Attached files
file | filename |
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EX-32 - EX-32 - TIDELANDS BANCSHARES INC | a10-12876_1ex32.htm |
EX-31.2 - EX-31.2 - TIDELANDS BANCSHARES INC | a10-12876_1ex31d2.htm |
EX-31.1 - EX-31.1 - TIDELANDS BANCSHARES INC | a10-12876_1ex31d1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended June 30, 2010
OR
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 No. 001-33065
TIDELANDS BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
South Carolina |
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02-0570232 |
(State or other jurisdiction |
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(I.R.S. Employer |
of incorporation) |
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Identification No.) |
875 Lowcountry Blvd.
Mount Pleasant, South Carolina 29464
(Address of principal executive offices)
(843) 388-8433
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the 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 x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of larger accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o |
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Accelerated filer o |
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Non-accelerated o |
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Smaller reporting company x |
(do not check if smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date:
4,277,176 shares of common stock, $.01 par value per share, were issued and outstanding as of August 9, 2010.
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Page No. |
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PART I - FINANCIAL INFORMATION |
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Consolidated Balance Sheets - June 30, 2010 (Unaudited) and December 31, 2009 |
3 |
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4 |
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5 |
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Consolidated Statements of Cash Flows - Six months ended June 30, 2010 and 2009 (Unaudited) |
6 |
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7-24 |
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Managements Discussion and Analysis of Financial Condition and Results of Operation |
25-50 |
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51 |
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51 |
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51 |
TIDELANDS BANCSHARES, INC. AND SUBSIDIARY
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June 30, |
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December 31, |
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2010 |
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2009 |
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(Unaudited) |
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(Audited) |
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Assets: |
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Cash and cash equivalents: |
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Cash and due from banks |
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$ |
8,211,232 |
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$ |
2,493,227 |
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Federal funds sold |
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27,665,000 |
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12,500,000 |
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Total cash and cash equivalents |
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35,876,232 |
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14,993,227 |
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Securities available-for-sale |
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37,975,593 |
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229,786,787 |
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Nonmarketable equity securities |
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5,892,650 |
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5,892,650 |
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Total securities |
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43,868,243 |
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235,679,437 |
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Mortgage loans held for sale |
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1,040,090 |
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617,000 |
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Loans receivable |
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465,017,044 |
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485,555,288 |
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Less allowance for loan losses |
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14,781,037 |
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10,048,015 |
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Loans, net |
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450,236,007 |
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475,507,273 |
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Premises, furniture and equipment, net |
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20,734,503 |
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18,802,701 |
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Accrued interest receivable |
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1,875,723 |
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3,283,931 |
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Bank owned life insurance |
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14,129,618 |
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13,856,165 |
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Other real estate owned |
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12,213,281 |
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6,865,461 |
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Other assets |
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4,556,587 |
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6,324,714 |
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Total assets |
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$ |
584,530,284 |
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$ |
775,929,909 |
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Liabilities: |
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Deposits: |
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Noninterest-bearing transaction accounts |
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$ |
15,460,448 |
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$ |
16,971,128 |
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Interest-bearing transaction accounts |
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35,343,848 |
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29,688,124 |
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Savings and money market |
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160,338,097 |
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237,589,561 |
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Time deposits $100,000 and over |
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129,858,953 |
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105,975,461 |
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Other time deposits |
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164,163,884 |
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201,324,905 |
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Total deposits |
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505,165,230 |
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591,549,179 |
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Securities sold under agreements to repurchase |
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20,000,000 |
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60,000,000 |
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Advances from Federal Home Loan Bank |
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9,000,000 |
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65,000,000 |
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Junior subordinated debentures |
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14,434,000 |
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14,434,000 |
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ESOP borrowings |
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1,750,000 |
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2,300,000 |
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Accrued interest payable |
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1,155,339 |
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1,359,861 |
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Other liabilities |
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2,521,805 |
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2,362,125 |
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Total liabilities |
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554,026,374 |
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737,005,165 |
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Commitments and contingencies |
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Shareholders equity: |
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Preferred stock, $.01 par value and liquidation value per share of $1,000, 10,000,000 shares authorized, 14,448 issued and outstanding at June 30, 2010 and December 31, 2009 |
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13,633,276 |
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13,529,660 |
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Common stock, $.01 par value, 10,000,000 shares authorized; 4,277,176 shares issued and outstanding at June 30, 2010 and December 31, 2009 |
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42,772 |
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42,772 |
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Common stock-warrants, 571,821 outstanding at June 30, 2010 and December 31, 2009 |
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1,112,248 |
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1,112,248 |
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Unearned ESOP shares |
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(1,919,694 |
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(2,204,073 |
) |
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Capital surplus |
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43,440,981 |
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43,584,958 |
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Retained deficit |
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(26,135,536 |
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(16,010,476 |
) |
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Accumulated other comprehensive income (loss) |
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329,863 |
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(1,130,345 |
) |
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Total shareholders equity |
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30,503,910 |
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38,924,744 |
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Total liabilities and shareholders equity |
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$ |
584,530,284 |
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$ |
775,929,909 |
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The accompanying notes are an integral part of the consolidated financial statements.
TIDELANDS BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Operations
For the six and three months ended June 30, 2010 and 2009
(Unaudited)
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Six Months Ended |
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Three Months Ended |
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June 30, |
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June 30, |
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2010 |
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2009 |
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2010 |
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2009 |
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Interest income: |
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Loans, including fees |
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$ |
12,425,237 |
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$ |
12,486,519 |
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$ |
6,101,689 |
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$ |
6,349,290 |
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Securities available for sale, taxable |
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4,189,763 |
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4,901,260 |
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1,701,796 |
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1,924,218 |
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Securities available for sale, non-taxable |
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37,723 |
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95,657 |
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15,533 |
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45,091 |
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Federal funds sold |
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37,426 |
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4,129 |
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24,705 |
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602 |
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Other interest income |
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879 |
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2,056 |
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763 |
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1,333 |
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Total interest income |
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16,691,028 |
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17,489,621 |
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7,844,486 |
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8,320,534 |
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Interest expense: |
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Time deposits $100,000 and over |
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1,305,127 |
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1,785,937 |
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633,543 |
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901,774 |
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Other deposits |
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3,720,647 |
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5,494,381 |
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1,660,361 |
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2,639,427 |
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Other borrowings |
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1,781,962 |
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2,165,968 |
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860,838 |
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1,122,102 |
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Total interest expense |
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6,807,736 |
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9,446,286 |
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3,154,742 |
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4,663,303 |
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Net interest income |
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9,883,292 |
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8,043,335 |
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4,689,744 |
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3,657,231 |
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Provision for loan losses |
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9,750,000 |
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7,605,000 |
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6,150,000 |
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5,470,000 |
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Net interest income (loss) after provision for loan losses |
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133,292 |
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438,335 |
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(1,460,256 |
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(1,812,769 |
) |
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Noninterest income (loss): |
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Service charges on deposit accounts |
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22,809 |
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20,283 |
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11,555 |
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10,706 |
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Residential mortgage origination income |
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124,091 |
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261,408 |
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58,125 |
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185,107 |
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Gain on sale of securities available for sale |
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1,347,131 |
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590,683 |
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1,208,289 |
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283,679 |
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Gain (loss) on sale of other real estate owned |
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(112,314 |
) |
(235 |
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(112,547 |
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39,469 |
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Other service fees and commissions |
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261,046 |
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270,310 |
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130,367 |
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136,793 |
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Increase in cash surrender value of BOLI |
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273,452 |
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252,619 |
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140,067 |
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127,939 |
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Loss on extinguishment of debt |
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(1,619,771 |
) |
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(2,019,771 |
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Impairment on nonmarketable equity securities |
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(76,640 |
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(1,640 |
) |
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Other |
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34,380 |
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22,423 |
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21,470 |
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14,677 |
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Total noninterest income (loss) |
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330,824 |
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1,340,851 |
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(562,445 |
) |
796,730 |
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Noninterest expense: |
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Salaries and employee benefits |
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3,959,284 |
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4,016,672 |
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1,919,625 |
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2,045,568 |
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Net occupancy |
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820,713 |
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780,994 |
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414,003 |
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396,445 |
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Furniture and equipment |
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446,144 |
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428,923 |
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235,109 |
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213,325 |
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Other operating |
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4,898,219 |
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2,785,419 |
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3,313,752 |
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1,597,831 |
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Total noninterest expense |
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10,124,360 |
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8,012,008 |
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5,882,489 |
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4,253,169 |
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Loss before income taxes |
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(9,660,244 |
) |
(6,232,822 |
) |
(7,905,190 |
) |
(5,269,208 |
) |
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Income tax benefit |
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(2,127,000 |
) |
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(1,793,000 |
) |
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Net loss |
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(9,660,244 |
) |
(4,105,822 |
) |
(7,905,190 |
) |
(3,476,208 |
) |
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Accretion of preferred stock to redemption value |
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103,616 |
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96,954 |
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51,808 |
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48,477 |
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Preferred dividends accrued |
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363,207 |
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363,207 |
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182,607 |
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182,607 |
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Net loss available to common shareholders |
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$ |
(10,127,067 |
) |
$ |
(4,565,983 |
) |
$ |
(8,139,605 |
) |
$ |
(3,707,292 |
) |
Loss per common share |
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Basic loss per share |
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$ |
(2.48 |
) |
$ |
(1.13 |
) |
$ |
(1.99 |
) |
$ |
(0.92 |
) |
Diluted loss per share |
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$ |
(2.48 |
) |
$ |
(1.13 |
) |
$ |
(1.99 |
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$ |
(0.92 |
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Weighted average common shares outstanding |
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Basic |
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4,087,917 |
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4,044,186 |
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4,085,622 |
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4,044,186 |
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Diluted |
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4,087,917 |
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4,044,186 |
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4,085,622 |
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4,044,186 |
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The accompanying notes are an integral part of the consolidated financial statements.
Consolidated Statements of Changes in Shareholders Equity and Comprehensive Loss
For the six months ended June 30, 2010 and 2009
(Unaudited)
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Preferred Stock |
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Common |
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Common Stock |
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Unearned |
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Capital |
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Retained |
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Accumulated |
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Shares |
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Amount |
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Warrants |
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Shares |
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Amount |
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Shares |
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Surplus |
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(deficit) |
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income (loss) |
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Total |
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Balance, December 31, 2008 |
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14,448 |
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$ |
13,335,752 |
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$ |
1,112,248 |
|
4,277,176 |
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$ |
42,772 |
|
$ |
(2,522,860 |
) |
$ |
43,364,255 |
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$ |
(4,905,419 |
) |
$ |
1,532,684 |
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$ |
51,959,432 |
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Allocation of unearned ESOP shares |
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(118,889 |
) |
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(118,889 |
) |
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Stock based compensation expense |
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|
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|
|
|
259,926 |
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259,926 |
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Preferred stock, dividend paid |
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|
|
|
|
|
|
|
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|
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|
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(292,973 |
) |
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(292,973 |
) |
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Accretion of discount on preferred stock |
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|
|
96,954 |
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|
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(96,954 |
) |
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|
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Repayment of Guarantee of ESOP borrowings |
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|
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|
|
|
|
|
|
|
159,828 |
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|
|
|
|
|
159,828 |
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Net loss |
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|
|
|
|
|
|
|
|
|
|
|
|
|
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(4,105,822 |
) |
|
|
(4,105,822 |
) |
||||||||
Other comprehensive loss, net of taxes of $156,395 |
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|
|
|
|
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|
|
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|
|
|
|
|
|
(255,171 |
) |
(255,171 |
) |
||||||||
Comprehensive loss |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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(4,360,993 |
) |
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Balance, June 30, 2009 |
|
14,448 |
|
$ |
13,432,706 |
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$ |
1,112,248 |
|
4,277,176 |
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$ |
42,772 |
|
$ |
(2,363,032 |
) |
$ |
43,505,292 |
|
$ |
(9,401,168 |
) |
$ |
1,277,513 |
|
$ |
47,606,331 |
|
|
|
|
|
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|
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Balance, December 31, 2009 |
|
14,448 |
|
$ |
13,529,660 |
|
$ |
1,112,248 |
|
4,277,176 |
|
$ |
42,772 |
|
$ |
(2,204,073 |
) |
$ |
43,584,958 |
|
$ |
(16,010,476 |
) |
$ |
(1,130,345 |
) |
$ |
38,924,744 |
|
Allocation of unearned ESOP shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
(207,044 |
) |
|
|
|
|
(207,044 |
) |
||||||||
Stock based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
63,067 |
|
|
|
|
|
63,067 |
|
||||||||
Preferred stock, dividend paid |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(361,200 |
) |
|
|
(361,200 |
) |
||||||||
Accretion of discount on preferred stock |
|
|
|
103,616 |
|
|
|
|
|
|
|
|
|
|
|
(103,616 |
) |
|
|
|
|
||||||||
Repayment of Guarantee of ESOP borrowings |
|
|
|
|
|
|
|
|
|
|
|
284,379 |
|
|
|
|
|
|
|
284,379 |
|
||||||||
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,660,244 |
) |
|
|
(9,660,244 |
) |
||||||||
Other comprehensive income, net of taxes of $894,965 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,460,208 |
|
1,460,208 |
|
||||||||
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,200,036 |
) |
||||||||
Balance, June 30, 2010 |
|
14,448 |
|
$ |
13,633,276 |
|
$ |
1,112,248 |
|
4,277,176 |
|
$ |
42,772 |
|
$ |
(1,919,694 |
) |
$ |
43,440,981 |
|
$ |
(26,135,536 |
) |
$ |
329,863 |
|
$ |
30,503,910 |
|
The accompanying notes are an integral part of the consolidated financial statements.
Consolidated Statements of Cash Flows
For the six months ended June 30, 2010 and 2009
(Unaudited)
|
|
2010 |
|
2009 |
|
||
Cash flows from operating activities: |
|
|
|
|
|
||
Net loss |
|
$ |
(9,660,244 |
) |
$ |
(4,105,822 |
) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
||
Provision for loan losses |
|
9,750,000 |
|
7,605,000 |
|
||
Depreciation and amortization expense |
|
495,687 |
|
477,194 |
|
||
Discount accretion and premium amortization |
|
762,501 |
|
2,420,033 |
|
||
Stock based compensation expense |
|
63,067 |
|
259,926 |
|
||
Proceeds from sale of residential mortgages |
|
5,727,995 |
|
21,740,707 |
|
||
Disbursements for residential mortgages held-for-sale |
|
(6,151,085 |
) |
(23,330,788 |
) |
||
Increase in accrued interest receivable |
|
1,408,207 |
|
188,649 |
|
||
Increase in accrued interest payable |
|
(204,521 |
) |
(675,627 |
) |
||
Increase in cash surrender value of life insurance |
|
(273,452 |
) |
(252,619 |
) |
||
Loss from sale of real estate |
|
112,314 |
|
3,963 |
|
||
Gain from sale of securities available-for-sale |
|
(1,347,131 |
) |
(590,683 |
) |
||
Other than temporary impairment on nonmarketable equity securities |
|
|
|
76,640 |
|
||
Gain from extinguishment of debt |
|
(400,000 |
) |
|
|
||
Decrease in prepaid FDIC assessment |
|
775,633 |
|
|
|
||
Decrease in carrying value of other real estate |
|
1,119,080 |
|
|
|
||
Decrease (increase) in other assets |
|
366,927 |
|
(2,220,548 |
) |
||
Increase (decrease) in other liabilities |
|
(24,532 |
) |
919,694 |
|
||
Net cash provided by operating activities |
|
2,520,446 |
|
2,515,719 |
|
||
Cash flows from investing activities: |
|
|
|
|
|
||
Purchases of securities available-for-sale |
|
(16,168,845 |
) |
(262,046,270 |
) |
||
Proceeds from sales of securities available-for-sale |
|
181,442,131 |
|
46,580,944 |
|
||
Proceeds from calls and maturities of securities available-for-sale |
|
29,477,711 |
|
94,948,730 |
|
||
Net (increase) decrease in loans receivable |
|
6,610,484 |
|
(18,740,638 |
) |
||
Purchase of premises, furniture and equipment, net |
|
(2,427,489 |
) |
(70,549 |
) |
||
Proceeds from sale of other real estate owned |
|
2,246,380 |
|
|
|
||
Net cash provided (used) by investing activities |
|
201,180,372 |
|
(139,327,783 |
) |
||
Cash flows from financing activities: |
|
|
|
|
|
||
Net increase (decrease) in demand deposits, interest-bearing transaction accounts and savings accounts |
|
(73,106,420 |
) |
26,737,407 |
|
||
Net decrease in certificates of deposit and other time deposits |
|
(13,277,529 |
) |
(5,852,358 |
) |
||
Proceeds from securities sold under agreements to repurchase |
|
|
|
52,500,000 |
|
||
Repayments of securities sold under agreements to repurchase |
|
(40,000,000 |
) |
|
|
||
Proceeds from FHLB advances |
|
|
|
40,000,000 |
|
||
Repayments of FHLB advances |
|
(56,000,000 |
) |
|
|
||
Repayment of ESOP borrowings |
|
(150,000 |
) |
(150,000 |
) |
||
Repayment of other borrowings |
|
|
|
(615,837 |
) |
||
Decrease in unearned ESOP shares |
|
77,336 |
|
40,939 |
|
||
Preferred stock - dividends paid |
|
(361,200 |
) |
(292,973 |
) |
||
Net cash provided (used) by financing activities |
|
(182,817,813 |
) |
112,367,178 |
|
||
Net increase (decrease) in cash and cash equivalents |
|
20,883,005 |
|
(24,444,886 |
) |
||
Cash and cash equivalents, beginning of period |
|
14,993,227 |
|
42,846,797 |
|
||
Cash and cash equivalents, end of period |
|
$ |
35,876,232 |
|
$ |
18,401,911 |
|
|
|
|
|
|
|
||
Supplemental cash flow information: |
|
|
|
|
|
||
Income taxes paid |
|
$ |
|
|
$ |
121,582 |
|
Interest paid on deposits and borrowed funds |
|
$ |
7,012,258 |
|
$ |
10,121,913 |
|
Transfer of loans to foreclosed assets |
|
$ |
8,910,782 |
|
$ |
4,258,767 |
|
The accompanying notes are an integral part of the consolidated financial statements.
NOTE 1 - BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with the requirements for interim financial statements and, accordingly, they are condensed and omit disclosures, which would substantially duplicate those contained in the most recent annual report on Form 10-K. The financial statements, as of June 30, 2010 and for the interim periods ended June 30, 2010 and 2009, are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation. Operating results for the six months ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. The financial information as of December 31, 2009 has been derived from the audited financial statements as of that date. For further information, refer to the financial statements and the notes included in the Companys 2009 Annual Report on Form 10-K.
In preparing these financial statements, subsequent events were evaluated through the time the financial statements were issued. Financial statements are considered issued when they are widely distributed to all shareholders and other financial statement users, or filed with the Securities and Exchange Commission. In conjunction with applicable accounting standards, all material subsequent events have been either recognized in the financial statements or disclosed in the notes to the financial statements.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - Tidelands Bancshares, Inc. (the Company) was incorporated on January 31, 2002 to serve as a bank holding company for its subsidiary, Tidelands Bank (the Bank). The Company operated as a development stage company from January 31, 2002 to October 5, 2003. Tidelands Bank commenced business on October 6, 2003. The principal business activity of the Bank is to provide banking services to domestic markets, principally in Charleston, Dorchester, Berkeley, Horry and Beaufort counties in South Carolina. The Bank is a state-chartered commercial bank, and its deposits are insured by the Federal Deposit Insurance Corporation. The consolidated financial statements include the accounts of the parent company and its wholly-owned subsidiary after elimination of all significant intercompany balances and transactions. On February 22, 2006, the Company formed Tidelands Statutory Trust I for the purpose of issuing trust preferred securities. In accordance with current accounting guidance, the Trust is not consolidated in these financial statements. On June 20, 2008, the Company formed Tidelands Statutory Trust II for the purpose of issuing trust preferred securities. In accordance with current accounting guidance, the Trust is not consolidated in these financial statements. As further discussed in Note 19, on December 19, 2008, as part of the Capital Purchase Program established by the U.S. Department of the Treasury under the Emergency Economic Stabilization Act of 2008, the Company issued 14,448 preferred shares and 571,821warrants in return for $14.4 million in cash, to the U.S. Department of Treasury.
Managements Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans, including valuation allowances for impaired loans, and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for losses on loans and foreclosed real estate, management obtains independent appraisals for significant properties. Management must also make estimates in determining the estimated useful lives and methods for depreciating premises and equipment.
While management uses available information to recognize losses on loans and foreclosed real estate, future additions to the allowances may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Banks allowance for losses on loans and valuation of foreclosed real estate. Such agencies may require the Bank to recognize additions to the allowances based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the allowance for losses on loans and valuation of foreclosed real estate may change materially in the near term.
Concentrations of Credit Risk - Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of loans receivable, investment securities, federal funds sold and amounts due from banks.
The Company makes loans to individuals and small businesses for various personal and commercial purposes primarily in the Charleston metropolitan area (which includes Charleston, Dorchester, and Berkeley counties), Horry and Beaufort counties, and additional markets along the South Carolina coast. The Companys loan portfolio is not concentrated in loans to any single borrower or a relatively small number of borrowers. Additionally, management is not aware of any
concentrations of loans to classes of borrowers or industries that would be similarly affected by economic conditions.
In addition to monitoring potential concentrations of loans to particular borrowers or groups of borrowers, industries and geographic regions, management monitors exposure to credit risk from concentrations of lending products and practices such as loans that subject borrowers to substantial payment increases (e.g., principal deferral periods, loans with initial interest-only periods, etc.), and loans with high loan-to-value ratios. Additionally, there are industry practices that could subject the Company to increased credit risk should economic conditions change over the course of a loans life. For example, the Company makes variable rate loans and fixed rate principal-amortizing loans with maturities prior to the loan being fully paid (i.e., balloon payment loans). These loans are underwritten and monitored to manage the associated risks. Therefore, management believes that these particular practices do not subject the Company to unusual credit risk.
The Companys investment portfolio consists principally of obligations of the United States and its agencies or its corporations. In the opinion of management, there is no concentration of credit risk in its investment portfolio. The Company places its deposits and correspondent accounts with and sells its federal funds to high quality institutions. Management believes credit risk associated with correspondent accounts is not significant.
Securities Available-for-Sale - Securities available-for-sale are carried at amortized cost and adjusted to estimated market value by recognizing the aggregate unrealized gains or losses in a valuation account. Aggregate market valuation adjustments are recorded in shareholders equity net of deferred income taxes. Reductions in market value considered by management to be other than temporary are reported as a realized loss and a reduction in the cost basis of the security. The adjusted cost basis of investments available-for-sale is determined by specific identification and is used in computing the gain or loss upon sale.
Nonmarketable Equity Securities - Nonmarketable equity securities include the cost of the Companys investment in the stock of the Federal Home Loan Bank and stock in community bank holding companies. The Federal Home Loan Bank stock has no quoted market value and no ready market exists. Investment in the Federal Home Loan Bank is a condition of borrowing from the Federal Home Loan Bank, and the stock is pledged to collateralize such borrowings. Dividends received on this stock are included as interest income on securities available-for-sale.
Loans Receivable - Loans are stated at their unpaid principal balance. Interest income on loans is computed based upon the unpaid principal balance. Interest income is recorded in the period earned.
The accrual of interest income is generally discontinued when a loan becomes contractually 90 days past due as to principal or interest. Management may elect to continue the accrual of interest when the estimated net realizable value of collateral exceeds the principal balance and accrued interest. A payment of interest on a loan that is classified as nonaccrual is applied against the principal balance. Nonaccrual loans may be restored to performing status when all principal and interest has been kept current for six months and full repayment of the remaining contractual principal and interest is expected.
Loan origination and commitment fees are deferred and amortized to income over the contractual life of the related loans or commitments, adjusted for prepayments, using the straight-line method, which approximates the interest method.
Loans are defined as impaired when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. All loans are subject to these criteria except for smaller balance homogeneous loans that are collectively evaluated for impairment and loans measured at fair value or at the lower of cost or fair value. The Company considers its consumer installment portfolio, credit card loans, and home equity lines as such exceptions.
Impairment of a loan is measured based on the present value of expected future cash flows discounted at the loans effective interest rate or the fair value of the collateral if the loan is collateral dependent. When management determines that a loan is impaired, the difference between the Companys investment in the related loan and the present value of the expected future cash flows, or the fair value of the collateral, is generally charged off with a corresponding entry to the allowance for loan losses. The accrual of interest is discontinued on an impaired loan when management determines the borrower may be unable to meet payments as they become due.
Allowance for Loan Losses - An allowance for loan losses is maintained at a level deemed appropriate by management to provide adequately for known and inherent losses in the loan portfolio. The allowance for loan losses represents an amount which the Company believes will be adequate to absorb probable losses on existing loans that may become uncollectible in the future. The Companys judgment as to the adequacy of the allowance for loan losses is based on a number of assumptions about future events, which the Company believes to be reasonable, but which may or may not prove to be accurate. The Companys determination of the allowance for loan losses is based on evaluations of the collectability of loans, including consideration of factors such as the balance of impaired loans, the quality, mix, and size of the Companys
overall loan portfolio, economic conditions that may affect the borrowers ability to repay, the amount and quality of collateral securing the loans, the Companys historical loan loss experience, and a review of specific problem loans. The Company also considers subjective issues such as changes in the lending policies and procedures, changes in the local/national economy, changes in volume or type of credits, changes in volume/severity of problem loans, quality of loan review and board of director oversight, concentrations of credit, and peer group comparisons. Loans which are deemed to be uncollectible are charged off and deducted from the allowance. The provision for loan losses and recoveries of loans previously charged off are added to the allowance. Our analysis in accordance with generally accepted accounting principles (GAAP) indicates that the level of the allowance for loan losses is appropriate to cover estimated credit losses on individually evaluated loans as well as estimated credit losses inherent in the remainder of the portfolio.
Residential Mortgage Loans Held-for-Sale - The Companys residential mortgage lending activities for sale in the secondary market are comprised of accepting residential mortgage loan applications, qualifying borrowers to standards established by investors, funding residential mortgage loans and selling mortgage loans to investors under pre-existing commitments. Funded residential mortgages held temporarily for sale to investors are recorded at the lower of cost or market value. Application and origination fees collected by the Company are recognized as income upon sale to the investor.
The Company issues rate lock commitments to borrowers based on prices quoted by secondary market investors. When rates are locked with borrowers, a sales commitment is immediately entered (on a best efforts basis) at a specified price with a secondary market investor. Accordingly, any potential liabilities associated with rate lock commitments are offset by sales commitments to investors.
Premises, Furniture and Equipment - Premises, furniture and equipment are stated at cost, less accumulated depreciation. The provision for depreciation is computed by the straight-line method, based on the estimated useful lives for furniture and equipment of five to 10 years and buildings of 40 years. Leasehold improvements are amortized over the life of the leases, which range up to 40 years. The cost of assets sold or otherwise disposed of and the related allowance for depreciation are eliminated from the accounts and the resulting gains or losses are reflected in the income statement when incurred. Maintenance and repairs are charged to current expense. The costs of major renewals and improvements are capitalized.
Other Real Estate Owned - Other real estate is acquired through, or in lieu of, foreclosure and is held for sale. It is initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations are included within noninterest expense as part of other operating expense.
Securities Sold Under Agreements to Repurchase - The Bank enters into sales of securities under agreements to repurchase. Fixed-coupon repurchase agreements are treated as financing, with the obligation to repurchase securities sold being reflected as a liability and the securities underlying the agreements remaining as assets.
Income Taxes - Income taxes are the sum of amounts currently payable to taxing authorities and the net changes in income taxes payable or refundable in future years. Income taxes deferred to future years are determined utilizing a liability approach. This method gives consideration to the future tax consequences associated with differences between financial accounting and tax bases of certain assets and liabilities which are principally the allowance for loan losses, depreciable premises and equipment, and the net operating loss carry forward. The Company believes that its income tax filing positions taken or expected to be taken in its tax returns will more likely than not be sustained upon audit by the taxing authorities and does not anticipate any adjustments that will result in a material adverse impact on the Companys financial condition, results of operations, or cash flow. Therefore, no reserves for uncertain income tax positions have been recorded.
Retirement Plan - The Company has a 401(k) profit sharing plan, which provides retirement benefits to substantially all officers and employees who meet certain age and service requirements. The plan includes a salary reduction feature pursuant to Section 401(k) of the Internal Revenue Code. At its discretion, the Bank makes matching contributions of $.50 for every dollar contributed up to 6% of the participants annual compensation. Additionally, the Company maintains supplemental retirement plans for certain highly compensated employees designed to offset the impact of regulatory limits on benefits under qualified pension plans. There are supplemental retirement plans in place for certain current employees.
Bank Owned Life Insurance - Bank owned life insurance (BOLI) represents life insurance on the lives of certain current and former employees who have provided positive consent allowing the Bank to be the beneficiary of such policies. The Bank purchases BOLI in order to use its earnings to help offset the costs of the Banks benefit expenses including pre- and post-retirement employee benefits. Increases in the cash surrender value (CSV) of the policies, as well as death benefits received net of any CSV, are recorded in other non-interest income, and are not subject to income taxes. The CSV of the
policies are recorded as assets of the Bank. Any amounts owed to employees from policy benefits are recorded as liabilities of the Bank. The Company reviews the financial strength of the insurance carriers prior to the purchase of BOLI and annually thereafter. BOLI with any individual carrier is limited to 15% of tier one capital and BOLI in total is limited to 25% of tier one capital based on Company policy.
Stock Option Plan - On May 10, 2004, the Company established the 2004 Tidelands Bancshares, Inc. Stock Incentive Plan (Stock Plan) that provides for the granting of options to purchase 20% of the outstanding shares of the Companys common stock to directors, officers, or employees of the Company. The per-share exercise price of incentive stock options granted under the Stock Plan may not be less than the fair market value of a share on the date of grant and vest based on continued service with the Company for a specified period, generally two to five years following the date of grant. The per-share exercise price of stock options granted is determined by a committee appointed by the Board of Directors. The expiration date of any option may not be greater than 10 years from the date of grant. Options that expire unexercised or are forfeited become available for reissuance.
Employee Stock Ownership Plan - The Company established the Tidelands Bancshares, Inc. Employee Stock Ownership Plan (ESOP) for the exclusive benefit of all eligible employees and their beneficiaries subject to authority to amend, from time to time, or terminate, the ESOP. The ESOP is primarily designed to invest in common stock of the Company and is permitted to purchase Company common stock with contributions to the ESOP made by the Company. Also, the ESOP is permitted to borrow money and use the loan proceeds to purchase Company common stock. The money and Company common stock in the ESOP is intended to grow tax free until retirement, death, permanent disability or other severance of employment with the Company. When an employee retires, he/she will receive the value of the accounts that have been set up for the contributions to the ESOP. An employee may also be eligible for benefits in the event of death, permanent disability or other severance from employment with the Company. The employee must pay taxes when the money is paid following one of these events or any other distributable event described in the ESOP unless it is transferred to another tax-qualified retirement plan or an IRA.
Earnings (loss) per share - Basic earnings (loss) per share represent income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Dilutive earnings (loss) per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relate solely to outstanding stock options and warrants and are determined using the treasury stock method. Weighted average shares outstanding are reduced for shares encumbered by the ESOP borrowings.
Comprehensive Income - Accounting principles generally require that recognized income, expenses, gains, and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.
Statements of Cash Flows - For purposes of reporting cash flows in the financial statements, the Company considers certain highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Cash equivalents include amounts due from banks and federal funds sold. Generally, federal funds are sold for one-day periods.
Changes in the valuation account of securities available-for-sale, including the deferred tax effects, are considered noncash transactions for purposes of the statement of cash flows and are presented in detail in the notes to the consolidated financial statements.
Off-Balance Sheet Financial Instruments - In the ordinary course of business, the Company enters into off-balance sheet financial instruments consisting of commitments to extend credit and letters of credit. These financial instruments are recorded in the financial statements when they become payable by the customer.
Recently Issued Accounting Pronouncements - The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting, and / or disclosure of financial information by the Company.
Income Tax guidance was amended in April 2010 to reflect an SEC Staff Announcement after the President signed the Health Care and Education Reconciliation Act of 2010 on March 30, 2010, which amended the Patient Protection and Affordable Care Act signed on March 23, 2010. According to the announcement, although the bills were signed on separate dates, regulatory bodies would not object if the two Acts were considered together for accounting purposes. This view is based on the SEC staffs understanding that the two Acts together represent the current health care reforms as passed by Congress and signed by the President. The amendment had no impact on the financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Companys financial position, results of operations or cash flows.
Risks and Uncertainties - In the normal course of its business, the Company encounters two significant types of risks: economic and regulatory. There are three main components of economic risk: interest rate risk, credit risk and market risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different speeds, or on different basis, than its interest-earning assets. Credit risk is the risk of default on the loan portfolio that results from borrowers inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of collateral underlying loans receivable and the valuation of real estate held by the Company.
The Company is subject to the regulations of various governmental agencies. These regulations can and do change significantly from period to period. Periodic examinations by the regulatory agencies may subject the company to further changes with respect to asset valuations, amounts of required loss allowances and operating restrictions from the regulators judgments based on information available to them at the time of their examination.
Reclassifications - Certain captions and amounts in the 2009 financial statements were reclassified to conform to the 2010 presentation.
NOTE 3 COMPREHENSIVE INCOME
The change in the components of other comprehensive income (loss) and related tax effects are as follows for the six and three months ended June 30, 2010 and 2009:
|
|
Six months |
|
Three months |
|
||||||||
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
||||
Change in unrealized gains (losses) on securities available for sale |
|
$ |
3,702,304 |
|
$ |
179,117 |
|
$ |
3,050,936 |
|
$ |
(1,111,556 |
) |
Reclassification adjustment for gains realized in net income |
|
(1,347,131 |
) |
(590,683 |
) |
(1,208,289 |
) |
(283,679 |
) |
||||
Net change in unrealized gains (losses) on securities |
|
2,355,173 |
|
(411,566 |
) |
1,842,647 |
|
(1,395,235 |
) |
||||
Tax effect |
|
(894,965 |
) |
156,395 |
|
(700,204 |
) |
530,190 |
|
||||
Net-of-tax amount |
|
$ |
1,460,208 |
|
$ |
(255,171 |
) |
$ |
1,142,443 |
|
$ |
(865,045 |
) |
NOTE 4 - FAIR VALUE MEASUREMENTS
The current accounting literature requires the disclosure of fair value information for financial instruments, whether or not they are recognized in the consolidated balance sheets, when it is practical to estimate the fair value. The guidance defines a financial instrument as cash, evidence of an ownership interest in an entity or contractual obligations, which require the exchange of cash, or other financial instruments. Certain items are specifically excluded from the disclosure requirements, including the Companys common stock, premises and equipment, accrued interest receivable and payable, and other assets and liabilities.
The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instruments. Because no market value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors.
The Company has used managements best estimate of fair value based on the above assumptions. Thus, the fair values presented may not be the amounts, which could be realized, in an immediate sale or settlement of the instrument. In addition, any income taxes or other expenses, which would be incurred in an actual sale or settlement, are not taken into consideration in the fair values presented.
The following methods and assumptions were used to estimate the fair value of significant financial instruments:
Cash and Due from Banks - The carrying amount for cash and due from banks is a reasonable estimate of fair value.
Federal Funds Sold - Federal funds sold are for a term of one day, and the carrying amount approximates the fair value.
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.
With respect to securities available-for-sale, Level 1 includes those securities 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.
Nonmarketable Equity Securities - The carrying amount for nonmarketable equity securities approximates the fair value since no readily available market exists for these securities.
Mortgage Loans Held for Sale - The carrying value for mortgage loans held for sale is a reasonable estimate for fair value considering the short time these loans are carried on the books. Management determined that only minor fluctuations occurred in fixed rate mortgage loans; therefore the carrying amount approximates fair value.
Loans Receivable - For certain categories of loans, such as variable rate loans which are repriced frequently and have no significant change in credit risk, fair values are based on the carrying amounts. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. 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. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.
Deposits - The fair value of demand deposits, savings, and money market accounts is the amount payable on demand at the reporting date. The fair values of certificates of deposit are estimated using a discounted cash flow calculation that applies current interest rates to a schedule of aggregated expected maturities.
Securities Sold Under Agreements to Repurchase - These repurchase agreements have a fixed rate. Due to the minor change in interest rates, management estimated the fair value using a discounted cash flow calculation that applies the Companys current borrowing rate for the securities sold under agreements to repurchase.
Advances from Federal Home Loan Bank - The fair values of fixed rate borrowings are estimated using a discounted cash flow calculation that applies the Companys current borrowing rate from the Federal Home Loan Bank. The carrying amounts of variable rate borrowings are reasonable estimates of fair value because they can be repriced frequently.
Junior Subordinated Debentures - The fair values of fixed rate junior subordinated debentures are estimated using a discounted cash flow calculation that applies the Companys current borrowing rate. The carrying amounts of variable rate borrowings are reasonable estimates of fair value because they can be repriced frequently.
Employee Stock Ownership Plan Borrowings - The carrying value of the ESOP borrowing is a reasonable estimate of fair value because they can be repriced frequently.
Off-Balance Sheet Financial Instruments - Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties credit standing.
The carrying values and estimated fair values of the Companys financial instruments are as follows:
|
|
June 30, |
|
December 31, |
|
||||||||
|
|
2010 |
|
2009 |
|
||||||||
|
|
Carrying |
|
Estimated |
|
Carrying |
|
Estimated |
|
||||
Financial Assets: |
|
|
|
|
|
|
|
|
|
||||
Cash and due from banks |
|
$ |
8,211,232 |
|
$ |
8,211,232 |
|
$ |
2,493,227 |
|
$ |
2,493,227 |
|
Federal funds sold |
|
27,665,000 |
|
27,665,000 |
|
12,500,000 |
|
12,500,000 |
|
||||
Securities available-for-sale |
|
37,975,593 |
|
37,975,593 |
|
229,786,787 |
|
229,786,787 |
|
||||
Nonmarketable equity securities |
|
5,892,650 |
|
5,892,650 |
|
5,892,650 |
|
5,892,650 |
|
||||
Mortgage loans held for sale |
|
1,040,090 |
|
1,040,090 |
|
617,000 |
|
617,000 |
|
||||
Loans receivable |
|
465,017,044 |
|
467,035,100 |
|
485,555,288 |
|
490,945,288 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
||||
Demand deposit, interest-bearing transaction, and savings accounts |
|
$ |
211,142,393 |
|
$ |
211,142,393 |
|
$ |
284,248,813 |
|
$ |
284,248,813 |
|
Certificates of deposit and other time deposits |
|
294,022,837 |
|
295,619,837 |
|
307,300,366 |
|
309,914,366 |
|
||||
Securities sold under agreements to repurchase |
|
20,000,000 |
|
21,383,000 |
|
60,000,000 |
|
60,241,000 |
|
||||
Advances from Federal Home Loan Bank |
|
9,000,000 |
|
8,752,000 |
|
65,000,000 |
|
64,360,000 |
|
||||
Junior subordinated debentures |
|
14,434,000 |
|
15,420,881 |
|
14,434,000 |
|
15,615,503 |
|
||||
ESOP borrowings |
|
1,750,000 |
|
1,750,000 |
|
2,300,000 |
|
2,300,000 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
|
|
Notional |
|
Estimated |
|
Notional |
|
Estimated |
|
||||
Off-Balance Sheet Financial Instruments: |
|
|
|
|
|
|
|
|
|
||||
Commitments to extend credit |
|
$ |
25,329,423 |
|
$ |
|
|
$ |
28,429,383 |
|
$ |
|
|
Letters of credit |
|
196,941 |
|
|
|
466,739 |
|
|
|
In determining appropriate levels, the Company performs a detailed analysis of the assets and liabilities that are subject to fair value disclosures. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3.
Assets and liabilities that are carried at fair value are classified in one of the following three categories based on a hierarchy for ranking the quality and reliability of the information used to determine fair value:
Level 1 |
Quoted prices in active markets for identical assets or liabilities. |
|
|
Level 2 |
Observable market based inputs or unobservable inputs that are corroborated by market data. |
|
|
Level 3 |
Unobservable inputs that are not corroborated by market data. |
Assets measured at fair value on a recurring basis are as follows as of June 30, 2010 and December 31, 2009:
|
|
Quoted market price |
|
Significant other |
|
Significant |
|
|||
June 30, 2010 |
|
|
|
|
|
|
|
|||
Government sponsored enterprises |
|
$ |
|
|
$ |
7,053,713 |
|
$ |
|
|
Mortgage-backed securities |
|
|
|
30,921,880 |
|
|
|
|||
Available-for-sale investment securities |
|
|
|
37,975,593 |
|
|
|
|||
Mortgage loans held for sale |
|
|
|
1,040,090 |
|
|
|
|||
Total |
|
$ |
|
|
$ |
39,015,683 |
|
$ |
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|||
Government sponsored enterprises |
|
$ |
|
|
$ |
88,612,765 |
|
$ |
|
|
Mortgage-backed securities |
|
|
|
133,898,555 |
|
|
|
|||
Municipals |
|
|
|
7,275,467 |
|
|
|
|||
Available-for-sale investment securities |
|
|
|
$ |
229,786,787 |
|
|
|
||
Mortgage loans held for sale |
|
|
|
617,000 |
|
|
|
|||
Total |
|
$ |
|
|
$ |
230,403,787 |
|
$ |
|
|
Assets measured at fair value on a nonrecurring basis are as follows as of June 30, 2010 and December 31, 2009:
|
|
Quoted market price |
|
Significant other |
|
Significant |
|
|||
June 30, 2010 |
|
|
|
|
|
|
|
|||
Impaired loans |
|
$ |
|
|
$ |
26,607,066 |
|
$ |
|
|
Other real estate owned |
|
|
|
12,213,281 |
|
|
|
|||
Total |
|
$ |
|
|
$ |
38,820,347 |
|
$ |
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|||
Impaired loans |
|
$ |
|
|
$ |
20,044,008 |
|
$ |
|
|
Other real estate owned |
|
|
|
6,865,461 |
|
|
|
|||
Total |
|
$ |
|
|
$ |
26,909,469 |
|
$ |
|
|
The Company has no assets or liabilities whose fair values are measured using level 3 inputs.
NOTE 5 - CASH AND DUE FROM BANKS
The Company maintains cash balances with its correspondent banks to meet reserve requirements determined by the Federal Reserve. At June 30, 2010 the reserve requirement was met by the cash balance in the vault. At December 31, 2009, the Bank had $224,000 on deposit with the Federal Reserve Bank to meet this requirement. At June 30, 2010, the Bank had $1.0 million in currency and cash on hand, $5.8 million in due from non-interest bearing balances and $47,000 in due from interest bearing balances and maintained compensating balances totaling $100,000 with a correspondent bank. At June 30, 2010, the Company had $1.3 million in interest bearing balances which are pledged as collateral against the ESOP borrowing.
NOTE 6 - INVESTMENT SECURITIES
The amortized cost and estimated fair values of securities available-for-sale were:
|
|
Amortized |
|
Gross Unrealized |
|
Estimated |
|
||||||
|
|
Cost |
|
Gains |
|
Losses |
|
Fair Value |
|
||||
June 30, 2010 |
|
|
|
|
|
|
|
|
|
||||
Government-sponsored enterprises |
|
$ |
6,999,823 |
|
$ |
53,890 |
|
$ |
|
|
$ |
7,053,713 |
|
Mortgage-backed securities |
|
30,461,696 |
|
465,577 |
|
5,393 |
|
30,921,880 |
|
||||
Total |
|
$ |
37,461,519 |
|
$ |
519,467 |
|
$ |
5,393 |
|
$ |
37,975,593 |
|
|
|
|
|
|
|
|
|
|
|
||||
December 31, 2009 |
|
|
|
|
|
|
|
|
|
||||
Government-sponsored enterprises |
|
$ |
89,774,279 |
|
$ |
47,186 |
|
$ |
1,208,700 |
|
$ |
88,612,765 |
|
Mortgage-backed securities |
|
134,534,637 |
|
160,950 |
|
797,032 |
|
133,898,555 |
|
||||
Municipals |
|
7,318,970 |
|
6,336 |
|
49,839 |
|
7,275,467 |
|
||||
Total |
|
$ |
231,627,886 |
|
$ |
214,472 |
|
$ |
2,055,571 |
|
$ |
229,786,787 |
|
The amortized cost and estimated fair values of investment securities at June 30, 2010, by contractual maturity dates, are shown in the following chart. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalty. Mortgage-backed securities are presented as a separate line item since pay downs are expected before contractual maturity dates.
|
|
Amortized Cost |
|
Fair Value |
|
||
Due within one year |
|
$ |
|
|
$ |
|
|
Due after one year through five years |
|
|
|
|
|
||
Due after five years through ten years |
|
6,999,823 |
|
7,053,713 |
|
||
Due after ten years |
|
|
|
|
|
||
Subtotal |
|
6,999,823 |
|
7,053,713 |
|
||
Mortgage-backed securities |
|
30,461,696 |
|
30,921,880 |
|
||
Total Securities |
|
$ |
37,461,519 |
|
$ |
37,975,593 |
|
At June 30, 2010 and December 31, 2009, investment securities with book values of $31,865,591 and $111,038,524 and market values of $32,318,173 and $110,043,275, respectively, were pledged as collateral for securities sold under agreements to repurchase and a fed funds line. Gross proceeds from the sale of investment securities totaled $181,442,131 and $369,561,934 for the six months ended June 30, 2010 and twelve months ended December 31, 2009, respectively. The gross realized gain on the sale of investment securities totaled $1,417,018 with $69,887 gross realized losses resulting in a net realized gain of $1,347,131 for the six months ended June 30, 2010. The gross realized gain on the sale of investment securities totaled $5,085,640 with gross realized losses of $228,245 resulting in a net realized gain of $4,857,395 for the year ended December 31, 2009.
The following table shows gross unrealized losses and fair value, for securities available-for-sale, and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2010 and December 31, 2009.
|
|
Less than |
|
Twelve months or more |
|
Total |
|
||||||||||||
|
|
Fair value |
|
Unrealized |
|
Fair value |
|
Unrealized |
|
Fair value |
|
Unrealized |
|
||||||
June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Government-sponsored enterprises |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Mortgage-backed securities |
|
883,696 |
|
5,393 |
|
|
|
|
|
883,696 |
|
5,393 |
|
||||||
|
|
$ |
883,696 |
|
$ |
5,393 |
|
$ |
|
|
$ |
|
|
$ |
883,696 |
|
$ |
5,393 |
|
|
|
Less than |
|
Twelve months or more |
|
Total |
|
||||||||||||
|
|
Fair value |
|
Unrealized |
|
Fair value |
|
Unrealized |
|
Fair value |
|
Unrealized |
|
||||||
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Government-sponsored enterprises |
|
$ |
61,020,580 |
|
$ |
1,208,700 |
|
$ |
|
|
$ |
|
|
$ |
61,020,580 |
|
$ |
1,208,700 |
|
Mortgage-backed securities |
|
90,910,751 |
|
797,032 |
|
|
|
|
|
90,910,751 |
|
797,032 |
|
||||||
Municipals |
|
4,879,928 |
|
49,839 |
|
|
|
|
|
4,879,928 |
|
49,839 |
|
||||||
|
|
$ |
156,811,259 |
|
$ |
2,055,571 |
|
$ |
|
|
$ |
|
|
$ |
156,811,259 |
|
$ |
2,055,571 |
|
Securities classified as available-for-sale are recorded at fair market value. Of the securities in an unrealized loss position, there were no securities in a continuous loss position for 12 months or more at June 30, 2010 and December 31, 2009. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell those securities before recovery of its amortized cost. The Company believes, based on industry analyst reports and credit ratings, that the deterioration in value is attributable to changes in market interest rates and not in the credit quality of the issuer and therefore, these losses are not considered other-than-temporary.
Nonmarketable equity securities include the cost of the Companys investment in the stock of the Federal Home Loan Bank and $28,750 of stock in community bank holding companies as of June 30, 2010 and December 31, 2009. The Federal Home Loan Bank stock has no quoted market value and no ready market exists. Investment in the Federal Home Loan Bank is a condition of borrowing from the Federal Home Loan Bank, and the stock is pledged to collateralize such borrowings. At June 30, 2010 and December 31, 2009, the Companys investment in Federal Home Loan Bank stock was $5,863,900.
The Company reviews its investment securities portfolio at least quarterly and more frequently when economic conditions warrant, assessing whether there is any indication of other-than-temporary impairment (OTTI). Factors considered in the review include estimated future cash flows, length of time and extent to which market value has been less than cost, the financial condition and near term prospects of the issuer, and our intent and ability to retain the security to allow for an anticipated recovery in market value. If the review determines that there is OTTI, then an impairment loss is recognized in earnings equal to the difference between the investments cost and its fair value at the balance sheet date of the reporting period for which the assessment is made, or a portion may be recognized in other comprehensive income. The fair value of investments on which OTTI is recognized then becomes the new cost basis of the investment.
NOTE 7 - LOANS RECEIVABLE
Major classifications of loans receivable are summarized as follows for the periods ended June 30, 2010 and December 31, 2009:
|
|
2010 |
|
2009 |
|
||
Real estate - construction |
|
$ |
102,055,764 |
|
$ |
118,182,732 |
|
Real estate - mortgage |
|
334,691,120 |
|
335,830,858 |
|
||
Commercial and industrial |
|
24,504,361 |
|
26,687,273 |
|
||
Consumer and other |
|
4,338,092 |
|
4,985,427 |
|
||
Deferred origination fees, net |
|
(572,293 |
) |
(131,002 |
) |
||
Total loans receivable, gross |
|
465,017,044 |
|
485,555,288 |
|
||
Less allowance for loan losses |
|
14,781,037 |
|
10,048,015 |
|
||
Total loans receivable, net |
|
$ |
450,236,007 |
|
$ |
475,507,273 |
|
The composition of gross loans by rate type is as follows for the periods ended June 30, 2010 and December 31, 2009:
|
|
2010 |
|
2009 |
|
||
Variable rate loans |
|
$ |
257,002,256 |
|
$ |
272,684,001 |
|
Fixed rate loans |
|
208,014,788 |
|
212,871,287 |
|
||
Total gross loans |
|
$ |
465,017,044 |
|
$ |
485,555,288 |
|
Transactions in the allowance for loan losses are summarized below for the periods ended June 30, 2010 and 2009:
|
|
2010 |
|
2009 |
|
||
Balance, beginning of period |
|
$ |
10,048,015 |
|
$ |
7,635,173 |
|
Provision charged to operations |
|
9,750,000 |
|
7,605,000 |
|
||
Gross loan charge offs |
|
(5,116,913 |
) |
(5,645,203 |
) |
||
Gross loan recoveries |
|
99,935 |
|
11,012 |
|
||
Balance, end of period |
|
$ |
14,781,037 |
|
$ |
9,605,982 |
|
Gross loans outstanding, end of period |
|
$ |
465,017,044 |
|
$ |
471,308,448 |
|
The following is a summary of information pertaining to impaired and nonaccrual loans at June 30, 2010 and December 31, 2009:
|
|
2010 |
|
2009 |
|
||
Impaired loans without a valuation allowance |
|
$ |
22,590,641 |
|
$ |
17,287,480 |
|
Impaired loans with a valuation allowance |
|
5,114,199 |
|
4,007,417 |
|
||
Total impaired loans |
|
$ |
27,704,840 |
|
$ |
21,294,897 |
|
|
|
|
|
|
|
||
Valuation allowance related to impaired loans |
|
$ |
1,097,774 |
|
$ |
1,250,889 |
|
Average of impaired loans during the period |
|
$ |
23,826,914 |
|
$ |
15,294,975 |
|
Total nonaccrual loans |
|
$ |
27,704,840 |
|
$ |
21,294,897 |
|
Total loans past due 90 days and still accruing interest |
|
$ |
|
|
$ |
|
|
The allowance for loan losses, as a percent of gross loans outstanding, was 3.18% and 2.04% for periods ended June 30, 2010 and 2009, respectively. At June 30, 2010, the Bank had 86 loans totaling $27,704,840, or 5.96% of gross loans, in nonaccrual status, of which there were none deemed to be troubled debt restructurings. At December 31, 2009, the Bank had 67 impaired loans totaling $21,294,897, or 4.39% of gross loans, in nonaccrual status, of which $4,142,694 were deemed to be troubled debt restructurings. There were no loans contractually past due 90 days or more and still accruing interest at June 30, 2010 or December 31, 2009. In addition, there were no loans restructured or otherwise impaired not already included in nonaccrual status at June 30, 2010 or December 31, 2009. Our analysis under generally accepted accounting principles indicates that the level of the allowance for loan losses is appropriate to cover estimated credit losses on individually evaluated loans as well as estimated credit losses inherent in the remainder of the portfolio. We do not recognize interest income on loans that are impaired. At June 30, 2010 and December 31, 2009, the Bank had $275,000 reserved for off-balance sheet credit exposure related to unfunded commitments included in other liabilities on our consolidated balance sheet.
At June 30, 2010, loans totaling $31.0 million were pledged as collateral at the Federal Home Loan Bank and $15.1 million to maintain a line of credit with the Federal Reserve Bank.
NOTE 8 - OTHER REAL ESTATE OWNED
Transactions in other real estate owned for the periods ended June 30, 2010 and December 31, 2009:
|
|
2010 |
|
2009 |
|
||
Balance, beginning of year |
|
$ |
6,865,461 |
|
$ |
1,800,604 |
|
Additions |
|
8,755,594 |
|
7,641,984 |
|
||
Sales |
|
(2,288,694 |
) |
(2,423,878 |
) |
||
Write-downs |
|
(1,119,080 |
) |
(153,249 |
) |
||
Balance, end of period |
|
$ |
12,213,281 |
|
$ |
6,865,461 |
|
NOTE 9 - PREMISES, FURNITURE AND EQUIPMENT
Premises, furniture and equipment consist of the following for the periods ended June 30, 2010 and December 31, 2009:
|
|
2010 |
|
2009 |
|
||
Land and land improvements |
|
$ |
3,265,318 |
|
$ |
3,265,318 |
|
Building and leasehold improvements |
|
13,299,873 |
|
13,291,654 |
|
||
Furniture and equipment |
|
4,165,540 |
|
4,061,487 |
|
||
Software |
|
723,682 |
|
684,421 |
|
||
Construction in progress |
|
2,701,656 |
|
425,701 |
|
||
Total |
|
24,156,069 |
|
21,728,581 |
|
||
Less, accumulated depreciation |
|
3,421,566 |
|
2,925,880 |
|
||
Premises, furniture and equipment, net |
|
$ |
20,734,503 |
|
$ |
18,802,701 |
|
Depreciation expense for the six months ended June 30, 2010 and 2009 amounted to $495,687 and $477,194 respectively. Construction in progress relates to the planned construction of an executive office building located at 830 Lowcountry Boulevard. Estimated construction costs for the project are expected to be approximately $4.5 million.
NOTE 10 - DEPOSITS
At June 30, 2010, the scheduled maturities of certificates of deposit were as follows:
Maturing: |
|
Amount |
|
|
Remaining through 2010 |
|
$ |
174,995,715 |
|
2011 |
|
113,986,077 |
|
|
2012 |
|
3,174,700 |
|
|
2013 |
|
584,118 |
|
|
2014 |
|
37,000 |
|
|
Thereafter |
|
1,245,227 |
|
|
Total |
|
$ |
294,022,837 |
|
NOTE 11 - SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
The Bank has entered into sales of securities under agreements to repurchase. These obligations to repurchase securities sold are reflected as liabilities in the consolidated balance sheets and consist of two obligations totaling $20.0 million at June 30, 2010. On September 21, 2007, the Bank borrowed $10.0 million under a five-year repurchase agreement at a fixed rate of 4.01%. On November 14, 2007, the Bank borrowed $10.0 million under a nine-year repurchase agreement at a fixed rate of 3.50%. All repurchase agreements require quarterly interest only payments with principal and interest due on maturity. The dollar amounts of securities underlying the agreements are book entry securities. Available-for-sale securities with book values of $23,921,559 and $73,349,838 and fair values of $24,261,256 and $72,884,324 at June 30, 2010 and December 31, 2009, respectively, are used as collateral for the agreements.
Securities sold under repurchase agreements are summarized as follows for the periods ended June 30, 2010 and December 31, 2009:
|
|
2010 |
|
2009 |
|
||
Amount outstanding at period end |
|
$ |
20,000,000 |
|
$ |
60,000,000 |
|
Average amount outstanding during the period |
|
41,181,602 |
|
63,090,274 |
|
||
Maximum outstanding at any month-end |
|
60,000,000 |
|
72,500,000 |
|
||
Weighted average rate paid at period-end |
|
3.76 |
% |
1.55 |
% |
||
Weighted average rate paid during the period |
|
2.02 |
% |
1.67 |
% |
||
NOTE 12 - JUNIOR SUBORDINATED DEBENTURES
On February 22, 2006, Tidelands Statutory Trust (the Trust I), a non-consolidated subsidiary of the Company, issued and sold floating rate capital securities of the trust (the Trust I Securities), generating proceeds of $8.0 million. The Trust I loaned these proceeds to the Company to use for general corporate purposes, primarily to provide capital to the Bank. The debentures qualify as Tier 1 capital under Federal Reserve Board guidelines.
The Trust I Securities in the transaction accrue and pay distributions quarterly at a rate per annum equal to the three-month LIBOR plus 1.38%, which was 1.669% at the period ended June 30, 2010. The distribution rate payable on the Trust I Securities is cumulative and payable quarterly in arrears. The Company has the right, subject to events of default, to defer payments of interest on the Trust I Securities for a period not to exceed 20 consecutive quarterly periods, provided that no extension period may extend beyond the maturity date of March 30, 2036. The Company has no current intention to exercise its right to defer payments of interest on the Trust I Securities.
The Trust I Securities mature or are mandatorily redeemable upon maturity on March 30, 2036 or upon earlier optional redemption as provided in the indenture. The Company has the right to redeem the Trust I Securities in whole or in part, on or after March 30, 2011. The Company may also redeem the Trust I Securities prior to such dates upon occurrence of specified conditions and the payment of a redemption premium.
On June 20, 2008, Tidelands Statutory Trust II (the Trust II), a non-consolidated subsidiary of the Company, issued and sold floating rate capital securities of the trust (the Trust II Securities), generating proceeds of $6.0 million. The Trust II loaned these proceeds to the Company to use for general corporate purposes, primarily to provide capital to the Bank. The debentures qualify as Tier 1 Capital under Federal Reserve Board guidelines.
The Trust II Securities accrue and pay distributions quarterly at a rate equal to (i) 9.425% fixed for the first 5 years, and (ii) the three-month LIBOR rate plus 5.075% thereafter. The distribution rate payable on the Trust II Securities is cumulative and payable quarterly in arrears. The Company has the right, subject to events of default, to defer payments of interest on the Trust II Securities for a period not to exceed 20 consecutive quarterly periods, provided that no extension period may extend beyond the maturity date of June 30, 2038. The Company has no current intention to exercise its right to defer payments of interest on the Trust II Securities.
The Trust II Securities mature or are mandatorily redeemable upon maturity on June 30, 2038 or upon earlier optional redemption as provided in the indenture. The Company has the right to redeem the Trust II Securities in whole or in part, on or after June 30, 2013. The Company may also redeem the Trust II Securities prior to such dates upon occurrence of specified conditions and the payment of a redemption premium.
NOTE 13 ADVANCES FROM FEDERAL HOME LOAN BANK
At June 30, 2010, advances from the Federal Home Loan Bank (FHLB) were comprised of one advance totaling $9.0 million. On September 21, 2007, the Bank borrowed $9.0 million under a 10-year convertible advance at a fixed rate of 3.96%. All advances require interest only payments with principal and interest due on maturity. The advance is collateralized by pledged loans. At June 30, 2010, loans totaling $31.0 million were pledged as collateral at the Federal Home Loan Bank.
FHLB advances are summarized as follows for the periods ended June 30, 2010 and December 31, 2009:
|
|
2010 |
|
2009 |
|
||
Amount outstanding at period end |
|
$ |
9,000,000 |
|
$ |
65,000,000 |
|
Average amount outstanding during the period |
|
70,348,066 |
|
91,074,521 |
|
||
Maximum outstanding at any month-end |
|
85,000,000 |
|
100,800,000 |
|
||
Weighted average rate at period-end |
|
3.96 |
% |
3.03 |
% |
||
Weighted average rate during the period |
|
2.79 |
% |
2.55 |
% |
||
NOTE 14 - OTHER OPERATING EXPENSES
Other operating expenses for the six and three months ended June 30, 2010 and 2009 are summarized below:
|
|
For the Six Months |
|
For the Three Months |
|
||||||||
|
|
Ended June 30, |
|
Ended June 30, |
|
||||||||
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
||||
Professional fees |
|
$ |
794,680 |
|
$ |
703,283 |
|
$ |
433,947 |
|
$ |
396,676 |
|
Telephone expenses |
|
94,842 |
|
96,925 |
|
48,848 |
|
49,365 |
|
||||
Office supplies, stationery, and printing |
|
51,951 |
|
53,591 |
|
27,381 |
|
24,887 |
|
||||
Insurance |
|
125,467 |
|
107,822 |
|
52,340 |
|
48,631 |
|
||||
Postage |
|
20,869 |
|
9,388 |
|
9,613 |
|
5,420 |
|
||||
Data processing |
|
276,889 |
|
257,777 |
|
140,897 |
|
131,810 |
|
||||
Advertising and marketing |
|
703,443 |
|
195,226 |
|
512,895 |
|
118,949 |
|
||||
FDIC Assessment |
|
707,603 |
|
755,000 |
|
347,603 |
|
515,000 |
|
||||
Other real estate owned expense |
|
1,478,502 |
|
171,748 |
|
1,278,108 |
|
81,826 |
|
||||
Other loan related expense |
|
130,839 |
|
143,182 |
|
88,962 |
|
75,038 |
|
||||
Other |
|
513,134 |
|
291,477 |
|
373,158 |
|
150,229 |
|
||||
Total |
|
$ |
4,898,219 |
|
$ |
2,785,419 |
|
$ |
3,313,752 |
|
$ |
1,597,831 |
|
NOTE 15 - COMMITMENTS AND CONTINGENCIES
The Company is subject to claims and lawsuits which arise primarily in the ordinary course of business. Management is not aware of any legal proceedings which they believe would reasonably be expected to have a material adverse effect on the financial position or operating results of the Company.
NOTE 16 EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share are computed by dividing net income by the weighted-average number of common shares outstanding. Diluted earnings (loss) per share is computed by dividing net income by the weighted-average number of common shares outstanding and dilutive common share equivalents using the treasury stock method. Potentially dilutive common share equivalents include common shares issuable upon the exercise of outstanding stock options and warrants.
Basic and diluted earnings (loss) per share are computed below for the six and three months ended June 30, 2010 and 2009:
|
|
Six months ended |
|
Three months ended |
|
||||||||
|
|
June 30, |
|
June 30, |
|
||||||||
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
||||
Basic net income (loss) per share computation: |
|
|
|
|
|
|
|
|
|
||||
Net income (loss) available to common shareholders |
|
$ |
(10,127,067 |
) |
$ |
(4,565,983 |
) |
$ |
(8,139,605 |
) |
$ |
(3,707,292 |
) |
Average common shares outstanding basic |
|
4,087,917 |
|
4,044,186 |
|
4,085,622 |
|
4,044,186 |
|
||||
Basic net income (loss) per share |
|
$ |
(2.48 |
) |
$ |
(1.13 |
) |
$ |
(1.99 |
) |
$ |
(0.92 |
) |
|
|
|
|
|
|
|
|
|
|
||||
Diluted net income (loss) per share computation: |
|
|
|
|
|
|
|
|
|
||||
Net income (loss) available to common shareholders |
|
$ |
(10,127,067 |
) |
$ |
(4,565,983 |
) |
$ |
(8,139,605 |
) |
$ |
(3,707,292 |
) |
Average common shares outstanding basic |
|
4,087,917 |
|
4,044,186 |
|
4,085,622 |
|
4,044,186 |
|
||||
Incremental shares from assumed conversions: |
|
|
|
|
|
|
|
|
|
||||
Stock options |
|
|
|
|
|
|
|
|
|
||||
Average common shares outstanding diluted |
|
4,087,917 |
|
4,044,186 |
|
4,085,622 |
|
4,044,186 |
|
||||
Diluted net income (loss) per share |
|
$ |
(2.48 |
) |
$ |
(1.13 |
) |
$ |
(1.99 |
) |
$ |
(0.92 |
) |
For the periods ended June 30, 2010 and 2009, there were 25,800 and 743,461 stock options outstanding that were anti-dilutive. At June 30, 2010 and 2009, there were 571,821 warrants outstanding that were anti-dilutive. These options and warrants are considered anti-dilutive because the exercise price exceeded the average market price for the period. During the quarter ended June 30, 2010, all options that had been previously granted were voluntarily forfeited by each officer or director grantee.
NOTE 17 - REGULATORY MATTERS
The Company and Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct adverse material effect on the Companys or Banks financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the Companys and Banks assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Companys and Banks capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum ratios of Tier 1 and total capital as a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%. Tier 1 capital consists of common shareholders equity, excluding the unrealized gain or loss on securities available-for-sale, minus certain intangible assets. Tier 2 capital consists of the allowance for loan losses subject to certain limitations. Total capital for purposes of computing the capital ratios consists of the sum of Tier 1 and Tier 2 capital. The regulatory minimum requirements are 4% for Tier 1 and 8% for total risk-based capital.
The Company and Bank are also required to maintain capital at a minimum level based on total assets, which is known as the leverage ratio. Only the strongest institutions are allowed to maintain capital at the minimum requirement of 3%. All others are subject to maintaining ratios 1% to 2% above the minimum.
As of June 30, 2010 and December 31, 2009, management believes it is categorized as well-capitalized under the regulatory framework for prompt corrective action. There are no conditions or events that management believes have changed the Companys and Banks category.
The following table summarizes the capital amounts and ratios of the Company and the regulatory minimum requirements at June 30, 2010 and December 31, 2009:
|
|
Actual |
|
For Capital |
|
To Be Well- |
|
||||||||
Tidelands Bancshares, Inc. |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Total capital (to risk-weighted assets) |
|
$ |
50,593,000 |
|
10.77 |
% |
$ |
37,576,720 |
|
8.00 |
% |
N/A |
|
N/A |
|
Tier 1 capital (to risk-weighted assets) |
|
40,232,000 |
|
8.57 |
% |
18,788,360 |
|
4.00 |
% |
N/A |
|
N/A |
|
||
Tier 1 capital (to average assets) |
|
40,232,000 |
|
5.46 |
% |
29,450,040 |
|
4.00 |
% |
N/A |
|
N/A |
|
||
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Total capital (to risk-weighted assets) |
|
$ |
61,076,000 |
|
11.67 |
% |
$ |
41,860,560 |
|
8.00 |
% |
N/A |
|
N/A |
|
Tier 1 capital (to risk-weighted assets) |
|
53,407,000 |
|
10.21 |
% |
20,930,280 |
|
4.00 |
% |
N/A |
|
N/A |
|
||
Tier 1 capital (to average assets) |
|
53,407,000 |
|
6.83 |
% |
31,257,760 |
|
4.00 |
% |
N/A |
|
N/A |
|
The following table summarizes the capital amounts and ratios of the Bank and the regulatory minimum requirements at June 30, 2010 and December 31, 2009:
|
|
Actual |
|
For Capital |
|
To Be Well- |
|
|||||||||
Tidelands Bank |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Total capital (to risk-weighted assets) |
|
$ |
48,278,000 |
|
10.30 |
% |
$ |
37,490,190 |
|
8.00 |
% |
$ |
46,862,740 |
|
10.00 |
% |
Tier 1 capital (to risk-weighted assets) |
|
42,307,000 |
|
9.03 |
% |
18,745,090 |
|
4.00 |
% |
28,117,640 |
|
6.00 |
% |
|||
Tier 1 capital (to average assets) |
|
42,307,000 |
|
5.76 |
% |
29,359,200 |
|
4.00 |
% |
36,699,000 |
|
5.00 |
% |
|||
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Total capital (to risk-weighted assets) |
|
$ |
57,989,000 |
|
11.10 |
% |
$ |
41,793,690 |
|
8.00 |
% |
$ |
52,242,110 |
|
10.00 |
% |
Tier 1 capital (to risk-weighted assets) |
|
51,412,000 |
|
9.84 |
% |
20,896,840 |
|
4.00 |
% |
31,345,260 |
|
6.00 |
% |
|||
Tier 1 capital (to average assets) |
|
51,412,000 |
|
6.59 |
% |
31,225,960 |
|
4.00 |
% |
39,032,450 |
|
5.00 |
% |
On November 16, 2009, we entered into an informal MOU (Memorandum of Understanding) with the South Carolina Banking Department and the FDIC. The MOU is based on the findings of the FDIC and South Carolina Banking Department during an examination conducted as of April 6, 2009 (the Examination). Under the terms of the MOU, we are required to, among other things, (1) submit a capital plan to the supervisory authorities for increasing and maintaining a Tier 1 leverage ratio at 8% and maintaining a well-capitalized designation; (2) develop specific plans and proposals for the reduction and improvement of assets which are subject to adverse classification and past due loans; (3) implement a plan to decrease the concentration of commercial real estate loans; and (4) review overall liquidity objectives and develop plans and procedures aimed at improving liquidity and reducing reliance on volatile liabilities to fund longer-term assets. We may supplement these plans and reports in the future in response to comments and requests from our regulators. While the MOU remains in place, we may not pay dividends without the prior written consent of the regulators and we may not extend any additional credit to any borrower that has been charged off by the bank or classified as substandard, doubtful or loss in any report of examination so long as that credit remains uncollected. At June 30, 2010, we believe that, with the exception of the requirement to achieve a minimum 8% leverage capital ratio, we are in compliance with the informal MOU.
NOTE 18 - UNUSED LINES OF CREDIT
As of June 30, 2010, the Bank had unused lines of credit to purchase federal funds from unrelated banks totaling $12.0 million. There were no balances outstanding related to any of these lines of credit as of June 30, 2010. These lines of credit are available on a one to 14 day basis for general corporate purposes. In addition to these credit lines, unused credit availability at the Federal Home Loan Bank amounted to $180.3 million at June 30, 2010. In addition, we maintain a line of credit with the Federal Reserve Bank of $15.1 million secured by current loans in our loan portfolio.
NOTE 19 - SHAREHOLDERS EQUITY
Preferred Stock - In December 2008, in connection with the Troubled Asset Relief Program (the TARP) Capital Purchase Program (the CPP), established as part of the Emergency Economic Stabilization Act of 2008, the Company issued to the U.S. Treasury 14,448 shares of the Companys Fixed Rate Cumulative Perpetual Preferred Stock, Series T (the Preferred Stock), having a liquidation preference of $1,000 per share. The Preferred Stock has a dividend rate of 5% for the first five years and 9% thereafter. The Preferred Stock has a call feature after three years.
In connection with the sale of the Preferred Stock, the Company also issued to the U.S. Treasury ten-year warrants to purchase up to 571,821 shares of the Companys common stock (the Warrants), par value $0.01 per share at an initial exercise price of $3.79 per share.
As required under the TARP Capital Purchase Program, dividend payments on and repurchase of the Companys common stock are subject to certain restrictions. For as long as the Preferred Stock is outstanding, no dividends may be declared or paid on the Companys common stock until all accrued and unpaid dividends on the Preferred Stock are fully paid. In addition, the U.S. Treasurys consent is required for any increase in dividends on common stock before the third anniversary of issuance of the Preferred Stock and for any repurchase of any common stock except for repurchases of common shares in connection with benefit plans.
The Preferred Stock and Warrants were sold to the U.S. Treasury for an aggregate purchase price of $14,448,000 in cash. The purchase price was allocated between the Preferred Stock and the Warrants based upon the relative fair values of each to
arrive at the amounts recorded by the Company. This resulted in the Preferred Stock being issued at a discount which is being amortized on a level yield basis as a charge to retained earnings over an assumed life of five years.
Restrictions on Dividends - South Carolina banking regulations restrict the amount of dividends that can be paid to shareholders. A South Carolina state bank may not pay dividends from its capital. All dividends must be paid out of undivided profits then on hand, after deducting expenses, including reserves for losses and bad debts. The bank is authorized to pay cash dividends up to 100% of net income in any calendar year without obtaining the prior approval of the South Carolina State Board of Financial Institutions, provided that the bank received a composite rating of one or two at the last federal or state regulatory examination. The bank must obtain approval from the South Carolina Board of Financial Institutions prior to the payment of any other cash dividends. In addition, under the Federal Deposit Insurance Corporation Improvement Act, the bank may not pay a dividend if, after paying the dividend, the bank would be undercapitalized. Under Federal Reserve Board regulations, the amounts of loans or advances from the Bank to the parent company are also restricted. While the MOU remains in place, we may not pay dividends without the prior written consent of the regulators.
NOTE 20 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist of commitments to extend credit and standby letters of credit. 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. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. A commitment involves, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The Companys exposure to credit loss in the event of nonperformance by the other party to the instrument is represented by the contractual notional amount of the instrument. Since certain commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company uses the same credit policies in making commitments to extend credit as it does for on-balance-sheet instruments. Standby letters of credit are conditional commitments issued to guarantee a customers performance to a third party and have essentially the same credit risk as other lending facilities.
Collateral held for commitments to extend credit and letters of credit varies but may include accounts receivable, inventory, property, plant, equipment and income-producing commercial properties.
The following table sets forth the unused commitments to extend credit and standby letters of credit at June 30, 2010:
|
|
Amount |
|
|
Commitments to extend credit |
|
$ |
25,329,423 |
|
Standby letters of credit |
|
196,941 |
|
|
Total |
|
$ |
25,526,364 |
|
NOTE 21 - EMPLOYEE STOCK OWNERSHIP PLAN
On May 17, 2007, the Company announced the formation of the Tidelands Bancshares, Inc. Employee Stock Ownership Plan (ESOP), a non-contributory plan, for its employees. The ESOP will purchase shares of the Companys common stock on the open market from time to time with funds borrowed from a loan from a third party lender. All employees of the Company meeting certain tenure requirements are entitled to participate in the ESOP. Compensation expense related to the ESOP was $150,747 and $146,118 for the periods ended June 30, 2010 and 2009, respectively. At June 30, 2010, the ESOP has outstanding loans amounting to $1,750,000.
A summary of the unallocated share activity of the Companys ESOP is presented for the periods ended June 30, 2010 and December 31, 2009:
|
|
2010 |
|
2009 |
|
Balance, beginning of year |
|
178,069 |
|
203,308 |
|
New share purchases |
|
15,042 |
|
18,701 |
|
Shares released to participants |
|
(1,967 |
) |
(330 |
) |
Shares allocated to participants |
|
|
|
(43,610 |
) |
Balance, end of period |
|
191,144 |
|
178,069 |
|
NOTE 22 RETIREMENT PLAN
The Company has a 401(k) profit sharing plan, which provides retirement benefits to a majority of officers and employees who meet certain age and service requirements. The plan includes a salary reduction feature pursuant to Section 401(k) of the Internal Revenue Code. At its discretion, the Bank may make matching contributions of $.50 for every dollar contributed up to 6% of the participants annual compensation. Expenses charged to earnings for the 401(k) profit sharing plan were $62,792 and $60,502, for the six months ended June 30, 2010 and 2009, respectively.
The Bank has a Supplemental Executive Retirement Plan (Supplemental Plan). This plan provides an annual post-retirement cash payment beginning after a chosen retirement date for certain officers of the Bank. The officer will receive an annual payment from the Bank equal to the promised benefits. In connection with this plan, life insurance contracts were purchased on the officers. There was $196,268 expense related to the plan for the six months ended June 30, 2010.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following is a discussion of our financial condition as of June 30, 2010 compared to December 31, 2009 and the results of operations for the six and three months ended June 30, 2010 compared to the six and three months ended June 30, 2009. These comments should be read in conjunction with our consolidated financial statements and accompanying footnotes appearing in this report and in conjunction with the financial statements and related notes and disclosures in our 2009 Annual Report on Form 10-K.
This report contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may relate to our financial condition, results of operation, plans, objectives, or future performance. These statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those projected in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. The words may, would, could, will, expect, anticipate, believe, intend, plan, and estimate, as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties include, but are not limited, to those described under Risk Factors in Item 1 of our 2009 Annual Report on Form 10-K and the following:
· general economic conditions (both generally and in our markets) may be less favorable than expected, resulting in, among other things, a continued deterioration in credit quality, a further reduction in demand for credit and/or a further decline in real estate values;
· the general decline in the real estate and lending market, particularly in our market areas, may continue to negatively affect our financial results;
· our ability to raise additional capital may be impaired if current levels of market disruption and volatility continue or worsen;
· the results of our most recent external, independent review of our credit risk assets may not accurately predict the adverse effects on our financial condition if the economy were to continue to deteriorate;
· restrictions or conditions imposed by our regulators on our operations, including the terms of the informal Memorandum of Understanding (MOU) with the South Carolina State Board of Financial Institutions (the South Carolina Banking Department) and the Federal Deposit Insurance Corporation (the FDIC), may make it more difficult for us to achieve our goals;
· the effect of final rules amending Regulation E that prohibit financial institutions from charging consumer fees for paying overdrafts on ATM and one-time debit card transactions, unless the consumer consents or opts-in to the overdraft service for those types of transactions;
· legislative or regulatory changes, including changes in accounting standards and compliance requirements, may adversely affect the businesses in which we are engaged;
· competitive pressures among depository and other financial institutions may increase significantly;
· changes in the interest rate environment may reduce margins or the volumes or values of the loans we make;
· competitors may have greater financial resources and develop products that enable those competitors to compete more successfully than we can;
· our ability to attract and retain key personnel can be affected by the increased competition for experienced employees in the banking industry;
· adverse changes may occur in the bond and equity markets;
· war or terrorist activities may cause further deterioration in the economy or cause instability in credit markets;
· economic, governmental or other factors may prevent the projected population, residential and commercial growth in the markets in which we operate; and
· we will or may continue to face the risk factors discussed from time to time in the periodic reports we file with the SEC.
These risks are exacerbated by the recent developments in national and international financial markets, and we are unable to predict what effect these uncertain market conditions will have on our Company. For more than two years, the capital and credit markets have experienced extended volatility and disruption. There can be no assurance that these unprecedented recent developments will not materially and adversely affect our business, financial condition and results of operations.
All forward-looking statements in this report are based on information available to us as of the date of this report. We undertake no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Overview
We are a South Carolina corporation organized in 2002 to serve as the holding company for Tidelands Bank, a state-chartered banking association under the laws of South Carolina headquartered in Mount Pleasant. Tidelands Bank commenced operations in October 2003 through our main office located in Mount Pleasant, South Carolina. On April 23, 2007, we opened a permanent full service banking facility in our Summerville location. We opened a permanent facility for our full service branch in Myrtle Beach on June 7, 2007. In addition, we opened a new full service branch office in the Park West area of Mount Pleasant on May 14, 2007, and converted the loan production office in the West Ashley area of Charleston to a full service branch on July 2, 2007. The Bluffton loan production office opened as a full service banking facility on May 21, 2008. On July 23, 2008, we opened a permanent full service banking facility in Murrells Inlet. We plan to focus our efforts at these branch locations on obtaining lower cost deposits that are less affected by rising rates.
The following discussion describes our results of operations for the six and three months ended June 30, 2010 as compared to the six and three months ended June 30, 2009 and also analyzes our financial condition as of June 30, 2010 as compared to December 31, 2009. Like most community banks, we derive most of our income from interest we receive on our loans and investments. In addition to earning interest on our loans and investments, we earn income through fees and other expenses we charge to our customers. We describe the various components of this noninterest income, as well as our noninterest expense, in the following discussion. Our primary source of funds for making these loans and investments is our deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities. There are risks inherent in all loans, so we maintain an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible. We establish and maintain this allowance by charging a provision for loan losses against our operating earnings. In the following section we have included a detailed discussion of this process.
We encourage you to read this discussion and analysis in conjunction with the financial statements and the related notes and the other statistical information also included in this report.
Critical Accounting Policies
We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States and with general practices within the banking industry in the preparation of our financial statements. Our significant accounting policies are described in the footnotes to our unaudited consolidated financial statements as of June 30, 2010.
Certain accounting policies involve significant judgments and assumptions by us that have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgment and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgment and assumptions we make, actual results could differ from these judgments and estimates that could have a material impact on the carrying values of our assets and liabilities and our results of operations.
We believe the allowance for loan losses is the critical accounting policy that requires the most significant judgment and estimates used in preparation of our consolidated financial statements. Some of the more critical judgments supporting the amount of our allowance for loan losses include judgments about the credit worthiness of borrowers, the estimated value of the underlying collateral, the assumptions about cash flow, determination of loss factors for estimating credit losses, the impact of current events, and conditions and other factors impacting the level of probable inherent losses. Under different conditions or using different assumptions, the actual amount of credit losses incurred by us may be different from managements estimates provided in our consolidated financial statements. Refer to the portion of this discussion that addresses our allowance for loan losses for a more complete discussion of our processes and methodology for determining our allowance for loan losses.
Recent Legislative and Regulatory Initiatives to Address Financial and Economic Crises
Markets in the United States and elsewhere have experienced extreme volatility and disruption for more than two years. These circumstances have exerted significant downward pressure on prices of equity securities and virtually all other asset classes, and have resulted in substantially increased market volatility, severely constrained credit and capital markets, particularly for financial institutions, and an overall loss of investor confidence. Loan portfolio performances have deteriorated at many institutions resulting from, among other factors, a weak economy and a decline in the value of the
collateral supporting their loans. Dramatic slowdowns in the housing industry, due in part to falling home prices and increasing foreclosures and unemployment, have created strains on financial institutions. Many borrowers are now unable to repay their loans, and the collateral securing these loans has, in some cases, declined below the loan balance. In response to the challenges facing the financial services sector, several regulatory and governmental actions have recently been announced including:
· The Emergency Economic Stabilization Act of 2008 (EESA), approved by Congress and signed by President Bush on October 3, 2008, which, among other provisions, allowed the U.S. Treasury to purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. EESA also temporarily raised the basic limit of FDIC deposit insurance from $100,000 to $250,000 through December 31, 2013.
· On October 7, 2008, the FDIC approved a plan to increase the rates banks pay for deposit insurance;
· On October 14, 2008, the U.S. Treasury announced the creation of a new program, the Troubled Asset Relief Program (the TARP) Capital Purchase Program (the CPP) that encourages and allows financial institutions to build capital through the sale of senior preferred shares to the U.S. Treasury on terms that are non-negotiable.
· On October 14, 2008, the FDIC announced the creation of the Temporary Liquidity Guarantee Program (the TLGP), which seeks to strengthen confidence and encourage liquidity in the banking system. The TLGP has two primary components that are available on a voluntary basis to financial institutions:
· The Transaction Account Guarantee Program (TAGP), which provides unlimited deposit insurance coverage through December 30, 2010 for noninterest-bearing transaction accounts (typically business checking accounts) and certain funds swept into noninterest-bearing savings accounts. Institutions participating in the TAGP pay a 15 to 25 basis points fee (annualized), according to the institutions risk category on the balance of each covered account in excess of $250,000, while the extra deposit insurance is in place; and
· The Debt Guarantee Program (DGP), under which the FDIC guarantees certain senior unsecured debt of FDIC-insured institutions and their holding companies. The guarantee would apply to new debt issued on or before October 31, 2009 and would provide protection until December 31, 2012. Issuers electing to participate would pay a 75 basis point fee for the guarantee.
· On February 10, 2009, the U.S. Treasury announced the Financial Stability Plan, which earmarked $350 billion of the TARP funds authorized under EESA. Among other things, the Financial Stability Plan includes:
· A capital assistance program that will invest in mandatory convertible preferred stock of certain qualifying institutions determined on a basis and through a process similar to the CPP;
· A consumer and business lending initiative to fund new consumer loans, small business loans and commercial mortgage asset-backed securities issuances;
· A new public-private investment fund that will leverage public and private capital with public financing to purchase up to $500 billion to $1 trillion of legacy toxic assets from financial institutions; and
· Assistance for homeowners by providing up to $75 billion to reduce mortgage payments and interest rates and establishing loan modification guidelines for government and private programs.
· On February 17, 2009 President Obama signed into law The American Recovery and Reinvestment Act of 2009 (ARRA), more commonly known as the economic stimulus or economic recovery package. ARRA includes a wide variety of programs intended to stimulate the economy and provide for extensive infrastructure, energy, health, and education needs. In addition, ARRA imposes certain executive compensation and corporate expenditure limits on all current and future TARP recipients that are in addition to those previously announced by the U.S. Treasury. These new limits are in place until the institution has repaid the Treasury, which is now permitted under ARRA without penalty and without the need to raise new capital, subject to the Treasurys consultation with the recipient institutions appropriate regulatory agency.
· On March 23, 2009, the U.S. Treasury, in conjunction with the FDIC and the Federal Reserve, announced the Public-Private Partnership Investment Program for Legacy Assets which consists of two separate plans, addressing two distinct asset groups:
· The first plan is the Legacy Loan Program, which has a primary purpose to facilitate the sale of troubled mortgage loans by eligible institutions, including FDIC-insured federal or state banks and savings associations. Eligible assets are not strictly limited to loans; however, what constitutes an eligible asset will be determined by participating banks, their primary regulators, the FDIC and the Treasury. Under the Legacy Loan Program, the FDIC has sold certain troubled assets out of an FDIC receivership in two separate transactions relating to the failed Illinois bank, Corus Bank, NA, and the failed Texas bank, Franklin Bank, S.S.B. These transactions were completed in September 2009 and October 2009, respectively.
· The second plan is the Securities Program, which is administered by the Treasury and involves the creation of public-private investment funds to target investments in eligible residential mortgage-backed securities and commercial mortgage-backed securities issued before 2009 that originally were rated AAA or the equivalent by two or more nationally recognized statistical rating organizations, without regard to rating enhancements (collectively, Legacy Securities). Legacy Securities must be directly secured by actual mortgage loans, leases or other assets, and may be purchased only from financial institutions that meet TARP eligibility requirements. Treasury received over 100 unique applications to participate in the Legacy Securities PPIP and in July 2009 selected nine public-private investment fund managers. As of December 31, 2009, public-private investment funds have completed initial and subsequent closings on approximately $6.2 billion of private sector equity capital, which was matched 100% by Treasury, representing $12.4 billion of total equity capital. Treasury has also provided $12.4 billion of debt capital, representing $24.8 billion of total purchasing power. As of December 31, 2009, public-private investment funds have drawn-down approximately $4.3 billion of total capital which has been invested in certain non-agency residential mortgage backed securities and commercial mortgage backed securities and cash equivalents pending investment.
· On May 22, 2009, the FDIC levied a one-time special assessment on all banks due on September 30, 2009.
· On November 12, 2009, the FDIC issued a final rule to require banks to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012 and to increase assessment rates effective on January 1, 2011.
· On February 2, 2010, the U.S. President called on the U.S. Congress to create a new Small Business Lending Fund. Under this proposal, $30 billion in TARP funds would be transferred to a new program outside of TARP to support small business lending. As proposed, only small- and medium-sized banks would qualify to participate in the program.
· On July 21, 2010, the U.S. President signed into a law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, a comprehensive regulatory framework that will affect every financial institution in the U.S. U.S. financial regulators will begin the rulemaking process over the next 6 to 18 months which will set the parameters of the new regulatory framework and provide a clearer understanding of the legislations effect on banks.
On December 19, 2008, as part of the TARP CPP, we entered into a Letter Agreement and Securities Purchase Agreement (collectively, the CPP Purchase Agreement) with the Treasury Department, pursuant to which we sold (i) 14,448 shares of our Fixed Rate Cumulative Perpetual Preferred Stock, Series T (the Series T Preferred Stock) and (ii) a warrant (the CPP Warrant) to purchase 571,821 shares of our common stock for an aggregate purchase price of $14,448,000 in cash.
The Series T Preferred Stock will qualify as Tier 1 capital and will be entitled to cumulative dividends at a rate of 5% per annum for the first five years, and 9% per annum thereafter. We must consult with the Federal Reserve before we may redeem the Series T Preferred Stock but, contrary to the original restrictions in the EESA, will not necessarily be required to raise additional equity capital in order to redeem this stock. The CPP Warrant has a 10-year term and is immediately exercisable upon its issuance, with an exercise price, subject to anti-dilution adjustments, equal to $3.79 per share of the common stock. Please see the Form 8-K we filed with the SEC on December 19, 2008, for additional information about the Series T Preferred Stock and the CPP Warrant.
We also participate in the TAGP and will participate in the extended TAGP. We have not opted out of the DGP. As a result of the enhancements to deposit insurance protection and the expectation that there will be demands on the FDICs deposit insurance fund, our deposit insurance costs have increased and will continue to increase during 2010.
It is likely that further regulatory actions may arise as the Federal government continues to attempt to address the economic situation. Governmental intervention and new regulations under these programs could materially and adversely affect our business, financial condition and results of operations. The following discussion and analysis describes our performance in this challenging economic environment. We encourage you to read this discussion and analysis in conjunction with our financial statements and the other statistical information included in this report.
Results of Operations
Income Statement Review
Summary
Six months ended June 30, 2010 and 2009
Our net loss was approximately $9.7 million for the six months ended June 30, 2010 compared to net loss of approximately $4.1 million for the same period in 2009. Net loss before income tax benefit was $9.7 million for the six months ended June 30, 2010 compared to net loss before income tax benefit of $6.2 million for the six months ended June 30, 2009. The $3.4 million increase in net loss before income tax benefit resulted primarily from increases in our provision for loan losses of $2.1 million and noninterest expense of $2.1 million and a decrease of $1.0 million in noninterest income offset by an increase of $1.8 million in net interest income before provision for loan losses.
Three months ended June 30, 2010 and 2009
Our net loss was approximately $7.9 million and $3.5 million for the three months ended June 30, 2010 and 2009, respectively. Net loss before income tax benefit was $7.9 million and $5.3 million for the three months ended June 30, 2010 and 2009, respectively. The $2.6 million increase in net loss before income tax benefit resulted primarily from increases in our provisions for loan losses of $680,000 and noninterest expense of $1.6 million and a $1.4 million decrease in noninterest income offset by an increase of $1.0 million in net interest income before provision for loan losses.
Net Interest Income
Our level of net interest income is determined by the level of earning assets and the management of our net interest margin. The growth in our loan portfolio has historically been the primary driver of the increase in net interest income. During the six months ended June 30, 2010, our loan portfolio decreased $20.5 million from the year-end balance. We anticipate the growth in loans will drive the growth in assets and the growth in net interest income once economic conditions improve. However, we do not expect to sustain the same growth rate in our loan portfolio as we have experienced in the past.
Our loans typically provide higher interest yields than do other types of interest-earning assets, which is why we direct a substantial percentage of our earning assets into our loan portfolio. This strategy resulted in a significant portion of our assets being in higher earning loans rather than in lower yielding investments. At June 30, 2010, loans represented 79.6% of total assets, while securities and federal funds sold represented 12.2% of total assets. While we plan to continue our focus on selectively increasing our loan portfolio, we also anticipate managing the size of the investment portfolio during the ongoing economic recession as loan demand remains soft and investment yields become more attractive on a relative basis.
At June 30, 2010, retail deposits represented $409.7 million, or 74.5% of total funding, which includes total deposits plus borrowings. Borrowings represented $45.2 million, or 8.2% of total funding, and wholesale deposits represented $95.4 million, or 17.3% of total funding. We plan to continue to offer competitive rates on our retail deposit accounts, including investment checking, money market accounts, savings accounts and time deposits. Our goal is to maintain a higher percentage of assets being funded by retail deposits and to increase the percentage of low-cost transaction accounts to total deposits. No assurance can be given that these objectives will be achieved. We operate seven full service banking offices located along the South Carolina coast. Although we anticipate that our full service banking offices will assist us in meeting these objectives, we believe that the current deposit strategies and the opening of new offices had a dampening effect on earnings. However, we believe that over time these two strategies will provide us with additional customers in our markets and will provide a lower alternative cost of funding.
In addition to the growth in both assets and liabilities, and the timing of the repricing of our assets and liabilities, net interest income is also affected by the ratio of interest-earning assets to interest-bearing liabilities and the changes in interest rates earned on our assets and interest rates paid on our liabilities. Despite difficult economic conditions, net interest income increased $1.8 million as the result of a decrease in total interest expense of $2.6 million, which offset a decline in loan revenue as compared to the prior period. Our net interest income for the period ended June 30, 2010 increased in part because we had more interest-bearing liabilities reprice at a lower rate than interest-earning assets. For the six months ended June 30, 2010 and 2009, average interest-earning assets exceeded average interest-bearing liabilities by $11.6 million and $14.3 million, respectively.
The impact of the Federal Reserves interest rate cuts since August 2007 continue to result in a decrease in both the yields on our variable rate assets and the rates that we pay for our short-term deposits and borrowings. The net interest margin increased during the six months ended June 30, 2010 when compared to the same period in 2009, as a result of the Bank having a higher volume of interest-bearing liabilities than interest-earning assets that repriced as market rates decreased over the period. Our net interest margins for the six months ended June 30, 2010 and 2009 were 2.80% and 2.20%, respectively. Net interest income increased from $8.0 million for the six months ended June 30, 2009 to $9.9 million for the same period ended June 30, 2010, or 22.9%.
We have included a number of unaudited tables to assist in our description of various measures of our financial performance. For example, the Average Balances table shows the average balance of each category of our assets and liabilities as well as the yield we earned or the rate we paid with respect to each category during the six and three months ended June 30, 2010 and 2009. Our loans typically provide higher interest yields than do other types of interest-earning assets, which is why we direct a substantial percentage of our earning assets into our loan portfolio. Similarly, the Rate/Volume Analysis tables help demonstrate the effect of changing interest rates and changing volume of assets and liabilities on our financial condition during the periods shown. We also track the sensitivity of our various categories of assets and liabilities to changes in interest rates, and we have included tables to illustrate our interest rate sensitivity with respect to interest-earning accounts and interest-bearing accounts. Finally, we have included various tables that provide detail about our investment securities, our loans, our deposits and other borrowings.
Six Months Ended June 30, 2010 and 2009
The following table sets forth information related to our average balance sheet, average yields on assets, and average costs of liabilities. We derived these yields by dividing income or expense by the average balance of the corresponding assets or liabilities. We derived average balances from the daily balances throughout the periods indicated. During the six months ended June 30, 2010 and 2009, we had no securities purchased with agreements to resell. All investments were owned at an original maturity of over one year.
Average Balances, Income and Expenses, and Rates
|
|
For the Six Months Ended |
|
For the Six Months Ended |
|
||||||||||||
|
|
Average |
|
Income/ |
|
Yield/ |
|
Average |
|
Income/ |
|
Yield/ |
|
||||
|
|
(dollars in thousands) |
|
||||||||||||||
Earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest bearing cash balances |
|
$ |
2,062 |
|
$ |
1 |
|
0.09 |
% |
$ |
2,976 |
|
$ |
2 |
|
0.14 |
% |
Federal funds sold |
|
22,275 |
|
37 |
|
0.34 |
% |
3,630 |
|
4 |
|
0.23 |
% |
||||
Taxable investment securities |
|
206,905 |
|
4,190 |
|
4.08 |
% |
259,379 |
|
4,901 |
|
3.81 |
% |
||||
Non-taxable investment securities |
|
1,894 |
|
38 |
|
4.02 |
% |
4,862 |
|
96 |
|
3.97 |
% |
||||
Loans receivable(2) |
|
479,441 |
|
12,425 |
|
5.23 |
% |
466,127 |
|
12,486 |
|
5.40 |
% |
||||
Total earning assets |
|
712,577 |
|
16,691 |
|
4.72 |
% |
736,974 |
|
17,489 |
|
4.79 |
% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Nonearning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash and due from banks |
|
5,719 |
|
|
|
|
|
14,816 |
|
|
|
|
|
||||
Mortgages held for sale |
|
332 |
|
|
|
|
|
1,348 |
|
|
|
|
|
||||
Premises and equipment, net |
|
19,521 |
|
|
|
|
|
19,245 |
|
|
|
|
|
||||
Other assets |
|
32,219 |
|
|
|
|
|
25,085 |
|
|
|
|
|
||||
Allowance for loan losses |
|
(11,653 |
) |
|
|
|
|
(8,220 |
) |
|
|
|
|
||||
Total nonearning assets |
|
46,138 |
|
|
|
|
|
52,274 |
|
|
|
|
|
||||
Total assets |
|
$ |
758,715 |
|
|
|
|
|
$ |
789,248 |
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest bearing transaction accounts |
|
$ |
29,304 |
|
154 |
|
1.06 |
% |
$ |
44,550 |
|
395 |
|
1.79 |
% |
||
Savings & money market |
|
243,034 |
|
1,697 |
|
1.41 |
% |
189,718 |
|
1,601 |
|
1.70 |
% |
||||
Time deposits less than $100,000 |
|
194,752 |
|
1,870 |
|
1.94 |
% |
220,259 |
|
3,498 |
|
3.20 |
% |
||||
Time deposits greater than $100,000 |
|
105,945 |
|
1,305 |
|
2.48 |
% |
95,944 |
|
1,786 |
|
3.75 |
% |
||||
Securities sold under repurchase agreements |
|
41,182 |
|
413 |
|
2.02 |
% |
58,552 |
|
539 |
|
1.85 |
% |
||||
Advances from FHLB |
|
70,348 |
|
974 |
|
2.79 |
% |
96,413 |
|
1,189 |
|
2.49 |
% |
||||
Junior subordinated debentures |
|
14,434 |
|
357 |
|
4.98 |
% |
14,434 |
|
406 |
|
5.68 |
% |
||||
ESOP borrowings |
|
1,967 |
|
38 |
|
3.87 |
% |
2,556 |
|
29 |
|
2.29 |
% |
||||
Federal funds purchased |
|
30 |
|
|
|
0.51 |
% |
199 |
|
1 |
|
1.14 |
% |
||||
Other borrowings |
|
|
|
|
|
|
% |
89 |
|
2 |
|
3.87 |
% |
||||
Total interest-bearing liabilities |
|
700,996 |
|
6,808 |
|
1.96 |
% |
722,714 |
|
9,446 |
|
2.64 |
% |
||||
Noninterest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Demand deposits |
|
15,159 |
|
|
|
|
|
11,890 |
|
|
|
|
|
||||
Other liabilities |
|
4,534 |
|
|
|
|
|
4,859 |
|
|
|
|
|
||||
Shareholders equity |
|
38,026 |
|
|
|
|
|
49,785 |
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total liabilities and shareholders equity |
|
$ |
758,715 |
|
|
|
|
|
$ |
789,248 |
|
|
|
|
|
||
Net interest income |
|
|
|
$ |
9,883 |
|
|
|
|
|
$ |
8,043 |
|
|
|
||
Net interest spread |
|
|
|
|
|
2.76 |
% |
|
|
|
|
2.15 |
% |
||||
Net interest margin |
|
|
|
|
|
2.80 |
% |
|
|
|
|
2.20 |
% |
(1) Annualized for the six month period.
(2) Includes nonaccruing loans.
The net interest spread and net interest margin increased during the six months ended June 30, 2010 primarily as a result of the Bank having more interest-earning liabilities than interest-bearing assets that repriced as market rates began to decrease to a lower rate over the period. Net interest income, the largest component of our income, was $9.9 million and $8.0 million for the six months ended June 30, 2010 and June 30, 2009, respectively. The $1.9 million increase in net interest income for the six months ended June 30, 2010 compared to the same period in 2009 resulted from a $798,000 decrease in interest income and a $2.6 million decrease in interest expense.
Interest income for the six months ended June 30, 2010 was $16.7 million, consisting of $12.4 million on loans, $4.2 million on investments, and $38,000 on federal funds sold and interest bearing balances. Interest income for the six months ended June 30, 2009 was $17.5 million, consisting of $12.5 million on loans, $5.0 million on investments, and $6,000 on federal funds sold and interest bearing balances. Interest and fees on loans represented 74.4% and 71.4% of total interest income for the six months ended June 30, 2010 and 2009, respectively. Income from investments, federal funds sold and interest bearing balances represented 25.6% and 28.6% of total interest income for the six months ended June 30, 2010 and 2009, respectively. The high percentage of interest income from loans related to our strategy to maintain a significant portion of our assets in higher earning loans compared to lower yielding investments. Average loans represented 67.3% and 63.2% of average interest-earning assets for the six months ended June 30, 2010 and 2009, respectively. During the six months ended June 30, 2010, average earning assets were lower by $24.4 million than for the same period in 2009.
Interest expense for the six months ended June 30, 2010 was $6.8 million, consisting of $5.0 million related to deposits, $413,000 related to securities sold under a repurchase agreement, $357,000 related to junior subordinated debentures, $974,000 related to advances from the FHLB and $38,000 related to other borrowings and federal funds purchased. Interest expense for the six months ended June 30, 2009 was $9.4 million, consisting of $7.3 million related to deposits, $539,000 related to securities sold under a repurchase agreement, $406,000 related to junior subordinated debentures, $1.2 million related to advances from the FHLB and $32,000 related to other borrowings and federal funds purchased. Interest expense on deposits for the six months ended June 30, 2010 and 2009 represented 73.8% and 77.1% of total interest expense, respectively, while interest expense on borrowings represented 26.2% and 22.9%, respectively, of total interest expense. During the six months ended June 30, 2010, average interest-bearing liabilities were lower by $21.7 million than for the same period in 2009.
Our net interest spread was 2.76% for the six months ended June 30, 2010, compared to 2.15% for the six months ended June 30, 2009. The net interest spread is the difference between the yield we earn on our interest-earning assets and the rate we pay on our interest-bearing liabilities. The net interest margin is calculated as net interest income divided by average interest-earning assets. Our net interest margin for the six months ended June 30, 2010 was 2.80%, compared to 2.20% for the six months ended June 30, 2009. For the second quarter of 2010, interest-earning assets averaged $712.6 million compared to $737.0 million in the same quarter of 2009. During the same periods, average interest-bearing liabilities were $701.0 million and $722.7 million, respectively.
Three Months Ended June 30, 2010 and 2009
The following table sets forth information related to our average balance sheet, average yields on assets, and average costs of liabilities. We derived these yields by dividing income or expense by the average balance of the corresponding assets or liabilities. We derived average balances from the daily balances throughout the periods indicated. During the three months ended June 30, 2010 and 2009, we had no securities purchased with agreements to resell. All investments were owned at an original maturity of over one year.
Average Balances, Income and Expenses, and Rates
|
|
For the Three Months Ended |
|
For the Three Months Ended |
|
||||||||||||
|
|
Average |
|
Income/ |
|
Yield/ |
|
Average |
|
Income/ |
|
Yield/ |
|
||||
|
|
(dollars in thousands) |
|
||||||||||||||
Earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest bearing cash balances |
|
$ |
3,173 |
|
$ |
1 |
|
0.10 |
% |
$ |
4,519 |
|
$ |
1 |
|
0.12 |
% |
Federal funds sold |
|
28,664 |
|
25 |
|
0.35 |
% |
|
|
1 |
|
|
% |
||||
Taxable investment securities |
|
181,359 |
|
1,702 |
|
3.76 |
% |
279,255 |
|
1,924 |
|
2.76 |
% |
||||
Non-taxable investment securities |
|
1,561 |
|
15 |
|
3.99 |
% |
4,556 |
|
45 |
|
3.97 |
% |
||||
Loans receivable(4) |
|
474,458 |
|
6,102 |
|
5.16 |
% |
467,975 |
|
6,349 |
|
5.44 |
% |
||||
Total earning assets |
|
689,215 |
|
7,845 |
|
4.57 |
% |
756,305 |
|
8,320 |
|
4.41 |
% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Nonearning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash and due from banks |
|
7,048 |
|
|
|
|
|
18,753 |
|
|
|
|
|
||||
Mortgages held for sale |
|
312 |
|
|
|
|
|
1,694 |
|
|
|
|
|
||||
Premises and equipment, net |
|
19,981 |
|
|
|
|
|
19,136 |
|
|
|
|
|
||||
Other assets |
|
32,443 |
|
|
|
|
|
26,329 |
|
|
|
|
|
||||
Allowance for loan losses |
|
(12,748 |
) |
|
|
|
|
(8,549 |
) |
|
|
|
|
||||
Total nonearning assets |
|
47,036 |
|
|
|
|
|
57,363 |
|
|
|
|
|
||||
Total assets |
|
$ |
736,251 |
|
|
|
|
|
$ |
813,668 |
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest bearing transaction accounts |
|
$ |
28,929 |
|
72 |
|
0.99 |
% |
$ |
43,625 |
|
196 |
|
1.80 |
% |
||
Savings & money market |
|
239,967 |
|
794 |
|
1.33 |
% |
195,226 |
|
835 |
|
1.72 |
% |
||||
Time deposits less than $100,000 |
|
189,081 |
|
794 |
|
1.69 |
% |
218,047 |
|
1,608 |
|
2.96 |
% |
||||
Time deposits greater than $100,000 |
|
107,884 |
|
634 |
|
2.36 |
% |
101,149 |
|
902 |
|
3.58 |
% |
||||
Securities sold under repurchase agreements |
|
30,207 |
|
198 |
|
2.63 |
% |
72,500 |
|
296 |
|
1.64 |
% |
||||
Advances from FHLB |
|
67,506 |
|
461 |
|
2.74 |
% |
100,800 |
|
610 |
|
2.43 |
% |
||||
Junior subordinated debentures |
|
14,434 |
|
181 |
|
5.02 |
% |
14,434 |
|
202 |
|
5.61 |
% |
||||
ESOP borrowings |
|
1,824 |
|
21 |
|
4.56 |
% |
2,524 |
|
14 |
|
2.28 |
% |
||||
Federal funds purchased |
|
11 |
|
|
|
0.97 |
% |
22 |
|
|
|
1.78 |
% |
||||
Total interest-bearing liabilities |
|
679,843 |
|
3,155 |
|
1.86 |
% |
748,327 |
|
4,663 |
|
2.50 |
% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Noninterest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Demand deposits |
|
15,148 |
|
|
|
|
|
12,382 |
|
|
|
|
|
||||
Other liabilities |
|
4,606 |
|
|
|
|
|
4,927 |
|
|
|
|
|
||||
Shareholders equity |
|
36,654 |
|
|
|
|
|
48,032 |
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total liabilities and shareholders equity |
|
$ |
736,251 |
|
|
|
|
|
$ |
813,668 |
|
|
|
|
|
||
Net interest income |
|
|
|
$ |
4,690 |
|
|
|
|
|
$ |
3,657 |
|
|
|
||
Net interest spread |
|
|
|
|
|
2.71 |
% |
|
|
|
|
1.91 |
% |
||||
Net interest margin |
|
|
|
|
|
2.73 |
% |
|
|
|
|
1.94 |
% |
(3) Annualized for the three month period.
(4) Includes nonaccruing loans
The net interest spread and net interest margin increased during the three months ended June 30, 2010 primarily as a result of the Bank having a higher volume of interest-earning liabilities than interest-bearing assets that repriced as market rates began to decrease to a lower rate over the period. Net interest income, the largest component of our income, was $4.7 million and $3.7 million for the three months ended June 30, 2010 and June 30, 2009, respectively. The increase of $1.0 million resulted from a $1.5 million decrease in interest expense offset by a $475,000 decrease in interest income.
Interest income for the three months ended June 30, 2010 was $7.8 million, consisting of $6.1 million on loans, $1.7 million on investments and interest bearing balances, and $26,000 on federal funds sold and interest bearing liabilities. Interest income for the three months ended June 30, 2009 was $8.3 million, consisting of $6.3 million on loans, $2.0 million on investments, and $2,000 on federal funds sold and interest bearing balances. Interest and fees on loans represented 77.8% and 76.3% of total interest income for the three months ended June 30, 2010 and 2009, respectively. Income from investments, federal funds sold, and interest bearing balances represented 22.2% and 23.7% of total interest income for the three months ended June 30, 2010 and 2009, respectively. The higher percentage of interest income from loans relates to our strategy to maintain a significant portion of our assets in higher earning loans compared to lower yielding investments. Average loans represented 68.8% and 61.9% of average interest-earning assets for the three months ended June 30, 2010 and 2009, respectively.
Interest expense for the three months ended June 30, 2010 was $3.2 million, consisting of $2.3 million related to deposits, $198,000 related to securities sold under repurchase agreements, $181,000 related to junior subordinated debentures, $461,000 related to Federal Home Loan Bank (FHLB) advances, and $21,000 related to ESOP borrowings. Interest expense for the three months ended June 30, 2009 was $4.7 million, consisting of $3.5 million related to deposits, $296,000 related to securities sold under repurchase agreements, $202,000 related to junior subordinated debentures, $610,000 related to FHLB advances, and $14,000 related to ESOP borrowings. Interest expense on deposits for the three months ended June 30, 2010 and 2009 represented 72.7% and 75.9%, respectively, of total interest expense, while interest expense on other liabilities represented 27.3% and 24.1%, respectively, of total interest expense for the three months ended June 30, 2010 and 2009, respectively.
Our net interest spread was 2.71% for the three months ended June 30, 2010, compared to 1.91% for the three months ended June 30, 2009. Our net interest margin for the three months ended June 30, 2010 was 2.73%, compared to 1.94% for the three months ended June 30, 2009. During the second quarter of 2010, interest-earning assets averaged $689.2 million, compared to $756.3 million in the same quarter of 2009. During the same periods, average interest-bearing liabilities were $679.8 million and $748.3 million, respectively.
Rate/Volume Analysis
Net interest income can be analyzed in terms of the impact of changing interest rates and changing volume. The following table sets forth the effect which the varying levels of interest-earning assets and interest-bearing liabilities and the applicable rates have had on changes in net interest income for the periods presented.
|
|
Six Months Ended |
|
Six Months Ended |
|
||||||||||||||||||||
|
|
Increase (Decrease) Due to |
|
Increase (Decrease) Due to |
|
||||||||||||||||||||
|
|
Volume |
|
Rate |
|
Rate/ |
|
Total |
|
Volume |
|
Rate |
|
Rate/ |
|
Total |
|
||||||||
|
|
(in thousands) |
|
||||||||||||||||||||||
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Loans |
|
$ |
357 |
|
$ |
(406 |
) |
$ |
(12 |
) |
$ |
(61 |
) |
$ |
1,777 |
|
$ |
(2,723 |
) |
$ |
(351 |
) |
$ |
(1,297 |
) |
Taxable investment securities |
|
(992 |
) |
351 |
|
(71 |
) |
(712 |
) |
4,971 |
|
(850 |
) |
(1,702 |
) |
2,419 |
|
||||||||
Non-taxable investment securities |
|
(58 |
) |
1 |
|
(1 |
) |
(58 |
) |
(53 |
) |
|
|
|
|
(53 |
) |
||||||||
Federal funds sold |
|
21 |
|
2 |
|
10 |
|
33 |
|
(148 |
) |
(169 |
) |
132 |
|
(185 |
) |
||||||||
Interest bearing cash balances |
|
(1 |
) |
(1 |
) |
1 |
|
(1 |
) |
54 |
|
(2 |
) |
(52 |
) |
|
|
||||||||
Total interest income |
|
(673 |
) |
(53 |
) |
(73 |
) |
(799 |
) |
6,601 |
|
(3,744 |
) |
(1,973 |
) |
884 |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Deposits |
|
298 |
|
(2,452 |
) |
(101 |
) |
(2,255 |
) |
2,333 |
|
(2,769 |
) |
(762 |
) |
(1,198 |
) |
||||||||
Junior subordinated debentures |
|
|
|
(50 |
) |
|
|
(50 |
) |
163 |
|
6 |
|
4 |
|
173 |
|
||||||||
Advances from FHLB |
|
(321 |
) |
147 |
|
(40 |
) |
(214 |
) |
1,481 |
|
(220 |
) |
(608 |
) |
653 |
|
||||||||
Securities sold under repurchase agreements |
|
(160 |
) |
48 |
|
(14 |
) |
(126 |
) |
452 |
|
(342 |
) |
(234 |
) |
(124 |
) |
||||||||
Federal funds purchased |
|
(1 |
) |
(1 |
) |
1 |
|
(1 |
) |
(1 |
) |
(5 |
) |
1 |
|
(5 |
) |
||||||||
ESOP borrowings |
|
(6 |
) |
20 |
|
(5 |
) |
9 |
|
(7 |
) |
(34 |
) |
3 |
|
(38 |
) |
||||||||
Other borrowings |
|
(2 |
) |
(2 |
) |
2 |
|
(2 |
) |
|
|
|
|
2 |
|
2 |
|
||||||||
Total interest expense |
|
(192 |
) |
(2,290 |
) |
(157 |
) |
(2,639 |
) |
4,421 |
|
(3,364 |
) |
(1,594 |
) |
(537 |
) |
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Net interest income |
|
$ |
(481 |
) |
$ |
2,237 |
|
$ |
84 |
|
$ |
1,840 |
|
$ |
2,180 |
|
$ |
(380 |
) |
$ |
(379 |
) |
$ |
1,421 |
|
|
|
Three Months Ended |
|
Three Months Ended |
|
||||||||||||||||||||
|
|
Increase (Decrease) Due to |
|
Increase (Decrease) Due to |
|
||||||||||||||||||||
|
|
Volume |
|
Rate |
|
Rate/ |
|
Total |
|
Volume |
|
Rate |
|
Rate/ |
|
Total |
|
||||||||
|
|
(in thousands) |
|
||||||||||||||||||||||
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Loans |
|
$ |
88 |
|
$ |
(331 |
) |
$ |
(5 |
) |
$ |
(248 |
) |
$ |
727 |
|
$ |
(952 |
) |
$ |
(104 |
) |
$ |
(329 |
) |
Taxable investment securities |
|
(675 |
) |
696 |
|
(244 |
) |
(223 |
) |
2,660 |
|
(678 |
) |
(1,372 |
) |
610 |
|
||||||||
Non-taxable investment securities |
|
(30 |
) |
|
|
|
|
(30 |
) |
(26 |
) |
1 |
|
|
|
(25 |
) |
||||||||
Federal funds sold |
|
|
|
|
|
25 |
|
25 |
|
(125 |
) |
|
|
|
|
(125 |
) |
||||||||
Interest bearing cash balances |
|
|
|
|
|
|
|
|
|
34 |
|
(1 |
) |
(33 |
) |
|
|
||||||||
Total interest income |
|
(617 |
) |
365 |
|
(224 |
) |
(476 |
) |
3,270 |
|
(1,630 |
) |
(1,509 |
) |
131 |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Deposits |
|
50 |
|
(1,279 |
) |
(18 |
) |
(1,247 |
) |
865 |
|
(1,209 |
) |
(252 |
) |
(596 |
) |
||||||||
Junior subordinated debentures |
|
|
|
(21 |
) |
|
|
(21 |
) |
67 |
|
18 |
|
12 |
|
97 |
|
||||||||
Advances from FHLB |
|
(202 |
) |
79 |
|
(26 |
) |
(149 |
) |
790 |
|
(109 |
) |
(332 |
) |
349 |
|
||||||||
Securities sold under repurchase agreements |
|
(172 |
) |
179 |
|
(105 |
) |
(98 |
) |
385 |
|
(149 |
) |
(212 |
) |
24 |
|
||||||||
ESOP borrowings |
|
(4 |
) |
14 |
|
(4 |
) |
6 |
|
(3 |
) |
(13 |
) |
1 |
|
(15 |
) |
||||||||
Total interest expense |
|
(328 |
) |
(1,028 |
) |
(153 |
) |
(1,509 |
) |
2,104 |
|
(1,462 |
) |
(783 |
) |
(141 |
) |
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Net interest income |
|
$ |
(289 |
) |
$ |
1,393 |
|
$ |
(71 |
) |
$ |
1,033 |
|
$ |
1,166 |
|
$ |
(168 |
) |
$ |
(726 |
) |
$ |
272 |
|
Provision for Loan Losses
We have established an allowance for loan losses through a provision for loan losses charged as an expense on our statement of operations. We review our loan portfolio periodically to evaluate our outstanding loans and to measure both the performance of the portfolio and the adequacy of the allowance for loan losses. Please see the discussion below under Balance Sheet Review Provision and Allowance for Loan Losses for a description of the factors we consider in determining the amount of the provision we expense each period to maintain this allowance.
Six Months Ended June 30, 2010 and 2009
Included in the statement of operations for the six months ended June 30, 2010 and 2009 is a noncash expense related to the provision for loan losses and a corresponding increase in the allowance of $9.8 million and $7.6 million, respectively. The increase in the allowance for the six months ended June 30, 2010 relates to our decision to increase the allowance to accommodate charge offs to certain loans and further increase the total allowance in response to the deteriorating credit environment as evidenced by the increasing level of nonperforming assets. The allowance for loan losses was approximately $14.8 million and $9.6 million as of June 30, 2010 and 2009, respectively. The allowance for loan losses as a percentage of gross loans was 3.18% at June 30, 2010 and 2.04% at June 30, 2009. At June 30, 2010, we had 86 nonperforming loans totaling approximately $27.7 million. Gross charge offs amounted to approximately $5.1 million and $5.6 million for the six months ended June 30, 2010 and 2009, respectively.
Three Months Ended June 30, 2010 and 2009
Included in the statement of operations for the three months ended June 30, 2010 and 2009 is a noncash expense related to the provision for loan losses of $6.2 million and $5.5 million, respectively. The increase in the allowance for the three months ended June 30, 2010 relates to our decision to increase the allowance to accommodate charge offs to certain loans and to further increase the total allowance in response to the deteriorating credit environment as stated above.
Noninterest Income (loss)
The following table sets forth information related to our noninterest income (loss) during the six and three months ended June 30, 2010 and 2009:
|
|
Six Months Ended |
|
Three Months Ended |
|
||||||||
|
|
June 30, |
|
June 30, |
|
||||||||
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
||||
|
|
(in thousands) |
|
||||||||||
Service fees on deposit accounts |
|
$ |
23 |
|
$ |
20 |
|
$ |
12 |
|
$ |
11 |
|
Residential mortgage origination fees |
|
114 |
|
229 |
|
53 |
|
164 |
|
||||
Origination income on mortgage loans sold |
|
10 |
|
32 |
|
5 |
|
21 |
|
||||
Gain on sale of investment securities |
|
1,347 |
|
591 |
|
1,208 |
|
284 |
|
||||
Gain (loss) on sale of real estate, other real estate owned and repossessed assets |
|
(112 |
) |
|
|
(112 |
) |
39 |
|
||||
Other service fees and commissions |
|
261 |
|
270 |
|
130 |
|
137 |
|
||||
Loss on extinguishment of debt |
|
(1,620 |
) |
|
|
(2,020 |
) |
|
|
||||
Bank owned life insurance |
|
274 |
|
253 |
|
140 |
|
128 |
|
||||
Impairment on nonmarketable equity securities |
|
|
|
(76 |
) |
|
|
(2 |
) |
||||
Other |
|
34 |
|
22 |
|
22 |
|
15 |
|
||||
Total noninterest income (loss) |
|
$ |
331 |
|
$ |
1,341 |
|
$ |
(562 |
) |
$ |
797 |
|
Six Months Ended June 30, 2010 and 2009
Noninterest income for the six months ended June 30, 2010 was $331,000, a decrease of $1.0 million, compared to noninterest income of $1.3 million during the same period in 2009. The change was primarily attributable to losses on the extinguishment of outstanding liabilities despite the increases in the gain on sale of investment securities during the second quarter of 2010.
Residential mortgage origination income consists primarily of mortgage origination fees we receive on residential loans sold to a third party. Residential mortgage origination fees were $114,000 and $229,000 for the six months ended June
30, 2010 and 2009, respectively. The decrease of $115,000 in 2010 related primarily to a decline in volume in the mortgage department during the first half of 2010. We received $10,000 of origination income on mortgage loans sold for the six months ended June 30, 2010 compared to $32,000 for the same period in 2009.
Service fees on deposits consist primarily of service charges on our checking, money market, and savings accounts. Service fees on deposit accounts were $23,000 and $20,000 for the six months ended June 30, 2010 and 2009, respectively. The additional $3,000 of income resulted from the larger number of customer accounts. Similarly, other service fees commissions and the fee income received from customer non-sufficient funds (NSF) transactions decreased $9,000 to $261,000 for the six months ended June 30, 2010 when compared to the same period in 2009.
An additional $21,000 in noninterest income was primarily attributable to the income received from bank owned life insurance for the six months ended June 30, 2010 when compared to the same period in 2009. Other income consists primarily of income received on fees received on debit and credit card transactions, income from sales of checks, and the fees received on wire transfers. Other income was $34,000 and $22,000 for the six months ended June 30, 2010 and 2009, respectively.
Three Months Ended June 30, 2010 and 2009
Noninterest loss for the three months ended June 30, 2010 was $562,000 compared to noninterest income of $797,000 during the same period in 2009. For the three months ended June 30, 2010, the decrease was primarily attributable to the $2.0 million loss on extinguishment of outstanding liabilities partially offset by the $1.2 million in gain on sale of investment securities during the second quarter of 2010 in comparison to the $284,000 for the same period in 2009.
Residential mortgage origination income consists primarily of mortgage origination fees we receive on residential loans sold to third parties. Residential mortgage origination fees were $53,000 and $164,000 for the three months ended June 30, 2010 and 2009, respectively. The decrease of $111,000 related primarily to a decrease in origination volume in the mortgage department during the second quarter of 2010. We received $5,000 of origination income on mortgage loans sold for the three months ended June 30, 2010 compared to $21,000 for the same period in 2009.
Service fees on deposits consist primarily of service charges on our checking, money market, and savings accounts. Service fees on deposit accounts were $12,000 and $11,000 for the three months ended June 30, 2010 and 2009, respectively. Other service fees, commissions, and the fee income received from customer NSF transactions decreased $7,000 to $130,000 for the three months ended June 30, 2010, when compared to the same period in 2009.
An additional $12,000 in noninterest income was primarily attributable to an increase in the cash surrender value of bank owned life insurance for the three months ended June 30, 2010 when compared to the same period in 2009. Other income consists primarily of income received on fees received on debit and credit card transactions, income from sales of checks, and the fees received on wire transfers. Other income was $22,000 and $15,000 for the three months ended June 30, 2010 and 2009, respectively.
Noninterest Expense
The following table sets forth information related to our noninterest expense for the six and three months ended June 30, 2010 and 2009:
|
|
Six Months |
|
Three Months |
|
||||||||
|
|
Ended June 30, |
|
Ended June 30, |
|
||||||||
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
||||
|
|
(in thousands) |
|
||||||||||
Salaries and benefits |
|
$ |
3,959 |
|
$ |
4,017 |
|
$ |
1,920 |
|
$ |
2,046 |
|
Occupancy |
|
821 |
|
781 |
|
414 |
|
396 |
|
||||
Furniture and equipment expense |
|
446 |
|
429 |
|
235 |
|
213 |
|
||||
Professional fees |
|
795 |
|
703 |
|
434 |
|
397 |
|
||||
Advertising and marketing |
|
703 |
|
195 |
|
513 |
|
119 |
|
||||
Insurance |
|
125 |
|
108 |
|
52 |
|
49 |
|
||||
FDIC Assessment |
|
708 |
|
755 |
|
347 |
|
515 |
|
||||
Data processing and related costs |
|
277 |
|
258 |
|
141 |
|
132 |
|
||||
Telephone |
|
95 |
|
97 |
|
49 |
|
49 |
|
||||
Postage |
|
21 |
|
9 |
|
10 |
|
5 |
|
||||
Office supplies, stationery and printing |
|
52 |
|
54 |
|
27 |
|
25 |
|
||||
Other real estate owned expense |
|
1,478 |
|
172 |
|
1,278 |
|
82 |
|
||||
Other loan related expense |
|
131 |
|
143 |
|
89 |
|
75 |
|
||||
Other |
|
513 |
|
291 |
|
373 |
|
150 |
|
||||
Total noninterest expense |
|
$ |
10,124 |
|
$ |
8,012 |
|
$ |
5,882 |
|
$ |
4,253 |
|
Six Months Ended June 30, 2010 and 2009
We incurred noninterest expense of $10.1 million for the six months ended June 30, 2010 compared to $8.0 million for the six months ended June 30, 2009. The $1.3 million increase in other real estate owned expense accounted for 61.3% of the $2.1 million increase in noninterest expense for the six months ended June 30, 2010 compared to the same period in 2009. Of the $1.5 million expenses related to other real estate owned, $1.1 million was related to the reduction in carrying value of properties in other real estate owned. The remaining increase resulted primarily from increases of $508,000 in marketing costs, $91,000 in professional fees, $40,000 in occupancy expense, $17,000 in furniture and equipment expense, $19,000 in data processing and related costs, $11,000 in postage expense, $17,000 in insurance costs, and $222,000 in other expenses offset by a decrease of $58,000 in salaries and benefits, $2,000 in telecommunications expense, $47,000 in the FDIC assessment and $2,000 in office supplies, stationery and printing costs. Included in the $703,000 marketing and advertising costs was a one time expense of $335,000 related to the stock offering withdrawn in the second quarter.
Salaries and employee benefits expense was $4.0 million for both the six months ended June 30, 2010 and 2009, respectively. These expenses represented 39.1% and 50.1% of our total noninterest expense for the six months ended June 30, 2010 and 2009, respectively. The $58,000 decrease in salaries and employees benefits expense in 2010 compared to 2009 resulted from the net effect of increases of $54,000 in higher benefits cost, $4,000 in additional incentive compensation, and $82,000 in base compensation offset by a decrease of $197,000 in stock based compensation related to the employees and directors voluntary forfeiture of all stock options outstanding.
Data processing and related costs increased $19,000, or 7.4%, for the six months ended June 30, 2010 compared to the same period in 2009. These expenses were $277,000 and $258,000 for the six months ended June 30, 2010 and 2009, respectively. During the six months ended June 30, 2010, our data processing costs for our core processing system were $249,000 compared to $204,000 for the six months ended June 30, 2009.
Three Months Ended June 30, 2010 and 2009
We incurred noninterest expense of approximately $5.9 million for the three months ended June 30, 2010 compared to $4.3 million for the three months ended June 30, 2009. The $1.2 million and $393,000 increase in other real estate owned expenses and marketing and related costs, respectively, accounted primarily for the increase in noninterest expense for the three months ended June 30, 2010 compared to the same period in 2009. Of the $1.3 million expenses related to other real estate owned, $1.1 million was related to the reduction in carrying value of properties in other real estate owned. Marketing and related costs increased as a result of advertising related to attracting new retail deposits. The remaining increase resulted primarily from increases of $37,000 in professional fees, $22,000 in furniture and equipment expense, $18,000 in occupancy expense, $9,000 in data processing costs, $4,000 in insurance costs, $4,000 in postage, $2,000 in office supplies, stationery
and printing costs and $223,000 in other expenses offset by a decrease of $168,000 in FDIC insurance and $126,000 in salaries and benefits. Included in the $513,000 marketing and advertising costs was a one time expense of $335,000 related to the stock offering withdrawn in the second quarter.
Salaries and employee benefits expense was approximately $1.9 million and $2.0 million for the three months ended June 30, 2010 and 2009. These expenses represented 32.6% and 48.1% of our total noninterest expense for the three months ended June 30, 2010 and 2009, respectively. The $126,000 decrease in salaries and employee benefits expense resulted from the net effect of increases of $17,000 in higher benefits cost and $4,000 in additional incentive compensation offset by a decrease of $18,000 in base compensation and $128,000 in stock based compensation.
Data processing and related costs increased approximately $9,000, or 6.8%, for the three months ended June 30, 2010 compared to the same period in 2009. These expenses were $141,000 and $132,000 for the three months ended June 30, 2010 and 2009, respectively. During the three months ended June 30, 2010, our data processing costs for our core processing system were $128,000 compared to $109,000 for the three months ended June 30, 2009.
Income Tax Expense
Six Months Ended June 30, 2010 and 2009
Our lack of income tax expense or benefit for June 30, 2010 is reflective of our establishing a valuation allowance for deferred tax assets previously recorded and currently compared to income tax benefit of $2.1 million for the six months ended June 30, 2009. Income taxes are based on effective tax rates of 34.0% for the six months ended June 30, 2009.
Three Months Ended June 30, 2010 and 2009
For June 30, 2010, there was no income tax expense or benefit, reflective of establishing a valuation allowance for deferred tax assets previously recorded and currently determined, compared to income tax benefit of $1.8 million for the three months ended June 30, 2009. Income tax was based on effective tax rates of 34.0% for the three months ended June 30, 2009. Management has determined that is more likely than not that the deferred tax asset related to continuing operations at June 30, 2010 will not be realized, and accordingly, has established a valuation allowance.
Balance Sheet Review
General
At June 30, 2010, we had total assets of $584.5 million, consisting principally of $450.2 million in net loans, $38.0 million in investment securities, $20.7 million in net premises, furniture and equipment, $27.7 million in federal funds sold and $8.2 million in cash and due from banks. Our liabilities at June 30, 2010 totaled $554.0 million, consisting principally of $505.2 million in deposits, $20.0 million in securities sold under agreements to repurchase, $14.4 million in junior subordinated debentures, $9.0 million in FHLB advances and $1.8 million in borrowings related to the ESOP. At June 30, 2010, our shareholders equity was $30.5 million.
During the quarter ended June 30, 2010, the Company executed on its plan to reduce its overall risk profile. Specifically, the goals were to reduce the overall size of the balance sheet, increase our reserves for credit exposure, reduce our dependence on brokered deposits and wholesale funding, position the Company to return to profitability and strengthen the Company and Banks capital ratios over the coming periods. As part of the execution of the plan, $184.9 million of investment securities available for sale were sold recognizing a gain of $1.2 million. These gains were used to partially offset the loss of $2.0 million recognized in the extinguishment of $91.0 million of wholesale borrowings.
Federal Funds Sold
At June 30, 2010, our $27.7 million in short-term investments in federal funds sold on an overnight basis comprised 4.7% of total assets, compared to $12.5 million, or 1.6% of total assets, at December 31, 2009. We continue to monitor our short-term liquidity and closely manage our overnight cash positions in light of the current economic environment.
Investments
At June 30, 2010, the $38.0 million in our available-for-sale investment securities portfolio represented approximately 6.5% of our total assets compared to $229.8 million, or 29.6% of total assets, at December 31, 2009. At June 30, 2010, we held U.S. government agency securities, government sponsored enterprises, municipal and mortgage-backed securities with a fair value of $38.0 million and an amortized cost of $37.5 million for a net unrealized gain of $514,000. We utilize the investment portfolio to provide additional income and to absorb liquidity. We anticipate maintaining an investment portfolio to provide both increased earnings and liquidity. As deposit growth outpaces our ability to lend to creditworthy customers, we anticipate maintaining the relative size of the investment portfolio to total assets and extinguishing additional wholesale funding liabilities.
Contractual maturities and yields on our investments at June 30, 2010 are shown in the following table. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
One year or less |
|
After
one year |
|
After
five years |
|
After ten years |
|
Total |
|
|||||||||||||||
|
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
|||||
|
|
(dollars in thousands) |
|
|||||||||||||||||||||||
Available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Government- sponsored enterprises |
|
$ |
|
|
|
% |
$ |
|
|
|
% |
7,054 |
|
4.16 |
% |
$ |
|
|
|
% |
7,054 |
|
4.16 |
% |
||
Mortgage-backed securities |
|
884 |
|
(0.32 |
)% |
|
|
|
% |
|
|
|
% |
30,038 |
|
4.19 |
% |
30,922 |
|
4.06 |
% |
|||||
Total |
|
$ |
884 |
|
(0.32 |
)% |
$ |
|
|
|
% |
$ |
7,054 |
|
4.16 |
% |
$ |
30,038 |
|
4.19 |
% |
$ |
37,976 |
|
4.08 |
% |
At June 30, 2010, our investments included government sponsored enterprises, which consist of securities issued by the Federal Home Loan Mortgage Corporation with amortized costs of approximately $7.0 million. Mortgage-backed securities consist of securities issued by the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation and Government National Mortgage Association with amortized costs of approximately $28.4 million, $1.2 million and $889,000 respectively.
At June 30, 2010, the fair value of investments issued by the Federal Home Loan Mortgage Corporation was approximately $7.1 million. Mortgage-backed securities consist of securities issued by the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation and Government National Mortgage Association with fair value of approximately $28.8 million, $1.2 million and $884,000, respectively.
Other nonmarketable equity securities at June 30, 2010 consisted of FHLB stock with a cost of $5.9 million, and other investments of $28,750.
The amortized costs and the fair value of our investments at June 30, 2010 and December 31, 2009 are shown in the following table.
|
|
June 30, 2010 |
|
December 31, 2009 |
|
||||||||
|
|
Amortized |
|
Fair |
|
Amortized |
|
Fair |
|
||||
|
|
(in thousands) |
|
||||||||||
Available-for-sale: |
|
|
|
|
|
|
|
|
|
||||
Government-sponsored enterprises |
|
$ |
7,000 |
|
$ |
7,054 |
|
$ |
89,774 |
|
$ |
88,613 |
|
Mortgage-backed securities |
|
30,462 |
|
30,922 |
|
134,535 |
|
133,898 |
|
||||
Municipals |
|
|
|
|
|
7,319 |
|
7,276 |
|
||||
Total |
|
$ |
37,462 |
|
$ |
37,976 |
|
$ |
231,628 |
|
$ |
229,787 |
|
Loans
Since loans typically provide higher interest yields than other types of interest-earning assets, a substantial percentage of our earning assets are invested in our loan portfolio. Average loans for the six months ended June 30, 2010 were $479.4 million compared to $472.0 million for the twelve months ended December 31, 2009. Gross loans outstanding at June 30, 2010 and December 31, 2009 were $465.0 million and $485.6 million, respectively.
Loans secured by real estate mortgages are the principal component of our loan portfolio. Most of our real estate loans are secured by residential or commercial property. We do not generally originate traditional long term residential mortgages for the portfolio, but we do issue traditional second mortgage residential real estate loans and home equity lines of credit. We obtain a security interest in real estate whenever possible, in addition to any other available collateral. This collateral is taken to increase the likelihood of the ultimate repayment of the loan. Generally, we limit the loan-to-value ratio on loans we make to 85%. Due to the short time our portfolio has existed, the current mix may not be indicative of our future portfolio mix. We attempt to maintain a relatively diversified loan portfolio to help reduce the risk inherent in concentration in certain types of collateral.
The following table summarizes the composition of our loan portfolio at June 30, 2010 and December 31, 2009.
|
|
June 30, 2010 |
|
December 31, 2009 |
|
||||||
|
|
Amount |
|
% of |
|
Amount |
|
% of |
|
||
|
|
(dollars in thousands) |
|
||||||||
Commercial |
|
|
|
|
|
|
|
|
|
||
Commercial and industrial |
|
$ |
24,504 |
|
5.3 |
% |
$ |
26,687 |
|
5.5 |
% |
|
|
|
|
|
|
|
|
|
|
||
Real Estate |
|
|
|
|
|
|
|
|
|
||
Mortgage |
|
334,691 |
|
72.0 |
% |
335,831 |
|
69.2 |
% |
||
Construction |
|
102,056 |
|
21.9 |
% |
118,183 |
|
24.3 |
% |
||
Total real estate |
|
436,747 |
|
93.9 |
% |
454,014 |
|
93.5 |
% |
||
|
|
|
|
|
|
|
|
|
|
||
Consumer |
|
|
|
|
|
|
|
|
|
||
Consumer |
|
4,338 |
|
0.9 |
% |
4,985 |
|
1.0 |
% |
||
|
|
|
|
|
|
|
|
|
|
||
Deferred origination fees, net |
|
(572 |
) |
(0.1 |
)% |
(131 |
) |
(0.0 |
)% |
||
|
|
|
|
|
|
|
|
|
|
||
Total gross loans, net of deferred fees |
|
465,017 |
|
100.0 |
% |
485,555 |
|
100.0 |
% |
||
Less allowance for loan losses |
|
(14,781 |
) |
|
|
(10,048 |
) |
|
|
||
Total loans, net |
|
$ |
450,236 |
|
|
|
$ |
475,507 |
|
|
|
Maturities and Sensitivity of Loans to Changes in Interest Rates
The information in the following table is based on the contractual maturities of individual loans, including loans that may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as well as modification of terms upon maturity. Actual repayments of loans may differ from the maturities reflected below because borrowers have the right to prepay obligations with or without prepayment penalties.
The following table summarizes the loan maturity distribution by type and related interest rate characteristics at June 30, 2010:
|
|
One year |
|
After one |
|
After five |
|
Total |
|
||||
|
|
(in thousands) |
|
||||||||||
Commercial |
|
$ |
12,411 |
|
$ |
11,188 |
|
$ |
905 |
|
$ |
24,504 |
|
Real estate |
|
186,109 |
|
202,300 |
|
48,338 |
|
436,747 |
|
||||
Consumer |
|
1,421 |
|
2,501 |
|
416 |
|
4,338 |
|
||||
Deferred origination fees, net |
|
(506 |
) |
(72 |
) |
6 |
|
(572 |
) |
||||
Total gross loans, net of deferred fees |
|
$ |
199,435 |
|
$ |
215,917 |
|
$ |
49,665 |
|
$ |
465,017 |
|
|
|
|
|
|
|
|
|
|
|
||||
Gross loans maturing after one year with: |
|
|
|
|
|
|
|
|
|
||||
Fixed interest rates |
|
|
|
|
|
|
|
$ |
144,681 |
|
|||
Floating interest rates |
|
|
|
|
|
|
|
120,967 |
|
||||
Total |
|
|
|
|
|
|
|
$ |
265,648 |
|
Provision and Allowance for Loan Losses
We have established an allowance for loan losses through a provision for loan losses charged to expense on our statement of operations. The allowance is maintained at a level deemed appropriate by management to provide adequately for known and inherent losses in the portfolio. The allowance for loan losses represents an amount which we believe will be adequate to absorb probable losses on existing loans that may become uncollectible. Our judgment as to the adequacy of the allowance for loan losses is based on a number of assumptions about future events, which we believe to be reasonable, but which may or may not prove to be accurate. Our determination of the allowance for loan losses is based on evaluations of the collectability of loans, including consideration of factors such as the balance of impaired loans, the quality, mix, and size of our overall loan portfolio, economic conditions that may affect the borrowers ability to repay, the amount and quality of collateral securing the loans, our historical loan loss experience, and a review of specific problem loans. We also consider subjective issues such as changes in the lending policies and procedures, changes in the local/national economy, changes in volume or type of credits, changes in volume/severity of problem loans, quality of loan review and board of director oversight, concentrations of credit, and peer group comparisons.
More specifically, in determining our allowance for loan losses, we review loans for specific and impaired reserves based on current appraisals less estimated closing costs. General and unallocated reserves are determined using historical loss trends applied to risk rated loans grouped by FDIC call report classification code. The general and unallocated reserves are calculated by applying the appropriate historical loss ratio to the loan categories grouped by risk rating (pass, special mention, substandard and doubtful). The quantitative value of the qualitative factors, as described below, is then applied to this amount to estimate the general and unallocated reserve for the specific loans within this rating category and particular loan category. Impaired loans are excluded from this analysis as they are individually reviewed for valuation. The sum of all such amounts determines our general and unallocated reserves.
We also track our portfolio and analyze loans grouped by call report categories. The first step in this process is to risk grade each and every loan in the portfolio based on a common set of parameters. These parameters include debt to worth, liquidity of the borrower, net worth, experience in a particular field and other factors. Weight is also given to the relative strength of any guarantors on the loan. We have retained an independent consultant to review the loan files on a test basis to confirm the grading of each loan.
After risk grading each loan, we then use fourteen qualitative factors to analyze the trends in the portfolio. These fourteen factors include both internal and external factors. The internal factors considered are the concentration of credit across the portfolio, current delinquency ratios and trends, the experience level of management and staff, our adherence to lending policies and procedures, current loss and recovery trends, the nature and volume of the portfolios categories, current nonaccrual and problem loan trends, the quality of our loan review system, policy exceptions, value of underlying collateral and other factors which include insurance shortfalls, loan fraud and unpaid tax risk. The external factors considered are regulatory and legal factors and the current economic and business environment, which includes indicators such as national GDP, pricing indicators, employment statistics, housing statistics, market indicators, financial regulatory economic analysis, and economic forecasts from reputable sources. A quantitative value is assigned to each of the fourteen internal and external factors, which, when added together, creates a net qualitative weight. The net qualitative weight is then added to the
minimum loss ratio. Negative trends in the loan portfolio increase the quantitative values assigned to each of the qualitative factors and, therefore, increase the loss ratio. As a result, an increased loss ratio will result in a higher allowance for loan loss. For example, as general economic and business conditions decline, this qualitative factors quantitative value will increase, which will increase the net qualitative weight and the loss ratio (assuming all other qualitative factors remain constant). Similarly, positive trends in the loan portfolio, such as improvement in general economic and business conditions, will decrease the quantitative value assigned to this qualitative factor, thereby decreasing the net qualitative weight (assuming all other qualitative factors remain constant). These factors are reviewed and updated by the Banks Senior Risk Committee on a quarterly basis to arrive at a consensus for our qualitative adjustments.
During the quarter ended June 30, 2010, we performed an extensive collateral analysis of the highest risk segments of our portfolio and determined based on this analysis that our exposure to continuing declines in collateral values necessitated an increase in our reserves for credit losses. Accordingly our provisions for loan losses in the second quarter amounted to $6.2 million, bringing the total year to date provision to $9.8 million. Meanwhile, gross charge-offs for the six months ended June 30, 2010 amounted to $5.1 million compared to $5.6 million at June 30, 2009.
We have shifted our methodology for determining our historical loss ratio to analyzing the most recent four quarters losses because we believe this period encompasses the most severe economic downturn and resulting credit losses in recent history. The resulting historical loss factor is used as a beginning point upon which we add our quantitative adjustments based on the qualitative factors discussed above. Once the qualitative adjustments are made, we refer to the final amount as the total. The total is then multiplied by the loans outstanding for the period ended, except for any loans classified as non-performing which are addressed specifically as discussed below.
Separately, we review all impaired loans individually to determine a specific allocation for each. In our assessment of impaired loans, we consider the primary source of repayment when determining whether or not loans are collateral dependent. Impairment of a loan is measured based on the present value of expected future cash flows discounted at the loans effective interest rate or the fair value of the collateral if the loan is collateral dependent. When management determines that a loan is impaired, the difference between our investment in the related loan and the present value of the expected future cash flows, or the fair value of the collateral, is generally charged against the allowance for loan losses.
Periodically, we adjust the amount of the allowance based on changing circumstances. We recognize loan losses to the allowance and add back subsequent recoveries. In addition, on a quarterly basis we informally compare our allowance for loan losses to various peer institutions; however, we recognize that allowances will vary as financial institutions are unique in the make-up of their loan portfolios and customers, which necessarily creates different risk profiles for the institutions. We would only consider further adjustments to our allowance for loan losses based on this peer review if our allowance was significantly different from our peer group. To date, we have not made any such adjustment. There can be no assurance that loan charge-offs of loans in future periods will not exceed the allowance for loan losses as estimated at any point in time or that provisions for loan losses will not be significant to a particular accounting period, especially considering the overall weakness in the commercial and residential real estate markets in our market areas.
The following table summarizes the activity related to our allowance for loan losses for the six months ended June 30, 2010 and 2009.
|
|
2010 |
|
2009 |
|
||
|
|
(dollars in thousands) |
|
||||
Balance, beginning of year |
|
$ |
10,048 |
|
$ |
7,635 |
|
Charge offs, Commercial and Industrial |
|
(277 |
) |
(1,131 |
) |
||
Charge offs, Real Estate Mortgage |
|
(2,360 |
) |
(1,731 |
) |
||
Charge offs, Real Estate Construction |
|
(2,174 |
) |
(2,778 |
) |
||
Charge offs, Consumer |
|
(306 |
) |
(5 |
) |
||
Recoveries, Commercial and Industrial |
|
12 |
|
|
|
||
Recoveries, Real Estate Mortgage |
|
83 |
|
10 |
|
||
Recoveries, Real Estate Construction |
|
2 |
|
|
|
||
Recoveries, Consumer |
|
3 |
|
1 |
|
||
Provision for loan losses |
|
9,750 |
|
7,605 |
|
||
Balance, end of period |
|
$ |
14,781 |
|
$ |
9,606 |
|
|
|
|
|
|
|
||
Total loans outstanding at end of period |
|
$ |
465,017 |
|
$ |
471,308 |
|
Allowance for loan losses to gross loans |
|
3.18 |
% |
2.04 |
% |
||
Net charge-offs to average loans |
|
0.48 |
% |
1.21 |
% |
Nonperforming Assets
The following table sets forth our nonperforming assets at June 30, 2010 and December 31, 2009:
|
|
2010 |
|
2009 |
|
||
|
|
(dollars in thousands) |
|
||||
Nonaccrual loans |
|
$ |
27,705 |
|
$ |
21,295 |
|
Loans 90 days or more past due and still accruing interest |
|
|
|
|
|
||
Loans restructured or otherwise impaired |
|
|
|
|
|
||
Total impaired loans |
|
27,705 |
|
21,295 |
|
||
Other real estate owned |
|
12,213 |
|
6,865 |
|
||
Total nonperforming assets |
|
$ |
39,918 |
|
$ |
28,160 |
|
|
|
|
|
|
|
||
Nonperforming assets to total assets |
|
6.83 |
% |
3.63 |
% |
We had 86 nonperforming loans at June 30, 2010, totaling $27.7 million and 67 nonperforming loans totaling $21.3 million at December 31, 2009, all of which were considered impaired. Of this amount it is anticipated that 74 loans totaling approximately $25.4 million will move to other real estate owned through foreclosure or through our acceptance of a deed in lieu of foreclosure. An additional four loans amounting to approximately $1.1 million are expected to be paid in full, and three loans totaling approximately $501,000 will be refinanced either through us or elsewhere. At June 30, 2010 and December 31, 2009, the allowance for loan losses was $14.8 million and $10.0 million, respectively, or 3.18% and 2.07%, respectively, of outstanding loans. We remain committed to working with borrowers to help them overcome their difficulties and will review loans on a loan by loan basis. However, despite our commitment, resolution across the portfolio is dependent on improvements in employment, housing, and overall economic conditions at the local, regional and national levels.
Included in nonperforming loans at June 30, 2010 are $16.0 million in real estate construction properties, representing approximately 57.9% of our nonperforming loan total. In addition, nonperforming loans included $11.2 million in real estate mortgage properties and $476,000 in commercial and industrial loans, representing approximately 40.3% and 1.7% of the nonperforming loan total, respectively. As a result of the current economic environment, the collateral value of these residential properties may have declined. To determine current collateral values, we obtain new appraisals on nonperforming loans. In the process of estimating collateral values for nonperforming loans, management evaluates markets for stagnation or distress and discounts appraised values on a property by property basis. Currently, management does not review collateral values for properties located in stagnant or distressed residential areas if the loan is performing and not up for renewal.
As of June 30, 2010, we had 88 loans with a current principal balance of $39.5 million on the watch list compared to 70 loans with a current principal balance of $37.2 million at December 31, 2009. The watch list is the classification utilized by us when we have an initial concern about the financial health of a borrower. We then gather current financial information about the borrower and evaluate our current risk in the credit. We will then either reclassify it as substandard or back to its original risk rating after a review of the information. There are times when we may leave the loan on the watch list, if, in managements opinion, there are risks that cannot be fully evaluated without the passage of time, and we want to review it on a more regular basis. Loans on the watch list are not considered potential problem loans until they are determined by management to be classified as substandard.
Loans past due 30-89 days amounted to $14.7 million at June 30, 2010, compared to $10.1 million at December 31, 2009. At June 30, 2010, we did not have any loans past due greater than 90 days that were not already placed on nonaccrual. Generally, a loan is placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when we believe, after considering economic and business conditions and collection efforts, that the borrowers financial condition is such that collection of the loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is applied against the principal balance. During the periods ended June 30, 2010 and December 31, 2009, we received approximately $150,000 and $709,000, respectively, in interest income in relation to loans that were on nonaccrual status at the respective period end prior to them being placed on nonaccrual status. In addition, we held approximately $12.2 million and $6.9 million in other real estate owned at the periods ended June 30, 2010 and December 31, 2009, respectively.
Deposits
Our primary source of funds for loans and investments is our deposits. National and local market trends over the past several years suggest that consumers have moved an increasing percentage of discretionary savings funds into investments such as annuities, stocks and mutual funds. Accordingly, it has become more difficult to attract local deposits. We have chosen to reduce a portion of money market and certificates of deposits that are obtained outside of our market. The deposits obtained outside of our market area generally have lower rates than rates being offered for similar deposit products in our local market. We also utilize wholesale deposits in certain instances to obtain deposits with more favorable maturities than are readily available in our local market. We anticipate that the ratio of wholesale deposits to total deposits will decline as our full service banking offices mature. The amount of wholesale deposits was $95.4 million, or 18.9% of total deposits, at June 30, 2010, and $189.9 million, or 32.1% of total deposits, at December 31, 2009. The decrease in brokered deposits was a strategic decision made by management to reduce the overall risk profile of the Company and Bank.
We anticipate being able to either renew or replace these out-of-market deposits when they mature, although we may not be able to replace them with deposits with the same terms or rates. Our loan-to-deposit ratio was 92.1% and 82.1% at June 30, 2010 and December 31, 2009, respectively.
The following table shows the average balance amounts and the average rates paid on deposits held by us for the six months ended June 30, 2010 and the year ended December 31, 2009.
|
|
June 30, 2010 |
|
December 31, 2009 |
|
||||||
|
|
Average |
|
Rate |
|
Average |
|
Rate |
|
||
|
|
(dollars in thousands) |
|
||||||||
Noninterest bearing demand deposits |
|
$ |
15,159 |
|
|
% |
$ |
12,516 |
|
|
% |
Interest bearing demand deposits |
|
29,304 |
|
1.06 |
% |
40,761 |
|
1.58 |
% |
||
Savings and money market accounts money |
|
243,034 |
|
1.41 |
% |
197,356 |
|
1.70 |
% |
||
Time deposits less than $100,000 |
|
194,752 |
|
1.94 |
% |
214,135 |
|
2.85 |
% |
||
Time deposits greater than $100,000 |
|
105,945 |
|
2.48 |
% |
97,918 |
|
3.31 |
% |
||
Total deposits |
|
$ |
588,194 |
|
1.72 |
% |
$ |
562,686 |
|
2.37 |
% |
All of our time deposits are certificates of deposits. The maturity distribution of our time deposits of $100,000 or more at June 30, 2010 and December 31, 2009 was as follows:
|
|
June 30, 2010 |
|
December 31, 2009 |
|
||
|
|
(in thousands) |
|
||||
Three months or less |
|
$ |
23,210 |
|
$ |
21,620 |
|
Over three through six months |
|
33,804 |
|
44,829 |
|
||
Over six though twelve months |
|
62,067 |
|
34,826 |
|
||
Over twelve months |
|
10,778 |
|
4,700 |
|
||
Total |
|
$ |
129,859 |
|
$ |
105,975 |
|
Borrowings and Other Interest-Bearing Liabilities
The following table outlines our various sources of borrowed funds during the six months ended June 30, 2010 and the year ended December 31, 2009, the amounts outstanding at the end of each period, at the maximum point for each component during the periods, on average for each period, and the average and period end interest rate that we paid for each borrowing source. The maximum month-end balance represents the high indebtedness for each component of borrowed funds at any time during each of the periods shown.
|
|
Ending |
|
Period |
|
Maximum |
|
Average |
|
|||||
|
|
Balance |
|
Rate |
|
Balance |
|
Balance |
|
Rate |
|
|||
|
|
(dollars in thousands) |
|
|||||||||||
At or for the six months ended June 30, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|||
Securities sold under agreement to repurchase |
|
$ |
20,000 |
|
3.76 |
% |
$ |
60,000 |
|
$ |
41,182 |
|
2.02 |
% |
Advances from FHLB |
|
9,000 |
|
3.96 |
% |
85,000 |
|
70,348 |
|
2.79 |
% |
|||
Junior subordinated debentures |
|
14,434 |
|
4.99 |
% |
14,434 |
|
14,434 |
|
4.98 |
% |
|||
ESOP borrowings |
|
1,750 |
|
4.50 |
% |
2,300 |
|
1,967 |
|
3.87 |
% |
|||
Federal funds purchased |
|
|
|
|
% |
|
|
30 |
|
0.51 |
% |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||
At or for the year ended December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|||
Securities sold under agreement to repurchase |
|
$ |
60,000 |
|
1.55 |
% |
$ |
72,500 |
|
$ |
63,090 |
|
1.67 |
% |
Advances from FHLB |
|
65,000 |
|
3.03 |
% |
100,800 |
|
91,075 |
|
2.55 |
% |
|||
Junior subordinated debentures |
|
14,434 |
|
4.97 |
% |
14,434 |
|
14,434 |
|
5.36 |
% |
|||
ESOP borrowings |
|
2,300 |
|
2.25 |
% |
2,600 |
|
2,480 |
|
2.29 |
% |
|||
Federal funds purchased |
|
|
|
|
% |
|
|
106 |
|
1.12 |
% |
|||
Other borrowings |
|
|
|
|
% |
|
|
45 |
|
3.99 |
% |
Capital Resources
Total shareholders equity was $30.5 million at June 30, 2010 and $38.9 million at December 31, 2009. The difference is attributable to the amount of preferred stock dividend paid of $361,000, additional paid in capital related to the ESOP of $207,000, an increase in the guarantee of ESOP borrowings of $284,000, net of current year reductions, an increase of $1.5 million in the fair value of available-for-sale securities and stock-based compensation expense of $63,000, net of the loss of $9.7 million for the six month period ended June 30, 2010. Since our inception, we have not paid any cash dividends on our common shares.
The following table shows the annualized return on average assets (net income (loss) divided by average total assets), annualized return on average equity (net income (loss) divided by average equity), and average equity to average assets ratio (average equity divided by average total assets) for the six months ended June 30, 2010 and the year ended December 31, 2009.
|
|
June 30, 2010 |
|
December 31, 2009 |
|
Return on average assets |
|
(2.57 |
)% |
(1.30 |
)% |
Return on average equity |
|
(51.23 |
)% |
(20.85 |
)% |
Equity to assets ratio |
|
5.01 |
% |
6.24 |
% |
The Federal Reserve and bank regulatory agencies require bank holding companies and financial institutions to maintain capital at adequate levels based on a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%. Under the capital adequacy guidelines, regulatory capital is classified into two tiers. These guidelines require an institution to maintain a certain level of Tier 1 and Tier 2 capital to risk-weighted assets. Tier 1 capital consists of common shareholders equity, excluding the unrealized gain or loss on securities available-for-sale, minus certain intangible assets. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100% based on the risks believed to be inherent in the type of asset. Tier 2 capital consists of Tier 1 capital plus the general reserve for loan losses, subject to certain limitations. Our bank is required to maintain capital at a minimum level based on total average assets, which is known as the Tier 1 leverage ratio.
To be considered well capitalized, we must maintain total risk-based capital of at least 10%, Tier 1 capital of at least 6%, and a leverage ratio of at least 5%. To be considered adequately capitalized under capital guidelines, we must maintain a minimum total risk-based capital of 8%, with at least 4% being Tier 1 capital. In addition, we must maintain a minimum Tier 1 leverage ratio of at least 4%.
The following table sets forth the companys various capital ratios at June 30, 2010 and December 31, 2009. For all periods, the company was in compliance with regulatory capital requirements established by the Federal Reserve Boards Capital Adequacy Guidelines for Bank Holding Companies.
|
|
June 30, |
|
December 31, |
|
Tidelands Bancshares, Inc. |
|
2010 |
|
2009 |
|
Leverage ratio |
|
5.46 |
% |
6.83 |
% |
Tier 1 risk-based capital ratio |
|
8.57 |
% |
10.21 |
% |
Total risk-based capital ratio |
|
10.77 |
% |
11.67 |
% |
The following table sets forth the Banks various capital ratios at June 30, 2010 and December 31, 2009. For all periods, the Bank was considered well capitalized.
|
|
June 30, |
|
December 31, |
|
Tidelands Bank |
|
2010 |
|
2009 |
|
Leverage ratio |
|
5.76 |
% |
6.59 |
% |
Tier 1 risk-based capital ratio |
|
9.03 |
% |
9.84 |
% |
Total risk-based capital ratio |
|
10.30 |
% |
11.10 |
% |
We intend to maintain a capital level for the Bank that exceeds the FDIC requirements to be classified as a well capitalized bank.
Effect of Inflation and Changing Prices
The effect of relative purchasing power over time due to inflation has not been taken into account in our consolidated financial statements. Rather, our financial statements have been prepared on an historical cost basis in accordance with generally accepted accounting principles.
Unlike most industrial companies, our assets and liabilities are primarily monetary in nature. Therefore, the effect of changes in interest rates will have a more significant impact on our performance than will the effect of changing prices and inflation in general. In addition, interest rates may generally increase as the rate of inflation increases, although not necessarily in the same magnitude. As discussed previously, we seek to manage the relationships between interest sensitive assets and liabilities in order to protect against wide rate fluctuations, including those resulting from inflation.
Off-Balance Sheet Risk
Commitments to extend credit are agreements to lend to a customer as long as the customer has not violated any material condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. At June 30, 2010, unfunded commitments to extend credit were $25.3 million. A significant portion of the unfunded commitments related to consumer equity lines of credit. Based on historical experience, we anticipate that a significant portion of these lines of credit will not be funded. We evaluate each customers credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. The type of collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate.
At June 30, 2010, there were commitments totaling approximately $197,000 under letters of credit. The credit risk and collateral involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Since most of the letters of credit are expected to expire without being drawn upon, they do not necessarily represent future cash requirements.
Except as disclosed in this report, we are not involved in off-balance sheet contractual relationships, unconsolidated related entities that have off-balance sheet arrangements or transactions that could result in liquidity needs or other commitments that significantly impact earnings.
Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates, which principally arises from interest rate risk inherent in our lending, investing, deposit gathering, and borrowing activities. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not generally arise in the normal course of our business.
We actively monitor and manage our interest rate risk exposure principally by measuring our interest sensitivity gap, and net interest income simulations. Interest sensitivity gap is the positive or negative dollar difference between assets and liabilities that are subject to interest rate repricing within a given period of time. Interest rate sensitivity can be managed by repricing assets or liabilities, selling securities available-for-sale, replacing an asset or liability at maturity, or adjusting the interest rate during the life of an asset or liability. Managing the amount of assets and liabilities repricing in this same time interval helps to hedge the risk and minimize the impact on net interest income of rising or falling interest rates. We generally would benefit from increasing market rates of interest when we have an asset-sensitive gap position and generally would benefit from decreasing market rates of interest when we are liability-sensitive. Based upon the contractual maturities within a 12-month period shown in the interest sensitivity report at June 30, 2010, our balance sheet is liability sensitive without regards to prepayments.
Approximately 55.3% of our loans were variable rate loans at June 30, 2010 and 88.6% of interest-bearing liabilities reprice within one year. However, interest rate movements typically result in changes in interest rates on assets that are different in magnitude from the corresponding changes in rates paid on liabilities. While a substantial portion of our loans reprice within the first three months of the year, a larger majority of our deposits will reprice within a 12-month period. However, `gap analysis is not a precise indicator of our interest sensitivity position. The analysis presents only a static view of the timing of maturities and repricing opportunities, without taking into consideration that changes in interest rates do not affect all assets and liabilities equally. For example, rates paid on a substantial portion of core deposits may change contractually within a relatively short time frame, but those rates are viewed by us as significantly less interest-sensitive than market-based rates such as those paid on noncore deposits. Net interest income may be affected by other significant factors in a given interest rate environment, including changes in the volume and mix of interest-earning assets and interest-bearing liabilities.
Liquidity and Interest Rate Sensitivity
Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss, and the ability to raise additional funds by increasing liabilities. Liquidity management involves monitoring our sources and uses of funds in order to meet our day-to-day cash flow requirements while maximizing profits. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of our investment portfolio is fairly predictable and subject to a high degree of control at the time investment decisions are made. However, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control.
At June 30, 2010 and December 31, 2009, our liquid assets, which consist of cash and due from banks, amounted to $35.9 million and $15.0 million, or 6.1% and 1.9% of total assets, respectively. Our available-for-sale securities at June 30, 2010 and December 31, 2009 amounted to $38.0 million and $229.8 million, or 6.50% and 29.6% of total assets, respectively. Investment securities traditionally provide a secondary source of liquidity since they can be converted into cash in a timely manner. However, approximately $32.3 million of these securities are pledged against outstanding debt or borrowing lines of credit. Therefore, the related debt would need to be repaid prior to the securities being sold in order for these securities to be converted to cash.
Our ability to maintain and expand our deposit base and borrowing capabilities serves as our primary source of liquidity. We plan to meet our future cash needs through the generation of deposits. In addition, we will receive cash upon the maturity and sale of loans and the maturity of investment securities. In addition, we maintain two federal funds purchased lines of credit with correspondent banks totaling $12.0 million. We are also a member of the FHLB of Atlanta, from which applications for borrowings can be made for leverage or liquidity purposes. The FHLB requires that securities, qualifying mortgage loans, and stock of the FHLB owned by the Bank be pledged to secure any advances. At June 30, 2010, we had $9.0 million in total advances and letters of credit from the FHLB with a remaining credit availability of $180.3 million and an excess lendable collateral value of approximately $21.1 million. In addition, we maintain a line of credit with the Federal Reserve Bank of $15.1 million secured by current loans in our loan portfolio.
Asset/liability management is the process by which we monitor and control the mix and maturities of our assets and liabilities. The essential purposes of asset/liability management are to ensure adequate liquidity and to maintain an appropriate balance between interest sensitive assets and liabilities in order to minimize potentially adverse impacts on earnings from changes in market interest rates. Our asset liability management committee and our risk management committee monitor and consider methods of managing exposure to interest rate risk. These committees are responsible for maintaining the level of interest rate sensitivity of our interest sensitive assets and liabilities within board-approved limits.
The following table sets forth information regarding our rate sensitivity, as of June 30, 2010, at each of the time intervals. The information in the table may not be indicative of our rate sensitivity position at other points in time. In addition, the maturity distribution implied in the table may differ from the contractual maturities of the earning assets and interest-bearing liabilities presented due to consideration of prepayment speeds under various interest rate change scenarios in the application of the interest rate sensitivity methods described above.
|
|
Within |
|
After three |
|
After one |
|
After |
|
Total |
|
|||||
|
|
(dollars in thousands) |
|
|||||||||||||
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Federal funds sold |
|
$ |
27,665 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
27,665 |
|
Investment securities |
|
2,175 |
|
5,905 |
|
11,169 |
|
18,727 |
|
37,976 |
|
|||||
Loans |
|
266,801 |
|
54,058 |
|
117,326 |
|
26,832 |
|
465,017 |
|
|||||
Total interest-earning assets |
|
$ |
296,641 |
|
$ |
59,963 |
|
$ |
128,495 |
|
$ |
45,559 |
|
$ |
530,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Money market and NOW |
|
$ |
61,851 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
61,851 |
|
Regular savings |
|
133,831 |
|
|
|
|
|
|
|
133,831 |
|
|||||
Time deposits |
|
97,626 |
|
170,324 |
|
24,899 |
|
1,173 |
|
294,022 |
|
|||||
Junior subordinated debentures |
|
8,248 |
|
|
|
|
|
6,186 |
|
14,434 |
|
|||||
Securities sold under agreements to repurchase |
|
|
|
|
|
10,000 |
|
10,000 |
|
20,000 |
|
|||||
Advances from Federal Home Loan Bank |
|
|
|
|
|
|
|
9,000 |
|
9,000 |
|
|||||
ESOP borrowings |
|
1,750 |
|
|
|
|
|
|
|
1,750 |
|
|||||
Total interest-bearing liabilities |
|
$ |
303,306 |
|
$ |
170,324 |
|
$ |
34,899 |
|
$ |
26,359 |
|
$ |
534,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Period gap |
|
$ |
(6,665 |
) |
$ |
(110,361 |
) |
$ |
93,596 |
|
$ |
19,200 |
|
$ |
(4,230 |
) |
Cumulative gap |
|
$ |
(6,665 |
) |
$ |
(117,026 |
) |
$ |
(23,430 |
) |
$ |
(4,230 |
) |
$ |
(4,230 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Ratio of cumulative gap to total earning assets |
|
(1.26 |
)% |
(22.05 |
)% |
(4.42 |
)% |
(0.80 |
)% |
(0.80 |
)% |
Item 4. Controls and Procedures.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our current disclosure controls and procedures are effective as of June 30, 2010. There have been no significant changes in our internal controls over financial reporting during the fiscal quarter ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table provides information about purchases of our common shares during the quarter ended June 30, 2010 by the Tidelands Bancshares, Inc. Employee Stock Ownership Plan (the ESOP).
Period |
|
(a) Total Number |
|
(b) Average Price |
|
(c) Total Number |
|
(d) Maximum |
|
|
January 2010 |
|
9,800 |
|
$ |
3.86 |
|
9,800 |
|
N/A |
|
February 2010 |
|
2,002 |
|
$ |
3.54 |
|
2,002 |
|
N/A |
|
March 2010 |
|
3,240 |
|
$ |
2.78 |
|
3,240 |
|
N/A |
|
April 2010 |
|
|
|
|
|
|
|
N/A |
|
|
May 2010 |
|
|
|
|
|
|
|
N/A |
|
|
June 2010 |
|
|
|
|
|
|
|
N/A |
|
|
Total |
|
15,042 |
|
$ |
3.27 |
|
15,042 |
|
N/A |
|
(1) Open-market transactions by ESOP
(2) The ESOP was established January 1, 2007 and does not have a fixed date of termination.
3.1 |
Articles of Amendment dated April 12, 2010 (incorporated by reference to Exhibit 3.3 of the Companys Form S-1/A filed on April 21, 2010). |
31.1 |
Rule 13a-14(a) Certification of the Principal Executive Officer. |
31.2 |
Rule 13a-14(a) Certification of the Principal Financial Officer. |
32 |
Section 1350 Certifications. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: August 13, 2010 |
By: |
/s/ Robert E. Coffee, Jr. |
|
|
Robert E. Coffee, Jr. |
|
|
Chief Executive Officer |
|
|
(Principal Executive Officer) |
|
|
|
Date: August 13, 2010 |
By: |
/s/ Alan W. Jackson |
|
|
Alan W. Jackson |
|
|
Chief Financial Officer |
|
|
(Principal Financial and Accounting Officer) |
EXHIBIT INDEX
Exhibit |
|
|
Number |
|
Description |
|
|
|
3.1 |
|
Articles of Amendment dated April 12, 2010 (incorporated by reference to Exhibit 3.3 of the Companys Form S-1/A filed on April 21, 2010). |
|
|
|
31.1 |
|
Rule 13a-14(a) Certification of the Principal Executive Officer. |
|
|
|
31.2 |
|
Rule 13a-14(a) Certification of the Principal Financial Officer. |
|
|
|
32 |
|
Section 1350 Certifications. |