UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended September 30, 2009
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File No. 001-16413
FIRST CENTURY BANCORP.
(Exact name of registrant as specified in its charter)
Georgia |
| 58-2554464 |
(State or other jurisdiction |
| (I.R.S. Employer |
of incorporation) |
| Identification No.) |
807 Dorsey Street
Gainesville, Georgia 30501
(Address of principal executive offices)
(770) 297-8060
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o |
| Accelerated filer o |
Non-accelerated o |
| Smaller reporting company x |
(do not check if smaller reporting company) |
|
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 4,998,820 shares of common stock, no par value per share, were issued and outstanding as of November 11, 2009
2
FIRST CENTURY BANCORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
|
| September 30, |
|
|
| ||
|
| 2009 |
| December 31, |
| ||
|
| (Unaudited) |
| 2008 |
| ||
|
|
|
|
|
| ||
Cash and Cash Equivalents |
|
|
|
|
| ||
Cash and Due from Banks |
| $ | 1,358,700 |
| $ | 1,525,027 |
|
Federal Funds Sold |
| — |
| 700,000 |
| ||
|
|
|
|
|
| ||
Total Cash and Cash Equivalents |
| 1,358,700 |
| 2,225,027 |
| ||
|
|
|
|
|
| ||
Investment Securities |
|
|
|
|
| ||
Available for Sale, at Fair Value |
| 8,510,995 |
| 11,100,067 |
| ||
Held to Maturity, at Cost (Fair Value of $18,166,594, and $7,129,889 as of September 30, 2009 and December 31, 2008, respectively) |
| 17,215,828 |
| 7,178,040 |
| ||
|
|
|
|
|
| ||
Total Investment Securities |
| 25,726,823 |
| 18,278,107 |
| ||
|
|
|
|
|
| ||
Other Investments |
| 386,600 |
| 427,170 |
| ||
|
|
|
|
|
| ||
Loans Held for Sale |
| 2,060,873 |
| 1,863,750 |
| ||
|
|
|
|
|
| ||
Loans |
| 38,311,793 |
| 37,943,602 |
| ||
Allowance for Loan Losses |
| (509,446 | ) | (838,234 | ) | ||
Net deferred loan costs |
| 111,964 |
| 157,468 |
| ||
|
|
|
|
|
| ||
Loans, Net |
| 37,914,311 |
| 37,262,836 |
| ||
|
|
|
|
|
| ||
Premises and Equipment |
| 2,310,128 |
| 2,425,568 |
| ||
|
|
|
|
|
| ||
Other Real Estate Owned |
| 653,501 |
| — |
| ||
|
|
|
|
|
| ||
Other Assets |
| 462,424 |
| 396,053 |
| ||
|
|
|
|
|
| ||
Total Assets |
| $ | 70,873,360 |
| $ | 62,878,510 |
|
The accompanying notes are an integral part of these consolidated balance sheets.
3
FIRST CENTURY BANCORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
| September 30, |
|
|
| ||
|
| 2009 |
| December 31, |
| ||
|
| (Unaudited) |
| 2008 |
| ||
|
|
|
|
|
| ||
Deposits |
|
|
|
|
| ||
Non-interest-Bearing |
| $ | 3,128,075 |
| $ | 3,036,337 |
|
Interest-Bearing |
| 57,013,998 |
| 54,084,517 |
| ||
|
|
|
|
|
| ||
Total Deposits |
| 60,142,073 |
| 57,120,854 |
| ||
|
|
|
|
|
| ||
Borrowings |
| 5,500,000 |
| 2,000,000 |
| ||
|
|
|
|
|
| ||
Other Liabilities |
| 652,576 |
| 593,755 |
| ||
|
|
|
|
|
| ||
Total Liabilities |
| 66,294,649 |
| 59,714,609 |
| ||
|
|
|
|
|
| ||
Shareholders’ Equity |
|
|
|
|
| ||
Preferred Stock, No Par Value; 10,000,000 Shares Authorized; 75,000 Shares Issued and Outstanding |
| 750,000 |
| 750,000 |
| ||
Common Stock, No Par Value; 50,000,000 Shares Authorized; 4,998,820 and 3,979,127 Shares Issued and Outstanding in 2009 and 2008, respectively |
| 14,923,328 |
| 13,572,151 |
| ||
Accumulated Deficit |
| (10,996,574 | ) | (11,075,145 | ) | ||
Accumulated Other Comprehensive (Loss) |
| (98,043 | ) | (83,105 | ) | ||
|
|
|
|
|
| ||
Total Shareholders’ Equity |
| 4,578,711 |
| 3,163,901 |
| ||
|
|
|
|
|
| ||
Total Liabilities and Shareholders’ Equity |
| $ | 70,873,360 |
| $ | 62,878,510 |
|
The accompanying notes are an integral part of these consolidated balance sheets.
4
FIRST CENTURY BANCORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30
(UNAUDITED)
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| 2009 |
| 2008 |
| 2009 |
| 2008 |
| ||||
Interest Income |
|
|
|
|
|
|
|
| |||||
Loans, Including Fees |
| $ | 570,555 |
| $ | 418,795 |
| $ | 1,736,699 |
| $ | 1,159,220 |
|
Investments |
| 634,926 |
| 132,268 |
| 1,937,006 |
| 346,316 |
| ||||
Interest Bearing Deposits |
| 500 |
| 5,731 |
| 552 |
| 39,158 |
| ||||
Federal Funds Sold |
| 11 |
| 28,361 |
| 176 |
| 96,661 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total Interest Income |
| 1,205,992 |
| 585,155 |
| 3,674,433 |
| 1,641,355 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Interest Expense |
|
|
|
|
|
|
|
|
| ||||
Deposits |
| 367,800 |
| 400,021 |
| 1,298,075 |
| 1,066,859 |
| ||||
Borrowings |
| 15,468 |
| 16,031 |
| 48,911 |
| 87,333 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total Interest Expense |
| 383,268 |
| 416,052 |
| 1,346,986 |
| 1,154,192 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net Interest Income |
| 822,724 |
| 169,103 |
| 2,327,447 |
| 487,163 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Provision for Loan Losses |
| 136,080 |
| 164,668 |
| 206,080 |
| 409,591 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net Interest Income (Loss) After Provision for Loan Losses |
| 686,644 |
| 4,435 |
| 2,121,367 |
| 77,572 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Non-interest Income |
|
|
|
|
|
|
|
|
| ||||
Service Charges and Fees on Deposits |
| 15,396 |
| 28,255 |
| 46,737 |
| 39,905 |
| ||||
Gain (Loss) on Investment Securities |
| — |
| — |
| (37,436 | ) | 3,507 |
| ||||
Mortgage Origination and Processing Fees |
| 322,062 |
| 175,933 |
| 1,330,996 |
| 354,352 |
| ||||
Other |
| 17,323 |
| (9,241 | ) | 17,574 |
| 6,434 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total Non-interest Income |
| 354,781 |
| 194,947 |
| 1,357,871 |
| 404,198 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Non-interest Expense |
|
|
|
|
|
|
|
|
| ||||
Salaries and Employee Benefits |
| 522,278 |
| 440,007 |
| 1,618,167 |
| 1,381,931 |
| ||||
Occupancy and Equipment |
| 95,149 |
| 150,869 |
| 309,624 |
| 400,825 |
| ||||
Professional Fees |
| 69,952 |
| 55,373 |
| 207,323 |
| 164,885 |
| ||||
Marketing |
| 76,999 |
| 142,921 |
| 185,072 |
| 252,838 |
| ||||
Data Processing |
| 140,162 |
| 166,070 |
| 387,464 |
| 389,795 |
| ||||
Telephone |
| 13,167 |
| 20,923 |
| 37,684 |
| 50,846 |
| ||||
Postage and Delivery Services |
| 7,110 |
| 15,763 |
| 18,662 |
| 36,214 |
| ||||
Office Supplies |
| 5,736 |
| 24,596 |
| 17,347 |
| 60,197 |
| ||||
Insurance, Tax, and Regulatory Assessments |
| 96,160 |
| 25,596 |
| 188,608 |
| 92,675 |
| ||||
Lending Related Expense |
| 61,632 |
| 32,116 |
| 247,894 |
| 91,019 |
| ||||
Other Non-Interest Expense |
| 102,928 |
| 97,375 |
| 182,822 |
| 115,465 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total Non-interest Expense |
| 1,191,273 |
| 1,171,609 |
| 3,400,667 |
| 3,036,690 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Income (Loss) Before Income Taxes |
| (149,848 | ) | (972,227 | ) | 78,571 |
| (2,554,920 | ) | ||||
Provision for Income Taxes |
| — |
| — |
| — |
| — |
| ||||
Net Income (Loss) |
| $ | (149,848 | ) | $ | (972,227 | ) | $ | 78,571 |
| $ | (2,554,920 | ) |
|
|
|
|
|
|
|
|
|
| ||||
Basic Earnings (Loss) Per Share |
| $ | (.03 | ) | $ | (.46 | ) | $ | .02 |
| $ | (1.38 | ) |
|
|
|
|
|
|
|
|
|
| ||||
Weighted Average Shares Outstanding |
| 4,998,820 |
| 2,100,357 |
| 4,658,766 |
| 1,855,986 |
|
The accompanying notes are an integral part of these consolidated statements of operations.
5
FIRST CENTURY BANCORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30
(UNAUDITED)
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| 2009 |
| 2008 |
| 2009 |
| 2008 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net Income (Loss) |
| $ | (149,848 | ) | $ | (972,227 | ) | $ | 78,571 |
| $ | (2,554,920 | ) |
|
|
|
|
|
|
|
|
|
| ||||
Other Comprehensive Income (Loss), Net of Tax |
|
|
|
|
|
|
|
|
| ||||
Unrealized Gains (Losses) on Securities Arising During the period |
| 40,160 |
| (160,107 | ) | (52,374 | ) | (177,715 | ) | ||||
Reclassification Adjustments for (gains) losses included in net income (loss) |
| — |
| — |
| 37,436 |
| (3,507 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Other comprehensive income (loss) |
| 40,160 |
| (160,107 | ) | (14,938 | ) | (181,222 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Comprehensive Income (Loss) |
| $ | (109,688 | ) | $ | (1,132,334 | ) | $ | 63,633 |
| $ | (2,736,142 | ) |
The accompanying notes are an integral part of these consolidated statements of comprehensive income (loss).
6
FIRST CENTURY BANCORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
| |||||
|
| Preferred Stock |
| Common Stock |
| Accumulated |
| Comprehensive |
|
|
| |||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Deficit |
| Income (Loss) |
| Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance, December 31, 2008 |
| 75,000 |
| $ | 750,000 |
| 3,979,127 |
| $ | 13,572,151 |
| $ | (11,075,145 | ) | $ | (83,105 | ) | $ | 3,163,901 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Issuance of Common Stock |
| — |
| — |
| 1,019,693 |
| 1,529,541 |
| — |
| — |
| 1,529,541 |
| |||||
Common Stock Issuance Costs |
| — |
| — |
| �� |
| (231,570 | ) | — |
| — |
| (231,570 | ) | |||||
Stock Compensation Costs |
| — |
| — |
| — |
| 53,206 |
| — |
| — |
| 53,206 |
| |||||
Net Change in Unrealized Gain (Loss) on Securities Available for Sale |
| — |
| — |
| — |
| — |
| — |
| (14,938 | ) | (14,938 | ) | |||||
Net Income |
| — |
| — |
| — |
| — |
| 78,571 |
| — |
| 78,571 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance, September 30, 2009 |
| 75,000 |
| $ | 750,000 |
| 4,998,820 |
| $ | 14,923,328 |
| $ | (10,996,574 | ) | $ | (98,043 | ) | $ | 4,578,711 |
|
The accompanying notes are an integral part of the consolidated statement of changes in shareholders’ equity.
7
FIRST CENTURY BANCORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30
(UNAUDITED)
|
| 2009 |
| 2008 |
| ||
Cash Flows from Operating Activities |
|
|
|
|
| ||
Net Income (Loss) |
| $ | 78,571 |
| $ | (2,554,920 | ) |
Adjustments to Reconcile Net Income (Loss) to Net Cash (Used) by Operating Activities |
|
|
|
|
| ||
Depreciation |
| 152,561 |
| 147,495 |
| ||
Amortization and Accretion |
| (735,875 | ) | (7,093 | ) | ||
Loss on Sale of repossessed assets |
| 7,263 |
| 24,832 |
| ||
Provision for Loan Losses |
| 206,080 |
| 409,591 |
| ||
(Gains) losses on Investment Securities |
| 37,436 |
| (3,506 | ) | ||
Stock Compensation Expense |
| 53,206 |
| 16,476 |
| ||
Change In |
|
|
|
|
| ||
Loans Held for Sale |
| (197,123 | ) | (2,035,020 | ) | ||
Other Assets |
| (98,634 | ) | (130,747 | ) | ||
Other Liabilities |
| 58,821 |
| 269,851 |
| ||
|
|
|
|
|
| ||
Net Cash Used by Operating Activities |
| (437,694 | ) | (3,863,042 | ) | ||
|
|
|
|
|
| ||
Cash Flows from Investing Activities |
|
|
|
|
| ||
Purchases of Investment Securities Available for Sale |
| (9,691,104 | ) | (5,406,593 | ) | ||
Proceeds from Sales of Investment Securities Available for Sale |
| 6,642,492 |
| — |
| ||
Proceeds from Maturities, Calls and Paydowns of Investment Securities Available for Sale |
| 5,801,011 |
| 4,879,576 |
| ||
Purchases of Investment Securities Held to Maturity |
| (11,599,250 | ) | — |
| ||
Proceeds from Maturities, Calls and Paydowns of Investment Securities Held to Maturity |
| 2,144,055 |
| — |
| ||
Purchases of Other Investments |
| (59,550 | ) | (13,650 | ) | ||
Proceeds from Sale of Other Investments |
| 37,700 |
| 16,550 |
| ||
Proceeds from Sale of Foreclosed and Repossessed Assets |
| 25,000 |
| 158,768 |
| ||
Net Change in Loans |
| (1,511,056 | ) | (13,982,395 | ) | ||
Purchases of Premises and Equipment |
| (37,121 | ) | (469,358 | ) | ||
|
|
|
|
|
| ||
Net Cash Used by Investing Activities |
| (8,247,823 | ) | (14,817,102 | ) | ||
|
|
|
|
|
| ||
Cash Flows from Financing Activities |
|
|
|
|
| ||
Net Change in Deposits |
| 3,021,219 |
| 11,893,613 |
| ||
Proceeds from Borrowings |
| 3,500,000 |
| — |
| ||
Repayment of Borrowings |
| — |
| (2,000,000 | ) | ||
Proceeds from the Issuance of Common Stock |
| 1,529,541 |
| 2,825,005 |
| ||
Payment of Stock Issuance Costs |
| (231,570 | ) | (1,308 | ) | ||
|
|
|
|
|
| ||
Net Cash Provided by Financing Activities |
| 7,819,190 |
| 12,717,310 |
| ||
|
|
|
|
|
| ||
Net (Decrease) in Cash and Cash Equivalents |
| (866,327 | ) | (5,962,833 | ) | ||
|
|
|
|
|
| ||
Cash and Cash Equivalents, Beginning |
| 2,225,027 |
| 8,349,446 |
| ||
|
|
|
|
|
| ||
Cash and Cash Equivalents, Ending |
| $ | 1,358,700 |
| $ | 2,386,613 |
|
|
|
|
|
|
| ||
Supplemental Disclosure of Cash Flow Information: |
|
|
|
|
| ||
|
|
|
|
|
| ||
Interest Paid |
| $ | 1,262,457 |
| $ | 1,099,544 |
|
Loans transferred to other real estate |
| $ | 653,501 |
| $ | 98,000 |
|
The accompanying notes are an integral part of the consolidated statements of cash flows.
8
Notes to Consolidated Financial Statements (Unaudited)
NOTE 1 — BASIS OF PRESENTATION
First Century Bancorp. (the “Company”), a bank holding company, owns 100% of the outstanding common stock of First Century Bank, National Association (the “Bank”), which is headquartered in Gainesville, Georgia. The Company also operates two loan production/deposit production offices (“LP/DP”) in south Hall County and in Oconee-Clarke County.
The consolidated financial statements include the accounts of the Company and the Bank. All inter-company accounts and transactions have been eliminated in consolidation.
The accompanying financial statements have been prepared in accordance with the requirements for interim financial statements and, accordingly, they omit substantially all disclosures, which would substantially duplicate those contained in the most recent annual report to shareholders on Form 10-K.�� The financial statements as of September 30, 2009 and 2008 are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation. The results of operations for the quarter and nine months ended September 30, 2009 are not necessarily indicative of the results of a full year’s operations. The financial information as of December 31, 2008 has been derived from the audited financial statements as of that date. For further information, refer to the financial statements and the notes included in the Company’s 2008 Annual Report on Form 10-K.
In certain instances, amounts reported in prior years’ consolidated financial statements and note disclosures have been reclassified to conform to statement presentations selected for September 30, 2009. Such reclassifications had no effect on previously reported stockholders’ equity or net loss.
As reported in the accompanying consolidated financial statements, the Company has reported net income (loss) of ($149,848) and $78,571 for the three and nine months ended September 30, 2009, respectively, and has an accumulated deficit of $10,996,574 as of September 30, 2009 Management of the Company has developed and implemented a capital plan to maintain minimum capital levels equal to or above those determined by regulatory authorities through the issuance of additional common stock in a private placement offering. The Company’s private offering commenced in July 2008 and was completed on May 14, 2009. During 2009, the Company received proceeds of $1,529,541 from the sale of 1,019,693 shares in the offering.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2009, the FASB issued SFAS 168, The FASB Accounting Standard Codification TM and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement 162, which is now included in the FASB codification under FASB ASC Topic 105. SFAS 168 establishes the FASB Accounting Standards Codification TM as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with US GAAP. SFAS 168 was effective for financial statements issued for interim and annual periods after September 15, 2009, for most entities. On the effective date, all non-SEC accounting and reporting standards was superseded.
In conjunction with the issuance of SFAS 168, the FASB also issued its first Accounting Standards Update No. 2009-1, Topic 105 — Generally Accepted Accounting Principles (“ASU 2009-1”), which includes SFAS 168 in its entirety as a transition to the ASC. ASU 2009-1 was effective for interim and annual periods ending after September 15, 2009 and will not have an impact on the Company’s financial position or results of operations, but will change the referencing system for accounting standards. Certain of the following pronouncements were issued prior to the issuance of the ASC and adoption of the ASUs. For such pronouncements, citation to the applicable FAS codification by Topic, Subtopic, and Section are provided where applicable, in addition to the original standard type and number.
In June 2009, the FASB issued SFAS 166, Accounting for Transfers of Financial Assets and SFAS 167, Amendments to FASB Interpretation 46R, which change the way entities account for securitizations and special-purpose entities.
SFAS 166 (not yet reflected in FASB ASC) is a revision to FASB SFAS140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and will require more information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. SFAS 166 also eliminates the concept of a “qualifying special-purpose entity”, changes the requirements for derecognizing financial assets and requires additional disclosures.
SFAS 167 (not yet reflected in FASB ASC) is a revision to FASB interpretation 46(R), Consolidation of Variable Interest Entities, and changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity
9
is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance.
Both SFAS 166 and SFAS 167 will be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. The recognition and measurement provisions of SFAS 166 shall be applied to transfers that occur on or after the effective date. The Company does not expect the adoption to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In May 2009, the FASB issued SFAS 165, Subsequent Events. Under SFAS 165, which is now included in the FASB codification under ASC Topic 855, companies are required to evaluate events and transactions that occur after the balance sheet date but before the date the financial statements are issued, or available to be issued in the case of non-public entities. SFAS 165 requires entities to recognize in the financial statements the effect of all events or transactions that provide additional evidence of conditions that existed at the balance sheet date, including the estimates inherent in the financial statement process. Entities shall not recognize the impact of events or transactions that provide evidence about conditions that did not exist at the balance sheet date but arose after that date. SFAS 165 also requires entities to disclose the date through which subsequent events have been evaluated. SFAS 165 was effective for interim and annual reporting periods ending after June 15, 2009. The adoption has not had a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In April 2009, the FASB issued FSP 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies, which is now included in the FASB codification under ASC Topic 805, Business Combinations. FSP 141(R)-1 provides additional guidance regarding the recognition, measurement and disclosure of assets and liabilities arising from contingencies in a business combination. FSP 141(R)-1 is effective for assets or liabilities arising form contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The impact of the Company adopting FSP 141(R)-1 will depend on the timing of future acquisitions, as well as the nature and existence of contingencies associated with such acquisitions.
In April 2009, the FASB issued FSP 115-2 & 124-2 Recognition and Presentation of Other-Than Temporary Impairments, which is now included in the FASB codification under ASC Section 320-10-65. The FSP eliminates the requirements for the issuer to evaluate whether it has the intent and ability to hold an impaired investment until maturity. Conversely, the new FSP requires the issuer to recognize an other-than-temporary-impairments (“OTTI”) in the event that the issuer intends to sell the impaired security or in the event that it is more likely than not that the issuer will sell the security prior to recovery. In the event that the sale of the security in question prior to its maturity is not probable but the entity does not expect to recover its amortized cost basis in that security, then the entity will be required to recognize an OTTI. In the event that the recovery of the security’s cost basis prior to maturity is not probable and an OTTI is recognized, the FSP provides that any component of the OTTI relating to a decline in the creditworthiness of the debtor should be reflected in earnings, with the remainder being recognized in Other Comprehensive Income. Conversely, in the event that the issuer intends to sell the security before the recovery of its cost basis, or if it is more likely than not that the Company will have to sell the security before recovery of its cost basis, then the entire OTTI will be recognized in earnings. The FSP was effective for interim and annual reporting periods ending after June 15, 2009. The Company does not expect the adoption to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In April 2009, the FASB issued FSP 157-4 Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, which is now included in the FASB codification under ASC Section 820-10-65. The FSP provides additional guidance for determining fair value based on observable transactions. The FSP provides that if evidence suggests that an observable transaction was not executed in an orderly way that little, if any, weight should be assigned to this indication of an Asset of Liability’s fair value. Conversely, if evidence suggests that the observable transaction was executed in an orderly way, the transaction price of the observable transaction may be appropriate to use in determining the fair value of the Asset/Liability in question, with appropriate weighting given to this indication based on facts and circumstances. Finally, if there is no way for the entity to determine whether the observable transaction was executed in an orderly way, relatively less weight should be ascribed to this indicator of fair value. The FSP was effective for interim and annual reporting periods ending after June 15, 2009. The adoption has not had a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In April 2009, the FASB issued FSP 107-1 & APB 28-1 Interim Disclosures about Fair Value of Financial Instruments, which is now included in the FASB codification under ASC Section 825-10-65. The FSP provides that publicly traded companies shall provide information concerning fair value of is financial instruments whenever it issues summarized financial information for interim reporting periods. In periods after initial adoption this FSP requires comparative disclosures only for periods ending after initial adoption. The FSP was effective for interim reporting periods after June 15, 2009.
10
NOTE 2 — CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company has adopted various accounting policies, which govern the application of accounting principles generally accepted in the United States of America in the preparation of our financial statements. The Company’s significant accounting policies are described in the footnotes to the consolidated financial statements at December 31, 2008 as filed on our Annual Report on Form 10-K.
Certain accounting policies involve significant estimates and assumptions by the Company, which have a material impact on the carrying value of certain assets and liabilities. The Company considers these accounting policies to be critical accounting policies. The estimates and assumptions used are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the estimates and assumptions made, actual results could differ from these estimates and assumptions which could have a material impact on carrying values of assets and liabilities and results of operations.
The Company believes that the provision and allowance for loan losses and income taxes are critical accounting policies that require the most significant judgments and estimates used in preparation of its consolidated financial statements. Refer to the portion of management’s discussion and analysis of financial condition and results of operations that addresses the provision for allowance for loan losses and income taxes for a description of the Company’s processes and methodology for determining the allowance for loan losses and income taxes.
NOTE 3 — STOCK COMPENSATION PLANS
Total unrecognized compensation cost related to non-vested options granted as of September 30, 2009 was $254,855, and is expected to be expensed ratably over the remaining vesting periods of the stock options. The Company did not grant any options to employees during the quarter ended September 30, 2009.
The fair value of each option granted in 2008 and 2009 was estimated on the date of grant using the Black-Scholes pricing model with the following assumptions: expected volatility range of 29.11 to 91.76 percent, risk-free interest rate range of 1.89 to 3.98 percent, dividend yield of 0 percent, and expected life of 6.50 years using the “simplified method” described in SEC Staff Accounting Bulletin No. 110.
NOTE 4 — NET INCOME (LOSS) PER SHARE
Net income (loss) per common share is based on the weighted average number of common shares outstanding during the period. The effects of potential common shares outstanding, including warrants and options, are included in diluted earnings per share. No common stock equivalents were considered in 2009 and 2008 as the effects of such would be anti-dilutive to the loss per share calculation.
11
NOTE 5 — INVESTMENT SECURITIES
Investment securities as of September 30, 2009 and December 31, 2008 are summarized as follows.
Securities Available for Sale
|
| September 30, 2009 |
| ||||||||||
|
| Amortized |
| Gross |
| Gross |
| Fair |
| ||||
Obligations of U.S. Government Agencies |
| $ | 982,739 |
| $ | 38,643 |
| $ | — |
| $ | 1,021,382 |
|
Obligations of States and Political Subdivisions |
| 325,549 |
| — |
| (80,203 | ) | 245,346 |
| ||||
Mortgage Backed Securities-GNMA |
| 1,781,260 |
| 78,754 |
| (2,621 | ) | 1,858,393 |
| ||||
Mortgage Backed Securities-FNMA and FHLMC |
| 899,544 |
| 10,349 |
| (1, 395) |
| 908,498 |
| ||||
Collateralized Mortgage Obligations |
| 27,667 |
| 54 |
| — |
| 27,721 |
| ||||
All other Residential Mortgage Backed Securities |
| 2,892,904 |
| 4,423 |
| (141,829 | ) | 2,755,498 |
| ||||
Commercial Mortgage Backed Securities |
| 825,695 |
| 20,752 |
| — |
| 846,447 |
| ||||
Corporate Debt Securities |
| 575,000 |
| 4,100 |
| (18,070 | ) | 561,030 |
| ||||
Equity Securities |
| 298,680 |
| — |
| (12,000 | ) | 286,680 |
| ||||
|
| $ | 8,609,038 |
| $ | 158,075 |
| $ | (256,118 | ) | $ | 8,510,995 |
|
Securities Held to Maturity
|
| September 30, 2009 |
| ||||||||||
|
| Amortized |
| Gross |
| Gross |
| Fair |
| ||||
All other Residential Mortgage Backed Securities |
| $ | 2,024,011 |
| $ | 141,586 |
| $ | — |
| $ | 2,165,597 |
|
Commercial Mortgage Backed Securities |
| 15,191,817 |
| 882,453 |
| (73,273 | ) | 16,000,997 |
| ||||
|
| $ | 17,215,828 |
| $ | 1,024,039 |
| $ | (73,273 | ) | $ | 18,166,594 |
|
Securities Available for Sale
|
| December 31, 2008 |
| ||||||||||
|
| Amortized |
| Gross |
| Gross |
| Fair |
| ||||
Obligations of U.S. Government Agencies |
| $ | 2,381,588 |
| $ | 57,950 |
| $ | — |
| $ | 2,439,538 |
|
Mortgage Backed Securities-GNMA |
| 3,033,535 |
| — |
| (11,564 | ) | 3,021,971 |
| ||||
Mortgage Backed Securities-FNMA and FHLMC |
| 1,216,275 |
| 1,963 |
| (196 | ) | 1,218,042 |
| ||||
Collateralized Mortgage Obligations |
| 1,788,390 |
| 7,182 |
| — |
| 1,795,572 |
| ||||
All other Residential Mortgage Backed Securities |
| 1,889,704 |
| 18,291 |
| (17,851 | ) | 1,890,144 |
| ||||
Corporate Debt Securities |
| 575,000 |
| 1,100 |
| (19,500 | ) | 556,600 |
| ||||
Equity Securities |
| 298,680 |
| — |
| (120,480 | ) | 178,200 |
| ||||
|
| $ | 11,183,172 |
| $ | 86,486 |
| $ | (169,591 | ) | $ | 11,100,067 |
|
Securities Held to Maturity
|
| December 31, 2008 |
| ||||||||||
|
| Amortized |
| Gross |
| Gross |
| Fair |
| ||||
All other Residential Mortgage Backed Securities |
| $ | 1,770,035 |
| $ | — |
| $ | (5,257 | ) | $ | 1,764,778 |
|
Commercial Mortgage Backed Securities |
| 5,408,005 |
| — |
| (42,894 | ) | 5,365,111 |
| ||||
|
| $ | 7,178,040 |
| $ | — |
| $ | (48,151 | ) | $ | 7,129,889 |
|
12
The following outlines the unrealized losses and fair value by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2009 and December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2009 |
| ||||||||||||||||
|
| Less than 12 Months |
| 12 Months or Greater |
| Total |
| ||||||||||||
|
| Fair |
| Gross |
| Fair |
| Gross |
| Fair |
| Gross |
| ||||||
Securities Available for Sale |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Obligations of States and Political Subdivisions |
| $ | 245,346 |
| $ | (80,203 | ) | $ | — |
| $ | — |
| $ | 245,346 |
| $ | (80,203 | ) |
Mortgage Backed Securities-GNMA |
| — |
| — |
| 175,711 |
| (2,621 | ) | 175,711 |
| (2,621 | ) | ||||||
Mortgage Backed Securities-FNMA and FHLMC |
| 569,504 |
| (1,395 | ) | — |
| — |
| 569,504 |
| (1,395 | ) | ||||||
All other Residential Mortgage Backed Securities |
| 1,422,993 |
| (141,829 | ) | — |
| — |
| 1,422,993 |
| (141,829 | ) | ||||||
Corporate Debt Securities |
| 306,930 |
| (18,070 | ) | — |
| — |
| 306,930 |
| (18,070 | ) | ||||||
Equity Securities |
| — |
| — |
| 286,680 |
| (12,000 | ) | 286,680 |
| (12,000 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
| $ | 2,544,773 |
| $ | (241,497 | ) | $ | 462,391 |
| $ | (14,621 | ) | $ | 3,007,164 |
| $ | (256,118 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Securities Held to Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Commercial Mortgage Backed Securities |
| 857,578 |
| (73,273 | ) | — |
| — |
| 857,578 |
| (73,273 | ) | ||||||
|
| $ | 857,578 |
| $ | (73,273 | ) | $ | — |
| $ | — |
| $ | 857,578 |
| $ | (73,273 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
| December 31, 2008 |
| ||||||||||||||||
|
| Less than 12 Months |
| 12 Months or Greater |
| Total |
| ||||||||||||
|
| Fair |
| Gross |
| Fair |
| Gross |
| Fair |
| Gross |
| ||||||
Securities Available for Sale |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Mortgage Backed Securities-GNMA |
| $ | 346,339 |
| $ | (3,112 | ) | $ | 200,222 |
| $ | (8,452 | ) | $ | 546,561 |
| $ | (11,564 | ) |
Mortgage Backed Securities-FNMA and FHLMC |
| 786,687 |
| (196 | ) | — |
| — |
| 786,687 |
| (196 | ) | ||||||
All other Residential Mortgage Backed Securities |
| 557,431 |
| (17,851 | ) | — |
| — |
| 557,431 |
| (17,851 | ) | ||||||
Corporate Debt Securities |
| 305,500 |
| (19,500 | ) | — |
| — |
| 305,500 |
| (19,500 | ) | ||||||
Equity Securities |
| 178,200 |
| (120,480 | ) | — |
| — |
| 178,200 |
| (120,480 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
| $ | 2,174,157 |
| $ | (161,139 | ) | $ | 200,222 |
| $ | (8,452 | ) | $ | 2,374,379 |
| $ | (169,591 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Securities Held to Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
All other Residential Mortgage Backed Securities |
| 1,764,778 |
| (5,257 | ) | — |
| — |
| 1,764,778 |
| (5,257 | ) | ||||||
Commercial Mortgage Backed Securities |
| 5,365,111 |
| (42,894 | ) | — |
| — |
| 5,365,111 |
| (42,894 | ) | ||||||
|
| $ | 7,129,889 |
| $ | (48,151 | ) | $ | — |
| $ | — |
| $ | 7,129,889 |
| $ | (48,151 | ) |
13
Management evaluates investment securities for other-than-temporary impairment on a quarterly basis. The Company’s unrealized losses at September 30, 2009 were attributable to changes in market interest rates since the securities were purchased and not in the credit quality of the issuer and, therefore, these losses are not considered other-than-temporary. Management has no specific intent to sell any securities, and it is more likely than not that the Bank will not have to sell any security before recovery of its cost basis.
Gross realized gains on securities totaled $24,984 and $3,507 for the nine month periods ending September 30, 2009 and 2008, respectively. Gross realized losses on securities totaled $62,420 and $0 for the nine month periods ending September 30, 2009 and 2008, respectively.
Other investments on the balance sheet at September 30, 2009 and December 31, 2008, respectively include restricted securities consisting of Federal Reserve Bank stock of $123,100 and $107,250, Federal Home Loan Bank stock of $263,500 and $257,500, and Silverton Bank stock of $0 and $62,420. These securities are carried at cost since they do not have readily determinable fair values due to their restricted nature and the Bank does not exercise significant influence. On May 1, 2009, Silverton Bank, a correspondent bank based in Atlanta, Georgia, was closed by the Office of the Comptroller of the Currency and the FDIC was named Receiver. The FDIC created a bridge bank to take over the operations of Silverton Bank. The creation of the bridge bank allowed Silverton Bank’s financial institution clients to transition their correspondent banking needs to other providers with the least amount of disruptions. The bridge bank continued to operate business as usual through July 29, 2009. As a result of this development, we believed that it is highly unlikely that we would recover any portion of our investment in the restricted stock of Silverton Bank’s holding company, Silverton Financial Services, Inc. Accordingly, in the second quarter of 2009, we recorded an other-than-temporary impairment charge of $62,420 with respect to this restricted security, reducing the carrying value of our investment to $0. There were no securities required to be pledged to secure public deposits at September 30, 2009 and December 31, 2008.
The amortized cost and estimated fair value of investment securities at September 30, 2009, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
|
| Available for Sale |
| Held to Maturity |
| ||||||||
|
| Amortized |
| Fair |
| Amortized |
| Fair |
| ||||
Obligations of U.S Government Agencies |
|
|
|
|
|
|
|
|
| ||||
5 to 10 Years |
| $ | 982,739 |
| $ | 1,021,382 |
| $ | — |
| $ | — |
|
Obligations of States and Political Subdivisions |
|
|
|
|
|
|
|
|
| ||||
1 to 5 Years |
| 325,549 |
| 245,346 |
| — |
| — |
| ||||
Corporate Debt Securities |
|
|
|
|
|
|
|
|
| ||||
1 to 5 Years |
| 575,000 |
| 561,030 |
| — |
| — |
| ||||
Equity Securities |
|
|
|
|
|
|
|
|
| ||||
1 to 5 Years |
| 298,680 |
| 286,680 |
| — |
| — |
| ||||
Mortgage Backed Securities |
|
|
|
|
|
|
|
|
| ||||
Less than 1 Year |
| 27,667 |
| 27,721 |
| 668,237 |
| 673,562 |
| ||||
1 to 5 Years |
| 5,812,087 |
| 5,857,571 |
| 16,314,339 |
| 17,227,240 |
| ||||
5 to 10 Years |
| 587,316 |
| 511,265 |
| 233,252 |
| 265,792 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
|
| $ | 8,609,038 |
| $ | 8,510,995 |
| $ | 17,215,828 |
| $ | 18,166,594 |
|
14
NOTE 6 - LOANS
Gross loans totaled $38,311,793 at September 30, 2009, an increase of $368,191, or 1.0%, since December 31, 2008. Balances within the major loans receivable categories as of September 30, 2009 and December 31, 2008 are as follows.
|
| September 30, 2009 |
| December 31, 2008 |
| ||
|
|
|
|
|
| ||
Commercial, Financial and Agricultural |
| $ | 4,039,136 |
| $ | 4,495,355 |
|
Real Estate-Mortgage |
| 26,646,218 |
| 26,411,116 |
| ||
Real Estate-Construction |
| 5,433,268 |
| 5,236,464 |
| ||
Consumer |
| 1,788,171 |
| 1,800,667 |
| ||
Other |
| 405,000 |
| — |
| ||
|
|
|
|
|
| ||
|
| $ | 38,311,793 |
| $ | 37,943,602 |
|
Activity in the allowance for loan losses for the nine months ended September 30, 2009 and the twelve months ended December 31, 2008 is summarized as follows:
|
| September 30, 2009 |
| December 31, 2008 |
| ||
|
|
|
|
|
| ||
Beginning Balance |
| $ | 838,234 |
| $ | 275,920 |
|
Provision Charged to Operations |
| 206,080 |
| 639,760 |
| ||
Loan Charge-Offs |
| (555,946 | ) | (127,311 | ) | ||
Loan Recoveries |
| 21,078 |
| 49,865 |
| ||
|
|
|
|
|
| ||
Ending Balance |
| $ | 509,446 |
| $ | 838,234 |
|
NOTE 7 — SHAREHOLDERS’ EQUITY
In July 2008, the Company commenced a private offering of shares of its common stock to a limited number of accredited investors. The private offering closed on May 14, 2009. The Company received aggregate net proceeds of $4,899,547 from the sale of 3,266,362 shares in the offering. The Company is using the net proceeds from the private offering for working capital purposes. During the first and second quarters of 2009, the Company received proceeds of $1,529,541 from the sale of 1,019,693 shares in the offering. The common stock that was sold in the offering has not been registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.
NOTE 8 — INCOME TAXES
The Company accounts for income taxes under the balance sheet method. Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets are subject to management’s judgment based upon available evidence that future realization is more likely than not. For financial reporting purposes, a valuation allowance of 100% of the deferred tax asset as of September 30, 2009 and December 31, 2008 has been recognized to offset the deferred tax assets related to cumulative temporary differences and tax loss carry-forwards. If management determines that the Company may be able to realize all or part of the deferred tax asset in the future, a credit to income tax expense may be required to increase the recorded value of net deferred tax asset to the expected realizable amount.
15
NOTE 9 — REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the consolidated financial statements. Under certain adequacy guidelines and the regulatory framework for prompt corrective action, specific capital guidelines that involve quantitative measures of the assets, liabilities and certain off-balance sheet items, as calculated under regulatory accounting practices, must be met. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
The Bank’s actual ratios as of September 30, 2009 are as follows:
Tier 1 Capital (to risk-weighted assets) |
| 10.30 | % |
Total Capital (to risk-weighted assets) |
| 11.43 | % |
Tier 1 Capital (to total average assets) |
| 6.57 | % |
16
NOTE 10 — FAIR VALUE DISCLOSURES
ASC Topic 825, Disclosures about Fair Value of Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized on the face of the balance sheet, for which it is practicable to estimate that value. The assumptions used in the estimation of the fair value of the Company’s financial instruments are detailed below. Where quoted prices are not available, fair values are based on estimates using discounted cash flows and other valuation techniques. The use of discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following disclosures should not be considered a surrogate of the liquidation value of the Company, but rather a good-faith estimate of the increase or decrease in value of financial instruments held by the Company since purchase, origination or issuance.
Cash and Short-Term Investments - For cash, due from banks and federal funds sold, the carrying amount is a reasonable estimate of fair value.
Investment Securities - Fair values for investment securities are based on quoted market prices.
Other Investments - The fair value of other investments approximates carrying value.
Loans Held for Sale — The fair value of loans held for sale approximates carrying value.
Loans - The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings. For variable rate loans, the carrying amount is a reasonable estimate of fair value.
Deposit Liabilities - The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities.
Borrowings — Due to their short-term nature, the fair value FRB advances approximates carrying amount. The fair value of FHLB advances are provided by the FHLB and approximate fair value derived from their proprietary models.
Standby Letters of Credit and Unfulfilled Loan Commitments - Fair values are based on fees currently charged to enter into similar agreements taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fees associated with these instruments are not considered material.
The carrying amount and estimated fair values of the Company’s financial instruments as of September 30 2009 and December 31, 2008 are presented hereafter:
|
| September 30, 2009 |
| December 31, 2008 |
| ||||||||
|
| Carrying |
| Estimated |
| Carrying |
| Estimated |
| ||||
|
| Amount |
| Fair Value |
| Amount |
| Fair Value |
| ||||
|
| (in Thousands) |
| ||||||||||
Assets |
|
|
|
|
|
|
|
|
| ||||
Cash and Short-Term Investments |
| $ | 1,359 |
| $ | 1,359 |
| $ | 2,225 |
| $ | 2,225 |
|
Investment Securities Available for Sale |
| 8,511 |
| 8,511 |
| 11,183 |
| 11,100 |
| ||||
Investment Securities Held to Maturity |
| 17,216 |
| 18,167 |
| 7,178 |
| 7,130 |
| ||||
Other Investments |
| 387 |
| 387 |
| 427 |
| 427 |
| ||||
Loans Held for Sale |
| 2,061 |
| 2,061 |
| 1,864 |
| 1,864 |
| ||||
Loans |
| 37,914 |
| 38,279 |
| 37,944 |
| 38,437 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Liabilities |
|
|
|
|
|
|
|
|
| ||||
Deposits |
| 60,142 |
| 60,184 |
| 57,121 |
| 57,008 |
| ||||
Borrowings |
| 5,500 |
| 5,571 |
| 2,000 |
| 2,071 |
| ||||
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on many judgments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
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Fair value estimates are based on existing on-and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial instruments include the deferred income taxes and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
Fair Value Hierarchy
ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
· Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
· Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
· Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.
Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy:
Investment Securities Available for Sale
Where quoted prices are available in an active market, investment securities are classified within level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where Level 1 and Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.
Loans Held for Sale
Loans held for sale are reported at the lower of cost or fair value. Fair Value is determined based on the expected proceeds based on sales contracts and commitments and are considered Level 2 inputs.
Following is a description of the valuation methodologies used for instruments measured at fair value on a non-recurring basis and recognized in the accompanying balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy:
Impaired loans
ASC Topic 820 applies to loans measured for impairment using the practical expedients permitted by ASC Section 310-30-30, including impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation which is then adjusted for the cost related to liquidation of the collateral.
Other Real Estate
Other real estate is reported at the lower of the loan carrying amount at foreclosure or fair value. Fair value is based on third party or internally developed appraisals considering the assumptions in the valuation and is considered Level 2 or Level 3 inputs.
18
Assets and Liabilities Measured at Fair Value on a Recurring Basis as of September 30, 2009
|
|
|
| Fair Value Measurements at Reporting Date Using |
| ||||||
|
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Investment Securities Available for Sale |
| $ | 8,510,995 |
| — |
| $ | 8,510,995 |
| — |
|
Loans Held for Sale |
| 2,060,873 |
| — |
| 2,060,873 |
| — |
| ||
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis as of September 30, 2009
|
|
|
| Fair Value Measurements at Reporting Date Using |
| ||||||
|
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Impaired Loans |
| $ | 371,781 |
| — |
| — |
| $ | 371,781 |
|
Other Real Estate |
| 653,501 |
|
|
|
|
| 653,501 |
| ||
NOTE 11 — SUBSEQUENT EVENTS
Subsequent events have been evaluated through November 16, 2009, which is the date the financial statements were available to be issued.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation
This discussion and analysis is intended to assist you in understanding our financial condition and results of operations. You should read this commentary in conjunction with the financial statements and the related notes and the other statistical information included elsewhere in this report and in our 2008 Annual Report Form 10-K, as well as with an understanding of our short operating history.
Discussion of Forward-Looking Statements
This report contains “forward-looking statements” relating to, without limitation, future economic performance, plans and objectives of management for future operations, and projections of revenues and other financial items that are based on the beliefs of management, as well as assumptions made by and information currently available to management. The words “may,” “will,” “anticipate,” “should,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” and “intend,” as well as other similar words and expressions of the future, are intended to identify forward-looking statements. Our actual results may differ materially from the results discussed in the forward-looking statements, and our operating performance each quarter is subject to various risks and uncertainties that are discussed in detail in our filings with the Securities and Exchange Commission, including, without limitation:
· significant increases in competitive pressure in the banking and financial services industries;
· changes in interest rates and their effect on the level and composition of deposits, loan demand, and the values of loan collateral, securities and other interest-sensitive assets and liabilities;
· the effects of the current global economic crisis, including, without limitation, the recent and dramatic deterioration of real estate values and credit and liquidity markets, as well as the Federal Reserve Board’s actions with respect to interest rates, may lead to a further deterioration in credit quality, thereby requiring increases in our provision for loan losses, or a reduced demand for credit, which would reduce earning assets;
· the U.S. government’s proposed plan to purchase large amounts of illiquid mortgage-backed and other securities from financial institutions may not have the desired impact on the financial markets;
· governmental monetary and fiscal policies, as well as legislative and regulatory changes, including changes in accounting standards and banking, securities and tax laws and regulations and governmental intervention in the U.S. financial system, as well as changes affecting financial institutions’ ability to lend and otherwise do business with consumers;
· our ability to control costs, expenses, and loan delinquency rates;
· general economic conditions, either nationally or regionally and especially in our primary service area, becoming less favorable than expected resulting in, among other things, a deterioration in credit quality;
· changes occurring in business conditions and inflation;
· changes in technology;
· changes in deposit flow;
· the failure of our assumptions underlying the establishment of allowances for loan losses and other estimates, or dramatic changes in those underlying assumptions or judgments in future periods, that, in either case, render the allowance for loan losses inadequate or require that further provisions for loan losses be made;
· the anticipated rate of loan growth and the lack of seasoning of our loan portfolio;
· the amount of real estate-based loans, and the weakness in the commercial real estate market;
· the rate of delinquencies and amounts of charge-offs;
· adverse changes in asset quality and resulting credit risk-related losses and expenses;
· loss of consumer confidence and economic disruptions resulting from terrorist activities;
· the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in our market area and elsewhere, including institutions operating regionally, nationally, and internationally, together with such competitors offering banking products and services by mail, telephone, computer and the Internet;
· changes in securities markets; and
· other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission.
These risks are exacerbated by the recent developments in national and international financial markets, and we are unable to predict what effect these uncertain market conditions will have on our Company. During 2008 and thus far in 2009, the capital and credit markets have experienced extended volatility and disruption. There can be no assurance that these unprecedented recent developments will not materially and adversely affect our business, financial condition and results of operations.
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Forward-looking statements speak only as of the date on which they are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made to reflect the occurrence of unanticipated events.
General
First Century Bancorp (the “Company”) was incorporated in 2000 for the purpose of becoming a bank holding company. We are subject to extensive federal and state banking laws and regulations, including the Bank Holding Company Act, and the bank holding company laws of Georgia. We have one bank subsidiary, First Century Bank, National Association (the “Bank”), which opened for business on March 25, 2002. The Bank is also subject to various federal banking laws and regulations.
The following discussion describes our results of operations for the three and nine months ended September 30, 2009 as compared to the same periods ended September 30, 2008 and also analyzes our financial condition at September 30, 2009 compared to December 31, 2008. Like most community banks, we derive a significant portion of our income from interest we receive on our loans and investments. Our primary sources of funds for making these loans and investments are our deposits and borrowings, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits and borrowings. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities.
Of course, there are risks inherent in all loans, so we maintain an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible. We establish and maintain this allowance by charging a provision for loan losses against our operating earnings. In the “Provision and Allowance for Loan Losses” section we have included a detailed discussion of this process.
In addition to earning interest on our loans and investments, we earn income through fees and other expenses we charge to our customers. We describe the various components of this non-interest income, as well as our non-interest expense, in the following discussion.
The following discussion and analysis also identifies significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements. We encourage you to read this discussion and analysis in conjunction with the financial statements and the related notes and the other statistical information also included herein.
Recent Legislative and Regulatory Initiatives to Address Financial and Economic Crisis
Markets in the United States and elsewhere have experienced extreme volatility and disruption for more than 12 months. These circumstances have exerted significant downward pressure on prices of equity securities and virtually all other asset classes, and have resulted in substantially increased market volatility, severely constrained credit and capital markets, particularly for financial institutions, and an overall loss of investor confidence. Loan portfolio performances have deteriorated at many institutions resulting from, among other factors, a weak economy and a decline in the value of the collateral supporting their loans. Dramatic slowdowns in the housing industry, due in part to falling home prices and increasing foreclosures and unemployment, have created strains on financial institutions. Many borrowers are now unable to repay their loans, and the collateral securing these loans has, in some cases, declined below the loan balance. In response to the challenges facing the financial services sector, several regulatory and governmental actions have recently been announced including:
· The Emergency Economic Stabilization Act of 2008 (“EESA”), approved by Congress and signed by President Bush on October 3, 2008, which, among other provisions, allowed the Treasury Department to purchase troubled assets from banks, authorized the Securities and Exchange Commission to suspend the application of marked-to-market accounting, and temporarily raised the basic limit of FDIC deposit insurance from $100,000 to $250,000 through December 31, 2013;
· On October 7, 2008, the FDIC approved a plan to increase the rates banks pay for deposit insurance;
· On October 14, 2008, the U.S. Treasury announced the creation of the Capital Purchase Program (the “CPP”) which encourages and allows financial institutions to build capital through the sale of senior preferred shares to the Treasury Department on terms that are non-negotiable;
· On October 14, 2008, the FDIC announced the creation of the Temporary Liquidity Guarantee Program (“TLGP”), which seeks to strengthen confidence and encourage liquidity in the banking system. The TLGP has two primary components that are available on a voluntary basis to financial institutions:
21
· The Transaction Account Guarantee Program (“TAGP”), which originally provided unlimited deposit insurance coverage through December 31, 2009 for noninterest-bearing transaction accounts (typically business checking accounts) and certain funds swept into noninterest-bearing savings accounts has been extended to provide unlimited deposit insurance through June 30, 2010. Institutions participating in the will have an opportunity to opt out of the extension. The extended program imposes an increased assessment and a risk-based fee system on participating entities;
· The Debt Guarantee Program (“DGP”), under which the FDIC guarantees certain senior unsecured debt of FDIC-insured institutions and their holding companies. The unsecured debt must have been issued on or after October 14, 2008 and not later than June 30, 2009, and the guarantee is effective through the earlier of the maturity date or June 30, 2012. On May 29, 2009, the FDIC issued a final rule to extend the DGP and impose surcharges on existing rates for certain debt issuances. This extension allows all participating depository institutions and other participating entities that issued guaranteed debt before April 1, 2009 to issue guaranteed debt during the extended issuance period that ends on October 31, 2009. For such institutions, the guarantee on debt issued on or after April 1, 2009, will expire no later than December 31, 2012. The DGP coverage limit is generally 125% of the eligible entity’s eligible debt outstanding on September 30, 2008 and scheduled to mature on or before June 30, 2009 or, for certain insured institutions, 2% of their liabilities as of September 30, 2008. Depending on the term of the debt maturity, the nonrefundable DGP fee ranges from 50 to 100 basis points (annualized. A surcharge will be imposed on debt issued with a maturity of one year or greater after April 1, 2009. On October 23, 2009, the FDIC adopted a final rule to phase out the DGP. The final rule terminates the DGP as of October 31, 2009, but provides for a six month emergency guarantee facility for companies that, because of circumstances beyond their control, are unable to issue non-guaranteed debt to replace maturing unsecured debt.
· On February 17, 2009, the American Recovery and Reinvestment Act (the “Recovery Act”) was signed into law in an effort to, among other things, create jobs and stimulate growth in the United States economy. The Recovery Act specifies appropriations of approximately $787 billion for a wide range of Federal programs and will increase or extend certain benefits payable under the Medicaid, unemployment compensation, and nutrition assistance programs. The Recovery Act also reduced individual and corporate income tax collections and makes a variety of other changes to tax laws. The Recovery Act also imposes certain limitations on compensation paid by participants in the U.S. Treasury’s Troubled Asset Relief Program (“TARP”).
· On March 23, 2009, the U.S. Treasury, in conjunction with the FDIC and the Federal Reserve, announced the Public-Private Partnership Investment Program for Legacy Assets which consists of two separate plans, addressing two distinct asset groups:
· The Legacy Loan Program, which the primary purpose will be to facilitate the sale of troubled mortgage loans by eligible institutions, which include FDIC-insured federal or state banks and savings associations. Eligible assets may not be strictly limited to loans; however, what constitutes an eligible asset will be determined by participating banks, their primary regulators, the FDIC and the U.S. Treasury. Additionally, the Legacy Loan Program’s requirements and structure will be subject to notice and comment rulemaking, which may take some time to complete.
· The Legacy Securities Program, which will be administered by the U.S. Treasury, involves the creation of public-private investment funds to target investments in eligible residential mortgage-backed securities and commercial mortgage-backed securities issued before 2009 that originally were rated AAA or the equivalent by two or more nationally recognized statistical rating organizations, without regard to rating enhancements (collectively, “Legacy Securities”). Legacy Securities must be directly secured by actual mortgage loans, leases or other assets, and may be purchased only from financial institutions that meet TARP eligibility requirements.
We will participate in the TAGP and have not opted out of the DGP. As a result of the enhancements to deposit insurance protection and the expectation that there will be demands on the FDIC’s deposit insurance fund, our deposit insurance costs have increased and will continue to increase significantly through the remainder of 2009 and throughout 2010. Governmental intervention and new regulations under these programs could materially and adversely affect our business, financial condition and results of operations. The following discussion and analysis describes our performance in this challenging economic environment.
22
Critical Accounting Policies
We have adopted various accounting policies, which govern the application of accounting principles generally accepted in the United States of America, in the preparation of our consolidated financial statements. Our significant accounting policies are described in Note 1 in the footnotes to the consolidated financial statements at December 31, 2008 included in the Company’s 2008 Annual Report on Form 10-K. Critical accounting policies are dependent on estimates that are particularly susceptible to significant changes. We believe that the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in preparation of our financial statements.
Allowance for Loan Losses
The allowance for loan losses represents management’s best estimate of the losses known and inherent in the loan portfolio that are both probable and reasonable to estimate, based on, among other factors, prior loss experience, volume and type of lending conducted, estimated value of any underlying collateral, economic conditions (particularly as such conditions relate to the Bank’s market area), regulatory guidance, peer statistics, management’s judgment, past due loans in the loan portfolio, loan charge off experience and concentrations of risk. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant estimates, assumptions, and judgments. The loan portfolio also represents the largest asset type on the consolidated balance sheets.
The evaluation of the adequacy of the allowance for loan losses is based upon loan categories except for delinquent loans and loans for which management has knowledge about possible credit problems of the borrower or knowledge of problems with loan collateral, which are evaluated separately and assigned loss amounts based upon the evaluation. Loss ratios are applied to each category of loan other than commercial loans, where the loans are further divided by risk rating, and loss ratios are applied by risk rating, to determine estimated loss amounts. Categories of loans are real estate loans (including mortgage and construction), consumer loans, and commercial loans.
Management has significant discretion in making the judgments inherent in the determination of the provision and allowance for loan losses, including in connection with the valuation of collateral and the financial condition of the borrower, and in establishing loss ratios and risk ratings. The establishment of allowance factors is a continuing exercise and allowance factors may change over time, resulting in an increase or decrease in the amount of the provision or allowance based upon the same volume and classification of loans.
Changes in allowance factors or in management’s interpretation of those factors will have a direct impact on the amount of the provision, and a corresponding effect on income and assets. Also, errors in management’s perception and assessment of the allowance factors could result in the allowance not being adequate to cover losses in the portfolio and may result in additional provisions or charge-offs, which would adversely affect income and capital. For additional information regarding the allowance for loan losses, see the “Provision and Allowance for Loan Losses” section below.
Income Taxes
Accounting for income taxes is another critical accounting policy because it requires significant estimates, assumptions, and judgments. Income taxes are accounted for using the balance sheet method. Under this method, deferred tax assets or liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The determination of current and deferred taxes is based on complex analyses of many factors including interpretation of federal and state income tax laws, the difference between tax and financial reporting basis assets and liabilities (temporary differences), estimates of amounts due or owed such as the reversals of temporary differences, and current financial accounting standards. Actual results could differ significantly from the estimates and interpretations used in determining current and deferred taxes.
Our ability to realize a deferred tax benefit as a result of net operating losses will depend upon whether we have sufficient taxable income of an appropriate character in the carry-forward periods. We then establish a valuation allowance to reduce the deferred tax asset to the level that it is “more likely than not” that we will realize the tax benefit.
23
Results of Operations
Three and Nine Months Ended September 30, 2009 and 2008
Net operating results for the third quarter of 2009 improved 85% over the same period in 2008. We had a net loss of $149,848 for the third quarter of 2009 as compared to a net loss of $972,227 for the same period in 2008. Net operating results for the nine months ended September 30, 2009 improved 103% over the same period in 2008. We had a net income of $78,571 for the nine months ended September 30, 2009 as compared to a net loss of $2,554,920 for the same period in 2008. Our operational results depend to a large degree on three factors: our net interest income, our provision for loan losses, and our non-interest income and expenses.
Net Interest Income
Net interest income is the difference between the interest income received on investments (such as loans, investment securities, and federal funds sold) and the interest expense on deposit liabilities and borrowings. Net interest income grew $653,621 to $822,724 for the three months ended September 30, 2009, compared to $169,103 for the same period in 2008. Net interest income grew $1,840,284 to $2,327,447 for the nine months ended September 30, 2009, compared to $487,163 for the same period in 2008. Management has reallocated cash to higher yielding investment securities and loans. Even though the falling interest rate environment of 2008 had a negative impact on the Bank’s adjustable rate loan yield, the Bank’s growth has been supported by the dual strategy of increasing lower cost wholesale funding in the short-term to allow time for a build up of low cost core funding to be developed over the longer-term. Since September 30, 2008, core deposits have grown approximately $3,786,000, or 36%. The Bank has been successful implementing this strategy resulting in an increase in net interest margin of 139%. The net interest margin realized on earning assets was 4.55% for the nine months ended September 30, 2009, as compared to 1.90% for the same period in 2008.
Provision for Loan Losses
Management considers the current allowance for loan losses to be adequate to sustain any estimated or potential losses based on the Bank’s internal analysis and on external credit review examinations conducted by regulatory authorities and by third-party review services. We believe our efforts to identify and reduce criticized and classified loans have resulted in an improvement in the overall credit quality of the Bank’s loan portfolio. The allowance for loan loss was $509,446 (1.33% of total gross loans) at September 30, 2009, compared to $370,416 (1.13% of total gross loans) at September 30, 2008, and $838,234 (2.21% of total gross loans) at December 31, 2008. A primary reason for the decrease in our allowance for loan losses for the nine months ended September 30, 2009 as compared to the period ended December 31, 2008, is the result of the Bank recording specific reserves on certain impaired loans with a balance of $1,142,558 in 2008. In 2009, three of these impaired loans were partially or fully charged off and another was foreclosed and transferred to other real estate owned, reducing the balance of impaired loans specifically reserved for to $371,781 at September 30, 2009. Management’s judgment about the adequacy of the allowance is based upon a number of assumptions, which it believes to be reasonable, but which may not prove to be accurate. The downturn in the real estate market has resulted in an increase in loan delinquencies, defaults and foreclosures, and we believe these trends are likely to continue. In some cases, this downturn has resulted in a significant impairment to the value of our collateral and our ability to sell the collateral upon foreclosure, and there is a risk that this trend will continue. The real estate collateral in each case provides alternate sources of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. If real estate values continue to decline, it is also more likely that we would be required to increase our allowance for loan losses. Thus, there is a risk that charge-offs in future periods could exceed the allowance for loan losses or that substantial additional increases in the allowance for loan losses could be required. Additions to the allowance for loan losses would result in a decrease of our net income and, possibly, our capital. See “Provision and Allowance for Loan Losses” below for further discussion.
Non-interest Income and Expense
The Bank experienced significant growth in 2008 and 2009 due to several initiatives established and implemented during that time period, including the opening of Century Point Mortgage, a division of First Century Bank, and two LP/DP offices in Oakwood, Georgia and Athens, Georgia. In September 2009, the Bank opened an additional mortgage origination office in Roswell, Georgia. All these divisions were initiated due to favorable market conditions and the Bank’s ability to attract and hire experienced bankers to lead these new divisions. During the fourth quarter of 2008, the Bank commenced a cost reduction plan that included the analysis of non-interest expenses in an on-going effort to reduce costs and create efficiencies when feasible.
Non-interest income includes service charges on deposit accounts, customer service fees, mortgage origination fee income and investment security gains (losses). Non-interest income for the quarter ended September 30, 2009 grew to $354,781 compared to $194,947 for the quarter ended September 30, 2008. For the nine months ended September 30, 2009, non-interest income grew to $1,357,871 compared to $404,198 for the nine month period ended September 30, 2008, an increase of $953,673, or
24
236%. The increase in non-interest income was primarily due to an increase in fees earned on mortgage originations, due to the establishment of the mortgage division in early 2008. The fees earned are related to the origination of mortgage loans that are sold within 30 days, which investors have committed to purchase before they are funded. The Bank funded $85,474,100 in mortgage loans in the nine months ended September 30, 2009, an increase of $54,515,032 from the same period a year ago. Gains (losses) on securities were ($37,436) and $3,507 for the nine months ended September 30, 2009 and 2008, respectively.
In furtherance of its growth initiatives the Bank hired a team of talented individuals in the Bank’s respective markets based on mergers and acquisitions occurring within the banking industry in the spring of 2008. The Bank hired four Divisional Presidents, several key lending personnel, and mortgage origination/support staff in 2008. The Bank continued to expand its mortgage division in the third quarter of 2009, by establishing a mortgage origination office, in Roswell, Georgia and hiring 29 new mortgage/origination support staff in September 2009. This office contains retail mortgage loan originators, processors, underwriters and closers, and will be the central office for all mortgage closings for the Bank. The salary and benefit expense for the additional staff hired to further our growth initiatives constitutes a significant portion of the increase in our non-interest expense from 2008 to 2009. Total non-interest expense for the quarter ended September 30, 2009 was $1,191,273 compared to $1,171,609 for the quarter ended September 30, 2008, an increase of $19,664, or 2%. For the nine months ended September 30, 2009, non-interest expense was $3,400,667 as compared to $3,036,690 for the nine months ended September 30, 2008, an increase of $363,977 or 12%.
Salaries and benefits, the largest component of non-interest expense, was $522,278 for the quarter ended September 30, 2009, compared to $440,007 for the same period a year ago, an increase of $82,271, or 19%. For the nine months ended September 30, 2009, salaries and benefits expense was $1,618,167 as compared to $1,381,931 for the nine months ended September 30, 2008, an increase of $236,236, or 17%. While salaries and benefits attributable to the growth initiatives increased expenses by $518,641, the Bank was concurrently creating efficiencies attributable to the data processing and master services agreement initiated in September 2008, which reduced salaries and benefits expense during the first nine months of 2009 by approximately $282,405, resulting in an overall increase of $236,236. A portion of this savings is replaced by the master services agreement expenses that are currently reflected in data processing expense below.
The Bank’s growth initiatives included the opening of two strategic locations in 2008 as well as our online mortgage division, Century Point Mortgage. Total occupancy and equipment expense was $95,149 for the quarter ended September 30, 2009, compared to $150,869 for the same period a year ago, a decrease of $55,720, or 37%. For the nine months ended September 30, 2009, occupancy expense was $309,624 as compared to $400,825 for the nine months ended September 30, 2008, a decrease of $91,201, or 23%. Total occupancy expense for the nine months ended September 30, 2009 was lower than the same period in 2008, even with the addition of the mortgage division and the two LP/DP offices as a result of management’s cost cutting initiatives.
Professional fees were $69,952 for the quarter ended September 30, 2009, compared to $55,373 for the quarter ended September 30, 2008, an increase of $14,579, or 26%. For the nine months ended September 30, 2009, professional fees were $207,323 compared to $164,885 for the nine months ended September 30, 2008, an increase of $42,438, or 26%. The increase in professional fees is primarily attributable to consulting fees for the Mortgage division of approximately $10,500 for the three months ended September 30, 2009, and $21,000 for the nine months ended September 30, 2009. Secondarily, the Bank increased expenditures for external credit and compliance reviews in 2009 resulting in an increase in professional fees of approximately $6,000 for the three month period ended September 30, 2009, and $18,000 for the nine month period ended September 30, 2009
Marketing expenses were $76,999 for the quarter ended September 30, 2009, compared to $142,921 for the quarter ended September 30, 2008, a decrease of $65,922, or 46%. For the nine months ended September 30, 2009, marketing expenses were $185,072 compared to $252,838 for the nine months ended September 30, 2008, a decrease of $ 67,766, or 27%. The decrease in marketing was primarily attributable to the Century Point Mortgage division which had heavily invested in internet advertising during its startup phase. As a national, internet-based lender, the Century Point Mortgage division’s business model depends on lead generation to drive a high volume of leads with a lower cost of customer acquisition than traditional mortgage lenders. Key elements of the Century Point Mortgage division’s web-based demand generation program are advertising on mortgage rate websites, paid search advertising, search engines optimizations and social media tools. As the Century Point Mortgage division is maturing, marketing budget is being analyzed and directed to the most successful techniques.
In 2008, the Bank entered into a data processing contract to move its processing from Fidelity Information Systems to Providence, the internal data processing system provided by First Covenant Bank. This change, which was completed in September 2008, has enabled the Bank to decrease its costs and increase its flexibility in data processing. Data processing expense was $140,162 for the quarter ended September 30, 2009, compared to $166,070 for the quarter ended September 30, 2008, a decrease of $25,908, or 16%. For the nine months ended September 30, 2009, data processing expense was $387,464 compared to $389,795 for the nine months ended September 30, 2008, a decrease of $2,331, or 1%. The year to date decrease includes approximately $152,000 of master services agreement costs noted under salaries and benefits mentioned above resulting in savings for core data processing expense of approximately $154,000 for the nine months ended September 30, 2009.
25
Telephone expense, postage and delivery services, and office supply expenses totaled $26,013 for the quarter ended September 30, 2009, compared to $61,282 for the quarter ended September 30, 2008, a decrease of $35,269, or 58%. For the nine months ended September 30, 2009, telephone, postage and delivery services, and office supply expenses totaled $73,693 compared to $147,257 for the nine months ended September 30, 2008, a decrease of $73,564, or 50%. These expenses were reduced as a result of management’s cost cutting initiatives.
Insurance, taxes, and regulatory assessment expenses totaled $96,160 for the quarter ended September 30, 2009, compared to $25,596 for the quarter ended September 30, 2008, an increase of $70,564, or 276%. For the nine months ended September 30, 2009, insurance, taxes, and regulatory assessment expenses totaled $188,608 compared to $92,675 for the nine months ended September 30, 2008, an increase of $95,933, or 104%. During the nine months ended September 30, 2009, the Bank’s FDIC expense increased $50,483 over the same period in 2008 due to the growth in deposits and changes in assessment rates.
Lending related expenses were $61,632 for the quarter ended September 30, 2009, compared to $32,116 for the quarter ended September 30, 2008, an increase of $29,516, or 92%. For the nine months ended September 30, 2009, lending related expenses were $247,894 compared to $91,019 for the nine months ended September 30, 2008, an increase of $156,875, or 172%. The increase is primarily related to appraisal expenses generated by the mortgage division.
Other non-interest expenses were $102,928 for the quarter ended September 30, 2009, compared to $97,375 for the quarter ended September 30, 2008, an increase of $5,553, or 6%. For the nine months ended September 30, 2009, other non-interest expenses were $182,822 compared to $115,465 for the nine months ended September 30, 2008, an increase of $67,357, or 58%. In July 2009 the Bank experienced a loss of approximately $59,000 due to a check fraud scheme, which was recorded as other non-interest expense.
26
The following table shows the components of non-interest expense incurred for nine months ended September 30, 2009 and 2008 and changes attributable to the growth of the Company:
|
| September |
| September |
| Increase / |
| Main |
| Oakwood |
| Athens |
| Mortgage |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Salaries and employee benefits |
| $ | 1,618,167 |
| $ | 1,381,931 |
| $ | 236,236 |
| $ | (282,405 | ) | $ | 217,894 |
| $ | 64,329 |
| $ | 236,418 |
|
Occupancy expenses |
| 309,624 |
| 400,825 |
| (91,201 | ) | (119,219 | ) | 16,119 |
| 11,100 |
| 799 |
| |||||||
Professional fees |
| 207,323 |
| 164,885 |
| 42,438 |
| 19,731 |
| (1,665 | ) | 800 |
| 23,572 |
| |||||||
Marketing |
| 185,072 |
| 252,838 |
| (67,766 | ) | (54,791 | ) | (214 | ) | (629 | ) | (12,132 | ) | |||||||
Data Processing |
| 387,464 |
| 389,795 |
| (2,331 | ) | 2,552 |
| 2,215 |
| 4,218 |
| (11,316 | ) | |||||||
Telephone |
| 37,684 |
| 50,846 |
| (13,162 | ) | (10,417 | ) | (1,723 | ) | 1,081 |
| (2,103 | ) | |||||||
Postage, and Delivery Services |
| 18,662 |
| 36,214 |
| (17,552 | ) | (17,436 | ) | (71 | ) | 17 |
| (62 | ) | |||||||
Insurance, Tax, and Assessment |
| 188,608 |
| 92,675 |
| 95,933 |
| 97,099 |
| (250 | ) | 60 |
| (976 | ) | |||||||
Office Supplies |
| 17,347 |
| 60,197 |
| (42,850 | ) | (38,404 | ) | (2,822 | ) | (537 | ) | (1,087 | ) | |||||||
Lending Related Expense |
| 247,894 |
| 91,019 |
| 156,875 |
| (16,187 | ) | (5,706 | ) | 949 |
| 177,819 |
| |||||||
Other Non-Interest Expense |
| 182,822 |
| 115,465 |
| 67,357 |
| (482 | ) | 10,718 |
| 1,685 |
| 55,436 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total Non-Interest Expense |
| $ | 3,400,667 |
| $ | 3,036,690 |
| $ | 363,977 |
| $ | (419,959 | ) | $ | 234,495 |
| $ | 83,073 |
| 466,368 |
| |
27
Interest Rate Sensitivity and Asset Liability Management
Interest rate sensitivity measures the timing and magnitude of the re-pricing of assets compared with the re-pricing of liabilities and is an important part of asset/liability management of a financial institution. The objective of interest rate sensitivity management is to generate stable growth in net interest income, and to control the risks associated with interest rate movements. Management constantly reviews interest rate risk exposure and the expected interest rate environment so that adjustments in interest rate sensitivity can be timely made. Since the assets and liabilities of a bank are primarily monetary in nature (payable in fixed, determinable amounts), the performance of a bank is affected more by changes in interest rates than by inflation. Interest rates generally increase as the rate of inflation increases, but the magnitude of the change in rates may not be the same.
Net interest income is the primary component of net income for financial institutions. Net interest income is affected by the timing and magnitude of re-pricing of as well as the mix of interest sensitive and non-interest sensitive assets and liabilities. “Gap” is a static measurement of the difference between the contractual maturities or re-pricing dates of interest sensitive assets and interest sensitive liabilities within the following twelve months. Gap is an attempt to predict the behavior of the Bank’s net interest income in general terms during periods of movement in interest rates. In general, if the Bank is liability sensitive, more of its interest sensitive liabilities are expected to re-price within twelve months than its interest sensitive assets over the same period. In a rising interest rate environment, liabilities re-pricing more quickly is expected to decrease net interest income. Alternatively, decreasing interest rates would be expected to have the opposite effect on net interest income since liabilities would theoretically be re-pricing at lower interest rates more quickly than interest sensitive assets. Although it can be used as a general predictor, Gap as a predictor of movements in net interest income has limitations due to the static nature of its definition and due to its inherent assumption that all assets will re-price immediately and fully at the contractually designated time. Management has several tools available to it to evaluate and affect interest rate risk, including deposit pricing policies and changes in the mix of various types of assets and liabilities. At September 30, 2009, the Bank, as measured by Gap, is in a liability sensitive position within one year. A liability-sensitive position means that, for cumulative gap measurement periods of one year or less, there are more liabilities than assets subject to immediate repricing as market rates change. Because rate-sensitive interest-bearing liabilities exceed rate sensitive assets, in a rising rate environment the Bank is exposed to declining earnings. Included in interest-bearing liabilities subject to rate changes within 90 days is a portion of the interest-bearing demand, savings and money market deposits. These types of deposits historically have not repriced in the same magnitude or in the same proportion as general market indicators.
Provision and Allowance for Loan Losses
The allowance for loan losses was $509,446 and $838,234 as of September 30, 2009 and December 31, 2008, respectively. The provision for loan losses was $136,080 for the quarter ended September 30, 2009, compared to $164,668 for the quarter ended September 30, 2008, a decrease of $28,588, or 17%. For the nine months ended September 30, 2009, the provision for loan losses was $206,080 compared to $409,591 for the nine months ended September 30, 2008, a decrease of $203,511, or 50%. A primary reason for the decrease in our provision for loan losses, and the allowance for loan losses for the nine months ended September 30, 2009, is the result of the Bank recording specific reserves on certain impaired loans with a balance of $1,142,558 in 2008. In 2009, three of these impaired loans were partially or fully charged off and another was foreclosed and transferred to other real estate owned, reducing the balance of impaired loans specifically reserved for to $371,781 at September 30, 2009.
In general, loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process we refer to as “seasoning.” As a result, a portfolio of older loans will usually behave more predictably than a newer portfolio. Because our loan portfolio is relatively new, the current level of delinquencies and defaults may not be representative of the level that will prevail when the portfolio becomes more seasoned, which may be higher than current levels. There are risks inherent in making all loans, including risks with respect to the period of time over which loans may be repaid, risks resulting from changes in economic and industry conditions, risks inherent in dealing with individual borrowers, and, in the case of a collateralized loan, risks resulting from uncertainties about the future value of the collateral. We anticipate maintaining an allowance for loan losses based on, among other things, historical experience, an evaluation of economic conditions, and regular reviews of delinquencies and loan portfolio quality. Our judgment about the adequacy of the allowance is based upon a number of assumptions which we believe to be reasonable, but which may not prove to be accurate. Thus, there is a risk that charge-offs in future periods could exceed the allowance for loan losses or that substantial additional increases in the allowance for loan losses could be required. Our loan loss reserve methodology incorporates any anticipated write-downs and charge-offs in all problem loans identified by management, credit review services and regulatory authorities. We consider the current allowance for loan losses to be adequate to sustain any estimated or potential losses based on the Bank’s internal analysis and on credit review examinations conducted by regulatory authorities and third-party review services.
28
Changes in the allowance for loan losses are summarized as follows:
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
|
| 2009 |
| 2008 |
| 2009 |
| 2008 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Balance beginning of period |
| $ | 417,277 |
| $ | 464,635 |
| $ | 838,234 |
| $ | 275,920 |
|
Provision for loan losses |
| 136,080 |
| 164,668 |
| 206,080 |
| 409,591 |
| ||||
Loan Charge-Offs: |
|
|
|
|
|
|
|
|
| ||||
Commercial, Financial and Agricultural |
| (26,866 | ) | — |
| (175,162 | ) | — |
| ||||
Real Estate-Mortgage |
| — |
| — |
| (57,137 | ) | (34,306 | ) | ||||
Real Estate-Construction |
| — |
| — |
| (275,000 | ) | — |
| ||||
Consumer |
| (21,701 | ) | (608 | ) | (48,647 | ) | (50,087 | ) | ||||
Total Charge-offs |
| (48,567 | ) | (608 | ) | (555,946 | ) | (84,393 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Loan Recoveries: |
|
|
|
|
|
|
|
|
| ||||
Consumer |
| 4,656 |
| 16.721 |
| 21,078 |
| 44,298 |
| ||||
Total Recoveries |
| 4,656 |
| 16.721 |
| 21,078 |
| 44,298 |
| ||||
Net (Charge-offs) Recoveries |
| (43,911 | ) | 16,113 |
| (534,868 | ) | (40,095 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Balance end of period |
| $ | 509,446 |
| $ | 645,416 |
| $ | 509,446 |
| $ | 645,416 |
|
The following is a summary of risk elements in the loan portfolio at September 30, 2009 and at December 31, 2008:
|
| September 30, 2009 |
| December 31, 2008 |
| ||
|
|
|
|
|
| ||
Loans on Nonaccrual |
| $ | 716,355 |
| $ | 957,181 |
|
Loans Past Due 90 Days and Still Accruing |
| 490,779 |
| 662,000 |
| ||
Other Real Estate Owned and Repossessions |
| 653,501 |
| — |
| ||
|
|
|
|
|
| ||
Total Nonperforming Assets |
| $ | 1,860,635 |
| $ | 1,619,181 |
|
|
|
|
|
|
| ||
Total Nonperforming Assets as a Percentage of Gross Loans |
| 4.86 | % | 4.25 | % |
A loan is placed on non-accrual status when, in management’s judgment, the collection of interest appears doubtful. As a result of management’s ongoing review of the loan portfolio, loans are classified as non-accrual when management believes, after considering economic and business conditions and collection efforts, the borrower’s financial condition is such that collection of interest is doubtful. Generally, loans are placed on non-accrual status when principal or interest payments are past due for more than 90 days. Exceptions are allowed for loans past due greater than 90 days when such loans are well secured and in process of collection. Interest income that would have been reported on the non-accrual loans totaled $60,208 for the nine months ended September 30, 2009 and totaled $53,754 for the twelve months ended December 31, 2008.
Financial Condition
Total assets increased $7,994,850, or 13%, from December 31, 2008 to September 30, 2009. The primary source of the increase was in investment securities, held to maturity, which increased by $10,037,788, or 140%. Total deposits increased by $3,021,219, or 5%, from December 31, 2008 to September 30, 2009 with a $4,440,489, or 45%, increase in core deposits. Other borrowings increased by $3,500,000, from December 31, 2008 to September 30, 2009, which was in the form of Federal Reserve Bank discount window program advances. Total shareholders’ equity increased $1,414,810 from $3,163,901 at December 31, 2008 to $4,578,711 at September 30, 2009. During the first and second quarters of 2009, we received proceeds of $1,529,541 from the sale of 1,019,693 shares in a private placement less stock issuance costs of $231,570.
29
Loans
Gross loans totaled $38,311,793 at September 30, 2009, an increase of $368,191, or 1.0%, since December 31, 2008. Balances within the major loans receivable categories as of September 30, 2009 and December 31, 2008 are as follows.
|
| September 30, 2009 |
| December 31, 2008 |
| ||
|
|
|
|
|
| ||
Commercial, Financial and Agricultural |
| $ | 4,039,136 |
| $ | 4,495,355 |
|
Real Estate-Mortgage |
| 26,646,218 |
| 26,411,116 |
| ||
Real Estate-Construction |
| 5,433,268 |
| 5,236,464 |
| ||
Consumer |
| 1,788,171 |
| 1,800,667 |
| ||
Other |
| 405,000 |
| — |
| ||
|
|
|
|
|
| ||
|
| $ | 38,311,793 |
| $ | 37,943,602 |
|
Deposits
Total deposits as of September 30, 2009 and December 31, 2008 were $60,142,073 and $57,120,854, respectively. Core deposits grew by $4,440,489 during the nine month period ended September 30, 2009. The Bank also grew institutional time deposits approximately $4,193,000 in an effort to increase liquidity at a more competitive price than retail CDs. The Bank reduced brokered deposits by $13,028,000, to $5,418,000, during the nine month period ended September 30, 2009.
Balances within the major deposit categories as of September 30, 2009 and December 31, 2008 are as follows (amounts presented in thousands):
|
| September 30, 2009 |
| December 31, 2008 |
| ||||||
|
| Amount |
| Rate |
| Amount |
| Rate |
| ||
Non-interest-bearing demand deposits |
| $ | 3,128 |
| N/A |
| $ | 3,036 |
| N/A |
|
Interest-bearing demand deposits |
| 1,078 |
| 0.98 | % | 1,082 |
| 2.08 | % | ||
MMDA and Savings deposits |
| 10,096 |
| 2.18 | % | 5,645 |
| 2.77 | % | ||
Time deposits less than $100,000 |
| 23,331 |
| 3.02 | % | 35,944 |
| 4.67 | % | ||
Time deposits $100,000 and over |
| 22,509 |
| 3.51 | % | 11,414 |
| 4.54 | % | ||
|
|
|
|
|
|
|
|
|
| ||
|
| $ | 60,142 |
|
|
| $ | 57,121 |
|
|
|
Another aspect of EESA (in addition to the Capital Purchase Plan described above) which became effective on October 3, 2008 is a temporary increase of the basic limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor. The standard insurance amount currently is $250,000 per depositor. The $250,000 limit is permanent for certain retirement accounts, which includes IRAs. The $250,000 limit is temporary for all other deposit accounts through December 31, 2013. On January 1, 2014, the standard insurance amount will return to $100,000 per depositor for all account categories except certain retirement accounts, which will remain at $250,000 per depositor. At September 30, 2009 the Bank had time deposits of $100,000 or more of $22,509,000. Approximately $42,000, or 0.2%, of these deposits would not be covered under the new FDIC insurance coverage.
30
Capital Resources
Total shareholders’ equity increased $1,414,810 from $3,163,901 at December 31, 2008 to $4,578,711 at September 30, 2009.
Bank holding companies and their banking subsidiaries are required by banking regulators to meet specific minimum levels of capital adequacy, which are expressed in the form of ratios. The Federal Reserve guidelines contain an exemption from the capital requirements for “small bank holding companies,” which in 2006 was amended to cover most bank holding companies with less than $500 million in total assets that do not have a material amount of debt or equity securities outstanding registered with the SEC. Although our class of common stock is registered under Section 12 of the Securities Exchange Act, we believe that because our stock is not listed on any exchange or otherwise actively traded, the Federal Reserve Board will interpret its new guidelines to mean that we qualify as a small bank holding company. Nevertheless, the Bank remains subject to capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Capital is separated into Tier 1 Capital (essentially common shareholders’ equity less intangible assets) and Tier 2 Capital (essentially the allowance for loan losses limited to 1.25% of risk-weighted assets). The first two ratios, which are based on the degree of credit risk in our assets, provide for the weighting of assets based on assigned risk factors and include off-balance sheet items such as loan commitments and stand-by letters of credit. The ratio of Tier 1 Capital to risk-weighted assets must be at least 4.0% and the ratio of Total Capital (Tier 1 Capital plus Tier 2 Capital) to risk-weighted assets must be at least 8.0% to be considered adequately capitalized.
Banks and bank holding companies are also required to maintain a minimum ratio of Tier 1 Capital to adjusted quarterly average total assets of 4.0%.
The following table summarizes the Bank’s risk-based capital ratios at September 30, 2009 and December 31, 2008:
| �� |
|
|
|
|
|
|
|
| To Be Well |
| |||||
|
|
|
|
|
|
|
|
|
| Capitalized Under |
| |||||
|
|
|
|
|
| For Capital |
| Prompt Corrective |
| |||||||
|
| Actual |
| Adequacy Purposes |
| Action Provisions |
| |||||||||
|
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| |||
|
| (In Thousands) |
| |||||||||||||
September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Total Capital to Risk-Weighted Assets |
| $ | 5,172 |
| 11.43 | % | $ | 3,620 |
| 8.00 | % | $ | 4,424 |
| 10.00 | % |
Tier I Capital to Risk-Weighted Assets |
| 4,662 |
| 10.30 |
| 1,810 |
| 4.00 |
| 2,715 |
| 6.00 |
| |||
Tier I Capital to Average Assets |
| 4,662 |
| 6.57 |
| 2,840 |
| 4.00 |
| 3,550 |
| 5.00 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Total Capital to Risk-Weighted Assets |
| $ | 3,793 |
| 9.29 | % | $ | 3,265 |
| 8.00 | % | $ | 4,081 |
| 10.00 | % |
Tier I Capital to Risk-Weighted Assets |
| 3,279 |
| 8.04 |
| 1,632 |
| 4.00 |
| 2,449 |
| 6.00 |
| |||
Tier I Capital to Average Assets |
| 3,279 |
| 6.07 |
| 2,160 |
| 4.00 |
| 2,701 |
| 5.00 |
|
The Bank was considered “well capitalized” at September 30, 2009.
In July 2008, we commenced a private offering of shares of our common stock. The private offering closed on May 14, 2009. The Company received total net proceeds from the offering of $4,899,547, from the sale of 3,266,362 shares. During the first and second quarters of 2009, the Company received proceeds of $1,529,541 from the sale of 1,019,693 shares in the offering, less stock issuance costs of $231,570. We have used and will continue to use the net proceeds for working capital purposes. The common stock that was sold in the offering has not been registered under the Securities Act of 1933, as amended, and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.
31
Regulatory Matters
In addition to the recent legislation previously discussed relating to the current economic crisis, from time to time, various bills are introduced in the United States Congress with respect to the regulation of financial institutions. Certain of these proposals, if adopted, could significantly change the regulation of banks and the financial services industry. We cannot predict whether any of these proposals will be adopted or, if adopted, how these proposals would affect us.
Liquidity
The Bank must maintain, on a daily basis, sufficient funds to cover the withdrawals from depositors’ accounts and to supply new borrowers with funds. To meet these obligations, the Bank keeps cash on hand, maintains account balances with its correspondent banks, and purchases and sells federal funds and other short-term investments. Asset and liability maturities are monitored in an attempt to match the maturities to meet liquidity needs. It is the policy of the Bank to monitor its liquidity to meet regulatory requirements and our local funding requirements.
As of September 30, 2009, the Bank had $1,358,700 in cash and cash equivalents as well as $8,510,995 in investment securities available-for-sale to fund its operations and loan growth. The Bank has borrowing capacity through its membership in the Federal Home Loan Bank of Atlanta (the “FHLB”) subject to the availability of investment securities to pledge as collateral. As of September 30, 2009, the Bank had FHLB advances outstanding of $2,000,000. The Bank has primary borrowing capacity through the Federal Reserve Bank discount window program subject to the availability of loans and investment securities to pledge as collateral. As of September 30, 2009, the Bank had Federal Reserve Bank advances outstanding of $3,500,000. The Bank has received a verbal commitment from CenterState Bank of Florida for a federal funds line of credit of $1,000,000. There were no federal funds purchased outstanding at September 30, 2009.
Off-Balance Sheet Arrangements
We are a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments consist of commitments to extend credit and standby letters of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Standby letters of credit are written conditional commitments issued by the bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. Most letters of credit extend for less than one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. A commitment involves, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. Our exposure to credit loss in the event of nonperformance by the other party to the instrument is represented by the contractual notional amount of the instrument.
Since certain commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We use the same credit policies in making commitments to extend credit as we do for on-balance-sheet instruments. Collateral held for commitments to extend credit varies but may include unimproved and improved real estate, certificates of deposit or personal property.
The following table summarizes our off-balance-sheet financial instruments whose contract amounts represent credit risk as of September 30, 2009 and December 31, 2008:
|
| September 30, 2009 |
| December 31, 2008 |
| ||
|
|
|
|
|
| ||
Commitments to extend credit |
| $ | 5,425,631 |
| $ | 3,093,000 |
|
Stand-by letters of credit |
| $ | 275,952 |
| $ | 261,000 |
|
32
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Not applicable.
Item 4. Controls and Procedures
As of the end of the period covered by this report we carried out an evaluation, under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e).
Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our current disclosure controls and procedures are effective as of September 30, 2009. There have been no significant changes in our internal controls over financial reporting during the fiscal quarter ended September 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
We are not a party to any material legal proceedings, nor are there any material proceedings known to us to be contemplated by any governmental authority. Additionally, we are not aware of any material proceedings, pending or contemplated, in which any of our directors, officers or affiliates, or any principal security holder or any associate of any of the foregoing, is a party or has an interest adverse to us.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
We held our annual meeting of shareholders on August 27, 2009. There were two matters submitted to shareholders at the meeting. The first matter was the election of eight persons to serve on our board of directors for a one-year term expiring at our 2010 annual meeting. The second matter was to ratify the appointment of Mauldin & Jenkins, Certified Public Accountants, LLC as our external auditors for the fiscal year 2009.
The following describes the matters voted upon at the annual meeting and sets forth the number of votes cast for each proposal and those withheld or abstained.
Proposal #1 – To elect eight persons to serve on our board of directors for a one-year term expiring at the 2010 annual meeting.
Nominees |
| For |
| Against (Withheld) |
|
Dr. Wendell A. Turner |
| 2,603,114 |
| 46,610 |
|
R.K. Whitehead III |
| 2,646,214 |
| 3,510 |
|
William R. Blanton |
| 2,646,214 |
| 3,510 |
|
William A. Bagwell, Jr. |
| 2,646,114 |
| 3,610 |
|
J. Allen Nivens, Jr. |
| 2,646,114 |
| 3,610 |
|
William M. Evans, Jr. |
| 2,646,214 |
| 3,510 |
|
Lanny W. Dunagan |
| 2,646,114 |
| 3,610 |
|
Gilbert T. Jones, Sr. |
| 2,603,114 |
| 46,610 |
|
Proposal #2 - To ratify the appointment of Mauldin & Jenkins, Certified Public Accountants, LLC as our external auditors for the fiscal year 2009:
Votes For: 2,589,948 |
| Votes Withheld: 51,676 |
| Abstain: 8,100 |
|
33
None.
31.1 |
| Rule 13a-14(a) Certification of the Principal Executive Officer. |
|
|
|
31.2 |
| Rule 13a-14(a) Certification of the Principal Financial Officer. |
|
|
|
32 |
| Section 1350 Certifications. |
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| FIRST CENTURY BANCORP. |
|
| (Registrant) |
|
|
|
|
|
|
Date: November 16, 2009 | By: | /s/ William R. Blanton |
|
| William R. Blanton |
|
| Principal Executive Officer |
|
|
|
|
|
|
Date: November 16, 2009 | By: | /s/ Denise Smyth |
|
| Denise Smyth |
|
| Principal Financial and Accounting Officer |
35
FIRST CENTURY BANCORP.
Exhibit |
|
|
Number |
| Description |
|
|
|
31.1 |
| Rule 13a-14(a) Certification of the Principal Executive Officer. |
|
|
|
31.2 |
| Rule 13a-14(a) Certification of the Principal Financial Officer. |
|
|
|
32 |
| Section 1350 Certifications. |
36