UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ |
Commission File No. 0-22981
GEORGIA-CAROLINA BANCSHARES, INC. | |
(Exact name of registrant as specified in its charter) | |
Georgia |
58-2326075 |
(State of Incorporation) |
(I.R.S. Employer Identification Number) |
3527 Wheeler Road Augusta, Georgia |
30909 |
(Address of Principal Executive Offices) |
(Zip Code) |
(706) 731-6600
(Registrant’s telephone number, including area code)
Securities registered under Section 12(b) of the Act: | |
Title of Each Class |
Name of each exchange on which registered |
None |
None |
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 Par Value
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒
Indicate by check mark whether the issuer has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ YES ☐ NO
Indicate by check mark whether the registrant has submitted electronically and has posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ YES ☐ NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer _____ |
Accelerated filer _____ |
Non-Accelerated filer _____ |
Smaller reporting company X |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ YES ☒ NO
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant (2,586,856 shares), on June 30, 2013 was $39,190,868 based on the closing price of the registrant’s common stock as reported on the Over-the-Counter Bulletin Board on June 30, 2013. For purposes of this response, officers, directors and holders of 5% or more of the registrant’s common stock are considered affiliates of the registrant at that date. As of March 7, 2014, 3,594,973 shares of the registrant’s common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement to be delivered to shareholders in connection with the 2014 Annual Meeting of Shareholders scheduled to be held on May 19, 2014 are incorporated herein by reference in response to Part III of this Report.
GEORGIA-CAROLINA BANCSHARES, INC.
2013 Form 10-K Annual Report
TABLE OF CONTENTS
Item Number In Form 10-K |
Description |
Page or Location | ||
PART I | ||||
Item 1. |
Business |
1 | ||
Item 1A. |
Risk Factors |
15 | ||
Item 1B. |
Unresolved Staff Comments |
23 | ||
Item 2. |
Properties |
23 | ||
Item 3. |
Legal Proceedings |
23 | ||
Item 4. |
Mine Safety Disclosures |
23 | ||
PART II | ||||
Item 5. |
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
24 | ||
Item 6. |
Selected Financial Data |
26 | ||
Item 7. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
27 | ||
Item 7A. |
Quantitative and Qualitative Disclosures About Market Risk |
47 | ||
Item 8. |
Financial Statements and Supplementary Data |
47 | ||
Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
47 | ||
Item 9A. |
Controls and Procedures |
47 | ||
Item 9B. |
Other Information |
48 | ||
PART III | ||||
Item 10. |
Directors, Executive Officers and Corporate Governance |
49 | ||
Item 11. |
Executive Compensation |
49 | ||
Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
49 | ||
Item 13. |
Certain Relationships and Related Transactions, and Director Independence |
49 | ||
Item 14. |
Principal Accountant Fees and Services |
49 | ||
PART IV | ||||
Item 15. |
Exhibits and Financial Statement Schedules |
50 | ||
Signatures |
54 |
Special Note Regarding Forward-Looking Statements
Certain statements in this Annual Report on Form 10-K contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, which represent the expectations or beliefs of our management, including, but not limited to, statements concerning the banking industry and our operations, performance, financial condition and growth. For this purpose, any statements contained in this Report that are not statements of historical fact may be deemed forward-looking statements. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “can,” “estimate,” or “continue” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, certain of which are beyond our control, and actual results may differ materially depending on a variety of important factors, including competition, general economic and market conditions, changes in interest rates, changes in the value of real estate and other collateral securing loans, interest rate sensitivity and exposure to regulatory and legislative changes, and other risks and uncertainties described in our periodic reports filed with the Securities and Exchange Commission (the “SEC”), including this Annual Report, and particularly the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Although we believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove to be inaccurate. Therefore, we can give no assurance that the results contemplated in the forward-looking statements will be realized. The inclusion of this forward-looking information should not be construed as a representation by us or any person that the future events, plans, or expectations contemplated by us will be achieved. We undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
PART I
Item 1. Business
General
Georgia-Carolina Bancshares, Inc. (the “Company,” “Holding Company” or “we,” “us,” “our”) is a one-bank holding company and owns 100% of the issued and outstanding stock of First Bank of Georgia (the “Bank”), an independent, locally owned, state-chartered commercial bank which opened for business in 1989. The Bank operates three branch offices in Augusta, Georgia, two branch offices in Martinez, Georgia, one branch office in Evans, Georgia, and one branch office in Thomson, Georgia. The Evans branch opened in May 2013. The Bank is also the parent company of Willhaven Holdings, LLC, which formerly held certain other real estate of the Bank.
The Bank operates as a locally owned bank that targets the banking needs of individuals and small to medium-sized businesses by emphasizing personal service. The Bank offers a full range of deposit and lending services and is a member of an electronic banking network that enables its customers to use the automated teller machines of other financial institutions. In addition, the Bank offers commercial and business credit services, as well as various consumer credit services, including home mortgage loans, automobile loans, lines of credit, home equity loans and home improvement loans. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”).
The Company was incorporated under the laws of the State of Georgia in January 1997 at the direction of the Board of Directors of the Bank based on a plan of reorganization developed by the Board to substantially strengthen the Bank’s competitive position. The reorganization, in which the Bank became a wholly owned subsidiary of the Company, was completed in June 1997.
In September 1999, the Bank established a mortgage division which operates as First Bank Mortgage (the “Mortgage Division”). The Mortgage Division originates mortgage loans and offers a variety of other mortgage products. As of December 31, 2013, First Bank Mortgage had locations in the Augusta and Savannah, Georgia markets.
In December 2003, the Bank established a financial services division which operates as FB Financial Services. FB Financial Services offers financial planning and investment services through its relationship with Linsco/Private Ledger (Member NASD/SIPC), one of the nation’s leading independent brokerage firms. A joint office of FB Financial Services and Linsco/Private Ledger is located in the Bank’s Daniel Village location on Wrightsboro Road in Augusta.
For further information responsive to this item, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Annual Report on Form 10-K.
Market Area and Competition
The primary service area of the Bank includes the counties of Richmond, Columbia and McDuffie, Georgia, the communities of Augusta, Martinez, Evans and Thomson, Georgia, and Aiken County, South Carolina, which are within a 40-mile radius of the Bank’s main office. The Bank encounters competition from other commercial banks, which offer a full range of banking services and compete for all types of services, especially deposits. In addition, in certain aspects of its banking business, the Bank also competes with credit unions, savings and loan associations, mortgage banking companies, consumer finance companies, brokerage houses, insurance companies, money market funds and other financial service companies which attract customers that have traditionally been served by banks.
The extent to which other types of financial services companies compete with commercial banks has increased significantly over the past several years as a result of federal and state legislation which has permitted these organizations to compete for customers of banks and offer products that have historically been offered by banks. See the “Supervision and Regulation” section that begins on the next page.
Asset/Liability Management
It is the objective of the Bank to manage assets and liabilities to provide a satisfactory, consistent level of profitability within the framework of established cash, loan investment, borrowing and capital policies. An investment committee is responsible for monitoring policies and procedures that are designed to ensure acceptable composition of the asset/liability mix, stability and leverage of all sources of funds while adhering to prudent banking practices. It is the overall philosophy of management to support asset growth primarily through growth of core deposits, which include deposits of all categories made by individuals, partnerships and corporations. Management of the Bank seeks to invest the largest portion of the Bank’s assets in commercial, consumer and real estate loans.
The Bank’s asset/liability mix is monitored on a daily basis and further evaluated with a quarterly report that reflects interest-sensitive assets and interest-sensitive liabilities. This report is prepared and presented to the Bank’s Investment Committee and Board of Directors. The objective of this policy is to control interest-sensitive assets and liabilities so as to minimize the impact of substantial movements in interest rates on the Company’s earnings.
Correspondent Banking
Correspondent banking involves the delivery of services by one bank to another bank which cannot provide that service from an economic or practical standpoint. The Bank purchases correspondent services offered by larger banks, including check collections, purchase and sale of federal funds, wire transfers, security safekeeping, investment services, coin and currency supplies, foreign exchange (currency and check collection), over line and liquidity loan participations, and sales of loans to or participations with correspondent banks. The Bank has established correspondent relationships with First National Bankers Bank, Federal Home Loan Bank of Atlanta and SunTrust Bank. As compensation for services provided by a correspondent, the Bank maintains certain balances with such correspondents in both non-interest bearing and interest bearing accounts. The Bank may also buy or sell loan participations with other non-correspondent banks.
Data Processing
In 2010 the Bank renewed its data processing servicing agreement through 2015 with Fidelity Information Services, under which the Bank receives a full range of data processing services, including an automated general ledger, deposit accounting, commercial, real estate and installment lending data processing, remote deposit capture, central information file and ATM/Debit card processing, and internet banking services, including bill pay, cash management services, and mobile banking. During 2012, the Bank contracted with Encompass to implement comprehensive mortgage origination and processing software for its Mortgage Division. That implementation was substantially completed at the end of 2012.
Employees
At December 31, 2013, the Company and the Bank employed 159 persons on a full-time basis and 6 persons on a part-time basis, including 56 banking officers.
Monetary Policies
The results of operations of the Bank are affected by credit policies of monetary authorities, particularly the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). The instruments of monetary policy employed by the Federal Reserve Board include open market operations in U.S. Government securities, changes in the discount rate on member bank borrowings, changes in reserve requirements against member bank deposits and limitations on interest rates which member banks may pay on time and savings deposits. In view of changing conditions in the national economy and in the money markets, as well as the effect of action by monetary and fiscal authorities, including the Federal Reserve Board, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or the business and earnings of the Bank.
SUPERVISION AND REGULATION
The following discussion sets forth the material elements of the regulatory framework applicable to bank holding companies and their subsidiaries and provides certain specific information relative to the Company and the Bank. The regulatory framework is intended primarily for the protection of depositors and the Deposit Insurance Fund (the “DIF”) of the FDIC and not for the protection of security holders and creditors. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory or regulatory provisions.
Federal Legislation Related to 2008 Economic Crisis
Economic Stabilization Legislation. In the wake of the 2008 financial crisis, the federal government enacted several laws and certain key federal regulatory agencies enacted various regulations and programs designed to stabilize the economy. The two principal pieces of legislation were the Emergency Economic Stabilization Act of 2008 (the “EESA”) and the American Recovery and Reinvestment Act of 2009. Under these laws and other authority, government agencies enacted the Troubled Asset Relief Program (“TARP”), Capital Purchase Program, Public-Private Investment Program, Temporary Liquidity Guarantee Program (“TLGP”) and other initiatives. The Board of Directors of the Bank elected to participate only in the TLGP (which expired at the end of 2012), although the Bank may elect to participate in other programs in the future.
Effective January 1, 2010, all mortgagees who participate in FHA/VA programs of the U.S. Department of Housing and Urban Development (HUD) are subject to additional requirements. First Bank of Georgia’s Mortgage Division initially fell under the requirement of Section 203(b)(1) of the new “Helping Families Save Their Homes Act of 2009” (HFSH Act) which requires that the Mortgage Division submit annual audited financial statements to HUD prepared and audited in accordance with HUD’s Consolidated Audit Guide for Audits of HUD Programs. The new requirements are a prudent safeguard that permits the FHA to ensure that those entities with which it does business are adequately capitalized to meet potential needs. The following reports are required to be submitted as part of the requirement: an audit report on internal controls as it relates to reporting and administering HUD-assisted programs and an audit report on compliance with applicable laws and regulations related to HUD-assisted programs. Those required audits were completed in early 2014.
The Dodd-Frank Act. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law on July 21, 2010 and results in sweeping changes in the regulation of financial institutions. Many provisions of the Dodd-Frank Act apply to, and are more likely to affect, larger financial institutions. However, the Dodd-Frank Act contains numerous other provisions that affect community banks.
Certain of these provisions may have the consequence of increasing expenses and decreasing revenues of all community banking organizations. Further, the environment in which community banking organizations will operate in the future, including legislative and regulatory changes affecting, among other things, their capital, liquidity, and supervision, may have long-term effects on the business model and profitability of community banking organizations, which effects cannot now be predicted. The specific impact of the Dodd-Frank Act on the current and future financial performance of the Bank, will, in large part, depend on the terms of the required regulations and policies to be developed and implemented by the appropriate regulatory agencies.
The Dodd-Frank Act effected a number of statutory changes that, together with the regulations promulgated thereunder, impact community banks. Certain of these changes are discussed below, as follows:
● |
Assessment Base for Deposit Insurance. The Dodd-Frank Act changed the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital, eliminated the ceiling on the size of the DIF, and increased the floor applicable to the size of the DIF, which may require an increase in the level of assessments for institutions such as the Bank. |
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Deposit Insurance Limits. The Dodd-Frank Act made permanent the $250,000 limit on federal deposit insurance. |
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Consumer Financial Protection Bureau. The Dodd-Frank Act centralized responsibility for consumer financial protection by creating a new agency responsible for implementing, examining, and enforcing compliance with federal consumer financial laws. The new Consumer Financial Protection Bureau (“CFPB”) has been created under the Federal Reserve Board and has rule-making, enforcement and investigative authority over consumer financial protection statutes. Many new consumer protection regulations are expected to be promulgated over the next few years. Many of those regulations will increase compliance costs for depository institutions or limit the fees they can charge. Community banks may find it more difficult than larger institutions to absorb the increased compliance costs and reduction in income. The new CFPB is specifically authorized to take action and promulgate rules to prohibit unfair, deceptive or abusive acts or practices in connection with any transaction with a consumer for a consumer financial product. Unfair and deceptive acts are already prohibited by the Federal Trade Commission Act and many state laws. However, the Dodd-Frank Act provides minimal guidance as to what activities will be considered “abusive.” This will likely be an area of significant consumer litigation in the future. State attorneys general are specifically granted the authority to enforce the regulations promulgated by the CFPB against state-chartered banks, which will likely result in increased enforcement of the new consumer regulations. |
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Loss of Federal Preemption. The Dodd-Frank Act restricts the preemption of state law by federal law and disallows subsidiaries and affiliates of national banks from availing themselves of such preemption. |
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Interstate Branching. The Dodd-Frank Act, subject to a state’s restrictions on intra-state branching, now permits interstate branching. Therefore a bank may enter a new state by acquiring a branch of an existing institution or by establishing a new branch office. As a result, there will be no need for the entering bank to acquire or merge with an existing institution in the target state. This ability to establish a de novo branch across state lines will have the effect of increasing competition within a community bank’s existing markets and may create downward pressure on the franchise value for existing community banks. |
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Requirement for Mortgage Loans. The Dodd-Frank Act created additional requirements for residential mortgage loans made by community banks and other mortgage lenders, including restrictions on prepayment penalties and yield-spread premiums, requirements for verification of a borrower’s ability to repay the mortgage loan, and other requirements and restrictions. These provisions of the Dodd-Frank Act will likely increase the compliance and management costs of community banks associated with the origination of residential mortgage loans. |
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Interchange Fees. The Dodd-Frank Act amended the Electronic Funds Transfer Act to, among other things, give the Federal Reserve Board the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer. The Federal Reserve Board issued its final rule establishing these new standards on June 29, 2011. Although community banks have been exempted from the cap on interchange fees, the cap on the fees of large banks will create market forces that force all fees downward. Therefore, community banks should expect lower interchange revenues in the future. |
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Source of Financial Strength. The Dodd-Frank Act codified the existing policy of the Federal Reserve Board, that a bank holding company serve as a “source of financial strength” for its subsidiary banks. This provision of the Dodd-Frank Act became effective on July 21, 2011, and clarifies ambiguities that might exist with respect to the requirements of a “policy,” as compared to the requirements of a “statute.” Presumably, the regulations promulgated under the statutory requirements will further clarify these source-of-financial-strength requirements for bank holding companies, together with the enforcement powers of the Federal Reserve Board relating thereto. |
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Minimum Capital Requirements and Enhanced Supervision. On June 14, 2011, the federal banking agencies published a final rule regarding minimum leverage and risk-based capital requirements for banks and bank holding companies consistent with the requirements of Section 171 of the Dodd-Frank Act. The Dodd-Frank Act also increased regulatory oversight, supervision and examination of banks, bank holding companies and their respective subsidiaries by the appropriate regulatory agency. In addition, new enhanced capital requirements have been approved by federal regulators, including the Federal Reserve and the FDIC (see “The Bank - Capital Adequacy” below). |
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Payment of Interest on Demand Deposits. On July 21, 2011, the Federal Reserve Board’s final rule repealing Regulation Q (“Prohibition Against Payment of Interest on Demand Deposits”), became effective. Regulation Q was promulgated to implement the statutory prohibition against payment of interest on demand deposits by institutions that are member banks of the Federal Reserve Board. This will increase community banks’ cost of funds as they may need to pay interest on demand deposits of business entities to retain such customers. |
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Transactions with Affiliates. The Dodd-Frank Act enhanced the requirements for certain transactions with affiliates under Section 23A and 23B of the Federal Reserve Act, including an expansion of the definition of “covered transactions” and increasing the amount of time for which collateral requirements regarding covered transactions must be maintained. These requirements became effective on July 21, 2011. |
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Enhanced Lending Limits. The Dodd-Frank Act strengthened the previous limits on a depository institution’s credit exposure to one borrower which limited a depository institution’s ability to extend credit to one person (or group of related persons) in an amount exceeding certain thresholds. The Dodd-Frank Act expanded the scope of these restrictions to include credit exposure arising from derivative transactions, repurchase agreements, and securities lending and borrowing transactions. |
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Compensation Practices. The Dodd-Frank Act provides that the appropriate federal regulators must establish standards prohibiting as an unsafe and unsound practice any compensation plan of a bank holding company or other “covered financial institution” that provides an insider or other employee with “excessive compensation” or compensation that gives rise to excessive risk or could lead to a material financial loss to such firm. In June 2010, prior to the Dodd-Frank Act, the bank regulatory agencies promulgated the Interagency Guidance on Sound Incentive Compensation Policies, which requires that financial institutions establish metrics for measuring the impact of activities to achieve incentive compensation with the related risk to the financial institution of such behavior. In addition, public companies must now hold non-binding advisory “say-on-pay” and “say-on-frequency” shareholder votes at defined intervals to give shareholders the opportunity to provide feedback on the company’s compensation practices. |
Although a significant number of the rules and regulations mandated by the Dodd-Frank Act have been finalized, many of the new requirements called for have yet to be implemented and will likely be subject to implementing regulations over the course of several years. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies, the full extent of the impact such requirements will have on financial institutions’ operations is unclear. The changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements.
The Company
Bank Holding Company Regulation. The Company is a bank holding company and a member of the Federal Reserve System under the Bank Holding Company Act of 1956 (the “BHC Act”). As such, the Company is subject to the supervision, examination and reporting requirements of the BHC Act, as well as other federal and state laws governing the banking business. The Federal Reserve Board is the primary regulator of the Company, and supervises the Company’s activities on a continual basis. The Company is required to furnish to the Federal Reserve Board an annual report of its operations at the end of each fiscal year, and such additional information as the Federal Reserve Board may require pursuant to the BHC Act. In general, the BHC Act limits bank holding company business to owning or controlling banks and engaging in other banking-related activities. The BHC Act requires that a bank holding company obtain the prior approval of the Federal Reserve Board before:
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acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank; |
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taking any action that causes a bank to become a subsidiary of a bank holding company; |
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merging or consolidating with another bank holding company; or |
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acquiring most other operating companies. |
Subject to certain state laws, a bank holding company that is adequately capitalized and adequately managed may acquire the assets of both in-state and out-of-state banks. Under the Gramm-Leach-Bliley Act (described below), a bank holding company meeting certain qualifications may apply to the Federal Reserve Board to become a financial holding company, and thereby engage (directly or through a subsidiary) in certain activities deemed financial in nature, such as securities brokerage and insurance underwriting. With certain exceptions, the BHC Act prohibits bank holding companies from acquiring direct or indirect ownership or control of voting shares in any company that is not a bank or a bank holding company unless the Federal Reserve Board determines such activities are incidental or closely related to the business of banking.
The Change in Bank Control Act of 1978 requires a person (or a group of persons acting in concert) acquiring “control” of a bank holding company to provide the Federal Reserve Board with 60 days’ prior written notice of the proposed acquisition. Following receipt of this notice, the Federal Reserve Board has 60 days (or up to 90 days if extended) within which to issue a notice disapproving the proposed acquisition. In addition, any “company” must obtain the Federal Reserve Board’s approval before acquiring 25% (5% if the “company” is a bank holding company) or more of the outstanding shares or otherwise obtaining control over a bank holding company.
Financial Services Modernization. The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (the “Modernization Act”) amended the BHC Act and:
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allows bank holding companies that qualify as “financial holding companies” to engage in a substantially broader range of non-banking activities than was permissible under prior law; |
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allows insurers and other financial services companies to acquire banks; |
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allows national banks, and some state banks, either directly or through operating subsidiaries, to engage in certain non-banking financial activities; |
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removes various restrictions that applied to bank holding company ownership of securities firms and mutual fund advisory companies; and |
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establishes the overall regulatory structure applicable to bank holding companies that also engage in insurance and securities operations. |
If the Company, which has not obtained qualification as a “financial holding company,” were to do so in the future, the Company would be eligible to engage in, or acquire companies engaged in, the broader range of activities that are permitted by the Modernization Act, provided that if any of the Company’s banking subsidiaries were to cease to be “well capitalized” or “well managed” under applicable regulatory standards, the Federal Reserve Board could, among other things, place limitations on the Company’s ability to conduct these broader financial activities or, if the deficiencies persisted, require the Company to divest the banking subsidiary. In addition, if the Company were to be qualified as a financial holding company and any of its banking subsidiaries were to receive a rating of less than satisfactory under the Community Reinvestment Act of 1977 (the “CRA”), the Company would be prohibited from engaging in any additional activities other than those permissible for bank holding companies that are not financial holding companies. The broader range of activities in which financial holding companies are eligible to engage include activities that are determined to be “financial in nature,” including insurance underwriting, securities underwriting and dealing, and making merchant banking investments in commercial and financial companies.
Transactions with Affiliates. The Company and the Bank are deemed to be affiliates within the meaning of the Federal Reserve Act, and transactions between affiliates are subject to certain restrictions. Generally, the Federal Reserve Act limits the extent to which a financial institution or its subsidiaries may engage in “covered transactions” with an affiliate. It also requires all transactions with an affiliate, whether or not “covered transactions,” to be on terms substantially the same, or at least as favorable to the institution or subsidiary, as those provided to a non-affiliate. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and other similar types of transactions.
Tie-In Arrangements. The Company and the Bank cannot engage in certain tie-in arrangements in connection with any extension of credit, sale or lease of property or furnishing of services. For example, with certain exceptions, neither the Company nor the Bank may condition an extension of credit on either a requirement that the customer obtain additional services provided by either the Company or the Bank, or an agreement by the customer to refrain from obtaining other services from a competitor. The Federal Reserve Board has adopted exceptions to its anti-tying rules that allow banks greater flexibility to package products with their affiliates. These exceptions were designed to enhance competition in banking and non-banking products and to allow banks and their affiliates to provide more efficient, lower cost service to their customers.
Source of Strength; Cross-Guarantee. Under former Federal Reserve Board policy and now codified by the Dodd-Frank Act, the Company is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank. This support may be required at times when, absent such rule, the Company may not find itself able to provide it. Capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.
Under the BHC Act, the Federal Reserve Board may require a bank holding company to terminate any activity or relinquish control of a non-bank subsidiary, other than a non-bank subsidiary of a bank, upon the Federal Reserve Board’s determination that such activity or control constitutes a serious risk to the financial soundness or stability of any subsidiary depository institution of the bank holding company. Further, federal bank regulatory authorities have additional discretion to require a bank holding company to divest itself of any bank or non-bank subsidiary if the agency determines that divestiture may aid the depository institution’s financial condition.
Subsidiary Dividends. The Company is a legal entity separate and distinct from the Bank. A portion of the Company’s revenues is derived from amounts paid as dividends to the Company by the Bank. Under Georgia law, the Bank may pay dividends only when and if the Bank is not insolvent. In addition, dividends may not be declared or paid at any time when the Bank does not have combined paid-in capital and appropriated retained earnings equal to at least 20% of the Bank’s capital stock. The Georgia Department of Banking and Finance’s approval must be obtained before the Bank may pay cash dividends out of retained earnings if (i) the total classified assets at the most recent examination of the Bank exceeded 80% of the equity capital, (ii) the aggregate amount of dividends declared or anticipated to be declared in the calendar year exceeds 50% of the net profits, after taxes but before dividends for the previous calendar year, or (iii) the ratio of equity capital to adjusted assets is less than 6%.
In addition, the Company and the Bank are subject to various general regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The appropriate federal regulatory authority is authorized to determine that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof, under certain circumstances relating to the financial condition of a bank or bank holding company. Federal regulatory authorities have indicated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsound and unsafe banking practice and that banking organizations should generally pay dividends only out of current operating earnings.
Incentive Compensation. On June 21, 2010, the Federal Reserve Board, along with the Office of the Comptroller of the Currency (the “OCC”), the Office of Thrift Supervision (the “OTS”), and the FDIC, issued final guidance on incentive compensation policies. The guidance is intended to ensure that the incentive compensation policies of financial institutions do not undermine the safety and soundness of such institutions by encouraging excessive risk-taking.
The agencies incorporate oversight of incentive compensation policies, as part of the regular, risk-focused examination process, of financial institutions that are not “large, complex banking organizations.” These reviews will be tailored to each financial institution based on the scope and complexity of the institution’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the financial institution’s supervisory ratings, which can affect the institution’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a financial institution if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the institution’s safety and soundness and the institution is not taking prompt and effective measures to correct the deficiencies.
The guidance is designed to ensure that incentive compensation arrangements at banking organizations appropriately tie rewards to longer-term performance and do not undermine the safety and soundness of the institution or create undue risks to the financial system. Because improperly structured compensation arrangements for both executive and non-executive employees may pose safety and soundness risks, the guidance applies not only to top-level managers, but also to other employees who have the ability to materially affect the risk profile of an organization, either individually or as part of a group.
The guidance is based upon the key principles that a financial institution’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the institution’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the institution’s board of directors.
The scope and content of banking regulators’ policies on executive compensation are likely to continue evolving in the future.
The Federal Reserve Board and the Dodd-Frank Act addressed loan officer origination compensation practices with new rules in 2010. See the discussion under “Other Laws and Regulations.”
State Law Restrictions. As a Georgia business corporation, the Company may be subject to certain limitations and restrictions under applicable Georgia corporate law.
The Bank
General. The Bank, as a Georgia state-chartered bank, is subject to regulation and examination by the State of Georgia Department of Banking and Finance, as well as the FDIC. Georgia state laws regulate, among other things, the scope of the Bank’s business, its investments, its payment of dividends to the Company, its required legal reserves and the nature, lending limit, maximum interest charged and amount of and collateral for loans. The laws and regulations governing the Bank generally have been promulgated by the Georgia Legislature to protect depositors and not to protect shareholders of the Company or the Bank.
Bank Lending Limit. In September 2009, the Bank became subject to revised regulations from the State of Georgia Department of Banking and Finance regarding its total aggregate lending limit to a single customer and that customer’s related entities. The new regulation revised the definition of how a single customer is defined. As a result, the Board of Directors of the Bank approved an increase in the Bank’s statutory capital base in October 2009 by appropriating a portion of retained earnings. At December 31, 2013, the Bank’s statutory capital base totaled $40.0 million and consisted of $3.18 million in capital stock, $16.32 million of surplus and $20.50 million in appropriated retained earnings, allowing for a $10.0 million lending limit (25%).
Commercial Real Estate Lending. Lending operations that involve concentration of commercial real estate loans are subject to enhanced scrutiny by federal banking regulators. The regulators have issued guidance with respect to the risks posed by commercial real estate lending concentrations. Real estate loans generally include land development, construction loans, loans secured by multi-family property and nonfarm nonresidential real property where the primary source of repayment is derived from rental income associated with the property. The guidance prescribes the following guidelines for examiners to help identify institutions that are potentially exposed to concentration risk and may warrant greater supervisory scrutiny:
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total reported loans for construction, land development and other land represent 100 percent or more of the institution’s total risk-based capital, or |
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total commercial real estate loans as defined in the guidance represent 300 percent or more of the institution’s total risk-based capital and the outstanding balance of the institution’s commercial real estate loan portfolio has increased by 50 percent or more during the prior 36 months. |
In October 2009, the federal banking agencies issued additional guidance on real estate lending that emphasizes these considerations.
Insider Credit Transactions. Banks are also subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to executive officers, directors, principal shareholders, or any related interests of such persons. Extensions of credit must be made on substantially the same terms, including interest rates and collateral, and follow credit underwriting procedures that are not less stringent than those prevailing at the time for comparable transactions with persons not covered above and who are not employees. Also, such extensions of credit must not involve more than the normal risk of repayment or present other unfavorable features.
Transactions with Affiliates and Insiders; Regulation W. The Bank is subject to Sections 23A and 23B of the Federal Reserve Act and Federal Reserve Regulation W. Section 23A of the Federal Reserve Act places limits on the amount of loans or extensions of credit to, or investments in, or certain other transactions with, affiliates and on the amount of advances to third parties collateralized by the securities or obligations of affiliates. The aggregate of all “covered transactions” is limited in amount, as to any one affiliate, to 10% of the Bank’s capital and surplus and, as to all affiliates combined, to 20% of the Bank’s capital and surplus. Furthermore, within the foregoing limitations as to amount, each covered transaction must meet specified collateral requirements. The Bank is forbidden to purchase low quality assets from an affiliate.
Section 23B of the Federal Reserve Act, among other things, prohibits an institution from engaging in certain transactions with certain affiliates unless the transactions are on terms substantially the same, or at least as favorable to such institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.
Regulation W generally excludes all non-bank and non-savings association subsidiaries of banks from treatment as affiliates, except to the extent that the Federal Reserve decides to treat these subsidiaries as affiliates. The regulation also limits the amount of loans that can be purchased by a bank from an affiliate to not more than 100% of the bank’s capital and surplus.
Federal Deposit Insurance Corporation Improvement Act. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (the “FDICIA”), all insured institutions must undergo regular on-site examinations by their appropriate banking agency. The cost of examinations of insured depository institutions and any affiliates may be assessed by the appropriate agency against each institution or affiliate as it deems necessary or appropriate. Insured institutions are required to submit annual reports to the FDIC, their federal regulatory agency, and their state supervisor when applicable. The FDICIA directs the FDIC to develop a method for insured depository institutions to provide supplemental disclosure of the estimated fair market value of assets and liabilities, to the extent feasible and practicable, in any balance sheet, financial statement, report of condition, or any other report of any insured depository institution. Each federal banking agency has prescribed, by regulation, non-capital safety and soundness standards for institutions under its authority. These standards cover internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, such other operational and managerial standards as the agency determines to be appropriate, and standards for asset quality, earnings and stock valuation.
Interstate Banking and Branching. The Dodd-Frank Act modified the federal statute governing de novo interstate branching by state member banks. As a result, a state member bank is authorized to open its initial branch in a host state by establishing a de novo branch at any location where a bank chartered by that host state could establish a branch. A host state is defined as a state, other than a bank’s home state, in which the bank seeks to establish and maintain a branch. A state member bank seeking to open a de novo interstate branch must file an application with the Federal Reserve Board in addition to adherence to state filing requirements and to capital, management, and community reinvestment standards.
Deposit Insurance and Assessments. The deposits of the Bank are currently insured to a maximum of $250,000 per depositor for substantially all depository accounts.
In February 2011, the FDIC board of directors approved a final plan to impose parity among banks in the deposit-insurance system by basing the assessment base on average total consolidated assets minus average tangible equity instead of domestic deposits. Institutions in Risk Category I, which includes more than 90 percent of community banks, pay 5-9 basis points instead of the prior base rate schedule of 12-16 basis points. Institutions in Risk Categories II, III and IV pay 14, 23 and 35 basis points, respectively, compared to the prior rates of 22, 32 and 45 basis points, respectively. In addition, the secured liability adjustment was eliminated under the final rule (although secured liabilities are reflected in a bank’s new assessment base), and the unsecured debt adjustment and the brokered deposit adjustment have remained but with some modifications. Under the final rule, institutions with less than $1 billion in assets report average weekly balances of their consolidated total assets rather than reporting average daily balances. The final rule allows institutions with less than $1 billion in average consolidated total assets to report the end-of-quarter amount of Tier 1 capital as a proxy for average tangible equity.
The Bank’s FDIC insurance expense totaled $254,428 for 2013. FDIC insurance expense includes deposit insurance assessments and Financing Corporation (“FICO”) assessments related to outstanding FICO bonds to fund interest payments on bonds to recapitalize the predecessor to the DIF. These assessments will continue until the FICO bonds mature in 2017. The FICO assessment rates, which are determined quarterly, are based on average total consolidated assets minus average tangible equity.
The FDIC may terminate the deposit insurance of any insured depository institution, including the Bank, if it determines after a hearing that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the banking regulator. It may also suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. Our management is not aware of any practice, condition or violation that might lead to termination of the Bank’s deposit insurance.
Community Reinvestment Act. The CRA requires that, in connection with examinations of financial institutions within their respective jurisdictions, the Federal Reserve Board, the FDIC, or the OCC (as applicable), shall evaluate the record of each financial institution in meeting the credit needs of its local community, including low and moderate income neighborhoods. These factors are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility. Failure to adequately meet these criteria could impose additional requirements and limitations on the Bank.
Capital Adequacy
Federal bank regulatory agencies use capital adequacy guidelines in the examination and regulation of bank holding companies and banks. If capital falls below minimum guideline levels, the holding company or bank may be denied approval to acquire or establish additional banks or non-bank businesses or to open new facilities.
The FDIC and Federal Reserve Board use risk-based capital guidelines for banks and bank holding companies. These are designed to make such capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. The guidelines are minimums, and the Federal Reserve Board has noted that bank holding companies contemplating significant expansion programs should not allow expansion to diminish their capital ratios and should maintain ratios well in excess of the minimum. The current guidelines require all bank holding companies and federally-regulated banks to maintain a minimum risk-based total capital ratio equal to 8%, of which at least 4% must be Tier 1 capital. Tier 1 capital for bank holding companies includes common shareholders’ equity, certain qualifying perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries, but excludes goodwill and most other intangibles and excludes the allowance for loan and lease losses. Tier 2 capital includes the excess of any preferred stock not included in Tier 1 capital, mandatory convertible securities, hybrid capital instruments, subordinated debt and intermediate term-preferred stock, and general reserves for loan and lease losses up to 1.25% of risk-weighted assets.
The FDIC and Federal Reserve Board also employ a leverage ratio, which is Tier 1 capital as a percentage of total assets less intangibles, to be used as a supplement to risk-based guidelines. The principal objective of the leverage ratio is to constrain the maximum degree to which a bank holding company or bank may leverage its equity capital base. A minimum leverage ratio of 3% is required for the most highly rated bank holding companies and banks. Other bank holding companies, banks and bank holding companies seeking to expand, however, are required to maintain minimum leverage ratios of at least 4% to 5%.
In September 2009, the U.S. Treasury Department released a set of principles for financial regulatory reform, including a general recommendation for increased capital for banks and bank holding companies across the board (with even higher requirements for systemically risky banking organizations). In December 2009, the Basel Committee on Banking Supervision issued proposals for regulatory capital changes, including greater emphasis on common equity as a component of Tier 1 capital. On September 12, 2010, the Basel Committee announced the calibration of its revised capital framework for major banking institutions (known as “Basel III”). Both proposals also recommended enhanced leverage and liquidity requirements.
In July 2013, the OCC and the Federal Reserve approved a final rule that replaces the existing risk-based and leverage capital rule. This rule was published in October 2013. An interim final rule was published by the FDIC in September 2013, which is consistent with the OCC/Federal Reserve rule. The Bank will be subject to the FDIC interim rule. The rule establishes a new regulatory capital framework that incorporates revisions to the Basel capital framework, including Basel III and other elements. The rule strengthens the definition of regulatory capital, increases risk-based capital requirements, and amends the methodologies for determining risk-weighted assets. Subject to various transition periods, the rule is effective for “advanced approaches” banks on January 1, 2014, and for all other banks (including the Bank) on January 1, 2015.
Highlights of the new regulatory capital rule:
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Revises the “Prompt Corrective Action” framework to incorporate new regulatory capital minimum thresholds. |
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Adds a new Common Equity Tier 1 capital ratio of 4.5 percent and increases the minimum Tier 1 capital ratio requirement from 4.0 percent to 6.0 percent. |
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Implements strict eligibility criteria for regulatory capital instruments. |
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Improves the measure of risk-weighted assets to enhance risk sensitivity. |
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Retains the existing regulatory capital framework for one- to four-family residential mortgage exposures. |
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Allows banks not subject to the advanced approaches rule to retain the existing treatment for accumulated other comprehensive income (“AOCI”) through a one-time election. |
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Allows certain depository institution holding companies to continue to include in Tier 1 capital previously issued trust preferred securities and cumulative perpetual preferred stock. |
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Limits capital distributions and certain discretionary bonus payments if banks do not maintain a “capital conservation buffer” of common equity Tier 1 capital in an amount greater than 2.5% of total risk-weighted assets. |
In December 2013, five federal agencies, including the Federal Reserve Board, the FDIC and the SEC, approved final rules to implement Section 619 of the Dodd-Frank Act, known as the “Volcker Rule.” Section 619 prohibits insured depository institutions and their affiliates from engaging in short-term proprietary trading of certain securities, derivatives, commodity futures and options, for their own account. The rules also impose limits on a banking entity’s investments in, and other relationships with, hedge funds and private equity funds. There are exemptions for certain activities and compliance with the rules varies with the size of the banking entity and scope of activities.
On January 14, 2014, the same five federal agencies approved an interim final rule to permit banking entities to retain interests in certain collateralized debt obligations backed primarily by trust preferred securities (“TruPS CDOs”) from the investment prohibitions of Section 619 of the Dodd-Frank Act. Under the interim final rule, the agencies permit the retention of an interest in or sponsorship of covered funds by banking entities if the following qualifications are met: (1) the TruPS CDO was established, and the interest was issued, before May 19, 2010; (2) the banking entity reasonably believes that the offering proceeds received by the TruPS CDO were invested primarily in Qualifying TruPS Collateral; and (3) the banking entity’s interest in the TruPS CDO was acquired on or before December 10, 2013 (the date the agencies issued final rules implementing Section 619 of the Dodd-Frank Act). The TruPS CDO structure was the vehicle that gave effect to the use of trust preferred securities as a regulatory capital instrument prior to May 19, 2010. Section 619 and the related regulations will not have an impact on the Company or the Bank.
Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) established a “prompt corrective action” program in which every bank is placed in one of five regulatory categories, depending primarily on its regulatory capital levels. Federal banking regulators are permitted to take increasingly severe action as a bank’s capital position or financial condition declines below the “Adequately Capitalized” level described below. Regulators are also empowered to place in receivership or require the sale of a bank to another depository institution when a bank’s leverage ratio reaches two percent. Better capitalized institutions are generally subject to less onerous regulation and supervision than banks with lesser amounts of capital. Currently, for community banks such as the Bank, the categories are:
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Well Capitalized — The institution exceeds the required minimum level for each relevant capital measure. A well capitalized institution is one (i) having a total capital ratio of 10% or greater, (ii) having a Tier 1 capital ratio of 6% or greater, (iii) having a leverage capital ratio of 5% or greater and (iv) that is not subject to any order or written directive to meet and maintain a specific capital level for any capital measure. |
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Adequately Capitalized — The institution meets the required minimum level for each relevant capital measure. No capital distribution may be made that would result in the institution becoming undercapitalized. An adequately capitalized institution is one (i) having a total capital ratio of 8% or greater, (ii) having a Tier 1 capital ratio of 4% or greater and (iii) having a leverage capital ratio of 4% or greater or a leverage capital ratio of 3% or greater if the institution is rated composite 1 under the CAMELS (Capital, Assets, Management, Earnings, Liquidity and Sensitivity to market risk) rating system. |
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Undercapitalized — The institution fails to meet the required minimum level for any relevant capital measure. An undercapitalized institution is one (i) having a total capital ratio of less than 8% or (ii) having a Tier 1 capital ratio of less than 4% or (iii) having a leverage capital ratio of less than 4%, or if the institution is rated a composite 1 under the CAMELS rating system, a leverage capital ratio of less than 3%. |
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Significantly Undercapitalized — The institution is significantly below the required minimum level for any relevant capital measure. A significantly undercapitalized institution is one (i) having a total capital ratio of less than 6% or (ii) having a Tier 1 capital ratio of less than 3% or (iii) having a leverage capital ratio of less than 3% and the institution is rated a composite 2-5 under the CAMELS rating system. |
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Critically Undercapitalized — The institution fails to meet a critical capital level set by the appropriate federal banking agency. A critically undercapitalized institution is one having a ratio of tangible equity to total assets that is equal to or less than 2%. |
For the Bank, new regulatory capital minimum thresholds will become effective January 1, 2015, as discussed above. As of December 31, 2013, under the present rules in effect, we were deemed to be “well capitalized”.
Standards for Safety and Soundness. The Federal Deposit Insurance Act (the “FDIA”) requires the federal banking regulatory agencies to prescribe, by regulation or guideline, operational and managerial standards for all insured depository institutions relating to: (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure; and (v) asset growth. The agencies must also prescribe standards for asset quality, earnings, and stock valuation, as well as standards for compensation, fees and benefits. The federal bank regulatory agencies have adopted regulations and Interagency Guidelines Prescribing Standards for Safety and Soundness to implement these required standards. These guidelines set forth the safety and soundness standards that the federal bank regulatory agencies use to identify and address problems at insured depository institutions before capital becomes impaired. Under the regulations, if the FDIC determines that we fail to meet any standards prescribed by the guidelines, the agency may require us to submit to the agency an acceptable plan to achieve compliance with the standard.
Other Laws and Regulations
International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001. On October 26, 2001, the USA PATRIOT Act was enacted. It includes the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001 (the “IMLAFA”) and strong measures to prevent, detect and prosecute terrorism and international money laundering. As required by the IMLAFA, the federal banking agencies, in cooperation with the U.S. Treasury Department, established rules that generally apply to insured depository institutions and U.S. branches and agencies of foreign banks.
Among other things, the new rules require that financial institutions implement reasonable procedures to (1) verify the identity of any person opening an account; (2) maintain records of the information used to verify the person’s identity; and (3) determine whether the person appears on any list of known or suspected terrorists or terrorist organizations. The rules also prohibit banks from establishing correspondent accounts with foreign shell banks with no physical presence and encourage cooperation among financial institutions, their regulators and law enforcement to share information regarding individuals, entities and organizations engaged in terrorist acts or money laundering activities. The rules also limit a financial institution’s liability for submitting a report of suspicious activity and for voluntarily disclosing a possible violation of law to law enforcement. Bank regulators routinely examine institutions for compliance with these obligations and are required to consider compliance in connection with the regulatory review of applications.
Under the USA PATRIOT Act, the Federal Bureau of Investigation (the “FBI”) can send to the bank regulatory agencies lists of the names of persons suspected of involvement in terrorist activities. A bank can be requested to search its records for any relationships or transactions with persons on those lists. If any relationships or transactions are found, the bank must file a suspicious activity report and contact the FBI.
The Office of Foreign Assets Control (“OFAC”), which is a division of the U.S. Department of the Treasury, is responsible for helping to ensure that United States entities do not engage in transactions with “enemies” of the United States, as defined by various Executive Orders and Acts of Congress. OFAC has sent, and will send, to bank regulatory agencies lists of names of persons and organizations suspected of aiding, harboring or engaging in terrorist acts. If a bank finds a name on any transaction, account or wire transfer that is on an OFAC list, the bank must freeze such account, file a suspicious activity report and notify the FBI. The Bank has appointed an OFAC compliance officer to oversee the inspection of accounts and the filing of any required notifications. The Bank actively checks high-risk OFAC areas such as new accounts, wire transfers and customer files, utilizing software which is updated each time a modification is made to the lists provided by OFAC and other agencies of Specially Designated Nationals and Blocked Persons.
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 (the “SOX”) was enacted to address corporate and accounting fraud. It established a new accounting oversight board that enforces auditing standards and restricts the scope of services that accounting firms may provide to their public company audit clients. Among other things, it also: (i) requires chief executive officers and chief financial officers to certify to the accuracy of periodic reports filed with the SEC; (ii) imposes new disclosure requirements regarding internal controls, off-balance-sheet transactions, and pro forma (non-GAAP) disclosures; (iii) accelerates the time frame for reporting of insider transactions and periodic disclosures by certain public companies; and (iv) requires companies to disclose whether or not they have adopted a code of ethics for senior financial officers and whether the audit committee includes at least one “audit committee financial expert.”
The SOX requires the SEC, based on certain enumerated factors, to review corporate filings regularly and systematically. To deter wrongdoing, it: (i) subjects bonuses issued to top executives to disgorgement if a restatement of a company’s financial statements was due to corporate misconduct; (ii) prohibits an officer or director from misleading or coercing an auditor; (iii) prohibits insider trades during pension fund “blackout periods”; (iv) imposes new criminal penalties for fraud and other wrongful acts; and (v) extends the period during which certain securities fraud lawsuits can be brought against a company or its officers.
Effective September 21, 2010, the SEC adopted amendments to its rules to conform to Section 404(c) of the SOX, as added by Section 989G of the Dodd-Frank Act. Section 404(c) provides that the SOX shall not apply to any audit report prepared by an issuer that is neither an accelerated filer nor a large accelerated filer as defined in Rule 12b-2 under the Securities Exchange Act of 1934.
With market value of its common equity less than $75 million, the Company does not qualify as an accelerated filer or large accelerated filer and therefore is not presently subject to Section 404(c) of the SOX for the year ended December 31, 2013. Prior to the enactment of the Dodd-Frank Act, the Company, as a non-accelerated filer, would have been required to include an attestation report from its public accounting firm on internal control over financial reporting in its Annual Report on Form 10-K filed with the SEC.
The Company’s management continues to be responsible for establishing and maintaining adequate internal control over financial reporting as detailed in Item 9A of this Annual Report on Form 10-K.
Other Laws and Regulations. Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates. The Bank’s loan operations are also subject to federal laws applicable to credit transactions, such as:
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Effective April 1, 2011, the Federal Reserve Board implemented new rules regarding all persons who originate loans, including mortgage loan officers and brokers. The new rules include, among other things, prohibition of compensation to loan originators based on the terms or conditions of a loan, prohibiting dual payment of a mortgage originator from both the consumer and the creditor, and prohibiting a loan officer from steering a consumer to a lender with less favorable terms that increase the loan officer or broker’s compensation. The Dodd-Frank Act also addressed loan originator compensation in a similar manner but with additional provisions. The Bank’s Mortgage Division has addressed these new rules and has met the April 1, 2011 implementation date. |
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The Federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers. |
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The Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves. |
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The Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit. |
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The Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies. |
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The Fair Debt Collection Practices Act, governing the manner in which consumer debts may be collected by collection agencies. |
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The Check Clearing for the 21st Century Act, giving “substitute checks,” such as a digital image of a check and copies made from that image, the same legal standing as the original paper check, and enacting other provisions related to check status, communication and verification procedures. |
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The rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws. |
The deposit operations of the Bank are also subject to:
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the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; and |
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the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve Board to implement that act, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services. |
Financial Institutions Reform Recovery and Enforcement Act of 1989. This act expanded and increased the enforcement powers of the federal regulatory agencies in terms of both civil and criminal penalties against depository institutions and certain “institution-affiliated parties.” Institution-affiliated parties primarily include management, employees, and agents of a financial institution, as well as independent contractors and consultants such as attorneys, accountants and others who participate in the conduct of the financial institution’s affairs. Practices subject to these sanctions can include the failure of an institution to timely file required reports or the filing of false or misleading information or the submission of inaccurate reports. Civil penalties may be as high as $1,000,000 a day for such violations. Criminal penalties for some financial institution crimes have been increased to 20 years. In addition, regulators are provided with greater flexibility to commence enforcement actions against institutions and institution-affiliated parties. Possible enforcement actions include the termination of deposit insurance. Furthermore, banking agencies’ power to issue cease-and-desist orders were expanded. Such orders may, among other things, require affirmative action to correct any harm resulting from a violation or practice, including restitution, reimbursement, indemnification or guarantees against loss. A financial institution may also be ordered to restrict its growth, dispose of certain assets, rescind agreements or contracts, or take other actions as determined by the ordering agency to be appropriate.
Privacy and Credit Reporting. Financial institutions are required to disclose their policies for collecting and protecting confidential information. Customers generally may prevent financial institutions from sharing nonpublic personal financial information with nonaffiliated third parties except under narrow circumstances, such as the processing of transactions requested by the consumer. Additionally, financial institutions generally may not disclose customer account numbers to any nonaffiliated third party for use in telemarketing, direct mail marketing or other marketing to consumers. It is the Bank’s policy not to disclose any personal information unless required by law.
Like other lending institutions, the Bank utilizes credit bureau data in its underwriting activities. Use of such data is regulated under the Fair Credit Reporting Act on a uniform, nationwide basis, including credit reporting, prescreening, sharing of information between affiliates, and the use of credit data. The Fair and Accurate Credit Transactions Act of 2003 (the “FACT Act”) authorizes states to enact identity theft laws that are not inconsistent with the conduct required by the provisions of the FACT Act.
Effect of Governmental Monetary Policies. The Bank’s earnings will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve Bank’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order to, among other things, curb inflation or combat a recession. The monetary policies of the Federal Reserve Board have major effects upon the levels of bank loans, investments and deposits through its open market operations in United States government securities and through its regulation of the discount rate on borrowings of member banks and the reserve requirements against member bank deposits. It is not possible to predict the nature or impact of future changes in monetary and fiscal policies.
Future Legislation. Various other legislative and regulatory initiatives affecting the banking system are from time to time introduced in Congress and state legislatures, as well as regulatory agencies. Future legislation regarding financial institutions may change banking statutes and the operating environment in substantial and unpredictable ways. The nature and extent of future legislative and regulatory changes affecting financial institutions is very unpredictable at this time. The Company cannot determine the ultimate effect that such potential legislation, if enacted, would have upon its financial condition or operations.
Item 1A. Risk Factors
The following is a summary of certain significant risks related to us, our business and an investment in our common stock. This should not be viewed as an all-inclusive or exhaustive list.
Risks Related to Our Industry
The banking crisis that began in 2008 adversely affected our industry, including our business, and may continue to have an adverse effect on our business in the future.
Dramatic declines in the housing market which began in 2008, unemployment and under-employment, negatively impacted the credit performance of real estate related loans and resulted in significant write-downs of asset values by financial institutions. The crisis caused many financial institutions to seek additional capital, to reduce or eliminate dividends, to merge with larger and stronger institutions and, in many cases, to fail. This economic turmoil and tightening of credit led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally. The resulting economic pressure on consumers and the lack of confidence in the financial markets adversely affected the banking industry, including our business. Although economic conditions have been improving, future market developments could affect consumer confidence levels and cause adverse changes in loan payment patterns, causing increases in delinquencies and default rates, which may impact our charge-offs and provision for credit losses.
The financial distress of other financial institutions could have a material adverse impact on us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have in the past led, and could in the future lead, to market-wide liquidity problems and thereafter losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure due us. There is no assurance that any such losses would not materially and adversely affect our business, financial condition, and results of operations.
Recent legislative reforms have resulted in our business becoming subject to significant and extensive additional regulations and/or could adversely affect our results of operations and financial condition.
The Dodd-Frank Act has resulted in sweeping changes in the regulation of financial institutions aimed at strengthening the sound operation of the financial services sector. The Dodd-Frank Act’s provisions that have received the most public attention generally have been those applying to or more likely to affect larger institutions. However, it contains numerous other provisions that have affected all banks and bank holding companies, and have fundamentally changed the system of oversight described in the section entitled “Supervision and Regulation” above.
Some of these provisions may have the consequence of increasing our expenses, decreasing our revenues, and changing the activities in which we choose to engage. The environment in which banking organizations will operate, including legislative and regulatory changes affecting capital, liquidity, supervision, permissible activities, corporate governance and compensation, changes in fiscal policy and steps to eliminate government support for banking organizations, may have long-term effects on the business model and profitability of banking organizations that cannot now be foreseen. The specific impact of the Dodd-Frank Act on our current activities or new financial activities we may consider in the future, our financial performance, and the markets in which we operate, will depend on the manner in which the relevant agencies develop and implement the required rules and the reaction of market participants to these regulatory developments.
Risks Related to Our Business
An economic downturn, especially one affecting Richmond, Columbia and McDuffie counties, could adversely affect our business.
Our success significantly depends upon the growth in population, income levels, deposits, and housing in our primary market areas of Richmond, Columbia and McDuffie counties in the State of Georgia. If these communities do not grow or if prevailing local or national economic conditions are unfavorable, our business may be adversely affected. An economic downturn would likely harm the quality of our loan portfolio and reduce the level of our deposits, which in turn would hurt our business. If the strength of the U.S. economy in general and the strength of the local economies in which the Company conducts operations declines, or continues to decline, this could result in, among other things, a deterioration in credit quality, increased loan charge-offs and delinquencies or a reduced demand for credit, including a resultant effect on the Bank’s loan portfolio and allowance for loan losses. These factors could materially adversely affect the Company’s financial condition and results of operations. Unlike many larger institutions, we are not able to spread the risks of unfavorable local economic conditions across a large number of diversified economies. The Bank is a community bank and as such, is mandated by the Community Reinvestment Act and other regulations to conduct most of its lending activities within the geographic area where it is located. As a result, the Bank and its borrowers may be especially vulnerable to the consequences of changes in the local economy.
Weakness in the real estate market, including the secondary residential mortgage loan markets, has adversely affected us in the past and could adversely affect us in the future.
Significant disruptions in the secondary market for residential mortgage loans have reduced the demand for and impaired the liquidity of many mortgage loans. Declining real estate prices have also caused higher delinquencies and losses on certain mortgage loans. Although the market has improved, the effects of mortgage market challenges, combined with a correction in residential real estate market prices and reduced levels of home sales, could result in further price reductions in single family home values, adversely affecting the value of collateral securing mortgage loans that we hold, mortgage loan originations and profits on sales of mortgage loans. Declines in real estate values and home sales, and financial stress on borrowers as a result of job losses, interest rate resets on adjustable rate mortgage loans or other factors, could have further adverse effects on borrowers, resulting in higher delinquencies and greater charge-offs in future periods, which could adversely affect our financial condition and results of operations.
Our loan portfolio includes a substantial amount of commercial real estate and construction and development loans, which may have more risks than residential or consumer loans.
Our commercial real estate loans and construction and development loans account for a substantial portion of our total loan portfolio. These loans generally carry larger loan balances and usually involve a greater degree of financial and credit risk than home equity, residential or consumer loans. The increased financial and credit risk associated with these types of loans is a result of several factors, including the concentration of principal in a limited number of loans and to borrowers in similar lines of business, the size of loan balances, the effects of general economic conditions on income-producing properties and the increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by commercial real estate in some cases is dependent upon the successful operation, development or sale of the related real estate or commercial project. If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired. This cash flow shortage may result in the failure to make loan payments. In these cases, we may be compelled to modify the terms of the loan. As a result, repayment of these loans may, to a greater extent than other types of loans, be subject to adverse conditions in the real estate market or economy.
Many of our borrowers have more than one loan or credit relationship with us.
Many of our borrowers have more than one commercial real estate or commercial business loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to, for example, a one-to-four family residential mortgage loan.
Our decisions regarding credit risk and reserves for loan losses may materially and adversely affect our business.
Making loans and other extensions of credit is an essential element of our business. Although we seek to mitigate risks inherent in lending by adhering to specific underwriting practices, our loans and other extensions of credit may not be repaid. The risk of nonpayment is affected by a number of factors, including:
● |
the duration of the credit; |
● |
credit risks of a particular customer; |
● |
changes in economic and industry conditions; and |
● |
in the case of a collateralized loan, risks resulting from uncertainties about the future value of the collateral. |
We attempt to maintain an appropriate allowance for loan losses to provide for potential losses in our loan portfolio. However, there is no precise method of predicting credit losses, since any estimate of loan losses is necessarily subjective and the accuracy depends on the outcome of future events. Therefore, we face the risk that charge-offs in future periods will exceed our allowance for loan losses and that additional increases in the allowance for loan losses will be required. Additions to the allowance for loan losses would result in a decrease of our net income, and possibly our capital.
The current prolonged low interest rate environment presents challenges to us in meeting profitability goals and managing interest rate risk.
The low interest rate environment for the past five years has presented a challenging operating environment for most banks, including us, whereby net interest margins become more and more compressed. This compression is the result of two factors: (1) declining earning asset yields as new loans and securities are added to the balance sheet at lower rates of return, and (2) the realization of lower incremental benefits related to lower interest payments on deposits and other interest-bearing liabilities. Further, the impact of net interest performance on a bank’s operating results is significantly influenced by the bank’s operational efficiency, which generally is a greater challenge for smaller banks than the largest banks. Lower margins result in less net interest income available to cover operating expenses, and may require balance sheet duration adjustments to capture additional yields and try to reduce costs of interest-bearing liabilities. Thus, meeting profitability goals is more difficult and interest rate risks have grown in this low interest rate environment and will continue to persist for the banking industry for the foreseeable future.
We face strong competition for customers, which could prevent us from obtaining customers and may cause us to pay higher interest rates to attract deposits.
The banking business is highly competitive and we experience competition in each of our markets from many other financial institutions. We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds and other mutual funds, as well as super-regional, national and international financial institutions that operate offices in our primary market areas and elsewhere. We compete with these institutions both in attracting deposits and in making loans. In addition, in order to grow we have to attract customers from other existing financial institutions or from new residents. Many of our competitors are well-established, larger financial institutions. These institutions offer some services, such as extensive and established branch networks and trust services, which we currently do not provide. In addition, competitors that are not depository institutions are generally not subject to the extensive regulations that apply to us. There is a risk that we will have a competitive disadvantage with these other financial institutions in our markets, and that we may have to pay higher interest rates to attract deposits and/or lower our interest rates on loans to customers, resulting in reduced profitability. In new markets that we may enter, we will also compete against well-established community banks that have developed relationships within the community.
Changes in monetary policies and interest rates could reduce our profitability and adversely affect our business.
Our profitability is affected by credit policies of monetary authorities, particularly the Federal Reserve Board, and depends in large part on our net interest income, which is the difference between interest earned from interest-earning assets, such as loans and investment securities, and interest paid on interest-bearing liabilities, such as deposits and borrowings. Our net interest income will be adversely affected if market interest rates change such that the interest we pay on deposits and borrowings increases faster than the interest we earn on loans and investments. Many factors cause changes in interest rates, including governmental monetary policies and domestic and international economic and political conditions. While we intend to manage the effects of changes in interest rates by adjusting the terms, maturities, and pricing of our assets and liabilities, our efforts may not be effective and our financial condition and results of operations may suffer.
Our recent operating results may not be indicative of our future operating results.
In 2013, we reported strong earnings and an increase in loans and deposit levels. However, we may not be able to sustain our historical rate of growth from prior years and may not even be able to grow our business at all. We may not be able to sustain or increase our profitability. Consequently, our historical results of operations are not necessarily indicative of our future operations. Various factors, such as economic conditions, regulatory and legislative considerations and competition may also impede our ability to increase our rate of growth and our profitability.
We could be adversely affected by the loss of one or more key personnel or by an inability to attract and retain employees.
We believe that our growth and future success will depend in large part on the skills of our executive and other senior officers. The loss of the services of one or more of these officers could impair our ability to continue to implement our business strategy. Our executive and other senior officers have extensive and long-standing ties within our primary market areas and substantial experience with our operations, and have contributed significantly to our growth. If we lose the services of any one of them, he or she may be difficult to replace and our business could be materially and adversely affected.
Our success also depends, in part, on our continued ability to attract and retain experienced and qualified employees. The competition for such employees is intense, and our inability to continue to attract, retain and motivate employees could adversely affect our business.
The success of our growth strategy depends on our ability to identify and recruit individuals with experience and relationships in the markets in which we intend to expand.
We intend to expand our banking network over the next several years into both new and existing markets in and around our current market areas. We believe that to expand into new markets successfully, we must identify and recruit experienced key management members with local expertise and relationships in these markets. We expect that competition for qualified management in the markets in which we may expand will be intense and that there will be a limited number of qualified persons with knowledge of and experience in the community banking industry in these markets. Even if we identify individuals that we believe could assist us in establishing a presence in a new market, we may be unable to recruit these individuals away from their current employers. In addition, the process of identifying and recruiting individuals with the combination of skills and attributes required to carry out our strategy is often lengthy. Our inability to identify, recruit and retain talented personnel to manage new offices effectively and in a timely manner would limit our growth and could materially adversely affect our business, financial condition and results of operations.
We will face risks with respect to future expansion and acquisitions or mergers.
We may expand into new lines of business or offer new products or services. Any expansion plans we undertake may also divert the attention of our management from the operation of our core business, which could have an adverse effect on our results of operations. We may also seek to acquire other financial institutions or assets of those institutions. Any of these activities would involve a number of risks such as the time and expense associated with evaluating new lines of business or new markets for expansion, hiring or retaining local management and integrating new acquisitions. Even if we acquire new lines of business or new products or services, they may not be profitable. Nor can we say with certainty that we will be able to consummate, or if consummated, successfully integrate, future acquisitions, if any, or that we will not incur disruptions or unexpected expense in integrating such acquisitions. Any given acquisition, if and when consummated, may adversely affect our results of operations and financial condition.
Our growth may require us to raise additional capital that may not be available when it is needed or may not be available on terms acceptable to us.
We are required by regulatory authorities to maintain adequate levels of capital to support our operations. To support our continued growth, we may need to raise additional capital. Our ability to raise additional capital, if needed, will depend in part on conditions in the capital markets at that time, which are outside our control. Accordingly, we cannot be assured of our ability to raise additional capital, if needed, on terms acceptable to us. If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth and acquisitions could be materially impaired.
We are subject to extensive regulation that could limit or restrict our activities, and such regulation is for the protection of our depositors and not for the benefit of our investors.
We operate in a highly regulated industry and are subject to examination, supervision and comprehensive regulation by various regulatory agencies. Our compliance with these regulations is costly and restricts certain of our activities, including payment of dividends, mergers and acquisitions, purchase and sale of investments, origination and sale of loans, interest rates charged on loans, interest rates paid on deposits and locations of offices. We are also subject to regulatory capital requirements established by our regulators, which require us to maintain adequate capital to support our growth. If we fail to meet these capital and other regulatory requirements, our ability to grow, our cost of funds and FDIC insurance, our ability to borrow funds, our ability to pay dividends on common stock, and our ability to make acquisitions, could be materially and adversely affected.
The laws and regulations applicable to the banking industry could change at any time, and we cannot predict the effects of these changes on our business and profitability. Because government regulation greatly affects the business and financial results of all banks and bank holding companies, our cost of compliance could adversely affect our profitability. In addition, the purpose of these laws and regulations is to protect and insure the interests and deposits of our depositors, and are not for the protection of our investors.
Efforts to comply with the Sarbanes-Oxley Act have involved significant expenditures, and non-compliance with the Sarbanes-Oxley Act may adversely affect us.
The Sarbanes-Oxley Act of 2002, and the related rules and regulations promulgated by the Securities and Exchange Commission, have increased the scope, complexity and cost of corporate governance, reporting and disclosure practices. We have experienced, and we expect to continue to experience, greater compliance costs, including costs related to internal controls, as a result of the Sarbanes-Oxley Act.
In 2010 the SEC adopted amendments to its rules and forms to implement revised Section 404(c) to exclude smaller reporting companies. We are a smaller reporting company and therefore are not presently subject to the SOX Section 404 as it relates to certain internal control requirements. However, management continues to be responsible for establishing and maintaining adequate internal control over financial reporting. For further discussion see “Supervision and Regulation - Other Laws and Regulations.”
We may be required to pay significantly higher FDIC premiums in the future.
Insured institution failures and a deterioration in banking and economic conditions since 2008 have significantly increased the insurance fund loss provisions of the Deposit Insurance Fund (“DIF”) of the FDIC. This resulted in a decline in the designated reserve ratio to historical lows through the end of 2012. The FDIC expects there could be additional insured institution failures in the next few years. The reserve ratio improved during 2013, however, it may decline again. Additionally, the limit on FDIC coverage was increased to $250,000 by the enactment of the Dodd-Frank Act.
These developments caused the premiums assessed by the FDIC to increase. We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. If there are additional bank or financial institution failures, we may be required to pay even higher FDIC premiums than current levels. Any future increases in FDIC insurance premiums may materially and adversely affect our results of operations. Additionally, the Dodd-Frank Act changed the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital. Although we may initially see a decline in premiums as a result of this change, there is still risk that future assessments could increase again.
Liquidity needs could adversely affect our results of operations and financial condition.
Our primary sources of funds are customer deposits and loan principal and interest payments. Deposit levels may be affected by a number of factors, including rates paid by competitors, general interest rate levels, returns available to customers on alternative investments and general economic conditions. Scheduled loan repayments are a relatively stable source of funds; however, they are subject to the ability of borrowers to repay the loans. Borrowers’ ability to repay loans can be adversely affected by a number of factors outside our control, including changes in economic conditions, adverse trends or events affecting business industry groups, reductions in real estate values or markets, business closings or lay-offs, inclement weather, natural disasters and international instability. Cash flows from investments are also fairly stable but can be accelerated or extended based on underlying interest rates. Accordingly, we may be required from time to time to rely on secondary sources of liquidity to meet deposit withdrawal demands or otherwise fund operations. Those sources may include Federal Home Loan Bank advances, brokered deposits and federal funds lines of credit from correspondent banks. While we believe these sources are currently adequate, there can be no assurance they will be sufficient to meet future liquidity demands, particularly if we experience atypical deposit withdrawal demands, increased loan demand or if regulatory decisions should limit available funding sources such as brokered deposits. We may be required to slow or discontinue loan growth, capital expenditures, other investments or liquidate assets should those sources not be adequate.
Changes in accounting policies and practices, as may be adopted by the regulatory agencies, the Financial Accounting Standards Board, or other authoritative bodies, could materially impact our financial statements.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time, the regulatory agencies, the Financial Accounting Standards Board, and other authoritative bodies change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be difficult to predict and can materially impact how we record and report our financial condition and results of operations.
We must respond to rapid technological changes, and these changes may be more difficult to implement or more expensive than anticipated.
We will have to respond to future technological changes. Specifically, if our competitors introduce new products and services embodying new technologies, or if new industry standards and practices emerge, then our existing product and service offerings, technology and systems may be impaired or become obsolete. Further, if we fail to adopt or develop new technologies or to adapt our products and services to emerging industry standards, then we may lose current and future customers, which could have a material adverse effect on our business, financial condition and results of operations. The financial services industry is changing rapidly and in order to remain competitive, we must continue to enhance and improve the functionality and features of our products, services and technologies. These changes may be more difficult to implement or more expensive than we anticipate.
Our operations and the operations of our vendors, suppliers and customers may be subject to disruption from events beyond our control.
Our operations and the operations of our vendors, suppliers and customers may be subject to disruption from a variety of causes, including work stoppages, financial difficulties, acts of war, terrorism, fire, ice storms, earthquakes, flooding or other natural disasters. If a major disruption were to occur it could result in suspension of operations, harm to people or the environment, delays in our ability to provide banking services, or the inability of customers to repay loan obligations. Adverse consequences may also result from disruptions in the operations of our vendors, suppliers and customers, which could have a material adverse effect upon our business.
Risks Related to Investing in Our Common Stock
Although there is a trading market for our common stock, an active trading market may never develop or be maintained.
Although our common stock is traded on the Over-The-Counter Bulletin Board, there is not a consistently active trading market for our common stock. An investor in our stock may be unable to liquidate his or its investment quickly and efficiently and should be prepared to bear the economic risk of an investment in our common stock for an indefinite period. We cannot predict the extent to which an active public market for our common stock may develop or be sustained.
Our ability to pay dividends is limited and we may be unable to pay future dividends. As a result, capital appreciation, if any, of our common stock may be your sole opportunity for gains on your investment for the foreseeable future.
We make no assurances that we will pay any dividends in the future. Holders of our common stock are not entitled to receive dividends unless declared by our board of directors. Our ability to do so will be limited by regulatory restrictions, our financial condition, results of operations, capital requirements, level of indebtedness and such other factors as our board of directors deems relevant. Our ability to pay dividends is limited by our obligations to maintain sufficient capital and by other restrictions on the payment of dividends that are applicable to us. Investors should not purchase our common stock if they require dividend income.
Our securities are not FDIC insured.
Our securities, including our common stock, are not savings or deposit accounts, and are not insured by the Deposit Insurance Fund, the FDIC or any other governmental agency and are subject to investment risk, including the possible loss of the entire investment.
We may issue additional shares of our common stock that could result in dilution of an investor’s investment.
Our board of directors may determine from time to time that there is a need to obtain additional capital through the issuance of additional shares of common stock. These issuances would likely dilute the ownership interests of our investors and may dilute the per share book value of our common stock. In addition, the issuance of additional shares of common stock under our stock option and equity incentive plans will further dilute each investor’s ownership of our common stock.
Our board of directors has the authority to set the terms of and issue preferred stock without shareholder approval, which could dilute your ownership interest in the Company, and which would likely have superior rights over the common stock of the Company as to dividends and liquidation preference.
The Company’s Articles of Incorporation authorize the issuance of up to 1,000,000 shares of preferred stock and give the board of directors the authority to decide what the terms (such as dividend rate, liquidation preference, redemption features and the like) of the shares of any series of preferred stock will be and how many shares to issue.
In the future, our board of directors may choose to designate one or more new series of preferred stock, with rights and preferences that are undetermined at this time. In general, dividends on any preferred stock that might be issued must be paid in full before you, as a holder of common stock, would receive any dividends, and holders of preferred stock would be paid out before you would receive anything if the Company were liquidated. Thus, our board of directors will have the ability to issue shares of preferred stock that would have rights superior to your rights as a holder of common stock which could be dilutive to and diminish the value of your common stock.
An entity holding as little as a 5% interest in our outstanding common stock could, under certain circumstances, be subject to regulation as a “bank holding company.”
Any entity, including a “group” composed of natural persons, owning or controlling with the power to vote 25% or more of our outstanding common stock, or 5% or more if the holder otherwise exercises a “controlling influence” over us, may be subject to regulation as a “bank holding company” in accordance with the Bank Holding Company Act (“BHCA”). In addition, (i) any bank holding company or foreign bank with a U.S. presence may be required to obtain the approval of the Federal Reserve under the BHCA to acquire or retain 5% or more of our outstanding common stock, and (ii) any person not otherwise defined as a company by the BHCA and its implementing regulations may be required to obtain the approval of the Federal Reserve under the Change in Bank Control Act to acquire or retain 10% or more of our outstanding common stock.
Becoming a bank holding company imposes statutory and regulatory restrictions and obligations, such as providing managerial and financial strength for any bank subsidiaries. Regulation as a bank holding company could require the holder to divest all or a portion of the holder’s investment in our common stock or those nonbanking investments that may be deemed impermissible or incompatible with bank holding company status, such as a material investment in a company unrelated to banking.
Item 1B. Unresolved Staff Comments
Not Applicable
Item 2. Properties
The Company’s and the Bank’s main office is located at 3527 Wheeler Road in Augusta, Georgia. This office was opened in September 2005. The Bank operates three banking offices in Augusta, Georgia, two banking offices in Martinez, Georgia, one banking office in Evans, Georgia, and one banking office in Thomson, Georgia. All of these offices are owned by the Bank. The following table sets forth the location of each of the Bank’s branch offices and the date each branch opened for business:
Branch |
Date Opened |
|
|
Hill Street Office, Thomson, Georgia |
January 1989 |
Daniel Village Office, Augusta, Georgia |
March 1999 |
West Town Office, Martinez, Georgia |
October 1999 |
Medical Center Office, Augusta, Georgia |
January 2001 |
Fury’s Ferry Road Office, Martinez, Georgia |
April 2002 |
Main Office, Augusta, Georgia |
September 2005 |
Evans Office, Evans, Georgia |
May 2013 |
The Bank also leases office space at one location in Augusta to house the Mortgage Division. The Mortgage Division also operates offices in Savannah, Georgia out of leased office space.
Item 3. Legal Proceedings
The nature of the business of the Bank is such that it ordinarily results in a certain amount of litigation. In the opinion of management, except as otherwise described below, there are no material pending legal proceedings to which the Company or the Bank is a party or of which any of their properties are the subject; nor are there material proceedings known to the Company or the Bank to be contemplated by any governmental authority; nor are there material proceedings known to the Company or the Bank, pending or contemplated, in which any director, officer, or affiliate or any principal security holder of the Company or the Bank, or any associate of any of the foregoing, is a party or has an interest adverse to the Company or the Bank.
In August 2011, the Bank was sued in State Court by a subcontractor related to a residential development project foreclosed upon by the Bank. The suit alleged various claims against the Bank, all of which the Bank denied. Following a mistrial in November 2012 where the jury failed to reach a verdict, a second trial in January 2013 resulted in a verdict against the Bank in the amount of $597,500. The Bank is in the process of appealing this verdict and believes it has meritorious defenses against the verdict. The entire judgment amount was recorded as a contingent liability as of December 31, 2012 and 2013; therefore management does not expect that there will be any material adverse effects on the Company’s future consolidated financial position, results of operations or cash flows related to this litigation.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
The Company’s common stock is listed on the OTC Markets Group’s (OTCQB) tier under the symbol “GECR”. The market for the Company’s common stock must be characterized as a limited market due to its relatively low trading volume and lack of analyst coverage. The following table sets forth for the periods indicated the quarterly high and low sales prices per share as reported by the OTCQB Marketplace. These quotations also reflect inter-dealer prices without retail mark-ups, mark-downs, or commissions and may not necessarily represent actual transactions. The share prices below reflect all stock splits.
High |
Low |
|||||||
Fiscal year ended December 31, 2013 |
||||||||
First Quarter |
$ | 14.25 | $ | 12.60 | ||||
Second Quarter |
$ | 15.99 | $ | 14.02 | ||||
Third Quarter |
$ | 16.00 | $ | 15.07 | ||||
Fourth Quarter |
$ | 15.25 | $ | 14.25 | ||||
Fiscal year ended December 31, 2012 |
||||||||
First Quarter |
$ | 9.25 | $ | 6.75 | ||||
Second Quarter |
$ | 9.45 | $ | 7.00 | ||||
Third Quarter |
$ | 10.75 | $ | 8.86 | ||||
Fourth Quarter |
$ | 12.98 | $ | 10.70 |
Holders of Common Stock
As of March 7, 2014 the number of holders of record of the Company’s common stock was approximately 520.
Dividends
Cash dividends totaling $623,000 and $432,000 were paid by the Company during the years ended December 31, 2013 and 2012, respectively. The Company paid a quarterly dividend of $0.04 per share in the first quarter of 2013 and $0.045 for the second, third and fourth quarters of 2013. Future dividends, if any, will be determined by the Board of Directors of the Company in light of circumstances existing from time to time, including the Company’s growth, financial condition and results of operations, the continued existence of the restrictions described below on the Bank’s ability to pay dividends and other factors that the Board of Directors of the Company considers relevant. In addition, the Board of Directors of the Company may determine, from time to time, that it is prudent to pay special nonrecurring cash dividends in addition to or in lieu of regular cash dividends. Such special dividends will depend upon the financial performance of the Company and will take into account its capital position. No special dividend is presently contemplated.
Because the Company’s principal operations are conducted through the Bank, the Company generates cash to pay dividends primarily through dividends paid to it by the Bank. Accordingly, any dividends paid by the Company will depend on the Bank’s earnings, capital requirements, financial condition and other factors. Under Georgia law, the Bank may pay dividends only when and if the Bank is not insolvent. In addition, dividends may not be declared or paid at any time when the Bank does not have combined paid-in capital and appropriated retained earnings equal to at least 20% of the Bank’s capital stock. Moreover, dividends may not be paid by the Bank without the prior approval of the Georgia Department of Banking and Finance (the “Georgia Banking Department”), if the dividends are in excess of specified amounts fixed by the Georgia Banking Department.
Equity Compensation Plan Information
The Company currently has three equity compensation plans: (i) the 1997 Stock Option Plan, which was approved by shareholders; (ii) the Amended and Restated 2004 Incentive Plan, which was approved by shareholders; and (iii) the Directors Equity Incentive Plan, which has not been approved by shareholders. The following table provides information as of December 31, 2013 regarding the Company’s then existing compensation plans and arrangements:
Plan category |
Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) |
Weighted-average exercise price of outstanding options, warrants and rights (b) |
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) |
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Equity compensation plans approved by security holders: |
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1997 Stock Option Plan |
29,751 | $ | 16.36 | - | ||||||||
2004 Incentive Plan |
152,491 | $ | 9.96 | 131,240 | ||||||||
Equity compensation plans not approved by security holders |
- | - | 156,363 | |||||||||
Total |
182,242 | $ | 11.00 | 287,603 |
Directors Equity Incentive Plan
The Directors Equity Incentive Plan provides that non-employee directors of the Company and the Bank may elect to purchase shares of the Company’s common stock in lieu of receiving cash for director fees earned in each calendar quarter. The purchase price for shares acquired under the plan is equal to 85% of the average closing market price of the Company’s common stock for the last ten trading days of each quarter as reported on the Over-the-Counter Bulletin Board. A non-employee director may join the plan at any time during the last seven days of each calendar quarter. The Directors Equity Incentive Plan also provides non-employee directors of the Company and the Bank annual retainer shares in the form of 1) base award shares, plus 2) bonus shares for service as Board chairman, plus 3) bonus shares for service on various committees. Non-employee advisory board members also qualify to receive annual award shares from the Directors Equity Incentive Plan provided they meet an agreed upon annual attendance requirement. During 2013, the Company issued 7,646 shares of stock as retainer stock, and 6,425 shares of stock in lieu of cash for directors’ fees.
Item 6. Selected Financial Data
Our selected consolidated financial data presented below as of and for the years ended December 31, 2009 through 2013 is derived from our audited consolidated financial statements. Our audited consolidated balance sheet as of December 31, 2013 and 2012 and results of operations for each of the years in the two year period ended December 31, 2013 are included elsewhere in this report. All years have been restated as necessary for stock dividends and stock splits.
At and for the Years Ended December 31, |
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(Dollars in thousands, except per share data) |
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2013 |
2012 |
2011 |
2010 |
2009 |
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Selected Balance Sheet Data: |
||||||||||||||||||||
Assets |
$ | 516,498 | $ | 506,175 | $ | 493,252 | $ | 495,311 | $ | 484,013 | ||||||||||
Investment securities |
158,439 | 132,760 | 100,283 | 79,431 | 47,289 | |||||||||||||||
Loans, held for investment |
274,747 | 265,831 | 285,614 | 316,809 | 336,849 | |||||||||||||||
Loans, held for sale (LHFS) |
31,298 | 48,432 | 45,227 | 46,570 | 58,135 | |||||||||||||||
Allowance for loan losses |
5,357 | 5,954 | 6,804 | 7,866 | 5,072 | |||||||||||||||
Deposits |
419,705 | 416,956 | 411,395 | 414,749 | 405,240 | |||||||||||||||
Repurchase agreements |
12,111 | 3,333 | 3,565 | 3,467 | 7,297 | |||||||||||||||
Long-term debt |
- | - | 25,000 | 25,000 | 25,000 | |||||||||||||||
Short-term debt |
22,200 | 25,028 | - | - | - | |||||||||||||||
Other liabilities |
5,593 | 4,533 | 2,847 | 7,119 | 3,203 | |||||||||||||||
Shareholders’ equity |
56,889 | 56,325 | 50,445 | 44,976 | 43,273 | |||||||||||||||
Selected Results of Operations Data: |
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Interest income |
18,332 | 20,569 | 22,323 | 24,409 | 24,604 | |||||||||||||||
Interest expense |
2,115 | 3,682 | 5,702 | 7,290 | 9,722 | |||||||||||||||
Net interest income |
16,217 | 16,887 | 16,621 | 17,119 | 14,882 | |||||||||||||||
Provision for loan losses |
(2,029 | ) | (605 | ) | 1,727 | 8,355 | 3,082 | |||||||||||||
Net interest income after provision for provision for loan losses |
18,246 | 17,492 | 14,894 | 8,764 | 11,800 | |||||||||||||||
Non-interest income |
12,904 | 14,653 | 11,170 | 13,246 | 14,157 | |||||||||||||||
Non-interest expense |
22,466 | 22,861 | 20,127 | 20,543 | 20,902 | |||||||||||||||
Income before taxes |
8,684 | 9,284 | 5,937 | 1,467 | 5,055 | |||||||||||||||
Income tax expense (benefit) |
2,480 | 2,663 | 1,838 | (66 | ) | 1,303 | ||||||||||||||
Net income |
$ | 6,204 | $ | 6,621 | $ | 4,099 | $ | 1,533 | $ | 3,752 | ||||||||||
Per Share Data |
||||||||||||||||||||
Net income – basic |
$ | 1.74 | $ | 1.84 | $ | 1.15 | $ | 0.44 | $ | 1.08 | ||||||||||
Net income – diluted |
$ | 1.73 | $ | 1.84 | $ | 1.15 | $ | 0.44 | $ | 1.07 | ||||||||||
Book value |
$ | 15.93 | $ | 15.96 | $ | 14.04 | $ | 12.72 | $ | 12.37 | ||||||||||
Dividends |
$ | 0.175 | $ | 0.120 | $ | 0.000 | $ | 0.000 | $ | 0.000 | ||||||||||
Weighted average number of shares outstanding: |
||||||||||||||||||||
Basic |
3,558,876 | 3,599,431 | 3,561,064 | 3,519,408 | 3,484,309 | |||||||||||||||
Diluted |
3,590,120 | 3,599,431 | 3,561,064 | 3,519,408 | 3,492,871 |
At and for the Years Ended December 31, |
||||||||||||||||||||
2013 |
2012 |
2011 |
2010 |
2009 |
||||||||||||||||
Performance Ratios: |
||||||||||||||||||||
Return on average assets |
1.26 | % | 1.34 | % | 0.82 | % | 0.32 | % | 0.79 | % | ||||||||||
Return on average equity |
10.68 | % | 12.16 | % | 8.45 | % | 3.41 | % | 8.93 | % | ||||||||||
Net interest margin (1) |
3.59 | % | 3.71 | % | 3.53 | % | 3.83 | % | 3.37 | % | ||||||||||
Efficiency ratio |
74.78 | % | 72.48 | % | 72.42 | % | 67.65 | % | 71.98 | % | ||||||||||
Loan (excl LHFS) to deposit ratio |
65.39 | % | 63.76 | % | 69.43 | % | 76.39 | % | 83.12 | % | ||||||||||
Asset Quality Ratios: |
||||||||||||||||||||
Nonperforming loans to total loans |
0.70 | % | 1.24 | % | 2.34 | % | 1.72 | % | 1.57 | % | ||||||||||
Nonperforming assets to total loans (excl LHFS + OREO) |
2.44 | % | 3.60 | % | 5.03 | % | 2.82 | % | 3.12 | % | ||||||||||
Allowance for loan losses to nonperforming loans |
278.38 | % | 152.86 | % | 87.98 | % | 125.71 | % | 81.94 | % | ||||||||||
Allowance for loan losses to total loans (excl LHFS) |
1.95 | % | 2.24 | % | 2.38 | % | 2.48 | % | 1.51 | % | ||||||||||
Capital Ratios: |
||||||||||||||||||||
Average equity to average assets |
11.77 | % | 11.04 | % | 9.66 | % | 9.36 | % | 8.81 | % | ||||||||||
Leverage ratio |
11.93 | % | 11.13 | % | 9.74 | % | 9.32 | % | 8.96 | % | ||||||||||
Tier 1 risk-based capital ratio |
15.99 | % | 15.34 | % | 12.11 | % | 11.75 | % | 10.50 | % | ||||||||||
Total risk-based capital ratio |
17.25 | % | 16.59 | % | 13.37 | % | 13.01 | % | 11.74 | % | ||||||||||
(1) Non-tax equivalent. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion provides information about the major components of the results of operations and financial condition, liquidity and capital resources of the Company and Bank and should be read in conjunction with the “Business” and “Financial Statements” sections included elsewhere in this report. Information given in response to Item 6 of this report, “Selected Financial Data,” is incorporated by reference in response to this Item 7.
Critical Accounting Policies
The accounting and reporting policies of the Company and Bank are in accordance with accounting principles generally accepted in the United States and conform to general practices within the banking industry. Application of these principles requires management to make estimates or judgments that affect the amounts reported in the financial statements and the accompanying notes. These estimates are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates or judgments. Certain policies inherently have a greater reliance on the use of estimates, and as such have a greater possibility of producing results that could be materially different than originally reported.
Estimates or judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or a valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record the valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available. When third-party information is not available, valuation adjustments are estimated in good faith by management primarily through the use of internal cash flow modeling techniques.
Management views critical accounting policies to be those that are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial statements.
Allowance for Loan Losses
The allowance for loan losses represents management’s estimate of probable credit losses inherent in the loan portfolio. Estimating the amount of the allowance for loan losses requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on non-impaired loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the consolidated balance sheet. Loan losses are charged off against the allowance, while recoveries of amounts previously charged off are credited to the allowance. A provision for loan losses is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors.
The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. These analyses involve a high degree of judgment in estimating the amount of loss associated with specific loans, including estimating the amount and timing of future cash flows and collateral values. The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. Management considers the actual loss history experience over the last four quarters, one year, two year, and three year periods by portfolio segment to determine the historical loss experience used in the general component. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries for the most recent three years; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations.
There are many factors affecting the allowance for loan losses; some are quantitative while others require qualitative judgment. Although management believes its process for determining the allowance adequately considers all possible factors that could potentially result in credit losses, the process includes subjective elements and may be susceptible to significant change. To the extent actual outcomes differ from management’s estimates, additional provisions for loan losses could be required that could adversely affect the Bank’s earnings or financial position in future periods.
Mortgage Banking Derivatives
Loan commitments, whose underlying mortgage loans at origination will be held for sale upon funding of the loan, are derivative instruments. Loan commitments are recognized on the consolidated balance sheet in other assets and other liabilities at fair value, with changes in their fair values recognized in other non-interest income. At the inception of a loan commitment, the Bank generally will simultaneously enter into a best efforts forward commitment to protect the Bank from losses on sales of the loans underlying the loan commitment by securing the ultimate sale price and delivery date of the loan.
Other Real Estate Owned
Assets acquired through or instead of loan foreclosure are initially recorded at fair value less estimated costs to sell when acquired, establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed. Costs related to the development and improvement of other real estate owned are capitalized.
Additional information on the Bank’s loan portfolio and allowance for loan losses can be found in the “Loan Portfolio” section of this Item 7. Note 1, Note 4, Note 7, and Note 19 to the consolidated financial statements also include additional information on the Bank’s accounting policies related to the allowance for loan losses and other real estate owned.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 19 to the consolidated financial statements. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates.
Consolidated Financial Information
Certain consolidated financial information for the Company and Bank as of and for the years ended December 31, 2013 and 2012 is presented below:
December 31, 2013 |
December 31, 2012 |
|||||||||||||||
Total Assets |
Net Income (Loss) |
Total Assets |
Net Income (Loss) |
|||||||||||||
(Dollars in thousands) |
||||||||||||||||
GECR consolidated |
$ | 516,498 | $ | 6,204 | $ | 506,175 | $ | 6,621 | ||||||||
The Bank |
$ | 516,135 | $ | 6,388 | $ | 505,919 | $ | 6,775 | ||||||||
The Company |
$ | (184 | ) | $ | (154 | ) |
The Holding Company on a stand alone basis incurred $288,635 and $229,140 in operational costs for the years ended December 31, 2013 and 2012, respectively. The operational costs were partially offset by income tax benefits of $104,615 and $74,990 for 2013 and 2012, respectively. In total, the net loss for the Holding Company alone was ($184,020) and ($154,150) for the years ended December 31, 2013 and 2012, respectively. The Holding Company alone received $160,000 and $1,500,000 in dividends from the Bank for the years ended December 31, 2013 and 2012, respectively. The Holding Company’s operational costs are primarily funded by proceeds from the exercise of stock options and the dividends received from the Bank.
Results of Operations – Comparison of 2013 and 2012
Balance Sheet
The Company’s total assets increased $10.3 million or 2.0%, to $516.5 million at December 31, 2013 from $506.2 million at December 31, 2012. Average total assets were $493.3 million in 2013 and $493.0 million in 2012, a slight increase of $300,000 or 0.1%. Loans held for sale decreased from $48.4 million at December 31, 2012 to $31.3 million at December 31, 2013, a decrease of $17.1 million or 35.4%. Substantially all loans held for sale originated by the Bank consist of well-secured single family residential mortgage loans which are originated with a sales commitment and are sold in the secondary market shortly after origination, thus reducing the Bank’s credit risk. All other loans, net of allowance, totaled $269.4 million at December 31, 2013 compared to $259.9 million at December 31, 2012, an increase of $9.5 million or 3.7%. Commercial and industrial loans decreased $1.7 million or 8.6%, from $19.8 million at December 31, 2012 to $18.1 million at December 31, 2013. Real estate – residential loans increased $300,000 or 0.5%, from $55.5 million at December 31, 2012 to $55.8 million at December 31, 2013, and real estate – construction, land and land development loans increased $4.6 million or 8.1%, from $55.9 million at December 31, 2012 to $60.5 million at December 31, 2013. Real estate – commercial loans increased $5.9 million or 4.5%, from $130.7 million at December 31, 2012 to $136.6 million at December 31, 2013. Consumer loans totaled $3.9 million at December 31, 2012 and 2013. The increases in most categories are primarily the result of improving loan demand.
While the Bank experienced an increase in loans and a decrease in loans held for sale, liquidity has continued to remain strong. Therefore, the Bank invested in securities available-for-sale during 2013. Securities available-for-sale increased $25.6 million or 19.3% to $158.4 million at December, 31, 2013 compared to $132.8 million at December 31, 2012. Cash and due from banks decreased $13.5 million or 44.4% to $16.8 million at December 31, 2013 from $30.3 million at December 31, 2012. At December 31, 2013 and 2012, interest bearing balances with correspondent banks totaled $7.2 million and $23.10 million, respectively.
During September 2013, the Bank purchased $5.0 million in additional bank-owned life insurance (BOLI). Please see Note 5 of the consolidated financial statements incorporated in this 10-K at Exhibit 99.1 for additional information.
The allowance for loan losses was $5.4 million at December 31, 2013 and $6.0 million at December 31, 2012. This represents a decrease of $0.6 million or 10.0%. The decrease in the allowance is based upon management’s rating and assessment of the loan portfolio and the credit risk inherent in the portfolio, and is impacted significantly by an increase in recoveries during 2013. The Bank’s ratio of allowance for loan losses to gross loans, excluding loans held for sale, was 1.95% at December 31, 2013, compared to 2.24% at December 31, 2012.
Other real estate owned decreased $1.0 million or 16.7% to $4.9 million at December 31, 2013 compared to $5.9 million at December 31, 2012. The decrease is primarily related to the liquidation of other real estate assets as well as a continued decrease in the acquisition of other properties.
Total deposit accounts at December 31, 2013 were $419.7 million, an increase of $2.7 million or 0.7%, from $417.0 million at December 31, 2012. Core deposits (DDA, NOW, money market and savings) increased $19.6 million or 7.9% in 2013 as compared to 2012. Non-interest bearing deposits increased by $5.8 million or 8.3%, from $70.9 million at December 31, 2012 to $76.7 million at December 31, 2013. NOW accounts increased by $2.2 million or 3.8% from $57.5 million at December 31, 2012 to $59.7 million at December 31, 2013. Savings accounts were $64.2 million at December 31, 2012 compared to $56.8 million at December 31, 2013, a decrease of $7.4 million or 11.6%. Money market accounts increased $19.1 million or 34.7%, from $55.0 million at December 31, 2012 to $74.1 million at December 31, 2013. Time deposits decreased $16.9 million or 10.0% in 2013 as compared to 2012. Classified in time deposits, brokered deposits totaled $13.4 million at December 31, 2013, a decrease of $2.0 million or 13%, compared to $15.4 million at December 31, 2012. The overall decline in brokered deposits is a direct result of the Bank’s increased reliance on core deposits. Total other borrowings by the Bank were $22.2 million at December 31, 2013, a decrease of $2.8 million or 11.2%, from the balance of $25.0 million at December 31, 2012. The Bank paid off $25.0 million in long-term advances during 2012 and subsequently borrowed $25.0 million from the Federal Home Loan Bank through its short-term line of credit product prior to December 31, 2012. The Bank has continued to utilize this daily rate credit product during 2013. Repurchase agreements increased from $3.3 million to $12.1 million from December 31, 2012 to December 31, 2013, respectively.
The Bank’s loan to deposit ratio was 72.9% at December 31, 2013 and 75.4% at December 31, 2012. Excluding mortgage loans held for sale, this ratio was 65.4% for 2013 and 63.7% for 2012.
Income Statement
Interest income was $18.3 million for 2013 compared to $20.6 million for 2012, a decrease of $2.3 million or 10.9%. This decrease was primarily the result of a continued decline in earning asset yields. While loan demand improved during 2013, the Bank experienced most of the increase in demand during the fourth quarter. As the loans held for sale decreased during 2013, the interest income for these loans also decreased. As a result of reduced loans held for sale, management continued to purchase investment securities. These securities produced a lower yield due to the low interest rate environment. Interest expense decreased $1.6 million or 42.6%, from $3.7 million in 2012 to $2.1 million in 2013. This decrease in interest expense was due to the lower cost of funds resulting from the continued downward repricing of deposits as well as the lower rate on borrowings. Cost of funds also declined due to significant increases in low-cost core deposits and significant decreases in time deposits. As noted above, there were notable changes in the deposit product balance mix which decreased cost of funds. Net interest income was $16.2 million for 2013 compared to $16.9 million for 2012, a decrease of $0.7 million or 4%. Net interest margin decreased to 3.59% for the year ended December 31, 2013 from 3.71% for 2012.
The Bank recorded a negative (credit) provision for loan losses of $0.6 million for the year ended December 31, 2012 compared to a negative (credit) provision for loan losses of $2.0 million for 2013, a decrease in expense of $1.4 million. The credit provision and decrease from 2012 is the result of management’s detailed review of the Bank’s loan portfolio, the decreased level of the Bank’s non-performing loans, net recoveries for the period and level of loan delinquencies. The allowance for loan losses to total loans, excluding loans held for sale, decreased to 1.95% at December 31, 2013 from 2.24% at December 31, 2012. Net recoveries were $1.4 million in 2013 compared to net charge offs of $245,000 in 2012. This change of $1.7 million resulted in annual charge-off to average loans excluding loans held for sale ratios of (-0.54%) and 0.09% for the years ended December 31, 2013 and 2012, respectively. Management considers the current allowance for loan losses to be appropriate based upon its detailed analysis of the potential risk in the portfolio; however, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional provisions will not be required.
Non-interest income for 2013 was $12.9 million compared to $14.7 million for 2012, a decrease of $1.8 million or 11.9%. This decrease in 2013 is due to the decrease in mortgage banking activities, partially offset by an increase in other income. Mortgage banking activities decreased to $8.2 million in 2013 from $11.4 million in 2012, a decrease of $3.2 million or 27.7%. The mortgage origination volume sold in 2013 was $379.7 million compared to $431.5 million in 2012, a decrease of $51.8 million or 12.0%. Other income increased from $1.9 million to $3.0 million from 2012 to 2013, primarily due to an $806,000 gain on BOLI, a $175,000 recovery of legal fees, and an increase in the gain on sale of real estate of $191,000.
Non-interest expense decreased from $22.9 million in 2012 to $22.5 million in 2013, a decrease of $400,000 or 1.7%. This decrease is due to several factors. Salaries and employee benefits increased $500,000 or 4.3% primarily due to an increase in the number of full-time employees from 2012 to 2013 and normal pay increases. Occupancy expense remained relatively flat, declining $100,000. Other real estate owned expenses decreased $600,000 due to decreased valuation adjustments. Other operating expenses decreased $200,000. In 2012, the Bank recorded a contingent liability of $600,000 due to a legal judgment against the Bank related to OREO. The Bank also recorded an FHLB prepayment penalty of $392,000 for the early payoff of two FHLB advances in 2012. During 2013, the Bank experienced increased loan related expenses of $395,000 and data processing expenses of $296,000. Therefore, other non-interest expense remained comparable from 2012 to 2013.
The Company recorded income tax expense of $2.5 million and $2.7 million for the years ended December 31, 2013 and 2012, respectively. The slight decrease in 2013 resulted from the decrease in net income before taxes. The effective tax rate was 28.6% and 28.8% for the years ended December 31, 2013 and 2012, respectively. The slight decrease in the effective tax rate was due to certain tax-exempt income items including the life insurance death benefit.
As a result of the above factors, net income decreased in 2013 by $400,000 from $6.6 million in 2012 to $6.2 million in 2013.
Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential
The following table presents the average balance sheet of the consolidated Company for the years ended December 31, 2013, 2012 and 2011. Also presented is the consolidated Company’s actual interest income and expense from each asset and liability, the average yield of each interest-earning asset and the average cost of each interest-bearing liability. This table includes all major categories of interest-earning assets and interest-bearing liabilities. Non-accruing loans have been included in the category “Loans, net of unearned income.”
CONSOLIDATED AVERAGE BALANCE SHEETS
(Dollars in thousands)
Year Ended December 31, |
||||||||||||||||||||||||||||||||||||
2013 |
2012 |
2011 |
||||||||||||||||||||||||||||||||||
Average Balance |
Interest Income/
Expense |
Average Yield /
Rate |
Average Balance |
Interest Income/
Expense |
Average Yield / Rate |
Average Balance |
Interest Income/
Expense |
Average Yield /
Rate |
||||||||||||||||||||||||||||
ASSETS |
||||||||||||||||||||||||||||||||||||
INTEREST-EARNING ASSETS |
||||||||||||||||||||||||||||||||||||
Loans, net of unearned income |
$ | 294,608 | $ | 15,277 | 5.19 | % | $ | 320,597 | $ | 18,019 | 5.62 | % | $ | 334,751 | $ | 19,624 | 5.86 | % | ||||||||||||||||||
Investment securities |
150,060 | 3,008 | 2.00 | % | 109,163 | 2,485 | 2.28 | % | 99,858 | 2,611 | 2.61 | % | ||||||||||||||||||||||||
Fed funds sold & cash in banks |
12,723 | 47 | 0.37 | % | 25,842 | 65 | 0.25 | % | 36,363 | 88 | 0.24 | % | ||||||||||||||||||||||||
Total interest-earning assets |
457,391 | 18,332 | 4.00 | % | 455,602 | 20,569 | 4.51 | % | 470,972 | 22,323 | 4.74 | % | ||||||||||||||||||||||||
NON-INTEREST-EARNING ASSETS |
||||||||||||||||||||||||||||||||||||
Cash and due from banks |
6,638 | 10,166 | 7,716 | |||||||||||||||||||||||||||||||||
Bank premises and fixed assets |
9,380 | 8,875 | 9,119 | |||||||||||||||||||||||||||||||||
Accrued interest receivable |
1,518 | 1,513 | 1,662 | |||||||||||||||||||||||||||||||||
Other assets |
23,911 | 23,522 | 20,520 | |||||||||||||||||||||||||||||||||
Allowance for loan losses |
(5,492 | ) | (6,697 | ) | (7,627 | ) | ||||||||||||||||||||||||||||||
Total assets |
$ | 493,346 | $ | 492,981 | $ | 502,362 | ||||||||||||||||||||||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||||||||||||||||||||||||||||||
INTEREST-BEARING DEPOSITS |
||||||||||||||||||||||||||||||||||||
NOW accounts |
$ | 56,472 | $ | 82 | 0.15 | % | $ | 50,604 | $ | 178 | 0.35 | % | $ | 40,958 | $ | 163 | 0.40 | % | ||||||||||||||||||
Savings accounts |
63,259 | 226 | 0.36 | % | 62,092 | 294 | 0.47 | % | 60,056 | 535 | 0.89 | % | ||||||||||||||||||||||||
Money market accounts |
69,423 | 243 | 0.35 | % | 54,281 | 249 | 0.46 | % | 45,311 | 333 | 0.73 | % | ||||||||||||||||||||||||
Time accounts |
160,769 | 1,537 | 0.96 | % | 183,331 | 2,282 | 1.24 | % | 224,842 | 3,648 | 1.62 | % | ||||||||||||||||||||||||
Total interest-bearing deposits |
349,923 | 2,088 | 0.60 | % | 350,308 | 3,003 | 0.86 | % | 371,167 | 4,679 | 1.26 | % | ||||||||||||||||||||||||
OTHER INTEREST-BEARING LIABILITIES |
||||||||||||||||||||||||||||||||||||
Borrowed funds |
8,147 | 27 | 0.33 | % | 22,904 | 679 | 2.96 | % | 29,561 | 1,023 | 3.46 | % | ||||||||||||||||||||||||
Total interest-bearing liabilities |
358,070 | 2,115 | 0.59 | % | 373,212 | 3,682 | 0.99 | % | 400,728 | 5,702 | 1.42 | % | ||||||||||||||||||||||||
NON-INTEREST-BEARING LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||||||||||||||||||||||||||||||
Demand deposits |
72,593 | 61,933 | 50,463 | |||||||||||||||||||||||||||||||||
Other liabilities |
4,606 | 3,400 | 2,647 | |||||||||||||||||||||||||||||||||
Shareholders’ equity |
58,077 | 54,436 | 48,524 | |||||||||||||||||||||||||||||||||
Total liabilities and shareholders’ equity |
$ | 493,346 | $ | 492,981 | $ | 502,362 | ||||||||||||||||||||||||||||||
Net interest income |
$ | 16,217 | $ | 16,887 | $ | 16,621 | ||||||||||||||||||||||||||||||
Interest rate spread |
3.42 | % | 3.52 | % | 3.32 | % | ||||||||||||||||||||||||||||||
Net interest margin |
3.59 | % | 3.71 | % | 3.53 | % | ||||||||||||||||||||||||||||||
Average loans (excl LHFS) to average deposits |
75.92 | % | 78.72 | % | 83.40 | % |
Rate/Volume Analysis of Net Interest Income
The following table sets forth information regarding changes in net interest income attributable to changes in average balances and changes in rates for the periods indicated. The effect of a change in average balance has been determined by applying the average rate in the earlier period to the change in average balance in the later period, as compared with the earlier period. The balance of the change in interest income or expense and net interest income has been attributed to a change in average rate. Non-accruing loans have been included in the category “Net loans and loans held for sale.”
Comparison of Years Ended December 31, 2013 and 2012 |
Comparison of Years Ended December 31, 2012 and 2011 |
|||||||||||||||||||||||
(Dollars in thousands) |
||||||||||||||||||||||||
Increase (Decrease) Due to |
||||||||||||||||||||||||
Balance |
Rate |
Total |
Balance |
Rate |
Total |
|||||||||||||||||||
Interest earned on: |
||||||||||||||||||||||||
Tax-exempt securities |
$ | 155 | $ | (58 | ) | $ | 97 | $ | 115 | $ | (79 | ) | $ | 36 | ||||||||||
Taxable securities |
773 | (347 | ) | 426 | 156 | (318 | ) | (162 | ) | |||||||||||||||
Federal funds sold and cash in banks |
(33 | ) | 15 | (18 | ) | (25 | ) | 2 | (23 | ) | ||||||||||||||
Net loans and loans held for sale |
(1,461 | ) | (1,281 | ) | (2,742 | ) | (830 | ) | (775 | ) | (1,605 | ) | ||||||||||||
Total interest income |
(566 | ) | (1,671 | ) | (2,237 | ) | (584 | ) | (1,170 | ) | (1,754 | ) | ||||||||||||
Interest paid on: |
||||||||||||||||||||||||
NOW deposits |
21 | (117 | ) | (96 | ) | 38 | (23 | ) | 15 | |||||||||||||||
Money market deposits |
69 | (75 | ) | (6 | ) | 66 | (150 | ) | (84 | ) | ||||||||||||||
Savings deposits |
6 | (74 | ) | (68 | ) | 18 | (259 | ) | (241 | ) | ||||||||||||||
Time deposits |
(281 | ) | (464 | ) | (745 | ) | (674 | ) | (692 | ) | (1,366 | ) | ||||||||||||
Borrowed funds |
(437 | ) | (215 | ) | (652 | ) | (230 | ) | (114 | ) | (344 | ) | ||||||||||||
Total interest expense |
(622 | ) | (945 | ) | (1,567 | ) | (782 | ) | (1,238 | ) | (2,020 | ) | ||||||||||||
Increase (decrease) in net interest income |
$ | 56 | $ | (726 | ) | $ | (670 | ) | $ | 198 | $ | 68 | $ | 266 |
Loan Portfolio
The Bank engages in a full complement of lending activities, including commercial, real estate and consumer loans. As of December 31, 2013, the Bank’s loan portfolio, excluding loans held for sale, consisted of 6.6% commercial and industrial loans, 22.0% real estate – construction, land and land development loans, 20.3% real estate – residential loans, 49.7% real estate – commercial loans, and 1.4% consumer loans.
Commercial and industrial lending is directed principally towards businesses whose demands for funds fall within the Bank’s legal lending limits and which are potential deposit customers of the Bank. This category of loans includes loans made to individual, partnership or corporate borrowers, for a variety of business purposes. These loans include short-term lines of credit, short- to medium-term plant and equipment loans, and loans for general working capital.
The Bank’s real estate – construction, land and land development loans consist of residential and commercial construction loans as well as land development loans. These loans are primarily construction and development loans to builders in the Augusta and Savannah, Georgia areas.
Real estate – residential loans include residential mortgage lending and are primarily single-family residential loans secured by the residential property. Home equity lines are also included in real estate – residential loans.
Real estate – commercial loans include commercial mortgage loans that are generally secured by office buildings, retail establishments and other types of real property, both owner occupied and non-owner occupied. A significant component of this type of lending is to owner occupied borrowers, including churches.
Consumer loans consist primarily of installment loans to individuals for personal, family or household purposes, including automobile loans to individuals and pre-approved lines of credit.
While risk of loss in the Bank’s loan portfolio is primarily tied to the credit quality of the various borrowers, risk of loss may also increase due to factors beyond the Bank’s control, such as local, regional and/or national economic downturns. General conditions in the real estate market may also impact the relative risk in the Bank’s real estate portfolio.
With respect to loans which exceed the Bank’s lending limits or established credit criteria, the Bank may originate such loans and sell them to another bank. The Bank may also purchase loans originated by other banks. Management of the Bank does not believe that its loan purchase participations will necessarily pose any greater risk of loss than loans which the Bank originates.
The following table presents the categories of loans contained in the Bank’s loan portfolio as of the end of the five most recent fiscal years and the total amount of all loans for such periods:
As of December 31, |
||||||||||||||||||||
2013 |
2012 |
2011 |
2010 |
2009 |
||||||||||||||||
(Dollars in thousands) |
||||||||||||||||||||
Commercial and industrial |
$ | 18,113 | $ | 19,816 | $ | 18,864 | $ | 20,298 | $ | 22,906 | ||||||||||
Real estate – construction, land and land development |
60,476 | 55,926 | 73,823 | 86,418 | 107,429 | |||||||||||||||
Real estate – residential |
55,792 | 55,495 | 56,563 | 61,194 | 66,050 | |||||||||||||||
Real estate – commercial |
136,632 | 130,729 | 131,725 | 142,351 | 133,140 | |||||||||||||||
Consumer |
3,931 | 3,921 | 4,715 | 6,606 | 7,468 | |||||||||||||||
Total loans receivable |
$ | 274,944 | $ | 265,887 | $ | 285,690 | $ | 316,867 | $ | 336,993 | ||||||||||
Less: |
||||||||||||||||||||
Unearned income and deferred loan fees |
(197 | ) | (56 | ) | (76 | ) | (58 | ) | (144 | ) | ||||||||||
Allowance for possible loan losses |
(5,357 | ) | (5,954 | ) | (6,804 | ) | (7,866 | ) | (5,072 | ) | ||||||||||
Total (net of allowance) |
$ | 269,390 | $ | 259,877 | $ | 278,810 | $ | 308,943 | $ | 331,777 |
In addition to the above, the Bank also had $31.3 million and $48.4 million of single family residential mortgage loans held for sale at December 31, 2013 and 2012, respectively, that were originated by the Bank’s Mortgage Division.
The table below presents an analysis of maturities of loans by loan type as of December 31, 2013:
Due in 1 Year or Less |
Due in 1 to 5 Years |
Due After 5 Years |
Total |
|||||||||||||
(Dollars in thousands) |
||||||||||||||||
Commercial and industrial |
$ | 9,264 | $ | 8,079 | $ | 770 | $ | 18,113 | ||||||||
Real estate – construction, land and land development |
39,573 | 15,654 | 5,249 | 60,476 | ||||||||||||
Real estate – residential |
20,555 | 19,653 | 15,584 | 55,792 | ||||||||||||
Real estate – commercial |
25,982 | 42,627 | 68,023 | 136,632 | ||||||||||||
Consumer |
941 | 2,932 | 58 | 3,931 | ||||||||||||
Total loans receivable |
$ | 96,315 | $ | 88,945 | $ | 89,684 | $ | 274,944 |
The following is a presentation of an analysis of sensitivities of loans to changes in interest rates as of December 31, 2013 (in thousands):
Loans due after one year with predetermined interest rates |
$ | 32,250 | ||
Loans due after one year with floating interest rates |
146,379 | |||
Total loans due after one year |
$ | 178,629 |
The following table presents information regarding non-accrual and past due loans at the dates indicated:
As of December 31, |
||||||||||||||||||||
2013 |
2012 |
2011 |
2010 |
2009 |
||||||||||||||||
(Dollars in thousands) |
||||||||||||||||||||
Loans accounted for on a non-accrual basis |
||||||||||||||||||||
Number |
23 | 35 | 48 | 50 | 63 | |||||||||||||||
Amount |
$ | 1,924 | $ | 3,896 | $ | 7,734 | $ | 6,257 | $ | 6,190 | ||||||||||
Accruing loans which are contractually past due 90 days or more as to principal and interest payments |
||||||||||||||||||||
Number |
- | - | - | - | - | |||||||||||||||
Amount |
$ | - | $ | - | $ | - | $ | - | $ | - |
Accrual of interest is discontinued when a loan becomes 90 days past due as to principal and interest or when, in management’s judgment, the interest will not be collectible in the normal course of business. Additional interest income of approximately $63,700 in 2013 would have been recorded if all loans accounted for on a non-accrual basis had been current in accordance with their original terms. No interest income has been recognized in 2013 or 2012 on loans that have been accounted for on a non-accrual basis.
At December 31, 2013, there were no loans classified for regulatory purposes as doubtful, substandard or special mention that have not been disclosed above which (i) represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity or capital resources, or (ii) represent material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms.
Troubled Debt Restructurings
As of December 31, 2013, the Bank had classified 25 loans totaling $7.3 million as “troubled debt restructurings” as defined in ASC 310-40. As of December 31, 2012, the Bank had classified 23 loans totaling $6.7 million as troubled debt restructurings. Included in the troubled debt restructurings was $473,000 and $1.6 million of loans also on non-accrual as of December 31, 2013 and December 31, 2012, respectively.
The following table presents loans classified as “troubled debt restructurings” as defined in ASC 310-40:
As of December 31, |
||||||||||||||||||||
2013 |
2012 |
2011 |
2010 |
2009 |
||||||||||||||||
(in thousands) |
||||||||||||||||||||
Troubled debt restructurings |
$ | 7,329 | $ | 6,734 | $ | 9,770 | $ | 9,250 | $ | 4,188 |
The Bank has utilized different types of concessions related to troubled debt restructurings. The Bank may perform “A note/B note” workout structures as a subset of the Bank’s troubled debt restructuring strategy. Under an A note/B note workout structure, the new A note is underwritten in accordance with customary troubled debt restructuring underwriting standards and is reasonably assured of full repayment while the B note is not. The B note is immediately charged off upon restructuring.
In the case above, if the loan was accruing prior to the troubled debt restructuring (documented with the loan legally bifurcated into an A note fully supporting accrual status and a B note fully contractually forgiven and charged off), the A note may remain on accrual status. If the loan was on nonaccrual prior to the troubled debt restructuring (documented with the loan legally bifurcated into an A note fully supporting accrual status and a B note contractually forgiven and fully charged off), the A note may be returned to accrual status, and risk rated accordingly, after a reasonable period of performance under the troubled debt restructuring terms. Six months of payment performance is generally required to return these loans to accrual status.
The A note will continue to be classified as a troubled debt restructuring and only may be removed from impaired status in years after the restructuring if (a) the restructuring agreement specifies an interest rate equal to or greater than the rate that the Bank was willing to accept at the time of the restructuring for a new loan with comparable risk, and (b) the loan is not impaired based on the terms specified by the restructuring agreement.
The Bank restructured one loan during 2011 using this A note/B note structure. As of December 31, 2013 and 2012 the outstanding balance of this loan was $635,000 and $690,000 , respectively. The Bank had no loans using this structure prior to 2011.
Summary of Loan Loss Experience
The following presents an analysis of the Bank’s loss experience for the periods indicated.
Years Ended December 31, |
||||||||||||||||||||
2013 |
2012 |
2011 |
2010 |
2009 |
||||||||||||||||
(Dollars in thousands) |
||||||||||||||||||||
Allowance for loan losses, beginning of year |
$ | 5,954 | $ | 6,804 | $ | 7,866 | $ | 5,072 | $ | 4,284 | ||||||||||
Charge‑offs: |
||||||||||||||||||||
Commercial and industrial |
12 | 98 | 40 | 139 | 208 | |||||||||||||||
Real estate – construction, land and land development |
- | 692 | 2,134 | 3,663 | 1,382 | |||||||||||||||
Real estate – residential |
96 | 242 | 570 | 980 | 553 | |||||||||||||||
Real estate – commercial |
105 | 179 | 319 | 850 | - | |||||||||||||||
Consumer |
93 | 108 | 105 | 147 | 199 | |||||||||||||||
306 | 1,319 | 3,168 | 5,779 | 2,342 | ||||||||||||||||
Recoveries: |
||||||||||||||||||||
Commercial and industrial |
6 | 225 | 62 | 63 | 14 | |||||||||||||||
Real estate – construction, land and land development |
1,467 | 734 | 20 | 16 | - | |||||||||||||||
Real estate – residential |
37 | 43 | 147 | 13 | 4 | |||||||||||||||
Real estate – commercial |
190 | 14 | 99 | 22 | 1 | |||||||||||||||
Consumer |
38 | 58 | 51 | 104 | 29 | |||||||||||||||
1,738 | 1,074 | 379 | 218 | 48 | ||||||||||||||||
Net charge-offs (recoveries) |
(1,432 | ) | 245 | 2,789 | 5,561 | 2,294 | ||||||||||||||
Provision charged to operations |
(2,029 | ) | (605 | ) | 1,727 | 8,355 | 3,082 | |||||||||||||
Allowance for loan losses, end of year |
$ | 5,357 | $ | 5,954 | $ | 6,804 | $ | 7,866 | $ | 5,072 | ||||||||||
Ratio of net charge-offs (recoveries) during the period to average loans outstanding during the period |
-0.54 | % | 0.09 | % | 0.90 | % | 1.69 | % | 0.67 | % |
Allowance for Loan Losses
In the normal course of business, the Bank has recognized and will continue to recognize losses resulting from the inability of certain borrowers to repay loans and the insufficient realizable value of collateral securing such loans.
Accordingly, management has established an allowance for loan losses, totaling $5.4 million at December 31, 2013, which is allocated according to the following table, along with the percentage of loans in each category to total loans:
December 31, 2013 |
December 31, 2012 |
December 31, 2011 |
December 31, 2010 |
December 31, 2009 |
||||||||||||||||||||||||||||||||||||
Allowance Amount |
Portfolio as % of Loans |
Allowance Amount |
Portfolio as % of Loans |
Allowance Amount |
Portfolio as % of Loans |
Allowance Amount |
Portfolio as % of Loans |
Allowance Amount |
Portfolio as % of Loans |
|||||||||||||||||||||||||||||||
(Dollars in thousands) |
||||||||||||||||||||||||||||||||||||||||
Commercial and industrial |
$ | 227 | 6.6 | % | $ | 225 | 7.4 | % | $ | 185 | 6.6 | % | $ | 227 | 6.4 | % | $ | 259 | 6.8 | % | ||||||||||||||||||||
Real estate – construction, land and land development |
1,626 | 22.0 | % | 2,870 | 21.0 | % | 3,219 | 25.8 | % | 3,908 | 27.3 | % | 2,364 | 31.9 | % | |||||||||||||||||||||||||
Real estate – residential |
772 | 20.3 | % | 794 | 20.9 | % | 1,141 | 19.8 | % | 1,070 | 19.3 | % | 827 | 19.6 | % | |||||||||||||||||||||||||
Real estate – commercial |
2,458 | 49.7 | % | 1,872 | 49.2 | % | 1,706 | 46.1 | % | 1,617 | 44.9 | % | 1,319 | 39.5 | % | |||||||||||||||||||||||||
Consumer |
210 | 1.4 | % | 77 | 1.5 | % | 108 | 1.7 | % | 251 | 2.1 | % | 176 | 2.2 | % | |||||||||||||||||||||||||
Unallocated |
64 | -- | 116 | -- | 445 | -- | 793 | -- | 127 | -- | ||||||||||||||||||||||||||||||
Total |
$ | 5,357 | $ | 5,954 | $ | 6,804 | $ | 7,866 | $ | 5,072 |
In evaluating the Bank’s allowance for loan losses, management takes into consideration concentrations within the loan portfolio, past loan loss experience, growth of the portfolio, current economic conditions and the appraised value of collateral securing loans. Although management believes the allowance for loan losses is adequate, management’s evaluation of losses is a continuing process which may necessitate adjustments to the allowance in future periods.
Commercial and industrial loans represented approximately 6.6% of outstanding loans at December 31, 2013. The Bank generally originates commercial loans on a secured basis. Management believes that the secured status of a substantial portion of the commercial loan portfolio reduces the risk of loss inherently present in commercial loans.
Real estate – construction, land and land development loans represented approximately 22.0% of the Bank’s outstanding loans at December 31, 2013. This category of the loan portfolio consists of commercial and residential construction and development loans located in the Bank’s market areas. Management closely monitors the performance of these loans and periodically inspects properties and development progress. Management considers these factors in estimating and evaluating the allowance for loan losses.
Real estate – residential loans constituted approximately 20.3% of outstanding loans at December 31, 2013. Residential mortgages are generally secured by the underlying residence. Management currently believes that these loans are adequately secured.
Real estate – commercial loans were approximately 49.7% of outstanding loans at December 31, 2013. Management believes the risk of loss for commercial real estate loans is generally higher than residential loans. Management continuously monitors the performance of the commercial real estate portfolio and collateral values.
Consumer loans represented approximately 1.4% of outstanding loans at December 31, 2013 and are also well secured. The majority of the Bank’s consumer loans are secured by collateral primarily consisting of automobiles, boats and other personal property. Management believes that these loans inherently possess less risk than other categories of loans.
Loans held for sale consist of single family residential mortgage loans originated by the Bank’s Mortgage Division. These loans are originated with an investor purchase commitment and are sold shortly after origination by the Bank.
The Bank’s management and Board of Directors monitor the loan portfolio monthly to evaluate the adequacy of the allowance for loan losses. Ratings on classified loans are also reviewed and performance is evaluated in determining the allowance. The provision for loan losses charged to operations is based on this analysis. In addition, management and the Board consider such factors as delinquent loans, collateral values and economic conditions in their evaluation of the adequacy of the allowance for loan losses.
Losses on Mortgage Loans Previously Sold
Losses on mortgage loans previously sold are recorded when the Bank indemnifies investors or repurchases mortgage loans previously sold. The representations and warranties in our loan sale agreements require that we repurchase or indemnify the investors for losses or costs on loans we sell under certain limited conditions. Some of these conditions include underwriting errors or omissions, fraud or material misstatements by the borrower in the loan application or invalid market value on the collateral property due to deficiencies in the appraisal. In addition, our loan sale contracts define a condition in which the borrower defaults during a short period of time, typically 120 days to one year, as an Early Payment Default (“EPD”). In the event of an EPD, we are required to return the premium paid by the investor for the loan as well as certain administrative fees, and in some cases repurchase the loan or indemnify the investor, unless an EPD waiver is obtained. The Bank obtains EPD waivers from as many investors as possible. The Bank incurred losses of $196,000 and $167,000 for indemnification and repurchase obligations for the years ended December 31, 2013 and 2012, respectively.
The following table presents the recourse liability activity for the years ended December 31, 2013 and 2012:
Recourse Liability for Mortgage Loans Sold Activity
(Dollars in thousands)
December 31, 2013 |
December 31, 2012 |
|||||||
Beginning balance |
$ | 772 | $ | 245 | ||||
Provision |
499 | 499 | ||||||
Losses |
(196 | ) | (167 | ) | ||||
Recoveries |
15 | 195 | ||||||
Ending balance |
$ | 1,090 | $ | 772 |
Cash and Due from Banks
Cash on hand, cash items in the process of collection, and amounts due from correspondent banks and the Federal Reserve Bank are included in “Cash and Due from Banks.” As of December 31, 2013 and 2012, cash and due from banks totaled $16.8 million and $30.3 million, respectively. Interest-bearing cash on deposit with correspondent banks totaled $1.4 million as of December 31, 2013 compared to $4.8 million as of December 31, 2012. Interest-bearing cash on deposit in the Federal Reserve Bank excess balance fund was $1.3 million as of December 31, 2013 compared to $14.5 million as of December 31, 2012. Other cash funds required to be on reserve with the Federal Reserve Bank totaled $4.5 million and $3.8 million as of December 31, 2013 and 2012, respectively.
Investments
As of December 31, 2013, investment securities comprised approximately 30.7% of the Bank’s assets. The Bank invests primarily in obligations or agencies of the United States, mortgage-backed securities and obligations, certain obligations of states and municipalities, corporate securities, Federal Home Loan Bank stock, and bank-owned life insurance. The Bank also enters into federal funds transactions with its principal correspondent banks. The Bank may act as a net seller or net purchaser of such funds.
The following table presents, for the dates indicated, the estimated fair market value of the Bank’s investment securities available for sale. The Bank has classified all of its investment securities as available for sale:
As of December 31, |
||||||||||||
2013 |
2012 |
2011 |
||||||||||
(Dollars in thousands) |
||||||||||||
U.S government and agencies |
$ | 58,281 | $ | 55,565 | $ | 31,069 | ||||||
Mortgage-backed securities |
64,732 | 51,295 | 54,351 | |||||||||
State and municipal |
30,751 | 22,788 | 14,863 | |||||||||
Corporate bonds |
4,675 | 3,112 | - | |||||||||
Total investment securities available for sale |
158,439 | 132,760 | 100,283 | |||||||||
Federal Home Loan Bank stock at cost |
1,606 | 1,865 | 2,070 | |||||||||
Total investment securities and FHLB stock |
$ | 160,045 | $ | 134,625 | $ | 102,353 |
The following tables present the contractual maturities and weighted average yields of the Bank’s investment securities as of December 31, 2013:
Maturities of Investment Securities |
||||||||||||||||
One Year or Less |
One To Five Years |
Five To Ten Years |
Over TenYears |
|||||||||||||
(Dollars in thousands) |
||||||||||||||||
U.S government and agencies |
$ | 13,178 | $ | 10,749 | $ | 18,082 | $ | 16,272 | ||||||||
Mortgage-backed securities |
- | 36,212 | 24,722 | 3,798 | ||||||||||||
State and municipal |
- | 10,016 | 16,170 | 4,565 | ||||||||||||
Corporate bonds |
- | 2,155 | 2,520 | - | ||||||||||||
Total |
$ | 13,178 | $ | 59,132 | $ | 61,494 | $ | 24,635 |
Weighted Average Yields |
||||||||||||||||
Less Than One Year |
One To Five Years |
Five To Ten Years |
Over Ten Years |
|||||||||||||
U.S government and agencies |
2.09 | % | 1.20 | % | 1.63 | % | 1.85 | % | ||||||||
Mortgage-backed securities |
- | 2.49 | % | 1.60 | % | 2.67 | % | |||||||||
State and municipal |
- | 4.22 | % | 3.77 | % | 4.14 | % | |||||||||
Corporate bonds |
- | 2.55 | % | 3.04 | % | - | ||||||||||
Total |
2.09 | % | 2.55 | % | 2.24 | % | 2.40 | % |
The weighted average yields on tax-exempt obligations presented in the table above have been computed on a tax-equivalent basis.
Increased liquidity has resulted in significant increases in investment securities, resulting in greater occurrence of issuer concentrations. The table below reflects investments with issuers having a book value which exceeds 10% of the Company’s shareholders’ equity as of December 31, 2013 and 2012:
2013 |
2012 |
|||||||||||||||
Book Value |
Market Value |
Book Value |
Market Value |
|||||||||||||
(Dollars in thousands) |
||||||||||||||||
Freddie Mac |
||||||||||||||||
U.S. agency securities |
$ | 3,000 | $ | 2,672 | $ | 3,000 | $ | 3,006 | ||||||||
Mortgage-backed securities |
13,214 | 12,937 | 7,517 | 7,693 | ||||||||||||
Ginnie Mae |
||||||||||||||||
Mortgage-backed securities |
23,760 | 23,393 | 19,020 | 19,439 | ||||||||||||
Fannie Mae |
||||||||||||||||
U.S. agency securities |
7,744 | 6,731 | 9,243 | 9,217 | ||||||||||||
Mortgage-backed securities |
29,122 | 28,402 | 23,468 | 24,164 | ||||||||||||
Small Business Association |
||||||||||||||||
U.S. agency securities |
35,841 | 35,574 | 30,261 | 30,482 | ||||||||||||
Federal Home Loan Bank |
||||||||||||||||
U.S. agency securities |
11,900 | 10,645 | 12,900 | 12,861 | ||||||||||||
Total |
$ | 124,581 | $ | 120,354 | $ | 105,409 | $ | 106,862 |
In September 2007, $8.0 million in bank-owned life insurance policy (BOLI) was acquired through two policies in order to insure certain key officers of the Bank. In September 2013, an additional $5.0 million BOLI policy was acquired in order to insure certain key officers of the Bank. These policies are recorded at cash surrender value, net of surrender charges and/or early termination charges. As of December 31, 2013, the BOLI cash surrender value was $14.8 million, resulting in other income for 2013 of $448,000 and an annualized net yield of 4.06%.
Deposits
The Bank offers a wide range of commercial and consumer interest bearing and non-interest bearing deposit accounts, including checking accounts, savings accounts, money market accounts, negotiable order of withdrawal (“NOW”) accounts, individual retirement accounts, and certificates of deposit. The sources of deposits are residents, businesses and employees of businesses within the Bank’s market area, obtained through the personal solicitation of the Bank’s officers and directors, direct mail solicitation and advertisements published in the local media. Although de-emphasized in 2012 and 2013, the Bank has also utilized the brokered certificate of deposit market and the CDARS program for funding needs for loan origination and liquidity. These brokered and CDARS deposits are included in time deposits on the balance sheet. The Bank pays competitive interest rates on time and savings deposits. In addition, the Bank has implemented a service charge fee schedule competitive with other financial institutions in the Bank’s market area, covering such matters as maintenance fees on checking accounts, per item processing fees on checking accounts, returned check charges and similar items.
The following table details, for the indicated periods, the average amount of and average rate paid on each of the following deposit categories:
December 31, |
||||||||||||||||||||||||
2013 |
2012 |
2011 |
||||||||||||||||||||||
Deposit Categories |
Average Amount |
Average Rate Paid |
Average Amount |
Average Rate Paid |
Average Amount |
Average Rate Paid |
||||||||||||||||||
(Dollars in thousands) |
||||||||||||||||||||||||
Non-interest bearing demand deposits |
$ | 72,593 | 0.00 | % | $ | 61,933 | 0.00 | % | $ | 50,463 | 0.00 | % | ||||||||||||
NOW and money market deposits |
125,895 | 0.26 | % | 104,885 | 0.41 | % | 86,269 | 0.57 | % | |||||||||||||||
Savings deposits |
63,259 | 0.36 | % | 62,092 | 0.47 | % | 60,056 | 0.89 | % | |||||||||||||||
Time deposits |
160,769 | 0.96 | % | 183,331 | 1.24 | % | 224,842 | 1.62 | % |
The maturities of certificates of deposit and individual retirement accounts of $100,000 or more as of December 31, 2013 were as follows:
December 31, 2013 |
||||
(Dollars in thousands) |
||||
Three months or less |
$ | 15,938 | ||
Over three months through six months |
27,384 | |||
Over six months through twelve months |
14,470 | |||
Over twelve months |
39,833 | |||
Total |
$ | 97,625 |
Borrowed Funds
The Bank’s borrowed funds consist of short-term borrowings and long-term debt, including federal funds purchased, retail repurchase agreements and lines of credit with the Federal Home Loan Bank and the Federal Reserve Bank. The average balance of borrowed funds was approximately $8.1 million, and $22.9 million for the years ended December 31, 2013 and 2012, respectively.
The most significant borrowed funds categories for the Bank are the lines of credit from the Federal Home Loan Bank, consisting of the “Loans Held For Sale” program (LHFS), a short-term 1-4 family and commercial real estate loans line of credit (1-4 LOC).
At December 31, 2013 and 2012, there was no outstanding balance on the LHFS line of credit. The LHFS line of credit was not used in 2013 or 2012. The interest rate on the LHFS line of credit is equal to the Federal Home Loan Bank’s Daily Rate Credit Program rate plus 50 basis points.
The outstanding balance on the short-term 1-4 LOC was $22.2 million at December 31, 2013, and $25.0 million at December 31, 2012 and 2011. The average balance outstanding on the 1-4 LOC was $3.5 million for 2013 with a weighted average interest rate of 0.36%. The average balance outstanding on the 1-4 LOC was $1.6 million for 2012 with a weighted average interest rate of 0.40%. The average balance outstanding on the 1-4 LOC was $14,000 for 2011 with a weighted average interest rate of 0.36%. The maximum amount outstanding on the 1-4 LOC at any month end during 2013 was $22.2 million, compared to $25.0 million in 2012, and $5.0 million in 2011. This 1-4 LOC is secured by the Bank’s portfolio of 1-4 family first mortgage loans, excluding those loans that are held for sale, and commercial real estate loans. The interest rate on the 1-4 LOC is equal to the Federal Home Loan Bank’s Daily Rate Credit Program rate.
During 2007, a long-term convertible advance was established as an additional line of credit. At December 31, 2011, the outstanding balance on this advance was $10.0 million with a weighted average interest rate of 3.83%. This advance was paid off in September 2012. An additional, but similar, long-term convertible advance was also established during 2008. At December 31, 2011, the outstanding balance on this advance was $15.0 million with a weighted average interest rate of 3.33%. This advance was also paid off in September 2012.
Return on Equity and Assets
The following table presents certain profitability, return and capital ratios for the Company as of the end of the past three fiscal years.
December 31, |
||||||||||||
2013 |
2012 |
2011 |
||||||||||
Return on Average Assets |
1.26 | % | 1.34 | % | 0.82 | % | ||||||
Return on Average Equity |
10.68 | % | 12.16 | % | 8.45 | % | ||||||
Dividend Payout Ratio |
10.04 | % | 6.52 | % | 0.00 | % | ||||||
Equity to Assets Ratio |
11.01 | % | 11.13 | % | 10.23 | % |
Liquidity and Interest Rate Sensitivity
Deposit levels and the associated timing and quantity of funds flowing into and out of a bank inherently involve a degree of uncertainty. In order to ensure that it is capable of meeting depositors’ demands for funds, the Bank must maintain adequate liquidity. Liquid assets, consisting primarily of cash and deposits due from other banks, federal funds sold, funds held in a Federal Reserve Bank excess balance account, and investment securities maturing within one year, provide the source of such funds. Insufficient liquidity may force a bank to engage in emergency measures to secure necessary funding, which could be costly and negatively affect earnings. The Bank monitors its liquidity on a monthly basis and seeks to maintain it at an optimal level.
As of December 31, 2013, the Bank’s liquidity ratio was 38.4% as compared to 42.4% at December 31, 2012. In addition to the liquid assets described above, the Bank has a reserve funding source in the form of federal funds lines of credit with First National Bankers Bank and SunTrust Bank. Management is not aware of any demands, commitments or uncertainties which could materially affect the Bank’s liquidity position. However, should an unforeseen demand for funds arise, the Bank held readily marketable investment securities at December 31, 2013 with a total market value of $158.4 million in its available-for-sale portfolio which would provide an additional source of liquidity.
Gap management is a conservative asset/liability strategy designed to maximize earnings over a complete interest rate cycle while reducing or minimizing the Bank’s exposure to interest rate risk. Various assets and liabilities are termed “rate sensitive” when the interest rate can be replaced. By definition, the “gap” is the difference between rate sensitive assets and rate sensitive liabilities in a given time horizon. At December 31, 2013, the Bank was liability sensitive in the 0-3 month and 3-12 month time frames, but asset sensitive in the 1-5 years and 5 years or more time frames.
The following is an analysis of rate sensitive assets and liabilities as of December 31, 2013 (in thousands):
0-3 months |
3-12 months |
1-5 years |
More than 5 years |
Total |
||||||||||||||||
(Dollars in thousands) |
||||||||||||||||||||
Taxable securities |
$ | 10,348 | $ | 2,830 | $ | 53,411 | $ | 72,088 | $ | 138,677 | ||||||||||
Tax-exempt securities |
- | - | 5,721 | 14,041 | 19,762 | |||||||||||||||
Federal funds sold and cash in banks |
7,215 | - | - | - | 7,215 | |||||||||||||||
Loans |
64,124 | 66,076 | 89,472 | 86,570 | 306,242 | |||||||||||||||
Total rate sensitive assets |
81,687 | 68,906 | 148,604 | 172,699 | 471,896 | |||||||||||||||
NOW and money market deposits |
133,717 | - | - | - | 133,717 | |||||||||||||||
Savings deposits |
56,757 | - | - | - | 56,757 | |||||||||||||||
Time deposits |
27,090 | 64,559 | 59,746 | 1,089 | 152,484 | |||||||||||||||
Total rate sensitive deposits |
217,564 | 64,559 | 59,746 | 1,089 | 342,958 | |||||||||||||||
Borrowed funds |
12,111 | 22,200 | - | - | 34,311 | |||||||||||||||
Total rate sensitive liabilities |
229,675 | 86,759 | 59,746 | 1,089 | 377,269 | |||||||||||||||
Excess of rate sensitive assets less rate |
||||||||||||||||||||
sensitive liabilities |
$ | (147,988 | ) | $ | (17,853 | ) | $ | 88,858 | $ | 171,610 | $ | 94,627 | ||||||||
Cumulative gap |
$ | (147,988 | ) | $ | (165,841 | ) | $ | (76,983 | ) | $ | 94,627 |
Capital Resources
The equity capital of the Bank totaled $56.1 million at December 31, 2013, an increase of $700,000, or 1.3%, from equity capital of $55.4 million at December 31, 2012. The increase in equity capital was attributable to the Bank’s net income of $6.4 million, partially offset by dividends paid to the Company of $160,000 and a decrease of $5.5 million in the Bank’s after-tax unrealized gain/(loss) on available-for-sale securities, which is recognized in the available-for-sale portion of the bond portfolio by making adjustments to the equity capital account. The consolidated equity capital of the Company totaled $56.9 million at December 31, 2013 compared to $56.3 million at December 31, 2012.
The following table sets forth the applicable actual and required capital ratios for the Company and the Bank as of December 31, 2013:
Bank |
December 31, 2013 |
Minimum Regulatory Requirement | ||||||
Total risk-based capital ratio |
17.25 | % | 8.00 | % | ||||
Tier 1 Capital ratio |
15.99 | % | 4.00 | % | ||||
Leverage ratio |
11.93 | % | 4.00 | % | ||||
Company |
||||||||
Total risk-based capital ratio |
17.44 | % | 8.00 | % | ||||
Tier 1 Capital ratio |
16.19 | % | 4.00 | % | ||||
Leverage ratio |
12.08 | % | 4.00 | % |
The above ratios indicate that the capital position of the Company and the Bank are sound and that the Company is well positioned for future growth.
There are no commitments of capital resources known to management which would have a material impact on the Bank’s capital position.
Fair Value Measurements
Fair value measurements for assets and liabilities where there exists limited or no observable market data and therefore measurements are based primarily upon estimates, are often calculated based on the economic and competitive environment, the characteristics of the asset or liability, and other factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values. Additional information regarding the Company’s fair value measurements for assets and liabilities can be found in Note 19 to the consolidated financial statements.
Market Risk
Market risk is the risk arising from adverse changes in the fair value of financial instruments due to a change in interest rates, exchange rates and equity prices. Our primary market risk is interest rate risk.
The primary objective of asset/liability management is to manage interest rate risk and achieve reasonable stability in net interest income throughout interest rate cycles. This is achieved by maintaining the proper balance of rate sensitive earning assets and rate sensitive liabilities. The ratio that compares rate sensitive earning assets to rate sensitive liabilities is the principal factor in projecting the effect that fluctuating interest rates will have on future net interest income. Rate sensitive earning assets and interest-bearing liabilities are those that can be re-priced to current market rates within a relatively short time period. Management monitors the rate sensitivity of earning assets and interest-bearing liabilities over the entire life of these instruments in order to manage this risk.
We have not experienced a high level of volatility in net interest income primarily because of the relatively large base of core deposits that do not re-price on a contractual basis. These deposit products include regular savings, interest-bearing transaction accounts and money market savings accounts. Balances for these accounts are reported based on historical re-pricing. However, the rates paid are typically not directly related to market interest rates, since management has some discretion in adjusting these rates as market rates change.
Off-Balance Sheet Arrangements
In the ordinary course of business, the Bank may enter into off-balance sheet financial instruments which are not reflected in the financial statements. These instruments include commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when funds are disbursed or the instruments become payable.
Following is an analysis of significant off-balance sheet financial instruments:
December 31, |
||||||||
2013 |
2012 |
|||||||
(Dollars in thousands) |
||||||||
Commitments to extend credit |
$ | 74,144 | $ | 48,976 | ||||
Standby letters of credit |
472 | 1,029 | ||||||
Total |
$ | 74,616 | $ | 50,005 |
Contractual Obligations
We have various contractual obligations that we must fund as part of our normal operations. The following table shows aggregate information about our contractual obligations, including interest, and the periods in which payments are due. The amounts and time periods are measured from December 31, 2013, based upon rates in effect at December 31, 2013.
Payments due by Period (Dollars in thousands) |
||||||||||||||||||||
Total |
Less than 1 year |
1-3 years |
3-5 years |
More than 5 years |
||||||||||||||||
Time Deposits |
$ | 152,484 | $ | 91,649 | $ | 42,999 | $ | 16,747 | $ | 1,089 | ||||||||||
Short-Term Debt |
22,200 | 22,200 | - | - | - | |||||||||||||||
Data Processing Obligations |
1,567 | 1,014 | 553 | - | ||||||||||||||||
Operating Lease Obligations |
498 | 239 | 259 | - | - | |||||||||||||||
Service Contract Obligations |
381 | 261 | 120 | - | - | |||||||||||||||
Total |
$ | 177,130 | $ | 115,363 | $ | 43,931 | $ | 16,747 | $ | 1,089 |
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Information in response to this Item 7A is incorporated by reference from the previous sections of Item 7 of this report entitled: “Liquidity and Interest Rate Sensitivity” and “Market Risk.”
Item 8. Financial Statements and Supplementary Data
The following financial statements are filed as Exhibit 99.1 to this Annual Report on Form 10-K and incorporated herein by reference:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition
as of December 31, 2013 and 2012
Consolidated Statements of Operations
for the years ended December 31, 2013 and 2012
Consolidated Statements of Comprehensive Income
for the years ended December 31, 2013 and 2012
Consolidated Statements of Shareholders’ Equity
for the years ended December 31, 2013 and 2012
Consolidated Statements of Cash Flows
for the years ended December 31, 2013 and 2012
Notes to Consolidated Financial Statements
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There has been no occurrence requiring a response to this item.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the Company’s disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the fiscal year covered by this report and have concluded that the Company’s disclosure controls and procedures are effective.
Management’s Annual Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. The Company’s management, including its Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework in “Internal Control—Integrated Framework established in 1992” and issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, the Company’s management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2013.
Pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report, this report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.
Changes in Internal Control over Financial Reporting
During the fourth quarter of 2013, there were no changes in the Company’s internal control over financial reporting that have materially affected, or that are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information
Not applicable.
PART III
Certain information required by Part III of this Form 10-K is incorporated by reference from the Company’s definitive proxy statement to be filed pursuant to Regulation 14A for the Company’s Annual Meeting of Shareholders to be held on May 19, 2014 (the “Proxy Statement”). The Company will, within 120 days of the end of its fiscal year, file the Proxy Statement with the Securities and Exchange Commission.
Item 10. Directors, Executive Officers and Corporate Governance
The information responsive to this item is incorporated by reference from the sections entitled “Election of Class II Directors,” “Corporate Governance and Board Matters,” “Executive Officers,” and Section 16(a) Beneficial Ownership Reporting Compliance” contained in the Proxy Statement.
Item 11. Executive Compensation
The information responsive to this item is incorporated by reference from the section entitled “Executive Compensation” contained in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information responsive to this item is incorporated by reference from the section entitled “Security Ownership of Certain Beneficial Owners and Management” contained in the Proxy Statement. See also the section entitled “Equity Compensation Plan Information” in Item 5 of this Annual Report on Form 10-K.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information responsive to this item is incorporated by reference from the sections entitled “Corporate Governance and Board Matters” and “Transactions with Related Persons, Promoters and Certain Control Persons” contained in the Proxy Statement.
Item 14. Principal Accountant Fees and Services
The information responsive to this item is incorporated by reference from the section entitled “Ratification of Appointment of Independent Registered Public Accounting Firm – Principal Accountant Fees and Services” contained in the Proxy Statement.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)1. The following financial statements are filed as Exhibit 99.1 to this Report and incorporated herein by reference:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition as of December 31, 2013 and 2012
Consolidated Statements of Operations for the years ended December 31, 2013 and 2012
Consolidated Statements of Comprehensive Income for the years ended December 31, 2013 and 2012
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2013 and 2012
Consolidated Statements of Cash Flows for the years ended December 31, 2013 and 2012
Notes to Consolidated Financial Statements
(a)2. Financial Statement Schedules
Not Applicable
(a)3 & (b). The following exhibits are filed with this report:
Exhibit Number |
Description of Exhibit | |
3.1 |
- |
Articles of Incorporation of the Company (incorporated herein by reference to the exhibit contained in the Company’s Registration Statement on Form SB-2 under the Securities Act of 1933, as amended, Registration No. 333-69763, previously filed with the Commission). |
3.1.1 |
- |
Articles of Amendment to the Articles of Incorporation of the Company (incorporated herein by reference to the exhibit contained in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2000, previously filed with the Commission). |
3.2 |
- |
By-Laws of the Company (incorporated herein by reference to the exhibit contained in the Company’s Registration Statement on Form SB-2 under the Securities Act of 1933, as amended (Registration No. 333-69763)). |
10.1* |
- |
1997 Stock Option Plan (incorporated herein by reference to the exhibit contained in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2001, previously filed with the Commission). |
10.1.1* |
- |
Amendment to 1997 Stock Option Plan effective July 28, 2008 (incorporated herein by reference to the exhibit contained in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2010, previously filed with the Commission). |
| ||
10.1.2* |
- |
Amendment to 1997 Stock Option Plan effective July 26, 2010 (incorporated herein by reference to the exhibit 10.2 contained in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, previously filed with the Commission). |
10.1.3* |
Amendment to 1997 Stock Option Plan effective May 20, 2013 (incorporated herein by reference to the exhibit 10.1 contained in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, previously filed with the Commission). | |
10.2* |
- |
Amended and Restated 2004 Incentive Plan effective April 23, 2012 (incorporated herein by reference to Exhibit 10.1 contained in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, previously filed with the Commission). |
10.3* |
- |
Form of Incentive Stock Option Agreement under the Company’s 2004 Incentive Plan (incorporated herein by reference to the exhibit contained in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2005, previously filed with the Commission). |
10.4* |
- |
Severance Protection Agreement between First Bank of Georgia and Remer Y. Brinson, III, dated September 4, 2000 (incorporated herein by reference to the exhibit contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, previously filed with the Commission). |
Exhibit Number |
Description of Exhibit | |
10.5* |
- |
Severance Protection Agreement with Thomas J. Flournoy (incorporated herein by reference to the exhibit contained in the Company’s Form 8-K filing on June 26, 2009 previously filed with the Commission). |
10.6*^ |
- |
Compensation Arrangements with Remer Y. Brinson, III. |
10.7*^ |
- |
Compensation Arrangements with Thomas J. Flournoy. |
10.8*^ |
- |
First Bank of Georgia Annual Incentive Plan for Remer Y. Brinson, III. |
10.9*^ |
- |
First Bank of Georgia Annual Incentive Plan for Thomas J. Flournoy. |
10.10* |
- |
Directors Equity Incentive Plan effective October 26, 2009 (incorporated herein by reference to the exhibit contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, previously filed with the Commission). |
10.10.1* |
- |
Amendment No. 1 to Directors Equity Incentive Plan effective January 23, 2012 (incorporated herein by reference to Exhibit 10.10.1 contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, previously filed with the Commission). |
10.10.2* |
- |
Amendment No. 2 to Directors Equity Incentive Plan effective April 23, 2012 (incorporated herein by reference to Exhibit 10.3 contained in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, previously filed with the Commission). |
10.11* |
- |
Form of Restricted Stock Award and Details (incorporated herein by reference to Exhibit 10.4 contained in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, previously filed with the Commission). |
10.12* |
- |
First Bank of Georgia Supplemental Executive Retirement Plan for Key Officers effective October 22, 2007 (incorporated herein by reference to Exhibit 10.12 contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, previously filed with the Commission). |
10.13* |
First Bank of Georgia Death Benefit Plan for Select Management (including the Company’s named executive officers) (incorporated herein by reference to Exhibit 10.1 contained in the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013, previously filed with the Commission). | |
14.1 |
- |
Code of Ethics (incorporated herein by reference from Exhibit 99.2 contained in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2004, previously filed with the Commission). |
21.1^ |
- |
Subsidiaries of the Registrant. |
Exhibit Number |
Description of Exhibit | |
23.1^ |
- |
Consent of Crowe Horwath LLP |
31.1^ |
- |
Certification of President and Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002. |
31.2^ |
- |
Certification of Senior Vice President and Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002. |
32.1^ |
- |
Certifications Pursuant to Section 906 of Sarbanes-Oxley Act of 2002. |
99.1^ |
- |
Financial Statements. |
101.INS^ |
- |
XBRL Instance Document** |
101.SCH^ |
- |
XBRL Taxonomy Extension Schema Document** |
101.CAL^ |
- |
XBRL Taxonomy Extension Calculation Linkbase Document** |
101.DEF^ |
- |
XBRL Taxonomy Extension Definition Linkbase Document** |
101.LAB^ |
- |
XBRL Taxonomy Extension Label Linkbase Document** |
101.PRE^ |
- |
XBRL Taxonomy Extension Presentation Linkbase Document** |
* - Denotes a management contract or compensatory plan or arrangement.
** - In accordance with Regulation S-T, XBRL (Extensible Business Reporting Language) related information in Exhibit No. (101) to this Annual Report on From 10-K shall be deemed “furnished” and not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section, and shall not be incorporated by reference into any registration statement pursuant to the Securities Act of 1933, as amended.
^ - Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
GEORGIA-CAROLINA BANCSHARES, INC.
|
By: |
/s/ Remer Y. Brinson, III |
|
Date: March 7, 2014 |
Remer Y. Brinson, III |
| |
|
President and Chief Executive Officer |
| |
|
(principal executive officer) |
|
|
By: |
/s/ Thomas J. Flournoy |
|
Date: March 7, 2014 |
|
Thomas J. Flournoy |
|
|
|
Senior Vice President and Chief Financial Officer |
|
|
|
(principal financial and accounting officer)
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
DIRECTORS |
DATE |
|
DIRECTORS |
DATE | ||
/s/ Patrick G. Blanchard |
March 7, 2014 |
|
/s/ Jefferson B. A. Knox |
March 7, 2014 | ||
Patrick G. Blanchard | Jefferson B. A. Knox | |||||
/s/ Remer Y. Brinson, III |
March 7, 2014 |
/s/ John W. Lee |
March 7, 2014 | |||
Remer Y. Brinson, III | John W. Lee | |||||
/s/ Mac A. Bowman |
March 7, 2014 |
|
/s/ James L. Lemley, M.D. |
March 7, 2014 | ||
Mac A. Bowman | James L. Lemley, M.D. | |||||
/s/ Philip G. Farr |
March 7, 2014 |
|
/s/ William D. McKnight |
March 7, 2014 | ||
Philip G. Farr | William D. McKnight | |||||
/s/ Samuel A. Fowler, Jr. |
March 7, 2014 |
/s/ A. Montague Miller |
March 7, 2014 | |||
Samuel A. Fowler, Jr. | A. Montague Miller | |||||
/s/ Arthur J. Gay, Jr. |
March 7, 2014 |
/s/ Robert N. Wilson, Jr. |
March 7, 2014 | |||
Arthur J. Gay, Jr. | Robert N. Wilson, Jr. | |||||
/s/ George H. Inman |
March 7, 2014 |
|
/s/ Bennye M. Young |
March 7, 2014 | ||
George H. Inman | Bennye M. Young | |||||
/s/ David W. Joesbury, Sr. |
March 7, 2014 |
|||||
David W. Joesbury, Sr. |
EXHIBIT INDEX
Exhibit Number |
Description of Exhibit |
10.6*^ |
- |
Compensation Arrangements with Remer Y. Brinson, III. |
10.7*^ |
- |
Compensation Arrangements with Thomas J. Flournoy. |
10.8*^ |
- |
First Bank of Georgia Annual Incentive Plan for Remer Y. Brinson, III. |
10.9*^ |
- |
First Bank of Georgia Annual Incentive Plan for Thomas J. Flournoy. |
21.1^ |
- |
Subsidiaries of the Registrant. |
23.1^ |
- |
Consent of Crowe Horwath LLP |
31.1^ |
- |
Certification of President and Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002. |
31.2^ |
- |
Certification of Senior Vice President and Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002. |
32.1^ |
- |
Certifications Pursuant to Section 906 of Sarbanes-Oxley Act of 2002. |
99.1^ |
- |
Financial Statements. |
101.INS^ |
- |
XBRL Instance Document** |
101.SCH^ |
- |
XBRL Taxonomy Extension Schema Document** |
101.CAL^ |
- |
XBRL Taxonomy Extension Calculation Linkbase Document** |
101.DEF^ |
- |
XBRL Taxonomy Extension Definition Linkbase Document** |
101.LAB^ |
- |
XBRL Taxonomy Extension Label Linkbase Document** |
101.PRE^ |
- |
XBRL Taxonomy Extension Presentation Linkbase Document** |
* - Denotes a management contract or compensatory plan or arrangement.
** - In accordance with Regulation S-T, XBRL (Extensible Business Reporting Language) related information in Exhibit No. (101) to this Annual Report on From 10-K shall be deemed “furnished” and not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section, and shall not be incorporated by reference into any registration statement pursuant to the Securities Act of 1933, as amended.
^ - Filed herewith.
56
EXHIBIT 10.6
Compensation Arrangements with Remer Y. Brinson, III
Neither Georgia-Carolina Bancshares, Inc. (“Company”), nor First Bank of Georgia (“Bank”), has a written employment agreement with Remer Y. Brinson, III, President and Chief Executive Officer of Georgia-Carolina Bancshares, Inc. and First Bank of Georgia. Mr. Brinson’s current (2014) salary is $320,000 and Mr. Brinson is eligible for an annual incentive award under the Bank’s Annual Incentive Plan, pursuant to which he received $185,857 for his performance in 2013. See Exhibit 10.8 for a description of Mr. Brinson’s Annual Incentive Plan. Mr. Brinson is eligible for stock option, restricted stock and other awards under the Company’s incentive plans as determined from time to time by the Board of Directors of the Company. In addition, Mr. Brinson participates in the Bank’s medical, dental, life and disability insurance plans and he may participate in the Company’s 401(k) plan. Mr. Brinson also receives the following perquisites: payment of private and civic club membership dues, provision of an automobile and an automobile allowance. The aggregate value of these perquisites in 2013 was less than $10,000.
Mr. Brinson entered into a Severance Protection Agreement with the Bank, which entitles him to certain payments following a change in control of the Company, which agreement is included as an exhibit to this Annual Report and is described in the Company’s annual proxy statements. Mr. Brinson also participates in the Bank’s Supplemental Executive Retirement Plan for certain key officers, which provides supplemental benefits upon retirement, termination of employment, death, disability or a change of control of the Bank, and is also included as an exhibit to this Annual Report and is described in the Company’s annual proxy statements. The Bank has also purchased bank owned life insurance (“BOLI”) on Mr. Brinson’s life, which plan and description are included as an exhibit to this Annual Report.
An annual incentive award (if any) shall be paid in restricted stock with three year cliff vesting based on a formula related to the Company’s return on average assets (“ROAA”). The formula for determining the number of shares of restricted stock to be awarded is based on the Company’s achievement of its annual ROAA goals, ranging from 0.85% (threshold award percentage) to 1.25% (stretch award percentage) of achievement for 2014, with a straight line calculation being used for awards between the ROAA threshold and the stretch. If the threshold ROAA target is achieved, then the eligible executive will automatically receive a minimum of 2,500 shares of restricted stock, which will range up to a maximum of 5,000 shares of restricted stock if the stretch is achieved.
EXHIBIT 10.7
Compensation Arrangements with Thomas J. Flournoy
Neither Georgia-Carolina Bancshares, Inc. (“Company”), nor First Bank of Georgia (“Bank”), has a written employment agreement with Thomas J. Flournoy, Senior Vice President and Chief Financial Officer of Georgia-Carolina Bancshares, Inc. and First Bank of Georgia. Mr. Flournoy’s current (2014) salary is $192,100 and Mr. Flournoy is eligible for an annual incentive award under the Bank’s Annual Incentive Plan, pursuant to which he received $73,503 for his performance in 2013. See Exhibit 10.9 for a description of Mr. Flournoy’s Annual Incentive Plan. Mr. Flournoy is eligible for stock option, restricted stock and other awards under the Company’s incentive plans as determined from time to time by the Board of Directors of the Company. In addition, Mr. Flournoy participates in the Bank’s medical, dental, life and disability insurance plans and he may participate in the Company’s 401(k) plan.
Mr. Flournoy entered into a Severance Protection Agreement with the Bank, which entitles him to certain payments following a change in control of the Company, which agreement is included as an exhibit to this Annual Report and is described in the Company’s proxy statements. The Bank has also purchased bank owned life insurance (“BOLI”) on Mr. Flournoy’s life, which plan and description are included as an exhibit to this Annual Report.
An annual incentive award (if any) shall be paid in restricted stock with three year cliff vesting based on a formula related to the Company’s return on average assets (“ROAA”). The formula for determining the number of shares of restricted stock to be awarded is based on the Company’s achievement of its annual ROAA goals, ranging from 0.85% (threshold award percentage) to 1.25% (stretch award percentage) of achievement for 2014, with a straight line calculation being used for awards between the ROAA threshold and the stretch. If the threshold ROAA target is achieved, then the eligible executive will automatically receive a minimum of 1,500 shares of restricted stock, which will range up to a maximum of 3,000 shares of restricted stock if the stretch is achieved.
EXHIBIT 10.8
First Bank of Georgia Annual Incentive Plan
for
Remer Y. Brinson, III, President and Chief Executive Officer,
Georgia-Carolina Bancshares, Inc. and First Bank of Georgia
Pursuant to the First Bank of Georgia Annual Incentive Plan (the “Plan”), Mr. Brinson may earn an incentive award equal to a percentage of his annual base salary. The cash incentive award is based upon meeting certain financial performance objectives established at the beginning of each calendar year.
The performance measures for Mr. Brinson are related to asset growth, net income (including accruals for incentive payments under the AIP), and a subjective assessment by the Board of Directors. The financial performance objectives of asset growth and net income are assigned a weighting factor of 40% each, and the subjective assessment of the Board of Directors is assigned a weighting factor of 20%.
The AIP includes a “threshold,” “target” and “stretch” or aspiration goal in each of the asset growth and net income categories. Failure to meet the threshold goals results in no incentive payment in that category. Achievement of the threshold goals is designed to result in an incentive award of 15% of base salary. Achievement of the target goals is designed to result in an incentive award of 30% of base salary. Achievement of the stretch goals is designed to result in an incentive award of 60% of base salary. The performance objectives are designed so that the achievement of the target goals would be considered to be reflective of superior performance, and the target goals are considered to be difficult to achieve.
Certain credit quality measures are also included in the AIP, which can have the effect of increasing or decreasing the incentive award amount by as much as 45%. The credit quality measures are designed to act as control measures to ensure that net income is not achieved at the expense of credit quality, and that balanced results are achieved. The credit quality measures include expectations related to: (i) classified assets as a percent of total assets, (ii) charge-offs as a percent of loans, and (iii) delinquencies as a percent of loans. If the credit quality results do not meet expectations for a particular credit quality measure, the incentive award will be reduced by 15%. If the credit quality results meet expectations, there is no impact on the incentive award. If the credit quality results exceed expectations, there will be a 15% increase in the incentive award. Adjustments under the credit quality measures will only be made if the threshold net income measure is exceeded.
The subjective assessment of the Board of Directors takes into account various circumstances, developments and occurrences during the year which may have had an impact on the performance measures, and the Board of Directors may act subjectively based upon those considerations and may make upward or downward adjustments to an incentive award based upon the 20% weighting factor.
Including the subjective assessment of the Board of Directors at the maximum amount, and assuming that (i) the stretch goals were attained for each financial performance category, and (ii) the results of each of the credit quality measures exceeded expectations, the maximum annual incentive award which could be earned in 2014 is 70.8% of base salary.
Pursuant to the actual results for the year ended December 31, 2013, Mr. Brinson’s incentive award included a provision for meeting the “stretch” goal for net income and the “target” goal for asset growth. The three credit quality criteria increased Mr. Brinson’s incentive award for 2013. Two criteria exceeded expectations, and one criteria did not meet expectations. Mr. Brinson’s incentive award for 2013 also included a subjective assessment of the Board of Directors at the “stretch” level. Therefore, pursuant to the 2013 AIP, Mr. Brinson’s incentive award was $185,857.
The financial performance objectives and credit quality measures may be adjusted annually by the Board of Directors or an appropriate committee of the Board of Directors. In 2014, the subjective assessment portion of the Plan will be paid, if at all, in restricted stock awards under the 2004 Incentive Plan, with immediate vesting, based upon the fair market value of the shares at the date of grant.
EXHIBIT 10.9
First Bank of Georgia Annual Incentive Plan
for
Thomas J. Flournoy, Senior Vice President and Chief Financial Officer,
Georgia-Carolina Bancshares, Inc. and First Bank of Georgia
Pursuant to the First Bank of Georgia Annual Incentive Plan (the “Plan”), Mr. Flournoy may earn an incentive award equal to a percentage of his annual base salary. The cash incentive award is based upon meeting certain financial performance objectives established at the beginning of each calendar year.
The performance measures for Mr. Flournoy are also related to asset growth, net income (including accruals for incentive payments under the AIP), and a subjective assessment by the Board of Directors. The financial performance objectives of asset growth and net income are assigned a weighting factor of 40% each, and the subjective assessment of the Board of Directors is assigned a weighting factor of 20%.
The AIP for Mr. Flournoy includes a “threshold,” “target” and “stretch” or aspiration goal in each of the asset growth and net income categories. Failure to meet the threshold goals results in no incentive payment in that category. Achievement of the threshold goals is designed to result in an incentive award of 10% of base salary. Achievement of the target goals is designed to result in an incentive award of 20% of base salary. Achievement of the stretch goals is designed to result in an incentive award of 40% of base salary. The performance objectives are designed so that the achievement of the target goals would be considered to be reflective of superior performance, and the target goals are considered to be difficult to achieve.
Certain credit quality measures are also included in the AIP, which can have the effect of increasing or decreasing the incentive award based on net income by as much 45%. The credit quality measures are designed to act as control measures to ensure that net income is not achieved at the expense of credit quality, and that balanced results are achieved. The credit quality measures include expectations related to: (i) classified assets as a percent of total assets, (ii) charge-offs as a percent of loans, and (iii) delinquencies as a percent of loans. If the credit quality results do not meet expectations for a particular credit quality measure, the incentive award will be reduced by 15%. If the credit quality results meet expectations, there is no impact on the incentive award. If the credit quality results exceed expectations, there will be a 15% increase in the incentive award. Adjustments under the credit quality measures will only be made if the threshold net income measure is exceeded.
The subjective assessment of the Board of Directors takes into account various circumstances, developments and occurrences during the year which may have had an impact on financial performance measures, and the Board of Directors may act subjectively based upon those considerations and may make upward or downward adjustments to an incentive award based upon the 20% weighting factor.
Including the subjective assessment of the Board of Directors at the maximum amount, and assuming (i) the stretch goals were attained for each financial performance category, and (ii) the results of each of the quality measures exceeded expectations, the maximum annual incentive award which could be earned in 2014 is 47.2% of base salary.
Pursuant to the actual results for the year ended December 31, 2013, Mr. Flournoy’s incentive award included a provision for meeting the “stretch” goal for net income and the “target” goal for asset growth. The three credit quality criteria increased Mr. Flournoy’s incentive award for 2013. Two criteria exceeded expectations, and one criteria did not meet expectations. Mr. Flournoy’s incentive award also included a subjective assessment of the Board of Directors at the “stretch” level. Therefore, pursuant to the 2013 AIP, Mr. Flournoy’s incentive award was $73,503.
The financial performance objectives and credit quality measures may be adjusted annually by the Board of Directors or an appropriate committee of the Board of Directors. In 2014, the subjective assessment portion of the Plan will be paid, if at all, in restricted stock awards under the 2004 Incentive Plan, with immediate vesting, based upon the fair market value of the shares at the date of grant.
EXHIBIT 21.1
Subsidiaries of the Registrant
First Bank of Georgia
EXHIBIT 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in Registration Statement Nos. 333-100176, 333-100177, 333-123855, and 333-190341 of Georgia-Carolina Bancshares, Inc. on Form S-8 of our report dated March 7, 2014, with respect to the consolidated financial statements of Georgia-Carolina Bancshares, Inc. as of December 31, 2013 and December 31, 2012 and for each of the years in the two year period ended December 31, 2013, which appears in this Annual Report on Form 10-K of Georgia-Carolina Bancshares, Inc.
/s/ Crowe Horwath LLP
Atlanta, Georgia
March 7, 2014
EXHIBIT 31.1
CERTIFICATION
I, Remer Y. Brinson, III, certify that:
1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2013 of Georgia-Carolina Bancshares, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: March 7, 2014
|
/s/ Remer Y. Brinson, III |
|
Remer Y. Brinson, III President and Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATION
I, Thomas J. Flournoy, certify that:
1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2013 of Georgia-Carolina Bancshares, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: March 7, 2014
|
/s/ Thomas J. Flournoy |
|
Thomas J. Flournoy Senior Vice President and Chief Financial Officer |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Georgia-Carolina Bancshares, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2013 as filed with the Securities and Exchange Commission on or about the date hereof (the “Report”), the undersigned, Remer Y. Brinson, III, President and Chief Executive Officer of the Company, and Thomas J. Flournoy, Senior Vice President and Chief Financial Officer, do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
By:
/s/ Remer Y. Brinson, III
Remer Y. Brinson, III
President and Chief Executive Officer
March 7, 2014
/s/ Thomas J. Flournoy
Thomas J. Flournoy
Senior Vice President and Chief Financial Officer
March 7, 2014
Exhibit 99.1
GEORGIA-CAROLINA BANCSHARES, INC.
Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
GEORGIA-CAROLINA BANCSHARES, INC.
Table of Contents
Financial Statements
For the Years Ended December 31, 2013 and 2012
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Page |
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Report of Independent Registered Public Accounting Firm |
1 |
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Consolidated Statements of Financial Condition |
2 |
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Consolidated Statements of Operations |
3 |
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|
Consolidated Statements of Comprehensive Income |
4 |
|
|
Consolidated Statements of Shareholders’ Equity |
5 |
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Consolidated Statements of Cash Flows |
6 |
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Notes to Consolidated Financial Statements |
7-68 |
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Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Georgia-Carolina Bancshares, Inc.
Augusta, Georgia
We have audited the accompanying consolidated statements of financial condition of Georgia-Carolina Bancshares, Inc. (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2013 and 2012, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
/s/ Crowe Horwath LLP
Atlanta, Georgia
March 7, 2014
GEORGIA-CAROLINA BANCSHARES, INC.
Consolidated Statements of Financial Condition
December 31, 2013 and 2012
(dollars in thousands, except per share data)
2013 |
2012 |
|||||||
Assets |
||||||||
Cash and due from banks |
$ | 16,828 | $ | 30,279 | ||||
Securities available-for-sale |
158,439 | 132,760 | ||||||
Loans |
274,747 | 265,831 | ||||||
Allowance for loan losses |
(5,357 | ) | (5,954 | ) | ||||
Loans, net |
269,390 | 259,877 | ||||||
Loans held for sale at fair value |
31,298 | 48,432 | ||||||
Bank-owned life insurance |
14,834 | 10,001 | ||||||
Bank premises and equipment, net |
9,512 | 8,790 | ||||||
Accrued interest receivable |
1,854 | 1,772 | ||||||
Other real estate owned, net |
4,897 | 5,876 | ||||||
Federal Home Loan Bank stock |
1,606 | 1,865 | ||||||
Other assets |
7,840 | 6,523 | ||||||
Total assets |
$ | 516,498 | $ | 506,175 | ||||
Liabilities and Shareholders’ Equity |
||||||||
Liabilities |
||||||||
Deposits |
||||||||
Non-interest bearing |
$ | 76,747 | $ | 70,880 | ||||
Interest-bearing: |
||||||||
NOW accounts |
59,661 | 57,482 | ||||||
Savings |
56,757 | 64,236 | ||||||
Money market accounts |
74,056 | 54,982 | ||||||
Time deposits of $100,000 or more |
97,625 | 111,537 | ||||||
Other time deposits |
54,859 | 57,839 | ||||||
Total deposits |
419,705 | 416,956 | ||||||
Short-term debt |
22,200 | 25,028 | ||||||
Repurchase agreements |
12,111 | 3,333 | ||||||
Other liabilities |
5,593 | 4,533 | ||||||
Total liabilities |
459,609 | 449,850 | ||||||
Shareholders’ equity |
||||||||
Preferred stock, par value $.001; 1,000,000 shares authorized; none issued |
- | - | ||||||
Common stock, par value $.001; 9,000,000 shares authorized; 3,572,204 and 3,528,296 shares issued and outstanding, respectively |
4 | 4 | ||||||
Additional paid-in capital |
16,192 | 15,687 | ||||||
Retained earnings |
44,758 | 39,177 | ||||||
Accumulated other comprehensive income (loss) |
(4,065 | ) | 1,457 | |||||
Total shareholders’ equity |
56,889 | 56,325 | ||||||
Total liabilities and shareholders’ equity |
$ | 516,498 | $ | 506,175 |
See notes to consolidated financial statements.
GEORGIA-CAROLINA BANCSHARES, INC.
Consolidated Statements of Operations
For the Years Ended December 31, 2013 and 2012
(dollars in thousands, except per share data)
2013 |
2012 |
|||||||
Interest income |
||||||||
Interest and fees on loans |
$ | 15,277 | $ | 18,019 | ||||
Interest on taxable securities |
2,472 | 2,046 | ||||||
Interest on nontaxable securities |
536 | 439 | ||||||
Other interest income |
47 | 65 | ||||||
Total interest income |
18,332 | 20,569 | ||||||
Interest expense |
||||||||
Interest on time deposits of $100,000 or more |
1,029 | 1,600 | ||||||
Interest on other deposits |
1,059 | 1,403 | ||||||
Interest on funds purchased and other borrowings |
27 | 679 | ||||||
Total interest expense |
2,115 | 3,682 | ||||||
Net interest income |
16,217 | 16,887 | ||||||
Provision for loan losses |
(2,029 | ) | (605 | ) | ||||
Net interest income after provision for loan losses |
18,246 | 17,492 | ||||||
Non-interest income |
||||||||
Service charges on deposits |
1,567 | 1,524 | ||||||
Mortgage banking activities |
8,225 | 11,376 | ||||||
Gain (loss) on sale of securities |
91 | (105 | ) | |||||
Other |
3,021 | 1,858 | ||||||
Total non-interest income |
12,904 | 14,653 | ||||||
Non-interest expense |
||||||||
Salaries and employee benefits |
12,853 | 12,329 | ||||||
Occupancy expenses |
1,505 | 1,556 | ||||||
Other real estate owned expenses |
1,654 | 2,284 | ||||||
Other |
6,454 | 6,692 | ||||||
Total non-interest expense |
22,466 | 22,861 | ||||||
Income before income taxes |
8,684 | 9,284 | ||||||
Income tax expense |
2,480 | 2,663 | ||||||
Net income |
$ | 6,204 | $ | 6,621 | ||||
Earnings per common share |
||||||||
Basic |
$ | 1.74 | $ | 1.84 | ||||
Diluted |
$ | 1.73 | $ | 1.84 | ||||
Dividends per common share |
$ | 0.175 | $ | 0.120 |
See notes to consolidated financial statements.
GEORGIA-CAROLINA BANCSHARES, INC.
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 2013 and 2012
(dollars in thousands)
2013 |
2012 |
|||||||
Net income |
$ | 6,204 | $ | 6,621 | ||||
Other comprehensive income (loss): |
||||||||
Unrealized holding gain (loss) arising during the period |
(8,144 | ) | 350 | |||||
Tax effect of unrealized holding gain (loss) |
2,682 | (114 | ) | |||||
Reclassification for (gain) loss included in net income |
(91 | ) | 105 | |||||
Tax effect of gain/ loss included in net income |
31 | (36 | ) | |||||
Total other comprehensive income (loss) |
(5,522 | ) | 305 | |||||
Comprehensive income |
$ | 682 | $ | 6,926 |
See notes to consolidated financial statements.
GEORGIA-CAROLINA BANCSHARES, INC.
Consolidated Statements of Shareholders’ Equity
For the Years Ended December 31, 2013 and 2012
(dollars in thousands)
Common Stock Shares |
Common Stock Par Value |
Additional Paid-in-Capital |
Retained Earnings |
Accumulated Other Comprehensive Income (Loss) |
Total Shareholders' Equity |
|||||||||||||||||||
Balance at January 1, 2012 |
3,592,100 | $ | 4 | $ | 16,301 | $ | 32,988 | $ | 1,152 | $ | 50,445 | |||||||||||||
Net income |
- | - | - | 6,621 | - | 6,621 | ||||||||||||||||||
Other comprehensive income |
- | - | - | - | 305 | 305 | ||||||||||||||||||
Proceeds from exercise of stock options |
45,491 | - | 253 | - | - | 253 | ||||||||||||||||||
Stock-based compensation expense |
- | - | 108 | - | - | 108 | ||||||||||||||||||
Issuance of restricted stock for compensation |
15,988 | - | 35 | - | - | 35 | ||||||||||||||||||
Issuance of stock for directors' fees |
24,504 | - | 209 | - | - | 209 | ||||||||||||||||||
Repurchase of common shares |
(149,787 | ) | - | (1,219 | ) | - | - | (1,219 | ) | |||||||||||||||
Dividends |
- | - | - | (432 | ) | - | (432 | ) | ||||||||||||||||
Balance at December 31, 2012 |
3,528,296 | $ | 4 | $ | 15,687 | $ | 39,177 | $ | 1,457 | $ | 56,325 | |||||||||||||
Net income |
- | - | - | 6,204 | - | 6,204 | ||||||||||||||||||
Other comprehensive income |
- | - | - | - | (5,522 | ) | (5,522 | ) | ||||||||||||||||
Proceeds from exercise of stock options |
28,469 | - | 407 | - | - | 407 | ||||||||||||||||||
Net settlement from exercise of stock options |
(22,638 | ) | (332 | ) | (332 | ) | ||||||||||||||||||
Stock-based compensation expense |
- | - | 93 | - | - | 93 | ||||||||||||||||||
Issuance of restricted stock for compensation |
24,006 | - | 132 | - | - | 132 | ||||||||||||||||||
Issuance of stock for directors' fees |
14,071 | - | 205 | - | - | 205 | ||||||||||||||||||
Dividends |
- | - | - | (623 | ) | - | (623 | ) | ||||||||||||||||
Balance at December 31, 2013 |
3,572,204 | $ | 4 | $ | 16,192 | $ | 44,758 | $ | (4,065 | ) | $ | 56,889 |
See notes to consolidated financial statements.
GEORGIA-CAROLINA BANCSHARES, INC.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2013 and 2012
(dollars in thousands)
2013 |
2012 |
|||||||
Cash flows from operating activities |
||||||||
Net income |
$ | 6,204 | $ | 6,621 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
603 | 622 | ||||||
Provision for loan losses |
(2,029 | ) | (605 | ) | ||||
OREO valuation adjustment |
896 | 1,434 | ||||||
Gain on sale of other real estate owned |
(231 | ) | (40 | ) | ||||
(Gain) loss on sale of equipment |
5 | (5 | ) | |||||
(Gain) loss on sale of securities |
(91 | ) | 105 | |||||
Gain on bank owned life insurance |
(806 | ) | - | |||||
Mortgage banking activities |
(8,225 | ) | (11,376 | ) | ||||
Proceeds from sale of loans held for sale |
384,495 | 438,048 | ||||||
Originations of loans held for sale |
(359,136 | ) | (429,877 | ) | ||||
Increase in cash value of bank-owned life insurance |
(448 | ) | (392 | ) | ||||
Stock-based compensation expense |
225 | 108 | ||||||
Stock compensation |
205 | 244 | ||||||
Deferred income tax (benefit) expense |
(549 | ) | (615 | ) | ||||
Increase in accrued interest receivable |
(82 | ) | (40 | ) | ||||
(Increase) decrease in other assets |
1,840 | (1,513 | ) | |||||
Decrease in accrued interest payable |
(56 | ) | (215 | ) | ||||
Increase in other liabilities |
1,116 | 1,901 | ||||||
Net cash provided by operating activities |
23,936 | 4,405 | ||||||
Cash flows from investing activities |
||||||||
Loan originations and collections, net |
(9,452 | ) | 14,352 | |||||
Purchases of available-for-sale securities |
(70,248 | ) | (76,053 | ) | ||||
Proceeds from maturities and calls of available-for-sale securities |
23,690 | 29,602 | ||||||
Proceeds from sales of available-for-sale securities |
12,735 | 14,324 | ||||||
Proceeds from sale of FHLB stock |
259 | 205 | ||||||
Purchase of bank-owned life insurance |
(5,000 | ) | - | |||||
Proceeds from life insurance death benefit |
1,421 | - | ||||||
Proceeds from sale of other real estate owned |
2,282 | 4,906 | ||||||
Net additions to bank premises and equipment |
(1,225 | ) | (323 | ) | ||||
Net cash used in investing activities |
(45,538 | ) | (12,987 | ) | ||||
Cash flows from financing activities |
||||||||
Increase in deposits |
2,749 | 5,561 | ||||||
Repayments on FHLB advances and other borrowings |
(41,528 | ) | (25,000 | ) | ||||
Proceeds from FHLB advances and other borrowings |
38,700 | 25,028 | ||||||
Increase (decrease) in repurchase agreements |
8,778 | (232 | ) | |||||
Proceeds from stock options exercised, net |
75 | 253 | ||||||
Purchase of stock |
- | (1,219 | ) | |||||
Cash dividends paid |
(623 | ) | (432 | ) | ||||
Net cash provided by financing activities |
8,151 | 3,959 | ||||||
Net decrease in cash and due from banks |
(13,451 | ) | (4,623 | ) | ||||
Cash and due from banks at beginning of the year |
30,279 | 34,902 | ||||||
Cash and due from banks at end of the year |
$ | 16,828 | $ | 30,279 |
See notes to consolidated financial statements.
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 1—Summary of significant accounting policies
Nature of business
Georgia-Carolina Bancshares, Inc. (the “Company”) is a one-bank holding company. Substantially all of its business is conducted by its wholly-owned subsidiary, First Bank of Georgia (the “Bank”). The Bank is engaged in community banking activities through its locations in Augusta, Thomson, Martinez and Evans, Georgia and the surrounding area. Most of the Bank’s loans and loan commitments have been made to customers in the Columbia, Richmond, and McDuffie County, Georgia areas. Many of the Bank’s loan customers are also depositors of the Bank. The Bank has established a mortgage division that operates as First Bank Mortgage. This division currently has offices in Augusta and Savannah, Georgia. The division originates residential real estate mortgage loans and provides financing to residential construction and development companies. Substantially all residential mortgage loans originated by the division are sold in the secondary market.
The Bank is subject to the regulations of federal and state banking agencies and is periodically examined by them.
Significant accounting policies
Basis of presentation: The consolidated financial statements include the accounts of the Company and the Bank. Significant intercompany transactions and accounts are eliminated in consolidation. The accounting and reporting policies of the Company and the Bank conform to accounting principles generally accepted in the United States of America and general practices within the banking industry.
Estimates: The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans, including valuation allowances for impaired loans, the valuation of other real estate acquired in connection with foreclosures or in satisfaction of loans, recourse liability on mortgage loans previously sold, and the fair value of mortgage loans held for sale and the fair value of the interest rate lock and forward commitment derivatives. In connection with the determination of the allowances for losses on loans and loss estimates on other real estate owned, management obtains independent appraisals for significant properties. Management must also make estimates in determining the estimated useful lives and methods for depreciating premises and equipment.
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 1—Summary of significant accounting policies (continued)
Management uses available information to recognize losses on loans and other real estate owned; however, future additions to the allowances may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowances for losses on loans and valuations of other real estate owned. Such agencies may require the Bank to recognize additional losses based on their judgments about information available to them at the time of their examinations. Because of these factors, it is reasonably possible that the allowances for losses on loans and loss estimates for other real estate owned may change materially in the near term.
Significant concentrations of credit risk: A substantial portion of the Bank’s loan portfolio is with customers in the Augusta, Georgia MSA market area. The ultimate collectability of a substantial portion of the portfolio is therefore susceptible to changes in the economic and market conditions in and around these areas.
Cash and due from banks: For purposes of reporting cash flows, cash and due from banks includes cash on hand and interest-bearing and noninterest-bearing amounts due from banks (including cash items in the process of clearing). The Bank maintains due from accounts with banks primarily located in Georgia and Louisiana. Balances generally exceed insured amounts. Net cash flows are presented for customer loan and deposit transactions and repurchase agreements.
Investment securities: The Bank’s investments in securities are classified and accounted for as follows:
Securities available-for-sale – Securities classified as available-for-sale are identified when acquired as being available-for-sale to meet liquidity needs or other purposes. They are carried at fair value with unrealized gains and losses, net of taxes, reported in other comprehensive income.
The Bank has not classified any securities as held-to-maturity or trading.
Realized gains and losses on the sale of securities are determined using the specific-identification method on a trade date basis. Dividends and interest income are recognized when earned. The amortization of premiums and accretion of discounts are recognized in interest income using methods approximating the interest method over the life of the securities.
Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) other-than-temporary impairment (OTTI) related to other factors, which is recognized in other comprehensive income.
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 1—Summary of significant accounting policies (continued)
The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.
Loans and interest income: Loans are stated at principal amounts outstanding less unearned income, deferred fees and costs, and the allowance for loan losses. Management has the intent and ability to hold for the foreseeable future or until maturity or payoff. Interest income on loans is credited to income based on the principal amount outstanding at the respective rate of interest.
Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield over the life of the loan. Loan origination fees and direct loan origination costs on loans held for sale are deferred and recognized at the time the loan is sold.
Accrual of interest income is discontinued for all classes of loans when a loan becomes 90 days past due as to principal and interest or when, in management’s judgment, the interest will not be collectible in the normal course of business. Accrual of interest on such loans is resumed when, in management’s judgment, the collection of interest and principal becomes probable. When a loan is placed on non-accrual status, all interest previously accrued but not collected is reversed against current interest income. Interest income is subsequently recognized only to the extent cash payments are received.
The accrual of interest on impaired loans is discontinued when, in management’s judgment, the borrower may be unable to meet payments as due. Impairment on loans is measured using either the discounted expected cash flow method or value of collateral method. A loan is impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts when due according to the contractual terms of the loan agreement. Impairments on loans are charged to the allowance for loan losses.
Management evaluates the borrower’s ability to pay, the value of any collateral, and other factors in determining when a loan is impaired. Management does not consider a loan to be impaired during a period of delay in payment if it is expected that the Bank will collect all amounts due, including interest accrued at the contractual interest rate for the period of the delay. Any loan classified as a troubled debt restructuring is considered impaired.
Interest payments on impaired loans are applied to the remaining principal balance until the balance is fully recovered. Once principal is recovered, cash payments received are recorded as recoveries to the extent of any principal previously charged-off and then as interest income.
Allowance for loan losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the loan balance is confirmed as uncollectible. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 1—Summary of significant accounting policies (continued)
The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired.
Factors considered by management in determining impaired loans include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
All loans included on the management watch list are individually evaluated for impairment. If a loan has an impairment, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.
Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, management determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.
The general component covers non-impaired loans and is based on historical loss experience adjusted for current economic factors. Management considers the actual loss history experience over the last four quarters, one year, two year, and three year periods by portfolio segment to determine the historical loss experience used in the general component. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries for the most recent three years; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations.
For further discussion of portfolio segments and associated risks and grades, please see Note 4 to the consolidated financial statements.
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 1—Summary of significant accounting policies (continued)
Loans held for sale: Prior to July 1, 2012, mortgage loans originated and intended for sale in the secondary market were carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors. Net unrealized losses, if any, were recorded as a valuation allowance and charged to earnings. Mortgage loans held for sale are generally sold with servicing rights released. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold. Loans held for sale, for which the fair value option has been elected starting July 1, 2012, are recorded at fair value as of each balance sheet date. The fair value includes the servicing value of the loans as well as any accrued interest.
Interest rate risk is minimal as rates on loans originated and intended for sale are locked with the investor and the loans are held in the portfolio only temporarily until funding from the investor is completed. The Bank also manages credit risk by having loans greater than $650,000 approved by the secondary market investors, while all other loans are approved internally.
Loans sold under the Bank’s mortgage loans held for sale portfolio contain certain representations and warranties in the loan sale agreements which require that we repurchase or indemnify the investors for losses or costs on loans we sell under certain limited conditions. Any losses related to loans previously sold are charged against the Bank’s recourse liability for mortgage loans previously sold. The recourse liability is based on historical loss experience adjusted for current information and events when it is probable that a loss will be incurred.
Transfers of Financial Assets: Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Bank-owned life insurance (BOLI): In order to insure the lives of its key officers, the Bank owns three bank-owned life insurance policies. BOLI is recorded at its cash surrender value, net of surrender charges and/or early termination charges that are probable at settlement. The increase in cash value is recorded as other income.
Bank premises and equipment: Land is carried at cost. Premises and equipment are stated at cost, less accumulated depreciation. Buildings and related components are depreciated using the straight-line method with useful lives ranging from five to thirty-nine years. Furniture, fixtures and equipment are depreciated using the straight-line method with useful lives ranging from three to fifteen years.
Other real estate owned: Other real estate owned represents properties acquired through foreclosure or other proceedings. The property is held for sale and is initially recorded at fair value less estimated selling costs at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, the assets are carried at the lower of carrying amount or fair value less estimated selling costs.
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 1—Summary of significant accounting policies (continued)
Expenses to maintain such assets and subsequent changes in the valuations are included in other noninterest expenses, while gains and losses on disposal are included in noninterest income.
Federal Home Loan Bank Stock: Federal Home Loan Bank Stock consists of the cost of the Company’s investment in the stock of the Federal Home Loan Bank (“FHLB”). The stock has no quoted market value and no ready market exists. Investment in the Federal Home Loan Bank is a condition of borrowing from the Federal Home Loan Bank, and the stock is pledged to collateralize such borrowings and periodically evaluated for impairment based on ultimate recovery of par value. Dividends received on this stock are included in other non-interest income.
Mortgage banking derivatives: Loan commitments, whose underlying mortgage loans at origination will be held for sale upon funding of the loan, are derivative instruments. Loan commitments are recognized on the consolidated statement of financial condition in other assets and other liabilities at fair value, with changes in their fair values recognized in mortgage banking activities. At the inception of a loan commitment, the Bank generally will simultaneously enter into a best efforts forward loan sale commitment to protect the Bank from losses on sales of the loans underlying the loan commitment by securing the ultimate sale price and delivery date of the loan.
Loan commitments and related financial instruments: In the ordinary course of business, the Bank has entered into off balance sheet financial instruments consisting of commitments to extend credit, commercial letters of credit and standby letters of credit. The face amount for these items represents the exposure to loss before considering customer collateral or ability to repay. Such financial instruments are recorded in the consolidated financial statements when they become payable.
Income taxes: Provisions for income taxes are based on amounts reported in the statements of operations after exclusion of nontaxable income, such as interest on state and municipal securities, and BOLI income, and include deferred taxes on temporary differences in the recognition of income and expense for tax and financial statement purposes. Deferred taxes are computed on the liability method. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. It is the Company’s policy to recognize interest and penalties associated with uncertain tax positions as components of income taxes and to disclose the recognized interest and penalties, if material.
Stock-based compensation: Compensation cost is recognized for stock options and restricted stock awards issued to employees, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options when granted and this cost is expensed over the required service period which is usually the vesting period of the options. The fair market value of the Company’s common stock at the date of grant is used for restricted stock awards and this cost is expensed over the required service period which is usually the vesting period of the stock awards.
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 1—Summary of significant accounting policies (continued)
Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.
Comprehensive income: Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income, although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the statement of financial condition. Such items, along with net income, are components of comprehensive income.
Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are any such matters pending that will have a material effect on the financial statements.
Earnings per common share: Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. The Company’s outstanding stock options are the primary component of the Company’s diluted earnings per share. All outstanding unvested share-based payment awards that contain rights to non-forfeitable dividends are considered participating securities for this calculation. Diluted earnings per common share include the dilutive effect of additional potential common shares issuable under stock options. Earnings and dividends per share are restated for all stock splits and stock dividends through the date of issuance of the financial statements.
Fair value of financial instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates.
Operating Segments: While management monitors the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company wide basis. Operating segments are aggregated into one as operating results for all segments are similar. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.
Reclassifications: Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior year net income or shareholders’ equity.
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 1—Summary of significant accounting policies (continued)
Recently issued accounting standards
In February 2013, the FASB amended existing guidance related to reporting amounts reclassified out of accumulated other comprehensive income. These amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. These amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional details about those amounts. For public companies, these amendments are effective prospectively for interim and annual reporting periods beginning after December 15, 2012. The effect of adopting this standard did not have a material effect on the Company’s operating results or financial condition.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies, but not specifically addressed in this report, are not expected to have a material impact on the Company’s financial condition, results of operations, or liquidity.
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 2—Cash and due from banks
Cash and due from banks totaled $16.8 million at December 31, 2013, compared to $30.3 million at December 31, 2012. Cash on hand, cash items in the process of collection, and amounts due from correspondent banks and the Federal Reserve Bank are included in cash and due from banks. As of December 31, 2013, interest-bearing cash on deposit with correspondent banks totaled $1.4 million compared to $4.8 million as of December 31, 2012. Interest-bearing cash on deposit in the Federal Reserve Bank was $1.3 million as of December 31, 2013 compared to $14.5 million as of December 31, 2012. Funds not included in interest bearing deposits, but required to be on reserve with the Federal Reserve Bank to meet regulatory and reserve clearing requirements totaled $4.5 million and $3.8 as of December 31, 2013 and 2012, respectively.
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 3—Investment securities
The amortized cost and fair value amounts of securities owned as of December 31, 2013 and 2012 are shown below:
2013 |
||||||||||||||||
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
|||||||||||||
(dollars in thousands) |
||||||||||||||||
Securities available-for-sale: |
||||||||||||||||
U.S. Government and agency |
$ | 61,486 | $ | 146 | $ | (3,351 | ) | $ | 58,281 | |||||||
Mortgage-backed |
66,095 | 558 | (1,921 | ) | 64,732 | |||||||||||
State and municipal |
32,088 | 255 | (1,592 | ) | 30,751 | |||||||||||
Corporate |
4,749 | 25 | (99 | ) | 4,675 | |||||||||||
Total |
$ | 164,418 | $ | 984 | $ | (6,963 | ) | $ | 158,439 |
2012 |
||||||||||||||||
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized |
Fair Value |
|||||||||||||
(dollars in thousands) |
||||||||||||||||
Securities available-for-sale: |
||||||||||||||||
U.S. Government and agency |
$ | 55,404 | $ | 260 | $ | (99 | ) | $ | 55,565 | |||||||
Mortgage-backed |
50,074 | 1,313 | (92 | ) | 51,295 | |||||||||||
State and municipal |
21,974 | 852 | (38 | ) | 22,788 | |||||||||||
Corporate |
3,052 | 68 | (8 | ) | 3,112 | |||||||||||
Total |
$ | 130,504 | $ | 2,493 | $ | (237 | ) | $ | 132,760 |
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 3—Investment securities (continued)
The amortized cost and fair value of securities as of December 31, 2013 by contractual maturity are as follows. Actual maturities may differ from contractual maturities in mortgage-backed securities, as the mortgages underlying the securities may be called or prepaid without penalty; therefore, these securities are not included in the maturity categories in the following maturity summary.
Securities Available-for-Sale |
||||||||
Amortized Cost |
Fair Value |
|||||||
(dollars in thousands) |
||||||||
Less than one year |
$ | 14,850 | $ | 13,178 | ||||
One to five years |
23,669 | 22,919 | ||||||
Five to ten years |
38,266 | 36,773 | ||||||
Over ten years |
21,538 | 20,837 | ||||||
Mortgage-backed securities |
66,095 | 64,732 | ||||||
Total |
$ | 164,418 | $ | 158,439 |
Securities with a carrying amount of approximately $64.1 million at December 31, 2013 and $53.7 million at December 31, 2012 were pledged to secure public deposits and for other purposes.
In 2013, the Bank sold $12.7 million in securities available-for-sale, realizing gains of $158,000 and losses of $74,400 for an overall net gain of $83,600. In 2012, the Bank sold $14.3 million in securities available-for-sale, realizing gains of $161,100 and losses of $270,500, for an overall loss of $109,400.
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 3—Investment securities (continued)
Information pertaining to securities with gross unrealized losses at December 31, 2013 and December 31, 2012, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:
2013 |
||||||||||||||||||||||||
Less than Twelve Months |
Over Twelve Months |
|||||||||||||||||||||||
Number of Securities |
Fair Value |
Gross Unrealized Losses |
Number of Securities |
Fair Value |
Gross Unrealized Losses |
|||||||||||||||||||
(dollars in thousands) |
||||||||||||||||||||||||
Securities available-for-sale: |
||||||||||||||||||||||||
U.S. Government and agency |
23 | $ | 34,142 | $ | (1,911 | ) | 7 | $ | 11,759 | (1,440 | ) | |||||||||||||
Corporate bonds |
4 | 3,487 | (99 | ) | - | - | - | |||||||||||||||||
Mortgage-backed |
31 | 40,852 | (1,744 | ) | 3 | 5,294 | (177 | ) | ||||||||||||||||
State and municipal |
41 | 19,934 | (1,156 | ) | 8 | 3,028 | (436 | ) | ||||||||||||||||
Total |
99 | $ | 98,415 | $ | (4,910 | ) | 18 | $ | 20,081 | $ | (2,053 | ) |
2012 |
||||||||||||||||||||||||
Less than Twelve Months |
Over Twelve Months |
|||||||||||||||||||||||
Number of Securities |
Fair Value |
Gross Unrealized Losses |
Number of Securities |
Fair Value |
Gross Unrealized Losses |
|||||||||||||||||||
(dollars in thousands) |
||||||||||||||||||||||||
Securities available-for-sale: |
||||||||||||||||||||||||
U.S. Government and agency |
7 | $ | 13,757 | $ | (99 | ) | 1 | $ | 1,365 | * | ||||||||||||||
Corporate bonds |
1 | 992 | (8 | ) | - | - | - | |||||||||||||||||
Mortgage-backed |
2 | 4,794 | (92 | ) | - | - | - | |||||||||||||||||
State and municipal |
5 | 2,035 | (38 | ) | - | - | - | |||||||||||||||||
Total |
15 | $ | 21,578 | $ | (237 | ) | 1 | $ | 1,365 | $ | - |
* |
Gross unrealized loss is less than $1,000. |
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 3—Investment securities (continued)
Management evaluates investment securities for other-than-temporary impairment on a periodic basis, and more frequently when economic or market conditions warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuers, and (3) the intent and ability of the Bank to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
At December 31, 2013 and 2012, the gross unrealized losses in securities available-for-sale are primarily the result of changes in market interest rates and not related to the credit quality of the underlying issuer. All of the securities are U.S. agency debt securities, corporate bonds, mortgage-backed securities, and municipal securities. Management has determined that no declines in market value are deemed to be other than temporary at December 31, 2013 and 2012. Securities rated below Moody’s (Baa) or Standard & Poor’s (BBB-) are not purchased. Non-rated municipal securities are limited to those bonds in the state of Georgia, and possess no greater risk that (Baa) or (BBB) bonds. Corporate bonds will have a minimum rating at purchase of Moody’s (A3), S&P (A-), or Fitch (A-). The Bank does not intend to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery.
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 4—Loans
The Bank engages in a full complement of lending activities, including commercial, consumer and real estate loans. The composition of loans for the years ended December 31, 2013 and 2012 is summarized as follows:
2013 |
2012 |
|||||||
(dollars in thousands) |
||||||||
Commercial and industrial |
$ | 18,113 | $ | 19,816 | ||||
Real estate - construction, land and land development |
60,476 | 55,926 | ||||||
Real estate - residential |
55,792 | 55,495 | ||||||
Real estate - commercial |
136,632 | 130,729 | ||||||
Consumer |
3,931 | 3,921 | ||||||
Total loans |
274,944 | 265,887 | ||||||
Deferred loan fees |
(197 | ) | (56 | ) | ||||
Total loans |
274,747 | 265,831 | ||||||
Allowance for loan losses |
(5,357 | ) | (5,954 | ) | ||||
Loans, net of allowance for loan losses |
$ | 269,390 | $ | 259,877 |
Loan segments
Commercial and industrial loans are directed principally towards individual, partnership or corporate borrowers, for a variety of business purposes. These loans include short-term lines of credit, short-term to medium-term plant and equipment loans, and loans for general working capital. Risks associated with this type of lending arise from the impact of economic stresses on the business operations of borrowers. The Bank mitigates such risks to the loan portfolio by diversifying lending across North American Industry Classification System (“NAICS”) codes and has experienced very low levels of loss for this loan type for the past three years.
Real estate – construction, land and land development loans consist of residential and commercial construction loans as well as land and land development loans. Land development loans are primarily construction and development loans to builders in the Augusta and Savannah, Georgia markets. These loan portfolios possess an increased level of risk compared to other types. The Bank’s approach to financing the development, financing the construction and providing the ultimate residential mortgage loans to the residential property purchasers has resulted in less exposure to the effects of declines in property values. These loans include certain real estate – construction loans classified as acquisition, development & construction. The loans are managed by the Bank’s construction division.
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 4—Loans (continued)
Real estate – residential loans include residential mortgage lending and are primarily single-family residential loans secured by the residential property. Residential property values have stabilized over the past year, and this loan type has experienced decreases in historical losses over the past three years. Home equity lines are also included in real estate – residential loans.
Real estate – commercial loans include commercial mortgage loans that are generally secured by office buildings, retail establishments and other types of real property, both owner occupied and non-owner occupied. A significant component of this type of lending is to owner occupied borrowers, including churches.
Consumer loans consist primarily of installment loans to individuals for personal, family or household purposes, including automobile loans to individuals and pre-approved lines of credit. The Bank has experienced low levels of loss for this loan type for the past three years compared to the other loan types.
Loan risk grades
The Company categorizes loans into risk grades based on relevant information about the ability of borrowers to service their debt such as: future repayment ability, financial condition, collateral, administration, management ability of borrower, and history and character of borrower. Grades are assigned at loan origination and may be changed due to the result of a loan review or at the discretion of management. The Company uses the following definitions for risk grades:
Grade 1: Highest quality - Alternate sources of cash exist, such as the commercial paper market, capital market, internal liquidity or other bank lines. These are national or regional companies with excellent cash flow which covers all debt service requirements and a significant portion of capital expenditures. Balance sheet strength and liquidity are excellent and exceed the industry norms. Financial trends are positive. Corporate borrowers are market leaders within the industry and the industry performance is excellent. This grade includes loans which are fully secured by cash or equivalents. This grade includes loans secured by marketable securities with no less than 25% margin. Borrowers are of unquestionable financial strength. Financial standing of borrower is known and borrower exhibits superior liquidity, net worth, cash flow and leverage.
Grade 2: Above average quality - There is minimal risk. Borrowers have strong, stable financial trends. There is strong cash flow covering debt service requirements and some portion of capital expenditures. Alternate sources of repayment are evident and financial ratios are comparable to or exceed the industry norms. Financial trends are positive. Borrower has prominent position within the industry or the local economy and the industry performance is above average. Management is strong in most areas and management depth is good. This grade includes loans secured by marketable securities with a margin less than 25%, and includes borrowers who have stable and reliable cash flow and above average liquidity and cash flow. There is modest risk from exposure to contingent liabilities.
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 4—Loans (continued)
Grade 3: Average quality - Cash flow is adequate to cover all debt service requirements but not capital expenditures. Balance sheet may be leveraged but still comparable to industry norms. Financial trends are stable to mixed over the long term but no significant concerns presently exist. Generally there is a stable industry outlook, although there may be some cyclical characteristics. Borrowers are of average position in the industry or the local economy. The management team is considered capable and stable. This grade includes borrowers with reliable cash flow and alternate sources of repayment which may require the sale of assets. Financial position has been leveraged to a modest degree. However, the borrower has a relatively strong net worth considering income and debt.
Grade 4: Below average quality - Loan conditions require more frequent monitoring. Stability is lacking in the primary repayment source, cash flow, credit history or liquidity; however, the instability is manageable and considered temporary. Overall trends are not yet adverse. These loans exhibit Grade 3 financial characteristics but lack proper and complete documentation. Sources of income or cash flow have become unstable or may possibly decline given current business or economic conditions. The borrower has a highly leveraged financial position or limited capital. Speculative construction loans originated by third parties are included in this grade.
Grade 5: Other Assets Especially Mentioned - These loans have potential weaknesses which may inadequately protect the Bank’s position at some future date. Unlike a Grade 4 credit, adverse trends in the borrower’s operations and/or financial position are evident, but have not yet developed into well-defined credit weaknesses. Specific negative events within the borrower or the industry have occurred, which may jeopardize cash flow. Borrower’s operations are highly cyclical or vulnerable to economic or market conditions. Management has potential weaknesses and management depth is lacking. Borrower is taking positive steps to alleviate potential weaknesses and has the potential for improvement and upgrade. Corrective strategy to protect the Bank may be required and active management attention is warranted. Some minor delinquencies may exist from time to time. Borrowers exhibit some degree of weakness in financial condition. This may manifest itself in a reduction of net worth and liquidity.
Grade 6: Substandard - A substandard loan has a well-defined weakness or weaknesses in the primary repayment source and undue reliance is placed on secondary repayment sources (collateral or guarantors). No loss beyond the specific reserves of the allowance for loan losses allocated to these loans is presently expected based on a current assessment of collateral values and guarantor cash flow. However, there is the distinct possibility that the Bank will sustain some future loss if the credit weaknesses are not corrected. Management is inadequate to the extent that the business’s ability to continue operations is in question. Intensive effort to correct the weaknesses and ensure protection against loss of principal (i.e. additional collateral) is mandatory. Delinquency of principal or interest may exist. Net worth, repayment ability, management and collateral protection, all exhibit weakness. In the case of consumer credit, closed end consumer installment loans delinquent between 90 and 119 days (4 monthly payments) will be minimally classified Substandard. Open end consumer credits will be minimally classified substandard if delinquent 90 to 179 days (4 to 6 billing cycles).
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 4—Loans (continued)
Grade 7: Doubtful - A doubtful loan has well-defined weaknesses as in Grade 6 with the added characteristic that collection or liquidation in full, on the basis of currently existing facts, conditions and values, is highly questionable and improbable. The possibility of loss is very high, but because of certain important and reasonably specific pending factors which may work to strengthen the credit, its classification as a loss is deferred until a more exact status can be determined. Pending factors include proposed merger, acquisition, liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans. Borrower is facing extreme financial distress, bankruptcy or liquidation, and prospects for recovery are limited. Loans are seriously in default and should be on non-accrual status. Collateral and guarantor protection are insufficient. Efforts are directed solely at retirement of debt, e.g., asset liquidation. Due to their highly questionable collectability, loans rated doubtful should not remain in this category for an extended period of time.
Grade 8: Loss - Loans classified loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value but rather it is not practical or desirable to defer writing off the asset while pursuing recovery. In the case of consumer credit, closed end consumer installment loans delinquent 120 days or more (5 monthly payments) will be classified Loss. Open end consumer credits will be classified Loss if delinquent 180 days or more (7 or more billing cycles).
As of December 31, 2013 and December 31, 2012, the Bank had no loans classified as Grade 7 or 8. It is the Bank’s practice, in most cases, to take a charge-off when a loan or portion of a loan is deemed doubtful or loss. Consequently, the remaining principal balance, if applicable, which has been evaluated as collectible, is graded accordingly.
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 4—Loans (continued)
As of December 31, 2013 and 2012, the credit risk grades of loans by loan class were as follows:
Credit Risk Profile by Risk Grade Category:
2013 |
||||||||||||||||
(dollars in thousands) |
||||||||||||||||
Grades 1 - 4 |
Grade 5 |
Grade 6 |
Total |
|||||||||||||
Commercial and industrial |
$ | 18,010 | $ | 103 | $ | - | $ | 18,113 | ||||||||
Real estate - construction, land and land development |
||||||||||||||||
Acquistion, development, & construction |
11,257 | 49 | - | 11,306 | ||||||||||||
Other real estate - construction |
49,078 | - | 92 | 49,170 | ||||||||||||
Real estate - residential |
||||||||||||||||
Home equity lines |
18,021 | - | 110 | 18,131 | ||||||||||||
Other real estate - residential |
36,493 | 612 | 556 | 37,661 | ||||||||||||
Real estate - commercial |
||||||||||||||||
Owner occupied |
54,450 | 4,845 | 1,493 | 60,788 | ||||||||||||
Non-owner occupied |
67,989 | 6,786 | 1,069 | 75,844 | ||||||||||||
Consumer |
3,910 | - | 21 | 3,931 | ||||||||||||
Total loans receivable |
$ | 259,208 | $ | 12,395 | $ | 3,341 | $ | 274,944 |
2012 |
||||||||||||||||
(dollars in thousands) |
||||||||||||||||
Grades 1 - 4 |
Grade 5 |
Grade 6 |
Total |
|||||||||||||
Commercial and industrial |
$ | 19,723 | $ | 32 | $ | 61 | $ | 19,816 | ||||||||
Real estate - construction, land and land development |
||||||||||||||||
Acquistion, development, & construction |
13,498 | 774 | - | 14,272 | ||||||||||||
Other real estate - construction |
41,344 | 192 | 118 | 41,654 | ||||||||||||
Real estate - residential |
||||||||||||||||
Home equity lines |
19,829 | 104 | 4 | 19,937 | ||||||||||||
Other real estate - residential |
33,446 | 81 | 2,031 | 35,558 | ||||||||||||
Real estate - commercial |
||||||||||||||||
Owner occupied |
47,833 | 5,191 | 1,804 | 54,828 | ||||||||||||
Non-owner occupied |
72,603 | 3,103 | 195 | 75,901 | ||||||||||||
Consumer |
3,872 | 22 | 27 | 3,921 | ||||||||||||
Total loans receivable |
$ | 252,148 | $ | 9,499 | $ | 4,240 | $ | 265,887 |
The credit risk profile by risk grade category excludes accrued interest receivables of approximately $953,000 and $1,057,000 as of December 31, 2013 and December 31, 2012, respectively.
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 4—Loans (continued)
The following tables present the activity in the allowance for loan losses by loan segment for the years ended December 31, 2013 and 2012:
Allowance for Loan Losses Activity
For the Year Ended December 31, 2013
(dollars in thousands)
Commercial and industrial |
Real estate - construction, land and land development |
Real estate - residential |
Real estate - commercial |
Consumer |
Unallocated |
Total |
||||||||||||||||||||||
Beginning balance |
$ | 225 | $ | 2,870 | $ | 794 | $ | 1,872 | $ | 77 | $ | 116 | $ | 5,954 | ||||||||||||||
Charge offs |
(12 | ) | - | (96 | ) | (105 | ) | (93 | ) | - | (306 | ) | ||||||||||||||||
Recoveries |
6 | 1,467 | 37 | 190 | 38 | - | 1,738 | |||||||||||||||||||||
Provisions |
8 | (2,711 | ) | 37 | 501 | 188 | (52 | ) | (2,029 | ) | ||||||||||||||||||
Ending balance |
$ | 227 | $ | 1,626 | $ | 772 | $ | 2,458 | $ | 210 | $ | 64 | $ | 5,357 | ||||||||||||||
Ending balances: |
||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | - | $ | 37 | $ | 67 | $ | 252 | $ | 2 | $ | - | $ | 358 | ||||||||||||||
Collectively evaluated for impairment |
$ | 227 | $ | 1,589 | $ | 705 | $ | 2,206 | $ | 208 | $ | 64 | $ | 4,999 |
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 4—Loans (continued)
Allowance for Loan Losses Activity
For the Year Ended December 31, 2012
(dollars in thousands)
Commercial and industrial |
Real estate - construction, land and land development |
Real estate - residential |
Real estate - commercial |
Consumer |
Unallocated |
Total |
||||||||||||||||||||||
Beginning balance |
$ | 185 | $ | 3,219 | $ | 1,141 | $ | 1,706 | $ | 108 | $ | 445 | $ | 6,804 | ||||||||||||||
Charge offs |
(98 | ) | (692 | ) | (242 | ) | (179 | ) | (108 | ) | - | (1,319 | ) | |||||||||||||||
Recoveries |
225 | 734 | 43 | 14 | 58 | - | 1,074 | |||||||||||||||||||||
Provisions |
(87 | ) | (391 | ) | (148 | ) | 331 | 19 | (329 | ) | (605 | ) | ||||||||||||||||
Ending balance |
$ | 225 | $ | 2,870 | $ | 794 | $ | 1,872 | $ | 77 | $ | 116 | $ | 5,954 | ||||||||||||||
Ending balances: |
||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 28 | $ | - | $ | 59 | $ | 185 | $ | - | $ | - | $ | 272 | ||||||||||||||
Collectively evaluated for impairment |
$ | 197 | $ | 2,870 | $ | 735 | $ | 1,687 | $ | 77 | $ | 116 | $ | 5,682 |
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 4—Loans (continued)
The following tables present the recorded investment in loans receivable by loan segment as of December 31, 2013 and December 31, 2012:
Recorded Investment in Loans Receivable
As of December 31, 2013
(dollars in thousands)
Commercial and industrial |
Real estate - construction, land and land development |
Real estate - residential |
Real estate - commercial |
Consumer |
Total |
|||||||||||||||||||
Individually evaluated for impairment |
$ | - | $ | 92 | $ | 1,695 | $ | 7,053 | $ | 21 | $ | 8,861 | ||||||||||||
Collectively evaluated for impairment |
$ | 18,177 | $ | 60,670 | $ | 54,367 | $ | 129,896 | $ | 3,926 | $ | 267,036 | ||||||||||||
Ending balance total |
$ | 18,177 | $ | 60,762 | $ | 56,062 | $ | 136,949 | $ | 3,947 | $ | 275,897 |
Recorded Investment in Loans Receivable
As of December 31, 2012
(dollars in thousands)
Commercial and industrial |
Real estate - construction, land and land development |
Real estate - residential |
Real estate - commercial |
Consumer |
Total |
|||||||||||||||||||
Individually evaluated for impairment |
$ | 90 | $ | 566 | $ | 2,376 | $ | 6,770 | $ | 27 | $ | 9,829 | ||||||||||||
Collectively evaluated for impairment |
$ | 19,798 | $ | 55,657 | $ | 53,413 | $ | 124,420 | $ | 3,914 | $ | 257,202 | ||||||||||||
Ending balance total |
$ | 19,888 | $ | 56,223 | $ | 55,789 | $ | 131,190 | $ | 3,941 | $ | 267,031 |
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 4—Loans (continued)
Loans for which it is probable that the payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired, and are individually evaluated for impairment. Impaired loans for which interest is recorded on a cash basis is immaterial for disclosure. The following tables present loans individually evaluated for impairment and related allowance by loan class for the years ended December 31, 2013 and 2012:
Impaired Loans
As of and for the Year Ended December 31, 2013
(dollars in thousands)
Unpaid Principal Balance |
Recorded Investment |
Related Allowance |
Average Recorded Investment |
Interest Income Recognized |
||||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||
Commercial and industrial |
$ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
Real estate - construction, land and land development |
||||||||||||||||||||
Acquistion, development, & construction |
- | - | - | - | - | |||||||||||||||
Other real estate - construction |
144 | 55 | - | 171 | 2 | |||||||||||||||
Real estate - residential |
||||||||||||||||||||
Home equity lines |
162 | 162 | - | 176 | 3 | |||||||||||||||
Other real estate - residential |
1,342 | 1,260 | - | 1,546 | 73 | |||||||||||||||
Real estate - comercial |
||||||||||||||||||||
Owner occupied |
5,219 | 5,184 | - | 6,012 | 249 | |||||||||||||||
Non-owner occupied |
1,060 | 1,057 | - | 1,061 | 37 | |||||||||||||||
Consumer |
31 | 19 | - | 32 | - | |||||||||||||||
Total |
$ | 7,958 | $ | 7,737 | $ | - | $ | 8,998 | $ | 364 | ||||||||||
With an allowance recorded: |
||||||||||||||||||||
Commercial and industrial |
$ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
Real estate - construction, land and land development |
||||||||||||||||||||
Acquistion, development, & construction |
- | - | - | - | - | |||||||||||||||
Other real estate - construction |
37 | 37 | 37 | - | - | |||||||||||||||
Real estate - residential |
||||||||||||||||||||
Home equity lines |
14 | 14 | 7 | - | - | |||||||||||||||
Other real estate - residential |
259 | 259 | 60 | - | - | |||||||||||||||
Real estate - comercial |
||||||||||||||||||||
Owner occupied |
812 | 812 | 252 | - | - | |||||||||||||||
Non-owner occupied |
- | - | - | - | - | |||||||||||||||
Consumer |
2 | 2 | 2 | - | - | |||||||||||||||
Total |
$ | 1,124 | $ | 1,124 | $ | 358 | $ | - | $ | - | ||||||||||
TOTAL |
||||||||||||||||||||
Commercial and industrial |
$ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
Real estate - construction, land and land development |
||||||||||||||||||||
Acquistion, development, & construction |
- | - | - | |||||||||||||||||
Other real estate - construction |
181 | 92 | 37 | 171 | 2 | |||||||||||||||
Real estate - residential |
||||||||||||||||||||
Home equity lines |
176 | 176 | 7 | 176 | 3 | |||||||||||||||
Other real estate - residential |
1,601 | 1,519 | 60 | 1,546 | 73 | |||||||||||||||
Real estate - comercial |
||||||||||||||||||||
Owner occupied |
6,031 | 5,996 | 252 | 6,012 | 249 | |||||||||||||||
Non-owner occupied |
1,060 | 1,057 | - | 1,061 | 37 | |||||||||||||||
Consumer |
33 | 21 | 2 | 32 | - | |||||||||||||||
Total |
$ | 9,082 | $ | 8,861 | $ | 358 | $ | 8,998 | $ | 364 |
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 4—Loans (continued)
Impaired Loans
As of and for the Year Ended December 31, 2012
(dollars in thousands)
Unpaid Principal Balance |
Recorded Investment |
Related Allowance |
Average Recorded Investment |
Interest Income Recognized |
||||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||
Commercial and industrial |
$ | 60 | $ | 61 | $ | - | $ | 454 | $ | 25 | ||||||||||
Real estate - construction, land and land development |
||||||||||||||||||||
Acquistion, development, & construction |
2,457 | 447 | - | 2,429 | 21 | |||||||||||||||
Other real estate - construction |
197 | 119 | - | 206 | 5 | |||||||||||||||
Real estate - residential |
||||||||||||||||||||
Home equity lines |
70 | 70 | - | 74 | - | |||||||||||||||
Other real estate - residential |
2,129 | 1,964 | - | 2,283 | 96 | |||||||||||||||
Real estate - comercial |
||||||||||||||||||||
Owner occupied |
6,053 | 5,866 | - | 6,168 | 258 | |||||||||||||||
Non-owner occupied |
- | - | - | - | - | |||||||||||||||
Consumer |
37 | 27 | - | 41 | - | |||||||||||||||
Total |
$ | 11,003 | $ | 8,554 | $ | - | $ | 11,655 | $ | 405 | ||||||||||
With an allowance recorded: |
||||||||||||||||||||
Commercial and industrial |
$ | 29 | $ | 29 | $ | 29 | $ | 32 | $ | 2 | ||||||||||
Real estate - construction, land and land development |
||||||||||||||||||||
Acquistion, development, & construction |
- | - | - | - | - | |||||||||||||||
Other real estate - construction |
- | - | - | - | - | |||||||||||||||
Real estate - residential |
||||||||||||||||||||
Home equity lines |
- | - | - | - | - | |||||||||||||||
Other real estate - residential |
342 | 342 | 60 | 346 | 23 | |||||||||||||||
Real estate - comercial |
||||||||||||||||||||
Owner occupied |
143 | 143 | 23 | 149 | 8 | |||||||||||||||
Non-owner occupied |
760 | 761 | 160 | 780 | 50 | |||||||||||||||
Consumer |
- | - | - | - | - | |||||||||||||||
Total |
$ | 1,274 | $ | 1,275 | $ | 272 | $ | 1,307 | $ | 83 | ||||||||||
TOTAL |
||||||||||||||||||||
Commercial and industrial |
$ | 89 | $ | 90 | $ | 29 | $ | 486 | $ | 27 | ||||||||||
Real estate - construction, land and land development |
||||||||||||||||||||
Acquistion, development, & construction |
2,457 | 447 | - | 2,429 | 21 | |||||||||||||||
Other real estate - construction |
197 | 119 | - | 206 | 5 | |||||||||||||||
Real estate - residential |
||||||||||||||||||||
Home equity lines |
70 | 70 | - | 74 | - | |||||||||||||||
Other real estate - residential |
2,471 | 2,306 | 60 | 2,629 | 119 | |||||||||||||||
Real estate - comercial |
||||||||||||||||||||
Owner occupied |
6,196 | 6,009 | 23 | 6,317 | 266 | |||||||||||||||
Non-owner occupied |
760 | 761 | 160 | 780 | 50 | |||||||||||||||
Consumer |
37 | 27 | - | 41 | - | |||||||||||||||
Total |
$ | 12,277 | $ | 9,829 | $ | 272 | $ | 12,962 | $ | 488 |
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 4—Loans (continued)
The following tables present a summary of current, past due and nonaccrual loans as of December 31, 2013 and 2012 by loan class:
Analysis of Current, Past Due and Nonaccrual Loans
As of December 31, 2013
(dollars in thousands)
Accruing |
||||||||||||||||||||||||
30-89 Days Past Due |
90 Days or more Past Due |
Nonaccrual |
Total Past Due and Nonaccrual |
Current and not Past Due or Nonaccrual |
Total Loans Receivable |
|||||||||||||||||||
Commercial and industrial |
$ | 59 | $ | - | $ | - | $ | 59 | $ | 18,054 | $ | 18,113 | ||||||||||||
Real estate - construction, land and land development |
||||||||||||||||||||||||
Acquistion, development, & construction |
- | - | - | - | 11,306 | 11,306 | ||||||||||||||||||
Other real estate - construction |
125 | 31 | 52 | 208 | 48,962 | 49,170 | ||||||||||||||||||
Real estate - residential |
||||||||||||||||||||||||
Home equity lines |
132 | - | 110 | 242 | 17,889 | 18,131 | ||||||||||||||||||
Other real estate - residential |
468 | - | 556 | 1,024 | 36,637 | 37,661 | ||||||||||||||||||
Real estate - comercial |
||||||||||||||||||||||||
Owner occupied |
919 | - | 744 | 1,663 | 59,125 | 60,788 | ||||||||||||||||||
Non-owner occupied |
- | - | 441 | 441 | 75,403 | 75,844 | ||||||||||||||||||
Consumer |
6 | - | 21 | 27 | 3,904 | 3,931 | ||||||||||||||||||
Total |
$ | 1,709 | $ | 31 | $ | 1,924 | $ | 3,664 | $ | 271,280 | $ | 274,944 |
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 4—Loans (continued)
Analysis of Current, Past Due and Nonaccrual Loans
As of December 31, 2012
(dollars in thousands)
Accruing |
||||||||||||||||||||||||
30-89 Days Past Due |
90 Days or more Past Due |
Nonaccrual |
Total Past Due and Nonaccrual |
Current and not Past Due or Nonaccrual |
Total Loans Receivable |
|||||||||||||||||||
Commercial and industrial |
$ | 134 | $ | - | $ | 61 | $ | 195 | $ | 19,621 | $ | 19,816 | ||||||||||||
Real estate - construction, land and land development |
||||||||||||||||||||||||
Acquistion, development, & construction |
- | - | 134 | 134 | 14,138 | 14,272 | ||||||||||||||||||
Other real estate - construction |
1,318 | - | 68 | 1,386 | 40,268 | 41,654 | ||||||||||||||||||
Real estate - residential |
||||||||||||||||||||||||
Home equity lines |
211 | - | 108 | 319 | 19,618 | 19,937 | ||||||||||||||||||
Other real estate - residential |
1,322 | - | 1,776 | 3,098 | 32,460 | 35,558 | ||||||||||||||||||
Real estate - comercial |
||||||||||||||||||||||||
Owner occupied |
941 | - | 1,527 | 2,468 | 52,360 | 54,828 | ||||||||||||||||||
Non-owner occupied |
772 | - | 195 | 967 | 74,934 | 75,901 | ||||||||||||||||||
Consumer |
27 | - | 27 | 54 | 3,867 | 3,921 | ||||||||||||||||||
Total |
$ | 4,725 | $ | - | $ | 3,896 | $ | 8,621 | $ | 257,266 | $ | 265,887 |
The Bank’s policy is that loans placed on nonaccrual will typically remain on nonaccrual status until all principal and interest payments are brought current and the prospect for future payments in accordance with the loan agreement appear relatively certain. The Bank’s policy generally refers to six months of payment performance as sufficient to warrant a return to accrual status.
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 4—Loans (continued)
Troubled debt restructurings
Troubled debt restructurings are defined as debt modifications, for economic or legal reasons related to the borrower’s financial difficulties, in which the Bank grants a concession that it would not otherwise consider.
Such a concession may stem from an agreement between the Bank and the borrower, or may be imposed by law or a court. Some examples of modifications are as follows:
Rate Modification - A modification in which the interest rate is changed.
Term Modification - A modification in which the maturity date, timing of payments, or frequency of payments is changed.
Interest Only Modification – A modification in which the loan is converted to interest only payments for a period of time.
Payment Modification – A modification in which the dollar amount of the payment is changed, other than an interest only modification described above.
Transfer of Assets Modification – A modification in which a transfer of assets has occurred to partially satisfy debt, including foreclosure and repossession.
Combination Modification – Any other type of modification which includes the use of multiple categories above.
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 4—Loans (continued)
The following tables present the Bank’s loans classified as troubled debt restructurings by loan class as of December 31, 2013 and 2012:
As of December 31, 2013
(dollars in thousands)
Number of Contracts |
Accrual |
Nonaccrual |
Total Restructurings |
|||||||||||||
Commercial and industrial |
- | $ | - | $ | - | $ | - | |||||||||
Real estate - construction, land and land development |
||||||||||||||||
Acquistion, development, & construction |
- | - | - | - | ||||||||||||
Other real estate - construction |
- | - | - | - | ||||||||||||
Real estate - residential |
||||||||||||||||
Home equity lines |
1 | 66 | - | 66 | ||||||||||||
Other real estate - residential |
10 | 925 | 925 | |||||||||||||
Real estate - comercial |
||||||||||||||||
Owner occupied |
13 | 5,775 | 5,775 | |||||||||||||
Non-owner occupied |
1 | 563 | - | 563 | ||||||||||||
Consumer |
- | - | - | - | ||||||||||||
Total |
25 | $ | 7,329 | $ | - | $ | 7,329 |
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 4—Loans (continued)
As of December 31, 2012
(dollars in thousands)
Number of Contracts |
Accrual |
Nonaccrual |
Total Restructurings |
|||||||||||||
Commercial and industrial |
1 | $ | - | $ | 34 | $ | 34 | |||||||||
Real estate - construction, land and land development |
||||||||||||||||
Acquistion, development, & construction |
2 | 310 | 134 | 444 | ||||||||||||
Other real estate - construction |
- | - | - | - | ||||||||||||
Real estate - residential |
||||||||||||||||
Home equity lines |
1 | 66 | - | 66 | ||||||||||||
Other real estate - residential |
10 | 583 | 243 | 826 | ||||||||||||
Real estate - comercial |
||||||||||||||||
Owner occupied |
9 | 4,187 | 1,177 | 5,364 | ||||||||||||
Non-owner occupied |
- | - | - | - | ||||||||||||
Consumer |
- | - | - | - | ||||||||||||
Total |
23 | $ | 5,146 | $ | 1,588 | $ | 6,734 |
At December 31, 2013 and 2012, commitments to advance additional funds outstanding on troubled debt restructurings totaled $0.
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 4—Loans (continued)
The following tables present newly restructured loans that occurred during the years ended December 31, 2013 and 2012, respectively:
Year Ended December 31, 2013
(dollars in thousands)
Number of Contracts |
Rate Modification |
Payment Modification |
Transfer of Assets Modification |
Combination Modification |
Total Modifications |
|||||||||||||||||||
Pre-Modification Outstanding Recorded Investment: |
||||||||||||||||||||||||
Real-estate - residential |
||||||||||||||||||||||||
Other real estate - residential |
2 | $ | 154 | $ | - | $ | - | $ | 18 | $ | 172 | |||||||||||||
Real estate - commercial |
||||||||||||||||||||||||
Owner occupied |
4 | 359 | - | - | 1,231 | 1,590 | ||||||||||||||||||
Non-owner occupied |
3 | 72 | - | - | 570 | 642 | ||||||||||||||||||
Total |
9 | $ | 585 | $ | - | $ | - | $ | 1,819 | $ | 2,404 | |||||||||||||
Post-Modification Outstanding Recorded Investment: |
||||||||||||||||||||||||
Real-estate - residential |
||||||||||||||||||||||||
Other real estate - residential |
2 | $ | 148 | $ | - | $ | - | $ | 18 | $ | 166 | |||||||||||||
Real estate - commercial |
||||||||||||||||||||||||
Owner occupied |
4 | 340 | - | - | 1,221 | 1,561 | ||||||||||||||||||
Non-owner occupied |
3 | 64 | - | - | 563 | 627 | ||||||||||||||||||
Total |
9 | $ | 552 | $ | - | $ | - | $ | 1,802 | $ | 2,354 |
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 4—Loans (continued)
Year Ended December 31, 2012
(dollars in thousands)
Number of Contracts |
Rate Modification |
Payment Modification |
Transfer of Assets Modification |
Combination Modification |
Total Modifications |
|||||||||||||||||||
Pre-Modification Outstanding Recorded Investment: |
||||||||||||||||||||||||
Real-estate - residential |
||||||||||||||||||||||||
Other real estate - residential |
8 | $ | 243 | $ | 566 | $ | - | $ | - | $ | 809 | |||||||||||||
Real estate - commercial |
||||||||||||||||||||||||
Owner occupied |
- | - | - | - | - | - | ||||||||||||||||||
Non-owner occupied |
- | - | - | - | - | - | ||||||||||||||||||
Total |
8 | $ | 243 | $ | 566 | $ | - | $ | - | $ | 809 | |||||||||||||
Post-Modification Outstanding Recorded Investment: |
||||||||||||||||||||||||
Real-estate - residential |
||||||||||||||||||||||||
Other real estate - residential |
8 | $ | 243 | $ | 557 | $ | - | $ | - | $ | 800 | |||||||||||||
Real estate - commercial |
||||||||||||||||||||||||
Owner occupied |
- | - | - | - | - | - | ||||||||||||||||||
Non-owner occupied |
- | - | - | - | - | - | ||||||||||||||||||
Total |
8 | $ | 243 | $ | 557 | $ | - | $ | - | $ | 800 |
The following tables represent loans receivable modified as troubled debt restructurings and with a payment default, with the payment default occurring within 12 months of the restructure date, and the payment default occurring during the years ended December 31, 2013 and 2012 (dollars in thousands):
2013 |
2012 |
|||||||||||||||
Number of Contracts |
Recorded Investment |
Number of Contracts |
Recorded Investment |
|||||||||||||
Commercial and industrial |
- | $ | - | 1 | $ | 34 | ||||||||||
Real estate - construction, land and land development |
||||||||||||||||
Other real estate - construction |
- | - | - | - | ||||||||||||
Real estate - residential |
||||||||||||||||
Other real estate - residential |
- | - | - | - | ||||||||||||
Real estate - commercial |
||||||||||||||||
Owner occupied |
1 | 563 | 2 | 1,001 | ||||||||||||
Total |
1 | $ | 563 | 3 | $ | 1,035 |
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 4—Loans (continued)
At December 31, 2013, executive officers and directors were indebted to the Bank in the aggregate amount of approximately $5,591,000. Following is a summary of transactions for the years ended December 31, 2013 and 2012:
2013 |
2012 |
|||||||
(dollars in thousands) |
||||||||
Balance at beginning of year |
$ | 6,376 | $ | 9,813 | ||||
Advances |
1,144 | 4,607 | ||||||
Repayments |
(1,929 | ) | (8,044 | ) | ||||
Balance at end of year |
$ | 5,591 | $ | 6,376 |
Note 5—Bank-owned life insurance (BOLI)
In September 2007, $8.0 million in bank-owned life insurance (BOLI) was acquired through two policies in order to insure certain key officers of the Bank. In September 2013, an additional $5.0 million bank-owned life insurance policy (BOLI) was acquired in order to insure certain key officers of the Bank. As of December 31, 2013, the total BOLI cash surrender value was $14.8 million resulting in other income for 2013 of $448,000 and an annualized net yield of 4.06%. As of December 31, 2012, the BOLI cash surrender value was $10.0 million resulting in other income for 2012 of $392,000 and an annualized net yield of 4.01%. During 2013, the Bank received death insurance benefits from the two original Bank owned life insurance policies totaling $1.42 million. These benefits resulted in $806,000 of other income.
Note 6—Bank premises and equipment
Bank premises and equipment consist of the following as of December 31, 2013 and 2012:
2013 |
2012 |
|||||||
(dollars in thousands) |
||||||||
Land and improvements |
$ | 3,855 | $ | 3,839 | ||||
Building and improvements |
7,191 | 6,445 | ||||||
Equipment, furniture and fixtures |
4,885 | 4,600 | ||||||
Construction in progress |
82 | 80 | ||||||
16,013 | 14,964 | |||||||
Less accumulated depreciation |
(6,501 | ) | (6,174 | ) | ||||
Premises and equipment, net |
$ | 9,512 | $ | 8,790 |
Depreciation expense for the years ended December 31, 2013 and 2012 was approximately $498,000 and $517,000, respectively. Rental expense of office premises and equipment was approximately $267,000 and $265,000 for the years ended December 31, 2013 and 2012, respectively.
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 7—Other real estate owned
At December 31, 2013 and 2012, the Bank had other real estate owned activities as follows:
2013 |
2012 |
|||||||
(dollars in thousands) |
||||||||
Balance at beginning of year |
$ | 5,876 | $ | 6,990 | ||||
Loans transferred to real estate owned |
1,968 | 5,186 | ||||||
Sales of real estate owned |
(2,051 | ) | (4,866 | ) | ||||
Direct write-downs |
(896 | ) | (1,434 | ) | ||||
Balance at end of year |
$ | 4,897 | $ | 5,876 |
Income and expenses related to other real estate owned for the years ending December 31, 2013 and 2012 were as follows:
2013 |
2012 |
|||||||
(dollars in thousands) |
||||||||
Net gains on sales |
$ | 231 | $ | 40 | ||||
Rental income |
$ | 567 | $ | 686 | ||||
Operating expenses |
$ | 758 | $ | 850 |
Note 8—Deposits
At December 31, 2013, the scheduled maturities of time deposit liabilities were as follows:
2013 |
||||
(dollars in thousands) |
||||
One year or less |
$ | 91,649 | ||
Over one year through two years |
32,700 | |||
Over two years through three years |
10,299 | |||
Over three years through four years |
8,642 | |||
Over four years |
9,194 | |||
Total |
$ | 152,484 |
The Bank may also enter into repurchase agreements with customers and may obtain short-term funding from other institutions through brokered and internet deposits in order to manage the Bank’s funding capabilities. Repurchase agreements with customers are generally secured by investment securities owned by the Bank and are established at prevailing market rates. Total repurchase agreements with customers were approximately $12.1 million and $3.3 million at December 31, 2013 and 2012, respectively. Total brokered and internet deposits were $19.9 million and $27.8 million at December 31, 2013 and 2012, respectively.
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 9—Federal Home Loan Bank advances and borrowings
As of December 31, 2013 and 2012, the Bank had credit availability, or potential borrowing capacity, of 25% of total assets, subject to the Bank’s financial condition and collateral balances with the FHLB. One of the advance products established is the “Loans Held for Sale” (LHFS) program. The line is collateralized by the Bank’s mortgage loans held for sale. Advances under this line are due 90 days from the date of the advance. As of December 31, 2013 and 2012, the Bank did not have a balance outstanding under the LHFS program. As of December 31, 2013, the Bank had $10.1 million in loans held for sale pledged as collateral under this line.
The Bank also maintains a line of credit with the FHLB which is secured by 1-4 family and commercial real estate loans held in the Bank’s loan portfolio. The balance at December 31, 2012 was $25,000,000 with a variable interest rate of 0.42% and a maturity date of September 30, 2013. The balance at December 31, 2013 was $22,200,000 with a variable interest rate of 0.355% and a maturity date of October 29, 2014. At December 31, 2013, the Bank had $68.5 million in 1-4 family and commercial real estate loans pledged as collateral to the FHLB.
In 2007, a long-term convertible advance was established. During the year ended December 31, 2012, the Bank paid off the outstanding balance on this advance of $10.0 million with a weighted average interest rate of 3.83%. An additional but similar long-term convertible advance was established during 2008. During the year ended December 31, 2012, the Bank paid off the outstanding balance on this advance of $15.0 million with a weighted average interest rate of 3.33%. The Bank paid a penalty of $392,000 for pre-payment of the advances which is included in other non-interest expense for 2012.
Note 10—Employee benefit plans
The Bank has a 401(k) salary-deferred plan covering substantially all employees. At the discretion of the Bank’s Board of Directors, the Bank may match a percentage of the annual amounts deferred by employees. Matching amounts are funded by the Bank as accrued. Total deferred and matching amounts are limited to amounts that can be deducted for Federal income tax purposes. The Bank’s matching contributions were approximately $206,000 and $200,000 for the years ended December 31, 2013 and 2012, respectively.
The Bank has a Nonqualified Executive Deferred Compensation Plan (“EDCP”) covering a select group of key employees and senior management. The EDCP allows participating employees to elect each year to defer compensation into a participant account. At its discretion, the Bank may also elect to make discretionary contributions to the participant account. The EDCP expense, including employee deferrals and contributions made by the Bank, totaled $22,000 and $23,000 for the years ending December 31, 2013 and 2012, respectively. The accrued liability related to the EDCP was approximately $96,000 and $74,000 at December 31, 2013 and 2012, respectively.
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 10—Employee benefit plans (continued)
The Bank also has a Supplemental Executive Retirement Plan (“SERP”) for the benefit of certain key officers. The SERP provides selected employees who satisfy specific eligibility requirements with supplemental benefits upon retirement, termination of employment, death, disability or a change of control of the Bank, in certain prescribed circumstances. The Bank recorded expense totaling $273,000 and $294,000 for the SERP for the years ended December 31, 2013 and 2012, respectively. The accrued liability related to the SERP was approximately $1,444,000 and $1,188,000 as of December 31, 2013 and 2012, respectively.
Note 11—Regulatory capital matters
The primary source of funds available to the Company is the payment of dividends by its subsidiary bank. Banking regulations limit the amount of dividends that may be paid by the Bank without prior approval of certain regulatory agencies. The amount of dividends allowable without prior approval was $13.9 million at December 31, 2013.
In 2012, the Company began paying cash dividends to shareholders. Three quarterly dividends of $0.04 per share were paid for a total of $431,500 for the year ended December 31, 2012. One quarterly dividend of $0.04 per share and three quarterly dividends of $0.045 per share were paid for a total of $623,000 for the year ended December 31, 2013.
On January 27, 2014, the Company declared another cash dividend of $0.045 per share to all shareholders of record as of February 11, 2014.
The Bank is subject to various regulatory capital requirements administered by state and Federal banking agencies. Failure to meet minimum capital requirements can trigger certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items, as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined). Management believes that, as of December 31, 2013, the Bank met all capital adequacy requirements to which it is subject.
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 11— Regulatory capital matters (continued)
As of December 31, 2013, the most recent notification from the regulatory agencies categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios, as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Bank’s category.
The Bank’s actual capital amounts (in thousands) and ratios as of December 31, 2013 and 2012 are presented in the following tables:
Actual |
Required for Capital Adequacy Purposes |
Required to be Well-Capitalized Under Prompt Corrective Action Provisions |
||||||||||||||||||||||
Amount |
Ratio |
Amount |
Ratio |
Amount |
Ratio |
|||||||||||||||||||
As of December 31, 2013: |
||||||||||||||||||||||||
Total capital to risk weighted assets |
||||||||||||||||||||||||
Bank |
$ | 64,863 | 17.25 | % | $ | 30,087 | 8.00 | % | $ | 37,609 | 10.00 | % | ||||||||||||
Consolidated |
$ | 65,663 | 17.44 | % | $ | 30,116 | 8.00 | % | $ | 37,645 | 10.00 | % | ||||||||||||
Tier 1 capital to risk weighted assets |
||||||||||||||||||||||||
Bank |
$ | 60,154 | 15.99 | % | $ | 15,043 | 4.00 | % | $ | 22,565 | 6.00 | % | ||||||||||||
Consolidated |
$ | 60,954 | 16.19 | % | $ | 15,058 | 4.00 | % | $ | 22,587 | 6.00 | % | ||||||||||||
Tier 1 leverage to average assets |
||||||||||||||||||||||||
Bank |
$ | 60,154 | 11.93 | % | $ | 20,172 | 4.00 | % | $ | 25,215 | 5.00 | % | ||||||||||||
Consolidated |
$ | 60,954 | 12.08 | % | $ | 20,189 | 4.00 | % | $ | 25,233 | 5.00 | % |
Actual |
Required for Capital Adequacy Purposes |
Required to be Well-Capitalized Under Prompt Corrective Action Provisions |
||||||||||||||||||||||
Amount |
Ratio |
Amount |
Ratio |
Amount |
Ratio |
|||||||||||||||||||
As of December 31, 2012: |
||||||||||||||||||||||||
Total capital to risk weighted assets |
||||||||||||||||||||||||
Bank |
$ | 58,321 | 16.59 | % | $ | 28,125 | 8.00 | % | $ | 35,156 | 10.00 | % | ||||||||||||
Consolidated |
$ | 59,262 | 16.86 | % | $ | 28,125 | 8.00 | % | $ | 35,156 | 10.00 | % | ||||||||||||
Tier 1 capital to risk weighted assets |
||||||||||||||||||||||||
Bank |
$ | 53,926 | 15.34 | % | $ | 14,062 | 4.00 | % | $ | 21,094 | 6.00 | % | ||||||||||||
Consolidated |
$ | 54,867 | 15.61 | % | $ | 14,062 | 4.00 | % | $ | 21,094 | 6.00 | % | ||||||||||||
Tier 1 leverage to average assets |
||||||||||||||||||||||||
Bank |
$ | 53,926 | 11.13 | % | $ | 19,382 | 4.00 | % | $ | 24,227 | 5.00 | % | ||||||||||||
Consolidated |
$ | 54,867 | 11.32 | % | $ | 19,383 | 4.00 | % | $ | 24,229 | 5.00 | % |
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 12— Stock based compensation
During 1997, the Company adopted the 1997 Stock Option Plan (the “1997 Plan”) for eligible directors, officers, and key employees of the Company and the Bank. The 1997 Plan expired in 2007 and no more grants may be made pursuant to this plan. Options were granted to purchase common shares at prices not less than the fair market value of the stock at the date of grant. Fair market value is defined to mean the average closing price for the ten business days prior to the date of board approval and grant. The maximum number of shares reserved under the 1997 Plan was 345,000 shares, as adjusted for the Company’s stock splits and stock dividends.
In early 2005, the Company adopted the 2004 Incentive Plan (the “2004 Plan”) for eligible directors, officers, and key employees of the Company and the Bank. The 2004 Plan allows awards of stock, performance units, stock appreciation rights, incentive stock options, non-qualified stock options and phantom stock. Options are granted to purchase common shares at prices not less than the fair market value of the stock at the date of grant. Fair market value is defined to mean the average closing price for the ten business days prior to the date of board approval and grant. The maximum number of shares reserved and available for issuance under the 2004 Plan is 330,125 shares, as adjusted for the Company’s stock split in 2005.
The Stock Incentive Committee of the Board of Directors of the Company administers both plans and establishes to whom awards shall be made and determines option exercise prices, methods of exercise, vesting requirements, the number of shares covered by each option, the terms and restrictions applicable to restricted stock awards, all subject to the approval of the Company’s Board of Directors.
The Company recorded compensation expense of approximately $93,000 and $108,000 for the years ended December 31, 2013 and 2012, respectively, related to employee stock options. No stock options were issued during the years ended December 31, 2013 and 2012.
The estimated fair value of options is amortized to expense over the option’s vesting period. Option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Changes in the subjective input assumptions can materially affect the fair value estimate. In management’s opinion, the model does not necessarily provide a reliable single measure of the fair value of options.
Vesting requirements are determined by the Board of Directors at the time options are granted and generally provide for vesting over a seven-year period. The plans provide that vesting periods may not exceed ten years.
During the years ending December 31, 2013 and 2012, the Company made restricted stock awards totaling 24,006 and 15,988 shares, respectively. The shares granted in 2012 vest fully at the end of three years. During 2013, there were 16,406 shares granted which vest fully at the end of three years and 7,600 shares granted which vest fully at the end of five years. The grants resulted in expense of $132,456 and $35,210 for the years ended December 31, 2013 and 2012, respectively.
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 12— Stock based compensation (continued)
A summary of the Company’s stock option activity under the plans as of December 31, 2013 and 2012, and changes and related information for the years then ended, is presented below:
Options |
Shares |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term |
Aggregate Intrinsic Value |
||||||||||||
Outstanding at January 1, 2013 |
238,728 | $ | 11.21 | 4.12 | $ | 583,833 | ||||||||||
Granted |
- | $ | - | |||||||||||||
Exercised |
(28,469 | ) | $ | (14.30 | ) | |||||||||||
Forfeited or expired |
(28,017 | ) | $ | (9.44 | ) | |||||||||||
Outstanding at December 31, 2013 |
182,242 | $ | 11.00 | 4.19 | $ | 710,283 | ||||||||||
Fully vested and expected to vest |
182,242 | $ | 11.00 | 4.19 | $ | 710,283 | ||||||||||
Exercisable at December 31, 2013 |
120,933 | $ | 12.49 | 3.26 | $ | 314,381 |
Options |
Shares |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term |
Aggregate Intrinsic Value |
||||||||||||
Outstanding at January 1, 2012 |
290,344 | $ | 10.26 | 4.35 | $ | 67,631 | ||||||||||
Granted |
- | $ | - | |||||||||||||
Exercised |
(45,491 | ) | $ | (5.55 | ) | |||||||||||
Forfeited or expired |
(6,125 | ) | $ | (7.96 | ) | |||||||||||
Outstanding at December 31, 2012 |
238,728 | $ | 11.21 | 4.12 | $ | 583,833 | ||||||||||
Fully vested and expected to vest |
238,728 | $ | 11.21 | 4.12 | $ | 583,833 | ||||||||||
Exercisable at December 31, 2012 |
160,861 | $ | 12.59 | 2.81 | $ | 251,921 |
At December 31, 2013, options both outstanding and exercisable under both plans have exercise prices that range from $7.00 per share to $20.41 per share.
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 12— Stock based compensation (continued)
The fair value of these options was estimated on the date of grant using a Black-Scholes option valuation model that used the following range of assumptions for each of the years presented:
2013 |
2012 |
|||||||
Total intrinsic value of options exercised |
$ | 6,263 | $ | 318,282 | ||||
Cash received from option exercise |
$ | 407,107 | $ | 252,630 | ||||
Tax benefit related to option exercises |
$ | 130,274 | $ | 85,890 |
In addition, the model assumed that each option grant was exercised in the initial year of full vesting.
A summary of the status of the Company’s nonvested options as of December 31, 2013 and 2012, and changes during the years then ended, is presented below:
Nonvested Options |
Shares |
Weighted Average Grant-Date Fair Value |
||||||
Nonvested at January 1, 2013 |
77,867 | $ | 5.55 | |||||
Granted |
- | $ | - | |||||
Vested |
(16,558 | ) | $ | 5.71 | ||||
Forfeited |
- | $ | - | |||||
Nonvested at December 31, 2013 |
61,309 | $ | 5.50 |
Nonvested Options |
Shares |
Weighted Average Grant-Date Fair Value |
||||||
Nonvested at January 1, 2012 |
93,516 | $ | 5.57 | |||||
Granted |
- | $ | - | |||||
Vested |
(15,355 | ) | $ | 5.71 | ||||
Forfeited |
(294 | ) | $ | 5.69 | ||||
Nonvested at December 31, 2012 |
77,867 | $ | 5.55 |
As of December 31, 2013, there was $243,195 of total unrecognized compensation cost related to the Company’s nonvested options granted under the plans. This cost is expected to be recognized over a weighted-average period of 1.61 years. The total fair value of shares vested during the years ended December 31, 2013 and 2012, was $94,494 and $87,638, respectively.
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 12— Stock based compensation (continued)
For the years ended December 31, 2013 and 2012, the Company issued a total of 14,071 and 24,504 shares of common stock, respectively, to non-employee directors as compensation for services rendered under the Company’s Directors Equity Incentive Plan. The Company recorded $205,000 and $209,000 in stock compensation expense related to the issuance of these shares for the years ended December 31, 2013 and 2012, respectively.
For shares issued as retainer stock, the shares are issued at fair value and the expense recognized was equal to the fair value of the shares on the date of grant. The Company issued 7,646 and 11,350 of retainer shares included above during the years ended December 31, 2013 and 2012, respectively.
In addition, directors may choose to purchase stock under this plan in lieu of directors fees paid for meeting attendance. The shares under the plan were purchased at 85% of the fair value of the shares on the date of the grant. The Company has defined fair value under the plan to be the average closing market price of the Company’s common stock for the last ten trading days of each quarter as reported on the Over-the-Counter Bulletin Board. The Company records the expense related to the purchases at fair value of the shares on the date of the grant. The following table represents activity in the Directors’ Equity Incentive Plan in 2013 and 2012:
2013 |
2012 |
|||||||
Beginning shares authorized and unissued |
170,434 | 21,739 | ||||||
Additional shares authorized and unissued |
- | 173,199 | ||||||
Shares issued |
(14,071 | ) | (24,504 | ) | ||||
Ending shares authorized and unissued |
156,363 | 170,434 |
A summary of common stock issued through the exercise of employee stock options and employee/director compensation and expense is as follows:
2013 |
2012 |
|||||||
Net options exercised |
5,831 | 45,491 | ||||||
Issuance of stock for compensation |
24,006 | 15,988 | ||||||
Issuance of stock for directors' fees |
14,071 | 24,504 | ||||||
Net issuance of common stock |
43,908 | 85,983 |
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 13— Earnings per common share
Following is a reconciliation of the income amounts and common stock amounts utilized in computing the Company’s earnings per share for each of the years ended December 31, 2013 and 2012:
2013 |
||||||||||||
Income (Numerator) |
Shares (Denominator) |
Per Share |
||||||||||
(dollars in thousands, except per share data) |
||||||||||||
Basic EPS |
||||||||||||
Net income available to common shareholders |
$ | 6,204 | 3,558,876 | $ | 1.74 | |||||||
Effect of stock options outstanding |
- | 31,244 | (0.01 | ) | ||||||||
Diluted EPS |
||||||||||||
Net income available to common shareholders |
$ | 6,204 | 3,590,120 | $ | 1.73 |
2012 |
||||||||||||
Income (Numerator) |
Shares (Denominator) |
Per Share |
||||||||||
(dollars in thousands, except per share data) |
||||||||||||
Basic EPS |
||||||||||||
Net income available to common shareholders |
$ | 6,621 | 3,599,431 | $ | 1.84 | |||||||
Effect of stock options outstanding |
- | - | - | |||||||||
Diluted EPS |
||||||||||||
Net income available to common shareholders |
$ | 6,621 | 3,599,431 | $ | 1.84 |
For the years ended December 31, 2013 and 2012, there were 47,365 and 129,417 options, respectively, that were antidilutive since the exercise price exceeded the average market price for the year.
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 14—Other expenses
Other non-interest expenses for the years ended December 31, 2013 and 2012 are as follows:
2013 |
2012 |
|||||||
(dollars in thousands) |
||||||||
Data processing |
$ | 1,346 | $ | 1,050 | ||||
FDIC assessment |
254 | 403 | ||||||
Legal and accounting |
713 | 783 | ||||||
Printing and supplies |
307 | 290 | ||||||
Advertising |
203 | 177 | ||||||
Business development |
158 | 144 | ||||||
Telecommunications |
222 | 194 | ||||||
Outside services |
255 | 240 | ||||||
Courier and postage |
204 | 178 | ||||||
Software license fees |
85 | 92 | ||||||
City and county taxes |
181 | 149 | ||||||
Directors fees |
288 | 275 | ||||||
Travel and employee meals and entertainment |
162 | 180 | ||||||
Provision for mortgage recourse liability |
499 | 499 | ||||||
Legal settlement payable |
- | 598 | ||||||
FHLB early payoff penalty |
- | 392 | ||||||
Other |
1,577 | 1,048 | ||||||
Total |
$ | 6,454 | $ | 6,692 |
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 15—Income Taxes
Total income taxes in the statements of income for the years ended December 31, 2013 and 2012 are as follows:
2013 |
2012 |
|||||||
(dollars in thousands) |
||||||||
Current tax provision |
$ | 3,012 | $ | 3,278 | ||||
Deferred tax expense (benefit) |
(532 | ) | (615 | ) | ||||
Total income tax expense (benefit) |
$ | 2,480 | $ | 2,663 |
The Bank’s provision for income taxes differs from the amounts computed by applying the Federal and state income tax statutory rates to income before income taxes. A reconciliation of the differences is as follows:
2013 |
2012 |
|||||||
Federal statutory rates |
34.0 | % | 34.0 | % | ||||
State taxes, net of federal benefit |
3.3 | % | 3.8 | % | ||||
Tax-exempt income |
-2.1 | % | -1.5 | % | ||||
State tax credits |
-3.0 | % | -2.6 | % | ||||
Bank-owned life insurance |
-4.9 | % | -1.4 | % | ||||
State tax credit valuation allowance |
0.5 | % | -4.1 | % | ||||
Other |
0.8 | % | 0.6 | % | ||||
Total |
28.6 | % | 28.8 | % |
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 15—Income Taxes (continued)
The primary components of deferred income taxes at December 31, 2013 and 2012 are as follows:
2013 |
2012 |
|||||||
Deferred tax assets |
||||||||
Allowance for loan losses |
$ | 1,713 | $ | 1,689 | ||||
Unrealized loss on securities available for sale |
1,913 | - | ||||||
Executive compensation plans |
646 | 502 | ||||||
Valuation adjustment of other real estate owned |
645 | 437 | ||||||
Recourse liability |
414 | 293 | ||||||
Contingent liability |
227 | 228 | ||||||
Investment in GA low-income housing tax credits |
310 | 270 | ||||||
State tax credits |
184 | 281 | ||||||
Mortgage derivatives IRLC expenses |
97 | 115 | ||||||
Other |
44 | 102 | ||||||
Total deferred income tax assets |
6,193 | 3,917 | ||||||
Deferred tax liabilities |
||||||||
Unrealized gain on securities available for sale |
- | (798 | ) | |||||
Qualified prepaids |
(26 | ) | (131 | ) | ||||
Depreciation on bank premises and equipment |
(198 | ) | (174 | ) | ||||
Mortgage derivative change in method |
(293 | ) | (439 | ) | ||||
Total deferred income tax liabilities |
(517 | ) | (1,542 | ) | ||||
Valuation allowance |
(310 | ) | (270 | ) | ||||
Net deferred income tax assets |
$ | 5,366 | $ | 2,105 |
Deferred tax assets are included in other assets. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered in income. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that the tax benefits will not be realized.
Prior to 2012, the Company had created a full valuation allowance for the Georgia Form 900 tax credits. During 2012, the Company reversed the deferred tax valuation allowance that was recorded against these tax credits since it was determined that, based on the profitability of the Company and other positive evidence, these state tax credits would be utilized before their expiration dates. The Company continues to reflect a full valuation allowance on its investment in a Georgia Low Income Housing Project, to reflect management’s estimate of the temporary deductible differences that may expire prior to their utilization.
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 15—Income Taxes (continued)
Management has evaluated all other tax positions that could have a significant effect on the consolidated financial statements and determined that the Company had no uncertain income tax positions at December 31, 2013.
The Company and its subsidiary are subject to U.S. Federal income tax as well as income tax within the state of Georgia. The Company is no longer subject to examination by taxing authorities for years before 2010.
Note 16—Commitments and contingencies
In the ordinary course of business, the Bank may enter into off-balance-sheet financial instruments that are not reflected in the consolidated financial statements. These instruments include commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the consolidated financial statements when funds are disbursed or the instruments become payable.
The Bank uses the same credit policies for these off-balance-sheet financial instruments as it does for other instruments that are recorded in the consolidated financial statements.
Following is an analysis of significant off-balance-sheet financial instruments for the years ended December 31, 2013 and 2012:
2013 |
2012 |
|||||||
(dollars in thousands) |
||||||||
Commitments to extend credit |
$ | 74,144 | $ | 48,976 | ||||
Standby letters of credit |
472 | 1,029 | ||||||
Total |
$ | 74,616 | $ | 50,005 |
Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitment amounts expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. In managing the Bank’s credit and market risk exposure, the Bank may participate with other institutions when these commitments are funded. The credit risk involved in issuing these financial instruments is essentially the same as that involved in making loans to customers. The amount of collateral obtained, if deemed necessary by the Bank, upon extension of credit is based on management’s credit evaluation of the customer. Collateral held varies, but may include real estate and improvements, marketable securities, accounts receivable, inventory, equipment, and personal property.
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 16—Commitments and contingencies (continued)
Loans sold under the mortgage loans held for sale portfolio contain certain representations and warranties in the loan sale agreements which require that we repurchase or indemnify the investors for losses or costs on loans we sell under certain limited conditions. Some of these conditions include underwriting errors or omissions, fraud or material misstatements by the borrower in the loan application or invalid market value on the collateral property due to deficiencies in the appraisal. In addition to these representations and warranties, our loan sale contracts define a condition in which the borrower defaults during a short period of time, typically 120 days to one year, as an Early Payment Default (“EPD”). In the event of an EPD, we are required to return the premium paid by the investor for the loan as well as certain administrative fees, and in some cases repurchase the loan or indemnify the investor. Based on these recourse provisions, the Bank established a recourse liability for mortgage loans sold. The following table demonstrates the activity for the years ended December 31, 2013 and 2012:
2013 |
2012 |
|||||||
(dollars in thousands) |
||||||||
Beginning balance |
$ | 772 | $ | 245 | ||||
Provision |
499 | 499 | ||||||
Losses |
(196 | ) | (167 | ) | ||||
Recoveries |
15 | 195 | ||||||
Ending balance |
$ | 1,090 | $ | 772 |
The nature of the business of the Bank is such that it ordinarily results in a certain amount of litigation. In the opinion of management, at December 31, 2013, there were no pending litigation matters in which the anticipated outcome would have a material adverse effect on the consolidated financial statements.
In August 2011, the Bank was sued in State Court by a subcontractor related to a residential development project foreclosed upon by the Bank. The suit alleged various claims against the Bank, all of which the Bank denied. Following a mistrial in November 2012 where the jury failed to reach a verdict, a second trial in January 2013 resulted in a verdict against the Bank in the amount of $597,500. The Bank is in the process of appealing this verdict and believes it has meritorious defenses against the verdict. The entire judgment amount was recorded as a contingent liability as of December 31, 2012; therefore, management does not expect that there will be any material adverse effects on the Company’s future consolidated financial position, results of operations or cash flows related to this litigation.
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 16—Commitments and contingencies (continued)
The Bank has various contractual obligations that it must fund as part of normal operations. The following is a summary of future minimum lease obligations as of December 31, 2013.
2014 |
2015 |
2016 |
2017 |
Thereafter |
Total |
|||||||||||||||||||
(dollars in thousands) |
||||||||||||||||||||||||
Operating leases |
$ | 239 | $ | 236 | $ | 12 | $ | 11 | $ | - | $ | 498 |
Note 17—Mortgage banking derivatives
Commitments to fund certain mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives. It is the Bank’s practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from its commitments to fund the loans. These mortgage banking derivatives are not designated in hedge relationships. At December 31, 2013, the Bank had approximately $25.6 million of interest rate lock commitments and $50.6 million of forward commitments for the future delivery of residential mortgage loans. The fair value of these mortgage banking derivatives was reflected by a derivative asset of $823,000 and a derivative liability of $175,000. The net gains related to interest rate lock commitments used for risk management were $166,000 as of December 31, 2013. The net gains for forward contracts related to these mortgage loans was $483,000 as of December 31, 2013. At December 31, 2012, the Company had approximately $35.9 million of interest rate lock commitments and $80.3 million of forward commitments for the future delivery of residential mortgage loans. The fair value of these mortgage banking derivatives was reflected by a derivative asset of $485,000 and a derivative liability of $409,000. The net gains related to interest rate lock commitments used for risk management were $303,000 as of December 31, 2012. The net losses for forward contracts related to these mortgage loans was $227,000 as of December 31, 2012. Fair values were estimated based on changes in mortgage interest rates from the date of the commitments. Changes in the fair values of these mortgage-banking derivatives are included in net gains on sales of loans.
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 18—Supplemental consolidated cash flow information
2013 |
2012 |
|||||||
(dollars in thousands) |
||||||||
Income taxes paid |
$ | 2,750 | $ | 3,225 | ||||
Interest paid |
$ | 2,171 | $ | 3,897 | ||||
Interest received |
$ | 18,250 | $ | 20,529 | ||||
Transfers from loans to real estate owned |
$ | 1,968 | $ | 5,186 | ||||
Unrealized gain(loss) on securities, net |
$ | (5,522 | ) | $ | 305 |
Note 19—Fair value of financial instruments
The Company utilizes fair value measurement to record fair value adjustments to certain other assets and liabilities and to determine fair value measurements where required. For these assets and liabilities recorded at fair value, it is the Company’s policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements.
The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are as follows:
Level 1 – Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. At December 31, 2013, the Company’s Level 1 assets include U.S. Government agency obligations.
Level 2 – Valuations for assets and liabilities that are obtained from readily available pricing sources via independent providers for market transactions involving similar assets or liabilities. The Company’s principal markets for these securities are the secondary institutional markets and valuations are based on observable market data in those markets. At December 31, 2013, the Company’s Level 2 assets include U.S. Government agency obligations, state and municipal bonds, and mortgage-backed securities.
Level 3 – Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. Level 3 assets include impaired loans and other real estate owned as discussed below.
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 19—Fair value of financial instruments (continued)
Following is a description of valuation methodologies used for determining fair value for assets and liabilities:
Investment Securities Available-for-Sale
Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as present value of future cash flows, adjusted for the securities’ credit rating, prepayment assumptions, and other factors such as credit loss assumptions. At December 31, 2013, the Company classified $158.4 million of investment securities available-for-sale subject to recurring fair value adjustments as Level 2. At December 31, 2012, the Company classified $132.8 million of investment securities available-for-sale subject to recurring fair value adjustments as Level 2.
Loans
The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans with respect to which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once an individual loan is identified as impaired, management measures the impairment in accordance with ASC 310-10-35, “Receivables-Subsequent Measurements.” The fair value of impaired loans is estimated primarily using the collateral value. However, in some cases other methods are used, such as market value of similar debt, enterprise value, liquidation value, and discounted cash flows. Those impaired loans not requiring an allowance represent loans with respect to which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At December 31, 2013, substantially all of the total impaired loans were evaluated based on the fair value of the collateral less estimated selling costs. In accordance with ASC 820-10, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. Most fair values of the collateral are based on an observable market price or a current appraised value by a third party appraiser, tax valuation, or broker price opinion; however, in some cases an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price.
As such, the Company records these collateral dependent impaired loans at fair value as nonrecurring Level 3. Collateral dependent impaired loans recorded at fair value totaled $1.4 million and $3.2 million at December 31, 2013 and December 31, 2012, respectively. Specific loan loss allowances for these impaired loans totaled $358,000 and $272,000 at December 31, 2013 and December 31, 2012, respectively. At December 31, 2013 and December 31, 2012, $1.0 million and $2.9 million of impaired loans, net of allowance for loan losses, respectively, were classified as Level 3.
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 19—Fair value of financial instruments (continued)
Loans Held for Sale
Loans held for sale are carried at fair value, as determined by outstanding commitments, from third party investors (Level 2). The Company elected the fair value option for loans held for sale on July 1, 2012. These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the loan and in accordance with the Company’s policy on loans held for investment. None of these loans are 90 days or more past due nor on nonaccrual as of December 31, 2013 and 2012.
As of December 31, 2013, the aggregate fair value was $31.3 million, the contractual balance including accrued interest was $30.9 million and the gain recorded from the change in fair value included in earnings for the year ended December 31, 2013 was $372,000. As of December 31, 2012, the aggregate fair value was $48.4 million, the contractual balance including accrued interest was $48.3 million and the gain recorded from the change in fair value included in earnings for the year ended December 31, 2012 was $179,000.
Interest Rate Lock and Forward Commitments
Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of these mortgage loans are accounted for as free standing derivatives. Fair values of these mortgage derivatives are estimated based on changes in mortgage interest rates from the date the interest on the loan is locked (Level 2). Changes in the fair values of these derivatives are included in net gains
on sales of loans. The interest rate lock commitments with a positive fair value totaled $39,000 and $97,000 at December 31, 2013 and 2012, respectively, and were recorded in other assets. The interest rate lock commitments with a negative fair value totaled $118,000 and $49,000 at December 31, 2013 and 2012, respectively, and were recorded in other liabilities.
The Company enters into forward commitments for the future delivery of mortgage loans when interest rate locks are entered into, in order to hedge the change in interest rates resulting from its commitments to fund the loans. Changes in the fair values of these derivatives are included in net gains on sales of loans. The interest rate lock commitments with a positive fair value totaled $118,000 and $49,000 at December 31, 2013 and 2012, respectively, and were recorded in other assets. The interest rate lock commitments with a negative fair value totaled $39,000 and $97,000 at December 31, 2013 and 2012, respectively, and were recorded in other liabilities.
Other Real Estate Owned
Foreclosed assets are adjusted to fair value upon transfer of the loans to other real estate owned. Subsequently, other real estate owned is carried at the lower of carrying value or fair value less estimated selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. Most fair values of the collateral are based on an observable market price or a current appraised value; however, in some cases an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price. Management may apply discount adjustments to the appraised value for estimated selling costs, information from comparable sales, and marketability of the property.
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 19—Fair value of financial instruments (continued)
As such, the Company records other real estate owned with subsequent write downs after transfer as nonrecurring Level 3. Other real estate owned that has had subsequent write-downs after transfer from loans to other real estate totaled $3.6 million and $1.2 million at December 31, 2013 and December 31, 2012, respectively.
The tables below present information about assets and liabilities which are measured at fair value on a recurring basis:
Fair Value Measurements at December 31, 2013, Using, |
||||||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Other Unobservable Inputs (Level 3) |
Total | |||||||||||||
(dollars in thousands) |
||||||||||||||||
U.S. Government and agency |
$ | - | $ | 58,281 | $ | - | $ | 58,281 | ||||||||
Mortgage-backed - residential GSEs |
- | 64,732 | - | 64,732 | ||||||||||||
State and municipal |
- | 30,751 | - | 30,751 | ||||||||||||
Corporate bonds |
- | 4,675 | - | 4,675 | ||||||||||||
Total |
$ | - | $ | 158,439 | $ | - | $ | 158,439 | ||||||||
Loans held for sale |
$ | - | $ | 31,298 | $ | - | $ | 31,298 | ||||||||
Derivative assets (1) |
$ | - | $ | 823 | $ | - | $ | 823 | ||||||||
Derivative liabilities(1) |
$ | - | $ | 175 | $ | - | $ | 175 |
|
(1) |
This amount includes mortgage related interest rate lock commitments and commitments to sell. |
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 19—Fair value of financial instruments (continued)
Fair Value Measurements at December 31, 2012, Using, |
||||||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Other Unobservable Inputs (Level 3) |
Total | |||||||||||||
(dollars in thousands) |
||||||||||||||||
U.S. Government and agency |
$ | - | $ | 55,565 | $ | - | $ | 55,565 | ||||||||
Mortgage-backed - residential GSEs |
- | 3,112 | - | 3,112 | ||||||||||||
State and municipal |
- | 51,295 | - | 51,295 | ||||||||||||
Corporate bonds |
- | 22,788 | - | 22,788 | ||||||||||||
Total |
$ | - | $ | 132,760 | $ | - | $ | 132,760 | ||||||||
Loans held for sale |
$ | - | $ | 48,432 | $ | - | $ | 48,432 | ||||||||
Derivative assets (1) |
$ | - | $ | 485 | $ | - | $ | 485 | ||||||||
Derivative liabilities(1) |
$ | - | $ | 409 | $ | - | $ | 409 |
|
(1) |
This amount includes mortgage related interest rate lock commitments and commitments to sell. |
There were no transfers between Level 1 and Level 2 during 2013 or 2012.
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 19—Fair value of financial instruments (continued)
Assets measured at fair value on a non-recurring basis are summarized below:
Fair Value Measurements at December 31, 2013, Using, |
||||||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Other Unobservable Inputs (Level 3) |
Total | |||||||||||||
(dollars in thousands) |
||||||||||||||||
Impaired loans, net of allowance |
||||||||||||||||
Commercial and industrial |
$ | - | $ | - | $ | - | $ | - | ||||||||
Real estate - construction |
- | - | 40 | 40 | ||||||||||||
Real estate - residential |
- | - | 249 | 249 | ||||||||||||
Real estate - commercial |
- | - | 701 | 701 | ||||||||||||
Consumer |
- | - | 11 | 11 | ||||||||||||
Total impaired loans |
$ | - | $ | - | $ | 1,001 | $ | 1,001 | ||||||||
Other real estate owned |
||||||||||||||||
Unimproved land |
$ | - | $ | - | $ | 471 | $ | 471 | ||||||||
Real estate - residential |
- | - | 144 | 144 | ||||||||||||
Real estate - commercial |
- | - | 2,951 | 2,951 | ||||||||||||
Total other real estate owned |
$ | - | $ | - | $ | 3,566 | $ | 3,566 |
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 19—Fair value of financial instruments (continued)
Fair Value Measurements at December 31, 2012, Using, |
||||||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Other Unobservable Inputs (Level 3) |
Total | |||||||||||||
(dollars in thousands) |
||||||||||||||||
Impaired loans, net of allowance |
||||||||||||||||
Commercial and industrial |
$ | - | $ | - | $ | - | $ | - | ||||||||
Real estate - construction |
- | - | 542 | 542 | ||||||||||||
Real estate - residential |
- | - | 477 | 477 | ||||||||||||
Real estate - commercial |
- | - | 1,895 | 1,895 | ||||||||||||
Consumer |
- | - | 16 | 16 | ||||||||||||
Total impaired loans |
$ | - | $ | - | $ | 2,930 | $ | 2,930 | ||||||||
Other real estate owned |
||||||||||||||||
Unimproved land |
$ | - | $ | - | $ | 642 | $ | 642 | ||||||||
Real estate - residential |
- | - | 346 | 346 | ||||||||||||
Real estate - commercial |
- | - | 172 | 172 | ||||||||||||
Total other real estate owned |
$ | - | $ | - | $ | 1,160 | $ | 1,160 |
The following tables represent changes in non-recurring fair value recorded during the years ended December 31, 2013 and 2012:
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
||||||||||||
Impaired Loans |
Other Real Estate Owned |
Total |
||||||||||
(dollars in thousands) |
||||||||||||
Balance at December 31, 2012 |
$ | 2,930 | $ | 1,160 | $ | 4,090 | ||||||
Gains included in earnings |
- | - | - | |||||||||
Gross reductions |
(135 | ) | (1,496 | ) | (1,631 | ) | ||||||
Transfers into (out of) Level 3 |
(1,794 | ) | 3,902 | 2,108 | ||||||||
Balance at December 31, 2013 |
$ | 1,001 | $ | 3,566 | $ | 4,567 |
Gross reductions in other real estate owned included $1,026,000 in sales and $470,000 in write downs.
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 19—Fair value of financial instruments (continued)
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
||||||||||||
Impaired Loans |
Other Real Estate Owned |
Total |
||||||||||
(dollars in thousands) |
||||||||||||
Balance at December 31, 2011 |
$ | 4,816 | $ | 1,038 | $ | 5,854 | ||||||
Gains (losses) included in earnings |
- | 103 | 103 | |||||||||
Gross additions (reductions) |
(1,886 | ) | (1,980 | ) | (3,866 | ) | ||||||
Transfers into (out of) Level 3 |
- | 1,999 | 1,999 | |||||||||
Balance at December 31, 2012 |
$ | 2,930 | $ | 1,160 | $ | 4,090 |
Gross reductions in other real estate owned included $1,752,000 in sales and $228,000 in write downs.
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 19—Fair value of financial instruments (continued)
The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2013 for collateral dependent impaired loans and other real estate owned:
Fair Value |
Valuation Technique |
Unobservable Inputs |
Range |
Weighted Average |
||||||||||||
Impaired loans: |
||||||||||||||||
Real estate – construction |
$ | 40 |
Sales comparison |
Management and appraiser adjustment for difference between comparable sales |
42.41% | - | 94% | 42.41 | % | |||||||
Real estate – residential |
249 |
Sales comparison |
Management and appraiser adjustment for difference between comparable sales |
27.31% | - | 94% | 16.92 | % | ||||||||
Real estate - commercial |
701 |
Sales comparison |
Management and appraiser adjustment for difference between comparable sales |
3.87% | - | 44.85% | 13.86 | % | ||||||||
Income approach |
Capitalization rate |
9.50% | 9.50 | % | ||||||||||||
Consumer |
11 |
NADA or third party valuation of underlying collateral |
Management adjustment for comparable sales |
45.85% | - | 100% | 45.85 | % | ||||||||
Total |
$ | 1,001 | ||||||||||||||
Other real estate owned: |
||||||||||||||||
Unimproved land |
$ | 471 |
Sales comparison |
Management and appraiser adjustment for difference between comparable sales |
0% | - | 10% | 1.51 | % | |||||||
Real estate - residential |
144 |
Sales comparison |
Management and appraiser adjustment for difference between comparable sales |
29.73% | - | 82.80% | 33.99 | % | ||||||||
Real estate – commercial |
2,951 |
Sales comparison |
Management and appraiser adjustment for difference between comparable sales |
10.12% | - | 26.54% | 17.86 | % | ||||||||
Income approach |
Capitalization rate |
10.00% | 10.00 | % | ||||||||||||
Total |
$ | 3,566 |
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 19—Fair value of financial instruments (continued)
Financial Instruments
Fair value measurements for assets and liabilities where there exists limited or no observable market data and, therefore, are based primarily upon estimates, are often calculated based on the economic and competitive environment, the characteristics of the asset or liability, and other factors. Therefore, the fair value cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect current or future values.
The methods and assumptions, not previously presented, used to estimate the fair value of significant financial instruments are as follows:
Cash and due from banks - The carrying value of cash and due from banks approximates the fair value and is classified as Level 1.
Loans held for sale – Loans held for sale are carried at fair value, as determined by outstanding commitments from third party investors. Loans held for sale are classified as Level 2.
Federal Home Loan Bank stock - The fair value of Federal Home Loan Bank (“FHLB”) stock is not practicable since no ready market exists for the stock.
Deposits - The fair value of time deposits is estimated using a discounted cash flow calculation that applies current interest rates to a schedule of aggregated expected maturities and is classified as Level 2. The carrying value of other deposits approximates the fair value and they are classified as Level 1.
Repurchase agreements - The carrying value of repurchase agreements approximates fair value due to their short-term nature and they are classified as Level 1.
Short-term debt and other borrowings - Fair value approximates the carrying value of other borrowings due to their short-term nature and they are classified as
Level 1.
Long-term debt - The fair value of long-term debt is calculated by discounting contractual cash flows using an estimated interest rate based on the current rates available for debt of similar remaining maturities and collateral terms, resulting in a Level 2 classification.
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 19—Fair value of financial instruments (continued)
The carrying amount and estimated fair values of financial instruments at December 31, 2013 and December 31, 2012 are as follows:
Fair Value Measurements at December 31, 2013 |
||||||||||||||||||||
Carrying Value |
Level 1 |
Level 2 |
Level 3 |
Total |
||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Financial assets: |
||||||||||||||||||||
Cash and due from banks |
$ | 16,828 | $ | 16,828 | $ | - | $ | - | $ | 16,828 | ||||||||||
Securities available for sale |
158,439 | - | 158,439 | - | 158,439 | |||||||||||||||
Loans, net of allowance |
269,390 | - | - | 271,112 | 271,112 | |||||||||||||||
Loans held for sale |
31,298 | - | 31,298 | - | 31,298 | |||||||||||||||
Federal Home Loan Bank stock |
1,606 |
N/A |
N/A |
N/A |
N/A |
|||||||||||||||
Accrued interest receivable, loans |
974 | - | 974 | - | 974 | |||||||||||||||
Accrued interest receivable, securities |
880 | - | 880 | - | 880 | |||||||||||||||
Other derivative assets(1) |
823 | - | 823 | - | 823 | |||||||||||||||
Financial liabilities |
||||||||||||||||||||
Time deposits |
$ | 152,484 | $ | - | $ | 153,411 | $ | - | $ | 153,411 | ||||||||||
Other deposits |
267,221 | 267,221 | - | - | 267,221 | |||||||||||||||
Repurchase agreements |
12,111 | 12,111 | - | - | 12,111 | |||||||||||||||
FHLB short-term debt |
22,200 | 22,200 | - | 22,200 | ||||||||||||||||
Accrued interest payable, deposits |
398 | 5 | 393 | - | 398 | |||||||||||||||
Accrued interest payable, borrowings |
6 | 6 | - | - | 6 | |||||||||||||||
Other derivative liabilities(1) |
409 | - | 409 | - | 409 |
|
(1) |
This amount includes mortgage related interest rate lock commitments and commitments to sell. |
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 19—Fair value of financial instruments (continued)
Fair Value Measurements at December 31, 2012 |
||||||||||||||||||||
Carrying Value |
Level 1 |
Level 2 |
Level 3 |
Total |
||||||||||||||||
(dollars in thousands) |
||||||||||||||||||||
Financial assets: |
||||||||||||||||||||
Cash and due from banks |
$ | 30,279 | $ | 30,279 | $ | - | $ | - | $ | 30,279 | ||||||||||
Securities available for sale |
132,760 | - | 132,760 | - | 132,760 | |||||||||||||||
Loans, net of allowance |
259,877 | - | - | 264,159 | 264,159 | |||||||||||||||
Loans held for sale |
48,432 | - | 48,432 | - | 48,432 | |||||||||||||||
Federal Home Loan Bank stock |
1,865 |
N/A |
N/A |
N/A |
N/A |
|||||||||||||||
Accrued interest receivable, loans |
1,123 | - | 1,123 | - | 1,123 | |||||||||||||||
Accrued interest receivable, securities |
649 | - | 649 | - | 649 | |||||||||||||||
Other derivative assets(1) |
485 | - | 485 | - | 485 | |||||||||||||||
Financial liabilities |
||||||||||||||||||||
Time deposits |
$ | 169,376 | $ | - | $ | 170,707 | $ | - | $ | 170,707 | ||||||||||
Other deposits |
247,580 | 247,580 | - | - | 247,580 | |||||||||||||||
Repurchase agreements |
3,333 | 3,333 | - | - | 3,333 | |||||||||||||||
FHLB short-term debt |
25,028 | 25,028 | - | 25,028 | ||||||||||||||||
Accrued interest payable, deposits |
458 | 5 | 453 | - | 458 | |||||||||||||||
Accrued interest payable, repurchase agreements |
3 | 3 | - | - | 3 | |||||||||||||||
Other derivative liabilities(1) |
409 | - | 409 | - | 409 |
|
(1) |
This amount includes mortgage related interest rate lock commitments and commitments to sell. |
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 20 – Quarterly Financial Data (Unaudited)
The following table represents summarized data for each of the quarters in 2013 and 2012:
Selected Quarterly Data |
||||||||||||||||||||||||||||||||
2013 |
2012 |
|||||||||||||||||||||||||||||||
4Q |
3Q |
2Q |
1Q |
4Q |
3Q |
2Q |
1Q |
|||||||||||||||||||||||||
(dollars in thousands, except per share data) |
||||||||||||||||||||||||||||||||
Interest income |
$ | 4,655 | $ | 4,581 | $ | 4,576 | $ | 4,520 | $ | 4,887 | $ | 5,200 | $ | 5,226 | $ | 5,256 | ||||||||||||||||
Interest expense |
489 | 512 | 545 | 569 | 649 | 945 | 1,016 | 1,072 | ||||||||||||||||||||||||
Net interest income |
4,166 | 4,069 | 4,031 | 3,951 | 4,238 | 4,255 | 4,210 | 4,184 | ||||||||||||||||||||||||
Provision for loan losses |
(242 | ) | 15 | (1,200 | ) | (602 | ) | (306 | ) | (729 | ) | 125 | 305 | |||||||||||||||||||
Net interest income after provision for loan losses |
4,408 | 4,054 | 5,231 | 4,553 | 4,544 | 4,984 | 4,085 | 3,879 | ||||||||||||||||||||||||
Non-interest income |
2,610 | 2,704 | 3,723 | 3,776 | 3,529 | 4,824 | 3,484 | 2,921 | ||||||||||||||||||||||||
Securities gain (loss) |
- | - | 78 | 13 | (116 | ) | 11 | - | - | |||||||||||||||||||||||
Other-than-temporary impairment on securities |
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Less: Non-interest expenses |
5,752 | 5,633 | 5,868 | 5,213 | 6,323 | 6,507 | 5,065 | 4,966 | ||||||||||||||||||||||||
Income before income tax expense (benefit) |
1,266 | 1,125 | 3,164 | 3,129 | 1,634 | 3,312 | 2,504 | 1,834 | ||||||||||||||||||||||||
Income tax expense (benefit) |
331 | 282 | 1,045 | 822 | 242 | 1,070 | 801 | 550 | ||||||||||||||||||||||||
Net income |
$ | 935 | $ | 843 | $ | 2,119 | $ | 2,307 | $ | 1,392 | $ | 2,242 | $ | 1,703 | $ | 1,284 | ||||||||||||||||
Basic earnings (loss) per common share |
$ | 0.26 | $ | 0.24 | $ | 0.60 | $ | 0.65 | $ | 0.39 | $ | 0.62 | $ | 0.47 | $ | 0.36 | ||||||||||||||||
Diluted earnings (loss) per common share |
$ | 0.26 | $ | 0.23 | $ | 0.59 | $ | 0.65 | $ | 0.39 | $ | 0.62 | $ | 0.47 | $ | 0.36 | ||||||||||||||||
Dividends per common share |
$ | 0.045 | $ | 0.045 | $ | 0.045 | $ | 0.040 | $ | 0.04 | $ | 0.04 | $ | 0.04 | $ | - |
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 21—Condensed financial information on Georgia-Carolina Bancshares, Inc. (Parent Company only)
Condensed Balance Sheets
December 31, 2013 and 2012
(dollars in thousands)
2013 |
2012 |
|||||||
Assets |
||||||||
Cash |
$ | 431 | $ | 683 | ||||
Investment in subsidiary |
56,089 | 55,383 | ||||||
Other assets |
436 | 317 | ||||||
Total assets |
$ | 56,956 | $ | 56,383 | ||||
Liabilities |
||||||||
Deferred tax liability |
$ | - | $ | 7 | ||||
Other liabilities |
67 | 51 | ||||||
Total liabilities |
67 | 58 | ||||||
Shareholders' equity |
56,889 | 56,325 | ||||||
Total liabilities and shareholders' equity |
$ | 56,956 | $ | 56,383 |
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 21—Condensed financial information on Georgia-Carolina Bancshares, Inc. (Parent Company only) (continued)
Condensed Statements of Income
Years Ended December 31, 2013 and 2012
(dollars in thousands)
2013 |
2012 |
|||||||
Income, dividends from subsidiary |
$ | 160 | $ | 1,500 | ||||
Expenses |
||||||||
Director compensation |
71 | 56 | ||||||
Legal fees |
80 | 73 | ||||||
Audit exam and accounting fees |
71 | 42 | ||||||
Annual report and proxy |
25 | 20 | ||||||
Shareholder services |
26 | 27 | ||||||
Other |
16 | 11 | ||||||
Total expenses |
289 | 229 | ||||||
Income (loss) before income tax benefits and equity in undistributed earnings of subsidiary |
(129 | ) | 1,271 | |||||
Income tax benefits |
105 | 75 | ||||||
Income (loss) before equity in undistributed earnings of subsidiary |
(24 | ) | 1,346 | |||||
Equity in undistributed earnins of subsidiary |
6,228 | 5,275 | ||||||
Net income |
$ | 6,204 | $ | 6,621 |
GEORGIA-CAROLINA BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 21—Condensed financial information on Georgia-Carolina Bancshares, Inc. (Parent Company only) (continued)
Condensed Statements of Cash Flows
Years Ended December 31, 2013 and 2012
(dollars in thousands)
2013 |
2012 |
|||||||
Cash flows from operating activities |
||||||||
Net income |
$ | 6,204 | $ | 6,621 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
||||||||
Provision for deferred income taxes |
(7 | ) | 1 | |||||
Stock incentive expense |
225 | 143 | ||||||
Stock compensation |
205 | 209 | ||||||
Equity in undistributed earnings of subsidiary |
(6,228 | ) | (5,275 | ) | ||||
Change in other liabilities |
16 | (32 | ) | |||||
Change in other assets |
(119 | ) | (78 | ) | ||||
Net cash provided by operating activities |
296 | 1,589 | ||||||
Cash flows from financing activities |
||||||||
Proceeds from stock options exercised |
75 | 253 | ||||||
Repurchased Stock |
- | (1,219 | ) | |||||
Dividends |
(623 | ) | (432 | ) | ||||
Net cash used in financing activities |
(548 | ) | (1,398 | ) | ||||
Net increase (decrease) in cash and due from backs |
(252 | ) | 191 | |||||
Cash and due from banks at beginning of period |
683 | 492 | ||||||
Cash and due from banks at end of period |
$ | 431 | $ | 683 |
68
Note 15 - Income taxes (Tables)
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Dec. 31, 2013
|
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Income Tax Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Components of Income Tax Expense (Benefit) [Table Text Block] |
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Schedule of Effective Income Tax Rate Reconciliation [Table Text Block] |
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Schedule of Deferred Tax Assets and Liabilities [Table Text Block] |
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