SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act
- -- of 1934
For the quarterly period ended September 30, 2007.
--------------------
or
- -- Transition Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _______________ to ________________.
Commission File No. 0-23980
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Southeastern Bank Financial Corporation
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(Exact name of registrant as specified in its charter)
Georgia 58-2005097
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(State of Incorporation) (I.R.S. Employer Identification No.)
3530 Wheeler Road, Augusta, Georgia 30909
-----------------------------------------
(Address of principal executive offices)
(706) 738-6990
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(Issuer's telephone number, including area code)
Not Applicable
--------------
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
-- --
Check whether the issuer 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. Large accelerated
filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act): Yes No X
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
5,425,482 shares of common stock, $3.00 par value per share, outstanding as
of October 31, 2007.
SOUTHEASTERN BANK FINANCIAL CORPORATION
FORM 10-Q
INDEX
Page
Part I
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2007 and
December 31, 2006 3
Consolidated Statements of Income for the Three and Nine
Months ended September 30, 2007 and 2006 4
Consolidated Statements of Cash Flows for the
Nine Months ended September 30, 2007 and 2006 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 24
Item 4. Controls and Procedures 24
Part II Other Information
Item 1. Legal Proceedings *
Item 1A. Risk Factors 25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
Item 3. Defaults Upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders *
Item 5. Other Information *
Item 6. Exhibits 27
Signature 28
* No information submitted under this caption
1
PART I
FINANCIAL INFORMATION
2
SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
September 30,
2007 December 31,
Assets (Unaudited) 2006
--------------- ---------------
Cash and due from banks $ 26,487,084 $ 25,709,915
Federal funds sold 23,847,000 14,688,000
Interest-bearing deposits in other banks 500,031 512,690
--------------- ---------------
Cash and cash equivalents 50,834,115 40,910,605
Investment securities
Available-for-sale 232,545,144 199,135,716
Held-to-maturity, at cost (fair values of
$1,980,734 and $3,048,196, respectively) 1,935,227 2,970,619
Loans held for sale 9,562,760 14,857,315
Loans 839,862,823 735,111,615
Less allowance for loan losses (11,804,686) (9,776,779)
--------------- ---------------
Loans, net 828,058,137 725,334,836
Premises and equipment, net 28,140,004 23,402,588
Accrued interest receivable 7,424,365 5,982,654
Bank-owned life insurance 16,476,922 15,982,052
Restricted equity securities 5,059,781 4,936,281
Other assets 7,882,950 7,689,596
--------------- ---------------
$1,187,919,405 $1,041,202,262
=============== ===============
Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing $ 109,053,029 $ 106,846,160
Interest-bearing:
NOW accounts 136,381,664 119,334,300
Savings 301,562,674 255,065,766
Money management accounts 59,520,051 45,897,176
Time deposits over $100,000 238,930,907 193,860,714
Other time deposits 105,779,924 80,758,973
--------------- ---------------
951,228,249 801,763,089
Federal funds purchased and securities sold
under repurchase agreements 61,953,938 70,019,551
Advances from Federal Home Loan Bank 59,000,000 60,000,000
Other borrowed funds 900,000 1,000,000
Accrued interest payable and other liabilities 8,224,404 9,495,498
Subordinated debentures 20,000,000 20,000,000
--------------- ---------------
Total liabilities 1,101,306,591 962,278,138
--------------- ---------------
Stockholders' equity:
Common stock, $3.00 par value; 10,000,000 shares
authorized; 5,433,614 and 5,433,285 shares issued in
2007 and 2006, respectively; 5,425,982 and 5,432,854
shares outstanding in 2007 and 2006, respectively 16,300,842 16,299,855
Additional paid-in capital 39,376,328 38,989,058
Retained earnings 32,255,461 25,287,006
Treasury stock, at cost; 7,632 and 431 shares in
2007 and 2006, respectively (289,865) (16,809)
Accumulated other comprehensive loss, net (1,029,952) (1,634,986)
--------------- ---------------
Total stockholders' equity 86,612,814 78,924,124
--------------- ---------------
$1,187,919,405 $1,041,202,262
=============== ===============
See accompanying notes to consolidated financial statements.
3
SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
Three Months Ended Nine Months Ended
September, 30, September, 30,
---------------------------- ---------------------------
2007 2006 2007 2006
------------- ------------- ------------- ------------
Interest income:
Loans, including fees $ 17,138,785 $ 14,208,614 $ 49,041,654 $ 39,038,976
Investment securities 3,015,836 2,705,083 8,548,646 7,863,464
Federal funds sold 220,138 195,013 901,723 389,642
Interest-bearing deposits in other banks 6,710 5,808 20,180 19,458
------------- ------------- ------------- ------------
Total interest income 20,381,469 17,114,518 58,512,203 47,311,540
------------- ------------- ------------- ------------
Interest expense:
Deposits 8,688,555 6,479,749 24,345,638 16,945,683
Federal funds purchased and securities sold
under repurchase agreements 829,797 754,106 2,499,627 2,162,860
Other borrowings 1,127,128 1,168,587 3,390,854 3,073,878
------------- ------------- ------------- ------------
Total interest expense 10,645,480 8,402,442 30,236,119 22,182,421
------------- ------------- ------------- ------------
Net interest income 9,735,989 8,712,076 28,276,084 25,129,119
Provision for loan losses 1,001,232 666,913 2,607,419 1,627,041
------------- ------------- ------------- ------------
Net interest income after provision
for loan losses 8,734,757 8,045,163 25,668,665 23,502,078
------------- ------------- ------------- ------------
Noninterest income:
Service charges and fees on deposits 1,675,173 1,422,806 4,653,640 4,314,928
Gain on sales of loans 1,349,880 1,328,907 3,954,535 3,854,244
Gain on sale of fixed assets 1,094,902 3,210 1,031,764 95,049
Investment securities (losses) gains, net (278,206) (10,000) (245,015) 273,600
Retail investment income 296,025 192,363 894,482 576,336
Trust service fees 271,167 214,294 829,609 605,126
Increase in cash surrender value of
bank-owned life insurance 169,133 156,010 494,870 445,253
Miscellaneous income 168,453 150,682 496,993 447,077
------------- ------------- ------------- ------------
Total noninterest income 4,746,527 3,458,272 12,110,878 10,611,613
------------- ------------- ------------- ------------
Noninterest expense:
Salaries and other personnel expense 4,905,273 4,538,449 14,329,031 13,483,469
Occupancy expenses 845,373 637,723 2,348,159 2,071,624
Other operating expenses 2,557,612 2,057,702 6,984,774 6,168,196
------------- ------------- ------------- ------------
Total noninterest expense 8,308,258 7,233,874 23,661,964 21,723,289
------------- ------------- ------------- ------------
Income before income taxes 5,173,026 4,269,561 14,117,579 12,390,402
Income tax expense 1,816,746 1,344,532 5,031,078 4,078,994
------------- ------------- ------------- ------------
Net income $ 3,356,280 $ 2,925,029 $ 9,086,501 $ 8,311,408
============= ============= ============= ============
Basic net income per share $ 0.62 $ 0.55 $ 1.67 $ 1.57
============= ============= ============= ============
Diluted net income per share $ 0.61 $ 0.55 $ 1.65 $ 1.56
============= ============= ============= ============
Weighted average common shares outstanding 5,428,409 5,312,831 5,431,489 5,288,760
============= ============= ============= ============
Weighted average number of common and
common equivalent shares outstanding 5,492,967 5,361,440 5,499,414 5,329,051
============= ============= ============= ============
See accompanying notes to consolidated financial statements.
4
SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30,
2007 2006
---------------- ----------------
Cash flows from operating activities:
Net income $ 9,086,501 $ 8,311,408
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 1,113,579 1,013,581
Provision for loan losses 2,607,419 1,627,041
Net investment securities losses (gains) 245,015 (273,600)
Net (accretion of discount) amortization of
premium on investment securities (112,505) (266,989)
Increase in CSV of bank owned life insurance (494,870) (445,253)
Stock options compensation cost 405,030 331,698
Gain on disposal of premises and equipment (1,031,764) (95,050)
Gain on the sale of other real estate (2,614) -
Gain on sales of loans (3,954,535) (3,854,244)
Real estate loans originated for sale (198,634,253) (200,576,379)
Proceeds from sales of real estate loans 207,883,343 211,288,167
Increase in accrued interest receivable (1,441,711) (763,351)
Increase in other assets (305,088) (1,331,854)
(Decrease) Increase in accrued interest payable and other liabilities (1,271,094) 835,676
---------------- ----------------
Net cash provided by operating activities 14,092,453 15,800,851
---------------- ----------------
Cash flows from investing activities:
Proceeds from sales of available for sale securities 8,309,763 15,729,239
Proceeds from maturities of available for sale securities 35,247,859 54,444,673
Proceeds from maturities of held to maturity securities 1,045,350 500,000
Purchase of available for sale securities (76,342,299) (89,515,360)
Purchase of Federal Home Loan Bank stock (618,500) (873,800)
Proceeds from redemption of FHLB stock 495,000 225,000
Net increase in loans (105,671,495) (99,503,380)
Purchase of Bank-owned life insurance - (3,500,000)
Additions to premises and equipment (7,813,269) (4,607,619)
Proceeds from sale of other real estate 292,937 -
Proceeds from sale of premises and equipment 2,994,038 1,791,151
---------------- ----------------
Net cash used in investing activities (142,060,616) (125,310,096)
---------------- ----------------
5
(continued)
Cash flows from financing activities:
Net increase in deposits 149,465,160 128,943,407
Net decrease in federal funds purchased and
securities sold under repurchase agreements (8,065,613) (4,110,635)
Advances from Federal Home Loan Bank 10,000,000 19,000,000
Payments of Federal Home Loan Bank advances (11,000,000) (11,000,000)
Proceeds from subordinated debentures - 10,000,000
Proceeds from issuance of common stock - 4,429,166
Principal payments on other borrowed funds (100,000) -
Purchase of treasury stock (289,865) (45,174)
Payment of cash dividends (2,118,046) (2,060,300)
Proceeds from stock options exercised 37 176,127
---------------- ----------------
Net cash provided by financing activities 137,891,673 145,332,591
---------------- ----------------
Net increase in cash and cash equivalents $ 9,923,510 $ 35,823,346
Cash and cash equivalents at beginning of period 40,910,605 22,563,056
---------------- ----------------
Cash and cash equivalents at end of period $ 50,834,115 $ 58,386,402
================ ================
Supplemental disclosures of cash paid during the period for:
Interest $ 30,152,761 $ 21,506,010
================ ================
Income taxes $ 6,444,181 $ 4,912,075
================ ================
Supplemental information on noncash investing activities:
Loans transferred to other real estate $ 340,775 $ -
================ ================
See accompanying notes to consolidated financial statements.
6
SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2007
Note 1 - Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Southeastern Bank Financial Corporation (the "Company", and its wholly-owned
subsidiaries, Georgia Bank & Trust Company (the "Bank") and Southern Bank &
Trust (the "Thrift"). Significant intercompany transactions and accounts are
eliminated in consolidation.
The financial statements for the three and nine months ended September 30, 2007
and 2006 are unaudited and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and regulations.
These consolidated financial statements should be read in conjunction with the
audited consolidated financial statements and footnotes included in the
Company's annual report on Form 10-K for the year ended December 31, 2006.
In the opinion of management, all adjustments necessary to present fairly the
financial position and the results of operations and cash flows for the interim
periods have been made. All such adjustments are of a normal recurring nature.
The results of operations for the three and nine months ended September 30, 2007
are not necessarily indicative of the results of operations which the Company
may achieve for the entire year.
Some items in the prior period financial statements were reclassified to conform
to the current presentation.
Note 2 - Comprehensive Income
Other comprehensive income for the Company consists of net unrealized gains and
losses on investment securities available for sale. Total comprehensive income
for the three months ended September 30, 2007 was $5,557,000 compared to
$5,358,000 for the three months ended September 30, 2006. Total comprehensive
income for the nine months ended September 30, 2007 was $9,692,000 compared to
$9,009,000 for the nine months ended September 30, 2006.
Note 3 - Cash Dividend Declared
On October 17, 2007, the Company declared a quarterly cash dividend of $0.13 per
share
7
on outstanding shares. The dividend is payable on November 16, 2007 to
shareholders of record as of November 2, 2007.
Note 4 - Unrealized Losses on Investment Securities
Available for Sale securities are carried at fair market value with related
unrealized gains or losses included in stockholders' equity as accumulated other
comprehensive income. Unrealized losses have not been recognized into income
because the issuers are either obligations of the U.S. government or are of high
credit quality. Also, the decline in fair value is largely due to changes in
interest rates and the fair value is expected to recover as the obligations
approach maturity.
Note 5 - Recently Issued Accounting Standards on the Financial Statements
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes ("FIN 48"), on January 1, 2007. The adoption of FIN
48 had no effect on the Company's financial statements. The Company has no
unrecognized tax benefits and does not anticipate any increase in unrecognized
benefits during 2007 relative to any tax positions taken prior to January 1,
2007. Should the accrual of any interest or penalties relative to unrecognized
tax benefits be necessary, it is the Company's policy to record such accruals in
its income taxes accounts; no such accruals exist as of January 1, 2007. The
Company and its subsidiaries file a consolidated U.S. federal income tax return
and file in the states of Georgia and South Carolina. These returns are subject
to examination by taxing authorities for all years after 2003.
In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-5,
Accounting for Purchases of Life Insurance - Determining the Amount That Could
Be Realized in Accordance with FASB Technical Bulletin No. 85-4 (Accounting for
Purchases of Life Insurance). This issue requires that a policyholder consider
contractual terms of a life insurance policy in determining the amount that
could be realized under the insurance contract. It also requires that if the
contract provides for a greater surrender value if all individual policies in a
group are surrendered at the same time, that the surrender value be determined
based on the assumption that policies will be surrendered on an individual
basis. Lastly, the issue discusses whether the cash surrender value should be
discounted when the policyholder is contractually limited in its ability to
surrender a policy. This issue is effective for fiscal years beginning after
December 15, 2006. The Company does not have any of the above mentioned
consideration in the Company's life insurance policies.
The Company has evaluated the impact of the following issued accounting
standards and has determined that the impact of adoptions is immaterial to the
financial statements. In general, these standards revise the accounting for
derivatives embedded in other financial instruments for 2007 and revise the
recognition and accounting for servicing of financial assets for 2007.
8
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements.
This Statement defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements. This Statement
establishes a fair value hierarchy about the assumptions used to measure fair
value and clarifies assumptions about risk and the effect of a restriction on
the sale or use of an asset. The standard is effective for fiscal years
beginning after November 15, 2007. The Company has not completed its evaluation
of the impact of the adoption of this standard.
In February 2007 the FASB issued Statement of Financial Accounting Standard
("SFAS") No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities." SFAS No. 159 permits entities to choose to measure many financial
instruments and certain other items at fair value with an objective of improving
financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. The provisions of SFAS No. 159 are effective as of the beginning of
an entity's first fiscal year that begins after November 15, 2007. Management is
currently evaluating the impact, if any, that adoption of SFAS No. 159 will have
on the Company's financial position, results of operations and liquidity.
The Company does not expect that the newly issued accounting standard that
revises the accrual of post-retirement benefits associated with providing
split-dollar life insurance will have a material effect on the financial
statements when adopted in future years. The Company did not have any of these
assets or liabilities as of September 30, 2007.
9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
- --------
Southeastern Bank Financial Corporation (the "Company") operates two
wholly-owned subsidiaries in the Augusta-Richmond County, GA-SC metropolitan
area. Georgia Bank & Trust Company (the "Bank") was organized by a group of
local citizens and commenced business on August 28, 1989, with one branch
location. Today, it is Augusta's largest community banking company operating ten
full service branches in Augusta, Martinez, and Evans, Georgia and one branch in
Athens, Georgia. A new full service branch was opened in Evans, Georgia on July
9, 2007. Mortgage origination offices are located in Augusta, Savannah and
Athens, Georgia. SB&T Capital Corporation (the "LPO") a wholly-owned subsidiary
of the Bank, was organized on August 16, 2007 and intends to open an office in
Greenville, South Carolina in fourth quarter 2007. Southern Bank & Trust (the
"Thrift"), a federally chartered thrift, opened its main office in Aiken, South
Carolina on September 12, 2006. A new full service branch of the Thrift was
opened on August 23, 2007 in North Augusta, South Carolina. A new branch of the
Thrift has been approved by the Office of the Thrift Supervision (the "OTS") and
expected to open early December 2007 in Downtown Aiken, South Carolina.
The Company's primary market includes Richmond and Columbia Counties in Georgia
and Aiken County in South Carolina, all part of the Augusta-Richmond County,
GA-SC metropolitan statistical area (MSA).
The Company's services include the origination of residential and commercial
real estate loans, construction and development loans, and commercial and
consumer loans. The Company also offers a variety of deposit programs,
including noninterest-bearing demand, interest checking, money management,
savings, and time deposits. In the primary market area, Augusta-Richmond
County, GA-SC metropolitan area, the Company had 13.63% of all deposits and was
the second largest depository institution at June 30, 2007, as cited from the
Federal Deposit Insurance Corporation's website. Securities sold under
repurchase agreements are also offered. Additional services include wealth
management, trust, retail investment, and mortgage. As a matter of practice,
most mortgage loans are sold in the secondary market; however, some mortgage
loans are placed in the portfolio based on asset/liability management
strategies. The Company continues to concentrate on increasing its market share
through various new deposit and loan products and other financial services and
by focusing on the customer relationship management philosophy. The Company is
committed to building life-long relationships with its customers, employees,
shareholders, and the communities it serves.
The Company's primary source of income is from its lending activities followed
by interest income from its investment activities, service charges and fees on
deposits, and gain on sales of mortgage loans in the secondary market. Interest
income on loans and investment securities increased during the first nine months
of 2007 as compared to the
10
first nine months of 2006 due to higher interest rates and increased volumes.
Retail investment and Trust service fees income increased due to higher volume.
Table 1 - Selected Financial Data
Sept 30, December 31, December 31,
2007 2006 2002
----------- ----------------------- --------------
(Dollars in thousands)
Assets $1,187,919 $ 1,041,202 $ 569,832
Loans 849,426 749,969 396,699
Deposits 951,228 801,763 439,557
Return on average total assets 1.10% 1.10% 1.14%
Return on average equity 14.77% 14.69% 13.95%
The Company continues to experience steady growth as evidenced in Table 1 above.
The Company has also achieved significant increases in loans and deposits and
continues to provide strong returns on assets and equity as noted in the table
above. Net income for the year ended 2002 was $6.0 million compared to net
income of $11.2 million at year end 2006. Net income for the nine months ended
September 30, 2007 was $9.1 million. The Company has paid cash dividends of
$0.13 per share each quarter since 2004.
The Company meets its liquidity needs by managing cash and due from banks,
federal funds purchased and sold, maturity of investment securities, principal
repayments from mortgage-backed securities, and draws on lines of credit.
Additionally, liquidity can be managed through structuring deposit and loan
maturities. The Company funds loan and investment growth with core deposits,
securities sold under repurchase agreements and Federal Home Loan Bank advances.
During inflationary periods, interest rates generally increase and operating
expenses generally rise. When interest rates rise, variable rate loans and
investments produce higher earnings; however, deposit and other borrowings
interest expense also rise. The Company monitors its interest rate risk as it
applies to net income in a ramp up and down annually 200 basis points (2%)
scenario and as it applies to economic value of equity in a shock up and down
200 (2%) basis points scenario. The Company monitors operating expenses through
responsibility center budgeting.
Forward-Looking Statements
- ---------------------------
Southeastern Bank Financial Corporation may, from time to time, make written or
oral forward-looking statements, including statements contained in the Company's
filings with the Securities and Exchange Commission (the "Commission") and its
reports to shareholders. Statements made in such documents, other than those
concerning historical information, should be considered forward-looking and
subject to various risks and uncertainties. Such forward-looking statements are
made based upon management's belief as well as assumptions made by, and
information currently available to, management pursuant to "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. The
Company's actual results may differ materially from the
11
results anticipated in forward-looking statements due to a variety of factors,
including unanticipated changes in the Company's local economy, the national
economy, governmental monetary and fiscal policies, deposit levels, loan demand,
loan collateral values and securities portfolio values; difficulties in interest
rate risk management; the effects of competition in the banking business;
difficulties in expanding the Company's business into new markets; changes in
governmental regulation relating to the banking industry, including regulations
relating to branching and acquisitions; failure of assumptions underlying the
establishment of reserves for loan losses, including the value of collateral
underlying delinquent loans; and other factors. The Company cautions that such
factors are not exclusive. The Company does not undertake to update any
forward-looking statement that may be made from time to time by, or on behalf
of, the Company.
Critical Accounting Estimates
- -------------------------------
The accounting and financial reporting policies of the Company and its
subsidiaries conform to accounting principles generally accepted in the United
States of America and to general practices within the banking industry. Of
these policies, management has identified the allowance for loan losses as a
critical accounting estimate that requires difficult, subjective judgment and is
important to the presentation of the financial condition and results of
operations of the Company.
The allowance for loan losses is established through a provision for loan losses
charged to expense, which affects the Company's earnings directly. Loans are
charged against the allowance for loan losses when management believes that the
collectability of the principal is unlikely. Subsequent recoveries are added to
the allowance. The allowance is an amount that management believes will be
adequate to absorb losses on existing loans that become uncollectible, based on
evaluations of the collectability of loans. The evaluations take into
consideration such factors as changes in the nature and volume of the loan
portfolio, historical loss rates, overall portfolio quality, review of specific
problem loans, and current economic conditions and trends that may affect a
borrower's ability to repay.
The Company segments its allowance for loan losses into the following three
major categories: 1) identified losses for impaired loans; 2) general allocation
for Classified/Watch loans; and 3) general allocation for loans with
satisfactory ratings. Risk ratings are initially assigned in accordance with
the Company's loan and collection policy. An organizationally independent
department reviews grade assignments on an ongoing basis. Management reviews
current information and events regarding a borrower's financial condition and
strengths, cash flows available for debt repayment, the related collateral
supporting the loan and the effects of known and expected economic conditions.
When the evaluation reflects a greater than normal risk associated with the
individual loan, management classifies the loan accordingly. If the loan is
determined to be impaired, management allocates a portion of the allowance for
loan losses for that loan based upon the present value of future cash flows
discounted at the loan's effective interest rate, or the fair value of the
collateral if collection of the loan is deemed to be dependent upon the
collateral. Regulatory guidance is also considered. Cash receipts for accruing
loans are applied to principal and interest under the contractual terms of the
loan
12
agreement; however, cash receipts on impaired and nonaccrual loans for which the
accrual of interest has been discontinued are generally applied first to
principal and then to interest income depending upon the overall risk of
principal loss to the Company. Impaired and Classified/Watch loans are
aggressively monitored. The allocation for loans rated satisfactory is further
subdivided into various types of loans as defined by regulatory reporting codes.
The Company's management also gives consideration to subjective factors such as,
national and local economic conditions, bankruptcy trends, unemployment trends,
loan concentrations, and competitive factors in the local market. These factors
represent uncertainties in the Company's business environment and are included
in the various individual components of the allowance for loan losses.
Performance Overview
- --------------------
The Company's net income for the third quarter of 2007 was $3.4 million, which
was an increase of $431,000 (14.7%) compared to net income of $2.9 million for
the third quarter of 2006. Diluted net income per share for the three months
ended September 30, 2007 was $0.61 compared to $0.55 for the three months ended
September 30, 2006. Net income for the first nine months of 2007 was $9.1
million, an increase of $775,000 (9.3%) compared with net income of $8.3 million
for the first nine months of 2006. The increase in net income for the three and
nine months ended September 30, 2007 as compared with the three and nine months
ended September 30, 2006, was primarily a result of increases in net interest
income and noninterest income, somewhat offset by increases in noninterest
expense and provision for loan losses. Interest income on both loans and
investment securities increased due to increased volumes and higher interest
rates. Interest expense on deposits, securities sold under repurchase
agreements and other borrowings increased as a result of higher volumes and
increase in interest rates. The loan loss provision increased primarily due to
loan volume growth as well as increases in specifically-reserved loans, higher
levels of Classified and Watch-rated debt and management's assessment of current
economic environment. Factors contributing to the increase in noninterest
income for the nine months ended September 30, 2007, were primarily from an
increase in the gain on sale of fixed assets due to a $1,097,000 gain on the
sale of property in August 2007, retail investment income and trust services
fees increased resulting from increased production in the Wealth Management
area, service charges and fees on deposits increased primarily due to increase
in NSF fees and ATM/debit card income somewhat offset by a decrease in
investment securities (losses) gains, net due to a $278,000 loss recognized in
third quarter 2007 for the three month period as well as a $526,000 gain
recognized on the sale of agency securities in second quarter 2006 as compared
to the $245,000 losses recognized on the sale of agency securities in 2007 for
the nine month period. Noninterest expense increased during the three and nine
months ended September 30, 2007 compared to the same periods ended September 30,
2006, primarily due to increases in salaries, employee benefits, occupancy
expense and other operating expenses. Significant changes in other operating
expenses during the three and nine month periods include increases in processing
expense, IT maintenance expense, and contributions.
13
Table 2 - Selected Balance Sheet Data
September 30, December 31, Variance
-----------------------------
2007 2006 Amount %
------------- ------------- -------------- -------------
(Dollars in thousands)
Cash and due from banks $ 26,487 $ 25,710 $ 777 3.0%
Federal funds sold 23,847 14,688 9,159 62.4%
Investment securities 234,480 202,106 32,374 16.0%
Loans 849,426 749,969 99,457 13.3%
Assets 1,187,919 1,041,202 146,717 14.1%
Deposits 951,228 801,763 149,465 18.6%
Securities sold under repurchase agreements 61,954 70,020 (8,066) (11.5%)
Liabilities 1,101,306 962,278 139,028 14.4%
Stockholders' equity 86,613 78,924 7,689 9.7%
Table 2 highlights significant changes in the balance sheet at September 30,
2007 as compared to December 31, 2006. Assets increased $146.7 million,
primarily the result of higher balances for fed funds sold, loans and investment
securities. The increase in assets was funded by the increase in deposits of
$149.5 million somewhat offset by an $8.1 million decrease in securities sold
under repurchase agreements. Net income of $9.1 million less dividends paid of
$2.1 million also contributed to the funding.
The annualized return on average assets for the Company was 1.10% for the nine
months ended September 30, 2007 equal to the return for December 31, 2006. The
annualized return on average stockholders' equity was 14.77% for the nine months
ended September 30, 2007, compared to 14.69% for December 31, 2006.
Net Interest Income
- ---------------------
The primary source of earnings for the Company is net interest income, which is
the difference between income on interest-earning assets, such as loans and
investment securities, and interest expense incurred on interest-bearing sources
of funds, such as deposits and borrowings. The following table shows the
average balances of interest-earning assets and interest-bearing liabilities,
annualized average yields earned and rates paid on those respective balances,
and the actual interest income and interest expense for the periods indicated.
Average balances are calculated based on daily balances, yields on non-taxable
investments are not reported on a tax equivalent basis and average balances for
loans include nonaccrual loans even though interest was not earned.
14
Table 3 - Average Balances, Income and Expenses, Yields and Rates
Three Months Ended September 30, 2007 Three Months Ended September 30, 2006
---------------------------------------- ----------------------------------------
Annualized Annualized
Average Average
Average Yield or Amount Paid Average Yield or Amount Paid
Amount Rate or Earned Amount Rate or Earned
---------------------------------------- ----------------------------------------
(Dollars in thousands)
Interest-earning assets:
Loans $ 826,787 8.14% $ 17,139 $ 674,006 8.28% $ 14,208
Investment securities 230,689 5.23% 3,016 213,263 5.07% 2,705
Federal funds sold 17,325 5.04% 220 15,525 4.99% 195
Interest-bearing deposits in other banks 500 5.40% 6 513 4.48% 6
----------------------------------------------------------------------------------
Total interest-earning assets $ 1,075,301 7.46% $ 20,381 $ 903,307 7.46% $ 17,114
------------ ------------ ------------ ------------
Interest-bearing liabilities:
Deposits $ 803,509 4.29% $ 8,689 $ 644,983 3.99% $ 6,480
Federal funds purchased / securities
sold under repurchase agreements 63,581 5.18% 830 58,013 5.16% 754
Other borrowings 78,618 5.69% 1,127 80,823 5.73% 1,168
------------ ------------ ------------ ------------
Total interest-bearing liabilities $ 945,708 4.47% $ 10,646 $ 783,819 4.25% $ 8,402
------------ ------------ ------------ ------------
Net interest margin/income: 3.54% $ 9,735 3.77% $ 8,712
============ ============
Table 4 - Average Balances, Income and Expenses, Yields and Rates
Nine Months Ended Sept. 30, 2007 Nine Months Ended Sept. 30, 2006
--------------------------------------- ----------------------------------------
Annualized Annualized
Average Amount Average Amount
Average Yield or Paid or Average Yield or Paid or
Amount Rate Earned Amount Rate Earned
------------ ------------ ------------ ------------ ------------ ------------
(Dollars in thousands)
Interest-earning assets:
Loans $ 793,660 8.18% $ 49,042 $ 642,156 8.05% $ 39,039
Investment securities 221,109 5.16% 8,549 212,909 4.93% 7,863
Federal funds sold 23,168 5.21% 902 11,034 4.72% 390
Interest-bearing deposits in other banks 508 5.31% 20 646 4.02% 19
------------ ------------ ------------ ------------
Total interest-earning assets $ 1,038,445 7.47% $ 58,513 $ 866,745 7.24% $ 47,311
------------ ------------ ------------ ------------
Interest-bearing liabilities:
Deposits $ 764,128 4.26% $ 24,346 $ 615,138 3.68% $ 16,946
Federal funds purchased / securities
sold under repurchase agreements 63,889 5.23% 2,500 60,193 4.80% 2,163
Other borrowings 79,223 5.72% 3,391 73,023 5.63% 3,074
------------ ------------ ------------ ------------
Total interest-bearing liabilities $ 907,240 4.46% $ 30,237 $ 748,354 3.96% $ 22,183
------------ ------------ ------------ ------------
Net interest margin/income: 3.57% $ 28,276 3.81% $ 25,128
============ ============
Net interest income increased $1.0 million (11.8%) during the three-month period
and $3.1 million (12.5%) during the nine-month period as compared to the same
period in 2006. Loan interest income increased $2.9 million and $10.0 million
in the three and nine month periods, respectively, while deposit interest
expense increased $2.2 million and $7.4 million in the three and nine month
periods, respectively, all the result of higher interest rates and continued
growth of account balances. The annual average balance for loans was $793.7
million at September 30, 2007 with an annualized average yield of 8.18% compared
to $642.2 million at September 30, 2006 with an annualized average yield of
8.05%. Interest-bearing deposits had an annual average balance of $764.1
million with an annualized average rate of 4.26% at September 30, 2007 compared
to
15
$615.1 million and 3.68% at September 30, 2006. Other contributing factors
during both the three and nine month periods included increases in interest
income on investment securities, increases in interest expense on securities
sold under repurchase agreements somewhat offset by decreases in interest
expense on other borrowings.
The Company's net interest margin for the three and nine months ended September
30, 2007 was 3.54% and 3.57%, respectively, as compared to 3.77% and 3.81% for
the three and nine months ended September 30, 2006, respectively. The rate for
earning assets increased 23 basis points for the nine month period, with higher
average yields on loans offset by lower average yields on investments and
federal funds sold accounting for most of the increase for the nine month
period. The cost to fund earning assets increased 22 basis points and 50 basis
points for the three and nine month periods, respectively, primarily due to
higher rates on deposits somewhat offset by lower rates on other borrowings.
Noninterest Income
- -------------------
Table 5 - Noninterest Income
Three Months Ended Nine Months Ended
September 30, Variance September 30, Variance
---------------------- --------------------- --------------------- ---------------------
2007 2006 Amount % 2007 2006 Amount %
---------- ---------- ---------- --------- ---------- --------- ---------- ---------
(Dollars in thousands) (Dollars in thousands)
Service charges and fees
on deposits $ 1,675 $ 1,423 $ 252 17.7% $ 4,654 $ 4,315 $ 339 7.9%
Gain on sales of loans 1,350 1,329 21 1.6% 3,954 3,854 100 2.6%
Gain on sale of fixed
assets 1,095 3 1,092 36400.0% 1,032 95 937 986.3%
Investment securities
(losses) gains, net (278) (10) (268) 2680.0% (245) 274 (519) (189.4%)
Retail investment income 296 192 104 54.2% 894 577 317 54.9%
Trust services fees 271 214 57 26.6% 830 605 225 37.2%
Increase in cash surrender
value of bank-owned
life insurance 169 156 13 8.3% 495 445 50 11.2%
Miscellaneous income 169 151 18 11.9% 497 447 50 11.2%
---------- ---------- ---------- --------- ---------- --------- ---------- ---------
Total noninterest income $ 4,747 $ 3,458 $ 1,289 37.3% $ 12,111 $ 10,612 $ 1,499 14.1%
========== ========== ========== ========= ========== ========= ========== =========
Noninterest income increased $1,289,000 (37.3%) during the three-month period
and increased $1,499,000 (14.1%) during the nine-month period. The most
significant changes for the three and nine month periods were increases in
service charge and fees on deposits, retail investment income, trust income, and
gain on sale of fixed assets somewhat offset by a decrease in net investment
securities gains. A $278,000 investment security loss was recognized in third
quarter 2007. The decrease in the nine month period was due to a $526,000 gain
recognized on the sale of equity securities somewhat offset by losses on the
sale of agency securities in second quarter 2006 as compared to the $245,000
losses recognized on the sale of agency securities in 2007. Service charge and
fees on deposits increased primarily due to increase in NSF charges in first
quarter 2007,
16
somewhat offset by discontinued fees for daily overdraft and debit card fees.
The increase in retail investment income is primarily due to broker production
increases from additional staff added in 2006. The increase in trust income is
primarily due to increased levels of assets under management. Gain on sale of
fixed assets increased due to the sale of the operations campus located in
Augusta, Georgia in August 2007.
Noninterest Expense
- --------------------
Table 6 - Noninterest Expense
Three Months Ended Nine Months Ended
September 30, Variance September 30, Variance
-------------------- ------------------- ------------------- --------------------
2007 2006 Amount % 2007 2006 Amount %
--------- --------- --------- --------- --------- --------- --------- ---------
(Dollars in thousands) (Dollars in thousands)
Salaries and other
personnel expense $ 4,905 $ 4,538 $ 367 8.1% $ 14,329 $ 13,483 $ 846 6.3%
Occupancy expenses 845 638 207 32.4% 2,348 2,072 276 13.3%
Other operating expenses 2,558 2,058 500 24.3% 6,985 6,168 817 13.2%
--------- --------- --------- --------- --------- --------- --------- ---------
Total noninterest expense $ 8,308 $ 7,234 $ 1,074 14.8% $ 23,662 $ 21,723 $ 1,939 8.9%
========= ========= ========= ========= ========= ========= ========= =========
Noninterest expense increased $1,074,000 (14.8%) during the three-month period
and $1.9 million (8.9%) during the nine-month period. Salary expense increased
during the three and nine month periods primarily due to opening of new branches
in North Augusta, South Carolina, and in Evans, Georgia as well as new personnel
due to continued company growth, somewhat offset by a decrease in commissions
and an increase in the deferral of loan production expense in compliance with
SFAS No. 91. Increases in employee benefits during the three and nine month
periods were for FICA taxes, medical expenses, employer 401K contributions, all
directly related to salaries as well as an increase in stock option expense.
Increases for occupancy expenses during the three and nine month periods
including miscellaneous equipment purchases, equipment maintenance expense and
other occupancy expenses were primarily related to the opening of new branches.
Additionally, rent expense increased for leased property for ATM's and parking.
Property taxes increased due to the opening of new branch offices at GB&T and
SB&T. Depreciation expense increased primarily due to the opening of SB&T and
new branches opened for GB&T, somewhat offset by a decrease due to the Company's
core hardware and software systems, which became fully depreciated by the end of
the second quarter of 2006. Other operating expenses increased $500,000 (24.3%)
for the three-month period and $817,000 (13.2%) for the nine-month period.
Increases in processing expenses during both the three and nine month periods
were attributable to new account growth for both retail and business checking
products and retail investment processing fees related to increased production.
Contributions increased for the three month period as the result of a $250,000
donation made to Georgia Bank Foundation in August 2007. Increases in IT
maintenance expense during the three and nine month periods were due primarily
to additional costs in software maintenance for SB&T and GB&T.
17
Income Taxes
- -------------
Income tax expense in the third quarter of 2007 totaled $1.8 million, an
increase of $472,000 (35.1%) over the third quarter of 2006. The effective tax
rate for the three months ended September 30, 2007 and 2006 was 35.1% and 31.5%,
respectively. Income tax expense for the nine months ended September 30, 2007
totaled $5.0 million for an effective tax rate of 35.6% compared to 32.9% for
the nine months ended September 30, 2006. The increase in the effective tax
rate for both the three and nine month periods are primarily due to lower
nontaxable interest income and an increase in the federal tax rate due to
anticipated higher income for the year.
Asset Quality
- --------------
Table 7 which follows shows the current and prior period amounts of
non-performing assets. Non-performing assets were $2.6 million at September 30,
2007, compared to $2.4 million at December 31, 2006 and $2.8 million at
September 30, 2006. Significant changes from December 2006 to September 2007
include a $50,000 increase in other real estate owned, a $178,000 increase in
non-accrual loans primarily due to a $850,000 increase for one customer added to
nonaccrual status somewhat offset by a $276,000 decrease in non-accrual loans
with balances less than $100,000, and a $396,000 decrease for customers with
balances greater than $100,000. The ratio of non-performing assets to total
loans and other real estate was 0.30% at September 30, 2007, compared to 0.31%
at December 31, 2006 and 0.40% at September 30, 2006. The control and
monitoring of non-performing assets continues to be a priority of management.
Table 7 - Non-Performing Assets
(Dollars in thousands)
September 30, 2007 December 31, 2006 September 30, 2006
-------------------- ------------------- --------------------
Nonaccrual loans $ 2,529 $ 2,351 $ 2,769
Other real estate owned 50 - -
-------------------- ------------------- --------------------
Total non-performing assets $ 2,579 $ 2,351 $ 2,769
==================== =================== ====================
Loans past due 90 days or more
and still accruing interest $ - $ - $ -
==================== =================== ====================
Total non-performing assets to total
loans and other real estate owned 0.30% 0.31% 0.40%
==================== =================== ====================
Allowance for Loan Losses
- ----------------------------
The allowance for loan losses represents an allocation for probable incurred
loan losses in the loan portfolio. The adequacy of the allowance for loan
losses is evaluated periodically based on a review of all significant loans,
with particular emphasis on impaired, non-accruing, past due, and other loans
that management believes require special attention. The determination of the
allowance for loan losses is considered a critical accounting estimate of the
Company. See "Critical Accounting Estimates."
18
When reviewing the allowance for loan losses, it is important to understand to
whom the Company lends. The following table sets forth the composition of the
Company's loan portfolio as of September 30, 2007 and December 31, 2006.
Table 8 - Loan Portfolio Composition
September 30, 2007 December 31, 2006
--------------------------- ---------------------------
Amount % Amount %
------------- ------------ ------------- ------------
(Dollars in thousands)
Commercial financial and agricultural $ 95,571 11.25% $ 80,823 10.78%
------------- ------------ ------------- ------------
Real estate
Commercial 233,868 27.53% 198,453 26.46%
Residential 179,135 21.09% 158,543 21.14%
Residential held for sale 9,563 1.13% 14,857 1.98%
Construction and development 300,436 35.37% 266,875 35.58%
------------- ------------ ------------- ------------
Total real estate 723,002 85.12% 638,728 85.17%
------------- ------------ ------------- ------------
Lease financing 71 0.01% 116 0.02%
Consumer
Direct 25,314 2.98% 24,146 3.22%
Indirect 4,657 0.55% 6,232 0.83%
Revolving 1,840 0.22% 843 0.11%
------------- ------------ ------------- ------------
Total consumer 31,811 3.75% 31,221 4.16%
------------- ------------ ------------- ------------
Deferred loan origination fees (1,030) -0.12% (919) -0.12%
------------- ------------ ------------- ------------
Total 849,425 100.00% $ 749,969 100.00%
============= ============ ============= ============
At September 30, 2007, the loan portfolio is comprised of 85.12% real estate
loans. Commercial, financial and agricultural loans comprise 11.25%, and
consumer loans comprise 3.75% of the portfolio.
While the Company has 85.12% of its loan portfolio composed of real estate
loans, this percentage is not significantly higher than in previous years.
Commercial real estate comprises 27.53% of the loan portfolio and is
approximately half owner occupied properties where the operations of the
commercial entity provide the necessary cash flow to service the debt. For this
portion of real estate loan portfolio, repayment is not dependent upon the sale
of the real estate held as collateral. Construction and development (35.37%)
has been an increasingly important portion of the real estate loan portfolio.
The Company carefully monitors the loans in this category since the repayment of
these loans is generally dependent upon the sale of the real estate in the
normal course of business and can be impacted by national and local economic
conditions. The residential category, 21.09% of the portfolio, represents those
loans that the Company chooses to maintain in its portfolio rather than selling
into the secondary market for marketing and competitive reasons and commercial
loans secured by residential real estate. The residential held for sale
category, 1.13% of the portfolio, comprises loans that are in the process of
being sold into the secondary market. In these
19
loans, the credit has been approved by the investor and the interest rate locked
so that the Company minimizes credit and interest rate risk with respect to
these loans.
The Company has no large loan concentrations to individual borrowers. Unsecured
loans at September 30, 2007 were $14.9 million. While management uses available
information to recognize losses on loans, future additions to the allowance may
be necessary based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies may
advise additions to the allowance based on their judgments about information
available to them at the time of their examination. Such regulatory guidance is
considered, and the Company may recognize additions to the allowance as a
result.
Additions to the allowance for loan losses are made periodically to maintain the
allowance at an appropriate level based upon management's analysis of potential
risk in the loan portfolio. Loans determined to be uncollectible are charged to
the allowance for loan losses and subsequent recoveries are added to the
allowance. A provision for losses in the amount of $1,001,000 was charged to
expense for the quarter ended September 30, 2007 compared to $667,000 for the
quarter ended September 30, 2006, and $2,607,000 for the nine months ended
September 30, 2007 compared to $1,627,000 for the nine months ended September
30, 2006. The increase in provision for loan losses for both three and nine
month periods is primarily due to the provision related to overall loan growth,
including the new Thrift's loan portfolio, an increase in specifically-reserved
loans and increased levels of classified/watch loans rated debt as well as
management's assessment of current economic environment. The increase in the
allowance for loan losses as of September 30, 2007 as compared to September 30,
2006 is primarily due to increases in outstanding loan balances including the
Thrift's loan portfolio, increases in the allowance applicable to specific
loans, and increases to the allowance due to higher levels of Classified and
Watch-rated debt as well as management's assessment of current economic
environment.
Table 9 - Allowance For Loan Losses
(Dollars in thousands)
2007 2006
-------- --------
Beginning balance, January 1 $ 9,777 $ 9,125
SAB 108 Adjustment - ($694)
Provision charged to expense 2,607 1,627
Recoveries 596 626
Loans charged off (1,175) (1,640)
-------- --------
Ending balance, June 30 $11,805 $ 9,044
======== ========
The allowance for loan loss was decreased $694,000 as of January 1, 2006 to
adjust for over accrual of estimated losses on unfunded lines and commitments
and standby letters of credit as required by the release of Staff Accounting
Bulletin No. 108, Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements (SAB 108).
20
At September 30, 2007 the ratio of allowance for loan losses to total loans was
1.39% compared to 1.30% at December 31, 2006 and 1.31% at September 30, 2006.
Management considers the current allowance for loan losses appropriate based
upon its analysis of the potential risk in the portfolio, although there can be
no assurance that the assumptions underlying such analysis will continue to be
correct.
Liquidity and Capital Resources
- ----------------------------------
The Company's liquidity remains adequate to meet operating and loan funding
requirements. The loan to deposit ratio at September 30, 2007 was 89.3%
compared to 93.5% at December 31, 2006 and 87.4% at September 30, 2006. The
decrease in the loan to deposit ratio from December 31, 2006 to September 30,
2007 reflects deposit growth at a higher rate than loan growth during the first
nine months of 2007. The increase in the loan to deposit ratio from September
30, 2006 to December 31, 2006 reflects loan growth at a higher rate than deposit
growth during that time period. Deposits at September 30, 2007 and December 31,
2006 include $79.2 million and $67.4 million of brokered certificates of
deposit, respectively. GB&T has also utilized borrowings from the Federal Home
Loan Bank. GB&T maintains a line of credit with the Federal Home Loan Bank
approximating 10% of GB&T's total assets. Federal Home Loan Bank advances are
collateralized by eligible first mortgage loans, commercial real estate loans
and investment securities. These borrowings totaled $59.0 million at September
30, 2007. GB&T maintains repurchase lines of credit with SunTrust Robinson
Humphrey, Atlanta, Georgia, for advances up to $20.0 million and with The
Bankers Bank, Atlanta, Georgia, for advances up to $10.0 million of which no
amounts where outstanding in either case as of September 30, 2007. GB&T has a
federal funds purchased accommodation with The Bankers Bank, Atlanta, Georgia,
for advances up to $16.7 million and with SunTrust Bank, Atlanta, Georgia for
advances up to $10.0 million, while SB&T has a federal funds purchased
accommodation with The Bankers Bank, Atlanta, Georgia, for advances up to $3.3
million. Additionally, liquidity needs can be satisfied by the structuring of
the maturities of investment securities and the pricing and maturities on loans
and deposits offered to customers. The Company also uses retail securities sold
under repurchase agreements to fund growth. Retail securities sold under
repurchase agreements were $62.0 million at September 30, 2007.
Stockholders' equity to total assets was 7.29% at September 30, 2007 compared to
7.58% at December 31, 2006 and 7.40% at September 30, 2006. Stockholders'
equity as of September 30, 2007 includes proceeds of $5.0 million from a private
placement stock offering held during the third and fourth quarters of 2006. The
capital of the Company exceeded all required regulatory guidelines at September
30, 2007. The Company's Tier 1 risk-based, total risk-based and leverage
capital ratios were 11.46%, 12.72%, and 9.35%, respectively, at September 30,
2007. The following table reflects the current regulatory capital levels in
more detail, including comparisons to the regulatory minimums.
21
Table 10 - Regulatory Capital Requirements
September 30, 2007
(Dollars in Thousands)
Required for capital
Actual adequacy purposes Excess
Amount Percent Amount Percent Amount Percent
------------ ------------ ----------- ------------ ----------- ------------
Southeastern Bank Financial
Corporation
Risk-based capital:
Tier 1 capital $ 107,503 11.46% 37,520 4.00% 69,983 7.46%
Total capital 119,350 12.72% 75,040 8.00% 44,310 4.72%
Tier 1 leverage ratio 107,503 9.35% 46,010 4.00% 61,493 5.35%
Georgia Bank & Trust Company
Risk-based capital:
Tier 1 capital $ 84,982 9.83% 34,589 4.00% 50,393 5.83%
Total capital 95,792 11.08% 69,179 8.00% 26,613 3.08%
Tier 1 leverage ratio 84,982 7.90% 43,020 4.00% 41,962 3.90%
Southern Bank & Trust
Risk-based capital:
Tier 1 capital $ 14,189 20.13% 2,820 4.00% 11,369 16.13%
Total capital 15,070 21.37% 5,640 8.00% 9,430 13.37%
Tier 1 leverage ratio 14,189 20.18% 2,812 4.00% 11,377 16.18%
Management is not aware of any events or uncertainties that are reasonably
likely to have a material effect on the Company's liquidity, capital resources
or operations.
Commitments and Contractual Obligations
- ------------------------------------------
The Company is a party to lines of credit with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. Lines
of credit are unfunded commitments to extend credit. These instruments involve,
in varying degrees, exposure to credit and interest rate risk in excess of the
amounts recognized in the financial statements. The Company's exposure to
credit loss in the event of nonperformance by the other party to the financial
instrument for unfunded commitments to extend credit and letters of credit is
represented by the contractual amount of those instruments. The Company
evaluates construction and acquisition and development loans for the percentage
completed before extending additional credit. The Company follows the same
credit policies in making commitments and contractual obligations as it does for
on-balance sheet instruments.
22
Unfunded commitments to extend credit where contract amounts represent potential
credit risk totaled $201.0 million at September 30, 2007. These commitments are
primarily at variable interest rates.
The Company's commitments are funded through internal funding sources of
scheduled repayments of loans and sales and maturities of investment securities
available for sale or external funding sources through acceptance of deposits
from customers or borrowings from other financial institutions.
The following table is a summary of the Company's commitments to extend credit,
commitments under contractual leases as well as the Company's contractual
obligations, consisting of deposits, FHLB advances, which are subject to early
termination options, and borrowed funds by contractual maturity date.
Table 11 - Commitments and
Contractual Obligations Less than 1 - 3 3 - 5 More than
($ in thousands) 1 Year Years Years 5 Years
- --------------------------------------------------- ---------- ------- ------- ----------
Lines of credit $ 200,991 - - -
Mortgage loan commitments $ 12,291 - - -
Lease agreements 173 316 217 204
Deposits 898,145 47,256 5,827 -
Securities sold under
repurchase agreements 61,954 - - -
FHLB advances - 17,000 13,000 29,000
Other borrowings 900 - - -
Subordinated debentures - - - 20,000
Total commitments and
contractual obligations $1,174,454 $64,572 $19,044 $ 49,204
========== ======= ======= ==========
Although management regularly monitors the balance of outstanding commitments to
fund loans to ensure funding availability should the need arise, management
believes that the risk of all customers fully drawing on all these lines of
credit at the same time is remote.
Effects of Inflation and Changing Prices
- ----------------------------------------
Inflation generally increases the cost of funds and operating overhead, and to
the extent loans and other assets bear variable rates, the yields on such
assets. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on the performance of a
financial institution than the effects of general levels of inflation. Although
interest rates do not necessarily move in the same direction and to the same
extent as the prices of goods and services, increases in inflation generally
have resulted in increased interest rates. In addition, inflation can increase
a financial institution's cost of goods and services purchased, the cost of
salaries and benefits, occupancy expense and similar items. Inflation and
related increases in interest rates generally decrease the
23
market value of investments and loans held and may adversely affect liquidity,
earnings, and stockholders' equity. Mortgage originations and refinances tend
to slow as interest rates increase, and can reduce the Company's earnings from
such activities and the income from the sale of residential mortgage loans in
the secondary market.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of September 30, 2007, there were no substantial changes in the interest rate
sensitivity analysis or the sensitivity of market value of portfolio equity for
various changes in interest rates calculated as of December 31, 2006. The
foregoing disclosures related to the market risk of the Company should be read
in conjunction with the Company's audited consolidated financial statements,
related notes and management's discussion and analysis of financial condition
and results of operations for the year ended December 31, 2006 included in the
Company's 2006 Annual Report on Form 10-K.
Item 4. Controls and Procedures
As of the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's President and Chief Executive Officer
(principal executive officer) and its Group Vice President and Chief Financial
Officer (principal financial officer), of the effectiveness of the design and
operation of the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-15. Based upon that evaluation, such officers concluded
that the Company's disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company (including its
consolidated subsidiaries) that is required to be included in the Company's
periodic filings with the Securities and Exchange Commission. There have been
no changes in the Company's internal controls or, to the Company's knowledge, in
other factors during the quarter covered by this report that have materially
affected, or are reasonably likely to materially affect, the Company's internal
controls over financial reporting.
24
Part II
OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which the
Company or any of its subsidiaries is a party or of which any of
their property is subject.
Item 1A. Risk Factors
Current Trends in the Mortgage Loan Markets Could Adversely
Affect our Credit Quality and Profitability.
Since the beginning of the year, the market has seen several
subprime lenders and hedge funds that had invested in loans
supported by real estate collateral declare bankruptcy and
discontinue operations, while other lenders have continued to put
in place more stringent underwriting criteria. Recent losses on
mortgage-backed investment securities recorded by some larger
financial institutions have resulted in reduced valuations,
demand and liquidity for these securities.
These challenges have affected the mortgage loan marketplace
by increasing the borrower's cost of funds for loan supported by
real estate. More stringent loan underwriting standards continue
to reduce the number of real estate borrowers who can find
financing in the marketplace, and this continues to reduce the
number of properties sold and refinanced. The number of
residential properties on the market has continued to increase,
and in certain markets including our own, there has been
increasing downward pressure on the selling prices of new and
existing homes and also in the sales market values of existing
properties, which are utilized as comparisons in valuing real
estate collateral. This affects the ability of some borrowers,
particularly those in construction and development, to sell the
properties securing their loans, which in turn makes it difficult
for them to make the scheduled repayments on those loans.
The impact of the described changes in the economy as a
whole, and the real estate marketplace specifically, could have a
negative effect on our ability to maintain or grow our loan
levels and on the values of the collateral underlying our loans.
These changes could limit growth in interest income and could
also cause an increase in expenses associated with collecting on
loans, foreclosing on real estate collateral, and selling
properties that have already been foreclosed. The potential
impact on the Company would depend on the duration and depth of
the real estate market downturn, which will also be affected by
the financial market's
25
response to correcting the problems that have affected the
market, including providing accommodations to borrowers in
default or who are experiencing financial difficulty.
In addition to the other information set forth in this
report, you should carefully consider the factors discussed in
Part I, "Item 1A. Risk Factors" in the Company's Annual Report on
Form 10-K for the year ended December 31, 2006, which could
materially affect its business, financial condition or future
results. The risks described in the Annual Report on Form 10-K
are not the only risks facing the Company. Additional risks and
uncertainties not currently known to management or that
management currently deems to be immaterial also may materially
adversely affect the Company's business, financial condition
and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table sets forth information regarding the
Company's purchases of its common stock on a monthly basis during
the third quarter of 2007. Of the 5752 shares repurchased during
the third quarter, 552 were privately negotiated and 5,200 were
made in the open market.
- ----------------------------------------------------------------------------------------------
Maximum Number (or
Total Number of Appropriate Dollar
Shares (or Uunits) Value) of Shares (or
Total Number Average Price Purchased as Part of Units) Yet be
of Shares Paid Per Publicly Announced Purchased Under the
Period Purchased Share Plans or Programs Plans or Programs
- ------------------- ------------ -------------- --------------------- --------------------
July 1 through
July 31, 2007 200 35.57 5,879 94,121
- ------------------- ------------ -------------- --------------------- --------------------
August 1 through
August 31, 2007 5,000 38.46 10,879 89,121
- ------------------- ------------ -------------- --------------------- --------------------
September 1 through
September 30, 2007 552 35.50 11,431 88,569
- ------------------- ------------ -------------- --------------------- --------------------
Total 5,752 $ 38.08 11,431 88,569
- ----------------------------------------------------------------------------------------------
On April 15, 2004, the Company announced the commencement of
a stock repurchase program, pursuant to which it will, from time
to time, repurchase up to 100,000 shares of its outstanding
stock. The program does not have a stated expiration date. No
stock repurchase programs were terminated during the third
quarter of 2007.
Item 3. Defaults Upon Senior Securities
26
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
31.1 Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
27
SOUTHEASTERN BANK FINANCIAL CORPORATION
Form 10-Q Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SOUTHEASTERN BANK FINANCIAL CORPORATION
Date: November 9, 2007 By: /s/ Darrell R. Rains
--------------------- ------------------------------------
Darrell R. Rains
Group Vice President, Chief
Financial Officer (Duly Authorized
Officer of Registrant and Principal
Financial Officer)
28