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 September 30, 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
October 29, 2010 (the most recent practicable date), the registrant had
outstanding 16,812,625 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 September 30, 2010 and December 31,
2009
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18
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Consolidated
Statements of Operations Three Months and Nine Months Ended September 30,
2010 and 2009
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19
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Consolidated
Statements of Comprehensive Income (Loss) Three Months and Nine Months
Ended September 30, 2010 and 2009
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20
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Consolidated
Statement of Changes in Stockholders’ Equity Nine Months Ended September
30, 2010
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21
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Consolidated
Statements of Cash Flows Nine Months Ended September 30, 2010 and
2009
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22
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Notes
to Consolidated Financial Statements
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23
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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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40
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Item
4 -
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Controls
and Procedures
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40
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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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41
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Item
6 -
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Exhibits
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41
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Signatures
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42
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Part
I. FINANCIAL INFORMATION
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SELECTED
FINANCIAL DATA
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At
or for the Quarter Ended
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%
Change Sept 30, 2010 from
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Sept
30,
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June
30,
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Sept
30,
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June
30,
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Sept
30,
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2010
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2010
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2009
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2010
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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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20,049
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$
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20,439
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$
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22,186
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(2
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%
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(10
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%
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Interest
expense
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6,773
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7,007
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8,868
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(3
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(24
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Net
interest income
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13,276
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13,432
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13,318
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(1
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-
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Provision
for loan losses
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17,000
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5,500
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6,000
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209
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183
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Net
interest income (loss) after provision for loan losses
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(3,724
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)
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7,932
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7,318
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(147
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(151
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Non-interest
income
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3,060
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4,392
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4,189
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(30
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(27
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Non-interest
expense
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10,984
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12,333
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12,621
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(11
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(13
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Income
(loss) before income taxes
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(11,648
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(9
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(1,114
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NM
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NM
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Benefit
from income taxes
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(3,698
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(270
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(683
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NM
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NM
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Net
income (loss)
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$
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(7,950
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$
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261
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$
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(431
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NM
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NM
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Effective
dividend on preferred stock
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633
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632
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621
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Net
income (loss) available to common shareholders
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$
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(8,583
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$
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(371
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$
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(1,052
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Net
Income (Loss) Per Common Share:
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Basic
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$
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(0.51
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$
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(0.02
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$
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(0.06
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Diluted
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(0.51
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(0.02
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(0.06
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Selected
Performance Ratios:
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Return
on average assets
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-1.91
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%
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0.06
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%
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-0.10
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%
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Return
on average equity
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-27.07
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%
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0.90
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%
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-1.28
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%
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Net
interest margin (1)
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3.39
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%
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3.46
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%
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3.30
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%
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Efficiency
ratio (2)
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67.24
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%
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69.19
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%
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72.09
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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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8.29
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%
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4.60
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%
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1.81
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%
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Nonperforming
assets to total assets (3)
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7.10
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%
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4.47
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%
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2.36
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%
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Net
loan charge-offs to average loans outstanding (annualized)
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3.78
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%
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3.95
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%
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1.45
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%
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Allowance
for loan losses to period-end loans
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2.95
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%
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2.46
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%
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1.66
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%
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Allowance
for loan losses to nonperforming loans
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0.36
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X
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0.53
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X
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0.92
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X
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Capital
Ratios:
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Total
risk-based capital
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12.20
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%
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12.85
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%
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13.65
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%
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Tier
1 risk-based capital
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10.11
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%
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10.96
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%
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12.30
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%
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Leverage
ratio
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8.45
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%
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8.95
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%
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10.08
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%
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Equity
to assets ratio
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6.56
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%
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7.05
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%
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7.77
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%
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Balance
Sheet Data (End of Period):
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Total
assets
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1,662,786
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1,660,115
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1,725,341
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-
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(4
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Loans
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1,183,753
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1,198,565
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1,248,249
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(1
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)
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(5
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)
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Deposits
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1,317,610
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1,292,847
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1,279,079
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2
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3
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Short-term
borrowings
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45,615
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59,533
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84,834
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(23
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)
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(46
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)
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Long-term
borrowings
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182,728
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182,770
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219,144
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-
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(17
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Stockholders’
equity
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109,094
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116,984
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134,062
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(7
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(19
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Other
Data:
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Weighted
average shares
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Basic
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16,812,625
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16,814,378
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16,791,175
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Diluted
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16,812,625
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16,814,378
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16,791,175
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Period
end outstanding shares
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16,812,625
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16,812,625
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16,791,175
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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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308
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|
303
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335
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(1) Net
interest margin is net interest income divided by average interest-earning
assets.
(2)
Efficiency ratio is non-interest expense divided by the sum of net interest
income and non-interest income.
(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 Third Quarter
Total
assets increased $2.7 million, or 0.2%, during the third quarter as loans
declined for the eighth consecutive quarter. Loans outstanding
decreased $14.8 million, or 1.2%, due to continued weak economic conditions and
resulting slowdown in loan demand. The allowance for loan losses
increased $5.5 million, or 18.6%, which was primarily attributable to increased
nonperforming loans and a revision to the methodology used to calculate the
allowance (discussed in the Asset Quality section below). Foreclosed
assets remained stable, increasing only $604 thousand. The investment
securities portfolio returned to a level consistent with previous quarters
increasing $14.8 million, or 4.8% as funds from loan run-off were redeployed and
deposit growth was invested. Total deposits were $1.32 billion at
September 30, 2010, an increase of $24.8 million, or 1.9%, from June 30,
2010. The increase in deposits was primarily due to an increase of
$50.8 million in wholesale time deposits used to increase balance sheet
liquidity at quarter end. Demand deposits and interest bearing
transaction deposits decreased $28.2 million, or 3.8%. Borrowings
decreased $14.0 million, or 5.8%, from the prior quarter end continuing a trend
of allowing borrowings to mature without renewal or replacement as loan demand
has declined. Deposit growth has been adequate to fund new loan
requests and increases to the investment securities portfolio.
Net
interest income decreased $156 thousand, or 1.2%, for the third quarter compared
to the second quarter 2010. The interest rate environment remained
relatively stable in the third quarter as the Federal Reserve maintained the
federal funds target rate consistent with the second quarter and changes in
LIBOR rates were relatively minor. Total interest income decreased by
$390 thousand, or 1.9%, while the cost of funds decreased $234 thousand, or
3.3%, compared to the previous quarter. The sequential decrease
in interest income was attributable to declining yields on loans and investments
as well as a modest shift in earning asset mix towards investment
securities. The following factors minimized the sequential reduction
in interest income: 1) effective discipline in pricing of loans including the
continued incorporation of interest rate floors on floating rate loans upon
renewal; and 2) lesser impact of nonaccrual loans despite the significant
increase in nonaccrual balances (see further discussion below and in the Asset
Quality section). Interest expense declined primarily due to reduced
levels of borrowings and lower cost of deposits from continued downward
repricing during the quarter. The net interest margin declined seven
basis points to 3.39% compared to 3.46% for the linked quarter and increased
nine basis points when compared to 3.30% for the third quarter of
2009.
The
Company’s provision for loan losses of $17.0 million increased from $5.5 million
for the second quarter 2010 and from $6.0 million for the third quarter of
2009. The increased level of provision was a result of continued
significant level of charge-offs, an increased level of nonperforming loans and
the impact of revising our methodology for calculating the general allowance
component of the allowance for loan losses. Despite the $7.6 million
impact of these factors on the general allowance component, the specific
valuation component decreased by $2.1 million on a linked quarter basis as fewer
newly identified nonperforming loans required a specific loan loss allowance
allocation during the third quarter. Annualized net charge-offs
decreased to 3.78% of average loans in third quarter 2010 from 3.95% of average
loans for second quarter 2010 and increased from 1.45% of average loans for the
third quarter 2009. Nonperforming loans increased to $98.7 million,
or 8.34% of loans, at September 30, 2010 from $55.5 million, or 4.63% of loans,
at June 30, 2010. Of the $43.2 million increase in nonperforming
loans, $26.0 million were loans whose repayment are dependent on the sale of
their collateral and whose payment terms were interest only. None of
these collateral dependent loans, which were placed on nonaccrual status during
the third quarter, were delinquent. We have since renegotiated the
payment structures on $20.1 million of these collateral dependent loans to
include interest plus scheduled principal curtailments. If these
borrowers maintain their current payment status under the restructured terms for
a reasonable period, the loans will be restored to accrual
status. Nonperforming assets rose to $118.1 million, or 7.10% of
total assets, at September 30, 2010 from $74.3 million, or 4.47% of total
assets, at June 30, 2010 primarily due to the increase in nonperforming 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. The allowance for loan
losses of $35.1 million at September 30, 2010 represented 2.95% of total loans
and 36% coverage of nonperforming loans at current quarter-end compared with
2.46% of total loans and 53% coverage of nonperforming loans at June 30,
2010. We believe the allowance is adequate for losses inherent in the
loan portfolio at September 30, 2010.
Non-interest
income was $3.1 million during the third quarter of 2010, compared to $4.4
million for the prior quarter and $4.2 million for the third quarter of
2009. The sequential decrease in non-interest income was primarily
due to decreased gains on sales of investment securities of $994 thousand, a
decrease in the fair value of derivatives of $346 thousand and a decrease in
Small Business Investment Company (SBIC) earnings of $197
thousand. These decreases in non-interest income were partially
offset by an increase of $392 thousand in mortgage banking activities
attributable to increased refinance production and loan sales
volumes. The year-over-year decrease of $1.1 million in non-interest
income was primarily due to decreased gains on sale of investment securities of
$711 thousand and a decrease in the fair value of derivatives of $700
thousand. There were increases in mortgage banking fees, service
charges on deposit and investment brokerage income compared to the third quarter
2009.
Non-interest
expense of $11.0 million in the third quarter of 2010 decreased $1.3 million, or
10.9%, from the prior quarter and decreased by $1.6 million, or 13.0%, compared
with the year ago period. Cost reductions were achieved throughout
non-interest expense categories with the largest reductions attributable to a
$469 thousand decrease in write-downs on carrying values of foreclosed real
estate, $183 thousand reduction in the costs of acquiring and maintaining
foreclosed real estate, $220 thousand decrease in buyer incentive program
expenses (as this program ended in June 2010), $139 thousand reduction in
advertising expenses and cost savings of $288 thousand in salaries and employee
benefits. Significant year-over-year decreases were recognized in
salary and employee benefits, the Company’s buyer incentive program, write-downs
on carrying values of foreclosed real estate, costs of acquiring and maintaining
foreclosed properties and FDIC deposit insurance premiums.
Financial
Condition at September 30, 2010 and December 31, 2009
During
the nine month period ending September 30, 2010, total assets declined $65.8
million, or 3.8%, to $1.66 billion. The Company continued to
emphasize improving the funding mix during a time of asset shrinkage due to slow
loan demand. A decrease of $56.2 million in borrowings accommodated
our balance sheet shrinkage. In addition, we focused on actively
managing the investment portfolio and maintaining an adequate allowance for loan
losses as well as a sufficient level of liquidity and regulatory capital ratios
in excess of well capitalized levels. The shift in the funding mix
contributed to an improvement in the net interest margin during the first nine
months of 2010. We continued to shift our deposit mix toward demand
deposits, lower cost money market, savings and transaction accounts and away
from certificates of deposit. Our continuing efforts to strengthen
customer relationships by acquiring core deposit accounts resulted in growth in
demand deposits of $877 thousand, or 0.7%, and growth in money market, savings
and NOW accounts of $21.0 million, or 3.6%, for the first nine months in
2010. Time deposits decreased $18.3 million largely due to a decline
in brokered deposits of $38.9 million. The investment portfolio
remained virtually unchanged from the last year end amount decreasing only $1.3
million, or 0.4%, during the nine month period; although $14.8 million was added
during the third quarter. While the total investment portfolio has
remained stable over the nine month period, the mix of investments has changed
with increases of $13.4 million in municipals and $10.0 million in corporate
bonds and decreases of $13.9 million in U.S. Government Agencies and $10.8
million in mortgage-backed securities. The allowance for loan losses
increased $5.5 million compared to the prior year end, while increasing $14.3
million, or 68.7%, compared to September 30, 2009.
Total
loans decreased $46.5 million, or 3.8%, during the nine month period with
decreases in the following major categories: $20.7 million, or 11.3%,
for commercial and industrial loans, $28.4 million, or 7.2%, for residential
mortgage loans and $4.2 million, or 2.4%, for construction
loans. Commercial mortgage loans increased $7.2 million, or 1.6%,
during the period. The decrease in loans outstanding during the
period can be attributed to a continued slowdown in loan demand during these
difficult economic times. For the third quarter 2010, the allowance
increased by $5.5 million as the provision of $17.0 million exceeded net
charge-offs of $11.5 million. Net charge-offs improved slightly from
the second quarter total of $11.9 million while the provision increased
significantly due to factors discussed in the Asset Quality
section.
At
September 30, 2010, our leverage ratio, Tier I risk-based capital ratio and
total risk-based capital ratio were 8.45%, 10.11% and 12.20%,
respectively. Our capital position remains strong, with all of our
regulatory capital ratios at levels that categorize us as “well capitalized”
under current regulatory capital guidelines. Given the current
regulatory environment and recent legislation such as the Dodd-Frank Act, our
regulatory burden could increase. Many aspects of Dodd-Frank are
subject to rulemaking and will take effect over several years. Such
matters could result in a material impact on the Company and could include
requirements for higher regulatory capital levels and various other
restrictions. While regulatory capital requirements are considered,
the Company also evaluates its capital needs based on other appropriate business
considerations on an ongoing basis. Based on their evaluations and
requirements, the Company may seek other sources of capital in the
future. Our ability to raise additional capital, if needed, will
depend on conditions in the capital markets at the time and on our financial
performance, among other factors. At September 30, 2010, our
stockholders’ equity totaled $109.0 million, a decrease of $12.9 million
compared to December 31, 2009. The decrease is the result of the net
loss for the period, $1.9 million in dividends on the preferred stock issued to
the United States Treasury through the Capital Purchase Program, and an increase
of $907 thousand in other comprehensive income items.
Results
of Operations for the Three Months Ended September 30, 2010 and
2009
Net
Loss.
Net loss
before preferred dividends of $8.0 million and our net loss after preferred
dividends of $8.6 million for the three months ended September 30, 2010
increased $7.5 million from the same three month period in 2009. Net
loss available to common shareholders was $0.51 per share for both basic and
diluted for the three months ended September 30, 2010 compared with a $0.06 loss
per share for both basic and diluted for the same period in 2009. Net
interest income for the third quarter of 2010 of $13.3 million decreased $42
thousand, or 0.3%, year-over-year, due to a decrease in interest earning assets
and reversal of interest income on loans placed in a non-accrual status despite
an improvement in the net interest margin which improved nine basis points to
3.39%. Repricing of interest bearing assets and liabilities continued
to have an effect on the current net interest income and
margin. Non-interest income of $3.1 million during the third quarter
of 2010 represents a decrease of 27.0% from non-interest income of $4.2 million
reported in the comparable period of 2009. Non-interest expense
decreased $1.6 million, or 13.0%, compared with the same quarter a year
ago. The largest decreases in non-interest expense resulted from
reduced salaries and employee benefits of $657 thousand, a reduction of $470
thousand in the Company’s buyer incentive plan and a reduction of $418 thousand
in write-downs on the carrying value of foreclosed real estate.
Net
Interest Income.
During the
three months ended September 30, 2010, our net interest income of $13.3 million
was virtually unchanged with a decrease of $42 thousand, or 0.3%, over the third
quarter 2009. Interest expense decreased $2.1 million from an
improvement in our funding mix and the repricing of deposits. This
reduction in our cost of funds was matched by the $2.1 million decrease in
interest income from declining outstanding balances, declining yields on
interest earning assets and the reversal of interest income on loans placed on
non-accrual. Maintaining our net interest income was achieved in
spite of the cost of carrying nonperforming assets with an average balance of
$87.3 million which had a negative impact on our net interest margin for the
third quarter 2010 of approximately ten 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 third 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 third quarter of 2010 and 2009 was 3.25%, remaining unchanged
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. As of September 30, 2010, 88% of our $600.5 million in variable
rate loans have interest rate floors. Additionally, we have
reinforced loan pricing discipline so we are adequately compensated for the risk
of each loan. These two factors limited the decline in loan yields to
25 basis points year-over-year. The average yield on interest-earning
assets was 5.11% in the third quarter of 2010 which decreased 39 basis points
year-over-year due to the decline in yields for loans and 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. The average rate for interest bearing liabilities was 1.91%
for the third quarter of 2010 decreasing 48 basis points
year-over-year. For the third quarter 2010, our net interest margin
of 3.39% increased nine basis points from 3.30% for the third quarter of
2009. The Company’s net interest margin has strengthened through the
improvement in our cost of funds via continued downward repricing of deposits
and borrowings at current market rates. During the past five
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. We have also seen increased aggressive pricing on loans
during the third quarter of 2010 as banks compete for available loans during
this period of weak loan demand.
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 September 30, 2010
|
|
|
Three Months Ended September 30, 2009
|
|
|
|
(Amounts in thousands)
|
|
|
|
Average
balance
|
|
|
Interest
earned/paid
|
|
|
Average
yield/cost
|
|
|
Average
balance
|
|
|
Interest
earned/paid
|
|
|
Average
yield/cost
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
1,209,013
|
|
|
$
|
17,202
|
|
|
|
5.64
|
%
|
|
$
|
1,251,076
|
|
|
$
|
18,568
|
|
|
|
5.89
|
%
|
Investment
securities available for sale
|
|
|
299,642
|
|
|
|
2,614
|
|
|
|
3.46
|
%
|
|
|
325,017
|
|
|
|
3,458
|
|
|
|
4.22
|
%
|
Investment
securities held to maturity
|
|
|
16,659
|
|
|
|
215
|
|
|
|
5.12
|
%
|
|
|
14,045
|
|
|
|
158
|
|
|
|
4.48
|
%
|
Federal
funds sold and overnight deposits
|
|
|
30,009
|
|
|
|
18
|
|
|
|
0.24
|
%
|
|
|
10,841
|
|
|
|
2
|
|
|
|
0.07
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest earning assets
|
|
|
1,555,323
|
|
|
|
20,049
|
|
|
|
5.11
|
%
|
|
|
1,600,979
|
|
|
|
22,186
|
|
|
|
5.50
|
%
|
Other
assets
|
|
|
96,584
|
|
|
|
|
|
|
|
|
|
|
|
122,245
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
1,651,907
|
|
|
|
|
|
|
|
|
|
|
$
|
1,723,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market, NOW and savings
|
|
$
|
607,112
|
|
|
$
|
1,320
|
|
|
|
0.86
|
%
|
|
$
|
497,366
|
|
|
$
|
1,672
|
|
|
|
1.33
|
%
|
Time
deposits greater than $100K
|
|
|
145,788
|
|
|
|
788
|
|
|
|
2.14
|
%
|
|
|
190,060
|
|
|
|
977
|
|
|
|
2.04
|
%
|
Other
time deposits
|
|
|
402,271
|
|
|
|
2,267
|
|
|
|
2.24
|
%
|
|
|
478,931
|
|
|
|
3,492
|
|
|
|
2.89
|
%
|
Short-term
borrowings
|
|
|
67,506
|
|
|
|
246
|
|
|
|
1.45
|
%
|
|
|
84,646
|
|
|
|
372
|
|
|
|
1.74
|
%
|
Long-term
borrowings
|
|
|
182,742
|
|
|
|
2,152
|
|
|
|
4.67
|
%
|
|
|
219,159
|
|
|
|
2,355
|
|
|
|
4.26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest bearing liabilities
|
|
|
1,405,419
|
|
|
|
6,773
|
|
|
|
1.91
|
%
|
|
|
1,470,162
|
|
|
|
8,868
|
|
|
|
2.39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
deposits
|
|
|
120,359
|
|
|
|
|
|
|
|
|
|
|
|
109,515
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
9,628
|
|
|
|
|
|
|
|
|
|
|
|
9,920
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
116,501
|
|
|
|
|
|
|
|
|
|
|
|
133,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
1,651,907
|
|
|
|
|
|
|
|
|
|
|
$
|
1,723,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income and net interest spread
|
|
|
|
|
|
$
|
13,276
|
|
|
|
3.20
|
%
|
|
|
|
|
|
$
|
13,318
|
|
|
|
3.10
|
%
|
Net
interest margin
|
|
|
|
|
|
|
|
|
|
|
3.39
|
%
|
|
|
|
|
|
|
|
|
|
|
3.30
|
%
|
Ratio
of average interest-earning assets to average interest-bearing
liabilities
|
|
|
110.67
|
%
|
|
|
|
|
|
|
|
|
|
|
108.90
|
%
|
|
|
|
|
|
|
|
|
Provision
for Loan Losses.
The Company
recorded a $17.0 million provision for loan losses for the quarter ended
September 30, 2010, representing an increase of $11.0 million from the $6.0
million provision for the third quarter of 2009. The increased level
of provision on a linked quarter basis was due to changes in the methodology for
calculating the general reserves portion of the allowance for loan losses
discussed in “Asset Quality” and a reduction in the specific reserves required
despite a significant increase in nonperforming loans during the
quarter. 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 year-over-year
increase in the provision was based on management’s analysis and evaluation of
the adequacy of the level of the allowance for loan
losses. 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 3.78%
for the quarter ended September 30, 2010, compared with 1.45% for the quarter
ended September 30, 2009.
Non-Interest
Income.
For the three months ended September 30, 2010,
non-interest income decreased $1.1 million, or 27.0%, to $3.1 million from $4.2
million for the same period in 2009 primarily resulting from decreased gains on
the sales of investment securities of $711 thousand, a decrease in the fair
value of derivatives of $700 thousand and decreased Small Business Investment
Company (SBIC) income of $45 thousand. Management curtailed their
practice of actively selling investment securities that met certain criteria
during the third quarter resulting in a third quarter gain of $24 thousand
compared to gains of $1.0 million and $1.4 million in the second and first
quarters of 2010, respectively. The 2010 third quarter gain was also
considerably less than the $735 thousand gain in the third quarter of
2009. The $700 thousand decrease in the fair values of derivatives
was comprised of a $384 thousand loss in the third quarter of 2010 compared to a
$316 thousand gain the same quarter of 2009. The Company recognized
$126 thousand in income from its SBIC investment during the third quarter 2010
compared to $171 thousand income in the same period of the prior
year. The SBIC income generated during the third quarter of 2010 was
from normal operations as no individual investments were harvested or written
off. Mortgage banking income increased $239 thousand, or 46.7%, from
increased mortgage production volume, primarily refinance activity, and
increased gains on loan sales. Investment brokerage income increased
$65 thousand compared to the third quarter of 2009 based on higher transaction
volume. Service charges increased $52 thousand compared to the 2009
quarter as debit card income increased $143 thousand due to increased debit card
transaction volume, other service charges increased $22 thousand and NSF charges
decreased $113 thousand from decreased overdraft volume.
Non-Interest
Expense.
For the three
months ended September 30, 2010, non-interest expenses decreased $1.6 million,
or 13.0%, over the same period in 2009 primarily due to reduced personnel costs,
reduced buyer incentive program expenses, reduced foreclosed real estate
write-downs and decreased FDIC deposit insurance premiums. Through a
reduction in staff and cost savings programs initiated in prior quarters,
management decreased discretionary spending, saving $657 thousand, or 11.6%, in
salary and employee benefit expense from a company-wide salary freeze and a
reduction in the employer 401(k) matching contribution. The Company
started a new program during 2008 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 was up to $10 thousand per property
to incent home buyers to purchase these homes. During July 2010, the
final house under this program was sold with a $10 thousand incentive expense
for the Company compared to $480 thousand in buyer incentive expenses for the
same quarter last year. While this program was successful in
encouraging sales of slow moving houses since inception, it has now been
discontinued at its predetermined expiration date. Foreclosed asset
write-downs diminished to $123 thousand during the third quarter of 2010
compared to $542 thousand in the third quarter of 2009. The cost of
acquiring, holding and maintaining foreclosed properties was $404 thousand for
the current quarter compared to $196 thousand year-over-year. The
$208 thousand year-over-year increase in expenses related to holding foreclosed
assets was partially offset by $136 thousand year-over-year increase in gains on
sales of foreclosed property. The Company’s FDIC deposit insurance
premium decreased $259 thousand as this expense returned to more normal
levels. Legal fees incurred primarily to assist in the resolution of
problem credits increased $236 thousand compared to the prior
year. Occupancy and equipment expense decreased $158 thousand
compared to the third quarter of 2009 due to decreased depreciation of equipment
and software and other equipment expenses.
Provision
for Income Taxes.
The
Company recorded an income tax benefit of $3.7 million for the quarter ending
September 30, 2010 compared to income tax benefit of $683 thousand for third
quarter 2009. The income tax benefit for third quarter 2010 is
reflective of the impact of tax exempt interest income, income from bank owned
life insurance and a $1.0 million valuation allowance related to the
realizability of net deferred tax assets.
Results
of Operations for the Nine Months Ended September 30, 2010 and 2009
Net
Income (Loss).
Our net loss before preferred dividends for the
nine months ended September 30, 2010 was $16.3 million, compared to $55.2
million net loss for the nine months ended September 30, 2009. The
net loss for 2009 included a non-cash goodwill impairment charge of $49.5
million. Net interest income increased $1.6 million, or 4.17%,
compared to the 2009 nine month period primarily attributable to net interest
margin improvement of 30 basis points in spite of the $82.4 million, or 5%,
decrease in the average balance of interest earning assets
year-over-year. The net interest margin increase was due to effective
loan pricing (including the use of interest rate floors) which limited the
decline in loan yields to ten basis points, improved funding mix to lower
costing transaction deposits from time deposits and borrowings and the downward
repricing of deposits. The provision for loan loss continued to be
the most significant factor in the financial statements increasing $16.5
million, or 103.1%, compared to the prior year period. Non-interest
income increased $2.0 million, or 21.6%, compared to the prior nine month period
with significant differences between the two periods discussed below under
“Non-Interest Income”. Non-interest expense decreased $2.3 million,
or 6.0%, year-over-year, excluding the goodwill impairment charge of $49.5
million recognized during the first quarter of 2009. The largest
decrease in non-interest expense for the nine month period was for salaries and
employee benefits of $1.3 million while the largest increase was $578 thousand
for professional services.
Net
Interest Income.
During the nine months ended September 30,
2010, our net interest income totaled $40.0 million, a year-over-year increase
of $1.6 million, or 4.2%. Net interest income benefited from
establishing interest rate floors on floating rate loans and the downward
repricing of deposits as well as an improved funding mix as previously
mentioned. The Federal Funds rate and the prime rate have remained
stable during the first three quarters of 2010 as these rates did during
2009. As shown in the table below, our average yield on
interest-earning assets decreased 22 basis points to 5.26% for the first three
quarters of 2010 compared to the same period in 2009 while loan yields only
decreased ten basis points. The net interest margin improvement of 30
basis points more than offset the $82.4 million, or 5%, decrease in the average
balance of interest earning assets year-over-year. Declining rates
have also impacted our funding costs for the first nine months of 2010, as
funding costs decreased 58 basis points to 2.00% from 2.58% for the comparable
period a year ago. Average interest bearing liabilities decreased
$71.2 million, or 4.7%, to $1.44 billion from $1.51 billion for the nine month
period ended September 2009. Despite this overall decrease in
funding, our funding mix improved through year-over-year increases in demand
deposits of $13.1 million, or 12.3%, and money market, savings and NOW accounts
of $73.1 million, or 13.9%.
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 income or expense by the average balances of assets or liabilities,
respectively, for the periods presented. The average loan portfolio
balances include non-accrual loans.
|
|
Nine Months Ended September 30, 2010
|
|
|
Nine Months Ended September 30, 2009
|
|
|
|
(Amounts in thousands)
|
|
|
|
Average
balance
|
|
|
Interest
earned/paid
|
|
|
Average
yield/cost
|
|
|
Average
balance
|
|
|
Interest
earned/paid
|
|
|
Average
yield/cost
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
1,213,497
|
|
|
$
|
52,162
|
|
|
|
5.75
|
%
|
|
$
|
1,280,803
|
|
|
$
|
56,003
|
|
|
|
5.85
|
%
|
Investment
securities available for sale
|
|
|
312,066
|
|
|
|
8,861
|
|
|
|
3.80
|
%
|
|
|
328,714
|
|
|
|
10,640
|
|
|
|
4.33
|
%
|
Investment
securities held to maturity
|
|
|
11,628
|
|
|
|
426
|
|
|
|
4.90
|
%
|
|
|
20,551
|
|
|
|
727
|
|
|
|
4.73
|
%
|
Federal
funds sold and over night deposits
|
|
|
24,313
|
|
|
|
25
|
|
|
|
0.15
|
%
|
|
|
13,877
|
|
|
|
11
|
|
|
|
0.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest earning assets
|
|
|
1,561,504
|
|
|
|
61,474
|
|
|
|
5.26
|
%
|
|
|
1,643,945
|
|
|
|
67,381
|
|
|
|
5.48
|
%
|
Other
assets
|
|
|
119,398
|
|
|
|
|
|
|
|
|
|
|
|
130,431
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
1,680,902
|
|
|
|
|
|
|
|
|
|
|
$
|
1,774,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market, NOW and savings
|
|
$
|
606,575
|
|
|
$
|
4,508
|
|
|
|
0.99
|
%
|
|
$
|
481,967
|
|
|
$
|
4,816
|
|
|
|
1.34
|
%
|
Time
deposits greater than $100K
|
|
|
173,623
|
|
|
|
1,895
|
|
|
|
1.46
|
%
|
|
|
194,557
|
|
|
|
3,952
|
|
|
|
2.72
|
%
|
Other
time deposits
|
|
|
391,202
|
|
|
|
7,663
|
|
|
|
2.62
|
%
|
|
|
501,694
|
|
|
|
11,700
|
|
|
|
3.12
|
%
|
Short-term
borrowings
|
|
|
73,426
|
|
|
|
933
|
|
|
|
1.70
|
%
|
|
|
108,874
|
|
|
|
1,253
|
|
|
|
1.54
|
%
|
Long-term
borrowings
|
|
|
190,879
|
|
|
|
6,520
|
|
|
|
4.57
|
%
|
|
|
219,775
|
|
|
|
7,304
|
|
|
|
4.44
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest bearing liabilities
|
|
|
1,435,705
|
|
|
|
21,519
|
|
|
|
2.00
|
%
|
|
|
1,506,867
|
|
|
|
29,025
|
|
|
|
2.58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
deposits
|
|
|
117,542
|
|
|
|
|
|
|
|
|
|
|
|
104,799
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
9,303
|
|
|
|
|
|
|
|
|
|
|
|
10,188
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
118,352
|
|
|
|
|
|
|
|
|
|
|
|
152,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
1,680,902
|
|
|
|
|
|
|
|
|
|
|
$
|
1,774,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income and net interest spread
|
|
|
|
|
|
$
|
39,955
|
|
|
|
3.26
|
%
|
|
|
|
|
|
$
|
38,356
|
|
|
|
2.90
|
%
|
Net
interest margin
|
|
|
|
|
|
|
|
|
|
|
3.42
|
%
|
|
|
|
|
|
|
|
|
|
|
3.12
|
%
|
Ratio
of average interest-earning assets to average interest-bearing
liabilities
|
|
|
108.76
|
%
|
|
|
|
|
|
|
|
|
|
|
109.10
|
%
|
|
|
|
|
|
|
|
|
Provision
for Loan Losses
.
The
Company recorded a $32.5 million provision for loan losses for the nine months
ended September 30, 2010, representing an increase of $16.5 million from the
$16.0 million provision for the comparable period of 2009. The level
of provision for the quarter is reflective of the trends in the loan portfolio,
including loan growth, levels of non-performing loans and other loan portfolio
quality measures, and analyses of impaired loans as well as the level of net
charge-offs during the period. 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 2.98% for the nine month period
ended September 30, 2010, compared with 1.47% for the period ended September 30,
2009.
Non-Interest
Income.
For the nine months ended September 30, 2010, the
Company reported non-interest income of $11.4 million compared to $9.4 million
for the first nine months of 2009, an increase of $2.0 million, or
21.6%. See note 7 to the Financial Statements for a summary of the
components of non-interest income. Gains on sales of investment
securities increased $1.2 million, or 93.9%, year-over-year as management
actively managed the investment portfolio during 2010 and sold investment
securities that met certain criteria. In 2009, management executed a
balance sheet management strategy to increase net interest margin in future
periods through the coordinated sale of $15.0 million of investment securities
and the prepayment of $15.0 million in FHLB advances which generated a $472
thousand loss on early extinguishment of debt. The year-over-year
increase in service charges on deposits of $341 thousand was attributable to a
$423 thousand increase in debit card income
reflecting the trend of
more customer transactions being completed electronically and less checks being
written. As fewer checks were written NSF income also decreased $194
thousand while other service charges increased $111
thousand. Investment brokerage income increased $301 thousand during
the 2010 period on increased brokerage transaction volumes. The
year-over-year increase of $259 thousand in SBIC income resulted from the
absence of write-offs of individual investments during the 2010
period. Loss on derivative activity decreased $165 thousand due
primarily to a non-recurring $1.0 million write-off of collateral held by Lehman
Brothers as the counterparty on certain terminated derivative contracts that was
recognized during 2009. Mortgage banking income decreased $220
thousand, or 13.0%, as new loan origination activity slowed during the 2010
period. Noninterest income also increased during 2010 due to the
absence of a nonrecurring $404 thousand write-off of the Company’s investment in
an equity security during 2009 although the effect was partially offset by a
$189 thousand “other-than-temporary-impairment” write-down recognized during the
first quarter of 2010.
Non-Interest
Expense
.
Excluding the
$49.5 million goodwill impairment charge in 2009, our non-interest expense
decreased $2.3 million, or 6.0%, over the nine month period in
2009. Through a reduction in staff and cost savings programs
initiated in prior quarters, management decreased discretionary spending, saving
$1.3 million in salary and employee benefit expense from a company-wide salary
freeze and a reduction in the employer 401(k) matching
contribution. Occupancy and equipment expense decreased $371 thousand
compared to the third quarter of 2009 due to decreased depreciation of equipment
and software and other equipment. The Company’s FDIC deposit
insurance premiums decreased $737 thousand year-over-year as a special
assessment of $800 thousand accrued during the second quarter 2009 was not
charged by the FDIC during 2010. During 2008, the Company started a
new program (called buyer incentive program) to help builders sell their
inventory of bank-financed houses that had been on the market for 12 months or
more by offering purchasers an incentive of up to $10 thousand per
property. The cost for this program totaled $413 thousand for the
first nine months of 2010 compared to $1.0 million for the same period in
2009. The program has now completed its original goal and is no
longer offered. Write-downs and other expenses related to foreclosed
property were $2.5 million for 2010 compared to $1.4 million in the 2009 period,
an increase of $1.1 million. Gains on the sale of foreclosed assets
had a positive impact on earnings totaling $452 thousand for 2010 compared to
$63 thousand for 2009 as the volume of additions to foreclosed assets and their
sales volume increased year-over-year. Of the $577 thousand
year-over-year increase in professional services, legal expenses increased $317
thousand primarily due to the increased level of problem assets for resolution
in 2010. Expenditures for advertising, postage, printing, office
supplies, telephone and communication also decreased $208 thousand in total
year-over-year. A non-recurring charge of $472 thousand was incurred
during 2009 for the early extinguishment of debt which is discussed above in the
Non-Interest Income section.
Provision
for Income Taxes.
The Company recorded an income tax benefit
of $4.0 million for the nine months ended September 30, 2010 due to our
operating loss. The income tax benefit for the 2010 period is
reflective of the impact of tax exempt interest income, income from bank owned
life insurance and a $3.0 million valuation allowance related to the Company’s
ability to realize our net deferred tax assets.
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
$322.4 million at September 30, 2010, a decrease of $1.3 million from $323.7
million at December 31, 2009. While decreases in government agencies
of $13.9 million and mortgage backed securities of $10.8 million slightly offset
increases in municipal securities of $13.4 million and corporate bonds of $10.0
million, these investment mix changes have little impact on our
liquidity. In 2010, the Federal Reserve began to pay interest on
excess balances on deposit with them. During the third quarter of
2010, the interest rate paid on these balances has been higher than the fed
funds rates paid by most correspondent banks thereby encouraging banks to
increase their balances at the Federal Reserve. Management has
increased our balances at the Federal Reserve Bank to $23.6 million at September
30, 2010 versus our reserve requirement of $2.0 million for the applicable
period. Supplementing liquid assets and 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 $52.0
million. We also have the credit capacity from the Federal Home Loan
Bank of Atlanta (FHLB) to borrow up to $414.5 million, as of September 30, 2010,
with lendable collateral value of $320.8 million and current outstanding
borrowings of $93.1 million. At September 30, 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 from various
institutions. The repurchases must be and are adequately
collateralized. We also had short-term repurchase agreements with
total outstanding balances of $4.4 million and $14.9 million at September 30,
2010 and December 31, 2009, respectively, all of which were done as
accommodations for our deposit customers. At September 30, 2010, our
outstanding commitments to extend credit consisted of loan commitments of $154.5
million and amounts available under home equity credit lines, other credit lines
and letters of credit of $95.3 million, $12.8 million and $10.3 million,
respectively. Given the amount of our unpledged collateral, 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. Brokered
deposits have decreased $39.4 million from September 30, 2009 to September 30,
2010 or from 17% to 13% of total deposits. Year-over-year money
market, savings and NOW accounts increased $73.1 million, or 13.9%, and demand
deposits increased $13.1 million, or 12.3%, while time deposits decreased $47.7
million, or 7.4%. Certificates of deposits represented 45.4% of our
total deposits at September 30, 2010, a decrease from 50.5% at September 30,
2009. Savings grew $29.4 million during the nine month period 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
September 30, 2010, our leverage ratio (Tier I capital to average quarterly
assets) was 8.45%, and all of our capital ratios remain in excess of the current
minimums established for a well-capitalized bank by regulatory
measures. Our Tier I risk-based capital ratio and total risk-based
capital ratio at September 30, 2010 were 10.11% and 12.20%,
respectively. Given the current regulatory environment and recent
legislation such as the Dodd-Frank Act, our regulatory burden could
increase. Such actions could result in a material impact on the
Company and could include requirements for higher regulatory capital levels and
various other restrictions.
Through
July 2006, the Company authorized the repurchase of 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 third 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.
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. 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 general 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.
In the
tables and discussion below, the credit metrics for the current quarter and
their sequential changes are illustrated reflecting: 1) an increase in
nonperforming loans despite significant charge-offs; 2) a decrease in loan
delinquencies, particularly in 30-89 days; 3) the continued increase in
classified loans accentuated by the downgrading of collateral dependent interest
only loans; and 4) the continued reduction in the higher risk loan segments
($39.2 million, or 24.7%, year-over-year).
The
following is a summary of nonperforming assets at the periods
presented:
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual
loans
|
|
$
|
76,600
|
|
|
$
|
36,073
|
|
|
$
|
45,249
|
|
|
$
|
35,535
|
|
|
$
|
22,697
|
|
Restructured
loans - nonaccruing
|
|
|
15,498
|
|
|
|
15,200
|
|
|
|
4,341
|
|
|
|
2,197
|
|
|
|
-
|
|
Subtotal
- nonaccrual loans
|
|
|
92,098
|
|
|
|
51,273
|
|
|
|
49,590
|
|
|
|
37,732
|
|
|
|
22,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured
loans - accruing
|
|
|
6,611
|
|
|
|
4,204
|
|
|
|
1,018
|
|
|
|
-
|
|
|
|
-
|
|
Total
nonperforming loans
|
|
|
98,709
|
|
|
|
55,477
|
|
|
|
50,608
|
|
|
|
37,732
|
|
|
|
22,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed
assets
|
|
|
19,385
|
|
|
|
18,781
|
|
|
|
20,285
|
|
|
|
19,634
|
|
|
|
18,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
nonperforming assets
|
|
$
|
118,094
|
|
|
$
|
74,258
|
|
|
$
|
70,893
|
|
|
$
|
57,366
|
|
|
$
|
40,766
|
|
Nonperforming
loans increased to $98.7 million, or 8.34% of total loans, at September 30, 2010
compared to $37.7 million, or 3.07% of loans, at December 31,
2009. Of the $43.2 million increase in nonperforming loans on a
linked quarter basis, $26.0 million were loans whose repayment are dependent on
the sale of their collateral and whose payment terms were interest
only. None of these collateral dependent loans that were placed on
nonaccrual during the third quarter were delinquent. Management has
subsequently restructured the payment terms on $20.1 million of these third
quarter 2010 nonaccrual additions from interest only to interest plus scheduled
principal curtailments. If these borrowers maintain their current
payment status under their restructured payment terms, these loans will be
restored to an accrual status after a reasonable period. Of this
$43.2 million increase in nonperforming loans, $25.5 million, or 59% of the
increase, was related to construction and development lending. This
$43.2 million increase in nonperforming loans is net of loan charge-offs of
$12.2 million during the third quarter. While there has been a
greater volume of loans that have been restructured in the last two quarters, we
initiated a process in the second quarter to better differentiate between
restructured loans that are on nonaccrual and the remainder of nonaccrual
loans.
We
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, in loans classified substandard or doubtful and in nonperforming
loans.
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
|
(Amounts in millions)
|
|
|
|
$
|
|
|
% of
Total
Loans
|
|
|
$
|
|
|
% of
Total
Loans
|
|
|
$
|
|
|
% of
Total
Loans
|
|
|
$
|
|
|
% of
Total
Loans
|
|
|
$
|
|
|
% of
Total
Loans
|
|
Loans
delinquencies: 30 - 89 days past due
|
|
$
|
8.9
|
|
|
|
0.75
|
%
|
|
$
|
9.7
|
|
|
|
0.80
|
%
|
|
$
|
22.3
|
|
|
|
1.84
|
%
|
|
$
|
7.2
|
|
|
|
0.58
|
%
|
|
$
|
9.1
|
|
|
|
0.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
classified substandard or doubtful
|
|
$
|
237.6
|
|
|
|
19.95
|
%
|
|
$
|
144.0
|
|
|
|
12.02
|
%
|
|
$
|
137.3
|
|
|
|
11.36
|
%
|
|
$
|
83.6
|
|
|
|
6.80
|
%
|
|
$
|
60.8
|
|
|
|
4.87
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming
loans
|
|
$
|
98.7
|
|
|
|
8.29
|
%
|
|
$
|
55.5
|
|
|
|
4.60
|
%
|
|
$
|
50.6
|
|
|
|
4.18
|
%
|
|
$
|
37.7
|
|
|
|
3.06
|
%
|
|
$
|
22.7
|
|
|
|
1.81
|
%
|
The
improvement in loan delinquencies shown above was attributable to a continued
strong involvement of commercial loan officers and their management in the
monthly collection efforts and a more “normal” quarter-end, particularly in
comparison to March 31, 2010 when there were a large number of pending renewals
and modifications/restructurings in process of negotiations. At
September 30, 2010, there were $70.4 million in nonaccrual loans that were not
delinquent. Of this amount, $26.0 million were collateral dependent,
interest only loans mentioned above.
The $93.5
million, or 65%, increase in adversely classified loans from June 30, 2010 to
September 30, 2010, was due to the downgrading of credit risk grades resulting
from our regular quarterly review of watch and criticized
loans. During the same period, total watch and criticized loans only
increased $14.4 million, or 3.4%, from $428.2 million, or 36% of total loans, at
June 30, 2010 to $442.6 million, or 38% of total loans, at September 30,
2010. These classified loans continue to be primarily in the
construction and land development portfolios.
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.
The
following table illustrates the quarterly trends in the outstanding balances of
these higher risk loan segments.
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
|
(Amounts in millions)
|
|
Residential
construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Speculative
Residential Construction
|
|
$
|
46.2
|
|
|
$
|
48.6
|
|
|
$
|
53.0
|
|
|
$
|
53.3
|
|
|
$
|
64.5
|
|
Land
Acquisition and Development
|
|
|
53.7
|
|
|
|
54.8
|
|
|
|
56.2
|
|
|
|
58.3
|
|
|
|
62.3
|
|
Lot
Inventory
|
|
|
19.7
|
|
|
|
25.3
|
|
|
|
28.0
|
|
|
|
29.5
|
|
|
|
32.0
|
|
Total
|
|
$
|
119.6
|
|
|
$
|
128.7
|
|
|
$
|
137.2
|
|
|
$
|
141.1
|
|
|
$
|
158.8
|
|
There has
been a continued reduction in these higher risk loan segments of $9.1 million,
or 7%, sequentially and a year-over-year decline of $39.2 million, or
24.7%. These reductions have been more pronounced in the speculative
residential construction segment which represents the majority of the
year-over-year decline ($18.3 million of the $39.2 million).
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 September 30, 2010, speculative construction loans on
our books more than twelve months amounted to $26.3 million, or 56.9%, of the
total speculative residential construction loan portfolio, a decrease from $34.1
million, or 64%, of total speculative residential construction loans as of
December 31, 2009. Land acquisition and development loans on our
books for more than twenty-four months at September 30, 2010 amounted to $43.6
million, or 81.2%, of that portfolio segment, a decrease from $48.8 million, or
84%, of that portfolio segment as of December 31, 2009.
The
following table sets forth a breakdown of nonperforming loans and foreclosed
assets as of September 30, 2010, by nature of the property.
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
Nonperforming loans
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
|
(Amounts in thousands)
|
|
Residential
Construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
Speculative
construction
|
|
$
|
21,706
|
|
|
$
|
11,329
|
|
|
$
|
9,049
|
|
|
$
|
4,210
|
|
Land
acquisition and development
|
|
|
33,362
|
|
|
|
18,136
|
|
|
|
17,462
|
|
|
|
11,997
|
|
Total
residential construction
|
|
|
55,068
|
|
|
|
29,465
|
|
|
|
26,511
|
|
|
|
16,207
|
|
Commercial
real estate
|
|
|
24,301
|
|
|
|
17,473
|
|
|
|
18,671
|
|
|
|
16,344
|
|
Commercial
and industrial
|
|
|
16,018
|
|
|
|
6,215
|
|
|
|
4,177
|
|
|
|
3,432
|
|
Consumer
|
|
|
3,322
|
|
|
|
2,324
|
|
|
|
1,249
|
|
|
|
1,749
|
|
Total
nonperforming loans
|
|
$
|
98,709
|
|
|
$
|
55,477
|
|
|
$
|
50,608
|
|
|
$
|
37,732
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
Foreclosed assets
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
Residential
construction, land development
|
|
|
|
|
|
|
|
|
|
|
|
|
and
other land
|
|
$
|
11,048
|
|
|
$
|
10,918
|
|
|
$
|
12,679
|
|
|
$
|
11,101
|
|
Commercial
construction
|
|
|
1,884
|
|
|
|
2,078
|
|
|
|
2,142
|
|
|
|
2,206
|
|
1 -
4 family residential properties
|
|
|
4,969
|
|
|
|
3,657
|
|
|
|
3,330
|
|
|
|
4,272
|
|
Nonfarm
nonresidential properties
|
|
|
1,260
|
|
|
|
1,743
|
|
|
|
1,749
|
|
|
|
1,670
|
|
Multi
family properties
|
|
|
160
|
|
|
|
160
|
|
|
|
160
|
|
|
|
160
|
|
Equipment
|
|
|
64
|
|
|
|
64
|
|
|
|
225
|
|
|
|
225
|
|
Total
foreclosed assets
|
|
$
|
19,385
|
|
|
$
|
18,620
|
|
|
$
|
20,285
|
|
|
$
|
19,634
|
|
The
largest nonaccrual balance of any borrower at September 30, 2010 was $7.3
million, with the average balance for the two hundred twenty-six nonaccrual
loans being $404 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 $139.0 million at
September 30, 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 September 30, 2010, foreclosed assets totaled $19.4
million, or 1.17% of total assets, and consisted of eighty-eight 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 $2.3 million at September 30, 2010 and $2.9 million at December 31,
2009. We recorded write-downs in the value of foreclosed assets of
$123 thousand during the third quarter of 2010, $591 thousand during the second
quarter of 2010, $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. 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. 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 ALLL
consists of two major components: specific valuation allowances and a general
valuation allowance. 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.
The
general valuation allowance is estimated primarily based on the historical loss
experience of the loan portfolio to provide for probable losses in the loan
portfolio. Prior to third quarter 2010, our methodology for
calculating this general valuation allowance applied loss factors based on the
credit risk grading of loans segmented into four major loan types: 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. In addition, we utilize other risk factors related to
economic and portfolio trends that are pertinent to the underlying risks in each
major loan type in estimating the general valuation allowance. This
methodology places a greater emphasis on the credit risk grading of the loan
portfolio and allows us to focus on the relative risk and the pertinent factors
for the major loan segments of the Company. During the third quarter
of 2010, we further enhanced our methodology for the calculation of the general
valuation allowance by expanding the number of loan segments from the four
previously mentioned to eight segments, focusing on segments which have
experienced greater recent historical loss experience such as residential lot
loans and construction and land development. Furthermore, we also
more heavily weighted the most recent twelve months historical loss experience
in our third quarter 2010 calculation of the general valuation component of our
ALLL. While the general valuation allowance component increased $7.6
million sequentially during the third quarter of 2010, the impact of this change
in the weighting of the historical loss experience increased the third quarter
provision for loan losses and the resulting allowance balance by approximately
$5.0 million.
As
discussed herein, management has undertaken various initiatives in response to
the challenging economic environment, increased nonperforming loans, weakened
collateral positions, and increased foreclosed asset levels, including but not
limited to:
|
·
|
Restructuring
interest only loan payment terms to require principal
repayments;
|
|
·
|
Refining
the allowance for loan losses methodology to weight current period loss
experience more heavily;
|
|
·
|
Downgrading
renewed and other higher risk loans to a substandard
classification;
|
|
·
|
Enhancing
the internal controls surrounding troubled debt restructured (TDR) loan
identification and monitoring;
|
|
·
|
Charging
off weakened credits;
|
|
·
|
Increasing
the staffing resources of our Credit Administration function, including
internal loan review;
|
|
·
|
Enhancing
our internal and external loan review protocol;
and
|
|
·
|
Increasing
our allowance for loan losses.
|
We will
continue to evaluate our management of credit and other risks, seeking
continuous improvements.
Additionally,
banking regulatory authorities may require certain other actions, or place
restrictions on the Company, based on their assessments, evaluations and
recommendations.
An
analysis of the allowance for loan losses and a breakdown of the specific and
general valuation components of the ALLL are as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
|
(Amounts
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$
|
29,609
|
|
|
$
|
36,007
|
|
|
$
|
29,638
|
|
|
$
|
29,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
17,000
|
|
|
|
5,500
|
|
|
|
10,000
|
|
|
|
32,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
(12,245
|
)
|
|
|
(12,807
|
)
|
|
|
(4,017
|
)
|
|
|
(29,069
|
)
|
Recoveries
|
|
|
736
|
|
|
|
909
|
|
|
|
386
|
|
|
|
2,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
charge-offs
|
|
|
(11,509
|
)
|
|
|
(11,898
|
)
|
|
|
(3,631
|
)
|
|
|
(27,038
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at end of period
|
|
$
|
35,100
|
|
|
$
|
29,609
|
|
|
$
|
36,007
|
|
|
$
|
35,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALLL/Loans
|
|
|
2.95
|
%
|
|
|
2.46
|
%
|
|
|
2.97
|
%
|
|
|
2.95
|
%
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
|
(Amounts in millions)
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
ALLL
components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific
|
|
$
|
9,497
|
|
|
|
27
|
%
|
|
$
|
11,584
|
|
|
|
39
|
%
|
|
$
|
17,583
|
|
|
|
49
|
%
|
|
$
|
9,792
|
|
|
|
33
|
%
|
General
|
|
|
25,603
|
|
|
|
73
|
%
|
|
|
18,025
|
|
|
|
61
|
%
|
|
|
18,424
|
|
|
|
51
|
%
|
|
|
19,846
|
|
|
|
67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
35,100
|
|
|
|
100
|
%
|
|
$
|
29,609
|
|
|
|
100
|
%
|
|
$
|
36,007
|
|
|
|
100
|
%
|
|
$
|
29,638
|
|
|
|
100
|
%
|
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 during the past eight 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 $17.0 million
for the third quarter of 2010 as compared to $5.5 million on a linked quarter
basis as a result of continued significant level of charge-offs increased level
of nonperforming loans and the impact of the change in our methodology for
calculating the general allowance component of our ALLL. Despite the
impact of these factors on the general allowance component, the specific
valuation component decreased by $2.1 million on a linked quarter basis with
fewer newly identified nonperforming loans requiring a specific allowance
allocation during the quarter. The allowance for loan losses of $35.1
million at September 30, 2010 represented 2.95% of total loans and provided
coverage for 36% of nonperforming loans. This level of allowance has
increased $5.5 million from December 31, 2009 when the allowance represented
2.41% of total loans and coverage for 53% of nonperforming loans. The
level of loan charge-offs during the third quarter remained at a similar level
to the second quarter, both heavily concentrated in construction and land
development lending (69% for third quarter 2010 compared with 77% for second
quarter 2010). We believe 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)
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009*
|
|
|
|
(Amounts in thousands, except share data)
|
|
Assets
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
44,612
|
|
|
$
|
30,184
|
|
Federal
funds sold and overnight deposits
|
|
|
1,646
|
|
|
|
31,269
|
|
Investment
securities
|
|
|
|
|
|
|
|
|
Available
for sale, at fair value
|
|
|
293,309
|
|
|
|
312,780
|
|
Held
to maturity, at amortized cost
|
|
|
29,122
|
|
|
|
10,919
|
|
Federal
Home Loan Bank stock
|
|
|
9,092
|
|
|
|
9,794
|
|
|
|
|
|
|
|
|
|
|
Loans
held for sale
|
|
|
7,161
|
|
|
|
3,025
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
1,183,753
|
|
|
|
1,230,275
|
|
Allowance
for loan losses
|
|
|
(35,100
|
)
|
|
|
(29,638
|
)
|
Net
Loans
|
|
|
1,148,653
|
|
|
|
1,200,637
|
|
|
|
|
|
|
|
|
|
|
Premises
and equipment, net
|
|
|
40,718
|
|
|
|
42,630
|
|
Foreclosed
assets
|
|
|
19,385
|
|
|
|
19,634
|
|
Other
assets
|
|
|
69,088
|
|
|
|
67,736
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
1,662,786
|
|
|
$
|
1,728,608
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
Non-interest
bearing demand
|
|
$
|
119,249
|
|
|
$
|
118,372
|
|
Money
market, NOW and savings
|
|
|
599,978
|
|
|
|
579,027
|
|
Time
|
|
|
598,383
|
|
|
|
616,671
|
|
Total
Deposits
|
|
|
1,317,610
|
|
|
|
1,314,070
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
|
45,615
|
|
|
|
85,477
|
|
Long-term
borrowings
|
|
|
182,728
|
|
|
|
199,103
|
|
Other
liabilities
|
|
|
7,739
|
|
|
|
7,961
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
1,553,692
|
|
|
|
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
|
|
|
|
|
|
|
|
|
September
30, 2010 and December 31, 2009
|
|
|
41,355
|
|
|
|
41,060
|
|
Common
stock, no par value, 30,000,000 shares authorized; issued
and
|
|
|
|
|
|
|
|
|
outstanding
16,812,625 shares at September 30, 2010
|
|
|
|
|
|
|
|
|
and
16,787,675 shares at December 31, 2009
|
|
|
119,375
|
|
|
|
119,282
|
|
Retained
earnings (accumulated deficit)
|
|
|
(55,628
|
)
|
|
|
(41,430
|
)
|
Accumulated
other comprehensive income
|
|
|
3,992
|
|
|
|
3,085
|
|
Total
Stockholders’ Equity
|
|
|
109,094
|
|
|
|
121,997
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' Equity
|
|
$
|
1,662,786
|
|
|
$
|
1,728,608
|
|
* Derived
from audited consolidated financial statements
See
accompanying notes.
SOUTHERN
COMMUNITY FINANCIAL CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS (Unaudited)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(Amounts in thousands, except per share and share data)
|
|
Interest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
17,202
|
|
|
$
|
18,568
|
|
|
$
|
52,162
|
|
|
$
|
56,003
|
|
Investment
securities available for sale
|
|
|
2,615
|
|
|
|
3,458
|
|
|
|
8,861
|
|
|
|
10,640
|
|
Investment
securities held to maturity
|
|
|
215
|
|
|
|
158
|
|
|
|
426
|
|
|
|
727
|
|
Federal
funds sold and overnight deposits
|
|
|
17
|
|
|
|
2
|
|
|
|
25
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Interest Income
|
|
|
20,049
|
|
|
|
22,186
|
|
|
|
61,474
|
|
|
|
67,381
|
|
Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market, NOW and savings deposits
|
|
|
1,320
|
|
|
|
1,672
|
|
|
|
4,508
|
|
|
|
4,815
|
|
Time
deposits
|
|
|
3,055
|
|
|
|
4,470
|
|
|
|
9,558
|
|
|
|
15,653
|
|
Borrowings
|
|
|
2,398
|
|
|
|
2,726
|
|
|
|
7,453
|
|
|
|
8,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Interest Expense
|
|
|
6,773
|
|
|
|
8,868
|
|
|
|
21,519
|
|
|
|
29,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Interest Income
|
|
|
13,276
|
|
|
|
13,318
|
|
|
|
39,955
|
|
|
|
38,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for Loan Losses
|
|
|
17,000
|
|
|
|
6,000
|
|
|
|
32,500
|
|
|
|
16,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Interest Income (Loss) After Provision for Loan Losses
|
|
|
(3,724
|
)
|
|
|
7,318
|
|
|
|
7,455
|
|
|
|
22,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Interest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges and fees on deposit accounts
|
|
|
1,640
|
|
|
|
1,588
|
|
|
|
4,916
|
|
|
|
4,575
|
|
Income
from mortgage banking activities
|
|
|
751
|
|
|
|
512
|
|
|
|
1,468
|
|
|
|
1,688
|
|
Investment
brokerage and trust fees
|
|
|
424
|
|
|
|
359
|
|
|
|
1,168
|
|
|
|
867
|
|
Gain
on sale of investment securities
|
|
|
24
|
|
|
|
735
|
|
|
|
2,396
|
|
|
|
1,236
|
|
Net
impairment loss recognized in earnings
|
|
|
-
|
|
|
|
-
|
|
|
|
(186
|
)
|
|
|
(404
|
)
|
Other
|
|
|
221
|
|
|
|
995
|
|
|
|
1,643
|
|
|
|
1,418
|
|
Total
Non-Interest Income
|
|
|
3,060
|
|
|
|
4,189
|
|
|
|
11,405
|
|
|
|
9,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
5,033
|
|
|
|
5,690
|
|
|
|
15,823
|
|
|
|
17,117
|
|
Occupancy
and equipment
|
|
|
1,839
|
|
|
|
1,997
|
|
|
|
5,650
|
|
|
|
6,021
|
|
Goodwill
impairment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
49,501
|
|
Other
|
|
|
4,112
|
|
|
|
4,934
|
|
|
|
13,687
|
|
|
|
14,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Non-Interest Expense
|
|
|
10,984
|
|
|
|
12,621
|
|
|
|
35,160
|
|
|
|
86,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) Before Income Taxes
|
|
|
(11,648
|
)
|
|
|
(1,114
|
)
|
|
|
(16,300
|
)
|
|
|
(55,184
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Tax (Benefit) Expense
|
|
|
(3,698
|
)
|
|
|
(683
|
)
|
|
|
(4,000
|
)
|
|
|
(2,742
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
|
(7,950
|
)
|
|
|
(431
|
)
|
|
|
(12,300
|
)
|
|
|
(52,442
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
Dividend on Preferred Stock
|
|
|
633
|
|
|
|
621
|
|
|
|
1,898
|
|
|
|
1,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss) Available to Common Shareholders
|
|
$
|
(8,583
|
)
|
|
$
|
(1,052
|
)
|
|
$
|
(14,198
|
)
|
|
$
|
(54,323
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss) Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.51
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.84
|
)
|
|
$
|
(3.24
|
)
|
Diluted
|
|
|
(0.51
|
)
|
|
|
(0.06
|
)
|
|
|
(0.84
|
)
|
|
|
(3.24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Common Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
16,812,625
|
|
|
|
16,791,175
|
|
|
|
16,811,122
|
|
|
|
16,787,565
|
|
Diluted
|
|
|
16,812,625
|
|
|
|
16,791,175
|
|
|
|
16,811,122
|
|
|
|
16,787,565
|
|
See
accompanying notes.
SOUTHERN
COMMUNITY FINANCIAL CORPORATION
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(7,950
|
)
|
|
$
|
(431
|
)
|
|
$
|
(12,300
|
)
|
|
$
|
(52,442
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding gains (loss) on available for sale securities
|
|
|
1,056
|
|
|
|
3,003
|
|
|
|
4,271
|
|
|
|
2,911
|
|
Tax
effect
|
|
|
(407
|
)
|
|
|
(1,157
|
)
|
|
|
(1,646
|
)
|
|
|
(1,121
|
)
|
Reclassification
of gains recognized in net income
|
|
|
(24
|
)
|
|
|
(735
|
)
|
|
|
(2,396
|
)
|
|
|
(1,236
|
)
|
Tax
effect
|
|
|
10
|
|
|
|
283
|
|
|
|
924
|
|
|
|
476
|
|
Reclassification
of impairment on equity securities
|
|
|
-
|
|
|
|
-
|
|
|
|
186
|
|
|
|
-
|
|
Tax
effect
|
|
|
-
|
|
|
|
-
|
|
|
|
(72
|
)
|
|
|
-
|
|
Net
of tax amount
|
|
|
635
|
|
|
|
1,394
|
|
|
|
1,267
|
|
|
|
1,030
|
|
Cash
flow hedging activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding gains (losses) on cash flow hedging activities
|
|
|
(187
|
)
|
|
|
(245
|
)
|
|
|
(795
|
)
|
|
|
356
|
|
Tax
effect
|
|
|
72
|
|
|
|
95
|
|
|
|
306
|
|
|
|
(137
|
)
|
Reclassification
of gains (losses) recognized in net income (loss), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassified
into income
|
|
|
71
|
|
|
|
69
|
|
|
|
221
|
|
|
|
157
|
|
Tax
effect
|
|
|
(27
|
)
|
|
|
(28
|
)
|
|
|
(85
|
)
|
|
|
(62
|
)
|
Amortization
of terminated floor contract
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(229
|
)
|
Acquisition
premium on interest rate cap contract, net of amortization
|
|
|
(5
|
)
|
|
|
3
|
|
|
|
(11
|
)
|
|
|
(399
|
)
|
Tax
effect
|
|
|
2
|
|
|
|
(1
|
)
|
|
|
4
|
|
|
|
154
|
|
Net
of tax amount
|
|
|
(74
|
)
|
|
|
(107
|
)
|
|
|
(360
|
)
|
|
|
(160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other comprehensive income
|
|
|
561
|
|
|
|
1,287
|
|
|
|
907
|
|
|
|
870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
(7,389
|
)
|
|
$
|
856
|
|
|
$
|
(11,393
|
)
|
|
$
|
(51,572
|
)
|
See
accompanying notes.
SOUTHERN
COMMUNITY FINANCIAL CORPORATION
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Retained
Earnings
(Accumulated
|
|
|
Accumulated
Other
Comprehensive
|
|
|
Total
Stockholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Deficit)
|
|
|
Income
|
|
|
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)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(12,300
|
)
|
|
|
-
|
|
|
|
(12,300
|
)
|
Other
comprehensive income, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
907
|
|
|
|
907
|
|
Restricted
stock issued
|
|
|
-
|
|
|
|
-
|
|
|
|
24,950
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Stock-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
93
|
|
|
|
-
|
|
|
|
-
|
|
|
|
93
|
|
Preferred
stock dividend
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,603
|
)
|
|
|
-
|
|
|
|
(1,603
|
)
|
Preferred
stock accretion of discount
|
|
|
-
|
|
|
|
295
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(295
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2010
|
|
|
42,750
|
|
|
$
|
41,355
|
|
|
|
16,812,625
|
|
|
$
|
119,375
|
|
|
$
|
(55,628
|
)
|
|
$
|
3,992
|
|
|
$
|
109,094
|
|
See
accompanying notes.
SOUTHERN
COMMUNITY FINANCIAL CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Unaudited)
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Amounts in thousands)
|
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(12,300
|
)
|
|
$
|
(52,442
|
)
|
Adjustments
to reconcile net income (loss) to net cash provided by
|
|
|
|
|
|
|
|
|
(used
in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
3,241
|
|
|
|
3,344
|
|
Provision
for loan losses
|
|
|
32,500
|
|
|
|
16,000
|
|
Net
proceeds from sales of loans held for sale
|
|
|
70,465
|
|
|
|
136,345
|
|
Originations
of loans held for sale
|
|
|
(73,133
|
)
|
|
|
(136,900
|
)
|
Gain
from mortgage banking
|
|
|
(1,468
|
)
|
|
|
(1,688
|
)
|
Stock-based
compensation
|
|
|
93
|
|
|
|
191
|
|
Net
increase in cash surrender value of life insurance
|
|
|
(803
|
)
|
|
|
(835
|
)
|
Realized
gain on sale of available for sale securities, net
|
|
|
(2,396
|
)
|
|
|
(1,236
|
)
|
Realized
loss on impairment of investment securities available for
sale
|
|
|
186
|
|
|
|
-
|
|
Realized
loss in equity investment security
|
|
|
-
|
|
|
|
404
|
|
Realized
(gain) loss on sale of premises and equipment
|
|
|
11
|
|
|
|
(57
|
)
|
(Gain)
loss on economic hedges
|
|
|
453
|
|
|
|
(26
|
)
|
Deferred
income taxes
|
|
|
(794
|
)
|
|
|
(647
|
)
|
Realized
gain on sales of foreclosed assets
|
|
|
(452
|
)
|
|
|
(63
|
)
|
Writedowns
in carrying values of foreclosed real estate
|
|
|
1,198
|
|
|
|
889
|
|
Goodwill
impairment
|
|
|
-
|
|
|
|
49,501
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Increase
in other assets
|
|
|
(911
|
)
|
|
|
(5,491
|
)
|
Decrease
in other liabilities
|
|
|
(675
|
)
|
|
|
(1,495
|
)
|
Total
Adjustments
|
|
|
27,515
|
|
|
|
58,236
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided by (Used in) Operating Activities
|
|
|
15,215
|
|
|
|
5,794
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
|
(Increase)
decrease in federal funds sold
|
|
|
29,623
|
|
|
|
(19,612
|
)
|
Purchase
of:
|
|
|
|
|
|
|
|
|
Available-for-sale
investment securities
|
|
|
(199,440
|
)
|
|
|
(201,897
|
)
|
Held-to-maturity
investment securities
|
|
|
(23,466
|
)
|
|
|
-
|
|
Proceeds
from maturities and calls of:
|
|
|
|
|
|
|
|
|
Available-for-sale
investment securities
|
|
|
128,540
|
|
|
|
113,877
|
|
Held-to-maturity
investment securities
|
|
|
5,273
|
|
|
|
21,237
|
|
Proceeds
from sale of:
|
|
|
|
|
|
|
|
|
Available-for-sale
investment securities
|
|
|
93,928
|
|
|
|
69,846
|
|
Purchase
of Federal Home Loan Bank stock
|
|
|
-
|
|
|
|
(421
|
)
|
Proceeds
from sales of Federal Home Loan Bank stock
|
|
|
702
|
|
|
|
384
|
|
Net
decrease in loans
|
|
|
9,738
|
|
|
|
31,663
|
|
Capitalized
cost in foreclosed real estate
|
|
|
-
|
|
|
|
(626
|
)
|
Purchases
of premises and equipment
|
|
|
(564
|
)
|
|
|
(5,083
|
)
|
Proceeds
from disposal of premises and equipment
|
|
|
92
|
|
|
|
58
|
|
Proceeds
from sales of foreclosed assets
|
|
|
9,087
|
|
|
|
8,331
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided by Investing Activities
|
|
|
53,513
|
|
|
|
17,757
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Net
increase in transaction accounts and savings accounts
|
|
|
21,828
|
|
|
|
70,613
|
|
Net
decrease in time deposits
|
|
|
(18,288
|
)
|
|
|
(9,253
|
)
|
Net
decrease in short-term borrowings
|
|
|
(39,862
|
)
|
|
|
(75,756
|
)
|
Proceeds
from long-term borrowings
|
|
|
-
|
|
|
|
16,250
|
|
Repayment
of long-term borrowings
|
|
|
(16,375
|
)
|
|
|
(25,122
|
)
|
Preferred
dividends paid
|
|
|
(1,603
|
)
|
|
|
(1,881
|
)
|
Cash
dividends paid
|
|
|
-
|
|
|
|
(664
|
)
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided by (Used in) Financing Activities
|
|
|
(54,300
|
)
|
|
|
(25,813
|
)
|
|
|
|
|
|
|
|
|
|
Net
Increase (Decrease) in Cash and Due From Banks
|
|
|
14,428
|
|
|
|
(2,262
|
)
|
Cash
and Due From Banks, Beginning of Period
|
|
|
30,184
|
|
|
|
25,215
|
|
|
|
|
|
|
|
|
|
|
Cash
and Due From Banks, End of Period
|
|
$
|
44,612
|
|
|
$
|
22,953
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Cash Flow Information:
|
|
|
|
|
|
|
|
|
Transfer
of loans to foreclosed assets
|
|
$
|
9,746
|
|
|
$
|
20,855
|
|
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 and
nine-month periods ended September 30, 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 and determination of stock-based compensation and income tax assets
or liabilities. Operating results for the three-month and nine-month
periods ended September 30, 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
. 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 for fiscal years beginning after November 15,
2009. The adoption of this statement did not have a material impact
on the 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 for fiscal years beginning after November 15, 2009. The
adoption of this statement did not have a material impact on the 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 disclosure
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 Company’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 were
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 and SEC Staff Accounting Bulletins on the
consolidated financial statements of the Company and monitors the status of
changes to and proposed effective dates of exposure drafts.
The
Company has adopted Accounting Standards Update No. 2010-18,
Effect of a Loan Modification When
the Loan is Part of a Pool that is Accounted for as a Single Asset
, which
affects the acquisition of a pool of loans subject to Subtopic 310-30 (formerly
SOP 03-3). The pronouncement requires that modified loans are
accounted for in a pool of loans remain in the pool if they are considered a
troubled debt restructuring. Consideration should continue concerning
whether the pool of assets in which the loan is included is impaired if expected
cash flows for the pool change. A loan is removed from the pool only
if either the loan is written off or the investor sells, forecloses or otherwise
receives assets in satisfaction of the loan. This pronouncement is
effective for the first interim or annual period ending on or after July 15,
2010. The adoption of this statement did not have a material impact
on the consolidated financial statements.
On July
21, 2010, the FASB issued
Disclosures about the Credit Quality
of Financing Receivables and the Allowance for Credit
Losses
. This standard requires additional disclosures related
to the allowance for loan loss with the objective of providing financial
statement users with greater transparency about an entity’s loan loss reserves
and overall credit quality disaggregated by portfolio segment and class of
financing receivable. Additional disclosures include showing on a
disaggregated basis the aging of receivables, credit quality indicators, and
troubled debt restructurings with their effect on the allowance for loan
loss. The provisions of this standard are effective for interim and
annual periods ending on or after December 15, 2010. The disclosures
about activity during a reporting period are effective for interim and annual
reporting periods beginning on or after December 15, 2010. The
adoption of this standard will not have a material impact on the Company’s
financial position and results of operations.
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
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
used in computing basic net
|
|
|
|
|
|
|
|
|
|
|
|
|
income
per share
|
|
|
16,812,625
|
|
|
|
16,791,175
|
|
|
|
16,811,122
|
|
|
|
16,787,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
and dilutive potential common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
used in computing diluted net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
per share
|
|
|
16,812,625
|
|
|
|
16,791,175
|
|
|
|
16,811,122
|
|
|
|
16,787,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) Available to Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders
(in thousands)
|
|
$
|
(8,583
|
)
|
|
$
|
(1,052
|
)
|
|
$
|
(14,198
|
)
|
|
$
|
(54,323
|
)
|
Basic
|
|
|
(0.51
|
)
|
|
|
(0.06
|
)
|
|
|
(0.84
|
)
|
|
|
(3.24
|
)
|
Diluted
|
|
|
(0.51
|
)
|
|
|
(0.06
|
)
|
|
|
(0.84
|
)
|
|
|
(3.24
|
)
|
For the
three months ended September 30, 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 amount to
630,091 and 2,342,468 shares for the three months ended September 30, 2010 and
2009, respectively and 630,091 and 2,342,468 shares for the nine months ended
September 30, 2010 and 2009, respectively. These options, warrants,
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 and nine months ended September 30, 2010 and 2009 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.
|
|
September 30, 2010
|
|
|
|
Amortized Cost
|
|
|
Gross Unrealized
Gains
|
|
|
Gross Unrealized
Losses
|
|
|
Fair Value
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.
S. government agencies
|
|
$
|
45,250
|
|
|
$
|
601
|
|
|
$
|
-
|
|
|
|
45,851
|
|
Mortgage-backed
securities
|
|
|
167,849
|
|
|
|
4,061
|
|
|
|
324
|
|
|
|
171,586
|
|
Municipals
|
|
|
64,848
|
|
|
|
3,789
|
|
|
|
22
|
|
|
|
68,615
|
|
Trust
preferred securities
|
|
|
4,252
|
|
|
|
12
|
|
|
|
1,023
|
|
|
|
3,241
|
|
Common
stocks and mutual funds
|
|
|
2,719
|
|
|
|
324
|
|
|
|
27
|
|
|
|
3,016
|
|
Other
|
|
|
1,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,000
|
|
|
|
$
|
285,918
|
|
|
$
|
8,787
|
|
|
$
|
1,396
|
|
|
$
|
293,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities
|
|
$
|
861
|
|
|
$
|
47
|
|
|
$
|
-
|
|
|
$
|
908
|
|
Municipals
|
|
|
18,261
|
|
|
|
252
|
|
|
|
59
|
|
|
|
18,454
|
|
Corporate
Bonds
|
|
|
10,000
|
|
|
|
5
|
|
|
|
101
|
|
|
|
9,904
|
|
|
|
$
|
29,122
|
|
|
$
|
304
|
|
|
$
|
160
|
|
|
$
|
29,266
|
|
|
|
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
|
|
For the
three months and nine months ended September 30, 2010, sales of securities
available for sale resulted in gross realized gains of $28 thousand and $2.4
million, respectively and $5 thousand in gross unrealized losses for each
period. These investment sales generated $537 thousand and $93.9
million in proceeds during these respective periods. Sales of
securities available for sale for the three months and nine months ended
September 30, 2009 resulted in $735 thousand and $1.3 million, respectively, in
realized gains and none and $48 thousand in realized losses,
respectively.
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.
|
|
September 30, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities
|
|
$
|
36,257
|
|
|
$
|
324
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
36,257
|
|
|
$
|
324
|
|
Municipals
|
|
|
2,562
|
|
|
|
20
|
|
|
|
113
|
|
|
|
2
|
|
|
|
2,675
|
|
|
|
22
|
|
Trust
preferred securities
|
|
|
-
|
|
|
|
-
|
|
|
|
2,228
|
|
|
|
1,023
|
|
|
|
2,228
|
|
|
|
1,023
|
|
Common
stocks and mutual funds
|
|
|
-
|
|
|
|
-
|
|
|
|
42
|
|
|
|
27
|
|
|
|
42
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
temporarily impaired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities
|
|
$
|
38,819
|
|
|
$
|
344
|
|
|
$
|
2,383
|
|
|
$
|
1,052
|
|
|
$
|
41,202
|
|
|
$
|
1,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipals
|
|
$
|
4,123
|
|
|
$
|
59
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,123
|
|
|
$
|
59
|
|
Corporate
Bonds
|
|
|
5,686
|
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
5,686
|
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
temporarily impaired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities
|
|
$
|
9,809
|
|
|
$
|
160
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9,809
|
|
|
$
|
160
|
|
|
|
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 September 30, 2010, there were four investment securities
with aggregate fair values of $2.4 million in an unrealized loss position for at
least twelve months including one trust preferred security valued at $2.1
million with a $945 thousand unrealized loss due to changes in the level of
market interest rates. The security has a variable rate based on
LIBOR which had declined steadily throughout 2009 and has stabilized during
2010. The fair value of this security increased slightly from the
second quarter of 2010, although the unrealized loss remained
significant. Based on the nature of these securities and the
continued timely receipt of scheduled payments, we believe the decline in value
to be solely due to changes in interest rates and the general economic
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 until 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 $27 thousand for more than twelve months at September 30,
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. The Company determined
one marketable equity security was “other-than-temporarily” impaired during the
first quarter and recognized a $186 thousand write-down on the
investment. The investment had been carried at a basis of $268
thousand and had a fair value of $82 thousand after the
write-down. Given sales of a portion of this equity security, the
fair value of the investment was $42 thousand at September 30, 2010 with an
unrealized loss of $28 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.
Note
3 – Investment Securities (continued)
The
amortized cost and fair values of securities available for sale and held to
maturity at September 30, 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 the
obligation.
|
|
September 30, 2010
|
|
|
|
Securities Available for Sale
|
|
|
Securities Held to Maturity
|
|
|
|
Amortized
Cost
|
|
|
Fair Value
|
|
|
Amortized
Cost
|
|
|
Fair Value
|
|
|
|
(Amount
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
within one year
|
|
$
|
3,633
|
|
|
$
|
3,659
|
|
|
$
|
101
|
|
|
$
|
102
|
|
Due
after one but through five years
|
|
|
11,943
|
|
|
|
12,127
|
|
|
|
1,004
|
|
|
|
1,078
|
|
Due
after five but through ten years
|
|
|
56,958
|
|
|
|
58,279
|
|
|
|
11,661
|
|
|
|
11,617
|
|
Due
after ten years
|
|
|
37,564
|
|
|
|
40,401
|
|
|
|
15,495
|
|
|
|
15,561
|
|
Mortgage-backed
securities
|
|
|
167,849
|
|
|
|
171,586
|
|
|
|
861
|
|
|
|
908
|
|
Trust
preferred securities
|
|
|
4,252
|
|
|
|
3,241
|
|
|
|
-
|
|
|
|
-
|
|
Common
stocks and mutual funds
|
|
|
2,719
|
|
|
|
3,016
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
285,918
|
|
|
$
|
293,309
|
|
|
$
|
29,122
|
|
|
$
|
29,266
|
|
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 $9.1
million and $9.8 million at September 30, 2010 and at December 31, 2009,
respectively. 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. 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. Prior
to the announcement the FHLB automatically repurchased excess stock on a daily
basis. Subsequently, the FHLB announced that it would repurchase up
to $300 million of members’ excess stock on July 15, 2010 and August 17,
2010. On those dates, the Company actually received $352 thousand and
$349 thousand, respectively, as its portion of those repurchases of excess
stock. The FHLB has paid a cash dividend to its members for the past
four consecutive quarters, beginning the second quarter 2009. On July
30, 2010, the FHLB paid a cash dividend to its members for the second quarter of
2010 at an annualized rate of 0.44%. At September 30, 2010 (the most
recent date available), the FHLB was in compliance with all of its regulatory
capital requirements. Management believes that our investment in FHLB
stock was not impaired as of September 30, 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 September 30,
|
|
|
At December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Amount
|
|
|
Percent
of Total
|
|
|
Amount
|
|
|
Percent
of Total
|
|
|
|
(Amounts in thousands)
|
|
Residential
mortgage loans
|
|
$
|
367,207
|
|
|
|
31.0
|
%
|
|
$
|
395,586
|
|
|
|
32.2
|
%
|
Commerical
mortgage loans
|
|
|
462,431
|
|
|
|
39.1
|
%
|
|
|
455,268
|
|
|
|
37.0
|
%
|
Construction
loans
|
|
|
174,031
|
|
|
|
14.7
|
%
|
|
|
178,239
|
|
|
|
14.5
|
%
|
Commercial
and industrial loans
|
|
|
162,629
|
|
|
|
13.7
|
%
|
|
|
183,319
|
|
|
|
14.9
|
%
|
Loans
to individuals
|
|
|
17,455
|
|
|
|
1.5
|
%
|
|
|
17,863
|
|
|
|
1.4
|
%
|
Subtotal
|
|
|
1,183,753
|
|
|
|
100.0
|
%
|
|
|
1,230,275
|
|
|
|
100.0
|
%
|
Less:
Allowance for loan losses
|
|
|
(35,100
|
)
|
|
|
|
|
|
|
(29,638
|
)
|
|
|
|
|
Net
loans
|
|
$
|
1,148,653
|
|
|
|
|
|
|
$
|
1,200,637
|
|
|
|
|
|
An
analysis of the allowance for loan losses is as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$
|
29,609
|
|
|
$
|
19,390
|
|
|
$
|
29,638
|
|
|
$
|
18,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
17,000
|
|
|
|
6,000
|
|
|
|
32,500
|
|
|
|
16,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
(12,245
|
)
|
|
|
(4,721
|
)
|
|
|
(29,069
|
)
|
|
|
(14,316
|
)
|
Recoveries
|
|
|
736
|
|
|
|
138
|
|
|
|
2,031
|
|
|
|
272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
charge-offs
|
|
|
(11,509
|
)
|
|
|
(4,583
|
)
|
|
|
(27,038
|
)
|
|
|
(14,044
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at end of period
|
|
$
|
35,100
|
|
|
$
|
20,807
|
|
|
$
|
35,100
|
|
|
$
|
20,807
|
|
The
following is a summary of nonperforming assets at the periods
presented:
|
|
September 30,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual
loans
|
|
$
|
76,600
|
|
|
$
|
35,535
|
|
|
$
|
22,697
|
|
Restructured
loans - nonaccruing
|
|
|
15,498
|
|
|
|
2,197
|
|
|
|
-
|
|
Restructured
loans - accruing
|
|
|
6,611
|
|
|
|
-
|
|
|
|
-
|
|
Total
nonperforming loans
|
|
|
98,709
|
|
|
|
37,732
|
|
|
|
22,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed
assets
|
|
|
19,385
|
|
|
|
19,634
|
|
|
|
18,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
nonperforming assets
|
|
$
|
118,094
|
|
|
$
|
57,366
|
|
|
$
|
40,766
|
|
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 based on the portfolio historical
loss experience 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. We further enhanced our methodology
for the calculation of the general valuation allowance by more heavily weighting
the most recent twelve months historical loss experience in our third quarter
2010 calculation of the general valuation component of our
ALLL. While the general valuation allowance component increased $7.6
million sequentially during the third quarter of 2010, the impact of this change
in the weighting of the historical loss experience was to increase the third
quarter provision for loan losses and the resulting allowance balance by
approximately $5.0 million.
Note
4 – Loans (continued)
At
September 30, 2010, the Company had loans with a book value of $86.0 million
that have been individually evaluated for impairment. A corresponding
valuation allowance of $9.5 million has been provided for these loans determined
to be impaired with an outstanding balance of $47.7 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 September 30, 2010 and December 31,
2009:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Amounts in thousands)
|
|
Short-term
borrowings
|
|
|
|
|
|
|
FHLB
advances
|
|
$
|
36,250
|
|
|
$
|
31,250
|
|
Repurchase
agreements
|
|
|
4,394
|
|
|
|
14,861
|
|
Other
borrowed funds
|
|
|
4,971
|
|
|
|
39,366
|
|
|
|
$
|
45,615
|
|
|
$
|
85,477
|
|
|
|
|
|
|
|
|
|
|
Long-term
borrowings
|
|
|
|
|
|
|
|
|
FHLB
advances
|
|
$
|
56,851
|
|
|
$
|
73,226
|
|
Term
repurchase agreements
|
|
|
80,000
|
|
|
|
80,000
|
|
Jr.
subordinated debentures
|
|
|
45,877
|
|
|
|
45,877
|
|
|
|
$
|
182,728
|
|
|
$
|
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
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(Amounts in thousands)
|
|
SBIC
income and management fees
|
|
$
|
126
|
|
|
$
|
171
|
|
|
$
|
625
|
|
|
$
|
366
|
|
Increase
in cash surrender value of life insurance
|
|
|
268
|
|
|
|
257
|
|
|
|
803
|
|
|
|
835
|
|
Loss
and net cash settlement on economic hedges
|
|
|
(384
|
)
|
|
|
316
|
|
|
|
(453
|
)
|
|
|
(618
|
)
|
Other
|
|
|
211
|
|
|
|
251
|
|
|
|
668
|
|
|
|
835
|
|
|
|
$
|
221
|
|
|
$
|
995
|
|
|
$
|
1,643
|
|
|
$
|
1,418
|
|
The major
components of other non-interest expense are as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(Amounts in thousands)
|
|
FDIC
deposit insurance
|
|
$
|
561
|
|
|
$
|
820
|
|
|
$
|
1,662
|
|
|
$
|
2,399
|
|
Postage,
printing and office supplies
|
|
|
163
|
|
|
|
211
|
|
|
|
558
|
|
|
|
699
|
|
Telephone
and communication
|
|
|
232
|
|
|
|
246
|
|
|
|
666
|
|
|
|
694
|
|
Advertising
and promotion
|
|
|
237
|
|
|
|
188
|
|
|
|
800
|
|
|
|
839
|
|
Data
processing and other outsourced services
|
|
|
223
|
|
|
|
206
|
|
|
|
665
|
|
|
|
570
|
|
Professional
services
|
|
|
849
|
|
|
|
528
|
|
|
|
2,288
|
|
|
|
1,711
|
|
Buyer
incentive plan
|
|
|
10
|
|
|
|
480
|
|
|
|
413
|
|
|
|
1,050
|
|
Loss
on early extinguishment of debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
472
|
|
Gain
on sales of foreclosed assets
|
|
|
(131
|
)
|
|
|
6
|
|
|
|
(452
|
)
|
|
|
(63
|
)
|
Expenses
of managing foreclosed assets
|
|
|
405
|
|
|
|
196
|
|
|
|
1,353
|
|
|
|
537
|
|
Writedowns
on foreclosed assets
|
|
|
123
|
|
|
|
542
|
|
|
|
1,198
|
|
|
|
889
|
|
Other
|
|
|
1,440
|
|
|
|
1,511
|
|
|
|
4,536
|
|
|
|
4,484
|
|
|
|
$
|
4,112
|
|
|
$
|
4,934
|
|
|
$
|
13,687
|
|
|
$
|
14,281
|
|
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 third 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.
The
Company currently has ten derivative instrument contracts consisting of two
interest rate caps, six 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 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.
Note
10 – Derivatives (continued)
The fair
value of the Company’s derivative assets and liabilities and their related
notional amounts is summarized below.
|
|
September 30, 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
|
|
$
|
291
|
|
|
$
|
65,000
|
|
|
$
|
939
|
|
|
$
|
65,000
|
|
Currency
Exchange Contracts
|
|
|
(795
|
)
|
|
|
10,000
|
|
|
|
(847
|
)
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps associated with borrowing activities: Trust Preferred
contracts
|
|
|
(546
|
)
|
|
|
10,000
|
|
|
|
(402
|
)
|
|
|
10,000
|
|
Interest
rate cap contracts
|
|
|
60
|
|
|
|
22,500
|
|
|
|
489
|
|
|
|
22,500
|
|
|
|
$
|
(990
|
)
|
|
$
|
107,500
|
|
|
$
|
179
|
|
|
$
|
107,500
|
|
See Note
12 for additional information on fair values of net derivatives.
The
following table further breaks down the derivative positions of the
Company:
|
|
For the Nine Months Ended September 30, 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 cap contracts
|
|
Other
Assets
|
|
$
|
60
|
|
|
|
|
|
Interest
rate swap contracts
|
|
Other
Assets
|
|
|
291
|
|
Other Liabilities
|
|
$
|
546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap contracts
|
|
|
|
|
-
|
|
Other Liabilities
|
|
|
795
|
|
Total
derivatives
|
|
|
|
$
|
351
|
|
|
|
$
|
1,341
|
|
Net
Derivative Asset (Liability)
|
|
|
|
|
|
|
|
|
$
|
(990
|
)
|
|
|
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 cap contracts
|
|
Other
Assets
|
|
$
|
489
|
|
|
|
|
|
Interest
rate swap contracts
|
|
Other
Assets
|
|
|
939
|
|
Other Liabilities
|
|
$
|
402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap contracts
|
|
|
|
|
-
|
|
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 September 30, 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
|
|
$
|
(187
|
)
|
|
Interest
Expense
|
|
$
|
(71
|
)
|
For the Nine Months Ended September 30, 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
|
|
$
|
(795
|
)
|
|
Interest
Expense
|
|
$
|
(221
|
)
|
For the Three Months Ended September 30, 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
|
|
$
|
(245
|
)
|
|
Interest
Expense
|
|
$
|
(69
|
)
|
For the Nine Months Ended September 30, 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
|
|
$
|
356
|
|
|
Interest
Expense
|
|
$
|
(157
|
)
|
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 and nine
months ended September 30, 2010 and 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 September 30, 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)
|
|
$
|
(385
|
)
|
|
|
|
|
|
|
|
Interest
Rate Contracts - Fair value hedging relationships
|
|
Interest
Income/(Expense)
|
|
$
|
330
|
|
For the Nine Months Ended September 30, 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)
|
|
$
|
(453
|
)
|
|
|
|
|
|
|
|
Interest
Rate Contracts - Fair value hedging relationships
|
|
Interest
Income/(Expense)
|
|
$
|
1,567
|
|
For the Three Months Ended September 30, 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)
|
|
$
|
(93
|
)
|
|
|
|
|
|
|
|
Interest
Rate Contracts - Fair value hedging relationships
|
|
Interest
Income/(Expense)
|
|
$
|
569
|
|
For the Nine Months Ended September 30, 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)
|
|
$
|
(26
|
)
|
|
|
|
|
|
|
|
Interest
Rate Contracts - Fair value hedging relationships
|
|
Interest
Income/(Expense)
|
|
$
|
782
|
|
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
29, 2013 and December 30, 2013. The interest rate swaps on
certificates of deposit have maturity dates of February 26, 2024, July 28, 2024,
July 28, 2025, August 27, 2030 and September 30, 2030. Three new
derivative contracts were entered into during the third quarter of
2010. Interest rate swaps with original maturity dates of July 28,
2024, August 28, 2024 and July 9, 2029 were called during the third
quarter.
Note
10 – Derivatives (continued)
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 $7.1 million and $4.2 million at September 30, 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 September 30, 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 September 30, 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.
Note
11 - Disclosures About Fair Values of Financial Instruments
(Continued)
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.
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
September 30, 2010 and December 31, 2009:
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
Carrying
amount
|
|
|
Estimated
fair value
|
|
|
Carrying
amount
|
|
|
Estimated
fair value
|
|
|
|
(Amounts
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
44,612
|
|
|
$
|
44,612
|
|
|
$
|
30,184
|
|
|
$
|
30,184
|
|
Federal
funds sold and other interest-bearing deposits
|
|
|
1,646
|
|
|
|
1,646
|
|
|
|
31,269
|
|
|
|
31,269
|
|
Investment
securities available for sale
|
|
|
293,309
|
|
|
|
293,309
|
|
|
|
312,780
|
|
|
|
312,780
|
|
Investment
securities held to maturity
|
|
|
29,122
|
|
|
|
29,266
|
|
|
|
10,919
|
|
|
|
11,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
1,148,653
|
|
|
|
1,168,524
|
|
|
|
1,200,637
|
|
|
|
1,226,248
|
|
Market
risk/liquidity adjustment
|
|
|
-
|
|
|
|
(50,751
|
)
|
|
|
-
|
|
|
|
(34,055
|
)
|
Net
loans
|
|
|
1,148,653
|
|
|
|
1,117,773
|
|
|
|
1,200,637
|
|
|
|
1,192,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in life insurance
|
|
|
29,568
|
|
|
|
29,568
|
|
|
|
28,766
|
|
|
|
28,766
|
|
Accrued
interest receivable
|
|
|
6,107
|
|
|
|
6,107
|
|
|
|
7,403
|
|
|
|
7,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
1,317,610
|
|
|
|
1,324,829
|
|
|
|
1,314,070
|
|
|
|
1,334,468
|
|
Short-term
borrowings
|
|
|
45,615
|
|
|
|
45,615
|
|
|
|
85,477
|
|
|
|
85,827
|
|
Long-term
borrowings
|
|
|
182,728
|
|
|
|
189,454
|
|
|
|
199,103
|
|
|
|
203,987
|
|
Accrued
interest payable
|
|
|
2,169
|
|
|
|
2,169
|
|
|
|
3,318
|
|
|
|
3,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-balance
sheet derivative financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap and option agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Assets)
Liabilities, net
|
|
|
990
|
|
|
|
990
|
|
|
|
(179
|
)
|
|
|
(179
|
)
|
Note
12 – Fair Values of Assets and Liabilities
Accounting
standards establish a framework for measuring fair value according to generally
accepted accounting principles and expands disclosures about fair value
measurements. Under these standards, there is a three level fair
value hierarchy that is fully described below. 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 September 30, 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.
|
|
|
September 30, 2010
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.
S. government agencies
|
|
$
|
45,851
|
|
|
$
|
-
|
|
|
$
|
45,851
|
|
|
$
|
-
|
|
Mortgage-backed
securities
|
|
|
171,586
|
|
|
|
-
|
|
|
|
171,586
|
|
|
|
-
|
|
Municipals
|
|
|
68,615
|
|
|
|
-
|
|
|
|
68,615
|
|
|
|
-
|
|
Trust
preferred securities
|
|
|
3,241
|
|
|
|
-
|
|
|
|
3,241
|
|
|
|
-
|
|
Common
stocks and mutual funds
|
|
|
3,016
|
|
|
|
42
|
|
|
|
-
|
|
|
|
2,974
|
|
Other
|
|
|
1,000
|
|
|
|
-
|
|
|
|
1,000
|
|
|
|
-
|
|
Net
Derivatives
|
|
|
(990
|
)
|
|
|
-
|
|
|
|
(195
|
)
|
|
|
(795
|
)
|
|
|
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
|
)
|
Note
12 – Fair Values of Assets and Liabilities (continued)
The table
below presents reconciliation for the period of January 1, 2010 to September 30,
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
|
|
|
-
|
|
|
|
52
|
|
Included
in other comprehensive income
|
|
|
182
|
|
|
|
-
|
|
Purchases,
issuances and settlements
|
|
|
-
|
|
|
|
-
|
|
Transfers
in and/or out of Level 3
|
|
|
-
|
|
|
|
-
|
|
Ending
Balance
|
|
$
|
2,974
|
|
|
$
|
(795
|
)
|
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 three months
and the nine months ended September 30, 2010.
The table
below presents the balances of assets and liabilities measured at fair value on
a nonrecurring basis.
|
|
September 30, 2010
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans
|
|
$
|
38,157
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
38,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed
assets
|
|
|
19,385
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,385
|
|
|
|
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
|
|
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 fair value of the collateral is less than the
recorded investment in the loan. At September 30, 2010, loans with a
book value of $86.0 million were evaluated for impairment. Of this
total, $47.7 million required a specific allowance totaling $9.5 million for a
net fair value of $38.2 million. The methods used to determine the
fair value of these loans were considered level 3.
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 3.
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 3%. If interest rates increased
instantaneously by two percentage points, our net interest income over a
one-year time frame could increase by approximately 5%.
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 September 30, 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 September 30, 2010 at the reasonable assurance level. However,
the Company believes that a system of internal controls, 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 controls over financial reporting that
occurred during the quarter ended September 30, 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
(a)
|
Exhibits.
|
|
|
|
|
|
Exhibit
31.1
|
Certification
of the Chief Executive Officer pursuant to Rule
13a-14(a)
|
|
|
|
|
Exhibit
31.2
|
Certification
of the Chief Financial Officer pursuant to Rule
13a-14(a)
|
|
|
|
|
Exhibit
32
|
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: November
9, 2010
|
By:
|
/s/ F. Scott Bauer
|
|
|
F.
Scott Bauer
|
|
|
Chairman
and Chief Executive Officer
|
|
|
(principal
executive officer)
|
|
|
|
Date: November
9, 2010
|
By:
|
/s/ James Hastings
|
|
|
James
Hastings
|
|
|
Executive
Vice President and Chief Financial Officer
|
|
|
(principal
financial and accounting
officer)
|
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