Item 7
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The following discussion reviews our financial condition and results of operations and contains forward-looking statements that are subject to known
and unknown risks, uncertainties and other factors that may cause the Companys actual results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences
include those discussed in Item 1A, Risk Factors and elsewhere in this Annual Report on Form 10-K. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with
Selected Financial Data and our Consolidated Financial Statements and the related notes included elsewhere in this Annual Report on Form 10-K.
Overview
Security Bank Corporation was incorporated on February 10, 1994 for the purpose of becoming a bank holding company. We are subject to extensive
federal and state banking laws and regulations, including the Bank Holding Company Act of 1956, as amended, and the bank holding company laws of Georgia. We own six state-chartered subsidiary banksSecurity Bank of Bibb County, Security Bank of
Houston County, Security Bank of Jones County, Security Bank of North Metro, Security Bank of North Fulton and Security Bank of Gwinnett County. We also own Fairfield Financial and CFS Wealth Management, which function as operating subsidiaries of
Security Bank of Bibb County and Security Bank Corporation, respectively. Our subsidiaries are also subject to various federal and state banking laws and regulations.
In 2007, the community banking industry was significantly impacted by a downturn in the residential housing market. In the
broader financial services industry, financial markets were also impacted by the collapse of subprime lending, an interim period of severe illiquidity in credit markets and declines in market value of a broad range of investment products.
Furthermore, given concerns about the slowing national economy, we started to see the easing of interest rates by the Federal Reserve in the latter part of 2007, which has continued into 2008. These market conditions had a significant impact on our
results, which showed slower loan growth, an increased provision for loan losses due to our growing level of nonperforming loans, primarily residential real estate acquisition and development, and construction, as well as compression in our net
interest margin given our asset sensitive balance sheet and the added costs of elevated nonperforming assets.
The following is a summary of our 2007 financial performance:
|
|
|
Loans receivable, net of unearned income increased 15% to approximately $2.2 billion, up from approximately $1.9 billion at December 31, 2006. Loan growth was
primarily driven by our Middle and Coastal Georgia markets, while our metropolitan Atlanta markets saw a significant slowing in loan demand starting in the spring of 2007.
|
|
|
|
Provision for loan losses increased $28.2 million, up 631% and exceeded net charge offs by $9.3 million.
|
|
|
|
Net charge-offs to average loans were 1.12%, up 97 basis points from 2006. Nonperforming assets increased $41.9 million to $79.1 million primarily due to the
downturn in the residential real estate market in the metropolitan Atlanta area.
|
|
|
|
Net interest income, calculated on a fully tax-equivalent basis, increased $11.1 million, or 14%. Net interest margin, however, declined 52 basis points to 3.88%,
reflecting costs associated with higher levels of nonperforming assets.
|
|
|
|
Noninterest income increased $1.0 million to $19.0 million and noninterest expense increased $11.4 million, the largest component of which was increased costs
associated with foreclosed properties.
|
|
|
|
Total deposits were approximately $2.3 billion, an increase of approximately 17% from $2.0 billion at December 31, 2006. Total assets increased approximately
14% to $2.8 billion, compared to approximately $2.5 billion at December 31, 2006.
|
27
|
|
|
Shareholders equity was essentially unchanged at $306.7 million compared to December 31, 2006, as earnings, net of dividends paid and changes in other
comprehensive income, were offset by $4.9 million in reduced equity as a result of shares purchased during the year under a share repurchase program.
|
Given the current changing and challenging operating environment, we have adjusted our strategic objectives. Our strategic objectives
include the following:
|
|
|
maintaining our subsidiary banks at a well-capitalized level;
|
|
|
|
dealing aggressively with our nonperforming assets through early identification, with increased reserves and by reassigning management with specific problem asset
expertise to help maximize recoveries;
|
|
|
|
slowing growth by limiting loan growth, not pursuing acquisitions and not opening any new branches in the near-term; and
|
|
|
|
controlling and reducing noninterest expenses to help offset margin pressure.
|
Outlook
As a result of the slowing in the residential real estate markets that began in the second quarter of 2007 our community bank business model experienced
significant stress in our real estate-oriented loan portfolio. Income generation from our residential real estate-related loans as well as cost containment of related expenses will be challenging for 2008.
For 2008, we believe that the level of nonperforming assets, provisions for
loan losses and loan charge-offs will all be significantly higher than the levels we experienced in 2007. As a result, we will experience increased pressure on our earnings, liquidity and regulatory capital. We believe we are taking prudent and
appropriate steps to ensure that as the residential real estate market remains unsettled, we focus on controlling costs and on actively managing our exposures in a challenging credit environment. We believe that our strategy of focusing on high
growth markets, exemplary customer service, expense discipline, and our commitment to strong credit risk management will continue to create value for shareholders over the long term.
Our outlook for 2008 generally assumes a slowing overall national economy and a steepening yield curve including the effect
of declining short-term interest rates. Based on these assumptions, we expect for the year 2008 compared with the year 2007:
|
|
|
Net interest income will decline as a result of spread tightening and significant increases in nonperforming assets.
|
|
|
|
Loan growth will slow to less than 5% compared with 15% given slower demand for certain types of loans, including residential real estate, which we will not be able
to offset with higher growth in other loan categories.
|
|
|
|
A continued rise in credit costs; charge-offs are expected to double 2007 levels but may exceed this amount if market conditions deteriorate further.
|
|
|
|
Increased equity capital of at least $18 million in first quarter 2008, resulting from standby purchases in our rights offering of our common stock, with up to $35
million if broader participation takes place.
|
|
|
|
Continued expense discipline including reduced director fees, suspension of branching plans, significant reduction in potential management bonuses, and a hiring
freeze which we expect to result in a 4% decline in noninterest expense.
|
28
Critical Accounting Policies
Our significant accounting policies are described in Note 1 of the consolidated financial statements and are essential
in understanding managements discussion and analysis of financial condition and results of operations. Some of our accounting policies require significant judgment to estimate values of either assets or liabilities. In addition, certain
accounting principles require significant judgment in applying the complex accounting principles to complicated transactions to determine the most appropriate treatment.
The following is a summary of the more judgmental estimates and complex accounting principles. In many cases, there are numerous
alternative judgments that could be used in the process of estimating values of assets or liabilities. Where alternatives exist, we have used the factors that it believes represent the most reasonable value in developing the inputs for the
valuation. Actual performance that differs from the Corporations estimates of the key variables could impact net income.
Allowance for Loan and Lease Losses (ALLL)
Our management assesses the adequacy of the ALLL quarterly. This assessment includes procedures to estimate the allowance and test the adequacy and
appropriateness of the resulting balance. The ALLL consists of two components: (1) a specific amount representative of identified credit exposures that are readily predictable by the current performance of the borrower and underlying
collateral; and (2) a general amount based upon historical losses that is then adjusted for various stress factors representative of various economic factors and characteristics of the loan portfolio. Even though the ALLL is composed of two
components, the entire ALLL is available to absorb any credit losses.
We establish the specific amount by examining impaired loans. Under generally accepted accounting principles, we may measure the loss either by (1) the observable market price of the loan; or (2) the present value of expected
future cash flows discounted at the loans effective interest rate; or (3) the fair value of the collateral if the loan is collateral dependent. Because the majority of our impaired loans are collateral dependent, nearly all of our
specific allowances are calculated based on the fair value of the collateral.
We establish the general amount by taking the remaining loan portfolio (excluding those loans discussed above) with allocations based on historical losses in the total portfolio. The calculation of the general amount
is then subjected to stress factors that are particularly subjective. The amount due to stress testing attempts to correlate the historical loss rates with current economic factors and current risks in the portfolio. The stress factors consist of:
(1) economic factors including such matters as changes in the local or national economy; (2) the depth or experience in the lending staff; (3) any concentrations of credit (such as commercial real estate) in any particular industry
group; (4) new banking laws or regulations; (5) the credit grade of the loans in our unsecured consumer loan portfolio; and (6) additional risk resulting from the level of speculative real estate loans in the portfolio. After we
assess applicable factors, we evaluate the remaining amount based on managements experience.
Finally, we compare the level of the ALLL with historical trends and peer information as a reasonableness test. Management then evaluates the result of
the procedures performed, including the result of our testing, and makes a conclusion regarding the appropriateness of the ALLL in its entirety.
In assessing the adequacy of the ALLL, we also rely on an ongoing independent credit administration review process. We undertake this process both to
ascertain whether there are loans in the portfolio whose credit quality has weakened over time and to assist in our overall evaluation of the risk characteristics of the entire loan portfolio. Our credit administration review process includes the
judgment of management, the input of our internal loan review function, and reviews that may have been conducted by bank regulatory agencies as part of their usual examination process. The Credit Quality Committee, which is a committee comprised of
members of the Boards of Directors of the Company and its subsidiaries, reviews the ALLL process and results.
29
Stock-Based Compensation
In accordance with Statement of Financial Accounting Standards (SFAS) No. 123R,
Accounting for Stock-Based Compensation,
management
expenses the fair value of stock options. We utilize the Black-Scholes model in determining the fair value of the stock options. The model takes into account certain estimated factors such as the expected life of the stock option and the volatility
of the stock. The expected life of the stock option is a function of the vesting period of the grant, the average length of time similar grants have remained outstanding, and the expected volatility of the underlying stock. Volatility is a measure
of the amount by which a price has fluctuated or is expected to fluctuate during a period.
Goodwill and Intangible Assets
Goodwill and intangible assets deemed to have indefinite lives are no longer being amortized but will be subject to impairment tests on at least an annual basis. Other intangible assets, primarily core deposits, will continue to be
amortized over their estimated useful lives. In 2007, the required impairment testing of goodwill was performed and no impairment existed as of the valuation date, as the fair value of our net assets exceeded their carrying value. If for any future
period we determine that there has been impairment in the carrying value of our goodwill balances, we will record a charge to our earnings, which could have a material adverse effect on our net income.
Income Taxes
The calculation of our income tax expense requires significant judgment and the use of estimates. We periodically assess tax
positions based on current tax developments, including enacted statutory, judicial and regulatory guidance. In analyzing our overall tax position, consideration is given to the amount and timing of recognizing income tax liabilities and benefits. In
applying the tax and accounting guidance to the facts and circumstances, income tax balances are adjusted appropriately through the income tax provision. Reserves for income tax uncertainties are maintained at levels we believe are adequate to
absorb probable payments. Actual amounts paid, if any, could differ significantly from these estimates.
Results of Operations for the Years Ended December 31, 2007, 2006 and 2005
Our net income was $6.6 million, $23.4 million, and $16.2 million, for the years ended December 31, 2007, 2006, and 2005, respectively. Our 2007
earnings were down 72% compared to 2006, and the 2006 earnings showed a 44% increase over 2005. Diluted earnings per share (EPS) amounted to $0.34 in 2007, $1.33 in 2006 and $1.27 in 2005. The $0.34 EPS in 2007 was down $0.99 per share from 2006
results for a decrease of 74%. The $1.33 EPS in 2006 was up $0.06 per share over 2005 results for an increase of 4.7%. Our return on average equity (ROE) of 2.10% in 2007 is a 718 basis-point decline from our 2006 ROE of 9.28%. The decline in the
ROE in 2007 was primarily attributable to the increase in the provision for loan losses from $4.5 million in 2006 to $32.7 million in 2007. Our ROE of 9.28% in 2006 is a 352 basis-point decline from our 2005 ROE of 12.80%. The decline in the ROE in
2006 was primarily attributable to the losses on the sale of securities of $1.6 million, common equity issuances of approximately $67.2 million in connection with our two acquisitions and the public offering of 1,725,000 shares of our common stock.
30
The following table provides an analysis of the dollar and percentage changes we have experienced in our
income statements, balances sheets and key ratios in recent years.
ANALYSIS OF CHANGES IN INCOME STATEMENT & KEY RATIOS
(Dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
2007 vs.
2006
|
|
|
% Change
2007 vs.
2006
|
|
|
2005
|
|
|
$ Change
2006 vs.
2005
|
|
|
% Change
2006 vs.
2005
|
|
Income Statement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income
|
|
$
|
192,840
|
|
|
$
|
148,082
|
|
|
$
|
44,758
|
|
|
30.23
|
%
|
|
$
|
78,192
|
|
|
$
|
69,890
|
|
|
89.38
|
%
|
Interest Expense
|
|
|
102,316
|
|
|
|
68,647
|
|
|
|
33,669
|
|
|
49.05
|
%
|
|
|
27,839
|
|
|
|
40,808
|
|
|
146.59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
|
|
90,524
|
|
|
|
79,435
|
|
|
|
11,089
|
|
|
13.96
|
%
|
|
|
50,353
|
|
|
|
29,082
|
|
|
57.76
|
%
|
Provision for Loan Losses
|
|
|
32,660
|
|
|
|
4,469
|
|
|
|
28,191
|
|
|
630.81
|
%
|
|
|
2,833
|
|
|
|
1,636
|
|
|
57.75
|
%
|
Noninterest Income
|
|
|
18,981
|
|
|
|
17,955
|
|
|
|
1,026
|
|
|
5.71
|
%
|
|
|
16,591
|
|
|
|
1,364
|
|
|
8.22
|
%
|
Noninterest Expense
|
|
|
67,074
|
|
|
|
55,651
|
|
|
|
11,423
|
|
|
20.53
|
%
|
|
|
38,616
|
|
|
|
17,035
|
|
|
44.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Tax
|
|
|
9,771
|
|
|
|
37,270
|
|
|
|
(27,499
|
)
|
|
-73.78
|
%
|
|
|
25,495
|
|
|
|
11,775
|
|
|
46.19
|
%
|
Income Taxes
|
|
|
3,183
|
|
|
|
13,878
|
|
|
|
(10,695
|
)
|
|
-77.06
|
%
|
|
|
9,310
|
|
|
|
4,568
|
|
|
49.07
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
6,588
|
|
|
$
|
23,392
|
|
|
$
|
(16,804
|
)
|
|
-71.84
|
%
|
|
$
|
16,185
|
|
|
$
|
7,207
|
|
|
44.53
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Operating Income
(1)
|
|
$
|
6,590
|
|
|
$
|
24,198
|
|
|
$
|
(17,608
|
)
|
|
-72.77
|
%
|
|
$
|
16,189
|
|
|
$
|
8,009
|
|
|
49.47
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.35
|
|
|
$
|
1.36
|
|
|
$
|
(1.01
|
)
|
|
-74.26
|
%
|
|
$
|
1.31
|
|
|
$
|
0.05
|
|
|
3.82
|
%
|
Diluted
|
|
|
0.34
|
|
|
|
1.33
|
|
|
|
(0.99
|
)
|
|
-74.44
|
%
|
|
|
1.27
|
|
|
|
0.06
|
|
|
4.72
|
%
|
Operating Earnings per Common Share:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.35
|
|
|
|
1.41
|
|
|
|
(1.06
|
)
|
|
-75.18
|
%
|
|
|
1.31
|
|
|
|
0.10
|
|
|
7.63
|
%
|
Diluted
|
|
|
0.34
|
|
|
|
1.38
|
|
|
|
(1.04
|
)
|
|
-75.36
|
%
|
|
|
1.27
|
|
|
|
0.11
|
|
|
8.66
|
%
|
Cash Dividends Paid
|
|
$
|
0.35
|
|
|
$
|
0.30
|
|
|
$
|
0.05
|
|
|
16.67
|
%
|
|
$
|
0.26
|
|
|
$
|
0.04
|
|
|
15.38
|
%
|
Weighted Average Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
19,081,636
|
|
|
|
17,222,139
|
|
|
|
1,859,497
|
|
|
10.80
|
%
|
|
|
12,393,980
|
|
|
|
4,828,159
|
|
|
38.96
|
%
|
Diluted
|
|
|
19,225,069
|
|
|
|
17,564,990
|
|
|
|
1,660,079
|
|
|
9.45
|
%
|
|
|
12,736,545
|
|
|
|
4,828,445
|
|
|
37.91
|
%
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on Average Assets
|
|
|
0.25
|
%
|
|
|
1.15
|
%
|
|
|
-0.90
|
%
|
|
-78.26
|
%
|
|
|
1.31
|
%
|
|
|
-0.16
|
%
|
|
-12.21
|
%
|
Return on Average Equity
|
|
|
2.10
|
%
|
|
|
9.28
|
%
|
|
|
-7.18
|
%
|
|
-77.37
|
%
|
|
|
12.80
|
%
|
|
|
-3.52
|
%
|
|
-27.50
|
%
|
Dividend Payout Ratio
|
|
|
100.00
|
%
|
|
|
22.06
|
%
|
|
|
77.94
|
%
|
|
353.31
|
%
|
|
|
19.85
|
%
|
|
|
2.21
|
%
|
|
11.15
|
%
|
Average Equity to Average Assets
|
|
|
12.10
|
%
|
|
|
12.42
|
%
|
|
|
-0.32
|
%
|
|
-2.58
|
%
|
|
|
10.21
|
%
|
|
|
2.21
|
%
|
|
21.62
|
%
|
Net Interest Margin
|
|
|
3.88
|
%
|
|
|
4.40
|
%
|
|
|
-0.52
|
%
|
|
-11.82
|
%
|
|
|
4.46
|
%
|
|
|
-0.06
|
%
|
|
-1.35
|
%
|
(1)
|
See Reconciliation of Non-GAAP Financial Measures.
|
31
Net Interest Income
Net interest income (the difference between the interest earned on assets and the interest paid on deposits and liabilities) is the principal source of
our earnings. Our average net interest rate margin, on a tax-equivalent basis, was 3.88% in 2007, 4.40% in 2006 and 4.46% in 2005. Net interest income before tax equivalency adjustments in 2007 amounted to $90.5 million, up 14% from $79.4 million in
2006. Net interest income before tax equivalency adjustments in 2006 amounted to $79.4 million, up 58% from $50.4 million in 2005.
The following table presents a summary of interest income, adjusted to a tax-equivalent basis, interest expense and the resulting average net interest
rate margins for the past three years.
NET INTEREST INCOME
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Interest Income
|
|
$
|
192,840
|
|
|
$
|
148,082
|
|
|
$
|
78,192
|
|
Taxable Equivalent Adjustment
|
|
|
445
|
|
|
|
413
|
|
|
|
324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income
(1)
|
|
|
193,285
|
|
|
|
148,495
|
|
|
|
78,516
|
|
Interest Expense
|
|
|
102,316
|
|
|
|
68,647
|
|
|
|
27,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
(1)
|
|
$
|
90,969
|
|
|
$
|
79,848
|
|
|
$
|
50,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(As a % of Average Earning Assets)
(2)
|
|
Interest Income
(1)
|
|
|
8.25
|
%
|
|
|
8.18
|
%
|
|
|
6.90
|
%
|
Interest Expense
|
|
|
4.37
|
%
|
|
|
3.78
|
%
|
|
|
2.44
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Rate Margin
(1)
|
|
|
3.88
|
%
|
|
|
4.40
|
%
|
|
|
4.46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Reflects taxable equivalent adjustments using the statutory federal income tax rate of 35% in adjusting interest on tax-exempt securities to a fully taxable basis.
|
(2)
|
Average Earning Assets used in ratios as follows (in thousands): 2007 $2,341,803; 2006 $1,815,505 and 2005 $1,137,202.
|
2007 compared to 2006
Net Interest Income.
Net interest income on a tax-equivalent basis for the year ended
December 31, 2007 increased $11.1million to $90.9 million from $79.8 million for the year ended December 31, 2006. The increase in net interest income was attributable to an increase of $44.8 million, or 30%, in interest income while
interest expense only increased $33.7 million during 2006. The net interest rate spread (the yield on earning assets minus the cost of interest-bearing liabilities) decreased 51 basis points from 3.87% for the year ended December 31, 2006 to
3.36% for the year ended December 31, 2007, while the net interest margin (net interest income on a tax-equivalent basis divided by average earning assets) decreased from 4.40% to 3.88% during the same period.
The decrease in the net interest rate spread in 2007 was primarily reflective
of a 58 basis-point increase in the average cost of interest-bearing liabilities, while the yield on earning assets increased seven basis points. We experienced significant increases in the costs of all deposits except for interest-bearing demand
and savings deposits. Our average cost of interest-bearing deposits increased to 4.82% in 2007 from 4.18% in 2006. Meanwhile, the loan portfolio yield remained consistent at 8.62%, primarily due to lost interest income from nonaccrual loans; while
the yield on investment securities increased from 4.74% in 2006 to 5.25% in 2007.
32
Interest Income.
Interest income on a tax-equivalent basis was $193.3
million for the year ended December 31, 2007, an increase of $44.8 million from $148.5 million for the year ended December 31, 2006. Interest income on loans and investment securities increased $41.6 million and $3.1 million, respectively,
for the year ended December 31, 2007 compared to the year ended December 31, 2006.
The increase in interest income on loans for the year ended December 31, 2007 compared to the year ended December 31, 2006 was primarily attributable to an increase in average balance of $482.2 million
resulting from loan growth in our core markets. The average yield on our loan portfolio remained consistent at 8.62%.
Interest income on investment securities increased $3.1 million as a result of an increase of $42.9 million in average balance for the year ended
December 31, 2007 compared to the year ended December 31, 2006, and an increase of 51 basis points in the average yield on these securities during the same period.
The primary reason for the increase in the average balance of investment securities of $42.9 million was our effort to
maintain a certain level of on-balance sheet liquidity. The average yield on securities increased 51 basis points partly as a result of the restructuring of our bond portfolio in December 2006, during which we sold several low-yield securities. At
December 31, 2007, investment securities equaled 10.8% of assets, as compared to 9.2% at December 31, 2006.
Overall, the yield on interest-earning assets increased seven basis points from 8.18% during the year ended December 31, 2006 to 8.25% for the year
ended December 31, 2007.
Interest
Expense.
Interest expense increased $33.7 million, to $102.3 million, for the year ended December 31, 2007, from $68.6 million for the year ended December 31, 2006. The increase in interest expense resulted
primarily from an increase of $33.1 million in interest expense on deposits. The average cost of interest-bearing deposits, the largest component of interest expense, increased by 64 basis points and the average balance increased by $496.3 million.
Of the $496.3 million increase in average balances, interest-bearing NOW accounts increased $62.9 million, money market accounts increased $18.2 million and savings accounts decreased $3.3 million. The increase in the average balance for
interest-bearing NOW accounts reflects the attractive rates paid on the Premium Select Checking account, which have contributed to continued balance growth. Time deposits, the largest category of deposits, increased $418.5 million; primarily due to
the increased use of brokered and internet-based certificates of deposit, which continue to provide a quick and cost-effective means of generating deposits to meet our funding needs. The average cost of time deposits increased 66 basis points. The
increase is due to the inclusion of a full year of results for Security Bank of North Fulton and Security Bank of Gwinnett County (both acquired in 2006) whose average cost of time deposits is generally higher than that of the Banks in the Middle
and Coastal Georgia markets.
The interest expense on borrowed
funds in 2007 increased by $0.5 million or 6.8% when compared to 2006. This increase is related to an increase of $5.4 million or 3.9% in the average balance of borrowed funds combined with an increase of 16 basis points to 5.85% in the average
costs of borrowings. The increase in the average balance is related to increases in the draws on correspondent bank lines of credit to meet our funding needs.
2006 compared to 2005
Net Interest Income.
Net interest income on a tax-equivalent basis for the year ended December 31, 2006 increased $29.1
million to $79.8 million from $50.7 million for the year ended December 31, 2005. The increase in net interest income was attributable to an increase of $70.0 million, or 89%, in interest income while interest expense only increased $40.8
million during 2006. The net interest rate spread (the yield on earning assets minus the cost of interest-bearing liabilities) decreased 20 basis points from 4.07% for the year ended December 31, 2005 to 3.87% for the year ended
December 31, 2006, while the net interest margin (net interest income on a tax-equivalent basis divided by average earning assets) decreased from 4.46% to 4.40% during the same period.
33
The decrease in the net interest rate spread in 2006 was primarily reflective of a 148 basis-point
increase in the average cost of interest-bearing liabilities, while the yield on earning assets increased only 128 basis points. We experienced significant increases in the costs of all deposits, except for savings accounts, as our average cost of
interest-bearing deposits increased to 4.18% in 2006 from 2.69% in 2005. Meanwhile, the loan portfolio yield increased 135 basis points as higher-yielding fixed rate loans repriced at higher rates and variable rate loans with interest rate floors
began to participate fully in rate increases during 2006.
Interest Income.
Interest income on a tax-equivalent basis was $148.5 million for the year ended December 31, 2006, an increase of $70 million from $78.5 million for the year ended December 31, 2005.
Interest income on loans and investment securities increased $65.5 million and $3.3 million, respectively, for the year ended December 31, 2006 compared to the year ended December 31, 2005.
The increase in interest income on loans for the year ended December 31,
2006 compared to the year ended December 31, 2005 was primarily attributable to an increase in average balance of $602.0 million, of which $189.9 million was attributable to the inclusion of loan balances acquired from Neighbors Bancshares,
Inc. and Homestead Bank. Excluding the acquired loan balances, the $412.1 million increase in average loans is attributable to the continued strong loan growth in our core markets.
Interest income on investment securities increased $3.3 million as a result of an increase of $58.2 million in average
balance for the year ended December 31, 2006 compared to the year ended December 31, 2005, and an increase of 49 basis points in the average yield on these securities during the same period. Excluding investment securities acquired from
Neighbors Bancshares, Inc. and Homestead Bank, the average balance of investment securities increased $39.1 million.
The primary reason for the increase in the average balance of investment securities of $39.1 million was to maintain the level of investment securities as
a percent of total assets, so that on-balance sheet liquidity would keep pace with loan growth. At December 31, 2006, investment securities equaled 9.2% of assets, as compared to 9.1% at December 31, 2005.
Overall, the yield on interest-earning assets increased 128 basis points from
6.90% during the year ended December 31, 2005 to 8.18% for the year ended December 31, 2006.
Interest Expense.
Interest expense increased $40.8 million, to $68.6 million, for the year ended December 31, 2006,
from $27.8 million for the year ended December 31, 2005. The increase in interest expense resulted primarily from an increase of $37.1 million in interest expense on deposits. Excluding the expense resulting from our acquisitions, interest
expense increased $31.0 million and interest expense on deposits increased $27.7 million. The average cost of interest-bearing deposits, the largest component of interest expense, increased by 149 basis points and the average balance increased by
$571.4 million. Of the $571.4 million increase in average balances, interest-bearing NOW accounts increased $152.4 million, money market accounts increased $46.8 million and savings accounts decreased $0.7 million. The increase in the average
balance for interest-bearing NOW accounts is primarily due to the increase in the number of customers with the Premium Select Checking account, which offers a competitive interest rate and the benefits of a traditional checking account. Given the
advantages and attractive interest rate offered with the Premium Select Checking account, some of our customers transferred their deposits from our traditional money market account to the Premium Select Checking account. Time deposits, the largest
category of deposits, increased $372.9 million; primarily due to the increase in brokered and internet-based certificates of deposit to fund loan growth in the Fairfield Financial Interim Lending (Acquisition and Development) division.
The interest expense on borrowed funds in 2006 increased by $3.8 million
or 92% when compared to 2005. This increase is related to an increase of $38.8 million or 39% in the average balance of borrowed funds combined with an increase of 158 basis points to 5.69% in the average costs of borrowings. The increase in the
average balance is related to an increase in advances with the Federal Home Loan Bank (FHLB) to meet our funding needs.
34
Interest Rates and Interest Differential
The following tables set forth our average balance sheets, interest and yield information on a tax-equivalent basis for the
years ended December 31, 2007, 2006, and 2005.
AVERAGE
BALANCE SHEETS, INTEREST AND YIELDS
(Tax-equivalent
basis, dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2007
|
|
|
Year Ended
December 31, 2006
|
|
|
Year Ended
December 31, 2005
|
|
|
|
Average
Balance
|
|
Interest
|
|
Yield/
Rate
|
|
|
Average
Balance
|
|
Interest
|
|
Yield/
Rate
|
|
|
Average
Balance
|
|
Interest
|
|
Yield/
Rate
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, Net of Unearned Income:
(1) (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
$
|
2,081,999
|
|
$
|
179,562
|
|
8.62
|
%
|
|
$
|
1,599,508
|
|
$
|
137,993
|
|
8.63
|
%
|
|
$
|
997,526
|
|
$
|
72,599
|
|
7.28
|
%
|
Loans Held for Sale
|
|
|
6,328
|
|
|
453
|
|
7.16
|
|
|
|
6,576
|
|
|
454
|
|
6.90
|
|
|
|
6,726
|
|
|
373
|
|
5.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans
|
|
|
2,088,327
|
|
|
180,015
|
|
8.62
|
|
|
|
1,606,084
|
|
|
138,447
|
|
8.62
|
|
|
|
1,004,252
|
|
|
72,972
|
|
7.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
197,436
|
|
|
10,159
|
|
5.15
|
|
|
|
154,927
|
|
|
7,053
|
|
4.55
|
|
|
|
101,992
|
|
|
4,007
|
|
3.93
|
|
Tax Exempt
(3)
|
|
|
20,412
|
|
|
1,274
|
|
6.24
|
|
|
|
19,976
|
|
|
1,238
|
|
6.20
|
|
|
|
14,680
|
|
|
947
|
|
6.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Securities
|
|
|
217,848
|
|
|
11,433
|
|
5.25
|
|
|
|
174,903
|
|
|
8,291
|
|
4.74
|
|
|
|
116,672
|
|
|
4,954
|
|
4.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Earning Deposits
|
|
|
4,561
|
|
|
242
|
|
5.31
|
|
|
|
2,851
|
|
|
160
|
|
5.61
|
|
|
|
2,950
|
|
|
112
|
|
3.80
|
|
Federal Funds Sold
|
|
|
31,067
|
|
|
1,595
|
|
5.13
|
|
|
|
31,667
|
|
|
1,597
|
|
5.04
|
|
|
|
13,328
|
|
|
478
|
|
3.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest-Earning Assets
|
|
|
2,341,803
|
|
|
193,285
|
|
8.25
|
|
|
|
1,815,505
|
|
|
148,495
|
|
8.18
|
|
|
|
1,137,202
|
|
|
78,516
|
|
6.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Earning Assets
|
|
|
250,144
|
|
|
|
|
|
|
|
|
213,401
|
|
|
|
|
|
|
|
|
100,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
2,591,947
|
|
|
|
|
|
|
|
$
|
2,028,906
|
|
|
|
|
|
|
|
$
|
1,238,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Demand Deposits
|
|
$
|
373,522
|
|
$
|
13,550
|
|
3.63
|
|
|
$
|
310,624
|
|
$
|
10,902
|
|
3.51
|
|
|
$
|
158,264
|
|
$
|
3,043
|
|
1.92
|
%
|
Money Market Accounts
|
|
|
145,619
|
|
|
5,499
|
|
3.78
|
|
|
|
127,456
|
|
|
3,694
|
|
2.90
|
|
|
|
80,640
|
|
|
1,350
|
|
1.67
|
|
Savings Deposits
|
|
|
16,005
|
|
|
89
|
|
0.56
|
|
|
|
19,268
|
|
|
106
|
|
0.55
|
|
|
|
19,969
|
|
|
102
|
|
0.51
|
|
Time Deposits of $100,000 or More
|
|
|
892,248
|
|
|
47,622
|
|
5.34
|
|
|
|
571,992
|
|
|
27,482
|
|
4.80
|
|
|
|
317,143
|
|
|
10,395
|
|
3.28
|
|
Other Time Deposits
|
|
|
521,923
|
|
|
27,114
|
|
5.20
|
|
|
|
423,708
|
|
|
18,555
|
|
4.38
|
|
|
|
305,609
|
|
|
8,837
|
|
2.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest-Bearing Deposits
|
|
|
1,949,317
|
|
|
93,874
|
|
4.82
|
|
|
|
1,453,048
|
|
|
60,739
|
|
4.18
|
|
|
|
881,625
|
|
|
23,727
|
|
2.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Funds Purchased and Repurchase Agreements Sold
|
|
|
43,881
|
|
|
2,104
|
|
4.79
|
|
|
|
29,874
|
|
|
1,469
|
|
4.92
|
|
|
|
16,294
|
|
|
528
|
|
3.24
|
|
Other Borrowed Money & Subordinated Debentures
|
|
|
100,430
|
|
|
6,338
|
|
6.31
|
|
|
|
108,997
|
|
|
6,439
|
|
5.91
|
|
|
|
83,755
|
|
|
3,584
|
|
4.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Borrowed Funds
|
|
|
144,311
|
|
|
8,442
|
|
5.85
|
|
|
|
138,871
|
|
|
7,908
|
|
5.69
|
|
|
|
100,049
|
|
|
4,112
|
|
4.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest-Bearing Funding
|
|
|
2,093,628
|
|
|
102,316
|
|
4.89
|
|
|
|
1,591,919
|
|
|
68,647
|
|
4.31
|
|
|
|
981,674
|
|
|
27,839
|
|
2.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Interest-Bearing Demand Deposits
|
|
|
163,712
|
|
|
|
|
|
|
|
|
166,190
|
|
|
|
|
|
|
|
|
119,867
|
|
|
|
|
|
|
Other Liabilities
|
|
|
21,103
|
|
|
|
|
|
|
|
|
18,793
|
|
|
|
|
|
|
|
|
10,031
|
|
|
|
|
|
|
Shareholders Equity
|
|
|
313,504
|
|
|
|
|
|
|
|
|
252,004
|
|
|
|
|
|
|
|
|
126,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities & Shareholders Equity
|
|
$
|
2,591,947
|
|
|
|
|
|
|
|
$
|
2,028,906
|
|
|
|
|
|
|
|
$
|
1,238,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Spread
|
|
|
|
|
|
|
|
3.36
|
%
|
|
|
|
|
|
|
|
3.87
|
%
|
|
|
|
|
|
|
|
4.07
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
|
|
|
|
$
|
90,969
|
|
|
|
|
|
|
|
$
|
79,848
|
|
|
|
|
|
|
|
$
|
50,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Margin
|
|
|
|
|
|
|
|
3.88
|
%
|
|
|
|
|
|
|
|
4.40
|
%
|
|
|
|
|
|
|
|
4.46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
(1)
|
Interest income includes loan fees as follows (in thousands): 2007 $7,645, 2006 $7,442 and 2005 $4,367.
|
(2)
|
Nonaccrual loans are included.
|
(3)
|
Reflects taxable equivalent adjustments using the statutory income tax rate of 35% in adjusting interest on tax exempt investment securities to a fully taxable basis. The taxable
equivalent adjustment included above amounts to (in thousands) $445 for 2007; $413 for 2006 and $324 for 2005.
|
The following table provides a detailed analysis of the changes in interest income and interest expense due to changes in rate and volume for 2007
compared to 2006 and for 2006 compared to 2005.
RATE /
VOLUME ANALYSIS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2007 Compared to 2006
Change Due
To
(1)
|
|
|
2006 Compared to 2005
Change Due
To
(1)
|
|
|
Volume
|
|
|
Rate
|
|
|
Net
Change
|
|
|
Volume
|
|
|
Rate
|
|
|
Net
Change
|
Interest Earned On:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Receivable, Net
|
|
$
|
41,626
|
|
|
$
|
(57
|
)
|
|
$
|
41,569
|
|
|
$
|
43,812
|
|
|
$
|
21,582
|
|
|
$
|
65,394
|
Loans Held for Sale
|
|
|
(17
|
)
|
|
|
16
|
|
|
|
(1
|
)
|
|
|
(8
|
)
|
|
|
89
|
|
|
|
81
|
Taxable Investment Securities
|
|
|
1,935
|
|
|
|
1,171
|
|
|
|
3,106
|
|
|
|
2,080
|
|
|
|
966
|
|
|
|
3,046
|
Tax Exempt Investment Securities
(2)
|
|
|
27
|
|
|
|
9
|
|
|
|
36
|
|
|
|
342
|
|
|
|
(51
|
)
|
|
|
291
|
Interest-Earning Deposits
|
|
|
96
|
|
|
|
(14
|
)
|
|
|
82
|
|
|
|
(4
|
)
|
|
|
52
|
|
|
|
48
|
Federal Funds Sold
|
|
|
(30
|
)
|
|
|
28
|
|
|
|
(2
|
)
|
|
|
658
|
|
|
|
461
|
|
|
|
1,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Income
|
|
|
43,637
|
|
|
|
1,153
|
|
|
|
44,790
|
|
|
|
46,880
|
|
|
|
23,099
|
|
|
|
69,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Paid On:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Demand Deposits
|
|
|
2,208
|
|
|
|
440
|
|
|
|
2,648
|
|
|
|
2,929
|
|
|
|
4,930
|
|
|
|
7,859
|
Money Market Accounts
|
|
|
526
|
|
|
|
1,279
|
|
|
|
1,805
|
|
|
|
784
|
|
|
|
1,560
|
|
|
|
2,344
|
Savings Deposits
|
|
|
(18
|
)
|
|
|
1
|
|
|
|
(17
|
)
|
|
|
(4
|
)
|
|
|
8
|
|
|
|
4
|
Time Deposits of $100,000 or More
|
|
|
15,387
|
|
|
|
4,753
|
|
|
|
20,140
|
|
|
|
8,353
|
|
|
|
8,734
|
|
|
|
17,087
|
Other Time Deposits
|
|
|
4,301
|
|
|
|
4,258
|
|
|
|
8,559
|
|
|
|
3,415
|
|
|
|
6,303
|
|
|
|
9,718
|
Federal Funds Purchased and Repurchase Agreements
|
|
|
689
|
|
|
|
(54
|
)
|
|
|
635
|
|
|
|
440
|
|
|
|
501
|
|
|
|
941
|
Other Borrowings
|
|
|
(506
|
)
|
|
|
405
|
|
|
|
(101
|
)
|
|
|
1,080
|
|
|
|
1,775
|
|
|
|
2,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Expense
|
|
|
22,587
|
|
|
|
11,082
|
|
|
|
33,669
|
|
|
|
16,997
|
|
|
|
23,811
|
|
|
|
40,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
|
$
|
21,050
|
|
|
$
|
(9,929
|
)
|
|
$
|
11,121
|
|
|
$
|
29,883
|
|
|
$
|
(712
|
)
|
|
$
|
29,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The change in interest due to both rate and volume has been allocated to the rate component.
|
(2)
|
Reflects taxable equivalent adjustments using the statutory federal income tax rate of 35% in adjusting interest on tax exempt investment securities to a fully taxable basis.
|
Provision for Loan Losses
The provision for loan losses is a charge to current earnings taken to
increase the allowance for loan losses. The general nature of lending results in periodic charge-offs of nonperforming loans, in spite of our continuous loan review process, credit standards and internal controls. We expensed $32.6 million in 2007,
$4.5 million in 2006, and $2.8 million in 2005 for loan loss provisions. The increase in the provision for loan losses in 2007 is due primarily to significant declines in residential real estate market values, primarily in the metropolitan Atlanta
area, caused by recent disruptions in financial markets. As a result of these adverse market conditions, our net
36
charge-offs increased to $23.3 million in 2007, compared to $2.4 million in 2006 and $1.2 million in 2005. Our net charge-offs as a percentage of average
loans outstanding increased to 1.12% in 2007 compared to 0.15% in 2006 and 0.12% in 2005. The adverse market conditions also resulted in an increase in the allowance for loan losses as a percentage of outstanding net loans receivable to 1.45% at
December 31, 2007, up from 1.18% at December 31, 2006 and 1.27% at December 31, 2005. See Risk Elements section on page 41 for further discussion.
Noninterest Income
2007 compared to 2006
Noninterest income of $19.0 million in 2007 represented an increase of 5.7% or $1.0 million from $18.0 million recorded in 2006. The increase is primarily
due to a reduction in the loss on the sale of securities. In 2006, we incurred a $1.6 million loss in connection with the restructuring of our bond portfolio and incurred a minimal loss in 2007. The $1.6 million increase resulting from the lower
loss on sale of securities is offset by a decrease in mortgage origination and related fee income of $0.4 million, which is the result of decreased loan volume.
2006 compared to 2005
Noninterest income of $18.0 million in 2006 represented an increase of 8.2% or $1.4 million from $16.6 million recorded in 2005. Service charges on
deposit accounts, which constitute 51% of noninterest income, are the largest component of noninterest income, generating $9.2 million for 2006, up from $7.4 million in 2005. Fees generated from our courtesy overdraft protection product accounted
for $6.8 million or 74% of service charges on deposits. The increase in fees from our courtesy overdraft product is also attributable to the significant growth in deposits during the year of $323.3 million or 25%, excluding the impact of 2006
acquisitions. The second largest component of noninterest income is mortgage origination and related fee income, which constituted 28% of noninterest income during 2006. Mortgage origination and related fee income increased $0.4 million, from $4.5
million in 2005 to $4.9 million in 2006. The increases in service charges and mortgage origination and related fee income are offset by losses of $1.6 million incurred in connection with the restructuring of our bond portfolio in December 2006.
Noninterest Expense
2007 compared to 2006
Noninterest expense was $67.1 million for 2007, up 20.5% or $11.4 million, from $55.7 million in 2006. Salaries and
benefits, the largest component of noninterest expense, constituting 54% of noninterest expense, increased $2.7 million to $35.1 million in 2007 from $32.4 million in 2006. Approximately $2.1 million of the increase in salaries and benefits is due
to the inclusion of a full years results for Security Bank of North Fulton and Security Bank of Gwinnett County, which were acquired in March and July 2006, respectively. The remainder of the increase is due to normal salary and benefit
increases from merit increases and the hiring of new employees.
All other operating overhead increased by $8.7 million, or 38%, during 2007. Approximately $1.2 million is attributable to increased professional fees. Specifically, audit fees increased by approximately $0.5 million as a result of the
additions of Security Bank of North Fulton and Security Bank of Gwinnett County in 2006. Further, legal fees and other expenses increased approximately $0.5 million as a result of the fees incurred in connection with the proposed acquisition of
First Commerce Community Bankshares, Inc. which was not consummated.
The increase is also due to a $4.4 million increase in foreclosed property expenses, stemming from the significant increase in nonperforming assets and an increase of $0.4 million in directors fees, resulting from the additional
directors at subsidiary banks acquired during 2006. The remainder of the increase is spread across various expense categories.
37
2006 compared to 2005
Non-interest expense was $55.7 million for the year ended 2006, up 44.1%, or $17.1 million, from $38.6 million in 2005. Salaries and benefits, the largest
component of non-interest expense, constituting 58% of non-interest expense, increased $9.6 million to $32.4 million in 2006 from $22.8 million in 2005. Approximately $2.4 million of the increase in salaries and benefits is related to the hiring of
employees in connection with the acquisitions of Neighbors Bancshares, Inc. (Security Bank of North Fulton) and Homestead Bank (Security Bank of Gwinnett County). Also contributing to the increase is the hiring of employees in connection with the
acquisition of Rivoli BanCorp on December 31, 2005. The remainder of the increase is due to normal salary and benefit increases from merit increases and the hiring of new employees.
All other operating overhead increased by $7.5 million, or 48%, during 2006. Excluding the expenses incurred by the banks
acquired during the year, other operating overhead increased approximately $5.8 million or 37%. Approximately $1.4 million is attributable to increased occupancy and equipment expenses resulting from the continued growth of the Banks in our core
markets. The increase is also attributable to a $795,000 increase in the amortization of intangibles resulting from the 2005 acquisitions of SouthBank and Rivoli BanCorp. Furthermore, approximately $590,000 of the increase is the result of increased
audit and other professional fees. The remaining increase of $3.0 million is related to increases in various service-related expenses including appraisal fees and directors fees resulting from additional directors at subsidiary banks acquired
in 2006.
Income Tax Expense
Our consolidated federal and state income tax expense decreased to $3.2
million in 2007, down from $13.9 million in 2006 and $9.3 million in 2005. Our effective tax rate also decreased to 32.6% in 2007, down from 37.2% in 2006 and 36.5% in 2005. Our effective tax rate has historically been at or just below the maximum
corporate federal and state income tax rates due to the relatively small percentage of tax-free investments carried on our balance sheet.
During 2007, we purchased low income housing tax credits. These credits provide reductions in our state income tax expense over the next 11 years. When
added to existing state income tax credits, the 2007 credits resulted in a zero state income tax expense for 2007. See Note 8 to our Consolidated Financial Statements for a detailed analysis of income taxes.
38
Quarterly Results of Operations
The following table provides income statement recaps and earnings per share data for each of the four quarters for the years ended
December 31, 2007 and 2006.
QUARTERLY RESULTS OF
OPERATIONS
(Dollars in thousands, except per share
data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Dec. 31
|
|
|
Sept. 30
|
|
June 30
|
|
Mar. 31
|
|
Total Year
|
For 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income
|
|
$
|
48,989
|
|
|
$
|
49,643
|
|
$
|
48,175
|
|
$
|
46,033
|
|
$
|
192,840
|
Interest Expense
|
|
|
27,406
|
|
|
|
26,862
|
|
|
24,792
|
|
|
23,256
|
|
|
102,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
|
|
21,583
|
|
|
|
22,781
|
|
|
23,383
|
|
|
22,777
|
|
|
90,524
|
Provision For Loan Losses
|
|
|
20,000
|
|
|
|
9,400
|
|
|
2,000
|
|
|
1,260
|
|
|
32,660
|
Noninterest Income
|
|
|
4,539
|
|
|
|
4,600
|
|
|
4,750
|
|
|
5,092
|
|
|
18,981
|
Noninterest Expense
|
|
|
17,583
|
|
|
|
17,059
|
|
|
16,544
|
|
|
15,888
|
|
|
67,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Income Taxes
|
|
|
(11,461
|
)
|
|
|
922
|
|
|
9,589
|
|
|
10,721
|
|
|
9,771
|
Income Taxes
|
|
|
(4,588
|
)
|
|
|
347
|
|
|
3,489
|
|
|
3,935
|
|
|
3,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(6,873
|
)
|
|
$
|
575
|
|
$
|
6,100
|
|
$
|
6,786
|
|
$
|
6,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.36
|
)
|
|
$
|
0.03
|
|
$
|
0.32
|
|
$
|
0.35
|
|
$
|
0.35
|
Diluted
|
|
|
(0.36
|
)
|
|
|
0.03
|
|
|
0.31
|
|
|
0.35
|
|
|
0.34
|
|
|
|
|
Three Months Ended
|
|
|
Dec. 31
|
|
|
Sept. 30
|
|
June 30
|
|
Mar. 31
|
|
Total Year
|
For 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income
|
|
$
|
44,415
|
|
|
$
|
40,669
|
|
$
|
34,214
|
|
$
|
28,783
|
|
$
|
148,081
|
Interest Expense
|
|
|
22,353
|
|
|
|
19,082
|
|
|
15,142
|
|
|
12,070
|
|
|
68,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
|
|
22,062
|
|
|
|
21,587
|
|
|
19,072
|
|
|
16,713
|
|
|
79,434
|
Provision For Loan Losses
|
|
|
1,873
|
|
|
|
1,226
|
|
|
739
|
|
|
630
|
|
|
4,468
|
Noninterest Income
|
|
|
3,075
|
|
|
|
5,029
|
|
|
4,937
|
|
|
4,914
|
|
|
17,955
|
Noninterest Expense
|
|
|
14,664
|
|
|
|
14,475
|
|
|
13,634
|
|
|
12,878
|
|
|
55,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes
|
|
|
8,600
|
|
|
|
10,915
|
|
|
9,636
|
|
|
8,119
|
|
|
37,270
|
Provision For Income Taxes
|
|
|
3,378
|
|
|
|
3,975
|
|
|
3,546
|
|
|
2,979
|
|
|
13,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
5,222
|
|
|
$
|
6,940
|
|
$
|
6,090
|
|
$
|
5,140
|
|
$
|
23,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.26
|
|
|
$
|
0.38
|
|
$
|
0.36
|
|
$
|
0.36
|
|
$
|
1.36
|
Diluted
|
|
|
0.26
|
|
|
|
0.37
|
|
|
0.36
|
|
|
0.35
|
|
|
1.33
|
Balance Sheet Review
Loan Portfolio
Our loan portfolio constitutes our largest interest-earning asset. To
analyze prospective loans, management reviews our credit quality and interest rate pricing guidelines to determine whether to extend a loan and the appropriate rate of interest for each loan. At December 31, 2007 and 2006, loans receivable, net
of unearned income, of $2.18 billion and $1.90 billion, respectively, amounted to 77.0% and 76.2% of total assets, and 94.9% and 96.5% of deposits. Loans, including loans held for sale amounted to 87.4% of interest-bearing liabilities at
39
December 31, 2007 and 89.0% at December 31, 2006. Our loan portfolio grew by 14.8% from December 31, 2006 to December 31, 2007. Loan
yields were 8.62% for 2007, compared to 8.62% for 2006 and 7.27% for 2005. Our allowance for loan losses as a percentage of loans receivable amounted to 1.45% at December 31, 2007, compared to 1.18% and 1.27% at December 31, 2006 and 2005,
respectively.
The largest components of our loan portfolio are
the real estate construction and land development loans and the other mortgages secured by nonfarm, nonresidential properties. Real estate construction and land development loans, which constituted 53.4% of the loans outstanding at December 31,
2007, are loans secured by real estate made to finance land development and residential and commercial construction.
The following table presents the amount of loans outstanding by category, both in dollars and in percentages of the total portfolio, at the end of each of
the past five years.
LOANS BY TYPE
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
Commercial and Industrial
|
|
$
|
161,911
|
|
|
$
|
142,537
|
|
|
$
|
106,300
|
|
|
$
|
86,575
|
|
|
$
|
62,618
|
|
Agricultural
|
|
|
1,225
|
|
|
|
2,029
|
|
|
|
3,035
|
|
|
|
3,179
|
|
|
|
1,359
|
|
Real EstateConstruction and Land Development
|
|
|
1,165,717
|
|
|
|
981,481
|
|
|
|
517,373
|
|
|
|
350,150
|
|
|
|
267,201
|
|
Real EstateMortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by Farmland
|
|
|
18,717
|
|
|
|
16,926
|
|
|
|
5,627
|
|
|
|
3,879
|
|
|
|
3,804
|
|
Secured by 1-4 Family Residential Properties
|
|
|
246,340
|
|
|
|
223,518
|
|
|
|
199,072
|
|
|
|
128,770
|
|
|
|
107,424
|
|
Secured by Multifamily Residential Properties
|
|
|
24,786
|
|
|
|
30,084
|
|
|
|
18,366
|
|
|
|
13,660
|
|
|
|
6,036
|
|
Secured by Nonfarm Nonresidential Properties
|
|
|
504,368
|
|
|
|
458,070
|
|
|
|
376,302
|
|
|
|
220,593
|
|
|
|
213,799
|
|
Consumer
|
|
|
61,757
|
|
|
|
48,923
|
|
|
|
47,608
|
|
|
|
40,012
|
|
|
|
36,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans
|
|
$
|
2,184,821
|
|
|
$
|
1,903,568
|
|
|
$
|
1,273,683
|
|
|
$
|
846,818
|
|
|
$
|
698,453
|
|
Unearned Income
|
|
|
(2,509
|
)
|
|
|
(2,467
|
)
|
|
|
(1,564
|
)
|
|
|
(1,053
|
)
|
|
|
(771
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Loans
|
|
$
|
2,182,312
|
|
|
$
|
1,901,101
|
|
|
$
|
1,272,119
|
|
|
$
|
845,765
|
|
|
$
|
697,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Total Portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
|
7.40
|
%
|
|
|
7.50
|
%
|
|
|
8.36
|
%
|
|
|
10.24
|
%
|
|
|
8.97
|
%
|
Agricultural
|
|
|
0.06
|
%
|
|
|
0.11
|
%
|
|
|
0.24
|
%
|
|
|
0.37
|
%
|
|
|
0.19
|
%
|
Real EstateConstruction and Land Development
|
|
|
53.42
|
%
|
|
|
51.63
|
%
|
|
|
40.67
|
%
|
|
|
41.40
|
%
|
|
|
38.30
|
%
|
Real EstateMortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by Farmland
|
|
|
0.86
|
%
|
|
|
0.89
|
%
|
|
|
0.44
|
%
|
|
|
0.45
|
%
|
|
|
0.55
|
%
|
Secured by 1-4 Family Residential Properties
|
|
|
11.29
|
%
|
|
|
11.76
|
%
|
|
|
15.65
|
%
|
|
|
15.23
|
%
|
|
|
15.40
|
%
|
Secured by Multifamily Residential Properties
|
|
|
1.14
|
%
|
|
|
1.58
|
%
|
|
|
1.44
|
%
|
|
|
1.62
|
%
|
|
|
0.87
|
%
|
Secured by Nonfarm Nonresidential Properties
|
|
|
23.11
|
%
|
|
|
24.09
|
%
|
|
|
29.58
|
%
|
|
|
26.08
|
%
|
|
|
30.64
|
%
|
Consumer
|
|
|
2.83
|
%
|
|
|
2.57
|
%
|
|
|
3.74
|
%
|
|
|
4.73
|
%
|
|
|
5.19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans
|
|
|
100.11
|
%
|
|
|
100.13
|
%
|
|
|
100.12
|
%
|
|
|
100.12
|
%
|
|
|
100.11
|
%
|
Unearned Income
|
|
|
(0.11
|
)%
|
|
|
(0.13
|
)%
|
|
|
(0.12
|
)%
|
|
|
(0.12
|
)%
|
|
|
(0.11
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Loans
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
Lending Limits
When the amount of a loan or loans to a single borrower or relationship exceeds an individual officers lending authority, the lending decision must
be approved by a more senior officer with the requisite loan authority, or the lending decision will be made by the loan committee comprised of officers or the loan committee comprised of members of the Board of Directors.
Lending limits vary based on the type of loan and nature of the borrower. In
general, however, we are able to loan to any one borrower a maximum amount equal to either 15% of total risk-based capital, or 25% of total risk-based capital if the amount that exceeds 15% is fully secured. As of December 31, 2007, our legal
lending limit was approximately $35.2 million (unsecured) plus an additional $23.4 million (secured) for a total of approximately $58.6 million, for loans that meet federal and/or state collateral guidelines. Regardless of the legal lending limit,
our internal guidelines limit the amount available to be loaned to any one borrowing relationship. We adjust the maximum amount available to any one borrower or relationship in accordance with an assigned credit grade. Every loan of material size is
assigned a credit grade either by our credit administration department or by the appropriate approval committee, with grades denoting more credit risk receiving a lower in-house maximum. As a result, our exposure to loans with more risk is limited
by the credit grades assigned to those loans. These credit grades are reviewed regularly by management, regulatory authorities and our external loan review vendor for appropriateness and applicability.
Underwriting
Collectively, our chief operating officer, other senior members of corporate management, our Bank presidents and chief
lending officers act as the primary lending officers for the Company. These individuals, combined, have over 475 years of lending experience. This experienced loan team has developed stringent credit underwriting and monitoring guidelines/policies
while simultaneously delivering strong growth in our loan portfolio. We stress individual accountability to our loan officers, basing a portion of their compensation on the performance of the loans they approve. We believe we employ a prudent credit
approval process and have developed a comprehensive risk-management system for monitoring and measuring the adequacy of our allowance for loan losses and anticipating net charge-offs.
Risk Elements
Nonperforming assets consist of nonaccrual loans, loans past due 90 days or more as to interest or principal and still accruing, and other real estate
owned, which is real estate acquired through foreclosure. Nonaccrual loans are those loans on which recognition of interest income has been discontinued. When management believes there is sufficient doubt as to the collectibility of principal or
interest on any loan, or generally when loans are 90 days or more past due, the accrual of the applicable interest is discontinued and the loan is designated as nonaccrual, unless the loan is well secured and in the process of
collection. Management reviews past due loans on a monthly basis and will place certain loans on nonaccrual status at 60 days past due in some circumstances. Interest payments received on nonaccrual loans are applied against principal. Loans are
returned to an accrual status when factors indicating doubtful collectibility on a timely basis no longer exist. Other real estate owned is initially recorded at the lower of cost or estimated market value at the date of acquisition. A provision for
estimated losses is recorded if a subsequent decline in value occurs.
Nonperforming assets at December 31, 2007 amounted to approximately $79.1 million, or 3.58% of loans receivable and other real estate. This compares to approximately $37.2 million in nonperforming assets, or 1.95% of loans receivable
and other real estate at December 31, 2006. The following table sets forth our nonperforming assets and allowance for loan losses at the end of the past five years.
41
NONPERFORMING ASSETS
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
Nonperforming loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans
|
|
$
|
50,635
|
|
|
$
|
34,401
|
|
|
$
|
6,997
|
|
|
$
|
6,214
|
|
|
$
|
4,154
|
|
Loans 90 days or more past due and still accruing
|
|
|
242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
|
50,877
|
|
|
|
34,401
|
|
|
|
6,997
|
|
|
|
6,214
|
|
|
|
4,181
|
|
Other real estate owned
|
|
|
28,175
|
|
|
|
2,775
|
|
|
|
2,394
|
|
|
|
1,991
|
|
|
|
4,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
79,052
|
|
|
$
|
37,176
|
|
|
$
|
9,391
|
|
|
$
|
8,205
|
|
|
$
|
8,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming assets to loans receivable and other real estate
|
|
|
3.58
|
%
|
|
|
1.95
|
%
|
|
|
0.74
|
%
|
|
|
0.97
|
%
|
|
|
1.17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to nonperforming loans
|
|
|
62.30
|
%
|
|
|
64.93
|
%
|
|
|
230.78
|
%
|
|
|
175.46
|
%
|
|
|
224.99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in
nonperforming assets is primarily attributable to the significant slowdown in residential real estate sales that began in the summer of 2007. Approximately 15% of the loan portfolio consists of loans made to purchase, develop and build residential
real estate. A significant portion of the loan portfolios of our metropolitan Atlanta banks and Fairfield Financial is concentrated in this market. During the summer of 2007, the subprime mortgage market collapsed as loans with adjustable interest
rates began resetting and homeowners could not afford the higher payments. The effects of this dilemma rippled throughout the national and international economy as many of these loans had been packaged and sold to financial firms around the world.
The home mortgage loan market experienced illiquidity during 2007 that affected prime customers as well. With the significant slowing of home and land sales, the prices of homes and land have begun to decline. Many potential home and land purchasers
are not making purchases as they watch the market for further slowing sales and declining prices. Therefore, many of our customers who develop and sell residential real estate cannot service their loans because they are not generating any revenue.
Presently, the majority of our loans in this category continue to perform; however, management cannot predict the impact of future economic changes on our nonperforming assets. Management believes that the increase in nonperforming assets during
2007 is indicative of a trend that we currently believe will accelerate at least throughout 2008.
The 10 largest nonaccrual loans comprise $28.3 million or 55.9% of the total. Of these 10 loans, seven are residential development loans and three are
commercial real estate loans. We experienced significant activity in nonaccrual loans during 2007 with $92.3 million in new loans moved to nonaccrual status, $23.3 million in nonaccruals being charged-off, $4.1 million in nonaccrual loans being sold
and $48.6 million in nonaccrual loans moved into foreclosure.
The 10 largest other real estate owned properties comprise $12.2 million or 43.2% of the total. Nine of these properties are residential in nature and one property is commercial. Of the total other real estate owned balance, the largest
component is residential real estate 42.0% followed by single family homes at 25.8%, raw land at 21.8% and commercial property at 9.7%. We incurred significant activity in other real estate owned during 2007 with $48.6 million in newly foreclosed
properties, $22.1 million in sales of the properties and $1.2 million in writedowns.
42
Summary of Loan Loss Experience
The following table summarizes loans charged-off, recoveries of loans previously charged-off and provisions for loan losses for the periods
indicated. We have no lease financing or foreign loans.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
Allowance for loan losses at beginning of period
|
|
$
|
22,336
|
|
|
$
|
16,148
|
|
|
$
|
10,903
|
|
|
$
|
9,407
|
|
|
$
|
5,480
|
|
Loans charged-off during the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, industrial and agricultural
|
|
|
2,142
|
|
|
|
539
|
|
|
|
470
|
|
|
|
290
|
|
|
|
68
|
|
Construction and land development
|
|
|
17,514
|
|
|
|
741
|
|
|
|
84
|
|
|
|
455
|
|
|
|
835
|
|
Real estate-mortgage
|
|
|
3,274
|
|
|
|
663
|
|
|
|
364
|
|
|
|
236
|
|
|
|
699
|
|
Consumer
|
|
|
1,488
|
|
|
|
1,183
|
|
|
|
797
|
|
|
|
1,069
|
|
|
|
654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs
|
|
|
24,418
|
|
|
|
3,126
|
|
|
|
1,715
|
|
|
|
2,050
|
|
|
|
2,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries during the period of loans previously charged-off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, industrial and agricultural
|
|
|
278
|
|
|
|
121
|
|
|
|
103
|
|
|
|
170
|
|
|
|
136
|
|
Construction and land development
|
|
|
8
|
|
|
|
1
|
|
|
|
5
|
|
|
|
37
|
|
|
|
3
|
|
Real estate-mortgage
|
|
|
19
|
|
|
|
57
|
|
|
|
16
|
|
|
|
46
|
|
|
|
187
|
|
Consumer
|
|
|
815
|
|
|
|
584
|
|
|
|
372
|
|
|
|
474
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
1,120
|
|
|
|
763
|
|
|
|
496
|
|
|
|
727
|
|
|
|
435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans charged-off during the period
|
|
|
23,298
|
|
|
|
2,363
|
|
|
|
1,219
|
|
|
|
1,323
|
|
|
|
1,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to allowance-provision expense
|
|
|
32,660
|
|
|
|
4,469
|
|
|
|
2,833
|
|
|
|
2,819
|
|
|
|
2,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Combinations
|
|
|
|
|
|
|
4,082
|
|
|
|
3,631
|
|
|
|
|
|
|
|
2,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses at end of period
|
|
$
|
31,698
|
|
|
$
|
22,336
|
|
|
$
|
16,148
|
|
|
$
|
10,903
|
|
|
$
|
9,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to period end net loans receivable
|
|
|
1.45
|
%
|
|
|
1.18
|
%
|
|
|
1.27
|
%
|
|
|
1.29
|
%
|
|
|
1.35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of net loans charged-off during the period to average net loans receivable outstanding during the period
|
|
|
1.12
|
%
|
|
|
0.15
|
%
|
|
|
0.12
|
%
|
|
|
0.17
|
%
|
|
|
0.32
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for loan
losses represents managements determination of the amount necessary to be transferred to the allowance for loan losses to maintain a level that it considers adequate in relation to the risk of future losses inherent in the loan portfolio. It
is the policy of our Banks to provide for exposure to losses principally through an ongoing loan review process. This review process is undertaken to ascertain any probable losses that must be charged-off and to assess the risk characteristics of
individually significant loans and of the portfolio in the aggregate. This review takes into consideration the judgments of the responsible lending officers and the loan committees of our Banks boards of directors, and also those of the
regulatory agencies that review the loans as part of their regular examination process. During routine examinations of the Banks, the primary banking regulators may, from time to time, require additions to the Banks provisions for loan losses
and allowances for loan losses if the regulators credit evaluations differ from those of management.
43
In addition to ongoing internal loan reviews and risk assessment, management uses other factors to judge
the adequacy of the allowance for loan losses, including current economic conditions, loan loss experience, regulatory guidelines and current levels of nonperforming loans. Management believes that the balances of $31.7 million and $22.3 million in
the allowance for loan losses at December 31, 2007 and 2006, respectively, were adequate to absorb known risks in the loan portfolio at those dates. No assurance can be given, however, that adverse economic conditions or other circumstances
will not result in increased losses in our loan portfolio or that our allowance for loan losses will be sufficient to absorb such unexpected losses.
In accordance with SFAS No. 114,
Accounting by Creditors for Impairment of a Loan
and SFAS No. 118,
Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures
, management, considering current information and events regarding the borrowers ability to repay their obligations, considers a loan to be impaired when the ultimate collectibility of
all amounts due, according to the contractual terms of the loan agreement, is in doubt. When a loan becomes impaired, management calculates the impairment based on the present value of expected future cash flows discounted at the loans
effective interest rate. If the loan is collateral dependent, the fair value of the collateral is used to measure the amount of impairment. The amount of impairment and any subsequent changes are recorded, through a charge to earnings, as the
specific allocation of the allowance for loan losses. When management considers a loan, or a portion thereof, as uncollectible, it is charged-off against the allowance for loan losses.
A general allocation of the allowance for loan losses has been made to provide for the possibility of incurred losses within
the various loan categories. The allocation is based primarily on previous charge-off experience adjusted for stress factors representative of various economic factors and characteristics of the loan portfolio. The allowance for loan loss allocation
is based on subjective judgment and estimates, and therefore is not necessarily indicative of the specific amounts or loan categories in which charge-offs may ultimately occur.
The following table shows a five-year comparison of the allocation of the allowance for loan losses based on loan
categories. The loan balance in each category is expressed as a percentage of the total loans at the end of the respective periods.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
Amount
|
|
%
|
|
|
Amount
|
|
%
|
|
|
Amount
|
|
%
|
|
|
Amount
|
|
%
|
|
|
Amount
|
|
%
|
|
Balance at end of period applicable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, industrial and agricultural
|
|
$
|
2,225
|
|
7
|
%
|
|
$
|
1,357
|
|
7
|
%
|
|
$
|
1,109
|
|
9
|
%
|
|
$
|
872
|
|
10
|
%
|
|
$
|
677
|
|
9
|
%
|
Construction and land development
|
|
|
15,898
|
|
53
|
%
|
|
|
9,212
|
|
52
|
%
|
|
|
5,248
|
|
41
|
%
|
|
|
3,576
|
|
41
|
%
|
|
|
2,860
|
|
38
|
%
|
Real estate-mortgage
|
|
|
10,831
|
|
37
|
%
|
|
|
6,839
|
|
38
|
%
|
|
|
6,078
|
|
46
|
%
|
|
|
3,838
|
|
44
|
%
|
|
|
3,612
|
|
48
|
%
|
Consumer
|
|
|
842
|
|
3
|
%
|
|
|
459
|
|
3
|
%
|
|
|
483
|
|
4
|
%
|
|
|
436
|
|
5
|
%
|
|
|
376
|
|
5
|
%
|
Unallocated
|
|
|
1,902
|
|
|
|
|
|
4,469
|
|
|
|
|
|
3,230
|
|
|
|
|
|
2,181
|
|
|
|
|
|
1,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance for loan losses
|
|
$
|
31,698
|
|
100
|
%
|
|
$
|
22,336
|
|
100
|
%
|
|
$
|
16,148
|
|
100
|
%
|
|
$
|
10,903
|
|
100
|
%
|
|
$
|
9,407
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
Investment Portfolio
The investment securities portfolio is another major interest-earning asset and consists of debt and equity securities categorized as either
Available for Sale or Held to Maturity. Given our strong loan demand in previous years, the investment portfolio is viewed primarily as a source of liquidity, with yield as a secondary consideration. Because the investment
portfolio is primarily for liquidity purposes, the investment portfolio has a relatively short effective duration of 3.12 years as of year end. The investment portfolio also serves to balance interest rate risk and credit risk related to the loan
portfolio.
As of December 31, 2007, our portfolio of
bonds and equity investments amounted to $305.4 million, or 10.8% of total assets, compared to $229.9 million, or 9.2% of total assets at December 31, 2006.
The average tax-equivalent yield on the portfolio was 5.25% for the year 2007 versus 4.74% in 2006 and 4.25% in 2005. Net
losses on the sale of securities were less than $0.1 million, $1.6 million, and less than $0.1 million in 2007, 2006 and 2005, respectively. In December 2006, we restructured our bond portfolio and sold a total of approximately $54.0 million in
bonds with lower yielding rates at a loss of approximately $1.3 million to reinvest in higher-yielding bonds.
At December 31, 2007, the major portfolio components included 70.1% in mortgage-backed securities issued by U.S. government agencies; 20.0% in other
bonds of U.S. government agencies; 6.6% in state, county and municipal bonds; 2.7% in FHLB stock; and 0.6% in other securities. As of December 31, 2007, the investment portfolio had gross unrealized gains of $2.5 million and gross unrealized
losses of $0.9 million for a net unrealized gain of $1.6 million. As of December 31, 2006, the portfolio had a net unrealized loss of $1.0 million. In accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity
Securities
, shareholders equity included net unrealized gains of $1.1 million for December 31, 2007 and net unrealized losses of $0.6 million for December 31, 2006 recorded on the Available for Sale portfolio, net of deferred tax
effects. Management identified no value impairment related to credit quality in the portfolio, and we hold no securities that are tied to the subprime home mortgage loans. In addition, management has the intent and ability to hold those securities
with unrealized losses until the market-based impairment is recovered; therefore, no value impairment was determined to be other than temporary.
No trading account has been established by us and none is anticipated.
45
The following table summarizes the Available for Sale and Held to Maturity investment securities
portfolios as of December 31, 2007, 2006 and 2005. Available for Sale securities are shown at fair value, while Held to Maturity securities are shown at amortized or accreted cost. Unrealized gains and losses on securities Available for Sale
are excluded from earnings and are reported, net of deferred taxes, in accumulated other comprehensive income, a component of shareholders equity.
INVESTMENT SECURITIES
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
Securities Available for Sale:
|
|
|
|
|
|
|
|
|
|
Mortgage-Backed Securities
|
|
$
|
214,150
|
|
$
|
132,289
|
|
$
|
76,713
|
U. S. Government Agencies
|
|
|
59,946
|
|
|
66,828
|
|
|
46,190
|
State, County & Municipal
|
|
|
20,237
|
|
|
20,096
|
|
|
20,068
|
Other Investments
|
|
|
1,823
|
|
|
1,966
|
|
|
691
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
296,156
|
|
$
|
221,179
|
|
$
|
143,662
|
|
|
|
|
|
|
|
|
|
|
Securities Held to Maturity:
|
|
|
|
|
|
|
|
|
|
U. S. Government Agencies
|
|
$
|
1,000
|
|
$
|
1,000
|
|
$
|
350
|
State, County & Municipal
|
|
|
|
|
|
240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,000
|
|
$
|
1,240
|
|
$
|
350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank Stock
|
|
$
|
8,243
|
|
$
|
7,521
|
|
$
|
6,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Securities:
|
|
|
|
|
|
|
|
|
|
Mortgage-Backed Securities
|
|
$
|
214,150
|
|
$
|
132,289
|
|
$
|
76,713
|
U. S. Government Agencies
|
|
|
60,946
|
|
|
67,828
|
|
|
46,190
|
State, County & Municipal
|
|
|
20,237
|
|
|
20,336
|
|
|
20,418
|
Other Investments
|
|
|
1,823
|
|
|
1,966
|
|
|
691
|
Federal Home Loan Bank Stock
|
|
|
8,243
|
|
|
7,521
|
|
|
6,974
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
305,399
|
|
$
|
229,940
|
|
$
|
150,986
|
|
|
|
|
|
|
|
|
|
|
46
The following table illustrates the contractual maturities and weighted average yields of investment
securities Available for Sale held at December 31, 2007. Expected maturities will differ from contractual maturities because certain issuers have the right to call or prepay obligations with or without call or prepayment penalties. No
prepayment assumptions have been estimated in the table. The weighted average yields are calculated on the basis of the amortized cost and effective yields of each security weighted for the scheduled maturity of each security. The yield on state,
county and municipal securities is computed on a tax-equivalent basis using a statutory federal income tax rate of 35%. At December 31, 2007, we had $1.0 million carrying value (and fair value) of U.S. Government Agency investment securities
classified as Held to Maturity, with an average yield of 5.0% with all securities maturing in the five to 10 year time period.
MATURITIES OF INVESTMENT SECURITIES AND AVERAGE YIELDS
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities at December 31, 2007
|
|
|
Held to Maturity
|
|
Available for Sale
|
|
|
Amortized
Cost
|
|
Average
Yield
|
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Average
Yield
|
|
|
Fair
Value
|
Mortgage-Backed Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 Year
|
|
$
|
|
|
0.00
|
%
|
|
$
|
|
|
$
|
661
|
|
3.36
|
%
|
|
$
|
657
|
After 1 through 5 Years
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
15,844
|
|
4.04
|
%
|
|
|
15,670
|
After 5 through 10 Years
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
14,236
|
|
5.33
|
%
|
|
|
14,388
|
More Than 10 Years
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
182,059
|
|
5.33
|
%
|
|
|
183,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
0.00
|
%
|
|
$
|
|
|
$
|
212,800
|
|
5.23
|
%
|
|
$
|
214,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other U.S. Government Agencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 Year
|
|
$
|
|
|
0.00
|
%
|
|
$
|
|
|
$
|
34,976
|
|
4.12
|
%
|
|
$
|
34,947
|
After 1 through 5 Years
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
2,500
|
|
4.84
|
%
|
|
|
2,500
|
After 5 through 10 Years
|
|
|
1,000
|
|
5.00
|
%
|
|
|
1,000
|
|
|
22,062
|
|
5.47
|
%
|
|
|
22,499
|
More Than 10 Years
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,000
|
|
5.00
|
%
|
|
$
|
1,000
|
|
$
|
59,538
|
|
4.65
|
%
|
|
$
|
59,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State, County and Municipal:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 Year
|
|
$
|
|
|
0.00
|
%
|
|
$
|
|
|
$
|
1,077
|
|
3.77
|
%
|
|
$
|
1,079
|
After 1 through 5 Years
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
7,594
|
|
4.03
|
%
|
|
|
7,672
|
After 5 through 10 Years
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
5,012
|
|
4.36
|
%
|
|
|
5,089
|
More Than 10 Years
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
6,527
|
|
3.99
|
%
|
|
|
6,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
0.00
|
%
|
|
$
|
|
|
$
|
20,210
|
|
4.09
|
%
|
|
$
|
20,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 Year
|
|
$
|
|
|
0.00
|
%
|
|
$
|
|
|
$
|
|
|
0.00
|
%
|
|
$
|
|
After 1 through 5 Years
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
After 5 through 10 Years
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
500
|
|
6.25
|
%
|
|
|
500
|
More Than 10 Years
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
1,458
|
|
5.98
|
%
|
|
|
1,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
0.00
|
%
|
|
$
|
|
|
$
|
1,958
|
|
6.04
|
%
|
|
$
|
1,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 Year
|
|
$
|
|
|
0.00
|
%
|
|
$
|
|
|
$
|
|
|
0.00
|
%
|
|
$
|
|
After 1 through 5 Years
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
After 5 through 10 Years
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
More Than 10 Years
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
8,243
|
|
5.98
|
%
|
|
|
8,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
0.00
|
%
|
|
$
|
|
|
$
|
8,243
|
|
5.98
|
%
|
|
$
|
8,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 Year
|
|
$
|
|
|
0.00
|
%
|
|
$
|
|
|
$
|
36,714
|
|
4.10
|
%
|
|
$
|
36,683
|
After 1 through 5 Years
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
25,938
|
|
4.12
|
%
|
|
|
25,842
|
After 5 through 10 Years
|
|
|
1,000
|
|
5.00
|
%
|
|
|
1,000
|
|
|
41,810
|
|
5.30
|
%
|
|
|
42,476
|
More Than 10 Years
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
198,287
|
|
5.32
|
%
|
|
|
199,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,000
|
|
5.00
|
%
|
|
$
|
1,000
|
|
$
|
302,749
|
|
5.06
|
%
|
|
$
|
304,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
As of December 31, 2007 and 2006, we had several holdings of securities of a single issuer in which
the aggregate book value and aggregate market value of the securities exceeded 10% of shareholders equity. Our total holdings of these issuers as a percentage of total shareholders equity are as follows:
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
FNMA
|
|
16.7
|
%
|
|
9.3
|
%
|
FHLB
|
|
13.0
|
%
|
|
10.9
|
%
|
FHLMC
|
|
19.6
|
%
|
|
14.6
|
%
|
GNMA
|
|
36.7
|
%
|
|
21.2
|
%
|
Deposits
Deposits are our primary liability and funding source. Total deposits as of
December 31, 2007 were $2.29 billion, an increase of 16.6% from $1.97 billion at December 31, 2006. Average deposits in 2007 were $2.11 billion, an increase of $0.5 million from $1.61 billion during 2006. The average cost of deposits,
considering non-interest checking accounts, was 4.44% during 2007, up from 3.75% during 2006 and 2.37% for 2005. We seek to set competitive deposit rates in our local markets to retain and grow our market share of deposits in our market area as our
principal funding source; however, we have continued to increase our reliance on brokered and internet-based certificates of deposit as sources of funding, given the cost-effectiveness and prompt receipt of funds. On an average basis for the year
2007, 7.8% of our deposits were held in non-interest-bearing checking accounts, 25.3% were in lower yielding interest-bearing transaction, money market and savings accounts, and 66.9% were in time certificates with higher yields. Comparable average
deposit mix percentages during 2006 were 10.3%, 28.2% and 61.5%, respectively. We hold no deposit funds from foreign depositors.
The following table reflects average balances of deposit categories for 2007, 2006 and 2005.
AVERAGE DEPOSITS
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
%
|
|
|
2006
|
|
%
|
|
|
2005
|
|
%
|
|
Non-Interest-Bearing Demand Deposits
|
|
$
|
163,712
|
|
7.75
|
%
|
|
$
|
166,190
|
|
10.27
|
%
|
|
$
|
119,867
|
|
11.97
|
%
|
Interest-Bearing Demand Deposits
|
|
|
373,522
|
|
17.68
|
%
|
|
|
310,624
|
|
19.18
|
%
|
|
|
158,264
|
|
15.80
|
%
|
Money Market Accounts
|
|
|
145,619
|
|
6.89
|
%
|
|
|
127,456
|
|
7.87
|
%
|
|
|
80,640
|
|
8.05
|
%
|
Savings Deposits
|
|
|
16,005
|
|
0.76
|
%
|
|
|
19,268
|
|
1.19
|
%
|
|
|
19,969
|
|
1.99
|
%
|
Time Deposits of $100,000 or More
|
|
|
892,248
|
|
42.23
|
%
|
|
|
571,992
|
|
35.32
|
%
|
|
|
317,143
|
|
31.67
|
%
|
Other Time Deposits
|
|
|
521,923
|
|
24.69
|
%
|
|
|
423,708
|
|
26.17
|
%
|
|
|
305,609
|
|
30.52
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,113,029
|
|
100.00
|
%
|
|
$
|
1,619,238
|
|
100.00
|
%
|
|
$
|
1,001,492
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table
outlines the maturities of certificates of deposit of $100,000 or more as of December 31, 2007, 2006 and 2005. All of our time deposits as of December 31, 2007 are certificates of deposit.
MATURITY DISTRIBUTION OF CERTIFICATES OF DEPOSIT OF $100,000 OR MORE
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
As of the End of Period:
|
|
|
|
|
|
|
|
|
|
3 Months or Less
|
|
$
|
363,792
|
|
$
|
209,359
|
|
$
|
96,263
|
Over 3 Months through 6 Months
|
|
|
304,519
|
|
|
245,712
|
|
|
106,542
|
Over 6 Months through 12 Months
|
|
|
187,999
|
|
|
244,429
|
|
|
142,354
|
Over 12 Months
|
|
|
179,333
|
|
|
48,731
|
|
|
48,784
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,035,643
|
|
$
|
748,231
|
|
$
|
393,943
|
|
|
|
|
|
|
|
|
|
|
48
Borrowed Funds
Our borrowed funds at December 31, 2007 totaled $206.3 million. The major component was $77.2 million in various advances from the FHLB. We have
borrowed from the FHLB under a Blanket Agreement for Advances and Security Agreement, under which our Banks have pledged residential first-mortgage loans, commercial real estate loans and investment securities of $467.1 million as collateral to
secure available advances. At December 31, 2007, our lendable collateral value, which represents approximately 23.3% of eligible collateral, was $108.8 million, $31.6 million of which was available. These advances have maturities in varying
lengths through January 2011 and interest rates ranging from 3.50% to 5.92%. Total outstanding advances from the FHLB averaged $55.0 million during 2007, with an average interest cost of 5.27%. Of the $77.2 million in FHLB advances outstanding at
December 31, 2007, $36.0 million, or 46.6%, mature during 2008. Another $31.2 million, or 40.4%, mature in 2009, and another $5.0 million or 6.4% mature in 2010. The remaining $5.0 million, or 6.6%, mature after three years. In 2006, FHLB
advances averaged $67.1 million with an average interest cost of 4.84%.
At the request of the Federal Reserve Bank of Atlanta, our Board of Directors passed a resolution stating that we will not incur additional debt at the holding company without the prior approval of the Federal Reserve Bank of Atlanta.
We have a revolving line of credit with Silverton Bank
(formerly The Bankers Bank, N.A.) in Atlanta, Georgia totaling $22.0 million. The line is secured with the common stock of Security Bank of Bibb County (and indirectly the stock of Fairfield Financial as its subsidiary), Security Bank of Houston
County and Security Bank of Jones County as collateral, and carries a floating interest rate of the Prime Rate minus 100 basis points. We use the revolving line of credit primarily to provide capital injections as necessary to our Banks. At
December 31, 2007 and 2006 the outstanding balance on the revolving line of credit was $17.5 million and zero, respectively. Total outstanding advances from the line of credit averaged $4.1 million during 2007, with an average interest cost of
6.56%. We did not borrow under the line of credit during 2006.
The revolving line of credit with Silverton Bank contains several debt covenants that are to be met either by the Company or the individual Banks. The covenants specify minimum amounts with respect to capital ratios, return on average
assets, allowance for loan losses as a percentage of loans and classified loans. At December 31, 2007, we failed two of these covenants: (1) minimum return on assets of 0.90% for any fiscal year and (2) total of assets classified as
substandard, doubtful or loss should not exceed 45% of Tier 1 capital plus the allowance for loan losses. The Company has a cure period of six months to regain compliance with these covenants. If the Company does not regain compliance at
the end of the cure period, the lender has the right to call the line of credit due and payable in full, or we can request a waiver of these covenants.
We also have a line of credit for $2 million with Thomasville National Bank. The line of credit matures on March 21, 2008 and interest is payable
quarterly based on the Prime Rate. At December 31, 2007, the outstanding balance under the line of credit was $2.0 million. We received the $2.0 million advance from the line of credit on December 28, 2007; therefore, the average balance
and related interest were minimal. For 2006, the average balance was $0.7 million with an average interest cost of 6.95%.
During the fourth quarter of 2002, a subsidiary trust issued $18.0 million in trust preferred securities. To support the trust preferred securities issued
by the trust, we issued a like amount of junior subordinated debentures to the trust, which the trust purchased from us using proceeds from its sale of the trust preferred securities. The trust preferred securities and related junior subordinated
debentures pay interest at a floating annual rate, reset quarterly, equal to the three-month LIBOR rate plus 3.25%, which equaled 8.11% at December 31, 2007. We used the proceeds from this trust preferred securities offering to retire holding
company debt and to fund our acquisition of Security Bank of Jones County.
In December 2005, a subsidiary trust issued $19.0 million in trust preferred securities. To support the trust preferred securities issued by the trust, we issued a like amount of junior subordinated debentures to the
trust, which the trust purchased from us using proceeds from its sale of the trust preferred securities. We used the
49
proceeds from this trust preferred securities offering to pay off our line of credit with The Bankers Bank (currently
Silverton Bank) and to fund the acquisition of Rivoli BanCorp. The trust preferred securities issued by the trust in 2005, and the junior subordinated debentures we issued to the trust in connection with that offering, bear a fixed rate of interest
equal to 6.46% annually for the first five years and a floating rate of interest, reset quarterly, equal to the three-month LIBOR rate plus 1.40% annually thereafter. In each case, the trust preferred securities and related junior subordinated
debentures issued by us have a maturity of 30 years and are redeemable after five years, subject to certain conditions and limitations.
In connection with our acquisition of Rivoli BanCorp, we assumed $3.0 million in junior subordinated debentures issued to a trust subsidiary in connection
with an issuance of trust preferred securities. Rivoli BanCorps trust subsidiary issued trust preferred securities in 2002 through a pool sponsored by Wells Fargo Bank. The Rivoli BanCorp trust preferred securities and related junior
subordinated debentures have a 30-year maturity and are redeemable after five years, subject to certain conditions and limitations. The Rivoli BanCorp trust preferred securities and related junior subordinated debentures pay interest at a floating
annual rate, reset quarterly, equal to the three-month LIBOR rate plus 3.45%, which rate equaled 8.32% at December 31, 2007.
The following table outlines our various sources of borrowed funds during the years 2007, 2006 and 2005, the amounts outstanding at year end, at the
maximum point for each component during the three years and on average for each year, and the average interest rate that we paid for each borrowing source. The maximum month-end balance represents the high indebtedness for each component of borrowed
funds at any time during each of the calendar years shown.
BORROWED FUNDS
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
Balance
|
|
Maximum
Month-End
Balance
|
|
Average
Balance
|
|
Interest
Expense
|
|
Average
Interest Rate
|
|
For The Year 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank Advances
|
|
$
|
77,172
|
|
$
|
88,650
|
|
$
|
55,032
|
|
$
|
2,898
|
|
5.27
|
%
|
Correspondent Bank Line of Credit
|
|
|
19,500
|
|
|
19,500
|
|
|
4,159
|
|
|
273
|
|
6.56
|
%
|
Securities Sold Under Agreements to Repurchase
|
|
|
34,940
|
|
|
41,853
|
|
|
30,666
|
|
|
1,422
|
|
4.64
|
%
|
Federal Funds Purchased
|
|
|
33,477
|
|
|
43,431
|
|
|
13,216
|
|
|
681
|
|
5.15
|
%
|
Subordinated Debentures
|
|
|
41,238
|
|
|
41,238
|
|
|
41,238
|
|
|
3,168
|
|
7.68
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Borrowed Funds
|
|
$
|
206,327
|
|
$
|
234,672
|
|
$
|
144,311
|
|
$
|
8,442
|
|
5.85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Year 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank Advances
|
|
$
|
83,450
|
|
$
|
107,427
|
|
$
|
67,097
|
|
$
|
3,246
|
|
4.84
|
%
|
Correspondent Bank Line of Credit
|
|
|
|
|
|
1,600
|
|
|
662
|
|
|
46
|
|
6.95
|
%
|
Securities Sold Under Agreements to Repurchase
|
|
|
25,917
|
|
|
30,309
|
|
|
18,513
|
|
|
840
|
|
4.54
|
%
|
Federal Funds Purchased
|
|
|
25,000
|
|
|
42,576
|
|
|
11,361
|
|
|
629
|
|
5.54
|
%
|
Subordinated Debentures
|
|
|
41,238
|
|
|
41,238
|
|
|
41,238
|
|
|
3,147
|
|
7.63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Borrowed Funds
|
|
$
|
175,605
|
|
$
|
223,150
|
|
$
|
138,871
|
|
$
|
7,908
|
|
5.69
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Year 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank Advances
|
|
$
|
85,427
|
|
$
|
85,427
|
|
$
|
58,618
|
|
$
|
1,975
|
|
3.37
|
%
|
Correspondent Bank Line of Credit
|
|
|
1,600
|
|
|
12,950
|
|
|
6,411
|
|
|
368
|
|
5.74
|
%
|
Securities Sold Under Agreements to Repurchase
|
|
|
15,219
|
|
|
15,219
|
|
|
6,868
|
|
|
206
|
|
3.00
|
%
|
Federal Funds Purchased
|
|
|
28,657
|
|
|
28,657
|
|
|
9,426
|
|
|
322
|
|
3.42
|
%
|
Subordinated Debentures
|
|
|
41,238
|
|
|
41,238
|
|
|
18,726
|
|
|
1,241
|
|
6.63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Borrowed Funds
|
|
$
|
172,141
|
|
$
|
183,491
|
|
$
|
100,049
|
|
$
|
4,112
|
|
4.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
Capital Resources and Dividends
We place an emphasis on maintaining an adequate capital base to support our activities in a safe manner while at the same time maximizing
shareholder returns. We continue to exceed all minimum regulatory capital requirements as shown in the table below. Our equity capital of $306.7 million at December 31, 2007 amounts to 10.8% of total assets, compared to 12.3% at
December 31, 2006, and 10.8% at December 31, 2005. On average, our equity capital was 12.1% of assets during 2007, compared to 12.4% for 2006 and 10.2% for 2005. The increase in the capital ratios in 2006 was primarily due to our issuance
of approximately $67.2 million in new equity capital related to the acquisitions of Neighbors Bancshares, Inc. and Homestead Bank. In addition, in May 2006, we sold 1,725,000 shares of our common stock in a public offering that generated $35.9
million in additional capital.
Our market capitalization
decreased from $437.4 million at the end of 2006 to $172.9 million at the end of 2007, a decrease of 60%. The decrease in market capitalization was primarily due to the decline in our stock price beginning in the third quarter of 2007.
Principal uses of our capital base in recent years have been:
|
|
|
sustaining the capital adequacy of our subsidiaries as they grew at a steady pace;
|
|
|
|
expanding our presence in Middle Georgia with more physical locations and improved delivery systems;
|
|
|
|
enhancing corporate infrastructure systems to support our multi-bank environment;
|
|
|
|
opening de novo branches in Glynn County in 2003 and 2005;
|
|
|
|
expanding our presence in Middle Georgia through our 2005 acquisition of Rivoli BanCorp;
|
|
|
|
expanding into northern metropolitan Atlanta through our 2005 and 2006 acquisitions of SouthBank (Security Bank of North Metro), Neighbors Bancshares, Inc.
(Security Bank of North Fulton) and Homestead Bank (Security Bank of Gwinnett County); and
|
|
|
|
acquiring CFS Wealth Management to provide investment management and financial planning services to customers in Middle Georgia.
|
Potential future uses of our capital base could include future acquisitions
and de novo branches, although we do not expect to engage in any acquisitions or branch expansion in the near-term.
Current regulatory standards require bank holding companies to maintain a minimum risk-based capital ratio of qualifying total capital to risk weighted
assets of 8.0%, with at least 4.0% of the capital consisting of Tier 1 capital, and a Tier 1 leverage ratio of at least 4.0%. As of December 31, 2007, the holding company had a Tier 1 leverage ratio of 8.03%, a Tier 1 capital ratio of 8.75%,
and a total risk-based capital ratio of 9.97%; therefore, we met the minimum risk-based capital ratios. Additionally, the regulatory agencies define a well-capitalized bank as one that has a Tier 1 leverage ratio of at least 5.0%, a Tier
1 capital ratio of at least 6.0%, and a total risk-based capital ratio of at least 10%. At December 31, 2007, each of our Banks was well-capitalized according to all regulatory guidelines.
51
The following table demonstrates our capital ratio calculations as of December 31, 2007 and 2006.
CAPITAL RATIOS
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Tier 1 Capital:
|
|
|
|
|
|
|
|
|
Total Equity Capital
|
|
$
|
306,693
|
|
|
$
|
306,407
|
|
Net Unrealized Losses (Gains) on Available for Sale Securities
|
|
|
(1,072
|
)
|
|
|
552
|
|
Accumulated Net Gains on Cash Flow Hedges
|
|
|
(3,232
|
)
|
|
|
|
|
Qualifying Subordinated Debentures Related to Trust Preferred Securities
|
|
|
40,000
|
|
|
|
40,000
|
|
Disallowed Goodwill and Other Intangible Assets
|
|
|
(132,696
|
)
|
|
|
(129,717
|
)
|
|
|
|
|
|
|
|
|
|
Total Tier 1 Capital
|
|
|
209,693
|
|
|
|
217,242
|
|
|
|
|
|
|
|
|
|
|
Tier 2 Capital:
|
|
|
|
|
|
|
|
|
Eligible Portion of Allowance for Loan Losses
|
|
|
29,113
|
|
|
|
22,336
|
|
|
|
|
|
|
|
|
|
|
Total Tier 2 Capital
|
|
|
29,113
|
|
|
|
22,336
|
|
|
|
|
|
|
|
|
|
|
Total Risk Based Capital
|
|
$
|
238,806
|
|
|
$
|
239,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
|
2007
|
|
|
2006
|
|
Total Risk Based Capital Ratio
|
|
8.00
|
%
|
|
9.97
|
%
|
|
11.59
|
%
|
Tier 1 Capital Ratio
|
|
4.00
|
%
|
|
8.75
|
%
|
|
10.51
|
%
|
Tier 1 Capital to Average Assets
|
|
4.00
|
%
|
|
8.03
|
%
|
|
9.70
|
%
|
We declared and paid
cash dividends of approximately $6.7 million or $0.35 per share of common stock during 2007, up from approximately $5.3 million or $0.30 per share during 2006 and approximately $3.3 million or $0.26 per share in 2005. The ratios of cash dividends
paid to net income for these years were 101.2%, 22.5% and 20.2%, respectively. Since the commencement of cash dividend payments in 1992, our Board of Directors has consistently declared and paid dividends on a quarterly basis.
As of December 31, 2007 and 2006, $40 million of junior subordinated
debentures related to trust preferred securities was classified as Tier 1 capital under Federal Reserve Board guidelines. For regulatory purposes, the trust preferred securities represent a minority investment in a consolidated subsidiary, which is
currently included in Tier 1 capital, so long as it does not exceed 25% of total Tier 1 capital. Under FASB Interpretation No. 46R (FIN 46R),
Consolidation of Variable Interest Entities
, however, the investment in the trust subsidiary
must be deconsolidated for accounting purposes. The Federal Reserves capital adequacy rules deduct goodwill and intangibles from equity in determining the amount of trust preferred securities and other restricted core capital
elements that can be included in Tier 1 Capital.
Liquidity
Primarily through the actions of our Banks, we manage our
liquidity to ensure adequate cash flow for deposit withdrawals, credit commitments and repayments of borrowed funds. Liquidity needs are met through loan repayments, net interest and fee income and the sale or maturity of existing assets. In
addition, liquidity is continuously provided through the acquisition of new deposits, the renewal of maturing deposits and external borrowings. Management monitors deposit flow and evaluates alternate pricing structures to retain and grow deposits
as needed. To the extent needed to fund loan demand, traditional local deposit funding sources are supplemented by the use of FHLB borrowings, brokered deposits and other wholesale deposit sources outside our immediate market area, including an
Internet-based national certificate of deposit service. Management has
52
found that most non-relationship oriented retail certificates of deposit are interchangeable with wholesale funding sources such as brokered deposits and
national market certificates of deposit and alternates between these sources depending on the relative cost.
Our Asset/Liability Senior Management Committee reviews a series of weekly reports related to liquidity-related issues such as loan pipelines, deposit
pricing and upcoming deposit maturities, among others. This committee meets monthly or more often if needed, to discuss these reports. Through various asset/liability management strategies, we maintain a balance among goals of liquidity, safety and
earnings potential. Our Banks monitor internal policies that are consistent with regulatory liquidity guidelines.
The investment portfolio provides a ready means to raise cash if liquidity needs arise. As of December 31, 2007, we held $296.2 million in bonds at
current market value in our Available for Sale portfolio. We purchase only marketable investment grade bonds. Although $140.2 million or 47% of our bond portfolio is encumbered as pledges to secure various public funds deposits, repurchase
agreements and for other purposes, management can restructure and free up investment securities for sale if required to meet liquidity needs.
Management continues to emphasize programs to generate local core deposits as our primary funding source. The stability of our core deposit base is an
important factor in our liquidity position. A heavy percentage of the deposit base is comprised of accounts of individuals and small businesses with comprehensive banking relationships and limited volatility.
At December 31, 2007 and 2006, our Banks had $1.04 billion and $748.2
million, respectively, in certificates of deposit of $100,000 or more. These larger deposits represented 48% and 42% of respective total interest-bearing deposits. Management seeks to monitor and control the use of these larger certificates, which
tend to be more volatile in nature, to ensure an adequate supply of funds as needed. Relative interest costs to attract local core relationships are compared to market rates of interest on various external deposit sources to help minimize our
overall cost of funds.
Our local market deposit sources have
not been sufficient to fund our strong loan growth trends over the last several years. As a result, our Banks supplemented deposit sources with brokered deposits and Internet-based certificates of deposit. As of December 31, 2007 the Banks
reported $673.0 million, or 29% of total deposits, in brokered certificates of deposit attracted by external third parties with a weighted average rate of 5.28%. Additionally, the Banks use external wholesale or Internet services to obtain out of
market certificates of deposits at competitive interest rates as needed. As of December 31, 2007, the Banks reported $181.4 million in wholesale certificates of deposit representing 7.9% of total deposits and carrying a weighted average rate of
5.29% at year end.
To plan for contingent sources of funding
not satisfied by both local and out of market deposit balances, we have established multiple borrowing sources to augment our funds management. At the holding company level, we have 2 secured lines of credit with correspondent banks totaling $24.0
million of which $19.5 million was outstanding at December 31, 2007. Subsequent to December 31, 2007, we repaid $2.0 million of these lines of credit. We expect to utilize a portion of the proceeds from the rights offering of our common stock
to repay the remaining amount outstanding on our lines of credit. Additionally, borrowing capacity exists through the membership of our subsidiary Banks in the FHLB program. Based on the collateral value of assets pledged to the FHLB at
December 31, 2007, our subsidiary Banks had total borrowing capacity of up to $108.8 million, of which $77.2 million was drawn and outstanding at year end. Our subsidiary Banks have also established overnight borrowing lines for federal funds
purchased through various correspondent banks that collectively amounted to $161.1 million in capacity at December 31, 2007. Approximately $33.5 million of our federal funds lines were in use at year-end. Management believes that the various
funding sources discussed above are adequate to meet our liquidity needs in the future without any material adverse impact on operating results.
53
Interest Rate Risk Management
We successfully managed the level of our net interest margin from 2002 through 2006. However, our net interest margin came
under intense pressures in 2007 from two different sources, and we expect these trends to continue into 2008. The first source was the decline in short term interest rates resulting from a decrease of 100 basis points in the Federal Funds Target
Rate from September to December 2007 set by the Federal Reserve Board. The resulting decrease in loan rates was not matched by our deposit rates due to the intense competition in our markets for deposits. Further compounding the pressure on our
margin was the significant growth in our nonaccrual loans and foreclosed real estate. During 2007, our nonaccrual loans grew from $34.4 million to $50.6 million. This growth in nonaccrual loans resulted in the reversal of approximately $2.8 million
in net interest income. Our net interest margin was 3.88% in 2007, 4.40% in 2006 and 4.46% in 2005. As noted above, we have been successful in alternating between retail certificates of deposit, borrowed funds and Internet/brokered certificates of
deposit to generate the lowest cost funding sources available.
To help us manage fluctuations in our net interest income, we use simulation modeling to estimate the impact on net interest income of both the current level of market interest rates and for changes to the current level of market interest
rates. We measure the projected changes in market interest rates in terms of rate shifts of plus or minus 100, 200 and 300 basis points over the current levels of market interest rates. We assume rate shifts occur ratably over a 12-month
measurement horizon. We base projected pricing for maturing and repricing assets and liabilities upon actual pricing experience over the period immediately preceding the projection period.
Using the outlook for market interest rates at December 31, 2007,
continued significant additions to our nonaccrual loans and actual pricing experience immediately preceding the projection, our simulation model projects changes in the net interest margin to be as follows:
|
|
|
|
|
|
Scenario
|
|
Net Interest
Margin Change
|
+300 Basis Point Ramp
|
|
+47
|
|
|
basis points
|
+200 Basis Point Ramp
|
|
+32
|
|
|
basis points
|
+100 Basis Point Ramp
|
|
+16
|
|
|
basis points
|
Base Case
|
|
|
|
|
basis points
|
-100 Basis Point Ramp
|
|
(14
|
)
|
|
basis points
|
-200 Basis Point Ramp
|
|
(28
|
)
|
|
basis points
|
-300 Basis Point Ramp
|
|
(44
|
)
|
|
basis points
|
We also use a
cumulative gap analysis model that seeks to measure the repricing differentials, or gap, between rate-sensitive assets and liabilities over various time horizons. The following table reflects the gap positions of our consolidated balance sheets as
of December 31, 2007 and 2006 at various repricing intervals. This gap analysis indicates that we had a slightly liability-sensitive balance sheet over a one-year time horizon at December 31, 2007, with cumulative rate-sensitive assets
amounting to 99% of cumulative rate-sensitive liabilities. At December 31, 2006, our balance sheet was slightly asset-sensitive balance sheet over a one-year time horizon, with cumulative rate-sensitive assets amounting to 105% of cumulative
rate-sensitive liabilities. The projected deposit repricing volumes reflect adjustments based on managements assumptions of the expected rate sensitivity to current market rates for core deposits without contractual maturity (i.e.,
interest-bearing checking, savings and money market accounts). Adjustments are also made for callable investment securities in the bond portfolio to place these bonds in call date categories. Management believes that our current degree of interest
rate risk is acceptable in the current interest rate environment.
54
The following table sets forth information regarding interest rate sensitivity.
INTEREST RATE SENSITIVITY
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
0 up to
3 months
|
|
|
Over
3 up to
12 Months
|
|
|
Over 1 year
up to
5 years
|
|
|
Over
5 years
|
|
Amounts Maturing or Repricing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities
(1)
|
|
$
|
89,726
|
|
|
$
|
18,988
|
|
|
$
|
73,389
|
|
|
$
|
121,647
|
|
Loans, Net of Unearned Income
(2)
|
|
|
1,504,758
|
|
|
|
372,601
|
|
|
|
256,625
|
|
|
|
24,236
|
|
Other Earning Assets
|
|
|
13,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Sensitive Assets
|
|
|
1,608,111
|
|
|
|
391,589
|
|
|
|
330,014
|
|
|
|
145,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonmaturity Deposits
|
|
|
457,735
|
|
|
|
30,726
|
|
|
|
161,714
|
|
|
|
66,743
|
|
Time Deposits
|
|
|
501,104
|
|
|
|
821,902
|
|
|
|
258,773
|
|
|
|
8
|
|
Borrowings
|
|
|
201,376
|
|
|
|
4,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Sensitive Liabilities
|
|
|
1,160,215
|
|
|
|
857,578
|
|
|
|
420,487
|
|
|
|
66,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Sensitivity Gap
|
|
$
|
447,896
|
|
|
$
|
(465,989
|
)
|
|
$
|
(90,473
|
)
|
|
$
|
79,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Interest Sensitivity Gap
|
|
$
|
447,896
|
|
|
$
|
(18,093
|
)
|
|
$
|
(108,566
|
)
|
|
$
|
(29,434
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Interest Sensitivity Gap to Total Interest Sensitive Assets
|
|
|
18.09
|
%
|
|
|
(0.73
|
)%
|
|
|
(4.39
|
)%
|
|
|
(1.19
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Interest Sensitive Assets to Cumulative Interest Sensitive Liabilities
|
|
|
138.60
|
%
|
|
|
99.10
|
%
|
|
|
95.55
|
%
|
|
|
98.82
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
0 up to
3 months
|
|
|
Over
3 up to
12 Months
|
|
|
Over 1 year
up to
5 years
|
|
|
Over
5 years
|
|
Amounts Maturing or Repricing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities
(1)
|
|
$
|
100,231
|
|
|
$
|
18,406
|
|
|
$
|
44,018
|
|
|
$
|
68,311
|
|
Loans, Net of Unearned Income
(2)
|
|
|
1,339,383
|
|
|
|
315,108
|
|
|
|
222,608
|
|
|
|
10,544
|
|
Other Earning Assets
|
|
|
96,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Sensitive Assets
|
|
|
1,536,184
|
|
|
|
333,514
|
|
|
|
266,626
|
|
|
|
78,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonmaturity Deposits
|
|
|
429,580
|
|
|
|
35,433
|
|
|
|
185,741
|
|
|
|
75,404
|
|
Time Deposits
|
|
|
322,935
|
|
|
|
817,543
|
|
|
|
103,996
|
|
|
|
295
|
|
Borrowings
|
|
|
169,666
|
|
|
|
3,959
|
|
|
|
1,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Sensitive Liabilities
|
|
|
922,181
|
|
|
|
856,935
|
|
|
|
291,717
|
|
|
|
75,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Sensitivity Gap
|
|
$
|
614,003
|
|
|
$
|
(523,421
|
)
|
|
$
|
(25,091
|
)
|
|
$
|
3,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Interest Sensitivity Gap
|
|
$
|
614,003
|
|
|
$
|
90,582
|
|
|
$
|
65,491
|
|
|
$
|
68,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Interest Sensitivity Gap to Total Interest Sensitive Assets
|
|
|
27.72
|
%%
|
|
|
4.09
|
%
|
|
|
2.96
|
%
|
|
|
3.10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Interest Sensitive Assets as a % of Cumulative Interest Sensitive Liabilities
|
|
|
166.58
|
%
|
|
|
105.09
|
%
|
|
|
103.16
|
%
|
|
|
103.20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Investment securities are shown at amortized or accreted costs. Includes FHLB stock & other equity securities.
|
(2)
|
Includes loans held for sale.
|
55
The following table provides information on the maturity distribution of selected categories of the loan
portfolio and certain interest sensitivity data as of December 31, 2007.
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
One Year
or Less
|
|
Over One
Year Through
Five Years
|
|
Over Five
Years
|
|
Total
|
Selected loan categories:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
$
|
86,214
|
|
$
|
66,457
|
|
$
|
10,464
|
|
$
|
163,135
|
Construction and land development
|
|
|
840,220
|
|
|
317,488
|
|
|
8,011
|
|
|
1,165,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
926,434
|
|
$
|
383,945
|
|
$
|
18,475
|
|
$
|
1,328,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans shown above due after one year:
|
|
|
|
|
|
|
|
|
|
|
|
|
Having predetermined interest rates
|
|
|
|
|
|
|
|
|
|
|
$
|
109,219
|
Having floating interest rates
|
|
|
|
|
|
|
|
|
|
|
|
293,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
$
|
402,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A significant portion
of our loan portfolio has variable interest rates. In 2007, in an effort to effectively manage the downward pressure on our net interest margin caused by potential future reductions in interest rates, we began analyzing various derivative
instruments to mitigate this pressure. As a result of this analysis, we entered into an interest rate swap contract under which we pay a variable rate and receive a fixed rate over a period of three years. The interest rate swap contract has a total
notional amount of $100.0 million and is designated as a cash flow hedge of our prime based loan portfolio. The change in fair value of cash flow hedges is recognized in other comprehensive income.
Management believes that the risk associated with using derivative financial
instruments to mitigate interest rate risk sensitivity is minimal and should not have any material unintended impact on the financial condition or results of operations.
Contractual Obligations
As of December 31, 2007, we are contractually obligated under long-term agreements as follows:
CONTRACTUAL OBLIGATIONS
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
Total
|
|
Less than
1 year
|
|
1-3 years
|
|
3-5
years
|
|
More than
5 years
|
Federal Home Loan Bank Advances
|
|
$
|
77,172
|
|
$
|
36,000
|
|
$
|
36,172
|
|
$
|
5,000
|
|
$
|
|
Correspondent Bank Lines of Credit
|
|
|
19,500
|
|
|
19,500
|
|
|
|
|
|
|
|
|
|
Subordinated Debentures
|
|
|
41,238
|
|
|
|
|
|
|
|
|
|
|
|
41,238
|
Operating Leases
|
|
|
8,655
|
|
|
901
|
|
|
2,064
|
|
|
1,752
|
|
|
3,938
|
Deferred Compensation
|
|
|
1,376
|
|
|
|
|
|
|
|
|
|
|
|
1,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
147,941
|
|
$
|
56,401
|
|
$
|
38,236
|
|
$
|
6,752
|
|
$
|
46,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
Please see Borrowed Funds elsewhere in this item for details related to our various
borrowings.
Operating leases are for the rental of certain
bank and lending offices.
Deferred compensation plans are
maintained by four of our Banks. These plans are for specific officers to defer current compensation until termination, retirement, death or an unforeseeable emergency. The contracts were initially funded through the purchase of life insurance
policies.
Off-Balance Sheet Arrangements
In the normal course of business, we are a party to financial instruments
with off-balance sheet risk to meet the financing needs of our customers. These financial instruments primarily include unfulfilled loan commitments and standby letters of credit. Our exposure to credit loss in the event of nonperformance by the
counter party to the financial instrument for unfulfilled loan commitments and standby letters of credit is represented by the contractual notional amount of those instruments. We use the same credit policies in making commitments and conditional
obligations as we do for on-balance sheet transactions.
Unfulfilled loan commitments are arrangements to lend to a customer as long as there is no 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. Historically, many commitments expire without being drawn upon; therefore, the following total commitment amounts are not necessarily indicative of future funding requirements.
Standby letters of credit are conditional commitments issued by us 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 loans to customers, and letters of credit are collateralized when deemed necessary.
The following table summarizes our off-balance sheet financial
instruments whose contract amounts represented credit risk as of December 31, 2007:
|
|
|
|
Standby and performance letters of credit
|
|
$
|
14,898,336
|
Unfulfilled loan commitments
|
|
$
|
430,786,775
|
Inflation
Inflation impacts our financial condition and operating results. However,
because most of the assets of the Banks are monetary in nature, the effect is less significant compared to other commercial or industrial companies with heavy investments in inventories and fixed assets. Inflation influences the growth of total
banking assets, which in turn produces a need for an increased equity capital base to support growing banks. Inflation also influences interest rates and tends to raise the general level of salaries, operating costs and purchased services. Our
mortgage division is particularly impacted by swings in the interest rate cycle. We have not attempted to measure the effect of inflation on various types of income and expense due to difficulties in quantifying the impact. Managements
awareness of inflationary effects has led to various operational strategies to cope with its impact. We engage in various asset/liability management strategies to control interest rate sensitivity and minimize exposure to interest rate risk. Prices
for banking products and services are continually reviewed in relation to current costs, and overhead cost cutting is an ongoing task.
Reconciliation of Non-GAAP Financial Measures
This Annual Report on Form 10-K contains financial information determined by methods other than in accordance with generally accepted accounting
principles (GAAP). These non-GAAP measures typically adjust GAAP performance measures to exclude the effects of significant gains, losses or expenses that are unusual in nature and not expected to recur. The non-GAAP financial measures included in
this Annual Report on Form
57
10-K are referred to as net operating income, basic operating earnings per share and diluted operating earnings per
share, which exclude losses on the sale of investment securities and gains on the early prepayment of advances with the FHLB. Please note that the calculation of earnings per share and operating earnings per share is based on our net income
and weighted average shares outstanding during the fourth quarter of 2007, 2006 and 2005 and the fiscal years ended December 31, 2007, 2006 and 2005. Since these items and their impact on our performance are difficult to predict, management
believes presentations of financial measures excluding the impact of these items provide useful supplemental information that is important for a proper understanding of the operating results of our core business. These disclosures should not be
viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. A reconciliation of GAAP to non-GAAP measures is included
in the table below.
GAAP TO NON-GAAP RECONCILIATION TABLE
(Dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
2005
|
|
|
YTD
|
|
4th Quarter
|
|
|
YTD
|
|
|
4th Quarter
|
|
YTD
|
|
4th Quarter
|
Net income (loss)
|
|
$
|
6,588
|
|
$
|
(6,873
|
)
|
|
$
|
23,392
|
|
|
$
|
5,222
|
|
$
|
16,185
|
|
$
|
4,379
|
Effect of securities losses (gains), net of tax
|
|
|
2
|
|
|
|
|
|
|
980
|
|
|
|
808
|
|
|
4
|
|
|
|
Effect of prepayment of FHLB advances, net of tax
|
|
|
|
|
|
|
|
|
|
(174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income (loss)
|
|
$
|
6,590
|
|
$
|
(6,873
|
)
|
|
$
|
24,198
|
|
|
$
|
6,030
|
|
$
|
16,189
|
|
$
|
4,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
0.35
|
|
$
|
(0.36
|
)
|
|
$
|
1.36
|
|
|
$
|
0.26
|
|
$
|
1.31
|
|
$
|
0.34
|
Effect of securities losses (gains), net of tax
|
|
|
|
|
|
|
|
|
|
0.06
|
|
|
|
0.05
|
|
|
|
|
|
|
Effect of prepayment of FHLB advances, net of tax
|
|
|
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic operating earnings (loss) per share
|
|
$
|
0.35
|
|
$
|
(0.36
|
)
|
|
$
|
1.41
|
|
|
$
|
0.31
|
|
$
|
1.31
|
|
$
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
$
|
0.34
|
|
$
|
(0.36
|
)
|
|
$
|
1.33
|
|
|
$
|
0.26
|
|
$
|
1.27
|
|
$
|
0.33
|
Effect of securities losses (gains), net of tax
|
|
|
|
|
|
|
|
|
|
0.06
|
|
|
|
0.05
|
|
|
|
|
|
|
Effect of prepayment of FHLB advances, net of tax
|
|
|
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted operating earnings (loss) per share
|
|
$
|
0.34
|
|
$
|
(0.36
|
)
|
|
$
|
1.38
|
|
|
$
|
0.31
|
|
$
|
1.27
|
|
$
|
0.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58