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 June 30, 2010
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 “accelerated filer,” “large 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: 8,090,772 shares of common stock, no par value per share, were issued and outstanding as of August 11, 2010.
| Page No. |
PART I. FINANCIAL INFORMATION |
|
|
|
Item 1. Financial Statements |
|
|
|
Consolidated Balance Sheets — June 30, 2010 (Unaudited) and December 31, 2009 | 3 |
|
|
5 | |
|
|
6 | |
|
|
7 | |
|
|
Consolidated Statements of Cash Flows (Unaudited) — Six Months Ended June 30, 2010 and 2009 | 8 |
|
|
9 | |
|
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 18 |
|
|
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 32 |
|
|
32 | |
|
|
| |
|
|
32 | |
|
|
32 | |
|
|
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 32 |
|
|
32 | |
|
|
32 | |
|
|
32 | |
|
|
32 | |
|
|
33 |
FIRST CENTURY BANCORP. AND SUBSIDIARY
ASSETS
|
| June 30, |
|
|
| ||
|
| 2010 |
| December 31, |
| ||
|
| (Unaudited) |
| 2009 |
| ||
|
|
|
|
|
| ||
Cash and Cash Equivalents |
|
|
|
|
| ||
Cash and Due from Banks |
| $ | 4,635,458 |
| $ | 2,531,126 |
|
Federal Funds Sold |
| — |
| — |
| ||
|
|
|
|
|
| ||
Total Cash and Cash Equivalents |
| 4,635,458 |
| 2,531,126 |
| ||
|
|
|
|
|
| ||
Investment Securities |
|
|
|
|
| ||
Available for Sale, at Fair Value |
| 4,380,713 |
| 7,594,425 |
| ||
Held to Maturity, at Cost (Fair Value of $13,644,867, and $18,048,359 as of June 30, 2010 and December 31, 2009, respectively) |
| 12,582,382 |
| 16,794,363 |
| ||
|
|
|
|
|
| ||
|
| 16,963,095 |
| 24,388,788 |
| ||
|
|
|
|
|
| ||
Other Investments |
| 476,600 |
| 400,800 |
| ||
|
|
|
|
|
| ||
Loans Held for Sale |
| 9,510,819 |
| 9,637,123 |
| ||
|
|
|
|
|
| ||
Loans |
| 33,446,473 |
| 36,630,587 |
| ||
Allowance for Loan Losses |
| (545,094 | ) | (414,670 | ) | ||
|
|
|
|
|
| ||
Loans, Net |
| 32,901,379 |
| 36,215,917 |
| ||
|
|
|
|
|
| ||
Premises and Equipment |
| 2,175,880 |
| 2,276,681 |
| ||
|
|
|
|
|
| ||
Other Real Estate |
| 556,501 |
| 653,501 |
| ||
|
|
|
|
|
| ||
Other Assets |
| 661,990 |
| 462,021 |
| ||
|
|
|
|
|
| ||
Total Assets |
| $ | 67,881,722 |
| $ | 76,565,957 |
|
The accompanying notes are an integral part of these consolidated balance sheets.
FIRST CENTURY BANCORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
| June 30, |
|
|
| ||
|
| 2010 |
| December 31, |
| ||
|
| (Unaudited) |
| 2009 |
| ||
|
|
|
|
|
| ||
Deposits |
|
|
|
|
| ||
Non-interest-Bearing |
| $ | 2,973,503 |
| $ | 3,076,222 |
|
Interest-Bearing |
| 56,573,746 |
| 66,490,456 |
| ||
|
|
|
|
|
| ||
Total Deposits |
| 59,547,249 |
| 69,566,678 |
| ||
|
|
|
|
|
| ||
Borrowings |
| 2,000,000 |
| 2,000,000 |
| ||
|
|
|
|
|
| ||
Other Liabilities |
| 641,185 |
| 600,370 |
| ||
|
|
|
|
|
| ||
Total Liabilities |
| 62,188,434 |
| 72,167,048 |
| ||
|
|
|
|
|
| ||
Shareholders’ Equity |
|
|
|
|
| ||
Preferred Stock, Non-voting; Non-participating; Variable Rate Cumulative; No Par Value; 10,000,000 Shares Authorized; -0- and 75,000 Shares Issued and Outstanding at June 30, 2010 and December 31, 2009, Respectively; Liquidation Preference of $10 Per Share Plus Accumulated Undeclared Dividends; |
| — |
| 750,000 |
| ||
Common Stock, No Par Value; 50,000,000 Shares Authorized; 7,697,475 and 4,998,820, Shares Issued at June 30, 2010 and December 31, 2009, Respectively |
| 16,747,684 |
| 14,948,028 |
| ||
Accumulated Deficit |
| (10,970,989 | ) | (11,031,585 | ) | ||
Treasury Stock, 670 shares, at cost |
| (1,005 | ) | (1,005 | ) | ||
Accumulated Other Comprehensive (Loss) |
| (82,402 | ) | (266,529 | ) | ||
|
|
|
|
|
| ||
Total Shareholders’ Equity |
| 5,693,288 |
| 4,398,909 |
| ||
|
|
|
|
|
| ||
Total Liabilities and Shareholders’ Equity |
| $ | 67,881,722 |
| $ | 76,565,957 |
|
The accompanying notes are an integral part of these consolidated balance sheets.
FIRST CENTURY BANCORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30
(UNAUDITED)
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||
Interest Income |
|
|
|
|
|
|
|
|
| ||||
Loans, Including Fees |
| $ | 559,423 |
| $ | 590,446 |
| $ | 1,202,646 |
| $ | 1,166,144 |
|
Investments |
| 463,501 |
| 737,588 |
| 995,937 |
| 1,302,080 |
| ||||
Interest Bearing Deposits |
| 2,307 |
| 24 |
| 4,471 |
| 51 |
| ||||
Federal Funds Sold |
| — |
| — |
| — |
| 166 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total Interest Income |
| 1,025,231 |
| 1,328,058 |
| 2,203,054 |
| 2,468,441 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Interest Expense |
|
|
|
|
|
|
|
|
| ||||
Deposits |
| 269,200 |
| 444,875 |
| 562,524 |
| 930,275 |
| ||||
Borrowings |
| 12,701 |
| 17,683 |
| 25,553 |
| 33,443 |
| ||||
Total Interest Expense |
| 281,901 |
| 462,558 |
| 588,077 |
| 963,718 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net Interest Income |
| 743,330 |
| 865,500 |
| 1,614,977 |
| 1,504,723 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Provision for Loan Losses |
| 235,739 |
| 70,000 |
| 310,739 |
| 70,000 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net Interest Income After Provision for Loan Losses |
| 507,591 |
| 795,500 |
| 1,304,238 |
| 1,434,723 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Non-interest Income |
|
|
|
|
|
|
|
|
| ||||
Service Charges and Fees on Deposits |
| 22,411 |
| 17,196 |
| 41,462 |
| 31,341 |
| ||||
Gain (Loss) on Investment Securities, net |
| 112,273 |
| (37,436 | ) | 145,602 |
| (37,436 | ) | ||||
Mortgage Banking Income |
| 1,019,608 |
| 674,818 |
| 1,905,639 |
| 1,008,934 |
| ||||
Other |
| 35,108 |
| 133 |
| 45,782 |
| 251 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total Non-interest Income |
| 1,189,400 |
| 654,711 |
| 2,138,485 |
| 1,003,090 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Non-interest Expense |
|
|
|
|
|
|
|
|
| ||||
Salaries and Employee Benefits |
| 907,851 |
| 604,764 |
| 1,830,063 |
| 1,095,889 |
| ||||
Occupancy and Equipment |
| 106,744 |
| 104,851 |
| 238,930 |
| 214,475 |
| ||||
Professional Fees |
| 99,407 |
| 85,275 |
| 179,026 |
| 137,371 |
| ||||
Advertising and Marketing |
| 62,002 |
| 52,290 |
| 113,333 |
| 108,073 |
| ||||
Data Processing |
| 172,682 |
| 127,517 |
| 341,052 |
| 247,302 |
| ||||
Telephone |
| 19,789 |
| 13,074 |
| 45,810 |
| 24,517 |
| ||||
Postage and Delivery Services |
| 20,923 |
| 5,887 |
| 39,291 |
| 11,552 |
| ||||
Insurance, Tax, and Regulatory Assessments |
| 99,065 |
| 46,155 |
| 170,478 |
| 92,448 |
| ||||
Office Supplies |
| 8,679 |
| 6,155 |
| 15,881 |
| 11,611 |
| ||||
Lending Related Expense |
| 102,167 |
| 103,585 |
| 264,603 |
| 186,262 |
| ||||
Other Non-interest Expense |
| 39,006 |
| 48,804 |
| 63,311 |
| 79,894 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total Non-interest Expense |
| 1,638,315 |
| 1,198,357 |
| 3,301,778 |
| 2,209,394 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Income Before Income Taxes |
| 58,676 |
| 251,854 |
| 140,945 |
| 228,419 |
| ||||
Provision for Income Taxes |
| — |
| — |
| — |
| — |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net Income |
| $ | 58,676 |
| $ | 251,854 |
| $ | 140,945 |
| $ | 228,419 |
|
|
|
|
|
|
|
|
|
|
| ||||
Basic Earnings Per Share |
| $ | .01 |
| $ | .05 |
| $ | .03 |
| $ | .05 |
|
Fully Diluted Earnings Per Share |
| $ | .01 |
| $ | .04 |
| $ | .03 |
| $ | .05 |
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted Average Shares Outstanding |
| 5,253,206 |
| 4,893,409 |
| 5,126,716 |
| 4,485,921 |
|
The accompanying notes are an integral part of these consolidated statements of operations.
FIRST CENTURY BANCORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30
(UNAUDITED)
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net Income |
| $ | 58,676 |
| $ | 251,854 |
| $ | 140,945 |
| $ | 228,419 |
|
|
|
|
|
|
|
|
|
|
| ||||
Other Comprehensive Income (Loss), Net of Tax |
|
|
|
|
|
|
|
|
| ||||
Unrealized Gains (Losses) on Securities Available for Sale Arising During the period |
| 297,400 |
| (5,510 | ) | 329,729 |
| (92,534 | ) | ||||
Reclassification Adjustments for (gains) losses included in net income |
| (112,273 | ) | 37,436 |
| (145,602 | ) | 37,436 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Other comprehensive income (loss) |
| 185,127 |
| 31,926 |
| 184,127 |
| (55,098 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Comprehensive Income |
| $ | 243,803 |
| $ | 283,780 |
| $ | 325,072 |
| $ | 173,321 |
|
The accompanying notes are an integral part of these consolidated statements.
FIRST CENTURY BANCORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
| ||||||
|
| Preferred Stock |
| Common Stock |
| Accumulated |
| Treasury |
| Other |
|
|
| ||||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Deficit |
| Stock |
| Loss |
| Total |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance, December 31, 2009 |
| 75,000 |
| $ | 750,000 |
| 4,998,820 |
| $ | 14,948,028 |
| $ | (11,031,585 | ) | $ | (1,005 | ) | $ | (266,529 | ) | $ | 4,398,909 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Exchange of Preferred Stock plus accrued dividends for Common Stock |
| (75,000 | ) | $ | (750,000 | ) | 1,239,328 |
| 830,349 |
| (80,349 | ) | — |
| — |
| — |
| |||||
Issuance of Common Stock |
| — |
| — |
| 1,459,327 |
| 977,749 |
| — |
| — |
| — |
| 977,749 |
| ||||||
Stock Compensation Costs |
| — |
| — |
| — |
| (8,442 | ) | — |
| — |
| — |
| (8,442 | ) | ||||||
Net Change in Unrealized Gain on Securities Available for Sale |
| — |
| — |
| — |
| — |
| — |
| — |
| 184,127 |
| 184,127 |
| ||||||
Net Income |
| — |
| — |
| — |
| — |
| 140,945 |
| — |
| — |
| 140,945 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance, June 30, 2010 |
| — |
| $ | — |
| 7,697,475 |
| $ | 16,747,684 |
| $ | (10,970,989 | ) | $ | (1,005 | ) | $ | (82,402 | ) | $ | 5,693,288 |
|
The accompanying notes are an integral part of these consolidated statements
FIRST CENTURY BANCORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30
(UNAUDITED)
|
| 2010 |
| 2009 |
| ||
Cash Flows from Operating Activities |
|
|
|
|
| ||
Net Income |
| $ | 140,945 |
| $ | 228,419 |
|
Adjustments to Reconcile Net Income to Net Cash Used by Operating Activities |
|
|
|
|
| ||
Depreciation |
| 97,939 |
| 102,173 |
| ||
Amortization and Accretion |
| (421,631 | ) | (475,455 | ) | ||
Provision for Loan Losses |
| 310,739 |
| 70,000 |
| ||
Write-down of Other Real Estate |
| 34,500 |
| — |
| ||
Loss on Sale of Other Assets |
| 12,175 |
| 7,263 |
| ||
(Gains) Losses on Investment Securities |
| (145,602 | ) | 37,436 |
| ||
Stock Compensation Expense (Recovery) |
| (8,442 | ) | 35,506 |
| ||
Change In |
|
|
|
|
| ||
Loans Held for Sale |
| 126,304 |
| (938,250 | ) | ||
Other Assets |
| (230,657 | ) | (10,332 | ) | ||
Other Liabilities |
| 40,815 |
| 185,828 |
| ||
|
|
|
|
|
| ||
Net Cash Used by Operating Activities |
| (42,915 | ) | (757,412 | ) | ||
|
|
|
|
|
| ||
Cash Flows from Investing Activities |
|
|
|
|
| ||
Purchases of Investment Securities Available for Sale |
| (1,000,000 | ) | (8,251,158 | ) | ||
Proceeds from Sales of Investment Securities Available for Sale |
| 3,524,842 |
| 6,642,492 |
| ||
Proceeds from Maturities, Calls and Paydowns of Investment Securities Available for Sale |
| 2,735,471 |
| 4,269,480 |
| ||
Purchases of Investment Securities Held to Maturity |
| — |
| (11,599,251 | ) | ||
Proceeds from Sales of Investment Securities Held to Maturity |
| 2,014,129 |
| — |
| ||
Proceeds from Maturities, Calls and Paydowns of Investment Securities Held to Maturity |
| 902,610 |
| 1,450,860 |
| ||
Net Purchases of Other Investments |
| (75,800 | ) | (21,850 | ) | ||
Net Change in Loans |
| 3,003,800 |
| (767,844 | ) | ||
Proceeds from Sale of Other Real Estate |
| 62,356 |
| — |
| ||
Proceeds from Sale of Other Assets |
| 24,107 |
| 25,000 |
| ||
Net Purchases of Premises and Equipment |
| (2,587 | ) | (23,225 | ) | ||
|
|
|
|
|
| ||
Net Cash Provided (Used) by Investing Activities |
| 11,188,928 |
| (8,275,496 | ) | ||
|
|
|
|
|
| ||
Cash Flows from Financing Activities |
|
|
|
|
| ||
Net Change in Deposits |
| (10,019,430 | ) | 3,961,362 |
| ||
Proceeds from Borrowings |
| — |
| 2,900,000 |
| ||
Proceeds from the Issuance of Common Stock |
| 977,749 |
| 1,529,541 |
| ||
Payment of Stock Issuance Costs |
| — |
| (224,158 | ) | ||
|
|
|
|
|
| ||
Net Cash Provided (Used) by Financing Activities |
| (9,041,681 | ) | 8,166,745 |
| ||
|
|
|
|
|
| ||
Net Increase (Decrease) in Cash and Cash Equivalents |
| 2,104,332 |
| (866,163 | ) | ||
|
|
|
|
|
| ||
Cash and Cash Equivalents, Beginning |
| 2,531,126 |
| 2,225,027 |
| ||
|
|
|
|
|
| ||
Cash and Cash Equivalents, Ending |
| $ | 4,635,458 |
| $ | 1,358,864 |
|
|
|
|
|
|
| ||
Supplemental Disclosure of Cash Flow Information: |
|
|
|
|
| ||
Interest Paid |
| $ | 513,060 |
| $ | 831,104 |
|
Change in Unrealized Gains (Losses) on Securities Available for Sale |
| $ | 184,127 |
| $ | (55,098 | ) |
Loans transferred to other real estate |
| $ | — |
| $ | 653,501 |
|
See accompanying notes to consolidated financial statements.
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 the Gainesville, Georgia.
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 disclosures, which would substantially duplicate those contained in the most recent annual report to shareholders on Form 10-K. The financial statements as of June 30, 2010 and 2009 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 six months ended June 30, 2010 are not necessarily indicative of the results of a full year’s operations. The financial information as of December 31, 2009 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 2009 Form 10-K.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2010, the FASB issued 2010-20 Accounting Standards Update (ASU) No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This ASU amends the guidance in the FASB Accounting Standards CodificationTM (Codification) to improve the disclosures that an entity provides about the credit quality of its financing receivables and the related allowance for credit losses. As a result of these amendments, an entity is required to disaggregate, by portfolio segment or class of financing receivable, certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses. The ASU is effective for interim and annual reporting periods ending on or after December 15, 2010.
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, 2009 as filed on its 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, income taxes, and valuation of investment securities for other-than- temporary impairment 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
The Company did not grant any options during the quarter or six month period ended June 30, 2010.
NOTE 4 — NET INCOME PER SHARE
Net income 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 2010 and 2009 as the effects of such would be anti-dilutive to the income per share calculation. Dividends accumulated on cumulative preferred stock totaled $0 and $57,979 at June 30, 2010, and June 30, 2009, respectively, and reduced the earnings available to common stockholders in the computation.
NOTE 5 — INVESTMENT SECURITIES
Investment securities as of June 30, 2010 and December 31, 2009 are summarized as follows.
|
| June 30, 2010 |
| ||||||||||
Securities Available for Sale |
| Amortized |
| Gross |
| Gross |
| Fair |
| ||||
Obligations of U.S. Government Agencies |
| $ | 1,000,000 |
| $ | 4,727 |
| $ | — |
| $ | 1,004,727 |
|
Obligations of States and Political Subdivisions |
| 329,596 |
| — |
| (31,616 | ) | 297,980 |
| ||||
Mortgage Backed Securities-GNMA |
| 402,483 |
| 11,924 |
| — |
| 414,407 |
| ||||
Mortgage Backed Securities-FNMA and FHLMC |
| 594,487 |
| 9,898 |
| (2,620 | ) | 601,765 |
| ||||
Private Label Residential Mortgage Backed Securities |
| 1,448,442 |
| — |
| (84,950 | ) | 1,363,492 |
| ||||
Private Label Commercial Mortgage Backed Securities |
| 688,107 |
| 10,235 |
| — |
| 698,342 |
| ||||
|
| $ | 4,463,115 |
| $ | 36,784 |
| $ | (119,186 | ) | $ | 4,380,713 |
|
Securities Held to Maturity |
|
|
|
|
|
|
|
|
| ||||
Private Label Residential Mortgage Backed Securities |
| $ | 885,916 |
| $ | 53,660 |
| $ | — |
| $ | 939,576 |
|
Private Label Commercial Mortgage Backed Securities |
| 11,696,466 |
| 1,008,825 |
| — |
| 12,705,291 |
| ||||
|
| $ | 12,582,382 |
| $ | 1,062,485 |
| $ | — |
| $ | 13,644,867 |
|
|
| December 31, 2009 |
| ||||||||||
Securities Available for Sale |
| Amortized |
| Gross |
| Gross |
| Fair |
| ||||
Obligations of U.S. Government Agencies |
| $ | 983,146 |
| $ | 28,888 |
| $ | — |
| $ | 1,012,034 |
|
Obligations of States and Political Subdivisions |
| 326,855 |
| — |
| (87,693 | ) | 239,162 |
| ||||
Mortgage Backed Securities-GNMA |
| 1,435,829 |
| 71,850 |
| — |
| 1,507,679 |
| ||||
Mortgage Backed Securities-FNMA and FHLMC |
| 794,697 |
| 9,750 |
| (1,928 | ) | 802,519 |
| ||||
Private Label Residential Mortgage Backed Securities |
| 2,720,521 |
| 4,331 |
| (288,440 | ) | 2,436,412 |
| ||||
Private Label Commercial Mortgage Backed Securities |
| 726,226 |
| 12,223 |
| — |
| 738,449 |
| ||||
Corporate Debt Securities |
| 575,000 |
| 6,700 |
| (9,490 | ) | 572,210 |
| ||||
Equity Securities |
| 298,680 |
| — |
| (12,720 | ) | 285,960 |
| ||||
|
| $ | 7,860,954 |
| $ | 133,742 |
| $ | (400,271 | ) | $ | 7,594,425 |
|
Securities Held to Maturity |
|
|
|
|
|
|
|
|
| ||||
Private Label Residential Mortgage Backed Securities |
| $ | 1,963,140 |
| $ | 255,583 |
| $ | — |
| $ | 2,218,723 |
|
Private Label Commercial Mortgage Backed Securities |
| 14,831,223 |
| 1,056,040 |
| (57,627 | ) | 15,829,636 |
| ||||
|
| $ | 16,764,363 |
| $ | 1,311,623 |
| $ | (57,627 | ) | $ | 18,048,359 |
|
Securities with a carrying value of $15,589,367 and $20,150,917 at June 30, 2010, and December 31, 2009, respectively, were pledged to institutions which the Company has available lines of credit outstanding.
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 June 30, 2010 and December 31, 2009:
|
| June 30, 2010 |
| ||||||||||||||||
|
| Less than 12 Months |
| 12 Months or Greater |
| Total |
| ||||||||||||
|
| Fair |
| Gross |
| Fair |
| Gross |
| Fair |
| Total |
| ||||||
Securities Available for Sale |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Obligations of States and Political Subdivisions |
| $ | — |
| $ | — |
| $ | 297,980 |
| $ | (31,616 | ) | $ | 297,980 |
| $ | (31,616 | ) |
Mortgage Backed Securities-FNMA and FHLMC |
| — |
| — |
| 348,285 |
| (2,620 | ) | 348,285 |
| (2,620 | ) | ||||||
Private Label Residential Mortgage Backed Securities |
| 1,125,030 |
| (67,357 | ) | 238,461 |
| (17,593 | ) | 1,363,491 |
| (84,950 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
| $ | 1,125,030 |
| $ | (67,357 | ) | $ | 884,726 |
| $ | (51,829 | ) | $ | 2,009,756 |
| $ | (119,186 | ) |
|
| December 31, 2009 |
| ||||||||||||||||
|
| Less than 12 Months |
| 12 Months or Greater |
| Total |
| ||||||||||||
|
| Fair |
| Gross |
| Fair |
| Gross |
| Fair |
| Total |
| ||||||
Securities Available for Sale |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Obligations of States and Political Subdivisions |
| $ | 239,162 |
| $ | (87,693 | ) | $ | — |
| $ | — |
| $ | 239,162 |
| $ | (87,693 | ) |
Mortgage Backed Securities-FNMA and FHLMC |
| — |
| — |
| 492,889 |
| (1,928 | ) | 492,889 |
| (1,928 | ) | ||||||
Private Label Residential Mortgage Backed Securities |
| 1,463,016 |
| (117,778 | ) | 416,654 |
| (170,662 | ) | 1,879,670 |
| (288,440 | ) | ||||||
Corporate Debt Securities |
| 315,510 |
| (9,490 | ) | — |
| — |
| 315,510 |
| (9,490 | ) | ||||||
Equity Securities |
| — |
| — |
| 285,960 |
| (12,720 | ) | 285,960 |
| (12,720 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
| $ | 2,017,688 |
| $ | (214,961 | ) | $ | 1,195,503 |
| $ | (185,310 | ) | $ | 3,213,191 |
| $ | (400,271 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Securities Held to Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Private Label Commercial Mortgage Backed Securities |
| $ | 887,578 |
| $ | (57,627 | ) | $ | — |
| $ | — |
| $ | 887,578 |
| $ | (57,627 | ) |
Management evaluates investment securities for other-than-temporary impairment on a quarterly basis.
At June 30, 2010, 4 of the 10 debt securities available for sale, and none of the 16 debt securities held to maturity contained unrealized losses with an aggregate depreciation of 5.60% from the Company’s amortized cost basis.
In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports. Although the issuers may have shown declines in earnings and a weakened financial condition as a result of the weakened economy, no credit issues have been identified that cause management to believe the declines in market value are other than temporary. As management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available for sale, no declines are deemed to be other than temporary.
Obligations of States and Political Subdivisions. The unrealized loss on the one investment in obligations of states and political subdivisions was caused by interest rate increases. The contractual terms of this investment do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investment and it is not more likely than not that the Company will be required to sell the investment before recovery of their amortized cost bases, which may be maturity, the Company does not consider this investment to be other-than-temporarily impaired at June 30, 2010.
GSE Residential Mortgage-backed Securities. The unrealized loss on the Company’s investment in one GSE mortgage-backed security was caused by interest rate increases. The Company purchased this investment at a discount relative to its face amount, and the contractual cash flows of this investment is guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the security would not be settled at a price less than the amortized cost bases of the Company’s investment.
Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investment and it is not more likely than not that the Company will be required to sell the investment before recovery of their amortized cost bases, which may be maturity, the Company does not consider this investment to be other-than-temporarily impaired at June 30, 2010.
Private Label Residential Mortgage-backed Securities. The unrealized losses associated with two private label residential mortgage-backed securities are primarily driven by higher projected collateral losses, wider credit spreads, and changes in interest rates. The Company assesses for credit impairment using a cash flow model. Based upon our assessment of the expected credit losses of the securities given the performance of the underlying collateral compared to our credit enhancement, the Company expects to recover the entire amortized cost basis of these securities.
Gross realized gains on securities totaled $228,899 and $49,177 for the six months ended June 30, 2010 and 2009, respectively. Gross realized losses, including impairment losses, on securities totaled $83,297 and $86,612 for the six months ended June 30, 2010 and 2009, respectively. Gains and losses from sales of securities are computed using the specific identification method and recorded on the trade date.
Other investments on the balance sheet at June 30, 2010 and December 31, 2009 include restricted equity securities consisting of Federal Reserve Bank stock of $134,900 and $137,300, respectively, and Federal Home Loan Bank stock of $341,700 and $263,500, respectively. 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.
The amortized cost, estimated fair value, and weighted average yield of investment securities at June 30, 2010, 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 |
| Weighted |
| Amortized |
| Fair Value |
| Weighted |
| ||||
Obligations of U.S. Government Agencies |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Less than 1 Year |
| $ | 1,000,000 |
| $ | 1,004,727 |
| 3.68 | % | $ | — |
| $ | — |
| — |
|
Obligations of States and Political Subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
1 to 5 Years |
| 329,596 |
| 297,980 |
| 8.71 | % | — |
| — |
| — |
| ||||
Mortgage Backed Securities |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Less than 1 Year |
| 1,779,886 |
| 1,788,105 |
| 7.03 | % | 349,650 |
| 359,864 |
| 10.35 | % | ||||
1 to 5 Years |
| 1,192,387 |
| 1,125,030 |
| 7.14 | % | 11,992,727 |
| 12,998,913 |
| 10.31 | % | ||||
5 to 10 Years |
| 161,246 |
| 164,871 |
| 1.86 | % | 240,005 |
| 286,090 |
| 9.58 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| $ | 4,463,115 |
| $ | 4,380,713 |
| 6.27 | % | $ | 12,582,382 |
| $ | 13,644,867 |
| 10.30 | % |
Three investment securities that were categorized as Held to Maturity were sold during the second quarter 2010. These securities were sold because they experienced significant credit deterioration and were downgraded by nationally recognized rating agencies. Since these securities were purchased at a substantial discount during the market disruption that occurred in late 2008 and early 2009, they were sold for a gain of $159,329.
NOTE 6 - LOANS
The composition of loans as of June 30, 2010 and December 31, 2009 are:
|
| June 30, 2010 |
| December 31, 2009 |
| ||
|
|
|
|
|
| ||
Commercial, Financial and Agricultural |
| $ | 3,190,374 |
| $ | 3,698,597 |
|
Real Estate-Mortgage |
| 24,083,090 |
| 26,564,533 |
| ||
Real Estate-Construction |
| 4,935,234 |
| 4,744,401 |
| ||
Consumer |
| 1,176,082 |
| 1,526,295 |
| ||
Net deferred costs |
| 61,693 |
| 96,761 |
| ||
|
|
|
|
|
| ||
|
| $ | 33,446,473 |
| $ | 36,630,587 |
|
Activity in the allowance for loan losses for the six month periods ended June 30 is summarized as follows:
|
| 2010 |
| 2009 |
| ||
|
|
|
|
|
| ||
Beginning Balance |
| $ | 414,670 |
| $ | 838,234 |
|
Provision Charged to Operations |
| 310,739 |
| 70,000 |
| ||
Loan Charge-Offs |
| (183,011 | ) | (507,379 | ) | ||
Loan Recoveries |
| 2,696 |
| 16,422 |
| ||
|
|
|
|
|
| ||
Ending Balance |
| $ | 545,094 |
| $ | 417,277 |
|
NOTE 7 — SHAREHOLDERS’ EQUITY
In June 2010, the Company commenced a private offering of up to 2,000,000 shares of its common stock at of price of $0.67 per share to a limited number of accredited investors. The private offering is scheduled to close August 13, 2010. During the second quarter of 2010 the Company has received net proceeds of $977,749 from the sale of 1,459,327 shares in the offering. For each share issued, a warrant to purchase one share of common stock at a price of $0.67 was also granted, resulting in the issuance of 1,459,327 warrants. The Company is using the net proceeds from the private offering for working capital purposes. 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.
In June 2010, the holders of Series B Preferred Stock exchanged their shares of preferred stock for shares of common stock at an exchange rate of $0.67 per share. The Company redeemed 75,000 shares of Series B Preferred Stock and issued an aggregate of 1,239,328 shares of common stock, which included the payment of accrued dividends, to accredited investors in transactions exempt from registration under Section 4(2) of the Securities Act.
NOTE 8 — INCOME TAXES
The Company accounts for income taxes under the liability 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 percent of the deferred tax assets as of June 30, 2010 and December 31, 2009 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.
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 June 30, 2010 are as follows:
|
|
|
|
|
|
|
|
|
| To Be Well |
| |||||
|
|
|
|
|
|
|
|
|
| Capitalized Under |
| |||||
|
|
|
|
|
| For Capital |
| Prompt Corrective |
| |||||||
|
| Actual |
| Adequacy Purposes |
| Action Provisions |
| |||||||||
|
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| |||
|
|
|
|
|
| (In Thousands) |
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Total Capital to |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Risk-Weighted Assets |
| $ | 6,219 |
| 14.81 | % | $ | 3,359 |
| 8.00 | % | $ | 4,199 |
| 10.00 | % |
Tier I Capital to |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Risk-Weighted Assets |
| 5,694 |
| 13.56 |
| 1,680 |
| 4.00 |
| 2,519 |
| 6.00 |
| |||
Tier I Capital to |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Average Assets |
| 5,694 |
| 8.37 |
| 2,722 |
| 4.00 |
| 3,402 |
| 5.00 |
| |||
NOTE 10 — FAIR VALUE DISCLOSURES
Fair Value of Financial Instruments
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 are based on third party quotes.
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. Fair values of nonperforming loans are estimated using discounted cash flow analysis or underlying collateral values, where applicable.
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.
Accrued Interest - The carrying amounts of accrued interest approximate fair value.
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 June 30, 2010 and December 31, 2009 are presented hereafter:
|
| June 30, 2010 |
| December 31, 2009 |
| ||||||||
|
| Carrying |
| Estimated |
| Carrying |
| Estimated |
| ||||
|
| Amount |
| Fair Value |
| Amount |
| Fair Value |
| ||||
|
| (in Thousands) |
| ||||||||||
Assets |
|
|
|
|
|
|
|
|
| ||||
Cash and Short-Term Investments |
| $ | 4,635 |
| $ | 4,635 |
| $ | 2,531 |
| $ | 2,531 |
|
Investment Securities Available for Sale |
| 4,381 |
| 4,381 |
| 7,594 |
| 7,594 |
| ||||
Investment Securities Held to Maturity |
| 12,582 |
| 13,645 |
| 16,794 |
| 18,048 |
| ||||
Other Investments |
| 477 |
| 477 |
| 401 |
| 401 |
| ||||
Loans Held for Sale |
| 9,511 |
| 9,511 |
| 9,637 |
| 9,637 |
| ||||
Loans, Net |
| 32,901 |
| 33,026 |
| 36,215 |
| 36,572 |
| ||||
Accrued Interest Receivable |
| 217 |
| 217 |
| 279 |
| 279 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Liabilities |
|
|
|
|
|
|
|
|
| ||||
Deposits |
| 59,547 |
| 59,556 |
| 69,567 |
| 69,596 |
| ||||
Borrowings |
| 2,000 |
| 2,078 |
| 2,000 |
| 2,062 |
| ||||
Accrued Interest Payable |
| 354 |
| 354 |
| 279 |
| 279 |
| ||||
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.
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, other real estate, 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.
Determination of Fair Value
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the Fair Value Measurements and Disclosures topic (FASB ASC 820), the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
The recent fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.
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 - Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2 - Valuation is based on inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
Level 3 - Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is 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 sheets, 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 sheets, 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 fair value less selling costs. 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.
Assets and Liabilities Measured at Fair Value on a Recurring Basis as of June 30, 2010 and December 31, 2009
|
|
|
| Fair Value Measurements at |
| ||||||
|
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Investment Securities Available for Sale |
| $ | 4,380,713 |
| — |
| $ | 4,380,713 |
| — |
|
Loans Held for Sale |
| 9,510,819 |
| — |
| 9,510,819 |
| — |
| ||
|
|
|
| Fair Value Measurements at |
| ||||||
|
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Investment Securities Available for Sale |
| $ | 7,594,425 |
| — |
| $ | 7,594,425 |
| — |
|
Loans Held for Sale |
| 9,637,123 |
| — |
| 9,637,123 |
| — |
| ||
The following table presents the financial instruments carried on the consolidated balance sheets by caption and by level in the fair value hierarchy at June 30, 2010 and December 31, 2009, for which a nonrecurring change in fair value has been recorded:
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis as of June 30, 2010 and December 31, 2009
|
| Fair Value Measurements at |
| Total |
| ||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| (Losses) |
| ||
|
|
|
|
|
|
|
|
|
| ||
Impaired Loans |
| — |
| — |
| $ | 667,864 |
| $ | (318,610 | ) |
|
| Fair Value Measurements at |
| Total |
| ||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| (Losses) |
| ||
|
|
|
|
|
|
|
|
|
| ||
Impaired Loans |
| — |
| — |
| $ | 935,284 |
| $ | (299,427 | ) |
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 2009 Form 10-K.
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;
· the effect of final rules amending Regulation E that prohibit financial institutions from charging consumer fees for paying overdrafts on ATM and one-time debit card transactions, unless the consumer consents or opts-in to the overdraft service for those types of transactions;
· 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.
All forward-looking statements in this report are based on information available to us as of the date of this report. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee you that these expectations will be achieved. We undertake no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
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. For more than two years, 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.
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 six months ended June 30, 2010 as compared to the same periods in 2009 and also analyzes our financial condition at June 30, 2010 compared to December 31, 2009. 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.
Critical Accounting Policies
We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States and with general practices within the banking industry in the preparation of our financial statements. Our significant accounting policies are described in the footnotes to our audited consolidated financial statements as of December 31, 2009 included in the Company’s 2009, as filed in our Annual Report on Form 10-K.
Certain accounting policies involve significant judgments and assumptions by us that have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgment and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgment and assumptions we make, actual results could differ from these judgments and estimates that could have a material impact on the carrying values of our assets and liabilities and our results of operations.
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 asset and liability 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.
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 24 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, approved by Congress and signed by President Bush on October 3, 2008, which, among other provisions, allowed the U.S. Treasury to purchase troubled assets from banks, authorized the SEC to suspend the application of marked-to-market accounting, and 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 a new program, the Capital Purchase Program, that encourages and allows financial institutions to build capital through the sale of senior preferred shares to the U.S. Treasury 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:
· Guarantee of newly-issued senior unsecured debt; the guarantee would apply to new debt issued on
or before October 31, 2009 and would provide protection until December 31, 2012; issuers electing to participate would pay a 75 basis point fee for the guarantee; and
· Unlimited deposit insurance for non-interest bearing deposit transaction accounts; financial institutions electing to participate will pay a 10 basis point premium in addition to the insurance premiums paid for standard deposit insurance.
· On February 10, 2009, the U.S. Treasury announced the Financial Stability Plan, which earmarked $350 billion of the TARP funds authorized under EESA. Among other things, the Financial Stability Plan includes:
· A capital assistance program that will invest in mandatory convertible preferred stock of certain qualifying institutions determined on a basis and through a process similar to the Capital Purchase Program;
· A consumer and business lending initiative to fund new consumer loans, small business loans and commercial mortgage asset-backed securities issuances;
· A new public-private investment fund that will leverage public and private capital with public financing to purchase up to $500 billion to $1 trillion of legacy “toxic assets” from financial institutions; and
· Assistance for homeowners by providing up to $75 billion to reduce mortgage payments and interest rates and establishing loan modification guidelines for government and private programs.
· 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 reduces 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 first plan is the Legacy Loan Program, which has a primary purpose to facilitate the sale of troubled mortgage loans by eligible institutions, including FDIC-insured federal or state banks and savings associations. Eligible assets are not strictly limited to loans; however, what constitutes an eligible asset will be determined by participating banks, their primary regulators, the FDIC and the Treasury.
· The second plan is the Securities Program, which is administered by the Treasury and 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. Treasury received over 100 unique applications to participate in the Legacy Securities PPIP and in July 2009 selected nine public-private investment fund managers. As of December 31, 2009, public-private investment funds have completed initial and subsequent closings on approximately $6.2 billion of private sector equity capital, which was matched 100% by Treasury, representing $12.4 billion of total equity capital. Treasury has also provided $12.4 billion of debt capital, representing $24.8 billion of total purchasing power. As of December 31, 2009, public-private investment funds have drawn-down approximately $4.3 billion of total capital which has been invested in certain non-agency residential mortgage backed securities and commercial mortgage backed securities and cash equivalents pending investment.
· On May 22, 2009, the FDIC levied a one-time special assessment on all banks due on September 30, 2009.
· On November 12, 2009, the FDIC issued a final rule to require banks to prepay their estimated quarterly risk-
based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012 and to increase assessment rates effective on January 1, 2011.
· On February 2, 2010, the U.S. President called on the U.S. Congress to create a new Small Business Lending Fund. Under this proposal, $30 billion in TARP funds would be transferred to a new program outside of TARP to support small business lending. As proposed, only small- and medium-sized banks would qualify to participate in the program.
· On July 21, 2010, the U.S. President signed into a law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, a comprehensive regulatory framework that will affect every financial institution in the U.S. U.S. financial regulators will begin the rulemaking process over the next 6 to 18 months which will set the parameters of the new regulatory framework and provide a clearer understanding of the legislation’s effect on banks.
We are participating in the unlimited deposit insurance component of the TLGP; however, we did not issue unsecured debt before the termination of that component of the TLGP. On April 13, 2010, the FDIC approved an interim rule that extends the Transaction Account Guarantee Program to December 31, 2010. We have elected to continue our voluntary participation in the program. Coverage under the program is in addition to and separate from the basic coverage available under the FDIC’s general deposit insurance rules. We believe participation in the program is enhancing our ability to retain customer deposits. 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 increased significantly. We have elected not to participate in the TARP Capital Purchase Program, but will consider participating in similar programs, if any, announced in the future.
It is likely that further regulatory actions may arise as the Federal government continues to attempt to address the economic situation. 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. We encourage you to read this discussion and analysis in conjunction with our financial statements and the other statistical information included in this report.
Results of Operations
Three and Six Months Ended June 30, 2010 and 2009
Net income for the second quarter of 2010 was $58,676 as compared to net income of $251,854 for the same period in 2009. Net income for the six months ended June 30, 2010 was $140,945 as compared to a net income of $228,419 for the same period in 2009. Our operational results depend to a large degree on three components: net interest income, provision for loan losses, and non-interest income and expenses.
There are several factors which have contributed towards reduced earnings in 2010 as compared to the same period in 2009. The Bank had previously purchased high yield securities which produced significant interest income in 2009. The principal balances have paid down since the first half of 2009 resulting in less volume of interest income. In addition to the reduction of securities, the Bank increased its provision for loan losses within the same time period. The Bank has also established and changed its allocation of resources from expanding its banking office network to investing in the expansion of its mortgage division. The expansion and corresponding integration of the mortgage division into the Bank has resulted in an increase in non-interest income as well as non-interest expense.
Net Interest Income
Net interest income is the difference between the interest income received on earning assets (such as loans, investment securities, and federal funds sold) and the interest expense on deposit liabilities and borrowings. For the three months ended June 30, 2010 and 2009, net interest income totaled $743,000 and $866,000, respectively. For the six months ended June 30, 2010 and 2009, net interest income totaled $1,615,000 and $1,505,000, respectively. Interest income from loans, including fees, was $559,000 and $590,000 for the three months ended June 30, 2010 and 2009, respectively. Interest income from loans, including fees, was $1,203,000 and $1,166,000 for the six months ended June 30, 2010 and 2009, respectively. The loan yield increased to 5.84% during the six months ended June 30, 2010, compared to the 5.69% loan yield earned during the same period in 2009. Interest income from investment securities was $464,000 and $738,000 for the three months ended June 30, 2010 and 2009, respectively. Interest income from investment securities was $996,000 and $1,302,000 for the six months ended June 30, 2010 and 2009, respectively. The investment yield increased to 9.20% during the six months ended June 30, 2010, compared to the 9.03% yield earned during the same period in 2009. Interest expense totaled $282,000 for the three months ended June 30, 2010, compared to $463,000 for the same period in 2009. Interest expense totaled $588,000 for the six months ended June 30, 2010, compared to $964,000 for the same period in 2009. Our cost of funds decreased to 1.90% during the six months ended June 30, 2010, compared to the 2.99% during the same period in 2009.
The Bank’s growth in net interest margin 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 June 30, 2009, core deposits have grown approximately $11.8 million, or 89%. The Bank has been successful implementing this strategy resulting in an increase in net interest margin of 0.41%. The net interest margin realized on earning assets was 4.83% for the six months ended June 30, 2010, as compared to 4.42% for the same period in 2009.
Average Balances and Interest Rates
The table below details the average balances outstanding for each category of interest earning assets and interest-bearing liabilities for the six months ended June 30, 2010 and 2009 and the average rate of interest earned or paid thereon. Average balances have been derived from the daily balances throughout the period indicated.
|
| For the Six Months Ended |
| For the Six Months Ended |
| ||||||||||||
|
| (Amounts presented in thousands) |
| ||||||||||||||
|
| Average |
|
|
| Yield/ |
| Average |
|
|
| Yield/ |
| ||||
|
| Balance |
| Interest |
| Rate |
| Balance |
| Interest |
| Rate |
| ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Loans (including loan fees) |
| $ | 41,533 |
| $ | 1,203 |
| 5.84 | % | $ | 39,279 |
| $ | 1,166 |
| 5.69 | % |
Investment securities and other investments |
| 21,839 |
| 996 |
| 9.20 | % | 29,085 |
| 1,302 |
| 9.03 | % | ||||
Interest bearing deposits |
| 4,102 |
| 4 |
| 0.22 | % | 92 |
| — |
| 0.11 | % | ||||
Federal funds sold |
| — |
| — |
| — | % | 260 |
| — |
| 0.13 | % | ||||
Total interest earning assets |
| 67,474 |
| 2,203 |
| 6.58 | % | 68,716 |
| 2,468 |
| 7.24 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other non-interest earnings assets |
| 3,271 |
|
|
|
|
| 4,487 |
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total assets |
| $ | 70,745 |
|
|
|
|
| $ | 73,203 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities and shareholders’ equity: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest-bearing demand |
| $ | 7,060 |
| $ | 21 |
| 0.61 | % | $ | 1,045 |
| $ | 5 |
| 1.03 | % |
Savings and money market |
| 13,026 |
| 115 |
| 1.78 | % | 7,791 |
| 90 |
| 2.32 | % | ||||
Time |
| 40,211 |
| 426 |
| 2.14 | % | 50,683 |
| 835 |
| 3.32 | % | ||||
Federal funds purchased |
| — |
| — |
| — | % | 81 |
| — |
| 0.97 | % | ||||
Borrowings |
| 2,200 |
| 26 |
| 2.34 | % | 5,441 |
| 33 |
| 1.22 | % | ||||
Total interest-bearing liabilities |
| 62,497 |
| 588 |
| 1.90 | % | 65,041 |
| 963 |
| 2.99 | % | ||||
Other non-interest bearing liabilities |
| 3,629 |
|
|
|
|
| 4,271 |
|
|
|
|
| ||||
Shareholders’ equity |
| 4,619 |
|
|
|
|
| 3,891 |
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total liabilities and shareholders’ equity |
| $ | 70,745 |
|
|
|
|
| $ | 73,203 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Excess of interest-earning assets over interest-bearing liabilities |
| $ | 4,977 |
|
|
|
|
| $ | 3,675 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Ratio of interest-earning assets to interest-bearing liabilities |
| 108 | % |
|
|
|
| 106 | % |
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net interest income |
|
|
| $ | 1,615 |
|
|
|
|
| $ | 1,505 |
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net interest spread |
|
|
|
|
| 4.68 | % |
|
|
|
| 4.25 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net interest margin |
|
|
|
|
| 4.83 | % |
|
|
|
| 4.42 | % |
Non-accrual loans are excluded from average loan balances and totaled $282,000 and $834,000 for the six months ended June 30, 2010 and 2009, respectively.
Non-interest Income and Expense
We look for business opportunities that will enable us to grow and increase our value for all its stakeholders. Due to the regulatory changes in the mortgage industry, the Bank expanded its mortgage operations to take advantage of the new benefits that now exist when partnering a bank with a mortgage operation. During the second quarter 2010, the Bank added a new retail mortgage call center in Norcross, Georgia. Our mortgage division was previously comprised of the Gainesville mortgage location, the retail production / operations hub, located in Roswell, Georgia, and the online Mortgage division,
Century Point Mortgage. It is the partnership of the banking and mortgage worlds which we anticipate will drive higher earnings and greater shareholder value for the Bank in the upcoming year. Revenues from the mortgage divisions are primarily non-interest income of fees, and gains on sale of the loans. Interest income is earned on the loans from the time they are closed to the time they are sold, which is typically two weeks. Expenses are primarily salaries and commissions, occupancy, and loan origination expenses such as appraisals.
Non-interest income includes service charges on deposit accounts, customer service fees, mortgage origination fee income and investment security gains (losses). For the quarter ended June 30, 2010, non-interest income grew to $1,189,000 from $655,000 for the quarter ended June 30, 2009, an increase of $534,000, or 82%. For the six months ended June 30, 2010 non-interest income grew to $2,138,000 from $1,003,000 for the six months ended June 30, 2009, an increase of $1,135,000, or 113%. The increase in non-interest income was primarily due to an increase in fees earned on mortgage originations, due to the growth of the mortgage divisions. 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 $81.1 million in mortgage loans during the first half of 2010, an increase of $10.8 million, or 15%, from the same period a year ago. Net gains (losses) on sales of securities were $112,000 and $(37,000) for the three months ended June 30, 2010 and 2009, respectively. Net gains (losses) on sales of securities were $146,000 and $(37,000) for the six months ended June 30, 2010 and 2009, respectively.
With increased resources being directed towards the business areas providing the highest return on investment, management reviewed all the other areas of resource allocation. As a part of this process, management decided to close the loan production offices in Oakwood and Athens in the first quarter of 2010. The office closures resulted in the reduction of seven lending and administrative or support personnel beginning in the fourth quarter of 2009 through the second quarter of 2010. The Bank will continue to service its customers out of the Gainesville headquarters and will continue to utilize technology to enable its customers to access many of the Bank’s services remotely.
Total non-interest expense for the quarter ended June 30, 2010 was $1,638,000 compared to $1,198,000 for the quarter ended June 30, 2009, an increase of $440,000, or 37%. For the six months ended June 30, 2010, non-interest expense was $3,302,000 as compared to $2,209,000 for the six months ended June 30, 2009, an increase of $1,093,000, or 49%.
Salaries and benefits, the largest component of non-interest expense, were $908,000 for the quarter ended June 30, 2010, as compared to $605,000 for the quarter ended June 30, 2009, an increase of $303,000, or 50%. Salaries and benefits, for the six months ended June 30, 2010 were $1,830,000, as compared to $1,096,000 for the six months ended June 30, 2009, an increase of $734,000, or 67%. The increase in salaries and benefits is primarily attributable to the growth in the mortgage divisions in which salaries and benefits increased $901,000. This increase was offset by the reduction in staff and a decrease of $167,000 in salaries and benefits during the first half of 2010 due to the closures of the Oakwood and Athens offices. We have added 41 full time equivalent employees since June 30, 2009.
Total occupancy and equipment expenses for the quarter ended June 30, 2010, were $107,000 as compared to $105,000 for the quarter ended June 30, 2009, an increase of $2,000, or 2%. Total occupancy and equipment expenses for the six months ended June 30, 2010, were $239,000 as compared to $214,000 for the six months ended June 30, 2009, an increase of $25,000, or 11%. Occupancy expenses attributable to the mortgage divisions increased $80,000 while Bank expense decreased by $55,000 as a result of management’s cost cutting initiatives, and office closures.
Professional fees were $99,000 for the quarter ended June 30, 2010, compared to $85,000 for the quarter ended June 30, 2009, an increase of $14,000, or 17%. For the six months ended June 30, 2010 professional fees were $179,000 compared to $137,000 for the six months ended June 30, 2009, an increase of $42,000, or 30%. The increase in professional fees is attributable to management consulting fees for the mortgage division, increased compliance and quality control reviews, and audit fees.
Marketing expenses for the quarter ended June 30, 2010, were $62,000 compared to $52,000 for the quarter ended June 30, 2009, an increase of $10,000, or 19%. Marketing expenses for the six months ended June 30, 2010, were $113,000 compared to $108,000 for the six months ended June 30, 2009, an increase of $5,000, or 5%. For the first half of 2010 Bank marketing expenses decreased approximately $17,000 over the same period in 2009, which was attributable to the discontinuance of a multimedia marketing campaign that included billboards and various other media advertisements targeted at the Gainesville, Oakwood and Athens, Georgia markets. The Century Point Mortgage division has heavily invested in internet advertising and increased marketing expense in the first half of 2010 by approximately $7,000 over the same period in 2009. 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 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 division is maturing, the marketing budget is being analyzed and directed to the most successful techniques. For the first half of 2010 the retail mortgage divisions increased marketing expense by $16,000 over the same period in 2009.
Data processing expense for the quarter ended June 30, 2010, were $173,000, compared to $128,000 for the quarter
ended June 30, 2009, an increase of $45,000, or 35%. Data processing expense for the six months ended June 30, 2010, were $341,000, compared to $247,000 for the six months ended June 30, 2009, an increase of $94,000, or 38%. Fees for core data processing were $120,000 and $87,000 for the six month periods ended June 30, 2010 and 2009, respectively. Fees paid for management and advisory services under the master services agreement were $166,000 and $91,000 for the six month periods ended June 30, 2010 and 2009, respectively, The fees for core processing have a base component which is adjusted quarterly based on asset size and a variable component based on transactional activity. Management and advisory services are adjusted quarterly based on asset size. Additional services were retained for the mortgage division in the second half of 2009.
Telephone expense, postage and delivery services, and office supply expenses for the quarter ended June 30, 2010 totaled $49,000 compared to $25,000 for the quarter ended June 30, 2009, an increase of $24,000, or 97%. Telephone expense, postage and delivery services, and office supply expenses for the six months ended June 30, 2010 totaled $101,000 compared to $48,000 for the six months ended June 30, 2009, an increase of $53,000, or 111%. The increase is primarily attributable to the growth in the mortgage divisions.
Insurance, taxes, and regulatory assessment expenses totaled $99,000 for the quarter ended June 30, 2010 compared to $46,000 for the quarter ended June 30, 2009, an increase of $53,000, or 115%. Insurance, taxes, and regulatory assessment expenses totaled $170,000 for the six months ended June 30, 2010 compared to $92,000 for the six months ended June 30, 2009, an increase of $78,000, or 84%. The Bank’s insurance expense increased $41,000 due to an increase in directors’ and officers’ liability insurance premiums upon renewal in June 2009. FDIC insurance assessments increased $21,000 for 2010 over 2009. OCC supervision assessment increased $13,000 for 2010 over 2009.
Lending related expenses were $102,000 for the quarter ended June 30, 2010 compared to $103,000 for the quarter ended June 30, 2009, a decrease of $1,000, or 1%. Lending related expenses were $264,000 for the six months ended June 30, 2010 compared to $186,000 for the six months ended June 30, 2009, an increase of $78,000, or 42%. The increase is primarily related to appraisal and other loan origination expenses generated by the mortgage divisions. As production fluctuates, so do these types of variable expenses.
Other non-interest expenses were $39,000 for the quarter ended June 30, 2010 compared to $49,000 for the quarter ended June 30, 2009, a decrease of $10,000, or 20%. Other non-interest expenses were $63,000 for the six months ended June 30, 2010 compared to $80,000 for the six months ended June 30, 2009, a decrease of $17,000, or 21%. The decrease was primarily due to changes being made to software licenses in the mortgage division.
The following table shows the components of non-interest expense incurred for six months ended June 30, 2010 and 2009 and changes attributable to the growth of the Company:
|
| 2010 |
| 2009 |
| Increase / |
| Main Office |
| Century |
| Gainesville |
| Roswell |
| Norcross |
| ||||||||
Salaries and employee benefits |
| $ | 1,830,063 |
| $ | 1,095,889 |
| $ | 734,174 |
| $ | (167,377 | ) | $ | (187,681 | ) | $ | 314,980 |
| $ | 766,399 |
| $ | 7,853 |
|
Occupancy expenses |
| 238,930 |
| 214,475 |
| 24,455 |
| (55,397 | ) | 13,409 |
| 239 |
| 66,204 |
| — |
| ||||||||
Professional fees |
| 179,026 |
| 137,371 |
| 41,655 |
| 40,862 |
| (17,593 | ) | 11,681 |
| 6,705 |
| — |
| ||||||||
Marketing |
| 113,333 |
| 108,073 |
| 5,260 |
| (17,196 | ) | 6,817 |
| 906 |
| 9,446 |
| 5,287 |
| ||||||||
Data Processing |
| 341,052 |
| 247,302 |
| 93,750 |
| 58,993 |
| 76,326 |
| 13,380 |
| (58,399 | ) | 3,450 |
| ||||||||
Telephone |
| 45,810 |
| 24,517 |
| 21,293 |
| 7,723 |
| 2,982 |
| 343 |
| 10,245 |
| — |
| ||||||||
Postage and Delivery Services |
| 39,291 |
| 11,552 |
| 27,739 |
| 4,676 |
| 5,324 |
| 1,348 |
| 16,391 |
| — |
| ||||||||
Insurance, Tax, and Assessment |
| 170,478 |
| 92,448 |
| 78,030 |
| 78,004 |
| 26 |
| — |
| — |
| — |
| ||||||||
Office Supplies |
| 15,881 |
| 11,611 |
| 4,270 |
| (2,061 | ) | (1,289 | ) | 839 |
| 6,781 |
| — |
| ||||||||
Lending Related Expense |
| 264,603 |
| 186,262 |
| 78,341 |
| 26,189 |
| (76,958 | ) | 16,879 |
| 112,231 |
| — |
| ||||||||
Other Non-Interest Expense |
| 63,311 |
| 79,894 |
| (16,583 | ) | 17,225 |
| (43,465 | ) | 1,508 |
| 8,149 |
| — |
| ||||||||
Total Non-Interest Expense |
| $ | 3,301,778 |
| $ | 2,209,394 |
| $ | 1,092,384 |
| $ | (8,359 | ) | $ | (222,102 | ) | $ | 362,103 |
| $ | 944,152 |
| $ | 16,590 |
|
Interest Rate Sensitivity and Asset Liability Management
Interest rate sensitivity measures the timing and magnitude of the repricing of assets compared with the repricing 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 repricing 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 repricing 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 reprice within twelve months than its interest sensitive assets over the same period. In a rising interest rate environment, liabilities repricing 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 repricing 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 reprice immediately and fully at the contractually designated time. At June 30, 2010, the Bank, as measured by Gap, is in a liability sensitive position within one year. 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.
We also measure the actual effects that repricing opportunities have on earnings through simulation modeling, referred to as earnings at risk. For short-term interest rate risk, the Bank’s model simulates the impact of balance sheet strategies on net interest income, pre-tax income, and net income. The model includes interest rate simulations to test the impact of rising and falling interest rates on projected earnings. The Bank determines the assumptions that are used in the model.
Provision and Allowance for Loan Losses
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 about future events, which we believe 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 capital.
The allowance for loan loss was $545,000 (1.63% of total gross loans) at June 30, 2010, compared to $415,000 (1.13% of total gross loans) at December 31, 2009. During the second quarter 2010 a new appraisal was obtained on an impaired loan that resulted in partial charge-off of $179,859. Management considers the current allowance for loan losses to be adequate to sustain any estimated or potential losses. Our loan loss methodology incorporates any anticipated write-downs and charge-offs in all problem loans identified by management, and 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 allocation of the allowance for loan losses by loan category at the date indicated is presented below (dollar amounts are presented in thousands):
|
| June 30, 2010 |
| December 31, 2009 |
| ||||||
|
| Amount |
| Percent of loans in |
| Amount |
| Percent of loans in |
| ||
|
|
|
|
|
|
|
|
|
| ||
Commercial, financial and agricultural |
| $ | 60 |
| 11 | % | $ | 84 |
| 20 | % |
Real estate - mortgage |
| 343 |
| 63 | % | 199 |
| 48 | % | ||
Real estate - construction |
| 119 |
| 22 | % | 85 |
| 21 | % | ||
Consumer |
| 23 |
| 4 | % | 47 |
| 11 | % | ||
|
| $ | 545 |
| 100 | % | $ | 415 |
| 100 | % |
The following table presents a summary of changes in the allowance for loan losses for the three and six month periods ended June 30, 2010 and 2009:
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| June 30, |
| June 30, |
| ||||||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Balance beginning of period |
| $ | 488,494 |
| $ | 391,909 |
| $ | 414,670 |
| $ | 838,234 |
|
Provision for loan losses |
| 235,739 |
| 70,000 |
| 310,739 |
| 70,000 |
| ||||
Loan Charge-Offs: |
|
|
|
|
|
|
|
|
| ||||
Commercial, Financial and Agricultural |
| — |
| — |
| — |
| (148,296 | ) | ||||
Real Estate-Mortgage |
| — |
| (57,137 | ) | — |
| (57,137 | ) | ||||
Real Estate-Construction |
| (179,859 | ) | — |
| (179,859 | ) | (275,000 | ) | ||||
Consumer |
| — |
| — |
| (3,152 | ) | (26,946 | ) | ||||
Total Charge-offs |
| (179,859 | ) | (57,137 | ) | (183,011 | ) | (507,379 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Loan Recoveries: |
|
|
|
|
|
|
|
|
| ||||
Consumer |
| 720 |
| 12,505 |
| 2,696 |
| 16,422 |
| ||||
Total Recoveries |
| 720 |
| 12,505 |
| 2,696 |
| 16,422 |
| ||||
Net (Charge-offs) Recoveries |
| (179,139 | ) | (44,632 | ) | (180,315 | ) | (490,957 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Balance end of period |
| $ | 545,094 |
| $ | 417,277 |
| $ | 545,094 |
| $ | 417,277 |
|
|
|
|
|
|
|
|
|
|
| ||||
Total loans at end of period |
| $ | 33,446 |
| $ | 37,724 |
| $ | 33,446 |
| $ | 37,724 |
|
|
|
|
|
|
|
|
|
|
| ||||
Average loans outstanding |
| 35,221 |
| 37,701 |
| $ | 35,980 |
| $ | 37,516 |
| ||
As a percentage of average loans: |
|
|
|
|
|
|
|
|
| ||||
Net loans charged-off |
| 0.51 | % | 0.12 | % | 0.50 | % | 1.31 | % | ||||
Provision for loan losses |
| 0.67 | % | 0.19 | % | 0.86 | % | 0.19 | % | ||||
Allowance for loan losses as a percentage of: |
|
|
|
|
|
|
|
|
| ||||
Gross loans |
| 1.63 | % | 1.11 | % | 1.63 | % | 1.11 | % |
The following is a summary of risk elements in the loan portfolio at June 30, 2010 and at December 31, 2009:
|
| June 30, 2010 |
| December 31, 2009 |
| ||
|
|
|
|
|
| ||
Loans on Nonaccrual |
| $ | 1,048,000 |
| $ | 122,000 |
|
Loans Past Due 90 Days and Still Accruing |
| 500,000 |
| 3,200 |
| ||
Other Real Estate Owned and Repossessions |
| 556,500 |
| 654,000 |
| ||
|
|
|
|
|
| ||
Total Nonperforming Assets |
| $ | 2,104,500 |
| $ | 799,200 |
|
|
|
|
|
|
| ||
Total Nonperforming Assets as a Percentage of Gross Loans |
| 6.29 | % | 2.13 | % |
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. One loan was past due greater than 90 days at June 30, 2010. Management is in the process of working on a plan for this loan and expects to collect all contractual payments. Several loans, totaling $752,000, placed on non accrual status at June 30, 2010, were not currently past due, but collection of all contractual payments remains uncertain. These loans have specific reserves of $14,000 allocated to them. We are in negotiations to sell one of these loans, and two are collateralized by leased property with rent being collected monthly. The remaining loans totaling $296,000, placed on nonaccrual status in 2010, have specific reserves of $140,000 allocated to them.
Financial Condition
Total assets decreased $8,684,000, or 11.3%, from $76,566,000 at December 31, 2009 to $67,882,000 at June 30, 2010. There was a reduction of investment securities through a combination of scheduled and unscheduled prepayments of principal and the sale of certain securities totaling $7,426,000, or 30%. Total deposits decreased by $10,019,000, or 14.4%, from December 31, 2009 to June 30, 2010, including a $4,504,000, or 25.0%, decrease in time deposits greater than $100,000.
Total shareholders’ equity increased $1,294,000 from $4,399,000 at December 31, 2009 to $5,693,000 at June 30, 2010. During the second quarter of 2010, we received proceeds of $977,749 from the sale of 1,459,327 shares in the private offering.
Loans
Gross loans totaled approximately $33,446,000 at June 30, 2010, a decrease of $3,185,000, or 8.7%, from $36,631,000 at December 31, 2009. Balances within the major loans receivable categories as of June 30, 2010 and December 31, 2009 are as follows (amounts presented in thousands). The reduction in the loan portfolio is consistent with the Bank’s current strategy of shrinking the balance sheet to preserve and improve its capital position.
|
| June 30, 2010 |
| December 31, 2009 |
| ||||||
Commercial, financial and agricultural |
| $ | 3,202 |
| 10 | % | $ | 3,716 |
| 10 | % |
Real estate — mortgage |
| 24,130 |
| 72 | % | 26,643 |
| 73 | % | ||
Real estate — construction |
| 4,938 |
| 15 | % | 4,746 |
| 13 | % | ||
Consumer |
| 1,176 |
| 3 | % | 1,526 |
| 4 | % | ||
Total |
| $ | 33,446 |
| 100 | % | $ | 36,631 |
| 100 | % |
Deposits
Total deposits as of June 30, 2010 and December 31, 2009 were $59,547,000 and $69,567,000, respectively. Balances and average rates paid for interest within the major deposit categories as of June 30, 2010 and December 31, 2009 are as follows (amounts presented in thousands):
|
| June 30, 2010 |
| December 31, 2009 |
| ||||||
|
| Amount |
| Rate |
| Amount |
| Rate |
| ||
|
|
|
|
|
|
|
|
|
| ||
Non-interest-bearing demand deposits |
| $ | 2,974 |
| N/A |
| $ | 3,076 |
| N/A |
|
Interest-bearing demand deposits |
| 6,626 |
| 0.61 | % | 8,443 |
| 0.85 | % | ||
MMDA and Savings deposits |
| 15,317 |
| 1.78 | % | 11,950 |
| 2.06 | % | ||
Time deposits less than $100,000 |
| 21,108 |
| 2.71 | % | 28,072 |
| 2.81 | % | ||
Time deposits $100,000 and over |
| 13,522 |
| 1.31 | % | 18,026 |
| 3.27 | % | ||
|
|
|
|
|
|
|
|
|
| ||
|
| $ | 59,547 |
|
|
| $ | 69,567 |
|
|
|
At June, 2010 the Bank had time deposits of $100,000 or more of $13,522,000. Approximately $1,320,000, or 10%, of these deposits, would not be covered under the new FDIC insurance coverage.
Capital Resources
Total shareholders’ equity increased from $4,399,000 at December 31, 2009 to $5,693,000 at June 30, 2010. In June 2010, the Company commenced a private offering of up to 2,000,000 shares of its common stock at of price of $0.67 per share to a limited number of accredited investors. The private offering is scheduled to close August 13, 2010. During the second quarter of 2010 the Company received net proceeds of $977,749 from the sale of 1,459,327 shares in the offering. For each share issued, a warrant to purchase one share of common stock at a price of $0.67 was also granted, resulting in the issuance of 1,459,327 warrants. The Company is using the net proceeds from the private offering for working capital purposes. 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.
In June 2010, the holders of Series B Preferred Stock exchanged their shares of preferred stock for shares of common stock at an exchange rate of $0.67 per share. We redeemed all of the shares of Series B Preferred Stock and issued 1,239,328 shares of common stock.
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%.
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 June 30, 2010 and December 31, 2009:
|
| June 30, 2010 |
| December 31, 2009 |
|
Tier 1 Capital (to risk-weighted assets) |
| 13.56 | % | 9.94 | % |
Total Capital (to risk-weighted assets) |
| 14.81 | % | 10.82 | % |
Tier 1 Capital (to total average assets) |
| 8.37 | % | 6.22 | % |
The Bank was considered “well capitalized” at June 30, 2010.
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 June 30, 2010 the Bank has $4,635,000 in cash and cash equivalents as well as $4,381,000 in investment securities available-for-sale to fund its operations and loan growth. The Bank also maintains relationships with correspondent banks that can provide funds to it on short notice, if needed. Presently, the Bank has arrangements with a correspondent bank for short-term unsecured advances up to $1,000,000. At June 30, 2010 there were no advances on these lines. The Bank has borrowing capacity through its membership in the Federal Home Loan Bank of Atlanta (“FHLB”) subject to the availability of investment securities to pledge as collateral. As of June 30, 2010, the Bank had 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 June 30, 2010, the Bank had no advances outstanding.
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 June 30, 2010:
Commitments to extend credit |
| $ | 1,861,000 |
|
Stand-by letters of credit |
| $ | 761,000 |
|
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 June 30, 2010. There have been no significant changes in our internal controls over financial reporting during the fiscal quarter ended June 30, 2010 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 other material legal proceedings, nor are there any other 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.
Not Applicable
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On June 18, 2010, the holders of Series B Preferred Stock exchanged their shares of preferred stock for shares of common stock at an exchange rate of $0.67 per share. We redeemed 75,000 shares of Series B Preferred Stock and issued an aggregate of 1,239,328 shares of common stock, which included the payment of accrued dividends, to accredited investors in transactions exempt from registration under Section 4(2) of the Securities Act.
Item 3. Defaults Upon Senior Securities
None.
Item 4. (Removed and Reserved)
None.
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.
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.
Date: August 12, 2010 | By: | /s/ William R. Blanton |
|
| William R. Blanton |
|
| Principal Executive Officer |
|
|
|
|
|
|
Date: August 12, 2010 | By: | /s/ Denise Smyth |
|
| Denise Smyth |
|
| Principal Financial and Accounting Officer |
FIRST CENTURY BANCORP.
EXHIBIT INDEX
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. |