Attached files
file | filename |
---|---|
EX-13 - EX-13 - FGBC Bancshares, Inc. | g22919exv13.htm |
EX-32 - EX-32 - FGBC Bancshares, Inc. | g22919exv32.htm |
EX-23 - EX-23 - FGBC Bancshares, Inc. | g22919exv23.htm |
EX-31.1 - EX-31.1 - FGBC Bancshares, Inc. | g22919exv31w1.htm |
EX-31.2 - EX-31.2 - FGBC Bancshares, Inc. | g22919exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
þ | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
o | TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to ________
Commission File No. 000-51957
FGBC BANCSHARES, INC.
Georgia (State or Other Jurisdiction of Incorporation or Organization) |
20-02743161 (I.R.S. Employer Identification Number) |
101 Main Street
Franklin, Georgia 30217
(Address of Principal Executive Offices)
Franklin, Georgia 30217
(Address of Principal Executive Offices)
(678) 839-4510
(Issuers Telephone Number, Including Area Code)
(Issuers Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value
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) 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 Date File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T 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-X 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 þ (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The aggregate market value of the registrants outstanding common equity held by
non-affiliates of the registrant on June 30, 2009 was zero (the registrants common stock is not
traded in any public trading market and therefore the market value by reference to public market
quotes is zero.)
There were 13,993,233 shares of common stock outstanding as of March 1, 2010.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants 2010 proxy statement for the annual meeting of shareholders
scheduled to be held on June 7, 2009 are incorporated by reference into Part III of this report.
Table of Contents
Page
2
Table of Contents
Forward-Looking Statements
This Annual Report on Form 10-K contains or incorporates by reference statements that are
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Statements made in this report, other than
those concerning historical information, should be considered forward-looking and subject to
various risks and uncertainties. Such forward-looking statements are made based upon managements
belief as well as assumptions made by, and information currently available to, management. Our
actual results may differ materially from the results anticipated in forward-looking statements due
to a variety of factors, including governmental monetary and fiscal policies, deposit levels, loan
demand, loan collateral values, securities portfolio values, interest rate risk management, the
effects of competition in the banking business from other commercial banks, thrifts, mortgage
banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance
companies, money market funds and other financial institutions operating in our market area and
elsewhere, including institutions operating through the Internet, changes in governmental
regulation relating to the banking industry, including regulations relating to branching and
acquisitions, failure of assumptions underlying the establishment of reserves for loan losses,
including the value of collateral underlying delinquent loans, and other factors. We caution that
such factors are not exclusive. We do not undertake to update any forward-looking statement that
may be made from time to time by, or on behalf of, us.
PART I
ITEM
1. Business.
Overview
FGBC Bancshares, Inc. (the Company, we or us) was organized in 2004 as a Georgia
corporation for the purpose of acquiring all of the common stock of First Georgia Banking Company
(the Bank), a Georgia bank that opened for business on November 3, 2003. On March 10, 2005 the
Company became the sole shareholder of the Bank by virtue of a share exchange whereby each
shareholder of the Bank exchanged their Bank stock for an equal number of shares in the Company (by
virtue of the share exchange stock certificates that previously represented Bank Stock were
automatically deemed to represent Company stock). The Company is a bank holding company within the
meaning of the Bank Holding Company Act of 1956 and the Georgia Bank Holding Company Act.
The Company was organized to facilitate the Banks ability to serve its customers
requirements for financial services. The holding company structure provides flexibility for
expansion of our banking business through the possible acquisition of other financial institutions
and the provision of additional banking-related services which a traditional commercial bank may
not provide under present laws. We have no present plans to acquire any operating subsidiaries;
however, we may make acquisitions in the future if such acquisitions are deemed to be in the best
interest of our shareholders. Any acquisitions would be subject to certain regulatory approvals
and requirements.
The Bank is a full service commercial bank headquartered at 101 Main Street, Franklin, Georgia
30217 (Heard County). In addition to the Franklin location the Bank currently has eleven
full-service branches and an Operations Center. The Banks full-service branches are located in
Homer (Banks County), Carrollton and Villa Rica (Carroll County), Lake Oconee (Greene County),
Cornelia (Habersham County), Bremen (Haralson County), Commerce and Jefferson (Jackson County),
Columbus (Muscogee County), Athens (Oconee County) and Dalton (Whitfield County), Georgia. The
Banks Operations Center is located in Carrollton (Carroll County), Georgia. The Bank has delayed
plans to construct a branch in Lake Oconee (Greene County), Georgia. We will continue to operate
out of leased space at this location. The Banks primary service area includes Banks, Carroll,
Greene, Habersham, Haralson, Heard, Jackson, Muscogee, Oconee and Whitfield County, Georgia. The
Bank also serves the adjacent areas or parts thereof. The principal business of the Bank is to
accept deposits from the public and to make loans and other investments. The principal source of
funds for the Banks loans and investments are checking (both interest and non-interest bearing),
money market, savings and time deposits, amortization and prepayments of loans and borrowings. The
principal sources of income for the Bank are interest and fees collected on loans, interest and
dividends collected on other investments and service charges. The principal expenses of the Bank
are interest
3
Table of Contents
paid on savings and deposits accounts, interest paid on other borrowings by the Bank, employee
compensation, office expenses and other overhead expenses.
Recent Developments
Effective July 7, 2009, the Company adopted a board resolution proposed by the Federal Reserve
Bank of Atlanta to not incur additional indebtedness, pay cash dividends or repurchase outstanding
stock without prior regulatory approval. We also agreed to provide financial statements and
written confirmation of our compliance with the resolution periodically to the Federal Reserve.
In addition, the Bank has recently been examined by the Georgia Department of Banking and
Finance (GDBF) and the FDIC (the Agencies). The examiners have completed their field work but
have not yet delivered the Report of Examination. Applicable law prohibits our disclosure of
specific exam findings, but the examiners have preliminarily indicated that, based on the level of
the banks capital and classified loans, we should expect to become subject to a formal enforcement
action in the near future. These actions typically require certain corrective steps, impose limits
on activities (such as lending, deposit taking, acquisitions or branching), prescribe lending
parameters (such as loan types, volumes and terms) and require additional capital to be raised. In
many cases, policies must be revised and submitted to the Agencies for approval within mandated
time frames. As with other similarly situated banks, we anticipate that the Bank will be
restricted from paying any dividends to the Company without the prior written consent of the
Agencies. We further anticipate that we will be required to send periodic written progress reports
to the Agencies to show our progress in complying with the restrictions imposed. Once a formal
enforcement action has been issued it would remain in place until terminated by the Agencies.
In conjunction with any order placed on the Bank, we anticipate that the Federal Reserve would
impose a similar order on the Company. The restrictions and requirements contained in such order
would remain in place until terminated by the Federal Reserve.
In anticipation of the enforcement actions discussed above, the Company has hired a consulting
firm to assist with complying with the expected restrictions and requirements.
On March 19, 2010 Jackie L. Reed resigned as President and Chief Executive Officer of both the
Company and Bank. Mr. Reed also resigned from his position as a director of the Company. The
Board of Directors appointed Mr. W. Brett Morgan as Interim Chief Executive Officer of both
entities, effective March 19, 2010. Mr. Morgan joined the Bank as the Senior Lending Officer in
March 2008 and became EVP/Chief Credit Officer in October 2008. Before joining the Bank Mr. Morgan
served for 33 years in various capacities for Regions Bank, including as City President over the
Dothan and Enterprise, Alabama markets from 2000 through the end of 2007.
Types of Loans
Below is a description of the principal categories and relative risks involved for loans made
through the Bank. As of December 31, 2009, our loan portfolio consisted of 65.11% in real estate
mortgage loans, 24.13% in real estate construction loans, 7.19% in commercial and industrial
loans and 3.57% in installment loans to individuals.
Real Estate Mortgage Loans. The Bank grants loans to borrowers secured by commercial real
estate mortgages and residential mortgages located in our market area. Commercial real estate
presents risks not found in consumer residential real estate lending. The repayment of these loans
is dependent upon successful management and marketing of properties and on the level of expense
necessary to maintain the property. The repayment of these loans may be adversely affected by
conditions in the real estate market or the general economy. In underwriting commercial real
estate loans the Bank considers the historic and projected future cash flows of the real estate
and/or owner occupied business supporting the real estate along with obtaining qualified appraisals
to help gauge the physical condition and general location of the property and the effect these
factors will have on its future desirability from a tenant perspective. These loans are subject to
our real estate lending policies which provide guidelines such as maximum loan-to-values acceptable
on loans. The commercial real estate loans in this category typically involve relatively large
loan balances to a single borrower. In order to mitigate these risks, the Bank monitors its
overall loan concentration mix and individual loans are reviewed both internally and by external
loan review consultants. This type loan generally has a shorter maturity than other loan types
giving the Bank an opportunity to reprice,
4
Table of Contents
restructure or decline to renew the credit. As with other loans, all commercial real estate
loans are graded depending upon strength of credit and performance. A lower grade will bring
increased scrutiny by management and the Board of Directors.
The consumer real estate portion of this category includes consumer home mortgages and home
equity lines of credit. These loans traditionally have had less risk compared to the consumer
installment loans which are dependant on depreciable collateral such as vehicles, boats, etc. but
do carry some additional risk because of the increased difficulty and holding costs that would
occur when converting real estate to cash in the event of a default. This is even more pronounced
in the especially difficult current economic environment with declining real estate values. This
risk is mitigated through our loan policy guidelines which detail acceptable loan-to-value
guidelines, debt-to-income levels and consumer credit score guidelines.
Real Estate Construction Loans. The real estate construction loan category includes
commercial and consumer residential construction and commercial construction for general
non-residential commercial buildings. The loans to commercial builders who build homes for resale
are subject to market and industry risk of supply and demand as well as the potential for
speculative house inventory to grow stale in times of economic slow downs. To mitigate this risk,
each loan goes through an evaluation process to identify local market trends along with the history
of the borrower. Management regularly reviews construction loan reports, which identify key
components in the Banks construction loan portfolio. This report also identifies the level of
speculative loans in the Banks total portfolio to monitor concentrations of this loan type.
With construction loans to individual consumers the risk is somewhat different. These loans
are evaluated by the officer based on consumer credit factors such as personal income, debt levels
and traditional consumer credit scores. These factors are tied to the local economy, which
provides jobs, standard-of-living and other factors in the communities involved. These loans are
considered on an individual basis with risk mitigated by the adherence to loan policy.
The Bank also makes loans for commercial construction for non-residential buildings, which can
be owner occupied or potential leased income space. These loans present different risks including
the risk of completing the project as well as repayment through successful management and marketing
of properties. The mitigation of risk comes through underwriting the credit to determine the
proper loan policy guidelines are maintained. After completion of construction these loans are
typically moved to the real estate mortgage loan category as either owner or non-owner occupied
commercial real estate.
The federal banking agencies, including the FDIC, restrict concentrations in commercial real
estate lending and have noted that recent increases in banks commercial real estate concentrations
have created safety and soundness concerns in the current economic downturn. The regulatory
guidance mandates certain minimal risk management practices and categorizes banks with defined
levels of such concentrations as banks requiring elevated examiner scrutiny. We have
concentrations in commercial real estate loans in excess of the levels identified by regulatory
guidance. Although management believes that our credit processes and procedures meet the risk
management standards dictated by this guidance, our regulators could
impose further restrictions upon the Bank that could adversely affect
our operations.
Commercial and Industrial Loans. We make loans to commercial and industrial businesses in our
primary market areas for purposes such as new or upgrades to plant and equipment, inventory
acquisition and various working capital purposes. All commercial loans are made to borrowers based
on cash flow, collateral strength, ability to repay and degree of management expertise. Loans in
this category are subject to many different types of risk, which will differ depending on the
particular industry a borrower is engaged in. These risks are to an industry, or sector of an
industry, and are monitored by management on an ongoing basis. Each loan is underwritten and
evaluated based on individual merit with financial data reviewed by a Bank loan officer and/or
credit administration. In addition, large credits are subject to internal loan review annually and
may also be reviewed by an external loan review team. Based on analysis by Bank officers, each
loan is assigned a grade that is based on overall credit risk to the Bank and the loan may receive
an increased degree of scrutiny by management up to and including additional loss reserves being
required.
Commercial loans are usually collateralized with assets of the business, which typically
include accounts receivable, inventory and equipment. Collateral is subject to risk relative to
conversion to a liquid asset if necessary
5
Table of Contents
as well as risks associated with degree of specialization, mobility and general collectability
in a default situation. In order to mitigate risk the collateral is underwritten to loan policy
standards, which determines the amount of margin or equity required in each asset taken as
collateral with the values monitored by the loan officer and credit personnel on a regular basis.
Installment Loans to Individuals. The Bank makes several types of consumer loans all of which
carry varying degrees of risk. Loans in this category are generally more risky than traditional
residential real estate but less risky than commercial loans. The risk of default is generally
determined by the well-being of the local economy, which in times of economic stress will affect
the consumers ability to repay. Loans in this category include vehicle notes, loans secured by
deposits and other loans of a consumer nature. Vehicle financing carries additional risks over
loans secured by real estate in that the collateral naturally declines in value over the life of
the loan and is mobile. These risks are managed by matching the amortization period (the age and
remaining useful life of the collateral) with the loan term to ensure the customer always has an
equity position and is never upside down. Loans secured by deposits present less risk with the
liquidity of collateral available in case of default. Other types of secured personal loans carry
a wide range of risks depending on the type of collateral with varying degrees of marketability in
the event of default. The risk on these types of loans is managed primarily at the underwriting
level with loan policy setting standards on evaluation characteristics such as debt-to-income ratio
limitations and margin collateral requirements. Other unsecured personal loans carry the greatest
degree of risk in the consumer portfolio. With the absence of collateral the Bank is completely
dependent on the stability of the borrowers income stream and commitment to repay. This risk is
mitigated through the Banks loan underwriting with strict adherence to debt-to-income ratios, time
at the present job and industry and policy guidelines relative to loan size as a percentage of net
worth and liquid assets.
Mortgage Originations
We engage in secondary-market mortgage activities by obtaining commitments from
secondary-market mortgage purchasers for primarily 1-4 family conforming loans brokered by our
Bank. Based on these commitments, we originate mortgage loans on comparable terms and generate fee
income and commissions to supplement our non-interest income. These loans are pre-sold in the
secondary market and are never closed or funded in the Banks name because they are pre-approved by
the secondary-market investor. There is generally no recourse or contingent liability associated
with these loans.
Loan Participations
Traditionally, we have not opted to sell or purchase loan participations. In 2008 and 2009,
however, we sold a limited number of loans to other financial institutions without recourse. In
the future, we may sell more loans either to provide liquidity or lower our total assets thus
increasing our capital ratios.
Managements Policy for Determining the Loan Loss Allowance
The allowance for loan losses represents managements assessment of the risk associated with
extending credit and its evaluation of the quality of the loan portfolio. In calculating the
adequacy of the loan loss allowance, management evaluates the following factors:
| the asset quality of individual loans; | ||
| changes in the national and local economy and business conditions/development, including underwriting standards, collections, charge-off and recovery practices; | ||
| changes in the nature, volume and mix of the loan portfolio; | ||
| changes in the experience, ability and depth of our lending staff and management; | ||
| changes in the trend of the volume and severity of past dues and classified loans; and trends in the volume of non-accrual loans, troubled debt restructurings and other modifications; | ||
| possible deterioration in collateral segments or other portfolio concentrations; |
6
Table of Contents
| historical loss experience for pools of loans (i.e. collateral types, borrowers, purposes, etc.); | ||
| changes in the quality of our loan review system; and | ||
| the effect of external factors such as competition and the legal and regulatory requirement on the level of estimated credit losses in our current loan portfolio. |
These factors are evaluated monthly and changes in the asset quality of individual loans are
evaluated as needed.
All of our loans are assigned individual loan grades when underwritten and these grades are
substantiated by the loan committee and/or loan review process. After a loan is underwritten and
booked, loans are monitored or reviewed by the account officer, management, internal loan review
personnel and external loan review personnel during the life of the loan. Payment performance is
monitored monthly for the entire loan portfolio, banking officers contact customers during the
course of business and may be able to ascertain if weaknesses are developing with the borrower,
external loan personnel perform an independent review annually and federal and state banking
regulators perform periodic reviews of the loan portfolio. If weaknesses develop in an individual
loan relationship and are detected, the loan is downgraded and higher reserves are assigned based
upon managements assessment to what extent the weaknesses may affect full collection of the debt.
If the principal and interest for a loan does not appear to be fully collectible the loan is
recorded as a non-accruing loan and further accrual of interest is discontinued while previously
accrued but uncollected interest is reversed against income. Impaired loans are individually
evaluated under accounting guidance, to determine potential loss based on collateral and specific
reserves are allocated based on this analysis.
Our net loan charge-offs to average total loans were 4.65% for the year ended December 31,
2009 as compared to 0.66% for the year ended December 31, 2008. Historical performance, however,
is not an indicator of future performance and future results could differ materially. Management
believes that based upon historical performance, known factors, managements judgment, and
regulatory guidance that the current methodology used to determine the adequacy of the allowance
for loan losses is reasonable.
Our allowance for loan losses is also subject to regulatory examinations and determinations as
to adequacy, which takes into account such factors as the methodology used to estimate the
allowance for loan losses. During their routine examinations of banks, regulatory agencies may
require a bank to make additional provisions to its allowance for loan losses when their credit
evaluations and resulting allowance for loan loss estimations differ materially from those of
management.
While it is our policy to charge-off in the current period loans for which a loss is
considered probable, there are additional risks of future losses that cannot be quantified
precisely or attributed to particular loans or classes of loans. Because these risks include the
state of the economy, managements judgment as to the adequacy of the allowance is necessarily
approximate and imprecise.
Managements Policy for Investing in Securities
Funds that are not otherwise needed to meet our loan demand may be invested in accordance with
our investment policy. The purpose of the investment policy is to provide a guideline by which
these funds can best be invested to earn the maximum return, yet still maintain sufficient
liquidity to meet fluctuations in our loan demand and deposit structure. The investment policy
adheres to the following objectives:
| provide an investment medium for funds which are not needed to meet loan demand or deposit withdrawal; | ||
| provide an investment medium for funds which may be needed for liquidity purposes; | ||
| provide an investment medium which will balance market and credit risk for other assets and our liability structure; | ||
| optimize income generated from the investment account consistent with the stated objectives for liquidity and quality standards; |
7
Table of Contents
| meet regulatory standards; and | ||
| provide collateral which we are required to pledge against public monies. |
Industry and Competition
Our primary service area covers various counties located primarily in the Western and
Northeastern parts of Georgia. These counties include Banks, Carroll, Greene, Habersham, Haralson,
Heard, Jackson, Muscogee, Oconee and Whitfield. Our marketing strategy emphasizes our local nature
and involvement in the communities located in our primary service area.
The Bank encounters vigorous competition from other commercial banks, savings and loan
associations and other financial institutions and intermediaries in its primary service areas. The
Bank competes with other banks in its primary service area in obtaining new deposits accounts,
making loans and providing other banking services. The Bank also competes with savings and loan
associations and credit unions for savings and transaction deposits, time deposits and various
types of retail and commercial loans.
The Bank must compete with other financial intermediaries, including mortgage banking firms
and real estate investment trusts, small loan and finance companies, insurance companies, credit
unions, leasing companies and certain government agencies. Competition exists for time deposits
and, to a more limited extent, demand and transaction deposits offered by a number of other
financial intermediaries and investment alternatives, including money market mutual funds,
brokerage firms, government and corporate bonds and other securities.
Competition for banking services in the State of Georgia is not limited to institutions
headquartered in the State. A number of large interstate banks, bank holding companies and other
financial institutions and intermediaries have established loan production offices, small loan
companies and other offices and affiliates in the State of Georgia. Many of the interstate
financial organizations that compete in the Georgia market engage in regional, national or
international operations and have substantially greater financial resources than we do.
Employees
As of December 31, 2009, the Bank had 167 full-time equivalent employees compared to 191
full-time equivalent employees as of December 31, 2008. We believe that the Bank enjoys
satisfactory relations with its employees.
Risk Factors
The following paragraphs describe material risks that we face.
Our independent registered public accountants have expressed substantial doubt about our
ability to continue as a going concern.
Our independent registered public accountants in their audit report for the year ended
December 31, 2009 have expressed substantial doubt about our ability to continue as a going
concern. Among the factors cited by our accountants were our significant recent losses and
declining capital levels. Continued operations depend on our ability
reverse these trends. 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 likely lose their investment in the Company.
See Note 2 of Notes to Consolidated Financial Statements.
8
Table of Contents
We expect to become subject to a formal enforcement action in the near future, which will
place significant restrictions on our operations.
Under applicable laws the Federal Reserve Board, the FDIC as our banks deposit insurer, and
the Georgia Department of Banking and Finance, as our banks chartering authority, have the ability
to impose substantial sanctions, restrictions, and requirement on us if they determine upon
examination or otherwise, violations of laws with which we must comply, or weaknesses or failures
with respect to general standards of safety and soundness. Applicable law prohibits our
disclosures of specific examination findings, but formal enforcement actions are generally
disclosed by the regulatory authorities after these actions become effective. These actions
typically require certain corrective steps, impose limits on activities (such as lending, deposit
taking, acquisitions or branching), prescribe lending parameters (such as loan types, volumes and
terms) and require additional capital to be raised. In addition, for the duration of such action,
the Bank may not pay dividends to the Company without the prior written consent of the FDIC and the Georgia Department of Banking and Finance. In many cases, policies must be revised and submitted
to the regulatory agencies for approval within time frames mandated by them. Failure to adhere to
the requirements of any action, once issued, can result in more severe penalties and could
eventually allow the banking regulators to appoint a receiver or conservator of the Banks net
assets. Generally, these enforcement actions can be lifted only after a subsequent examination
substantiates complete correction of the underlying issues. We expect to become subject to a
formal enforcement action in the near future, which will negatively affect our operations.
An inability to improve our regulatory capital position could adversely affect our operations
and future prospects.
Our success as a financial institution is dependent on our ability to raise sufficient capital
or reduce our assets to improve our regulatory capital position. At December 31, 2009, we were
classified as undercapitalized, which restricts our operations. As a result of our capital
levels, we are subject to various restrictions including: (1) our loans to one
borrower limit may be reduced, which affects the size of the loans that we can originate and may also requires us to sell, participate, or refuse to renew loans that exceed our lower loans to one
borrower limit, any of which could negatively impact our earnings; (2) we cannot renew, accept or
rollover brokered deposits; (3) we must obtain prior regulatory approval to undertake any branch
expansion activities; (4) we will pay higher insurance premiums to the FDIC, which will reduce our
earnings; (5) we are subject to growth restrictions and limits on capital distributions; and (6) we are required to file a capital restoration plan with the FDIC and Georgia Department of Banking and
Finance. Our ability to raise additional capital will depend to some degree on conditions in the
capital markets which are outside of our control. Furthermore, the sale of common or preferred
stock to raise additional capital could be highly dilutive to our existing shareholders. If we are
unable to improve our capital position, our financial condition and future prospects will be
materially and adversely affected.
We hold in our portfolio a significant number of land acquisition and development and
construction loans, which concentration poses credit and regulatory risk.
Our loan portfolio contains a significant level of land acquisition and development, and
construction (ADC) loans for builders and developers. As of December 31, 2009, approximately 24%
of our total loan portfolio fell into this category. These loans are considered more risky than
other types of loans. The primary credit risks associated with ADC lending are underwriting,
project risks, and market risks. Project risks include cost overruns, borrower credit risk,
project completion risk, general contractor credit risk, and environmental and other hazard risks.
Market risks are risks associated with the sale of the completed residential units. They include
9
Table of Contents
affordability risk, which means the risk that borrowers cannot obtain affordable financing,
product design risk, and risks posed by competing projects.
Although the aggregate balance of our ADC loans declined during 2009, the balance of these
loans as a percentage of our capital increased due to the reduction in our capital base caused by
our net loss. There can be no assurance that losses in our ADC loan portfolio will not exceed our
reserves, which could adversely impact our earnings. Given the current environment, the
non-performing loans in our ADC portfolio may increase substantially in 2010, and these
non-performing loans could result in a material level of charge-offs, which will negatively impact
our capital and earnings.
In addition to the general credit risk associated with our ADC loans, we face regulatory risk
given that banking regulators apply greater scrutiny to these types of loans and may require us to
implement improved underwriting, internal controls, risk management policies and portfolio stress
testing, as well as possibly requiring higher levels of allowances for possible loan losses and
capital levels as a result of ADC lending exposures. Additionally the banking regulators have
determined that our exposure to ADC is excessive and could impose further restrictions on us that
could adversely affect our results of operation, financial condition and future prospects.
Ongoing deterioration in the housing market and the homebuilding industry have led to
increased losses and may cause further worsening of delinquencies and nonperforming assets in our
loan portfolio. Consequently, our results of operations have been and may continue to be adversely
impacted.
There has been substantial industry concern and national publicity over asset quality among
financial institutions due in large part to issues related to subprime mortgage lending, declining
real estate values and the general economic downturn. Furthermore, the housing and the residential
mortgage markets have experienced, and continue to experience, a variety of difficulties and
deteriorating economic conditions. These conditions are particularly prevalent in our market and
contributed in large part to an increase in our non-accrual loans from almost $37 million at
December 31, 2008 to $48.7 million at December 31, 2009. If market conditions in our market areas
continue to deteriorate, this could lead to additional valuation adjustments on our loan portfolios
and real estate owned as we continue to reassess the market value of our loan portfolio, the losses
associated with loans in default and the net realizable value of real estate owned.
Difficult economic conditions have adversely affected the banking industry.
The capital, credit and financial markets have experienced significant volatility and
disruption for the past few years. These conditions have had significant adverse effects on our
national and local economies, including declining real estate values, a widespread tightening of
available credit, illiquidity in certain securities markets, increasing loan delinquencies,
mortgage foreclosures, personal and business bankruptcies and unemployment rates, declining
consumer confidence and spending, significant write-downs of asset values by financial institutions
and government-sponsored entities, and a reduction of manufacturing and service business activity
and international trade. These conditions have also adversely affected the stock market generally,
and have contributed to significant declines in the trading prices of financial institution stocks.
We do not expect these difficult market conditions to improve over the short term, and a
continuation or worsening of these conditions could exacerbate their adverse effects. The adverse
effects of these condition could include increases in loan delinquencies and charge-offs, increases
to the portion of our loan loss reserve that we base on economic factors, increases to our specific
loan loss reserves due to the impact of these conditions on specific borrowers or the collateral
for their loans, declines in the value of our investment securities, increases in our cost of funds
due continued aggressive deposit pricing by local and national competitors with liquidity needs,
increases in regulatory and compliance costs, core deposit attrition due to this aggressive deposit
pricing and/or consumer concerns about the safety of their deposits.
Our access to additional short term funding to meet our liquidity needs is limited.
We must maintain, on a daily basis, sufficient funds to cover withdrawals from
depositors accounts and to supply new borrowers with funds. We routinely monitor asset and
liability maturities in an attempt to match maturities to meet liquidity needs. To meet our cash
obligations, we rely on repayments as asset mature, keep cash on hand, maintain account balances
with correspondent banks, purchase and sell federal funds, and maintain a line of credit with
correspondent banks, the Federal Home Loan Bank and the Federal Reserve Bank. If we are unable to
10
Table of Contents
meet our liquidity needs through loan and other asset repayments and our cash on hand, we may
need to borrow additional funds. Currently, our access to additional borrowed funds is limited and
we may be required to pay above market rates for additional borrowed funds, which may adversely our
results of operations. We may face a severe liquidity deficiency if any of our traditional funding
sources become unavailable.
Negative publicity about financial institutions, generally, or about the Company or Bank
specifically, could damage the Companys reputation and adversely impact its business operations
and financial results.
Reputation risk, or the risk to our business from negative publicity, is inherent in our
business. Negative publicity can result from the actual or alleged conduct of financial
institutions, generally, or the Company or Bank specifically, in any number of activities,
including corporate governance and actions taken by government regulators in response to those
activities. Negative publicity can adversely affect our ability to keep and attract customers and
can expose us to litigation and regulatory action, any of which could negatively affect our
business operations or financial results.
Our net interest income and liquidity could be negatively affected if we are unable to retain
maturing time deposits at competitive rates.
We rely heavily on time deposits. As of December 31, 2009, we had approximately $320 million
in time deposits scheduled to mature within one year, which represented approximately 44% of our
total deposits. We expect to continue to rely on short-term time deposits as a primary source of
funding for the foreseeable future. Time deposits are generally not as stable as other types of
deposits and therefore may be lost if we are unable to offer competitive interest rates upon their
renewal.
Because we are undercapitalized according to applicable regulatory standards, we are no longer
able to accept, renew or roll over brokered deposits and have been forced to find other sources of
liquidity, limit our growth and/or sell assets, which could materially and adversely affect our
financial condition and results of operation.
As of December 31, 2009, we had brokered deposits of $73.3 million, of which $27.2 million are
scheduled to mature prior to December 31, 2010. Because of the limitations on brokered deposits
imposed by our regulators due to our undercapitalized status, we must find other sources of
liquidity to replace these deposits as they mature. In addition, we may be compelled to limit our
growth and/or sell assets, which could materially and adversely affect our financial condition and
results of operations.
Current and future restrictions on the conduct of our business could adversely impact our
ability to attract deposits.
Because the Bank is not longer considered well capitalized for regulatory purposes, it is,
among other restrictions, prohibited from paying rates in excess of 75 basis points above the local
market average on deposits of comparable maturity. Effective January 1, 2010, financial
institutions that are not well capitalized are prohibited from paying yields for deposits in
excess of 75 basis points above a national average rate for deposits of comparable maturity, as
calculated by the FDIC, except in very limited circumstances where the FDIC permits use of a higher
local market rate. The national rate may be lower than the prevailing rates in our local markets,
and the Bank may not be able to secure the
permission of the FDIC to use a local market rate. If restrictions on the rates our Bank is able
to pay on deposit accounts negatively impacts its ability to compete for deposits in our market
area, the Bank may be unable to attract or maintain core deposits, and its liquidity and ability to
support demand for loans could be adversely affected.
If our allowance for loan losses is not adequate to cover actual losses, our net income may
decrease.
Our success depends to a significant extent upon the quality of our assets, particularly
loans. In originating loans, there is a substantial likelihood that credit losses will be
experienced. The risk of loss will vary with, among other things, general economic conditions, the
type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the
case of a collateralized loan, the quality of the collateral for the loan.
Our loan customers may not repay their loans according to the terms of these loans, and the
collateral securing the payment of these loans may be insufficient to assure repayment. As a
result, we may experience significant loan losses, which could have a material adverse effect on
our operating results. Management makes various assumptions and judgments about the collectability
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. We maintain
an allowance for loan losses in an attempt to cover any loan losses that may occur. In determining
the size of the allowance, we rely on an analysis of our loan portfolio based on historical loss
experience, volume and types of loans, trends in classification, volume and trends in delinquencies
and non-accruals, national and local economic conditions and other pertinent information.
11
Table of Contents
If our assumptions are wrong, our current allowance may not be sufficient to cover future loan
losses, and adjustments may be necessary to allow for different economic conditions or adverse
developments in our loan portfolio. Material additions to our allowance would materially decrease
our net income. We can make no assurance that our allowance will be adequate to cover future loan
losses given current and future market conditions.
In addition, federal and state regulators periodically review our allowance for loan losses
and may require us to increase our provision for loan losses or recognize further loan charge-offs,
based on judgments different than those of our management. Any increase in our allowance for loan
losses or loan charge-offs as required by these regulatory agencies would have a negative effect on
our operating results.
Because a significant portion of our loan portfolio is secured by real estate, any negative
developments affecting real estate, such as the current market downturn, may harm our business.
A significant portion of our loan portfolio consists of commercial loans that are secured by
various types of real estate as collateral, as well as real estate loans on commercial properties.
As of December 31, 2009 our loan portfolio consisted of approximately 65% real estate mortgage
loans and 24% real estate construction loans (commercial and consumer.) Because these loans rely
on real estate as collateral, they are sensitive to economic conditions and interest rates. Real
estate lending also presents additional credit related risks, including a borrowers inability to
pay and deterioration in the value of real estate held as collateral. If a borrower is unable to
repay its loan and the value of the underlying real estate collateral declines to a point that is
below the amount of our loan then we will suffer a loss.
The amount of our foreclosed assets has increased significantly and may continue to increase,
resulting in additional losses, and costs and expenses that have and will continue to negatively
affect our operations.
At December 31, 2009, we had a total of $13.74 million of foreclosed assets, reflecting a $7.7
million, or 127%, increase from December 31, 2008. This increase in foreclosed assets is due to
the continued deterioration of the residential real estate market and the overall tightening of the
credit market. As the amount of foreclosed assets increases, our losses, and the costs and
expenses to maintain the assets likewise increase. Due to the on-going economic crisis, the amount
of our foreclosed assets may continue to increase. Any additional increase in losses, and
maintenance costs and expenses due to foreclosed assets may have material adverse effects on our
business, financial condition and results of operations. Such effects may be particularly
pronounced in a market of reduced real estate values and excess inventory, which may make the
disposition of foreclosed assets more difficult, increase maintenance costs and expenses, and may
reduce our ultimate realization from any sales.
Environmental liability associated with lending activities could result in losses.
In the course of our business, we may foreclose on and take title to properties securing our
loans. If hazardous substances are discovered on any of these properties, we may be liable to
governmental entities or third parties for the costs of remediation of the hazard, as well as for
personal injury and property damage. Many environmental laws can impose liability regardless of
whether we knew of, or were responsible for, the contamination. In addition, if we arrange for the
disposal of hazardous or toxic substances at another site, we may be liable for the costs of
cleaning up and removing those substances from the site, even if we neither own nor operate the
disposal site. Environmental laws may require us to incur substantial expenses and may materially
limit the use of properties that we acquire through foreclosure, reduce their value or limit our
ability to sell them in the event of a default on the loans they secure. In addition, future laws
or more stringent interpretations or enforcement policies with respect to existing laws may
increase our exposure to environmental liability.
FDIC Deposit Insurance premiums have increased and may increase further in the future.
The Federal Deposit Insurance Act, as amended, requires the FDIC to maintain a reserve ratio
between 1.15 and 1.50 percent. The FDICs board of directors must establish a designated reserve
ratio within that range and sets assessment rates to meet that target within a time-frame that the
board deems appropriate. If the reserve ratio falls below 1.15 percent, the FDICs board is
required to establish a restoration plan to bring the reserve ratio back to 1.15 percent within
five years. The FDICs reserve ratio has declined over the past year due to costs associated with
bank failures and FDIC-assisted transactions, and the reserve ratio is expected to continue to
decline due to future bank failures and FDIC-assisted transactions. In addition, the FDIC basic
insurance coverage limit was temporarily
12
Table of Contents
increased to $250,000 through December 31, 2013, and certain types of deposit accounts will
have unlimited deposit insurance coverage through December 31, 2010. These increases have
increased the aggregate amount of deposits that the FDIC insures and thus have exposed the FDICs
deposit insurance fund to potentially greater losses. The FDIC has adopted a plan to restore the
reserve ratio to the required level by increasing the deposit insurance assessment rates that it
currently charges to insured depository institutions. This increase will have an adverse impact on
our results of operations in 2010 and in future years, and if the FDIC is required to increase its
deposit insurance assessment rate beyond the levels currently contemplated, the adverse impact will
be exacerbated.
For the year ended December 31, 2009, we paid $2,229,052 of deposit insurance assessments.
Due to the large number of unaffiliated FDIC insured depository institution failures, the
corresponding increase in assessments and our institutional risk profile degradation, we will be
required to pay additional amounts to the Deposit Insurance Fund throughout 2010, which will have
an adverse effect on our earnings. If the deposit insurance premium assessment rate applicable to
us increases again, either because of our risk classification or because of another uniform
increase, our earnings would be further adversely impacted.
Future impairment losses could be required on various investment securities, which may
materially reduce the Companys and the Banks regulatory capital levels.
The Company establishes fair value estimates of securities available for sale in accordance
with generally accepted accounting principles. The Companys estimates can change from reporting
period to reporting period, and we cannot provide any assurance that the fair value estimates of
our investment securities would be the realizable value in the event of a sale of the securities.
A number of factors could cause us to conclude in one or more future reporting periods that
any difference between the fair value and the amortized cost of one or more of the securities that
we own constitutes an other-than-temporary impairment. These factors include, but are not limited
to, an increase in the severity of the unrealized loss on a particular security, an increase in the
length of time unrealized losses continue without an improvement in value, a change in our intent
or ability to hold the security for a period of time sufficient to allow for the forecasted
recovery, or changes in market conditions or industry or issuer specific factors that would render
us unable to forecast a full recovery in value, including adverse developments concerning the
financial condition of the companies in which we have invested.
The Company may be required to take other-than-temporary impairment charges on various
securities in its investment portfolio. Any other-than-temporary impairment charges would
negatively affect our regulatory capital levels, and may result in a change to our capitalization
category, which could limit certain corporate practices and could compel us to take specific
actions.
Changes in market interest rates could adversely affect our financial condition and results of
operations.
Our financial condition and results of operations are significantly affected by changes in
market interest rates because our assets, primarily loans, and our liabilities, primarily deposits,
are monetary in nature. Our results of operations depend substantially on our net interest income,
which is the difference between the interest income that we earn on our interest-earning assets and
the interest expense that we pay on our interest-bearing liabilities. We are unable to predict
changes in market interest rates that are affected by many factors beyond our control, including
inflation, recession, unemployment, money supply, domestic and international events and changes in
the United States and other financial markets. Our net interest income is affected not only by the
level and direction of interest rates, but also by the shape of the yield curve and relationships
between interest sensitive instruments and key driver rates, and by balance sheet growth, customer
loan and deposit preferences and the timing of changes in these variables which themselves are
impacted by changes in market interest rates. As a result, changes in market interest rates can
significantly impact our net interest income as well as the fair market valuation of our assets and
liabilities.
The failure of other financial institutions could adversely affect us.
Our ability to engage in routine transactions, including for example funding transactions,
could be adversely affected by the actions and potential failures of other financial institutions.
We have exposure to many different industries and counterparties, and we routinely execute
transactions with a variety of counterparties in the
13
Table of Contents
financial services industry. As a result, defaults by, or even rumors or concerns about, one
or more financial institutions with which we do business, or the financial services industry
generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or
by other institutions. Many of these transactions expose us to credit risk in the event of default
of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral
we hold cannot be sold at prices that are sufficient for us to recover the full amount of our
exposure. Any such losses could materially and adversely affect our financial condition or results
of operations.
The markets for our services are highly competitive and we face substantial competition.
The banking business is highly competitive. We compete as a financial intermediary with other
commercial banks, savings and loan associations, credit unions, finance companies, mutual funds,
insurance companies and brokerage and investment banking firms soliciting business from residents
of and businesses located in our market areas, many of which have greater resources than we have.
Many of our competitors enjoy competitive advantages, including greater financial resources, a
wider geographic presence, the ability to offer additional services, more favorable pricing
alternatives and lower origination and operating costs. This competition could result in a
decrease in loans we originate and could negatively affect our results of operations.
In attracting deposits, we compete with insured depository institutions such as banks, savings
institutions and credit unions, as well as institutions offering uninsured investment alternatives,
including money market funds. Traditional banking institutions, as well as entities intending to
transact business solely online, are increasingly using the Internet to attract deposits without
geographic or physical limitations. In addition, many non-bank competitors are not subject to the
same extensive regulations that govern us. These competitors may offer higher interest rates than
we offer, which could result in either attracting fewer deposits or increasing our interest rates
in order to attract deposits. Increased deposit competition could increase our cost of funds and
could affect adversely our ability to generate the funds necessary for our lending operations,
which would negatively affect our results of operations.
Our business is subject to the success of the local economies where we operate.
Our success significantly depends on the growth in population, income levels, deposits and
housing starts in our primary and surrounding markets. If the communities in which we operate do
not grow or if prevailing economic conditions locally or nationally continue to be unfavorable, our
business may not succeed. We are currently experiencing economic conditions in our market areas
that have negatively affected the ability of our customers to repay their loans to us and generally
negatively affected our financial condition and results of operations. We are less able than a
larger institution to spread the risks of unfavorable local economic conditions across a large
number of diversified economies and are thus disproportionately impacted. Moreover, we cannot give
any assurance that we will benefit from any market growth or favorable economic conditions in our
primary and surrounding market areas if they do materialize in the future.
Our business may be adversely affected by the highly regulated environment in which we
operate.
We are subject to extensive federal and state legislation, regulation, examination and
supervision. Recently enacted, proposed and future legislation and regulations could have a
substantial and unpredictable adverse effect on our business and operations. Our success depends
on our continued ability to comply with these laws and regulations. Some of these regulations may
increase our costs. For example, the Sarbanes-Oxley Act of 2002, and the related rules and regulations
promulgated by the SEC that currently apply to us have increased the scope, complexity and cost of
corporate governance, reporting and disclosure practices. As a result, we may experience greater
compliance costs. While we cannot predict what effect any future changes in these laws or
regulations or their interpretations would have on us, these changes or interpretations may
adversely affect our future operations. With the current economic environment, the nature and
extent of future legislative and regulatory changes affecting financial institutions is very
unpredictable.
14
Table of Contents
Non-compliance with USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could
result in fines or sanctions, and curtail expansion opportunities.
Financial institutions are required under the USA PATRIOT and the Bank Secrecy Act to develop
programs to prevent financial institutions from being used for money laundering and terrorist
activities. Financial institutions are also obligated to file suspicious activity reports with the
U.S. Treasury Departments Office of Financial Crimes Enforcement Network if such activities are
detected. These rules also require financial institutions to establish procedures for identifying
and verifying the identity of customers seeking to open new financial accounts. Failure or the
inability to comply with these regulations could result in fines or penalties, curtailment of
expansion opportunities, intervention or sanctions by regulators and costly litigation or expensive
additional controls and systems. During the last few years, several banking institutions have
received large fines for non-compliance with these laws and regulations. We have developed
policies and continue to augment procedures and systems designed to assist in compliance with these
laws and regulations. However, we cannot be assured that such policies will effectively protect
us.
Losing key personnel will negatively affect us.
We may not be able to attract or retain the personnel we require to compete successfully. We
currently depend heavily on the services of our executive officers and other members of our senior
management team. While our executive officers and the majority of our market presidents have
employment contracts, nothing in these contracts prevents these individuals from leaving the
Company or the Bank at any time they choose. Losing the services of these or other members of
senior management could affect us in a material and adverse way. Our success will also depend on
attracting and retaining additional qualified management personnel. Additionally, the scope and
content of banking regulators policies on executive compensation are continuing to develop and are
likely to continue evolving in the near future. It cannot be determined at this time whether
compliance with such policies will adversely affect our ability to hire, retain and motivate key
employees.
There are limitations on your ability to transfer our common stock.
There is no public trading market for the shares of our common stock, and we do not anticipate
that a market for our common stock will develop in the near future. As a result, shareholders who
may wish or need to dispose of all or a part of their investment in our common stock may not be
able to do so except by private direct negotiations with third parties, assuming that third parties
are willing to purchase our common stock.
We do not intend to pay dividends on our common stock.
We have never declared or paid cash dividends on our common stock. We are under regulatory
prohibition from paying dividends now and for the foreseeable future.
We encounter technological change continually and have fewer resources than many of our
competitors to invest in technological improvements.
The financial services industry is undergoing rapid technological changes, with frequent
introductions of new technology-driven products and services. In addition to serving customers
better, the effective use of technology increases efficiency and enables financial institutions to
reduce costs. Our success will depend in part on our ability to address our customers needs by
using technology to provide products and services that will satisfy customer demands for
convenience, as well as to create additional efficiencies in our operations. Many of our
competitors have substantially greater resources to invest in technological improvements than we
have. We may not be able to implement new technology-driven products and services effectively or
be successful in marketing these products and services to our customers.
Supervision and Regulation
Both the Company and the Bank are subject to extensive state and federal banking regulations
that impose restrictions on and provide for general regulatory oversight of their operations.
These laws generally are intended to protect depositors and not shareholders. The following
discussions describe the material elements of the regulatory framework that applies to us.
15
Table of Contents
FGBC Bancshares
Since we own all of the capital stock of the Bank, we are a bank holding company under the
Federal Bank Holding Company Act of 1956 (the BHC Act). As a result, we are primarily subject to
the supervision, examination, and reporting requirements of the BHC Act and the regulations of the
Board of Governors of the Federal Reserve System (the Federal Reserve). As a bank holding
company located in Georgia, the Georgia Department of Banking and Finance (the GDBF) also
regulates and monitors all significant aspects of our operations.
Acquisition of Banks
The BHC Act requires every bank holding company to obtain the Federal Reserves prior approval
before:
| acquiring direct or indirect ownership or control of any voting shares of any bank if, after the acquisition, the bank holding company will directly or indirectly own or control more than 5% of the banks voting shares; | ||
| acquiring all or substantially all of the assets of any bank; or | ||
| merging or consolidating with any other bank holding company. |
Additionally, the BHC Act provides that the Federal Reserve may not approve any of these
transactions if it would result in or tend to create a monopoly or substantially lessen competition
or otherwise function as a restraint of trade, unless the anti-competitive effects of the proposed
transaction are clearly outweighed by the public interest in meeting the convenience and needs of
the community to be served. The Federal Reserve is also required to consider the financial and
managerial resources and future prospects of the bank holding companies and banks concerned and the
convenience and needs of the community to be served. The Federal Reserves consideration of
financial resources generally focuses on capital adequacy, which is discussed below.
Under the BHC Act, if adequately capitalized and adequately managed, we or any other bank
holding company located in Georgia may purchase a bank located outside of Georgia. Conversely, an
adequately capitalized and adequately managed bank holding company located outside of Georgia may
purchase a bank located inside Georgia. In each case, however, restrictions may be placed on the
acquisition of a bank that has only been in existence for a limited amount of time or will result
in specified concentrations of deposits. Currently, Georgia law prohibits acquisitions of banks
that have been chartered for less than three years.
Change in Bank Control
Subject to various exceptions, the BHC Act and the Change in Bank Control Act, together with
related regulations, require Federal Reserve approval prior to any person or company acquiring
control of a bank holding company. Control is conclusively presumed to exist if an individual or
company acquires 25% or more of any class of voting securities. In addition, a rebuttable
presumption of control exists if, immediately following the acquisition of voting securities, the
holder controls more than 10% of any class of voting securities and either:
| the bank holding company has registered securities under Section 12 of the Exchange Act; or | ||
| no other person owns a greater percentage of that class of voting securities immediately after the transaction. |
Our common stock is registered under Section 12 of the Exchange Act. The regulations set
forth certain a procedure for challenging the rebuttable presumption of control.
Permitted Activities
A bank holding company is generally permitted under the BHC Act to engage in or acquire direct
or indirect control of more than 5% of the voting shares of any company engaged in the following
activities:
| banking or managing or controlling banks; and |
16
Table of Contents
| any activity that the Federal Reserve determines to be so closely related to banking as to be a proper incident to the business of banking. |
Activities that the Federal Reserve has found to be so closely related to banking as to be a
proper incident to the business of banking include:
| factoring accounts receivable; | ||
| making, acquiring, brokering or servicing loans and usual related activities; | ||
| leasing personal or real property; | ||
| operating a non-bank depository institution, such as a savings association; | ||
| trust company functions; | ||
| financial and investment advisory activities; | ||
| conducting discount securities brokerage activities; | ||
| underwriting and dealing in government obligations and money market instruments; | ||
| providing specified management consulting and counseling activities; | ||
| performing selected data processing services and support services; | ||
| acting as agent or broker in selling credit life insurance and other types of insurance in connection with credit transactions; and | ||
| performing selected insurance underwriting activities. |
Despite prior approval, the Federal Reserve may order a bank holding company or its
subsidiaries to terminate any of these activities or to terminate its ownership or control of any
subsidiary when it has reasonable cause to believe that the bank holding companys continued
ownership, activity or control constitutes a serious risk to the financial safety, soundness, or
stability of it or any of its bank subsidiaries.
In addition to the permissible bank holding company activities listed above, a bank holding
company may qualify and elect to become a financial holding company, permitting the bank holding
company to engage in activities that are financial in nature or incidental or complementary to
financial activity. The BHC Act expressly lists the following activities as financial in nature:
| lending, trust and other banking activities; | ||
| insuring, guaranteeing, or indemnifying against loss or harm, or providing and issuing annuities, and acting as principal, agent, or broker for these purposes, in any state; | ||
| providing financial, investment, or advisory services; | ||
| issuing or selling instruments representing interests in pools of assets permissible for a bank to hold directly; | ||
| underwriting, dealing in or making a market in securities; | ||
| other activities that the Federal Reserve may determine to be so closely related to banking or managing or controlling banks as to be a proper incident to managing or controlling banks; | ||
| foreign activities permitted outside of the United States if the Federal Reserve has determined them to be usual in connection with banking operations abroad; | ||
| merchant banking through securities or insurance affiliates; and | ||
| insurance company portfolio investments. |
To qualify to become a financial holding company, the Bank and any other depository
institution subsidiary of ours must be well capitalized and well managed and must have a Community
Reinvestment Act rating of at least
17
Table of Contents
satisfactory. Additionally, a bank holding company must file an election with the Federal
Reserve to become a financial holding company and must provide the Federal Reserve within 30 days
written notice prior to engaging in a permitted financial activity. We are not currently eligible
to become a financial holding company at this time. If we become
eligible in the future we may
decide to make this election.
Support of Subsidiary Institutions
Under Federal Reserve policy, bank holding companies are expected to
act as a source of financial strength for their bank subsidiaries and to commit resources to
support their bank subsidiaries. As a result, a bank holding company may be required to loan money
to its subsidiaries in the form of capital notes or other instruments that qualify as capital of
the subsidiary bank under regulatory rules. However, any loans from the bank holding company to
those subsidiary banks will likely be unsecured and subordinated to that banks depositors and
perhaps to other creditors of that bank. In the event of the Companys bankruptcy, any commitment
by the Company to a bank regulatory agency to maintain the capital of a subsidiary bank at a
certain level would be assumed by the bankruptcy trustee and entitled to priority of payment.
First Georgia Banking Company
The Bank is subject to extensive state and federal banking regulations that impose
restrictions on and provide for general regulatory oversight of our operations. These laws are
generally intended to protect depositors and not shareholders. The following discussion describes
the material elements of the regulatory framework that applies to the Bank.
Since the Bank is a commercial bank chartered under the laws of the State of Georgia, it is
primarily subject to the supervision, examination and reporting requirements of the FDIC and the
GDBF. The FDIC and the GDBF regularly examine the Banks operations and have the authority to
approve or disapprove mergers, the establishment of branches and similar corporate actions. Both
regulatory agencies have the power to prevent the continuance or development of unsafe or unsound
banking practices or other violations of law. Additionally, the Banks deposits are insured by the
FDIC to the maximum extent provided by law. The Bank is also subject to numerous state and federal
statutes and regulations that affect its business, activities and operations.
Branching
Under current Georgia law, the Bank may open branch offices throughout Georgia with the prior
approval of the GDBF. In addition, with prior regulatory approval, the Bank may acquire branches
of existing banks located in Georgia. The Bank and any other national or state-chartered bank
generally may branch across state lines by merging with banks in other states if allowed by the
laws of the applicable state (the foreign state). Georgia law, with limited exceptions, currently
permits branching across state lines through interstate mergers.
Under the Federal Deposit Insurance Act, states may opt-in and allow out-of-state banks to
branch into their state by establishing a new start-up branch in the state. Currently, Georgia has
not opted-in to this provision. Therefore, interstate merger is the only method through which a
bank located outside of Georgia may branch into Georgia. This provides a limited barrier of entry
into the Georgia banking market, which protects us from an important segment of potential
competition. However, because Georgia has elected not to opt-in, our ability to establish a new
start-up branch in another state may be limited. Many states that have elected to opt-in have done
so on a reciprocal basis, meaning that an out-of-state bank may establish a new start-up branch
only if their home state has also elected to opt-in. Consequently, unless Georgia changes its
election, the only way we will be able to branch into states that have elected to opt-in on a
reciprocal basis will be through interstate merger.
Prompt Corrective Action
The FDIC Improvement Act of 1991 established a system of prompt corrective action to resolve
the problems of undercapitalized financial institutions. Under this system, the federal banking
regulators have established five capital categories (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically undercapitalized) in which all
institutions are placed. The federal banking agencies have also specified by regulation the
relevant capital levels for each of these categories. At December 31, 2009, the Bank was
undercapitalized.
18
Table of Contents
Federal banking regulators are required to take various mandatory supervisory actions and are
authorized to take other discretionary actions with respect to institutions in the three
undercapitalized categories. The severity of the action depends upon the capital category in which
the institution is placed. Generally, subject to a narrow exception, the banking regulator must
appoint a receiver or conservator for an institution that is critically undercapitalized.
An institution that is categorized as undercapitalized, significantly undercapitalized, or
critically undercapitalized is required to submit an acceptable capital restoration plan to its
appropriate federal banking agency. A bank holding company must guarantee that a subsidiary
depository institution meets its capital restoration plan, subject to various limitations. The
controlling holding companys obligation to fund a capital restoration plan is limited to the
lesser of 5% of an undercapitalized subsidiarys assets at the time it became undercapitalized or
the amount required to meet regulatory capital requirements. An undercapitalized institution is
also generally subject to restrictions on asset growth, capital distributions, management fees,
acquisitions, establishing any branches or engaging in any new line of business, except under an
accepted capital restoration plan or with FDIC approval. The regulations also establish procedures
for downgrading an institution to a lower capital category based on supervisory factors other than
capital.
Insurance of Deposit Accounts and Regulation by the FDIC
The Banks deposits are insured up to applicable limits by the Deposit Insurance Fund of the
FDIC. The Deposit Insurance Fund is the successor to the Bank Insurance Fund and the Savings
Association Insurance Fund, which were merged effective March 31, 2006. As insurer, the FDIC
imposes deposit insurance premiums and is authorized to conduct examinations of and to require
reporting by FDIC insured institutions. It also may prohibit any FDIC insured institution from
engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the
insurance fund. The FDIC also has the authority to initiate enforcement actions against
institutions, and may terminate deposit insurance if it determines that the institution has engaged
in unsafe or unsound practices or is in an unsafe or unsound condition.
On October 3, 2008, President George W. Bush signed the EESA, which temporarily raised the
basic limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor. The
temporary increase in deposit insurance coverage became effective immediately upon the Presidents
signature. The legislation provides that the basic deposit insurance limit will return to $100,000
after December 31, 2013.
Under regulations effective January 1, 2007, the FDIC adopted a new risk-based premium system
that provides for quarterly assessments based on an insured institutions ranking in one of four
risk categories based upon supervisory and capital evaluations. For deposits held as of March 31,
2009, institutions were assessed at annual rates ranging from 12 to 50 basis points, depending on
each institutions risk of default as measured by regulatory capital ratios and other supervisory
measures. Effective April 1, 2009, assessments also took into account each institutions reliance
on secured liabilities and brokered deposits. This resulted in assessments ranging from 7 to 77.5
basis points. In May 2009, the FDIC issued a final rule which levied a special assessment
applicable to all insured depository institutions totaling 5 basis points of each institutions
total assets less Tier 1 capital as of June 30, 2009, not to exceed 10 basis points of domestic
deposits. This special assessment was part of the FDICs efforts to rebuild the Deposit Insurance
Fund. We paid this one-time special assessment in the amount of $367,050 to the FDIC on September
30, 2009.
In November 2009, the FDIC issued a rule that required all insured depository institutions,
with limited exceptions, to prepay their estimated quarterly risk-based assessments for the fourth
quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC also adopted a uniform three-basis
point increase in assessment rates effective on January 1, 2011. We were required to prepay $6.1
million for the FDIC insurance assessment. We incurred increased deposit insurance costs during
2009 over previous periods due to our increased risk profile.
FDIC insured institutions are required to pay a Financing Corporation assessment to fund the
interest on bonds issued to resolve thrift failures in the 1980s. For the first quarter of 2009,
the Financing Corporation assessment equaled 1.14 basis points for domestic deposits. These
assessments, which may be revised based upon the level of deposits, will continue until the bonds
mature in the years 2017 through 2019.
19
Table of Contents
The FDIC may terminate the deposit insurance of any insured depository institution, including
the Bank, if it determines after a hearing that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC. It also may suspend
deposit insurance temporarily during the hearing process for the permanent termination of
insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the
accounts at the institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by the FDIC.
Management of the Bank is not aware of any practice, condition or violation that might lead to
termination of the banks deposit insurance.
Temporary Liquidity Guarantee Program
On November 21, 2008, the Board of Directors of the FDIC adopted a final rule relating to the
Temporary Liquidity Guarantee Program (TLG Program). The TLG Program was announced by the FDIC
on October 14, 2008, preceded by the determination of systemic risk by Treasury, as an initiative
to counter the system-wide crisis in the nations financial sector. Under the TLG Program the FDIC
will (i) guarantee, through the earlier of maturity or June 30, 2012, certain newly issued senior
unsecured debt issued by participating institutions and (ii) provide full FDIC deposit insurance
coverage for non-interest bearing transaction deposit accounts, certain accounts on which the bank
has guaranteed it will pay less than 0.5% interest per annum and interest on Lawyers Trust Accounts
held at participating FDIC-insured institutions. Coverage under the TLG Program was available for
the first 30 days without charge. The fee assessment for coverage of senior unsecured debt ranges
from 50 basis points to 100 basis points per annum, depending on the initial maturity of the debt.
The fee assessment for deposit insurance coverage is 10 basis points per quarter on amounts in
covered accounts exceeding $250,000 through December 31, 2009. We elected to participate in both
guarantee programs. On April 13, 2010, the FDIC extended the Transaction Account Guarantee (TAG)
portion of the TLG Program through December 31, 2010 at a cost of 25 basis points per annum. As of
December 31, 2009, we had issued no debt has been issued under the TLG Program.
Community Reinvestment Act
The Community Reinvestment Act requires that, in connection with examinations of financial
institutions within their respective jurisdictions, the Federal Reserve or the FDIC will evaluate
the record of each financial institution in meeting the credit needs of its local community,
including low and moderate-income neighborhoods. These facts are also considered in evaluating
mergers, acquisitions, and applications to open a branch or facility. Failure to adequately meet
these criteria could impose additional requirements and limitations on the Bank. Additionally, we
must publicly disclose the terms of various Community Reinvestment Act-related agreements.
The USA PATRIOT Act and the Bank Secrecy Act
The USA PATRIOT Act and the Bank Secrecy Act require financial institutions to develop
programs to detect and report money-laundering and terrorist activities, as well as suspicious
activities. The USA PATRIOT Act also gives the federal government new powers to address terrorist
threats through enhanced domestic security measures, expanded surveillance powers, increased
information sharing and broadened anti-money laundering requirements. The federal banking agencies
are required to take into consideration the effectiveness of controls designed to combat
money-laundering activities in determining whether to approve a merger or other acquisition
application of a member institution. Accordingly, if we engage in a merger or other acquisition,
our controls designed to combat money laundering would be considered as part of the application
process. In addition, non-compliance with these laws and regulations could result in fines,
penalties and other enforcement measures. We have developed policies and continue to augment
procedures and systems designed to comply with these laws and regulations.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 was enacted in response to public concerns regarding corporate
accountability in connection with certain accounting scandals. The stated goals of the
Sarbanes-Oxley Act are to increase corporate responsibility, to provide for enhanced penalties for
accounting and auditing improprieties at publicly traded companies, and to protect investors by
improving the accuracy and reliability of corporate disclosures pursuant to the securities laws.
The Sarbanes-Oxley Act generally applies to all companies that file or
20
Table of Contents
are required to file periodic reports with the Securities and Exchange Commission, under the
Securities Exchange Act of 1934.
The Sarbanes-Oxley Act includes specific additional disclosure requirements, requires the
Securities and Exchange Commission and national securities exchanges to adopt extensive additional
disclosure, corporate governance and other related rules, and mandates further studies of certain
issues by the Securities and Exchange Commission. The Sarbanes-Oxley Act represents significant
federal involvement in matters traditionally left to state regulatory systems, such as the
regulation of the accounting profession, and to state corporate law, such as the relationship
between a board of directors and management and between a board of directors and its committees.
Other Regulations
Interest and other charges collected or contracted for by the Bank are subject to state usury
laws, and federal laws concerning interest rates. The Banks loan operations are also subject to
federal laws applicable to credit transactions, such as the:
| federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; | ||
| Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; | ||
| Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit; | ||
| Fair Credit Reporting Act of 1978, governing the use and provisions of information to credit reporting agencies; | ||
| Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; | ||
| Soldiers and Sailors Civil Relief Act of 1940, governing the repayment terms of, and property rights underlying, secured obligations of persons in military service; and | ||
| rules and regulations of the various federal agencies charged with the responsibility of implementing these federal laws. |
The deposit operations of the Bank are subject to laws and regulations such as:
| the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve to implement that act, which govern automatic deposits to and withdrawals from deposit accounts and customers rights and liabilities arising from the use of automated teller machines and other electronic banking services. |
All areas of the Bank are subject to:
| the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records. |
Capital Adequacy
The Company and the Bank are required to comply with the capital adequacy standards
established by the Federal Reserve (in the case of the Company) and the FDIC (in the case of the
Bank). The Federal Reserve has established a risk-based and a leverage measure of capital adequacy
for bank holding companies. The Bank is also subject to risk-based and leverage capital
requirements adopted by the FDIC, which are substantially similar to those adopted by the Federal
Reserve for bank holding companies.
The risk-based capital standards are designed to make regulatory capital requirements more
sensitive to differences in risk profiles among banks and bank holding companies, to account for
off-balance-sheet exposure,
21
Table of Contents
and to minimize disincentives for holding liquid assets. Assets and off-balance-sheet items,
such as letters of credit and unfunded loan commitments, are assigned to broad risk categories,
each with appropriate risk weights. The resulting capital ratios represent capital as a percentage
of total risk-weighted assets and off-balance-sheet items.
The minimum guideline for the ratio of total capital to risk-weighted assets is 8%. Total
capital consists of two components, Tier 1 Capital and Tier 2 Capital. Tier 1 Capital generally
consists of common stock, minority interests in the equity accounts of consolidated subsidiaries,
noncumulative perpetual preferred stock, and a limited amount of qualifying cumulative perpetual
preferred stock, less goodwill and other specified intangible assets. Tier 1 Capital must equal at
least 4% of risk-weighted assets. Tier 2 Capital generally consists of subordinated debt, other
preferred stock, and a limited amount of loan loss reserves. The total amount of Tier 2 Capital is
limited to 100% of Tier 1 Capital. At December 31, 2009 our consolidated ratio of total capital to
risk-weighted assets was 7.01%, which is a decrease of 3.66% from 10.67% at December 31, 2008. Our
ratio of Tier 1 Capital to risk-weighted assets was 5.75% as of December 31, 2009, which is a
decrease of 3.67% from 9.42% at December 31, 2008. Our capital ratios declined in 2009 due to
losses incurred during the year.
In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank
holding companies. These guidelines provide for a minimum ratio of Tier 1 Capital to average
assets, less goodwill and other specified intangible assets, of 3% for bank holding companies that
meet specified criteria, including having the highest regulatory rating and implementing the
Federal Reserves risk-based capital measure for market risk. All other banking holding companies
generally are required to maintain a leverage ratio of at least 4%. At December 31, 2009, our
leverage ratio was 4.37%, which is a 3.28% decrease from 7.65% at December 31, 2008. The
guidelines also provide that bank holding companies experiencing internal growth or making
acquisitions will be expected to maintain strong capital positions substantially above the minimum
supervisory levels without reliance on intangible assets. Because of our recent deterioration and
risk exposure, our regulators expect us to maintain capital ratios substantially above the
regulatory minimums. The Federal Reserve considers the leverage ratio and other indicators of
capital strength in evaluating proposals for expansion or new activities.
As of December 31, 2009, the Company and the Bank were categorized as undercapitalized. As a
result, we are prohibited from directly or indirectly accepting, renewing or rolling over any
brokered deposits. In addition, as an undercapitalized Bank we may be required to comply with
additional operating restrictions, including having to submit a plan to restore the Bank to an
acceptable capital category. Failure to adequately comply could eventually allow the banking
regulators to appoint a receiver or conservator of our net assets. These matters are a major focus
of the attention and efforts of the Board of Directors and management. Significant additional
restrictions can be imposed on FDIC-insured depository institutions that fail to meet applicable
capital requirements.
Payment of Dividends
We are a legal entity separate and distinct from the Bank, which is our subsidiary. The
principal sources of our cash flow, including cash flow to pay dividends to our shareholders, are
dividends that the Bank pays to us. Statutory and regulatory limitations apply to the Banks
payment of dividends. If, in the opinion of its federal banking regulator, the Bank were engaged
in or about to engage in an unsafe or unsound practice, the federal banking regulator could
require, after notice and a hearing, that it stop or refrain from engaging in the questioned
practice. The federal banking agencies have indicated that paying dividends that deplete a
depository institutions capital base to an inadequate level would be an unsafe and unsound banking
practice. Under the FDIC Improvement Act of 1991, a depository institution may not pay any
dividends if payment would cause it to become undercapitalized or if it already is
undercapitalized. Moreover, the federal agencies have issued policy statements that provide that
bank holding companies and insured banks should generally only pay dividends out of current
operating earnings.
The GDBF also regulates the Banks dividend payments. Under the provisions of the Financial
Institutions Code of Georgia, the Bank may declare and pay cash dividends only out of our retained
earnings, and dividends may not be declared or paid at any time at which the Banks paid-in capital
and retained earnings do not, in combination, equal at least 20% of our capital stock account. In
addition, under the current rules and regulations of the GDBF, cash dividends may only be declared
or paid on the Banks outstanding capital stock, without any requirement to notify the GDBF or
request the approval of the GDBF, under the following conditions:
22
Table of Contents
| total classified assets at the Banks most recent examination do not exceed 80% of Tier 1 Capital plus the allowance for loan losses as reflected at such examination; | ||
| the aggregate amount of dividends declared or anticipated to be declared in the calendar year does not exceed 50% of the Banks net profits, after taxes but before dividends, for the previous calendar year; and | ||
| the ratio of Tier 1 Capital to adjusted total assets is not less than 6%. |
Any dividend to be declared by the Bank at the time when each of the conditions provided above
does not exist must be approved, in writing, by the GDBF prior to the payment of the dividend
pursuant to the provisions of Section 7-1-460(a)(3) of the Financial Institutions Code of Georgia.
(Section 7-1-460(a)(3) of the Financial Institutions Code of Georgia provides that [d]ividends may
not be paid without the prior approval of the [D]epartment in excess of specified amounts as may be
fixed by regulations of the [D]epartment to assure that banks and trust companies maintain an
adequate capital structure.)
The payment of dividends may also be affected or limited by other factors, such as the
requirement to maintain adequate capital above regulatory guidelines. In addition, if, in the
opinion of the applicable regulatory authority, a bank under its jurisdiction is engaged in or is
about to engage in an unsafe or unsound practice (which, depending upon the financial condition of
the bank, could include the payment of dividends), such authority may require, after notice and
hearing, that such bank cease and desist from such practice. In addition to the formal statutes and
regulations, regulatory authorities consider the adequacy of a banks total capital in relation to
its assets, deposits and other such items.
Restrictions on Transactions with Affiliates
We are subject to the provisions of Section 23A of the Federal Reserve Act. Section 23A
places limits on the amount of:
| a banks loans or extensions of credit to affiliates; | ||
| a banks investment in affiliates; | ||
| assets a bank may purchase from affiliates, except for real and personal property exempted by the Federal Reserve; | ||
| loans or extensions of credit made by a bank to third parties collateralized by the securities or obligations of affiliates; and | ||
| a banks guarantee, acceptance or letter of credit issued on behalf of an affiliate. |
The total amount of the above transactions is limited in amount, as to any one affiliate, to
10% of a banks capital and surplus and, as to all affiliates combined, to 20% of a banks capital
and surplus. In addition to the limitation on the amount of these transactions, each of the above
transactions must also meet specified collateral requirements. The Bank must also comply with
other provisions designed to avoid the taking of low-quality assets.
We are also subject to the provisions of Section 23B of the Federal Reserve Act which, among
other things, prohibit an institution from engaging in transactions with affiliates unless the
transactions are on terms substantially the same, or at least as favorable to the institution or
its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated
companies.
The Bank is also subject to restrictions on extensions of credit to its executive officers,
directors, principal shareholders and their related interests. These extensions of credit (1) must
be made on substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with third parties and (2) must not involve more
than the normal risk of repayment or present other unfavorable features.
Privacy
Financial institutions are required to disclose their policies for collecting and protecting
confidential information. Customers generally may prevent financial institutions from sharing
nonpublic personal financial
23
Table of Contents
information with nonaffiliated third parties except under narrow circumstances, such as the
processing of transactions requested by the consumer or when the financial institution is jointly
sponsoring a product or service with a nonaffiliated third party. Additionally, financial
institutions generally may not disclose consumer account numbers to any nonaffiliated third party
for use in telemarketing, direct mail marketing or other marketing to consumers.
Consumer Credit Reporting
On December 4, 2003, President Bush signed the Fair and Accurate Credit Transactions Act (the
FAIR Act), amending the federal Fair Credit Reporting Act (the FCRA). These amendments to the
FCRA (the FCRA Amendments) became effective in 2004.
The FCRA Amendments include, among other things:
| requirements for financial institutions to develop policies and procedures to identify potential identity theft and, upon the request of a consumer, place a fraud alert in the consumers credit file stating that the consumer may be the victim of identity theft or other fraud. | ||
| for entities that furnish information to consumer reporting agencies (which would include the Bank), requirements to implement procedures and policies regarding the accuracy and integrity of the furnished information and regarding the correction of previously furnished information that is later determined to be inaccurate; and | ||
| a requirement for mortgage lenders to disclose credit scores to consumers. |
Proposed Legislation and Regulatory Action
New regulations and statutes are regularly proposed that contain wide-ranging proposals for
altering the structures, regulations and competitive relationships of financial institutions
operating or doing business in the United States. We cannot predict whether or in what form any
proposed regulation or statute will be adopted or the extent to which our business may be affected
by any new regulation or statute.
ITEM 1A. | Risk Factors. |
Our business faces risks. The material risk factors that we face are described under the
heading Risk Factors within Item 1 of this report and incorporated into this Item 1A. by
reference.
ITEM
1B. Unresolved Staff Comments.
None.
ITEM 2. | Properties. |
We own all of our branches except for our Commerce (Jackson County) location, in which we have
a five-year lease. Our owned properties are listed below:
| 1989 Historic Homer Highway, Commerce, Georgia 30529 (Banks County) | ||
| 100 Tom Reeve Drive, Carrollton, Georgia 30117 (Carroll County) also Operations Center | ||
| 908 South Carroll Road, Villa Rica, Georgia 30180 (Carroll County) | ||
| 920 Level Grove Road, Cornelia, Georgia 30531 (Habersham County) | ||
| 102 Stockbridge Boulevard, Bremen, GA 30110 (Haralson County) | ||
| 101 Main Street, Franklin, Georgia 30217 (Heard County) | ||
| 1465 Old Swimming Pool Road, Jefferson, Georgia 30549 (Jackson County) | ||
| 7320 Veterans Parkway, Columbus, Georgia 31909 (Muscogee County) | ||
| 1251 Virgil Langford Road, Bogart, Georgia 30622 (Oconee County) | ||
| 1378 Dug Gap Road, Dalton, Georgia 30720 (Whitfield County) |
24
Table of Contents
We currently operate out of rental space in our Lake Oconee (Greene County) branch. We
believe that our properties are in good condition and suitable for our operations.
ITEM 3. | Legal Proceedings. |
There are no material pending legal proceedings to which the Company is a party or of which
any of its properties are subject, nor are there material proceedings known to the Company to be
contemplated by any governmental authority. Additionally, the Company is unaware of any material
proceedings, pending or contemplated, in which any existing director, officer or affiliate of the
Company or any associate of any of the foregoing, is a party or has an interest adverse to the
Company.
PART II
ITEM 4. | Market For Registrants Common Equity, Related Shareholder Matters and Issuer Purchasers of Equity Securities. |
No public market exists for our common stock, and there can be no assurance that a public
trading market for our common stock will develop. As of March 1, 2010, there were approximately
1,540 holders of record of our common stock who collectively held 13,993,233 shares of our common
stock. As of December 31, 2009, there were 1,182,420 options and 365,590 warrants presently
subject to purchase such common shares.
We have not paid dividends since inception and are currently prohibited from doing so pursuant
to regulatory restrictions. For a complete discussion on the restrictions on dividends, see Part
I, Item 1, Supervision and Regulation Payment of Dividends.
ITEM 5. | Selected Financial Data. |
The following table presents selected financial data for years ended December 31, 2009, 2008,
2007, 2006, and 2005.
Year ended December 31, | ||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
EARNINGS |
||||||||||||||||||||
Interest income |
$ | 39,199,664 | $ | 44,734,948 | $ | 46,997,687 | $ | 33,106,902 | $ | 14,437,231 | ||||||||||
Interest expense |
18,090,629 | 24,007,875 | 25,193,386 | 15,836,438 | 6,292,607 | |||||||||||||||
Provision for loan loss |
32,170,357 | 8,914,368 | 2,353,244 | 2,740,843 | 1,814,746 | |||||||||||||||
Net interest income (expense)
(after provision) |
(11,061,322 | ) | 11,812,705 | 19,451,057 | 14,529,621 | 6,329,878 | ||||||||||||||
Non-interest income |
4,205,035 | 4,625,591 | 3,437,606 | 2,557,536 | 1,693,746 | |||||||||||||||
Non-interest expense |
26,547,583 | 24,472,995 | 21,413,101 | 16,821,026 | 8,888,651 | |||||||||||||||
Net income (loss) |
(37,049,267 | ) | (5,074,935 | ) | 2,055,068 | 266,131 | (865,027 | ) | ||||||||||||
SELECTED AVERAGE BALANCES |
||||||||||||||||||||
Assets |
$ | 798,800,000 | $ | 768,800,000 | $ | 630,034,000 | $ | 449,611,000 | $ | 238,615,000 | ||||||||||
Earning assets |
733,656,000 | 720,266,000 | 590,797,000 | 425,222,000 | 225,955,000 | |||||||||||||||
Loans |
651,316,000 | 633,201,000 | 485,631,000 | 348,869,000 | 178,332,000 | |||||||||||||||
Total deposits |
725,674,000 | 684,010,000 | 563,598,000 | 374,283,000 | 208,480,000 | |||||||||||||||
Shareholders equity |
62,731,000 | 67,432,000 | 65,004,000 | 61,252,000 | 36,945,000 | |||||||||||||||
Common shares outstanding diluted |
13,482,241 | 13,020,215 | 12,889,153 | 12,282,832 | 7,095,891 |
25
Table of Contents
Year ended December 31, | ||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
YEAR-END BALANCES |
||||||||||||||||||||
Assets |
$ | 792,200,607 | $ | 821,385,621 | $ | 684,633,510 | $ | 579,410,303 | $ | 326,690,446 | ||||||||||
Earning assets |
679,689,392 | 731,898,700 | 641,553,971 | 544,695,656 | 310,873,458 | |||||||||||||||
Loans (net of allowance) |
599,333,982 | 672,163,689 | 533,441,960 | 403,397,896 | 260,870,361 | |||||||||||||||
Total deposits |
734,789,120 | 737,091,694 | 615,236,359 | 496,692,502 | 258,791,577 | |||||||||||||||
Other liabilities |
1,033,892 | 1,730,132 | 2,607,209 | 19,158,514 | 10,957,201 | |||||||||||||||
Shareholders equity |
34,377,595 | 65,813,795 | 66,789,942 | 63,559,287 | 56,941,668 | |||||||||||||||
Common shares outstanding |
13,993,233 | 12,492,206 | 12,185,144 | 12,062,331 | 11,229,851 | |||||||||||||||
PER COMMON SHARE |
||||||||||||||||||||
Earnings (loss) per share basic |
$ | (2.82 | ) | $ | (0.41 | ) | $ | .17 | $ | .02 | $ | (0.12 | ) | |||||||
Earnings (loss) per share diluted |
$ | (2.82 | ) | $ | (0.41 | ) | .16 | .02 | (0.12 | ) | ||||||||||
Book value |
2.46 | 5.27 | 5.48 | 5.27 | 5.07 | |||||||||||||||
Cash dividend paid |
| | | | | |||||||||||||||
FINANCIAL RATIOS |
||||||||||||||||||||
Return on average assets |
(4.64 | %) | (0.66 | %) | .33 | % | .06 | % | (0.36 | %) | ||||||||||
Return on average equity |
(59.06 | %) | (7.53 | %) | 3.16 | % | .43 | % | (2.34 | %) | ||||||||||
Average equity to average assets |
7.85 | % | 8.77 | % | 10.32 | % | 13.62 | % | 15.48 | % | ||||||||||
Dividend payout ratio |
n/a | n/a | n/a | n/a | n/a | |||||||||||||||
NON-FINANCIAL |
||||||||||||||||||||
Employees |
167 | 191 | 192 | 185 | 130 | |||||||||||||||
Banking offices |
12 | 12 | 11 | 10 | 3 | |||||||||||||||
ATMs |
12 | 12 | 12 | 10 | 3 |
ITEM 6. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Overview
Our 2009 results were highlighted by substantial deterioration in our loan portfolio. The
communities that we serve continue to experience significant economic weakness, especially related
to the real estate markets. This downturn has negatively affected borrowers such as builders who
are unable to sell their inventory, retail and other commercial businesses, and consumers who have
lost equity in their homes do to declining values. Additionally, increased unemployment rates have
led to customers encountering difficulties making loan payments. These factors produced a net loss
of approximately $37.0 million for the year ended December 31, 2009, or $2.82 per share. This
compares to a net loss of approximately $5.1 million for the year ended December 31, 2008, or $0.41
per share.
The following is a more detailed summary of our 2009 financial performance:
| Total loans decreased to approximately $612 million at December 31, 2009, down from approximately $683 million at December 31, 2008. This represents a 10.4% decrease for the year. We intentionally reduced the size of our loan portfolio, and therefore our overall assets, in an effort to positively impact our capital ratios in the wake of the severe decline these ratios have sustained due to recent losses. | ||
| Total deposits were approximately $735 million at December 31, 2009, a slight decline from approximately $737 million at December 31, 2008. Approximately 59% of our deposits at December 31, 2009 consisted of time deposits. | ||
| Our provision for loan losses, which was by far the largest single contributor to our overall loss, was $32.1 million in 2009, up from $8.9 million in 2008. The increase was primarily the result of the weakening real estate markets in the communities we serve, especially as it relates to our portfolio or commercial real estate loans. Net charge offs totaled $30.3 million during 2009 compared to $4.2 |
26
Table of Contents
million in 2008. Our allowance for loan losses as a percentage of total loans stood at 2.10% as of December 31, 2009, up from 1.61% at December 31, 2008. | |||
| Nonaccrual loans increased to $48.7 million at December 31, 2009 from $36.7 at December 31, 2008. Approximately 35% of these nonaccrual loans consisted of commercial real estate loans. Increasing levels of non-performing loans negatively impacted our net interest income as the accrual of interest was discontinued and previously accrued but uncollected interest was reserved against income. | ||
| Foreclosed assets (primarily real estate) increased to $13.7 million at December 31, 2009 from $6.0 million at December 31, 2008 as we foreclosed on properties and other assets that had served as collateral for delinquent loans. Related to this increase, foreclosed asset expense increased by approximately $1.4 million as compared to 2008 as we incurred expenses for the upkeep of properties, legal fees, taxes and other holding costs. Write-downs of foreclosed properties totaled approximately $2.0 million in 2009 as compared to approximately $1.2 million for 2008. During 2009 we sold approximately $8.8 million of foreclosed property at a loss of approximately $800,000. At December 31, 2009 we had nine properties under contract to sell for an aggregate agreed upon price of $771,600. | ||
| Net interest income before the provision for loan losses increased marginally to $21.1 million for 2009 compared to $20.7 million for 2008. Our net interest margin remained at 2.88% during 2009, unchanged from 2008. The negative impact of lost interest income from nonaccrual loans was offset by a declining costs of funds as deposits re-priced to lower rates during the course of the year. | ||
| Noninterest income was approximately $4.2 million for the year ended December 31, 2009, down from approximately $4.6 million during 2008. | ||
| Noninterest expense increased to approximately $26.5 million in 2009 compared to approximately $24.5 million in 2008, which represents an 8.2% increase. Increased expenses associated with foreclosed assets, as detailed above, and increases in FDIC insurance premiums offset reductions in salary and employee benefits expenses. | ||
| Due to our significant losses, we are unable to conclude that we will generate sufficient net income in the foreseeable future to realize the full value of our deferred tax assets. Therefore, we established a $16.3 million deferred tax asset valuation allowance as of December 31, 2009, bringing our net deferred tax asset to approximately $197,000, which equals the portion of our deferred tax asset that is related to our net unrealized losses on our securities portfolio. As a result, any further losses will not have an associated tax benefit unless and until we can show that it is more likely than not that we will realize those tax benefits. | ||
| Shareholders equity decreased to approximately $34.4 million at December 31, 2009 from approximately $65.8 million at December 31, 2008. The reduction was primarily a result of our net loss, although it was mitigated to a small degree by net proceeds of approximately $5.1 million from the sale of common stock and warrants in a private placement that commenced in June 2009. Our book value per common share at December 31, 2009 was $2.46, down from $5.27 at December 31, 2008. |
We expect to continue to experience pressure on our earnings, liquidity and regulatory capital
over the foreseeable future. Our current focus, therefore, is to improve our capital position. We
intend to accomplish this objective at least in part through moderate contraction of our balance
sheet. We are also exploring alternatives to raise additional capital. Because of the liquidity
pressures we may face due to the unavailability of traditions funding sources we intend to maintain
a high level of liquid assets until such time as we can improve our capital position. We believe
this strategy is prudent in the short run even though liquid assets tend to provide lower yields
and thus produce less income.
The following tables set forth selected measures of our financial performance and condition
for the years and dates indicated.
27
Table of Contents
Year Ended | Year Ended | Year Ended | ||||||||||
December 31, | December 31, | December 31, | ||||||||||
2009 | 2008 | 2007 | ||||||||||
Total revenues (1) |
$ | 43,404,699 | $ | 49,360,539 | $ | 50,435,293 | ||||||
Net income (loss) |
$ | (37,049,267 | ) | $ | (5,074,935 | ) | $ | 2,055,068 |
At December 31, | At December 31, | At December 31, | ||||||||||
2009 | 2008 | 2007 | ||||||||||
Total assets |
$ | 792,200,607 | $ | 821,385,621 | $ | 684,633,510 | ||||||
Total loans (2) |
$ | 599,333,982 | $ | 672,163,689 | $ | 533,441,960 | ||||||
Total deposits |
$ | 734,789,120 | $ | 737,091,694 | $ | 615,236,359 |
(1) | Total revenue equals interest income plus total non-interest income. | |
(2) | Total loans reported net of allowance for loan losses and unearned income. |
The following is a more detailed discussion of our financial condition at December 31, 2009,
2008 and 2007 and the results of operations for the years then ended. The purpose of this
discussion is to focus on information about our financial condition and results of operations that
is not otherwise apparent from the audited financial statements. Analysis of the results presented
should be made with an understanding of our relatively short history. The following discussion
should also be read in conjunction with our financial statements and related notes and the other
financial data included elsewhere in this report.
Critical Accounting Policies
We have adopted various accounting policies which govern the application of accounting
principles generally accepted in the United States of America in the preparation of our
consolidated financial statements. Our significant accounting policies are described in the
footnotes to the consolidated financial statements at December 31, 2009 which are made a part of
this annual report. Certain accounting policies involve significant judgments and assumptions by
us which have a material impact on the carrying value of certain assets and liabilities. We
consider these accounting policies to be critical accounting policies. The judgments and
assumptions we use are based on historical experience and other factors, which we believe to be
reasonable under the circumstances. Because of the nature of the judgments and assumptions we
make, actual results could differ from these judgments and estimates which could have a material
impact on our carrying values of assets and liabilities and our results of operations.
Allowance for Loan Losses
We believe the allowance for loan losses is a critical accounting estimate that requires the
most significant judgments and assumptions used in the preparation of our consolidated financial
statements. Because the allowance for loan losses is replenished through a provision for loan
losses that is charged against earnings, our subjective determinations regarding the allowance
affect our earnings directly. Refer to the portion of this discussion that addresses our allowance
for loan losses for a description of our processes and methodology for determining our allowance
for loan losses.
Estimates of Fair Value
The estimation of fair value is significant to a number of the Companys assets, including,
but not limited to, investment securities, impaired loans and foreclosed assets. Investment
securities are recorded at fair value while impaired loans and foreclosed assets are recorded at
either cost or fair value, whichever is lower.
Fair values for investment securities are based on quoted market prices, and if not available,
quoted prices on similar instruments. The fair values of foreclosed assets are often determined
based upon the lowest of the following three methods: (1) independently observed market prices; (2)
appraised values or (3) managements estimation of the value of the property. Write-downs based on
the fair value of the asset at acquisition is charged to the allowance for loan losses. In the
event that foreclosed real estate is incomplete at the time of foreclosure, it is held for sale and
initially recorded at fair value as obtained from a current appraisal less estimated costs to
complete
28
Table of Contents
and sell. We will obtain an as-completed appraisal and capitalize costs associated with
completion up to this value, less selling costs, in accordance with generally accepted accounting
procedures. For the year ended December 31, 2009 we charged down $293,223 at the time of
foreclosure. After foreclosure, valuations are periodically performed and the assets are carried
at the lower of the carrying or fair value, less estimated cost to sell. Costs incurred in
maintaining foreclosed assets and subsequent write-downs based on updated valuations of the
property are included in other operating expenses. In response to the slowing economy and general
decline in real estate values, we incurred $2,029,695 in subsequent write-downs on previously
foreclosed assets and realized net losses of on sales of foreclosed assets of $798,840 for the year
ended December 31, 2009. The carrying amount of foreclosed assets at December 31, 2009 and 2008
was $13,740,602 and $6,041,163, respectively. Based on our assumptions, we believe that the
carrying value of our foreclosed assets at December 31, 2009 is reasonable. However, if our
assumptions prove incorrect, or if market conditions deteriorate further, we may have to take
further write downs on our foreclosed properties. Because of the lack of stability in our markets
for the past few years, we believe that the range of possible outcomes relating to our foreclosed
property is greater than usual.
Income taxes
The determination of our overall income tax provision is complex and requires careful
analysis. This analysis includes evaluating the amount and timing of the realization of income tax
liabilities or benefits. Management continually monitors tax developments as they affect our
overall tax position. Deferred income tax assets and liabilities are determined using the balance
sheet method. Under this method, the net deferred tax asset or liability is determined based on
the tax effects of the temporary differences between the book and tax bases of the various balance
sheet assets and liabilities and gives current recognition to changes in tax rates and laws. A
valuation allowance for deferred tax assets is required when it more likely than not that some
portion or all of the deferred tax assets will not be realized in the near term. In assessing the
realization of the deferred tax assets, we consider the scheduled reversals of deferred tax
liabilities, projected future taxable income, and tax planning strategies. During 2007, we
assessed the continuing need for a valuation allowance against deferred tax assets and concluded
that an allowance was no longer necessary under accounting guidance. As a result, we eliminated
the valuation allowance that was recorded as of December 31, 2006. However, due to our recent
significant losses, we were unable to conclude that we will generate sufficient net income in the
near term to realize the full value of our deferred tax assets. Therefore, we established a $16.3
million deferred tax asset valuation allowance in 2009 bringing our net deferred tax asset to
approximately $197,000, which is the deferred tax for the net unrealized losses on our securities
portfolio. As a result, any further losses will not have an associated tax benefit until we can
show that it is more likely than not that we will realize those tax benefits.
Stock-based compensation
The assumptions used in the determination of the fair value of stock options granted
ultimately determine the recognition of stock-based compensation expense. The short-cut method was
used to determine the expected life of the options. This method calculates the expected term based
on the midpoint between the vesting date of the option and the end of the contractual term.
Expected volatility was based upon the volatility of similar entities. Risk-free interest rates
for periods within the contractual life of the option are based upon the U.S. Treasury yield curve
in effect at the time of the grant. Because of the need to retain capital and past history, the
expected dividend rate is 0%. These assumptions have a significant impact on the amount of expense
recognized for stock-based compensation.
Results of operations for the years ended December 31, 2009, 2008 and 2007
Net Income (Loss) |
2009 Compared to 2008. For the year ended December 31, 2009, we recorded a net loss of
$37,049,267, which compares to a net loss of $5,074,935 for the year ended December 31, 2008.
Basic and diluted loss per share amounted to $2.82 and $.41 for the years ended December 31, 2009
and 2008, respectively. The net decrease in income of $31,974,332 was primarily due to a
$23,255,989 increase in the provision for loan losses compared to 2008 as a result of the continued
asset quality deterioration in our loan portfolio. Establishing a deferred tax asset valuation
allowance, as noted above, further negatively impacted our earnings as we recorded tax expense of
$3,645,397 for the year ended December 31, 2009, which is an increase of $6,605,161 as compared to
the same period in 2008.
29
Table of Contents
2008 Compared to 2007. For the year ended December 31, 2008, we recorded a net loss of
($5,074,935), which compares to net income of $2,055,068 for the year ended December 31, 2007.
Basic and diluted losses per share amounted to ($.41) for the year ended December 31, 2008,
compared to basic earnings per share of $.17 and diluted earnings per shares of $.16 for the year
ended December 31, 2007. The net decrease in income of $7,130,003 was primarily due to a
$6,561,124 increase in the provision for loan losses as a result of a general decline in the real
estate markets that we serve, as well as the overall economy, and the negative effect that these
trends had on our loan portfolio.
Net Interest Income
Table 1: Average balances, interest income, and interest expense
The following table contains condensed average balance sheets for the years indicated. In
addition, the amount of our interest income and interest expense for each category of
interest-earning assets and interest-bearing liabilities and the related average interest rates,
net interest spread and net yield on average interest earning assets are included.
Analysis of net interest income | ||||||||||||||||||||||||||||||||||||
for the years ended December 31, 2009, 2008 and 2007 | ||||||||||||||||||||||||||||||||||||
2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||
Average | Income/ | Yield/ | Average | Income/ | Yield/ | Average | Income/ | Yield/ | ||||||||||||||||||||||||||||
Balance | Expense | Rate | Balance | Expense | Rate | Balance | Expense | Rate | ||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||
Assets: |
||||||||||||||||||||||||||||||||||||
Taxable investment
securities |
$ | 40,352 | $ | 1,901 | 4.71 | % | $ | 61,432 | $ | 3,136 | 5.10 | % | $ | 67,247 | $ | 3,219 | 4.79 | % | ||||||||||||||||||
Non-taxable investment
securities (1) |
13,157 | 529 | 4.02 | % | 15,501 | 618 | 3.99 | % | 10,556 | 417 | 3.95 | % | ||||||||||||||||||||||||
Interest-bearing deposits |
20,711 | 165 | .80 | % | 2,249 | 67 | 2.98 | % | 2,749 | 131 | 4.76 | % | ||||||||||||||||||||||||
FHLB stock |
2,349 | 58 | 2.47 | % | 1,753 | 58 | 3.31 | % | 980 | 58 | 5.92 | % | ||||||||||||||||||||||||
Federal funds sold |
5,772 | 16 | .27 | % | 6,131 | 127 | 2.07 | % | 23,810 | 1,203 | 5.05 | % | ||||||||||||||||||||||||
Loans (2) (3) |
651,316 | 36,531 | 5.61 | % | 633,201 | 40,729 | 6.43 | % | 485,631 | 41,970 | 8.64 | % | ||||||||||||||||||||||||
Allowance for loan
losses |
(11,253 | ) | (7,815 | ) | (5,729 | ) | ||||||||||||||||||||||||||||||
Cash and due from
banks |
15,948 | 8,595 | 7,315 | |||||||||||||||||||||||||||||||||
Other assets |
60,906 | 47,753 | 37,475 | |||||||||||||||||||||||||||||||||
Total assets |
$ | 798,258 | $ | 768,800 | $ | 630,034 | ||||||||||||||||||||||||||||||
Total interest-earning
assets |
$ | 733,657 | $ | 39,200 | 5.34 | % | $ | 720,267 | $ | 44,735 | 6.21 | % | $ | 590,973 | $ | 46,998 | 7.95 | % | ||||||||||||||||||
Liabilities: |
||||||||||||||||||||||||||||||||||||
Noninterest-bearing
demand |
$ | 40,997 | $ | 38,822 | $ | 32,281 | ||||||||||||||||||||||||||||||
Interest bearing demand
and savings |
257,482 | 3,981 | 1.55 | % | 186,544 | $ | 4,014 | 2.15 | % | 147,356 | $ | 4,772 | 3.24 | % | ||||||||||||||||||||||
Time |
426,576 | 13,590 | 3.19 | % | 458,644 | 19,516 | 4.26 | % | 382,061 | 20,364 | 5.33 | % | ||||||||||||||||||||||||
Total deposits |
725,055 | 684,010 | 561,698 | |||||||||||||||||||||||||||||||||
Other borrowings |
9,824 | 519 | 5.28 | % | 12,466 | 427 | 3.43 | % | 658 | 52 | 7.87 | % | ||||||||||||||||||||||||
Federal funds purchased |
15 | | .60 | % | 2,280 | 51 | 2.24 | % | ||||||||||||||||||||||||||||
Securities sold under
repurchase agreement |
| | | % | | | | % | 126 | 6 | 4.95 | % | ||||||||||||||||||||||||
Other liabilities |
1,173 | 2,612 | 2,548 | |||||||||||||||||||||||||||||||||
Shareholders equity |
62,731 | 67,432 | 65,004 | |||||||||||||||||||||||||||||||||
Total liabilities and
shareholders equity |
$ | 798,798 | $ | 768,800 | $ | 630,034 | ||||||||||||||||||||||||||||||
Total interest-bearing
liabilities |
$ | 693,897 | $ | 18,091 | 2.61 | % | $ | 659,934 | $ | 24,008 | 3.64 | % | $ | 530,201 | $ | 25,194 | 4.75 | % | ||||||||||||||||||
Net interest income |
$ | 21,109 | $ | 20,727 | $ | 21,804 | ||||||||||||||||||||||||||||||
Net interest margin (4) |
2.88 | % | 2.88 | % | 3.69 | % | ||||||||||||||||||||||||||||||
Net interest spread (5) |
2.74 | % | 2.57 | % | 3.20 | % |
30
Table of Contents
(1) | Yield on non-taxable investment securities have not been computed on a tax equivalent basis. | |
(2) | Interest income from loans includes total fee income of approximately $1,353,000, $1,854,000 and $1,692,000 for the years ended December 31, 2009, 2008 and 2007, respectively. | |
(3) | Average non-accrual loans of $27,574,290, $10,993,379 and $1,183,800 are excluded for the years ended December 31, 2009, 2008 and 2007, respectively. | |
(4) | Net interest margin is net interest income divided by average interest-earning assets. | |
(5) | Interest rate spread is the weighted average yield on interest-earning assets minus the average rate on interest-bearing liabilities. |
Table 2: Rate and volume analysis
The following table describes the extent to which changes in interest rates and changes in
volume of interest-earning assets and interest-bearing liabilities have affected our interest
income and expense during the years indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to (1) change in
volume (change in volume multiplied by previous year rate); (2) change in rate (change in rate
multiplied by previous year volume) and (3) a combination of change in rate and change in volume.
The changes in interest income and interest expense attributable to both volume and rate have been
allocated proportionately to the change due to volume and the change due to rate.
Analysis of changes in net interest income
for the years ended December 31, 2009, 2008 and 2007
(Dollars in thousands)
for the years ended December 31, 2009, 2008 and 2007
(Dollars in thousands)
2009 Compared to 2008 | 2008 Compared to 2007 | |||||||||||||||||||||||
Increase (decrease) | Increase (decrease) | |||||||||||||||||||||||
Due to change in | Due to change in | |||||||||||||||||||||||
Rate | Volume | Change | Rate | Volume | Change | |||||||||||||||||||
Income from interest-earning assets: |
||||||||||||||||||||||||
Interest and fees on loans |
$ | (5,213 | ) | $ | 1,016 | $ | (4,198 | ) | $ | (10,731 | ) | $ | 9,490 | $ | (1,241 | ) | ||||||||
Interest on taxable securities |
(241 | ) | (994 | ) | (1,235 | ) | 214 | (297 | ) | (83 | ) | |||||||||||||
Interest on non-taxable securities |
5 | (94 | ) | (89 | ) | 4 | 197 | 201 | ||||||||||||||||
Interest on FHLB stock |
(15 | ) | 15 | | (26 | ) | 26 | | ||||||||||||||||
Interest on Federal funds sold |
(110 | ) | (1 | ) | (111 | ) | (711 | ) | (365 | ) | (1,076 | ) | ||||||||||||
Interest on deposits in banks |
(49 | ) | 147 | 98 | (50 | ) | (14 | ) | (64 | ) | ||||||||||||||
Total interest income |
$ | (5,623 | ) | $ | 89 | $ | (5,535 | ) | $ | (11,300 | ) | $ | 9,037 | $ | (2,263 | ) | ||||||||
Expense from interest-bearing liabilities |
||||||||||||||||||||||||
Interest on interest-bearing demand deposits |
$ | (1,129 | ) | $ | 1,097 | $ | (32 | ) | $ | (1,602 | ) | $ | 844 | $ | (758 | ) | ||||||||
Interest on time deposits |
(4,904 | ) | (1,022 | ) | (5,926 | ) | (4,107 | ) | 3,259 | (848 | ) | |||||||||||||
Interest on borrowings |
232 | (140 | ) | 92 | (30 | ) | 405 | 375 | ||||||||||||||||
Interest on Federal funds purchased |
(37 | ) | (14 | ) | (51 | ) | | 51 | 51 | |||||||||||||||
Interest on securities sold under repurchase
agreement |
| | | (3 | ) | (3 | ) | (6 | ) | |||||||||||||||
Total interest expense |
(5,838 | ) | (79 | ) | (5,917 | ) | (5,742 | ) | 4,556 | (1,186 | ) | |||||||||||||
Net interest income |
$ | 215 | $ | 168 | $ | 382 | $ | (5,558 | ) | $ | 4,481 | $ | (1,077 | ) | ||||||||||
2009 Compared to 2008. Net interest income increased by $381,962 (or 1.84%) for the year
ended December 31, 2009 due to interest expense decreasing by a larger amount than interest income.
Total interest income decreased by $5,535,284 (or 12.37%) primarily due to discontinuing accrual
of interest on a growing balance of non-performing loans and previously accrued but uncollected
interest reversed against income. Interest and fees on loans decreased $4,198,397 (or 10.31%) from
$40,729,021 for the year ended December 31, 2008 as compared to $36,530,624 for the same period in
2009. Additionally, interest income on our securities portfolio decreased by $1,324,392 from
$3,754,519 for the year ended December 31, 2008 as compared to $2,430,127 for the same period in
2009. While the yield on our securities portfolio decreased, the decline in securities income is
mainly due to our portfolio shrinking from $71,764,629 at December 31, 2008 to $44,955,347 at
December 31,
31
Table of Contents
2009, as part of managements plan to increase liquidity. The decreases in our loan and
securities income was offset by lower interest expense for our deposits, which decreased $5,957,945
(or 25.32%) from $23,529,667 at December 31, 2008 to $17,571,722 at December 31, 2009, and an
slight increase in other borrowings expense of $40,699 (or 8.51%) from $478,208 at December 31,
2008 to $518,907 at December 31, 2009.
Average interest-earnings assets increased by $13.3 million from 2008 to 2009 with a decrease
in the average rates earned of .87%. From 2008 to 2009 our average loans increased by $18 million,
with a .82% decrease in yield, and average interest-bearing deposits increased by $18 million, with
a 2.18% decrease in yield. From 2008 to 2009 our average balances for our securities portfolio
(including restricted equities) decreased by $22.8 million, with a .39% decrease in yield.
Average interest-bearing liabilities increased by $34 million from 2008 to 2009 with a
decrease in the average rates paid of 1.03%. From 2008 to 2009 our average interest-bearing demand
and savings deposits grew $70.9 million, with a .60% decrease in average rates paid. From 2008 to
2009 our average time deposits decreased by $32 million, with a 1.07% decrease in average rates
paid, average other borrowings decreased by $2.6 million, with a 1.85% increase in average rates
paid, and average federal funds purchased decreased by $2.3 million, with a 1.64% decrease in
average rates paid.
2008 Compared to 2007. Net interest income decreased by $1,077,228 (or 4.94%) for the year
ended December 31, 2008 compared to 2007. The decrease in net interest income was due to
compression in our net interest margin from 3.69% to 2.88% as we were negatively affected by a
falling interest rate environment for our interest-earning assets, which typically reprice faster
than our interest-earning liabilities (along with reversed interest income for non-accrual loans),
combined with stiff competition for loans and deposits. Additionally, non-performing loans
negatively impacted our net interest income because accrued interest is backed out of income when
the loan becomes non-accrual. Our non-accrual loans increased by $34,577,090 from December 31,
2007 to December 31, 2008.
The most significant increase in average interest-earning assets consisted of an increase of
$147.6 million in total loans for the year ended December 31, 2008 compared to the year ended
December 31, 2007. The average rates earned on our loan portfolio decreased 2.21% to 6.43% for the
year ended December 31, 2008 from 8.64% for the year ended December 31, 2007.
Average interest-bearing demand and savings deposits grew by $39.2 million and average time
deposits grew by $76.67 million for the year ended December 31, 2008 compared to 2007. The average
rate paid on these deposits in 2008 was 2.15% and 4.26%, down from 3.24% and 5.33%, respectively,
in 2007. The decrease in the average rates paid for interest-bearing deposits of approximately 1%
does not correspond to the interest rate cuts initiated by the Federal Reserve, which triggered a
reduction in the prime rate from 7.25% in December 2007 to 3.25% in December 2008. Our average
deposit rate paid is a reflection of the intense competition for deposits in 2008, particularly in
markets where our competition is forced to raise funds, often at a premium, to remain liquid.
Other Income
2009 Compared to 2008. Other income decreased by $420,556 (or 9.09%) for the year ended
December 31, 2009 as compared to the same period in 2008. We experienced a decrease in mortgage
origination fees of $219,161 (or 17.22%) as compared to the same period in 2008 due to a continued
decline in applications for secondary-market mortgage loans that are pre-sold in the secondary
market, from which our mortgage origination fees are driven. This fee income does not carry a
corresponding asset on our balance sheet. We also saw a decrease in service charges on deposit
accounts of $113,163 (or 5.11%) for the year ended December 31, 2009 as compared to the same period
in 2008 mainly due to a decrease in NSF fees as we believe more customers are closely monitoring
their account balances with the weakened economy. In 2008 we had a net gain on the sale of
premises and equipment of $182,305 but did not have any sales in 2009 so this category shows a
decrease of $182,305 (or 100%). We had a net increase of $56,022 (or 7.71%) on the sale of
securities available-for-sale for the year ended December 31, 2009 as compared to the same period
in 2008 and an increase in other operating income of $38,051 (or 16.43%) from 2008 to 2009.
2008 Compared to 2007. Other income increased by $1,187,985 in 2008 (or 34.6%) as compared to
2007. This increase was due to net gains of $692,568 on the sale of securities, an increase of
$342,807 in service charges on deposit accounts (attributable to an increased volume of
transactions, as our deposit base increased from
32
Table of Contents
approximately $615 million to $737 million during 2008), net gains of $182,305 on the sale of
premises and equipment and an increase in other operating income of $41,063. We experienced a
decrease in mortgage origination fees of $70,758 in 2008 as compared to the same period in 2007 due
to fewer applications for secondary-market mortgage loans that are pre-sold in the secondary
market. Our mortgage origination fees are the result of mortgage loans pre-sold in the secondary
market, which do not carry a corresponding asset on our balance sheet.
Other Expenses
2009 Compared to 2008. Other expenses increased by $2,074,588 (or 8.48%) for the year ended
December 31, 2009 as compared to the same period in 2008 primarily related to expenses associated
with foreclosed assets and an increase in our FDIC insurance premiums. The net increase for
expenses associated with foreclosed assets for 2009 as compared to 2008 is $2,808,089, which
includes the following categories: foreclosed asset expense increased $1,381,922 (or 566.2%), net
loss on the sale of foreclosed assets increased $582,000 (or 268.4%) and write-down on foreclosed
assets increased $844,167 (or 71.21%.) At December 31, 2009, we had a total of $13.7 million of
foreclosed assets, reflecting a $7.7 million (or 127.45%) increase from December 31, 2008. This
increase is due to, among other things, the continued deterioration of the residential real estate
market and the tightening of the credit market. As the amount of foreclosed assets increased, our
losses and the costs and expenses to maintain the assets likewise increased. Our FDIC insurance
premiums increased by $1,727,892 (or 344.78%) for the year ended December 31, 2009 as compared to
the same period in 2008 because of the large number of unaffiliated FDIC insurance depository
institution failures and the corresponding increase in assessments along with an increase in the
rates specific to our institutions risk profile. Salaries and employee benefits expenses
decreased by $1,963,317 (or 14.67%) for the year. During the fourth quarter of 2008 and the first
and fourth quarters of 2009, the Bank conducted a reduction-in-force eliminating a total of 34
positions across the company and reducing salaries for several other positions. Additionally, we
suspended our incentive program during 2008 (for which bonuses would have been paid in the first
quarter of 2009) and the program remains suspended. The number of full-time equivalent employees
decreased from 191 at December 31, 2008 to 167 at December 31, 2009. Lastly, our other operating
expenses decreased by $421,827 (or 7.52%) and our equipment and occupancy expenses decreased by
$76,249 (or 2.29%) as management has aggressively worked to eliminate all non-essential expenses
during this difficult economic period.
2008 Compared to 2007. Other expenses increased by $3,059,894 in 2008 compared to the same
period in 2007. Other operating expenses increased by $2,033,469 during 2008 with the largest
increases occurring in write downs on foreclosed assets ($1,037,253), data processing expenses
($313,630), FDIC insurance assessments ($201,148), foreclosed asset expenses ($179,174), directors
fees ($57,199), supplies and printing ($45,299) and audit, tax and accounting fees ($41,127).
These expenses, as well as other miscellaneous operating expenses, have increased primarily as a
result of growth and market expansion, while increases in write downs on our foreclosed assets were
related to the rapid deterioration of the real estate market in the latter part of 2008. Salaries
and employee benefits increased by $552,337 for the year due to normal increases in salaries that
took effect in early 2008 and group insurance and payroll taxes. Employee incentive pay was
suspended for 2008 due to managements plan to aggressively cut all non-essential costs. The
number of full-time equivalent employees decreased by one from 192 at December 31, 2007 to 191 at
December 31, 2008. Equipment and occupancy expenses increased by $474,088 in 2008 and are
primarily the result of additional depreciation expense for permanent banking facilities put into
service during the period.
Balance Sheet Review
2009 Compared to 2008. Total assets decreased by $29,185,014 (or 3.55%) in 2009 with the most
significant decreases occurring in the loan portfolio, which decreased by $70,964,622 (or 10.39%)
and our securities portfolio, which decreased by 26,809,282 (or 37.36%). Cash and due from banks
and interest-bearing deposits in banks increased by $64,399,118 (323.6%) during the year. Total
interest-earning assets decreased by $52,209,308 (or 7.13%) as compared to 2008. We have
written-off substantial problem assets during the year and invested loan payoffs and securities
sales, calls and maturities into interest-bearing deposits in banks to increase our liquidity as
previously discussed.
Total deposits decreased by $2,302,574 (or .31%). Non-interest-bearing demand deposits
increased by $2,704,277 (or 7.74%), interest-bearing demand and savings increased by $56,543,764
(or 26.98%) and time deposits decreased by $61,550,615 (or 12.5%). Included in our deposits on
December 31, 2009 were $73,288,882 in
33
Table of Contents
brokered time deposits (including $5,153,575 of deposits placed in the Certificate of Deposit
Account Registry Service CDARS reciprocal program), which comprised approximately 17% of our
total time deposits and 10% of our overall deposits. Our ability to use brokered deposits has been
restricted as we fell below well capitalized status.
Stockholders equity decreased by $31,436,200 (or 47.77%) during 2009 primarily due to our
$37,049,267 loss. This decrease was slightly offset by the net issuance of common stock and
exercise of stock options of $5,265,680 and stock compensation expense of $267,351. Accumulated
other comprehensive loss represents the net unrealized loss on securities available-for-sale, which
decreased during 2009 by $80,035 to $321,726.
2008 Compared to 2007. Total assets increased by $136.7 million (or 20%) in 2008 with the
most significant increase occurring in the loan portfolio, which grew 26.6% or $143.5 million.
Total interest-earning assets increased by $90.3 million, or 14% in 2008 as compared to 2007. We
invested excess funds not deployed in loans in interest-bearing deposits with other banks, which
yielded a higher rate of return than the federal funds rate. We intend to keep a high ratio of
interest-bearing assets to total assets to maximize profitability.
Total deposits increased by 19.8% or $121.9 million, which funded a large part of our asset
growth. Non-interest-bearing demand deposits increased by $3.4 million, or 10.9%, interest-bearing
demand and savings increased by $45.4 million, or 27%, and time deposits increased by $73 million,
or 17.4%. Included in our deposits on December 31, 2008 was $88.1 million in brokered time
deposits (including $34,578,804 of deposits placed in the Certificate of Deposit Account Registry
Service (CDARS) reciprocal program), which comprised approximately 17.9% of our total time deposits
and 12% of our overall deposits. Until recently, brokered time deposits have been considered more
risky than core deposits because they are a less stable source of funding on a long-term basis.
Our market, however, has become increasingly more competitive with respect to deposit funding. We
do not believe that the risk associated with brokered deposits is significantly larger than risks
associated with time deposits generally. We believe that our use of brokered deposits is on a
level that is consistent with similarly situated financial institutions in our market but expect
that our percentage of brokered time deposits to total time deposits and overall deposits will
decrease from present levels.
Stockholders equity decreased by $976,147 or 1.5% during 2008. This decrease was a result of
a net loss of $5,074,935, net issuance of common stock and exercise of stock options of $4,071,686
and stock compensation expense of $357,980. Accumulated other comprehensive loss represents the
net unrealized loss on securities available-for-sale, which increased during 2008 by $330,878 to
$401,761.
Securities Portfolio
We have a portfolio of various investment securities for liquidity and interest income. The
portfolio is currently comprised of U.S Government-sponsored enterprises (GSEs), mortgage-backed
securities (GSE residential), state, county and municipal securities and financial-sector single
issuer trust-preferred (corporate) securities. The mortgage-backed securities have stated
maturities of up to thirty years. However, the portfolio balance reduces monthly as the underlying
mortgages are paid down. Most will have an effective life that is much shorter than the stated
maturity of the security. Although the exact maturity date is uncertain, the portfolio is
predicted to have an effective maturity of approximately eleven years. Decreases in interest rates
will generally cause an acceleration of prepayment levels. In a declining interest rate
environment, we may not be able to reinvest the proceeds from these prepayments in assets that have
comparable yields. In a rising rate environment, the opposite occurs. Prepayments tend to slow
and the weighted average life extends. This is referred to as extension risk, which can lead to
lower levels of liquidity due to the delay of cash receipts, and can result in the holding of an
asset that yields a below-market rate for a longer period of time.
The entire portfolio is classified as available-for-sale and thus carried at fair value. See
Note 16, Fair Value of Assets and Liabilities for additional information on the determination of
fair value. The carrying amounts of securities at the dates indicated are summarized as follows:
34
Table of Contents
December 31 | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
(Dollars in Thousands) | ||||||||||||
U.S. Government-sponsored enterprises (GSEs) |
$ | 1,484 | $ | 21,127 | $ | 30,490 | ||||||
Mortgage-backed securities (GSE residential) |
34,964 | 34,819 | 32,633 | |||||||||
State, county and municipals |
6,099 | 13,541 | 15,040 | |||||||||
Corporate securities |
2,408 | 2,277 | 2,568 | |||||||||
$ | 44,955 | $ | 71,764 | $ | 80,731 | |||||||
Temporarily Impaired Securities
The
following table shows the gross unrealized losses and fair value of
our available-for-sale investments with unrealized losses that are not deemed to be
other-than-temporarily impaired, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position at December 31, 2009.
December 31, 2009 | ||||||||||||||||||||||||
Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Description of Securities | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
U.S. Government-sponsored
enterprises (GSEs) |
$ | 1,483,594 | $ | (16,406 | ) | $ | | $ | | $ | 1,483,594 | $ | (16,406 | ) | ||||||||||
Mortgage-backed securities GSE residential |
24,022,030 | (294,669 | ) | | | 24,022,030 | (294,669 | ) | ||||||||||||||||
State, county and municipals |
1,236,523 | (22,342 | ) | 2,445,005 | (286,710 | ) | 3,681,528 | (309,052 | ) | |||||||||||||||
Corporate securities |
930,000 | (70,000 | ) | 1,478,502 | (63,222 | ) | 2,408,502 | (133,222 | ) | |||||||||||||||
Total temporarily impaired securities |
$ | 27,672,147 | $ | (403,417 | ) | $ | 3,923,507 | $ | (349,932 | ) | $ | 31,595,654 | $ | (753,349 | ) | |||||||||
We have evaluated and considered the following factors in determining the carrying amount
of our securities portfolio:
U.S. Government-sponsored enterprises (GSEs) The unrealized loss on our one investment in
U.S. Government-sponsored enterprises (GSEs) was caused by interest rate increases. The
contractual terms of this investment do not permit the issuer to settle the security at a price
less than the amortized cost basis of the investment. Because we do not intend to sell the
investment and it is not more likely than not that we will be required to sell the investment
before recovery of its amortized cost basis, which may be maturity, we do not consider this
investment to be other-than-temporarily impaired at December 31, 2009.
Mortgage-backed securities: GSE residential The unrealized losses on our investment in
eleven GSE mortgage-backed securities were caused by interest rate increases. We purchased those
investments at a premium relative to their face amount, and the contractual cash flows of those
investments are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that
the securities would not be settled at a price less than the par value of these investments.
Because the decline in market value is attributable to changes in interest rates and not credit
quality, and because we do not intend to sell the investments and it is not more likely than not
that we will be required to sell the investments before recovery of their amortized cost bases,
which may be maturity, we do not consider those investments to be other-than-temporarily impaired
at December 31, 2009.
State, county and municipals The unrealized losses on the seven investments were caused by
interest rate increases. The contractual terms of those investments do not permit the issuer to
settle the securities at a price less than the amortized cost bases of the investments. In
addition all of these securities are guaranteed against default by third-party insurers. Because
we do not intend to sell the investments and it is not more likely than not that we will be
required to sell the investments before recovery of their amortized cost bases, which may be
maturity, we do not consider those investments to be other-than-temporarily impaired at December
31, 2009.
35
Table of Contents
Corporate securities We currently own trust-preferred securities of United Community Capital
Trust (United Community Bank) with a book value of $1,000,000 with an unrealized loss of $70,000 as
of December 31, 2009. We also own trust-preferred securities for which Wells Fargo is now the
ultimate guarantor at a book value of $1,541,724 with an unrealized loss of $63,222 at December 31,
2009. The unrealized losses are primarily caused by recent decreases in profitability and profit
forecasts by industry analysts resulting from the sub-prime mortgage market and a recent sector
downgrade by several industry analysts. The contractual terms of those investments do not permit
the issuer to settle the security at a price less than the amortized cost basis of the investment.
Each of these issuers has made all contractual interest payments on schedule. We currently do not
believe it is probable that we will be unable to collect all amounts due according to the
contractual terms of the investments. Fourth quarter 2009 financial reports were reviewed as part
of managements other-than-temporary-impairment analysis. Because we do not intend to sell the
investments and it is not more likely than not that we will be required to sell the investments
before recovery of their amortized cost bases, which may be maturity, we do not consider these
investments to be other-than-temporarily impaired at December 31, 2009.
For the reasons above, we have concluded that our holdings of U.S. Government-sponsored
enterprises (GSEs), Mortgage-backed securities, corporate securities and state, county and
municipals are not other than temporarily impaired as of December 31, 2009 and ultimate
recoverability of these investments is probable. If we determine that any impairment becomes other
than temporary we will recognize an appropriate impairment loss.
The carrying amounts of securities in each category as of December 31, 2009 are shown in the
following table according to contractual maturity classifications. The yields for each range of
securities are weighted-average yields.
U.S. Government- | ||||||||||||||||||||||||||||||||
sponsored enterprises | Mortgage-backed | State, county and | Corporate | |||||||||||||||||||||||||||||
(GSEs) | securities | municipals | securities | |||||||||||||||||||||||||||||
Carrying | Carrying | Carrying | Carrying | |||||||||||||||||||||||||||||
Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | |||||||||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||||||||||
In one year or less |
$ | | | % | $ | | | % | $ | | | % | $ | | | % | ||||||||||||||||
After one year through
two years |
| | % | 1,069 | 5.23 | % | | | % | | | % | ||||||||||||||||||||
After two year through
five years |
| | % | 12,508 | 4.04 | % | | | % | | | % | ||||||||||||||||||||
After five years through
ten years |
| | % | 11,120 | 3.89 | % | | | % | | | % | ||||||||||||||||||||
After ten years |
1,484 | 3.00 | % | 10,268 | 3.94 | % | 6,099 | 4.08 | % | 2,408 | 7.40 | % | ||||||||||||||||||||
Total |
$ | 1,484 | 3.00 | % | $ | 34,964 | 4.00 | % | $ | 6,099 | 4.08 | % | $ | 2,408 | 7.40 | % | ||||||||||||||||
We also maintain certain nonmarketable equity investments required by law which are reflected
on our balance sheet. The carrying amounts for certain of these investments as of December 31,
2009 and 2008 consisted of the following (dollars in thousands):
As of December 31, | ||||||||
2009 | 2008 | |||||||
Federal Home Loan Bank stock |
$ | 2,694 | $ | 2,053 |
The following factors have been evaluated and considered in determining the carrying amount of
the FHLB stock:
| We evaluated the ultimate recoverability of the par value. | ||
| All of the various Federal Home Loan Banks are meeting their debt obligations. | ||
| We believe that we currently have sufficient liquidity or have access to other sources of liquidity to meet all operational needs in the foreseeable future, and would not have the need to dispose of this stock below the recorded amount. |
36
Table of Contents
| Historically, the FHLB does not allow for discretionary purchases or sales of this stock. Redemptions of the stock occur at the discretion of the FHLB, subsequent to the maturity of outstanding advances held by the member institutions. | ||
| We have reviewed the assessments by rating agencies, which have concluded that debt ratings are likely to remain unchanged and the FHLB has the ability to absorb economic losses, given the expectation that the various FHLBanks have a very high degree of government support. | ||
| The unrealized losses related to the securities owned by the FHLBanks are manageable given the capital levels of these organizations. | ||
| In the first and second quarter of 2009, we considered the fact that the FHLB did not make any dividend payments (distributions) in the fourth quarter of 2008 and would not make any dividend determinations until after the end of each quarter when quarterly results were known; however, our holdings of FHLB stock are not intended for the receipt of dividends or stock growth, but for the purpose and right to receive advances, or funding. Further, we deem the FHLBs process of determining after each quarter end whether it will pay a dividend and, if so, the amount, as essentially similar to standard practice by most dividend-paying companies. Based on the FHLBs second and third quarter results, the FHLB announced on August 12, 2009 and October 30, 2009 a dividend payment for the second quarter and third quarter, respectively. |
For the reasons above, we have concluded that our holdings of FHLB stock are not other than
temporarily impaired as of December 31, 2009 and ultimate recoverability of the par value of this
investment is probable.
Loan Portfolio
Types of Loans
We offer a variety of lending services, including real estate, commercial, and consumer loans,
including home equity lines of credit, primarily to individuals and small- to mid-size businesses
that are located, or conducting a substantial portion of their business in the Homer (Banks
County), Carrollton and Villa Rica (Carroll County), Lake Oconee (Greene County), Cornelia
(Habersham County), Bremen (Haralson County), Commerce and Jefferson (Jackson County), Columbus
(Muscogee County), Athens (Oconee County) and Dalton (Whitfield County), Georgia markets. The
Banks Operations Center is located in Carrollton (Carroll County), Georgia markets. We emphasize
a strong credit culture based on traditional credit measures and our knowledge of our markets
through experienced relationship managers. Since loans typically provide higher interest yields
than do other types of interest-earning assets, we have historically invested a substantial
percentage of our earning assets in our loan portfolio. During 2009 we reduced the size of the
loan portfolio as part of our strategy to increase our capital ratios and liquidity. As a result,
our loan balances decreased from $683 million at
December 31, 2008 to $612 million at December 31,
2009.
Although we are reducing the size of our loan portfolio, we plan to continue to originate
loans which meet our loan underwriting criteria and are priced appropriately for the credit risk.
However, we are focused on continuing to decrease the concentration of commercial real estate and
construction loans in our portfolio.
Our underwriting standards vary for each type of loan. While we have generally underwritten
the loans in our portfolio in accordance with the loan-to-value levels in our internal underwriting
guidelines and regulatory supervisory guidelines, in certain circumstances we have made loans that
exceed either our internal underwriting guidelines, regulatory supervisory guidelines, or both. We
are generally permitted to hold real estate loans whose loan-to-value levels exceed regulatory
guidelines totaling up to 100% of our capital of which up to 30% may be in non-residential real
estate. We have made loans that exceed our internal guidelines to a limited number of our
customers who have significant liquid assets, net worth, and deposit balances with the Bank. As of
December 31, 2009, $22.7 million in loans, representing approximately 3.7% of our loans and 66.6%
of our Banks regulatory
capital, had loan-to-value ratios that exceeded regulatory supervisory guidelines. Most of
these were centered in our Lake Oconee market. We generally consider making such loans only after
taking into account the financial strength of the borrower. The number of loans in our portfolio
with loan-to-value ratios in excess of supervisory limits, our
37
Table of Contents
internal guidelines, or both could
increase the risk of delinquencies or defaults in our portfolio. Any such delinquencies or
defaults could have an adverse effect on our results of operations and financial condition.
The amount of loans outstanding at the indicated dates is shown in the following table
according to the type of loan.
December 31, | ||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||
Commercial and industrial |
$ | 43,998 | $ | 49,641 | $ | 47,363 | $ | 42,405 | $ | 35,761 | ||||||||||
Real estate construction |
147,714 | 202,523 | 163,206 | 114,528 | 60,967 | |||||||||||||||
Real estate mortgage |
398,714 | 402,843 | 299,219 | 225,119 | 142,520 | |||||||||||||||
Installment loans to individuals |
21,890 | 28,368 | 30,136 | 26,859 | 24,997 | |||||||||||||||
612,316 | 683,375 | 539,924 | 408,911 | 264,245 | ||||||||||||||||
Deferred loan fees and costs |
(103 | ) | (198 | ) | (215 | ) | (269 | ) | (181 | ) | ||||||||||
Less allowance for loan losses |
(12,879 | ) | (11,013 | ) | (6,267 | ) | (5,244 | ) | (3,194 | ) | ||||||||||
Loans, net |
$ | 599,334 | $ | 672,164 | $ | 533,442 | $ | 403,398 | $ | 260,870 | ||||||||||
Maturities and sensitivities to changes in interest rates
The following table presents the expected maturities for commercial and industrial loans and
real estate construction loans at December 31, 2009. The table also presents the rate structure
for these loans that mature after one year.
Rate Structure for | ||||||||||||||||||||||||
Loans with | ||||||||||||||||||||||||
Maturities Over | ||||||||||||||||||||||||
Maturity in Months(1) | One Year | |||||||||||||||||||||||
(Dollars in Thousands) | (Dollars in Thousands) | |||||||||||||||||||||||
Less than | Variable | Fixed | ||||||||||||||||||||||
12(2) | 13-60 | Over 60 | Total | Rates | Rates | |||||||||||||||||||
Commercial and
industrial |
$ | 21,387 | $ | 15,844 | $ | 6,767 | $ | 43,998 | $ | 8,085 | $ | 14,526 | ||||||||||||
Real estate
construction |
97,534 | 49,864 | 316 | 147,714 | 7,196 | 42,984 | ||||||||||||||||||
Total |
$ | 118,921 | $ | 65,708 | $ | 7,083 | $ | 191,712 | $ | 15,281 | $ | 57,510 | ||||||||||||
(1) | The amounts are classified based on the contractual maturity date of the loan. Our installment loans generally require the borrower to make amortizing principal payments over the terms of the loan. These amortization payments are reported according to the maturity date of the underlying loan even though the loan requires that they be paid earlier. | |
(2) | We do not have any demand loans or loans without a stated maturity. |
Risk Elements
The following table presents, at the dates indicated, the aggregate nonperforming loans for
the following categories:
38
Table of Contents
December 31, | ||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||
Non-accrual loans |
||||||||||||||||||||
Commercial and industrial |
$ | 3,690 | $ | 1,048 | $ | 94 | $ | | $ | | ||||||||||
Real estate construction |
17,003 | 23,859 | 1,110 | | | |||||||||||||||
Real estate mortgage |
27,734 | 11,631 | 883 | 269 | 219 | |||||||||||||||
Installment loans to individuals |
293 | 323 | 197 | 84 | 33 | |||||||||||||||
Total non-accrual loans |
$ | 48,720 | $ | 36,861 | $ | 2,284 | $ | 353 | $ | 252 | ||||||||||
Loans contractually past due ninety days or more as
to interest or principal payments and still accruing |
| | | | | |||||||||||||||
Loans, the terms of which have been renegotiated to provide
a reduction or deferral of interest or principal because of
deterioration in the financial position of the borrower |
||||||||||||||||||||
Commercial and industrial |
$ | 89 | $ | | $ | | $ | | $ | | ||||||||||
Real estate construction |
| 4,640 | | | | |||||||||||||||
Real estate mortgage |
464 | 215 | | | | |||||||||||||||
Installment loans to individuals |
| | | | | |||||||||||||||
Total restructured loans |
$ | 553 | $ | 4,855 | $ | | $ | | $ | | ||||||||||
Loans now current about which there are serious doubts as to
the ability of the borrower to comply with present loan
repayment terms (potential problem loans) |
||||||||||||||||||||
Commercial and industrial |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Real estate construction |
| | | | | |||||||||||||||
Real estate mortgage |
| | | | | |||||||||||||||
Installment loans to individuals |
| | | | | |||||||||||||||
Total potential problem loans |
$ | | $ | | $ | | $ | | $ | |
The reduction in interest income associated with non-accrual loans as of December 31, 2009 is
as follows:
Interest income that would have been recorded on non-accrual
loans under
original terms |
$ | 4,520,577 | ||
Interest income that was recorded on non-accrual loans |
2,081,934 | |||
Reduction in interest income |
$ | 2,438,643 | ||
Our non-accrual loans by geographic market are shown in the following table as of December 31,
2009 and 2008.
December 31, | ||||||||
2009 | 2008 | |||||||
Dalton |
$ | 13,775 | $ | 5,218 | ||||
Carrollton |
8,553 | 4,593 | ||||||
Bremen |
8,050 | 7,590 | ||||||
Villa Rica |
7,399 | 11,368 | ||||||
Other (8 markets) |
10,943 | 8,092 | ||||||
Total |
$ | 48,720 | $ | 36,861 | ||||
The economic downturn, and particularly the weak real estate markets, have led to increased
delinquencies and charge-offs. The weakened real estate market affects several segments of
borrowers: 1) builders and acquisition/development customers who are not able to sell their
inventory and thus cannot generate cash flow to make loan payments; 2) owners of commercial
property who are unable to lease or rent their properties and thus suffer from a lack of cash flow
and 3) consumers who have lost equity in their residences related to foreclosures and are unable to
access this liquidity source or refinance into lower rate mortgages. Increased unemployment rates
in
39
Table of Contents
our market areas have increased our non-performing loans because borrowers no longer have the
necessary cash flow to pay their loan obligations. In early 2009 we saw some evidence that the
real estate markets may have been improving; however, the third and fourth quarters did not bear
these anticipated results as demand for property further declined. Current economic forecasts
indicate a weak recovery for 2010 thus no substantial improvement in non-accrual, past due and
potential problem loans is expected for the foreseeable future.
Loans greater than 90 days past due are automatically placed on non-accrual status.
Additionally, we may place loans that are not greater than 90 days past due on non-accrual status
if we determine that the full collection of principal and interest is in doubt. In making that
determination we consider all of the relevant facts and circumstances and take into consideration
the judgment of responsible lending officers, our loan committee and the regulatory agencies that
review the loans as part of their regular examination process. If we determine that a larger
allowance to loan losses is necessary then we will make an increase to the allowance through
provision expense.
At December 31, 2009, we had $48,720,377 of non-accrual loans, which is an increase of
$11,859,018 from December 31, 2008. The net increase in non-accrual loans consists of the
following loan categories: commercial and industrial increased by $2,641,974, real estate
construction decreased by $6,855,802, real estate mortgage increased by $16,103,086 and
installment loans to individuals decreased by $30,240. The changes to balances of non-accrual
loans represent loans moving through the collection cycle related to the continued difficult
economic environment and from guidance received during our recent regulatory examination.
Non-accrual loans in our Carrollton and Villa Rica (Carroll County), Bremen (Haralson County), and
Dalton (Whitfield County), Georgia markets accounted for 77.5% of our non-accrual loans. At
December 31, 2009, no accrued interest on non-accrual loans was recognized.
In the opinion of management, any loans classified by regulatory authorities as doubtful,
substandard or special mention that have not been disclosed above do not (1) represent or result
from trends or uncertainties which management reasonably expects will materially impact future
operating results, liquidity, or capital resources, or (2) represent material credits about which
management is aware of any information which causes management to have serious doubts as to the
ability of such borrowers to comply with the loan repayment terms. In the event of non-performance
by the borrower, these loans have collateral pledged which we believe would prevent the recognition
of substantial losses. We have charged-off any loans classified by regulatory authorities as loss.
Summary of Loan Loss Experience
The allowance for loan losses is established through charges to earnings in the form of a
provision for loan losses. When a loan or portion of a loan is determined to be uncollectible, the
amount deemed uncollectible is charged against the allowance and subsequent recoveries, if any, are
credited to the allowance.
The allowance is an amount that we believe will be adequate to absorb estimated losses
relating to specifically identified loans, as well as probable credit losses inherent in the
balance of the loan portfolio, based on a periodic evaluation. While we use the best information
available to make our evaluation, future adjustments to the allowance may be necessary if there are
any significant changes in economic conditions. In addition, regulatory agencies, as an integral
part of their examination process, periodically review our allowance for loan losses, and may
require us to make additions to the allowance based on their judgment about information available
to them at the time of their examinations.
We determine the allowance for loan loss by first dividing the loan portfolio into two major
categories: (1) satisfactory and past due loans plus loans classified substandard, but not impaired
and (2) impaired loans. For purposes of evaluation, satisfactory and past due loans are further
segmented into the following categories: 1-4 family residential construction, other construction,
farmland, 1-4 residential revolving, 1-4 residential 1st liens, 1-4 residential Jr. liens,
multifamily, owner-occupied non-farm non-residential, other non-farm non-residential, commercial
and industrial, consumer installment, and other. A percentage allocation is also assigned to the
loans classified as substandard and doubtful that are not impaired or are under $200,000 and
impaired. We apply our historical trend loss factors to each category and adjust these percentages
for qualitative or environmental factors, as discussed below. Because of the deterioration in the
economy and real estate markets over the past several years, we use a two-year internal trending
analysis in calculating our general reserve, versus the three-year internal and peer-based averages
we had relied on in the past. Loan loss reserves are calculated primarily based upon this
historical loss experience by segment and adjusted for qualitative factors including changes in the
nature and volume of the
40
Table of Contents
loan portfolio, overall portfolio quality, changes in levels of non-performing loans,
significant shifts in real estate values, changes in levels of collateralization, trends in staff
lending experience and turnover, loan concentrations and current economic conditions that may
affect the borrowers ability to pay. For example, because of the recent increase in the level of
our non-performing loans and general decline in real estate values we have increased the
qualitative economic and environmental factors in our satisfactory and past due loan calculation.
A loan is generally classified as impaired, based on current information and events, if it is
probable that we will be unable to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. Impaired loans are measured by either
the present value of expected future cash flows discounted at the loans effective interest rate,
the loans obtainable market price, or the fair value of the collateral if the loan is collateral
dependent. A substantial portion of our impaired loans are collateral dependent, which in the past
was included in our allowance for loan losses. New appraisals continue to show declining real
estate values as compared to previous levels thus we have experienced losses upon disposal of these
assets. The process of updating appraisals on collateral dependent troubled debt restructurings
(TDRs) and nonaccrual loans previously included in our calculations have confirmed losses and
accelerated charge-offs into 2009 through subsequent events. Significant individual credits
classified as substandard within our credit grading system that are determined to be impaired
require both individual analysis and specific allocation. Loans in the substandard category are
characterized by deterioration in quality exhibited by any number of well-defined weaknesses
requiring corrective action, such as declining or negative earnings trends and declining or
inadequate liquidity. Impaired loans with balances in excess of $200,000 are evaluated
individually, while impaired loans with balances of $200,000 or less are evaluated as a group. No
additional funds are committed to be advanced in connection with impaired loans.
Generally, for larger collateral-dependent loans, current market appraisals are ordered to
estimate the current fair value of the collateral. During our most recent regulatory examination,
we had appraisals prepared and reviewed on a large number of our residential and commercial
collateral-dependent loans. However, in situations where a current market appraisal is not
available, management uses the best available information (including recent appraisals for similar
properties, communications with qualified real estate professionals, information contained in
reputable trade publications and other observable market data) to estimate the current fair value.
In these situations, valuations based on our internal calculations have generally been consistent
with the valuations determined by appraisals on similar properties and as such, management believes
the internal valuations can be reasonably relied upon for valuation purposes. The estimated costs
to sell the subject property, if any, are then deducted from the estimated fair value to arrive at
the net realizable value of the loan and to determine the specific reserve on each impaired loan
reviewed.
Our analysis of impaired loans and their underlying collateral values has revealed the
continued deterioration in the level of property values, as well as reduced borrower ability to
make regularly scheduled payments. Loans in our residential land development and construction
portfolios are secured by unimproved and improved land, residential lots, and single-family and
multi-family homes. Generally, current lot sales by the developers and/or borrowers are taking
place at a greatly reduced pace and at reduced prices. As home sales volumes have declined, income
of residential developers, contractors and other real estate-dependent borrowers has also been
reduced. This difficult operating environment, along with the additional loan carrying time, has
caused some borrowers to exhaust payment sources. Within the last several months, several of our
clients have reached the point where payment sources have been exhausted.
The general reserve estimate is then added to the specific allocations made to determine the
amount of the total allowance for loan losses. The allocation of the allowance to the respective
loan categories is an approximation and not necessarily indicative of future losses. The entire
allowance is available to absorb losses occurring in the loan portfolio. We regularly monitor
trends with respect to non-accrual, restructured and potential problems loans. Subsequent negative
changes in these loans have led us to increase our environmental adjustment in the allowance for
loan loss to accommodate these trends.
When a loan first shows signs of weakness we will, if warranted, place the loan on non-accrual
status pending a more complete investigation of the underlying credit quality of the loan and its
collateral. After this investigation, which may include steps such as obtaining an updated
appraisal and a review of the financial condition of the guarantor(s), we will charge-off the
portions of the loans that we deem uncollectible or confirmed through updated appraisals on
collateral dependent loans.
41
Table of Contents
The following table details the changes in our allowance for loan losses over the last five years.
December 31, | ||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||
Average balance of loans outstanding |
$ | 651,316 | $ | 633,201 | $ | 485,631 | $ | 348,869 | $ | 178,332 | ||||||||||
Balance of allowance for loan losses at beginning
of year |
$ | 11,013 | $ | 6,267 | $ | 5,244 | $ | 3,194 | $ | 1,705 | ||||||||||
Charge-offs: |
||||||||||||||||||||
Commercial and industrial |
(2,612 | ) | (1,078 | ) | (207 | ) | (207 | ) | (69 | ) | ||||||||||
Real estate construction |
(13,453 | ) | (1,073 | ) | (106 | ) | 0 | 0 | ||||||||||||
Real estate mortgage |
(13,290 | ) | (1,769 | ) | (609 | ) | (182 | ) | (74 | ) | ||||||||||
Installment loans to individuals |
(1,038 | ) | (326 | ) | (466 | ) | (361 | ) | (210 | ) | ||||||||||
Total |
(30,393 | ) | (4,246 | ) | (1,388 | ) | (750 | ) | (353 | ) | ||||||||||
Recoveries: |
||||||||||||||||||||
Commercial and industrial |
5 | 24 | 1 | 2 | 0 | |||||||||||||||
Real estate construction |
6 | 0 | 0 | 0 | 0 | |||||||||||||||
Real estate mortgage |
38 | 4 | 0 | 0 | 0 | |||||||||||||||
Installment loans to individuals |
40 | 50 | 57 | 57 | 27 | |||||||||||||||
Total |
89 | 78 | 58 | 59 | 27 | |||||||||||||||
Net charge-offs |
(30,304 | ) | (4,168 | ) | (1,330 | ) | (691 | ) | (326 | ) | ||||||||||
Additions to allowance charged to operations |
32,170 | 8,914 | 2,353 | 2,741 | 1,815 | |||||||||||||||
Balance of allowance at end of year |
$ | 12,879 | $ | 11,013 | $ | 6,267 | $ | 5,244 | $ | 3,194 | ||||||||||
Ratio of net loan charge-offs during the year to
average loans outstanding during the year |
4.65 | % | .66 | % | .27 | % | .20 | % | 0.18 | % | ||||||||||
42
Table of Contents
Charge-offs accelerated during 2009 as economic conditions continued to decline and we worked
through the identified problem portions of our portfolio. Net charge-offs on real estate
construction loans totaled $13.4 million in 2009 compared with $1.1 million in 2008 and $106,000 in
2007. Net charge offs on real estate mortgage loans totaled $13.3 million in 2009 compared to
$1.8 million in 2008 and $609,000 in 2007. The net charge-offs to average loans ratio for the year
ended December 31, 2009 was 4.65% as compared to 0.66% for the year ended December 31, 2008 and
0.27% for the year ended December 31, 2007. For the year ended December 31, 2009, total net charge
offs were $30.3 million compared to $4.2 million for the same period in 2008 and $1.3 for the year
ended December 31, 2007. The actual loss on disposition of the loan and/or the underlying
collateral may be more or less than the amount charged-off.
The following table summarizes the allocation of the allowance for loan losses to types of
loans as of the indicated dates. The allowance for loan loss allocation is based on a subjective
judgment and estimates and therefore is not necessarily indicative of the specific amounts or loan
categories in which charge-offs may ultimately occur. In addition, there will be allowance amounts
that are allocated based on evaluation of individual loans considered to be impaired by management.
December 31 | ||||||||||||||||||||||||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||||||||||||||||||
Percent | Percent | Percent | Percent | Percent | ||||||||||||||||||||||||||||||||||||||
Of Loans | Of Loans | Of Loans | Of Loans | Of Loans | ||||||||||||||||||||||||||||||||||||||
In Each | In Each | In Each | In Each | In Each | ||||||||||||||||||||||||||||||||||||||
Category | Category | Category | Category | Category | ||||||||||||||||||||||||||||||||||||||
To Total | To Total | To Total | To Total | To Total | ||||||||||||||||||||||||||||||||||||||
Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | |||||||||||||||||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||||||||||||||||||||
Commercial
and industrial |
$ | 1,281 | 7.19 | % | $ | 632 | 7.26 | % | $ | 426 | 8.77 | % | $ | 1,263 | 10.37 | % | $ | 839 | 13.53 | % | ||||||||||||||||||||||
Real estate
construction |
4,700 | 24.13 | % | 5,452 | 29.64 | % | 2,281 | 30.23 | % | 838 | 28.01 | % | 368 | 23.08 | % | |||||||||||||||||||||||||||
Real estate
mortgage |
6,460 | 65.11 | % | 4,578 | 58.95 | % | 3,191 | 55.42 | % | 2,869 | 55.05 | % | 1,755 | 53.93 | % | |||||||||||||||||||||||||||
Installment loans
to individuals |
438 | 3.57 | % | 351 | 4.15 | % | 369 | 5.58 | % | 274 | 6.57 | % | 232 | 9.46 | % | |||||||||||||||||||||||||||
$ | 12,879 | 100.00 | % | $ | 11,013 | 100.00 | % | $ | 6,267 | 100.00 | % | $ | 5,244 | 100.00 | % | $ | 3,194 | 100.00 | % | |||||||||||||||||||||||
We believe that the allowance can be allocated by category only on an approximate basis.
The allocation of the allowance to each category is not necessarily indicative of further losses
and does not restrict the use of the allowance to absorb losses in any other category.
Foreclosed Assets
The following table summarizes the composition of our foreclosed assets as of December 31,
2009 and 2008 (dollars in thousands):
December 31, | ||||||||
2009 | 2008 | |||||||
Raw land |
$ | 6,618 | $ | 188 | ||||
Subdivision lots |
1,794 | 1,442 | ||||||
1-4 family residential |
4,560 | 3,678 | ||||||
Multifamily |
| 288 | ||||||
Commercial real estate |
704 | 360 | ||||||
Other repossessed assets |
65 | 85 | ||||||
Total |
$ | 13,741 | $ | 6,041 | ||||
43
Table of Contents
The following table summarizes the geographic distribution of our foreclosed assets as of
December 31, 2009 and 2008 (dollars in thousands):
December 31, | ||||||||
2009 | 2008 | |||||||
Villa Rica |
$ | 5,885 | $ | 1,507 | ||||
Carrollton |
2,248 | 714 | ||||||
Jefferson |
1,524 | 1,131 | ||||||
Dalton |
1,395 | 1,215 | ||||||
Other (8 markets) |
2,689 | 1,474 | ||||||
Total |
$ | 13,741 | $ | 6,041 | ||||
At December 31, 2008 we had foreclosed assets of $6,041,163. In 2009 we transferred
$23,590,226 of loans into foreclosed assets (see the Supplemental Disclosures section of our
Statement of Cash Flows for the year ended December 31, 2009). We had $301,583 of additional
expense to complete pieces of real estate and wrote-down $2,029,695. We subsequently sold for cash
$8,843,171and internally financed $4,520,663 of these assets incurring $798,840 of loss on sale, as
noted in the other expenses section of the Consolidated Statement of Operations. We continue to
hold foreclosed assets valued at $13,740,602. Our Carrollton and Villa Rica (Carroll County),
Jefferson (Jackson County), and Dalton (Whitfield County), Georgia markets account for $11,051,262,
or 80.4% of our foreclosed assets. These properties are being actively marketed and maintained
with the primary objective of liquidating the collateral at a level which most accurately
approximates fair market value and allows recovery of as much of the unpaid principal balance as
possible upon the sale of the property in a reasonable period of time. In determining the carrying
amount at December 31, 2009 we have taken into account the recent trend of declining real estate
values. Although this trend has not reversed, we believe that the pace of the decline is beginning
to slow. Based on our assumptions, we believe that the carrying value of our foreclosed assets at
December 31, 2009 is reasonable. However, if our assumptions prove incorrect, we may have to take
further write downs on our foreclosed properties. Because of the recent lack of stability in our
markets, we believe that the range of possible outcomes relating to our foreclosed property is
greater than usual.
Deposits
The average amount of deposits and average rates paid thereon, classified as to non-interest
bearing demand deposits, interest-bearing demand and savings deposits and time deposits, for the
periods indicated are presented below.
December 31, | ||||||||||||||||||||||||
2009 | 2008 | 2007 | ||||||||||||||||||||||
Amount | Rate | Amount | Rate | Amount | Rate | |||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||
Non-interest bearing demand deposits |
$ | 40,997 | $ | 38,822 | $ | 32,281 | ||||||||||||||||||
Interest-bearing demand and savings
deposits |
257,482 | 1.55 | % | 186,544 | 2.15 | % | 147,356 | 3.24 | % | |||||||||||||||
Time deposits |
426,576 | 3.19 | % | 458,644 | 4.26 | % | 382,061 | 5.33 | % | |||||||||||||||
$ | 725,055 | $ | 684,010 | $ | 561,698 | |||||||||||||||||||
The maturity distribution for our time deposits of $100,000 or more as of December 31, 2009 is
as follows (dollars in thousands):
As of December 31, | ||||
2009 | ||||
Three months or less |
$ | 46,415 | ||
Over three months through six months |
42,598 | |||
Over six through 12 months |
72,637 | |||
Over 12 months |
75,854 | |||
Total |
$ | 237,504 | ||
44
Table of Contents
Borrowings
Other borrowings consist of the following advances from the Federal Home Loan Bank of Atlanta:
Fixed rate credit at 1.43% due November 4, 2011 |
$ | 10,000,000 | ||
Fixed rate credit at 2.34% due November 18, 2013 |
7,000,000 | |||
Fixed rate credit at 3.04% due November 4, 2014 |
5,000,000 | |||
$ | 22,000,000 | |||
Our total borrowed funds are collateralized by securities with a carrying value of $4,211,826,
Federal Home Loan Bank stock of $2,694,000 and blanket lien agreements for certain qualifying loan
types of $43,089,745.
Return on Equity and Assets
The following table summarizes our return on average assets and return on average equity for
the years ended December 31, 2009, 2008 and 2007.
For the Years Ending | ||||||||||||
December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Return on average assets |
(4.64 | %) | (.66 | %) | .33 | % | ||||||
Return on average equity |
(59.06 | %) | (7.53 | %) | 3.16 | % | ||||||
Average equity as a percentage of average assets |
7.85 | % | 8.77 | % | 10.32 | % |
Liquidity
Our primary sources of liquidity are our deposits, the scheduled repayments on our loans, and
interest and maturities of our investments. All securities have been classified as available for
sale, which means they are carried at fair value with unrealized gains and losses excluded from
earnings and reported as a separate component of other comprehensive income. If necessary, we have
the ability to sell a portion of our unpledged investment securities to manage interest sensitivity
gap or liquidity. Our pledged securities totaled $7.8 million at December 31, 2009, and our
efforts were successful to reduce this amount from the December 31, 2008 balance of $20.7 million.
Cash and due from banks and federal funds sold may also be utilized to meet liquidity needs. Due
to our undercapitalized status, we are unable to accept, rollover, or renew any brokered deposits.
The Company has $27.2 million of brokered deposits maturing in 2010 and as these brokered deposits
mature it could create a strain on liquidity. We are also currently prohibited from paying yields
for deposits in excess of 75 basis points above a published national average rate for deposits of
comparable maturity unless the FDIC permits the use of a higher local market rate. This rate
restriction could negatively impact our ability to attract or maintain deposits and therefore may
negatively affect our liquidity. Based on current and expected liquidity needs and sources,
however, management expects to be able to meet obligations at least through December 31, 2010.
Regulatory Capital Requirements
We are subject to minimum capital standards as set forth by federal bank regulatory agencies.
Our capital for regulatory purposes differs from our equity as determined under generally accepted
accounting principles. Generally, Tier 1 regulatory capital will equal capital as determined
under generally accepted accounting principles less any unrealized gains or losses on securities
available for sale while Tier 2 capital includes the allowance for loan losses up to certain
limitations. Total risk based capital is the sum of Tier 1 and Tier 2 capital. Our capital ratios
and required minimums at December 31, 2009 are shown below. Because of our recent deterioration
and risk exposure, our regulators expect us to maintain capital ratios substantially above the
regulatory minimums.
45
Table of Contents
Tier 1 | Tier 1 | Total | ||||||||||
Leverage | Risk-based | Risk-based | ||||||||||
Minimum regulatory requirement |
4.00 | % | 4.00 | % | 8.00 | % | ||||||
Minimum regulatory requirement for well capitalized status |
5.00 | % | 6.00 | % | 10.00 | % | ||||||
Actual ratios at December 31, 2009 |
||||||||||||
FGBC Bancshares, Inc. |
4.37 | % | 5.75 | % | 7.01 | % | ||||||
First Georgia Banking Company |
4.29 | % | 5.65 | % | 6.91 | % |
As of December 31, 2009, the Company and the Bank were undercapitalized, primarily due to the
net loss recorded for the year. As a result, we are prohibited from directly or indirectly
accepting, renewing or rolling over any brokered deposits. In addition, as an undercapitalized
Bank we will be required to comply with additional operating restrictions, including having to
submit a plan to restore the Bank to an acceptable capital category. Failure to adequately comply
could eventually allow the banking regulators to appoint a receiver or conservator of our net
assets. Our total capital also has an important effect on the amount of FDIC insurance premiums
paid as institutions considered undercapitalized are subject to higher rates for FDIC insurance.
These matters are a major focus of the attention and efforts of the Board of Directors and
management. Significant additional restrictions can be imposed on FDIC-insured depository
institutions that fail to meet applicable capital requirements. Please see Supervision and
Regulation Capital Adequacy within Item 1 of this report for a more complete discussion of the
regulatory capital requirements.
Off Balance Sheet Arrangements
In the ordinary course of business, we grant commitments to extend credit and standby letters
of credit to approved customers. Generally, these commitments to extend credit have been granted
on a temporary basis for seasonal or inventory requirements. These commitments are recorded in the
financial statements as they are funded. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since many of the commitment amounts
expire without being drawn upon, the total commitment amounts do not necessarily represent future
cash requirements.
The following is a summary of the commitments outstanding at December 31, 2009, 2008 and 2007.
December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
(Dollars in Thousands) | ||||||||||||
Commitments to extend credit |
$ | 34,397 | $ | 52,382 | $ | 62,064 | ||||||
Letters of credit |
308 | 957 | 1,404 | |||||||||
$ | 34,705 | $ | 53,339 | $ | 63,468 | |||||||
Commitments to extend credit include unused commitments for open-end lines secured by 1-4
family residential properties, commitments to fund loans secured by commercial real estate,
construction loans, land development loans and other unused commitments.
Asset/Liability Management
It is our objective to manage assets and liabilities to provide a satisfactory, consistent
level of profitability within the framework of established cash, loan, investment, borrowing, and
capital policies. Certain of our officers are charged with the responsibility for monitoring
policies and procedures that are designed to ensure acceptable composition of the asset/liability
mix.
Our asset/liability mix is monitored on a regular basis with a report reflecting the interest
rate sensitive assets and interest rate sensitive liabilities being prepared and presented to the
board of directors and managements asset/liability committee on a quarterly basis. The objective
is to monitor interest rate sensitive assets and liabilities so as to minimize the impact of
substantial movements in interest rates on earnings. An asset or liability is considered to be
interest rate-sensitive if it will reprice or mature within the time period analyzed, usually one
year
46
Table of Contents
or less. The interest rate-sensitivity gap is the difference between the
interest-earning assets and interest-bearing liabilities scheduled to mature or reprice within such
time period. A gap is considered positive when the amount of interest rate-sensitive assets
exceeds the amount of interest rate-sensitive liabilities. A gap is considered negative when the
amount of interest rate-sensitive liabilities exceeds the interest rate-sensitive assets. If one
assumes that the interest sensitive assets and liabilities are all impacted to the same degree and
timing then during a period of rising interest rates, a negative gap would tend to adversely affect
net interest income, while a positive gap would tend to result in an increase in net interest
income. Conversely, during a period of falling interest rates, a negative gap would tend to result
in an increase in net interest income, while a positive gap would tend to adversely affect net
interest income. If our assets and liabilities were equally flexible and moved concurrently, the
impact of any increase or decrease in interest rates on net interest income would be minimal.
A simple interest rate gap analysis by itself may not be an accurate indicator of how net
interest income will be affected by changes in interest rates. Accordingly, we also evaluate how
the repayment of particular assets and liabilities is impacted by changes in interest rates.
Income associated with interest-earning assets and costs associated with interest-bearing
liabilities may not be affected uniformly by changes in interest rates. In addition, the magnitude
and duration of changes in interest rates may have a significant impact on net interest income.
For example, although certain assets and liabilities may have similar maturities or periods of
repricing, they may react in different degrees to changes in market interest rates. Interest rates
on certain types of assets and liabilities fluctuate in advance of changes in general market rates,
while interest rates on other types may lag behind changes in general market rates. Prepayment and
early withdrawal levels also could deviate significantly from those assumed in calculating the
interest rate gap. The ability of many borrowers to service their debts also may decrease in the
event of an interest rate increase.
The table below summarizes our interest-sensitive assets and liabilities as of December 31,
2009. Adjustable rate loans are included in the period in which their interest rates are scheduled
to adjust. Fixed rate loans are included in the periods in which they are anticipated to be repaid
based on scheduled maturities. Non-accrual loans are not included in loan balances. Investment
securities are included in their period of maturity while mortgage backed securities are included
according to expected repayment. Certificates of deposit are presented according to contractual
maturity.
Analysis of Interest Sensitivity
As of December 31, 2009
(Dollars in Thousands)
As of December 31, 2009
(Dollars in Thousands)
0 3 | 3 - 12 | Over 1 | ||||||||||||||
Months | Months | Year | Total | |||||||||||||
Interest-earning assets: |
||||||||||||||||
Interest-bearing deposits in banks |
68,547 | | | 68,547 | ||||||||||||
Securities |
| | 44,955 | 44,955 | ||||||||||||
FHLB stock |
2,694 | | | 2,694 | ||||||||||||
Federal funds sold |
| | | | ||||||||||||
Loans (1) |
120,994 | 159,787 | 282,816 | 563,597 | ||||||||||||
Total interest-earning assets |
192,235 | 159,787 | 327,771 | 679,793 | ||||||||||||
Interest-bearing liabilities: |
||||||||||||||||
Interest-bearing demand deposits |
89,860 | | | 89,860 | ||||||||||||
Savings and money markets |
176,282 | | | 176,282 | ||||||||||||
Time deposits |
95,772 | 224,214 | 110,997 | 430,983 | ||||||||||||
Federal Home Loan Bank borrowings |
| | 22,000 | 22,000 | ||||||||||||
Total interest-bearing liabilities |
361,914 | 224,214 | 132,997 | 719,125 | ||||||||||||
Interest rate sensitivity gap |
(169,679 | ) | (64,427 | ) | 194,774 | (39,332 | ) | |||||||||
Cumulative interest rate sensitivity gap |
(169,679 | ) | (234,106 | ) | (39,332 | ) | ||||||||||
Interest rate sensitivity gap ratio |
.53 | .71 | 2.46 | |||||||||||||
Cumulative interest rate sensitivity gap ratio |
.53 | .60 | .95 | |||||||||||||
(1) | Excludes non-accrual loans totaling approximately $48.7 million. |
47
Table of Contents
At December 31, 2009 our cumulative one-year interest rate sensitivity gap ratio was .60.
Our targeted ratio is 0.8 to 1.2. This indicates that the interest-earning assets will reprice
during this period at a rate slower than the interest-bearing liabilities. Our experience,
however, has been that not all liabilities shown as being subject to repricing will in fact reprice
with changes in market rates. We have a base of core deposits consisting of interest bearing
checking accounts and savings accounts whose average balances and rates paid thereon will not
fluctuate with changes in the levels of market interest rates.
Effects of Inflation
Our consolidated financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles which require the measure of financial
position and operating results in terms of historic dollars, without considering changes in the
relative purchasing power of money over time due to inflation.
Inflation generally increases the costs of funds and operating overhead, and to the extent
loans and other assets bear variable rates, the yields on such assets. Unlike most industrial
companies, virtually all of the assets and liabilities of a financial institution are monetary in
nature. As a result, interest rates generally have a more significant effect on the performance of
a financial institution than the effects of general levels of inflation. In addition, inflation
affects financial institutions cost of goods and services purchased, the cost of salaries and
benefits, occupancy expense and similar items. Inflation and related increases in interest rates
generally decrease the market value of investments and loans held and may adversely affect
liquidity, earnings and stockholders equity. Mortgage originations and refinancing of existing
mortgages tend to slow as interest rates increase, and likely will reduce our volume of such
activities and the income from the sale of residential mortgage loans in the secondary market.
Contractual Obligations
The follow table sets forth certain contractual obligations as of December 31, 2009.
Payment Due by Period | ||||||||||||||||||||
Contractual Obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||
Operating lease obligations |
$ | 42,500 | $ | 30,000 | $ | 12,500 | $ | | $ | |
ITEM 6A. | Quantitative and Qualitative Disclosures About Market Risk. |
See the discussion under Asset/Liability Management under Item 7 above, which is
incorporated by reference into this Item 6A.
48
Table of Contents
ITEM 7. | Financial Statements and Supplementary Data. |
Presented below is a summary of the unaudited consolidated quarterly financial data for the
years ended December 31, 2009 and 2008.
Quarterly Financial Summary for 2009 and 2008
Quarterly Period Ended | ||||||||||||||||
March 31 | June 30 | September 30 | December 31 | |||||||||||||
Year ended December 31, 2009 |
||||||||||||||||
Interest income |
$ | 10,247 | $ | 10,043 | $ | 9,826 | $ | 9,084 | ||||||||
Interest expense |
(5,819 | ) | (4,762 | ) | (3,947 | ) | (3,563 | ) | ||||||||
Net interest income |
4,428 | 5,281 | 5,879 | 5,521 | ||||||||||||
Provision for loan losses |
(1,919 | ) | (4,332 | ) | (11,797 | ) | (14,122 | ) | ||||||||
Net interest income after provision for loan losses |
2,509 | 949 | (5,918 | ) | (8,601 | ) | ||||||||||
Other income |
1,573 | 922 | 814 | 896 | ||||||||||||
Other expenses |
(5,986 | ) | (6,956 | ) | (7,289 | ) | (6,317 | ) | ||||||||
Income before income taxes |
(1,904 | ) | (5,085 | ) | (12,393 | ) | (14,022 | ) | ||||||||
Income tax (expense) benefit |
728 | 1,929 | 2,068 | (8,370 | ) | |||||||||||
Net income (loss) |
$ | (1,176 | ) | $ | (3,156 | ) | $ | (10,325 | ) | $ | (22,392 | ) | ||||
Basic earnings (losses) per share |
$ | (0.09 | ) | $ | (0.25 | ) | $ | (0.76 | ) | $ | (1.72 | ) | ||||
Diluted earnings(losses) per share |
$ | (0.09 | ) | $ | (0.25 | ) | $ | (0.76 | ) | $ | (1.72 | ) | ||||
Year ended December 31, 2008 |
||||||||||||||||
Interest income |
$ | 11,600 | $ | 11,029 | $ | 11,531 | $ | 10,574 | ||||||||
Interest expense |
(6,227 | ) | (5,761 | ) | (6,040 | ) | (5,980 | ) | ||||||||
Net interest income |
5,373 | 5,268 | 5,491 | 4,594 | ||||||||||||
Provision for loan losses |
(859 | ) | (1,566 | ) | (2,151 | ) | (4,338 | ) | ||||||||
Net interest income after provision for loan losses |
4,514 | 3,702 | 3,340 | 256 | ||||||||||||
Other income |
1,755 | 986 | 921 | 964 | ||||||||||||
Other expenses |
(5,851 | ) | (5,955 | ) | (5,780 | ) | (6,887 | ) | ||||||||
Income before income taxes |
418 | (1,267 | ) | (1,519 | ) | (5,667 | ) | |||||||||
Income tax (expense) benefit |
(128 | ) | 504 | 591 | 1,993 | |||||||||||
Net income |
$ | 290 | $ | (763 | ) | $ | (928 | ) | $ | (3,674 | ) | |||||
Basic earnings per share |
$ | 0.02 | $ | (0.06 | ) | $ | (0.08 | ) | $ | (0.29 | ) | |||||
Diluted earnings per share |
$ | 0.02 | $ | (0.06 | ) | $ | (0.08 | ) | $ | (0.29 | ) | |||||
The annual financial statements required by this Item 7 are included in Exhibit 13 to
this report and incorporated into this Item 7 by reference.
49
Table of Contents
ITEM 8. | Changes and Disagreements with Accountants on Accounting and Financial Disclosure. |
None.
ITEM 8A. | Controls and Procedures. |
Evaluation of Disclosure Controls and Procedures
Our management conducted an evaluation, with the participation of our Interim Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of December 31, 2009. Our disclosure controls and procedures
are designed to ensure that information required to be disclosed by us in the reports that we file
or submit under the Exchange Act is recorded, processed, summarized, and reported on a timely
basis. Based upon that evaluation, the Interim Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective as of December 31, 2009 to
give reasonable assurance in alerting us in a timely fashion to material information relating to us
that is required to be included in the reports that we file under the Exchange Act.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting that occurred during
the fourth quarter of 2009 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
Managements Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting. Our internal control system was designed to provide reasonable assurance to
our management and Board of Directors regarding the preparation and fair presentation of published
financial statements.
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.
Our management assessed the effectiveness of our internal control over financial reporting as
of December 31, 2009. In making this assessment, it used the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework. Based on our assessment, management believes that the Company maintained effective
internal control over financial reporting as of December 31, 2009.
Attestation Report of the Registered Public Accounting Firm
Our independent auditors have issued an attestation report on the effectiveness of our
internal control over financial reporting. This report appears in Exhibit 13 to this Annual Report
on Form 10-K.
ITEM 8B. | Other Information. |
None.
PART III
ITEM 9. | Directors, Executive Officers and Corporate Governance. |
The disclosures required by this Item 9 are incorporated by reference to the sections titled
Directors and Executive Officers, Section 16 Beneficial Ownership Reporting Compliance, Code
of Ethics and Committees and Meetings of the Board of Directors in our definitive proxy
statement for the 2010 annual meeting of shareholders.
50
Table of Contents
ITEM 10. | Executive Compensation. |
The disclosures required by this Item 10 are incorporated by reference to the section titled
Executive Compensation in our definitive proxy statement for the 2010 annual meeting of
shareholders.
ITEM 11. | Securities Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
The disclosures required by this Item 11, except as set forth below, are incorporated by
reference to the sections titled Outstanding Voting Securities of the Company and Principal
Holders Thereof in our definitive proxy statement for the 2010 annual meeting of shareholders.
Equity Compensation Plan Table
The following table sets forth information relating to the Companys equity compensation plans
as of December 31, 2009.
(a) | (b) | (c) | ||||||||||
Number of | Weighted- | Number of securities | ||||||||||
securities to be | average exercise | remaining available for | ||||||||||
issued upon | price of | future issuance under | ||||||||||
exercise of | outstanding | equity compensation | ||||||||||
outstanding | options, | plans (excluding | ||||||||||
options, warrants | warrants | securities reflected in | ||||||||||
Plan category | and rights | and rights | column (a)) | |||||||||
Equity compensation
plans approved by
security holders |
1,071,047 | $ | 6.26 | 347,446 | ||||||||
Equity compensation
plans not approved
by security holders |
| | | |||||||||
Total |
1,071,047 | $ | 6.26 | 347,446 | ||||||||
ITEM 12. | Certain Relationships and Related Transactions, and Director Independence. |
The disclosures required by this Item 12 are incorporated by reference to the section titled
Certain Relationships and Related Transactions in our definitive proxy statement for the 2010
annual meeting of shareholders.
ITEM 13. | Principal Accountant Fees and Services. |
The disclosures required by this Item 13 are incorporated by reference to the section titled
Ratification of Independent Auditors in our definitive proxy statement for the 2010 annual
meeting of shareholders.
PART IV
ITEM 14. | Exhibits and Financial Statement Schedules |
1. | The following financial statements are filed as a part of this report: | |
Report of Independent Registered Public Accounting Firm | ||
Consolidated Balance Sheets as of December 31, 2009 and 2008 | ||
Consolidated Statements of Operations for Years Ended December 31, 2009, 2008 and 2007 | ||
Consolidated Statements of Comprehensive Income (Loss) for Years Ended December 31, 2009, 2008 and 2007 | ||
Consolidated Statements of Stockholders Equity for Years Ended December 31, 2009, 2008 and 2007 | ||
Consolidated Statements of Cash Flows for Years Ended December 31, 2009, 2008 and 2007 | ||
Notes to Consolidated Financial Statements |
51
Table of Contents
2. | All financial statement schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes. |
3. | The following exhibits are filed with this report on Form 10-K. |
Exhibit No. | Name of Exhibit | |
3.1
|
Articles of Incorporation, as amended (incorporated by reference to exhibit 3.1 of Registrants Form 10-K filed with the SEC on April 2, 2009) | |
3.2
|
Bylaws (incorporated by reference to exhibit 3.2 of Registrants Form 10 filed with the SEC on May 1, 2006) | |
10.1
|
2004 Stock Option Plan (incorporated by reference to exhibit 10.1 of Registrants Form 10 filed with the SEC on May 1, 2006) * | |
10.2
|
2007 Equity Plan (incorporated by reference to Appendix C to the Registrants definitive proxy statement filed with the SEC on April 25, 2007, which consists of pages C-1 through C-18)* | |
10.3
|
Employment Agreement with Jackie L. Reed (incorporated by reference to exhibit 10.3 of Registrants Form 10-K filed with the SEC of April 2, 2009)* | |
10.4
|
Employment Agreement with Teresa L. Martin (incorporated by reference to exhibit 10.4 of Registrants Form 10-K filed with the SEC of April 2, 2009)* | |
10.5
|
Employment Agreement with Gregory S. Akins (incorporated by reference to exhibit 10.5 of Registrants Form 10-K filed with the SEC of April 2, 2009)* | |
10.6
|
Employment Agreement with W. Brett Morgan (incorporated by reference to exhibit 10.6 of Registrants Form 10-K filed with the SEC of April 2, 2009)* | |
13
|
Consolidated Financial Statements of FGBC Bancshares, Inc. | |
21
|
List of Subsidiaries (incorporated by reference to exhibit 21 of Registrants Form 10 filed with the SEC on May 1, 2006) | |
23
|
Consent of Mauldin & Jenkins, LLC | |
31.1
|
Certificate of the Interim CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2
|
Certificate of the CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32
|
Certificate of the Interim CEO and CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
* | Indicates a management contract or compensatory plan or arrangement. |
52
Table of Contents
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.
FGBC BANCSHARES, INC. |
||||
By: /s/ W. Brett Morgan
Name: W. Brett
Morgan
|
Date: | April 15, 2010 | ||
Title: Interim President and Chief
Executive Officer |
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.
/s/ W. Brett Morgan
|
Date: | April 15, 2010 | ||
Interim President and Chief Executive Officer |
||||
[Principal Executive Officer] |
||||
/s/ Teresa L. Martin
|
Date: | April 15, 2010 | ||
Chief Financial Officer and Executive Vice President |
||||
[Principal Financial Officer and Principal Accounting Officer] |
||||
/s/ Roy L. Denny
|
Date: | April 15, 2010 | ||
/s/ Walter D. Duke
|
Date: | April 15, 2010 | ||
/s/ Wyche T. Green, III
|
Date: | April 15, 2010 | ||
/s/ Greg M. Hagan
|
Date: | April 15, 2010 | ||
/s/ George B. Hamil, Jr.
|
Date: | April 15, 2010 | ||
/s/ Terry L. Harper
|
Date: | April 15, 2010 | ||
/s/ Emmett K. Harrod
|
Date: | April 15, 2010 | ||
/s/ Howard J. Lindsey
|
Date: | April 15, 2010 | ||
/s/ Dennis H. McDowell
|
Date: | April 15, 2010 | ||
/s/ Edward R. Newbern
|
Date: | April 15, 2010 |
53
Table of Contents
/s/ Randall Pugh
|
Date: | April 15, 2010 | ||
/s/ Carl R. Sewell, Jr.
|
Date: | April 15, 2010 | ||
/s/ Bart R. Smith
|
Date: | April 15, 2010 | ||
/s/ Gleamer L. Smith, Jr.
|
Date: | April 15, 2010 | ||
/s/ Robert L. Stewart, Jr.
|
Date: | April 15, 2010 |
54