General
Thomasville Bancshares, Inc., a Georgia corporation (the Company), was formed in March 1995 to organize and act as the holding company for
Thomasville National Bank (the Bank), a national banking association. The Bank opened for business in October 1995, and presently operates two branches in Thomasville, Georgia. The Bank is a full service commercial bank, with trust
powers, and offers a full range of interest-bearing and non-interest-bearing accounts, including commercial and retail checking accounts, money market accounts, individual retirement and Keogh accounts, regular interest-bearing statement savings
accounts, certificates of deposit, commercial loans, real estate loans, home equity loans and consumer/installment loans. In addition, the Bank provides consumer services such as U.S. Savings Bonds, travelers checks, cashiers checks, safe deposit
boxes, bank by mail services, Internet banking, direct deposit and automatic teller services.
The holding company structure was adopted as
a mechanism to enhance the Banks ability to serve its future customers requirements for financial services. The Company provides flexibility for expansion of the banking business through the acquisition of other financial institutions
and provision of additional banking-related services which the traditional commercial bank may not provide under present laws. For example, banking regulations require that the Bank maintain a minimum ratio of capital to assets. In the event that
the Banks growth is such that this minimum ratio is not maintained, the Company may borrow funds, subject to the capital adequacy guidelines of the Federal Reserve Board, and contribute them to the capital of the Bank, or raise capital
otherwise in a manner which is unavailable to the Bank under existing banking regulations.
In September 2001, the Bank formed an operating
subsidiary, TNB Financial Services, Inc., a Georgia corporation with trust powers. On March 31, 2004, TNB Financial Services was liquidated, with all of its operations being transferred to TNB Trust Services, a division of the Bank.
3
In July 2002, the Company acquired all of the issued and outstanding capital stock of Joseph
Parker & Company, Inc. (JPC), a Georgia corporation and federally registered investment advisory firm located in Thomasville, Georgia. In July 2004, JPCs name was changed to TNB Financial Services, Inc.
(TNBFS).
In June 2006, TNBFS was liquidated, with all of its operations transferred to TNB Trust Services, a division of the
Bank. Subsequently, TNB Trust Services changed its name to TNB Financial Services.
As of December 31, 2007, TNB Financial Services
managed approximately $514 million in trust, agency and custody accounts.
Market Area and Competition
The market area of the Bank consists of Thomas County, Georgia and is focused on Thomasville, the county seat. Thomas County has been experiencing steady
growth in both jobs and banking deposits in recent years. Thomasville is a regional and commercial medical center for Southwest Georgia. Thomas County maintains a steady industrial and agricultural base, which has been expanding in recent years. The
largest employers in the county include the John D. Archbold Memorial Hospital and Flowers Industries, Inc. Agricultural activities in the county are supported by the second-largest fresh vegetable market in Georgia and a daily cash market for hogs,
cattle and poultry.
Competition among financial institutions in the Banks market area is intense. There are three commercial banks
and a total of nine branches in Thomasville and four additional branches in smaller communities in Thomas County. In addition, there is one savings and loan association in Thomasville, and three credit unions headquartered in Thomas County.
Financial institutions primarily compete with one another for deposits. In turn, a banks deposit base directly affects the
banks loan activities and general growth. Primary methods of competition include interest rates on deposits and loans, service charges on deposit accounts and the offering of unique financial services products. The Bank is competing with
financial institutions that have much greater financial resources, and that may be able to offer more services and possibly better terms to their customers. However, the management of the Bank believes that the Bank will be able to attract
sufficient deposits to enable the Bank to compete effectively with other area financial institutions.
The Bank competes with existing area
financial institutions other than commercial banks and savings and loan associations, including insurance companies, consumer finance companies, brokerage houses, credit unions and other business entities which have recently been invading the
traditional banking markets. Due to the growth of the Thomasville area, it is anticipated that additional competition will continue from new entrants to the market.
4
Distribution of Assets, Liabilities and Stockholders Equity; Interest Rates and Interest Differential
The following is a presentation of the average consolidated balance sheet of the Company for the years ended December 31, 2007,
2006 and 2005. This presentation includes all major categories of interest-earning assets and interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
(In thousands)
|
AVERAGE CONSOLIDATED ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits in banks
|
|
$
|
31
|
|
$
|
55
|
|
$
|
23
|
Taxable securities
|
|
|
15,010
|
|
|
13,264
|
|
|
11,847
|
Federal funds sold
|
|
|
21,471
|
|
|
13,514
|
|
|
8,566
|
Loans, net of unearned interest
|
|
|
263,321
|
|
|
220,842
|
|
|
216,544
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
299,833
|
|
|
247,675
|
|
|
236,980
|
Cash and due from banks
|
|
|
10,030
|
|
|
8,299
|
|
|
7,599
|
Other assets
|
|
|
13,586
|
|
|
27,480
|
|
|
10,563
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
323,449
|
|
$
|
283,454
|
|
$
|
255,142
|
|
|
|
|
|
|
|
|
|
|
|
AVERAGE CONSOLIDATED LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
NOW and money market deposits
|
|
$
|
181,996
|
|
$
|
144,119
|
|
$
|
119,925
|
Savings deposits
|
|
|
7,189
|
|
|
7,687
|
|
|
7,544
|
Time deposits
|
|
|
62,086
|
|
|
61,600
|
|
|
59,928
|
Other borrowings
|
|
|
8,645
|
|
|
10,565
|
|
|
15,470
|
Junior subordinated debentures
|
|
|
4,124
|
|
|
4,124
|
|
|
3,093
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
264,040
|
|
|
228,095
|
|
|
205,960
|
Noninterest-bearing deposits
|
|
|
29,387
|
|
|
29,798
|
|
|
27,010
|
Other liabilities
|
|
|
2,011
|
|
|
1,268
|
|
|
1,130
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
295,438
|
|
|
259,161
|
|
|
234,100
|
Stockholders equity
|
|
|
28,011
|
|
|
24,293
|
|
|
21,042
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
323,449
|
|
$
|
283,454
|
|
$
|
255,142
|
|
|
|
|
|
|
|
|
|
|
The following statistical information should be read in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and related notes included elsewhere in this Form 10-K and in the documents incorporated herein by reference.
5
The following tables set forth the amount of the interest income or interest expense for each category of
interest-earning assets and interest-bearing liabilities, and the average interest rate for total interest-earning assets and total interest-bearing liabilities, net interest spread and net yield (or net interest margin) on average
interest-earning assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Average
Balance
|
|
|
Interest
Income/
Expense
|
|
Average
Yield/
Rate Paid
|
|
|
Average
Balance
|
|
|
Interest
Income/
Expense
|
|
Average
Yield/
Rate Paid
|
|
|
|
(Dollars in Thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net of unearned interest
|
|
$
|
263,321
|
|
|
$
|
20,783
|
|
7.89
|
%
|
|
$
|
220,842
|
|
|
$
|
18,396
|
|
8.33
|
%
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
15,010
|
|
|
|
645
|
|
4.30
|
%
|
|
|
13,264
|
|
|
|
528
|
|
3.98
|
%
|
Interest-bearing deposits in banks
|
|
|
31
|
|
|
|
2
|
|
6.45
|
%
|
|
|
55
|
|
|
|
2
|
|
3.64
|
%
|
Federal funds sold
|
|
|
21,471
|
|
|
|
1,078
|
|
5.02
|
%
|
|
|
13,514
|
|
|
|
671
|
|
4.97
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
299,833
|
|
|
|
22,508
|
|
7.51
|
%
|
|
|
247,675
|
|
|
|
19,597
|
|
7.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
10,030
|
|
|
|
|
|
|
|
|
|
8,299
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(3,460
|
)
|
|
|
|
|
|
|
|
|
(2,888
|
)
|
|
|
|
|
|
|
Other assets
|
|
|
17,046
|
|
|
|
|
|
|
|
|
|
30,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest-earning assets
|
|
|
23,616
|
|
|
|
|
|
|
|
|
|
35,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
323,449
|
|
|
|
|
|
|
|
|
$
|
283,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and interest-bearing demand deposits
|
|
$
|
189,185
|
|
|
$
|
7,562
|
|
4.00
|
%
|
|
$
|
151,806
|
|
|
$
|
5,558
|
|
3.66
|
%
|
Time deposits
|
|
|
62,086
|
|
|
|
3,084
|
|
4.97
|
%
|
|
|
61,600
|
|
|
|
2,643
|
|
4.29
|
%
|
Other borrowings
|
|
|
8,645
|
|
|
|
395
|
|
4.57
|
%
|
|
|
10,565
|
|
|
|
502
|
|
4.75
|
%
|
Junior subordinated debentures
|
|
|
4,124
|
|
|
|
302
|
|
7.32
|
%
|
|
|
4,124
|
|
|
|
293
|
|
7.10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
264,040
|
|
|
|
11,343
|
|
4.30
|
%
|
|
|
228,095
|
|
|
|
8,996
|
|
3.94
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities and stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
29,387
|
|
|
|
|
|
|
|
|
|
29,798
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
2,011
|
|
|
|
|
|
|
|
|
|
1,268
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
28,011
|
|
|
|
|
|
|
|
|
|
24,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest-bearing liabilities and stockholders equity
|
|
|
59,409
|
|
|
|
|
|
|
|
|
|
55,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
323,449
|
|
|
|
|
|
|
|
|
$
|
283,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread
|
|
|
|
|
|
|
|
|
3.21
|
%
|
|
|
|
|
|
|
|
|
3.97
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
11,165
|
|
|
|
|
|
|
|
|
$
|
10,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
|
|
|
|
|
|
3.72
|
%
|
|
|
|
|
|
|
|
|
4.28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
The following table reflects the changes in net interest income resulting from changes in interest rates
and from asset and liability volume. The change in interest attributable to rate has been determined by applying the change in rate between years to average balances outstanding in the later year. The change in interest due to volume has been
determined by applying the rate from the earlier year to the change in average balances outstanding between years. Thus, changes that are not solely due to volume have been consistently attributed to rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007 vs. 2006
|
|
|
2006 vs. 2005
|
|
|
|
Increase
(Decrease)
|
|
|
Changes Due To
|
|
|
Increase
(Decrease)
|
|
|
Changes Due To
|
|
|
|
|
Rate
|
|
|
Volume
|
|
|
|
Rate
|
|
Volume
|
|
|
|
(Dollars in Thousands)
|
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans
|
|
$
|
2,387
|
|
|
$
|
(1,151
|
)
|
|
$
|
3,538
|
|
|
$
|
3,898
|
|
|
$
|
3,610
|
|
$
|
288
|
|
Interest on securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
117
|
|
|
|
47
|
|
|
|
70
|
|
|
|
105
|
|
|
|
54
|
|
|
51
|
|
Interest-bearing deposits in banks
|
|
|
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
|
|
|
1
|
|
Interest on federal funds
|
|
|
407
|
|
|
|
12
|
|
|
|
395
|
|
|
|
369
|
|
|
|
195
|
|
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
2,911
|
|
|
|
(1,091
|
)
|
|
|
4,002
|
|
|
|
4,373
|
|
|
|
3,859
|
|
|
514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense from interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on savings and interest-bearing demand deposits
|
|
|
2,004
|
|
|
|
635
|
|
|
|
1,369
|
|
|
|
2,592
|
|
|
|
2,026
|
|
|
566
|
|
Interest on time deposits
|
|
|
441
|
|
|
|
420
|
|
|
|
21
|
|
|
|
876
|
|
|
|
827
|
|
|
49
|
|
Interest on other borrowings
|
|
|
(107
|
)
|
|
|
(16
|
)
|
|
|
(91
|
)
|
|
|
(108
|
)
|
|
|
85
|
|
|
(193
|
)
|
Interest on junior subordinated debentures
|
|
|
9
|
|
|
|
9
|
|
|
|
|
|
|
|
95
|
|
|
|
29
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
2,347
|
|
|
|
1,048
|
|
|
|
1,299
|
|
|
|
3,455
|
|
|
|
2,967
|
|
|
488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
564
|
|
|
$
|
(2,139
|
)
|
|
$
|
2,703
|
|
|
$
|
918
|
|
|
$
|
892
|
|
$
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
The Bank offers a full range of interest-bearing and noninterest-bearing accounts, including commercial and retail checking accounts, money market accounts, individual retirement and Keogh accounts, regular
interest-bearing statement savings accounts and certificates of deposit with fixed and variable rates and a range of maturity date options. The sources of deposits are residents, businesses and employees of businesses within the Banks market
area, obtained through the personal solicitation of the Banks officers and directors, direct mail solicitation and advertisements published in the local media. The Bank pays competitive interest rates on time and savings deposits up to the
maximum permitted by law or regulation. In addition, the Bank has implemented a service charge fee schedule competitive with other financial institutions in the Banks market area, covering such matters as maintenance fees on checking accounts,
per item processing fees on checking accounts and returned check charges.
7
The following table presents, for the periods indicated, the average amount of and average rate paid on
each of the following deposit categories:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2007
|
|
|
Year Ended
December 31, 2006
|
|
|
Year Ended
December 31, 2005
|
|
Deposit Category
|
|
Average
Amount
|
|
Average
Rate Paid
|
|
|
Average
Amount
|
|
Average
Rate Paid
|
|
|
Average
Amount
|
|
Average
Rate Paid
|
|
|
|
(Dollars in thousands)
|
|
Noninterest-bearing demand deposits
|
|
29,387
|
|
N/A
|
|
|
$
|
29,798
|
|
N/A
|
|
|
$
|
27,010
|
|
N/A
|
|
Savings and interest-bearing demand deposits
|
|
189,185
|
|
4.00
|
%
|
|
|
151,806
|
|
3.66
|
%
|
|
|
127,469
|
|
2.33
|
%
|
Time deposits
|
|
62,086
|
|
4.97
|
%
|
|
|
61,600
|
|
4.29
|
%
|
|
|
59,928
|
|
2.95
|
%
|
The following table indicates amounts outstanding of time certificates of deposit of $100,000 or
more and respective maturities at December 31, 2007:
|
|
|
|
|
|
At December 31, 2007
|
|
|
(In thousands)
|
Time Certificates of Deposit
|
|
|
|
3 months or less
|
|
$
|
6,544
|
3-12 months
|
|
|
22,970
|
over 12 months
|
|
|
17,627
|
|
|
|
|
Total
|
|
$
|
47,141
|
|
|
|
|
Loan Portfolio
The Bank engages in a full complement of lending activities, including commercial/industrial, consumer and real estate loans. As of December 31, 2007, the Bank had a legal lending limit for unsecured loans of up
to $5,011,800 to any one person.
While risk of loss in the Banks loan portfolio is primarily tied to the credit quality of its
various borrowers, risk of loss may also increase due to factors beyond the Banks 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
Banks real estate portfolio. Of the Banks target areas of lending activities, commercial loans are generally considered to have greater risk than real estate loans or consumer installment loans.
The Bank participates with other banks with respect to loans originated by the Bank which exceed the Banks lending limits. Management of the Bank
does not believe that loan participations necessarily pose any greater risk of loss than other loans.
The following is a description of
each of the major categories of loans in the Banks loan portfolio:
Commercial, Financial and Agricultural Loans.
Commercial
lending is directed principally towards businesses whose demands for funds fall within the Banks 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, and obtained for a variety of business purposes. Particular emphasis is placed on loans to small- and medium-sized businesses. The primary repayment risk for commercial loans is the failure of the business due to economic or
financial factors. Although the Bank typically looks to a commercial borrowers cash flow as the principal source of repayment for such loans, many commercial loans are secured by inventory, equipment, accounts receivable, and other assets.
8
Consumer Loans.
The Banks consumer loans consist primarily of installment loans to
individuals for personal, family and household purposes, including automobile loans to individuals and pre-approved lines of credit. This category of loans also includes lines of credit and term loans secured by second mortgages on the residences of
borrowers for a variety of purposes, including home improvements, education and other personal expenditures. In evaluating these loans the Bank reviews the borrowers level and stability of income and past credit history and the impact of these
factors on the ability of the borrower to repay the loan in a timely manner. In addition, the Bank maintains a proper margin between the loan amount and collateral value.
Real Estate Loans.
The Banks real estate loans consist of residential first and second mortgage loans, residential construction loans and commercial real estate loans to a limited degree. These loans are
made consistent with the Banks appraisal policy and real estate lending policy which detail maximum loan-to-value ratios and maturities. These loan-to-value ratios are sufficient to compensate for fluctuations in the real estate market to
minimize the risk of loss to the Bank.
The following table presents various categories of loans contained in the Banks loan
portfolio as of the dates indicated and the total amount of all loans for such periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
Type of Loan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
$
|
51,406
|
|
|
$
|
38,506
|
|
|
$
|
39,540
|
|
|
$
|
48,498
|
|
|
$
|
43,179
|
|
Real Estate construction
|
|
|
15,118
|
|
|
|
12,182
|
|
|
|
10,133
|
|
|
|
7,919
|
|
|
|
9,834
|
|
Real Estate mortgage
|
|
|
187,818
|
|
|
|
171,293
|
|
|
|
156,302
|
|
|
|
138,978
|
|
|
|
117,167
|
|
Installment and other loans to individuals
|
|
|
22,917
|
|
|
|
20,480
|
|
|
|
21,096
|
|
|
|
11,158
|
|
|
|
11,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
277,259
|
|
|
|
242,461
|
|
|
|
227,071
|
|
|
|
206,553
|
|
|
|
181,711
|
|
Less: allowance for possible loan losses
|
|
|
(3,806
|
)
|
|
|
(3,365
|
)
|
|
|
(2,713
|
)
|
|
|
(2,225
|
)
|
|
|
(1,961
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (net of allowances)
|
|
$
|
273,453
|
|
|
$
|
239,096
|
|
|
$
|
224,358
|
|
|
$
|
204,328
|
|
|
$
|
179,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a presentation of an analysis of maturities of certain loans as of
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in 1
Year or Less
|
|
Due After 1 to
5 Years
|
|
Due After
5 Years
|
|
Total
|
|
|
(In thousands)
|
Type of Loan
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
$
|
34,593
|
|
$
|
16,768
|
|
$
|
45
|
|
$
|
51,406
|
Real Estate - construction
|
|
|
12,389
|
|
|
2,729
|
|
|
|
|
|
15,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
46,982
|
|
$
|
19,497
|
|
$
|
45
|
|
$
|
66,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For all loan categories, the following is a presentation of an analysis of sensitivities to
changes in interest rates as of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due In 1
Year or Less
|
|
Due After
1 to 5 Years
|
|
Due After
5 Years
|
|
Total
|
|
|
(In thousands)
|
Predetermined interest rate
|
|
$
|
89,152
|
|
$
|
36,473
|
|
$
|
1,915
|
|
$
|
127,540
|
Floating interest rate
|
|
|
104,656
|
|
|
42,816
|
|
|
2,247
|
|
|
149,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
193,808
|
|
$
|
79,289
|
|
$
|
4,162
|
|
$
|
277,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
As of December 31, 2007 and 2006, the total recorded investment in impaired loans, all of which had
allowances determined in accordance with FASB Statements No. 114 and No. 118, amounted to approximately $262,800 and $197,000, respectively. The average recorded investment in impaired loans amounted to approximately $118,900 and $380,000
for 2007 and 2006, respectively. The allowance related to impaired loans amounted to approximately $26,300 and $19,700 at December 31, 2007 and 2006, respectively. The balance of the allowance in excess of the above specific reserves is
available to absorb the inherent losses of all other loans. There was no significant amount of interest income recognized on impaired loans for the years ended December 31, 2007 and 2006. The amount of interest recognized on impaired loans
using the cash method of accounting was not material for 2007 and 2006. Loans on non-accrual status at December 31, 2007 and 2006 had outstanding balances of approximately $262,800 and $197,000, respectively. Interest recognized on non-accruing
loans at December 31, 2007 and 2006 was $5,490 and $19,308, respectively. The Bank has no commitments to lend additional funds to borrowers whose loans have been modified.
As of December 31, 2007, there were no loans not disclosed above that are classified for regulatory purposes as doubtful, substandard or special
mention 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.
Accrual of interest is discontinued on a loan when management of the Bank determines upon consideration of economic and business factors affecting collection efforts that collection of interest is doubtful. The
following table provides information regarding certain loan classifications.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
# of
Loans
|
|
Aggregate
Principal
Balance
|
|
# of
Loans
|
|
Aggregate
Principal
Balance
|
|
# of
Loans
|
|
Aggregate
Principal
Balance
|
|
# of
Loans
|
|
Aggregate
Principal
Balance
|
|
# of
Loans
|
|
Aggregate
Principal
Balance
|
Loans over 90 days past due but still accruing interest
|
|
5
|
|
200,991
|
|
1
|
|
$
|
19,000
|
|
6
|
|
$
|
18,494
|
|
6
|
|
$
|
166,000
|
|
8
|
|
$
|
71,000
|
Loans considered to be troubled-debt restructured
|
|
2
|
|
2,044,000
|
|
1
|
|
$
|
94,000
|
|
1
|
|
$
|
94,000
|
|
1
|
|
$
|
187,000
|
|
1
|
|
$
|
151,000
|
Loans on non-accrual status
|
|
3
|
|
262,800
|
|
1
|
|
$
|
197,000
|
|
15
|
|
$
|
624,000
|
|
21
|
|
$
|
1,806,000
|
|
7
|
|
$
|
106,000
|
Additional discussion regarding the Companys non-performing assets is set forth in the
Managements Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Form 10-K.
10
Summary of Loan Loss Experience
An analysis of the Banks loss experience is furnished in the following table for the periods indicated, as well as a breakdown of the allowance for possible loan losses:
Analysis of the Allowance for Possible Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in thousands)
|
|
Balance at beginning of period
|
|
$
|
3,365
|
|
|
$
|
2,713
|
|
|
$
|
2,225
|
|
|
$
|
1,961
|
|
|
$
|
1,722
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans
|
|
|
(125
|
)
|
|
|
(24
|
)
|
|
|
(31
|
)
|
|
|
(10
|
)
|
|
|
(120
|
)
|
Installments and other loans to individuals
|
|
|
(39
|
)
|
|
|
(65
|
)
|
|
|
(82
|
)
|
|
|
(67
|
)
|
|
|
(65
|
)
|
Commercial loans
|
|
|
|
|
|
|
(2
|
)
|
|
|
(3
|
)
|
|
|
(181
|
)
|
|
|
(7
|
)
|
Recoveries
|
|
|
10
|
|
|
|
23
|
|
|
|
109
|
|
|
|
12
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(154
|
)
|
|
|
(68
|
)
|
|
|
(7
|
)
|
|
|
(246
|
)
|
|
|
(181
|
)
|
Additions charged to operations
|
|
|
595
|
|
|
|
720
|
|
|
|
495
|
|
|
|
510
|
|
|
|
420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
3,806
|
|
|
$
|
3,365
|
|
|
$
|
2,713
|
|
|
$
|
2,225
|
|
|
$
|
1,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of net charge-offs during the period to average loans outstanding during the period
|
|
|
0.06
|
%
|
|
|
0.03
|
%
|
|
|
0.01
|
%
|
|
|
0.13
|
%
|
|
|
0.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31 of each of the last five years, the allowance was allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
Amount
|
|
Percent of
loans
in each
category
to total
loans
|
|
|
Amount
|
|
Percent of
loans
in each
category
to total
loans
|
|
|
Amount
|
|
Percent of
loans
in each
category
to total
loans
|
|
|
Amount
|
|
Percent of
loans
in each
category
to total
loans
|
|
|
Amount
|
|
Percent of
loans
in each
category
to total
loans
|
|
|
|
(Dollars in thousands)
|
|
Commercial, Financial and Agricultural
|
|
$
|
798
|
|
21
|
%
|
|
$
|
1,897
|
|
56.4
|
%
|
|
$
|
1,040
|
|
17.4
|
%
|
|
$
|
680
|
|
23.5
|
%
|
|
$
|
590
|
|
23.8
|
%
|
Real Estate - Construction
|
|
|
196
|
|
5.1
|
%
|
|
|
152
|
|
4.5
|
|
|
|
170
|
|
4.5
|
|
|
|
130
|
|
3.8
|
|
|
|
150
|
|
5.4
|
|
Real Estate - Mortgage
|
|
|
1,903
|
|
50
|
%
|
|
|
1,185
|
|
35.2
|
|
|
|
1,190
|
|
68.8
|
|
|
|
1,150
|
|
67.3
|
|
|
|
990
|
|
64.5
|
|
Installment and Other Loans to Individuals
|
|
|
112
|
|
2.9
|
%
|
|
|
90
|
|
2.7
|
|
|
|
180
|
|
9.3
|
|
|
|
210
|
|
5.4
|
|
|
|
220
|
|
6.3
|
|
Unallocated
|
|
|
797
|
|
21
|
%
|
|
|
41
|
|
1.2
|
|
|
|
133
|
|
N/A
|
|
|
|
55
|
|
N/A
|
|
|
|
11
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,806
|
|
100.0
|
%
|
|
$
|
3,365
|
|
100.0
|
%
|
|
$
|
2,713
|
|
100.0
|
%
|
|
$
|
2,225
|
|
100.0
|
%
|
|
$
|
1,961
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Loss Reserve
As of December 31, 2007, 18.5% of outstanding loans were in the category of commercial loans, which includes commercial, industrial and agricultural loans. Although commercial loans are generally considered by
management as having greater risk than other categories of loans in the Banks loan portfolio, 96.3% of these commercial loans at December 31, 2007 were made on a secured basis. Management believes that the secured condition of the
preponderant portion of the Banks commercial loan portfolio greatly reduces any risk of loss inherently present in commercial loans.
The Banks consumer loan portfolio is also well secured. At December 31, 2007, 91.1% of the Banks consumer loans were secured by collateral primarily consisting of automobiles, boats and other personal property. Management
believes that these loans involve less risk than commercial loans.
11
Real estate mortgage loans constituted 67.7% of outstanding loans at December 31, 2007. The loans in
this category represent residential and commercial real estate mortgages where the amount of the original loan generally does not exceed 85% of the appraised value of the collateral. These loans are considered by management to be well secured with a
low risk of loss.
A review of the loan portfolio by an independent firm is conducted annually. The purpose of this review is to assess the
risk in the loan portfolio and to evaluate managements determination of the adequacy of the allowance for loan losses. The review includes analyses of historical performance, the level of non-conforming and rated loans, loan volume and
activity, review of loan files and consideration of economic conditions and other pertinent information. Upon completion, the report is approved by the Board and management of the Bank. In addition to the above review, the Banks primary
regulator, the Office of the Comptroller of the Currency (the OCC), also conducts an annual examination of the loan portfolio. Upon completion, the OCC presents its report of findings to the Board and management of the Bank. Information
provided from the above two independent sources, together with information provided by the management of the Bank and other information known to members of the Board, are utilized by the Board to monitor, on a quarterly basis, the loan portfolio.
Specifically, the Board attempts to identify risks inherent in the loan portfolio (e.g., problem loans, potential problem loans and loans to be charged off), assess the overall quality and collectibility of the loan portfolio, and determine amounts
of the allowance for loan losses and the provision for loan losses to be reported based on the results of their review.
12
Investments
As of December 31, 2007, investment securities comprised approximately 4.9% of the Banks assets and net loans comprised approximately 87.3% of the Banks assets. The Bank invests primarily in direct obligations of the United
States, obligations guaranteed as to principal and interest by the United States, obligations of agencies of the United States and certificates of deposit issued by commercial banks. In addition, the Bank enters into Federal Funds transactions with
its principal correspondent banks, and acts as a net seller of such funds. The sale of Federal Funds amounts to a short-term loan from the Bank to another bank.
The following table presents, for the dates indicated, the carrying value of the Banks investments. All securities held at December 31, 2007, 2006 and 2005 were categorized as available for sale.
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|
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|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
(In thousands)
|
Obligations of U. S. government sponsored agencies
|
|
$
|
15,248
|
|
$
|
13,414
|
|
$
|
10,372
|
Other equity securities
|
|
|
290
|
|
|
290
|
|
|
290
|
Restricted equity securities
|
|
|
1,363
|
|
|
1,267
|
|
|
1,345
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,901
|
|
$
|
14,971
|
|
$
|
12,007
|
|
|
|
|
|
|
|
|
|
|
The following table indicates as of December 31, 2007 the amount of investments due in
(i) one year or less, (ii) one to five years, (iii) five to ten years, and (iv) over ten years:
|
|
|
|
|
|
|
|
|
At December 31, 2007
|
|
|
|
Amount
|
|
Weighted
Average
Yield
|
|
|
|
(Dollars in thousands)
|
|
Obligations of U. S. government sponsored agencies:
|
|
|
|
|
|
|
0 - 1 year
|
|
$
|
5,161
|
|
3.51
|
%
|
Over 1 through 5 years
|
|
|
10,087
|
|
4.87
|
%
|
Over 5 through 10 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,248
|
|
4.41
|
%
|
|
|
|
|
|
|
|
Return on Equity and Assets
Returns on average consolidated assets and average consolidated equity for the periods indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Return on average assets
|
|
1.38
|
%
|
|
1.52
|
%
|
|
1.39
|
%
|
Return on average equity
|
|
15.9
|
%
|
|
17.8
|
%
|
|
16.9
|
%
|
Average equity to average assets ratio
|
|
8.7
|
%
|
|
8.6
|
%
|
|
8.2
|
%
|
Dividend payout ratio
|
|
26.6
|
%
|
|
20.5
|
%
|
|
20.7
|
%
|
13
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.
Certain of the officers of the Bank are 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 Banks assets in commercial, consumer and real estate loans.
The Banks
asset/liability mix is monitored on a daily basis with a monthly report reflecting interest-sensitive assets and interest-sensitive liabilities being prepared and presented to the Banks 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 Banks earnings.
Correspondent Banking
Correspondent banking involves the providing of services by one bank to another bank which cannot
provide that service for itself from an economic or practical standpoint. The Bank purchases correspondent services offered by larger banks, including check collections, purchase of Federal Funds, security safekeeping, investment services, coin and
currency supplies, overline and liquidity loan participations and sales of loans to or participations with correspondent banks.
The Bank
sells loan participations to correspondent banks with respect to loans which exceed the Banks lending limit. As compensation for services provided by a correspondent, the Bank may maintain certain balances with such correspondents in
non-interest bearing accounts. At December 31, 2007, the Bank had outstanding participations totaling $3,955,416.
Data Processing
The Bank performs a full range of data processing services internally, including an automated general ledger, deposit accounting, commercial, real
estate and installment lending data processing, central information file and ATM processing.
Employees
At March 21, 2008, the Bank employed 62 persons on a full-time basis, including 22 officers, and 8 persons on a part-time basis.
Monetary Policies
The results of operations of the
Bank are affected by credit policies of monetary authorities, particularly 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.
14
Registrar and Transfer Agent
Computershare Investor Services, LLC, Atlanta, Georgia, serves as the Transfer Agent and Registrar for the Companys common stock.
Supervision and Regulation
The following discussion sets forth some of the material elements of the
regulatory framework applicable to bank holding companies and their subsidiaries and provides some specific information relative to the Company. The regulatory framework is intended primarily for the protection of depositors and the Bank Insurance
Fund 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 and regulatory
provisions.
The Company
General.
As a bank holding company, the Company is regulated under the Bank Holding Company Act of 1956 (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 Companys activities on a continual basis. The Bank is also subject to regulation and supervision by various regulatory authorities, including the Federal Reserve Board, the Office of the
Comptroller of the Currency (the OCC) and the Federal Deposit Insurance Corporation (the FDIC).
Bank Holding
Company Regulation.
In general, the BHC Act limits bank holding company business to owning or controlling banks and engaging in other banking-related activities. Bank holding companies must obtain the Federal Reserve Boards approval before
they:
|
|
|
acquire direct or indirect ownership or control of any voting shares of any bank that results in total ownership or control, directly or indirectly, of more than 5%
of the voting shares of such bank;
|
|
|
|
merge or consolidate with another bank holding company; or
|
|
|
|
acquire substantially all of the assets of any additional banks.
|
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. 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 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 Boards approval before acquiring 25% (5% if the company is a bank
holding company) or more of the outstanding shares or otherwise obtaining control over the Company.
Financial Services
Modernization
. The Gramm-Leach-Bliley Financial Modernization Act of 1999 (the Modernization Act), enacted on November 12, 1999, amended the BHC Act and,
|
|
|
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;
|
|
|
|
allows insurers and other financial services companies to acquire banks;
|
|
|
|
allows national banks, and some state banks, either directly or through operating subsidiaries, to engage in certain non-banking financial activities;
|
|
|
|
removes various restrictions that applied to bank holding company ownership of securities firms and mutual fund advisory companies; and
|
15
|
|
|
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 Companys 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 Companys 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 that financial holding companies are eligible to engage in includes those 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.
Under Federal Reserve Board policy, 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 that Federal Reserve Board policy, 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 companys 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.
Federal law
also authorizes the OCC to order an assessment of the Company if the capital of the Bank were to become impaired. If the Company failed to pay the assessment within three months, the OCC could order the sale of the Companys stock in the Bank
to cover the deficiency.
Subsidiary Dividends.
The Company is a legal entity separate and distinct from the Bank. A major portion
of the Companys revenues results from amounts paid as dividends to the Company by the Bank. The OCCs prior approval is required if the total of all dividends declared by a national bank in any calendar year will exceed the sum of that
banks net profits for that year and its retained net profits for the preceding two calendar years, less any required transfers to surplus. Federal law also prohibits national banks from paying dividends that would be greater than the
banks undivided profits after deducting statutory bad debt in excess of the banks allowance for loan losses.
16
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 under certain circumstances relating to the financial
condition of a bank or bank holding company that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. The appropriate federal regulatory authorities have indicated that paying dividends that deplete a
banks 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.
State Law Restrictions.
As a Georgia business corporation, the Company may be subject to certain limitations and restrictions under applicable
Georgia corporate law. In addition, although the Bank is a national bank and therefore primarily regulated by the OCC, Georgia banking law may restrict certain activities of the Bank.
The Bank
General
. The Bank, as a national banking association, is subject to regulation and
examination by the OCC. The federal laws that apply to the Bank regulate, among other things, the scope of its business, its investments, its reserves against deposits, the timing of the availability of deposited funds and the nature and amount of
and collateral for loans. The laws and regulations governing the Bank generally have been promulgated to protect depositors and not to protect shareholders of the Company or the Bank.
Community Reinvestment Act.
The CRA requires that, in connection with examinations of financial institutions within their jurisdiction, the OCC
evaluate the record of the financial institutions in meeting the credit needs of their local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of those banks. These factors are also considered
in evaluating mergers, acquisitions, and applications to open a branch or facility.
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.
Federal
Deposit Insurance Corporation Improvement Act
. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (the FDICIA), each federal banking agency has prescribed, by regulation, noncapital 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 Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the IBBEA) permits nationwide interstate banking and branching under certain circumstances.
This legislation generally authorizes interstate branching and relaxes federal law restrictions on interstate banking. Currently, bank holding companies may purchase banks in any state, and states may not prohibit such purchases. Additionally, banks
are permitted to merge with banks in other states as long as the home state of neither merging bank has opted out. The IBBEA requires regulators to consult with community organizations before permitting an interstate institution to close
a branch in a low-income area. The IBBEA also prohibits the interstate acquisition of a bank if, as a result, the bank holding company would control more than ten percent of the total United States insured depository deposits or more than thirty
percent, or the applicable state law limit,
17
of deposits in the acquired banks state. The federal banking agencies prohibit banks from using their interstate branches primarily for deposit
production and have accordingly implemented a loan-to-deposit ratio screen to ensure compliance with this prohibition.
Georgia has
opted in to the IBBEA and allows in-state banks to merge with out-of-state banks subject to certain requirements. Georgia law generally authorizes the acquisition of an in-state bank by an out-of-state bank by merger with a Georgia
financial institution that has been in existence for at least 3 years prior to the acquisition. With regard to interstate bank branching, out-of-state banks that do not already operate a branch in Georgia may not establish de novo branches in
Georgia.
Deposit Insurance.
The deposits of the Bank are currently insured to a maximum of $100,000 per depositor through a fund
administered by the FDIC. All insured banks are required to pay semi-annual deposit insurance premium assessments to the FDIC.
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 nonbank businesses or to open new facilities.
The FDIC, the OCC and the 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, less intangibles except as described above.
The FDIC, the OCC and the 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 and banks and bank holding companies seeking to expand, however, are required to maintain leverage ratios of at least 4% to 5%.
The FDICIA created a statutory framework of supervisory actions indexed to the capital level of the individual institution. Under regulations adopted by the FDIC, the OCC and the Federal Reserve Board, an institution
is assigned to one of five capital categories depending on its total risk-based capital ratio, Tier 1 risk-based capital ratio, and leverage ratio, together with certain subjective factors. Institutions which are deemed to be
undercapitalized depending on the category to which they are assigned are subject to certain mandatory supervisory corrective actions.
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.
18
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 persons 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 institutions liability for submitting a report of suspicious activity and for voluntarily
disclosing a possible violation of law to law enforcement.
Sarbanes-Oxley Act of 2002
. The Sarbanes-Oxley Act of 2002 (the
SOA) 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 SOA requires the SEC, based on certain enumerated factors, to regularly and systematically review corporate filings. To deter wrongdoing, it
(i) subjects bonuses issued to top executives to disgorgement if a restatement of a companys 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.
Privacy.
Under the Modernization Act, federal banking regulators adopted rules limiting
the ability of banks and other financial institutions to disclose nonpublic information about consumers to nonaffiliated third parties. The rules require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to
prevent disclosure of certain personal information to nonaffiliated third parties. The privacy provisions of the Modernization Act affect how consumer information is transmitted through diversified financial services companies and conveyed to
outside vendors.
Future Legislation.
Changes to federal and state laws and regulations can affect the operating environment of bank
holding companies and their subsidiaries in substantial and unpredictable ways. From time to time, various legislative and regulatory proposals are introduced. These proposals, if codified, may change banking statutes and regulations and the
Companys operating environment in substantial and unpredictable ways. If codified, these proposals could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks,
savings associations, credit unions and other financial institutions. The Company cannot accurately predict whether those changes in laws and regulations will occur, and, if those changes occur, the ultimate effect they would have upon the
Companys financial condition or results of operation.