U.S.
Securities and Exchange Commission
Washington,
D.C. 20549
Form
10-Q
x
Quarterly
Report Under Section 13 or 15(d)
of
the Securities Exchange Act of 1934
For
the quarterly period ended March 31, 2010
¨
Transition Report Under
Section 13 or 15(d)
of the
Securities Exchange Act of 1934
For the
transition period ended
Commission
File Number 000-33227
Southern Community Financial
Corporation
(Exact
name of registrant as specified in its charter)
North Carolina
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56-2270620
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(State
or other jurisdiction of
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(I.R.S.
Employer Identification No.)
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incorporation
or organization)
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4605
Country Club Road
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Winston-Salem, North
Carolina
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27104
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant's
telephone number, including area code (336) 768-8500
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes
x
No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files)
Yes
¨
No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act. (Check one):
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
As of
April 30, 2010 (the most recent practicable date), the registrant had
outstanding 16,818,125 shares of Common Stock, no par value.
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Page No.
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Part
I.
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FINANCIAL
INFORMATION
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Item
1 -
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Financial
Statements (Unaudited)
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Consolidated
Statements of Financial Condition
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March
31, 2010 and December 31, 2009
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15
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Consolidated
Statements of Operations
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Three
Months Ended March 31, 2010 and 2009
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16
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Consolidated
Statements of Comprehensive Income (Loss)
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Three
Months Ended March 31, 2010 and 2009
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17
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Consolidated
Statement of Changes in Stockholders’ Equity
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Three
Months Ended March 31, 2010
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18
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Consolidated
Statements of Cash Flows
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Three
Months Ended March 31, 2010 and 2009
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19
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Notes
to Consolidated Financial Statements
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20
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Selected
Financial Data
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3
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Item
2 -
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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4
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Item
3 -
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Quantitative
and Qualitative Disclosures about Market Risk
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37
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Item
4 -
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Controls
and Procedures
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38
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Part
II.
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Other
Information
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Item
1A -
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Risk
Factors
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38
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Item
6 -
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Exhibits
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38
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Signatures
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39
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Part
I. FINANCIAL INFORMATION
SELECTED
FINANCIAL DATA
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At or for the Quarter Ended
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% Change March 31, 2010 from
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March 31,
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December 31,
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March 31,
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December
31,
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March
31,
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2010
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2009
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2009
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2009
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2009
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(Amounts in thousands, except per share data)
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Operating
Data:
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Interest
income
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$
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20,986
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$
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22,092
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$
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22,744
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(5
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%
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(8
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)
%
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Interest
expense
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7,739
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8,701
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10,285
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(11
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)
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(25
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Net
interest income
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13,247
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13,391
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12,459
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(1
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6
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Provision
for loan losses
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10,000
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18,000
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4,000
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(44
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150
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Net
interest income (loss) after provision for loan losses
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3,247
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(4,609
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)
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8,459
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(170
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)
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(62
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Non-interest
income
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3,953
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3,526
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2,587
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12
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53
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Non-interest
expense
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11,843
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13,578
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60,584
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(13
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(80
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)
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Income
(loss) before income taxes
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(4,643
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(14,661
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(49,538
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)
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(68
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)
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(91
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)
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Benefit
from income taxes
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(32
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(3,944
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(214
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(99
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)
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(85
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)
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Net
income (loss)
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$
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(4,611
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$
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(10,717
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$
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(49,324
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(57
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)
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(91
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)
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Effective
dividend on preferred stock
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633
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627
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627
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Net
income (loss) available to common shareholders
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$
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(5,244
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$
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(11,344
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$
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(49,951
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Net
Income (Loss) Per Common Share:
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Basic
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$
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(0.31
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$
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(0.68
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$
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(2.98
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Diluted
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(0.31
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(0.68
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(2.98
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Selected
Performance Ratios:
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Return
on average assets
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-1.10
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%
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-2.44
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%
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NM
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Return
on average equity
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NM
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NM
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NM
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Net
interest margin (1)
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3.41
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%
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3.28
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%
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3.01
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%
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Efficiency
ratio (2)
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68.85
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%
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80.26
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%
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73.66
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%
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Asset
Quality Ratios:
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Nonperforming
loans to period-end loans
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4.19
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%
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3.07
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%
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1.56
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%
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Nonperforming
assets to total assets (3)
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4.15
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%
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3.32
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%
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1.73
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%
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Net
loan charge-offs to average loans outstanding (annualized)
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1.20
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%
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2.92
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%
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1.09
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%
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Allowance
for loan losses to period-end loans
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2.98
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%
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2.41
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%
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1.49
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%
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Allowance
for loan losses to nonperforming loans
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0.71
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X
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0.79
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X
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0.95
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X
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Capital
Ratios:
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Total
risk-based capital
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12.80
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%
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12.92
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%
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13.69
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%
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Tier
1 risk-based capital
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10.92
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%
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11.34
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%
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12.35
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%
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Leverage
ratio
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8.86
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%
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9.14
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%
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9.96
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%
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Equity
to assets ratio
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6.85
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%
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7.06
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%
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7.72
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%
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Balance
Sheet Data (End of Period):
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Total
assets
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1,707,180
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1,728,608
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1,789,734
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(1
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)
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(5
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Loans
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1,208,454
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1,230,275
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1,297,489
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(2
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)
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(7
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)
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Deposits
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1,306,954
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1,353,436
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1,328,143
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(3
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)
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(2
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)
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Short-term
borrowings
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76,769
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85,477
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101,425
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(10
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)
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(24
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)
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Long-term
borrowings
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199,062
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199,103
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212,975
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-
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(7
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Stockholders’
equity
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116,882
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121,997
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138,209
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(4
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)
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(15
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)
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Other
Data:
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Weighted
average shares
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Basic
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|
16,806,292
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16,789,045
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16,780,058
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Diluted
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16,806,292
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16,789,045
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16,780,058
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Period
end outstanding shares
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16,818,125
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16,787,675
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16,793,175
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Number
of banking offices
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22
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22
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22
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Number
of full-time equivalent employees
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321
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|
331
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|
341
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(1)
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Net
interest margin is net interest income divided by average interest-earning
assets.
|
(2)
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Efficiency
ratio is non-interest expense divided by the sum of net interest income
and non-interest income. This ratio for first quarter 2009
excludes the $49,501 goodwill impairment
charge.
|
(3)
|
Nonperforming
assets consist of nonaccrual loans, restructured loans and foreclosed
assets, where applicable.
|
NM - Not
meaningful
Item
2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
This
Quarterly Report on Form 10-Q may contain certain forward-looking statements
consisting of estimates with respect to our financial condition, results of
operations and business that are subject to various factors which could cause
actual results to differ materially from these estimates. These
factors include, but are not limited to, general economic conditions, changes in
interest rates, deposit flows, loan demand, real estate values and competition;
changes in accounting principles, policies, or guidelines; changes in
legislation or regulation; and other economic, competitive, governmental,
regulatory, technological factors affecting our operations, pricing, products
and services, and other factors discussed in our filings with the Securities and
Exchange Commission.
Summary
of First Quarter
Total
assets decreased $21.4 million, or 1.2%, during the first quarter as loans
declined for the sixth consecutive quarter. Loans outstanding
decreased $21.8, million or 1.8%, due to the continued weak economic conditions
and resulting slowdown in loan demand. The allowance for loan losses
increased $6.4 million, or 21.5% primarily attributable to elevated levels in
our provision for loan losses resulting from increases in volume and loss
impairment of nonperforming loans. Foreclosed assets remained stable,
increasing only $651 thousand. Investment securities and cash and due
from banks increased $11.8 million, or 3.7%, and $3.7 million, or 12.3%,
respectively; while federal funds sold decreased $8.9 million as part of ongoing
balance sheet management to maximize available yields on
investments. Total deposits were $1.31 billion at March 31, 2010, a
decrease of $7.1 million, or 0.5%, from December 31, 2009. The
decrease in deposits was from time deposits and demand deposits which decreased
$43.4 million, or 7.0%, and $5.1 million, or 4.3%, respectively; while interest
bearing transaction deposits increased $41.4 million or 7.2%. The
decrease in time deposits was primarily attributed to declines in brokered
deposits of $41.3 million. Borrowings decreased $8.7 million, or
3.1%, from the prior quarter end continuing a trend of allowing borrowings to
mature without renewal or replacement as loan demand has declined and deposit
growth has been adequate to fund new loan requests.
Net
interest income decreased $144 thousand, or 1.1%, for the first quarter compared
to the fourth quarter 2009. The interest rate environment remained
relatively stable in the first quarter as the Federal Reserve maintained the
federal funds target rate consistent with the fourth quarter. Total
interest income decreased by $1.1 million, or 5.0%; while the cost of funds
decreased $1.0 million, or 11.1%, compared to the previous
quarter. Effective pricing of loans including the continued
incorporation of interest rate floors on floating rate loans upon renewal and
loan balances decreasing at a slower pace during the quarter minimized
the
reduction in interest
income. Interest expense declined primarily due to reduced levels of
higher cost time deposits and borrowings and as deposits continued to reprice at
lower rates during the quarter. The net interest margin improved 13
basis points to 3.41% compared to 3.28% for the linked quarter and increased 40
basis points when compared to 3.01% for the first quarter of 2009.
The
Company’s provision for loan losses of $10.0 million decreased from $18.0
million for the fourth quarter 2009 although it increased from $4.0 million
reported in the first quarter of 2009. This level of provision and
net charge-offs are the continuation of our proactive efforts to resolve
troubled loans. This approach has led to an early identification of
potential problem loans and their timely resolution, including the recognition
of their loss exposure. The impairment of $5.1 million on two
loan relationships was a significant factor in the level of provision for loan
losses during the quarter. Annualized net charge-offs decreased to
1.20% of average loans in first quarter 2010 from 2.92% of average loans for
fourth quarter 2009 and increased from 1.09% of average assets for the first
quarter 2009. Nonperforming loans increased to $50.6 million or 4.19%
of loans at March 31, 2010 from $37.7 million or 3.07% of loans at December 31,
2009. The $12.9 million increase in nonperforming loans reflects an
increase of $6.7 million derived from one loan relationship as well as an
increase in the volume of other new nonaccrual loans. Nonperforming
assets rose to $70.9 million or 4.15% of total assets at March 31, 2010 from
$57.4 million, or 3.32% of total assets, at December 31, 2009 primarily due to
the increase in nonaccrual loans during the quarter. The activity for
this quarter in net charge-offs, nonperforming loans and nonperforming assets
continues to be predominately related to construction and development lending
although commercial real estate was more of a factor. The allowance
for loan losses of $36.0 million at March 31, 2010 represented 2.98% of total
loans and a 0.71% coverage of nonperforming loans at current quarter-end
compared with 2.41% of total loans and a 0.79% coverage of nonperforming loans
at December 31, 2009. We believe the allowance is adequate for losses
inherent in the loan portfolio at March 31, 2010.
Non-interest
income was $4.0 million during the first quarter of 2010, compared to $3.5
million for the prior quarter and $2.6 million for the first quarter of
2009. The increase in non-interest income was primarily due to a $1.4
million gain on the sale of investment securities and improved SBIC earnings of
$176 thousand compared to a $218 thousand loss in the prior
quarter. All other categories decreased during the first quarter
compared to the fourth quarter 2009. The decline in non-interest income during
the first quarter also included a $186 thousand “other-than-temporary”
impairment loss from the write-down of one equity investment
security. The increase in non-interest income compared to the first
quarter of 2009 was also primarily due to a $1.4 million gain on the sale of
investment securities and improved service charges of $113
thousand.
Non-interest
expense of $11.8 million in the first quarter of 2010 decreased $1.7 million or
12.8% from the prior quarter, and grew by $766 thousand or 6.9% compared with
the year ago period excluding the $49.5 million goodwill impairment
charge. The decrease from the fourth quarter of 2009 is primarily due
to a $1.1 million reduction in write-downs on carrying values on foreclosed real
estate. Compared to the first quarter of 2009, significant increases
were recognized in foreclosed asset related expenses and write-downs, FDIC
deposit insurance premiums and the Company’s buyer incentive
program.
Financial
Condition at March 31, 2010 and December 31, 2009
During
the three month period ending March 31, 2010, total assets declined $21.4
million or 1.2% to $1.71 billion. The key drivers of the change in
balance sheet mix were an emphasis on maintaining an adequate allowance for loan
losses, actively managing the investment portfolio, maintaining both a high
level of liquidity and our regulatory capital ratios in excess of the well
capitalized level. The allowance for loan losses was increased to
2.98% of period end loans compared to 2.41% at the end of the previous quarter
and 1.49% at the end of the first quarter of 2009. The allowance was
increased by $10.0 million during the quarter while net charge offs totaled $3.6
million. The investment portfolio was increased slightly during the
quarter in order to fully utilize the increased liquidity caused by the lower
loan balances. Total deposits decreased $7.1 million during the
quarter with time deposits declining $43.4 million while lower cost transaction
accounts increased $36.3 million. Virtually the entire decline in
time deposits was brokered deposits which declined $41.3 million. Excess
liquidity was also used to repay $8.7 million in borrowings. The
shift in the funding mix contributed to an improvement in the net interest
margin during the first quarter.
Total
loans decreased $21.8 million or 1.8% during the quarter with decreases in the
following major categories: $6.0 million, or 3.3%, for
commercial and industrial loans, $5.9 million, or 1.3%, for commercial mortgage
loans, $5.8 million, or 1.5%, for residential mortgage loans and $3.4 million,
or 1.9%, for construction loans. The decrease in loans outstanding
during the quarter can be attributed to a continued slowdown in loan demand
during these difficult economic times. Loans held for sale decreased
by $41 thousand or 1.4% from the prior year end.
Our
capital position remains strong, with all of our regulatory capital ratios at
levels that categorize us “well capitalized” under federal bank regulatory
capital guidelines. At March 31, 2010, our stockholders’ equity
totaled $116.9 million, a decrease of $5.1 million compared to December 31,
2009. The decrease is the result of the net loss for the quarter,
$633 thousand in dividends on the preferred stock issued to the United States
Treasury through the Capital Purchase Program, and a decrease of $7 thousand in
other comprehensive income items.
Results
of Operations for the Three Months Ended March 31, 2010 and 2009
Net
Loss.
Our net loss
from operations of $4.6 million and our net loss after preferred dividends of
$5.2 million for the three months ended March 31, 2010 decreased $44.7 million
from the same three month period in 2009 which included a $49.5 million goodwill
impairment charge. Net loss per share available to common
shareholders was a $0.31 loss per share for both basic and diluted for the three
months ended March 31, 2010 as compared with a $2.98 loss per share for both
basic and diluted for the same period in 2009. Net interest income
for the first quarter of 2010 was $13.2 million, up $788 thousand, or 6.3%,
compared with the first quarter 2009, due to an improvement in the net interest
margin despite a decrease in interest earning assets. The net
interest margin of 3.41% improved 40 basis points from the year ago
period. The Federal Reserve did not change rates during the current
quarter, although repricing of interest bearing assets and liabilities continued
to have an effect on the current net interest income and margin. The
primary factor for the loss in the first quarter was the continued elevated
level of asset quality costs, including a provision for loan losses of $10.0
million for the quarter. Non-interest income was $4.0 million during
the first quarter of 2010, which represents an increase of 52.8% from
non-interest income of $2.6 million reported in the comparable period in
2009. Excluding the $49.5 million goodwill impairment charge in first
quarter 2009, non-interest expense increased $766 thousand, or 6.9%, compared
with the same quarter a year ago. The largest increases in
non-interest expense resulted from increased OREO write-downs and other OREO
expense totaling $630 thousand and an increased FDIC deposit insurance premium
of $304 thousand from ongoing deposit insurance premium rate
increases.
Net
Interest Income.
During the
three months ended March 31, 2010, our net interest income was $13.2 million, an
increase of $788 thousand, or 6.3%, over the first quarter
2009. Interest expense decreased $2.5 million from repricing of
deposits and the reduction in the cost of borrowings. This reduction
in our cost of funds exceeded the $1.8 million decrease in interest income from
declining outstanding balances and declining yields on interest earning
assets. This increase in net interest income was achieved in spite of
the cost of carrying nonperforming assets with an average balance of $60.5
million whose annualized impact on our net interest margin is approximately nine
basis points.
Our net
interest margin has been impacted and will continue to be impacted in the near
term by actions taken by the Federal Reserve Board with respect to interest
rates and by competition in our markets. During the first quarter of
2010, the Federal Reserve maintained the Federal Funds rate at the all time low
of between zero and 25 basis points since December 2008. The average
prime rate for the first quarter of 2010 and 2009 remained at 3.25% at which it
was since December 2008. During the first half of 2008, we began to
incorporate interest rate floors on most of our floating rate loans upon
renewal. We have continued this practice throughout 2009 and 2010
such that most of our floating rate loan portfolio now has interest rate
floors. Additionally, we have reinforced loan pricing discipline so
we are adequately compensated for the risk of each loan. These
practices have resulted in a five basis point improvement in the average loan
yield during the first quarter 2010 compared with the same period in
2009. The average yield on interest-earning assets in the first
quarter of 2010 decreased 8 basis points to 5.41% compared to the first quarter
2009 due to the decline in yields for investment securities and the shift in mix
from loans to lower yielding securities. The lower interest rate
environment has also impacted our funding costs. Deposits, such as
money market and NOW accounts, are repriced at the discretion of management
while time deposits can only be repriced as they mature. Our cost of
average interest bearing liabilities for the first quarter of 2010 decreased 57
basis points to 2.15% compared to the first quarter of 2009. For the
first quarter 2010, our net interest margin of 3.41% increased 40 basis points
from 3.01% for the first quarter of 2009. While the interest rate
environment has been constant throughout 2010 in the prime rate and federal
funds sold, market interest rates such as LIBOR have drifted lower in first
quarter 2009 and moved slightly higher during the first quarter of
2010. This has strengthened the Company’s net interest margin through
the improvement in our cost of funds via continued downward repricing of time
deposits and borrowings at current market rates. During the past
three quarters, we have seen more rational deposit pricing in our local markets
in contrast with the first half of 2009 when some larger banks sought needed
liquidity with above market, long term retail certificate
offerings.
Average
Yield/Cost Analysis
The
following table contains information relating to the Company’s average balance
sheet and reflects the average yield on assets and cost of liabilities for the
periods indicated. Such annualized yields and costs are derived by
dividing annualized income or expense by the average balances of assets or
liabilities, respectively, for the periods presented. The average
loan portfolio balances include nonaccrual loans.
|
|
Three Months Ended March 31, 2010
|
|
|
Three Months Ended March 31, 2009
|
|
|
|
(Amounts in thousands)
|
|
|
|
Average
balance
|
|
|
Interest
earned/paid
|
|
|
Average
yield/cost
|
|
|
Average
balance
|
|
|
Interest
earned/paid
|
|
|
Average
yield/cost
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
1,222,594
|
|
|
$
|
17,668
|
|
|
|
5.86
|
%
|
|
$
|
1,310,679
|
|
|
$
|
18,762
|
|
|
|
5.81
|
%
|
Investment
securities available for sale
|
|
|
310,150
|
|
|
|
3,192
|
|
|
|
4.17
|
%
|
|
|
315,765
|
|
|
|
3,642
|
|
|
|
4.68
|
%
|
Investment
securities held to maturity
|
|
|
10,655
|
|
|
|
122
|
|
|
|
4.64
|
%
|
|
|
27,864
|
|
|
|
332
|
|
|
|
4.83
|
%
|
Federal
funds sold
|
|
|
29,848
|
|
|
|
4
|
|
|
|
0.05
|
%
|
|
|
24,985
|
|
|
|
8
|
|
|
|
0.13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest earning assets
|
|
|
1,573,247
|
|
|
|
20,986
|
|
|
|
5.41
|
%
|
|
|
1,679,293
|
|
|
|
22,744
|
|
|
|
5.49
|
%
|
Other
assets
|
|
|
130,943
|
|
|
|
|
|
|
|
|
|
|
|
105,781
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
1,704,190
|
|
|
|
|
|
|
|
|
|
|
$
|
1,785,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW,
Money Market, and Savings
|
|
$
|
594,152
|
|
|
$
|
1,784
|
|
|
|
1.22
|
%
|
|
$
|
469,447
|
|
|
$
|
1,628
|
|
|
|
1.41
|
%
|
Time
deposits greater than $100K
|
|
|
177,408
|
|
|
|
622
|
|
|
|
1.42
|
%
|
|
|
181,416
|
|
|
|
1,425
|
|
|
|
3.19
|
%
|
Other
time deposits
|
|
|
410,898
|
|
|
|
2,756
|
|
|
|
2.72
|
%
|
|
|
519,969
|
|
|
|
4,251
|
|
|
|
3.32
|
%
|
Short-term
borrowings
|
|
|
78,102
|
|
|
|
388
|
|
|
|
2.01
|
%
|
|
|
101,425
|
|
|
|
565
|
|
|
|
2.26
|
%
|
Long-term
borrowings
|
|
|
199,076
|
|
|
|
2,189
|
|
|
|
4.46
|
%
|
|
|
263,699
|
|
|
|
2,416
|
|
|
|
3.72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest bearing liabilities
|
|
|
1,459,636
|
|
|
|
7,739
|
|
|
|
2.15
|
%
|
|
|
1,535,956
|
|
|
|
10,285
|
|
|
|
2.72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
deposits
|
|
|
113,991
|
|
|
|
|
|
|
|
|
|
|
|
101,747
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
8,619
|
|
|
|
|
|
|
|
|
|
|
|
9,360
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
121,944
|
|
|
|
|
|
|
|
|
|
|
|
138,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
1,704,190
|
|
|
|
|
|
|
|
|
|
|
$
|
1,785,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income and net interest spread
|
|
|
|
|
|
$
|
13,247
|
|
|
|
3.26
|
%
|
|
|
|
|
|
$
|
12,459
|
|
|
|
2.78
|
%
|
Net
interest margin
|
|
|
|
|
|
|
|
|
|
|
3.41
|
%
|
|
|
|
|
|
|
|
|
|
|
3.01
|
%
|
Ratio
of average interest-earning assets to average interest-bearing
liabilities
|
|
|
107.78
|
%
|
|
|
|
|
|
|
|
|
|
|
109.33
|
%
|
|
|
|
|
|
|
|
|
Provision
for Loan Losses
.
The Company
recorded a $10.0 million provision for loan losses for the quarter ended March
31, 2010, representing an increase of $6.0 million from the $4.0 million
provision for the first quarter of 2009. The level of provision for
the quarter is reflective of the trends in the loan portfolio, including levels
of nonperforming loans and other loan portfolio quality measures, and analyses
of impaired loans as well as the level of net charge-offs during the
period. The substantial increase in the provision for the first
quarter of 2010 compared with the provision for loan losses for first quarter
2009 was based on certain loans identified as impaired and other specific loans
currently identified with a greater than normal risk based on the current
economic conditions. Additional amounts are also required to properly
recognize the loss potential inherent in riskier segments of the loan portfolio,
particularly the residential construction and development loan segment based on
the historic loss experience of each loan segment. Nonperforming
loans as a percentage of total loans increased to 4.19% at March 31, 2010
compared with 1.56% at March 31, 2009. Provisions for loan losses are
charged to income to bring our allowance for loan losses to a level deemed
appropriate by management based on the factors discussed under “Asset
Quality.” On an annualized basis, our percentage of net loan
charge-offs to average loans outstanding was 1.20% for the quarter ended March
31, 2010, compared with 1.09% for the quarter ended March 31, 2009.
Non-Interest
Income.
For the three months ended March 31, 2010,
non-interest income increased $1.4 million, or 52.8%, to $4.0 million from $2.6
million for the same period in 2009 primarily resulting from a $1.4 million
increase in gains on sale of investment securities as part of ongoing portfolio
management. Service charges increased $113 thousand compared to the
2009 quarter as debit card income increased $86 thousand, other service charges
increased $60 thousand and NSF charges decreased $33 thousand from decreased
overdraft volume. Mortgage banking income decreased $58 thousand or
13.9% from decreased customer transaction volume including refinance
activity. The Company recognized $176 thousand income from its
investment in Small Business Investment Company (SBIC) during the first quarter
2010 compared to $238 thousand in the same period of the prior
year. The income generated during the quarter was from normal
operations as no individual investments were harvested or written off during
this quarter. Investment brokerage income decreased $61 thousand
compared to the first quarter of 2009 based on lower transaction
volume. During the first quarter of 2010, an “other-than-temporary”
impairment charge of $186 thousand was recognized on one equity investment while
the write-off of our equity position in the failed Silverton Bank totaling $404
thousand was recognized during the first quarter of 2009.
Non-Interest
Expense
.
For the three
months ended March 31, 2010, our non-interest expense decreased $48.7 million,
or 80.5%, over the same period in 2009 primarily due to recognizing a $49.5
million goodwill impairment charge in first quarter 2009. Excluding
goodwill, our non-interest expense increased $766 thousand or 6.9% compared to
the first quarter of 2009. The Company’s FDIC deposit insurance
premium increased $304 thousand as the FDIC increased the ongoing deposit
insurance premium rates to maintain adequate balances in the Deposit Insurance
Fund to protect depositors during this time of unusually high number of bank
failures. Management decreased discretionary spending as advertising
and promotion expense decreased $156 thousand and travel and entertainment
decreased $33 thousand. Foreclosed asset write-downs were $484
thousand during the first quarter of 2010 with the continued devaluation of
properties held; this compared to none in the first quarter of
2009. OREO expenses were $360 thousand for the current quarter
compared to $214 thousand in the first quarter last year due to the $9.5 million
increase in the balances of foreclosed assets, the increased cost of acquiring,
holding and maintaining foreclosed properties. The Company started a
new program during 2009 to help builders sell their bank-financed inventory of
houses that had been on the market for 12 months or more. The cost
for this program totaled $173 thousand to incent home buyers to purchase 17
homes during the first quarter of 2010 compared to $100 thousand in the first
quarter of 2009. While this program has been successful in
encouraging sales of slow moving houses since inception, it is expected to be
discontinued after the second quarter of 2010. These increased
expenses were offset by gains on sales of OREO property which increased $94
thousand year over year. Salaries and employee benefits decreased $61
thousand year over year as total employee benefits decreased $147 thousand
primarily due to a reduction in the Company’s 401(k) match. The
employer 401(k) match was decreased during the third quarter of 2009 from a 100%
match on the first 6% of employee compensation contributed to
50%. This employee benefit cost reduction was partially offset by a
net increase in salary expense of $97 thousand. The movement in
salary expense was impacted by a reduction in staffing amounting to 20 full-time
equivalents and the imposition of a Company-wide salary freeze effective August
1, 2009. Occupancy and equipment expense decreased $118 thousand
compared to the first quarter of 2009 due to decreases in software depreciation
and maintenance.
Provision
for Income Taxes
.
The Company
recorded an income tax benefit of $32 thousand for the quarter ending March 31,
2010 compared to income tax benefit of $214 thousand for first quarter
2009. The unusually low effective tax rate, especially for first
quarter 2010, is reflective of the impact of tax exempt interest income and
income from bank owned life insurance for both years and a $2.0 million
valuation allowance increase related to the ability of the Company to realize
its net deferred tax assets. The non-deductible goodwill impairment
charge was the most significant factor for the unusually low rate for
2009. A $2.0 million valuation allowance related to the deferred tax
asset for the allowance for loan losses was also recognized in the fourth
quarter of 2009 resulting in a total valuation allowance of $4.0 million at
March 31, 2010.
Liquidity
and Capital Resources
Market
and public confidence in our financial strength and in the strength of financial
institutions in general will largely determine our access to appropriate levels
of liquidity. This confidence is significantly dependent on our
ability to maintain sound asset quality and sufficient levels of capital
resources to generate appropriate earnings and to maintain a consistent dividend
policy.
Liquidity
is defined as our ability to meet anticipated customer demands for funds under
credit commitments and deposit withdrawals at a reasonable cost and on a timely
basis. Management measures our liquidity position by giving
consideration to both on- and off-balance sheet sources of funds and demands for
funds on a daily and weekly basis.
Sources
of liquidity include cash and cash equivalents, net of federal requirements to
maintain reserves against deposit liabilities, unpledged investments available
for sale, loan repayments, loan sales, deposits, and borrowings from the Federal
Home Loan Bank, the Federal Reserve and from correspondent banks under overnight
federal funds credit lines. In addition to deposit and borrowing
withdrawals and maturities, the Company’s primary demand for liquidity is
anticipated funding under credit commitments to customers.
We
believe our liquidity is adequate to fund expected loan demand and current
deposit and borrowing maturities. Investment securities totaled
$335.5 million at March 31, 2010, an increase of $11.8 million from $323.7
million at December 31, 2009. Government agencies increased $38.0
million and mortgage backed securities decreased $28.5 million during this three
month period, while municipal securities increased $1.6
million. Supplementing customer deposits as a source of funding, we
have available lines of credit from various correspondent banks to purchase
federal funds on a short-term basis of approximately $107.0
million. We also have the credit capacity from the Federal Home Loan
Bank of Atlanta (FHLB) to borrow up to $425.7 million, as of March 31, 2010,
with lendable collateral value of $326.8 million. Borrowings with the
FHLB were $104.4 million at March 31, 2010. At March 31, 2010, we had
funding of $80.0 million in the form of term repurchase agreements with
maturities from two to eight years under repurchase lines of credit aggregating
$100.0 million from various institutions. The repurchases must be
adequately collateralized. We also had short-term repurchase
agreements with total outstanding balances of $14.5 million and $14.9 million at
March 31, 2010 and December 31, 2009, respectively, $4.5 million of which were
done as accommodations for our deposit customers. Securities sold
under agreements to repurchase generally mature within ninety days from the
transaction date and are collateralized by U.S. government agency
obligations. At March 31, 2010, our outstanding commitments to extend
credit consisted of loan commitments of $163.7 million and amounts available
under home equity credit lines, other credit lines and letters of credit of
$99.0 million, $12.4 million and $9.4 million, respectively. Given
the amount of our unpledged collateral of $107.1 million, we believe that our
combined aggregate liquidity position from all sources is sufficient to meet the
funding requirements of loan demand and deposit maturities and withdrawals in
the near term.
Historically,
we have relied heavily on certificates of deposits as a source of
funds. While the majority of these funds are from our local market
area, the Bank has utilized brokered and out-of-market certificates of deposits
to diversify and supplement our deposit base. In recent years, the
Bank has emphasized initiatives to increase lower cost transaction accounts and
other core deposit accounts to improve our funding mix. Time deposits
of $573.2 million at March 31, 2010 decreased $43.4 million, or 7.0%, compared
to December 31, 2009. Certificates of deposits represented 43.9% of
our total deposits at March 31, 2010, a decrease from 46.9% at December 31,
2009. Deposit growth shifted from time deposits to money market,
savings and NOW accounts in the first quarter of 2010 with growth of $36.3
million, or 5.2%. Savings grew $18.8 million during the quarter from
the introduction of our new Ready Saver account which is available only on the
internet.
Under the
United States Treasury’s Capital Purchase Program (CPP), the Company issued
$42.75 million in Cumulative Perpetual Preferred Stock, Series A, on December 5,
2008. In addition, the Company provided warrants to the Treasury to
purchase 1,623,418 shares of the Company’s common stock at an exercise price of
$3.95 per share. These warrants are immediately exercisable and
expire ten years from the date of issuance. The preferred stock is
non-voting, other than having class voting rights on certain matters, and pays
cumulative dividends quarterly at a rate of 5% per annum for the first five
years and 9% per annum thereafter. The preferred shares are
redeemable at the option of the Company subject to regulatory
approval.
As a
condition of the CPP, the Company must obtain consent from the United States
Department of the Treasury to repurchase its common stock or to increase its
cash dividend on its common stock from the September 30, 2008 quarterly level of
$0.04 per common share. The Company has agreed to certain
restrictions on executive compensation, including limitations on amounts payable
to certain executives under severance arrangements and change in control
provisions of employment contracts and clawback provisions in compensation
plans, as part of the CPP. Under the American Recovery and
Reinvestment Act of 2009, the Company is limited to using restricted stock as
the form of payment to the top five highest compensated executives under any
incentive or bonus compensation programs.
At March
31, 2010, our leverage ratio (Tier I capital to average quarterly assets) was
8.86%, and all of our capital ratios exceeded the minimums established for a
well-capitalized bank by regulatory measures. Our Tier I risk-based
capital ratio and total risk-based capital ratio at March 31, 2010 were 10.92%
and 12.80%, respectively.
Through
July 2006, the Company authorized the repurchase up to 1.9 million shares of its
common stock. Through December 5, 2008 (the date of our participation
in the Treasury’s Capital Purchase Plan), the Company had repurchased 1,858,073
shares at an average price of $6.99 per share under the three
plans. During the first quarter in 2010, there were no
repurchases. Under the provisions of the Treasury’s Capital Purchase
Program, the Company may not repurchase any of its common stock without the
consent of the Treasury as long as the Treasury invests in our preferred
stock.
On March
24, 2009, the Company announced that its Board of Directors voted to suspend
payment of a quarterly cash dividend to common shareholders. The
Board will continue to evaluate the payment of a quarterly cash dividend on a
periodic basis.
Asset
Quality
We
consider asset quality to be of primary importance. We employ a
formal internal loan review process to ensure adherence to the Lending Policy as
approved by the Board of Directors. It is the responsibility of each
lending officer to assign an appropriate risk grade to every loan
originated. Credit Administration, through the loan review process,
validates the accuracy of the initial and any revised risk grade
assessment. In addition, as a given loan’s credit quality improves or
deteriorates, it is the loan officer’s responsibility to change the borrower’s
risk grade accordingly. Our policy in regard to past due loans
normally requires a charge-off to the allowance for loan losses within a
reasonable period after collection efforts and a thorough review have been
completed. Further collection efforts are then pursued through
various means including legal remedies. Loans carried in a nonaccrual
status and probable losses are considered in the determination of the allowance
for loan losses.
Our
financial statements are prepared on the accrual basis of accounting, including
the recognition of interest income on loans, unless we place a loan on
nonaccrual basis. We account for loans on a nonaccrual basis when we
have serious doubts about the collectability of principal or
interest. Generally, our policy is to place a loan on nonaccrual
status when the loan becomes past due 90 days. We also place loans on
nonaccrual status in cases where we are uncertain whether the borrower can
satisfy the contractual terms of the loan agreement. At March 31,
2010 and December 31, 2009, our nonaccrual loans included $12.0 million and
$10.0 million, respectively, of loans past due less than 90
days. Amounts received on nonaccrual loans generally are applied
first to principal and then to interest only after all principal has been
collected. If a borrower brings their loan current, our policy is to
keep this loan in a nonaccrual status until this loan has remained current for
six months. Restructured loans are those for which concessions,
including the reduction of interest rates below a rate otherwise available to
that borrower or the deferral of interest or principal have been granted due to
the borrower’s weakened financial condition. We record interest on
restructured loans at the restructured rates, as collected, when we anticipate
that no loss of original principal will occur. Management also
considers potential problem loans in the evaluation of the adequacy of the
Bank’s allowance for loan losses. Potential problem loans are loans
which are currently performing and are not included in nonaccrual or
restructured loans as shown above, but about which we have doubts as to the
borrower’s ability to comply with present repayment terms. Because
these loans are at a heightened risk of becoming past due, reaching nonaccrual
status or being restructured, they are being monitored closely.
Nonperforming
loans increased to $50.6 million or 4.19% of total loans at March 31, 2010,
compared to $37.7 million or 3.07% of loans at December 31,
2009. Approximately 62% of these nonperforming loans at March 31,
2010 were related to construction and development lending. Of the
$12.9 million increase in nonperforming loans on a linked quarter basis, $10.3
million, or 80% of the increase, was related to construction and development
lending. In addition to the financial strength of each borrower and
cash flow characteristics of each project, the repayment of construction and
development loans are particularly dependent on the value of the real estate
collateral. Repayment of such loans is generally considered subject
to greater credit risk than residential mortgage loans. Regardless of
the underwriting criteria the Company utilizes, losses may be experienced as a
result of various factors beyond our control, including, among other things,
changes in market conditions affecting the value of the real estate collateral
and problems affecting the credit of our borrowers. Due to the above
mentioned factors, we consider certain segments of our residential construction
and development loan portfolio to represent higher risk loans. These
higher risk loans are speculative construction loans and land acquisition and
development loans, including lot inventory loans.
In the
tables and discussion below, the credit metrics for the current quarter and
their sequential changes are illustrated: 1) significant increase in
nonperforming loans related to construction development lending; 2) significant
increase in classified assets; and 3) increase in loan
delinquencies. While the impairment of two loan relationships had a
significant impact on these credit metrics, the continued deterioration of the
construction and development portfolio has also had a significant
impact. (See further discussion on potential problem loans
below).
The
following table sets forth a breakdown of nonperforming loans and foreclosed
assets as of March 31, 2010, by nature of the property.
|
|
March 31,
|
|
|
December
31,
|
|
Nonperforming loans
|
|
2010
|
|
|
2009
|
|
|
|
(Amounts in thousands)
|
|
Residential
Construction:
|
|
|
|
|
|
|
Speculative
construction
|
|
$
|
9,049
|
|
|
$
|
4,210
|
|
Land
acquisition and development
|
|
|
17,462
|
|
|
|
11,997
|
|
Total
residential construction
|
|
|
26,511
|
|
|
|
16,207
|
|
Commercial
real estate
|
|
|
18,671
|
|
|
|
16,344
|
|
Commercial
and industrial
|
|
|
4,177
|
|
|
|
3,432
|
|
Consumer
|
|
|
1,249
|
|
|
|
1,749
|
|
Total
nonperforming loans
|
|
$
|
46,431
|
|
|
$
|
37,732
|
|
|
|
March 31,
|
|
|
December 31,
|
|
Foreclosed assets
|
|
2010
|
|
|
2009
|
|
|
|
(Amounts in thousands)
|
|
Residential
construction, land development and other land
|
|
$
|
12,679
|
|
|
$
|
11,101
|
|
Commercial
construction
|
|
|
2,142
|
|
|
|
2,206
|
|
1 -
4 family residential properties
|
|
|
3,330
|
|
|
|
4,272
|
|
Nonfarm
nonresidential properties
|
|
|
1,749
|
|
|
|
1,670
|
|
Multi
family properties
|
|
|
160
|
|
|
|
160
|
|
Equipment
|
|
|
225
|
|
|
|
225
|
|
Total
foreclosed assets
|
|
$
|
20,285
|
|
|
$
|
19,634
|
|
The
following table illustrates the quarterly trends in the outstanding balances of
these higher risk loan segments.
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
|
(Amounts
in millions)
|
|
Residential
construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Speculative
Residential Construction
|
|
$
|
53.0
|
|
|
$
|
53.3
|
|
|
$
|
64.5
|
|
|
$
|
75.1
|
|
|
$
|
87.7
|
|
Land
Acquisition and Development
|
|
|
56.2
|
|
|
|
58.3
|
|
|
|
62.3
|
|
|
|
62.3
|
|
|
|
66.5
|
|
Lot
Inventory
|
|
|
28.0
|
|
|
|
29.5
|
|
|
|
32.0
|
|
|
|
32.3
|
|
|
|
33.5
|
|
Total
|
|
$
|
137.2
|
|
|
$
|
141.1
|
|
|
$
|
158.8
|
|
|
$
|
169.7
|
|
|
$
|
187.7
|
|
Furthermore,
we monitor certain performance and credit metrics related to these higher risk
loan segments, including the aging of the underlying loans in these
segments. As of March 31, 2010, speculative construction loans on our
books more than twelve months amounted to $31.7 million or 59.8% of the total
speculative residential construction loan portfolio. Land acquisition
and development loans on our books for more than twenty-four months at March 31,
2010 amounted to $48.3 million or 85.9% of that portfolio segment.
We also
monitor credit risk migration and delinquency trends in the ongoing evaluation
and assessment of credit risk exposure in the overall loan
portfolio. The following table presents quarterly trends in loan
delinquencies, nonaccrual loans and in loans classified substandard or
doubtful.
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
|
(Amounts in millions)
|
|
|
|
$
|
|
|
% of
Total
Loans
|
|
|
$
|
|
|
% of
Total
Loans
|
|
|
$
|
|
|
% of
Total
Loans
|
|
|
$
|
|
|
% of
Total
Loans
|
|
|
$
|
|
|
% of
Total
Loans
|
|
Loans
classified substandard or doubtful
|
|
$
|
137.3
|
|
|
|
11.36
|
%
|
|
$
|
83.6
|
|
|
|
6.80
|
%
|
|
$
|
60.8
|
|
|
|
4.87
|
%
|
|
$
|
56.7
|
|
|
|
4.53
|
%
|
|
$
|
41.4
|
|
|
|
3.19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
delinquencies 30 days or more past due
|
|
$
|
37.3
|
|
|
|
3.09
|
%
|
|
$
|
29.7
|
|
|
|
2.42
|
%
|
|
$
|
25.8
|
|
|
|
2.07
|
%
|
|
$
|
24.0
|
|
|
|
1.92
|
%
|
|
$
|
32.9
|
|
|
|
2.54
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming
Loans
|
|
$
|
50.6
|
|
|
|
4.19
|
%
|
|
$
|
37.7
|
|
|
|
3.07
|
%
|
|
$
|
22.7
|
|
|
|
1.82
|
%
|
|
$
|
17.9
|
|
|
|
1.43
|
%
|
|
$
|
20.3
|
|
|
|
1.56
|
%
|
The $53.7
million, or 64%, increase in classified loans from December 31, 2009 to March
31, 2010, was due to the impact of two loan relationships totaling $15.0 million
combined with a significant downgrading of credit risk grades resulting from our
regular quarterly review of watch and criticized loans. Total loan
delinquencies (including nonaccrual loans) increased by $7.6 million from
December 31, 2009 to March 31, 2010; while the 30 to 89 day delinquencies
increased $10.4 million during the same period.
The
following is a summary of nonperforming assets at the periods
presented:
|
|
March 31,
|
|
|
December 31,
|
|
|
March
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual
loans
|
|
$
|
45,249
|
|
|
$
|
35,535
|
|
|
$
|
20,251
|
|
Restructured
loans - nonaccruing
|
|
|
4,341
|
|
|
|
2,197
|
|
|
|
-
|
|
Restructured
loans - accruing
|
|
|
1,018
|
|
|
|
-
|
|
|
|
-
|
|
Total
nonperforming loans
|
|
|
50,608
|
|
|
|
37,732
|
|
|
|
20,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed
assets
|
|
|
20,285
|
|
|
|
19,634
|
|
|
|
10,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
nonperforming assets
|
|
$
|
70,893
|
|
|
$
|
57,366
|
|
|
$
|
31,049
|
|
The
largest nonaccrual balance of any one borrower at March 31, 2010 was $6.9
million, with the average balance for the one hundred fifty-two nonaccrual loans
being $329 thousand. At December 31, 2009, the largest nonaccrual
balance of any one borrower was $7.0 million, with the average balance for the
one hundred twenty-eight nonaccrual loans being $295 thousand.
In
addition to nonperforming loans, there were loans totaling $87.7 million at
March 31, 2010, for which management has concerns regarding the ability of the
borrowers to meet existing repayment terms. While we have seen some
increased credit deterioration in the commercial real estate portfolio, the
largest increase in potential problem loans remain related to residential
construction and development lending. Potential problem loans are
primarily classified as substandard for regulatory purposes and reflect the
distinct possibility, but not the probability, that the Company will not be able
to collect all amounts due according to the contractual terms of the loan
agreement. Although these loans have been identified as potential
problem loans, they may never become delinquent, nonperforming or
impaired. Additionally, these loans are generally secured by
residential real estate or other assets, thus reducing, to some extent given
current real estate market trends, the potential for loss should they become
nonperforming. Potential problem loans are considered in the
determination of the adequacy of the allowance for loan losses.
Foreclosed
assets consist of real estate acquired through foreclosure and repossessed
assets. At March 31, 2010, foreclosed assets totaled $20.3 million,
or 1.19% of total assets, and consisted of seventy-three properties compared to
$19.6 million, or 1.14% of total assets, and seventy-one properties at December
31, 2009. The largest dollar value of a foreclosed property was $2.9
million at March 31, 2010 and December 31, 2009. We recorded
write-downs in the value of foreclosed assets of $484 thousand during the first
quarter of 2010 and $1.6 million during the fourth quarter of
2009. We have reviewed recent appraisals of these properties and
believe that the fair values, less estimated costs to sell, equal or exceed
their carrying value.
Our
allowance for loan losses (“ALLL”) is established through charges to earnings in
the form of a provision for loan losses. We increase our allowance
for loan losses by provisions charged to operations and by recoveries of amounts
previously charged off and we reduce our allowance by loans charged
off. In evaluating the adequacy of the allowance, we consider the
growth, composition and industry diversification of the portfolio, historical
loan loss experience, current delinquency levels, trends in past dues and
classified assets, adverse situations that may affect a borrower’s ability to
repay, estimated value of any underlying collateral, prevailing economic
conditions and other relevant factors derived from our history of
operations. The methodology and assumptions used to determine the
allowance are continually reviewed as to their appropriateness given the most
recent losses realized and other factors that influence the estimation
process. The model assumptions and resulting allowance level are
adjusted accordingly as these factors change.
The
Bank’s format for the calculation of ALLL begins with the evaluation of
individual loans considered impaired. For the purpose of evaluating
loans for impairment, loans are considered impaired when it is considered
probable that all amounts due under the contractual terms of the loan will not
be collected when due (minor shortfalls in amount or timing
excepted). The Bank has established policies and procedures for
identifying loans that should be considered for impairment. Loans are
reviewed through multiple means such as delinquency management, credit risk
reviews, watch and criticized loan monitoring meetings and general account
management. Loans that are outside of the Bank’s established criteria
for evaluation may be considered for impairment testing when management deems
the risk sufficient to warrant this approach. For loans determined to
be impaired, the specific allowance is based on the most appropriate of the
three measurement methods: present value of expected future cash flows, fair
value of collateral, or the observable market price of a loan
method. While management uses the best information available to make
evaluations, future adjustments to the allowance may be necessary if conditions
differ substantially from the assumptions used in making the
evaluations. Once a loan is considered individually impaired, it is
not included in other troubled loan analysis, even if no specific allowance is
considered necessary. See Note 4 to the Financial Statements for
further discussion.
The Bank
also utilizes various other factors to further evaluate the portfolio for risk
to determine the appropriate level of allowance to provide for probable losses
in the loan portfolio. During the third quarter of 2009, we made some
enhancements to our methodology for the calculation of ALLL in regards to loans
that are not evaluated individually. The major change was to apply
loss factors based on the credit risk grading of these loans segmented by major
loan types of residential construction and development, commercial real estate,
consumer and other loans. These loss factors were based on an
appropriate loss history for each major loan type adjusted by credit grade
migration factors and other risk factors. While similar to other risk
factors related to economic and portfolio trends used in prior quarters, we
focused on risk factors pertinent to the underlying risks in each major loan
type such as changes in sales activity and pricing for sales of newly
constructed homes for residential construction and changes in vacancy levels and
collateral value for commercial real estate. These enhancements place
a greater emphasis on the credit risk grading of the loan portfolio and allow us
to focus on the relative risk and the pertinent factors for the major loan
segments of the Company.
Management
is continuing to closely monitor the value of real estate serving as collateral
for our loans, especially lots and land under development, due to continued
concern that the low level of real estate sales activity will continue to have a
negative impact on the value of real estate collateral. In addition,
depressed market conditions have adversely impacted, and may continue to
adversely impact, the financial condition and liquidity position of certain of
our borrowers. Additionally, the value of commercial real estate
collateral may come under further pressure from weak economic conditions and
prevailing unemployment levels.
Throughout
our history, growth in loans outstanding has been the primary reason for
increases in our allowance for loan losses and the resultant provisions for loan
losses. Although at the end of the last four quarters loans
outstanding have decreased, the allowance for loan losses has continued to
increase due to increased nonperforming loans and increasing levels of net
charge-offs. The provision for loan losses increased to $10.0 million
for the first quarter of 2010 as compared to $4.0 million for the same period
last year due principally to an increase in nonperforming loans. The
allowance for loan losses at March 31, 2010 was $36.0 million and represented
2.98% of total loans which increased from 2.41% from year end and provided
coverage of 71% of nonperforming loans. This level of allowance has
increased a net of $6.4 million from $29.6 million, or 2.41% of total loans at
December 31, 2009, which provided coverage for 79% on nonperforming
loans. At March 31, 2009, the allowance was $19.4 million, which
represented 1.49% of total loans and coverage of 0.95% of nonperforming
loans. As a percentage of loans outstanding, the allowance increased
both sequentially and year-over-year as a result of increased nonperforming
loans and is based on the model described above. We believe that the
Company’s allowance is adequate to absorb probable future losses inherent in our
loan portfolio. No assurance can be given, however, that adverse
economic circumstances or other events, including additional and continued loan
review, future regulatory examination findings or changes in borrowers’
financial conditions, will not result in increased losses in the loan portfolio
or in the need for increases in the allowance for loan losses.
Item
1 - Financial Statements
SOUTHERN
COMMUNITY FINANCIAL CORPORATION
CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION (Unaudited)
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2010
|
|
|
2009
*
|
|
|
|
|
|
|
|
|
|
|
(Amounts
in thousands, except share data)
|
|
Assets
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
33,885
|
|
|
$
|
30,184
|
|
Federal
funds sold
|
|
|
22,352
|
|
|
|
31,269
|
|
Investment
securities
|
|
|
|
|
|
|
|
|
Available
for sale, at fair value
|
|
|
325,311
|
|
|
|
312,780
|
|
Held
to maturity, at amortized cost
|
|
|
10,207
|
|
|
|
10,919
|
|
Federal
Home Loan Bank stock
|
|
|
9,794
|
|
|
|
9,794
|
|
|
|
|
|
|
|
|
|
|
Loans
held for sale
|
|
|
2,984
|
|
|
|
3,025
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
1,208,454
|
|
|
|
1,230,275
|
|
Allowance
for loan losses
|
|
|
(36,007
|
)
|
|
|
(29,638
|
)
|
Net
Loans
|
|
|
1,172,447
|
|
|
|
1,200,637
|
|
|
|
|
|
|
|
|
|
|
Premises
and equipment, net
|
|
|
42,058
|
|
|
|
42,630
|
|
Foreclosed
assets
|
|
|
20,285
|
|
|
|
19,634
|
|
Other
assets
|
|
|
67,857
|
|
|
|
67,736
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
1,707,180
|
|
|
$
|
1,728,608
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
Non-interest
bearing demand
|
|
$
|
113,292
|
|
|
$
|
118,372
|
|
Money
market, NOW and savings
|
|
|
620,433
|
|
|
|
579,027
|
|
Time
|
|
|
573,229
|
|
|
|
616,671
|
|
Total
Deposits
|
|
|
1,306,954
|
|
|
|
1,314,070
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
|
76,769
|
|
|
|
85,477
|
|
Long-term
borrowings
|
|
|
199,062
|
|
|
|
199,103
|
|
Other
liabilities
|
|
|
7,513
|
|
|
|
7,961
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
1,590,298
|
|
|
|
1,606,611
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
Senior
cumulative preferred stock (Series A), no par value, 1,000,000 shares
authorized; 42,750 shares issued and outstanding at March 31,
2010 and December 31, 2009
|
|
|
41,158
|
|
|
|
41,060
|
|
Common
stock, no par value, 30,000,000 shares authorized; issued and outstanding
16,818,125 shares at March 31, 2010 and 16,787,675 shares at December 31,
2009
|
|
|
119,320
|
|
|
|
119,282
|
|
Retained
earnings (accumulated deficit)
|
|
|
(46,674
|
)
|
|
|
(41,430
|
)
|
Accumulated
other comprehensive income
|
|
|
3,078
|
|
|
|
3,085
|
|
Total
Stockholders’ Equity
|
|
|
116,882
|
|
|
|
121,997
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' Equity
|
|
$
|
1,707,180
|
|
|
$
|
1,728,608
|
|
* Derived
from audited consolidated financial statements
See
accompanying notes.
SOUTHERN
COMMUNITY FINANCIAL CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS (Unaudited)
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Amounts
in thousands, except per
|
|
|
|
share
and share data)
|
|
Interest
Income
|
|
|
|
|
|
|
Loans
|
|
$
|
17,668
|
|
|
$
|
18,762
|
|
Investment
securities available for sale
|
|
|
3,192
|
|
|
|
3,642
|
|
Investment
securities held to maturity
|
|
|
122
|
|
|
|
332
|
|
Federal
funds sold
|
|
|
4
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
Total
Interest Income
|
|
|
20,986
|
|
|
|
22,744
|
|
Interest
Expense
|
|
|
|
|
|
|
|
|
Money
market, NOW and savings deposits
|
|
|
1,784
|
|
|
|
1,628
|
|
Time
deposits
|
|
|
3,378
|
|
|
|
5,676
|
|
Borrowings
|
|
|
2,577
|
|
|
|
2,981
|
|
|
|
|
|
|
|
|
|
|
Total
Interest Expense
|
|
|
7,739
|
|
|
|
10,285
|
|
|
|
|
|
|
|
|
|
|
Net
Interest Income
|
|
|
13,247
|
|
|
|
12,459
|
|
|
|
|
|
|
|
|
|
|
Provision
for Loan Losses
|
|
|
10,000
|
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
Net
Interest Income After Provision for Loan Losses
|
|
|
3,247
|
|
|
|
8,459
|
|
|
|
|
|
|
|
|
|
|
Non-Interest
Income
|
|
|
|
|
|
|
|
|
Service
charges and fees on deposit accounts
|
|
|
1,557
|
|
|
|
1,444
|
|
Income
from mortgage banking activities
|
|
|
358
|
|
|
|
416
|
|
Investment
brokerage and trust fees
|
|
|
235
|
|
|
|
296
|
|
Net
impairment loss recognized in earnings
|
|
|
(186
|
)
|
|
|
(404
|
)
|
Other
|
|
|
1,989
|
|
|
|
835
|
|
Total
non-interest income
|
|
|
3,953
|
|
|
|
2,587
|
|
|
|
|
|
|
|
|
|
|
Non-Interest
Expense
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
5,469
|
|
|
|
5,530
|
|
Occupancy
and equipment
|
|
|
1,916
|
|
|
|
2,034
|
|
Goodwill
impairment
|
|
|
-
|
|
|
|
49,501
|
|
Other
|
|
|
4,458
|
|
|
|
3,519
|
|
|
|
|
|
|
|
|
|
|
Total
Non-Interest Expense
|
|
|
11,843
|
|
|
|
60,584
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) Before Income Taxes
|
|
|
(4,643
|
)
|
|
|
(49,538
|
)
|
|
|
|
|
|
|
|
|
|
Income
Tax (Benefit) Expense
|
|
|
(32
|
)
|
|
|
(214
|
)
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
|
(4,611
|
)
|
|
|
(49,324
|
)
|
|
|
|
|
|
|
|
|
|
Effective
Dividend on Preferred Stock
|
|
|
633
|
|
|
|
627
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss) Available to Common Shareholders
|
|
$
|
(5,244
|
)
|
|
$
|
(49,951
|
)
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss) Per Common Share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.31
|
)
|
|
$
|
(2.98
|
)
|
Diluted
|
|
|
(0.31
|
)
|
|
|
(2.98
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
Average Common Shares Outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
16,806,292
|
|
|
|
16,780,058
|
|
Diluted
|
|
|
16,806,292
|
|
|
|
16,780,058
|
|
See
accompanying notes.
SOUTHERN
COMMUNITY FINANCIAL CORPORATION
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
(Amounts
in thousands)
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(4,611
|
)
|
|
$
|
(49,324
|
)
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Securities
available for sale:
|
|
|
|
|
|
|
|
|
Unrealized
holding gains (loss) on available for sale securities
|
|
|
1,400
|
|
|
|
1,489
|
|
Tax
effect
|
|
|
(540
|
)
|
|
|
(573
|
)
|
Reclassification
of gains recognized in net income
|
|
|
(1,354
|
)
|
|
|
(1
|
)
|
Tax
effect
|
|
|
523
|
|
|
|
-
|
|
Reclassification
of impairment on equity securities
|
|
|
186
|
|
|
|
404
|
|
Tax
effect
|
|
|
(72
|
)
|
|
|
(156
|
)
|
Net
of tax amount
|
|
|
143
|
|
|
|
1,163
|
|
Cash
flow hedging activities:
|
|
|
|
|
|
|
|
|
Unrealized
holding gains (losses) on cash flow hedging activities
|
|
|
(319
|
)
|
|
|
257
|
|
Tax
effect
|
|
|
123
|
|
|
|
(99
|
)
|
Reclassification
of gains (losses) recognized in net income (loss), net:
|
|
|
|
|
|
|
|
|
Reclassified
into income
|
|
|
75
|
|
|
|
(166
|
)
|
Tax
effect
|
|
|
(29
|
)
|
|
|
-
|
|
Acquisition
premium on interest rate cap contract, net of amortization
|
|
|
-
|
|
|
|
(405
|
)
|
Tax
effect
|
|
|
-
|
|
|
|
156
|
|
Net
of tax amount
|
|
|
(150
|
)
|
|
|
(257
|
)
|
|
|
|
|
|
|
|
|
|
Total
other comprehensive income (loss)
|
|
|
(7
|
)
|
|
|
906
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss)
|
|
$
|
(4,618
|
)
|
|
$
|
(48,418
|
)
|
See
accompanying notes.
SOUTHERN
COMMUNITY FINANCIAL CORPORATION
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
(accumulated
deficit)
|
|
|
Comprehensive
Income (loss)
|
|
|
Stockholders'
Equity
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2009
|
|
|
42,750
|
|
|
$
|
41,060
|
|
|
|
16,787,675
|
|
|
$
|
119,282
|
|
|
$
|
(41,430
|
)
|
|
$
|
3,085
|
|
|
$
|
121,997
|
|
Net
income (loss)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,611
|
)
|
|
|
-
|
|
|
|
(4,611
|
)
|
Other
comprehensive income, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7
|
)
|
|
|
(7
|
)
|
Restricted
stock issued
|
|
|
-
|
|
|
|
-
|
|
|
|
30,450
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Stock-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
38
|
|
|
|
-
|
|
|
|
-
|
|
|
|
38
|
|
Preferred
stock dividend
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(535
|
)
|
|
|
-
|
|
|
|
(535
|
)
|
Preferred
stock accretion of discount
|
|
|
-
|
|
|
|
98
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(98
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at March 31, 2010
|
|
|
42,750
|
|
|
$
|
41,158
|
|
|
|
16,818,125
|
|
|
$
|
119,320
|
|
|
$
|
(46,674
|
)
|
|
$
|
3,078
|
|
|
$
|
116,882
|
|
See
accompanying notes.
SOUTHERN
COMMUNITY FINANCIAL CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Unaudited)
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Amounts
in thousands)
|
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(4,611
|
)
|
|
$
|
(49,324
|
)
|
Adjustments
to reconcile net income (loss) to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,029
|
|
|
|
907
|
|
Provision
for loan losses
|
|
|
10,000
|
|
|
|
4,000
|
|
Net
proceeds from sales of loans held for sale
|
|
|
36,048
|
|
|
|
28,507
|
|
Originations
of loans held for sale
|
|
|
(35,649
|
)
|
|
|
(33,819
|
)
|
Gain
from mortgage banking
|
|
|
(358
|
)
|
|
|
(416
|
)
|
Stock-based
compensation
|
|
|
38
|
|
|
|
43
|
|
Net
increase in cash surrender value of life insurance
|
|
|
(265
|
)
|
|
|
(340
|
)
|
Realized
gain on sale of available for sale securities, net
|
|
|
(1,354
|
)
|
|
|
(1
|
)
|
Realized
loss on impairment of investment securities available for
sale
|
|
|
186
|
|
|
|
-
|
|
Realized
loss of equity investment in Silverton Bank
|
|
|
-
|
|
|
|
404
|
|
Realized
loss on sale of premises and equipment
|
|
|
-
|
|
|
|
1
|
|
Realized
gain on sale of loans
|
|
|
-
|
|
|
|
(1
|
)
|
Gain
(loss) on economic hedges
|
|
|
(31
|
)
|
|
|
22
|
|
Deferred
income taxes
|
|
|
(89
|
)
|
|
|
(743
|
)
|
Realized
gain on sale of foreclosed assets
|
|
|
(100
|
)
|
|
|
(6
|
)
|
Oreo
writedown
|
|
|
484
|
|
|
|
-
|
|
Goodwill
impairment
|
|
|
-
|
|
|
|
49,501
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Increase
in other assets
|
|
|
(60
|
)
|
|
|
(1,247
|
)
|
Decrease
in other liabilities
|
|
|
(417
|
)
|
|
|
(1,080
|
)
|
Total
Adjustments
|
|
|
9,462
|
|
|
|
45,732
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided by (Used in) Operating Activities
|
|
|
4,851
|
|
|
|
(3,592
|
)
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Increase
(decrease) in federal funds sold
|
|
|
8,917
|
|
|
|
(15,711
|
)
|
Purchase
of:
|
|
|
|
|
|
|
|
|
Available-for-sale
investment securities
|
|
|
(85,984
|
)
|
|
|
(71,530
|
)
|
Proceeds
from maturities and calls of:
|
|
|
|
|
|
|
|
|
Available-for-sale
investment securities
|
|
|
21,015
|
|
|
|
29,697
|
|
Held-to-maturity
investment securities
|
|
|
715
|
|
|
|
10,265
|
|
Proceeds
from sale of:
|
|
|
|
|
|
|
|
|
Available-for-sale
investment securities
|
|
|
53,677
|
|
|
|
11,897
|
|
Purchase
of Federal Home Loan Bank stock
|
|
|
-
|
|
|
|
(421
|
)
|
Net
(increase) decrease in loans
|
|
|
14,651
|
|
|
|
7,158
|
|
OREO
capitalized cost
|
|
|
(16
|
)
|
|
|
(172
|
)
|
Purchases
of premises and equipment
|
|
|
(245
|
)
|
|
|
(1,423
|
)
|
Proceeds
from sale of foreclosed assets
|
|
|
2,520
|
|
|
|
1,753
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided by (Used in) Investing Activities
|
|
|
15,250
|
|
|
|
(28,487
|
)
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Net
increase in transaction accounts and savings accounts
|
|
|
36,326
|
|
|
|
595
|
|
Net
increase (decrease) in time deposits
|
|
|
(43,442
|
)
|
|
|
94,436
|
|
Net
decrease in short-term borrowings
|
|
|
(8,708
|
)
|
|
|
(43,772
|
)
|
Repayment
of long-term borrowings
|
|
|
(41
|
)
|
|
|
(15,041
|
)
|
Preferred
dividends paid
|
|
|
(535
|
)
|
|
|
(415
|
)
|
Cash
dividends paid
|
|
|
-
|
|
|
|
(671
|
)
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided by (Used in) Financing Activities
|
|
|
(16,400
|
)
|
|
|
35,132
|
|
|
|
|
|
|
|
|
|
|
Net
Increase in Cash and Due From Banks
|
|
|
3,701
|
|
|
|
3,053
|
|
Cash
and Due From Banks, Beginning of Period
|
|
|
30,184
|
|
|
|
25,215
|
|
|
|
|
|
|
|
|
|
|
Cash
and Due From Banks, End of Period
|
|
$
|
33,885
|
|
|
$
|
28,268
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Cash Flow Information:
|
|
|
|
|
|
|
|
|
Transfer
of loans to foreclosed assets
|
|
$
|
3,539
|
|
|
$
|
6,628
|
|
See
accompanying notes.
Southern
Community Financial Corporation
Notes
to Consolidated Financial Statements (Unaudited)
Note
1 – Basis of Presentation
The
consolidated financial statements include the accounts of Southern Community
Financial Corporation (the “Company”), and its wholly-owned subsidiary, Southern
Community Bank and Trust (the “Bank”). All intercompany transactions
and balances have been eliminated in consolidation. In management’s
opinion, the financial information, which is unaudited, reflects all adjustments
(consisting solely of normal recurring adjustments) necessary for a fair
presentation of the financial information as of and for the three-month period
ended March 31, 2010 and 2009, in conformity with accounting principles
generally accepted in the United States of America.
The
preparation of the consolidated financial statements and accompanying notes
requires management of the Company to make estimates and assumptions relating to
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the
period. Actual results could differ significantly from those
estimates and assumptions. Material estimates that are particularly
susceptible to significant change relate to the determination of the allowance
for loan losses. To a lesser extent, significant estimates are also
associated with the valuation of securities, intangibles and derivative
instruments, determination of stock-based compensation and income tax assets or
liabilities, and accounting for acquisitions. Operating results for
the three-month period ended March 31, 2010 is not necessarily indicative of the
results that may be expected for the fiscal year ending December 31,
2010.
The
organization and business of the Company, accounting policies followed by the
Company and other relevant information are contained in the notes to the
consolidated financial statements filed as part of the Company’s 2009 annual
report on Form 10-K. This quarterly report should be read in
conjunction with the annual report.
Recently
issued accounting pronouncements
The
Company has adopted new disclosures about derivative and hedging activities,
including the underlying derivative instruments. These disclosures
include a description of the objectives including how and why derivative
instruments are used. Other disclosures include how derivative
instruments and related hedged items are accounted for and how derivatives and
related hedged items affect an entity’s financial position, financial
performance and cash flows. Cross-referencing is provided within the
footnotes to improve the reader’s ability to locate information about derivative
instruments. For additional information, see Note 10 (Derivatives) to
Financial Statements.
The
Company has adopted ASC Topic 860,
Accounting for Transfers of
Financial Assets – an amendment of FASB Statement No.
140
. Topic 860 improves all aspects of transfers of financial
assets including the transferor’s continuing involvement, if any, in transferred
financial assets. Topic 860 eliminates the concept of a qualifying
special-purpose entity, creates more stringent conditions for reporting a
transfer of a portion of a financial asset as a sale, clarifies other
sale-accounting criteria, and changes the initial measurement of a transferor’s
interest in transferred financial assets. This pronouncement was
effective after the beginning of fiscal years beginning after November 15,
2009. The Company does not anticipate that the adoption of this
statement will have a material impact on its consolidated financial
statements.
The
Company has adopted ASC Topic 810,
Amendments to FASB Interpretation
No. 46(R). The Company has not invested and does not anticipate
investing in any Variable Interest Entities.
This
pronouncement was effective after the beginning of fiscal years beginning after
November 15, 2009. The Company does not anticipate that the adoption
of this statement will have a material impact on its consolidated financial
statements.
The
Company has adopted Accounting Standards Update No. 2010-06,
Fair Value Measurements Disclosures,
which
requires new
disclosures for fair value measurements and clarifies existing disclosures
requirements. Fair value measurements must now be disclosed
separately for each class of assets and liabilities based on the nature and
risks of the assets and liabilities, their classification in the fair value
hierarchy and the level of disaggregated information already required for
specific assets and liabilities under other applicable
pronouncements. Disclosure is also required of the amounts of
significant transfers between level 1 and level 2 in the fair value hierarchy
and the reasons for the transfers. The entity’s policy regarding the
timing of recognizing transfers and specific information such as the actual date
of the event or change in circumstances causing the transfer must also be
disclosed. The reconciliation of the beginning and ending balances in
level 3 fair value measurements now also requires separate disclosure of gains
and losses for the period recognized in other comprehensive income and separate
disclosure is now required for purchases, sales, issuances and
settlements. Valuation techniques applied and inputs used to
determine observable inputs (level 2) and significant unobservable inputs (level
3) must also be disclosed. The new disclosure requirements are
effective for interim and annual reporting periods beginning after December 15,
2009. The requirements to disclose separately purchases, sales
issuances and settlements in the level 3 reconciliation are effective for fiscal
years beginning after December 15, 2010. The adoption of this
pronouncement in the first quarter 2010 did not have a material impact on the
consolidated financial statements, other than adding expanded
disclosures.
From time
to time the FASB issues exposure drafts for proposed statements of financial
accounting standards. Such exposure drafts are subject to comment
from the public, to revisions by the FASB and to final issuance by the FASB as
statements of financial accounting standards. Management considers
the effect of the proposed statements on the consolidated financial statements
of the Company and monitors the status of changes to and proposed effective
dates of exposure drafts.
Note
2 – Net Income (Loss) Per Common Share
Basic and
diluted net income (loss) per common share is computed based on the weighted
average number of shares outstanding during each period. Diluted net
income per share reflects the potential dilution that could occur if stock
options or warrants were exercised, resulting in the issuance of common stock
that then shared in the net income of the Company.
Basic and
diluted net income per share have been computed based upon the weighted average
number of common shares outstanding or assumed to be outstanding as summarized
below.
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares used in computing basic net income per
share
|
|
|
16,806,292
|
|
|
|
16,780,058
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares and dilutive potential common shares used
in computing diluted net income per share
|
|
|
16,806,292
|
|
|
|
16,780,058
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) Available to Common
|
|
|
|
|
|
|
|
|
Shareholders
(in thousands)
|
|
$
|
(5,244
|
)
|
|
$
|
(49,951
|
)
|
Basic
|
|
|
(0.31
|
)
|
|
|
(2.98
|
)
|
Diluted
|
|
|
(0.31
|
)
|
|
|
(2.98
|
)
|
For the
three months ended March 31, 2010 and 2009, net loss for determining net loss
per common share was reported as net income (loss) less the dividend on
preferred stock. Options and warrants to purchase shares that have
been excluded from the determination of diluted earnings per share because they
are antidilutive (the exercise price is higher than the current market price)
amount to 661,867 and 731,201 shares for the three months ended March 31, 2010
and 2009, respectively. Unvested shares of restricted stock and all
other common stock equivalents were excluded from the determination of diluted
earnings per share for the three months ended March 31, 2010 due to the
Company’s loss position for those periods.
Note
3 – Investment Securities
The
following is a summary of the securities portfolio by major classification at
the dates presented.
|
|
March
31, 2010
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
|
(Amounts
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.
S. government agencies
|
|
$
|
95,163
|
|
|
$
|
249
|
|
|
$
|
139
|
|
|
|
95,273
|
|
Mortgage-backed
securities
|
|
|
148,919
|
|
|
|
4,828
|
|
|
|
104
|
|
|
|
153,643
|
|
Municipals
|
|
|
67,186
|
|
|
|
1,445
|
|
|
|
108
|
|
|
|
68,523
|
|
Trust
preferred securities
|
|
|
4,252
|
|
|
|
-
|
|
|
|
1,057
|
|
|
|
3,195
|
|
Common
stocks and mutual funds
|
|
|
3,232
|
|
|
|
280
|
|
|
|
31
|
|
|
|
3,481
|
|
Other
|
|
|
1,000
|
|
|
|
196
|
|
|
|
-
|
|
|
|
1,196
|
|
|
|
$
|
319,752
|
|
|
$
|
6,998
|
|
|
$
|
1,439
|
|
|
$
|
325,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.
S. government agencies
|
|
$
|
2,500
|
|
|
$
|
6
|
|
|
$
|
-
|
|
|
|
2,506
|
|
Mortgage-backed
securities
|
|
|
1,104
|
|
|
|
53
|
|
|
|
-
|
|
|
|
1,157
|
|
Municipals
|
|
|
6,603
|
|
|
|
158
|
|
|
|
5
|
|
|
|
6,756
|
|
|
|
$
|
10,207
|
|
|
$
|
217
|
|
|
$
|
5
|
|
|
$
|
10,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2009
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
|
(Amounts
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.
S. government agencies
|
|
$
|
57,441
|
|
|
$
|
407
|
|
|
$
|
560
|
|
|
$
|
57,288
|
|
Mortgage-backed
securities
|
|
|
176,543
|
|
|
|
5,813
|
|
|
|
256
|
|
|
|
182,100
|
|
Municipals
|
|
|
64,797
|
|
|
|
1,564
|
|
|
|
102
|
|
|
|
66,259
|
|
Trust
preferred securities
|
|
|
4,252
|
|
|
|
-
|
|
|
|
1,376
|
|
|
|
2,876
|
|
Common
stocks and mutual funds
|
|
|
3,418
|
|
|
|
141
|
|
|
|
295
|
|
|
|
3,264
|
|
Other
|
|
|
1,000
|
|
|
|
-
|
|
|
|
7
|
|
|
|
993
|
|
|
|
$
|
307,451
|
|
|
$
|
7,925
|
|
|
$
|
2,596
|
|
|
$
|
312,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.
S. government agencies
|
|
$
|
2,500
|
|
|
$
|
35
|
|
|
$
|
-
|
|
|
$
|
2,535
|
|
Mortgage-backed
securities
|
|
|
1,175
|
|
|
|
44
|
|
|
|
-
|
|
|
|
1,219
|
|
Municipals
|
|
|
7,244
|
|
|
|
185
|
|
|
|
3
|
|
|
|
7,426
|
|
|
|
$
|
10,919
|
|
|
$
|
264
|
|
|
$
|
3
|
|
|
$
|
11,180
|
|
Sales of
securities available for sale for the three months ended March 31, 2010 produced
$53.7 million in proceeds and resulted in gross realized gains of $1.4 million
and no realized losses.
Note
3 – Investment Securities (continued)
The
following table shows the gross unrealized losses and fair values for our
investments and length of time that the individual securities have been in a
continuous unrealized loss position.
|
|
March 31, 2010
|
|
|
|
Less than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Fair Value
|
|
|
Unrealized
losses
|
|
|
Fair Value
|
|
|
Unrealized
losses
|
|
|
Fair
Value
|
|
|
Unrealized
losses
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.
S. government agencies
|
|
$
|
35,059
|
|
|
$
|
139
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
35,059
|
|
|
$
|
139
|
|
Mortgage-backed
securities
|
|
|
8,718
|
|
|
|
104
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,718
|
|
|
|
104
|
|
Municipals
|
|
|
9,624
|
|
|
|
103
|
|
|
|
109
|
|
|
|
5
|
|
|
|
9,733
|
|
|
|
108
|
|
Trust
preferred securities
|
|
|
2,040
|
|
|
|
960
|
|
|
|
1,155
|
|
|
|
97
|
|
|
|
3,195
|
|
|
|
1,057
|
|
Common
stocks and mutual funds
|
|
|
-
|
|
|
|
-
|
|
|
|
468
|
|
|
|
31
|
|
|
|
468
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
temporarily impaired securities
|
|
$
|
55,441
|
|
|
$
|
1,306
|
|
|
$
|
1,732
|
|
|
$
|
133
|
|
|
$
|
57,173
|
|
|
$
|
1,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipals
|
|
$
|
495
|
|
|
$
|
5
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
495
|
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2009
|
|
|
|
Less
than 12 Months
|
|
|
12
Months or More
|
|
|
Total
|
|
|
|
Fair
Value
|
|
|
Unrealized
losses
|
|
|
Fair
Value
|
|
|
Unrealized
losses
|
|
|
Fair
Value
|
|
|
Unrealized
losses
|
|
|
|
(Amount
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.
S. government agencies
|
|
$
|
27,131
|
|
|
$
|
560
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
27,131
|
|
|
$
|
560
|
|
Mortgage-backed
securities
|
|
|
15,414
|
|
|
|
256
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,414
|
|
|
|
256
|
|
Municipals
|
|
|
6,881
|
|
|
|
102
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,881
|
|
|
|
102
|
|
Trust
preferred securities
|
|
|
1,770
|
|
|
|
1,230
|
|
|
|
1,106
|
|
|
|
146
|
|
|
|
2,876
|
|
|
|
1,376
|
|
Common
stocks and mutual funds
|
|
|
69
|
|
|
|
198
|
|
|
|
403
|
|
|
|
97
|
|
|
|
472
|
|
|
|
295
|
|
Other
|
|
|
993
|
|
|
|
7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
993
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
temporarily impaired securities
|
|
$
|
52,258
|
|
|
$
|
2,353
|
|
|
$
|
1,509
|
|
|
$
|
243
|
|
|
$
|
53,767
|
|
|
$
|
2,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipals
|
|
$
|
497
|
|
|
$
|
3
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
497
|
|
|
$
|
3
|
|
In
evaluating investment securities for “other-than-temporary impairment” losses,
management considers, among other things, (i) the length of time and the extent
to which the investment is in an unrealized loss position, (ii) the financial
condition and near term prospects of the issuer, and (iii) the intent and
ability of the Company to retain its investment in the issuer for a sufficient
period of time to allow for any anticipated recovery of unrealized
loss. At March 31, 2010, there were four investment securities with
aggregate fair values of $1.7 million in an unrealized loss position for at
least twelve months. The trust preferred securities had one
investment security in an unrealized loss position for less than 12 months due
to changes in the level of market interest rates and to the lack of an active
market in these securities. The security has a variable rate based on
LIBOR which had declined steadily throughout 2009. The fair value of
this security improved during the first quarter of 2010 although the unrealized
loss remained significant. Based on the nature of these securities,
we believe the decline in value to be solely due to changes in interest rates
and the general economic
Note
3 – Investment Securities (continued)
conditions
and not deterioration in their credit quality. We have the intention
and ability to hold these securities for a period of time sufficient to allow
for their recovery in value or maturity. The unrealized losses are
reflected in other comprehensive income. The common stock and mutual
funds category had one equity security with an unrealized loss of $31 thousand
for more than twelve months at March 31, 2010. Due to the amount of
the loss and the ability of the security to recover its value in the near future
the Company did not consider this investment “other-than-temporarily”
impaired. For the three months ended March 31, 2010, the Company
determined one marketable equity security was “other-than-temporarily” impaired
and recognized a $186 thousand write-down on the investment. The
investment had been carried at a basis of $268 thousand. The fair
value of the investment at March 31, 2010 is $82 thousand. The
Company recorded a loss of $404 thousand in the first quarter of 2009 to
write-off its equity investment in Silverton Bank, N.A.
The
amortized cost and fair values of securities available for sale and held to
maturity at March 31, 2010 by contractual maturity are shown
below. Actual expected maturities may differ from contractual
maturities because issuers may have the right to call or prepay
obligation.
|
|
March
31, 2010
|
|
|
|
Securities
Available for Sale
|
|
|
Securities
Held to Maturity
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
|
(Amount
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
within one year
|
|
$
|
2,116
|
|
|
$
|
2,116
|
|
|
$
|
3,375
|
|
|
$
|
3,383
|
|
Due
after one but through five years
|
|
|
29,026
|
|
|
|
29,287
|
|
|
|
1,440
|
|
|
|
1,492
|
|
Due
after five but through ten years
|
|
|
46,755
|
|
|
|
46,765
|
|
|
|
1,756
|
|
|
|
1,825
|
|
Due
after ten years
|
|
|
84,452
|
|
|
|
85,628
|
|
|
|
2,532
|
|
|
|
2,562
|
|
Mortgage-backed
securities
|
|
|
148,919
|
|
|
|
153,643
|
|
|
|
1,104
|
|
|
|
1,157
|
|
Trust
preferred securities
|
|
|
4,252
|
|
|
|
3,195
|
|
|
|
-
|
|
|
|
-
|
|
Common
stocks and mutual funds
|
|
|
3,232
|
|
|
|
3,481
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
1,000
|
|
|
|
1,196
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
319,752
|
|
|
$
|
325,311
|
|
|
$
|
10,207
|
|
|
$
|
10,419
|
|
Federal
Home Loan Bank Stock
As
disclosed separately on our statements of financial condition, the Company has
an investment in Federal Home Loan Bank of Atlanta (“FHLB”) stock of $9.8
million at March 31, 2010 and December 31, 2009. The Company carries
its investment in FHLB at its cost which is the par value of the
stock. In prior years, member institutions of the FHLB system have
been able to redeem shares in excess of their required investment level at par
on a voluntary basis daily. On March 6, 2009, FHLB announced changes
in the calculation of member stock requirements (that had the impact of
requiring increased member stock ownership) and changes in its policy toward the
repurchase of excess stock held by members. Prior to the announcement
the FHLB automatically repurchased excess stock on a daily
basis. Subsequently, the FHLB will evaluate on a quarterly basis
whether to repurchase excess capital stock from its members. The FHLB
announced that it will not repurchase excess stock outstanding at March 31, 2010
and will continue to evaluate their decision on a quarterly
basis. These steps were taken as capital preservation measures
reflecting a conservative financial management approach in the face of continued
volatility in the financial markets and regulatory pressures. After
not paying a cash dividend for the fourth quarter 2008 and first quarter 2009,
FHLB paid a cash dividend for the second, third and fourth quarters at an
annualized rate of 0.84%, 0.41% and 0.27%, respectively. At December
31, 2009 (the most recent date available), the FHLB was in compliance with all
of its regulatory capital requirements as its total regulatory capital-to-assets
ratio was 6.07% exceeding the 4% requirement, and its leverage capital ratio was
9.11%, exceeding its 5.0% requirement. Management believes that our
investment in FHLB stock was not impaired as of March 31, 2010. There
can be no assurance that the impact of recent or future legislation on the
Federal Home Loan Banks will not cause a decrease in the value of the Company’s
investment in FHLB stock.
Note
4 – Loans
Following
is a summary of loans:
|
|
At
March
31,
|
|
|
At
December
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Amount
|
|
|
Percent
of
Total
|
|
|
Amount
|
|
|
Percent
of
Total
|
|
|
|
(Amounts in thousands)
|
|
Residential
mortgage loans
|
|
$
|
389,760
|
|
|
|
32.3
|
%
|
|
$
|
395,586
|
|
|
|
32.2
|
%
|
Commercial
mortgage loans
|
|
|
449,327
|
|
|
|
37.2
|
%
|
|
|
455,268
|
|
|
|
37.0
|
%
|
Construction
loans
|
|
|
174,859
|
|
|
|
14.5
|
%
|
|
|
178,239
|
|
|
|
14.5
|
%
|
Commercial
and industrial loans
|
|
|
177,286
|
|
|
|
14.7
|
%
|
|
|
183,319
|
|
|
|
14.9
|
%
|
Loans
to individuals
|
|
|
17,222
|
|
|
|
1.3
|
%
|
|
|
17,863
|
|
|
|
1.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
1,208,454
|
|
|
|
100.0
|
%
|
|
|
1,230,275
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Allowance for loan losses
|
|
|
(36,007
|
)
|
|
|
|
|
|
|
(29,638
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loans
|
|
$
|
1,172,447
|
|
|
|
|
|
|
$
|
1,200,637
|
|
|
|
|
|
An
analysis of the allowance for loan losses is as follows:
|
|
Three
Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Amounts
in thousands)
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$
|
29,638
|
|
|
$
|
18,851
|
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
10,000
|
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
(4,017
|
)
|
|
|
(3,596
|
)
|
Recoveries
|
|
|
386
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
Net
charge-offs
|
|
|
(3,631
|
)
|
|
|
(3,537
|
)
|
|
|
|
|
|
|
|
|
|
Balance
at end of period
|
|
$
|
36,007
|
|
|
$
|
19,314
|
|
The
following is a summary of nonperforming assets at the periods
presented:
|
|
March
31,
|
|
|
December 31,
|
|
|
March
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
|
(Amounts
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual
loans
|
|
$
|
45,249
|
|
|
$
|
35,535
|
|
|
$
|
20,251
|
|
Restructured
loans - nonaccruing
|
|
|
4,341
|
|
|
|
2,197
|
|
|
|
-
|
|
Restructured
loans - accruing
|
|
|
1,018
|
|
|
|
-
|
|
|
|
-
|
|
Total
nonperforming loans
|
|
|
50,608
|
|
|
|
37,732
|
|
|
|
20,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed
assets
|
|
|
20,285
|
|
|
|
19,634
|
|
|
|
10,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
nonperforming assets
|
|
$
|
70,893
|
|
|
$
|
57,366
|
|
|
$
|
31,049
|
|
Note
4 – Loans (continued)
Management
estimates the allowance for loan losses required using past loan loss
experience, the nature and volume of the portfolio, information about specific
borrower situations, estimated collateral values, economic conditions and other
factors. The allowance consists of several components. One
component is for loans that are individually classified as impaired which may
result in a need for specific valuation allowances. The other
components are for collective loan impairment which generates a general
valuation allowance. Allocations of the allowance may be made for
specific loans, but the entire allowance is available for any loan that, in
management’s judgment, should be charged off.
At March
31, 2010, the Company had loans with a book value of $51.4 million that have
been individually evaluated for impairment. A corresponding valuation
allowance of $18.3 million has been provided for these loans with determined to
be impaired an outstanding balance of $42.9 million. Based upon
extensive analyses of the credits, including collateral position, loss exposure,
guaranties, or other considerations, no additional specific valuation allowance
credits were deemed necessary.
Note
5 – Goodwill
Goodwill
represents the excess of the cost of an acquisition over the fair value of the
net assets acquired. Goodwill impairment testing is performed
annually or more frequently if events or circumstances indicate possible
impairment. An impairment loss is recorded to the extent that the
carrying value of goodwill exceeds its implied fair value.
We
completed our goodwill impairment testing as of March 31, 2009. Given
the substantial declines in our common stock price, declining operating results,
asset quality trends, market comparables and the economic outlook for our
industry, the results of impairment testing process indicated that the Company’s
estimated fair value was less than book value. After additional
analysis, it was determined that the Company’s fair value did not support the
goodwill recorded at the time of the acquisition of The Community Bank in
January 2004; therefore, the Company recorded a $49.5 million goodwill
impairment charge to write-off the entire amount of goodwill as of March 31,
2009. This non-cash goodwill impairment charge to earnings was
recorded as a component of non-interest expense on the consolidated statement of
operations.
Note
6 – Borrowings
The
following is a summary of our borrowings at March 31, 2010 and December 31,
2009:
|
|
March
31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Amounts
in thousands)
|
|
Short-term
borrowings
|
|
|
|
|
|
|
FHLB
advances
|
|
$
|
31,250
|
|
|
$
|
31,250
|
|
Repurchase
agreements
|
|
|
14,457
|
|
|
|
14,861
|
|
Other
borrowed funds
|
|
|
31,062
|
|
|
|
39,366
|
|
|
|
$
|
76,769
|
|
|
$
|
85,477
|
|
|
|
|
|
|
|
|
|
|
Long-term
borrowings
|
|
|
|
|
|
|
|
|
FHLB
advances
|
|
$
|
73,185
|
|
|
$
|
73,226
|
|
Term
repurchase agreements
|
|
|
80,000
|
|
|
|
80,000
|
|
Jr.
subordinated debentures
|
|
|
45,877
|
|
|
|
45,877
|
|
|
|
$
|
199,062
|
|
|
$
|
199,103
|
|
Note
7 – Non-Interest Income and Other Non-Interest Expense
The major
components of other non-interest income are as follows:
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Amounts
in thousands)
|
|
Gain
on sale of investment securities
|
|
|
1,354
|
|
|
|
-
|
|
SBIC
income and management fees
|
|
|
176
|
|
|
|
238
|
|
Increase
in cash surrender value of life insurance
|
|
|
266
|
|
|
|
340
|
|
Loss
and net cash settlement on economic hedges
|
|
|
(31
|
)
|
|
|
(22
|
)
|
Other
|
|
|
224
|
|
|
|
279
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,989
|
|
|
$
|
835
|
|
The major
components of other non-interest expense are as follows:
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Amounts
in thousands)
|
|
FDIC
deposit insurance
|
|
$
|
547
|
|
|
$
|
176
|
|
Postage,
printing and office supplies
|
|
|
203
|
|
|
|
239
|
|
Telephone
and communication
|
|
|
218
|
|
|
|
229
|
|
Advertising
and promotion
|
|
|
131
|
|
|
|
287
|
|
Data
processing and other outsourced services
|
|
|
226
|
|
|
|
186
|
|
Professional
services
|
|
|
657
|
|
|
|
608
|
|
Buyer
incentive plan
|
|
|
173
|
|
|
|
100
|
|
Gain
on sales of foreclosed assets
|
|
|
(100
|
)
|
|
|
(6
|
)
|
Oreo
Expense
|
|
|
360
|
|
|
|
214
|
|
Oreo
Writedown
|
|
|
484
|
|
|
|
-
|
|
Other
|
|
|
1,559
|
|
|
|
1,486
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,458
|
|
|
$
|
3,519
|
|
Note
8 – Cumulative Perpetual Preferred Stock
Under the
United States Treasury’s Capital Purchase Program (CPP), the Company issued
$42.75 million to the United States Treasury in Cumulative Perpetual Preferred
Stock, Series A, on December 5, 2008. In addition, the Company
provided warrants to the Treasury to purchase 1,623,418 shares of the Company’s
common stock at an exercise price of $3.95 per share. These warrants
are immediately exercisable and expire ten years from the date of
issuance. The preferred stock is non-voting, other than having class
voting rights on certain matters, and pays cumulative dividends quarterly at a
rate of 5% per annum for the first five years and 9% per annum
thereafter. The preferred shares are redeemable at the option of the
Company subject to regulatory approval.
As a
condition of the CPP, the Company must obtain consent from the United States
Department of the Treasury to repurchase its common stock or to increase its
cash dividend on its common stock from the September 30, 2008 quarterly level of
$0.04 per common share. Furthermore, the Company has agreed to
certain restrictions on executive compensation. Under the American
Recovery and Reinvestment Act of 2009, the Company is limited to using
restricted stock as the form of payment to the top five highest compensated
executives under any incentive compensation programs.
Note
9 – Common Stock Repurchase Programs
Through
July 2006, the Company authorized the repurchase up to 1.9 million shares of its
common stock. Through December 5, 2008 (the date of our participation
in the Treasury’s Capital Purchase Plan), the Company had repurchased 1,858,073
shares at an average price of $6.99 per share under the three
plans. During the first quarter in 2010, there were no
repurchases. Under the provisions of the Treasury’s Capital Purchase
Program, the Company may not repurchase any of its common stock without the
consent of the United States Treasury as long as the Treasury holds an
investment in our preferred stock.
Note
10 - Derivatives
Derivative
Financial Instruments
The
Company utilizes stand-alone derivative financial instruments, primarily in the
form of interest rate swap and option agreements, in its asset/liability
management program. These transactions involve both credit and market
risk. The Company uses derivative instruments to mitigate exposure to
adverse changes in fair value or cash flows of certain assets and
liabilities. Derivative instruments designated in a hedge
relationship to mitigate exposure to changes in the fair value of an asset,
liability, or firm commitment attributable to a particular risk, such as
interest rate risk, are considered fair value hedges. Derivative
instruments designated in a hedge relationship to mitigate exposure to
variability in expected future cash flows, or other types of forecasted
transactions, are considered cash flow hedges.
Fair
value hedges are accounted for by recording the fair value of the derivative
instrument and the fair value related to the risk being hedged of the hedged
asset or liability on the balance sheet with corresponding offsets recorded in
the income statement. The adjustment to the hedged asset or liability
is included in the basis of the hedged item, while the fair value of the
derivative is recorded as a freestanding asset or liability. Actual
cash receipts or payments and related amounts accrued during the period on
derivatives included in a fair value hedge relationship are recorded as
adjustments to the income or expense on the hedged asset or
liability. Cash flow hedges are accounted for by recording the fair
value of the derivative instrument on the balance sheet as either a freestanding
asset or liability, with a corresponding offset recorded in accumulated other
comprehensive income within stockholders’ equity, net of tax. Amounts
are reclassified from accumulated other comprehensive income to the income
statement in the period or periods the hedged transaction affects
earnings. Under both the fair value and cash flow hedge methods,
derivative gains and losses not effective in hedging the change in fair value or
expected cash flows of the hedged item are recognized immediately in the income
statement.
The
Company does not enter into derivative financial instruments for speculative or
trading purposes. For derivatives that are economic hedges, but are
not designated as hedging instruments or otherwise do not qualify for hedge
accounting treatment, all changes in fair value are recognized in non-interest
income during the period of change. The net cash settlement on these
derivatives is included in non-interest income.
The
Company is exposed to credit-related losses in the event of nonperformance by
the counterparties to these agreements. The Company controls the
credit risk of its financial contracts through credit approvals, limits and
monitoring procedures and agreements that specify collateral levels to be
maintained by the Company and the counterparties. These collateral
levels are based on the credit rating of the counterparties.
Note
10 – Derivatives (continued)
The
Company currently has eleven derivative instrument contracts consisting of two
interest rate caps, seven interest rate swaps and two foreign exchange
contracts. The primary objective for each of these contracts is to
minimize risk, interest rate risk being the primary risk for the interest rate
caps and swaps while foreign exchange risk is the primary risk for the foreign
exchange contracts. The Company’s strategy is to use derivative
contracts to stabilize and improve net interest margin and net interest income
currently and in future periods. In order to acquire low cost, long
term fixed rate funding without incurring currency risk, the Company entered
into the foreign exchange contract to convert foreign currency denominated
certificates of deposit into long term dollar denominated time
deposits. The interest rate on the underlying certificates of deposit
with an original notional of $10.0 million is based on a proprietary index
(Barclays Intelligent Carry Index USD ER) managed by the counterparty (Barclays
Bank). The currency swap is also based on this proprietary
index.
The fair
value of the Company’s derivative assets and liabilities and their related
notional amounts is summarized below.
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Fair Value
|
|
|
Notional
Amount
|
|
|
Fair Value
|
|
|
Notional
Amount
|
|
|
|
(Amounts
in thousands)
|
|
Fair
value hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps associated with deposit activities:
Certificate of Deposit
contracts
|
|
$
|
954
|
|
|
$
|
65,000
|
|
|
$
|
939
|
|
|
$
|
65,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency
Exchange Contracts
|
|
|
(871
|
)
|
|
|
10,000
|
|
|
|
(847
|
)
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps associated with borrowing activities:
Trust Preferred
contracts
|
|
|
(470
|
)
|
|
|
10,000
|
|
|
|
(402
|
)
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate cap contracts
|
|
|
315
|
|
|
|
22,500
|
|
|
|
489
|
|
|
|
22,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(72
|
)
|
|
$
|
107,500
|
|
|
$
|
179
|
|
|
$
|
107,500
|
|
See Note
12 for additional information on fair values of net
derivatives.
Note
10 – Derivatives (continued)
The
following table further breaks down the derivative positions of the
Company:
|
For
the Year Ended March 31, 2010
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
|
2010
|
|
2010
|
|
|
Balance
Sheet
|
|
|
|
Balance
Sheet
|
|
|
|
|
Location
|
|
Fair Value
|
|
Location
|
|
Fair Value
|
|
|
(Amounts
in thousands)
|
|
Derivatives
designated as
|
|
|
|
|
|
|
|
|
hedging
instruments
|
|
|
|
|
|
|
|
|
Interest
rate options
|
Other
Assets
|
|
$
|
315
|
|
|
|
|
|
Interest
rate contracts
|
Other
Assets
|
|
|
954
|
|
Other Liabilities
|
|
$
|
470
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
not designated as
|
|
|
|
|
|
|
|
|
|
|
hedging
instruments
|
|
|
|
|
|
|
|
|
|
|
Interest
rate contracts
|
Other
Assets
|
|
|
-
|
|
Other Liabilities
|
|
|
871
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
derivatives
|
|
|
$
|
1,269
|
|
|
|
$
|
1,341
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Derivative Asset (Liability)
|
|
|
|
|
|
|
|
$
|
(72
|
)
|
|
For
the Year Ended December 31, 2009
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
|
2009
|
|
2009
|
|
|
Balance
Sheet
|
|
|
|
Balance
Sheet
|
|
|
|
|
Location
|
|
Fair Value
|
|
Location
|
|
Fair Value
|
|
|
(Amounts
in thousands)
|
|
Derivatives
designated as
|
|
|
|
|
|
|
|
|
hedging
instruments
|
|
|
|
|
|
|
|
|
Interest
rate options
|
Other
Assets
|
|
$
|
489
|
|
|
|
|
|
Interest
rate contracts
|
Other
Assets
|
|
|
939
|
|
Other Liabilities
|
|
$
|
402
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
not designated as
|
|
|
|
|
|
|
|
|
|
|
hedging
instruments
|
|
|
|
|
|
|
|
|
|
|
Interest
rate contracts
|
Other
Assets
|
|
|
-
|
|
Other Liabilities
|
|
|
847
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
derivatives
|
|
|
$
|
1,428
|
|
|
|
$
|
1,249
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Derivative Asset (Liability)
|
|
|
|
|
|
|
|
$
|
179
|
|
Note
10 – Derivatives (continued)
The
tables below illustrate the effective portion of the gains (losses) recognized
in other comprehensive income and the gains (losses) reclassified from
accumulated other comprehensive income into earnings.
For
the Three Months Ended March 31, 2010
|
|
|
|
|
|
Location
of Gain or
|
|
|
Amount
of Gain or (Loss)
|
|
|
|
Amount
of Gain or (Loss)
|
|
|
(Loss)
Reclassified from
|
|
|
Reclassified
from
|
|
|
|
Recognized
in OCI on
|
|
|
Accumulated
OCI
|
|
|
Accumulated
OCI into
|
|
Cash
Flow Hedging
|
|
Derivative
(Effective
|
|
|
into
Income
|
|
|
Income
(Effective
|
|
Relationships
|
|
Portion)
|
|
|
(Effective Portion)
|
|
|
Portion)
|
|
|
|
(Amounts
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate contracts
|
|
$
|
(319
|
)
|
|
Interest
Expense
|
|
|
$
|
(75
|
)
|
For
the Three Months Ended March 31, 2009
|
|
|
|
|
|
Location
of Gain or
|
|
|
Amount
of Gain or (Loss)
|
|
|
|
Amount
of Gain or (Loss)
|
|
|
(Loss)
Reclassified from
|
|
|
Reclassified
from
|
|
|
|
Recognized
in OCI on
|
|
|
Accumulated
OCI
|
|
|
Accumulated
OCI into
|
|
Cash
Flow Hedging
|
|
Derivative
(Effective
|
|
|
into
Income
|
|
|
Income
(Effective
|
|
Relationships
|
|
Portion)
|
|
|
(Effective Portion)
|
|
|
Portion)
|
|
|
|
(Amounts
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate contracts
|
|
$
|
(257
|
)
|
|
Interest
Expense
|
|
|
$
|
-
|
|
There was
no gain or loss recognized in the income statement due to any ineffective
portion of any cash flow hedging relationship for the three months ended March
31, 2010 or 2009.
Note
10 – Derivatives (continued)
The
tables below show the location and amount of gains (losses) recognized in
earnings for fair value hedges and other economic hedges.
For
the Three Months Ended March 31, 2010
|
|
|
Location
of Gain or
|
|
Amount
of Gain or (Loss)
|
|
|
|
(Loss)
Recognized in
|
|
Recognized
in Income on
|
|
Description
|
|
Income on Derivative
|
|
Derivative
|
|
|
|
|
(Amounts
in thousands)
|
|
Interest
rate contracts - Not
|
|
|
|
|
|
designated
as hedging instruments
|
|
Other income (expense)
|
|
$
|
(31
|
)
|
|
|
|
|
|
|
|
Interest
Rate Contracts - Fair
|
|
|
|
|
|
|
value
hedging relationships
|
|
Interest
Income/(Expense)
|
|
$
|
579
|
|
For
the Three Months Ended March 31, 2009
|
|
|
Location
of Gain or
|
|
Amount
of Gain or (Loss)
|
|
|
|
(Loss)
Recognized in
|
|
Recognized
in Income on
|
|
Description
|
|
Income on Derivative
|
|
Derivative
|
|
|
|
|
(Amounts
in thousands)
|
|
Interest
rate contracts - Not
|
|
|
|
|
|
designated
as hedging instruments
|
|
Other income (expense)
|
|
$
|
66
|
|
|
|
|
|
|
|
|
Interest
Rate Contracts - Fair
|
|
|
|
|
|
|
value
hedging relationships
|
|
Interest
Income/(Expense)
|
|
$
|
46
|
|
The
maturity dates for the two interest rate cap contracts are November 23, 2010 and
February 18, 2014. The interest rate swap with borrowing activities
on trust preferred securities has a maturity of September 6,
2012. The currency exchange contracts have maturity dates of November
26, 2013 and December 26, 2013. The interest rate swaps with deposit
taking activities on certificates of deposit have maturity dates of February 26,
2024, June 25, 2029, July 9, 2029, July 28, 2024, July 28, 2024 and August 28,
2024. No new derivative contracts were entered into during the first
quarter of 2010.
Certain
derivative liabilities were collateralized by securities, which are held by the
counterparty or in safekeeping by third parties. The fair value of
these securities was $4.6 million and $4.2 million at March 31, 2010 and
December 31, 2009, respectively. Collateral calls can be required at
any time that the market value exposure of the contracts is less than the
collateral pledged. The degree of overcollateralization is dependent
on the derivative contracts to which the Company is a party.
As part
of our banking activities, the Company originates certain residential loans and
commits these loans for sale. The commitments to originate
residential loans and the sales commitments are freestanding derivative
instruments and are generally funded within 90 days. The fair value
of these commitments was not significant at March 31, 2010.
Note
11 - Disclosures About Fair Values of Financial Instruments
Financial
instruments include cash and due from banks, federal funds sold, investment
securities, loans, bank-owned life insurance, deposit accounts and other
borrowings, accrued interest and derivatives. Fair value estimates
are made at a specific moment in time, based on relevant market information and
information about the financial instrument. These estimates do not
reflect any premium or discount that could result from offering for sale at one
time the Company’s entire holdings of a particular financial
instrument. Because no active market readily exists for a portion of
the Company’s financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other
factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and, therefore, cannot be
determined with precision. Changes in assumptions could significantly
affect the estimates.
The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments for which it is practicable to estimate that
value:
Cash
and due from banks, federal funds sold and other interest-bearing
deposits
The
carrying amounts for cash and due from banks, federal funds sold and other
interest-bearing deposits approximate fair value because of the short maturities
of those instruments.
Investment
securities
Fair
value for investment securities equals quoted market price if such information
is available. If a quoted market price is not available, fair value
is estimated using quoted market prices for similar securities.
Loans
For
certain homogeneous categories of loans, such as residential mortgages, fair
value is 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 is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining
maturities. However, the values derived likely do not represent exit
prices due to the distressed market conditions; therefore, incremental market
risks and liquidity discounts ranging from 5% to 25%, depending upon the nature
of the loans, were subtracted to reflect the illiquid and distressed conditions
at March 31, 2010 and December 31, 2009.
Investment
in bank-owned life insurance
The
carrying value of bank-owned life insurance approximates fair value because this
investment is carried at cash surrender value, as determined by the
insurer.
Deposits
The fair
value of demand deposits is the amount payable on demand at the reporting
date. The fair value of time deposits is estimated based on
discounting expected cash flows using the rates currently offered for deposits
of similar remaining maturities.
Borrowings
The fair
values are based on discounting expected cash flows at the current interest rate
for debt with the same or similar remaining maturities and collateral
requirements.
Accrued
interest
The
carrying amounts of accrued interest approximate fair value.
Note
11 - Disclosures About Fair Values of Financial Instruments
(Continued)
Derivative
financial instruments
Fair
values for interest rate swap and option agreements are based upon the amounts
required to settle the contracts. Fair values for commitments to
originate loans held for sale are based on fees currently charged to enter into
similar agreements. Fair values for fixed rate commitments also
consider the difference between current levels of interest rates and the
committed rates.
The
carrying amounts and estimated fair values of the Company’s financial
instruments, none of which are held for trading purposes, are as follows at
March 31, 2010 and December 31, 2009:
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Carrying
amount
|
|
|
Estimated
fair value
|
|
|
Carrying
amount
|
|
|
Estimated
fair value
|
|
|
|
(Amounts
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
33,885
|
|
|
$
|
33,885
|
|
|
$
|
30,184
|
|
|
$
|
30,184
|
|
Federal
funds sold and other interest-bearing deposits
|
|
|
22,352
|
|
|
|
22,352
|
|
|
|
31,269
|
|
|
|
31,269
|
|
Investment
securities available for sale
|
|
|
325,311
|
|
|
|
325,311
|
|
|
|
312,780
|
|
|
|
312,780
|
|
Investment
securities held to maturity
|
|
|
10,207
|
|
|
|
10,419
|
|
|
|
10,919
|
|
|
|
11,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
1,172,447
|
|
|
|
1,194,130
|
|
|
|
1,200,637
|
|
|
|
1,226,248
|
|
Market
risk/liquidity adjustment
|
|
|
-
|
|
|
|
(43,420
|
)
|
|
|
-
|
|
|
|
(34,055
|
)
|
Net
loans
|
|
|
1,172,447
|
|
|
|
1,150,710
|
|
|
|
1,200,637
|
|
|
|
1,192,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in life insurance
|
|
|
29,031
|
|
|
|
29,031
|
|
|
|
28,766
|
|
|
|
28,766
|
|
Accrued
interest receivable
|
|
|
6,924
|
|
|
|
6,924
|
|
|
|
7,403
|
|
|
|
7,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
1,306,954
|
|
|
|
1,321,502
|
|
|
|
1,314,070
|
|
|
|
1,334,468
|
|
Short-term
borrowings
|
|
|
76,769
|
|
|
|
76,937
|
|
|
|
85,477
|
|
|
|
85,827
|
|
Long-term
borrowings
|
|
|
199,062
|
|
|
|
216,177
|
|
|
|
199,103
|
|
|
|
203,987
|
|
Accrued
interest payable
|
|
|
2,399
|
|
|
|
2,399
|
|
|
|
3,318
|
|
|
|
3,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-balance
sheet derivative financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap and option agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Assets)
Liabilities, net
|
|
|
72
|
|
|
|
72
|
|
|
|
(179
|
)
|
|
|
(179
|
)
|
Note
12 – Fair Values of Assets and Liabilities
Effective
January 1, 2008, the Company adopted the new requirement for optional reporting
of financial assets and financial liabilities at fair value.
The effect of adopting
the fair value reporting standards was not material to the financial
statements.
The new
standard defines fair value, establishes a framework for measuring fair value
according to generally accepted accounting principles and expands disclosures
about fair value measurements. This pronouncement establishes a three
level fair value hierarchy that is fully described below. While this
standard does not require any financial instruments to be measured at fair
value, the provisions of the statement must be applied in situations where other
accounting pronouncements either permit or require fair value
measurement. The Company reports fair value on a recurring basis for
certain financial instruments, most notably for available for sale investment
securities and certain derivative instruments. The Company may be
required, from time to time, to measure certain assets at fair value on a
nonrecurring basis. These include assets that are measured at the
lower of cost or market that were recognized at fair value which was below cost
at the end of the period. Assets subject to nonrecurring use of fair
value measurements could include loans held for sale, goodwill, and foreclosed
assets. At March 31, 2010 and December 31, 2009, the Company had
certain impaired loans and foreclosed assets that are measured at fair value on
a nonrecurring basis.
The
Company groups financial assets and financial liabilities measured at fair value
in three levels, based on the markets in which the assets and liabilities are
traded and the reliability of the assumptions used to determine fair
value. These levels are:
|
·
|
Level
1 – Valuations for assets and liabilities traded in active exchange
markets, such as the New York Stock Exchange. Level 1 also
includes U.S. Treasury securities that are traded by dealers or brokers in
active markets. Valuations are obtained from readily available
pricing sources for market transactions involving identical assets or
liabilities.
|
|
·
|
Level
2 – Valuations for assets and liabilities traded in less active dealer or
broker markets. Level 2 securities include mortgage-backed
securities issued by government sponsored entities, municipal bonds and
corporate debt securities. Valuations are obtained from third
party services for similar or comparable assets or
liabilities.
|
|
·
|
Level
3 – Valuations for assets and liabilities that are derived from other
valuation methodologies, including option pricing models,
discounted cash flow models and similar techniques, and not based on
market exchange, dealer, or brokered traded transactions. Level
3 valuations incorporate certain assumptions and projections in
determining the fair value assigned to such assets or
liabilities.
|
Note
12 – Fair Values of Assets and Liabilities (continued)
The table
below presents the balances of assets and liabilities measured at fair value on
a recurring basis.
|
|
March 31, 2010
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(Amounts
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.
S. government agencies
|
|
$
|
95,273
|
|
|
$
|
-
|
|
|
$
|
95,273
|
|
|
$
|
-
|
|
Mortgage-backed
securities
|
|
|
153,643
|
|
|
|
-
|
|
|
|
153,643
|
|
|
|
-
|
|
Municipals
|
|
|
68,523
|
|
|
|
-
|
|
|
|
68,523
|
|
|
|
-
|
|
Trust
preferred securities
|
|
|
3,195
|
|
|
|
-
|
|
|
|
3,195
|
|
|
|
-
|
|
Common
stocks and mutual funds
|
|
|
3,481
|
|
|
|
550
|
|
|
|
-
|
|
|
|
2,931
|
|
Other
|
|
|
1,196
|
|
|
|
-
|
|
|
|
1,196
|
|
|
|
-
|
|
Net
Derivatives
|
|
|
(72
|
)
|
|
|
-
|
|
|
|
799
|
|
|
|
(871
|
)
|
|
|
December 31, 2009
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(Amounts
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.
S. government agencies
|
|
$
|
57,288
|
|
|
$
|
-
|
|
|
$
|
57,288
|
|
|
$
|
-
|
|
Mortgage-backed
securities
|
|
|
182,100
|
|
|
|
-
|
|
|
|
182,100
|
|
|
|
-
|
|
Municipals
|
|
|
66,259
|
|
|
|
-
|
|
|
|
66,259
|
|
|
|
-
|
|
Trust
preferred securities
|
|
|
2,876
|
|
|
|
-
|
|
|
|
2,876
|
|
|
|
-
|
|
Common
stocks and mutual funds
|
|
|
3,264
|
|
|
|
472
|
|
|
|
-
|
|
|
|
2,792
|
|
Other
|
|
|
993
|
|
|
|
-
|
|
|
|
993
|
|
|
|
-
|
|
Net
Derivatives
|
|
|
179
|
|
|
|
-
|
|
|
|
1,026
|
|
|
|
(847
|
)
|
The table
below presents reconciliation for the period of January 1, 2010 to March 31,
2010, for all Level 3 assets and liabilities that are measured at fair value on
a recurring basis.
|
Fair Value Measurements Using Significant
Unobservable Inputs
|
|
|
|
(Dollars
in Thousands)
|
|
|
|
Securities
|
|
|
|
|
|
|
Available for Sale
|
|
|
Net Derivatives
|
|
Beginning
Balance January 1, 2010
|
|
$
|
2,792
|
|
|
$
|
(847
|
)
|
Total
realized and unrealized gains or losses:
|
|
|
|
|
|
|
|
|
Included
in earnings
|
|
|
-
|
|
|
|
(24
|
)
|
Included
in other comprehensive income
|
|
|
139
|
|
|
|
-
|
|
Purchases,
issuances and settlements
|
|
|
-
|
|
|
|
-
|
|
Transfers
in and/or out of Level 3
|
|
|
-
|
|
|
|
-
|
|
Ending
Balance
|
|
$
|
2,931
|
|
|
$
|
(871
|
)
|
The
Company utilizes a third party pricing service to provide valuations on its
securities portfolio. Despite most of these securities being U.S.
government agency debt obligations, agency mortgage-backed securities and
municipal securities traded in active markets, third party valuations are
determined based on the characteristics of a security (such as maturity,
duration, rating, etc.) and in reference to similar or comparable
securities. Due to the nature and methodology of these valuations,
the Company considers these fair value measurements as Level 2. No
securities were transferred between level 1 and level 2 during the first quarter
of 2010.
Note
12 – Fair Values of Assets and Liabilities (continued)
The
Company records loans in the ordinary course of business and does not record
loans at fair value on a recurring basis. As previously discussed in
“Asset Quality”, loans are considered impaired when it is determined to be
probable that all amounts due under the contractual terms of the loan will not
be collected when due. A specific allowance is established for loans
considered individually impaired if required based on the most appropriate of
the three measurement methods: present value of expected future cash flows, fair
value of collateral, or the observable market price of a loan
method. A specific allowance is required if the fair value of the
expected repayments or the collateral is less than the recorded investment in
the loan. At March 31, 2010, loans with a book value of $50.6 million
were evaluated for impairment. Of this total, $42.9 million required
a specific allowance totaling $17.6 million for a net fair value of $25.4
million. The methods used to determine the fair value of these loans
were considered level three.
Assets
acquired through, or in lieu of, foreclosure are held for sale and are initially
recorded at fair value less estimated cost to sell on the date of
foreclosure. Subsequent to foreclosure, valuations are periodically
performed by management or outside appraisers and the assets are carried at the
lower of carrying amount or fair value less estimated cost to
sell. These valuations generally are based on market comparable sales
data for similar type of properties. The range of discounts in these
valuations is specific to the nature, type, location, condition and market
demand for each property. The methods used to determine the fair
value of these foreclosed assets were considered level three.
The table
below presents the balances of assets and liabilities measured at fair value on
a nonrecurring basis.
|
|
March 31, 2010
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(Amounts
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans
|
|
$
|
25,365
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
25,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed
assets
|
|
|
20,285
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20,285
|
|
|
|
December 31, 2009
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(Amounts
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans
|
|
$
|
19,322
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
19,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed
assets
|
|
|
19,634
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,634
|
|
Note
13 – Subsequent Events
Management
is not aware of any reportable events subsequent to March 31, 2010.
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
Market
risk reflects the risk of economic loss resulting from adverse changes in market
prices and interest rates. This risk of loss can be reflected in
diminished current market values and/or reduced potential net interest income in
future periods.
The
Company’s market risk arises primarily from interest rate risk inherent in its
lending, deposit-taking and borrowing activities. The structure of
the Company’s loan and liability portfolios is such that a significant decline
in interest rates may adversely impact net market values and net interest
income. The Company does not maintain a trading account nor is the
Company subject to currency exchange risk or commodity price risk.
In
reviewing the needs of our Bank with regard to proper management of its
asset/liability program, we estimate future needs, taking into consideration
investment portfolio purchases, calls and maturities in addition to estimated
loan and deposit increases (due to increased demand through marketing) and
forecasted interest rate changes. We use a number of measures to
monitor and manage interest rate risk, including net interest income simulations
and gap analyses. A net interest income simulation model is the
primary tool used to assess the direction and magnitude of changes in net
interest income resulting from changes in interest rates. Key
assumptions in the model include prepayment speeds on mortgage-related assets,
cash flows and maturities of other investment securities, loan and deposit
volumes and pricing. These assumptions are inherently uncertain and,
as a result, the model cannot precisely estimate net interest income or
precisely predict the impact of higher or lower interest rates on net interest
income. Actual results will differ from simulated results due to
timing, magnitude and frequency of interest rate changes and changes in market
conditions and management strategies, among other factors. The
results of the most recent analysis indicated that the Company is relatively
interest rate neutral. Given the current level of market interest
rates, it is not meaningful to use an assumed decrease in interest rates of more
than 1%. If interest rates decreased instantaneously by one
percentage point, our net interest income over a one-year time frame could
decrease by approximately 4%. If interest rates increased
instantaneously by two percentage points, our net interest income over a
one-year time frame could increase by approximately 13%.
Item
4. Controls and Procedures
The
Company conducted an evaluation, under the supervision and with the
participation of its Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company’s disclosure controls
and procedures as of March 31, 2010. The Company’s disclosure
controls and procedures are designed to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities and Exchange
Commission, and that such information is accumulated and communicated to the
Company’s management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.
Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company’s disclosure controls and procedures were effective
as of March 31, 2010 at the reasonable assurance level. However, the
Company believes that a controls system, no matter how well designed and
operated, cannot provide absolute assurance that the objectives of the controls
system are met and no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within a company have been
detected.
There
were no changes in the Company’s internal control over financial reporting that
occurred during the quarter ended March 31, 2010 that materially affected, or
are reasonably likely to materially affect, the Company’s internal controls over
financial reporting. The Company reviews its disclosure controls and
procedures, which may include its internal control over financial reporting, on
an ongoing basis, and may from time to time make changes aimed at enhancing
their effectiveness and to ensure that the Company’s systems evolve with its
business.
Part
II. OTHER INFORMATION
Item
1A. Risk Factors
There
have been no material changes in our risk factors from those disclosed in our
Annual Report on Form 10-K for the year ended December 31, 2009.
Item
6. Exhibits
|
Exhibit3.2
|
Bylaws
of Southern Community Financial
Corporation
|
|
Exhibit31.1
|
Certification
of the Chief Executive Officer pursuant to Rule
13a-14(a)
|
|
Exhibit31.2
|
Certification
of the Chief Financial Officer pursuant to Rule
13a-14(a)
|
|
Exhibit32
|
Section
1350 Certification
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Company has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
|
SOUTHERN
COMMUNITY FINANCIAL CORPORATION
|
|
|
Date: May
10, 2010
|
By:
|
/s/ F. Scott
Bauer
|
|
|
F.
Scott Bauer
|
|
|
Chairman
and Chief Executive Officer
|
|
|
(principal
executive officer)
|
|
|
Date: May
10, 2010
|
By:
|
/s/ James
Hastings
|
|
|
James
Hastings
|
|
|
Executive
Vice President and Chief Financial Officer
|
|
|
(principal
financial and accounting
officer)
|
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