FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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(Mark One) |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2008 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
Commission File No. 0-22891
GEORGIA-CAROLINA BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
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Georgia
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58-2326075 |
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(State of Incorporation)
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(I.R.S. Employer Identification Number) |
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3527 Wheeler Road
Augusta, Georgia
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30909 |
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(Address of Principal Executive Offices)
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(Zip Code) |
(706) 731-6600
(Registrant’s telephone number, including area code)
Securities registered under Section 12(b) of the Act:
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Title of Each Class
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Name of each exchange on which registered |
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None
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None |
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 Par Value
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No x
Indicate by check mark whether the issuer has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing
requirements for the past
90 days. Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer ___
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Accelerated filer ___
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Non-Accelerated filer ___
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Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant (2,721,475 shares), on June 30, 2008 was
$30,344,446 based on the closing price of the registrant’s common stock as reported on the Over-the-Counter Bulletin Board on June 30, 2008. For
purposes of this response, officers, directors and holders of 5% or more of the registrant’s common stock are considered affiliates of the registrant
at that date. As of March 27, 2009, 3,470,737 shares of the registrant’s common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant’s definitive proxy statement to be delivered to shareholders in connection
with the 2009 Annual Meeting of Shareholders scheduled to be held on May 18, 2009 are incorporated
herein by reference in response to Part III of this Report.
GEORGIA-CAROLINA BANCSHARES, INC.
2008 Form 10-K Annual Report
TABLE OF CONTENTS
Special Note Regarding Forward-Looking Statements
Certain statements in this Annual Report on Form 10-K contain “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act of 1995, which
represent the expectations or beliefs of our management, including, but not limited to, statements
concerning the banking industry and the issuer’s operations, performance, financial condition and
growth. For this purpose, any statements contained in this Report that are not statements of
historical fact may be deemed forward-looking statements. Without limiting the generality of the
foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,”
“should,” “can,” “estimate,” or “continue” or the negative or other variations thereof or
comparable terminology are intended to identify forward-looking statements. These statements by
their nature involve substantial risks and uncertainties, certain of which are beyond our control,
and actual results may differ materially depending on a variety of important factors, including
competition, general economic and market conditions, changes in interest rates, changes in the
value of real estate and other collateral securing loans, interest rate sensitivity and exposure to
regulatory and legislative changes, and other risks and uncertainties described in our filings with
the Securities and Exchange Commission. Although we believe that the assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could prove to be inaccurate.
Therefore, we can give no assurance that the results contemplated in the forward-looking statements
will be realized. The inclusion of this forward-looking information should not be construed as a
representation by us or any person that the future events, plans, or expectations contemplated by
us will be achieved. We undertake no obligation to update publicly or revise any forward-looking
statements, whether as a result of new information, future events, or otherwise.
PART I
Item 1. Business
General
Georgia-Carolina Bancshares, Inc. (the “Company”) is a one-bank holding company and owns 100% of
the issued and outstanding stock of First Bank of Georgia (the “Bank”), an independent, locally
owned, state-chartered commercial bank which opened for business in 1989. The Bank operates three
branch offices in Augusta, Georgia, two branch offices in Martinez, Georgia and one branch office
in Thomson, Georgia.
The Bank operates as a locally owned bank that targets the banking needs of individuals and small
to medium-sized businesses by emphasizing personal service. The Bank offers a full range of
deposit and lending services and is a member of an electronic banking network that enables its
customers to use the automated teller machines of other financial institutions. In addition, the
Bank offers commercial and business credit services, as well as various consumer credit services,
including home mortgage loans, automobile loans, lines of credit, home equity loans and home
improvement loans. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation
(the “FDIC”).
The Company was incorporated under the laws of the State of Georgia in January 1997 at the
direction of the Board of Directors of the Bank based on a plan of reorganization developed by the
Board to substantially strengthen the Bank’s competitive position. The reorganization, in which the
Bank became a wholly owned subsidiary of the Company, was completed in June 1997.
In September 1999, the Bank established a mortgage division which operates as First Bank Mortgage
(the “Mortgage Division”). The Mortgage Division originates mortgage loans and offers a variety of
other
mortgage products. As of December 31, 2008, First Bank Mortgage had locations in the Augusta and
Savannah, Georgia markets as well as the Jacksonville, Florida market.
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In December 2003, the Bank established a financial services division which operates as FB Financial
Services. FB Financial Services offers financial planning and investment services through its
relationship with Linsco/Private Ledger (Member NASD/SIPC), one of the nation’s leading independent
brokerage firms. A joint office of FB Financial Services and Linsco/Private Ledger is located in
the Bank’s Main Office location on Wheeler Road in Augusta.
For further information responsive to this item, see “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in Item 7 of this report.
Market Area and Competition
The primary service area of the Bank includes the counties of Richmond, Columbia and McDuffie,
Georgia, the communities of Augusta, Martinez, Evans and Thomson, Georgia, and Aiken County, South
Carolina, which are within a 40-mile radius of the Bank’s main office. The Bank encounters
competition from other commercial banks, which offer a full range of banking services and compete
for all types of services, especially deposits. In addition, in certain aspects of its banking
business, the Bank also competes with credit unions, small loan companies, consumer finance
companies, brokerage houses, insurance companies, money market funds and other financial service
companies which attract customers that have traditionally been served by banks.
The extent to which other types of financial service companies compete with commercial banks has
increased significantly over the past several years as a result of federal and state legislation
which has permitted these organizations to compete for customers and offer products that have
historically been offered by banks. The impact of this legislation and other subsequent
legislation on the financial services industry cannot be predicted. See “Supervision and
Regulation.”
Asset/Liability Management
It is the objective of the Bank to manage assets and liabilities to provide a satisfactory,
consistent level of profitability within the framework of established cash, loan investment,
borrowing and capital policies. An investment committee is responsible for monitoring policies and
procedures that are designed to ensure acceptable composition of the asset/liability mix, stability
and leverage of all sources of funds while adhering to prudent banking practices. It is the
overall philosophy of management to support asset growth primarily through growth of core deposits,
which include deposits of all categories made by individuals, partnerships and corporations.
Management of the Bank seeks to invest the largest portion of the Bank’s assets in commercial,
consumer and real estate loans.
The Bank’s asset/liability mix is monitored on a daily basis and further evaluated with a quarterly
report that reflects interest-sensitive assets and interest-sensitive liabilities. This report is
prepared and presented to the Bank’s Investment Committee and Board of Directors. The objective of
this policy is to control interest-sensitive assets and liabilities so as to minimize the impact of
substantial movements in interest rates on the Company’s earnings.
Correspondent Banking
Correspondent banking involves the delivery of services by one bank to another bank which cannot
provide that service from an economic or practical standpoint. The Bank purchases correspondent
services offered by larger banks, including check collections, purchase and sale of federal funds,
wire
transfers, security safekeeping, investment services, coin and currency supplies, foreign exchange
(currency and check collection), over line and liquidity loan participations, and sales of loans to
or participations with correspondent banks.
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The Bank sells loan participations to correspondent banks. The Bank has established correspondent
relationships with Silverton Bank, the Federal Home Loan Bank of Atlanta and SunTrust Bank. As
compensation for services provided by a correspondent, the Bank maintains certain balances with
such correspondents in both non-interest bearing and interest bearing accounts.
Data Processing
The Bank has entered into a data processing servicing agreement with Fidelity Information Services,
under which the Bank receives a full range of data processing services, including an automated
general ledger, deposit accounting, commercial, real estate and installment lending data
processing, central information file and ATM processing, and internet banking services.
Employees
At December 31, 2008, the Company and the Bank employed 161 persons on a full-time basis and 6
persons on a part-time basis, including 51 officers.
Monetary Policies
The results of operations of the Bank are affected by credit policies of monetary authorities,
particularly the Federal Reserve Board. The instruments of monetary policy employed by the Federal
Reserve Board include open market operations in U.S. Government securities, changes in the discount
rate on member bank borrowings, changes in reserve requirements against member bank deposits and
limitations on interest rates which member banks may pay on time and savings deposits. In view of
changing conditions in the national economy and in the money markets, as well as the effect of
action by monetary and fiscal authorities, including the Federal Reserve Board, no prediction can
be made as to possible future changes in interest rates, deposit levels, loan demand or the
business and earnings of the Bank.
SUPERVISION AND REGULATION
The following discussion sets forth some of the material elements of the regulatory framework
applicable to bank holding companies and their subsidiaries and provides some specific information
relative to the Company and the Bank. The regulatory framework is intended primarily for the
protection of depositors and the Deposit Insurance Fund and not for the protection of security
holders and creditors. To the extent that the following information describes statutory and
regulatory provisions, it is qualified in its entirety by reference to the particular statutory and
regulatory provisions.
Recent
Federal Legislation
Emergency Economic Stabilization Act of 2008. On October 3, 2008, the Emergency Economic
Stabilization Act of 2008 (the “EESA”) became law. Under the Troubled Asset Relief Program
(“TARP”) authorized by EESA, the U.S. Treasury has established a Capital Purchase Program (“CPP”)
providing for the purchase of senior preferred shares of qualifying U.S. controlled banks, savings
associations and certain bank and savings and loan holding companies. The Board of Directors of
the Bank decided not to participate in the CPP. The EESA also establishes a Temporary Liquidity
Guarantee Program (“TLGP”) that gives the FDIC the ability to provide a guarantee for newly-issued
senior unsecured debt and non-interest bearing transaction deposit accounts at eligible insured
institutions. The Board of Directors of the Bank has elected to participate in the TLGP.
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On March 23, 2009, the U.S. Treasury, in conjunction with the FDIC and Federal Reserve,
announced the Public-Private Investment Program (the “PPIP”). Targeting illiquid real estate loans
held on the books of financial institutions, referred to as legacy loans, and securities backed by
loan portfolios, referred to as legacy securities, the PPIP is designed to open lending channels by
facilitating a market for distressed assets. The PPIP has been structured to combine $75 to $100
billion in capital from TARP with capital from the private sector to generate $500 billion in
purchasing power that will be used to buy legacy loans and legacy securities.
The Company
Bank Holding Company Regulation. The Company is a bank holding company and a member of the Federal
Reserve System under the Bank Holding Company Act of 1956 (the “BHC Act”). As such, the Company is
subject to the supervision, examination and reporting requirements of the BHC Act, as well as other
federal and state laws governing the banking business. The Federal Reserve Board is the primary
regulator of the Company, and supervises the Company’s activities on a continual basis. The
Company is required to furnish to the Federal Reserve an annual report of its operations at the end
of each fiscal year, and such additional information as the Federal Reserve may require pursuant to
the BHC Act. In general, the BHC Act limits bank holding company business to owning or controlling
banks and engaging in other banking-related activities. The BHC Act requires that a bank holding
company obtain the prior approval of the Federal Reserve before:
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acquiring direct or indirect ownership or control of more than 5% of the voting shares
of any bank; |
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taking any action that causes a bank to become a subsidiary of a bank holding company; |
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merging or consolidating with another bank holding company; or |
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acquiring most other operating companies. |
Subject to certain state laws, a bank holding company that is adequately capitalized and adequately
managed may acquire the assets of both in-state and out-of-state banks. Under the
Gramm-Leach-Bliley Act (described below), a bank holding company meeting certain qualifications may
apply to the Federal Reserve Board to become a financial holding company, and thereby engage
(directly or through a subsidiary) in certain activities deemed financial in nature, such as
securities brokerage and insurance underwriting. With certain exceptions, the BHC Act prohibits
bank holding companies from acquiring direct or indirect ownership or control of voting shares in
any company that is not a bank or a bank holding company unless the Federal Reserve Board
determines such activities are incidental or closely related to the business of banking.
The Change in Bank Control Act of 1978 requires a person (or a group of persons acting in concert)
acquiring “control” of a bank holding company to provide the Federal Reserve Board with 60 days’
prior written notice of the proposed acquisition. Following receipt of this notice, the Federal
Reserve Board has 60 days (or up to 90 days if extended) within which to issue a notice
disapproving the proposed acquisition. In addition, any “company” must obtain the Federal Reserve
Board’s approval before acquiring 25% (5% if the “company” is a bank holding company) or more of
the outstanding shares or otherwise obtaining control over the Company.
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Financial Services Modernization. The Gramm-Leach-Bliley Financial Modernization Act of 1999 (the
“Modernization Act”), enacted on November 12, 1999, amended the BHC Act and:
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allows bank holding companies that qualify as “financial holding companies” to engage in
a substantially broader range of non-banking activities than was permissible under prior
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allows insurers and other financial services companies to acquire banks; |
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allows national banks, and some state banks, either directly or through operating
subsidiaries, to engage in certain non-banking financial activities; |
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removes various restrictions that applied to bank holding company ownership of
securities firms and mutual fund advisory companies; and |
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establishes the overall regulatory structure applicable to bank holding companies that
also engage in insurance and securities operations. |
If the Company, which has not obtained qualification as a “financial holding company,” were to do
so in the future, the Company would be eligible to engage in, or acquire companies engaged in, the
broader range of activities that are permitted by the Modernization Act, provided that if any of
the Company’s banking subsidiaries were to cease to be “well capitalized” or “well managed” under
applicable regulatory standards, the Federal Reserve Board could, among other things, place
limitations on the Company’s ability to conduct these broader financial activities or, if the
deficiencies persisted, require the Company to divest the banking subsidiary. In addition, if the
Company were to be qualified as a financial holding company and any of its banking subsidiaries
were to receive a rating of less than satisfactory under the Community Reinvestment Act of 1977
(the “CRA”), the Company would be prohibited from engaging in any additional activities other than
those permissible for bank holding companies that are not financial holding companies. The broader
range of activities in which financial holding companies are eligible to engage include activities
that are determined to be “financial in nature,” including insurance underwriting, securities
underwriting and dealing, and making merchant banking investments in commercial and financial
companies.
Transactions with Affiliates. The Company and the Bank are deemed to be affiliates within the
meaning of the Federal Reserve Act, and transactions between affiliates are subject to certain
restrictions. Generally, the Federal Reserve Act limits the extent to which a financial
institution or its subsidiaries may engage in “covered transactions” with an affiliate. It also
requires all transactions with an affiliate, whether or not “covered transactions,” to be on terms
substantially the same, or at least as favorable to the institution or subsidiary, as those
provided to a non-affiliate. The term “covered transaction” includes the making of loans, purchase
of assets, issuance of a guarantee and other similar types of transactions.
Tie-In Arrangements. The Company and the Bank cannot engage in certain tie-in arrangements in
connection with any extension of credit, sale or lease of property or furnishing of services. For
example, with certain exceptions, neither the Company nor the Bank may condition an extension of
credit on either a requirement that the customer obtain additional services provided by either the
Company or the Bank, or an agreement by the customer to refrain from obtaining other services from
a competitor. The Federal Reserve Board has adopted exceptions to its anti-tying rules that allow
banks greater flexibility to package products with their affiliates. These exceptions were
designed to enhance competition in banking and non-banking products and to allow banks and their
affiliates to provide more efficient, lower cost service to their customers.
Source of Strength; Cross-Guarantee. Under Federal Reserve Board policy, the Company is expected
to act as a source of financial strength to the Bank and to commit resources to support the Bank.
This support may be required at times when, absent that Federal Reserve Board policy, the Company
may not find itself able to provide it. Capital loans by a bank holding company to any of its
subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness
of such subsidiary banks. In the event of a bank holding company’s bankruptcy, any commitment by
the bank holding company to a federal bank regulatory agency to maintain the capital of a
subsidiary bank will be assumed by the
bankruptcy trustee and entitled to a priority of payment.
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Under the Bank Holding Company Act, the Federal Reserve Board may require a bank holding company to
terminate any activity or relinquish control of a non-bank subsidiary, other than a non-bank
subsidiary of a bank, upon the Federal Reserve Board’s determination that such activity or control
constitutes a serious risk to the financial soundness or stability of any subsidiary depository
institution of the bank’s holding company. Further, federal bank regulatory authorities have
additional discretion to require a bank holding company to divest itself of any bank or non-bank
subsidiary if the agency determines that divestiture may aid the depository institution’s financial
condition.
Subsidiary Dividends. The Company is a legal entity separate and distinct from the Bank. A major
portion of the Company’s revenues results from amounts paid as dividends to the Company by the
Bank. The Georgia Department of Banking and Finance’s approval must be obtained before the Bank
may pay cash dividends out of retained earnings if (i) the total classified assets at the most
recent examination of the Bank exceeded 80% of the equity capital, (ii) the aggregate amount of
dividends declared or anticipated to be declared in the calendar year exceeds 50% of the net
profits, after taxes but before dividends for the previous calendar year, or (iii) the ratio of
equity capital to adjusted assets is less than 6%.
In addition, the Company and the Bank are subject to various general regulatory policies and
requirements relating to the payment of dividends, including requirements to maintain adequate
capital above regulatory minimums. The appropriate federal regulatory authority is authorized to
determine under certain circumstances relating to the financial condition of a bank or bank holding
company that the payment of dividends would be an unsafe or unsound practice and to prohibit
payment thereof. The appropriate federal regulatory authorities have indicated that paying
dividends that deplete a bank’s capital base to an inadequate level would be an unsound and unsafe
banking practice and that banking organizations should generally pay dividends only out of current
operating earnings.
State Law Restrictions. As a Georgia business corporation, the Company may be subject to certain
limitations and restrictions under applicable Georgia corporate law.
The Bank
General. The Bank, as a Georgia state-chartered bank, is subject to regulation and examination by
the State of Georgia Department of Banking and Finance, as well as the FDIC. Georgia state laws
regulate, among other things, the scope of the Bank’s business, its investments, its payment of
dividends to the Company, its required legal reserves and the nature, lending limit, maximum
interest charged and amount of and collateral for loans. The laws and regulations governing the
Bank generally have been promulgated by Georgia to protect depositors and not to protect
shareholders of the Company or the Bank.
Insider Credit Transactions. Banks are also subject to certain restrictions imposed by the Federal
Reserve Act on extensions of credit to executive officers, directors, principal shareholders, or
any related interests of such persons. Extensions of credit must be made on substantially the same
terms, including interest rates and collateral, and follow credit underwriting procedures that are
not less stringent than those prevailing at the time for comparable transactions with persons not
covered above and who are not employees. Also, such extensions of credit must not involve more
than the normal risk of repayment or present other unfavorable features.
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Regulation W. The Federal Reserve Board has issued Regulation W, which codifies prior regulations
under Sections 23A and 23B of the Federal Reserve Act and interpretative guidance with respect to
affiliate transactions. Regulation W incorporates the exemption from the affiliate transaction
rules but expands the exemption to cover the purchase of any type of loan or extension of credit
from an affiliate. In addition, under Regulation W:
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a bank and its subsidiaries may not purchase a low-quality asset from an affiliate; |
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covered transactions and other specified transactions between a bank or its subsidiaries
and an affiliate must be on terms and conditions that are consistent with safe and sound
banking practices; and |
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with some exceptions, each loan or extension of credit by a bank to an affiliate must be
secured by collateral with a market value ranging from 100% to 130%, depending on the type
of collateral, of the amount of the loan or extension of credit. |
Regulation W generally excludes all non-bank and non-savings association subsidiaries of banks from
treatment as affiliates, except to the extent that the Federal Reserve Board decides to treat these
subsidiaries as affiliates. Concurrently, with the adoption of Regulation W, the Federal Reserve
Board has proposed a regulation which would further limit the amount of loans that could be
purchased by a bank from an affiliate to not more than 100% of the bank’s capital and surplus.
This regulation has not yet been adopted.
Federal Deposit Insurance Corporation Improvement Act. Under the Federal Deposit Insurance
Corporation Improvement Act of 1991 (the “FDICIA”), all insured institutions must undergo regular
on-site examinations by their appropriate banking agency. The cost of examinations of insured
depository institutions and any affiliates may be assessed by the appropriate agency against each
institution or affiliate as it deems necessary or appropriate. Insured institutions are required
to submit annual reports to the FDIC, their federal regulatory agency, and their state supervisor
when applicable. The FDICIA directs the FDIC to develop a method for insured depository
institutions to provide supplemental disclosure of the estimated fair market value of assets and
liabilities, to the extent feasible and practicable, in any balance sheet, financial statement,
report of condition, or any other report of any insured depository institution. Each federal
banking agency has prescribed, by regulation, non-capital safety and soundness standards for
institutions under its authority. These standards cover internal controls, information systems and
internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, compensation, fees and benefits, such other operational and managerial standards as the
agency determines to be appropriate, and standards for asset quality, earnings and stock valuation.
Interstate Banking and Branching. The Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 (the “IBBEA”) permits nationwide interstate banking and branching under certain
circumstances. This legislation generally authorizes interstate branching and relaxes federal law
restrictions on interstate banking. Currently, bank holding companies may purchase banks in any
state, and states may not prohibit such purchases. Additionally, banks are permitted to merge with
banks in other states as long as the home state of neither merging bank has “opted out.” The IBBEA
requires regulators to consult with community organizations before permitting an interstate
institution to close a branch in a low-income area. The IBBEA also prohibits the interstate
acquisition of a bank if, as a result, the bank holding company would control more than ten percent
of the total United States insured depository deposits or more than thirty percent, or the
applicable state law limit, of deposits in the acquired bank’s state. Under recent FDIC
regulations, banks are prohibited from using their interstate branches primarily for deposit
production. The FDIC has accordingly implemented a loan-to-deposit ratio screen to ensure
compliance with this prohibition.
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Georgia has “opted in” to the IBBEA and allows in-state banks to merge with out-of-state banks
subject
to certain requirements. Georgia law generally authorizes the acquisition of an in-state bank by
an out-of-state bank by merger with a Georgia financial institution that has been in existence for
at least three years prior to the acquisition. With regard to interstate bank branching,
out-of-state banks that do not already operate a branch in Georgia may not establish de novo
branches in Georgia.
Deposit Insurance and Assessments. The deposits of the Bank are currently insured to a maximum of
$250,000 per depositor until December 31, 2009, at which time the maximum is reduced to $100,000.
All insured banks are required to pay semi-annual deposit insurance assessments to the FDIC, which
are determined pursuant to a risk-based system adopted by the FDIC. In 2006, the FDIC enacted
various rules to implement the provisions of the Federal Deposit Insurance Reform Act of 2005 (the
“FDI Reform Act”). On March 31, 2006, in accordance with the FDI Reform Act, the FDIC merged the
Bank Insurance Fund and the Savings Association Insurance Fund to form the Deposit Insurance Fund
(“DIF”). Effective January 1, 2007, the FDIC also revised the risk-based premium system under
which the FDIC classifies institutions and generally assesses higher rates on those institutions
that tend to pose greater risks to the DIF. Under the new rules, the FDIC will evaluate each
institution’s, including the Bank’s, risk based on a combination of the institution’s supervisory
ratings and financial ratios.
The FDIC adopted an interim rule imposing a 20 basis point emergency special assessment on the
industry on June 30, 2009. The assessment is to be collected on September 30, 2009. The interim
rule would also permit the FDIC to impose an emergency special assessment after June 30, 2009, of
up to 10 basis points if necessary to maintain public confidence in deposit insurance. Comments on
the interim rule on special assessments are due no later than April 2, 2009.
Changes to the assessment system include higher rates for institutions that rely significantly on
secured liabilities, which may increase the FDIC’s loss in the event of failure without providing
additional assessment revenue. Under the final rule, assessments will be higher for institutions
that rely significantly on brokered deposits but, for well-managed and well-capitalized
institutions, only when accompanied by rapid asset growth. The final rule would also provide
incentives in the form of a reduction in assessment rates for institutions to hold long-term
unsecured debt and, for smaller institutions, high levels of Tier 1 capital.
Community Reinvestment Act. The Community Reinvestment Act requires that, in connection with
examinations of financial institutions within their respective jurisdictions, the Federal Reserve,
the FDIC, or the Office of the Comptroller of the Currency, shall evaluate the record of each
financial institution in meeting the credit needs of its local community, including low and
moderate income neighborhoods. These factors are also considered in evaluating mergers,
acquisitions, and applications to open a branch or facility. Failure to adequately meet these
criteria could impose additional requirements and limitations on the bank. Under the Modernization
Act, banks with aggregate assets of not more than $250 million will be subject to a Community
Reinvestment Act examination only once every sixty months if the bank receives an outstanding
rating, once every forty-eight months if it receives a satisfactory rating, and as needed if the
rating is less that satisfactory. Additionally, under the Modernization Act, banks are required to
publicly disclose the terms of various Community Reinvestment Act-related agreements.
The Modernization Act-Consumer Privacy. The Modernization Act also contains provisions regarding
consumer privacy. These provisions require financial institutions to disclose their policy for
collecting and protecting confidential information. Customers generally may prevent financial
institutions from sharing personal financial information with nonaffiliated third parties except
for third parties that market an institution’s own products and services. Additionally, financial
institutions generally may not disclose consumer account numbers to any nonaffiliated third party
for use in telemarketing, direct mail marketing, or other marketing to the consumer.
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Capital Adequacy
Federal bank regulatory agencies use capital adequacy guidelines in the examination and regulation
of bank holding companies and banks. If capital falls below minimum guideline levels, the holding
company or bank may be denied approval to acquire or establish additional banks or non-bank
businesses or to open new facilities.
The FDIC and Federal Reserve Board use risk-based capital guidelines for banks and bank holding
companies. These are designed to make such capital requirements more sensitive to differences in
risk profiles among banks and bank holding companies, to account for off-balance sheet exposure and
to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are
assigned to broad risk categories, each with appropriate weights. The resulting capital ratios
represent capital as a percentage of total risk-weighted assets and off-balance sheet items. The
guidelines are minimums, and the Federal Reserve Board has noted that bank holding companies
contemplating significant expansion programs should not allow expansion to diminish their capital
ratios and should maintain ratios well in excess of the minimum. The current guidelines require
all bank holding companies and federally-regulated banks to maintain a minimum risk-based total
capital ratio equal to 8%, of which at least 4% must be Tier 1 capital. Tier 1 capital for bank
holding companies includes common shareholders’ equity, certain qualifying perpetual preferred
stock and minority interests in equity accounts of consolidated subsidiaries, but excludes goodwill
and most other intangibles and excludes the allowance for loan and lease losses. Tier 2 capital
includes the excess of any preferred stock not included in Tier 1 capital, mandatory convertible
securities, hybrid capital instruments, subordinated debt and intermediate term-preferred stock,
and general reserves for loan and lease losses up to 1.25% of risk-weighted assets.
The FDIC and Federal Reserve Board also employ a leverage ratio, which is Tier 1 capital as a
percentage of total assets less intangibles, to be used as a supplement to risk-based guidelines.
The principal objective of the leverage ratio is to constrain the maximum degree to which a bank
holding company or bank may leverage its equity capital base. A minimum leverage ratio of 3% is
required for the most highly rated bank holding companies and banks. Other bank holding companies,
banks and bank holding companies seeking to expand, however, are required to maintain minimum
leverage ratios of at least 4% to 5%.
The FDICIA created a statutory framework of supervisory actions indexed to the capital level of the
individual institution. Under the “prompt corrective action” regulations adopted by the FDIC and
the Federal Reserve Board, an institution is assigned to one of five capital categories, ranging
from “well-capitalized” to “critically undercapitalized”, depending on its total risk-based capital
ratio, Tier 1 risk-based capital ratio, and leverage ratio, together with certain subjective
factors. Institutions which are deemed to be “significantly undercapitalized” or “critically
undercapitalized” are subject to certain mandatory supervisory corrective actions.
Other Laws and Regulations
International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001. On October 26,
2001, the USA PATRIOT Act was enacted. It includes the International Money Laundering Abatement
and Anti-Terrorist Financing Act of 2001 (the “IMLAFA”) and strong measures to prevent, detect and
prosecute terrorism and international money laundering. As required by the IMLAFA, the federal
banking agencies, in cooperation with the U.S. Treasury Department, established rules that
generally apply to insured depository institutions and U.S. branches and agencies of foreign banks.
Among other things, the new rules require that financial institutions implement reasonable
procedures to (1) verify the identity of any person opening an account; (2) maintain records of the
information used to verify the person’s identity; and (3) determine whether the person appears on
any list of known or
9
suspected terrorists or terrorist organizations. The rules also prohibit banks from establishing
correspondent accounts with foreign shell banks with no physical presence and encourage cooperation
among financial institutions, their regulators and law enforcement to share information regarding
individuals, entities and organizations engaged in terrorist acts or money laundering activities.
The rules also limit a financial institution’s liability for submitting a report of suspicious
activity and for voluntarily disclosing a possible violation of law to law enforcement.
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 (the “SOX”) was enacted to address
corporate and accounting fraud. It established a new accounting oversight board that enforces
auditing standards and restricts the scope of services that accounting firms may provide to their
public company audit clients. Among other things, it also; (i) requires chief executive officers
and chief financial officers to certify to the accuracy of periodic reports filed with the
Securities and Exchange Commission (the “SEC”); (ii) imposes new disclosure requirements regarding
internal controls, off-balance-sheet transactions, and pro forma (non-GAAP) disclosures; (iii)
accelerates the time frame for reporting of insider transactions and periodic disclosures by
certain public companies; and (iv) requires companies to disclose whether or not they have adopted
a code of ethics for senior financial officers and whether the audit committee includes at least
one “audit committee financial expert.”
The SOX requires the SEC, based on certain enumerated factors, to regularly and systematically
review corporate filings. To deter wrongdoing, it: (i) subjects bonuses issued to top executives
to disgorgement if a restatement of a company’s financial statements was due to corporate
misconduct; (ii) prohibits an officer or director from misleading or coercing an auditor; (iii)
prohibits insider trades during pension fund “blackout periods”; (iv) imposes new criminal
penalties for fraud and other wrongful acts; and (v) extends the period during which certain
securities fraud lawsuits can be brought against a company or its officers.
Other Regulations. Interest and other charges collected or contracted for by the Bank are subject
to state usury laws and federal laws concerning interest rates. The Bank’s loan operations are also
subject to federal laws applicable to credit transactions, such as:
|
• |
|
the federal Truth-In-Lending Act, governing disclosures of credit terms to consumer
borrowers; |
|
|
• |
|
the Home Mortgage Disclosure Act of 1975, requiring financial institutions to
provide information to enable the public and public officials to determine whether a
financial institution is fulfilling its obligation to help meet the housing needs of
the community it serves; |
|
|
• |
|
the Equal Credit Opportunity Act, prohibiting discrimination on the basis of race,
creed or other prohibited factors in extending credit; |
|
|
• |
|
the Fair Credit Reporting Act of 1978, governing the use and provision of
information to credit reporting agencies; |
|
|
• |
|
the Fair Debt Collection Act, governing the manner in which consumer debts may be
collected by collection agencies; and |
|
|
• |
|
the rules and regulations of the various federal agencies charged with the
responsibility of implementing such federal laws. |
The deposit operations of the Bank are also subject to:
|
• |
|
the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality
of
consumer financial records and prescribes procedures for complying with administrative
subpoenas of financial records; and |
10
|
• |
|
the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve
Board to implement that act, which governs automatic deposits to and withdrawals from
deposit accounts and customers’ rights and liabilities arising from the use of
automated teller machines and other electronic banking services. |
Financial Institutions Reform Recovery and Enforcement Act. This act expanded and increased the
enforcement powers of the regulators in terms of both civil and criminal penalties available for
use by the federal regulatory agencies against depository institutions and certain
“institution-affiliated parties.” Institution-affiliated parties primarily include management,
employees, and agents of a financial institution, as well as independent contractors and
consultants such as attorneys and accountants and others who participate in the conduct of the
financial institution’s affairs. These practices can include the failure of an institution to
timely file required reports or the filing of false or misleading information or the submission of
inaccurate reports. Civil penalties may be as high as $1,000,000 a day for such violations.
Criminal penalties for some financial institution crimes have been increased to twenty years. In
addition, regulators are provided with greater flexibility to commence enforcement actions against
institutions and institution-affiliated parties. Possible enforcement actions include the
termination of deposit insurance. Furthermore, banking agencies’ power to issue cease-and-desist
orders were expanded. Such orders may, among other things, require affirmative action to correct
any harm resulting from a violation or practice, including restitution, reimbursement,
indemnification or guarantees against loss. A financial institution may also be ordered to restrict
its growth, dispose of certain assets, rescind agreements or contracts, or take other actions as
determined by the ordering agency to be appropriate.
Privacy and Credit Reporting. Financial institutions are required to disclose their policies for
collecting and protecting confidential information. Customers generally may prevent financial
institutions from sharing nonpublic personal financial information with nonaffiliated third parties
except under narrow circumstances, such as the processing of transactions requested by the
consumer. Additionally, financial institutions generally may not disclose consumer account numbers
to any nonaffiliated third party for use in telemarketing, direct mail marketing or other marketing
to consumers. It is the Bank’s policy not to disclose any personal information unless required by
law.
Like other lending institutions, the Bank utilizes credit bureau data in its underwriting
activities. Use of such data is regulated under the Federal Credit Reporting Act on a uniform,
nationwide basis, including credit reporting, prescreening, sharing of information between
affiliates, and the use of credit data. The Fair and Accurate Credit Transactions Act of 2003 (the
“FACT Act”) authorizes states to enact identity theft laws that are not inconsistent with the
conduct required by the provisions of the FACT Act.
Check 21. The Check Clearing for the 21st Century Act gives “substitute checks,” such as a digital
image of a check and copies made from that image, the same legal standing as the original paper
check. Some of the major provisions include:
|
• |
|
allowing check truncation without making it mandatory; |
|
|
• |
|
demanding that every financial institution communicate to accountholders in writing
a description of its substitute check processing program and their rights under the
law; |
|
|
• |
|
legalizing substitutions for and replacements of paper checks without agreement from
consumers; |
11
|
• |
|
retaining in place the previously mandated electronic collection and return of
checks between financial institutions only when individual agreements are in place; |
|
• |
|
requiring that when accountholders request verification, financial institutions
produce the original check (or a copy that accurately represents the original) and
demonstrate that the account debit was accurate and valid; and |
|
|
• |
|
requiring the re-crediting of funds to an individual’s account on the next business
day after a consumer proves that the financial institution has erred. |
Effect of Governmental Monetary Policies. Our earnings will be affected by domestic economic
conditions and the monetary and fiscal policies of the United States government and its agencies.
The Federal Reserve Bank’s monetary policies have had, and are likely to continue to have, an
important impact on the operating results of commercial banks through its power to implement
national monetary policy in order, among other things, to curb inflation or combat a recession. The
monetary policies of the Federal Reserve Board have major effects upon the levels of bank loans,
investments and deposits through its open market operations in United States government securities
and through its regulation of the discount rate on borrowings of member banks and the reserve
requirements against member bank deposits. It is not possible to predict the nature or impact of
future changes in monetary and fiscal policies.
Future Legislation. Changes to federal and state laws and regulations can affect the operating
environment of bank holding companies and their subsidiaries in substantial and unpredictable ways.
From time to time, various legislative and regulatory proposals are introduced. These proposals,
if codified, may change banking statutes and regulations and the Company’s operating environment in
substantial and unpredictable ways. If codified, these proposals could increase or decrease the
cost of doing business, limit or expand permissible activities or affect the competitive balance
among banks, savings associations, credit unions and other financial institutions. The Company
cannot accurately predict whether those changes in laws and regulations will occur, and, if those
changes occur, the ultimate effect they would have upon the Company’s financial condition or
results of operation.
The following are certain significant risks that our management believes are specific to our
business. This should not be viewed as an all-inclusive list.
Recent Market, Legislative and Regulatory Events
The current banking crisis in the United States and globally has adversely affected our industry,
including our business, and may continue to have an adverse effect on our business in the
future.
Dramatic declines in the housing market over the past two years, with falling home prices and
increasing foreclosures, unemployment and under-employment, have negatively impacted the credit
performance of real estate related loans and resulted in significant write-downs of asset values by
financial institutions. These write-downs, initially of asset-backed securities (“ABS”) but
spreading to other securities and loans, have caused many financial institutions to seek additional
capital, to reduce or eliminate dividends, to merge with larger and stronger institutions and, in
some cases, to fail. Reflecting concern about the stability of the financial markets generally and
the strength of counterparties, many lenders and institutional investors have reduced or ceased
providing funding to borrowers, including to other financial institutions. This market turmoil and
tightening of credit have led to an increased level of commercial and consumer delinquencies, lack
of consumer confidence, increased market volatility and widespread
12
reduction of business activity generally. The resulting economic pressure on consumers and the
lack of confidence in the financial markets have adversely affected our business, financial
condition and results of operations. Market developments may affect consumer confidence levels and
may cause adverse changes in payment patterns, causing increases in delinquencies and default
rates, which may impact our charge-offs and provision for credit losses. A worsening of these
conditions would likely exacerbate the adverse effects of these difficult market conditions on us
and others in the financial institutions industry.
Current levels of market volatility are unprecedented.
The capital and credit markets have been experiencing volatility and disruption for more than 12
months. Recently, volatility and disruption have reached unprecedented levels. In some cases, the
markets have produced downward pressure on stock prices and credit availability for certain issuers
without regard to those issuers’ underlying financial strength. If current levels of market
disruption and volatility continue or worsen, there can be no assurance that we will not experience
an adverse effect, which may be material, on our ability to access capital and on our business,
financial condition and results of operations.
The soundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions
and commercial soundness of other financial institutions. Financial services institutions are
interrelated as a result of trading, clearing, counterparty, or other relationships. We have
exposure to many different industries and counterparties, and we routinely execute transactions
with counterparties in the financial industry, including brokers and dealers, commercial banks,
investment banks, mutual and hedge funds, and other institutional clients. As a result, defaults
by, or even rumors or questions about, one or more financial services institutions, or the
financial services industry generally, have led to market-wide liquidity problems and could lead to
losses or defaults by us or by other institutions. Many of these transactions expose us to credit
risk in the event of default of our counterparty or client. In addition, our credit risk may be
exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not
sufficient to recover the full amount of the financial instrument exposure due us. There is no
assurance that any such losses would not materially and adversely affect our business, financial
condition, and results of operations.
There can be no assurance that new legislation and federal programs will stabilize the U.S.
financial system, and may adversely affect us.
In response to the financial issues affecting the banking system and financial markets and going
concern threats to investment banks and other financial institutions, the U.S. Congress recently
enacted the Emergency Economic Stabilization Act of 2008 (“EESA”). The EESA provides the U.S.
Secretary of the Treasury with the authority to establish a Troubled Asset Relief Program (“TARP”)
with up to $700 billion of residential or commercial mortgages and any securities, obligations or
other instruments that are based on or related to such mortgages, that in each case was originated
or issued on or before March 14, 2008, as well as any other financial instrument that the U.S.
Secretary of the Treasury, after consultation with the Chairman of the Federal Reserve, determines
the purchase of which is necessary to promote financial market stability, which include capital
injections into financial institutions.
As part of the EESA, the Treasury Department has developed a Capital Purchase Program to purchase
up to $250 billion in senior preferred stock from qualifying financial institutions. The Capital
Purchase Program was designed to strengthen the capital and liquidity positions of viable
institutions and to encourage banks and thrifts to increase lending to creditworthy borrowers. The
EESA also establishes a Temporary Liquidity Guarantee Program (“TLGP”) that gives the FDIC the
ability to provide a guarantee for newly-issued senior unsecured debt and non-interest bearing
transaction deposit accounts at eligible
insured institutions. For non-interest bearing transaction deposit accounts, a 10 basis point
annual rate surcharge will be applied to deposit amounts in excess of $250,000. We elected not to
participate in the Capital Purchase Program but will participate in the TLGP.
13
The U.S. Congress or federal banking regulatory agencies could adopt additional regulatory
requirements or restrictions in response to the threats to the financial system and such changes
may adversely affect our operations. In addition, the EESA may not have the intended beneficial
impact on the financial markets or the banking industry. To the extent the market does not respond
favorably to the TARP or the program does not function as intended, our prospects and results of
operations could be adversely affected.
Contemplated and proposed legislation, state and federal programs, and increased government control
or influence may adversely affect us by increasing the uncertainty in our lending operations and
expose us to increased losses. Statutes and regulations may be altered that may potentially
increase our costs to service and underwrite mortgage loans.
Similarly, any program established by the FDIC under the systematic risk exception of the Federal
Deposit Act (FDA) may adversely affect us whether we participate or not. Our participation in the
TLGP requires we pay additional insurance premiums to the FDIC. Additionally, the FDIC has
increased premiums on insured accounts because market developments, including the increase of
failures in the banking industry, have significantly depleted the insurance fund of the FDIC and
reduced the ratio of reserves to insured deposits.
Our Material Business Risks
An economic downturn, especially one affecting Richmond, Columbia and McDuffie counties, could
adversely affect our business.
Our success significantly depends upon the growth in population, income levels, deposits, and
housing in our primary market areas of Richmond, Columbia and McDuffie counties in the State of
Georgia. If these communities do not grow or if prevailing local or national economic conditions
are unfavorable, our business may be adversely affected. An economic downturn would likely harm the
quality of our loan portfolio and reduce the level of our deposits, which in turn would hurt our
business. If the strength of the U.S. economy in general and the strength of the local economies
in which the Company conducts operations declines, or continues to decline, this could result in,
among other things, a deterioration in credit quality, increased loan charge offs and delinquencies
or a reduced demand for credit, including a resultant effect on the Bank’s loan portfolio and
allowance for loan losses. These factors could materially adversely affect the Company’s financial
condition and results of operations. Unlike many larger institutions, we are not able to spread
the risks of unfavorable local economic conditions across a large number of diversified economies.
An economic downturn could, therefore, result in losses that materially and adversely affect our
business. The Bank is a community bank and as such, is mandated by the Community Reinvestment Act
and other regulations to conduct most of its lending activities within the geographic area where it
is located. As a result, the Bank and its borrowers may be especially vulnerable to the
consequences of changes in the local economy.
Weakness in the real estate market, including the secondary residential mortgage loan markets, has
adversely affected us and may continue to adversely affect us.
Significant ongoing disruptions in the secondary market for residential mortgage loans have reduced
the demand for and impaired the liquidity of many mortgage loans. The effects of ongoing mortgage
market challenges, combined with the ongoing correction in residential real estate market prices
and reduced levels of home sales, could result in further price reductions in single family home
values, adversely
14
affecting the value of collateral securing mortgage loans that we hold, mortgage loan originations
and profits on sale of mortgage loans. Declining real estate prices and higher interest rates have
also caused higher delinquencies and losses on certain mortgage loans. These trends could
continue. Continued declines in real estate values, home sales volumes and financial stress on
borrowers as a result of job losses, interest rate resets on adjustable rate mortgage loans or
other factors could have further adverse effects on borrowers, resulting in higher delinquencies
and greater charge-offs in future periods, which could adversely affect our financial condition or
results of operations. Additionally, decreases in real estate values might adversely affect the
creditworthiness of state and local governments, and this might result in decreased profitability
or credit losses from loans made to such governments.
Our loan portfolio includes a substantial amount of commercial real estate and construction and
development loans, which may have more risks than residential or consumer loans.
Our commercial real estate loans and construction and development loans account for a substantial
portion of our total loan portfolio. These loans generally carry larger loan balances and usually
involve a greater degree of financial and credit risk than home equity, residential or consumer
loans. The increased financial and credit risk associated with these types of loans is a result of
several factors, including the concentration of principal in a limited number of loans and to
borrowers in similar lines of business, the size of loan balances, the effects of general economic
conditions on income-producing properties and the increased difficulty of evaluating and monitoring
these types of loans.
Furthermore, the repayment of loans secured by commercial real estate in some cases is dependent
upon the successful operation, development or sale of the related real estate or commercial
project. If the cash flow from the project is reduced, the borrower’s ability to repay the loan
may be impaired. This cash flow shortage may result in the failure to make loan payments. In
these cases, we may be compelled to modify the terms of the loan. As a result, repayment of these
loans may, to a greater extent than other types of loans, be subject to adverse conditions in the
real estate market or economy.
Many of our borrowers have more than one loan or credit relationship with us.
Many of our borrowers have more than one commercial real estate or commercial business loan
outstanding with us. Consequently, an adverse development with respect to one loan or one credit
relationship can expose us to a significantly greater risk of loss compared to an adverse
development with respect to, for example, a one- to- four-family residential mortgage loan.
Our decisions regarding credit risk and reserves for loan losses may materially and adversely
affect our business.
Making loans and other extensions of credit is an essential element of our business. Although we
seek to mitigate risks inherent in lending by adhering to specific underwriting practices, our
loans and other extensions of credit may not be repaid. The risk of nonpayment is affected by a
number of factors, including:
|
• |
|
the duration of the credit; |
|
|
• |
|
credit risks of a particular customer; |
|
|
• |
|
changes in economic and industry conditions; and |
|
|
• |
|
in the case of a collateralized loan, risks resulting from uncertainties about the
future value of the collateral. |
15
We attempt to maintain an appropriate allowance for loan losses to provide for potential losses in
our loan portfolio. However, there is no precise method of predicting credit losses, since any estimate of
loan losses is necessarily subjective and the accuracy depends on the outcome of future events.
Therefore, we face the risk that charge-offs in future periods will exceed our allowance for loan
losses and that additional increases in the allowance for loan losses will be required. Additions
to the allowance for loan losses would result in a decrease of our net income, and possibly our
capital.
We face strong competition for customers, which could prevent us from obtaining customers and may
cause us to pay higher interest rates to attract deposits.
The banking business is highly competitive and we experience competition in each of our markets
from many other financial institutions. We compete with commercial banks, credit unions, savings
and loan associations, mortgage banking firms, consumer finance companies, securities brokerage
firms, insurance companies, money market funds and other mutual funds, as well as super-regional,
national and international financial institutions that operate offices in our primary market areas
and elsewhere. We compete with these institutions both in attracting deposits and in making
loans. In addition, in order to grow we have to attract customers from other existing financial
institutions or from new residents. Many of our competitors are well-established, larger financial
institutions. These institutions offer some services, such as extensive and established branch
networks and trust services, which we currently do not provide. In addition, competitors that are
not depository institutions are generally not subject to the extensive regulations that apply to
us. There is a risk that we will have a competitive disadvantage with these other financial
institutions in our markets, and that we may have to pay higher interest rates to attract deposits,
resulting in reduced profitability. In new markets that we may enter, we will also compete
against well-established community banks that have developed relationships within the community.
Changes in interest rates may reduce our profitability.
Our profitability depends in large part on our net interest income, which is the difference between
interest earned from interest-earning assets, such as loans and investment securities, and interest
paid on interest-bearing liabilities, such as deposits and borrowings. Our net interest income
will be adversely affected if market interest rates change such that the interest we pay on
deposits and borrowings increases faster than the interest we earn on loans and investments. Many
factors cause changes in interest rates, including governmental monetary policies and domestic and
international economic and political conditions. While we intend to manage the effects of changes
in interest rates by adjusting the terms, maturities, and pricing of our assets and liabilities,
our efforts may not be effective and our financial condition and results of operations may suffer.
Our recent operating results may not be indicative of our future operating results.
We may not be able to sustain our historical rate of growth and may not even be able to grow our
business at all. Consequently, our historical results of operations are not necessarily indicative
of our future operations. Various factors, such as economic conditions, regulatory and legislative
considerations and competition may also impede our ability to expand our market presence. If we
experience a significant decrease in our rate of growth, our results of operations and financial
condition may be adversely affected because a high percentage of our operating costs are fixed
expenses.
We could be adversely affected by the loss of one or more key personnel or by an inability to
attract and retain employees.
We believe that our growth and future success will depend in large part on the skills of our
executive officers. The loss of the services of one or more of these officers could impair our
ability to continue to
16
implement our business strategy. Our executive officers have extensive and long-standing ties
within our primary market areas and substantial experience with our operations, and have
contributed significantly to our growth. If we lose the services of any one of them, he may be
difficult to replace and our business could be materially and adversely affected.
Our success also depends, in part, on our continued ability to attract and retain experienced and
qualified employees. The competition for such employees is intense, and our inability to continue
to attract, retain and motivate employees could adversely affect our business.
The success of our growth strategy depends on our ability to identify and recruit individuals with
experience and relationships in the markets in which we intend to expand.
We intend to expand our banking network over the next several years into both new and existing
markets in and around our current market areas. We believe that to expand into new markets
successfully, we must identify and recruit experienced key management members with local expertise
and relationships in these markets. We expect that competition for qualified management in the
markets in which we may expand will be intense and that there will be a limited number of qualified
persons with knowledge of and experience in the community banking industry in these markets. Even
if we identify individuals that we believe could assist us in establishing a presence in a new
market, we may be unable to recruit these individuals away from their current employers. In
addition, the process of identifying and recruiting individuals with the combination of skills and
attributes required to carry out our strategy is often lengthy. Our inability to identify, recruit
and retain talented personnel to manage new offices effectively and in a timely manner would limit
our growth and could materially adversely affect our business, financial condition and results of
operations.
We will face risks with respect to future expansion and acquisitions or mergers.
We may expand into new lines of business or offer new products or services. Any expansion plans we
undertake may also divert the attention of our management from the operation of our core business,
which could have an adverse effect on our results of operations. We may also seek to acquire other
financial institutions or assets of those institutions. Any of these activities would involve a
number of risks such as the time and expense associated with evaluating new lines of business or
new markets for expansion, hiring or retaining local management and integrating new acquisitions.
Even if we acquire new lines of business or new products or services, they may not be profitable.
Nor can we say with certainty that we will be able to consummate, or if consummated, successfully
integrate, future acquisitions, if any, or that we will not incur disruptions or unexpected expense
in integrating such acquisitions. Any given acquisition, if and when consummated, may adversely
affect our results of operations and financial condition.
Our growth may require us to raise additional capital that may not be available when it is needed
or may not be available on terms acceptable to us.
We are required by regulatory authorities to maintain adequate levels of capital to support our
operations. To support our continued growth, we may need to raise additional capital. Our ability
to raise additional capital, if needed, will depend in part on conditions in the capital markets at
that time, which are outside our control. Accordingly, we cannot be assured of our ability to
raise additional capital, if needed, on terms acceptable to us. If we cannot raise additional
capital when needed, our ability to further expand our operations through internal growth and
acquisitions could be materially impaired.
17
We are subject to extensive regulation that could limit or restrict our activities.
We operate in a highly regulated industry and are subject to examination, supervision and
comprehensive regulation by various regulatory agencies. Our compliance with these regulations is
costly and restricts certain of our activities, including payment of dividends, mergers and
acquisitions, purchase and sale of investments, origination and sale of loans, interest rates
charged on loans, interest rates paid on deposits and locations of offices. We are also subject to
regulatory capital requirements established by our regulators, which require us to maintain
adequate capital to support our growth. If we fail to meet these
capital and other regulatory requirements, our ability to grow, our cost of funds and FDIC
insurance, our ability to borrow funds, our ability to pay dividends on common stock, and our
ability to make acquisitions could be materially and adversely affected.
The laws and regulations applicable to the banking industry could change at any time, and we cannot
predict the effects of these changes on our business and profitability. Because government
regulation greatly affects the business and financial results of all banks and bank holding
companies, our cost of compliance could adversely affect our profitability.
Efforts to comply with the Sarbanes-Oxley Act have involved significant expenditures, and
non-compliance with the Sarbanes-Oxley Act may adversely affect us.
The Sarbanes-Oxley Act of 2002, and the related rules and regulations promulgated by the Securities
and Exchange Commission, have increased the scope, complexity and cost of corporate governance,
reporting and disclosure practices. We have experienced, and we expect to continue to experience,
greater compliance costs, including costs related to internal controls, as a result of the
Sarbanes-Oxley Act. As of December 31, 2007, we were required to comply with Section 404 of the Sarbanes-Oxley Act and issue
a report on our internal controls. These rules and regulations have increased our accounting,
legal and other costs, and make some activities more difficult, time consuming and costly. In the
event that we are unable to maintain compliance with the Sarbanes-Oxley Act and related rules, we
may be adversely affected.
We conduct evaluations of our internal control systems in order to allow management to report on,
and our independent registered public accounting firm to attest to our internal control over
financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. If we identify
significant deficiencies or material weaknesses in our internal control over financial reporting
that we cannot remediate in a timely manner, or if we are unable to receive a positive attestation
from our independent registered public accounting firm with respect to our internal control over
financial reporting, the trading price of our common stock could decline, our ability to obtain any
necessary equity or debt financing could suffer and the trading market for our common stock could
be materially impaired.
18
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Item 1B. |
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Unresolved Staff Comments |
Not Applicable
The Company’s and the Bank’s main office is located at 3527 Wheeler Road in Augusta, Georgia. This
office was opened in September 2005. The Bank operates three banking offices in Augusta, Georgia,
two banking offices in Martinez, Georgia and one banking office in Thomson, Georgia. The following
table sets forth the location of each of the Bank’s branch offices and the date each branch opened
for business:
|
|
|
Branch |
|
Date Opened |
Hill Street Office, Thomson, Georgia
|
|
January 1989 |
Daniel Village Office, Augusta, Georgia
|
|
March 1999 |
West Town Office, Martinez, Georgia
|
|
October 1999 |
Medical Center Office, Augusta, Georgia
|
|
January 2001 |
Fury’s Ferry Road Office, Martinez, Georgia
|
|
April 2002 |
Main Office, Augusta, Georgia
|
|
September 2005 |
In January 2002, the Bank purchased a site located in Evans, Georgia. In March 2005, the Bank
entered into a contract to purchase another site in Evans, Georgia and finalized that purchase in
February 2006. The Bank will continue to evaluate the possibility of constructing a full service
banking facility on one of the two sites in Evans, Georgia.
The Bank also leases office space at one location in Augusta to house the Mortgage Division. The
Mortgage Division also operates offices in Savannah, Georgia and Jacksonville, Florida out of
leased office space.
|
|
|
Item 3. |
|
Legal Proceedings |
There are no material pending legal proceedings to which the Company or the Bank is a party or of
which any of their properties are subject; nor are there material proceedings known to the Company
or the Bank to be contemplated by any governmental authority; nor are there material proceedings
known to the Company or the Bank, pending or contemplated, in which any director, officer or
affiliate or any principal security holder of the Company or the Bank, or any associate of any of
the foregoing is a party or has an interest adverse to the Company or the Bank.
|
|
|
Item 4. |
|
Submission of Matters to a Vote of Security Holders |
No matter was submitted during the fourth quarter ended December 31, 2008 to a vote of security
holders of the Company.
19
PART II
|
|
|
Item 5. |
|
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Market Information
The Company’s common stock trades on the Over-The-Counter Bulletin Board under the symbol “GECR”.
The market for the Company’s common stock must be characterized as a limited market due to its
relatively low trading volume and lack of analyst coverage. The following table sets forth for the
periods indicated the quarterly high and low bid quotations per share as reported by the
Over-The-Counter Bulletin Board. These quotations also reflect inter-dealer prices without retail
mark-ups, mark-downs, or commissions and may not necessarily represent actual transactions. The
share prices below reflect all stock splits.
|
|
|
|
|
|
|
|
|
|
|
High |
|
|
Low |
|
Fiscal year ended December 31, 2008 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
11.00 |
|
|
$ |
9.05 |
|
Second Quarter |
|
$ |
11.50 |
|
|
$ |
9.00 |
|
Third Quarter |
|
$ |
12.35 |
|
|
$ |
9.00 |
|
Fourth Quarter |
|
$ |
12.35 |
|
|
$ |
7.00 |
|
Fiscal year ended December 31, 2007 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
14.10 |
|
|
$ |
12.90 |
|
Second Quarter |
|
$ |
14.00 |
|
|
$ |
12.90 |
|
Third Quarter |
|
$ |
13.50 |
|
|
$ |
13.00 |
|
Fourth Quarter |
|
$ |
13.20 |
|
|
$ |
10.90 |
|
Holders of Common Stock
As of March 27, 2009, the number of holders of record of the Company’s common stock was
approximately 586.
Dividends
No cash dividends were paid by the Company during the years ended December 31, 2008 or 2007.
Future dividends will be determined by the Board of Directors of the Company in light of
circumstances existing from time to time, including the Company’s growth, financial condition and
results of operations, the continued existence of the restrictions described below on the Bank’s
ability to pay dividends and other factors that the Board of Directors of the Company considers
relevant. In addition, the Board of Directors of the Company may determine, from time to time,
that it is prudent to pay special nonrecurring cash dividends in addition to or in lieu of regular
cash dividends. Such special dividends will depend upon the financial performance of the Company
and will take into account its capital position. No special dividend is presently contemplated.
20
Because the Company’s principal operations are conducted through the Bank, the Company generates
cash to pay dividends primarily through dividends paid to it by the Bank. Accordingly, any
dividends paid by the Company will depend on the Bank’s earnings, capital requirements, financial
condition and other factors. Under Georgia law, the Bank may pay dividends only when and if the
Bank is not insolvent. In addition, dividends may not be declared or paid at any time when the
Bank does not have combined paid-in capital and appropriated retained earnings equal to at least
20% of the Bank’s capital stock. Moreover, dividends may not be paid by the Bank without the prior
approval of the Georgia Banking Department, if the dividends are in excess of specified amounts
fixed by the Georgia Banking Department.
Equity Compensation Plan Information
The Company currently has three equity compensation plans: (i) the 1997 Stock Option Plan,
which was approved by shareholders; (ii) the 2004 Incentive Plan, which was approved by
shareholders; and (iii) the Director Stock Purchase Plan, which has not been approved by
shareholders. The following table provides information as of December 31, 2008 regarding the
Company’s then existing compensation plans and arrangements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
Weighted-average |
|
|
Number of securities remaining |
|
|
|
to be issued upon |
|
|
exercise price of |
|
|
available for future issuance |
|
|
|
exercise of outstanding |
|
|
outstanding |
|
|
under equity compensation |
|
|
|
options, warrants and |
|
|
options, warrants |
|
|
plans (excluding securities |
|
|
|
rights |
|
|
and rights |
|
|
reflected in column (a)) |
|
Plan category |
|
(a) |
|
|
(b) |
|
|
(c) |
|
Equity compensation plans approved
by security holders: |
|
|
|
|
|
|
|
|
|
|
|
|
1997 Stock Option Plan |
|
|
220,555 |
|
|
$ |
7.93 |
|
|
|
— |
|
2004 Incentive Plan |
|
|
66,320 |
|
|
$ |
13.32 |
|
|
|
262,805 |
|
Equity compensation plans not
approved by security holders |
|
|
N/A |
|
|
|
N/A |
|
|
|
70,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
286,875 |
|
|
$ |
9.18 |
|
|
|
333,239 |
|
Director Stock Purchase Plan
The Director Stock Purchase Plan provides that non-employee directors of the Company and
the Bank may elect to purchase shares of the Company’s common stock in lieu of receiving
cash for director fees earned in each calendar quarter. The purchase price for shares
acquired under the plan is $2.00 less than the closing market price of the Company’s common
stock as reported on the Over-the-Counter Bulletin Board on the last day of each calendar
quarter. A non-employee director may join the plan at any time during the last seven days
of each calendar quarter.
21
|
|
|
Item 6. |
|
Selected Financial Data |
Our selected consolidated financial data presented below as of and for the years ended December 31,
2004 through 2008 is derived from our audited consolidated financial statements. Our audited
consolidated financial statements as of December 31, 2008 and 2007 and for each of the years in the
three year period ended December 31, 2008 are included elsewhere in this report. All years have
been restated as necessary for stock dividends and stock splits.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At and for the Years Ended December 31, |
|
|
|
($ in thousands, except per share data) |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Selected Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
460,828 |
|
|
$ |
447,869 |
|
|
$ |
417,471 |
|
|
$ |
349,481 |
|
|
$ |
332,393 |
|
Investment securities |
|
|
59,795 |
|
|
|
60,393 |
|
|
|
55,404 |
|
|
|
39,362 |
|
|
|
43,375 |
|
Loans, held for investment |
|
|
336,293 |
|
|
|
322,201 |
|
|
|
280,883 |
|
|
|
248,311 |
|
|
|
216,728 |
|
Loans, held for sale |
|
|
28,402 |
|
|
|
39,547 |
|
|
|
56,758 |
|
|
|
40,064 |
|
|
|
56,729 |
|
Allowance for loan losses |
|
|
4,284 |
|
|
|
5,059 |
|
|
|
4,386 |
|
|
|
3,756 |
|
|
|
3,416 |
|
Deposits |
|
|
377,009 |
|
|
|
379,966 |
|
|
|
341,342 |
|
|
|
304,440 |
|
|
|
257,780 |
|
Short-term borrowings |
|
|
15,859 |
|
|
|
17,473 |
|
|
|
38,661 |
|
|
|
13,442 |
|
|
|
47,087 |
|
Long-term debt |
|
|
25,400 |
|
|
|
10,500 |
|
|
|
600 |
|
|
|
700 |
|
|
|
800 |
|
Other liabilities |
|
|
3,476 |
|
|
|
3,959 |
|
|
|
4,742 |
|
|
|
2,290 |
|
|
|
1,358 |
|
Shareholders’ equity |
|
|
39,084 |
|
|
|
35,971 |
|
|
|
32,126 |
|
|
|
28,609 |
|
|
|
25,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Results of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
26,371 |
|
|
|
29,019 |
|
|
|
25,335 |
|
|
|
20,876 |
|
|
|
16,088 |
|
Interest expense |
|
|
13,038 |
|
|
|
15,706 |
|
|
|
11,969 |
|
|
|
8,420 |
|
|
|
4,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
13,333 |
|
|
|
13,313 |
|
|
|
13,366 |
|
|
|
12,456 |
|
|
|
11,620 |
|
Provision for loan losses |
|
|
1,456 |
|
|
|
909 |
|
|
|
898 |
|
|
|
1,022 |
|
|
|
808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for
provision for loan losses |
|
|
11,877 |
|
|
|
12,404 |
|
|
|
12,468 |
|
|
|
11,434 |
|
|
|
10,812 |
|
Non-interest income |
|
|
9,920 |
|
|
|
9,932 |
|
|
|
9,800 |
|
|
|
10,331 |
|
|
|
10,571 |
|
Non-interest expense |
|
|
17,745 |
|
|
|
17,816 |
|
|
|
17,911 |
|
|
|
16,368 |
|
|
|
15,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
4,052 |
|
|
|
4,520 |
|
|
|
4,357 |
|
|
|
5,397 |
|
|
|
5,669 |
|
Income tax expense |
|
|
1,252 |
|
|
|
1,619 |
|
|
|
1,460 |
|
|
|
1,942 |
|
|
|
2,167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,800 |
|
|
$ |
2,901 |
|
|
$ |
2,897 |
|
|
$ |
3,455 |
|
|
$ |
3,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income — basic |
|
$ |
0.82 |
|
|
$ |
0.85 |
|
|
$ |
0.86 |
|
|
$ |
1.04 |
|
|
$ |
1.06 |
|
Net income — diluted |
|
$ |
0.80 |
|
|
$ |
0.83 |
|
|
$ |
0.83 |
|
|
$ |
0.98 |
|
|
$ |
0.99 |
|
Book value |
|
$ |
11.31 |
|
|
$ |
10.58 |
|
|
$ |
9.51 |
|
|
$ |
8.53 |
|
|
$ |
7.65 |
|
Weighted average number of shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
3,426,860 |
|
|
|
3,393,224 |
|
|
|
3,370,277 |
|
|
|
3,336,834 |
|
|
|
3,305,534 |
|
Diluted |
|
|
3,503,856 |
|
|
|
3,508,606 |
|
|
|
3,489,564 |
|
|
|
3,524,294 |
|
|
|
3,521,876 |
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At and for the Years Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Performance Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets |
|
|
0.62 |
% |
|
|
0.69 |
% |
|
|
0.78 |
% |
|
|
1.00 |
% |
|
|
1.19 |
% |
Return on average equity |
|
|
7.36 |
% |
|
|
8.39 |
% |
|
|
9.57 |
% |
|
|
12.80 |
% |
|
|
14.86 |
% |
Net interest margin (1) |
|
|
3.15 |
% |
|
|
3.36 |
% |
|
|
3.81 |
% |
|
|
3.78 |
% |
|
|
4.14 |
% |
Efficiency ratio (2) |
|
|
76.31 |
% |
|
|
76.64 |
% |
|
|
77.39 |
% |
|
|
71.45 |
% |
|
|
70.81 |
% |
Loan to deposit ratio |
|
|
96.73 |
% |
|
|
95.21 |
% |
|
|
98.92 |
% |
|
|
94.72 |
% |
|
|
106.08 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Quality Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans to total loans |
|
|
1.39 |
% |
|
|
3.20 |
% |
|
|
0.68 |
% |
|
|
0.59 |
% |
|
|
0.61 |
% |
Nonperforming assets to total assets |
|
|
2.66 |
% |
|
|
2.69 |
% |
|
|
0.69 |
% |
|
|
0.61 |
% |
|
|
0.63 |
% |
Net charge-offs to average total loans |
|
|
0.67 |
% |
|
|
0.08 |
% |
|
|
0.09 |
% |
|
|
0.24 |
% |
|
|
0.23 |
% |
Allowance for loan losses to
nonperforming loans |
|
|
84.65 |
% |
|
|
43.77 |
% |
|
|
191.86 |
% |
|
|
219.91 |
% |
|
|
205.29 |
% |
Allowance for loan losses to total loans |
|
|
1.17 |
% |
|
|
1.40 |
% |
|
|
1.30 |
% |
|
|
1.30 |
% |
|
|
1.25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average equity to average assets |
|
|
8.41 |
% |
|
|
8.16 |
% |
|
|
8.11 |
% |
|
|
7.80 |
% |
|
|
7.99 |
% |
Leverage ratio |
|
|
8.59 |
% |
|
|
8.18 |
% |
|
|
7.85 |
% |
|
|
8.14 |
% |
|
|
7.98 |
% |
Tier 1 risk-based capital ratio |
|
|
9.82 |
% |
|
|
9.39 |
% |
|
|
9.25 |
% |
|
|
9.91 |
% |
|
|
9.11 |
% |
Total risk-based capital ratio |
|
|
10.91 |
% |
|
|
10.72 |
% |
|
|
10.50 |
% |
|
|
11.16 |
% |
|
|
10.34 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Growth Ratios and Other Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage change in net income |
|
|
(3.5 |
%) |
|
|
0.1 |
% |
|
|
(16.2 |
%) |
|
|
(1.3 |
%) |
|
|
(30.4 |
%) |
Percentage change in diluted net
income per share |
|
|
(3.6 |
%) |
|
|
0.0 |
% |
|
|
(15.3 |
%) |
|
|
(1.0 |
%) |
|
|
(29.8 |
%) |
Percentage change in assets |
|
|
2.9 |
% |
|
|
7.3 |
% |
|
|
19.5 |
% |
|
|
5.1 |
% |
|
|
24.9 |
% |
Percentage change in loans |
|
|
0.8 |
% |
|
|
7.1 |
% |
|
|
17.1 |
% |
|
|
5.5 |
% |
|
|
31.0 |
% |
Percentage change in deposits |
|
|
(0.8 |
%) |
|
|
11.3 |
% |
|
|
12.1 |
% |
|
|
18.1 |
% |
|
|
16.3 |
% |
Percentage change in equity |
|
|
8.7 |
% |
|
|
12.0 |
% |
|
|
12.3 |
% |
|
|
12.8 |
% |
|
|
16.0 |
% |
|
|
|
(1) |
|
Non-tax equivalent. |
|
(2) |
|
Computed by dividing non-interest
expense by the sum of net interest
income and non-interest income,
excluding gains and losses on the sale
of assets. |
|
|
|
Item 7. |
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion provides information about the major components of the results of
operations and financial condition, liquidity and capital resources of the Company and Bank and
should be read in conjunction with the “Business” and “Financial Statements” sections included
elsewhere in this report. Information given in response to Item 6 of this report, “Selected
Financial Data” is incorporated by reference in response to this Item 7.
Critical Accounting Policies
The accounting and reporting policies of the Company and Bank are in accordance with accounting
principles generally accepted in the United States and conform to general practices within the
banking industry. Application of these principles requires management to make estimates or
judgments that affect the amounts reported in the financial statements and the accompanying notes.
These estimates are based on information available as of the date of the financial statements;
accordingly, as this information changes, the financial statements could reflect different
estimates or judgments. Certain policies inherently have a greater reliance on the use of
estimates, and as such have a greater possibility of producing results that could be materially
different than originally reported.
Estimates or judgments are necessary when assets and liabilities are required to be recorded at
fair value, when a decline in the value of an asset not carried on the financial statements at fair
value warrants an impairment write-down or valuation reserve to be established, or when an asset or
liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at
fair value inherently results in more financial statement volatility. The fair values and the
information used to record the valuation adjustments for certain assets and liabilities are based
either on quoted market prices or are provided by
23
other third-party sources, when available. When third-party information is not available, valuation
adjustments are estimated in good faith by management primarily through the use of internal cash
flow modeling techniques.
The most significant accounting policies for the Company and Bank are presented in Note 1 to the
consolidated financial statements. These policies, along with the disclosures presented in the
other financial statement notes, provide information on how significant assets and liabilities are
valued in the financial statements and how those values are determined. Management views critical
accounting policies to be those that are highly dependent on subjective or complex judgments,
estimates and assumptions, and where changes in those estimates and assumptions could have a
significant impact on the financial statements. Management currently views the determination of the
allowance for loan losses to be the only critical accounting policy.
The allowance for loan losses represents management’s estimate of probable credit losses inherent
in the loan portfolio. Estimating the amount of the allowance for loan losses requires significant
judgment and the use of estimates related to the amount and timing of expected future cash flows on
impaired loans, estimated losses on non-impaired loans based on historical loss experience, and
consideration of current economic trends and conditions, all of which may be susceptible to
significant change. The loan portfolio also represents the largest asset type on the consolidated
balance sheet. Loan losses are charged off against the allowance, while recoveries of amounts
previously charged off are credited to the allowance. A provision for loan losses is charged to
operations based on management’s periodic evaluation of the factors previously mentioned, as well
as other pertinent factors.
The allowance for loan losses consists of an allocated component and an unallocated component. The
components of the allowance for loan losses represent an estimation made pursuant to either
Statement of Financial Accounting Standards (SFAS) No. 5, Accounting for Contingencies, or SFAS
114, Accounting by Creditors for Impairment of a Loan. The allocated component of the allowance for
loan losses reflects expected losses resulting from analyses developed through specific credit
allocations for individual loans and historical loss experience for each loan category. The
specific credit allocations are based on regular analyses of all loans over a fixed-dollar amount
where the internal credit rating is at or below a predetermined classification. These analyses
involve a high degree of judgment in estimating the amount of loss associated with specific loans,
including estimating the amount and timing of future cash flows and collateral values. The
historical loss element is determined using the average of actual losses incurred over prior years
for each type of loan. The historical loss experience is adjusted for known changes in economic
conditions and credit quality trends such as changes in the amount of past due and nonperforming
loans. The resulting loss allocation factors are applied to the balance of each type of loan after
removing the balance of impaired loans from each category.
There are many factors affecting the allowance for loan losses; some are quantitative while others
require qualitative judgment. Although management believes its process for determining the
allowance adequately considers all the potential factors that could potentially result in credit
losses, the process includes subjective elements and may be susceptible to significant change. To
the extent actual outcomes differ from management estimates, additional provisions for loan losses
could be required that could adversely affect earnings or financial position in future periods.
Additional information on the Bank’s loan portfolio and allowance for loan losses can be found in
the “Loan Portfolio” section on pages 33-38 of this “Management’s Discussion and Analysis.” Note 1
to the consolidated financial statements also includes additional information on the Bank’s
accounting policies related to the allowance for loan losses.
24
Consolidated Financial Information
Certain financial information for the Company and Bank consolidated, and solely for the Bank as of
and for the years ended December 31, 2008, 2007 and 2006 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
Total Assets |
|
|
Net Income |
|
|
Total Assets |
|
|
Net Income |
|
|
Total Assets |
|
|
Net Income |
|
|
|
(Dollar amounts in thousands) |
Consolidated |
|
$ |
460,828 |
|
|
$ |
2,800 |
|
|
$ |
447,869 |
|
|
$ |
2,901 |
|
|
$ |
417,471 |
|
|
$ |
2,897 |
|
Bank only |
|
$ |
460,726 |
|
|
$ |
2,983 |
|
|
$ |
447,852 |
|
|
$ |
3,155 |
|
|
$ |
417,154 |
|
|
$ |
3,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent company only |
|
|
|
|
|
$ |
(183 |
) |
|
|
|
|
|
$ |
(254 |
) |
|
|
|
|
|
$ |
(143 |
) |
During 2008, the Company funded operational costs primarily through the income tax credit
provided by the Bank and proceeds from the exercise of stock options. The Company incurred
$269,108 in operational costs for the year ended December 31, 2008. The Company recorded an income
tax benefit of $86,497, resulting in a net loss of $182,611 for 2008.
The
Company has an agreement with a financial institution that provided the Company with a line of credit of
up to $3 million through December 30, 2003. The original principal balance of $900,000 under this
line of credit is payable in nine (9) annual installments of $100,000 that began on January 1,
2005. This line of credit matures January 1, 2014 and bears interest at the prime rate minus 50
basis points. As of December 31, 2008 and 2007, the outstanding balance under the line of credit
was $500,000 and $600,000, respectively. The arrangement requires the Company and the Bank to
comply with certain financial and other covenants. At December 31, 2008, the Company and the Bank
were in compliance with all but one of these covenants. The Company’s ratio of classified assets
to Tier 1 capital was slightly higher than the required ratio but a waiver of the covenant
requirement for December 31, 2008 was granted by the financial
institution. At December 31, 2007, the Company
and the Bank were in compliance with all covenants. Future noncompliance with this covenant would
not have a material impact on the Company’s ability to meet future obligations.
Results of Operations — Comparison of 2008 and 2007
Balance Sheet
For the year ended December 31, 2008, the Company and Bank consolidated experienced an increase in
total assets and a slight decrease in net income. Total assets increased 2.9% to $460.8 million at
December 31, 2008 from $447.9 million at December 31, 2007. Average total assets were $452.4
million in 2008 and $421.1 million in 2007, an increase of $31.3 million or 7.4%. This increase in
average assets is primarily the result of the Bank’s loan portfolio growth during 2008. Net loans
held for investment increased from $317.1 million at December 31, 2007 to $332.0 million at
December 31, 2008, an increase of $14.9 million or 4.7%. Commercial loans increased $1.6 million
or 5.4%, from $29.6 million at December 31, 2007 to $31.2 million at December 31, 2008. Real
estate mortgage loans decreased $1.5 million or 0.8%, from $192.7 million at December 31, 2007 to
$191.2 million at December 31, 2008, and real estate construction loans increased $15.4 million or
17.2%, from $89.6 million at December 31, 2007 to $105.0 million at December 31, 2008. Installment
and consumer loans decreased $1.4 million or 13.3%, from $10.5 million at December 31, 2007 to $9.1
million at December 31, 2008. The decreases in installment and consumer loans and real estate
mortgage loans are primarily the result of weaker demand in this segment of the loan portfolio.
The increases in the commercial and construction loan categories
25
are the result of the Bank’s continuing efforts to increase these types of loans and the overall
stability of the Richmond, McDuffie, and Columbia County, Georgia market areas. Loans held for
sale by the Bank decreased $11.1 million or 28.1%, from $39.5 million at December 31, 2007 to $28.4
million at December 31, 2008, primarily as a result of the mortgage industry downturn during 2008.
The allowance for loan losses was $4,284,000 at December 31, 2008 and $5,059,000 at December 31,
2007. This represents a decrease of $775,000 or 15.3%. The decrease in the allowance is based
upon management’s rating and assessment of the loan portfolio and the credit risk inherent in the
portfolio, and reflects an increase in loan charge-offs during 2008 partially offset by the
continued growth in the Bank’s loan portfolio. The Bank’s ratio of allowance for loan losses to
gross loans was 1.17% at December 31, 2008 and 1.40% at December 31, 2007. Substantially all loans
held for sale originated by the Bank consist of well-secured single family residential mortgage
loans which are originated with a sales commitment and are sold in the secondary market shortly
after origination, thus greatly reducing the Bank’s credit risk. The Bank’s ratio of allowance for
loan losses to gross loans, excluding loans held for sale, was 1.27% at December 31, 2008, compared
to 1.57% at December 31, 2007.
The asset growth of the Bank during 2008 was funded through deposit account activity within the
Bank’s existing market areas as well as out-of-market funding, through short-term borrowings from
correspondent banks, and from lines of credit established with the Federal Home Loan Bank. Total
deposit accounts at December 31, 2008 were $377.0 million, a decrease of $3.0 million or 0.8%, from
$380.0 million at December 31, 2007. Total other borrowings by the Bank were $41.1 million at
December 31, 2008, an increase of $13.7 million or 50.0%, from the balance of $27.4 million at
December 31, 2007. Borrowings were up in 2008 as a result of the decrease in deposit accounts.
The Bank’s loan to deposit ratio was 96.7% at December 31, 2008 and 95.2% at December 31, 2007.
Excluding mortgage loans held for sale, this ratio was 89.2% for 2008 and 84.8% for 2007.
Income Statement
Interest income was $26.4 million for 2008, compared to $29.0 million for 2007. This represents a
decrease of $2.6 million or 9.0%. This decrease was primarily the result of the continued
tightening of the lowering of interest rates and the market deterioration experienced in 2008.
Interest expense decreased $2.7 million or 17.2%, from $15.7 million for 2007 to $13.0 million for
2008. This decrease in interest expense was primarily due to a decrease in interest-bearing
deposits and the lower cost of funds resulting from the falling interest rate environment in 2008.
In an effort to obtain growth in deposit accounts to fund the growing loan portfolio, the Bank
focuses its marketing efforts in the local markets served by the Bank and performs strategic
planning with respect to obtaining out-of-market funds. Despite the decrease in interest-bearing
deposits, non-interest bearing deposits increased $3.8 million or 12.5%, from $30.3 million in 2007
to $34.1 million in 2008. This increase in non-interest bearing deposits is primarily the result
of the Bank’s marketing efforts related to its ATM Anywhere Free Checking product. Net interest
income for 2008 and 2007 was flat at $13.3 million.
Non-interest income for 2008 and 2007 was also flat at $9.9 million.
Non-interest expense decreased slightly from $17.8 million in 2007 to $17.7 million in 2008, a
decrease of $0.1 million or 0.6% as management exercised control over costs as margins declined.
In total, net income decreased in 2008 by $100,000 or 3.4%, from $2.9 million in 2007 to $2.8
million in 2008 as a result of each of the above factors.
26
Comparison of 2007 and 2006
Balance Sheet
For the year ended December 31, 2007, the Company and Bank consolidated experienced an increase in
total assets and a slight increase in net income. Total assets increased 7.3% to $447.9 million at
December 31, 2007 from $417.5 million at December 31, 2006. Average total assets were $421.1
million in 2007 and $372.8 million in 2006, an increase of $48.3 million or 13.0%. This increase
in average assets was primarily the result of strong loan demand and an increase in investments
during 2007. Net loans held for investment increased from $276.5 million at December 31, 2006 to
$317.1 million at December 31, 2007, an increase of 14.7%. Commercial loans increased $1.9 million
or 6.9%, from $27.7 million at December 31, 2006 to $29.6 million at December 31, 2007. Real
estate mortgage loans increased $23.6 million or 14.0%, from $169.1 million at December 31, 2006 to
$192.7 million at December 31, 2007, and real estate construction loans increased $16.1 million or
21.9%, from $73.5 million at December 31, 2006 to $89.6 million at December 31, 2007. Installment
and consumer loans decreased $100,000 or 0.9%, from $10.6 million at December 31, 2006 to $10.5
million at December 31, 2007. The decrease in installment and consumer loans was primarily the
result of softer demand in this segment of the loan portfolio. The increases in each of the other
loan categories were the result of the Bank’s continuing efforts to increase these types of loans.
Loans held for sale by the Bank decreased 30.5% from $56.8 million at December 31, 2006 to $39.5
million at December 31, 2007, as a result of mortgage rate increases and tightening of credit
policy in the mortgage market during the last six months of 2007.
The allowance for loan losses was $5,059,000 at December 31, 2007 and $4,386,000 at December 31,
2006. This represents an increase of $673,000 or 15.3%. The increase in the allowance is based
upon management’s rating and assessment of the loan portfolio and the credit risk inherent in the
portfolio, and reflects the growth in the Bank’s loan portfolio. The Bank’s ratio of allowance for
loan losses to gross loans was 1.40% at December 31, 2007 and 1.30% at December 31, 2006.
Substantially all loans held for sale originated by the Bank consist of well-secured single family
residential mortgage loans which are originated with a sales commitment and are sold in the
secondary market shortly after origination, thus greatly reducing the Bank’s credit risk. The
Bank’s ratio of allowance for loan losses to gross loans, excluding loans held for sale, was 1.57%
at December 31, 2007, compared to 1.56% at December 31, 2006.
The asset growth of the Bank during 2007 was funded through deposit account growth within the
Bank’s existing market areas as well as out-of-market funding, through short-term borrowings from
correspondent banks, and from lines of credit established with the Federal Home Loan Bank. Total
deposit accounts at December 31, 2007 were $380.0 million, an increase of $38.7 million or 11.3%,
from $341.3 million at December 31, 2006. Total other borrowings by the Bank were $27.4 million at
December 31, 2007, a decrease of $11.2 million or 29.0%, from the balance of $38.6 million at
December 31, 2006. Borrowings were down in 2007 as a result of the growth in deposit accounts.
The Bank’s loan to deposit ratio was 95.2% at December 31, 2007 and 98.9% at December 31, 2006.
Excluding mortgage loans held for sale, this ratio was 84.8% for 2007 and 82.3% for 2006.
Income Statement
Interest income was $29.0 million for 2007, compared to $25.3 million for 2006. This represents an
increase of $3.7 million or 14.6%. This increase was attributable to both higher loan volume as
well as higher yields. Interest expense increased $3.7 million or 30.8%, from $12.0 million for
2006 to $15.7 million for 2007. This increase in interest expense was also the result of increased
deposit account
27
balances as well as a higher cost of funds for the year. The increase in deposit accounts was a
result of marketing efforts in the local markets served by the Bank and strategic planning with
respect to obtaining out-of-market funds. The Bank focuses on obtaining growth in deposit accounts
to fund the Bank’s loan growth. Non-interest bearing deposits decreased $9.5 million or 23.9%,
from $39.8 million in 2006 to $30.3 million in 2007, due primarily to the change in mortgage loan
funding requirements and the resulting decrease in the required balance of the corresponding
deposit account. Net interest income for 2007 was $13.3 million, representing a slight decrease of
$100,000 or 0.7%, from $13.4 million in 2006.
Non-interest income of $9.9 million was recorded in 2007, a slight increase of $100,000 or 1.0%,
from the $9.8 million recorded in 2006.
Non-interest expense decreased slightly from $17.9 million in 2006 to $17.8 million in 2007, a
decrease of $100,000 or 0.6%.
In total, net income for 2007 remained steady at $2.9 million compared to 2006 as a result of each
of the above factors.
Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest
Differential
The following table presents the average balance sheet of the consolidated Company for the years
ended December 31, 2008, 2007 and 2006. Also presented is the consolidated Company’s actual
interest income and expense from each asset and liability, the average yield of each
interest-earning asset and the average cost of each interest-bearing liability. This table
includes all major categories of interest-earning assets and interest-bearing liabilities:
28
CONSOLIDATED AVERAGE BALANCE SHEETS
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
Interest |
|
|
Average |
|
|
|
|
|
|
Interest |
|
|
Average |
|
|
|
|
|
|
Interest |
|
|
Average |
|
|
|
Average |
|
|
Income/ |
|
|
Yield / |
|
|
Average |
|
|
Income/ |
|
|
Yield / |
|
|
Average |
|
|
Income/ |
|
|
Yield / |
|
|
|
Balance |
|
|
Expense |
|
|
Rate |
|
|
Balance |
|
|
Expense |
|
|
Rate |
|
|
Balance |
|
|
Expense |
|
|
Rate |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST-EARNING ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net of unearned income |
|
$ |
360,689 |
|
|
$ |
23,186 |
|
|
|
6.43 |
% |
|
$ |
336,434 |
|
|
$ |
25,998 |
|
|
|
7.73 |
% |
|
$ |
302,778 |
|
|
$ |
23,144 |
|
|
|
7.64 |
% |
Investment securities |
|
|
61,375 |
|
|
|
3,100 |
|
|
|
5.05 |
% |
|
|
57,463 |
|
|
|
2,760 |
|
|
|
4.80 |
% |
|
|
47,153 |
|
|
|
2,053 |
|
|
|
4.35 |
% |
Fed funds sold & cash in banks |
|
|
3,996 |
|
|
|
85 |
|
|
|
2.13 |
% |
|
|
4,887 |
|
|
|
261 |
|
|
|
5.35 |
% |
|
|
2,788 |
|
|
|
138 |
|
|
|
4.95 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
426,060 |
|
|
|
26,371 |
|
|
|
6.19 |
% |
|
|
398,784 |
|
|
|
29,019 |
|
|
|
7.28 |
% |
|
|
352,719 |
|
|
|
25,335 |
|
|
|
7.18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-INTEREST-EARNING ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
6,296 |
|
|
|
|
|
|
|
|
|
|
|
7,530 |
|
|
|
|
|
|
|
|
|
|
|
7,404 |
|
|
|
|
|
|
|
|
|
Bank premises and fixed assets |
|
|
10,260 |
|
|
|
|
|
|
|
|
|
|
|
10,623 |
|
|
|
|
|
|
|
|
|
|
|
10,879 |
|
|
|
|
|
|
|
|
|
Accrued interest receivable |
|
|
1,956 |
|
|
|
|
|
|
|
|
|
|
|
2,031 |
|
|
|
|
|
|
|
|
|
|
|
1,779 |
|
|
|
|
|
|
|
|
|
Other assets |
|
|
12,978 |
|
|
|
|
|
|
|
|
|
|
|
6,746 |
|
|
|
|
|
|
|
|
|
|
|
4,010 |
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
|
(5,190 |
) |
|
|
|
|
|
|
|
|
|
|
(4,640 |
) |
|
|
|
|
|
|
|
|
|
|
(4,039 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
452,360 |
|
|
|
|
|
|
|
|
|
|
$ |
421,074 |
|
|
|
|
|
|
|
|
|
|
$ |
372,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’
EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST-BEARING DEPOSITS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts |
|
$ |
31,674 |
|
|
$ |
376 |
|
|
|
1.19 |
% |
|
$ |
28,935 |
|
|
$ |
478 |
|
|
|
1.65 |
% |
|
$ |
29,395 |
|
|
$ |
497 |
|
|
|
1.69 |
% |
Savings accounts |
|
|
67,259 |
|
|
|
1,408 |
|
|
|
2.09 |
% |
|
|
68,691 |
|
|
|
2,928 |
|
|
|
4.26 |
% |
|
|
53,603 |
|
|
|
1,994 |
|
|
|
3.72 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market accounts |
|
|
8,773 |
|
|
|
167 |
|
|
|
1.90 |
% |
|
|
10,982 |
|
|
|
307 |
|
|
|
2.79 |
% |
|
|
18,782 |
|
|
|
555 |
|
|
|
2.96 |
% |
Time accounts |
|
|
231,736 |
|
|
|
9,999 |
|
|
|
4.31 |
% |
|
|
222,664 |
|
|
|
11,201 |
|
|
|
5.03 |
% |
|
|
178,982 |
|
|
|
7,760 |
|
|
|
4.34 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
339,442 |
|
|
|
11,950 |
|
|
|
3.52 |
% |
|
|
331,272 |
|
|
|
14,914 |
|
|
|
4.50 |
% |
|
|
280,762 |
|
|
|
10,806 |
|
|
|
3.85 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INTEREST-BEARING
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowed funds |
|
|
37,390 |
|
|
|
1,088 |
|
|
|
2.91 |
% |
|
|
15,721 |
|
|
|
792 |
|
|
|
5.04 |
% |
|
|
21,592 |
|
|
|
1,163 |
|
|
|
5.39 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
376,832 |
|
|
|
13,038 |
|
|
|
3.46 |
% |
|
|
346,993 |
|
|
|
15,706 |
|
|
|
4.53 |
% |
|
|
302,354 |
|
|
|
11,969 |
|
|
|
3.96 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-INTEREST-BEARING LIABILITIES
AND
SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
33,501 |
|
|
|
|
|
|
|
|
|
|
|
34,789 |
|
|
|
|
|
|
|
|
|
|
|
36,717 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
3,971 |
|
|
|
|
|
|
|
|
|
|
|
4,922 |
|
|
|
|
|
|
|
|
|
|
|
3,433 |
|
|
|
|
|
|
|
|
|
Shareholders’ equity |
|
|
38,056 |
|
|
|
|
|
|
|
|
|
|
|
34,370 |
|
|
|
|
|
|
|
|
|
|
|
30,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders’ equity |
|
$ |
452,360 |
|
|
|
|
|
|
|
|
|
|
$ |
421,074 |
|
|
|
|
|
|
|
|
|
|
$ |
372,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread |
|
|
|
|
|
|
|
|
|
|
2.73 |
% |
|
|
|
|
|
|
|
|
|
|
2.75 |
% |
|
|
|
|
|
|
|
|
|
|
3.22 |
% |
Net interest income |
|
|
|
|
|
$ |
13,333 |
|
|
|
|
|
|
|
|
|
|
$ |
13,313 |
|
|
|
|
|
|
|
|
|
|
$ |
13,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin |
|
|
|
|
|
|
|
|
|
|
3.13 |
% |
|
|
|
|
|
|
|
|
|
|
3.34 |
% |
|
|
|
|
|
|
|
|
|
|
3.79 |
% |
Average interest-earning assets
to average total assets |
|
|
|
|
|
|
|
|
|
|
94.19 |
% |
|
|
|
|
|
|
|
|
|
|
94.71 |
% |
|
|
|
|
|
|
|
|
|
|
94.63 |
% |
Average loans to average deposits |
|
|
|
|
|
|
|
|
|
|
96.71 |
% |
|
|
|
|
|
|
|
|
|
|
91.91 |
% |
|
|
|
|
|
|
|
|
|
|
95.37 |
% |
29
Rate/Volume Analysis of Net Interest Income
The following table sets forth information regarding changes in net interest income attributable to
changes in average balances and changes in rates for the periods indicated. The effect of a change
in average balance has been determined by applying the average rate in the earlier period to the
change in average balance in the later period, as compared with the earlier period. The balance of
the change in interest income or expense and net interest income has been attributed to a change in
average rate. Non-accruing loans have been included in the category “Net loans and loans held for
sale.”
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of Years Ended |
|
|
Comparison of Years Ended |
|
|
|
December 31, 2008 and 2007 |
|
|
December 31, 2007 and 2006 |
|
|
|
(in thousands) |
|
|
|
Increase (Decrease) Due to |
|
|
|
Volume |
|
|
Rate |
|
|
Total |
|
|
Volume |
|
|
Rate |
|
Total |
|
Interest earned on: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt securities |
|
$ |
64 |
|
|
$ |
3 |
|
|
$ |
67 |
|
|
$ |
64 |
|
|
$ |
32 |
|
|
$ |
96 |
|
Taxable securities |
|
|
113 |
|
|
|
160 |
|
|
|
273 |
|
|
|
379 |
|
|
|
232 |
|
|
|
611 |
|
Federal funds sold and cash in
banks |
|
|
(47 |
) |
|
|
(129 |
) |
|
|
(176 |
) |
|
|
106 |
|
|
|
17 |
|
|
|
123 |
|
Net loans and loans held for sale |
|
|
1,874 |
|
|
|
(4,686 |
) |
|
|
(2,812 |
) |
|
|
2,573 |
|
|
|
281 |
|
|
|
2,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
$ |
2,004 |
|
|
$ |
(4,652 |
) |
|
$ |
(2,648 |
) |
|
$ |
3,122 |
|
|
$ |
562 |
|
|
$ |
3,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid on: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW deposits |
|
|
45 |
|
|
|
(147 |
) |
|
|
(102 |
) |
|
|
(8 |
) |
|
|
(11 |
) |
|
|
(19 |
) |
Money market deposits |
|
|
(62 |
) |
|
|
(78 |
) |
|
|
(140 |
) |
|
|
(230 |
) |
|
|
(18 |
) |
|
|
(248 |
) |
Savings deposits |
|
|
(61 |
) |
|
|
(1,459 |
) |
|
|
(1,520 |
) |
|
|
561 |
|
|
|
373 |
|
|
|
934 |
|
Time deposits |
|
|
457 |
|
|
|
(1,659 |
) |
|
|
(1,202 |
) |
|
|
1,894 |
|
|
|
1,547 |
|
|
|
3,441 |
|
Borrowed funds |
|
|
1,173 |
|
|
|
(877 |
) |
|
|
296 |
|
|
|
(351 |
) |
|
|
(20 |
) |
|
|
(371 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
$ |
1,552 |
|
|
$ |
(4,220 |
) |
|
$ |
(2,668 |
) |
|
$ |
1,866 |
|
|
$ |
1,871 |
|
|
$ |
3,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in net
interest income |
|
$ |
452 |
|
|
$ |
(432 |
) |
|
$ |
20 |
|
|
$ |
1,256 |
|
|
$ |
(1,309 |
) |
|
$ |
(53 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
The Bank offers a wide range of commercial and consumer interest bearing and non-interest bearing
deposit accounts, including checking accounts, money market accounts, negotiable order of
withdrawal (“NOW”) accounts, individual retirement accounts, certificates of deposit and regular
savings accounts. The sources of deposits are residents, businesses and employees of businesses
within the Bank’s market area, obtained through the personal solicitation of the Bank’s officers
and directors, direct mail solicitation and advertisements published in the local media. The Bank
also utilizes the brokered certificate of deposit market and the Promontory Interfinancial Network
(CDARS) program for funding needs for loan origination and liquidity. These brokered and CDARS
deposits are included in time deposits on the balance sheet. The Bank pays competitive interest
rates on time and savings deposits. In addition, the Bank has implemented a service charge fee
schedule competitive with other financial institutions in the Bank’s market area, covering such
matters as maintenance fees on checking accounts, per item processing fees on checking accounts,
returned check charges and similar items.
30
The following table details, for the periods indicated, the average amount of and average rate paid
on each of the following deposit categories (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008 |
|
|
Year Ended December 31, 2007 |
|
|
Year Ended December 31, 2006 |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Average |
|
|
Rate |
|
|
Average |
|
|
Rate |
|
|
Average |
|
|
Rate |
|
|
|
Amount |
|
|
Paid |
|
|
Amount |
|
|
Paid |
|
|
Amount |
|
|
Paid |
|
Deposit Category |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
bearing demand
deposits |
|
$ |
34,034 |
|
|
|
— |
|
|
$ |
35,062 |
|
|
|
— |
|
|
$ |
36,717 |
|
|
|
— |
|
NOW and money
market deposits |
|
|
40,447 |
|
|
|
1.34 |
% |
|
|
39,917 |
|
|
|
1.97 |
% |
|
|
48,177 |
|
|
|
2.18 |
% |
Savings deposits |
|
|
67,259 |
|
|
|
2.09 |
% |
|
|
68,691 |
|
|
|
4.26 |
% |
|
|
53,603 |
|
|
|
3.72 |
% |
Time deposits |
|
|
231,736 |
|
|
|
4.31 |
% |
|
|
222,664 |
|
|
|
5.03 |
% |
|
|
178,982 |
|
|
|
4.34 |
% |
The maturities of certificates of deposit and individual retirement accounts of $100,000 or
more as of December 31, 2008 were as follows (in thousands):
|
|
|
|
|
Three months or less |
|
$ |
37,231 |
|
Over three months through six months. |
|
|
25,122 |
|
Over six months through twelve months |
|
|
95,180 |
|
Over twelve months |
|
|
13,345 |
|
|
|
|
|
Total |
|
$ |
170,878 |
|
|
|
|
|
Borrowed Funds
The Bank’s borrowed funds consist of short-term borrowings and long-term debt, including
federal funds purchased, retail and other repurchase agreements and lines of credit with the
Federal Home Loan Bank. The average balance of borrowed funds was approximately $36.8 million for
the year ended December 31, 2008, compared to $15.1 million and $20.8 million for the years ended
December 31, 2007 and 2006, respectively.
The most significant borrowed funds categories for the Bank are three lines of credit from the
Federal Home Loan Bank, consisting of the “Loans Held for Sale” (LHFS) program (formerly known as
the warehouse line of credit), a 1-4 family housing loan line of credit (1-4 LOC), and a long-term
convertible advance.
At December 31, 2008, there was no outstanding balance on the LHFS line of credit, compared to an
outstanding balance of $1,342,686 with an interest rate of 5.19% at December 31, 2007. At December
31, 2006, the outstanding balance on the LHFS line of credit was $23,328,076 with an interest rate
of 6.06%. The average balance outstanding on the LHFS line of credit was $76,125 for 2008 with a
weighted average interest rate of 2.83%. The average balance outstanding on the LHFS line of
credit was $2,448,636 for 2007 with a weighted average interest rate of 5.82%. The average balance
outstanding for 2006 was $7,574,412 with a weighted average interest rate of 5.69%. The maximum
amount outstanding on the LHFS line of credit at any month end during 2008 was $0, compared to
$5,477,302 in 2007 and $24,213,305 in 2006. The LHFS line of credit is secured by the mortgage
loans held for sale originated with the borrowed funds. The interest rate on the LHFS line of
credit is equal to the Federal Home Loan Bank’s Daily Rate Credit Program rate plus 50 basis
points.
31
At December 31, 2008, the outstanding balance on the 1-4 LOC was $6,000,000 with an interest rate
of 0.46%, compared to an outstanding balance of $5,000,000 with an interest rate of 4.40% at
December 31, 2007. At December 31, 2006, the outstanding balance on the 1-4 LOC was $8,500,000
with an interest rate of 5.50%. The average balance outstanding on the 1-4 LOC was $8,297,541 for
2008 with a weighted average interest rate of 2.40%. The average balance outstanding on the 1-4 LOC
was $6,011,781 for 2007 with a weighted average interest rate of 5.32% . The average balance
outstanding for 2006 was $7,370,137 with a weighted average interest rate of 5.56%. The maximum
amount outstanding on the 1-4 LOC at any month end during 2008 was $24,200,000, compared to
$11,000,000 in 2007 and $9,200,000 in 2006. This 1-4 LOC is secured by the Bank’s portfolio of 1-4
family first mortgage loans, excluding those loans that are held for sale. The interest rate on the
1-4 LOC is equal to the Federal Home Loan Bank’s Daily Rate Credit Program rate.
During 2007, a long-term convertible advance was established as a new additional line of credit.
At December 31, 2008, the outstanding balance on this advance was $10.0 million with a weighted
average interest rate of 3.83%. This advance matures December 2012 and is callable until December
2010. An additional, but similar, long-term convertible advance was established during 2008. At
December 31, 2008, the outstanding balance on this new advance was $15.0 million with a weighted
average interest rate of 3.33%. This advance matures May 2013 and is callable until May 2010.
Loan Portfolio
The Bank engages in a full complement of lending activities, including commercial,
consumer/installment and real estate loans. As of December 31, 2008, the Bank’s loan portfolio
consisted of 56.8% real estate mortgage loans, 31.2% real estate construction loans, 9.3%
commercial loans and 2.7% consumer/installment loans.
Commercial lending is directed principally towards businesses whose demands for funds fall within
the Bank’s legal lending limits and which are potential deposit customers of the Bank. This
category of loans includes loans made to individual, partnership or corporate borrowers, for a
variety of business purposes. These loans include short-term lines of credit, short- to
medium-term plant and equipment loans, loans for general working capital and letters of credit.
The Bank’s consumer loans consist primarily of installment loans to individuals for personal,
family or household purposes, including automobile loans to individuals and pre-approved lines of
credit.
The Bank’s real estate mortgage loans include commercial mortgage lending and residential mortgage
lending. The Bank’s commercial mortgage loans are generally secured by office buildings, retail
establishments and other types of property. The Bank’s residential mortgage loans are primarily
single-family residential loans secured by the residential property.
The Bank’s real estate construction loans consist of residential and commercial construction loans
as well as land development loans. These loans are primarily construction and development loans to
builders in the Augusta and Savannah, Georgia areas and the Jacksonville, Florida area.
While risk of loss in the Bank’s loan portfolio is primarily tied to the credit quality of the
various borrowers, risk of loss may also increase due to factors beyond the Bank’s control, such as
local, regional and/or national economic downturns. General conditions in the real estate market
may also impact the relative risk in the Bank’s real estate portfolio.
With respect to loans which exceed the Bank’s lending limits or established credit criteria, the
Bank may originate such loans and sell them to another bank. The Bank may also purchase loans
originated by
other banks. Management of the Bank does not believe that loan purchase participations will
necessarily pose any greater risk of loss than loans which the Bank originates.
32
The following table presents the categories of loans contained in the Bank’s loan portfolio as of
the end of the five most recent fiscal years and the total amount of all loans for such periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(in thousands) |
|
Type of
Loan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and
agricultural |
|
$ |
31,173 |
|
|
$ |
29,582 |
|
|
$ |
27,692 |
|
|
$ |
29,945 |
|
|
$ |
30,820 |
|
Real estate — construction |
|
|
105,032 |
|
|
|
89,580 |
|
|
|
73,502 |
|
|
|
55,737 |
|
|
|
46,581 |
|
Real estate — mortgage |
|
|
191,152 |
|
|
|
192,668 |
|
|
|
169,141 |
|
|
|
152,497 |
|
|
|
127,691 |
|
Installment and consumer |
|
|
9,092 |
|
|
|
10,487 |
|
|
|
10,609 |
|
|
|
10,189 |
|
|
|
11,705 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
$ |
336,449 |
|
|
$ |
322,317 |
|
|
$ |
280,944 |
|
|
$ |
248,368 |
|
|
$ |
216,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned income and deferred loan
fees |
|
|
(156 |
) |
|
|
(116 |
) |
|
|
(61 |
) |
|
|
(57 |
) |
|
|
(69 |
) |
Allowance for possible loan losses |
|
|
(4,284 |
) |
|
|
(5,059 |
) |
|
|
(4,386 |
) |
|
|
(3,756 |
) |
|
|
(3,416 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (net of allowance) |
|
$ |
332,009 |
|
|
$ |
317,142 |
|
|
$ |
276,497 |
|
|
$ |
244,555 |
|
|
$ |
213,312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to the above, at December 31, 2008, the Bank also had $28.4 million of single
family residential mortgage loans held for sale that were originated by the Bank’s Mortgage
Division.
The table below presents an analysis of maturities of certain categories of loans as of December
31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Year or |
|
|
Due in 1 to |
|
|
Due After |
|
|
|
|
Type of Loan |
|
|
Less |
|
|
5 Years |
|
|
5 Years |
|
|
Total |
|
|
|
|
(In thousands) |
|
Commercial, financial
and agricultural |
|
$ |
20,952 |
|
|
$ |
10,004 |
|
|
$ |
217 |
|
|
$ |
31,173 |
|
Real estate-construction |
|
|
84,337 |
|
|
|
20,695 |
|
|
|
— |
|
|
|
105,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
105,289 |
|
|
$ |
30,699 |
|
|
$ |
217 |
|
|
$ |
136,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a presentation of an analysis of sensitivities of certain loans (those
presented in the maturity table above) to changes in interest rates as of December 31, 2008 (in
thousands):
|
|
|
|
|
Loans due after 1 year with predetermined interest rates |
|
$ |
12,355 |
|
Loans due after 1 year with floating interest rates |
|
$ |
18,561 |
|
33
The following table presents information regarding non-accrual and past due loans at the dates
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
|
(Dollars in thousands) |
Loans accounted for on a non-accrual basis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
56 |
|
|
|
65 |
|
|
|
49 |
|
|
|
73 |
|
|
|
75 |
|
Amount
|
|
$ |
5,061 |
|
|
$ |
11,558 |
|
|
$ |
2,286 |
|
|
$ |
1,708 |
|
|
$ |
1,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing loans
which are
contractually past
due 90 days or more
as to principal and
interest payments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
3 |
|
|
|
4 |
|
|
|
2 |
|
|
|
10 |
|
|
|
6 |
|
Amount
|
|
$ |
1 |
|
|
$ |
18 |
|
|
$ |
71 |
|
|
$ |
297 |
|
|
$ |
444 |
|
The Bank does not have any loans which are “troubled debt restructurings” as defined in SFAS
No. 15.
Accrual of interest is discontinued when a loan becomes 90 days past due as to principal and
interest or when, in management’s judgment, the interest will not be collectible in the normal
course of business. Additional interest income of $93,125 in 2008 would have been recorded if all
loans accounted for on a non-accrual basis had been current in accordance with their original
terms. No interest income has been recognized in 2008 on loans that have been accounted for on a
non-accrual basis.
At December 31, 2008, there were no loans classified for regulatory purposes as doubtful,
substandard or special mention that have not been disclosed above which (i) represent or result
from trends or uncertainties which management reasonably expects will materially impact future
operating results, liquidity or capital resources, or (ii) represent material credits about which
management is aware of any information which causes management to have serious doubts as to the
ability of such borrowers to comply with the loan repayment terms.
34
Summary of Loan Loss Experience
An analysis of the Bank’s loss experience is furnished in the following table for the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(Dollar amounts in thousands) |
|
Allowance for loan losses,
beginning of year |
|
$ |
5,059 |
|
|
$ |
4,386 |
|
|
$ |
3,756 |
|
|
$ |
3,416 |
|
|
$ |
3,164 |
|
Charge-offs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction, land
development and other land
loans |
|
|
1,107 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Commercial, financial and
agricultural |
|
|
223 |
|
|
|
163 |
|
|
|
106 |
|
|
|
521 |
|
|
|
240 |
|
Installment and consumer |
|
|
110 |
|
|
|
97 |
|
|
|
95 |
|
|
|
129 |
|
|
|
127 |
|
Real estate — mortgage |
|
|
824 |
|
|
|
28 |
|
|
|
98 |
|
|
|
73 |
|
|
|
333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,264 |
|
|
|
288 |
|
|
|
299 |
|
|
|
723 |
|
|
|
700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction, land
development and other land
loans |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Commercial, financial and
agricultural |
|
|
5 |
|
|
|
10 |
|
|
|
16 |
|
|
|
34 |
|
|
|
— |
|
Installment and consumer |
|
|
25 |
|
|
|
31 |
|
|
|
7 |
|
|
|
7 |
|
|
|
14 |
|
Real estate — mortgage |
|
|
3 |
|
|
|
11 |
|
|
|
8 |
|
|
|
— |
|
|
|
130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33 |
|
|
|
52 |
|
|
|
31 |
|
|
|
41 |
|
|
|
144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (charge-offs) recoveries |
|
|
(2,231 |
) |
|
|
(236 |
) |
|
|
(268 |
) |
|
|
(682 |
) |
|
|
(556 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision charged to operations |
|
|
1,456 |
|
|
|
909 |
|
|
|
898 |
|
|
|
1,022 |
|
|
|
808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses, end
of year |
|
$ |
4,284 |
|
|
$ |
5,059 |
|
|
$ |
4,386 |
|
|
$ |
3,756 |
|
|
$ |
3,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of net (charge-offs)
recoveries during the period
to average loans outstanding
during the period |
|
|
(.62%) |
|
|
|
(.07%) |
|
|
|
(.09%) |
|
|
|
(.24%) |
|
|
|
(.23%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan Losses
In the normal course of business, the Bank has recognized and will continue to recognize losses
resulting from the inability of certain borrowers to repay loans and the insufficient realizable
value of collateral securing such loans.
35
Accordingly, management has established an allowance for loan losses, which totaled approximately
$4,284,000 at December 31, 2008, which is allocated according to the following table, along with
the percentage of loans in each category to total loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
|
|
(Dollar amounts in thousands) |
|
Commercial,
financial and
agricultural |
|
$ |
436 |
|
|
|
9.3 |
% |
|
$ |
562 |
|
|
|
9.2 |
% |
|
$ |
883 |
|
|
|
9.9 |
% |
|
$ |
543 |
|
|
|
12.1 |
% |
|
$ |
581 |
|
|
|
14.2 |
% |
Real estate
— construction |
|
|
1,838 |
|
|
|
31.2 |
% |
|
|
1,928 |
|
|
|
27.8 |
% |
|
|
1,442 |
|
|
|
26.2 |
% |
|
|
1,312 |
|
|
|
22.4 |
% |
|
|
1,165 |
|
|
|
21.5 |
% |
Real estate
— Mortgage |
|
|
1,770 |
|
|
|
56.8 |
% |
|
|
2,247 |
|
|
|
59.8 |
% |
|
|
1,760 |
|
|
|
60.2 |
% |
|
|
1,671 |
|
|
|
61.4 |
% |
|
|
1,432 |
|
|
|
58.9 |
% |
Consumer and
installment |
|
|
133 |
|
|
|
2.7 |
% |
|
|
195 |
|
|
|
3.2 |
% |
|
|
191 |
|
|
|
3.7 |
% |
|
|
136 |
|
|
|
4.1 |
% |
|
|
152 |
|
|
|
5.4 |
% |
Unallocated |
|
|
107 |
|
|
|
— |
|
|
|
127 |
|
|
|
— |
|
|
|
110 |
|
|
|
— |
|
|
|
94 |
|
|
|
— |
|
|
|
86 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,284 |
|
|
|
|
|
|
$ |
5,059 |
|
|
|
|
|
|
$ |
4,386 |
|
|
|
|
|
|
$ |
3,756 |
|
|
|
|
|
|
$ |
3,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In evaluating the Bank’s allowance for loan losses, management has taken into consideration
concentrations within the loan portfolio, past loan loss experience, growth of the portfolio,
current economic conditions and the appraised value of collateral securing loans. Although
management believes the allowance for loan losses is adequate, management’s evaluation of losses is
a continuing process which may necessitate adjustments to the allowance in future periods.
Real estate mortgage loans constituted approximately 56.8% of outstanding loans at December 31,
2008. These loans include both commercial and residential mortgage loans. Management believes the
risk of loss for commercial real estate loans is generally higher than residential loans.
Management continuously monitors the performance of the commercial real estate portfolio and
collateral values. Residential mortgages are generally secured by the underlying residence.
Management of the Bank currently believes that these loans are adequately secured.
Real estate construction loans represented approximately 31.2% of the Bank’s outstanding loans at
December 31, 2008. This category of the loan portfolio consists of commercial and residential
construction and development loans located in the Bank’s market areas in Georgia and Florida.
Management of the Bank closely monitors the performance of these loans and periodically inspects
properties and development progress. Management considers these factors in estimating and
evaluating the allowance for loan losses.
Commercial loans represented approximately 9.3% of outstanding loans at December 31, 2008.
Commercial loans are generally considered by management as having greater risk than other
categories of loans in the Bank’s loan portfolio. However, the Bank generally originates
commercial loans on a secured basis, and at December 31, 2008, over 98% of the Bank’s commercial
loans were secured. Management believes that the secured status of a substantial portion of the
commercial loan portfolio greatly reduces the risk of loss inherently present in commercial loans.
Consumer and installment loans represented approximately 2.7% of outstanding loans at December 31,
2008 and are also well secured. At December 31, 2008, the majority of the Bank’s consumer loans
were secured by collateral primarily consisting of automobiles, boats and other personal property.
Management believes that these loans inherently possess less risk than other categories of loans.
36
Loans held for sale consist of single family residential mortgage loans originated by the Bank’s
Mortgage Division. These loans are originated with an investor purchase commitment and are sold
shortly after origination by the Bank.
The Bank’s management and Board of Directors monitor the loan portfolio monthly to evaluate the
adequacy of the allowance for loan losses. Ratings on classified loans are also reviewed and
performance is evaluated in determining the allowance. The provision for loan losses charged to
operations is based on this analysis. In addition, management and the Board consider such factors
as delinquent loans, collateral values and economic conditions in their evaluation of the adequacy
of the allowance for loan losses.
Cash and Due from Banks
Cash on hand, cash items in the process of collection, and amounts due from correspondent banks and
the Federal Reserve Bank are included in cash and due from banks. As of December 31, 2008,
interest-bearing cash due from banks totaled $1.3 million and funds required to be on reserve with
the Federal Reserve totaled $960,000.
Investments
As of December 31, 2008, investment securities comprised approximately 12.5% of the Bank’s assets.
The Bank invests primarily in obligations of the United States or agencies of the United States,
mortgage-backed securities and obligations, certain obligations of states and municipalities,
corporate securities, Federal Home Loan Bank stock, and bank-owned life insurance. The Bank also
enters into federal funds transactions with its principal correspondent banks. The Bank may act as
a net seller or net purchaser of such funds.
The following table presents, for the dates indicated, the estimated fair market value of the
Bank’s investment securities available for sale. The Bank has classified all of its investment
securities as available for sale.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands) |
|
Obligations of the U.S. Treasury and other U.S
government agencies |
|
$ |
27,330 |
|
|
$ |
32,148 |
|
|
$ |
26,177 |
|
Mortgage-backed securities |
|
|
20,190 |
|
|
|
19,332 |
|
|
|
21,415 |
|
Obligations of States and political subdivisions |
|
|
9,924 |
|
|
|
7,243 |
|
|
|
5,681 |
|
Corporate obligations |
|
|
150 |
|
|
|
183 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
$ |
57,594 |
|
|
$ |
58,906 |
|
|
$ |
53,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank stock |
|
|
2,201 |
|
|
|
1,487 |
|
|
|
2,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities and FHLB stock |
|
$ |
59,795 |
|
|
$ |
60,393 |
|
|
$ |
55,404 |
|
|
|
|
|
|
|
|
|
|
|
37
The following tables present the contractual maturities and weighted average yields of the
Bank’s investment securities as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities of Investment Securities |
|
|
|
Less Than |
|
|
One To |
|
|
Five To |
|
|
Over |
|
|
|
One Year |
|
|
Five Years |
|
|
Ten Years |
|
|
Ten Years |
|
|
|
(In thousands) |
|
Obligations of the U.S. Treasury and other U.S.
government agencies |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
11,822 |
|
|
$ |
15,508 |
|
Mortgage-backed securities |
|
|
— |
|
|
|
1,246 |
|
|
|
— |
|
|
|
18,944 |
|
Obligations of States and political subdivisions |
|
|
226 |
|
|
|
833 |
|
|
|
3,602 |
|
|
|
5,263 |
|
Corporate obligations |
|
|
— |
|
|
|
— |
|
|
|
150 |
|
|
|
— |
|
Federal home loan bank stock |
|
|
2,201 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,427 |
|
|
$ |
2,079 |
|
|
$ |
15,574 |
|
|
$ |
39,715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Yields |
|
|
|
|
|
|
|
After One |
|
|
After Five |
|
|
|
|
|
|
Within |
|
|
Through |
|
|
Through |
|
|
After |
|
|
|
One Year |
|
|
Five Years |
|
|
Ten Years |
|
|
Ten Years |
|
Obligations of the U.S. Treasury and other U.S.
government agencies |
|
|
— |
|
|
|
— |
|
|
|
5.35 |
% |
|
|
5.71 |
% |
Mortgage-backed securities |
|
|
— |
|
|
|
3.62 |
% |
|
|
— |
|
|
|
5.20 |
% |
Obligations of States and political subdivisions |
|
|
3.62 |
% |
|
|
5.61 |
% |
|
|
5.70 |
% |
|
|
5.83 |
% |
Corporate obligations |
|
|
— |
|
|
|
— |
|
|
|
5.60 |
% |
|
|
— |
|
Federal home loan bank stock |
|
|
4.29 |
% |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted average yield |
|
|
4.22 |
% |
|
|
4.42 |
% |
|
|
5.43 |
% |
|
|
5.48 |
% |
The weighted average yields on tax-exempt obligations presented in the table above have been
computed on a tax-equivalent basis.
With the exception of U.S. government agency securities, the Bank did not have investments with a
single issuer exceeding, in the aggregate, 10% of the Company’s shareholders’ equity.
In September 2007, an $8.0 million bank-owned life insurance policy (BOLI) was acquired in order to
insure the key officers of the Bank. Per FASB Technical Bulletin 85-4, this policy is classified
as a miscellaneous asset at its cash surrender value, net of surrender charges and/or early
termination charges. As of December 31, 2008, the BOLI cash surrender value was $8,401,691,
resulting in other income for 2008 of $315,832 and an annualized net yield of 3.84%.
Return on Equity and Assets
The following table presents certain profitability, return and capital ratios for the Company as of
the end of the past three fiscal years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Return on Average Assets |
|
|
0.62 |
% |
|
|
0.69 |
% |
|
|
0.78 |
% |
Return on Average Equity |
|
|
7.36 |
% |
|
|
8.39 |
% |
|
|
9.57 |
% |
Dividend Payout Ratio |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Equity to Assets Ratio |
|
|
8.48 |
% |
|
|
8.03 |
% |
|
|
7.70 |
% |
38
Liquidity and Interest Rate Sensitivity
Deposit levels and the associated timing and quantity of funds flowing into and out of a bank
inherently involve a degree of uncertainty. In order to ensure that it is capable of meeting
depositors’ demands for funds, the Bank must maintain adequate liquidity. Liquid assets consisting
primarily of cash and deposits due from other banks, federal funds sold and investment securities
maturing within one year provide the source of such funds. Insufficient liquidity may force a bank
to engage in emergency measures to secure necessary funding, which could be costly and negatively
affect earnings. The Bank monitors its liquidity on a monthly basis and seeks to maintain it at an
optimal level.
As of December 31, 2008, the Bank’s liquidity ratio was 20.4% as compared to 17.9% at December 31,
2007. In addition to the liquid assets described above, the Bank has a reserve funding source in
the form of federal funds lines of credit with Silverton Bank and SunTrust Bank. Management is not
aware of any demands, commitments or uncertainties which could materially affect the Bank’s
liquidity position. However, should an unforeseen demand for funds arise, the Bank held readily
marketable investment securities at December 31, 2008 with a market value of $57.6 million in its
available-for-sale portfolio which would provide an additional source of liquidity.
Gap management is a conservative asset/liability strategy designed to maximize earnings over a
complete interest rate cycle while reducing or minimizing the Bank’s exposure to interest rate
risk. Various assets and liabilities are termed “rate sensitive” when the interest rate can be
replaced. By definition, the “gap” is the difference between rate sensitive assets and rate
sensitive liabilities in a given time horizon. At December 31, 2008, the Bank was asset sensitive
except in the 3-12 month time frame.
The following is an analysis of rate sensitive assets and liabilities as of December 31, 2008 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 years |
|
|
|
|
|
|
0-3 mos. |
|
|
3-12 mos. |
|
|
1-5 years |
|
|
or more |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable securities |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,246 |
|
|
$ |
46,424 |
|
|
$ |
47,670 |
|
Tax-exempt securities |
|
|
— |
|
|
|
226 |
|
|
|
833 |
|
|
|
8,865 |
|
|
|
9,924 |
|
Federal funds sold and cash in banks |
|
|
9,954 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
9,954 |
|
Loans |
|
|
195,740 |
|
|
|
44,863 |
|
|
|
119,406 |
|
|
|
4,686 |
|
|
|
364,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rate sensitive assets |
|
|
205,694 |
|
|
|
45,089 |
|
|
|
121,485 |
|
|
|
59,975 |
|
|
|
432,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW and money market deposits |
|
|
47,145 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
47,145 |
|
Savings deposits |
|
|
55,426 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
55,426 |
|
Time deposits |
|
|
49,285 |
|
|
|
165,887 |
|
|
|
24,844 |
|
|
|
301 |
|
|
|
240,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rate sensitive deposits |
|
|
151,856 |
|
|
|
165,887 |
|
|
|
24,844 |
|
|
|
301 |
|
|
|
342,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowed funds |
|
|
15,128 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
15,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rate sensitive liabilities |
|
|
166,984 |
|
|
|
165,887 |
|
|
|
24,844 |
|
|
|
301 |
|
|
|
358,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess of rate sensitive assets less rate
sensitive liabilities |
|
$ |
38,710 |
|
|
$ |
(120,798 |
) |
|
$ |
96,641 |
|
|
$ |
59,674 |
|
|
$ |
74,227 |
|
Cumulative ratio of rate sensitive assets
to liabilities |
|
|
123 |
% |
|
|
75 |
% |
|
|
104 |
% |
|
|
121 |
% |
|
|
|
|
Cumulative gap |
|
$ |
38,710 |
|
|
$ |
(82,088 |
) |
|
$ |
14,553 |
|
|
$ |
74,227 |
|
|
|
|
|
39
Capital Resources
The equity capital of the Bank totaled $39.0 million at December 31, 2008, an increase of $3.0
million, or 8.3%, from equity capital of $36.0 million at December 31, 2007. The increase in
equity capital was attributable to the Bank’s net income of $3.0 million and a negligible decrease
of $7,000 in the Bank’s after-tax unrealized gain/(loss) on available-for-sale securities which,
under Statement of Financial Accounting Standard No. 115, is recognized in the available-for-sale
portion of the bond portfolio by making adjustments to the equity capital account. The equity
capital of the Company totaled $39.1 million at December 31, 2008.
Management believes that the capitalization of the Company and the Bank is adequate to sustain the
growth experienced in 2008. The following table sets forth the applicable actual and required
capital ratios for the Company and the Bank as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum |
|
|
December 31, 2008 |
|
Regulatory Requirement |
|
|
|
|
|
|
|
|
|
Bank |
|
|
|
|
|
|
|
|
Total risk-based capital ratio
|
|
|
10.89 |
% |
|
|
8.0 |
% |
Tier 1 Capital ratio
|
|
|
9.80 |
% |
|
|
4.0 |
% |
Leverage ratio
|
|
|
8.58 |
% |
|
|
4.0 |
% |
|
|
|
|
|
|
|
|
|
Company — Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital ratio
|
|
|
10.91 |
% |
|
|
8.0 |
% |
Tier 1 Capital ratio
|
|
|
9.82 |
% |
|
|
4.0 |
% |
Leverage ratio
|
|
|
8.59 |
% |
|
|
4.0 |
% |
The above ratios indicate that the capital position of the Company and the Bank are sound and that
the Company is well positioned for future growth.
There are no commitments of capital resources known to management which would have a material
impact on the Bank’s capital position.
Fair Value Measurement
On January 1, 2008, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No.
157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring
fair value in accordance with U.S. GAAP, and expands disclosures about fair value measurements. The
Company has elected not to delay the application of SFAS No. 157 to non-financial assets and
non-financial liabilities, as allowed by Financial Accounting Standards Board (“FASB”) Staff
Position SFAS 157-2. SFAS No. 157 applies whenever other standards require (or permit) assets or
liabilities to be measured at fair value and, therefore, does not expand the use of fair value in
any new circumstances. Fair value is defined as the exchange price that would be received to sell
an asset or paid to transfer a liability in the principal or most advantageous market for the asset
or liability in an orderly transaction between market participants on the measurement date. SFAS
No. 157 clarifies that fair value should be based on the assumptions market participants would use
when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the
information used to develop those assumptions. The fair value hierarchy gives the highest priority
to quoted prices in active markets and the lowest priority to unobservable data. SFAS No. 157
requires fair value measurements to be separately disclosed by level within the fair value
hierarchy. Under SFAS No. 157, the Company bases fair values as defined above. For assets and
liabilities recorded at fair value, it is the Company’s policy to maximize the use of
observable inputs and minimize the use of unobservable inputs when developing fair value
measurements, in accordance with the fair value hierarchy in SFAS No. 157.
40
Fair value measurements for assets and liabilities where there exists limited or no observable
market data and, therefore, are based primarily upon estimates, are often calculated based on the
economic and competitive environment, the characteristics of the asset or liability, and other
factors. Therefore, the results cannot be determined with precision and may not be realized in an
actual sale or immediate settlement of the asset or liability. Additionally, there may be inherent
weaknesses in any calculation technique, and changes in the underlying assumptions used, including
discount rates and estimates of future cash flows, could significantly affect the results of
current or future values.
The Company utilizes fair value measurements to record fair value adjustments to certain assets and
liabilities and to determine fair value disclosures. Securities available-for-sale are recorded at
fair value on a recurring basis. Additionally, from time to time, the Company may be required to
record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held
for investment, and certain other assets. These nonrecurring fair value adjustments typically
involve application of lower of cost or market accounting or write-downs of individual assets.
Under SFAS No. 157, the Company groups assets and liabilities at fair value in three levels, based
on the markets in which the assets and liabilities are traded and the reliability of the
assumptions used to determine fair value. These levels are:
Level 1 — Valuations for assets and liabilities traded in active exchange markets, such as
the New York Stock Exchange. The Company had no Level 1 assets or liabilities at December 31,
2008.
Level 2 — Valuations are obtained from readily available pricing sources via independent
providers for market transactions involving similar assets or liabilities. The Company’s principal
market for these securities is the secondary institutional markets and valuations are based on
observable market data in those markets. At December 31, 2008, Level 2 securities included U.S.
Government agency obligations, state and municipal bonds, corporate debt securities,
mortgage-backed securities, and FHLB stock.
Level 3 — Valuations for assets and liabilities that are derived from other valuation
methodologies, including option pricing models, discounted cash flow models and similar techniques,
and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations
incorporate certain assumptions and projections in determining the fair value assigned to such
assets or liabilities. The Company had no Level 3 assets or liabilities at December 31, 2008.
Following is a description of valuation methodologies used for assets and liabilities recorded at
fair value.
Investment Securities Available-for-Sale
Investment securities available-for-sale, including FHLB stock, are recorded at fair value on a
recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted
prices are not available, fair values are measured using independent pricing models or other
model-based valuation techniques such as present value of future cash flows, adjusted for the
securities’ credit rating, prepayment assumptions, and other factors such as credit loss
assumptions. At December 31, 2008, the Company classified $59.8 million of investment securities
available-for-sale, including FHLB stock, subject to recurring fair value adjustments as Level 2.
Loans Held for Sale
Loans held for sale are carried at the lower of cost or market value. The fair value of loans held
for sale is based on what secondary markets are currently offering for portfolios with similar
characteristics. As
such, the Company classifies loans subjected to nonrecurring fair value adjustments as Level 2.
There were no fair value adjustments related to the $28.4 million of loans held for sale at
December 31, 2008.
41
Loans
The Company does not record loans at fair value on a recurring basis. However, from time to time,
a loan is considered impaired and an allowance for loan losses is established. Loans for which it
is probable that payment of interest and principal will not be made in accordance with the
contractual terms of the loan agreement are considered impaired. Once an individual loan is
identified as impaired, management measures the impairment in accordance with SFAS No. 114,
“Accounting by Creditors for Impairment of a Loan.” The fair value of impaired loans is estimated
using one of several methods, including collateral value, market value of similar debt, enterprise
value, liquidation value, and discounted cash flows. Those impaired loans not requiring an
allowance represent loans for which the fair value of the expected repayments or collateral exceed
the recorded investments in such loans. At December 31, 2008, substantially all of the total
impaired loans were evaluated based on the fair value of the collateral. In accordance with SFAS
No. 157, impaired loans where an allowance is established based on the fair value of collateral
require classification in the fair value hierarchy. When the fair value of the collateral is based
on an observable market price or a current appraised value, the Company records the impaired loans
as nonrecurring Level 2. When an appraised value is not available or management determines the
fair value of the collateral is further impaired below the appraised value and there is no
observable market price, the Company records the impaired loan as nonrecurring Level 3. Impaired
loans, classified as Level 2, totaled $6.1 million at December 31, 2008 and had specific loan loss
allowances aggregating $0.8 million.
Foreclosed Assets
Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets.
Subsequently, foreclosed assets are carried at the lower of carrying value or fair value. Fair
value is based upon independent market prices, appraised values of the collateral or management’s
estimation of the value of the collateral. When the fair value of the collateral is based on an
observable market price or a current appraised value, the Company records the foreclosed asset as
nonrecurring Level 2. When an appraised value is not available or management determines the fair
value of the collateral is further impaired below the appraised value and there is no observable
market price, the Company records the foreclosed assets as nonrecurring Level 3. There were no
fair value adjustments related to foreclosed real estate of $7.2 million at December 31, 2008.
Below is a table that presents information about certain assets and liabilities measured at fair
value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at |
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008, Using, |
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying |
|
|
|
|
|
|
Quoted |
|
|
|
|
|
|
|
|
|
Amount in |
|
|
|
|
|
|
Prices in |
|
|
|
|
|
|
|
|
|
the |
|
|
Assets/ |
|
|
Active |
|
|
Significant |
|
|
Significant |
|
|
|
Consolidated |
|
|
Liabilities |
|
|
Markets for |
|
|
Other |
|
|
Other |
|
|
|
Balance |
|
|
Measured at |
|
|
Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
Sheet |
|
|
Fair Value |
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
Description |
|
12/31/2008 |
|
|
12/31/2008 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities,
including FHLB
stock |
|
$ |
59,795 |
|
|
$ |
59,795 |
|
|
$ |
— |
|
|
$ |
59,795 |
|
|
$ |
— |
|
42
Market Risk
Market risk is the risk arising from adverse changes in the fair value of financial instruments due
to a change in interest rates, exchange rates and equity prices. Our primary market risk is
interest rate risk.
The primary objective of asset/liability management is to manage interest rate risk and achieve
reasonable stability in net interest income throughout interest rate cycles. This is achieved by
maintaining the proper balance of rate sensitive earning assets and rate sensitive liabilities.
The relationship that compares rate sensitive earning assets to rate sensitive liabilities is the
principal factor in projecting the effect that fluctuating interest rates will have on future net
interest income. Rate sensitive earning assets and interest-bearing liabilities are those that can
be re-priced to current market rates within a relatively short time period. Management monitors
the rate sensitivity of earning assets and interest-bearing liabilities over the entire life of
these instruments in order to manage this risk
We have not experienced a high level of volatility in net interest income primarily because of the
relatively large base of core deposits that do not re-price on a contractual basis. These deposit
products include regular savings, interest-bearing transaction accounts and money market savings
accounts. Balances for these accounts are reported based on historical re-pricing. However, the
rates paid are typically not directly related to market interest rates, since management has some
discretion in adjusting these rates as market rates change.
Off-Balance Sheet Arrangements
In the ordinary course of business, the Bank may enter into off-balance sheet financial instruments
which are not reflected in the financial statements. These instruments include commitments to
extend credit and standby letters of credit. Such financial instruments are recorded in the
financial statements when funds are disbursed or the instruments become payable.
Following is an analysis of significant off-balance sheet financial instruments at December 31,
2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
December 31, 2007 |
|
|
|
(In thousands) |
|
Commitments to extend credit |
|
$ |
56,426 |
|
|
$ |
40,492 |
|
Standby letters of credit |
|
|
5,102 |
|
|
|
1,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
61,528 |
|
|
$ |
42,404 |
|
|
|
|
|
|
|
|
43
Contractual Obligations
We have various contractual obligations that we must fund as part of our normal operations. The
following table shows aggregate information about our contractual obligations, including interest,
and the periods in which payments are due. The amounts and time periods are measured from December
31, 2008, based upon rates in effect at December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period (in thousands) |
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More than |
|
|
|
Total |
|
|
1 year |
|
|
1-3 years |
|
|
3-5 years |
|
|
5 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time Deposits |
|
$ |
254,914 |
|
|
$ |
228,426 |
|
|
$ |
25,636 |
|
|
$ |
550 |
|
|
$ |
302 |
|
Long-Term Debt |
|
|
29,611 |
|
|
|
1,072 |
|
|
|
2,134 |
|
|
|
26,405 |
|
|
|
— |
|
Data Processing Obligations |
|
|
2,236 |
|
|
|
1,032 |
|
|
|
1,204 |
|
|
|
— |
|
|
|
— |
|
Operating Lease Obligations |
|
|
1,201 |
|
|
|
291 |
|
|
|
566 |
|
|
|
344 |
|
|
|
— |
|
Service Contract Obligations |
|
|
615 |
|
|
|
232 |
|
|
|
272 |
|
|
|
111 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
288,577 |
|
|
$ |
231,053 |
|
|
$ |
29,812 |
|
|
$ |
27,410 |
|
|
$ |
302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 7A. |
|
Quantitative and Qualitative Disclosures About Market Risk |
Information in response to this Item 7A is incorporated by reference from the following sections of
Item 7 of this report: “Liquidity and Interest Rate Sensitivity” and “Market Risk.”
|
|
|
Item 8. |
|
Financial Statements and Supplementary Data |
The following financial statements are filed as Exhibit 99.1 to this Report and incorporated herein
by reference:
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Financial Condition
as of December 31, 2008 and 2007 |
|
|
|
|
|
|
|
|
|
Consolidated Statements of Income
for the years ended December 31, 2008, 2007 and 2006 |
|
|
|
|
|
|
|
|
|
Consolidated Statements of Comprehensive Income
for the years ended December 31, 2008, 2007 and 2006 |
|
|
|
|
|
|
|
|
|
Consolidated Statements of Shareholders’ Equity
for the years ended December 31, 2008, 2007 and 2006 |
|
|
|
|
|
|
|
|
|
Consolidated Statements of Cash Flows
for the years ended December 31, 2008, 2007 and 2006 |
|
|
|
|
|
|
|
|
|
Notes to Consolidated Financial Statements |
|
|
|
|
44
|
|
|
Item 9. |
|
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
There has been no occurrence requiring a response to this item.
|
|
|
Item 9A. |
|
Controls and Procedures. |
Not applicable.
|
|
|
Item 9A(T). |
|
Controls and Procedures. |
Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the Company’s
disclosure controls and procedures as of the end of the fiscal year covered by this report and have
concluded that the Company’s disclosure controls and procedures are effective.
Management’s Annual Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control
over financial reporting. The Company’s management, including its Chief Executive Officer and
Chief Financial Officer, conducted an evaluation of the effectiveness of its internal control over
financial reporting based on the framework in “Internal Control—Integrated Framework” issued by
the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation,
the Company’s management concluded that the Company’s internal control over financial reporting was
effective as of December 31, 2008.
This report on Form 10-K does not include an attestation report of the Company’s registered public
accounting firm regarding internal control over financial reporting. Management’s report was not
subject to attestation requirements by the Company’s registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit the Company to provide only
management’s report in this report.
Changes in Internal Control over Financial Reporting
During the fourth quarter of 2008, there were no changes in the Company’s internal control over
financial reporting that have materially affected, or that are reasonably likely to materially
affect, the Company’s internal control over financial reporting.
|
|
|
Item 9B. |
|
Other Information. |
Not applicable.
45
PART III
Certain information required by Part III of this Form 10-K is incorporated by reference from the
Company’s definitive proxy statement to be filed pursuant to Regulation 14A for the Company’s
Annual Meeting of Shareholders to be held on May 18, 2009 (the “Proxy Statement”). The Company
will, within 120 days of the end of its fiscal year, file the Proxy Statement with the Securities
and Exchange Commission.
|
|
|
Item 10. |
|
Directors, Executive Officers and Corporate Governance. |
The information responsive to this item is incorporated by reference from the sections entitled
“Corporate Governance and Board Matters,” “Election of Directors” and “Executive Officers”
contained in the Proxy Statement.
|
|
|
Item 11. |
|
Executive Compensation. |
The information responsive to this item is incorporated by reference from the section entitled
“Executive Compensation” contained in the Proxy Statement.
|
|
|
Item 12. |
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
The information responsive to this item is incorporated by reference from the section entitled
“Security Ownership of Certain Beneficial Owners and Management” contained in the Proxy Statement.
See also the section entitled “Equity Compensation Plan Information” in Item 5 of this Annual
Report.
|
|
|
Item 13. |
|
Certain Relationships and Related Transactions, and Director Independence. |
The information responsive to this item is incorporated by reference from the sections entitled
“Corporate Governance and Board Matters and “Transactions with Related Persons, Promoters and
Certain Control Persons” contained in the Proxy Statement.
|
|
|
Item 14. |
|
Principal Accountant Fees and Services |
The information responsive to this item is incorporated by reference from the section entitled
“Independent Public Accountants” contained in the Proxy Statement.
46
PART IV
|
|
|
Item 15. |
|
Exhibits and Financial Statement Schedules. |
(a)1. The following financial statements are filed as Exhibit 99.1 to this Report and
incorporated herein by reference:
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Financial Condition
as of December 31, 2008 and 2007 |
|
|
|
|
|
|
|
|
|
Consolidated Statements of Income
for the years ended December 31, 2008, 2007 and 2006 |
|
|
|
|
|
|
|
|
|
Consolidated Statements of Comprehensive Income
for the years ended December 31, 2008, 2007 and 2006 |
|
|
|
|
|
|
|
|
|
Consolidated Statements of Shareholders’ Equity
for the years ended December 31, 2008, 2007 and 2006 |
|
|
|
|
|
|
|
|
|
Consolidated Statements of Cash Flows
for the years ended December 31, 2008, 2007 and 2006 |
|
|
|
|
|
|
|
|
|
Notes to Consolidated Financial Statements |
|
|
|
|
(a)2. Financial Statement Schedules
Not Applicable
(a)3 & (b). The following exhibits are filed with this report:
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
|
|
Description of Exhibit |
3.1
|
|
—
|
|
Articles of Incorporation of the Company
(incorporated herein by reference to the exhibit
contained in the Company’s Registration Statement
on Form SB-2 under the Securities Act of 1933, as
amended, Registration No. 333-69763, previously
filed with the Commission). |
|
|
|
|
|
3.1.1
|
|
—
|
|
Articles of Amendment to the Articles of
Incorporation of the Company (incorporated herein
by reference to the exhibit contained in the
Company’s Annual Report on Form 10-KSB for the year
ended December 31, 2000, previously filed with the
Commission). |
|
|
|
|
|
3.2
|
|
—
|
|
By-Laws of the Company (incorporated herein by
reference to the exhibit contained in the Company’s
Registration Statement on Form SB-2 under the
Securities Act of 1933, as amended (Registration
No. 333-69763)). |
|
|
|
|
|
47
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
|
|
Description of Exhibit |
* 10.1
|
|
—
|
|
1997 Stock Option Plan (incorporated herein by
reference to the exhibit contained in the Company’s
Annual Report on Form 10-KSB for the year ended
December 31, 2002, previously filed with the
Commission). |
|
|
|
|
|
* 10.2
|
|
—
|
|
Directors Stock Purchase Plan (incorporated herein
by reference to the exhibit contained in the
Company’s Annual Report on Form 10-KSB for the year
ended December 31, 2002, previously filed with the
Commission). |
|
|
|
|
|
* 10.3
|
|
—
|
|
2005 Incentive Plan (incorporated herein by
reference to Appendix A contained in the Company’s
Proxy Statement for its 2005 Annual Meeting of
Shareholders, filed with the Commission on May 5,
2005). |
|
|
|
|
|
* 10.4
|
|
—
|
|
Form of Incentive Stock Option Agreement under the
Company’s 2005 Incentive Plan (incorporated herein
by reference to the exhibit contained in the
Company’s Annual Report on Form 10-KSB for the year
ended December 31, 2005, previously filed with the
Commission). |
|
|
|
|
|
* 10.5
|
|
—
|
|
Severance Protection Agreement between First Bank
of Georgia and Remer Y. Brinson, III, dated
September 4, 2000 (incorporated herein by reference
to the exhibit contained in the Company’s Annual
Report on Form 10-K for the year ended December 31,
2006, previously filed with the Commission). |
|
|
|
|
|
* 10.6
|
|
—
|
|
Compensation Arrangements with Remer Y. Brinson,
III (incorporated herein by reference to the
exhibit contained in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2007,
previously filed with the Commission). |
|
|
|
|
|
* 10.7
|
|
—
|
|
First Bank of Georgia Annual Incentive Plan for
Patrick G. Blanchard and Remer Y. Brinson, III
(incorporated herein by reference to the exhibit
contained in the Company’s Annual Report on Form
10-K for the year ended December 31, 2006,
previously filed with the Commission). |
|
|
|
|
|
14.1
|
|
—
|
|
Code of Ethics (incorporated herein by reference
from Exhibit 99.2 contained in the Company’s Annual
Report on Form 10-KSB for the year ended December
31, 2004, previously filed with the Commission). |
|
|
|
|
|
21.1
|
|
—
|
|
Subsidiaries of the Registrant. |
|
|
|
|
|
23.1
|
|
—
|
|
Consent of Cherry, Bekaert & Holland, L.L.P. |
48
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
|
|
Description of Exhibit |
|
|
|
|
|
31.1
|
|
—
|
|
Certification of President and Chief Executive
Officer Pursuant to Section 302 of Sarbanes-Oxley
Act of 2002. |
|
|
|
|
|
31.2
|
|
—
|
|
Certification of Senior Vice President and Chief
Financial Officer Pursuant to Section 302 of
Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
32.1
|
|
—
|
|
Certifications Pursuant to Section 906 of
Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
99.1
|
|
—
|
|
Financial Statements. |
|
|
|
* |
|
- Denotes a management contract or compensatory plan or arrangement. |
49
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant
has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
GEORGIA-CAROLINA BANCSHARES, INC.
|
|
Date: March 31, 2009 |
By: |
/s/ Remer Y. Brinson, III
|
|
|
|
Remer Y. Brinson, III |
|
|
|
President and Chief Executive
Officer
(principal executive officer) |
|
|
|
|
|
|
|
|
|
|
Date: March 31, 2009 |
By: |
/s/ Thomas J. Flournoy
|
|
|
|
Thomas J. Flournoy |
|
|
|
Senior Vice President and Chief Financial Officer
(principal financial and accounting officer) |
|
50
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
|
|
|
|
|
|
|
DIRECTORS |
|
DATE |
|
DIRECTORS |
|
DATE |
|
|
|
|
|
|
|
/s/ Patrick G. Blanchard
|
|
March 31, 2009
|
|
/s/ Robert N. Wilson, Jr.
|
|
March 31, 2009 |
|
|
|
|
|
|
|
Patrick G. Blanchard
|
|
|
|
Robert N. Wilson, Jr. |
|
|
|
|
|
|
|
|
|
/s/ Remer Y. Brinson, III
|
|
March 31, 2009
|
|
/s/ Hugh L. Hamilton, Jr.
|
|
March 31, 2009 |
|
|
|
|
|
|
|
Remer Y. Brinson, III
|
|
|
|
Hugh L. Hamilton, Jr. |
|
|
|
|
|
|
|
|
|
/s/ Mac A. Bowman
|
|
March 31, 2009
|
|
/s/ George H. Inman
|
|
March 31, 2009 |
|
|
|
|
|
|
|
Mac A. Bowman
|
|
|
|
George H. Inman |
|
|
|
|
|
|
|
|
|
/s/ Philip G. Farr
|
|
March 31, 2009
|
|
/s/ David W. Joesbury, Sr.
|
|
March 31, 2009 |
|
|
|
|
|
|
|
Philip G. Farr
|
|
|
|
David W. Joesbury, Sr. |
|
|
|
|
|
|
|
|
|
/s/ Samuel A. Fowler, Jr.
|
|
March 31, 2009
|
|
/s/ James L. Lemley, M.D.
|
|
March 31, 2009 |
|
|
|
|
|
|
|
Samuel A. Fowler, Jr.
|
|
|
|
James L. Lemley, M.D. |
|
|
|
|
|
|
|
|
|
/s/ Arthur J. Gay, Jr.
|
|
March 31, 2009
|
|
/s/ Julian W. Osbon
|
|
March 31, 2009 |
|
|
|
|
|
|
|
Arthur J. Gay, Jr.
|
|
|
|
Julian W. Osbon |
|
|
|
|
|
|
|
|
|
/s/ John W. Lee
|
|
March 31, 2009
|
|
/s/ Bennye M. Young
|
|
March 31, 2009 |
|
|
|
|
|
|
|
John W. Lee
|
|
|
|
Bennye M. Young |
|
|
|
|
|
|
|
|
|
/s/ A. Montague Miller
|
|
March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
A. Montague Miller
|
|
|
|
|
|
|
51