e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED June 30, 2010
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
Commission File number 0-25033
Superior Bancorp
(Exact Name of Registrant as Specified in its Charter)
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Delaware
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63-1201350 |
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|
(State or Other Jurisdiction of Incorporation)
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(IRS Employer Identification No.) |
17 North 20th Street, Birmingham, Alabama 35203
(Address of Principal Executive Offices)
(205) 327-1400
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer o | |
Accelerated filer o | |
Non-accelerated filer o | |
Smaller reporting company þ |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
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|
Class |
|
Outstanding as of August 13, 2010 |
Common stock, $.001 par value
|
|
12,560,457 |
SUPERIOR BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
(Dollars in thousands, except per share data)
|
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|
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|
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June 30, |
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December 31, |
|
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2010 |
|
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2009 |
|
ASSETS
|
Cash and due from banks |
|
$ |
54,648 |
|
|
$ |
74,020 |
|
Interest-bearing deposits in other banks |
|
|
245,182 |
|
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|
23,714 |
|
Federal funds sold |
|
|
1,328 |
|
|
|
2,036 |
|
|
|
|
|
|
|
|
Total cash and cash equivalents |
|
|
301,158 |
|
|
|
99,770 |
|
Investment securities available-for-sale |
|
|
269,943 |
|
|
|
286,310 |
|
Tax lien certificates |
|
|
18,820 |
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19,292 |
|
Mortgage loans held-for-sale |
|
|
54,823 |
|
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|
71,879 |
|
Loans, net of unearned income |
|
|
2,482,560 |
|
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|
2,472,697 |
|
Allowance for loan losses |
|
|
(79,425 |
) |
|
|
(41,884 |
) |
|
|
|
|
|
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Net loans |
|
|
2,403,135 |
|
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|
2,430,813 |
|
Premises and equipment, net |
|
|
102,765 |
|
|
|
104,022 |
|
Accrued interest receivable |
|
|
15,168 |
|
|
|
15,581 |
|
Stock in FHLB |
|
|
18,212 |
|
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|
18,212 |
|
Cash surrender value of life insurance |
|
|
50,792 |
|
|
|
50,142 |
|
Core deposit and other intangible assets |
|
|
14,746 |
|
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|
16,694 |
|
Other real estate |
|
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45,184 |
|
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|
41,618 |
|
Other assets |
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63,589 |
|
|
|
67,536 |
|
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Total assets |
|
$ |
3,358,335 |
|
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$ |
3,221,869 |
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|
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LIABILITIES AND STOCKHOLDERS EQUITY
|
Deposits: |
|
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|
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|
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Noninterest-bearing |
|
$ |
275,712 |
|
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$ |
257,744 |
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Interest-bearing |
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2,562,809 |
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2,398,829 |
|
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Total deposits |
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2,838,521 |
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2,656,573 |
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Advances from FHLB |
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216,324 |
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218,322 |
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Security repurchase agreements |
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|
762 |
|
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|
841 |
|
Notes payable |
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45,150 |
|
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|
45,917 |
|
Subordinated debentures, net |
|
|
81,196 |
|
|
|
84,170 |
|
Accrued expenses and other liabilities |
|
|
27,068 |
|
|
|
24,342 |
|
|
|
|
|
|
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|
Total liabilities |
|
|
3,209,021 |
|
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3,030,165 |
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Commitments and contingencies |
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Stockholders equity: |
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Preferred stock, par value $.001 per share; shares authorized 5,000,000: |
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Series B, cumulative convertible preferred stock, 111 and -0- shares
issued and outstanding as of June 30, 2010 and December 31, 2009,
respectively |
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Series C, cumulative convertible preferred stock, 3 and -0- shares
issued and outstanding as of June 30, 2010 and December 31, 2009,
respectively |
|
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|
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Common stock, par value $.001 per share; shares authorized 200,000,000;
shares issued 12,560,457 and 11,673,837, respectively; outstanding
12,560,457 and 11,667,794, respectively |
|
|
13 |
|
|
|
12 |
|
Surplus preferred |
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|
10,888 |
|
|
|
|
|
warrants |
|
|
9,827 |
|
|
|
8,646 |
|
common |
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|
325,159 |
|
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|
322,043 |
|
Accumulated deficit |
|
|
(191,250 |
) |
|
|
(130,889 |
) |
Accumulated other comprehensive loss |
|
|
(5,136 |
) |
|
|
(7,825 |
) |
Unearned ESOP stock |
|
|
(174 |
) |
|
|
(263 |
) |
Unearned restricted stock |
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|
(13 |
) |
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|
(20 |
) |
|
|
|
|
|
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|
Total stockholders equity |
|
|
149,314 |
|
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|
191,704 |
|
|
|
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|
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|
Total liabilities and stockholders equity |
|
$ |
3,358,335 |
|
|
$ |
3,221,869 |
|
|
|
|
|
|
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|
See Notes to Condensed Consolidated Financial Statements.
3
SUPERIOR BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Dollars in thousands, except per share data)
|
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For the |
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For the |
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2010 |
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2009 |
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|
2010 |
|
|
2009 |
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans |
|
$ |
36,212 |
|
|
$ |
35,959 |
|
|
$ |
72,554 |
|
|
$ |
70,911 |
|
Interest on taxable securities |
|
|
2,625 |
|
|
|
3,778 |
|
|
|
5,536 |
|
|
|
7,787 |
|
Interest on tax-exempt securities |
|
|
314 |
|
|
|
434 |
|
|
|
626 |
|
|
|
863 |
|
Interest on federal funds sold |
|
|
2 |
|
|
|
2 |
|
|
|
3 |
|
|
|
7 |
|
Interest and dividends on other investments |
|
|
393 |
|
|
|
456 |
|
|
|
765 |
|
|
|
818 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
39,546 |
|
|
|
40,629 |
|
|
|
79,484 |
|
|
|
80,386 |
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on deposits |
|
|
11,452 |
|
|
|
14,109 |
|
|
|
22,977 |
|
|
|
29,002 |
|
Interest on other borrowed funds |
|
|
2,542 |
|
|
|
2,597 |
|
|
|
5,064 |
|
|
|
4,938 |
|
Interest on subordinated debentures |
|
|
2,399 |
|
|
|
1,206 |
|
|
|
4,785 |
|
|
|
2,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
16,393 |
|
|
|
17,912 |
|
|
|
32,826 |
|
|
|
36,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
23,153 |
|
|
|
22,717 |
|
|
|
46,658 |
|
|
|
44,046 |
|
Provision for loan losses |
|
|
50,363 |
|
|
|
5,982 |
|
|
|
59,490 |
|
|
|
9,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest (loss) income after provision for loan losses |
|
|
(27,210 |
) |
|
|
16,735 |
|
|
|
(12,832 |
) |
|
|
34,612 |
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges and fees on deposits |
|
|
2,335 |
|
|
|
2,524 |
|
|
|
4,551 |
|
|
|
4,911 |
|
Mortgage banking income |
|
|
2,667 |
|
|
|
2,271 |
|
|
|
4,677 |
|
|
|
3,961 |
|
Investment securities gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of securities |
|
|
1,858 |
|
|
|
|
|
|
|
1,858 |
|
|
|
|
|
Total other-than-temporary impairment losses (OTTI) |
|
|
(683 |
) |
|
|
(6,685 |
) |
|
|
(883 |
) |
|
|
(17,189 |
) |
Portion of OTTI recognized in other comprehensive
loss |
|
|
181 |
|
|
|
904 |
|
|
|
183 |
|
|
|
5,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities gains (losses) |
|
|
1,356 |
|
|
|
(5,781 |
) |
|
|
1,158 |
|
|
|
(11,626 |
) |
Change in fair value of derivatives |
|
|
(239 |
) |
|
|
(67 |
) |
|
|
(29 |
) |
|
|
(266 |
) |
Increase in cash surrender value of life insurance |
|
|
558 |
|
|
|
540 |
|
|
|
1,126 |
|
|
|
1,055 |
|
Gain on exchange of subordinated debt for common stock |
|
|
507 |
|
|
|
|
|
|
|
507 |
|
|
|
|
|
Other income |
|
|
1,344 |
|
|
|
1,340 |
|
|
|
2,750 |
|
|
|
2,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
8,528 |
|
|
|
827 |
|
|
|
14,740 |
|
|
|
592 |
|
Noninterest expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
13,840 |
|
|
|
12,304 |
|
|
|
28,040 |
|
|
|
24,613 |
|
Occupancy, furniture and equipment |
|
|
4,850 |
|
|
|
4,503 |
|
|
|
9,613 |
|
|
|
8,919 |
|
Amortization of core deposit intangibles |
|
|
869 |
|
|
|
985 |
|
|
|
1,739 |
|
|
|
1,971 |
|
FDIC assessments |
|
|
1,853 |
|
|
|
1,932 |
|
|
|
3,233 |
|
|
|
2,389 |
|
Foreclosure losses |
|
|
3,358 |
|
|
|
1,748 |
|
|
|
5,935 |
|
|
|
2,317 |
|
Other expenses |
|
|
6,763 |
|
|
|
6,323 |
|
|
|
12,782 |
|
|
|
11,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expenses |
|
|
31,533 |
|
|
|
27,795 |
|
|
|
61,342 |
|
|
|
51,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(50,215 |
) |
|
|
(10,233 |
) |
|
|
(59,434 |
) |
|
|
(16,655 |
) |
Income tax expense (benefit) |
|
|
3,507 |
|
|
|
(4,539 |
) |
|
|
28 |
|
|
|
(7,387 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(53,722 |
) |
|
|
(5,694 |
) |
|
|
(59,462 |
) |
|
|
(9,268 |
) |
Preferred stock dividends and amortization |
|
|
(899 |
) |
|
|
(1,167 |
) |
|
|
(899 |
) |
|
|
(2,310 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stockholders |
|
$ |
(54,621 |
) |
|
$ |
(6,861 |
) |
|
$ |
(60,361 |
) |
|
$ |
(11,578 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
12,305 |
|
|
|
10,071 |
|
|
|
11,977 |
|
|
|
10,062 |
|
Weighted average common shares outstanding, assuming dilution |
|
|
12,305 |
|
|
|
10,071 |
|
|
|
11,977 |
|
|
|
10,062 |
|
Basic net loss per common share |
|
$ |
(4.44 |
) |
|
$ |
(0.68 |
) |
|
$ |
(5.04 |
) |
|
$ |
(1.15 |
) |
Diluted net loss per common share |
|
$ |
(4.44 |
) |
|
$ |
(0.68 |
) |
|
$ |
(5.04 |
) |
|
$ |
(1.15 |
) |
See Notes to Condensed Consolidated Financial Statements.
4
SUPERIOR BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY (UNAUDITED)
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Unearned |
|
|
Unearned |
|
|
Total |
|
|
|
Preferred |
|
|
Common |
|
|
Surplus |
|
|
Accumulated |
|
|
Comprehensive |
|
|
ESOP |
|
|
Restricted |
|
|
Stockholders |
|
|
|
Stock |
|
|
Stock |
|
|
Preferred |
|
|
Warrants |
|
|
Common |
|
|
Deficit |
|
|
(Loss) Gain |
|
|
Stock |
|
|
Stock |
|
|
Equity |
|
Balance at December 31, 2009 |
|
$ |
|
|
|
$ |
12 |
|
|
$ |
|
|
|
$ |
8,646 |
|
|
$ |
322,043 |
|
|
$ |
(130,889 |
) |
|
$ |
(7,825 |
) |
|
$ |
(263 |
) |
|
$ |
(20 |
) |
|
$ |
191,704 |
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(59,462 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(59,462 |
) |
Other
comprehensive gain, net of tax expense of $1.6 million unrealized gain on
securities available for sale, arising during the period, net of reclassification
adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,780 |
|
|
|
|
|
|
|
|
|
|
|
2,780 |
|
Change in accumulated loss on cash flow hedging instrument, net of tax benefit of $56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(91 |
) |
|
|
|
|
|
|
|
|
|
|
(91 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56,773 |
) |
Cumulative preferred stock dividend, net of amortization |
|
|
|
|
|
|
|
|
|
|
718 |
|
|
|
|
|
|
|
|
|
|
|
(899 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(181 |
) |
Exchange of trust preferred debt for
849,156 shares of common stock |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
2,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,884 |
|
Compensation expense related to stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
162 |
|
Issuance of 111 shares Series B preferred stock and 792,859 warrants |
|
|
|
|
|
|
|
|
|
|
9,887 |
|
|
|
1,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,051 |
|
Issuance of 3 shares Series C preferred stock and 21,429 warrants |
|
|
|
|
|
|
|
|
|
|
283 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300 |
|
Amortization of unearned restricted
stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
7 |
|
Issuance of 43,507 shares related to
board compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
155 |
|
Release of 1,969 shares by ESOP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(84 |
) |
|
|
|
|
|
|
|
|
|
|
89 |
|
|
|
|
|
|
|
5 |
|
|
|
|
Balance at June 30, 2010 |
|
$ |
|
|
|
$ |
13 |
|
|
$ |
10,888 |
|
|
$ |
9,827 |
|
|
$ |
325,159 |
|
|
$ |
(191,250 |
) |
|
$ |
(5,136 |
) |
|
$ |
(174 |
) |
|
$ |
(13 |
) |
|
$ |
149,314 |
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
5
SUPERIOR BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
Net cash provided by (used in) operating activities |
|
$ |
30,260 |
|
|
$ |
(71,019 |
) |
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
Proceeds from sales of investment securities available-for-sale |
|
|
89,130 |
|
|
|
|
|
Proceeds from maturities of investment securities available-for-sale |
|
|
49,458 |
|
|
|
40,602 |
|
Purchase of investment securities available-for-sale |
|
|
(117,055 |
) |
|
|
(11,683 |
) |
Net increase in loans |
|
|
(52,856 |
) |
|
|
(110,932 |
) |
Redemptions of tax lien certificates |
|
|
9,171 |
|
|
|
18,582 |
|
Purchase of tax lien certificates |
|
|
(8,699 |
) |
|
|
(20,329 |
) |
Purchase of premises and equipment |
|
|
(2,313 |
) |
|
|
(5,295 |
) |
Proceeds from sale of premises and equipment |
|
|
|
|
|
|
338 |
|
Proceeds from sale of foreclosed assets |
|
|
13,962 |
|
|
|
5,673 |
|
Decrease in stock of FHLB |
|
|
|
|
|
|
3,198 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(19,202 |
) |
|
|
(79,846 |
) |
Financing activities |
|
|
|
|
|
|
|
|
Net increase in deposits |
|
|
181,873 |
|
|
|
261,784 |
|
Decrease in FHLB advances |
|
|
(1,998 |
) |
|
|
(134,493 |
) |
Proceeds from note payable |
|
|
|
|
|
|
38,575 |
|
Principal payment on note payable |
|
|
(1,000 |
) |
|
|
|
|
Net decrease in other borrowed funds |
|
|
(138 |
) |
|
|
|
|
Proceeds from exchange of subordinated debt for common stock |
|
|
193 |
|
|
|
|
|
Proceeds from issuance of preferred stock |
|
|
11,400 |
|
|
|
|
|
Cash dividends paid |
|
|
|
|
|
|
(1,534 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
190,330 |
|
|
|
164,332 |
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
201,388 |
|
|
|
13,467 |
|
Cash and cash equivalents at beginning of period |
|
|
99,770 |
|
|
|
89,448 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
301,158 |
|
|
$ |
102,915 |
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with the instructions for Form 10-Q, and therefore, do not include all information and
footnotes necessary for a fair presentation of financial position, results of operations and cash
flows in conformity with generally accepted accounting principles. For a summary of significant
accounting policies that have been consistently followed, see Note 1 to the Consolidated Financial
Statements included in Superior Bancorps (the Corporations) Annual Report on Form 10-K for the
year ended December 31, 2009. It is managements opinion that all adjustments, consisting of only
normal and recurring items necessary for a fair presentation, have been included in these condensed
consolidated financial statements. Operating results for the three and six months ended June 30,
2010, are not necessarily indicative of the results that may be expected for the year ending
December 31, 2010.
The Condensed Consolidated Statement of Financial Condition as of December 31, 2009, presented
herein has been derived from the financial statements audited by Grant Thornton LLP, independent
registered public accountants, as indicated in their report, dated March 11, 2010, included in our
Annual Report on Form 10-K. The Condensed Consolidated Financial Statements do not include all of
the information and footnotes required by generally accepted accounting principles for complete
financial statements.
Reclassifications
Certain reclassifications have been made in the previously reported financial statements and
accompanying notes to make the prior year amounts comparable to those of the current year. Such
reclassifications had no effect on previously reported net income or stockholders equity.
Note 2 Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Codification (ASC) 860 - Accounting for Transfers of Financial Assets (Topic 860). Topic 860
is a revision to preceding guidance and requires more information about transfers of financial
assets, including securitization transactions, and where entities have continuing exposure to the
risks related to transferred financial assets. It eliminates the concept of a qualifying special
purpose entity, changes the requirements for derecognizing financial assets, and requires
additional disclosures.
In December 2009, the FASB issued Accounting Standards Update (ASU) No.
2009-16 Transfers and Servicing Accounting for Transfers of Financial Assets (ASU 2009 -16).
ASU 2009-16 formally codifies FASB Statement No. 166, Accounting for Transfers of Financial Assets
and provides a revision for Topic 860 to require more information about transfers of financial
assets. Topic 860 and ASU 2009-16 became effective for interim and annual reporting periods
beginning January 1, 2010. The adoption of this statement and update did not have a material
impact on the Corporations consolidated financial statements.
In December 2009, FASB issued ASU No. 2009-17 Consolidation Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities (ASU 2009-17). ASU 2009-17 amends the
consolidation guidance applicable to variable interest entities. The amendments to the
consolidation guidance affect all entities, as well as qualifying special-purpose entities that
were previously excluded from previous consolidation guidance. ASU 2009-17 became effective as of
the beginning of the first annual reporting period that began after November 15, 2009. The
adoption of ASU 2009-17 did not have a significant impact on the Corporations ongoing financial
position or results of operations.
In January 2010, FASB issued ASU No. 2010-06 Fair Value Measurements and Disclosures Improving
Disclosures about Fair Value Measurements (ASU
2010-06). ASU 2010-06 amends
Subtopic 820-10, Fair Value Measurements and Disclosures, that require new disclosures for
transfers in and out of Levels 1 and 2, and for activity in Level 3 fair value measurements. In
addition, ASU 2010-06 provides amendments that clarify existing disclosures relating to the level
of disaggregation and inputs and valuation techniques. Fair value measurement disclosures should
be provided for each class of assets and liabilities, and disclosures should be made about the
valuation techniques and inputs used to measure fair value for both recurring and nonrecurring
measurements that fall in either Level 2 or Level 3. The new disclosures and clarification of
existing disclosures are effective for interim and annual reporting periods beginning after
December 15, 2009. The Corporation adopted these disclosure requirements of ASU 2010-06 as of
January 1, 2010. The adoption of ASU 2010-06 did not have an impact to the Corporations financial
position, results of operations or cash flows (see Note 11). The disclosures about purchases,
sales, issuances and settlements in the roll-forward activity of activity in the Level 3 fair value
measurements will become effective for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years.
7
In June 2010, FASB issued ASU No. 2010-20 Receivables (Topic 310) Disclosures about the Credit
Quality of Financing Receivables and the Allowance for Credit Losses
(ASU 2010-20). ASU 2010-20
was issued to create greater transparency and help financial users assess an entitys credit risk
exposure and its allowance for credit losses. ASU 2010-20 requires an entity to provide a greater
level of disaggregated information about the credit quality of its financing receivables and its
allowance for credit losses. In addition, an entity will be required to disclose credit quality
indicators, past due information and modifications of its financing receivables. The new
disclosure requirements will become effective for periods ending on or after December 15, 2010. The
adoption of ASU 2010-20 will not have an impact on the Corporations ongoing financial position or
results of operations.
Note 3 Investment Securities
The amortized cost and estimated fair values of investment securities as of June 30, 2010 are shown
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Investment securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Agency securities |
|
$ |
18,277 |
|
|
$ |
342 |
|
|
$ |
|
|
|
$ |
18,619 |
|
Mortgage-backed securities (MBS): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Agency pass-through |
|
|
109,180 |
|
|
|
3,249 |
|
|
|
7 |
|
|
|
112,422 |
|
U.S. Agency collateralized mortgage obligation (CMO) |
|
|
82,941 |
|
|
|
1,513 |
|
|
|
|
|
|
|
84,454 |
|
Private-label CMO |
|
|
17,076 |
|
|
|
296 |
|
|
|
2,716 |
|
|
|
14,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total MBS |
|
|
209,197 |
|
|
|
5,058 |
|
|
|
2,723 |
|
|
|
211,532 |
|
State, county and municipal securities |
|
|
30,493 |
|
|
|
430 |
|
|
|
262 |
|
|
|
30,661 |
|
Corporate obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt |
|
|
4,101 |
|
|
|
|
|
|
|
101 |
|
|
|
4,000 |
|
Pooled trust preferred securities |
|
|
8,288 |
|
|
|
|
|
|
|
5,025 |
|
|
|
3,263 |
|
Single issue trust preferred securities |
|
|
5,000 |
|
|
|
|
|
|
|
3,245 |
|
|
|
1,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate obligations |
|
|
17,389 |
|
|
|
|
|
|
|
8,371 |
|
|
|
9,018 |
|
Equity securities |
|
|
113 |
|
|
|
|
|
|
|
|
|
|
|
113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities available-for-sale |
|
$ |
275,469 |
|
|
$ |
5,830 |
|
|
$ |
11,356 |
|
|
$ |
269,943 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities with an amortized cost of $264.9 million as of June 30, 2010 were pledged to
secure public funds and for other purposes as required or permitted by law.
The amortized cost and estimated fair values of investment securities as of June 30, 2010, by
contractual maturity, are shown below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or without call or
prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
Securities Available-for-Sale |
|
|
|
Amortized |
|
|
Estimated |
|
|
|
Cost |
|
|
Fair Value |
|
|
|
(Dollars in thousands) |
|
Due in one year or less |
|
$ |
285 |
|
|
$ |
287 |
|
Due after one year through five years |
|
|
6,970 |
|
|
|
6,909 |
|
Due after five years through ten years |
|
|
23,130 |
|
|
|
23,562 |
|
Due after ten years |
|
|
35,887 |
|
|
|
27,652 |
|
Mortgage-backed securities |
|
|
209,197 |
|
|
|
211,533 |
|
|
|
|
|
|
|
|
|
|
$ |
275,469 |
|
|
$ |
269,943 |
|
|
|
|
|
|
|
|
During the
three months ended June 30, 2010, the Corporation sold certain U.S.
Agency securities and U.S Agency MBS with
combined amortized cost and market values of $87.4 million and $89.1 million, respectively. The
Corporation reinvested a portion of the proceeds into a like amount of U. S Agency MBS guaranteed
by the Government National Mortgage Association (Ginnie Mae). This repositioning reduced the duration
of the portfolio and improved risk-based capital. The Corporation realized a net gain of
approximately $1.7 million. A portion of these securities had impairment losses of approximately
$0.2 million, which the Corporation realized in the three months
ended March 31, 2010.
8
The following table summarizes the investment securities with unrealized losses as of June 30, 2010
by aggregated major security type and length of time in a continuous unrealized loss position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months |
|
More than 12 Months |
|
Total |
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
|
Value |
|
Losses (1) |
|
Value |
|
Losses (1) |
|
Value |
|
Losses (1) |
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
Temporarily Impaired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Agency pass-through |
|
$ |
23 |
|
|
$ |
|
|
|
$ |
240 |
|
|
$ |
7 |
|
|
$ |
263 |
|
|
$ |
7 |
|
Private-label CMO |
|
|
|
|
|
|
|
|
|
|
6,338 |
|
|
|
1,096 |
|
|
|
6,338 |
|
|
|
1,096 |
|
|
|
|
|
|
|
|
Total MBS |
|
|
23 |
|
|
|
|
|
|
|
6,578 |
|
|
|
1,103 |
|
|
|
6,601 |
|
|
|
1,103 |
|
State, county and municipal securities |
|
|
5,585 |
|
|
|
116 |
|
|
|
1,602 |
|
|
|
146 |
|
|
|
7,187 |
|
|
|
262 |
|
Corporate obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt |
|
|
|
|
|
|
|
|
|
|
4,000 |
|
|
|
101 |
|
|
|
4,000 |
|
|
|
101 |
|
Single issue trust preferred securities |
|
|
|
|
|
|
|
|
|
|
1,755 |
|
|
|
3,245 |
|
|
|
1,755 |
|
|
|
3,245 |
|
|
|
|
|
|
|
|
Total corporate obligations |
|
|
|
|
|
|
|
|
|
|
5,755 |
|
|
|
3,346 |
|
|
|
5,755 |
|
|
|
3,346 |
|
|
|
|
|
|
|
|
Total temporarily impaired securities |
|
|
5,608 |
|
|
|
116 |
|
|
|
13,935 |
|
|
|
4,595 |
|
|
|
19,543 |
|
|
|
4,711 |
|
Other-than-temporarily Impaired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private-label CMO |
|
|
|
|
|
|
|
|
|
|
3,021 |
|
|
|
1,620 |
|
|
|
3,021 |
|
|
|
1,620 |
|
Corporate obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pooled trust preferred securities |
|
|
|
|
|
|
|
|
|
|
3,263 |
|
|
|
5,025 |
|
|
|
3,263 |
|
|
|
5,025 |
|
|
|
|
|
|
|
|
Total OTTI securities |
|
|
|
|
|
|
|
|
|
|
6,284 |
|
|
|
6,645 |
|
|
|
6,284 |
|
|
|
6,645 |
|
|
|
|
|
|
|
|
Total temporarily and other-than-temporarily impaired |
|
$ |
5,608 |
|
|
$ |
116 |
|
|
$ |
20,219 |
|
|
$ |
11,240 |
|
|
$ |
25,827 |
|
|
$ |
11,356 |
|
\ |
|
|
|
|
|
|
|
|
|
(1) |
|
Unrealized losses are included in other comprehensive loss, net of unrealized gains and
applicable income taxes. |
9
The following is a summary of the total count by category of investment securities with
gross unrealized losses as of June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than |
|
Greater Than |
|
|
|
|
12 Months |
|
12 Months |
|
Total |
Temporarily Impaired |
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Agency pass-through |
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
Private-label CMO |
|
|
|
|
|
|
5 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total MBS |
|
|
1 |
|
|
|
6 |
|
|
|
7 |
|
State, county and municipal securities |
|
|
15 |
|
|
|
6 |
|
|
|
21 |
|
Corporate obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt |
|
|
|
|
|
|
3 |
|
|
|
3 |
|
Single issue trust preferred securities |
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate obligations |
|
|
|
|
|
|
4 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities |
|
|
16 |
|
|
|
16 |
|
|
|
32 |
|
Other-than-temporarily Impaired |
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Private-label CMO |
|
|
|
|
|
|
1 |
|
|
|
1 |
|
Corporate obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
Pooled trust preferred securities |
|
|
|
|
|
|
4 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total OTTI securities |
|
|
|
|
|
|
5 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily and other-than-temporarily impaired |
|
|
16 |
|
|
|
21 |
|
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
Other-Than-Temporary Impairment (OTTI)
Management evaluates securities for OTTI at least on a quarterly basis. The investment securities
portfolio is evaluated for OTTI by segregating the portfolio into the various segments outlined in
the tables above and applying the appropriate OTTI model. Investment securities classified as
available-for-sale or held-to-maturity are generally evaluated for OTTI according to ASC 320-10
guidance. In addition, certain purchased beneficial interests, which may include private-label
MBS, asset-backed securities and collateralized debt obligations that had
credit ratings of below AA at the time of purchase are evaluated using the model outlined in ASC
325-40 guidance.
In determining OTTI according to FASB guidance, management considers many factors, including: (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 issuer, (3) whether the market decline was
affected by macroeconomic conditions and (4) whether we have the intent to sell the debt security
or more likely than not will be required to sell the debt security before its anticipated recovery.
The assessment of whether an other-than-temporary decline exists involves a high degree of
subjectivity and judgment and is based on the information available to management at a point in
time.
The pooled trust preferred segment of the portfolio uses the OTTI guidance that is specific to
purchased beneficial interests that, on the purchase date, were rated below AA. Under the model, we
compare the present value of the remaining cash flows as estimated at the preceding evaluation date
to the current expected remaining cash flows. An OTTI is deemed to have occurred if there has been
an adverse change in the remaining expected future cash flows.
When OTTI occurs under either model, the amount of the OTTI recognized in earnings depends on
whether an entity intends to sell the security or it is more likely than not it will be required to
sell the security before recovery of its amortized cost basis, less any current-period credit loss.
If an entity intends to sell, or more likely than not will be required to sell, the security before
recovery of its amortized cost basis, less any current-period credit loss, the OTTI is recognized
in earnings at an amount equal to the entire difference between the investments amortized cost
basis and its fair value at the balance sheet date. If an entity does not intend to sell the
security and it is not more likely than not that the entity will be required to sell the security
before recovery of its amortized cost basis less any current-period loss, the OTTI is separated
into the amount representing the credit loss and the amount related to all other factors. The
amount of the total OTTI related to the credit loss is determined based on the present value of
cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI
related to other factors is recognized in other comprehensive income, net of applicable taxes. The
previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost
basis of the investment.
As of June 30, 2010, our securities portfolio consisted of 204 securities, 37 of which were in an
unrealized loss position. The majority of unrealized losses are related to our private-label CMOs
and trust preferred securities, as discussed below.
11
Mortgage-backed securities
As of June 30, 2010, approximately 93% of the dollar volume of mortgage-backed securities we held
were issued by U.S. government-sponsored entities and agencies, primarily the Federal National
Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac) and
Ginnie Mae, institutions which the government has affirmed its commitment to support, and these
securities have nominal unrealized losses. Our MBS portfolio also includes
10 private-label CMOs with a market value of $14.7 million, which had net unrealized losses of
approximately $2.4 million as of June 30, 2010. These private-label CMOs were rated AAA at
purchase. The following is a summary of the investment grades for these securities (Dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Support |
|
|
Net |
|
Rating |
|
|
|
|
|
Coverage |
|
|
Unrealized |
|
Moody/Fitch |
|
Count |
|
|
Ratios (1) |
|
|
(Loss) Gain |
|
A1/NR |
|
|
1 |
|
|
|
3.06 |
|
|
$ |
(152 |
) |
Aaa/NR |
|
|
1 |
|
|
|
4.25 |
|
|
|
|
|
NR/AAA |
|
|
1 |
|
|
|
3.05 |
|
|
|
110 |
|
NR/AA |
|
|
1 |
|
|
|
3.12 |
|
|
|
(240 |
) |
B2/AA |
|
|
1 |
|
|
|
N/A |
|
|
|
(548 |
) |
B2/NR |
|
|
1 |
|
|
|
4.02 |
|
|
|
(92 |
) |
NR/BBB |
|
|
1 |
|
|
|
2.39 |
|
|
|
(64 |
) |
Caa2/CCC (2) |
|
|
1 |
|
|
|
0.91 |
|
|
|
(1,620 |
) |
NR/C (2) |
|
|
2 |
|
|
|
0.00-0.30 |
|
|
|
186 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
10 |
|
|
|
|
|
|
$ |
(2,420 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Credit Support Coverage Ratio is the ratio that determines the multiple of credit
support, and it is based on assumptions for the performance of the loans within the delinquency
pipeline. The assumptions used are: Current Collateral Support/ ((60 day delinquencies x.60) +
(90 day delinquencies x.70) + (foreclosures x 1.00) + (other real estate x 1.00)) x .40 for
loss severity. |
|
(2) |
|
Includes all private-label CMOs that have OTTI (see discussion
below). |
During the first quarter of 2010, the Corporation recognized an immaterial amount of OTTI on one of
the private-label CMOs. The assumptions used in the valuation model include expected future
default rates, loss severity and prepayments. The model also takes into account the structure of
the security, including credit support. Based on these assumptions, the model calculates and
projects the timing and amount of interest and principal payments expected for the security. As of
June 30, 2010, the fair values of the three private-label CMO securities with OTTI totaling $3.9
million were measured using Level 3 inputs because the market for them has become illiquid, as
indicated by few, if any, trades during the period. The discount rates used in the valuation model
were based on a yield that the market would require for securities with maturities and risk
characteristics similar to the securities being measured (See Note 12 for additional disclosure).
The following table provides additional information regarding these CMO valuations as of June 30,
2010 (Dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-to-Date |
|
|
|
|
|
|
|
Margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual |
|
|
OTTI |
|
|
|
Price |
|
|
Basis |
|
|
|
|
|
|
Cumulative |
|
|
Average |
|
|
60+ Days |
|
|
Credit |
|
|
|
|
|
|
|
Security |
|
(%) |
|
|
Points |
|
|
Yield |
|
|
Default |
|
|
Security |
|
|
Delinquent |
|
|
Portion |
|
|
Other |
|
|
Total |
|
CMO 1 |
|
|
19.13 |
|
|
|
1684 |
|
|
|
18% |
|
|
|
51.87% |
|
|
|
50% |
|
|
|
7.52% |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
CMO 2 |
|
|
19.27 |
|
|
|
1586 |
|
|
|
17% |
|
|
|
48.73% |
|
|
|
45% |
|
|
|
27.89% |
|
|
|
|
|
|
|
|
|
|
|
|
|
CMO 4 |
|
|
60.41 |
|
|
|
1472 |
|
|
|
17% |
|
|
|
29.03% |
|
|
|
45% |
|
|
|
16.48% |
|
|
|
(21 |
) |
|
|
(2 |
) |
|
|
(23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(21 |
) |
|
$ |
(2 |
) |
|
$ |
(23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the first quarter of 2010, CMO 3, which had a nominal remaining amortized cost, was
completely written off. The Corporation does not expect to recover any future cash flows from CMO
3.
As of June 30, 2010, management did not intend to sell these
securities, nor did management believe that it is more likely
than not that the Corporation will be required to sell the securities before the entire amortized
cost basis is recovered.
12
State, county and municipal securities
The unrealized losses in the municipal securities portfolio are primarily a reflection of changes
in interest rates. This portfolio segment was not experiencing any credit problems as of June 30,
2010. We believe that all contractual cash flows will be received on this portfolio.
As of June 30, 2010, management did not intend to sell these securities, nor was it more likely
than not that we will be required to sell the securities before the entire amortized cost basis is
recovered since our current financial condition, including liquidity and interest rate risk, is not
expected to require such action.
Trust preferred securities
The Corporations investment portfolio includes four collateralized debt obligations (CDOs), the
collateral of which is pooled trust preferred securities of various financial institutions. The
Corporation also owns a single issuers trust preferred
security. The Corporation determined the fair value
of the CDOs with the assistance of an external valuation firm. The valuation was
accomplished by evaluating all relevant credit and structural aspects of the CDOs, determining
appropriate performance assumptions and performing a discounted cash flow analysis. The valuation
was structured as follows:
|
|
|
Detailed credit and structural evaluation for each piece of collateral in the CDO; |
|
|
|
|
Collateral performance projections for each piece of collateral in the CDO (default,
recovery and prepayment/amortization probabilities); |
|
|
|
|
Terms of the CDO structure, as laid out in the indenture; |
|
|
|
|
The cash flow waterfall (for both interest and principal); |
|
|
|
|
Overcollateralization and interest coverage tests; |
|
|
|
|
Events of default/liquidation; |
|
|
|
|
Mandatory auction call; |
|
|
|
|
Optional redemption; |
|
|
|
|
Hedge agreements; and |
|
|
|
|
Discounted cash flow modeling. |
On the basis of the evaluation of collateral credit and in combination with a review of historical
industry default data and current/near-term operating conditions, appropriate default and recovery
probabilities are determined for each piece of collateral in the CDO;
specifically, the Corporation estimates the probability that a given piece of collateral will default in any given year. Next, on the basis
of credit factors like asset quality and leverage, the Corporation
formulates a recovery assumption for each
piece of collateral in the event of a default. For collateral that
has already defaulted, the Corporation assumes
no recovery. For collateral that is deferring, the Corporation assumes a recovery rate of 10%. It is also noted
that there is a possibility, in some cases, that deferring collateral will become current at some
point in the future. As a result, deferring issuers are evaluated on a case-by-case basis and in
some instances, based on an analysis of the credit, the Corporation
assigns a probability that the deferral will
ultimately cure.
The base-case collateral-specific assumptions are aggregated into cumulative weighted-average
default, recovery and prepayment probabilities. In light of generally weakening collateral credit
performance and a challenging U.S. credit and real estate environment, our assumptions generally
imply a larger amount of collateral defaults during the next three years than that which has been
experienced historically and a gradual leveling off of defaults thereafter.
The discount rates used to determine fair value are intended to reflect the uncertainty inherent in
the projection of each CDOs cash flows. Therefore, spreads were chosen that are comparable to
spreads observed currently in the market for similarly rated
instruments, and those spreads are intended to reflect
general market discounts currently applied to structured credit products. The discount rates used
to determine the credit portion of the OTTI are equal to the current yield on the issuances as
prescribed under ASC 325-40.
13
The following tables provide various information and fair value model assumptions regarding
our CDOs as of June 30, 2010 (Dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-to-Date |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary-impairment |
|
|
|
Single/ |
|
|
Class/ |
|
|
Amortized |
|
|
Fair |
|
|
Unrealized |
|
|
Credit |
|
|
|
|
|
|
|
Name |
|
Pooled |
|
|
Tranche |
|
|
Cost |
|
|
Value |
|
|
Loss |
|
|
Portion |
|
|
Other |
|
|
Total |
|
MM Caps Funding I Ltd |
|
Pooled |
|
MEZ |
|
$ |
2,083 |
|
|
$ |
984 |
|
|
$ |
(1,099 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
MM Community Funding Ltd |
|
Pooled |
|
|
B |
|
|
|
2,026 |
|
|
|
720 |
|
|
|
(1,306 |
) |
|
|
(20 |
) |
|
|
(117 |
) |
|
|
(137 |
) |
Preferred Term Securities V |
|
Pooled |
|
MEZ |
|
|
1,189 |
|
|
|
434 |
|
|
|
(755 |
) |
|
|
(24 |
) |
|
|
|
|
|
|
(24 |
) |
Tpref Funding III Ltd |
|
Pooled |
|
|
B-2 |
|
|
|
2,990 |
|
|
|
1,125 |
|
|
|
(1,865 |
) |
|
|
(32 |
) |
|
|
(64 |
) |
|
|
(96 |
) |
Emigrant Capital Trust (1) |
|
Single |
|
Sole |
|
|
5,000 |
|
|
|
1,755 |
|
|
|
(3,245 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
13,288 |
|
|
$ |
5,018 |
|
|
$ |
(8,270 |
) |
|
$ |
(76 |
) |
|
$ |
(181 |
) |
|
$ |
(257 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original Collateral - |
|
Performing Collateral - |
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Actual |
|
Percent of Expected |
|
|
|
|
Lowest |
|
Performing |
|
Deferrals and |
|
Deferrals and |
|
Excess |
Name |
|
Rating |
|
Banks |
|
Defaults |
|
Defaults |
|
Subordination (2) |
MM Caps Funding I Ltd |
|
Ca |
|
|
21 |
|
|
|
21 |
% |
|
|
19 |
% |
|
|
0 |
% |
MM Community Funding Ltd |
|
Ca |
|
|
8 |
|
|
|
21 |
% |
|
|
43 |
% |
|
|
0 |
% |
Preferred Term Securities V |
|
Ba3 |
|
|
2 |
|
|
|
4 |
% |
|
|
26 |
% |
|
|
0 |
% |
Tpref Funding III Ltd |
|
Ca |
|
|
22 |
|
|
|
28 |
% |
|
|
25 |
% |
|
|
0 |
% |
Emigrant Capital Trust (1) |
|
NR |
|
NA |
|
NA |
|
NA |
|
NA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value |
|
Discount Margin |
|
Yield |
Name |
|
(Price to Par) |
|
(Basis Points) |
|
(Basis Points) |
MM Caps Funding I Ltd |
|
$ |
44.85 |
|
|
Swap + 1700 |
|
9.48% Fixed |
MM Community Funding Ltd |
|
|
14.40 |
|
|
LIBOR + 1500 |
|
LIBOR + 310 |
Preferred Term Securities V |
|
|
31.52 |
|
|
LIBOR + 1400 |
|
LIBOR + 210 |
Tpref Funding III Ltd |
|
|
28.14 |
|
|
LIBOR + 1200 |
|
LIBOR + 190 |
Emigrant Capital Trust (1) |
|
|
35.10 |
|
|
LIBOR + 1312 |
|
LIBOR + 200 |
|
|
|
(1) |
|
There has been no notification of deferral or default on this issue. An analysis of the
company, including discussion with its management, indicates there is adequate capital and
liquidity to service the debt. The discount margin of 1312 basis points was derived from
implied credit spreads from certain publicly traded trust preferred securities within the
issuers peer group. |
|
(2) |
|
Excess subordination represents the additional defaults in excess of both the current and
projected defaults the issue can absorb before the security experiences any credit impairment.
Excess subordination is calculated by determining what level of defaults an issue can
experience before the security has any credit impairment and then subtracting both the current
and projected future defaults. |
In April 2009, management received notification that interest payments related to New South Capital
would be deferred for up to 20 quarters. In addition, New South Capitals external auditor issued a
going concern opinion on May 2, 2009. Management determined that there was not sufficient positive
evidence that this issue would ever pay principal or interest. Therefore, OTTI was recognized on
the full amount of the $5.0 million New South Capital Trust Preferred security during the first quarter of 2009. In December 2009, the banking
subsidiary of New South Capital was closed by its regulator and placed into receivership.
In addition to the impact of interest rates, the estimated fair values of these CDOs have been and
continue to be depressed due to the unusual credit conditions that the financial industry has faced
since the middle of 2008 and a weakening economy, which has severely reduced the demand for these
securities and rendered their trading market inactive.
As of
June 30, 2010, management did not intend to sell these
securities, nor did management believe it is more likely than
not that the Corporation will be required to sell the securities before the entire amortized cost
basis is recovered.
14
The following table provides a roll-forward of the amount of credit-related losses recognized in
earnings for which a portion of OTTI has been recognized in other comprehensive income for the
period shown:
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
|
For the Six |
|
|
|
Months Ended |
|
|
Months Ended |
|
|
|
June 30, 2010 |
|
|
June 30, 2010 |
|
|
|
(Dollars in thousands) |
|
Balance at beginning of period |
|
$ |
8,886 |
|
|
$ |
8,869 |
|
Amounts related to credit losses for which an OTTI was not previously recognized |
|
|
450 |
|
|
|
604 |
|
Increases in credit loss for which an OTTI was previously recognized when the investor
does not intend to sell the security and it is not more likely than not that the entity will
be required to sell the security before recovery of its amortized cost |
|
|
51 |
|
|
|
97 |
|
Reductions for securities where there is an intent to sell or requirement to sell |
|
|
|
|
|
|
(154 |
) |
Reductions for increases in cash flows expected to be collected |
|
|
(13 |
) |
|
|
(42 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
9,374 |
|
|
$ |
9,374 |
|
|
|
|
|
|
|
|
Management will continue to evaluate the investment ratings in the securities portfolio, severity
in pricing declines, market price quotes along with timing and receipt of amounts contractually
due. Based upon these and other factors, the securities portfolio may experience further
impairment.
Stock in the Federal Home Loan Bank of Atlanta (FHLB Atlanta)
As of June 30, 2010, the Corporation has stock in FHLB Atlanta totaling $18.2 million (its par
value), which is presented separately on the face of the statement of financial condition. There is
no ready market for the stock and no quoted market values, as only member institutions are eligible
to be shareholders and all transactions are, by charter, to take place at par with FHLB Atlanta as
the only purchaser. Therefore, the Corporation accounts for this investment as a long-term asset
and carries it at cost. Management reviews this stock quarterly for impairment and conducts its
analysis in accordance with ASC 942-325-35-3.
Managements determination as to whether this investment is impaired is based on managements
assessment of the ultimate recoverability of its par value (cost) rather than recognizing temporary
declines in its value. The determination of whether the decline affects the ultimate recoverability
of our investment is influenced by available information regarding criteria such as:
|
|
|
the significance of the decline in net assets of FHLB Atlanta as compared to the capital
stock amount for FHLB Atlanta and the length of time this decline has persisted; |
|
|
|
|
commitments by FHLB Atlanta to make payments required by law or regulation and the level
of such payments in relation to the operating performance of FHLB Atlanta; |
|
|
|
|
the impact of legislative and regulatory changes on financial institutions and,
accordingly, on the customer base of FHLB Atlanta; and |
|
|
|
|
the liquidity position of FHLB Atlanta. |
Management has reviewed publicly available information regarding the financial condition of FHLB
Atlanta and concluded that no impairment existed based on its assessment of the ultimate
recoverability of the par value of the investment. FHLB Atlanta reported net income of $48 million
for the first quarter of 2010, an increase of approximately $50 million from a net loss of
approximately $2 million for the first quarter of 2009. On May 11, 2010, FHLB Atlanta announced
the approval of an annualized dividend rate for the first quarter of 2010 of 0.26% compared to no
dividends in the first quarter of 2009. During the second quarter of 2009, FHLB Atlanta
reinstated its dividend at rates of 0.84%, 0.41% and 0.27%, for the second, third and fourth
quarters of 2009, respectively, resulting in an annualized dividend rate of 0.38%. The Board of
FHLB Atlanta made a decision to retain a larger portion of earnings and significantly higher
capital ratios than in previous years. On the basis of a review of the financial condition, cash
flow, liquidity and asset quality indicators of FHLB Atlanta as of the end of the first quarter
of 2010, management has concluded that no impairment exists on the Corporations investment in the
stock of FHLB Atlanta. This is a long-term investment that serves a business purpose of enabling us
to enhance the liquidity of the Corporations subsidiary, Superior Bank, through access to the
lending facilities of FHLB Atlanta. For the foregoing reasons, management believes that FHLB
Atlantas current position does not indicate that the Corporations investment will not be
recoverable at par, the cost, and thus the investment was not impaired as of June 30, 2010.
15
Note 4
Allowance For Loan Losses
The following tables show the provision for loan losses, gross and net charge-offs, and the level
of allowance for loan losses that resulted from our ongoing assessment of the loan portfolio for
the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Three Months Ended
|
|
For The Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
June 30,
|
|
June 30,
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
(Dollars in thousands)
|
|
Beginning allowance for loan losses
|
|
$
|
43,190
|
|
|
$
|
29,870
|
|
|
$
|
41,884
|
|
|
$
|
28,850
|
|
Provision for loan losses
|
|
|
50,363
|
|
|
|
5,982
|
|
|
|
59,490
|
|
|
|
9,434
|
|
Total charge-offs
|
|
|
14,633
|
|
|
|
2,513
|
|
|
|
22,720
|
|
|
|
5,322
|
|
Total recoveries
|
|
|
(505
|
)
|
|
|
(165
|
)
|
|
|
(771
|
)
|
|
|
(542
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
14,128
|
|
|
|
2,348
|
|
|
|
21,949
|
|
|
|
4,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance for loan losses
|
|
$
|
79,425
|
|
|
$
|
33,504
|
|
|
$
|
79,425
|
|
|
$
|
33,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, net of unearned income
|
|
$
|
2,482,560
|
|
|
$
|
2,398,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to total loans, net of unearned income
|
|
|
3.20
|
%
|
|
|
1.40
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the
second quarter of 2010, the Corporation experienced (1) a migration of performing classified loans into
non-performing status, (2) an increase in troubled debt restructurings (TDRs) resulting from
workout activity, and (3) an increase in collateral impairments relative to other external
factors such as short sales and deteriorated values in comparable
properties. These factors
created the need for increased loan loss provision during the
second quarter of 2010. In addition, management increased the general allowance for loan losses to
account for the estimated increase in losses related to the recent oil spill in
the Gulf of Mexico. The historical loss ratio used to
estimate the allowance for loan losses also increased significantly during
the second quarter of 2010. This ratio is based on a four-quarter
rolling average and has been affected by the level of charge-offs
during 2010.
Note 5 Notes Payable
The following is a summary of notes payable as of June 30, 2010 (Dollars in thousands):
|
|
|
|
|
Note payable
to bank, borrowed under $7.0 million line of credit, due
September 3, 2010; interest is based on Wall Street prime plus 1.25 but not less than 4.5%,
secured by 100% of the outstanding Superior Bank stock |
|
$ |
6,000 |
|
Senior note guaranteed under the TLGP, due March 30, 2012, 2.625% fixed rate due
semi-annually |
|
|
40,000 |
|
Less: Discount, FDIC guarantee premium and other issuance costs |
|
|
(850 |
) |
|
|
|
|
Total notes payable |
|
$ |
45,150 |
|
|
|
|
|
On June 30, 2010, the Corporation entered into an amended agreement related to the $7.0 million
line of credit, which required that the Corporation make a contemporaneous principal payment of
$1.0 million and two additional principal payments of not less
than $33,000 on July 15, 2010 and
August 15, 2010. The Corporation made two principal payments,
each in the amount of $33,000, on July 15,
2010 and August 12, 2010.
The Corporation has agreed to seek OTS approval before incurring any new debt or renewing any
existing debt.
Note 6 Derivative Financial Instruments
The fair value of derivative positions outstanding is included in other assets and other
liabilities in the accompanying condensed consolidated statement of financial condition and in the
net change in each of these financial statement line items in the accompanying condensed
consolidated statements of cash flows.
The Corporation utilizes interest rate swaps, forward commitments, caps and floors to mitigate
exposure to interest rate risk and to facilitate the needs of its customers. The Corporations
objectives for utilizing these derivative instruments are described below:
Interest Rate Swaps
The Corporation has entered into interest rate swaps (CD swaps) to convert the fixed rate paid on
brokered certificates of deposit (CDs) to a variable rate based upon three-month London Interbank
Offered Rate (LIBOR). As of June 30, 2010 and December 31, 2009, the Corporation had $0.7 million
in notional amount of CD swaps which had not been designated as hedges. These CD swaps had not been
designated as hedges because they represent the portion of the interest rate swaps that are
over-hedged due to principal reductions on the brokered CDs.
The Corporation has entered into certain interest rate swaps on commercial loans that are not
designated as hedging instruments. These derivative contracts relate to transactions in which the
Corporation enters into an interest rate swap with a loan customer while at the same time entering
into an offsetting interest rate swap with another financial institution. In connection with each
swap transaction, the Corporation agrees to pay interest to the customer on a notional amount at a
variable interest rate and receive interest from the customer on a similar notional amount at a
fixed interest rate. At the same time, the Corporation agrees to pay another financial institution
the same fixed interest rate on the same notional amount and receive the same variable interest
rate on the same notional amount. The transaction allows the Corporations customer to effectively
convert a variable rate loan to a fixed rate. Because the Corporation acts as an intermediary for
its customer, changes in the fair value of the underlying derivative contracts offset each other,
for the most part, and do not significantly impact the Corporations results of operations.
16
Fair Value Hedges
As of June 30, 2010 and December 31, 2009, the Corporation had $2.8 million in notional amount of
CD swaps designated and qualified as fair value hedges. These CD swaps were designated as hedging
instruments to hedge the risk of changes in the fair value of the underlying brokered CD due to
changes in interest rates. As of June 30, 2010 and December 31, 2009, the amount of CD swaps
designated as hedging instruments had a recorded fair value of $0.3 million and $0.2 million,
respectively, and a weighted average life of 2.2 years and 2.5 years, respectively. The weighted
average fixed rate (receiving rate) was 4.70% and the weighted average variable rate (paying rate)
was 0.46% (LIBOR-based).
Cash Flow Hedges
The Corporation has entered into interest rate swap agreements designated and qualified as a hedge
with notional amounts of $18.5 million to hedge the variability in cash flows on $18.5 million of
junior subordinated debentures. During the second quarter, the Corporation settled $3.5 million of
notional amount of interest rate swap agreements related to certain subordinated debt that was
exchanged for common stock and incurred a loss of $0.1 million
(see Note 13 for additional
disclosure). Under the terms of the interest rate swaps, which mature September 15, 2012, the
Corporation receives a floating rate based on 3-month LIBOR plus 1.33% (1.87% as of June 30, 2010)
and pays a weighted average fixed rate of 4.42%. As of June 30, 2010 and December 31, 2009, these
interest rate swap agreements are recorded as liabilities in the amount of $0.9 million and $0.8
million, respectively.
Interest Rate Lock Commitments
In the ordinary course of business, the Corporation enters into certain commitments with customers
in connection with residential mortgage loan applications. Such commitments are considered
derivatives under FASB guidance and are required to be recorded at fair value. The aggregate amount
of these mortgage loan origination commitments was $50.2 million and $41.0 million as of June 30,
2010 and December 31, 2009, respectively. The fair value of the origination commitments was $0.6
million and $(0.4) million as of June 30, 2010 and December 31, 2009, respectively.
Forward Sales Commitments
To mitigate the effect of the interest rate risk inherent in providing interest rate lock
commitments to customers, the Corporation enters into forward sales commitments of MBS. During the
period from commitment date to closing date, the Corporation is subject to the risk that market
rates of interest may change. If market rates rise, investors generally will pay less to purchase
such loans, resulting in a reduction in the gain on sale of the loans or, possibly, a loss. In an
effort to mitigate such risk, forward delivery sales commitments, under which the Corporation
agrees to deliver certain MBS, are established. These commitments are non-hedging derivatives in
accordance with FASB guidance and recorded at fair value. The aggregate amount of forward
commitments was $72.3 million as of June 30, 2010. The fair value of the commitments was $(1.3)
million as of June 30, 2010.
Forward Purchase Commitments
If the Corporation determines that the amount of its forward sales commitments exceeds the amount
necessary to mitigate the interest rate risk in the rate lock
commitments, it will enter into
forward purchase commitments to purchase MBS on an agreed-upon date and price similar to the terms
of forward sales commitments. These commitments are non-hedging derivatives in accordance with
FASB guidance and recorded at fair value. The aggregate amount of forward loan purchase
commitments was $39.3 million as of June 30, 2010. The fair value of the commitments was $0.2
million as of June 30, 2010.
The Corporation obtains dealer quotations to value its interest rate derivative contracts
designated as hedges of cash flows, while the fair values of other derivative contracts are
estimated utilizing internal valuation models with observable market data inputs. The estimated
fair values of the Corporations derivatives are included in the Assets and Liabilities Recorded at
Fair Value on a Recurring Basis table of Note 12 to the condensed consolidated financial
statements.
17
The following table includes the notional amounts and estimated fair values of the
Corporations derivative contracts outstanding as of the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
December 31, 2009 |
|
|
|
|
|
|
Estimated |
|
|
|
|
|
Estimated |
|
|
Notional |
|
Fair |
|
Notional |
|
Fair |
|
|
Amount |
|
Value |
|
Amount |
|
Value |
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
Interest rate derivatives designated as hedges of fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap on brokered certificates of deposit |
|
$ |
2,777 |
|
|
$ |
325 |
|
|
$ |
2,777 |
|
|
$ |
228 |
|
Interest rate derivatives designated as hedges of cash flows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps on subordinated debenture |
|
|
18,500 |
|
|
|
(900 |
) |
|
|
22,000 |
|
|
|
(766 |
) |
Non-hedging derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brokered certificates of deposit interest rate swap |
|
|
723 |
|
|
|
85 |
|
|
|
723 |
|
|
|
59 |
|
Mortgage loan held for sale interest rate lock commitment |
|
|
50,194 |
|
|
|
630 |
|
|
|
41,038 |
|
|
|
(370 |
) |
Mortgage loan forward sales commitments |
|
|
72,329 |
|
|
|
(1,261 |
) |
|
|
|
|
|
|
|
|
Mortgage loan forward purchase commitments |
|
|
39,306 |
|
|
|
209 |
|
|
|
|
|
|
|
|
|
Commercial
loan interest rate swap with loan customer |
|
|
3,716 |
|
|
|
388 |
|
|
|
3,766 |
|
|
|
323 |
|
Commercial
loan interest rate swap with financial institution |
|
|
3,716 |
|
|
|
(388 |
) |
|
|
3,766 |
|
|
|
(323 |
) |
The weighted-average rates paid and received for interest rate swaps outstanding as of June 30,
2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
Interest |
|
Interest |
|
|
Rate |
|
Rate |
|
|
Paid |
|
Received |
Interest rate swaps: |
|
|
|
|
|
|
|
|
Fair value hedge on brokered certificates of deposit interest rate swap |
|
|
0.46 |
% |
|
|
4.70 |
% |
Cash flow hedge interest rate swaps on subordinated debentures |
|
|
4.42 |
|
|
|
1.87 |
|
Non-hedging interest rate swap on commercial loan |
|
|
6.73 |
|
|
|
6.73 |
|
Gains, Losses and Derivative Cash Flows
For fair value hedges, the changes in the fair value of both the derivative hedging instrument and
the hedged item are included in noninterest income to the extent that such changes in fair value do
not offset hedge ineffectiveness. For cash flow hedges, the effective portion of the gain or loss
due to changes in the fair value of the derivative hedging instrument is included in other
comprehensive loss, while the ineffective portion (indicated by the excess of the cumulative change
in the fair value of the derivative over that which is necessary to offset the cumulative change in
expected future cash flows on the hedge transaction) is included in noninterest income. Net cash
flows from the interest rate swap on subordinated debentures designated as a hedging instrument in
an effective hedge of cash flows are included in interest expense on subordinated debentures. For
non-hedging derivative instruments, gains and losses due to changes in fair value and all cash
flows are included in other noninterest income.
18
Amounts included in the condensed consolidated statements of operations related to interest rate
derivatives designated as hedges of fair value are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the |
|
For the |
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
Interest rate swap on brokered certificates of deposit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain included in interest expense on deposits |
|
$ |
29 |
|
|
$ |
26 |
|
|
$ |
59 |
|
|
$ |
49 |
|
Amount of gain (loss) included in other noninterest income |
|
|
|
|
|
|
(51 |
) |
|
|
1 |
|
|
|
(481 |
) |
Amounts included in the condensed consolidated statements of operations and in other comprehensive
loss for the period related to interest rate derivatives designated as hedges of cash flows are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the |
|
For the |
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
Interest rate swap on subordinated debenture: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss included in interest expense on subordinated debt |
|
$ |
(159 |
) |
|
$ |
(104 |
) |
|
$ |
(315 |
) |
|
$ |
(159 |
) |
Amount of (loss) gain recognized in other comprehensive income |
|
|
(92 |
) |
|
|
223 |
|
|
|
(191 |
) |
|
|
205 |
|
An immaterial amount of ineffectiveness related to interest rate derivatives designated as hedges
of cash flows was recognized in the condensed consolidated statements of operations during the
reported periods. The accumulated net after-tax loss related to effective cash flow hedge included
in accumulated other comprehensive income was $0.6 million as of June 30, 2010 and 2009.
Amounts included in the condensed consolidated statements of operations related to non-hedging
interest rate swaps on commercial loans were not significant during any of the reported periods. As
stated above, the Corporation enters into non-hedge-related derivative positions primarily to
accommodate the business needs of its customers. Upon the origination of a derivative contract with
a customer, the Corporation simultaneously enters into an offsetting derivative contract with a
third party. The Corporation recognizes immediate income based upon the difference in the bid/ask
spread of the underlying transactions with its customers and the third party. Because the
Corporation acts only as an intermediary for its customer, subsequent changes in the fair value of
the underlying derivative contracts for the most part offset each other and do not significantly
impact the Corporations results of operations.
Gain (loss) included in noninterest income in the condensed consolidated statements of operations
related to non-hedging derivative instruments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the |
|
For the |
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
Non-hedging derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brokered certificates of deposit interest rate swap |
|
$ |
25 |
|
|
$ |
(27 |
) |
|
$ |
41 |
|
|
$ |
(72 |
) |
Mortgage loan held for sale interest rate lock commitment |
|
|
807 |
|
|
|
12 |
|
|
|
1,000 |
|
|
|
288 |
|
Mortgage loan forward sales commitments |
|
|
(1,261 |
) |
|
|
|
|
|
|
(1,261 |
) |
|
|
|
|
Mortgage loan forward purchase commitments |
|
|
209 |
|
|
|
|
|
|
|
209 |
|
|
|
|
|
19
Counterparty Credit Risk
Derivative contracts involve the risk of dealing with both bank customers and institutional
derivative counterparties and their ability to meet contractual terms. Institutional counterparties
must have an investment grade credit rating and be approved by the Corporations Asset/Liability
Management Committee. The Corporations credit exposure on interest rate swaps is limited to the
net favorable value and interest payments. Credit exposure may be reduced by the amount of
collateral pledged by the counterparty. There are no credit-risk-related contingent features
associated with any of the Corporations derivative contracts.
The aggregate cash collateral posted with the counterparties as collateral by the Corporation
related to derivative contracts was approximately $3.2 million as of June 30, 2010.
20
Note 7 Segment Reporting
The Corporation has two reportable segments, the Alabama Region and the Florida Region. The Alabama
Region consists of operations located throughout Alabama. The Florida Region consists of operations
located primarily in the Tampa Bay area and panhandle region of Florida. The Corporations
reportable segments are managed as separate business units because they are located in different
geographic areas. Both segments derive revenues from the delivery of financial services. These
services include commercial loans, mortgage loans, consumer loans, deposit accounts and other
financial services. Administrative and other banking activities include the results of the
Corporations investment portfolio, home mortgage division, brokered deposits and borrowed funds
positions.
The Corporation evaluates performance and allocates resources based on profit or loss from
operations. There are no material inter-segment sales or transfers. Net interest income is used as
the basis for performance evaluation rather than its components, total interest income and total
interest expense. The accounting policies used by each reportable segment are the same as those
discussed in Note 1 to the consolidated financial statements included in the Corporations Annual
Report on Form 10-K for the year ended December 31, 2009. All costs, except corporate
administration and income taxes, have been allocated to the reportable segments. Therefore,
combined amounts agree to the consolidated totals.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Superior |
|
|
|
Alabama |
|
|
Florida |
|
|
Alabama and |
|
|
Administrative |
|
|
Bancorp |
|
|
|
Region |
|
|
Region |
|
|
Florida |
|
|
and Other |
|
|
Combined |
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Three Months Ended June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
9,942 |
|
|
$ |
10,943 |
|
|
$ |
20,885 |
|
|
$ |
2,268 |
|
|
$ |
23,153 |
|
Provision
for loan losses(1) |
|
|
1,889 |
|
|
|
11,751 |
|
|
|
13,640 |
|
|
|
36,723 |
|
|
|
50,363 |
|
Noninterest income |
|
|
2,009 |
|
|
|
438 |
|
|
|
2,447 |
|
|
|
6,081 |
|
|
|
8,528 |
|
Noninterest expense |
|
|
9,578 |
|
|
|
6,450 |
|
|
|
16,028 |
|
|
|
15,505 |
|
|
|
31,533 |
|
|
|
|
Operating profit (loss) |
|
$ |
484 |
|
|
$ |
(6,820 |
) |
|
$ |
(6,336 |
) |
|
$ |
(43,879 |
) |
|
|
(50,215 |
) |
|
|
|
|
|
|
|
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(53,722 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,057,887 |
|
|
$ |
1,267,926 |
|
|
$ |
2,325,813 |
|
|
$ |
1,032,522 |
|
|
$ |
3,358,335 |
|
|
|
|
Three Months Ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
8,931 |
|
|
$ |
9,396 |
|
|
$ |
18,327 |
|
|
$ |
4,390 |
|
|
$ |
22,717 |
|
Provision for loan losses(1) |
|
|
1,424 |
|
|
|
1,486 |
|
|
|
2,910 |
|
|
|
3,072 |
|
|
|
5,982 |
|
Noninterest income |
|
|
2,206 |
|
|
|
514 |
|
|
|
2,720 |
|
|
|
(1,893 |
) |
|
|
827 |
|
Noninterest expense |
|
|
9,113 |
|
|
|
5,832 |
|
|
|
14,945 |
|
|
|
12,850 |
|
|
|
27,795 |
|
|
|
|
Operating profit (loss) |
|
$ |
600 |
|
|
$ |
2,592 |
|
|
$ |
3,192 |
|
|
$ |
(13,425 |
) |
|
$ |
(10,233 |
) |
|
|
|
|
|
|
|
Income tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,539 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(5,694 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,073,850 |
|
|
$ |
1,171,252 |
|
|
$ |
2,245,102 |
|
|
$ |
964,319 |
|
|
$ |
3,209,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
20,090 |
|
|
$ |
21,670 |
|
|
$ |
41,760 |
|
|
$ |
4,898 |
|
|
$ |
46,658 |
|
Provision for loan losses(1) |
|
|
2,862 |
|
|
|
18,969 |
|
|
|
21,831 |
|
|
|
37,659 |
|
|
|
59,490 |
|
Noninterest income |
|
|
3,972 |
|
|
|
890 |
|
|
|
4,862 |
|
|
|
9,878 |
|
|
|
14,740 |
|
Noninterest expense |
|
|
18,318 |
|
|
|
13,406 |
|
|
|
31,724 |
|
|
|
29,618 |
|
|
|
61,342 |
|
|
|
|
Operating profit (loss) |
|
$ |
2,882 |
|
|
$ |
(9,815 |
) |
|
$ |
(6,933 |
) |
|
$ |
(52,501 |
) |
|
$ |
(59,434 |
) |
|
|
|
|
|
|
|
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(59,462 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
16,991 |
|
|
$ |
18,467 |
|
|
$ |
35,458 |
|
|
$ |
8,588 |
|
|
$ |
44,046 |
|
Provision for loan losses(1) |
|
|
3,036 |
|
|
|
2,964 |
|
|
|
6,000 |
|
|
|
3,434 |
|
|
|
9,434 |
|
Noninterest income |
|
|
4,277 |
|
|
|
1,029 |
|
|
|
5,306 |
|
|
|
(4,714 |
) |
|
|
592 |
|
Noninterest expense |
|
|
17,425 |
|
|
|
11,568 |
|
|
|
28,993 |
|
|
|
22,866 |
|
|
|
51,859 |
|
|
|
|
Operating profit (loss) |
|
$ |
807 |
|
|
$ |
4,964 |
|
|
$ |
5,771 |
|
|
$ |
(22,426 |
) |
|
$ |
(16,655 |
) |
|
|
|
|
|
|
|
Income tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,387 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(9,268 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Provision for loan losses for Alabama and Florida segments
primarily represents charge-offs during the periods presented. Any provision in
excess of charge-offs initially flows though Administrative and Other. |
21
Note 8 Net Loss per Common Share
The following table sets forth the computation of basic net loss per common share and diluted net
loss per common share (Dollars in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the |
|
|
For the |
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(53,722 |
) |
|
$ |
(5,694 |
) |
|
$ |
(59,462 |
) |
|
$ |
(9,268 |
) |
Less preferred stock dividends and amortization |
|
|
(899 |
) |
|
|
(1,167 |
) |
|
|
(899 |
) |
|
|
(2,310 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
For basic and diluted, net loss applicable to common
stockholders |
|
$ |
(54,621 |
) |
|
$ |
(6,861 |
) |
|
$ |
(60,361 |
) |
|
$ |
(11,578 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For basic, weighted average common shares outstanding |
|
|
12,305 |
|
|
|
10,071 |
|
|
|
11,977 |
|
|
|
10,062 |
|
Effect of dilutive stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding, assuming dilution |
|
|
12,305 |
|
|
|
10,071 |
|
|
|
11,977 |
|
|
|
10,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per common share |
|
$ |
(4.44 |
) |
|
$ |
(0.68 |
) |
|
$ |
(5.04 |
) |
|
$ |
(1.15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net loss per common share |
|
$ |
(4.44 |
) |
|
$ |
(0.68 |
) |
|
$ |
(5.04 |
) |
|
$ |
(1.15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per common share is calculated by dividing net loss, less dividend requirements on
outstanding preferred stock, by the weighted-average number of common shares outstanding for the
period.
Diluted net loss per common share takes into consideration the pro forma dilution assuming certain
warrants, unvested restricted stock and unexercised stock option awards were converted or exercised
into common shares. Common stock equivalents of 415,329 and 439,600 and 67,422 and 77,027 were not
included in computing diluted net loss per share for the three and six months ended June 30, 2010
and 2009, respectively, as they were considered anti-dilutive.
22
Note 9 Comprehensive Loss
Total comprehensive loss was $52.0 million and $56.8 million for the three and six months ended
June 30, 2010, respectively, and $4.1 million and $9.3 million for the three and six months ended
June 30, 2009, respectively. Total comprehensive loss consists of net loss and other comprehensive
loss. The components of other comprehensive loss for the three and six months ended June 30, 2010
and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-Tax |
|
|
Income Tax |
|
|
Net of |
|
|
|
Amount |
|
|
Expense |
|
|
Income Tax |
|
|
|
(Dollars in thousands) |
|
Three Months Ended June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on available-for-sale securities |
|
$ |
4,031 |
|
|
$ |
(1,491 |
) |
|
$ |
2,540 |
|
Reclassification adjustment for gains realized in net loss |
|
|
(1,356 |
) |
|
|
502 |
|
|
|
(854 |
) |
Unrealized gain on derivatives |
|
|
24 |
|
|
|
(9 |
) |
|
|
15 |
|
Reclassification adjustment for gains realized in net loss |
|
|
(13 |
) |
|
|
5 |
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
Net unrealized gain |
|
$ |
2,686 |
|
|
$ |
(993 |
) |
|
$ |
1,693 |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on available-for-sale securities |
|
$ |
(3,660 |
) |
|
$ |
1,354 |
|
|
$ |
(2,306 |
) |
Reclassification adjustment for losses realized in net loss |
|
|
5,781 |
|
|
|
(2,139 |
) |
|
|
3,642 |
|
Unrealized gain on derivatives |
|
|
354 |
|
|
|
(131 |
) |
|
|
223 |
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain |
|
$ |
2,475 |
|
|
$ |
(916 |
) |
|
$ |
1,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on available-for-sale securities |
|
$ |
5,571 |
|
|
$ |
(2,061 |
) |
|
$ |
3,510 |
|
Reclassification adjustment for gains realized in net loss |
|
|
(1,158 |
) |
|
|
428 |
|
|
|
(730 |
) |
Unrealized loss on derivatives |
|
|
(134 |
) |
|
|
51 |
|
|
|
(83 |
) |
Reclassification adjustment for gains realized in net loss |
|
|
(13 |
) |
|
|
5 |
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
Net unrealized gain |
|
$ |
4,266 |
|
|
$ |
(1,577 |
) |
|
$ |
2,689 |
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on available-for-sale securities |
|
$ |
(12,054 |
) |
|
$ |
4,459 |
|
|
$ |
(7,595 |
) |
Reclassification adjustment for losses realized in net loss |
|
|
11,626 |
|
|
|
(4,302 |
) |
|
|
7,324 |
|
Unrealized gain on derivatives |
|
|
325 |
|
|
|
(120 |
) |
|
|
205 |
|
|
|
|
|
|
|
|
|
|
|
Net unrealized loss |
|
$ |
(103 |
) |
|
$ |
37 |
|
|
$ |
(66 |
) |
|
|
|
|
|
|
|
|
|
|
Note 10 Income Taxes
The Corporation recognized income tax expense of $3.5 million and $0.0 million for the three and
six months ended June 30, 2010, respectively, compared to an income tax benefit of $4.5 million and
$7.4 million for the three and six months ended June 30, 2009, respectively. The difference
between the effective tax rates in 2010 and the blended federal statutory rate of 34% and state tax
rates between 5% and 6% was primarily due to the recognition of an additional $22.0 million
valuation allowance against the Corporations deferred tax assets (DTAs). The Corporations
total valuation allowance was $23.2 million at June 30, 2010. The difference between the effective
and statutory tax rates in 2009 was primarily due to certain tax-exempt income from investments and
income reported from insurance policies.
Deferred income tax assets and liabilities are determined using the balance sheet method. Under
this method, the net deferred tax assets and liabilities are determined based on temporary
differences between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to reverse. These calculations are based on many complex
factors, including estimates of the timing of reversals of temporary differences, the
interpretation of federal and state income tax laws, and a determination of the differences between
the tax and the
financial reporting basis of assets and liabilities. Actual results could differ significantly from
the estimates and interpretations used in determining the current and deferred income tax assets
and liabilities.
The recognition of DTAs is based upon managements judgment that realization of the asset is more
likely than not. Managements judgment is based on estimates concerning various future events and
uncertainties, including future reversals of existing taxable
23
temporary differences, the timing and amount of future income earned by the Corporations
subsidiaries, and the implementation of various tax planning strategies to maximize realization of
the DTA. A complete discussion of managements assessment of the realizability of the Corporations
DTAs is included in the 2009 Annual Report on Form 10-K under the heading Critical Accounting
Estimates in Managements Discussion and Analysis and in Note 14 to the 2009 consolidated
financial statements.
Management evaluates the realizability of DTAs quarterly and, if necessary, adjusts the valuation
allowance accordingly. Based on the net loss incurred in the second quarter, management
has revised its assessment of the realizablity of the DTAs as of June 30, 2010 and recorded a $23.2
million valuation allowance. As previously disclosed in the 2009 Annual Report on Form 10-K,
forecasted taxable income is based on several economic scenarios which have been stressed in
varying degrees to reflect slower economic recovery than currently
anticipated by management. Under the model, this results in
additional credit losses with a corresponding impact on the net
interest assigned an individual probability of occurring each year, with the final
forecast comprising the scenarios that exceed a cumulative probability of 50% (the more likely than
not threshold) in any year. Based on the current period loss, management revised these assigned
probabilities, which reduced the amount of projected taxable income exceeding the more likely than
not threshold. This required management to increase the valuation allowance. Additionally,
management may further increase the valuation allowance in the near term if estimates of future taxable
income are reduced due to further deteriorations in market conditions or the economy, which could
produce additional credit losses within the loan and investment portfolios.
Note 11 Stock Incentive Plan
In April 2010, the Corporations stockholders approved the Superior Bancorp 2010 Incentive
Compensation Plan (the 2010 Plan) which succeeded the 2008 Plan. The purpose of the 2010 Plan is
to provide additional incentive for the Corporations directors and key employees to further the
growth, development and financial success of the Corporation and its subsidiaries by personally
benefiting through the ownership of the Corporations common stock, or other rights which recognize
such growth, development and financial success. The Corporations Board also believes the 2010 Plan
will enable it to obtain and retain the services of directors and employees who are considered
essential to its long-range success by offering them an opportunity to own stock and other rights
that reflect the Corporations financial success. The maximum aggregate number of shares of common
stock that may be issued or transferred pursuant to awards under the 2010 Plan is 1,500,000 shares
plus an annual addition of shares on January 1 of each year equal to two percent of the number of
shares of the Corporations outstanding common stock at that time.
During the first quarter of 2005, the Corporation granted 422,734 options to the new management
team. These options have exercise prices ranging from $32.68 to $38.52 per share and were granted
outside of the stock incentive plan as part of the inducement package for new management. These
shares are included in the tables below.
The fair value of each option award is estimated on the date of grant based upon the Black-Scholes
pricing model that uses the assumptions noted in the following table. The risk-free interest rate
is based on the implied yield on U.S. Treasury zero-coupon issues with a remaining term equal to
the expected term. Expected volatility has been estimated based on historical data. The expected
term has been estimated based on the five-year vesting date and change of control provisions. The
Corporation used the following weighted-average assumptions for the six months ended June 30:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
Risk-free interest rate |
|
|
2.57 |
% |
|
|
3.59 |
% |
Volatility factor |
|
|
55.79 |
|
|
|
35.59 |
|
Expected term (in years) |
|
|
5.00 |
|
|
|
5.00 |
|
Dividend yield |
|
|
0.00 |
|
|
|
0.00 |
|
24
A summary of stock option activity as of June 30, 2010 and changes during the six months ended
is shown below (Dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
For the Six Months Ended June 30, 2010 |
|
Number |
|
|
Price |
|
|
Term |
|
|
Value |
|
Under option, beginning of period |
|
|
925,647 |
|
|
$ |
26.85 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
5,000 |
|
|
|
3.44 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(25,119 |
) |
|
|
14.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under option, end of period |
|
|
905,528 |
|
|
$ |
27.06 |
|
|
|
5.21 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period |
|
|
613,028 |
|
|
$ |
31.91 |
|
|
|
2.63 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average fair value per
option of options granted during the
period |
|
$ |
3.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010, there was $0.3 million of total unrecognized compensation expense related to
the unvested awards. This expense will be recognized over approximately the next 30 months unless
the shares vest earlier based on achievement of benchmark trading price levels. During the three
and six months ended June 30, 2010, the Corporation recognized approximately $0.1 million and $0.2
million, respectively, in compensation expense related to options granted. During the three and
six months ended June 30, 2009, the Corporation recognized approximately $0.1 million and $0.2
million, respectively, in compensation expense related to options granted.
Note 12 Fair Value Measurements
In accordance with FASB guidance, the Corporation measures fair value at the price that would be
received by selling an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. The Corporation prioritizes the assumptions that
market participants would use in pricing the asset or liability (inputs) into a three-tier fair
value hierarchy. This fair value hierarchy gives the highest priority (Level 1) to quoted prices in
active markets for identical assets or liabilities and the lowest priority (Level 3) to
unobservable inputs for which little or no market data exists, requiring companies to develop their
own assumptions. Observable inputs that do not meet the criteria of Level 1, and include quoted
prices for similar assets or liabilities in active markets or quoted prices for identical assets
and liabilities in markets that are not active, are categorized as Level 2. Level 3 inputs are
those that reflect managements estimates about the assumptions market participants would use in
pricing the asset or liability, based on the best information available in the circumstances.
Valuation techniques for assets and liabilities measured using Level 3 inputs may include
methodologies such as the market approach, the income approach or the cost approach, and may use
unobservable inputs such as projections, estimates and managements interpretation of current
market data. These unobservable inputs are only utilized to the extent that observable inputs are
not available or cost-effective to obtain.
25
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The table below presents the Corporations assets and liabilities measured at fair value on a
recurring basis categorized by the level of inputs used in the valuation of each asset as of June
30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
Significant |
|
|
|
|
|
|
Active Markets for |
|
Significant Other |
|
Unobservable |
|
|
Carrying |
|
Identical Assets |
|
Observable Inputs |
|
Inputs |
|
|
Value |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
|
|
|
|
(Dollars in thousands) |
June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Agency securities |
|
$ |
18,619 |
|
|
$ |
|
|
|
$ |
18,619 |
|
|
$ |
|
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Agency MBS pass-through |
|
|
112,422 |
|
|
|
|
|
|
|
112,422 |
|
|
|
|
|
U.S. Agency CMO |
|
|
84,454 |
|
|
|
|
|
|
|
84,454 |
|
|
|
|
|
Private-label CMO |
|
|
14,656 |
|
|
|
|
|
|
|
8,052 |
|
|
|
6,604 |
|
|
|
|
Total MBS |
|
|
211,532 |
|
|
|
|
|
|
|
204,928 |
|
|
|
6,604 |
|
State, county and municipal securities |
|
|
30,661 |
|
|
|
|
|
|
|
29,061 |
|
|
|
1,600 |
|
Corporate obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt |
|
|
4,000 |
|
|
|
|
|
|
|
4,000 |
|
|
|
|
|
Pooled trust preferred securities |
|
|
3,263 |
|
|
|
|
|
|
|
|
|
|
|
3,263 |
|
Single issue trust preferred securities |
|
|
1,755 |
|
|
|
|
|
|
|
|
|
|
|
1,755 |
|
|
|
|
Total corporate obligations |
|
|
9,018 |
|
|
|
|
|
|
|
4,000 |
|
|
|
5,018 |
|
Equity securities |
|
|
113 |
|
|
|
113 |
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
available-for-sale |
|
|
269,943 |
|
|
|
113 |
|
|
|
256,608 |
|
|
|
13,222 |
|
Derivative assets |
|
|
1,637 |
|
|
|
|
|
|
|
1,637 |
|
|
|
|
|
|
|
|
Total recurring basis measured assets |
|
$ |
271,580 |
|
|
$ |
113 |
|
|
$ |
258,245 |
|
|
$ |
13,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
$ |
2,549 |
|
|
$ |
|
|
|
$ |
2,549 |
|
|
$ |
|
|
|
|
|
Total recurring basis measured liabilities |
|
$ |
2,549 |
|
|
$ |
|
|
|
$ |
2,549 |
|
|
$ |
|
|
|
|
|
26
The table below presents the Corporations assets and liabilities measured at fair value on a
recurring basis categorized by the level of inputs used in the valuation of each asset as of
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
Significant |
|
|
|
|
|
|
Active Markets for |
|
Significant Other |
|
Unobservable |
|
|
Carrying |
|
Identical Assets |
|
Observable Inputs |
|
Inputs |
|
|
Value |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
|
|
|
|
(Dollars in thousands) |
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Agency securities |
|
$ |
53,681 |
|
|
$ |
|
|
|
$ |
53,681 |
|
|
$ |
|
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Agency pass-through |
|
|
163,724 |
|
|
|
|
|
|
|
163,724 |
|
|
|
|
|
U.S. Agency CMO |
|
|
12,759 |
|
|
|
|
|
|
|
12,759 |
|
|
|
|
|
Private-label CMO |
|
|
16,191 |
|
|
|
|
|
|
|
8,771 |
|
|
|
7,420 |
|
|
|
|
Total MBS |
|
|
192,674 |
|
|
|
|
|
|
|
185,254 |
|
|
|
7,420 |
|
State, county and municipal securities |
|
|
31,462 |
|
|
|
|
|
|
|
29,733 |
|
|
|
1,729 |
|
Corporate obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt |
|
|
4,000 |
|
|
|
|
|
|
|
4,000 |
|
|
|
|
|
Pooled trust preferred securities |
|
|
3,203 |
|
|
|
|
|
|
|
|
|
|
|
3,203 |
|
Single issue trust preferred securities |
|
|
977 |
|
|
|
|
|
|
|
|
|
|
|
977 |
|
|
|
|
Total corporate obligations |
|
|
8,180 |
|
|
|
|
|
|
|
4,000 |
|
|
|
4,180 |
|
Equity securities |
|
|
313 |
|
|
|
313 |
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
available-for-sale |
|
|
286,310 |
|
|
|
313 |
|
|
|
272,668 |
|
|
|
13,329 |
|
Derivative assets |
|
|
610 |
|
|
|
|
|
|
|
610 |
|
|
|
|
|
|
|
|
Total recurring basis measured assets |
|
$ |
286,920 |
|
|
$ |
313 |
|
|
$ |
273,278 |
|
|
$ |
13,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
$ |
1,459 |
|
|
$ |
|
|
|
$ |
1,459 |
|
|
$ |
|
|
|
|
|
Total recurring basis measured liabilities |
|
$ |
1,459 |
|
|
$ |
|
|
|
$ |
1,459 |
|
|
$ |
|
|
|
|
|
Valuation Techniques Recurring Basis
Securities Available-for-Sale
When quoted prices are available in an active market, securities are classified as Level 1. These
securities include investments in Fannie Mae and Freddie Mac preferred stock. For securities
reported at fair value utilizing Level 2 inputs, the Corporation obtains fair value measurements
from an independent pricing service. These fair value measurements consider observable market data
that may include benchmark yield curves, reported trades, broker/dealer quotes, issuer spreads and
credit information, among other inputs. In certain cases where there is limited activity,
securities are classified as Level 3 within the valuation hierarchy. These securities include a
single issue trust preferred security and CDOs backed by pooled trust preferred securities and
certain private-label mortgage-backed securities. The fair value of the trust preferred securities
is calculated using an income approach based on various spreads to LIBOR determined after a review
of applicable financial data and credit ratings (see Note 3 Trust Preferred Securities). As of
June 30, 2010, the fair values of five private-label mortgage-backed securities totaling $6.6
million were measured using Level 3 inputs because the market has become illiquid, as indicated by
few, if any, trades during the period. Prior to June 30, 2009, these securities were previously
measured using Level 2 inputs. The assumptions used in the valuation model include expected future
default rates, loss severity and prepayments. The model also takes into account the structure of
the security including credit support. Based on these assumptions the model calculates and projects
the timing and amount of interest and principal payments expected for the security. The discount
rates used in the valuation
model were based on a yield that the market would require for such securities with maturities and
risk characteristics similar to the securities being measured (see Note 3 Mortgage-backed
Securities).
27
Derivative Financial Instruments
Derivative financial instruments are measured at fair value based on modeling that utilizes
observable market inputs for various interest rates published by leading third-party financial news
and data providers. This is observable data that represents the rates used by market participants
for instruments entered into at that date; however, they are not based on actual transactions so
they are classified as Level 2.
Changes in Level 3 Fair Value Measurements
The tables below include a roll-forward of the condensed consolidated statement of financial
condition amounts for the periods indicated, including changes in fair value for financial
instruments within Level 3 of the valuation hierarchy. Level 3 financial instruments typically
include unobservable components, but may also include some observable components that may be
validated to external sources. The gains or (losses) in the following table may include changes to
fair value due in part to observable factors that may be part of the valuation methodology:
Level 3 Assets Measured at Fair Value on a Recurring Basis
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Securities |
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(Dollars in thousands) |
|
Balance at January 1 |
|
$ |
13,329 |
|
|
$ |
18,497 |
|
Transfer into level 3 category during the year |
|
|
|
|
|
|
6,181 |
|
Total gains (losses) (realized and unrealized) |
|
|
|
|
|
|
|
|
Included in earnings investment security loss |
|
|
(97 |
) |
|
|
(11,626 |
) |
Included in other comprehensive loss |
|
|
929 |
|
|
|
(3,038 |
) |
Other changes due to principal payments |
|
|
(939 |
) |
|
|
(309 |
) |
|
|
|
|
|
|
|
Balance at June 30 |
|
$ |
13,222 |
|
|
$ |
9,705 |
|
|
|
|
|
|
|
|
Total amount of loss for the period year-to-date
included in earnings attributable to the change in
unrealized gains (losses) related to assets held at
June 30 |
|
$ |
(97 |
) |
|
$ |
(11,626 |
) |
|
|
|
|
|
|
|
28
Assets Recorded at Fair Value on a Nonrecurring Basis
The table below presents the assets measured at fair value on a nonrecurring basis categorized by
the level of inputs used in the valuation of each asset for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
in |
|
|
|
|
|
|
|
|
|
|
Active Markets |
|
|
|
|
|
|
|
|
|
|
for |
|
Significant Other |
|
Significant |
|
|
|
|
|
|
Identical |
|
Observable |
|
Unobservable |
|
|
Carrying |
|
Assets |
|
Inputs |
|
Inputs |
|
|
Value |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
|
|
|
|
(Dollars in thousands) |
June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held-for-sale |
|
$ |
54,823 |
|
|
$ |
|
|
|
$ |
54,823 |
|
|
$ |
|
|
Impaired loans, net of specific allowance |
|
|
204,957 |
|
|
|
|
|
|
|
|
|
|
|
204,957 |
|
Other foreclosed real estate |
|
|
45,184 |
|
|
|
|
|
|
|
|
|
|
|
45,184 |
|
Other real estate held-for-sale |
|
|
3,342 |
|
|
|
|
|
|
|
|
|
|
|
3,342 |
|
|
|
|
Total nonrecurring basis measured assets |
|
$ |
308,306 |
|
|
$ |
|
|
|
$ |
54,823 |
|
|
$ |
253,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held-for-sale |
|
$ |
71,879 |
|
|
$ |
|
|
|
$ |
71,879 |
|
|
$ |
|
|
Impaired loans, net of specific allowance |
|
|
155,545 |
|
|
|
|
|
|
|
|
|
|
|
155,545 |
|
Other foreclosed real estate |
|
|
41,618 |
|
|
|
|
|
|
|
|
|
|
|
41,618 |
|
Other real estate held-for-sale |
|
|
3,349 |
|
|
|
|
|
|
|
|
|
|
|
3,349 |
|
|
|
|
Total nonrecurring basis measured assets |
|
$ |
272,391 |
|
|
$ |
|
|
|
$ |
71,879 |
|
|
$ |
200,512 |
|
|
|
|
Valuation Techniques Nonrecurring Basis
Mortgage Loans Held- for- Sale
Mortgage loans held-for-sale are recorded at the lower of aggregate cost or fair value. Fair value
is generally based on quoted market prices of similar loans and is considered to be Level 2 in the
fair value hierarchy.
Impaired Loans
Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the
lower of cost or fair value. These loans are collateral-dependent, and their fair value is measured
based on the value of the collateral securing these loans and is classified at a Level 3 in the
fair value hierarchy. Collateral typically includes real estate and/or business assets including
equipment. The value of real estate collateral is determined based on
such appraisals. The value of business equipment is
also determined based on such appraisals, if significant. Appraised and reported values are discounted based on managements
historical knowledge, changes in market conditions from the time of valuation, and/or managements
expertise and knowledge of the client and clients business. Impaired loans are reviewed and
evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based
on the same factors identified above.
29
Other Foreclosed Real Estate
Other real estate, acquired through partial or total satisfaction of loans, is carried at fair
value, less estimated selling expenses. At the date of acquisition, any difference between the fair
value and book value of the asset is charged to the allowance for loan losses. The value of other
foreclosed real estate collateral is determined based on appraisals by qualified licensed
appraisers approved and hired by the Corporation. Appraised and reported values are discounted
based on managements historical knowledge, changes in market conditions from the time of
valuation, and/or managements expertise and knowledge of the client and the clients business.
Foreclosed real estate is reviewed and evaluated on at least a quarterly basis for additional
impairment and adjusted accordingly, based on the same factors identified above.
Other Real Estate Held-for-Sale
Other real estate held-for-sale, which consists primarily of closed branch locations, is carried at
the lower of cost or fair value, less estimated selling expenses. The fair value of other real
estate held-for-sale is determined based on managements appraisal of properties assessed values
and general market conditions. Other real estate held-for-sale is reviewed and evaluated on at
least a quarterly basis for additional impairment and adjusted accordingly, based on the same
factors identified above.
The methodologies for estimating the fair value of financial assets and financial liabilities that
are measured at fair value on a recurring or non-recurring basis are discussed above. The estimated
fair value approximates carrying value for cash and short-term instruments, accrued interest and
the cash surrender value of life insurance policies. The methodologies for other financial assets
and financial liabilities are discussed below:
Tax Lien Certificates
The carrying amount of tax lien certificates approximates their fair value.
Net Loans
Fair values for variable-rate loans that re-price frequently and have no significant change in
credit risk are based on carrying values. Fair values for all other loans are estimated using
discounted cash flow analyses using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. Fair values for impaired loans are estimated using
discounted cash flow analyses or underlying collateral values, where applicable.
Deposits
The fair
values disclosed for demand deposits are, by definition, equal to the amounts payable on
demand at the reporting date (that is, their carrying amounts). The carrying amounts of
variable-rate, fixed-term money market accounts and certificates of deposit (CDs) approximate
their fair values at the reporting date. Fair values for fixed-rate CDs are estimated using a
discounted cash flow calculation that applies interest rates currently being offered on advances
from the FHLB Atlanta to a schedule of aggregated expected monthly maturities on time deposits.
Advances from FHLB Atlanta
The fair
values of FHLB Atlanta advances are based on pricing supplied by FHLB Atlanta.
Federal Funds Borrowed and Security Repurchase Agreements
The carrying amount of federal funds borrowed and security repurchase agreements approximate their
fair values.
Notes Payable
The
carrying amount of variable rate notes payable approximates their fair values.
The fair value for fixed-rate notes payable is estimated using a
discounted cash flow calculation that applies an interest rate based
on a credit spread above the current Treasury yield.
30
Subordinated debentures
Rates currently available in the market for preferred offerings with similar terms and maturities
are used to estimate fair value.
Limitations
Fair value estimates are made at a specific point in time and are based on relevant market
information, which is continuously changing. Because no quoted market prices exist for a
significant portion of the Corporations financial instruments, fair values for such instruments
are based on managements assumptions with respect to future economic conditions, estimated
discount rates, estimates of the amount and timing of future cash flows, expected loss experience,
and other factors. These estimates are subjective in nature involving uncertainties and matters of
significant judgment; therefore, they cannot be determined with precision. Changes in the
assumptions could significantly affect the estimates.
The estimated fair values of the Corporations financial instruments for the periods indicated are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
December 31, 2009 |
|
|
|
|
|
|
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
|
|
Amount |
|
Value |
|
Amount |
|
Value |
|
|
|
|
|
|
|
(Dollars in thousands) |
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
54,648 |
|
|
$ |
54,648 |
|
|
$ |
74,020 |
|
|
$ |
74,020 |
|
Interest-bearing deposits in other banks |
|
|
245,182 |
|
|
|
245,182 |
|
|
|
23,714 |
|
|
|
23,714 |
|
Federal funds sold |
|
|
1,328 |
|
|
|
1,328 |
|
|
|
2,036 |
|
|
|
2,036 |
|
Securities available for sale |
|
|
269,943 |
|
|
|
269,943 |
|
|
|
286,310 |
|
|
|
286,310 |
|
Tax lien certificates |
|
|
18,820 |
|
|
|
18,820 |
|
|
|
19,292 |
|
|
|
19,292 |
|
Mortgage loans held for sale |
|
|
54,823 |
|
|
|
54,823 |
|
|
|
71,879 |
|
|
|
71,879 |
|
Net loans |
|
|
2,403,135 |
|
|
|
2,418,129 |
|
|
|
2,430,813 |
|
|
|
2,440,026 |
|
Stock in FHLB |
|
|
18,212 |
|
|
|
18,212 |
|
|
|
18,212 |
|
|
|
18,212 |
|
Accrued interest receivable |
|
|
50,792 |
|
|
|
50,792 |
|
|
|
50,142 |
|
|
|
50,142 |
|
Derivative assets |
|
|
1,637 |
|
|
|
1,637 |
|
|
|
610 |
|
|
|
610 |
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
2,838,521 |
|
|
|
2,856,411 |
|
|
|
2,656,573 |
|
|
|
2,671,504 |
|
Advances from FHLB |
|
|
216,324 |
|
|
|
233,574 |
|
|
|
218,322 |
|
|
|
233,028 |
|
Security repurchase agreements |
|
|
762 |
|
|
|
762 |
|
|
|
841 |
|
|
|
841 |
|
Note payable |
|
|
45,150 |
|
|
|
46,765 |
|
|
|
45,917 |
|
|
|
45,917 |
|
Subordinated debentures |
|
|
81,196 |
|
|
|
58,956 |
|
|
|
84,170 |
|
|
|
51,609 |
|
Derivative liabilities |
|
|
2,549 |
|
|
|
2,549 |
|
|
|
1,459 |
|
|
|
1,459 |
|
Note 13 Stockholders Equity
During the
second quarter of 2010, Cambridge Savings Bank (Cambridge) exchanged $3.5 million of trust
preferred securities issued by the Corporations wholly-owned unconsolidated subsidiary, Superior
Capital Trust I, for 849,156 shares of the Corporations common stock, pursuant to an agreement
dated January 15, 2010. The number of shares of common stock
issued to Cambridge was based on 77% of the
face value of the trust preferred securities divided by a weighted average of the sales prices of
newly issued shares of the Corporations common stock sold between the date of the agreement and
the closing of the exchange ($2.4 million at $3.19 per share
and $1.1 million at $3.15 per share). The Corporation
recorded a net after-tax gain of $0.5 million upon exchange of the trust preferred securities. The
exchange increased stockholders equity by approximately $3.2 million, consisting of both the
increase in equity upon recording a $0.5 million gain on exchange of the securities and the value
of the newly issued shares.
On January 20, 2010, the Corporation entered into an agreement with KBW, Inc. (KBW) pursuant to
which KBW will exchange $4.0 million of trust preferred securities issued by the Corporations
wholly-owned unconsolidated subsidiary, Superior Capital Trust I, for
shares of the Corporations common stock. The number of shares of common stock to be issued to KBW
will equal 50% of the face value of the trust preferred securities divided by the greater of the
following prices of the Corporations common stock during the ten trading days prior to the closing
of the exchange: (1) the average of the closing prices or
(2) 90% of the volume-weighted average
31
price. The consummation of the transaction is conditioned upon obtaining consent of the
Corporations stockholders if required by NASDAQ, and other
customary closing conditions. Consummation of the transaction remains
pending.
Neither the Corporation nor its affiliates have any material relationship with Cambridge other than
in respect of the exchange agreement. Neither the Corporation nor its affiliates have any material
relationship with KBW, except that the Corporation has engaged an affiliate of KBW to assist it in
formulating and implementing strategies to strengthen its capital position.
In the
second quarter, the Corporation issued Series B Cumulative Convertible
Preferred Stock (Series B Preferred Stock) with a
liquidation value of $11.1 million for cash
consideration of $11.1 million. At the
same time, the Corporation issued to the purchasers five-year warrants to purchase 792,859 shares of
the Corporations common stock at an exercise price of $3.50 per share. The fair value of the
warrants was determined to be $1.2 million using the Black-Scholes option-pricing model and the value
allocated using the proportional method. The assumptions used in the model were: risk-free rate of
2.38%, volatility factor of 65.90% and a dividend yield of 0.00%. The Series B Preferred Stock had
a beneficial conversion feature of $2.5 million as of the date of issuance. The value of the
warrants and the beneficial conversion feature is being amortized against retained earnings as part
of the preferred stock dividend until December 15, 2010. The Series B Preferred Stock is
mandatorily convertible upon the earlier of December 15, 2010 or the completion of additional
capital financing by the Corporation, but is not voluntarily convertible by the holder prior to
such time. If the Series B Preferred Stock converts in conjunction with the consummation of
additional capital financing, the conversion rate will be the lower of $2.89 or 83% of the offering
price of the additional financing. If the Series B Preferred Stock converts on December 15, 2010, the
conversion rate will be the lower of $2.89 or 83% of the 10-day volume-weighted trailing average of
closing prices of the Corporations common stock.
In
addition, during the second quarter, the Corporation issued
Series C
Cumulative Convertible Preferred Stock with a liquidation value of
$0.3 million for cash consideration in the same amount along with
five-year warrants to purchase 21,429 shares of its common stock at an exercise price of $3.50.
The fair value of the warrants, which were nominal, was determined using the Black-Scholes option-pricing
model and the value allocated using the proportional method. The assumptions used in the model
were: risk-free rate of 2.38%, volatility factor of 65.90% and a dividend yield of 0.00%. The value
of the warrants is being amortized against retained earnings as part of the preferred stock
dividend until December 15, 2010. The Series C Preferred Stock is mandatorily convertible upon the
earlier of December 15, 2010 or the completion of additional capital financing by the Corporation,
but is not voluntarily convertible by the holder prior to such time. The conversion rate
of the Series C Preferred Stock is the market price (the Market Price) of the Corporations
common stock on the trading day immediately preceding the date of issuance of the Series C
Preferred Stock. However, if stockholder approval is obtained prior to conversion, the conversion
rate of the Series C Preferred Stock will be the lower of
(a) the Market Price and (b) 83% of the
offering price of additional capital financings by the Corporation
or, if no such financing occurs,
the 10-day volume-weighted trailing average of closing prices of the Corporations common stock
prior to December 15, 2010.
There were no underwriting discounts or commissions in connection with the sale of Series B
Preferred Stock or Series C Preferred Stock.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Basis of Presentation
The following is a discussion and analysis of our June 30, 2010 condensed consolidated financial
condition and results of operations for the three and six months ended June 30, 2010 and 2009. All
significant intercompany accounts and transactions have been eliminated. Our accounting and
reporting policies conform to generally accepted accounting principles applicable to financial
institutions.
This information should be read in conjunction with our unaudited condensed consolidated financial
statements and related notes appearing elsewhere in this report and the audited consolidated
financial statements and related notes and Managements Discussion and Analysis of Financial
Condition and Results of Operations appearing in our Annual Report on Form 10-K for the year ended
December 31, 2009.
32
Overview
Our principal subsidiary is Superior Bank, a federal savings bank. Superior Bank has principal
offices in Birmingham, Alabama and Tampa, Florida, and operates 73 banking offices in Alabama (45)
and Florida (28). Superior Banks consumer finance subsidiaries operate an additional 24 consumer
finance offices in northern Alabama, doing business as 1st Community Credit and Superior
Financial Services. We had assets of approximately $3.358 billion, loans of approximately
$2.483 billion, deposits of approximately $2.839 billion and stockholders equity of approximately
$149.3 million as of June 30, 2010. Total assets increased 4.2% compared to $3.222 billion as of
December 31, 2009. Loans increased 0.4% compared to $2.473 billion as of December 31, 2009. Total
deposits increased 6.9% from $2.657 billion as of December 31, 2009.
We
incurred a net loss for the three months ended June 30, 2010 of
$53.7 million compared to a net loss of $5.7
million in the three months ended June 30, 2009. Included in the net loss for the three months ended June 30, 2010 was an
increase in credit-related costs (i.e. provisions for loan loss, other real estate owned (OREO)
expense, collection costs, etc.) of $46.0 million. This increase was partially offset by a $5.3
million decline in other-than-temporary impairments (OTTI) associated with securities in our
investment portfolio. We also recorded a $22.0 million deferred tax valuation allowance, which
eliminated any tax benefit on our loss for the three months ended June 30, 2010.
During the
quarter, we experienced (1) a migration of performing classified loans into
non-performing status, (2) an increase in troubled debt restructurings (TDRs) resulting from
workout activity, and (3) an increase in collateral impairments relative to other external
factors such as short sales and deteriorated values in comparable
properties. These factors
created the need for increased loan loss provision during the
second quarter of 2010. In addition, management increased the general allowance for loan losses to
account for its estimate of losses related to the recent oil spill in
the Gulf of Mexico (the spill). The historical loss ratio used to
estimate the allowance for loan losses also increased significantly
during the second quarter of 2010. The ratio is based on a
four-quarter rolling average and has been affected by the level of
charge-offs during 2010. See Part II, Item 1A.
Risk FactorsRisks Relating to our Business
elsewhere in this report.
Our non-performing loans increased to $231.4 million, or 9.32% of loans as of June 30, 2010, from
$178.0 million, or 7.10% of loans as of March 31, 2010. The overall increase in nonperforming
loans was primarily related to real estate construction and commercial real estate mortgage loan
portfolios. Loans in the 30-89 days past due category decreased to 1.78% of total loans as of June
30, 2010 from 1.88% of total loans as of March 31, 2010.
Non-performing assets were 8.25% of total
assets as of June 30, 2010 compared to 6.73% as of March 31, 2010.
Our annualized ratio of net charged-off loans to average loans increased to 2.26% for the three
months ended June 30, 2010 compared to 1.27% for the three months ended March 31, 2010 and 1.03%
for the three months ended December 31, 2009. Of the $14.1 million net charge-offs, for the three
months ended June 30, 2010, Superior Banks net charge-offs
were $13.5 million, or 2.17% of
consolidated average loans on an annualized basis, and our two consumer finance companies net charge-offs were $0.6
million, or 0.09% of consolidated average loans on an annualized basis.
Our loan
loss provision significantly increased over the provision reflected in previous
periods, with a provision of $50.4 million
for the three months ended June 30, 2010, compared to $9.1 million for the three months ended March
31, 2010 and $6.0 million for the three months ended June 30, 2009. As of June 30, 2010, the
allowance for loan losses increased by $36.2 million to $79.4 million, or 3.20% of net loans,
compared to $43.2 million, or 1.72% of net loans, as of March 31, 2010. In addition, our losses
and expenses on OREO were $3.4 million during the three months ended June 30, 2010 and $2.6 million
for the three months ended March 31, 2010, an increase from the $1.7 million during the three
months ended June 30, 2009, reflecting dispositions of several
foreclosed properties. At 3.20% of net loans, the allowance for loan
losses is equal to approximately 2.4x net loan losses for the last 12
months.
Our loans, net of unearned income, were $2.483 billion as of June 30, 2010, a decrease of 0.9%, or
$22.9 million, from $2.505 billion as of March 31, 2010. As of June 30, 2010, we had a decrease in
balances outstanding in certain categories of loans, primarily in residential construction lending,
which decreased $13.0 million to $288.9 million compared to
$301.9 million as of March 31, 2010.
This was primarily related to existing construction loans paying off as completed homes have sold
during the spring and summer selling season. Commercial construction also decreased slightly by
$0.4 million to $391.5 million compared to March 31, 2010, as projects have been completed. Other
categories of commercial real estate lending were up approximately
$3.5 million, principally
related to increases in healthcare-related properties. In addition, single-family residential
mortgages decreased approximately $2.7 million from March 31, 2010. Our stance on new credit will
continue to remain cautious, with loan totals likely remaining flat to declining slowly. We also
are subject to certain lending restrictions imposed by the Office of
Thrift Supervision (OTS). See Part II, Item 1A.
Risk FactorsRisks Relating to Our Business
elsewhere in this report. This is also consistent with our stance on capital preservation in the
near term, as we seek to maintain high capital ratios in this uncertain environment.
Our primary source of revenue is net interest income, which is determined by calculating the
difference between income earned on interest-earning assets, such as loans and investments, and
interest paid on interest-bearing liabilities, such as deposits and borrowings. Our results of
operations are also affected by credit cost, including the provision for loan losses, losses and
other costs on foreclosed properties (foreclosure losses), and other noninterest expenses, such
as salaries and benefits, occupancy expenses and provision for income taxes. The effects of these
noninterest expenses are partially offset by noninterest sources of revenue, such as service
charges and fees on deposit accounts and mortgage banking income. Our volume of business is
influenced by competition in our markets and overall economic conditions including such factors as
market interest rates, business spending and consumer confidence. See
Part II, Item 1A. Risk FactorsRisks Relating to Our Business elsewhere in this report.
Net interest income decreased to $23.2 million during the three months ended June 30, 2010 from
$23.5 million for the three months ended March 31, 2010, and increased from the $22.7 million for
the three months ended June 30, 2009. The net interest margin was 3.02% for the three months ended
June 30, 2010 compared to 3.19% for the three months ended March 31, 2010 and 3.22% for the three
months ended June 30, 2009. In prior periods, payments on our $69.0 million principal amount of
preferred stock issued to the Treasury under the CPP were treated as dividends, but effective with
the conversion of that preferred stock to trust preferred securities in December 2009, payments on
those trust preferred securities were treated as interest expense. This had an effect on the reported net interest
margin for the three and six months ended June 30, 2010 of 0.22%
for both periods. The
effect on net interest margin of loans being placed on non-accrual status approximated 0.19% and
0.13% for the three and six months ended June 30, 2010,
respectively. Including both foregone interest and the reversal of interest
33
accrued during the year on those loans, the effect
on net interest margin was 0.57% and 0.49%, respectively. Additionally, the net interest margin
reflected our decision to maintain higher levels of very short-term investments for liquidity
purposes. These investments, which averaged $145.0 million and $117.9 million for the three and
six months ended June 30, 2010, respectively, had an average yield of 0.36% and 0.38%,
respectively, which led to a decline in the yield on earning assets.
Liquidity and Capital
Short-term liquid assets (cash and due from banks, interest-bearing deposits in other banks and
federal funds sold) increased $201.4 million to $301.2 million as of June 30, 2010 from $99.8
million as of December 31, 2009. As of June 30, 2010, short-term liquid assets were 9.0% of total
assets, compared to 3.1% as of December 31, 2009. Management continually monitors our liquidity
position and will increase or decrease short-term liquid assets as necessary. Our principal sources
of funds are deposits, principal and interest payments on loans and federal funds sold. Management
believes it has established sufficient sources of funds to meet its
anticipated liquidity needs. See Part II, Item 1A.
Risk FactorsRisks Relating to Our Business
elsewhere in this report.
Superior Bank is adequately capitalized under regulatory guidelines, with a total risk-based
capital ratio of 8.85%, a Tier I core capital ratio of 5.64% and a Tier I risk-based capital ratio
of 7.22% as of June 30, 2010. Superior Banks tangible common equity ratio was 6.34% as of June 30,
2010. Our consolidated total risk-based capital ratio was 9.46% and our tangible common equity
ratio was 3.41% as of June 30, 2010. We are currently exploring and pursuing a variety of
initiatives aimed at increasing our capital and returning to well capitalized status.
Recent Accounting Pronouncements
See Note 1
to the condensed consolidated financial statements elsewhere in this
report for other recent accounting
pronouncements that are not expected to have a significant effect on our financial condition,
results of operations or cash flows.
34
Results of Operations
For the three months ended June 30, 2010, we reported a net loss of $53.7 million, primarily as a
result of increases in the provision for loan losses of $44.4 million, foreclosure losses of $1.6
million, and salaries and benefits of $1.5 million. These expense increases were partially offset
by a decrease in losses on portfolio securities of $7.1 million compared to the same period in 2009.
For the six months ended June 30, 2010, we reported a net loss of $59.5 million, primarily as a
result of increases in the provision for loan losses of $50.1 million, foreclosure losses of $3.6
million, and salaries and benefits of $3.4 million. These expense increases were partially offset
by a decrease in security losses of $12.8 million compared to the same period in 2009.
Changes in other components of our operations are discussed in the various sections that follow.
The following table presents key data for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the |
|
For the |
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
|
(Dollars in thousands, except per share data) |
Net loss |
|
$ |
(53,722 |
) |
|
$ |
(5,694 |
) |
|
$ |
(59,462 |
) |
|
$ |
(9,268 |
) |
Net loss applicable to common shareholders |
|
|
(54,621 |
) |
|
|
(6,861 |
) |
|
|
(60,361 |
) |
|
|
(11,578 |
) |
Net loss per common share (diluted) |
|
|
(4.44 |
) |
|
|
(0.68 |
) |
|
|
(5.04 |
) |
|
|
(1.15 |
) |
Net interest margin |
|
|
3.02 |
% |
|
|
3.22 |
% |
|
|
3.10 |
% |
|
|
3.17 |
% |
Net interest spread |
|
|
2.89 |
|
|
|
3.04 |
|
|
|
2.97 |
|
|
|
2.97 |
|
Return on average assets |
|
|
(6.42 |
) |
|
|
(0.72 |
) |
|
|
(3.62 |
) |
|
|
(0.60 |
) |
Return on average stockholders equity |
|
|
(113.06 |
) |
|
|
(9.28 |
) |
|
|
(62.73 |
) |
|
|
(7.51 |
) |
Common book value per share |
|
$ |
10.24 |
|
|
$ |
16.66 |
|
|
$ |
10.24 |
|
|
$ |
16.66 |
|
35
The following tables depict, on a taxable equivalent basis for the periods indicated, certain
information related to our average balance sheet and our average yields on assets and average costs
of liabilities. Average yields are calculated by dividing income or expense by the average balance
of the corresponding assets or liabilities. Average balances have been calculated on a daily basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
Average |
|
|
Income/ |
|
|
Yield/ |
|
|
Average |
|
|
Income/ |
|
|
Yield/ |
|
|
|
Balance |
|
|
Expense |
|
|
Rate |
|
|
Balance |
|
|
Expense |
|
|
Rate |
|
|
|
(Dollars in thousands) |
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net of unearned income (1) |
|
$ |
2,565,992 |
|
|
$ |
36,212 |
|
|
|
5.66 |
% |
|
$ |
2,459,020 |
|
|
$ |
35,959 |
|
|
|
5.87 |
% |
Investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
258,851 |
|
|
|
2,625 |
|
|
|
4.07 |
|
|
|
280,655 |
|
|
|
3,778 |
|
|
|
5.40 |
|
Tax-exempt (2) |
|
|
29,781 |
|
|
|
476 |
|
|
|
6.41 |
|
|
|
41,510 |
|
|
|
658 |
|
|
|
6.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
|
288,632 |
|
|
|
3,101 |
|
|
|
4.31 |
|
|
|
322,165 |
|
|
|
4,436 |
|
|
|
5.52 |
|
Federal funds sold |
|
|
2,690 |
|
|
|
2 |
|
|
|
0.30 |
|
|
|
3,498 |
|
|
|
2 |
|
|
|
0.23 |
|
Other investments |
|
|
181,794 |
|
|
|
393 |
|
|
|
0.87 |
|
|
|
71,650 |
|
|
|
456 |
|
|
|
2.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
3,039,108 |
|
|
|
39,708 |
|
|
|
5.24 |
|
|
|
2,856,333 |
|
|
|
40,853 |
|
|
|
5.74 |
|
Noninterest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
69,357 |
|
|
|
|
|
|
|
|
|
|
|
81,951 |
|
|
|
|
|
|
|
|
|
Premises and equipment |
|
|
102,204 |
|
|
|
|
|
|
|
|
|
|
|
105,519 |
|
|
|
|
|
|
|
|
|
Accrued interest and other assets |
|
|
187,145 |
|
|
|
|
|
|
|
|
|
|
|
160,060 |
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
|
(43,709 |
) |
|
|
|
|
|
|
|
|
|
|
(29,889 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
3,354,105 |
|
|
|
|
|
|
|
|
|
|
$ |
3,173,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
$ |
657,265 |
|
|
$ |
2,060 |
|
|
|
1.26 |
% |
|
$ |
672,869 |
|
|
$ |
2,172 |
|
|
|
1.29 |
% |
Savings deposits |
|
|
344,485 |
|
|
|
1,117 |
|
|
|
1.30 |
|
|
|
235,946 |
|
|
|
904 |
|
|
|
1.54 |
|
Time deposits |
|
|
1,520,740 |
|
|
|
8,275 |
|
|
|
2.18 |
|
|
|
1,402,255 |
|
|
|
11,033 |
|
|
|
3.16 |
|
Other borrowings |
|
|
267,839 |
|
|
|
2,542 |
|
|
|
3.81 |
|
|
|
292,474 |
|
|
|
2,597 |
|
|
|
3.56 |
|
Subordinated debentures (2) |
|
|
84,487 |
|
|
|
2,843 |
|
|
|
13.50 |
|
|
|
60,795 |
|
|
|
1,206 |
|
|
|
7.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
2,874,816 |
|
|
|
16,837 |
|
|
|
2.35 |
|
|
|
2,664,339 |
|
|
|
17,912 |
|
|
|
2.70 |
|
Noninterest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
269,095 |
|
|
|
|
|
|
|
|
|
|
|
245,819 |
|
|
|
|
|
|
|
|
|
Accrued interest and other liabilities |
|
|
19,600 |
|
|
|
|
|
|
|
|
|
|
|
17,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
3,163,511 |
|
|
|
|
|
|
|
|
|
|
|
2,927,821 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
190,594 |
|
|
|
|
|
|
|
|
|
|
|
246,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
3,354,105 |
|
|
|
|
|
|
|
|
|
|
$ |
3,173,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/net interest spread |
|
|
|
|
|
|
22,871 |
|
|
|
2.89 |
% |
|
|
|
|
|
|
22,941 |
|
|
|
3.04 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net yield on earning assets |
|
|
|
|
|
|
|
|
|
|
3.02 |
% |
|
|
|
|
|
|
|
|
|
|
3.22 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable equivalent adjustment (2): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities |
|
|
|
|
|
|
(162 |
) |
|
|
|
|
|
|
|
|
|
|
(224 |
) |
|
|
|
|
Interest expense on subordinated debentures |
|
|
|
|
|
|
444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
23,153 |
|
|
|
|
|
|
|
|
|
|
$ |
22,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
Average |
|
|
Income/ |
|
|
Yield/ |
|
|
Average |
|
|
Income/ |
|
|
Yield/ |
|
|
|
Balance |
|
|
Expense |
|
|
Rate |
|
|
Balance |
|
|
Expense |
|
|
Rate |
|
|
|
(Dollars in thousands) |
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net of unearned income (1) |
|
$ |
2,552,351 |
|
|
$ |
72,554 |
|
|
|
5.73 |
% |
|
$ |
2,425,767 |
|
|
$ |
70,911 |
|
|
|
5.89 |
% |
Investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
256,332 |
|
|
|
5,536 |
|
|
|
4.36 |
|
|
|
291,255 |
|
|
|
7,787 |
|
|
|
5.39 |
|
Tax-exempt (2) |
|
|
30,023 |
|
|
|
948 |
|
|
|
6.37 |
|
|
|
40,898 |
|
|
|
1,307 |
|
|
|
6.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
|
286,355 |
|
|
|
6,484 |
|
|
|
4.57 |
|
|
|
332,153 |
|
|
|
9,094 |
|
|
|
5.52 |
|
Federal funds sold |
|
|
2,452 |
|
|
|
3 |
|
|
|
0.25 |
|
|
|
5,359 |
|
|
|
7 |
|
|
|
0.26 |
|
Other investments |
|
|
155,115 |
|
|
|
765 |
|
|
|
0.99 |
|
|
|
64,739 |
|
|
|
818 |
|
|
|
2.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
2,996,273 |
|
|
|
79,806 |
|
|
|
5.37 |
|
|
|
2,828,018 |
|
|
|
80,830 |
|
|
|
5.76 |
|
Noninterest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
71,594 |
|
|
|
|
|
|
|
|
|
|
|
76,104 |
|
|
|
|
|
|
|
|
|
Premises and equipment |
|
|
102,555 |
|
|
|
|
|
|
|
|
|
|
|
105,300 |
|
|
|
|
|
|
|
|
|
Accrued interest and other assets |
|
|
185,932 |
|
|
|
|
|
|
|
|
|
|
|
156,807 |
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
|
(42,764 |
) |
|
|
|
|
|
|
|
|
|
|
(29,508 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
3,313,590 |
|
|
|
|
|
|
|
|
|
|
$ |
3,136,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
$ |
661,245 |
|
|
$ |
4,114 |
|
|
|
1.25 |
% |
|
$ |
657,286 |
|
|
$ |
4,366 |
|
|
|
1.34 |
% |
Savings deposits |
|
|
321,148 |
|
|
|
2,090 |
|
|
|
1.31 |
|
|
|
217,655 |
|
|
|
1,825 |
|
|
|
1.69 |
|
Time deposits |
|
|
1,501,486 |
|
|
|
16,773 |
|
|
|
2.25 |
|
|
|
1,380,972 |
|
|
|
22,811 |
|
|
|
3.33 |
|
Other borrowings |
|
|
268,403 |
|
|
|
5,064 |
|
|
|
3.80 |
|
|
|
312,812 |
|
|
|
4,938 |
|
|
|
3.18 |
|
Subordinated
debentures (2) |
|
|
84,372 |
|
|
|
5,674 |
|
|
|
13.56 |
|
|
|
60,823 |
|
|
|
2,400 |
|
|
|
7.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
$ |
2,836,654 |
|
|
|
33,715 |
|
|
|
2.40 |
|
|
$ |
2,629,548 |
|
|
|
36,340 |
|
|
|
2.79 |
|
Noninterest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
265,636 |
|
|
|
|
|
|
|
|
|
|
|
238,722 |
|
|
|
|
|
|
|
|
|
Accrued interest and other liabilities |
|
|
20,158 |
|
|
|
|
|
|
|
|
|
|
|
19,594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
3,122,448 |
|
|
|
|
|
|
|
|
|
|
|
2,887,864 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
191,142 |
|
|
|
|
|
|
|
|
|
|
|
248,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
3,313,590 |
|
|
|
|
|
|
|
|
|
|
$ |
3,136,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/net interest spread |
|
|
|
|
|
|
46,091 |
|
|
|
2.97 |
% |
|
|
|
|
|
|
44,490 |
|
|
|
2.97 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net yield on earning assets |
|
|
|
|
|
|
|
|
|
|
3.10 |
% |
|
|
|
|
|
|
|
|
|
|
3.17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable equivalent adjustment: (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities |
|
|
|
|
|
|
(322 |
) |
|
|
|
|
|
|
|
|
|
|
(444 |
) |
|
|
|
|
Interest expense on subordinated debentures |
|
|
|
|
|
|
889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
46,658 |
|
|
|
|
|
|
|
|
|
|
$ |
44,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Nonaccrual loans are included in loans, net of unearned income. No adjustment has been
made for these loans in the calculation of yields. |
|
(2) |
|
Interest income/expense and yields are presented on a fully taxable equivalent basis using a
tax rate of 34%. |
37
The largest component of our net income is net interest income, which is the difference between the
income earned on interest-earning assets and interest paid on deposits and borrowings. The
following table summarizes the changes in the components of net interest income for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in |
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2010 vs. 2009 |
|
|
2010 vs. 2009 |
|
|
|
Average |
|
|
Income/ |
|
|
Yield/ |
|
|
Average |
|
|
Income/ |
|
|
Yield/ |
|
|
|
Balance |
|
|
Expense |
|
|
Rate |
|
|
Balance |
|
|
Expense |
|
|
Rate |
|
|
|
(Dollars in thousands) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net of unearned income |
|
$ |
106,972 |
|
|
$ |
253 |
|
|
|
(0.21 |
)% |
|
$ |
126,584 |
|
|
$ |
1,643 |
|
|
|
(0.16 |
)% |
Investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
(21,804 |
) |
|
|
(1,153 |
) |
|
|
(1.33 |
) |
|
|
(34,923 |
) |
|
|
(2,251 |
) |
|
|
(1.03 |
) |
Tax-exempt |
|
|
(11,729 |
) |
|
|
(182 |
) |
|
|
0.05 |
|
|
|
(10,875 |
) |
|
|
(359 |
) |
|
|
(0.07 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
|
(33,533 |
) |
|
|
(1,335 |
) |
|
|
(1.21 |
) |
|
|
(45,798 |
) |
|
|
(2,610 |
) |
|
|
(0.95 |
) |
Federal funds sold |
|
|
(808 |
) |
|
|
|
|
|
|
0.07 |
|
|
|
(2,907 |
) |
|
|
(4 |
) |
|
|
(0.01 |
) |
Other investments |
|
|
110,144 |
|
|
|
(63 |
) |
|
|
(1.68 |
) |
|
|
90,376 |
|
|
|
(53 |
) |
|
|
(1.56 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
$ |
182,775 |
|
|
|
(1,145 |
) |
|
|
(0.50 |
) |
|
$ |
168,255 |
|
|
|
(1,024 |
) |
|
|
(0.39 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
$ |
(15,604 |
) |
|
$ |
(112 |
) |
|
|
(0.03 |
)% |
|
$ |
3,959 |
|
|
$ |
(252 |
) |
|
|
(0.09 |
)% |
Savings deposits |
|
|
108,539 |
|
|
|
213 |
|
|
|
(0.24 |
) |
|
|
103,493 |
|
|
|
265 |
|
|
|
(0.38 |
) |
Time deposits |
|
|
118,485 |
|
|
|
(2,758 |
) |
|
|
(0.98 |
) |
|
|
120,514 |
|
|
|
(6,038 |
) |
|
|
(1.08 |
) |
Other borrowings |
|
|
(24,635 |
) |
|
|
(55 |
) |
|
|
0.25 |
|
|
|
(44,409 |
) |
|
|
126 |
|
|
|
0.62 |
|
Subordinated debentures |
|
|
23,692 |
|
|
|
1,637 |
|
|
|
5.54 |
|
|
|
23,549 |
|
|
|
3,274 |
|
|
|
5.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
$ |
210,477 |
|
|
|
(1,075 |
) |
|
|
(0.35 |
) |
|
$ |
207,106 |
|
|
|
(2,625 |
) |
|
|
(0.39 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/net interest spread |
|
|
|
|
|
|
(70 |
) |
|
|
(0.15 |
)% |
|
|
|
|
|
|
1,601 |
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net yield on earning assets |
|
|
|
|
|
|
|
|
|
|
(0.20 |
)% |
|
|
|
|
|
|
|
|
|
|
(0.07 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable equivalent adjustment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities |
|
|
|
|
|
|
62 |
|
|
|
|
|
|
|
|
|
|
|
122 |
|
|
|
|
|
Interest expense on subordinated
debentures |
|
|
|
|
|
|
444 |
|
|
|
|
|
|
|
|
|
|
|
889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
436 |
|
|
|
|
|
|
|
|
|
|
$ |
2,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
The following table sets forth, on a taxable equivalent basis, the effect that the varying
levels of interest-earning assets and interest-bearing liabilities and the applicable rates have
had on changes in net interest income for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2010 vs. 2009 (1) |
|
|
2010 vs. 2009 (1) |
|
|
|
Increase |
|
|
Changes Due To |
|
|
Increase |
|
|
Changes Due To |
|
|
|
(Decrease) |
|
|
Rate |
|
|
Volume |
|
|
(Decrease) |
|
|
Rate |
|
|
Volume |
|
|
|
(Dollars in thousands) |
|
|
(Dollars in thousands) |
|
Increase (decrease) in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from interest-earning
assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans |
|
$ |
253 |
|
|
$ |
(1,299 |
) |
|
$ |
1,552 |
|
|
$ |
1,643 |
|
|
$ |
(1,969 |
) |
|
$ |
3,612 |
|
Interest on securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
(1,153 |
) |
|
|
(877 |
) |
|
|
(276 |
) |
|
|
(2,251 |
) |
|
|
(1,383 |
) |
|
|
(868 |
) |
Tax-exempt |
|
|
(182 |
) |
|
|
5 |
|
|
|
(187 |
) |
|
|
(359 |
) |
|
|
(14 |
) |
|
|
(345 |
) |
Interest on federal funds |
|
|
|
|
|
|
1 |
|
|
|
(1 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
(4 |
) |
Interest on other investments |
|
|
(63 |
) |
|
|
(439 |
) |
|
|
376 |
|
|
|
(53 |
) |
|
|
(713 |
) |
|
|
660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
(1,145 |
) |
|
|
(2,609 |
) |
|
|
1,464 |
|
|
|
(1,024 |
) |
|
|
(4,079 |
) |
|
|
3,055 |
|
Expense from interest-bearing
liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on demand deposits |
|
|
(112 |
) |
|
|
(56 |
) |
|
|
(56 |
) |
|
|
(252 |
) |
|
|
(280 |
) |
|
|
28 |
|
Interest on savings deposits |
|
|
213 |
|
|
|
(157 |
) |
|
|
370 |
|
|
|
265 |
|
|
|
(472 |
) |
|
|
737 |
|
Interest on time deposits |
|
|
(2,758 |
) |
|
|
(3,635 |
) |
|
|
877 |
|
|
|
(6,038 |
) |
|
|
(7,894 |
) |
|
|
1,856 |
|
Interest on other borrowings |
|
|
(55 |
) |
|
|
174 |
|
|
|
(229 |
) |
|
|
126 |
|
|
|
883 |
|
|
|
(757 |
) |
Interest on subordinated
debentures |
|
|
1,637 |
|
|
|
1,049 |
|
|
|
588 |
|
|
|
3,274 |
|
|
|
2,112 |
|
|
|
1,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
(1,075 |
) |
|
|
(2,625 |
) |
|
|
1,550 |
|
|
|
(2,625 |
) |
|
|
(5,651 |
) |
|
|
3,026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
(70 |
) |
|
$ |
16 |
|
|
$ |
(86 |
) |
|
$ |
1,601 |
|
|
$ |
1,572 |
|
|
$ |
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The change in interest due to both rate and volume has been allocated to rate and volume
changes in proportion to the relationship of the absolute dollar amounts of the changes in
each. |
39
Noninterest income
Noninterest income increased $7.7 million and $14.1 million to $8.5 million and $14.7 million for
the three and six months ended June 30, 2010, respectively, compared to $0.8 million and $0.6
million for the three and six months ended June 30, 2009, respectively. The increases were
primarily due to reductions in OTTI, increases in mortgage banking income and a gain on the
exchange of trust preferred securities for shares of our common
stock. See Financial Condition
Investment Securities for additional discussion. The components of noninterest income for the
periods indicated consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
Service charges and fees on deposits |
|
$ |
2,335 |
|
|
$ |
2,524 |
|
|
|
(7.49 |
)% |
Mortgage banking income |
|
|
2,667 |
|
|
|
2,271 |
|
|
|
17.44 |
|
Investment securities gains (losses) |
|
|
1,356 |
|
|
|
(5,781 |
) |
|
|
NCM |
|
Change in fair value of derivatives |
|
|
(239 |
) |
|
|
(67 |
) |
|
|
NCM |
|
Increase in cash surrender value of life insurance |
|
|
558 |
|
|
|
540 |
|
|
|
3.33 |
|
Gain on exchange of subordinated debt for common stock |
|
|
507 |
|
|
|
|
|
|
|
NCM |
|
Other noninterest income |
|
|
1,344 |
|
|
|
1,340 |
|
|
|
0.30 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
8,528 |
|
|
$ |
827 |
|
|
|
NCM |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
Service charges and fees on deposits |
|
$ |
4,551 |
|
|
$ |
4,911 |
|
|
|
(7.33 |
)% |
Mortgage banking income |
|
|
4,677 |
|
|
|
3,961 |
|
|
|
18.08 |
|
Investment securities gains (losses) |
|
|
1,158 |
|
|
|
(11,626 |
) |
|
|
NCM |
|
Change in fair value of derivatives |
|
|
(29 |
) |
|
|
(266 |
) |
|
|
NCM |
|
Increase in cash surrender value of life insurance |
|
|
1,126 |
|
|
|
1,055 |
|
|
|
6.73 |
|
Gain on exchange of subordinated debt for common stock |
|
|
507 |
|
|
|
|
|
|
|
NCM |
|
Other noninterest income |
|
|
2,750 |
|
|
|
2,557 |
|
|
|
7.55 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
14,740 |
|
|
$ |
592 |
|
|
|
NCM |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
NCM not considered meaningful. |
40
Noninterest expenses
Noninterest expenses increased $3.7 million, or 13.5%, and $9.5 million, or 18.3%, to $31.5 million
and $61.3 million for the three and six months ended June 30, 2010, respectively, from $27.8
million and $51.9 million for the three and six months ended June 30, 2009, respectively. These
increases were primarily due to increased foreclosure losses, salaries and employee benefits and
professional fees. Our foreclosure losses relate to various costs incurred to acquire, maintain
and dispose of other real estate acquired through foreclosure. These costs are directly related to
the volume of foreclosures, which have increased due to the negative credit cycle. These costs
could increase in future periods, depending on the duration of the credit cycle, and have a
material impact on our operating expenses. The increase in salaries and employee benefits was
primarily related to the expansion of our mortgage operations. Noninterest expenses included the
following for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
|
(Dollars in thousands) |
|
Noninterest Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
$ |
13,840 |
|
|
$ |
12,304 |
|
|
|
12.48 |
% |
Occupancy, furniture and equipment expense |
|
|
4,850 |
|
|
|
4,503 |
|
|
|
7.71 |
|
Amortization of core deposit intangibles |
|
|
869 |
|
|
|
985 |
|
|
|
(11.78 |
) |
FDIC assessments |
|
|
1,853 |
|
|
|
1,932 |
|
|
|
(4.09 |
) |
Foreclosure losses |
|
|
3,358 |
|
|
|
1,748 |
|
|
|
92.11 |
|
Professional fees |
|
|
1,438 |
|
|
|
1,027 |
|
|
|
40.02 |
|
Insurance expense |
|
|
789 |
|
|
|
612 |
|
|
|
28.92 |
|
Postage, stationery and supplies |
|
|
743 |
|
|
|
760 |
|
|
|
(2.24 |
) |
Communications expense |
|
|
780 |
|
|
|
760 |
|
|
|
2.63 |
|
Advertising expense |
|
|
625 |
|
|
|
787 |
|
|
|
(20.58 |
) |
Other operating expense |
|
|
2,388 |
|
|
|
2,377 |
|
|
|
0.46 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
31,533 |
|
|
$ |
27,795 |
|
|
|
13.45 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
|
(Dollars in thousands) |
|
Noninterest Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
$ |
28,040 |
|
|
$ |
24,613 |
|
|
|
13.92 |
% |
Occupancy, furniture and equipment expense |
|
|
9,613 |
|
|
|
8,919 |
|
|
|
7.78 |
|
Amortization of core deposit intangibles |
|
|
1,739 |
|
|
|
1,971 |
|
|
|
(11.77 |
) |
FDIC assessment |
|
|
3,233 |
|
|
|
2,389 |
|
|
|
35.33 |
|
Foreclosure losses |
|
|
5,935 |
|
|
|
2,317 |
|
|
|
156.15 |
|
Professional fees |
|
|
2,818 |
|
|
|
1,792 |
|
|
|
57.25 |
|
Insurance expense |
|
|
1,527 |
|
|
|
1,221 |
|
|
|
25.06 |
|
Postage, stationery and supplies |
|
|
1,464 |
|
|
|
1,487 |
|
|
|
(1.55 |
) |
Communications expense |
|
|
1,435 |
|
|
|
1,563 |
|
|
|
(8.19 |
) |
Advertising expense |
|
|
1,296 |
|
|
|
1,337 |
|
|
|
(3.07 |
) |
Other operating expense |
|
|
4,242 |
|
|
|
4,250 |
|
|
|
(0.19 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
61,342 |
|
|
$ |
51,859 |
|
|
|
18.29 |
% |
|
|
|
|
|
|
|
|
|
|
41
Income tax
We recognized income tax expense of $3.5 million and $0.0 million for the three and six months
ended June 30, 2010, respectively, compared to an income tax benefit of $4.5 million and $7.4
million for the three and six months ended June 30, 2009, respectively. The difference between the
effective tax rates in 2010 and the blended federal statutory rate of 34% and state tax rates
between 5% and 6% was primarily due to the recognition of an additional $22.0 million valuation
allowance against our deferred tax assets (DTAs). Our total valuation allowance was $23.2
million at June 30, 2010. The difference between the effective and statutory tax rates in 2009 was
primarily due to certain tax-exempt income from investments and income reported from insurance
policies.
Deferred income tax assets and liabilities are determined using the balance sheet method. Under
this method, the net deferred tax assets and liabilities are determined based on temporary
differences between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to reverse. These calculations are based on many complex
factors, including estimates of the timing of reversals of temporary differences, the
interpretation of federal and state income tax laws, and a determination of the differences between
the tax and the financial reporting basis of assets and liabilities. Actual results could differ
significantly from the estimates and interpretations used in determining the current and deferred
income tax assets and liabilities. See Part II, Item 1A.
Risk FactorsRisks Relating to Our Business
elsewhere in this report.
The recognition of DTAs is based upon managements judgment that realization of the asset is more
likely than not. Managements judgment is based on estimates concerning various future events and
uncertainties, including future reversals of existing taxable temporary differences, the timing and
amount of future income earned by our subsidiaries, and the implementation of various tax planning
strategies to maximize realization of the DTAs. A complete discussion of managements assessment of
the realizability of our DTAs is included in our 2009 Annual Report on Form 10-K under the heading
Critical Accounting Estimates in Managements Discussion and Analysis and in Note 14 to the 2009
consolidated financial statements.
Management evaluates the realizability of DTAs quarterly and, if necessary, adjusts the valuation
allowance accordingly. Based on the net loss incurred in the second quarter, management
has revised its assessment of the realizablity of the DTAs as of June 30, 2010 and recorded a $23.2
million valuation allowance. As previously disclosed in our 2009 Annual Report on Form 10-K,
forecasted taxable income is based on several economic scenarios which have been stressed in
varying degrees to reflect slower economic recovery than currently
anticipated by management. Under the model, this results in additional credit losses with a corresponding impact on the net interest
margin. Each scenario is assigned an individual probability of this occurring each year, with the final
forecast comprising the scenarios that exceed cumulative probability of 50% (the more likely than
not threshold) in any year. Based on the second quarter loss, management revised these assigned
probabilities, which reduced the amount of projected taxable income exceeding the more likely than
not threshold. This required management to increase the valuation allowance. Additionally,
management may further increase the valuation allowance in the near term if estimates of future taxable
income are reduced due to further deteriorations in market conditions or the economy, which could
produce additional credit losses within the loan and investment portfolios.
Provision for Loan Losses and Loan Charge-offs
The provision for loan losses was $50.4 million for the three months ended June 30, 2010, compared
to $9.1 million for the three months ended March 31, 2010 and $6.0 million for the three months
ended June 30, 2009. During the three months ended June 30, 2010, we had net charged-off loans
totaling $14.1 million, compared to net charged-off loans of $7.8 million and $2.3 million for the
three months ended March 31, 2010 and June 30, 2009, respectively. The annualized ratio of net
charged-off loans to average loans was 2.26% for the three months ended June 30, 2010, compared to
1.27% and 0.39% for the three months ended March 31, 2010 and June 30, 2009, respectively. The
allowance for loan losses was $79.4 million, or 3.20% of loans, net of unearned income, as of June
30, 2010, compared to $43.2 million, or 1.72%, and $33.5 million, or 1.40%, as of March 31, 2010
and June 30, 2009, respectively.
42
The following tables show the provision for loan losses, gross and net charge-offs, and the level
of allowance for loan losses that resulted from our ongoing assessment of the loan portfolio for
the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Three Months Ended |
|
|
|
June 30, |
|
|
March 31, |
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2010 |
|
|
2009 |
|
|
2009 |
|
|
|
(Dollars in thousands) |
|
Beginning allowance for loan losses |
|
$ |
43,190 |
|
|
$ |
41,884 |
|
|
$ |
29,870 |
|
|
$ |
34,336 |
|
Provision for loan losses |
|
|
50,363 |
|
|
|
9,127 |
|
|
|
5,982 |
|
|
|
13,947 |
|
Total charge-offs |
|
|
14,633 |
|
|
|
8,087 |
|
|
|
2,513 |
|
|
|
6,793 |
|
Total recoveries |
|
|
(505 |
) |
|
|
(266 |
) |
|
|
(165 |
) |
|
|
(394 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
14,128 |
|
|
|
7,821 |
|
|
|
2,348 |
|
|
|
6,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance for loan losses |
|
$ |
79,425 |
|
|
$ |
43,190 |
|
|
$ |
33,504 |
|
|
$ |
41,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, net of unearned income |
|
$ |
2,482,560 |
|
|
$ |
2,505,465 |
|
|
$ |
2,398,471 |
|
|
$ |
2,472,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to total
loans, net of unearned income |
|
|
3.20 |
% |
|
|
1.72 |
% |
|
|
1.40 |
% |
|
|
1.69 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Six Months Ended |
|
|
Year Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2009 |
|
|
|
(Dollars in thousands) |
|
Beginning allowance for loan losses |
|
$ |
41,884 |
|
|
$ |
28,850 |
|
|
$ |
28,850 |
|
Provision for loan losses |
|
|
59,490 |
|
|
|
9,434 |
|
|
|
28,550 |
|
Total charge-offs |
|
|
22,720 |
|
|
|
5,322 |
|
|
|
16,661 |
|
Total recoveries |
|
|
(771 |
) |
|
|
(542 |
) |
|
|
(1,145 |
) |
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
21,949 |
|
|
|
4,780 |
|
|
|
15,516 |
|
|
|
|
|
|
|
|
|
|
|
Ending allowance for loan losses |
|
$ |
79,425 |
|
|
$ |
33,504 |
|
|
$ |
41,884 |
|
|
|
|
|
|
|
|
|
|
|
See Financial Condition Allowance for Loan Losses for additional discussion
Results of Segment Operations
We have two reportable segments, the Alabama Region and the Florida Region. The Alabama Region
consists of operations located throughout Alabama. The Florida Region consists of operations
located primarily in the Tampa Bay area and panhandle region of
Florida. Please see Note 7
Segment Reporting in the accompanying notes to consolidated financial statements included elsewhere
in this report for additional disclosure regarding our segment reporting. Operating profit (loss)
by segment is presented below for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the |
|
|
For the |
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(Dollars in thousands) |
|
Alabama region |
|
$ |
484 |
|
|
$ |
600 |
|
|
$ |
2,882 |
|
|
$ |
807 |
|
Florida region |
|
|
(6,820 |
) |
|
|
2,592 |
|
|
|
(9,815 |
) |
|
|
4,964 |
|
Administrative and other |
|
|
(43,879 |
) |
|
|
(13,425 |
) |
|
|
(52,501 |
) |
|
|
(22,426 |
) |
Income tax expense (benefit) |
|
|
3,507 |
|
|
|
(4,539 |
) |
|
|
28 |
|
|
|
(7,387 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net loss |
|
$ |
(53,722 |
) |
|
$ |
(5,694 |
) |
|
$ |
(59,462 |
) |
|
$ |
(9,268 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
43
Alabama Region
Operating income was $0.5 million and $2.9 million for the three and six months ended June 30,
2010, respectively, compared to $0.6 million and $0.8 million for the three and six months ended
June 30, 2009, respectively, primarily due to an increase in net interest income, partially offset
by an increase in the provision for loan losses.
Net interest income for the three and six months ended June 30, 2010 increased $1.0 million and
$3.1 million, or 11.3% and 18.2%, respectively, compared to the same periods in the prior year. The
increase was the result of a decrease in the average cost of interest-bearing liabilities. See the
analysis of net interest income included in the section captioned Net Interest Income elsewhere
in this discussion.
The provision for loan losses for the three and six months ended June 30, 2010 increased $0.5
million and decreased $0.2 million, or 32.6% and 5.7%, respectively, compared to the same periods
in the prior year. See the analysis of the provision for loan losses included in the section
captioned Provision for Loan Losses and Loan Charge-offs elsewhere in this discussion.
Noninterest income for the three and six months ended June 30, 2010 decreased $0.2 million and $0.3
million, or 8.9% and 7.1%, respectively, compared to the same periods in the prior year, primarily
due to a decline in service charges. See the analysis of noninterest income in the section
captioned Noninterest Income included elsewhere in this discussion.
Noninterest expense for the three and six months ended June 30, 2010 increased $0.5 million and
$0.9 million, or 5.1%, for both periods, compared to the same periods in the prior year. This was
primarily the result of an increase in the costs of foreclosed assets and was partially offset by a
decline in salaries. See additional analysis of noninterest expense included in the section
captioned Noninterest Expense included elsewhere in this discussion.
Florida Region
The Florida segment experienced an operating loss of $6.8 million and $9.8 million for the three
and six months ended June 30, 2010, respectively, compared to operating income of $2.6 million and
$5.0 million for the same periods in the prior year. The decrease in profits was primarily the
result of an increase in the provision for loan losses.
Net interest income for the three and six months ended June 30, 2010 increased $1.5 million and
$3.2 million, or 16.5% and 17.3%, respectively, compared to the same periods in the prior year. The
increase was the result of a decrease in the average cost of interest-bearing liabilities. See the
analysis of net interest income included in the section captioned Net Interest Income elsewhere
in this discussion.
The provision for loan losses for the three and six months ended June 30, 2010 increased $10.3
million and $16.0 million, respectively, compared to the same periods in the prior year. See the
analysis of the provision for loan losses included in the section captioned Provision for Loan
Losses and Loan Charge-offs elsewhere in this discussion.
Noninterest income for the three and six months ended June 30, 2010 decreased $0.1 million and $0.1
million, or 14.8% and 13.5%, respectively, compared to the same periods in the prior year,
primarily due to a decline in service charges. See the analysis of noninterest income in the
section captioned Noninterest Income included elsewhere in this discussion.
Noninterest expense for the three and six months ended June 30, 2010 increased $0.6 million and
$1.8 million, or 10.6% and 15.9%, respectively, compared to the same periods in the prior year,
primarily as a result of an increase in the costs of foreclosed assets and professional fees. See
additional analysis of noninterest expense included in the section captioned Noninterest Expense
included elsewhere in this discussion.
44
Fair Value Measurements
We measure fair value at the price we would receive by selling an asset or pay to transfer a
liability in an orderly transaction between market participants at the measurement date. We
prioritize the assumptions that market participants would use in pricing the asset or liability
(the inputs) into a three-tier fair value hierarchy. This fair value hierarchy gives the highest
priority (Level 1) to quoted prices in active markets for identical assets or liabilities and the
lowest priority (Level 3) to unobservable inputs for which little or no market data exists,
requiring companies to develop their own assumptions. Observable inputs that do not meet the
criteria of Level 1, and include quoted prices for similar assets or liabilities in active markets
or quoted prices for identical assets and liabilities in markets that are not active, are
categorized as Level 2. Level 3 inputs are those that reflect managements estimates about the
assumptions market participants would use in pricing the asset or liability, based on the best
information available in the circumstances. Valuation techniques for assets and liabilities
measured using Level 3 inputs may include methodologies such as the market approach, the income
approach or the cost approach, and may use unobservable inputs such as projections, estimates and
managements interpretation of current market data. These unobservable inputs are only utilized to
the extent that observable inputs are not available or cost-effective to obtain.
As of June 30, 2010 and December 31, 2009, we had $266.7 million, or 46.0%, and $213.8 million, or
49.0%, respectively, of total assets valued at fair value that are considered Level 3 valuations
using unobservable inputs. As shown in Note 12 to the consolidated financial statements,
available-for-sale securities with a carrying value of $13.2 million and $13.3 million, as of June
30, 2010 and December 31, 2009, respectively, were included in the Level 3 assets category measured
at fair value on a recurring basis. These securities consist primarily of certain private-label
mortgage-backed securities (MBS) and collateralized debt obligations (CDOs) backed by pooled trust
preferred securities and a single issuers trust preferred security. As the market for these
securities became less active and pricing less reliable, management determined that the trust
preferred securities should be transferred to a Level 3 category during the third quarter of 2008,
and that six private-label MBS be transferred during the second and third
quarters of 2009.
Management measures fair value on the trust preferred securities based on various spreads to LIBOR
determined after its review of applicable financial data and credit ratings (See Financial
Condition Investment Securities below for additional
discussion). As of June 30, 2010, the fair
values of five private-label MBS totaling $6.6 million were measured using
Level 3 inputs because the market for them has become illiquid, as indicated by few, if any, trades
during the period. Prior to June 30, 2009, these securities were measured using Level 2 inputs.
The assumptions used in the valuation model include expected future default rates, loss severity
and prepayments. The model also takes into account the structure of
the security, including credit
support. Based on these assumptions, the model calculates and projects the timing and amount of
interest and principal payments expected for the security. The discount rates used in the valuation
model were based on a yield that the market would require for securities with maturities and
risk characteristics similar to the securities being measured (See Financial Condition
Investment Securities Mortgage-backed securities). The
remaining Level 3 assets, totaling $253.5
million, include loans which have been impaired, foreclosed other real estate and other real estate
held for sale, which are valued on a nonrecurring basis based on appraisals of the collateral. The
value of this collateral is based primarily on appraisals by qualified licensed appraisers approved
and hired by management. Appraised and reported values are discounted based on managements
historical knowledge, changes in market conditions from the time of valuation, and/or managements
expertise and knowledge of the client and the clients business. The collateral is reviewed and
evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based
on the same factors identified above. See Note 12 to the condensed consolidated financial
statements for additional disclosures regarding fair value measurements.
Financial Condition
Total assets were $3.358 billion as of June 30, 2010, an increase of $136.5 million, or 4.2%, from
$3.222 billion as of December 31, 2009. Average total assets for the three months ended June 30,
2010 were $3.354 billion, and were funded by average total liabilities of $3.164 billion and
average total stockholders equity of $190.6 million.
Short-term liquid assets
Short-term liquid assets (cash and due from banks, interest-bearing deposits in other banks and
federal funds sold) increased $201.4 million to $301.2 million as of June 30, 2010 from $99.8
million as of December 31, 2009. As of June 30, 2010, short-term liquid assets were 9.0% of total
assets, compared to 3.1% as of December 31, 2009. We continually monitor our liquidity position and
will increase or decrease our short-term liquid assets as we deem necessary. See Liquidity for
additional discussion.
45
Investment Securities
Total investment securities decreased $16.4 million, or 5.7%, to $269.9 million as of June 30,
2010, from $286.3 million as of December 31, 2009. Average investment securities were $288.6
million and $286.4 million for the three and six months ended June 30, 2010,
respectively, compared to $322.2 million and $332.2 million for the same periods in the prior year.
Investment securities were 8.7% of interest-earning assets as of June 30, 2010 compared to 10.0% as
of December 31, 2009. The investment portfolio produced an average taxable equivalent yield of
4.31% and 4.57% for the three and six months ended June 30, 2010, respectively, compared to 5.52%
for both the three and six months ended June 30, 2009, respectively.
During the
second quarter, we sold certain U.S. Agency securities and U.S Agency MBS with combined amortized
cost and market values of $87.4 million and $89.1 million, respectively. We reinvested a portion
of the proceeds into a like amount of U. S Agency MBS guaranteed by
the Government National Mortgage
Association (Ginnie Mae). This repositioning is expected to reduce the duration of the portfolio
and improve risk-based capital. We realized a net gain of approximately $1.7 million. A portion of
these securities had impairment losses of approximately $0.2 million, which we realized in the
first quarter.
Investment Portfolio
The following table presents the carrying value of securities we held as of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale |
|
|
|
June 30, |
|
|
December 31, |
|
|
Percent |
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
|
(Dollars in thousands) |
|
Investment securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agency securities |
|
$ |
18,619 |
|
|
$ |
53,681 |
|
|
|
(65.3 |
)% |
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Agency pass-through |
|
|
112,422 |
|
|
|
163,724 |
|
|
|
(31.3 |
) |
U.S. Agency collateralized mortgage obligation (CMO) |
|
|
84,454 |
|
|
|
12,759 |
|
|
NCM |
|
Private-label CMO |
|
|
14,656 |
|
|
|
16,191 |
|
|
|
(9.5 |
) |
|
|
|
|
|
|
|
|
|
|
Total MBS |
|
|
211,532 |
|
|
|
192,674 |
|
|
|
9.8 |
|
State, county and municipal securities |
|
|
30,661 |
|
|
|
31,462 |
|
|
|
(2.5 |
) |
Corporate obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt |
|
|
4,000 |
|
|
|
4,000 |
|
|
|
|
|
Pooled trust preferred securities |
|
|
3,263 |
|
|
|
3,203 |
|
|
|
1.9 |
|
Single issue trust preferred securities |
|
|
1,755 |
|
|
|
977 |
|
|
|
79.6 |
|
|
|
|
|
|
|
|
|
|
|
Total corporate obligations |
|
|
9,018 |
|
|
|
8,180 |
|
|
|
10.2 |
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
113 |
|
|
|
313 |
|
|
|
(63.9 |
) |
|
|
|
|
|
|
|
|
|
|
Total investment securities available-for-sale |
|
$ |
269,943 |
|
|
$ |
286,310 |
|
|
|
(5.7 |
)% |
|
|
|
|
|
|
|
|
|
|
46
The following table summarizes the investment securities with unrealized losses as of June 30,
2010 by aggregated major security type and length of time in a continuous unrealized loss position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months |
|
More than 12 Months |
|
Total |
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
|
Value |
|
Losses (1) |
|
Value |
|
Losses (1) |
|
Value |
|
Losses (1) |
|
|
(Dollars in thousands) |
Temporarily Impaired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Agency pass-through |
|
$ |
23 |
|
|
$ |
|
|
|
$ |
240 |
|
|
$ |
7 |
|
|
$ |
263 |
|
|
$ |
7 |
|
Private-label CMO |
|
|
|
|
|
|
|
|
|
|
6,338 |
|
|
|
1,096 |
|
|
|
6,338 |
|
|
|
1,096 |
|
|
|
|
|
|
|
|
Total MBS |
|
|
23 |
|
|
|
|
|
|
|
6,578 |
|
|
|
1,103 |
|
|
|
6,601 |
|
|
|
1,103 |
|
State, county and municipal securities |
|
|
5,585 |
|
|
|
116 |
|
|
|
1,602 |
|
|
|
146 |
|
|
|
7,187 |
|
|
|
262 |
|
Corporate obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt |
|
|
|
|
|
|
|
|
|
|
4,000 |
|
|
|
101 |
|
|
|
4,000 |
|
|
|
101 |
|
Single issue trust preferred securities |
|
|
|
|
|
|
|
|
|
|
1,755 |
|
|
|
3,245 |
|
|
|
1,755 |
|
|
|
3,245 |
|
|
|
|
|
|
|
|
Total corporate obligations |
|
|
|
|
|
|
|
|
|
|
5,755 |
|
|
|
3,346 |
|
|
|
5,755 |
|
|
|
3,346 |
|
|
|
|
|
|
|
|
Total temporarily impaired securities |
|
|
5,608 |
|
|
|
116 |
|
|
|
13,935 |
|
|
|
4,595 |
|
|
|
19,543 |
|
|
|
4,711 |
|
Other-than-temporarily Impaired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private-label CMO |
|
|
|
|
|
|
|
|
|
|
3,021 |
|
|
|
1,620 |
|
|
|
3,021 |
|
|
|
1,620 |
|
Corporate obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pooled trust preferred securities |
|
|
|
|
|
|
|
|
|
|
3,263 |
|
|
|
5,025 |
|
|
|
3,263 |
|
|
|
5,025 |
|
|
|
|
|
|
|
|
Total OTTI securities |
|
|
|
|
|
|
|
|
|
|
6,284 |
|
|
|
6,645 |
|
|
|
6,284 |
|
|
|
6,645 |
|
|
|
|
|
|
|
|
Total temporarily and
other-than-temporarily impaired |
|
$ |
5,608 |
|
|
$ |
116 |
|
|
$ |
20,219 |
|
|
$ |
11,240 |
|
|
$ |
25,827 |
|
|
$ |
11,356 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Unrealized losses are included in other comprehensive income (loss), net of unrealized gains
and applicable income taxes. |
Other-Than-Temporary-Impairment
Management evaluates securities for OTTI at least on a quarterly basis. The investment securities
portfolio is evaluated for OTTI by segregating the portfolio into the various segments outlined in
the tables above and applying the appropriate OTTI model. Investment securities classified as
available-for-sale or held-to-maturity are generally evaluated for OTTI according to ASC 320-10
guidance. In addition, certain purchased beneficial interests, which may include private-label
mortgage-backed securities, asset-backed securities and collateralized debt obligations that had
credit ratings of below AA at the time of purchase are evaluated using the model outlined in ASC
325-40 guidance.
In determining OTTI according to FASB guidance, management considers many factors, including: (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 issuer, (3) whether the market decline was
affected by macroeconomic conditions and (4) whether we have the intent to sell the debt security
or more likely than not will be required to sell the debt security before its anticipated recovery.
The assessment of whether an other-than-temporary decline exists involves a high degree of
subjectivity and judgment and is based on the information available to management at a point in
time.
The pooled trust preferred segment of the portfolio uses the OTTI guidance that is specific to
purchased beneficial interests that, on the purchase date, were rated below AA. Under the model, we
compare the present value of the remaining cash flows as estimated at the preceding evaluation date
to the current expected remaining cash flows. An OTTI is deemed to have occurred if there has been
an adverse change in the remaining expected future cash flows.
When OTTI occurs under either model, the amount of the OTTI recognized in earnings depends on
whether an entity intends to sell the security or it is more likely than not it will be required to
sell the security before recovery of its amortized cost basis, less any current-period credit loss.
If an entity intends to sell, or more likely than not will be required to sell, the security before
recovery of its amortized cost basis, less any current-period credit loss, the OTTI is recognized
in earnings at an amount equal to the entire difference
between the investments amortized cost basis and its fair value at the balance sheet date. If an
entity does not intend to sell the security and it is not more likely than not that the entity will
be required to sell the security before recovery of its amortized cost basis less any
47
current-period loss, the OTTI is separated into the amount representing the credit loss and the
amount related to all other factors. The amount of the total OTTI related to the credit loss is
determined based on the present value of cash flows expected to be collected and is recognized in
earnings. The amount of the total OTTI related to other factors is recognized in other
comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI
recognized in earnings becomes the new amortized cost basis of the investment.
As of June 30, 2010, our securities portfolio consisted of 204 securities, 37 of which were in an
unrealized loss position. The majority of unrealized losses are related to our private-label CMOs
and trust preferred securities, as discussed below.
Mortgage-backed securities
As of
June 30, 2010, approximately 93% of the dollar volume of MBS we held
were issued by U.S. government-sponsored entities and agencies, primarily the Federal National
Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac) and
Ginnie Mae, institutions which the government has affirmed its commitment to support, and these
securities have nominal unrealized losses. Our MBS portfolio also includes
10 private-label CMOs with a market value of $14.7 million, which had net unrealized losses of
approximately $2.4 million as of June 30, 2010. These private-label CMOs were rated AAA at
purchase. The following is a summary of the investment grades for these securities (Dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Support |
|
|
Net |
|
Rating |
|
|
|
|
|
Coverage |
|
|
Unrealized |
|
Moody/Fitch |
|
Count |
|
|
Ratios (1) |
|
|
(Loss) Gain |
|
A1/NR |
|
|
1 |
|
|
|
3.06 |
|
|
$ |
(152 |
) |
Aaa/NR |
|
|
1 |
|
|
|
4.25 |
|
|
|
|
|
NR/AAA |
|
|
1 |
|
|
|
3.05 |
|
|
|
110 |
|
NR/AA |
|
|
1 |
|
|
|
3.12 |
|
|
|
(240 |
) |
B2/AA |
|
|
1 |
|
|
|
N/A |
|
|
|
(548 |
) |
B2/NR |
|
|
1 |
|
|
|
4.02 |
|
|
|
(92 |
) |
NR/BBB |
|
|
1 |
|
|
|
2.39 |
|
|
|
(64 |
) |
Caa2/CCC (2) |
|
|
1 |
|
|
|
0.91 |
|
|
|
(1,620 |
) |
NR/C (2) |
|
|
2 |
|
|
|
0.00-0.30 |
|
|
|
186 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
10 |
|
|
|
|
|
|
$ |
(2,420 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Credit Support Coverage Ratio determines the multiple of
credit support, based on assumptions for the performance of the loans within the delinquency
pipeline. The assumptions used are: Current Collateral Support/ ((60 day delinquencies x.60) +
(90 day delinquencies x.70) + (foreclosures x 1.00) + (other real estate x 1.00)) x .40 for
loss severity. |
|
(2) |
|
Includes all private-label CMOs that have OTTI. See discussion that follows. |
During the first quarter of 2010, we recognized an immaterial amount of OTTI on one of the
private-label CMOs. The assumptions used in the valuation model include expected future default
rates, loss severity and prepayments. The model also takes into account the structure of the
security, including credit support. Based on these assumptions, the model calculates and projects
the timing and amount of interest and principal payments expected for the security. As of June 30,
2010, the fair values of the three private-label CMO securities with OTTI totaling $3.9 million
were measured using Level 3 inputs because the market for them has become illiquid, as indicated by
few, if any, trades during the period. The discount rates used in the valuation model were based
on a yield that the market would require for securities with maturities and risk
characteristics similar to the securities being measured (See Note 12 for additional disclosure).
The following table provides additional information regarding these CMO valuations as of June 30,
2010 (Dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-to-Date |
|
|
|
|
|
|
|
Margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual |
|
|
OTTI |
|
|
|
Price |
|
|
Basis |
|
|
|
|
|
|
Cumulative |
|
|
Average |
|
|
60+ Days |
|
|
Credit |
|
|
|
|
|
|
|
Security |
|
(%) |
|
|
Points |
|
|
Yield |
|
|
Default |
|
|
Security |
|
|
Delinquent |
|
|
Portion |
|
|
Other |
|
|
Total |
|
CMO 1 |
|
|
19.13 |
|
|
|
1684 |
|
|
|
18% |
|
|
|
51.87% |
|
|
|
50% |
|
|
|
7.52% |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
CMO 2 |
|
|
19.27 |
|
|
|
1586 |
|
|
|
17% |
|
|
|
48.73% |
|
|
|
45% |
|
|
|
27.89% |
|
|
|
|
|
|
|
|
|
|
|
|
|
CMO 4 |
|
|
60.41 |
|
|
|
1472 |
|
|
|
17% |
|
|
|
29.03% |
|
|
|
45% |
|
|
|
16.48% |
|
|
|
(21 |
) |
|
|
(2 |
) |
|
|
(23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(21 |
) |
|
$ |
(2 |
) |
|
$ |
(23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
During the first quarter of 2010, CMO 3, which had a nominal remaining amortized cost, was
completely written off. We do not expect to recover any future cash flows for CMO 3.
As of June 30, 2010,
management did not intend to sell these securities, nor did management believe that it is more likely than
not that the we will be required to sell the securities before the entire amortized cost basis is
recovered.
State, county and municipal securities
The unrealized losses in the municipal securities portfolio are primarily a reflection of changes
in interest rates. This portfolio segment is not experiencing any credit problems as of June 30,
2010. We believe that all contractual cash flows will be received on this portfolio.
As of June 30, 2010, management does not intend to sell these
securities, nor did management believe that it is more likely
than not that we will be required to sell the securities before the entire amortized cost basis is
recovered.
Trust preferred securities
Our investment portfolio includes four CDOs, the collateral of which is pooled trust
preferred securities of various financial institutions. We also own a single issuers trust preferred
security. We determined the fair value of the CDOs with the assistance of an
external valuation firm. The valuation was accomplished by evaluating all relevant credit and
structural aspects of the CDOs, determining appropriate performance assumptions and performing a
discounted cash flow analysis. The valuation was structured as follows:
|
|
|
Detailed credit and structural evaluation for each piece of collateral in the CDO; |
|
|
|
Collateral performance projections for each piece of collateral in the CDO (default,
recovery and prepayment/amortization probabilities); |
|
|
|
Terms of the CDO structure, as laid out in the indenture; |
|
|
|
The cash flow waterfall (for both interest and principal); |
|
|
|
Overcollateralization and interest coverage tests; |
|
|
|
Events of default/liquidation; |
|
|
|
Mandatory auction call; |
|
|
|
Discounted cash flow modeling. |
On the basis of the evaluation of collateral credit, and in combination with a review of historical
industry default data and current/near-term operating conditions, appropriate default and recovery
probabilities are determined for each piece of collateral in the CDO;
specifically, we estimate
the probability that a given piece of collateral will default in any given year. Next, on the basis
of credit factors, like asset quality and leverage, we formulate a recovery assumption for each
piece of collateral in the event of a default. For collateral that has already defaulted, we assume
no recovery. For collateral that is deferring, we assume a recovery rate of 10%. It is also noted
that there is a possibility, in some cases, that deferring collateral will become current at some
point in the future. As a result, deferring issuers are evaluated on a case-by-case basis, and, in
some instances, based on an analysis of the credit, and assign a probability that the deferral will
ultimately cure.
The base-case collateral-specific assumptions are aggregated into cumulative weighted-average
default, recovery and prepayment probabilities. In light of generally weakening collateral credit
performance and a challenging U.S. credit and real estate environment, our assumptions generally
imply a larger amount of collateral defaults during the next three years than that which has been
experienced historically, gradually leveling off thereafter.
The discount rates used to determine fair value are intended to reflect the uncertainty inherent in
the projection of each CDOs cash flows. Therefore, spreads were chosen that are comparable to
spreads observed currently in the market for similarly rated
instruments,
and such spreads are intended to reflect general market discounts currently applied to structured credit
products. The discount rates used to determine the credit portion of the OTTI are equal to the
current yield on the issuances as prescribed under ASC 325-40.
49
The following tables provide various information and fair value model assumptions regarding our
CDOs as of June 30, 2010 (Dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-to-Date |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary-impairment |
|
|
|
Single/ |
|
Class/ |
|
Amortized |
|
|
Fair |
|
|
Unrealized |
|
|
Credit |
|
|
|
|
|
|
|
Name |
|
Pooled |
|
Tranche |
|
Cost |
|
|
Value |
|
|
Loss |
|
|
Portion |
|
|
Other |
|
|
Total |
|
MM Caps Funding I Ltd |
|
Pooled |
|
MEZ |
|
$ |
2,083 |
|
|
$ |
984 |
|
|
$ |
(1,099 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
MM Community Funding Ltd |
|
Pooled |
|
B |
|
|
2,026 |
|
|
|
720 |
|
|
|
(1,306 |
) |
|
|
(20 |
) |
|
|
(117 |
) |
|
|
(137 |
) |
Preferred Term Securities V |
|
Pooled |
|
MEZ |
|
|
1,189 |
|
|
|
434 |
|
|
|
(755 |
) |
|
|
(24 |
) |
|
|
|
|
|
|
(24 |
) |
Tpref Funding III Ltd |
|
Pooled |
|
B-2 |
|
|
2,990 |
|
|
|
1,125 |
|
|
|
(1,865 |
) |
|
|
(32 |
) |
|
|
(64 |
) |
|
|
(96 |
) |
Emigrant Capital Trust (1) |
|
Single |
|
Sole |
|
|
5,000 |
|
|
|
1,755 |
|
|
|
(3,245 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
13,288 |
|
|
$ |
5,018 |
|
|
$ |
(8,270 |
) |
|
$ |
(76 |
) |
|
$ |
(181 |
) |
|
$ |
(257 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original Collateral - |
|
Performing Collateral - |
|
|
|
|
|
|
|
|
Percent of Actual |
|
Percent of Expected |
|
|
|
|
Lowest |
|
Performing |
|
Deferrals and |
|
Deferrals and |
|
Excess |
Name |
|
Rating |
|
Banks |
|
Defaults |
|
Defaults |
|
Subordination (2) |
MM Caps Funding I Ltd |
|
Ca |
|
21 |
|
|
21 |
% |
|
|
19 |
% |
|
|
0 |
% |
MM Community Funding Ltd |
|
Ca |
|
8 |
|
|
21 |
% |
|
|
43 |
% |
|
|
0 |
% |
Preferred Term Securities V |
|
Ba3 |
|
2 |
|
|
4 |
% |
|
|
26 |
% |
|
|
0 |
% |
Tpref Funding III Ltd |
|
Ca |
|
22 |
|
|
28 |
% |
|
|
25 |
% |
|
|
0 |
% |
Emigrant Capital Trust (1) |
|
NR |
|
NA |
|
NA |
|
NA |
|
NA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value |
|
Discount Margin |
|
Yield |
Name |
|
(Price to Par) |
|
(Basis Points) |
|
(Basis Points) |
MM Caps Funding I Ltd |
|
$ |
44.85 |
|
|
Swap + 1700 |
|
9.48% Fixed |
MM Community Funding Ltd |
|
|
14.40 |
|
|
LIBOR + 1500 |
|
LIBOR + 310 |
Preferred Term Securities V |
|
|
31.52 |
|
|
LIBOR + 1400 |
|
LIBOR + 210 |
Tpref Funding III Ltd |
|
|
28.14 |
|
|
LIBOR + 1200 |
|
LIBOR + 190 |
Emigrant Capital Trust (1) |
|
|
35.10 |
|
|
LIBOR + 1312 |
|
LIBOR + 200 |
|
|
|
(1) |
|
There has been no notification of deferral or default on this issue. An analysis of the
company, including discussion with its management, indicates there is adequate capital and
liquidity to service the debt. The discount margin of 1312 basis points was derived from
implied credit spreads from certain publicly traded trust preferred securities within the
issuers peer group. |
50
|
|
|
(2) |
|
Excess subordination represents the additional defaults in excess of both the current and
projected defaults the issue can absorb before the security experiences any credit impairment.
Excess subordination is calculated by determining what level of defaults an issue can
experience before the security has any credit impairment and then subtracting both the current
and projected future defaults. |
In April 2009, management received notification that interest payments related to New South Capital
would be deferred for up to 20 quarters. In addition, New South Capitals external auditor issued a
going concern opinion on May 2, 2009. Management determined that there was not sufficient positive
evidence that this issue will ever pay principal or interest. Therefore, OTTI was recognized on the
full amount of the $5.0 million New South Capital Trust preferred security during the first quarter of 2009. In December 2009, the banking
subsidiary of New South Capital was closed by its regulator and placed into receivership.
In addition to the impact of interest rates, the estimated fair value of these CDOs have been and
will continue to be depressed, as a result of the unusual credit conditions that the financial
industry has faced since the middle of 2008 and a weakening economy, both of which have severely
reduced the demand for these securities and rendered their trading market inactive.
As of
June 30, 2010, management does not intend to sell these
securities, nor did management believe it is more likely
than not that we will be required to sell the securities before the entire amortized cost basis is
recovered.
The following table provides a roll-forward of the amount of credit-related losses recognized in
earnings for which a portion of OTTI has been recognized in other comprehensive income for the
period indicated:
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
|
For the Six |
|
|
|
Months Ended |
|
|
Months Ended |
|
|
|
June 30, 2010 |
|
|
June 30, 2010 |
|
|
|
(Dollars in thousands) |
|
Balance at beginning of period |
|
$ |
8,886 |
|
|
$ |
8,869 |
|
Amounts related to credit losses for which an OTTI was not previously recognized |
|
|
450 |
|
|
|
604 |
|
Increases in credit loss for which an OTTI was previously recognized when the investor
does not intend to sell the security and it is not more likely than not that the entity will
be required to sell the security before recovery of its amortized cost |
|
|
51 |
|
|
|
97 |
|
Reductions for securities where there is an intent to sell or requirement to sell |
|
|
|
|
|
|
(154 |
) |
Reductions for increases in cash flows expected to be collected |
|
|
(13 |
) |
|
|
(42 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
9,374 |
|
|
$ |
9,374 |
|
|
|
|
|
|
|
|
Management will continue to evaluate the investment ratings in the securities portfolio,
severity in pricing declines, market price quotes along with timing and receipt of amounts
contractually due. Based upon these and other factors, the securities portfolio may experience
further impairment.
Stock in the Federal Home Loan Bank of Atlanta (FHLB Atlanta)
As of June 30, 2010, we had stock in FHLB Atlanta in the amount of $18.2 million (its par value),
which is presented separately on the face of our statement of financial condition. There is no
ready market for the stock and no quoted market values, as only member institutions are eligible to
be shareholders and all transactions are, by charter, to take place at par with FHLB Atlanta as the
only purchaser. Therefore, we account for this investment as a long-term asset and carry it at
cost. Management reviews this stock quarterly for impairment and conducts its analysis in
accordance with ASC 942-325-35-3.
Managements determination as to whether this investment is impaired is based on managements
assessment of the ultimate recoverability of its par value (cost) rather than recognizing temporary
declines in its value. The determination of whether the decline affects the ultimate recoverability
of our investment is influenced by available information regarding criteria such as:
|
|
|
the significance of the decline in net assets of FHLB Atlanta as compared to the capital
stock amount for FHLB Atlanta and the length of time this decline has persisted; |
|
|
|
commitments by FHLB Atlanta to make payments required by law or regulation and the level
of such payments in relation to the
operating performance of FHLB Atlanta; |
51
|
|
|
the impact of legislative and regulatory changes on financial institutions and,
accordingly, on the customer base of FHLB Atlanta; and |
|
|
|
the liquidity position of FHLB Atlanta. |
Management has reviewed publicly available information regarding the financial condition of FHLB
Atlanta and concluded that no impairment existed based on its assessment of the ultimate
recoverability of the par value of the investment. FHLB Atlanta reported net income of $48 million
for the first quarter of 2010, an increase of approximately $50 million from a net loss of
approximately $2 million for the first quarter of 2009. On May 11, 2010, FHLB Atlanta announced
the approval of an annualized dividend rate for the first quarter of 2010 of 0.26% compared to no
dividends in the first quarter of 2009. During the second quarter of 2009, FHLB Atlanta
reinstated its dividend at rates of 0.84%, 0.41% and 0.27%, for the second, third and fourth
quarters of 2009, respectively, resulting in an annualized dividend rate of 0.38%. The Board of
FHLB Atlanta made a decision to retain a larger portion of earnings and significantly higher
capital ratios than in previous years. On the basis of a review of the financial condition, cash
flow, liquidity and asset quality indicators of FHLB Atlanta as of the end of the first quarter
of 2010, management has concluded that no impairment exists on our investment in the
stock of FHLB Atlanta. This is a long-term investment that serves a business purpose of enabling us
to enhance the liquidity of our subsidiary, Superior Bank, through access to the
lending facilities of FHLB Atlanta. For the foregoing reasons, management believes that FHLB
Atlantas current position does not indicate that our investment will not be
recoverable at par, the cost, and thus the investment was not impaired as of June 30, 2010.
Loans
Composition of Loan Portfolio, Yield Changes and Diversification
Our loans, net of unearned income, were $2.483 billion as of June 30, 2010, an increase of $9.9
million from $2.473 billion as of December 31, 2009. Mortgage loans held for sale were $54.8
million as of June 30, 2010, a decrease of 23.7%, or
$17.1 million, from $71.9 million as of
December 31, 2009. Average loans, including mortgage loans held for sale, for the three months
ended June 30, 2010 were $2.566 billion, compared to $2.463 billion for the year ended December 31,
2009. Loans, net of unearned income, comprised 80.3% of interest-earning assets as of June 30,
2010, compared to 85.4% as of December 31, 2009. Mortgage loans held for sale comprised 1.8% of
interest-earning assets as of June 30, 2010, compared to 2.5% as of December 31, 2009. The average
yield of the loan portfolio was 5.66%, 5.81% and 5.84% for the three months ended June 30, 2010,
March 31, 2010 and December 31, 2009, respectively. The decrease in the average yield was primarily
the result of a generally lower level of market rates and the effect
of increasing nonaccrual loans.
The following table details the distribution of our loan portfolio by category for the periods
presented:
Distribution of Loans by Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
December 31, 2009 |
|
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
Percent of |
|
|
|
Amount |
|
|
Total |
|
|
Amount |
|
|
Total |
|
|
|
(Dollars in thousands) |
|
Commercial and industrial |
|
$ |
186,954 |
|
|
|
7.52 |
% |
|
$ |
213,329 |
|
|
|
8.62 |
% |
Real estate construction and land development |
|
|
680,364 |
|
|
|
27.37 |
|
|
|
680,445 |
|
|
|
27.48 |
|
Real estate mortgages |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family |
|
|
701,220 |
|
|
|
28.21 |
|
|
|
691,364 |
|
|
|
27.93 |
|
Commercial |
|
|
829,081 |
|
|
|
33.35 |
|
|
|
801,813 |
|
|
|
32.39 |
|
Other |
|
|
31,201 |
|
|
|
1.26 |
|
|
|
28,885 |
|
|
|
1.17 |
|
Consumer |
|
|
56,139 |
|
|
|
2.26 |
|
|
|
58,785 |
|
|
|
2.37 |
|
Other |
|
|
844 |
|
|
|
0.03 |
|
|
|
969 |
|
|
|
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
2,485,803 |
|
|
|
100.00 |
% |
|
|
2,475,590 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned income |
|
|
(3,243 |
) |
|
|
|
|
|
|
(2,893 |
) |
|
|
|
|
Allowance for loan losses |
|
|
(79,425 |
) |
|
|
|
|
|
|
(41,884 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans |
|
$ |
2,403,135 |
|
|
|
|
|
|
$ |
2,430,813 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
The following table shows the amount of total loans, net of unearned income, by segment and
the percent change for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
Percent |
|
|
2010 |
|
2009 |
|
Change |
|
|
(Dollars in thousands) |
Total loans, net of unearned income |
|
$ |
2,482,560 |
|
|
$ |
2,472,697 |
|
|
|
0.4 |
% |
Alabama segment |
|
|
991,418 |
|
|
|
996,545 |
|
|
|
(0.5 |
) |
Florida segment |
|
|
1,219,000 |
|
|
|
1,213,202 |
|
|
|
0.5 |
|
Other |
|
|
272,142 |
|
|
|
262,950 |
|
|
|
3.5 |
|
A further analysis of the components of our real estate construction and land development and
real estate mortgage loans for the periods indicated is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
Commercial |
|
|
|
|
|
|
Development |
|
|
Development |
|
|
Total |
|
|
|
(Dollars in thousands) |
|
Real estate construction and land development |
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
Alabama segment |
|
$ |
158,204 |
|
|
$ |
87,429 |
|
|
$ |
245,633 |
|
Florida segment |
|
|
121,115 |
|
|
|
281,317 |
|
|
|
402,432 |
|
Other |
|
|
9,532 |
|
|
|
22,767 |
|
|
|
32,299 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
288,851 |
|
|
$ |
391,513 |
|
|
$ |
680,364 |
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Alabama segment |
|
$ |
163,978 |
|
|
$ |
102,339 |
|
|
$ |
266,317 |
|
Florida segment |
|
|
129,590 |
|
|
|
265,767 |
|
|
|
395,357 |
|
Other |
|
|
7,856 |
|
|
|
10,915 |
|
|
|
18,771 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
301,424 |
|
|
$ |
379,021 |
|
|
$ |
680,445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single- |
|
|
|
|
|
|
family |
|
|
Commercial |
|
|
|
(Dollars in thousands) |
|
Real estate mortgages |
|
|
|
|
|
|
|
|
|
As of June 30, 2010 |
|
|
|
|
|
|
|
|
Alabama segment |
|
$ |
419,831 |
|
|
$ |
314,347 |
|
Florida segment |
|
|
226,759 |
|
|
|
470,047 |
|
Other |
|
|
54,630 |
|
|
|
44,687 |
|
|
|
|
|
|
|
|
Total |
|
$ |
701,220 |
|
|
$ |
829,081 |
|
|
|
|
|
|
|
|
As of December 31, 2009 |
|
|
|
|
|
|
|
|
Alabama segment |
|
$ |
461,365 |
|
|
$ |
296,520 |
|
Florida segment |
|
|
189,245 |
|
|
|
475,218 |
|
Other |
|
|
40,754 |
|
|
|
30,075 |
|
|
|
|
|
|
|
|
Total |
|
$ |
691,364 |
|
|
$ |
801,813 |
|
|
|
|
|
|
|
|
Allowance for Loan Losses
Overview
It is the responsibility of management to assess and maintain the allowance for loan losses at a
level it believes is appropriate to absorb the estimated credit losses within our loan portfolio
through the provision for loan losses. The determination of our allowance for loan losses is based
on managements analysis of the credit quality of the loan portfolio including its judgment
regarding certain internal and external factors that affect loan collectability. This process is
performed on a quarterly basis under the oversight of the Board of Directors. The estimation of the
allowance for loan losses is based on two basic components those estimations calculated in
accordance with the requirements of ASC 450-20, and those specific impairments under ASC 310-35
(see discussions below). The calculation of the allowance for loan losses is inherently subjective,
and actual losses could be greater or less than the estimates.
53
ASC 450-20
Under ASC 450-20, estimated losses on all loans that have not been identified with specific
impairment under ASC 310-35 are calculated based on the historical loss ratios applied to our
standard loan categories using a rolling average adjusted for certain qualitative risk factors, as
shown below. In addition to these standard loan categories, management may identify other areas of
risk based on its analysis of such qualitative risk factors and estimate additional losses as it
deems necessary. The qualitative risk factors that management uses in
its estimate include, but are
not limited to, the following:
|
|
|
effects of changes in credit concentrations; |
|
|
|
levels of and trends in delinquencies, classified loans and non-performing assets; |
|
|
|
levels of and trends in charge-offs and recoveries; |
|
|
|
changes in lending policies and underwriting guidelines; |
|
|
|
national and local economic trends and condition; and |
|
|
|
mergers and acquisitions. |
ASC 310-35
Pursuant to ASC 310-35, impaired loans are loans that are
specifically reviewed and for which it is probable that we will be unable to collect all amounts
due according to the terms of the loan agreement (see Impaired Loans below). Impairment is measured by comparing the recorded
investment in the loan with the present value of expected future cash flows discounted at the
loans effective interest rate, at the loans observable market price or the fair value of the
collateral if the loan is collateral dependent. A valuation allowance is provided to the extent
that the measure of the impaired loans is less than the recorded investment. A loan is not
considered impaired during a period of delay in payment if we continue to expect that all amounts
due will ultimately be collected according to the terms of the loan agreement. Our Credit
Administration department maintains supporting documentation regarding collateral valuations and/or
discounted cash flow analyses.
54
The following table summarizes certain information with respect to our allowance for loan losses
and the composition of charge-offs and recoveries for the periods indicated:
Summary of Loan Loss Experience
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
Year Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2009 |
|
|
|
(Dollars in thousands) |
|
Allowance for loan losses at beginning of period |
|
$ |
43,190 |
|
|
$ |
29,870 |
|
|
$ |
41,884 |
|
|
$ |
28,850 |
|
|
$ |
28,850 |
|
Charge-offs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
2,880 |
|
|
|
141 |
|
|
|
2,935 |
|
|
|
197 |
|
|
|
1,390 |
|
Real estate construction and land development |
|
|
7,503 |
|
|
|
131 |
|
|
|
13,095 |
|
|
|
1,055 |
|
|
|
4,870 |
|
Real estate mortgage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family |
|
|
2,751 |
|
|
|
821 |
|
|
|
3,803 |
|
|
|
1,368 |
|
|
|
5,372 |
|
Commercial |
|
|
712 |
|
|
|
508 |
|
|
|
1,254 |
|
|
|
848 |
|
|
|
1,094 |
|
Other |
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
186 |
|
|
|
210 |
|
Consumer |
|
|
736 |
|
|
|
707 |
|
|
|
1,440 |
|
|
|
1,402 |
|
|
|
3,346 |
|
Other |
|
|
51 |
|
|
|
198 |
|
|
|
193 |
|
|
|
266 |
|
|
|
379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs |
|
|
14,633 |
|
|
|
2,513 |
|
|
|
22,720 |
|
|
|
5,322 |
|
|
|
16,661 |
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
27 |
|
|
|
41 |
|
|
|
59 |
|
|
|
108 |
|
|
|
161 |
|
Real estate construction and land development |
|
|
4 |
|
|
|
6 |
|
|
|
20 |
|
|
|
26 |
|
|
|
68 |
|
Real estate mortgage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family |
|
|
36 |
|
|
|
21 |
|
|
|
91 |
|
|
|
32 |
|
|
|
71 |
|
Commercial |
|
|
311 |
|
|
|
2 |
|
|
|
335 |
|
|
|
5 |
|
|
|
277 |
|
Other |
|
|
14 |
|
|
|
19 |
|
|
|
61 |
|
|
|
217 |
|
|
|
251 |
|
Consumer |
|
|
64 |
|
|
|
41 |
|
|
|
134 |
|
|
|
83 |
|
|
|
186 |
|
Other |
|
|
49 |
|
|
|
35 |
|
|
|
71 |
|
|
|
71 |
|
|
|
131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries |
|
|
505 |
|
|
|
165 |
|
|
|
771 |
|
|
|
542 |
|
|
|
1,145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
14,128 |
|
|
|
2,348 |
|
|
|
21,949 |
|
|
|
4,780 |
|
|
|
15,516 |
|
Provision for loan losses |
|
|
50,363 |
|
|
|
5,982 |
|
|
|
59,490 |
|
|
|
9,434 |
|
|
|
28,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses at end of period |
|
$ |
79,425 |
|
|
$ |
33,504 |
|
|
$ |
79,425 |
|
|
$ |
33,504 |
|
|
$ |
41,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans at end of period, net of unearned income |
|
$ |
2,482,560 |
|
|
$ |
2,398,471 |
|
|
$ |
2,482,560 |
|
|
$ |
2,398,471 |
|
|
$ |
2,472,697 |
|
Average loans, net of unearned income |
|
|
2,512,856 |
|
|
|
2,387,078 |
|
|
|
2,502,589 |
|
|
|
2,364,676 |
|
|
|
2,401,805 |
|
Ratio of ending allowance to ending loans |
|
|
3.20 |
% |
|
|
1.40 |
% |
|
|
3.20 |
% |
|
|
1.40 |
% |
|
|
1.69 |
% |
Ratio of net charge-offs to average loans (1) |
|
|
2.26 |
|
|
|
0.39 |
|
|
|
1.77 |
|
|
|
0.41 |
|
|
|
0.65 |
|
Net charge-offs as a percentage of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
28.05 |
|
|
|
39.26 |
|
|
|
36.90 |
|
|
|
50.66 |
|
|
|
54.35 |
|
Allowance for loan losses (1) |
|
|
71.34 |
|
|
|
28.11 |
|
|
|
55.73 |
|
|
|
28.77 |
|
|
|
37.04 |
|
Allowance for loan losses as a percentage of
nonperforming loans |
|
|
34.32 |
|
|
|
28.46 |
|
|
|
34.32 |
|
|
|
28.46 |
|
|
|
26.25 |
|
55
The allowance as a percentage of loans, net of unearned income, as of June 30, 2010 was 3.20%,
compared to 1.72% and 1.69% as of March 31, 2010 and December 31, 2009, respectively.
The allowance for loan losses as a percentage of nonperforming loans, excluding TDRs, increased to
34.32% as of June 30, 2010 from 24.27% as of March 31, 2010 and 26.25% as of December 31, 2009.
Approximately $38.2 million of the allowance for loan losses was specifically allocated to
nonperforming loans as of June 30, 2010. As of June 30, 2010, nonperforming loans were $231.4
million, of which $227.3 million, or 98.2%, were loans secured by real estate compared to $173.7
million, or 97.6%, as of March 31, 2010. See Nonperforming Assets.
Three Months Ended June 30, 2010 compared to Three Months Ended March 31, 2010
Net
charge-offs increased $6.3 million, to $14.1 million for the three months ended June 30, 2010
from $7.8 million during the three months ended March 31, 2010. Of the $14.1 million, $8.4 million
was related to a single relationship totaling approximately $21.3 million. The remaining $12.9
million of this relationship was classified as nonperforming during the second quarter. Net
charge-offs of real estate loans increased $3.6 million to $10.6 million. Net charge-offs of
commercial loans increased by $2.8 million to $2.8 million. Net charge-offs of consumer loans
decreased by $0.1 million to $0.7 million. Net charge-offs as a percentage of the allowance for
loan losses were 71.34% for the three months ended June 30, 2010, down slightly from 73.44% for the
three months ended March 31, 2010 and up from 28.11% for three months ended June 30, 2009.
Net charge-offs related to construction and land development real estate loans increased $1.9
million, to $7.5 million during the three months ended June 30, 2010, from $5.6 million for the
three months ended March 31, 2010. Residential construction and land development net charge-offs
accounted for $6.9 million, or 92.4%, of the total losses from this portfolio, with $0.6 million,
or 7.6%, coming from commercial real estate construction and land development. Of the commercial
purpose loan losses, all were located in Florida.
Six Months Ended June 30, 2010 compared to the Six Months Ended June 30, 2009
Net
charge-offs increased $17.2 million, to $21.9 million for the six months ended June 30, 2010
from $4.8 million during the six months ended June 30, 2009. Net charge-offs of real estate loans
increased $14.5 million to $17.6 million. Net charge-offs of commercial loans increased by $2.8
million to $2.9 million. Net charge-offs of consumer loans decreased $0.1 million to $1.4 million.
Net charge-offs as a percentage of the allowance for loan losses were 55.73% for the six months
ended June 30, 2010, up from 28.77% for the six months ended June 30, 2009.
Net charge-offs related to construction and land development real estate loans increased $12.1
million, to $13.1 million, during the six months ended June 30, 2010, from $1.0 million for the six
months ended June 30, 2009. Residential construction and land development net charge-offs accounted
for $11.1 million, or 84.9%, of the total losses from this portfolio, with $2.0 million, or 15.1%,
coming from commercial real estate residential construction and land development. Of the
commercial loan losses, $1.9 million, or 96.9%, were located in Florida.
Allocation of the Allowance for Loan Losses
The allowance for loan losses calculation is segregated into various segments that include specific
allocations for loans, portfolio segments and general allocations for portfolio risk.
Risk ratings are subject to independent review by internal loan review, which also performs
ongoing, independent review of the risk management process. The risk management process includes
underwriting, documentation and collateral control. Loan review is centralized and independent of
the lending function. The loan review results are reported to senior management and the Audit and
Enterprise Risk Management Committee of the Board of Directors. Credit Administration relies upon
the independent work of loan review in risk rating in developing its recommendations to the Audit
and Enterprise Risk Management Committee of the Board of Directors for the allocation of the
allowance for loan losses, and performs this function independent of the lending area of Superior
Bank.
We historically have allocated our allowance for loan losses to specific loan categories. Although
the allowance for loan losses is allocated, it is available to absorb losses in the entire loan
portfolio. This allocation is made for estimation purposes only and is not necessarily indicative
of the allocation between categories in which future losses may occur, nor is it limited to the
categories to which it is allocated.
56
Allocation of the Allowance for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
December 31, 2009 |
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
|
of Loans |
|
|
|
|
|
|
of Loans |
|
|
|
|
|
|
|
in Each |
|
|
|
|
|
|
in Each |
|
|
|
|
|
|
|
Category |
|
|
|
|
|
|
Category |
|
|
|
|
|
|
|
to Total |
|
|
|
|
|
|
to Total |
|
|
|
Amount |
|
|
Loans |
|
|
Amount |
|
|
Loans |
|
|
|
(Dollars in thousands) |
|
Commercial and industrial |
|
$ |
5,975 |
|
|
|
7.5 |
% |
|
$ |
2,356 |
|
|
|
8.6 |
% |
Real estate construction and land development |
|
|
43,392 |
|
|
|
27.4 |
|
|
|
17,971 |
|
|
|
27.5 |
|
Real estate mortgages |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family |
|
|
16,860 |
|
|
|
28.2 |
|
|
|
12,342 |
|
|
|
27.9 |
|
Commercial |
|
|
11,142 |
|
|
|
33.3 |
|
|
|
7,019 |
|
|
|
32.4 |
|
Other |
|
|
209 |
|
|
|
1.3 |
|
|
|
371 |
|
|
|
1.2 |
|
Consumer |
|
|
1,847 |
|
|
|
2.3 |
|
|
|
1,825 |
|
|
|
2.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
79,425 |
|
|
|
100.0 |
% |
|
$ |
41,884 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
During the
second quarter of 2010, we experienced (1) a migration of performing classified loans into
non-performing status, (2) an increase in TDRs resulting from workout activity, and (3) an
increase in collateral impairments relative to other external factors
such as short sales and deteriorated values in comparable
properties. These factors created the need for increased loan
provision during the second quarter of 2010. In addition,
management identified approximately $549 million in loans to customers that could be directly or
indirectly impacted by the spill with the majority of these customers being located along or near
the Alabama and northwest Florida coast. Within this group, $149 million, or 27%, can be
categorized as beachfront properties, which could be more directly impacted by this spill. Four
major loan categories were identified as being most susceptible to the impact of the spill: real
estate construction, single-family mortgage loans, commercial real estate mortgage (CRE) loans,
and commercial and industrial (C & I) loans. Given the added exposure in these
categories related to the spill, coupled with the current recessionary impact already in place, management has allocated
approximately $7.8 million in reserves to real estate construction, single family mortgage,
commercial real estate mortgage, and C & I loans, which represents an increase of approximately
$3.0 million from $4.8 million, the balance at March 31, 2010. Management believes that these additional
reserves will be adequate to cover any losses directly associated with the spill. The areas
anticipated to be most affected by the long-term impact, if any, resulting from the spill will
primarily be along the Louisiana and Mississippi coasts, with Alabama and Florida being impacted to
a lesser degree. All of Superior Banks beachfront exposure is in Alabama and Florida, with the
majority in Florida where the impact is anticipated to be the least. It is also worthwhile to note
that a significant portion of the identified beachfront properties
are hospitality-related. While
tourism traffic is down, both due to economic factors as well the publics concern over the spill,
the decrease in tourism traffic has been somewhat offset by the influx of workers engaged in
cleanup and recovery efforts. In light of these factors, management believes that the
increased level of allowance for loan losses is adequate. In
addition, the historical loss ratio used to estimate the allowance
for loan losses increased significantly during the second quarter of
2010. This ratio is based on a four-quarter rolling average and has
been affected by the level of charge-offs during 2010.
During the six months ended June 30, 2010, we increased the allowance for loan losses related to
construction and land development real estate loans by $25.4 million, from $18.0 million as of
December 31, 2009 to $43.4 million as of June 30, 2010, because of continued weakness and
increasing levels of risk due to general economic conditions in the construction and land
development real estate markets throughout our franchise.
Our allocation of the allowance for loan losses related to single-family mortgage loans increased
to $16.9 million as of June 30, 2010 from $12.3 million as of December 31, 2009. This allocation
reflects the continued risk exposure due to the current downturn in the national economy and the
effect on the housing sector which has increased our foreclosure activity within this portfolio.
As of June 30, 2010, only 5.3% of our loans secured by single family properties had a loan-to-value
(LTV) that was 90% or greater and were without private mortgage insurance (PMI) or other
government guarantee.
Before the end of the third quarter, management expects to receive updated appraisals on
approximately $112.1 million in collateral securing various real estate loans. Any changes in
these appraisals may have a significant impact on the level of the specific reserve allocations in
the third quarter. As of June 30, 2010, management believes it has estimated adequate general
reserves to absorb any additional specific reserves that may be required by the updated appraisals.
57
Nonperforming Assets
Nonperforming
assets increased $51.9 million, or 23.1%, to $276.9 million as of June 30, 2010 from
$225.0 million as of March 31, 2010. As a percentage of net loans plus nonperforming assets,
nonperforming assets increased to 10.95% as of June 30, 2010 from 8.82% as of March 31, 2010. The
overall increase in nonperforming assets was primarily related to our
real estate construction loan and
commercial mortgage loan portfolios. The majority of the net increase in nonperforming real
estate construction related to 13 real estate construction credits over $1.0 million totaling
$38.9 million. Seven of these large credits, totaling $21.9 million, were located in Florida with
the remainder in Alabama. The commercial real estate increase was the result of four commercial
real estate credits, totaling $7.9 million, primarily in the hospitality category. Three of these
credits, totaling $6.1 million, were located in Florida. In all cases, management continues to
actively work to mitigate the risks of loss across all categories of the loan portfolio. The
following table shows our nonperforming assets for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(Dollars in thousands) |
|
Nonaccrual |
|
$ |
215,891 |
|
|
$ |
155,631 |
|
Accruing loans 90 days or more delinquent |
|
|
15,547 |
|
|
|
3,920 |
|
|
|
|
|
|
|
|
Total nonperforming loans |
|
|
231,438 |
|
|
|
159,551 |
|
Other real estate owned assets |
|
|
45,184 |
|
|
|
41,618 |
|
Repossessed assets |
|
|
322 |
|
|
|
380 |
|
|
|
|
|
|
|
|
Total nonperforming assets |
|
$ |
276,944 |
|
|
$ |
201,549 |
|
|
|
|
|
|
|
|
Restructured and performing under restructured
terms, net of specific allowance |
|
$ |
147,588 |
|
|
$ |
110,777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans as a percentage of loans |
|
|
9.32 |
% |
|
|
6.45 |
% |
|
|
|
|
|
|
|
Nonperforming assets as a percentage of loans plus
nonperforming assets |
|
|
10.95 |
% |
|
|
8.01 |
% |
|
|
|
|
|
|
|
Nonperforming assets as a percentage of total assets |
|
|
8.25 |
% |
|
|
6.26 |
% |
|
|
|
|
|
|
|
58
The following is a summary of nonperforming loans by category for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(Dollars in thousands) |
|
Commercial and industrial |
|
$ |
3,030 |
|
|
$ |
1,797 |
|
Real estate construction and land development |
|
|
|
|
|
|
|
|
Residential |
|
|
81,464 |
|
|
|
23,818 |
|
Commercial |
|
|
52,385 |
|
|
|
49,240 |
|
Real estate mortgages |
|
|
|
|
|
|
|
|
Single-family |
|
|
54,007 |
|
|
|
52,323 |
|
Commercial |
|
|
39,091 |
|
|
|
30,343 |
|
Other |
|
|
336 |
|
|
|
436 |
|
Consumer |
|
|
834 |
|
|
|
734 |
|
Other |
|
|
291 |
|
|
|
860 |
|
|
|
|
|
|
|
|
Total nonperforming loans |
|
$ |
231,438 |
|
|
$ |
159,551 |
|
|
|
|
|
|
|
|
A delinquent loan is ordinarily placed on nonaccrual status no later than when it becomes 90
days past due and management believes, after considering economic and business conditions and
collection efforts, that the borrowers financial condition is such that the collection of interest
is doubtful. When a loan is placed on nonaccrual status, all unpaid interest which has been accrued
on the loan during the current period is reversed and deducted from earnings as a reduction of
reported interest income; any prior period accrued and unpaid interest is reversed and charged
against the allowance for loan losses. No additional interest income is accrued on the loan balance
until the collection of both principal and interest becomes reasonably certain. When a problem loan
is finally resolved, there may be an actual write-down or charge-off of the principal balance of
the loan to the allowance for loan losses.
As of June 30, 2010, single-family residential mortgages accounted for $54.0 million, or 23.3%, of
total nonperforming loans, up $3.2 million from $50.8 million as of March 31, 2010. Foreclosure
activity during the three months ended June 30, 2010 resulted in $11.0 million of new foreclosures,
with residential construction properties accounting for
$6.2 million, or 56.1%; single family
residential properties accounting for $3.5 million, or 32.4%;
and CRE properties accounting for another
$1.3 million, or 11.5%. Approximately 75% of foreclosures originated in Alabama and the remaining
25% originated in Florida. Our OREO acquired through foreclosure was $45.2 million as of June 30,
2010 a decrease of $1.5 million from $46.7 million as of March 31, 2010, which resulted from
increased OREO sales activity.
The
following is a summary of OREO by category for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(Dollars in thousands) |
|
Acreage |
|
$ |
4,844 |
|
|
$ |
2,251 |
|
Commercial buildings |
|
|
6,177 |
|
|
|
5,226 |
|
Residential condominiums |
|
|
1,952 |
|
|
|
2,730 |
|
Residential single-family homes |
|
|
16,753 |
|
|
|
15,696 |
|
Residential lots |
|
|
12,022 |
|
|
|
14,613 |
|
Other |
|
|
3,436 |
|
|
|
1,102 |
|
|
|
|
|
|
|
|
Other real estate owned |
|
$ |
45,184 |
|
|
$ |
41,618 |
|
|
|
|
|
|
|
|
59
Other real estate, acquired through partial or total satisfaction of loans, is carried at the
lower of cost or fair value, less estimated selling expenses. At the date of acquisition, any
difference between the fair value and book value of the asset is charged to the allowance for loan
losses. The value of other foreclosed real estate collateral is determined based on appraisals by
qualified licensed appraisers approved and hired by our management. Appraised and reported values
are discounted based on managements historical knowledge, changes in market conditions from the
time of valuation, and/or managements expertise and knowledge of the client and the clients
business. Foreclosed real estate is reviewed and evaluated on at least a quarterly basis for
additional impairment and adjusted accordingly, based on the same factors identified above.
Impaired Loans
As of June 30, 2010, our recorded investment in impaired loans, under ASC 310-35 was $399.7
million, an increase of $109.7 million from $290.0 million as of March 31, 2010. Approximately
$272.1 million was located in the Florida Region, $114.4 million was located in the Alabama Region,
and $13.2 million was located in other areas. Approximately $47.2 million of the allowance for loan
losses was specifically allocated to these loans, providing 11.8% coverage. Additionally, $396.3
million, or 99.1%, of the $399.7 million in impaired loans was secured by real estate.
The following is a summary of impaired loans and the specifically allocated allowance for loan
losses by category for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
December 31, 2009 |
|
|
|
Oustanding |
|
|
Specific |
|
|
Oustanding |
|
|
Specific |
|
|
|
Balance |
|
|
Allowance |
|
|
Balance |
|
|
Allowance |
|
|
|
(Dollars in thousands) |
|
Commercial and industrial |
|
$ |
3,443 |
|
|
$ |
1,825 |
|
|
$ |
3,032 |
|
|
$ |
1,053 |
|
Real estate construction and land development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
114,141 |
|
|
|
18,155 |
|
|
|
31,912 |
|
|
|
3,044 |
|
Commercial |
|
|
80,335 |
|
|
|
10,409 |
|
|
|
82,356 |
|
|
|
3,675 |
|
Real estate mortgages |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family |
|
|
67,492 |
|
|
|
8,839 |
|
|
|
53,229 |
|
|
|
5,005 |
|
Commercial |
|
|
132,211 |
|
|
|
7,824 |
|
|
|
109,222 |
|
|
|
1,686 |
|
Other |
|
|
2,123 |
|
|
|
147 |
|
|
|
500 |
|
|
|
62 |
|
Consumer |
|
|
|
|
|
|
|
|
|
|
97 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
399,745 |
|
|
$ |
47,199 |
|
|
$ |
280,348 |
|
|
$ |
14,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At the time a loan is identified as impaired, it is evaluated and valued at the lower of cost or
fair value. For collateral dependent loans, of which $205.0 million is included above and primarily
secured by real estate, fair value is measured based on the value of the collateral securing these
loans and is classified at a Level 3 in the fair value hierarchy. The value of real estate
collateral is determined based on appraisals by qualified licensed appraisers approved and hired by
management. The value of business equipment is determined based on appraisals by qualified licensed
appraisers approved and hired by management, if significant. Appraised and reported values are
discounted based on managements historical knowledge, changes in market conditions from the time
of valuation, and/or managements expertise and knowledge of the client and clients business.
Our other impaired loans are measured based on the present value of the expected future cash flows
discounted at the loans effective interest rate. Impairment measured under this method is
comprised primarily of loans considered TDRs where the terms of
these loans have been restructured based on the expected future cash flows. Included in our
impaired loans are nonperforming loans with specific impairment and loans considered TDRs. A
restructuring of debt constitutes a TDR if for economic or legal reasons related to borrowers
financial difficulties we grant a concession to the borrower that we would not otherwise consider.
All impaired loans are reviewed and evaluated on at least a quarterly basis for additional
impairment and adjusted accordingly.
60
The following is a summary of our TDRs as of June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured |
|
|
|
Performing |
|
|
Not-Performing |
|
|
|
in accordance |
|
|
in accordance |
|
|
|
with restructured terms |
|
|
with restructured terms |
|
|
|
Oustanding |
|
|
Specific |
|
|
Oustanding |
|
|
Specific |
|
|
|
Balance |
|
|
Allowance |
|
|
Balance |
|
|
Allowance |
|
|
|
(Dollars in thousands) |
|
Alabama: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Real estate construction and land development |
|
|
4,155 |
|
|
|
274 |
|
|
|
|
|
|
|
|
|
Real estate mortgages |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family |
|
|
11,435 |
|
|
|
441 |
|
|
|
2,210 |
|
|
|
622 |
|
Commercial |
|
|
22,846 |
|
|
|
382 |
|
|
|
|
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
38,436 |
|
|
$ |
1,097 |
|
|
$ |
2,210 |
|
|
$ |
622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Florida |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
909 |
|
|
$ |
857 |
|
|
$ |
304 |
|
|
$ |
7 |
|
Real estate construction and land development |
|
|
37,895 |
|
|
|
734 |
|
|
|
1,291 |
|
|
|
8 |
|
Real estate mortgages |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family |
|
|
9,691 |
|
|
|
800 |
|
|
|
4,581 |
|
|
|
1,065 |
|
Commercial |
|
|
69,653 |
|
|
|
5,508 |
|
|
|
3,310 |
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
118,148 |
|
|
$ |
7,899 |
|
|
$ |
9,486 |
|
|
$ |
1,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
909 |
|
|
$ |
857 |
|
|
$ |
304 |
|
|
$ |
7 |
|
Real estate construction and land development |
|
|
42,050 |
|
|
|
1,008 |
|
|
|
1,291 |
|
|
|
8 |
|
Real estate mortgages |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family |
|
|
21,126 |
|
|
|
1,241 |
|
|
|
6,791 |
|
|
|
1,687 |
|
Commercial |
|
|
92,499 |
|
|
|
5,890 |
|
|
|
3,310 |
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
156,584 |
|
|
$ |
8,996 |
|
|
$ |
11,696 |
|
|
$ |
1,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential Problem Loans
In addition to nonperforming loans, management has identified $40.2 million in potential problem
loans as of June 30, 2010. Potential problem loans are loans where known information about possible
credit problems of the borrowers causes management to have doubts as to the ability of such
borrowers to comply with the present repayment terms. Potential
problem loans may become nonperforming loans in future periods. Three categories accounted for 94.0% of total potential problem
loans. Real estate construction loans account for 41.0% of the total, and single family residential
loans and commercial real estate loans accounted for 36.2% and 16.8%, respectively. Geographically,
51.2% of the loans were located in Florida, with the remainder located in Alabama. In each case,
management is actively working a plan of action to ensure that any loss exposure is mitigated and
will continue to monitor the cash flow and collateral characteristics of each credit. Included in
potential problem loans are four relationships exceeding $1.0 million that total $16.6 million.
The remaining $23.6 million all represent relationships of less than $1.0 million.
61
Deposits
Noninterest-bearing deposits were $275.7 million as of June 30, 2010, an increase of 7.0%, or
$18.0 million, from $257.7 million as of December 31, 2009. Noninterest-bearing deposits were 9.7%
of total deposits as of June 30, 2010 and December 31, 2009.
Interest-bearing deposits were $2.563 billion as of June 30, 2010, an increase of 6.8%, or
$164.0 million, from $2.399 billion as of December 31, 2009. Interest-bearing deposits averaged
$2.484 billion for the six months ended June 30, 2010 compared to $2.256 billion for the six months
ended June 30, 2009. The average rate paid on all interest-bearing deposits during the six months
ended June 30, 2010 and 2009, was 0.93% and 1.29%, respectively.
As shown below, there were significant increases in our demand and savings deposits within our
reportable segments that represent core deposits received through our branch network. Growth in
our core deposit base has largely been concentrated in 22 de novo branches opened between 2006 and
2010, which have grown to $539.7 million as of June 30, 2010. Of this growth, $106.9 million
occurred in the six months ended June 30, 2010. This expansion of our core funding has
significantly improved our liquidity and has enabled us to grow earning assets while reducing
reliance on borrowings and other non-core sources.
The following table sets forth the composition of our total deposit accounts as of the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
Percent |
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Noninterest-bearing demand |
|
$ |
275,712 |
|
|
$ |
257,744 |
|
|
|
7.0 |
% |
Alabama segment |
|
|
146,612 |
|
|
|
137,160 |
|
|
|
6.9 |
|
Florida segment |
|
|
123,377 |
|
|
|
103,621 |
|
|
|
19.1 |
|
Other |
|
|
5,723 |
|
|
|
16,963 |
|
|
|
(66.3 |
) |
Interest-bearing demand |
|
|
650,402 |
|
|
|
690,677 |
|
|
|
(5.8 |
) |
Alabama segment |
|
|
393,635 |
|
|
|
385,246 |
|
|
|
2.2 |
|
Florida segment |
|
|
246,222 |
|
|
|
233,740 |
|
|
|
5.3 |
|
Other |
|
|
10,545 |
|
|
|
71,691 |
|
|
|
(85.3 |
) |
Savings |
|
|
365,249 |
|
|
|
284,430 |
|
|
|
28.4 |
|
Alabama segment |
|
|
181,469 |
|
|
|
151,263 |
|
|
|
20.0 |
|
Florida segment |
|
|
181,618 |
|
|
|
131,185 |
|
|
|
38.4 |
|
Other |
|
|
2,162 |
|
|
|
1,982 |
|
|
|
9.1 |
|
Time deposits |
|
|
1,547,158 |
|
|
|
1,423,722 |
|
|
|
8.7 |
|
Alabama segment |
|
|
725,442 |
|
|
|
663,510 |
|
|
|
9.3 |
|
Florida segment |
|
|
625,914 |
|
|
|
555,262 |
|
|
|
12.7 |
|
Other |
|
|
195,802 |
|
|
|
204,950 |
|
|
|
(4.5 |
) |
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
2,838,521 |
|
|
$ |
2,656,573 |
|
|
|
6.8 |
% |
|
|
|
|
|
|
|
|
|
|
Alabama segment |
|
$ |
1,447,158 |
|
|
$ |
1,337,179 |
|
|
|
8.2 |
% |
|
|
|
|
|
|
|
|
|
|
Florida segment |
|
$ |
1,177,131 |
|
|
$ |
1,023,808 |
|
|
|
15.0 |
% |
|
|
|
|
|
|
|
|
|
|
Other |
|
$ |
214,232 |
|
|
$ |
295,586 |
|
|
|
(27.5 |
)% |
|
|
|
|
|
|
|
|
|
|
Borrowings
During the six months ended June 30, 2010, average borrowed funds decreased $25.6 million, or 8.7%,
to $268.4 million, from $294.0 million for the year ended December 31, 2009. The average rate paid
on borrowed funds during the six months ended June 30, 2010 and 2009 was 3.80%, and 3.18%,
respectively. Because of a relatively high loan-to-deposit ratio, the existence and stability of
these funding sources are important to our maintenance of short-term and long-term liquidity.
As of June 30, 2010, advances from the FHLB decreased $2.0 million to $216.3 million from
$218.3 million as of December 31, 2009. FHLB Atlanta advances had a weighted average interest rate
of approximately 3.71% as of June 30, 2010. The advances are secured by FHLB Atlanta stock, agency
securities and a blanket lien on certain residential real estate loans and commercial loans, all
with a carrying value of approximately $940.0 million as of June 30, 2010. We had approximately
$139.8 million available in unused advances under the blanket lien subject to the availability of
qualifying collateral.
62
Stockholders Equity
Overview
Our stockholders equity was $149.3 million as of June 30, 2010 compared to $191.7 million as of
December 31, 2009. The decrease was primarily due to the net loss for the period, partially offset
by the preferred stock issuances and the exchange of trust preferred debt for common stock
discussed below.
During the
second quarter, we issued $11.1 million in liquidation value of our Series B Cumulative Convertible Preferred
Stock (Preferred Stock) for an equal amount of cash. In addition, we issued
$0.3 million in liquidation value of our Series C Preferred Stock for an equal amount of cash. We also consummated our
agreement with Cambridge Savings Bank and exchanged $3.5 million of our outstanding non-pooled
trust preferred securities for 849,156 newly issued shares of our common stock, which resulted in
an increase to our common equity of $2.9 million and a gain on exchange of debt in the amount of
$0.5 million, net of tax. Please refer to the Condensed Consolidated Statement of Changes in
Stockholders Equity and Note 13 Stockholders Equity to the Condensed Consolidated Financial
Statements for additional information.
Other Comprehensive Income
The components of other comprehensive (loss) income for the periods indicated are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-Tax |
|
|
Income Tax |
|
|
Net of |
|
|
|
Amount |
|
|
Expense |
|
|
Income Tax |
|
|
|
(Dollars in thousands) |
|
Three Months Ended June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on available-for-sale securities |
|
$ |
4,031 |
|
|
$ |
(1,491 |
) |
|
$ |
2,540 |
|
Reclassification adjustment for gains realized in net loss |
|
|
(1,356 |
) |
|
|
502 |
|
|
|
(854 |
) |
Unrealized gain on derivatives |
|
|
24 |
|
|
|
(9 |
) |
|
|
15 |
|
Reclassification adjustment for gains realized in net loss |
|
|
(13 |
) |
|
|
5 |
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
Net unrealized gain |
|
$ |
2,686 |
|
|
$ |
(993 |
) |
|
$ |
1,693 |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on available-for-sale securities |
|
$ |
(3,660 |
) |
|
$ |
1,354 |
|
|
$ |
(2,306 |
) |
Reclassification adjustment for losses realized in net loss |
|
|
5,781 |
|
|
|
(2,139 |
) |
|
|
3,642 |
|
Unrealized gain on derivatives |
|
|
354 |
|
|
|
(131 |
) |
|
|
223 |
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain |
|
$ |
2,475 |
|
|
$ |
(916 |
) |
|
$ |
1,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on available-for-sale securities |
|
$ |
5,571 |
|
|
$ |
(2,061 |
) |
|
$ |
3,510 |
|
Reclassification adjustment for gains realized in net loss |
|
|
(1,158 |
) |
|
|
428 |
|
|
|
(730 |
) |
Unrealized loss on derivatives |
|
|
(134 |
) |
|
|
51 |
|
|
|
(83 |
) |
Reclassification adjustment for gains realized in net loss |
|
|
(13 |
) |
|
|
5 |
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
Net unrealized gain |
|
$ |
4,266 |
|
|
$ |
(1,577 |
) |
|
$ |
2,689 |
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on available-for-sale securities |
|
$ |
(12,054 |
) |
|
$ |
4,459 |
|
|
$ |
(7,595 |
) |
Reclassification adjustment for losses realized in net loss |
|
|
11,626 |
|
|
|
(4,302 |
) |
|
|
7,324 |
|
Unrealized gain on derivatives |
|
|
325 |
|
|
|
(120 |
) |
|
|
205 |
|
|
|
|
|
|
|
|
|
|
|
Net unrealized loss |
|
$ |
(103 |
) |
|
$ |
37 |
|
|
$ |
(66 |
) |
|
|
|
|
|
|
|
|
|
|
Please refer to the Financial Condition Investment Securities section for additional discussion
regarding the realized/unrealized gains and losses on the investment securities portfolio.
63
Regulatory Capital
The table below represents Superior Banks regulatory and minimum regulatory capital requirements
for the period indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be Well |
|
|
|
|
|
|
|
|
|
|
For |
|
Capitalized Under |
|
|
|
|
|
|
|
|
|
|
Capital Adequacy |
|
Prompt Corrective |
|
|
Actual |
|
Purposes |
|
Action |
|
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
Superior Bank |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Core Capital (to Adjusted Total Assets) |
|
$ |
187,183 |
|
|
|
5.64 |
% |
|
$ |
132,727 |
|
|
|
4.00 |
% |
|
$ |
165,909 |
|
|
|
5.00 |
% |
Total Capital (to Risk Weighted Assets) |
|
|
229,408 |
|
|
|
8.85 |
|
|
|
207,397 |
|
|
|
8.00 |
|
|
|
259,247 |
|
|
|
10.00 |
|
Tier 1 Capital (to Risk Weighted Assets) |
|
|
187,183 |
|
|
|
7.22 |
|
|
NA |
|
|
NA |
|
|
|
155,548 |
|
|
|
6.00 |
|
Tangible Capital (to Adjusted Total Assets) |
|
|
187,183 |
|
|
|
5.64 |
|
|
|
49,773 |
|
|
|
1.50 |
|
|
NA |
|
|
NA |
|
Liquidity
Our principal sources of funds are deposits, principal and interest payments on loans, federal
funds sold and maturities and sales of investment securities. In addition to these sources of
liquidity, we have access to purchased funds from several regional financial institutions, the
Federal Reserve Discount Window, and may borrow from the FHLB Atlanta under a blanket floating lien
on certain commercial loans and residential real estate loans.
Also, we have established certain repurchase agreements with a large financial institution. While
scheduled loan repayments and maturing investments are relatively predictable, interest rates,
general economic conditions and competition primarily influence deposit flows and early loan
payments. Management places constant emphasis on the maintenance of adequate liquidity to meet
conditions that might reasonably be expected to occur. Management believes it has established
sufficient sources of funds to meet its anticipated liquidity needs. See Part II, Item 1A.
Risk FactorsRisks Relating to Our Business.
As shown in the Condensed Consolidated Statement of Cash Flows, operating activities provided $30.3
million and used $71.0 million for the six months ended June 30, 2010 and 2009, respectively,
primarily due to changes in mortgage loans held-for-sale.
Investing activities resulted in a net use of funds of $19.2 million and $79.8 million for the six
months ended June 30, 2010 and 2009, respectively, primarily due to purchases of investment
securities and an increase in loans, partially offset by maturities and principal pay- downs in the
investment securities portfolio. In addition, during the six months ended June 30, 2010, funds
were provided from the sale of investment securities.
Financing activities provided $190.3 million and $164.3 million in funds for the six months ended
June 30, 2010 and 2009, respectively, primarily as a result of an increase in customer deposits.
In addition, during the six months ended June 30, 2010 funds were provided by the issuance of
preferred stock. During the six months ended June 30, 2009, additional increases in funds were
provided by proceeds from senior unsecured debt and were partially offset by the maturity of FHLB
Atlanta advances.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements made by us or on our behalf. Some of the disclosures in this Quarterly Report on Form
10-Q, including any statements preceded by, followed by or which include the words may, could,
should, will, would, hope, might, believe, expect, anticipate, estimate,
intend, plan, assume or similar expressions constitute forward-looking statements.
These forward-looking statements, implicitly and explicitly, include the assumptions underlying the
statements and other information with respect to our beliefs, plans, objectives, goals,
expectations, anticipations, estimates, intentions, financial condition, results of operations,
future performance and business, including our expectations and estimates with respect to our
revenues, expenses, earnings, return on equity, return on assets, efficiency ratio, asset quality,
the adequacy of our allowance for loan losses and other financial data and capital and performance
ratios.
64
Although we believe
that the expectations reflected in our forward-looking statements are reasonable,
these statements involve risks and uncertainties which are subject to change based
on various important factors (some of which are beyond our control).
Such forward-looking statements should, therefore, be considered in light of various important
factors set forth from time to time in our reports and registration statements filed
with the SEC. The following factors, among others, could cause our financial performance
to differ materially from our goals, plans, objectives, intentions, expectations and other
forward-looking statements: (1) the strength of the United States economy in general and
the strength of the regional and local economies in which we conduct operations; (2)
changes in local economic conditions in the markets in which we operate; (3) the continued
weakening in the real estate values in the markets in which we operate; (4) the effects of,
and changes in, trade, monetary and fiscal policies and laws, including interest rate policies
of the Board of Governors of the Federal Reserve System; (5) increases in FDIC deposit insurance
premiums and assessments; (6) inflation or deflation and interest rate, market and monetary
fluctuations; (7) the adequacy of our allowance for loan losses to cover actual losses and
impact of credit risk exposures; (8) greater loan losses than historic levels and
increased allowance for loan losses; (9) our timely development of new products and
services in a changing environment, including the features, pricing and quality compared
to the products and services of our competitors; (10) the willingness of users to substitute
competitors products and services for our
products and services; (11) changes in loan underwriting, credit review or
loss reserve policies associated with economic conditions, examination conclusions, or
regulatory developments; (12) the impact of changes in financial services policies, laws and
regulations, including laws, regulations and policies concerning taxes, banking, securities and insurance,
and the application thereof by regulatory bodies; (13) our ability to comply with any requirements imposed on
us and Superior Bank by our regulators; (14) restrictions or limitations on our access to funds from Superior
Bank; (15) changes in accounting policies, principles and guidelines applicable to us; (16) our focus on lending to
small to mid-size community-based businesses, which may increase our credit risk; (17) our ability to resolve any regulatory,
legal or judicial proceeding on acceptable terms and its effect on our financial condition or results of operations; (18)
technological changes; (19) changes in consumer spending and savings habits; (20) the effect of natural or environmental
disasters, such as, among other things, hurricanes and oil spills, in our geographic markets; (21) the continuing instability
in the domestic and international capital markets; (22) the effects on our operations of policy initiatives or laws that have
been and may continue to be introduced by the Presidential
administration or Congress and related regulatory actions, including,
but not limited to, the Dodd-Frank Wall Street Reform and Consumer Protection Act and the regulations promulgated thereunder;
(23) our ability to successfully integrate the assets, liabilities, customers, systems and management we acquire or merge into
our operations; (24) our ability to raise additional capital to fund growth plans or to meet regulatory requirements; and (25)
other factors and information contained in reports and other filings we make with the SEC.
If one or more of the factors affecting our forward-looking information and statements proves
incorrect, then our actual results, performance or achievements could differ materially from those
expressed in, or implied by, forward-looking information and
statements contained in this quarterly
report. Therefore, we caution you not to place undue reliance on our forward-looking information
and statements.
We do not intend to update our forward-looking information and statements, whether written or oral,
to reflect change. All forward-looking statements attributable to us are expressly qualified by
these cautionary statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information shown under the caption Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations-Market Risk-Interest Rate Sensitivity included in our Annual
Report on Form 10-K for the year ended December 31, 2009, is hereby incorporated herein by
reference.
Market risk is the risk of loss arising from adverse changes in the fair values of financial
instruments due to changes in interest rates, exchange rates, commodity prices, equity prices or
credit quality.
Interest Rate Sensitivity
Our primary market risk component is interest rate risk (IRR). We define interest rate risk as
an adverse change in our net interest income (NII) or economic value of equity (EVE) due to
changing interest rates. IRR results because changing interest rates affect the values of and the
cash flows generated by our assets, liabilities, and off-balance sheet items in different ways.
Sensitivity Measurement
Financial simulation models are the primary tools we use to measure interest rate risk exposures.
By examining a range of hypothetical deterministic interest rate scenarios, these models provide
management with information regarding the potential impact on NII and EVE caused by changes in
interest rates.
The models are built to simulate the cash flows and accounting accruals generated by the financial
instruments on our balance sheet, and for NII simulations, the cash flows generated by the new
business we anticipate over a 12-month forecast horizon. Numerous assumptions are made in the
modeling process, including balance sheet composition, the pricing, re-pricing and maturity
characteristics of existing business and new business. Additionally, loan and investment
prepayment, administered rate account elastisities and other option risks are considered as well as
the uncertainty surrounding future customer behavior.
65
Interest Rate Exposures
Superior Banks net interest income simulation model projects that net interest income over a
12-month horizon will increase on an annual basis by 3.1%, or approximately $3.0 million, assuming
an instantaneous and parallel increase in interest rates of 200 basis points. The following is a
comparison of these measurements for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change (in Basis Points) |
|
Increase in Net Interest Income |
in Interest Rates |
|
June 30, 2010 |
|
December 31, 2009 |
(12-Month Projection) |
|
Amount |
|
Percent |
|
Amount |
|
Percent |
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
+ 200 BP (1) |
|
$ |
2,973 |
|
|
|
3.1 |
% |
|
$ |
2,200 |
|
|
|
2.3 |
% |
- 200 BP (2) |
|
NCM |
|
NCM |
|
NCM |
|
NCM |
|
|
|
(1) |
|
Results are within our asset and liability management policy. |
|
(2) |
|
Not considered meaningful in the current rate environment. |
EVE is defined as the net present value of the balance sheets cash flows or the residual value of
future cash flows. While EVE does not represent actual market liquidation or replacement value, it
is a useful tool for estimating our balance sheet earnings sensitivity to changes in interest rates
over a longer time horizon. A higher EVE results in a greater earnings capacity. Superior Banks
EVE model projects that EVE will increase 7.50% and 12.6% assuming an instantaneous and parallel
increase in interest rates of 100 and 200 basis points, respectively. Assuming an instantaneous and
parallel decrease of 100 basis points, EVE is projected to decrease 2.4% (although such a decline
is unlikely given the present low level of interest rates). The EVE shifts produced by these
scenarios are within the limits of our asset and liability management policy. The following table
sets forth Superior Banks EVE limits as of June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
Change (in Basis Points) in Interest Rates |
|
EVE |
|
Amount |
|
Percent |
|
|
(Dollars in thousands) |
|
|
|
|
+ 200 BP |
|
$ |
295,608 |
|
|
$ |
33,125 |
|
|
|
12.6 |
% |
+ 100 BP |
|
|
282,172 |
|
|
|
19,686 |
|
|
|
7.5 |
|
0 BP |
|
|
262,479 |
|
|
|
|
|
|
|
|
|
- 100 BP |
|
|
256,080 |
|
|
|
(6,404 |
) |
|
|
(2.4 |
) |
Both the net interest income and EVE simulations include assumptions regarding balances, asset
prepayment speeds and interest rate relationships among balances that management believes to be
reasonable for the various interest rate environments. Differences in actual occurrences from these
assumptions, as well as non-parallel changes in the yield curve, may change our market risk
exposure.
ITEM 4. CONTROLS AND PROCEDURES
CEO and CFO Certification
Appearing as exhibits to this report are Certifications of our Chief Executive Officer (CEO) and
our Chief Financial Officer (CFO). The Certifications are required to be made by Rule 13a-14
under the Securities Exchange Act of 1934, as amended. This Item contains the information about the
evaluation that is referred to in the Certifications, and the
Certifications should be read in conjunction with the information set forth below in this
Item 4 for a more complete understanding of
the Certifications.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures to ensure that material information required to be
disclosed in our Exchange Act reports is made known to the officers who certify our financial
reports and to other members of our senior management and our Board of Directors.
Based on their evaluation as of June 30, 2010, our CEO and our CFO have concluded that our
disclosure controls and procedures (as defined in Rule 13a-l5(e) under the Securities Exchange Act
of 1934) are effective to ensure that the information required to be disclosed by us in the reports
that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized
and reported
66
within the time periods specified in SEC rules and forms and that such information is
accumulated and communicated to our management as appropriate to allow timely decisions regarding
required disclosures.
All internal controls systems, no matter how well designed, have inherent limitations and may not
prevent or detect misstatements in our financial statements, including the possibility of
circumvention or overriding of controls. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement preparation and
presentation. Also, projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
While we are a party to various legal proceedings arising in the ordinary course of business, we
believe that there are no proceedings threatened or pending against us at this time that will
individually, or in the aggregate, materially adversely affect our business, financial condition or
results of operations. We believe that we have strong claims and defenses in each lawsuit in which
we are involved. While we believe that we will prevail in each lawsuit, there can be no assurance
that the outcome of the pending, or any future, litigation, either individually or in the
aggregate, will not have a material adverse effect on our financial condition or our results of
operations.
ITEM 1A. RISK FACTORS
Risks Relating To Our Business
The current economic environment poses significant challenges for us and our industry and could
adversely affect our financial condition and results of operations. We are operating in a
challenging and uncertain economic environment, both nationally and in our local markets. Financial
institutions continue to be affected by declines in the real estate market and constrained
financial markets. Declines in the housing market beginning in 2008 and continuing into 2010,
including falling home prices and increasing delinquencies, foreclosures and unemployment, have
resulted in significant write-downs of asset values by many financial institutions, including us.
Continued concerns over the stability of the financial markets and the economy have resulted in
decreased lending by financial institutions to their clients and to each other. This market turmoil
and tightening of credit has led to increased commercial and consumer credit quality issues, lack
of customer confidence, increased market volatility and widespread reduction in general business
activity. Many financial institutions have experienced decreased access to deposits and borrowings.
The resulting economic pressure on consumers and businesses and the lack of confidence in the
financial markets has had, and may continue to have, an adverse effect on our business, financial
condition and results of operations. For example, a deepening national economic recession or
further deterioration in local economic conditions in our market areas could cause losses that
exceed our allowance for loan losses. We cannot predict when economic conditions are likely to
improve. We may also face additional risks in connection with the current economic environment,
including the following:
|
|
|
Economic conditions that negatively affect housing prices and the job
market have caused, and may continue to cause, the credit quality of
our loan portfolios to deteriorate, and that deterioration in credit
quality has had, and could continue to have, a negative effect on our
business. |
|
|
|
|
Market developments may affect consumer confidence levels and may
cause adverse changes in payment patterns, causing increases in
delinquencies and default rates on loans and other credit facilities. |
|
|
|
|
Market conditions can change rapidly in the current
economic environment, and, if they do, the processes we
use to estimate our allowance for loan losses and reserves
may no longer be reliable. |
|
|
|
|
The value of our securities portfolio may decline. |
|
|
|
|
Our industry faces increased regulation, and compliance
with such regulatory changes has increased our costs and
the complexity of our compliance processes and may
continue to do so. |
|
|
|
|
Natural and environmental disasters, such as hurricanes or
oil spills, have adversely affected and may continue to
adversely affect the local economies in which we operate,
with the potential for further deterioration in credit
quality in those markets as well as a general reduction in
business activity. |
67
As these conditions or similar ones continue to exist or worsen, we could experience continuing or
increased adverse effects on our business, financial condition and results of operations.
Our allowance for loan losses may not be adequate to cover actual losses. If our allowance for
loan losses is not sufficient to cover our actual loan losses, our earnings could decrease. The
determination of the adequacy of our allowance for loan losses is based on managements analysis of
the credit quality of the loan portfolio, which is reviewed regularly. Management maintains an
allowance for loan losses based upon, among other things:
|
|
|
trends in volume; |
|
|
|
|
effects of changes in credit concentrations; |
|
|
|
|
levels of and trends in delinquencies, classified loans and non-performing assets; |
|
|
|
|
levels of and trends in charge-offs and recoveries; |
|
|
|
|
changes in lending policies and underwriting guidelines; |
|
|
|
|
national and local economic trends and conditions; and |
|
|
|
|
mergers and acquisitions. |
Based on those factors, management makes various assumptions and judgments about the ultimate
collectability of our loan portfolios. The determination of the appropriate level of the allowance
for loan losses inherently involves a high degree of subjectivity and requires management to make
significant estimates of current credit risks and future trends, all of which may undergo material
changes. In addition, federal regulators periodically review our allowance for loan losses and may
require us to increase our allowance or recognize further loan charge-offs, based on judgments
different than those of our management. Higher charge-off rates or an increase in our allowance
for loan losses, separately or in combination, may have a material adverse effect on our capital
position and our overall financial performance and may increase our cost of funds. The amount of
future loan losses may be affected by changes in economic, operating and other conditions, which
may be beyond our control, and these losses may exceed current estimates. While we believe that our
allowance for loan losses is adequate to cover current losses, we cannot guarantee that we will not
need to increase our allowance for loan losses or that regulators will not require an increase in
our allowance. Either of these occurrences could materially and adversely affect our financial
condition and results of operations.
Further deterioration of local economic conditions where we operate could have a continuing
negative effect on us. Our success depends significantly on the general economic conditions of the
geographic markets we serve in Alabama and Florida. The local economic conditions in these areas
significantly affect our commercial, real estate and construction loan activity, the ability of
borrowers to repay these loans, and the value of the collateral securing these loans. There can be
no assurance that the economic conditions that have adversely affected the financial services
industry, and the capital, credit and real estate markets generally, will improve in the near term,
in which case we could continue to experience losses and write-downs of assets, and could face
increased capital and liquidity constraints or other business challenges. A continuing
deterioration in economic conditions could result in the following consequences, among others, any
of which could have a material adverse effect on our business:
|
|
|
loan delinquencies may increase; |
|
|
|
|
problem assets and foreclosures may increase; |
|
|
|
|
demand for our products and services may decline; and |
|
|
|
|
collateral for loans we make, especially loans secured by real estate,
may decline in value, in turn reducing a customers borrowing power,
and reducing the value of assets and collateral associated with our
loans. |
Liquidity needs could adversely affect our results of operations and financial condition. Superior
Banks primary sources of funds are customer deposits, principal and interest payments on loans,
federal funds sold and maturities and sales of investment securities. Scheduled loan repayments
are subject to the ability of borrowers to repay the loans. The ability of borrowers to repay loans
can be adversely affected by a number of factors outside of 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
68
or environmental disasters and international instability. Deposit levels and early loan payments may
be affected by a number of factors, including changes in prevailing interest rates, general
economic conditions and competition. In addition, we have access to other sources of liquidity,
including purchased funds from several regional financial institutions, the Federal Reserve
Discount Window, and may borrow from the Federal Home Loan Bank (FHLB). While we believe that
these sources are currently adequate, there can be no assurance these sources will be sufficient to
meet future liquidity demands, particularly if regulatory restrictions should limit their
availability. If our access to these sources of liquidity is diminished or only available on
unfavorable terms, our overall liquidity likely would be adversely affected.
Changes in monetary policy and interest rates could adversely affect our profitability. Our
results of operations are affected by decisions of monetary authorities, particularly the Federal
Reserve. Our profitability depends to a significant extent on our net interest income. Net interest
income is the difference between income we receive from interest-earning assets and interest we pay
to fund those assets. Interest rates are highly sensitive to many factors that are beyond our
control, including general economic conditions and the policies of various governmental and
regulatory agencies. Changes in monetary policy, including changes in interest rates, could affect
not only the interest we receive on loans and securities and the interest we pay on deposits and
borrowings, but also our ability to originate loans and obtain deposits and the average duration of
our mortgage-backed securities portfolio.
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 earned on loans and
investments. Changes in interest rates could also adversely affect some of our noninterest income
sources. For example, if mortgage interest rates increase, the demand for residential mortgage
loans will likely decrease, which will have an adverse effect on our mortgage loan fee income.
Declines in security values could further reduce our investment income.
In light of changing conditions in the national economy and in the financial markets, particularly
the uncertain economic environment, the continuing threat of terrorist acts and the current
military operations in the Middle East, we cannot predict possible future changes in interest
rates, which may negatively affect our deposit levels, our loan demand and our business and
earnings. Furthermore, the actions of the United States and other governments in response to
ongoing economic crises may result in currency fluctuations, exchange controls, market disruption
and other adverse effects.
Non-performing assets take significant time to resolve and adversely affect our results of
operations and financial condition. Non-performing assets adversely affect our net earnings in
various ways. We expect to continue to have a provision for loan losses relating to non-performing
loans that is higher than our historical experience. We generally do not record interest income on
non-performing loans or other real estate owned, thereby reducing our earnings, while our loan
administration costs are higher for non-performing loans. When we take collateral in foreclosures
and similar proceedings, we are required to mark the related asset to the then-fair market value of
the collateral, which may ultimately result in a loss. An increase in the level of non-performing
assets increases our risk profile and may affect the capital levels our regulators believe are
appropriate. While we reduce problem assets through loan sales, workouts, restructurings and
otherwise, decreases in the value of the underlying collateral, or in these borrowers performance
or financial condition, whether or not due to economic and market conditions beyond our control,
could adversely affect our business, results of operations and financial condition. In addition,
the resolution of non-performing assets requires significant commitments of time from management,
which may reduce the time available for the performance of their other responsibilities. There can
be no assurance that we will not experience future increases in non-performing assets.
The failures of other financial institutions could adversely affect us. Our ability to engage in
routine funding transactions could be adversely affected by the actions and potential failures of
other financial institutions. Financial institutions are interrelated as a result of trading,
clearing, counterparty and other relationships. As a result, defaults by, or even rumors or
concerns about, one or more financial institutions with which we do business, or the financial
services industry generally, have led to market-wide liquidity problems and could lead to losses or
defaults by us or by other institutions. Many of these transactions expose us to credit risk in the
event of default by our counterparty or client. In addition, failures of other financial
institutions, and in particular, the failure of community banks, could damage our reputation and
credibility. Any such losses or damage to our reputation could materially and adversely affect our
financial condition and results of operations. Further, we could experience increases in deposits
and assets as a result of other financial institution
difficulties or failure, which could increase the capital we need to support growth.
An interruption or breach in security with respect to our information systems, as well as
information systems of our outsourced service providers, could have a material adverse effect on
us. We rely heavily on communications and information systems to conduct our business. Any
failure, interruption or breach in security with respect to our information systems, as well as
information systems of our outsourced service providers, could damage our reputation, result in a
loss of client business, subject us to additional regulatory scrutiny, or expose us to civil
litigation, any of which could result in failures or disruptions in our client relationship
management, general ledger,
69
deposit, loan and other systems, resulting in a material adverse effect
on our business, financial condition and results of operations.
We incurred a net loss in our last fiscal year and for the first six months of the current fiscal
year and losses may continue in the future. We incurred a net loss of $19.9 million for our fiscal
year ended December 31, 2009, and have incurred a net loss of $59.5 million for the six months
ended June 30, 2010. The loss for the fiscal year ended December 31, 2009 was primarily due to the
increases in the provision for loan losses, foreclosure losses and other-than-temporary impairment
(OTTI) of investment securities we hold, as well as an increase in our FDIC assessment. The loss
for the six months ended June 30, 2010 was primarily due to an increase of $50 million in the
provision for loan losses, foreclosure losses, and salaries and benefits increases. These losses
may continue in the future, and no assurance can be given as to when we may return to profitability
or the level of any profitability.
A significant portion of our loan portfolio is secured by real estate, and events that negatively
affect the real estate market could hurt our business. As of June 30, 2010, approximately 90.3% of
our loans were secured by real estate mortgages. The real estate collateral for these loans
provides an alternate source of repayment in the event of default by the borrower and may
deteriorate in value over the life of the loan. A further weakening of the real estate market in
our market areas could result in an increase in the number of borrowers who default on their loans
and a reduction in the value of the collateral. Further, the value of the collateral underlying a
given loan, and the realizable value of such collateral in a foreclosure sale, likely will be
negatively affected by the continuing downturn in the real estate market. Thus, we may not be able
to realize the full value of underlying collateral securing some of our loans, particularly those
secured by real estate. If we are not able to realize the full value of underlying collateral in
the event of a loan default, there could be an adverse effect our business, financial condition,
and results of operations and the price of our securities. Acts of nature, including hurricanes,
tornados, earthquakes, fires and floods, or environmental disasters such as oil spills, which may
cause uninsured damage and other loss of value to real estate that secures these loans, may also
negatively affect our financial condition.
An increase in loan prepayments may adversely affect our profitability. The rate at which
borrowers prepay loans is dependent on a number of factors outside our control, including changes
in market interest rates, conditions in the housing and financial markets and general economic
conditions. We cannot always accurately predict prepayment rates. If the prepayment rates with
respect to our loans are greater than we anticipate, there may be a negative impact on our
profitability because we may not be able to reinvest prepayment proceeds at rates comparable to
those we received on the prepaid loans, particularly in a time of falling interest rates.
Events in our geographic markets could adversely affect us. Our business is concentrated in six
geographic regions in Alabama and Florida. Any adverse changes in market or economic conditions in
Alabama and Florida may increase the risk that our customers will be unable to make their loan
payments. In addition, the market value of the real estate securing loans as collateral could be
adversely affected by unfavorable changes in local market conditions and general economic
conditions. Any period of increased payment delinquencies, foreclosures or losses caused by adverse
market or economic conditions in general or in our markets in Alabama and Florida, in particular,
could adversely affect our results of operations and financial condition.
With most of our loans concentrated in a small number of markets, further declines in local
economic conditions could adversely affect the values of our real estate collateral. Thus, a
decline in local economic conditions may have a greater effect on our earnings and capital than on
the earnings and capital of larger financial institutions whose real estate loan portfolios are
more geographically diverse.
In addition, natural or environmental disasters, such as hurricanes, tornados and oil spills, in
our markets could adversely affect our business. The occurrence of such natural disasters in our
markets could result in a decline in the value or destruction of mortgaged properties and in an
increase in the risk of delinquencies, foreclosures or losses on these loans and may impact our
customers ability to repay loans.
We face substantial competition. There are numerous competitors in our geographic markets,
including national, regional and local banks and thrifts and other financial services businesses,
some of which have substantially greater resources, higher brand visibility and a wider geographic
presence than we have. Some of these competitors may offer a greater range of services, more
favorable pricing and greater customer convenience than we are able to. In addition, in some of our
markets, there are a significant number of new banks and other financial institutions that have
opened in the recent past or are expected to open in the near future, and such new competitors may
also seek to exploit our markets and customer base. If we are unable to maintain and grow our
market share in the face of such competition, our results of operations will be adversely affected.
We are subject to extensive regulation. Our operations are subject to regulation and examination
by the Office of Thrift Supervision (OTS) and the Federal Deposit Insurance Corporation (FDIC).
We are also subject to applicable regulations of the FHLB. Regulation by these entities is intended
primarily for the protection of our depositors and the deposit insurance fund and not for the
benefit of our stockholders. We may incur substantial costs in complying with such regulations, and
our failure to comply with them may
70
expose us to substantial penalties or regulatory enforcement
action, which may include requirements or limitations of varying degrees of severity, including,
among other things, restrictions on our ability to develop any new business, as well as
restrictions on our existing business, and requirements that we raise additional capital and/or
dispose of certain assets and liabilities within a prescribed period of time, or both. The terms of
any such enforcement action could have a material adverse effect on our business, financial
condition or results of operations and the value of our common stock.
In June 2010, the OTS imposed certain restrictions and requirements on us and Superior Bank,
including, among others: (1) Superior Bank may not pay any dividends to us without the prior
approval of the OTS and is subject to certain lending restrictions, brokered deposit restrictions
and certain liquidity planning and reporting requirements; (2) we must notify the OTS of any
proposed addition to our Board, the employment of any senior executive officer or changes in
responsibilities of any senior executive officer; (3)we may not make any golden parachute payment,
except as permitted by law; (4) we may not renew, extend or revise any compensation or benefits of
any director or officer without prior OTS approval; and (5) we may not enter into any third party
contracts outside the normal course of business without prior written approval of the OTS.
Additional restrictions and/or requirements may be imposed in the future by the OTS.
In addition, we are subject to numerous consumer protection laws and other laws relating to the
operation of financial institutions. Our failure to comply with such laws could expose us to
liability, which could have a material adverse effect on our results of operations.
Recently enacted financial reform legislation will, among other things, tighten capital standards,
create a new Consumer Financial Protection Bureau and result in new regulations that are expected
to increase our costs of operations. On July 21, 2010, the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the Dodd-Frank Act) was signed into law. This new law will
significantly change the current bank regulatory structure and affect the lending, deposit,
investment, trading and operating activities of financial institutions and their holding companies.
The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing
rules and regulations and to prepare numerous studies and reports for Congress. The federal
agencies are given significant discretion in drafting the implementing rules and regulations, and
consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for
many months or years.
The Dodd-Frank Act will eliminate the OTS, our current federal regulator, one year from the
enactment of the law (unless extended). As a result, the Comptroller of the Currency, the primary
federal regulator for national banks, will become the primary federal regulator of Superior Bank
and the Board of Governors of the Federal Reserve System (the Federal Reserve) will have
exclusive authority to regulate all thrift holding companies that were formerly regulated by the
OTS, including us.
In addition, the Dodd-Frank Act will eliminate the federal prohibitions on paying interest on
demand deposits effective one year after the date of its enactment, thus allowing businesses to
have interest bearing checking accounts. Depending on competitive responses, this significant
change to existing law could have an adverse impact on our interest expense.
Among the many requirements in the Dodd-Frank Act for new banking regulations is a requirement for
new capital regulations to be adopted within 18 months. These regulations must be at least as
stringent as, and may call for higher levels of capital than, current regulations. Generally,
trust preferred securities will no longer be eligible as Tier 1 capital, but our currently
outstanding trust preferred securities will be grandfathered.
The Dodd-Frank Act also broadens the base for FDIC insurance assessments. Assessments will now be
based on the average consolidated total assets less tangible equity capital of a financial
institution. The Dodd-Frank Act permanently increases the maximum amount of deposit insurance for
banks, savings institutions and credit unions to $250,000 per depositor. Non-interest bearing
transaction accounts have unlimited deposit insurance through December 31, 2013.
The Dodd-Frank Act will require publicly traded companies to give stockholders a non-binding vote
on executive compensation and golden parachute payments. In addition, the Dodd-Frank Act
authorizes the Securities and Exchange Commission to promulgate rules that would allow stockholders
to nominate their own candidates using a companys proxy materials and directs the federal banking
regulators to issue rules prohibiting incentive compensation that encourages inappropriate risks.
The Dodd-Frank Act creates a new Bureau of Consumer Financial Protection with broad powers to
supervise and enforce consumer protection laws. The Bureau will have broad rule-making authority
for a wide range of consumer protection laws that apply to all banks, including the authority to
prohibit unfair, deceptive or abusive acts and practices. The Bureau will have examination and
enforcement authority over all banks with more than $10 billion in assets. Savings institutions
with less than $10 billion in assets will continue to be examined for compliance with consumer laws
by their primary bank regulator.
71
Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several
years, making it difficult to anticipate the overall financial impact on us. However, compliance
with this new law and its implementing regulations clearly will result in some additional operating
and compliance costs that could have a material adverse effect on our business, financial condition
and results of operations.
We may require additional capital to fund our growth plans and to meet regulatory requirements. We
are required by federal regulatory authorities to maintain adequate levels of capital to support
our operations. Our business strategy includes the expansion of our business through the
development of new locations and through the acquisition of other financial institutions and, to
the extent permitted by applicable law, complementary businesses as appropriate opportunities
arise. In order to finance such growth and to maintain required regulatory capital levels, we may
require additional capital in the future. Our ability to raise additional capital, if needed, will
depend on conditions in the capital markets at that time, which are outside of our control, and on
our financial performance. Accordingly, we may not be able to raise additional capital, if needed,
on favorable economic terms, or other terms acceptable to us. If we cannot raise additional
capital when needed, our ability to maintain or expand our operations, our ability to operate
without additional regulatory or other restrictions, and our operating results, could be materially
adversely affected.
We are dependent upon the services of our management team. Our operations and strategy are
directed by our senior management team, most of whom have joined Superior Bancorp since January
2005. Any loss of the services of members of our management team could have a material adverse
effect on our results of operations and our ability to implement our business strategy.
Additional regulatory requirements especially those imposed under ARRA, EESA or other legislation
intended to strengthen the U.S. financial system, could adversely affect us. Recent government
efforts to strengthen the U.S. financial system, including the implementation of the American
Recovery and Reinvestment Act (ARRA), the Emergency Economic Stabilization Act (EESA), the
Temporary Liquidity Guarantee Program (TLGP) and special assessments imposed by the FDIC, subject
us, to the extent applicable, to additional regulatory fees, corporate governance requirements,
restrictions on executive compensation, restrictions on declaring or paying dividends, restrictions
on stock repurchases, limits on executive compensation tax deductions and prohibitions against
golden parachute payments. These fees, requirements and restrictions, as well as any others that
may be imposed in the future, may have a material and adverse effect on our business, financial
condition, and results of operations.
The imposition of certain restrictions on our executive compensation as a result of our decision to
participate in the CPP may have material adverse effects on our business and results of
operations. As a result of our election to participate in the CPP, we have adopted the Treasury
Departments standards for executive compensation and corporate governance for the period during
which the Treasury Department holds any of our equity issued under the CPP. These standards
generally apply to our Chief Executive Officer, our Chief Financial Officer and the three next most
highly compensated executive officers, referred to collectively as the senior executive officers,
and, in the case of some standards, to other of our employees as well. The standards include:
(i) ensuring that incentive compensation plans and arrangements do not encourage unnecessary and
excessive risks that threaten the value of us and Superior Bank, (ii) prohibiting a bonus payment
to any of the five most highly compensated employees unless paid in the form of long-term
restricted stock, (iii) requiring a clawback of any bonus or incentive compensation paid to a
senior executive officer or any of the 20 next most highly compensation employees based on
statements of earnings, gains or other criteria that are later proven to be materially inaccurate,
(iv) prohibiting golden parachute payments to a senior executive officer or any of the five next
most highly compensated employees, (v) prohibiting reimbursement or gross-up of taxes paid with
respect to compensation for any of our senior executive officers or the 20 next most highly
compensated employees, and (vi) agreeing not to deduct, for tax purposes, compensation paid to an
employee in excess of $500,000. These restrictions may place us at a competitive disadvantage in
attracting and retaining management.
Higher FDIC deposit insurance premiums and assessments could adversely affect our financial
condition. Recent insured institution failures, as well as deterioration in banking and economic
conditions, have significantly increased the loss provisions of the FDIC, resulting in a decline to
historical lows in the designated reserve ratio. The FDIC expects a higher rate of insured
institution failures in the next few years. The FDIC has substantially increased its premium
assessments, and may raise the premiums even higher in the future. We expect to pay significantly
higher FDIC premiums in the future. Additional special assessments may be imposed by the FDIC for
future periods. Participants in the TLGP for noninterest-bearing transaction deposit accounts pay
additional annual assessments to the FDIC. The FDIC required all insured institutions to prepay
insurance premiums through 2012 in order to recapitalize the Deposit Insurance Fund. In the case of
Superior Bank, this prepayment aggregated $15.9 million in the fourth quarter of 2009. Future
increases in FDIC insurance premiums would likely have an adverse effect on the operating expenses
and results of operations of Superior Bank. Management cannot predict what insurance assessment
rates will be in the future.
72
Changes in accounting policies and practices, as may be adopted by regulatory agencies, the
Financial Accounting Standards Board, or other authoritative bodies, could materially affect our
reported financial condition and results of operations. Our accounting policies and methods are
fundamental to how we record and report our financial condition and results of operations. From
time to time, 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 may be hard to predict and can materially
affect how we record and report our financial condition and results of operations.
The accuracy of our financial statements and related disclosures could be affected because we are
exposed to conditions or assumptions different from the judgments, assumptions or estimates used in
our critical accounting policies. The preparation of financial statements and related disclosures
in conformity with accounting principles generally accepted in the United States requires us to
make judgments, assumptions and estimates that affect the amounts reported in our consolidated
financial statements and accompanying notes. Our critical accounting policies, which we summarize
in our Annual Report on Form 10-K for the year ended December 31, 2009, describe those significant
accounting policies and methods used in the preparation of our consolidated financial statements
that we consider critical because they require judgments, assumptions and estimates about the
future that materially affect our financial disclosures. For example, material estimates that are
particularly susceptible to significant change underlie the determination of the allowance for
losses on loans, including valuation allowances for impaired loans, and the valuation of real
estate acquired in connection with foreclosures or in satisfaction of loans. As a result, if future
events differ significantly from the judgments, assumptions and estimates in our critical
accounting policies, those events or assumptions could have a material impact on our audited
consolidated financial statements and related disclosures.
Future losses could result in the recording of a valuation allowance against our deferred tax
assets (DTA) and impair our ability to recover our deferred tax assets. We currently recognize
DTA aggregating $58.2 million, net a valuation allowance of $23.2 million. The recognition of DTA
is based upon managements judgment that realization of the asset is more likely than not.
Managements judgment is based on estimates concerning various future events and uncertainties,
including future reversals of existing taxable temporary differences, the timing and amount of
future income earned by our subsidiaries and the implementation of various tax planning strategies
to maximize realization of the DTA. As a result of book losses incurred in 2009 and 2008, we are in
a three-year-cumulative loss position at December 31, 2009, and there are no taxes paid in prior
years that are available for the carryback period. A cumulative loss position is considered
significant negative evidence in assessing the realizability of a DTA. Our management has concluded
that sufficient positive evidence exists to overcome this negative
evidence. See Note 10 of Notes to
Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for the
quarter ended June 30, 2010 and Note 14 of Notes to Consolidated Financial Statements in our Annual
Report on Form 10-K for the year ended December 31, 2009. The amount of our DTA considered
realizable, however, could be significantly reduced in the near term if estimates of future taxable
income during the carryforward period are significantly lower than forecasted due to further
decreases in market conditions or the economy, which could produce additional credit losses within
our loan and investment portfolios. We evaluate quarterly the realizability of our net DTA and, if
necessary, adjust our valuation allowance accordingly.
Issuances or sales of common stock or other equity securities could result in an ownership change
as defined for U.S. federal income tax purposes. If an ownership change were to occur, our
ability to fully utilize a significant portion of our U.S. federal and state tax net operating
losses and certain built-in losses that have not been recognized for tax purposes could be impaired
as a result of the operation of Section 382 of the Internal Revenue Code. Our ability to use
certain realized net operating losses and unrealized built-in losses to offset future taxable
income may be significantly limited if we experience an ownership change as defined by
Section 382 of the Internal Revenue Code of 1986 (the Code). An ownership change under
Section 382 generally occurs when a change in the aggregate percentage ownership of the stock of
the corporation held by five percent stockholders increases by more than fifty percentage points
over a rolling three-year period. A corporation experiencing an ownership change generally is
subject to an annual limitation on its utilization of pre-change losses and certain post-change
recognized built-in losses equal to the value of the stock of the corporation immediately before
the ownership change, multiplied by the long-term tax-exempt rate (subject to certain adjustments).
The annual limitation is increased each year to the extent that there is an unused limitation in a
prior year. Since U.S. federal net operating losses generally may be carried forward for up to
20 years, the annual limitation also effectively provides a cap on the cumulative amount of
pre-change losses and certain post-change recognized built-in losses that may be utilized.
Pre-change losses and certain post-change
recognized built-in losses in excess of the cap are effectively unable to be used to reduce future
taxable income. In some circumstances, issuances or sales of our stock (including any common stock
or other equity issuances or debt-for-equity exchanges and certain transactions involving our stock
that are outside of our control) could result in an ownership change under Section 382.
If an ownership change under Section 382 were to occur, the value of our net operating losses and
a portion of the net unrealized built-in losses would be impaired which could result in a
significant increase in our future tax liability and could negatively affect our financial
condition and operations. Additionally, this would require us to increase our DTA valuation
allowance, as discussed above.
73
Our financial condition and outlook may be adversely affected by damage to our reputation. Our
financial condition and outlook is highly dependent upon perceptions of our business practices and
reputation. Our ability to attract and retain customers and employees could be adversely affected
if our reputation is damaged. Negative public opinion could result from our actual or alleged
conduct in any number of activities, including lending practices, corporate governance, regulatory
compliance, mergers and acquisitions, or inappropriate disclosure or inadequate protection of
customer information, as well as from actions taken by government regulators and community
organizations in response to that conduct. Damage to our reputation could give rise to legal risks,
which, in turn, could increase the size and number of litigation claims and damages asserted or
subject us to enforcement actions, fines and penalties and cause us to incur related costs and
expenses. Additionally, reputational damage could result in a loss of deposits, thereby reducing
liquidity and reducing our ability to leverage our capital into earnings.
We will realize additional future losses if the proceeds we receive upon liquidation of assets are
less than the carrying value of such assets. We may dispose of non-performing assets. We may also
sell assets in the future that are not currently identified as non-performing assets. We will
realize additional future losses if the proceeds we receive upon dispositions of assets are less
than the recorded carrying value of such assets. Furthermore, if market conditions continue to
decline, the magnitude of losses we may realize upon the disposition of assets may increase, which
could materially adversely affect our business, financial condition and results of operations.
If we defer payments of interest on our outstanding junior subordinated debentures or if certain
defaults relating to those debentures occur, we will be prohibited from declaring or paying
dividends or distributions on, and from making liquidation payments with respect to, our preferred
and common stock. At June 30, 2010, we had outstanding $118.2 million aggregate principal amount
of junior subordinated debentures issued in connection with the sale of trust preferred securities
through statutory business trusts. We have unconditionally guaranteed these trust preferred
securities. There are currently five separate series of these junior subordinated debentures
outstanding, each series having been issued under a separate indenture and with a separate
guarantee. Each of these indentures, together with the related guarantee, prohibits us, subject to
limited exceptions, from declaring or paying any dividends or distributions on, or redeeming,
repurchasing, acquiring or making any liquidation payments with respect to, any of our capital
stock at any time when (i) there shall have occurred and be continuing an event of default under
such indenture or any event, act or condition that with notice or lapse of time or both would
constitute an event of default under such indenture; (ii) we are in default with respect to payment
of any obligations under such guarantee; or (iii) we have deferred payment of interest on the
junior subordinated debentures outstanding under that indenture. In that regard, we are entitled,
at our option but subject to certain conditions, to defer payments of interest on the junior
subordinated debentures of each series from time to time for up to five years.
Events of default under the indentures generally consist of our failure to pay interest on the
junior debentures securities under certain circumstances, our failure to pay any principal of or
premium on such junior debentures securities when due, our failure to comply with certain covenants
under the indenture, and certain events of bankruptcy, insolvency or liquidation relating to us or
Superior Bank.
As a result of these provisions, if we were to elect to defer payments of interest on any series of
junior subordinated debentures, or if any of the other events described in clause (i) or (ii) of
the first paragraph of this risk factor were to occur, we would be prohibited from declaring or
paying any dividends on our preferred and common stock, from repurchasing or otherwise acquiring
any such common stock, and from making any payments to holders of our preferred and common stock in
the event of our liquidation, which would likely have a material adverse effect on the market value
of our common stock.
Risks Related To an Investment in Our Common Stock
Our stock price may be volatile due to limited trading volume and general market conditions. Our
common stock is traded on the NASDAQ Global Market. However, the average daily trading volume in
our common stock is relatively small, typically less than 90,000 shares per day and sometimes
significantly less. Trades involving a relatively small number of shares may have a substantial
effect on the market price of our common stock, and it may be difficult for investors to acquire or
dispose of large blocks of stock without
significantly affecting the market price.
In addition, market fluctuations, industry factors, general economic conditions and political
events, including economic slowdowns or recessions, interest rate changes or market trends, also
could cause our stock price to decrease regardless of our results of operations. Stock prices of
thrift holding companies, such as ours, have been negatively affected by the current condition of
the financial markets.
74
Our common stock is equity and is subordinate to our existing and future indebtedness and preferred
stock. Shares of common stock are equity interests in us and are not indebtedness. As such, shares
of common stock will rank junior to all of our indebtedness, debentures and preferred stock and to
other non-equity claims against us and our assets available to satisfy claims against us, including
in any liquidation or similar proceeding. Additionally, holders of our common stock are subject to
the prior dividend and liquidation rights of holders of our outstanding preferred stock, debentures
and the holders of our trust preferred securities. As of June 30, 2010, we had $118.2 million of
subordinated debentures issued in connection with trust preferred securities, including $69,100,000
issued in connection with the trust preferred securities held by the U.S. Treasury. Payments of the
principal and interest on the trust preferred securities are unconditionally guaranteed by us.
Upon any liquidation, lenders and holders of our debt securities and preferred stock would receive
distributions of our available assets prior to holders of our common stock.
Our ability to pay dividends and to repurchase shares of common stock is limited. We do not
currently pay dividends on our common stock. Our board of directors has agreed to obtain the
written consent of the OTS prior to the declaring or paying of any dividends. This restriction
will remain in effect until such time as the OTS modifies, terminates, or otherwise suspends the
restriction. In addition, our ability to declare or pay dividends on our common stock is restricted
as described below.
Our ability to pay dividends is limited by regulatory requirements and the need to maintain
sufficient consolidated capital to meet the capital needs of our business, including capital needs
related to future growth. Our primary source of income is the payment of dividends from Superior
Bank to us. Superior Bank, in turn, is likewise subject to regulatory
requirements that currently restrict its ability to pay such dividends to us and by the need to maintain sufficient capital for
its operations and obligations. In the event Superior Bank is unable to pay dividends to us for an
extended period of time, we may not be able to service our debt, pay
our obligations as they become
due, or pay dividends on our common stock. We are obligated, subject to regulatory limitations, to
make periodic distributions on our trust preferred securities, subordinated debentures and
preferred stock, which reduces the income that might otherwise be available to pay dividends on our
common stock. Thus, there can be no assurance that we will pay dividends to our common
stockholders, no assurance as to the amount or timing of any such dividends, and no assurance that
such dividends, if and when paid, will be maintained, at the same level or at all, in future
periods.
At June 30, 2010, we had $118.2 million in liquidation value amount of outstanding subordinated
debentures (and the related trust preferred securities). An inability of Superior Bank to pay cash
dividends to us could affect our future ability to make interest payments on our subordinated
debentures (and the related trust preferred securities). We have the right to defer distributions
on the subordinated debentures (and the related trust preferred securities) for up to five years,
during which time no dividends may be paid to holders of our common stock. If we were to default
in payments due with respect to the subordinated debentures or otherwise defer payments under the
terms of the subordinated debentures, we would be prohibited from declaring or paying dividends on
our common stock.
The exercise of our warrants would dilute existing stockholders ownership interest. In connection
with the sale of certain preferred securities and subordinated notes, we granted warrants to
purchase shares of our common stock, including a warrant to initially purchase 1,923,792 shares of
common stock at an initial exercise price of $5.38 to the Treasury Department (the Treasury
Warrant), a warrant to initially purchase 1,000,000 shares of common stock at an initial exercise
price of $7.53 to the purchaser of subordinated notes (the Debt Warrant), warrants to initially
purchase 792,859 shares of common stock at an initial exercise price of $3.50 to the purchasers of
our Series B Preferred Stock and warrants to initially purchase 21,429 shares of common stock at
$3.50 to the purchasers of our Series C Preferred Stock. These warrants are subject to adjustment
under certain circumstances. If any warrant holder exercises its warrant that would result in
dilution to the ownership interest of our existing stockholders and dilute the earnings per share
of our common stock.
We may issue additional shares of common stock or equity derivative securities that will dilute the
percentage ownership interest of existing stockholders and may dilute the book value per share of
our common stock. Subject to applicable NASDAQ rules, our board generally has the authority,
without action by or vote of our stockholders, to issue all or part of any authorized but unissued
shares of common stock for any corporate purpose, including issuance of equity-based incentives
under or outside of our equity compensation plans. We may seek additional equity capital in the
future as we develop our business and expand our operations. In addition, we may use our common
stock to acquire other financial institution and related businesses subject to applicable
regulatory requirements. Any issuance of additional shares of common stock or equity derivative
securities will dilute the percentage ownership interest of our existing
stockholders and may dilute the book value per share of our common stock. In addition, new
investors may also have rights, preferences and privileges that are senior to our common
stockholders.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the second quarter, Cambridge Savings Bank (Cambridge) exchanged $3.5 million of trust
preferred securities issued by our wholly owned unconsolidated subsidiary, Superior Capital Trust
I, for 849,156 shares of our common stock, $0.001 par value per share.
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The terms of the exchange
were previously reported in a Current Report on Form 8-K filed on January 22, 2010. Exemption from
registration is claimed under Section 3(a)(9) of the Securities Act of 1933. The common stock
which is being issued is being exchanged with existing security holders exclusively, and no
commission or other remuneration is being paid or given directly or indirectly for soliciting such
exchange.
Between
June 22, 2010 and June 30, 2010, we sold $11.1 million
in liquidation amount of our Series B Cumulative
Convertible Preferred Stock (the Series B Preferred
Stock) and $0.3 million in liquidation amount of our Series C
Cumulative Convertible Preferred Stock (Series C Preferred Stock) for total cash consideration of
$1.4 million. There were no underwriting discounts or commissions in connection with the
transactions. The terms of the Series B Preferred Stock were disclosed in a Current Report on
Form 8-K filed on May 6, 2010. The Series C Preferred Stock is mandatorily convertible upon the
earlier of December 15, 2010 or the completion of additional capital financing by the Company, but
is not voluntarily convertible by the holder prior to such time. The initial conversion rate of
the Series C Preferred Stock is the market price on the trading day immediately preceding the
issuance of the stock (the Market Price), as determined in accordance with NASDAQ listing rules.
If approval of our stockholders is obtained prior to conversion, the conversion rate will be the
lower of (a) the Market Price or (b) 83% of the offering price of the additional financing or, if
no additional financing occurs, the 10-day volume-weighted trailing average of closing prices of
our common stock prior to December 15, 2010. We issued to the purchasers of our convertible
preferred stock issued in June 2010 five-year warrants to purchase approximately 100,002 shares in
the aggregate of our common stock at an exercise price of $3.50 per share. The issuance and sale
of the convertible preferred stock and warrants is exempt from registration under the Securities
Act of 1933 (the Act) in reliance on the exemptions from the registration requirement of the Act
for transactions not involving any public offering pursuant to Section 4(2) of the Act and Rule 506
of Regulation D promulgated pursuant to the Act. The issuance and sale of the preferred stock and
warrants qualifies for these exemptions because the offering was made to a limited number of
sophisticated investors who were accredited investors within the meaning of Regulation D.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
(a) Exhibit:
3 |
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Certificate of Designation of Preferences and Rights of Series C Cumulative Convertible Preferred Stock |
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31.1 |
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Certification of principal executive officer pursuant to Rule 13a-14(a). |
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31.2 |
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Certification of principal financial officer pursuant to Rule 13a-14(a). |
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32.1 |
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Certification of principal executive officer pursuant to 18 U.S.C. Section 1350. |
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32.2 |
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Certification of principal financial officer pursuant to 18 U.S.C. Section 1350. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Date: August 16, 2010 |
By: |
/s/ C. Stanley Bailey
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C. Stanley Bailey |
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Chief Executive Officer |
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Date: August 16, 2010 |
By: |
/s/ James A. White
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James A. White |
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Chief Financial Officer
(Principal Financial Officer) |
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77