Attached files
file | filename |
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EXCEL - IDEA: XBRL DOCUMENT - Southeastern Bank Financial CORP | Financial_Report.xls |
EX-31.2 - EXHIBIT 31.2 - Southeastern Bank Financial CORP | c22882exv31w2.htm |
EX-32.1 - EXHIBIT 32.1 - Southeastern Bank Financial CORP | c22882exv32w1.htm |
EX-31.1 - EXHIBIT 31.1 - Southeastern Bank Financial CORP | c22882exv31w1.htm |
Table of Contents
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2011.
or
o | Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to .
Commission File No. 0-24172
Southeastern Bank Financial Corporation
(Exact name of registrant as specified in its charter)
Georgia | 58-2005097 | |
(State of Incorporation) | (I.R.S. Employer Identification No.) |
3530 Wheeler Road, Augusta, Georgia 30909
(Address of principal executive offices)
(Address of principal executive offices)
(706) 738-6990
(Issuers telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the issuer is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act): Yes o No þ
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuers classes of common equity, as of
the latest practicable date:
6,677,667 shares of common stock, $3.00 par value per share, outstanding as of October 27,
2011.
SOUTHEASTERN BANK FINANCIAL CORPORATION
FORM 10-Q
INDEX
FORM 10-Q
INDEX
Page | ||||||||
3 | ||||||||
5 | ||||||||
7 | ||||||||
8 | ||||||||
41 | ||||||||
67 | ||||||||
67 | ||||||||
* | ||||||||
68 | ||||||||
68 | ||||||||
* | ||||||||
* | ||||||||
* | ||||||||
69 | ||||||||
70 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT |
* | No information submitted under this caption |
1
Table of Contents
PART I
FINANCIAL INFORMATION
SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except share data)
(Dollars in thousands, except share data)
September 30, | ||||||||
2011 | December 31, | |||||||
(Unaudited) | 2010 | |||||||
Assets |
||||||||
Cash and due from banks |
$ | 74,260 | $ | 42,305 | ||||
Interest-bearing deposits in other banks |
8,992 | 22,810 | ||||||
Cash and cash equivalents |
83,252 | 65,115 | ||||||
Investment securities |
||||||||
Available-for-sale |
596,936 | 586,302 | ||||||
Held-to-maturity, at cost (fair values of
$0 and $311, respectively) |
| 310 | ||||||
Loans held for sale |
23,504 | 12,775 | ||||||
Loans |
838,777 | 874,095 | ||||||
Less allowance for loan losses |
29,339 | 26,657 | ||||||
Loans, net |
809,438 | 847,438 | ||||||
Premises and equipment, net |
28,051 | 29,416 | ||||||
Accrued interest receivable |
6,159 | 6,382 | ||||||
Bank-owned life insurance |
30,446 | 24,178 | ||||||
Restricted equity securities |
5,277 | 5,707 | ||||||
Other real estate owned |
7,859 | 7,751 | ||||||
Prepaid FDIC assessment |
3,537 | 4,784 | ||||||
Deferred tax asset |
11,926 | 14,595 | ||||||
Other assets |
3,041 | 2,352 | ||||||
$ | 1,609,426 | $ | 1,607,105 | |||||
2
Table of Contents
SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except share data)
(Dollars in thousands, except share data)
September 30, | ||||||||
2011 | December 31, | |||||||
(Unaudited) | 2010 | |||||||
Liabilities and Stockholders Equity |
||||||||
Deposits |
||||||||
Noninterest-bearing |
$ | 135,465 | $ | 120,139 | ||||
Interest-bearing: |
||||||||
NOW accounts |
330,319 | 356,267 | ||||||
Savings |
478,583 | 409,584 | ||||||
Money management accounts |
41,937 | 36,937 | ||||||
Time deposits over $100 |
290,300 | 346,721 | ||||||
Other time deposits |
124,668 | 141,089 | ||||||
1,401,272 | 1,410,737 | |||||||
Securities sold under repurchase agreements |
540 | 818 | ||||||
Advances from Federal Home Loan Bank |
52,000 | 60,000 | ||||||
Accrued interest payable and other liabilities |
17,268 | 12,645 | ||||||
Subordinated debentures |
22,947 | 22,947 | ||||||
Total liabilities |
1,494,027 | 1,507,147 | ||||||
Stockholders equity: |
||||||||
Preferred stock, no par value; 10,000,000 shares
authorized; 0 shares outstanding in 2011 and
2010, respectively |
| | ||||||
Common stock, $3.00 par value; 10,000,000 shares
authorized; 6,677,059 and 6,675,147 shares issued
and outstanding in 2011 and 2010, respectively |
20,031 | 20,025 | ||||||
Additional paid-in capital |
62,729 | 62,618 | ||||||
Retained earnings |
27,580 | 19,548 | ||||||
Accumulated other comprehensive income (loss), net |
5,059 | (2,233 | ) | |||||
Total stockholders equity |
115,399 | 99,958 | ||||||
$ | 1,609,426 | $ | 1,607,105 | |||||
See accompanying notes to consolidated financial statements.
3
Table of Contents
SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
(Dollars in thousands, except share data)
(Dollars in thousands, except share data)
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Interest income: |
||||||||||||||||
Loans, including fees |
$ | 12,636 | $ | 13,611 | $ | 38,090 | $ | 40,471 | ||||||||
Investment securities |
4,450 | 4,169 | 13,280 | 11,543 | ||||||||||||
Federal funds sold |
| 2 | | 9 | ||||||||||||
Interest-bearing deposits in other banks |
35 | 112 | 120 | 294 | ||||||||||||
Total interest income |
17,121 | 17,894 | 51,490 | 52,317 | ||||||||||||
Interest expense: |
||||||||||||||||
Deposits |
3,394 | 5,187 | 11,316 | 15,873 | ||||||||||||
Securities sold under repurchase
agreements |
1 | 2 | 5 | 18 | ||||||||||||
Other borrowings |
637 | 912 | 2,014 | 2,757 | ||||||||||||
Total interest expense |
4,032 | 6,101 | 13,335 | 18,648 | ||||||||||||
Net interest income |
13,089 | 11,793 | 38,155 | 33,669 | ||||||||||||
Provision for loan losses |
3,535 | 4,759 | 10,198 | 11,841 | ||||||||||||
Net interest income after provision
for loan losses |
9,554 | 7,034 | 27,957 | 21,828 | ||||||||||||
Noninterest income: |
||||||||||||||||
Service charges and fees on deposits |
1,729 | 1,802 | 5,057 | 5,145 | ||||||||||||
Gain on sales of loans |
2,097 | 2,877 | 5,024 | 6,453 | ||||||||||||
Gain (loss) on sale of fixed assets |
| (1 | ) | 17 | 26 | |||||||||||
Investment securities gains, net |
250 | 775 | 369 | 937 | ||||||||||||
Other-than-temporary loss |
||||||||||||||||
Total impairment loss |
(64 | ) | (96 | ) | (191 | ) | (96 | ) | ||||||||
Less loss recognized in other comprehensive income |
(24 | ) | | (89 | ) | | ||||||||||
Net impairment loss recognized in earnings |
(40 | ) | (96 | ) | (102 | ) | (96 | ) | ||||||||
Retail investment income |
444 | 497 | 1,408 | 1,248 | ||||||||||||
Trust service fees |
284 | 276 | 849 | 853 | ||||||||||||
Increase in cash surrender value of
bank-owned life insurance |
302 | 257 | 768 | 709 | ||||||||||||
Miscellaneous income |
169 | 149 | 574 | 466 | ||||||||||||
Total noninterest income |
5,235 | 6,536 | 13,964 | 15,741 | ||||||||||||
Noninterest expense: |
||||||||||||||||
Salaries and other personnel expense |
5,990 | 6,115 | 17,208 | 17,524 | ||||||||||||
Occupancy expenses |
1,088 | 1,132 | 3,315 | 3,469 | ||||||||||||
Other real estate losses, net |
572 | 708 | 1,033 | 1,036 | ||||||||||||
Other operating expenses |
2,972 | 3,028 | 8,904 | 8,948 | ||||||||||||
Total noninterest expense |
10,622 | 10,983 | 30,460 | 30,977 | ||||||||||||
Income before income taxes |
4,167 | 2,587 | 11,461 | 6,592 | ||||||||||||
Income tax expense |
1,243 | 752 | 3,430 | 1,882 | ||||||||||||
Net income |
$ | 2,924 | $ | 1,835 | $ | 8,031 | $ | 4,710 | ||||||||
Comprehensive income |
$ | 5,637 | $ | 2,380 | $ | 15,323 | $ | 10,311 | ||||||||
4
Table of Contents
SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
(Dollars in thousands, except share data)
(Dollars in thousands, except share data)
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Basic net income per share |
$ | 0.44 | $ | 0.27 | $ | 1.20 | $ | 0.71 | ||||||||
Diluted net income per share |
$ | 0.44 | $ | 0.27 | $ | 1.20 | $ | 0.71 | ||||||||
Weighted average common shares outstanding |
6,677,059 | 6,674,465 | 6,676,463 | 6,673,912 | ||||||||||||
Weighted average number of common and
common equivalent shares outstanding |
6,677,059 | 6,674,465 | 6,676,463 | 6,673,912 | ||||||||||||
See accompanying notes to consolidated financial statements.
5
Table of Contents
SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Dollars in thousands)
(Unaudited)
Nine Months Ended | ||||||||
September 30, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 8,031 | $ | 4,710 | ||||
Adjustments to reconcile net income to net cash
provided by operating activities |
||||||||
Depreciation |
1,862 | 2,018 | ||||||
Deferred income tax benefit |
(1,974 | ) | (1,982 | ) | ||||
Provision for loan losses |
10,198 | 11,841 | ||||||
Net investment securities gains |
(369 | ) | (937 | ) | ||||
Other-than-temporary impairment losses |
102 | 96 | ||||||
Net amortization of premium on investment securities |
2,301 | 1,057 | ||||||
Increase in CSV of bank-owned life insurance |
(768 | ) | (709 | ) | ||||
Stock options compensation cost |
95 | 181 | ||||||
Gain on disposal of premises and equipment |
(17 | ) | (26 | ) | ||||
Deferred gain on the sale of other real estate |
| (17 | ) | |||||
Loss (gain) on the sale of other real estate |
222 | (344 | ) | |||||
Provision for other real estate valuation allowance |
811 | 1,380 | ||||||
Gain on sales of loans |
(5,024 | ) | (6,453 | ) | ||||
Real estate loans originated for sale |
(171,672 | ) | (244,807 | ) | ||||
Proceeds from sales of real estate loans |
165,968 | 238,612 | ||||||
Decrease (increase) in accrued interest receivable |
223 | (135 | ) | |||||
Decrease in other assets |
559 | 6,357 | ||||||
Increase in accrued interest payable and other liabilities |
2,579 | 2,928 | ||||||
Net cash provided by operating activities |
13,127 | 13,770 | ||||||
Cash flows from investing activities: |
||||||||
Proceeds from sales of securities |
66,946 | 41,907 | ||||||
Proceeds from maturities and calls of available-for-sale securities |
143,928 | 139,190 | ||||||
Proceeds from maturities and calls of held-to-maturity securities |
| 180 | ||||||
Purchase of available-for-sale securities |
(209,255 | ) | (407,589 | ) | ||||
Purchase of restricted equity securities |
(38 | ) | | |||||
Proceeds from redemption of FHLB stock |
468 | 426 | ||||||
Net decrease in loans |
22,443 | 32,343 | ||||||
Purchase of bank-owned life insurance |
(5,500 | ) | | |||||
Additions to premises and equipment |
(520 | ) | (290 | ) | ||||
Proceeds from sale of other real estate |
4,218 | 7,760 | ||||||
Proceeds from sale of premises and equipment |
40 | 30 | ||||||
Net cash provided by (used in) investing activities |
22,730 | (186,043 | ) | |||||
6
Table of Contents
SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Dollars in thousands)
(Unaudited)
Nine Months Ended | ||||||||
September 30, | ||||||||
2011 | 2010 | |||||||
Cash flows from financing activities: |
||||||||
Net (decrease) increase in deposits |
(9,465 | ) | 154,819 | |||||
Net decrease in securities sold under
repurchase agreements |
(278 | ) | (2,750 | ) | ||||
Payments of Federal Home Loan Bank advances |
(8,000 | ) | (10,000 | ) | ||||
Proceeds from other borrowed funds |
| 100 | ||||||
Proceeds from Directors stock purchase plan |
23 | 18 | ||||||
Net cash (used in) provided by financing activities |
(17,720 | ) | 142,187 | |||||
Net increase (decrease) in cash and cash equivalents |
$ | 18,137 | $ | (30,086 | ) | |||
Cash and cash equivalents at beginning of period |
65,115 | 147,994 | ||||||
Cash and cash equivalents at end of period |
$ | 83,252 | $ | 117,908 | ||||
Supplemental disclosures of cash paid during the period for: |
||||||||
Interest |
$ | 14,038 | $ | 18,780 | ||||
Income taxes |
$ | 4,669 | $ | (1,213 | ) | |||
Supplemental information on noncash investing activities: |
||||||||
Loans transferred to other real estate |
$ | 5,359 | $ | 7,911 | ||||
See accompanying notes to consolidated financial statements.
7
Table of Contents
SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2011
Note 1 Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying consolidated financial statements include the accounts of Southeastern Bank
Financial Corporation (the Company), and its wholly-owned subsidiaries, Georgia Bank & Trust
Company of Augusta (GB&T) and Southern Bank & Trust (SB&T). Significant intercompany
transactions and accounts are eliminated in consolidation. Dollar amounts are rounded to thousands
except share and per share data.
The financial statements for the three and nine months ended September 30, 2011 and 2010 are
unaudited and have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted pursuant to such rules and regulations. These
consolidated financial statements should be read in conjunction with the audited consolidated
financial statements and footnotes included in the Companys annual report on Form 10-K for the
year ended December 31, 2010.
In the opinion of management, all adjustments necessary to present fairly the financial position
and the results of operations and cash flows for the interim periods have been made. All such
adjustments are of a normal recurring nature. The results of operations for the three and nine
months ended September 30, 2011 are not necessarily indicative of the results of operations which
the Company may achieve for the entire year.
Some items in the prior period financial statements were reclassified to conform to the current
presentation.
(b) Interest Rate Swap Derivatives
At the inception of a derivative contract, the Company designates the derivative, based on the
Companys intentions and belief as to likely effectiveness as a hedge. A hedge of a forecasted
transaction or the variability of cash flows to be received or paid related to a recognized asset
or liability is referred to as a cash flow hedge. For a cash flow hedge, the gain or loss on the
derivative is reported in other comprehensive income and is reclassified into earnings in the same
periods during which the hedged transaction affects earnings. The changes in the fair value of the
hedge that are not highly effective in
hedging the changes in fair value or expected cash flows of the hedged item are recognized
immediately in current earnings.
8
Table of Contents
Net cash settlements are recorded in interest income or interest expense, based on the item being
hedged. Cash flows on hedges are classified in the cash flow statement the same as the cash flows
of the items being hedged.
The Company formally documents the relationship between derivatives and hedged items, as well as
the risk-management objective and the strategy for undertaking hedge transactions at the inception
of the hedging relationship. This documentation includes linking cash flow hedges to specific
assets and liabilities on the balance sheet or to specific firm commitments or forecasted
transactions. The Company also formally assesses, both at the hedges inception and on an ongoing
basis, whether the derivative instruments that are used are highly effective in offsetting changes
in the cash flows of the hedged items. To the extent that the cumulative change in anticipated cash
flows from the hedging derivative offsets from 80% to 125% of the cumulative change in anticipated
interest cash flows from the hedged exposure, the hedge will be deemed effective. The Company
discontinues hedge accounting when it determines that the derivative is no longer effective in
offsetting changes in the cash flows of the hedged item, the derivative is settled or terminates, a
hedged forecasted transaction is no longer probable, a hedged firm commitment is no longer firm, or
treatment of the derivative as a hedge is no longer appropriate or intended.
When hedge accounting is discontinued, subsequent changes in fair value of the derivative are
recorded as noninterest income. When a cash flow hedge is discontinued but the hedged cash flows
or forecasted transactions are still expected to occur, gains or losses that were accumulated in
other comprehensive income are amortized into earnings over the same periods which the hedged
transactions will affect earnings.
(c) Recent Accounting Pronouncements
In January 2010, the FASB amended previous guidance related to fair value measurements and
disclosures, which requires new disclosures for transfers in and out of Levels 1 and 2 and requires
a reconciliation to be provided for the activity in Level 3 fair value measurements. A reporting
entity should disclose separately the amounts of significant transfers in and out of Levels 1 and 2
and provide an explanation for the transfers. This guidance is effective for interim periods
beginning after December 15, 2009, and did not have a material effect on the Companys results of
operations or financial position.
In the reconciliation for fair value measurements using unobservable inputs (Level 3) a reporting
entity should present separately information about purchases, sales, issuances, and settlements on
a gross basis rather than a net basis. Disclosures relating to purchases, sales, issuances, and
settlements in the roll forward of activity in Level 3 fair value measurement became
effective for fiscal years beginning after December 15, 2010, and for interim periods within
those fiscal years. The adoption of this standard did not
have a material effect on the Companys results of operations or financial position but did require
expansion of the Companys disclosures about fair value measurements.
9
Table of Contents
In July 2010, the FASB amended existing guidance related to financing receivables and the allowance
for credit losses, which requires further disaggregated disclosures that improve financial
statement users understanding of 1) the nature of an entitys credit risk associated with its
financing receivables and 2) the entitys assessment of that risk in estimating its allowance for
credit losses as well as changes in the allowance and the reasons for those changes. The new and
amended disclosures as of the end of a reporting period are effective for interim and annual
reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs
during a reporting period are effective for interim and annual reporting periods beginning on or
after December 15, 2010. The adoption of this standard did not have a material effect on the
Companys result of operations or financial position but did require expansion of the Companys
disclosures.
In April 2011, the FASB amended existing guidance to assist creditors in determining whether a
modification of the terms of a receivable meets the definition of a troubled debt restructuring
(TDR). The guidance does not change previous standards that a restructuring of debt constitutes
a TDR if the creditor for economic or legal reasons related to the debtors financial difficulties
grants a concession to the debtor that it would not otherwise consider, but provides clarification
on determining whether a debtor is in financial difficulty and if a concession was granted. The
guidance is effective for interim and annual periods beginning on or after June 15, 2011, and
should be applied retrospectively to restructurings occurring on or after the beginning of the
fiscal year of adoption. The adoption of this guidance did not have a material effect on the
Companys results of operations or financial position, but did require expansion of the Companys
disclosures.
In June 2011, the FASB amended existing guidance relating to presentation of other comprehensive
income in a convergence effort with international accounting standards. This guidance eliminates
the option to present the components of comprehensive income as a part of the statement of changes
in stockholders equity and requires a consecutive presentation of net income and other
comprehensive income, and a reconciliation of the components of other comprehensive income.
Similar to the requirements of existing guidance, entities are required to present on the face of
the financial statements reclassification adjustments for items that are reclassified from OCI to
net income in the statements where the components of net income and OCI are presented. The
amendments in this guidance should be applied retrospectively and are effective for fiscal years,
and interim periods within those years, beginning after December 15, 2011. Early adoption is
permitted and the amendments do not require any transition disclosures. The adoption of this
guidance will not have an effect on the Companys results of operations or financial position but
will require expansion of the Companys financial statement presentation.
10
Table of Contents
Note 2 Investment Securities
The following tables summarize the amortized cost and fair value of the available-for-sale and
held-to-maturity investment securities portfolio at September 30, 2011 and December 31, 2010 and
the corresponding amounts of unrealized gains and losses therein.
September 30, 2011 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | unrealized | unrealized | Estimated | |||||||||||||
cost | gains | losses | fair value | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Available-for-sale |
||||||||||||||||
Obligations of U.S. Government agencies |
$ | 175,434 | 1,160 | (29 | ) | 176,565 | ||||||||||
Obligations of states and
political subdivisions |
89,267 | 4,597 | (14 | ) | 93,850 | |||||||||||
Mortgage backed securities |
||||||||||||||||
U.S. GSEs* MBS residential |
159,498 | 4,540 | (124 | ) | 163,914 | |||||||||||
U.S. GSEs CMO |
115,230 | 1,777 | (353 | ) | 116,654 | |||||||||||
Other CMO |
2,293 | | (195 | ) | 2,098 | |||||||||||
Corporate bonds |
44,891 | 129 | (1,165 | ) | 43,855 | |||||||||||
$ | 586,613 | 12,203 | (1,880 | ) | 596,936 | |||||||||||
* | Government sponsored entities |
December 31, 2010 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | unrealized | unrealized | Estimated | |||||||||||||
cost | gains | losses | fair value | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Available-for-sale |
||||||||||||||||
Obligations of U.S. Government agencies |
$ | 202,153 | 527 | (1,763 | ) | 200,917 | ||||||||||
Obligations of states and
political subdivisions |
67,137 | 318 | (3,337 | ) | 64,118 | |||||||||||
Mortgage backed securities |
||||||||||||||||
U.S. GSEs MBS residential |
141,524 | 1,880 | (1,679 | ) | 141,725 | |||||||||||
U.S. GSEs CMO |
139,208 | 1,756 | (630 | ) | 140,334 | |||||||||||
Other CMO |
3,382 | 50 | (359 | ) | 3,073 | |||||||||||
Corporate bonds |
36,551 | 467 | (885 | ) | 36,133 | |||||||||||
Equity securities |
2 | | | 2 | ||||||||||||
$ | 589,957 | 4,998 | (8,653 | ) | 586,302 | |||||||||||
Held-to-maturity |
||||||||||||||||
Obligations of states and
political subdivisions |
$ | 310 | 1 | | 311 | |||||||||||
$ | 310 | 1 | | 311 | ||||||||||||
11
Table of Contents
Proceeds from sales of securities and the associated gains (losses) for the three and nine
months ended September 30, 2011 and 2010 were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||
Proceeds |
$ | 6,962 | $ | 21,543 | $ | 66,946 | $ | 41,907 | ||||||||
Gross Gains |
233 | 822 | 672 | 1,178 | ||||||||||||
Gross Losses |
| (70 | ) | (358 | ) | (284 | ) |
The amortized cost and fair value of the investment securities portfolio excluding equity
securities are shown by expected maturity. Expected maturities may differ from contractual
maturities if borrowers have the right to call or prepay obligations with or without call or
prepayment penalties.
September 30, 2011 | ||||||||
Amortized | Estimated | |||||||
cost | fair value | |||||||
(Dollars in thousands) | ||||||||
Available-for-sale: |
||||||||
One year or less |
$ | 161 | 163 | |||||
After one year through five years |
24,155 | 24,175 | ||||||
After five years through ten years |
75,124 | 76,401 | ||||||
After ten years |
487,173 | 496,197 | ||||||
$ | 586,613 | 596,936 | ||||||
12
Table of Contents
The following tables summarize the investment securities with unrealized losses at September
30, 2011 and December 31, 2010, aggregated by investment category and length of time the individual
securities have been in a continuous unrealized loss position.
September 30, 2011 | ||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
Estimated | Unrealized | Estimated | Unrealized | Estimated | Unrealized | |||||||||||||||||||
fair value | loss | fair value | loss | fair value | loss | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Temporarily impaired |
||||||||||||||||||||||||
Obligations
of U.S. Government agencies |
$ | 15,499 | 25 | 2,587 | 4 | 18,086 | 29 | |||||||||||||||||
Obligations of states and
political subdivisions |
1,299 | 14 | | | 1,299 | 14 | ||||||||||||||||||
Mortgage backed securities |
||||||||||||||||||||||||
U.S. GSEs MBS residential |
7,725 | 28 | 427 | 96 | 8,152 | 124 | ||||||||||||||||||
U.S. GSEs CMO |
25,125 | 296 | 5,476 | 57 | 30,601 | 353 | ||||||||||||||||||
Other CMO |
291 | 16 | 1,315 | 160 | 1,606 | 176 | ||||||||||||||||||
Corporate bonds |
11,711 | 447 | 11,441 | 718 | 23,152 | 1,165 | ||||||||||||||||||
$ | 61,650 | 826 | 21,246 | 1,035 | 82,896 | 1,861 | ||||||||||||||||||
Other-than-temporarily impaired |
||||||||||||||||||||||||
Mortgage backed securities |
||||||||||||||||||||||||
Other CMO |
$ | | | 492 | 19 | 492 | 19 | |||||||||||||||||
$ | 61,650 | 826 | 21,738 | 1,054 | 83,388 | 1,880 | ||||||||||||||||||
December 31, 2010 | ||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
Estimated | Unrealized | Estimated | Unrealized | Estimated | Unrealized | |||||||||||||||||||
fair value | loss | fair value | loss | fair value | loss | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Temporarily impaired |
||||||||||||||||||||||||
Obligations
of U.S. Government agencies |
$ | 99,306 | 1,763 | | | 99,306 | 1,763 | |||||||||||||||||
Obligations of states and
political subdivisions |
45,906 | 3,245 | 2,309 | 92 | 48,215 | 3,337 | ||||||||||||||||||
Mortgage backed securities |
||||||||||||||||||||||||
U.S. GSEs MBS residential |
81,783 | 1,538 | 509 | 141 | 82,292 | 1,679 | ||||||||||||||||||
U.S. GSEs CMO |
46,776 | 630 | | | 46,776 | 630 | ||||||||||||||||||
Other CMO |
| | 2,085 | 359 | 2,085 | 359 | ||||||||||||||||||
Corporate bonds |
22,385 | 481 | 3,880 | 404 | 26,265 | 885 | ||||||||||||||||||
$ | 296,156 | 7,657 | 8,783 | 996 | 304,939 | 8,653 | ||||||||||||||||||
Other-Than-Temporary Impairment September 30, 2011
Management evaluates securities for other-than-temporary impairment (OTTI) at least on a
quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.
Investment securities classified as available-for-sale or held-to-maturity are generally evaluated
for OTTI under the provisions of ASC 320-10, Investments Debt and Equity Securities. In
determining OTTI, management considers many factors, including: (1) the length of time and the
extent to which the fair value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions,
and (4) whether the entity has the intent to sell the debt security or more likely than not will be
required to sell the debt security before its anticipated recovery. The assessment of whether an
other-than-temporary decline exists involves a high degree of subjectivity and judgment and is
based on the information available to management at a point in time.
13
Table of Contents
When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity
intends to sell the security or it is more likely than not it will be required to sell the security
before recovery of its amortized cost basis. If an entity intends to sell or it is more likely
than not it will be required to sell the security before recovery of its amortized cost basis, the
OTTI shall be recognized in earnings equal to the entire difference between the investments
amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to
sell the security and it is not more likely than not that the entity will be required to sell the
security before recovery of its amortized cost basis, the OTTI shall be separated into the amount
representing the credit loss and the amount related to all other factors. The amount of the total
OTTI related to the credit loss is determined based on the present value of cash flows expected to
be collected and is recognized in earnings. The amount of the total OTTI related to other factors
is recognized in other comprehensive income or loss, net of applicable taxes. The previous amortized
cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the
investment.
As of September 30, 2011, the Companys security portfolio consisted of 358 securities, 45 of which
were in an unrealized loss position. Of these securities with unrealized losses, 97.71% were
related to the Companys mortgage-backed and corporate securities as discussed below.
Mortgage-backed Securities
At September 30, 2011, $280,568 or approximately 99.26% of the Companys mortgage-backed securities
were issued by U.S. government-sponsored entities and agencies, primarily the Federal National
Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac) and
the Government National Mortgage Association (Ginnie Mae), institutions which the government has
affirmed its commitment to support. Because the decline in fair value is attributable to changes
in interest rates and illiquidity, and not credit quality, and because the Company does not have
the intent to sell these mortgage-backed securities and it is likely that it will not be required
to sell the securities before their anticipated recovery, the Company does not consider these
securities to be other-than-temporarily impaired at September 30, 2011.
The Companys mortgage-backed securities portfolio also includes five non-agency collateralized
mortgage obligations with a market value of $2,098 which had unrealized losses of approximately
$195 at September 30, 2011. These non-agency securities were rated AAA at purchase.
At September 30, 2011, four of these non-agency securities were rated below investment grade and a
cash flow analysis was performed. According to our model, none of these securities were considered
other-than-temporarily impaired. The assumptions used in the model include expected future default
rates, loss severity and prepayments. The model also takes into account the structure of the
security including credit support. Based on these assumptions the model calculates and projects
the timing and amount of interest and principal payments expected for the security. In addition
the model was used to stress each security, or make assumptions more severe than expected
activity, to determine the degree to which assumptions could deteriorate before the security could
no longer fully support repayment. During the first quarter of 2011, one of the non-agency
mortgage-backed securities was considered to be other-than-temporarily impaired with an OTTI loss
of $127, of which $62 was recognized in earnings. An additional OTTI loss of $64, of which $40 was
recognized in earnings, was taken on this security during the third quarter of 2011. This security
remains classified as available-for-sale at September 30, 2011.
14
Table of Contents
At September 30, 2011, the fair values of three collateralized mortgage obligations totaling $1,722
were measured using Level 3 inputs because the market for them has become illiquid, as indicated by
few, if any, trades during the period. The discount rates
used in the valuation model were based on a yield of 10% that the market would require for
collateralized mortgage obligations with maturities and risk characteristics similar to the
securities being measured.
Corporate Securities
The Company holds twenty-two corporate securities totaling $43,855, of which fourteen had an
unrealized loss of $1,165. The Companys unrealized losses on corporate securities relate primarily
to its investment in single issuer corporate and corporate trust preferred securities. At
September 30, 2011, seven securities to three issuers were not rated. None of the issuers were in
default but in January of 2011 the Company was notified that two trust preferred securities
totaling $1,250 to two issuers not rated had elected to defer interest payments. The issuers are
both bank holding companies with operations in the Southeast. One of the issuers of $1,000 of such
securities announced a successful capital raise which was completed in the first quarter of 2011
and during the third quarter this issuer brought current all interest previously deferred. The
Company considered several factors including the financial condition and near term prospects of the
issuers and concluded that the decline in fair value was primarily attributable to temporary
illiquidity and the financial crisis affecting these markets and not necessarily the expected cash
flows of the individual securities. Although one issuer continues to indicate they will defer
payments going forward, the Company has considered the capital position of the subsidiary banks,
the liquidity of the holding company, the existence and severity of publicly available regulatory
agreements, and the fact that these deferrals are coming after the most severe impact of the
national and regional recession. The prospect of capital formation in the current market,
improving operating results of the industry overall have caused the Company to conclude that a
return to normal subsidiary dividends and thus interest payments on the debt for these issuers is
reasonably assured at this time. Because the Company does not have the intent to sell these
securities and it is likely that it will not be required to sell the securities before their
anticipated recovery, the Company does not consider these securities to be other-than-temporarily
impaired at September 30, 2011.
15
Table of Contents
At September 30, 2011, the fair values of four corporate securities totaling $2,446 were measured
using Level 3 inputs because the market for them has become illiquid, as indicated by few, if any,
trades during the period. The discount rates used in the valuation model were based on a yield of
10% or current spreads to U.S. Treasury rates of long-term corporate debt obligations with
maturities and risk characteristics similar to the subordinated debentures being measured. An
additional adjustment to the discount rate for illiquidity in the market for subordinated
debentures was not considered necessary based on the illiquidity premium already present in the
spreads used to estimate the discount rate.
The table below presents a roll forward of the credit losses recognized in earnings for the nine
month period ended September 30, 2011.
Beginning balance, January 1, 2011 |
$ | 571 | ||
Amounts related to credit loss for which
an other-than-temporary impairment
was not previously recognized |
| |||
Additions/Subtractions |
||||
Amounts realized for securities sold during the period |
| |||
Amounts related to securities for which the company
intends to sell or that it will be more likely than not
that the company will be required to sell prior to
recovery of amortized cost basis |
| |||
Reductions for increase in cash flows expected to be
collected that are recognized over the remaining
life of the security |
| |||
Increases to the amount related to the credit
loss for which other-than-temporary impairment was
previously recognized |
102 | |||
Ending balance, September 30, 2011 |
$ | 673 | ||
Total other-than-temporary impairment recognized in accumulated other comprehensive income for
the nine month period was $89 as of September 30, 2011.
Other-Than-Temporary Impairment September 30, 2010
As of September 30, 2010, the Companys security portfolio consisted of 305 securities, 52 of which
were in an unrealized loss position. The majority or 95.00% of unrealized losses were related to
the Companys mortgage-backed and corporate securities. Based on managements evaluation at
September 30, 2010, one security was determined to be other-than-temporarily impaired, as discussed
below.
16
Table of Contents
Mortgage-backed Securities
At September 30, 2010, $256,375 or approximately 98.52% of the Companys mortgage-backed securities
were issued by U.S. government-sponsored entities and agencies, primarily the Federal National
Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac) and
the Government National Mortgage Association (Ginnie Mae), institutions which the government has
affirmed its commitment to support. Because the decline in fair value is attributable to changes
in interest rates and illiquidity, and not credit quality, and because the Company does not have
the intent to sell these mortgage-backed securities and it is likely that it will not be required
to sell the securities before their anticipated recovery, the Company does not consider these
securities to be other-than-temporarily impaired at September 30, 2010.
The Companys mortgage-backed securities portfolio also includes five non-agency collateralized
mortgage obligations with a market value of $3,858, of which four had unrealized losses of
approximately $87 at September 30, 2010. These non-agency securities were rated AAA at purchase.
At September 30, 2010, four of these non-agency securities were rated below investment grade and a
cash flow analysis was performed to evaluate OTTI. The assumptions used in the model include
expected future default rates, loss severity and prepayments. The model also takes into account
the structure of the security including credit support. Based on these assumptions the model
calculates and projects the timing and amount of interest and principal payments expected for the
security. In addition the model was used to stress each security, or make assumptions more
severe than expected activity, to determine the degree to which assumptions could deteriorate
before the security could no longer fully support repayment. Upon completion of the September 30,
2010 analysis, our model indicated other-than-temporary impairment on one of these securities.
This security had OTTI losses of $96 and remained classified as available-for-sale at September 30,
2010.
At September 30, 2010, the fair values of three collateralized mortgage obligations totaling $2,925
were measured using Level 3 inputs because the market for them has become illiquid, as indicated by
few, if any, trades during the period. The discount rates used in the valuation model were based
on a yield that the market would require for collateralized mortgage obligations with maturities
and risk characteristics similar to the securities being measured.
Corporate Securities
The Company holds nineteen corporate securities totaling $32,990, of which seven had an unrealized
loss of $273. The Companys unrealized losses on corporate securities relate primarily to its
investment in single issuer corporate and corporate trust preferred securities. At September 30,
2010 two of the corporate securities were rated below investment grade. The Company considered
several factors including the financial condition and near term prospects of the issuers and
concluded that the decline in fair value was primarily attributable to temporary illiquidity and
the financial crisis affecting these markets and not necessarily the expected cash flows of the
individual securities. Because the Company does not have the intent to sell these securities and
it is likely that it will not be required to sell the securities before their anticipated recovery,
the Company does not consider these securities to be other-than-temporarily impaired at September
30, 2010.
17
Table of Contents
At September 30, 2010, the fair values of twelve corporate securities totaling $10,919 were
measured using Level 3 inputs because the market for them has become illiquid, as indicated by few,
if any, trades during the period. The discount rates used in the valuation model were based on
current spreads to U.S. Treasury rates of long-term corporate debt obligations with maturities and
risk characteristics similar to the subordinated debentures being measured. An additional
adjustment to the discount rate for illiquidity in the market for subordinated debentures was not
considered necessary based on the illiquidity premium already present in the spreads used to
estimate the discount rate.
The table below presents a roll forward of the credit losses recognized in earnings for the nine
month period ended September 30, 2010.
Beginning balance, January 1, 2010 |
$ | 475 | ||
Amounts related to credit loss for which
an other-than-temporary impairment
was not previously recognized |
96 | |||
Additions/Subtractions |
||||
Amounts realized for securities sold during the period |
| |||
Amounts related to securities for which the company
intends to sell or that it will be more likely than not
that the company will be required to sell prior to
recovery of amortized cost basis |
| |||
Reductions for increase in cash flows expected to be
collected that are recognized over the remaining
life of the security |
| |||
Increases to the amount related to the credit
loss for which other-than-temporary impairment was
previously recognized |
| |||
Ending balance, September 30, 2010 |
$ | 571 | ||
Total other-than-temporary impairment recognized in accumulated other comprehensive income for the
nine month period ended September 30, 2010 was not material.
18
Table of Contents
Note 3 Loans
The following table summarizes loans at September 30, 2011 and December 31, 2010.
September 30, 2011 | December 31, 2010 | |||||||
(Dollars in thousands) | ||||||||
Commercial, financial, and agricultural |
$ | 160,567 | 189,128 | |||||
Real estate: |
||||||||
Commercial |
338,205 | 327,458 | ||||||
Residential |
158,826 | 157,680 | ||||||
Acquisition, development
and construction |
165,745 | 182,412 | ||||||
Consumer installment |
15,338 | 17,412 | ||||||
$ | 838,681 | 874,090 | ||||||
Less allowance for loan losses |
29,339 | 26,657 | ||||||
Less deferred loan origination fees (costs) |
(96 | ) | (5 | ) | ||||
$ | 809,438 | 847,438 | ||||||
19
Table of Contents
The following tables present the allowance for loan losses and the recorded investment in
loans by portfolio segment and based on impairment method as of September 30, 2011 and December 31,
2010.
September 30, 2011 | ||||||||||||||||||||||||||||||||
Commercial, | ||||||||||||||||||||||||||||||||
Financial, and | CRE - Owner | CRE - Non Owner | Residential | ADC | ADC | |||||||||||||||||||||||||||
Agricultural | Occupied | Occupied | Real Estate | CSRA | Other | Consumer | Total | |||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||||||||||||||
Beginning balance |
$ | 3,463 | 3,921 | 4,777 | 5,372 | 5,097 | 3,396 | 631 | 26,657 | |||||||||||||||||||||||
Charge-offs |
1,154 | 621 | 621 | 1,605 | 1,255 | 2,260 | 526 | 8,042 | ||||||||||||||||||||||||
Recoveries |
154 | 5 | | 23 | | 6 | 338 | 526 | ||||||||||||||||||||||||
Provision |
1,391 | 2,926 | 1,117 | 1,510 | 1,067 | 2,122 | 65 | 10,198 | ||||||||||||||||||||||||
Ending balance |
$ | 3,854 | 6,231 | 5,273 | 5,300 | 4,909 | 3,264 | 508 | 29,339 | |||||||||||||||||||||||
Ending balance attributable to loans: |
||||||||||||||||||||||||||||||||
Individually evaluated for impairment |
125 | | | 35 | | | | 160 | ||||||||||||||||||||||||
Collectively evaluated for impairment |
3,729 | 6,231 | 5,273 | 5,265 | 4,909 | 3,264 | 508 | 29,179 | ||||||||||||||||||||||||
$ | 3,854 | 6,231 | 5,273 | 5,300 | 4,909 | 3,264 | 508 | 29,339 | ||||||||||||||||||||||||
Loans: |
||||||||||||||||||||||||||||||||
Individually evaluated for impairment |
2,396 | 4,231 | 6,494 | 4,584 | 4,646 | 4,547 | 133 | 27,031 | ||||||||||||||||||||||||
Collectively evaluated for impairment |
158,171 | 187,596 | 139,884 | 154,242 | 134,944 | 21,608 | 15,205 | 811,650 | ||||||||||||||||||||||||
$ | 160,567 | 191,827 | 146,378 | 158,826 | 139,590 | 26,155 | 15,338 | 838,681 | ||||||||||||||||||||||||
December 31, 2010 | ||||||||||||||||||||||||||||||||
Commercial, | ||||||||||||||||||||||||||||||||
Financial, and | CRE - Owner | CRE - Non Owner | Residential | ADC | ADC | |||||||||||||||||||||||||||
Agricultural | Occupied | Occupied | Real Estate | CSRA | Other | Consumer | Total | |||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||||||||||||||
Ending balance attributable to loans: |
||||||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | | 3 | 210 | 42 | 156 | 1,063 | | 1,474 | |||||||||||||||||||||||
Collectively evaluated for impairment |
3,463 | 3,918 | 4,567 | 5,330 | 4,941 | 2,333 | 631 | 25,183 | ||||||||||||||||||||||||
$ | 3,463 | 3,921 | 4,777 | 5,372 | 5,097 | 3,396 | 631 | 26,657 | ||||||||||||||||||||||||
Loans: |
||||||||||||||||||||||||||||||||
Individually evaluated for impairment |
1,744 | 519 | 3,407 | 4,971 | 4,492 | 9,915 | | 25,048 | ||||||||||||||||||||||||
Collectively evaluated for impairment |
187,384 | 183,944 | 139,588 | 152,709 | 144,078 | 23,927 | 17,412 | 849,042 | ||||||||||||||||||||||||
$ | 189,128 | 184,463 | 142,995 | 157,680 | 148,570 | 33,842 | 17,412 | 874,090 | ||||||||||||||||||||||||
20
Table of Contents
The following tables present loans individually evaluated for impairment by class of loans as
of September 30, 2011 and December 31, 2010.
September 30, 2011 | ||||||||||||||||||||||||
Allowance for | Average | Cash Basis | ||||||||||||||||||||||
Unpaid Principal | Recorded | Loan Losses | Recorded | Interest Income | Interest Income | |||||||||||||||||||
Balance (1) | Investment | Allocated | Investment | Recognized | Recognized | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
With no related allowance recorded: (2) |
||||||||||||||||||||||||
Commercial, financial, and
agricultural: |
||||||||||||||||||||||||
Commerical |
$ | 100 | 100 | | 100 | | | |||||||||||||||||
Financial |
| | | | | | ||||||||||||||||||
Agricultural |
1,299 | 1,299 | | 1,324 | 31 | 31 | ||||||||||||||||||
Equity lines |
732 | 732 | | 732 | | | ||||||||||||||||||
Other |
| | | | | | ||||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||
Owner occupied |
4,231 | 4,231 | | 4,530 | 13 | 13 | ||||||||||||||||||
Non Owner occupied |
6,494 | 6,499 | | 6,487 | | | ||||||||||||||||||
Residential real estate: |
||||||||||||||||||||||||
Secured by first liens |
4,185 | 4,187 | | 4,736 | 13 | 13 | ||||||||||||||||||
Secured by junior liens |
239 | 239 | | 428 | 9 | 9 | ||||||||||||||||||
Acquisition, development and
construction: |
||||||||||||||||||||||||
Residential |
| | | | | | ||||||||||||||||||
Other |
9,193 | 9,193 | | 11,921 | | | ||||||||||||||||||
Consumer |
133 | 133 | | 133 | | | ||||||||||||||||||
26,606 | 26,613 | | 30,391 | 66 | 66 | |||||||||||||||||||
With an allowance recorded: |
||||||||||||||||||||||||
Commercial, financial, and
agricultural: |
||||||||||||||||||||||||
Commerical |
72 | 72 | 10 | 3 | | | ||||||||||||||||||
Financial |
| | | | | | ||||||||||||||||||
Agricultural |
193 | 193 | 115 | 88 | | | ||||||||||||||||||
Equity lines |
| | | | | | ||||||||||||||||||
Other |
| | | | | | ||||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||
Owner occupied |
| | | | | | ||||||||||||||||||
Non Owner occupied |
| | | | | | ||||||||||||||||||
Residential real estate: |
||||||||||||||||||||||||
Secured by first liens |
160 | 161 | 35 | 160 | | | ||||||||||||||||||
Secured by junior liens |
| | | | | | ||||||||||||||||||
Acquisition, development and
construction: |
||||||||||||||||||||||||
Residential |
| | | | | | ||||||||||||||||||
Other |
| | | | | | ||||||||||||||||||
Consumer |
| | | | | | ||||||||||||||||||
425 | 426 | 160 | 251 | | | |||||||||||||||||||
$ | 27,031 | 27,039 | 160 | 30,642 | 66 | 66 | ||||||||||||||||||
(1) | The Unpaid Principal Balance is net of any partial charge-offs. |
|
(2) | No specific allowance for credit losses is allocated to these loans since they are
sufficiently collateralized or had charge-offs. |
21
Table of Contents
December 31, 2010 | ||||||||||||
Allowance for | ||||||||||||
Unpaid Principal | Recorded | Loan Losses | ||||||||||
Balance | Investment | Allocated | ||||||||||
(Dollars in thousands) | ||||||||||||
With no related allowance recorded: |
||||||||||||
Commercial, financial, and
agricultural: |
||||||||||||
Commerical |
$ | 8 | 8 | | ||||||||
Financial |
| | | |||||||||
Agricultural |
1,016 | 1,016 | | |||||||||
Equity lines |
720 | 720 | | |||||||||
Other |
| | | |||||||||
Commercial real estate: |
||||||||||||
Owner occupied |
390 | 390 | | |||||||||
Non Owner occupied |
180 | 180 | | |||||||||
Residential real estate: |
||||||||||||
Secured by first liens |
1,742 | 1,742 | | |||||||||
Secured by junior liens |
| | | |||||||||
Acquisition, development and
construction: |
||||||||||||
Residential |
636 | 636 | | |||||||||
Other |
5,987 | 5,987 | | |||||||||
Consumer |
| | | |||||||||
10,679 | 10,679 | | ||||||||||
With an allowance recorded: |
||||||||||||
Commercial, financial, and
agricultural: |
||||||||||||
Commerical |
| | | |||||||||
Financial |
| | | |||||||||
Agricultural |
| | | |||||||||
Equity lines |
| | | |||||||||
Other |
| | | |||||||||
Commercial real estate: |
||||||||||||
Owner occupied |
129 | 129 | 3 | |||||||||
Non Owner occupied |
3,227 | 3,230 | 210 | |||||||||
Residential real estate: |
||||||||||||
Secured by first liens |
3,229 | 3,234 | 42 | |||||||||
Secured by junior liens |
| | | |||||||||
Acquisition, development and
construction: |
||||||||||||
Residential |
156 | 156 | | |||||||||
Other |
7,628 | 7,638 | 1,219 | |||||||||
Consumer |
| | | |||||||||
14,369 | 14,387 | 1,474 | ||||||||||
$ | 25,048 | 25,066 | 1,474 | |||||||||
22
Table of Contents
Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance
homogeneous loans that are collectively evaluated for impairment and individually classified
impaired loans.
The following tables present the recorded investment in nonaccrual and loans past due over 90 days
still on accrual by class of loans as of September 30, 2011 and December 31, 2010.
September 30, 2011 | ||||||||
Loans Past Due | ||||||||
90 Days or More | ||||||||
Nonaccrual | Still Accruing | |||||||
(Dollars in thousands) | ||||||||
Commercial, financial, and
agricultural: |
||||||||
Commerical |
$ | 382 | | |||||
Financial |
| | ||||||
Agricultural |
1,912 | | ||||||
Equity lines |
1,553 | | ||||||
Other |
| | ||||||
Commercial real estate: |
||||||||
Owner occupied |
4,363 | | ||||||
Non Owner occupied |
5,345 | | ||||||
Residential real estate: |
||||||||
Secured by first liens |
3,904 | | ||||||
Secured by junior liens |
311 | | ||||||
Acquisition, development and
construction: |
||||||||
Residential |
4 | | ||||||
Other |
9,368 | | ||||||
Consumer |
270 | | ||||||
$ | 27,412 | | ||||||
23
Table of Contents
December 31, 2010 | ||||||||
Loans Past Due | ||||||||
90 Days or More | ||||||||
Nonaccrual | Still Accruing | |||||||
(Dollars in thousands) | ||||||||
Commercial, financial, and
agricultural: |
||||||||
Commerical |
$ | 190 | | |||||
Financial |
| | ||||||
Agricultural |
1,250 | | ||||||
Equity lines |
1,136 | | ||||||
Other |
348 | | ||||||
Commercial real estate: |
||||||||
Owner occupied |
1,207 | | ||||||
Non Owner occupied |
2,586 | | ||||||
Residential real estate: |
||||||||
Secured by first liens |
4,551 | 69 | ||||||
Secured by junior liens |
183 | | ||||||
Acquisition, development and
construction: |
||||||||
Residential |
1,275 | | ||||||
Other |
10,678 | | ||||||
Consumer |
301 | | ||||||
$ | 23,705 | 69 | ||||||
The following tables present the aging of the recorded investment in past due loans as of
September 30, 2011 and December 31, 2010 by class of loans.
September 30, 2011 | ||||||||||||||||||||||||
30 - 89 Days | 90 Days or | Nonaccrual | Total | Loans Not | ||||||||||||||||||||
Past Due | More Past Due | Loans | Past Due | Past Due | Total | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Commercial, financial, and
agricultural: |
||||||||||||||||||||||||
Commerical |
$ | 148 | | 382 | 530 | 95,669 | 96,199 | |||||||||||||||||
Financial |
| | | | 3,307 | 3,307 | ||||||||||||||||||
Agricultural |
136 | | 1,912 | 2,048 | 12,627 | 14,675 | ||||||||||||||||||
Equity lines |
139 | | 1,553 | 1,692 | 37,915 | 39,607 | ||||||||||||||||||
Other |
| | | | 6,779 | 6,779 | ||||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||
Owner occupied |
2,187 | | 4,363 | 6,550 | 185,282 | 191,832 | ||||||||||||||||||
Non Owner occupied |
1,176 | | 5,345 | 6,521 | 139,852 | 146,373 | ||||||||||||||||||
Residential real estate: |
||||||||||||||||||||||||
Secured by first liens |
1,058 | | 3,904 | 4,962 | 144,310 | 149,272 | ||||||||||||||||||
Secured by junior liens |
47 | | 311 | 358 | 9,196 | 9,554 | ||||||||||||||||||
Acquisition, development and
construction: |
||||||||||||||||||||||||
Residential |
| | 4 | 4 | 38,934 | 38,938 | ||||||||||||||||||
Other |
1,972 | | 9,368 | 11,340 | 115,467 | 126,807 | ||||||||||||||||||
Consumer |
167 | | 270 | 437 | 14,901 | 15,338 | ||||||||||||||||||
$ | 7,030 | | 27,412 | 34,442 | 804,239 | 838,681 | ||||||||||||||||||
24
Table of Contents
December 31, 2010 | ||||||||||||||||||||||||
30 - 89 Days | 90 Days or | Nonaccrual | Total | Loans Not | ||||||||||||||||||||
Past Due | More Past Due | Loans | Past Due | Past Due | Total | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Commercial, financial, and
agricultural: |
||||||||||||||||||||||||
Commerical |
$ | 170 | | 190 | 360 | 117,786 | 118,146 | |||||||||||||||||
Financial |
| | | | 3,588 | 3,588 | ||||||||||||||||||
Agricultural |
| | 1,250 | 1,250 | 12,940 | 14,190 | ||||||||||||||||||
Equity lines |
214 | | 1,136 | 1,350 | 41,687 | 43,037 | ||||||||||||||||||
Other |
| | 348 | 348 | 9,819 | 10,167 | ||||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||
Owner occupied |
317 | | 1,207 | 1,524 | 182,939 | 184,463 | ||||||||||||||||||
Non Owner occupied |
521 | | 2,586 | 3,107 | 139,888 | 142,995 | ||||||||||||||||||
Residential real estate: |
||||||||||||||||||||||||
Secured by first liens |
2,417 | 69 | 4,551 | 7,037 | 140,238 | 147,275 | ||||||||||||||||||
Secured by junior liens |
155 | | 183 | 338 | 10,067 | 10,405 | ||||||||||||||||||
Acquisition, development and
construction: |
||||||||||||||||||||||||
Residential |
| | 1,275 | 1,275 | 41,538 | 42,813 | ||||||||||||||||||
Other |
121 | | 10,678 | 10,799 | 128,800 | 139,599 | ||||||||||||||||||
Consumer |
31 | | 301 | 332 | 17,080 | 17,412 | ||||||||||||||||||
$ | 3,946 | 69 | 23,705 | 27,720 | 846,370 | 874,090 | ||||||||||||||||||
Troubled Debt Restructurings:
The Company has troubled debt restructurings (TDRs) with a balance of $4,572 and $3,514 included in
impaired loans at September 30, 2011 and December 31, 2010, respectively. Specific reserves of $45
and $80 have been allocated to customers whose loan terms have been modified in TDRs as of
September 30, 2011 and December 31, 2010. The Company is not committed to lend additional amounts
as of September 30, 2011 and December 31, 2010 to customers with outstanding loans that are
classified as TDRs. The following table presents TDRs as of September 30, 2011.
25
Table of Contents
September 30, 2011 | ||||||||||||
Pre-Modification | Post-Modification | |||||||||||
Number of | Outstanding | Outstanding | ||||||||||
Loans | Recorded Investment | Recorded Investment | ||||||||||
(Dollars in thousands) | ||||||||||||
Troubled Debt Restructurings: |
||||||||||||
Commercial, financial, and
agricultural: |
||||||||||||
Commerical |
1 | $ | 72 | $ | 72 | |||||||
Financial |
| | | |||||||||
Agricultural |
| | | |||||||||
Equity lines |
| | | |||||||||
Other |
| | | |||||||||
Commercial real estate: |
||||||||||||
Owner occupied |
3 | 711 | 580 | |||||||||
Non Owner occupied |
5 | 2,527 | 2,047 | |||||||||
Residential real estate: |
||||||||||||
Secured by first liens |
7 | 2,121 | 1,739 | |||||||||
Secured by junior liens |
2 | 143 | 83 | |||||||||
Acquisition, development and
construction: |
||||||||||||
Residential |
| | | |||||||||
Other |
| | | |||||||||
Consumer |
2 | 53 | 51 | |||||||||
Total |
20 | $ | 5,627 | $ | 4,572 | |||||||
During the periods ended September 30, 2011 and 2010, the terms of certain loans were modified
as TDRs. The modification of the terms of such loans included one or a combination of the
following: a reduction of the stated interest rate of the loan; an extension of the maturity date
at a stated rate of interest lower than the current market rate for new debt with similar risk; or
a permanent reduction of the recorded investment in the loan.
Modifications involving a reduction of the stated interest rate of the loan were for rate
reductions ranging from 2.00% to 5.00%. Modifications involving an extension of the maturity date
were for periods ranging from 2 months to 84 months.
26
Table of Contents
The following table presents loans by class modified as TDRs that occurred during the three and
nine months ended September 30, 2011 and 2010.
Three Months Ended September 30, 2011 |
Three Months Ended September 30, 2010 |
|||||||||||||||||||||||
Pre-Modification | Post-Modification | Pre-Modification | Post-Modification | |||||||||||||||||||||
Number of | Outstanding | Outstanding | Number of | Outstanding | Outstanding | |||||||||||||||||||
Loans | Recorded Investment | Recorded Investment | Loans | Recorded Investment | Recorded Investment | |||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||
Troubled Debt Restructurings: |
||||||||||||||||||||||||
Commercial, financial, and
agricultural: |
||||||||||||||||||||||||
Commerical |
1 | $ | 72 | $ | 72 | 1 | $ | 126 | $ | 117 | ||||||||||||||
Financial |
| | | | | | ||||||||||||||||||
Agricultural |
| | | | | | ||||||||||||||||||
Equity lines |
| | | | | | ||||||||||||||||||
Other |
| | | | | | ||||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||
Owner occupied |
1 | 193 | 187 | | | | ||||||||||||||||||
Non Owner occupied |
| | | 1 | 196 | 185 | ||||||||||||||||||
Residential real estate: |
||||||||||||||||||||||||
Secured by first liens |
1 | 161 | 161 | | | | ||||||||||||||||||
Secured by junior liens |
| | | 1 | 48 | 44 | ||||||||||||||||||
Acquisition, development and
construction: |
||||||||||||||||||||||||
Residential |
| | | | | | ||||||||||||||||||
Other |
| | | | | | ||||||||||||||||||
Consumer |
1 | 33 | 32 | | | | ||||||||||||||||||
Total |
4 | $ | 459 | $ | 452 | 3 | $ | 370 | $ | 346 | ||||||||||||||
Nine Months Ended September 30, 2011 |
Nine Months Ended September 30, 2010 |
|||||||||||||||||||||||
Pre-Modification | Post-Modification | Pre-Modification | Post-Modification | |||||||||||||||||||||
Number of | Outstanding | Outstanding | Number of | Outstanding | Outstanding | |||||||||||||||||||
Loans | Recorded Investment | Recorded Investment | Loans | Recorded Investment | Recorded Investment | |||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||
Troubled Debt Restructurings: |
||||||||||||||||||||||||
Commercial, financial, and
agricultural: |
||||||||||||||||||||||||
Commerical |
1 | $ | 72 | $ | 72 | 1 | $ | 126 | $ | 117 | ||||||||||||||
Financial |
| | | | | | ||||||||||||||||||
Agricultural |
| | | | | | ||||||||||||||||||
Equity lines |
| | | | | | ||||||||||||||||||
Other |
| | | | | | ||||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||
Owner occupied |
3 | 711 | 580 | 1 | 131 | 130 | ||||||||||||||||||
Non Owner occupied |
1 | 76 | 75 | 3 | 1,831 | 1,802 | ||||||||||||||||||
Residential real estate: |
||||||||||||||||||||||||
Secured by first liens |
5 | 1,044 | 552 | | | | ||||||||||||||||||
Secured by junior liens |
2 | 143 | 83 | 1 | 48 | 44 | ||||||||||||||||||
Acquisition, development and
construction: |
||||||||||||||||||||||||
Residential |
| | | | | | ||||||||||||||||||
Other |
| | | | | | ||||||||||||||||||
Consumer |
2 | 53 | 51 | | | | ||||||||||||||||||
Total |
14 | $ | 2,099 | $ | 1,413 | 6 | $ | 2,136 | $ | 2,093 | ||||||||||||||
The TDRs described above increased the allowance for loan losses by $170 and $410 for the
three and nine months ended September 30, 2011 and resulted in charge-offs of $125 and $365 for the
three and nine months ended September 30, 2011, respectively.
For the three and nine months ended September 30, 2010, the TDRs described above increased the
allowance for loan losses by $0 and $350, respectively. There were no charge-offs taken on these
TDRs for the three and nine months ended September 30, 2010.
27
Table of Contents
Charge-offs on such loans are factored into the rolling historical loss rate, which is used in the
calculation of the allowance for loan losses.
A loan is considered to be in payment default once it is 90 days contractually past due under the
modified terms. During the nine months ended September 30, 2011, one residential real estate loan
with a recorded investment of $10 at September 30, 2011 defaulted resulting in a $36 charge-off
during the third quarter of 2011. There were no TDRs with payment defaults during the nine months
ended September 30, 2010. As of September 30, 2011, all other TDRs are performing according to
their modified terms.
The terms of certain other loans were modified during the nine month period ended September 30,
2011 and 2010 that did not meet the definition of a TDR. These loans have a total recorded
investment as of September 30, 2011 and 2010 of $10,453 and $8,210, respectively. The modification
of these loans involved either a modification of the terms of a loan to borrowers who were not
experiencing financial difficulties or a delay in a payment that was considered to be
insignificant.
In order to determine whether a borrower is experiencing financial difficulty, an evaluation is
performed of the probability that the borrower will be in payment default on any of its debt in the
foreseeable future without the modification. This evaluation is performed under the Companys
internal underwriting policy.
Certain loans which were modified during the nine month period ended September 30, 2011 and 2010
and did not meet the definition of a TDR, as the modification was a delay in a payment that was
considered to be insignificant, had delays in payment ranging from 30 days to 4 months.
Credit Quality Indicators:
The Company categorizes loans into risk categories based on relevant information about the ability
of borrowers to service their debt such as: current financial information, historical payment
experience, credit documentation, public information, and current economic trends, among other
factors. The Company, through its originating account officer, places an initial credit risk
rating on every loan. An annual review and analysis of loan relationships (irrespective of loan
types included in the overall relationship) with total related exposure of $500 or greater is
performed by the Credit Administration department in order to update risk ratings given current
available information. The Company uses the following definitions for risk ratings.
Watch: Loans classified as watch have a potential weakness that deserves managements close
attention. If left uncorrected, these potential weaknesses may result in deterioration of
the repayment prospects for the loan or of the institutions credit position at some future
date.
Substandard: Loans classified as substandard are inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if
any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the
liquidation of the debt. They are characterized by the distinct possibility that the
institution will sustain some loss if the deficiencies are not corrected.
28
Table of Contents
Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified
as substandard, with the added characteristic that the weaknesses make collection or
liquidation in full, on the basis of currently existing facts, conditions, and values,
highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above described
process are considered to be pass rated loans. As of September 30, 2011 and December 31, 2010, and
based on the most recent analysis performed, the risk category of loans by class of loans is as
follows.
September 30, 2011 | ||||||||||||||||
Pass | Watch | Substandard | Doubtful | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Commercial, financial, and
agricultural: |
||||||||||||||||
Commerical |
$ | 87,763 | 5,127 | 3,309 | | |||||||||||
Financial |
954 | 2,353 | | | ||||||||||||
Agricultural |
10,102 | 1,927 | 2,646 | | ||||||||||||
Equity lines |
36,692 | 1,114 | 1,801 | | ||||||||||||
Other |
5,846 | 328 | 605 | | ||||||||||||
Commercial real estate: |
||||||||||||||||
Owner occupied |
163,709 | 13,622 | 14,501 | | ||||||||||||
Non Owner occupied |
114,798 | 23,861 | 7,714 | | ||||||||||||
Residential real estate: |
||||||||||||||||
Secured by first liens |
129,525 | 11,057 | 8,690 | | ||||||||||||
Secured by junior liens |
8,230 | 926 | 398 | | ||||||||||||
Acquisition, development and
construction: |
||||||||||||||||
Residential |
37,974 | 760 | 204 | | ||||||||||||
Other |
93,399 | 10,888 | 22,520 | | ||||||||||||
Consumer |
14,466 | 397 | 475 | | ||||||||||||
$ | 703,458 | 72,360 | 62,863 | | ||||||||||||
29
Table of Contents
December 31, 2010 | ||||||||||||||||
Pass | Watch | Substandard | Doubtful | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Commercial, financial, and
agricultural: |
||||||||||||||||
Commerical |
$ | 103,337 | 8,074 | 6,735 | | |||||||||||
Financial |
1,103 | 2,485 | | | ||||||||||||
Agricultural |
9,343 | 2,609 | 2,238 | | ||||||||||||
Equity lines |
39,144 | 1,915 | 1,978 | | ||||||||||||
Other |
8,893 | 926 | 348 | | ||||||||||||
Commercial real estate: |
||||||||||||||||
Owner occupied |
157,155 | 22,329 | 4,979 | | ||||||||||||
Non Owner occupied |
119,160 | 16,579 | 7,256 | | ||||||||||||
Residential real estate: |
||||||||||||||||
Secured by first liens |
124,261 | 14,837 | 8,177 | | ||||||||||||
Secured by junior liens |
9,418 | 708 | 279 | | ||||||||||||
Acquisition, development and
construction: |
||||||||||||||||
Residential |
38,374 | 2,721 | 1,718 | | ||||||||||||
Other |
92,514 | 23,285 | 23,800 | | ||||||||||||
Consumer |
16,247 | 567 | 598 | | ||||||||||||
$ | 718,949 | 97,035 | 58,106 | | ||||||||||||
Note 4 Fair Value Measurements
Fair value is the exchange price that would be received to sell an asset or paid to transfer a
liability (exit price) in the principal or most advantageous market for the asset or liability in
an orderly transaction between market participants at the measurement date. The fair value
hierarchy requires an entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. The standard describes three levels of inputs that
may be used to measure fair values:
Level 1:
|
Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. | |
Level 2:
|
Significant other observable inputs other than Level 1 prices, such as quoted market prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data. | |
Level 3:
|
Significant unobservable inputs that reflect a companys own assumptions about the assumptions that market participants would use in pricing an asset or liability. |
30
Table of Contents
In determining the appropriate levels, the Company used the following methods and significant
assumptions to estimate the fair value of each type of financial instrument:
Investment Securities: The fair values for investment securities are determined by quoted
market prices, if available (Level 1). For securities where quoted prices are not available, fair
values are calculated based on market prices of similar securities (Level 2). For securities where
quoted prices or market prices of similar securities are not available, fair values are calculated
using discounted cash flows or other market indicators (Level 3). Discounted cash flows are
calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities,
volatility, credit spread and optionality. During times when trading is more liquid, broker quotes
are used (if available) to validate the model. Rating agency and industry research reports as well
as defaults and deferrals on individual securities are reviewed and incorporated into the
calculations.
Interest Rate Swap Derivatives: The fair value of interest rate swap derivatives is
determined based on discounted cash flow valuation models using observable market data as of the
measurement date (Level 2 inputs). The fair value adjustment is included in other liabilities.
Mortgage Banking Derivatives: The fair value of mortgage banking derivatives is determined
by individual third party sales contract prices for the specific loans held at each reporting
period end (Level 2 inputs). The fair value adjustment is included in other assets.
Loans Held for Sale: Loans held for sale are carried at fair value, as determined by
outstanding commitments, from third party investors (Level 2).
Impaired Loans: The fair value of impaired loans with specific allocations of the
allowance for loan losses is generally based on recent real estate appraisals. These appraisals may
utilize a single valuation approach or a combination of approaches including comparable sales and
the income approach. Adjustments are routinely made in the appraisal process by the appraisers to
adjust for differences between the comparable sales and income data available. Such adjustments are
typically significant and result in a Level 3 classification of the inputs for determining fair
value.
Investments in Tax Credits: The fair values for tax credits are measured on a recurring
basis and are based upon total credits and deductions remaining to be allocated and total estimated
credits and deductions to be allocated (Level 3 inputs).
Other Real Estate Owned: The fair value of other real estate owned is generally based on
recent real estate appraisals. These appraisals may utilize a single valuation approach or a
combination of approaches including comparable sales and the income approach. Adjustments are
routinely made in the appraisal process by the appraisers to adjust for differences between the
comparable sales and income data available. Such adjustments are typically significant and result
in a Level 3 classification of the inputs for determining fair value.
31
Table of Contents
Assets and Liabilities Measured on a Recurring Basis
The following tables present the balances of assets and liabilities measured at fair value on a
recurring basis by level within the hierarchy as of September 30, 2011 and December 31, 2010.
Quoted Prices in | Significant | |||||||||||||||
Active Markets for | Significant Other | Unobservable | ||||||||||||||
September 30, | Identical Assets | Observable Inputs | Inputs | |||||||||||||
2011 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Assets: |
||||||||||||||||
Available-for-sale securities
|
||||||||||||||||
Obligations of U.S. Government agencies |
$ | 176,565 | 53,030 | 123,535 | | |||||||||||
Obligations of states and
political subdivisions |
93,850 | | 93,850 | | ||||||||||||
Mortgage-backed securities
|
||||||||||||||||
U.S. GSEs MBS residential |
163,914 | | 163,478 | 436 | ||||||||||||
U.S. GSEs CMO |
116,654 | | 116,654 | | ||||||||||||
Other CMO |
2,098 | | 376 | 1,722 | ||||||||||||
Corporate bonds |
43,855 | | 41,409 | 2,446 | ||||||||||||
Total available-for-sale securities |
$ | 596,936 | 53,030 | 539,302 | 4,604 | |||||||||||
Tax credits |
296 | | | 296 | ||||||||||||
Loans held for sale |
23,504 | | 23,504 | | ||||||||||||
Mortgage banking derivatives |
49 | | 49 | | ||||||||||||
$ | 620,785 | 53,030 | 562,855 | 4,900 | ||||||||||||
Liabilities: |
||||||||||||||||
Interest rate swap derivatives |
2,044 | | 2,044 | | ||||||||||||
$ | 2,044 | | 2,044 | | ||||||||||||
32
Table of Contents
Quoted Prices in | Significant | |||||||||||||||
Active Markets for | Significant Other | Unobservable | ||||||||||||||
December 31, | Identical Assets | Observable Inputs | Inputs | |||||||||||||
2010 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Available-for-sale securities |
||||||||||||||||
Obligations of U.S. Government agencies |
$ | 200,917 | 31,405 | 169,512 | | |||||||||||
Obligations of states and political subdivisions |
64,118 | | 64,118 | | ||||||||||||
Mortgage-backed securities |
||||||||||||||||
U.S. GSEs MBS residential |
141,725 | | 141,216 | 509 | ||||||||||||
U.S. GSEs CMO |
140,334 | 985 | 139,349 | | ||||||||||||
Other CMO |
3,073 | | 663 | 2,410 | ||||||||||||
Corporate bonds |
36,133 | | 25,395 | 10,738 | ||||||||||||
Equity securities |
2 | 2 | | | ||||||||||||
Total available-for-sale securities |
$ | 586,302 | 32,392 | 540,253 | 13,657 | |||||||||||
Tax credits |
356 | | | 356 | ||||||||||||
Loans held for sale |
12,775 | | 12,775 | | ||||||||||||
Mortgage banking derivatives |
2 | | 2 | | ||||||||||||
Total |
$ | 599,435 | 32,392 | 553,030 | 14,013 | |||||||||||
During the nine months ended September 30, 2011, six U.S. agency securities with a market
value of $15,564 were transferred out of Level 2 and into Level 1. During the first quarter of
2011, eight corporate securities with a market value of $7,278 were transferred out of Level 3 and
into Level 2 based on observable market data for these securities due to increased market activity
for these securities. The tables below present a reconciliation and income statement
classification of gains and losses for all assets measured at fair value on a recurring basis using
significant unobservable inputs (Level 3) as of September 30, 2011 and 2010.
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Fair Value Measurements Using Significant Unobservable Inputs | ||||||||||||
(Level 3) | ||||||||||||
Available-for-sale | ||||||||||||
Tax credits | Securities | Total | ||||||||||
(Dollars in thousands) | ||||||||||||
Beginning balance, January 1, 2011 |
$ | 356 | 13,657 | 14,013 | ||||||||
Total gains or losses (realized/unrealized) |
||||||||||||
Included in earnings |
||||||||||||
Gain (loss) on sales |
| | | |||||||||
Other-than-temporary impairment |
| (102 | ) | (102 | ) | |||||||
Amortization of tax credit investment |
(60 | ) | | (60 | ) | |||||||
Included in other comprehensive income |
| (1,673 | ) | (1,673 | ) | |||||||
Purchases, sales, issuances and settlements |
||||||||||||
Purchases |
| | | |||||||||
Sales |
| | | |||||||||
Issuances |
| | | |||||||||
Settlements |
| | | |||||||||
Transfers into Level 3 |
| | | |||||||||
Transfers out of Level 3 |
| (7,278 | ) | (7,278 | ) | |||||||
Ending balance, September 30, 2011 |
$ | 296 | 4,604 | 4,900 | ||||||||
Fair Value Measurements Using Significant Unobservable Inputs | ||||||||||||
(Level 3) | ||||||||||||
Available-for-sale | ||||||||||||
Tax credits | Securities | Total | ||||||||||
(Dollars in thousands) | ||||||||||||
Beginning balance, January 1, 2010 |
$ | 435 | 14,365 | 14,800 | ||||||||
Total gains or losses (realized/unrealized) |
||||||||||||
Included in earnings |
||||||||||||
Gain (loss) on sales |
| (122 | ) | (122 | ) | |||||||
Other-than-temporary impairment |
| (96 | ) | (96 | ) | |||||||
Amortization of tax credit investment |
(60 | ) | | (60 | ) | |||||||
Included in other comprehensive income |
| 1,940 | 1,940 | |||||||||
Purchases, sales, issuances and settlements |
||||||||||||
Purchases |
| | | |||||||||
Sales |
| (1,790 | ) | (1,790 | ) | |||||||
Issuances |
| | | |||||||||
Settlements |
| | | |||||||||
Transfers into Level 3 |
| | | |||||||||
Transfers out of Level 3 |
| | | |||||||||
Ending balance, September 30, 2010 |
$ | 375 | 14,297 | 14,672 | ||||||||
34
Table of Contents
Assets and Liabilities Measured on a Non-Recurring Basis
Assets and liabilities measured at fair value on a non-recurring basis as of September 30, 2011 and
December 31, 2010 are summarized below.
Quoted Prices in | Significant | |||||||||||||||
Active Markets for | Significant Other | Unobservable | ||||||||||||||
September 30, | Identical Assets | Observable Inputs | Inputs | |||||||||||||
2011 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Assets: |
||||||||||||||||
Impaired loans |
||||||||||||||||
Commercial, financial, and agricultural |
$ | 240 | | | 240 | |||||||||||
Real estate: |
||||||||||||||||
Commercial |
7,196 | | | 7,196 | ||||||||||||
Residential |
3,174 | | | 3,174 | ||||||||||||
Acquisition, development and
construction |
7,498 | | | 7,498 | ||||||||||||
Consumer installment |
82 | | | 82 | ||||||||||||
Total impaired loans (1) |
$ | 18,190 | | | 18,190 | |||||||||||
Other real estate owned |
7,859 | | | 7,859 | ||||||||||||
Total |
$ | 26,049 | | | 26,049 | |||||||||||
(1) | Includes loans directly charged down to fair value. |
Quoted Prices in | ||||||||||||||||
Active Markets for | Significant | |||||||||||||||
Identical | Significant Other | Unobservable | ||||||||||||||
December 31, | Assets | Observable Inputs | Inputs | |||||||||||||
2010 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Assets: |
||||||||||||||||
Impaired loans |
||||||||||||||||
Commercial, financial, and agricultural |
$ | | | | | |||||||||||
Real estate: |
||||||||||||||||
Commercial |
3,143 | | | 3,143 | ||||||||||||
Residential |
3,187 | | | 3,187 | ||||||||||||
Acquisition, development and
construction |
6,565 | | | 6,565 | ||||||||||||
Consumer installment |
| | | | ||||||||||||
Total impaired loans |
$ | 12,895 | | | 12,895 | |||||||||||
Other real estate owned |
7,751 | | | 7,751 | ||||||||||||
Total |
$ | 20,646 | | | 20,646 | |||||||||||
35
Table of Contents
The following represents impairment charges recognized during the period:
Impaired loans, which are measured for impairment using the fair value of collateral for collateral
dependent loans, had a carrying amount of $18,350, with a valuation allowance of $160, resulting in
an additional provision for loan losses of $1,057 and $3,934 for the three and nine months ended
September 30, 2011, respectively. Impaired loans that are not carried at fair value had a carrying
amount of $8,681 at September 30, 2011.
As of December 31, 2010, impaired loans had a carrying amount of $14,369, with a valuation
allowance of $1,474, resulting in an additional provision for loan losses of $6,831 for the year
ending 2010. Impaired loans that are not carried at fair value had a carrying amount of $10,679 at
December 31, 2010.
Other real estate owned, which is carried at lower of cost or fair value, was $7,859 which
consisted of the outstanding balance of $10,371, less a valuation allowance of $2,512, resulting in
a write down of $563 and $811 for the three and nine months ended September 30, 2011, respectively.
As of December 31, 2010, other real estate owned was $7,751 which consisted of the outstanding
balance of $9,866, less a valuation allowance of $2,115, resulting in a write down of $1,909 for
the year ending 2010.
Disclosure of fair value information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value is required. Fair value
estimates are made at a specific point in time, based on relevant market information and
information about the financial instrument. These estimates do not reflect any premium or discount
that could result from offering for sale at one time the Companys entire holdings of a particular
financial instrument.
Because no market exists for a portion of the Companys financial instruments, fair value estimates
are based on judgments regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These estimates are
subjective in nature and involve uncertainties and matters of significant judgment and, therefore,
cannot be determined with precision. Changes in assumptions could significantly affect the
estimates.
Fair value estimates are based on existing on and off-balance sheet financial instruments without
attempting to estimate the value of anticipated future business and the value of assets and
liabilities that are not considered financial instruments. In addition, the tax ramifications
related to the realization of the unrealized gains and losses can have a significant effect on fair
value estimates and have not been considered in any of the estimates.
The assumptions used in the estimation of the fair value of the Companys financial instruments are
explained below. Where quoted market prices are not available, fair values are based on estimates
using discounted cash flow and other valuation techniques. Discounted cash flows can be
significantly affected by the assumptions used, including the discount rate and estimates of future
cash flows. The following fair value estimates
cannot be substantiated by comparison to independent markets and should not be considered
representative of the liquidation value of the Companys financial instruments, but rather a
good-faith estimate of the fair value of financial instruments held by the Company. Certain
financial instruments and all nonfinancial instruments are excluded from disclosure requirements.
36
Table of Contents
The following methods and assumptions were used by the Company in estimating the fair value of its
financial instruments:
(a) | Cash and Cash Equivalents |
||
Fair value equals the carrying value of such assets due to their nature. |
|||
(b) | Loans, net |
||
The fair value of loans is calculated using discounted cash flows by loan type. The
discount rate used to determine the present value of the loan portfolio is an estimated
market rate that reflects the credit and interest rate risk inherent in the loan
portfolio without considering widening credit spreads due to market illiquidity. The
estimated maturity is based on the Companys historical experience with repayments
adjusted to estimate the effect of current market conditions. The carrying amount of
related accrued interest receivable, due to its short-term nature, approximates its
fair value, is not significant and is not disclosed. The carrying amount of real
estate loans originated for sale approximates their fair value. The allowance for loan
losses is considered a reasonable discount for credit risk. |
|||
(c) | Deposits |
||
Fair values for certificates of deposit have been determined using discounted cash
flows. The discount rate used is based on estimated market rates for deposits of
similar remaining maturities. The carrying amounts of all other deposits, due to their
short-term nature, approximate their fair values. The carrying amount of related
accrued interest payable, due to its short-term nature, approximates its fair value, is
not significant and is not disclosed. |
|||
(d) | Securities Sold Under Repurchase Agreements |
||
Fair value approximates the carrying value of such liabilities due to their short-term
nature. |
|||
(e) | Advances from Federal Home Loan Bank |
||
The fair value of the Federal Home Loan Bank (FHLB) advances is obtained from the
FHLB and is calculated by discounting contractual cash flows using an estimated
interest rate based on the current rates available to the Company for debt of similar
remaining maturities and collateral terms. |
|||
(f) | Subordinated debentures |
||
The fair value for subordinated debentures is calculated based upon current market
spreads to LIBOR for debt of similar remaining maturities and collateral terms. |
37
Table of Contents
(g) | Commitments |
||
The difference between the carrying values and fair values of commitments to extend
credit are not significant and are not disclosed. |
The carrying amounts and estimated fair values of the Companys financial instruments at September
30, 2011 and December 31, 2010 are as follows:
September 30, 2011 | ||||||||
Carrying | Estimated | |||||||
amount | fair value | |||||||
(Dollars in thousands) | ||||||||
Financial assets: |
||||||||
Cash and cash
equivalents |
$ | 83,252 | 83,252 | |||||
Loans, net |
832,942 | 832,913 | ||||||
Financial liabilities: |
||||||||
Deposits with stated maturities |
414,968 | 418,317 | ||||||
Deposits without stated maturities |
986,304 | 986,304 | ||||||
Securities sold under
repurchase agreements |
540 | 540 | ||||||
Advances from FHLB |
52,000 | 58,734 | ||||||
Subordinated debentures |
22,947 | 15,120 |
December 31, 2010 | ||||||||
Carrying | Estimated | |||||||
amount | fair value | |||||||
(Dollars in thousands) | ||||||||
Financial assets: |
||||||||
Cash and cash
equivalents |
$ | 65,115 | 65,115 | |||||
Loans, net |
860,213 | 858,505 | ||||||
Financial liabilities: |
||||||||
Deposits with stated maturities |
487,810 | 491,867 | ||||||
Deposits without stated maturities |
922,927 | 922,927 | ||||||
Securities sold under
repurchase agreements |
818 | 818 | ||||||
Advances from FHLB |
60,000 | 64,615 | ||||||
Subordinated debentures |
22,947 | 14,978 |
Note 5 Interest Rate Swap Derivatives
The Company utilizes interest rate swap agreements as part of its asset liability management
strategy to help manage its interest rate risk position. The notional amount of the interest rate
swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by
reference to the notional amount and the other terms of the individual interest rate swap
agreements.
38
Table of Contents
During May 2011, the Company entered into two interest rate swaps with notional amounts totaling
$10 million, which were designated as cash flow hedges of certain subordinated debentures and were
determined to be fully effective during all periods presented. As such, no amount of
ineffectiveness has been included in net income. Therefore, the aggregate fair value of the swaps
is recorded in other liabilities with changes in fair value recorded in other comprehensive income.
The Company expects the hedges to remain highly effective during the remaining terms of the swaps.
Summary information about the interest rate swaps designated as cash flow hedges as of September
30, 2011 is as follows:
September 30, 2011 | ||||
(Dollars in thousands) | ||||
Notional Amounts |
$ | 10,000 | ||
Weighted average pay rates |
5.35 | % | ||
Weighted average receive rates |
1.65 | % | ||
Weigted average maturity |
16.75 years | |||
Unrealized losses |
$ | 2,044 |
The swaps are forward starting and have effective dates of March 15, 2012 and June 15, 2012.
No interest income (expense) has been recorded on these swap transactions during 2011. When
interest income (expense) is recorded it will be reported as a component of interest expense in
other borrowings.
If the fair value falls below specified levels, the Company is required to pledge collateral
against these derivative contract liabilities. As of September 30, 2011, the Company had pledged
$1,984 with the counterparty. Under certain circumstances, including a downgrade of its credit
rating below specified levels, the counterparty is required to pledge collateral against these
derivative contract liabilities. As of September 30, 2011, no collateral had been received from
the counterparty.
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Table of Contents
Note 6 Comprehensive Income
Other comprehensive income for the Company consists of changes in net unrealized gains and losses
on investment securities available-for-sale and interest rate swap derivatives. The following
table presents total comprehensive income as of September 30, 2011 and 2010.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||
Net income |
$ | 2,924 | $ | 1,835 | $ | 8,031 | $ | 4,710 | ||||||||
Other comprehensive income: |
||||||||||||||||
Net change in unrealized derivative losses |
(1,938 | ) | | (2,044 | ) | | ||||||||||
Net change in unrealized investment gains |
6,588 | 1,556 | 14,245 | 9,899 | ||||||||||||
Reclassification adjustment for investment
gains, net of OTTI included in net
income |
(210 | ) | (679 | ) | (267 | ) | (841 | ) | ||||||||
Tax effect |
(1,727 | ) | (332 | ) | (4,643 | ) | (3,457 | ) | ||||||||
Other comprehensive income |
2,713 | 545 | 7,292 | 5,601 | ||||||||||||
Total comprehensive income |
$ | 5,637 | $ | 2,380 | $ | 15,323 | $ | 10,311 | ||||||||
Note 7 Dividends
The Company suspended the payment of quarterly cash dividends on the Companys common stock
effective April 22, 2009. The Company considered the action prudent in order to maintain its
capital position in the current state of the economy. The Company plans to reinstate the dividend
payment at an appropriate time once economic conditions improve and stabilize.
40
Table of Contents
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
(Dollar amounts are expressed in thousands unless otherwise noted)
Overview
Southeastern Bank Financial Corporation (the Company) operates two wholly-owned subsidiaries in
the Augusta-Richmond County, GA-SC metropolitan area Georgia Bank & Trust Company (GB&T) and
Southern Bank & Trust (SB&T), a South Carolina State Bank (collectively, the Banks). GB&T was
organized by a group of local citizens and commenced business on August 28, 1989, with one branch
location. Today, it is Augustas largest community banking company operating nine full service
branches in Augusta, Martinez, and Evans, Georgia. Mortgage origination offices are located in
Augusta and Savannah, Georgia. SB&T was organized by the Company during 2005 and 2006 and opened
its main office on September 12, 2006. Today it operates three full service branches in North
Augusta and Aiken, South Carolina. The Companys Operations Center is located in Martinez, Georgia
and services both subsidiaries.
On August 2, 2011, the Company filed an Interagency Bank Merger Act Application with the
appropriate regulatory agencies for approval of a merger between GB&T and SB&T with GB&T the
surviving entity. The consolidation is intended to lower the Companys cost structure while
allowing GB&T and the former SB&T to continue with operating autonomy in areas that impact customer
relationships. On October 20, 2011, the regulatory agencies approved the merger. Management
anticipates the two banks will merge operations in the fourth quarter of 2011. The Company
anticipates, but has not quantified, cost savings to occur in the areas of information technology,
audit and regulatory exam expense and other back office operational costs.
The Companys primary market includes Richmond and Columbia Counties in Georgia and Aiken County in
South Carolina, all part of the Augusta-Richmond County, GA-SC metropolitan statistical area (MSA).
The Augusta market area has a diversified economy based principally on government, public
utilities, health care, manufacturing, construction, and wholesale and retail trade. Augusta is
one of the leading medical centers in the Southeast.
The Companys services include the origination of residential and commercial real estate loans,
construction and development loans, and commercial and consumer loans. The Company also offers a
variety of deposit programs, including noninterest-bearing demand, interest checking, money
management, savings, and time deposits. In the primary market area, Augusta-Richmond County, GA-SC
metropolitan area, the Company had 19.46% of all deposits and was the second largest depository
institution at June 30, 2011, as cited from the Federal Deposit Insurance Corporations website.
Securities sold under repurchase agreements are also offered. Additional services include wealth
management, trust, retail investment, and mortgage. As a matter of practice, most mortgage loans
are sold in the secondary market; however, some mortgage loans are
placed in the portfolio based on asset/liability management strategies. The Company continues to
concentrate on increasing its market share through various new deposit and loan products and other
financial services and by focusing on customer relationship management philosophy. The Company is
committed to building life-long relationships with its customers, employees, shareholders, and the
communities it serves.
41
Table of Contents
The Companys primary source of income is from its lending activities followed by interest income
from its investment activities, service charges and fees on deposits, and gain on sales of mortgage
loans in the secondary market. Interest income on loans decreased during the first nine months of
2011 as compared to the first nine months of 2010 and is due primarily to decreased loan volume.
Interest income on investment securities increased primarily due to a significantly larger
investment portfolio but the increase was limited by declining yields on the portfolio. The
average portfolio yield has decreased in part due to declining market interest rates which caused
higher yielding securities to be called. Decreases in non-sufficient funds (NSF) income on
retail checking accounts, due primarily to decreased economic activity, were mostly offset by
increases in ATM/Debit card income for the first nine months of 2011. For the nine month period,
gain on sales of loans decreased and resulted primarily from decreased mortgage refinancing
activity during the first nine months of the year. Investment securities gains decreased on a net
basis during the first nine months of 2011 as compared to the same period last year due in part to
selected sales of higher duration securities to reduce exposure to rising interest rates and a
settlement of $149 with an institution regarding premium amortization on certain bonds purchased in
2010.
Table 1 Selected Financial Data
September 30, | December 31, | September 30, | ||||||||||
2011 | 2010 | 2010 | ||||||||||
(Dollars in thousands) | ||||||||||||
Assets |
$ | 1,609,426 | $ | 1,607,105 | $ | 1,646,725 | ||||||
Investment securities |
596,936 | 586,612 | 541,859 | |||||||||
Loans |
838,777 | 874,095 | 888,596 | |||||||||
Deposits |
1,401,272 | 1,410,737 | 1,435,353 | |||||||||
Annualized return on average total
assets |
0.67 | % | 0.44 | % | 0.41 | % | ||||||
Annualized return on average equity |
10.18 | % | 6.81 | % | 6.33 | % |
The Company continues to focus on the net interest margin, regulatory capital levels,
liquidity management, asset quality and risk mitigation. Asset levels have remained relatively
flat due to the Companys focus on improving regulatory capital levels and have been driven by a
$9,465 decrease in deposits during the first nine months of 2011, most of which occurred in the
second quarter. Loan balances have trended lower as demand has remained weak while investment
portfolio balances have increased over the comparable periods in order to obtain an improvement in
net interest income.
42
Table of Contents
Annualized return on average total assets and annualized return on average equity have improved in
2011 as compared to 2010. The increased returns were due primarily to increased net interest
income and somewhat decreased provision for loan losses. Net income for the nine months ended
September 30, 2011 was $8,031 compared to $4,710 for the same period in 2010. The effects of the
economic downturn continue to negatively affect financial results primarily through a lack of loan
demand and a continued elevated level of provision for loan losses.
The Company meets its liquidity needs by managing cash and due from banks, federal funds purchased
and sold, maturity of investment securities, principal repayments from mortgage-backed securities,
and draws on lines of credit. Additionally, liquidity can be managed through structuring deposit
and loan maturities. The Company funds loan and investment growth with core deposits, securities
sold under repurchase agreements, Federal Home Loan Bank advances and other wholesale funding
including brokered certificates of deposit. During inflationary periods, interest rates generally
increase and operating expenses generally rise. When interest rates rise, variable rate loans and
investments produce higher earnings; however, deposit and other borrowings interest expense also
rise. The Company monitors its interest rate risk as it applies to net interest income in a ramp
up and down annually 400 basis points (4.00%) scenario and as it applies to economic value of
equity in a shock up and down 400 basis points (4.00%) scenario. The Company monitors operating
expenses through responsibility center budgeting.
Forward-Looking Statements
Southeastern Bank Financial Corporation may, from time to time, make written or oral
forward-looking statements, including statements contained in the Companys filings with the
Securities and Exchange Commission (the Commission) and its reports to shareholders. Statements
made in such documents, other than those concerning historical information, should be considered
forward-looking and subject to various risks and uncertainties. Such forward-looking statements
are made based upon managements belief as well as assumptions made by, and information currently
available to, management pursuant to safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. The Companys actual results may differ materially from the results
anticipated in forward-looking statements due to a variety of factors, including unanticipated
changes in the Companys local economies, the national economy, governmental monetary and fiscal
policies, deposit levels, loan demand, loan collateral values and securities portfolio values;
difficulties in interest rate risk management; the effects of competition in the banking business;
difficulties in expanding the Companys business into new markets; changes in governmental
regulation relating to the banking industry, including but not limited to the Dodd-Frank Wall
Street Reform and Consumer Protection Act; failure of assumptions underlying the establishment of
reserves for loan losses, including the value of collateral underlying delinquent loans; and other
factors. The Company cautions that such factors are not exclusive. The Company does not undertake
to update any forward-looking statement that may be made from time to time by, or on behalf of, the
Company.
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Table of Contents
Critical Accounting Estimates
The accounting and financial reporting policies of the Company and its subsidiaries conform to
accounting principles generally accepted in the United States of America and to general practices
within the banking industry. Of these policies, management has identified the allowance for loan
losses, determining the fair values of financial instruments including other real estate owned,
derivatives, investment securities, and other-than-temporary impairment as critical accounting
estimates that requires difficult, subjective judgment and are important to the presentation of the
financial condition and results of operations of the Company.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan losses charged to
expense, which affects the Companys earnings directly. Loans are charged against the allowance
for loan losses when management believes that the collectability of the principal is unlikely.
Subsequent recoveries are added to the allowance. The allowance is an amount that reflects
managements estimate of the level of probable incurred losses in the portfolio. Factors
considered by management in determining the adequacy of the allowance include, but are not limited
to: (1) detailed reviews of individual loans; (2) historical and current trends in loan charge-offs
for the various portfolio segments evaluated; (3) the level of the allowance in relation to total
loans and to historical loss levels; (4) levels and trends in non-performing and past due loans;
(5) collateral values of properties securing loans; and (6) managements assessment of economic
conditions. The Companys Board of Directors reviews the recommendations of management regarding
the appropriate level for the allowance for loan losses based upon these factors.
The provision for loan losses is the charge to operating earnings necessary to maintain an adequate
allowance for loan losses. The Company has developed policies and procedures for evaluating the
overall quality of its loan portfolio and the timely identification of problem credits. Management
continues to review these policies and procedures and makes further improvements as needed. The
adequacy of the Companys allowance for loan losses and the effectiveness of the Companys internal
policies and procedures are also reviewed periodically by the Companys regulators and the
Companys internal loan review personnel. The Companys regulators may advise the Company to
recognize additions to the allowance based upon their judgments about information available to them
at the time of their examination. Such regulatory guidance is considered, and the Company may
recognize additions to the allowance as a result.
The Company continues to refine the methodology on which the level of the allowance for loan losses
is based, by comparing historical loss ratios utilized to actual experience and by classifying
loans for analysis based on similar risk characteristics. Cash receipts for accruing loans are
applied to principal and interest under the contractual terms of the loan agreement; however, cash
receipts on impaired and nonaccrual loans for which the accrual of interest has been discontinued
are applied to principal and interest income depending upon the overall risk of principal loss to
the Company.
44
Table of Contents
Fair Value of Financial Instruments
A significant portion of the Companys assets are financial instruments carried at fair value. This
includes securities available-for-sale, loans held for sale, certain impaired loans, tax credits,
derivatives and other real estate owned. At September 30, 2011 and December 31, 2010 the percentage
of total assets measured at fair value was 40.19% and 38.58%, respectively. The majority of assets
carried at fair value are based on either quoted market prices or market prices for similar
instruments. At September 30, 2011 4.78% of assets measured at fair value were based on significant
unobservable inputs. This represents approximately 1.92% of the Companys total assets. See Note 4
Fair Value Measurements in the Notes to Consolidated Financial Statements herein for additional
disclosures regarding the fair value of financial instruments.
Other Real Estate Owned
Assets acquired through or instead of loan foreclosure are initially recorded at fair value less
estimated costs to sell when acquired, establishing a new cost basis. If fair value declines
subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs
after acquisition are expensed. Costs related to the development and improvement of real estate
owned are capitalized.
Interest Rate Swap Derivatives
The fair value of interest rate swap derivatives is determined based on discounted cash flow
valuation models using observable market data as of the measurement date. The fair value
adjustment is included in other liabilities. See Note 1 Summary of Significant Accounting
Policies in the Notes to Consolidated Financial Statements herein for additional disclosures
regarding the fair value of financial instruments.
Investment Securities
The fair values for available-for-sale securities are generally based upon quoted market prices or
observable market prices for similar instruments. These values take into account recent market
activity as well as other market observable data such as interest rate, spread and prepayment
information. When market observable data is not available, which generally occurs due to the lack
of liquidity for certain securities, the valuation of the security is subjective and may involve
substantial judgment. The Company conducts periodic reviews to identify and evaluate each
available-for-sale security that has an unrealized loss for other-than-temporary impairment. An
unrealized loss exists when the fair value of an individual security is less than its amortized
cost basis. The primary factors the Company considers in determining whether an impairment is
other-than-temporary are the financial condition and near-term prospects of the issuer, including
any specific events which may influence the operations of the issuer and whether the Company
intends to sell the security or it is more likely than not it will be required to sell the security
before recovery of its amortized cost basis. As of September 30, 2011, the Company had
approximately $4,604 of available-for-sale securities, which is
approximately 0.29% of total assets, valued using unobservable inputs (Level 3). These securities
were primarily non-agency mortgage-backed securities and subordinated debentures issued by
financial institutions.
45
Table of Contents
Results of Operations
Net income for the first nine months of 2011 was $8,031, an increase of $3,321 compared with net
income of $4,710 for the first nine months of 2010. The increase in net income was primarily a
result of an increase in net interest income of $4,486 due primarily to declining costs of deposits
and an increased level of investments.
Noninterest income decreased a net of $1,777 or 11.29% for the nine months ended September 30, 2011
and resulted primarily from decreases in gain on sales of loans and investment securities offset in
part by an increase in retail investment income and cash surrender value of bank-owned life
insurance. Gain on sales of loans decreased $1,429 or 22.14% as mortgage production decreased in
the first nine months of 2011. Retail investment income increased $160 or 12.82% due to increased
brokerage activity. Net investment securities gains year to date are $369 as compared to net
securities gains of $937 in 2010.
Noninterest expense totaled $30,460 for the nine months ended September 30, 2011, a decrease of
$517 or 1.67% compared to the same period ended September 30, 2010. Notable changes included a
decrease in FDIC insurance of $279 and a decrease in salaries and other personnel expense of $316.
Table 2 Selected Balance Sheet Data
September 30, | December 31, | Variance | ||||||||||||||
2011 | 2010 | Amount | % | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Cash, due from banks
and interest-bearing deposits |
$ | 83,252 | $ | 65,115 | $ | 18,137 | 27.85 | % | ||||||||
Investment securities |
596,936 | 586,612 | 10,324 | 1.76 | % | |||||||||||
Loans |
838,777 | 874,095 | (35,318 | ) | (4.04 | %) | ||||||||||
Other real estate owned |
7,859 | 7,751 | 108 | 1.39 | % | |||||||||||
Assets |
1,609,426 | 1,607,105 | 2,321 | 0.14 | % | |||||||||||
Deposits |
1,401,272 | 1,410,737 | (9,465 | ) | (0.67 | %) | ||||||||||
Securities sold under repurchase agreements |
540 | 818 | (278 | ) | (33.99 | %) | ||||||||||
Advances from Federal Home Loan Bank |
52,000 | 60,000 | (8,000 | ) | (13.33 | %) | ||||||||||
Liabilities |
1,494,027 | 1,507,147 | (13,120 | ) | (0.87 | %) | ||||||||||
Stockholders equity |
115,399 | 99,958 | 15,441 | 15.45 | % |
Table 2 highlights significant changes in the balance sheet at September 30, 2011 as compared
to December 31, 2010. Total assets increased $2,321 and reflect an increase in investment
securities of $10,324 coupled with an increase in cash, due from banks and interest bearing
deposits of $18,137 and an increase in bank-owned life insurance of $6,268. Total liabilities
decreased $13,120 and reflect a decrease in deposits of $9,465 and a decrease in advances from
Federal Home Loan Bank of $8,000. Somewhat offsetting this decrease was a $4,623 increase in
accrued interest payable and other liabilities, which reflects $2,044 in unrealized losses on
interest rate swap derivatives.
46
Table of Contents
The Company has continued to maintain a relatively high level of liquid funds in light of current
economic conditions and volatility in the banking industry but has elected to invest a portion of
these funds and funds obtained through deposit growth and loan repayments into the investment
portfolio. Loan demand was weak during the first nine months of 2011 and resulted in a decrease in
loans of $35,318. The change in investment securities during the year included maturities and calls
of bonds and selected sales of high duration securities for interest rate risk management purposes.
These changes coupled with reinvestment of proceeds contributed to the average yield of the taxable
investment portfolio to decline from 3.77% to 3.00%.
The decrease in deposits was net of the repayment of approximately $28,390 in brokered deposits
which totaled $155,342 at September 30, 2011 compared to $183,732 at December 31, 2010. NOW
accounts decreased $25,948 and retail time deposits decreased $72,842. These decreases were offset
by savings accounts which increased $68,999 and noninterest-bearing deposits which increased
$15,326.
The annualized return on average assets for the Company was 0.67% for the nine months ended
September 30, 2011, compared to 0.41% for the same period last year.
The annualized return on average stockholders equity was 10.18% for the nine months ended
September 30, 2011, compared to 6.33% for the same period last year.
Net Interest Income
The primary source of earnings for the Company is net interest income, which is the difference
between income on interest-earning assets, such as loans and investment securities, and interest
expense incurred on interest-bearing sources of funds, such as deposits and borrowings. The
following table shows the average balances of interest-earning assets and interest-bearing
liabilities, annualized average yields earned and rates paid on those respective balances, and the
actual interest income and interest expense for the periods indicated. Average balances are
calculated based on daily balances, yields on non-taxable investments are not reported on a tax
equivalent basis and average balances for loans include nonaccrual loans even though interest was
not earned.
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Table of Contents
Table 3 Average Balances, Income and Expenses, Yields and Rates
Three Months Ended Sept. 30, 2011 | Three Months Ended Sept. 30, 2010 | |||||||||||||||||||||||
Annualized | Annualized | |||||||||||||||||||||||
Average | Amount | Average | Amount | |||||||||||||||||||||
Average | Yield or | Paid or | Average | Yield or | Paid or | |||||||||||||||||||
Amount | Rate | Earned | Amount | Rate | Earned | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Loans |
$ | 877,342 | 5.66 | % | $ | 12,636 | $ | 922,049 | 5.80 | % | $ | 13,611 | ||||||||||||
Investment securities |
||||||||||||||||||||||||
Taxable |
520,963 | 3.03 | % | 3,940 | 459,384 | 3.41 | % | 3,915 | ||||||||||||||||
Tax-exempt |
53,117 | 3.84 | % | 510 | 24,072 | 4.22 | % | 254 | ||||||||||||||||
Federal funds sold |
| 0.00 | % | | 4,870 | 0.16 | % | 2 | ||||||||||||||||
Interest-bearing deposits in other banks |
17,997 | 0.76 | % | 35 | 75,084 | 0.59 | % | 112 | ||||||||||||||||
Total interest-earning assets |
$ | 1,469,419 | 4.60 | % | $ | 17,121 | $ | 1,485,459 | 4.75 | % | $ | 17,894 | ||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
Deposits |
$ | 1,262,385 | 1.07 | % | $ | 3,394 | $ | 1,276,453 | 1.61 | % | $ | 5,187 | ||||||||||||
Securities sold under repurchase
agreements |
642 | 0.62 | % | 1 | 520 | 1.54 | % | 2 | ||||||||||||||||
Other borrowings |
74,947 | 3.37 | % | 637 | 95,673 | 3.78 | % | 912 | ||||||||||||||||
Total interest-bearing liabilities |
$ | 1,337,974 | 1.20 | % | $ | 4,032 | $ | 1,372,646 | 1.76 | % | $ | 6,101 | ||||||||||||
Net interest margin/income: |
3.51 | % | $ | 13,089 | 3.12 | % | $ | 11,793 | ||||||||||||||||
Table 4 Average Balances, Income and Expenses, Yields and Rates
Nine Months Ended Sept. 30, 2011 | Nine Months Ended Sept. 30, 2010 | |||||||||||||||||||||||
Annualized | Annualized | |||||||||||||||||||||||
Average | Amount | Average | Amount | |||||||||||||||||||||
Average | Yield or | Paid or | Average | Yield or | Paid or | |||||||||||||||||||
Amount | Rate | Earned | Amount | Rate | Earned | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Loans |
$ | 879,489 | 5.73 | % | $ | 38,090 | $ | 933,036 | 5.74 | % | $ | 40,471 | ||||||||||||
Investment securities |
||||||||||||||||||||||||
Taxable |
525,168 | 3.00 | % | 11,830 | 382,836 | 3.77 | % | 10,816 | ||||||||||||||||
Tax-exempt |
47,849 | 4.04 | % | 1,450 | 22,828 | 4.24 | % | 727 | ||||||||||||||||
Federal funds sold |
| 0.00 | % | | 6,481 | 0.19 | % | 9 | ||||||||||||||||
Interest-bearing deposits in other banks |
28,008 | 0.57 | % | 120 | 75,644 | 0.52 | % | 294 | ||||||||||||||||
Total interest-earning assets |
$ | 1,480,514 | 4.61 | % | $ | 51,490 | $ | 1,420,825 | 4.88 | % | $ | 52,317 | ||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
Deposits |
$ | 1,271,616 | 1.19 | % | $ | 11,316 | $ | 1,222,743 | 1.74 | % | $ | 15,873 | ||||||||||||
Securities sold under repurchase
agreements |
670 | 1.04 | % | 5 | 1,647 | 1.46 | % | 18 | ||||||||||||||||
Other borrowings |
78,470 | 3.43 | % | 2,014 | 97,223 | 3.79 | % | 2,757 | ||||||||||||||||
Total interest-bearing liabilities |
$ | 1,350,756 | 1.32 | % | $ | 13,335 | $ | 1,321,613 | 1.89 | % | $ | 18,648 | ||||||||||||
Net interest margin/income: |
3.41 | % | $ | 38,155 | 3.13 | % | $ | 33,669 | ||||||||||||||||
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Table of Contents
Third Quarter 2011 compared to Third Quarter 2010:
Net interest income increased $1,296 (10.99%) during the three month period as compared to the same
period in 2010. Loan interest income decreased $975 (7.16%) in the three month period primarily as
a result of decreased volumes and slightly lower yields. Nonaccrual loans resulted in the reversal
of $59 in interest income in the current quarter compared to $66 in the 2010 quarter. Deposit
interest expense decreased $1,793 (34.57%) in the three month period primarily as a result of
declining deposit costs on the Companys checking and savings products. Due to the low interest
rate environment, the quarterly annualized average rate of interest bearing liabilities decreased
from 1.76% at September 30, 2010 to 1.20% at September 30, 2011.
The Companys net interest margin for the quarter was 3.51% as compared to 3.12% for the 2010
quarter. The increase in the net interest margin for the three month period was impacted primarily
by decreased costs of interest bearing deposits offset in part by declining loans, loan yields and
investment portfolio yields. In addition, the Company added to its tax exempt portfolio during the
quarter. Average taxable investment securities increased $61,579 (13.40%) while the average yield
decreased from 3.41% to 3.03%. Average tax exempt investment securities increased $29,045 (120.66%)
while the average yield decreased from 4.22% to 3.84%. Average loans decreased $44,707 (4.85%) with
the average yield decreasing from 5.80% to 5.66%. Average interest bearing deposits decreased
$14,068 (1.10%) while the average rate paid decreased from 1.61% to 1.07%.
Nine Months Ended 2011 compared to Nine Months Ended 2010:
Net interest income increased $4,486 (13.32%) during the nine month period as compared to the same
period in 2010. Loan interest income decreased $2,381 (5.88%) in the nine month period primarily
as a result of decreased volume. Deposit interest expense decreased $4,557 (28.71%) in the nine
month period primarily as a result of declining deposit costs offset in part by growth in account
balances. Annualized loan yields for the year were unchanged and were somewhat impacted by
decreases in levels of average nonaccrual loans for the comparable periods offset by lower rates on
loan renewals and the repayment of higher yielding loans. Nonaccrual loans resulted in the
reversal of $233 in interest income compared to $566 in the same period in 2010. Due to the low
interest rate environment, the annualized average rate of interest bearing liabilities decreased
from 1.89% at September 30, 2010 to 1.32% at September 30, 2011.
The Companys net interest margin for the nine months ended September 30, 2011 was 3.41% as
compared to 3.13% for the nine months ended September 30, 2010. The increase in the net interest
margin for the nine month period was impacted primarily by decreased cost of interest bearing
deposits offset in part by declining loans and investment portfolio yields. In addition, the
Company added to its tax exempt portfolio during the comparable nine month periods. Average taxable
investment securities increased $142,332 (37.18%) while the average yield decreased from 3.77% to
3.00%. Average tax exempt investment securities increased $25,021 (109.61%) while the average yield
decreased from 4.24% to 4.04%. Average loans decreased $53,547 (5.74%) with the average yield
remaining virtually flat at 5.73%. Average interest bearing deposits increased $48,873 (4.00%)
while the average rate paid decreased from 1.74% to 1.19%.
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Table of Contents
Changes in the net interest income from period to period result from increases or decreases in the
volume of interest-earning assets and interest-bearing liabilities, increases or decreases in the
average rates earned and paid on such assets and liabilities, the ability to manage the earning
asset portfolio, and the availability of particular sources of funds, such as noninterest-bearing
deposits. The following tables present the extent to which changes in interest rates and changes
in the volume of interest-earning assets and interest-bearing liabilities have impacted the
Companys interest income and interest expense during the periods indicated. Information is
provided in each category with respect to changes attributable to change in volume (change in
volume multiplied by prior rate), changes attributable to change in rate (change in rate multiplied
by prior volume), and changes in rate/volume (change in rate multiplied by change in volume).
Table 5 Rate/Volume Analysis
Three Months Ended | ||||||||||||||||
September 30, 2011 compared to September 30, 2010 | ||||||||||||||||
Increase (Decrease) due to | ||||||||||||||||
Volume | Rate | Combined | Total | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Interest-earning assets: |
||||||||||||||||
Loans |
(660 | ) | (331 | ) | 16 | (975 | ) | |||||||||
Investment securities |
||||||||||||||||
Taxable |
525 | (441 | ) | (59 | ) | 25 | ||||||||||
Tax-exempt |
306 | (23 | ) | (27 | ) | 256 | ||||||||||
Federal funds sold |
(2 | ) | (2 | ) | 2 | (2 | ) | |||||||||
Interest-bearing deposits in other
banks |
(85 | ) | 34 | (26 | ) | (77 | ) | |||||||||
Total interest-earning assets |
84 | (763 | ) | (94 | ) | (773 | ) | |||||||||
Interest-bearing liabilities: |
||||||||||||||||
Deposits |
(57 | ) | (1,755 | ) | 19 | (1,793 | ) | |||||||||
Securities sold under repurchase
agreements |
0 | (1 | ) | (0 | ) | (1 | ) | |||||||||
Other borrowings |
(197 | ) | (99 | ) | 21 | (275 | ) | |||||||||
Total interest-bearing liabilities |
(254 | ) | (1,855 | ) | 40 | (2,069 | ) | |||||||||
Net change in net interest income |
$ | 1,296 | ||||||||||||||
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Table of Contents
Table 6 Rate/Volume Analysis
Nine Months Ended | ||||||||||||||||
September 30, 2011 compared to September 30, 2010 | ||||||||||||||||
Increase (Decrease) due to | ||||||||||||||||
Volume | Rate | Combined | Total | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Interest-earning assets: |
||||||||||||||||
Loans |
(2,323 | ) | (62 | ) | 4 | (2,381 | ) | |||||||||
Investment securities |
||||||||||||||||
Taxable |
4,021 | (2,192 | ) | (815 | ) | 1,014 | ||||||||||
Tax-exempt |
797 | (35 | ) | (39 | ) | 723 | ||||||||||
Federal funds sold |
(9 | ) | (9 | ) | 9 | (9 | ) | |||||||||
Interest-bearing deposits in other
banks |
(185 | ) | 30 | (19 | ) | (174 | ) | |||||||||
Total interest-earning assets |
2,301 | (2,268 | ) | (860 | ) | (827 | ) | |||||||||
Interest-bearing liabilities: |
||||||||||||||||
Deposits |
634 | (4,991 | ) | (200 | ) | (4,557 | ) | |||||||||
Federal funds purchased / securities
sold under repurchase agreements |
(10 | ) | (6 | ) | 3 | (13 | ) | |||||||||
Other borrowings |
(532 | ) | (262 | ) | 51 | (743 | ) | |||||||||
Total interest-bearing liabilities |
92 | (5,259 | ) | (146 | ) | (5,313 | ) | |||||||||
Net change in net interest income |
$ | 4,486 | ||||||||||||||
Provision for Loan Losses
The provision for loan losses is the charge to operating earnings necessary to maintain the
allowance for loan losses at a level which, in managements estimate, is adequate to cover the
estimated amount of probable incurred losses in the loan portfolio. The provision for loan losses
totaled $3,535 for the three months ended September 30, 2011 compared to $4,759 for the three
months ended September 30, 2010 and $10,198 for the nine months ended September 30, 2011 compared
to $11,841 for the same period in 2010. See Allowance for Loan Losses for further analysis of
the provision for loan losses.
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Table of Contents
Noninterest Income
Table 7 Noninterest Income
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
September 30, | Variance | September 30, | Variance | |||||||||||||||||||||||||||||
2011 | 2010 | Amount | % | 2011 | 2010 | Amount | % | |||||||||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||
Service charges and fees on deposits |
$ | 1,729 | $ | 1,802 | $ | (73 | ) | (4.05 | %) | $ | 5,057 | $ | 5,145 | $ | (88 | ) | (1.71 | %) | ||||||||||||||
Gain on sales of loans |
2,097 | 2,877 | (780 | ) | (27.11 | %) | 5,024 | 6,453 | (1,429 | ) | (22.14 | %) | ||||||||||||||||||||
Gain (loss) on sale of fixed assets |
| (1 | ) | 1 | NM | 17 | 26 | (9 | ) | (34.62 | %) | |||||||||||||||||||||
Investment securities gains (losses), net
of other-than-temporary impairment |
210 | 679 | (469 | ) | (69.07 | %) | 267 | 841 | (574 | ) | (68.25 | %) | ||||||||||||||||||||
Retail investment income |
444 | 497 | (53 | ) | (10.66 | %) | 1,408 | 1,248 | 160 | 12.82 | % | |||||||||||||||||||||
Trust services fees |
284 | 276 | 8 | 2.90 | % | 849 | 853 | (4 | ) | (0.47 | %) | |||||||||||||||||||||
Increase in cash surrender value of
bank-owned life insurance |
302 | 257 | 45 | 17.51 | % | 768 | 709 | 59 | 8.32 | % | ||||||||||||||||||||||
Miscellaneous income |
169 | 149 | 20 | 13.42 | % | 574 | 466 | 108 | 23.18 | % | ||||||||||||||||||||||
Total noninterest income |
$ | 5,235 | $ | 6,536 | $ | (1,301 | ) | (19.91 | %) | $ | 13,964 | $ | 15,741 | $ | (1,777 | ) | (11.29 | %) | ||||||||||||||
Third Quarter 2011 compared to Third Quarter 2010:
Noninterest income decreased $1,301 (19.91%) during the three month period as compared to the same
period in 2010. The most significant change for the three month period was a decrease in gain on
sales of loans due to reduced mortgage financing activity. Gain on sales of loans decreased $780
(27.11%). Also contributing to the decrease was service charges and fees on deposits which
decreased $73 (4.05%) primarily due to decreased consumer overdraft fees due to decreased economic
activity and regulatory changes in how fees are charged. Investment securities gains (losses), net
of other-than-temporary impairment decreased $469 (69.07%). Cash surrender value of bank-owned life
insurance increased due to purchases of additional policies in 2011.
Nine Months Ended 2011 compared to Nine Months Ended 2010:
Noninterest income decreased $1,777 (11.29%) during the nine month period as compared to the same
period in 2010. The most significant change for the nine month period was a decrease in gain on
sales of loans due to reduced mortgage financing activity. Gain on sales of loans decreased $1,429
(22.14%). Increases in retail investment income, cash surrender value of bank-owned life insurance
and miscellaneous income were offset by decreases in investment securities gains (losses), net of
other-than-temporary impairment and service charges and fees on deposits.
52
Table of Contents
Noninterest Expense
Table 8 Noninterest Expense
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
September 30, | Variance | September 30, | Variance | |||||||||||||||||||||||||||||
2011 | 2010 | Amount | % | 2011 | 2010 | Amount | % | |||||||||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||
Salaries and other
personnel expense |
$ | 5,990 | $ | 6,115 | $ | (125 | ) | (2.04 | %) | $ | 17,208 | $ | 17,524 | $ | (316 | ) | (1.80 | %) | ||||||||||||||
Occupancy expenses |
1,088 | 1,132 | (44 | ) | (3.89 | %) | 3,315 | 3,469 | (154 | ) | (4.44 | %) | ||||||||||||||||||||
Marketing & business development |
341 | 315 | 26 | 8.25 | % | 1,040 | 903 | 137 | 15.17 | % | ||||||||||||||||||||||
Processing expense |
457 | 392 | 65 | 16.58 | % | 1,277 | 1,150 | 127 | 11.04 | % | ||||||||||||||||||||||
Legal and professional fees |
446 | 468 | (22 | ) | (4.70 | %) | 1,189 | 1,302 | (113 | ) | (8.68 | %) | ||||||||||||||||||||
Data processing expense |
453 | 347 | 106 | 30.55 | % | 1,191 | 1,037 | 154 | 14.85 | % | ||||||||||||||||||||||
FDIC insurance |
374 | 538 | (164 | ) | (30.48 | %) | 1,352 | 1,631 | (279 | ) | (17.11 | %) | ||||||||||||||||||||
Communications expense |
211 | 160 | 51 | 31.88 | % | 663 | 500 | 163 | 32.60 | % | ||||||||||||||||||||||
Loss (gain) on sale of other real estate |
9 | 25 | (16 | ) | (64.00 | %) | 222 | (344 | ) | 566 | (164.53 | %) | ||||||||||||||||||||
Provision for other real estate losses |
563 | 683 | (120 | ) | (17.57 | %) | 811 | 1,380 | (569 | ) | (41.23 | %) | ||||||||||||||||||||
Other operating expenses |
690 | 808 | (118 | ) | (14.60 | %) | 2,192 | 2,425 | (233 | ) | (9.61 | %) | ||||||||||||||||||||
Total noninterest expense |
$ | 10,622 | $ | 10,983 | $ | (361 | ) | (3.29 | %) | $ | 30,460 | $ | 30,977 | $ | (517 | ) | (1.67 | %) | ||||||||||||||
Third Quarter 2011 compared to Third Quarter 2010:
Noninterest expense decreased $361 (3.29%) during the three month period as compared to the same
period in 2010. The most significant changes for the three month period were accrued FDIC insurance
expense which decreased $164 (30.48%) due to a lower accrual rate for deposit insurance beginning
in the second quarter of 2011, salaries and other personnel expense which decreased $125 (2.04%)
due to lower full time equivalent employees (FTEs) as compared to the same period in 2010 and
lower provision for other real estate losses which decreased $120 (17.57%). Marketing, processing,
communications and data processing expenses all increased during the comparable periods.
Occupancy expenses decreased $44 (3.89%) during the three month period and were primarily due to
decreased depreciation expense as a result of certain assets becoming fully depreciated.
Other real estate expenses decreased $136 and resulted primarily from a decreased level of
additions to the OREO valuation allowance of $120.
Communications expense increased $51 (31.88%) and was due to costs associated with changing
carriers. Processing expense increased $65 (16.58%) due to an increase in ATM processing fees in
the third quarter of 2011 as compared to the same quarter of 2010.
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Table of Contents
Nine Months Ended 2011 compared to Nine Months Ended 2010:
Salaries and other personnel expense decreased $316 (1.80%) during the nine month period as
compared to the same period in 2010 and was due primarily to lower FTEs resulting from the closing
of the Athens branch and the Greenville loan office.
Occupancy expenses decreased $154 (4.44%) during the nine month period and were primarily due to
decreased depreciation expense as a result of certain assets becoming fully depreciated.
Other real estate expenses decreased $3 and resulted from an increased loss on sale of OREO of $566
offset by a decreased level of additions to the OREO valuation allowance of $569 in the first nine
months of 2011 as compared to 2010.
FDIC insurance expense decreased $279 (17.11%) and was due to a lower accrual rate and assessment
base for deposit insurance beginning in the second quarter of 2011. Processing expense increased
$127 (11.04%) and was due to an increase in ATM processing fees in the first nine months of 2011 as
compared to the same period in 2010.
Income Taxes
The Company recognized income tax expense of $1,243 and $3,430 for the three and nine months ended
September 30, 2011 as compared to an income tax expense of $752 and $1,882 for the same periods in
2010. The significant increase in pretax income resulted in an increase in income tax expense and
a slightly higher effective income tax rate for the three and nine month periods. The effective
income tax rate for the three and nine months ended September 30, 2011 was 29.83% and 29.93%,
respectively.
At September 30, 2011, the Company maintains net deferred tax assets of $11,926. A valuation
allowance is required for deferred tax assets if, based on available evidence, it is more likely
than not that all or some portion of the asset may not be realized due to the inability to generate
sufficient taxable income in the period and/or of the character necessary to utilize the benefit of
the deferred tax asset. In making this assessment, all sources of taxable income available to
realize the deferred tax asset are considered including taxable income in prior carry-back years,
future reversals of existing temporary differences, tax planning strategies and future taxable
income exclusive of reversing temporary differences and carryforwards. Based on managements
assessment, no valuation allowance was deemed necessary at September 30, 2011.
The Company has no net operating loss carryforwards. The Company was able to carryback both the
federal and state net operating losses (NOLs) sustained in 2009. These carrybacks generated a
federal tax refund of $2,755 that was received in the first quarter of 2010 and a state tax refund
of $495, of which $494 was received in the third quarter of 2011.
54
Table of Contents
Loans
The following table presents the composition of the Companys loan portfolio as of September 30,
2011 and December 31, 2010.
Table 9 Loan Portfolio Composition
September 30, 2011 | December 31, 2010 | |||||||||||||||
Amount | % | Amount | % | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Commercial financial and
agricultural |
$ | 160,567 | 19.14 | % | $ | 189,128 | 21.64 | % | ||||||||
Real estate |
||||||||||||||||
Commercial |
338,205 | 40.32 | % | 327,458 | 37.46 | % | ||||||||||
Residential |
158,826 | 18.94 | % | 157,680 | 18.04 | % | ||||||||||
Acquisition, development
and construction |
165,745 | 19.76 | % | 182,412 | 20.87 | % | ||||||||||
Total real estate |
662,776 | 79.02 | % | 667,550 | 76.37 | % | ||||||||||
Consumer |
||||||||||||||||
Direct |
14,470 | 1.72 | % | 15,643 | 1.79 | % | ||||||||||
Indirect |
495 | 0.06 | % | 899 | 0.10 | % | ||||||||||
Revolving |
373 | 0.04 | % | 870 | 0.10 | % | ||||||||||
Total consumer |
15,338 | 1.82 | % | 17,412 | 1.99 | % | ||||||||||
Deferred loan origination costs (fees) |
96 | 0.02 | % | 5 | 0.00 | % | ||||||||||
Total |
$ | 838,777 | 100.00 | % | $ | 874,095 | 100.00 | % | ||||||||
At September 30, 2011, the loan portfolio is comprised of 79.02% real estate loans.
Commercial, financial and agricultural loans comprise 19.14%, and consumer loans comprise 1.82% of
the portfolio.
Commercial real estate comprises 40.32% of the loan portfolio and consist of both non-owner
occupied and owner occupied properties where the operations of the commercial entity provide the
necessary cash flow to service the debt. For this portion of the real estate loan portfolio,
repayment is generally not dependent upon the sale of the real estate held as collateral.
Construction and development loans comprise 19.76% of the real estate loan portfolio and the
Company has recognized significant losses in this portfolio. The Company carefully monitors the
loans in this category since the repayment of these loans is generally dependent upon the sale of
the real estate in the normal course of business and can be impacted by national and local economic
conditions. New construction and absorption of existing real estate inventory in the Companys
primary market area of the Augusta-Richmond County, GA-SC MSA have slowed and prices have declined
but less than the national rate. The residential category, 18.94% of the portfolio, represents
those loans that the Company chooses to maintain in its portfolio rather than selling into the
secondary market for marketing and competitive reasons and commercial loans secured by residential
real estate.
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The Company has no large loan concentrations to individual borrowers. Unsecured loans at September
30, 2011 totaled $16,768.
Interest reserves are established for certain ADC (acquisition development and construction) loans
based on the feasibility of the project, the timeframe for completion, the creditworthiness of the
borrower and guarantors, and collateral. An interest reserve allows the borrowers interest cost
to be capitalized and added to the loan balance. As a matter of practice the Banks do not
generally establish loan funded interest reserves on ADC loans; however, the Companys loan
portfolio includes six loans with interest reserves at September 30, 2011, which were fully
advanced at September 30, 2011 and December 31, 2010.
Underwriting for ADC loans with interest reserves follows the same process as those loans without
reserves. In order for the Banks to establish a loan-funded interest reserve, the borrower must
have the ability to repay without the use of a reserve and a history of developing and stabilizing
similar properties. All ADC loans, including those with interest reserves, are carefully monitored
through periodic construction site inspections by bank employees or third party inspectors to
ensure projects are moving along as planned. Management assesses the appropriateness of the use of
interest reserves during the entire term of the loan as well as the adequacy of the reserve.
Collateral inspections are completed before approval of advances. Two of these loans have been
renewed; one due to delays and time needed to obtain current financial information on the
guarantors and another to allow for completion of the final punch list and negotiation of the
permanent loan. None of these loans have been restructured or are currently on nonaccrual.
Loan Review and Classification Process
The Company maintains a loan review and classification process which involves multiple officers of
the Company and is designed to assess the general quality of credit underwriting and to promote
early identification of potential problem loans. All loan officers are charged with the
responsibility of risk rating all loans in their portfolios and updating the ratings, positively or
negatively, on an ongoing basis as conditions warrant. Risk ratings are selected from an 8-point
scale with ratings as follows: ratings 1- 4 Satisfactory (pass), rating 5 Watch (potential
weakness), rating 6 Substandard (well-defined weakness), rating 7 Doubtful and rating 8 Loss.
When a loan officer originates a new loan, he or she documents the credit file with an offering
sheet summary, supplemental underwriting analyses, relevant financial information and collateral
evaluations. All of this information is used in the determination of the initial loan risk rating.
Then, the Companys Credit Administration department undertakes an independent credit review of
that relationship in order to validate the lending officers rating. Lending relationships with
total related exposure of $500 or greater are also placed into a tracking database and reviewed by
Credit Administration personnel on an annual basis in conjunction with the receipt of updated
borrower and guarantor financial information. The individual loan reviews analyze such items as:
loan type; nature, type and estimated value of collateral; borrower and/or guarantor estimated
financial strength; most recently available financial information; related loans and total borrower
exposure; and current/anticipated performance of the loan. The results of such reviews are
presented to Executive Management.
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Through the review of delinquency reports, updated financial statements or other relevant
information in the normal course of business, the lending officer and/or Credit Administration
review personnel may determine that a loan relationship has weakened to the point that a criticized
(loan grade 5) or classified (loan grade 6 through 8) status is warranted. When a loan relationship
with total related exposure of $200 or greater is adversely graded (5 or above), the lending
officer is then charged with preparing a Classified/Watch report which outlines the background of
the credit problem, current repayment status of the loans, current collateral evaluation and a
workout plan of action. This plan may include goals to improve the credit rating, assisting the
borrower in moving the loans to another institution and/or collateral liquidation. All such
Classified/Watch reports are reviewed on a quarterly basis by members of Executive Management at a
regularly scheduled meeting in which each lending officer presents the workout plans for their
criticized credit relationships.
Depending upon the individual facts, circumstances and the result of the Classified/Watch review
process, Executive Management may categorize the loan relationship as impaired. Once that
determination has occurred, Executive Management in conjunction with Credit Administration
personnel, will complete an evaluation of the collateral (for collateral-dependent loans) based
upon appraisals on file adjusting for current market conditions and other local factors that may
affect collateral value. This judgmental evaluation may produce an initial specific allowance for
placement in the Companys Allowance for Loan Losses calculation. As soon as practical, updated
appraisals on the collateral backing that impaired loan relationship are ordered. When the updated
appraisals are received, Executive Management with assistance from Credit Administration department
personnel reviews the appraisal, and updates the specific allowance analysis for each loan
relationship accordingly. The Directors Loan Committee reviews on a quarterly basis the
Classified/Watch reports including changes in credit grades of 5 or higher as well as all impaired
loans, the related allowances and OREO.
In general, once the specific allowance has been finalized, Executive Management will authorize a
charge-off prior to the following calendar quarter-end in which that reserve calculation is
finalized.
The review process also provides for the upgrade of loans that show improvement since the last
review.
Nonperforming Assets
Non-performing assets include nonaccrual loans, loans past due 90 days or more, restructured loans
and other real estate owned. Table 10 shows the current and prior period amounts of non-performing
assets. Non-performing assets were $37,586 at September 30, 2011, compared to $34,000 at December
31, 2010 and $32,557 at September 30, 2010. Significant changes from December 2010 to September
2011 include a $5,915 increase in nonaccrual commercial real estate loans and a decrease of $2,581
in nonaccrual ADC loans. Total nonaccrual loans increased $3,707.
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There were no loans past due 90 days or more and still accruing at September 30, 2011 and 2010
compared to $69 at December 31, 2010.
Troubled debt Restructurings (TDRs) are troubled loans on which the original terms have been
modified in favor of the borrower or either principal or interest has been forgiven due to
deterioration in the borrowers financial condition. There were $4,564 in TDRs at September 30,
2011, of which $2,248 were on nonaccrual status. TDRs totaled $3,514 at December 31, 2010, of
which $970 were on nonaccrual status, and $2,090 at September 30, 2010, of which $1,172 were on
nonaccrual status.
Table 10 Non-Performing Assets
September 30, 2011 | December 31, 2010 | September 30, 2010 | ||||||||||
(Dollars in thousands) | ||||||||||||
Nonaccrual loans: |
||||||||||||
Commercial financial and agricultural |
$ | 3,847 | $ | 2,924 | $ | 746 | ||||||
Real Estate: |
||||||||||||
Commercial |
9,708 | 3,793 | 4,754 | |||||||||
Residential |
4,215 | 4,734 | 4,623 | |||||||||
Acquisition, development and construction |
9,372 | 11,953 | 13,999 | |||||||||
Consumer |
270 | 301 | 411 | |||||||||
Total Nonaccrual loans |
27,412 | 23,705 | 24,533 | |||||||||
Restructured loans (1) |
2,316 | 2,544 | 918 | |||||||||
Other real estate owned |
7,859 | 7,751 | 7,106 | |||||||||
Total Non-performing assets |
$ | 37,587 | $ | 34,000 | $ | 32,557 | ||||||
Loans past due 90 days or more
and still accruing interest |
$ | | $ | 69 | $ | | ||||||
Non-performing assets to total assets |
2.34 | % | 2.12 | % | 1.98 | % | ||||||
Non-performing assets to total loans and OREO |
4.44 | % | 3.86 | % | 3.63 | % | ||||||
Allowance for loan loss to total nonaccrual loans |
107.03 | % | 112.45 | % | 104.10 | % |
(1) | Restructured loans on nonaccrual status at period end are included under nonaccrual loans in
the table. |
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The ratio of non-performing assets to total loans and other real estate was 4.44% at September
30, 2011 compared to 3.86% at December 31, 2010 and 3.63% at September 30, 2010. The ratio of
allowance for loan losses to total nonaccrual loans was 107.03% at September 30, 2011 compared to
112.45% at December 31, 2010 and 104.10% at September 30, 2010. The resolution of non-performing
assets continues to be a priority of management.
Nonaccrual loans have increased from September 30, 2010 despite a significant decline in ADC
properties that the Company has been actively addressing over the past two years. Although the
exposure has declined, a significant portion of nonaccrual loans continues to be collateral
dependent ADC loans as well as commercial real estate loans. The following table provides further
information regarding the Companys nonaccrual loans.
Nonaccrual | Appraisal | Appraised | ||||||||||||||||||||||||
Balance | Originated | Date | Trigger | Collateral | Allowance | Method | Date | Value | ||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||
1-4 Family Residential |
$ | 852 | 5/29/2008 | 12/14/10 | financial condition | houses & land | $ | | collateral value | 03/11 | $ | 1,035 | ||||||||||||||
ADC Loan Other |
825 | 04/08-05/08 | 06/30/11 | delinquency | lots | | collateral value | 09/11 | 3,400 | |||||||||||||||||
Commercial Real Estate |
3,490 | 03/10/08 | 06/30/11 | delinquency | commercial bldg | | collateral value | 08/11 | 5,205 | |||||||||||||||||
ADC Loan Other |
1,225 | 09/30/08 | 05/06/10 | delinquency | lots & land | | collateral value | 09/11 | 1,269 | |||||||||||||||||
ADC Loan CSRA |
1,009 | 03/07-04/08 | 11/30/09 | delinquency | lots & land | | collateral value | 03/11 | 1,075 | |||||||||||||||||
Farmland & Equity lines |
837 | 09/18/08 | 11/10-12/10 | financial condition | house & land | | collateral value | 11/10 - 12/10 | 1,943 | |||||||||||||||||
ADC Loan Other |
1,661 | 10/31/06 | 08/16/11 | financial condition | lots & land | | collateral value | 09/11 | 1,739 | |||||||||||||||||
Commercial Real Estate |
3,281 | 03/21/08 | 08/30/11 | financial condition | commercial bldg | | collateral value | 09/11 | 4,955 | |||||||||||||||||
ADC Loan Other |
1,785 | 08/06-01/07 | 01/28/09 | delinquency | land & townhomes | | collateral value | 09/10 - 04/11 | 2,354 | |||||||||||||||||
ADC Loan Other |
1,500 | 03/29/11 | 03/29/11 | financial condition | land | | collateral value | 06/11 | 2,178 | |||||||||||||||||
$ | 16,465 | |||||||||||||||||||||||||
Other, net |
10,947 | |||||||||||||||||||||||||
Nonaccrual loans at
September 30, 2011 |
$ | 27,412 | ||||||||||||||||||||||||
The following table presents a roll forward of other real estate owned for the nine month
periods ended September 30, 2011 and 2010, respectively.
Table 11 Other Real Estate Owned
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Beginning balance, January 1 |
$ | 7,751 | 7,974 | |||||
Additions |
5,359 | 7,911 | ||||||
Increase in valuation allowance |
(811 | ) | (1,380 | ) | ||||
Sales |
(4,218 | ) | (7,760 | ) | ||||
Gain (loss) on sale of OREO |
(222 | ) | 344 | |||||
Deferred gain on sale of OREO |
| 17 | ||||||
Ending balance, September 30 |
$ | 7,859 | 7,106 | |||||
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The following table provides details of other real estate owned as of September 30, 2011 and
2010, respectively.
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Other Real Estate: |
||||||||
Single family developed lots |
$ | 1,590 | $ | 1,819 | ||||
Residential land |
378 | | ||||||
1-4 Family residential |
1,419 | 1,286 | ||||||
Commercial real estate |
4,157 | 2,825 | ||||||
Condominums |
2,827 | 2,827 | ||||||
10,371 | 8,757 | |||||||
Valuation allowance |
(2,512 | ) | (1,651 | ) | ||||
$ | 7,859 | $ | 7,106 | |||||
The increase in other real estate owned is due to the continuing process of resolving problem
loans. In the first nine months of 2011, additions to other real estate owned totaled $5,359 and
proceeds from sales of other real estate totaled $4,218. In addition, there was an $811 increase
to the valuation allowance as a result of declining property values.
Allowance for Loan Losses
The allowance for loan losses represents an allocation for the estimated amount of probable
incurred losses in the loan portfolio. The adequacy of the allowance for loan losses is evaluated
periodically based on a review of all significant loans, with particular emphasis on impaired,
non-accruing, past due, and other loans that management believes require special attention. The
determination of the allowance for loan losses is considered a critical accounting estimate of the
Company. See Critical Accounting Estimates.
While management uses available information to recognize losses on loans, future additions to the
allowance may be necessary based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process, periodically review the
Companys allowance for loan losses. Such agencies may advise additions to the allowance based on
their judgments about information available to them at the time of their examination. Such
regulatory guidance is considered, and the Company may recognize additions to the allowance as a
result.
Additions to the allowance for loan losses are made periodically to maintain the allowance at
an appropriate level based upon managements analysis of risk in the loan portfolio. Loans
determined to be uncollectible are charged to the allowance for loan losses and subsequent
recoveries are added to the allowance. A provision for losses in the amount of $3,535 was charged
to expense for the quarter ended September 30, 2011 compared to $4,759 for the 2010 quarter and
$10,198 for the nine months ended September 30, 2011 compared to $11,841 for the nine months ended
September 30, 2010.
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Significant portions of the overall level of losses in 2011 relate to the charge off of
specific reserve allowances on impaired loans.
At September 30, 2011 the ratio of allowance for loan losses to period end loans was 3.50% compared
to 3.05% at December 31, 2010 and 2.87% at September 30, 2010. Net charge-offs totaled $7,516 of
which $3,509, or 46.69%, were related to ADC loans. Of the ADC charge-offs, $1,255 or 35.77% were
related to ADC loans in the CSRA and $2,254 or 64.23% were related to ADC loans in other markets.
The provisions for loan losses allocated to individual portfolio segments are affected by the
calculation of average historical net loss rate factors and by the internal and external
qualitative factors within each category. The loan loss provision allocated to the ADC-CSRA
portfolio was $1,067 and was affected in part by charge-offs of $1,255, an increase in the level of
substandard rated loans and qualitative factors related to trends in classified loans, collateral
values and other external factors related to competition, legal and regulatory requirements. The
loan loss provision allocated to the ADC-Other portfolio was $2,122 and was affected in part by
charge-offs of $2,260 and qualitative factors related to collateral values. The loan loss
provision allocated to the commercial real estate owner occupied portfolio was $2,926 and was
affected in part by charge-offs of $621, growth in the portfolio and qualitative factors related to
collateral values and local economic trends and conditions. The loan loss provision allocated to
the commercial, financial and agricultural portfolio was $1,391 and was affected in part by
charge-offs of $1,154, an increase in the adjusted historical loss factor and qualitative factors
related to collateral values. The loan loss provision allocated to the 1-4 family portfolio was
$1,510 and was affected in part by charge-offs of $1,605 and qualitative factors related to
national and local economic trends and conditions. The loan loss provision allocated to the non
owner occupied commercial real estate portfolio was $1,117 and was affected in part by charge-offs
of $621, an increase in the level of impaired and substandard rated loans, and qualitative factors
related to trends in impaired, classified and rated loans. See note 3 to the Financial Statements.
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Table 12 Allowance for Loan Losses
September 30, | ||||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Total loans outstanding at end of period,
net of unearned income |
$ | 838,777 | $ | 888,596 | ||||
Average loans outstanding, net of
unearned income |
$ | 865,990 | $ | 904,808 | ||||
Balance of allowance for loan losses at
beginning of year |
$ | 26,657 | $ | 22,338 | ||||
Charge-offs: |
||||||||
Commercial, financial and agricultural |
1,154 | 477 | ||||||
Real estate commercial |
1,242 | 538 | ||||||
Real estate residential mortgage |
1,605 | 869 | ||||||
Real estate acquisition, development
and construction |
3,515 | 7,375 | ||||||
Consumer |
526 | 394 | ||||||
Total charge-offs |
8,042 | 9,653 | ||||||
Recoveries of previous loan losses: |
||||||||
Commercial, financial and agricultural |
154 | 159 | ||||||
Real estate commercial |
5 | 10 | ||||||
Real estate residential mortgage |
23 | 51 | ||||||
Real estate acquisition, development
and construction |
6 | 543 | ||||||
Consumer |
338 | 251 | ||||||
Total recoveries |
526 | 1,014 | ||||||
Net loan losses |
7,516 | 8,639 | ||||||
Provision for loan losses |
10,198 | 11,841 | ||||||
Balance of allowance for loan losses at
end of period |
$ | 29,339 | $ | 25,540 | ||||
Allowance for loan losses to period end
loans |
3.50 | % | 2.87 | % | ||||
Annualized net charge-offs to average loans |
1.16 | % | 1.28 | % |
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Management considers the current allowance for loan losses appropriate based upon its analysis
in the portfolio using the methods previously discussed. Managements judgment is based upon a
number of assumptions about events which are believed to be reasonable, but which may or may not
prove correct. While it is the Companys policy to charge off in the current period the loans in
which a loss is considered probable, there are additional risks of losses which cannot be
quantified precisely or attributed to a particular loan or class of loans. Because management
evaluates such factors as changes in the nature and volume of the loan portfolio, historical loss
rates, overall portfolio quality, review of specific problem loans, and current economic conditions
and trends that may affect a borrowers ability to repay, managements judgment as to the adequacy
of the allowance is necessarily approximate and imprecise. Thus, there can be no assurance that
charge-offs in future periods will not exceed the allowance for loan losses or that additional
increases in the allowance will not be required.
Liquidity and Capital Resources
The Company has maintained adequate liquidity to meet operating and loan funding requirements
despite the lack of such demand due to current market conditions. The loan to deposit ratio at
September 30, 2011 was 59.86% compared to 61.96% at December 31, 2010 and 61.91% at September 30,
2010. The decrease in the loan to deposit ratio from September 30, 2010 to September 30, 2011
reflects the decreased demand for loans resulting from the slowing economy. Deposits at September
30, 2011 and December 31, 2010 include $155,342 and $183,732 of brokered certificates of deposit,
respectively. GB&T and SB&T have also utilized borrowings from the Federal Home Loan Bank. They
each maintain a line of credit with the Federal Home Loan Bank approximating 10% of their total
assets. Federal Home Loan Bank advances are collateralized by eligible first mortgage loans,
commercial real estate loans and investment securities. Federal Home Loan Bank advances totaled
$52,000 at September 30, 2011. GB&T and SB&T maintain repurchase lines of credit with SunTrust
Robinson Humphrey, Atlanta, Georgia, for advances up to $20,000 and $10,000, respectively, of which
no amounts were outstanding at September 30, 2011. GB&T and SB&T have federal funds purchased
accommodations with SunTrust Bank, Atlanta, Georgia for advances up to $10,000 and $3,750
respectively, of which no amounts were outstanding at September 30, 2011. GB&T also has a $10,000
repurchase line of credit with Center State Bank, Orlando, Florida on which no amounts were
outstanding at September 30, 2011. Additionally, liquidity needs can be supplemented by the
structuring of the maturities of investment securities and the pricing and maturities on loans and
deposits offered to customers. The Company also uses retail securities sold under repurchase
agreements to fund operations. Retail securities sold under repurchase agreements were $540 at
September 30, 2011.
Stockholders equity to total assets was 7.17% at September 30, 2011 compared to 6.22% at December
31, 2010 and 6.33% at September 30, 2010. The capital of the Company exceeded all required
regulatory guidelines at September 30, 2011. The Companys Tier 1 risk-based, total risk-based and
leverage capital ratios were 12.96%, 14.35%, and 8.14%, respectively, at September 30, 2011.
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The following table reflects the current regulatory capital levels in more detail, including
comparisons to the regulatory minimums.
Table 13 Regulatory Capital Requirements
September 30, 2011
September 30, 2011
Required for capital | ||||||||||||||||||||||||
Actual | adequacy purposes | Excess | ||||||||||||||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Southeastern Bank Financial
Corporation |
||||||||||||||||||||||||
Risk-based capital: |
||||||||||||||||||||||||
Tier 1 capital |
$ | 130,200 | 12.96 | % | 40,176 | 4.00 | % | 90,024 | 8.96 | % | ||||||||||||||
Total capital |
144,141 | 14.35 | % | 80,352 | 8.00 | % | 63,789 | 6.35 | % | |||||||||||||||
Tier 1 leverage ratio |
130,200 | 8.14 | % | 63,974 | 4.00 | % | 66,226 | 4.14 | % | |||||||||||||||
Georgia Bank & Trust Company |
||||||||||||||||||||||||
Risk-based capital: |
||||||||||||||||||||||||
Tier 1 capital |
$ | 114,696 | 12.96 | % | 35,391 | 4.00 | % | 79,305 | 8.96 | % | ||||||||||||||
Total capital |
125,942 | 14.23 | % | 70,781 | 8.00 | % | 55,161 | 6.23 | % | |||||||||||||||
Tier 1 leverage ratio |
114,696 | 8.06 | % | 63,997 | 4.50 | % | 50,699 | 3.56 | % | |||||||||||||||
Southern Bank & Trust |
||||||||||||||||||||||||
Risk-based capital: |
||||||||||||||||||||||||
Tier 1 capital |
$ | 14,932 | 12.55 | % | 4,758 | 4.00 | % | 10,174 | 8.55 | % | ||||||||||||||
Total capital |
16,440 | 13.82 | % | 9,516 | 8.00 | % | 6,924 | 5.82 | % | |||||||||||||||
Tier 1 leverage ratio |
14,932 | 8.04 | % | 7,432 | 4.00 | % | 7,500 | 4.04 | % |
Georgia Bank & Trust Company is regulated by the Department of Banking and Finance of the
State of Georgia (DBF). The DBF requires that state banks in Georgia generally maintain a minimum
ratio of Tier 1 capital to total assets of four and one-half percent (4.50%).
Management is not aware of any other events or uncertainties that are reasonably likely to have a
material effect on the Companys liquidity, capital resources or operations.
Commitments and Contractual Obligations
The Company is a party to lines of credit with off-balance sheet risk in the normal course of
business to meet the financing needs of its customers. Lines of credit are unfunded commitments to
extend credit. These instruments involve, in varying degrees, exposure to credit and interest rate
risk in excess of the amounts recognized in the financial statements. The Companys exposure to
credit loss in the event of nonperformance by the other party to the financial instrument for
unfunded commitments to extend credit and letters of credit is represented by the contractual
amount of those instruments. The Company evaluates construction and acquisition and development
loans for the percentage completed before extending additional credit. The Company follows the
same credit policies in making commitments and contractual obligations as it does for on-balance
sheet instruments.
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Unfunded commitments to extend credit where contract amounts represent potential credit risk
totaled $153,879 at September 30, 2011. These commitments are primarily at variable interest
rates.
The Companys commitments are funded through internal funding sources of scheduled repayments of
loans and sales and maturities of investment securities available-for-sale or external funding
sources through acceptance of deposits from customers or borrowings from other financial
institutions.
The following table is a summary of the Companys commitments to extend credit, commitments under
contractual leases as well as the Companys contractual obligations, consisting of deposits, FHLB
advances, which are subject to early termination options, and borrowed funds by contractual
maturity date.
Table 14 Commitments and Contractual Obligations
Less than | 1 - 3 | 3 - 5 | More than | |||||||||||||
1 Year | Years | Years | 5 Years | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Lines of credit |
$ | 153,879 | | | | |||||||||||
Lease agreements |
280 | 110 | 78 | | ||||||||||||
Deposits |
1,229,934 | 141,973 | 28,187 | 1,178 | ||||||||||||
Securities sold under
repurchase agreements |
540 | | | | ||||||||||||
FHLB advances |
| 13,000 | | 39,000 | ||||||||||||
Subordinated debentures |
| 2,947 | | 20,000 | ||||||||||||
Total commitments and
contractual obligations |
$ | 1,384,633 | $ | 158,030 | $ | 28,265 | $ | 60,178 | ||||||||
Although management regularly monitors the balance of outstanding commitments to fund loans to
ensure funding availability should the need arise, management believes that the risk of all
customers fully drawing on all these lines of credit at the same time is remote.
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Effects of Inflation and Changing Prices
Inflation generally increases the cost of funds and operating overhead, and to the extent loans and
other assets bear variable rates, the yields on such assets. Unlike most industrial companies,
virtually all of the assets and liabilities of a financial institution are monetary in nature. As
a result, interest rates generally have a more significant impact on the performance of a financial
institution than the effects of general levels of inflation. Although interest rates do not
necessarily move in the same direction and to the same extent as the prices of goods and services,
increases in inflation generally have resulted in increased interest rates. In addition, inflation
can increase a financial institutions cost of goods and services purchased, the cost of salaries
and benefits, occupancy expense and similar items. Inflation and related increases in interest
rates generally decrease the market value of investments and loans held and may adversely affect
liquidity, earnings, and stockholders equity. Mortgage originations and refinances tend to slow
as interest rates increase, and can reduce the Companys earnings from such activities and the
income from the sale of residential mortgage loans in the secondary market.
Regulatory Reform Legislation
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank
Reform Act) was signed into law. The Dodd-Frank Reform Act represents a significant overhaul of
many aspects of the regulation of the financial services industry, although many of its provisions
(e.g., the interchange and trust preferred capital limitations) apply to companies that are
significantly larger than the Company. The Dodd-Frank Reform Act directs applicable regulatory
authorities to promulgate regulations implementing its provisions, and its effect on the Company
and on the financial services industry as a whole will be clarified as those regulations are
issued. Major elements of the Dodd-Frank Reform Act include:
A permanent increase in deposit insurance coverage to $250,000 per account, permanent unlimited
deposit insurance on noninterest-bearing transaction accounts, and an increase in the minimum
Deposit Insurance Fund reserve requirement from 1.15% to 1.35%, with assessments to be based on
assets as opposed to deposits.
New disclosure and other requirements relating to executive compensation and corporate
governance.
Amendments to the Truth in Lending Act aimed at improving consumer protections with respect to
mortgage originations, including originator compensation, minimum repayment standards, and
prepayment considerations.
The establishment of the Financial Stability Oversight Council, which will be responsible for
identifying and monitoring systemic risks posed by financial firms, activities, and practices.
The development of regulations to limit debit card interchange fees.
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The future elimination of trust preferred securities as a permitted element of Tier 1 capital.
The creation of a special regime to allow for the orderly liquidation of systemically important
financial companies, including the establishment of an orderly liquidation fund.
The development of regulations to address derivatives markets, including clearing and exchange
trading requirements and a framework for regulating derivatives-market participants.
Enhanced supervision of credit rating agencies through the Office of Credit Ratings within the
SEC.
Increased regulation of asset-backed securities, including a requirement that issuers of
asset-backed securities retain at least 5% of the risk of the asset-backed securities.
The establishment of a Bureau of Consumer Financial Protection, within the Federal Reserve, to
serve as a dedicated consumer-protection regulatory body.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
As of September 30, 2011, there were no substantial changes in the interest rate sensitivity
analysis or the sensitivity of market value of portfolio equity for various changes in interest
rates calculated as of December 31, 2010. A detailed discussion of market risk is provided in the
Companys 2010 Annual Report on Form 10-K.
Item 4. | Controls and Procedures |
As of the end of the period covered by this report, the Company carried out an evaluation, under
the supervision and with the participation of the Companys management, including the Companys
President and Chief Executive Officer (principal executive officer) and its Group Vice President
and Chief Financial Officer (principal financial officer), of the effectiveness of the design and
operation of the Companys disclosure controls and procedures pursuant to Exchange Act Rule 13a-15.
Based upon that evaluation, such officers concluded that the Companys disclosure controls and
procedures are effective in timely alerting them to material information relating to the Company
(including its consolidated subsidiaries) that is required to be included in the Companys periodic
filings with the Securities and Exchange Commission. There have been no changes in the Companys
internal controls or, to the Companys knowledge, in other factors during the quarter covered by
this report that have materially affected, or are reasonably likely to materially affect, the
Companys internal controls over financial reporting.
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Part II
OTHER INFORMATION
OTHER INFORMATION
Item 1. | Legal Proceedings |
There are no material pending legal proceedings to which the Company or any of its
subsidiaries is a party or of which any of their property is subject.
Item 1A. | Risk Factors |
In addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, Item 1A. Risk Factors in the Companys
Annual Report on Form 10-K for the year ended December 31, 2010, which could
materially affect its business, financial condition or future results. The risks
described in the Annual Report on Form 10-K are not the only risks facing the
Company. Additional risks and uncertainties not currently known to management or
that management currently deems to be immaterial also may materially adversely
affect the Companys business, financial condition and/or operating results.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Issuer Purchases of Equity Securities
On April 15, 2004, the Company announced the commencement of a stock
repurchase program, pursuant to which it will, from time to time, repurchase up to
100,000 shares of its outstanding stock. The program does not have a stated
expiration date. No stock repurchase programs were terminated during the third
quarter of 2011 and there were no shares repurchased under the existing stock
repurchase plan or otherwise during the third quarter.
Item 3. | Defaults Upon Senior Securities |
Not applicable
Item 4. | [Removed and Reserved] |
Item 5. | Other Information |
None
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Item 6. | Exhibits |
31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
|||
31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
|||
32.1 | Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|||
101 | Interactive Data Files providing financial information from the
Registrants Quarterly Report on Form 10-Q for the quarter ended
September 30, 2011 in XBRL (eXtensible Business Reporting
Language). Pursuant to Regulation 406T of Regulation S-T, these
Interactive data files are deemed not filed or part of a registration
statement or prospectus for purposes of Section 11 or 12 of the
Securities Act of 1933, as amended, or Section 18 of the Securities
Exchange Act of 1934, as amended, and are otherwise not subject to
liability.
|
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SOUTHEASTERN BANK FINANCIAL CORPORATION
Form 10-Q Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SOUTHEASTERN BANK FINANCIAL CORPORATION |
||||
Date: October 28, 2011 | By: | /s/ Darrell R. Rains | ||
Darrell R. Rains | ||||
Group Vice President, Chief
Financial Officer (Duly Authorized Officer of Registrant and Principal Financial Officer) |
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