Attached files
file | filename |
---|---|
EX-32.1 - EXHIBIT 32.1 - Southeastern Bank Financial CORP | c04028exv32w1.htm |
EX-31.1 - EXHIBIT 31.1 - Southeastern Bank Financial CORP | c04028exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - Southeastern Bank Financial CORP | c04028exv31w2.htm |
Table of Contents
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2010. |
or |
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. 0-24172
Southeastern Bank Financial Corporation
(Exact name of registrant as specified in its charter)
Georgia | 58-2005097 | |
(State of Incorporation) | (I.R.S. Employer Identification No.) |
3530 Wheeler Road, Augusta, Georgia 30909
(Address of principal executive offices)
(Address of principal executive offices)
(706) 738-6990
(Issuers telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T 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 whether the issuer is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act): Yes o No þ
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuers classes of common equity, as of
the latest practicable date:
6,674,465 shares of common stock, $3.00 par value per share, outstanding as of July 29, 2010.
SOUTHEASTERN BANK FINANCIAL CORPORATION
FORM 10-Q
INDEX
FORM 10-Q
INDEX
Page | ||||||||
3 | ||||||||
5 | ||||||||
7 | ||||||||
9 | ||||||||
28 | ||||||||
56 | ||||||||
56 | ||||||||
57 | ||||||||
57 | ||||||||
57 | ||||||||
57 | ||||||||
57 | ||||||||
57 | ||||||||
58 | ||||||||
59 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 |
* | No information submitted under this caption |
1
Table of Contents
Table of Contents
SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except share data)
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
Assets |
||||||||
Cash and due from banks |
$ | 99,210 | $ | 123,661 | ||||
Federal funds sold |
7,300 | 7,300 | ||||||
Interest-bearing deposits in other banks |
17,276 | 17,033 | ||||||
Cash and cash equivalents |
123,786 | 147,994 | ||||||
Investment securities |
||||||||
Available-for-sale |
455,050 | 306,216 | ||||||
Held-to-maturity, at cost (fair values of
$312 and $492, respectively) |
310 | 490 | ||||||
Loans held for sale |
33,142 | 19,157 | ||||||
Loans |
900,167 | 937,489 | ||||||
Less allowance for loan losses |
23,826 | 22,338 | ||||||
Loans, net |
876,341 | 915,151 | ||||||
Premises and equipment, net |
30,524 | 31,702 | ||||||
Accrued interest receivable |
5,631 | 6,091 | ||||||
Bank-owned life insurance |
23,700 | 23,248 | ||||||
Restricted equity securities |
6,338 | 6,338 | ||||||
Other real estate owned |
7,205 | 7,974 | ||||||
Prepaid FDIC assessment |
5,871 | 6,886 | ||||||
Deferred tax asset |
8,839 | 11,160 | ||||||
Other assets |
4,191 | 8,712 | ||||||
$ | 1,580,928 | $ | 1,491,119 | |||||
3
Table of Contents
SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except share data)
(Dollars in thousands, except share data)
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
Liabilities and Stockholders Equity |
||||||||
Deposits |
||||||||
Noninterest-bearing |
$ | 118,212 | $ | 114,780 | ||||
Interest-bearing: |
||||||||
NOW accounts |
318,982 | 210,438 | ||||||
Savings |
382,696 | 343,740 | ||||||
Money management accounts |
36,479 | 44,781 | ||||||
Time deposits over $100 |
370,041 | 418,751 | ||||||
Other time deposits |
145,032 | 148,044 | ||||||
1,371,442 | 1,280,534 | |||||||
Securities sold under repurchase agreements |
448 | 3,188 | ||||||
Advances from Federal Home Loan Bank |
72,000 | 77,000 | ||||||
Other borrowed funds |
900 | 600 | ||||||
Accrued interest payable and other liabilities |
11,384 | 13,106 | ||||||
Subordinated debentures |
22,947 | 22,947 | ||||||
Total liabilities |
1,479,121 | 1,397,375 | ||||||
Stockholders equity: |
||||||||
Preferred stock, no par value; 10,000,000 shares
authorized; 0 shares outstanding in 2010 and
2009, respectively |
| | ||||||
Common stock, $3.00 par value; 10,000,000 shares
authorized; 6,673,925 and 6,672,826 shares issued
and outstanding in 2010 and 2009, respectively |
20,022 | 20,018 | ||||||
Additional paid-in capital |
62,488 | 62,360 | ||||||
Retained earnings |
15,567 | 12,692 | ||||||
Accumulated other comprehensive income (loss), net |
3,730 | (1,326 | ) | |||||
Total stockholders equity |
101,807 | 93,744 | ||||||
$ | 1,580,928 | $ | 1,491,119 | |||||
See accompanying notes to consolidated financial statements.
4
Table of Contents
SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
(Dollars in thousands, except share data)
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Interest income: |
||||||||||||||||
Loans, including fees |
$ | 13,517 | $ | 14,206 | $ | 26,860 | $ | 28,010 | ||||||||
Investment securities |
3,955 | 3,595 | 7,374 | 7,669 | ||||||||||||
Federal funds sold |
3 | 10 | 7 | 22 | ||||||||||||
Interest-bearing deposits in other banks |
94 | 24 | 182 | 41 | ||||||||||||
Total interest income |
17,569 | 17,835 | 34,423 | 35,742 | ||||||||||||
Interest expense: |
||||||||||||||||
Deposits |
5,319 | 6,009 | 10,686 | 12,810 | ||||||||||||
Federal funds purchased and securities sold
under repurchase agreements |
5 | 95 | 16 | 206 | ||||||||||||
Other borrowings |
891 | 1,023 | 1,845 | 1,919 | ||||||||||||
Total interest expense |
6,215 | 7,127 | 12,547 | 14,935 | ||||||||||||
Net interest income |
11,354 | 10,708 | 21,876 | 20,807 | ||||||||||||
Provision for loan losses |
3,794 | 5,114 | 7,082 | 9,863 | ||||||||||||
Net interest income after provision
for loan losses |
7,560 | 5,594 | 14,794 | 10,944 | ||||||||||||
Noninterest income: |
||||||||||||||||
Service charges and fees on deposits |
1,748 | 1,737 | 3,343 | 3,378 | ||||||||||||
Gain on sales of loans |
2,223 | 2,461 | 3,576 | 4,697 | ||||||||||||
Gain (loss) on sale of fixed assets |
| (42 | ) | 27 | (16 | ) | ||||||||||
Investment securities gains (losses), net |
149 | 1,101 | 162 | 1,312 | ||||||||||||
Other-than-temporary loss |
||||||||||||||||
Total impairment loss |
| (816 | ) | | (1,191 | ) | ||||||||||
Loss recognized in other comprehensive loss |
| 572 | | 572 | ||||||||||||
Net impairment loss recognized in earnings |
| (244 | ) | | (619 | ) | ||||||||||
Retail investment income |
416 | 318 | 751 | 527 | ||||||||||||
Trust service fees |
290 | 245 | 577 | 498 | ||||||||||||
Increase in cash surrender value of
bank-owned life insurance |
223 | 213 | 452 | 394 | ||||||||||||
Miscellaneous income |
156 | 123 | 317 | 286 | ||||||||||||
Total noninterest income |
5,205 | 5,912 | 9,205 | 10,457 | ||||||||||||
Noninterest expense: |
||||||||||||||||
Salaries and other personnel expense |
5,915 | 5,800 | 11,409 | 11,458 | ||||||||||||
Occupancy expenses |
1,166 | 1,140 | 2,337 | 2,281 | ||||||||||||
Other real estate (gains) losses |
414 | 179 | 328 | 291 | ||||||||||||
Other operating expenses |
3,067 | 3,689 | 5,920 | 6,612 | ||||||||||||
Total noninterest expense |
10,562 | 10,808 | 19,994 | 20,642 | ||||||||||||
Income before income taxes |
2,203 | 698 | 4,005 | 759 | ||||||||||||
Income tax expense |
583 | 61 | 1,130 | 66 | ||||||||||||
Net income |
$ | 1,620 | $ | 637 | $ | 2,875 | $ | 693 | ||||||||
5
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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
(Dollars in thousands, except share data)
(Dollars in thousands, except share data)
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Basic net income per share |
$ | 0.24 | $ | 0.10 | $ | 0.43 | $ | 0.11 | ||||||||
Diluted net income per share |
$ | 0.24 | $ | 0.10 | $ | 0.43 | $ | 0.11 | ||||||||
Weighted average common shares outstanding |
6,673,925 | 6,348,312 | 6,673,631 | 6,169,125 | ||||||||||||
Weighted average number of common and
common equivalent shares outstanding |
6,673,968 | 6,354,344 | 6,673,631 | 6,177,569 | ||||||||||||
6
Table of Contents
SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Six Months Ended | ||||||||
June 30, | ||||||||
2010 | 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 2,875 | $ | 693 | ||||
Adjustments to reconcile net income to net cash
provided by operating activities |
||||||||
Depreciation |
1,365 | 1,336 | ||||||
Deferred income tax benefit |
(804 | ) | | |||||
Provision for loan losses |
7,082 | 9,863 | ||||||
Net investment securities (gains) losses |
(162 | ) | (693 | ) | ||||
Net amortization of premium (accretion of discount)
on investment securities |
584 | (90 | ) | |||||
Increase in CSV of bank-owned life insurance |
(452 | ) | (394 | ) | ||||
Stock options compensation cost |
120 | 94 | ||||||
(Gain) loss on disposal of premises and equipment |
(27 | ) | 16 | |||||
(Gain) loss on the sale of other real estate |
(369 | ) | 291 | |||||
Increase in other real estate valuation allowance |
697 | | ||||||
Gain on sales of loans |
(3,576 | ) | (4,697 | ) | ||||
Real estate loans originated for sale |
(144,349 | ) | (219,406 | ) | ||||
Proceeds from sales of real estate loans |
133,939 | 219,083 | ||||||
Decrease in accrued interest receivable |
460 | 820 | ||||||
Decrease (increase) in other assets |
5,536 | (545 | ) | |||||
(Decrease) increase in accrued interest payable and other liabilities |
(1,722 | ) | 456 | |||||
Net cash provided by operating activities |
1,197 | 6,827 | ||||||
Cash flows from investing activities: |
||||||||
Proceeds from sales of available-for-sale securities |
20,364 | 58,439 | ||||||
Proceeds from maturities and calls of available-for-sale securities |
65,453 | 90,467 | ||||||
Proceeds from maturities of held-to-maturity securities |
180 | 203 | ||||||
Purchase of available-for-sale securities |
(226,892 | ) | (126,515 | ) | ||||
Purchase of restricted equity securities |
| (299 | ) | |||||
Net decrease in loans |
26,184 | 9,225 | ||||||
Purchase of bank-owned life insurance |
| (5,000 | ) | |||||
Additions to premises and equipment |
(189 | ) | (570 | ) | ||||
Proceeds from sale of other real estate |
5,985 | 2,961 | ||||||
Proceeds from sale of premises and equipment |
30 | 270 | ||||||
Net cash (used) provided by investing activities |
(108,885 | ) | 29,181 | |||||
7
Table of Contents
SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Dollars in thousands)
(Unaudited)
Six Months Ended | ||||||||
June 30, | ||||||||
2010 | 2009 | |||||||
Cash flows from financing activities: |
||||||||
Net increase in deposits |
90,908 | 51,724 | ||||||
Net decrease in federal funds purchased and
securities sold under repurchase agreements |
(2,740 | ) | (13,192 | ) | ||||
Payments of Federal Home Loan Bank advances |
(5,000 | ) | | |||||
Proceeds from subordinated debentures |
| 2,947 | ||||||
Proceeds from other borrowed funds |
300 | 700 | ||||||
Purchase of treasury stock |
| (5 | ) | |||||
Proceeds from issuance of common stock |
| 9,010 | ||||||
Payment of cash dividends |
| (778 | ) | |||||
Proceeds from Directors stock purchase plan |
12 | 15 | ||||||
Net cash provided by financing activities |
83,480 | 50,421 | ||||||
Net (decrease) increase in cash and cash equivalents |
$ | (24,208 | ) | $ | 86,429 | |||
Cash and cash equivalents at beginning of period |
147,994 | 37,768 | ||||||
Cash and cash equivalents at end of period |
$ | 123,786 | $ | 124,197 | ||||
Supplemental disclosures of cash paid during the period for: |
||||||||
Interest |
$ | 12,660 | $ | 15,879 | ||||
Income taxes |
$ | 1,846 | $ | 336 | ||||
Supplemental information on noncash investing activities: |
||||||||
Loans transferred to other real estate |
$ | 5,544 | $ | 11,305 | ||||
See accompanying notes to consolidated financial statements.
8
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SOUTHEASTERN BANK FINANCIAL CORPORATION AND
SUBSIDIARIES
SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2010
Note 1 Basis of Presentation
The accompanying consolidated financial statements include the accounts of Southeastern Bank
Financial Corporation (the Company), and its wholly-owned subsidiaries, Georgia Bank & Trust
Company of Augusta (the Bank) and Southern Bank & Trust (the Thrift). Significant intercompany
transactions and accounts are eliminated in consolidation. Dollar amounts are rounded to thousands
except share and per share data.
The financial statements for the three and six months ended June 30, 2010 and 2009 are unaudited
and have been prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and regulations. These consolidated
financial statements should be read in conjunction with the audited consolidated financial
statements and footnotes included in the Companys annual report on Form 10-K for the year ended
December 31, 2009.
In the opinion of management, all adjustments necessary to present fairly the financial position
and the results of operations and cash flows for the interim periods have been made. All such
adjustments are of a normal recurring nature. The results of operations for the three and six
months ended June 30, 2010 are not necessarily indicative of the results of operations which the
Company may achieve for the entire year.
Some items in the prior period financial statements were reclassified to conform to the current
presentation.
Note 2 Recent Accounting Pronouncements
In January 2010, the FASB issued Accounting Standards Update No. 2010-4, Accounting for Various
Topics, Technical Corrections to SEC Paragraphs. In addition, in February 2010, the FASB issued
Accounting Standards Update No. 2010-8, Technical Corrections to Various Topics. These updates
covered a wide variety of accounting matters, including subsequent events, goodwill, derivative
financial instruments, and investments in limited partnerships. The most significant provisions of
these updates were effective upon issuance and did not have a material effect on the Companys
results of operations or financial position.
9
Table of Contents
In January 2010, the FASB amended previous guidance related to fair value measurements and
disclosures, which requires new disclosures for transfers in and out of Levels 1 and 2 and requires
a reconciliation to be provided for the activity in Level 3 fair value measurements. A reporting
entity should disclose separately the amounts of significant transfers in and out of Levels 1 and 2
and provide an explanation for the transfers. This guidance is effective for interim periods
beginning after December 15, 2009, and did not have a material effect on the Companys results of
operations or financial position.
In the reconciliation for fair value measurements using unobservable inputs (Level 3) a reporting
entity should present separately information about purchases, sales, issuances, and settlements on
a gross basis rather than a net basis. Disclosures relating to purchases, sales, issuances, and
settlements in the roll forward of activity in Level 3 fair value measurement will
become effective beginning after December 15, 2010, and for interim periods within those
fiscal years. The adoption of this standard is not expected to have a material effect on the
Companys results of operations or financial position but it will require expansion of the
Companys future disclosures about fair value measurements.
In June 2009, the FASB amended previous guidance relating to transfers of financial assets and
eliminates the concept of a qualifying special purpose entity. This guidance must be applied as of
the beginning of each reporting entitys first annual reporting period that begins after
November 15, 2009, for interim periods within that first annual reporting period and for interim
and annual reporting periods thereafter. This guidance must be applied to transfers occurring on or
after the effective date. Additionally, on and after the effective date, the concept of a
qualifying special-purpose entity is no longer relevant for accounting purposes. Therefore,
formerly qualifying special-purpose entities should be evaluated for consolidation by reporting
entities on and after the effective date in accordance with the applicable consolidation guidance.
The disclosure provisions were also amended and apply to transfers that occurred both before and
after the effective date of this guidance. The effect of adopting this new guidance was not
material to the consolidated financial statements.
In June 2009, the FASB amended guidance for consolidation of variable interest entity guidance by
replacing the quantitative-based risks and rewards calculation for determining which enterprise, if
any, has a controlling financial interest in a variable interest entity with an approach focused on
identifying which enterprise has the power to direct the activities of a variable interest entity
that most significantly impact the entitys economic performance and (1) the obligation to absorb
losses of the entity or (2) the right to receive benefits from the entity. Additional disclosures
about an enterprises involvement in variable interest entities are also required. This guidance is
effective as of the beginning of each reporting entitys first annual reporting period that begins
after November 15, 2009, for interim periods within that first annual reporting period, and for
interim and annual reporting periods thereafter. Early adoption is prohibited. The effect of
adopting this new guidance was not material to the consolidated financial statements.
10
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Note 3 Investment Securities
The following table summarizes the amortized cost and fair value of the available-for-sale and
held-to-maturity investment securities portfolio at June 30, 2010 and December 31, 2009 and the
corresponding amounts of unrealized gains and losses therein.
June 30, 2010 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | unrealized | unrealized | Estimated | |||||||||||||
cost | gains | losses | fair value | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Available-for-sale |
||||||||||||||||
Mortgage backed securities |
||||||||||||||||
U.S. GSEs MBS residential* |
$ | 71,778 | 3,480 | (86 | ) | 75,172 | ||||||||||
U.S. GSEs CMO |
148,319 | 2,168 | (143 | ) | 150,344 | |||||||||||
Other CMO |
4,384 | 2 | (146 | ) | 4,240 | |||||||||||
Total MBS |
$ | 224,481 | 5,650 | (375 | ) | 229,756 | ||||||||||
Obligations of U.S. |
||||||||||||||||
Government agencies |
$ | 182,738 | 720 | (33 | ) | 183,425 | ||||||||||
Obligations of states and
political subdivisions |
31,138 | 535 | (376 | ) | 31,297 | |||||||||||
Corporate bonds |
10,681 | 328 | (442 | ) | 10,567 | |||||||||||
Equity securities |
4 | 1 | | 5 | ||||||||||||
$ | 449,042 | 7,234 | (1,226 | ) | 455,050 | |||||||||||
Held-to-maturity |
||||||||||||||||
Obligations of states and
political subdivisions |
$ | 310 | 2 | | 312 | |||||||||||
$ | 310 | 2 | | 312 | ||||||||||||
* | Government sponsored entities |
11
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December 31, 2009 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | unrealized | unrealized | Estimated | |||||||||||||
cost | gains | losses | fair value | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Available-for-sale |
||||||||||||||||
Mortgage backed securities |
||||||||||||||||
U.S. GSEs MBS residential |
$ | 86,463 | 2,245 | (107 | ) | 88,601 | ||||||||||
U.S. GSEs CMO |
107,153 | 1,116 | (1,427 | ) | 106,842 | |||||||||||
Other CMO |
8,484 | 142 | (399 | ) | 8,227 | |||||||||||
Total MBS |
$ | 202,100 | 3,503 | (1,933 | ) | 203,670 | ||||||||||
Obligations of U.S. |
||||||||||||||||
Government agencies |
$ | 67,290 | 43 | (1,003 | ) | 66,330 | ||||||||||
Obligations of states and
political subdivisions |
26,402 | 299 | (521 | ) | 26,180 | |||||||||||
Corporate bonds |
12,591 | 35 | (2,594 | ) | 10,032 | |||||||||||
Equity securities |
4 | | | 4 | ||||||||||||
$ | 308,387 | 3,880 | (6,051 | ) | 306,216 | |||||||||||
Held-to-maturity |
||||||||||||||||
Obligations of states and
political subdivisions |
$ | 490 | 2 | | 492 | |||||||||||
$ | 490 | 2 | | 492 | ||||||||||||
The amortized cost and fair value of the investment securities portfolio excluding equity
securities are shown by expected maturity. Expected maturities may differ from contractual
maturities if borrowers have the right to call or prepay obligations with or without call or
prepayment penalties.
June 30, 2010 | ||||||||
Amortized | Estimated | |||||||
cost | fair value | |||||||
(Dollars in thousands) | ||||||||
Available-for-sale: |
||||||||
One year or less |
$ | 618 | 620 | |||||
After one year through five years |
3,123 | 3,173 | ||||||
After five years through ten years |
85,409 | 86,544 | ||||||
After ten years |
359,888 | 364,708 | ||||||
$ | 449,038 | 455,045 | ||||||
Held-to-maturity: |
||||||||
After one year through five years |
$ | 310 | 312 | |||||
$ | 310 | 312 | ||||||
12
Table of Contents
The following tables summarize the investment securities with unrealized losses at June 30, 2010
and December 31, 2009, aggregated by investment category and length of time the individual
securities have been in a continuous unrealized loss position.
June 30, 2010 | ||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
Estimated | Unrealized | Estimated | Unrealized | Estimated | Unrealized | |||||||||||||||||||
fair value | loss | fair value | loss | fair value | loss | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Temporarily impaired |
||||||||||||||||||||||||
Mortgage backed securities |
||||||||||||||||||||||||
U.S. GSEs MBS
residential |
$ | | | 564 | 86 | 564 | 86 | |||||||||||||||||
U.S. GSEs CMO |
28,528 | 143 | | | 28,528 | 143 | ||||||||||||||||||
Other CMO |
| | 3,059 | 146 | 3,059 | 146 | ||||||||||||||||||
Total MBS |
$ | 28,528 | 143 | 3,623 | 232 | 32,151 | 375 | |||||||||||||||||
Obligations of U.S. |
||||||||||||||||||||||||
Government agencies |
$ | 24,435 | 33 | | | 24,435 | 33 | |||||||||||||||||
Obligations of states and
political subdivisions |
2,424 | 33 | 6,044 | 343 | 8,468 | 376 | ||||||||||||||||||
Corporate bonds |
| | 6,334 | 442 | 6,334 | 442 | ||||||||||||||||||
$ | 55,387 | 209 | 16,001 | 1,017 | 71,388 | 1,226 | ||||||||||||||||||
December 31, 2009 | ||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
Estimated | Unrealized | Estimated | Unrealized | Estimated | Unrealized | |||||||||||||||||||
fair value | loss | fair value | loss | fair value | loss | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Temporarily impaired |
||||||||||||||||||||||||
Mortgage backed securities |
||||||||||||||||||||||||
U.S. GSEs MBS residential |
$ | 21,444 | 107 | | | 21,444 | 107 | |||||||||||||||||
U.S. GSEs CMO |
61,373 | 1,408 | 665 | 19 | 62,038 | 1,427 | ||||||||||||||||||
Other CMO |
552 | 98 | 4,243 | 285 | 4,795 | 383 | ||||||||||||||||||
Total MBS |
$ | 83,369 | 1,613 | 4,908 | 304 | 88,277 | 1,917 | |||||||||||||||||
Obligations of U.S. |
||||||||||||||||||||||||
Government agencies |
$ | 43,528 | 1,003 | | | 43,528 | 1,003 | |||||||||||||||||
Obligations of states and
political subdivisions |
8,644 | 220 | 4,457 | 301 | 13,101 | 521 | ||||||||||||||||||
Corporate bonds |
733 | 267 | 6,291 | 2,327 | 7,024 | 2,594 | ||||||||||||||||||
$ | 136,274 | 3,103 | 15,656 | 2,932 | 151,930 | 6,035 | ||||||||||||||||||
Other-than-temporarily impaired |
||||||||||||||||||||||||
Mortgage backed securities |
||||||||||||||||||||||||
Other CMO |
$ | | | 748 | 16 | 748 | 16 | |||||||||||||||||
$ | 136,274 | 3,103 | 16,404 | 2,948 | 152,678 | 6,051 | ||||||||||||||||||
Proceeds from maturities, sales and calls of securities available-for-sale were $59,266 and
$88,871 for the three months ended June 30, 2010 and 2009, respectively. Gross gains of $363 and
$1,114 and gross losses of $214 and $15 were realized on these sales and calls during 2010 and
2009, respectively.
Proceeds from maturities, sales and calls of securities available-for-sale were $85,817 and
$148,906 for the six months ended June 30, 2010 and 2009, respectively. Gross gains of $376 and
$1,879 and gross losses of $214 and $569 were realized on these sales and calls during 2010 and
2009, respectively.
13
Table of Contents
Other-Than-Temporary Impairment June 30, 2010
Management evaluates securities for other-than-temporary impairment (OTTI) at least on a
quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.
Investment securities classified as available-for-sale or held-to-maturity are generally evaluated
for OTTI under the provisions of ASC 320-10, Investments Debt and Equity Securities. In
determining OTTI, management considers many factors, including: (1) the length of time and the
extent to which the fair value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions,
and (4) whether the entity has the intent to sell the debt security or more likely than not will be
required to sell the debt security before its anticipated recovery. The assessment of whether an
other-than-temporary decline exists involves a high degree of subjectivity and judgment and is
based on the information available to management at a point in time.
When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity
intends to sell the security or it is more likely than not it will be required to sell the security
before recovery of its amortized cost basis. If an entity intends to sell or it is more likely
than not it will be required to sell the security before recovery of its amortized cost basis, the
OTTI shall be recognized in earnings equal to the entire difference between the investments
amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to
sell the security and it is not more likely than not that the entity will be required to sell the
security before recovery of its amortized cost basis, the OTTI shall be separated into the amount
representing the credit loss and the amount related to all other factors. The amount of the total
OTTI related to the credit loss is determined based on the present value of cash flows expected to
be collected and is recognized in earnings. The amount of the total OTTI related to other factors
is recognized in other comprehensive income or loss, net of applicable taxes. The previous
amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of
the investment.
As of June 30, 2010, the Companys security portfolio consisted of 299 securities, 56 of which were
in an unrealized loss position. The majority or 66.64% of unrealized losses were related to the
Companys mortgage-backed and corporate securities. Four of the mortgage-backed securities were
rated below investment grade and a cash flow analysis was performed to evaluate OTTI. The
assumptions used in the model include expected future default rates, loss severity and prepayments.
The model also takes into account the structure of the security including credit support. Based
on these assumptions, the model calculates and projects the timing and amount of interest and
principal payments expected for the security. In addition, the model was used to stress each
security, or make assumptions more severe than expected activity, to determine the degree to which
assumptions could deteriorate before the security could no longer fully support repayment. Upon
completion of the June 30, 2010 analysis, our model indicated that none of these securities were
other-than-temporarily impaired.
14
Table of Contents
Other-Than-Temporary Impairment June 30, 2009
The following information is related to other-than-temporary impairment as of June 30, 2009:
As of June 30, 2009, the Companys security portfolio consisted of 247 securities, 95 of which were
in an unrealized loss position. The majority of unrealized losses were related to the Companys
mortgage-backed and corporate securities. Based on managements evaluation at June 30, 2009, two
securities were determined to be other-than-temporarily impaired, as discussed below.
Mortgage-backed Securities
At June 30, 2009, approximately 92% of the mortgage-backed securities held by the Company were
issued by U.S. government-sponsored entities and agencies, primarily Fannie Mae and Freddie Mac,
institutions which the government has affirmed its commitment to support. Because the decline in
fair value is attributable to changes in interest rates and illiquidity, and not credit quality,
and because the Company does not have the intent to sell these mortgage-backed securities and it is
likely that it will not be required to sell the securities before their anticipated recovery, the
Company does not consider these securities to be other-than-temporarily impaired at June 30, 2009.
The Companys mortgage-backed securities portfolio also includes twelve non-agency collateralized
mortgage obligations with a market value of $9,468 which had unrealized losses of approximately
$965 at June 30, 2009. These non-agency securities were rated AAA at purchase.
At June 30, 2009 four of these non-agency securities were rated below investment grade and a cash
flow analysis was performed to evaluate OTTI. The assumptions used in the model include expected
future default rates, loss severity and prepayments. The model also takes into account the
structure of the security including credit support. Based on these assumptions the model
calculates and projects the timing and amount of interest and principal payments expected for the
security. In addition the model was used to stress each security, or make assumptions more
severe than expected activity, to determine the degree to which assumptions could deteriorate
before the security could no longer fully support repayment. Upon completion of the June 30, 2009
analysis, our model indicated other-than-temporary impairment on two of these securities. These
two securities had OTTI losses of $691, of which $119 was recorded as expense and $572 was recorded
in other comprehensive income. These two securities remained classified as available-for-sale at
June 30, 2009.
At June 30, 2009, the fair values of four collateralized mortgage obligations totaling $4,721 were
measured using Level 3 inputs because the market for them has become illiquid, as indicated by few,
if any, trades during the period. These securities were previously measured using Level 2 inputs.
The discount rates used in the valuation model were based on a yield that the market would require
for collateralized mortgage obligations with maturities and risk characteristics similar to the securities being measured.
15
Table of Contents
Corporate Securities
The Company holds fifteen corporate securities to ten issuers totaling $14,352 with an unrealized
loss of $1,710. The Companys unrealized losses on corporate securities relate primarily to its
investment in single issuer corporate and corporate trust preferred securities. At June 30, 2009
three of the corporate securities were rated Speculative and seven were rated Investment grade by
at least one of the rating agencies, Moodys, S&P and Fitch. Five of the securities to two issuers
were not rated. None of the issuers were in default and all interest payments have been made as
contracted. We considered several factors including the financial condition and near term prospects
of the issuers and concluded that the decline in fair value was primarily attributable to temporary
illiquidity and the financial crisis affecting these markets and not necessarily the expected cash
flows of the individual securities. Because the Company does not have the intent to sell these
securities and it is likely that it will not be required to sell the securities before their
anticipated recovery, the Company does not consider these securities to be other-than-temporarily
impaired at June 30, 2009.
At June 30, 2009, the fair values of twelve corporate securities totaling $10,065 were measured
using discounted cash flows (Level 3 inputs) because the market for them has become illiquid, as
indicated by few, if any, trades during the period. These securities, seven of which totaled
$4,774 were previously measured using Level 2 inputs. The discount rates used in the valuation
model were based on current spreads to U.S. Treasury rates of long-term corporate debt obligations
with maturities and risk characteristics similar to the subordinated debentures being measured. An
additional adjustment to the discount rate for illiquidity in the market for subordinated
debentures was not considered necessary based on the illiquidity premium already present in the
spreads used to estimate the discount rate.
In addition to the securities discussed above the Company had an investment in the senior debt of
Silverton Financial Services, Inc. of $500 for which an estimated other-than-temporary impairment
charge was taken of $375 in the first quarter of 2009. During the second quarter it became apparent
that a buyer for the entity would not materialize and the remaining investment of $125 was written
off.
16
Table of Contents
The following table presents a roll forward of the credit losses recognized in earnings for the
three month period ended June 30, 2009:
Beginning balance, April 1, 2009 |
$ | 375 | ||
Amounts related to credit loss for which
an other-than-temporary impairment
was not previously recognized |
119 | |||
Additions/Subtractions |
||||
Amounts realized for securities sold during the period |
| |||
Amounts related to securities for which the company
intends to sell or that it will be more likely than not
that the company will be required to sell prior to
recovery of amortized cost basis |
| |||
Reductions for increase in cash flows expected to be
collected that are recognized over the remaining
life of the security |
| |||
Increases to the amount related to the credit
loss for which other-than-temporary impairment was
previously recognized |
125 | |||
Ending balance, June 30, 2009 |
619 | |||
The following details the two mortgage backed securities and one single issuer corporate debt
security with OTTI at June 30, 2009 and the related credit losses recognized in earnings:
Silverton | ||||||||||||||||
Financial | ||||||||||||||||
Services, Inc | CMO 1 | CMO 2 | Total | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Amount of other-than-temporary
impairment
related to credit losses at April 1, 2009 |
$ | 375 | $ | | $ | | $ | 375 | ||||||||
Addition for credit losses recognized in
earnings |
125 | 57 | 62 | 244 | ||||||||||||
Amount of other-than-temporary impairment
related to credit losses at June 30, 2009 |
$ | 500 | $ | 57 | $ | 62 | $ | 619 | ||||||||
Further deterioration in economic conditions could cause the Company to record additional
impairment charges related to credit losses of up to $2,553 which is the carrying amount of these
securities.
17
Table of Contents
The following table details the credit ratings and the total impairment loss related to all other
factors recorded as a component of accumulated other comprehensive income for the Companys
mortgage backed securities.
Estimated | ||||||||||||||||||||||||
Amortized | Fair | Unrealized | Ratings as of June 30, 2009 | |||||||||||||||||||||
cost | Value | Losses | S&P | Fitch | Moodys | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Silverton Financial Services,
Inc. |
$ | | $ | | $ | | NR | NR | NR | |||||||||||||||
CMO 1 |
925 | 721 | (204 | ) | B*- | CCC | NR | |||||||||||||||||
CMO 2 |
1,628 | 1,260 | (368 | ) | AAA*- | NR | Caa2 | |||||||||||||||||
Total |
$ | 2,553 | $ | 1,981 | $ | (572 | ) | |||||||||||||||||
Note 4 Loans
The following table summarizes loans at June 30, 2010 and 2009.
June 30, 2010 | June 30, 2009 | |||||||
(Dollars in thousands) | ||||||||
Commercial, financial, and agricultural |
$ | 96,087 | $ | 100,139 | ||||
Real estate: |
||||||||
Commercial |
323,375 | 282,095 | ||||||
Residential |
232,830 | 209,836 | ||||||
Acquisition, development
and construction |
227,200 | 339,944 | ||||||
Consumer installment |
20,668 | 25,945 | ||||||
$ | 900,160 | $ | 957,959 | |||||
Less allowance for loan losses |
23,826 | 16,031 | ||||||
Less deferred loan origination fees (costs) |
(7 | ) | 232 | |||||
$ | 876,341 | $ | 941,696 | |||||
Activity in the allowance for loan losses was as follows:
June 30, 2010 | June 30, 2009 | |||||||
(Dollars in thousands) | ||||||||
Balance, beginning of year |
$ | 22,338 | 14,742 | |||||
Provision for loan losses |
7,082 | 9,863 | ||||||
Charge-offs |
(6,498 | ) | (9,074 | ) | ||||
Recoveries |
904 | 500 | ||||||
Balance, end of year |
$ | 23,826 | 16,031 | |||||
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Individually impaired loans were as follows:
June 30, 2010 | June 30, 2009 | |||||||
(Dollars in thousands) | ||||||||
Period end loans with no allocated allowance
for loan losses |
$ | 26,207 | $ | 17,449 | ||||
Period end loans with allocated allowance
for loan losses |
2,474 | 17,177 | ||||||
$ | 28,681 | $ | 34,626 | |||||
Amount of the allowance for loan loss allocated |
$ | 538 | $ | 3,170 |
June 30, 2010 | June 30, 2009 | |||||||
(Dollars in thousands) | ||||||||
Average of
individually impaired loans during year |
$ | 27,836 | $ | 39,817 | ||||
Interest income recognized during impairment |
66 | 195 | ||||||
Cash-basis interest income recognized |
66 | 195 |
Nonaccrual loans and loans past due 90 days still on accrual were as follows:
June 30, 2010 | June 30, 2009 | |||||||
(Dollars in thousands) | ||||||||
Loans past due over 90 days still on accrual |
$ | 299 | $ | 3,478 | ||||
Nonaccrual loans |
31,803 | 39,564 |
Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance
homogeneous loans that are collectively evaluated for impairment and individually classified
impaired loans.
19
Table of Contents
Note 5 Fair Value Measurements
Fair value is the exchange price that would be received to sell an asset or paid to transfer a
liability (exit price) in the principal or most advantageous market for the asset or liability in
an orderly transaction between market participants at the measurement date. The fair value
hierarchy requires an entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. The standard describes three levels of inputs that
may be used to measure fair values:
Level 1:
|
Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. | |
Level 2:
|
Significant other observable inputs other than Level 1 prices, such as quoted market prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data. | |
Level 3:
|
Significant unobservable inputs that reflect a companys own assumptions about the assumptions that market participants would use in pricing an asset or liability. |
In determining the appropriate levels, the Company used the following methods and significant
assumptions to estimate the fair value of each type of financial instrument:
Investment Securities: The fair values for investment securities are determined by quoted
market prices, if available (Level 1). For securities where quoted prices are not available, fair
values are calculated based on market prices of similar securities (Level 2). For securities where
quoted prices or market prices of similar securities are not available, fair values are calculated
using discounted cash flows or other market indicators (Level 3). Discounted cash flows are
calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities,
volatility, credit spread and optionality. During times when trading is more liquid, broker quotes
are used (if available) to validate the model. Rating agency and industry research reports as well
as defaults and deferrals on individual securities are reviewed and incorporated into the
calculations.
Mortgage Banking Derivatives: The fair value of mortgage banking derivatives is determined
by individual third party sales contract prices for the specific loans held at each reporting
period end (Level 2 inputs). The fair value adjustment is included in other assets.
Loans Held for Sale: Loans held for sale are carried at fair value, as determined by
outstanding commitments, from third party investors (Level 2).
Impaired Loans: The fair value of impaired loans with specific allocations of the
allowance for loan losses is generally based on recent real estate appraisals. These appraisals may
utilize a single valuation approach or a combination of approaches including comparable sales and
the income approach. Adjustments are routinely made in the appraisal process by the appraisers to
adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3
classification of the inputs for determining fair value.
Investments
in Tax Credits: The fair values for tax credits are measured on a recurring
basis and are based upon total credits and deductions remaining to be allocated and total estimated
credits and deductions to be allocated (Level 3 inputs).
20
Table of Contents
Other Real Estate Owned: The fair value of other real estate owned is generally based on
recent real estate appraisals. These appraisals may utilize a single valuation approach or a
combination of approaches including comparable sales and the income approach. Adjustments are
routinely made in the appraisal process by the appraisers to adjust for differences between the
comparable sales and income data available. Management may adjust the appraised value for estimated
costs to sell. Such adjustments are typically significant and result in a Level 3 classification of
the inputs for determining fair value.
Assets and Liabilities Measured on a Recurring Basis
The following tables present the balances of assets and liabilities measured at fair value on a
recurring basis by level within the hierarchy as of June 30, 2010 and December 31, 2009.
Quoted Prices in | Significant Other | Significant | ||||||||||||||
Active Markets for | Observable | Unobservable | ||||||||||||||
June 30, | Identical Assets | Inputs | Inputs | |||||||||||||
2010 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Available-for-sale securities |
||||||||||||||||
Obligations of U.S. |
||||||||||||||||
Government agencies |
$ | 183,425 | 64,046 | 119,379 | | |||||||||||
Obligations of states and
political subdivisions |
31,297 | 500 | 30,797 | | ||||||||||||
Mortgage-backed securities |
||||||||||||||||
U.S. GSEs MBS residential |
75,172 | 5,048 | 69,561 | 563 | ||||||||||||
U.S. GSEs CMO |
150,344 | 28,367 | 121,977 | | ||||||||||||
Other CMO |
4,240 | | 1,061 | 3,179 | ||||||||||||
Corporate bonds |
10,567 | | | 10,567 | ||||||||||||
Equity securities |
5 | 5 | | | ||||||||||||
Total available-for-sale securities |
$ | 455,050 | 97,966 | 342,775 | 14,309 | |||||||||||
Tax credits |
395 | | | 395 | ||||||||||||
Loans held for sale |
33,142 | | 33,142 | | ||||||||||||
Mortgage banking derivatives |
47 | | 47 | | ||||||||||||
Total |
$ | 488,634 | 97,966 | 375,964 | 14,704 | |||||||||||
21
Table of Contents
Quoted Prices in | Significant Other | Significant | ||||||||||||||
Active Markets for | Observable | Unobservable | ||||||||||||||
December 31, | Identical Assets | Inputs | Inputs | |||||||||||||
2009 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Available-for-sale securities |
||||||||||||||||
Obligations of U.S. |
||||||||||||||||
Government agencies |
$ | 66,330 | 21,663 | 44,667 | | |||||||||||
Obligations of states and
political subdivisions |
26,180 | | 26,180 | | ||||||||||||
Mortgage-backed securities |
||||||||||||||||
U.S. GSEs MBS residential |
88,601 | | 88,601 | | ||||||||||||
U.S. GSEs CMO |
106,842 | 10,510 | 96,332 | | ||||||||||||
Other CMO |
8,227 | | 3,894 | 4,333 | ||||||||||||
Corporate bonds |
10,032 | | | 10,032 | ||||||||||||
Equity securities |
4 | 4 | | | ||||||||||||
Total available-for-sale securities |
$ | 306,216 | 32,177 | 259,674 | 14,365 | |||||||||||
Tax credits |
435 | | | 435 | ||||||||||||
Loans held for sale |
19,157 | | 19,157 | | ||||||||||||
Mortgage banking derivatives |
182 | | 182 | | ||||||||||||
Total |
$ | 325,990 | 32,177 | 279,013 | 14,800 | |||||||||||
The tables below present a reconciliation and income statement classification of gains and
losses for all assets measured at fair value on a recurring basis using significant unobservable
inputs (Level 3) as of June 30, 2010 and 2009.
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||||||||
Available-for-sale | ||||||||||||
Tax credits | Securities | Total | ||||||||||
(Dollars in thousands) | ||||||||||||
Beginning balance, January 1, 2010 |
$ | 435 | 14,365 | 14,800 | ||||||||
Total gains or losses (realized/unrealized) |
||||||||||||
Included in earnings |
||||||||||||
Gain (loss) on sales |
| (122 | ) | (122 | ) | |||||||
Other-than-temporary impairment |
| | | |||||||||
Amortization of tax credit investment |
(40 | ) | | (40 | ) | |||||||
Included in other comprehensive income |
| 1,856 | 1,856 | |||||||||
Purchases, sales, issuances and settlements, net |
| (1,790 | ) | (1,790 | ) | |||||||
Transfers in and/or out of Level 3 |
| | | |||||||||
Ending balance, June 30, 2010 |
$ | 395 | 14,309 | 14,704 | ||||||||
22
Table of Contents
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||||||||
Available-for-sale | ||||||||||||
Tax credits | Securities | Total | ||||||||||
(Dollars in thousands) | ||||||||||||
Beginning balance, January 1, 2009 |
$ | 515 | 4,130 | 4,645 | ||||||||
Total gains or losses (realized/unrealized) |
||||||||||||
Included in earnings |
||||||||||||
Other-than-temporary impairment |
| (119 | ) | (119 | ) | |||||||
Amortization of tax credit investment |
(41 | ) | | (41 | ) | |||||||
Included in other comprehensive income |
| 1,162 | 1,162 | |||||||||
Transfers in and/or out of Level 3 |
| 9,614 | 9,614 | |||||||||
Ending balance, June 30, 2009 |
$ | 474 | 14,787 | 15,261 | ||||||||
Assets and Liabilities Measured on a Non-Recurring Basis
Assets and liabilities measured at fair value on a non-recurring basis as of June 30, 2010 and
December 31, 2009 are summarized below.
Quoted Prices in | Significant Other | Significant | ||||||||||||||
Active Markets for | Observable | Unobservable | ||||||||||||||
June 30, | Identical Assets | Inputs | Inputs | |||||||||||||
2010 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Assets: |
||||||||||||||||
Impaired loans |
$ | 20,407 | | | 20,407 | |||||||||||
Other real estate owned |
7,205 | | | 7,205 |
Quoted Prices in | Significant Other | Significant | ||||||||||||||
Active Markets for | Observable | Unobservable | ||||||||||||||
December 31, | Identical Assets | Inputs | Inputs | |||||||||||||
2009 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Assets: |
||||||||||||||||
Impaired loans |
$ | 22,581 | | | 22,581 | |||||||||||
Other real estate owned |
7,974 | | | 7,974 |
The following represents impairment charges recognized during the period:
Impaired loans, which are measured for impairment using the fair value of collateral for collateral
dependent loans, had a carrying amount of $19,713, with a valuation allowance
of $538, resulting in an additional provision for loan losses of $1,836 and $2,050 for the three
and six months ended June 30, 2010, respectively. Impaired loans that are not carried at fair
value had a carrying amount of $8,968 at June 30, 2010.
23
Table of Contents
As of December 31, 2009, impaired loans had a carrying amount of $24,276, with a valuation
allowance of $1,979, resulting in an additional provision for loan losses of $11,761 for the year
ending 2009. Impaired loans that are not carried at fair value had a carrying amount of $10,391 at
December 31, 2009.
Other real estate owned, which is carried at lower of cost or fair value, was $7,205 which
consisted of the outstanding balance of $8,173, less a valuation allowance of $968, resulting in a
write down of $442 and $697 for the three and six months ended June 30, 2010, respectively.
As of December 31, 2009, other real estate owned was $7,974 which consisted of the outstanding
balance of $8,562, less a valuation allowance of $588, resulting in a write down of $588 for the
year ending 2009.
Disclosure of fair value information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value is required. Fair value
estimates are made at a specific point in time, based on relevant market information and
information about the financial instrument. These estimates do not reflect any premium or discount
that could result from offering for sale at one time the Companys entire holdings of a particular
financial instrument.
Because no market exists for a portion of the Companys financial instruments, fair value estimates
are based on judgments regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These estimates are
subjective in nature and involve uncertainties and matters of significant judgment and, therefore,
cannot be determined with precision. Changes in assumptions could significantly affect the
estimates.
Fair value estimates are based on existing on and off-balance sheet financial instruments without
attempting to estimate the value of anticipated future business and the value of assets and
liabilities that are not considered financial instruments. In addition, the tax ramifications
related to the realization of the unrealized gains and losses can have a significant effect on fair
value estimates and have not been considered in any of the estimates.
The assumptions used in the estimation of the fair value of the Companys financial instruments are
explained below. Where quoted market prices are not available, fair values are based on estimates
using discounted cash flow and other valuation techniques. Discounted cash flows can be
significantly affected by the assumptions used, including the discount rate and estimates of future
cash flows. The following fair value estimates cannot be substantiated by comparison to
independent markets and should not be considered representative of the liquidation value of the
Companys financial instruments, but rather a good-faith estimate of the fair value of financial instruments held by
the Company. Certain financial instruments and all nonfinancial instruments are excluded from
disclosure requirements.
24
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The following methods and assumptions were used by the Company in estimating the fair value of its
financial instruments:
(a) | Cash and Cash Equivalents and Federal Funds Sold |
Fair value equals the carrying value of such assets due to their nature. |
(b) | Investment Securities |
The fair values of investment securities are determined as discussed above. |
(c) | Loans |
The fair value of loans is calculated using discounted cash flows by loan type. The
discount rate used to determine the present value of the loan portfolio is an estimated
market rate that reflects the credit and interest rate risk inherent in the loan
portfolio without considering widening credit spreads due to market illiquidity. The
estimated maturity is based on the Companys historical experience with repayments
adjusted to estimate the effect of current market conditions. The carrying amount of
related accrued interest receivable approximates its fair value and is not disclosed.
The carrying amount of real estate loans originated for sale approximates their fair
value. The allowance for loan losses is considered a reasonable discount for credit
risk. |
(d) | Deposits |
Fair values for certificates of deposit have been determined using discounted cash
flows. The discount rate used is based on estimated market rates for deposits of
similar remaining maturities. The carrying amounts of all other deposits, due to their
short-term nature, approximate their fair values. The carrying amount of related
accrued interest payable approximates its fair value and is not disclosed. |
(e) | Securities Sold Under Repurchase Agreements |
Fair value approximates the carrying value of such liabilities due to their short-term
nature. |
(f) | Other Borrowed Funds |
Fair value approximates the carrying value of such liabilities as the borrowings are at
a variable rate of interest. |
(g) | Advances from Federal Home Loan Bank |
The fair value of the Federal Home Loan Bank (FHLB) advances is obtained from the
FHLB and is calculated by discounting contractual cash flows using an estimated interest rate based on the current rates available to the
Company for debt of similar remaining maturities and collateral terms. |
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(h) | Subordinated debentures |
The fair value for subordinated debentures is calculated based upon current market
spreads to LIBOR for debt of similar remaining maturities and collateral terms. |
(i) | Commitments |
The difference between the carrying values and fair values of commitments to extend
credit are not significant and are not disclosed. |
The carrying amounts and estimated fair values of the Companys financial instruments at June 30,
2010 and December 31, 2009 are as follows:
June 30, 2010 | ||||||||
Carrying | Estimated | |||||||
amount | fair value | |||||||
(Dollars in thousands) | ||||||||
Financial assets: |
||||||||
Cash and cash
equivalents |
$ | 123,786 | 123,786 | |||||
Investment securities |
455,360 | 455,362 | ||||||
Loans, net |
909,483 | 907,595 | ||||||
Financial liabilities: |
||||||||
Deposits with stated maturities |
515,073 | 518,476 | ||||||
Deposits without stated maturities |
856,369 | 856,369 | ||||||
Securities sold under
repurchase agreements |
448 | 448 | ||||||
Other borrowed funds |
900 | 900 | ||||||
Advances from FHLB |
72,000 | 77,480 | ||||||
Subordinated debentures |
22,947 | 14,884 |
December 31, 2009 | ||||||||
Carrying | Estimated | |||||||
amount | fair value | |||||||
(Dollars in thousands) | ||||||||
Financial assets: |
||||||||
Cash and cash
equivalents |
$ | 147,994 | 147,994 | |||||
Investment securities |
306,706 | 306,708 | ||||||
Loans, net |
934,308 | 943,885 | ||||||
Financial liabilities: |
||||||||
Deposits with stated maturities |
566,795 | 570,791 | ||||||
Deposits without stated maturities |
713,739 | 713,739 | ||||||
Securities sold under
repurchase agreements |
3,188 | 3,188 | ||||||
Other borrowed funds |
600 | 600 | ||||||
Advances from FHLB |
77,000 | 80,670 | ||||||
Subordinated debentures |
22,947 | 14,793 |
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Note 6 Comprehensive Income
Other comprehensive income for the Company consists of changes in net unrealized gains and losses
on investment securities available-for-sale. Net income of $1,620 coupled with a $2,521 change in
other comprehensive income for the quarter resulted in total comprehensive income of $4,141 for the
three months ended June 30, 2010 compared to total comprehensive loss of $1,142 for the three
months ended June 30, 2009. Net income of $2,875 coupled with a year to date $5,056 change in
other comprehensive income resulted in a total comprehensive income of $7,931 for the six months
ended June 30, 2010 compared to total comprehensive loss of $134 for the six months ended June 30,
2009.
Note 7 Dividends
The Company suspended the payment of quarterly cash dividends on the companys common stock
effective April 22, 2009. The Company considered the action prudent in order to maintain its
capital position in the current state of the economy. The Company plans to reinstate the dividend
payment at an appropriate time once economic conditions improve and stabilize.
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Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
(Dollar amounts are expressed in thousands unless otherwise noted)
Overview
Southeastern Bank Financial Corporation (the Company) operates two wholly-owned subsidiaries in
the Augusta-Richmond County, GA-SC metropolitan area. Georgia Bank & Trust Company (the Bank)
was organized by a group of local citizens and commenced business on August 28, 1989, with one
branch location. Today, it is Augustas largest community banking company operating nine full
service branches in Augusta, Martinez, and Evans, Georgia and one branch in Athens, Georgia.
Mortgage origination offices are located in Augusta, Savannah and Athens, Georgia. Southern Bank &
Trust (the Thrift), a federally chartered thrift, was organized by the Company during 2005 and
2006 and opened its main office on September 12, 2006. Today it operates three full service
branches in North Augusta and Aiken, South Carolina. The Companys Operations Center is located in
Martinez, Georgia and services both subsidiaries.
On July 16, 2010, the Thrift filed an application with the South Carolina State Board of Financial
Institutions to convert the Thrifts charter to a commercial bank charter under the laws of the
State of South Carolina (the Charter Conversion). It also filed notifications with the Office of
Thrift Supervision and the FDIC. The Company has filed a notification of the Charter Conversion
with the Georgia Department of Banking and Finance and plans to file a notification with the
Federal Reserve Bank of Atlanta in August 2010. Management anticipates that the Charter Conversion
will be completed during the third quarter of 2010.
The Companys primary market includes Richmond and Columbia Counties in Georgia and Aiken County in
South Carolina, all part of the Augusta-Richmond County, GA-SC metropolitan statistical area (MSA).
The 2009 population of the Augusta-Richmond County, GA-SA MSA was 539,154, the second largest in
Georgia and fourth largest in South Carolina. The Augusta market area has a diversified economy
based principally on government, public utilities, health care, manufacturing, construction, and
wholesale and retail trade. Augusta is one of the leading medical centers in the Southeast. The
Company entered the Athens, GA market in December 2005. The 2009 population for the Athens-Clarke
County, GA MSA was 192,222, ranked fifth in the state of Georgia. The Athens market area has a
diversified economy based primarily on government, retail services, tourism, manufacturing, other
services, and health care, with the largest share of government jobs in the state.
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The Companys services include the origination of residential and commercial real estate loans,
construction and development loans, and commercial and consumer loans. The Company also offers a
variety of deposit programs, including noninterest-bearing demand, interest checking, money
management, savings, and time deposits. In the primary market area, Augusta-Richmond County, GA-SC
metropolitan area, the Company had 16.70% of all deposits and was the second largest depository
institution at June 30, 2009, as cited from the Federal Deposit Insurance Corporations website.
Securities sold under repurchase agreements are also offered. Additional services include wealth
management, trust, retail investment, and mortgage. As a matter of practice, most mortgage loans
are sold in the secondary market; however, some mortgage loans are placed in the portfolio based on
asset/liability management strategies. The Company continues to concentrate on increasing its
market share through various new deposit and loan products and other financial services, by adding
locations, and by focusing on the customer relationship management philosophy. The Company is
committed to building life-long relationships with its customers, employees, shareholders, and the
communities it serves.
The Companys primary source of income is from its lending activities followed by interest income
from its investment activities, service charges and fees on deposits, and gain on sales of mortgage
loans in the secondary market. Interest income on loans decreased during the first six months of
2010 as compared to the first six months of 2009 due primarily to decreased loan volume offset in
part by higher yields. Interest income on investment securities decreased primarily due to
decreased yields somewhat offset by a larger portfolio. Decreases in non-sufficient funds (NSF)
income on retail checking accounts, due primarily to decreased economic activity, were offset by
increases in ATM/Debit card income which resulted in a small decrease in service charges and fees
on deposits for the first six months of 2010. Gain on sales of loans decreased from 2009 as a
result of decreased mortgage refinancing activity. Investment securities gains have declined
during the first six months of 2010 as compared to the same period last year due to an $1,856 gain
from several called securities recorded in 2009. Somewhat offsetting the gain in 2009 was a $119
impairment charge on two securities deemed to be other-than-temporarily impaired and a $1,033
impairment charge related to investments in the common stock and trust preferred securities of
Silverton Financial Services, Inc.
Table 1 Selected Financial Data
June 30, | December 31, | June 30, | ||||||||||
2010 | 2009 | 2009 | ||||||||||
(Dollars in thousands) | ||||||||||||
Assets |
$ | 1,580,928 | $ | 1,491,119 | $ | 1,461,875 | ||||||
Loans |
900,167 | 937,489 | 957,727 | |||||||||
Deposits |
1,371,442 | 1,280,534 | 1,191,277 | |||||||||
Annualized return on average total assets |
0.38 | % | (0.54 | %) | 0.10 | % | ||||||
Annualized return on average equity |
5.94 | % | (7.92 | %) | 1.44 | % |
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The Company continues to maintain a defensive posture as uncertainty remains about the
sustainability of economic recovery. Since the first quarter of 2009, the Company has attempted to
restrain asset growth, as compared to its high historical growth levels. The operational focuses
in 2009 of capital preservation, strong liquidity and risk mitigation with rising non-performing
assets, has ultimately driven the financial results achieved in the first half of 2010, where the
Company returned to profitability. Of particular note has been the $180 million increase in
deposits over the past 12 months, which has created a larger base of core deposits with less
reliance on more volatile funding sources. The Company continues to operate in a challenging
economic environment and expects to continue to realize higher levels of expenses until
non-performing assets are ultimately reduced to normalized levels. Earnings will be impacted by the
lack of income from these assets and the costs to carry them.
Annualized return on average total assets and annualized return on average equity have improved
recently as compared to declines the Company experienced in 2009. The increased returns were due
primarily to decreased levels of non-performing assets which have resulted in lower loan loss
provisions in the first half of 2010. Net income for the six months ended June 30, 2010 was $2,875
compared to $693 thousand for the same period in 2009. The effects of the economic downturn
continue to negatively affect financial results primarily through a continued elevated level of
provision for loan losses. The Company suspended the payment of dividends indefinitely effective
April 22, 2009 to conserve capital.
The Company meets its liquidity needs by managing cash and due from banks, federal funds purchased
and sold, maturity of investment securities, principal repayments from mortgage-backed securities,
and draws on lines of credit. Additionally, liquidity can be managed through structuring deposit
and loan maturities. The Company funds loan and investment growth with core deposits, securities
sold under repurchase agreements, Federal Home Loan Bank advances and other wholesale funding
including brokered certificates of deposit. During inflationary periods, interest rates generally
increase and operating expenses generally rise. When interest rates rise, variable rate loans and
investments produce higher earnings; however, deposit and other borrowings interest expense also
rise. The Company monitors its interest rate risk as it applies to net interest income in a ramp
up and down annually 300 basis points (3.00%) scenario and as it applies to economic value of
equity in a shock up and down 300 (3.00%) basis points scenario. The Company monitors operating
expenses through responsibility center budgeting.
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Forward-Looking Statements
Southeastern Bank Financial Corporation may, from time to time, make written or oral
forward-looking statements, including statements contained in the Companys filings with the
Securities and Exchange Commission (the Commission) and its reports to shareholders. Statements
made in such documents, 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 pursuant to safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. The Companys actual results may differ materially from the results
anticipated in forward-looking statements due to a variety of factors, including unanticipated
changes in the Companys local economies, the national economy, governmental monetary and fiscal
policies, deposit levels, loan demand, loan collateral values and securities portfolio values;
difficulties in interest rate risk management; the effects of competition in the banking business;
difficulties in expanding the Companys business into new markets; changes in governmental
regulation relating to the banking industry, including but not limited to the Dodd-Frank Wall
Street Reform and Consumer Protection Act; failure of assumptions underlying the establishment of
reserves for loan losses, including the value of collateral underlying delinquent loans; and other
factors. The Company cautions that such factors are not exclusive. The Company does not undertake
to update any forward-looking statement that may be made from time to time by, or on behalf of, the
Company.
Critical Accounting Estimates
The accounting and financial reporting policies of the Company and its subsidiaries conform to
accounting principles generally accepted in the United States of America and to general practices
within the banking industry. Of these policies, management has identified the allowance for loan
losses, determining the fair values of financial instruments including other real estate owned,
investment securities, and other-than-temporary impairment as critical accounting estimates that
requires difficult, subjective judgment and are important to the presentation of the financial
condition and results of operations of the Company.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan losses charged to
expense, which affects the Companys earnings directly. Loans are charged against the allowance
for loan losses when management believes that the collectability of the principal is unlikely.
Subsequent recoveries are added to the allowance. The allowance is an amount that reflects
managements estimate of the level of probable incurred losses in the portfolio. Factors
considered by management in determining the adequacy of the allowance include, but are not limited
to: (1) detailed reviews of individual loans; (2) historical and current trends in loan charge-offs
for the various portfolio segments evaluated; (3) the level of the allowance in relation to total
loans and to historical loss levels; (4) levels and trends in non-performing and past due loans;
(5) collateral values of properties securing loans; (6) managements assessment of economic
conditions. The Companys Board of Directors reviews the recommendations of management regarding
the appropriate level for the allowance for loan losses based upon these factors.
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The provision for loan losses is the charge to operating earnings necessary to maintain an adequate
allowance for loan losses. The Company has developed policies and procedures for evaluating the
overall quality of its loan portfolio and the timely identification of problem credits. Management
continues to review these policies and procedures and makes further improvements as needed. The
adequacy of the Companys allowance for loan losses and the effectiveness of the Companys internal
policies and procedures are also reviewed periodically by the Companys regulators and the
Companys internal loan review personnel. The Companys regulators may advise the Company to
recognize additions to the allowance based upon their judgments about information available to them
at the time of their examination. Such regulatory guidance is considered, and the Company may
recognize additions to the allowance as a result.
The Company continues to refine the methodology on which the level of the allowance for loan losses
is based, by comparing historical loss ratios utilized to actual experience and by classifying
loans for analysis based on similar risk characteristics. Cash receipts for accruing loans are
applied to principal and interest under the contractual terms of the loan agreement; however, cash
receipts on impaired and nonaccrual loans for which the accrual of interest has been discontinued
are applied to principal and interest income depending upon the overall risk of principal loss to
the Company.
Fair Value of Financial Instruments
A significant portion of the Companys assets are financial instruments carried at fair value. This
includes securities available-for-sale, loans held for sale, certain impaired loans, tax credits,
mortgage banking derivatives and other real estate owned. At June 30, 2010 and December 31, 2009
the percentage of total assets measured at fair value was 31.49% and 23.04% respectively. The
majority of assets carried at fair value are based on either quoted market prices or market prices
for similar instruments. At June 30, 2010, 4.79% of assets measured at fair value were based on
significant unobservable inputs. This represents approximately 1.51% of the Companys total assets.
See Note 4 Fair Value Measurements in the Notes to Consolidated Financial Statements herein for
additional disclosures regarding the fair value of financial instruments.
Other Real Estate Owned
Real estate properties acquired through, or in lieu of, loan foreclosure are initially recorded at
the lesser of the outstanding loan balance or the fair value at the date of foreclosure minus
estimated costs to sell. Any valuation adjustments required at the time of foreclosure are charged
to the allowance for loan losses. After foreclosure, the properties are carried at the lower of
carrying value or fair value less estimated costs to sell. Any subsequent valuation adjustments,
operating expenses or income, and gains and losses on disposition of such properties are recognized
in current operations. The valuation allowance is established based on our historical realization
of losses and adjusted for current market trends.
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Investment Securities
The fair values for available-for-sale securities are generally based upon quoted market prices or
observable market prices for similar instruments. These values take into account recent market
activity as well as other market observable data such as interest rate, spread and prepayment
information. When market observable data is not available, which generally occurs due to the lack
of liquidity for certain securities, the valuation of the security is subjective and may involve
substantial judgment. The Company conducts periodic reviews to identify and evaluate each
available-for-sale security that has an unrealized loss for other-than-temporary impairment. An
unrealized loss exists when the fair value of an individual security is less than its amortized
cost basis. The primary factors the Company considers in determining whether an impairment is
other-than-temporary are the financial condition and near-term prospects of the issuer, including
any specific events which may influence the operations of the issuer and whether the Company
intends to sell the security or it is more likely than not it will be required to sell the security
before recovery of its amortized cost basis. As of June 30, 2010, the Company had approximately
$14,309 of available-for-sale securities, which is approximately 0.91% of total assets, valued
using unobservable inputs (Level 3). These securities were primarily non-agency mortgage-backed
securities and subordinated debentures issued by financial institutions.
Results of Operations
The Companys net income for the second quarter of 2010 was $1,620 which was an increase of $983
compared to net income of $637 for the second quarter of 2009. Diluted net income per share for
the three months ended June 30, 2010 was $0.24 compared to $0.10 for the three months ended June
30, 2009. Net income for the first six months of 2010 was $2,875, an increase of $2,182 compared
with net income of $693 for the first six months of 2009. The increase in net income for the three
and six months ended June 30, 2010 as compared with the three and six months ended June 30, 2009,
was primarily a result of decreases in the provision for loan losses due to decreased levels of
nonperforming assets. The provision for loan losses decreased $1,320 in the second quarter of 2010
and $2,781 in the first half of 2010 as compared to the same periods in 2009. Interest income on
loans decreased due to a lower volume of loans somewhat offset by increased yields. Interest
income on investment securities decreased due to lower yields offset in part by increased volumes.
Interest expense on deposits decreased as a result of lower interest rates offset in part by higher
volumes of interest bearing liabilities.
Factors contributing to the decrease in noninterest income for the six months ended June 30, 2010,
were primarily decreases in gain on sales of loans and decreased net investment securities gains.
These decreases were partially offset by an increase in retail investment income and trust service
fees.
Gain on sales of loans decreased substantially as mortgage production slowed during the first half
of 2010. While mortgage rates remain at historically low levels which are normally favorable to
refinance activity, the lower production levels have resulted from the overall weakening of the
economy and the decrease in borrower capacity to refinance, based on tightening of credit standards
from our third party investors to whom we sell, as well as overall lower values of properties
securing such refinanced loans. For the year, gain on sales of loans decreased from $4,697 to
$3,576 or 23.87%.
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Table of Contents
Net investment securities gains for the year were $162 as opposed to net securities gains of $693
in 2009. The net securities gains in the first half of 2009 included an other than temporary
impairment charge of $1,152 of which $1,033 was related to investments in the common stock and
trust preferred securities of Silverton Financial Services, Inc., parent holding company of
Silverton Bank, N.A., which failed in 2009. Despite these losses, net investment securities gains
declined in the first half of 2010 as compared to the same period in 2009 due to gains of $1,856
from several called securities in the first half of 2009.
Noninterest expense totaled $19,994 for the six months ended June 30, 2010, a decrease of $648 or
3.14% compared to the same period ended June 30, 2009. The decrease was primarily due to decreased
FDIC insurance, which declined $565 or 34.08% from 2009 as a result of a special assessment of $670
taken in the second quarter of 2009, and a $203 decline in processing expense due to reductions in
direct mail programs as well as a reduction in ATM processing fees. Loss on sale of real estate
owned totaled $328 for the six months ended June 30, 2010 compared to a loss of $291 in 2009. The
2010 period included a provision for loss of $697 on certain properties based on updated
appraisals.
Table 2 Selected Balance Sheet Data
June 30, | December 31, | Variance | ||||||||||||||
2010 | 2009 | Amount | % | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Cash, due from banks
and interest-bearing deposits |
$ | 116,486 | $ | 140,694 | $ | (24,208 | ) | (17.2 | %) | |||||||
Federal funds sold |
7,300 | 7,300 | 0 | 0.0 | % | |||||||||||
Investment securities |
455,360 | 306,706 | 148,654 | 48.5 | % | |||||||||||
Loans |
900,167 | 937,489 | (37,322 | ) | (4.0 | %) | ||||||||||
Other real estate owned |
7,205 | 7,974 | (769 | ) | (9.6 | %) | ||||||||||
Assets |
1,580,928 | 1,491,119 | 89,809 | 6.0 | % | |||||||||||
Deposits |
1,371,442 | 1,280,534 | 90,908 | 7.1 | % | |||||||||||
Securities sold under repurchase agreements |
448 | 3,188 | (2,740 | ) | (85.9 | %) | ||||||||||
Advances from Federal Home Loan Bank |
72,000 | 77,000 | (5,000 | ) | (6.5 | %) | ||||||||||
Liabilities |
1,479,121 | 1,397,375 | 81,746 | 5.8 | % | |||||||||||
Stockholders equity |
101,807 | 93,744 | 8,063 | 8.6 | % |
Table 2 highlights significant changes in the balance sheet at June 30, 2010 as compared to
December 31, 2009. Total assets increased $89,809 and the balance sheet changes primarily reflect
a significant increase in deposits coupled with a decline in loans and a moderate deployment of
liquidity which was used to increase the investment portfolio. Cash, due from banks and
interest-bearing deposits in other banks decreased $24,208 or 17.2% from $140,694 at December 31,
2009 to $116,486 at June 30, 2010, $88,549 of which was held at the Federal Reserve Bank. The
Company has continued to maintain a high level of liquid funds in light of current economic
conditions and volatility in the banking industry but has elected to invest a portion of these
funds and funds obtained through deposit growth and loan repayments into the investment portfolio.
Loan demand was weak during the first half of 2010 and resulted in a decrease in gross loans of
$37,322 or 4.0%. The decreased demand caused
34
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normal
principal repayments to exceed the
originations of new loans during the year. Investment securities increased $148,654 or 48.5%
during the year primarily for the purpose of deploying liquid assets to achieve an overall higher
yield on interest earning assets. In addition, proceeds from sales and
maturities and other purchases were partially reinvested in instruments that required a lower level
of regulatory capital and that have lower levels of interest rate risk. The increase in the
investment portfolio was funded by an increase in deposits of $90,908, the decrease in loans of
$37,322 and the decrease in cash and due from banks of $24,208 somewhat offset by decreases in
advances from Federal Home Loan Bank of $5,000 and securities sold under repurchase agreements of
$2,740.
The net increase in deposits was net of the repayment of approximately $45,601 in brokered
deposits, and also included reduced retail time deposits of $6,122. These decreases were more than
offset by approximately $108,544 in new checking account balances from a promotion started in the
first quarter of 2010 and a major public funds checking relationship. In addition, retail savings
accounts increased $38,957.
The annualized return on average assets for the Company was 0.38% for the six months ended June 30,
2010, compared to 0.10% for the same period last year.
The annualized return on average stockholders equity was 5.94% for the six months ended June 30,
2010, compared to 1.44% for the same period last year. The increase is primarily attributable to
the increase in net income.
Net Interest Income
The primary source of earnings for the Company is net interest income, which is the difference
between income on interest-earning assets, such as loans and investment securities, and interest
expense incurred on interest-bearing sources of funds, such as deposits and borrowings. The
following table shows the average balances of interest-earning assets and interest-bearing
liabilities, annualized average yields earned and rates paid on those respective balances, and the
actual interest income and interest expense for the periods indicated. Average balances are
calculated based on daily balances, yields on non-taxable investments are not reported on a tax
equivalent basis and average balances for loans include nonaccrual loans even though interest was
not earned.
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Table 3 Average Balances, Income and Expenses, Yields and Rates
Three Months Ended June 30, 2010 | Three Months Ended June 30, 2009 | |||||||||||||||||||||||
Annualized | Annualized | |||||||||||||||||||||||
Average | Amount | Average | Amount | |||||||||||||||||||||
Average | Yield or | Paid or | Average | Yield or | Paid or | |||||||||||||||||||
Amount | Rate | Earned | Amount | Rate | Earned | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Loans |
$ | 937,226 | 5.73 | % | $ | 13,517 | $ | 986,570 | 5.72 | % | $ | 14,206 | ||||||||||||
Investment securities |
||||||||||||||||||||||||
Taxable |
376,253 | 3.95 | % | 3,714 | 267,540 | 5.05 | % | 3,377 | ||||||||||||||||
Tax-exempt |
22,654 | 4.26 | % | 241 | 21,429 | 4.07 | % | 218 | ||||||||||||||||
Federal funds sold |
7,300 | 0.16 | % | 3 | 19,980 | 0.20 | % | 10 | ||||||||||||||||
Interest-bearing deposits in other banks |
66,515 | 0.57 | % | 94 | 36,181 | 0.27 | % | 24 | ||||||||||||||||
Total interest-earning assets |
$ | 1,409,948 | 4.96 | % | $ | 17,569 | $ | 1,331,700 | 5.33 | % | $ | 17,835 | ||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
Deposits |
$ | 1,221,701 | 1.75 | % | $ | 5,319 | $ | 1,072,863 | 2.25 | % | $ | 6,009 | ||||||||||||
Federal funds purchased / securities
sold under repurchase agreements |
1,390 | 1.44 | % | 5 | 48,389 | 0.79 | % | 95 | ||||||||||||||||
Other borrowings |
95,741 | 3.73 | % | 891 | 106,153 | 3.87 | % | 1,023 | ||||||||||||||||
Total interest-bearing liabilities |
$ | 1,318,832 | 1.89 | % | $ | 6,215 | $ | 1,227,405 | 2.33 | % | $ | 7,127 | ||||||||||||
Net interest margin/income: |
3.19 | % | $ | 11,354 | 3.18 | % | $ | 10,708 | ||||||||||||||||
Table 4 Average Balances, Income and Expenses, Yields and Rates
Six Months Ended June 30, 2010 | Six Months Ended June 30, 2009 | |||||||||||||||||||||||
Annualized | Annualized | |||||||||||||||||||||||
Average | Amount | Average | Amount | |||||||||||||||||||||
Average | Yield or | Paid or | Average | Yield or | Paid or | |||||||||||||||||||
Amount | Rate | Earned | Amount | Rate | Earned | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Loans |
$ | 938,620 | 5.71 | % | $ | 26,860 | $ | 993,531 | 5.63 | % | $ | 28,010 | ||||||||||||
Investment securities |
||||||||||||||||||||||||
Taxable |
343,928 | 4.01 | % | 6,901 | 273,230 | 5.31 | % | 7,248 | ||||||||||||||||
Tax-exempt |
22,196 | 4.26 | % | 473 | 19,638 | 4.29 | % | 421 | ||||||||||||||||
Federal funds sold |
7,300 | 0.19 | % | 7 | 37,593 | 0.12 | % | 22 | ||||||||||||||||
Interest-bearing deposits in other banks |
75,928 | 0.48 | % | 182 | 21,188 | 0.39 | % | 41 | ||||||||||||||||
Total interest-earning assets |
$ | 1,387,972 | 4.95 | % | $ | 34,423 | $ | 1,345,180 | 5.31 | % | $ | 35,742 | ||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
Deposits |
$ | 1,195,442 | 1.80 | % | $ | 10,686 | $ | 1,074,926 | 2.40 | % | $ | 12,810 | ||||||||||||
Federal funds purchased / securities
sold under repurchase agreements |
2,219 | 1.44 | % | 16 | 51,913 | 0.80 | % | 206 | ||||||||||||||||
Other borrowings |
98,011 | 3.80 | % | 1,845 | 105,354 | 3.67 | % | 1,919 | ||||||||||||||||
Total interest-bearing liabilities |
$ | 1,295,672 | 1.95 | % | $ | 12,547 | $ | 1,232,193 | 2.44 | % | $ | 14,935 | ||||||||||||
Net interest margin/income: |
3.13 | % | $ | 21,876 | 3.07 | % | $ | 20,807 | ||||||||||||||||
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Table of Contents
Second Quarter 2010 compared to Second Quarter 2009:
Net interest income increased $646 (6.03%) during the three month period as compared to the same
period in 2009. Loan interest income decreased $689 (4.85%) in the three month period primarily as
a result of decreased volume offset in part by slightly higher yields. Deposit interest expense
decreased $690 (11.48%) in the three month period primarily as a result of declining costs on
repricing deposits offset in part by the continued growth of account balances. Annualized loan
yields for the quarter were 5.73% compared to 5.72% in the prior period and were somewhat impacted
by decreases in levels of nonaccrual loans. Nonaccrual loans resulted in the reversal of $161 in
interest income in the current quarter compared to $105 in the 2009 quarter. Due to the continued
low interest rate environment, the quarterly annualized average rate of interest bearing
liabilities decreased from 2.33% to 1.89% at June 30, 2010 compared to June 30, 2009.
The Companys net interest margin for the three months ended June 30, 2010 was 3.19% as compared to
3.18% for the three months ended June 30, 2009. This net interest margin for the three month
period was impacted by several offsetting factors, including decreased levels of nonaccrual loans,
an increase in the volume of the taxable investment portfolio of $108,713 (40.63%), a decrease in
the average yield of the taxable investment portfolio from 5.05% to 3.95%, a decrease in average
loans of $49,344 (5.00%) and an increase in deposits of $148,838 (13.87%).
Six Months Ended 2010 compared to Six Months Ended 2009:
Net interest income increased $1,069 (5.14%) during the six month period as compared to the same
period in 2009. Loan interest income decreased $1,150 (4.11%) in the six month period primarily as
a result of decreased volume offset in part by slightly higher yields. Deposit interest expense
decreased $2,124 (16.58%) in the six month period primarily as a result of declining costs on
repricing deposits offset in part by the continued growth of account balances. Annualized loan
yields for the year increased from 5.63% to 5.71% and were somewhat impacted by decreases in levels
of nonaccrual loans and declining loan portfolio. Nonaccrual loans resulted in the reversal of
$499 in interest income compared to $766 in 2009. Due to the low interest rate environment, the
annualized average rate of interest bearing liabilities decreased from 2.44% to 1.95% at June 30,
2010 compared to June 30, 2009.
The Companys net interest margin for the six months ended June 30, 2010 was 3.13% as compared to
3.07% for the six months ended June 30, 2009. This increase in the net interest margin for the six
month period was primarily impacted by several offsetting factors, including decreased levels of
nonaccrual loans, an increase in the volume of the taxable investment portfolio of $70,698
(25.87%), a decrease in the average yield of the taxable investment portfolio from 5.31% to 4.01%,
a decrease in average loans of $54,911 (5.53%) and an increase in deposits of $120,516 (11.21%).
37
Table of Contents
Changes in the net interest income from period to period result from increases or decreases in the
volume of interest-earning assets and interest-bearing liabilities, increases or decreases in the
average rates earned and paid on such assets and liabilities, the ability to manage the earning
asset portfolio, and the availability of particular sources of funds, such as noninterest-bearing
deposits. The following tables present the extent to which changes in interest rates and changes
in the volume of interest-earning assets and interest-bearing liabilities have impacted the
Companys interest income and interest expense during the periods indicated. Information is
provided in each category with respect to changes attributable to change in volume (change in
volume multiplied by prior rate), changes attributable to change in rate (change in rate multiplied
by prior volume), and changes in rate/volume (change in rate multiplied by change in volume).
Table 5 Rate/Volume Analysis
Three Months Ended | ||||||||||||||||
June 30, 2010 compared to June 30, 2009 | ||||||||||||||||
Increase (Decrease) due to | ||||||||||||||||
Volume | Rate | Combined | Total | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Interest-earning assets: |
||||||||||||||||
Loans |
(711 | ) | 23 | (1 | ) | (689 | ) | |||||||||
Investment securities |
||||||||||||||||
Taxable |
1,372 | (736 | ) | (299 | ) | 337 | ||||||||||
Tax-exempt |
12 | 10 | 1 | 23 | ||||||||||||
Federal funds sold |
(6 | ) | (2 | ) | 1 | (7 | ) | |||||||||
Interest-bearing deposits in other banks |
20 | 27 | 23 | 70 | ||||||||||||
Total interest-earning assets |
687 | (678 | ) | (275 | ) | (266 | ) | |||||||||
Interest-bearing liabilities: |
||||||||||||||||
Deposits |
834 | (1,338 | ) | (186 | ) | (690 | ) | |||||||||
Federal funds purchased / securities
sold under repurchase agreements |
(92 | ) | 79 | (77 | ) | (90 | ) | |||||||||
Other borrowings |
(100 | ) | (35 | ) | 3 | (132 | ) | |||||||||
Total interest-bearing liabilities |
642 | (1,294 | ) | (260 | ) | (912 | ) | |||||||||
Net change in net interest income |
$ | 646 | ||||||||||||||
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Table 6 Rate/Volume Analysis
Six Months Ended | ||||||||||||||||
June 30, 2010 compared to June 30, 2009 | ||||||||||||||||
Increase (Decrease) due to | ||||||||||||||||
Volume | Rate | Combined | Total | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Interest-earning assets: |
||||||||||||||||
Loans |
(1,548 | ) | 421 | (23 | ) | (1,150 | ) | |||||||||
Investment securities |
||||||||||||||||
Taxable |
1,875 | (1,765 | ) | (457 | ) | (347 | ) | |||||||||
Tax-exempt |
55 | (3 | ) | (0 | ) | 52 | ||||||||||
Federal funds sold |
(18 | ) | 14 | (11 | ) | (15 | ) | |||||||||
Interest-bearing deposits in other banks |
106 | 10 | 25 | 141 | ||||||||||||
Total interest-earning assets |
470 | (1,323 | ) | (466 | ) | (1,319 | ) | |||||||||
Interest-bearing liabilities: |
||||||||||||||||
Deposits |
1,436 | (3,201 | ) | (359 | ) | (2,124 | ) | |||||||||
Federal funds purchased / securities
sold under repurchase agreements |
(197 | ) | 168 | (161 | ) | (190 | ) | |||||||||
Other borrowings |
(134 | ) | 64 | (4 | ) | (74 | ) | |||||||||
Total interest-bearing liabilities |
1,105 | (2,969 | ) | (524 | ) | (2,388 | ) | |||||||||
Net change in net interest income |
$ | 1,069 | ||||||||||||||
Provision for Loan Losses
The provision for loan losses is the charge to operating earnings necessary to maintain the
allowance for loan losses at a level which, in managements estimate, is adequate to cover the
estimated amount of probable incurred losses in the loan portfolio. The provision for loan losses
totaled $3,794 for the three months ended June 30, 2010 compared to $5,114 for the three months
ended June 30, 2009 and $7,082 for the six months ended June 30, 2010 compared to $9,863 for the
same period in 2009. See Allowance for Loan Losses for further analysis of the provision for
loan losses.
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Table of Contents
Noninterest Income
Table 7 Noninterest Income
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
June 30, | Variance | June 30, | Variance | |||||||||||||||||||||||||||||
2010 | 2009 | Amount | % | 2010 | 2009 | Amount | % | |||||||||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||
Service charges and fees
on deposits |
$ | 1,748 | $ | 1,737 | $ | 11 | 0.6 | % | $ | 3,343 | $ | 3,378 | $ | (35 | ) | (1.0 | %) | |||||||||||||||
Gain on sales of loans |
2,223 | 2,461 | (238 | ) | (9.7 | %) | 3,576 | 4,697 | (1,121 | ) | (23.9 | %) | ||||||||||||||||||||
Gain (loss) on sale of fixed assets |
| (42 | ) | 42 | (100.0 | %) | 27 | (16 | ) | 43 | (268.8 | %) | ||||||||||||||||||||
Investment securities gains, net |
149 | 857 | (708 | ) | (82.6 | %) | 162 | 693 | (531 | ) | (76.6 | %) | ||||||||||||||||||||
Retail investment income |
416 | 318 | 98 | 30.8 | % | 751 | 527 | 224 | 42.5 | % | ||||||||||||||||||||||
Trust services fees |
290 | 245 | 45 | 18.4 | % | 577 | 498 | 79 | 15.9 | % | ||||||||||||||||||||||
Increase in cash surrender
value of bank-owned
life insurance |
223 | 213 | 10 | 4.7 | % | 452 | 394 | 58 | 14.7 | % | ||||||||||||||||||||||
Miscellaneous income |
156 | 123 | 33 | 26.8 | % | 317 | 286 | 31 | 10.8 | % | ||||||||||||||||||||||
Total noninterest income |
$ | 5,205 | $ | 5,912 | $ | (707 | ) | (12.0 | %) | $ | 9,205 | $ | 10,457 | $ | (1,252 | ) | (12.0 | %) | ||||||||||||||
Second Quarter 2010 compared to Second Quarter 2009:
Noninterest income decreased $707 (12.00%) during the three month period as compared to the same
period in 2009. The most significant changes for the three month period were decreases in gain on
sales of loans and net investment securities gains. The decreased gain on sales of loans was due
to a significant decrease in refinancing volume. Net investment securities gains decreased during
the three month period as compared to the same period in 2009 due primarily to $953 in net gains
from several called agency securities somewhat offset by an other than temporary impairment charge
of $119 on two securities deemed to be other-than-temporarily impaired and a $125 impairment loss
related to the trust preferred securities of Silverton Financial Services, Inc., parent holding
company of Silverton Bank, N.A. in the second quarter of 2009.
Six Months Ended 2010 compared to Six Months Ended 2009:
Noninterest income decreased $1,252 (12.00%) during the six month period as compared to the same
period in 2009. The most significant changes for the six month period were decreases in gain on
sales of loans and net investment gains somewhat offset by increases in retail investment income
and trust services fees. The decreased gain on sales of loans was due to a significant decrease in
refinancing volume. Net investment securities gains decreased during the six month period as
compared to the same period in 2009 due primarily to $1,856 in gains from several called securities
somewhat offset by an other than temporary impairment charge of $119 on two securities deemed to be
other than temporarily impaired and a $1,033 impairment loss related to investments in the common
stock and trust preferred securities of Silverton Financial Services, Inc., parent holding company
of Silverton Bank, N.A. in the first half of 2009.
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Noninterest Expense
Table 8 Noninterest Expense
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
June 30, | Variance | June 30, | Variance | |||||||||||||||||||||||||||||
2010 | 2009 | Amount | % | 2010 | 2009 | Amount | % | |||||||||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||
Salaries and other
personnel expense |
$ | 5,915 | $ | 5,800 | $ | 115 | 2.0 | % | $ | 11,409 | $ | 11,458 | $ | (49 | ) | (0.4 | %) | |||||||||||||||
Occupancy expenses |
1,166 | 1,140 | 26 | 2.3 | % | 2,337 | 2,281 | 56 | 2.5 | % | ||||||||||||||||||||||
Marketing & business development |
294 | 382 | (88 | ) | (23.0 | %) | 588 | 729 | (141 | ) | (19.3 | %) | ||||||||||||||||||||
Processing expense |
392 | 469 | (77 | ) | (16.4 | %) | 758 | 961 | (203 | ) | (21.1 | %) | ||||||||||||||||||||
Legal and professional fees |
403 | 402 | 1 | 0.2 | % | 835 | 763 | 72 | 9.4 | % | ||||||||||||||||||||||
Data processing expense |
345 | 308 | 37 | 12.0 | % | 690 | 612 | 78 | 12.7 | % | ||||||||||||||||||||||
FDIC insurance |
552 | 1,177 | (625 | ) | (53.1 | %) | 1,093 | 1,658 | (565 | ) | (34.1 | %) | ||||||||||||||||||||
(Gain) loss on sale of other real estate |
(28 | ) | 179 | (207 | ) | (115.6 | %) | (369 | ) | 291 | (660 | ) | (226.8 | %) | ||||||||||||||||||
Other real estate valuation allowance |
442 | | 442 | N/A | 697 | | 697 | N/A | ||||||||||||||||||||||||
Other operating expenses |
1,081 | 951 | 130 | 13.7 | % | 1,956 | 1,889 | 67 | 3.5 | % | ||||||||||||||||||||||
Total noninterest expense |
$ | 10,562 | $ | 10,808 | $ | (246 | ) | (2.3 | %) | $ | 19,994 | $ | 20,642 | $ | (648 | ) | (3.1 | %) | ||||||||||||||
Second Quarter 2010 compared to Second Quarter 2009:
Salaries and other personnel expense increased $115 (2.00%) during the three month period as
compared to the same period in 2009. This increase was primarily due to increased group health
insurance costs and other benefits and was partially offset by decreased commissions and officer
salaries.
Increases in occupancy expenses during the three month period were primarily due to increased
depreciation expense as a result of the purchase of an upgraded mainframe computer and related
software, general maintenance on buildings and equipment and increased property tax accruals
somewhat offset by a decrease in maintenance agreement expense.
(Gain) loss on sale of other real estate decreased $207 and resulted from a gain in the 2010
quarter compared to a loss in 2009. Offsetting the gain in 2010 was a valuation allowance on other
real estate of $442 during the quarter.
FDIC insurance expense decreased $625 or 53.10% due to the accrual of the special assessment for
$670 in second quarter 2009. Marketing and business development expense decreased $88 or 23.04% due
to a decrease in other print media, printing and sponsorships expense somewhat offset by additional
costs for billboard and newspaper advertising. Other operating expense increased primarily due to
other loan related expenses in the three month period.
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Table of Contents
Six Months Ended 2010 compared to Six Months Ended 2009:
Salaries and other personnel expense decreased $49 (0.43%) during the six month period as compared
to the same period in 2009. This decrease was primarily due to reduced commission expense related
to the level of mortgage originations. In addition, officer and salary costs declined due to
reduced full time equivalent employees and the Companys decision to suspend merit increases for
officers and limit staff increases to 2.00% in 2010. A decrease in the discount rate for salary
continuation expense and increased group health insurance costs and other benefits almost
completely offset the reduction in commission and salary expense.
Increases in occupancy expenses during the first half of 2010 were primarily due to increased
depreciation expense as a result of the purchase of an upgraded mainframe computer and related
software and increased property tax accruals somewhat offset by a decrease in maintenance agreement
expense.
(Gain) loss on sale of other real estate decreased $660 and resulted from a gain in the first half
of 2010 compared to a loss in 2009. Offsetting the gain in 2010 was a valuation allowance on other
real estate of $697.
FDIC insurance expense decreased $565 or 34.08% due to the accrual of the special assessment of
$670 which was paid in September of 2009. Processing expense decreased $203 due to reductions in
direct mail programs as well as a reduction in ATM processing fees in the six months ended 2010 as
compared to the same period ended 2009.
Income Taxes
The Company recognized income tax expense of $583 and $1,130 for the three and six months ended
June 30, 2010 as compared to income tax expense of $61 and $66 for the same periods in 2009. The
significant increase in pretax income coupled with a lower proportion of nontaxable interest income
resulted in an increase in income tax expense and the effective income tax rate for the three and
six month periods. The effective income tax rate for the three and six months ended June 30, 2010
was 26.46% and 28.21%, respectively.
At June 30, 2010, the Company maintains net deferred tax assets of $8,839. In assessing the
realizability of deferred tax assets and the need for a valuation allowance, management has
considered primarily existing carryback potential of approximately $12,000. Furthermore, although
the Company did incur a loss in 2009, management has considered the severity of that loss and
weighed the prospects for returning to sustained profitability in future periods in determining a
need for a valuation allowance. Based on managements assessment, no valuation allowance was
deemed necessary at June 30, 2010.
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Table of Contents
The Company was able to carryback the net operating loss (NOL) sustained in 2009. This carryback
generated a tax refund of $2,755 that was received in the first quarter of 2010.
The Company was able to carryback a capital loss sustained in 2009. This carryback generated a tax
refund of $226, which was received in the second quarter of 2010.
Loans
The following table presents the composition of the Companys loan portfolio as of June 30, 2010
and December 31, 2009.
Table 9 Loan Portfolio Composition
June 30, 2010 | December 31, 2009 | |||||||||||||||
Amount | % | Amount | % | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Commercial financial and
agricultural |
$ | 96,087 | 10.67 | % | $ | 102,160 | 10.90 | % | ||||||||
Real estate |
||||||||||||||||
Commercial |
323,375 | 35.92 | % | 322,864 | 34.44 | % | ||||||||||
Residential |
232,830 | 25.87 | % | 219,217 | 23.38 | % | ||||||||||
Acquisition, development
and construction |
227,200 | 25.24 | % | 270,062 | 28.81 | % | ||||||||||
Total real estate |
783,405 | 87.03 | % | 812,143 | 86.63 | % | ||||||||||
Consumer |
||||||||||||||||
Direct |
18,432 | 2.05 | % | 20,507 | 2.19 | % | ||||||||||
Indirect |
1,325 | 0.15 | % | 1,898 | 0.20 | % | ||||||||||
Revolving |
911 | 0.10 | % | 836 | 0.09 | % | ||||||||||
Total consumer |
20,668 | 2.30 | % | 23,241 | 2.48 | % | ||||||||||
Deferred loan origination costs (fees) |
7 | 0.00 | % | (55 | ) | (0.01 | %) | |||||||||
Total |
$ | 900,167 | 100.00 | % | $ | 937,489 | 100.00 | % | ||||||||
At June 30, 2010, the loan portfolio is comprised of 87.03% real estate loans. Commercial,
financial and agricultural loans comprise 10.67%, and consumer loans comprise 2.30% of the
portfolio.
Commercial real estate comprises 35.92% of the loan portfolio and consist of both non-owner
occupied and owner occupied properties where the operations of the commercial entity provide the
necessary cash flow to service the debt. For this portion of the real estate loan portfolio,
repayment is not dependent upon the sale of the real estate held as collateral. Construction and
development loans comprise 25.24% of the real estate loan portfolio and the Company has recognized
significant losses in this portfolio. The Company carefully monitors the loans in this category
since the repayment of these loans is generally dependent upon the sale of the real estate in the
normal course of business and can be impacted by national and local economic conditions. New
construction and absorption of existing real estate inventory in the Companys primary market area
of the Augusta-Richmond County, GA-SC MSA have slowed and prices have declined but less than the
national rate. Conditions on certain loans the Company has made in markets outside the Companys
primary market area are outlined in Table 12. The residential category, 25.87% of the portfolio,
represents those loans that the Company chooses to maintain in its portfolio rather than selling
into the secondary market for marketing and competitive reasons and commercial loans secured by
residential real estate.
43
Table of Contents
The Company has no large loan concentrations to individual borrowers. Unsecured loans at June 30,
2010 totaled $19,594.
Interest reserves are established for certain ADC (acquisition development and construction) loans
based on the feasibility of the project, the timeframe for completion, the creditworthiness of the
borrower and guarantors, and collateral. An interest reserve allows the borrowers interest cost
to be capitalized and added to the loan balance. As a matter of practice the Company does not
generally establish loan funded interest reserves on ADC loans; however, the Companys loan
portfolio includes six loans with interest reserves at June 30, 2010. The following tables detail
the loans and accompanying interest reserves as of June 30, 2010 and December 31, 2009.
June 30, 2010 | ||||||||||||||||
Reserves | ||||||||||||||||
Balance | Original | Advanced | Remaining | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Loan 1 |
$ | 4,219 | 179 | 179 | | |||||||||||
Loan 2 |
10,213 | 300 | 296 | 4 | ||||||||||||
Loan 3 |
2,515 | 255 | 255 | | ||||||||||||
Loan 4 |
454 | 30 | 30 | | ||||||||||||
Loan 5 |
164 | 10 | 10 | | ||||||||||||
Loan 6 |
1,112 | 81 | 81 | |
December 31, 2009 | ||||||||||||||||
Reserves | ||||||||||||||||
Balance | Original | Advanced | Remaining | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Loan 1 |
$ | 4,278 | 179 | 179 | | |||||||||||
Loan 2 |
9,666 | 300 | 77 | 223 | ||||||||||||
Loan 3 |
2,598 | 255 | 255 | | ||||||||||||
Loan 4 |
455 | 30 | 30 | | ||||||||||||
Loan 5 |
166 | 10 | 10 | | ||||||||||||
Loan 6 |
1,133 | 81 | 81 | |
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Underwriting for ADC loans with interest reserves follows the same process as those loans without
reserves. In order for the bank to establish a loan-funded interest reserve, the borrower must
have the ability to repay without the use of a reserve and a history of developing and stabilizing
similar properties. All ADC loans, including those with interest reserves, are carefully monitored
through periodic construction site inspections by Bank employees or third party inspectors to
ensure projects are moving along as planned. The Bank assesses the appropriateness of the use of
interest reserves during the entire term of the loan as well as the adequacy of the reserve.
Collateral inspections are completed before approval of advances. Two of these loans have been
renewed; one due to delays and time needed to obtain current financial information on the
guarantors and another to allow for completion of the final punch list and negotiation of the
permanent loan. None of these loans have been restructured or are currently on nonaccrual.
Loan Review and Classification Process
The Company maintains a loan review and classification process which involves multiple officers of
the Company and is designed to assess the general quality of credit underwriting and to promote
early identification of potential problem loans. All loan officers are charged with the
responsibility of risk rating all loans in their portfolios and updating the ratings, positively or
negatively, on an ongoing basis as conditions warrant. Risk ratings are selected from an 8-point
scale with ratings as follows: ratings 1- 4 Satisfactory (pass), rating 5 Watch (potential
weakness), rating 6 Substandard (well-defined weakness), rating 7 Doubtful and rating 8 Loss.
When a loan officer originates a new loan, he or she documents the credit file with an offering
sheet summary, supplemental underwriting analyses, relevant financial information and collateral
evaluations. All of this information is used in the determination of the initial loan risk rating.
Then, the Companys Credit Administration department undertakes an independent credit review of
that relationship in order to validate the lending officers rating. Lending relationships with
total related exposure of $500 or greater are also placed into a tracking database and reviewed by
Credit Administration personnel on an annual basis in conjunction with the receipt of updated
borrower and guarantor financial information. The individual loan reviews analyze such items as:
loan type; nature, type and estimated value of collateral; borrower and/or guarantor estimated
financial strength; most recently available financial information; related loans and total borrower
exposure; and current/anticipated performance of the loan. The results of such reviews are
presented to Executive Management.
45
Table of Contents
Through the review of delinquency reports, updated financial statements or other relevant
information in the normal course of business, the lending officer and/or Credit Administration
review personnel may determine that a loan relationship has weakened to the point that a criticized
(loan grade 5) or classified (loan grade 6 through 8) status is warranted. When a loan relationship
with total related exposure of $200 or greater is adversely graded (5 or above), the lending
officer is then charged with preparing a Classified/Watch report which outlines the background of
the credit problem, current repayment status of the loans, current collateral evaluation and a
workout plan of action. This plan may include goals to improve the credit rating, assisting the
borrower in moving the loans to another institution and/or collateral liquidation. All such
Classified/Watch reports are reviewed on a quarterly basis by members of Executive Management at a
regularly scheduled meeting in which each lending officer presents the workout plans for his
criticized credit relationships.
Depending upon the individual facts, circumstances and the result of the Classified/Watch review
process, Executive Management may categorize the loan relationship as impaired. Once that
determination has occurred, Executive Management in conjunction with Credit Administration
personnel, will complete an evaluation of the collateral (for collateral-dependent loans) based
upon appraisals on file adjusting for current market conditions and other local factors that may
affect collateral value. This judgmental evaluation may produce an initial specific allowance for
placement in the Companys Allowance for Loan & Lease Losses calculation. As soon as practical,
updated appraisals on the collateral backing that impaired loan relationship are ordered. When the
updated appraisals are received, Executive Management with assistance from Credit Administration
department personnel reviews the appraisal, and updates the specific allowance analysis for each
loan relationship accordingly. The Directors Loan Committee reviews on a quarterly basis the
Classified/Watch reports including changes in credit grades of 5 or higher as well as all impaired
loans, the related allowances and OREO.
In general, once the specific allowance has been finalized, Executive Management will authorize a
charge-off prior to the following calendar quarter-end in which that reserve calculation is
finalized.
The review process also provides for the upgrade of loans that show improvement since the last
review.
Nonperforming Assets
Non-performing assets include nonaccrual loans, loans past due 90 days or more, restructured loans
and other real estate owned. Table 10 shows the current and prior period amounts of non-performing
assets. Non-performing assets were $39,926 at June 30, 2010, compared to $40,231 at December 31,
2009 and $53,350 at June 30, 2009. Significant changes from December 2009 to June 2010 include a
$918 increase in restructured loans still accruing, a $769 decrease in other real estate owned and
a $454 decrease in nonaccrual loans.
There were $299 loans past due 90 days or more and still accruing at June 30, 2010 compared to
$3,478 at June 30, 2009 and none at December 31, 2009.
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Restructured loans are loans on which the original terms have been modified in favor of the
borrower or either principal or interest has been forgiven due to deterioration in the borrowers
financial condition. There were $1,748 in restructured loans at June 30, 2010 of which $830 were
on nonaccrual status. Restructured loans totaled $0 in June 30, 2009 and $1,656 at December 31,
2009. These restructured loans at December 31, 2009 were on nonaccrual status at year end and are
included under nonaccrual loans in the table below.
Table 10 Non-Performing Assets
June 30, 2010 | December 31, 2009 | June 30, 2009 | ||||||||||
(Dollars in thousands) | ||||||||||||
Nonaccrual loans: |
||||||||||||
Commercial financial and agricultural |
$ | 637 | $ | 616 | $ | 690 | ||||||
Real Estate: |
||||||||||||
Commercial |
10,038 | 2,932 | 2,423 | |||||||||
Residential |
4,601 | 4,623 | 4,801 | |||||||||
Acquisition, development and construction |
16,054 | 23,755 | 31,266 | |||||||||
Consumer: |
||||||||||||
Direct |
473 | 331 | 384 | |||||||||
Revolving |
| | | |||||||||
Total Nonaccrual loans |
31,803 | 32,257 | 39,564 | |||||||||
Restructured loans (1) |
918 | | | |||||||||
Other real estate owned |
7,205 | 7,974 | 13,786 | |||||||||
Total Non-performing assets |
$ | 39,926 | $ | 40,231 | $ | 53,350 | ||||||
Loans past due 90 days or more
and still accruing interest |
$ | 299 | $ | | $ | 3,478 | ||||||
Non-performing assets to total assets |
2.53 | % | 2.70 | % | 3.65 | % | ||||||
Non-performing assets to total loans and OREO |
4.40 | % | 4.26 | % | 5.49 | % | ||||||
Allowance for loan loss to total non-performing loans |
74.92 | % | 69.25 | % | 40.52 | % |
(1) | Restructured loans on nonaccrual status at period end are included under nonaccrual loans in
the table. |
The ratio of non-performing assets to total loans and other real estate was 4.40% at June 30, 2010
compared to 4.26% at December 31, 2009 and 5.49% at June 30, 2009. The ratio of allowance for loan
losses to total non-performing loans was 74.92% at June 30, 2010 compared to 69.25% at December 31,
2009 and 40.52% at June 30, 2009. The resolution of non-performing assets continues to be a
priority of management.
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The table below presents a roll forward of other real estate owned for the six month period ended
June 30, 2010 and 2009, respectively.
Table 11 Other Real Estate Owned
2010 | 2009 | |||||||
(Dollars in thousands) | ||||||||
Beginning balance, January 1 |
$ | 7,974 | 5,734 | |||||
Additions |
5,544 | 11,304 | ||||||
Increase in valuation allowance |
(697 | ) | | |||||
Sales |
(5,985 | ) | (2,961 | ) | ||||
Gain (loss) on sale of OREO |
369 | (291 | ) | |||||
Ending balance, June 30 |
$ | 7,205 | 13,786 | |||||
The following table provides details of other real estate owned as of June 30, 2010 and 2009,
respectively.
2010 | 2009 | |||||||
(Dollars in thousands) | ||||||||
Other Real Estate: |
||||||||
Single family developed lots |
$ | 2,350 | $ | 1,820 | ||||
Single family undeveloped land |
| 1,050 | ||||||
1-4 Family residential |
1,071 | 3,787 | ||||||
Commercial real estate |
1,925 | 4,243 | ||||||
Condominums |
2,827 | 2,886 | ||||||
8,173 | 13,786 | |||||||
Valuation allowance |
(968 | ) | | |||||
$ | 7,205 | $ | 13,786 | |||||
The decrease in other real estate owned is primarily due to an aggressive liquidation the Company
began in the fourth quarter of 2009 in response to plummeting real estate values in metro Atlanta,
Athens and Savannah, Georgia. In the first half of 2010 proceeds of $3,650 generated from the sale
of a 71 acre tract of commercial land and a $697 increase to the valuation allowance based on
recent appraisals also contributed to the decline in other real estate. The net decrease in
nonaccrual loans reflects increased levels of such loans which were more than offset by
foreclosures. A significant portion of the increases were in ADC loans. The following table
provides further information regarding the Companys nonaccrual loans.
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Nonaccrual | Appraisal | Appraised | ||||||||||||||||||||||||
Balance | Originated | Date | Trigger | Collateral | Allowance | Method | Date | Value | ||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||
Commercial Real Estate |
$ | 1,268 | 04/08/08 | 03/30/10 | delinquency | equipment, land & stock | | collateral value | 05/10 | 1,277 | ||||||||||||||||
ADC Loan Greenville, South Carolina |
2,556 | 03/05/08-10/01/08 | 06/14/10 | delinquency | home & land | | collateral value | 05/10 | 2,840 | |||||||||||||||||
ADC Loan Savannah, Georgia |
1,523 | 09/30/08 | 05/06/10 | delinquency | lots | | collateral value | 06/10 | 1,650 | |||||||||||||||||
ADC Loan CSRA |
1,247 | 12/16/05-02/19/10 | 11/09-2/10 | delinquency | lots & land | | collateral value | 03/10 | 1,761 | |||||||||||||||||
1-4 Family Residential |
1,162 | 10/22/07-09/04/08 | 11/30/09 | delinquency | houses & lots | | collateral value | 03/10 | 1,173 | |||||||||||||||||
Commercial Real Estate |
963 | 12/07/06-01/20/09 | 06/21/10 | financial condition | land | | collateral value | 1/06-5/07 | 1,527 | |||||||||||||||||
1-4 Family Residential |
899 | 04/19/07 | 06/21/10 | financial condition | home | 68 | collateral value | 6/10 - listing | 995 | |||||||||||||||||
ADC Loan CSRA |
1,060 | 08/17/07-05/02/08 | 12/30/09 | delinquency | lots | | collateral value | 12/09 | 1,220 | |||||||||||||||||
ADC Loan CSRA |
3,242 | 08/25/06 | 08/17/09 | delinquency | lots & land | | collateral value | 09/09 | 6,333 | |||||||||||||||||
Commercial Real Estate* |
3,919 | 12/19/08 | 01/15/10 | delinquency | golf course | | collateral value | 03/10 | 8,100 | |||||||||||||||||
ADC Loan CSRA* |
2,668 | 01/02/07-03/01/10 | 1/10-3/10 | delinquency | homes, lots & land | | collateral value | 03/10 | 2,002 | |||||||||||||||||
ADC Loan Athens, Georgia |
2,413 | 08/18/06-01/10/07 | 01/28/09 | delinquency | land & townhomes | | collateral value | 02/09 | 3,526 | |||||||||||||||||
$ | 22,920 | |||||||||||||||||||||||||
Other, net |
8,883 | |||||||||||||||||||||||||
Nonaccrual loans at June 30, 2010 |
$ | 31,803 | ||||||||||||||||||||||||
*ADC Loan cross collateralized by CRE |
Allowance for Loan Losses
The allowance for loan losses represents an allocation for the estimated amount of probable
incurred losses in the loan portfolio. The adequacy of the allowance for loan losses is evaluated
periodically based on a review of all significant loans, with particular emphasis on impaired,
non-accruing, past due, and other loans that management believes require special attention. The
determination of the allowance for loan losses is considered a critical accounting estimate of the
Company. See Critical Accounting Estimates.
While management uses available information to recognize losses on loans, future additions to the
allowance may be necessary based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process, periodically review the
Companys allowance for loan losses. Such agencies may advise additions to the allowance based on
their judgments about information available to them at the time of their examination. Such
regulatory guidance is considered, and the Company may recognize additions to the allowance as a
result.
Additions to the allowance for loan losses are made periodically to maintain the allowance at an
appropriate level based upon managements analysis of risk in the loan portfolio. Loans determined
to be uncollectible are charged to the allowance for loan losses and subsequent recoveries are
added to the allowance. A provision for losses in the amount of $3,794 was charged to expense for
the quarter ended June 30, 2010 compared to $5,114 for the 2009 quarter and $7,082 for the six
months ended June 30, 2010 compared to $9,863 for the six months ended June 30, 2009.
Significant portions of the overall level of losses in 2010 relate to the charge off of specific
reserve allowances on impaired loans. The following table provides selected asset quality
information related to the acquisition development and construction loan portfolio as of June 30,
2010 and December 31, 2009.
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Table 12 Acquisition Development and Construction Loans
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
(Dollars in thousands) | ||||||||
CSRA primary market area |
||||||||
Period-end loans |
173,265 | 195,394 | ||||||
Impaired loans |
7,448 | 11,278 | ||||||
Classified/watch rated loans |
31,819 | 27,237 | ||||||
Charge-offs % (annualized) |
1.31 | % | 0.44 | % | ||||
Specific reserve allowance / Impaired loans |
0.00 | % | 10.29 | % | ||||
General reserve allowance / Loans not impaired % |
2.88 | % | 2.10 | % | ||||
Allowance / Charge-offs |
2.40 | 6.94 | ||||||
Savannah, Georgia |
||||||||
Period-end loans |
13,475 | 19,666 | ||||||
Impaired loans |
1,750 | 1,300 | ||||||
Classified/watch rated loans |
1,331 | 4,064 | ||||||
Charge-offs % (annualized) |
13.45 | % | 11.21 | % | ||||
Specific reserve allowance / Impaired loans |
0.00 | % | 8.62 | % | ||||
General reserve allowance / Loans not impaired % |
3.22 | % | 3.42 | % | ||||
Allowance / Charge-offs |
0.21 | 0.34 | ||||||
Athens, Georgia |
||||||||
Period-end loans |
16,460 | 20,031 | ||||||
Impaired loans |
3,332 | 8,457 | ||||||
Classified/watch rated loans |
2,256 | 2,742 | ||||||
Charge-offs % (annualized) |
(2.04 | %) | 47.59 | % | ||||
Specific reserve allowance / Impaired loans |
0.00 | % | 0.00 | % | ||||
General reserve allowance / Loans not impaired % |
10.66 | % | 10.68 | % | ||||
Allowance / Charge-offs |
(4.17 | ) | 0.13 | |||||
ADC Participations Georgia |
||||||||
Period-end loans |
6,500 | 9,893 | ||||||
Impaired loans |
| 3,393 | ||||||
Classified/watch rated loans |
6,500 | 6,500 | ||||||
Charge-offs % (annualized) |
45.05 | % | 47.41 | % | ||||
Specific reserve allowance / Impaired loans |
0.00 | % | 20.81 | % | ||||
General reserve allowance / Loans not impaired % |
9.51 | % | 9.50 | % | ||||
Allowance / Charge-offs |
0.21 | 0.28 | ||||||
ADC Participations Florida |
||||||||
Period-end loans |
3,600 | 4,034 | ||||||
Impaired loans |
600 | 1,034 | ||||||
Classified/watch rated loans |
| | ||||||
Charge-offs % (annualized) |
10.83 | % | 10.26 | % | ||||
Specific reserve allowance / Impaired loans |
0.00 | % | 0.00 | % | ||||
General reserve allowance / Loans not impaired % |
10.00 | % | 10.00 | % | ||||
Allowance / Charge-offs |
0.77 | 0.72 |
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At June 30, 2010 the ratio of allowance for loan losses to total loans was 2.65% compared to 2.38%
at December 31, 2009 and 1.67% at June 30, 2009. The increase in the allowance for loan losses as
of June 30, 2010 as compared to June 30, 2009 is primarily due to higher levels of classified and
watch-rated loans as well as managements assessment of current economic environment. Also
impacting the allowance were charge-offs of $6,498 of which $4,838, or 74.45%, were related to ADC
loans. Of the ADC charge-offs $1,659, or 34.29%, are related to collateral dependent ADC loan
participations and $906 or 18.73% are related to ADC loans in the Savannah, Georgia market. The
provision for loan losses exceeded charge-offs during the quarter which contributed to an increase
in the ratio of allowance for loan losses to total loans as noted in the table below.
Table 13 Allowance for Loan Losses
June 30, | ||||||||
2010 | 2009 | |||||||
(Dollars in thousands) | ||||||||
Total loans outstanding at end of period,
net of unearned income |
$ | 900,167 | $ | 957,727 | ||||
Average loans outstanding, net of
unearned income |
$ | 912,181 | $ | 971,139 | ||||
Balance of allowance for loan losses at
beginning of year |
$ | 22,338 | $ | 14,742 | ||||
Charge-offs: |
||||||||
Commercial, financial and agricultural |
343 | 429 | ||||||
Real estate commercial |
463 | | ||||||
Real estate acquisition, development
and construction |
4,838 | 7,100 | ||||||
Real estate residential mortgage |
564 | 1,213 | ||||||
Consumer |
290 | 332 | ||||||
Total charge-offs |
6,498 | 9,074 | ||||||
Recoveries of previous loan losses: |
||||||||
Commercial, financial and agricultural |
116 | 207 | ||||||
Real estate commercial |
5 | | ||||||
Real estate acquisition, development
and construction |
530 | 1 | ||||||
Real estate residential mortgage |
33 | 168 | ||||||
Consumer |
220 | 124 | ||||||
Total recoveries |
904 | 500 | ||||||
Net loan losses |
5,594 | 8,574 | ||||||
Provision for loan losses |
7,082 | 9,863 | ||||||
Balance of allowance for loan losses at
end of period |
$ | 23,826 | $ | 16,031 | ||||
Allowance for loan losses to period end
loans |
2.65 | % | 1.67 | % | ||||
Annualized net charge-offs to average loans |
1.24 | % | 1.78 | % |
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Management considers the current allowance for loan losses appropriate based upon its analysis in
the portfolio using the methods previously discussed. Managements judgment is based upon a number
of assumptions about events which are believed to be reasonable, but which may or may not prove
correct. While it is the Companys policy to charge off in the current period the loans in which a
loss is considered probable, there are additional risks of losses which cannot be quantified
precisely or attributed to a particular loan or class of loans. Because management evaluates such
factors as changes in the nature and volume of the loan portfolio, historical loss rates, overall
portfolio quality, review of specific problem loans, and current economic conditions and trends
that may affect a borrowers ability to repay, managements judgment as to the adequacy of the
allowance is necessarily approximate and imprecise. Thus, there can be no assurance that
charge-offs in future periods will not exceed the allowance for loan losses or that additional
increases in the allowance will not be required.
Liquidity and Capital Resources
The Company has maintained adequate liquidity to meet operating and loan funding requirements
despite the lack of such demand due to current market conditions. The loan to deposit ratio at
June 30, 2010 was 65.64% compared to 73.21% at December 31, 2009 and 82.41% at June 30, 2009. The
decrease in the loan to deposit ratio from December 31, 2009 to June 30, 2010 reflects the
decreased demand for loans resulting from the slowing economy coupled with an increased level of
deposits. Deposits at June 30, 2010 and December 31, 2009 include $210,276 and $255,876 of
brokered certificates of deposit, respectively. The Bank and the Thrift have also utilized
borrowings from the Federal Home Loan Bank. They each maintain a line of credit with the Federal
Home Loan Bank approximating 10% of their total assets. Federal Home Loan Bank advances are
collateralized by eligible first mortgage loans, commercial real estate loans and investment
securities. These borrowings totaled $72,000 at June 30, 2010. The Bank maintains repurchase
lines of credit with SunTrust Robinson Humphrey, Atlanta, Georgia, for advances up to $20,000 of
which no amounts were outstanding at June 30, 2010. The Bank has a federal funds purchased
accommodation with SunTrust Bank, Atlanta, Georgia for advances up to $10,000 and a $10,000
repurchase line of credit with Center State Bank, Orlando, Florida. Additionally, liquidity needs
can be supplemented by the structuring of the maturities of investment securities and the pricing
and maturities on loans and deposits offered to customers. The Company also uses retail securities
sold under repurchase agreements to fund growth. Retail securities sold under repurchase
agreements were $448 at June 30, 2010.
Stockholders equity to total assets was 6.45% at June 30, 2010 compared to 6.29% at December 31,
2009 and 7.04% at June 30, 2009. The capital of the Company exceeded all required regulatory
guidelines at June 30, 2010. The Companys Tier 1 risk-based, total risk-based and leverage
capital ratios were 11.75%, 13.19%, and 7.62%, respectively, at June 30, 2010.
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The following table reflects the current regulatory capital levels in more detail, including
comparisons to the regulatory minimums.
Table 14 Regulatory Capital Requirements
June 30, 2010
June 30, 2010
Required for capital | ||||||||||||||||||||||||
Actual | adequacy purposes | Excess | ||||||||||||||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Southeastern Bank Financial
Corporation |
||||||||||||||||||||||||
Risk-based capital: |
||||||||||||||||||||||||
Tier 1 capital |
$ | 117,937 | 11.75 | % | 40,139 | 4.00 | % | 77,798 | 7.75 | % | ||||||||||||||
Total capital |
132,388 | 13.19 | % | 80,277 | 8.00 | % | 52,111 | 5.19 | % | |||||||||||||||
Tier 1 leverage ratio |
117,937 | 7.62 | % | 61,877 | 4.00 | % | 56,060 | 3.62 | % | |||||||||||||||
Georgia Bank & Trust Company |
||||||||||||||||||||||||
Risk-based capital: |
||||||||||||||||||||||||
Tier 1 capital |
$ | 102,884 | 11.65 | % | 35,327 | 4.00 | % | 67,557 | 7.65 | % | ||||||||||||||
Total capital |
114,057 | 12.91 | % | 70,654 | 8.00 | % | 43,403 | 4.91 | % | |||||||||||||||
Tier 1 leverage ratio |
102,884 | 7.47 | % | 62,001 | 4.50 | % | 40,883 | 2.97 | % | |||||||||||||||
Southern Bank & Trust |
||||||||||||||||||||||||
Risk-based capital: |
||||||||||||||||||||||||
Tier 1 capital |
$ | 14,415 | 12.12 | % | 4,758 | 4.00 | % | 9,657 | 8.12 | % | ||||||||||||||
Total capital |
15,908 | 13.37 | % | 9,517 | 8.00 | % | 6,391 | 5.37 | % | |||||||||||||||
Tier 1 leverage ratio |
14,415 | 8.20 | % | 7,029 | 4.00 | % | 7,386 | 4.20 | % |
Georgia Bank & Trust Company is regulated by the Department of Banking and Finance of the State of
Georgia (DBF). The DBF requires that state banks in Georgia generally maintain a minimum ratio of
Tier 1 capital to total assets of four and one-half percent (4.50%).
Management is not aware of any other events or uncertainties that are reasonably likely to have a
material effect on the Companys liquidity, capital resources or operations.
Commitments and Contractual Obligations
The Company is a party to lines of credit with off-balance sheet risk in the normal course of
business to meet the financing needs of its customers. Lines of credit are unfunded commitments to
extend credit. These instruments involve, in varying degrees, exposure to credit and interest rate
risk in excess of the amounts recognized in the financial statements. The Companys exposure to
credit loss in the event of nonperformance by the other party to the financial instrument for
unfunded commitments to extend credit and letters of credit is represented by the contractual
amount of those instruments. The Company evaluates construction and acquisition and development
loans for the percentage completed before extending additional credit. The Company follows the
same credit policies in making commitments and contractual obligations as it does for on-balance
sheet instruments.
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Unfunded commitments to extend credit where contract amounts represent potential credit risk
totaled $133,778 at June 30, 2010. These commitments are primarily at variable interest rates.
The Companys commitments are funded through internal funding sources of scheduled repayments of
loans and sales and maturities of investment securities available-for-sale or external funding
sources through acceptance of deposits from customers or borrowings from other financial
institutions.
The following table is a summary of the Companys commitments to extend credit, commitments under
contractual leases as well as the Companys contractual obligations, consisting of deposits, FHLB
advances, which are subject to early termination options, and borrowed funds by contractual
maturity date.
Table 15 Commitments and Contractual Obligations
Less than | 1 - 3 | 3 - 5 | More than | |||||||||||||
1 Year | Years | Years | 5 Years | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Lines of credit |
$ | 133,778 | | | | |||||||||||
Lease agreements |
307 | 352 | 91 | 44 | ||||||||||||
Deposits |
1,207,063 | 147,050 | 15,934 | 1,395 | ||||||||||||
Securities sold under
repurchase agreements |
448 | | | | ||||||||||||
FHLB advances |
20,000 | 10,000 | 3,000 | 39,000 | ||||||||||||
Other borrowings |
900 | | | | ||||||||||||
Subordinated debentures |
| | 2,947 | 20,000 | ||||||||||||
Total commitments and
contractual obligations |
$ | 1,362,496 | $ | 157,402 | $ | 21,972 | $ | 60,439 | ||||||||
Although management regularly monitors the balance of outstanding commitments to fund loans to
ensure funding availability should the need arise, management believes that the risk of all
customers fully drawing on all these lines of credit at the same time is remote.
54
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Effects of Inflation and Changing Prices
Inflation generally increases the cost 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 impact on the performance of a financial
institution than the effects of general levels of inflation. Although interest rates do not
necessarily move in the same direction and to the same extent as the prices of goods and services,
increases in inflation generally have resulted in increased interest rates. In addition, inflation
can increase a 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 refinances tend to slow
as interest rates increase, and can reduce the Companys earnings from such activities and the
income from the sale of residential mortgage loans in the secondary market.
Regulatory Reform Legislation
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank
Reform Act) was signed into law. The Dodd-Frank Reform Act represents a significant overhaul of
many aspects of the regulation of the financial services industry, although many of its provisions
(e.g., the interchange and trust preferred capital limitations) apply to companies that are
significantly larger than the Company. The Dodd-Frank Reform Act directs applicable regulatory
authorities to promulgate regulations implementing its provisions, and its effect on the Company
and on the financial services industry as a whole will be clarified as those regulations are
issued. Major elements of the Dodd-Frank Reform Act include:
A permanent increase in deposit insurance coverage to $250,000 per account, permanent unlimited
deposit insurance on noninterest-bearing transaction accounts, and an increase in the minimum
Deposit Insurance Fund reserve requirement from 1.15% to 1.35%, with assessments to be based on
assets as opposed to deposits.
New disclosure and other requirements relating to executive compensation and corporate
governance.
Amendments to the Truth in Lending Act aimed at improving consumer protections with respect to
mortgage originations, including originator compensation, minimum repayment standards, and
prepayment considerations.
The establishment of the Financial Stability Oversight Council, which will be responsible for
identifying and monitoring systemic risks posed by financial firms, activities, and practices.
The development of regulations to limit debit card interchange fees.
55
Table of Contents
The future elimination of trust preferred securities as a permitted element of Tier 1 capital.
The creation of a special regime to allow for the orderly liquidation of systemically important
financial companies, including the establishment of an orderly liquidation fund.
The development of regulations to address derivatives markets, including clearing and exchange
trading requirements and a framework for regulating derivatives-market participants.
Enhanced supervision of credit rating agencies through the Office of Credit Ratings within the
SEC.
Increased regulation of asset-backed securities, including a requirement that issuers of
asset-backed securities retain at least 5% of the risk of the asset-backed securities.
The establishment of a Bureau of Consumer Financial Protection, within the Federal Reserve, to
serve as a dedicated consumer-protection regulatory body.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of June 30, 2010, there were no substantial changes in the interest rate sensitivity analysis or
the sensitivity of market value of portfolio equity for various changes in interest rates
calculated as of December 31, 2009. The foregoing disclosures related to the market risk of the
Company should be read in conjunction with the Companys audited consolidated financial statements,
related notes and managements discussion and analysis of financial condition and results of
operations for the year ended December 31, 2009 included in the Companys 2009 Annual Report on
Form 10-K.
Item 4. Controls and Procedures
As of the end of the period covered by this report, the Company carried out an evaluation, under
the supervision and with the participation of the Companys management, including the Companys
President and Chief Executive Officer (principal executive officer) and its Group Vice President
and Chief Financial Officer (principal financial officer), of the effectiveness of the design and
operation of the Companys disclosure controls and procedures pursuant to Exchange Act Rule 13a-15.
Based upon that evaluation, such officers concluded that the Companys disclosure controls and
procedures are effective in timely alerting them to material information relating to the Company
(including its consolidated subsidiaries) that is required to be included in the Companys periodic
filings with the Securities and Exchange Commission. There have been no changes in the Companys
internal controls or, to the Companys knowledge, in other factors during the quarter covered by
this report that have materially affected, or are reasonably likely to materially affect, the
Companys internal controls over financial reporting.
56
Table of Contents
Part II
OTHER INFORMATION
OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which the Company or any of its
subsidiaries is a party or of which any of their property is subject.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, Item 1A. Risk Factors in the Companys
Annual Report on Form 10-K for the year ended December 31, 2009, which could
materially affect its business, financial condition or future results. The risks
described below and in the Annual Report on Form 10-K are not the only risks facing
the Company. Additional risks and uncertainties not currently known to management
or that management currently deems to be immaterial also may materially adversely
affect the Companys business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
On April 15, 2004, the Company announced the commencement of a stock repurchase
program, pursuant to which it will, from time to time, repurchase up to 100,000
shares of its outstanding stock. The program does not have a stated expiration
date. No stock repurchase programs were terminated during the second quarter of
2010 and there were no shares repurchased under the existing stock repurchase plan
or otherwise during the second quarter.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
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Item 6. Exhibits
31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
|||
31.2 | Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. |
|||
32.1 | Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
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SOUTHEASTERN BANK FINANCIAL CORPORATION
Form 10-Q Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SOUTHEASTERN BANK FINANCIAL CORPORATION |
||||
Date: July 30, 2010 | By: | /s/ Darrell R. Rains | ||
Darrell R. Rains | ||||
Group Vice President, Chief Financial Officer (Duly Authorized Officer of Registrant and Principal Financial Officer) |
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