Attached files
file | filename |
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EX-31.1 - EXHIBIT 31.1 - SOUTHCREST FINANCIAL GROUP INC | ex31_1.htm |
EX-32.2 - EXHIBIT 32.2 - SOUTHCREST FINANCIAL GROUP INC | ex32_2.htm |
EX-31.2 - EXHIBIT 31.2 - SOUTHCREST FINANCIAL GROUP INC | ex31_2.htm |
EX-32.1 - EXHIBIT 32.1 - SOUTHCREST FINANCIAL GROUP INC | ex32_1.htm |
U.S.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
_________________________
FORM
10-Q
_________________________
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended September 30, 2009
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from
to
Commission
File Number: 000-51287
__________________________
SouthCrest
Financial Group, Inc.
(Exact
name of small business issuer as specified in its charter)
__________________________
Georgia
|
58-2256460
|
(State
or other jurisdiction of incorporation or organization)
|
(IRS
Employer Identification No.)
|
600
North Glynn Street
Fayetteville,
GA 30214
(Address
of principal executive offices)
(770)-461-2781
(Issuer’s
telephone number)
______________________________________________________________________
(Former
name, former address and former fiscal year, if changed since last
report)
__________________________
Check
whether the issuer (1) has filed all reports required to be filed by Section 13
or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90
days. Yes 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 (Section 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
Yes ¨ 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
|
ndicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of November 14, 2009: 3,931,528.
SouthCrest Financial Group, Inc.
And
Subsidiaries
INDEX
Page
|
||||
Part
I.
|
FINANCIAL
INFORMATION
|
|||
Item
1.
|
||||
1
|
||||
2
|
||||
3
|
||||
4
|
||||
5
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||||
7
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||||
Item
2.
|
19
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|||
Item
3.
|
31
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|||
Item
4.
|
31
|
|||
Part
II.
|
OTHER
INFORMATION
|
31
|
||
Item
1.
|
31
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|||
Item
1A.
|
31
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|||
Item
2.
|
31
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|||
Item
3.
|
31
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Item
4.
|
32
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Item
5.
|
32
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Item
6.
|
32
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33
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PART
I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SouthCrest
Financial Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
September
30, 2009 and December 31, 2008
(Unaudited)
(In
thousands, except share and per share data)
September
30,
|
December
31,
|
|||||||
Assets
|
2009
|
2008* | ||||||
Cash
and due from banks
|
$ | 23,021 | $ | 18,267 | ||||
Federal
funds sold
|
2,300 | 7,776 | ||||||
Interest-bearing
deposits at other financial institutions
|
36,838 | 16,763 | ||||||
Securities
available for sale
|
93,106 | 78,910 | ||||||
Securities
held to maturity (fair value $30,444 and $39,502)
|
29,807 | 39,216 | ||||||
Restricted
equity securities, at cost
|
1,845 | 2,294 | ||||||
Loans
held for sale
|
251 | 349 | ||||||
Loans,
net of unearned income
|
391,741 | 395,788 | ||||||
Less
allowance for loan losses
|
8,660 | 7,285 | ||||||
Loans,
net
|
383,081 | 388,503 | ||||||
Bank-owned
life insurance
|
17,486 | 16,997 | ||||||
Premises
and equipment, net
|
19,897 | 19,373 | ||||||
Goodwill
|
- | 6,397 | ||||||
Intangible
assets, net
|
2,063 | 2,577 | ||||||
Other
real estate owned
|
9,580 | 5,592 | ||||||
Other
assets
|
8,261 | 7,537 | ||||||
Total
assets
|
$ | 627,536 | $ | 610,551 | ||||
Liabilities, Redeemable Common Stock, and
Stockholders' Equity
|
||||||||
Liabilities:
|
||||||||
Deposits:
|
||||||||
Noninterest-bearing
|
$ | 72,735 | $ | 75,912 | ||||
Interest-bearing
|
466,719 | 443,789 | ||||||
Total
deposits
|
539,454 | 519,701 | ||||||
Borrowed
funds
|
7,847 | 16,782 | ||||||
Other
liabilities
|
9,430 | 9,546 | ||||||
Total
liabilities
|
556,731 | 546,029 | ||||||
Commitments
and contingencies
|
||||||||
Redeemable
common stock held by ESOP
|
472 | 494 | ||||||
Stockholders'
equity:
|
||||||||
Preferred
stock, par value $1; 10,000,000 shares authorized
|
||||||||
Preferred
stock, Series A, no par value, 12,900 shares issued and outstanding at
September 30, 2009
|
12,203 | - | ||||||
Preferred
stock, Series A, no par value, 645 shares issued and outstanding at
September 30, 2009
|
723 | - | ||||||
Common
stock, par value $1; 10,000,000 shares authorized, 3,931,528
issued
|
3,932 | 3,932 | ||||||
Additional
paid-in capital
|
49,865 | 49,812 | ||||||
Retained
earnings
|
2,803 | 9,700 | ||||||
Unearned
compensation - ESOP
|
(303 | ) | (326 | ) | ||||
Accumulated
other comprehensive income
|
1,110 | 910 | ||||||
Total
stockholders' equity
|
70,333 | 64,028 | ||||||
Total
liabilities, redeemable common stock, and stockholders'
equity
|
$ | 627,536 | $ | 610,551 |
See
Notes to Condensed Consolidated Financial Statements.
*
Derived from audited consolidated financial statements.
SouthCrest Financial Group, Inc. and Subsidiaries
Condensed
Consolidated Statements of Operations
For
The Three and Nine Months Ended September 30, 2009 and 2008
(Unaudited)
(In
thousands, except share and per share data)
Three
Months
|
Nine
Months
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Interest
income:
|
||||||||||||||||
Loans
|
$ | 6,259 | $ | 6,915 | $ | 19,030 | $ | 21,088 | ||||||||
Securities
- taxable
|
1,061 | 1,339 | 3,246 | 4,081 | ||||||||||||
Securities
- nontaxable
|
209 | 230 | 641 | 688 | ||||||||||||
Federal
funds sold
|
1 | 20 | 6 | 236 | ||||||||||||
Interest-bearing
deposits at other banks
|
161 | 155 | 455 | 405 | ||||||||||||
Total
interest income
|
7,691 | 8,659 | 23,378 | 26,498 | ||||||||||||
Interest
expense:
|
||||||||||||||||
Deposits
|
2,359 | 3,028 | 7,512 | 9,860 | ||||||||||||
Other
borrowings
|
97 | 122 | 226 | 330 | ||||||||||||
Total
interest expense
|
2,456 | 3,150 | 7,738 | 10,190 | ||||||||||||
Net
interest income
|
5,235 | 5,509 | 15,640 | 16,308 | ||||||||||||
Provision
for loan losses
|
875 | 837 | 3,112 | 2,307 | ||||||||||||
Net
interest income after provision
|
||||||||||||||||
for
loan losses
|
4,360 | 4,672 | 12,528 | 14,001 | ||||||||||||
Other
income:
|
||||||||||||||||
Service
charges on deposit accounts
|
938 | 1,025 | 2,621 | 2,987 | ||||||||||||
Other
service charges and fees
|
407 | 345 | 1,273 | 1,148 | ||||||||||||
Net
gain on sale of loans
|
78 | 31 | 523 | 251 | ||||||||||||
Net
gain (loss) on sale and call of securities
|
4 | (570 | ) | (197 | ) | (451 | ) | |||||||||
Income
on bank-owned life insurance
|
159 | 170 | 489 | 519 | ||||||||||||
Other
operating income
|
198 | 169 | 493 | 478 | ||||||||||||
Total
other income
|
1,784 | 1,170 | 5,202 | 4,932 | ||||||||||||
Other
expenses:
|
||||||||||||||||
Salaries
and employee benefits
|
2,740 | 2,940 | 8,788 | 8,683 | ||||||||||||
Equipment
and occupancy expenses
|
660 | 655 | 1,922 | 1,864 | ||||||||||||
Goodwill
impairment
|
6,397 | - | 6,397 | - | ||||||||||||
Amortization
of intangibles
|
241 | 276 | 742 | 817 | ||||||||||||
Other
operating expenses
|
2,481 | 1,517 | 6,200 | 4,418 | ||||||||||||
Total
other expenses
|
12,519 | 5,388 | 24,049 | 15,782 | ||||||||||||
Income
(loss) before income taxes
|
(6,375 | ) | 454 | (6,319 | ) | 3,151 | ||||||||||
Income
tax (benefit) expense
|
(175 | ) | (22 | ) | (395 | ) | 663 | |||||||||
Net
income (loss)
|
$ | (6,200 | ) | $ | 476 | $ | (5,924 | ) | $ | 2,488 | ||||||
Preferred
dividends
|
169 | - | 169 | - | ||||||||||||
Net
income (loss) available to common shareholders
|
$ | (6,369 | ) | $ | 476 | $ | (6,093 | ) | $ | 2,488 | ||||||
Basic
and diluted earnings (loss) per share
|
$ | (1.63 | ) | $ | 0.12 | $ | (1.56 | ) | $ | 0.64 | ||||||
Dividends
per share
|
$ | 0.04 | $ | 0.13 | $ | 0.21 | $ | 0.39 | ||||||||
Average
shares outstanding - basic and diluted
|
3,917,765 | 3,916,707 | 3,917,408 | 3,916,239 |
See
Notes to Condensed Consolidated Financial Statements.
SouthCrest Financial Group, Inc. and Subsidiaries
Condensed
Consolidated Statements of Comprehensive Income (Loss)
For
The Three and Nine Months Ended September 30, 2009 and 2008
(Unaudited)
(In
thousands)
Three
Months
|
Nine
Months
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net
income (loss)
|
$ | (6,200 | ) | $ | 476 | $ | (5,924 | ) | $ | 2,488 | ||||||
Other
comprehensive gain (loss):
|
||||||||||||||||
Unrealized
holding gains (losses) on securities available for sale arising during the
period, net of taxes of $424, $405, $48, and $(8)
|
691 | 665 | 78 | (13 | ) | |||||||||||
Impairment
charge on investment securities, net of taxes of $0, $(216), $0, and
$(216)
|
- | (354 | ) | - | (354 | ) | ||||||||||
Reclassification
adjustment for (gains) losses included in net income, net of tax of $2,
$-0-, $(75) and $45
|
(2 | ) | - | 122 | (74 | ) | ||||||||||
Comprehensive
income (loss)
|
$ | (5,511 | ) | $ | 787 | $ | (5,724 | ) | $ | 2,047 |
See
Notes to Condensed Consolidated Financial Statements.
SouthCrest Financial Group, Inc.
And
Subsidiaries
Consolidated
Statements of Stockholders' Equity
For
The Nine Months Ended September 30, 2009 and 2008
(Unaudited)
(In
thousands, except share and per share data)
Preferred
Stock
|
Common
Stock
|
Additional
Paid-In
|
Retained
|
Accumulated
Other Comprehensive
|
Unearned
Compensation
|
Total
Stockholders'
|
||||||||||||||||||||||||||||||
Series
A
|
Series
B
|
Shares
|
Par
|
Capital
|
Earnings
|
Income
|
(ESOP)
|
Equity
|
||||||||||||||||||||||||||||
Balance,
December 31, 2008
|
$ | - | $ | - | 3,931,528 | $ | 3,932 | $ | 49,812 | $ | 9,700 | $ | 910 | $ | (326 | ) | $ | 64,028 | ||||||||||||||||||
Net
loss
|
- | - | - | (5,924 | ) | - | - | (5,924 | ) | |||||||||||||||||||||||||||
Issuance
of preferred stock
|
12,174 | 726 | - | - | - | - | - | - | 12,900 | |||||||||||||||||||||||||||
Common
stock dividends declared,$0.25 per share
|
- | - | - | - | - | (826 | ) | - | - | (826 | ) | |||||||||||||||||||||||||
Preferred
stock dividends declared
|
- | - | - | - | - | (143 | ) | - | - | (143 | ) | |||||||||||||||||||||||||
Amortization
of preferred stock premiums and discounts
|
29 | (3 | ) | - | - | - | (26 | ) | - | - | - | |||||||||||||||||||||||||
Stock-based
compensation
|
- | - | - | - | 53 | - | - | - | 53 | |||||||||||||||||||||||||||
Adjustment
for shares owned by ESOP
|
- | - | - | - | - | 22 | - | - | 22 | |||||||||||||||||||||||||||
Principal
reduction of ESOP debt
|
- | - | - | - | - | - | - | 23 | 23 | |||||||||||||||||||||||||||
Other
comprehensive income
|
- | - | - | - | - | - | 200 | - | 200 | |||||||||||||||||||||||||||
Balance,
September 30, 2009
|
$ | 12,203 | $ | 723 | 3,931,528 | $ | 3,932 | $ | 49,865 | $ | 2,803 | $ | 1,110 | $ | (303 | ) | $ | 70,333 | ||||||||||||||||||
Balance,
December 31, 2007
|
$ | - | $ | - | 3,931,528 | $ | 3,932 | $ | 49,707 | $ | 17,881 | $ | 550 | $ | (349 | ) | $ | 71,721 | ||||||||||||||||||
Net
income
|
- | - | - | 2,488 | - | - | 2,488 | |||||||||||||||||||||||||||||
Adjustment
resulting from adoption of EITF Issue 06-4
|
- | - | - | (493 | ) | - | - | (493 | ) | |||||||||||||||||||||||||||
Cash
dividends declared,$0.39 per share
|
- | - | - | (1,532 | ) | - | - | (1,532 | ) | |||||||||||||||||||||||||||
Stock-based
compensation
|
- | - | 78 | - | - | - | 78 | |||||||||||||||||||||||||||||
Adjustment
for shares owned by ESOP
|
- | - | - | 30 | - | - | 30 | |||||||||||||||||||||||||||||
Principal
reduction of ESOP debt
|
- | - | - | - | - | 23 | 23 | |||||||||||||||||||||||||||||
Other
comprehensive income
|
- | - | - | - | (441 | ) | - | (441 | ) | |||||||||||||||||||||||||||
Balance,
September 30, 2008
|
$ | - | $ | - | 3,931,528 | $ | 3,932 | $ | 49,785 | $ | 18,374 | $ | 109 | $ | (326 | ) | $ | 71,874 |
See
Notes to Condensed Consolidated Financial Statements.
SouthCrest Financial Group, Inc. and Subsidiaries
Condensed
Consolidated Statements of Cash Flows
For
The Nine Months Ended September 30, 2009 and 2008
(Unaudited)
(In
thousands)
2009
|
2008
|
|||||||
OPERATING
ACTIVITIES
|
||||||||
Net
income (loss)
|
$ | (5,924 | ) | $ | 2,488 | |||
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
||||||||
Depreciation
|
984 | 912 | ||||||
Amortization
of intangibles
|
742 | 817 | ||||||
Impairment
charges on goodwill
|
6,397 | - | ||||||
Other
amortization
|
178 | 43 | ||||||
Provision
for loan losses
|
3,112 | 2,307 | ||||||
Impairment
charges on investments
|
- | 570 | ||||||
Stock
compensation expense
|
53 | 78 | ||||||
Deferred
income taxes
|
201 | 865 | ||||||
Income
on bank-owned life insurance
|
(489 | ) | (519 | ) | ||||
Loss
(gain) on sales and calls of investment securities
|
197 | (119 | ) | |||||
(Increase)
decrease in interest receivable
|
134 | (711 | ) | |||||
Increase
(decrease) in income taxes payable
|
(513 | ) | 747 | |||||
Increase
(decrease) in interest payable
|
152 | (561 | ) | |||||
Net
gain on sale of loans
|
(523 | ) | (251 | ) | ||||
Originations
of mortgage loans held for sale
|
(25,941 | ) | (12,278 | ) | ||||
Proceeds
from sales of mortgage loans held for sale
|
26,334 | 12,367 | ||||||
Loss
on sale of other real estate
|
447 | 52 | ||||||
Increase in
other assets
|
(1,180 | ) | (538 | ) | ||||
Increase
in other liabilities
|
157 | 131 | ||||||
Net
cash provided by operating activities
|
4,518 | 6,400 | ||||||
INVESTING
ACTIVITIES
|
||||||||
Proceeds
from maturities of securities held to maturity
|
9,610 | 23,583 | ||||||
Purchases
of securities held to maturity
|
(275 | ) | (7,170 | ) | ||||
Proceeds
from maturities of securities available for sale
|
(44,288 | ) | (31,479 | ) | ||||
Purchases
of securities available for sale
|
29,642 | 26,114 | ||||||
Proceeds
from sales of securities available for sale
|
350 | - | ||||||
Redemption
(purchase) of restricted equity securities
|
449 | (406 | ) | |||||
Net
increase in interest-bearing deposits in banks
|
(20,075 | ) | (6,224 | ) | ||||
Net
increase in loans
|
(3,860 | ) | (32,253 | ) | ||||
Purchase
of premises and equipment
|
(1,508 | ) | (2,122 | ) | ||||
Proceeds
from sale of other real estate owned
|
1,855 | 852 | ||||||
Net
cash used in investing activities
|
(28,100 | ) | (29,105 | ) |
See
Notes to Condensed Consolidated Financial Statements.
SouthCrest
Financial Group, Inc. and Subsidiaries
Condensed
Consolidated Statements of Cash Flows (continued)
For
The Nine Months Ended September 30, 2009 and 2008
(Unaudited)
(In
thousands)
2009
|
2008
|
|||||||
|
|
|||||||
FINANCING
ACTIVITIES
|
||||||||
Net
increase in deposits
|
19,753 | 997 | ||||||
Repayments
of borrowed funds
|
(9,143 | ) | (3,055 | ) | ||||
Increase
in borrowed funds
|
208 | 14,973 | ||||||
Net
increase in federal funds purchased
|
- | 609 | ||||||
Proceeds
from issuance of preferred stock
|
12,900 | - | ||||||
Leveraged
ESOP transaction
|
23 | 23 | ||||||
Common
stock dividends paid
|
(826 | ) | (1,532 | ) | ||||
Preferred
stock dividends paid
|
(55 | ) | - | |||||
Net
cash provided by financing activities
|
22,860 | 12,015 | ||||||
Net
decrease in cash and due from banks
|
(722 | ) | (10,690 | ) | ||||
Cash
and cash equivalents at beginning of period
|
26,043 | 25,376 | ||||||
Cash
and cash equivalents end of period
|
$ | 25,321 | $ | 14,686 | ||||
SUPPLEMENTAL
DISCLOSURES
|
||||||||
Cash
paid for:
|
||||||||
Interest
|
$ | 7,586 | $ | 10,751 | ||||
Income
taxes
|
368 | 1,718 | ||||||
NONCASH
TRANSACTIONS
|
||||||||
Principal
balances of loans transferred to other real estate owned
|
$ | 6,290 | $ | 6,595 | ||||
Increase
in mortgage servicing rights
|
227 | 121 | ||||||
Increase
(decrease) in redeemable common stock held by ESOP
|
22 | (30 | ) | |||||
Unrealized
gain (loss) on securities available for sale, net
|
200 | (441 | ) | |||||
Accrual
of cumulative preferred dividends
|
89 | - |
See
Notes to Condensed Consolidated Financial Statements.
SouthCrest Financial Group, Inc. and
Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1 — NATURE OF
BUSINESS AND BASIS OF PRESENTATION
SouthCrest
Financial Group, Inc. (“SouthCrest” or the “Company”) is a bank holding company
whose principal activity is the ownership and management of its wholly owned
subsidiary banks, Bank of Upson (“Upson”), The First National Bank of Polk
County (“FNB Polk”), Peachtree Bank (“Peachtree”), and Bank of Chickamauga
(“Chickamauga”). All of the subsidiary banks (collectively, the
“Banks”) are commercial banks that provide a full range of banking services
within their primary market areas. Upson is headquartered in
Thomaston, Upson County, Georgia with six full service branches located in
Thomaston, Tyrone Manchester, Warm Springs and Luthersville, Georgia, serving
its primary market area of Upson, Fayette, Meriwether and the surrounding
counties. In April, 2009, Upson closed its full service branch in
Fayetteville and converted it to a Loan Production Office. FNB Polk
is located in Cedartown, Polk County, Georgia with two branches in Cedartown,
Georgia and one branch in Rockmart, Georgia. FNB Polk primarily
serves the market area of Polk County. Peachtree is headquartered in
Maplesville, Chilton County, Alabama with one branch in Maplesville and another
in Clanton, Alabama. Chickamauga is headquartered in Chickamauga,
Walker County, Georgia where it maintains two branches.
The
accompanying unaudited condensed consolidated financial statements of the
Company have been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do not include
all the information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. Operating results for the nine month
period ended September 30, 2009 are not necessarily indicative of the results
that may be expected for the year ended December 31, 2009. For further
information, refer to the financial statements and notes included in the
Company's consolidated financial statements and notes thereto for the year ended
December 31, 2008 included in the Company’s annual report on Form 10-K
(Registration No. 000-51287).
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries, Bank of Upson, The First National Bank of
Polk County, Peachtree Bank, and Bank of Chickamauga. All significant
inter-company accounts and transactions have been eliminated in
consolidation. Certain reclassifications to prior period balance
sheets and income statements have been made to conform to current
classifications. These reclassifications have no impact on net income
or stockholders’ equity reported for the previous periods. Subsequent
events have been evaluated through November 16, 2009, which is the date of
financial statement issuance.
NOTE 2 – EARNINGS
PER COMMON SHARE
Basic
earnings per share is computed by dividing net income available to common
stockholders (net income (loss) adjusted for cumulative preferred stock
dividends) by the weighted average number of shares outstanding during the
period. Diluted earnings per share would be computed by dividing net
income by the sum of the weighted-average number of shares of common stock
outstanding and dilutive potential common shares, such as outstanding stock
options. Dilutive potential common shares are calculated in
accordance with the treasury stock method, which assumes that proceeds from the
exercise of all options are used to repurchase common stock at market
value. The amount of shares remaining after the proceeds are
exhausted represents the potentially dilutive effect of the
securities.
At
September 30, 2009 and 2008, the Company had 185,400 and 191,400 options
outstanding under the SouthCrest Financial Group, Inc. 2005 Stock Incentive
Plan. For the three and nine month periods ended September 30, 2009
and 2008, these options were nondilutive. The Company’s ESOP
has a loan from the holding company secured by 13,763 shares of Company stock
which have not been allocated to participant accounts and are therefore not
considered outstanding for purposes of computing earnings per
share. The weighted average number of shares outstanding for purposes
of computing earnings per share was 3,917,765 and 3,916,707 for the three month
periods and 3,917,408 and 3,916,239 for the nine month periods ended September
30, 2009 and 2008.
NOTE 3 — INVESTMENT
SECURITIES
The
amortized cost and fair value of securities available for sale are as
follows:
(Dollars
in thousands)
|
Amortized
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Fair
Value
|
||||||||||||
September
30, 2009:
|
||||||||||||||||
U.S.
Government and agency securities
|
$ | 40,512 | $ | 476 | $ | (39 | ) | $ | 40,949 | |||||||
State
and municipal securities
|
17,134 | 515 | (12 | ) | 17,637 | |||||||||||
Mortgage backed securities –
residential -Government-sponsored enterprises
|
31,089 | 1,215 | (8 | ) | 32,296 | |||||||||||
Corporate
bonds
|
1,963 | 3 | (309 | ) | 1,657 | |||||||||||
Equity
Securities
|
623 | - | (56 | ) | 567 | |||||||||||
$ | 91,321 | $ | 2,209 | $ | (424 | ) | $ | 93,106 | ||||||||
December
31, 2008:
|
||||||||||||||||
U.S.
Government and agency securities
|
$ | 25,702 | $ | 509 | $ | - | $ | 26,211 | ||||||||
State
and municipal securities
|
16,648 | 262 | (135 | ) | 16,775 | |||||||||||
Mortgage backed securities –
residential -Government-sponsored enterprises
|
32,035 | 1,090 | (27 | ) | 33,098 | |||||||||||
Corporate
bonds and equity securities
|
3,083 | 22 | (279 | ) | 2,826 | |||||||||||
$ | 77,468 | $ | 1,883 | $ | (441 | ) | $ | 78,910 |
The
amortized cost and fair value of securities held to maturity are summarized as
follows:
(Dollars
in thousands)
|
Amortized
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Fair
Value
|
||||||||||||
Securities
Held to Maturity
|
||||||||||||||||
September
30, 2009:
|
||||||||||||||||
U.S.
Government and agency securities
|
$ | - | $ | - | $ | - | $ | - | ||||||||
State
and municipal securities
|
5,546 | 189 | (27 | ) | 5,708 | |||||||||||
Mortgage backed securities -
residential Government-sponsored enterprises
|
23,261 | 756 | (1 | ) | 24,016 | |||||||||||
Corporate
bonds
|
1,000 | - | (279 | ) | 721 | |||||||||||
$ | 29,807 | $ | 945 | $ | (307 | ) | $ | 30,445 | ||||||||
December
31, 2008:
|
||||||||||||||||
U.S.
Government and agency securities
|
$ | 1,990 | $ | 28 | $ | - | $ | 2,018 | ||||||||
State
and municipal securities
|
6,579 | 128 | (98 | ) | 6,609 | |||||||||||
Mortgage backed securities -
residential Government-sponsored enterprises
|
29,647 | 369 | (187 | ) | 29,829 | |||||||||||
Corporate
bonds
|
1,000 | 46 | - | 1,046 | ||||||||||||
$ | 39,216 | $ | 571 | $ | (285 | ) | $ | 39,502 |
The
amortized cost and fair value of securities held to maturity and securities
available for sale as of September 30, 2009 by contractual maturity are shown
below. Actual maturities may differ from contractual maturities because issuers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
Securities
Available For Sale
|
Securities
Held To Maturity
|
|||||||||||||||
(Dollars
in thousands)
|
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
Fair
Value
|
||||||||||||
Due
within one year
|
$ | 4,789 | $ | 4,872 | $ | 455 | $ | 465 | ||||||||
Due
from one to five years
|
20,272 | 20,655 | 984 | 996 | ||||||||||||
Due
from five to ten years
|
24,021 | 24,382 | 1,994 | 2,103 | ||||||||||||
Due
after ten years
|
8,564 | 8,677 | 2,113 | 2,144 | ||||||||||||
Government-sponsored
enterprises
|
31,089 | 32,296 | 23,261 | 24,016 | ||||||||||||
Corporate
bonds and equity securities
|
2,586 | 2,224 | 1,000 | 721 | ||||||||||||
$ | 91,321 | $ | 93,106 | $ | 29,807 | $ | 30,445 |
The
following table shows the gross unrealized losses and fair value of securities,
aggregated by category and length of time that securities have been in a
continuous unrealized loss position at September 30, 2009 and December 31,
2008.
(Dollars
in thousands)
|
Less
Than 12 Months
|
12
Months or More
|
Total
|
|||||||||||||||||||||
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||
Description
of securities
|
Value
|
Losses
|
Value
|
Losses
|
Value
|
Losses
|
||||||||||||||||||
September
30, 2009
|
||||||||||||||||||||||||
U.S.
Government and agency securities
|
$ | 2,462 | $ | (39 | ) | $ | - | $ | - | 2,462 | (39 | ) | ||||||||||||
State
and municipal securities
|
405 | - | 611 | (39 | ) | 1,016 | (39 | ) | ||||||||||||||||
Mortgage backed securities -
residential government-sponsored enterprises
|
1,399 | (8 | ) | 130 | (1 | ) | 1,529 | (9 | ) | |||||||||||||||
Equity
securities
|
- | - | 167 | (56 | ) | 167 | (56 | ) | ||||||||||||||||
Corporate
bonds
|
720 | (279 | ) | 640 | (309 | ) | 1,360 | (588 | ) | |||||||||||||||
Total
|
$ | 4,986 | $ | (326 | ) | $ | 1,548 | $ | (405 | ) | $ | 6,534 | $ | (731 | ) | |||||||||
(Dollars
in thousands)
|
Less
Than 12 Months
|
12
Months or More
|
Total
|
|||||||||||||||||||||
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||
Description
of securities
|
Value
|
Losses
|
Value
|
Losses
|
Value
|
Losses
|
||||||||||||||||||
December
31, 2008
|
||||||||||||||||||||||||
U.S.
Government and agency securities
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
State
and municipal securities
|
2,940 | (147 | ) | 364 | (86 | ) | 3,304 | (233 | ) | |||||||||||||||
Mortgage
backed securities - residential government-sponsored
enterprises
|
6,587 | (71 | ) | 5,858 | (143 | ) | 12,445 | (214 | ) | |||||||||||||||
Equity
securities
|
1,021 | (102 | ) | - | - | 1,021 | (102 | ) | ||||||||||||||||
Corporate
bonds
|
767 | (177 | ) | - | - | 767 | (177 | ) | ||||||||||||||||
Total
|
$ | 11,315 | $ | (497 | ) | $ | 6,222 | $ | (229 | ) | $ | 17,537 | $ | (726 | ) |
These unrealized losses are considered temporary because of acceptable investment grades on each security, the likelihood of the market value increasing to the initial cost basis of the security, and the intent and ability of the Company to hold these securities until recovery of the market values. During the nine month period ended September 30, 2009, the Company incurred $197,000 in losses on sales and calls of securities. Gross gains on sales and calls of securities totaled $19,000 and total gross losses totaled $216,000. Of incurred losses, $150,000 represented a loss on redemption of preferred stock having an original cost of $500,000. The loss occurred as the Company accepted a tender offer made by the issuing bank to redeem the stock. In addition, the Company incurred a loss of $66,000 relating to common stock in Silverton Bank, N.A. On May 1, 2009, the Office of the Comptroller of the Currency closed Silverton Bank, and the FDIC was appointed as Receiver for Silverton Bank.
Our
restricted equity securities are comprised of our investments in Federal Reserve
Bank stock and Federal Home Loan Bank of Atlanta (“FHLB”) stock, each with no
readily determinable market value. The amortized cost and fair value
of all these securities are equal at period end. As of September 30, 2009, the
investment in Federal Reserve Bank Stock totaled $588,000. Recovery
of this amount is reasonably expected. As of September 30,
2009, the investment in FHLB stock represented approximately $1.26 million, or
0.20% as a percentage of total assets. In determining the carrying
amount of the FHLB stock, we have evaluated and considered that the FHLB Banks
appear to be in stable operational positions and are meeting all of their debt
obligations. Also, given the capital levels and expectations that
several of the FHLB Banks have a very high degree of government support, it
appears that the FHLB has the ability to absorb economic
losses. Further, the Company has access to adequate sources of
liquidity in order to meet our operational needs in the foreseeable
future. We would therefore not have the need to dispose of this stock
below the recorded amount.
NOTE 4 — LOANS
RECEIVABLE
The
composition of loans at September 30, 2009 and December 31, 2008 is summarized
as follows:
September
30,
|
December
31,
|
|||||||
(Dollars
in thousands)
|
2009
|
2008
|
||||||
Commercial,
financial, and agricultural
|
$ | 16,864 | $ | 18,740 | ||||
Real
estate – construction
|
70,388 | 74,095 | ||||||
Real
estate – mortgage
|
262,416 | 261,866 | ||||||
Consumer
|
32,922 | 35,552 | ||||||
Other
|
9,157 | 5,547 | ||||||
391,747 | 395,800 | |||||||
Unearned
income
|
(6 | ) | (12 | ) | ||||
Allowance
for loan losses
|
(8,660 | ) | (7,285 | ) | ||||
Loans,
net
|
$ | 383,081 | $ | 388,503 |
Changes
in the allowance for loan losses are as follows:
(Dollars
in thousands)
|
September 30,
2009
|
December 31,
2008
|
||||||
Balance,
beginning of year
|
$ | 7,285 | $ | 4,952 | ||||
Provision
for loan losses
|
3,112 | 4,002 | ||||||
Loans
charged off
|
(2,112 | ) | (2,244 | ) | ||||
Recoveries
of loans previously charged off
|
375 | 575 | ||||||
Balance,
end of year
|
$ | 8,660 | $ | 7,285 | ||||
|
The
following is a summary of information pertaining to impaired loans:
(Dollars
in thousands)
|
September 30,
2009
|
December 31,
2008
|
||||||
Impaired
loans without a valuation allowance
|
$ | 2,213 | $ | - | ||||
Impaired
loans with a valuation allowance
|
11,608 | 9,164 | ||||||
Total
impaired loans
|
$ | 13,821 | $ | 9,164 | ||||
Valuation
allowance related to impaired loans
|
$ | 1,681 | $ | 1,603 | ||||
Average
investment in impaired loans
|
$ | 8,399 | $ | 5,920 |
There
were $6,031,000 and $9,164,000 loans on nonaccrual status at September 30, 2009
and December 31, 2008. Loans of $890,000 and $779,000 were past due
ninety days or more and still accruing interest at September 30, 2009 and
December 31, 2008, respectively. Loans restructured under troubled
debt were $2,043,000 and $-0- at September 30, 2009 and December 31, 2008,
respectively.
NOTE 5 —
DEPOSITS
At
September 30, 2009 and December 31, 2008, deposits were as
follows:
(Dollars
In Thousands)
|
September 30,
2009
|
December 31,
2008
|
||||||
Noninterest
bearing deposits
|
$ | 72,735 | $ | 75,912 | ||||
Interest
checking
|
107,306 | 95,979 | ||||||
Money
market
|
56,637 | 54,545 | ||||||
Savings
|
45,216 | 42,651 | ||||||
Certificates
of deposit
|
257,560 | 250,614 | ||||||
$ | 539,454 | $ | 519,701 |
NOTE 6 — NEW
ACCOUNTING PRONOUNCEMENTS
In April
2009, the Financial Accounting Standards Board ("FASB") issued
authoritative guidance for the recognition and presentation of
other-than-temporary impairments. The guidance changes existing guidance for
determining whether impairment of debt securities is other than temporary and
requires other-than-temporary impairment to be separated into the amount
representing the decrease in cash flows expected to be collected from a security
(referred to as credit losses), which is recognized in earnings, and the amount
related to other factors, which is recognized in other comprehensive income. The
non-credit loss component of the impairment can only be classified in other
comprehensive income if the holder of the security concludes (1) that it does
not intend to sell the security and (2) that it is more likely than not that it
will not be required to sell the security before the security recovers its
value. If these two conditions are not met, the non-credit loss component of the
impairment must also be recognized in earnings.
Upon
adoption of this guidance, the entity is required to record a cumulative-effect
adjustment, as of the beginning of the period of adoption, to reclassify the
non-credit loss component of previously recognized other-than-temporary
impairment from retained earnings to accumulated other comprehensive income. The
guidance is effective, as of June 30, 2009, with early adoption permitted as of
March 31, 2009. The Company did not elect to early-adopt the standard nor did it
have a material impact on the consolidated financial statements of the Company
when adopted.
In April
2009, the FASB issued authoritative guidance for determining fair value when the
volume and level of activity for the asset or liability have significantly
decreased and for identifying transactions that are not orderly. The guidance,
while emphasizing the objective of fair value measurement, provides additional
guidance for determining whether market activity for a financial asset or
liability has significantly decreased, as well as for identifying circumstances
that indicate that transactions are not orderly.
This
guidance reiterates that if a market is determined to be inactive and the
related market price is deemed to be reflective of a "distressed sale" price,
then further analysis is required to estimate fair value. The guidance
identifies factors to be considered when determining whether or not a market is
inactive. The guidance is effective, as of June 30, 2009, with early adoption
permitted as of March 31, 2009. The Company did not elect to early-adopt the
guidance nor did it have a material impact on the consolidated financial
statements of the Company when adopted.
In April
2009, the FASB issued authoritative guidance for interim disclosures about fair
value of financial instruments that was effective as of June 30, 2009, with
early adoption permitted as of March 31, 2009. This guidance amends previously
issued accounting standards to require disclosures about fair values of
financial instruments in all interim financial statements. Once adopted, the
disclosures required by the guidance are to be provided prospectively. The
Company did not elect to early-adopt the guidance and provided the required
disclosures beginning as of June 30, 2009.
In April
2009, the FASB issued authoritative guidance for accounting for assets acquired
and liabilities assumed in a business combination that arise from contingencies
that is effective for business combinations occurring after January 1, 2009.
This guidance amends and clarifies the earlier provisions of the standards
for accounting for business combinations, with respect to the initial
recognition and measurement, subsequent measurement and accounting, and
disclosure of assets and liabilities arising from contingencies associated with
a business combination. The impact of adoption of the guidance on the
consolidated financial statements will depend on the nature, terms and size of
future business combinations.
In April
2009, the FASB issued authoritative guidance for subsequent
events. The Company adopted the guidance during the quarter ended
June 30, 2009. This guidance sets forth the circumstances under which
an entity should recognize events occurring after the balance sheet date and the
disclosures that should be made. Also, this guidance requires
disclosure of the date through which the entity has evaluated subsequent events
(for public companies, and other companies that expect to widely distribute
their financial statements, this date is the date of financial statement
issuance, and for nonpublic companies, the date the financial statements are
available to be issued). The adoption of this guidance did not have a
material impact on the consolidated financial statements of the
Company.
In June
2009, the FASB issued authoritative guidance for accounting for transfers of
financial assets. This guidance eliminates the concept of a
qualifying special purpose entity ("QSPE"), changes the requirements for
derecognizing financial assets, and requires additional disclosures, including
information about continuing exposure to risks related to transferred financial
assets. This guidance is effective for financial asset transfers
occurring after the beginning of fiscal years beginning after November 15,
2009. The disclosure requirements must be applied to transfers that
occurred before and after the effective date. The Company is
currently evaluating the impact of adoption on the consolidated financial
statements, but does not believe that adoption will have a material
impact.
In June
2009, the FASB issued authoritative guidance for the way entities account for
securitizations and special-purpose entities which contains new criteria for
determining the primary beneficiary, eliminates the exception to consolidating
QSPEs, requires continual reconsideration of conclusions reached in determining
the primary beneficiary, and requires additional disclosures. This
guidance is effective as of the beginning of fiscal years beginning after
November 15, 2009 and is applied using a cumulative effect adjustment to
retained earnings for any carrying amount adjustments (e.g., for
newly-consolidated Variable Interest Entities). The Company is
currently evaluating the impact of adoption on the consolidated financial
statements, but does not believe that adoption will have a material
impact.
In June
2009, the FASB issued authoritative guidance for the FASB accounting standards
codification and the hierarchy of generally accepted accounting
principles. The Codification will become the source of authoritative
US GAAP recognized by the FASB to be applied by nongovernmental entities and
will supersede all non-SEC accounting and reporting standards. This
statement is effective for financial statements issued for interim periods and
annual financial statements for periods ending after September 15,
2009. The adoption of this guidance did not have a material impact on
the consolidated financial statements of the Company.
NOTE
7 -- FAIR VALUE
Accounting
standards establish a framework for measuring fair value under accounting
principles generally accepted in the United States, and enhances disclosures
about fair value measurements. Accounting standards clarify that fair
value should be based on the assumptions market participants would use when
pricing an asset or liability and establishes a fair value hierarchy that
prioritizes the information used to develop those assumptions.
The
Company utilizes fair value measurements to record fair value adjustments to
certain assets and liabilities and to determine fair value
disclosures. Available for sale securities are recorded at fair value
on a recurring basis. Additionally, from time to time, the Company
may be required to record at fair value other assets on a nonrecurring basis,
such as loans held for sale, loans held for investment and certain other
assets. These nonrecurring fair value adjustments would typically
involve application of lower of cost or market accounting or write-downs of
individual assets.
Accounting
standards establish a three-tier fair value hierarchy which prioritizes the
inputs used in measuring fair value as follows:
Level
1
|
Observable
inputs such as quoted prices in active
markets;
|
Level
2
|
Inputs,
other than the quoted prices in active markets, that are observable either
directly or indirectly; and
|
Level
3
|
Unobservable
inputs in which there is little or no market data, which require the
reporting entity to develop its own
assumptions.
|
Following
is a description of valuation methodologies used for assets recorded at fair
value.
Investment
Securities
Securities
available for sale and securities held to maturity are valued on a recurring
basis at quoted market prices where available. If quoted market
prices are not available, fair values are based on quoted market prices of
comparable securities. Level 1 securities include those traded on an
active exchange, such as the New York Stock Exchange, U.S. Treasury securities
that are traded by dealers or brokers in active over-the-counter markets and
money market funds. Level 2 securities include mortgage-backed
securities and debentures issued by government sponsored entities, municipal
bonds and corporate debt securities. Securities classified as Level 3
include asset-backed securities in less liquid markets such as some common stock
not traded on a national exchange. Securities held to
maturity are valued at quoted market prices or dealer quotes, similar to
securities available for sale. The carrying value of Federal Reserve
Bank and Federal Home Loan Bank stock approximates fair value based on their
redemption provisions.
Loans
Held for Sale
Loans
held for sale, consisting of mortgages to be sold in the secondary market, are
carried at the lower of cost or market value. The fair values of
mortgage loans held for sale are based on commitments on hand from investors
within the secondary market for loans with similar
characteristics. As such, the fair value adjustments for mortgage
loans held for sale is nonrecurring Level 2.
Loans
The
Company does not record loans at fair value on a recurring basis. However, from
time to time, a loan may be considered impaired and an allowance for loan losses
may be established. Loans for which it is probable that payment of
interest and principal will not be made in accordance with the contractual terms
of the loan agreement are considered impaired. Once a loan is identified as
individually impaired, management measures for impairment. The fair value of
impaired loans is estimated using one of several methods, including collateral
value, market value of similar debt, enterprise value, liquidation value and
discounted cash flows. Those impaired loans not requiring an
allowance represent loans for which the fair value of the expected repayments or
collateral exceed the recorded investments in such loans. At
September 30, 2009, all of the total impaired loans were evaluated based on the
fair value of the collateral. Impaired loans where an allowance is
established based on the fair value of collateral require classification in the
fair value hierarchy. When the fair value of the collateral is based
on an observable market price or a current appraised value, the Company records
the impaired loan as nonrecurring Level 2. When an appraised value is not
available or management determines the fair value of the collateral is further
impaired below the appraised value and there is no observable market price, the
Company records the impaired loan as nonrecurring Level 3.
Assets
and Liabilities Recorded at Fair Value on a Recurring Basis
The table
below presents the recorded amount of assets and liabilities measured at fair
value on a recurring basis.
(Dollars
in thousands)
|
Fair
Value
|
Quoted
Prices In Active Markets for Identical Assets (Level 1)
|
Significant
Other Observable Inputs (Level 2)
|
Significant
Observable Inputs (Level 3)
|
||||||||||||
As
of September 30, 2009
|
|
|
|
|
||||||||||||
U.S.
Government and agency securities
|
$ | 40,949 | $ | - | $ | 40,949 | $ | - | ||||||||
State
and municipal securities
|
17,637 | - | 17,637 | - | ||||||||||||
Mortgage-backed
securities
|
32,296 | - | 32,296 | - | ||||||||||||
Corporate
bonds
|
1,657 | - | 1,657 | - | ||||||||||||
Equity
securities
|
567 | 26 | - | 541 | ||||||||||||
$ | 93,106 | $ | 26 | $ | 92,539 | $ | 541 | |||||||||
As
of December 31, 2008
|
||||||||||||||||
U.S.
Government and agency securities
|
$ | 26,211 | $ | - | $ | 26,211 | $ | - | ||||||||
State
and municipal securities
|
16,775 | - | 16,775 | - | ||||||||||||
Mortgage-backed
securities
|
33,098 | - | 33,098 | - | ||||||||||||
Corporate
bonds
|
1,805 | - | 1,805 | - | ||||||||||||
Equity
securities
|
1,021 | 27 | - | 994 | ||||||||||||
$ | 78,910 | $ | 27 | $ | 77,889 | $ | 994 |
The
securities measured as Level 3 include investment in the common stock of a bank
holding company that is not listed on an exchange.
For those
securities available for sale with fair values that are determined by reliance
on significant unobservable inputs, the following table identifies the factors
causing the change in fair value from January 1, 2009 to
September 30, 2009:
|
Investment
Securities Available For Sale
|
|||
|
||||
Beginning
balance, January 1, 2009
|
$ | 994 | ||
Total
gains (losses) realized or unrealized
|
||||
Included
in earnings
|
(150 | ) | ||
Included
in other comprehensive income
|
47 | |||
Purchases, issuances, sales and settlements, net | (350 | ) | ||
Transfers
in (out) of Level 3
|
- | |||
Ending
balance, September 30, 2009
|
$ | 541 |
The table
below presents the recorded amount of assets and liabilities measured at fair
value on a nonrecurring basis.
(Dollars
in thousands)
|
Fair
Value
|
Quoted
Prices
In
Active
Markets
for
Identical
Assets
(Level
1)
|
Significant
Other
Observable
Inputs
(Level
2)
|
Significant
Unobservable
Inputs
(Level
3)
|
|||||||||||||
As
of September 30, 2009
|
|
|
|
|
|||||||||||||
Impaired
loans
|
$ | 9,927 | $ | - | $ | - | $ | 9,927 | |||||||||
Other
real estate
|
9,580 | - | - | 9,580 | |||||||||||||
As
of December 31, 2008
|
|||||||||||||||||
Impaired
loans
|
$ | 7,561 | $ | - | $ | - | $ | 7,561 | |||||||||
Other
real estate
|
5,592 | - | - | 5,592 |
Other
real estate owned is initially accounted for at fair value, less estimated costs
to dispose of the property. Any excess of the recorded investment over fair
value, less costs to dispose, is charged to the allowance for loan and lease
losses at the time of foreclosure. A provision is charged to earnings and a
related valuation account for subsequent losses on other real estate owned is
established when, in the opinion of Management, such losses have occurred. The
ability of the Company to recover the carrying value of real estate is based
upon future sales of the real estate. Our ability to effect such sales is
subject to market conditions and other factors, all of which are beyond our
control. The recognition of sales and sales gains is dependent upon whether the
nature and terms of the sales, including possible future involvement of the
Company, if any, meet certain defined requirements. If those requirements are
not met, sale and gain recognition is deferred.
The
estimated fair values and related carrying amounts of the Company’s financial
instruments were as follows:
September
30, 2009
|
December
31, 2008
|
|||||||||||||||
(Dollars
in thousands)
|
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
||||||||||||
Financial
assets
|
||||||||||||||||
Cash,
due from banks, interest bearing deposits in other banks, and federal
funds sold
|
$ | 62,159 | $ | 62,159 | $ | 42,806 | $ | 42,806 | ||||||||
Securities
|
122,913 | 123,550 | 118,149 | 118,412 | ||||||||||||
Restricted
equity securities
|
1,845 | 1,845 | 2,294 | 2,294 | ||||||||||||
Loans
and loans held for sale, net
|
391,992 | 400,143 | 396,136 | 399,408 | ||||||||||||
Accrued
interest receivable
|
2,805 | 2,805 | 2,939 | 2,939 | ||||||||||||
Bank-owned
life insurance
|
17,486 | 17,486 | 16,997 | 16,997 | ||||||||||||
Financial
liabilities
|
||||||||||||||||
Deposits
|
539,454 | 544,133 | 519,701 | 524,136 | ||||||||||||
Borrowed
funds
|
7,847 | 7,856 | 16,782 | 16,802 | ||||||||||||
Accrued
interest payable
|
2,079 | 2,079 | 1,927 | 1,927 |
NOTE 8— BORROWED
FUNDS
At
September 30, 2009, the Company had $5,972,000 outstanding on its line of credit
with Silverton Bridge Bank, N.A. (formerly Silverton Bank, N.A.). On
May 1, 2009, the Office of the Comptroller of the Currency closed Silverton
Bank. The FDIC was appointed as Receiver for Silverton Bank, and Silverton
Bridge Bank, N.A. has been formed to take over the operations of Silverton Bank.
The stock of our subsidiary banks is pledged as collateral for this
loan. The terms of the line of credit contain certain restrictive
covenants including, among others, a requirement of each subsidiary bank to
maintain certain minimum capital levels as well as maximum ratios related to the
levels of nonperforming assets, to be measured quarterly. At the
inception of the loan, the restriction relative to maximum levels of
nonperforming assets required that these assets not exceed 1% of each
subsidiary’s total assets. The Company was in violation of this
covenant for the second and third quarters of 2008 for which it received waivers
from the lender. The Company and the lender agreed to amend the
covenants such that each subsidiary’s nonperforming assets may not exceed 5% of
total assets as of December 31, 2008 and for each quarter of
2009. Thereafter, this ratio would reduce by 1% during each quarter
in 2010 so that the maximum ratio returns to 1% of total assets by December 31,
2010. At September 30, 2009, this ratio for the subsidiary banks
ranged from 0.41% to 3.73%.
At
December 31, 2008, as a result of its impairment of its goodwill and core
deposit intangible assets, the Company was not in compliance with its covenant
to maintain a minimum debt service coverage ratio, defined as net income of
subsidiary banks for the prior four quarters multiplied by 50%, divided by the
annual debt service of the Company. In order to remedy this covenant
violation, in June, 2009, the covenants and the note were amended such that the
debt service covenant was replaced by a liquidity covenant in which the Parent
would maintain cash balances of $800,000, which the Company maintains as demand
deposits at its subsidiary banks. In addition, the interest rate of
the note was changed from Prime minus 0.5% to Prime plus 1% through July 1,
2010, Prime plus 2% through July 1, 2011, and Prime plus 3% through July 1,
2012. On July 1, 2012, the remaining balance outstanding on the note,
estimated to be $4.2 million, would become payable as a balloon
payment. As of September 30, 2009, the Company believes it was in
compliance with all covenants as amended in June 2009.
NOTE
9. FDIC SPECIAL ASSESSMENT
The FDIC
imposed an emergency special assessment on insured depository institutions as of
June 30, 2009. The FDIC collected this assessment on September 30, 2009. For the
Company, the special assessment was 5 basis points of the Bank's total assets
less its Tier 1 capital. The Company accrued $284,000 for this special
assessment as of June 30, 2009. The FDIC may impose an additional emergency
special assessment after June 30, 2009, of up to 5 basis points if necessary to
maintain public confidence in federal deposit insurance. In November
2009, the FDIC approved a rule that, in lieu of a further special assessment in
2009, will require all insured depository institutions, with limited exceptions,
to prepay their estimated quarterly risk-based assessments for the fourth
quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC also proposed to
adopt a uniform three basis point increase in assessment rates effective on
January 1, 2011. If the rule is finalized as proposed, the Company expects to be
required to prepay approximately $2.8 million in risk-based
assessments.
NOTE
10. PARTICIPATION IN U.S. TREASURY CAPITAL PURCHASE PROGRAM
On July
17, 2009, The Company issued 12,900 shares of cumulative perpetual
preferred stock (“Series A Preferred Stock”), no par value having a liquidation
amount equal to $1,000 per share, to the U.S. Treasury with an attached warrant
to purchase an additional 645 shares of cumulative perpetual preferred stock,
initial price $.01 per share having a liquidation amount equal to $1,000 per
share, for an aggregate price of $12,900,000. The warrants were exercised
immediately resulting in the issuance of 645 shares of cumulative perpetual
preferred stock (“Series B Preferred Stock) to the U.S. Treasury.
Series A
Preferred Stock is non-voting and pays cumulative dividends quarterly at a rate
of 5% per annum for the first five years and 9% per annum thereafter. The
preferred shares are redeemable at the option of the Company under certain
circumstances.
The terms
of the Series B Preferred Stock are substantially identical to those of the
Series A Preferred Stock. Differences include the payment under the Series B
Preferred Stock of cumulative dividends at a rate of 9% per year. In addition
such stock may not be redeemed while shares of the Series A Preferred Stock are
outstanding.
The net
proceeds were allocated between Preferred Stock Series A and Preferred Stock
Series B based on their relative fair values at the time of issuance. The
discount on Preferred Stock Series A and the premium on Preferred Stock Series B
resulting from the differences between the initial carrying amounts and the
liquidation amounts were calculated to be accreted or amortized over the
five-year period preceding the 9% perpetual dividend, using the effective yield
method.
No
dividends may be paid on common stock unless dividends have been paid on the
senior preferred stock. Also, benefit plans and certain employment arrangements
must be modified to comply with the issuance of the cumulative perpetual
preferred stock as required by the U.S. Treasury.
NOTE
11 GOODWILL IMPAIRMENT
Goodwill
impairment testing is performed annually or more frequently if events or
circumstances indicate possible impairment. The evaluation of
goodwill for impairment uses both the income and market approaches to value the
reporting units of the Company. The income approach consists of
discounting projected long-term future cash flows (earnings), which are derived
from internal forecasts and economic expectations for the Company and its
reporting units. The significant inputs to the income approach
include the long-term target tangible equity to tangible assets ratio and the
discount rate, which is determined utilizing the Company’s cost of capital
adjusted for a company-specific risk factor. The
company-specific risk factor is used to address the uncertainty of growth
estimates and earnings projections of management. Under the market
approach, values are calculated from an analysis of comparable
acquisition transactions based on earnings, book value, assets and deposit
premium multiples from the sale of similar financial institutions and our own
market capitalization position. The Company’s goodwill testing for
2009, conducted in the third quarter, indicated that the remaining goodwill
recorded at the time of acquisition of FNB Polk, Peachtree and Chickamauga were
impaired based on the substantial decline in the Company’s common stock price
and the economic outlook for the Company’s industry. As a result, the
Company recorded a goodwill impairment charge of $6,397,000 during the quarter
ended September 30, 2009. While
there were insignificant updates to the underlying assumptions, the most
significant variable driving the impairment in the third quarter relates to the
decline in Company market capitalization and the duration of depressed stock
prices.
NOTE
12. SUPPLEMENTARY FINANCIAL DATA
Components
of other operating expenses in excess of 1% of revenue are as
follows:
Three
Months
|
Nine
Months
|
|||||||||||||||
(dollars
in thousands)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
FDIC
special assessment
|
$ | - | $ | - | $ | 284 | $ | - | ||||||||
FDIC
premiums
|
227 | 55 | 641 | 81 | ||||||||||||
Professional
fees
|
311 | 152 | 740 | 457 | ||||||||||||
Loss
on sale of other real estate
|
391 | 27 | 447 | 27 | ||||||||||||
Director
fees
|
115 | 98 | 328 | 319 | ||||||||||||
Telephone
|
112 | 89 | 346 | 274 | ||||||||||||
Postage
and supplies
|
166 | 165 | 427 | 502 | ||||||||||||
Data
processing expenses
|
406 | 364 | 1,267 | 1,061 |
SouthCrest
Financial Group, Inc. and Subsidiaries
ITEM 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The
following is management’s discussion and analysis of certain significant factors
which have affected the financial position and operating results of SouthCrest
Financial Group, Inc. and its bank subsidiaries, Bank of Upson, The First
National Bank of Polk County, Peachtree Bank, and Bank of Chickamauga during the
period included in the accompanying consolidated financial
statements. The purpose of this discussion is to focus on
information about our financial condition and results of operations that are not
otherwise apparent from our consolidated financial statements.
Forward
Looking Statements
Some of
the statements in this Report, including, without limitation, matters discussed
under the caption “Management’s Discussion and Analysis of Financial Condition
and Results of Operation,” of SouthCrest Financial Group, Inc. are
“forward-looking statements” within the meaning of the federal securities
laws. Forward-looking statements include statements about the
competitiveness of the banking industry, potential regulatory obligations, our
entrance and expansion into other markets, integration of recently acquired
banks, pending or proposed acquisitions, our other business strategies, our
expectations with respect to our allowance for loan losses and impaired loans,
anticipated capital expenditures for our operations center, and other statements
that are not historical facts. When we use words like “anticipate,”
“believe,” “intend,” “expect,” “estimate,” “could,” “should,” “will,” and
similar expressions, you should consider them as identifying forward-looking
statements, although we may use other phrasing. These forward-looking
statements involve risks and uncertainties and are based on our beliefs and
assumptions, and on the information available to us at the time that these
disclosures were prepared. Factors that may cause actual results to
differ materially from those expressed or implied by such forward-looking
statements include, among others, the following possibilities: (1) competitive
pressures among depository and other financial institutions may increase
significantly; (2) changes in the interest rate environment may reduce margins;
(3) general economic conditions may be less favorable than expected, resulting
in, among other things, a deterioration in credit quality and/or a reduction in
demand for credit; (4) legislative or regulatory changes, including changes in
accounting standards may adversely affect the businesses in which we are
engaged; (5) costs or difficulties related to the integration of our businesses,
may be greater than expected; (6) deposit attrition, customer loss or revenue
loss following acquisitions may be greater than expected; (7) competitors may
have greater financial resources and develop products that enable such
competitors to compete more successfully than us; and (8) adverse changes may
occur in the equity markets.
Many of
such factors are beyond our ability to control or predict, and readers are
cautioned not to put undue reliance on such forward-looking
statements. We disclaim any obligation to update or revise any
forward-looking statements contained in this Report, whether as a result of new
information, future events or otherwise.
Critical
Accounting Estimates
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
notes to the consolidated financial statements for the year ended December 31,
2008 included in our Form 10-K (Registration No.
000-51287). 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 judgments
and assumptions to be our critical accounting estimates. 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 estimate that
requires the most significant judgments and assumptions used in preparation of
our consolidated financial statements. Because the allowance for loan
losses is replenished through a provision for loan losses that is charged
against earnings, our subjective determinations regarding the allowance affect
our earnings directly. Refer to the portion of this discussion
that addresses our allowance for loan losses for a description of our processes
and methodology for determining our allowance for loan losses.
Goodwill
represents the excess of the cost of an acquisition over the fair value of the
net assets acquired. Other intangible assets include core deposit
intangibles recognized in bank and branch acquisitions, and mortgage servicing
rights recognized in connection with the sale of mortgage loans in which the
Company retains the servicing rights. Goodwill impairment
testing is performed annually or more frequently if events or circumstances
indicate possible impairment. The evaluation of goodwill for
impairment uses both the income and market approaches to value the reporting
units of the Company. The income approach consists of discounting
projected long-term future cash flows (earnings), which are derived from
internal forecasts and economic expectations for the Company and its reporting
units. The significant inputs to the income approach include the
long-term target tangible equity to tangible assets ratio and the discount rate,
which is determined utilizing the Company’s cost of capital adjusted for a
company-specific risk factor. The company-specific risk factor
is used to address the uncertainty of growth estimates and earnings projections
of management. Under the market approach, values
are calculated from an analysis of comparable acquisition transactions
based on earnings, book value, assets and deposit premium multiples from the
sale of similar financial institutions and our own market capitalization
position. Our goodwill testing for 2009, which was updated as of
September 30, 2009, indicated that the goodwill recorded at the time of
acquisition of FNB Polk, Peachtree and Chickamauga were impaired based on the
substantial decline in our common stock price and the economic outlook for our
industry. As a result, the Company recorded goodwill impairment
charge of $6,397,000 during the quarter ended September 30, 2009. While
there were insignificant updates to the underlying assumptions, the most
significant variable driving the impairment in the third quarter relates to the
decline in Company market capitalization and the duration of depressed stock
prices.
The
consolidated financial statements include certain accounting and disclosures
that require management to make estimates about fair
values. Estimates of fair value are used in the accounting for
securities available for sale, loans held for sale, stock compensation,
goodwill, other intangible assets, and acquisition purchase accounting
adjustments. Estimates of fair values are used in disclosures
regarding securities held to maturity, stock compensation, commitments, and the
fair values of financial instruments. Fair values are estimated using
relevant market information and other assumptions such as interest rates, credit
risk, prepayments and other factors. The fair values of financial
instruments are subject to change as influenced by market
conditions.
Financial
Condition
During
the nine months ended September 30, 2009, our total assets increased $17.0
million to $627.5 million at September 30, 2009. During this period,
total loans decreased $4.0 million, while loans held for sale decreased $98,000
from December 31, 2008. Securities available for sale increased $14.2
million due primarily to purchases made during the period while securities held
to maturity decreased $9.4 million due to maturities. Federal funds
sold decreased $5.5 million. Interest bearing deposits at other
financial institutions increased $20.1 million due to purchases of certificates
of deposits in financial institutions. These certificates are
purchased in amounts such that at all times, the principal and accrued interest
are fully insured by the FDIC. Intangible assets declined $6.9
million due primarily to a $6.4 million impairment charge related to the
Company’s goodwill.
During
the year to date period ended September 30, 2009, deposits increased $19.8
million or 3.8%. Changes in deposits are summarized
below:
(Dollars
In Thousands)
|
September 30,
2009
|
December 31,
2008
|
Change
|
|||||||||
Noninterest
bearing deposits
|
$ | 72,735 | $ | 75,912 | $ | (3,177 | ) | |||||
Interest
checking
|
107,306 | 95,979 | 11,327 | |||||||||
Money
market
|
56,637 | 54,545 | 2,092 | |||||||||
Savings
|
45,216 | 42,651 | 2,565 | |||||||||
Certificates
of deposit
|
257,560 | 250,614 | 6,946 | |||||||||
$ | 539,454 | $ | 519,701 | $ | 19,753 |
Since
December 31, 2008, borrowed funds declined $9.0 million primarily due to
repayments of Federal Home Loan Bank advances totaling $8,287,000 and $317,000
in principal reductions against of our line of credit. During the
second quarter of 2009, the terms of our line of credit were amended
in response to the Company’s violation of the loan covenant related to certain
minimum debt service ratios. This covenant noncompliance was the
result of the impairment losses recorded at December 31, 2008 related to
goodwill and core deposit intangible assets. The covenants were
amended by eliminating the debt service covenant and instituting a liquidity
covenant whereby the Parent Company must maintain cash reserves of at least
$800,000. In addition, the interest rate was changed from prime minus
0.5% to Prime plus 1% through July 1, 2010, Prime plus 2% through July 1, 2011,
and Prime plus 3% through July 1, 2012 at which time the remaining balance of
the loan (projected to be $3.4 million) would become due in a lump sum
payment.
At
September 30, 2009, the Company had not purchased federal funds. The
Company monitors changes in its loan portfolio and changes in its deposit
levels, and seeks to maintain a proper mix of types, maturities, and interest
rates.
Our total
stockholders’ equity has increased by $6.4 million since December 31, 2008,
primarily due to the $12.9 million received under the U.S. Treasury’s Capital
Purchase Program. In addition, during the nine month period ended
September 30, 2009, the Company recorded a net loss of $5.9
million.
Loan Portfolio. The following table
presents various categories of loans contained in the loan portfolios of the
subsidiary banks as of September 30, 2009 and December 31,
2008:
September
30,
|
December
31,
|
|||||||
(Dollars
in thousands)
|
2009
|
2008
|
||||||
Commercial,
financial, and agricultural
|
$ | 16,864 | $ | 18,740 | ||||
Real
estate – construction
|
70,388 | 74,095 | ||||||
Real
estate – mortgage
|
262,416 | 261,866 | ||||||
Consumer
|
32,922 | 35,552 | ||||||
Other
|
9,157 | 5,547 | ||||||
391,747 | 395,800 | |||||||
Unearned
income
|
(6 | ) | (12 | ) | ||||
Allowance
for loan losses
|
(8,660 | ) | (7,285 | ) | ||||
Loans,
net
|
$ | 383,081 | $ | 388,503 |
Nonaccrual, Past Due and Restructured
Loans. The
following table presents various categories of nonaccrual, past due, potential
problem loans, and restructured loans in the Banks’ loan portfolios
as of September 30, 2009 and December 31, 2008:
(Dollars
in thousands)
|
September 30,
2009
|
December 31,
2008
|
||||||
Nonaccrual
loans
|
$ | 6,031 | $ | 9,164 | ||||
Loans
past due 90 days or more and still accruing
|
$ | 890 | $ | 779 | ||||
Loans
restructured under troubled debt
|
$ | 2,043 | $ | - |
As of
September 30, 2009 nonaccrual loans decreased $3.1 million from $9,164,000 at
December 31, 2008 to $6,031,000. The decline results primarily to the
foreclosure in the third quarter of a of a $2.6 million loan secured by a
shopping center. Impaired loans at September 30, 2009 consisted of
$4.5 million in construction and development loans and $760,000 in first
mortgages secured by single family dwellings, $59,000 in commercial real estate
loans, and $168,000 in second mortgages. Impaired construction and
development loans include a $3.45 million loan secured by an apartment complex
for which a valuation allowance of $196,000 was established; a $698,000
residential development loan; a $604,000 residential development loan, and a
$376,000 construction loan secured by a partially completed office
building. The valuation allowance for the apartment
complex was reduced from $846,000 at March 31, 2009 based on a more recent
appraisal received for the property. Impaired first mortgage
loans consist of 28 loans, the largest of which is $135,000.
Information
regarding impaired loans as of September 30, 2009 and December 31, 2008 are as
follows:
(Dollars
in thousands)
|
September 30,
2009
|
December 31,
2008
|
||||||
Impaired
loans without a valuation allowance
|
$ | 2,213 | $ | - | ||||
Impaired
loans with a valuation allowance
|
11,608 | 9,164 | ||||||
Total
impaired loans
|
$ | 13,821 | $ | 9,164 | ||||
Valuation
allowance related to impaired loans
|
$ | 1,681 | $ | 1,603 | ||||
Average
investment in impaired loans
|
$ | 8,399 | $ | 5,920 |
Impaired
loans without a valuation allowance at September 30, 2009 consist of twenty two
loans secured by real estate, the largest of which is a $697,000 loan secured by
land. The remaining loans are secured by single family dwelling, with
the largest loan having a balance of $247,000.
In
addition to the impaired loans in the table above, at September 30, 2009 the
Company had $37.4 million in potential problem
loans. Potential problem loans are loans which are
currently performing but as to which information about the
borrowers' possible credit problems
causes management to have doubts about
their ability to comply with current repayment
terms. Management has downgraded these loans and closely monitors
their continued performance. The following is a summary of our
potential problem loans at September 30, 2009:
(Dollars
in thousands)
|
||||
Construction
and development loans
|
$ | 6,925 | ||
First
mortgage
|
16,510 | |||
Second
mortgage and home equity line of credit
|
652 | |||
Nonresidential
mortgage
|
10,473 | |||
Commercial
|
1,800 | |||
Consumer
|
1,014 | |||
Total
|
$ | 37,374 |
Other Real Estate. Other real estate
totaled $9,580,000 and $5,592,000 as of September 30, 2009 and December 31,
2008, respectively. At September 30, 2009, the largest component
of other real estate was $4.9 million which represented the Company’s 75 percent
interest in foreclosed property consisting of 96 developed residential lots and
24 partially developed lots in a golf course development in Jackson County,
Georgia. The Company sold a 25 percent participation interest at the
time the loan was originated. In addition to the above, other real
estate includes a retail shopping center recorded a carrying amount of $2.6
million, a 20% interest in land zoned for retail shopping recorded at a carrying
amount of $500,000, and an office building under construction in Atlanta,
Georgia which was written down in the third quarter by $133,000 to
$394,000. The remainder of other real estate consists of
thirteen properties, the largest having a balance of $245,000.
Summary of Loan Loss
Experience. An analysis of
SouthCrest’s loan loss experience is included in the following table for the
periods ended September 30, 2009 and 2008:
Analysis
of Allowance for Loan Losses
|
||||||||||||||||
For
The Three and Nine Months Ended September 30, 2009 and
2008
|
||||||||||||||||
(Dollars
in thousands)
|
Three
Months
|
Nine
Months
|
||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Balance
at beginning of period
|
$ | 8,105 | $ | 6,206 | $ | 7,285 | $ | 4,952 | ||||||||
Chargeoffs
|
||||||||||||||||
Commercial
loans
|
9 | 3 | 66 | 44 | ||||||||||||
Real
estate - construction
|
137 | 616 | 1,021 | 638 | ||||||||||||
Real
estate - mortgage
|
139 | 76 | 482 | 180 | ||||||||||||
Consumer
|
137 | 286 | 479 | 566 | ||||||||||||
Other
|
25 | 29 | 64 | 88 | ||||||||||||
Total
Chargeoffs
|
447 | 1,010 | 2,112 | 1,516 | ||||||||||||
Recoveries
|
||||||||||||||||
Commercial
loans
|
28 | 12 | 44 | 19 | ||||||||||||
Real
estate - construction
|
- | 1 | - | 25 | ||||||||||||
Real
estate - mortgage
|
18 | 2 | 28 | 43 | ||||||||||||
Consumer
|
81 | 120 | 266 | 294 | ||||||||||||
Other
|
- | 21 | 37 | 65 | ||||||||||||
Total
recoveries
|
127 | 156 | 375 | 446 | ||||||||||||
Net
chargeoffs
|
(320 | ) | (854 | ) | (1,737 | ) | (1,070 | ) | ||||||||
Additions
charged to operations
|
875 | 837 | 3,112 | 2,307 | ||||||||||||
Balance
at end of period
|
$ | 8,660 | $ | 6,189 | $ | 8,660 | $ | 6,189 | ||||||||
Annualized
ratio of net chargeoffs during the period to average loans outstanding
during the period
|
0.33 | % | 0.89 | % | 0.59 | % | 0.37 | % |
Allowance for Loan Losses. The allowance for
loan losses as of September 30, 2009 was $8,660,000 compared to $7,285,000 at
December 31, 2008 and $6,189,000 at September 30, 2008. As a
percentage of gross loans, the allowance for loan losses was 2.21% at September
30, 2009 compared to 1.84% as of December 31, 2008 and 1.55% at September 30,
2008. The provisions for loan losses during the three and nine months ended
September 30, 2009 of $875,000 and $3,112,000, respectively, were the result of
management's assessment of risks inherent in the loan
portfolio. Management’s estimate of the allowance for loan losses
utilizes a loan grading system to assign a risk grade to each loan based on
factors such as the quality of collateral securing a loan, the financial
condition of the borrower and the payment history of each loan. Based
on net charge-off history experienced for each category within the loan
portfolio, as well as general economic factors affecting the lending market,
management assigns an estimated allowance for each risk grade within each of the
loan categories. Management then estimates the required allowance,
which may also include a portion that is not allocated to a specific category of
the loan portfolio, but which management deems is necessary based on the overall
risk inherent in the loan portfolio. The estimation of the allowance
may change due to fluctuations in the factors noted above as well as changes in
the trends of net charge-offs, past due loans, and general economic conditions
of the markets served by the Company’s subsidiary banks.
During
the nine months ended September 30, 2009, the Company recorded gross chargeoffs
of $2,112,000. Of this total, $500,000 related to a loan secured by a
real estate development that was foreclosed in the first quarter and $348,000
related to a tract of land foreclosed in the second quarter. The
$500,000 charged off in the first quarter represented the valuation allowance
established for this loan as of December 31, 2008.
Management
considers the allowance for loan losses to be adequate; however, there can be no
assurance that charge-offs in future periods will not exceed the allowance for
loan losses or that additional provisions of the allowance will not be
required.
Results
of Operations For The Three and Nine Months Ended September 30, 2009 and
2008
The
results of operations for the three month period ended September 30, 2009
amounted to a net loss of $(6.2) million, or $(1.63) basic and diluted
earnings per share, compared to net income of $476,000 or $0.12 basic and
diluted earnings per share for the same three-month period in
2008. Results for the nine month period ended September 30, 2009 was
a net loss of $(5.9) million, or $(1.56) basic and diluted earnings per share
compared to net income of $2,488,000 or $0.64 basic and diluted earnings per
share in 2008. The primary reason for the decline is a
$6,397,000 impairment charge recorded in the current quarter related to the
Company’s goodwill. This impairment charge eliminated the remaining
balance of goodwill.
Net Interest Income. Net interest income
represents the difference between interest received on interest earning assets
and interest paid on interest bearing liabilities.
Net
interest income for the three months ended September 30, 2009 decreased $274,000
or 5.0% over the same period in 2008. This decline is the result of a
$193,000 reduction attributable to changes in interest rates and a decrease of
$81,000 attributable to declines in the average balances of interest earning
assets and interest bearing liabilities. Beginning in August 2007,
the Federal Reserve has announced several reductions in the discount rate, with
the result being that the average discount rate for the period ending September
30, 2009 was approximately 175 basis points lower than the same period in
2008. These reductions have contributed to a reduction in the average
yield on earning assets from 6.30% during the three month period ending
September 30, 2008 to 5.61% in the same period in 2009. The average
cost of funds declined from 2.74% in 2008 to 2.04% in 2009. The net
interest margin for the current year period decreased from 4.01% in 2008 to
3.82% in 2009. The net interest spread increased from 3.56% in 2008
to 3.57% in 2009. Total interest income decreased $968,000 to
$7,691,000 for the quarter ended September 30, 2009. Interest income
earned on loans decreased $656,000 composed of a $788,000 reduction in interest
due to the reduction in the average yield of the loan portfolio from 7.13% to
6.31%, offset by a $132,000 increase that relates to a $7.6 million growth in
the average balance of loans. The reduction in the average yield on
loans results from a significant portion of the loan portfolio having variable
interest rates that are tied to the prime rate. Interest income
on taxable securities decreased $278,000 caused by a reduction in the average
yield from 4.73% in 2008 to 4.18% in 2009 and a reduction in the average balance
from $112.6 million in 2008 to $100.6 million in 2009.
Interest
expense decreased $694,000 to $2,456,000 for the quarter ended September 30,
2009. The main component of the decrease in interest expense was a
$418,000 decrease in interest paid on certificates of deposit and is primarily
the result of a decrease in the average rate paid on such accounts from 3.83%
for the quarter ended September 30, 2008 to 2.98% for the same quarter in 2009
and is the result of declines in the general level of interest
rates. The average rate on certificates of deposits typically lags
the changes in the discount rate due to the longer term of the accounts and to
competition from other banks for such funds.
The
following presents, for the three month periods ended September 30, 2009 and
2008, the main components of interest earning assets and interest bearing
liabilities and related interest income and expense and effective yields and
cost of funds.
Average
Consolidated Balance Sheets and Net Interest Income Analysis
For the
Three Month Periods Ended September 30,
(Dollars
in thousands)
Average
Balances (1)
|
Yields
/ Rates
|
Income
/ Expense
|
Increase
|
|||||||||||||||||||||||||
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
(Decrease)
|
||||||||||||||||||||||
Assets
|
||||||||||||||||||||||||||||
Loans,
including fee income
|
$ | 393,374 | $ | 385,974 | 6.31 | % | 7.13 | % | $ | 6,259 | $ | 6,915 | $ | (656 | ) | |||||||||||||
Taxable
securities
|
100,587 | 112,558 | 4.18 | % | 4.73 | % | 1,061 | 1,339 | (278 | ) | ||||||||||||||||||
Nontaxable
securities
|
22,649 | 23,480 | 3.66 | % | 3.90 | % | 209 | 230 | (21 | ) | ||||||||||||||||||
Federal
funds sold
|
3,470 | 9,957 | 0.11 | % | 0.80 | % | 1 | 20 | (19 | ) | ||||||||||||||||||
Interest
bearing deposits in banks
|
23,664 | 15,141 | 2.70 | % | 4.07 | % | 161 | 155 | 6 | |||||||||||||||||||
Total
earning assets
|
543,744 | 547,110 | 5.61 | % | 6.30 | % | 7,691 | 8,659 | (968 | ) | ||||||||||||||||||
Cash
and due from banks
|
35,540 | 15,031 | ||||||||||||||||||||||||||
Allowance
for loan losses
|
(7,974 | ) | (5,781 | ) | ||||||||||||||||||||||||
Other
assets
|
61,237 | 62,159 | ||||||||||||||||||||||||||
Total
|
$ | 632,547 | $ | 618,519 | ||||||||||||||||||||||||
Liabilities
and Equity
|
||||||||||||||||||||||||||||
Interest
bearing demand (2)
|
$ | 157,211 | $ | 149,593 | 0.75 | % | 1.39 | % | $ | 297 | $ | 524 | $ | (227 | ) | |||||||||||||
Savings
|
44,904 | 44,141 | 0.48 | % | 0.70 | % | 54 | 78 | (24 | ) | ||||||||||||||||||
Certificates
of deposit
|
267,208 | 252,144 | 2.98 | % | 3.83 | % | 2,008 | 2,426 | (418 | ) | ||||||||||||||||||
Total
interest bearing deposits
|
469,323 | 445,878 | 1.99 | % | 2.70 | % | 2,359 | 3,028 | (669 | ) | ||||||||||||||||||
Borrowed
funds
|
8,447 | 11,124 | 4.56 | % | 4.36 | % | 97 | 122 | (25 | ) | ||||||||||||||||||
Total
interest bearing liabilities
|
477,770 | 457,002 | 2.04 | % | 2.74 | % | 2,456 | 3,150 | (694 | ) | ||||||||||||||||||
Noninterest
bearing demand deposits
|
75,225 | 78,477 | ||||||||||||||||||||||||||
Other
liabilities
|
9,978 | 10,170 | ||||||||||||||||||||||||||
Redeemable
common stock held by ESOP
|
481 | 712 | ||||||||||||||||||||||||||
Shareholders'
equity
|
69,093 | 72,158 | ||||||||||||||||||||||||||
Total
|
$ | 632,547 | $ | 618,519 | ||||||||||||||||||||||||
Net
interest income
|
$ | 5,235 | $ | 5,509 | $ | (274 | ) | |||||||||||||||||||||
Net
interest yield on earning assets
|
3.82 | % | 4.01 | % | ||||||||||||||||||||||||
Net
interest spread
|
3.57 | % | 3.56 | % |
(1) Daily
averages. Loans includes nonaccrual loans.
(2) Includes
money market accounts
The
following presents, for the nine month periods ended September 30, 2009 and
2008, the main components of interest earning assets and interest bearing
liabilities and related interest income and expense and effective yields and
cost of funds.
Average
Consolidated Balance Sheets and Net Interest Income Analysis
For the
Nine Month Periods Ended September 30,
(Dollars
in thousands)
Average
Balances (1)
|
Yields
/ Rates
|
Income
/ Expense
|
Increase
|
|||||||||||||||||||||||||
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
(Decrease)
|
||||||||||||||||||||||
Assets
|
||||||||||||||||||||||||||||
Loans,
including fee income
|
$ | 394,463 | $ | 383,165 | 6.45 | % | 7.35 | % | $ | 19,030 | $ | 21,088 | $ | (2,058 | ) | |||||||||||||
Taxable
securities
|
100,369 | 113,039 | 4.32 | % | 4.82 | % | 3,246 | 4,081 | (835 | ) | ||||||||||||||||||
Nontaxable
securities
|
22,735 | 23,475 | 3.77 | % | 3.91 | % | 641 | 688 | (47 | ) | ||||||||||||||||||
Federal
funds sold
|
3,771 | 12,155 | 0.21 | % | 2.59 | % | 6 | 236 | (230 | ) | ||||||||||||||||||
Interest
bearing deposits in banks
|
22,402 | 14,398 | 2.72 | % | 3.76 | % | 455 | 405 | 50 | |||||||||||||||||||
Total
earning assets
|
543,740 | 546,232 | 5.75 | % | 6.48 | % | 23,378 | 26,498 | (3,120 | ) | ||||||||||||||||||
Cash
and due from banks
|
33,827 | 15,010 | ||||||||||||||||||||||||||
Allowance
for loan losses
|
(7,851 | ) | (5,575 | ) | ||||||||||||||||||||||||
Other
assets
|
60,570 | 61,876 | ||||||||||||||||||||||||||
Total
|
$ | 630,286 | $ | 617,543 | ||||||||||||||||||||||||
Liabilities
and Equity
|
||||||||||||||||||||||||||||
Interest
bearing demand (2)
|
$ | 156,441 | $ | 149,032 | 0.82 | % | 1.49 | % | $ | 964 | $ | 1,657 | $ | (693 | ) | |||||||||||||
Savings
|
44,721 | 44,064 | 0.50 | % | 0.72 | % | 168 | 237 | (69 | ) | ||||||||||||||||||
Certificates
of deposit
|
267,237 | 252,601 | 3.19 | % | 4.21 | % | 6,380 | 7,966 | (1,586 | ) | ||||||||||||||||||
Total
interest bearing deposits
|
468,399 | 445,697 | 2.14 | % | 2.96 | % | 7,512 | 9,860 | (2,348 | ) | ||||||||||||||||||
Borrowed
funds
|
8,612 | 10,093 | 3.51 | % | 4.37 | % | 226 | 330 | (104 | ) | ||||||||||||||||||
Total
interest bearing liabilities
|
477,011 | 455,790 | 2.17 | % | 2.99 | % | 7,738 | 10,190 | (2,452 | ) | ||||||||||||||||||
Noninterest
bearing demand deposits
|
75,394 | 78,516 | ||||||||||||||||||||||||||
Other
liabilities
|
10,008 | 10,247 | ||||||||||||||||||||||||||
Redeemable
common stock held by ESOP
|
480 | 782 | ||||||||||||||||||||||||||
Shareholders'
equity
|
67,393 | 72,208 | ||||||||||||||||||||||||||
Total
|
$ | 630,286 | $ | 617,543 | ||||||||||||||||||||||||
Net
interest income
|
$ | 15,640 | $ | 16,308 | $ | (668 | ) | |||||||||||||||||||||
Net
interest yield on earning assets
|
3.85 | % | 3.99 | % | ||||||||||||||||||||||||
Net
interest spread
|
3.58 | % | 3.49 | % |
(1) Daily
averages. Loans includes nonaccrual loans.
(2) Includes
money market accounts
Net
interest income for the nine months ended September 30, 2009 decreased $668,000
or 4.1% over the same period in 2008. This decline is the result of a
$422,000 reduction attributable to changes in interest rates and a $246,000
reduction attributable to increases in the average balances of interest earning
assets and interest bearing liabilities. The average Federal Reserve
discount rate for the period ending September 30, 2009 was approximately 227
basis points lower than the same period in 2008. The resulting
reductions in the general level of interest rates have contributed to a
reduction in the average yield on earning assets from 6.48% during the nine
month period ending September 30, 2008 to 5.75% in the same period in
2009. The average cost of funds declined from 2.99% in 2008 to 2.17%
in 2009. The net interest margin for the current year period declined
14 basis points from 2008, decreasing from 3.99% in 2008 to 3.85% in
2009. The net interest spread increased from 3.49% in 2008 to 3.58%
in 2009. Total interest income decreased $3,120,000 to
$23,378,000 for the nine month period ended September 30,
2009. Interest income earned on loans decreased $2,058,000 composed
of a $2,663,000 reduction in interest income due to the reduction in the average
yield of the loan portfolio from 7.35% to 6.45%, offset by a $605,000 increase
that relates to a $11.3 million growth in the average balance of
loans. The reduction in the average yield on loans results from a
significant portion of the loan portfolio having variable interest rates that
are tied to the prime rate. Interest income on taxable
securities decreased $835,000, of which $401,000 was caused by a reduction in
the average yield from 4.82% in 2008 to 4.32% in 2009 and $434,000 was caused by
a reduction in the average balance from $113.0 million in 2008 to $100.4 million
in 2009. The increase in nonperforming assets in 2009 has also decreased the net
interest margin.
Interest
expense decreased $2,452,000 to $7,738,000 for the nine month period ended
September 30, 2009. The main component of the decrease in interest
expense was a $1,586,000 decrease in interest paid on certificates of deposit
and is primarily the result of a decrease in the average rate paid on such
accounts from 4.21% for the period ended September 30, 2008 to 3.19% for the
same period in 2009 and is the result of declines in the general level of
interest rates. The average rate on certificates of deposits
typically lags the changes in the discount rate due to the longer term of the
accounts and to competition from other banks for such funds.
Other Income. Total other income for the
three-month period ended September 30, 2009 amounted to $1,784,000 compared to
$1,170,000 for the same period in 2008, an increase of $614,000. For
the nine-month period, other income was $5,202,000 in 2009 compared to
$4,932,000 in 2008, an increase of $270,000 or 5.5%.
The
primary cause of the increase in income relates to a charge of $600,000 recorded
in the previous year for a loss on investment securities. For the
current year to date period, losses on securities totaled
$197,000. Of the losses in 2009, $216,000 relate to losses realized
on common and preferred stocks, including a $66,000 loss on our common stock
investment in Silverton Bank, N.A. For tax purposes, these are
capital losses for which the Company is not able to obtain a tax
benefit.
Service
charges (including NSF and overdraft charges) on deposit accounts decreased
$87,000 or 8.5% for the three month period and $366,000 or 12.3% for the nine
month period. For the three month period, these fees were 1.61% of
interest-bearing and non-interest bearing checking accounts in 2009 compared to
1.80% in 2008. NSF fees account for $77,000 of the $87,000 reduction,
declining from $889,000 in 2008 to $812,000 in 2009. For the nine
month period, these fees were 1.51% of interest-bearing and non-interest bearing
checking accounts in 2009 compared to 1.75% in 2008. Of the $366,000
decline in fees for the nine month fees, reductions in NSF fees accounted for
$312,000, reducing from $2,541,000 in 2008 to $2,229,000 in 2009. In
general, the decline in these fees is believed to be the result of the current
economic recession in which consumers have generally reduced their spending
levels and maintain higher balances in their checking accounts, thus avoiding
service charges and NSF fees.
For the
three months ended September 30, 2009, gain on sale of loans was $77,000
compared to $31,000 in 2008 due to increased volume of loans sold as a result of
increased refinancing activity caused by declines in interest
rates. The gain on sale of loans for the nine month periods ended
September 30, 2009 and 2008 were $522,000 and $251,000,
respectively. Included in the gain on sale of loans are the
recognition of mortgage servicing rights of $31,000 and $17,000 for the three
month periods ended September 30, 2009 and 2008, respectively, and $227,000 and
$121,000 for the nine month periods ended September 30, 2009 and 2008,
respectively. The following presents the activity in the
Company’s mortgage servicing rights in 2009 and 2008:
Three
Months
|
Nine
Months
|
|||||||||||||||
(dollars
in thousands)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Beginning
balance
|
$ | 601 | $ | 556 | $ | 525 | $ | 510 | ||||||||
Servicing
rights recognized
|
31 | 17 | 227 | 121 | ||||||||||||
Amortization
expense
|
(51 | ) | (34 | ) | (171 | ) | (92 | ) | ||||||||
Ending
balance
|
$ | 581 | $ | 539 | $ | 581 | $ | 539 |
Other
Expenses. Other expenses for the three-month period ended
September 30, 2009 amounted to $12,519,000. Excluding the $6,397,000
goodwill impairment charge, other expenses were increased $734,000 over the same
period in 2008. For the nine month period, excluding the goodwill
impairment charge, other expenses increased $1,870,000 over the same period in
2008.
The
largest component of other expenses is salaries and employee benefits, which
decreased $200,000, or 6.8% for the three month period and increased $105,000 or
1.2% for the nine month period. During 2009, the Company has
instituted measures to reduce its costs, including eliminating incentives and
bonuses, reducing retirement expenses, and increasing its cost cutting measures,
and combining job duties when possible as employees resign. For the
nine month period, the primary component of the increase in cost was a $400,000
accrual in the first quarter for the cost of the termination of Bank of
Chickamauga’s Defined Benefit Plan, which occurred in the second
quarter. The compensation cost that was charged against income for
our stock option plans was $2,000 and $26,000 for the three month periods ended
September 30, 2009 and 2008, respectively, and $52,000 and $78,000 for the nine
month periods ended September 30, 2009 and 2008, respectively. The
total compensation cost related to nonvested awards not yet recognized at
September 30, 2009 is $131,000 which will be recognized over the weighted
average period of approximately 1.40 years.
For the
three month period ended September 30, 2009, amortization of intangibles
decreased $35,000. Amortization of core deposit intangibles decreased
by $52,000 as impairment charges recorded against these assets at December 31,
2008 reduced required future amortization. Amortization expense for
mortgage servicing rights for the quarter increased $17,000. For the
nine month period ended September 30, 2009, amortization of intangibles
decreased $75,000. Amortization of core deposit intangibles decreased
by $154,000 while amortization expense for mortgage servicing rights increased
$79,000. Equipment and occupancy expenses increased $5,000 for the
three month period and $58,000 for the nine month period. The
increase for the nine month period relates to a $72,000 increase in depreciation
expense over 2008. FDIC premiums increased $172,000 for the three
month period and $844,000 for the nine month period due to increases in premiums
assessed by the FDIC, including $284,000 accrued in the second quarter for the
FDIC’s Special Assessment. Professional fees increased
$159,000 for the three month period and $283,000 for the nine
months primarily
because of increased collection costs of nonperforming assets, costs associated
with the special proxy statement and goodwill assessment
costs. Loss on sale of real estate increased $364,000 for the
three month period and $420,000 for the nine month period. The
increase primarily relates to a $212,000 loss on the sale of a tract of land
sold in the third quarter and a $150,000 writedown of the carrying value of an
office building previously foreclosed.
Income Taxes. The
Company recorded an income tax benefit totaling $(175,000) and (22,000) for the
three-month periods ending September 30, 2009 and 2008,
respectively. The effective tax rate for the periods was (2.75)% and
(4.85)%, respectively. For the nine month period, the Company
recorded an income tax benefit totaling $(395,000) and income tax expense of
$663,000, respectively, resulting in effective tax rates for the periods
of (6.25)% and 21.1%, respectively. Tax-exempt interest
income, income on bank-owned life insurance and the impairment charge on
goodwill are the primary reasons that the Company’s effective tax rates differ
from the statutory tax rate of 34%.
Liquidity
and Capital Resources
Liquidity
is our ability to meet deposit withdrawals immediately while also providing for
the credit needs of our customers. We monitor our liquidity resources
on an ongoing basis. State and Federal regulatory authorities also monitor our
liquidity on a periodic basis. As of September 30, 2009, we believe our
liquidity, as determined under guidelines established by regulatory authorities
and internal policies, was satisfactory.
The
Company, if needed, has the ability to cash out certificates with asset cash
flow under normal circumstances. In the event that abnormal circumstances arise,
the Banks have federal funds lines of credit in place totaling $5.1 million. In
addition, if needed for both short-term and longer-term funding needs, the Banks
have available lines of credit with the Federal Home Loan Bank of Atlanta on
which $44.8 million was available at September 30, 2009.
At
September 30, 2009, our capital ratios met regulatory minimum capital
requirements for “well-capitalized” categorization. The minimum capital
requirements and the actual capital ratios on a consolidated and bank-only basis
are as follows:
Tier
1
Leverage
|
Tier
1 Risk-
Based
|
Total
Risk-
Based
|
||||||||||
Minimum
required
|
4.00 | % | 4.00 | % | 8.00 | % | ||||||
Minimum
required to be well capitalized
|
5.00 | % | 6.00 | % | 10.00 | % | ||||||
Actual
ratios at September 30, 2009
|
||||||||||||
Consolidated
|
10.83 | % | 16.23 | % | 17.49 | % | ||||||
Bank
of Upson
|
9.57 | % | 13.47 | % | 14.73 | % | ||||||
The
First National Bank of Polk County
|
11.21 | % | 17.22 | % | 18.48 | % | ||||||
Peachtree
Bank
|
8.67 | % | 13.44 | % | 14.69 | % | ||||||
Bank
of Chickamauga
|
8.83 | % | 17.77 | % | 19.03 | % |
In
response to the financial crisis affecting the banking system and financial
markets, on October 3, 2008, the Emergency Economic Stabilization Act of 2008
(the “EESA”) was signed into law. Pursuant to the EESA, the U.S.
Treasury will have the authority to, among other things, purchase up to $700
billion of mortgages, mortgage-backed securities and certain other financial
instruments from financial institutions for the purpose of stabilizing and
providing liquidity to the U.S. financial markets.
On
October 14, 2008, Secretary Paulson announced that the Department of the
Treasury will purchase equity stakes in a wide variety of banks and
thrifts. Under this program, known as the Troubled Asset Relief
Program Capital Purchase Program (the “CPP”), from the $700 billion authorized
by the EESA, the Treasury will make $250 billion of capital available to U.S.
financial institutions in the form of preferred stock. In conjunction with the
purchase of preferred stock, the Treasury will receive warrant preferred having
an aggregate redemption value equal to 5% of the preferred
investment. Participating financial institutions will be required to
adopt the Treasury’s standards for executive compensation and corporate
governance for the period during which the Treasury holds equity issued under
the CPP. Institutions that receive Treasury approval to
participate in the CPP have 30 days to satisfy all requirements for
participation and to complete the issuance of the senior preferred shares to the
Treasury. On April 21, 2009, the Company was notified by the U.S. Treasury that
it had been approved to participate in the program, and the Company elected to
participate in the CPP in July 2009. On July 17, 2009 the Company
issued and sold to the Treasury (i) 12,900 shares of the Company’s Fixed Rate
Cumulative Perpetual Preferred Stock, Series A, having a liquidation preference
of $1,000 per share (Preferred Stock Series A) and (ii) a Warrant to purchase
645 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock,
Series B, having a liquidation preference of $1,000 per share (Preferred Stock
Series B) at an initial price of $0.01 per share (the “Warrant”), all for an
aggregate purchase price of $12,900,000 in cash. The Warrant was exercised by
the Treasury immediately on July 31, 2009 pursuant to a cashless exercise, and
645 shares of Preferred Stock Series B were issued to the Treasury and the
Warrant was cancelled.
The
Preferred Stock Series A pays cumulative dividends at a rate of 5% per annum for
the first five years, and 9% per annum thereafter, but will be paid only if, as,
and when declared by the Company’s Board of Directors. The Preferred Stock
Series A has no maturity date and ranks senior to the Company’s common stock
with respect to the payment of dividends and distributions and amounts payable
upon the liquidation and dissolution and the winding up of the Company. The
Preferred Stock Series A is generally non-voting. The Company
may redeem the Preferred Stock Series A at par at any time.
The terms
of the Preferred Stock Series B are substantially identical to those of the
Preferred Stock Series A. Differences include the payment under the Preferred
Stock Series B of cumulative dividends at a rate of 9% per year, and such stock
may not be redeemed while shares of the Preferred Stock Series A are
outstanding.
At
September 30, 2009, the Company had $5,972,000 outstanding on its line of credit
with Silverton Bridge Bank, N.A. (formerly The Bankers Bank and Silverton Bank
N.A.). On May 1, 2009, the Office of the Comptroller of the Currency
closed Silverton Bank. The FDIC was appointed as Receiver for Silverton Bank,
and Silverton Bridge Bank, N.A. was formed to take over the operations of
Silverton Bank. The stock of our subsidiary banks is pledged as collateral for
this loan. The terms of the line of credit contain certain
restrictive covenants including, among others, a requirement of each subsidiary
bank to maintain certain minimum capital levels as well as maximum ratios
related to the levels of nonperforming assets, to be measured
quarterly. At the inception of the loan, the restriction relative to
maximum levels of nonperforming assets required that these assets not exceed 1%
of each subsidiary’s total assets. The Company was in violation of
this covenant for the second and third quarters of 2008 for which it received
waivers from the lender. The Company and the lender agreed to amend
the covenants such that each subsidiary’s nonperforming assets may not exceed 5%
of total assets as of December 31, 2008 and for each quarter of
2009. Thereafter, this ratio would reduce by 1% during each quarter
in 2010 so that the maximum ratio returns to 1% of total assets by December 31,
2010.
At
December 31, 2008, as a result of its impairment of its goodwill and core
deposit intangible assets, the Company was not in compliance with its covenant
to maintain a minimum debt service coverage ratio, defined as net income of
subsidiary banks for the prior four quarters multiplied by 50%, divided by the
annual debt service of the Company. During the second quarter
of 2009, the terms of the line of credit were amended in response to
this covenant noncompliance by eliminating the debt service covenant and
instituting a liquidity covenant whereby the Parent Company must maintain cash
reserves of at least $800,000. In addition, the interest rate was
changed from prime minus 0.5% to Prime plus 1% through July 1, 2010, Prime plus
2% through July 1, 2011, and Prime plus 3% through July 1, 2012 on which date
the unpaid balance of the loan (projected to be $3.4 million) would become due
in a lump sum payment.
FDIC
Special Assessment
The FDIC
imposed an emergency special assessment on insured depository institutions as of
June 30, 2009. The FDIC collected this assessment on September 30, 2009. For the
Company, the special assessment was 5 basis points of the Bank's total assets
less its Tier 1 capital. The Company accrued $284,000 for this special
assessment as of June 30, 2009. The FDIC may impose an additional emergency
special assessment in the future of up to 5 basis points if necessary
to maintain public confidence in federal deposit insurance. In
November 2009, the FDIC approved a rule that, in lieu of a further special
assessment in 2009, will require all insured depository institutions, with
limited exceptions, to prepay their estimated quarterly risk-based assessments
for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC also
proposed to adopt a uniform three basis point increase in assessment rates
effective on January 1, 2011. If the rule is finalized as proposed, the Company
expects to be required to prepay approximately $2.8 million in risk-based
assessments.
Off-Balance-Sheet
Financing
Our
financial statements do not reflect various commitments and contingent
liabilities that arise in the normal course of business. These off-balance-sheet
financial instruments include commitments to extend credit and standby letters
of credit. These financial instruments are included in the financial statements
when funds are distributed or the instruments become payable. We use the same
credit policies in making commitments as we do for on-balance sheet
instruments. Our exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to extend credit,
standby letters of credit and credit card commitments is represented by the
contractual amount of those instruments. The table below contains a summary of
our contractual obligations and commitments as of September 30,
2009.
Commitments
and Contractual Obligations
(Dollars
in thousands)
Less
than one year
|
1-3
years
|
3-5
years
|
Thereafter
|
Total
|
||||||||||||||||
Contractual
obligations
|
||||||||||||||||||||
Deposits
having no stated maturity
|
$ | 281,894 | $ | - | $ | - | $ | - | $ | 281,894 | ||||||||||
Certificates
of Deposit
|
198,170 | 38,841 | 20,549 | - | 257,560 | |||||||||||||||
Long-term
borrowed funds
|
1,489 | 2,353 | 4,006 | - | 7,848 | |||||||||||||||
Deferred
compensation
|
43 | 289 | 588 | 4,505 | 5,425 | |||||||||||||||
Leases
|
77 | 159 | 165 | 274 | 675 | |||||||||||||||
Total
contractual obligations
|
$ | 481,673 | $ | 41,642 | $ | 25,308 | $ | 4,779 | $ | 553,402 | ||||||||||
Commitments
|
||||||||||||||||||||
Commitments
to extend credit
|
$ | 24,006 | $ | - | $ | - | $ | - | $ | 24,006 | ||||||||||
Credit
card commitments
|
5,803 | - | - | - | 5,803 | |||||||||||||||
Commercial
standby letters of credit
|
803 | - | - | - | 803 | |||||||||||||||
Total
commitments
|
$ | 30,612 | $ | - | $ | - | $ | - | $ | 30,612 |
ITEM 3. Quantitative and Qualitative Disclosures about
Market Risk
Pursuant
to the revised disclosure requirements for smaller reporting companies effective
February 4, 2008, no disclosure under this Item is required.
ITEM 4T. Controls and Procedures
As of the
end of the period covered by this Quarterly Report on Form 10-Q, our principal
executive officer and principal financial officer have evaluated the
effectiveness of our “disclosure controls and procedures” (“Disclosure
Controls”). Disclosure Controls, as defined in Rule 13a-15(e) of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), are procedures
that are designed with the objective of ensuring that information required to be
disclosed in our reports filed under the Exchange Act, such as this Quarterly
Report, 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 with the objective of
ensuring 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
management, including the CEO and CFO, does not expect that our Disclosure
Controls will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are
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. The design
of any system of controls also is based in part upon 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.
Based
upon their controls evaluation, our CEO and CFO have concluded that our
Disclosure Controls are effective at a reasonable assurance level.
There
have been no changes in our internal controls over financial reporting during
our first fiscal quarter that have materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.
PART
II - OTHER INFORMATION
Item
1.
|
Legal
Proceedings
|
The
Company and its subsidiaries are subject to claims and suits arising in the
ordinary course of business. In the opinion of management, the
ultimate resolution of these pending claims and legal proceedings will not have
a material adverse effect on the Company’s results of operations.
Item
1A.
|
Risk
Factors
|
In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, "Item 1. Business" under the heading
"Risk Factors" in our Annual Report on Form 10-K for the year ended December 31,
2008, which could materially affect our business, financial condition or future
results. The risks described in our Annual Report on Form 10-K are
not the only risks facing our Company. Additional risks and
uncertainties not currently known to us or that we currently deem to be
immaterial also may materially adversely affect our business, financial
condition and/or operating results.
Item
2.
|
Unregistered Sales of
Equity Securities and Use of
Proceeds
|
None.
Item
3.
|
Defaults upon Senior
Securities
|
None.
Item
4.
|
Submission of Matters
to a Vote of Security
Holders
|
None.
Other
Information
|
None.
Exhibits
|
Exhibits
|
Chief Executive
Officer Certification Pursuant to Rule
13a-14(a)/15d-14(a)
|
|
Chief Financial
Officer Certification Pursuant to Rule
13a-14(a)/15d-14(a)
|
|
Chief Executive
Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
Chief Financial
Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SouthCrest Financial Group,
Inc.
(Registrant)
DATE: November
16, 2009
|
BY:
|
/s/ Larry T. Kuglar
|
Larry
T. Kuglar.
|
||
President
and Chief Executive Officer
|
||
DATE: November
16, 2009
|
BY:
|
/s/ Douglas J. Hertha
|
Douglas
J. Hertha
|
||
Senior
Vice President, Chief Financial
Officer
|
33