Attached files
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EX-32 - EXHIBIT 32 - COMMUNITY CAPITAL CORP /SC/ | ex32.htm |
EX-31.2 - EXHIBIT 31.2 - COMMUNITY CAPITAL CORP /SC/ | ex31-2.htm |
EX-31.1 - EXHIBIT 31.1 - COMMUNITY CAPITAL CORP /SC/ | ex31-1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2011
Commission File Number 0-18460
COMMUNITY CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
South Carolina
|
57-0866395
|
(State or other jurisdiction of
|
(I.R.S. Employer Identification
|
incorporation) | No.) |
1402C Highway 72 West
Greenwood, SC 29649
(Address of principal executive
|
offices, including zip code) |
(864) 941-8200
(Registrant’s 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 Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No __
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes__ 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 “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ( ) Accelerated Filer ( ) Non-Accelerated Filer ( ) Smaller Reporting Company (X)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES__ NO X
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date
10,060,777 shares of common stock, $1.00 par value per share, as of April 29, 2011
COMMUNITY CAPITAL CORPORATION
Index
PART I. - FINANCIAL INFORMATION | Page No. |
Item 1. | Financial Statements (Unaudited) | ||
Condensed Consolidated Balance Sheets – March 31, 2011 and December 31, 2010 | 3 | ||
Condensed Consolidated Statements of Operations - | |||
Three months ended March 31, 2011 and 2010 | 4 | ||
Condensed Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income - | |||
Three months ended March 31, 2011 and 2010 | 5 | ||
Condensed Consolidated Statements of Cash Flows - Three months ended March 31, 2011 and 2010 | 6 | ||
Notes to Condensed Consolidated Financial Statements | 7-23 | ||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 24-42 | |
Item 3. | Quantitative and Qualitative Disclosure About Market Risk | 43 | |
Item 4. | Controls and Procedures | 43-44 |
PART II. - OTHER INFORMATION
Item 1. | Legal Proceedings | 45 | |
Item 1A. | Risk Factors | 45 | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 45 | |
Item 3. | Defaults Upon Senior Securities | 45 | |
Item 4. | (Removed and Reserved) | 45 | |
Item 5. | Other Information | 45 | |
Item 6. | Exhibits | 45 |
-2-
COMMUNITY CAPITAL CORPORATION
Condensed Consolidated Balance Sheets
PART I. FINANCIAL STATEMENTS
Item 1. Financial Statements
March 31,
|
December 31,
|
|||||||
(Dollars in thousands, shares are not in dollars) |
2011
|
2010
|
||||||
Assets: |
(Unaudited)
|
|||||||
Cash and cash equivalents: | ||||||||
Cash and due from banks | $ |
11,079
|
$ | 9,315 | ||||
Interest-bearing deposit accounts |
43,580
|
27,860
|
||||||
|
||||||||
Total cash and cash equivalents |
54,659
|
37,175
|
||||||
Investment securities: | ||||||||
Securities available-for-sale |
67,197
|
74,025
|
||||||
Nonmarketable equity securities
|
9,416
|
9,626
|
||||||
Total investment securities
|
76,613
|
83,651
|
||||||
Loans held for sale
|
1,781
|
5,516
|
||||||
Loans receivable
|
464,978
|
479,393
|
||||||
Less allowance for loan losses
|
(15,112
|
)
|
(17,165
|
) | ||||
Loans, net
|
449,866
|
462,228
|
||||||
Other real estate owned
|
13,691
|
13,496
|
||||||
Premises and equipment, net
|
15,153
|
15,342
|
||||||
Accrued interest receivable
|
2,201
|
2,289
|
||||||
Prepaid expenses
|
2,857
|
3,349
|
||||||
Intangible assets
|
1,162
|
1,259
|
||||||
Cash surrender value of life insurance
|
17,569
|
17,397
|
||||||
Deferred tax asset
|
8,469
|
8,992
|
||||||
Income tax receivable
|
3,104
|
3,158
|
||||||
Other assets
|
2,010
|
2,082
|
||||||
Total assets
|
$
|
649,135
|
$
|
655,934
|
||||
Liabilities:
|
||||||||
Deposits:
|
||||||||
Noninterest-bearing
|
$
|
108,844
|
$
|
103,080
|
||||
Interest-bearing
|
378,171
|
392,102
|
||||||
Total deposits
|
487,015
|
495,182
|
||||||
Advances from the Federal Home Loan Bank
|
95,400
|
95,400
|
||||||
Accrued interest payable
|
615
|
708
|
||||||
Junior subordinated debentures
|
10,310
|
10,310
|
||||||
Other liabilities
|
6,920
|
6,930
|
||||||
Total liabilities
|
600,260
|
608,530
|
||||||
Shareholders’ equity: | ||||||||
Common stock, $1.00 par value; 20,000,000 shares authorized; | ||||||||
10,721,350 shares issued at March 31, 2011 and December 31, 2010 |
10,721
|
10,721
|
||||||
Capital surplus |
64,160
|
64,679
|
||||||
Accumulated other comprehensive income (loss) | (165 |
)
|
(460 | ) | ||||
Retained earnings (deficit) | (16,167 | ) |
(17,189
|
) | ||||
Nonvested restricted stock | (84 | ) |
(116
|
) | ||||
Treasury stock, at cost (660,573 and 704,702 shares in 2011 and 2010, | ||||||||
respectively) | (9,590 | ) |
(10,231
|
) | ||||
Total shareholders’ equity | 48,875 | 47,404 | ||||||
Total liabilities and shareholders’ equity | $ | 649,135 | $ | 655,934 |
See Notes to Condensed Consolidated Financial Statements
-3-
COMMUNITY CAPITAL CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except for per share data amounts)
|
Three Months Ended
March 31,
|
|||||||
2011
|
2010
|
|||||||
Interest income:
|
||||||||
Loans, including fees
|
$ | 6,405 | $ | 7,500 | ||||
Investment securities:
|
||||||||
Taxable
|
366 | 536 | ||||||
Tax-exempt
|
113 | 169 | ||||||
Nonmarketable equity securities
|
41 | 31 | ||||||
Other interest income
|
16 | 22 | ||||||
Total
|
6,941 | 8,258 | ||||||
Interest expense:
|
||||||||
Deposits
|
1,002 | 1,930 | ||||||
Federal Home Loan Bank advances
|
817 | 823 | ||||||
Other interest expense
|
195 | 179 | ||||||
Total
|
2,014 | 2,932 | ||||||
Net interest income
|
4,927 | 5,326 | ||||||
Provision for loan losses
|
600 | 1,600 | ||||||
Net interest income after provision for loan losses
|
4,327 | 3,726 | ||||||
Other operating income:
|
||||||||
Service charges on deposit accounts
|
375 | 482 | ||||||
Gain on sales of loans held for sale
|
427 | 298 | ||||||
Fees from brokerage services
|
76 | 64 | ||||||
Income from fiduciary activities
|
530 | 472 | ||||||
Gain on sale of securities available-for-sale
|
224 | 683 | ||||||
Other operating income
|
484 | 1,348 | ||||||
Total
|
2,116 | 3,347 | ||||||
Other operating expenses:
|
||||||||
Salaries and employee benefits
|
2,572 | 2,439 | ||||||
Net occupancy
|
335 | 322 | ||||||
Amortization of intangible assets
|
97 | 103 | ||||||
Furniture and equipment
|
168 | 203 | ||||||
FDIC banking assessments
|
479 | 346 | ||||||
Net cost of operation of other real estate owned
|
159 | 295 | ||||||
Other operating expenses
|
1,187 | 1,079 | ||||||
Total
|
4,997 | 4,787 | ||||||
Income before income taxes
|
1,446 | 2,286 | ||||||
Income tax provision
|
424 | 686 | ||||||
Net income
|
$ | 1,022 | $ | 1,600 | ||||
Basic net income per share
|
$ | 0.10 | $ | 0.16 | ||||
Diluted net income per share
|
$ | 0.10 | $ | 0.16 | ||||
See Notes to Condensed Consolidated Financial Statements
-4-
COMMUNITY CAPITAL CORPORATION
Condensed Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income
For the three months ended March 31, 2011 and 2010
(Unaudited)
(Dollars in thousands
except for per share
|
Common Stock
|
Nonvested
Restricted
Stock
|
Capital
Surplus
|
Retained
Earnings (loss)
|
Accumulated
Other
Comprehensive
Income (loss)
|
Treasury
Stock
|
Total
|
|||||||||||||||||||||||||
amounts)
|
||||||||||||||||||||||||||||||||
Shares
|
Amount
|
|||||||||||||||||||||||||||||||
Balance,
December 31, 2009
|
10,721,450 | $ | 10,721 | $ | (364 | ) | $ | 66,473 | $ | (11,705 | ) | $ | 909 | $ | (12,277 | ) | $ | 53,757 | ||||||||||||||
Net income
|
1,600 | 1,600 | ||||||||||||||||||||||||||||||
Other
comprehensive
loss, net of tax benefit
|
(465 | ) | (465 | ) | ||||||||||||||||||||||||||||
Comprehensive Income
|
1,135 | |||||||||||||||||||||||||||||||
Sales of treasury shares (45,498 shares)
|
(531 | ) | 661 | 130 | ||||||||||||||||||||||||||||
Capitalized expenses associated with rights offering
|
(36 | ) | (36 | ) | ||||||||||||||||||||||||||||
Amortization of deferred
compensation on restricted stock
|
71 | 71 | ||||||||||||||||||||||||||||||
Balance, March 31, 2010
|
10,721,450 | $ | 10,721 | $ | (293 | ) | $ | 65,906 | $ | (10,105 | ) | $ | 444 | $ | (11,616 | ) | $ | 55,057 | ||||||||||||||
Balance,
December 31, 2010
|
10,721,350 | $ | 10,721 | $ | (116 | ) | $ | 64,679 | $ | (17,189 | ) | $ | (460 | ) | $ | (10,231 | ) | $ | 47,404 | |||||||||||||
Net income
|
1,022 | 1,022 | ||||||||||||||||||||||||||||||
Other
comprehensive
income, net of tax effects
|
295 | 295 | ||||||||||||||||||||||||||||||
Comprehensive Income
|
1,317 | |||||||||||||||||||||||||||||||
Sales of treasury shares (44,129 shares)
|
(519 | ) | 641 | 122 | ||||||||||||||||||||||||||||
Amortization of deferred
compensation on restricted
stock
|
32 | 32 | ||||||||||||||||||||||||||||||
Balance, March 31, 2011
|
10,721,350 | $ | 10,721 | $ | (84 | ) | $ | 64,160 | $ | (16,167 | ) | $ | (165 | ) | $ | (9,590 | ) | $ | 48,875 |
See Notes to Condensed Consolidated Financial Statements
-5-
COMMUNITY CAPITAL CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
|
Three Months Ended
March 31,
|
|||||||
2011
|
2010
|
|||||||
Cash flows from operating activities:
|
||||||||
Net Income
|
$ | 1,022 | $ | 1,600 | ||||
Adjustments to reconcile net income to net cash provided
|
||||||||
by operating activities:
|
||||||||
Depreciation
|
196 | 243 | ||||||
Provision for loan losses
|
600 | 1,600 | ||||||
Deferred income tax benefit
|
523 | 667 | ||||||
Amortization of intangible assets
|
97 | 103 | ||||||
Amortization less accretion on investments
|
308 | (53 | ) | |||||
Amortization of deferred loan costs and fees, net
|
206 | 218 | ||||||
Amortization of deferred compensation on restricted stock
|
32 | 71 | ||||||
Write downs of other real estate owned
|
- | 40 | ||||||
Net gain on sales of securities available-for-sale
|
(224 | ) | (683 | ) | ||||
Net loss on sale of other real estate owned
|
82 | 86 | ||||||
Disbursements for loans held for sale
|
(9,378 | ) | (6,853 | ) | ||||
Proceeds from sales of loans held for sale
|
13,113 | 6,560 | ||||||
Decrease in income tax receivable
|
54 | 7,994 | ||||||
Decrease in interest receivable
|
88 | 363 | ||||||
Decrease in interest payable
|
(93 | ) | (412 | ) | ||||
(Increase) decrease in other assets
|
240 | (1,195 | ) | |||||
Increase (decrease) in other liabilities
|
(10 | ) | 494 | |||||
Net cash provided by operating activities
|
6,856 | 10,843 | ||||||
Cash flows from investing activities:
|
||||||||
Net decrease in loans to customers
|
10,847 | 12,809 | ||||||
Purchases of securities available-for-sale
|
(1,709 | ) | (37,228 | ) | ||||
Proceeds from maturities and sales of securities available-for-sale
|
8,900 | 38,321 | ||||||
Purchases of nonmarketable equity securities
|
- | (178 | ) | |||||
Proceeds from sales of nonmarketable equity securities
|
210 | - | ||||||
Proceeds from sales of other real estate owned
|
432 | 1,605 | ||||||
Purchases of premises and equipment
|
(7 | ) | (24 | ) | ||||
Net cash provided by investing activities
|
18,673 | 15,305 | ||||||
Cash flows from financing activities:
|
||||||||
Net decrease in deposit accounts
|
(8,167 | ) | (4,987 | ) | ||||
Advances of Federal Home Loan Bank borrowings
|
- | 20,000 | ||||||
Repayments of Federal Home Loan Bank borrowings
|
- | (20,000 | ) | |||||
Sales of treasury stock
|
122 | 130 | ||||||
Capitalized expenses associated with rights offering
|
- | (36 | ) | |||||
Net cash used by financing activities
|
(8,045 | ) | (4,893 | ) | ||||
Net increase in cash and cash equivalents
|
17,484 | 21,255 | ||||||
Cash and cash equivalents, beginning of period
|
37,175 | 49,131 | ||||||
Cash and cash equivalents, end of period
|
$ | 54,659 | $ | 70,386 | ||||
See Notes to Condensed Consolidated Financial Statements
-6-
COMMUNITY CAPITAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 - Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with the requirements for interim financial statements and, accordingly, they are condensed and omit disclosures that would substantially duplicate those contained in the most recent annual report to shareholders. The financial statements as of March 31, 2011 and for the interim periods ended March 31, 2011 and 2010 are unaudited and include all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation. The financial information as of December 31, 2010 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 our 2010 Annual Report. In preparing the financial statements, the Company has evaluated events and transactions occurring subsequent to the financial statement date through the date the financial statements were available to be issued for potential recognition of disclosure.
Note 2 – Pending Merger
On March 30, 2011, the Company and Park Sterling Corporation ("Park Sterling") entered into an Agreement and Plan of Merger (the "Merger Agreement") pursuant to which the Company will be merged with and into Park Sterling. Under the terms of the Merger Agreement, each outstanding share of the Company's common stock will be converted into the right to receive either (i) $3.30 in cash or (ii) 0.6667 of a share of Park Sterling's common stock. The election of consideration by the holders of the Company's common stock is subject to the limitation that no more than 40% of the shares of the Company's common stock be exchanged for cash.
The merger is expected to close in the third quarter of 2011, and is subject to approval by federal and state regulatory authorities and the Company's shareholders and the satisfaction of the closing conditions set forth in the Merger Agreement.
Note 3 - Supplemental Cash Flow Information
(Dollars in thousands)
|
Three Months Ended March 31,
|
|||||||
2011
|
2010
|
|||||||
Cash paid during the period for:
|
||||||||
Income taxes
|
$ | - | $ | - | ||||
Interest
|
2,107 | 3,248 | ||||||
Noncash investing and financing activities:
|
||||||||
Foreclosures on loans
|
$ | 709 | $ | 3,399 |
Note 4 - Shareholders' Equity
During the first quarter of 2011, the Company sold 44,129 shares of treasury stock for total proceeds of $122,000. From April 2009 through March 2011, the Company’s 401(k) plan and Dividend Reinvestment and Stock Purchase Plan purchased shares from treasury versus the open market to generate additional capital for the Company. The purchase prices for these transactions are valued based on the end of day closing market price of the security.
-7-
COMMUNITY CAPITAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 5 - Earnings Per Share
A reconciliation of the numerators and denominators used to calculate basic and diluted earnings per share are as follows:
(Dollars in thousands, except per share)
|
Three Months Ended March 31, 2011
|
|||||||||||
Income
(Numerator)
|
Shares
(Denominator)
|
Per Share
Amount
|
||||||||||
Basic earnings per share
|
||||||||||||
Income available to common shareholders
|
$ | 1,022 | 10,017,607 | $ | 0.10 | |||||||
Effect of dilutive securities
|
||||||||||||
Unvested restricted stock
|
- | 18,539 | ||||||||||
Diluted earnings per share
|
||||||||||||
Income available to common shareholders
plus assumed conversions
|
$ | 1,022 | 10,036,146 | $ | 0.10 |
(Dollars in thousands, except per share)
|
Three Months Ended March 31, 2010
|
|||||||||||
Income
(Numerator)
|
Shares
(Denominator)
|
Per Share
Amount
|
||||||||||
Basic earnings per share
|
||||||||||||
Income available to common shareholders
|
$ | 1,600 | 9,852,025 | $ | 0.16 | |||||||
Effect of dilutive securities
|
||||||||||||
Unvested restricted stock
|
- | 42,863 | ||||||||||
Diluted earnings per share
|
||||||||||||
Income available to common shareholders
plus assumed conversions
|
$ | 1,600 | 9,894,888 | $ | 0.16 |
-8-
COMMUNITY CAPITAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 6 - Comprehensive Income (Loss)
The following tables set forth the amounts of other comprehensive income (loss) included in equity along with the related tax effects:
Three Months Ended March 31, 2011
|
||||||||||||
(Dollars in thousands)
|
Pre-tax
Amount
|
(Expense)
Benefit
|
Net-of-tax
Amount
|
|||||||||
Unrealized gains (losses) on securities:
|
||||||||||||
Unrealized holding losses arising during the period
|
$ | 223 | $ | (76 | ) | $ | 147 | |||||
Less: reclassification adjustment for gains realized
in net income
|
224 | (76 | ) | 148 | ||||||||
Net unrealized losses on securities
|
447 | (152 | ) | 295 | ||||||||
Other comprehensive loss
|
$ | 447 | $ | (152 | ) | $ | 295 |
Three Months Ended March 31, 2010
|
||||||||||||
(Dollars in thousands)
|
Pre-tax
Amount
|
(Expense)
Benefit
|
Net-of-tax
Amount
|
|||||||||
Unrealized gains on securities:
|
||||||||||||
Unrealized holding gains arising during the period
|
$ | (1,388 | ) | $ | 472 | $ | (916 | ) | ||||
Less: reclassification adjustment for gains realized
in net income
|
683 | (232 | ) | 451 | ||||||||
Net unrealized gains on securities
|
(705 | ) | 240 | (465 | ) | |||||||
Other comprehensive income
|
$ | (705 | ) | $ | 240 | $ | (465 | ) |
Note 7 – Stock Based Compensation
The 2004 Equity Incentive Plan provides for the granting of restricted stock, statutory incentive stock options within the meaning of Section 422 of the Internal Revenue Code as well as nonstatutory stock options, or stock appreciation rights of up to 258,750 shares of our common stock, to officers, employees, and directors. Awards may be granted for a term of up to ten years from the effective date of grant. Under this Plan, our Board of Directors has sole discretion as to the exercise date of any awards granted. The per-share exercise price of incentive stock options may not be less than the fair value of a share of common stock on the date the option is granted. The per-share exercise price of nonqualified stock options may not be less than 50% of the fair value of a share on the effective date of grant. Any options that expire unexercised or are canceled become available for reissuance. No awards may be made on or after May 19, 2014.
There have been no shares of restricted stock issued during the first quarter of 2011 or during the year ending December 31, 2010. Compensation cost associated with prior issuances of restricted stock was $32,000 and $71,000 for the three months ended March 31, 2011 and 2010, respectively. At March 31, 2011, we had 97,198 stock awards available for grant under the 2004 Equity Incentive Plan.
-9-
COMMUNITY CAPITAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 8 – Investment Securities
Securities available-for-sale at March 31, 2011 and December 31, 2010 consisted of the following:
Amortized
|
Gross Unrealized
|
Estimated | ||||||||||||||
(Dollars in thousands)
|
Cost
|
Gains
|
Losses
|
Fair Value
|
||||||||||||
March 31, 2011
|
||||||||||||||||
Obligations of state and local governments
|
$ | 8,800 | $ | 52 | $ | 76 | $ | 8,776 | ||||||||
Mortgage-backed securities
|
58,647 | 64 | 290 | 58,421 | ||||||||||||
Total
|
$ | 67,447 | $ | 116 | $ | 366 | $ | 67,197 | ||||||||
December 31, 2010
|
||||||||||||||||
Obligations of state and local governments
|
$ | 10,853 | $ | 133 | $ | 190 | $ | 10,796 | ||||||||
Mortgage-backed securities
|
63,869 | 157 | 797 | 63,229 | ||||||||||||
Total
|
$ | 74,722 | $ | 290 | $ | 987 | $ | 74,025 |
The following table shows gross unrealized losses and fair value, aggregated by investment category, and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2011.
Securities Available-for-Sale
Less than
|
Twelve months
|
|||||||||||||||||||||||
twelve months
|
or more | Total | ||||||||||||||||||||||
Unrealized
|
Unrealized
|
Unrealized | ||||||||||||||||||||||
(Dollars in thousands)
|
Fair value
|
losses
|
Fair value
|
losses
|
Fair value
|
losses
|
||||||||||||||||||
Obligations of state and local
|
$ | 3,600 | $ | 76 | $ | - | $ | - | $ | 3,600 | $ | 76 | ||||||||||||
governments
|
||||||||||||||||||||||||
Mortgage-backed securities
|
37,520 | 290 | - | - | 37,520 | 290 | ||||||||||||||||||
Total
|
$ | 41,120 | $ | 366 | $ | - | $ | - | $ | 41,120 | $ | 366 |
Securities classified as available-for-sale are recorded at fair market value. 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 the 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 rates and is not in the credit quality of the issuer and therefore, these losses are not considered other-than-temporary. The Company did not have any securities in a continuous loss position for twelve months or more.
The Company reviews its investment 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 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 entire difference between the investment’s cost and its fair value at the balance sheet date of the reporting period for which the assessment is made, or may recognize a portion in other comprehensive income. The fair value of investments on which OTTI is recognized then becomes the new cost basis of the investment.
-10-
COMMUNITY CAPITAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 8 – Investment Securities - continued
The following table summarizes the maturities of securities available-for-sale as of March 31, 2011, based on the contractual maturities. Actual maturities may differ from the 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 paydowns are expected before the contractual maturity dates.
Securities
|
|||||||||
Available-For-Sale
|
|||||||||
Amortized
|
Estimated
|
||||||||
(Dollars in thousands) |
Cost
|
Fair Value
|
|||||||
Due in one year or less
|
$ | 315 | $ | 316 | |||||
Due after one year but within five years
|
1,481 | 1,511 | |||||||
Due after five years but within ten years
|
1,963 | 1,975 | |||||||
Due after ten years
|
5,041 | 4,974 | |||||||
8,800 | 8,776 | ||||||||
Mortgage-backed securities
|
58,647 | 58,421 | |||||||
Total
|
$ | 67,447 | $ | 67,197 |
Proceeds from maturities and sales of securities available-for-sale during the three months ended March 31, 2011 were $8,900,000 which resulted in gross realized gains of $224,000 during the three months ended March 31, 2011. Proceeds from maturities and sales of securities available-for-sale during the three months ended March 31, 2010 were $38,321,000 which resulted in gross realized gains of $683,000 during the three months ended March 31, 2010.
At March 31, 2011 and December 31, 2010, securities having amortized costs of approximately $44,594,000 and $32,681,000, respectively, were pledged as collateral for short-term borrowings, to secure public and trust deposits, and for other purposes as required and permitted by law.
The Company has nonmarketable equity securities consisting of investments in several financial institutions. These investments totaled $9,416,000 at March 31, 2011 and $9,626,000 at December 31, 2010. During the first three months of 2011, sales of nonmarketable equity securities totaled $210,000, however there were no losses recorded related to OTTI.
NOTE 9- LOANS RECEIVABLE
Loans receivable are summarized as follows:
(Dollars in thousands)
|
March 31,
2011
|
December 31,
2010
|
||||||
Commercial
|
$ | 50,510 | $ | 51,112 | ||||
Commercial real estate – construction
|
70,622 | 79,762 | ||||||
Commercial real estate – other
|
164,125 | 162,367 | ||||||
Residential
|
133,010 | 137,618 | ||||||
Home equity
|
40,764 | 42,167 | ||||||
Consumer
|
5,947 | 6,367 | ||||||
Total gross loans
|
$ | 464,978 | $ | 479,393 |
At March 31, 2011 and December 31, 2010, the Company had sold participations in loans aggregating $3,658,000 and $3,665,000, respectively, to other financial institutions on a nonrecourse basis. Collections on loan participations and remittances to participating institutions conform to customary banking practices.
At March 31, 2011 and December 31, 2010, the Company had pledged approximately $96,474,000 and $101,870,000, respectively, of loans on residential and commercial real estate as collateral for advances from the Federal Home Loan Bank.
-11-
COMMUNITY CAPITAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 9 - LOANS RECEIVABLE - continued
An analysis of the allowance for loan losses for the periods ended March 31, 2011, December 31, 2010, and March 31, 2010 is as follows:
(Dollars in thousands)
|
March 31,
2011
|
December 31,
2010
|
March 31,
2010
|
|||||||||
Balance, beginning of year
|
$
|
17,165
|
$
|
14,160
|
$
|
14,160
|
||||||
Provision charged to operations
|
600
|
18,350
|
1,600
|
|||||||||
Recoveries on loans previously charged-off
|
51
|
422
|
176
|
|||||||||
Loans charged-off
|
(2,704
|
)
|
(15,767
|
)
|
(1,918
|
)
|
||||||
Balance, end of year
|
$
|
15,112
|
$
|
17,165
|
$
|
14,018
|
An analysis of the allowance for loan losses for the three month period ended March 31, 2011 is as follows:
(Dollars in thousands) | Commercial | Commercial | |||||||||||||||||||||||
Allowance for credit | Real Estate |
Real Estate
|
|||||||||||||||||||||||
losses: |
Commercial
|
Construction
|
Other |
Consumer
|
Residential
|
HELOC
|
Unallocated
|
Total
|
|||||||||||||||||
Beginning balance
|
$
|
438
|
$
|
7,041
|
$
|
1,317
|
$
|
28
|
$
|
4,102
|
$
|
530
|
$
|
3,709
|
$
|
17,165
|
|||||||||
Chargeoffs
|
(20
|
)
|
(1,830
|
)
|
(339
|
)
|
(4
|
)
|
(447
|
)
|
(64
|
)
|
-
|
(2,704
|
)
|
||||||||||
Recoveries
|
11
|
1
|
-
|
5
|
33
|
1
|
-
|
51
|
|||||||||||||||||
Provisions
|
(19
|
)
|
1,850
|
332
|
(6
|
)
|
(798
|
)
|
35
|
(794
|
)
|
600
|
|||||||||||||
Ending balance
|
$
|
410
|
$
|
7,062
|
$
|
1,310
|
$
|
23
|
$
|
2,890
|
$
|
502
|
$
|
2,915
|
$
|
15,112
|
|||||||||
Ending balance:
Individually evaluated
for impairment
|
$
|
7
|
$
|
-
|
$
|
22
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
29
|
|||||||||
Ending balance:
Collectively evaluated
for impairment
|
$
|
403
|
$
|
7,062
|
$
|
1,288
|
$
|
23
|
$
|
2,890
|
$
|
502
|
$
|
2,915
|
$
|
15,083
|
|||||||||
Ending balance:
Loans acquired with
deteriorated credit quality
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
|||||||||
Loans receivable:
|
|||||||||||||||||||||||||
Ending balance
|
$
|
50,510
|
$
|
70,622
|
$
|
164,125
|
$
|
5,947
|
$
|
133,010
|
$
|
40,764
|
$
|
-
|
$
|
464,978
|
|||||||||
Ending balance:
Individually evaluated
for impairment
|
$
|
666
|
$
|
14,007
|
$
|
8,495
|
$
|
-
|
$
|
11,095
|
$
|
157
|
$
|
-
|
$
|
34,420
|
|||||||||
Ending balance:
Collectively evaluated
for impairment
|
$
|
49,844
|
$
|
56,615
|
$
|
155,630
|
$
|
5,947
|
$
|
121,915
|
$
|
40,607
|
$
|
-
|
$
|
430,558
|
|||||||||
Ending balance:
Loans acquired with
deteriorated credit quality
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
-12-
COMMUNITY CAPITAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 9 - LOANS RECEIVABLE - continued
An analysis of the allowance for loan losses for the year ended December 31, 2010 is as follows:
(Dollars in thousands) | Commercial | Commercial | |||||||||||||||||||||||
Allowance for credit | Real Estate | Real Estate | |||||||||||||||||||||||
losses: |
Commercial
|
Construction
|
Other |
Consumer
|
Residential
|
HELOC
|
Unallocated
|
Total
|
|||||||||||||||||
Beginning balance
|
$
|
248
|
$
|
4,375
|
$
|
98
|
$
|
59
|
$
|
1,718
|
$
|
386
|
$
|
7,276
|
$
|
14,160
|
|||||||||
Chargeoffs
|
(493
|
)
|
(8,902
|
)
|
(1,309
|
)
|
(36
|
)
|
(4,481
|
)
|
(546
|
)
|
-
|
(15,767
|
)
|
||||||||||
Recoveries
|
1
|
104
|
61
|
25
|
226
|
5
|
-
|
422
|
|||||||||||||||||
Provisions
|
682
|
11,464
|
2,467
|
(20
|
)
|
6,639
|
685
|
(3,567
|
)
|
18,350
|
|||||||||||||||
Ending balance
|
$
|
438
|
$
|
7,041
|
$
|
1,317
|
$
|
28
|
$
|
4,102
|
$
|
530
|
$
|
3,709
|
$
|
17,165
|
|||||||||
Ending balance:
Individually evaluated
for impairment
|
$
|
7
|
$
|
229
|
$
|
142
|
$
|
-
|
$
|
336
|
$
|
-
|
$
|
-
|
$
|
714
|
|||||||||
Ending balance:
Collectively evaluated
for impairment
|
$
|
431
|
$
|
6,812
|
$
|
1,175
|
$
|
28
|
$
|
3,766
|
$
|
530
|
$
|
3,709
|
$
|
16,451
|
|||||||||
Ending balance:
Loans acquired with
deteriorated credit quality
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
|||||||||
Loans receivable:
|
|||||||||||||||||||||||||
Ending balance
|
$
|
51,112
|
$
|
79,762
|
$
|
162,367
|
$
|
6,367
|
$
|
137,618
|
$
|
42,167
|
$
|
-
|
$
|
479,393
|
|||||||||
Ending balance:
Individually evaluated
for impairment
|
$
|
690
|
$
|
17,430
|
$
|
8,993
|
$
|
-
|
$
|
12,218
|
$
|
54
|
$
|
-
|
$
|
39,385
|
|||||||||
Ending balance:
Collectively evaluated
for impairment
|
$
|
50,422
|
$
|
62,332
|
$
|
153,374
|
$
|
6,367
|
$
|
125,400
|
$
|
42,113
|
$
|
-
|
$
|
440,008
|
|||||||||
Ending balance:
Loans acquired with
deteriorated credit quality
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
Credit Quality Indicators
The Company segments its commercial loans into risk categories based on relevant information about the ability of the borrowers and guarantors (if any) to service their debt. Relevant items include but are not limited to current financial information, historical payment and loan performance experience, credit documentation, public information and current economic trends. The Company analyzes loans individually by classifying the loans as to credit risk. Loans classified as substandard or special mention are reviewed quarterly by the Company for further signs of improvement or deterioration and to determine if the loan remains properly classified and what impairment may be required, if any. Other loans rated Pass, where the total credit exposure to one borrower is $500,000 or more, are reviewed at least annually to validate the assigned loan grade. In addition, any consumer or commercial unsecured loan or lines of $5,000 or more are specifically reviewed annually to validate the loan grade, if any. Further, during the renewal process of any loan, as well as if a loan becomes past due, or for any Home Equity Lines that have a loan-to-value greater than 80% and either are past due more than 30 days or are funded at 90% or more, the Company will evaluate the loan grade.
Consumer loans are not assigned a risk rating at loan origination. If a consumer loan becomes past due and shows signs of deterioration in the creditworthiness of the borrower, a rating classification will then be assigned for monitoring purposes and the loan will be monitored quarterly with the commercial loans indicated above.
-13-
COMMUNITY CAPITAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 9- LOANS RECEIVABLE - continued
Loans excluded from the scope of the annual review process are generally classified as pass credits until: (a) they become past due; (b) management becomes aware of deterioration in the credit worthiness of the borrower; or (c) the customer contacts the Company for a modified repayment plan. In these circumstances, the loan is specifically evaluated for potential classification as to special mention, substandard, doubtful or loss.
The Company utilizes an asset risk classification system in compliance with guidelines established by the Federal Reserve as part of its efforts to improve commercial asset quality. “Special Mention” loans are defined as loans that in management’s opinion are subject to potential future ratings downgrades, where market conditions may unfavorably affect the borrower in the future or where there are declining trends in the borrowers operations or where market conditions may unfavorably affect the borrower in the future. “Substandard” assets have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt and that the Company may experience a loss if the weakness(es) are not corrected. Assets that are rated “Doubtful” have the same characteristics of a substandard asset with an additional weakness that make collection or liquidation of the asset highly questionable, and there is a high probability of loss based on currently existing facts, conditions or values.
The following table summarizes the credit risk profile of the company’s commercial loan portfolio for the periods ending March 31, 2011 and December 31, 2010 based on the company’s internally assigned grade:
Commercial Credit Exposure
(Dollars in thousands)
Commercial Real Estate
|
Commercial Real Estate
|
||||||||||||||||||||||
Commercial
|
Construction
|
Other
|
|||||||||||||||||||||
March 31,
2011
|
December 31, 2010
|
March 31,
2011
|
December 31, 2010
|
March 31,
2011
|
December 31, 2010
|
||||||||||||||||||
Grade:
|
|||||||||||||||||||||||
Pass
|
$
|
45,944
|
$
|
46,959
|
$
|
49,535
|
$
|
57,003
|
$
|
146,993
|
$
|
142,598
|
|||||||||||
Special mention
|
2,546
|
2,093
|
1,319
|
843
|
6,404
|
8,676
|
|||||||||||||||||
Substandard
|
2,020
|
2,060
|
18,119
|
20,250
|
10,728
|
11,093
|
|||||||||||||||||
Doubtful
|
-
|
-
|
1,649
|
1,666
|
-
|
-
|
|||||||||||||||||
Total
|
$
|
50,510
|
$
|
51,112
|
$
|
70,622
|
$
|
79,762
|
$
|
164,125
|
$
|
162,367
|
Consumer Credit Exposure
(Dollars in thousands)
The following table summarizes the credit risk profile of the company’s residential loan portfolio for the periods ending March 31, 2011 and December 31, 2010 based on the company’s internally assigned grade. In determining the classification of a subprime loan, the company utilizes the definition supplied by the Federal Home Loan Bank.
Residential Prime | Residential Subprime | |||||||||||||||
March 31, 2011 | December 31, 2010 | March 31, 2011 | December 31, 2010 | |||||||||||||
Grade:
|
||||||||||||||||
Pass
|
$
|
103,727
|
$
|
108,000
|
$
|
3,459
|
$
|
2,731
|
||||||||
Special mention
|
6,448
|
5,834
|
801
|
672
|
||||||||||||
Substandard
|
17,266
|
19,110
|
1,309
|
1,271
|
||||||||||||
Doubtful
|
-
|
-
|
-
|
-
|
||||||||||||
Total
|
$
|
127,441
|
$
|
132,944
|
$
|
5,569
|
$
|
4,674
|
-14-
COMMUNITY CAPITAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 9- LOANS RECEIVABLE - continued
The following table summarizes the credit risk profile of the company’s consumer loan portfolio for the periods ending March 31, 2011 and December 31, 2010 based on payment activity:
(Dollars in thousands)
Consumer
|
|||||||||||||||||||
Overdraft Protection
|
HELOC
|
Consumer Other
|
|||||||||||||||||
March 31,
|
December 31,
|
March 31,
|
December 31, |
March 31,
|
December 31, | ||||||||||||||
2011
|
2010 |
2011
|
2010 |
2011
|
2010 | ||||||||||||||
Performing
|
$
|
1,172
|
$
|
1,228
|
$
|
40,606
|
$
|
42,113
|
$
|
4,774
|
$
|
5,139
|
|||||||
Nonperforming
|
-
|
-
|
158
|
54
|
1
|
-
|
|||||||||||||
Total
|
$
|
1,172
|
$
|
1,228
|
$
|
40,764
|
$
|
42,167
|
$
|
4,775
|
$
|
5,139
|
Impaired Loans
The following is a summary of information relating to impaired loans at March 31, 2011:
(Dollars in thousands)
|
Unpaid
|
Average
|
Interest
|
||||||||||||||||
Recorded
|
Principal
|
Related
|
Recorded
|
Income
|
|||||||||||||||
Investment
|
Balance
|
Allowance
|
Investment
|
Recognized
|
|||||||||||||||
With no related allowance recorded:
|
|||||||||||||||||||
Commercial
|
$
|
515
|
$
|
538
|
$
|
-
|
$
|
535
|
$
|
9
|
|||||||||
Commercial real estate – construction
|
14,007
|
25,668
|
-
|
15,710
|
23
|
||||||||||||||
Commercial real estate – other
|
8,001
|
8,690
|
-
|
8,319
|
90
|
||||||||||||||
Residential – prime
|
9,814
|
11,829
|
-
|
10,223
|
20
|
||||||||||||||
Residential – subprime
|
1,281
|
1,362
|
-
|
1,226
|
2
|
||||||||||||||
HELOC
|
157
|
168
|
-
|
167
|
-
|
||||||||||||||
With an allowance recorded:
|
|||||||||||||||||||
Commercial
|
151
|
151
|
7
|
152
|
2
|
||||||||||||||
Commercial real estate – construction
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||
Commercial real estate – other
|
494
|
494
|
22
|
495
|
7
|
||||||||||||||
Residential – prime
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||
Total:
|
|||||||||||||||||||
Commercial
|
$
|
666
|
$
|
689
|
$
|
7
|
$
|
687
|
$
|
11
|
|||||||||
Commercial real estate – construction
|
14,007
|
25,668
|
-
|
15,710
|
23
|
||||||||||||||
Commercial real estate – other
|
8,495
|
9,184
|
22
|
8,814
|
97
|
||||||||||||||
Residential – prime
|
9,814
|
11,829
|
-
|
10,223
|
20
|
||||||||||||||
Residential – subprime
|
1,281
|
1,362
|
-
|
1,226
|
2
|
||||||||||||||
HELOC
|
157
|
168
|
-
|
167
|
-
|
||||||||||||||
Totals
|
$
|
34,420
|
$
|
48,900
|
$
|
29
|
$
|
36,827
|
$
|
153
|
-15-
COMMUNITY CAPITAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 9- LOANS RECEIVABLE - continued
The following is a summary of information relating to impaired loans at December 31, 2010:
(Dollars in thousands)
|
Unpaid
|
Average
|
Interest
|
||||||||||||||||
Recorded
|
Principal
|
Related
|
Recorded
|
Income
|
|||||||||||||||
Investment
|
Balance
|
Allowance
|
Investment
|
Recognized
|
|||||||||||||||
With no related allowance recorded:
|
|||||||||||||||||||
Commercial
|
$
|
538
|
$
|
539
|
$
|
-
|
$
|
365
|
$
|
10
|
|||||||||
Commercial real estate – construction
|
12,908
|
22,552
|
-
|
19,163
|
398
|
||||||||||||||
Commercial real estate – other
|
7,393
|
7,885
|
-
|
7,892
|
356
|
||||||||||||||
Residential – prime
|
9,363
|
11,377
|
-
|
10,935
|
143
|
||||||||||||||
Residential – subprime
|
1,189
|
1,229
|
-
|
1,163
|
31
|
||||||||||||||
HELOC
|
54
|
71
|
-
|
71
|
1
|
||||||||||||||
With an allowance recorded:
|
|||||||||||||||||||
Commercial
|
152
|
152
|
7
|
157
|
11
|
||||||||||||||
Commercial real estate – construction
|
4,522
|
4,743
|
229
|
4,689
|
2
|
||||||||||||||
Commercial real estate – other
|
1,600
|
1,601
|
142
|
1,615
|
96
|
||||||||||||||
Residential – prime
|
1,666
|
1,667
|
336
|
1,681
|
49
|
||||||||||||||
Total:
|
|||||||||||||||||||
Commercial
|
$
|
690
|
$
|
691
|
$
|
7
|
$
|
522
|
$
|
21
|
|||||||||
Commercial real estate – construction
|
17,430
|
27,295
|
229
|
23,852
|
400
|
||||||||||||||
Commercial real estate – other
|
8,993
|
9,486
|
142
|
9,507
|
452
|
||||||||||||||
Residential – prime
|
9,363
|
11,377
|
-
|
10,935
|
143
|
||||||||||||||
Residential – subprime
|
2,855
|
2,896
|
336
|
2,844
|
80
|
||||||||||||||
HELOC
|
54
|
71
|
-
|
71
|
1
|
||||||||||||||
Totals
|
$
|
39,385
|
$
|
51,816
|
$
|
714
|
$
|
47,731
|
$
|
1,097
|
Modifications
The following is a summary of information relating to modifications and troubled debt restructurings at March 31, 2011:
Pre-Modification
|
Post-Modification
|
||||||||||||||
Number of
|
Outstanding Recorded
|
Outstanding Recorded
|
|||||||||||||
(Dollars in thousands)
|
Contracts
|
Investments
|
Investments
|
||||||||||||
Troubled debt restructuring:
|
|||||||||||||||
Commercial
|
1
|
$
|
151
|
$
|
151
|
||||||||||
Commercial real estate – construction
|
4
|
4,850
|
4,850
|
||||||||||||
Commercial real estate – other
|
4
|
1,852
|
1,852
|
||||||||||||
Residential – prime
|
6
|
6,525
|
6,525
|
||||||||||||
Residential – subprime | 3 |
883
|
883
|
Troubled debt restructuring
that subsequently defaulted
|
Number of Contracts
|
Recorded Investment
|
|||||||||
Commercial real estate – construction
|
1
|
$
|
83
|
||||||||
Residential – prime
|
2
|
$
|
2,462
|
-16-
COMMUNITY CAPITAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 9- LOANS RECEIVABLE - continued
The following is a summary of information relating to modifications and troubled debt restructurings at December 31, 2010:
Pre-Modification
|
Post-Modification
|
||||||||||||||
Number of
|
Outstanding Recorded
|
Outstanding Recorded
|
|||||||||||||
(Dollars in thousands)
|
Contracts
|
Investments
|
Investments
|
||||||||||||
Troubled debt restructuring:
|
|||||||||||||||
Commercial
|
1
|
$
|
152
|
$
|
152
|
||||||||||
Commercial real estate – construction
|
3
|
640
|
640
|
||||||||||||
Commercial real estate – other
|
2
|
1,572
|
1,572
|
||||||||||||
Residential – prime
|
7
|
7,097
|
7,097
|
||||||||||||
Residential – subprime | 2 |
790
|
790
|
Troubled debt restructuring
that subsequently defaulted
|
Number of Contracts
|
Recorded Investment
|
|||||||||
Commercial real estate – construction
|
1
|
$
|
83
|
||||||||
Residential – prime
|
2
|
$
|
2,758
|
The following is a summary of information pertaining to TDRs:
(Dollars in thousands)
|
March 31,
2011
|
December 31,
2010
|
||||||
Nonperforming TDRs
|
$ | 13,314 | $ | 6,815 | ||||
Performing TDRs:
|
||||||||
Commercial
|
$ | 151 | $ | 152 | ||||
Commercial real estate - construction
|
141 | 143 | ||||||
Residential
|
655 | 3,141 | ||||||
Total performing TDRs
|
$ | 947 | $ | 3,436 | ||||
Total TDRs
|
$ | 14,261 | $ | 10,251 |
Analysis of Past Due Loans Receivable
The following is a summary of information relating to analysis of past due loans receivable at March 31, 2011:
Recorded
|
||||||||||||||||||||||||||||
(Dollars in thousands)
|
Greater
|
Total
|
Investment
|
|||||||||||||||||||||||||
30 – 59 days
|
60 – 89 days
|
Than
|
Total
|
Loans
|
> 90 days and
|
|||||||||||||||||||||||
Past Due
|
Past Due
|
90 days
|
Past Due
|
Current
|
Receivable
|
Accruing
|
||||||||||||||||||||||
Commercial
|
$
|
459
|
$
|
-
|
$
|
72
|
$
|
531
|
$
|
49,979
|
$
|
50,510
|
$
|
-
|
||||||||||||||
Commercial RE - Construction
|
48
|
-
|
12,676
|
12,724
|
57,898
|
70,622
|
-
|
|||||||||||||||||||||
Commercial RE – Other
|
877
|
-
|
2,807
|
3,684
|
159,781
|
164,125
|
660
|
|||||||||||||||||||||
Residential – prime
|
1,005
|
77
|
9,053
|
10,135
|
116,924
|
127,441
|
382
|
|||||||||||||||||||||
Residential - subprime
|
458
|
-
|
1,157
|
1,615
|
3,954
|
5,569
|
-
|
|||||||||||||||||||||
HELOC
|
-
|
20
|
157
|
177
|
40,587
|
40,764
|
-
|
|||||||||||||||||||||
Consumer – OD Protection
|
2
|
1
|
-
|
3
|
1,169
|
1,172
|
-
|
|||||||||||||||||||||
Consumer – Other
|
29
|
-
|
-
|
29
|
4,746
|
4,775
|
-
|
|||||||||||||||||||||
Total
|
$
|
2,878
|
$
|
98
|
$
|
25,922
|
$
|
28,898
|
$
|
435,038
|
$
|
464,978
|
$
|
1,042
|
-17-
COMMUNITY CAPITAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 9- LOANS RECEIVABLE - continued
The following is a summary of information relating to analysis of past due loans receivable at December 31, 2010:
Recorded
|
||||||||||||||||||||||||||||
(Dollars in thousands)
|
Greater
|
Total
|
Investment
|
|||||||||||||||||||||||||
30 – 59 days
|
60 – 89 days
|
Than
|
Total
|
Loans
|
> 90 days and
|
|||||||||||||||||||||||
Past Due
|
Past Due
|
90 days
|
Past Due
|
Current
|
Receivable
|
Accruing
|
||||||||||||||||||||||
Commercial
|
$
|
255
|
$
|
14
|
$
|
44
|
$
|
313
|
$
|
50,799
|
$
|
51,112
|
$
|
-
|
||||||||||||||
Commercial RE - Construction
|
76
|
-
|
14,615
|
14,691
|
65,071
|
79,762
|
-
|
|||||||||||||||||||||
Commercial RE – Other
|
223
|
233
|
2,198
|
2,654
|
159,053
|
162,367
|
660
|
|||||||||||||||||||||
Residential – prime
|
146
|
302
|
9,180
|
9,628
|
122,934
|
132,944
|
382
|
|||||||||||||||||||||
Residential - subprime
|
164
|
-
|
398
|
562
|
4,112
|
4,674
|
-
|
|||||||||||||||||||||
HELOC
|
-
|
113
|
54
|
167
|
42,000
|
42,167
|
-
|
|||||||||||||||||||||
Consumer – OD Protection
|
5
|
-
|
-
|
5
|
1,223
|
1,228
|
-
|
|||||||||||||||||||||
Consumer – Other
|
16
|
-
|
-
|
16
|
5,123
|
5,139
|
-
|
|||||||||||||||||||||
Total
|
$
|
885
|
$
|
662
|
$
|
26,489
|
$
|
28,036
|
$
|
450,315
|
$
|
479,393
|
$
|
1,042
|
Loans Receivable on Nonaccrual Status
The following is a summary of information relating to loans receivable on nonaccrual status for the periods ended March 31, 2011 and December 31, 2010:
March 31,
|
December 31,
|
|||||||
(Dollars in thousands)
|
2011
|
2010
|
||||||
Commercial
|
$
|
72
|
$
|
44
|
||||
Commercial RE - Construction
|
12,781
|
14,615
|
||||||
Commercial RE – Other
|
2,807
|
2,198
|
||||||
Residential – prime
|
8,947
|
8,553
|
||||||
Residential - subprime
|
1,120
|
1,025
|
||||||
HELOC
|
157
|
54
|
||||||
Total
|
$
|
25,884
|
$
|
26,489
|
In the normal course of business, the Company is a party to financial instruments with off-balance-sheet risk. These financial instruments are commitments to extend credit, commitments under credit card arrangements and letters of credit and have elements of risk in excess of the amount recognized in the balance sheet. 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 consolidated balance sheets. The Company’s 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. Letters of credit are conditional commitments issued to guarantee a customer’s performance to a third party and have essentially the same credit risk as other lending facilities. The Company uses the same credit policies in making commitments to extend credit as it does for on-balance-sheet instruments.
-18-
COMMUNITY CAPITAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 10– OTHER REAL ESTATE OWNED
The Bank possessed $13,691,000 in other real estate owned at March 31, 2011. Transactions in other real estate owned for the periods ended March 31, 2011 and December 31, 2010 are summarized below:
March 31,
|
December 31,
|
|||||||
(Dollars in thousands)
|
2011
|
2010
|
||||||
Balance, beginning of period
|
$
|
13,496
|
$
|
7,165
|
||||
Additions
|
709
|
16,460
|
||||||
Sales
|
(432
|
)
|
(8,938
|
)
|
||||
Write downs | (82 | ) | (1,191 | ) | ||||
Balance, end of period
|
$
|
13,691
|
$
|
13,496
|
The following is a summary of information relating to analysis of other real estate owned at March 31, 2011 and December 31, 2010:
March 31,
|
December 31,
|
|||||||
(Dollars in thousands)
|
2011
|
2010
|
||||||
Construction, land development and other land
|
$
|
12,442
|
$
|
12,111
|
||||
Commercial RE – Other
|
987
|
1,020
|
||||||
Residential
|
262
|
365
|
||||||
Total
|
$
|
13,691
|
$
|
13,496
|
NOTE 11- FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which an 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 following methods and assumptions were used to estimate the fair value of significant financial instruments:
Cash and Due from Banks and Interest-Bearing Deposit Accounts - The carrying amount is a reasonable estimate of fair value.
Investment Securities - The fair values of securities held-to-maturity are based on quoted market prices or dealer quotes. For securities available-for-sale, fair value equals the carrying amount which is the quoted market price. If quoted market prices are not available, fair values are based on quoted market prices of comparable securities.
Nonmarketable Equity Securities - Cost is a reasonable estimate of fair value for nonmarketable equity securities because no quoted market prices are available and the securities are not readily marketable. The carrying amount is adjusted for any permanent declines in value.
Cash Surrender Value of Life Insurance - The carrying amount is a reasonable estimate of fair value.
Loans Receivable and Loans Held for Sale - For certain categories of loans, such as variable rate loans which are repriced frequently and have no significant change in credit risk and credit card receivables, 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 the borrowers with similar credit ratings and for the same remaining maturities.
Accrued Interest Receivable and Payable - The carrying value of these instruments is a reasonable estimate of fair value.
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.
-19-
COMMUNITY CAPITAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 11- FAIR VALUE OF FINANCIAL INSTRUMENTS – continued
Advances 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. The fair values of fixed rate borrowings are estimated using a discounted cash flow calculation that applies the Company’s current borrowing rate from the Federal Home Loan Bank.
Junior Subordinated Debentures – The fair value of fixed rate junior subordinated debentures are estimated using a discounted cash flow calculation that applies the Company’s current borrowing rate. The carrying amounts of variable rate borrowings are reasonable estimates of fair value because they can reprice frequently.
Off-Balance-Sheet Financial Instruments – Fair values of 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.
Commitments to Extend Credit and Commercial Letters of Credit – Because commitments to expand credit and commercial letters of credit are made using variable rates, or are recently executed, the contract value is a reasonable estimate of fair value.
The carrying values and estimated fair values of the Company’s financial instruments are as follows:
March 31, 2011
|
December 31, 2010
|
|||||||||||||||
Carrying
|
Estimated
|
Carrying
|
Estimated
|
|||||||||||||
(Dollars in thousands) |
Amount
|
Fair Value
|
Amount
|
Fair Value
|
||||||||||||
Financial Assets: | ||||||||||||||||
Cash and due from banks
|
$
|
11,079
|
$
|
11,079
|
$
|
9,315
|
$
|
9,315
|
||||||||
Interest-bearing deposit accounts
|
43,580
|
43,580
|
27,860
|
27,860
|
||||||||||||
Securities available-for-sale
|
67,197
|
67,197
|
74,025
|
74,025
|
||||||||||||
Nonmarketable equity securities
|
9,416
|
9,416
|
9,626
|
9,626
|
||||||||||||
Cash surrender value of life insurance
|
17,569
|
17,569
|
17,397
|
17,397
|
||||||||||||
Loans and loans held for sale
|
466,759
|
465,680
|
484,909
|
483,885
|
||||||||||||
Accrued interest receivable
|
2,201
|
2,201
|
2,289
|
2,289
|
Financial Liabilities:
|
||||||||||||||||
Demand deposit, interest bearing
|
||||||||||||||||
transaction, and savings accounts
|
$
|
346,627
|
$
|
346,627
|
$
|
341,994
|
$
|
341,994
|
||||||||
Certificates of deposit and other time deposits
|
140,388
|
141,020
|
153,188
|
154,187
|
||||||||||||
Advances from the Federal Home Loan Bank
|
95,400
|
100,042
|
95,400
|
100,753
|
||||||||||||
Junior subordinated debentures
|
10,310
|
10,371
|
10,310
|
10,422
|
||||||||||||
Accrued interest payable
|
615
|
615
|
708
|
708
|
Notional
|
Estimated
|
Notional
|
Estimated
|
|||||||||||||
Amount
|
Fair Value
|
Amount
|
Fair Value
|
|||||||||||||
Off-Balance Sheet Financial Instruments:
|
||||||||||||||||
Commitments to extend credit
|
$
|
45,421
|
$
|
-
|
$
|
49,961
|
$
|
-
|
||||||||
Letters of credit
|
1,705
|
-
|
1,647
|
-
|
||||||||||||
Accounting standards provide a framework for measuring and disclosing fair value which require disclosure about the fair value of assets and liabilities recognized on the balance sheet, whether the measurements are made on a recurring basis or on a nonrecurring basis. Fair value is defined as the exchange in price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Accounting standards also establish a fair value hierarchy, which requires an entity to maximize the use of unobservable inputs when measuring fair value.
-20-
COMMUNITY CAPITAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 11- FAIR VALUE OF FINANCIAL INSTRUMENTS – continued
The Company utilizes fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. The objective is to enable the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values.
Assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:
Level 1
|
Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as U.S. Treasuries, and money market funds.
|
Level 2
|
Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments, mortgage-backed securities, municipal bonds, corporate debt securities, and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes certain derivative contracts and impaired loans.
|
Level 3
|
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. For example, this category generally includes certain private equity investments, retained residual interests in securitizations, residential mortgage servicing rights, and highly-structured or long-term derivative contracts.
|
Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.
Investment 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 cash flows, adjusted for the security’s rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities includes those traded on an active exchange such as the New York Stock Exchange, Treasury securities that are traded by dealers or brokers in active over-the-counter market 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.
Loans Held- for-Sale-The carrying amount of loans held for sale is a reasonable estimate of fair value.
Loans – The Company does not record loans at fair value on a recurring basis, however, from time to time, a loan is considered impaired and an allowance for loan loss 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 are considered impaired. Once a loan is identified as individually impaired, management measures impairment. The fair value of impaired loans is estimated using one of several methods, including the collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring a specific allowance represent loans for which the fair value of expected repayments or collateral exceed the recorded investment in such loans. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the loan as nonrecurring Level 3.
-21-
COMMUNITY CAPITAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 11- FAIR VALUE OF FINANCIAL INSTRUMENTS – continued
Other Real Estate Owned – Foreclosed assets are adjusted to fair value upon transfer of the loans to other real estate owned. Real estate acquired in settlement of loans is recorded initially at estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional allowances, which are charges to earnings if the estimated fair value of the property less estimated seling costs declines below the initial recorded value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3.
The table below presents the balances of assets and liabilities measured at fair value on a recurring basis by level within the hierarchy.
March 31, 2011
|
Quoted market price in active markets
|
Significant other observable inputs
|
Significant unobservable inputs
|
|||||||||
(Dollars in thousands)
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
|||||||||
Mortgage-backed securities
|
$
|
-
|
$
|
58,421
|
$
|
-
|
||||||
State and municipal obligations
|
-
|
8,776
|
||||||||||
Available-for-sale securities
|
-
|
67,197
|
-
|
|||||||||
Loans held for sale
|
-
|
1,781
|
-
|
|||||||||
Total
|
$
|
-
|
$
|
68,978
|
$
|
-
|
||||||
December 31, 2010
|
||||||||||||
(Dollars in thousands)
|
||||||||||||
Mortgage-backed securities
|
$
|
-
|
$
|
63,229
|
$
|
-
|
||||||
State and municipal obligations
|
-
|
10,796
|
-
|
|||||||||
Available-for-sale securities
|
-
|
74,025
|
-
|
|||||||||
Loans held for sale
|
-
|
5,516
|
-
|
|||||||||
Total
|
$
|
-
|
$
|
79,541
|
$
|
-
|
There were no liabilities measured at fair value on a recurring basis for the periods ended March 31, 2011 and December 31, 2010.
Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following table presents the assets and liabilities carried on the balance sheet by caption and by level within the valuation hierarchy (as described above) for which a nonrecurring change in fair value has been recorded during
the year.
-22-
COMMUNITY CAPITAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 11- FAIR VALUE OF FINANCIAL INSTRUMENTS – continued
March 31, 2011
|
Quoted market price in
active markets
|
Significant other
observable inputs
|
Significant
unobservable inputs
|
|||||||||
(Dollars in thousands)
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
|||||||||
Other real estate owned
|
$ | - | $ | 9,365 | $ | 4,326 | ||||||
Impaired loans
|
- | 33,022 | 1,369 | |||||||||
Total
|
$ | - | $ | 42,387 | $ | 5,695 | ||||||
December 31, 2010
|
||||||||||||
(Dollars in thousands)
|
||||||||||||
Other real estate owned
|
$ | - | $ | 8,781 | $ | 4,715 | ||||||
Impaired loans
|
- | 35,498 | 3,173 | |||||||||
Total
|
$ | - | $ | 44,279 | $ | 7,888 |
There were no liabilities measured at fair value on a nonrecurring basis for the periods ended March 31, 2011 and December 31, 2010.
-23-
COMMUNITY CAPITAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
In this quarterly report on Form 10-Q, or this “Quarterly Report,” we refer to Community Capital Corporation as “we,” “us,” “our,” or the “Company,” unless we specifically state otherwise or the context indicates otherwise, and we refer to our bank subsidiary, CapitalBank, as our “Bank,” unless we specifically state otherwise or the context indicates otherwise .
Cautionary Note Regarding Forward-Looking Statements
Some of our statements contained in, or incorporated by reference into, this Quarterly Report are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Forward-looking statements may relate to our financial condition, results of operation, plans, objectives, or future performance. Forward-looking statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those anticipated 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,” “should,” “will,” “expect,” “anticipate,” “predict,” “project,” “potential,” “believe,” “continue,” “assume,” “believe,” “intend,” “plan,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results to differ from those anticipated in any forward-looking statements include, but are not limited to, those described in our Annual Report on Form 10-K for the year ended December 31, 2010 under Item 1A “Risk Factors” and the following:
·
|
reduced earnings due to higher credit losses generally and specifically because losses in the sectors of our loan portfolio secured by real estate are greater than expected due to economic factors, including, but not limited to, declining real estate values, increasing interest rates, increasing unemployment, or changes in payment behavior or other factors;
|
·
|
reduced earnings due to higher credit losses because our loans are concentrated by loan type, industry segment, borrower type, or location of the borrower or collateral;
|
·
|
high concentration of our real estate-based loans collateralized by real estate in a weak commercial real estate market;
|
·
|
adequacy of the level of our allowance for loan losses;
|
·
|
the rate of delinquencies and amounts of charge-offs;
|
·
|
challenges, costs, and complications associated with the continued development of our branches;
|
·
|
changes in political conditions or the legislative or regulatory environment;
|
·
|
significant increases in competitive pressure in CapitalBank’s banking and financial services industries;
|
·
|
general economic conditions, either nationally or regionally and especially in our primary service area, becoming less favorable than expected, resulting in, among other things, a deterioration in credit quality;
|
·
|
adverse conditions in the stock market, the public debt market, and other capital markets;
|
·
|
changes occurring in business conditions and inflation;
|
·
|
changes in technology;
|
·
|
changes in monetary and tax policies;
|
·
|
the rates of loan growth;
|
·
|
adverse changes in asset quality and resulting credit risk-related losses and expenses;
|
·
|
loss of consumer confidence and economic disruptions resulting from terrorist activities;
|
·
|
changes in the securities markets; and
|
·
|
other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission (the “SEC”).
|
These risks are exacerbated by the developments over the past two years in national and international financial markets, and we are unable to predict what effect these uncertain market conditions will have on our Company. During 2008 and 2009, the capital and credit markets experienced unprecedented levels of 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. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee you that these expectations will be achieved. 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.
-24-
COMMUNITY CAPITAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued
Overview
We are a bank holding company headquartered in Greenwood, South Carolina with 18 banking offices located in 13 different cities throughout South Carolina. Since our formation in 1988, we have grown in our core markets through organic growth, and to expand our market presence from central South Carolina to the upstate region of South Carolina, we have made selective acquisitions and formed de novo banking operations. We continuously evaluate our branch network to determine how to best serve our customers efficiently and to improve our profitability.
We operate a general commercial and retail banking business through our bank subsidiary, CapitalBank. We believe our commitment to quality and personalized banking services is a factor that contributes to our competitiveness and success. Through the Bank, we provide a full range of lending services, including real estate, consumer and commercial loans to individuals and small to medium-sized businesses in our market areas, as well as residential mortgage loans. Our primary focus has been on real estate construction loans, commercial mortgage loans and residential mortgage loans. We complement our lending services with a full range of retail and commercial banking products and services, including checking, savings and money market accounts, certificates of deposit, credit card accounts, individual retirement accounts, safe deposit accounts, money orders and electronic funds transfer services. In addition to our traditional banking services, we also offer customers trust and fiduciary services. We make discount securities brokerage services available through a third-party brokerage service that has contracted with CapitalBank.
Like most community banks, we derive the majority of our income from interest we receive on our loans and investments. 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 earned on our interest-earning assets, such as loans and investments, and the expense cost of 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.
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 non-interest income, as well as our non-interest expenses, in the following discussion.
As of March 31, 2011, we had total consolidated assets of approximately $649 million, total deposits of approximately $487 million, total consolidated liabilities, including deposits, of approximately $600 million, and total consolidated shareholders’ equity of approximately $49 million. While the majority of our loan portfolio continues to perform well, real estate, construction and land development portion of our portfolio has been negatively impacted by current economic climate and the deterioration in the residential real estate sector. We continue to actively manage our non-performing assets and we may sell assets and take advantage of other market opportunities to dispose of problem assets. Recently, we have emphasized cost controls throughout our organization, which have been an important focus as economic growth has slowed.
On March 30, 2011, we entered into an Agreement and Plan of Merger with Park Sterling Corporation ("Park Sterling") pursuant to which our Company will merge with and into Park Sterling, with Park Sterling as the surviving entity, in a cash and stock transaction valued at approximately $32.4 million. Under the terms of the Merger Agreement, our shareholders will receive for each share of common stock owned one of the following: (i) $3.30 in cash; or (ii) 0.6667 of a share of Park Sterling common stock. In total, 60% of our outstanding shares of common stock will be exchanged for shares of Park Sterling and 40% of our outstanding shares of common stock will be exchanged for cash. The merger is currently expected to be completed in the third quarter of 2011, pending receipt of the approvals of our shareholders and regulatory approvals. The merger agreement also provides that we must pay to Park Sterling a cash fee of $2,000,000 and up to $500,000 in respect of Park Sterling’s legal and due diligence expenses if the merger agreement is terminated under certain conditions.
-25-
COMMUNITY CAPITAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations – continued
Recent Regulatory Developments
As previously reported, we entered into a written agreement with the Federal Reserve on July 28, 2010, which requires the Bank to take certain actions, including, but not limited to, designing a plan to improve the Bank's position on certain problem loans, reviewing and revising its allowance for loan and lease losses ("ALLL") methodology, strengthening its credit risk management and lending program, enhancing its written liquidity and contingency funding plan, and submitting a capital plan to maintain the Bank's capital ratios in excess of the minimum thresholds required to be well-capitalized. The written agreement also prohibits the Company and the Bank from declaring or paying any dividends, without the prior written approval of the Federal Reserve and the South Carolina Board of Financial Institutions, respectively.
The written agreement does not contain any provisions to increase capital and will not result in any change to financial results. We intend to take all actions necessary to enable the Bank to comply with the requirements of this agreement, and as of the date hereof we have submitted all documentation required to the Federal Reserve. Nevertheless, there can be no assurance that the Bank will be able to fully comply with the provisions of the agreement, and the determination of our compliance will be made by the Federal Reserve. If we were to fail to comply with the requirements of the written agreement, we could be subject to further regulatory action by the Federal Reserve.
Financial Condition
The following is a discussion of our financial condition as of March 31, 2011 compared to December 31, 2010 and the results of operations for the three months ended March 31, 2011 compared to the three months ended March 31, 2010. We encourage you to read this discussion and analysis in conjunction with our financial statements and the other statistical information included in this Quarterly Report.
Critical Accounting Policies
We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States in the preparation of our financial statements. Our significant accounting policies are described in the footnotes to the consolidated financial statements at December 31, 2010 as filed on our Annual Report on Form 10-K. 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 judgments and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgments and assumptions we make, actual results could differ from these judgments and estimates, which could have a material impact on our carrying values of assets and liabilities and our results of operations.
We believe the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in preparation of our consolidated financial statements. Refer to the portion of this discussion that addresses our allowance for loan losses for a description of our processes and methodology for determining our allowance for loan losses.
The Allowance for Loan Losses represents our estimate of probable losses inherent in the lending portfolio. See Provision and Allowance for Losses for additional discussion including factors impacting the Allowance and the methodology for analyzing the adequacy of the Allowance. This methodology relies upon our judgment. Our judgments are based on an assessment of various issues, including, but not limited to, the pace of loan growth, emerging portfolio concentrations, the risk management system relating to lending activities, entry into new markets, new product offerings, loan portfolio quality trends, and uncertainty in current economic and business conditions. We consider the year-end Allowance appropriate and adequate to cover probable losses in the loan portfolio. However, our judgment is based upon a number of assumptions about current events, which are believed to be reasonable, but which may or may not prove valid. Thus, there can be no assurance that loan losses in future periods will not exceed the current Allowance amount or that future increases in the Allowance will not be required. No assurance can be given that our ongoing evaluation of the loan portfolio, in light of changing economic conditions and other relevant circumstances, will not require significant future additions to the Allowance, thus adversely impacting the results of operations of the Company.
We believe the accounting for OREO is a critical accounting policy that requires judgments and estimates used in preparation of our consolidated financial statements. OREO is initially recorded at fair value, less any costs to sell. If the fair value, less cost to sell at the time of foreclosure, is less than the loan balance, the deficiency is charged against the allowance for loan losses. If
-26-
COMMUNITY CAPITAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations – continued
the fair value, less cost to sell, of the OREO decreases during the holding period, a valuation allowance is established with a charge to foreclosed property costs. When the OREO is sold, a gain or loss is recognized on the sale for the difference between the sales proceeds and the carrying amount of the property. Financed sales of OREO are accounted for in accordance with ASC 360-20, Real Estate Sales.
We evaluate securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition of the issuer,the outlook for receiving the contractual cash flows of the investments, and anticipated outlook for changes in the general level of interest rates, and our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or for a debt security whether it is more-likely-than-not that the Company will be required to sell the debt security prior to recovering its fair value.
We use assumptions and estimates in determining income taxes payable or refundable for the current year, deferred income tax liabilities and assets for events recognized differently in its financial statements and income tax returns, and income tax expense. Determining these amounts requires analysis of certain transactions and interpretation of tax laws and regulations. We exercise considerable judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments and estimates are reevaluated on a continual basis as regulatory and business factors change. No assurance can be given that either the tax returns submitted by us or the income tax reported on the Consolidated Financial Statements will not be adjusted by either adverse rulings by the United States
Tax Court, changes in the tax code, or assessments made by the Internal Revenue Service. We are subject to potential adverse adjustments, including, but not limited to, an increase in the statutory federal or state income tax rates, the permanent nondeductibility of amounts currently considered deductible either now or in future periods, and the dependency on the generation of future taxable income, including capital gains, in order to ultimately realize deferred income tax assets. Historically, our estimated income taxes have been materially correct, and we are not aware of any reason that a material change will occur in the future. See Note 20 of Notes to Consolidated Financial Statements contained in Item 8 herein that summarizes current period income tax expense as well as future tax liabilities associated with differences in the timing of expenses and income recognition for book and tax accounting purposes.
Recent Developments
Markets in the United States and elsewhere have experienced extreme volatility and disruption over the past three plus 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, beginning in 2008 a multitude of new regulatory and governmental actions have been announced, including the Emergency Economic Stabilization Act ("EESA"), approved by Congress and signed by President Bush on October 3, 2008 and the American Recovery and Reinvestment Act on February 17, 2009, amonth others. Some of the more recent actions include:
·
|
On July 21, 2010, the U.S. President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), a comprehensive regulatory framework that will likely result in dramatic changes across the financial regulatory system, some of which became effective immediately and some of which will not become effective until various future dates. Implementation of the Dodd-Frank Act will require many new rules to be made by various federal regulatory agencies over the next several years. Uncertainty remains as to the ultimate impact of the Dodd-Frank Act until final rulemaking is complete, which could have a material adverse impact either on the financial services industry as a whole or on our business, financial condition, results of operations, and cash flows. Provisions in the legislation that
|
-27-
COMMUNITY CAPITAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations – continued
affect consumer financial protection regulations, deposit insurance assessments, payment of interest on demand deposits, and interchange fees could increase the costs associated with deposits and place limitations on certain revenues those deposits may generate. The Dodd-Frank Act includes provisions that, among other things, will:
o
|
Centralize responsibility for consumer financial protection by creating a new agency, the Bureau of Consumer Financial Protection, responsible for implementing, examining, and enforcing compliance with federal consumer financial laws;
|
o
|
Create the Financial Stability Oversight Council that will recommend to the Federal Reserve increasingly strict rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity;
|
o
|
Provide mortgage reform provisions regarding a customer’s ability to repay, restricting variable-rate lending by requiring that the ability to repay variable-rate loans be determined by using the maximum rate that will apply during the first five years of a variable-rate loan term, and making more loans subject to provisions for higher cost loans, new disclosures, and certain other revisions;
|
o
|
Change the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital, eliminate the ceiling on the size of the Deposit Insurance Fund (“DIF”), and increase the floor on the size of the DIF, which generally will require an increase in the level of assessments for institutions with assets in excess of $10 billion;
|
o
|
Make permanent the $250,000 limit for federal deposit insurance and provide unlimited federal deposit insurance until December 31, 2012 for noninterest-bearing demand transaction accounts at all insured depository institutions;
|
o
|
Implement corporate governance revisions, including with regard to executive compensation and proxy access by shareholders, which apply to all public companies, not just financial institutions;
|
o
|
Repeal the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transactions and other accounts;
|
o
|
Amend the Electronic Fund Transfer Act (“EFTA”) to, among other things, give the Federal Reserve the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer;
|
o
|
Eliminate the Office of Thrift Supervision (“OTS”) one year from the date of the new law’s enactment. The Office of the Comptroller of the Currency, which is currently the primary federal regulator for national banks, will become the primary federal regulator for federal thrifts. In addition, the Federal Reserve will supervise and regulate all savings and loan holding companies that were formerly regulated by the OTS.
|
·
|
On September 27, 2010, the U.S. President signed into law the Small Business Jobs Act of 2010 (the “Act”). The Small Business Lending Fund (the “SBLF”), which was enacted as part of the Act, is a $30 billion fund that encourages lending to small businesses by providing Tier 1 capital to qualified community banks with assets of less than $10 billion. On December 21, 2010, the U.S. Treasury published the application form, term sheet and other guidance for participation in the SBLF. Under the terms of the SBLF, the Treasury will purchase shares of senior preferred stock from banks, bank holding companies, and other financial institutions that will qualify as Tier 1 capital for regulatory purposes and rank senior to a participating institution’s common stock. The application deadline for participating in the SBLF is May 16, 2011. Based on the program criteria, we do not plan to participate in the SBLF.
|
-28-
COMMUNITY CAPITAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations – continued
·
|
Internationally, both the Basel Committee on Banking Supervision (the “Basel Committee”) and the Financial Stability Board (established in April 2009 by the Group of Twenty (“G-20”) Finance Ministers and Central Bank Governors to take action to strengthen regulation and supervision of the financial system with greater international consistency, cooperation, and transparency) have committed to raise capital standards and liquidity buffers within the banking system (“Basel III”). On September 12, 2010, the Group of Governors and Heads of Supervision agreed to the calibration and phase-in of the Basel III minimum capital requirements (raising the minimum Tier 1 common equity ratio to 4.5% and minimum Tier 1 equity ratio to 6.0%, with full implementation by January 2015) and introducing a capital conservation buffer of common equity of an additional 2.5% with full implementation by January 2019. The U.S. federal banking agencies support this agreement. In December 2010, the Basel Committee issued the Basel III rules text, outlining the details and time-lines of global regulatory standards on bank capital adequacy and liquidity. According to the Basel Committee, the framework sets out higher and better-quality capital, better risk coverage, the introduction of a leverage ratio as a backstop to the risk-based requirement, measures to promote the build-up of capital that can be drawn down in periods of stress, and the introduction of two global liquidity standards.
|
·
|
In November 2010, the Federal Reserve's monetary policymaking committee, the Federal Open Market Committee (“FOMC”), decided that further support to the economy was needed. With short-term interest rates already nearing 0%, the FOMC agreed to deliver that support by committing to purchase additional longer-term securities, as it did in 2008 and 2009. The FOMC intends to buy an additional $600 billion of longer-term U.S. Treasury securities by mid-2011 and will continue to reinvest repayments of principal on its holdings of securities, as it has been doing since August 2010.
|
·
|
In November 2010, the FDIC approved two proposals that amend the deposit insurance assessment regulations. The first proposal implements a provision in the Dodd-Frank Act that changes the assessment base from one based on domestic deposits (as it has been since 1935) to one based on assets. The assessment base changes from adjusted domestic deposits to average consolidated total assets minus average tangible equity. The second proposal changes the deposit insurance assessment system for large institutions in conjunction with the guidance given in the Dodd-Frank Act. In February 2011, the FDIC approved the final rules that change the assessment base from domestic deposits to average assets minus average tangible equity, adopt a new scorecard-based assessment system for financial institutions with more than $10 billion in assets, and finalize the designated reserve ratio target size at 2.0% of insured deposits. We elected to voluntarily participate in the unlimited deposit insurance component of the Treasury’s Transaction Account Guarantee Program (“TAGP”) through December 31, 2010. Coverage under the program was in addition to and separate from the basic coverage available under the FDIC’s general deposit insurance rules. As a result of the Dodd-Frank Act that was signed into law on July 21, 2010, the program ended on December 31, 2010, and all institutions are now required to provide full deposit insurance on noninterest-bearing transaction accounts until December 31, 2012. There will not be a separate assessment for this as there was for institutions participating in the deposit insurance component of the TAGP.
|
·
|
On December 16, 2010, the Federal Reserve Board issued a proposal to implement a provision in the Dodd-Frank Act that requires the Federal Reserve Board to set debit card interchange fees. The proposed rule, if implemented in its current form, would result in a significant reduction in debit-card interchange revenue. Though the rule technically does not apply to institutions with less than $10 billion in assets, there is concern that the price controls may harm community banks, which could be pressured by the marketplace to lower their own interchange rates.
|
·
|
On April 19, 2011, the Federal Reserve Board issued a proposed rule under Regulation Z that would require creditors to determine a consumer’s ability to repay a mortgage before making the loan and would establish minimum mortgage underwriting standards. The proposal is being made pursuant to the Dodd-Frank Act. The proposed rule, if implemented in its current form, provides four options for complying with the ability-to-repay requirement and would apply to all consumer mortgages, except home equity lines of credit, timeshare plans, reverse mortgages, or temporary loans. The proposal would also implement the Dodd-Frank Act’s limits on prepayment penalties, lengthen the time creditors must retain records that evidence compliance with the ability
|
to-repay and prepayment penalty provisions, and prohibit evasion of the rule by structuring a closed-end extension of credit as an open-end plan.
-29-
COMMUNITY CAPITAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations – continued
Although it is likely that further regulatory actions will arise as the Federal government attempts to address the economic situation, we cannot predict the effect that fiscal or monetary policies, economic control, or new federal or state legislation may have on our business and earnings in the future.
Results of Operations
Net Interest Income
The largest component of our net income is our net interest income, which is the difference between the income earned on assets and interest paid on deposits and borrowings used to support such assets. Net interest income is determined by the yields earned on our interest-earning assets and the rates paid on our interest-bearing liabilities, the relative amounts of interest-earning assets and interest-bearing liabilities and the degree of mismatch and the maturity and repricing characteristics of our interest-earning assets and interest-bearing liabilities. Net interest income divided by average interest-earning assets represents our net interest margin.
The following table sets forth, for the periods indicated, certain information related to our average balance sheet and our average yields on assets and average costs of liabilities. Such yields are derived by dividing income or expense by the average balance of the corresponding assets or liabilities. Average balances have been derived from the daily balances throughout the periods indicated.
Average Balances, Income and Expenses, and Rates
|
||||||||||||||||||||||||
For the Three Months Ended
|
||||||||||||||||||||||||
March 31, 2011
|
March 31, 2010
|
|||||||||||||||||||||||
(Dollars in thousands)
|
Average Balance
|
Income/
Expense
|
Yield/
Rate (1)
|
Average Balance
|
Income/
Expense
|
Yield/
Rate (1)
|
||||||||||||||||||
Assets:
|
||||||||||||||||||||||||
Earning Assets:
|
||||||||||||||||||||||||
Loans(2)(4)
|
$ | 475,989 | $ | 6,411 | 5.46 | % | $ | 560,249 | $ | 7,506 | 5.43 | % | ||||||||||||
Securities, taxable (3)
|
62,630 | 365 | 2.36 | % | 54,697 | 536 | 3.97 | % | ||||||||||||||||
Securities, nontaxable (3)(4)
|
10,407 | 157 | 6.12 | % | 15,827 | 233 | 5.97 | % | ||||||||||||||||
Nonmarketable equity securities
|
9,495 | 41 | 1.75 | % | 10,267 | 31 | 1.22 | % | ||||||||||||||||
Fed funds sold and other
|
31,708 | 16 | 0.20 | % | 43,968 | 22 | 0.20 | % | ||||||||||||||||
Total earning assets
|
590,229 | 6,990 | 4.80 | % | 685,008 | 8,328 | 4.93 | % | ||||||||||||||||
Non-earning assets
|
60,152 | 64,760 | ||||||||||||||||||||||
Total assets
|
$ | 650,381 | $ | 749,768 | ||||||||||||||||||||
Liabilities:
|
||||||||||||||||||||||||
Interest bearing liabilities:
|
||||||||||||||||||||||||
Interest bearing transaction
accounts
|
192,505 | 396 | 0.83 | % | 190,446 | 552 | 1.18 | % | ||||||||||||||||
Savings accounts
|
42,814 | 81 | 0.77 | % | 43,175 | 138 | 1.30 | % | ||||||||||||||||
Time deposits
|
146,291 | 525 | 1.46 | % | 237,570 | 1,240 | 2.12 | % | ||||||||||||||||
Federal Home Loan Bank
advances
|
95,400 | 817 | 3.47 | % | 95,400 | 823 | 3.50 | % | ||||||||||||||||
Junior subordinated debentures
|
10,310 | 195 | 7.67 | % | 10,310 | 179 | 7.04 | % | ||||||||||||||||
Total interest bearing
liabilities
|
487,320 | 2,014 | 1.67 | % | 576,901 | 2,932 | 2.06 | % | ||||||||||||||||
Non-interest bearing liabilities
|
114,512 | 118,471 | ||||||||||||||||||||||
Shareholders’ equity
|
48,549 | 54,396 | ||||||||||||||||||||||
Total liabilities and
shareholders’equity
|
$ | 650,381 | $ | 749,768 | ||||||||||||||||||||
Net interest spread
|
3.13 | % | 2.87 | % | ||||||||||||||||||||
Net interest income/margin
|
$ | 4,976 | 3.42 | % | $ | 5,396 | 3.19 | % |
(1) Annualized for the three-month period.
(2) The effect of loans in nonaccrual status and fees collected is not significant to the computations.
All loans and deposits are domestic.
(3) Average investment securities exclude the valuation allowance on securities available-for-sale.
(4) Fully tax-equivalent basis at 38% tax rate for nontaxable securities and loans.
-30-
COMMUNITY CAPITAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations – continued
Net Interest Income – continued
The tax-effected net interest spread and net interest margin were 3.13% and 3.42%, respectively, for the three-month period ended March 31, 2011, compared to 2.87% and 3.19%, respectively, for the three-month period ended March 31, 2010. The increase in net interest margin is due to management’s strategy to allow approximately $60 million in high cost certificates to run off during 2010. During the three months ended March 31, 2011, earning assets averaged $590,229,000, compared to $685,008,000 for the three months ended March 31, 2010. Interest earning assets exceeded interest earning liabilities by $102,909,000, and $108,107,000 for the three-month periods ended March 31, 2011 and March 31, 2010, respectively.
For the three months ended March 31, 2011, our tax-effected net interest income, the major component of our net income, was $4,976,000 compared to $5,396,000 for the same period of 2010, a decrease of $420,000 or 7.78%. The decline in net interest income is a result of a decline in volume of earning assets and the movement of assets on the balance sheet out of higher yielding loans in to lower yielding, more liquid investments and interest bearing bank balances. The average rate realized on interest-earning assets decreased to 4.80% from 4.93%, while the average rate paid on interest-bearing liabilities decreased to 1.67% from 2.06% for the three month periods ended March 31, 2011 and 2010, respectively.
Our tax-effected interest income for the three months ended March 31, 2011 was $6,990,000, which consisted of $6,411,000 on loans, $563,000 on investments, and $16,000 on federal funds sold and interest bearing deposits with correspondent banks. The tax-effected interest income for the three months ended March 31, 2010 was $8,328,000, which consisted of $7,506,000 on loans, $800,000 on investments, and $22,000 on federal funds sold and interest bearing deposits with correspondent banks. Interest on loans for the three months ended March 31, 2011 and March 31, 2010, represented 91.72% and 90.13%, respectively, of total interest income. Average loans represented 80.64% and 81.79% of average earning assets for the three-month periods ended March 31, 2011 and March 31, 2010, respectively.
Interest expense for the three months ended March 31, 2011 was $2,014,000, which consisted of $1,002,000 related to deposits and $1,012,000 related to other borrowings. Interest expense for the three months ended March 31, 2010 was $2,932,000, which consisted of $1,930,000 related to deposits and $1,002,000 related to other borrowings. Interest expense on deposits for the three months ended March 31, 2011 and March 31, 2010 represented 49.75% and 65.83%, respectively, of total interest expense. Average interest bearing deposits represented 78.31% and 81.68% of average interest bearing liabilities for the three months ended March 31, 2011 and March 31, 2010, respectively.
-31-
COMMUNITY CAPITAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations – continued
Net Interest Income – continued
Analysis of Changes in Net Interest Income
The following table sets forth the effect that the varying levels of earning assets and interest-bearing liabilities and the applicable rates have had on changes in net interest income for the time periods indicated.
Three Months Ended
|
||||||||||||||||||||||||
March 31, 2011 vs. 2010
|
March 31, 2010 vs. 2009
|
|||||||||||||||||||||||
Variance Due to
|
Variance Due to
|
|||||||||||||||||||||||
(Dollars in thousands)
|
Volume (1)
|
Rate (1)
|
Total
|
Volume (1)
|
Rate (1)
|
Total
|
||||||||||||||||||
Earning Assets
|
||||||||||||||||||||||||
Loans
|
$
|
(1,135
|
)
|
$
|
40
|
$
|
(1,095
|
)
|
$
|
(1,032
|
)
|
$
|
39
|
$
|
(993
|
)
|
||||||||
Securities, taxable
|
70
|
(241
|
)
|
(171
|
)
|
88
|
(167
|
)
|
(79
|
)
|
||||||||||||||
Securities, nontaxable
|
(82
|
)
|
6
|
(76
|
)
|
(184
|
)
|
(36
|
)
|
(220
|
)
|
|||||||||||||
Nonmarketable equity securities
|
(2
|
)
|
12
|
10
|
41
|
(40
|
)
|
1
|
||||||||||||||||
Federal funds sold and other
|
(6
|
)
|
-
|
(6
|
)
|
21
|
(1
|
)
|
20
|
|||||||||||||||
Total interest income
|
(1,155
|
)
|
(183
|
)
|
(1,338
|
)
|
(1,066
|
)
|
(205
|
)
|
(1,271
|
)
|
||||||||||||
Interest-Bearing Liabilities
|
||||||||||||||||||||||||
Interest-bearing deposits:
|
||||||||||||||||||||||||
Interest-bearing transaction accounts
|
6
|
(162
|
)
|
(156
|
)
|
(25
|
)
|
287
|
262
|
|||||||||||||||
Savings accounts
|
(1
|
)
|
(56
|
)
|
(57
|
)
|
24
|
(54
|
)
|
(30
|
)
|
|||||||||||||
Time deposits
|
(394
|
)
|
(321
|
)
|
(715
|
)
|
318
|
(462
|
)
|
(144
|
)
|
|||||||||||||
Total interest-bearing deposits
|
(389
|
)
|
(539
|
)
|
(928
|
)
|
317
|
(229
|
)
|
88
|
||||||||||||||
Other short-term borrowings
|
-
|
-
|
-
|
(17
|
)
|
(17
|
)
|
(34
|
)
|
|||||||||||||||
Federal Home Loan Bank advances
|
-
|
(6
|
)
|
(6
|
)
|
(461
|
)
|
(173
|
)
|
(634
|
)
|
|||||||||||||
Junior subordinate debt
|
-
|
16
|
16
|
-
|
(2
|
)
|
(2
|
)
|
||||||||||||||||
Total interest expense
|
(389
|
)
|
(529
|
)
|
(918
|
)
|
(161
|
)
|
(421
|
)
|
(582
|
)
|
||||||||||||
Net interest income
|
$
|
(766
|
)
|
$
|
346
|
$
|
(420
|
)
|
$
|
(905
|
)
|
$
|
216
|
$
|
(689
|
)
|
-------------------------
(1)
|
Volume-rate changes have been allocated to each category based on the percentage of the total change.
|
Provision and Allowance for Loan Losses
The allowance for loan losses represents management’s estimate of probable losses inherent in the loan portfolio. We have developed policies and procedures for evaluating the overall quality of our credit portfolio and the timely identification of potential problem credits. CapitalBank’s Board of Directors reviews and approves the appropriate level for its allowance for loan losses quarterly based upon management’s recommendations, the results of the internal monitoring and reporting system, analysis of economic conditions in our markets, and a review of historical statistical data for both us and other financial institutions. Additions to the allowance for loan losses, which are expensed as the provision for loan losses on our income statement, are periodically made to maintain the allowance at an appropriate level based on our analysis of the potential risk in the loan portfolio. Loan losses, which include write downs and charge offs, and recoveries are charged or credited directly to the allowance. The amount of the provision is a function of the level of loans outstanding, the level of nonperforming loans, historical loan loss experience, the amount of loan losses actually charged against the reserve during a given period, and current and anticipated economic conditions.
Our allowance for loan losses is based upon judgments and assumptions of risk elements in the portfolio, future economic conditions, and other factors affecting borrowers. The process includes identification and analysis of loss potential in various portfolio segments utilizing a credit risk grading process and specific reviews and evaluations of significant problem credits. In addition, we monitor overall portfolio quality through observable trends in delinquency, charge offs, and general and economic conditions in the service area. Risks are inherent in making all loans, including risks with respect to the period of time over
-32-
COMMUNITY CAPITAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations – continued
Provision and Allowance for Loan Losses - continued
which loans may be repaid, risks resulting from changes in economic and industry conditions, risks inherent in dealing with individual borrowers, and, in the case of a collateralized loan, risks resulting from uncertainties about the future value of the collateral.
In determining our allowance for loan loss, we regularly review loans for specific and impaired reserves based on the appropriate impairment assessment methodology. Pooled reserves are determined using historical loss trends measured over an eight quarter rolling average applied to risk rated loans grouped by Federal Financial Examination Council (“FFIEC”) call code and segmented by impairment status. The pooled reserves are calculated by applying the appropriate historical loss ratio to the loan categories. Impaired loans greater than a minimum threshold established by management are excluded from this analysis. The sum of all such amounts determines our pooled reserves.
We track our portfolio and analyze loans grouped by FFIEC call code categories. The first step in this process is to risk grade each and every loan in the portfolio based on one common set of parameters. These parameters include items like debt-to-worth ratio, liquidity of the borrower, net worth, experience in a particular field and other factors such as underwriting exceptions. Weight is also given to the relative strength of any guarantors on the loan.
After risk grading each loan, we then segment the portfolio by FFIEC call code groupings, separating out substandard or impaired loans. The remaining loans are grouped into “performing loan pools”. The loss history for each performing loan pool is measured over an eight quarter rolling average to create a loss factor. The loss factor is then applied to the pool balance and the reserve per pool calculated. Loans deemed to be substandard but not impaired are segregated and a loss factor is applied to this pool as well. Finally, impaired loans are segmented based upon size; smaller impaired loans are pooled and loss factor applied, while larger impaired loans are assessed individually using the appropriate impairment measuring methodology.
In developing our ASC 450-20 general reserve estimate, we have segmented the loan portfolio into 12 risk categories:
§
|
installment loans
|
§
|
home equity lines of credit
|
§
|
DDA overdraft loans
|
§
|
cash secured loans
|
§
|
mortgage loans for resale
|
§
|
1-4 family residential loans
|
§
|
1-4 family residential construction loans
|
§
|
commercial real estate loans including (other construction and land loans, multi-family, commercial real estate owner-occupied, commercial real estate other and commercial and farm land)
|
Loss experience on each of the risk categories is compiled over the previous four quarters (or 12 months). Each of the segments of the loan portfolio is analyzed for historical loss percentages. We then apply the results generated from the four quarter loss history analysis to each of these segments. When a particular loan is identified as impaired, it is removed from the corresponding segment and individually analyzed and measured for specific reserve allocation.
Qualitative and environmental factors include external risk factors that we believe are representative of our overall lending environment. We have identified the following factors in establishing a more comprehensive system of controls in which we can monitor the quality of the loan portfolio:
·
|
Portfolio risk
|
·
|
Loan policy, procedures and monitoring risk
|
·
|
National and local economic trends and conditions
|
·
|
Concentration risk
|
·
|
Acquisition and development loan portfolio risks
|
·
|
Impaired loan portfolio additional risks
|
-33-
COMMUNITY CAPITAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations – continued
Provision and Allowance for Loan Losses – continued
Certain problem loans are reviewed individually for impairment. An impaired loan may not represent an expected loss; however a loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. In determining if a loan is impaired, the bank considers all non-accrual loans, loans whose terms are modified in a troubled debt restructuring, and any other loan that is individually evaluated and determined to be impaired based on risk ratings and loan amounts of certain segments of the bank’s loan portfolio. If a loan is individually evaluated and identified as impaired, it is measured by using either the fair value of the collateral, less expected costs to sell, present value of expected future cash flows, discounted at the loans effective interest rate, or observable market price of the loan. Management chooses a method on a loan-by-loan basis. Measuring impaired loans requires judgment and estimates and the eventual outcomes may differ from those estimates. At March 31, 2011, impaired loans totaled $34.4 million, all of which are valued on a nonrecurring basis at the lower of cost or market value of the underlying collateral.
Total provision expense for the three months ended March 31, 2011 was $600,000, compared to $1.6 million for the three months ended March 31, 2010. The allowance for loan losses was 3.25% of total loans at March 31, 2011 compared to 2.55% at March 31, 2010.
Based on present information and an ongoing evaluation, management considers the allowance for loan losses to be adequate to meet presently known and inherent losses in the loan portfolio. However, underlying assumptions may be impacted in future periods by changes in economic conditions, the impact of regulatory examinations, and the discovery of information with respect to borrowers, which was not known to management at the time of the issuance of the Company’s consolidated financial statements. Therefore, management’s assumptions may or may not prove valid. Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the allowance for loan losses will not be required, especially considering the overall weakness in the real estate market in our market areas. Additionally, no assurance can be given that management’s ongoing evaluation of the loan portfolio, in light of changing economic conditions and other relevant factors, will not require significant future additions to the allowance for loan losses, thus adversely impacting the Company’s business, financial condition, results of operations, and cash flows.
Please see our risk factors that appear in Part I – Item 1A – Risk Factors of this Annual Report on Form 10-K.
-34-
COMMUNITY CAPITAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations – continued
Provision and Allowance for Loan Losses - continued
The following table sets forth certain information with respect to our allowance for loan losses and the composition of charge offs and recoveries as of March 31, 2011 and March 31, 2010.
Allowance for Loan Losses
(Dollars in thousands)
March 31,
|
||||||||
2011
|
2010
|
|||||||
Total loans outstanding
|
$
|
464,978
|
$
|
549,010
|
||||
Average loans outstanding
|
$
|
475,989
|
$
|
560,249
|
||||
Balance of allowance for loan losses
|
||||||||
at beginning of period
|
$
|
17,165
|
$
|
14,160
|
||||
Loan losses:
|
||||||||
Commercial and industrial
|
20
|
35
|
||||||
Real estate - mortgage
|
2,679
|
1,869
|
||||||
Consumer
|
5
|
14
|
||||||
Total loan losses
|
2,704
|
1,918
|
||||||
Recoveries of previous loan losses:
|
||||||||
Commercial and industrial
|
11
|
-
|
||||||
Real estate - mortgage
|
35
|
168
|
||||||
Consumer
|
5
|
8
|
||||||
Total recoveries
|
51
|
176
|
||||||
Net loan losses
|
2,653
|
1,742
|
||||||
Provision for loan losses
|
600
|
1,600
|
||||||
Balance of allowance for loan losses
|
||||||||
at end of period
|
$
|
15,112
|
$
|
14,018
|
||||
Allowance for loan losses to period end loans
|
3.25
|
%
|
2.55
|
%
|
||||
Net charge offs to average loans
|
0.56
|
%
|
0.31
|
%
|
Nonperforming Assets. The following table sets forth our nonperforming assets for the dates indicated.
Nonperforming Assets
(Dollars in thousands)
March 31,
|
|||||||
2011
|
2010
|
||||||
Nonaccrual loans
|
$
|
25,884
|
$
|
32,628
|
|||
Other real estate owned
|
13,691
|
8,833
|
|||||
Total nonperforming assets
|
$
|
39,575
|
$
|
41,461
|
|||
Loans 90 days or more past due and
|
|||||||
still accruing interest
|
S
|
1,042
|
1,294
|
||||
Impaired loans still accruing interest
|
$
|
8,536
|
44,841
|
||||
Nonperforming assets to period end assets
|
6.10
|
%
|
5.56
|
%
|
Accrual of interest is discontinued on a loan when we believe, after considering economic and business conditions and collection efforts that the borrower’s financial condition is such that the collection of interest is doubtful. A delinquent loan is generally placed in nonaccrual status when it becomes 90 days or more past due. When a loan is placed in nonaccrual status, all interest that has been accrued on the loan but remains unpaid is reversed and deducted from current earnings as a reduction of reported interest income. No additional interest is accrued on the loan balance until the collection of both principal and interest becomes reasonably certain. When a problem loan is finally resolved, we may ultimately write-down or charge off the principal balance of the loan that would necessitate additional charges to earnings. For all periods presented, the additional interest income, which would have been recognized into earnings if our nonaccrual loans had been current in accordance with their original terms, is immaterial.
-35-
COMMUNITY CAPITAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations – continued
Provision and Allowance for Loan Losses - continued
Total nonperforming assets totaled $39.6 million at March 31, 2011 and $41.5 million at March 31, 2010. This amount consists primarily of nonaccrual loans that totaled $25.9 million and $32.6 million at March 31, 2011 and 2010, respectively. The decrease in nonaccrual loans is primarily due to their migration into other real estate owned status and our efforts of selling these assets. Nonperforming assets were 8.51% of total loans at March 31, 2011. The allowance for loan losses to period end nonperforming assets was 38.19% at March 31, 2011. A significant portion, or 99.7%, of nonperforming loans at March 31, 2011 were secured by real estate. We have evaluated the underlying collateral on these loans and believe that the collateral on these loans is sufficient to minimize future losses. However, the recent downturn in the real estate market has resulted in increased loan delinquencies, defaults and foreclosures, and we believe that these trends are likely to continue. In some cases, this downturn has resulted in a significant impairment to the value of the collateral used to secure these loans and the ability to sell the collateral upon foreclosure. These conditions have adversely affected our loan portfolio. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. If real estate values continue to decline, it is also more likely that we would be required to increase our allowance for loan losses. If during a period of reduced real estate values we are required to liquidate the property collateralizing a loan to satisfy the debt or to increase the allowance for loan losses, this could materially reduce our profitability and adversely affect our financial condition.
Potential Problem Loans. At March 31, 2011, through our internal review mechanisms, we had identified $18.3 million of criticized loans and $56.2 million of classified loans. The results of this internal review process are the primary determining factor in our assessment of the adequacy of the allowance for loan losses.
Our criticized loans decreased from $18.9 million at December 31, 2010 to $18.3 million at March 31, 2011. Total classified loans decreased from $56.6 million at December 31, 2010 to $52.4 million at March 31, 2011. The $4.8 million decrease in criticized and classified loans from December 31, 2010 to March 31, 2011 were primarily due to real estate development and single family construction loans, all of which are secured by real estate.
The continued elevated level of criticized and classified loans is primarily due to the current economic downturn and related decline in demand for residential real estate. As a result of the slowing demand, several real estate developers are having significant cash flow issues. Furthermore, residential real estate values are declining further exacerbating these cash flow issues.
Impaired loans primarily consist of nonperforming loans and troubled debt restructurings (“TDRs”), but can include other loans identified by management as being impaired. Historically, we considered all loans identified as “substandard” assets to be “impaired” assets. A regulatory external audit identified the need to separate these categories per the actual regulatory definition for each classification. A bank asset may meet the definition of “substandard” while not also meeting the definition of “impaired”. However, all assets meeting the definition of “impaired” are automatically “substandard”. Accordingly, we evaluated those loans identified as substandard and separated “substandard” assets from “substandard and impaired” assets.
Loans are classified as TDRs by the Company when certain modifications are made to the loan terms and concessions are granted to the borrowers due to financial difficulty experienced by those borrowers. The Company only restructures loans for borrowers in financial difficulty that have designed a viable business plan to fully pay off all obligations, including outstanding debt, interest and fees, either by generating additional income from the business or through liquidation of assets. Generally, these loans are restructured to provide the borrower additional time to execute upon their plans. With respect to restructured loans, the Company grants concessions by (1) reduction of the stated interest rate for the remaining original life of the debt, or (2) extension of the maturity date at a stated interest rate lower than the current market rate for new debt with similar risk. The Company does not generally grant concessions through forgiveness of principal or accrued interest. Restructured loans where a concession has been granted through extension of the maturity date generally include extension of payments in an interest only period, extension of payments with capitalized interest and extension of payments through a forbearance agreement. These extended payment terms are also combined with a reduction of the stated interest rate in certain cases. Success in restructuring loans has been mixed but it has proven to be a useful tool in certain situations to protect collateral values and allow certain borrowers additional time to execute upon defined business plans. In situations where a TDR is unsuccessful and the borrower is unable to follow through with terms of the restricted agreement, the loan is placed on nonaccrual status and continues to be written down to the underlying collateral value. The Company’s policy with respect to accrual of interest on loans restructured in a TDR follows relevant supervisory guidance. That is, if a borrower has
-36-
COMMUNITY CAPITAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations – continued
Provision and Allowance for Loan Losses - continued
demonstrated performance under the previous loan terms and shows capacity to perform under the restructured loan terms; continued accrual of interest at the restructured interest rate is likely. If a borrower was materially delinquent on payments prior to the restructuring but shows capacity to meet the restructured loan terms, the loan will likely continue as nonaccrual going forward. Lastly, if the borrower does not perform under the restructured terms, the loan is placed on nonaccrual status. The Company will continue to closely monitor these loans and will cease accruing interest on them if management believes that the borrowers may not continue performing based on the restructured note terms. If, after previously being classified as a TDR, a loan is restructured a second time, then that loan is automatically placed on nonaccrual status. The Company’s policy with respect to nonperforming loans requires the borrower to make a minimum of six consecutive payments in accordance with the loan terms before that loan can be placed back on accrual status. Further, the borrower must show capacity to continue performing into the future prior to restoration of accrual status. To date, the Company has not restored any nonaccrual loan classified as a TDR to accrual status.
The following is a summary of information pertaining to TDRs:
(Dollars in thousands)
|
March 31,
2011
|
December 31, 2010
|
||||||
Nonperforming TDRs
|
$ | 13,314 | $ | 6,815 | ||||
Performing TDRs:
|
||||||||
Commercial
|
$ | 151 | $ | 152 | ||||
Commercial real estate - construction
|
141 | 143 | ||||||
Residential
|
655 | 3,141 | ||||||
Total performing TDRs
|
$ | 947 | $ | 3,436 | ||||
Total TDRs
|
$ | 14,261 | $ | 10,251 |
Noninterest Income
Total noninterest income for the three months ended March 31, 2011 was $2,116,000, a decrease of $1,231,000, or 36.78% compared to $3,347,000 for the three months ended March 31, 2010. Other operating income decreased $864,000, or 64.09%, to $484,000 for the three months ended March 31, 2011 compared to $1,348,000 for the three months ended March 31, 2010, primarily due to a payment of $912,000 we received during the first quarter of 2010 for the settlement of a lawsuit regarding the management of a participation loan.
We also recognized gains on the sale of securities available-for-sale in the amount of $224,000 for the three months ended March 31, 2011, compared to gains of $683,000 for the three months ended March 31, 2010.
Service charges on deposit accounts decreased $107,000, or 22.20%, from the three months ended March 31, 2010 to the three months ended March 31, 2011. Gains on sales of loans held for sale increased $129,000, or 43.29%, from $298,000 to $427,000 for the three months ended March 31, 2011 compared to the three months ended March 31, 2010. The income from fiduciary activities increased $58,000, or 12.29%, from the three-month period ended March 31, 2010 to the three-month period ended March 31, 2011. The increase is primarily due to growth of new accounts as well as increased market value of assets under management. Fees from brokerage services increased $12,000, or 18.75%, from the three months ended March 31, 2010 to the three months ended March 31, 2011.
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COMMUNITY CAPITAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations – continued
Noninterest Expense
Total noninterest expense for the first three months of 2011 was $4,997,000, an increase of $210,000, or 4.39%, when compared to $4,787,000 for the first three months of 2010.
The primary component of noninterest expense is salaries and benefits, which increased $133,000, or 5.45%, from $2,439,000 for the three months ended March 31, 2010 to $2,572,000 for the three months ended March 31, 2011. Net occupancy expense increased $13,000 for the three-month period ended March 31, 2011, an increase of 4.04% over the related period in 2010. The amortization of intangible assets decreased $6,000, or 5.83%, to $97,000 from the three-month period ended March 31, 2010 to the three-month period ended March 31, 2011. Furniture and equipment expense decreased $35,000, or 17.24% from the three-month period ended March 31, 2010 to the three-month period ended March 31, 2011.
We realized an increase in FDIC assessments of $133,000, or 38.44%, from $346,000 for the three-month period ended March 31, 2010 to $479,000 for the three-month period ended March 31, 2011. The increase is primarily a result of increases in the FDIC insurance premiums due to the recession of the U.S. economy and failure of unaffiliated FDIC-insured depository institutions.
Net cost of operation of other real estate owned decreased 46.10% to $159,000 for the three months ended March 31, 2011 from $295,000 for the three-month period ended March 31, 2010. Other operating expenses were $1,187,000 for the three months ended March 31, 2011, as compared to $1,079,000 for the same period in 2010, an increase of $108,000, or 10.00%.
Income Taxes
For the three months ended March 31, 2011 and 2010, the effective income tax rate was 29.32% and 30.01%, respectively, and the income tax provision was $424,000 and $686,000, respectively.
Net Income
The combination of the above factors resulted in net income of $1,022,000 for the three months ended March 31, 2011 compared to $1,600,000 for the comparable period in 2010, a decrease of $578,000, or 36.13%.
Assets and Liabilities
During the first three months of 2011, total assets decreased $6,799,000, or 1.04%, when compared to December 31, 2010. We experienced a decrease of $14,415,000, or 3.01%, in loans during the first three months of 2011. Total investment securities decreased 8.41%, or $7,038,000, when compared to December 31, 2010. Cash and due from banks including interest-bearing deposit accounts increased $17,484,000, or 47.03%, to $54,659,000 at March 31, 2011 compared to $37,175,000 at December 31, 2010. The increase in cash at March 31, 2011 compared to December 31, 2010 was primarily due to our efforts in increase our on-balance sheet liquidity. As a result, we retained significant balances in our Federal Reserve account rather than investing them in other types of assets. On the liability side, total deposits decreased $8,167,000, or 1.65%, to $487,015,000 at March 31, 2011.
Investment Securities
Investment securities decreased $7,038,000, or 8.41%, to $76,613,000 at March 31, 2011 from $83,651,000 at December 31, 2010. Securities available for sale decreased $6,828,000, or 9.22%, during the first three months of 2011 and nonmarketable equity securities decreased $210,000, or 2.18%, during the first three months of 2011. As of March 31, 2011, securities available for sale totaling $41,487,000 were in an unrealized loss position, all of which have been in a loss position for less than 12 months. Based on industry analyst reports and credit ratings, we believe that the deterioration in value is attributable to changes in market interest rates and is not in the credit quality of the issuer, and, therefore, these losses are not considered other-than-temporary.
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COMMUNITY CAPITAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued
Investment Securities - continued
We review our investment 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 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 entire difference between the investment’s cost and its fair value at the balance sheet date of the reporting period for which the assessment is made, or may recognize a portion in other comprehensive income. The fair value of investments on which OTTI is recognized then becomes the new cost basis of the investment.
Loans
Loans receivable decreased $14,415,000, or 3.01%, since December 31, 2010. The largest decrease was in real estate construction, which decreased $8,831,000, or 8.91%, to $90,245,000 at March 31, 2011. Real estate mortgage and commercial loans decreased $2,048,000, or 0.73%, to $277,512,000 at March 31, 2011. Commercial and agricultural loans decreased $2,292,000, or 5.77%, to $37,428,000 at March 31, 2011. Balances within the major loan receivable categories as of March 31, 2011 and December 31, 2010 are as follows:
(Dollars in thousands)
|
March 31, 2011
|
December 31, 2010
|
||||||
Commercial and agricultural
|
$ | 37,428 | $ | 39,720 | ||||
Real estate – construction
|
90,245 | 99,076 | ||||||
Real estate - mortgage and commercial
|
277,512 | 279,560 | ||||||
Home equity
|
40,764 | 42,167 | ||||||
Consumer, installment
|
17,855 | 17,636 | ||||||
Consumer, credit card and checking
|
1,174 | 1,234 | ||||||
$ | 464,978 | $ | 479,393 |
Premises and Equipment
Our purchases of fixed assets during the first three months of 2011 totaled $7,000, compared to $24,000 during the first three months of 2010. Total fixed assets, net of depreciation, decreased $189,000 during the first three months of 2011.
Deposits
Total deposits decreased $8,167,000, or 1.65%, to $487,015,000 at March 31, 2011 from $495,182,000 at December 31, 2010. Expressed in percentages, noninterest-bearing deposits increased 5.59% from $103,080,000 at December 31, 2010 to $108,844,000 at March 31, 2011, and interest-bearing deposits decreased 3.55% from $392,102,000 at December 31, 2010 to $378,171,000 at March 31, 2011. Balances within the major deposit categories as of March 31, 2011 and December 31, 2010 are as follows:
(Dollars in thousands)
|
March 31, 2011
|
December 31, 2010
|
||||||
Noninterest-bearing demand deposits
|
$ | 108,844 | $ | 103,080 | ||||
Interest-bearing demand deposits
|
64,319 | 63,024 | ||||||
Money market accounts
|
129,989 | 133,409 | ||||||
Savings deposits
|
43,475 | 42,481 | ||||||
Certificates of deposit
|
132,539 | 145,339 | ||||||
Brokered certificates of deposit
|
7,849 | 7,849 | ||||||
$ | 487,015 | $ | 495,182 |
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COMMUNITY CAPITAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued
Advances from the Federal Home Loan Bank
Advances from the Federal Home Loan Bank of Atlanta to us totaled $95,400,000 at March 31, 2011 and December 31, 2010. Of the $95,400,000 in advances with Federal Home Loan Bank, the following have scheduled maturities greater than one year:
Maturing on
|
Interest Rate
|
Principal
|
|||
(Dollars in thousands)
|
|||||
05/18/12
|
4.62% - fixed, callable 05/18/11
|
$ | 5,000 | ||
03/05/13
|
1.94% - fixed, callable 06/06/11
|
5,400 | |||
01/06/14
|
0.41% - adjustable rate, resets 04/06/11
|
10,000 | |||
01/06/14
|
0.41% - adjustable rate, resets 04/06/11
|
10,000 | |||
01/16/15
|
2.77% - fixed, callable 04/18/11
|
10,000 | |||
06/03/15
|
3.36% - fixed, callable 06/03/11
|
15,000 | |||
02/02/17
|
4.31% - fixed, callable 05/02/11
|
10,000 | |||
05/18/17
|
4.15% - fixed, callable 05/18/11
|
10,000 | |||
$ | 75,400 |
Junior Subordinated Debentures
On June 15, 2006, Community Capital Corporation Statutory Trust I (a non-consolidated subsidiary) issued $10,000,000 in trust preferred securities with a maturity of June 15, 2036. The rate is fixed at 7.04% until June 14, 2011, at which point the rate adjusts quarterly to the three-month LIBOR plus 1.55%, and can be called without penalty beginning on June 15, 2011. In accordance with accounting standards, the Trust has not been consolidated in these financial statements. We received from the Trust $10,000,000 of proceeds from the issuance of the securities and $310,000 of initial proceeds from the capital investment in the Trust, and accordingly have shown the funds due to the Trust as $10,310,000 junior subordinated debentures.
The proceeds from the issuance were used to extinguish short-term borrowings and to inject capital into the Bank, as the current regulatory rules allow certain amount of junior subordinated debentures to be included in the calculation of regulatory capital.
In January 2010, we announced the decision to defer future interest payments on our trust preferred subordinated debt, beginning with our interest payment due on March 15, 2010, for the foreseeable future to maintain cash levels at the holding company level. The terms of the debentures and trust indentures allow for us to defer interest payments for up to 20 consecutive quarters without default or penalty. During the period that the interest deferrals are elected, we will continue to record interest expense associated with the debentures. Upon the expiration of the deferral period, all accrued and unpaid interest will be due and payable.
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COMMUNITY CAPITAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued
Capital
Quantitative measures established by the federal banking agencies to ensure capital adequacy require us 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.
We are also required to maintain capital at a minimum level based on total average assets, which is known as the leverage ratio. Only the strongest banks are allowed to maintain capital at the minimum requirement of 3%. All others are subject to maintaining ratios at least 1% to 2% above the minimum.
The following table summarizes capital ratios and the regulatory minimum requirements at March 31, 2011:
Tier 1
|
Total
|
Tier 1
|
|||
Risk-based
|
Risk-based
|
Leverage | |||
Actual ratio:
|
|||||
Community Capital Corporation
|
11.46%
|
12.73%
|
8.31%
|
||
CapitalBank
|
11.28%
|
12.56%
|
8.17%
|
||
Regulatory minimums:
|
|||||
For capital adequacy purposes
|
4.00%
|
8.00%
|
4.00%
|
||
To be well-capitalized under prompt action provisions
|
6.00%
|
10.00%
|
5.00%
|
Liquidity and Capital Resources
Shareholders’ equity was increased by net income of $1,022,000 during the three months ended March 31, 2011. Due to changes in the market rates of interest, the fair value of our securities available-for-sale increased, which had the effect of increasing shareholders’ equity by $295,000, net of deferred taxes, for the three months ended March 31, 2011 when compared to December 31, 2010. Total equity also increased by $32,000 for the amortization of deferred compensation on restricted stock for the three months ended March 31, 2011. Total equity was also increased by $122,000 for sales of treasury shares.
Our liquidity position remained strong during the first quarter of 2011, as we had no overnight wholesale borrowings and $43,400,000 in our Federal Reserve correspondent account at March 31, 2011. For the near term, maturities and sales of securities available-for-sale are expected to be a source of liquidity as we deploy these funds into loans to achieve the desired mix of assets and liabilities. At March 31, 2011, we had $22,384,000 million of securities available-for-sale as sources of liquidity. We also expect to build our deposit base. Advances from the Federal Home Loan Bank, availability at Federal Reserve Bank Discount Window, and our correspondent banks will also continue to serve as a funding source, at least for the near future. At March 31, 2011, we had no borrowings outstanding and had the ability to receive $5,856,000 in funds under the terms of our agreement with the Federal Reserve Bank. Additionally , we have the ability to receive an additional $68,330,000 in advances under the terms of our agreement with the Federal Home Loan Bank. Short-term borrowings by CapitalBank are not expected to be a primary source of liquidity for the near term; however, we have approximately $15,000,000 of unused lines of credit to purchase federal funds.
Off-Balance Sheet Risk
Through the operations of CapitalBank, we have made contractual commitments to extend credit in the ordinary course of our business activities. These commitments are legally binding agreements to lend money to our customers at predetermined interest rates for a specified period of time. At March 31, 2011, we had issued commitments to extend credit of $45,421,000 and standby letters of credit of $1,705,000 through various types of commercial lending arrangements. Approximately $35,257,000 of these commitments to extend credit had variable rates.
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COMMUNITY CAPITAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued
Off-Balance Sheet Risk - continued
The following table sets forth the length of time until maturity for unused commitments to extend credit and standby letters of credit at March 31, 2011.
After One
|
After Three | |||||||||||||||||||||||
Within
|
Through
|
Through
|
Greater | |||||||||||||||||||||
One
|
Three
|
Twelve |
Within
|
Than | ||||||||||||||||||||
(Dollars in thousands)
|
Month
|
Months
|
Months
|
One Year
|
One Year
|
Total
|
||||||||||||||||||
Unused commitments
|
||||||||||||||||||||||||
to extend credit
|
$ | 2,827 | $ | 3,195 | $ | 12,452 | $ | 18,474 | $ | 26,947 | $ | 45,421 | ||||||||||||
Standby letters of
|
||||||||||||||||||||||||
credit
|
139 | 85 | 1,481 | 1,705 | - | 1,705 | ||||||||||||||||||
Total
|
$ | 2,966 | $ | 3,280 | $ | 13,933 | $ | 20,179 | $ | 26,947 | $ | 47,126 |
We have evaluated each customer’s 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. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, commercial and residential real estate.
Recently Issued Accounting Standards
The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting, and / or disclosure of financial information by the Company.
In July 2010, the Receivables topic of the Accounting Standards Codification (“ASC”) was amended by Accounting Standards Update (“ASU”) 2010-20 to require expanded disclosures related to a company’s allowance for credit losses and the credit quality of its financing receivables. The amendments require the allowance disclosures to be provided on a disaggregated basis. The Company is required to include these disclosures in their interim and annual financial statements. See Note 9.
Disclosures about Troubled Debt Restructurings (“TDRs”) required by ASU 2010-10 were deferred by the Financial Accounting Standards Board (“FASB”) in ASU 2011-01 issued in January 2011. In April 2011 FASB issued ASU 2011-02 to assist creditors with their determination of when a restructuring is a TDR. The determination is based on whether the restructuring constitutes a concession and whether the debtor is experiencing financial difficulties as both events must be present.
Disclosures related to TDRs under ASU 2010-20 will be effective for reporting periods beginning after June 15, 2011.
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 Company’s financial position, results of operations or cash flows.
Regulatory Matters
We are not aware of any current recommendations by regulatory authorities, which, if they were to be implemented, would have a material effect on liquidity, capital resources, or operations.
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COMMUNITY CAPITAL CORPORATION
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
Item 4. Controls and Procedures
Controls Evaluation and Related CEO and CFO Certifications. We conducted an evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures” (Disclosure Controls) as of the end of the period covered by this Quarterly Report. The controls evaluation was done under the supervision and with the participation of management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO).
Attached as exhibits to this Quarterly Report are certifications of the CEO and the CFO, which are required in accordance with Rule 13a-14 of the Exchange Act. This “Controls and Procedures” section includes the information concerning the controls evaluation referred to in the certifications, and it should be read in conjunction with the certifications for a more complete understanding of the topics presented.
Definition of Disclosure Controls. Disclosure Controls are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure Controls are also designed to reasonably assure that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Our Disclosure Controls include components of our internal control over financial reporting, which consists of control processes designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles in the U.S. To the extent that components of our internal control over financial reporting are included within our Disclosure Controls, they are included in the scope of our quarterly controls evaluation.
Limitations on the Effectiveness of Controls. The company’s management, including the CEO and CFO, does not expect that our Disclosure Controls or our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Scope of the Controls Evaluation. The evaluation of our Disclosure Controls included a review of the controls’ objectives and design, the company’s implementation of the controls and the effect of the controls on the information generated for use in this Quarterly Report. In the course of the controls evaluation, we sought to identify data errors, control problems or acts of fraud and confirm that appropriate corrective actions, including process improvements, were being undertaken. This type of evaluation is performed on a quarterly basis so that the conclusions of management, including the CEO and CFO, concerning the effectiveness of the controls can be reported in our Quarterly Reports on Form 10-Q and to supplement our disclosures made in our Annual Report on Form 10-K. Many of the components of our Disclosure Controls are also evaluated on an ongoing basis by our finance personnel, as well as our independent auditors who evaluate them in connection with determining their auditing procedures related to their report on our annual financial statements and not to provide assurance on our controls. The overall goals of these various evaluation activities are to monitor our Disclosure Controls, and to modify them as necessary. Our intent is to maintain the Disclosure Controls as dynamic systems that change as conditions warrant.
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COMMUNITY CAPITAL CORPORATION
Among other matters, we also considered whether our evaluation identified any “significant deficiencies” or “material weaknesses” in our internal control over financial reporting, and whether the company had identified any acts of fraud involving personnel with a significant role in our internal control over financial reporting. This information was important both for the controls evaluation generally, and because Item 5 in the certifications of the CEO and CFO requires that the CEO and CFO disclose that information to our Board’s Audit Committee and to our independent auditors. In the professional auditing literature, “significant deficiencies” are referred to as “reportable conditions,” which are deficiencies in the design or operation of controls that could adversely affect our ability to record, process, summarize and report financial data in the financial statements. Auditing literature defines “material weakness” as a particularly serious reportable condition in which the internal control does not reduce to a relatively low level the risk that misstatements caused by error or fraud may occur in amounts that would be material in relation to the financial statements and the risk that such misstatements would not be detected within a timely period by employees in the normal course of performing their assigned functions. We also sought to address other controls matters in the controls evaluation, and in each case if a problem was identified, we considered what revision, improvement and/or correction to make in accordance with our ongoing procedures.
Conclusions. Based upon the controls evaluation, our CEO and CFO have concluded that, subject to the limitations noted above, as of the end of the period covered by this Quarterly Report, our Disclosure Controls were effective to provide reasonable assurance that material information relating to us and our consolidated subsidiaries is made known to management, including the CEO and CFO, particularly during the period when our periodic reports are being prepared.
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COMMUNITY CAPITAL CORPORATION
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are party to certain litigation that we consider routine and incidental to our business. Management does not expect the results of any of these actions to have a material effect on our business, results of operations or financial condition.
Item 1A. Risk Factors
Not Applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. (Removed and Reserved)
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit 31.1 | Certification of Principal Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities | |
Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
Exhibit 31.2 | Certificate of Principal Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities | |
Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
Exhibit 32 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted | |
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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COMMUNITY CAPITAL CORPORATION
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.
COMMUNITY CAPITAL CORPORATION
|
By:
|
/s/ WILLIAM G. STEVENS
|
William G. Stevens
President & Chief Executive Officer
Date: May 13, 2011 By: /s/ R. WESLEY BREWER
R. Wesley Brewer
Chief Financial Officer
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