UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
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| Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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For the fiscal year ended December 31, 2005 | ||
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OR | ||
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| Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to .
Commission File Number 000-50771
BG Financial Group, Inc. |
(Exact name of registrant as specified in Charter) |
Tennessee |
| 62-1852691 |
(State or other jurisdiction |
| (I.R.S. Employer |
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3095 East Andrew Johnson Highway, Greeneville, Tennessee |
| 37745 |
(Address of principal executive office) |
| (Zip Code) |
Registrant’s telephone number, including area code (423) 636-1555
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.333 par value per share
Indicate by check mark if the registrant is a well-known, seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
Indicate by check mark whether registrant (1) has filed 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 ý No o.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer ý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o. No ý.
The aggregate market value of the registrant’s voting stock held by non-affiliates of the registrant at February 28, 2006 was $34,661,565 million, based upon the average sale price on that date.
DOCUMENTS INCORPORATED BY REFERENCE
Part III – Definitive Proxy Statement involving the election of directors at the annual meeting of shareholders to be held May 25, 2006.
TABLE OF CONTENTS
General
BG Financial Group, Inc. (the “Corporation”) is a one-bank holding company formed as a Tennessee corporation to own the shares of Bank of Greeneville (the “Bank”). The Corporation was incorporated on October 10, 2003, for the purpose of acquiring 100% of the shares of the Bank by means of a share exchange, and becoming a registered bank holding company under the Federal Reserve Act. The share exchange was completed on January 23, 2004. The activities of the Corporation are subject to the supervision of the Board of Governors of the Federal Reserve System (“Federal Reserve Board”). The offices of the Corporation are the same as the principal office of the Bank. The Bank is the only subsidiary of the Corporation.
Bank of Greeneville commenced operations as a state chartered bank on July 9, 2001. The Bank has total assets of approximately $88 million at December 31, 2005. The Bank’s deposit accounts are insured by the FDIC, up to the maximum applicable limits thereof. The Bank is not a member of the Federal Reserve System.
The Bank’s customer base consists primarily of small to medium-sized business retailers, manufacturers, distributors, contractors, professionals, service businesses and local residents. The Bank offers a full range of competitive retail and commercial banking services. The deposit services offered include various types of checking accounts, savings accounts, money market investment accounts, certificates of deposits, and retirement accounts. Lending services include consumer installment loans, various types of mortgage loans, personal lines of credit, home equity loans, credit cards, real estate construction loans, commercial loans to small and medium size businesses and professionals, and letters of credit. The Bank also offers safe deposit boxes of various sizes. The Bank issues VISA and MasterCard credit cards and is a merchant depository for cardholder drafts under both types of credit cards. The Bank offers its customers drive-through banking services at both offices and automated teller machines (“ATMs”). The Bank has trust powers but does not have a trust department.
The Bank is subject to the regulatory authority of the Department of Financial Institutions of the State of Tennessee (“TDFI”) and the Federal Deposit Insurance Corporation (“FDIC”).
The Corporation’s and the Bank’s principal executive offices are both located at 3095 East Andrew Johnson Highway, Greeneville, Tennessee 37745, and its telephone number is (423) 636-1555.
First Community Corporation
First Community Corporation is a bank holding company that commenced operations in 1994. Its principal asset is the capital stock of First Community Bank of East Tennessee in Rogersville, Tennessee (a Tennessee state-chartered bank that began operations in April 1993). In 2000, the Board of Directors of First Community Corporation decided to expand its business into Greene County. After consultation with legal counsel and regulators, and after the services were obtained of J. Robert Grubbs, a long-time Greene County banker, First Community Bank of East Tennessee opened a branch in Greeneville on July 26, 2000.
On July 6, 2001, First Community Bank of East Tennessee sold all its Greeneville branch assets and liabilities, including loans, investments, property, fixed assets, and deposits to the Bank pursuant to a Purchase and Assumption Agreement. The sale occurred at the net book value of the assets and liabilities assumed with an adjustment for any net operating loss or gain incurred by the branch operations.
Market Area and Competition
All phases of the Bank’s business are highly competitive. The Bank is subject to intense competition from various financial institutions and other companies or firms that offer financial services. The Bank competes for deposits with other commercial banks, savings and loan associations, credit unions and issuers of commercial paper and other securities, such as money-market and mutual funds. In making loans, the Bank is expected to compete
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with other commercial banks, savings and loan associations, consumer finance companies, credit unions, leasing companies, and other lenders.
In Greene County as of June 30, 2005, there were 7 banks and 1 savings and loan institution, with at least 25 offices actively engaged in banking activities, including 3 major state-wide financial institutions, with a total of $923 million in deposits. In addition, there are numerous credit unions, finance companies, and other financial services providers.
Employees
At December 31, 2005, the Bank employed 35 persons on a full-time basis, and 7 persons on a part-time basis. The Bank’s employees are not represented by any union or other collective bargaining agreement and the Bank believes its employee relations are satisfactory.
Supervision and Regulation
Bank Holding Company Regulation
The Corporation is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the “Holding Company Act”), and is registered with the Federal Reserve Board. Its banking subsidiaries are subject to restrictions under federal law which limit the transfer of funds by the subsidiary banks to their respective holding companies and nonbanking subsidiaries, whether in the form of loans, extensions of credit, investments, or asset purchases. Such transfers by any subsidiary bank to its holding company or any non-banking subsidiary are limited in amount to 10% of the subsidiary bank’s capital and surplus and, with respect to the Corporation and all such nonbanking subsidiaries, to an aggregate of 20% of such bank’s capital and surplus. Furthermore, such loans and extensions of credit are required to be secured in specified amounts. The Holding Company Act also prohibits, subject to certain exceptions, a bank holding company from engaging in or acquiring direct or indirect control of more than 5% of the voting stock of any company engaged in non banking activities. An exception to this prohibition is for activities expressly found by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto or financial in nature.
As a bank holding company, the Corporation is required to file with the Federal Reserve Board semi-annual reports and such additional information as the Federal Reserve Board may require. The Federal Reserve Board also makes examinations of the Corporation.
According to Federal Reserve Board policy, bank holding companies are expected to act as a source of financial strength to each subsidiary bank and to commit resources to support each such subsidiary. This support may be required at times when a bank holding company may not be able to provide such support. Furthermore, in the event of a loss suffered or anticipated by the FDIC - either as a result of default of a banking or thrift subsidiary of the Corporation or related to FDIC assistance provided to a subsidiary in danger of default - the other banking subsidiaries of the Corporation may be assessed for the FDIC’s loss, subject to certain exceptions.
Various federal and state statutory provisions limit the amount of dividends the subsidiary banks can pay to their holding companies without regulatory approval. The payment of dividends by any bank also may be affected by other factors, such as the maintenance of adequate capital for such subsidiary bank. In addition to the foregoing restrictions, the Federal Reserve Board has the power to prohibit dividends by bank holding companies if their actions constitute unsafe or unsound practices. The Federal Reserve Board has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve Board’s view that a bank holding company experiencing earnings weaknesses should not pay cash dividends that exceed its net income or that could only be funded in ways that weaken the bank holding company’s financial health, such as by borrowing. Furthermore, the TDFI also has authority to prohibit the payment of dividends by a Tennessee bank when it determines such payment to be an unsafe and unsound banking practice.
A bank holding company and its subsidiaries are also prohibited from acquiring any voting shares of, or interest in, any banks located outside of the state in which the operations of the bank holding company’s subsidiaries
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are located, unless the acquisition is specifically authorized by the statutes of the state in which the target is located. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with the extension of credit or provision of any property or service. Thus, an affiliate of a bank holding company may not extend credit, lease or sell property, or furnish any services or fix or vary the consideration for these on the condition that (i) the customer must obtain or provide some additional credit, property or services from or to its bank holding company or subsidiaries thereof or (ii) the customer may not obtain some other credit, property, or services from a competitor, except to the extent reasonable conditions are imposed to assure the soundness of the credit extended.
In approving acquisitions by bank holding companies of banks and companies engaged in the banking-related activities described above, the Federal Reserve Board considers a number of factors, including the expected benefits to the public such as greater convenience, increased competition, or gains in efficiency, as weighed against the risks of possible adverse effects such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices. The Federal Reserve Board is also empowered to differentiate between new activities and activities commenced through the acquisition of a going concern.
The Attorney General of the United States may, within 30 days after approval by the Federal Reserve Board of an acquisition, bring an action challenging such acquisition under the federal antitrust laws, in which case the effectiveness of such approval is stayed pending a final ruling by the courts. Failure of the Attorney General to challenge an acquisition does not, however, exempt the holding company from complying with both state and federal antitrust laws after the acquisition is consummated or immunize the acquisition from future challenge under the anti-monopolization provisions of the Sherman Act.
Capital Guidelines
The Federal Reserve Board has risk based capital guidelines for bank holding companies and member banks. Under the guidelines, the minimum ratio of capital to risk weighted assets (including certain off balance sheet items, such as standby letters of credit) is 8%. To be considered a “well capitalized” bank or bank holding company under the guidelines, a bank or bank holding company must have a total risk based capital ratio in excess of 10%. At December 31, 2005, on a pro forma basis, the Corporation would have been sufficiently capitalized to be considered “well capitalized.”
At least half of the total capital is to be comprised of common equity, retained earnings, and a limited amount of perpetual preferred stock, after subtracting goodwill and certain other adjustments (“Tier I capital”). The remainder may consist of perpetual debt, mandatory convertible debt securities, a limited amount of subordinated debt, other preferred stock not qualifying for Tier I capital, and a limited amount of loan loss reserves (“Tier II capital”). The Bank is subject to similar capital requirements adopted by the FDIC. In addition, the Federal Reserve Board, and the FDIC have adopted a minimum leverage ratio (Tier I capital to total assets) of 3% (or 4% if the bank’s CAMEL rating is below “1”). Generally, banking organizations are expected to operate well above the minimum required capital level of 3% unless they meet certain specified criteria, including that they have the highest regulatory ratings. Most banking organizations are required to maintain a leverage ratio of 3%, plus an additional cushion of at least 1% to 2%. Most community banks are encouraged to maintain a leverage ratio of 6.5% to 7.0%; the Bank’s leverage ratio at December 31, 2005, was 9.62%. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance upon intangible assets.
Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”), failure to meet the capital guidelines could subject a banking institution to a variety of enforcement remedies available to federal regulatory authorities, including the termination of deposit insurance by the FDIC.
Sarbanes-Oxley Act of 2002
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002. This legislation represents a comprehensive revision of laws affecting corporate governance, accounting obligations and corporate reporting. The Sarbanes-Oxley Act is applicable to all companies with equity securities registered, or that file
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reports under, the Securities Exchange Act of 1934. In particular, the act establishes (i) new requirements for audit committees, including independence, expertise and responsibilities; (ii) additional responsibilities regarding financial statements for the chief executive officer and chief financial officer of the reporting company and new requirements for them to certify the accuracy of periodic reports; (iii) new standards for auditors and regulation of audits; (iv) increased disclosure and reporting obligations for the reporting company and its directors and executive officers, including an accelerated time frame for reporting of insider transactions; and (v) new and increased civil and criminal penalties for violations of the federal securities laws. The legislation also established a new accounting oversight board to enforce auditing standards and restrict the scope of services that accounting firms may provide to their public company audit clients.
Because the Corporation’s common stock is registered with the SEC, it is subject to the requirements of this legislation. At the present time, and subject to the final rules and regulations to be adopted and issued by the SEC, management anticipates that the Corporation will incur additional expense as a result of the act but does not expect that the Corporation’s compliance will have a material impact on its business. To the extent that the Corporation has already implemented the requirements of this legislation and the related regulations, compliance has been accomplished with existing Corporation personnel.
The Corporation files periodic reports with the SEC. The public may read and copy any materials the Corporation files with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Information regarding the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding the Corporation that the Corporation files electronically with the SEC. This information may be found at www.sec.gov.
Bank Regulation
The Bank is a Tennessee state-chartered bank and is subject to the regulations of and supervision by the FDIC as well as the TDFI, Tennessee’s state banking authority. The Bank is also subject to various requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of the Bank. In addition to the impact of regulation, commercial banks are affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy.
From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial institutions. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial institutions are frequently made in Congress, in the Tennessee legislature and before various bank regulatory and other professional agencies. The likelihood of any major legislative changes and the impact such changes might have on the Bank are impossible to predict.
General. The Bank, as a Tennessee state chartered bank, is subject to primary supervision, periodic examination and regulation by the Commissioner of the TDFI (“Commissioner”) and the FDIC. If, as a result of an examination of a bank, the FDIC should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of the Bank’s operations are unsatisfactory or that the Bank or its management is violating or has violated any law or regulation, various remedies are available to the FDIC. Such remedies include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the growth of the Bank, to assess civil monetary penalties, to remove officers and directors and ultimately to terminate a Bank’s deposit insurance. The Commissioner has many of the same remedial powers, including the power to take possession of a bank whose capital becomes impaired.
The deposits of the Bank are insured by the FDIC in the manner and to the extent provided by law. For this protection, the Bank pays a semiannual statutory assessment. Although the Bank is not a member of the Federal Reserve System, it is nevertheless subject to certain regulations of the Federal Reserve Board.
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Various requirements and restrictions under the laws of the State of Tennessee and the United States affect the operations of the Bank. State and federal statutes and regulations relate to many aspects of the Bank’s operations, including reserves against deposits, interest rates payable on deposits, loans, investments, mergers and acquisitions, borrowings, dividends, locations of branch offices and capital requirements. Further, the Bank is required to maintain certain levels of capital.
Tennessee law contains limitations on the interest rates that may be charged on various types of loans and restrictions on the nature and amount of loans that may be granted and on the types of investments which may be made. The operations of banks are also affected by various consumer laws and regulations, including those relating to equal credit opportunity and regulation of consumer lending practices. All Tennessee banks must become and remain insured banks under the FDIA. (See 12 U.S.C. §1811, et seq.).
Payment of Dividends. The Bank is subject to the Tennessee Banking Act, which limits a bank’s ability to pay dividends. The payment of dividends by any bank is dependent upon its earnings and financial condition and subject to the statutory power of certain federal and state regulatory agencies to act to prevent what they deem unsafe or unsound banking practices. The payment of dividends could, depending upon the financial condition of the Bank, be deemed to constitute such an unsafe or unsound banking practice. Under Tennessee law, the board of directors of a state bank may not declare dividends in any calendar year that exceeds the total of its retained net income of the preceding two (2) years without the prior approval of the TDFI. The FDIA prohibits a state bank, the deposits of which are insured by the FDIC, from paying dividends if it is in default in the payment of any assessments due the FDIC. The Bank is also subject to the minimum capital requirements of the FDIC which impact the Bank’s ability to pay dividends. If the Bank fails to meet these standards, it may not be able to pay dividends or to accept additional deposits because of regulatory requirements.
If, in the opinion of the applicable federal bank regulatory authority, a depository institution is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the depository institution, could include the payment of dividends), such authority may require that such institution cease and desist from such practice. The federal banking agencies have indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be such an unsafe and unsound banking practice. Moreover, the Federal Reserve Board, the Comptroller of the Currency and the FDIC have issued policy statements which provide that bank holding companies and insured depository institutions generally should only pay dividends out of current operating earnings.
The payment of dividends by the Bank may also be affected or limited by other factors, such as the requirement to maintain adequate capital above regulatory guidelines.
FIRREA. Congress enacted the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”) on August 9, 1989. FIRREA provides that a depository institution insured by the FDIC can be held liable for any loss incurred by, or reasonable expected to be incurred by, the FDIC after August 9, 1989 in connection with (i) the default of a commonly controlled FDIC insured depository institution or (ii) any assistance provided by the FDIC to a commonly controlled FDIC insured depository institution in danger of default. FIRREA provides that certain types of persons affiliated with financial institutions can be fined by the federal regulatory agency having jurisdiction over a depository institution with federal deposit insurance (such as the Bank) up to $1 million per day for each violation of certain regulations related (primarily) to lending to and transactions with executive officers, directors, principal shareholders and the interests of these individuals. Other violations may result in civil money penalties of $5,000 to $30,000 per day or in criminal fines and penalties. In addition, the FDIC has been granted enhanced authority to withdraw or to suspend deposit insurance in certain cases.
FDICIA. The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) which was enacted on December 19, 1991, substantially revised the depository institution regulatory and funding provisions of the FDIA and made revisions to several other federal banking statutes. Among other things, FDICIA requires the federal banking regulators to take “prompt corrective action” in respect of FDIC-insured depository institutions that do not meet minimum capital requirements. FDICIA establishes five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” Under applicable regulations, a FDIC-insured depository institution is defined to be well capitalized if it maintains a Leverage Ratio of at least 5%, a risk adjusted Tier 1 Capital Ratio of at least 6% and a Total Risk-Based Capital Ratio of at least
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10% and is not subject to a directive, order or written agreement to meet and maintain specific capital levels. An insured depository institution is defined to be adequately capitalized if it meets all of its minimum capital requirements as described above. In addition, an insured depository institution will be considered undercapitalized if it fails to meet any minimum required measure, significantly undercapitalized if it is significantly below such measure and critically undercapitalized if it fails to maintain a level of tangible equity equal to not less than 2% of total assets. An insured depository institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating.
The capital-based prompt corrective action provision of FDICIA and their implementing regulations apply to FDIC-insured depository institutions and are not directly applicable to holding companies which control such institutions. However, the Federal Reserve Board has indicated that, in regulating bank holding companies, it will take appropriate action at the holding company level based on an assessment of the effectiveness of supervisory actions imposed upon subsidiary depository institutions pursuant to such provisions and regulations.
FDICIA generally prohibits an FDIC-insured depository institution from making any capital distribution (including payment of dividends) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to restrictions on borrowing from the Federal Reserve System. In addition, undercapitalized depository institutions are subject to growth limitations and are required to submit capital restoration plans. A depository institution’s holding company must guarantee the capital plan, up to an amount equal to the lesser of 5% of the depository institution’s assets at the time it becomes undercapitalized or the amount of the capital deficiency when the institution fails to comply with the plan. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized.
Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. Critically undercapitalized depository institutions are subject to appointment of a receiver or conservator generally within 90 days of the date on which they became critically undercapitalized.
The Bank believes that at December 31, 2005, the Bank was well capitalized under the criteria discussed above.
FDICIA contains numerous other provisions, including accounting, audit and reporting requirements, termination of the “too big to fail” doctrine except in special cases, limitations on the FDIC’s payment of deposits at foreign branches, new regulatory standards in such areas as asset quality, earnings and compensation and revised regulatory standards for, among other things, powers of state banks, real estate lending and capital adequacy. FDICIA also requires that a depository institution provide 90 days prior notice of the closing of any branches.
Various other legislation, including proposals to revise the bank regulatory system and to limit the investments that a depository institution may make with insured funds, is from time to time introduced in Congress. The TDFI and FDIC will examine the Bank periodically for compliance with various regulatory requirements. Such examinations, however, are for the protection of the Bank Insurance Fund (“BIF”) and for depositors, and not for the protection of investors and shareholders.
Interstate Act. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Interstate Act”), which was enacted on September 29, 1994, among other things and subject to certain conditions and exceptions, permits on an interstate basis (i) bank holding company acquisitions commencing one year after enactment of banks of a minimum age of up to five years as established by state law in any state, (ii) mergers of national and state banks after May 31, 1997 unless the home state of either bank has opted out of the interstate bank merger provision, (iii) branching de novo by national and state banks if the host state has opted-in to this provision of the Interstate Act, and (iv) certain bank agency activities after one year after enactment. The Interstate Act contains a 30% intrastate deposit cap, except for the initial acquisition in the state, restriction that applies to certain interstate acquisitions unless a different intrastate cap has been adopted by the applicable state pursuant to the provisions of the Interstate Act and a 10% national deposit cap restriction. Tennessee has opted-in to the Interstate
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Act. Management cannot predict the extent to which the business of the Bank may be affected. Tennessee has also adopted legislation allowing banks to acquire branches across state lines subject to certain conditions, including the availability of similar legislation in the other state.
Brokered Deposits and Pass-Through Insurance. The FDIC has adopted regulations under FDICIA governing the receipt of brokered deposits and pass-through insurance. Under the regulations, a bank cannot accept or rollover or renew brokered deposits unless (i) it is well capitalized or (ii) it is adequately capitalized and receives a waiver from the FDIC. A bank that cannot receive brokered deposits also cannot offer “pass-through” insurance on certain employee benefit accounts. Whether or not it has obtained such a waiver, an adequately capitalized bank may not pay an interest rate on any deposits in excess of 75 basis points over certain index prevailing market rates specified by regulation. There are no such restrictions on a bank that is well capitalized. Because it believes that the Bank was well capitalized as of December 31, 2005, the Bank believes the brokered deposits regulation will have no material effect on the funding or liquidity of the Bank.
FDIC Insurance Premiums. The Bank is required to pay semiannual FDIC deposit insurance assessments. As required by FDICIA, the FDIC adopted a risk-based premium schedule which increased the assessment rates for most FDIC-insured depository institutions. Under the schedule, the premiums initially range from $.0 to $.27 for every $100 of deposits. Each financial institution is assigned to one of three capital groups - well capitalized, adequately capitalized or undercapitalized - and further assigned to one of three subgroups within a capital group, on the basis of supervisory evaluations by the institution’s primary federal and, if applicable, state supervisors and other information relevant to the institution’s financial condition and the risk posed to the applicable FDIC deposit insurance fund. The actual assessment rate applicable to a particular institution will, therefore, depend in part upon the risk assessment classification so assigned to the institution by the FDIC. Recently the FDIC has passed a resolution to lower premiums.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by a federal bank regulatory agency.
Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act adopted in November 1999 has been referred to as the most important banking bill in over 60 years. The most significant provisions ratify new powers for banks and bank holding companies, especially in the areas of securities and insurance. The Act also includes requirements regarding the privacy and protection of customer information held by financial institutions, as well as many other providers of financial services. There are provisions providing for functional regulation of the various services provided by institutions among different regulators. There are other provisions which limit the future expansion of unitary thrift holding companies which now prevent companies like Wal-Mart from owning a thrift institution. Finally, among many other sections of the Act, there is some relief for small banks from the regulatory burden of the Community Reinvestment Act. The regulatory agencies have been adopting many new regulations to implement the Act.
USA Patriot Act. On October 26, 2001, the President signed the USA PATRIOT Act of 2001 into law. This act contains the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (the “IMLAFA”). The IMLAFA substantially broadens existing anti-money laundering legislation and the extraterritorial jurisdiction of the United States, imposes new compliance and due diligence obligations, creates new crimes and penalties, compels the production of documents located both inside and outside the United States, including those of foreign institutions that have a correspondent relationship in the United States, and clarifies the safe harbor from civil liability to customers. The U.S. Treasury Department has issued a number of regulations implementing the USA PATRIOT Act that apply certain of its requirements to financial institutions such as our banking and broker-dealer subsidiaries. The regulations impose new obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing. The Treasury Department is expected to issue a number of additional regulations which will further clarify the USA PATRIOT Act’s requirements.
The IMLAFA requires all “financial institutions,” as defined, to establish anti-money laundering compliance and due diligence programs no later than April 2003. Such programs must include, among other things, adequate policies, the designation of a compliance officer, employee training programs, and an independent audit
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function to review and test the program. The Bank has established anti-money laundering compliance and due diligence programs to comply with IMLAFA.
Capital Requirements. The federal regulatory agencies use capital adequacy guidelines in their examination and regulation of banks. If the capital falls below the minimum levels established by these guidelines, the Bank may (1) be denied approval to acquire or establish additional banks or non-bank businesses or to open facilities, or (2) be subject to other regulatory restrictions or actions.
Banking organizations historically were required to maintain a minimum ratio of primary capital to total assets of 5.5%, and a minimum ratio of total capital to total assets of 6.0%. The primary and total capital ratio requirements have been replaced by the adoption of risk-based and leverage capital requirements.
Risk-Based Capital Requirements
The FDIC adopted risk-based capital guidelines for banks effective after December 31, 1990. The risk-based capital guidelines are designed to make regulatory capital requirements more sensitive to differences in risk profile among banks to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. The ratios are minimums. The guidelines require all federally regulated banks to maintain a minimum risk-based total capital ratio of 8%, of which at least 4% must be Tier I capital (see the description of Tier I capital and Tier II capital below).
A banking organization’s qualifying total capital consists of two components: Tier I capital (core capital) and Tier II capital (supplementary capital). Tier I capital is an amount equal to the sum of: (i) common shareholders’ equity (including adjustments for any surplus or deficit); (ii) non-cumulative perpetual preferred stock; and (iii) the company’s minority interests in the equity accounts of consolidated subsidiaries. Intangible assets generally must be deducted from Tier I capital, subject to limited exceptions for goodwill arising from certain supervisory acquisitions. Other intangible assets may be included in an amount up to 25% of Tier I capital, provided that the asset meets each of the following criteria: (i) the asset must be able to be separated and sold apart from the banking organization or the bulk of its assets; (ii) the market value of the asset must be established on an annual basis through an identifiable stream of cash flows and there must be a high degree of certainty that the asset will hold this market value notwithstanding the future prospects of the banking organization; and (iii) the banking organization must demonstrate that a liquid market exists for the asset. Intangible assets in excess of 25% of Tier I capital generally are deducted from a banking organization’s regulatory capital. At least 50% of the banking organization’s total regulatory capital must consist of Tier I capital.
Tier II capital is an amount equal to the sum of (i) the allowance for possible credit losses in an amount up to 1.25% of risk-weighted assets; (ii) cumulative perpetual preferred stock with an original maturity of 20 years or more and related surplus; (iii) hybrid capital instruments (instruments with characteristics of both debt and equity), perpetual debt and mandatory convertible debt securities; and (iv) in an amount up to 50% of Tier I capital, eligible term subordinated debt and intermediate-term preferred stock with an original maturity of five years or more, including related surplus. The inclusion of the foregoing elements of Tier II capital are subject to certain requirements and limitations of the FDIC.
Investments in unconsolidated banking and finance subsidiaries, investments in securities subsidiaries and reciprocal holdings of capital instruments must be deducted from capital. The federal banking regulators may require other deductions on a case-by-case basis.
Under the risk-weighted capital guidelines, balance sheets assets and certain off-balance sheet items, such as standby letters of credit, are assigned to one of four risk weight categories (0%, 20%, 50%, or 100%) according to the nature of the asset and its collateral or the identity of any obligor or guarantor. For example, cash is assigned to the 0% risk category, while loans secured by one-to-four family residences are assigned to the 50% risk category. The aggregate amount of such asset and off-balance sheet items in each risk category is adjusted by the risk weight assigned to that category to determine weighted values, which are added together to determine the total risk-weighted assets for the banking organization. Accordingly, an asset, such as a commercial loan, which is
8
assigned to a 100% risk category is included in risk-weighted assets at its nominal face value, whereas a loan secured by a single-family home mortgage is included at only 50% of its nominal face value. The application ratios are equal to capital, as determined, divided by risk-weighted assets, as determined.
Leverage Capital Requirements
The FDIC has a regulation requiring certain banking organizations to maintain additional capital of 1% to 2% above a 3% minimum Tier I Leverage Capital Ratio (Tier I capital, less intangible assets, to total assets). In order for an institution to operate at or near the minimum Tier I leverage capital requirement of 3%, the FDIC expects that such institution would have well-diversified risk, no undue rate risk exposure, excellent asset quality, high liquidity and good earnings. In general, the bank would have to be considered a strong banking organization, rated in the highest category under the bank rating system and have no significant plans for expansion. Higher Tier I leverage capital ratios of up to 5% will generally be required if all of the above characteristics are not exhibited, or if the institution is undertaking expansion, seeking to engage in new activities, or otherwise faces unusual or abnormal risks.
The FDIC rule provides that institutions not in compliance with the regulation are expected to be operating in compliance with a capital plan or agreement with the regulator. If they do not do so, they are deemed to be engaging in an unsafe and unsound practice and may be subject to enforcement action. In addition, failure by an institution to maintain capital of at least 2% of assets constitutes an unsafe and unsound practice and may subject the institution to enforcement action. An institution=s failure to maintain capital of at least 2% of assets constitutes an unsafe and unsound condition justifying termination of FDIC insurance.
Depositor Preference. The Omnibus Budget Reconciliation Act of 1993 provides that deposits and certain claims for administrative expenses and employee compensation against an insured depositary institution would be afforded a priority over other general unsecured claims against such an institution, including federal funds and letters of credit, in the “liquidation or other resolution” of such an institution by any receiver.
Effect of Governmental Policies. The Bank is affected by the policies of regulatory authorities, including the Federal Reserve System. An important function of the Federal Reserve System is to regulate the national money supply. Among the instruments of monetary policy used by the Federal Reserve are: purchases and sales of U.S. Government securities in the marketplace; changes in the discount rate, which is the rate any depository institution must pay to borrow from the Federal Reserve; and changes in the reserve requirements of depository institutions. These instruments are effective in influencing economic and monetary growth, interest rate levels and inflation.
The monetary policies of the Federal Reserve System and other governmental policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. Because of changing conditions in the national economy and in the money market, as well as the result of actions by monetary and fiscal authorities, it is not possible to predict with certainty future changes in interest rates, deposit levels, loan demand or the business and earnings of the Bank or whether the changing economic conditions will have a positive or negative effect on operations and earnings.
Bills are pending before the United States Congress and the Tennessee General Assembly which could affect the business of the Bank, and there are indications that other similar bills may be introduced in the future. It cannot be predicted whether or in what form any of these proposals will be adopted or the extent to which the business of the Bank may be affected thereby.
Investment Policy
The objective of the Bank’s investment policy is to invest funds not otherwise needed to meet the loan demand of its market area to earn the maximum return for the Bank, yet still maintain sufficient liquidity to meet fluctuations in the Bank’s loan demand and deposit structure. In doing so, the Bank balances the market and credit risks against the potential investment return, makes investments compatible with the pledge requirements of the Bank’s deposits of public funds, maintains compliance with regulatory investment requirements, and assists the various public entities with their financing needs. The asset liability and investment committee has full authority
9
over the investment portfolio and makes decisions on purchases and sales of securities. The entire portfolio, along with all investment transactions occurring since the previous Board of Director’s meeting, is reviewed by the Board at its next monthly meeting. The investment policy allows portfolio holdings to include short-term securities purchased to provide the Bank’s needed liquidity and longer term securities purchased to generate level income for the Bank over periods of interest rate fluctuations.
Loan Policy
All lending activities of the Bank are under the direct supervision and control of the full Board of Directors and Douglas P. Archbold, Chief Credit Officer. The Board of Directors enforces loan authorizations, decides on loans exceeding such limits, services all requests for officer credits to the extent allowable under current laws and regulations, administers all problem credits, and determines the allocation of funds for each lending division. The Bank’s established maximum loan volume to deposits is 100%. The loan portfolio consists primarily of real estate, commercial, farming and installment loans. Commercial loans consist of either real estate loans or term loans. Maturity of term loans is normally limited to five to seven years. Conventional real estate loans may be made up to 85% of the appraised value or purchase cost of the real estate for no more than a thirty year term. Installment loans are based on the earning capacity and vocational stability of the borrower.
The full Board makes a monthly review of loans which are 30 days or more past due and the full Board of Directors makes a monthly review of loans which are 45 days or more past due.
Management of the Bank periodically reviews the loan portfolio, particularly nonaccrual and renegotiated loans. The review may result in a determination that a loan should be placed on a nonaccrual status for income recognition. In addition, to the extent that management identifies potential losses in the loan portfolio, it reduces the book value of such loans, through charge-offs, to their estimated collectible value. The Bank’s policy is that accrual of interest is discontinued on a loan when management of the Bank determines upon consideration of economic and business factors affecting collection efforts that collection of interest is doubtful. The Bank maintains a specific reserve for impaired loans.
When a loan is classified as nonaccrual, any unpaid interest is reversed against current income. Interest is included in income thereafter only to the extent received in cash. The loan remains in a nonaccrual classification until such time as the loan is brought current, when it may be returned to accrual classification. When principal or interest on a nonaccrual loan is brought current, if in management’s opinion future payments are questionable, the loan would remain classified as nonaccrual. After a nonaccrual or renegotiated loan is charged off, any subsequent payments of either interest or principal are applied first to any remaining balance outstanding, then to recoveries and lastly to income.
The Bank had no tax-exempt loans during the period ended December 31, 2005. The Bank had no loans outstanding to foreign borrowers at December 31, 2005. The Bank’s underwriting guidelines are applied to four major categories of loans, commercial and industrial, consumer, agricultural and real estate which includes residential, construction and development and certain other real estate loans. The Bank requires its loan officers and Board to consider the borrower’s character, the borrower’s financial condition as reflected in current financial statements, the borrower’s management capability, the borrower’s industry and the economic environment in which the loan will be repaid. Before approving a loan, the loan officer or Board must determine that the borrower is basically honest and creditworthy, determine that the borrower is a capable manager, understand the specific purpose of the loan, understand the source and plan of repayment, determine that the purpose, plan and source of repayment as well as collateral are acceptable, reasonable and practical given the normal framework within which the borrower operates.
Credit Risk Management and Reserve for Loan Losses
Credit risk and exposure to loss are inherent parts of the banking business. Management seeks to manage and minimize these risks through its loan and investment policies and loan review procedures. Management establishes and continually reviews lending and investment criteria and approval procedures that it believes reflect the risk sensitive nature of the Bank. The loan review procedures are set to monitor adherence to the established criteria and to ensure that on a continuing basis such standards are enforced and maintained. Management’s
10
objective in establishing lending and investment standards is to manage the risk of loss and provide for income generation through pricing policies.
The loan portfolio is regularly reviewed and management determines the amount of loans to be charged-off. In addition, such factors as the Bank’s previous loan loss experience, prevailing and anticipated economic conditions, industry concentrations and the overall quality of the loan portfolio are considered. While management uses available information to recognize losses on loans and real estate owned, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowances for losses on loans and real estate owned. Such agencies may require the Bank to recognize additions to the allowances based on their judgments about information available at the time of their examinations. In addition, any loan or portion thereof which is classified as a “loss” by regulatory examiners is charged-off.
Capital Resources/Liquidity
Liquidity. Of primary importance to depositors, creditors and regulators is the ability to have readily available funds sufficient to repay fully maturing liabilities. The Bank’s liquidity, represented by cash and cash due from banks, is a result of its operating, investing and financing activities. In order to insure funds are available at all times, the Bank devotes resources to projecting on a monthly basis the amount of funds which will be required and maintains relationships with a diversified customer base so funds are accessible. Liquidity requirements can also be met through short-term borrowings or the disposition of short-term assets which are generally matched to correspond to the maturity of liabilities.
The Bank has a formal liquidity policy whereby management considers several liquidity ratios on a monthly basis to determine the adequacy of liquidity. In the opinion of management, its liquidity levels are considered adequate. The Bank is subject to general FDIC guidelines which do not require a minimum level of liquidity. Management believes its liquidity ratios meet or exceed these guidelines. Management does not know of any trends or demands which are reasonably likely to result in liquidity increasing or decreasing in any material manner.
Impact of Inflation and Changing Prices. The financial statements and related financial data presented herein have been prepared in accordance with U.S. generally accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time and due to inflation. The impact of inflation on operations of the Bank is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of the Bank are monetary in nature. As a result, interest rates have a more significant impact on the Bank’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services.
Capital Adequacy
Capital adequacy refers to the level of capital required to sustain asset growth over time and to absorb losses. The objective of the Bank’s management is to maintain a level of capitalization that is sufficient to take advantage of profitable growth opportunities while meeting regulatory requirements. This is achieved by improving profitability through effectively allocating resources to more profitable businesses, improving asset quality, strengthening service quality, and streamlining costs. The primary measures used by management to monitor the results of these efforts are the ratios of average equity to average assets, average tangible equity to average tangible assets, and average equity to net loans.
The Federal Reserve Board has adopted capital guidelines governing the activities of bank holding companies. These guidelines require the maintenance of an amount of capital based on risk-adjusted assets so that categories of assets with potentially higher credit risk will require more capital backing than assets with lower risk. In addition, banks and bank holding companies are required to maintain capital to support, on a risk-adjusted basis, certain off-balance sheet activities such as loan commitments.
11
The capital guidelines classify capital into two tiers, referred to as Tier I and Tier II. Under risk-based capital requirements, total capital consists of Tier I capital which is generally common stockholders’ equity less goodwill and Tier II capital which is primarily a portion of the allowance for loan losses and certain qualifying debt instruments. In determining risk-based capital requirements, assets are assigned risk-weights of 0% to 100%, depending primarily on the regulatory assigned levels of credit risk associated with such assets. Off-balance sheet items are considered in the calculation of risk-adjusted assets through conversion factors established by the regulators. The framework for calculating risk-based capital requires banks and bank holding companies to meet the regulatory minimums of 4% Tier I and 8% total risk-based capital. In 1990 regulators added a leveraged computation to the capital requirements, comparing Tier I capital to total average assets less goodwill.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) established five capital categories for banks and bank holding companies. The bank regulators adopted regulations defining these five capital categories in September 1992. Under these new regulations each bank is classified into one of the five categories based on its level of risk-based capital as measured by Tier I capital, total risk-based capital, and Tier I leverage ratios and its supervisory ratings.
The following table lists the five categories of capital and each of the minimum requirements for the three risk-based capital ratios.
|
| Total Risk-Based |
| Tier I Risk-Based |
| Leverage Ratio |
|
|
|
|
|
|
|
|
|
Well-capitalized |
| 10% or above |
| 6% or above |
| 5% or above |
|
|
|
|
|
|
|
|
|
Adequately capitalized |
| 8% or above |
| 4% or above |
| 4% or above |
|
|
|
|
|
|
|
|
|
Undercapitalized |
| Less than 8% |
| Less than 4% |
| Less than 4% |
|
|
|
|
|
|
|
|
|
Significantly undercapitalized |
| Less than 6% |
| Less than 3% |
| Less than 3% |
|
|
|
|
|
|
|
|
|
Critically undercapitalized |
| — |
| — |
| 2% or less |
|
Investing in our common stock involves various risks which are particular to us, our bank, our industry and our market area. Several risk factors regarding investing in our common stock are discussed below. This listing should not be considered as all-inclusive. If any of the following risks were to occur, we may not be able to conduct our business as currently planned and our financial condition or operating results could be negatively impacted. These matters could cause the trading price of our common stock to decline in future periods.
We are geographically concentrated in the Greeneville, Tennessee, and changes in local economic conditions impact our profitability.
We operate primarily in Greeneville, Tennessee, and substantially all of our loan customers and most of our deposit and other customers live or have operations in Greeneville. Accordingly, our success significantly depends upon the growth in population, income levels, deposits and housing starts in Greeneville, along with the continued attraction of business ventures to the area. Our profitability is impacted by the changes in general economic conditions in this market. Additionally, unfavorable local or national economic conditions could reduce our growth rate, affect the ability of our customers to repay their loans to us and generally affect our financial condition and results of operations.
We are less able than a larger institution to spread the risks of unfavorable local economic conditions across a large number of diversified economies. Moreover, we cannot give any assurance that we will benefit from any market growth or favorable economic conditions in our primary market areas if they do occur.
12
Our continued growth may require the need for additional capital and further regulatory approvals which, if not obtained, could adversely impact our profitability and implementation of our current business plan.
To continue to grow, we will need to provide sufficient capital to the Corporation through earnings generation, additional equity offerings or borrowed funds or any combination of these sources of funds. Should we incur indebtedness, we are required to obtain certain regulatory approvals beforehand. Should our growth exceed our expectations, we may need to raise additional capital over our projected capital needs. However, our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we cannot assure our ability to raise additional capital if needed on terms acceptable to us. If we cannot raise additional capital when needed, our ability to further expand and grow our operations could be materially impaired. Additionally, our current plan involves increasing our branch network, which will require capital expenditures. Our expansion efforts may also require certain regulatory approvals. Should we not be able to obtain such approvals or otherwise not be able to grow our asset base, our ability to attain our long-term profitability goals will be more difficult.
If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings will decrease.
If loan customers with significant loan balances fail to repay their loans according to the terms of these loans, our earnings would suffer. We make various assumptions and judgments about the collectibility of our loan portfolio, including the creditworthiness of our borrowers and the value of any collateral securing the repayment of our loans. We maintain an allowance for loan losses in an attempt to cover the inherent risks associated with lending. In determining the size of this allowance, we rely on an analysis of our loan portfolio based on volume and types of loans, internal loan classifications, trends in classifications, volume and trends in delinquencies, nonaccruals and charge-offs, national and local economic conditions, other factors and other pertinent information. Because we are a relatively young organization, our allowance estimation may be less reflective of our historical loss experience than a more mature organization. If our assumptions are inaccurate, our current allowance may not be sufficient to cover potential loan losses, and additional provisions may be necessary which would decrease our earnings.
In addition, federal and state regulators periodically review our loan portfolio and may require us to increase our allowance for loan losses or recognize loan charge-offs. Their conclusions about the quality of our loan portfolio may be different than ours. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory agencies could have a negative effect on our operating results.
Fluctuations in interest rates could reduce our profitability.
Changes in interest rates may affect our level of interest income, the primary component of our gross revenue, as well as the level of our interest expense. Interest rate fluctuations are caused by many factors which, for the most part, are not under our direct control. For example, national monetary policy plays a significant role in the determination of interest rates. Additionally, competitor pricing and the resulting negotiations that occur with our customers also impact the rates we collect on loans and the rates we pay on deposits.
As interest rates change, we expect that we will periodically experience “gaps” in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. In either event, if market interest rates should move contrary to our position, this “gap” may work against us, and our earnings may be negatively affected.
Changes in the level of interest rates also may negatively affect our ability to originate real estate loans, the value of our assets and our ability to realize gains from the sale of our assets, all of which ultimately affect our earnings. A decline in the market value of our assets may limit our ability to borrow additional funds. As a result, we could be required to sell some of our loans and investments under adverse market conditions, upon terms that are not favorable to us, in order to maintain our liquidity. If those sales are made at prices lower than the amortized costs of the investments, we will incur losses.
13
The Corporation could sustain losses if its asset quality declines.
The Corporation’s earnings are affected by the Bank’s ability to properly originate, underwrite and service loans. The Corporation could sustain losses if it incorrectly assesses the creditworthiness of its borrowers or fails to detect or respond to deterioration in asset quality in a timely manner. Problems with asset quality could cause the Bank’s interest income and net interest margin to decrease and its provisions for loan losses to increase, which could adversely affect the Corporation’s results of operations and financial condition.
Loss of our senior executive officers or other key employees could impair our relationship with our customers and adversely affect our business.
We have assembled a senior management team which has a substantial background and experience in banking and financial services in the Greeneville market. Loss of these key personnel could negatively impact our earnings because of their skills, customer relationships and/or the potential difficulty of promptly replacing them.
Competition with other banking institutions could adversely affect our profitability.
A number of banking institutions in the Greeneville market have higher lending limits, more banking offices, and a larger market share. In addition, our asset management division competes with numerous brokerage firms and mutual fund companies which are also much larger. In some respects, this may place these competitors in a competitive advantage, although many of our customers have selected us because of service quality concerns at the larger enterprises. This competition may limit or reduce our profitability, reduce our growth and adversely affect our results of operations and financial condition.
Even though the Corporation’s common stock is currently traded on a local basis, the trading volume in its common stock has been thin and the sale of substantial amounts of the Corporation’s common stock in the public market could depress the price of its common stock.
The Corporation cannot say with any certainty when a more active and liquid trading market for its common stock will develop or be sustained. Because of this, the Corporation’s shareholders may not be able to sell their shares at the volumes, prices, or times that they desire.
The Corporation cannot predict the effect, if any, that future sales of its common stock in the market, or availability of shares of its common stock for sale in the market, will have on the market price of the Corporation’s common stock. The Corporation, therefore, can give no assurance that sales of substantial amounts of its common stock in the market, or the potential for large amounts of sales in the market, would not cause the price of its common stock to decline or impair its ability to raise capital through sales of its common stock.
The market price of the Corporation’s common stock may fluctuate in the future, and these fluctuations may be unrelated to its performance. General market price declines or overall market volatility in the future could adversely affect the price of our common stock, and the current market price may not be indicative of future market prices.
The Corporation may issue additional common stock or other equity securities in the future which could dilute the ownership interest of existing shareholders.
In order to maintain its capital at desired levels or required regulatory levels, or to fund future growth, the Corporation’s board of directors may decide from time to time to issue additional shares of common stock, or securities convertible into, exchangeable for or representing rights to acquire shares of its common stock. The sale of these shares may significantly dilute the Corporation’s shareholders ownership interest as a shareholder and the per share book value of its common stock. New investors in the future may also have rights, preferences and privileges senior to its current shareholders which may adversely impact its current shareholders.
14
The Corporation’s ability to declare and pay dividends is limited by law and it may be unable to pay future dividends.
The Corporation’s ability to pay dividends is derived from the income of the Bank. The Bank’s ability to declare and pay dividends is limited by its obligations to maintain sufficient capital and by other general restrictions on its dividends that are applicable to banks that are regulated by the FDIC and the Department of Financial Institutions. In addition, the FRB may impose restrictions on the Corporation’s ability to pay dividends on its common stock. As a result, the Corporation cannot assure its shareholders that it will declare or pay dividends on shares of its common stock in the future.
Liquidity needs could adversely affect the Corporation’s results of operations and financial condition.
The Corporation relies on dividends from the Bank as its primary source of funds. The primary source of funds of the Bank are customer deposits and loan repayments. While scheduled loan repayments are a relatively stable source of funds, they are subject to the ability of borrowers to repay the loans. The ability of borrowers to repay loans can be adversely affected by a number of factors, including changes in economic conditions, adverse trends or events affecting business industry groups, reductions in real estate values or markets, business closings or lay-offs, inclement weather, natural disasters and international instability. Additionally, deposit levels may be affected by a number of factors, including rates paid by competitors, general interest rate levels, returns available to customers on alternative investments and general economic conditions. Accordingly, the Bank may be required from time to time to rely on secondary sources of liquidity to meet withdrawal demands or otherwise fund operations. Such sources include Federal Home Loan Bank advances and federal funds lines of credit from correspondent banks. While the Bank believes that these sources are currently adequate, there can be no assurance they will be sufficient to meet future liquidity demands. The Bank may be required to slow or discontinue loan growth, capital expenditures or other investments or liquidate assets should such sources not be adequate.
Our business is dependent on technology, and an inability to invest in technological improvements may adversely affect our results of operations and financial condition.
The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. We have made significant investments in data processing, management information systems and internet banking accessibility. Our future success will depend in part upon our ability to create additional efficiencies in our operations through the use of technology, particularly in light of our past and projected growth strategy. Many of our competitors have substantially greater resources to invest in technological improvements. We cannot make assurances that our technological improvements will increase our operational efficiency or that we will be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
The main office of the Corporation is located at 3095 East Andrew Johnson Highway, Greeneville, Greene County, Tennessee, which is also the main office of the Bank. This location is a 2.66 acre lot, on which there is a fully operational modular bank unit. A full service branch banking office of the Bank is located at 506 Asheville Highway, Greeneville, Greene County, Tennessee. Both locations are centrally located and in high traffic/exposure areas. Automatic teller machines and overnight “deposit drops” are positioned to serve the Bank’s clients. Additional branches may be established as market opportunities surface
15
To the best of the Corporation’s knowledge, there are no pending legal proceedings, other than routine litigation incidental to the business, to which the Corporation or the Bank is a party or of which any of the Corporation’s or the Bank’s property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter of 2005 through the solicitation of proxies or otherwise.
16
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
The common stock of the Corporation is not traded through an organized exchange nor is there a known active trading market. The number of shareholders of record at December 31, 2005 was 1,610. Holders of the Corporation’s common stock are entitled to receive dividends when declared by the Board of Directors out of funds legally available. Dividends will be affected by other factors including applicable government regulations and policies. The following table shows the quarterly range of high and low sale prices for the Corporation’s stock during the fiscal years 2005 and 2004. These sale prices represent known transactions and do not necessarily represent all trading transactions for the periods.
Year |
|
|
| High |
| Low |
| ||
|
|
|
|
|
|
|
| ||
2004: |
| First Quarter |
| $ | 16.00 |
| $ | 15.00 |
|
|
| Second Quarter |
| $ | 17.00 |
| $ | 16.00 |
|
|
| Third Quarter |
| $ | 17.00 |
| $ | 15.00 |
|
|
| Fourth Quarter |
| $ | 18.00 |
| $ | 15.00 |
|
|
|
|
|
|
|
|
| ||
2005: |
| First Quarter |
| $ | 19.00 |
| $ | 14.00 |
|
|
| Second Quarter |
| $ | 19.00 |
| $ | 16.00 |
|
|
| Third Quarter |
| $ | 17.00 |
| $ | 14.00 |
|
|
| Fourth Quarter |
| $ | 16.00 |
| $ | 15.00 |
|
Dividends
The payment of cash dividends is subject to the discretion of the Corporation’s Board of Directors and the Bank’s ability to pay dividends. The Bank’s ability to pay dividends is restricted by applicable regulatory requirements. For more information on these restrictions, please see PART I, ITEM 1 “DESCRIPTION OF BUSINESS - Payment of Dividends”. No assurances can be given that any dividend will be declared or, if declared, what the amount of such dividend would be or whether such dividends would continue in future periods.
Securities Authorized for Issuance Under Equity Compensation Plans
The Bank issued stock option agreements to certain officers and employees (“Options”), at various times beginning on July 16, 2001. These Options were not approved by the shareholders, as such approval is not necessary for these non-qualified option agreements. Upon consummation of the Share Exchange, the Corporation became party to these options issued by the Bank.
The following table reflects the number of shares to be issued upon the exercise of options granted under the Option agreements, the weighted-average exercise price of all such options, and the total number of shares of common stock reserved for issuance upon the exercise of authorized, not-yet-granted options as of December 31, 2005:
17
Equity Compensation Plan Information
Plan Category |
| # of Securities to be |
| Weighted-average |
| # of Equity Securities |
| |
Equity Compensation Plans Approved by Security Holders |
| — |
| — |
| — |
| |
Equity Compensation Plans Not Approved by Security Holders |
| 242,629 |
| $ | 5.12 |
| 73,700 |
|
Total |
| 242,629 |
| $ | 5.12 |
| 73,700 |
|
The maximum number of shares of the Corporation’s common stock available for issuance pursuant to stock options is 375,000 shares. As of December 31, 2005 the maximum number of shares available for future stock option grants is 73,700 shares. The option exercise price is equal to the fair market value of the Corporation’s common stock at the date of the grant. The options expire on the tenth anniversary of the date of the option. In anticipation of adopting Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment, the Corporation elected to immediately vest all remaining stock options during 2005 to avoid the recognition of compensation costs in the consolidated statements of income in future periods. Proceeds received by the Corporation from exercises of the stock options are credited to common stock and additional paid-in capital.
Recent Sales of Unregistered Securities
In July 2001, the Bank issued 750,000 shares of its common stock in an initial offering. This sale was exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 3. Since its initial offering, neither the Bank nor the Corporation has sold any additional shares of its common stock, except as follows:
• On December 31, 2002, J. Robert Grubbs, exercised the option to purchase 30,000 shares of common stock at an exercise price of $3.33 per share. On December 31, 2003, J. Robert Grubbs, Don Waddell and Julia Hawk exercised the option to purchase 3,175, 4,500 and 3,000 shares of common stock at an exercise price of $3.33 per share, respectively. On December 31, 2004, Don Waddell, Julia Hawk and Eric Scott exercised the option to purchase 2,000, 3,000 and 6,000 shares of common stock at an exercise price of $3.33 per share, respectively. On July 6, 2005, Julia Hawk exercised the option to purchase 1,000 shares of common stock at an exercise price of $3.33 per share. On July 8, 2005, Julia Hawk exercised the option to purchase 900 shares of common stock at an exercise price of $3.33 per share. On July 12, 2005, Julia Hawk exercised the option to purchase 1,334 shares of common stock at an exercise price of $3.33 per share. On July 22, 2005, Julia Hawk exercised the option to purchase 162 shares of common stock at an exercise price of $3.33 per share. On August 23, 2005, Julia Hawk exercised the option to purchase 600 shares of common stock at an exercise price of $3.33 per share. The Corporation relied on the exemption provided by Section 4(2) of the Securities Act of 1933 for each of these transactions.
Purchases of Equity Securities by the Registrant and Affiliated Purchasers
The Corporation made no repurchases of its equity securities, and no Affiliated Purchasers (as defined in Rule 10b - 18(a)(3) under the Securities Exchange Act of 1934) purchased any shares of the Corporation’s equity securities during the fourth quarter of the fiscal year ended December 31, 2005.
18
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the years ended December 31, 2005, 2004, 2003, 2002, and 2001 should be read in conjunction with the financial statements included in Item 8:
|
| 2005 |
| 2004 |
| 2003 |
| 2002 |
| 2001 |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Income Statement Data: |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total interest income |
| $ | 5,499,510 |
| $ | 5,498,717 |
| $ | 4,308,390 |
| $ | 2,598,782 |
| $ | 658,849 |
| ||||||||
Total interest expense |
| 2,118,949 |
| 1,576,080 |
| 1,216,359 |
| 790,959 |
| 222,539 |
| |||||||||||||
Net interest income |
| 3,380,561 |
| 3,922,637 |
| 3,092,031 |
| 1,807,823 |
| 436,310 |
| |||||||||||||
(Provision for)/benefit from loan losses |
| 555,222 |
| (615,251 | ) | (956,609 | ) | (315,620 | ) | (136,004 | ) | |||||||||||||
Net interest income after provision for loan losses |
| 3,935,783 |
| 3,307,386 |
| 2,135,422 |
| 1,492,203 |
| 300,306 |
| |||||||||||||
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Other income |
| 565,259 |
| 531,677 |
| 612,465 |
| 461,892 |
| 122,084 |
| |||||||||||||
Noninterest expenses |
| (3,573,651 | ) | (3,107,363 | ) | (2,404,681 | ) | (1,823,986 | ) | (1,761,303 | ) | |||||||||||||
Income before income taxes |
| 927,391 |
| 731,700 |
| 343,206 |
| 130,109 |
| (1,338,913 | ) | |||||||||||||
Income tax expense |
| (342,981 | ) | (227,555 | ) | (89,704 | ) | 510,006 |
| — |
| |||||||||||||
Net income (loss) |
| $ | 584,410 |
| $ | 504,145 |
| $ | 253,502 |
| $ | 640,115 |
| $ | (1,338,913 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Per Share Data: (1) |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net income (loss), basic |
| $ | 0.25 |
| $ | 0.22 |
| $ | 0.11 |
| $ | 0.28 |
| $ | (1.79 | ) | ||||||||
Net income (loss), assuming dissolution |
| $ | 0.24 |
| $ | 0.21 |
| $ | 0.11 |
| $ | 0.28 |
| $ | (1.79 | ) | ||||||||
Dividends declared |
| N/A |
| N/A |
| N/A |
| N/A |
| N/A |
| |||||||||||||
Book value |
| $ | 3.61 |
| $ | 3.36 |
| $ | 3.14 |
| $ | 3.03 |
| $ | 2.74 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Financial Condition Data: |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total assets |
| $ | 87,784,710 |
| $ | 91,174,368 |
| $ | 85,075,150 |
| $ | 53,045,438 |
| $ | 24,617,801 |
| ||||||||
Loans, net |
| $ | 64,054,625 |
| $ | 72,355,286 |
| $ | 68,539,235 |
| $ | 42,293,917 |
| $ | 17,857,395 |
| ||||||||
Federal Home Loan Bank stock |
| $ | 244,500 |
| $ | 226,500 |
| $ | 171,700 |
| $ | 134,300 |
| $ | — |
| ||||||||
Federal funds sold |
| $ | 13,557,689 |
| $ | 7,619,619 |
| $ | 7,244,455 |
| $ | 5,579,365 |
| $ | 2,813,875 |
| ||||||||
Deposits |
| $ | 74,702,688 |
| $ | 78,387,227 |
| $ | 73,461,766 |
| $ | 43,269,854 |
| $ | 18,307,070 |
| ||||||||
Federal Home Loan Bank - advances |
| $ | 4,179,052 |
| $ | 4,359,346 |
| $ | 4,254,106 |
| $ | 2,672,000 |
| $ | — |
| ||||||||
Stockholder’s equity |
| $ | 8,340,823 |
| $ | 7,743,097 |
| $ | 7,207,287 |
| $ | 6,901,202 |
| $ | 6,161,087 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Selected Ratios: |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Interest rate spread |
| 3.95 | % | 4.40 | % | 4.55 | % | 4.59 | % | 3.24 | % | |||||||||||||
Net yield on interest-earning assets |
| 4.24 | % | 4.61 | % | 4.85 | % | 4.99 | % | 3.75 | % | |||||||||||||
Return on average assets |
| 0.67 | % | 0.55 | % | 0.37 | % | 1.62 | % | (10.31 | )% | |||||||||||||
Return on average equity |
| 7.32 | % | 6.60 | % | 3.51 | % | 10.33 | % | (49.15 | )% | |||||||||||||
Average equity to average assets |
| 9.12 | % | 8.37 | % | 10.64 | % | 15.64 | % | 20.98 | % | |||||||||||||
Dividend payout ratio |
| N/A |
| N/A |
| N/A |
| N/A |
| N/A |
| |||||||||||||
Ratio of nonperforming assets to total assets |
| 2.39 | % | 0.59 | % | 0.10 | % | 0.00 | % | 0.00 | % | |||||||||||||
Ratio of allowance for loan losses to nonperforming assets |
| 33.28 | % | 300.79 | % | 1,626.14 | % | N/A |
| N/A |
| |||||||||||||
Ratio of allowance for loan losses to total loans, net of unearned income |
| 1.08 | % | 2.17 | % | 1.93 | % | 1.25 | % | 1.25 | % | |||||||||||||
(1) Amounts have been restated to reflect the effect of the Company’s three-for-one stock split effected April 25, 2003.
19
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following is a discussion of our financial condition and results of operations for the years ended December 31, 2005, 2004 and 2003. The discussion and analysis should be read in conjunction with our consolidated financial statements and related notes in order to obtain a better understanding of the information contained in the financial statements. The discussions contained herein are for the consolidated entity BG Financial Group, Inc. (the “Corporation”) and its wholly-owned subsidiary Bank of Greeneville (the “Bank”) collectively referred to herein as the “Company”. As discussed in the Footnote 1 to the financial statements the financial condition and results of operations for the years ended December 31, 2005 and 2004 are for the Corporation and the Bank as a consolidated entity and the financial condition and results of operations for the year ended December 31, 2003 are for the Bank only.
Overview
The Company’s net income increased to $584,410 in 2005 from $504,145 in 2004. This represents a 15.9% increase.
Management believes that a rising interest rate environment, which appears to be more likely than a falling or steady rate environment, should result in greater net interest income for the Company. As of December 31, 2005 approximately 57% of the Company’s loans are adjustable rate loans that reprice with prime rate increases on a daily basis. The Company believes that we will continue to place our emphasis on making adjustable rate loans to better match corresponding rising costs of funds.
Impact of Inflation
The financial statements and related financial data presented herein have been prepared in accordance with accounting principles generally accepted in the United States and practices within the banking industry which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation.
Critical Accounting Estimates
The Company follows generally accepted accounting principles that are recognized in the United States, along with general practices within the banking industry. In connection with the application of those principles and practices, we have made judgments and estimates which, in the case of our allowance for loan and lease losses (ALLL), are material to the determination of our financial position and results of operation. Other estimates relate to the valuation of assets acquired in connection with foreclosures or in satisfaction of loans, and realization of deferred tax assets.
Recent Accounting Pronouncements
In March 2004, the SEC issued Staff Accounting Bulletin No. 105, Application of Accounting Principles to Loan Commitments. Current accounting guidance requires the commitment to originate mortgage loans to be held for sale be recognized on the balance sheet at fair value from inception through expiration or funding. SAB 105 requires that the fair-value measurement include only differences between the guaranteed interest rate in the loan commitment and a market interest rate, excluding any expected future cash flows related to the customer relationship or loan servicing. SAB 105 is effective for commitments to originate mortgage loans to be held for sale that are entered into after March 31, 2004. Its adoption did not have a material impact on the consolidated financial position or results of operations of the Company.
FASB Staff Position on FAS No. 115-1 and FAS No. 124-1 (“the FSP”), “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” was issued in November 2005 and addresses the determination of when an investment is considered impaired; whether the impairment is other-than-temporary; and
20
how to measure an impairment loss. The FSP also addresses accounting considerations subsequent to the recognition of an other-than-temporary impairment on a debt security, and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The FSP replaces the impairment guidance on Emerging Issues Task Force (EITF) Issue No. 03-1 with references to existing authoritative literature concerning other-than-temporary determinations. Under the FSP, losses arising from impairment deemed to be other-than-temporary, must be recognized in earnings at an amount equal to the entire difference between the securities cost and its fair value at the financial statement date, without considering partial recoveries subsequent to that date. The FSP also required that an investor recognize an other-than-temporary impairment loss when a decision to sell a security has been made and the investor does not expect the fair value of the security to fully recover prior to the expected time of sale. The FSP is effective for reporting periods beginning after December 15, 2005. The adoption of this statement is not expected to have a material impact on the Company’s consolidated financial statements.
In December 2004, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123R”), which revised SFAS No. 123, “Accounting for Stock-Based Compensation.” This statement supercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” The revised statement addresses the accounting for share-based payment transactions with employees and other third parties, eliminates the ability to account for share-based compensation transactions using APB 25 and requires that the compensation costs relating to such transactions be recognized in the consolidated statement of income. The revised statement is effective as of the first interim or annual period beginning after June 15, 2005. In anticipation of adopting SFAS No. 123R, the Company elected to immediately vest all remaining stock options during 2005 to avoid the recognition of compensation costs in the consolidated statement of income in future periods.
The FASB issued an FSP on December 15, 2005, “SOP 94-6-1 - Terms of Loan Products That May Give Rise to a Concentration of Credit Risk” which addresses the disclosure requirements for certain nontraditional mortgage and other loan products the aggregation of which may constitute a concentration of credit risk under existing accounting literature. Pursuant to this FSP, the FASB’s intentions were to reemphasize the adequacy of such disclosures and noted that the recent popularity of certain loan products such as negative amortization loans, high loan-to-value loans, interest only loans, teaser rate loans, option adjusted rate mortgage loans and other loan product types may aggregate to the point of being a concentration of credit risk to an issuer and thus may require enhanced disclosures under existing guidance. This FSP was effective immediately. The adoption of this FSP did not have a material impact on the consolidated financial statements.
Forward-Looking Statements
Management’s discussion of the Company and management’s analysis of the Company’s operations and prospects, and other matters, may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other provisions of federal and state securities laws. Although the Company believes that the assumptions underlying such forward-looking statements contained in this Report are reasonable, any of the assumptions could be inaccurate and, accordingly, there can be no assurance that the forward-looking statements included herein will prove to be accurate. The use of such words as “expect,” “anticipate,” “forecast,” and comparable terms should be understood by the reader to indicate that the statement is “forward-looking” and thus subject to change in a manner that can be unpredictable. Factors that could cause actual results to differ from the results anticipated, but not guaranteed, in this Report, include (without limitation) economic and social conditions, competition for loans, mortgages, and other financial services and products, changes in interest rates, unforeseen changes in liquidity, results of operations, and financial conditions affecting the Company’s customers, and other risks that cannot be accurately quantified or completely identified. Many factors affecting the Company’s financial condition and profitability, including changes in economic conditions, the volatility of interest rates, political events and competition from other providers of financial services simply cannot be predicted. Because these factors are unpredictable and beyond the Company’s control, earnings may fluctuate from period to period. The purpose of this type of information is to provide readers with information relevant to understanding and assessing the financial condition and results of operations of the Company, and not to predict the future or to guarantee results. The Company is unable to predict the types of circumstances, conditions and factors that can cause anticipated results to change. The Company undertakes no obligation to publish revised forward-looking statements to reflect the occurrence of changes or unanticipated events, circumstances, or results.
21
Results of Operations
The Company had net income of $584,410 for the year ended December 31, 2005 (or $.25 per share) compared to $504,145 (or $.22 per share) and $253,502 (or $.11 per share) for the years ended December 31, 2004 and 2003 respectively.
Net Interest Income/Margin
Net interest income represents the amount by which interest earned on various assets exceeds interest paid on deposits and other interest-bearing liabilities and is the most significant component of the Company’s earnings. Interest income for 2005 was $5,499,510 compared to $5,498,717 and $4,308,390 in 2004 and 2003 respectively. Total interest expense was $2,118,949 in 2005 compared to $1,576,080 and $1,216,359 in 2004 and 2003 respectively. Average earning assets increased from approximately $64 million in 2003 to approximately $85 million in 2004 (33%) and decreased to approximately $80 million in 2005 (6%). Average interest-bearing deposits increased from approximately $55 million in 2003 to approximately $77 million in 2004 (40%) and to approximately $72 million (6%) in 2005.
Benefit from / Provision for Loan Losses
The provision for (benefit from) loan losses represents a charge (or recovery) to operations necessary to establish an allowance for possible loan losses, which in management’s evaluation, is adequate to provide coverage for estimated losses on outstanding loans and to provide for uncertainties in the economy. For the year ended December 31, 2005, there was a net benefit to earnings of $555,222 due to a decrease in the allowance for loan losses as compared to an expense of $615,251 for the year ended December 31, 2004. There are several reasons for the benefit recognized in 2005. One factor was that several loans, which were classified as special mention, substandard or doubtful as of December 31, 2004, were paid out during 2005 with minimal losses. In addition, the Bank’s loan portfolio as a whole, as of December 31, 2005, has decreased by approximately $9.2 million (includes classified loans from 2004 that paid out in 2005 discussed above) since December 31, 2004. Another factor is that the Bank modified its methodology to specifically evaluate all commercial and real estate loans classified as substandard or doubtful over $100,000 for impairment. This change in methodology provided a benefit of approximately $163,000 in 2005. Given the fact that many of the Bank’s loans are considered to be well collateralized by real estate, the Bank has estimated minimal exposure on its impaired loans as of December 31, 2005. For much of 2005, the Bank was under competitive pressure from local credit unions and other local banks offering lower rates on fixed rate loans. Management made the decision to let certain outstanding loans refinance at credit unions and other local banks, versus subjecting the bank to the interest rate and credit risks that would be created to retain the loan.
The tables below illustrate the impact of several loans, which were classified as special mention, substandard or doubtful, as of December 31, 2004, paying out during 2005 with minimal losses. In addition, they illustrate the impact of the modification to the methodology used for loan losses to evaluate more specific loans for impairment. They also demonstrate the progress that has been made throughout the 2005 year in reducing the aggregate level of classified loans.
2004 general reserve on $5,001,456 of classified loans |
|
|
| $ | 725,843 |
| |
2005 general reserve on $338,978 of classified loans |
|
|
| 25,757 |
| ||
|
| Impact |
| (700,086 | ) | ||
|
|
|
|
|
| ||
2004 specific reserve on $323,446 of loans evaluated |
|
|
| 45,000 |
| ||
2005 specific reserve on $1,692,162 of loans evaluated |
|
|
| 90,662 |
| ||
|
| Impact |
| 45,662 |
| ||
|
| Total impact |
| (654,424 | ) | ||
|
|
|
|
|
| ||
Total benefit from change in methodology |
|
|
| (163,162 | ) | ||
Estimated benefit from other decline in loan portfolio as a whole |
|
|
| (102,815 | ) | ||
Net charged-off loans during 2005 |
|
|
| 365,179 |
| ||
|
| Benefit from loan losses for 2005 year |
| $ | (555,222 | ) | |
22
|
| Allowance for Loan Losses |
| |||||||||||||
Component |
| 12/31/04 |
| 03/31/05 |
| 06/30/05 |
| 09/30/05 |
| 12/31/05 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Classified Loans |
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
General |
| $ | 924,499 |
| $ | 592,991 |
| $ | 116,102 |
| $ | 27,481 |
| $ | 44,429 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Specific |
| 45,000 |
| 319,471 |
| 305,042 |
| 309,528 |
| 90,662 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total Allowance for Classified Loans |
| 969,499 |
| 912,462 |
| 421,144 |
| 337,009 |
| 135,091 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Special Mention |
| 109,755 |
| 65,229 |
| 45,594 |
| 38,362 |
| 56,069 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Remaining Loans |
| 528,305 |
| 526,131 |
| 503,879 |
| 541,685 |
| 505,853 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total |
| $ | 1,607,559 |
| $ | 1,503,822 |
| $ | 970,617 |
| $ | 917,056 |
| $ | 697,013 |
|
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures. For large groups of smaller homogeneous loans, the allowance is determined by calculating the following components: historical loss experience, adjustments to reflect the effect of current conditions, and adjustments for other factors. Management believes the allowance for possible loan losses at December 31, 2005 to be adequate.
The year ended December 31, 2005 represents the Bank’s fourth full year of operations. In determining the component for historical loss experience, the Bank has considered the average of the last four years’ experience. This component has been adjusted, due to the fact that the Bank has limited loss experience given the age of the Bank. The component has been further adjusted for uncertain local economic conditions, due to higher unemployment.
Provisions for Income Taxes
Due to the Company’s bank subsidiary’s loss in 2001, there was no income tax expense incurred, and a deferred tax asset was recorded with a valuation allowance. In 2003, 2004 and 2005, the Company posted pre-tax income of $343,206, $731,700 and $927,391 respectively; causing management to believe that it is more likely than not that it will generate future taxable income to utilize its net deferred tax asset. As a result, the valuation allowance was eliminated and a net deferred tax asset was recorded for the deductible temporary differences and carryforwards that are expected to be available to reduce future taxable income.
Noninterest Income
The Company’s noninterest income consists of service charges on deposit accounts and other fees and commissions. Total noninterest income for 2005 was $565,259 compared to $531,677 and $612,465 in 2004 and 2003 respectively. The main reason for the increase in 2005 when compared to 2004 was due to a 14% increase in service charges on deposit accounts. The decrease in 2004 when compared to 2003 was due to a decrease in mortgage banking activities (origination and sale of 1-4 family loans), and the decrease in service charges on
23
deposits. Management projects that other fees and commissions and service charges will increase in 2006 due to the growth of the Company.
Noninterest Expense
Noninterest expenses totaled $3,573,651 in 2005 compared to $3,107,363 and $2,404,681 in 2004 and 2003, respectively, and consisted of employee costs, occupancy expense and other operating expenses. Salaries and employee benefits increased from $1,290,696 in 2003 to $1,529,482 in 2004 and to $1,802,775 in 2005.
Financial Condition
Total assets at December 31, 2005, were $87,784,710, a decrease of $3,389,658 or 3.7% over 2004 year end assets of $91,174,368. Total assets for the 2003 year end were $85,075,150. Deposits decreased to $74,702,688 at December 31, 2005, a decrease of $3,684,539 or 4.70% from $78,387,227 at December 31, 2004. Total deposits for the year end 2003 were $73,461,766. Loans decreased by $9,211,207, or 12.5%, to $64,751,638 at year end 2005, from $73,962,845 at year-end 2004. Total loans for the year end 2003 were $69,889,501. Securities were $244,500 at December 31, 2005 compared to $226,500 at December 31, 2004. Securities were $171,700 at year end 2003. Most of the decrease in total assets from 2004 to 2005 is accounted for by the reduction in the loan portfolio. The reason for the loan portfolio reduction is explained below.
The Company places an emphasis on an integrated approach to its balance sheet management. Significant balance sheet components of investment securities, loans and sources of funds are managed in an integrated manner with the management of interest rate risk, liquidity, and capital. These components are discussed below.
Loans
Loans outstanding totaled $64,751,638 at December 31, 2005 compared to $73,962,845 and $69,889,501 at December 31, 2004 and 2003 respectively. Commercial real estate loan growth decreased $5,777,834 while other commercial loans decreased $1,605,159 during 2005. As previously stated, the Bank was under competitive pressure from local credit unions and other local banks offering lower rates on fixed rate loans for most of 2005. Management made the decision to let certain outstanding loans refinance at credit unions and other local banks, versus subjecting the bank to the interest rate and credit risks that would be created to retain the loan. The loan portfolio was further reduced by several classified loans being paid out during the year 2005.
The types of loans at December 31, 2005 are Installment ($4,642,731), Commercial ($19,322,800), Commercial Real Estate ($25,782,176), and Mortgage ($15,003,931).
Management feels the overall quality of loans remains solid. In the event that a loan is 90 days or more past due the accrual of income is generally discontinued when the full collection of principal or interest is in doubt unless the obligations are both well secured and in the process of collection. At December 31, 2005, total loans 90 days or more past due and still accruing interest were $78,509 while total loans 90 days or more past due and in non-accrual status equaled $2,094,311.
Securities
Federal Home Loan Bank (FHLB) stock at December 31, 2005 had an amortized cost of $244,500 and a market value of $244,500 as compared to an amortized cost of $226,500 and a market value of $226,500 at December 31, 2004. The amortized cost and market value of the FHLB stock for the year end 2003 were $171,700. As a member of the Federal Home Loan Bank, the Company is required to maintain stock in an amount equal to 0.15% of total assets. Federal Home Loan Bank stock is maintained by the Company at par value of one hundred dollars per share.
24
Deposits
Total deposits, which are the principal source of funds for the Company, were $74,702,688 at December 31, 2005 compared to $78,387,227 and $73,461,766 at December 31, 2004 and 2003, respectively. The decrease of $3,684,539 from year end 2004 to year end 2005 represents a decrease of 4.70%. The Company has targeted local consumers, professional and commercial businesses as its central clientele, therefore, deposit instruments in the form of demand deposits, savings accounts, money market demand accounts, NOW accounts, certificates of deposit and individual retirement accounts are offered to customers. The Company established a line of credit with the Federal Home Loan Bank secured by a blanket-pledge of 1-4 family residential mortgage loans. At December 31, 2005, 2004 and 2003 the Company had outstanding advances of $4,179,052, $4,359,346 and $4,254,106, respectively, at the Federal Home Loan Bank.
Liquidity
At December 31, 2005, the Company had liquid assets of approximately $18.5 million in the form of cash, federal funds sold and Federal Home Loan Bank Stock available for sale compared to approximately $13.4 million and approximately $12.5 million on December 31, 2004 and 2003 respectively. Management believes that the liquid assets are adequate at December 31, 2005. Additional liquidity will be provided by the growth in deposit accounts and loan repayments. The Company also has the ability to purchase federal funds and is a member of the Federal Home Loan Bank of Cincinnati that will provide an additional credit line if necessary. Management is not aware of any trends, events or uncertainties that are reasonably likely to have a material impact on the Company’s short term or long term liquidity.
Capital
Total shareholders’ equity at December 31, 2005 was $8,340,823, an increase of $597,726 from $7,743,097 at December 31, 2004, due to a profit of $584,410 for the 2005 year and the exercise of 3,996 shares of common stock options by key officers of the Company. Common stock increased $1,331 and surplus $11,985 from the exercise of common stock options. The total capital for the year end 2003 was $7,207,287.
At December 31, 2005, capital ratios were in excess of the regulatory minimums with the Company’s Tier 1, total risk-based and leverage ratio.
25
The Company’s actual capital amounts and ratios are as follows:
|
| Actual |
|
|
| For Capital |
|
|
| To Be Well |
| |||||||||||||
|
| Amount |
| Ratio |
|
|
| Amount |
|
|
| Ratio |
|
|
| Amount |
|
|
| Ratio |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
As of December 31, 2005 (in Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Tier 1 Capital (To Average assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Consolidated |
| $ | 8,345 |
| 9.65 | % | > |
| $ | 3,459 |
| > |
| 4 | % | > |
| N/A |
|
|
| N/A |
| |
Bank of Greeneville |
| $ | 8,317 |
| 9.62 | % | > |
| $ | 3,458 |
| > |
| 4 | % | > |
| $ | 4,322 |
| > |
| 5 | % |
Tier 1 Capital (To Risk Weighted Assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Consolidated |
| $ | 8,345 |
| 12.12 | % | > |
| $ | 2,756 |
| > |
| 4 | % | > |
| N/A |
|
|
| N/A |
| |
Bank of Greeneville |
| $ | 8,317 |
| 12.08 | % | > |
| $ | 2,754 |
| > |
| 4 | % | > |
| $ | 4,132 |
| > |
| 6 | % |
Total Capital (To Risk Weighted Assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Consolidated |
| $ | 9,042 |
| 13.13 | % | > |
| $ | 5,511 |
| > |
| 8 | % | > |
| N/A |
|
|
| N/A |
| |
Bank of Greeneville |
| $ | 9,014 |
| 13.09 | % | > |
| $ | 5,509 |
| > |
| 8 | % | > |
| $ | 6,886 |
| > |
| 10 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
As of December 31, 2004 (in Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Tier 1 Capital (To Average assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Consolidated |
| $ | 7,743 |
| 8.55 | % | > |
| $ | 3,621 |
| > |
| 4 | % | > |
| N/A |
|
|
| N/A |
| |
Bank of Greeneville |
| $ | 7,690 |
| 8.50 | % | > |
| $ | 3,620 |
| > |
| 4 | % | > |
| $ | 4,525 |
| > |
| 5 | % |
Tier 1 Capital (To Risk Weighted Assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Consolidated |
| $ | 7,743 |
| 9.90 | % | > |
| $ | 3,129 |
| > |
| 4 | % | > |
| N/A |
|
|
| N/A |
| |
Bank of Greeneville |
| $ | 7,690 |
| 10.00 | % | > |
| $ | 3,076 |
| > |
| 4 | % | > |
| $ | 4,614 |
| > |
| 6 | % |
Total Capital (To Risk Weighted Assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Consolidated |
| $ | 8,713 |
| 11.14 | % | > |
| $ | 6,258 |
| > |
| 8 | % | > |
| N/A |
|
|
| N/A |
| |
Bank of Greeneville |
| $ | 8,659 |
| 11.26 | % | > |
| $ | 6,152 |
| > |
| 8 | % | > |
| $ | 7,691 |
| > |
| 10 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
As of December 31, 2003 (in Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Tier 1 Capital (To Average assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Bank of Greeneville |
| $ | 7,207 |
| 8.9 | % | > |
| $ | 3,246 |
| > |
| 4. | % | > |
| $ | 4,057 |
| > |
| 5.0 | % |
Tier 1 Capital (To Risk Weighted Assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Bank of Greeneville |
| $ | 7,207 |
| 10.2 | % | > |
| $ | 2,821 |
| > |
| 4. | % | > |
| $ | 4,231 |
| > |
| 6.0 | % |
Total Capital (To Risk Weighted Assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Bank of Greeneville |
| $ | 8,094 |
| 11.5 | % | > |
| $ | 5,642 |
| > |
| 8. | % | > |
| $ | 7,052 |
| > |
| 10.0 | % |
Liability and Asset Management
The Company’s Asset/Liability Committee (“ALCO”) actively measures and manages interest rate risk using a process developed by the Company. The ALCO is also responsible for implementing the Company’s asset/liability management policies, overseeing the formulation and implementation of strategies to improve balance sheet positioning and earnings, and reviewing the Company’s interest rate sensitivity position.
The primary tool that management uses to measure short-term interest rate risk is a net interest income simulation model prepared by an independent correspondent institution. These simulations estimate the impact that various changes in the overall level of interest rates over one- and two-year time horizons would have on net interest income. The results help the Company develop strategies for managing exposures to interest rate risk.
Like any forecasting technique, interest rate simulation modeling is based on a large number of assumptions. In this case, the assumptions relate primarily to loan and deposit growth, asset and liability prepayments, interest rates and balance sheet management strategies. Management believes that both individually and in the aggregate the assumptions are reasonable. Nevertheless, the simulation modeling process produces only a sophisticated estimate, not a precise calculation of exposure.
At December 31, 2005, approximately 57% of the Company’s gross loans had adjustable rates. Based on the asset/liability modeling management believes that these loans reprice at a faster pace than liabilities held at the Company. Because the majority of the institution’s liabilities are 12 months and under and the gap in repricing is asset sensitive, with loans repricing daily, management believes that a rising rate environment would have a positive
26
impact on the Company’s net interest margin. Floors in the majority of the Company’s adjustable rate assets also mitigate interest rate sensitivity in a decreasing rate environment.
Off-Balance Sheet Arrangements
The Company, at December 31, 2005, had outstanding unused lines of credit and standby letters of credit that totaled $9,805,884. These commitments have fixed maturity dates and many will mature without being drawn upon, meaning that the total commitment does not necessarily represent the future cash requirements. The Company has the ability to liquidate Federal funds sold or, on a short-term basis, to purchase Federal funds from other banks and to borrow from the Federal Home Loan Bank. At December 31, 2005, the Company had established with correspondent banks the ability to purchase Federal funds if needed.
I. AVERAGE BALANCE SHEETS, NET INTEREST REVENUE AND CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
The following table shows the amount of our average balances, interest income or interest expense for each category of interest-earning assets and interest-bearing liabilities and the average interest rate for total interest-earning assets and total interest-bearing liabilities, net interest spread and net yield on average interest-earning assets for each of the years in the two-year period ended December 31, 2005. The table is presented on taxable equivalent basis, if applicable.
|
| 2005 |
| 2004 |
| ||||||||||||
|
| Average |
| Interest |
| Average Rate |
| Average |
| Interest |
| Average Rate |
| ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Loans |
| $ | 68,904,827 |
| $ | 5,149,519 |
| 7.47 | % | $ | 75,435,264 |
| $ | 5,376,509 |
| 7.13 | % |
FHLB stock |
| 234,889 |
| 11,780 |
| 5.02 | % | 205,821 |
| 8,578 |
| 4.17 | % | ||||
Deposits |
| 1,590,170 |
| 45,806 |
| 2.88 | % | 1,857,123 |
| 19,943 |
| 1.07 | % | ||||
Federal funds sold |
| 9,053,400 |
| 292,405 |
| 3.23 | % | 7,588,098 |
| 93,687 |
| 1.23 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total interest-earning assets |
| 79,783,286 |
| 5,499,510 |
| 6.89 | % | 85,086,306 |
| 5,498,717 |
| 6.46 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cash and due from banks |
| 3,507,530 |
|
|
|
|
| 2,961,599 |
|
|
|
|
| ||||
Other assets |
| 5,443,680 |
|
|
|
|
| 4,679,699 |
|
|
|
|
| ||||
Allowance for loan losses |
| (1,175,266 | ) |
|
|
|
| (1,442,234 | ) |
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total Assets |
| $ | 87,559,230 |
|
|
|
|
| $ | 91,285,370 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities and Stockholder’s Equity: |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Demand deposits |
| $ | 11,125,760 |
| $ | 233,235 |
| 2.10 | % | $ | 9,686,964 |
| $ | 102,811 |
| 1.06 | % |
Savings deposits |
| 7,267,492 |
| 132,254 |
| 1.82 | % | 4,516,184 |
| 45,658 |
| 1.01 | % | ||||
Other time deposits |
| 49,375,553 |
| 1,613,861 |
| 3.27 | % | 58,014,179 |
| 1,282,098 |
| 2.21 | % | ||||
FHLB advances |
| 4,276,160 |
| 139,599 |
| 3.26 | % | 4,409,274 |
| 145,513 |
| 3.30 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total interest-bearing liabilities |
| 72,044,965 |
| 2,118,949 |
| 2.94 | % | 76,626,601 |
| 1,576,080 |
| 2.06 | % | ||||
27
|
| 2005 |
| 2004 |
| ||||||||||||
|
| Average |
| Interest |
| Average Rate |
| Average |
| Interest |
| Average Rate |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Non-interest bearing demand deposits |
| 7,106,706 |
|
|
|
|
| 6,643,265 |
|
|
|
|
| ||||
Other liabilities |
| 421,067 |
|
|
|
|
| 378,163 |
|
|
|
|
| ||||
Stockholder’s equity |
| 7,986,492 |
|
|
|
|
| 7,637,341 |
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total liabilities and stockholder’s equity |
| $ | 87,559,230 |
|
|
|
|
| $ | 91,285,370 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net interest earnings |
|
|
| $ | 3,380,561 |
|
|
|
|
| $ | 3,922,637 |
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net interest spread |
|
|
|
|
| 3.95 | % |
|
|
|
| 4.40 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net interest margin |
|
|
|
|
| 4.24 | % |
|
|
|
| 4.61 | % | ||||
Note: Average loan balances include nonaccrual loans. Interest income collected on nonaccrual loans has been included.
The net interest margin for 2005 was 4.24% compared to a net interest margin of 4.61% for the same period in 2004, a decrease of 37 basis points. The net change in the net interest margin is due to competitive pressure from local banks and credit unions offering lower rates on fixed rate loans for most of 2005. Several loans were not renewed or renewed at lower interest rate spreads. The net interest margin for 2003 was 4.85%, compared to the 4.61% margin in 2004, a decrease of 24 basis points. Other matters related to the changes in net interest income, net yields and rate, and net interest margin are presented below:
• Our loan yields increased from 2004 to 2005. For asset/liability management purposes, we have emphasized variable rate loans since our inception such that approximately 57.0% of our loans are variable rate loans at December 31, 2005 compared to 62.0% at December 31, 2004 and 61.0% at December 31, 2003. Variable rate loans generally have lower yields than do fixed rate loans, but better match the cost of funds in a rising rate environment.
• During 2005 the average balances of noninterest bearing deposits increased by $463,441 or 6.98%, while interest bearing deposits decreased by $4,581,636 or 5.98%. Rates continued to increase in 2005 over 2004. Management anticipates a continuation in funding rate increases on interest bearing deposits in 2006.
Net interest income decreased by $542,076 between the years ended December 31, 2005 and 2004 and increased by $830,606 between the years ended December 31, 2004 and 2003. The following is an analysis of the changes in our net interest income comparing the changes attributable to rates and those attributable to volumes:
|
| 2005 Compared to 2004 |
| 2004 Compared to 2003 |
| ||||||||||||||
|
| Rate |
| Volume |
| Net |
| Rate |
| Volume |
| Net |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Loans |
| $ | 238,630 |
| $ | (465,620 | ) | $ | (226,990 | ) | $ | (387,384 | ) | $ | 1,544,296 |
| $ | 1,156,912 |
|
FHLB stock |
| 1,990 |
| 1,212 |
| 3,202 |
| (46 | ) | 2,070 |
| 2,024 |
| ||||||
Deposits |
| 28,719 |
| (2,856 | ) | 25,863 |
| 7,665 |
| 419 |
| 8,084 |
| ||||||
Federal funds sold |
| 180,695 |
| 18,023 |
| 198,718 |
| 13,091 |
| 10,216 |
| 23,307 |
| ||||||
28
|
| 2005 Compared to 2004 |
| 2004 Compared to 2003 |
| ||||||||||||||
|
| Rate |
| Volume |
| Net |
| Rate |
| Volume |
| Net |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total interest-earning assets |
| 450,034 |
| (449,241 | ) | 793 |
| (366,674 | ) | 1,557,001 |
| 1,190,327 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Demand deposits |
| 116,428 |
| 15,251 |
| 131,679 |
| (18,436 | ) | 18,932 |
| 496 |
| ||||||
Savings deposits |
| 58,870 |
| 27,788 |
| 86,658 |
| (4,845 | ) | 17,808 |
| 12,963 |
| ||||||
Other time deposits |
| 521,360 |
| (190,914 | ) | 330,446 |
| (76,129 | ) | 404,636 |
| 328,507 |
| ||||||
FHLB advances |
| (1,521 | ) | (4,393 | ) | (5,914 | ) | (12,210 | ) | 29,965 |
| 17,755 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total interest-bearing liabilities |
| 695,137 |
| (152,268 | ) | 542,869 |
| (111,620 | ) | 471,341 |
| 359,721 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net interest income |
| $ | (245,103 | ) | $ | (296,973 | ) | $ | (542,076 | ) | $ | (255,054 | ) | $ | 1,085,660 |
| $ | 830,606 |
|
Changes in net interest income are attributed to either changes in average balances (volume change) or changes in average rates (rate change) for earning assets and sources of funds on which interest is received or paid. Volume changes have been determined by multiplying the prior years’ average rate by the change in average balances outstanding. The rate change is the difference between the net change and the volume change.
II. INVESTMENT PORTFOLIO
The Company had no investments as of December 31, 2005 and 2004.
III. LOAN PORTFOLIO
A. Loan Types.
The following schedule details the loans of the Company at December 31, 2005 and 2004:
|
| December 31 |
| December 31 |
| ||
|
|
|
|
|
| ||
Consumer installment |
| $ | 4,642,731 |
| $ | 5,522,402 |
|
Commercial |
| 19,322,800 |
| 20,927,959 |
| ||
Commercial real estate |
| 25,782,176 |
| 31,560,010 |
| ||
Residential mortgage |
| 15,003,931 |
| 15,952,474 |
| ||
|
| 64,751,638 |
| 73,962,845 |
| ||
Less: |
|
|
|
|
| ||
Allowance for loan losses |
| 697,013 |
| 1,607,559 |
| ||
|
|
|
|
|
| ||
Loans, net |
| $ | 64,054,625 |
| $ | 72,355,286 |
|
29
B. Maturities and Sensitivities of Loans to Changes in Interest Rates
The following schedule details maturities and sensitivities to interest rate changes for loans and deposits as of December 31, 2005:
|
| Within |
| 1 to 5 |
| Over 5 |
| Total |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Uses of Funds: |
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Loans |
|
|
|
|
|
|
|
|
| ||||
Installment |
| $ | 1,369,940 |
| $ | 3,178,264 |
| $ | 94,527 |
| $ | 4,642,731 |
|
Commercial |
| 8,721,793 |
| 10,361,698 |
| 239,309 |
| 19,322,800 |
| ||||
Commercial real estate |
| 8,757,956 |
| 16,722,666 |
| 301,554 |
| 25,782,176 |
| ||||
Mortgage |
| 4,347,106 |
| 7,889,063 |
| 2,767,762 |
| 15,003,931 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total Loans |
| 23,196,795 |
| 38,151,691 |
| 3,403,152 |
| 64,751,638 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
FHLB stock |
| 244,500 |
| — |
| — |
| 244,500 |
| ||||
Deposits |
| 1,441,687 |
| — |
| — |
| 1,441,687 |
| ||||
Federal funds sold |
| 13,557,689 |
| — |
| — |
| 13,557,689 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total earning assets |
| $ | 38,440,671 |
| $ | 38,151,691 |
| $ | 3,403,152 |
| $ | 79,995,514 |
|
|
|
|
|
|
|
|
|
|
| ||||
Sources of funds: |
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Deposits: |
|
|
|
|
|
|
|
|
| ||||
Interest bearing Money market, interest checking and savings |
| $ | 22,070,383 |
| $ | — |
| $ | — |
| $ | 22,070,383 |
|
Time deposits |
| 36,478,874 |
| 7,529,020 |
| — |
| 44,007,894 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total Deposits |
| 58,549,257 |
| 7,529,020 |
| — |
| 66,078,277 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Borrowings |
| — |
| 4,179,052 |
| — |
| 4,179,052 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total interest-bearing liabilities |
| $ | 58,549,257 |
| $ | 11,708,072 |
| $ | — |
| $ | 70,257,329 |
|
|
|
|
|
|
|
|
|
|
| ||||
Net repricing gap |
| $ | (20,108,586 | ) | $ | 26,443,619 |
| $ | 3,403,152 |
| $ | 9,738,185 |
|
|
|
|
|
|
|
|
|
|
| ||||
Rate sensitivity gap: |
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net repricing gap as a percentage of total earning assets |
| (25.14 | )% | 33.06 | % | 4.25 | % | 12.17 | % | ||||
Cumulative Gap |
| $ | (20,108,586 | ) | $ | 6,335,033 |
| $ | 9,738,185 |
|
|
| |
|
|
|
|
|
|
|
|
|
| ||||
Cumulative gap as a percentage of total earning assets |
| (25.14 | )% | 7.92 | % | 12.17 | % |
|
| ||||
30
|
| Within |
| 1 to 5 |
| Over 5 |
| Total |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Rate Risk: |
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Loans with fixed rates |
| $ | 9,754,491 |
| $ | 17,963,260 |
| $ | 423,691 |
| $ | 28,141,442 |
|
|
|
|
|
|
|
|
|
|
| ||||
Loans with variable/adjusted rate |
| 13,442,304 |
| 20,188,431 |
| 2,979,461 |
| 36,610,196 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
|
| $ | 23,196,795 |
| $ | 38,151,691 |
| $ | 3,403,152 |
| $ | 64,751,638 |
|
C. Risk Elements
The following table presents information regarding nonaccrual, past due and restructured loans at December 31, 2005 and 2004:
|
| 2005 |
| 2004 |
| ||
Loans accounted for on a non-accrual basis: |
|
|
|
|
| ||
Number |
| 28 |
| 12 |
| ||
Amount |
| $ | 2,094,311 |
| $ | 534,442 |
|
Accruing loans (including consumer loans) which are contractually past due 90 days or more as to principal or interest payments: |
|
|
|
|
| ||
Number |
| 4 |
| 3 |
| ||
Amount |
| $ | 78,509 |
| $ | 13,109 |
|
Loans defined as “troubled debt restructurings” |
|
|
|
|
| ||
Number |
| — |
| — |
| ||
Amount |
| $ | — |
| $ | — |
|
Accrual of interest is discontinued on a loan when management of the Company determines upon consideration of economic and business factors affecting collection efforts that collection of interest is doubtful.
The Bank collectively evaluates large groups of smaller balance homogeneous loans for impairment. Loans collectively evaluated for impairment, with a classification of substandard or doubtful, as of December 31, 2005 and 2004, were $365,352 and $5,001,456, respectively.
There are no other loans which are not disclosed above, but where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms.
31
IV. SUMMARY OF LOAN LOSS EXPERIENCE
The following schedule details selected information related to the allowance for possible loan loss account of the Company at December 31, 2005 and 2004:
|
| December 31 |
| ||||
|
| 2005 |
| 2004 |
| ||
|
|
|
|
|
| ||
Balance at beginning of year |
| $ | 1,607,559 |
| $ | 1,350,266 |
|
|
|
|
|
|
| ||
Provision charged to expense |
| (555,222 | ) | 615,251 |
| ||
|
|
|
|
|
| ||
Charge offs: |
|
|
|
|
| ||
Installment loans |
| (47,838 | ) | (82,166 | ) | ||
Commercial |
| (292,292 | ) | (373,645 | ) | ||
Mortgage |
| (25,049 | ) | (45,968 | ) | ||
Overdrafts |
| — |
| — |
| ||
|
|
|
|
|
| ||
Total Charge Offs |
| (365,179 | ) | (501,779 | ) | ||
|
|
|
|
|
| ||
Recoveries: |
|
|
|
|
| ||
|
|
|
|
|
| ||
Installment loans |
| 3,762 |
| 39,450 |
| ||
Commercial |
| 4,927 |
| 77,486 |
| ||
Mortgage |
| 1,166 |
| 26,885 |
| ||
|
|
|
|
|
| ||
Total Loan Recoveries |
| 9,855 |
| 143,821 |
| ||
|
|
|
|
|
| ||
Net Charge Offs |
| (355,324 | ) | (357,958 | ) | ||
|
|
|
|
|
| ||
Balance at end of year |
| $ | 697,013 |
| $ | 1,607,559 |
|
|
|
|
|
|
| ||
Ratio of net charge offs during the period to average loans outstanding during the period |
| 0.52 | % | 0.47 | % | ||
|
|
|
|
|
| ||
Allowance for loan losses as a percent of year end loans |
| 1.08 | % | 2.17 | % | ||
32
At December 31, 2005 and 2004, the allowance for loan losses were allocated as follows:
|
| December 31, 2005 |
| December 31, 2004 |
| ||||||
|
| Amount |
| Percentage of loan |
| Amount |
| Percentage of loan |
| ||
|
|
|
|
|
|
|
|
|
| ||
Installment |
| $ | 43,236 |
| 6.20 | % | $ | 120,604 |
| 7.50 | % |
Commercial |
| 179,072 |
| 25.69 | % | 380,275 |
| 23.66 | % | ||
Commercial real estate |
| 303,691 |
| 43.57 | % | 741,958 |
| 46.15 | % | ||
Mortgage |
| 168,149 |
| 24.13 | % | 350,074 |
| 21.78 | % | ||
Overdrafts |
| 2,865 |
| 0.41 | % | 14,648 |
| 0.91 | % | ||
|
|
|
|
|
|
|
|
|
| ||
|
| $ | 697,013 |
| 100.00 | % | $ | 1,607,559 |
| 100.00 | % |
Nonaccrual and Past Due Loans:
|
| 2005 |
| 2004 |
| ||
Principal: |
|
|
|
|
| ||
Nonaccruing loans |
| $ | 2,094,311 |
| $ | 534,442 |
|
Loans past due 90 days or more and still accruing |
| 78,509 |
| 13,109 |
| ||
|
| $ | 2,172,820 |
| $ | 547,551 |
|
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
V. DEPOSITS
The average amounts and average interest rates for deposits for 2005 and 2004 are detailed in the following schedule:
|
| Years Ended December 31, |
| ||||||||
|
| 2005 |
| 2004 |
| ||||||
Deposit Category |
| Average |
| Average Rate |
| Average |
| Average Rate |
| ||
|
|
|
|
|
|
|
|
|
| ||
Noninterest-bearing demand |
| $ | 7,106,706 |
| N/A |
| $ | 6,643,265 |
| N/A |
|
NOW deposits |
| 11,125,760 |
| 2.10 | % | 9,686,964 |
| 1.06 | % | ||
Savings deposits |
| 7,267,492 |
| 1.82 | % | 4,516,184 |
| 1.01 | % | ||
Time deposits |
| 49,375,553 |
| 3.27 | % | 58,014,179 |
| 2.21 | % | ||
33
The following schedule details the amount outstanding of time certificates of deposit of $100,000 or more and respective maturities for the year ended December 31, 2005:
|
| Certificates of Deposit |
| |
|
|
|
| |
3 months or less |
| $ | 1,583,216 |
|
3-6 months |
| 1,758,942 |
| |
6-12 months |
| 2,272,595 |
| |
Over 12 months |
| 2,264,082 |
| |
|
|
|
| |
Total |
| $ | 7,878,835 |
|
VI. RETURN ON EQUITY AND ASSETS
Returns on average consolidated assets and average consolidated equity for the periods indicated are as follows:
|
| Year Ended December 31, |
| ||
|
| 2005 |
| 2004 |
|
|
|
|
|
|
|
Return on average assets |
| .67 | % | .55 | % |
Return on average equity |
| 7.32 | % | 6.60 | % |
Average equity to average assets ratio |
| 9.12 | % | 8.37 | % |
Dividend payout ratio |
| N/A |
| N/A |
|
VII. SHORT-TERM BORROWINGS
Federal Home Loan Bank Advances:
Pursuant to collateral agreements with Federal Home Loan Bank (FHLB), the advances are collateralized by specific first mortgage loans. The FHLB’s required unpaid principal balance of eligible mortgages was $7,719,341 and $6,198,317 at December 31, 2005 and 2004, respectively. The advances at December 31, 2005 and 2004, have the maturity dates as follows:
Maturity Date |
| Interest Rate |
| December 31, 2005 |
| ||
|
|
|
|
|
| ||
12/01/07 |
| 3.11 | % | $ | 17,586 |
| |
12/01/07 |
| 3.83 |
| 488,984 |
| ||
01/01/08 |
| 3.50 |
| 16,886 |
| ||
12/20/07 |
| 3.60 |
| 30,000 |
| ||
07/07/06 |
| 3.07 |
| 1,600,000 |
| ||
08/04/06 |
| 2.99 |
| 100,000 |
| ||
04/01/10 |
| 3.56 |
| 682,779 |
| ||
05/01/08 |
| 2.64 |
| 45,192 |
| ||
06/01/08 |
| 3.28 |
| 735,680 |
| ||
08/01/08 |
| 2.85 |
| 39,573 |
| ||
08/01/08 |
| 2.99 |
| 65,422 |
| ||
11/01/08 |
| 3.54 |
| 106,886 |
| ||
03/01/07 |
| 2.91 |
| 250,064 |
| ||
|
|
|
| $ | 4,179,052 |
| |
34
Maturity Date |
| Interest Rate |
| December 31, 2004 |
| |
|
|
|
|
|
| |
07/07/06 |
| 3.07 | % | $ | 1,600,000 |
|
08/04/06 |
| 2.99 |
| 100,000 |
| |
03/01/07 |
| 2.91 |
| 265,313 |
| |
12/01/07 |
| 3.11 |
| 25,978 |
| |
12/01/07 |
| 3.83 |
| 520,490 |
| |
12/20/07 |
| 3.60 |
| 30,000 |
| |
01/01/08 |
| 3.50 |
| 17,989 |
| |
05/01/08 |
| 2.64 |
| 63,892 |
| |
06/01/08 |
| 3.28 |
| 782,534 |
| |
08/01/08 |
| 2.85 |
| 44,126 |
| |
08/01/08 |
| 2.99 |
| 69,609 |
| |
11/01/08 |
| 3.54 |
| 113,301 |
| |
04/01/10 |
| 3.56 |
| 726,114 |
| |
|
|
|
| $ | 4,359,346 |
|
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information set forth on pages 16 through 30 of Item 7, “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The report of Independent Accountants, Consolidated Financial Statements and supplementary data required by Item 8 are set forth on pages F-1 through F-29 of this Report and are incorporated herein by reference.
Index to Financial Statements
Financial Statements |
| Page |
|
|
|
|
|
Consolidated Statements of Financial Condition |
| F-1 |
|
Consolidated Statements of Income |
| F-2 |
|
Consolidated Statements of Changes in Stockholders’ Equity |
| F-3 |
|
Consolidated Statements of Cash Flows |
| F-4 |
|
Notes to Consolidated Financial Statements |
| F5 - F29 |
|
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
a) Evaluation of Disclosure Controls and Procedures. The Corporation maintains disclosure controls and procedures, as defined in Rule 13a-15(a) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by it in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Corporation’s management, including its Chief Executive Officer and Chief Financial Officer. The Corporation carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this report. Based on the evaluation of these disclosure
35
controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure control and procedures were effective.
b) Changes in Internal Controls and Procedures. There were no changes in the Corporation’s internal control over financial reporting during the Corporation’s fiscal quarter ended December 31, 2005 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
None.
36
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to our directors and executive officers will be contained in a definitive Proxy Statement involving the election of directors at the annual meeting of shareholders to be held May 25, 2006, and such information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation will be contained in the Proxy Statement referred to above in Item 10, and such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information relating to security ownership of certain beneficial owners and management will be contained in the Proxy Statement referred to above in Item 10, and such information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to certain relationships and related transactions will be contained in the Proxy Statement referred to above in Item 10, and such information is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information relating to the principal accountant fees and services will be contained in the Proxy Statement referred to above in Item 10, and such information is incorporated herein by reference.
37
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements:
(2) Schedules required by Article 12 of Regulation S-X are either omitted because they are not applicable or because the required information is shown in the financial statements or the notes thereto.
(3) Exhibits:
Exhibit No. |
| Description |
|
|
|
3.1* |
| Charter of BG Financial Group, Inc. |
3.2* |
| Bylaws of BG Financial Group, Inc. |
10.1* |
| Share Exchange Agreement between BG Financial Group, Inc. and Bank of Greeneville, effective January 23, 2004 |
10.2** |
| Stock Option Agreement between Bank of Greeneville and J. Robert Grubbs |
10.3** |
| Stock Option Agreement between Bank of Greeneville and T. Don Waddell |
10.4** |
| Purchase and Assumption Agreement between Bank of Greeneville and First Community Bank of East Tennessee, dated July 6, 2001; |
21.1 |
| Subsidiaries of BG Financial Group, Inc. |
31.1 |
| Certification pursuant to Rule 13a-14a/15d-14(a) |
31.2 |
| Certification pursuant to Rule 13a-14a/15d-14(a) |
32.1 |
| Certification pursuant to Rule 18 USC Section 1350-Sarbanes-Oxley Act of 2002 |
32.2 |
| Certification pursuant to Rule 18 USC Section 1350-Sarbanes-Oxley Act of 2002 |
* Previously filed as an exhibit to a Form 8-K filed by BG Financial Group, Inc. with the Commission on May 21, 2004.
** Previously filed as an exhibit to Bank of Greeneville’s Registration Statement on Form 10-SB, as filed with the Federal Deposit Insurance Corporation on April 27, 2002.
38
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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.
BG FINANCIAL GROUP, INC. | |||
|
| ||
By: | /s/ J. Robert Grubbs | ||
| J. Robert Grubbs, President and Chief | ||
| Executive Officer | ||
|
| ||
|
| ||
Date: | April 17, 2006 | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in their capacities as directors.
By: | /s/ Don E. Claiborne |
| By: | /s/ William J. Smead | ||
| Don E. Claiborne |
|
| William J. Smead | ||
|
|
| ||||
Date: April 17, 2006 |
| Date: April 17, 2006 | ||||
|
|
| ||||
By: | /s/ J. Robert Grubbs |
| By: | /s/ Wendy C. Warner | ||
| J. Robert Grubbs |
|
| Wendy C. Warner | ||
|
|
| ||||
Date: April 17, 2006 |
| Date: April 17, 2006 | ||||
|
|
| ||||
By: | /s/ Leonard B. Lawson |
| By: | /s/ Roger A. Woolsey | ||
| Leonard B. Lawson |
|
| Roger A. Woolsey | ||
|
|
| ||||
Date: April 17, 2006 |
| Date: April 17, 2006 | ||||
39
BG FINANCIAL GROUP, INC. AND SUBSIDIARY (2005) AND (2004)
AND BANK OF GREENEVILLE (2003)
Greeneville, Tennessee
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, 2004 and 2003
| One Perkins Place, 525 Portland Street |
Knoxville, TN 37919 | |
(p) (865)673-0844 (f) (865)673-0173 | |
(w) www.pyapc.com |
INDEPENDENT AUDITOR’S REPORT
To the Boards of Directors of
BG Financial Group, Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheets of BG Financial Group, Inc. and Subsidiary (the Company) as of December 31, 2005 and 2004 and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The financial statements of the Bank of Greeneville for the year ended December 31, 2003 were audited by other auditors whose report dated March 3, 2004 expressed an unqualified opinion on those statements.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. Our audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of BG Financial Group, Inc. and Subsidiary as of December 31, 2005 and 2004 and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2005 in conformity with U.S. generally accepted accounting principles.
PERSHING YOAKLEY & ASSOCIATES
Knoxville, Tennessee
February 24, 2006
CONTENTS
|
|
CONSOLIDATED FINANCIAL STATEMENTS |
|
|
|
| |
| |
| |
| |
|
BG FINANCIAL GROUP, INC. AND SUBSIDIARY (2005) AND (2004)
AND BANK OF GREENEVILLE (2003)
Greeneville, Tennessee
|
| 2005 |
| 2004 |
| ||
ASSETS |
|
|
|
|
| ||
|
|
|
|
|
| ||
Cash and due from banks |
| $ | 4,716,153 |
| $ | 5,538,897 |
|
Federal funds sold |
| 13,557,689 |
| 7,619,619 |
| ||
Cash and cash equivalents |
| 18,273,842 |
| 13,158,516 |
| ||
Federal Home Loan Bank stock, at cost |
| 244,500 |
| 226,500 |
| ||
Loans, net of allowance for loan losses of $697,013 in 2005 and $1,607,559 in 2004 |
| 64,054,625 |
| 72,355,286 |
| ||
Premises and equipment, net |
| 3,777,981 |
| 3,895,500 |
| ||
Accrued income receivable |
| 418,329 |
| 389,308 |
| ||
Deferred tax benefit |
| 236,743 |
| 601,307 |
| ||
Foreclosed assets |
| 616,279 |
| 489,649 |
| ||
Other assets |
| 162,411 |
| 58,302 |
| ||
Total Assets |
| $ | 87,784,710 |
| $ | 91,174,368 |
|
|
|
|
|
|
| ||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
| ||
|
|
|
|
|
| ||
LIABILITIES |
|
|
|
|
| ||
Deposits: |
|
|
|
|
| ||
Noninterest-bearing |
|
|
|
|
| ||
Demand |
| $ | 8,624,411 |
| $ | 6,755,994 |
|
|
|
|
|
|
| ||
Interest-bearing |
|
|
|
|
| ||
Money market, interest checking and savings |
| 22,070,383 |
| 16,046,823 |
| ||
Time deposits |
| 44,007,894 |
| 55,584,410 |
| ||
Total Deposits |
| 74,702,688 |
| 78,387,227 |
| ||
Accrued interest |
| 353,534 |
| 202,564 |
| ||
Other liabilities |
| 208,613 |
| 482,134 |
| ||
Federal Home Loan Bank advances |
| 4,179,052 |
| 4,359,346 |
| ||
Total Liabilities |
| 79,443,887 |
| 83,431,271 |
| ||
|
|
|
|
|
| ||
STOCKHOLDERS’ EQUITY |
|
|
|
|
| ||
|
|
|
|
|
| ||
Stock: |
|
|
|
|
| ||
Preferred stock, no par value; authorized 1,000,000 shares; none issued and outstanding |
| — |
| — |
| ||
Common stock, $0.333 par value; authorized 6,000,000 shares; issued and outstanding 2,310,771 shares in 2005; 2,306,775 shares in 2004 |
| 770,256 |
| 768,925 |
| ||
Additional paid-in capital |
| 6,932,307 |
| 6,920,322 |
| ||
Retained earnings |
| 638,260 |
| 53,850 |
| ||
Total Stockholders’ Equity |
| 8,340,823 |
| 7,743,097 |
| ||
Total Liabilities and Stockholders’ Equity |
| $ | 87,784,710 |
| $ | 91,174,368 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-1
BG FINANCIAL GROUP, INC. AND SUBSIDIARY (2005) AND (2004)
AND BANK OF GREENEVILLE (2003)
Greeneville, Tennessee
CONSOLIDATED STATEMENTS OF INCOME
|
| 2005 |
| 2004 |
| 2003 |
| ||||||
|
|
|
|
|
|
|
| ||||||
Interest and dividend income: |
|
|
|
|
|
|
| ||||||
Loans, including fees |
| $ | 5,149,519 |
| $ | 5,376,509 |
| $ | 4,219,597 |
| |||
Dividends on Federal Home Loan Bank stock |
| 11,780 |
| 8,578 |
| 6,554 |
| ||||||
Federal funds sold and other |
| 338,211 |
| 113,630 |
| 82,239 |
| ||||||
Total interest and dividend income |
| 5,499,510 |
| 5,498,717 |
| 4,308,390 |
| ||||||
|
|
|
|
|
|
|
| ||||||
Interest expense: |
|
|
|
|
|
|
| ||||||
Deposits |
| 1,979,350 |
| 1,430,567 |
| 1,088,601 |
| ||||||
Borrowed funds |
| 139,599 |
| 145,513 |
| 127,758 |
| ||||||
|
|
|
|
|
|
|
| ||||||
Total interest expense |
| 2,118,949 |
| 1,576,080 |
| 1,216,359 |
| ||||||
Net interest income before provision for loan losses |
| 3,380,561 |
| 3,922,637 |
| 3,092,031 |
| ||||||
|
|
|
|
|
|
|
| ||||||
Provision for (benefit from) loan losses |
| (555,222 | ) | 615,251 |
| 956,609 |
| ||||||
Net interest income after provision for (benefit from) |
| 3,935,783 |
| 3,307,386 |
| 2,135,422 |
| ||||||
|
|
|
|
|
|
|
| ||||||
Noninterest income: |
|
|
|
|
|
|
| ||||||
Service charges on deposit accounts |
| 310,935 |
| 272,611 |
| 296,020 |
| ||||||
Fees from origination of mortgage loans |
| 118,353 |
| 127,417 |
| 154,767 |
| ||||||
Investment sales commissions |
| 100,066 |
| 97,313 |
| 97,178 |
| ||||||
Other |
| 35,905 |
| 34,336 |
| 64,500 |
| ||||||
Total noninterest income |
| 565,259 |
| 531,677 |
| 612,465 |
| ||||||
|
|
|
|
|
|
|
| ||||||
Noninterest expenses: |
|
|
|
|
|
|
| ||||||
Compensation and benefits |
| 1,802,775 |
| 1,529,482 |
| 1,290,696 |
| ||||||
Occupancy expenses |
| 481,813 |
| 400,454 |
| 294,491 |
| ||||||
Marketing |
| 121,858 |
| 143,266 |
| 89,348 |
| ||||||
Data processing |
| 191,202 |
| 191,748 |
| 148,156 |
| ||||||
Legal and professional expenses |
| 366,128 |
| 289,990 |
| 98,066 |
| ||||||
Other operating expenses |
| 609,875 |
| 552,423 |
| 483,924 |
| ||||||
Total noninterest expense |
| 3,573,651 |
| 3,107,363 |
| 2,404,681 |
| ||||||
Income before income taxes |
| 927,391 |
| 731,700 |
| 343,206 |
| ||||||
|
|
|
|
|
|
|
| ||||||
Income tax expense |
| 342,981 |
| 227,555 |
| 89,704 |
| ||||||
|
|
|
|
|
|
|
| ||||||
Net income |
| $ | 584,410 |
| $ | 504,145 |
| $ | 253,502 |
| |||
|
|
|
|
|
|
|
| ||||||
Per share information: |
|
|
|
|
|
|
| ||||||
Basic net income per common share |
| $ | 0.25 |
| $ | 0.22 |
| $ | 0.11 |
| |||
Diluted net income per common share |
| $ | 0.24 |
| $ | 0.21 |
| $ | 0.11 |
| |||
Weighted average basic shares outstanding |
| 2,308,609 |
| 2,299,656 |
| 2,286,844 |
| ||||||
Weighted average diluted shares outstanding |
| 2,480,337 |
| 2,382,873 |
| 2,333,507 |
| ||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-2
BG FINANCIAL GROUP, INC. AND SUBSIDIARY (2005) AND (2004)
AND BANK OF GREENEVILLE (2003)
Greeneville, Tennessee
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
|
| Number |
| Common |
| Additional |
| Retained |
| Total |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Balance, December 31, 2002 |
| 2,280,000 |
| $ | 760,000 |
| $ | 6,840,000 |
| $ | (698,798 | ) | $ | 6,901,202 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
|
|
| — |
| — |
| 253,502 |
| 253,502 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total comprehensive income |
|
|
|
|
|
|
|
|
| 253,502 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Issuance of 15,775 shares of common stock under stock option plan |
| 15,775 |
| 5,258 |
| 47,325 |
| — |
| 52,583 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Balance, December 31, 2003 |
| 2,295,775 |
| 765,258 |
| 6,887,325 |
| (445,296 | ) | 7,207,287 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Effect of the Plan of Share Exchange and consolidation of Bank of Greeneville into BG Financial Group, Inc. |
|
|
| — |
| — |
| (4,999 | ) | (4,999 | ) | ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
|
|
| — |
| — |
| 504,145 |
| 504,145 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total comprehensive income |
|
|
|
|
|
|
|
|
| 504,145 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Issuance of 11,000 shares of common stock under stock option plan |
| 11,000 |
| 3,667 |
| 32,997 |
| — |
| 36,664 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Balance, December 31, 2004 |
| 2,306,775 |
| 768,925 |
| 6,920,322 |
| 53,850 |
| 7,743,097 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
|
|
| — |
| — |
| 584,410 |
| 584,410 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total comprehensive income |
|
|
|
|
|
|
|
|
| 584,410 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Issuance of 3,996 shares of common stock under stock option plan |
| 3,996 |
| 1,331 |
| 11,985 |
| — |
| 13,316 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Balance, December 31, 2005 |
| 2,310,771 |
| $ | 770,256 |
| $ | 6,932,307 |
| $ | 638,260 |
| $ | 8,340,823 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-3
BG FINANCIAL GROUP, INC. AND SUBSIDIARY (2005) AND (2004)
AND BANK OF GREENEVILLE (2003)
Greeneville, Tennessee
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| 2005 |
| 2004 |
| 2003 |
| ||||||||||
|
|
|
|
|
|
|
| ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
| ||||||||||
Net income |
| $ | 584,410 |
| $ | 504,145 |
| $ | 253,502 |
| |||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
| ||||||||||
Provision for (benefit from) loan losses |
| (555,222 | ) | 615,251 |
| 956,609 |
| ||||||||||
Write-down of foreclosed assets |
| 19,149 |
| — |
| — |
| ||||||||||
Depreciation |
| 304,513 |
| 259,067 |
| 201,687 |
| ||||||||||
Realized loss (gain) on sales of premises and equipment |
| 4,913 |
| — |
| (8,470 | ) | ||||||||||
Realized loss (gain) on sales of foreclosed assets |
| 8,543 |
| (8,919 | ) | — |
| ||||||||||
Deferred income tax expense (benefit) |
| 364,564 |
| 4,831 |
| (93,171 | ) | ||||||||||
Net change in: |
|
|
|
|
|
|
| ||||||||||
Accrued income receivable |
| (29,021 | ) | (2,051 | ) | (130,989 | ) | ||||||||||
Other assets |
| (8,343 | ) | (32,218 | ) | (110,399 | ) | ||||||||||
Other liabilities |
| (218,317 | ) | 626,193 |
| (50,388 | ) | ||||||||||
Net cash provided by operating activities |
| 475,189 |
| 1,966,299 |
| 1,018,381 |
| ||||||||||
|
|
|
|
|
|
|
| ||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
| ||||||||||
Federal Home Loan Bank stock purchases |
| (18,000 | ) | (54,800 | ) | (37,400 | ) | ||||||||||
Proceeds from sales of premises and equipment |
| — |
| — |
| 14,000 |
| ||||||||||
Proceeds from sales of foreclosed assets |
| 731,061 |
| — |
| — |
| ||||||||||
Loan originations and principal collections, net |
| 7,970,500 |
| (4,727,904 | ) | (27,386,054 | ) | ||||||||||
Purchase of land for future development |
| — |
| (563,362 | ) | — |
| ||||||||||
Additions to premises and equipment |
| (191,907 | ) | (828,053 | ) | (429,171 | ) | ||||||||||
Net cash provided by (used in) investing activities |
| 8,491,654 |
| (6,174,119 | ) | (27,838,625 | ) | ||||||||||
|
|
|
|
|
|
|
| ||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
| ||||||||||
Net change in deposits |
| 7,891,977 |
| 4,768,779 |
| 3,866,820 |
| ||||||||||
Net change in certificates of deposit |
| (11,576,516 | ) | 156,682 |
| 26,325,092 |
| ||||||||||
Federal Home Loan Bank advances |
| — |
| 276,462 |
| 3,777,000 |
| ||||||||||
Federal Home Loan Bank repayments |
| (180,294 | ) | (171,221 | ) | (2,194,894 | ) | ||||||||||
Issuance of common stock |
| 13,316 |
| 36,664 |
| 52,583 |
| ||||||||||
Net cash provided by (used in) financing activities |
| (3,851,517 | ) | 5,067,366 |
| 31,826,601 |
| ||||||||||
|
|
|
|
|
|
|
| ||||||||||
Net change in cash and cash equivalents |
| 5,115,326 |
| 859,546 |
| 5,006,357 |
| ||||||||||
|
|
|
|
|
|
|
| ||||||||||
Cash and cash equivalents at beginning of year |
| 13,158,516 |
| 12,298,970 |
| 7,292,613 |
| ||||||||||
|
|
|
|
|
|
|
| ||||||||||
Cash and cash equivalents at end of year |
| $ | 18,273,842 |
| $ | 13,158,516 |
| $ | 12,298,970 |
| |||||||
|
|
|
|
|
|
|
| ||||||||||
SUPPLEMENTARY CASH FLOW INFORMATION: |
|
|
|
|
|
|
| ||||||||||
|
|
|
|
|
|
|
| ||||||||||
Interest paid on deposits and borrowed funds |
| $ | 1,964,685 |
| $ | 1,428,238 |
| $ | 1,281,349 |
| |||||||
Income taxes paid |
| $ | 148,090 |
| $ | 87,431 |
| $ | 302,340 |
| |||||||
|
|
|
|
|
|
|
| ||||||||||
SUPPLEMENTAl SCHEDULE OF NON-CASH ACTIVITIES: |
|
|
|
|
|
|
| ||||||||||
|
|
|
|
|
|
|
| ||||||||||
Foreclosed assets sold during the year and financed through loans |
| $ | 65,412 |
| $ | 255,177 |
| $ | — |
| |||||||
Loans moved to foreclosed assets |
| $ | 950,795 |
| $ | 83,383 |
| $ | 184,127 |
| |||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-4
BG FINANCIAL GROUP, INC. AND SUBSIDIARY (2005) AND (2004)
AND BANK OF GREENEVILLE (2003)
Greeneville, Tennessee
Note 1. Operations and Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of BG Financial Group, Inc. and Bank of Greeneville, a wholly owned subsidiary of the BG Financial Group, Inc. collectively referred to herein as the “Company”. All significant intercompany balances and transactions have been eliminated.
Nature of Business
BG Financial Group, Inc. (the “Holding Company”) is a bank holding company whose business is conducted by its wholly-owned subsidiary, Bank of Greeneville (the “Bank”) (collectively, “the Company”). The Bank is engaged in the business of originating loans within its lending area, Greeneville and Greene County in Tennessee. The Bank obtains deposits both inside and outside of its primary lending area. The Holding Company was organized in November 2003. The Holding Company had minimal assets, liabilities or operations until January, 2004, when it acquired the Bank in a Plan of Share Exchange whereby the stockholders exchanged their shares of ownership in the Bank for shares of ownership in the Holding Company on a one-for-one basis. As a part of the Plan of Share Exchange, the Bank became a wholly owned subsidiary of the Holding Company. As a result of this transaction, the financial statements at December 31, 2005 and 2004 present the Holding Company and the Bank as a consolidated entity. All significant intercompany balances and transactions have been eliminated. Information related to the results of operations for the year ended December 31, 2003 are for the Bank only.
Use of Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans, the valuation of assets acquired in connection with foreclosures or in satisfaction of loans, and realization of deferred tax assets.
The ultimate collectibility of a substantial portion of the Company’s loan portfolio and the recovery of a substantial portion of the carrying amount of foreclosed assets are susceptible to changes in local market conditions.
While management uses available information to recognize losses on loans and foreclosed assets, future additions to the allowances may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowances for losses on loans and foreclosed assets. Such agencies may require the Company to recognize additions to the allowances based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the allowances for losses on loans and foreclosed assets may change materially in the near term.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and balances due from banks and federal funds sold.
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Trading Securities
Government bonds held principally for resale in the near term, and mortgage-backed securities held for sale in conjunction with the Company’s mortgage banking activities, are classified as trading account securities and recorded at their fair values. Unrealized gains and losses on trading account securities are included immediately in other income. However, at December 31, 2005 and 2004 the Company did not have any trading securities.
Debt Securities
Debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. Securities not classified as held to maturity or trading, including equity securities with readily determinable fair values, are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. There were no securities classified as “held to maturity” or “available for sale” as of December 31, 2005 and 2004.
Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other then temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Any loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. There were no net loan origination fees considered to be material for deferral at December 31, 2005 or 2004.
The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on non-accrual basis or charged-off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on a non-accrual basis or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of
The accompanying notes are an integral part of these consolidated financial statements.
F-6
any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of specific and general components. The specific component relates to loans that are considered to be impaired. An allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. During 2005, the Bank modified its methodology to also specifically evaluate all commercial and real estate loans classified as substandard or doubtful over $100,000 for impairment (see Note 5). Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and real estate loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures.
For large groups of smaller homogeneous loans, the allowance is determined by calculating the following components: historical loss experience, adjustments to reflect the effect of current conditions, and adjustments for other factors. Each of these components is explained in more detail below.
The year ended December 31, 2005 represents the Bank’s fourth full year of operations. In determining the component for historical loss experience, the Bank has considered the average of the last four years’ experience. This component has been adjusted, due to the fact that the Bank has limited loss experience given the age of the Bank. The component has been further adjusted for uncertain local economic conditions, due to higher unemployment.
Loans collectively assessed for impairment are consumer, residential, and smaller-balance commercial and commercial real estate loans. These loans are collectively assessed by groupings as follows: loans secured by deposits; past-due loans; substandard and doubtful loans with outstanding balances less than $100,000; and all remaining loans. The credit risk characteristics within each such grouping is considered to be consistent with prior experience, and thus the credit risk evaluation process is based on historical experience as adjusted for the factors described above.
At year end 2005, the objective evidence used in measuring each component of loans is primarily as follows:
(a) Impaired loans under Financial Accounting Standards Board (FASB) Statement No. 114: delinquency information and estimates of future collections
(b) Loans collectively assessed under FASB Statement No. 5: (a) historical component: loan balances and average losses over the last four years in each category; (b) component for increase due to limited loss experience given the age of the Bank; and (c) increase for uncertain local economic conditions, due to higher unemployment.
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Advertising
The Company’s policy is to expense advertising costs as the costs are incurred.
Premises and Equipment
Land is carried at cost. Company premises and equipment are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the following estimated useful lives:
|
| Years |
| |
|
|
|
| |
Buildings and improvements |
|
| 31 1/2 |
|
Furniture and equipment |
|
| 3-10 |
|
Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized. Gains and losses on dispositions are included in current operations.
Foreclosed Assets
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Any changes in the valuation allowance are included in noninterest expense. There was no such valuation allowance at December 31, 2005 and 2004.
Income Taxes
Income taxes are provided for the tax effects of the transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of the allowance for loan losses and accumulated depreciation. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
Off-Balance Sheet Credit Related Financial Instruments
In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when they are funded.
Stock-Based Compensation Plan
The Company accounts for non-cash stock-based compensation in accordance with the provisions of Accounting Principles Board Opinion No. 25 (Accounting for Stock Issued to Employees), and its related interpretations, which states that no compensation expense is recognized for stock options or other stock-based awards to employees that are granted with an exercise price equal to or above the estimated fair value per share of the Company’s common stock on the grant date. Stock options issued under the Company’s Stock Option Plan have no intrinsic value at the grant date, and under Opinion No. 25 no compensation costs are recognized for them.
The Company has adopted the disclosure requirements of Statement of Financial Accounting Standards No. 123 (Accounting for Stock-Based Compensation), which requires certain pro forma disclosures as if compensation
The accompanying notes are an integral part of these consolidated financial statements.
F-8
expense was determined based on the fair value of the options granted at the date of the grant. See Note 15 for a further description of the assumptions used for preparing the pro forma disclosures as prescribed by Statement 123.
Earnings Per Common Share
Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Bank relate solely to outstanding stock options and are determined using the treasury stock method.
Recent Accounting Pronouncements
In March 2004, the SEC issued Staff Accounting Bulletin No. 105, Application of Accounting Principles to Loan Commitments. Current accounting guidance requires the commitment to originate mortgage loans to be held for sale be recognized on the balance sheet at fair value from inception through expiration or funding. SAB 105 requires that the fair-value measurement include only differences between the guaranteed interest rate in the loan commitment and a market interest rate, excluding any expected future cash flows related to the customer relationship or loan servicing. SAB 105 is effective for commitments to originate mortgage loans to be held for sale that are entered into after March 31, 2004. Its adoption did not have a material impact on the consolidated financial position or results of operations of the Company.
FASB Staff Position on FAS No. 115-1 and FAS No. 124-1 (“the FSP”), “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” was issued in November 2005 and addresses the determination of when an investment is considered impaired; whether the impairment is other-than-temporary; and how to measure an impairment loss. The FSP also addresses accounting considerations subsequent to the recognition of an other-than-temporary impairment on a debt security, and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The FSP replaces the impairment guidance on Emerging Issues Task Force (EITF) Issue No. 03-1 with references to existing authoritative literature concerning other-than-temporary determinations. Under the FSP, losses arising from impairment deemed to be other-than-temporary, must be recognized in earnings at an amount equal to the entire difference between the securities cost and its fair value at the financial statement date, without considering partial recoveries subsequent to that date. The FSP also required that an investor recognize an other-than-temporary impairment loss when a decision to sell a security has been made and the investor does not expect the fair value of the security to fully recover prior to the expected time of sale. The FSP is effective for reporting periods beginning after December 15, 2005. The adoption of this statement is not expected to have a material impact on the Company’s consolidated financial statements.
In December 2004, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123R”), which revised SFAS No. 123, “Accounting for Stock-Based Compensation. This statement supercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” The revised statement addresses the accounting for share-based payment transactions with employees and other third parties, eliminates the ability to account for share-based compensation transactions using APB 25 and requires that the compensation costs relating to such transactions be recognized in the consolidated statement of income. The revised statement is effective as of the first interim or annual period beginning after June 15, 2005. In anticipation of adopting SFAS No. 123R, the Company elected to immediately vest all remaining stock options during 2005 to avoid the recognition of compensation costs in the consolidated statement of income in future periods.
The FASB issued an FSP on December 15, 2005, “SOP 94-6-1 - Terms of Loan Products That May Give Rise to a Concentration of Credit Risk” which addresses the disclosure requirements for certain nontraditional mortgage and other loan products the aggregation of which may constitute a concentration of credit risk under existing accounting literature. Pursuant to this FSP, the FASB’s intentions were to reemphasize the adequacy of
The accompanying notes are an integral part of these consolidated financial statements.
F-9
such disclosures and noted that the recent popularity of certain loan products such as negative amortization loans, high loan-to-value loans, interest only loans, teaser rate loans, option adjusted rate mortgage loans and other loan product types may aggregate to the point of being a concentration of credit risk to an issuer and thus may require enhanced disclosures under existing guidance. This FSP was effective immediately. The adoption of this FSP did not have a material impact on the consolidated financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform with current year presentations.
Note 2. Restrictions On Cash and Due From Banks
Under agreements with correspondent banks, the Company maintains deposit balances with the correspondents to cover various bank processing charges. At December 31, 2005 and 2004, approximately $1,725,000 of the cash and due from banks balance represents the deposits maintained with the correspondent banks. In addition, the Company must maintain an average reserve balance related to customers’ deposit balances as required by the Federal Reserve. At December 31, 2005 and 2004, approximately $25,000 represents the cash reserve balance required to be on hand by the Federal Reserve.
Note 3. Federal Home Loan Bank Stock
As a member of the Federal Home Loan Bank, the Company is required to maintain stock in an amount equal to .15% of total assets. Federal Home Loan Bank stock is carried at cost. Federal Home Loan Bank stock is maintained by the Company at par value of one hundred dollars per share.
Note 4. Loans
The composition of the net loans is as follows:
|
| December 31 |
| December 31 |
| |||
|
|
|
|
|
| |||
Consumer installment |
| $ | 4,642,731 |
| $ | 5,522,402 |
| |
Commercial |
| 19,322,800 |
| 20,927,959 |
| |||
Commercial real estate |
| 25,782,176 |
| 31,560,010 |
| |||
Residential mortgage |
| 15,003,931 |
| 15,952,474 |
| |||
|
| 64,751,638 |
| 73,962,845 |
| |||
Less: |
|
|
|
|
| |||
Allowance for loan losses |
| 697,013 |
| 1,607,559 |
| |||
|
|
|
|
|
| |||
Loans, net |
| $ | 64,054,625 |
| $ | 72,355,286 |
| |
The following is a summary of information pertaining to impaired and non-accrual loans:
|
| December 31 |
| December 31 |
| ||
|
|
|
|
|
| ||
Impaired loans with a specific valuation allowance |
| $ | 1,652,034 |
| $ | 323,446 |
|
Total specifically evaluated impaired loans |
| $ | 1,652,034 |
| $ | 323,446 |
|
Specific valuation allowance related to impaired loans |
| $ | 90,662 |
| $ | 45,000 |
|
|
|
|
|
|
| ||
Past-due loans ninety days or more and still accruing |
| $ | 78,509 |
| $ | 13,109 |
|
Total non-accrual loans |
| $ | 2,094,311 |
| $ | 534,442 |
|
|
|
|
|
|
| ||
Average investment in specifically evaluated impaired loans |
| $ | 1,685,714 |
| $ | 27,396 |
|
Interest income recognized on impaired loans |
| $ | 27,344 |
| $ | — |
|
Interest income recognized on a cash basis on impaired loans |
| $ | 27,344 |
| $ | — |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-10
Interest income that would have accrued on non-accrual loans if they were on a current basis was $155,347 and $23,362 in 2005 and 2004, respectively.
The Bank collectively evaluates large groups of smaller balance homogeneous loans for impairment. Loans collectively evaluated for impairment, with a classification of substandard or doubtful, as of December 31, 2005 and 2004, were $365,352 and $5,001,456, respectively.
The following table is a summary of loans as of December 31, 2005:
|
| Fixed Rate |
| Variable |
| Total |
| |||||
|
|
|
|
|
|
|
| |||||
Installment |
| $ | 3,766,208 |
| $ | 876,523 |
| $ | 4,642,731 |
| ||
Commercial |
| 3,741,164 |
| 15,581,636 |
| 19,322,800 |
| |||||
Commercial real estate |
| 10,208,976 |
| 15,573,200 |
| 25,782,176 |
| |||||
Mortgage |
| 10,425,094 |
| 4,578,837 |
| 15,003,931 |
| |||||
|
|
|
|
|
|
|
| |||||
Total |
| $ | 28,141,442 |
| $ | 36,610,196 |
| $ | 64,751,638 |
| ||
The schedule of maturities for loans at December 31, 2005 by fixed and variable rates are shown below:
|
| Fixed Rate |
| Variable |
| Total |
| |||||
|
|
|
|
|
|
|
| |||||
Due in one year or less |
| $ | 9,754,491 |
| $ | 13,442,304 |
| $ | 23,196,795 |
| ||
Due after one year through five years |
| 17,963,260 |
| 20,188,431 |
| 38,151,691 |
| |||||
Due after five years |
| 423,691 |
| 2,979,461 |
| 3,403,152 |
| |||||
Total |
| $ | 28,141,442 |
| $ | 36,610,196 |
| $ | 64,751,638 |
| ||
The accompanying notes are an integral part of these consolidated financial statements.
F-11
Note 5. Allowance for Loan Losses
Changes in the allowance for loan losses for the Bank are as follows:
|
| Year Ended |
| Year Ended |
| Year Ended |
| |||
|
|
|
|
|
|
|
| |||
Balance, beginning |
| $ | 1,607,559 |
| $ | 1,350,266 |
| $ | 533,819 |
|
Provision for (benefit from) loan losses |
| (555,222 | ) | 615,251 |
| 956,609 |
| |||
Recoveries of loans previously charged-off |
| 9,855 |
| 143,821 |
| 7,005 |
| |||
|
| 1,062,192 |
| 2,109,338 |
| 1,497,433 |
| |||
Loans charged-off |
| 365,179 |
| 501,779 |
| 147,167 |
| |||
Balance, ending |
| $ | 697,013 |
| $ | 1,607,559 |
| $ | 1,350,266 |
|
During 2005, the Bank recognized a benefit of $555,222 from the reduction of the allowance for loan losses. One factor was that several loans, which were classified as special mention, substandard or doubtful as of December 31, 2004, were paid out during 2005 with minimal losses. In addition, the Bank’s loan portfolio as a whole, as of December 31, 2005, has decreased by approximately $9,200,000 million (includes classified loans from 2004 that paid out in 2005 discussed above) since December 31, 2004. Another factor is that the Bank modified its methodology to evaluate more specific loans for impairment (see Note 1). This change in methodology provided a benefit of approximately $163,000 in 2005. Given the fact that many of the Bank’s loans are considered to be well collateralized by real estate, the Bank has estimated minimal exposure on its specifically- evaluated impaired loans as of December 31, 2005.
Note 6. Premises and Equipment
The major classes of premises and equipment and the total accumulated depreciation are as follows:
|
| December 31 |
| December 31 |
| |||
Land |
| $ | 1,170,363 |
| $ | 1,170,363 |
| |
Land for future development |
| 564,712 |
| 563,362 |
| |||
Premises and improvements |
| 1,420,548 |
| 1,414,544 |
| |||
Furniture and equipment |
| 1,597,621 |
| 1,473,463 |
| |||
Construction in process |
| 31,063 |
| 5,919 |
| |||
|
| 4,784,307 |
| 4,627,651 |
| |||
Less: Accumulated depreciation |
| 1,006,326 |
| 732,151 |
| |||
|
|
|
|
|
| |||
|
| $ | 3,777,981 |
| $ | 3,895,500 |
| |
Depreciation and amortization expense of premises and equipment for 2005 and 2004 was $304,513 and $259,067, respectively.
Rental expense under operating leases for 2005 and 2004 were $23,599 and $22,961, respectively.
The accompanying notes are an integral part of these consolidated financial statements.
F-12
Future minimum rental payments required under noncancelable operating leases for equipment and data processing fees under operating agreements were as follows:
2006 |
| $ | 39,394 |
|
2007 |
| 14,463 |
| |
2008 |
| 13,028 |
| |
2009 |
| 13,028 |
| |
2010 and Thereafter |
| 6,550 |
| |
|
| $ | 86,463 |
|
Note 7. Federal Home Loan Bank Advance
Pursuant to collateral agreements with Federal Home Loan Bank (FHLB), the advance is collateralized by specific first mortgage loans. The FHLB’s required unpaid principal balance of eligible mortgages was $7,719,341 at December 31, 2005. The advances at December 31, 2005, have maturity dates as follows:
Maturity Date |
| Interest Rate |
| December 31, 2005 |
| |
|
|
|
|
|
| |
12/01/07 |
| 3.11 | % | $ | 17,586 |
|
12/01/07 |
| 3.83 |
| 488,984 |
| |
01/01/08 |
| 3.50 |
| 16,886 |
| |
12/20/07 |
| 3.60 |
| 30,000 |
| |
07/07/06 |
| 3.07 |
| 1,600,000 |
| |
08/04/06 |
| 2.99 |
| 100,000 |
| |
04/01/10 |
| 3.56 |
| 682,779 |
| |
05/01/08 |
| 2.64 |
| 45,192 |
| |
06/01/08 |
| 3.28 |
| 735,680 |
| |
08/01/08 |
| 2.85 |
| 39,573 |
| |
08/01/08 |
| 2.99 |
| 65,422 |
| |
11/01/08 |
| 3.54 |
| 106,886 |
| |
03/01/07 |
| 2.91 |
| 250,064 |
| |
|
|
|
| $ | 4,179,052 |
|
As of December 31, 2005, the Company had $232,000 available in unfunded letters of credit with the FHLB.
The accompanying notes are an integral part of these consolidated financial statements.
F-13
Note 8. Income Tax Matters
Net deferred tax assets consist of the following components as of December 31, 2005 and 2004:
|
| 2005 |
| 2004 |
| ||
|
|
|
|
|
| ||
Deferred Tax Assets: |
|
|
|
|
| ||
Allowance for loan losses |
| $ | 266,886 |
| $ | 615,534 |
|
Amortization of intangibles start-up cost and organizational costs |
| 59,630 |
| 128,493 |
| ||
Interest on non-accrual loans |
| 68,536 |
| — |
| ||
Other |
| 3,561 |
| — |
| ||
|
|
|
|
|
| ||
|
| 398,613 |
| 744,027 |
| ||
Deferred Tax Liabilities: |
|
|
|
|
| ||
Depreciable assets |
| 161,870 |
| 142,720 |
| ||
|
|
|
|
|
| ||
Net deferred tax assets |
| $ | 236,743 |
| $ | 601,307 |
|
The provision for income taxes charged to income from continuing operations for the years ended December 31, 2005, 2004, and 2003 consists of the following:
|
| 2005 |
| 2004 |
| 2003 |
| |||
|
|
|
|
|
|
|
| |||
Current tax expense (benefit) |
| $ | (21,583 | ) | $ | 222,724 |
| $ | 182,875 |
|
Deferred tax expense (benefit) |
| 364,564 |
| 4,831 |
| (93,171 | ) | |||
Total income tax expense |
| $ | 342,981 |
| $ | 227,555 |
| $ | 89,704 |
|
The income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income from continuing operations for the years ended December 31, 2005, 2004, and 2003, due to the following:
|
| 2005 |
| 2004 |
| 2003 |
| |||
|
|
|
|
|
|
|
| |||
Computed “expected” tax expense |
| $ | 315,313 |
| $ | 248,778 |
| $ | 116,690 |
|
State income tax, net of federal benefits |
| 39,785 |
| 31,390 |
| 14,773 |
| |||
Other, net |
| (12,117 | ) | (52,613 | ) | (41,759 | ) | |||
|
|
|
|
|
|
|
| |||
|
| $ | 342,981 |
| $ | 227,555 |
| $ | 89,704 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-15
Note 9. Deposits
The aggregate amount of time deposits in denominations of $100,000 or more at December 31, 2005 and 2004 was $7,878,835 and $4,740,407, respectively.
At December 31, 2005, the scheduled maturities of time deposits are as follows:
2006 |
| $ | 36,478,874 |
|
2007 |
| 5,804,416 |
| |
2008 |
| 1,650,110 |
| |
2009 |
| 74,494 |
| |
2010 and Thereafter |
| — |
| |
|
| $ | 44,007,894 |
|
Note 10. Regulatory Capital Requirements
The Company is 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 affect on the Company and the consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2005, that the Company meets all capital adequacy requirements to which it is subject.
As of December 31, 2005, the Company was categorized as well capitalized under the regulatory framework for prompt corrective action according to the most recent notification dated April 29, 2004, from the Federal Deposit Insurance Corporation. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below. There are no conditions or events since the notification that management believes has changed the institution’s category.
The accompanying notes are an integral part of these consolidated financial statements.
F-16
The Company’s actual capital amounts and ratios are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| To Be Well |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Capitalized Under |
| |||||||
|
|
|
|
|
|
|
| For Capital |
|
| Prompt Corrective |
| |||||||||||
|
| Actual |
|
|
| Adequacy Purposes |
|
| Action Provisions |
| |||||||||||||
|
| Amount |
| Ratio |
|
|
| Amount |
|
|
| Ratio |
|
| Amount |
|
|
| Ratio |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
As of December 31, 2005 (in Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Tier 1 Capital (To Average assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Consolidated |
| $ | 8,345 |
| 9.65 | % | > |
| $ | 3,459 |
| > |
| 4 | % | > | N/A |
|
|
| N/A |
| |
Bank of Greeneville |
| $ | 8,317 |
| 9.62 | % | > |
| $ | 3,458 |
| > |
| 4 | % | > | $ | 4,322 |
| > |
| 5 | % |
Tier 1 Capital (To Risk Weighted Assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Consolidated |
| $ | 8,345 |
| 12.12 | % | > |
| $ | 2,756 |
| > |
| 4 | % | > | N/A |
|
|
| N/A |
| |
Bank of Greeneville |
| $ | 8,317 |
| 12.08 | % | > |
| $ | 2,754 |
| > |
| 4 | % | > | $ | 4,132 |
| > |
| 6 | % |
Total Capital (To Risk Weighted Assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Consolidated |
| $ | 9,042 |
| 13.13 | % | > |
| $ | 5,511 |
| > |
| 8 | % | > | N/A |
|
|
| N/A |
| |
Bank of Greeneville |
| $ | 9,014 |
| 13.09 | % | > |
| $ | 5,509 |
| > |
| 8 | % | > | $ | 6,886 |
| > |
| 10 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
As of December 31, 2004 (in Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Tier 1 Capital (To Average assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Consolidated |
| $ | 7,743 |
| 8.55 | % | > |
| $ | 3,621 |
| > |
| 4 | % | > | N/A |
|
|
| N/A |
| |
Bank of Greeneville |
| $ | 7,690 |
| 8.50 | % | > |
| $ | 3,620 |
| > |
| 4 | % | > | $ | 4,525 |
| > |
| 5 | % |
Tier 1 Capital (To Risk Weighted Assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Consolidated |
| $ | 7,743 |
| 9.90 | % | > |
| $ | 3,129 |
| > |
| 4 | % | > | N/A |
|
|
| N/A |
| |
Bank of Greeneville |
| $ | 7,690 |
| 10.00 | % | > |
| $ | 3,076 |
| > |
| 4 | % | > | $ | 4,614 |
| > |
| 6 | % |
Total Capital (To Risk Weighted Assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Consolidated |
| $ | 8,713 |
| 11.14 | % | > |
| $ | 6,258 |
| > |
| 8 | % | > | N/A |
|
|
| N/A |
| |
Bank of Greeneville |
| $ | 8,659 |
| 11.26 | % | > |
| $ | 6,152 |
| > |
| 8 | % | > | $ | 7,691 |
| > |
| 10 | % |
Note 11. Commitments and Contingencies
Financial Instruments with Off-Balance-Sheet Risk
In the normal course of business, the Company has entered into off-balance sheet financial instruments which include commitments to extend credit (i.e., including unfunded lines of credit) and standby letters of credit. Commitments to extend credit are usually the result of lines of credit granted to existing borrowers under agreements that the total outstanding indebtedness will not exceed a specific amount during the term of the indebtedness. Typical borrowers are commercial concerns and their total outstanding indebtedness may fluctuate during any time period based on the seasonality of their business and the resultant timing of their cash flows. Other typical lines of credit are related to home equity loans granted to consumers. Commitments to extend credit generally have fixed expiration dates or other termination clauses and may require payment of a fee.
Standby letters of credit are generally issued on behalf of an applicant to a specifically named beneficiary and are the result of a particular business arrangement that exists between the applicant and the beneficiary. Standby letters of credit have fixed expiration dates and are usually for terms of two years or less unless terminated beforehand due to criteria specified in the standby letter of credit. A typical arrangement involves the applicant routinely being indebted to the beneficiary for such items as inventory purchases, insurance, utilities, lease guarantees or other third party commercial transactions. The standby letter of credit would permit the beneficiary to obtain payment from the Company under certain prescribed circumstances. Subsequently, the Company would then seek reimbursement from the applicant pursuant to the terms of the standby letter of credit.
The accompanying notes are an integral part of these consolidated financial statements.
F-17
The Company follows the same credit policies and underwriting practices when making these commitments as it does for on-balance sheet instruments. Each customer’s creditworthiness is evaluated on a case-by-case basis and the amount of collateral obtained, if any, is based on management’s credit evaluation of the customer.
Collateral held varies but may include cash, real estate and improvements, marketable securities, accounts receivable, inventory, equipment, and personal property.
The contractual amounts of these commitments are not reflected in the consolidated financial statements and would only be reflected if drawn upon. Since many of the commitments are expected to expire without being drawn upon, the contractual amounts do not necessarily represent future cash requirements. However, should the commitments be drawn upon and should the customers default on their resulting obligation, the Company’s maximum exposure to credit loss, without consideration of collateral, is represented by the contractual amount of those instruments.
A summary of the Company’s total contractual amount for all off-balance sheet commitments at December 31, 2005 is as follows:
Commitments to extend credit |
| $ | 9,533,334 |
|
Standby letters of credit |
| $ | 272,550 |
|
Significant Concentrations of Credit Risk
All of the Company’s loans, commitments to extend credit, and standby letters of credit have been granted to customers in the Company’s market area. The concentrations of credit by type of loan are set forth in Note 4. Standby letters of credit were granted primarily to commercial borrowers. The Company is not permitted to extend credit to any single borrower or group of related borrowers in excess of 25% of capital.
Contingencies
In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the Company’s financial statements.
Note 12. Fair Value of Financial Instruments
The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. 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. Statement of Financial Accounting Standards (SFAS) No. 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:
Cash and Cash Equivalents
The carrying amounts of cash and federal funds sold approximate fair values.
The accompanying notes are an integral part of these consolidated financial statements.
F-18
Interest-Bearing Deposits in Banks
The carrying amounts of any interest-bearing deposits maturing within ninety days approximate their fair values. Fair values of any other interest-bearing deposits are estimated using discounted cash flow analyses based on current rates for similar types of deposits. There were no interest-bearing deposits with other banks as of December 31, 2005 and 2004.
Trading Assets
Fair values for trading account securities, which also are the amounts recognized in the consolidated balance sheet, are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.
Securities
Fair values for securities, excluding Federal Home Loan Bank stock, are based on quoted market prices. The carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank.
Loans Receivable
For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for fixed-rate loans (including non-performing loans) are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.
Deposit Liabilities
The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Short-Term Borrowings
The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings maturing within ninety days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.
Long-Term Borrowings
The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.
Accrued Interest
The carrying amounts of accrued interest approximate fair value.
The accompanying notes are an integral part of these consolidated financial statements.
F-19
Off-Balance Sheet Credit-Related Instruments
Commitments to extend credit and standby letters of credit do not represent a significant value to the Company until such commitments are funded.
The estimated fair values of the Company’s financial instruments are as follows at December 31:
|
| 2005 |
| 2004 |
| ||||||||
|
| Carrying |
| Fair |
| Carrying |
| Fair |
| ||||
Financial Assets: |
|
|
|
|
|
|
|
|
| ||||
Cash and federal funds sold |
| $ | 18,273,842 |
| $ | 18,273,842 |
| $ | 13,158,516 |
| $ | 13,158,516 |
|
Federal Home Loan Bank Stock |
| 244,500 |
| 244,500 |
| 226,500 |
| 226,500 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Loans, net: |
|
|
|
|
|
|
|
|
| ||||
Held for investment |
| 64,054,625 |
| 63,844,692 |
| 72,355,286 |
| 72,235,046 |
| ||||
Total financial assets |
| 82,572,967 |
| $ | 82,363,034 |
| 85,740,302 |
| $ | 85,620,062 |
| ||
|
|
|
|
|
|
|
|
|
| ||||
Nonfinancial Assets: |
|
|
|
|
|
|
|
|
| ||||
Other assets |
| 5,211,743 |
|
|
| 5,434,066 |
|
|
| ||||
Total assets |
| $ | 87,784,710 |
|
|
| $ | 91,174,368 |
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||||
Financial Liabilities: |
|
|
|
|
|
|
|
|
| ||||
Deposits |
|
|
|
|
|
|
|
|
| ||||
Without stated maturities |
| $ | 30,694,794 |
| $ | 30,694,794 |
| $ | 22,802,817 |
| $ | 22,802,817 |
|
With stated maturities |
| 44,007,894 |
| 43,940,148 |
| 55,584,410 |
| 55,653,487 |
| ||||
Federal Home Loan Bank advances |
| 4,179,052 |
| 4,136,131 |
| 4,359,346 |
| 4,291,977 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total financial liabilities |
| 78,881,740 |
| $ | 78,771,073 |
| 82,746,573 |
| $ | 82,748,281 |
| ||
|
|
|
|
|
|
|
|
|
| ||||
Other Nonfinancial Liabilities |
| 562,147 |
|
|
| 684,698 |
|
|
| ||||
Shareholder’s Equity |
| 8,340,823 |
|
|
| 7,743,097 |
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total liabilities and shareholders’ equity |
| $ | 87,784,710 |
|
|
| $ | 91,174,368 |
|
|
| ||
|
| Notional Amounts |
|
|
| Notional Amounts |
|
|
| ||||
Off-balance sheet financial |
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Instruments: |
|
|
|
|
|
|
|
|
| ||||
Loan commitments |
| $ | 9,533,334 |
| $ | — |
| $ | 6,416,071 |
| $ | — |
|
Letters of credit |
| $ | 272,550 |
| $ | — |
| $ | 1,272,700 |
| $ | — |
|
The carrying amounts in the table above are the amounts at which the financial instruments are reported in the financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
F-20
Note 13. Transactions With Related Parties
The Company has had, and may be expected to have in the future, banking transactions in the ordinary course of business with directors, principal officers, their immediate families and affiliated companies in which they are principal stockholders (commonly referred to as related parties), all of which have been, in the opinion of management, on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others.
The amounts of loans due directly from officers and directors of the Company or indirectly from corporations, partnerships of ventures in which these individuals have an interest were approximately $1,005,289 and $667,673 at December 31, 2005 and 2004, respectively. During the years ended December 31, 2005 and 2004, total principal additions were $767,970 and $128,073, respectively, and total principal payments were $430,354 and $666,463, respectively.
Note 14. Employee Benefit Plans
The Company has a retirement savings 401(k) plan in which all employees may participate. To be eligible, an employee must complete six (6) months of service and reach their entry date. An entry date is the first day of the Plan Year quarter coinciding with or following the date that satisfies the Plan’s eligibility requirements. For 2005, employees may make pretax, voluntary contributions in amounts up to $14,000 (age 49 or less) and $18,000 (age 50 and older). The Company may make discretionary matching contributions equal to a uniform percentage of tiered salary deferrals. This percentage will be determined each year. The Company’s expense for the plan was $46,144 and $53,470 for the years ended December 31, 2005 and 2004, respectively.
Note 15. Stock Compensation Plan
The Company has an employee Stock Option Plan (the Plan) under which certain employees may be granted options to purchase shares of the Company’s authorized but unissued common stock. The maximum number of shares of the Company’s common stock available for issuance under the Plan is 375,000 shares. As of December 31, 2005 and 2004, the maximum number of shares available for future grants under the Plan is 73,700 shares and 74,200 shares, respectively. Under the Plan, the option exercise price is equal to the fair market value of the Company’s common stock at the date of the grant. The options expire on the tenth anniversary of the date of the option. As discussed in Note 1, management elected to vest all remaining stock options during 2005. Proceeds received by the Company from exercises of the stock options are credited to common stock and additional paid-in capital.
Additional information with respect to the Plan’s stock option activity is as follows:
|
| Number of |
| Weighted Average |
| |
|
|
|
|
|
| |
Outstanding at December 31, 2003 |
| 249,025 |
| $ | 4.08 |
|
Granted |
| 17,100 |
| 17.00 |
| |
Forfeited |
| (9,000 | ) | 3.33 |
| |
Exercised |
| (11,000 | ) | 3.33 |
| |
Outstanding at December 31, 2004 |
| 246,125 |
| $ | 5.06 |
|
Granted |
| 700 |
| 17.00 |
| |
Forfeited |
| (200 | ) | 17.00 |
| |
Exercised |
| (3,996 | ) | 3.33 |
| |
Outstanding at December 31, 2005 |
| 242,629 |
| $ | 5.11 |
|
Options exercisable at December 31, 2004 |
| 106,765 |
| $ | 3.99 |
|
Options exercisable at December 31, 2005 |
| 242,629 |
| $ | 5.12 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-21
The following tables summarize the information about the stock options outstanding and exercisable at December 31, 2005:
|
| Stock Options Outstanding |
| |||
Exercise Price |
| Number of |
| Weighted Average |
| |
|
|
|
|
|
| |
$ | 3.33 |
| 174,429 |
| 5.5 |
|
$ | 5.33 |
| 15,000 |
| 6.0 |
|
$ | 7.33 |
| 15,300 |
| 6.7 |
|
$ | 7.67 |
| 3,900 |
| 6.8 |
|
$ | 8.00 |
| 15,000 |
| 6.9 |
|
$ | 13.00 |
| 1,400 |
| 7.8 |
|
$ | 17.00 |
| 1,000 |
| 8.6 |
|
$ | 17.00 |
| 900 |
| 8.7 |
|
$ | 17.00 |
| 15,000 |
| 8.7 |
|
$ | 19.00 |
| 700 |
| 9.3 |
|
|
| 242,629 |
| 6.0 |
| |
|
| Stock Options Exercisable |
| |||
|
| Number of |
| Weighted Average |
| |
|
|
|
|
|
| |
|
| 174,429 |
| $ | 3.33 |
|
|
| 15,000 |
| 5.33 |
| |
|
| 15,300 |
| 7.33 |
| |
|
| 3,900 |
| 7.67 |
| |
|
| 15,000 |
| 8.00 |
| |
|
| 1,400 |
| 13.00 |
| |
|
| 16,900 |
| 17.00 |
| |
|
| 700 |
| 19.00 |
| |
|
| 242,629 |
| $ | 5.12 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-22
The following tables summarize the information about the stock options outstanding and exercisable at December 31, 2004:
|
| Stock Options Outstanding |
| |||
Exercise Price |
| Number of |
| Weighted Average |
| |
$ | 3.33 |
| 178,425 |
| 6.5 |
|
$ | 5.33 |
| 15,000 |
| 7.0 |
|
$ | 7.33 |
| 15,300 |
| 7.7 |
|
$ | 7.67 |
| 3,900 |
| 7.8 |
|
$ | 8.00 |
| 15,000 |
| 7.9 |
|
$ | 14.00 |
| 1,400 |
| 8.8 |
|
$ | 17.00 |
| 1,000 |
| 9.6 |
|
$ | 17.00 |
| 1,100 |
| 9.7 |
|
$ | 17.00 |
| 15,000 |
| 9.7 |
|
|
| 246,125 |
| 6.9 |
| |
|
| Stock Options Exercisable |
| |||
|
| Number of |
| Weighted Average |
| |
|
| 87,585 |
| $ | 3.33 |
|
|
| 6,000 |
| 5.33 |
| |
|
| 6,120 |
| 7.33 |
| |
|
| 780 |
| 7.67 |
| |
|
| 6,000 |
| 8.00 |
| |
|
| 280 |
| 13.00 |
| |
|
| 106,765 |
| $ | 3.99 |
|
The Company has elected to follow APB Opinion No. 25 (Accounting for Stock Issued to Employees) in accounting for its employee stock options. Accordingly, no compensation expense is recognized in the Company’s financial statements because the exercise price of the Company’s employee stock option equals the market price of the Company’s common stock on the date of the grant. If under the Financial Accounting Standards Board Statement No. 123 (Accounting for Stock-Based Compensation), the Company determined compensation costs based on the fair value at the grant date for its stock options, net earnings and earnings per share would have been reduced to the following pro forma amounts:
The accompanying notes are an integral part of these consolidated financial statements.
F-23
|
| 2005 |
| 2004 |
| ||
|
|
|
|
|
| ||
Net earnings (loss): |
|
|
|
|
| ||
As reported |
| $ | 584,410 |
| $ | 504,145 |
|
Pro forma, net of related taxes |
| $ | 458,735 |
| $ | 366,672 |
|
|
|
|
|
|
| ||
Basic earnings (loss) per share: |
|
|
|
|
| ||
As reported |
| $ | 0.25 |
| $ | 0.22 |
|
Pro forma, net of related taxes |
| $ | 0.20 |
| $ | 0.16 |
|
|
|
|
|
|
| ||
Diluted earnings (loss) per share: |
|
|
|
|
| ||
As reported |
| $ | 0.24 |
| $ | 0.21 |
|
Pro forma, net of related taxes |
| $ | 0.18 |
| $ | 0.15 |
|
The weighted-average estimated fair value of stock options granted during 2005 and 2004 was $8.12 and $8.25 per share, respectively. These amounts were determined using the Black-Scholes option-pricing model, which values options based on the stock price at the grant date, the expected life of the option, the estimated volatility of the stock, the expected dividend payments, and the risk-free interest rate over the expected life of the option. The assumptions used in the Black-Scholes model were as follows for the stock options granted in 2005 and 2004:
|
| 2005 |
| 2004 |
|
|
|
|
|
|
|
Risk-free interest rate |
| 4.21 | % | 4.00 | % |
Expected volatility of common stock |
| 27.4 | % | 27.45 | % |
Dividend yield |
| 0.00 | % | 0.00 | % |
Expected life of options |
| 10.0 years |
| 6.7 years |
|
The Black-Scholes option valuation model was developed for estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Because option valuation models require the use of subjective assumptions, changes in these assumptions can materially affect the fair value of the options, and the Company’s options do not have the characteristics of traded options, the option valuation models do not necessarily provide a reliable measure of the fair value of its options.
Note 16. Stock Split
On March 31, 2003, the Bank’s Board of Directors approved a three-for-one stock split effective April 25, 2003. Shareholders’ equity, common stock, and stock option activity for all periods presented have been restated to give retroactive recognition to the stock split. In addition, all references in the financial statements and notes to financial statements to weighted average number of shares, per share amounts, and market prices of the Bank’s common stock have been restated to give retroactive recognition to the stock split.
Note 17. Restrictions on Payment of Dividends
The Bank is subject to the Tennessee Banking Act, which provides that dividends will be paid out of undivided profits. The payment of dividends by any bank is dependent upon its earnings and financial condition and subject to the statutory power of certain federal and state regulatory agencies to act to prevent what they deem unsafe or unsound banking practices. Moreover, the Federal Reserve Board, the Comptroller of the Currency and the FDIC have issued policy statements which provide that bank holding companies and insured depository institutions generally should only pay dividends out of current operating earnings. Under Tennessee law, the board of directors of a state bank may not declare dividends in any calendar year that exceeds the total of its retained net
The accompanying notes are an integral part of these consolidated financial statements.
F-24
income of the preceding two (2) years without prior approval of the Tennessee Department of Financial Institutions (TDFI). The payment of dividends by the Company may also be affected or limited by other factors, such as the requirement to maintain adequate capital above regulatory guidelines.
Note 18. Capital Structure
Common Stock
The Board of Directors of the Holding Company is authorized to issue up to 6,000,000 shares of common stock. Holders of common stock have unlimited voting rights and are entitled to receive the net assets of the Holding Company upon dissolution.
Preferred Stock
The Board of Directors of the Holding Company is authorized to issue up to 1,000,000 shares of preferred stock. Shares of the preferred stock may be issued from time to time in one or more series, each such series to be so designated as to distinguish the shares thereof from the shares of all other series and classes. The Board of Directors has the authority to divide any or all classes of preferred stock into series and to fix and determine the relative rights and preferences of the shares of any series so established.
Note 19. Condensed Financial Statements of Parent Company
Financial information pertaining only to BG Financial Group, Inc. is as follows:
Balance Sheets
|
| December 31, |
| December 31, |
| ||
Assets |
|
|
|
|
| ||
|
|
|
|
|
| ||
Cash and due from banks |
| $ | 601 |
| $ | 31,553 |
|
Investment in Bank of Greeneville |
| 8,317,664 |
| 7,690,685 |
| ||
Other assets |
| 26,575 |
| 20,959 |
| ||
Total assets |
| $ | 8,344,840 |
| $ | 7,743,197 |
|
|
|
|
|
|
| ||
Liabilities and Stockholders’ Equity |
|
|
|
|
| ||
Accounts payable |
| $ | 3,293 |
| $ | — |
|
Accrued expenses |
| 724 |
| 100 |
| ||
Total liabilities |
| 4,017 |
| 100 |
| ||
Stockholders’ equity |
| 8,340,823 |
| 7,743,097 |
| ||
Total liabilities and stockholders’ equity |
| $ | 8,344,840 |
| $ | 7,743,197 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-25
Statement of Income
|
| Year Ended |
| Year Ended |
| ||
|
| December 31, |
| December 31, |
| ||
|
| 2005 |
| 2004 |
| ||
|
|
|
|
|
| ||
Income |
|
|
|
|
| ||
|
|
|
|
|
| ||
Dividends from Bank of Greeneville |
| $ | — |
| $ | 49,000 |
|
|
|
|
|
|
| ||
Total income |
| — |
| 49,000 |
| ||
Operating expenses |
| 63,037 |
| 45,621 |
| ||
|
|
|
|
|
| ||
Income (loss) before income taxes and equity in undistributed net income of Bank of Greeneville |
| (63,037 | ) | 3,379 |
| ||
Applicable income tax benefit |
| (20,468 | ) | (17,368 | ) | ||
|
| (42,569 | ) | 20,747 |
| ||
Equity in undistributed net income |
| 626,979 |
| 483,398 |
| ||
|
|
|
|
|
| ||
Net income |
| $ | 584,410 |
| $ | 504,145 |
|
Statement of Cash Flows
|
| Year Ended |
| Year Ended, |
| ||
|
| December 31, |
| December 31, |
| ||
|
| 2005 |
| 2004 |
| ||
|
|
|
|
|
| ||
Cash flows from operating activities: |
|
|
|
|
| ||
Net income |
| $ | 584,410 |
| $ | 504,145 |
|
|
|
|
|
|
| ||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|
|
|
|
| ||
Equity in undistributed income of |
|
|
|
|
| ||
|
|
|
|
|
| ||
Bank of Greeneville |
| (626,979 | ) | (483,398 | ) | ||
Depreciation |
| 146 |
| 49 |
| ||
Deferred income tax expense (benefit) |
| 4,129 |
| (2,903 | ) | ||
Decrease in other liabilities |
| (5,974 | ) | (14,565 | ) | ||
|
|
|
|
|
| ||
Net cash provided (used in) operating activities |
| (44,268 | ) | 3,328 |
| ||
|
|
|
|
|
| ||
Cash flows from investing activities: |
|
|
|
|
| ||
Purchase of equipment |
| — |
| (439 | ) | ||
|
|
|
|
|
| ||
Net cash used in investing activities |
| — |
| (439 | ) | ||
Cash flows from financing activities: |
|
|
|
|
| ||
Issuance of stock |
| 13,316 |
| 36,664 |
| ||
Decrease in short-term notes |
| — |
| (8,000 | ) | ||
|
|
|
|
|
| ||
Net cash provided by financing activities |
| 13,316 |
| 28,664 |
| ||
|
|
|
|
|
| ||
Net increase (decrease) in cash and cash equivalents |
| (30,952 | ) | 31,553 |
| ||
Cash and cash equivalents at beginning of year |
| 31,553 |
| — |
| ||
Cash and cash equivalents at end of year |
| $ | 601 |
| $ | 31,553 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-26
Note 20. Subsidiary Bank Only Financial Information
Financial information pertaining only to Bank of Greeneville is as follows:
Balance Sheets
|
| As of |
| As of |
| ||
|
| December 31, 2005 |
| December 31, 2004 |
| ||
ASSETS |
|
|
|
|
| ||
|
|
|
|
|
| ||
Cash and due from banks |
| $ | 4,716,153 |
| $ | 5,538,897 |
|
Federal funds sold |
| 13,557,689 |
| 7,619,619 |
| ||
Cash and cash equivalents |
| 18,273,842 |
| 13,158,516 |
| ||
Federal Home Loan Bank stock, at cost |
| 244,500 |
| 226,500 |
| ||
Loans, net of allowance for loan losses $697,013 in 2005 and $1,607,559 in 2004 |
| 64,054,625 |
| 72,355,286 |
| ||
Premises and equipment, net |
| 3,777,737 |
| 3,895,110 |
| ||
Accrued income receivable |
| 418,329 |
| 389,308 |
| ||
Deferred tax benefit |
| 235,007 |
| 595,443 |
| ||
Foreclosed assets |
| 616,279 |
| 489,649 |
| ||
Other assets |
| 137,814 |
| 58,302 |
| ||
Total Assets |
| $ | 87,758,133 |
| $ | 91,168,114 |
|
|
|
|
|
|
| ||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
| ||
|
|
|
|
|
| ||
LIABILITIES |
|
|
|
|
| ||
Deposits: |
|
|
|
|
| ||
Noninterest-bearing |
|
|
|
|
| ||
Demand |
| $ | 8,624,411 |
| $ | 6,787,547 |
|
Interest-bearing |
|
|
|
|
| ||
Money market, interest checking and savings |
| 22,070,984 |
| 16,046,823 |
| ||
Time deposits |
| 44,007,894 |
| 55,584,410 |
| ||
Total Deposits |
| 74,703,289 |
| 78,418,780 |
| ||
Accrued interest |
| 353,534 |
| 202,564 |
| ||
Other liabilities |
| 204,594 |
| 496,739 |
| ||
Federal Home Loan Bank advances |
| 4,179,052 |
| 4,359,346 |
| ||
Total Liabilities |
| 79,440,469 |
| 83,477,429 |
| ||
|
|
|
|
|
| ||
STOCKHOLDERS’ EQUITY |
|
|
|
|
| ||
Stock: |
|
|
|
|
| ||
Preferred stock, no par value; authorized 1,000,000 shares; none issued and outstanding |
| — |
| — |
| ||
Common stock, $0.333 par value; authorized 6,000,000 shares; issued and outstanding 2,310,771 shares in 2005; 2,306,775 shares in 2004 |
| 765,258 |
| 765,258 |
| ||
Additional paid-in capital |
| 6,838,325 |
| 6,838,325 |
| ||
Retained earnings |
| 714,081 |
| 87,102 |
| ||
Total Stockholders’ Equity |
| 8,317,664 |
| 7,690,685 |
| ||
Total Liabilities and Stockholders’ Equity |
| $ | 87,758,133 |
| $ | 91,168,114 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-27
Statements of Income
|
| Twelve Months Ended December 31 |
| |||||||
|
| 2005 |
| 2004 |
| 2003 |
| |||
|
|
|
|
|
|
|
| |||
Interest and dividend income: |
|
|
|
|
|
|
| |||
Loans, including fees |
| $ | 5,149,519 |
| $ | 5,376,509 |
| $ | 4,219,597 |
|
Dividends on Federal Home Loan Bank stock |
| 11,780 |
| 8,578 |
| 6,554 |
| |||
Federal funds sold and other |
| 338,211 |
| 113,630 |
| 82,239 |
| |||
Total interest and dividend income |
| 5,499,510 |
| 5,498,717 |
| 4,308,390 |
| |||
|
|
|
|
|
|
|
| |||
Interest expense: |
|
|
|
|
|
|
| |||
Deposits |
| 1,979,350 |
| 1,430,567 |
| 1,088,601 |
| |||
Borrowed funds |
| 139,599 |
| 144,632 |
| 127,758 |
| |||
|
|
|
|
|
|
|
| |||
Total interest expense |
| 2,118,949 |
| 1,575,199 |
| 1,216,359 |
| |||
Net interest income before provision for loan losses |
| 3,380,561 |
| 3,923,518 |
| 3,092,031 |
| |||
|
|
|
|
|
|
|
| |||
Provision for (benefit from) loan losses |
| (555,222 | ) | 615,251 |
| 956,609 |
| |||
Net interest income after provision for (benefit from) loan losses |
| 3,935,783 |
| 3,308,267 |
| 2,135,422 |
| |||
|
|
|
|
|
|
|
| |||
Noninterest income: |
|
|
|
|
|
|
| |||
Service charges on deposit accounts |
| 310,935 |
| 272,611 |
| 296,020 |
| |||
Fees from origination of mortgage loans |
| 118,353 |
| 127,417 |
| 154,767 |
| |||
Investment sales commissions |
| 100,066 |
| 97,313 |
| 97,178 |
| |||
Other |
| 35,905 |
| 34,336 |
| 64,500 |
| |||
Total noninterest income |
| 565,259 |
| 531,677 |
| 612,465 |
| |||
|
|
|
|
|
|
|
| |||
Noninterest expenses: |
|
|
|
|
|
|
| |||
Compensation and benefits |
| 1,802,775 |
| 1,529,482 |
| 1,290,696 |
| |||
Occupancy expenses |
| 481,667 |
| 400,405 |
| 294,491 |
| |||
Marketing |
| 121,858 |
| 143,267 |
| 89,348 |
| |||
Data processing |
| 191,202 |
| 191,748 |
| 148,156 |
| |||
Legal and professional expense |
| 316,514 |
| 262,515 |
| 98,066 |
| |||
Other operating expenses |
| 596,597 |
| 535,206 |
| 483,924 |
| |||
Total noninterest expense |
| 3,510,613 |
| 3,062,623 |
| 2,404,681 |
| |||
Income before income taxes |
| 990,429 |
| 777,321 |
| 343,206 |
| |||
|
|
|
|
|
|
|
| |||
Income tax expense |
| 363,450 |
| 244,923 |
| 89,704 |
| |||
|
|
|
|
|
|
|
| |||
Net income |
| $ | 626,979 |
| $ | 532,398 |
| $ | 253,502 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-28
Statements of Cash Flows
|
| Twelve Months Ended December 31 |
| |||||||
|
| 2005 |
| 2004 |
| 2003 |
| |||
|
|
|
|
|
|
|
| |||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
| |||
Net income |
| $ | 626,979 |
| $ | 532,398 |
| $ | 253,502 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
| |||
Provision for (benefit from)loan losses |
| (555,222 | ) | 615,251 |
| 956,609 |
| |||
Write-down of foreclosed assets |
| 19,149 |
| — |
| — |
| |||
Depreciation |
| 304,367 |
| 259,018 |
| 201,687 |
| |||
Realized loss (gain) on sales of premises and equipment |
| 4,913 |
| — |
| (8,470 | ) | |||
Realized loss (gain) on sales of foreclosed assets |
| 8,543 |
| (8,919 | ) | — |
| |||
Deferred income tax expense (benefit) |
| 360,436 |
| 7,734 |
| (93,171 | ) | |||
Net change in: |
|
|
|
|
|
|
| |||
Accrued income receivable |
| (29,021 | ) | (2,051 | ) | (130,989 | ) | |||
Other assets |
| (8,343 | ) | (32,218 | ) | (110,399 | ) | |||
Other liabilities |
| (212,344 | ) | 648,758 |
| (50,388 | ) | |||
Net cash provided by operating activities |
| 519,457 |
| 2,019,971 |
| 1,018,381 |
| |||
|
|
|
|
|
|
|
| |||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
| |||
Federal Home Loan Bank stock purchases |
| (18,000 | ) | (54,800 | ) | (37,400 | ) | |||
Proceeds from sales of premises and equipment |
| — |
| — |
| 14,000 |
| |||
Proceeds from sales of foreclosed assets |
| 731,061 |
| — |
| — |
| |||
Loan originations and principal collections, net |
| 7,970,500 |
| (4,727,904 | ) | (27,386,054 | ) | |||
Purchase of land for future development |
| — |
| (563,362 | ) | — |
| |||
Additions to premises and equipment |
| (191,907 | ) | (827,614 | ) | (429,171 | ) | |||
Net cash provided by (used in) investing activities |
| 8,491,654 |
| (6,173,680 | ) | (27,838,625 | ) | |||
|
|
|
|
|
|
|
| |||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
| |||
Net change in deposits |
| 7,861,025 |
| 4,800,332 |
| 3,866,820 |
| |||
Net change in certificates of deposit |
| (11,576,516 | ) | 156,682 |
| 26,325,092 |
| |||
Federal Home Loan Bank advances |
| — |
| 276,462 |
| 3,777,000 |
| |||
Federal Home Loan Ban repayments |
| (180,294 | ) | (171,221 | ) | (2,194,894 | ) | |||
Dividends paid |
| — |
| (49,000 | ) | 52,583 |
| |||
Net cash provided by (used in) financing activities |
| (3,895,785 | ) | 5,013,255 |
| 31,826,601 |
| |||
|
|
|
|
|
|
|
| |||
Net change in cash and cash equivalents |
| 5,115,326 |
| 859,546 |
| 5,006,357 |
| |||
|
|
|
|
|
|
|
| |||
Cash and cash equivalents at beginning of year |
| 13,158,516 |
| 12,298,970 |
| 7,292,613 |
| |||
|
|
|
|
|
|
|
| |||
Cash and cash equivalents at end of year |
| $ | 18,273,842 |
| $ | 13,158,516 |
| $ | 12,298,970 |
|
|
|
|
|
|
|
|
| |||
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES: |
|
|
|
|
|
|
| |||
Foreclosed assets sold during the year and financed through loans |
| $ | 65,412 |
| $ | 255,177 |
| $ | — |
|
Loans moved to foreclosed assets |
| $ | 950,795 |
| $ | 83,383 |
| $ | 184,127 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-29
