UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
|
For the quarterly period ended September 30, 2011
OR
¨
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
|
For the transition period from
to
.
COMMISSION FILE NO. 000-49747
FIRST SECURITY GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
|
|
|
Tennessee
|
|
58-2461486
|
(State of Incorporation)
|
|
(I.R.S. Employer
Identification No.)
|
|
|
531 Broad Street, Chattanooga, TN
|
|
37402
|
(Address of principal executive offices)
|
|
(Zip Code)
|
(423) 266-2000
(Registrants telephone number, including area code)
Not
Applicable
(Former name, former address, and former fiscal year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes
x
No
¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes
x
No
¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of large accelerated
filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
|
|
|
|
|
|
|
Large accelerated filer
|
|
¨
|
|
Accelerated filer
|
|
¨
|
|
|
|
|
Non-accelerated filer
|
|
¨
|
|
Smaller reporting company
|
|
x
|
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
¨
No
x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date:
Common Stock, $0.01 par value:
1,649,342 shares outstanding and issued as of November 10, 2011
First Security Group, Inc. and Subsidiary
Form 10-Q
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1.
|
FINANCIAL STATEMENTS
|
First Security Group, Inc. and Subsidiary
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
September 30,
2011
(unaudited)
|
|
|
December 31,
2010
|
|
|
September 30,
2010
(unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Due from Banks
|
|
$
|
9,595
|
|
|
$
|
8,298
|
|
|
$
|
8,545
|
|
Interest Bearing Deposits in Banks
|
|
|
267,184
|
|
|
|
200,621
|
|
|
|
224,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
|
276,779
|
|
|
|
208,919
|
|
|
|
232,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Available-for-Sale
|
|
|
158,788
|
|
|
|
154,165
|
|
|
|
155,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Held for Sale
|
|
|
2,284
|
|
|
|
2,556
|
|
|
|
3,386
|
|
Loans
|
|
|
602,140
|
|
|
|
724,535
|
|
|
|
774,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans
|
|
|
604,424
|
|
|
|
727,091
|
|
|
|
777,418
|
|
Less: Allowance for Loan and Lease Losses
|
|
|
18,750
|
|
|
|
24,000
|
|
|
|
25,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loans
|
|
|
585,674
|
|
|
|
703,091
|
|
|
|
752,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premises and Equipment, net
|
|
|
30,050
|
|
|
|
30,814
|
|
|
|
31,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets
|
|
|
1,116
|
|
|
|
1,461
|
|
|
|
1,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
71,106
|
|
|
|
70,098
|
|
|
|
73,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
1,123,513
|
|
|
$
|
1,168,548
|
|
|
$
|
1,246,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(See Accompanying Notes to Consolidated Financial Statements)
1
First Security Group, Inc. and Subsidiary
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except share and per share data)
|
|
September 30,
2011
(unaudited)
|
|
|
December 31,
2010
|
|
|
September 30,
2010
(unaudited)
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Bearing Demand
|
|
$
|
162,166
|
|
|
$
|
149,323
|
|
|
$
|
166,723
|
|
Interest Bearing Demand
|
|
|
60,761
|
|
|
|
63,838
|
|
|
|
65,047
|
|
Savings and Money Market Accounts
|
|
|
150,463
|
|
|
|
161,873
|
|
|
|
170,426
|
|
Certificates of Deposit less than $100 thousand
|
|
|
208,986
|
|
|
|
205,675
|
|
|
|
215,811
|
|
Certificates of Deposit of $100 thousand or more
|
|
|
171,256
|
|
|
|
153,138
|
|
|
|
164,466
|
|
Brokered Deposits
|
|
|
265,378
|
|
|
|
314,876
|
|
|
|
329,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Deposits
|
|
|
1,019,010
|
|
|
|
1,048,723
|
|
|
|
1,112,204
|
|
Federal Funds Purchased and Securities Sold under Agreements to Repurchase
|
|
|
15,054
|
|
|
|
15,933
|
|
|
|
17,676
|
|
Security Deposits
|
|
|
242
|
|
|
|
732
|
|
|
|
939
|
|
Other Borrowings
|
|
|
63
|
|
|
|
77
|
|
|
|
81
|
|
Other Liabilities
|
|
|
11,098
|
|
|
|
9,709
|
|
|
|
8,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
1,045,467
|
|
|
|
1,075,174
|
|
|
|
1,139,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock no par value 10,000,000 shares authorized; 33,000 issued as of September 30,
2011, December 31, 2010 and September 30, 2010; Liquidation value of $33,000 as of September 30, 2011, December 31, 2010 and September 30, 2010
|
|
|
32,018
|
|
|
|
31,718
|
|
|
|
31,620
|
|
Common Stock $.01 par value 150,000,000 shares authorized; 1,649,249 shares issued as of September 30, 2011,
1,641,833 issued as of December 31, 2010 and September 30, 2010
|
|
|
114
|
|
|
|
114
|
|
|
|
114
|
|
Paid-In Surplus
|
|
|
110,231
|
|
|
|
111,344
|
|
|
|
111,550
|
|
Common Stock Warrants
|
|
|
2,006
|
|
|
|
2,006
|
|
|
|
2,006
|
|
Unallocated ESOP Shares
|
|
|
(4,019
|
)
|
|
|
(5,218
|
)
|
|
|
(5,396
|
)
|
Accumulated Deficit
|
|
|
(66,701
|
)
|
|
|
(50,629
|
)
|
|
|
(38,789
|
)
|
Accumulated Other Comprehensive Income
|
|
|
4,397
|
|
|
|
4,039
|
|
|
|
5,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
78,046
|
|
|
|
93,374
|
|
|
|
106,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$
|
1,123,513
|
|
|
$
|
1,168,548
|
|
|
$
|
1,246,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(See Accompanying Notes to Consolidated Financial Statements)
2
First Security Group, Inc. and Subsidiary
Consolidated Income Statements
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
(in thousands, except per share data)
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
INTEREST INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, including fees
|
|
$
|
9,020
|
|
|
$
|
11,909
|
|
|
$
|
28,914
|
|
|
$
|
38,090
|
|
Debt Securities taxable
|
|
|
858
|
|
|
|
926
|
|
|
|
2,604
|
|
|
|
3,010
|
|
Debt Securities non-taxable
|
|
|
316
|
|
|
|
335
|
|
|
|
965
|
|
|
|
1,062
|
|
Other
|
|
|
144
|
|
|
|
32
|
|
|
|
371
|
|
|
|
371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Income
|
|
|
10,338
|
|
|
|
13,202
|
|
|
|
32,854
|
|
|
|
42,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Demand Deposits
|
|
|
39
|
|
|
|
47
|
|
|
|
120
|
|
|
|
142
|
|
Savings Deposits and Money Market Accounts
|
|
|
261
|
|
|
|
341
|
|
|
|
811
|
|
|
|
1,105
|
|
Certificates of Deposit of less than $100 thousand
|
|
|
692
|
|
|
|
1,131
|
|
|
|
2,230
|
|
|
|
3,722
|
|
Certificates of Deposit of $100 thousand or more
|
|
|
606
|
|
|
|
970
|
|
|
|
1,868
|
|
|
|
3,261
|
|
Brokered Deposits
|
|
|
1,951
|
|
|
|
2,459
|
|
|
|
5,970
|
|
|
|
7,169
|
|
Other
|
|
|
113
|
|
|
|
119
|
|
|
|
334
|
|
|
|
363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Expense
|
|
|
3,662
|
|
|
|
5,067
|
|
|
|
11,333
|
|
|
|
15,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST INCOME
|
|
|
6,676
|
|
|
|
8,135
|
|
|
|
21,521
|
|
|
|
26,771
|
|
Provision for Loan and Lease Losses
|
|
|
3,882
|
|
|
|
18,408
|
|
|
|
7,391
|
|
|
|
26,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST INCOME (LOSS) AFTER PROVISION FOR LOAN AND LEASE LOSSES
|
|
|
2,794
|
|
|
|
(10,273
|
)
|
|
|
14,130
|
|
|
|
365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service Charges on Deposit Accounts
|
|
|
791
|
|
|
|
951
|
|
|
|
2,351
|
|
|
|
2,999
|
|
Gain on Sales of Available-for-Sale Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
|
|
Other
|
|
|
1,313
|
|
|
|
1,453
|
|
|
|
4,073
|
|
|
|
4,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Noninterest Income
|
|
|
2,104
|
|
|
|
2,404
|
|
|
|
6,424
|
|
|
|
7,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and Employee Benefits
|
|
|
4,265
|
|
|
|
4,787
|
|
|
|
12,792
|
|
|
|
14,438
|
|
Expense on Premises and Fixed Assets, net of rental income
|
|
|
1,266
|
|
|
|
1,431
|
|
|
|
3,813
|
|
|
|
4,187
|
|
Other
|
|
|
5,902
|
|
|
|
6,301
|
|
|
|
18,451
|
|
|
|
15,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Noninterest Expenses
|
|
|
11,433
|
|
|
|
12,519
|
|
|
|
35,056
|
|
|
|
34,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE INCOME TAX (BENEFIT) PROVISION
|
|
|
(6,535
|
)
|
|
|
(20,388
|
)
|
|
|
(14,502
|
)
|
|
|
(26,551
|
)
|
Income Tax (Benefit) Provision
|
|
|
(54
|
)
|
|
|
9,384
|
|
|
|
32
|
|
|
|
6,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
|
(6,481
|
)
|
|
|
(29,772
|
)
|
|
|
(14,534
|
)
|
|
|
(33,012
|
)
|
Preferred Stock Dividends
|
|
|
412
|
|
|
|
413
|
|
|
|
1,238
|
|
|
|
1,238
|
|
Accretion on Preferred Stock Discount
|
|
|
102
|
|
|
|
95
|
|
|
|
300
|
|
|
|
281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS ALLOCATED TO COMMON STOCKHOLDERS
|
|
$
|
(6,995
|
)
|
|
$
|
(30,280
|
)
|
|
$
|
(16,072
|
)
|
|
$
|
(34,531
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss Per Share Basic
|
|
$
|
(4.40
|
)
|
|
$
|
(19.18
|
)
|
|
$
|
(10.13
|
)
|
|
$
|
(21.97
|
)
|
Net Loss Per Share Diluted
|
|
$
|
(4.40
|
)
|
|
$
|
(19.18
|
)
|
|
$
|
(10.13
|
)
|
|
$
|
(21.97
|
)
|
Dividends Declared Per Common Share
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
(See Accompanying Notes to Consolidated Financial Statements)
3
First Security Group, Inc. and Subsidiary
Consolidated Statement of Stockholders Equity
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
|
|
|
|
|
(in thousands)
|
|
Preferred
Stock
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid-In
Surplus
|
|
|
Common
Stock
Warrants
|
|
|
Accumulated
Deficit
|
|
|
|
Unallocated
ESOP Shares
|
|
|
Total
|
|
Balance December 31, 2010
|
|
$
|
31,718
|
|
|
|
1,642
|
|
|
$
|
114
|
|
|
$
|
111,344
|
|
|
$
|
2,006
|
|
|
$
|
(50,629
|
)
|
|
$
|
4,039
|
|
|
$
|
(5,218
|
)
|
|
$
|
93,374
|
|
Issuance of Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,534
|
)
|
|
|
|
|
|
|
|
|
|
|
(14,534
|
)
|
Change Unrealized Gain:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Available-for-Sale, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,326
|
|
|
|
|
|
|
|
1,326
|
|
Fair Value of Derivatives, net of tax and reclassification adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(968
|
)
|
|
|
|
|
|
|
(968
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,176
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of Discount Associated with Preferred Stock
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock Dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,238
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,238
|
)
|
Stock-based Compensation, net of forfeitures
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
ESOP Allocation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,129
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,199
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance September 30, 2011
|
|
$
|
32,018
|
|
|
|
1,649
|
|
|
$
|
114
|
|
|
$
|
110,231
|
|
|
$
|
2,006
|
|
|
$
|
(66,701
|
)
|
|
$
|
4,397
|
|
|
$
|
(4,019
|
)
|
|
$
|
78,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(See Accompanying Notes to Consolidated Financial Statements)
4
First Security Group, Inc. and Subsidiary
Consolidated Statements of Cash Flow
(unaudited)
|
|
|
000000000000
|
|
|
|
000000000000
|
|
|
|
Nine Months Ended September 30,
|
|
(in thousands)
|
|
2011
|
|
|
2010
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(14,534
|
)
|
|
$
|
(33,012
|
)
|
Adjustments to Reconcile Net Loss to Net Cash From Operating Activities -
|
|
|
|
|
Provision for Loan and Lease Losses
|
|
|
7,391
|
|
|
|
26,406
|
|
Amortization, net
|
|
|
974
|
|
|
|
751
|
|
Stock-Based Compensation
|
|
|
14
|
|
|
|
73
|
|
ESOP Compensation
|
|
|
70
|
|
|
|
310
|
|
Depreciation
|
|
|
1,126
|
|
|
|
1,372
|
|
(Loss) Gain on Sale of Premises and Equipment
|
|
|
24
|
|
|
|
(17
|
)
|
Loss and Write-downs on Other Real Estate and Repossessions, net
|
|
|
5,118
|
|
|
|
3,265
|
|
Gain on Sale of Available-for-Sale Securities
|
|
|
|
|
|
|
(57
|
)
|
Income on Bank-owned Life Insurance
|
|
|
(765
|
)
|
|
|
(754
|
)
|
Accretion of Terminated Cash Flow Swaps
|
|
|
(1,856
|
)
|
|
|
(1,532
|
)
|
Changes in Operating Assets and Liabilities -
|
|
|
|
|
|
|
|
|
Loans Held for Sale
|
|
|
272
|
|
|
|
(2,164
|
)
|
Interest Receivable
|
|
|
437
|
|
|
|
584
|
|
Other Assets
|
|
|
1,079
|
|
|
|
5,864
|
|
Interest Payable
|
|
|
(1,009
|
)
|
|
|
(1,291
|
)
|
Other Liabilities
|
|
|
916
|
|
|
|
(1,621
|
)
|
|
|
|
|
|
|
|
|
|
Net Cash From Operating Activities
|
|
|
(743
|
)
|
|
|
(1,823
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Activity in Available-for-Sale-Securities -
|
|
|
|
|
|
|
|
|
Maturities, Prepayments, and Calls
|
|
|
46,462
|
|
|
|
46,685
|
|
Sales
|
|
|
|
|
|
|
14,762
|
|
Purchases
|
|
|
(49,705
|
)
|
|
|
(73,002
|
)
|
Loan Originations and Principal Collections, net
|
|
|
94,794
|
|
|
|
134,191
|
|
Proceeds from Sale of Premises and Equipment
|
|
|
45
|
|
|
|
17
|
|
Proceeds from Sales of Other Real Estate and Repossessions
|
|
|
8,049
|
|
|
|
8,086
|
|
Additions to Premises and Equipment
|
|
|
(436
|
)
|
|
|
(1,379
|
)
|
|
|
|
|
|
|
|
|
|
Net Cash From Investing Activities
|
|
|
99,209
|
|
|
|
129,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net Decrease in Deposits
|
|
|
(29,713
|
)
|
|
|
(70,469
|
)
|
Net Decrease in Federal Funds Purchased and Securities Sold Under Agreements to Repurchase
|
|
|
(879
|
)
|
|
|
(235
|
)
|
Net Decrease of Other Borrowings
|
|
|
(14
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
Net Cash From Financing Activities
|
|
|
(30,606
|
)
|
|
|
(70,717
|
)
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
67,860
|
|
|
|
56,820
|
|
CASH AND CASH EQUIVALENTS beginning of period
|
|
|
208,919
|
|
|
|
175,836
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS end of period
|
|
$
|
276,779
|
|
|
$
|
232,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW DISCLOSURES
|
|
|
|
|
|
|
|
|
|
|
|
00000000
|
|
|
|
00000000
|
|
|
|
Nine Months Ended September 30,
|
|
(in thousands)
|
|
2011
|
|
|
2010
|
|
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Transfers to Foreclosed Properties and Repossessions
|
|
$
|
15,728
|
|
|
$
|
18,781
|
|
SUPPLEMENTAL SCHEDULE OF CASH FLOWS
|
|
|
|
|
|
|
|
|
Interest Paid
|
|
$
|
12,342
|
|
|
$
|
17,053
|
|
Income Taxes Paid
|
|
$
|
304
|
|
|
$
|
128
|
|
(See Accompanying Notes to Consolidated Financial Statements)
5
FIRST SECURITY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by
accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair statement of financial condition and the results of operations have been
included. All such adjustments were of a normal recurring nature. Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior year net income or
shareholders equity.
The consolidated financial statements include the accounts of First Security Group, Inc. and its
subsidiary bank, which is wholly-owned. All significant intercompany balances and transactions have been eliminated.
On
September 19, 2011 (the Effective Date), First Security completed a one-for-ten reverse stock split of its common stock. In connection with the reverse stock split, every ten shares of issued and outstanding First Security common stock
at the Effective Date were exchanged for one share of newly issued common stock. Fractional shares were rounded up to the next whole share. Other than the number of authorized shares of common stock disclosed in the Consolidated Balance Sheets, all
prior period share amounts have been retroactively restated to reflect the reverse stock split. For additional information related to the reverse stock split, see Note 2, Operational and Regulatory Matters and Note 9, Stockholders Equity.
Operating results for the three and nine months ended September 30, 2011 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2011 or any other period. These interim financial statements should be read in conjunction with the Companys latest annual consolidated financial statements and footnotes thereto
included in the Companys Annual Report on Form 10-K for the year ended December 31, 2010.
NOTE 2 OPERATIONAL AND REGULATORY MATTERS
The Company continues to operate in a difficult environment and has been significantly impacted by unprecedented credit
and economic turmoil in our market area, as well as the recessionary economy that has had significant impact worldwide. Deterioration in the Tennessee and Georgia commercial and residential real estate markets and related declines in property values
in those markets have had a negative impact on our operating results since the latter half of 2008.
Operational Matters
The Companys financial statements are presented on a going concern basis, which contemplates the realization of
assets and satisfaction of liabilities in the normal course of business. The Company has experienced losses from operations during the last two years that raise substantial doubt as to its ability to continue as a going concern. The Companys
ability to continue as a going concern is contingent upon its ability to devise and successfully execute a management plan to develop profitable operations, satisfy the requirements of the regulatory actions detailed below, and lower the level of
problem assets to an acceptable level.
Management has developed strategic and capital plans, which include, but are not
limited to: (1) reorganizing management into a line of business structure, (2) restructuring credit and lending functions with new policies and centralized processes, (3) reducing adversely classified assets, (4) maintaining a
Tier 1 leverage capital ratio of not less than 9%, (5) maintaining a total risk-based capital ratio of not less than 13%, (6) maintaining an adequate allowance for loan losses and (7) actively working to maintain appropriate liquidity
while reducing reliance on non-core sources of funding.
On May 4, 2011, the Company announced the engagement of Triumph
Investment Managers, LLC (Triumph) to provide strategic advisory services. Management, with the assistance of Triumph, is currently reviewing and modifying the previously developed capital and strategic plans. The Company anticipates submitting the
revised capital and strategic plans to the regulators upon completion.
The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.
On September 13, 2011, shareholders approved at the Companys annual meeting a proposal to amend the Companys
Articles of Incorporation that effected a one-for-ten (1-for-10) reverse stock split of the Companys common stock. The reverse stock split was effective at the opening of business on September 19, 2011. On October 3, 2011, NASDAQ notified the
Company that it had regained compliance with the Bid Price Rule after the closing bid was in excess of $1.00 for 10 consecutive business days, from September 19, 2011 to September 30, 2011. The Company has maintained a closing bid in excess of $1.00
through the filing date of this Report.
Regulatory Matters
First Security Group, Inc.
On September 7, 2010, the Company entered into a Written Agreement (Agreement) with the Federal Reserve Bank of Atlanta (Federal Reserve), the Companys primary regulator. The Agreement is
designed to enhance the Companys ability to act as a source of strength to the Bank.
The Agreement prohibits the
Company from declaring or paying dividends without prior written consent of the Federal Reserve. The Company is also prohibited from taking dividends, or any other form of payment representing a reduction of capital, from the Bank without prior
written consent.
6
Within 60 days of the Agreement, the Company was required to submit to the Federal Reserve
Bank a written plan designed to maintain sufficient capital at the Company and the Bank. The Company submitted a copy of the Banks capital plan that had previously been submitted to the Banks primary regulator, the Office of the
Comptroller of the Currency (OCC). Neither the Federal Reserve Bank nor the OCC have accepted that capital plan. As discussed above, management, with the assistance of Triumph, is reviewing and modifying the previously developed capital and
strategic plans.
The Company is currently deemed not in compliance with several provisions of the Agreement. Any material
noncompliance may result in further enforcement actions by the Federal Reserve Bank. Management believes the successful execution of the strategic initiatives discussed above will ultimately result in full compliance with the Agreement and position
the Company for long-term growth and a return to profitability.
On September 14, 2010, the Company filed a current
report on Form 8-K describing the Agreement. The Form 8-K also provides the final, executed Agreement.
FSGBank, N.A.
On April 28, 2010, pursuant to a Stipulation and Consent to the Issuance of a Consent Order (Order), FSGBank, the
Companys wholly-owned subsidiary, consented and agreed to the issuance of a Consent Order by the OCC.
The Bank and the
OCC agreed as to the areas of the Banks operations that warrant improvement and a plan for making those improvements. The Order required the Bank to develop and submit written strategic and capital plans covering at least a three-year period.
The Bank is required to review and revise various policies and procedures, including those associated with credit concentration management, the allowance for loan and lease losses, liquidity management, criticized assets, loan review and credit.
Within 120 days of the effective date of the Order, the Bank was required to achieve and thereafter maintain total capital at
least equal to 13 percent of risk-weighted assets and Tier 1 capital at least equal to 9 percent of adjusted total assets. As of September 30, 2011, the fifth financial reporting period subsequent to the 120 day requirement, the Banks
total capital to risk-weighted assets was 11.9 percent and the Tier 1 capital to adjusted total assets was 6.4 percent. The Bank has notified the OCC of the non-compliance.
During the third quarter of 2010, the OCC requested additional information and clarifications to the Banks submitted strategic and capital plans as well as the management assessments. At this time,
the Bank has not submitted updated strategic and capital plans. However, management, with the assistance of Triumph, is currently reviewing and modifying the previously developed capital and strategic plans and incorporating appropriate points to
address the items raised by the OCC.
Because the Order established specific capital amounts to be maintained by the Bank, the
Bank may not be considered better than adequately capitalized for capital adequacy purposes, even if the Bank exceeds the levels of capital set forth in the Order. As an adequately capitalized institution, the Bank may not pay interest
on deposits that are more than 75 basis points above the rate applicable to the applicable market of the Bank as determined by the FDIC. Additionally, the Bank may not accept, renew or roll over brokered deposits without prior approval of the FDIC.
The OCC is currently conducting its annual Safety and Soundness examination of the Bank. The exam includes evaluating the
Banks level of compliance with the provisions of the Order. At the conclusion of the 2010 examination, the Bank was deemed not in compliance with the provisions of the Order. The Bank remains in non-compliance with the capital provision of the
Order but anticipates progress with certain other provisions based on the organizational and operational changes that have been implemented over the last twelve months. Any material noncompliance may result in further enforcement actions by the OCC,
including the OCC requiring that FSGBank develop a plan to sell, merge or liquidate. Management believes the successful execution of the strategic initiatives discussed above will ultimately result in full compliance with the Order and position the
Bank for long-term growth and a return to profitability.
On April 29, 2010, the Company filed a current report on Form
8-K describing the Order and the Banks actions to date. The Form 8-K also provides the final, executed Order.
Regulatory Capital Ratios
Banks and bank holding companies, as regulated institutions, must meet required levels of capital. OCC and the Federal Reserve, the primary federal regulators for FSGBank and First Security,
respectively, have adopted minimum capital regulations or guidelines that categorize components and the level of risk associated with various types of assets. Financial institutions are expected to maintain a level of capital commensurate with
the risk profile assigned to their assets in accordance with the guidelines. As described above, the Consent Order requires FSGBank to achieve and maintain total capital to risk adjusted assets of at least 13% and a leverage ratio of at least
9%. The Order provided 120 days from April 28, 2010, the effective date of the Order, to achieve these ratios. FSGBank is currently not in compliance with the capital requirements.
The following table compares the required capital ratios
maintained by First Security and FSGBank:
CAPITAL RATIOS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2011
|
|
FSGBank
Consent
Order
1
|
|
|
Well
Capitalized
|
|
|
Adequately
Capitalized
|
|
|
First
Security
|
|
|
FSGBank
|
|
Tier I capital to risk adjusted assets
|
|
|
n/a
|
|
|
|
6.0
|
%
|
|
|
4.0
|
%
|
|
|
10.8
|
%
|
|
|
10.6
|
%
3
|
Total capital to risk adjusted assets
|
|
|
13.0
|
%
|
|
|
10.0
|
%
|
|
|
8.0
|
%
|
|
|
12.0
|
%
|
|
|
11.9
|
%
3
|
Leverage ratio
|
|
|
9.0
|
%
|
|
|
5.0
|
%
2
|
|
|
4.0
|
%
|
|
|
6.5
|
%
|
|
|
6.4
|
%
3
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital to risk adjusted assets
|
|
|
n/a
|
|
|
|
6.0
|
%
|
|
|
4.0
|
%
|
|
|
11.2
|
%
|
|
|
10.9
|
%
3
|
Total capital to risk adjusted assets
|
|
|
13.0
|
%
|
|
|
10.0
|
%
|
|
|
8.0
|
%
|
|
|
12.5
|
%
|
|
|
12.2
|
%
3
|
Leverage ratio
|
|
|
9.0
|
%
|
|
|
5.0
|
%
2
|
|
|
4.0
|
%
|
|
|
7.3
|
%
|
|
|
7.1
|
%
3
|
|
|
|
|
|
|
September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital to risk adjusted assets
|
|
|
n/a
|
|
|
|
6.0
|
%
|
|
|
4.0
|
%
|
|
|
11.9
|
%
|
|
|
11.7
|
%
3
|
Total capital to risk adjusted assets
|
|
|
13.0
|
%
|
|
|
10.0
|
%
|
|
|
8.0
|
%
|
|
|
13.2
|
%
|
|
|
12.9
|
%
3
|
Leverage ratio
|
|
|
9.0
|
%
|
|
|
5.0
|
%
2
|
|
|
4.0
|
%
|
|
|
7.6
|
%
|
|
|
7.4
|
%
3
|
1
|
FSGBank was required to achieve and maintain the above capital ratios within 120 days from April 28, 2010.
|
2
|
The Federal Reserve Board definition of well capitalized for bank holding companies does not include a leverage ratio component; accordingly, the
leverage ratio requirement for well capitalized status only applies to FSGBank.
|
3
|
Due to the capital requirement within FSGBanks Consent Order, FSGBank is considered to be adequately capitalized.
|
7
NOTE 3 COMPREHENSIVE INCOME (LOSS)
Comprehensive income is a measure of all changes in equity, not only reflecting net income but certain other changes as
well. The following table presents the comprehensive loss for the three and nine month periods ended September 30, 2011 and 2010, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(in thousands)
|
|
Net loss
|
|
$
|
(6,481
|
)
|
|
$
|
(29,772
|
)
|
|
$
|
(14,534
|
)
|
|
$
|
(33,012
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net gain on securities arising during the period
|
|
|
634
|
|
|
|
794
|
|
|
|
2,009
|
|
|
|
911
|
|
Tax expense related to unrealized net gain
|
|
|
(216
|
)
|
|
|
(270
|
)
|
|
|
(683
|
)
|
|
|
(310
|
)
|
Reclassification adjustments for realized gain included in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(57
|
)
|
Tax expense related to gain realized in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on securities, net of tax
|
|
|
418
|
|
|
|
524
|
|
|
|
1,326
|
|
|
|
563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on derivatives arising during the period
|
|
|
9
|
|
|
|
41
|
|
|
|
(62
|
)
|
|
|
|
|
Tax (expense) benefit related to unrealized gain (loss)
|
|
|
(3
|
)
|
|
|
(14
|
)
|
|
|
21
|
|
|
|
|
|
Reclassification adjustments for realized gain included in net income
|
|
|
(442
|
)
|
|
|
(485
|
)
|
|
|
(1,404
|
)
|
|
|
(1,537
|
)
|
Tax expense related to gain realized in net income
|
|
|
150
|
|
|
|
165
|
|
|
|
477
|
|
|
|
523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on derivatives, net of tax
|
|
|
(286
|
)
|
|
|
(293
|
)
|
|
|
(968
|
)
|
|
|
(1,014
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax
|
|
|
132
|
|
|
|
231
|
|
|
|
358
|
|
|
|
(451
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(6,349
|
)
|
|
$
|
(29,541
|
)
|
|
$
|
(14,176
|
)
|
|
$
|
(33,463
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 4 EARNINGS (LOSS) PER SHARE
The difference in basic and diluted weighted average shares is due to the assumed conversion of outstanding options
using the treasury stock method. The following table presents the computation of basic and diluted earnings per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(in thousands, except per share data)
|
|
|
|
|
|
|
Net loss allocated to common stockholders
|
|
$
|
(6,995
|
)
|
|
$
|
(30,280
|
)
|
|
$
|
(16,072
|
)
|
|
$
|
(34,531
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
1,591
|
|
|
|
1,579
|
|
|
|
1,587
|
|
|
|
1,572
|
|
Equivalent shares issuable upon exercise of stock options, stock warrants and restricted stock grants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding
|
|
|
1,591
|
|
|
|
1,579
|
|
|
|
1,587
|
|
|
|
1,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(4.40
|
)
|
|
$
|
(19.18
|
)
|
|
$
|
(10.13
|
)
|
|
$
|
(21.97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(4.40
|
)
|
|
$
|
(19.18
|
)
|
|
$
|
(10.13
|
)
|
|
$
|
(21.97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to the net loss allocated to common shareholders for all periods shown, all stock options, stock
warrants, and restricted stock grants are considered anti-dilutive. As of September 30, 2011, a total of 145 thousand stock options, stock warrants and restricted stock grants were considered anti-dilutive. All prior periods have been restated to
give retroactive effect to the one-for-ten reverse stock split that took effect on September 19, 2011.
8
NOTE 5 SECURITIES
Investment Securities by Type
The following table presents the amortized cost and fair value of securities, with gross unrealized gains and losses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
|
|
(in thousands)
|
|
Securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agencies
|
|
$
|
21,987
|
|
|
$
|
311
|
|
|
$
|
|
|
|
$
|
22,298
|
|
Mortgage-backedresidential
|
|
|
100,056
|
|
|
|
3,206
|
|
|
|
15
|
|
|
|
103,247
|
|
Municipals
|
|
|
31,752
|
|
|
|
1,455
|
|
|
|
|
|
|
|
33,207
|
|
Other
|
|
|
127
|
|
|
|
|
|
|
|
91
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
153,922
|
|
|
$
|
4,972
|
|
|
$
|
106
|
|
|
$
|
158,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agencies
|
|
$
|
31,967
|
|
|
$
|
199
|
|
|
$
|
339
|
|
|
$
|
31,827
|
|
Mortgage-backedresidential
|
|
|
84,515
|
|
|
|
2,366
|
|
|
|
73
|
|
|
|
86,808
|
|
Municipals
|
|
|
34,700
|
|
|
|
947
|
|
|
|
147
|
|
|
|
35,500
|
|
Other
|
|
|
127
|
|
|
|
|
|
|
|
97
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
151,309
|
|
|
$
|
3,512
|
|
|
$
|
656
|
|
|
$
|
154,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agencies
|
|
$
|
27,787
|
|
|
$
|
386
|
|
|
$
|
|
|
|
$
|
28,173
|
|
Mortgage-backedresidential
|
|
|
86,876
|
|
|
|
2,978
|
|
|
|
|
|
|
|
89,854
|
|
Municipals
|
|
|
35,326
|
|
|
|
1,690
|
|
|
|
10
|
|
|
|
37,006
|
|
Other
|
|
|
127
|
|
|
|
|
|
|
|
52
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
150,116
|
|
|
$
|
5,054
|
|
|
$
|
62
|
|
|
$
|
155,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no sales of securities for the three and nine months ended September 30, 2011, nor were
there sales for the three months ended September 30, 2010. Proceeds from sales of securities available-for-sale totaled $14,762 thousand for the nine months ended September 30, 2010. Gross realized gains from sales of securities were $368
thousand for the nine months ended September 30, 2010. Gross realized losses were $311 thousand for the nine months ended September 30, 2010.
At September 30, 2011, December 31, 2010 and September 30, 2010, federal agencies, municipals and mortgage-backed securities with a carrying value of $21,320 thousand, $21,572 thousand
and $28,949 thousand, respectively, were pledged to secure public deposits. At September 30, 2011, December 31, 2010 and September 30, 2010, the carrying amount of securities pledged to secure repurchase agreements was $18,398
thousand, $30,254 thousand and $20,095 thousand, respectively. At September 30, 2011, December 31, 2010 and September 30, 2010, securities of $6,031 thousand, $5,756 thousand and $5,899 thousand were pledged to the Federal
Reserve Bank of Atlanta to secure the Companys daytime correspondent transactions. At September 30, 2011, the carrying amount of securities pledged to secure lines of credit with the FHLB totaled $10,175 thousand. At September 30,
2011, pledged and unpledged securities totaled $55,925 thousand and $102,863 thousand, respectively.
9
Maturity of Securities
The following table presents the amortized cost and fair value of debt securities by contractual maturity at September 30, 2011.
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
|
(in thousands)
|
|
Within 1 year
|
|
$
|
3,573
|
|
|
$
|
3,616
|
|
Over 1 year through 5 years
|
|
|
16,760
|
|
|
|
17,404
|
|
5 years to 10 years
|
|
|
29,206
|
|
|
|
30,062
|
|
Over 10 years
|
|
|
4,327
|
|
|
|
4,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,866
|
|
|
|
55,541
|
|
Mortgage-backed residential securities
|
|
|
100,056
|
|
|
|
103,247
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
153,922
|
|
|
$
|
158,788
|
|
|
|
|
|
|
|
|
|
|
Impairment Analysis
The following table shows the gross unrealized losses and fair value of the Companys investments with unrealized losses that are not
deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2011, December 31, 2010 and
September 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
|
12 months or greater
|
|
|
Totals
|
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
|
(in thousands)
|
|
September 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agencies
|
|
$
|
9,482
|
|
|
$
|
15
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
9,482
|
|
|
$
|
15
|
|
Mortgage-backedresidential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
36
|
|
|
|
91
|
|
|
|
36
|
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
9,482
|
|
|
$
|
15
|
|
|
$
|
36
|
|
|
$
|
91
|
|
|
$
|
9,518
|
|
|
$
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agencies
|
|
$
|
15,147
|
|
|
$
|
339
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
15,147
|
|
|
$
|
339
|
|
Mortgage-backedresidential
|
|
|
8,466
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
8,466
|
|
|
|
73
|
|
Municipals
|
|
|
4,030
|
|
|
|
110
|
|
|
|
364
|
|
|
|
37
|
|
|
|
4,394
|
|
|
|
147
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
97
|
|
|
|
30
|
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
27,643
|
|
|
$
|
522
|
|
|
$
|
394
|
|
|
$
|
134
|
|
|
$
|
28,037
|
|
|
$
|
656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agencies
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Mortgage-backedresidential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipals
|
|
|
|
|
|
|
|
|
|
|
392
|
|
|
|
10
|
|
|
|
392
|
|
|
|
10
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
75
|
|
|
|
52
|
|
|
|
75
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
|
|
|
$
|
|
|
|
$
|
467
|
|
|
$
|
62
|
|
|
$
|
467
|
|
|
$
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2011, the Company performed an impairment assessment of the securities in its
portfolio that had an unrealized loss to determine whether the decline in the fair value of these securities below their cost was other-than-temporary. Under authoritative accounting guidance, impairment is considered other-than-temporary if any of
the following conditions exists: (1) the Company intends to sell the security, (2) it is more likely than not that the Company will be required to sell the security before recovery of its amortized costs basis or (3) the Company does
not expect to recover the securitys entire amortized cost basis, even if the Company does not intend to sell. Additionally, accounting guidance requires that for impaired securities that the Company does not intend to sell and/or that it is
not more-likely-than-not that the Company will have to sell prior to recovery but for which credit losses exist, the other-than-temporary impairment should be separated between the total impairment related to credit losses, which should be
recognized in current earnings, and the amount of impairment related to all other factors, which should be recognized in other comprehensive income. If a decline is determined to be other-than-temporary due to credit losses, the cost basis of the
individual security is written down to fair value, which then becomes the new cost basis. The new cost basis would not be adjusted in future periods for subsequent recoveries in fair value, if any.
10
In evaluating the recovery of the entire amortized cost basis, the Company considers factors
such as (1) the length of time and the extent to which the market value has been less than cost, (2) the financial condition and near-term prospects of the issuer, including events specific to the issuer or industry, (3) defaults or
deferrals of scheduled interest, principal or dividend payments and (4) external credit ratings and recent downgrades.
As of September 30, 2011, gross unrealized losses in the Companys portfolio totaled $106 thousand, compared to $656 thousand
as of December 31, 2010 and $62 thousand as of September 30, 2010. The unrealized losses in federal agencies (consisting of three securities) are primarily due to widening credit spreads and changes in interest rates subsequent to
purchase. The unrealized losses in other securities are two pooled trust preferred securities. The unrealized losses in the pooled trust preferred securities are primarily due to widening credit spreads subsequent to purchase and a lack of demand
for trust preferred securities. The Company does not intend to sell the investments with unrealized losses and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis,
which may be maturity. Based on results of the Companys impairment assessment, the unrealized losses at September 30, 2011 are considered temporary.
NOTE 6 LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES
Loans by type are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2011
|
|
|
December 31,
2010
|
|
|
September 30,
2010
|
|
Loans secured by real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
$
|
221,886
|
|
|
$
|
252,026
|
|
|
$
|
258,579
|
|
Commercial
|
|
|
200,228
|
|
|
|
226,357
|
|
|
|
236,991
|
|
Construction
|
|
|
54,793
|
|
|
|
84,232
|
|
|
|
101,870
|
|
Multi-family and farmland
|
|
|
32,914
|
|
|
|
36,393
|
|
|
|
37,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
509,821
|
|
|
|
599,008
|
|
|
|
635,256
|
|
Commercial loans
|
|
|
64,864
|
|
|
|
82,807
|
|
|
|
91,637
|
|
Consumer installment loans
|
|
|
22,632
|
|
|
|
33,860
|
|
|
|
37,884
|
|
Leases, net of unearned income
|
|
|
3,425
|
|
|
|
7,916
|
|
|
|
10,139
|
|
Other
|
|
|
3,682
|
|
|
|
3,500
|
|
|
|
2,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
604,424
|
|
|
|
727,091
|
|
|
|
777,418
|
|
Allowance for loan and lease losses
|
|
|
(18,750
|
)
|
|
|
(24,000
|
)
|
|
|
(25,320
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
$
|
585,674
|
|
|
$
|
703,091
|
|
|
$
|
752,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The allowance for loan and lease losses is composed of two primary components: (1) specific
impairments for substandard/nonaccrual loans and leases and (2) general allocations for classified loan pools, including special mention and substandard/accrual loans, as well as all remaining pools of loans. The Company accumulates pools based on
the underlying classification of the collateral. Each pool is assigned a loss severity rate based on historical loss experience and various qualitative and environmental factors, including, but not limited to, credit quality and economic conditions.
The Company determines the allowance on a quarterly basis. Because of uncertainties inherent in the estimation process, managements estimate of credit losses in the loan portfolio and the related allowance may materially change in the near
term. However, the amount of the change that is reasonably possible cannot be estimated.
11
The following table presents an analysis of the activity in the allowance for loan and lease
losses for the three and nine months ended September 30, 2011 and September 30, 2010. The provisions for loan and lease losses in the table below do not include the Companys provision accrual for unfunded commitments of $18 thousand
for both the nine month periods ended September 30, 2011 and September 30, 2010. The reserve for unfunded commitments is included in other liabilities in the consolidated balance sheets and totaled $247 thousand and $223 thousand at
September 30, 2011 and 2010, respectively.
Allowance for Loan and Lease Losses
For the Three Months Ended September 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
Residential
1-4 family
|
|
|
Real estate:
Commercial
|
|
|
Real estate:
Construction
|
|
|
Real estate:
Multi-family
and
farmland
|
|
|
Commercial
|
|
|
Consumer
|
|
|
Leases
|
|
|
Other
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Allowance for loan and lease losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, June 30, 2011
|
|
$
|
6,875
|
|
|
$
|
5,708
|
|
|
$
|
4,089
|
|
|
$
|
541
|
|
|
$
|
3,929
|
|
|
$
|
517
|
|
|
$
|
816
|
|
|
$
|
10
|
|
|
$
|
|
|
|
$
|
22,485
|
|
Charge-offs
|
|
|
(924
|
)
|
|
|
(2,706
|
)
|
|
|
(3,631
|
)
|
|
|
(82
|
)
|
|
|
(899
|
)
|
|
|
(92
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
(8,344
|
)
|
Recoveries
|
|
|
177
|
|
|
|
15
|
|
|
|
260
|
|
|
|
1
|
|
|
|
126
|
|
|
|
68
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
727
|
|
Provision
|
|
|
37
|
|
|
|
2,354
|
|
|
|
197
|
|
|
|
242
|
|
|
|
994
|
|
|
|
53
|
|
|
|
(32
|
)
|
|
|
7
|
|
|
|
30
|
|
|
|
3,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, September 30, 2011
|
|
$
|
6,165
|
|
|
$
|
5,371
|
|
|
$
|
915
|
|
|
$
|
702
|
|
|
$
|
4,150
|
|
|
$
|
546
|
|
|
$
|
854
|
|
|
$
|
17
|
|
|
$
|
30
|
|
|
$
|
18,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan and Lease Losses
For the Nine Months Ended September 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
Residential
1-4 family
|
|
|
Real estate:
Commercial
|
|
|
Real estate:
Construction
|
|
|
Real estate:
Multi-family
and
farmland
|
|
|
Commercial
|
|
|
Consumer
|
|
|
Leases
|
|
|
Other
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Allowance for loan and lease losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, December 31, 2010
|
|
$
|
7,346
|
|
|
$
|
5,550
|
|
|
$
|
2,905
|
|
|
$
|
761
|
|
|
$
|
5,692
|
|
|
$
|
813
|
|
|
$
|
917
|
|
|
$
|
16
|
|
|
$
|
|
|
|
$
|
24,000
|
|
Charge-offs
|
|
|
(1,451
|
)
|
|
|
(5,780
|
)
|
|
|
(5,062
|
)
|
|
|
(82
|
)
|
|
|
(2,336
|
)
|
|
|
(275
|
)
|
|
|
(929
|
)
|
|
|
(
|
)
|
|
|
|
|
|
|
(15,915
|
)
|
Recoveries
|
|
|
358
|
|
|
|
215
|
|
|
|
565
|
|
|
|
383
|
|
|
|
526
|
|
|
|
753
|
|
|
|
470
|
|
|
|
4
|
|
|
|
|
|
|
|
3,274
|
|
Provision
|
|
|
(88
|
)
|
|
|
5,386
|
|
|
|
2,507
|
|
|
|
(360
|
)
|
|
|
268
|
|
|
|
(745
|
)
|
|
|
396
|
|
|
|
(3
|
)
|
|
|
30
|
|
|
|
7,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, September 30, 2011
|
|
$
|
6,165
|
|
|
$
|
5,371
|
|
|
$
|
915
|
|
|
$
|
702
|
|
|
$
|
4,150
|
|
|
$
|
546
|
|
|
$
|
854
|
|
|
$
|
17
|
|
|
$
|
30
|
|
|
$
|
18,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan and Lease
Losses
For the Three Months Ended September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
Residential
1-4 family
|
|
|
Real estate:
Commercial
|
|
|
Real estate:
Construction
|
|
|
Real estate:
Multi-family
and
farmland
|
|
|
Commercial
|
|
|
Consumer
|
|
|
Leases
|
|
|
Other
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Allowance for loan and lease losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, June 30, 2010
|
|
$
|
5,326
|
|
|
$
|
5,325
|
|
|
$
|
4,459
|
|
|
$
|
794
|
|
|
$
|
8,030
|
|
|
$
|
1,072
|
|
|
$
|
1,801
|
|
|
$
|
23
|
|
|
$
|
|
|
|
$
|
26,830
|
|
Charge-offs
|
|
|
(864
|
)
|
|
|
(1,177
|
)
|
|
|
(2,497
|
)
|
|
|
(794
|
)
|
|
|
(13,704
|
)
|
|
|
(346
|
)
|
|
|
(701
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
(20,084
|
)
|
Recoveries
|
|
|
4
|
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
113
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
166
|
|
Provision
|
|
|
1,812
|
|
|
|
2,146
|
|
|
|
2,325
|
|
|
|
550
|
|
|
|
11,650
|
|
|
|
(84
|
)
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
18,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, September 30, 2010
|
|
$
|
6,278
|
|
|
$
|
6,295
|
|
|
$
|
4,289
|
|
|
$
|
550
|
|
|
$
|
6,089
|
|
|
$
|
688
|
|
|
$
|
1,100
|
|
|
$
|
31
|
|
|
$
|
|
|
|
$
|
25,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
Allowance for Loan and Lease Losses
For the Nine Months Ended September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
Residential
1-4 family
|
|
|
Real estate:
Commercial
|
|
|
Real estate:
Construction
|
|
|
Real estate:
Multi-family
and
farmland
|
|
|
Commercial
|
|
|
Consumer
|
|
|
Leases
|
|
|
Other
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Allowance for loan and lease losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, December 31, 2009
|
|
$
|
5,037
|
|
|
$
|
4,525
|
|
|
$
|
6,706
|
|
|
$
|
766
|
|
|
$
|
6,953
|
|
|
$
|
1,107
|
|
|
$
|
1,386
|
|
|
$
|
12
|
|
|
$
|
|
|
|
$
|
26,492
|
|
Charge-offs
|
|
|
(1,736
|
)
|
|
|
(1,972
|
)
|
|
|
(5,574
|
)
|
|
|
(924
|
)
|
|
|
(15,421
|
)
|
|
|
(826
|
)
|
|
|
(1,641
|
)
|
|
|
(36
|
)
|
|
|
|
|
|
|
(28,130
|
)
|
Recoveries
|
|
|
37
|
|
|
|
153
|
|
|
|
5
|
|
|
|
|
|
|
|
242
|
|
|
|
114
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
552
|
|
Provision
|
|
|
2,940
|
|
|
|
3,589
|
|
|
|
3,152
|
|
|
|
708
|
|
|
|
14,315
|
|
|
|
293
|
|
|
|
1,355
|
|
|
|
54
|
|
|
|
|
|
|
|
26,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, September 30, 2010
|
|
$
|
6,278
|
|
|
$
|
6,295
|
|
|
$
|
4,289
|
|
|
$
|
550
|
|
|
$
|
6,089
|
|
|
$
|
688
|
|
|
$
|
1,100
|
|
|
$
|
31
|
|
|
$
|
|
|
|
$
|
25,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents an analysis of the end of period balance of the allowance for loan and lease
losses as of September 30, 2011.
As of September 30, 2011
|
|
|
000000
|
|
|
|
000000
|
|
|
|
000000
|
|
|
|
000000
|
|
|
|
000000
|
|
|
|
000000
|
|
|
|
000000
|
|
|
|
000000
|
|
|
|
000000
|
|
|
|
000000
|
|
|
|
Real estate:
Residential
1-4
family
|
|
|
Real estate:
Commercial
|
|
|
Real estate:
Construction
|
|
|
Real estate:
Multi-family
and
farmland
|
|
|
Total Real Estate
Loans
|
|
|
|
Carrying
Value
|
|
|
Associated
Allowance
|
|
|
Carrying
Value
|
|
|
Associated
Allowance
|
|
|
Carrying
Value
|
|
|
Associated
Allowance
|
|
|
Carrying
Value
|
|
|
Associated
Allowance
|
|
|
Carrying
Value
|
|
|
Associated
Allowance
|
|
|
|
(in thousands)
|
|
Individually evaluated
|
|
$
|
4,742
|
|
|
$
|
|
|
|
$
|
13,553
|
|
|
$
|
32
|
|
|
$
|
15,697
|
|
|
$
|
|
|
|
$
|
1,829
|
|
|
$
|
9
|
|
|
$
|
35,821
|
|
|
$
|
41
|
|
Collectively evaluated
|
|
|
217,144
|
|
|
|
6,165
|
|
|
|
186,675
|
|
|
|
5,339
|
|
|
|
39,096
|
|
|
|
915
|
|
|
|
31,085
|
|
|
|
693
|
|
|
|
474,000
|
|
|
|
13,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total evaluated
|
|
$
|
221,886
|
|
|
$
|
6,165
|
|
|
$
|
200,228
|
|
|
$
|
5,371
|
|
|
$
|
54,793
|
|
|
$
|
915
|
|
|
$
|
32,914
|
|
|
$
|
702
|
|
|
$
|
509,821
|
|
|
$
|
13,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
000000
|
|
|
|
000000
|
|
|
|
000000
|
|
|
|
000000
|
|
|
|
000000
|
|
|
|
000000
|
|
|
|
000000
|
|
|
|
000000
|
|
|
|
000000
|
|
|
|
000000
|
|
|
|
Commercial
|
|
|
Consumer
|
|
|
Leases
|
|
|
Other and
Unallocated
|
|
|
Grand Total
|
|
(continued from above)
|
|
Carrying
Value
|
|
|
Associated
Allowance
|
|
|
Carrying
Value
|
|
|
Associated
Allowance
|
|
|
Carrying
Value
|
|
|
Associated
Allowance
|
|
|
Carrying
Value
|
|
|
Associated
Allowance
|
|
|
Carrying
Value
|
|
|
Associated
Allowance
|
|
|
|
(in thousands)
|
|
Individually evaluated
|
|
$
|
3,048
|
|
|
$
|
|
|
|
$
|
250
|
|
|
$
|
|
|
|
$
|
989
|
|
|
$
|
489
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
40,108
|
|
|
$
|
530
|
|
Collectively evaluated
|
|
|
61,816
|
|
|
|
4,150
|
|
|
|
22,382
|
|
|
|
546
|
|
|
|
2,436
|
|
|
|
365
|
|
|
|
3,682
|
|
|
|
47
|
|
|
|
564,316
|
|
|
|
18,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total evaluated
|
|
$
|
64,864
|
|
|
$
|
4,150
|
|
|
$
|
22,632
|
|
|
$
|
546
|
|
|
$
|
3,425
|
|
|
$
|
854
|
|
|
$
|
3,682
|
|
|
$
|
47
|
|
|
$
|
604,424
|
|
|
$
|
18,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
The following table presents an analysis of the end of period balance of the allowance for
loan and lease losses as of December 31, 2010.
As of December 31, 2010
|
|
|
0000000
|
|
|
|
0000000
|
|
|
|
0000000
|
|
|
|
0000000
|
|
|
|
0000000
|
|
|
|
0000000
|
|
|
|
0000000
|
|
|
|
0000000
|
|
|
|
0000000
|
|
|
|
0000000
|
|
|
|
Real estate:
Residential
1-4
family
|
|
|
Real estate:
Commercial
|
|
|
Real estate:
Construction
|
|
|
Real estate:
Multi-family
and
farmland
|
|
|
Total Real Estate
Loans
|
|
|
|
Carrying
Value
|
|
|
Associated
Allowance
|
|
|
Carrying
Value
|
|
|
Associated
Allowance
|
|
|
Carrying
Value
|
|
|
Associated
Allowance
|
|
|
Carrying
Value
|
|
|
Associated
Allowance
|
|
|
Carrying
Value
|
|
|
Associated
Allowance
|
|
|
|
(in thousands)
|
|
Individually evaluated
|
|
$
|
1,944
|
|
|
$
|
|
|
|
$
|
8,232
|
|
|
$
|
|
|
|
$
|
23,909
|
|
|
$
|
148
|
|
|
$
|
415
|
|
|
$
|
|
|
|
$
|
34,500
|
|
|
$
|
148
|
|
Collectively evaluated
|
|
|
250,082
|
|
|
|
7,346
|
|
|
|
218,125
|
|
|
|
5,550
|
|
|
|
60,323
|
|
|
|
2,757
|
|
|
|
35,978
|
|
|
|
761
|
|
|
|
564,508
|
|
|
|
16,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total evaluated
|
|
$
|
252,026
|
|
|
$
|
7,346
|
|
|
$
|
226,357
|
|
|
$
|
5,550
|
|
|
$
|
84,232
|
|
|
$
|
2,905
|
|
|
$
|
36,393
|
|
|
$
|
761
|
|
|
$
|
599,008
|
|
|
$
|
16,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0000000
|
|
|
|
0000000
|
|
|
|
0000000
|
|
|
|
0000000
|
|
|
|
0000000
|
|
|
|
0000000
|
|
|
|
0000000
|
|
|
|
0000000
|
|
|
|
0000000
|
|
|
|
0000000
|
|
|
|
Commercial
|
|
|
Consumer
|
|
|
Leases
|
|
|
Other
|
|
|
Grand Total
|
|
(continued from above)
|
|
Carrying
Value
|
|
|
Associated
Allowance
|
|
|
Carrying
Value
|
|
|
Associated
Allowance
|
|
|
Carrying
Value
|
|
|
Associated
Allowance
|
|
|
Carrying
Value
|
|
|
Associated
Allowance
|
|
|
Carrying
Value
|
|
|
Associated
Allowance
|
|
|
|
(in thousands)
|
|
Individually evaluated
|
|
$
|
3,600
|
|
|
$
|
309
|
|
|
$
|
1,423
|
|
|
$
|
|
|
|
$
|
2,083
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
41,606
|
|
|
$
|
457
|
|
Collectively evaluated
|
|
|
79,207
|
|
|
|
5,383
|
|
|
|
32,437
|
|
|
|
813
|
|
|
|
5,833
|
|
|
|
917
|
|
|
|
3,500
|
|
|
|
16
|
|
|
|
685,485
|
|
|
|
23,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total evaluated
|
|
$
|
82,807
|
|
|
$
|
5,692
|
|
|
$
|
33,860
|
|
|
$
|
813
|
|
|
$
|
7,916
|
|
|
$
|
917
|
|
|
$
|
3,500
|
|
|
$
|
16
|
|
|
$
|
727,091
|
|
|
$
|
24,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company utilizes a risk rating system to evaluate the credit risk of its loan portfolio. The Company
classifies loans as: pass, special mention, substandard, doubtful or loss. The Company assigns a pass rating to loans that are performing as contractually agreed and do not exhibit the characteristics of heightened credit risk. The Company assigns a
special mention risk rating to loans that have certain potential weaknesses but not considered to present as severe of credit risk as a classified loan. Special mention loans generally contain one or more potential weaknesses, which if not
corrected, could result in an unacceptable increase in the credit risk at some future date. The Company assigns a substandard risk rating to loans that have specifically identified weaknesses and deficiencies typically resulting from severe adverse
trends of a financial, economic or managerial nature and may require nonaccrual status. Substandard loans have a greater likelihood of loss than pass or special mention loans. The Company assigns a doubtful risk rating to loans that the
collection or liquidation in full of principal and/or interest is highly questionable or improbable. Any loans that are assigned a risk rating of loss are fully charged-off in the period of the downgrade.
The Company segregates substandard loans into two classifications based on the Companys allowance methodology for impaired loans.
The Company defines an impaired loan as a substandard loan relationship in excess of $500 thousand that is also on nonaccrual status. The Company individually reviews these relationships on a quarterly basis to determine the required allowance or
loss, as applicable.
For the allowance analysis, the Companys primary categories are: pass, special mention,
substandard non-impaired, and substandard impaired. Loans in the substandard and doubtful loan categories are combined and impaired loans are segregated from non-impaired loans. The following table presents the Companys internal
risk rating by loan classification as utilized in the allowance analysis as of September 30, 2011:
As of
September 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
|
Special
Mention
|
|
|
Substandard
Non-impaired
|
|
|
Substandard
Impaired
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Loans by Classification
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate: Residential 1-4 family
|
|
$
|
189,766
|
|
|
$
|
7,648
|
|
|
$
|
19,730
|
|
|
$
|
4,742
|
|
|
$
|
221,886
|
|
Real estate: Commercial
|
|
|
156,152
|
|
|
|
13,849
|
|
|
|
16,674
|
|
|
|
13,553
|
|
|
|
200,228
|
|
Real estate: Construction
|
|
|
33,866
|
|
|
|
2,901
|
|
|
|
2,329
|
|
|
|
15,697
|
|
|
|
54,793
|
|
Real estate: Multi-family and farmland
|
|
|
26,256
|
|
|
|
2,954
|
|
|
|
1,875
|
|
|
|
1,829
|
|
|
|
32,914
|
|
Commercial
|
|
|
40,833
|
|
|
|
3,984
|
|
|
|
16,999
|
|
|
|
3,048
|
|
|
|
64,864
|
|
Consumer
|
|
|
22,086
|
|
|
|
89
|
|
|
|
207
|
|
|
|
250
|
|
|
|
22,632
|
|
Leases
|
|
|
|
|
|
|
1,611
|
|
|
|
825
|
|
|
|
989
|
|
|
|
3,425
|
|
Other
|
|
|
3,605
|
|
|
|
19
|
|
|
|
58
|
|
|
|
|
|
|
|
3,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans
|
|
$
|
472,564
|
|
|
$
|
33,055
|
|
|
$
|
58,697
|
|
|
$
|
40,108
|
|
|
$
|
604,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
The following table presents the Companys internal risk rating by loan classification
as utilized in the allowance analysis as of December 31, 2010:
As of December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
|
Special
Mention
|
|
|
Substandard
Non-impaired
|
|
|
Substandard
Impaired
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Loans by Classification
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate: Residential 1-4 family
|
|
$
|
217,470
|
|
|
$
|
7,378
|
|
|
$
|
25,234
|
|
|
$
|
1,944
|
|
|
$
|
252,026
|
|
Real estate: Commercial
|
|
|
182,584
|
|
|
|
18,030
|
|
|
|
17,511
|
|
|
|
8,232
|
|
|
|
226,357
|
|
Real estate: Construction
|
|
|
46,305
|
|
|
|
3,970
|
|
|
|
10,048
|
|
|
|
23,909
|
|
|
|
84,232
|
|
Real estate: Multi-family and farmland
|
|
|
30,835
|
|
|
|
3,238
|
|
|
|
1,905
|
|
|
|
415
|
|
|
|
36,393
|
|
Commercial
|
|
|
54,553
|
|
|
|
4,338
|
|
|
|
20,316
|
|
|
|
3,600
|
|
|
|
82,807
|
|
Consumer
|
|
|
31,238
|
|
|
|
43
|
|
|
|
1,156
|
|
|
|
1,423
|
|
|
|
33,860
|
|
Leases
|
|
|
|
|
|
|
2,036
|
|
|
|
3,797
|
|
|
|
2,083
|
|
|
|
7,916
|
|
Other
|
|
|
3,464
|
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
3,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans
|
|
$
|
566,449
|
|
|
$
|
39,033
|
|
|
$
|
80,003
|
|
|
$
|
41,606
|
|
|
$
|
727,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company classifies a loan as impaired when, based on current information and events, it is probable
that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans were $40,108 thousand, $41,606 thousand and $45,395 thousand at September 30, 2011, December 31, 2010 and
September 30, 2010, respectively. For impaired loans, the Company generally applies all payments directly to principal. Accordingly, the Company did not recognize any significant amount of interest for impaired loans during the three or nine
months ended September 30, 2011. The following table presents additional information on the Companys impaired loans as of September 30, 2011 and December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2011
|
|
|
As of December 31, 2010
|
|
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
|
Average
Balance of
Recorded
Investment
|
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
|
|
(in thousands)
|
|
Impaired loans with no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate: Residential 1-4 family
|
|
$
|
3,748
|
|
|
$
|
3,933
|
|
|
$
|
|
|
|
$
|
2,701
|
|
|
$
|
1,944
|
|
|
$
|
2,265
|
|
|
$
|
|
|
Real estate: Commercial
|
|
|
12,369
|
|
|
|
17,733
|
|
|
|
|
|
|
|
12,904
|
|
|
|
8,232
|
|
|
|
9,210
|
|
|
|
|
|
Real estate: Construction
|
|
|
12,406
|
|
|
|
15,357
|
|
|
|
|
|
|
|
13,432
|
|
|
|
18,644
|
|
|
|
24,886
|
|
|
|
|
|
Real estate: Multi-family and farmland
|
|
|
1,829
|
|
|
|
2,417
|
|
|
|
|
|
|
|
1,486
|
|
|
|
415
|
|
|
|
415
|
|
|
|
|
|
Commercial
|
|
|
3,048
|
|
|
|
4,965
|
|
|
|
|
|
|
|
3,076
|
|
|
|
2,658
|
|
|
|
12,634
|
|
|
|
|
|
Consumer
|
|
|
250
|
|
|
|
250
|
|
|
|
|
|
|
|
962
|
|
|
|
1,423
|
|
|
|
1,423
|
|
|
|
|
|
Leases
|
|
|
989
|
|
|
|
989
|
|
|
|
|
|
|
|
1,039
|
|
|
|
2,083
|
|
|
|
2,198
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
34,639
|
|
|
$
|
45,644
|
|
|
$
|
|
|
|
$
|
35,600
|
|
|
$
|
35,399
|
|
|
$
|
53,031
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate: Residential 1-4 family
|
|
$
|
994
|
|
|
$
|
1,024
|
|
|
$
|
|
|
|
$
|
502
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Real estate: Commercial
|
|
|
1,184
|
|
|
|
1,661
|
|
|
|
41
|
|
|
|
592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate: Construction
|
|
|
3,291
|
|
|
|
5,400
|
|
|
|
489
|
|
|
|
4,739
|
|
|
|
5,265
|
|
|
|
5,400
|
|
|
|
148
|
|
Real estate: Multi-family and farmland
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
464
|
|
|
|
942
|
|
|
|
977
|
|
|
|
309
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,469
|
|
|
$
|
8,085
|
|
|
$
|
530
|
|
|
$
|
6,297
|
|
|
$
|
6,207
|
|
|
$
|
6,377
|
|
|
$
|
457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
Nonaccrual loans were $48,642 thousand, $54,082 thousand and $55,083 thousand at
September 30, 2011, December 31, 2010 and September 30, 2010, respectively. The following table provides nonaccrual loans by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
September 30,
2011
|
|
|
As of
December 31,
2010
|
|
|
As of
September 30,
2010
|
|
|
|
(in thousands)
|
|
Nonaccrual Loans by Classification
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate: Residential 1-4 family
|
|
$
|
9,941
|
|
|
$
|
8,906
|
|
|
$
|
7,113
|
|
Real estate: Commercial
|
|
|
14,775
|
|
|
|
9,181
|
|
|
|
6,278
|
|
Real estate: Construction
|
|
|
16,074
|
|
|
|
25,586
|
|
|
|
30,225
|
|
Real estate: Multi-family and farmland
|
|
|
1,929
|
|
|
|
826
|
|
|
|
1,049
|
|
Commercial
|
|
|
3,718
|
|
|
|
4,228
|
|
|
|
4,886
|
|
Consumer and other
|
|
|
391
|
|
|
|
1,896
|
|
|
|
1,991
|
|
Leases
|
|
|
1,814
|
|
|
|
3,459
|
|
|
|
3,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans
|
|
$
|
48,642
|
|
|
$
|
54,082
|
|
|
$
|
55,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company monitors loans by past due status. The following table provides the past due status for all
loans. Nonaccrual loans are included in the applicable classification.
As of September 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-89
Days
Past Due
|
|
|
Greater
than
90 Days
Past Due
|
|
|
Total
Past Due
|
|
|
Current
|
|
|
Total
|
|
|
Greater
than
90 Days
Past Due
and
Accruing
|
|
|
|
(in thousands)
|
|
Loans by Classification
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate: Residential 1-4 family
|
|
$
|
3,843
|
|
|
$
|
6,133
|
|
|
$
|
9,976
|
|
|
$
|
211,910
|
|
|
$
|
221,886
|
|
|
$
|
140
|
|
Real estate: Commercial
|
|
|
4,994
|
|
|
|
11,845
|
|
|
|
16,839
|
|
|
|
183,389
|
|
|
|
200,228
|
|
|
|
855
|
|
Real estate: Construction
|
|
|
1,166
|
|
|
|
13,055
|
|
|
|
14,221
|
|
|
|
40,572
|
|
|
|
54,793
|
|
|
|
259
|
|
Real estate: Multi-family and farmland
|
|
|
221
|
|
|
|
1,830
|
|
|
|
2,051
|
|
|
|
30,863
|
|
|
|
32,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal of real estate secured loans
|
|
|
10,224
|
|
|
|
32,863
|
|
|
|
43,087
|
|
|
|
466,734
|
|
|
|
509,821
|
|
|
|
1,254
|
|
Commercial
|
|
|
3,114
|
|
|
|
3,933
|
|
|
|
7,047
|
|
|
|
57,817
|
|
|
|
64,864
|
|
|
|
373
|
|
Consumer
|
|
|
209
|
|
|
|
312
|
|
|
|
521
|
|
|
|
22,111
|
|
|
|
22,632
|
|
|
|
42
|
|
Leases
|
|
|
592
|
|
|
|
1,814
|
|
|
|
2,406
|
|
|
|
1,019
|
|
|
|
3,425
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
14
|
|
|
|
14
|
|
|
|
3,668
|
|
|
|
3,682
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans
|
|
$
|
14,139
|
|
|
$
|
38,936
|
|
|
$
|
53,075
|
|
|
$
|
551,349
|
|
|
$
|
604,424
|
|
|
$
|
1,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-89
Days
Past Due
|
|
|
Greater
than
90 Days
Past Due
|
|
|
Total
Past Due
|
|
|
Current
|
|
|
Total
|
|
|
Greater
than
90 Days
Past Due
and
Accruing
|
|
|
|
(in thousands)
|
|
Loans by Classification
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate: Residential 1-4 family
|
|
$
|
3,629
|
|
|
$
|
5,855
|
|
|
$
|
9,484
|
|
|
$
|
242,542
|
|
|
$
|
252,026
|
|
|
$
|
403
|
|
Real estate: Commercial
|
|
|
5,185
|
|
|
|
5,905
|
|
|
|
11,090
|
|
|
|
215,267
|
|
|
|
226,357
|
|
|
|
2,271
|
|
Real estate: Construction
|
|
|
3,732
|
|
|
|
15,371
|
|
|
|
19,103
|
|
|
|
65,129
|
|
|
|
84,232
|
|
|
|
3
|
|
Real estate: Multi-family and farmland
|
|
|
53
|
|
|
|
1,757
|
|
|
|
1,810
|
|
|
|
34,583
|
|
|
|
36,393
|
|
|
|
985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal of real estate secured loans
|
|
|
12,599
|
|
|
|
28,888
|
|
|
|
41,487
|
|
|
|
557,521
|
|
|
|
599,008
|
|
|
|
3,662
|
|
Commercial
|
|
|
1,726
|
|
|
|
2,955
|
|
|
|
4,681
|
|
|
|
78,126
|
|
|
|
82,807
|
|
|
|
409
|
|
Consumer
|
|
|
384
|
|
|
|
2,430
|
|
|
|
2,814
|
|
|
|
31,046
|
|
|
|
33,860
|
|
|
|
679
|
|
Leases
|
|
|
2,725
|
|
|
|
3,055
|
|
|
|
5,780
|
|
|
|
2,136
|
|
|
|
7,916
|
|
|
|
82
|
|
Other
|
|
|
80
|
|
|
|
6
|
|
|
|
86
|
|
|
|
3,414
|
|
|
|
3,500
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans
|
|
$
|
17,514
|
|
|
$
|
37,334
|
|
|
$
|
54,848
|
|
|
$
|
672,243
|
|
|
$
|
727,091
|
|
|
$
|
4,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2011, the Company had two loans, not on non-accrual, that were considered troubled
debt restructurings. A commercial loan, totaling $697 thousand, was restructured to an extended term to assist the borrower by reducing the monthly payments. A commercial real estate loan, totaling $835 thousand, was restructured to provide for
payments at a below market rate. As of September 30, 2011, both loans are performing under the modified terms.
16
The Company has allocated no specific reserves to customers whose loan terms have been
modified in troubled debt restructurings as of September 30, 2011 and December 31, 2010. The Company has not committed to lend additional amounts as of September 30, 2011 and December 31, 2010 to customers with outstanding loans that are classified
as troubled debt restructurings. The Company had no modifications that would qualify as troubled debt restructurings for the three and nine months ended September 30, 2011. The following table represents the trouble debt restructurings as of
September 30, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2011
|
|
|
|
Number of
Contracts
|
|
|
Pre-Modification
Outstanding
Recorded
Investment
|
|
|
Post-Modification
Outstanding
Recorded
Investment
|
|
|
|
|
|
|
(in thousands)
|
|
Troubled Debt Restructurings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
2
|
|
|
|
1,265
|
|
|
|
1,265
|
|
Commercial
|
|
|
2
|
|
|
|
2,685
|
|
|
|
1,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4
|
|
|
$
|
3,950
|
|
|
$
|
2,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents loans by class modified as troubled debt restructurings for which there was
a payment default within twelve months following the modification during the period ending September 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2011
|
|
|
|
Number of
Contracts
|
|
|
Pre-Modification
Outstanding
Recorded
Investment
|
|
|
Post-Modification
Outstanding
Recorded
Investment
|
|
|
|
|
|
|
(in thousands)
|
|
Troubled Debt Restructurings That Subsequently Defaulted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
1
|
|
|
|
430
|
|
|
|
430
|
|
Commercial
|
|
|
1
|
|
|
|
1,988
|
|
|
|
959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2
|
|
|
$
|
2,418
|
|
|
$
|
1,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A loan is considered to be in payment default once it is 30 days contractually past due under the
modified terms.
The trouble debt restructurings that subsequently defaulted described above did not increase the allowance
for loan losses and resulted in no charge offs during the period ending September 30, 2011.
There were no loans modified
during the three and nine month periods ended September 30, 2011 that met the definition of a troubled debt restructuring.
17
NOTE 7 SUPPLEMENTAL FINANCIAL DATA
Components of other noninterest income or other noninterest expense in excess of 1% of the aggregate of total interest
income and noninterest income are shown in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months
ended September 30,
|
|
|
For the nine months
ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
Noninterest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Point-of-service fees
|
|
$
|
343
|
|
|
$
|
322
|
|
|
$
|
1,007
|
|
|
$
|
948
|
|
Mortgage loan and related fees
|
|
|
169
|
|
|
|
319
|
|
|
|
470
|
|
|
|
704
|
|
Bank-owned life insurance income
|
|
|
247
|
|
|
|
251
|
|
|
|
765
|
|
|
|
754
|
|
Trust fees
|
|
|
181
|
|
|
|
190
|
|
|
|
596
|
|
|
|
567
|
|
All other items
|
|
|
373
|
|
|
|
371
|
|
|
|
1,235
|
|
|
|
1,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other noninterest income
|
|
$
|
1,313
|
|
|
$
|
1,453
|
|
|
$
|
4,073
|
|
|
$
|
4,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional fees
|
|
$
|
565
|
|
|
$
|
936
|
|
|
$
|
2,678
|
|
|
$
|
2,344
|
|
FDIC insurance
|
|
|
1,017
|
|
|
|
1,044
|
|
|
|
3,089
|
|
|
|
2,581
|
|
Data processing
|
|
|
327
|
|
|
|
354
|
|
|
|
1,285
|
|
|
|
1,089
|
|
Losses on other real estate owned, repossessions and fixed assets
|
|
|
407
|
|
|
|
88
|
|
|
|
1,047
|
|
|
|
763
|
|
Write-downs on other real estate owned and repossessions
|
|
|
1,538
|
|
|
|
1,575
|
|
|
|
4,139
|
|
|
|
2,715
|
|
OREO and repossession holding costs
|
|
|
585
|
|
|
|
356
|
|
|
|
1,449
|
|
|
|
1,269
|
|
Communications
|
|
|
137
|
|
|
|
184
|
|
|
|
420
|
|
|
|
476
|
|
ATM/Debit Card fees
|
|
|
134
|
|
|
|
128
|
|
|
|
408
|
|
|
|
391
|
|
All other items
|
|
|
1,192
|
|
|
|
1,636
|
|
|
|
3,936
|
|
|
|
3,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other noninterest expense
|
|
$
|
5,902
|
|
|
$
|
6,301
|
|
|
$
|
18,451
|
|
|
$
|
15,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 8 COMMITMENTS AND CONTINGENCIES
The Company is party to credit related financial instruments with off-balance-sheet risk in the normal course of
business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and the issuance of financial guarantees in the form of financial and performance standby letters of credit. Such commitments
involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.
The Companys exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as they do for on-balance-sheet
instruments. The Companys maximum exposure to credit risk for unfunded loan commitments and standby letters of credit at September 30, 2011, December 31, 2010 and September 30, 2010, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2011
|
|
|
December 31,
2010
|
|
|
September 30,
2010
|
|
|
|
(in thousands)
|
|
Commitments to extend credit
|
|
$
|
103,108
|
|
|
$
|
127,377
|
|
|
$
|
142,588
|
|
Standby letters of credit
|
|
$
|
8,103
|
|
|
$
|
14,090
|
|
|
$
|
14,625
|
|
Commitments to extend credit are agreements to lend to customers. Standby letters of credit are
contingent commitments issued by the Company to guarantee performance of a customer to a third party under a contractual non-financial obligation for which it receives a fee. Financial standby letters of credit represent a commitment to guarantee
customer repayment of an outstanding loan or debt instrument. Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since many of the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customers creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company on
extension of credit, is based on managements credit evaluation. Collateral held varies but may include accounts receivable, inventory, property and equipment and income-producing commercial properties.
The Company is subject to various legal proceedings and claims
that arise in the ordinary course of its business. Additionally, in the ordinary course of business, the Company is subject to regulatory examinations, information gathering requests, inquiries, and investigations. The Company establishes accruals
for litigation and regulatory matters when those matters present loss contingencies that the Company determines to be both probable and reasonably estimable. Based on current knowledge, advice of counsel and available insurance coverage, management
does not believe that liabilities arising from legal claims, if any, will have a material adverse effect on the Companys consolidated financial condition, results of operations, or cash flows. However, in light of the significant uncertainties
involved in these matters, the early stage of various legal proceedings, and the indeterminate amount of damages sought in some of these matters, it is possible that the ultimate resolution of these matters, if unfavorable, could be material to the
Companys results of operations for any particular period.
The Company intends to vigorously pursue all available
defenses to these claims. There are significant uncertainties involved in any litigation. Although the ultimate outcome of these lawsuits cannot be ascertained at this time, based upon information that presently is
18
available to it, management is unable to predict the outcome of these cases and cannot determine the probability of an adverse result or reasonably estimate a range of potential loss, if any. In
addition, management is unable to estimate a range of reasonably possible losses with respect to these claims.
NOTE 9 STOCKHOLDERS EQUITY
Common Stock
On April 4, 2011, the Company received a notice from the NASDAQ Stock Market (Nasdaq) that its stock had closed below $1.00 per share for 30 consecutive business days, and was therefore
not in compliance with Nasdaq Marketplace Rule 5450(a)(1) (the Bid Price Rule). In accordance with Marketplace Rule 5810(c)(3)(A), the Company may regain compliance with the Bid Price Rule if its stock closes at or above $1.00 for 10
consecutive business days by October 3, 2011. The notification has no effect on the listing of the Companys stock at this time. The Company filed a Current Report on Form 8-K on April 8, 2011 that provides additional information.
On September 13, 2011, shareholders approved at the Companys annual meeting a proposal to amend the Companys
Articles of Incorporation that effected a one-for-ten (1-for-10) reverse stock split of the Companys common stock. The reverse stock split was effective at the opening of business on September 19, 2011. Any fractional shares resulting
from the reverse stock split were eliminated by rounding up to the next whole share. The Company issued 495 additional common shares as a result of eliminating fractional shares. The number of authorized shares of common stock following the reverse
stock split remained at 150,000,000 shares. All prior periods have been restated to give retroactive effect to the one-for-ten reverse stock split that took effect on September 19, 2011.
Preferred Stock
Beginning with the February 15, 2010 dividend on its Preferred Stock, the Companys Board of Directors elected to defer payments on the dividend on the Preferred Stock. Dividends for the Series
A Preferred Stock are cumulative. The Company has missed seven quarterly Preferred Stock dividend payments, giving the Treasury the right to appoint two directors to the Companys Board of Directors until all accrued but unpaid dividends have
been paid on the Preferred Stock. At this time, the Treasury has not exercised its right to appoint two directors; instead, the Treasury has requested, and the Company has agreed, to permit an observer employed by the Treasury to attend meetings of
the Companys Board of Directors.
On September 7, 2010, the Company entered into a Written Agreement with the
Federal Reserve Bank of Atlanta. As part of the Agreement, the Company is prohibited from declaring or paying dividends without prior written consent from the Federal Reserve. Note 2 provides additional information on the Agreement.
The Company recognized $412 thousand and $1,238 thousand in dividends for Preferred Stock for the three and nine months ended
September 30, 2011, respectively, compared to $413 thousand and $1,238 thousand for the three and nine months ended September 30, 2010. As of September 30, 2011, the unpaid, accrued dividend is $3,094 thousand and is included in other
liabilities in the Companys consolidated balance sheet. For the three months ended September 30, 2011 and 2010, the Company recognized $102 thousand and $95 thousand, respectively, in Preferred Stock discount accretion. For the nine months
ended September 30, 2011 and 2010, the Company recognized $300 thousand and $281 thousand, respectively, in Preferred Stock discount accretion.
ESOP Activity
On September 30, 2011, June 30, 2011
and March 31, 2011, the Company released shares from the Employee Stock Ownership Plan (ESOP) for the matching contribution of 100% of the employees contribution up to 1% of the employees compensation for the Plan year. The number
of unallocated, committed to be released, and allocated shares for the ESOP are presented in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated
Shares
|
|
|
Committed
to be
released
shares
|
|
|
Allocated
Shares
|
|
|
Compensation
Expense
|
|
|
|
(in thousands)
|
|
Shares as of December 31, 2010
|
|
|
58
|
|
|
|
|
|
|
|
62
|
|
|
|
|
|
Shares allocated during 2011
|
|
|
(17
|
)
|
|
|
|
|
|
|
17
|
|
|
$
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares as of September 30, 2011
|
|
|
41
|
|
|
|
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 10 TAXES
The Company accounts for income taxes in accordance with ASC 740, which requires an asset and liability approach for
the financial accounting and reporting of income taxes. Under this method, deferred income taxes are recognized for the expected future tax consequences of differences between the tax bases of assets and liabilities and their reported amounts in the
consolidated financial statements. These balances are measured using the enacted tax rates expected to apply in the year(s) in which these temporary differences are expected to reverse. The effect on deferred income taxes of a change in tax rates is
recognized in income in the period when the change is enacted.
19
In accordance with ASC 740, the Company is required to establish a valuation allowance for
deferred tax assets when it is more likely than not that a portion or all of the deferred tax assets will not be realized. The evaluation requires significant judgment and extensive analysis of all available positive and negative
evidence, the forecasts of future income, applicable tax planning strategies and assessments of the current and future economic and business conditions.
During 2010, the Company established a deferred tax asset valuation allowance after evaluating all available positive and negative evidence. Positive evidence included the existence of taxes paid in
available carryback years. Negative evidence included a cumulative loss in recent years and general business and economic trends. As business and economic conditions change, the Company will re-evaluate the valuation allowance. As of
September 30, 2011, the valuation allowance totals $28,752 thousand.
For the three and nine months ended
September 30, 2011, the Company recognized an income tax benefit of $54 thousand and an income tax provision of $32 thousand, respectively. For the three and nine months ended September 30, 2010, the Company recognized an income tax
provision of $9,384 thousand and $6,461 thousand, respectively. The following reconciles the income tax (benefit) provision to statutory rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months
ended September 30,
|
|
|
For the nine months
ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(in thousands)
|
|
Federal taxes at statutory tax rate
|
|
$
|
(2,222
|
)
|
|
$
|
(6,932
|
)
|
|
$
|
(4,931
|
)
|
|
$
|
(9,027
|
)
|
Tax exempt earnings on loans and securities
|
|
|
(107
|
)
|
|
|
(115
|
)
|
|
|
(329
|
)
|
|
|
(366
|
)
|
Tax exempt earnings on bank owned life insurance
|
|
|
(84
|
)
|
|
|
(84
|
)
|
|
|
(260
|
)
|
|
|
(256
|
)
|
Low-income housing tax credits
|
|
|
(97
|
)
|
|
|
(103
|
)
|
|
|
(292
|
)
|
|
|
(310
|
)
|
Other, net
|
|
|
60
|
|
|
|
20
|
|
|
|
98
|
|
|
|
123
|
|
State tax provision, net of federal effect
|
|
|
(320
|
)
|
|
|
(834
|
)
|
|
|
(669
|
)
|
|
|
(1,135
|
)
|
Changes in the deferred tax asset valuation allowance
|
|
|
2,716
|
|
|
|
17,432
|
|
|
|
6,415
|
|
|
|
17,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) provision
|
|
$
|
(54
|
)
|
|
$
|
9,384
|
|
|
$
|
32
|
|
|
$
|
6,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increases in the deferred tax valuation allowance offset the income tax benefits recognized for the
three and nine months ended September 30, 2011. The benefit recognized before the valuation allowance primarily related to the year-to-date operating loss.
The Company evaluated its material tax positions as of September 30, 2011. Under the more-likely-than-not threshold guidelines, the Company believes it has identified all significant
uncertain tax benefits. The Company evaluates, on a quarterly basis or sooner if necessary, to determine if new or pre-existing uncertain tax positions are significant. In the event a significant uncertain tax position is determined to exist,
penalty and interest will be accrued, in accordance with Internal Revenue Service guidelines, and recorded as a component of income tax expense in the Companys consolidated financial statements. The roll-forward of unrecognized tax benefits is
as follows:
|
|
|
|
|
|
|
Amount
|
|
|
|
(in thousands)
|
|
Balance at January 1, 2011
|
|
$
|
1,338
|
|
Increases related to current year tax positions
|
|
|
101
|
|
|
|
|
|
|
Balance at September 30, 2011
|
|
$
|
1,439
|
|
|
|
|
|
|
NOTE 11 FAIR VALUE MEASUREMENTS
The authoritative accounting guidance for fair value measurements defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the
asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. Authoritative guidance establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in
active markets for identical assets or liabilities and the lowest priority to unobservable inputs.
The following tables
present information about the Companys assets and liabilities measured at fair value on a recurring basis as of September 30, 2011, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine
such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs
utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include
20
quoted prices for similar assets or liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that
are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to
measure fair value may fall into different levels of the hierarchy. In such cases, the fair value is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
The Company used the following methods and significant assumptions to estimate fair value:
Investment Securities
: The fair values for investment securities are determined by quoted market prices, if available (Level 1).
For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are
calculated using discounted cash flows or other market indicators (Level 3). Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality.
During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the
calculations.
Derivatives
: The fair values of derivatives are based on valuation models using observable market data
as of the measurement date (Level 2).
Impaired Loans
: The fair value of collateral dependent impaired loans with
specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.
Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3
classification of the inputs for determining fair value.
Other Real Estate Owned
: Nonrecurring adjustments to certain
commercial and residential real estate properties classified as other real estate owned (OREO) are measured at fair value, less costs to sell. Fair values are based on recent real estate appraisals. These appraisals may use a single valuation
approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data
available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.
Loans Held For Sale
: Loans held for sale are carried at fair value, as determined by outstanding commitments, from third party investors.
Assets and liabilities measured at fair value on a recurring basis, including financial assets and liabilities for which the Company has
elected the fair value option, are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
September 30,
2011
|
|
|
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
|
(in thousands)
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Agencies
|
|
$
|
22,298
|
|
|
$
|
|
|
|
$
|
22,298
|
|
|
$
|
|
|
Mortgage-backedresidential
|
|
|
103,247
|
|
|
|
|
|
|
|
103,247
|
|
|
|
|
|
Municipals
|
|
|
33,207
|
|
|
|
|
|
|
|
32,957
|
|
|
|
250
|
|
Other
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
Loans held for sale
|
|
|
2,284
|
|
|
|
|
|
|
|
2,284
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward loan sales contracts
|
|
|
22
|
|
|
|
|
|
|
|
22
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
December 31,
2010
|
|
|
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
|
(in thousands)
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Agencies
|
|
$
|
31,827
|
|
|
$
|
|
|
|
$
|
31,827
|
|
|
$
|
|
|
Mortgage-backedresidential
|
|
|
86,808
|
|
|
|
|
|
|
|
86,808
|
|
|
|
|
|
Municipals
|
|
|
35,500
|
|
|
|
|
|
|
|
35,250
|
|
|
|
250
|
|
Other
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
Loans held for sale
|
|
|
2,556
|
|
|
|
|
|
|
|
2,556
|
|
|
|
|
|
Forward loan sales contracts
|
|
|
84
|
|
|
|
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
September 30,
2010
|
|
|
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
|
(in thousands)
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Agencies
|
|
$
|
28,173
|
|
|
$
|
|
|
|
$
|
28,173
|
|
|
$
|
|
|
Mortgage-backedresidential
|
|
|
89,854
|
|
|
|
|
|
|
|
89,854
|
|
|
|
|
|
Municipals
|
|
|
37,006
|
|
|
|
|
|
|
|
36,756
|
|
|
|
250
|
|
Other
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
72
|
|
Loans held for sale
|
|
|
3,386
|
|
|
|
|
|
|
|
3,386
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents additional information about changes in assets and liabilities measured at
fair value on a recurring basis and for which the Company utilized Level 3 inputs to determine fair value as of September 30, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
December 31,
2010
|
|
|
Total
Realized
and
Unrealized
Gains or
Losses
|
|
|
Purchases,
Sales, Other
Settlements
and
Issuances,
net
|
|
|
Net
Transfers
In and/or
Out of
Level 3
|
|
|
Balance as of
September 30,
2011
|
|
|
|
(in thousands)
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipals
|
|
$
|
250
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
250
|
|
Other
|
|
|
30
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
The Company recognized a $6 thousand unrealized gain on its pooled trust preferred securities, which are
classified as Level 3 fair value assets.
At September 30, 2011, the Company also had assets and liabilities measured at
fair value on a non-recurring basis. Items measured at fair value on a non-recurring basis include other real estate owned (OREO), and collateral-dependent impaired loans. Such measurements were determined utilizing Level 3 inputs.
Upon initial recognition, OREO and repossessions are measured at fair value less cost of sale, which becomes the cost basis. The cost
basis is subsequently re-measured at fair value when events or circumstances occur that indicate the initial fair value has declined. The fair value is generally determined using appraisals or other indications of value based on recent comparable
sales of similar properties or assumptions generally observable in the marketplace. Fair value adjustments for OREO and repossessions have generally been classified as Level 3.
The Company records nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of
the uncollectible portions of these loans. Nonrecurring adjustments also include certain impairment amounts for collateral-dependent loans when establishing the allowance for loan and lease losses. If the recorded investment in the impaired loan
exceeds the measure of fair value, a valuation allowance may be established as a component of the allowance for loan and lease losses or the expense is recognized as a partial charge-off. The fair value of collateral-dependent loans is generally
determined using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally available in the marketplace. These measurements have generally been classified as Level 3.
22
The following table presents the carrying value and associated valuation allowance of those
assets measured at fair value on a non-recurring basis for which impairment was recognized for during the nine months ended September 30, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
Value as of
September 30,
2011
|
|
|
Level 1
Fair
Value
Measurement
|
|
|
Level 2
Fair
Value
Measurement
|
|
|
Level 3
Fair
Value
Measurement
|
|
|
Valuation
Allowance
as
of
September 30,
2011
|
|
|
|
(in thousands)
|
|
Other real estate owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction/development loans
|
|
$
|
11,443
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
11,443
|
|
|
$
|
(4,056
|
)
|
Residential real estate loans
|
|
|
6,887
|
|
|
|
|
|
|
|
|
|
|
|
6,887
|
|
|
|
(1,999
|
)
|
Commercial real estate loans
|
|
|
3,523
|
|
|
|
|
|
|
|
|
|
|
|
3,523
|
|
|
|
(2,325
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned
|
|
|
21,853
|
|
|
|
|
|
|
|
|
|
|
|
21,853
|
|
|
|
(8,380
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral-dependent loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate: Residential 1-4 family
|
|
|
1,915
|
|
|
|
|
|
|
|
|
|
|
|
1,915
|
|
|
|
|
|
Real Estate: Commercial
|
|
|
3,366
|
|
|
|
|
|
|
|
|
|
|
|
3,366
|
|
|
|
|
|
Real Estate: Construction
|
|
|
9,344
|
|
|
|
|
|
|
|
|
|
|
|
9,344
|
|
|
|
|
|
Real Estate: Multi-family and farmland
|
|
|
1,111
|
|
|
|
|
|
|
|
|
|
|
|
1,111
|
|
|
|
(9
|
)
|
Commercial
|
|
|
1,416
|
|
|
|
|
|
|
|
|
|
|
|
1,416
|
|
|
|
(489
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral-dependent loans
|
|
|
17,152
|
|
|
|
|
|
|
|
|
|
|
|
17,152
|
|
|
|
(498
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
39,005
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
39,005
|
|
|
$
|
(8,878
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine month period ended September 30, 2011, the Company established or increased its
valuation allowance on $21,853 thousand of other real estate owned. The cumulative valuation allowance of $8,380 thousand included write-downs of $3,547 thousand and charge-offs of $723 thousand recorded during the nine months ended
September 30, 2011. For collateral-dependent loans, the $498 thousand is the cumulative valuation allowance for which the Company established or increased its valuation allowance during the nine months ended September 30, 2011. Any changes
in the valuation allowance for a collateral-dependent loan are included in the allowance analysis and may result in additional provision expense.
During 2011, the Company determined that the Level 3 fair value methodology was more consistent with the Companys valuation approach to other real estate owned, repossessions and
collateral-dependent loans. As such, the Company transferred all applicable balances into the Level 3 category.
The following
table presents the estimated fair values of the Companys financial instruments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2011
|
|
|
December 31, 2010
|
|
|
September 30, 2010
|
|
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
|
|
(in thousands)
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
9,595
|
|
|
$
|
9,595
|
|
|
$
|
8,298
|
|
|
$
|
8,298
|
|
|
$
|
8,545
|
|
|
$
|
8,545
|
|
Interest bearing deposits in banks
|
|
$
|
267,184
|
|
|
$
|
267,184
|
|
|
$
|
200,621
|
|
|
$
|
200,621
|
|
|
$
|
224,111
|
|
|
$
|
224,111
|
|
Securities available-for-sale
|
|
$
|
158,788
|
|
|
$
|
158,788
|
|
|
$
|
154,165
|
|
|
$
|
154,165
|
|
|
$
|
155,108
|
|
|
$
|
155,108
|
|
Loans held for sale
|
|
$
|
2,284
|
|
|
$
|
2,284
|
|
|
$
|
2,556
|
|
|
$
|
2,556
|
|
|
$
|
3,386
|
|
|
$
|
3,386
|
|
Loans
|
|
$
|
602,140
|
|
|
$
|
613,086
|
|
|
$
|
724,535
|
|
|
$
|
736,232
|
|
|
$
|
774,032
|
|
|
$
|
793,061
|
|
Allowance for loan and lease losses
|
|
$
|
(18,750
|
)
|
|
$
|
(18,750
|
)
|
|
$
|
(24,000
|
)
|
|
$
|
(24,000
|
)
|
|
$
|
(25,320
|
)
|
|
$
|
(25,320
|
)
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
1,019,010
|
|
|
$
|
1,018,680
|
|
|
$
|
1,048,723
|
|
|
$
|
1,052,784
|
|
|
$
|
1,112,204
|
|
|
$
|
1,118,438
|
|
Federal funds purchased and securities sold under agreements to repurchase
|
|
$
|
15,054
|
|
|
$
|
15,054
|
|
|
$
|
15,933
|
|
|
$
|
15,933
|
|
|
$
|
17,676
|
|
|
$
|
17,676
|
|
Other borrowings
|
|
$
|
63
|
|
|
$
|
63
|
|
|
$
|
77
|
|
|
$
|
77
|
|
|
$
|
81
|
|
|
$
|
81
|
|
23
The following methods and assumptions were used by the Company in estimating fair value of
each class of financial instruments for which it is practicable to estimate that value:
|
|
|
Cash and cash equivalents The carrying value of cash and cash equivalents approximates fair value.
|
|
|
|
Interest bearing deposits in banks The carrying amounts of interest bearing deposits in banks approximate fair value.
|
|
|
|
Securities The Companys securities are valued utilizing Level 2 inputs with the exception of one $250 thousand bond and two pooled trust
preferred securities as discussed in Note 11. Level 2 inputs are based on quoted prices for similar assets in active markets.
|
|
|
|
Loans held for sale Fair value for loans held for sale are based on quoted prices for similar assets in active markets.
|
|
|
|
Loans For variable-rate loans that reprice frequently and have no significant changes in credit risk, fair values are based on carrying values.
Fair values for certain mortgage loans and other consumer loans are estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans and leases
is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers of similar credit ratings quality. Fair value for impaired loans and leases are estimated using discounted cash flow analysis
or underlying collateral values, where applicable.
|
|
|
|
Deposit liabilities The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at
the reporting date. The fair value for fixed-rate certificates of deposit is estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregate expected maturities on
time deposits.
|
|
|
|
Federal funds purchased and securities sold under agreements to repurchase These borrowings generally mature in 90 days or less and,
accordingly, the carrying amount reported in the consolidated balance sheets approximates fair value.
|
|
|
|
Other borrowings Other borrowings carrying amount reported in the consolidated balance sheets approximates fair value.
|
24
NOTE 12 FAIR VALUE OPTION
Authoritative accounting guidance provides a fair value option election (FVO) that allows companies to irrevocably
elect fair value as the initial and subsequent measurement attribute for certain financial assets and liabilities, with changes in fair value recognized in earnings as they occur. The guidance permits the fair value option election on an instrument
by instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument.
The Company records all newly-originated loans held for sale under the fair value option. Origination fees and costs are recognized in earnings at the time of origination. The servicing value is included
in the fair value of the loan and recognized at origination of the loan. The Company uses derivatives to hedge changes in servicing value as a result of including the servicing value in the fair value of the loan. The estimated impact from
recognizing servicing value, net of related hedging costs, as part of the fair value of the loan is captured in the mortgage loan and related fees component of noninterest income.
As of September 30, 2011, December 31, 2010 and September 30, 2010, there were $2,284 thousand, $2,556 thousand and
$3,386 thousand in loans held for sale recorded at fair value, respectively. For the three and nine months ended September 30, 2011, approximately $169 thousand and $470 thousand in loan origination and related fee income was recognized in
noninterest income, respectively. For the three and nine months ended September 30, 2010, approximately $319 thousand and $704 thousand, respectively, in loan origination and related fee income was recognized in noninterest income. An
insignificant amount of origination and related fee expense was recognized in the three and nine months ended September 30, 2011 and 2010 in noninterest expense utilizing the fair value option.
For the nine months ended September 30, 2011, the Company recognized a loss of $186 thousand due to changes in fair value for loans
held for sale in which the fair value option was elected. For the nine months ended September 30, 2010, the Company recognized a gain of $45 thousand due to changes in fair value for loans held for sale in which the fair value option was
elected. This amount does not reflect the change in fair value attributable to the related hedges the Company used to mitigate the interest rate risk associated with loans held for sale. The changes in the fair value of the hedges were also recorded
in the mortgage loan and related fee component of noninterest income, and provided $248 thousand of income for the nine months ended September 30, 2011. The changes in the fair value of the hedges reduced income by $39 thousand for the nine
months ended September 30, 2010.
The following table provides the difference between the aggregate fair value and the
aggregate unpaid principal balance of loans held for sale for which the fair value option has been elected.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
fair value
|
|
|
Aggregate
unpaid
principal
balance
under
FVO
|
|
|
Fair
value
carrying
amount
over
(under)
unpaid
principal
|
|
|
|
(in thousands)
|
|
Loans held for sale
|
|
$
|
2,284
|
|
|
$
|
2,306
|
|
|
$
|
(22
|
)
|
NOTE 13 DERIVATIVE FINANCIAL INSTRUMENTS
The Company records all derivative financial instruments at fair value in the financial statements. It is the policy of
the Company to enter into various derivatives both as a risk management tool and in a dealer capacity, as necessary, to facilitate client transactions. Derivatives are used as a risk management tool to hedge the exposure to changes in interest rates
or other identified market risks. As of September 30, 2011, the Company has not entered into a transaction in a dealer capacity.
When a derivative is intended to be a qualifying hedged instrument, the Company prepares written hedge documentation that designates the derivative as (1) a hedge of the fair value of a recognized
asset or liability or of an unrecognized firm commitment (fair value hedge) or (2) a hedge of a forecasted transaction, such as the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge).
The written documentation includes identification of, among other items, the risk management objective, hedging instrument,
hedged item, and methodologies for assessing and measuring hedge effectiveness and ineffectiveness, along with support for managements assertion that the hedge will be highly effective. Methodologies related to hedge effectiveness and
ineffectiveness include (1) statistical regression analysis of changes in the cash flows of the actual derivative and a perfectly effective hypothetical derivative, (2) statistical regression analysis of changes in fair values of the
actual derivative and the hedged item and (3) comparison of the critical terms of the hedged item and the hedging derivative. Changes in fair value of a derivative that is highly effective and that has been designated and qualifies as a fair
value hedge are recorded in current period earnings, along with the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. Changes in the fair value of a derivative that is highly effective and that has
been designed and qualifies as a cash flow hedge are initially recorded in other comprehensive income and reclassified to earnings in conjunction with the recognition of the earnings impacts of the hedged item; any ineffective portion is recorded in
current period earnings. Designated hedge transactions are reviewed at least quarterly for ongoing effectiveness. Transactions that are no longer deemed to be effective are removed from hedge accounting classification and the recorded impacts of the
hedge are recognized in current period income or expense in conjunction with the recognition of the income or expense on the originally hedged item.
25
The Companys derivatives are based on underlying risks, primarily interest rates. The
Company has utilized swaps to reduce the risks associated with interest rates. Swaps are contracts in which a series of net cash flows, based on a specific notional amount that is related to an underlying risk, are exchanged over a prescribed
period. The Company also utilizes forward contracts on the held for sale loan portfolio. The forward contracts hedge against changes in fair value of the held for sale loans.
Derivatives expose the Company to credit risk. If the counterparty fails to perform, the credit risk is equal to the fair value gain of the derivative. The credit exposure for swaps is the replacement
cost of contracts that have become favorable. Credit risk is minimized by entering into transactions with high quality counterparties that are initially approved by the Board of Directors and reviewed periodically by the Asset/Liability Committee.
It is the Companys policy of requiring that all derivatives be governed by an International Swap and Derivatives Associations Master Agreement (ISDA). Bilateral collateral agreements may also be required.
On August 28, 2007 and March 26, 2009, the Company elected to terminate a series of interest rate swaps with a total notional
value of $150 million and $50 million, respectively. At termination, the swaps had a market value of $2,010 thousand and $5,778 thousand, respectively. These gains are being accreted into interest income over the remaining life of the originally
hedged items. The Company recognized $442 thousand and $1,405 thousand for the three and nine months ended September 30, 2011, and $485 thousand and $1,537 thousand for the three and nine months ended September 30, 2010.
The following table presents the accretion of the remaining gain for the terminated swaps.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
1
|
|
|
2012
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Accretion of gain from 2007 terminated swaps
|
|
$
|
32
|
|
|
$
|
62
|
|
|
$
|
94
|
|
Accretion of gain from 2009 terminated swaps
|
|
$
|
410
|
|
|
$
|
1,272
|
|
|
$
|
1,682
|
|
1
|
Represents the
gain accretion for October 1, 2011 to December 31, 2011. Excludes the amounts recognized in the first nine months of 2011.
|
The following table presents the cash flow hedges as of September 30, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
Amount
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
|
Maturity
Date
|
|
|
|
(in thousands)
|
|
Asset hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts
|
|
$
|
2,195
|
|
|
$
|
3
|
|
|
$
|
25
|
|
|
$
|
(15
|
)
|
|
|
Various
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,195
|
|
|
$
|
3
|
|
|
$
|
25
|
|
|
$
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terminated asset hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges:
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
$
|
35,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
62
|
|
|
|
June 28, 2012
|
|
Interest rate swap
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
555
|
|
|
|
October 11, 2012
|
|
Interest rate swap
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
555
|
|
|
|
October 11, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
85,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
The $1.2 million of gains, net of taxes, recorded in accumulated other comprehensive income as of September 30, 2011, will be reclassified into
earnings as interest income over the remaining life of the respective hedged items.
|
26
The following table presents additional information on the active derivative positions as of
September 30, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance
Sheet
Presentation
|
|
|
Consolidated Income
Statement
Presentation
|
|
|
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Gains
|
|
|
|
Notional
|
|
|
Classification
|
|
Amount
|
|
|
Classification
|
|
Amount
|
|
|
Classification
|
|
Amount
Recognized
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
Hedging Instrument:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts
|
|
$
|
2,195
|
|
|
Other assets
|
|
$
|
N/A
|
|
|
Other liabilities
|
|
$
|
22
|
|
|
Noninterest
income other
|
|
$
|
248
|
|
|
|
|
|
|
|
|
|
Hedged Items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
|
N/A
|
|
|
Loans held for
sale
|
|
$
|
2,195
|
|
|
N/A
|
|
|
N/A
|
|
|
Noninterest
income other
|
|
|
N/A
|
|
For the three and nine months ended September 30, 2011, no significant amounts were recognized for
hedge ineffectiveness.
NOTE 14 RECENT ACCOUNTING PRONOUNCEMENTS
In April 2011, the FASB issued ASU No. 2011-02, Receivables (Topic 310) A Creditors
Determination of Whether a Restructuring is a Troubled Debt Restructuring. The ASU provides additional guidance to creditors for evaluating whether a modification or restructuring of a receivable constitutes a troubled debt restructuring
(TDR) by clarifying the existing guidance on whether (1) the creditor has granted a concession and (2) whether the debtor is experiencing financial difficulties, which are the two criteria used to determine whether a
modification or restructuring is a TDR. The ASU:
|
|
|
Provides additional guidance on determining whether a creditor has granted a concession, including guidance on collection on all amounts due, receipt
of additional collateral or guarantees from the debtor, and restructuring the debt at a below-market rate;
|
|
|
|
Includes factors and examples for creditors to determine whether an insignificant delay in payment is considered a concession;
|
|
|
|
Prohibits creditors from using the borrowers effective rate test in ASC 470-50,
Debt, Modifications and Extinguishment
, to evaluate
whether a concession has been granted to a borrower;
|
|
|
|
Adds factors for creditors to use to determine whether the debtor is experiencing financial difficulties; and
|
|
|
|
Ends the FASBs deferral of the additional disclosures about TDR activities required by ASU 2010-20.
|
This ASU is effective for the first interim period beginning on or after June 15, 2011 and presented in Note 6. The adoption of this
guidance did not materially impact the Company.
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive
Income (Topic 220) Presentation of Comprehensive Income. The ASU requires entities to present items of net income and other comprehensive income either in one continuous statement referred to as the statement of comprehensive
income or in two separate, but consecutive, statements of net income and other comprehensive income. The ASU is effective for the first interim period beginning after December 15, 2011. On October 21, 2011, the FASB proposed to
defer the requirement to include reclassifications of other comprehensive income on the face of the income statement. Companies will still be required to adopt the other requirements contained in the ASU. The adoption of this guidance will not
materially impact the Company.
In May, 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820)
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU represents the converged guidance of the FASB and the IASB (the Boards) on fair value measurement. The collective efforts of the
Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term fair value. The
Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs. Included in the ASU are requirements to
disclose additional quantitative disclosures about unobservable inputs for all Level 3 fair value measurements, as well as qualitative disclosures about the sensitivity inherent in recurring Level 3 fair value measurements. The ASU is effective
during the interim and annual periods beginning after December 15, 2011. The Company is currently evaluating the impact this new ASU will have on the financial statements.
27
NOTE 15 SUBSEQUENT EVENTS
On October 3, 2011, NASDAQ notified the Company that it had regained compliance with the Bid Price Rule after the
closing bid was in excess of $1.00 for 10 consecutive business days, from September 19, 2011 to September 30, 2011. The Company has maintained a closing bid in excess of $1.00 through the filing date of this Report.
On October 31, 2011, five branches of the Bank were consolidated into nearby existing branches. A sixth branch is currently
scheduled to be consolidated by December 31, 2011.
28
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In this Form 10-Q, First Security, we, us, the
Company and our refer to First Security Group, Inc.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the statements made under the caption Managements Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere throughout this Form 10-Q are forward-looking statements for purposes of the Securities Act of 1933 and the Securities Exchange Act of 1934. Forward-looking statements relate to future events
or our future financial performance and may involve known or unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of First Security to be materially different from future results,
performance, or achievements expressed or implied by such forward-looking statements. Forward-looking statements include statements using the words such as may, will, anticipate, should,
would, believe, contemplate, expect, estimate, continue, intend, seeks, or other similar words and expressions of the future.
These forward-looking statements involve risks and uncertainties, and may not be realized due to a variety of factors, including, without
limitation: the effects of future economic conditions, governmental monetary and fiscal policies, as well as legislative and regulatory changes; the risks of changes in interest rates on the level and composition of deposits, loan demand, and the
values of loan collateral, securities, and interest sensitive assets and liabilities; the costs of evaluating possible acquisitions and the risks inherent in integrating acquisitions; the effects of competition from other commercial banks, thrifts,
mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in First Securitys market area and elsewhere,
including institutions operating regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone, computer and the Internet; and, the failure of assumptions underlying the
establishment of reserves for possible loan losses. All written or oral forward-looking statements attributable to First Security are expressly qualified in their entirety by this Special Note.
THIRD QUARTER 2011 AND RECENT EVENTS
The following discussion and analysis sets forth the major factors that affected the results of operations and financial condition reflected in the unaudited financial statements for the three and nine
month periods ended September 30, 2011 and 2010. Such discussion and analysis should be read in conjunction with the Companys Consolidated Financial Statements and the notes attached thereto.
Company Overview
First Security Group, Inc. is a bank holding company headquartered in Chattanooga, Tennessee, with $1.1 billion in assets as of September 30, 2011. Founded in 1999, First Securitys community
bank subsidiary, FSGBank, N.A. currently has 31 full-service banking offices, including the headquarters, along the interstate corridors of eastern and middle Tennessee and northern Georgia and 318 full-time equivalent employees. In Dalton, Georgia,
FSGBank operates under the name of Dalton Whitfield Bank; along the Interstate 40 corridor in Tennessee, FSGBank operates under the name of Jackson Bank & Trust. FSGBank provides retail and commercial banking services, trust and investment
management, mortgage banking, financial planning and internet banking (www.FSGBank.com) services.
Strategic Initiatives
for 2011
During 2011, we continued to execute certain strategic initiatives that began during 2009 and 2010. Additionally,
we are consolidating six branches while launching deposit and lending campaigns, as discussed in further detail below. We believe our strategic initiatives are positioning us appropriately for both short-term stability and long-term success.
Executed initiatives include centralizing loan underwriting and approval, deepening senior management, improving our liquidity position and outsourcing the marketing and sales function for most of our foreclosed properties.
Strategic Initiative Triumph Investment Managers
As announced on May 4, 2011, we engaged Triumph Investment Managers, LLC (Triumph) to provide strategic advisory services and
subsequently appointed Mr. Robert P. Keller, a managing director of Triumph, to our Board of Directors. The mutual goal of this engagement is to create and restore shareholder value through the realignment of the organizational structure and the
installation of a philosophy that provides for greater accountability. Triumph and management will evaluate, monitor, and, as appropriate, refine, these existing initiatives, while also considering others.
29
Strategic Initiative Branch Consolidation
During the third quarter of 2011, six branch locations were selected for consolidation. Five of those offices were consolidated on
October 31, 2011. We anticipate the remaining branch consolidation to take place during the fourth quarter of 2011. The cost savings are estimated to be $1 million per year.
Strategic Initiative Deposit Campaigns
During June 2011 and continuing into the third quarter, we launched two consecutive five-week deposit campaigns aimed to increase our customer base and core deposits. These campaigns generated strong
response throughout our branch network and resulted in nearly $55 million of new deposits. We may run additional deposit campaigns during the fourth quarter of 2011.
Strategic Initiative Strengthening Management and Lending Campaigns
As part of our strategy to further strengthen management, we re-established our Chief Lending Officer position. On August 8, 2011, Joseph (Joe) E. Dell, Jr. was appointed as Executive Vice President
and Chief Lending Officer. Mr. Dell has over 25 years of community banking experience, most recently serving as Executive Vice President and Chief Lending Officer of First Commonwealth Bank in Indiana, Pennsylvania. During September 2011 and
continuing into the fourth quarter, we launched several lending campaigns that we believe will stabilize our loan portfolio and position us for growth over the next six to twelve months.
Going Concern Discussion
In connection with our audited financial statements for the year ended December 31, 2010, our independent registered public accounting firm included language in its audit opinion related to our
ability to continue as a going concern. As discussed in Note 2 to our consolidated financial statements for the year ended December 31, 2010, we recognized that the losses recorded during 2009 and 2010 had significantly impacted our operating
results for those two years. Our ability to continue as a going concern is contingent upon our ability to devise and successfully execute a management plan to develop profitable operations, satisfy the requirements of the regulatory actions detailed
above, and lower the level of problem assets to an acceptable level.
As discussed above, we are developing strategic and
capital plans, which include, but are not limited to: (1) reorganizing management into a line of business structure, (2) restructuring credit and lending functions with new policies and centralized processes, (3) reducing adversely
classified assets, (4) maintaining an adequate allowance for loan losses, (5) actively working to maintain appropriate liquidity while reducing reliance on non-core sources of funding and (6) evaluating strategic and capital
opportunities.
We believe that the successful execution of the strategic initiatives will ultimately result in full
compliance with the regulatory requirements and position us for long-term growth and a return to profitability.
Material
Weakness in Internal Controls over Financial Reporting
As reported in the December 31, 2010 Annual Report on Form
10-K, management determined that a material weakness in internal controls over financial reporting existed as of December 31, 2010. Specifically, First Security did not maintain an effective control environment. The control environment sets the
tone of the organization, influences the control consciousness of its people, and is the foundation for all other components of internal control over financial reporting.
Subsequent to year-end, various changes have occurred that may have subsequently affected First Securitys control environment:
|
|
|
The Board granted day-to-day operational oversight to Ralph E. Coffman, Jr. as President and Chief Operating Officer following the resignation of
Chairman and CEO Rodger B. Holley. Mr. Coffman has more than 20 years of executive management experience in financial organizations, including serving in the CEO or President role at three different financial institutions.
|
|
|
|
The Board appointed John R. Haddock as Chief Financial Officer following the resignation of William L. Lusk, Jr. Mr. Haddock previously served as
the Corporate Controller since 2006.
|
|
|
|
On April 11, 2011, Kelly P. Kirkland joined the Board of Directors. Ms. Kirkland brings over 27 years of legal experience in private
practice, including the representation of numerous complex public companies.
|
30
|
|
|
On May 4, 2011, we engaged Triumph to assist the Board and management with strategic advisory services. Pursuant to our agreement, our Board
invited, subject to regulatory non-objections, Robert P. Keller and John J. Clarke, the managing directors of Triumph, to serve on our Board. Mr. Keller and Mr. Clarke provide over 60 years of experience in investment and bank activity,
including leadership experience as directors to three other financial institutions. Mr. Keller was subsequently approved and joined the Board of Directors on August 24, 2011.
|
|
|
|
During the third quarter of 2011, we revised various policies, including the policies for OREO, repossessions and related party transactions.
|
|
|
|
During the third quarter of 2011, the Company hired a Controller with a banking background that includes financial and internal audit experience. The
internal control procedures over financial reporting for this Quarterly Report reflected the separation of the Controller and Chief Financial Officer roles.
|
|
|
|
During the fourth quarter of 2011, we are conducting code of conduct training for our employees. Additionally, we are holding a separate training for
executive management and our Board of Directors to emphasize the importance of setting the tone at the top. A primary purpose of this training is to communicate the expected culture of high integrity and high ethical standards by our Board,
executive management, and all employees.
|
Overall, management believes that First Securitys control
environment has improved as of the filing of this Quarterly Report on Form 10-Q. However, we are continuing to evaluate various additional enhancements, included but not limited to, additional training and education. We are committed to establishing
and maintaining an appropriate control environment and we anticipate that these actions and measures combined with future actions will appropriately address the material weakness related to the issues described above.
Replacement of Auditors
Effective July 8, 2011, First Securitys Audit/Corporate Governance Committee (the Audit Committee) approved the dismissal of Joseph Decosimo and Company, PLLC as First
Securitys independent registered public accounting firm. Effective July 11, 2011, the Audit Committee approved the engagement of Crowe Horwath, LLP as First Securitys independent registered public accounting firm for its 2011 fiscal
year.
Reverse Stock Split and NASDAQ Bid Price Compliance
On September 19, 2011 (the Effective Date), we completed a one-for-ten reverse stock split of our common stock. In connection
with the reverse stock split, every ten shares of issued and outstanding First Security common stock at the Effective Date were exchanged for one share of newly issued common stock. Fractional shares were rounded up to the next whole share. Other
than the number of authorized shares of common stock disclosed in the Consolidated Balance Sheets, all prior period share amounts have been retroactively restated to reflect the reverse stock split. For additional information related to the reverse
stock split, see Notes 1, 2, and 9 to our consolidated financial statements.
On October 3, 2011, NASDAQ notified us that we
had regained compliance with the Bid Price Rule after our closing bid price was in excess of $1.00 for 10 consecutive business days.
Recent Regulatory Events
Effective September 7, 2010, First Security
entered into an Agreement with the Federal Reserve Bank. The Agreement is designed to ensure First Security is a source of strength to FSGBank. Substantially all of the requirements of the Agreement are similar to those already in effect for FSGBank
pursuant to the Consent Order that is described below. On September 14, 2010, we filed a current report on Form 8-K describing the Agreement. The Form 8-K also provides a copy of the fully executed Agreement.
We are currently deemed not in compliance with several provisions of the Agreement. Any material noncompliance may result in further
enforcement actions by the Federal Reserve Bank. We can provide no assurances that we will be able to comply fully with the Agreement, that efforts to comply with the Agreement will not have a material adverse effect on the operations and financial
condition of First Security, or that further enforcement actions will not be imposed on First Security. Effective April 28, 2010, FSGBank reached an agreement with its primary regulator, the Office of the Comptroller of the Company (OCC),
regarding the issuance of a Consent Order. The Order is a result of the OCCs regular examination of FSGBank in the fall of 2009 and directs FSGBank to take actions intended to strengthen its overall condition. All customer deposits remain
fully insured by the FDIC to the maximum extent allowed by law; the Order does not impact this coverage in any manner. On April 29, 2010, First Security filed a current report on Form 8-K describing the Order and the related actions taken by
the Bank to date. The Form 8-K also provides a copy of the fully executed Order.
The OCC is currently conducting its annual
Safety and Soundness examination of the Bank. The exam includes evaluating our level of compliance with the provisions of the Order. At the conclusion of the 2010 examination, the Bank was deemed not in compliance with the provisions of the Order.
The Bank remains in non-compliance with the capital provision of the Order but anticipates progress with certain other provisions based on the organizational and operational changes that have been implemented over the last twelve months. Any
material noncompliance may result in further enforcement actions by the OCC. We can provide no assurances that we will be able to comply fully with the Order, that efforts to comply with the Order will not have a material adverse effect on the
operations and financial condition of FSGBank, or that further enforcement actions wont be imposed on FSGBank.
Overview
Market Conditions
Most indicators point toward the overall U.S. economy transitioning to a gradual recovery period over the next several years. However, the impact of the U.S. credit rating downgrade to AA+ may have
long-term economic consequences, including possibly extending the current economic conditions. As our financial results can be a reflection of our regional economy, we closely monitor and evaluate local and regional economic trends. At this time, we
anticipate our regional economy will recover at a faster rate than the national average due to the economic developments occurring in our region.
Announced in 2008, the $1 billion Volkswagen automotive production facility has launched vehicle production. The Volkswagen plant has added about 2,000 direct jobs, including approximately 400
white-collar jobs, and up to 9,500 indirect jobs to the region. We believe the positive economic impact on Chattanooga and the surrounding region from Volkswagen and other recently announced large economic investments will be significant and it may
stabilize and possibly increase real estate values and enhance economic activity within our market area.
While the economic
recession has resulted in higher unemployment across the country, our market areas benefit from more stable rates of employment. Our major market areas of Chattanooga and Knoxville have a lower unemployment rate of 8.8% and 7.9%, respectively (as of
August 2011, the most recent available data), than the Tennessee rate of 9.7%. The economy of the Dalton,
31
Georgia Metropolitan Statistical Area (MSA) is primarily centered on the carpet and floor-covering industries. With the decline in housing starts and the overall economy, Dalton has been the most
negatively impacted region in our footprint. The unemployment rate in the Dalton MSA is 12.1% (as of August 2011) compared to the Georgia rate of 10.3%. For the Chattanooga and Knoxville MSAs, the number of unemployed workers has climbed since May
2011 lows but remains well below the peak in June 2009, having declined by 11.0% in Chattanooga and 14.5% in Knoxville. We believe the increase was attributable to graduations and the unemployment numbers will continue to improve throughout 2011.
Our market area has also benefited from a relatively stable housing market. According to the National Association of
REALTORS, the median sales prices of existing single-family homes declined 6.0% and 5.5% for the Chattanooga and Knoxville MSAs, respectively, from 2008 to 2010 compared to 12.0% decline for the nation and a 9.3% decline for the census region
identified as the South. The median sales prices of existing single-family homes decreased 8.1% and 0.4% for Chattanooga and Knoxville, respectively, from the second quarter of 2010 to the second quarter of 2011 compared to a 2.8% and 2.7% decline
for the nation and South, respectively. While residential real estate values may continue to decline, we are hopeful that housing prices will begin to stabilize.
Financial Results
As of September 30, 2011, we had total
consolidated assets of $1.1 billion, total loans of $604.4 million, total deposits of $1.02 billion and stockholders equity of $78.0 million. For the three and nine months ended September 30, 2011, our net loss allocated to common
shareholders was $7.0 million and $16.1 million, respectively, resulting in basic and diluted net loss of $4.40 per share for the quarter and $10.13 per share for the year-to-date period, adjusted to reflect the reverse split. All prior periods have
been restated to give retroactive effect to the one-for-ten reverse stock split that took effect on September 19, 2011.
As of
September 30, 2010, we had total consolidated assets of $1.2 billion, total loans of $777.4 million, total deposits of $1.1 billion and stockholders equity of $106.8 million. For the three and nine months ended September 30, 2010,
our net loss allocated to common shareholders was $30.3 million and $34.5 million, respectively, resulting in basic and diluted net loss of $19.18 per share for the quarter and $21.97 per share for the year-to-date period. All prior periods have
been restated to give retroactive effect to the one-for-ten reverse stock split that took effect on September 19, 2011.
For
the three and nine month periods ended September 30, 2011, net interest income decreased by $1.5 million and $5.3 million, respectively, and noninterest income decreased by $300 thousand and $842 thousand, respectively, compared to the same
periods in 2010. For the three months ended September 30, 2011, noninterest expense decreased by $1.1 million, and for the nine months ended September 30, 2011, noninterest expense increased by $892 thousand, compared to the same periods in
2010. The decline in net interest income is primarily attributable to a reduction in our loan portfolio. Noninterest income decreased primarily due to lower deposit fees while noninterest expense decreased for the quarter primarily due to lower
expenses associated with nonperforming assets, including write-downs, losses and holding costs, and increased for the year primarily due to higher expenses associated with nonperforming assets, FDIC insurance, and professional fees. The increases
for the year were partially offset by reductions in salary and benefit expense. Full-time equivalent employees were 318 at September 30, 2011, compared to 325 at September 30, 2010.
The provision for loan and lease losses decreased $14.5 million and $19.0 million for the three and nine month periods ended
September 30, 2011, respectively, compared to the same periods in 2010.
Our efficiency ratio increased in the third
quarter of 2011 to 130.2% compared to 118.7% in the same period of 2010 primarily due to reductions in net interest income and noninterest income that were proportionally larger than the decrease in noninterest expense. We anticipate our efficiency
ratio to begin to improve during the fourth quarter of 2011 as we focus on enhancing revenue while continuing to reduce certain overhead expenses. However, the stabilization and possible improvement of our efficiency ratio over the balance of 2011
is contingent on both macro-economic factors, such as potential changes to the federal funds target rate, and micro-economic factors, such as local unemployment and real estate values.
Net interest margin in the third quarter of 2011 was 2.65%, or 7 basis points lower than the prior year period of 2.72%. We believe that
our net interest margin has stabilized and we anticipate it to improve in the fourth quarter of 2011. The projected improvement of our net interest margin is dependent on multiple factors including our ability to raise core deposits, our growth or
contraction in loans, our deposit and loan pricing, maturities of brokered deposits, and any possible further action by the Federal Reserve Board.
During the third quarter of 2011, our Board of Directors elected to defer payment of the Series A Preferred Stock (Preferred Stock). To date, the Company has deferred seven consecutive Preferred Stock
dividend payments. The sixth deferred payment provided the U.S. Treasury (Treasury) the right to appoint two directors to our Board of Directors until all accrued but unpaid dividends have been paid on the Preferred Stock. Pursuant to the Written
Agreement between First Security and the Federal Reserve, we may not declare or pay dividends without prior written consent from the Federal Reserve. During April 2011, the Treasury requested and we consented to allow an observer to attend our Board
meetings.
32
RESULTS OF OPERATIONS
We reported a net loss to common stockholders for the three and nine month periods ended September 30, 2011 of $7.0 million and $16.1
million compared to a net loss for the same periods in 2010 of $30.3 million and $34.5 million, respectively. In the third quarter of 2011, basic and diluted net loss per share was $4.40 on approximately 1.6 million weighted average shares
outstanding. On a year-to-date basis, basic and diluted net loss per share was $10.13 on approximately 1.6 million weighted average shares outstanding. As above, these figures reflect the effect of the one-for-ten reverse stock split.
Net loss on a quarterly and year-to-date basis in 2011 was below the comparable amounts in 2010 as a result of the reduction
in our provision for loan loss. The year-to-date 2011 loss before taxes was $14.5 million compared to $26.6 million for the same period in 2010. As of September 30, 2011, we had 36 banking offices, including the headquarters, and 318 full-time
equivalent employees.
The following table summarizes the components of income and expense and the changes in those components
for the three and nine month periods ended September 30, 2011 compared to the same periods in 2010.
C
ONDENSED
C
ONSOLIDATED
I
NCOME
S
TATEMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
Months
Ended
September 30,
2011
|
|
|
Change from Prior
Year
|
|
|
For the Nine
Months
Ended
September 30,
2011
|
|
|
Change from Prior
Year
|
|
|
|
Amount
|
|
|
Percentage
|
|
|
|
Amount
|
|
|
Percentage
|
|
|
|
(in thousands, except percentages)
|
|
Interest income
|
|
$
|
10,338
|
|
|
$
|
(2,864
|
)
|
|
|
-21.7
|
%
|
|
$
|
32,854
|
|
|
$
|
(9,679
|
)
|
|
|
-22.8
|
%
|
Interest expense
|
|
|
3,662
|
|
|
|
(1,405
|
)
|
|
|
-27.7
|
%
|
|
|
11,333
|
|
|
|
(4,429
|
)
|
|
|
-28.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
6,676
|
|
|
|
(1,459
|
)
|
|
|
-17.9
|
%
|
|
|
21,521
|
|
|
|
(5,250
|
)
|
|
|
-19.6
|
%
|
Provision for loan and lease losses
|
|
|
3,882
|
|
|
|
(14,533
|
)
|
|
|
-78.9
|
%
|
|
|
7,391
|
|
|
|
(19,033
|
)
|
|
|
-72.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan and lease losses
|
|
|
2,794
|
|
|
|
13,074
|
|
|
|
-127.2
|
%
|
|
|
14,130
|
|
|
|
13,783
|
|
|
|
3972.0
|
%
|
Noninterest income
|
|
|
2,104
|
|
|
|
(300
|
)
|
|
|
-12.5
|
%
|
|
|
6,424
|
|
|
|
(842
|
)
|
|
|
-11.6
|
%
|
Noninterest expense
|
|
|
11,433
|
|
|
|
(1,079
|
)
|
|
|
-8.6
|
%
|
|
|
35,056
|
|
|
|
892
|
|
|
|
2.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before income taxes
|
|
|
(6,535
|
)
|
|
|
13,853
|
|
|
|
-67.9
|
%
|
|
|
(14,502
|
)
|
|
|
12,049
|
|
|
|
-45.4
|
%
|
Income tax (benefit) provision
|
|
|
(54
|
)
|
|
|
(9,438
|
)
|
|
|
-100.6
|
%
|
|
|
32
|
|
|
|
(6,429
|
)
|
|
|
-99.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(6,481
|
)
|
|
|
23,291
|
|
|
|
-78.2
|
%
|
|
|
(14,534
|
)
|
|
|
18,478
|
|
|
|
-56.0
|
%
|
Preferred stock dividends and discount accretion
|
|
|
514
|
|
|
|
6
|
|
|
|
1.2
|
%
|
|
|
1,538
|
|
|
|
(19
|
)
|
|
|
-1.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss allocated to common stockholders
|
|
$
|
(6,995
|
)
|
|
$
|
23,285
|
|
|
|
-76.9
|
%
|
|
$
|
(16,072
|
)
|
|
$
|
18,459
|
|
|
|
-53.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
Net interest income (the difference between the interest earned on assets, such as loans and investment securities, and the interest paid on liabilities, such as deposits and other borrowings) is our
primary source of operating income. For the three months ended September 30, 2011, net interest income decreased by $1.5 million, or 17.9%, to $6.7 million compared to $8.1 million for the same period in 2010. For the nine months ended
September 30, 2011, net interest income decreased by $5.3 million, or 19.6%, to $21.5 million for the period ended September 30, 2011, compared to $26.8 million for the same period in 2010.
We monitor and evaluate the effects of certain risks on our earnings and seek balance between the risks assumed and returns sought. Some
of these risks include interest rate risk, credit risk and liquidity risk.
The level of net interest income is determined
primarily by the average balances (volume) of interest earning assets and the various rate spreads between our interest earning assets and our funding sources. Changes in net interest income from period to period result from increases or decreases
in the volume of interest earning assets and interest bearing liabilities, increases or decreases in the average interest rates earned and paid on such assets and liabilities, the ability to manage the interest earning asset portfolio (which
includes loans), and the availability of particular sources of funds, such as noninterest bearing deposits.
33
The following tables summarize net interest income and average yields and rates paid for the
quarters ended September 30, 2011 and 2010.
A
VERAGE
C
ONSOLIDATED
B
ALANCE
S
HEETS
AND
N
ET
I
NTEREST
A
NALYSIS
F
ULLY
T
AX
E
QUIVALENT
B
ASIS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
Average
Balance
|
|
|
Income/
Expense
|
|
|
Yield/
Rate
|
|
|
Average
Balance
|
|
|
Income/
Expense
|
|
|
Yield/
Rate
|
|
|
|
(in thousands, except percentages)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net of unearned income
(1) (2)
|
|
$
|
628,358
|
|
|
$
|
9,020
|
|
|
|
5.70
|
%
|
|
$
|
823,753
|
|
|
$
|
11,912
|
|
|
|
5.74
|
%
|
Debt securities taxable
|
|
|
123,521
|
|
|
|
869
|
|
|
|
2.79
|
%
|
|
|
115,557
|
|
|
|
937
|
|
|
|
3.22
|
%
|
Debt securities non-taxable
(2)
|
|
|
33,729
|
|
|
|
482
|
|
|
|
5.66
|
%
|
|
|
37,033
|
|
|
|
512
|
|
|
|
5.49
|
%
|
Other earning assets
|
|
|
241,023
|
|
|
|
144
|
|
|
|
0.24
|
%
|
|
|
236,651
|
|
|
|
32
|
|
|
|
0.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
|
1,026,631
|
|
|
|
10,515
|
|
|
|
4.06
|
%
|
|
|
1,212,994
|
|
|
|
13,393
|
|
|
|
4.38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses
|
|
|
(23,993
|
)
|
|
|
|
|
|
|
|
|
|
|
(27,626
|
)
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
1,185
|
|
|
|
|
|
|
|
|
|
|
|
1,634
|
|
|
|
|
|
|
|
|
|
Cash & due from banks
|
|
|
9,518
|
|
|
|
|
|
|
|
|
|
|
|
7,836
|
|
|
|
|
|
|
|
|
|
Premises & equipment
|
|
|
30,208
|
|
|
|
|
|
|
|
|
|
|
|
32,125
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
71,269
|
|
|
|
|
|
|
|
|
|
|
|
81,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
1,114,818
|
|
|
|
|
|
|
|
|
|
|
$
|
1,308,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand deposits
|
|
$
|
60,267
|
|
|
|
39
|
|
|
|
0.26
|
%
|
|
$
|
65,547
|
|
|
|
47
|
|
|
|
0.28
|
%
|
Money market accounts
|
|
|
110,693
|
|
|
|
238
|
|
|
|
0.85
|
%
|
|
|
132,945
|
|
|
|
314
|
|
|
|
0.94
|
%
|
Savings deposits
|
|
|
38,648
|
|
|
|
23
|
|
|
|
0.24
|
%
|
|
|
39,211
|
|
|
|
27
|
|
|
|
0.27
|
%
|
Time deposits of less than $100 thousand
|
|
|
218,000
|
|
|
|
692
|
|
|
|
1.26
|
%
|
|
|
226,002
|
|
|
|
1,131
|
|
|
|
1.99
|
%
|
Time deposits of $100 thousand or more
|
|
|
142,435
|
|
|
|
606
|
|
|
|
1.69
|
%
|
|
|
178,410
|
|
|
|
970
|
|
|
|
2.16
|
%
|
Brokered CDs and CDARS®
|
|
|
273,536
|
|
|
|
1,951
|
|
|
|
2.83
|
%
|
|
|
346,197
|
|
|
|
2,459
|
|
|
|
2.82
|
%
|
Repurchase agreements
|
|
|
15,030
|
|
|
|
112
|
|
|
|
2.96
|
%
|
|
|
17,523
|
|
|
|
117
|
|
|
|
2.65
|
%
|
Other borrowings
|
|
|
65
|
|
|
|
1
|
|
|
|
6.10
|
%
|
|
|
83
|
|
|
|
2
|
|
|
|
9.56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
858,674
|
|
|
|
3,662
|
|
|
|
1.69
|
%
|
|
|
1,005,918
|
|
|
|
5,067
|
|
|
|
2.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
$
|
6,853
|
|
|
|
2.37
|
%
|
|
|
|
|
|
$
|
8,326
|
|
|
|
2.38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing demand deposits
|
|
|
161,858
|
|
|
|
|
|
|
|
|
|
|
|
155,889
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other liabilities
|
|
|
11,187
|
|
|
|
|
|
|
|
|
|
|
|
10,520
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
78,765
|
|
|
|
|
|
|
|
|
|
|
|
130,503
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
4,334
|
|
|
|
|
|
|
|
|
|
|
|
5,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$
|
1,114,818
|
|
|
|
|
|
|
|
|
|
|
$
|
1,308,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of noninterest bearing sources and other changes in balance sheet composition
|
|
|
|
|
|
|
|
|
|
|
0.28
|
%
|
|
|
|
|
|
|
|
|
|
|
0.34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
2.65
|
%
|
|
|
|
|
|
|
|
|
|
|
2.72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Nonaccrual loans
have been included in the average balance. Only the interest collected on such loans has been included as income.
|
(2)
|
Interest income from securities and loans includes the effects of taxable-equivalent adjustments using a federal income tax rate of approximately 34%
for both years reported and where applicable, state income taxes, to increase tax-exempt interest income to a taxable-equivalent basis. The net taxable equivalent adjustment amounts included in the above table were $177 thousand and $191 thousand
for the three months ended September 30, 2011 and 2010, respectively.
|
34
The following table presents the relative impact on net interest income to changes in the
average outstanding balances (volume) of earning assets and interest bearing liabilities and the rates earned and paid by us on such assets and liabilities. Variances resulting from a combination of changes in rate and volume are allocated in
proportion to the absolute dollar amount of the change in each category.
C
HANGE
IN
I
NTEREST
I
NCOME
AND
E
XPENSE
ON
A
T
AX
E
QUIVALENT
B
ASIS
F
OR
THE
T
HREE
M
ONTHS
E
NDED
S
EPTEMBER
30, 2011
C
OMPARED
TO
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in Interest
Income and Expense Due to
Changes in:
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net of unearned income
|
|
$
|
(2,826
|
)
|
|
$
|
(66
|
)
|
|
$
|
(2,892
|
)
|
Debt securities taxable
|
|
|
65
|
|
|
|
(133
|
)
|
|
|
(68
|
)
|
Debt securities non-taxable
|
|
|
(46
|
)
|
|
|
16
|
|
|
|
(30
|
)
|
Other earning assets
|
|
|
1
|
|
|
|
111
|
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
|
(2,806
|
)
|
|
|
(72
|
)
|
|
|
(2,878
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand deposits
|
|
|
(4
|
)
|
|
|
(4
|
)
|
|
|
(8
|
)
|
Money market accounts
|
|
|
(53
|
)
|
|
|
(23
|
)
|
|
|
(76
|
)
|
Savings deposits
|
|
|
|
|
|
|
(4
|
)
|
|
|
(4
|
)
|
Time deposits of less than $100 thousand
|
|
|
(40
|
)
|
|
|
(399
|
)
|
|
|
(439
|
)
|
Time deposits of $100 thousand or more
|
|
|
(196
|
)
|
|
|
(168
|
)
|
|
|
(364
|
)
|
Brokered CDs and CDARS®
|
|
|
(516
|
)
|
|
|
8
|
|
|
|
(508
|
)
|
Repurchase agreements
|
|
|
(17
|
)
|
|
|
12
|
|
|
|
(5
|
)
|
Other borrowings
|
|
|
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
(826
|
)
|
|
|
(579
|
)
|
|
|
(1,405
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in net interest income
|
|
$
|
(1,980
|
)
|
|
$
|
507
|
|
|
$
|
(1,473
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
The following tables summarize net interest income and average yields and rates paid for the
year-to-date periods ended September 30, 2011 and 2010.
A
VERAGE
C
ONSOLIDATED
B
ALANCE
S
HEETS
AND
N
ET
I
NTEREST
A
NALYSIS
F
ULLY
T
AX
E
QUIVALENT
B
ASIS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
Average
Balance
|
|
|
Income/
Expense
|
|
|
Yield/
Rate
|
|
|
Average
Balance
|
|
|
Income/
Expense
|
|
|
Yield/
Rate
|
|
|
|
(in thousands, except percentages)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net of unearned income
(1) (2)
|
|
$
|
667,124
|
|
|
$
|
28,916
|
|
|
|
5.80
|
%
|
|
$
|
878,851
|
|
|
$
|
38,097
|
|
|
|
5.82
|
%
|
Debt securities taxable
|
|
|
120,134
|
|
|
|
2,637
|
|
|
|
2.93
|
%
|
|
|
110,036
|
|
|
|
3,048
|
|
|
|
3.70
|
%
|
Debt securities non-taxable
(2)
|
|
|
34,600
|
|
|
|
1,474
|
|
|
|
5.70
|
%
|
|
|
38,823
|
|
|
|
1,623
|
|
|
|
5.59
|
%
|
Other earning assets
|
|
|
206,451
|
|
|
|
371
|
|
|
|
0.24
|
%
|
|
|
219,126
|
|
|
|
371
|
|
|
|
0.23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
|
1,028,309
|
|
|
|
33,398
|
|
|
|
4.34
|
%
|
|
|
1,243,836
|
|
|
|
43,139
|
|
|
|
4.64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses
|
|
|
(24,344
|
)
|
|
|
|
|
|
|
|
|
|
|
(26,917
|
)
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
1,301
|
|
|
|
|
|
|
|
|
|
|
|
1,748
|
|
|
|
|
|
|
|
|
|
Cash & due from banks
|
|
|
9,963
|
|
|
|
|
|
|
|
|
|
|
|
8,157
|
|
|
|
|
|
|
|
|
|
Premises & equipment
|
|
|
30,437
|
|
|
|
|
|
|
|
|
|
|
|
32,553
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
72,295
|
|
|
|
|
|
|
|
|
|
|
|
79,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
1,117,961
|
|
|
|
|
|
|
|
|
|
|
$
|
1,339,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand deposits
|
|
$
|
61,854
|
|
|
|
120
|
|
|
|
0.26
|
%
|
|
$
|
65,751
|
|
|
|
142
|
|
|
|
0.29
|
%
|
Money market accounts
|
|
|
114,307
|
|
|
|
741
|
|
|
|
0.87
|
%
|
|
|
134,892
|
|
|
|
1,028
|
|
|
|
1.02
|
%
|
Savings deposits
|
|
|
38,885
|
|
|
|
70
|
|
|
|
0.24
|
%
|
|
|
38,536
|
|
|
|
77
|
|
|
|
0.27
|
%
|
Time deposits of less than $100 thousand
|
|
|
204,775
|
|
|
|
2,230
|
|
|
|
1.46
|
%
|
|
|
235,175
|
|
|
|
3,722
|
|
|
|
2.12
|
%
|
Time deposits of $100 thousand or more
|
|
|
144,847
|
|
|
|
1,868
|
|
|
|
1.72
|
%
|
|
|
192,980
|
|
|
|
3,261
|
|
|
|
2.26
|
%
|
Brokered CDs and CDARS®
|
|
|
282,089
|
|
|
|
5,970
|
|
|
|
2.83
|
%
|
|
|
341,003
|
|
|
|
7,112
|
|
|
|
2.79
|
%
|
Brokered money markets and NOWs
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
8,772
|
|
|
|
57
|
|
|
|
0.87
|
%
|
Repurchase agreements
|
|
|
15,446
|
|
|
|
330
|
|
|
|
2.86
|
%
|
|
|
18,790
|
|
|
|
358
|
|
|
|
2.55
|
%
|
Other borrowings
|
|
|
69
|
|
|
|
4
|
|
|
|
7.75
|
%
|
|
|
87
|
|
|
|
5
|
|
|
|
7.68
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
862,272
|
|
|
|
11,333
|
|
|
|
1.76
|
%
|
|
|
1,035,986
|
|
|
|
15,762
|
|
|
|
2.03
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
$
|
22,064
|
|
|
|
2.58
|
%
|
|
|
|
|
|
$
|
27,377
|
|
|
|
2.61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing demand deposits
|
|
|
157,329
|
|
|
|
|
|
|
|
|
|
|
|
154,312
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other liabilities
|
|
|
10,740
|
|
|
|
|
|
|
|
|
|
|
|
10,090
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
83,600
|
|
|
|
|
|
|
|
|
|
|
|
133,093
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
4,020
|
|
|
|
|
|
|
|
|
|
|
|
5,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$
|
1,117,961
|
|
|
|
|
|
|
|
|
|
|
$
|
1,339,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of noninterest bearing sources and other changes in balance sheet composition
|
|
|
|
|
|
|
|
|
|
|
0.29
|
%
|
|
|
|
|
|
|
|
|
|
|
0.33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
2.87
|
%
|
|
|
|
|
|
|
|
|
|
|
2.94
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Nonaccrual loans
have been included in the average balance. Only the interest collected on such loans has been included as income.
|
(2
)
|
Interest income from securities and loans includes the effects of taxable-equivalent adjustments using a federal income tax rate of approximately 34%
for both years reported and where applicable, state income taxes, to increase tax-exempt interest income to a taxable-equivalent basis. The net taxable equivalent adjustment amounts included in the above table were $544 thousand and $606 thousand
for the nine months ended September 30, 2011 and 2010, respectively.
|
36
The following table presents the relative impact on net interest income to changes in the
average outstanding balances (volume) of earning assets and interest bearing liabilities and the rates earned and paid by us on such assets and liabilities. Variances resulting from a combination of changes in rate and volume are allocated in
proportion to the absolute dollar amount of the change in each category.
C
HANGE
IN
I
NTEREST
I
NCOME
AND
E
XPENSE
ON
A
T
AX
E
QUIVALENT
B
ASIS
F
OR
THE
N
INE
M
ONTHS
E
NDED
S
EPTEMBER
30,
2011 C
OMPARED
TO
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in Interest
Income and Expense Due to
Changes in:
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net of unearned income
|
|
$
|
(9,158
|
)
|
|
$
|
(23
|
)
|
|
$
|
(9,181
|
)
|
Debt securities taxable
|
|
|
271
|
|
|
|
(682
|
)
|
|
|
(411
|
)
|
Debt securities non-taxable
|
|
|
(180
|
)
|
|
|
31
|
|
|
|
(149
|
)
|
Other earning assets
|
|
|
(22
|
)
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
|
(9,089
|
)
|
|
|
(652
|
)
|
|
|
(9,741
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand deposits
|
|
|
(9
|
)
|
|
|
(13
|
)
|
|
|
(22
|
)
|
Money market accounts
|
|
|
(159
|
)
|
|
|
(128
|
)
|
|
|
(287
|
)
|
Savings deposits
|
|
|
|
|
|
|
(7
|
)
|
|
|
(7
|
)
|
Time deposits of less than $100 thousand
|
|
|
(490
|
)
|
|
|
(1,002
|
)
|
|
|
(1,492
|
)
|
Time deposits of $100 thousand or more
|
|
|
(820
|
)
|
|
|
(573
|
)
|
|
|
(1,393
|
)
|
Brokered CDs and CDARS®
|
|
|
(1,245
|
)
|
|
|
103
|
|
|
|
(1,142
|
)
|
Brokered money markets and NOWs
|
|
|
(57
|
)
|
|
|
|
|
|
|
(57
|
)
|
Repurchase agreements
|
|
|
(65
|
)
|
|
|
37
|
|
|
|
(28
|
)
|
Other borrowings
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
(2,846
|
)
|
|
|
(1,583
|
)
|
|
|
(4,429
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in net interest income
|
|
$
|
(6,243
|
)
|
|
$
|
931
|
|
|
$
|
(5,312
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income Volume and Rate Changes
Interest income for the third quarter of 2011 was $10.3 million, a 21.7% decrease compared to the same period in 2010. Average earning
assets decreased $186.4 million, or 15.4%, in the third quarter of 2011 compared to the same period in 2010. Average loans declined in the third quarter of 2011 by $195.4 million, offset by a $4.7 million increase in investment securities and a $4.4
million increase in other earning assets. The change in mix and volume of earning assets reduced interest income by $2.8 million, comparing the third quarter of 2011 to the same period in 2010. For other earning assets, we maintained an elevated
balance at the Federal Reserve Bank of Atlanta, which averaged over approximately $238 million for the third quarter of 2011. The yield on this account is approximately 25 basis points. The purpose of maintaining an elevated balance in liquid assets
is to reduce liquidity risk, which we describe more fully below in the Liquidity section, resulting from deteriorating asset quality and the Consent Order. We anticipate average loans to stabilize over the next six to twelve months. We anticipate
average earning assets to decline as brokered deposits mature and/or are called, and are funded with existing cash reserves.
Interest income for the nine months ended September 30, 2011 was $32.9 million, a 22.8% decrease compared to the same period in
2010. On a year-to-date basis, average earning assets declined $184.8 million, with average loans declining $178.8 million. The reduction in average loans reduced interest income by $9.2 million.
The tax equivalent yield on earning assets decreased by 32 basis points for the three month period and 30 basis points for the nine month
period ended September 30, 2011, compared to the same periods in 2010. Comparing the third quarter of 2011 to 2010, the yield on loans declined by 4 basis points to 5.70%. We anticipate the yield on loans to remain consistent or improve over
the balance of 2011 as we have instituted higher loan pricing floors on new and renewing loans. During the first quarter of 2010, we conducted a bond swap by selling approximately $14.8 million of investment securities with an average tax-equivalent
yield of 5.20% and replacing with $14.6 million of bonds with an average tax-equivalent yield of 3.17%. The transactions eliminated the credit risk associated with our private-label CMO securities, as well as certain municipal securities. We
anticipate the yield on investment securities for the fourth quarter of 2011 will be consistent with the yield for third quarter 2011 and lower than the comparable 2010 periods. We are maintaining an asset-sensitive balance sheet and will benefit
from an eventual increase in the federal funds rate. As of September 30, 2011, approximately 38% of our loan portfolio is either variable or adjustable rate. The variable rate loans reprice simultaneously with
37
changes in the associated index, such as the Prime, LIBOR or Treasury bond rates, while the repricing of adjustable rate loans are based on a time component in addition to changes in the
associated index. Accordingly, changes in the target federal funds rate have an immediate impact on the yield of our earning assets.
Total interest expense was $3.7 million in the third quarter of 2011, or 27.7% lower than the same period in 2010. On a year-to-date basis, total interest expense was $11.3 million, or 28.1% lower than
the same period in 2010. Average interest bearing liabilities decreased by $147.2 million and $173.7 million for the three and nine month periods of 2011, respectively, compared to the same periods in 2010. Comparing the third quarter of 2011 to the
same period in 2010, average brokered deposits declined by $72.7 million while retail and jumbo certificates of deposits declined by $8.0 million and $36.0 million, respectively. For the year-to-date period, average brokered deposits decreased by
$67.7 million while average retail and jumbo certificates of deposits declined by $30.4 million and $48.1 million, respectively. The reductions in volume reduced interest expense by $0.8 million and $2.8 million for the three and nine month period
ended September 30, 2011. Further reducing interest expense was the decline in rates paid on deposits, primarily in retail and jumbo certificates of deposits. The decrease in rates is due primarily to term deposits maturing and repricing at
lower current market rates.
We expect average loans to stabilize over the next six to twelve months as the regional economy
begins to enter into some measure of recovery. Beginning in September, we introduced a loan campaign that is expected to maintain or grow loans. Investment securities will continue to grow as earnings are reinvested into new securities and excess
cash is invested. We expect other earning assets to continue to decline during the remainder of 2011 as brokered deposits mature without being replaced. Beginning in June and continuing into the fourth quarter of 2011, we launched a deposit special
campaign. To date, the campaign has been successful in maintaining our customer deposits. For the remainder of 2011, we expect average interest bearing liabilities to be comparable or higher to the third quarter 2011 results. Rates paid on deposits
for the remainder of the year are expected to be consistent with third quarter results.
Net Interest Income Net
Interest Spread and Net Interest Margin
The banking industry uses two key ratios to measure profitability of net
interest income: net interest rate spread and net interest margin. The net interest rate spread measures the difference between the average yield on earning assets and the average rate paid on interest bearing liabilities. The net interest rate
spread does not consider the impact of noninterest bearing deposits and gives a direct perspective on the effect of market interest rate movements. The net interest margin is defined as net interest income as a percentage of total average earning
assets and takes into account the positive effects of investing noninterest bearing deposits in earning assets.
Our net
interest rate spread (on a tax equivalent basis) was 2.37% and 2.58% for the three and nine months ended September 30, 2011, respectively, compared to 2.38% and 2.61% for the same periods in 2010, respectively. Our net interest margin (on a tax
equivalent basis) was 2.65% and 2.87% for the three and nine months ended September 30, 2011, respectively, compared to 2.72% and 2.94% for the same periods in 2010, respectively. Our net interest spread and margin results were consistent
comparing 2011 to 2010. During December of 2009 and the first quarter of 2010, we issued over $180.0 million in brokered deposits to improve our contingent funding capacity. A portion of these funds was utilized to pay off our variable-rate brokered
money market account during the first quarter of 2010. The remaining funds were placed in our interest bearing account at the Federal Reserve Bank of Atlanta. As of September 30, 2011, our balance at the Federal Reserve Bank was approximately
$265.7 million. The negative spread associated between the interest bearing cash and the brokered deposits will continue to negatively impact our net interest spread and margin.
Average interest bearing liabilities as a percentage of average earning assets was consistent for all periods. Noninterest bearing
funding sources were also consistent, contributing between 28 and 34 basis points to each period shown.
In prior years, we
terminated two sets of interest rate swaps. The combined gains at termination were $7.8 million, which are being accreted into interest income over the remaining life of the originally hedged items. For the three and nine months ended
September 30, 2011, the accretion of the swaps added approximately $442 thousand and $1.4 million, respectively, to interest income compared to $490 thousand and $1.5 million for the same periods in 2010.
We anticipate our net interest margin will remain consistent or improve during the remainder of 2011. However, improvement is dependent
on multiple factors including our ability to raise core deposits, anticipated maturities of brokered deposits, our growth or contraction in loans, our deposit and loan pricing, maturities of brokered deposits, and any possible further action by the
Federal Reserve Board.
Provision for Loan and Lease Losses
The provision for loan and lease losses charged to operations during the three and nine month periods ended September 30, 2011 were
$3.9 million and $7.4 million, respectively, compared to $18.4 million and $26.4 million, respectively, for the same periods in 2010. Net charge-offs for the three and nine months ended September 30, 2011 were $7.6 million and $12.6 million,
respectively, compared to net charge-offs of $19.9 million and $27.6 million, respectively, for the same periods in 2010. Annualized net charge-offs as a percentage of average loans were 2.53% for the nine months ended September 30, 2011
compared to 4.53% for the same period in 2010. Our peer groups average annualized net charge-offs (as reported in the September 30, 2011 Uniform Bank Performance Report) were 0.89%.
38
The decrease in our provision for loan and lease losses for both the three and nine month
periods of 2011 compared to the same periods in 2010 resulted from our analysis of inherent risks in the loan portfolio in relation to the reduction of our portfolio, the level of past due, charged-off, classified and nonperforming loans, as well as
general economic conditions.
For the nine month period ended September 30, 2011, our provision expense decreased by
$19.0 million compared to the same period in 2010. The year-over-year decrease is primarily due to a $14.9 million reduction in net charge-offs for 2011 as well as the year-over-year decline in the loan portfolio.
As of September 30, 2011, management determined our allowance of $18.8 million was adequate to provide for credit losses, which we
describe more fully below in the Allowance for Loan and Lease Losses section. We analyze the allowance on at least a quarterly basis, and the next review will be at December 31, 2011, or sooner if needed, and the provision expense will be
adjusted accordingly, if necessary.
We will continue to provide provision expense to maintain an allowance level adequate to
absorb known and estimated losses inherent in our loan portfolio. As the determination of provision expense is a function of the adequacy of the allowance for loan and lease losses, we cannot reasonably estimate the provision expense for the
remainder of 2011. Furthermore, the provision expense could materially increase or decrease in 2011 depending on a number of factors, including, among others, the level of net charge-offs, the amount of classified loans and the value of collateral
associated with impaired loans.
Noninterest Income
Noninterest income totaled $2.1 million for the third quarter of this year, a decrease of $300 thousand, or 12.5%, from the same period in
2010. On a year-to-date basis, noninterest income totaled $6.4 million, a decrease of $842 thousand, or 11.6%, from the 2010 level. The quarterly and year-to-date declines are primarily a result of lower deposit fees and lower mortgage loan fees.
The following table presents the components of noninterest income for the periods ended September 30, 2011 and 2010.
N
ONINTEREST
I
NCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2011
|
|
|
Percent
Change
|
|
|
2010
|
|
|
2011
|
|
|
Percent
Change
|
|
|
2010
|
|
|
|
(in thousands, except percentages)
|
|
|
|
|
|
|
|
|
Non-sufficient funds (NSF) fees
|
|
$
|
595
|
|
|
|
-17.2
|
%
|
|
$
|
719
|
|
|
$
|
1,756
|
|
|
|
-22.9
|
%
|
|
$
|
2,227
|
|
Service charges on deposit accounts
|
|
|
196
|
|
|
|
-15.5
|
%
|
|
|
232
|
|
|
|
595
|
|
|
|
-17.6
|
%
|
|
|
722
|
|
Point-of-sale (POS) fees
|
|
|
343
|
|
|
|
6.5
|
%
|
|
|
322
|
|
|
|
1,007
|
|
|
|
6.2
|
%
|
|
|
948
|
|
Bank-owned life insurance income
|
|
|
247
|
|
|
|
-1.6
|
%
|
|
|
251
|
|
|
|
765
|
|
|
|
1.5
|
%
|
|
|
754
|
|
Mortgage loan and related fees
|
|
|
169
|
|
|
|
-47.0
|
%
|
|
|
319
|
|
|
|
470
|
|
|
|
-33.2
|
%
|
|
|
704
|
|
Trust fees
|
|
|
181
|
|
|
|
-4.7
|
%
|
|
|
190
|
|
|
|
596
|
|
|
|
5.1
|
%
|
|
|
567
|
|
Net gain on sale of available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-100.0
|
%
|
|
|
57
|
|
Other income
|
|
|
373
|
|
|
|
0.5
|
%
|
|
|
371
|
|
|
|
1,235
|
|
|
|
-0.2
|
%
|
|
|
1,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income
|
|
$
|
2,104
|
|
|
|
-12.5
|
%
|
|
$
|
2,404
|
|
|
$
|
6,424
|
|
|
|
-11.6
|
%
|
|
$
|
7,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our largest sources of noninterest income are service charges and fees on deposit accounts. Total service
charges, including non-sufficient funds (NSF) fees, were $791 thousand for the third quarter of 2011, a decrease of $160 thousand, or 16.8%, from the same period in 2010. While service charges and fees on deposit accounts typically correspond to the
level and mix of our customer deposits, the recently-enacted Dodd-Frank financial reform bill may directly or indirectly impact the fee structure of our deposit products; therefore, we cannot reasonably estimate deposit fees for future periods.
Point-of-sale fees (POS fees) increased 6.5% and 6.2% to $343 thousand and $1,007 thousand for the three and nine months
ended September 30, 2011, respectively, compared to the same periods in 2010. POS fees are primarily generated when our customers use their debit cards for retail purchases. We anticipate POS fees to continue to grow as customer trends show
increased use of debit cards, although it is unclear if certain provisions affecting interchange fees for card issuers included in the recently-enacted Dodd-Frank financial reform bill will have a future material impact on this product and its
revenue.
Bank-owned life insurance income was $247 thousand and $765 thousand for the three and nine months ended
September 30, 2011, respectively, remaining consistent with 2010 levels. The Company is the owner and beneficiary of these contracts. The income generated by the cash value of the insurance policies accumulates on a tax-deferred basis and is
tax-free to maturity. In addition, the insurance death benefit will be a tax-free payment to the Company. This tax-advantaged asset enables us to provide benefits to our employees. On a fully tax-equivalent basis, the weighted average interest rate
earned on the policies was approximately 6% through September 30, 2011.
39
Mortgage loan and related fees for the third quarter of 2011 decreased $150 thousand, or
47.0%, to $169 thousand compared to $319 thousand in the third quarter of 2010. For the nine months ended September 30, 2011, mortgage income decreased $234 thousand, or 33.2%, compared to the same period in 2010. As discussed in the notes to
our consolidated financial statements, we elect the fair value option for all held for sale loan originations. This election impacts the timing and recognition of origination fees and costs, as well as the value of servicing rights. The recognition
of the income and fees is concurrent with the origination of the loan.
Our process to originate and sell a conforming
mortgage in the secondary market typically takes 30 to 60 days from the date of mortgage origination to the date the mortgage is sold to an investor in the secondary market. Due to the normal processing time, we will have a certain amount of held
for sale loans at any time. Mortgages originated in the secondary market totaled $8.4 million and $19.3 million for the three and nine months ended September 30, 2011, respectively. Mortgages sold in the secondary market for the three and nine
months ended September 30, 2011 totaled $7.3 million and $19.6 million, respectively. Mortgages originated for sale in the secondary markets totaled $15.6 million and $33.4 million for the three and nine months ended September 30, 2010,
respectively. Mortgages sold in the secondary market totaled $14.9 million and $31.2 million for the three and nine months of 2010, respectively. We sold these loans with the right to service the loan being released to the purchaser for a fee.
Mortgage income for the remainder of the year is dependent on mortgage rates as well as our ability to generate higher levels of held for sale loans.
Trust fees decreased $9 thousand and increased $29 thousand for the three and nine months ended September 30, 2011 compared to 2010. As of September 30, 2011, our trust and wealth management
department had 440 accounts with assets held under management of $153.4 million compared to 471 accounts with assets held under management of $204.9 million as of September 30, 2010. As a significant portion of our trust fees is associated with
the level of assets under management, income for future periods is dependent on our ability to retain and expand our client base as well as the performance of the stock market.
During the first quarter of 2010, we conducted a bond swap that resulted in a $57 thousand gain on sale of available-for-sale securities.
This transaction is discussed above in the
Net Interest Income Volume and Rate Change
section of MD&A.
Other income for the third quarter of 2011 was $373 thousand compared to $371 thousand for the same period in 2010. For the nine months
ended September 30, 2011, other income decreased $151 thousand to $1.2 million compared to $1.2 million for the same period in 2010. The components of other income primarily consist of ATM fee income, gains on sales of other real estate owned
(OREO) and repossessions, underwriting revenue, and safe deposit box fee income.
Noninterest Expense
Noninterest expense for the third quarter of 2011 decreased $1.1 million, or 8.6%, to $11.4 million compared to $12.5 million for the same
period in 2010. On a year-to-date basis, noninterest expense increased $892 thousand, or 2.6%, to $35.1 million compared to $34.2 million for the same period in 2010. The decreases in the third quarter are primarily due to lower write-downs
associated with other real estate owned and lower salaries and benefits, offset in part by higher losses and holding costs associated with other real estate owned and repossessions. The increases for the first nine months are primarily due to higher
nonperforming asset costs, including write-downs, losses and holding costs associated with other real estate owned and repossessions and increased professional fees, partially offset by lower salaries and benefits costs as well as expenses from
furniture and equipment.
As discussed in the
Strategic Initiatives for 2011
section of MD&A above, we completed a
review of our branch network during the second quarter of 2011. The results identified six branch locations that have been announced for consolidation into surrounding branch locations during the fourth quarter of 2011. The cost savings are
estimated to be $1 million per year. Accordingly, we would anticipate savings in applicable noninterest expense categories after the consolidation.
40
The following table represents the components of noninterest expense for the three and nine
month periods ended September 30, 2011 and 2010.
N
ONINTEREST
E
XPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2011
|
|
|
Percent
Change
|
|
|
2010
|
|
|
2011
|
|
|
Percent
Change
|
|
|
2010
|
|
|
|
(in thousands, except
percentages)
|
|
|
|
|
|
|
|
|
|
|
Salaries & benefits
|
|
$
|
4,265
|
|
|
|
-10.9
|
%
|
|
$
|
4,787
|
|
|
$
|
12,792
|
|
|
|
-11.4
|
%
|
|
$
|
14,438
|
|
Occupancy
|
|
|
826
|
|
|
|
-9.0
|
%
|
|
|
908
|
|
|
|
2,521
|
|
|
|
-4.3
|
%
|
|
|
2,633
|
|
Furniture and equipment
|
|
|
440
|
|
|
|
-15.7
|
%
|
|
|
522
|
|
|
|
1,292
|
|
|
|
-16.9
|
%
|
|
|
1,554
|
|
Professional fees
|
|
|
565
|
|
|
|
-39.6
|
%
|
|
|
936
|
|
|
|
2,678
|
|
|
|
14.2
|
%
|
|
|
2,344
|
|
FDIC insurance
|
|
|
1,017
|
|
|
|
-2.6
|
%
|
|
|
1,044
|
|
|
|
3,089
|
|
|
|
19.7
|
%
|
|
|
2,581
|
|
Write-downs on other real estate owned and repossessions
|
|
|
1,538
|
|
|
|
-2.3
|
%
|
|
|
1,575
|
|
|
|
4,139
|
|
|
|
52.4
|
%
|
|
|
2,715
|
|
Losses on other real estate owned, repossessions and fixed assets
|
|
|
407
|
|
|
|
362.5
|
%
|
|
|
88
|
|
|
|
1,047
|
|
|
|
37.2
|
%
|
|
|
763
|
|
OREO and repossession holding costs
|
|
|
585
|
|
|
|
64.3
|
%
|
|
|
356
|
|
|
|
1,449
|
|
|
|
14.2
|
%
|
|
|
1,269
|
|
Data processing
|
|
|
327
|
|
|
|
-7.6
|
%
|
|
|
354
|
|
|
|
1,285
|
|
|
|
18.0
|
%
|
|
|
1,089
|
|
Communications
|
|
|
137
|
|
|
|
-25.5
|
%
|
|
|
184
|
|
|
|
420
|
|
|
|
-11.8
|
%
|
|
|
476
|
|
ATM/Debit Card fees
|
|
|
185
|
|
|
|
44.5
|
%
|
|
|
128
|
|
|
|
459
|
|
|
|
17.4
|
%
|
|
|
391
|
|
Intangible asset amortization
|
|
|
118
|
|
|
|
1.7
|
%
|
|
|
116
|
|
|
|
353
|
|
|
|
1.1
|
%
|
|
|
349
|
|
Printing & supplies
|
|
|
56
|
|
|
|
-38.5
|
%
|
|
|
91
|
|
|
|
214
|
|
|
|
-19.9
|
%
|
|
|
267
|
|
Advertising
|
|
|
43
|
|
|
|
22.9
|
%
|
|
|
35
|
|
|
|
193
|
|
|
|
59.5
|
%
|
|
|
121
|
|
Other expense
|
|
|
924
|
|
|
|
-33.4
|
%
|
|
|
1,389
|
|
|
|
3,125
|
|
|
|
-1.5
|
%
|
|
|
3,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
$
|
11,433
|
|
|
|
-8.6
|
%
|
|
$
|
12,512
|
|
|
$
|
35,056
|
|
|
|
2.6
|
%
|
|
$
|
34,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits for the third quarter of 2011 decreased $522 thousand, or 10.9%, compared to the
same period in 2010 and $1.6 million, or 11.4%, on a year-to-date basis. The decrease in salaries and benefits is primarily related to our reductions in staffing. As of September 30, 2011, we had 318 full time equivalent employees compared to
325 as of September 30, 2010. We currently operate 31 full-service banking offices.
Occupancy expense for the third
quarter of 2011 decreased $82 thousand, or 9.0%, compared to the same period in 2010 and decreased $112 thousand, or 4.3%, for the year-to-date period of 2011 compared to the same period in 2010. As of September 30, 2011, First Security leased
six facilities and the land for five branches. As a result, current period occupancy expense is higher than if we owned these facilities, including the real estate, but due to market conditions, property availability and favorable lease terms, we
leased these locations to execute our growth strategy. Furthermore, we have been able to deploy the capital into earning assets rather than capital expenditures for facilities.
Furniture and equipment expense decreased on a quarterly and year-to-date basis $82 thousand, or 15.7%, and $262 thousand, or 16.9%,
respectively, primarily due to lower equipment depreciation expense.
Professional fees decreased $371 thousand for the third
quarter of 2011 compared to the same period in 2010 and increased $334 thousand on a year-to-date basis. The decrease in the third quarter is primarily due to lower incremental legal costs associated with new nonperforming assets for the quarter
while the increase year-to-date is primarily due to additional legal costs associated with higher levels of nonperforming assets for the year as well as elevated corporate legal expenses. Professional fees include fees related to investor relations,
outsourcing compliance and a portion of internal audit to Professional Bank Services, as well as external audit, tax services and legal and accounting advice related to, among other things, foreclosures, lending activities, employee benefit
programs, prospective capital offerings and regulatory matters.
FDIC deposit premium insurance decreased $26 thousand to $1.0
million and increased $509 thousand to $3.1 million for the three and nine months ended September 30, 2011, respectively, compared to the same periods in 2010. The year-to-date increase is an indirect result of the items discussed in the
Consent Order, including the deterioration of our asset quality and its impact on our financial results. FDIC insurance premiums are likely to remain elevated for so long as the Consent Order remains in place.
Write-downs on OREO and repossessions declined $37 thousand for the quarter and increased $1.4 million for the three and nine month
periods ended September 30, 2011 compared to the same periods in 2010. At foreclosure or repossession, the fair value of the property is determined and a charge-off to the allowance is recorded, if applicable. Any decreases in value subsequent
to the initial determination of fair value are recorded as a write-down. As a general policy, we re-assess the fair value of OREO and repossessions
41
on at least an annual basis or sooner if there are indicators that deterioration in value has occurred. Write-downs are based on property-specific appraisals or valuations. Write-downs for the
remainder of 2011 are dependent on real estate market conditions and our ability to liquidate properties.
Losses on OREO,
repossessions and fixed assets increased $319 thousand to $407 thousand, or 362.5%, and increased $284 thousand to $1.0 million, or 37.2%, for the three and nine month periods ended September 30, 2011, compared to the same periods in 2010. The
increased losses are primarily a result of higher levels of OREO properties and repossessions. As we seek to liquidate existing properties and repossessions in a timely manner, we may continue to experience losses, depending on real estate market
conditions and our ability to liquidate properties.
OREO and repossession holding costs include, among other items,
maintenance, repairs, utilities, taxes and storage costs. Holding costs increased $229 thousand, or 64.3%, and $180 thousand, or 14.2%, for the three and nine months ended September 30, 2011 compared to the same periods in 2010. We anticipate
the level of holding costs to remain elevated for 2011.
Data processing fees declined 7.6% for the third quarter of 2011
compared to the same period in 2010 and increased 18.0% on a year-to-date basis. The monthly fees associated with data processing are typically based on transaction volume.
We anticipate communications and printing and supplies expenses to remain stable or decline for the remainder of 2011 as we continue to reduce discretionary expenses.
Advertising expenses increased as a result of the deposit special campaign and other advertising incurred to stimulate bank business.
Intangible asset amortization expense remained consistent for the third quarter of 2011 compared to the same period in 2010
and also on a year-to-date basis. Our core deposit intangible assets amortize on an accelerated basis in which the expense recognized declines over the estimated useful life of ten years. We anticipate slight decreases in amortization expense
throughout the remainder of 2011.
ATM and debit card fees increased 44.5% for the third quarter of 2011 compared to the same
period in 2010 and 17.4% on a year-to-date basis. The monthly fees associated with ATM and debit card processing are typically based on transaction volume.
Other expense decreased $399 thousand for the quarter and $29 thousand for the nine months ended September 30, 2011, respectively, compared to the same periods in 2010. The decreases are primarily
due to elevated levels of shareholder expense in 2010 associated with an aborted secondary offering.
Income Taxes
We recorded an income tax benefit of $54 thousand and income tax expense of $32 thousand for the three and nine months
ended September 30, 2011 compared to income tax expense of $9.4 million and $6.5 million for the same periods in 2010. During 2010, we established a deferred tax asset valuation allowance. For the nine months ended September 30, 2011, we
recorded $6.4 million in additional deferred tax valuation allowance to offset the tax benefits generated during the first three quarters of 2011. For the nine months ended September 30, 2011, our tax-exempt income from municipal securities and
loans as well as bank-owned life insurance was approximately $1.8 million. We also recorded low-income housing tax credits of $292 thousand.
At September 30, 2011, we evaluated our significant uncertain tax positions. Under the more-likely-than-not threshold guidelines, we believe we have identified all significant uncertain
tax benefits. We evaluate, on a quarterly basis or sooner if necessary, to determine if new or pre-existing uncertain tax positions are significant. In the event a significant uncertain tax position is determined to exist, penalty and interest will
be recorded as a component of income tax expense in our consolidated financial statements. During the fourth quarter of 2009, we accrued $1.1 million for an uncertain tax position and approximately $155 thousand in associated interest and penalties.
During 2010, certain tax refunds were withheld and applied to the disputed uncertain tax position. As of September 30, 2011, our total accrual for uncertain tax positions is approximately $1.0 million.
The remaining deferred tax asset is anticipated to be realized through available carryback tax periods. A valuation allowance is required
when it is more likely than not that the deferred tax assets will not be realized. The evaluation requires significant judgment and extensive analysis of all available positive and negative evidence, the forecasts of future income,
applicable tax planning strategies and assessments of the current and future economic and business conditions. We identified as positive evidence the existence of taxes paid in available carryback years. Negative evidence included a cumulative loss
in recent years as well as current business trends. As conditions change, we will evaluate the need to increase or decrease the valuation allowance. Currently, we anticipate increasing the valuation allowance to offset any future recorded tax
benefit to result in minimal, if any, income tax expense or benefit.
42
STATEMENT OF FINANCIAL CONDITION
Our total assets were $1.1 billion at September 30, 2011, $1.2 billion at December 31, 2010 and $1.2 billion at
September 30, 2010. The decline from September 30, 2010 to September 30, 2011 is primarily due to the reductions in our loan portfolio. For the remainder of 2011, we anticipate funding prudent investment opportunities through our
existing cash reserves or with growth in core deposits.
Loans
The effects of the economic recession, as well as our active efforts to reduce certain credit exposures and their related balance sheet
risk, resulted in declining loan balances during 2010 and for the first nine months in 2011. As of September 30, 2011, total loans declined by $122.7 million, or 16.9% (22.5% annualized), from December 31, 2010 and by $172.0 million, or
22.1%, from September 30, 2010. As discussed in the
Strategic Initiatives for 2011
section of MD&A above, we have appointed Mr. Joseph Dell as EVP and Chief Lending Officer. We are currently developing several lending
initiatives that we believe will stabilize our loan portfolio over the next six to twelve months and position us for long-term growth.
The following table presents our loan portfolio by type.
L
OAN
P
ORTFOLIO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent change from
|
|
|
|
September 30,
2011
|
|
|
December 31,
2010
|
|
|
September 30,
2010
|
|
|
December 31,
2010
|
|
|
September 30,
2010
|
|
|
|
(in thousands, except percentages)
|
|
Loans secured by real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
$
|
221,886
|
|
|
$
|
252,026
|
|
|
$
|
258,579
|
|
|
|
-12.0
|
%
|
|
|
-14.2
|
%
|
Commercial
|
|
|
200,228
|
|
|
|
226,357
|
|
|
|
236,991
|
|
|
|
-11.5
|
%
|
|
|
-15.5
|
%
|
Construction
|
|
|
54,793
|
|
|
|
84,232
|
|
|
|
101,870
|
|
|
|
-34.9
|
%
|
|
|
-46.2
|
%
|
Multi-family and farmland
|
|
|
32,914
|
|
|
|
36,393
|
|
|
|
37,816
|
|
|
|
-9.6
|
%
|
|
|
-13.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
509,821
|
|
|
|
599,008
|
|
|
|
635,256
|
|
|
|
-14.9
|
%
|
|
|
-19.7
|
%
|
Commercial loans
|
|
|
64,864
|
|
|
|
82,807
|
|
|
|
91,637
|
|
|
|
-21.7
|
%
|
|
|
-29.2
|
%
|
Consumer installment loans
|
|
|
22,632
|
|
|
|
33,860
|
|
|
|
37,884
|
|
|
|
-33.2
|
%
|
|
|
-40.3
|
%
|
Leases, net of unearned income
|
|
|
3,425
|
|
|
|
7,916
|
|
|
|
10,139
|
|
|
|
-56.7
|
%
|
|
|
-66.2
|
%
|
Other
|
|
|
3,682
|
|
|
|
3,500
|
|
|
|
2,502
|
|
|
|
5.2
|
%
|
|
|
-47.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
604,424
|
|
|
|
727,091
|
|
|
|
777,418
|
|
|
|
-16.9
|
%
|
|
|
-22.3
|
%
|
Allowance for loan and lease losses
|
|
|
(18,750
|
)
|
|
|
(24,000
|
)
|
|
|
(25,320
|
)
|
|
|
-21.9
|
%
|
|
|
-25.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
$
|
585,674
|
|
|
$
|
703,091
|
|
|
$
|
752,098
|
|
|
|
-16.7
|
%
|
|
|
-22.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-to-date, the largest declining loan balances were 1-4 family residential real estate loans of $30.1
million, or 12.0%, commercial real estate (CRE) loans of $26.1 million, or 11.5%, and construction and land development (C&D) loans of $29.4 million, or 34.9%. Comparing September 30, 2011 to September 30, 2010, the largest declining
loan balances were C&D loans of $47.1 million, or 46.2%, commercial real estate (CRE) loans of $36.8 million, or 15.5%, and residential 1-4 family loans of $36.7 million, or 14.2%.
As we develop and implement lending initiatives, we will focus on extending prudent loans to creditworthy consumers and businesses.
However, due to the economic environment, we anticipate our loans may remain stable or possibly decline in the near term. Funding of future loans may be restricted by our ability to raise core deposits, although we may use current cash reserves, as
necessary and appropriate. Loan growth may also be restricted by the necessity for us to maintain appropriate capital levels, as well as adequate liquidity.
Allowance for Loan and Lease Losses
The allowance for loan and lease
losses reflects our assessment and estimate of the risks associated with extending credit and our evaluation of the quality of the loan portfolio. We regularly analyze our loan portfolio in an effort to establish an allowance that we believe will be
adequate in light of anticipated risks and loan losses. In assessing the adequacy of the allowance, we review the size, quality and risk of loans in the portfolio. We also consider such factors as:
|
|
|
our loan loss experience;
|
|
|
|
the status and amount of past due and nonperforming assets;
|
43
|
|
|
underlying estimated values of collateral secured loans;
|
|
|
|
current and anticipated economic conditions; and
|
|
|
|
other factors which we believe affect the allowance for potential credit losses.
|
The allowance is composed of two primary components: (1) specific impairments for substandard/nonaccrual loans and leases and
(2) general allocations for classified loan pools, including special mention and substandard/accrual loans, as well as general allocations for the remaining pools of loans. We accumulate pools based on the underlying classification of the
collateral. Each pool is assigned a loss severity rate based on historical loss experience and various qualitative and environmental factors, including, but not limited to, credit quality and economic conditions.
The following loan portfolio segments have been identified: (1) Real estate: Residential 1-4 family, (2) Real estate:
Commercial, (3) Real estate: Construction, (4) Real estate: Multi-family and farmland, (5) Commercial, (6) Consumer, (7) Leases and (8) Other. We evaluate the risks associated with these segments based upon specific
characteristics associated with the loan segments. The risk associated with the Real estate: Construction portfolio is most directly tied to the probability of declines in value of the residential and commercial real estate in our market area and
secondarily to the financial capacity of the borrower. The risk associated with the Real estate: Commercial portfolio is most directly tied to the lease rates and occupancy rates for commercial real estate in our market area and secondarily to the
financial capacity of the borrower. The other portfolio segments have various risk characteristics, including, but not limited to: the borrowers cash flow, the value of the underlying collateral, and the capacity of guarantors.
An analysis of the credit quality of the loan portfolio and the adequacy of the allowance for loan and lease losses is prepared jointly
by our accounting and credit administration departments and presented to our Board of Directors or the Directors Loan Committee on at least a quarterly basis. Based on our analysis, we may determine that our future provision expense needs to
increase or decrease in order for us to remain adequately reserved for probable loan losses. As stated earlier, we make this determination after considering both quantitative and qualitative factors under appropriate regulatory and accounting
guidelines.
Our allowance for loan and lease losses is also subject to regulatory examinations and determinations as to
adequacy, which may take into account such factors as the methodology used to calculate the allowance and the size of the allowance compared to a group of peer banks. During their routine examinations of banks, the regulators may require a bank to
make additional provisions to its allowance for loan losses when, in the opinion of the regulators, their credit evaluations and allowance methodology differ materially from the banks methodology. We believe our allowance methodology is in
compliance with regulatory interagency guidance as well as applicable GAAP guidance.
While it is our policy to charge-off all
or a portion of certain loans in the current period when a loss is considered probable, there are additional risks of future losses that cannot be quantified precisely or attributed to particular loans or classes of loans. Because the assessment of
these risks includes assumptions regarding local and national economic conditions, our judgment as to the adequacy of the allowance may change from our original estimates as more information becomes available and events change.
44
The following table presents an analysis of the changes in the allowance for loan and lease
losses for the nine months ended September 30, 2011 and 2010. The provision for loan and lease losses in the table below does not include our provision accrual for unfunded commitments of $18 thousand and $18 thousand for the nine month periods
ended September 30, 2011 and 2010, respectively. The reserve for unfunded commitments totaled $247 thousand and $223 thousand as of September 30, 2011 and 2010, respectively, and is included in other liabilities in the accompanying
consolidated balance sheets.
A
NALYSIS
OF
C
HANGES
IN
A
LLOWANCE
FOR
L
OAN
AND
L
EASE
L
OSSES
|
|
|
|
|
|
|
|
|
|
|
For the nine
months
ended
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(in thousands, except
percentages)
|
|
Allowance for loan and lease losses
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
$
|
24,000
|
|
|
$
|
26,492
|
|
Provision for loan and lease losses
|
|
|
7,391
|
|
|
|
26,406
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
31,391
|
|
|
|
52,898
|
|
|
|
|
|
|
|
|
|
|
Charged-off loans:
|
|
|
|
|
|
|
|
|
Real estate residential 1-4 family
|
|
|
1,451
|
|
|
|
1,736
|
|
Real estate commercial
|
|
|
5,780
|
|
|
|
1,972
|
|
Real estate construction
|
|
|
5,062
|
|
|
|
5,574
|
|
Real estate multi-family and farmland
|
|
|
82
|
|
|
|
924
|
|
Commercial loans
|
|
|
2,336
|
|
|
|
15,421
|
|
Consumer installment and Other loans
|
|
|
275
|
|
|
|
862
|
|
Leases, net of unearned income
|
|
|
929
|
|
|
|
1,641
|
|
|
|
|
|
|
|
|
|
|
Total charged-off
|
|
|
15,915
|
|
|
|
28,130
|
|
|
|
|
|
|
|
|
|
|
Recoveries of charged-off loans:
|
|
|
|
|
|
|
|
|
Real estate residential 1-4 family
|
|
|
358
|
|
|
|
37
|
|
Real estate commercial
|
|
|
215
|
|
|
|
153
|
|
Real estate construction
|
|
|
565
|
|
|
|
5
|
|
Real estate multi-family and farmland
|
|
|
383
|
|
|
|
|
|
Commercial loans
|
|
|
526
|
|
|
|
242
|
|
Consumer installment and Other loans
|
|
|
757
|
|
|
|
115
|
|
Leases, net of unearned income
|
|
|
470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
3,274
|
|
|
|
552
|
|
|
|
|
|
|
|
|
|
|
Net charged-off loans
|
|
|
12,641
|
|
|
|
27,578
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses end of period
|
|
$
|
18,750
|
|
|
$
|
25,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans end of period
|
|
$
|
604,424
|
|
|
$
|
777,418
|
|
Average loans
|
|
$
|
667,124
|
|
|
$
|
875,851
|
|
Net loans charged-off to average loans, annualized
|
|
|
2.53
|
%
|
|
|
4.20
|
%
|
Provision for loan and lease losses to average loans, annualized
|
|
|
1.48
|
%
|
|
|
4.02
|
%
|
Allowance for loan and lease losses as a percentage of:
|
|
|
|
|
|
|
|
|
Period end loans
|
|
|
3.10
|
%
|
|
|
3.26
|
%
|
Nonperforming loans
|
|
|
37.26
|
%
|
|
|
31.97
|
%
|
45
The following table presents the allocation of the allowance for loan and lease losses for
each respective loan category with the corresponding percentage of loans in each category to total loans. The comprehensive allowance analysis developed by our financial reporting and credit administration group enables us to allocate the allowance
based on risk elements within the portfolio.
A
LLOCATION
OF
THE
A
LLOWANCE
FOR
L
OAN
AND
L
EASE
L
OSSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
2011
|
|
|
As of December 31,
2010
|
|
|
As of September 30,
2010
|
|
|
|
Amount
|
|
|
Percent
of
Portfolio
1
|
|
|
Amount
|
|
|
Percent
of
Portfolio
1
|
|
|
Amount
|
|
|
Percent
of
Portfolio
1
|
|
|
|
(in thousands, except percentages)
|
|
Real estate residential 1-4 family
|
|
$
|
6,190
|
|
|
|
33.0
|
%
|
|
$
|
7,346
|
|
|
|
34.7
|
%
|
|
$
|
6,278
|
|
|
|
33.3
|
%
|
Real estate commercial
|
|
|
5,352
|
|
|
|
28.5
|
%
|
|
|
5,550
|
|
|
|
31.1
|
%
|
|
|
6,295
|
|
|
|
30.5
|
%
|
Real estate construction
|
|
|
921
|
|
|
|
4.9
|
%
|
|
|
2,905
|
|
|
|
11.6
|
%
|
|
|
4,289
|
|
|
|
13.0
|
%
|
Real estate multi-family and farmland
|
|
|
706
|
|
|
|
3.8
|
%
|
|
|
761
|
|
|
|
5.0
|
%
|
|
|
550
|
|
|
|
4.9
|
%
|
Commercial loans
|
|
|
4,167
|
|
|
|
22.2
|
%
|
|
|
5,692
|
|
|
|
11.4
|
%
|
|
|
6,089
|
|
|
|
11.8
|
%
|
Consumer installment loans
|
|
|
538
|
|
|
|
2.9
|
%
|
|
|
813
|
|
|
|
4.7
|
%
|
|
|
688
|
|
|
|
4.9
|
%
|
Leases, net of unearned income
|
|
|
859
|
|
|
|
4.6
|
%
|
|
|
917
|
|
|
|
1.1
|
%
|
|
|
1,100
|
|
|
|
1.3
|
%
|
Other
|
|
|
17
|
|
|
|
0.1
|
%
|
|
|
16
|
|
|
|
0.4
|
%
|
|
|
31
|
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,750
|
|
|
|
100.0
|
%
|
|
$
|
24,000
|
|
|
|
100.0
|
%
|
|
$
|
25,320
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
Represents the
percentage of loans in each category to total loans.
|
Over the last two years, the ratio of the allowance to
total loans significantly increased largely because of the economic downturn and the associated decline in real estate values. These two factors have contributed to a significant increase in classified loans, which is a driving component of the
allowance.
We utilize a risk rating system to evaluate the credit risk of our loan portfolio. We classify loans as: pass,
special mention, substandard, doubtful or loss. We assign a pass rating to loans that are performing as contractually agreed and do not exhibit the characteristics of heightened credit risk. A special mention risk rating is assigned to loans that
are criticized but not considered to have weaknesses as serious as those of a classified loan. Special mention loans generally contain one or more potential weaknesses, which if not corrected, could result in an unacceptable increase in the credit
risk at some future date. A substandard risk rating is assigned to loans that have specifically identified weaknesses and deficiencies typically resulting from severe adverse trends of a financial, economic or managerial nature and may require
nonaccrual status. Substandard loans have a greater likelihood of loss. We assign a doubtful risk rating to loans that the collection or liquidation in full of principal and/or interest is highly questionable or improbable. Any loans that are
assigned a risk rating of loss are fully charged-off in the period of the downgrade.
We segregate substandard loans into two
classifications based on our allowance methodology for impaired loans. An impaired loan is defined as a substandard loan relationship in excess of $500 thousand that is also on nonaccrual status. These relationships are individually reviewed on a
quarterly basis to determine the required allowance or loss, as applicable.
For the allowance analysis, the primary
categories are: pass, special mention, substandard non-impaired, and substandard impaired. Loans in the substandard and doubtful loan categories are combined and impaired loans are segregated from non-impaired loans. The following
table presents our internal risk rating by loan classification as utilized in the allowance analysis as of September 30, 2011 and December 31, 2010:
As of September 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
|
Special
Mention
|
|
|
Substandard
Non-impaired
|
|
|
Substandard
Impaired
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Loans by Classification
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate: Residential 1-4 family
|
|
$
|
189,766
|
|
|
$
|
7,648
|
|
|
$
|
19,730
|
|
|
$
|
4,742
|
|
|
$
|
221,886
|
|
Real estate: Commercial
|
|
|
156,152
|
|
|
|
13,849
|
|
|
|
16,674
|
|
|
|
13,553
|
|
|
|
200,228
|
|
Real estate: Construction
|
|
|
33,866
|
|
|
|
2,901
|
|
|
|
2,329
|
|
|
|
15,697
|
|
|
|
54,793
|
|
Real estate: Multi-family and farmland
|
|
|
26,256
|
|
|
|
2,954
|
|
|
|
1,875
|
|
|
|
1,829
|
|
|
|
32,914
|
|
Commercial
|
|
|
40,833
|
|
|
|
3,984
|
|
|
|
16,999
|
|
|
|
3,048
|
|
|
|
64,864
|
|
Consumer
|
|
|
22,086
|
|
|
|
89
|
|
|
|
207
|
|
|
|
250
|
|
|
|
22,632
|
|
Leases
|
|
|
|
|
|
|
1,611
|
|
|
|
825
|
|
|
|
989
|
|
|
|
3,425
|
|
Other
|
|
|
3,605
|
|
|
|
19
|
|
|
|
58
|
|
|
|
|
|
|
|
3,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans
|
|
$
|
472,564
|
|
|
$
|
33,055
|
|
|
$
|
58,697
|
|
|
$
|
40,108
|
|
|
$
|
604,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
As of December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
|
Special
Mention
|
|
|
Substandard
Non-impaired
|
|
|
Substandard
Impaired
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans by Classification
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate: Residential 1-4 family
|
|
$
|
217,470
|
|
|
$
|
7,378
|
|
|
$
|
25,234
|
|
|
$
|
1,944
|
|
|
$
|
252,026
|
|
Real estate: Commercial
|
|
|
182,584
|
|
|
|
18,030
|
|
|
|
17,511
|
|
|
|
8,232
|
|
|
|
226,357
|
|
Real estate: Construction
|
|
|
46,305
|
|
|
|
3,970
|
|
|
|
10,048
|
|
|
|
23,909
|
|
|
|
84,232
|
|
Real estate: Multi-family and farmland
|
|
|
30,835
|
|
|
|
3,238
|
|
|
|
1,905
|
|
|
|
415
|
|
|
|
36,393
|
|
Commercial
|
|
|
54,553
|
|
|
|
4,338
|
|
|
|
20,316
|
|
|
|
3,600
|
|
|
|
82,807
|
|
Consumer
|
|
|
31,238
|
|
|
|
43
|
|
|
|
1,156
|
|
|
|
1,423
|
|
|
|
33,860
|
|
Leases
|
|
|
|
|
|
|
2,036
|
|
|
|
3,797
|
|
|
|
2,083
|
|
|
|
7,916
|
|
Other
|
|
|
3,464
|
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
3,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans
|
|
$
|
566,449
|
|
|
$
|
39,033
|
|
|
$
|
80,003
|
|
|
$
|
41,606
|
|
|
$
|
727,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We classify a loan as impaired when, based on current information and events, it is probable that we will
be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans were $40,108 thousand and $41,606 thousand at September 30, 2011 and December 31, 2010, respectively. For impaired loans, any
payments made by the borrower are generally applied directly to principal.
We believe that the allowance for loan and lease
losses as of September 30, 2011 is sufficient to absorb probable incurred losses in the loan portfolio based on our assessment of the information available, including the results of ongoing internal reviews of our loan portfolio, as discussed
in the Asset Quality and Non-Performing Asset section below. Our assessment involves uncertainty and judgment; therefore, the adequacy of the allowance cannot be determined with precision and may be subject to change in future periods. In
addition, bank regulatory authorities, as part of their periodic examinations, may require additional charges to the provision for loan losses in future periods if the results of their reviews warrant.
Asset Quality and Non-Performing Assets
Asset Quality Strategic Initiatives
Our ability to return to
profitability is largely dependent on properly addressing and improving asset quality. As of September 30, 2011, our loan portfolio was 52.1% of total assets. Over the past two years, we implemented several significant strategies to further
address our asset quality, including:
|
|
|
Restructured and expanded our credit department, including special assets
|
|
|
|
Developed centralized underwriting, document preparation and collections processes
|
|
|
|
Conducted a third-party loan review
|
|
|
|
Hired experienced special assets and credit officers
|
|
|
|
Expanded our loan review department, and
|
|
|
|
Outsourced the marketing and sales of residential OREO to market-leading real estate firms
|
During the fourth quarter of 2009, we began the process of restructuring our credit administration department to add additional depth and
expertise. Specifically, the credit department is now aligned by line of business for commercial and retail credit with dedicated credit officers and staff supporting each of these portfolios. The chief credit officer will serve to support the
senior credit officers.
With the additional depth and expertise of the restructured credit department, we have centralized
our loan underwriting, document preparation and collections processes. This centralization will improve consistency, increase quality and provide higher levels of operational efficiencies. Collectively, we believe these changes will assist in
reducing current and future non-performing assets.
Our internal loan review department performs risk-based reviews and
historically targets 60% to 70% of our portfolio over an 18-month cycle. In the last twelve months, we have added two experienced loan review employees to our loan review department. During 2010 and in the nine month period ending September 30,
2011, we achieved the 60% to 70% review of our portfolio, focusing on a risk-based approach.
47
During the second half of 2010, we outsourced the marketing and sales process over our OREO
properties to market leading real estate companies. We anticipate higher volumes of OREO sales in 2011.
We believe the above
loan review and credit initiatives will enable us to improve our asset quality over time through a more timely recognition of problem relationships. Additionally, we believe the expanded special assets department will allow us to manage the problem
relationships in a more efficient and effective manner to ultimately reduce future loan losses.
Asset Quality and
Non-Performing Assets Analysis and Discussion
As of September 30, 2011, our allowance for loan and lease losses
as a percentage of total loans was 3.10%, which is a decrease from the 3.30% as of December 31, 2010 and 3.26% as of September 30, 2010. The decline in the allowance percentage is directly related to certain impaired loans that were
specifically reserved for in prior periods and were charged off in the current period. Net charge-offs as a percentage of average loans (annualized) decreased to 2.53% for the nine months ended September 30, 2011 compared to 4.20% for the same
period in 2010. Non-performing assets as a percentage of total assets was 6.73% at September 30, 2011, compared to 6.78% as of December 31, 2010 and 6.35 % as of September 30, 2010. As of September 30, 2011,
non-performing assets, including loans that are 90 days past due, decreased to $77.3 million, or 6.88% of total assets, from $84.1 million, or 7.20% of total assets as of December 31, 2010 and from $85.2 million, or 6.84% as of
September 30, 2010.
We believe that overall asset quality will stabilize and begin to improve in the following
quarters. Our special assets department actively collects past due loans and develops action plans for classified and criticized loans and leases. For OREO properties, we are focused on achieving the proper level of balance between
maximizing the realized value upon sale and minimizing the holding period and carrying costs with a bias towards liquidation.
Nonperforming assets include nonaccrual loans, restructured loans, OREO and repossessed assets. We place loans on non-accrual status
when we have concerns relating to our ability to collect the loan principal and interest, and generally when such loans are 90 days or more past due. The following table presents our non-performing assets and related ratios.
NON-PERFORMING ASSETS BY TYPE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2011
|
|
|
December 31,
2010
|
|
|
September 30,
2010
|
|
|
|
(in thousands, except percentages)
|
|
Nonaccrual loans
|
|
$
|
48,642
|
|
|
$
|
54,082
|
|
|
$
|
55,083
|
|
Loans past due 90 days and still accruing
|
|
|
1,683
|
|
|
|
4,838
|
|
|
|
6,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
$
|
50,325
|
|
|
$
|
58,920
|
|
|
$
|
61,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned
|
|
$
|
26,628
|
|
|
$
|
24,399
|
|
|
$
|
22,888
|
|
Repossessed assets
|
|
|
310
|
|
|
|
763
|
|
|
|
1,229
|
|
Nonaccrual loans
|
|
|
48,642
|
|
|
|
54,082
|
|
|
|
55,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
75,580
|
|
|
$
|
79,244
|
|
|
$
|
79,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans as a percentage of total loans
|
|
|
8.33
|
%
|
|
|
8.10
|
%
|
|
|
7.86
|
%
|
Nonperforming assets as a percentage of total assets
|
|
|
6.73
|
%
|
|
|
6.78
|
%
|
|
|
6.35
|
%
|
Nonperforming assets plus loans 90 days past due to total assets
|
|
|
6.88
|
%
|
|
|
7.20
|
%
|
|
|
6.84
|
%
|
48
The following table provides the classifications for nonaccrual loans and other real estate
owned as of September 30, 2011, December 31, 2010 and September 30, 2010.
N
ON
-P
ERFORMING
A
SSETS
C
LASSIFICATION
AND
N
UMBER
OF
U
NITS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2011
|
|
|
December 31,
2010
|
|
|
September 30,
2010
|
|
|
|
Amount
|
|
|
Units
|
|
|
Amount
|
|
|
Units
|
|
|
Amount
|
|
|
Units
|
|
|
|
(dollar amounts in thousands)
|
|
Nonaccrual loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction/development loans
|
|
$
|
16,074
|
|
|
|
11
|
|
|
$
|
25,586
|
|
|
|
56
|
|
|
$
|
30,225
|
|
|
|
60
|
|
Residential real estate loans
|
|
|
9,941
|
|
|
|
77
|
|
|
|
8,906
|
|
|
|
84
|
|
|
|
7,113
|
|
|
|
58
|
|
Commercial real estate loans
|
|
|
16,704
|
|
|
|
18
|
|
|
|
10,007
|
|
|
|
30
|
|
|
|
7,327
|
|
|
|
25
|
|
Commercial and industrial loans
|
|
|
3,718
|
|
|
|
24
|
|
|
|
4,228
|
|
|
|
26
|
|
|
|
4,886
|
|
|
|
31
|
|
Commercial leases
|
|
|
1,814
|
|
|
|
53
|
|
|
|
3,459
|
|
|
|
59
|
|
|
|
3,541
|
|
|
|
59
|
|
Consumer and other loans
|
|
|
391
|
|
|
|
12
|
|
|
|
1,896
|
|
|
|
18
|
|
|
|
1,991
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
48,642
|
|
|
|
195
|
|
|
$
|
54,082
|
|
|
|
273
|
|
|
$
|
55,083
|
|
|
|
259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction/development loans
|
|
$
|
14,462
|
|
|
|
81
|
|
|
$
|
10,821
|
|
|
|
67
|
|
|
$
|
10,510
|
|
|
|
64
|
|
Residential real estate loans
|
|
|
7,997
|
|
|
|
74
|
|
|
|
8,266
|
|
|
|
63
|
|
|
|
7,789
|
|
|
|
60
|
|
Multi-family and farmland
|
|
|
525
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate loans
|
|
|
3,644
|
|
|
|
16
|
|
|
|
5,312
|
|
|
|
20
|
|
|
|
4,589
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
26,628
|
|
|
|
173
|
|
|
$
|
24,399
|
|
|
|
150
|
|
|
$
|
22,888
|
|
|
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans totaled $48.6 million, $54.1 million and $55.1 million as of September 30,
2011, December 31, 2010 and September 30, 2010, respectively. We place loans on nonaccrual when we have concerns related to our ability to collect the loan principal and interest, and generally when loans are 90 or more days past
due. As of September 30, 2011, we are not aware of any additional material loans that we have doubts as to the collectability of principal and interest that are not classified as nonaccrual. As previously described, we have
individually reviewed each nonaccrual loan in excess of $500 thousand for possible impairment. We measure impairment by adjusting loans to either the present value of expected cash flows, the fair value of the collateral or observable market
prices.
As of September 30, 2011, nonaccruals decreased by $5.4 million, or 10.1%, compared to year-end 2010. Comparing
September 30, 2011 to December 31, 2010, nonaccrual construction and development loans declined by $9.5 million while nonaccrual commercial real estate loans increased by $6.7 million. During the first half of 2011, there were two commercial
real estate properties placed on nonaccrual that totaled $4.1 million, or nearly 70% of the increase in nonaccrual commercial real estate loans. The decline in construction and development loans was a result of certain relationships migrating to
OREO. We continue to actively pursue the appropriate strategies to reduce the current level of nonaccrual loans.
Other real
estate increased $2.2 million from December 31, 2010 to September 30, 2011, as additions continued to outpace dispositions. During the first three quarters of 2011, we sold 59 properties with total proceeds of $6.7 million, resulting
in an 85% realization rate as compared to appraised value. Based on our sales analysis, we estimated and recorded a valuation allowance of $800 thousand related to other real estate owned as of September 30, 2011 to lower the carrying value of the
OREO portfolio to approximately 85% of appraised value. As previously mentioned, we have outsourced the marketing and sales process of our OREO properties to market-leading real estate firms. We anticipate increased sales volume during 2011 as a
result of this outsourcing. Additionally, we are taking a more aggressive sales approach to dispose of our current properties, which may lead to a lower realization rate.
Loans 90 days past due and still accruing declined $2,873 thousand for the quarter and $3,155 thousand compared to year-end 2010 in a positive trend. As of September 30, 2011, the $4.6 million
in past due loans was composed of $2.0 million in commercial and industrial loans, $1.6 million in commercial real estate loans, $724 thousand in residential real estate loans and the remainder in other categories. As of September 30, 2011, past due
construction and land development loans totaled only $45 thousand in a positive trend.
Total non-performing assets for the
third quarter of 2011 were $75.6 million compared to $79.2 million at December 31, 2010 and $79.2 million at September 30, 2010.
Our asset ratios were generally less favorable as compared to our peer group. Our peer group, as defined by the Uniform Bank Performance Report (UBPR), is all commercial banks between $1 billion and
$3 billion in total assets. The following table provides our asset quality ratios and our UBPR peer group ratios as of September 30, 2011, which is the latest available information.
49
N
ONPERFORMING
A
SSET
R
ATIOS
|
|
|
|
|
|
|
|
|
|
|
First
Security
Group,
Inc.
|
|
|
UBPR
Peer
Group
|
|
Nonperforming loans
1
as a percentage of gross loans
|
|
|
8.32
|
%
|
|
|
3.17
|
%
|
Nonperforming loans
1
as a percentage of the allowance
|
|
|
268.40
|
%
|
|
|
147.46
|
%
|
Nonperforming loans
1
as a percentage of equity capital
|
|
|
64.48
|
%
|
|
|
19.15
|
%
|
Nonperforming loans
1
plus OREO as a percentage of gross loans plus OREO
|
|
|
12.19
|
%
|
|
|
4.43
|
%
|
1
|
Nonperforming
loans are: Nonaccrual loans plus loans 90 days past due and still accruing
|
Investment Securities and
Other Earning Assets
The composition of our securities portfolio reflects our investment strategy of maintaining an
appropriate level of liquidity while providing a relatively stable source of income. Our securities portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet while providing a vehicle for
investing available funds, furnishing liquidity and supplying securities to pledge as required collateral for certain deposits and borrowed funds. Currently, all of our investments are classified as available-for-sale. As of
September 30, 2011, we have no plans to liquidate a significant amount of any available-for-sale securities. However, the securities classified as available-for-sale may be used for liquidity purposes should we deem it to be in our best
interest.
Available-for-sale securities totaled $158.8 million at September 30, 2011, $154.2 million at
December 31, 2010 and $155.1 million at September 30, 2010. We maintain a level of securities to provide an appropriate level of liquidity and to provide a proper balance to our interest rate and credit risk in our loan portfolio. At
September 30, 2011, the available-for-sale securities portfolio had unrealized net gains of approximately $3.2 million, net of tax. All investment securities purchased to date have been classified as available-for-sale. Our securities portfolio
at September 30, 2011 consisted of tax-exempt municipal securities, federal agency mortgage bonds, federal agency issued Real Estate Mortgage Investment Conduits (REMICs), federal agency issued pools and pooled trust preferred securities.
The following table provides the amortized cost of our available-for-sale securities by their stated maturities (this
maturity schedule excludes security prepayment and call features), as well as the tax equivalent yields for each maturity range.
M
ATURITY
OF
AFS I
NVESTMENT
S
ECURITIES
A
MORTIZED
C
OST
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
than One
Year
|
|
|
One to
Five
Years
|
|
|
Five to
Ten
Years
|
|
|
More
than
Ten
Years
|
|
|
Totals
|
|
|
|
(in thousands, except percentages)
|
|
Municipal-tax exempt
|
|
$
|
3,573
|
|
|
$
|
13,760
|
|
|
$
|
10,219
|
|
|
$
|
4,200
|
|
|
$
|
31,752
|
|
Agency bonds
|
|
|
|
|
|
|
3,000
|
|
|
|
18,987
|
|
|
|
|
|
|
|
21,987
|
|
Agency issued REMICs
|
|
|
6,385
|
|
|
|
44,053
|
|
|
|
|
|
|
|
|
|
|
|
50,438
|
|
Agency issued mortgage pools
|
|
|
187
|
|
|
|
35,107
|
|
|
|
14,226
|
|
|
|
98
|
|
|
|
49,618
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
127
|
|
|
|
127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,145
|
|
|
$
|
95,920
|
|
|
$
|
43,432
|
|
|
$
|
4,425
|
|
|
$
|
153,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Equivalent Yield
|
|
|
5.36
|
%
|
|
|
3.37
|
%
|
|
|
3.54
|
%
|
|
|
6.18
|
%
|
|
|
3.63
|
%
|
We currently have the ability and intent to hold our available-for-sale investment securities to
maturity. However, should conditions change, we may sell unpledged securities. We consider the overall quality of the securities portfolio to be high. All securities held are historically traded in liquid markets, except for three bonds. A $250
thousand investment is a Qualified Zone Academy Bond (within the meaning of Section 1379E of the Internal Revenue Code of 1986, as amended) issued by the Health, Educational and Housing Facility Board of the County of Knox under the authority
from the State of Tennessee. The remaining two are pooled trust preferred securities with a book value of $36 thousand.
As of
September 30, 2011, we performed an impairment assessment of the securities in our portfolio that had an unrealized loss to determine whether the decline in the fair value of these securities below their cost was other-than-temporary. Under
authoritative accounting guidance, impairment is considered other-than-temporary if any of the following conditions exists: (1) we intend to sell the security, (2) it is more likely than not that we will be required to sell the security
before recovery of its amortized cost basis or (3) we do not expect to recover the securitys entire amortized cost basis, even if we do not intend to sell. Additionally, accounting guidance requires that for impaired securities that we do
not intend to sell and/or that it is not more-likely-than-not that we will have to sell prior to recovery but for which credit losses exist, the other-than-temporary impairment should be separated between the total impairment related to credit
losses, which should be recognized in current earnings, and the amount of impairment related to all other factors, which should be recognized in other comprehensive income. If a decline is determined to be other-than-temporary due to credit losses,
the cost basis of the individual security is written down to fair value, which then becomes the new cost basis. The new cost basis would not be adjusted in future periods for subsequent recoveries in fair value, if any.
50
In evaluating the recovery of the entire amortized cost basis, we consider factors such as
(1) the length of time and the extent to which the market value has been less than cost, (2) the financial condition and near-term prospects of the issuer, including events specific to the issuer or industry, (3) defaults or deferrals
of scheduled interest, principal or dividend payments and (4) external credit ratings and recent downgrades.
As of
September 30, 2011, gross unrealized losses in our portfolio totaled $106 thousand, compared to $656 thousand and $62 thousand as of December 31, 2010 and June 30, 2010, respectively. The unrealized losses in other securities are two
pooled trust preferred securities. The unrealized losses associated with the trust preferred securities are primarily due to widening credit spreads subsequent to purchase and a lack of demand for trust preferred securities. The remaining unrealized
losses in our portfolio are primarily due to widening credit spreads and changes in interest rates subsequent to purchase. Based on results of our impairment assessment, the unrealized losses at September 30, 2011 are considered temporary.
As of September 30, 2011, we owned securities from issuers in which the aggregate amortized cost from such issuers
exceeded 10% of our stockholders equity. The following table presents the amortized cost and market value of the securities from each such issuer as of September 30, 2011.
|
|
|
|
|
|
|
|
|
|
|
Book
Value
|
|
|
Market
Value
|
|
|
|
(in thousands)
|
|
Fannie Mae
|
|
$
|
40,629
|
|
|
$
|
42,048
|
|
FHLMC*
|
|
$
|
57,472
|
|
|
$
|
59,034
|
|
Ginnie Mae
|
|
$
|
29,942
|
|
|
$
|
30,530
|
|
*
|
Federal Home Loan Mortgage Corporation
|
We held no federal funds sold as of September 30, 2011, December 31, 2010 or September 30, 2010. As of September 30, 2011, we held $267.1 million in interest bearing deposits,
primarily at the Federal Reserve Bank of Atlanta, compared to $200.6 million at December 31, 2010 and $224.1 million as of September 30, 2010. The yield on our account at the Federal Reserve Bank is approximately 25 basis points.
As of September 30, 2011, we held $100 thousand in certificates of deposit at another FDIC insured financial
institution. At September 30, 2011, we held $26.5 million in bank-owned life insurance, compared to $25.8 million at December 31, 2010 and $25.6 million at September 30, 2010.
Deposits and Other Borrowings
As of September 30, 2011, deposits
decreased by 2.8% from December 31, 2010 while decreasing by 8.4% from September 30, 2010. Excluding the changes in brokered deposits, our deposits increased by 2.7% from December 31, 2010 and decreased 3.7% from September 30,
2010. In the first nine months of 2011, the fastest growing sectors of our core deposit base were noninterest bearing demand deposits which grew 8.6%. We define our core deposits to include interest bearing and noninterest bearing demand deposits,
savings and money market accounts, as well as retail certificates of deposit with denominations less than $100,000. We consider our retail certificates of deposit to be a stable source of funding because they are in-market, relationship-oriented
deposits. Core deposit growth is an important tenet of our business strategy.
Brokered deposits decreased $64.4 million from
September 30, 2010 to September 30, 2011 due to maturities in the absence of brokered deposit issuances. During January 2010, we issued $94.5 million in brokered certificates of deposit. Approximately $77 million of the January funds were used to
eliminate our brokered money market account. In addition to brokered certificates of deposits, we are a member bank of the Certificate of Deposit Account Registry Service (CDARS) network. CDARS is a network of banks that allows customers CDs
to receive full FDIC insurance of up to $50 million. Additionally, members have the opportunity to purchase or sell one-way time deposits. As of September 30, 2011, our CDARS balance consists of $6.6 million in purchased time deposits and $705
thousand in our customers reciprocal accounts.
51
Brokered deposits at September 30, 2011, December 31, 2010 and
September 30, 2010 were as follows:
B
ROKERED
D
EPOSITS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2011
|
|
|
December 31,
2010
|
|
|
September 30,
2010
|
|
|
|
(in thousands)
|
|
Brokered deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
Brokered certificates of deposits
|
|
$
|
258,065
|
|
|
$
|
302,584
|
|
|
$
|
302,584
|
|
CDARS®
|
|
|
7,313
|
|
|
|
12,292
|
|
|
|
27,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
265,378
|
|
|
$
|
314,876
|
|
|
$
|
329,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below is a maturity scheduled for our brokered deposits.
B
ROKERED
D
EPOSITS
BY
M
ATURITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
than 3
months
|
|
|
Three
months
to six
months
|
|
|
Six
months
to twelve
months
|
|
|
One to
two
years
|
|
|
Greater
than two
years
|
|
|
|
(in thousands)
|
|
Brokered certificates of deposit
|
|
$
|
10,242
|
|
|
$
|
12,205
|
|
|
$
|
20,400
|
|
|
$
|
82,349
|
|
|
$
|
132,869
|
|
CDARS®
|
|
|
5,830
|
|
|
|
|
|
|
|
|
|
|
|
1,026
|
|
|
|
457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,072
|
|
|
$
|
12,205
|
|
|
$
|
20,400
|
|
|
$
|
83,375
|
|
|
$
|
133,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2011, December 31, 2010 and September 30, 2010, we had no Federal
funds purchased.
Securities sold under agreements to repurchase with commercial checking customers were $5.1 million as of
September 30, 2011, compared to $5.9 million and $7.7 million as of December 31, 2010 and September 30, 2010, respectively. In November 2007, we entered into a five-year structured repurchase agreement with another financial
institution for $10.0 million, with a stated maturity in November 2012. For the nine months ended September 30, 2011 and 2010, we paid a fixed rate of 3.93% for the structured repurchase agreement. The agreement is callable on a quarterly
basis.
Liquidity
Liquidity refers to our ability to adjust future cash flows to meet the needs of our daily operations. We rely primarily on management fees from FSGBank to fund our daily operations liquidity needs.
Our cash balance on deposit with FSGBank, which totaled approximately $1.4 million as of September 30, 2011, is available for funding activities for which FSGBank would not receive direct benefit, such as acquisition due diligence, shareholder
relations and holding company operations. These funds should adequately meet our cash flow needs. If we determine that our cash flow needs will be satisfactorily met, we may deploy a portion of the funds as additional capital into FSGBank.
Since January 2010, to further preserve our capital resources and liquidity, our Board of Directors has elected to defer the
dividend payments on our Series A Preferred Stock. As the payment of future dividends requires prior written consent by the Federal Reserve, we anticipate continuing to defer the dividend payments on the Preferred Stock until conditions improve.
The liquidity of FSGBank refers to the ability or financial flexibility to adjust its future cash flows to meet the needs of
depositors and borrowers and to fund operations on a timely and cost effective basis. The primary sources of funds for FSGBank are cash generated by repayments of outstanding loans, interest payments on loans and new deposits. Additional liquidity
is available from the maturity and earnings on securities and liquid assets, as well as the ability to liquidate available-for-sale securities.
As of September 30, 2011, our interest bearing account at the Federal Reserve Bank of Atlanta totaled approximately $265.7 million. This excess liquidity is available to fund our contractual
obligations and prudent investment opportunities.
As of September 30, 2011, the unused borrowing capacity (using 1-4 family
residential mortgages) for FSGBank at the FHLB required the individual pledging of loans.
52
Another source of funding is loan participations sold to other commercial banks (in which we
retain the service rights). As of quarter-end, we had $7.9 million in loan participations sold. FSGBank may continue to sell loan participations as a source of liquidity. An additional source of short-term funding would be to pledge investment
securities against a line of credit at a commercial bank. As of quarter-end, FSGBank had pledges of $6.0 million pledged to Federal Reserve Bank of Atlanta for the discount window, and $10.2 million pledged to FHLB as security for existing advances.
There were no other borrowings against our investment securities, except for repurchase agreements and public fund deposits attained in the ordinary course of business.
Historically, we have utilized brokered deposits to provide an additional source of funding. As of September 30, 2011, we had $258.1 million in brokered CDs outstanding with a weighted average
remaining life of approximately 24 months, a weighted average coupon rate of 2.58% and a weighted average all-in cost (which includes fees paid to deposit brokers) of 2.83%. Our CDARS product had $7.3 million at September 30, 2011, with a
weighted average coupon rate of 1.95% and a weighted average remaining life of approximately 5 months. Our certificates of deposit greater than $100 thousand were generated in our communities and are considered relatively stable. During 2009, we
were approved to use the Federal Reserve discount window. We applied to utilize the Federal Reserve window as an abundance of caution due to the economic climate. As discussed in Note 2 of our consolidated financial statements, the presence of a
capital requirement in our Consent Order restricts our ability to accept, renew or roll over brokered deposits without prior approval of the FDIC.
Management believes that our liquidity sources are adequate to meet our current operating needs. We continue to study our contingency funding plans and update them as needed paying particular attention to
the sensitivity of our liquidity and deposit base to positive and negative changes in our asset quality.
We also have
contractual cash obligations and commitments, which include certificates of deposit, other borrowings, operating leases and loan commitments. Unfunded loan commitments totaled $103.1 million at September 30, 2011. The following table
illustrates our significant contractual obligations at September 30, 2011 by future payment period.
C
ONTRACTUAL
O
BLIGATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
One Year
|
|
|
One to
Three
Years
|
|
|
Three to
Five
Years
|
|
|
More
than
Five
Years
|
|
|
Total
|
|
|
|
|
|
|
(in thousands)
|
|
Certificates of deposit
|
|
|
(1
|
)
|
|
$
|
268,676
|
|
|
$
|
108,155
|
|
|
$
|
3,411
|
|
|
$
|
|
|
|
$
|
380,242
|
|
Brokered certificates of deposit
|
|
|
(1
|
)
|
|
|
42,847
|
|
|
|
160,539
|
|
|
|
52,703
|
|
|
|
1,976
|
|
|
|
258,065
|
|
CDARS®
|
|
|
(1
|
)
|
|
|
5,830
|
|
|
|
1,026
|
|
|
|
457
|
|
|
|
|
|
|
|
7,313
|
|
Federal funds purchased and securities sold under agreements to repurchase
|
|
|
(2
|
)
|
|
|
5,054
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
15,054
|
|
FHLB borrowings
|
|
|
(3
|
)
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Operating lease obligations
|
|
|
(4
|
)
|
|
|
675
|
|
|
|
1,005
|
|
|
|
889
|
|
|
|
4,105
|
|
|
|
6,674
|
|
Commitments to fund affordable housing investments
|
|
|
(5
|
)
|
|
|
127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
127
|
|
Note payable
|
|
|
(6
|
)
|
|
|
17
|
|
|
|
38
|
|
|
|
7
|
|
|
|
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
323,226
|
|
|
$
|
280,764
|
|
|
$
|
57,467
|
|
|
$
|
6,081
|
|
|
$
|
667,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
Certificates of
deposits give customers rights to early withdrawal. Early withdrawals may be subject to penalties. The penalty amount depends on the remaining time to maturity at the time of early withdrawal. For more information regarding certificates of deposit,
see Deposits and Other Borrowings.
|
2
|
We expect
securities repurchase agreements to be re-issued and, as such, do not necessarily represent an immediate need for cash.
|
3
|
For more
information regarding FHLB borrowings, see Deposits and Other Borrowings.
|
4
|
Operating lease
obligations include existing and future property and equipment non-cancelable lease commitments.
|
5
|
We have
commitments to certain investments in affordable housing and historic building rehabilitation projects within our market area. The investments entitle us to receive historic tax credits and low-income housing tax credits.
|
6
|
This note payable
is a mortgage on the land of our branch facility located at 2905 Maynardville Highway, Maynardville, Tennessee.
|
Net cash used in operations during the nine months of 2011 totaled $743 thousand compared to net cash used in operations of $1.8 million for the same period in 2010. The decrease in net cash used is
primarily due to lower provision expense. Net cash provided by investing activities decreased from $129.4 million to $99.2 million. The change is primarily associated with the change in net loan originations and principal collections. Net cash used
in financing activities was $30.6 million for the first nine months of 2011 compared to $70.7 million in the comparable 2010 period. The decrease in cash used in financing activities is primarily related to a lower decline in deposits.
53
Derivative Financial Instruments
Derivatives are used as a risk management tool and to facilitate client transactions. We utilize derivatives to hedge the exposure to
changes in interest rates or other identified market risks. Derivatives may also be used in a dealer capacity to facilitate client transactions by creating customized loan products for our larger customers. These products allow us to meet the needs
of our customers, while minimizing our interest rate risk. We currently have not entered into any transactions in a dealer capacity.
The Asset/Liability Committee of the Board of Directors (ALCO) provides oversight by ensuring that policies and procedures are in place to monitor our significant derivative positions. We believe the use
of derivatives will reduce our interest rate risk and potential earnings volatility caused by changes in interest rates.
Our
derivatives are based on underlying risks, primarily interest rates. Historically, we have utilized cash flow swaps to reduce the risks associated with interest rates. On August 28, 2007 and March 26, 2009, we elected to terminate a series
of interest rate swaps with a total notional value of $150 million and $50 million, respectively. At termination, the swaps had a market value of $2.0 million and $5.8 million, respectively. These gains are being accreted into interest income over
the remaining life of the originally hedged items. We recognized a total of $1,405 thousand in interest income for the nine months ended September 30, 2011.
The following table presents the accretion of the remaining gain for the terminated swaps.
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|
|
|
|
|
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2011
1
|
|
|
2012
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Accretion of gain from 2007 terminated swaps
|
|
$
|
32
|
|
|
$
|
62
|
|
|
$
|
94
|
|
Accretion of gain from 2009 terminated swaps
|
|
$
|
410
|
|
|
$
|
1,272
|
|
|
$
|
1,682
|
|
1
|
Represents the
gain accretion for October 1, 2011 to December 31, 2011. Excludes the amounts recognized in the first nine months of 2011.
|
We also use forward contracts to hedge against changes in interest rates on our held for sale loan portfolio. Our practice is to enter into a best efforts contract with the investor concurrently with
providing an interest rate lock to a customer. The use of the fair value option on the closed held for sale loans and the forward contracts minimize the volatility in earnings from changes in interest rates.
54
The following table presents the cash flow hedges as of September 30, 2011.
C
ASH
F
LOW
H
EDGES
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|
|
|
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|
Notional
Amount
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
|
Maturity Date
|
|
|
(in thousands)
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|
|
|
|
|
|
Asset hedges
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts
|
|
$
|
2,195
|
|
|
$
|
3
|
|
|
$
|
25
|
|
|
$
|
(15
|
)
|
|
Various
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,195
|
|
|
$
|
3
|
|
|
$
|
25
|
|
|
$
|
(15
|
)
|
|
|
|
|
|
|
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|
|
|
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|
|
|
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|
|
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|
Terminated asset hedges
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|
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|
|
|
|
|
|
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|
Cash flow hedges:
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
$
|
35,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
62
|
|
|
June 28, 2012
|
Interest rate swap
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
555
|
|
|
October 11, 2012
|
Interest rate swap
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
555
|
|
|
October 11, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
85,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
1
|
The $1.2 million
of gains, net of taxes, recorded in accumulated other comprehensive income as of September 30, 2011, will be reclassified into earnings as interest income over the remaining life of the respective hedged items.
|
The following table presents additional information on the active derivative positions as of September 30, 2011.
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|
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|
Notional
|
|
|
Consolidated Balance Sheet
Presentation
|
|
|
Consolidated Income
Statement
Presentation
|
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Gains
|
|
|
|
|
Classification
|
|
Amount
|
|
|
Classification
|
|
Amount
|
|
|
Classification
|
|
Amount
Recognized
|
|
|
|
(in thousands)
|
|
Hedging Instrument:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts
|
|
$
|
2,195
|
|
|
Other assets
|
|
$
|
N/A
|
|
|
Other liabilities
|
|
$
|
22
|
|
|
Noninterest income other
|
|
$
|
248
|
|
|
|
|
|
|
|
|
|
Hedged Items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
|
N/A
|
|
|
Loans held for sale
|
|
$
|
2,195
|
|
|
N/A
|
|
|
N/A
|
|
|
Noninterest income other
|
|
|
N/A
|
|
Derivatives expose us to credit risk from the counterparty when the derivatives are in an unrealized gain
position. All counterparties must be approved by the board of directors and are monitored by ALCO on an ongoing basis. We minimize the credit risk exposure by requiring collateral when certain conditions are met. When the derivatives are at an
unrealized loss position, our counterparty may require us to pledge collateral.
Off-Balance Sheet Arrangements
We are party to credit-related financial instruments with off-balance sheet risk in the normal course of business to meet
the financing needs of our customers. These financial instruments include commitments to extend credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated
balance sheets.
Our exposure to credit loss is represented by the contractual amount of these commitments. We follow the same
credit policies in making commitments as we do for on-balance sheet instruments.
55
The following table discloses our maximum exposure to credit risk for unfunded loan
commitments and standby letters of credit at September 30, 2011 and 2010.
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|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(in thousands)
|
|
Commitments to extend credit
|
|
$
|
103,108
|
|
|
$
|
142,588
|
|
Standby letters of credit
|
|
$
|
8,103
|
|
|
$
|
14,625
|
|
Commitments to extend credit are agreements to lend to customers. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of fees. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We
evaluate each customers creditworthiness on a case-by-case basis. The amount of collateral, if any, we obtain on an extension of credit is based on our credit evaluation of the customer. Collateral held varies but may include accounts
receivable, inventory, property and equipment and income-producing commercial properties.
Capital Resources
Banks and bank holding companies, as regulated institutions, must meet required levels of capital. The OCC and the
Federal Reserve, the primary federal regulators for FSGBank and First Security, respectively, have adopted minimum capital regulations or guidelines that categorize components and the level of risk associated with various types of
assets. Financial institutions are expected to maintain a level of capital commensurate with the risk profile assigned to their assets in accordance with the guidelines. As described in Note 2 to our consolidated financial statements, the
Consent Order requires FSGBank to achieve and maintain total capital to risk adjusted assets of at least 13% and a leverage ratio of at least 9%. The Order provided 120 days from April 28, 2010, the effective date of the Order, to
achieve these ratios. As shown below, FSGBank is not currently in compliance with the capital requirements.
The following
table compares the required capital ratios maintained by First Security and FSGBank:
C
APITAL
R
ATIOS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2011
|
|
FSGBank
Consent
Order
1
|
|
|
Well
Capitalized
|
|
|
Adequately
Capitalized
|
|
|
First
Security
|
|
|
FSGBank
|
|
Tier I capital to risk adjusted assets
|
|
|
n/a
|
|
|
|
6.0
|
%
|
|
|
4.0
|
%
|
|
|
10.8
|
%
|
|
|
10.6
|
%
3
|
Total capital to risk adjusted assets
|
|
|
13.0
|
%
|
|
|
10.0
|
%
|
|
|
8.0
|
%
|
|
|
12.0
|
%
|
|
|
11.9
|
%
3
|
Leverage ratio
|
|
|
9.0
|
%
|
|
|
5.0
|
%
2
|
|
|
4.0
|
%
|
|
|
6.5
|
%
|
|
|
6.4
|
%
3
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital to risk adjusted assets
|
|
|
n/a
|
|
|
|
6.0
|
%
|
|
|
4.0
|
%
|
|
|
11.2
|
%
|
|
|
10.9
|
%
3
|
Total capital to risk adjusted assets
|
|
|
13.0
|
%
|
|
|
10.0
|
%
|
|
|
8.0
|
%
|
|
|
12.5
|
%
|
|
|
12.2
|
%
3
|
Leverage ratio
|
|
|
9.0
|
%
|
|
|
5.0
|
%
2
|
|
|
4.0
|
%
|
|
|
7.3
|
%
|
|
|
7.1
|
%
3
|
|
|
|
|
|
|
September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital to risk adjusted assets
|
|
|
n/a
|
|
|
|
6.0
|
%
|
|
|
4.0
|
%
|
|
|
11.9
|
%
|
|
|
11.7
|
%
3
|
Total capital to risk adjusted assets
|
|
|
13.0
|
%
|
|
|
10.0
|
%
|
|
|
8.0
|
%
|
|
|
13.2
|
%
|
|
|
12.9
|
%
3
|
Leverage ratio
|
|
|
9.0
|
%
|
|
|
5.0
|
%
2
|
|
|
4.0
|
%
|
|
|
7.6
|
%
|
|
|
7.4
|
%
3
|
1
|
FSGBank was
required to achieve and maintain the above capital ratios within 120 days from April 28, 2010.
|
2
|
The Federal
Reserve Board definition of well capitalized for bank holding companies does not include a leverage ratio component; accordingly, the leverage ratio requirement for well capitalized status only applies to FSGBank.
|
3
|
Due to the capital
requirement within FSGBanks Consent Order, FSGBank is considered to be adequately capitalized.
|
Since
the first quarter of 2010, to further preserve our capital resources, our Board of Directors has elected to suspend our common stock dividend and defer the dividend on the Series A Preferred Stock. Any future determination relating to dividend
policy will be made at the discretion of our Board of Directors and will depend on a number of factors, including our future earnings, capital requirements, financial condition, future prospects, regulatory restrictions, and other factors that our
Board of Directors may deem relevant.
56
EFFECTS OF GOVERNMENTAL POLICIES
We are affected by the policies of regulatory authorities, including the Federal Reserve Board and the Office of the Comptroller of the
Currency. An important function of the Federal Reserve Board is to regulate the national money supply.
Among the instruments
of monetary policy used by the Federal Reserve Board 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
Board; 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 Board 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 and international 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 or loan demand or whether the changing economic conditions will have a positive or negative effect on operations and earnings.
Legislation from time to time is introduced in the United States Congress and the Tennessee General Assembly and other state
legislatures, and regulations are proposed by the regulatory agencies that could affect our business. It cannot be predicted whether or in what form any of these proposals will be adopted or the extent to which our business may be affected thereby.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
.
The Dodd-Frank Wall Street Reform and
Consumer Protection Act (the Dodd-Frank Act) has had a broad impact on the financial services industry, including significant regulatory and compliance changes previously discussed and including, among other things, (i) enhanced
resolution authority of troubled and failing banks and their holding companies; (ii) increased regulatory examination fees; and (iii) numerous other provisions designed to improve supervision and oversight of, and strengthening safety and
soundness for, the financial services sector. Additionally, the Dodd-Frank Act establishes a new framework for systemic risk oversight within the financial system to be distributed among new and existing federal regulatory agencies, including the
Financial Stability Oversight Council, the Federal Reserve Board, the OCC and the FDIC.
Many of the requirements called for
in the Dodd-Frank Act will be implemented over time and most will be subject to implementing regulations over the course of several years. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be
implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on financial institutions operations is unclear. The changes resulting from the Dodd-Frank Act may impact the
profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect our business. These changes may also
require us to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2011, the FASB issued ASU
No. 2011-02, Receivables (Topic 310) A Creditors Determination of Whether a Restructuring is a Troubled Debt Restructuring. The ASU provides additional guidance to creditors for evaluating whether a modification or
restructuring of a receivable constitutes a troubled debt restructuring (TDR) by clarifying the existing guidance on whether (1) the creditor has granted a concession and (2) whether the debtor is experiencing financial
difficulties, which are the two criteria used to determine whether a modification or restructuring is a TDR. The ASU:
|
|
|
Provides additional guidance on determining whether a creditor has granted a concession, including guidance on collection on all amounts due, receipt
of additional collateral or guarantees from the debtor, and restructuring the debt at a below-market rate;
|
|
|
|
Includes factors and examples for creditors to determine whether an insignificant delay in payment is considered a concession;
|
|
|
|
Prohibits creditors from using the borrowers effective rate test in ASC 470-50,
Debt, Modifications and Extinguishment
, to evaluate
whether a concession has been granted to a borrower;
|
|
|
|
Adds factors for creditors to use to determine whether the debtor is experiencing financial difficulties; and
|
|
|
|
Ends the FASBs deferral of the additional disclosures about TDR activities required by ASU 2010-20.
|
This ASU is effective for the first interim period beginning on or after June 15, 2011. The disclosures required by this ASU are
presented in Note 6.
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220)
Presentation of Comprehensive Income. The ASU requires entities to present items of net income and other comprehensive income either in one continuous statement referred to as the statement of comprehensive income or in two
separate, but consecutive, statements of net income and other comprehensive income. The ASU is effective for the first interim period beginning after December 15, 2011. The adoption of this guidance will not materially impact our financial
statements beyond the change in presentation.
In May, 2011, the FASB issued ASU No. 2011-04, Fair Value
Measurement (Topic 820) Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU represents the converged guidance of the FASB and the IASB (the Boards) on fair value measurement.
The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have
57
resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term fair value. The
Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs. Included in the ASU are requirements to
disclose additional quantitative disclosures about unobservable inputs for all Level 3 fair value measurements, as well as qualitative disclosures about the sensitivity inherent in recurring Level 3 fair value measurements. The ASU is effective
during the interim and annual periods beginning after December 15, 2011. We are currently evaluating the impact this new ASU will have on the financial statements.
ITEM 3.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Market risk, with respect to us, is the risk of loss arising from adverse changes in interest rates and prices. The risk of loss can result in either lower fair market values or reduced net interest
income. We manage several types of risk, such as credit, liquidity and interest rate. We consider interest rate risk to be a significant risk that could potentially have a large material effect on our financial condition. Further, we process
hypothetical scenarios whereby we shock our balance sheet up and down for possible interest rate changes, we analyze the potential change (positive or negative) to net interest income, as well as the effect of changes in fair market values of assets
and liabilities. We do not deal in international instruments, and therefore are not exposed to risk inherent to foreign currency.
Our interest rate risk management is the responsibility of the Asset/Liability Committee (ALCO). ALCO has established policies and limits to monitor, measure and coordinate our sources, uses and pricing
of funds.
Interest rate risk represents the sensitivity of earnings to changes in interest rates. As interest rates change,
the interest income and expense associated with our interest sensitive assets and liabilities also change, thereby impacting net interest income, the primary component of our earnings. ALCO utilizes the results of both static gap and income
simulation reports to quantify the estimated exposure of net interest income to a sustained change in interest rates.
Our
income simulation analysis projected net interest income based on both a rise and fall in interest rates of 200 basis points (i.e. 2.00%) over a twelve-month period. Given this scenario, we had, as of September 30, 2011, an exposure to falling
rates and a benefit from rising rates. More specifically, our model forecasts a decline in net interest income of $7.1 million, or 14.7%, as a result of a 200 basis point decline in rates based on annualizing our financial results through
September 30, 2011. The model also predicts a $4.2 million increase in net interest income, or 24.7%, as a result of a 200 basis point increase in rates. The following chart reflects our sensitivity to changes in interest rates as of
September 30, 2011. The numbers are based on a static balance sheet, and the chart assumes that pay downs and maturities of both assets and liabilities are reinvested in like instruments at current interest rates, rates down 200 basis points,
and rates up 200 basis points.
I
NTEREST
R
ATE
R
ISK
I
NCOME
S
ENSITIVITY
S
UMMARY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Down
200 BP
|
|
|
Current
|
|
|
Up 200
BP
|
|
|
|
(in thousands, except percentages)
|
|
|
|
|
|
Annualized net interest income
1
|
|
$
|
35,891
|
|
|
$
|
28,773
|
|
|
$
|
24,560
|
|
Dollar change net interest income
|
|
|
(7,117
|
)
|
|
|
|
|
|
|
4,214
|
|
Percentage change net interest income
|
|
|
(14.65
|
)%
|
|
|
0.00
|
%
|
|
|
24.74
|
%
|
1
|
Annualized net
interest income is a twelve month projection based on year-to-date results.
|
The preceding sensitivity
analysis is a modeling analysis, which changes periodically and consists of hypothetical estimates based upon numerous assumptions including interest rate levels, shape of the yield curve, prepayments on loans and securities, rates on loans and
deposits, reinvestments of paydowns and maturities of loans, investments and deposits, and other assumptions. In addition, there is no input for growth or a change in asset mix. While assumptions are developed based on the current economic and
market conditions, we cannot make any assurances as to the predictive nature of these assumptions including how customer preferences or competitor influences might change.
As market conditions vary from those assumed in the sensitivity analysis, actual results will differ. Also, the sensitivity analysis does not reflect actions that we might take in responding to or
anticipating changes in interest rates.
We use the Sendero Vision Asset/Liability system, which is a comprehensive interest
rate risk measurement tool that is widely used in the banking industry. Generally, it provides the user with the ability to more accurately model both static and dynamic gap, economic value of equity, duration and income simulations using a wide
range of scenarios including interest rate shocks and rate ramps. The system also models derivative instruments.
58
ITEM 4.
|
CONTROLS AND PROCEDURES
|
As of the end of the period covered by this Quarterly Report on Form 10-Q, our principal executive officer and principal financial officer
have evaluated the effectiveness of our disclosure controls and procedures (Disclosure Controls). Disclosure Controls, as defined in Rule 13a-15(e) of the Exchange Act, are procedures that are designed with the objective of ensuring that
information required to be disclosed in our reports filed under the Exchange Act, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules
and forms. Disclosure Controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the principal executive officer (PEO) and chief financial officer (CFO) (hereinafter
in Item 4 management, including the President and CFO, are referred to collectively as management), as appropriate to allow timely decisions regarding required disclosure.
Our management does not expect that our Disclosure Controls will prevent all error and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have
been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls also is based in part upon
certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
As previously disclosed in First Securitys Annual Report on Form 10-K, filed with the Securities and Exchange Commission (SEC) on
April 15, 2011, management identified a material weakness in the Companys entity level controls and therefore concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2010.
Subsequent to December 31, 2010, various changes have occurred that are reasonably likely to materially affect our control environment. The changes to our control environment are detailed in Item 2. Managements Discussion and
Analysis of Financial Condition and Results of Operations under the subheading Material Weakness in Internal Controls over Financial Reports on pages 30 and 31.
Management believes that its control environment has improved as of the filing of this Quarterly Report on Form 10-Q, however, we are
continuing to evaluate additional changes, including but not limited to additional training and education. The Company cannot provide any assurance these remediation efforts will be successful or the Companys internal control over financial
reporting will be effective as a result of these efforts. As we are continuing to implement additional changes to entity level controls, our President and CFO have concluded that our Disclosure Controls remain ineffective until all remediation
efforts have been implemented and tested for effectiveness.
PART II. OTHER INFORMATION
ITEM 1.
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LEGAL PROCEEDINGS
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In the
normal course of business, we are at times subject to pending and threatened legal actions. Although we are not able to predict the outcome of such actions, after reviewing pending and threatened actions with counsel, we believe that the outcome of
any or all such actions will not have a material adverse effect on our business, financial condition and/or operating results.
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 our Annual Report on Form 10-K for the year ended December 31, 2010, which could materially
affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be
immaterial also may materially adversely affect our business, financial condition and/or operating results.
ITEM 2.
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UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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As previously disclosed in First Securitys Quarterly Report on Form 10-Q that was filed on August 15, 2011, First Security sold a total of 930 shares to certain directors and director nominees on
July 29, 2011. Under the terms of the National Bank Act, each bank director is required to own shares in his or her own right with a market value or cost basis of at least $1,000. The shares were sold at a price of $3.25 per share,
providing aggregate consideration of $3,022.50. In accordance with NASDAQ requirements, the shares were sold at a per share price at the greater of book or market value. In issuing the securities, First Security relied on Section 4(2) of the
Securities Act of 1933, as amended.
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ITEM 3.
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DEFAULTS UPON SENIOR SECURITIES
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As previously disclosed, First Security has decided to defer quarterly cash dividend payments on its Series A Preferred Stock. Cash dividends on the Series A Preferred Stock are cumulative and accrue and
compound on each subsequent payment date. At September 30, 2011, First Security had unpaid preferred stock dividends in arrears of $3.1 million. If First Security misses six quarterly dividend payments on the Series A Preferred Stock, whether
or not consecutive, the Treasury will have the right to appoint two directors to First Securitys board of directors until all accrued but unpaid dividends have been paid. First Security has deferred seven consecutive dividend payments.
Currently, the Treasury has assigned an observer to attend all Board of Director meetings.
Exhibits:
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EXHIBIT
NUMBER
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DESCRIPTION
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31.1
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Certification of Principal Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
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31.2
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Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
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32.1
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Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934
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32.2
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Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934
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101
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Interactive Data Files providing financial information from the Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 in XBRL (eXtensible Business
Reporting Language). Pursuant to Regulation 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended,
or Section 18 of the Securities Exchange Act of 1934, as amended, and are otherwise not subject to liability.
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60
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed by the
undersigned, thereunto duly authorized.
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FIRST SECURITY GROUP, INC.
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(Registrant)
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November 14, 2011
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/s/ RALPH E. COFFMAN,
JR.
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Ralph E. Coffman, Jr.
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President & Chief Operating Officer
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November 14, 2011
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/s/ JOHN R.
HADDOCK
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John R. Haddock
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Secretary, Chief Financial Officer & Executive Vice President
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61
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