to maturity |
$ | 23,627 | $ | 665 | $ | | $ | 24,292 | ||||||||
* | Others include investments in common stocks, preferred stocks and mutual funds. |
Sales and calls of securities available for sale for the year ended December 31, 2008 resulted in
$62 thousand realized gains and $68 thousand realized losses. Calls of securities held to maturity
resulted in $5 thousand gains and no losses in 2008. The amortized cost of certain equity
securities were written down by $1.9 million in 2008 for declines in value deemed to be other than
temporary impairment.
As of December 31, 2008, accumulated other comprehensive losses, net of deferred income taxes,
included unrealized net gains of $736 thousand, net of deferred income taxes of $293 thousand,
related to securities available for sale.
The following is the amortized cost and fair value of other investment securities:
(Table in thousands) | ||||||||||||||||
Amortized | Gross Unrealized | Fair | ||||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
December 31, 2009 |
||||||||||||||||
Federal Home Loan Bank stock |
$ | 3,914 | $ | | $ | | $ | 3,914 | ||||||||
December 31, 2008 |
||||||||||||||||
Federal Home Loan Bank stock |
$ | 3,342 | $ | | $ | | $ | 3,342 | ||||||||
44
Table of Contents
The Company has determined that the investment in Federal Home Loan Bank stock of $3.9 million is not other than
temporarily impaired as of December 31, 2009 and ultimate recoverability of the par value of these
investments is probable. The Company is required to pledge securities for public deposits, Federal
Home Loan Bank advances and certain Federal Reserve Bank activities. These requirements were
approximately $91.5 million at December 31, 2009.
Securities with unrealized losses at December 31, 2009 and 2008 not recognized in income were as
follows:
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
(Table in thousands) | Value | Loss | Value | Loss | Value | Loss | ||||||||||||||||||
2009 |
||||||||||||||||||||||||
U.S. Government agencies |
$ | 40,503 | $ | (1,669 | ) | $ | | $ | | $ | 40,503 | $ | (1,669 | ) | ||||||||||
GNMA Mortgage-backed
securities |
124,311 | (3,099 | ) | | | 124,311 | (3,099 | ) | ||||||||||||||||
Total temporarily impaired |
$ | 164,814 | $ | (4,768 | ) | $ | | $ | | $ | 164,814 | $ | (4,768 | ) | ||||||||||
2008 |
||||||||||||||||||||||||
U.S. Government agencies |
$ | 1,995 | $ | (5 | ) | $ | | $ | | $ | 1,995 | $ | (5 | ) | ||||||||||
State and local |
985 | (60 | ) | 2,128 | (47 | ) | 3,113 | (107 | ) | |||||||||||||||
Total temporarily impaired |
$ | 2,980 | $ | (65 | ) | $ | 2,128 | $ | (47 | ) | $ | 5,108 | $ | (112 | ) | |||||||||
Declines in the fair value of available-for-sale and held-to-maturity securities that are
deemed to be other-than-temporarily impaired are reflected in earnings as realized losses. In
estimating other-than-temporary impairment losses, management considers, among other things, (i)
the length of time and the extent to which the fair value has been less than cost, (ii) the
financial condition and near-term prospects of the issuer, and (iii) the intent and ability of the
Company to retain its investment in the issuer for a period of time sufficient to allow for any
anticipated recovery of unrealized loss.
Unrealized losses on securities have not been recognized in income because management has the
intent and ability to hold for the foreseeable future, and the decline in fair value is largely
due to decreases in market interest rates. The fair value is expected to recover as the
securities approach their maturity date and/or market interest rates decline. Furthermore, it is
not likely that the Company will have to sell any impaired securities before a recovery of the
amortized cost.
4. LOANS
Loans are made primarily to customers in the Companys market areas. Loans at December 31, 2009 and
2008, classified by type, are as follows:
(Table in thousands) | 2009 | 2008 | ||||||
Real estate: |
||||||||
Construction |
$ | 59,701 | $ | 146,167 | ||||
Mortgage, primarily commercial |
565,997 | 593,233 | ||||||
Commercial, financial and agricultural |
143,618 | 199,370 | ||||||
Consumer |
6,206 | 10,713 | ||||||
All other loans |
147 | 258 | ||||||
775,669 | 949,741 | |||||||
Deferred origination fees, net |
(650 | ) | (1,592 | ) | ||||
Total |
$ | 775,019 | $ | 948,149 | ||||
45
Table of Contents
Nonperforming assets at December 31, 2009 and 2008 are as follows:
(Table in thousands) | 2009 | 2008 | ||||||
Nonaccrual loans |
$ | 40,736 | $ | 50,591 | ||||
Restructured loans nonaccrual |
12,404 | | ||||||
Total nonperforming loans |
53,140 | 50,591 | ||||||
Foreclosed properties |
13,235 | 6,805 | ||||||
Total nonperforming assets |
$ | 66,375 | $ | 57,396 | ||||
Restructured loans accruing |
$ | 13,284 | $ | | ||||
Loans 90 days or more and still accruing interest |
$ | 1,195 | $ | 114 | ||||
Impaired loans with related loan loss allowance |
$ | 27,149 | $ | 20,816 | ||||
Impaired loans without related loan loss allowance |
11,763 | 21,799 | ||||||
Total investment in impaired loans |
$ | 38,912 | $ | 42,615 | ||||
Loan loss allowance related to impaired loans |
$ | 7,715 | $ | 5,400 | ||||
Average recorded balance of impaired loans |
$ | 34,025 | $ | 29,000 | ||||
For the years ended December 31, 2009 and 2008, the Bank recognized interest income on
impaired loans of approximately $1.0 million and $0.8 million, respectively.
If interest from nonaccrual loans had been recognized in accordance with the original terms
of the loans, interest income would have been approximately $2.8 million in 2009 and $2.0
million in 2008, respectively. Interest income recognized on nonaccrual loans for 2009 and
2008 was approximately $1.5 million and $1.0 million, respectively.
Changes in foreclosed properties for years ended December 31, 2009 and 2008 are as follows:
(Table in thousands) | 2009 | 2008 | ||||||
Balance at beginning of year |
$ | 6,805 | $ | 2,491 | ||||
Additions |
21,977 | 6,022 | ||||||
Proceeds from sale |
(7,731 | ) | (1,027 | ) | ||||
Write-downs and net loss on sale |
(7,816 | ) | (681 | ) | ||||
Balance at end of year |
$ | 13,235 | $ | 6,805 | ||||
Directors and officers of the Company and companies with which they are affiliated are
customers of and borrowers from the Bank in the ordinary course of business. At December 31,
2009 and 2008, directors and principal officers direct and indirect indebtedness to the
Bank was an aggregate amount of $4.7 million and $5.2 million, respectively. During 2009,
additions to such loans were $0.7 million and repayments totaled $1.2 million. In the opinion
of management, these loans do not involve more than normal risk of collectibility, nor do
they present other unfavorable features.
46
Table of Contents
5. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the years ended December 31, 2009 and 2008 are as
follows:
(Table in thousands) | 2009 | 2008 | ||||||
Balance at beginning of year |
$ | 24,806 | $ | 17,673 | ||||
Loans charged off: |
||||||||
Real estate |
23,435 | 15,550 | ||||||
Commercial, financial and agricultural |
5,003 | 10,557 | ||||||
Consumer and other |
291 | 607 | ||||||
Total charge-offs |
28,729 | 26,714 | ||||||
Recoveries of loans previously charged off: |
||||||||
Real estate |
738 | 1,340 | ||||||
Commercial, financial and agricultural |
2,176 | 2,041 | ||||||
Consumer and other |
113 | 238 | ||||||
Total recoveries |
3,027 | 3,619 | ||||||
Net charge-offs |
25,702 | 23,095 | ||||||
Provision for loan losses |
28,733 | 30,228 | ||||||
Balance at end of year |
$ | 27,837 | $ | 24,806 | ||||
6. PREMISES AND EQUIPMENT
Summaries of premises and equipment at December 31, 2009 and 2008 are as follows:
Premises and | ||||||||||||
Accumulated | Equipment, | |||||||||||
(Table in thousands) | Cost | Depreciation | Net | |||||||||
At December 31, 2009: |
||||||||||||
Land |
$ | 3,706 | $ | | $ | 3,706 | ||||||
Buildings |
12,514 | 4,833 | 7,681 | |||||||||
Leasehold improvements |
690 | 366 | 324 | |||||||||
Furniture and equipment |
15,924 | 13,471 | 2,453 | |||||||||
Capitalized leases |
1,959 | 567 | 1,392 | |||||||||
Total |
$ | 34,793 | $ | 19,237 | $ | 15,556 | ||||||
Included in buildings is an asset with a carrying value of $2.8 million that is currently
held for sale for which the Company has taken an impairment charge of $1.0 million.
Premises and | ||||||||||||
Accumulated | Equipment, | |||||||||||
(Table in thousands) | Cost | Depreciation | Net | |||||||||
At December 31, 2008: |
||||||||||||
Land |
$ | 3,937 | $ | | $ | 3,937 | ||||||
Buildings |
13,935 | 4,618 | 9,317 | |||||||||
Leasehold improvements |
768 | 389 | 379 | |||||||||
Furniture, equipment and vehicles |
16,842 | 13,078 | 3,764 | |||||||||
Capitalized leases |
1,959 | 349 | 1,610 | |||||||||
Construction in progress |
72 | | 72 | |||||||||
Total |
$ | 37,513 | $ | 18,434 | $ | 19,079 | ||||||
47
Table of Contents
7. INCOME TAXES
The passage of the Worker, Homeownership and Business Assistance Act of 2009 (the Act) in
November 2009 provided that small companies who had not received TARP could carryback tax
losses from 2008 or 2009 to previously closed years extending to 2003. As a result, the
Company is able to carryback 2009 partial tax losses and recover approximately $5.8 million
which is reflected as a current benefit in the Consolidated Financial Statements. In 2008 the
Company carried back the tax loss to 2006 and 2005 and received $5.3 million. There are no
additional loss carrybacks available.
Additionally, in 2008 the Company determined that sufficient evidence to support the future
realization of deferred tax assets was not determinable, and a $13.0 million valuation
reserve was established. As a result, any change in deferred tax assets will be offset by
changes in the valuation reserve ($3.3 million in 2009) and the Company will not record tax
expense or tax benefit (except for the special legislation outlined above) until positive
operating results utilize all existing tax loss carryforwards and supports the partial or
full reinstatement of the deferred tax assets.
The Company has approximately $1.7 million federal tax loss carryforward expiring in 2030 and $21.9 million
state tax loss carryforwards expiring in years through 2024.
The components of income tax expense (benefit) for the years ended December 31, 2009 and 2008
follow.
(Table in thousands) | 2009 | 2008 | ||||||
Income tax expense (benefit) |
||||||||
Current |
$ | (5,800 | ) | $ | (4,910 | ) | ||
Deferred |
| 9,507 | ||||||
Total |
$ | (5,800 | ) | $ | 4,597 | |||
Changes in deferred taxes of approximately $2.1 million and $(357) thousand related to
unrealized gains and losses on securities available for sale during 2009 and 2008,
respectively, were allocated to other comprehensive income in the respective years. Changes
in deferred taxes of approximately $(1.0) million and $1.0 million during 2009 and 2008,
respectively, related to deferred retirement prior service costs were allocated to other
comprehensive income.
Reconciliations of reported income tax expense for the years ended December 31, 2009 and
2008 to the amount of tax expense (benefit) computed by multiplying income before income
taxes by the statutory federal income tax rate follows.
(Table dollars in thousands) | 2009 | 2008 | ||||||
Statutory federal income tax rate |
35 | % | 35 | % | ||||
Tax expense (benefit) at statutory rate |
$ | (10,997 | ) | $ | (11,079 | ) | ||
Increase (decrease) in income taxes
resulting from: |
||||||||
Redemption of investment in BOLI |
1,711 | | ||||||
Deferred tax asset valuation allowance |
3,284 | 13,000 | ||||||
Goodwill impairment |
| 3,767 | ||||||
Other, net |
202 | (1,091 | ) | |||||
Income tax expense (benefit) |
$ | (5,800 | ) | $ | 4,597 | |||
The tax effect of the cumulative temporary differences and carryforwards that gave rise
to the deferred tax assets and liabilities at December 31, 2009 and 2008 are as follows:
48
Table of Contents
December 31, 2009 | ||||||||||||
(Table in thousands) | Assets | Liabilities | Total | |||||||||
Excess book over tax bad debt expense |
$ | 10,520 | $ | | $ | 10,520 | ||||||
Deferred compensation |
792 | | 792 | |||||||||
Excess tax over book loan income |
969 | | 969 | |||||||||
Operating loss and capital carryforwards |
2,601 | | 2,601 | |||||||||
Other real estate writedowns |
2,237 | | 2,237 | |||||||||
Other, net |
260 | (1,095 | ) | (835 | ) | |||||||
Deferred tax asset valuation allowance |
(16,284 | ) | | (16,284 | ) | |||||||
Unrealized losses on securities
available for sale |
1,836 | | 1,836 | |||||||||
Total |
$ | 2,931 | $ | (1,095 | ) | $ | 1,836 | |||||
December 31, 2008 | ||||||||||||
(Table in thousands) | Assets | Liabilities | Total | |||||||||
Excess book over tax bad debt expense |
$ | 9,877 | $ | | $ | 9,877 | ||||||
Deferred compensation |
3,368 | | 3,368 | |||||||||
Operating loss carryforward |
1,511 | | 1,511 | |||||||||
Excess tax over book loan fee income |
1,641 | | 1,641 | |||||||||
Deferred tax asset valuation allowance |
(13,000 | ) | | (13,000 | ) | |||||||
OID loan fee deferrals |
| | | |||||||||
Other, net |
72 | (1,898 | ) | (1,826 | ) | |||||||
Total |
$ | 3,469 | $ | (1,898 | ) | $ | 1,571 | |||||
8. STOCK OPTIONS
At December 31, 2009 and 2008, 50,327 and 90,612 shares of common stock, respectively, were
reserved for stock options outstanding under the Companys stock option plans. Shares
available for grants under the Companys stock option plans were 743,300 shares at December
31, 2009. Option prices are established at market value on the dates granted by the Board
of Directors.
A summary of the status of the Companys incentive stock option plans at December 31, 2009
and 2008 and changes during the years then ended are presented below:
2009 | 2008 | |||||||||||||||
Weighted | Weighted | |||||||||||||||
Average | Average | |||||||||||||||
Exercise | Exercise | |||||||||||||||
Shares | Price | Shares | Price | |||||||||||||
Outstanding at beginning of year |
90,612 | $ | 11.00 | 153,837 | $ | 13.08 | ||||||||||
Granted |
| | 5,000 | 7.30 | ||||||||||||
Exercised |
| | 16,036 | 7.99 | ||||||||||||
Expired, forfeited or canceled |
40,285 | 11.68 | 52,189 | 17.69 | ||||||||||||
Outstanding at end of year |
50,327 | $ | 10.46 | 90,612 | $ | 11.00 | ||||||||||
Options exercisable at end of year |
44,902 | $ | 10.60 | 76,662 | $ | 10.83 | ||||||||||
Options granted become exercisable in accordance with the vesting schedule specified by
the Board of Directors in the grant. In general, options become exercisable over a
five-year period at the rate of 20% per year beginning one-year from the date of grant.
49
Table of Contents
9. EMPLOYEE BENEFIT PLANS
Bank
Profit-Sharing Plan
The Bank sponsors a tax-qualified profit-sharing retirement plan covering substantially
all employees. Contributions to the plan are made at the discretion of the Board of
Directors but may not exceed the maximum amount allowable for federal income tax purposes.
There were no Company contributions made for the years ended December 31, 2009 and 2008.
Bank
Savings SERP
The Bank sponsors a non-tax qualified profit-sharing supplemental executive retirement plan
for certain executive officers, which allows the Bank to supplement the level of the
executive officers retirement incomes over that which is obtainable through the
tax-qualified profit-sharing retirement plan sponsored by the Bank. There was no Company
expense for the years ended December 31, 2009 and 2008.
Bank
Officers SERP
Effective
January 1, 2008, the Bank implemented the Amended and Restated Bank of Granite Salary Continuation Plan (the Plan). The Plan is non-tax qualified and is unfunded. The Plan
benefits are generally based on a final pay concept and a first to occur event related to
change of control, retirement or death. As a result of the Plan implementation, the Company
applied the accounting guidelines of Retirement Benefits. Accordingly, the Company recorded
the Plan projected benefit obligation of $7.9 million at December 31, 2008 and recorded prior
service cost and unrecognized actuarial loss amounts of $2.5 million in other comprehensive
income.
The pension expense for 2008 was $1.3 million, and the expense recorded through September
30, 2009 (based on actuarial estimates at December 31, 2008) was $963 thousand. In October
2009, the Company determined to curtail the Plan and freeze all service benefits as of
October 31, 2009. The resulting actuarial computations of the projected benefit obligation
resulted in and adjustment of the 2009 expense by $962 thousand. Additionally, in
accordance with Retirement Benefits, the prior service cost and net actuarial loss recorded in 2008 was reversed.
The Plan activity for 2009 is summarized as follows:
Beginning projected benefit obligation |
$ | 7,911 | ||
Participant payments |
(3,691 | ) | ||
2009 expense |
1 | |||
Prior
service cost and net actuarial loss reversal |
(2,526 | ) | ||
Ending projected benefit obligation |
$ | 1,695 | ||
As stated, all service benefits are frozen. The projected benefit obligation will accrete
to the retirement date of each of the 20 active participants at the discount rate set
forth in the Plan and determined each year (2009 - 5.85%).
Anticipated payments for each year ending December 31, 2010 through 2014 are: 2010 -
approximately $155 thousand; 2011 - 2014 - approximately $58 thousand per year. Based on the
discount rate, the 2010 expense would approximate $102 thousand.
10. LEASES
LESSEE CAPITALIZED The Companys subsidiaries lease certain premises under
capitalized lease agreements. Leases that meet the criteria for capitalization are
recorded as assets and the related obligations are included in other liabilities on the
accompanying balance sheets. Amortization of property under capital lease is included in
depreciation expense. Included in premises and equipment as of December 31, 2009 is
$2.0 million as the capitalized cost of these leases and accumulated amortization of
approximately $567 thousand.
50
Table of Contents
As of December 31, 2009, future minimum lease payments under noncancelable
capitalized leases are as follows:
(Table in thousands)
Year | Payments | |||
2010 |
$ | 444 | ||
2011 |
444 | |||
2012 |
442 | |||
2013 |
357 | |||
2014 |
314 | |||
2015 and thereafter |
1,455 | |||
Total minimum lease payments |
3,456 | |||
Less amount representing interest |
(1,809 | ) | ||
Present value of net minimum lease payments |
$ | 1,647 | ||
LESSEE OPERATING The Companys subsidiaries lease certain premises and equipment under
operating lease agreements. As of December 31, 2009, future minimum lease payments under
noncancelable operating leases are as follows:
(Table in thousands)
Year | Payments | |||
2010 |
$ | 95 | ||
2011 |
89 | |||
2012 |
60 | |||
Total |
$ | 244 | ||
Rental expense charged to operations under all operating lease agreements was approximately
$249 thousand and $811 thousand for the years ended December 31, 2009 and 2008,
respectively.
In 2008, the Bank obtained an independent appraisal of its facility in Winston-Salem,
North Carolina and purchased it from Salem Investors, LLC (which was a related party
entity) for its appraised value of $3.8 million. The building is currently for sale.
11. OVERNIGHT AND SHORT-TERM BORROWED FUNDS
Overnight and short-term borrowed funds are summarized as follows:
December 31, | ||||||||
(Table in thousands) | 2009 | 2008 | ||||||
Overnight borrowings |
||||||||
Bank of Granite Corporation: |
||||||||
Commercial deposits swept into commercial paper |
$ | | $ | 12,669 | ||||
Total overnight borrowings |
| 12,669 | ||||||
Short-term borrowings |
||||||||
Bank of Granite Corporation: |
||||||||
Unsecured line of credit |
| 2,500 | ||||||
Bank of Granite: |
||||||||
Short-term borrowings from the Federal Home Loan Bank |
20,000 | 13,000 | ||||||
Granite Mortgage: |
||||||||
Warehouse line of credit |
| 20,778 | ||||||
Total short-term borrowings |
20,000 | 36,278 | ||||||
Total overnight and short-term borrowings |
$ | 20,000 | $ | 48,947 | ||||
51
Table of Contents
A summary of selected data related to overnight and short-term borrowed funds follows:
Overnight borrowings
December 31, | ||||||||
(Table dollars in thousands) | 2009 | 2008 | ||||||
Balance outstanding at end of year |
$ | | $ | 12,669 | ||||
Maximum outstanding at any month-end during the year |
16,278 | 59,090 | ||||||
Average daily balance outstanding during the year |
11,240 | 28,306 | ||||||
Average interest rate during the year |
1.09 | % | 2.49 | % | ||||
Average interest rate at end of year |
N/A | 1.49 | % |
Other short-term borrowings
December 31, | ||||||||
(Table dollars in thousands) | 2009 | 2008 | ||||||
Balance outstanding at end of year |
$ | 20,000 | $ | 36,278 | ||||
Maximum outstanding at any month-end during the year |
46,059 | 49,870 | ||||||
Average daily balance outstanding during the year |
21,628 | 38,317 | ||||||
Average interest rate during the year |
3.17 | % | 4.52 | % | ||||
Average interest rate at end of year |
2.62 | % | 3.93 | % |
Prior to March 31, 2009, Granite Mortgage temporarily funded its mortgages and construction
loans, from the time of origination until the time of sale, through the use of a line of
credit from one of the Banks correspondent financial institutions. As of December 31, 2008,
this line of credit was $30.0 million. The line of credit was terminated and paid in full in
April 2009. Granite Mortgage had intercompany borrowings with the Bank that were paid in
full during the fourth quarter of 2009.
12. LONG-TERM BORROWINGS
Long-term borrowings are summarized as follows:
December 31, | ||||||||
(Table in thousands) | 2009 | 2008 | ||||||
Bank of Granite: |
||||||||
Federal Home Loan Bank convertible advance at
5.22% due March 9, 2011 callable on or after
March 9, 2006 |
$ | 3,000 | $ | 3,075 | ||||
Federal Home Loan Bank fixed rate credit
at 4.67% due September 20, 2010 |
| 5,000 | ||||||
Federal Home Loan Bank fixed rate credit
at 3.31% due February 11, 2010 |
| 3,000 | ||||||
Federal Home Loan Bank fixed rate credit
at 3.44% due June 1, 2010 |
| 1,000 | ||||||
Federal Home Loan Bank fixed rate credit
at 1.88% due January 31, 2011 |
5,000 | | ||||||
Federal Home Loan Bank fixed rate credit
at 3.79% due May 31, 2011 |
1,000 | 1,000 | ||||||
Federal Home Loan Bank fixed rate credit
at 2.18% due July 29, 2011 |
5,000 | | ||||||
Federal Home Loan Bank fixed rate credit
at 2.41% due January 30, 2012 |
5,000 | | ||||||
Federal Home Loan Bank fixed rate credit
at 4.04% due May 30, 2012 |
1,000 | 1,000 | ||||||
Total long-term borrowings |
$ | 20,000 | $ | 14,075 | ||||
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13. MATURITIES OF TIME DEPOSITS
Principal maturities of the Banks time deposits, including brokered time deposits of
$8.2 million, as of December 31, 2009 are as follows:
(Table in thousands)
Year | Maturities | |||
2010 |
$ | 432,039 | ||
2011 |
74,708 | |||
2012 |
16,512 | |||
2013 |
13,301 | |||
Total |
$ | 536,560 | ||
14. BASIC EARNINGS PER SHARE
Basic earnings per share (EPS) is computed by dividing net income (loss) by the weighted
average number of common shares outstanding for the period. Basic EPS excludes the dilutive
effect that could occur if any securities or other contracts to issue common stock were
exercised or converted into or resulted in the issuance of common stock.
(Table in thousands except per share data) | 2009 | 2008 | ||||||
BASIC LOSS PER SHARE |
||||||||
Net loss |
$ | (25,620 | ) | $ | (36,251 | ) | ||
Divide by: Weighted average shares outstanding |
15,454 | 15,448 | ||||||
Basic loss per share |
$ | (1.66 | ) | $ | (2.35 | ) | ||
There is no dilution of earnings per share for any period as all outstanding stock option
exercise prices are substantially in excess of market and are anti-dilutive.
15. REGULATION AND REGULATORY RESTRICTIONS
The Company is regulated by the Board of Governors of the Federal Reserve System (FRB) and
is subject to securities registration and public reporting regulations of the Securities and
Exchange Commission. The Bank is regulated by the Federal Deposit Insurance Corporation
(FDIC), the North Carolina State Banking Commission and the FRB.
The Companys actual capital ratios are also presented in the table:
Adequately | Well | |||||||||||
Consolidated | Actual | Capitalized | Capitalized | |||||||||
As of December 31, 2009 |
||||||||||||
Tier I capital to average assets |
4.84 | % | 4.00 | % | 5.00 | % | ||||||
Tier I capital to risk weighted assets |
6.44 | % | 4.00 | % | 6.00 | % | ||||||
Total capital to risk weighted assets |
7.73 | % | 8.00 | % | 10.00 | % | ||||||
As of December 31, 2008 |
||||||||||||
Tier I capital to average assets |
6.49 | % | 4.00 | % | 5.00 | % | ||||||
Tier I capital to risk weighted assets |
7.46 | % | 4.00 | % | 6.00 | % | ||||||
Total capital to risk weighted assets |
8.73 | % | 8.00 | % | 10.00 | % |
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Adequately | Well | |||||||||||
Bank Only | Actual | Capitalized | Capitalized | |||||||||
As of December 31, 2009 |
||||||||||||
Tier I capital to average assets |
4.66 | % | 4.00 | % | 5.00 | % | ||||||
Tier I capital to risk weighted assets |
6.19 | % | 4.00 | % | 6.00 | % | ||||||
Total capital to risk weighted assets |
7.48 | % | 8.00 | % | 10.00 | % | ||||||
As of December 31, 2008 |
||||||||||||
Tier I capital to average assets |
6.00 | % | 4.00 | % | 5.00 | % | ||||||
Tier I capital to risk weighted assets |
6.88 | % | 4.00 | % | 6.00 | % | ||||||
Total capital to risk weighted assets |
8.14 | % | 8.00 | % | 10.00 | % |
See Note 2, Regulatory Matters and Going Concern Considerations for further
discussion on regulatory capital matters.
16. FAIR VALUE MEASUREMENTS AND DISCLOSURES
Investment
Securities Available for Sale
A significant portion of the Companys available for sale investment portfolio is government
guaranteed, and the fair value measurements were estimated using independent pricing sources
that were determined to be Level 2 measurements, Significant Other Observable Inputs, for the
U.S. Government agencies, mortgage-backed and a portion of the equity securities. The
remaining equity securities were Level 1 measurements from quoted prices in active markets.
Unrealized gains and losses on securities available for sale are reflected in accumulated
other comprehensive income and recognized gains and losses are reported as securities gains
and losses in noninterest income.
The following table reflects investment securities available for sale measured at fair
value on a recurring basis at December 31, 2009 and 2008:
Fair Value Measurements at | ||||||||||||||||
Reporting Date Using | ||||||||||||||||
Quoted Prices | Significant | |||||||||||||||
in Active | Other | Significant | ||||||||||||||
Markets for | Observable | Unobservable | ||||||||||||||
Identical Assets | Inputs | Inputs | ||||||||||||||
(Table in thousands) | Fair Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
December 31, 2009 |
||||||||||||||||
U.S. Government agencies |
$ | 42,051 | $ | | $ | 42,051 | $ | | ||||||||
GNMA Mortgage-backed securities |
147,831 | | 147,831 | | ||||||||||||
Equities |
1,039 | 1,039 | | | ||||||||||||
Total investment securities
available for sale |
$ | 190,921 | $ | 1,039 | $ | 189,882 | $ | | ||||||||
December 31, 2008 |
||||||||||||||||
U.S. Government agencies |
$ | 46,063 | $ | | $ | 46,063 | $ | | ||||||||
State and local |
5,416 | | 5,416 | | ||||||||||||
Equities |
7,097 | $ | 1,643 | 5,454 | | |||||||||||
Total investment securities
available for sale |
$ | 58,576 | $ | 1,643 | $ | 56,933 | $ | | ||||||||
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Impaired Loans
The fair value of impaired loans is estimated using one of several methods, including collateral
value, market value of similar debt, enterprise value, liquidation value and discounted cash
flows. Those impaired loans not requiring an allowance represent loans for which the fair value
of the expected repayments or collateral exceed the recorded investments in such loans. At
December 31, 2009, substantially all of the total impaired loans were evaluated based on the fair
value of the collateral. In accordance with accounting standards for fair value measurements and
disclosures, impaired loans where an allowance is established based on the fair value of
collateral require classification in the fair value hierarchy. When the fair value of the
collateral is based on an observable market price, the Company records the impaired loan as
nonrecurring Level 2. When appraised values are used, or management determines the fair value of
the collateral is impaired below the appraised value, the Company records the impaired loan as
nonrecurring Level 3. At December 31, 2009, all impaired loan values were determined to be Level
3 measurements.
Other Real Estate Owned
Other real estate owned by the Bank and Granite Mortgage resulting from foreclosures is estimated
at the fair value of the collateral based on a current appraised value or other management
estimate and is recorded as nonrecurring Level 3. At December 31, 2009, the fair value
measurements for other real estate were determined to be Level 3 measurements.
The following table reflects certain loans and other real estate measured at fair value on a
nonrecurring basis at December 31, 2009 and 2008:
Fair Value Measurements at | ||||||||||||||||
Reporting Date Using | ||||||||||||||||
Quoted Prices | Significant | |||||||||||||||
in Active | Other | Significant | ||||||||||||||
Markets for | Observable | Unobservable | ||||||||||||||
Identical Assets | Inputs | Inputs | ||||||||||||||
(Table in thousands) | Fair Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
December 31, 2009 |
||||||||||||||||
Impaired loans (1) |
$ | 26,788 | $ | | $ | | $ | 26,788 | ||||||||
Other real estate owned |
13,235 | | | 13,235 | ||||||||||||
Total assets |
$ | 40,023 | $ | | $ | | $ | 40,023 | ||||||||
December 31, 2008 |
||||||||||||||||
Mortgage loans held for sale (2) |
$ | 16,770 | $ | | $ | 16,770 | $ | | ||||||||
Impaired loans (1) |
35,298 | | | 35,298 | ||||||||||||
Other real estate owned |
6,805 | | | 6,805 | ||||||||||||
Total assets |
$ | 58,873 | $ | | $ | 16,770 | $ | 42,103 | ||||||||
(1) | Net of reserves and loans carried at cost. | |
(2) | Mortgage loans held for sale were carried at the lower of cost or market or fair value. The fair value was determined to be Level 2 measurements, Significant Other Observable Inputs as the portfolio turned rapidly and current prices could be observed. |
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17. PARENT COMPANY CONDENSED FINANCIAL INFORMATION
Condensed financial data for Bank of Granite Corporation (parent company only) follows:
December 31, | ||||||||
Condensed Balance Sheets | 2009 | 2008 | ||||||
(In thousands) |
||||||||
Assets: |
||||||||
Cash and cash equivalents |
$ | 343 | $ | 13,380 | ||||
Investment in subsidiary bank at equity |
45,151 | 66,465 | ||||||
Investment in subsidiary mortgage bank at equity |
1,592 | 6,665 | ||||||
Other |
| 2,832 | ||||||
Total |
$ | 47,086 | $ | 89,342 | ||||
Liabilities and Stockholders Equity: |
||||||||
Overnight and short-term borrowings |
$ | | $ | 15,169 | ||||
Other |
| 3 | ||||||
Stockholders equity |
47,086 | 74,170 | ||||||
Total |
$ | 47,086 | $ | 89,342 | ||||
For the Years Ended December 31, | ||||||||
Condensed Results of Operations | 2009 | 2008 | ||||||
(In thousands) |
||||||||
Equity in loss of subsidiary bank: |
||||||||
Dividends |
$ | | $ | (2,257 | ) | |||
Loss retained |
(22,948 | ) | (34,425 | ) | ||||
Equity in earnings (loss)of subsidiary mortgage bank: |
||||||||
Dividends |
2,953 | | ||||||
Earnings (loss) retained |
(5,073 | ) | 8 | |||||
Income (expenses), net |
(552 | ) | 423 | |||||
Net loss |
$ | (25,620 | ) | $ | (36,251 | ) | ||
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For the Years Ended December 31, | ||||||||
Condensed Cash Flow | 2009 | 2008 | ||||||
(In thousands) |
||||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (25,620 | ) | $ | (36,251 | ) | ||
Adjustments to reconcile net loss to net cash
provided (used) by operating activities: |
||||||||
Equity in losses of subsidiaries |
25,068 | 36,674 | ||||||
Stock-based compensation expense |
5 | 15 | ||||||
Premium amortization and discount
accretion, net |
(1 | ) | (3 | ) | ||||
Losses (gains) on sales or calls of
securities available for sale |
(174 | ) | 67 | |||||
Impairment losses on securities |
478 | 1,104 | ||||||
Decrease in accrued interest receivable |
32 | | ||||||
Decrease in accrued interest payable |
| (1 | ) | |||||
Decrease in other assets |
| 1 | ||||||
Decrease in other liabilities |
(4 | ) | (2 | ) | ||||
Net cash provided (used) by operating activities |
(216 | ) | 1,604 | |||||
Cash flows from investing activities: |
||||||||
Proceeds from maturities of securities
available for sale |
| 2 | ||||||
Proceeds from sales of securities
available for sale |
2,348 | 275 | ||||||
Net cash provided by investing activities |
2,348 | 277 | ||||||
Cash flows from financing activities: |
||||||||
Net decrease in overnight and
short-term borrowings |
(15,169 | ) | (7,460 | ) | ||||
Net decrease in long-term borrowings |
| (2,500 | ) | |||||
Net proceeds from issuance of common stock |
| 138 | ||||||
Net dividends paid |
| (6,024 | ) | |||||
Net cash used by financing activities |
(15,169 | ) | (15,846 | ) | ||||
Net decrease in cash |
(13,037 | ) | (13,965 | ) | ||||
Cash at beginning of year |
13,380 | 27,345 | ||||||
Cash at end of year |
$ | 343 | $ | 13,380 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid during the year for: |
||||||||
Interest |
$ | 139 | $ | 643 | ||||
Noncash investing and financing activities: |
||||||||
In-kind dividend from subsidiary mortgage bank |
2,953 | |
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18. COMMITMENTS AND CONTINGENCIES
The Companys subsidiaries are parties to financial instruments in the ordinary course of
business. The Bank routinely enters into commitments to extend credit and issues standby letters
of credit in order to meet the financing needs of its customers.
December 31, | ||||||||
(Table in thousands) | 2009 | 2008 | ||||||
Financial instruments whose contract amounts represent credit risk |
||||||||
Commitments to extend credit |
$ | 106,122 | $ | 162,958 | ||||
Standby letters of credit |
2,967 | 4,998 | ||||||
Financial instruments whose notional or contract amounts are
intended to hedge against interest rate risk |
||||||||
Forward commitments and options to sell mortgage-backed securities |
| 14,702 |
Commitments to extend credit are legally binding agreements to lend to a customer as long as there
is no violation of any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts outstanding do not necessarily
represent future cash requirements. Standby letters of credit represent conditional commitments
issued by the Bank to assure the performance of a customer to a third party.
The Banks exposure to credit loss for commitments to extend credit and standby letters of credit
is the contractual amount of those financial instruments. The Bank uses the same credit policies
for making commitments and issuing standby letters of credit as it does for on-balance sheet
financial instruments. Each customers creditworthiness is evaluated on an individual case-by-case
basis. The amount and type of collateral, if deemed necessary by management, is based upon this
evaluation of creditworthiness. Collateral held varies, but may include marketable securities,
deposits, property, plant and equipment, investment assets, inventories and accounts receivable.
Management does not anticipate any significant losses as a result of these financial instruments.
In 2008 forward commitments and options to sell mortgage-backed securities were contracts for
delayed delivery of securities in which Granite Mortgage agreed to make delivery at a specified
future date of a specified instrument, at a specified price or yield. Risks arose from the
possible inability of counterparties to meet the terms of their contracts and from movements in
the underlying securities values and interest rates.
Legal Proceedings
The nature of the businesses of the Companys subsidiaries ordinarily results in a certain amount
of litigation. The Companys subsidiaries are involved in various legal proceedings, all of which
are considered incidental to the normal conduct of business. Management believes that the
liabilities, if any, arising from these proceedings will not have a material adverse effect on the
consolidated financial position or consolidated results of operations of the Company.
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19. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value information about financial instruments, whether or not recognized in the balance
sheet, for which it is practical to estimate the value, is based upon the characteristics of the
instruments and relevant market information. Financial instruments include cash, evidence of
ownership in an entity or contracts that convey or impose on an entity the contractual right or
obligation to either receive or deliver cash for another financial instrument. These fair value
estimates are made at December 31, based on relevant market information and information about the
financial instruments. Fair value estimates are intended to represent the price for which an
asset could be sold or liability could be settled. However, given there is no active market or
observable market transactions for many of the Companys financial instruments, it has made
estimates of many of these fair values which are subjective in nature, involve uncertainties and
matters of significant judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimated values. The fair value estimates are
determined in accordance with the accounting standards for Fair Value
Measurements and Disclosures.
December 31, 2009 | December 31, 2008 | |||||||||||||||
Estimated | Estimated | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
(Table in thousands) | Amount | Value | Amount | Value | ||||||||||||
Assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 73,374 | $ | 73,374 | $ | 48,983 | $ | 48,983 | ||||||||
Investment securities |
190,921 | 190,921 | 82,203 | 82,868 | ||||||||||||
Bank owned life insurance |
4,106 | 4,106 | 31,278 | 31,278 | ||||||||||||
Mortgage loans held for sale |
| | 16,770 | 16,949 | ||||||||||||
Loans (1) |
747,182 | 752,000 | 923,343 | 929,447 | ||||||||||||
Market risk/liquidity adjustment |
| (40,000 | ) | | (45,000 | ) | ||||||||||
Net loans |
747,182 | 712,000 | 923,343 | 884,447 | ||||||||||||
Liabilities: |
||||||||||||||||
Demand deposits |
430,045 | 430,045 | 494,394 | 494,394 | ||||||||||||
Time deposits |
536,560 | 539,000 | 497,428 | 509,447 | ||||||||||||
Overnight and short-term borrowings |
20,000 | 20,000 | 48,947 | 48,947 | ||||||||||||
Long-term borrowings |
20,000 | 21,000 | 14,075 | 15,158 |
(1) | Loan fair values are based on a hypothetical exit price, which does not represent the estimated intrinsic value of the loan if held for investment. The assumptions used are expected to approximate those that a market participant purchasing the loans would use to value the loans, including a market risk premium and liquidity discount. |
Estimating the fair value of the loan portfolio when loan sales and trading markets are illiquid,
are for certain loan types, or are nonexistent, requires significant judgment. Therefore, the
estimated fair value can vary significantly depending on a market participants ultimate
considerations and assumptions. The final value yields a market participants expected return on
investment that is indicative of the current distressed market conditions, but it does not take
into consideration the Companys estimated value from continuing to hold these loans or its lack
of willingness to transact at these estimated values.
The Company estimated fair value based on estimated future cash flows discounted at current
origination rates for loans with similar terms and credit quality. The estimated values in 2009
are a function of higher credit spreads, partially offset by lower risk-free interest rates.
However, the values derived from origination rates at the end of 2009 likely do not represent exit
prices due to the distressed market conditions; therefore, incremental market risks and liquidity
discounts ranging from 2% to 25%, depending on the nature of the loans, were subtracted to reflect
the illiquid and distressed market conditions as of December 31, 2009. The discounted value is a
function of a market participants required yield in the current environment and is not a
reflection of the expected cumulative losses on the loans.
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The book values of cash and due from banks, federal funds sold, interest-bearing deposits, accrued
interest receivable, overnight borrowings, accrued interest payable and other liabilities are
considered to be equal to fair values as a result of the short-term nature of these items. The
fair values of investment securities are based on quoted market prices, dealer quotes and prices
obtained from independent pricing services. The fair value of time deposits, other borrowings,
commitments and guarantees is estimated based on present values using applicable risk-adjusted
spreads to the U.S. Treasury curve to approximate current entry-value interest rates applicable to
each category of such financial instruments.
Demand deposits are shown at their face value.
20. OPERATING SEGMENTS
The Companys operations are divided into three reportable business segments: Community Banking,
Mortgage Banking and Other. These operating segments have been identified based on the Companys
organizational structure. The segments require unique technology and marketing strategies and
offer different products and services. While the Company is managed as an integrated organization,
individual executive managers are held accountable for the operations of these business segments.
The Company measures and presents information for internal reporting purposes in a variety of
different ways. Information for the Companys reportable segments is available based on
organizational structure, product offerings and customer relationships. The internal reporting
system presently utilized by management in the planning and measuring of operating activities, as
well as the system to which most managers are held accountable, is based on organizational
structure.
The Company emphasizes revenue growth by focusing on client service, sales effectiveness and
relationship management. The segment results contained herein are presented based on internal
management accounting policies that were designed to support these strategic objectives. Unlike
financial accounting, there is no comprehensive authoritative body of guidance for management
accounting equivalent to generally accepted accounting principles. Therefore, the performance of
the segments is not necessarily comparable with the Companys consolidated results or with similar
information presented by other financial institutions. Additionally, because of the
interrelationships of the various segments, the information presented is not indicative of how the
segments would perform if they operated as independent entities.
COMMUNITY BANKING
The Companys Community Banking segment serves individual and business customers by offering a
variety of loan and deposit products and other financial services.
MORTGAGE BANKING
During 2009 Granite Mortgage ceased mortgage originations, as previously reported. The current
activity is related to the resolution of residual assets and settling existing contractual
obligations.
The 2008 financial statements include the following items, which are not deemed significant for
expanded disclosure herein, because they are insignificant to the 2008 financial statements. The
balance sheet reflects $16.8 million loans held for sale and $20.8 million outstanding on a
mortgage warehouse line of credit; the footnotes disclosed $44.5 million notional mortgage
pipeline positions (derivatives) with immaterial fair values.
OTHER
The Companys Other segment historically represented certain treasury and administration
activities that have been discontinued during 2009. Included in this segment are certain
investments and commercial paper issued to the Banks commercial sweep account customers.
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The following table presents selected financial information for reportable business segments for
the years ended December 31, 2009 and 2008.
(Table in thousands) | 2009 | 2008 | ||||||
COMMUNITY BANKING |
||||||||
Net interest income |
$ | 30,071 | $ | 34,345 | ||||
Provision for loan losses |
28,644 | 30,143 | ||||||
Total other income |
8,452 | 7,988 | ||||||
Total other expenses |
38,627 | 41,773 | ||||||
Loss before income tax expense (benefit) |
(28,748 | ) | (29,583 | ) | ||||
Net loss |
(22,948 | ) | (34,425 | ) | ||||
Identifiable segment assets |
1,058,522 | 1,112,029 | ||||||
MORTGAGE BANKING |
||||||||
Net interest income |
1,389 | 3,158 | ||||||
Provision for loan losses |
89 | 85 | ||||||
Total other income |
747 | 3,560 | ||||||
Total other expenses |
4,167 | 6,870 | ||||||
Loss before income tax benefit |
(2,120 | ) | (237 | ) | ||||
Net income (loss) |
(2,120 | ) | 8 | |||||
Identifiable segment assets |
1,562 | 31,885 | ||||||
ALL OTHER |
||||||||
Net interest expense |
(38 | ) | (333 | ) | ||||
Total other income |
(312 | ) | (1,170 | ) | ||||
Total other expenses |
202 | 331 | ||||||
Loss before income tax benefit |
(552 | ) | (1,834 | ) | ||||
Net loss |
(552 | ) | (1,834 | ) | ||||
Identifiable segment assets |
| 3,041 | ||||||
TOTAL SEGMENTS |
||||||||
Net interest income |
31,422 | 37,170 | ||||||
Provision for loan losses |
28,733 | 30,228 | ||||||
Total other income |
8,887 | 10,378 | ||||||
Total other expenses |
42,996 | 48,974 | ||||||
Loss before income tax expense (benefit) |
(31,420 | ) | (31,654 | ) | ||||
Net loss |
(25,620 | ) | (36,251 | ) | ||||
Identifiable segment assets |
1,060,084 | 1,146,955 |
ITEM 9 CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no disagreements with accountants on accounting and financial disclosures as
described in Item 304 of Regulation S-K.
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ITEM 9A CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of December 31, 2009, the end of the period covered by this Annual Report on Form 10-K, an
evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules
13(a)-15(e) and 15(d)-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the
Exchange Act)) was performed under the supervision and with the participation of our management,
including our Chief Executive Officer and our Chief Financial Officer. Based upon, and as of the
date of this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded
that our disclosure controls and procedures were effective to ensure that information required to
be disclosed by us in the reports that we file or submit under the Exchange Act is (i) recorded,
processed, summarized and reported within the time periods specified in the Securities and
Exchange Commissions rules and forms, and (ii) accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosures.
Changes in Internal Control over Financial Reporting
Management of the Company has evaluated, with the participation of the Companys Chief Executive
Officer and Chief Financial Officer, changes in the Companys internal control over financial
reporting (as defined in rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter
ended December 31, 2009. Based upon that evaluation, management has determined that there have
been no changes to the Companys internal control over financial reporting that occurred during
the Companys fourth quarter of 2009 that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.
MANAGEMENTS ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting
for the Company. The Companys internal control over financial reporting is a process designed under the
supervision of the Companys CEO and CFO to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of the Companys financial statements for external reporting purposes
in accordance with U.S. generally accepted accounting principles. Management has made a comprehensive
review, evaluation and assessment of the Companys internal control over financial reporting as of
December 31, 2009. In making its assessment of internal control over financial reporting, management used
the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal ControlIntegrated Framework. In accordance with Section 404 of the Sarbanes-Oxley Act of 2002, management makes the following assertions:
| Management has implemented a process to monitor and assess both the design and operating effectiveness of internal control over financial reporting. | ||
| All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. | ||
| The Companys management assessed the effectiveness of the Companys internal control over financial reporting as of December 31, 2009. In making this assessment, it used criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commissions (COSO) in Internal ControlIntegrated Framework. Based on that assessment, we believe that, as of December 31, 2009, the Companys internal control over financial reporting is effective based on those criteria. |
This annual report does not include an attestation report of the Companys registered public
accounting firm regarding internal control over financial reporting. Managements report was not
subject to attestation by the Companys registered public accounting firm pursuant to temporary
rules of the Securities and Exchange commission that permit the Company to provide only
managements report in this annual report.
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ITEM 9B OTHER INFORMATION
Jefferson C. Easley, Senior Vice President and Chief Credit Officer of the Bank, resigned from his
position with the Bank effective December 11, 2009.
PART III
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is set forth in our definitive proxy materials to be filed
in connection with our 2010 ANNUAL MEETING OF STOCKHOLDERS, under the captions Information About
the Board of Directors and Committees of the Board, Directors/Nominees and Nondirector Executive
Officers, Section 16(a) Beneficial Ownership Reporting Compliance, and Ethics Policy. The
information required by this item contained in such definitive proxy materials is incorporated
herein by reference.
ITEM 11 EXECUTIVE COMPENSATION
The information required by this item is set forth in our definitive proxy materials to be filed
in connection with our 2010 ANNUAL MEETING OF STOCKHOLDERS, under the captions Summary
Compensation Table, Grant of Plan-Based Awards, Outstanding Equity Awards at Fiscal
Year-end, Option Exercises and Stock Vested, Salary Continuation Plan, and Potential
Payments Upon Termination or Change of Control. The information required by this item contained
in such definitive proxy materials is incorporated herein by reference.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The information required by this item is set forth in our definitive proxy materials to be filed
in connection with our 2010 ANNUAL MEETING OF STOCKHOLDERS, under the captions Principal Holders
of Voting Securities, Directors/Nominees and Nondirector Executive Officers and Potential
Payments Upon Termination or Change of Control. The information required by this item contained
in such definitive proxy materials is incorporated herein by reference.
The following table sets forth information as of December 31, 2009 regarding shares of our common
stock that may be issued upon exercise of options previously granted and currently outstanding
under our stock option plans, as well as the number of shares available for the grant of options
that had not been granted as of that date.
(a) Number of | (b) Weighted- | (c) Number of Securities | ||||||||||
Securities To Be | Average Exercise | Remaining Available for | ||||||||||
Issued Upon Exercise | Price Of | Future Issuance Under | ||||||||||
Of Outstanding | Outstanding | Equity Compensation Plans | ||||||||||
Options, Warrants and | Options, Warrants | (excluding securities | ||||||||||
Rights | and Rights | reflected in column (a)) | ||||||||||
Equity compensation plans |
||||||||||||
Approved by security holders |
50,327 | $ | 10.46 | 743,300 | ||||||||
Not approved by security holders |
-0- | n/a | n/a | |||||||||
Total |
50,327 | $ | 10.46 | 743,300 | ||||||||
We suspended our common stock repurchase plan in 2007, which we historically used to (1) reduce
the number of shares outstanding when our share price in the market makes repurchases advantageous
and (2) manage capital levels. Therefore, there were no share repurchase transactions for the
quarter ended December 31, 2009.
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ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this item is set forth in our definitive proxy materials to be filed
in connection with our 2010 ANNUAL MEETING OF STOCKHOLDERS, under the caption Information About
Board of Directors and Committees of the Board and Transactions With Officers and Directors.
The information required by this item contained in such definitive proxy materials is incorporated
herein by reference.
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is set forth in our definitive proxy materials filed in
connection with our 2010 ANNUAL MEETING OF STOCKHOLDERS, under the caption Ratification of
Selection of Accountants. The information required by this item contained in such definitive
proxy materials is incorporated herein by reference.
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PART IV
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
* Exhibits incorporated by reference into this filing were filed with the Securities and Exchange
Commission. We provide these documents through our Internet site at www.bankofgranite.com or by
mail upon request to Investor Relations, Bank of Granite Corporation, P.O. Box 128, Granite
Falls, North Carolina 28630.
(a)1.
|
Financial Statements | |
The information required by this item is set forth under Item 8. | ||
2.
|
Financial Statement Schedules | |
The information required by this item is set forth in the Notes to Consolidated Financial Statements under Item 8. | ||
3.
|
Exhibits | |
3.1
|
Certificate of Incorporation, as amended | |
Bank of Granite Corporations Restated Certificate of Incorporation, filed as Exhibit 3.1 to our Quarterly Report on Form 10-Q dated May 9, 2006, is incorporated herein by reference. | ||
3.2
|
Bylaws of the Registrant, as amended | |
Bank of Granite Corporations Amended and Restated Bylaws, filed as Exhibit 3.1 to the Registrants Current Report on Form 8-K dated April 28, 2008, is incorporated herein by reference. | ||
4.
|
Instruments defining the rights of holders | |
4.1
|
Form of stock certificate for Bank of Granite Corporations common stock, filed as Exhibit 4.1 to our Registration Statement on Form S-4 (Registration Statement No. 333-104233) on April 1, 2003, is incorporated herein by reference. | |
4.2
|
Articles 5, 6, 7, 10 and 13 of the Restated Certificate of Incorporation of Bank of Granite Corporation (included in Exhibit 3.1 hereto). | |
10.
|
Material Contracts | |
10.1
|
Bank of Granite Employees Profit Sharing Plan and Trust, as amended, filed as Exhibit 4.1 to the Registrants Registration Statement on Form S-8 (Registration Statement No. 333-102383) on January 7, 2003, is incorporated herein by reference. | |
10.2
|
Agreement between Bank of Granite and D. Mark Stephens, dated October 23, 2009.** | |
10.3
|
Written Description of Director Compensation pursuant to Item 601(b)(10)(iii)(A) of Regulation S-K, dated August 24, 2009. | |
10.4
|
Consulting Agreement, dated December 19, 2005, between the Bank and John A. Forlines, Jr. filed as Exhibit 10.1 to our Current Report on Form 8-K dated December 19, 2005, is incorporated herein by reference. |
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10.5
|
Bank of Granite Corporations 2007 Stock Incentive Plan, filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q dated August 9, 2007, is incorporated herein by reference.** | |
10.6
|
Summary of Agreement between Bank of Granite and Jerry A. Felts, Chief Operating Officer and Chief Financial Officer, effective as of July 1, 2009.** | |
10.7
|
Form of Amended and Restated Bank of Granite Salary Continuation Plan, effective January 1, 2008 filed as Exhibit 10.7 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 is incorporated herein by reference.** | |
10.8
|
Amended and Restated Change of Control Agreement, dated December 19, 2008, between the Company and R. Scott Anderson, filed as Exhibit 10.8 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 is incorporated herein by reference.** | |
10.9
|
Amended and Restated Change of Control Agreement, dated December 19, 2008, between the Company and Samuel M. Black, filed as Exhibit 10.11 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 is incorporated herein by reference.** | |
10.10
|
Amended and Restated Change of Control Agreement, dated December 19, 2008, between the Company and D. Mark Stephens.** | |
10.11
|
Stipulation and Consent between Bank of Granite and the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks and related Order to Cease and Desist, filed as Exhibit 10.1 to our Current Report on Form 8-K, dated August 27, 2009, is incorporated herein by reference. | |
10.12
|
Amendment to Bank of Granite Salary Continuation Plan, effective November 1, 2009, filed as Exhibit 10.1 to our Current Report on Form 8-K, dated October 30, 2009, is incorporated herein by reference.** | |
14.
|
Ethics Policy, dated March 8, 2004, filed as Exhibit 14 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2004 is incorporated herein by reference. | |
21.
|
Subsidiaries of the Registrant | |
The information required by this item is also set forth under Item 8, Note 1, Summary of Significant Accounting Policies. | ||
23.1
|
Consent of Dixon Hughes PLLC | |
31.1
|
Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 | |
31.2
|
Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 | |
32.1
|
Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2
|
Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
** | Management Compensatory plan or arrangement |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
BANK OF GRANITE CORPORATION |
||||||
By: | /s/ R. Scott Anderson | |||||
R. Scott Anderson | ||||||
Chief Executive Officer | ||||||
March 31, 2010 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
Signature | Title | Date | ||
/s/ R. Scott Anderson
|
Chief Executive Officer and President | March 31, 2010 | ||
/s/ Jerry A. Felts
|
Chief Operating Officer and Chief Financial Officer |
March 31, 2010 | ||
/s/ John N. Bray
|
Chairman and Director | March 31, 2010 | ||
/s/ R. Scott Anderson
|
Director | March 31, 2010 | ||
/s/ Joseph D. Crocker
|
Director | March 31, 2010 | ||
/s/ Leila N. Erwin
|
Director | March 31, 2010 | ||
/s/ Paul M. Fleetwood, III
|
Director | March 31, 2010 | ||
/s/ Hugh R. Gaither
|
Director | March 31, 2010 | ||
/s/ James Y. Preston
|
Director | March 31, 2010 | ||
/s/ Boyd C. Wilson, Jr.
|
Director | March 31, 2010 |
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Begins | ||||
Exhibit | on Page | |||
3.1
|
Bank of Granite Corporations Certificate of Incorporation | * | ||
3.2
|
Bank of Granite Corporations Bylaws | * | ||
4.1
|
Form of stock certificate | * | ||
4.2
|
Articles 5, 6, 7, 10 and 13 of the Restated Certificate of Incorporation | * | ||
10.1
|
Bank of Granite Employees Profit Sharing Plan and Trust | * | ||
10.2
|
Agreement between Bank of Granite and D. Mark Stephens** | Filed herewith | ||
10.3
|
Written Description of Director Compensation | Filed herewith | ||
10.4
|
Consulting Agreement between the Company and John A. Forlines, Jr. | * | ||
10.5
|
Bank of Granite Corporations 2007 Stock Incentive Plan** | * | ||
10.6
|
Summary of Agreement between Bank of Granite and Jerry A. Felts** | Filed herewith | ||
10.7
|
Form of Amended and Restated Bank of Granite Salary Continuation Plan** | * | ||
10.8
|
Amended and Restated Change of Control Agreement between the Company and R. Scott Anderson** | * | ||
10.9
|
Amended and Restated Change of Control Agreement between the Company and Samuel M. Black** | * | ||
10.10
|
Amended and Restated Change of Control Agreement between the Company and D. Mark Stephens** | Filed herewith | ||
10.11
|
Stipulation and Consent between Bank of Granite and the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks and related Order to Cease and Desist | * | ||
10.12
|
Amendment to Bank of Granite Salary Continuation Plan** | * | ||
14
|
Ethics Policy | * | ||
21
|
Subsidiaries of the Registrant | Filed herewith | ||
23.1
|
Consent of Independent Auditors | Filed herewith | ||
31.1
|
Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 | Filed herewith | ||
31.2
|
Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 | Filed herewith | ||
32.1
|
Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | Filed herewith | ||
32.2
|
Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | Filed herewith |
* | Incorporated herein by reference | |
* * | Management compensatory plan or arrangement |
68