e10vqza
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
10-Q/A
(Amendment
No. 1)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarter ended June 30, 2009
Commission file number 000-19297
FIRST COMMUNITY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
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Nevada
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55-0694814 |
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(State or other jurisdiction of incorporation)
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(IRS Employer Identification No.) |
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P.O. Box 989 |
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Bluefield, Virginia
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24605-0989 |
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(Address of principal executive offices)
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(Zip Code) |
(276) 326-9000
(Registrants telephone number, including area code)
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.
þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
o Yes o No
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions 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 þ |
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Non-accelerated filer o (Do not check if a smaller reporting company) |
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes þ No
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
Class Common Stock, $1.00 Par Value; 17,698,892 shares outstanding as of July 31, 2009
FIRST COMMUNITY BANCSHARES, INC.
FORM 10-Q/A
For the quarter ended June 30, 2009
INDEX
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PART I. FINANCIAL INFORMATION |
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4 |
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5 |
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6 |
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7 |
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8 |
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30 |
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42 |
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43 |
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44 |
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44 |
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51 |
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51 |
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51 |
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52 |
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52 |
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55 |
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56 |
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EX-31.1 |
EX-31.2 |
EX-32 |
- 2 -
Explanatory Note
Overview
First Community Bancshares, Inc. (the Company) is filing this amendment to its
Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 (the Original Filing) to amend and restate
financial statements and other financial information in the Original Filing as filed with the Securities and Exchange
Commission (SEC) to reflect the correction of a computational error in its model used to calculate its allowance for loan losses. For the same reason, Company also is restating the financial statements and other financial information filed
with the SEC for the years ended December 31, 2009 and 2008 and each of the quarters ended March 31, 2009,
September 30, 2009 and March 31, 2010.
Background
The reason for the restatement is to correct a computational error in the model that the
Company used to calculate the quantitative basis for its allowance for loan losses for the
periods indicated. The Company identified the computational error as a result of one of
its routine internal audits. In connection with its determination of the appropriate loan
loss reserves at December 31, 2008, the Company made certain modifications to its loan
loss reserves model with respect to a $130.76 million pool of loans. However, in
calculating the loan loss reserves for this pool of loans, the computational error resulted
in the Companys historical quarterly net charge-off rates not being annualized.
The Company has corrected the computational error in its model for calculating the
allowance for loan losses. Based on the Companys modeling using the corrected
computations, the Company, in consultation with the Audit Committee of its Board of
Directors, determined that the amount of the allowance for loan losses should be
increased by an aggregate of $2.55 million for the period beginning December 31, 2008
and ending March 31, 2010.
Amendments to the Original Filing
The following sections of this Quarterly Report on Form 10-Q/A have been revised to
reflect the restatement: Part I Item 1 Financial Statements, Item 2 Managements
Discussion and Analysis of Financial Condition and Results of Operations, Item 4
Controls and Procedures, and Part II Item 6 Exhibits. Except to the extent relating to
the restatement of the Companys financial statements and other financial information described
above, the financial statements and other disclosures in this Quarterly Report on Form
10-Q/A do not reflect any events that have occurred after the Original Filing was filed
with the SEC on August 13, 2009. This Quarterly Report on Form 10-Q/A does not
modify or update those disclosures affected by subsequent events. Information not
affected by the restatement is unchanged and reflects the disclosures made at the time of
the Original Filing. Although the Company is amending only certain portions of its
Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, for convenience and
ease of reference, it is filing the entire Quarterly Report on this Form 10-Q/A.
- 3 -
PART I. ITEM 1. Financial Statements
FIRST
COMMUNITY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
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June 30, |
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December 31, |
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2009 |
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2008* |
|
(Dollars in Thousands, Except Per Share Data) |
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(Unaudited) |
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(Restated) |
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(Restated) |
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Assets |
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Cash and due from banks |
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$ |
116,095 |
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$ |
39,310 |
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Interest-bearing balances with banks |
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28,354 |
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7,129 |
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Total cash and cash equivalents |
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144,449 |
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46,439 |
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Securities available-for-sale |
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521,879 |
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520,723 |
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Securities held-to-maturity |
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7,725 |
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8,670 |
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Loans held for sale |
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802 |
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1,024 |
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Loans held for investment, net of unearned income |
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1,269,443 |
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1,298,159 |
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Less allowance for loan losses |
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18,543 |
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17,782 |
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Net loans held for investment |
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1,250,900 |
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1,280,377 |
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Premises and equipment |
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55,193 |
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55,024 |
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Other real estate owned |
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3,615 |
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1,326 |
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Interest receivable |
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8,935 |
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10,084 |
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Goodwill and other intangible assets |
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89,534 |
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89,612 |
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Other assets |
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119,013 |
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118,908 |
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Total Assets |
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$ |
2,202,045 |
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$ |
2,132,187 |
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Liabilities |
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Deposits: |
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Noninterest-bearing |
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$ |
202,543 |
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$ |
199,712 |
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Interest-bearing |
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1,344,815 |
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1,304,046 |
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Total Deposits |
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1,547,358 |
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1,503,758 |
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Interest, taxes and other liabilities |
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27,630 |
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27,423 |
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Securities sold under agreements to repurchase |
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153,804 |
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165,914 |
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FHLB borrowings and other indebtedness |
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190,863 |
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215,877 |
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Total Liabilities |
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1,919,655 |
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1,912,972 |
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Stockholders Equity |
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Preferred stock, par value undesignated; 1,000,000 shares authorized; 41,500 issued
at June 30, 2009, and December 31, 2008. |
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40,525 |
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40,419 |
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Common stock, $1 par value; 25,000,000 shares authorized; 17,341,234 shares
issued at June 30, 2009, and 12,051,234 issued December 31, 2008, including
431,642 and 483,785 shares in treasury, respectively |
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17,341 |
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12,051 |
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Additional paid-in capital |
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183,955 |
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128,526 |
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Retained earnings |
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115,832 |
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106,104 |
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Treasury stock, at cost |
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(13,712 |
) |
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(15,368 |
) |
Accumulated other comprehensive loss |
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(61,551 |
) |
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(52,517 |
) |
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Total Stockholders Equity |
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282,390 |
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219,215 |
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Total Liabilities and Stockholders Equity |
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$ |
2,202,045 |
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$ |
2,132,187 |
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* |
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Derived from audited financial statements. |
See Notes to Consolidated Financial Statements.
- 4 -
FIRST
COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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(Dollars In Thousands, Except Per Share Data) |
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2009 |
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2008 |
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2009 |
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2008 |
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(Restated) |
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Interest Income |
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Interest and fees on loans held for investment |
|
$ |
19,571 |
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$ |
19,891 |
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$ |
39,555 |
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$ |
41,128 |
|
Interest on securities-taxable |
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5,177 |
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|
5,467 |
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|
10,341 |
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|
11,534 |
|
Interest on securities-nontaxable |
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|
1,402 |
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|
2,004 |
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|
3,078 |
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|
4,067 |
|
Interest on federal funds sold and deposits |
|
|
39 |
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|
|
71 |
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|
78 |
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|
251 |
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Total interest income |
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26,189 |
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|
27,433 |
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|
|
53,052 |
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|
|
56,980 |
|
Interest Expense |
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Interest on deposits |
|
|
7,076 |
|
|
|
7,118 |
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|
14,643 |
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|
|
15,859 |
|
Interest on borrowings |
|
|
2,792 |
|
|
|
3,690 |
|
|
|
5,655 |
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|
|
8,136 |
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|
|
|
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|
|
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Total interest expense |
|
|
9,868 |
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|
|
10,808 |
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|
|
20,298 |
|
|
|
23,995 |
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|
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|
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Net interest income |
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|
16,321 |
|
|
|
16,625 |
|
|
|
32,754 |
|
|
|
32,985 |
|
Provision for loan losses |
|
|
2,552 |
|
|
|
937 |
|
|
|
4,700 |
|
|
|
1,260 |
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|
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|
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|
|
|
|
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|
Net interest income after provision for loan losses |
|
|
13,769 |
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|
|
15,688 |
|
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|
28,054 |
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|
|
31,725 |
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Noninterest Income |
|
|
|
|
|
|
|
|
|
|
|
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|
|
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Wealth management income |
|
|
1,133 |
|
|
|
1,098 |
|
|
|
2,117 |
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|
|
1,997 |
|
Service charges on deposit accounts |
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|
3,491 |
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|
|
3,463 |
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|
|
6,648 |
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|
|
6,562 |
|
Other service charges and fees |
|
|
1,133 |
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|
|
1,064 |
|
|
|
2,311 |
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|
|
2,185 |
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Insurance commissions |
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|
1,639 |
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|
1,146 |
|
|
|
3,956 |
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|
|
2,490 |
|
Total impairment losses on securities |
|
|
(25,169 |
) |
|
|
|
|
|
|
(25,378 |
) |
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|
Portion of loss recognized in other comprehensive income |
|
|
21,393 |
|
|
|
|
|
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|
21,393 |
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|
|
|
|
|
|
|
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|
|
|
|
|
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|
Net impairment losses recognized in earnings |
|
|
(3,776 |
) |
|
|
|
|
|
|
(3,985 |
) |
|
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Security gains |
|
|
1,653 |
|
|
|
150 |
|
|
|
2,064 |
|
|
|
1,970 |
|
Other operating income |
|
|
349 |
|
|
|
803 |
|
|
|
935 |
|
|
|
1,661 |
|
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|
|
|
|
|
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|
|
|
|
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|
Total non-interest income |
|
|
5,622 |
|
|
|
7,724 |
|
|
|
14,046 |
|
|
|
16,865 |
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|
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|
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|
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Noninterest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
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Salaries and employee benefits |
|
|
7,405 |
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|
7,580 |
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|
|
15,271 |
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|
15,370 |
|
Occupancy expense of bank premises |
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|
1,333 |
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|
|
1,256 |
|
|
|
2,936 |
|
|
|
2,420 |
|
Furniture and equipment expense |
|
|
892 |
|
|
|
973 |
|
|
|
1,830 |
|
|
|
1,874 |
|
Amortization of intangible assets |
|
|
244 |
|
|
|
158 |
|
|
|
489 |
|
|
|
318 |
|
FHLB debt prepayment fees |
|
|
88 |
|
|
|
|
|
|
|
88 |
|
|
|
1,647 |
|
FDIC premiums and assessments |
|
|
1,287 |
|
|
|
39 |
|
|
|
1,475 |
|
|
|
79 |
|
Other operating expense |
|
|
4,894 |
|
|
|
4,753 |
|
|
|
9,248 |
|
|
|
9,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
16,143 |
|
|
|
14,759 |
|
|
|
31,337 |
|
|
|
31,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
3,248 |
|
|
|
8,653 |
|
|
|
10,763 |
|
|
|
17,548 |
|
Income tax expense |
|
|
843 |
|
|
|
2,415 |
|
|
|
3,166 |
|
|
|
4,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
2,405 |
|
|
|
6,238 |
|
|
|
7,597 |
|
|
|
12,550 |
|
Dividends on preferred stock |
|
|
578 |
|
|
|
|
|
|
|
1,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
1,827 |
|
|
$ |
6,238 |
|
|
$ |
6,448 |
|
|
$ |
12,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
0.14 |
|
|
$ |
0.57 |
|
|
$ |
0.53 |
|
|
$ |
1.14 |
|
Diluted earnings per common share |
|
$ |
0.14 |
|
|
$ |
0.56 |
|
|
$ |
0.53 |
|
|
$ |
1.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share |
|
$ |
0.20 |
|
|
$ |
0.28 |
|
|
$ |
0.20 |
|
|
$ |
0.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding |
|
|
12,696,202 |
|
|
|
10,992,301 |
|
|
|
12,135,103 |
|
|
|
11,011,116 |
|
Weighted average diluted shares outstanding |
|
|
12,741,080 |
|
|
|
11,073,440 |
|
|
|
12,181,843 |
|
|
|
11,091,714 |
|
See Notes to Consolidated Financial Statements
- 5 -
FIRST
COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
(In Thousands) |
|
2009 |
|
|
2008 |
|
|
|
(Restated) |
|
|
|
|
Operating activities: |
|
|
|
|
|
|
|
|
Net Income |
|
$ |
7,597 |
|
|
$ |
12,550 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
4,700 |
|
|
|
1,260 |
|
Depreciation and amortization of premises and equipment |
|
|
2,189 |
|
|
|
1,855 |
|
Intangible amortization |
|
|
489 |
|
|
|
318 |
|
Net investment amortization and accretion |
|
|
768 |
|
|
|
(526 |
) |
Net gain on the sale of assets |
|
|
(2,154 |
) |
|
|
(1,929 |
) |
Mortgage loans originated for sale |
|
|
(18,422 |
) |
|
|
(22,964 |
) |
Proceeds from sales of mortgage loans |
|
|
18,685 |
|
|
|
22,376 |
|
Gain on sales of loans |
|
|
(41 |
) |
|
|
(123 |
) |
Deferred income tax benefit |
|
|
(611 |
) |
|
|
(330 |
) |
Decrease in interest receivable |
|
|
1,148 |
|
|
|
2,473 |
|
Non-cash other-than-temporary impairment charge |
|
|
3,985 |
|
|
|
|
|
Other operating activities, net |
|
|
(25 |
) |
|
|
(118 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
18,308 |
|
|
|
14,842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Proceeds from sales of securities available-for-sale |
|
|
89,827 |
|
|
|
73,731 |
|
Proceeds from maturities and calls of securities available-for-sale |
|
|
28,051 |
|
|
|
54,521 |
|
Proceeds from maturities and calls of securities held-to-maturity |
|
|
946 |
|
|
|
1,578 |
|
Purchase of securities available-for-sale |
|
|
(125,496 |
) |
|
|
(97,491 |
) |
Net decrease in loans held for investment |
|
|
22,375 |
|
|
|
43,740 |
|
Proceeds from the redemption of FHLB stock |
|
|
351 |
|
|
|
|
|
Proceeds from sales of equipment |
|
|
188 |
|
|
|
|
|
Purchase of premises and equipment |
|
|
(2,393 |
) |
|
|
(3,549 |
) |
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
13,849 |
|
|
|
72,530 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Net increase in demand and savings deposits |
|
|
15,477 |
|
|
|
4,139 |
|
Net increase (decrease) in time deposits |
|
|
28,123 |
|
|
|
(58,175 |
) |
Net decrease in federal funds purchased |
|
|
|
|
|
|
48,000 |
|
Net (decrease) increase in securities sold under agreement to repurchase |
|
|
(12,110 |
) |
|
|
8,183 |
|
Net decrease in FHLB and other borrowings |
|
|
(25,014 |
) |
|
|
(75,054 |
) |
FHLB debt
prepayment fees |
|
|
(88 |
) |
|
|
(1,647 |
) |
Net proceeds from the issuance of common stock |
|
|
61,668 |
|
|
|
|
|
Proceeds from the exercise of stock options |
|
|
|
|
|
|
97 |
|
Excess tax benefit from stock-based compensation |
|
|
|
|
|
|
22 |
|
Acquisition of treasury stock |
|
|
|
|
|
|
(4,112 |
) |
Preferred dividends paid |
|
|
(1,043 |
) |
|
|
|
|
Common dividends paid |
|
|
(1,160 |
) |
|
|
(6,154 |
) |
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
65,853 |
|
|
|
(84,701 |
) |
|
|
|
|
|
|
|
Increase in cash and cash equivalents |
|
|
98,010 |
|
|
|
2,671 |
|
Cash and cash equivalents at beginning of period |
|
|
46,439 |
|
|
|
52,746 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
144,449 |
|
|
$ |
55,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental information Noncash items |
|
|
|
|
|
|
|
|
Transfer of loans to other real estate |
|
$ |
2,485 |
|
|
$ |
637 |
|
Cumulative effect adjustment of FAS 115-2, net of tax |
|
$ |
6,131 |
|
|
$ |
|
|
See Notes to Consolidated Financial Statements.
- 6 -
FIRST
COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Preferred |
|
|
Common |
|
|
Paid-in |
|
|
Retained |
|
|
Treasury |
|
|
Comprehensive |
|
|
|
|
|
|
Stock |
|
|
Stock |
|
|
Capital |
|
|
Earnings |
|
|
Stock |
|
|
Loss |
|
|
Total |
|
(Dollars in Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 1, 2008 |
|
$ |
|
|
|
$ |
11,499 |
|
|
$ |
108,825 |
|
|
$ |
117,670 |
|
|
$ |
(13,613 |
) |
|
$ |
(7,283 |
) |
|
$ |
217,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,550 |
|
|
|
|
|
|
|
|
|
|
|
12,550 |
|
Other comprehensive loss, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on securities
available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,631 |
) |
|
|
(21,631 |
) |
Reclassification adjustment for
gains realized in net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(810 |
) |
|
|
(810 |
) |
Unrealized gain on derivative securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13 |
) |
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,550 |
|
|
|
|
|
|
|
(22,454 |
) |
|
|
(9,904 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of change in
accounting principle |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(813 |
) |
|
|
|
|
|
|
|
|
|
|
(813 |
) |
Common dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,154 |
) |
|
|
|
|
|
|
|
|
|
|
(6,154 |
) |
Acquisition of 128,100 treasury shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,112 |
) |
|
|
|
|
|
|
(4,112 |
) |
Acquisition of GreenPoint Insurance Group -
7,728 shares issued |
|
|
|
|
|
|
|
|
|
|
22 |
|
|
|
|
|
|
|
245 |
|
|
|
|
|
|
|
267 |
|
Equity-based compensation expense |
|
|
|
|
|
|
|
|
|
|
107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107 |
|
Tax benefit from exercise of stock options |
|
|
|
|
|
|
|
|
|
|
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29 |
|
Option exercises - 4,804 shares |
|
|
|
|
|
|
|
|
|
|
(57 |
) |
|
|
|
|
|
|
152 |
|
|
|
|
|
|
|
95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2008 |
|
$ |
|
|
|
$ |
11,499 |
|
|
$ |
108,926 |
|
|
$ |
123,253 |
|
|
$ |
(17,328 |
) |
|
$ |
(29,737 |
) |
|
$ |
196,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 1, 2009 (restated) |
|
$ |
40,419 |
|
|
$ |
12,051 |
|
|
$ |
128,526 |
|
|
$ |
106,104 |
|
|
$ |
(15,368 |
) |
|
$ |
(52,517 |
) |
|
$ |
219,215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of change in
accounting principle |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,131 |
|
|
|
|
|
|
|
(6,131 |
) |
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (restated) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,597 |
|
|
|
|
|
|
|
|
|
|
|
7,597 |
|
Other comprehensive loss, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on securities
available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,890 |
) |
|
|
(2,890 |
) |
Reclassification adjustment for
gains realized in net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(363 |
) |
|
|
(363 |
) |
Unrealized gain on derivative securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
350 |
|
|
|
350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,597 |
|
|
|
|
|
|
|
(2,903 |
) |
|
|
4,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred dividend, net |
|
|
106 |
|
|
|
|
|
|
|
(37 |
) |
|
|
(1,149 |
) |
|
|
|
|
|
|
|
|
|
|
(1,080 |
) |
Common dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,851 |
) |
|
|
|
|
|
|
|
|
|
|
(2,851 |
) |
Issuance of vested shares |
|
|
|
|
|
|
|
|
|
|
(22 |
) |
|
|
|
|
|
|
22 |
|
|
|
|
|
|
|
|
|
Equity-based compensation expense |
|
|
|
|
|
|
|
|
|
|
72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72 |
|
Common stock issuance -
5,290,000 shares issued |
|
|
|
|
|
|
5,290 |
|
|
|
56,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,668 |
|
Retirement plan contribution -
51,443 shares issued |
|
|
|
|
|
|
|
|
|
|
(962 |
) |
|
|
|
|
|
|
1,634 |
|
|
|
|
|
|
|
672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2009 (restated) |
|
$ |
40,525 |
|
|
$ |
17,341 |
|
|
$ |
183,955 |
|
|
$ |
115,832 |
|
|
$ |
(13,712 |
) |
|
$ |
(61,551 |
) |
|
$ |
282,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
- 7 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. General
Unaudited Consolidated Financial Statements
The accompanying unaudited consolidated financial statements of First Community Bancshares, Inc.
and subsidiaries (First Community or the Company) have been prepared in accordance with United
States generally accepted accounting principles (GAAP) for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all
adjustments, including normal recurring accruals, necessary for a fair presentation have been made.
These results are not necessarily indicative of the results of consolidated operations that might
be expected for the full calendar year.
The
consolidated balance sheet as of December 31, 2008, has been
derived from the restated audited
consolidated financial statements included in the Companys 2008
Annual Report on Form 10-K/A (the 2008 Form 10-K/A).
Certain information and footnote disclosures normally included in annual consolidated financial
statements prepared in accordance with GAAP have been omitted in accordance with standards for the
preparation of interim consolidated financial statements. These consolidated financial statements
should be read in conjunction with the consolidated financial statements and notes thereto included
in the Companys 2008 Form 10-K/A.
A more complete and detailed description of First Communitys significant accounting policies is
included within Footnote 1 of Item 8, Financial Statements and Supplementary Data in the
Companys 2008 Form 10-K/A. Further discussion of the Companys
application of critical accounting policies is included within the Application of Critical
Accounting Policies section of Part I, Item 2, Managements Discussion and Analysis of Financial
Condition and Results of Operations, included herein.
The Company operates within two business segments, banking and insurance services. Insurance
services are comprised of agencies which sell property and casualty and life and health insurance
policies and arrangements. All other operations, including commercial and consumer banking,
lending activities, and wealth management are included within the banking segment.
Earnings Per Share
Basic earnings per share is determined by dividing net income available to common shareholders by
the weighted average number of shares outstanding. Diluted earnings per share is determined by
dividing net income available to common shareholders by the weighted average shares outstanding,
which includes the dilutive effect of stock options, warrants and contingently issuable shares.
Basic and diluted net income per common share calculations follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
For the six months |
|
|
|
ended June 30, |
|
|
ended June 30, |
|
(Amounts in Thousands, Except Share and Per Share Data) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
(Restated) |
|
|
|
|
Net income available to common shareholders |
|
$ |
1,827 |
|
|
$ |
6,238 |
|
|
$ |
6,448 |
|
|
$ |
12,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
12,696,202 |
|
|
|
10,992,301 |
|
|
|
12,135,103 |
|
|
|
11,011,116 |
|
Dilutive shares for stock options |
|
|
2,411 |
|
|
|
58,134 |
|
|
|
4,274 |
|
|
|
57,593 |
|
Contingently issuable shares |
|
|
42,467 |
|
|
|
23,005 |
|
|
|
42,467 |
|
|
|
23,005 |
|
Common stock warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average dilutive shares outstanding |
|
|
12,741,080 |
|
|
|
11,073,440 |
|
|
|
12,181,843 |
|
|
|
11,091,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.14 |
|
|
$ |
0.57 |
|
|
$ |
0.53 |
|
|
$ |
1.14 |
|
Diluted earnings per share |
|
$ |
0.14 |
|
|
$ |
0.56 |
|
|
$ |
0.53 |
|
|
$ |
1.13 |
|
For the three- and six-month periods ended June 30, 2009, options and warrants to purchase
399,156 and 400,156 shares, respectively, of common stock were outstanding but were not included in
the computation of diluted earnings per common share because the exercise price was greater than
the market price of our common stock and, accordingly, they would have an anti-dilutive effect.
This compares to options to purchase 10,000 shares of common stock outstanding, but not included in
the
- 8 -
computation of diluted earnings per common share because their effect would be anti-dilutive for
the three- and six-month periods ended June 30, 2008.
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standard Board (FASB) issued Statement No. 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles
(SFAS 168). The Codification will become the source of authoritative US GAAP recognized by the
FASB to be applied by nongovernmental entities and will supersede all non-SEC accounting and
reporting standards. This statement is effective for financial statements issued for interim and
annual financial statements ending after September 15, 2009, and is not expected to have an impact
on the Companys consolidated financial statements.
In June 2009, the FASB issued Statement No. 167, Amendments to FASB Interpretation No. 46(R)
(SFAS 167). This statement, which is a revision to FIN 46(R), contains new criteria for
determining the primary beneficiary, eliminates the exception to consolidating QSPEs, requires
continual reconsideration of conclusions reached in determining the primary beneficiary, and
requires additional disclosures. SFAS 167 is effective as of the beginning of fiscal years
beginning after November 15, 2009 and is applied using a cumulative effect adjustment to retained
earnings for any carrying amount adjustments (e.g., for newly-consolidated VIEs). The Company does
not expect SFAS 167 to have a material effect on its financial condition, results of operations, or
liquidity.
In June 2009, the FASB issued Statement No. 166, Accounting for Transfers of Financial Assets
(SFAS 166). This statement, which is a revision to SFAS No. 140, eliminates the concept of a
qualifying special purpose entity (QSPE), changes the requirements for derecognizing financial
assets, and requires additional disclosures, including information about continuing exposure to
risks related to transferred financial assets. SFAS 166 is effective for financial asset transfers
occurring after the beginning of fiscal years beginning after November 15, 2009. The disclosure
requirements must be applied to transfers that occurred before and after the effective date, and
are not expected to have an impact on the Companys consolidated financial statements.
In May 2009, the FASB Statement No. 165, Subsequent Events (SFAS 165). This statement
establishes general standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or available to be issued. SFAS 165
defines (i) the period after the balance sheet date during which a reporting entitys management
should evaluate events or transactions that may occur for potential recognition or disclosure in
the financial statements, (ii) the circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its financial statements and (iii) the
disclosures an entity should make about events or transactions that occurred after the balance
sheet date. The Company adopted SFAS 165 effective April 1, 2009 and provided related disclosure in
Note 15.
In April 2009, the FASB issued FASB Staff Position (FSP) 107-1 and APB 28-1, Interim Disclosures
about Fair Value of Financial Instruments. The FSP requires a public entity to provide
disclosures about fair value of financial instruments in interim financial information. The FSP
will be effective for interim and annual financial periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009. The Company adopted the provisions of
FSP FAS 107-1 and APB 28-1 effective January 1, 2009 and
provided related disclosure in Note 13.
In April 2009, the FASB issued FSP FAS 115-2, FAS 124-2 and EITF 99-20-2, Recognition and
Presentation of Other-Than-Temporary-Impairment. The FSP (i) changes existing guidance for
determining whether an impairment is other than temporary to debt securities and (ii) replaces the
existing requirement that the entitys management assert it has both the intent and ability to hold
an impaired debt security until recovery with a requirement that management assert: (a) it does not
have the intent to sell the debt security; and (b) it is more likely than not that it will not have
to sell the debt security before recovery of its cost basis. Under the FSP, declines in the fair
value of held-to-maturity and available-for-sale debt securities below their cost that are deemed
to be other than temporary are reflected in earnings as realized losses to the extent the
impairment is related to credit losses. The amount of impairment related to other factors is
recognized in other comprehensive income. The Company adopted the provisions of FSP FAS 115-2, FAS
124-2 and EITF 99-20-2-1 effective January 1, 2009, which resulted in a cumulative effect credit
adjustment in retained earnings of approximately $6.13 million and provided related disclosure in
Note 4 to the Financial Statements.
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. The FSP affirms the objective of fair value when a market is not active,
clarifies and includes additional factors for determining whether there has been a significant
decrease in market activity, eliminates the presumption that all transactions are distressed unless
proven
- 9 -
otherwise, and requires an entity to disclose a change in valuation technique. The Company adopted
the provisions of FSP FAS 157-4 effective January 1, 2009, which did not have a material impact on
the Companys financial condition or results of operations and provided related disclosure in Note
12.
In May 2008, the FASB issued Statement No. 162, The Hierarchy of Generally Accepted Accounting
Principles (SFAS 162). This statement establishes a framework for selecting accounting
principles to be used in preparing financial statements that are presented in conformity with GAAP.
SFAS 162 was effective 60 days following the approval of the Public Company Accounting Oversight
Board Auditing amendments to AU Section 411, The Meaning of Present Fairly in Conformity with
Generally Accepted Accounting Principles by the Securities and Exchange Commission (SEC), and is
not expected to have an impact on the Companys consolidated financial statements.
In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and
Hedging Activities an amendment of FASB Statement No. 133 (SFAS 161). This statement
requires enhanced disclosures about an entitys derivative and hedging activities in order to
improve the transparency of financial reporting. Entities are required to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement 133 and its related
interpretations, and (c) how derivative instruments and related hedged items affect an entitys
financial position, financial performance, and cash flows. The Company adopted SFAS 161 effective
January 1, 2009, and the enhanced disclosures are included in
Note 12 Derivatives and Hedging
Activities.
In December 2007, the FASB revised Statement No. 141, Business Combinations (SFAS 141R). This
statement requires an acquirer to recognize the assets acquired, the liabilities assumed, and any
non-controlling interest in the acquiree at the acquisition date, measured at their fair values as
of that date. This statement recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase. This statement also defines the acquirer as the
entity that obtains control of one or more businesses in the business combination and establishes
the acquisition date as the date that the acquiree achieves control. Additionally this statement
determines what information to disclose to enable users of the financial statements to evaluate the
nature and financial effects of the business combination. In connection with its January 1, 2009,
adoption of SFAS 141R, the Company has expensed costs associated with recently announced
transactions. This standard will impact the accounting of the transaction related to the
acquisition of TriStone Community Bank that closed on July 30, 2009.
Note 2. Restatement of Consolidated Financial Statements
As a result of a routine internal audit, the Company determined there was a computational error in
the model that it uses to calculate the quantitative basis for its allowance for loan losses. In
connection with its determination of the appropriate loan loss reserve at December 31, 2008, the
Company made certain modifications to its loan loss reserve model with respect to a $130.76 million
pool of loans. However, in calculating the loan loss reserves for this pool of loans, the
historical quarterly net charge-off rates were not annualized as was the case with all other
quarterly loss rates in the model. The Company has corrected the computational error in its model
for calculating the allowance for loan losses.
Based on the Companys modeling using the corrected computations, the Company, in
consultation with the Audit Committee of its Board of Directors, determined that the
amount of the allowance for loan losses should be increased by an aggregate of $2.55
million for the period beginning December 31, 2008 and ending March 31, 2010.
In this
Form 10-Q/A, the Company is restating its unaudited consolidated balance sheet as of June 30, 2009. The consolidated statement of income and statement of
cash flows for the three months ended June 30, 2009, were not affected by the restatement. The
Company is also restating its unaudited consolidated statement of income,
statement of cash flows, and statement of changes in stockholders equity for the six months
ended June 30, 2009.
In its
2008 Form 10-K/A, which has been filed with the SEC, the Company restated its consolidated balance sheet, statements of income,
statements of cash flows and statement of changes in stockholders equity at and for the year
ended December 31, 2008.
For ease of reference, the effects of the restatement on the consolidated balance sheet for the
year ended December 31, 2008 is provided below in this Note 2.
The effects of the restatement by line item for the periods presented in this Quarterly Report on Form 10-Q/A follow.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact on Consolidated |
|
|
Balance Sheets |
|
|
June 30, 2009 |
|
December 31, 2008 |
|
|
As Previously |
|
|
|
|
|
|
|
|
|
As Previously |
|
|
|
|
(Amounts in Thousands) |
|
Reported |
|
As Restated |
|
Effect of Change |
|
Reported |
|
As Restated |
|
Effect of Change |
Allowance for loan losses |
|
$ |
16,678 |
|
|
$ |
18,543 |
|
|
$ |
1,865 |
|
|
$ |
15,978 |
|
|
$ |
17,782 |
|
|
$ |
1,804 |
|
Net loans
held for investment |
|
|
1,252,765 |
|
|
|
1,250,900 |
|
|
|
(1,865 |
) |
|
|
1,282,181 |
|
|
|
1,280,377 |
|
|
|
(1,804 |
) |
Other assets |
|
|
118,313 |
|
|
|
119,013 |
|
|
|
700 |
|
|
|
118,231 |
|
|
|
118,908 |
|
|
|
677 |
|
Total assets |
|
|
2,203,210 |
|
|
|
2,202,045 |
|
|
|
(1,165 |
) |
|
|
2,133,314 |
|
|
|
2,132,187 |
|
|
|
(1,127 |
) |
Retained earnings |
|
|
116,997 |
|
|
|
115,832 |
|
|
|
(1,165 |
) |
|
|
107,231 |
|
|
|
106,104 |
|
|
|
(1,127 |
) |
Total stockholders equity |
|
|
283,555 |
|
|
|
282,390 |
|
|
|
(1,165 |
) |
|
|
220,342 |
|
|
|
219,215 |
|
|
|
(1,127 |
) |
- 10 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact on Consolidated |
|
|
Statements of Income |
|
|
Six Months Ended June 30, 2009 |
|
|
As Previously |
|
|
|
|
|
Effect of |
(Amounts in Thousands, except per share data) |
|
Reported |
|
As Restated |
|
Change |
Provision for loan losses |
|
$ |
4,639 |
|
|
$ |
4,700 |
|
|
$ |
61 |
|
Net interest income after provision for loan losses |
|
|
28,115 |
|
|
|
28,054 |
|
|
|
(61 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
10,824 |
|
|
|
10,763 |
|
|
|
(61 |
) |
Income tax expense |
|
|
3,189 |
|
|
|
3,166 |
|
|
|
(23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
7,635 |
|
|
|
7,597 |
|
|
|
(38 |
) |
Net income to common shareholders |
|
|
6,486 |
|
|
|
6,448 |
|
|
|
(38 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.53 |
|
|
$ |
0.53 |
|
|
$ |
|
|
Diluted |
|
$ |
0.53 |
|
|
$ |
0.53 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact on Consolidated |
|
|
Statements of Cash Flows |
|
|
Six Months Ended June 30, 2009 |
|
|
As Previously |
|
|
|
|
|
Effect of |
(Amounts in Thousands) |
|
Reported |
|
As Restated |
|
Change |
Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
7,635 |
|
|
$ |
7,597 |
|
|
$ |
(38 |
) |
Provision for loan losses |
|
|
4,639 |
|
|
|
4,700 |
|
|
|
61 |
|
Deferred income tax benefit |
|
|
(588 |
) |
|
|
(611 |
) |
|
|
(23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact on Consolidated |
|
|
Statements of |
|
|
Changes in Stockholders Equity |
|
|
Six Months Ended June 30, 2009 |
|
|
As Previously |
|
|
|
|
|
Effect of |
(Amounts in Thousands) |
|
Reported |
|
As Restated |
|
Change |
Total retained earnings, January 1 |
|
$ |
107,231 |
|
|
$ |
106,104 |
|
|
$ |
(1,127 |
) |
Net income |
|
|
7,635 |
|
|
|
7,597 |
|
|
|
(38 |
) |
Total retained earnings, June 30 |
|
|
116,997 |
|
|
|
115,832 |
|
|
|
(1,165 |
) |
Note 3. Mergers, Acquisitions, and Branching Activity
On April 2, 2009, the Company
signed a definitive agreement providing for the acquisition of
TriStone Community Bank (TriStone), a $152.42 million state-chartered commercial bank
headquartered in Winston-Salem, North Carolina. Under the terms of the merger agreement, subject to
dissenters rights, shares of TriStone were exchanged for .5262 shares of the Companys
common stock, resulting in a purchase price of approximately $10.73 million. TriStone was
merged with and into the Companys wholly-owned national bank subsidiary, First
Community Bank, N. A., on July 31, 2009, and at acquisition, had total assets of approximately
$165.53 million, loans of approximately $132.23 million, and deposits of approximately
$142.22 million.
On November 14, 2008, the Company completed the acquisition of Coddle Creek Financial Corp.
(Coddle Creek), based in Mooresville, North Carolina. Coddle Creek had three full service
locations in Mooresville, Cornelius, and Huntersville, North Carolina. At acquisition, Coddle
Creek had total assets of approximately $158.66 million, loans of approximately $136.99 million,
and deposits of approximately $137.06 million. Under the terms of the merger agreement, shares of
Coddle Creek were exchanged for .9046 shares of the Companys common stock and $19.60 in cash, for
a total purchase price of approximately $32.29 million. As a result of the acquisition and
purchase price allocation, approximately $14.41 million in goodwill was recorded, which represents
the excess purchase price over the fair market value of the net assets acquired and identified
intangibles.
Since January 1, 2008, GreenPoint Insurance Group, Inc., the Companys wholly-owned insurance
agency subsidiary, has acquired a total of five agencies, issuing cash consideration of
approximately $2.04 million. Acquisition terms in all instances call for additional cash
consideration if certain operating performance targets are met. If those targets are met, the
value of the consideration ultimately paid will be added to the cost of the acquisitions. Goodwill
and other intangibles associated with those acquisitions total approximately $2.04 million.
The Company
opened a new branch location in Grafton, West Virginia, in June 2009.
- 11 -
Note 4. Investment Securities
As of June 30, 2009, and December 31, 2008, the amortized cost and estimated fair value of
available-for-sale securities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
(In Thousands) |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
U.S. Government agency securities |
|
$ |
53,426 |
|
|
$ |
428 |
|
|
$ |
(24 |
) |
|
$ |
53,830 |
|
States and political subdivisions |
|
|
136,358 |
|
|
|
1,143 |
|
|
|
(3,535 |
) |
|
|
133,966 |
|
Trust preferred securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single issue |
|
|
55,552 |
|
|
|
|
|
|
|
(23,041 |
) |
|
|
32,511 |
|
Pooled |
|
|
90,270 |
|
|
|
|
|
|
|
(62,120 |
) |
|
|
28,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trust preferred securities |
|
|
145,822 |
|
|
|
|
|
|
|
(85,162 |
) |
|
|
60,661 |
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency |
|
|
250,279 |
|
|
|
3,823 |
|
|
|
(1,600 |
) |
|
|
252,502 |
|
Non-Agency prime residential |
|
|
6,596 |
|
|
|
|
|
|
|
(1,338 |
) |
|
|
5,258 |
|
Non-Agency Alt-A residential |
|
|
20,968 |
|
|
|
|
|
|
|
(10,465 |
) |
|
|
10,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities |
|
|
277,843 |
|
|
|
3,823 |
|
|
|
(13,403 |
) |
|
|
268,263 |
|
Equities |
|
|
5,476 |
|
|
|
400 |
|
|
|
(717 |
) |
|
|
5,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
618,925 |
|
|
$ |
5,794 |
|
|
$ |
(102,840 |
) |
|
$ |
521,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
U.S. Government agency securities |
|
$ |
53,425 |
|
|
$ |
1,393 |
|
|
$ |
|
|
|
$ |
54,818 |
|
States and political subdivisions |
|
|
163,042 |
|
|
|
864 |
|
|
|
(4,487 |
) |
|
|
159,419 |
|
Trust preferred securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single Issue |
|
|
55,491 |
|
|
|
|
|
|
|
(21,950 |
) |
|
|
33,541 |
|
Pooled |
|
|
93,269 |
|
|
|
|
|
|
|
(60,757 |
) |
|
|
32,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trust preferred securities |
|
|
148,760 |
|
|
|
|
|
|
|
(82,707 |
) |
|
|
66,053 |
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency |
|
|
212,315 |
|
|
|
4,649 |
|
|
|
(2 |
) |
|
|
216,962 |
|
Non-Agency prime residential |
|
|
7,423 |
|
|
|
|
|
|
|
(1,657 |
) |
|
|
5,766 |
|
Non-Agency Alt-A residential |
|
|
10,750 |
|
|
|
|
|
|
|
|
|
|
|
10,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities |
|
|
230,488 |
|
|
|
4,649 |
|
|
|
(1,659 |
) |
|
|
233,478 |
|
Equities |
|
|
7,979 |
|
|
|
357 |
|
|
|
(1,381 |
) |
|
|
6,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
603,694 |
|
|
$ |
7,263 |
|
|
$ |
(90,234 |
) |
|
$ |
520,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 12 -
As of June 30, 2009, and December 31, 2008, the amortized cost and estimated fair value of
held-to-maturity securities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
(In Thousands) |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
States and political subdivisions |
|
$ |
7,725 |
|
|
$ |
121 |
|
|
$ |
|
|
|
$ |
7,846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
7,725 |
|
|
$ |
121 |
|
|
$ |
|
|
|
$ |
7,846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
States and political subdivisions |
|
$ |
8,670 |
|
|
$ |
133 |
|
|
$ |
(1 |
) |
|
$ |
8,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
8,670 |
|
|
$ |
133 |
|
|
$ |
(1 |
) |
|
$ |
8,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and estimated fair value of available-for-sale securities by contractual
maturity, at June 30, 2009, are shown below. Expected maturities may differ from contractual
maturities because issuers may have the right to call or prepay obligations with or without call or
prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
|
|
|
|
Cost |
|
|
Fair Value |
|
|
|
(Dollars in Thousands) |
|
Due within one year |
|
$ |
1,329 |
|
|
$ |
1,340 |
|
Due after one year but within
five years |
|
|
4,680 |
|
|
|
4,763 |
|
Due after five years but within
ten years |
|
|
71,416 |
|
|
|
71,751 |
|
Due after ten years |
|
|
258,181 |
|
|
|
170,603 |
|
|
|
|
|
|
|
|
|
|
|
335,606 |
|
|
|
248,457 |
|
Mortgage-backed securities |
|
|
277,843 |
|
|
|
268,263 |
|
Equity securities |
|
|
5,476 |
|
|
|
5,159 |
|
|
|
|
|
|
|
|
Total |
|
$ |
618,925 |
|
|
$ |
521,879 |
|
|
|
|
|
|
|
|
The amortized cost and estimated fair value of held-to-maturity securities by contractual maturity,
at June 30, 2009, are shown below. Expected maturities may differ from contractual maturities
because issuers may have the right to call or prepay obligations with or without call or prepayment
penalties.
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
|
|
|
|
Cost |
|
|
Fair Value |
|
|
|
(Dollars in Thousands) |
|
Due within one year |
|
$ |
1,091 |
|
|
$ |
1,105 |
|
Due after one year but within
five years |
|
|
3,988 |
|
|
|
4,053 |
|
Due after five years but
within ten years |
|
|
|
|
|
|
|
|
Due after ten years |
|
|
2,646 |
|
|
|
2,688 |
|
|
|
|
|
|
|
|
Total |
|
$ |
7,725 |
|
|
$ |
7,846 |
|
|
|
|
|
|
|
|
The carrying value of securities pledged to secure public deposits and for other purposes required
by law were $355.27 million and $377.56 million at June 30, 2009, and December 31, 2008,
respectively.
During the three months ended June 30, 2009, net gains on the sale of securities were $1.65
million. Gross gains were $1.67 million while gross losses were $16 thousand. During the six
months ended June 30, 2009, net gains on the sale of securities were $2.06 million. Gross gains
were $2.87 million while gross losses were $805 thousand.
- 13 -
The following table reflects those investments in an unrealized loss position at June 30, 2009, and
December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
Description of Securities |
|
Less than 12 Months |
|
|
12 Months or longer |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
(In Thousands) |
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
U. S. Government
agency securities |
|
$ |
9,411 |
|
|
$ |
(24 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
9,411 |
|
|
$ |
(24 |
) |
States and political
subdivisions |
|
|
47,796 |
|
|
|
(1,757 |
) |
|
|
16,844 |
|
|
|
(1,778 |
) |
|
|
64,640 |
|
|
|
(3,535 |
) |
Trust preferred securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single Issue |
|
|
|
|
|
|
|
|
|
|
32,511 |
|
|
|
(23,041 |
) |
|
|
32,511 |
|
|
|
(23,041 |
) |
Pooled |
|
|
|
|
|
|
|
|
|
|
26,906 |
|
|
|
(62,120 |
) |
|
|
26,906 |
|
|
|
(62,120 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trust preferred
securities |
|
|
|
|
|
|
|
|
|
|
59,417 |
|
|
|
(85,162 |
) |
|
|
59,417 |
|
|
|
(85,162 |
) |
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency |
|
|
73,616 |
|
|
|
(1,599 |
) |
|
|
42 |
|
|
|
(1 |
) |
|
|
73,658 |
|
|
|
(1,600 |
) |
Prime residential |
|
|
|
|
|
|
|
|
|
|
5,258 |
|
|
|
(1,338 |
) |
|
|
5,258 |
|
|
|
(1,338 |
) |
Alt-A residential |
|
|
|
|
|
|
|
|
|
|
10,503 |
|
|
|
(10,465 |
) |
|
|
10,503 |
|
|
|
(10,465 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed
securities |
|
|
73,616 |
|
|
|
(1,599 |
) |
|
|
15,803 |
|
|
|
(11,804 |
) |
|
|
89,419 |
|
|
|
(13,403 |
) |
Equity securities |
|
|
565 |
|
|
|
(164 |
) |
|
|
1,229 |
|
|
|
(553 |
) |
|
|
1,794 |
|
|
|
(717 |
) |
Total |
|
$ |
131,388 |
|
|
$ |
(3,544 |
) |
|
$ |
93,293 |
|
|
$ |
(99,296 |
) |
|
$ |
234,681 |
|
|
$ |
(102,840 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
Less than 12 Months |
|
|
12 Months or longer |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
Description of Securities |
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
U. S. Government agency
securities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
States and political
subdivisions |
|
|
85,374 |
|
|
|
(2,948 |
) |
|
|
16,413 |
|
|
|
(1,539 |
) |
|
|
101,787 |
|
|
|
(4,487 |
) |
Trust preferred securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single Issue |
|
|
|
|
|
|
|
|
|
|
30,693 |
|
|
|
(21,950 |
) |
|
|
30,693 |
|
|
|
(21,950 |
) |
Pooled |
|
|
|
|
|
|
|
|
|
|
29,567 |
|
|
|
(60,757 |
) |
|
|
29,567 |
|
|
|
(60,757 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trust preferred
securities |
|
|
|
|
|
|
|
|
|
|
60,260 |
|
|
|
(82,707 |
) |
|
|
60,260 |
|
|
|
(82,707 |
) |
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency |
|
|
42,674 |
|
|
|
(1 |
) |
|
|
43 |
|
|
|
(1 |
) |
|
|
42,717 |
|
|
|
(2 |
) |
Prime residential |
|
|
5,766 |
|
|
|
(1,657 |
) |
|
|
|
|
|
|
|
|
|
|
5,766 |
|
|
|
(1,657 |
) |
Alt-A residential |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed
securities |
|
|
48,440 |
|
|
|
(1,658 |
) |
|
|
43 |
|
|
|
(1 |
) |
|
|
48,483 |
|
|
|
(1,659 |
) |
Equity securities |
|
|
2,167 |
|
|
|
(1,161 |
) |
|
|
2,201 |
|
|
|
(220 |
) |
|
|
4,368 |
|
|
|
(1,381 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
135,981 |
|
|
$ |
(5,767 |
) |
|
$ |
78,917 |
|
|
$ |
(84,467 |
) |
|
$ |
214,898 |
|
|
$ |
(90,234 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
June 30, 2009, the combined depreciation in value of the 207 individual securities in an
unrealized loss position was approximately 19.42% of the combined reported value of the aggregate
securities portfolio. At December 31, 2008, the combined depreciation in value of the 310
individual securities in an unrealized loss position was approximately 17.04% of the combined
reported value of the aggregate securities portfolio.
The
Company reviews its investment portfolio on a quarterly basis for indications of other-than-temporary
impairment (OTTI). The analysis differs depending upon the type of investment security is being
analyzed. First, for all debt securities we have determined that we do not intend to sell
securities that are impaired and have asserted that it is not more likely than not that we will
have to sell impaired securities before recovery of the impairment occurs. Our assertion is based
upon our investment strategy for the particular type of security, the Companys cash flow needs,
liquidity position, capital adequacy and interest rate risk position.
For analysis of non-beneficial interest debt securities, we analyze several qualitative factors
such as the severity and duration of the impairment, adverse conditions within the issuing industry,
prospects for the issuer, performance of the security, changes in rating by rating agencies and
other qualitative factors to determine if the impairment will be recovered. If it is
- 14 -
determined
that there is evidence that the impairment will not be recovered, we perform a present value
calculation to determine the amount of credit related impairment and record any credit related OTTI
through earnings and the non-credit related OTTI through other comprehensive income (OCI).
During the three and six months ended June 30, 2009 and 2008, respectively, we incurred no OTTI
charges related to non-beneficial interest debt securities. The impairment on these securities is
primarily related to changes in interest rates, certain disruptions in the credit markets, and
other current economic factors that did not lead to OTTI.
For analysis of beneficial interest debt securities, we prepare cash flow analyses on each
applicable security to determine if an adverse change in cash flows expected to be collected has
occurred. An adverse change in cash flows expected to be collected has occurred if the present
value of cash flows previously projected is greater than the present value of cash flows projected
at the current reporting date and less than the current book value. If an adverse change in cash
flows is deemed to have occurred, then OTTI has occurred. We then compare the present value of
cash flows using the current yield for the current reporting period and compare it to the reference
amount, or current net book value, to determine the credit-related OTTI. The credit-related OTTI
is then recorded through earnings and the non-credit related OTTI is accounted for in OCI.
During the three- and six- month periods ended June 30, 2009, we incurred credit-related OTTI
charges of $3.37 million and non-credit related impairment of $22.85 million for beneficial
interest debt securities. For the beneficial interest debt securities not deemed to have incurred
OTTI, we have concluded that the primary difference in the fair value of the securities and our
cash flow model is the significantly higher rate of return currently demanded by market
participants in this illiquid and inactive market as compared to the rate of return that we
received when we purchased the security in a normally functioning market.
The cash flow projections for the pooled trust preferred securities beneficial interest debt
securities utilize a discounted cash flow test that uses variables such as the estimate of future
cash flows, creditworthiness of the underlying banks and determination of probability of default of
the underlying collateral. Cash flows are constructed in an INTEX cash flow model. INTEX is a
proprietary cash flow model recognized as the industry standard for analyzing all types of
collateralized debt obligations. It includes each individual deals structural features updated
with trustee information, including asset-by-asset detail, as it becomes available. The modeled
cash flows are then used to determine if all the scheduled principal and interest payments of our
investments will be returned.
The expected future default assumptions for the pooled trust preferred securities are based upon
the approximate level of depository institution failures experienced during the savings and loan
crisis in the late 1980s and early 1990s. Those default rates equate to 3% constant default in
2009 and 2010, 2.5% in 2011, 2% in 2012, 1% in 2013, and 0.25% in 2014 and beyond. This is an
increase from the 0.75% constant default rate used in prior projections. Banks currently in
default or deferring interest payments are assigned a 100% probability of default. In all cases, a
15% projected recovery rate is applied to current deferrals and projected defaults.
In addition, the risk of future OTTI may be influenced by additional bank failures, prolonged
recession in the U.S. economy, changes in real estate values, interest deferrals, and whether the
federal government provides assistance to certain financial institutions.
For the non-Agency Alt-A MBS, we model cash flows using the following assumptions: constant
prepayment speed of 5, a customized constant default rate scenario starting at 15 for the first six
quarters declining to 3 beginning with the fourth year, and a default severity of 45.
- 15 -
The following table presents in more detail the Companys single-issue and pooled trust preferred
security holdings as of June 30, 2009. These details are listed separately due to the inherent
level of risk for OTTI within these portfolios.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars In Thousands) |
|
June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferrals/Defaults |
|
|
Excess Subordination |
|
|
|
|
|
Current |
|
Credit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class/ |
|
Credit |
|
Rating at |
|
Issuing |
|
Book |
|
|
Fair |
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
Percent of |
|
Deal Name |
|
Tranche |
|
Rating |
|
Purchase |
|
Banks |
|
Value |
|
|
Value |
|
|
Amount |
|
|
Deal |
|
|
Amount |
|
|
Deal |
|
Single-issuer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BankAmerica Cap |
|
n/a |
|
BBB |
|
A+ |
|
|
1 |
|
|
$ |
3,079 |
|
|
$ |
2,329 |
|
|
None |
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
BankBoston Cap |
|
n/a |
|
AA |
|
A+ |
|
|
1 |
|
|
|
4,901 |
|
|
|
2,956 |
|
|
None |
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
Chase Capital II |
|
n/a |
|
A |
|
A |
|
|
1 |
|
|
|
3,618 |
|
|
|
2,128 |
|
|
None |
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
CoreStates Capital I |
|
n/a |
|
A |
|
A+ |
|
|
1 |
|
|
|
2,933 |
|
|
|
1,498 |
|
|
None |
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
First Chicago NDB CA |
|
n/a |
|
A |
|
A |
|
|
1 |
|
|
|
1,435 |
|
|
|
840 |
|
|
None |
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
JPMorgan Chase Cap X |
|
n/a |
|
A |
|
A |
|
|
1 |
|
|
|
5,013 |
|
|
|
2,818 |
|
|
None |
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
NB-Global |
|
n/a |
|
BBB |
|
A+ |
|
|
1 |
|
|
|
20,751 |
|
|
|
12,486 |
|
|
None |
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
NTC Capital I Float |
|
n/a |
|
A |
|
A2 |
|
|
1 |
|
|
|
4,006 |
|
|
|
2,119 |
|
|
None |
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
SunTrust Banks |
|
n/a |
|
BBB |
|
A |
|
|
1 |
|
|
|
4,940 |
|
|
|
2,625 |
|
|
None |
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
Wachovia Cap II |
|
n/a |
|
A |
|
A+ |
|
|
1 |
|
|
|
4,876 |
|
|
|
2,712 |
|
|
None |
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
55,552 |
|
|
$ |
32,511 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pooled |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PreTSL X |
|
B1 |
|
CC |
|
A |
|
|
58 |
|
|
$ |
8,779 |
|
|
$ |
4,436 |
|
|
$ |
126,625 |
|
|
|
32.5 |
% |
|
$ |
14,000 |
|
|
|
4.0 |
% |
PreTSL XII |
|
B1 |
|
CC |
|
A |
|
|
79 |
|
|
|
19,551 |
|
|
|
10,006 |
|
|
|
142,600 |
|
|
|
22.4 |
% |
|
|
48,500 |
|
|
|
8.0 |
% |
PreTSL XIV |
|
B1 |
|
CC |
|
A |
|
|
64 |
|
|
|
9,000 |
|
|
|
6,439 |
|
|
|
51,000 |
|
|
|
11.9 |
% |
|
|
77,000 |
|
|
|
18.0 |
% |
PreTSL XVI |
|
C |
|
CC |
|
A |
|
|
50 |
|
|
|
4,024 |
|
|
|
914 |
|
|
|
111,910 |
|
|
|
22.5 |
% |
|
|
57,500 |
|
|
|
12.0 |
% |
PreTSL XXII |
|
C1 |
|
CC |
|
A |
|
|
82 |
|
|
|
12,631 |
|
|
|
1,293 |
|
|
|
231,500 |
|
|
|
20.0 |
% |
|
|
182,500 |
|
|
|
16.0 |
% |
PreTSL XXIII |
|
C1 |
|
CCC |
|
A |
|
|
70 |
|
|
|
7,934 |
|
|
|
2,480 |
|
|
|
191,500 |
|
|
|
16.0 |
% |
|
|
250,000 |
|
|
|
21.0 |
% |
PreTSL XXVI |
|
C1 |
|
CC |
|
A |
|
|
64 |
|
|
|
6,984 |
|
|
|
395 |
|
|
|
159,000 |
|
|
|
19.7 |
% |
|
|
125,000 |
|
|
|
16.0 |
% |
SLOSO 2007 1A |
|
A3L |
|
CC |
|
A |
|
|
56 |
|
|
|
1,244 |
|
|
|
1,244 |
|
|
|
52,500 |
|
|
|
11.1 |
% |
|
|
140 |
|
|
|
0.0 |
% |
TRAPEZA SER 13A |
|
D |
|
C |
|
A |
|
|
63 |
|
|
|
20,123 |
|
|
|
943 |
|
|
|
66,000 |
|
|
|
9.7 |
% |
|
|
1,263 |
|
|
|
0.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
90,270 |
|
|
$ |
28,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The collateral underlying the pooled trust preferred securities is comprised of 86% of bank trust
preferred securities and subordinated debt issuances of over 580 banks nationwide. The remaining
collateral is from insurance companies and real estate investment trusts.
The table below provides a cumulative roll forward of credit losses recognized in earnings for debt
securities held and not intended to be sold:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Six Months |
|
(In Thousands) |
|
Ended June 30, 2009 |
|
|
Ended June 30, 2009 |
|
Estimated credit losses, beginning balance* |
|
|
19,707 |
|
|
|
19,707 |
|
Additions for credit losses not previously recognized |
|
|
3,370 |
|
|
|
3,370 |
|
Reduction for increases in cash flows |
|
|
|
|
|
|
|
|
Reduction for realized losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated credit losses as of June 30, 2009 |
|
$ |
23,077 |
|
|
$ |
23,077 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
The beginning balance includes credit related losses included in other-than-temporary impairment
charges recognized on debt securities in prior periods. |
During the first quarter of 2009, the Company adopted FSP FAS 115-2, FAS 124-2 and EITF 99-20-2,
Recognition and Presentation of Other-Than-Temporary-Impairment which amended the assessment
criteria for recognizing and measuring OTTI related to debt securities. It also amends the
presentation requirements for OTTI and significantly impacted disclosures of all investment
securities. In 2008, $14.47 million in pre-tax other-than-temporary impairment charges related to
a non-Agency Alt-A mortgage-backed security were recognized, of which $4.25 million was credit
related. As a result of the adoption in the first quarter of 2009, the Company made a cumulative
effect adjustment to increase retained earnings and decrease AOCI by
- 16 -
approximately $6.13 million, net of tax. The cumulative effect
adjustment represented the non-credit related portion of OTTI losses
recognized in prior year earnings, net of tax. In 2008, the Company also recognized impairment
charges of $15.46 million on a 2007 pooled trust preferred security. The Company determined that
it was appropriate not to make a cumulative effect adjustment for that security.
For equity securities, the Company reviews for OTTI based upon the
prospects of the underlying companies, analyst expectations, and
certain other qualitative factors. During the three- and six-month
periods ended June 30, 2009, the Company recognized OTTI charges
on certain of its equity positions of $406 thousand and
$615 thousand, respectively.
As a condition to membership in the FHLB system, the Company is required to subscribe to a minimum
level of stock in the FHLB of Atlanta (FHLBA). The Company feels this ownership position provides access to
relatively inexpensive wholesale and overnight funding. As per AICPA guidance, the Company
accounts for FHLBA and Federal Reserve Bank stock as a long-term investment in other assets. At
June 30, 2009, and December 31, 2008, the Company owned approximately $12.81 million and
$13.17 million in FHLBA stock, respectively, which is classified as other assets. The Companys
policy is to review for impairment at each reporting period, similar to our policy for other cost
method investments under SOP 01-6 and FSP FAS 115-1. During the six
months ended June 30, 2009, the FHLB repurchased excess
activity-based stock from the Company and has recently reinstituted quarterly dividends. At June 30, 2009, FHLBA
was in compliance with all of its regulatory capital requirements. Based on our review, we believe that, as of
June 30, 2009, and December 31, 2008, our FHLBA stock was not impaired.
Note 5. Loans
Loans, net of unearned income, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
December 31, 2008 |
|
(Dollars in Thousands) |
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
Loans held for investment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial, and agricultural |
|
$ |
83,873 |
|
|
|
6.61 |
% |
|
$ |
85,034 |
|
|
|
6.55 |
% |
Real estate commercial |
|
|
410,473 |
|
|
|
32.33 |
% |
|
|
407,638 |
|
|
|
31.40 |
% |
Real estate construction |
|
|
112,361 |
|
|
|
8.85 |
% |
|
|
130,610 |
|
|
|
10.06 |
% |
Real estate residential |
|
|
594,646 |
|
|
|
46.85 |
% |
|
|
602,573 |
|
|
|
46.42 |
% |
Consumer |
|
|
62,077 |
|
|
|
4.89 |
% |
|
|
66,258 |
|
|
|
5.10 |
% |
Other |
|
|
6,014 |
|
|
|
0.47 |
% |
|
|
6,046 |
|
|
|
0.47 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,269,443 |
|
|
|
100.00 |
% |
|
$ |
1,298,159 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale |
|
$ |
802 |
|
|
|
|
|
|
$ |
1,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company is a party to financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of its customers. These financial instruments include
commitments to extend credit, standby letters of credit and financial guarantees. These
instruments involve, to varying degrees, elements of credit and interest rate risk beyond the
amount recognized on the balance sheet. The contractual amounts of those instruments reflect the
extent of involvement the Company has in particular classes of financial instruments. The
Companys exposure to credit loss in the event of non-performance by the other party to the
financial instrument for commitments to extend credit and standby letters of credit and financial
guarantees written is represented by the contractual amount of those instruments. The Company uses
the same credit policies in making commitments and conditional obligations as it does for
on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is not a
violation of any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each customers
creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary
by the Company upon extension of credit, is based on managements credit evaluation of the
counterparties. Collateral held varies but may include accounts receivable, inventory, property,
plant and equipment, and income-producing commercial properties.
Standby letters of credit and written financial guarantees are conditional commitments issued by
the Company to guarantee the performance of a customer to a third party. The credit risk involved
in issuing letters of credit is essentially the same as that involved in extending loan facilities
to customers. To the extent deemed necessary, collateral of varying types and amounts is held to
secure customer performance under certain of those letters of credit outstanding.
Financial instruments whose contract amounts represent credit risk are commitments to extend credit
(including availability of lines of credit) of $209.60 million and standby letters of credit and
financial guarantees written of $2.14 million at June 30, 2009. Additionally, the Company had
gross notional amount of outstanding commitments to lend related to secondary market mortgage loans
of $7.31 million at June 30, 2009.
- 17 -
Note 6. Allowance for Loan Losses
The allowance for loan losses is maintained at a level sufficient to absorb probable loan losses
inherent in the loan portfolio. The allowance is increased by charges to earnings in the form of
provision for loan losses and recoveries of prior loan charge-offs, and decreased by loans charged
off. The provision is calculated to bring the allowance to a level which, according to a
systematic process of measurement, reflects the amount management estimates is needed to absorb
probable losses within the portfolio.
Management performs periodic assessments to determine the appropriate level of allowance.
Differences between actual loan loss experience and estimates are reflected through adjustments
that are made by either increasing or decreasing the loss provision based upon current measurement
criteria. Commercial, consumer and mortgage loan portfolios are evaluated separately for purposes
of determining the allowance. The specific components of the allowance include allocations to
individual commercial credits and allocations to the remaining non-homogeneous and homogeneous
pools of loans. Managements allocations are based on judgment of qualitative and quantitative
factors about both macro and micro economic conditions reflected within the portfolio of loans and
the economy as a whole. Factors considered in this evaluation include, but are not necessarily
limited to, probable losses from loan and other credit arrangements, general economic conditions,
changes in credit concentrations or pledged collateral, historical loan loss experience, and trends
in portfolio volume, maturities, composition, delinquencies, and non-accruals. While management
has allocated the allowance for loan losses to various portfolio segments, the entire allowance is
available for use against any type of loan loss deemed appropriate by management.
The following table details the Companys allowance for loan loss activity for the three- and
six-month periods ended June 30, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In Thousands) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(Restated) |
|
|
|
|
|
(Restated) |
|
|
|
|
Beginning balance |
|
$ |
18,420 |
|
|
$ |
12,862 |
|
|
$ |
17,782 |
|
|
$ |
12,833 |
|
Provision for loan
losses |
|
|
2,552 |
|
|
|
937 |
|
|
|
4,700 |
|
|
|
1,260 |
|
Charge-offs |
|
|
(2,681 |
) |
|
|
(1,198 |
) |
|
|
(4,411 |
) |
|
|
(2,164 |
) |
Recoveries |
|
|
252 |
|
|
|
832 |
|
|
|
472 |
|
|
|
1,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
18,543 |
|
|
$ |
13,433 |
|
|
$ |
18,543 |
|
|
$ |
13,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7. Deposits
The following is a summary of interest-bearing deposits by type as of June 30, 2009, and December
31, 2008.
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(In Thousands) |
|
2009 |
|
|
2008 |
|
Interest-bearing demand deposits |
|
$ |
195,905 |
|
|
$ |
185,117 |
|
Savings and money market deposits |
|
|
311,435 |
|
|
|
309,577 |
|
Certificates of deposit |
|
|
837,475 |
|
|
|
809,352 |
|
Total |
|
$ |
1,344,815 |
|
|
$ |
1,304,046 |
|
|
|
|
|
|
|
|
- 18 -
Note 8. Borrowings
The following schedule details the Companys Federal Home Loan Bank (FHLB) borrowings and other
indebtedness at June 30, 2009, and December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(In Thousands) |
|
2009 |
|
|
2008 |
|
FHLB borrowings |
|
$ |
175,000 |
|
|
$ |
200,000 |
|
Subordinated debt |
|
|
15,464 |
|
|
|
15,464 |
|
Other long-term debt |
|
|
399 |
|
|
|
413 |
|
|
|
|
|
|
|
|
Total |
|
$ |
190,863 |
|
|
$ |
215,877 |
|
|
|
|
|
|
|
|
FHLB borrowings included $175.00 million in convertible and callable advances at June 30, 2009.
The weighted average interest rate of advances was 2.70% and 3.70% at June 30, 2009, and December
31, 2008, respectively.
The Company has entered into a derivative interest rate swap instrument where it receives
LIBOR-based variable interest payments and pays fixed interest payments. The notional amount of
the derivative swap is $50.00 million and effectively fixes a portion of the FHLB borrowings at
approximately 4.34%. After considering the effect of the interest rate swap, the effective
weighted average interest rate of all FHLB borrowings was 3.73% at June 30, 2009. The fair value
of the interest rate swap was a liability of $2.75 million at June 30, 2009.
At June 30, 2009, the FHLB advances have approximate contractual maturities between seven and
twelve years. The scheduled maturities of the advances are as follows:
|
|
|
|
|
(In Thousands) |
|
Amount |
|
2009 |
|
$ |
|
|
2010 |
|
|
|
|
2011 |
|
|
|
|
2012 |
|
|
|
|
2013 |
|
|
|
|
2014 and thereafter |
|
|
175,000 |
|
|
|
|
|
Total |
|
$ |
175,000 |
|
|
|
|
|
The callable advances may be redeemed at quarterly intervals after various lockout periods. These
call options may substantially shorten the lives of these instruments. If these advances are
called, the debt may be paid in full, converted to another FHLB credit product, or converted to a
fixed or adjustable rate advance. Prepayment of the advances may result in substantial penalties
based upon the differential between contractual note rates and current advance rates for similar
maturities. Advances from the FHLB are secured by stock in the FHLB of Atlanta, qualifying loans,
mortgage-backed securities, and certain other securities.
Also included in other indebtedness is $15.46 million of junior subordinated debentures (the
Debentures) issued by the Company in October 2003 to an unconsolidated trust subsidiary, FCBI
Capital Trust (the Trust), with an interest rate of three-month LIBOR plus 2.95%. The Trust was
able to purchase the Debentures through the issuance of trust preferred securities which had
substantially identical terms as the Debentures. The Debentures mature on October 8, 2033, and are
currently callable.
The Company has committed to irrevocably and unconditionally guarantee the following payments or
distributions with respect to the preferred securities to the holders thereof to the extent that
the Trust has not made such payments or distributions: (i) accrued and unpaid distributions, (ii)
the redemption price, and (iii) upon a dissolution or termination of the trust, the lesser of the
liquidation amount and all accrued and unpaid distributions and the amount of assets of the trust
remaining available for distribution, in each case to the extent the Trust has funds available.
- 19 -
Note 9. Net Periodic Benefit Cost-Defined Benefit Plans
The following sets forth the components of the net periodic benefit cost of the domestic
non-contributory defined benefit plan for the three- and six- month periods ended June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
(In Thousands) |
|
June 30, 2009 |
|
|
June 30, 2009 |
|
Service cost |
|
$ |
53 |
|
|
$ |
106 |
|
Interest cost |
|
|
47 |
|
|
|
94 |
|
Net periodic cost |
|
$ |
100 |
|
|
$ |
200 |
|
|
|
|
|
|
|
|
Note 10. Comprehensive Income
Comprehensive income is the total of net income and other comprehensive income and loss. The
following table summarizes the components of comprehensive income and loss.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In Thousands) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
(Restated) |
|
|
|
|
Net income |
|
$ |
2,405 |
|
|
$ |
6,238 |
|
|
$ |
7,597 |
|
|
$ |
12,550 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain/(loss) on securities available-for-sale
with other-than-temporary impairment |
|
|
(25,169 |
) |
|
|
|
|
|
|
(25,378 |
) |
|
|
|
|
Unrealized gain/(loss) on securities available-for-sale
without other-than-temporary impairment |
|
|
32,979 |
|
|
|
|
|
|
|
20,716 |
|
|
|
|
|
Unrealized loss on securities available-for-sale
prior to adoption of FSP115-2 |
|
|
|
|
|
|
(22,138 |
) |
|
|
|
|
|
|
(36,052 |
) |
Reclassification adjustment for losses (gains)
realized in net income |
|
|
(360 |
) |
|
|
(460 |
) |
|
|
(585 |
) |
|
|
(1,350 |
) |
Unrealized (loss) gain on derivative securities |
|
|
326 |
|
|
|
1,562 |
|
|
|
565 |
|
|
|
(22 |
) |
Income tax effect |
|
|
(2,955 |
) |
|
|
8,415 |
|
|
|
1,779 |
|
|
|
14,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income/(loss) |
|
|
4,821 |
|
|
|
(12,622 |
) |
|
|
(2,903 |
) |
|
|
(22,454 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income/(loss) |
|
$ |
7,226 |
|
|
$ |
(6,384 |
) |
|
$ |
4,694 |
|
|
$ |
(9,904 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in accumulated other comprehensive income at June 30, 2009 was
$26.05 million related to non-credit impairment in
available-for-sale securities with other-than-temporary impairment.
Note 11. Commitments and Contingencies
In the normal course of business, the Company is a defendant in various legal actions and asserted
claims. While the Company and its legal counsel are unable to assess the ultimate outcome of each
of these matters with certainty, the resolution of these actions, singly or in the aggregate,
should not have a material adverse effect on the financial condition, results of operations or cash
flows of the Company.
Note 12. Segment Information
The Company operates in two segments: Community Banking and Insurance Services. The Community
Banking segment includes both commercial and consumer lending and deposit services. This segment
provides customers with such products as commercial loans, real estate loans, business financing
and consumer loans. This segment also provides customers with several choices of deposit products
including demand deposit accounts, savings accounts and certificates of deposit. In addition, the
Community Banking segment provides wealth management services to a broad range of customers. The
Insurance Services segment is a full-service insurance agency providing commercial and personal
lines of insurance.
- 20 -
The following table sets forth information about the reportable operating segments and
reconciliation of this information to the consolidated financial statements at and for the three-
and six-month periods ended June 30, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
June 30, 2009 |
|
|
|
Community |
|
|
Insurance |
|
|
Parent/ |
|
|
|
|
(In Thousands) |
|
Banking |
|
|
Services |
|
|
Elimination |
|
|
Total |
|
Net interest income |
|
$ |
16,343 |
|
|
$ |
(16 |
) |
|
$ |
(6 |
) |
|
$ |
16,321 |
|
Provision for loan losses |
|
|
2,552 |
|
|
|
|
|
|
|
|
|
|
|
2,552 |
|
Noninterest income |
|
|
6,613 |
|
|
|
1,665 |
|
|
|
(2,656 |
) |
|
|
5,622 |
|
Noninterest expense |
|
|
17,595 |
|
|
|
1,474 |
|
|
|
(2,926 |
) |
|
|
16,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
2,809 |
|
|
|
175 |
|
|
|
264 |
|
|
|
3,248 |
|
Provision for income taxes |
|
|
429 |
|
|
|
51 |
|
|
|
363 |
|
|
|
843 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,380 |
|
|
$ |
124 |
|
|
$ |
(99 |
) |
|
$ |
2,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period goodwill and other intangibles |
|
$ |
78,506 |
|
|
$ |
11,028 |
|
|
$ |
|
|
|
|
89,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period assets (restated) |
|
$ |
2,174,946 |
|
|
$ |
11,252 |
|
|
$ |
15,847 |
|
|
|
2,202,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended |
|
|
|
June 30, 2009 |
|
|
|
Community |
|
|
Insurance |
|
|
Parent/ |
|
|
|
|
(In Thousands) |
|
Banking |
|
|
Services |
|
|
Elimination |
|
|
Total |
|
|
|
(Restated) |
|
|
|
|
|
|
|
|
(Restated) |
|
Net interest income |
|
$ |
32,835 |
|
|
$ |
(34 |
) |
|
$ |
(47 |
) |
|
$ |
32,754 |
|
Provision for loan losses |
|
|
4,700 |
|
|
|
|
|
|
|
|
|
|
|
4,700 |
|
Noninterest income |
|
|
12,737 |
|
|
|
4,009 |
|
|
|
(415 |
) |
|
|
16,331 |
|
Noninterest expense |
|
|
31,177 |
|
|
|
3,112 |
|
|
|
(667 |
) |
|
|
33,622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
9,695 |
|
|
|
863 |
|
|
|
205 |
|
|
|
10,763 |
|
Provision for income taxes |
|
|
2,338 |
|
|
|
254 |
|
|
|
574 |
|
|
|
3,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
7,357 |
|
|
$ |
609 |
|
|
$ |
(369 |
) |
|
$ |
7,597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period goodwill and other intangibles |
|
$ |
78,506 |
|
|
$ |
11,028 |
|
|
$ |
|
|
|
|
89,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period assets |
|
$ |
2,174,946 |
|
|
$ |
11,252 |
|
|
$ |
15,847 |
|
|
|
2,202,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
June 30, 2008 |
|
|
|
Community |
|
|
Insurance |
|
|
Parent/ |
|
|
|
|
(In Thousands) |
|
Banking |
|
|
Services |
|
|
Elimination |
|
|
Total |
|
Net interest income |
|
$ |
16,840 |
|
|
$ |
(5 |
) |
|
$ |
(210 |
) |
|
$ |
16,625 |
|
Provision for loan losses |
|
|
937 |
|
|
|
|
|
|
|
|
|
|
|
937 |
|
Noninterest income |
|
|
6,644 |
|
|
|
1,146 |
|
|
|
(66 |
) |
|
|
7,724 |
|
Noninterest expense |
|
|
14,046 |
|
|
|
991 |
|
|
|
(278 |
) |
|
|
14,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
8,501 |
|
|
|
150 |
|
|
|
2 |
|
|
|
8,653 |
|
Provision for income taxes |
|
|
2,369 |
|
|
|
44 |
|
|
|
2 |
|
|
|
2,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
6,132 |
|
|
$ |
106 |
|
|
$ |
|
|
|
$ |
6,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period goodwill and other intangibles |
|
$ |
62,247 |
|
|
$ |
8,934 |
|
|
$ |
|
|
|
|
71,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period assets |
|
$ |
2,034,670 |
|
|
$ |
9,067 |
|
|
$ |
9,950 |
|
|
|
2,053,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 21 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended |
|
|
|
June 30, 2008 |
|
|
|
Community |
|
|
Insurance |
|
|
Parent/ |
|
|
|
|
(In Thousands) |
|
Banking |
|
|
Services |
|
|
Elimination |
|
|
Total |
|
Net interest income |
|
$ |
33,475 |
|
|
$ |
(11 |
) |
|
$ |
(479 |
) |
|
$ |
32,985 |
|
Provision for loan losses |
|
|
1,260 |
|
|
|
|
|
|
|
|
|
|
|
1,260 |
|
Noninterest income |
|
|
14,638 |
|
|
|
2,490 |
|
|
|
(263 |
) |
|
|
16,865 |
|
Noninterest expense |
|
|
29,838 |
|
|
|
2,037 |
|
|
|
(833 |
) |
|
|
31,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
17,015 |
|
|
|
442 |
|
|
|
91 |
|
|
|
17,548 |
|
Provision for income taxes |
|
|
4,801 |
|
|
|
130 |
|
|
|
67 |
|
|
|
4,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
12,214 |
|
|
$ |
312 |
|
|
$ |
24 |
|
|
$ |
12,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period goodwill and other intangibles |
|
$ |
62,247 |
|
|
$ |
8,934 |
|
|
$ |
|
|
|
|
71,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period assets |
|
$ |
2,034,670 |
|
|
$ |
9,067 |
|
|
$ |
9,950 |
|
|
|
2,053,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 13. Fair Value Disclosures
SFAS 157, as amended, defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair value measurements.
SFAS 157 defines fair value as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants. A fair value
measurement assumes that the transaction to sell the asset or transfer the liability occurs in the
principal market for the asset or liability or, in the absence of a principal market, the most
advantageous market for the asset or liability. The price in the principal, or most advantageous,
market used to measure the fair value of the asset or liability shall not be adjusted for
transaction costs. An orderly transaction is a transaction that assumes exposure to the market for
a period prior to the measurement date to allow for marketing activities that are usual and
customary for transactions involving such assets and liabilities; it is not a forced transaction.
Market participants are buyers and sellers in the principal market that are (i) independent, (ii)
knowledgeable, (iii) able to transact, and (iv) willing to transact.
SFAS 157 establishes a fair value hierarchy for valuation inputs that gives the highest priority to
quoted prices in active markets for identical assets or liabilities and the lowest priority to
unobservable inputs. The fair value hierarchy is as follows:
|
Level 1 Inputs |
|
Unadjusted quoted prices in active markets for identical assets or
liabilities that the reporting entity has the ability to access at the measurement date. |
|
Level 2 Inputs |
|
Inputs other than quoted prices included in Level 1 that are observable for
the asset or liability, either directly or indirectly. These might include quoted prices
for similar assets or liabilities in active markets, quoted prices for identical or similar
assets or liabilities in markets that are not active, inputs other than quoted prices that
are observable for the asset or liability, such as interest rates, volatilities, prepayment
speeds, and credit risks, or inputs that are derived principally from or corroborated by
market data by correlation or other means. |
|
Level 3 Inputs |
|
Unobservable inputs for determining the fair values of assets or
liabilities that reflect an entitys own assumptions about the assumptions that market
participants would use in pricing the assets or liabilities. |
A description of the valuation methodologies used for instruments measured at fair value, as well
as the general classification of such instruments pursuant to the valuation hierarchy, is set forth
below. These valuation methodologies were applied to all of the Companys financial assets and
financial liabilities carried at fair value. In general, fair value is based upon quoted market
prices, where available. If such quoted market prices are not available, fair value is based upon
third party models that primarily use, as inputs, observable market-based parameters. Valuation
adjustments may be made to ensure that financial instruments are recorded at fair value. These
adjustments may include amounts to reflect counterparty credit quality, the Companys creditworthiness, among other things, as well as unobservable parameters. Any such
valuation adjustments are applied consistently over time. The Companys valuation methodologies may
produce a fair value calculation that may not be indicative of net realizable value or reflective
of future fair values. While management believes the Companys valuation methodologies are
appropriate and consistent with other market participants, the use of different
- 22 -
methodologies or
assumptions to determine the fair value of certain financial instruments could result in a
different estimate of fair value at the reporting date.
Securities Available-for-Sale: Securities classified as available-for-sale are reported at fair
value utilizing Level 1, Level 2, and Level 3 inputs. Securities are classified as Level 1 within
the valuation hierarchy when quoted prices are available in an active market. This includes
securities whose value is based on quoted market prices in active markets for identical assets. The
Company also uses Level 1 inputs for the valuation of equity securities traded in active markets.
Securities are classified as Level 2 within the valuation hierarchy when the Company obtains fair
value measurements from an independent pricing service. The fair value measurements consider
observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield
curve, live trading levels, trade execution data, market consensus prepayment speeds, credit
information, and the bonds terms and conditions, among other things. Level 2 inputs are used to
value U.S. Agency securities, mortgage-backed securities, municipal securities, single-issue trust
preferred securities, and certain equity securities that are not actively traded.
Securities are classified as Level 3 within the valuation hierarchy in certain cases when there is
limited activity or less transparency to the valuation inputs. These securities include pooled
trust preferred securities. In the absence of observable or corroborated market data, internally
developed estimates that incorporate market-based assumptions are used when such information is
available. The Level 3 inputs used to value our pooled trust preferred security holdings are
weighted between discounted cash flow model results and actual trades of the same and similar
securities in the inactive trust preferred market. The cash flow modeling uses discount rates based
upon observable market expectations, known defaults and deferrals, projected future defaults and
deferrals, and projected prepayments to arrive at fair value.
Fair value models may be required when trading activity has declined significantly or does not
exist, prices are not current or pricing variations are significant. The Companys fair value from
third party models utilize modeling software that uses market participant data and knowledge of the
structures of each individual security to develop cash flows specific to each security. The fair
values of the securities are determined by using the cash flows developed by the fair value model
and applying appropriate market observable discount rates. The discount rates are developed by
determining credit spreads above a benchmark rate, such as LIBOR, and adding premiums for
illiquidity developed based on a comparison of initial issuance spread to LIBOR versus a financial
sector curve for recently issued debt to LIBOR. Specific securities that have increased uncertainty
regarding the receipt of cash flows are discounted at higher rates due to the addition of a deal
specific credit premium. Finally, internal fair value model pricing and external pricing
observations are combined by assigning weights to each pricing observation. Pricing is reviewed for
reasonableness based on the direction of the specific markets and the general economic indicators.
Subsequent
to our earnings release issued on July 23, 2009, management
revised certain assumptions regarding the discount rate used in
valuing cash flows projected to be received from a pooled trust
preferred security. Based on the revised cash flow results, net
credit-related impairment reported in earnings increased from the
amount reported in the earnings release by $1.70 million for the
three- and six-month periods ended June 30, 2009. The numbers
presented in this Form 10-Q/A reflect the revised cash flow
results.
Other Assets and Associated Liabilities: Securities held for trading purposes are recorded at fair
value and included in other assets on the consolidated balance sheets. Securities held for
trading purposes include assets related to employee deferred compensation plans. The assets
associated with these plans are generally invested in equities and classified as Level 1. Deferred
compensation liabilities, also classified as Level 1, are carried at the fair value of the
obligation to the employee, which corresponds to the fair value of the invested assets.
Derivatives: Derivatives are reported at fair value utilizing Level 2 inputs. The Company obtains
dealer quotations based on observable data to value its derivatives.
Impaired Loans: Certain impaired loans are reported at the fair value of the underlying collateral
if repayment is expected solely from the collateral. Collateral values are estimated using Level 3
inputs based on appraisals adjusted for customized discounting criteria.
Other Real Estate Owned. The fair value of the Companys other real estate owned is determined
using current and prior appraisals, estimates of costs to sell, and proprietary qualitative
adjustments. Accordingly, other real estate owned is stated at a Level 3 fair value.
- 23 -
The following table summarizes financial assets and financial liabilities measured at fair value on
a recurring basis as of June 30, 2009, and December 31, 2008, segregated by the level of the
valuation inputs within the fair value hierarchy utilized to measure fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
|
Fair Value Measurements Using |
|
|
Total |
|
(In Thousands) |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Fair Value |
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency securities |
|
$ |
|
|
|
$ |
53,830 |
|
|
$ |
|
|
|
$ |
53,830 |
|
Agency mortgage-backed securities |
|
|
|
|
|
|
252,502 |
|
|
|
|
|
|
|
252,502 |
|
Non-Agency prime residential MBS |
|
|
|
|
|
|
5,258 |
|
|
|
|
|
|
|
5,258 |
|
Non-Agency Alt-A residential MBS |
|
|
|
|
|
|
10,503 |
|
|
|
|
|
|
|
10,503 |
|
Municipal securities |
|
|
|
|
|
|
133,966 |
|
|
|
|
|
|
|
133,966 |
|
Single-issue trust preferred securities |
|
|
|
|
|
|
32,511 |
|
|
|
|
|
|
|
32,511 |
|
Pooled trust preferred securities |
|
|
|
|
|
|
|
|
|
|
28,150 |
|
|
|
28,150 |
|
Equity securities |
|
|
5,015 |
|
|
|
144 |
|
|
|
|
|
|
|
5,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-for-sale securities |
|
|
5,015 |
|
|
|
488,714 |
|
|
|
28,150 |
|
|
|
521,879 |
|
Other assets |
|
|
2,509 |
|
|
|
|
|
|
|
|
|
|
|
2,509 |
|
Derivative assets |
|
|
|
|
|
|
23 |
|
|
|
|
|
|
|
23 |
|
Other liabilities |
|
|
2,509 |
|
|
|
|
|
|
|
|
|
|
|
2,509 |
|
Derivative liabilities |
|
|
|
|
|
|
2,792 |
|
|
|
|
|
|
|
2,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
Fair Value Measurements Using |
|
|
Total |
|
(In Thousands) |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Fair Value |
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency securities |
|
$ |
|
|
|
$ |
54,818 |
|
|
$ |
|
|
|
$ |
54,818 |
|
Agency mortgage-backed securities |
|
|
|
|
|
|
216,962 |
|
|
|
|
|
|
|
216,962 |
|
Non-Agency prime residential MBS |
|
|
|
|
|
|
5,766 |
|
|
|
|
|
|
|
5,766 |
|
Non-Agency Alt-A residential MBS |
|
|
|
|
|
|
10,750 |
|
|
|
|
|
|
|
10,750 |
|
Municipal securities |
|
|
|
|
|
|
159,419 |
|
|
|
|
|
|
|
159,419 |
|
Single-issue trust preferred securities |
|
|
|
|
|
|
33,541 |
|
|
|
|
|
|
|
33,541 |
|
Pooled trust preferred securities |
|
|
|
|
|
|
4,445 |
|
|
|
28,067 |
|
|
|
32,512 |
|
Equity securities |
|
|
6,811 |
|
|
|
144 |
|
|
|
|
|
|
|
6,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-for-sale securities |
|
|
6,811 |
|
|
|
485,845 |
|
|
|
28,067 |
|
|
|
520,723 |
|
Other assets |
|
|
2,637 |
|
|
|
|
|
|
|
|
|
|
|
2,637 |
|
Derivative assets |
|
|
|
|
|
|
39 |
|
|
|
|
|
|
|
39 |
|
Other liabilities |
|
|
2,637 |
|
|
|
|
|
|
|
|
|
|
|
2,637 |
|
Derivative liabilities |
|
|
|
|
|
|
3,343 |
|
|
|
|
|
|
|
3,343 |
|
- 24 -
The following table shows a reconciliation of the beginning and ending balances for assets measured
at fair value on a recurring basis using significant unobservable inputs.
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Securities |
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
(In Thousands) |
|
June 30, 2009 |
|
|
June 30, 2009 |
|
Beginning balance |
|
$ |
22,705 |
|
|
$ |
28,067 |
|
Total gains or loss (realized/unrealized) |
|
|
|
|
|
|
|
|
Included in earnings |
|
|
(3,370 |
) |
|
|
(3,370 |
) |
Included in other comprehensive income |
|
|
8,815 |
|
|
|
1,307 |
|
Paydowns and maturities |
|
|
|
|
|
|
(33 |
) |
Transfers into Level 3 |
|
|
|
|
|
|
2,179 |
|
|
|
|
|
|
|
|
Ending balance June 30, 2009 |
|
$ |
28,150 |
|
|
$ |
28,150 |
|
|
|
|
|
|
|
|
Certain financial and non-financial assets are measured at fair value on a nonrecurring basis; that
is, the instruments are not measured at fair value on an ongoing basis but are subject to fair
value adjustments in certain circumstances, for example, when there is evidence of impairment.
Items subjected to nonrecurring fair value adjustments at June 30, 2009, and December 31, 2008, are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
Fair Value Measurements Using |
|
Total |
(In Thousands) |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Fair Value |
Impaired loans |
|
$ |
|
|
|
$ |
|
|
|
$ |
3,379 |
|
|
$ |
3,379 |
|
Other real estate owned |
|
|
|
|
|
|
|
|
|
|
3,615 |
|
|
|
3,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31. 2008 |
|
|
Fair Value Measurements Using |
|
Total |
(In Thousands) |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Fair Value |
Impaired loans |
|
$ |
|
|
|
$ |
|
|
|
$ |
5,980 |
|
|
$ |
5,980 |
|
- 25 -
Fair Value of Financial Instruments
Fair value information about financial instruments, whether or not recognized in the balance sheet,
for which it is practical to estimate the value is based upon the characteristics of the
instruments and relevant market information. Financial instruments include cash, evidence of
ownership in an entity, or contracts that convey or impose on an entity that contractual right or
obligation to either receive or deliver cash for another financial instrument. Fair value is the
amount at which a financial instrument could be exchanged in a current transaction between willing
parties, other than in a forced sale or liquidation, and is best evidenced by a quoted market price
if one exists.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
December 31, 2008 |
|
|
Carrying |
|
|
|
|
|
Carrying |
|
|
|
|
Amount |
|
Fair Value |
|
Amount |
|
Fair Value |
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
144,449 |
|
|
$ |
144,449 |
|
|
$ |
46,439 |
|
|
$ |
46,439 |
|
Investment Securities |
|
|
529,604 |
|
|
|
529,725 |
|
|
|
529,393 |
|
|
|
529,525 |
|
Loans held for sale |
|
|
802 |
|
|
|
802 |
|
|
|
1,024 |
|
|
|
1,026 |
|
Loans held
for investment (restated) |
|
|
1,250,900 |
|
|
|
1,248,044 |
|
|
|
1,280,377 |
|
|
|
1,274,675 |
|
Accrued interest receivable |
|
|
8,934 |
|
|
|
8,934 |
|
|
|
10,084 |
|
|
|
10,084 |
|
Bank owned life insurance |
|
|
40,272 |
|
|
|
40,272 |
|
|
|
40,784 |
|
|
|
40,784 |
|
Derivative financial assets |
|
|
23 |
|
|
|
23 |
|
|
|
39 |
|
|
|
39 |
|
Deferred compensation assets |
|
|
2,509 |
|
|
|
2,509 |
|
|
|
2,637 |
|
|
|
2,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
$ |
202,543 |
|
|
$ |
202,543 |
|
|
$ |
199,712 |
|
|
$ |
199,712 |
|
Interest-bearing demand deposits |
|
|
195,905 |
|
|
|
195,905 |
|
|
|
185,117 |
|
|
|
185,117 |
|
Savings deposits |
|
|
311,435 |
|
|
|
311,435 |
|
|
|
309,577 |
|
|
|
309,577 |
|
Time deposits |
|
|
837,475 |
|
|
|
851,933 |
|
|
|
809,352 |
|
|
|
824,068 |
|
Securities sold under agreements to repurchase |
|
|
153,804 |
|
|
|
161,317 |
|
|
|
165,914 |
|
|
|
177,454 |
|
Accrued interest payable |
|
|
4,659 |
|
|
|
4,659 |
|
|
|
5,326 |
|
|
|
5,326 |
|
FHLB and other indebtedness |
|
|
190,863 |
|
|
|
203,351 |
|
|
|
215,877 |
|
|
|
242,223 |
|
Derivative financial liabilities |
|
|
2,792 |
|
|
|
2,792 |
|
|
|
3,343 |
|
|
|
3,343 |
|
Deferred compensation liabilities |
|
|
2,509 |
|
|
|
2,509 |
|
|
|
2,637 |
|
|
|
2,637 |
|
The following summary presents the methodologies and assumptions used to estimate the fair value of
the Companys financial instruments presented below. The information used to determine fair value
is highly subjective and judgmental in nature and, therefore, the results may not be precise.
Subjective factors include, among other things, estimates of cash flows, risk characteristics,
credit quality, and interest rates, all of which are subject to change. Since the fair value is
estimated as of the balance sheet date, the amounts that will actually be realized or paid upon
settlement or maturity on these various instruments could be significantly different.
Cash and Cash Equivalents: The book values of cash and due from banks and federal funds sold and
purchased are considered to be equal to fair value as a result of the short-term nature of these
items.
Investment Securities and Deferred Compensation Assets and Liabilities: Fair values are determined
in the same manner as previously disclosed.
Loans: The estimated fair value of loans held for investment is measured based upon discounted
future cash flows using current rates for similar loans. Loans held for sale are recorded at lower
of cost or estimated fair value. The fair value of loans held for sale is determined based upon the
market sales price of similar loans.
Accrued
Interest Receivable and Payable: The book value is considered to
be equal to the fair value due to the short-term nature of
instrument.
Bank-Owned
Life Insurance: Fair value is determined by stated contract
values.
Derivative Financial Instruments: The estimated fair value of derivative financial instruments is
based upon the current market price for similar instruments.
Deposits and Securities Sold Under Agreements to Repurchase: Deposits without a stated maturity,
including demand, interest-bearing demand, and savings accounts, are reported at their carrying
value in accordance with SFAS 107. No value has
- 26 -
been assigned to the franchise value of these
deposits. For other types of deposits and repurchase agreements with fixed maturities and rates,
fair value has been estimated by discounting future cash flows based on interest rates currently
being offered on instruments with similar characteristics and maturities.
FHLB and Other Indebtedness: Fair value has been estimated based on interest rates currently
available to the Company for borrowings with similar characteristics and maturities.
Commitments to Extend Credit, Standby Letters of Credit, and Financial Guarantees: The amount of
off-balance sheet commitments to extend credit, standby letters of credit, and financial guarantees
is considered equal to fair value. Because of the uncertainty involved in attempting to assess the
likelihood and timing of commitments being drawn upon, coupled with the lack of an established
market and the wide diversity of fee structures, the Company does not believe it is meaningful to
provide an estimate of fair value that differs from the given value of the commitment.
Note 14. Derivatives and Hedging Activities
The Company, through its mortgage banking and risk management operations, is party to various
derivative instruments that are used for asset and liability management and customers financing
needs. Derivative assets and liabilities are recorded at fair value on the balance sheet.
The primary derivatives that the Company uses are interest rate swaps and interest rate lock
commitments (IRLCs). Generally, these instruments help the Company manage exposure to market risk
and meet customer financing needs. Market risk represents the possibility that economic value or
net interest income will be adversely affected by fluctuations in external factors, such as
interest rates, market-driven loan rates and prices or other economic factors.
The following table presents the aggregate contractual, or notional, amounts of derivative
financial instruments as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
June 30, 2009 |
|
|
December 31, 2008 |
|
|
June 30, 2008 |
|
Interest rate swap |
|
$ |
50,000 |
|
|
$ |
50,000 |
|
|
$ |
50,000 |
|
IRLCs |
|
|
7,314 |
|
|
|
10,500 |
|
|
|
7,201 |
|
As of June 30, 2009, December 31, 2008 and June 30, 2008, the fair values of the Companys
derivatives were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives |
|
|
|
June 30, 2009 |
|
|
December 31, 2008 |
|
|
June 30, 2008 |
|
|
|
Balance Sheet |
|
|
Fair |
|
|
Balance Sheet |
|
|
Fair |
|
|
Balance Sheet |
|
|
Fair |
|
(In Thousands) |
|
Location |
|
|
Value |
|
|
Location |
|
|
Value |
|
|
Location |
|
|
Value |
|
Derivatives designated as hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap |
|
Other assets |
|
$ |
|
|
|
Other assets |
|
$ |
|
|
|
Other assets |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IRLCs |
|
Other assets |
|
$ |
23 |
|
|
Other assets |
|
$ |
39 |
|
|
Other assets |
|
$ |
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
23 |
|
|
|
|
|
|
$ |
39 |
|
|
|
|
|
|
$ |
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives |
|
|
|
|
|
$ |
23 |
|
|
|
|
|
|
$ |
39 |
|
|
|
|
|
|
$ |
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 27 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives |
|
|
|
June 30, 2009 |
|
|
December 31, 2008 |
|
|
June 30, 2008 |
|
|
|
Balance Sheet |
|
|
Fair |
|
|
Balance Sheet |
|
|
Fair |
|
|
Balance Sheet |
|
|
Fair |
|
(In Thousands) |
|
Location |
|
|
Value |
|
|
Location |
|
|
Value |
|
|
Location |
|
|
Value |
|
Derivatives designated as hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap |
|
Other liabilities |
|
$ |
2,745 |
|
|
Other liabilities |
|
$ |
3,327 |
|
|
Other liabilities |
|
$ |
1,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
2,745 |
|
|
|
|
|
|
$ |
3,327 |
|
|
|
|
|
|
$ |
1,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IRLCs |
|
Other liabilities |
|
$ |
47 |
|
|
Other liabilities |
|
$ |
16 |
|
|
Other liabilities |
|
$ |
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
47 |
|
|
|
|
|
|
$ |
16 |
|
|
|
|
|
|
$ |
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives |
|
|
|
|
|
$ |
2,792 |
|
|
|
|
|
|
$ |
3,343 |
|
|
|
|
|
|
$ |
1,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps. The Company uses interest rate swap contracts to modify its exposure to
interest rate risk. The Company currently employs a cash flow hedging strategy to effectively
convert certain floating-rate liabilities into fixed-rate instruments. The interest rate swap is
accounted for under the short-cut method in SFAS 133. Changes in fair value of the interest rate
swap are reported as a component of other comprehensive income. The Company does not currently
employ fair value hedging strategies.
Interest Rate Lock Commitments. In the normal course of business, the Company sells originated
mortgage loans into the secondary mortgage loan market. During the period of loan origination and
prior to the sale of the loans in the secondary market, the Company has exposure to movements in
interest rates associated with mortgage loans that are in the mortgage pipeline. A pipeline loan
is one on which the potential borrower has set the interest rate for the loan by entering into an
IRLC. Once a mortgage loan is closed and funded, it is included within loans held for sale and
awaits sale and delivery into the secondary market. During the term of an IRLC, the Company has the
risk that interest rates will change from the rate quoted to the borrower.
The Companys balance of mortgage loans held for sale is subject to changes in fair value, due to
fluctuations in interest rates from the loan closing date through the date of sale of the loan into
the secondary market. Typically, the fair value of the warehouse declines in value when interest
rates increase and rises in value when interest rates decrease.
Effect of Derivatives and Hedging Activities on the Income Statement
For the quarters ended June 30, 2009 and 2008, the Company has determined there was no amount of
ineffectiveness on cash flow hedges. The following table details gains and losses recognized in
income on non-designated hedging instruments under SFAS 133 for the three- and six-month periods
ended June 30, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not |
|
|
|
|
|
Amount of Gain/(Loss) |
|
designated as hedging |
|
Location of Gain/(Loss) |
|
|
Recognized in Income on Derivative |
|
instruments under |
|
Recognized in Income on |
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
SFAS 133 |
|
Derivative |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
IRLCs |
|
Other income
|
|
$ |
(107 |
) |
|
$ |
(33 |
) |
|
$ |
(77 |
) |
|
$ |
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
(107 |
) |
|
$ |
(33 |
) |
|
$ |
(77 |
) |
|
$ |
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Counterparty Credit Risk. Like other financial instruments, derivatives contain an element of
credit risk. Credit risk is the possibility that the Company will incur a loss because a
counterparty, which may be a bank, a broker-dealer or a customer, fails to meet its contractual
obligations. This risk is measured as the expected positive replacement value of contracts. All
derivative contracts may be executed only with exchanges or counterparties approved by the
Companys Asset/Liability Management Committee. The Company reviews its counterparty risk regularly
and has determined that, as of June 30, 2009, there is no significant counterparty credit risk.
- 28 -
Note 15. Subsequent Events
Subsequent
events have been evaluated through August 13, 2009, the date of financial statement
issuance.
On July 8, 2009, the Company redeemed all 41,500 outstanding shares of Fixed Rate Cumulative
Perpetual Preferred Stock, Series A, par value $1 and liquidation preference $1,000 per share, that
were issued to the United States Department of the Treasury pursuant to the Troubled Asset Relief
Program. The aggregate purchase price paid by the Company to the Treasury for the preferred stock
was approximately $41.81 million, including approximately $305 thousand of accrued and unpaid
dividends. The Company expects to recognize a deemed dividend of approximately $972 thousand
associated with the discount in the third quarter of 2009.
- 29 -
PART I. ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion and analysis is provided to address information about the Companys
financial condition and results of operations. This discussion and analysis should be read in
conjunction with the Companys 2008 Form 10-K/A and the other financial information
included in this report.
The following information has been adjusted to reflect the restatement of the our financial results
for the year ended December 31, 2008, and the three- and six-month periods ended June 30, 2009,
which is more fully described in the Explanatory Note immediately preceding Part I, Item 1 and in
Note 2. Restatement of Consolidated Financial Statements of the Notes to Consolidated Financial
Statements of this Quarterly Report on Form 10-Q/A.
The Company is a multi-state financial holding company headquartered in Bluefield, Virginia, with
total assets of $2.20 billion at June 30, 2009. Through its community bank subsidiary, First
Community Bank, N. A. (the Bank), the Company provides financial, trust and investment advisory
services to individuals and commercial customers through more than fifty locations in Virginia,
West Virginia, North Carolina, South Carolina, and Tennessee. The Company is also the parent of
GreenPoint Insurance Group, Inc., a North Carolina-based full-service insurance agency offering
commercial and personal lines (GreenPoint). The Bank is the parent of Investment Planning
Consultants, Inc. (IPC), a registered investment advisory firm that offers wealth management and
investment advice. The Companys common stock is traded on the NASDAQ Global Select Market under
the symbol, FCBC.
Restatement
As a result of a routine internal audit, the Company determined there was a computational error in
the model that it uses to calculate the quantitative basis for its allowance for loan losses. In
connection with its determination of the appropriate loan loss reserve at December 31, 2008, the
Company made certain modifications to its loan loss reserve model with respect to a $130.76 million
pool of loans. However, in calculating the loan loss reserves for this pool of loans, the
historical quarterly net charge-off rates were not annualized as was the case with all other
quarterly loss rates in the model. The Company has corrected the computational error in its model
for calculating the allowance for loan losses. The financial information for the quarter ended
June 30, 2009 provided in this Managements Discussion and Analysis of Financial Condition and
Results of Operations has been restated to reflect the correction of the computational error. For
additional information, see the Explanatory Note immediately preceding Part I, Item 1 and Note 2. Restatement of Consolidated Financial Statements of the Notes
to Consolidated Financial Statements of this Quarterly Report on Form 10-Q/A.
FORWARD-LOOKING STATEMENTS
The Company may from time to time make written or oral forward-looking statements, including
statements contained in its filings with the SEC (including this
Quarterly Report on Form 10-Q/A and
the Exhibits hereto and thereto), in its reports to stockholders and in other communications which
are made in good faith by the Company pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995.
These forward-looking statements include, among others, statements with respect to the Companys
beliefs, plans, objectives, goals, guidelines, expectations, anticipations, estimates and
intentions that are subject to significant risks and uncertainties and are subject to change based
on various factors (many of which are beyond the Companys control). The words may, could,
should, would, believe, anticipate, estimate, expect, intend, plan, and similar
expressions are intended to identify forward-looking statements. We caution that the
forward-looking statements are based largely on our expectations and are subject to a number of
known and unknown risks and uncertainties that are subject to change based on factors which are, in
many instances, beyond our control. Actual results, performance or achievements could differ
materially from those contemplated, expressed, or implied by the forward-looking statements. The
following factors, among others, could cause our financial performance to differ materially from
that expressed in such forward-looking statements:
|
|
|
The strength of the United States economy in general and the strength of the local
economies in which we conduct operations; |
|
|
|
|
Geopolitical conditions, including acts or threats of terrorism, actions taken by the
United States or other governments in response to acts or threats of terrorism and/or
military conflicts, which could impact business and economic conditions in the United
States and abroad; |
|
|
|
|
The effects of, and changes in, trade, monetary and fiscal policies and laws, including
interest rate policies of the Board of Governors of the Federal Reserve System (the
Federal Reserve Board); |
|
|
|
|
Inflation, interest rate, market and monetary fluctuations; |
|
|
|
|
The timely development of competitive new products and services and the acceptance of
these products and services by new and existing customers; |
|
|
|
|
The willingness of users to substitute competitors products and services for our
products and services; |
|
|
|
|
The impact of changes in financial services policies, laws and regulations, including
laws, regulations and policies concerning taxes, banking, securities and insurance, and the
application thereof by regulatory bodies; |
|
|
|
|
Technological changes; |
|
|
|
|
The effect of acquisitions we may make, including, without limitation, the failure to
achieve the expected revenue growth and/or expense savings from such acquisitions; |
|
|
|
|
The growth and profitability of non-interest or fee income being less than expected; |
|
|
|
|
Changes in the level of our non-performing assets and charge-offs; |
|
|
|
|
The effect of changes in accounting policies and practices, as may be adopted from
time-to-time by bank regulatory agencies, the SEC, the Public Company Accounting Oversight
Board, the FASB or other accounting standards setters; |
|
|
|
|
Possible other-than-temporary impairments of securities held by us; |
|
|
|
|
The impact of current governmental efforts to restructure the U.S. financial regulatory
system; |
|
|
|
|
Changes in consumer spending and savings habits; and |
|
|
|
|
Unanticipated regulatory or judicial proceedings. |
- 30 -
If one or more of the factors affecting our forward-looking information and statements proves
incorrect, then our actual results, performance or achievements could differ materially from those
expressed in, or implied by, forward-looking information and statements contained in this Quarterly
Report on Form 10-Q/A and other reports filed by us with the SEC. Therefore, we caution you not to
place undue reliance on our forward-looking information and statements.
The Company cautions that the foregoing list of important factors is not exclusive. The Company
does not undertake to update any forward-looking statement, whether written or oral, that may be
made from time to time by or on behalf of the Company. These factors and other risks and
uncertainties are discussed in Item 1A. Risk Factors in Part II of this Quarterly Report on Form
10-Q/A, which revise certain risk factors previously disclosed in the
Companys 2008 Form 10-K/A, and add certain new risk factors.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The Companys consolidated financial statements are prepared in accordance with GAAP and conform to
general practices within the banking industry. The Companys financial position and results of
operations are affected by managements application of accounting policies, including judgments
made to arrive at the carrying value of assets and liabilities and amounts reported for revenues,
expenses and related disclosures. Different assumptions in the application of these policies could
result in material changes in the Companys consolidated financial position and consolidated
results of operations.
Estimates, assumptions, and judgments are necessary principally when assets and liabilities are
required to be recorded at estimated fair value, when a decline in the value of an asset carried on
the financial statements at fair value warrants an impairment write-down or valuation reserve to be
established, or when an asset or liability needs to be recorded based upon the probability of
occurrence of a future event. Carrying assets and liabilities at fair value inherently results in
more financial statement volatility. The fair values and the information used to record valuation
adjustments for certain assets and liabilities are based either on quoted market prices or are
provided by third party sources, when available. When third party information is not available,
valuation adjustments are estimated by management primarily through the use of internal modeling
techniques and appraisal estimates.
The Companys accounting policies are fundamental to understanding Managements Discussion and
Analysis of Financial Condition and Results of Operation. The disclosures presented in the Notes
to the Consolidated Financial Statements and in Managements Discussion and Analysis provide
information on how significant assets and liabilities are valued in the financial statements and
how those values are determined. Based on the valuation techniques used and the sensitivity of
financial statement amounts to the methods, assumptions, and estimates underlying those amounts,
management has identified the accounting for and valuation of investment securities, the
determination of the allowance for loan losses, accounting for acquisitions and intangible assets,
and accounting for income taxes as the four accounting areas that require the most subjective or
complex judgments. The identified critical accounting policies are described in detail in the
Companys 2008 Form 10-K/A.
COMPANY OVERVIEW
The Company is a financial holding company which operates within the five-state region of Virginia,
West Virginia, North Carolina, South Carolina, and Tennessee. The Company operates through the
Bank, IPC, and GreenPoint to offer a wide range of financial services. The Company reported total
assets of $2.20 billion at June 30, 2009.
The Company funds its lending activities primarily through the retail deposit operations of its
branch banking network. Retail and wholesale repurchase agreements and borrowings from the Federal
Home Loan Bank (FHLB) provide additional funding as needed. The Company invests its funds
primarily in loans to retail and commercial customers. In addition to loans, the Company invests a
portion of its funds in various debt securities, including those of United States agencies, state
and political subdivisions, and certain corporate notes and debt instruments. The Company also
maintains overnight interest-bearing balances with the FHLB and correspondent banks. The
difference between interest earned on assets and interest paid on liabilities is the Companys
primary source of earnings. Net interest income is supplemented by fees for services, commissions
on sales, and various deposit service charges.
The Company also conducts asset management activities through the Banks Trust and Financial
Services Division (Trust Division) and its registered investment advisory firm, IPC. The Banks
Trust Division and IPC manage assets with an aggregate market value of $811 million, as of June 30,
2009. These assets are not assets of the Company, but are managed under various fee-based
arrangements as fiduciary or agent.
- 31 -
RECENT MARKET DEVELOPMENTS
The global and U.S. economies continue to experience significantly reduced business activity as a
result of recessionary economic conditions and disruptions in the financial system. Dramatic
declines in home prices and increasing foreclosures and unemployment have resulted in significant
write-downs of asset values by financial institutions, including government-sponsored entities and
major commercial and investment banks. These write-downs, initially of mortgage-backed securities
but spreading to credit default swaps, other derivative securities, and to loan portfolios, have
caused many financial institutions to seek additional capital, to merge with larger and stronger
institutions and, in some cases, to fail. Further adverse effects could have an adverse impact on
the Company and its business.
MERGERS, ACQUISITIONS AND BRANCHING ACTIVITY
On April 2, 2009, the Company signed a definitive agreement providing for the acquisition of
TriStone Community Bank (TriStone), a $152.42 million state-chartered commercial bank
headquartered in Winston-Salem, North Carolina. Under the terms of
this merger agreement, subject to dissenter's rights, shares of
TriStone were exchanged for .5262 shares of the company's common
stock, resulting in a purchase price of approximately
$10.73 million. TriStone was merged with and into the
Company's wholly-owned national bank subsidiary, First Community
Bank, N.A., on July 31, 2009, and at
acquisition, had total assets of approximately
$165.53 million, loans of approximately $132.23 million,
and deposits of approximately $142.22 million.
On November 14, 2008, the Company completed the acquisition of Coddle Creek Financial Corp.
(Coddle Creek), based in Mooresville, North Carolina. Coddle Creek had three full service
locations in Mooresville, Cornelius, and Huntersville, North Carolina. At acquisition, Coddle
Creek had total assets of approximately $158.66 million, loans of approximately $136.99 million,
and deposits of approximately $137.06 million. Under the terms of the merger agreement, shares of
Coddle Creek were exchanged for .9046 shares of the Companys common stock and $19.60 in cash, for
a total purchase price of approximately $32.29 million. As a result of the acquisition and
purchase price allocation, approximately $14.41 million in goodwill was recorded, which represents
the excess purchase price over the fair market value of the net assets acquired and identified
intangibles.
Since January 1, 2008, GreenPoint has acquired a total of five agencies, issuing cash consideration
of approximately $2.04 million. Acquisition terms in all instances call for additional cash
consideration if certain operating performance targets are met. If those targets are met, the
value of the consideration ultimately paid will be added to the cost of the acquisitions. Goodwill
and other intangibles associated with GreenPoints acquisitions total approximately $2.04 million.
The
Company opened a new branch location in Grafton, West Virginia, in
June 2009 and in Richmond, Virginia, in July 2009.
RESULTS OF OPERATIONS
Overview
Net income
available to common shareholders for the three months ended
June 30, 2009, was $1.83
million, or $0.14 per basic and diluted share, compared with $6.24 million, or $0.57 per basic and
$0.56 per diluted share, for the three months ended June 30,
2008, a decrease of $4.41 million, or
70.71%. Return on average assets was 0.34% for the three months ended June 30, 2009, compared with
1.23% for the same period in 2008. Return on average common equity for the three months ended June
30, 2009, was 3.85% compared with 12.08% for the three months ended June 30, 2008. The main
reasons for the decrease in net income between the three months ended June 30, 2009 and 2008, were
increased provisions for loan losses, net securities impairments, and a special assessment by the
Federal Deposit Insurance Corporation (FDIC) of $988
thousand.
Net income
available to common shareholders for the six months ended
June 30, 2009, was $6.45
million, or $0.53 per basic and diluted share, compared with $12.55 million, or $1.14 per basic and
$1.13 per diluted share, for the six months ended June 30, 2008,
a decrease of $6.10 million, or
48.62%. Return on average assets was 0.60% for the six months ended June 30, 2009, compared with
1.22% for the same period in 2008. Return on average common equity for the six months ended June
30, 2009, was 7.08% compared with 11.87% for the six months ended June 30, 2008. The main reasons
for the decrease in net income between the six months ended June 30, 2009 and 2008, were increased
provisions for loan losses, net securities impairments, and a special assessment by the FDIC.
Net Interest Income Quarterly Comparison (See Table I)
Net interest income, the largest contributor to earnings, was $16.32 million for the three months
ended June 30, 2009, compared with $16.63 million for the corresponding period in 2008, a decrease
of $304 thousand, or 1.83%. Tax-equivalent net interest income totaled $17.09 million for the
three months ended June 30, 2009, a decrease of $633 thousand, or 3.57%,
from $17.73 million for the second quarter of 2008. The decrease in tax-equivalent net interest
income was due primarily to
- 32 -
decreases in loan and investment yields as a result of the precipitous
declines in benchmark interest rates, including the Prime Rate, since late 2007.
Compared with the second quarter of 2008, average earning assets increased $75.08 million while
interest-bearing liabilities increased $120.56 million during the three months ended June 30, 2009.
The changes include the impact of the Coddle Creek acquisition in November 2008. The yield on
average earning assets decreased 60 basis points to 5.71% from 6.31% between the three months ended
June 30, 2009 and 2008, respectively. Total cost of interest-bearing liabilities decreased 42
basis points between the second quarters of 2008 and 2009, which resulted in a net interest rate
spread that was 17 basis points lower at 3.42% for the second quarter of 2009 compared with 3.59%
for the same period last year. The Companys tax-equivalent net interest margin of 3.62% for the
three months ended June 30, 2009 decreased 30 basis points from 3.92% for the same period of 2008.
The rate earned on loans decreased 59 basis points to 6.19% from 6.78% for the three months ended
June 30, 2009 and 2008, respectively. The effect of the cuts in the target federal funds rate by
the Federal Open Market Committee and the associated decline in the Prime rate had a profound
impact on loan yields throughout 2008 and 2009 and when combined with the addition of Coddle Creek
resulted in a net decrease of $324 thousand, or 1.63%, in tax-equivalent loan interest income for
the second quarter of 2009 compared with the second quarter of 2008.
During the three months ended June 30, 2009, the tax-equivalent yield on available-for-sale
securities decreased 28 basis points to 5.16%, while the average balance decreased by $55.3
million, or 9.03%, compared with the same period in 2008. The decline in average balance was due
largely to declines in the fair value of available-for-sale securities. The average balance of the
held-to-maturity securities portfolio continued to decline as securities matured or were called and
were not replaced.
Compared with the second quarter of 2008, average interest-bearing balances with banks increased to
$57.89 million during the second quarter of 2009, as the yield decreased 190 basis points to 0.27%
during the same period. Interest-bearing balances with banks are comprised largely of excess
liquidity bearing overnight market rates. The rate earned on these overnight balances during the
second quarter of 2009 decreased along with decreases in short-term benchmark interest rates. The
Company maintained a strong liquidity position in the second quarter to balance the risks
associated with the fed funds market and general economic conditions.
Compared with the same period in 2008,
the average balances of interest-bearing demand deposits
increased $23.61 million, or 13.56%, while the average rate paid during the second quarter of 2009
increased by two basis points. During the three months ended June 30, 2009, the average balances
of savings deposits increased $9.36 million, or 3.03%, while the average rate paid decreased 87
basis points compared to the same period in 2008. Average time deposits increased $206.32 million,
or 32.23%, while the average rate paid on time deposits decreased 63 basis points from 3.69% in the
second quarter of 2008 to 3.06% in the second quarter of 2009. The level of average
non-interest-bearing demand deposits decreased $16.03 million, or 7.37%, to $201.67 million during
the quarter ended June 30, 2009, compared with the corresponding period of the prior year. The
overall increase in the level of average deposits reflects the addition of Coddle Creek. Movements
within the deposit types reflect customers seeking yield enhancement
and safety within FDIC-insured products.
Retail repurchase agreements, which consist of collateralized retail deposits and commercial
treasury accounts, decreased $52.24 million, or 33.98%, to $101.53 million for the second quarter
of 2009 while the rate decreased 74 basis points to 1.32% during the same period. The decrease in
average balance can be largely attributed to the customers converting retail repurchase agreements
to certificates of deposit and businesses using cash during difficult economic times. There were
no fed funds purchased on average during the second quarter of 2009, compared with $9.93 million in
the same period in 2008. Wholesale repurchase agreements remained unchanged at $50.00 million,
while the rate increased 201 basis points between the two periods due
to structure within those borrowings. The average balance of FHLB
borrowings and other long-term debt decreased by $56.56 million, or 21.37%, in the second quarter
of 2009 to $208.10 million, while the rate paid on those borrowings decreased 15 basis points.
Net Interest Income Year-to-Date Comparison (See Table II)
Net interest income was $32.75 million for the six months ended June 30, 2009, compared with $32.99
million for the corresponding period in 2008, a decrease of $231 thousand, or 0.70%.
Tax-equivalent net interest income totaled $34.44 million for the six months ended June 30, 2009, a
decrease of $774 thousand, or 2.20%, from $35.22 million for the first half of 2008. The decrease
in tax-equivalent net interest income was due primarily to decreases in loan and investment yields
as a result of the precipitous declines in benchmark interest rates, including the Prime Rate,
since late 2007.
Compared with the first half of 2008, average earning assets increased $49.20 million while
interest-bearing liabilities increased $106.47 million during the six
months ended June 30, 2009.
The changes include the impact of the Coddle Creek
- 33 -
acquisition in November 2008. The yield on
average earning assets decreased 63 basis points to 5.84% from 6.47% between the six months ended
June 30, 2009 and 2008, respectively. Total cost of interest-bearing liabilities decreased 61
basis points between the second quarters of 2008 and 2009, which resulted in a net interest rate
spread that was two basis points lower at 3.47% for the first half of 2009 compared with 3.49% for
the same period last year. The Companys tax-equivalent net interest margin of 3.68% for the six
months ended June 30, 2009 decreased 17 basis points from 3.85% for the same period of 2008.
The rate earned on loans decreased 71 basis points to 6.23% from 6.94% for the six months ended
June 30, 2009 and 2008, respectively. The effect of the cuts in the target federal funds rate by
the Federal Open Market Committee and the associated decline in the Prime rate had a profound
impact on loan yields throughout 2008 and 2009, resulting in a net decrease of $1.59 million, or
3.85%, in tax-equivalent loan interest income for the first half of 2009 compared with the first
half of 2008.
During the six months ended June 30, 2009, the tax-equivalent yield on available-for-sale
securities decreased 7 basis points to 5.55%, while the average balance decreased by $82.52
million, or 13.36%, compared with the same period in 2008. The decline in average balance was due
to declines in the fair value of available-for-sale securities. The average balance of the
held-to-maturity securities portfolio continued to decline as securities matured or were called and
were not replaced.
Compared with the first half of 2008, average interest-bearing balances with banks increased to
$65.71 million during the first half of 2009, as the yield decreased 258 basis points to 0.24%
during the same period. Interest-bearing balances with banks is comprised largely of excess
liquidity bearing overnight market rates. The rate earned on these overnight balances during the
first half of 2009 decreased along with decreases in short-term benchmark interest rates.
Compared with the same period in 2008, the average balances of interest-bearing demand deposits
increased $25.85 million, or 15.37%, while the average rate paid during the first half of 2009
remained constant with the same period of 2008 at 0.17%. During the six months ended June 30,
2009, the average balances of savings deposits decreased $2.56 million, or 0.80%, while the average
rate paid decreased 92 basis points compared to the same period in 2008. Average time deposits
increased $195.82 million, or 29.83%, while the average rate paid on time deposits decreased 86
basis points from 4.00% in the first half of 2008 to 3.14% in the first half of 2009. The level of
average non-interest-bearing demand deposits decreased $14.84 million, or 6.89%, to $200.50 million
during the half ended June 30, 2009, compared with the corresponding period of the prior year. The
overall increase in the level of average deposits reflects the addition of Coddle Creek. Movements
within the deposit types reflect customers seeking yield enhancement within FDIC insured products.
Retail repurchase agreements, which consist of collateralized retail deposits and commercial
treasury accounts, decreased $47.69 million, or 31.44%, to $103.98 million for the first half of
2009, while the rate decreased 100 basis points to 1.40% during the same period. The decrease in
average balance can be largely attributed to the customers converting retail repurchase agreements
to certificates of deposit and businesses using cash during difficult economic times. There were
no fed funds purchased on average during the first half of 2009, compared with $5.88 million in the
same period in 2008. Wholesale repurchase agreements remained unchanged at $50.00 million, while
the rate increased 117 basis points between the two periods. The average balance of FHLB
borrowings and other long-term debt decreased by $59.07 million, or 21.83%, in the first half of
2009 to $211.51 million, while the rate paid on those borrowings decreased 36 basis points.
- 34 -
Table I
AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
June 30, 2009 |
|
|
June 30, 2008 |
|
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
|
Balance |
|
|
Interest (1) |
|
|
Rate (1) |
|
|
Balance |
|
|
Interest (1) |
|
|
Rate (1) |
|
|
|
|
(Restated) |
(Dollars in Thousands) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (2) |
|
$ |
1,269,584 |
|
|
$ |
19,588 |
|
|
|
6.19 |
% |
|
$ |
1,180,813 |
|
|
$ |
19,912 |
|
|
|
6.78 |
% |
Securities available for sale |
|
|
557,110 |
|
|
|
7,169 |
|
|
|
5.16 |
% |
|
|
612,411 |
|
|
|
8,278 |
|
|
|
5.44 |
% |
Securities held to maturity |
|
|
7,824 |
|
|
|
164 |
|
|
|
8.40 |
% |
|
|
10,927 |
|
|
|
273 |
|
|
|
10.05 |
% |
Interest-bearing deposits |
|
|
57,885 |
|
|
|
39 |
|
|
|
0.27 |
% |
|
|
13,171 |
|
|
|
71 |
|
|
|
2.17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Earning Assets |
|
|
1,892,403 |
|
|
|
26,960 |
|
|
|
5.71 |
% |
|
|
1,817,322 |
|
|
|
28,534 |
|
|
|
6.31 |
% |
Other assets |
|
|
287,211 |
|
|
|
|
|
|
|
|
|
|
|
228,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
2,179,614 |
|
|
|
|
|
|
|
|
|
|
$ |
2,045,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
$ |
197,710 |
|
|
$ |
81 |
|
|
|
0.17 |
% |
|
$ |
174,100 |
|
|
$ |
65 |
|
|
|
0.15 |
% |
Savings deposits |
|
|
317,700 |
|
|
|
540 |
|
|
|
0.68 |
% |
|
|
308,344 |
|
|
|
1,188 |
|
|
|
1.55 |
% |
Time deposits |
|
|
846,560 |
|
|
|
6,454 |
|
|
|
3.06 |
% |
|
|
640,236 |
|
|
|
5,865 |
|
|
|
3.68 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
1,361,970 |
|
|
|
7,076 |
|
|
|
2.08 |
% |
|
|
1,122,680 |
|
|
|
7,118 |
|
|
|
2.55 |
% |
Borrowings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,932 |
|
|
|
60 |
|
|
|
2.43 |
% |
Retail repurchase agreements |
|
|
101,525 |
|
|
|
333 |
|
|
|
1.32 |
% |
|
|
153,768 |
|
|
|
789 |
|
|
|
2.06 |
% |
Wholesale repurchase agreements |
|
|
50,000 |
|
|
|
465 |
|
|
|
3.73 |
% |
|
|
50,000 |
|
|
|
214 |
|
|
|
1.72 |
% |
FHLB borrowings and other indebtedness |
|
|
208,103 |
|
|
|
1,994 |
|
|
|
3.84 |
% |
|
|
264,661 |
|
|
|
2,627 |
|
|
|
3.99 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings |
|
|
359,627 |
|
|
|
2,792 |
|
|
|
3.11 |
% |
|
|
478,361 |
|
|
|
3,690 |
|
|
|
3.10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
1,721,597 |
|
|
|
9,868 |
|
|
|
2.30 |
% |
|
|
1,601,041 |
|
|
|
10,808 |
|
|
|
2.72 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interestbearing demand deposits |
|
|
201,670 |
|
|
|
|
|
|
|
|
|
|
|
217,704 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
24,419 |
|
|
|
|
|
|
|
|
|
|
|
19,368 |
|
|
|
|
|
|
|
|
|
Stockholders Equity |
|
|
231,928 |
|
|
|
|
|
|
|
|
|
|
|
207,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
|
$ |
2,179,614 |
|
|
|
|
|
|
|
|
|
|
$ |
2,045,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income, Tax Equivalent |
|
|
|
|
|
$ |
17,093 |
|
|
|
|
|
|
|
|
|
|
$ |
17,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Rate Spread (3) |
|
|
|
|
|
|
|
|
|
|
3.42 |
% |
|
|
|
|
|
|
|
|
|
|
3.59 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Margin (4) |
|
|
|
|
|
|
|
|
|
|
3.62 |
% |
|
|
|
|
|
|
|
|
|
|
3.92 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Fully Taxable Equivalent (FTE) at the rate of 35%. The FTE basis adjusts for the tax
benefits of income on certain tax-exempt loans and investments using the federal statutory rate of
35% for each period presented. The Company believes this measure to be the preferred industry
measurement of net interest income and provides relevant comparison between taxable and non-taxable
amounts. |
|
(2) |
|
Non-accrual loans are included in average balances outstanding but with no related interest
income during the period of non-accrual. |
|
(3) |
|
Represents the difference between the yield on earning assets and cost of funds. |
|
(4) |
|
Represents tax equivalent net interest income divided by average interest-earning assets. |
- 35 -
Table II
AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, 2009 |
|
|
June 30, 2008 |
|
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
|
Balance |
|
|
Interest (1) |
|
|
Rate (1) |
|
|
Balance |
|
|
Interest (1) |
|
|
Rate (1) |
|
|
|
|
(Restated) |
(Dollars in Thousands) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (2) |
|
$ |
1,280,394 |
|
|
$ |
39,584 |
|
|
|
6.23 |
% |
|
$ |
1,193,147 |
|
|
$ |
41,169 |
|
|
|
6.94 |
% |
Securities available for sale |
|
|
535,326 |
|
|
|
14,741 |
|
|
|
5.55 |
% |
|
|
617,843 |
|
|
|
17,276 |
|
|
|
5.62 |
% |
Securities held to maturity |
|
|
8,147 |
|
|
|
336 |
|
|
|
8.31 |
% |
|
|
11,501 |
|
|
|
515 |
|
|
|
9.00 |
% |
Interest-bearing deposits |
|
|
65,713 |
|
|
|
78 |
|
|
|
0.24 |
% |
|
|
17,887 |
|
|
|
251 |
|
|
|
2.82 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Earning Assets |
|
|
1,889,580 |
|
|
|
54,739 |
|
|
|
5.84 |
% |
|
|
1,840,378 |
|
|
|
59,211 |
|
|
|
6.47 |
% |
Other assets |
|
|
288,115 |
|
|
|
|
|
|
|
|
|
|
|
228,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
2,177,695 |
|
|
|
|
|
|
|
|
|
|
$ |
2,068,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
$ |
193,983 |
|
|
$ |
160 |
|
|
|
0.17 |
% |
|
$ |
168,138 |
|
|
$ |
140 |
|
|
|
0.17 |
% |
Savings deposits |
|
|
315,146 |
|
|
|
1,196 |
|
|
|
0.77 |
% |
|
|
317,702 |
|
|
|
2,675 |
|
|
|
1.69 |
% |
Time deposits |
|
|
852,258 |
|
|
|
13,287 |
|
|
|
3.14 |
% |
|
|
656,440 |
|
|
|
13,044 |
|
|
|
4.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
1,361,387 |
|
|
|
14,643 |
|
|
|
2.17 |
% |
|
|
1,142,280 |
|
|
|
15,859 |
|
|
|
2.79 |
% |
Borrowings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,875 |
|
|
|
79 |
|
|
|
2.70 |
% |
Retail repurchase agreements |
|
|
103,983 |
|
|
|
723 |
|
|
|
1.40 |
% |
|
|
151,675 |
|
|
|
1,809 |
|
|
|
2.40 |
% |
Wholesale repurchase agreements |
|
|
50,000 |
|
|
|
975 |
|
|
|
3.93 |
% |
|
|
50,000 |
|
|
|
687 |
|
|
|
2.76 |
% |
FHLB borrowings and other indebtedness |
|
|
211,511 |
|
|
|
3,956 |
|
|
|
3.77 |
% |
|
|
270,583 |
|
|
|
5,561 |
|
|
|
4.13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings |
|
|
365,494 |
|
|
|
5,655 |
|
|
|
3.12 |
% |
|
|
478,133 |
|
|
|
8,136 |
|
|
|
3.42 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
1,726,881 |
|
|
|
20,298 |
|
|
|
2.37 |
% |
|
|
1,620,413 |
|
|
|
23,995 |
|
|
|
2.98 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interestbearing demand deposits |
|
|
200,497 |
|
|
|
|
|
|
|
|
|
|
|
215,338 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
25,064 |
|
|
|
|
|
|
|
|
|
|
|
20,159 |
|
|
|
|
|
|
|
|
|
Stockholders Equity |
|
|
225,253 |
|
|
|
|
|
|
|
|
|
|
|
212,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
|
$ |
2,177,695 |
|
|
|
|
|
|
|
|
|
|
$ |
2,068,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income, Tax Equivalent |
|
|
|
|
|
$ |
34,442 |
|
|
|
|
|
|
|
|
|
|
$ |
35,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Rate Spread (3) |
|
|
|
|
|
|
|
|
|
|
3.47 |
% |
|
|
|
|
|
|
|
|
|
|
3.49 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Margin (4) |
|
|
|
|
|
|
|
|
|
|
3.68 |
% |
|
|
|
|
|
|
|
|
|
|
3.85 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Fully Taxable Equivalent (FTE) at the rate of 35%. The FTE basis adjusts for the tax
benefits of income on certain tax-exempt loans and investments using the federal statutory rate of
35% for each period presented. The Company believes this measure to be the preferred industry
measurement of net interest income and provides relevant comparison between taxable and non-taxable
amounts. |
|
(2) |
|
Non-accrual loans are included in average balances outstanding but with no related interest
income during the period of non-accrual. |
|
(3) |
|
Represents the difference between the yield on earning assets and cost of funds. |
|
(4) |
|
Represents tax equivalent net interest income divided by average interest-earning assets. |
- 36 -
The following table summarizes the changes in tax-equivalent interest earned and paid detailing the
amounts attributable to (i) changes in volume (change in the average volume times the prior years
average rate), (ii) changes in rate (changes in the average rate times the prior years average
volume), and (iii) changes in rate/volume (change in the average column times the change in
average rate)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, 2009 Compared to 2008 |
|
|
June 30, 2009 Compared to 2008 |
|
|
|
$ Increase/(Decrease) due to |
|
|
$ Increase/(Decrease) due to |
|
|
|
|
|
|
|
|
|
|
|
Rate/ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate/ |
|
|
|
|
(In Thousands) |
|
Volume |
|
|
Rate |
|
|
Volume |
|
|
Total |
|
|
Volume |
|
|
Rate |
|
|
Volume |
|
|
Total |
|
Interest Earned On: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (1) |
|
$ |
1,501 |
|
|
$ |
(1,748 |
) |
|
$ |
(77 |
) |
|
$ |
(324 |
) |
|
$ |
3,002 |
|
|
$ |
(4,168 |
) |
|
$ |
(419 |
) |
|
$ |
(1,585 |
) |
Securities available-for-sale (1) |
|
|
(750 |
) |
|
|
(420 |
) |
|
|
61 |
|
|
|
(1,109 |
) |
|
|
(2,301 |
) |
|
|
(215 |
) |
|
|
(19 |
) |
|
|
(2,535 |
) |
Securities held-to-maturity (1) |
|
|
(78 |
) |
|
|
(45 |
) |
|
|
13 |
|
|
|
(109 |
) |
|
|
(150 |
) |
|
|
(39 |
) |
|
|
10 |
|
|
|
(179 |
) |
Interest-bearing deposits
with other banks |
|
|
242 |
|
|
|
(62 |
) |
|
|
(211 |
) |
|
|
(32 |
) |
|
|
669 |
|
|
|
(229 |
) |
|
|
(613 |
) |
|
|
(173 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
915 |
|
|
|
(2,275 |
) |
|
|
(214 |
) |
|
|
(1,574 |
) |
|
|
1,221 |
|
|
|
(4,651 |
) |
|
|
(1,041 |
) |
|
|
(4,472 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Paid On: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
9 |
|
|
|
6 |
|
|
|
1 |
|
|
|
16 |
|
|
|
21 |
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
20 |
|
Savings deposits |
|
|
36 |
|
|
|
(667 |
) |
|
|
(17 |
) |
|
|
(648 |
) |
|
|
(21 |
) |
|
|
(1,462 |
) |
|
|
4 |
|
|
|
(1,479 |
) |
Time deposits |
|
|
1,895 |
|
|
|
(1,000 |
) |
|
|
(306 |
) |
|
|
589 |
|
|
|
3,880 |
|
|
|
(2,774 |
) |
|
|
(864 |
) |
|
|
243 |
|
Fed funds purchased |
|
|
(60 |
) |
|
|
|
|
|
|
0 |
|
|
|
(60 |
) |
|
|
(79 |
) |
|
|
|
|
|
|
(0 |
) |
|
|
(79 |
) |
Retail repurchase agreements |
|
|
(269 |
) |
|
|
(287 |
) |
|
|
100 |
|
|
|
(456 |
) |
|
|
(567 |
) |
|
|
(749 |
) |
|
|
231 |
|
|
|
(1,086 |
) |
Wholesale repurchase
agreement |
|
|
|
|
|
|
250 |
|
|
|
1 |
|
|
|
251 |
|
|
|
|
|
|
|
290 |
|
|
|
(2 |
) |
|
|
288 |
|
FHLB borrowings and other
long-term debt |
|
|
(563 |
) |
|
|
(98 |
) |
|
|
28 |
|
|
|
(633 |
) |
|
|
(1,211 |
) |
|
|
(485 |
) |
|
|
90 |
|
|
|
(1,605 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
1,048 |
|
|
|
(1,796 |
) |
|
|
(194 |
) |
|
|
(941 |
) |
|
|
2,024 |
|
|
|
(5,181 |
) |
|
|
(541 |
) |
|
|
(3,698 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net interest income,
tax-equivalent |
|
$ |
(133 |
) |
|
$ |
(480 |
) |
|
$ |
(21 |
) |
|
$ |
(633 |
) |
|
$ |
(803 |
) |
|
$ |
529 |
|
|
$ |
(500 |
) |
|
$ |
(774 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Fully taxable equivalent using a rate of 35%. |
Provision and Allowance for Loan Losses
There was significant disruption and volatility in the financial and capital markets during 2008
and the first six months of 2009. Turmoil in the mortgage market adversely impacted both domestic
and global markets, resulting in a credit and liquidity crisis. The disruption has been
exacerbated by significant declines in valuations within the real estate and housing markets.
Decreases in real estate values could adversely affect the value of property used as collateral for
loans, including loans originated by the Company. In addition, adverse changes in the economy,
particularly continued high rates of unemployment, may have a negative effect on the ability of the
Companys borrowers to make timely loan payments, which would have an adverse impact on the
Companys earnings. A further increase in loan delinquencies could adversely impact loan loss
experience, causing potential increases in the provision and allowance for loan losses.
- 37 -
The
allowance for loan losses was $18.54 million at June 30,
2009, $17.78 million at December 31,
2008 and $13.43 million at June 30, 2008. The Companys allowance for loan loss activity for the
three- and six-month periods ended June 30, 2009 and 2008, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In Thousands) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(Restated) |
|
|
|
|
|
(Restated) |
|
|
|
|
Allowance for loan losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
18,420 |
|
|
$ |
12,862 |
|
|
$ |
17,782 |
|
|
$ |
12,833 |
|
Provision for loan losses |
|
|
2,552 |
|
|
|
937 |
|
|
|
4,700 |
|
|
|
1,260 |
|
Charge-offs |
|
|
(2,681 |
) |
|
|
(1,198 |
) |
|
|
(4,411 |
) |
|
|
(2,164 |
) |
Recoveries |
|
|
252 |
|
|
|
832 |
|
|
|
472 |
|
|
|
1,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
(2,429 |
) |
|
|
(366 |
) |
|
|
(3,939 |
) |
|
|
(660 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
18,543 |
|
|
$ |
13,433 |
|
|
$ |
18,543 |
|
|
$ |
13,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total
allowance for loan losses to loans held for investment ratio was 1.46% at June 30, 2009,
compared with 1.37% at December 31, 2008, and 1.14% at June 30, 2008. Management considers the
allowance adequate based upon its analysis of the portfolio as of June 30, 2009. Management
believes that it uses relevant information available to make determinations about the allowance.
If circumstances differ substantially from the assumptions used in making determinations,
adjustments to the allowance may be necessary and results of operations could be affected. Because
events affecting borrowers and collateral charge-offs cannot be predicted with certainty, there can
be no assurance that increases to the allowance will not be necessary should the quality of any
loans deteriorate.
Throughout the second quarter and first half of 2009, the Company incurred net charge-offs of $2.43
million and $3.94 million, respectively, compared with $366 thousand and $660 thousand in the
respective periods of 2008. Annualized net charge-offs for the second quarter and first half of
2009 were 0.77% and 0.62%, respectively. The Company made provisions for loan losses of $2.55
million and $4.70 million for the second quarter and first half of 2009, respectively, compared to
$937 thousand and $1.26 million in the respective periods of 2008. The increase in loan loss
provision is primarily attributable to rising loss factors as net charge-offs were higher than in
2008. Qualitative risk factors were also higher, reflective of the higher risk of inherent loan
losses due to rising unemployment, recessionary pressures, and devaluation of various categories of
collateral.
Noninterest Income
Noninterest income consists of all revenues that are not included in interest and fee income
related to earning assets. Noninterest income for the second quarter
of 2009 was $5.62 million
compared with $7.72 million in the same period of 2008, a
decrease of $2.10 million, or 27.21%.
Wealth management revenues increased $35 thousand, or 3.19%, to $1.13 million for the three months
ended June 30, 2009, compared with the same period in 2008. IPC added several large accounts
during 2008 and 2009, which offset revenue decline caused by asset devaluation. Service charges on
deposit accounts increased $28 thousand, or 0.81%, to $3.49 million for the three months ended June
30, 2009, compared with the same period in 2008. The increase is smaller than recent quarters
increases due to lower consumer spending and a generally higher rate of savings. Other service
charges, commissions, and fees increased $69 thousand, or 6.48%, to $1.13 million for the three
months ended June 30, 2009, compared with the same period in 2008. Insurance commissions for the
second quarter of 2009 were $1.64 million, an increase of $493 thousand, or 43.02%, over 2008.
Increased insurance commissions reflect revenue increases associated with agency acquisitions made
by GreenPoint throughout 2008. Other operating income was $349 thousand for the three months ended
June 30, 2009, a decrease of $454 thousand, or 56.54%, compared with the same period in 2008.
Other operating income was down due largely to decreases in dividends on FHLB stock. At June 30,
2009, the Company recognized $3.78 million of
other-than-temporary impairment on three pooled trust
preferred securities and several smaller equity security holdings. During the second quarter of
2009, securities gains of $1.65 million were realized, compared with a gain of $150 thousand in the
comparable period in 2008.
Noninterest
income for the first half of 2009 was $14.05 million compared with $16.87 million in
the same period of 2008, a decrease of $2.82 million, or 16.72%. Wealth management revenues
increased $120 thousand, or 6.01%, to $2.12 million for the six months ended June 30, 2009,
compared with the same period in 2008. IPC added several large accounts during 2008 and 2009,
which offset revenue decline caused by asset devaluation. Service charges on deposit accounts
increased $86 thousand, or 1.31%, to $6.65 million for the six months ended June 30, 2009, compared
with the same period in 2008. The increase is smaller than recent increases due to lower consumer
spending and a generally higher rate of savings. Other
service charges, commissions, and fees increased $126 thousand, or 5.77%, to $2.31 million for the
six months ended
- 38 -
June 30, 2009, compared
with the same period in 2008. Insurance commissions for
the first half of 2009 were $3.96 million, an increase of $1.47 million, or 58.88%, over 2008.
Increased insurance commissions reflect revenue increases associated with agency acquisitions made
by GreenPoint throughout 2008 including its largest acquisition to
date in the fourth quarter of 2008. Other operating income was $935 thousand for the six months ended
June 30, 2009, a decrease of $726 thousand, or 43.71%, compared with the same period in 2008.
Other operating income was down due largely to decreases in dividends on FHLB stock. Through June
30, 2009, the Company recognized $2.29 million of
other-than-temporary impairment on three pooled
trust preferred securities and several smaller equity security holdings. During the first half of
2009, securities gains of $2.05 million were realized, compared with a gain of $1.97 million in the
comparable period in 2008.
Noninterest Expense
Noninterest expense totaled $16.14 million for the quarter ended June 30, 2009, an increase of
$1.38 million, or 9.38%, from the same period in 2008. Salaries and benefits for the second
quarter of 2009 decreased $175 thousand, or 2.31%, compared to the same period in 2008. Salaries
and benefits at GreenPoint increased $360 thousand over the prior second quarter, a result of new
agency acquisitions; salaries and benefits at the new branches from Coddle Creek were $291
thousand. Decreases in general bank staffing levels and benefits largely offset the increases.
Occupancy and furniture and fixtures expenses increased between the comparable periods with the
addition of GreenPoint and the Coddle Creek branches. Other non-interest expense totaled $4.89
million for the second quarter of 2009, an increase of $141 thousand, or 2.97%, from $4.75 million
for the second quarter of 2008.
Over the course of the last three quarters, the FDIC has announced increases in deposit insurance
premiums, as well as proposals to levy special assessments. Deposit insurance premiums and
assessments were $1.29 million and $1.48 million for the three- and six-month periods ended June
30, 2009. The company expects that quarterly premiums for the remainder of 2009 could approximate
$400 thousand, The FDIC special assessment for the period ended June 30, 2009 totaled $988
thousand. The FDIC is considering another special assessment; however, the Company is unable to
estimate the level of any additional assessments at this time.
Noninterest expense totaled $31.34 million for the six months ended June 30, 2009, an increase of
$295 thousand, or 0.95%, from the same period in 2008. Salaries and benefits for the first half of
2009 decreased $99 thousand, or 0.64%, compared to the same period in 2008. Salaries and benefits
at GreenPoint increased $798 thousand over the prior first half, a result of new agency
acquisitions; salaries and benefits at the new branches from Coddle Creek were $632 thousand.
Decreases in general bank staffing levels and benefits largely offset the increases. Occupancy and
furniture and fixtures expenses increased between the comparable periods with the addition of
GreenPoint and the Coddle Creek branches. Other non-interest expense totaled $9.25 million for the
first half of 2009, a decrease of $86 thousand, or 0.92%, from $9.33 million for the first half of
2008 despite the addition of insurance agencies and Coddle Creek,
primarily through cost reduction programs implemented throughout the
first half of 2009.
Income Tax Expense
Income tax expense is comprised of federal and state current and deferred income taxes on pre-tax
earnings of the Company. Income taxes as a percentage of pre-tax income may vary significantly
from statutory rates due to items of income and expense which are excluded, by law, from the
calculation of taxable income. These items are commonly referred to as permanent differences. The
most significant permanent differences for the Company include income on state and municipal
securities which are exempt from federal income tax, certain dividend payments which are deductible
by the Company, and tax credits generated by investments in low income housing and historic
building rehabilitations.
For the second quarter of 2009, income taxes
were $843 thousand compared with $2.42 million for the
second quarter of 2008. For the quarters ended June 30, 2009 and 2008, the effective tax rates
were 25.95% and 27.91%, respectively. The decrease in the effective
rate is due largely to the reduction in taxable income from the
impairment charges. For the six months ended June 30, 2009, income taxes were
$3.17 million compared with $5.00 million for the same period in 2008. For the six months ended
June 30, 2009 and 2008, the effective tax rates were 29.42% and 28.48%, respectively. The increase
in the effective tax rate is due largely to decreases in tax-free
municipal security income and income from bank-owned life insurance.
FINANCIAL CONDITION
Total assets at June 30, 2009,
increased $69.86 million, or 3.28%, to $2.20 billion from December
31, 2008. The increase reflects net increases in the customer deposits as a result of deposit
campaigns and a general movement of funds into FDIC-insured products and continued loan payoffs.
- 39 -
Securities
Available-for-sale securities were $521.88 million at June 30, 2009, compared with $520.72 million
at December 31, 2008, an increase of $1.16 million, or 0.22%. Held-to-maturity securities declined
to $7.73 million at June 30, 2009, compared with $8.67 million at December 31, 2008.
During the
second quarter, the Company recognized other-than-temporary
impairment charges in earnings related to three pooled trust preferred
securities of $3.37 million. During the three- and six-month
periods ended June 30, 2009, the Company recognized impairment
charges on equity securities of $406 thousand and
$615 thousand, respectively.
For a more
detailed discussion of activities regarding investment securities, please see Note 4 to
the Financial Statements.
Loan Portfolio
Loans Held for Sale: The $802 thousand balance of loans held for sale at June 30, 2009, represents
mortgage loans that are sold to investors on a best efforts basis. Accordingly, the Company does
not retain the interest rate risk involved in the commitment. The gross notional amount of
outstanding commitments on loans committed but not closed at June 30, 2009, was $7.31 million on 53 loans.
Loans Held for Investment: Total loans
held for investment were $1.27 billion at June 30, 2009,
representing a decline of $28.72 million from December 31, 2008, and an increase of $88.34 million
from June 30, 2008. The average loan to deposit ratio decreased to 81.19% for the second quarter of
2009, compared with 86.01% for the fourth quarter of 2008 and 88.10% for the second quarter of
2008. Year-to-date average loans of $1.28 billion increased $87.25 million when compared to 2008.
Over the course of the last four years,
the Company has taken measures to enhance its commercial
underwriting standards. The more stringent underwriting has sustained
credit quality; however, these measures, coupled with a reduced complement of commercial loan officers, have resulted in decreases in the
loan portfolio. The Company also continues to realize net payoffs in the area of consumer finance,
as it competes with credit card lenders and captive automobile finance companies.
The held for investment loan portfolio continues to be diversified among loan types and industry
segments. The following table presents the various loan categories and changes in composition as
of June 30, 2009, December 31, 2008, and June 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
December 31, 2008 |
|
|
June 30, 2008 |
|
(Dollars in Thousands) |
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
Loans Held for Investment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and agricultural |
|
$ |
83,873 |
|
|
|
6.61 |
% |
|
$ |
85,034 |
|
|
|
6.55 |
% |
|
$ |
85,833 |
|
|
|
7.27 |
% |
Commercial real estate |
|
|
410,473 |
|
|
|
32.33 |
% |
|
|
407,638 |
|
|
|
31.40 |
% |
|
|
385,870 |
|
|
|
32.67 |
% |
Residential real estate |
|
|
594,646 |
|
|
|
46.85 |
% |
|
|
602,573 |
|
|
|
46.42 |
% |
|
|
490,519 |
|
|
|
41.53 |
% |
Construction |
|
|
112,361 |
|
|
|
8.85 |
% |
|
|
130,610 |
|
|
|
10.06 |
% |
|
|
144,094 |
|
|
|
12.20 |
% |
Consumer |
|
|
62,077 |
|
|
|
4.89 |
% |
|
|
66,258 |
|
|
|
5.10 |
% |
|
|
67,572 |
|
|
|
5.72 |
% |
Other |
|
|
6,014 |
|
|
|
0.47 |
% |
|
|
6,046 |
|
|
|
0.47 |
% |
|
|
7,219 |
|
|
|
0.61 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,269,443 |
|
|
|
100.00 |
% |
|
$ |
1,298,159 |
|
|
|
100.00 |
% |
|
$ |
1,181,107 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Held for Sale |
|
$ |
802 |
|
|
|
|
|
|
$ |
1,024 |
|
|
|
|
|
|
$ |
1,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Performing Assets
Non-performing assets include loans on non-accrual status, loans contractually past due 90 days or
more and still accruing interest, and other real estate owned (OREO). Non-performing assets were
$15.26 million at June 30, 2009, $14.09 million at December 31, 2008, and $4.63 million at June 30,
2008. The percentage of non-performing assets to total loans and OREO was 1.20% at June 30, 2009,
1.08% at December 31, 2008, and 0.39% at June 30, 2008.
- 40 -
The following schedule details non-performing assets by category at the close of each of the
quarters ended June 30, 2009 and 2008, and December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
(In Thousands) |
|
2009 |
|
|
2008 |
|
|
2008 |
|
Non-accrual |
|
$ |
11,645 |
|
|
$ |
12,763 |
|
|
$ |
4,126 |
|
Ninety days past due and accruing |
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned |
|
|
3,615 |
|
|
|
1,326 |
|
|
|
500 |
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets |
|
$ |
15,260 |
|
|
$ |
14,089 |
|
|
$ |
4,626 |
|
|
|
|
|
|
|
|
|
|
|
Ongoing activity within the classification and categories of non-performing loans includes
collections on delinquencies, foreclosures and movements into or out of the non-performing
classification as a result of changing customer business conditions. OREO was $3.62 million at
June 30, 2009, and is carried at the lesser of estimated net realizable value or cost. OREO
increased from December 31, 2008 as non-performing loans were converted to foreclosed real estate.
Deposits and Other Borrowings
Total deposits increased by $43.60 million, or 2.90%, during the first six months of 2009. Non
interest-bearing demand deposits increased $2.83 million to $202.54 million at June 30, 2009,
compared with $199.71 million at December 31, 2008. Interest-bearing demand deposits increased
$10.79 million to $195.91 million at June 30, 2009. Savings increased $1.86 million, or 0.60%, and
time deposits increased $28.12 million, or 3.47%, during the first half of 2009. The Companys
increase in deposits is likely due to increasing customer household
savings, a desire for FDIC insured deposit products, and a flow of funds out of equity markets.
Securities sold under repurchase agreements decreased $12.11 million, or 7.30%, in the first six
months of 2009 to $153.80 million. There were no federal funds purchased outstanding at June 30,
2009, as the Company maintained strong liquidity through the second quarter.
Stockholders Equity
Total
stockholders equity increased $63.18 million, or 28.82%,
from $219.22 million at December
31, 2008, to $282.39 million at June 30, 2009. In June 2009, we completed the sale of 5.29 million
shares of our common stock in a public offering. The purchase price was $12.50 per share, and net
proceeds from the sale totaled approximately $61.67 million. Other changes in equity were the
result of net earnings of $7.60 million, less preferred dividends of $1.15 million, common
dividends declared of $2.85 million, the cumulative effect adjustment of $6.13 million, and other
comprehensive loss of $2.90 million.
On November 21, 2008, we completed the issuance of $41.5 million of Series A perpetual preferred
stock and a related warrant under the U.S. Department of the Treasurys (Treasury) voluntary TARP
Capital Purchase Program (CPP). The warrant represents the right to purchase 176,546 shares of
our common stock at an initial exercise price of $35.26 per share. On July 8, 2009, we repurchased
the $41.5 million in preferred stock from the Treasury. We did not repurchase the warrants, so the
Treasury has the option to sell the warrants in the open market to a third party.
Risk-Based Capital
Risk-based capital guidelines promulgated by federal banking agencies weight balance sheet assets
and off-balance sheet commitments based on inherent risks associated with the respective asset
types. At June 30, 2009, the Companys total capital to
risk-weighted assets ratio was 14.61%
compared with 12.94% at December 31, 2008. The Companys Tier 1 capital to risk-weighted assets
ratio was 13.65% at June 30, 2009, compared with 11.84% at December 31, 2008. The Companys Tier 1
leverage ratio at June 30, 2009, was 12.49% compared with 9.70% at December 31, 2008. All of the
Companys regulatory capital ratios exceed the current well-capitalized levels. Regulatory capital
ratios increased from December 31, 2008, primarily because of
the common stock offering, offset by the
treatment of certain debt securities when rated below investment grade.
- 41 -
PART I. ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Liquidity and Capital Resources
At June 30, 2009, the Company maintained liquidity in the form of cash and cash equivalent balances
of $116.10 million, unpledged securities available-for-sale of $166.61 million, and total FHLB
credit availability of approximately $91.05 million. Cash and cash equivalents as well as
advances from the FHLB are immediately available for satisfaction of deposit withdrawals, customer
credit needs and operations of the Company. Investment securities available-for-sale represents a
secondary level of liquidity available for conversion to liquid funds in the event of extraordinary
needs. The Company also maintains approved lines of credit with correspondent banks as backup
liquidity sources.
The Company maintains a liquidity policy as a means to manage liquidity and the associated risk.
The policy includes a Liquidity Contingency Plan (the Liquidity Plan) that is designed as a tool
for the Company to detect liquidity issues promptly in order to protect depositors, creditors and
shareholders. The Liquidity Plan includes monitoring various internal and external indicators such
as changes in core deposits and changes in market conditions. It provides for timely responses to a
wide variety of funding scenarios ranging from changes in loan demand to a decline in the Companys
quarterly earnings to a decline in the market price of the Companys stock. The Liquidity Plan
calls for specific responses designed to meet a wide range of liquidity needs based upon
assessments on a recurring basis by the Company and its Board of Directors.
Interest Rate Risk and Asset/Liability Management
The Companys profitability is dependent to a large extent upon its net interest income, which is
the difference between its interest income on interest-earning assets, such as loans and
securities, and its interest expense on interest-bearing liabilities, such as deposits and
borrowings. The Company, like other financial institutions, is subject to interest rate risk to
the degree that interest-earning assets reprice differently than interest-bearing liabilities. The
Company manages its mix of assets and liabilities with the goals of limiting its exposure to
interest rate risk, ensuring adequate liquidity, and coordinating its sources and uses of funds
while maintaining an acceptable level of net interest income given the current interest rate
environment.
The Companys primary component of operational revenue, net interest income, is subject to
variation as a result of changes in interest rate environments in conjunction with unbalanced
repricing opportunities on earning assets and interest-bearing liabilities. Interest rate risk has
four primary components: repricing risk, basis risk, yield curve risk and option risk. Repricing
risk occurs when earning assets and paying liabilities reprice at differing times as interest rates
change. Basis risk occurs when the underlying rates on the assets and liabilities the institution
holds change at different levels or in varying degrees. Yield curve risk is the risk of adverse
consequences as a result of unequal changes in the spread between two or more rates for different
maturities for the same instrument. Lastly, option risk is due to embedded options, often put or
call options, given or sold to holders of financial instruments.
In order to mitigate the effect of changes in the general level of interest rates, the Company
manages repricing opportunities and thus, its interest rate sensitivity. The Company seeks to
control its interest rate risk exposure to insulate net interest income and net earnings from
fluctuations in the general level of interest rates. To measure its exposure to interest rate
risk, quarterly simulations of net interest income are performed using financial models that
project net interest income through a range of possible interest rate environments including
rising, declining, most likely and flat rate scenarios. The simulation model used by the Company
captures all earning assets, interest-bearing liabilities and off-balance sheet financial
instruments and combines the various factors affecting rate sensitivity into an earnings outlook.
The results of these simulations indicate the existence and severity of interest rate risk in each
of those rate environments based upon the current balance sheet position, assumptions as to changes
in the volume and mix of interest-earning assets and interest-paying liabilities and the Companys
estimate of yields to be attained in those future rate environments and rates that will be paid on
various deposit instruments and borrowings. These assumptions are inherently uncertain and, as a
result, the model cannot precisely predict the impact of fluctuations in interest rates on net
interest income. Actual results will differ from simulated results due to timing, magnitude, and
frequency of interest rate changes, as well as changes in market conditions and the Companys
strategies. However, the earnings simulation model is currently the best tool available to the
Company for managing interest rate risk.
Specific strategies for management of interest rate risk have included shortening the amortized
maturity of new fixed-rate loans, increasing the volume of adjustable-rate loans to reduce the
average maturity of the Companys interest-earning assets, and monitoring the term and structure of
liabilities to maintain a balanced mix of maturity and repricing structures to mitigate potential
exposure. At June 30, 2009, net interest income modeling shows the Company to be in a relatively
neutral position.
- 42 -
The Company has established policy limits for tolerance of interest rate risk that allow for no
more than a 10% reduction in projected net interest income for the next twelve months based on a
comparison of net interest income simulations in various interest rate scenarios. In addition, the
policy addresses exposure limits to changes in the economic value of equity according to predefined
policy guidelines. The most recent simulation indicates that current exposure to interest rate
risk is within the Companys defined policy limits.
The following table summarizes the
projected impact on the next twelve months net interest income
and the economic value of equity as of June 30, 2009, and December 31, 2008, of immediate and
sustained rate shocks in the interest rate environments of plus and minus 100 and 200 basis points
from the base simulation, assuming no remedial measures are affected. As of June 30, 2009, the
Federal Open Market Committee maintains a target range for federal funds of 0 to 25 basis points,
rendering a complete downward shock of 200 basis points unrealistic and not meaningful. In the
downward rate shocks presented, benchmark interest rates are dropped with floors near 0%.
The economic value of equity is a measure which reflects the impact of changing rates on the
underlying values of the Companys assets and liabilities in various rate scenarios. The scenarios
illustrate the potential estimated impact of instantaneous rate shocks on the underlying value of
equity. The economic value of the equity is based on the present value of all the future cash
flows under the different rate scenarios.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate Sensitivity Analysis |
(Dollars in Thousands) |
|
June 30, 2009 |
|
|
Change in |
|
|
|
|
|
Change in |
|
|
Increase (Decrease) in |
|
Net Interest |
|
% |
|
Economic Value |
|
% |
Interest Rates (Basis Points) |
|
Income |
|
Change |
|
of Equity |
|
Change |
200 |
|
$ |
3,260 |
|
|
|
4.8 |
|
|
$ |
11,848 |
|
|
|
4.9 |
|
100 |
|
|
2,178 |
|
|
|
3.2 |
|
|
|
16,734 |
|
|
|
6.9 |
|
(100) |
|
|
221 |
|
|
|
0.3 |
|
|
|
(12,078 |
) |
|
|
(5.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
Change in |
|
|
|
|
|
Change in |
|
|
Increase (Decrease) in |
|
Net Interest |
|
% |
|
Economic Value |
|
% |
Interest Rates (Basis Points) |
|
Income |
|
Change |
|
of Equity |
|
Change |
200 |
|
$ |
1,479 |
|
|
|
2.3 |
|
|
$ |
(8,040 |
) |
|
|
(3.7 |
) |
100 |
|
|
1,493 |
|
|
|
2.3 |
|
|
|
719 |
|
|
|
0.3 |
|
(100) |
|
|
1,874 |
|
|
|
2.9 |
|
|
|
(21,443 |
) |
|
|
(9.9 |
) |
PART I. ITEM 4. Controls and Procedures
Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company carried out an evaluation, under
the supervision and with the participation of the Companys management, including the Companys
Chief Executive Officer (CEO) along with the Companys Chief Financial Officer (CFO), of the
effectiveness of the Companys disclosure controls and procedures pursuant to the Securities
Exchange Act of 1934 (Exchange Act) Rule 13a-15(b). As a result of the restatement described in Note 2. Restatement of Consolidated Financial
Statements of the Notes to Consolidated Financial Statements of this
Quarterly Report on
Form 10-Q/A, management
concluded that, as of June 30, 2009, the Company did not maintain effective controls to ensure the
appropriate calculation of its allowance for loan losses. Specifically, during a process
enhancement to the model that calculates the allowance for loan losses, the quarterly average loss
rate was not annualized. Control procedures in place for reviewing the quantitative model for
calculating the allowance for loan losses did not timely identify this error. Solely because of
this material weakness, management has concluded that the Companys disclosure controls and
procedures were not effective as of June 30, 2009. As of July 27, 2010, the Company has corrected the computational
error in its model for calculating the allowance for loan losses.
The Companys management, including the CEO and CFO, does not expect that the Companys disclosure
controls and internal controls will prevent all errors and all fraud. A control system, no matter
how well conceived and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision making can be faulty, and
that breakdowns can occur because of simple error or mistake.
- 43 -
Additionally, controls can be circumvented by the individual acts of some persons, by collusion of
two or more people, or by management override of the controls.
Changes in Internal Control Over Financial Reporting
The Company assesses the adequacy of its internal control over financial reporting quarterly and
enhances its controls in response to internal control assessments and internal and external audit
and regulatory recommendations. Except for the foregoing, there were no changes in the Companys
internal control over financial reporting for the quarter ended June 30, 2009, that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company is currently a defendant in various legal actions and asserted claims in the normal
course of business. Although the Company and legal counsel are unable to assess the ultimate
outcome of each of these matters with certainty, they are of the belief that the resolution of
these actions should not have a material adverse affect on the financial position, results of
operations, or cash flows of the Company.
ITEM 1A. Risk Factors
The below risk factors revise certain risk factors previously disclosed in the Companys Annual
Report on Form 10-K/A for the year ended December 31, 2008, and add certain new risk factors.
RISK FACTORS
Risks Related to Ownership of Our Common Stock
The price of our common stock may fluctuate significantly, and this may make it difficult for you
to resell shares of common stock owned by you at times or at prices you find attractive.
Stock price volatility may make it difficult for you to resell your common stock when you want and
at prices you find attractive. Our stock price can fluctuate significantly in response to a
variety of factors including, among other things:
|
|
|
Actual or anticipated variations in quarterly results of operations; |
|
|
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|
Recommendations by securities analysts; |
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|
Operating and stock price performance of other companies that investors deem comparable to us; |
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|
News reports relating to trends, concerns and other issues in the financial services
industry, including the failures of other financial institutions in the current economic
downturn; |
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|
Perceptions in the marketplace regarding us and/or our competitors; |
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|
New technology used, or services offered, by competitors; |
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|
Significant acquisitions or business combinations, strategic partnerships, joint
ventures or capital commitments by or involving us or our competitors; |
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|
Failure to integrate acquisitions or realize anticipated benefits from acquisitions; |
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|
Changes in government regulations; and |
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|
Geopolitical conditions such as acts or threats of terrorism or military conflicts. |
General market fluctuations, industry factors and general economic and political conditions and
events, such as economic slowdowns or recessions, interest rate changes or credit loss trends,
could also cause our stock price to decrease regardless of operating results as evidenced by the
current volatility and disruption of capital and credit markets.
The trading volume in our common stock is less than that of other larger financial services
companies which may adversely affect the price of our common stock.
Although our common stock is traded on The NASDAQ Global Select Market, the trading volume in our
common stock is less than that of other larger financial services companies. A public trading
market having the desired characteristics of depth, liquidity and orderliness depends on the
presence in the marketplace of willing buyers and sellers of our common stock at any given time.
This presence depends on the individual decisions of investors and general economic and market
conditions over which we have no control. Given the lower trading volume of our common stock,
significant sales of our common stock, or the expectation of these sales, could cause the our stock
price to fall.
- 44 -
An investment in our common stock is not an insured deposit.
Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any
other deposit insurance fund or by any other public or private entity. Investment in our common
stock is inherently risky for the reasons described in this Risk Factors section and is subject
to the same market forces that affect the price of common stock in any company. As a result, if you
acquire our common stock, you may lose some or all of your investment.
There may be future sales or other dilutions of our equity which may adversely affect the market
price of our common stock.
We generally are not restricted from issuing additional shares of common stock, including
securities that are convertible into or exchangeable for, or that represent the right to receive
our common stock. Because our decision to issue securities in any future offering will depend on
market conditions and other factors beyond our control, we cannot predict or estimate the amount,
timing or nature of any future offerings. Thus, our stockholders bear the risk of any future stock
issuances reducing the market price of our common stock and diluting their stock holdings in us.
The exercise of any options granted to directors, executive officers and other employees under our
stock compensation plans, the issuance of shares of common stock in acquisitions and other
issuances of our common stock could have an adverse effect on the market price of the shares of our
common stock, and the existence of options, or shares of our common stock reserved for issuance as
restricted shares of our common stock, may materially adversely affect the terms upon which we may
be able to obtain additional capital in the future through the sale of equity securities. In
addition, future issuances of shares of our common stock will be dilutive to existing stockholders.
In connection with our TARP CPP financing, the Treasury received a warrant to purchase 176,546
shares of our common stock at an initial per share exercise price of $35.26, subject to adjustment,
which expires ten years from the issuance date. The issuance of any additional shares of common
stock as a result of exercise of the warrant held by the Treasury or the issuance of any other
common stock or convertible securities could dilute the ownership interest of our existing common
stockholders. The market price of our common stock could decline as a result of future sales of
our common stock as well as other sales of a large block of shares of our common stock in the
market, or the perception that such sales could occur.
Future offerings of debt, which would be senior to our common stock upon liquidation, and/or
preferred equity securities which may be senior to our common stock for purposes of dividend
distributions or upon liquidation, may adversely affect the market price of our common stock.
In the future, we may attempt to increase our capital resources or, if the Banks capital ratios
fall below the required minimums, we could be forced to raise additional capital by making
additional offerings of debt or preferred equity securities, including medium-term notes, trust
preferred securities, senior or subordinated notes or preferred stock. Upon liquidation, holders
of our debt securities and shares of preferred stock and lenders with respect to other borrowings
will receive distributions of our available assets prior to the holders of our common stock.
Additional equity offerings may dilute the holdings of our existing stockholders or reduce the
market price of our common stock, or both. Holders of our common stock are not entitled to
preemptive rights or other protections against dilution.
The Banks ability to pay dividends is subject to regulatory limitations which, to the extent we
require such dividends in the future, may affect our ability to pay our obligations and pay
dividends.
We are a separate legal entity from the Bank and our other subsidiaries, and we do not have
significant operations of our own. We have historically depended on the Banks cash and liquidity
as well as dividends to pay our operating expenses and dividends to stockholders. Recently, we
announced a reduction of the quarterly dividend paid on our common stock to $0.10 per share. The
reduction in the dividend rate was made primarily to enhance the Companys capital position, and we
expect such reduction to be temporary.
The availability of dividends from the Bank is limited by various statutes and regulations. Under
the National Bank Act, without prior approval from the Office of the Comptroller of the Currency,
or OCC, the Banks primary regulator, a national bank such as the Bank may not declare and pay
dividends in any year in excess of an amount equal to the sum of the total of the net income of the
bank for that year and the retained net income of the bank for the preceding two years. As a
result of reduced net income during 2008 due to impairment charges on certain of our investment
securities and increased provisions for loan losses, as well as the payment of a special dividend
by the Bank to permit us to purchase certain trust preferred securities from the Bank in order to
reduce the Banks holdings of the securities of certain issuers in order to comply with regulatory
limits on investment concentrations, we currently need to receive permission of the OCC for the
Bank to pay dividends to us. We believe that our cash and liquid securities are sufficient to pay
our expenses and dividend obligations to
- 45 -
our stockholders for 2009 without the need for any dividend from the Bank. However, there can be
no assurance that the Banks future earnings will be sufficient to permit it to pay dividends to us
without the approval of the OCC, or that we will have the capacity to pay dividends on our common
stock without dividends from the Bank. In addition, it is possible, depending upon the financial
condition of the Bank and other factors, that the OCC could assert that payment of dividends or
other payments by the Bank are an unsafe or unsound practice. In the event the Bank is unable to
pay dividends sufficient to satisfy our obligations or is otherwise unable to pay dividends to us,
we may not be able to service our obligations as they become due, including payments required to be
made to the FCBI Capital Trust, our business trust subsidiary, or to pay dividends on our common
stock. Consequently, the inability to receive dividends from the Bank could adversely affect our
financial condition, results of operations, cash flows and prospects.
Potential acquisitions may disrupt our business and dilute stockholder value.
In recent years we have been an active acquirer of other entities, both in the banking and
insurance sectors. We have sought merger or acquisition partners that are culturally similar and
have experienced management and possess either significant market presence or have potential for
improved profitability through financial management, economies of scale or expanded services.
Acquiring other banks, businesses, or branches involves various risks commonly associated with
acquisitions, including, among other things:
|
|
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Potential exposure to unknown or contingent liabilities of the target company; |
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|
|
Exposure to potential asset quality issues of the target company; |
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|
Difficulty and expense of integrating the operations and personnel of the target company; |
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|
Potential disruption to our business; |
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|
Potential diversion of our managements time and attention; |
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|
The possible loss of key employees and customers of the target company; |
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|
Difficulty in estimating the value of the target company; and |
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|
Potential changes in banking or tax laws or regulations that may affect the target company. |
We regularly evaluate merger and acquisition opportunities and conduct due diligence activities
related to possible transactions with other financial institutions and financial services
companies. As a result, merger or acquisition discussions and, in some cases, negotiations may
take place and future mergers or acquisitions involving cash, debt or equity securities may occur
at any time. Acquisitions typically involve the payment of a premium over book and market values,
and, therefore, some dilution of our tangible book value and net income per common share may occur
in connection with any future transaction. Furthermore, failure to realize the expected revenue
increases, cost savings, increases in geographic or product presence, and/or other projected
benefits from an acquisition could have a material adverse effect on our financial condition and
results of operations.
Risks Related to Our Business
Changes in the fair value of our securities may reduce our stockholders equity and net income.
At June 30, 2009, $521.88 million of our securities were classified as available-for-sale. At such
date, the aggregate unrealized losses on our available-for-sale
securities was $102.84 million. We
increase or decrease stockholders equity by the amount of the change in the unrealized gain or
loss (the difference between the estimated fair value and the amortized cost) of our
available-for-sale securities portfolio, net of the related tax benefit, under the category of
accumulated other comprehensive income/loss. Therefore, a decline in the estimated fair value of
this portfolio will result in a decline in reported stockholders equity, as well as book value per
common share and tangible book value per common share. This decrease will occur even though the
securities are not sold. In the case of debt securities, if these securities are never sold and
there are no further credit impairments, the decrease will be recovered over the life of the
securities. In the case of equity securities which have no stated maturity, the declines in fair
value may or may not be recovered over time.
We conduct a periodic review and evaluation of the entire securities portfolio to determine if the
decline in the fair value of any security below its cost basis is other-than-temporary. Factors
which we consider in our analysis of debt securities include, but are not limited to, intent to
sell the security, evidence available to determine if it is more-likely-than not that the Company
will have to sell the securities before recovery of the amortized cost, and probable credit losses.
Probable credit losses are evaluated based upon, but are not limited to: the present value of
future cash flows, the severity and duration of the decline in fair value of the security below its
amortized cost, the financial condition and near-term prospects of the issuer, whether the decline
appears to be related to issuer conditions or general market or industry conditions, the payment
structure of the security, failure of the security to make scheduled interest or principal
payments, and changes to the rating of the security by rating agencies. We generally view changes
in fair value for debt securities caused by changes in interest rates as temporary,
- 46 -
which is consistent with our experience. If we deem such decline to be other-than-temporary, the
security is written down to a new cost basis and the resulting loss is charged to earnings as a
component of non-interest income. For the year ended December 31, 2008, we reported a non-cash
other-than-temporary impaired, or OTTI, charge of $29.9 million on our debt securities portfolio.
Upon adoption of a new accounting accounting principle, we recaptured $10.2 of the December 31,
2008 impairment charge as a non-credit related impairment.
Factors that we consider in our analysis of equity securities include, but are not limited to:
intent to sell the security before recovery of the cost, the severity and duration of the decline
in fair value of the security below its cost, the financial condition and near-term prospects of
the issuer, and whether the decline appears to be related to issuer conditions or general market or
industry conditions.
We continue to monitor the fair value of our entire securities portfolio as part of our ongoing
OTTI evaluation process. No assurance can be given that we will not need to recognize OTTI charges
related to securities in the future.
If dividends paid on our investment in the Federal Home Loan Bank of Atlanta continue to be
suspended, or if our investment is classified as OTTI or as permanently impaired, our earnings
and/or stockholders equity could decrease.
We own common stock of the FHLB-Atlanta, to qualify for membership in the Federal Home Loan Bank
system and to be eligible to borrow funds under the FHLBs advance program. There is no market for
our FHLB common stock. The FHLB has reported losses for the quarter ended June 30, 2009 and the
year ended December 31, 2008, primarily due to an OTTI charge on its private-label mortgage backed
securities portfolio. As a result of the losses, the FHLB also suspended the dividend paid on its
common stock. The continued suspension of the dividend will decrease our income. In an extreme
situation, it is possible that the capitalization of the FHLB could be substantially diminished or
reduced to zero. Consequently, we believe that there is a risk that our investment in FHLB common
stock could be deemed OTTI at some time in the future, and if this occurs, it would cause our
earnings and stockholders equity to decrease by the after-tax amount of the impairment charge.
The current economic environment poses significant challenges for us and could adversely affect our
financial condition and results of operations.
We are operating in a challenging and uncertain economic environment, including generally uncertain
national and local conditions. Financial institutions continue to be affected by sharp declines in
the real estate market and constrained financial markets. Dramatic declines in the housing market
over the past year, with falling home prices and increasing foreclosures and unemployment, have
resulted in significant write-downs of asset values by financial institutions. Continued declines
in real estate values, home sales volumes, and financial stress on borrowers as a result of the
uncertain economic environment could have an adverse effect on our borrowers or their customers,
which could adversely affect our financial condition and results of operations. A worsening of
these conditions would likely exacerbate the adverse effects on us and others in the financial
institutions industry. For example, further deterioration in local economic conditions in our
markets could drive losses beyond that which is provided for in our allowance for loan losses. We
may also face the following risks in connection with these events:
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|
|
Economic conditions that negatively affect housing prices and the job market have
resulted, and may continue to result, in a deterioration in credit quality of our loan
portfolios, and such deterioration in credit quality has had, and could continue to have, a
negative impact on our business; |
|
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|
Market developments may affect consumer confidence levels and may cause adverse changes
in payment patterns, causing increases in delinquencies and default rates on loans and
other credit facilities; |
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|
The processes we use to estimate our allowance for loan losses and reserves may no
longer be reliable because they rely on complex judgments, including forecasts of economic
conditions, which may no longer be capable of accurate estimation; |
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|
Our ability to assess the creditworthiness of our customers may be impaired if the
models and approaches we use to select, manage, and underwrite our customers become less
predictive of future charge-offs; and |
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|
We expect to face increased regulation of our industry, and compliance with such
regulation may increase our costs, limit our ability to pursue business opportunities, and
increase compliance challenges. |
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|
As these conditions or similar ones continue to exist or worsen, we could experience
continuing or increased adverse effects on our financial condition. |
- 47 -
Our business is subject to interest rate risk and variations in interest rates may negatively
affect our financial performance.
Our earnings and cash flows are largely dependent upon our net interest income. Net interest
income is the difference between interest income earned on interest-earning assets, such as loans
and securities, and interest expense paid on interest-bearing liabilities, such as deposits and
borrowed funds. Interest rates are highly sensitive to many factors that are beyond our control,
including general economic conditions and policies of various governmental and regulatory agencies
and, in particular, the Federal Reserve Board. Changes in monetary policy, including changes in
interest rates, could influence not only the interest we receive on loans and securities and the
amount of interest we pay on deposits and borrowings, but such changes could also affect (i) our
ability to originate loans and obtain deposits, and (ii) the fair value of our financial assets and
liabilities. If the interest rates paid on deposits and other borrowings increase at a faster rate
than the interest rates received on loans and other investments, our net interest income, and
therefore earnings, could be adversely affected. Earnings could also be adversely affected if the
interest rates received on loans and other investments fall more quickly than the interest rates
paid on deposits and other borrowings. Based on net interest income simulations conducted as of
June 30, 2009, the Company is in a relatively neutral position with respect to interest rate
shocks that simulate decreases in interest rates of 1.0% and increases in interest rates of 1.0%
and 2.0%.
The Banks allowance for loan losses may not be adequate to cover actual losses.
Like all financial institutions, the Bank maintains an allowance for loan losses to provide for
probable losses. The Banks allowance for loan losses may not be adequate to cover actual loan
losses, and future provisions for loan losses could materially and adversely affect the Banks
operating results. The Banks allowance for loan losses is determined by analyzing historical loan
losses, current trends in delinquencies and charge-offs, plans for problem loan resolution, changes
in the size and composition of the loan portfolio, and industry information. Also included in
managements estimates for loan losses are considerations with respect to the impact of economic
events, the outcome of which are uncertain. The amount of future losses is susceptible to changes
in economic, operating and other conditions, including changes in interest rates that may be beyond
the Banks control, and these losses may exceed current estimates. Federal regulatory agencies, as
an integral part of their examination process, review the Banks loans and allowance for loan
losses. Although we believe that the Banks allowance for loan losses is adequate to provide for
probable losses, we cannot assure you that we will not need to increase the Banks allowance for
loan losses or that regulators will not require us to increase this allowance. Either of these
occurrences could materially and adversely affect our earnings and profitability.
Our business is subject to various lending and other economic risks that could adversely impact our
results of operations and financial condition.
There was significant disruption and volatility in the financial and capital markets during 2008
and the first six months of 2009. The financial markets and the financial services industry in
particular suffered unprecedented disruption, causing a number of institutions to fail or require
government intervention to avoid failure. These conditions were largely the result of the erosion
of the U.S. and global credit markets, including a significant and rapid deterioration in the
mortgage lending and related real estate markets. As a consequence of the difficult economic
environment, we experienced losses, resulting primarily from significant provisions for loan losses
and substantial impairment charges on our investment securities. There can be no assurance that the
economic conditions that have adversely affected the financial services industry, and the capital,
credit and real estate markets generally, will improve in the near term, in which case we could
continue to experience losses and write-downs of assets, and could face capital and liquidity
constraints or other business challenges. A further deterioration in economic conditions,
particularly within our geographic region, could result in the following consequences, any of which
could have a material adverse effect on our business:
|
|
|
Loan delinquencies may further increase causing additional increases in our provision
and allowance for loan losses; |
|
|
|
|
Problem assets and foreclosures may continue to increase; |
|
|
|
|
Demand for our products and services may further decline; and |
|
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|
|
Collateral for loans made by the Bank, especially real estate, may continue to decline
in value, in turn reducing a clients borrowing power, and reducing the value of assets and
collateral associated with our loans held for investment. |
The declining real estate market could impact our business.
Our business activities are conducted in Virginia, West Virginia, North Carolina, South Carolina,
Tennessee and the surrounding region. During 2008 and the first six months of 2009, the real
estate market in these regions experienced
- 48 -
declines with falling home prices and increased foreclosures. As our net charge-offs increased
during this period and in recognition of the continued deterioration in the real estate market and
corresponding expected further increases in non-performing assets, we increased our provision for
loan losses during 2008 and the first six months of 2009. A continued downturn in this regional
real estate market could hurt our business because of the geographic concentration within this
regional area and because the vast majority of our loans are secured by real estate. If there is a
further decline in real estate values, the collateral for our loans will provide less security. As
a result, our ability to recover on defaulted loans by selling the underlying real estate will be
diminished, and we will be more likely to suffer losses on defaulted loans.
Our level of credit risk is increasing due to our focus on commercial and construction lending, and
the concentration on small businesses and middle market customers with heightened vulnerability to
economic conditions.
As of June 30, 2009, our largest
outstanding commercial business loan and largest outstanding
commercial real estate loan amounted to $3.24 million ($3.24 million is committed as of such
date) and $12.98 million, respectively. At such date, our commercial business loans amounted to
$89.42 million, or 7.03% of our total loan portfolio, and our commercial real estate loans
amounted to $410.36 million, or 32.26% of our total loan portfolio. Commercial business and
commercial real estate loans generally are considered riskier than single-family residential loans
because they have larger balances to a single borrower or group of related borrowers. Commercial
business and commercial real estate loans involve risks because the borrowers ability to repay the
loans typically depends primarily on the successful operation of the businesses or the properties
securing the loans. Most of the Banks commercial business loans are made to small business or
middle market customers who may have a heightened vulnerability to economic conditions. Moreover,
a portion of these loans have been made or acquired by us in recent years and the borrowers may not
have experienced a complete business or economic cycle.
In addition to commercial real estate and
commercial business loans, we hold a portfolio of
construction loans. At June 30, 2009, our construction loans
amounted to $112.59 million, or 8.85%
of our total loan portfolio. Construction loans generally have a higher risk of loss than
single-family residential mortgage loans due primarily to the critical nature of the initial
estimates of a propertys value upon completion of construction compared to the estimated costs,
including interest, of construction as well as other assumptions. If the estimates upon which
construction loans are made prove to be inaccurate, we may be confronted with projects that, upon
completion, have values which are below the loan amounts. The nature of the allowance for loan
losses requires that we must use assumptions regarding, among other factors, individual loans and
the economy. While we are not aware of any specific, material impediments impacting any of our
builder/developer borrowers at this time, there continues to be nationwide reports of significant
problems which have adversely affected many property developers and builders as well as the
institutions that have provided them loans. If any of the builder/developers to which we have
extended construction loans experience the type of difficulties that are being reported, it could
have adverse consequences upon our future results of operations.
The Bank may suffer losses in its loan portfolio despite its underwriting practices.
The Bank seeks to mitigate the risks inherent in the Banks loan portfolio by adhering to specific
underwriting practices. These practices include analysis of a borrowers prior credit history,
financial statements, tax returns and cash flow projections, valuation of collateral based on
reports of independent appraisers and verification of liquid assets. Although the Bank believes
that its underwriting criteria are appropriate for the various kinds of loans it makes, the Bank
may incur losses on loans that meet its underwriting criteria, and these losses may exceed the
amounts set aside as reserves in the Banks allowance for loan losses.
We have experienced increases in the levels of our non-performing assets and loan charge-offs in
recent periods. Our total non-performing assets amounted to $15.26 million at June 30, 2009, $14.1
million at December 31, 2008, and $3.5 million at December 31, 2007. We had $6.37 million of net
loan charge-offs for the quarter ended June 30, 2009, compared to $5.4 million and $2.4 million in
net loan charge-offs for the years ended December 31, 2008 and 2007, respectively. Our provision
for loan losses was $2.55 million for the quarter ended
June 30, 2009, $9.23 million for the year
ended December 31, 2008, and $717 thousand for the year ended December 31, 2007. At June 30, 2009,
the ratios of our allowance for loan losses to non-accrual loans and to total loans outstanding was
159.24% and 1.46%, respectively. Additional increases in our non-performing assets or loan
charge-offs may require us to increase our allowance for loan losses, which would have an adverse
effect upon our future results of operations.
We and our subsidiaries are subject to extensive regulation which could adversely affect us.
Our and our subsidiaries operations are subject to extensive regulation and supervision by federal
and state governmental authorities and are subject to various laws and judicial and administrative
decisions imposing requirements and restrictions on part or all of our operations. Banking
regulations governing our operations are primarily intended to protect depositors
- 49 -
funds, federal deposit insurance funds and the banking system as a whole, not security holders.
Congress and federal regulatory agencies continually review banking laws, regulations and policies
for possible changes. Changes to statutes, regulations or regulatory policies, including changes
in interpretation or implementation of statutes, regulations or policies, could affect us in
substantial and unpredictable ways. Such changes could subject us to additional costs, limit the
types of financial services and products we may offer and/or increase the ability of non-banks to
offer competing financial services and products, among other things. Failure to comply with laws,
regulations or policies could result in sanctions by regulatory agencies, civil money penalties
and/or reputation damage, which could have a material adverse effect on our business, financial
condition and results of operations. While we have policies and procedures designed to prevent any
such violations, there can be no assurance that such violations will not occur. These laws, rules
and regulations, or any other laws, rules or regulations, that may be adopted in the future, could
make compliance more difficult or expensive, restrict our ability to originate, broker or sell
loans, further limit or restrict the amount of commissions, interest or other charges earned on
loans originated or sold by the Bank and otherwise adversely affect our business, financial
condition or prospects.
On October 3, 2008, the Emergency Economic Stabilization Act of 2008, or the EESA, was signed into
law. Pursuant to the EESA, the Treasury was granted the authority to take a range of actions for
the purpose of stabilizing and providing liquidity to the U.S. financial markets and has proposed
several programs, including the purchase by the Treasury of certain troubled assets from financial
institutions and the direct purchase by the Treasury of equity of financial institutions. There
can be no assurance, however, as to the actual impact that the foregoing or any other governmental
program will have on the financial markets. The failure of the financial markets to stabilize and
a continuation or worsening of current financial market conditions could materially and adversely
affect our business, financial condition, results of operations, access to credit or the trading
price of our common stock. In addition, current initiatives of President Obamas Administration
and Congress may adversely affect our financial condition and results of operations.
The financial services industry could face increased regulation and supervision as a result of the
existing financial crisis. Such additional regulation and supervision may increase our costs and
limit our ability to pursue business opportunities. The affects of such recently enacted, and
proposed, legislation and regulatory programs on us cannot reliably be determined at this time.
We face strong competition from other financial institutions, financial service companies and other
organizations offering services similar to those offered by us and our subsidiaries, which could
hurt our business.
Our business operations are conducted in Virginia, West Virginia, North Carolina, South Carolina,
Tennessee and the surrounding region. Increased competition within this region may result in
reduced loan originations and deposits. Ultimately, we may not be able to compete successfully
against current and future competitors. Many competitors offer the types of loans and banking
services that we offer. These competitors include other savings associations, national banks,
regional banks and other community banks. We also face competition from many other types of
financial institutions, including finance companies, brokerage firms, insurance companies, credit
unions, mortgage banks and other financial intermediaries. In particular, the Banks competitors
include other state and national banks and major financial companies whose greater resources may
afford them a marketplace advantage by enabling them to maintain numerous banking locations and
mount extensive promotional and advertising campaigns.
Additionally, banks and other financial institutions with larger capitalization and financial
intermediaries not subject to bank regulatory restrictions have larger lending limits and are
thereby able to serve the credit needs of larger clients. These institutions, particularly to the
extent they are more diversified than us, may be able to offer the same loan products and services
that we offer at more competitive rates and prices. If we are unable to attract and retain banking
clients, we may be unable to continue the Banks loan and deposit growth and our business,
financial condition and prospects may be negatively affected.
The FDIC is imposing an emergency assessment on financial institutions, which will decrease our
earnings in 2009.
On May 22, 2009, the FDIC announced a five basis point special assessment on each insured
depository institutions assets minus its Tier 1 capital as of June 30, 2009. The amount of the
special assessment for any institution will not exceed ten basis points times the institutions
domestic deposit assessment base for the second quarter 2009 risk-based assessment. The FDIC will
collect the special assessment on September 30, 2009. Based on our assets and Tier 1 capital at
June 30, 2009, we estimate the impact of the special assessment to be approximately $988 thousand.
An additional special assessment later in 2009 is probable, but the amount is uncertain at this
time.
- 50 -
We may fail to realize the anticipated benefits of the TriStone Acquisition.
On July 31, 2009, we completed our acquisition of TriStone. However, we will face certain risks in
integrating TriStones business with ours. Among other things, we may be assuming greater risks in
the loans to be acquired from TriStone as their loan underwriting standards are not the same as
ours. The success of the merger with TriStone will depend on, among other things, our ability to
realize anticipated cost savings and to combine the businesses of TriStone and the Bank in a manner
that permits growth opportunities and does not materially disrupt the existing customer
relationships of the Bank nor result in decreased revenues resulting from any loss of customers.
If we are not able to successfully achieve these objectives, the anticipated benefits of the merger
acquisition may not be realized fully or at all or may take longer to realize than expected.
Additionally, we will make fair value estimates of certain assets and liabilities in recording the
merger. Actual values of these assets and liabilities could differ from our estimates, which could
result in our not achieving the anticipated benefits of the merger.
Our goodwill may be determined to be impaired.
As of June 30, 2009, the carrying amount of our goodwill and other intangible assets was $89.53
million. The Company tests goodwill for impairment on an annual basis, or more frequently if
necessary. According to SFAS No. 142, Goodwill and Other Intangible Assets, quoted market prices
in active markets are the best evidence of fair value and are to be used as the basis for measuring
impairment, when available. Other acceptable valuation methods include present-value measurements
based on multiples of earnings or revenues, or similar performance measures. If we were to
determine that the carrying amount of our goodwill exceeded its implied fair value, we would be
required to write down the value of the goodwill on our balance sheet. This, in turn, would result
in a charge against earnings and, thus, a reduction in our stockholders equity and certain related
capital measures.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
|
(a) |
|
Not Applicable |
|
|
(b) |
|
Not Applicable |
|
|
(c) |
|
Issuer Purchases of Equity Securities |
There were no open market purchases by the Company of its equity securities during the three months
ended June 30, 2009. The maximum number of shares that may yet be purchased under a publicly
announced plan at June 30, 2009, was 668,358 shares. The Companys stock repurchase plan allows
for the purchase and retention of up to 1,100,000 shares. The plan has no expiration date and
remains open. The Company held 431,642 shares in treasury at June 30, 2009.
ITEM 3. Defaults Upon Senior Securities
Not Applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
|
(a) |
|
The Annual Meeting of Stockholders was held on April 28, 2009. |
|
|
(b) |
|
The following directors were elected to serve a three-year term through the date of the
2012 Annual Meeting of Stockholders: |
|
|
|
|
I. Norris Kantor, A. A. Modena, William P. Stafford, II |
|
|
|
|
The following directors terms continued after the Annual Meeting: |
|
|
|
|
Franklin P. Hall, Allen T. Hamner, John M. Mendez, Robert E. Perkinson, and William P.
Stafford |
- 51 -
|
(c) |
|
Three proposals were voted upon at the annual meeting, which included: 1) the election
of the aforementioned directors as the Class of 2012; 2) ratification of the selection of
Dixon Hughes PLLC, Asheville, North Carolina, as independent registered public accountants
for the year ending December 31, 2008; and 3) approval, on a non-binding advisory basis,
the Companys named executive officer compensation. The results of the proposals and
voting are as follows: |
Proposal 1. Election of Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Votes |
|
For All |
|
|
Votes For |
|
Withheld |
|
Except |
I. Norris Kantor |
|
|
8,956,476 |
|
|
|
384,048 |
|
|
|
91,947 |
|
A. A. Modena |
|
|
8,929,404 |
|
|
|
384,048 |
|
|
|
119,019 |
|
William P. Stafford, II |
|
|
8,670,847 |
|
|
|
384,048 |
|
|
|
377,576 |
|
Proposal 2. Ratification of the selection of Dixon Hughes PLLC as independent registered public
accountants:
|
|
|
|
|
|
|
|
|
|
|
|
|
Votes For |
|
|
9,095,202 |
|
|
|
|
|
|
|
|
|
Votes Against |
|
|
303,512 |
|
|
|
|
|
|
|
|
|
Votes Abstained |
|
|
33,756 |
|
|
|
|
|
|
|
|
|
Proposal 3. Approval, on a non-binding advisory basis, the Companys named executive officer
compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Votes For |
|
|
7,901,769 |
|
|
|
|
|
|
|
|
|
Votes Against |
|
|
1,466,195 |
|
|
|
|
|
|
|
|
|
Votes Abstained |
|
|
64,505 |
|
|
|
|
|
|
|
|
|
ITEM 5. Other Information
Not Applicable
ITEM 6. Exhibits
|
|
|
Exhibit |
|
|
No. |
|
Exhibit |
|
|
|
2.1
|
|
Reserved. |
|
|
|
2.2
|
|
Agreement and Plan of Merger dated April 2, 2009, among First Community Bancshares, Inc.
and TriStone Community Bank (25) |
|
|
|
3(i)
|
|
Articles of Incorporation of First Community Bancshares, Inc., as amended. (1) |
|
|
|
3(ii)
|
|
Certificate of Designation Series A Preferred Stock (22) |
|
|
|
3(iii)
|
|
Bylaws of First Community Bancshares, Inc., as amended. (17) |
|
|
|
4.1
|
|
Specimen stock certificate of First Community Bancshares, Inc. (3) |
|
|
|
4.2
|
|
Indenture Agreement dated September 25, 2003. (11) |
|
|
|
4.3
|
|
Amended and Restated Declaration of Trust of FCBI Capital Trust dated September 25, 2003. (11) |
|
|
|
4.4
|
|
Preferred Securities Guarantee Agreement dated September 25, 2003. (11) |
|
|
|
4.5
|
|
Form of Certificate for the Series A Preferred Stock (22) |
|
|
|
4.6
|
|
Warrant to purchase 176,546 shares of common stock of First Community Bancshares, Inc (22) |
|
|
|
10.1**
|
|
First Community Bancshares, Inc. 1999 Stock Option Contracts (2) and Plan. (4) |
|
|
|
10.1.1**
|
|
Amendment to First Community Bancshares, Inc. 1999 Stock Option Plan. (11) |
|
|
|
10.2**
|
|
First Community Bancshares, Inc. 2001 Non-Qualified Directors Stock Option Plan. (5) |
|
|
|
10.3**
|
|
Employment Agreement dated December 16, 2008, between First Community Bancshares, Inc. and
John M. Mendez. (6) |
|
|
|
10.4**
|
|
First Community Bancshares, Inc. 2000 Executive Retention Plan, as amended. (24) |
|
|
|
10.5**
|
|
First Community Bancshares, Inc. Split Dollar Plan and Agreement. (2) |
|
|
|
10.6**
|
|
First Community Bancshares, Inc. 2001 Directors Supplemental Retirement Plan. (2) |
|
|
|
10.6.1**
|
|
First Community Bancshares, Inc. 2001 Directors Supplemental Retirement Plan. Second
Amendment (B.W. Harvey, Sr. October 19, 2004). (14) |
- 52 -
|
|
|
Exhibit |
|
|
No. |
|
Exhibit |
|
10.7**
|
|
First Community Bancshares, Inc. Wrap Plan. (7)
|
|
|
|
10.8
|
|
Reserved. |
|
|
|
10.9**
|
|
Form of Indemnification Agreement between First Community Bancshares, Inc., its Directors
and Certain Executive Officers. (9) |
|
|
|
10.10**
|
|
Form of Indemnification Agreement between First Community Bank, N. A, its Directors and
Certain Executive Officers. (9) |
|
|
|
10.11
|
|
Reserved. |
|
|
|
10.12**
|
|
First Community Bancshares, Inc. 2004 Omnibus Stock Option Plan (10) and Award Agreement. (13) |
|
|
|
10.13
|
|
Reserved. |
|
|
|
10.14**
|
|
First Community Bancshares, Inc. Directors Deferred Compensation Plan. (7) |
|
|
|
10.15**
|
|
First Community Bancshares, Inc. Deferred Compensation and Supplemental Bonus Plan For Key
Employees. (15) |
|
|
|
10.16**
|
|
Employment Agreement dated November 30, 2006, between First Community Bank, N. A. and
Ronald L. Campbell. (19) |
|
|
|
10.17**
|
|
Employment Agreement dated September 28, 2007, between GreenPoint Insurance Group, Inc.
and Shawn C. Cummings. (20) |
|
|
|
10.18
|
|
Securities Purchase Agreement by and between the United States Department of the Treasury
and First Community Bancshares, Inc. dated November 21, 2008. (22) |
|
|
|
10.19**
|
|
Employment Agreement dated December 16, 2008, between First Community Bancshares, Inc. and
David D. Brown. (23) |
|
|
|
10.20**
|
|
Employment Agreement dated December 16, 2008, between First Community Bancshares, Inc. and
Robert L. Buzzo (26) |
|
|
|
10.21**
|
|
Employment Agreement dated December 16, 2008, between First Community Bancshares, Inc. and
E. Stephen Lilly (26) |
|
|
|
10.22**
|
|
Employment Agreement dated December 16, 2008, between First Community Bank, N. A. and Gary
R. Mills (26) |
|
|
|
10.23**
|
|
Employment Agreement dated December 16, 2008, between First Community Bank, N. A. and
Martyn A. Pell (26) |
|
|
|
10.24**
|
|
Employment Agreement dated December 16, 2008, between First Community Bank, N. A. and
Robert L. Schumacher (26) |
|
|
|
10.25**
|
|
Employment Agreement dated July 31, 2009, between First Community Bank, N. A. and Simpson
O. Brown (25) |
|
|
|
10.26**
|
|
Employment Agreement dated July 31, 2009, between First Community Bank, N. A. and Mark R.
Evans (25) |
|
|
|
31.1*
|
|
Rule 13a-14(a)/a5d-14(a) Certification of Chief Executive Officer. |
|
|
|
31.2*
|
|
Rule 13a-14(a)/a5d-14(a) Certification of Chief Financial Officer. |
|
|
|
32*
|
|
Certification of Chief Executive Officer and Chief Financial Officer Section 1350. |
|
|
|
* |
|
Furnished herewith. |
|
** |
|
Indicates a management contract or compensation plan. |
|
(1) |
|
Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended June
30, 2005, filed on August 5, 2005. |
|
(2) |
|
Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended June
30, 2002, filed on August 14, 2002. |
|
(3) |
|
Incorporated by reference from the Annual Report on Form 10-K for the period ended December
31, 2002, filed on March 25, 2003, as amended on March 31, 2003. |
|
(4) |
|
Incorporated by reference from the Annual Report on Form 10-K for the period ended December
31, 1999, filed on March 30, 2000, as amended April 13, 2000. |
|
(5) |
|
The option agreements entered into pursuant to the 1999 Stock Option Plan and the 2001
Non-Qualified Directors Stock Option Plan are incorporated by reference from the Quarterly
Report on Form 10-Q for the period ended June 30, 2002, filed on August 14, 2002. |
|
(6) |
|
Incorporated by reference from Exhibit 10.1 of the Current Report on Form 8-K dated and
filed December 16, 2008. |
|
(7) |
|
Incorporated by reference from the Current Report on Form 8-K dated August 22, 2006, and
filed August 23, 2006. |
|
(8) |
|
Reserved. |
|
(9) |
|
Form of indemnification agreement entered into by the Company and by First Community Bank,
N. A. with their respective directors and certain officers of each including, for the
Registrant and Bank: John M. Mendez, Robert L. Schumacher, Robert L. Buzzo, E. Stephen Lilly,
David D. Brown, and Gary R. Mills. Incorporated |
- 53 -
|
|
|
|
|
by reference from the Annual Report on Form 10-K for the period ended December 31, 2003,
filed on March 15, 2004, and amended on May 19, 2004. |
|
(10) |
|
Incorporated by reference from the 2004 First Community Bancshares, Inc. Definitive Proxy
filed on March 19, 2004. |
|
(11) |
|
Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended
September 30, 2003, filed on November 10, 2003. |
|
(12) |
|
Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended March
31, 2004, filed on May 7, 2004. |
|
(13) |
|
Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended June
30, 2004, filed on August 6, 2004. |
|
(14) |
|
Incorporated by reference from the Annual Report on Form 10-K for the period ended December
31, 2004, and filed on March 16, 2005.
Amendments in substantially similar form were
executed for Directors Clark, Kantor, Hamner, Modena, Perkinson, Stafford, and
Stafford II. |
|
(15) |
|
Incorporated by reference from the Current Report on Form 8-K dated October 24, 2006, and
filed October 25, 2006. |
|
(16) |
|
Reserved. |
|
(17) |
|
Incorporated by reference from Exhibit 3.1 of the Current Report on Form 8-K dated February
14, 2008, filed on February 20, 2008. |
|
(18) |
|
Reserved |
|
(19) |
|
Incorporated by reference from Exhibit 2.1 of the Form S-3 registration statement filed May
2, 2007. |
|
(20) |
|
Incorporated by reference from the Annual Report on Form 10-K for the period ended December
31, 2007, filed on March 13, 2008. |
|
(21) |
|
Reserved. |
|
(22) |
|
Incorporated by reference from the Current Report on Form 8-K dated November 21, 2008, and
filed November 24, 2008. |
|
(23) |
|
Incorporated by reference from Exhibit 10.2 of the Current Report on Form 8-K dated and
filed December 16, 2008. |
|
(24) |
|
Incorporated by reference from Exhibit 10.1 of the Current Report on Form 8-K dated
December 30, 2008, and filed January 5, 2009. |
|
(25) |
|
Incorporated by reference from Exhibit 2.2 of the Current Report on Form 8-K dated April 2,
2009 and filed April 3, 2009. |
|
(26) |
|
Incorporated by reference from the Current Report on Form 8-K dated and filed July 6, 2009. |
- 54 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
First Community Bancshares, Inc.
DATE:
August 16, 2010
|
|
|
/s/ John M. Mendez
John M. Mendez
|
|
|
President & Chief Executive Officer |
|
|
(Principal Executive Officer) |
|
|
DATE:
August 16, 2010
|
|
|
/s/ David D. Brown
David D. Brown
|
|
|
Chief Financial Officer |
|
|
(Principal Accounting Officer) |
|
|
- 55 -
EXHIBIT INDEX
|
|
|
Exhibit No. |
|
Exhibit |
|
|
|
31.1
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
|
|
|
31.2
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
|
|
|
32
|
|
Certification of Chief Executive and Chief Financial Officer pursuant to 18 USC Section 1350 |
- 56 -