UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
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x
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Quarterly
Report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of
1934 for the quarterly period ended March 31, 2009
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o
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Transition
Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the transition period from _____ to
_____
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Commission
file number: 000-30805
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WGNB
CORP.
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(Exact
name of registrant as specified in its
charter)
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Georgia
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58-1640130
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(State
of Incorporation)
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(I.R.S.
Employer Identification No.)
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201
Maple Street
P.O.
Box 280
Carrollton,
Georgia 30112
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(Address
of principal executive offices)
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(770)
832-3557
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(Registrant’s
telephone number, including area
code)
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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
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a small reporting company. See
definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one).
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Large Accelerated
filer
o
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Accelerated filer
o
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Non-accelerated
filer
o
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Smaller reporting
company
x
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Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No
x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date:
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Class
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Outstanding
at May 14, 2009
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Common
Stock, no par value
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6,058,007
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WGNB
CORP.
INDEX
TO FORM 10-Q
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Item
Number
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Description
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Page
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Part
One
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Financial
Information
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Item
1.
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Financial
Statements
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Consolidated
Balance Sheets as of March 31, 2009 and December 31, 2008
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2
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Consolidated
Statements of Operations for the Three Months ended March 31, 2009 and
March 31, 2008
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3
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Consolidated
Statements of Comprehensive Income (Loss) for the Three Months ended March
31, 2009 and March 31, 2008
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4
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Consolidated
Statements of Cash Flows for the Three Months ended March 31, 2009 and
March 31, 2008
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5
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Notes
to Consolidated Financial Statements
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7
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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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13
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Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk
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22
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Item
4T.
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Controls
and Procedures
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23
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Part
Two
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Other
Information
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Item
1.
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Legal
Proceedings
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23
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Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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23
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Item
3.
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Defaults
Upon Senior Securities
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24
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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24
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Item
5.
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Other
Information
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24
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Item
6.
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Exhibits
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24
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Signatures
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26
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Part I –
Financial Information
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Item
1.
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Financial
Statements
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The
unaudited financial statements of WGNB Corp. (the “Company”) are set forth on
the following pages. All adjustments have been made which, in the opinion of
management, are necessary in order to make the financial statements not
misleading.
WGNB
CORP.
Consolidated
Balance Sheets
As
of March 31, 2009 and December 31, 2008
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Assets
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March
31,
2009
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December
31,
2008
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(unaudited)
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(audited)
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Cash
and cash due from banks
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$
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33,096,972
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16,936,965
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Interest-bearing
funds in other banks
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20,021,299
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12,574,624
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Federal
funds sold
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54,221,414
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45,839,396
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Cash
and cash equivalents
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107,339,685
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75,350,985
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Securities
available-for-sale
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93,076,994
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94,369,622
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Securities
held-to-maturity, estimated fair values of $1,923,530 and
$2,853,170
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7,623,908
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7,622,340
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Loans,
net
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607,716,010
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618,922,150
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Premises
and equipment, net
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16,702,849
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17,016,363
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Accrued
interest receivable
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3,258,473
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3,573,092
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Cash
surrender value of life insurance
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3,838,874
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3,803,010
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Intangible
assets, net
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4,733,850
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4,877,300
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Foreclosed
property
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47,283,435
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45,797,654
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Deferred
tax asset
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8,722,504
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7,574,933
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Other
assets
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12,174,000
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13,312,001
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$
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912,470,582
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892,219,450
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Liabilities
and Stockholders’ Equity
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Deposits:
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Demand
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$
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72,958,675
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66,296,298
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Interest-bearing
demand
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200,737,354
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194,241,342
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Savings
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20,710,520
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18,653,924
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Time
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238,034,928
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222,457,656
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Time,
over $100,000
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254,659,925
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260,043,855
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Total
deposits
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787,101,402
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761,693,075
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Federal
Home Loan Bank advances
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52,000,000
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52,000,000
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Junior
subordinated debentures
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10,825,000
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10,825,000
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Accrued
interest payable
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2,590,582
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2,847,758
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Other
liabilities
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5,951,626
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7,924,350
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Total
liabilities
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858,468,610
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835,290,183
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Commitments
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Stockholders’
equity:
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Series
A convertible perpetual preferred stock, 9% non-cumulative, no par value,
$8 liquidation value, 10,000,000 shares authorized; 1,509,100 shares
issued and outstanding
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11,943,515
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11,943,515
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Common
stock, no par value, 20,000,000 shares authorized; 6,058,007 shares issued
and outstanding
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37,956,304
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37,917,152
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Retained
earnings
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5,594,707
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8,874,438
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Accumulated
other comprehensive loss
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(1,492,554
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)
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(1,805,838
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)
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Total
stockholders’ equity
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54,001,972
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56,929,267
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$
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912,470,582
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892,219,450
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See
accompanying notes to unaudited consolidated financial statements.
WGNB
CORP.
Consolidated
Statements of Operations
For
the Three Months Ended March 31, 2009 and 2008
(unaudited)
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2009
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2008
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Interest
income:
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Interest
and fees on loans
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$
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8,934,636
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12,302,116
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Interest
on federal funds sold and interest-bearing funds in other
banks
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35,277
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53,166
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Interest
on investment securities:
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U.S.
Government sponsored enterprises
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456,414
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664,771
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State,
county and municipal
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603,064
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757,059
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Other
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130,219
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353,995
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Total
interest income
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10,159,610
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14,131,107
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Interest
expense:
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Interest
on deposits:
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Demand
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206,150
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1,252,577
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Savings
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15,219
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47,211
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Time
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4,971,295
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4,739,121
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Interest
on FHLB and other borrowings
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605,269
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780,197
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Total
interest expense
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5,797,933
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6,819,106
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Net
interest income
|
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4,361,677
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7,312,001
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Provision
for loan losses
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3,950,000
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750,000
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Net
interest income after provision for loan losses
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|
411,677
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6,562,001
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Other
income:
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Service
charges on deposit accounts
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1,288,062
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1,539,262
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Mortgage
origination fees
|
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68,661
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117,047
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Brokerage
fees
|
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|
132,984
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111,205
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ATM
network fees
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394,126
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385,166
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Gain
on sale of securities available-for-sale
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488,882
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46,923
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Loss
on write-down of other investment
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(79,114
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)
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—
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(Loss)
gain on sale and write-down of foreclosed property, net
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(1,517,142
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)
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12,281
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Miscellaneous
|
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81,117
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222,797
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Total
other income
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857,576
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2,434,681
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Other
expenses:
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Salaries
and employee benefits
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3,178,988
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3,626,366
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Occupancy
|
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|
930,587
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1,022,844
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Expense
on loans and foreclosed property
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|
543,402
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312,066
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Other
operating
|
|
|
1,680,580
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1,619,632
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Total
other expenses
|
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|
6,333,557
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|
6,580,908
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(Loss)
earnings before income taxes
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|
(5,064,304
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)
|
|
|
2,415,774
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|
|
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|
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Income
tax benefit (expense)
|
|
|
2,053,193
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(584,803
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)
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Net
(loss) earnings
|
|
$
|
(3,011,111
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)
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|
1,830,971
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Basic
(loss) earnings per share
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|
$
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(.54
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)
|
|
|
.30
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|
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Diluted
(loss) earnings per share
|
|
$
|
(.54
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)
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|
|
.30
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Dividends
declared per share
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|
$
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—
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|
|
0.2100
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|
See
accompanying notes to unaudited consolidated financial statements.
WGNB
CORP.
Consolidated
Statements of Comprehensive Income (Loss)
For
the Three Months Ended March 31, 2009 and 2008
(unaudited)
|
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2009
|
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|
2008
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) earnings
|
|
$
|
(3,011,111
|
)
|
|
|
1,830,971
|
|
|
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|
|
|
|
|
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|
|
|
Other
comprehensive income (loss), net of tax:
|
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|
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|
Unrealized
gains on investment securities available for sale:
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|
Unrealized
gains arising during the period
|
|
|
949,594
|
|
|
|
449,606
|
|
|
Associated
taxes
|
|
|
(322,862
|
)
|
|
|
(152,866
|
)
|
|
Reclassification
adjustment for gain realized
|
|
|
(488,882
|
)
|
|
|
(46,923
|
)
|
|
Associated
taxes
|
|
|
166,220
|
|
|
|
15,954
|
|
|
Change
in fair value of derivatives for cash flow hedges:
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in fair value of derivatives for cash flow hedges arising
during the period
|
|
|
13,961
|
|
|
|
(468,812
|
)
|
|
Associated
(taxes) benefit
|
|
|
(4,747
|
)
|
|
|
159,396
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss)
|
|
|
313,284
|
|
|
|
(43,645
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
(loss) income
|
|
$
|
(2,697,827
|
)
|
|
|
1,787,326
|
|
See
accompanying notes to unaudited consolidated financial statements.
WGNB
CORP.
Consolidated
Statements of Cash Flows
For
the Three Months Ended March 31, 2009 and 2008
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
(loss) earnings
|
|
$
|
(3,011,111
|
)
|
|
|
1,830,971
|
|
|
Adjustments
to reconcile net (loss) earnings to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation,
amortization and accretion
|
|
|
467,935
|
|
|
|
440,631
|
|
|
Provision
for loan losses
|
|
|
3,950,000
|
|
|
|
750,000
|
|
|
Loss
on sale and disposal of premises and equipment
|
|
|
2,732
|
|
|
|
87
|
|
|
Income
from bank owned life insurance
|
|
|
(35,864
|
)
|
|
|
(41,098
|
)
|
|
Gain
on sale of securities available-for-sale
|
|
|
(488,882
|
)
|
|
|
(46,923
|
)
|
|
Loss
on write-down of other investment
|
|
|
79,114
|
|
|
|
—
|
|
|
Loss
(gain) on sale and write-down of foreclosed property, net
|
|
|
1,517,142
|
|
|
|
(12,281
|
)
|
|
Deferred
income tax benefit
|
|
|
(1,401,516
|
)
|
|
|
(371,819
|
)
|
|
Stock-based
employee compensation expense
|
|
|
39,150
|
|
|
|
50,500
|
|
|
Change
in:
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
1,480,023
|
|
|
|
(1,001,434
|
)
|
|
Other
liabilities
|
|
|
(2,229,898
|
)
|
|
|
(976,179
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
368,825
|
|
|
|
622,455
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds
from the sale of available-for-sale securities
|
|
|
24,045,067
|
|
|
|
4,981,120
|
|
|
Proceeds
from maturities of securities available-for-sale
|
|
|
2,685,480
|
|
|
|
4,623,559
|
|
|
Proceeds
from maturities of securities held-to-maturity
|
|
|
—
|
|
|
|
371,171
|
|
|
Purchases
of securities available-for-sale
|
|
|
(24,501,784
|
)
|
|
|
(5,125,320
|
)
|
|
Net
change in loans
|
|
|
3,867,666
|
|
|
|
(9,559,647
|
)
|
|
Purchases
of premises and equipment
|
|
|
(68,718
|
)
|
|
|
(178,601
|
)
|
|
Proceeds
from the sale of premises and equipment
|
|
|
—
|
|
|
|
3,778
|
|
|
Proceeds
from the sale of foreclosed property
|
|
|
459,567
|
|
|
|
210,052
|
|
|
Capital
expenditures for foreclosed property
|
|
|
(7,110
|
)
|
|
|
(265,569
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided (used) by investing activities
|
|
|
6,480,168
|
|
|
|
(4,939,457
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Net
change in deposits
|
|
|
25,408,327
|
|
|
|
(3,294,343
|
)
|
|
Net
change in federal funds purchased
|
|
|
—
|
|
|
|
8,412,000
|
|
|
Repayment
of Federal Home Loan Bank borrowings
|
|
|
—
|
|
|
|
(2,500,000
|
)
|
|
Dividends
paid on preferred stock
|
|
|
(268,620
|
)
|
|
|
—
|
|
|
Dividends
paid on common stock
|
|
|
—
|
|
|
|
(1,273,977
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
25,139,707
|
|
|
|
1,343,680
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in cash and cash equivalents
|
|
|
31,988,700
|
|
|
|
(2,973,322
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
75,350,985
|
|
|
|
25,845,340
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
107,339,685
|
|
|
|
22,872,018
|
|
See
accompanying notes to unaudited consolidated financial statements.
WGNB
CORP.
Consolidated
Statements of Cash Flows, continued
For
the Three Months Ended March 31, 2009 and 2008
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
6,055,109
|
|
|
|
7,505,648
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
Transfer
of loans to foreclosed property
|
|
$
|
3,689,380
|
|
|
|
10,363,996
|
|
|
Loans
to facilitate the sale of foreclosed property
|
|
$
|
234,000
|
|
|
|
6,024,339
|
|
|
Change
in unrealized gains on securities available for sale, net of
tax
|
|
$
|
304,070
|
|
|
|
265,771
|
|
|
Change
in fair value of derivatives for cash flow hedges, net of
tax
|
|
$
|
9,214
|
|
|
|
(309,416
|
)
|
|
Change
in dividends payable
|
|
$
|
—
|
|
|
|
(1,883
|
)
|
See
accompanying notes to unaudited consolidated financial statements.
WGNB
Corp.
Notes
to Consolidated Financial Statements
|
|
|
|
(1)
|
Basis
of Presentation
|
The
consolidated financial statements include the accounts of WGNB Corp. (the
“Company”) and its wholly-owned subsidiary, First National Bank of Georgia (the
“Bank”). All significant inter-company accounts have been eliminated in
consolidation.
The
accompanying unaudited interim consolidated financial statements reflect all
adjustments which, in the opinion of management, are necessary to present fairly
the Company’s financial position as of March 31, 2009, and the results of its
operations and its cash flows for the three-month periods ended March 31, 2009
and 2008. All such adjustments are normal and recurring in nature. The financial
statements included herein should be read in conjunction with the consolidated
financial statements and the related notes and the report of independent
accountants included in the Company’s Annual Report on Form 10-K for fiscal year
ended December 31, 2008 which included the results of operations for the years
ended December 31, 2008, 2007 and 2006.
Certain
reclassifications have been made in the prior year’s consolidated statements to
conform to the presentation used in 2009.
|
|
|
|
(2)
|
Net
Earnings Per Share
|
Basic
earnings per share is based on the weighted average number of common shares
outstanding during the period while the effects of potential common shares
outstanding during the period are included in diluted earnings per share. The
average market price during the period is used to compute equivalent
shares.
SFAS No.
128, “Earnings Per Share,” requires that employee equity share options,
non-vested shares and similar equity instruments granted to employees be treated
as potential common shares in computing diluted earnings per share. Diluted
earnings per share should be based on the actual number of options or shares
granted and not yet forfeited, unless doing so would be anti-dilutive. The
Company uses the “treasury stock” method for equity instruments granted in
share-based payment transactions provided in SFAS No. 128 to determine diluted
earnings per share.
Set forth
below is a table showing a reconciliation of the amounts used in the computation
of basic and diluted earnings per share. Only a reconciliation of amounts for
the period ended March 31, 2008 is presented. No presentation for the period
ended March 31, 2009 is set forth below because inclusion of potential common
shares in the diluted loss per share calculation for these periods would be
anti-dilutive. Basic loss per share for the period ended March 31, 2009 is
computed by dividing the net loss for first quarter 2009 less dividends paid to
preferred shareholders by the weighted average common shares outstanding in the
first quarter of 2009 as follows: $(3,011,111) less $268,620 divided by
6,058,007 shares. Reconciliation of the amounts used in the computation of both
“basic earnings per share” and “diluted earnings per share” for the period ended
March 31, 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the three months ended March 31, 2008
|
|
|
|
|
|
Net
Earnings
|
|
Common
Shares
|
|
Earnings
per
Share
|
|
|
|
Basic
earnings per share
|
|
$
|
1,830,971
|
|
|
6,057,594
|
|
$
|
0.30
|
|
|
|
Effect
of dilutive securities – stock options
|
|
|
—
|
|
|
3,567
|
|
|
(0.00
|
)
|
|
|
Diluted
earnings per share
|
|
$
|
1,830,971
|
|
|
6,061,161
|
|
$
|
0.30
|
|
The
Company had 238,916 and 245,725, respectively of anti-dilutive options
outstanding as of March 31, 2009 and 2008.
WGNB
Corp.
Notes
to Consolidated Financial Statements, continued
|
|
|
|
(3)
|
Stock-based
Compensation
|
The
Company accounts for its stock based employee benefit plans in accordance with
SFAS No. 123 (revised 2004) (SFAS No. 123 (R)) “
Share-Based
Payment
”. SFAS No. 123 (R) addresses the accounting for share-based
payment transactions in which the Company receives employee services in exchange
for equity instruments of the Company. SFAS No. 123 (R) requires the Company to
recognize as compensation expense the “grant date fair value” of stock options
granted to employees in the statement of earnings using the fair-value-based
method.
The
Company recognized $39,150 and $50,500 of stock-based employee compensation
expense during the three months ended March 31, 2009 and 2008, respectively,
associated with its stock option grants. The Company is recognizing the
compensation expense for stock option grants with graded vesting schedules on a
straight-line basis over the requisite service period of the award as permitted
by SFAS No. 123 (R). As of March 31, 2009, there was $429,388 of unrecognized
compensation expense related to stock option grants. The expense is expected to
be recognized over the remaining average vesting period of five
years.
There
were no options granted in the first quarter of 2009. The grant-date fair value
of the options granted during the first quarter of 2008 was $3.37. The fair
value of each option is estimated on the date of grant using the Black-Scholes
Model. The following weighted average assumptions were used for grants in
2008:
|
|
|
|
|
|
|
|
First
Quarter 2008
|
|
|
Dividend
yield
|
|
|
3.09
|
%
|
|
Expected
volatility
|
|
|
22
|
%
|
|
Risk-free
interest rate
|
|
|
3.50
|
%
|
|
Expected
term
|
|
6.5
years
|
|
Effective
January 1, 2008, the Company adopted Financial Accounting Standards Board
(“FASB”) Statement No. 157,
Fair
Value Measurements
(“SFAS No. 157”), which provides a framework for
measuring fair value under generally accepted accounting principles. SFAS No.
157 applies to all financial instruments that are being measured and reported on
a fair value basis.
The
Company utilizes fair value measurements to record fair value adjustments to
certain assets and liabilities and to determine fair value disclosures.
Securities available for sale and derivatives are recorded at fair value on a
recurring basis. Additionally, from time to time, the Company may be required to
record at fair value other assets on a nonrecurring basis, such as impaired
loans and foreclosed property. These nonrecurring fair value adjustments
typically involve application of lower of cost or market accounting or
write-downs of individual assets.
Fair
Value Hierarchy
Under
SFAS No. 157, the Company groups assets and liabilities 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 –
|
Valuation
is based upon quoted prices for identical instruments traded in active
markets.
|
|
|
|
|
|
|
Level
2 –
|
Valuation
is based upon quoted prices for similar instruments in active markets,
quoted prices for identical or similar instruments in markets that are not
active, and model-based valuation techniques for which all significant
assumptions are observable in the market.
|
|
|
|
|
|
|
Level
3 –
|
Valuation
is generated from model-based techniques that use at least one significant
assumption not observable in the market. These unobservable assumptions
reflect estimates of assumptions that
market
participants would use in pricing the asset or liability. Valuation
techniques include use of option pricing models, discounted cash flow
models and similar
techniques.
|
WGNB
Corp.
Notes
to Consolidated Financial Statements, continued
|
|
|
|
(4)
|
Fair
Value, continued
|
Following
is a description of valuation methodologies used for assets and liabilities
recorded at fair value.
Securities
Available-for-Sale
Securities
available-for-sale are recorded at fair value on a recurring basis. Fair value
measurement is based upon quoted prices, if available. If quoted prices are not
available, fair values are measured using independent pricing models or other
model-based valuation techniques such as the present value of future cash flows,
adjusted for the security’s credit rating, prepayment assumptions and other
factors such as credit loss assumptions. Level 1 securities include those traded
on active exchanges such as U.S. Treasury securities that are traded by dealers
or brokers in active over-the-counter markets. Level 2 securities include
mortgage-backed securities issued by government sponsored enterprises, corporate
debt securities and municipal bonds. Securities classified as Level 3 include
asset-backed securities in less liquid markets.
Loans
The
Company does not record loans at fair value on a recurring basis. However, from
time to time, a loan is considered impaired and an allowance for loan losses is
established. Loans for which it is probable that payment of interest and
principal will not be made in accordance with the contractual terms of the loan
agreement are considered impaired. Once a loan is identified as individually
impaired, management measures impairment in accordance with SFAS No. 114,
Accounting
by Creditors for Impairment of a Loan
, (“SFAS No. 114”). The fair value
of impaired loans is estimated using one of three methods, including collateral
value, market value of similar debt and net present value of discounted cash
flows. Those impaired loans not requiring an allowance represent loans for which
the fair value of the expected repayments or collateral exceed the recorded
investments in such loans. At March 31, 2009, substantially all of the impaired
loans were evaluated based on the fair value of the collateral. In accordance
with SFAS No. 157, impaired loans where an allowance is established based on the
fair value of collateral require classification in the fair value hierarchy.
When the fair value of the collateral is based on an observable market price or
a current appraised value, the Company records the impaired loan as nonrecurring
Level 2. When an appraised value is not available or management determines the
fair value of the collateral is further impaired below the appraised value and
there is no observable market price, the Company records the impaired loan as
nonrecurring Level 3.
Foreclosed
Assets
Foreclosed
assets are adjusted to fair value upon transfer of the loans to foreclosed
assets. Subsequently, foreclosed assets are carried at the lower of carrying
value or fair value. Fair value is based upon independent market prices,
appraised values of the collateral or management’s estimation of the value of
the collateral. When the fair value of the collateral is based on an observable
market price or a current appraised value, the Company records the foreclosed
asset as nonrecurring Level 2. When an appraised value is not available or
management determines the fair value of the collateral is further impaired below
the appraised value and there are no observable market prices, the Company
records the foreclosed asset as nonrecurring Level 3.
Intangible
Assets
Identified
intangible assets are subject to impairment testing. A projected cash flow
valuation method is used in the completion of impairment testing. This valuation
method requires a significant degree of management judgment. In the event the
projected undiscounted net operating cash flows are less than the carrying
value, the asset is recorded at fair value as determined by the valuation model.
As such, the Company classifies intangible assets subjected to nonrecurring fair
value adjustments as Level 3.
WGNB
Corp.
Notes
to Consolidated Financial Statements, continued
|
|
|
|
(4)
|
Fair
Value, continued
|
Derivative
Financial Instruments
The
Company has used interest rate swaps to manage interest rate risk. The valuation
of these instruments is determined using widely accepted valuation techniques
including discounted cash flow analysis on the expected cash flows of each
derivative. This analysis reflects the contractual terms of the derivatives,
including the period to maturity, and uses observable market-based inputs,
including interest rate curves and implied volatilities. The fair values of
interest rate swaps are determined using the market standard methodology of
netting the discounted future fixed cash receipts and the discounted expected
variable cash payments. The variable cash payments are based on an expectation
of future interest rates (forward curves derived from observable market interest
rate curves).
To comply
with the provisions of SFAS No. 157, the Company incorporates credit valuation
adjustments to appropriately reflect both its own nonperformance risk and the
respective counterparty’s nonperformance risk in the fair value measurements. In
adjusting the fair value of its derivative contracts for the effect of
nonperformance risk, the Company has considered the impact of netting any
applicable credit enhancements such as collateral postings, thresholds, mutual
puts and guarantees.
Although
the Company has determined that the majority of the inputs used to value its
derivatives fall within Level 2 of the fair value hierarchy, the credit
valuation adjustments, if any, associated with its derivatives utilize Level 3
inputs, such as estimates of current credit spreads to evaluate the likelihood
of default by itself or the counterparties. However, as of March 31, 2009, the
Company has assessed the significance of the impact of the credit valuation
adjustments on the overall valuation of its derivative positions and has
determined that the credit valuation adjustments are not significant to the
overall valuation of its derivatives. As a result, the Company has determined
that its derivative valuations in their entirety are classified in Level 2 of
the fair value hierarchy.
Assets
and Liabilities Recorded at Fair Value on a Recurring
Basis
The table
below presents the recorded amount of the Company’s assets and liabilities
measured at fair value on a recurring basis as of March 31, 2009 and December
31, 2008 aggregated by the level in the fair value hierarchy within which those
measurements fall:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
Balance
at
March
31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for- sale
|
|
$
|
—
|
|
|
93,076,994
|
|
|
—
|
|
|
93,076,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
financial instruments–cash flow hedge
|
|
$
|
—
|
|
|
(829,908
|
)
|
|
—
|
|
|
(829,908
|
)
|
|
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
Balance
at
December
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for- sale
|
|
$
|
—
|
|
|
94,369,622
|
|
|
—
|
|
|
94,369,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
financial instruments–cash flow hedge
|
|
$
|
—
|
|
|
(843,869
|
)
|
|
—
|
|
|
(843,869
|
)
|
WGNB
Corp.
Notes
to Consolidated Financial Statements, continued
|
|
|
|
(4)
|
Fair
Value, continued
|
Assets
Recorded at Fair Value on a Nonrecurring Basis
The
Company may be required, from time to time, to measure certain assets at fair
value on a nonrecurring basis in accordance with U.S. Generally Accepted
Accounting Principles. These include assets that are measured at the lower of
cost or market that were recognized at fair value below cost at the end of the
period. The table below presents the Company’s assets measured at fair value on
a nonrecurring basis as of March 31, 2009 and December 31, 2008 by the level in
the fair value hierarchy within which those measurements fall:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
Balance
at
March
31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
—
|
|
|
70,654,382
|
|
|
—
|
|
|
70,654,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed
property
|
|
$
|
—
|
|
|
47,283,435
|
|
|
—
|
|
|
47,283,435
|
|
|
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
Balance
at
December
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
—
|
|
|
68,160,976
|
|
|
—
|
|
|
68,160,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed
property
|
|
$
|
—
|
|
|
45,797,654
|
|
|
—
|
|
|
45,797,654
|
|
|
(5)
|
Non-performing
Assets
|
Non-performing
assets consist of foreclosed property, non-accrual loans and loans 90 days past
due still accruing. The table below summarizes non-performing
assets:
|
|
|
|
|
|
|
|
|
|
|
March
31, 2009
|
|
|
December
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed
property
|
|
$
|
47,283,435
|
|
|
|
45,797,654
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual
loans
|
|
|
76,231,630
|
|
|
|
71,599,772
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
90 days past due still accruing
|
|
|
2,416,344
|
|
|
|
4,597,667
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
125,931,409
|
|
|
|
121,995,093
|
|
Non-performing
assets consist primarily of 24 residential real estate construction and
acquisition and development loan relationships ranging in balance from $1
million to $8 million. All properties are being actively marketed for sale and
management is continuously monitoring the properties for proper
valuation.
|
|
|
|
(6)
|
Recent
Accounting Pronouncements
|
In April
2009, the FASB issued FSP FAS 141 (R)-1,
Accounting
for Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies
. This FASB Staff Position amends and clarifies SFAS
No. 141 (R),
Business
Combinations
, to address application issues on the initial recognition
and measurement, subsequent measurement and accounting, and disclosure of assets
and liabilities arising from contingencies in a business combination. This
statement is effective for financial statements issued for fiscal years
beginning after December 15, 2008. The Company cannot determine what impact this
will have until the transactions occur.
In April 2009, the FASB
issued FSP FAS 157-4,
Determining
Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not
Orderly
. This FASB Staff Position provides additional guidance for
estimating fair value in accordance with SFAS No. 157,
Fair
Value
WGNB
Corp.
Notes
to Consolidated Financial Statements, continued
|
|
|
|
(6)
|
Recent
Accounting Pronouncements,
continued
|
Measurements
,
when the volume and level of activity for the asset or liability have
significantly decreased. It also includes guidance on identifying circumstances
that indicate a transaction is not orderly. It emphasizes that even if there has
been a significant decrease in the volume and level of activity for the asset or
liability and regardless of the valuation technique used, the objective of a
fair value measurement remains the same. Fair value is the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date under current
market conditions. This FASB Staff Position is effective for interim and annual
reporting periods ending after June 15, 2009 with early adoption being permitted
for periods ending after March 15, 2009 and shall be applied prospectively. The
Company does not anticipate the new accounting principle to have a material
effect on its financial position or results of
operations.
In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2,
Recognition
and Presentation of Other-Than-Temporary Impairments
. This FASB Staff
Position amends the other-than-temporary impairment guidance in U.S. GAAP for
debt securities to make the guidance more operational and to improve the
presentation and disclosure of other-than-temporary impairments on debt and
equity securities in the financial statements and does not amend existing
recognition and measurement guidance related to other-than-temporary impairments
of equity securities. This FASB Staff Position is effective for interim and
annual reporting periods ending after June 15, 2009 with early adoption being
permitted for periods ending after March 15, 2009. The Company does not
anticipate the new accounting principle to have a material effect on its
financial position or results of operations.
In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1,
Interim
Disclosures about Fair Value of Financial Instruments
. This FASB Staff
Position amends SFAS No. 107,
Disclosures
about Fair Value of Financial Instruments
, to require disclosures about
fair value of financial instruments for interim reporting periods of publicly
traded companies as well as in annual financial statements. It also amends APB
No. 28,
Interim
Financial Reporting
, to require those disclosures in summarized financial
information at interim reporting periods. This FASB Staff Position is effective
for interim and annual reporting periods ending after June 15, 2009 with early
adoption being permitted for periods ending after March 15, 2009. The Company
does not anticipate the new accounting principle to have a material effect on
its financial position or results of operations.
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
The
following analysis compares the Company’s results of operations for the three
month periods ended March 31, 2009 and 2008 and reviews important factors
affecting the Company’s financial condition at March 31, 2009, compared to
December 31, 2008. These comments should be read in conjunction with the
Company’s consolidated financial statements and accompanying notes appearing in
this Report.
Cautionary
Notice Regarding Forward-Looking Statements
Certain
of the statements made in this Report and in documents incorporated by reference
herein, including matters discussed under the caption “Management’s Discussion
and Analysis of Financial Condition and Results of Operations,” as well as oral
statements made by the Company or its officers, directors or employees, may
constitute forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such
forward-looking statements are based on management’s beliefs, current
expectations, estimates and projections about the financial services industry,
the economy and about the Company and the Bank in general. The words “expect,”
“anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate” and similar
expressions are intended to identify such forward-looking statements. Such
forward-looking statements are not guarantees of future performance and are
subject to risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company to differ materially from
historical results or from any results expressed or implied by such
forward-looking statements. The Company cautions readers that the following
important factors, among others, could cause the Company’s actual results to
differ materially from the forward-looking statements contained in this
Report:
|
|
|
|
|
|
●
|
the
effect of changes in laws and regulations, including federal and state
banking laws and regulations, with which we must comply, and the
associated costs of compliance with such laws and regulations either
currently or in the future as applicable;
|
|
|
|
|
|
|
●
|
the
effect of changes in accounting policies, standards, guidelines or
principles, as may be adopted by the regulatory agencies as well as by the
Financial Accounting Standards Board;
|
|
|
|
|
|
|
●
|
the
effect of changes in our organization, compensation and benefit
plans;
|
|
|
|
|
|
|
●
|
the
effect on our competitive position within our market area of the
increasing consolidation within the banking and financial services
industries, including the increased competition from larger regional and
out-of-state banking organizations as well as non-bank providers of
various financial services;
|
|
|
|
|
|
|
●
|
the
effect of changes in interest rates;
|
|
|
|
|
|
|
●
|
the
effect of compliance, or failure to comply within stated deadlines, of the
provisions of our formal agreement with our primary
regulators;
|
|
|
|
|
|
|
●
|
the
effect of changes in the business cycle and downturns in local, regional
or national economies;
|
|
|
|
|
|
|
●
|
the
effect of the continuing deterioration of the local economies in which we
conduct operations which results in, among other things, a deterioration
in credit quality or a reduced demand for credit, including a resultant
adverse effect on our loan portfolio and allowance for loan and lease
losses;
|
|
|
|
|
|
|
●
|
the
possibility that our allowance for loan and lease losses proves to be
inadequate or that federal and state regulators who periodically review
our loan portfolio require us to increase the provision for loan losses or
recognize loan charge-offs;
|
|
|
|
|
|
|
●
|
the
effect of the current and anticipated deterioration in the housing market
and the residential construction industry which may lead to increased loss
severities and further worsening of delinquencies and non-performing
assets in our loan portfolios;
|
|
|
|
|
|
|
●
|
the
effect of the significant number of construction loans we have in our loan
portfolios, which may pose more credit risk than other types of mortgage
loans typically made by banking institutions due to the disruptions in
credit and housing markets.
|
|
|
|
|
|
|
●
|
the
effect of troubled institutions in our market area continuing to dispose
of problem assets which, given the already excess inventory of residential
homes and lots will continue to negatively impact home values and increase
the time it takes us or our borrowers to sell existing
inventory;
|
|
|
●
|
the
effect of public perception that banking institutions are risky
institutions for purposes of regulatory compliance or safeguarding
deposits which may cause depositors nonetheless to move their funds to
larger institutions;
|
|
|
|
|
|
|
●
|
the
possibility that we could be held responsible for environmental
liabilities of properties acquired through
foreclosure;
|
The
Company cautions that the foregoing list of important factors is not exclusive.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements.
Critical
Accounting Policies
The
Company has established various accounting policies which govern the application
of accounting principles generally accepted in the United States in the
preparation of its financial statements. These significant accounting policies
are described in the notes to the consolidated financial statements filed with
the Company’s Annual Report on Form 10-K for the year ended December 31, 2008
(the “2008 Notes”). Certain accounting policies involve significant judgments
and assumptions by management which have a material impact on the carrying value
of certain assets and liabilities; management considers these accounting
policies to be critical accounting policies. The judgments and assumptions used
by management are based on historical experience and other factors, which are
believed to be reasonable under the circumstances. Because of the nature of the
judgments and assumptions made by management, actual results could differ from
these judgments and estimates which could have a material impact on the carrying
value of assets and liabilities and the results of operations of the Company.
All accounting policies are important, and all policies described in the 2008
Notes should be reviewed for a greater understanding of how the Company’s
financial performance is recorded and reported.
The
Company believes the allowance for loan losses is a critical accounting policy
that requires the most significant judgments and estimates used in the
preparation of the Company’s consolidated financial statements. The allowance
for loan losses represents management’s estimate of probable loan losses
inherent in the loan portfolio. Calculation of the allowance for loan losses is
a critical accounting estimate due to the significant judgment, assumptions and
estimates related to the amount and timing of estimated losses, consideration of
current and historical trends and the amount and timing of cash flows related to
impaired loans. Please refer to the section of the Company’s Annual Report on
10-K for the year ended December 31, 2008 entitled “Balance Sheet Overview –
Provision and Allowance for Possible Loan and Lease Losses” and Note 1 and Note
4 to the 2008 Notes for a detailed description of the Company’s estimation
processes and methodology related to the allowance for loan losses.
Results
of Operations
Overview
The net
loss for the three months ended March 31, 2009 was $3.0 million or $0.54 per
diluted common share.
The
Company originally announced a net loss of $1.6 million, or $0.31 per diluted
common share. However, additional adjustments were detected by management in
April as the result of its normal loan analysis and asset impairment process
that provided additional evidence with respect to conditions that existed at
March 31, 2009. The adjustments are reflected in the Company's operations
for the quarter ended March 31, 2009 and include certain write-downs of
foreclosed property, an equity investment in a financial institution and accrued
interest on impaired loans, additions to the allowance for loan loss and the
corresponding tax benefit.
Comparing
the earnings performance of the first quarter ended March 31, 2009 to the first
quarter ended March 31, 2008, the impact of the continued deterioration of
credit quality is a significant factor. The Company recorded net earnings in the
amount of $1.83 million, or $0.30 per diluted common share, in the first quarter
ended March 31, 2008. The operating environment for community banking,
particularly those institutions like us that have historically invested in the
community’s real estate projects, has changed significantly over the past year
when comparing quarterly data. The residential real estate market in the west
Georgia area has been hard hit by the economic downturn that the southeastern
region and the nation have been experiencing over the past eighteen to
twenty-four months.
Real
estate values have declined significantly depending on a particular location or
property type in our market area. The demand for the property has diminished
such that borrowers unable to sell their property are depleting their financial
resources to service both their debt and the development and marketing expenses
of the residential real estate construction or development project. In many
cases, the borrowers owe more than the property is now worth. The deterioration
of the collectability of construction and development loans has caused the
Company to increase its loan loss provision, charge-off accrued interest on the
impaired collateral dependent loans, place the loans on non-accruing status,
incur collection costs (primarily legal costs) for the collection of loans,
incur ownership costs (real estate taxes, property maintenance and insurance) of
foreclosed property and potentially incur additional write-downs on property
value in the post-foreclosure valuation process. The Company also incurs
interest expense on the deposits used to fund the non-performing loan or
foreclosed property which reduces net interest income.
Net
interest income decreased $3.0 million, or 40.4 percent, from the first quarter
of 2008 to the first quarter of 2009. The decline in net interest income is
primarily due to the impact of funding non-performing assets that have
accumulated since the first quarter of 2008 and maintaining large amounts of
liquidity necessary to provide customers with the comfort they desire to ensure
that their deposits are both available and safe. Rapidly declining yields on
liquid assets and loans has also contributed to the decrease in net interest
income when comparing the first quarter of 2009 with the first quarter of
2008.
The
provision for loan loss for the first quarter of 2009 was $4.0 million, an
increase of $3.2 million, or 427 percent, compared to the first quarter of 2008.
The loss on sale and write-down of foreclosed property in the first three months
of 2009 was $1.5 million compared to a gain of $12 thousand for the same period
in 2008. This computes to a reduction of income in the amount of $1.5 million
comparing the periods. We have been successful in reducing operating expenses
except for the expense of maintaining and carrying foreclosed property and
collecting on non-performing loans. In total, non-interest expense decreased by
$247 thousand, or 3.8 percent, comparing the first quarter of 2009 with 2008.
However, expense on loans and foreclosed property increased by $231 thousand, or
74.1 percent. The loss before income taxes was $5.1 million in the first quarter
of 2009 compared to earnings before taxes in the amount of $2.4 million in the
first quarter of 2008, for a reduction between the two periods of $7.5 million.
The reduction of net interest income ($3.0 million), the reduction of salaries
and employee benefits ($447 thousand), the increase in loan loss provision ($3.2
million), the increase in the loss on sale and write down of foreclosed property
($1.5 million) and the increase in expense on loans and foreclosed property
($231 thousand) accounted for the $7.5 million of the reduction in earnings
before taxes.
To better
understand the recent operating trends, it is helpful to compare the operating
results of the first quarter of 2009 with the fourth quarter of 2008. The net
loss before taxes of $5.1 million for the first quarter of 2009 was reduced
compared to the net loss (before taxes and goodwill charge) in the fourth
quarter of 2008. The net loss before taxes for the fourth quarter of 2008
(excluding a goodwill impairment charge in the amount of $24.1 million) was $6.5
million, a decrease in pretax loss of $1.4 million, comparing the first quarter
of 2009 to the fourth quarter of 2008. The difference in the results for the
first quarter of 2009 and the fourth quarter of 2008 can be traced primarily to
a decrease in the loan loss provision of $700 thousand. During the fourth
quarter of 2008, the Company charged-off interest income on impaired loans in
the amount of $541 thousand compared to a net recovery in the first quarter of
2009 of previously charged-off interest in the amount of $26 thousand, a
difference of $567 thousand. The expense on loans and foreclosed property in the
fourth quarter of 2008 was $1.2 million compared to $543 thousand for the first
quarter of 2009, a decrease in expense of $657 thousand.
Total
non-interest expense, comparing the first quarter of 2009 to the fourth quarter
of 2008 (not including the goodwill impairment charge which was classified as
non-interest expense in the fourth quarter of 2008) decreased by $1.6 million,
or 20.0 percent. As described above, expense on loans and foreclosed property
decreased by $657 thousand. Salary and employee benefit expense decreased by
$682 thousand, or 21.5 percent, comparing the fourth quarter of 2008 to the
first quarter of 2009. Management is making every effort to reduce expenses and
preserve capital.
Management
and the board remain concerned about the remainder of 2009 in terms of real
estate values. Many of the Company’s foreclosed properties and collateral on
non-performing collateral dependent loans must be re-evaluated at least annually
for their fair values. If current trends continue, as the properties are
re-appraised, the values may be lower than previous appraisals. We believe our
valuation process has, to date, yielded accurate market values based on our
recent sales efforts and other market intelligence. Improved property, for
example a lot with a residence, has a more determinable value since sales for
comparison purposes are typically more recent. Developed or undeveloped lots, in
contrast, require more judgment on the part of management as the excess supply
of residential lots, fewer sales for comparative purposes and more frequent
distressed sales of these types of properties make valuation more
difficult.
The
rising cost of deposit insurance also remains a concern of management for the
remainder of 2009. Our deposit insurance assessment applicable for the next
three months reflects an increased cost of three times that for the previous
three months. In addition, there are proposals currently pending before Congress
requesting a special assessment of deposit insurance on banks in the amount of
20 basis points. If approved, this additional assessment could amount to
approximately $1.5 million for the Bank.
Non-performing
assets as of March 31, 2009 were $125.9 million, or 18.8 percent of total loans
plus foreclosed property, compared to $54.5 million, or 8.0 percent of total
loans plus foreclosed property, as of March 31, 2008 and $122.0 million, or 18.0
percent of total loans plus foreclosed property, as of December 31, 2008. The
$125.9 million in non-performing assets was comprised primarily of 24 loan
relationships ranging in outstanding balances from $1 million to $8 million. The
performing residential real estate construction and acquisition and development
portfolio not including impaired and non-accrual loans was $113.0 million as of
March 31, 2009 and comprised primarily of 12 loan relationships ranging in
balance from $1 million to $7 million.
Some
evidence suggests that we may be seeing improved conditions in the residential
real estate market. During the first quarter of 2009, 20 properties totaling
approximately $3.8 million were placed under contract but had not closed as of
March 31, 2009. The increase in non-performing loans also slowed in the first
quarter of 2009. In the fourth quarter of 2008, for example, non-performing
assets increased by $21.6 million, or 21.6 percent from September 30, 2008 to
December 31, 2008. In the first quarter of 2009, non-performing assets increased
by $3.9 million, or 3.2 percent from December 31, 2008 to March 31, 2009. The
increase in the first quarter of 2009 was primarily attributable to two loan
relationships. Our problem loans have related to the same loan relationships we
have been monitoring over the past 12 to 18 months as they have migrated from
classified loans, to impaired non-performing loans and, ultimately, to
foreclosed property. Stated differently, the total number of problem credit
relationships is not increasing as rapidly as in preceding
quarters.
Net
Interest Income
Net
interest income decreased by $3.0 million, or 40.4 percent, from the first
quarter of 2008 to the first quarter of 2009. Total interest income for the
first quarter of 2009 decreased by $4.0 million, or 28.1 percent, while total
interest expense decreased by $1.0 million, or 15.0 percent. The decrease in net
interest income from the first quarter of 2008 to the first quarter of 2009 was
most impacted by the increase in non-performing assets and liquidity (defined as
cash and cash equivalents). The average balance of non-performing loans and
foreclosed property increased from $38.0 million and $14.6 million,
respectively, through the first quarter of 2008 to $75.0 million and $47.6
million, respectively, through the first quarter of 2009. The average balance of
interest-bearing liquidity was $56.9 million through March 31, 2009 compared to
$6.7 million through March 31 2008. The total increase in average balance of
non-performing assets and liquidity was $120.2 million which means the Bank
needed to carry $120.2 million more deposits at a weighted average cost of 2.79
percent to fund non-performing assets and low yielding liquidity. Stated
differently, the Bank incurred an estimated $838 thousand ($120.2 million x 2.79
percent/4) of interest expense on deposits to carry non-performing assets.
Non-performing assets have no yield and our liquid balances had an average yield
of approximately 30 basis points in the first quarter of 2009. Our goal is to
reduce both non-performing assets and liquidity for the remainder of 2009. This
can be achieved by selling non-performing assets and reducing higher cost
deposits such as certificates of deposit as they mature, thereby reducing
liquidity.
The net
interest margin was also negatively impacted by the increase in non-performing
assets and liquidity. The net interest margin for the first quarter of 2008 was
3.39 percent compared to 2.38 percent through the first quarter of 2009, a
decrease of approximately 1.0 percent. The compression in the net interest
margin was not only caused by the increase in non-performing assets and
liquidity but by other factors as well. Certain of our adjustable rate loans and
deposits, for example, are tied to short-term interest rates such as the prime
rate and the federal target discount rate. Many of our adjustable rate loans and
deposits have adjusted downward in response to the decline in short term
interest rates. However, many certificates of deposit will be maturing and
re-pricing at a much lower rates in the coming quarters. Our forward interest
rate risk analysis indicates that the cost of funds will be decreasing in the
near term, because of the re-pricing of certificates of deposit to lower market
rates and the reduction of certificates of deposit as a ratio of total deposits.
Additionally, our average yield on earning assets will be increasing as
liquidity is decreased as a ratio to total earning assets.
The Bank
was more asset-sensitive in the first quarter of 2009, that is, more assets, as
a total, re-priced than deposits. As market interest rates approach zero, demand
deposit rates “bottom out” at near zero. However, asset yields had decreased
more in the first quarter in comparison to demand deposit rates. We have placed
interest rate floors on many of our loans which will be advantageous to the
Bank’s interest income and net interest margin as our cost of funds decreases.
Over the next two quarters, we believe the contraction of the net interest
margin should reverse to expansion as non-performing assets decrease, liquidity
and certificates of deposit are reduced and/or re-priced.
Non-Interest
Income
Non-interest
income decreased by $1.6 million, or 64.8 percent, when comparing the first
quarter of 2009 to first quarter of 2008. As discussed above, the reduction in
non-interest income was primarily attributable to the loss on sale and
write-down of foreclosed property in the first quarter of 2009 compared to a
gain on sale of foreclosed property of $12 thousand in the first quarter of
2008. In the first three months of 2009, we closed on sales in the amount of
$756 thousand in book value of foreclosed property for a loss of $62 thousand,
and we wrote-down foreclosed property by $1.5 million due to updated appraisals
on properties or other valuation criteria.
Service
charge income decreased by $251 thousand, or 16.3 percent, when comparing the
first quarters of 2009 and 2008. The decrease was the result of less overdraft
charges on deposit accounts. This trend is counterintuitive since one would
expect that, as the economy weakens, overdraft charges on deposit accounts would
increase or at least remain consistent. Despite an increase in the number of
demand deposit accounts, overdraft fees have decreased on a first quarter over
quarter basis, by $239 thousand, or 16.9 percent. We can only conclude that our
customers are changing their overdraft habits in order to conserve their money.
All other service charge income has remained relatively stable.
Mortgage
fee income decreased by $48 thousand, or 41.3 percent, from first quarter 2008
to first quarter 2009. Again, the decrease in mortgage origination volume is
counterintuitive. With mortgage rates at a historical low, one would expect that
the demand for refinancing and home purchases would be greater. On the contrary,
increased unemployment, increased underwriting standards and the lack of a
stabilized value in residential real estate have diminished demand for
mortgages. If values in the residential real estate market are able to
stabilize, the demand for mortgage loans could increase. In March of 2009,
applications increased after two consecutive quarters of very low volume. But as
underwriting standards have increased and appraisals have been scrutinized,
fewer applicants are qualifying for mortgages.
During
the first quarter of 2009, the brokerage division generated $133 thousand in
brokerage fees which represented a $22 thousand, or 19.6 percent, increase
compared to the first quarter of 2008. As the equity markets have firmed,
customers are seeking investment opportunities which have stimulated the volume
of brokerage fees. The brokerage division was cumulatively profitable by $9
thousand in the first quarter of 2009 compared to a $6 thousand loss in the
first quarter of 2008.
Other
non-interest income such as ATM network fees increased by $9 thousand, or 2.3
percent. The increase in ATM network fees is ordinary in nature based on
increased volume. The Company recorded a gain on the sale of securities in the
amount of $489 thousand in the first quarter of 2009 compared to a $47 thousand
gain in the first quarter of 2008. In addition, the Company charged-down an
equity investment in an institution by $79 thousand. We consider these gains and
charge-down non-recurring in nature. The sale of securities was part of a
strategy to reposition the investment portfolio away from non-taxable municipal
securities into taxable investments. The Company is not receiving a current tax
benefit from its non-taxable municipal securities because it is not generating
taxable income. In instances where we could increase the yield on the investment
security, we sold municipal securities and reinvested the proceeds in taxable
mortgage backed securities and municipal securities to generate taxable income
to offset taxable losses. Because of the increase in the bond market over the
past three months, the sales generated a larger than historic gain.
Miscellaneous
income decreased by $142 thousand, or 63.6 percent, comparing the first quarter
of 2009 to the first quarter of 2008. During the first quarter of 2009, we
incurred miscellaneous loss totaling $163 thousand that was non-recurring in
nature.
Non-interest
Expense
When
comparing total non-interest expense for the three month periods ended March 31,
2009 with the same period of 2008, we experienced a decrease of $247 thousand,
or 3.8 percent. Although the total decrease in non-interest expense was modest,
there has been a significant change in the management of non-interest expense.
We have responded to the increase in non-performing assets by implementing
cost-saving measures such as reducing staff, employee benefits and other expense
in the first quarter of 2009. In total, management has reduced expenses such
that we estimate a cost savings of approximately $2.5 million to $3.0 million
from that reported in 2008. However, we do expect that expense on loans and
foreclosed property will increase in 2009 compared to 2008 because the amount of
impaired loans and foreclosed property has increased significantly since the
first part of 2008.
Salaries
and employee benefits decreased by $447 thousand, or 12.3 percent, as of March
31, 2009 compared to the same period in 2008. As of March 31, 2008, we had 273
full time equivalent employees compared to 231 full time equivalent employees at
March 31, 2009, a reduction of 42 full time equivalent employees, or 15.4
percent. Salary expense decreased by $275 thousand, or 10.0 percent, and
benefits expense decreased by $172 thousand, or 19.9 percent, from the first
quarter of 2008 to the same period in 2009. The reduction in salaries was
directly attributable to reduction in full time equivalent employees. Virtually
all departments and branches were affected by staff reduction. The Bank closed
its loan production office and Banco de Progreso Branch in Coweta County in the
fourth quarter of 2008 and its Banco de Progreso Branch in Carrollton in the
first quarter of 2009. The decrease in employee benefits came primarily from the
reduction in the 401k match from (up to) six percent of an employee’s salary to
one percent and no bonus accruals in 2009.
Following
the second quarter of 2008, management and the Board of Directors determined
that aggressive cost cutting measures would need to be taken in order to
preserve capital through the downturn in the residential real estate market and
credit quality. The expense line item that is the largest and most discretionary
is salaries and benefits. The following measures were taken to reduce salary and
benefits expense: reduction in the full time equivalent employee count by 20
percent; cessation of bonuses and increases in salary for 2009; reduction of the
401k match from six percent to one percent; and utilization of greater
efficiencies in departmental and customer service operations. The Board of
Directors reduced their director fees two times in the last fifteen months
although they are meeting more frequently than in the past. Certain committees
are not being compensated for some or all of their meetings. Management’s goal
was to reduce salary and benefits expense by $2.5 million, for a savings of 17
to 20 percent in 2009 from salary and benefits expense realized in
2008.
Occupancy
expense in the first quarter of 2009 decreased $92 thousand, or 9.0 percent,
when compared to the first quarter of 2008. The decrease in occupancy expense
was attributable to decreased depreciation expense ($42 thousand), decreased
maintenance and repairs on bank equipment and premises ($38 thousand) and
decreased telephone expense ($21 thousand). The reduction in depreciation
expense was the result of closing branches and reducing fixed asset
purchases.
Expense
on loans and foreclosed property has become a significant operating expense for
the Company. In late 2007 and early 2008, the Bank began an aggressive
collection process on its construction and development loan portfolio. This
process caused the Bank to incur expenses for such things as collection of debt,
past due and current property tax bills, insurance, maintenance, utilities,
environmental protection and marketing costs on foreclosed property. Expense on
loans and foreclosed property increased by $231 thousand, or 74.1 percent, from
the first quarter of 2008 to the first quarter of 2009. The increase is
primarily due to $105 thousand of estimated property tax expense accrued for the
first quarter of 2009. Additionally, the number of foreclosed properties is
higher as of March 31, 2009 than March 31, 2008 ($47.3 million compared to $14.7
million, respectively). As a result of the increase number of properties owned,
property tax, maintenance, insurance, utilities and environmental protection
expenses have increased.
Income
Taxes
Income
tax benefit for the first three months of 2009 was $2.1 million, compared to
income tax expense in the amount of $585 thousand for the same period in 2008.
The effective tax rates for each of the periods ended March 31, 2009 and 2008
were 40.5 percent and 24.2 percent, respectively. The effective tax rate
increased due to the increase in tax advantaged income such as interest on
municipal securities and tax credits as a percentage of total loss in
2009.
Provision
and Allowance for Loan Losses
The
adequacy of the allowance for loan losses is determined through management’s
informed judgment concerning the amount of risk inherent in the Bank’s loan and
lease portfolios. This judgment is based on such factors as the change in levels
of non-performing and past due loans and leases, historical loan loss
experience, borrowers’ financial condition, concentration of loans to specific
borrowers and industries, estimated values of underlying collateral, and current
and prospective economic conditions. Management has taken an aggressive approach
to identification and recognition of potential problem loans. In addition,
management is attempting to recognize impairment of a loan and to continue to
analyze and evaluate current market values for collateral on impaired loans
during their holding period. While uncertainty prevails in assessing loan
quality and collateral valuations, a formal allowance for loan loss adequacy
test is performed quarterly and updates are performed each month end. Specific
amounts of loss are estimated on problem loans and historical loss percentages
are applied to the balance of the portfolio using certain portfolio
stratifications. Additionally, the evaluation takes into consideration such
factors as changes in the nature and volume of the loan portfolio, current
economic conditions, regulatory examination results, and the existence of loan
concentrations.
Through
our problem loan identification program, we strive to identify those loans that
exhibit weakness and classify them on a classified and criticized loan list.
Management meets with lenders and credit staff more often and in greater detail
than it may have in a more stable credit quality period. Special attention is
given to construction and land development loans in order to accurately evaluate
the exposure to loan loss of this portfolio. This migration analysis assigns
historical loss amounts to pools of loans according to classifications of risk
ratings to calculate a general allowance to the overall portfolio. In cases
where significant weaknesses exist in a specific loan, a specific reserve is
assigned to such loan.
The
allowance for loan losses at March 31, 2009 was $12.0 million, or 1.94 percent
of total loans, compared to $13.1 million, or 1.98 percent of loans, at March
31, 2008 and $11.2 million, or 1.78 percent of total loans, at December 31,
2008. Management believes that the allowance for loan losses is adequate to
absorb risk of loss identified in the loan portfolio as of March 31, 2009.
Changes in the allowance for loan losses for the three month period ended March
31, 2009 compared to March 31, 2008 are as follows:
Allowance
for Loan Loss
|
|
|
|
|
|
|
|
|
|
|
For
the Three Months Ended March 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Balance
at beginning of period
|
|
$
|
11,239,767
|
|
|
$
|
12,422,428
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
Commercial,
financial and agricultural
|
|
|
105,922
|
|
|
|
47,853
|
|
|
Real
estate – construction
|
|
|
2,221,102
|
|
|
|
4,998
|
|
|
Real
estate – mortgage
|
|
|
597,864
|
|
|
|
11,425
|
|
|
Consumer
loans
|
|
|
255,799
|
|
|
|
85,974
|
|
|
Total
charge-offs
|
|
|
3,180,687
|
|
|
|
150,250
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
Commercial,
financial and agricultural
|
|
|
1,262
|
|
|
|
11,645
|
|
|
Real
estate – construction
|
|
|
16,284
|
|
|
|
62,320
|
|
|
Real
estate – mortgage
|
|
|
35,372
|
|
|
|
1,471
|
|
|
Consumer
loans
|
|
|
24,187
|
|
|
|
44,434
|
|
|
Total
recoveries
|
|
|
77,105
|
|
|
|
119,638
|
|
|
Net
(charge-offs) recoveries
|
|
|
(3,103,582
|
)
|
|
|
(30,380
|
)
|
|
Provision
for loan losses
|
|
|
3,950,000
|
|
|
|
750,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at end of period
|
|
$
|
12,086,185
|
|
|
$
|
13,142,048
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio
of net (charge-offs) recoveries during the period to average loans
outstanding
|
|
|
(1.97
|
)%
|
|
<(0.01
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
Ratio
of allowance to total loans
|
|
|
1.94
|
%
|
|
|
1.98
|
%
|
The
Company recognized net charge-offs on a portion of several impaired loans in the
amount of $3.2 million in the first quarter of 2009 compared to $9.0 million in
the fourth quarter of 2008. In analyzing the impaired and potentially impaired
loans, management recognized the need to assign specific reserves to the loans
since the ultimate collectability would likely be dependent on the collateral
securing the loans rather than the ability of the borrower to repay or the
income on the property. Management obtained updated appraisals on the properties
which collateralize the loans to determine the amount of charge-off that it
believed was necessary. Management also identified additional potentially
impaired loans as of March 31, 2009 and determined the additional specific
reserves and increased loan loss provision needed as a result. Management
intends to adequately provide for potential loan loss in the
portfolio.
The
rapidness with which the overall residential real estate market deteriorated
affected borrowers who were not typically past due. While conditions have not
further deteriorated and have shown some signs of recovery over the first
quarter of 2009, we feel the downturn will have an impact on the amount of
charge-offs and provision for loan loss that is recognized over the remainder of
2009. We continue to receive updated appraisals on properties and assess whether
the appraised values will be sustained or whether additional charge-offs will be
necessary. Management’s policy is to charge-off loans to the extent that they
exceed 85 percent of the updated appraisal. This allows for an estimate of 15
percent for selling costs. The 85 percent valuation allowance has been effective
in the past as the Company has not had significant gain or loss on its
disposition of property.
In many
cases, it may be in the best interest of the Company to discount a property to
reduce its holding period. If this becomes necessary, the Company could
experience further write-downs. In any case, it is management’s and the Board’s
goal to maximize the amount that the Company will ultimately realize while
minimizing a property’s holding period. We are making judgments on individual
properties to strike a balance between holding the property until values
stabilize or selling the property and converting it to an earning asset. We also
desire to mitigate the expense, ownership exposure and interest carry of holding
a property.
Non-Performing
Assets and Past Due Loans
Non-performing
assets at March 31, 2009 were $125.9 million, or 18.8 percent, of total loans
plus foreclosed property compared to $122.0 million, or 18.0 percent, of total
loans plus foreclosed property at December 31, 2008 and $54.5 million, or 8.0
percent, of total loans plus foreclosed property at March 31, 2008. The levels
of non-performing loans are at a historic high for the Company. The primary
cause of the increase in non-performing asset levels is the decline in the
residential real estate market in the metro-Atlanta area. Over the past five
years, our market area has become more connected with the growth of
metro-Atlanta. Residential real estate growth became a leading industry in our
market. Over those five years, residential construction and development loans
averaged 33 percent of our loan portfolio.
In
recognition of the potential impact of a downturn, in 2004 management began to
raise the credit standards for those borrowers. Management was, however,
surprised by both the suddenness and the severity with which the downturn came
in the last half of 2007. Many in the market did not realize the impact that
subprime mortgage lending had on the absorption rate of home sales in the market
area. When subprime lenders began to experience credit quality problems related
to increased rates in the adjustable subprime market, that type of lending
ceased. Further, as homes that were built to meet both the subprime and
conforming mortgage demand came to market, not only had the subprime demand
decreased sharply, but homes which were subject to subprime lending began
emerging back on the market in foreclosure. This trend continued at an
increasing rate through the first quarter of 2009. The downturn has been further
impacted by a steady increase in unemployment that continues to plague both the
national and regional economy.
The
excess supply of homes and developed residential lots has had a negative impact
on our residential construction and development borrowers and the values of
their properties. The borrowers continue to experience much longer than expected
sales time and, therefore, the holding period and expense of carrying the homes
or residential lots was much higher than expected. As time passes, the borrowers
have been paying the interest and ownership carry on the properties, but have
diminished their financial capacity to continue to hold the property. This is
further exacerbated by the decline in real estate values over the period. Thus,
we have been experiencing an increased number of past due loans which has led to
impairment of the loan and, at an increasing rate, foreclosure for some
borrowers. In addition, some borrowers may file for protection under bankruptcy
laws which can further lengthen the collection period of the loan. Approximately
85 percent of the total amount of non-performing assets as of March 31, 2009 is
made up of 24 loan relationships with original balances of $1 million to $8
million per relationship.
Management
continues to perform impairment analyses on each troubled loan relationship and
remains focused on the credit quality of its residential construction and
development loan portfolio. The impairment analysis entails evaluating the fair
value of the properties which were held as collateral for the loans. The
properties are re-appraised when appropriate and those updated appraisals are
evaluated by management. Generally, there is greater uncertainty in real estate
values in times of a market downturn. As expected, updated values are often less
than the earlier appraisals. Therefore, if fair value analysis is below the
recorded loan amount, management generally suspends the accrual of interest and,
in certain instances, charges-down the balance of the impaired loans as dictated
by collateral values in our fair value assessment. As part of our ongoing
evaluation of the collectability of the impaired asset, management must continue
to make value judgments on the properties or loans through updated appraisals
and our knowledge of the market. There can be no assurance that residential real
estate values will not continue to decline or that more loans will become
impaired, thereby causing more potential suspension of accrued interest or
further charge-down of loans.
Management’s
most critical priority remains disposing of and maximizing the net realizable
value of the non-performing assets. In the first quarter of 2009, the special
assets management group of the Bank received 20 contracts on properties in the
total amount of approximately $3.8 million for an average of approximately 80
percent of the original loan amount. Management considers multiple avenues to
reduce non-performing assets. The holding period of non-performing assets must
be minimized as these assets bear a cost to carry for us in interest expense,
maintenance, insurance and real estate tax expense. We believe that the ultimate
outcome of this cycle of economic downturn is the largest uncertainty management
faces over the next twelve months. We are in a market that has high historical
and projected population and income growth potential. While the current downturn
has had a significant impact on asset quality and, therefore, earnings, we
believe our long term growth and earnings outlook for the Company remains
positive.
Financial
Condition
Overview
Total
assets were $912.5 million at March 31, 2009, an increase of $20.3 million, or
2.3 percent, from December 31, 2008. During the first quarter of 2009, cash and
equivalents increased by 32.0 million, or 42.5 percent, while total loans
decreased $10.5 million, or 1.7 percent, and total deposits increased $25.4
million, or 3.3 percent. Loan demand in the Bank’s market area has decreased
considerably compared to historical levels due to recessionary economic
conditions discussed throughout this Report.
Assets
and Funding
At March
31, 2009, earning assets totaled $728.1 million, an increase of $811 thousand,
or less than 0.1 percent, from December 31, 2008. Both periods were hampered by
the high level of non-performing assets described elsewhere in this Report. As
stated elsewhere, the largest change in the earning assets mix was attributable
to cash and cash equivalents. These investments were earning between 10 basis
points and 25 basis points as of March 31, 2009. Management intends to remain
more liquid than historically but less liquid than it was as in the first
quarter of 2009. Uncertainty continues to prevail in the banking industry and we
want our customers to be confident that their deposits are accessible when they
need them.
At March
31, 2009, interest-bearing liabilities increased $18.7 million, or 2.4 percent,
when compared to December 31, 2008 and increased $47.6 million, or 9.3 percent,
when compared to March 31, 2008. Non-interest bearing demand accounts increased
by $6.7 million, or 10.0 percent, interest-bearing demand and savings accounts
increased by $8.6 million, or 4.0 percent, and total time deposits increased by
$10.2 million, or 2.1 percent, comparing March 31, 2009 to December 31, 2008. At
March 31, 2009, deposits represented 91.9 percent and Federal Home Loan Bank
advances and the junior subordinated debentures represented 8.1 percent of
interest-bearing liabilities, respectively, compared to 91.7 percent and 8.3
percent, respectively, as of December 31, 2008.
Major
classifications of loans at March 31, 2009 and December 31, 2008 are summarized
as follows:
|
|
|
|
|
|
|
|
|
Loan
|
|
March
31, 2009
|
|
|
December
31, 2008
|
|
|
Commercial,
financial and agricultural
|
|
$
|
63,255,375
|
|
|
$
|
64,433,643
|
|
|
Real
Estate – mortgage
|
|
|
346,175,173
|
|
|
|
349,612,461
|
|
|
Real
Estate – construction
|
|
|
179,574,331
|
|
|
|
182,877,720
|
|
|
Consumer
|
|
|
31,983,703
|
|
|
|
34,575,962
|
|
|
Total
|
|
$
|
620,988,582
|
|
|
$
|
631,499,786
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned
loan fees
|
|
|
(1,186,387
|
)
|
|
|
(1,337,869
|
)
|
|
Allowance
for loan losses
|
|
|
(12,086,185
|
)
|
|
|
(11,239,767
|
)
|
|
Net
Loans
|
|
$
|
607,716,010
|
|
|
$
|
618,922,150
|
|
Liquidity
Net cash
provided by operating activities totaled $369 thousand for the three months
ended March 31, 2009. Net cash provided by investing activities totaled $6.5
million, which consisted primarily of $3.9 million cash used to fund loans and
$2.2 million of net proceeds from sales of securities available-for-sale less
purchases . Net cash provided by financing activities totaled $25.1 million for
the three months ended March 31, 2009, which primarily consisted of a $25.4
million increase in deposits. The net increase in cash and cash equivalents for
the period ended March 31, 2009 was $32.0 million.
Capital
Resources
The
Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company’s and the Bank’s financial statements. Under
certain adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and the Bank must meet minimum capital guidelines that
involve quantitative measures of the assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of total
and Tier I capital to risk-weighted assets and of Tier I capital to average
assets. Under certain circumstances, the regulators may impose higher minimum
capital levels or otherwise adjust and institution’s capital category based on
market conditions.
The Bank
received certain requests relating to capital from its primary regulator, the
OCC, the terms of which are confidential. Management is in the process of
complying with the requirements. If the regulatory capital requirements are not
met and/or maintained, additional regulatory actions may be taken against the
Bank.
As of
March 31, 2009, the most recent notification from the Federal Deposit Insurance
Corporation categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as adequately
capitalized the Bank must maintain minimum total risk-based, Tier I risk-based
and Tier I leverage ratios as set forth in the table. Presented below are the
Company’s actual capital amounts and ratios at March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2009
|
|
|
|
|
Actual
Amount
|
|
%
|
|
Required
Amount
|
|
%
|
|
Excess
Amount
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital (to risk-weighted assets)
|
|
$
|
68,280
|
|
|
10.24
|
%
|
$
|
53,333
|
|
|
8.00
|
%
|
$
|
14,947
|
|
|
2.24
|
%
|
|
Tier
1 capital (to risk-weighted assets)
|
|
|
59,900
|
|
|
8.99
|
%
|
|
26,667
|
|
|
4.00
|
%
|
|
33,233
|
|
|
4.99
|
%
|
|
Tier
1 capital (to average assets)
|
|
|
59,900
|
|
|
6.67
|
%
|
|
35,922
|
|
|
4.00
|
%
|
|
23,978
|
|
|
2.67
|
%
|
Off
Balance Sheet Risk
Through
the operations of the Bank, the Company has made contractual commitments to
extend credit in the ordinary course of its business activities. These
commitments are legally binding agreements to lend money to the Bank’s customers
at predetermined interest rates for a specified period of time. At March 31,
2009, the Bank had issued commitments to extend credit of $59,971,000 through
various types of commercial lending arrangements and additional commitments
through standby letters of credit of $10,079,000. The Bank evaluates each
customer’s creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Bank upon extension of credit, is based on
its credit evaluation of the borrower. Collateral varies but may include
accounts receivable, inventory, property, plant and equipment, commercial and
residential real estate. The Bank manages the credit risk on these commitments
by subjecting them to normal underwriting and risk management processes. Because
the letters of credit generally have fixed expiration dates and many will expire
without being drawn upon, the total commitment level does not necessarily
represent future cash requirements. If needed to fund these outstanding
commitments, the Bank has the ability to liquidate Federal funds sold or
securities available-for-sale or on a short-term basis to borrow and purchase
Federal funds from other financial institutions.
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market
Risk
|
Market
risk is the risk of loss from adverse changes in market prices and interest
rates. The Company’s market risk arises primarily from interest rate risk
inherent in its lending and deposit-taking activities. The Company has little or
no risk related to trading accounts, commodities or foreign
exchanges.
Interest
rate risk, which encompasses price risk, is the exposure of a banking
organization’s financial condition and earnings ability to adverse movements in
interest rates. The measurement of market risk associated with financial
instruments is meaningful only when all related and offsetting on-and
off-balance sheet transactions are aggregated, and the resulting net positions
are identified. Disclosures about the fair value of financial instruments as of
December 31, 2008, which reflected changes in market prices and rates, can be
found in the Company’s Annual Report on Form 10-K for the year ended December
31, 2008 under the section entitled “Management’s Discussion and Analysis of
Financial Condition and Results of Operation – Asset/Liability
Management.”
Management
actively monitors and manages the Company’s interest rate risk exposure. The
primary objective in managing interest rate risk is to limit, within established
guidelines, the adverse impact of changes in interest rates on the Company’s net
interest income and capital, while adjusting the Company’s asset-liability
structure to obtain the maximum yield versus cost spread on that structure.
Management relies primarily on its asset-liability structure to control interest
rate risk. However, a sudden and substantial increase in interest rates borne by
assets and liabilities do not change at the same speed, to the same extent, or
on the same basis. Management believes that there have been no significant
changes in the Company’s market risk exposure since December 31,
2008.
|
|
|
|
Item
4T.
|
Controls
and Procedures
|
The
Company maintains disclosure controls and procedures, as defined in Rule
13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange
Act”), that are designed to ensure that information required to be disclosed in
the reports that the Company 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 and chief financial officers, as appropriate, to
allow timely decisions regarding required disclosure. The Company carried out an
evaluation, under the supervision and with the participation of its management,
including its chief executive and chief financial officers, of the effectiveness
of the design and operation of its disclosure controls and procedures as of the
end of the period covered by this Report. Based on the evaluation of these
disclosure controls and procedures, the chief executive and chief financial
officers of the Company concluded that the Company’s disclosure controls and
procedures were effective as of the end of the period covered by this
Report.
There
were no changes in the Company’s internal control over financial reporting
during the Company’s fiscal quarter ended March 31, 2009 that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
Part
II – Other Information
|
|
|
|
Item
1.
|
Legal
Proceedings
|
While the
Company and its subsidiaries are from time to time party to various legal
proceedings arising from the ordinary course of business, management believes
that there are no proceedings of material risk threatened or
pending.
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds
|
|
|
(a)
|
Not
applicable.
|
|
|
|
|
|
|
(b)
|
Not
applicable
|
|
|
|
|
|
|
(c)
|
There
were no issuer purchases of equity securities during the period covered by
this Report.
|
No
dividends were paid on our common stock during the first quarter of 2009. During
the first quarter of 2009, the Company declared quarterly cash dividends on its
Series A Preferred Stock amounting to approximately 18 cents per share which
were paid on March 15, 2009. The declaration of future dividends is within the
discretion of the Board of Directors and will depend, among other things, upon
business conditions, earnings, the financial condition of the Bank and the
Company, and regulatory requirements. The terms of our Series A Preferred stock
also prohibit us from paying dividends on our common stock unless dividends on
our Series A Preferred stock are paid for the applicable quarterly period. We
would also be prohibited from paying dividends on any capital stock if we were
in default or elect to defer payment of interest under our outstanding Trust
Preferred securities.
|
Item
3.
|
Defaults
Upon Senior Securities
|
Not
applicable.
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security
Holders
|
Not
applicable.
|
|
|
|
Item
5.
|
Other
Information
|
Not
applicable.
|
(a)
|
The
following exhibits are filed as part of this Report:
|
|
|
|
|
|
|
3.1
|
Amended
and Restated Articles of Incorporation (Incorporated by reference to
Exhibit 3.1 to the Company’s Registration Statement on Form 10-SB filed
June 14, 2000 (the “Form 10-SB”))
|
|
|
|
|
|
|
3.2
|
Articles
of Amendment to Amended and Restated Articles of Incorporation
(Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K
filed June 19, 2008)
|
|
|
|
|
|
|
3.3
|
Second
Articles of Amendment to Amended and Restated Articles of Incorporation
(Regarding Designations, Preferences and Rights of Series A Convertible
Preferred Stock) (Incorporated by reference to Exhibit 3.1 to Current
Report on Form 8-K filed June 26, 2008)
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3.4
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Third
Articles of Amendment to Amended and Restated Articles of Incorporation
(Regarding restatement of Designations, Preferences and Rights of Series A
Convertible Preferred Stock) (Incorporated by reference to Exhibit 3.1 to
Current Report on Form 8-K filed July 22, 2008)
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3.5
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Amended
and Restated Bylaws (Incorporated by reference to Exhibit 3.2 to the Form
10-SB)
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4.1
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See
exhibits 3.1 through 3.5 for provisions of Company’s Articles of
Incorporation and Bylaws Defining the Rights of
Shareholders
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4.2
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Specimen
certificate representing shares of Common Stock (Incorporated by reference
to Exhibit 4.2 to the Form 10-SB)
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4.3
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Specimen
certificate representing shares of Series A Convertible Preferred Stock
(Incorporated by reference to Exhibit 4.3 to Registration Statement on
Form S-1 (Registration No. 333-151820) filed June 20,
2008)
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4.4
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Amended
and Restated Trust Agreement dated July 2, 2007 (Incorporated by reference
to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed July 6,
2007 (the “July 2007 Form 8-K”)
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4.5
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Indenture,
dated July 2, 2007, by and between WGNB Corp. and Wilmington Trust Company
(Incorporated by reference to Exhibit 4.2 to the July 2007 Form
8-K)
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4.6
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Guarantee
Agreement, dated July 2, 2007, by and between WGNB Corp. and Wilmington
Trust Company (Incorporated by reference to Exhibit 4.3 to the July 2007
Form 8-K)
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4.7
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WGNB
Corp. Direct Stock Purchase and Dividend Reinvestment Plan (Incorporated
by reference to Form S-3 filed May 20, 2008 as amended November 6,
2008)
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31.1
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Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
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31.2
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Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley
Act of 2002.
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32.1
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Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
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32.2
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Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes Oxley
Act of 2002.
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SIGNATURES
In
accordance with the requirements of the Securities Exchange Act of 1934, the
Company has caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated:
May 15, 2009
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WGNB
CORP.
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By:
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/s/
H.B. Lipham, III
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H.
B. Lipham, III
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Chief
Executive Officer
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(Principal
Executive Officer)
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By:
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/s/
Steven J. Haack
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Steven
J. Haack
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Secretary
and Treasurer
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(Principal
Financial Officer)
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26
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