Attached files
file | filename |
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EX-32 - EX-32 - FGBC Bancshares, Inc. | g24352exv32.htm |
EX-31.2 - EX-32.1 - FGBC Bancshares, Inc. | g24352exv31w2.htm |
EX-31.1 - EX-31.1 - FGBC Bancshares, Inc. | g24352exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended: June 30, 2010
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the transition period from to
Commission File Number: 000-51957
FGBC BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Georgia | 20 - 02743161 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
101 Main Street, Franklin, Georgia 30217
(Address of principal executive office)
(Address of principal executive office)
(678) 839-4510
(Issuers telephone number)
(Issuers telephone number)
N/A
(Former name, former address and former fiscal year, if changed since last report)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
There were 13,993,233 shares of common stock outstanding as of July 1, 2010.
Table of Contents
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this Report) contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act)
and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). These
forward-looking statements include or relate to our future results, including certain projections
and business trends. Assumptions relating to forward-looking statements involve judgments with
respect to, among other things, future economic, competitive and market conditions and future
business decisions, all of which are difficult or impossible to predict accurately and many of
which are beyond our control. When used in this Report, the words estimate, project, intend,
believe and expect and similar expressions identify forward-looking statements. Although we
believe that assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could prove inaccurate, and we may not realize the results contemplated by the
forward-looking statement. Management decisions are subjective in many respects and susceptible to
interpretations and periodic revisions based on actual experience and business developments, the
impact of which may cause us to alter our business strategy that may, in turn, affect our results
of operations. In light of the significant uncertainties inherent in the forward-looking
information included in this Report, you should not regard the inclusion of this information as our
representation that we will achieve any strategy, objectives or other plans. The forward-looking
statements contained in this Report speak only as of the date of the Report and we undertake no
obligation to update or revise any of these forward-looking statements.
The forward-looking statements that we make in this Report, as well as other statements that
are not historical facts, are based largely on managements current expectations and assumptions
and are subject to a number of risks and uncertainties that could cause actual results to differ
materially from those contemplated by forward-looking statements. These risks and uncertainties
include, among other things, the risks and uncertainties described in Item 1A of our Annual Report
on Form 10-K filed with the Securities and Exchange Commission on April 15, 2010.
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FGBC BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2010 AND DECEMBER 31, 2009
JUNE 30, 2010 AND DECEMBER 31, 2009
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
(unaudited) | (audited) | |||||||
Assets |
||||||||
Cash and due from banks |
$ | 17,942,048 | $ | 15,752,900 | ||||
Interest-bearing deposits in banks |
112,878,227 | 68,547,359 | ||||||
Federal funds sold |
| | ||||||
Securities available-for-sale, at fair value |
48,276,601 | 44,955,347 | ||||||
Restricted equity securities, at cost |
2,694,000 | 2,694,000 | ||||||
Loans |
560,300,984 | 612,213,063 | ||||||
Less allowance for loan losses |
14,180,964 | 12,879,081 | ||||||
Loans, net |
546,120,020 | 599,333,982 | ||||||
Premises and equipment |
36,215,523 | 37,045,578 | ||||||
Foreclosed assets |
30,012,263 | 13,740,602 | ||||||
Accrued interest receivable |
2,672,585 | 2,929,608 | ||||||
Other assets |
4,719,540 | 7,201,231 | ||||||
Total assets |
$ | 801,530,807 | $ | 792,200,607 | ||||
Liabilities and Stockholders Equity |
||||||||
Liabilities |
||||||||
Deposits: |
||||||||
Noninterest-bearing |
$ | 46,473,926 | $ | 37,663,983 | ||||
Interest-bearing |
702,837,398 | 697,125,137 | ||||||
Total deposits |
749,311,324 | 734,789,120 | ||||||
Other borrowings |
22,000,000 | 22,000,000 | ||||||
Accrued interest payable |
570,159 | 531,655 | ||||||
Other liabilities |
858,050 | 502,237 | ||||||
Total liabilities |
772,739,533 | 757,823,012 | ||||||
Stockholders equity |
||||||||
Preferred stock, par value $0; 10,000,000 shares authorized;
0 shares issued and outstanding |
| | ||||||
Common stock, par value $0; 100,000,000 shares authorized;
13,993,233 shares issued and outstanding |
77,535,569 | 77,440,952 | ||||||
Accumulated deficit |
(48,684,798 | ) | (42,741,631 | ) | ||||
Accumulated other comprehensive income (loss) |
93,543 | (321,726 | ) | |||||
Treasury stock, 66,251 shares |
(153,040 | ) | | |||||
Total stockholders equity |
28,791,274 | 34,377,595 | ||||||
Total liabilities and stockholders equity |
$ | 801,530,807 | $ | 792,200,607 | ||||
See notes to consolidated financial statements.
4
Table of Contents
FGBC BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2010 AND 2009
AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(Unaudited)
THREE MONTHS ENDED JUNE 30, 2010 AND 2009
AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Interest income: |
||||||||||||||||
Loans, including fees |
$ | 8,323,704 | $ | 9,399,340 | $ | 16,896,284 | $ | 18,816,636 | ||||||||
Taxable securities |
388,681 | 452,922 | 762,308 | 1,076,069 | ||||||||||||
Nontaxable securities |
55,496 | 141,693 | 118,943 | 288,702 | ||||||||||||
Federal funds sold |
35,401 | 2,805 | 35,401 | 13,831 | ||||||||||||
Other interest income |
65,882 | 46,021 | 152,613 | 94,716 | ||||||||||||
Total interest income |
8,869,164 | 10,042,781 | 17,965,549 | 20,289,954 | ||||||||||||
Interest expense: |
||||||||||||||||
Deposits |
3,268,581 | 4,759,980 | 6,593,492 | 10,142,879 | ||||||||||||
Other borrowings |
115,880 | 1,567 | 230,486 | 437,764 | ||||||||||||
Total interest expense |
3,384,461 | 4,761,547 | 6,823,978 | 10,580,643 | ||||||||||||
Net interest income |
5,484,703 | 5,281,234 | 11,141,571 | 9,709,311 | ||||||||||||
Provision for loan losses |
4,348,173 | 4,332,170 | 6,619,495 | 6,251,177 | ||||||||||||
Net interest income after provision for
loan losses |
1,136,530 | 949,064 | 4,522,076 | 3,458,134 | ||||||||||||
Other income: |
||||||||||||||||
Service charges on deposit accounts |
528,406 | 534,232 | 1,025,891 | 992,771 | ||||||||||||
Mortgage origination fees |
220,425 | 311,597 | 349,269 | 636,583 | ||||||||||||
Net gain on sale of securities available for
sale |
145,623 | 10,739 | 371,941 | 721,331 | ||||||||||||
Net gain on sale of premises and equipment |
10,340 | | 19,340 | | ||||||||||||
Other operating income |
135,236 | 65,599 | 264,152 | 144,802 | ||||||||||||
Total other income |
1,040,030 | 922,167 | 2,030,593 | 2,495,487 | ||||||||||||
Other expenses: |
||||||||||||||||
Salaries and employee benefits |
2,382,165 | 2,882,676 | 4,828,353 | 6,027,152 | ||||||||||||
Equipment and occupancy expenses |
739,880 | 849,244 | 1,503,896 | 1,686,401 | ||||||||||||
Net loss on sale of foreclosed assets |
186,461 | 199,489 | 282,343 | 291,656 | ||||||||||||
Write down on foreclosed assets |
580,785 | 557,247 | 652,484 | 557,247 | ||||||||||||
Foreclosed asset expenses |
632,640 | 444,525 | 1,179,135 | 587,474 | ||||||||||||
FDIC insurance premiums |
719,259 | 700,445 | 1,614,348 | 1,168,217 | ||||||||||||
Other operating expenses |
1,298,261 | 1,322,909 | 2,435,277 | 2,624,323 | ||||||||||||
Total other expenses |
6,539,451 | 6,956,535 | 12,495,836 | 12,942,470 | ||||||||||||
Loss before income taxes |
(4,362,891 | ) | (5,085,304 | ) | (5,943,167 | ) | (6,988,849 | ) | ||||||||
Income tax benefit |
| (1,929,562 | ) | | (2,657,218 | ) | ||||||||||
Net loss |
(4,362,891 | ) | (3,155,742 | ) | (5,943,167 | ) | (4,331,631 | ) | ||||||||
Basic losses per share |
$ | (0.31 | ) | $ | (0.25 | ) | $ | (0.42 | ) | $ | (0.35 | ) | ||||
Diluted losses per share |
$ | (0.31 | ) | $ | (0.25 | ) | $ | (0.42 | ) | $ | (0.35 | ) | ||||
Cash dividends per share |
$ | | $ | | $ | | $ | | ||||||||
See Notes to Consolidated Financial Statements.
5
Table of Contents
FGBC BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
THREE MONTHS ENDED JUNE 30, 2010 AND 2009
AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(Unaudited)
THREE MONTHS ENDED JUNE 30, 2010 AND 2009
AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net loss |
$ | (4,362,891 | ) | $ | (3,155,742 | ) | $ | (5,943,167 | ) | $ | (4,331,631 | ) | ||||
Other comprehensive income (loss): |
||||||||||||||||
Reclassification adjustment for net gains on sales of
securities
included in net income, net of tax of $0 and $4,081 for
(three months) and $0 and $274,106 for (six months) |
(145,623 | ) | (6,658 | ) | (371,941 | ) | (447,225 | ) | ||||||||
Net unrealized holding gains on securities available for sale
arising during period, net of tax benefit of $0 and $178,980
for (three months) and $0 and $155,222 for (six months) |
605,718 | (292,021 | ) | 787,210 | (253,258 | ) | ||||||||||
Other comprehensive income (loss) |
460,095 | (298,679 | ) | 415,269 | (700,483 | ) | ||||||||||
Comprehensive income (loss) |
$ | (3,902,796 | ) | $ | (3,454,421 | ) | $ | (5,527,898 | ) | $ | (5,032,114 | ) | ||||
See Notes to Consolidated Financial Statements.
6
Table of Contents
FGBC BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(Unaudited)
SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(Unaudited)
2010 | 2009 | |||||||
OPERATING ACTIVITIES |
||||||||
Net loss |
$ | (5,943,167 | ) | $ | (4,331,631 | ) | ||
Adjustments to reconcile net loss to net cash provided by
operating activities: |
||||||||
Depreciation |
864,868 | 984,437 | ||||||
Provision for loan losses |
6,619,495 | 6,251,177 | ||||||
Amortization and accretion of securities |
166,407 | 84,392 | ||||||
Writedowns of foreclosed assets |
652,484 | 557,247 | ||||||
Stock compensation expense |
94,617 | 155,884 | ||||||
Deferred taxes |
| 1,012,421 | ||||||
Net gain on sale of securities available-for-sale |
(370,326 | ) | (721,331 | ) | ||||
Net loss on sale of foreclosed assets |
348,074 | 339,710 | ||||||
Gain on sale of premises and equipment |
(19,340 | ) | | |||||
Decrease in income taxes payable |
| (1,684,597 | ) | |||||
Decrease in interest receivable |
257,023 | 228,873 | ||||||
Increase (decrease) in interest payable |
38,504 | (263,106 | ) | |||||
Net other operating activities |
2,837,504 | 710,302 | ||||||
Net cash provided by operating activities |
5,195,916 | 3,323,778 | ||||||
INVESTING ACTIVITIES |
||||||||
(Increase) decrease in interest-bearing deposits in banks |
(44,033,398 | ) | 6,746,697 | |||||
Purchases of securities available for sale |
(29,618,741 | ) | (24,151,260 | ) | ||||
Proceeds from maturities of securities available for sale |
2,396,014 | 11,007,608 | ||||||
Proceeds from sales of securities available for sale |
24,717,848 | 35,832,302 | ||||||
Purchases of restricted equity securities |
| (640,600 | ) | |||||
Decrease in federal funds sold |
| 722,000 | ||||||
Net decrease in loans |
25,515,802 | 17,896,905 | ||||||
Purchase of premises and equipment |
(34,813 | ) | (959,672 | ) | ||||
Proceeds from sale of foreclosed assets |
3,839,944 | 3,433,500 | ||||||
Proceeds from sale of premises and equipment |
19,340 | | ||||||
Additions to other real estate owned |
(33,498 | ) | (133,548 | ) | ||||
Net cash provided by (used in) investing activities |
(17,231,502 | ) | 49,753,932 | |||||
FINANCING ACTIVITIES |
||||||||
Net increase (decrease) in deposits |
14,522,204 | (34,502,752 | ) | |||||
Net proceeds from other borrowings |
| 10,250,000 | ||||||
Proceeds from sale of common stock |
| 1,721,531 | ||||||
Proceeds from exercise of stock options |
| 142,013 | ||||||
Purchase of fractional shares of common stock |
| | ||||||
Net cash provided by (used in) financing activities |
14,522,204 | (22,389,208 | ) | |||||
Net increase in cash and due from banks |
2,486,618 | 30,688,502 | ||||||
Cash and due from banks, beginning of period |
15,752,900 | 8,858,796 | ||||||
Cash and due from banks, end of period |
$ | 18,239,518 | $ | 39,547,298 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
||||||||
Cash paid during period for: |
||||||||
Interest |
$ | 6,785,473 | $ | 10,861,286 | ||||
Income taxes |
$ | | $ | | ||||
NONCASH TRANSACTIONS |
||||||||
Financed sales of foreclosed assets |
$ | 915,088 | $ | 1,522,002 | ||||
Loans transferred to foreclosed assets |
$ | 21,993,753 | $ | 13,817,509 | ||||
Treasury stock acquired in collection of loan |
$ | 153,041 | $ | |
See notes to consolidated financial statements.
7
Table of Contents
FGBC BANCSHARES, INC.
AND SUBSIDIARY
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(Unaudited)
June 30, 2010
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The financial information contained herein is unaudited. Accordingly, the information does
not include all the information and footnotes required by generally accepted accounting principles
for complete financial statements, however, such information reflects all adjustments (consisting
solely of normal recurring adjustments), which are, in the opinion of management, necessary for a
fair statement of results for the interim periods.
Operating results for the three and six-month period ended June 30, 2010 are not necessarily
indicative of the results that may be expected for the year ending December 31, 2010. These
statements should be read in conjunction with the financial statements and footnotes thereto
included in the Companys annual report on Form 10-K for the year ended December 31, 2009.
NOTE 2. REGULATORY OVERSIGHT, CAPITAL ADEQUACY AND MANAGEMENTS PLANS
The Consolidated Financial Statements have been prepared on a going concern basis, which
contemplates the realization of assets and the discharge of liabilities in the normal course of
business for the foreseeable future. However, due to the Companys recent financial results, the
substantial uncertainty throughout the U.S. banking industry and other matters discussed below, a
substantial doubt exists regarding the Companys ability to continue as a going concern.
Effective August 11, 2010 the Bank entered into a Stipulation and Consent Agreement with the
Georgia Department of Banking and Financing (the DBF), and acknowledged by the FDIC, agreeing to
the issuance of a Consent Order (the Order). Our future viability is subject to our ability to
successfully operate under the terms of the Order, which requires the Bank to take a number of
affirmative steps including, among other things, achieving and maintaining a tier 1 capital to
total assets ratio of at least 8.0%. In order to comply with these regulatory requirements, we
need to raise substantial additional capital or significantly reduce our asset size. There is no
guarantee that sufficient capital will be available at acceptable terms, if at all, when needed, or
that the Company would be able to sell assets at terms favorable enough to accomplish our
regulatory capital needs. In such event, we may be subject to increased regulatory enforcement
actions and operating restrictions.
As of June 30, 2010, the Company was considered undercapitalized, under regulatory
guidelines. In light of the requirement to improve the capital ratios of the Bank and further
reduce the level of classified assets, management is pursuing a number of strategic alternatives.
Current market conditions for banking institutions, the overall uncertainty in financial markets
and the Companys high level of non-performing assets are potential barriers to the success of
these strategies. Ongoing failure to adequately address regulatory concerns could ultimately
result in the eventual appointment of a receiver or conservator of the Banks assets. If current
adverse market factors continue for a prolonged period of time, new adverse market factors emerge,
and/or the Company is unable to successfully execute its plans or adequately address regulatory
concerns in a sufficiently timely manner, it could have a material adverse effect on the Companys
business, results of operations and financial position.
NOTE 3. EARNINGS (LOSSES) PER SHARE
The Company is required to report earnings per common share with and without the dilutive
effects of potential common stock issuances from instruments such as options, convertible
securities and warrants on the face of the statements of operations. Earnings per common share are
based on the weighted average number of common shares outstanding during the period while the
effects of potential common shares outstanding during the period are included in diluted earnings
per share. Presented below is a summary of the components used to calculate basic and diluted
earnings per common share.
8
Table of Contents
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Basic losses per share: |
||||||||||||||||
Weighted average common shares outstanding |
13,993,233 | 12,533,357 | 13,993,233 | 12,521,148 | ||||||||||||
Net loss |
$ | (4,362,891 | ) | $ | (3,155,742 | ) | $ | (5,822,413 | ) | $ | (4,331,631 | ) | ||||
Basic losses per share |
$ | (0.31 | ) | $ | (0.25 | ) | $ | (0.42 | ) | $ | (0.35 | ) | ||||
Diluted losses per share: |
||||||||||||||||
Weighted average common shares outstanding |
13,993,233 | 12,533,357 | 13,993,233 | 12,521,148 | ||||||||||||
Net effect of the assumed exercise of stock
options based on the treasury stock method
using average market prices for the year |
| | | | ||||||||||||
Total weighted average common shares and
common stock equivalents outstanding |
13,993,233 | 12,533,357 | 13,993,233 | 12,521,148 | ||||||||||||
Net loss |
$ | (4,362,891 | ) | $ | (3,155,742 | ) | $ | (5,822,413 | ) | $ | (4,331,631 | ) | ||||
Diluted losses per share |
$ | (0.31 | ) | $ | (0.25 | ) | $ | (0.42 | ) | $ | (0.35 | ) | ||||
Potential common shares of 1,428,625 and 1,428,625 for the three and six- months ended
June 30, 2010 and 2009, respectively, were anti-dilutive and not included in the computation of
diluted earnings per share.
NOTE 4. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
On July 21, 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of
Financing Receivables and the Allowance for Credit Losses, which requires significant new
disclosures about the allowance for credit losses and the credit quality of financing receivables.
The requirements are intended to enhance transparency regarding credit losses and the credit
quality of loan and lease receivables. Under this statement, allowance for credit losses and fair
value are to be disclosed by portfolio segment, while credit quality information, impaired
financing receivables and nonaccrual status are to be presented by class of financing receivable.
Disclosure of the nature and extent, the financial impact and segment information of troubled debt
restructurings will also be required. The disclosures are to be presented at the level of
disaggregation that management uses when assessing and monitoring the portfolios risk and
performance. This ASU is effective for interim and annual reporting periods after December 15, 2010
and the related disclosures will be included in the Companys notes to the consolidated financial
statements beginning in the fourth quarter of 2010.
In January 2010, the FASB amended existing guidance for fair value measurements and
disclosures which requires disclosures for transfers in and out of Levels 1 and 2 fair value
measurements and activity in Level 3 fair value measurements. The amendments in the guidance also
clarify existing disclosures for the level of disaggregation and disclosures about inputs and
valuation techniques. The amendments in the guidance also include conforming amendments to the
guidance on employers disclosures about postretirement benefit plan assets. The guidance was
effective for interim and annual reporting periods beginning after December 15, 2009, except for
the disclosures about activity in Level 3 fair value measurements. Those disclosures are effective
for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal
years. The effect of adopting this new guidance did not have any material effect on the Companys
operating results or financial condition.
In February 2010, the FASB issued Accounting Standards Update No. 2010-09, Subsequent Events:
Amendments to Certain Recognition and Disclosure Requirements (ASC No. 2010-09). ASU No. 2010-09
removes some contradictions between the requirements of GAAP and the filing rules of the Securities
and Exchange Commission (SEC). SEC filers are required to evaluate subsequent events through the
date the financial statements are issued, and they are no longer required to disclose the date
through which subsequent events have been evaluated. This guidance was effective upon issuance
except for the use of the issued date for conduit debt obligors, and it is not expected to have a
material impact on the Companys results of operations, financial position or disclosures.
9
Table of Contents
NOTE 5. FAIR VALUE DISCLOSURES
Determination of Fair Value
The Company uses fair value measurements to record fair value adjustments to certain assets
and liabilities and to determine fair value disclosures. In accordance with the Fair Value
Measurements and Disclosures guidance, the fair value of a financial instrument is the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. Fair value is best determined based upon
quoted market prices. However, in many instances, there are no quoted market prices for the
Companys various financial instruments. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an
immediate settlement of the instrument.
The recent fair value guidance provides a consistent definition of fair value, which focuses
on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale)
between market participants at the measurement date under current market conditions. If there has
been a significant decrease in the volume and level of activity for the asset or liability, a
change in valuation technique or the use of multiple valuation techniques may be appropriate. In
such instances, determining the price at which willing market participants would transact at the
measurement date under current market conditions depends on the facts and circumstances and
requires the use of significant judgment. The fair value is a reasonable point within the range
that is most representative of fair value under current market conditions.
Fair Value Hierarchy
In accordance with this guidance, the Company groups its financial assets and financial
liabilities generally measured at fair value in three levels, based on the markets in which the
assets and liabilities are traded and the reliability of the assumptions used to determine fair
value.
Level 1 Valuation is based on quoted prices in active markets for identical assets or
liabilities that the reporting entity has the ability to access at the measurement date. Level 1
assets and liabilities generally include debt and equity securities that are traded in an active
exchange market. Valuations are obtained from readily available pricing sources for market
transactions involving identical assets or liabilities.
Level 2 Valuation is based on inputs other than quoted prices included within level 1 that
are observable for the asset or liability, either directly or indirectly. The valuation may be
based on quoted prices for similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by observable market data for
substantially the full term of the asset or liability.
Level 3 Valuation is based on unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets or liabilities. Level 3 assets
and liabilities include financial instruments whose value is determined using pricing models,
discounted cash flow methodologies, or similar techniques, as well as instruments for which
determination of fair value requires significant management judgment or estimation.
A financial instruments categorization within the valuation hierarchy is based upon the
lowest level of input that is significant to the fair value measurement.
The following methods and assumptions were used by the Company in estimating fair value
disclosures for financial instruments:
Cash and cash equivalents and interest-bearing deposits in banks: The carrying amounts of
cash and short-term instruments approximate fair values based on the short-term nature of the
assets. Fair values of other interest-bearing deposits are estimated using discounted cash flow
analyses based on current rates for similar types of deposits.
Securities Available for Sale: Investment securities available-for-sale are recorded at fair
value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If
quoted prices are not available, fair values are measured using independent pricing models or other
model-based valuation techniques such as the present value of future cash flows, adjusted for the
securitys credit rating, prepayment assumptions and other factors such as credit loss assumptions.
Level 1 securities include those traded on an active exchange, such as the New York Stock
Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter
markets and money market funds. Level 2 securities include mortgage-backed securities issued by
government sponsored entities, municipal bonds and corporate debt securities. Securities
classified as Level 3 include asset-backed securities in less liquid markets.
Restricted equity securities: The carrying value of restricted equity securities with no
readily determinable fair value approximates fair value.
10
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Loans: The Company does not record loans at fair value on a recurring basis. However, from
time to time, a loan is considered impaired and an allowance for loan losses is established. Loans
for which it is probable that payment of interest and principal will not be made in accordance with
the contractual terms of the loan agreement are considered impaired. Once a loan is identified as
individually impaired, management measures impairment based on the present value of expected future
cash flows discounted at the loans effective interest rate, except that as a practical expedient,
a creditor may measure impairment based on a loans observable market price, or the fair value of
the collateral if repayment of the loan is dependent upon the sale of the underlying collateral.
Those impaired loans not requiring an allowance represent loans for which the fair value of the
expected repayments or collateral exceed the recorded investments in such loans. At June 30, 2010,
substantially all of the total impaired loans were evaluated based on the fair value of the
collateral. In accordance with generally accepted accounting principles, impaired loans where an
allowance is established based on the fair value of collateral require classification in the fair
value hierarchy. When the fair value of the collateral is based on an observable market price or a
current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an
appraised value is not available or management determines the fair value of the collateral is
further impaired below the appraised value and there is no observable market price, the Company
records the impaired loan as nonrecurring Level 3.
Foreclosed Assets: Foreclosed assets are adjusted to fair value upon transfer of the loans to
foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value or
fair value. Fair value is based upon independent market prices, appraised values of the collateral
or managements estimation of the value of the collateral. When the fair value of the collateral
is based on an observable market price or a current appraised value, the Company records the
foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management
determines the fair value of the collateral is further impaired below the appraised value and there
is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3.
Deposits: The carrying amount of demand deposits, savings deposits, and variable-rate
certificates of deposit approximates fair value. The fair value of fixed-rate certificates of
deposit is estimated based on discounted contractual cash flows using interest rates currently
being offered for certificates of similar maturities.
Other Borrowings: The fair value of fixed rate borrowings is based on discounted contractual
cash flows using interest rates currently offered for debt with similar terms.
Accrued Interest: The carrying amount of accrued interest approximates fair value.
Assets measured at fair value on a recurring basis are summarized below:
(Dollars In Thousands) | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets for | Significant Other | Significant | ||||||||||||||
Identical Assets | Observable Inputs | Unobservable Inputs | ||||||||||||||
June 30, 2010 | (Level 1) | (Level 2) | (Level 3) | Fair Value | ||||||||||||
Available for sale securities |
$ | | $ | 48,277 | $ | | $ | 48,277 | ||||||||
Total assets at fair value |
$ | | $ | 48,277 | $ | | $ | 48,277 | ||||||||
December 31, 2009 |
||||||||||||||||
Available for sale securities |
$ | | $ | 44,955 | $ | | $ | 44,955 | ||||||||
Total assets at fair value |
$ | | $ | 44,955 | $ | | $ | 44,955 | ||||||||
Assets measured at fair value on a nonrecurring basis are summarized below:
(Dollars In Thousands) | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets for | Significant Other | Significant | ||||||||||||||
Identical Assets | Observable Inputs | Unobservable Inputs | ||||||||||||||
June 30, 2010 | (Level 1) | (Level 2) | (Level 3) | Total Gains (Losses) | ||||||||||||
Impaired loans |
$ | | $ | 21,799 | $ | 18,267 | $ | (2,551 | ) | |||||||
Foreclosed assets |
| 12,471 | 17,501 | (652 | ) | |||||||||||
Total |
$ | | $ | 34,270 | $ | 35,768 | $ | (3,203 | ) | |||||||
December 31, 2009 |
||||||||||||||||
Impaired loans |
$ | | $ | 24,665 | $ | 24,452 | $ | (19,256 | ) | |||||||
Foreclosed assets |
| 5,165 | 8,575 | (1,251 | ) | |||||||||||
Total |
$ | | $ | 29,830 | $ | 33,027 | $ | (20,507 | ) | |||||||
11
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In accordance with the provisions of the loan impairment guidance, individual loans with
a carrying amount of $40,544,740 were written down to their fair value of $37,993,313 resulting in
an impairment charge of $2,551,427 which was included in earnings for the period. Write downs of
impaired loans are estimated using the present value of expected cash flows or the appraised value
of the underlying collateral discounted as necessary due to reflect managements estimates of
changes in economic conditions.
The carrying amount and estimated fair value of the Companys financial instruments at June
30, 2010 and December 31, 2009 were as follows:
June 30, 2010 | December 31, 2009 | |||||||||||||||
Carrying | Carrying | |||||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
(Dollars In Thousands) | ||||||||||||||||
Financial Assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 130,820 | $ | 130,820 | $ | 84,300 | $ | 84,300 | ||||||||
Securities available-for-sale |
48,277 | 48,277 | 44,955 | 44,955 | ||||||||||||
Restricted equity securities |
2,694 | 2,694 | 2,694 | 2,694 | ||||||||||||
Loans, net |
546,120 | 544,794 | 599,334 | 596,516 | ||||||||||||
Accrued interest receivable |
2,673 | 2,673 | 3,104 | 3,104 | ||||||||||||
Financial Liabilities: |
||||||||||||||||
Deposits |
$ | 749,311 | $ | 753,484 | $ | 734,789 | $ | 739,833 | ||||||||
Other borrowings |
22,000 | 22,145 | 22,000 | 21,243 | ||||||||||||
Accrued interest payable |
570 | 570 | 532 | 532 |
NOTE 5. SECURITIES AVAILABLE-FOR-SALE
The amortized cost and fair value of securities available-for-sale with gross unrealized gains
and losses are summarized below:
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
June 30, 2010: |
||||||||||||||||
U.S. Government-sponsored
Enterprises (GSEs) |
$ | 14,795,058 | $ | 104,269 | $ | | $ | 14,899,327 | ||||||||
Mortgage-backed securities
GSE residential |
25,625,250 | 319,586 | | 25,944,836 | ||||||||||||
State, county and municipals |
5,224,004 | 8,568 | (246,229 | ) | 4,986,343 | |||||||||||
Corporate securities |
2,538,746 | | (92,651 | ) | 2,446,095 | |||||||||||
$ | 48,183,058 | $ | 432,423 | $ | (338,880 | ) | $ | 48,276,601 | ||||||||
December 31, 2009: |
||||||||||||||||
U.S. Government-sponsored
Enterprises (GSEs) |
$ | 1,500,000 | $ | | $ | (16,406 | ) | $ | 1,483,594 | |||||||
Mortgage-backed securities
GSE residential |
35,043,311 | 215,528 | (294,669 | ) | 34,964,170 | |||||||||||
State, county and municipals |
6,389,224 | 18,909 | (309,052 | ) | 6,099,081 | |||||||||||
Corporate securities |
2,541,724 | | (133,222 | ) | 2,408,502 | |||||||||||
$ | 45,474,259 | $ | 234,437 | $ | (753,349 | ) | $ | 44,955,347 | ||||||||
Securities with a carrying value of $10,554,028 and $7,760,242 as of June 30,
2010 and December 31, 2009, respectively, were pledged to secure public deposits and for other
purposes required or permitted by law.
12
Table of Contents
Temporarily Impaired Securities
The following table shows the gross unrealized losses and fair value of the Companys
available-for-sale investments with unrealized losses that are not deemed to be
other-than-temporarily impaired, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position.
June 30, 2010 | ||||||||||||||||||||||||
Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
Description of Securities |
||||||||||||||||||||||||
U.S. Government-sponsored
enterprises (GSEs) |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
Mortgage-backed securities
GSE residential |
| | | | | | ||||||||||||||||||
State, county and municipals |
1,027,547 | (12,285 | ) | 1,998,849 | (233,944 | ) | 3,026,396 | (246,229 | ) | |||||||||||||||
Corporate securities |
1,516,095 | (22,651 | ) | 930,000 | (70,000 | ) | 2,446,095 | (92,651 | ) | |||||||||||||||
Total temporarily impaired securities |
$ | 2,543,642 | $ | (34,936 | ) | $ | 2,928,849 | $ | (303,944 | ) | $ | 5,472,491 | $ | (338,880 | ) | |||||||||
December 31, 2009 | ||||||||||||||||||||||||
Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Fair | Unrealized | ||||||||||||||||||||
Value | Losses | Value | Unrealized Losses | Value | Losses | |||||||||||||||||||
Description of Securities |
||||||||||||||||||||||||
U.S. Government-sponsored
enterprises (GSEs) |
$ | 1,483,594 | $ | (16,406 | ) | $ | | $ | | $ | 1,483,594 | $ | (16,406 | ) | ||||||||||
Mortgage-backed securities
GSE residential |
24,022,030 | (294,669 | ) | | | 24,022,030 | (294,669 | ) | ||||||||||||||||
State, county and municipals |
1,236,523 | (22,342 | ) | 2,445,005 | (286,710 | ) | 3,681,528 | (309,052 | ) | |||||||||||||||
Corporate securities |
930,000 | (70,000 | ) | 1,478,502 | (63,222 | ) | 2,408,502 | (133,222 | ) | |||||||||||||||
Total temporarily impaired securities |
$ | 27,672,147 | $ | (403,417 | ) | $ | 3,923,507 | $ | (349,932 | ) | $ | 31,595,654 | $ | (753,349 | ) | |||||||||
The amortized cost and fair value of debt securities as of June 30, 2010 by contractual
maturity are shown on the following page. Actual maturities may differ from contractual maturities
of mortgage-backed securities because the mortgages underlying the securities may be called or
repaid without penalty. Therefore, these securities are not included in the maturity categories in
the following summary.
Amortized | Fair | |||||||
Cost | Value | |||||||
Five to Ten Years |
$ | 7,550,000 | $ | 7,600,456 | ||||
After ten years |
15,007,808 | 14,731,309 | ||||||
Mortgage-backed securities |
25,625,250 | 25,944,836 | ||||||
$ | 48,183,058 | $ | 48,276,601 | |||||
13
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The gross gains and losses realized by the Company from sales of available-for-sale
securities for the three and six-months ended June 30, 2010 and 2009, respectively, were as
follows:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Gross gains realized |
$ | 145,623 | $ | 10,739 | $ | 371,942 | $ | 721,331 | ||||||||
Gross losses realized |
| | | | ||||||||||||
Net realized gains |
$ | 145,623 | $ | 10,739 | $ | 371,942 | $ | 721,331 | ||||||||
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
The following is managements discussion and analysis of certain significant factors which
have affected our financial position and operating results during the periods included in the
accompanying consolidated financial statements.
Overview
We experienced a net loss for the six-months ended June 30, 2010 of $5,943,167, or $0.42 per
share. This compares to a net loss of $4,331,631 for the second quarter of 2009, or $0.35 per
share. The net loss for the first six months of 2009 was mitigated by an income tax benefit of
$2,657,218. Due to our recent significant losses, we will not be able to record any further tax
benefits unless and until we can show that it is more likely than not that we will realize such
benefits.
Our net loss for the three months ended June 30, 2010 was $4.4 million, or $0.31 per share,
compared to a net loss of $3.2 million, or $0.25 per share, for the three months ended June 30,
2009. Our second quarter results reflect continued weak economic conditions, although we believe
that the pace of asset deterioration has slowed considerably when compared to the pace of decline
that we experienced during the last half of 2009.
Our provision for loan losses was $6.6 million for the six months ended June 30, 2010,
compared to $6.3 million for the corresponding period in 2009. Net charge-offs for the first six
months quarter of 2010 totaled $5.3 million compared to $6.4 million for the first six months of
2009. Nonperforming assets of $66.2 million were 8.26% of total assets at June 30, 2010, compared
to 7.88% at December 31, 2009 and 4.62% at June 30, 2009. Our allowance for loan losses was $14.2
million at June 30, 2010, or 2.53% of total loans, compared to $12.9 million at December 31, 2009,
or 2.10% of total loans.
Our net interest margin was 2.96% for the six months ended June 30, 2010 compared to 2.61% for
the corresponding period in 2009. Our net interest income, even after increased provisions,
increased from $3.5 million for the first six months of 2009 to $4.5 million for the first six
months of 2010. Non-interest income dropped from $2.5 million for the first six months of 2009 to
$2.0 million for the first six months of 2010 due largely to a decline in mortgage origination
income and lower gains on sales of securities. Other expenses were relatively stable from the
first six months of 2009 to the first six months of 2010. Over the last year management has
focused on the reduction or elimination of any non-essential expenses such as directors fees,
social club dues, marketing and certain employee related expenses. As part of that effort,
management eliminated 34 positions and reduced salaries for several executive positions. The
savings achieved from this effort, however, have been offset by increased expenses relating to
foreclosed assets and higher levels of FDIC insurance premiums. Our recent loses ad resulting
declines in capital were primary contributors to our entry into a Consent Order with our
regulators, effective August 11, 2010 (see Consent Order under Item 5 in Part II to this report).
Total assets increased from $792 million at December 31, 2009 to $801 million at June 30,
2010. The increase was primarily attributable to an increase of approximately $46 million in cash
and cash equivalents, funded largely by an increase in deposits, which offset a marginal decline in
loans. This change in the composition of our balance sheet reflects managements intent to
increase liquidity in light of the Banks undercapitalized regulatory status, which among other
things prohibits the Bank from accepting, renewing or rolling over brokered deposits without a
regulatory waiver and also restricts the level of interest rates that the Bank may pay on deposits.
We intend to maintain a high level of liquidity until the economies in the communities we serve
stabilize and our capital position improves.
We believe that our most significant challenges over the foreseeable future are to
improve our capital position, which has been decreased significantly over the last year due to our
losses, and to maintain liquidity. As of June 30, 2010 the Banks tier one leverage ratio stood at
3.51%, down from 7.71% at June 30, 2009 and 4.29% at December 31, 2009. Our viability
depends in large part upon our ability to reverse the trend on declining capital and otherwise
comply with our
14
Table of Contents
regulatory requirements. Accordingly, we are actively exploring all strategic options to
improve our capital, including the potential sale of equity securities.
Critical Accounting Policies
The accounting and financial policies of the Company conform to accounting principles
generally accepted in the United States and to general practices within the banking industry. To
prepare consolidated financial statements in conformity with accounting principles generally
accepted in the United States, management makes estimates and assumptions based on available
information. These estimates and assumptions affect the amounts reported in the financial
statements and the disclosures provided, and future results could differ. The allowance for loan
losses, valuation of foreclosed real estate and fair value of financial instruments are
particularly significant to us and subject to change. Information concerning our accounting
policies with respect to these items is available in Item 6, Managements Discussion and Analysis
of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2009 as filed with the SEC on April 15, 2010.
Liquidity and Capital Resources
Our primary sources of liquidity are our deposits, the scheduled repayments on our loans, and
interest and maturities of our investments. All securities have been classified as available for
sale, which means they are carried at fair value with unrealized gains and losses excluded from
earnings and reported as a separate component of other comprehensive income (loss). If necessary,
we have the ability to sell a portion of our unpledged investment securities to manage interest
sensitivity gap or liquidity. Our pledged securities totaled $10.6 million at June 30, 2010 as
compared to $7.8 million at December 31, 2009. Cash and due from banks and interest-bearing
deposits in banks may also be utilized to meet liquidity needs. Due to our undercapitalized
status, we are unable to accept, rollover, or renew any brokered deposits. The Company has $36.5
million of brokered deposits maturing in the next twelve months and as these brokered deposits
mature it could create a strain on liquidity. We are also currently prohibited from paying yields
for deposits in excess of 75 basis points above a published national average rate for deposits of
comparable maturity unless the FDIC permits the use of a higher local market rate. Banks in the
state of Georgia are currently deemed by the FDIC to be in a high interest rate market. As a
result we are allowed to analyze the average interest rate in each of our markets and are limited
to offering rates no more than 75 basis points above this average. This analysis occurs on a
weekly basis and the FDIC may at anytime revoke their high rate designation for any or all of our
markets. Such rate restrictions could negatively impact our ability to attract or maintain
deposits and therefore may negatively affect our liquidity. Based on current and expected
liquidity needs and sources, however, management expects to be able to meet obligations at least
for the foreseeable future.
We are subject to minimum capital standards as set forth by federal bank regulatory agencies.
Our capital for regulatory purposes differs from our equity as determined under generally accepted
accounting principles. Generally, Tier 1 regulatory capital will equal capital as determined
under generally accepted accounting principles less any unrealized gains or losses on securities
available for sale while Tier 2 capital includes the allowance for loan losses up to certain
limitations. Total risk based capital is the sum of Tier 1 and Tier 2 capital. Our capital ratios
at June 30, 2010 and the required minimums (including the requirements under the Banks consent
order) are shown below.
Tier 1 Leverage | Tier 1 Risk-based | Total Risk-based | ||||||||||
Minimum regulatory requirement |
4.00 | % | 4.00 | % | 8.00 | % | ||||||
Minimum regulatory requirement for well capitalized status |
5.00 | % | 6.00 | % | 10.00 | % | ||||||
Minimum regulatory requirement under consent order |
8.00 | % | 6.00 | % | 10.00 | % | ||||||
Actual ratios at June 30, 2010 |
||||||||||||
FGBC Bancshares, Inc. |
3.50 | % | 5.09 | % | 6.35 | % | ||||||
First Georgia Banking Company |
3.51 | % | 5.10 | % | 6.36 | % |
As of June 30, 2010, the Company and the Bank were undercapitalized, primarily due to the net
loss recorded for the year ended December 31, 2009 and for the first six months of 2010. As a
result, we are prohibited from directly or indirectly accepting, renewing or rolling over any
brokered deposits. In addition, as an undercapitalized Bank we are required to comply with
additional operating restrictions, including having to submit a plan to restore the Bank to an
acceptable capital category. Failure to adequately comply could eventually allow the banking
regulators to appoint a receiver or conservator of our net assets. Our total capital also has an
important effect on the amount of FDIC insurance premiums paid as institutions considered
undercapitalized are subject to higher rates for FDIC insurance. Significant additional
restrictions can be imposed on FDIC-insured depository institutions that fail to meet applicable
capital requirements. These matters are a major focus of the attention and efforts of the Board of
Directors and management. Please see Supervision and Regulation Capital Adequacy within
Item 1 of our Annual Report on Form 10-K filed with
15
Table of Contents
the Securities and Exchange Commission on April 15, 2010 for a more complete discussion of
regulatory capital requirements.
Off-Balance Sheet Risk
We are a party to financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of our customers. These financial instruments include
commitments to extend credit and standby letters of credit. Such commitments involve, to varying
degrees, elements of credit risk and interest rate risk in excess of the amount recognized in the
balance sheets.
Our exposure to credit loss in the event of nonperformance by the other party to the financial
instrument for commitments to extend credit and standby letters of credit is represented by the
contractual amount of those instruments. We use the same credit policies in making commitments and
conditional obligations as we do for on-balance sheet instruments. A summary of our commitments is
as follows:
June 30, 2010 | ||||
(Dollars in Thousands) | ||||
Commitments to extend credit |
$ | 26,519 | ||
Letters of credit |
868 | |||
$ | 27,387 | |||
Commitments to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The amount of collateral obtained, if deemed necessary by us upon
extension of credit, is based on our credit evaluation of the customer.
Standby letters of credit are conditional commitments issued by us to guarantee the
performance of a customer to a third party. Those letters of credit are primarily issued to
support public and private borrowing arrangements. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loans to customers. Collateral is
required in instances which we deem necessary.
Financial Condition
The following is a summary of our balance sheets at the dates indicated:
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
(Dollars in Thousands) | ||||||||
Cash and due from banks |
$ | 17,942 | $ | 15,753 | ||||
Interest-bearing deposits in banks |
112,878 | 68,547 | ||||||
Securities, available-for-sale |
48,277 | 44,955 | ||||||
Restricted equity securities, at cost |
2,694 | 2,694 | ||||||
Loans, net |
546,120 | 599,334 | ||||||
Premises and equipment |
36,216 | 37,046 | ||||||
Foreclosed assets |
30,012 | 13,741 | ||||||
Accrued interest receivable |
2,673 | 2,930 | ||||||
Other assets |
4,719 | 7,201 | ||||||
$ | 801,531 | $ | 792,201 | |||||
Deposits |
$ | 749,312 | $ | 734,789 | ||||
Other borrowings |
22,000 | 22,000 | ||||||
Accrued interest payable |
570 | 532 | ||||||
Other liabilities |
858 | 502 | ||||||
Stockholders equity |
28,791 | 34,378 | ||||||
$ | 801,531 | $ | 792,201 | |||||
Our total assets increased by $9,330,200, or 1.18%, to $801,530,807 for the first six
months of 2010 as compared to December 31, 2009, which is due primarily to an increase of
$46,520,016 in cash and interest-bearing deposits in banks, $16,271,661 in foreclosed assets and
$3,321,254 in securities available-for-sale combined with a decrease in net loans of $53,213,962.
These changes reflect managements intent to increase liquidity due to our undercapitalized
regulatory status
16
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and shrink the loan portfolio. Changes to premises and equipment, accrued interest receivable
and other assets were not significant for these same periods.
For the first six months of 2010 as compared to December 31, 2009, total liabilities increased
by $14,916,521, or 1.97%, primarily due to a $5,712,260 increase in interest-bearing deposits and a
$8,809,943 increase in non-interest bearing deposits. The balance in FHLB borrowed funds did not
change from December 31, 2009 and changes to other liabilities and accrued interest payable were
not significant. Stockholders equity decreased by $5,586,321 due to a $5,943,167 loss for the
first six months of 2010, an increase in other comprehensive gain of $415,269, treasury stock of
$153,041 and an increase to common stock of $94,617 as we recognized stock compensation expense.
Results of Operations for the Three and Six Months Ended June 30, 2010 and 2009
The following is a summary of our operations for the periods indicated:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(Dollars in Thousands) | ||||||||||||||||
Interest income |
$ | 8,869 | $ | 10,043 | $ | 17,965 | $ | 20,290 | ||||||||
Interest expense |
(3,384 | ) | (4,762 | ) | (6,824 | ) | (10,581 | ) | ||||||||
Net interest income |
5,485 | 5,281 | 11,141 | 9,709 | ||||||||||||
Provision for loan losses |
(4,348 | ) | (4,332 | ) | (6,619 | ) | (6,251 | ) | ||||||||
Other income |
1,040 | 922 | 2,031 | 2,495 | ||||||||||||
Other expense |
(6,540 | ) | (6,957 | ) | (12,496 | ) | (12,942 | ) | ||||||||
Pretax income (loss) |
(4,363 | ) | (5,086 | ) | (5,943 | ) | (6,989 | ) | ||||||||
Income tax expense
(benefit) |
| (1,930 | ) | | (2,657 | ) | ||||||||||
Net income (loss) |
$ | (4,363 | ) | $ | (3,156 | ) | $ | (5,943 | ) | $ | (4,332 | ) | ||||
Our net interest income for the six months ended June 30, 2010 was $11,141,571, which is
an increase of $1,432,260, or 14.75%, as compared to the same period for 2009. Between the fourth
quarter of 2007 and the first quarter of 2009 we experienced compression in our net interest margin
due to a falling interest rate environment and stiff competition for deposits. Since the first
quarter of 2009, however, we have seen general improvement in our net interest margin, due to a
combination of our loan yields increasing and deposits repricing to lower rates. Our quarterly net
interest margins for the last two years are as follows:
Period | Net interest margin | |||
June, 2010 |
2.96 | % | ||
March, 2010 |
3.01 | % | ||
December, 2009 |
2.88 | % | ||
September, 2009 |
2.83 | % | ||
June, 2009 |
2.61 | % | ||
March, 2009 |
2.32 | % | ||
December, 2008 |
2.88 | % | ||
September, 2008 |
3.08 | % |
Provision and Allowance for Loan Losses
The allowance for loan losses is established through charges to earnings in the form of a
provision for loan losses. When a loan or portion of a loan is determined to be uncollectible, the
amount deemed uncollectible is charged against the allowance and subsequent recoveries, if any, are
credited to the allowance.
The allowance is an amount that we believe will be adequate to absorb estimated losses
relating to specifically identified loans, as well as probable credit losses inherent in the
balance of the loan portfolio, based on a periodic evaluation. While we use the best information
available to make our evaluation, future adjustments to the allowance may be necessary if there are
any significant changes in economic conditions. In addition, regulatory agencies, as an integral
part of their examination process, periodically review our allowance for loan losses, and may
require us to make additions to the allowance based on their judgment about information available
to them at the time of their examinations.
We determine the allowance for loan loss by first dividing the loan portfolio into two major
categories: (1) satisfactory and past due loans plus loans classified substandard, but not impaired
and (2) impaired loans. For purposes of
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evaluation, satisfactory and past due loans are further segmented into the following
categories: 1-4 family residential construction, other construction, farmland, 1-4 residential -
revolving, 1-4 residential 1st liens, 1-4 residential Jr. liens, multifamily, owner-occupied
non-farm non-residential, other non-farm non-residential, commercial and industrial, consumer
installment, and other. A percentage allocation is also assigned to the loans classified as
substandard and doubtful that are not impaired or are under $200,000 and impaired. We apply our
historical trend loss factors to each category and adjust these percentages for qualitative or
environmental factors, as discussed below. Because of the deterioration in the economy and real
estate markets over the past several years, we use a two-year internal trending analysis in
calculating our general reserve, versus the three-year internal and peer-based averages we had
relied on in the past. Loan loss reserves are calculated primarily based upon this historical loss
experience by segment and adjusted for qualitative factors including changes in the nature and
volume of the loan portfolio, overall portfolio quality, changes in levels of non-performing loans,
significant shifts in real estate values, changes in levels of collateralization, trends in staff
lending experience and turnover, loan concentrations and current economic conditions that may
affect the borrowers ability to pay.
A loan is generally classified as impaired, based on current information and events, if it is
probable that we will be unable to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. Impaired loans are measured by either
the present value of expected future cash flows discounted at the loans effective interest rate,
the loans obtainable market price, or the fair value of the collateral if the loan is collateral
dependent. A substantial portion of our impaired loans are collateral dependent, which in the past
was included in our allowance for loan losses. New appraisals continue to show declining real
estate values as compared to previous levels thus we have experienced losses upon disposal of these
assets. The process of updating appraisals on collateral dependent troubled debt restructurings
(TDRs) and nonaccrual loans previously included in our calculations have confirmed losses and
accelerated charge-offs into 2009 through subsequent events. Significant individual credits
classified as substandard within our credit grading system that are determined to be impaired
require both individual analysis and specific allocation. Loans in the substandard category are
characterized by deterioration in quality exhibited by any number of well-defined weaknesses
requiring corrective action, such as declining or negative earnings trends and declining or
inadequate liquidity. Impaired loans with balances in excess of $200,000 are evaluated
individually, while impaired loans with balances of $200,000 or less are evaluated as a group. No
additional funds are committed to be advanced in connection with impaired loans.
Generally, for collateral-dependent loans, current market appraisals are ordered to estimate
the current fair value of the collateral. During our most recent regulatory examination, we had
appraisals prepared and reviewed on a large number of our residential and commercial
collateral-dependent loans. However, in situations where a current market appraisal is not
available, management uses the best available information (including recent appraisals for similar
properties, communications with qualified real estate professionals, information contained in
reputable trade publications and other observable market data) to estimate the current fair value.
In these situations, valuations based on our internal calculations have generally been consistent
with the valuations determined by appraisals on similar properties and as such, management believes
the internal valuations can be reasonably relied upon for valuation purposes. The estimated costs
to sell the subject property, if any, are then deducted from the estimated fair value to arrive at
the net realizable value of the loan and to determine the specific reserve on each impaired loan
reviewed.
Our analysis of impaired loans and their underlying collateral values has revealed the
continued deterioration in the level of property values, as well as reduced borrower ability to
make regularly scheduled payments. Loans in our residential land development and construction
portfolios are secured by unimproved and improved land, residential lots, and single-family and
multi-family homes. Generally, current lot sales by the developers and/or borrowers are taking
place at a greatly reduced pace and at reduced prices. As home sales volumes have declined, income
of residential developers, contractors and other real estate-dependent borrowers has also been
reduced. This difficult operating environment, along with the additional loan carrying time, has
caused some borrowers to exhaust payment sources. Within the last several months, several of our
clients have reached the point where payment sources have been exhausted.
The general reserve estimate is then added to the specific allocations made to determine the
amount of the total allowance for loan losses. The allocation of the allowance to the respective
loan categories is an approximation and not necessarily indicative of future losses. The entire
allowance is available to absorb losses occurring in the loan portfolio. We regularly monitor
trends with respect to non-accrual, restructured and potential problems loans. We have been in the
current economic cycle for an extended period thus allowing for current negative environmental
factors and market-driven trends inherent in the economy to be reflected in our historical net
charge off ratio. In managements opinion, the loan loss allowance is considered adequate at June
30, 2010.
When a loan first shows signs of weakness we will, if warranted, place the loan on non-accrual
status pending a more complete investigation of the underlying credit quality of the loan and its
collateral. After this investigation, which may include steps such as obtaining an updated
appraisal and a review of the financial condition of the guarantor(s), we will charge-off the
portions of the loans that we deem uncollectible or confirmed through updated appraisals on
collateral dependent loans.
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Table of Contents
The following table summarizes the allocation of the allowance for loan losses to types of
loans as of the indicated dates. The allowance for loan loss allocation is based on a subjective
judgment and estimates and therefore is not necessarily indicative of the specific amounts or loan
categories in which charge-offs may ultimately occur. In addition, there will be allowance amounts
that are allocated based on evaluation of individual loans considered to be impaired by management.
June 30, 2010 | December 31, 2009 | |||||||||||||||
Percentage of loans | Percentage of loans | |||||||||||||||
Amount | in each category | Amount | in each category | |||||||||||||
(Dollars in Thousands) | ||||||||||||||||
Commercial and industrial |
$ | 1,301 | 7.06 | % | $ | 1,281 | 7.19 | % | ||||||||
Real estate construction |
5,026 | 22.54 | % | 4,700 | 24.13 | % | ||||||||||
Real estate mortgage |
7,398 | 66.79 | % | 6,460 | 65.11 | % | ||||||||||
Installment loans to individuals |
456 | 3.61 | % | 438 | 3.57 | % | ||||||||||
$ | 14,181 | 100 | % | $ | 12,879 | 100 | % | |||||||||
Information with respect to non-accrual, past due and restructured loans at June 30,
2010 and December 31, 2009 is as follows:
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
(Dollars in Thousands) | ||||||||
Non-accrual loans |
||||||||
Commercial and industrial |
$ | 3,603 | $ | 3,690 | ||||
Real estate construction |
11,118 | 17,003 | ||||||
Real estate mortgage |
20,898 | 27,734 | ||||||
Installment loans to individual |
599 | 293 | ||||||
Total non-accrual loans |
$ | 36,218 | $ | 48,720 | ||||
Loans contractually past due ninety days or more as to interest
or principal payments and still accruing |
$ | | $ | | ||||
Loans, the terms of which have been renegotiated to provide
a reduction or deferral of interest or principal because of
deterioration in the financial position of the borrower |
||||||||
Commercial and industrial |
$ | | $ | 89 | ||||
Real estate construction |
| | ||||||
Real estate mortgage |
| 464 | ||||||
Installment loans to individual |
| | ||||||
Total restructured loans |
$ | | $ | 553 | ||||
Loans now current about which there are serious doubts as to
the ability of the borrower to comply with present loan
repayment terms (potential problem loans) |
||||||||
Commercial and industrial |
$ | | $ | | ||||
Real estate construction |
| | ||||||
Real estate mortgage |
| | ||||||
Installment loans to individual |
| | ||||||
Total potential problem loans |
$ | | $ | | ||||
Interest income that would have been recorded on non-accrual
loans under original terms |
$ | 1,278 | ||||||
Interest income that was recorded on non-accrual loans |
388 | |||||||
Reduction in interest income |
$ | 890 | ||||||
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The economic downturn, and particularly the weak real estate markets, have led to
increased delinquencies and charge-offs. The weakened real estate market affects several segments
of borrowers: 1) builders and acquisition / development customers who are not able to sell their
inventory and thus cannot generate cash flow to make loan payments; 2) owners of commercial
property who are unable to lease or rent their properties and thus suffer from a lack of cash flow
and 3) consumers who have lost equity in their residences related to foreclosures and are unable to
access this liquidity source or refinance into lower rate mortgages. Increased unemployment rates
in our market areas have increased our non-performing loans because borrowers no longer have the
necessary cash flow to pay their loan obligations. Current economic forecasts indicate a weak
recovery for 2010 thus no substantial improvement in non-accrual, past due and potential problem
loans is expected for the foreseeable future.
Loans greater than 90 days past due are automatically placed on non-accrual status.
Additionally, we may place loans that are not greater than 90 days past due on non-accrual status
if we determine that the full collection of principal and interest comes into doubt. In making
that determination we consider all of the relevant facts and circumstances and take into
consideration the judgment of responsible lending officers, our loan committee and the regulatory
agencies that review the loans as part of their regular examination process. If we determine that
a larger allowance to loan losses is necessary then we will make an increase to the allowance
through a provision.
At June 30, 2010, we had $36,217,700 of non-accrual loans, which is a decrease of $12,502,677
from December 31, 2009. The decrease is primarily the result of loans being charged-off or
collateral related to these loans being foreclosed upon and moving into other real estate. Our
level of foreclosed assets increased from $13.7 million at December 31, 2009 to $30.0 million at
June 30, 2010. This process caused the level of our non-accrual real estate mortgage and real
estate construction loans to decrease by approximately $6.8 million and $5.8 million,
respectively, while our non-accrual installment loans increased by $306,000 during the first six
months of 2010. Non-accrual commercial and industrial loans also decreased by $87,000. At June 30,
2010, no accrued interest on non-accrual loans had been recognized.
Our non-accrual loans by geographic market are shown in the following table as of June 30,
2010 and December 31, 2009.
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
(Dollars in Thousands) | ||||||||
Bremen |
$ | 9,784 | $ | 8,050 | ||||
Carrollton |
8,630 | 8,553 | ||||||
Villa Rica |
4,653 | 7,399 | ||||||
Dalton |
4,386 | 13,775 | ||||||
Other (8 markets) |
8,765 | 10,943 | ||||||
Total |
$ | 36,218 | 48,720 | |||||
In the opinion of management, any loans classified by regulatory authorities as doubtful,
substandard or special mention that have not been disclosed above do not (1) represent or result
from trends or uncertainties which management reasonably expects will materially impact future
operating results, liquidity, or capital resources, or (2) represent material credits about which
management is aware of any information which causes management to have serious doubts as to the
ability of such borrowers to comply with the loan repayment terms. In the event of non-performance
by the borrower, these loans have collateral pledged which we believe would prevent the recognition
of substantial losses. Any loans classified by regulatory authorities as loss have been charged
off.
Restructured loans are loans for which the terms have been negotiated to provide a reduction
or deferral of interest or principal because of deterioration in the financial position of the
borrower. All such loans are now in non-accrual status.
Potential problem loans are defined as loans about which we have serious doubts as to the
ability of the borrower to comply with the present loan repayment terms and which may cause the
loan to be placed on non-accrual status, to become past due more than ninety days, or to be
restructured.
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Information regarding certain loans and allowance for loan
loss data through June 30, 2010 and 2009 is as follows:
loss data through June 30, 2010 and 2009 is as follows:
Six Months Ended | ||||||||
June 30, | ||||||||
2010 | 2009 | |||||||
(Dollars in Thousands) | ||||||||
Average amount of loans outstanding |
$ | 593,149 | $ | 666,254 | ||||
Balance of allowance for loan losses at beginning of period |
$ | 12,879 | $ | 11,013 | ||||
Loans charged off |
||||||||
Commercial and industrial |
(94 | ) | (383 | ) | ||||
Real estate construction |
(1,371 | ) | (3,395 | ) | ||||
Real estate mortgage |
(3,848 | ) | (2,380 | ) | ||||
Installment loans to individuals |
(272 | ) | (311 | ) | ||||
(5,585 | ) | (6,469 | ) | |||||
Loans recovered |
||||||||
Commercial and industrial |
35 | 5 | ||||||
Real estate construction |
97 | 5 | ||||||
Real estate mortgage |
96 | 2 | ||||||
Installment loans to individuals |
40 | 12 | ||||||
268 | 24 | |||||||
Net charge-offs |
(5,317 | ) | (6,445 | ) | ||||
Additions to allowance charged to operating expense during period |
6,619 | 6,251 | ||||||
Balance of allowance for loan losses at end of period |
$ | 14,181 | $ | 10,819 | ||||
Ratio of net loans charged off during the period to
average loans outstanding |
.90 | % | .97 | % | ||||
Foreclosed Assets
The following table summarizes the composition of our foreclosed assets as of June 30, 2010
and December 31, 2009.
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
(Dollars in Thousands) | ||||||||
Raw land |
$ | 11,360 | $ | 6,618 | ||||
1-4 family residential |
7,685 | 4,560 | ||||||
Subdivision lots |
5,177 | 1,794 | ||||||
Commercial real estate |
2,757 | 704 | ||||||
Multifamily |
2,512 | | ||||||
Farmland |
481 | | ||||||
Other repossessed assets |
40 | 65 | ||||||
Total |
$ | 30,012 | $ | 13,741 | ||||
The following table summarizes the geographic distribution of our foreclosed assets as of June
30, 2010 and December 31, 2009.
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
(Dollars in Thousands) | ||||||||
Dalton |
$ | 11,207 | $ | 1,395 | ||||
Villa Rica |
7,682 | 5,885 | ||||||
Carrollton |
4,159 | 2,248 | ||||||
Jefferson |
2,959 | 1,524 | ||||||
Other (8 markets) |
4,005 | 2,689 | ||||||
Total |
$ | 30,012 | $ | 13,741 | ||||
At December 31, 2009 we had foreclosed assets of $13,740,602. In 2010 we transferred
$21,993,753 of loans into foreclosed assets (see the Supplemental Disclosures section of our
Statement of Cash Flows for the six months ended June 30, 2010). We had $33,498 of additional
expense to complete pieces of real estate and wrote-down the carrying value by $652,484. We
subsequently sold for cash $3,839,944 and internally financed $915,088 of these assets incurring
$348,074 of gain on sale, as noted in the other expenses section of the Consolidated Statement of
Operations.
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We continue to hold foreclosed assets valued at $30,012,262. Our Carrollton and Villa Rica
(Carroll County), Jefferson (Jackson County), and Dalton (Whitfield County), Georgia markets
account for $26,007,597, or 86.66% of our foreclosed assets. These properties are being actively
marketed and maintained with the primary objective of liquidating the collateral at a level which
most accurately approximates fair market value and allows recovery of as much of the unpaid
principal balance as possible in a reasonable period of time. In determining the carrying amount
at June 30, 2010 we have taken into account the recent trend of declining real estate values.
Although this trend has not reversed, we believe that the pace of the decline is slowing. Based on
our assumptions, we believe that the carrying value of our foreclosed assets at June 30, 2010 is
reasonable. However, if our assumptions prove incorrect, we may have to take further write downs
on our foreclosed properties. Because of the recent lack of stability in our markets, we believe
that the range of possible outcomes relating to our foreclosed property is greater than usual.
Other Income and Expenses
Other income decreased by $464,894 (or 18.63%) for the six months ended June 30, 2010 as
compared to the same period in 2009. We had a $349,390 (or 48.44%) decrease in the net gain on
sale of securities available-for-sale for the first six months of 2010 as compared to the same
period in 2009. We experienced a $287,314 (or 45.13%) decrease in mortgage origination fees as
compared to the same period in 2009 due to a continued decline in applications. Our other
operating income increased by $119,350 (or 82.42%) during the first six months of 2010 when
compared to the corresponding period in 2009 primarily from rental income on our foreclosed assets.
We had a slight increase of $33,120 (or 3.34%) in service charges on deposit accounts compared to
the same period in 2009 mostly due to an increase in debit card fee income. For the first six
months of 2010 as compared to the same period in 2009 we had a $19,340 increase in the net gain on
sale of premises and equipment.
Other expenses decreased by $446,634 (or 3.45%) for the six months ended June 30, 2010 as
compared to the same period in 2009. Several categories of expenses showed appreciable decreases
while other areas experienced noticeable increases as compared to the same period in the preceding
year. Areas which had decreases include salaries and employee benefits which decreased $1,198,799
(or 19.89%), other operating expenses which decreased by $189,046 (or 7.20%), equipment and
occupancy expenses which decreased by a $182,505 (or 10.82%) and net loss on sale of foreclosed
assets which had a small decrease of $9,313 (or 3.19%). The decrease in salaries and employee
benefits expenses is due to three reduction-in-force plans which eliminated 34 positions across the
company and reduced salaries for several other positions towards the end of 2008 and in 2009. The
number of full-time equivalent employees further decreased from 167 at December 31, 2009 to 158 on
June 30, 2010. Our other operating expenses and equipment and occupancy expenses have also
decreased as management has aggressively worked to eliminate all non-essential expenses during
this continuing difficult economic period.
In contrast to the above noted decreases, we saw several areas move the opposite direction
such as FDIC insurance premiums, which increased by $446,131 (or 38.19%) for the six months ended
June 30, 2010 as compared to the same period in 2009. This increase is mainly due to the large
number of unaffiliated FDIC insurance depository institution failures and the corresponding
increase in assessments along with an increase in the rates specific to our institutions risk
profile. Foreclosed asset expenses also increased by $591,661 (or 100.71%) for the six months
ended June 30, 2010 as compared to 2009. This category includes items such as property taxes,
legal and utility expenses that we incur to gain possession and maintain our foreclosed properties.
For the six months ending June 30, 2010 we recorded no income tax expense or benefit as
compared to a $2,657,218 tax benefit for the same period in 2009. During the third and fourth
quarter of 2009, due to our significant losses, management was unable to conclude that Bank would
generate sufficient net income in the near term to realize the full value of our deferred tax
assets. Therefore, as of December 31, 2009 we had established a $16.3 million deferred tax asset
valuation allowance. At June 30, 2010 our deferred tax asset valuation allowance balance was $17.0
million. Any further losses will not have an associated tax benefit unless and until we can show
that it is more likely than not that we will realize those tax benefits.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
It is our objective to manage assets and liabilities to provide a satisfactory, consistent
level of profitability within the framework of established cash, loan, investment, borrowing, and
capital policies. Certain of our officers are charged with the responsibility for monitoring
policies and procedures that are designed to ensure acceptable composition of the asset/liability
mix.
Our asset/liability mix is monitored on a regular basis with a report reflecting the interest
rate sensitive assets and interest rate sensitive liabilities being prepared and presented to the
board of directors and managements asset/liability committee on a quarterly basis. The objective
is to monitor interest rate sensitive assets and liabilities so as to minimize the impact of
substantial movements in interest rates on earnings. An asset or liability is considered to be
interest rate sensitive if it will reprice or mature within the time period analyzed, usually one
year or less. The interest rate-sensitivity gap is the difference between the interest-earning
assets and interest-bearing liabilities scheduled to mature or reprice
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within such time period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds the interest rate sensitive
assets. During a period of rising interest rates, a negative gap would tend to adversely affect
net interest income, while a positive gap would tend to result in an increase in net interest
income. Conversely, during a period of falling interest rates, a negative gap would tend to result
in an increase in net interest income, while a positive gap would tend to adversely affect net
interest income. If our assets and liabilities were equally flexible and moved concurrently, the
impact of any increase or decrease in interest rates on net interest income would be minimal.
A simple interest rate gap analysis by itself may not be an accurate indicator of how net
interest income will be affected by changes in interest rates. Accordingly, we also evaluate how
the repayment of particular assets and liabilities is impacted by changes in interest rates.
Income associated with interest-earning assets and costs associated with interest-bearing
liabilities may not be affected uniformly by changes in interest rates. In addition, the magnitude
and duration of changes in interest rates may have a significant impact on net interest income.
For example, although certain assets and liabilities may have similar maturities or periods of
repricing, they may react in different degrees to changes in market interest rates. Interest rates
on certain types of assets and liabilities fluctuate in advance of changes in general market rates,
while interest rates on other types may lag behind changes in general market rates. Prepayment and
early withdrawal levels also could deviate significantly from those assumed in calculating the
interest rate gap. The ability of many borrowers to service their debts also may decrease in the
event of an interest rate increase.
The table that follows summarizes our interest sensitive assets and liabilities as of June 30,
2010. Adjustable rate loans are included in the period in which their interest rates are scheduled
to adjust. Fixed rate loans are included in the periods in which they are anticipated to be repaid
based on scheduled maturities and anticipated prepayments. Investment securities are included in
their period of maturity. Certificates of deposit are presented according to contractual maturity.
Analysis of Interest Sensitivity
As of June 30, 2010
(Dollars in Thousands)
As of June 30, 2010
(Dollars in Thousands)
0-3 | 3-12 | Over 1 | ||||||||||||||
Months | Months | Year | Total | |||||||||||||
Interest-earning assets: |
||||||||||||||||
Interest-bearing deposits in banks |
112,878 | | | 112,878 | ||||||||||||
Securities |
| | 48,277 | 48,277 | ||||||||||||
Restricted equity securities |
2,694 | | | 2,694 | ||||||||||||
Federal funds sold |
| | | | ||||||||||||
Loans (1) |
74,213 | 163,365 | 286,431 | 524,009 | ||||||||||||
Total interest-earning assets |
189,785 | 163,365 | 334,708 | 687,858 | ||||||||||||
Interest-bearing liabilities: |
||||||||||||||||
Interest-bearing demand deposits |
70,820 | | | 70,820 | ||||||||||||
Savings and money markets |
148,450 | | | 148,450 | ||||||||||||
Time deposits |
96,861 | 298,033 | 88,673 | 483,567 | ||||||||||||
Federal Home loan Bank borrowings |
| | 22,000 | 22,000 | ||||||||||||
Total interest-bearing liabilities |
316,131 | 298,033 | 110,673 | 724,837 | ||||||||||||
Interest rate sensitivity gap |
(126,346 | ) | (134,668 | ) | 224,035 | (36,979 | ) | |||||||||
Cumulative interest rate sensitivity gap |
(126,346 | ) | (261,014 | ) | (36,979 | ) | ||||||||||
Interest rate sensitivity gap ratio |
0.60 | 0.55 | 3.02 | |||||||||||||
Cumulative interest rate sensitivity gap ratio |
0.60 | 0.58 | 0.95 | |||||||||||||
(1) | Excludes non-accrual loans totaling approximately $36,217,000 and deferred fees of approximately $75,000. |
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At
June 30, 2010 our cumulative one-year interest rate sensitivity
gap ratio was .58.
Our targeted ratio is 0.8 to 1.2. This indicates that the interest-earning assets will reprice
during this period at a rate slower than the interest-bearing liabilities. Our experience,
however, has been that not all liabilities shown as being subject to repricing will in fact reprice
with changes in market rates. We have a base of core deposits consisting of interest-bearing
checking accounts and savings accounts whose average balances and rates paid thereon will not
fluctuate with changes in the levels of market interest rates.
Item 4. | Controls and Procedures |
Our management carried out an evaluation, under the supervision and with the participation of
our Interim Chief Executive Officer and Chief Financial Officer, of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the
quarterly period covered by this Form 10-Q and based on this evaluation, our Interim Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure controls and
procedures were effective. There were no changes in our internal control over financial reporting
during the second quarter of 2010 that have materially affected, or that are reasonably likely to
materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. | Legal Proceedings |
We are not a party to any material legal proceedings other than ordinary routine litigation
that is incidental to our business.
Item 1A. | Risk Factors |
The Companys business involves a high degree of risk. The following paragraph updates the
risk factors as previously disclosed in Item 1A. to Part I to the Companys Form 10-K filed with
the SEC on April 15, 2010 (the 10-K). The risk factor set forth below should be read together
with the risk factors set forth in the 10-K, which are incorporated herein by reference.
The Bank is currently operating under a consent order and may be unable to meet all of the
steps required to be taken under the order. The failure to do so could result in further
regulatory action and operating restrictions and could threaten the viability of the Bank.
Effective August 11, 2010 the Bank entered into a Stipulation and Consent Agreement with the
Georgia Department of Banking and Financing (the DBF), and acknowledged by the FDIC, agreeing to
the issuance of a Consent Order (the Order). Our future viability is subject to our ability to
successfully operate under the terms of the Order, which requires the Bank to take a number of
affirmative steps including, among other things, achieving and maintaining a tier 1 capital to
total assets ratio of at least 8.0%. In order to comply with these regulatory requirements, we
need to raise substantial additional capital or significantly reduce our asset size. There is no
guarantee that sufficient capital will be available at acceptable terms, if at all, when needed, or
that the Company would be able to sell assets at terms favorable enough to accomplish our
regulatory capital needs. In such event, we may be subject to increased regulatory enforcement
actions and operating restrictions.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
Item 3. | Defaults Upon Senior Securities |
None.
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Item 4. | (Removed and Reserved) |
Item 5. | Other Information |
Appointment of W. Brett Morgan as Permanent CEO
On August 9, 2010 the Company and the Bank each appointed W. Brett Morgan as permanent Chief
Executive Officer. Mr. Morgan joined the Bank as the Senior Lending Officer in March 2008 and
became EVP/Chief Credit Officer in October 2008. On March 19, 2010 Mr. Morgan was appointed
interim CEO of the Company and the Bank. Before joining the Bank Mr. Morgan served for 33 years in
various capacities for Regions Bank, including as City President over the Dothan and Enterprise,
Alabama markets from 2000 through the end of 2007. Mr. Morgans annual base salary, which was
increased to $185,000 effective on January 1, 2010, was not changed in connection with his
appointment as permanent CEO and no other changes to his compensation package have been determined.
Consent Order
Effective August 11, 2010, the Bank voluntarily entered into an agreement with the Georgia
Department of Banking and Finance (the DBF) agreeing to the issuance of a consent order (the
Order). The Order, which was acknowledged by the FDIC, stems from the findings of a joint
regulatory examination of the Bank conducted by the DBF and the FDIC based on the Banks condition
as of September 30, 2009. The Order does not affect the Banks ability to continue to conduct its
banking business with customers in a normal fashion. Banking products and services, hours of
business, internet banking, and ATM usage are unaffected, and our deposits remain insured to the
highest limits set by the FDIC. Furthermore, no fines or penalties were imposed as a part of the
Order.
The Order requires the Bank to implement a number of measures. For example, the Bank must:
have increased participation from its Board; develop a written analysis and assessment of the
Banks management and staffing needs; charge off all assets classified as loss and 50% of all
assets classified as doubtful on the most recent report of examination and on any future report
of examination; eliminate or substantially reduce certain other problem assets within established
timeframes; submit to the DBF and FDIC specific plans for reducing and/or improving adversely
classified assets that exceed $350,000; restrict additional credit to borrowers that have or have
had problem loans at the Bank; implement an independent loan review program that provides for a
periodic review of the Banks loan portfolio and the identification and categorization of problem
credits; maintain an adequate allowance for loan losses; adopt and implement a policy, consistent
with regulatory guidance, limiting the use of loan interest reserves; submit a capital plan that
calls for the Bank to achieve and maintain a tier 1 capital level equal to or exceeding 8% of total
assets and a total risk-based capital ratio equal to or exceeding 10% (the risk-based capital ratio
is a percentage of total risk-weighted assets); adopt and implement a written plan to provide
effective guidance, monitoring, and control over the Banks commercial real estate lending
portfolio; review and revise, as appropriate, the Banks written liquidity policy; formulate and
implement a written plan and comprehensive budget for all categories of income and expense for each
calendar year; eliminate and/or correct all violations of law and regulation as well as any
contraventions of policy which are set out in the report of examination; and limit asset growth to
no more than 10% per year without prior regulatory approval.
The Bank is also restricted from paying cash dividends or bonuses and from accepting, renewing
or rolling over brokered deposits without prior regulatory approval. In addition, the Bank may not
make material changes in its business plan or pay director fees without prior regulatory approval.
Since the time of the exam the Bank has undertaken various initiatives designed to address the
operational challenges that the Bank faces, including the weaknesses identified during the exam. A
number of the measures required by the Order have already been taken. The Banks Board of
Directors is committed to full compliance with the remaining provisions of the Order.
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Item 6. | Exhibits |
The following exhibits are included with this report:
31.1
|
Certificate of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2
|
Certificate of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32
|
Certificate of CEO and CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FGBC BANCSHARES, INC. |
||||
Date: August 13, 2010 | /s/ W. Brett Morgan | |||
W. Brett Morgan | ||||
Principal Executive Officer | ||||
Date: August 13, 2010 | /s/ Teresa L. Martin | |||
Teresa L. Martin | ||||
Chief Financial Officer |
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