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 September 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
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Outstanding as of November 10 , 2010 |
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Common stock, $.001 par value
|
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12,560,457 |
SUPERIOR BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share data)
|
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|
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September 30, |
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December 31, |
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2010 |
|
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2009 |
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(Unaudited) |
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ASSETS
|
Cash and due from banks |
|
$ |
66,937 |
|
|
$ |
74,020 |
|
Interest-bearing deposits in other banks |
|
|
195,212 |
|
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|
23,714 |
|
Federal funds sold |
|
|
1,946 |
|
|
|
2,036 |
|
|
|
|
|
|
|
|
Total cash and cash equivalents |
|
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264,095 |
|
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|
99,770 |
|
Investment securities available-for-sale |
|
|
261,002 |
|
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286,310 |
|
Tax lien certificates |
|
|
19,849 |
|
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19,292 |
|
Mortgage loans held-for-sale |
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63,884 |
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71,879 |
|
Loans, net of unearned income |
|
|
2,415,862 |
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|
2,472,697 |
|
Allowance for loan losses |
|
|
(151,362 |
) |
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|
(41,884 |
) |
|
|
|
|
|
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Net loans |
|
|
2,264,500 |
|
|
|
2,430,813 |
|
Premises and equipment, net |
|
|
102,097 |
|
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|
104,022 |
|
Accrued interest receivable |
|
|
13,693 |
|
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|
15,581 |
|
Stock in FHLB |
|
|
16,907 |
|
|
|
18,212 |
|
Cash surrender value of life insurance |
|
|
51,277 |
|
|
|
50,142 |
|
Core deposit and other intangible assets |
|
|
13,772 |
|
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16,694 |
|
Other real estate |
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58,766 |
|
|
|
41,618 |
|
Other assets |
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36,659 |
|
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|
67,536 |
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Total assets |
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$ |
3,166,501 |
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$ |
3,221,869 |
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LIABILITIES AND STOCKHOLDERS EQUITY
|
Deposits: |
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Noninterest-bearing |
|
$ |
276,473 |
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$ |
257,744 |
|
Interest-bearing |
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2,500,357 |
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2,398,829 |
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Total deposits |
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2,776,830 |
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2,656,573 |
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Advances from FHLB |
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216,325 |
|
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218,322 |
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Security repurchase agreements |
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726 |
|
|
|
841 |
|
Notes payable |
|
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45,201 |
|
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45,917 |
|
Subordinated debentures, net |
|
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81,518 |
|
|
|
84,170 |
|
Accrued expenses and other liabilities |
|
|
30,497 |
|
|
|
24,342 |
|
|
|
|
|
|
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Total liabilities |
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3,151,097 |
|
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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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|
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Series B, cumulative convertible preferred stock, 111, -0- and -0-
shares issued and outstanding as of September 30, 2010 and 2009
and December 31, 2009, respectively |
|
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|
|
|
|
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|
Series C, cumulative convertible preferred stock, 3, -0- and -0-
shares issued and outstanding as of September 30, 2010 and 2009
and December 31, 2009, respectively |
|
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Common stock, par value $.001 per share; shares authorized 200,000,000,
20,000,000 and 200,000,000 at September 30, 2010 and 2009 and December
31, 2009, respectively;
shares issued 12,560,457, 11,624,279 and 11,673,837, respectively;
outstanding 12,560,457, 11,624,279 and 11,667,794, respectively |
|
|
13 |
|
|
|
12 |
|
Surplus preferred |
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|
12,428 |
|
|
|
|
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warrants |
|
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9,827 |
|
|
|
8,646 |
|
common |
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|
325,158 |
|
|
|
322,043 |
|
Accumulated deficit |
|
|
(329,030 |
) |
|
|
(130,889 |
) |
Accumulated other comprehensive loss |
|
|
(2,853 |
) |
|
|
(7,825 |
) |
Unearned ESOP stock |
|
|
(129 |
) |
|
|
(263 |
) |
Unearned restricted stock |
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|
(10 |
) |
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|
(20 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
15,404 |
|
|
|
191,704 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
3,166,501 |
|
|
$ |
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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Nine Months Ended |
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September 30, |
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September 30, |
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|
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2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans |
|
$ |
34,108 |
|
|
$ |
36,783 |
|
|
$ |
106,662 |
|
|
$ |
107,693 |
|
Interest on taxable securities |
|
|
2,299 |
|
|
|
3,362 |
|
|
|
7,835 |
|
|
|
11,148 |
|
Interest on tax-exempt securities |
|
|
302 |
|
|
|
432 |
|
|
|
928 |
|
|
|
1,295 |
|
Interest on federal funds sold |
|
|
1 |
|
|
|
1 |
|
|
|
4 |
|
|
|
8 |
|
Interest and dividends on other investments |
|
|
542 |
|
|
|
471 |
|
|
|
1,307 |
|
|
|
1,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
37,252 |
|
|
|
41,049 |
|
|
|
116,736 |
|
|
|
121,433 |
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on deposits |
|
|
10,843 |
|
|
|
13,315 |
|
|
|
33,821 |
|
|
|
42,317 |
|
Interest on other borrowed funds |
|
|
2,505 |
|
|
|
2,619 |
|
|
|
7,568 |
|
|
|
7,558 |
|
Interest on subordinated debentures |
|
|
2,384 |
|
|
|
1,202 |
|
|
|
7,169 |
|
|
|
3,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
15,732 |
|
|
|
17,136 |
|
|
|
48,558 |
|
|
|
53,477 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
21,520 |
|
|
|
23,913 |
|
|
|
68,178 |
|
|
|
67,956 |
|
Provision for loan losses |
|
|
102,106 |
|
|
|
5,169 |
|
|
|
161,596 |
|
|
|
14,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest (loss) income after provision for loan losses |
|
|
(80,586 |
) |
|
|
18,744 |
|
|
|
(93,418 |
) |
|
|
53,354 |
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges and fees on deposits |
|
|
2,268 |
|
|
|
2,595 |
|
|
|
6,819 |
|
|
|
7,506 |
|
Mortgage banking income |
|
|
6,198 |
|
|
|
1,506 |
|
|
|
10,875 |
|
|
|
5,468 |
|
Investment securities gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of securities |
|
|
3 |
|
|
|
5,644 |
|
|
|
1,861 |
|
|
|
5,644 |
|
Total other-than-temporary impairment losses (OTTI) |
|
|
(174 |
) |
|
|
(3,478 |
) |
|
|
(1,057 |
) |
|
|
(20,669 |
) |
Portion of OTTI recognized in other comprehensive
loss |
|
|
(135 |
) |
|
|
(45 |
) |
|
|
48 |
|
|
|
5,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities gains (losses) |
|
|
(306 |
) |
|
|
2,121 |
|
|
|
852 |
|
|
|
(9,506 |
) |
Change in fair value of derivatives |
|
|
(1,481 |
) |
|
|
435 |
|
|
|
(1,510 |
) |
|
|
170 |
|
Increase in cash surrender value of life insurance |
|
|
576 |
|
|
|
568 |
|
|
|
1,702 |
|
|
|
1,623 |
|
Gain on exchange of subordinated debt for common stock |
|
|
|
|
|
|
|
|
|
|
507 |
|
|
|
|
|
Other income |
|
|
552 |
|
|
|
1,254 |
|
|
|
3,302 |
|
|
|
3,811 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
7,807 |
|
|
|
8,479 |
|
|
|
22,547 |
|
|
|
9,072 |
|
Noninterest expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
14,062 |
|
|
|
12,234 |
|
|
|
42,102 |
|
|
|
36,976 |
|
Occupancy, furniture and equipment |
|
|
5,012 |
|
|
|
4,478 |
|
|
|
14,625 |
|
|
|
13,397 |
|
Amortization of core deposit intangibles |
|
|
870 |
|
|
|
985 |
|
|
|
2,609 |
|
|
|
2,956 |
|
FDIC assessments |
|
|
2,613 |
|
|
|
921 |
|
|
|
5,846 |
|
|
|
3,310 |
|
Foreclosure losses |
|
|
6,187 |
|
|
|
1,337 |
|
|
|
12,122 |
|
|
|
3,656 |
|
Other expenses |
|
|
7,398 |
|
|
|
5,687 |
|
|
|
20,180 |
|
|
|
17,207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expenses |
|
|
36,142 |
|
|
|
25,642 |
|
|
|
97,484 |
|
|
|
77,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(108,921 |
) |
|
|
1,581 |
|
|
|
(168,355 |
) |
|
|
(15,076 |
) |
Income tax expense (benefit) |
|
|
26,972 |
|
|
|
701 |
|
|
|
27,000 |
|
|
|
(6,686 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(135,893 |
) |
|
|
880 |
|
|
|
(195,355 |
) |
|
|
(8,390 |
) |
Preferred stock dividends and amortization |
|
|
(1,887 |
) |
|
|
(1,167 |
) |
|
|
(2,786 |
) |
|
|
(3,477 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stockholders |
|
$ |
(137,780 |
) |
|
$ |
(287 |
) |
|
$ |
(198,141 |
) |
|
$ |
(11,867 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
12,531 |
|
|
|
10,984 |
|
|
|
12,164 |
|
|
|
10,373 |
|
Weighted average common shares outstanding, assuming dilution |
|
|
12,531 |
|
|
|
10,984 |
|
|
|
12,164 |
|
|
|
10,373 |
|
Basic net loss per common share |
|
$ |
(11.00 |
) |
|
$ |
(0.03 |
) |
|
$ |
(16.29 |
) |
|
$ |
(1.14 |
) |
Diluted net loss per common share |
|
$ |
(11.00 |
) |
|
$ |
(0.03 |
) |
|
$ |
(16.29 |
) |
|
$ |
(1.14 |
) |
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(195,355 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(195,355 |
) |
Other comprehensive gain, net of tax
expense of $2.6 million unrealized gain
on securities available for sale, arising
during the period, net of
reclassification adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,489 |
|
|
|
|
|
|
|
|
|
|
|
4,489 |
|
Change in accumulated loss on cash flow
hedging instrument, net of tax of $0.3
million |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
483 |
|
|
|
|
|
|
|
|
|
|
|
483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(190,383 |
) |
Cumulative preferred stock dividend, net of
amortization |
|
|
|
|
|
|
|
|
|
|
2,258 |
|
|
|
|
|
|
|
|
|
|
|
(2,786 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(528 |
) |
Exchange of trust preferred debt for
849,156 shares of common stock |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
2,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,884 |
|
Compensation expense related to stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
204 |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
10 |
|
Issuance of 43,507 shares related to
board compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
155 |
|
Release of 2,954 shares by ESOP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(127 |
) |
|
|
|
|
|
|
|
|
|
|
134 |
|
|
|
|
|
|
|
7 |
|
|
|
|
Balance at September 30, 2010 |
|
$ |
|
|
|
$ |
13 |
|
|
$ |
12,428 |
|
|
$ |
9,827 |
|
|
$ |
325,158 |
|
|
$ |
(329,030 |
) |
|
$ |
(2,853 |
) |
|
$ |
(129 |
) |
|
$ |
(10 |
) |
|
$ |
15,404 |
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
5
SUPERIOR BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
Net cash provided by (used in) operating activities |
|
$ |
26,141 |
|
|
$ |
(23,537 |
) |
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
Proceeds from sales of investment securities available-for-sale |
|
|
89,130 |
|
|
|
157,614 |
|
Proceeds from maturities of investment securities available-for-sale |
|
|
60,577 |
|
|
|
57,334 |
|
Purchase of investment securities available-for-sale |
|
|
(117,055 |
) |
|
|
(162,586 |
) |
Net increase in loans |
|
|
(38,946 |
) |
|
|
(164,713 |
) |
Redemptions of tax lien certificates |
|
|
14,318 |
|
|
|
29,909 |
|
Purchase of tax lien certificates |
|
|
(14,875 |
) |
|
|
(30,823 |
) |
Purchase of premises and equipment |
|
|
(3,403 |
) |
|
|
(6,616 |
) |
Proceeds from sale of premises and equipment |
|
|
|
|
|
|
376 |
|
Proceeds from sale of foreclosed assets |
|
|
18,661 |
|
|
|
11,149 |
|
Decrease in stock of FHLB |
|
|
1,305 |
|
|
|
3,199 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
9,712 |
|
|
|
(105,157 |
) |
Financing activities |
|
|
|
|
|
|
|
|
Net increase in deposits |
|
|
120,147 |
|
|
|
277,130 |
|
Decrease in FHLB advances |
|
|
(1,997 |
) |
|
|
(145,033 |
) |
Proceeds from note payable |
|
|
|
|
|
|
38,575 |
|
Principal payment on note payable |
|
|
(1,067 |
) |
|
|
|
|
Net decrease in other borrowed funds |
|
|
(204 |
) |
|
|
|
|
Proceeds from exchange of subordinated debt for common stock |
|
|
193 |
|
|
|
|
|
Proceeds from issuance of common stock |
|
|
|
|
|
|
3,299 |
|
Proceeds from issuance of preferred stock |
|
|
11,400 |
|
|
|
|
|
Cash dividends paid |
|
|
|
|
|
|
(2,395 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
128,472 |
|
|
|
171,576 |
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
164,325 |
|
|
|
42,882 |
|
Cash and cash equivalents at beginning of period |
|
|
99,770 |
|
|
|
89,448 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
264,095 |
|
|
$ |
132,330 |
|
|
|
|
|
|
|
|
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 for Superior Bancorp (the
Corporation) 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 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 nine
months ended September 30, 2010, are not necessarily indicative of the results that may be expected
for the year ending December 31, 2010.
See Note 14 Subsequent Event regarding the recent issuance by the Office of Thrift Supervision
(the OTS) of an Order to Cease and Desist to the Corporation and its wholly-owned subsidiary,
Superior Bank.
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 the
Corporations 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 Topic 860 and ASU 2009-16 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 the disclosure requirements of ASU 2010-06 as of January 1, 2010. The
adoption of ASU 2010-06 did
7
not have an impact to the Corporations financial position, results of
operations or cash flows (See Note 12). 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.
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 September 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 |
|
$ |
18,255 |
|
|
$ |
341 |
|
|
$ |
|
|
|
$ |
18,596 |
|
Mortgage-backed securities (MBS): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Agency pass-through |
|
|
102,425 |
|
|
|
3,280 |
|
|
|
7 |
|
|
|
105,698 |
|
U.S. Agency collateralized mortgage obligation (CMO) |
|
|
81,183 |
|
|
|
2,596 |
|
|
|
|
|
|
|
83,779 |
|
Private-label CMO |
|
|
15,264 |
|
|
|
239 |
|
|
|
2,234 |
|
|
|
13,269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total MBS |
|
|
198,872 |
|
|
|
6,115 |
|
|
|
2,241 |
|
|
|
202,746 |
|
State, county and municipal securities |
|
|
29,415 |
|
|
|
960 |
|
|
|
208 |
|
|
|
30,167 |
|
Corporate obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt |
|
|
4,082 |
|
|
|
|
|
|
|
82 |
|
|
|
4,000 |
|
Pooled trust preferred securities |
|
|
8,080 |
|
|
|
|
|
|
|
4,501 |
|
|
|
3,579 |
|
Single issue trust preferred securities |
|
|
5,000 |
|
|
|
|
|
|
|
3,225 |
|
|
|
1,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate obligations |
|
|
17,162 |
|
|
|
|
|
|
|
7,808 |
|
|
|
9,354 |
|
Equity securities |
|
|
113 |
|
|
|
26 |
|
|
|
|
|
|
|
139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities available-for-sale |
|
$ |
263,817 |
|
|
$ |
7,442 |
|
|
$ |
10,257 |
|
|
$ |
261,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities with an amortized cost of $253.8 million as of September 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 September 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 |
|
|
$ |
286 |
|
Due after one year through five years |
|
|
7,403 |
|
|
|
7,401 |
|
Due after five years through ten years |
|
|
23,202 |
|
|
|
23,735 |
|
Due after ten years |
|
|
34,055 |
|
|
|
26,834 |
|
Mortgage-backed securities |
|
|
198,872 |
|
|
|
202,746 |
|
|
|
|
|
|
|
|
|
|
$ |
263,817 |
|
|
$ |
261,002 |
|
|
|
|
|
|
|
|
During the second quarter, 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
8
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.
The following table summarizes the investment securities with unrealized losses as of September 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MBS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Agency pass-through |
|
$ |
74 |
|
|
$ |
|
|
|
$ |
239 |
|
|
$ |
7 |
|
|
$ |
313 |
|
|
$ |
7 |
|
U.S. Agency CMO |
|
|
38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38 |
|
|
|
|
|
Private-label CMO |
|
|
|
|
|
|
|
|
|
|
5,903 |
|
|
|
850 |
|
|
|
5,903 |
|
|
|
850 |
|
|
|
|
|
|
|
|
Total MBS |
|
|
112 |
|
|
|
|
|
|
|
6,142 |
|
|
|
857 |
|
|
|
6,254 |
|
|
|
857 |
|
State, county and municipal securities |
|
|
1,585 |
|
|
|
79 |
|
|
|
970 |
|
|
|
129 |
|
|
|
2,555 |
|
|
|
208 |
|
Corporate obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt |
|
|
|
|
|
|
|
|
|
|
4,000 |
|
|
|
82 |
|
|
|
4,000 |
|
|
|
82 |
|
Single issue trust preferred securities |
|
|
|
|
|
|
|
|
|
|
1,775 |
|
|
|
3,225 |
|
|
|
1,775 |
|
|
|
3,225 |
|
|
|
|
|
|
|
|
Total corporate obligations |
|
|
|
|
|
|
|
|
|
|
5,775 |
|
|
|
3,307 |
|
|
|
5,775 |
|
|
|
3,307 |
|
|
|
|
|
|
|
|
Total temporarily impaired securities |
|
|
1,697 |
|
|
|
79 |
|
|
|
12,887 |
|
|
|
4,293 |
|
|
|
14,584 |
|
|
|
4,372 |
|
Other-than-temporarily Impaired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MBS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private-label CMO |
|
|
|
|
|
|
|
|
|
|
3,094 |
|
|
|
1,384 |
|
|
|
3,094 |
|
|
|
1,384 |
|
Corporate obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pooled trust preferred securities |
|
|
|
|
|
|
|
|
|
|
3,579 |
|
|
|
4,501 |
|
|
|
3,579 |
|
|
|
4,501 |
|
|
|
|
|
|
|
|
Total OTTI securities |
|
|
|
|
|
|
|
|
|
|
6,673 |
|
|
|
5,885 |
|
|
|
6,673 |
|
|
|
5,885 |
|
|
|
|
|
|
|
|
Total temporarily and
other-than-temporarily impaired |
|
$ |
1,697 |
|
|
$ |
79 |
|
|
$ |
19,560 |
|
|
$ |
10,178 |
|
|
$ |
21,257 |
|
|
$ |
10,257 |
|
|
|
|
|
|
|
|
|
|
|
(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 September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than |
|
Greater Than |
|
|
|
|
12 Months |
|
12 Months |
|
Total |
Temporarily Impaired |
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Agency residential |
|
|
2 |
|
|
|
1 |
|
|
|
3 |
|
U.S. Agency CMO |
|
|
1 |
|
|
|
|
|
|
|
1 |
|
Private-label CMO |
|
|
|
|
|
|
5 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total MBS |
|
|
3 |
|
|
|
6 |
|
|
|
9 |
|
State, county and municipal securities |
|
|
6 |
|
|
|
3 |
|
|
|
9 |
|
Corporate obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt |
|
|
|
|
|
|
3 |
|
|
|
3 |
|
Single issue trust preferred securities |
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate obligations |
|
|
|
|
|
|
4 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities |
|
|
9 |
|
|
|
13 |
|
|
|
22 |
|
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 |
|
|
9 |
|
|
|
18 |
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 the Corporation has 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,
the Corporation compares 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 September 30, 2010, the Corporations securities portfolio consisted of 198 securities, 27 of
which were in an unrealized loss position. The majority of unrealized losses are related to the
Corporations private-label CMOs and trust preferred securities, as discussed below.
11
Mortgage-backed securities
As of September 30, 2010, approximately 93% of the dollar volume of MBS the Corporation 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. The Corporations MBS portfolio also includes 10 private-label CMOs with
a market value of $13.3 million, which had net unrealized losses of approximately $2.0 million as
of September 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 |
|
2.61 |
|
$ |
(162 |
) |
Aaa/NR |
|
1 |
|
4.73 |
|
|
|
|
NR/AAA |
|
1 |
|
3.08 |
|
|
111 |
|
NR/AA |
|
1 |
|
3.26 |
|
|
(143 |
) |
B2/AA |
|
1 |
|
N/A |
|
|
(452 |
) |
B2/NR |
|
1 |
|
3.99 |
|
|
(56 |
) |
NR/BBB |
|
1 |
|
2.17 |
|
|
(37 |
) |
Caa2/CCC (2) |
|
1 |
|
0.75 |
|
|
(1,384 |
) |
NR/C (2) |
|
2 |
|
0.00-0.25 |
|
|
128 |
|
|
|
|
|
|
|
|
|
Total |
|
10 |
|
|
|
$ |
(1,995 |
) |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Credit Support Coverage Ratio 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 and third quarters of 2010, the Corporation recognized an immaterial amount of
OTTI on two 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 September 30, 2010, the fair values of the three private-label CMO securities with
OTTI totaled $3.7 million and 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). The
following table provides additional information regarding these CMO valuations as of September 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 |
|
|
10.76 |
|
|
|
1756 |
|
|
|
18% |
|
|
|
55.09% |
|
|
|
50% |
|
|
|
16.27% |
|
|
$ |
(54 |
) |
|
$ |
(85 |
) |
|
$ |
(139 |
) |
CMO 2 |
|
|
17.57 |
|
|
|
1629 |
|
|
|
17% |
|
|
|
49.04% |
|
|
|
45% |
|
|
|
27.72% |
|
|
|
|
|
|
|
|
|
|
|
|
|
CMO 4 |
|
|
63.01 |
|
|
|
1440 |
|
|
|
16% |
|
|
|
29.38% |
|
|
|
45% |
|
|
|
16.67% |
|
|
|
(97 |
) |
|
|
74 |
|
|
|
(23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(151 |
) |
|
$ |
(11 |
) |
|
$ |
(162 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 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 September
30, 2010. The Corporation believes that all contractual cash flows will be received on this portfolio.
As of September 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 the Corporations 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, assigned 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, the Corporations
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 the
Corporations CDOs as of September 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 |
|
$ |
2,135 |
|
|
$ |
896 |
|
|
$ |
(1,239 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
MM Community Funding Ltd |
|
Pooled |
|
B |
|
|
1,957 |
|
|
|
789 |
|
|
|
(1,168 |
) |
|
|
(20 |
) |
|
|
(117 |
) |
|
|
(137 |
) |
Preferred Term
Securities V |
|
Pooled |
|
MEZ |
|
|
1,145 |
|
|
|
808 |
|
|
|
(337 |
) |
|
|
(61 |
) |
|
|
37 |
|
|
|
(24 |
) |
Tpref Funding III Ltd |
|
Pooled |
|
B-2 |
|
|
2,843 |
|
|
|
1,086 |
|
|
|
(1,757 |
) |
|
|
(174 |
) |
|
|
43 |
|
|
|
(131 |
) |
Emigrant Capital Trust
(1) |
|
Single |
|
Sole |
|
|
5,000 |
|
|
|
1,775 |
|
|
|
(3,225 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
13,080 |
|
|
$ |
5,354 |
|
|
$ |
(7,726 |
) |
|
$ |
(255 |
) |
|
$ |
(37 |
) |
|
$ |
(292 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
C |
|
|
21 |
|
|
|
21 |
% |
|
|
18 |
% |
|
|
0 |
% |
MM Community Funding Ltd |
|
C |
|
|
7 |
|
|
|
25 |
% |
|
|
29 |
% |
|
|
0 |
% |
Preferred Term Securities V |
|
CCC |
|
|
2 |
|
|
|
5 |
% |
|
|
36 |
% |
|
|
0 |
% |
Tpref Funding III Ltd |
|
C |
|
|
22 |
|
|
|
28 |
% |
|
|
20 |
% |
|
|
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
|
|
$ |
44.79 |
|
|
Swap + 1800
|
|
9.48% Fixed |
MM Community Funding Ltd
|
|
|
15.77 |
|
|
LIBOR + 1500
|
|
LIBOR + 310 |
Preferred Term Securities V
|
|
|
58.85 |
|
|
LIBOR + 1600
|
|
LIBOR + 210 |
Tpref Funding III Ltd
|
|
|
27.16 |
|
|
LIBOR + 1200
|
|
LIBOR + 190 |
Emigrant Capital Trust (1)
|
|
|
35.50 |
|
|
LIBOR + 1162
|
|
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 1162 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 September 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 Nine |
|
|
|
Months Ended |
|
|
Months Ended |
|
|
|
September 30, 2010 |
|
|
September 30, 2010 |
|
|
|
(Dollars in thousands) |
|
Balance at beginning of period |
|
$ |
8,924 |
|
|
$ |
8,869 |
|
Amounts related to credit losses for which an OTTI was not previously recognized |
|
|
|
|
|
|
154 |
|
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 |
|
|
309 |
|
|
|
405 |
|
Reductions for securities where there is an intent to sell or requirement to sell |
|
|
|
|
|
|
(154 |
) |
Reductions for securities that are in total default |
|
|
(1,434 |
) |
|
|
(1,434 |
) |
Reductions for increases in cash flows expected to be collected |
|
|
(447 |
) |
|
|
(488 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
7,352 |
|
|
$ |
7,352 |
|
|
|
|
|
|
|
|
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 September 30, 2010, the Corporation has stock in FHLB Atlanta totaling $16.9 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. 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.
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 the Corporations ongoing assessment of the loan
portfolio for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Three Months Ended |
|
For The Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
|
(Dollars in thousands) |
Beginning allowance for loan losses |
|
$ |
79,425 |
|
|
$ |
33,504 |
|
|
$ |
41,884 |
|
|
$ |
28,850 |
|
Provision for loan losses |
|
|
102,106 |
|
|
|
5,169 |
|
|
|
161,596 |
|
|
|
14,602 |
|
Total charge-offs |
|
|
30,422 |
|
|
|
4,546 |
|
|
|
52,837 |
|
|
|
9,868 |
|
Total recoveries |
|
|
(253 |
) |
|
|
(209 |
) |
|
|
(719 |
) |
|
|
(752 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
30,169 |
|
|
|
4,337 |
|
|
|
52,118 |
|
|
|
9,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance for loan losses |
|
$ |
151,362 |
|
|
$ |
34,336 |
|
|
$ |
151,362 |
|
|
$ |
34,336 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, net of unearned income |
|
$ |
2,415,862 |
|
|
$ |
2,434,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to total
loans, net of unearned income |
|
|
6.27 |
% |
|
|
1.41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
The overall level of allowance for loan losses increased significantly over the course of 2010 with
the largest increase occurring during the third quarter of 2010. Specific allowance levels and
historical loss ratios were the drivers of this increase with the level of specific allocation
required relative to impaired loans being the most significant. In comparison to the second
quarter of 2010, historical loss ratios continued to increase as the Corporation continued to
realize losses in all major loan categories with the majority of loss experience in construction
loans secured by undeveloped or partially-developed land.
Note 5 Debt
On September 3, 2010, the Corporation entered into a second modification and limited waiver
agreement (the Agreement) related to the $5.9 million outstanding on its line of credit with a
regional bank. The Agreement extends the maturity date to November 3, 2010 and provides a limited
waiver of certain rights and covenants under the original loan agreement.
In addition, the Corporation has deferred regularly scheduled interest payments on all issues of
its junior subordinated debentures relating to its five different issues of trust preferred
securities aggregating approximately $118 million in principal amount currently outstanding. During
the deferral period, the respective trusts will likewise suspend the declaration and payment of
dividends on the trust preferred securities. The terms of the junior subordinated debentures and
the related documents governing the respective issues of trust preferred securities contemplate the
possibility of such deferrals and allow the Corporation to defer payments without default or
penalty. The deferrals are for up to five years.
So long as interest is deferred on the junior subordinated debentures and corresponding
distributions are deferred on the trust preferred securities, interest will continue to accrue on
the junior subordinated notes, and that deferred interest will also accrue interest. The
Corporation may terminate the deferrals and resume payments at any time. Upon the termination or
expiration of the deferrals, all accrued and unpaid interest will be due and payable on the junior
subordinated notes, and a corresponding amount of distributions will be payable on the trust
preferred securities.
The Corporation must seek OTS approval before incurring any new debt or renewing any existing debt
(See Note 14).
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 September 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 September 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 September 30, 2010 and December 31, 2009, the amount of CD
swaps designated as hedging instruments had a recorded fair value of $0.4 million and $0.2 million,
respectively, and a weighted average life of 2.1 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 0.40% (LIBOR-based).
Cash Flow Hedges
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). During the third quarter,
the Corporation settled the remaining $18.5 million of notional amount of interest rate swap
agreements related to certain subordinated debt and incurred a loss of $1.0 million.
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 $90.3 million and $41.0 million as of September
30, 2010 and December 31, 2009, respectively. The fair value of the origination commitments was
$0.8 million and $(0.4) million as of September 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 $147.6 million as of September 30, 2010. The fair value of the commitments was $0.3
million as of September 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 purchase
commitments was $45.3 million as of September 30, 2010. The fair value of the commitments was
$(0.1) million as of September 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 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 |
|
|
$ |
374 |
|
|
$ |
2,777 |
|
|
$ |
228 |
|
Interest rate derivatives designated as hedges of cash flows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps on subordinated debenture |
|
|
|
|
|
|
|
|
|
|
22,000 |
|
|
|
(766 |
) |
Non-hedging derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brokered certificates of deposit interest rate swap |
|
|
723 |
|
|
|
97 |
|
|
|
723 |
|
|
|
59 |
|
Mortgage loan held for sale interest rate lock commitment |
|
|
93,891 |
|
|
|
825 |
|
|
|
41,038 |
|
|
|
(370 |
) |
Mortgage loan forward sales commitments |
|
|
147,598 |
|
|
|
305 |
|
|
|
|
|
|
|
|
|
Mortgage loan forward purchase commitments |
|
|
45,321 |
|
|
|
(115 |
) |
|
|
|
|
|
|
|
|
Commercial loan interest rate swap with loan customer |
|
|
3,690 |
|
|
|
407 |
|
|
|
3,766 |
|
|
|
323 |
|
Commercial loan interest rate swap with financial institution |
|
|
3,690 |
|
|
|
(407 |
) |
|
|
3,766 |
|
|
|
(323 |
) |
The weighted-average rates paid and received for interest rate swaps outstanding as of September
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 |
|
|
0.43 |
% |
|
|
4.70 |
% |
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.
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 |
|
Nine Months Ended |
|
|
September 30, |
|
September 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 |
|
$ |
30 |
|
|
$ |
29 |
|
|
$ |
89 |
|
|
$ |
79 |
|
Amount of loss included in other noninterest income |
|
|
(5 |
) |
|
|
(12 |
) |
|
|
(5 |
) |
|
|
(492 |
) |
18
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 |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
|
(Dollars in thousands) |
Interest rate swap on subordinated debenture: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss included in interest expense on subordinated debt |
|
$ |
(105 |
) |
|
$ |
(142 |
) |
|
$ |
(420 |
) |
|
$ |
(301 |
) |
Amount of gain (loss) recognized in other comprehensive income |
|
|
575 |
|
|
|
(138 |
) |
|
|
384 |
|
|
|
66 |
|
Amount of loss recognized in other income |
|
|
(975 |
) |
|
|
|
|
|
|
(1,129 |
) |
|
|
|
|
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 |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
|
(Dollars in thousands) |
Non-hedging derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brokered certificates of deposit interest rate swap |
|
$ |
21 |
|
|
$ |
19 |
|
|
$ |
62 |
|
|
$ |
(53 |
) |
Mortgage loan held for sale interest rate lock commitment |
|
|
195 |
|
|
|
428 |
|
|
|
1,195 |
|
|
|
715 |
|
Mortgage loan forward sales commitments |
|
|
956 |
|
|
|
|
|
|
|
(305 |
) |
|
|
|
|
Mortgage loan forward purchase commitments |
|
|
324 |
|
|
|
|
|
|
|
(115 |
) |
|
|
|
|
Net settlement of forward purchase and sale commitments |
|
|
(2,323 |
) |
|
|
|
|
|
|
(2,323 |
) |
|
|
|
|
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 September 30, 2010.
19
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 September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
10,278 |
|
|
$ |
9,071 |
|
|
$ |
19,349 |
|
|
$ |
2,171 |
|
|
$ |
21,520 |
|
Provision for loan losses (1) |
|
|
5,158 |
|
|
|
36,396 |
|
|
|
41,554 |
|
|
|
60,552 |
|
|
|
102,106 |
|
Noninterest income |
|
|
2,042 |
|
|
|
427 |
|
|
|
2,469 |
|
|
|
5,338 |
|
|
|
7,807 |
|
Noninterest expense |
|
|
9,674 |
|
|
|
9,258 |
|
|
|
18,932 |
|
|
|
17,210 |
|
|
|
36,142 |
|
|
|
|
Operating loss |
|
$ |
(2,512 |
) |
|
$ |
(36,156 |
) |
|
$ |
(38,668 |
) |
|
$ |
(70,253 |
) |
|
|
(108,921 |
) |
|
|
|
|
|
|
|
Income tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(135,893 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,040,934 |
|
|
$ |
1,222,415 |
|
|
$ |
2,263,349 |
|
|
$ |
930,152 |
|
|
$ |
3,193,501 |
|
|
|
|
Three Months Ended September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
9,870 |
|
|
$ |
9,828 |
|
|
$ |
19,698 |
|
|
$ |
4,215 |
|
|
$ |
23,913 |
|
Provision for loan losses (1) |
|
|
1,398 |
|
|
|
3,536 |
|
|
|
4,934 |
|
|
|
235 |
|
|
|
5,169 |
|
Noninterest income |
|
|
2,241 |
|
|
|
483 |
|
|
|
2,724 |
|
|
|
5,755 |
|
|
|
8,479 |
|
Noninterest expense |
|
|
8,737 |
|
|
|
5,911 |
|
|
|
14,648 |
|
|
|
10,994 |
|
|
|
25,642 |
|
|
|
|
Operating profit (loss) |
|
$ |
1,976 |
|
|
$ |
864 |
|
|
$ |
2,840 |
|
|
$ |
(1,259 |
) |
|
$ |
1,581 |
|
|
|
|
|
|
|
|
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
880 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,067,866 |
|
|
$ |
1,222,358 |
|
|
$ |
2,290,224 |
|
|
$ |
936,346 |
|
|
$ |
3,226,570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
30,368 |
|
|
$ |
30,741 |
|
|
$ |
61,109 |
|
|
$ |
7,069 |
|
|
$ |
68,178 |
|
Provision for loan losses (1) |
|
|
8,020 |
|
|
|
55,365 |
|
|
|
63,385 |
|
|
|
98,211 |
|
|
|
161,596 |
|
Noninterest income |
|
|
6,015 |
|
|
|
1,317 |
|
|
|
7,332 |
|
|
|
15,215 |
|
|
|
22,547 |
|
Noninterest expense |
|
|
27,992 |
|
|
|
22,664 |
|
|
|
50,656 |
|
|
|
46,828 |
|
|
|
97,484 |
|
|
|
|
Operating profit (loss) |
|
$ |
371 |
|
|
$ |
(45,971 |
) |
|
$ |
(45,600 |
) |
|
$ |
(122,755 |
) |
|
$ |
(168,355 |
) |
|
|
|
|
|
|
|
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(195,355 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
26,861 |
|
|
$ |
28,294 |
|
|
$ |
55,155 |
|
|
$ |
12,801 |
|
|
$ |
67,956 |
|
Provision for loan losses (1) |
|
|
4,434 |
|
|
|
6,499 |
|
|
|
10,933 |
|
|
|
3,669 |
|
|
|
14,602 |
|
Noninterest income |
|
|
6,518 |
|
|
|
1,512 |
|
|
|
8,030 |
|
|
|
1,042 |
|
|
|
9,072 |
|
Noninterest expense |
|
|
26,162 |
|
|
|
17,479 |
|
|
|
43,641 |
|
|
|
33,861 |
|
|
|
77,502 |
|
|
|
|
Operating profit (loss) |
|
$ |
2,783 |
|
|
$ |
5,828 |
|
|
$ |
8,611 |
|
|
$ |
(23,687 |
) |
|
$ |
(15,076 |
) |
|
|
|
|
|
|
|
Income tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,686 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(8,390 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 through Administrative and Other. |
20
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 |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(135,893 |
) |
|
$ |
880 |
|
|
$ |
(195,355 |
) |
|
$ |
(8,390 |
) |
Less preferred stock dividends and amortization |
|
|
(1,887 |
) |
|
|
(1,167 |
) |
|
|
(2,786 |
) |
|
|
(3,477 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
For basic and diluted, net loss applicable to
common stockholders |
|
$ |
(137,780 |
) |
|
$ |
(287 |
) |
|
$ |
(198,141 |
) |
|
$ |
(11,867 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For basic, weighted average common shares
outstanding |
|
|
12,531 |
|
|
|
10,984 |
|
|
|
12,164 |
|
|
|
10,373 |
|
Effect of dilutive stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding, assuming
dilution |
|
|
12,531 |
|
|
|
10,984 |
|
|
|
12,164 |
|
|
|
10,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per common share |
|
$ |
(11.00 |
) |
|
$ |
(0.03 |
) |
|
$ |
(16.29 |
) |
|
$ |
(1.14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net loss per common share |
|
$ |
(11.00 |
) |
|
$ |
(0.03 |
) |
|
$ |
(16.29 |
) |
|
$ |
(1.14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 20,290 and 299,830 and 303,549 and 152,535 were
not included in computing diluted net loss per share for the three and nine months ended September
30, 2010 and 2009, respectively, as they were considered anti-dilutive.
21
Note 9 Comprehensive Loss
Total comprehensive income (loss) was $(133.6) million and $(190.4) million for the three and nine
months ended September 30, 2010, respectively, and $1.4 million and $(8.0) million for the three
and nine months ended September 30, 2009, respectively. Total comprehensive income (loss) consists
of net loss and other comprehensive income (loss). The components of other comprehensive income
(loss) for the three and nine months ended September 30, 2010 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-Tax |
|
|
Income Tax |
|
|
Net of |
|
|
|
Amount |
|
|
Expense |
|
|
Income Tax |
|
|
|
(Dollars in thousands) |
|
Three Months Ended September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on available-for-sale securities |
|
$ |
2,406 |
|
|
$ |
(890 |
) |
|
$ |
1,516 |
|
Reclassification adjustment for losses realized in net loss |
|
|
306 |
|
|
|
(113 |
) |
|
|
193 |
|
Unrealized loss on derivatives |
|
|
(75 |
) |
|
|
28 |
|
|
|
(47 |
) |
Reclassification adjustment for losses realized in net loss |
|
|
975 |
|
|
|
(361 |
) |
|
|
614 |
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain |
|
$ |
3,612 |
|
|
$ |
(1,336 |
) |
|
$ |
2,276 |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on available-for-sale securities |
|
$ |
3,119 |
|
|
$ |
(1,154 |
) |
|
$ |
1,965 |
|
Reclassification adjustment for gains realized in net loss |
|
|
(2,121 |
) |
|
|
785 |
|
|
|
(1,336 |
) |
Unrealized loss on derivatives |
|
|
(219 |
) |
|
|
81 |
|
|
|
(138 |
) |
|
|
|
|
|
|
|
|
|
|
Net unrealized gain |
|
$ |
779 |
|
|
$ |
(288 |
) |
|
$ |
491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on available-for-sale securities |
|
$ |
7,977 |
|
|
$ |
(2,951 |
) |
|
$ |
5,026 |
|
Reclassification adjustment for gains realized in net loss |
|
|
(852 |
) |
|
|
315 |
|
|
|
(537 |
) |
Unrealized loss on derivatives |
|
|
(363 |
) |
|
|
135 |
|
|
|
(228 |
) |
Reclassification adjustment for losses realized in net loss |
|
|
1,129 |
|
|
|
(418 |
) |
|
|
711 |
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain |
|
$ |
7,891 |
|
|
$ |
(2,919 |
) |
|
$ |
4,972 |
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on available-for-sale securities |
|
$ |
(8,936 |
) |
|
$ |
3,306 |
|
|
$ |
(5,630 |
) |
Reclassification adjustment for losses realized in net loss |
|
|
9,506 |
|
|
|
(3,517 |
) |
|
|
5,989 |
|
Unrealized gain on derivatives |
|
|
106 |
|
|
|
(39 |
) |
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain |
|
$ |
676 |
|
|
$ |
(250 |
) |
|
$ |
426 |
|
|
|
|
|
|
|
|
|
|
|
Note 10 Income Taxes
The Corporation recognized income tax expense of $27.0 million for the three
and nine months ended September 30, 2010, respectively, compared to an income tax expense (benefit) of $0.7 million and $(6.7) million
for the three and nine months ended September 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
$66.9 million and $88.9 million valuation allowance against the Corporations deferred tax assets (DTAs) during the three and nine months
ended September 30,2010, respectively. The Corporations total valuation allowance was $90.1 million at September 30, 2010, which has
reduced the net DTA to $0.0. 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.
22
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 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 and third quarters, management has revised its
assessment of the realizablity of the DTAs as of September 30, 2010 and recorded a $90.1 million valuation allowance.
As a result, beginning in the third quarter of 2010, the Corporation no longer considers future taxable income in determining the realizability of its DTA.
The Corporations estimate of the realization of its DTA is solely based on future reversals of existing taxable temporary differences
and currently available tax planning strategies. 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 nine months ended September 30:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
Risk-free interest rate |
|
|
2.57 |
% |
|
|
2.57 |
% |
Volatility factor |
|
|
55.79 |
|
|
|
55.38 |
|
Expected term (in years) |
|
|
5.00 |
|
|
|
5.00 |
|
Dividend yield |
|
|
0.00 |
|
|
|
0.00 |
|
23
A summary of stock option activity as of September 30, 2010 and changes during the nine months
ended is shown below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
For the Nine Months Ended September 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 |
|
|
|
4.96 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 2010, there was $0.2 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 nine months ended September 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 nine months ended September 30, 2009, the Corporation recognized approximately $0.1
million and $0.4 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.
24
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
September 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) |
September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Agency securities |
|
$ |
18,596 |
|
|
$ |
|
|
|
$ |
18,596 |
|
|
$ |
|
|
MBS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Agency MBS pass-through |
|
|
105,698 |
|
|
|
|
|
|
|
105,698 |
|
|
|
|
|
U.S. Agency CMO |
|
|
83,779 |
|
|
|
|
|
|
|
83,779 |
|
|
|
|
|
Private-label CMO |
|
|
13,269 |
|
|
|
|
|
|
|
7,129 |
|
|
|
6,140 |
|
|
|
|
Total MBS |
|
|
202,746 |
|
|
|
|
|
|
|
196,606 |
|
|
|
6,140 |
|
State, county and municipal securities |
|
|
30,167 |
|
|
|
|
|
|
|
28,645 |
|
|
|
1,522 |
|
Corporate obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt |
|
|
4,000 |
|
|
|
|
|
|
|
4,000 |
|
|
|
|
|
Pooled trust preferred securities |
|
|
3,579 |
|
|
|
|
|
|
|
|
|
|
|
3,579 |
|
Single issue trust preferred securities |
|
|
1,775 |
|
|
|
|
|
|
|
|
|
|
|
1,775 |
|
|
|
|
Total corporate obligations |
|
|
9,354 |
|
|
|
|
|
|
|
4,000 |
|
|
|
5,354 |
|
Equity securities |
|
|
139 |
|
|
|
139 |
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
available-for-sale |
|
|
261,002 |
|
|
|
139 |
|
|
|
247,847 |
|
|
|
13,016 |
|
Derivative assets |
|
|
1,876 |
|
|
|
|
|
|
|
1,876 |
|
|
|
|
|
|
|
|
Total recurring basis measured assets |
|
$ |
262,878 |
|
|
$ |
139 |
|
|
$ |
249,723 |
|
|
$ |
13,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
$ |
1,000 |
|
|
$ |
|
|
|
$ |
1,000 |
|
|
$ |
|
|
|
|
|
Total recurring basis measured liabilities |
|
$ |
1,000 |
|
|
$ |
|
|
|
$ |
1,000 |
|
|
$ |
|
|
|
|
|
25
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 |
|
|
$ |
|
|
MBS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
September 30, 2010, the fair values of five private-label mortgage-backed securities totaling $6.1
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).
26
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 |
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(Dollars in thousands) |
|
Balance at January 1 |
|
$ |
13,329 |
|
|
$ |
18,497 |
|
Transfer into level 3 category during the year |
|
|
|
|
|
|
13,978 |
|
Total gains (losses) (realized and unrealized) |
|
|
|
|
|
|
|
|
Included in earnings investment security loss |
|
|
(405 |
) |
|
|
(15,150 |
) |
Included in other comprehensive loss |
|
|
1,783 |
|
|
|
(1,554 |
) |
Other changes due to principal payments |
|
|
(1,691 |
) |
|
|
(1,192 |
) |
|
|
|
|
|
|
|
Balance at September 30 |
|
$ |
13,016 |
|
|
$ |
14,579 |
|
|
|
|
|
|
|
|
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 September 30 |
|
$ |
(405 |
) |
|
$ |
(15,150 |
) |
|
|
|
|
|
|
|
27
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) |
September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held-for-sale |
|
$ |
63,884 |
|
|
$ |
|
|
|
$ |
63,884 |
|
|
$ |
|
|
Impaired loans, net of specific allowance |
|
|
192,850 |
|
|
|
|
|
|
|
|
|
|
|
192,850 |
|
Other foreclosed real estate |
|
|
58,766 |
|
|
|
|
|
|
|
|
|
|
|
58,766 |
|
Other real estate held-for-sale |
|
|
3,258 |
|
|
|
|
|
|
|
|
|
|
|
3,258 |
|
|
|
|
Total nonrecurring basis measured assets |
|
$ |
318,758 |
|
|
$ |
|
|
|
$ |
63,884 |
|
|
$ |
254,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 appraisals by qualified
licensed appraisers approved and hired by the Corporation. 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.
Other Foreclosed Real Estate
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 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.
28
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 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.
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.
29
The estimated fair values of the Corporations financial instruments for the periods indicated are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
December 31, 2009 |
|
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
|
|
Amount |
|
Value |
|
Amount |
|
Value |
|
|
(Dollars in thousands) |
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
66,937 |
|
|
$ |
66,937 |
|
|
$ |
74,020 |
|
|
$ |
74,020 |
|
Interest-bearing deposits in other banks |
|
|
195,212 |
|
|
|
195,212 |
|
|
|
23,714 |
|
|
|
23,714 |
|
Federal funds sold |
|
|
1,946 |
|
|
|
1,946 |
|
|
|
2,036 |
|
|
|
2,036 |
|
Securities available for sale |
|
|
261,002 |
|
|
|
261,002 |
|
|
|
286,310 |
|
|
|
286,310 |
|
Tax lien certificates |
|
|
19,849 |
|
|
|
19,849 |
|
|
|
19,292 |
|
|
|
19,292 |
|
Mortgage loans held for sale |
|
|
63,884 |
|
|
|
63,884 |
|
|
|
71,879 |
|
|
|
71,879 |
|
Net loans |
|
|
2,264,500 |
|
|
|
2,297,632 |
|
|
|
2,430,813 |
|
|
|
2,440,026 |
|
Stock in FHLB |
|
|
16,907 |
|
|
|
16,907 |
|
|
|
18,212 |
|
|
|
18,212 |
|
Accrued interest receivable |
|
|
51,277 |
|
|
|
51,277 |
|
|
|
50,142 |
|
|
|
50,142 |
|
Derivative assets |
|
|
1,876 |
|
|
|
1,876 |
|
|
|
610 |
|
|
|
610 |
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
2,776,830 |
|
|
|
2,799,858 |
|
|
|
2,656,573 |
|
|
|
2,671,504 |
|
Advances from FHLB |
|
|
216,325 |
|
|
|
235,785 |
|
|
|
218,322 |
|
|
|
233,028 |
|
Security repurchase agreements |
|
|
726 |
|
|
|
726 |
|
|
|
841 |
|
|
|
841 |
|
Note payable |
|
|
45,201 |
|
|
|
46,898 |
|
|
|
45,917 |
|
|
|
45,917 |
|
Subordinated debentures |
|
|
81,518 |
|
|
|
59,801 |
|
|
|
84,170 |
|
|
|
51,609 |
|
Derivative liabilities |
|
|
1,000 |
|
|
|
1,000 |
|
|
|
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 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
30
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.
Note 14 Subsequent Event
On November 4, 2010, the Corporation issued a press release announcing its entry, together with its
wholly-owned subsidiary, Superior Bank (the Bank) into certain agreements with the Office of
Thrift Supervision (OTS). On November 2, 2010 (the Effective Date), the Corporation and the
Bank each entered into a Stipulation and Consent with the OTS, the Corporations and the Banks
primary federal regulator, whereby each of the Corporation and the Bank consented to the issuance
of an Order to Cease and Desist issued by the OTS, without admitting or denying that any grounds
exist for the issuance of the Cease and Desist Orders.
The summaries that follow do not purport to be complete and are qualified by reference to the
exhibits included in a Form 8-K filed by the Corporation with the SEC on November 4, 2010, which are incorporated herein and which set forth complete copies
of the Stipulations and Orders.
The Bank Order provides, among other things, that:
|
|
|
The Bank shall cease and desist from any action for or toward causing,
bringing about, participating in, counseling, or aiding and abetting
unsafe or unsound banking practices that resulted in certain
occurrences specified in the Bank Order. |
|
|
|
|
No later than March 31, 2011, the Bank shall achieve, and maintain
thereafter, a Tier 1 (Core) Capital Ratio of at least 10.0% and a
Total Risk-Based Capital Ratio of at least 14.0% after funding an
adequate allowance for loan losses. |
|
|
|
|
Within 60 days of the Effective Date, the Bank shall adopt and submit
to the OTS a written capital plan to achieve and maintain the
foregoing capital levels, specifying target dates to reach those
capital levels. If the Bank fails to achieve the required capital
levels in the prescribed time frame or otherwise fails to meet its
capital plan, then within 15 days the Bank shall prepare a contingency
plan, which shall detail actions to be taken specified in the Bank
Order. |
|
|
|
|
Effective immediately, the Bank (i) will not originate or purchase or
commit to originate or purchase, any new construction, multifamily,
non-residential, land or commercial mortgage loans (Covered Loans),
nor may the Bank renew or modify an existing Covered Loans without
meeting specified conditions; (ii) will not without the prior written
approval of the OTS increase its total assets during any quarter in
excess of an amount equal to net interest credited on deposit
liabilities during the prior quarter; and (iii) will limit its acceptance or extension of brokered deposits. |
|
|
|
|
Within 60 days of the Effective Date, the Bank shall (i) submit to the
OTS a business plan through 2012 for achieving profitability and a
business plan to reduce the Banks level of problem assets, (ii)
revise its policies, procedures and methodology relating to the timely |
31
|
|
|
establishment and maintenance of an adequate allowance for
loan losses; (iii) revise its
written internal asset review and classification program to address
all corrective action set forth in the 2010 OTS Examination, which,
among other things, will provide for the appointment of a qualified,
experienced and independent third party to conduct annual reviews of
the Banks loan portfolio and assessments of the Banks internal asset
review process; (iv) revise its program for controlling risks
associated with concentrations of credit; and (v) revise its
Enterprise Risk Management Plan, and within 90 days of the Effective
Date, the Bank shall submit to the OTS an assessment of the Banks
board and management prepared by an independent third party. |
|
|
|
|
The Bank is to implement a liquidity funding plan that is
to include the designation of specific actions that will
be taken to reduce the Banks dependency on volatile
funding sources and a detailed cash flow analysis. |
|
|
|
|
Effective immediately, the Bank shall (i) not make any golden
parachute payments or prohibited indemnification payment unless the
Bank has complied with 12. C.F.R. Part 359 and 12 C.F.R Section
545.121; (ii) comply with the OTS prior notification requirements for
changes in directors and senior executive officers set forth in 12
C.F.R. Part 563, Subpart H; (iii) not enter into, extend or revise any
contractual arrangement relating to compensation or benefits with any
senior executive officer or director; and (iv) not enter into any
arrangement or contract with a third party service provider that is
significant or outside the Banks normal course of business without
obtaining written non-objection from the OTS. |
The Bank Order will remain in effect until terminated, modified or suspended by the OTS.
The Corporation Order provides, among other things, that:
The Corporation shall cease and desist from any action for or toward causing, bringing about,
participating in counseling, or aiding and abetting unsafe or unsound banking practices that
resulted in certain occurrences specified in the Corporation Order.
|
|
|
Within 60 days of the Effective Date, the Corporation shall submit to
the OTS (i) a plan to maintain and enhance the Corporations capital
and the Banks capital and ensure that the Bank complies with the
requirement imposed on it in the Bank Order; and (ii) a business plan
through calendar year 2012 for achieving profitability. |
|
|
|
|
The Corporation shall (i) not accept from the Bank or declare or pay
any dividends or capital distributions; (ii) not incur or increase any
debt without the prior written non-objection of the OTS; (iii) not
make any golden parachute payment or any prohibited indemnification
payment unless the Corporation complies with 12 C.F.R. Part 359; (iv)
comply with the OTSs prior notification requirements for changes in
directors and senior executive officers set forth in 12 C.F.R. Part
563, Subpart H; (v) not enter into, renew or extend any
contractual arrangements related to compensation or benefits with any
director or senior executive officer of the Corporation without first
providing prior written notice to the OTS; and (vi) not enter
into any arrangement or contract with a third party service provider
that is significant or outside the normal course of business without
obtaining written non-objection from the OTS. |
The Corporation Order will remain in effect until terminated, modified or suspended by the OTS.
Failure by the Corporation and the Bank to comply with the provisions of their
respective Orders, could result in further enforcement actions by the
OTS which could ultimately lead to our common stock losing all its
value. While the Corporation
and the Bank intend to take such actions as may be necessary to comply with the requirements of the
Orders, there can be no assurance that the Corporation or the Bank will be able to comply fully
with the Orders, or that efforts to comply with the Orders will not have adverse effects on the
operations and financial condition of the Corporation or the Bank.
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 September 30, 2010, condensed consolidated
financial condition and results of operations for the three and nine months ended September 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.
32
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.
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.
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) our ability to raise additional capital to meet regulatory requirements set forth in the Orders to Cease and Desist or fund future growth;
(2) the adequacy of our allowance for loan losses to cover actual losses and impact of credit risk exposures;
(3) greater loan losses than historic levels and increased allowance for loan losses;
(4) our ability to comply with any requirements imposed on us
and Superior Bank by the Orders to Cease and Desist issued to each of
us by the OTS or additional restrictions imposed by our regulators;
(5) restrictions or limitations on our access to funds from Superior Bank;
(6) our ability to resolve any regulatory, legal or judicial proceeding on acceptable terms and its effect on our financial condition or results of operations;
(7) the effect of natural or environmental disasters, such as, among other things, hurricanes and oil spills, in our geographic markets;
(8) the strength of the United States economy in general and the strength of the regional and local economies in which we conduct operations;
(9) changes in local economic conditions in the markets in which we operate;
(10) the continued weakening in the real estate values in the markets in which we operate;
(11) 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;
(12) increases in FDIC deposit insurance premiums and assessments;
(13) inflation or deflation and interest rate, market and monetary fluctuations;
(14) 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;
(15) the willingness of users to substitute competitors products and services for our products and services;
(16) changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory requirements or developments;
(17) 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;
(18) changes in accounting policies, principles and guidelines applicable to us;
(19) our focus on lending to small to mid-size community-based businesses, which may increase our credit risk;
(20) technological changes;
(21) changes in consumer spending and savings habits;
(22) the continuing instability in the domestic and international capital markets;
(23) 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;
(24) our ability to successfully integrate the assets,
liabilities, customers, systems and management we acquire or merge into our operations; 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.
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 $3.166 billion, loans of approximately $2.416
billion, deposits of approximately $2.777 billion and stockholders equity of approximately $15.4
million as of September 30, 2010. Total assets decreased 1.72% compared to $3.222 billion as of
December 31, 2009. Loans decreased 2.3% compared to $2.473 billion as of December 31, 2009. Total
deposits increased 4.5% from $2.657 billion as of December 31, 2009.
We incurred a net loss for the three months ended September 30, 2010 of $135.9 million compared to
net income of $0.9 million in the three months ended September 30, 2009. Included in the net loss
for the three months ended September 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
$108.3 million. We also recorded a $66.9 million deferred
tax valuation allowance during the period which
eliminated any tax benefit on our loss for the three months ended September 30, 2010.
The large provisions for loan losses and OREO
charges in this and the preceding quarter are, in part, the result of appraisal
updates that have
produced valuations that were substantially less than those previously obtained. The decline in
values is attributable to a number of factors, certainly including continued decreases in
comparable valuations on which these appraisals are based under standard appraisal protocols.
Additionally, as discussed in greater detail below, the Gulf Oil Spill had a
significant impact on expectations for recovery of real estate values in the Gulf region, where many of
our properties are located. As the result of this process, the provision for loan loss in the
third quarter of 2010 was $102.1 million, bringing the total allowance for loan loss to $151.4
million at quarter end. Of this amount, approximately $103.1 million is allocated to specific
credits under ASC 310-35. (See Impaired Loans section for more detail). In comparison to the
second quarter of 2010, historical loss ratios continued to increase as the bank realized losses in
all major loan categories with the majority of loss experience in construction loans secured by
undeveloped or partially-developed land. (See Risk Factors Risks Relating to Our Business
elsewhere in this report.)
Our non-performing loans increased to $277.5 million, or 11.48% of loans as of September 30, 2010,
from $231.4 million, or 9.32% of loans as of June 30, 2010. The overall increase in nonperforming
loans was primarily related to our real estate construction loan portfolios. Loans in the 30-89
days past due category decreased to 1.47% of total loans as of September 30, 2010 from 1.78% of
total loans as of June 30, 2010. Non-performing assets were 10.63% of total assets as of September
30, 2010 compared to 8.25% as of June 30, 2010.
Our annualized ratio of net charged-off loans to average loans increased to 4.85% for the three
months ended September 30, 2010 compared to 2.26% for the three months ended June 30, 2010 and
1.03% for the three months ended December 31, 2009. Of the $30.2 million net charge-offs for the
three months ended September 30, 2010, Superior Banks net charge-offs were $29.6 million, or 4.75%
of consolidated average loans on an annualized basis, and our two consumer finance companies net
charge-offs were $0.6 million, or 0.10% 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 $102.1 million for the three months ended September 30, 2010, compared to $50.4
million for the three months ended June 30, 2010 and $5.2 million for the three months ended
September 30, 2009. As of September 30, 2010, the allowance for loan losses increased by $72.0
million to $151.4 million, or 6.27% of net loans, compared to $79.4 million, or 3.20% of net loans,
as of June 30, 2010. In addition, our losses and expenses on OREO were $6.2 million during the
three months ended September 30, 2010 and $3.4 million for the three months ended June 30, 2010, an
increase from the $2.8 million during the three months ended September 30, 2009, reflecting
dispositions of several foreclosed properties for less than their carrying values.
Our loans, net of unearned income, were $2.416 billion as of September 30, 2010, a decrease of
2.7%, or $67.0 million, from $2.483 billion as of June 30, 2010. As of September 30, 2010, we had
a decrease in balances outstanding in certain categories of loans, primarily
in construction lending, which decreased $47.6 million to $632.8 million compared to $680.4 million
as of June 30, 2010.
33
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 costs, including the provision for loan losses, losses and
other costs on foreclosed properties (foreclosure losses), and by 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 Risk
Factors Risks Relating to Our Business elsewhere in this report.)
Net interest income decreased to $21.5 million during the three months ended September 30, 2010
from $23.2 million for the three months ended June 30, 2010, and decreased from $23.9 million
for the three months ended September 30, 2009. The net interest margin was 2.77% for the three
months ended September 30, 2010 compared to 3.02% for the three months ended June 30, 2010 and
3.36% for the three months ended September 30, 2009. The effect on net interest margin of loans
being placed on non-accrual status has been significant. Additionally, the net interest margin
reflected our decision to maintain higher levels of very short-term investments for liquidity
purposes. These investments, which averaged $220 million and $152 million for the three and nine
months ended September 30, 2010, respectively, had an average yield of 0.36% and 0.37%,
respectively, which led to a decline in the yield on earning assets.
Certain
Factors Contributing to Our Recent Results and Our Response to Those
Factors
The
Economic Downturn. The financial crisis of 2008 and the economic downturn that followed have led
to our recent losses as well as those at many other financial institutions. Those events have
eroded capital at financial institutions and left markets uncertain as to the industrys prospects
in late 2010 and beyond. Loan portfolio performances have deteriorated at many institutions
resulting from, among other factors, a weak economy, a decline in the value of collateral
supporting loans, and the decreased ability of retail and commercial borrowers to meet repayment
schedules. The competition for deposits has increased significantly due to liquidity concerns at
many of those same institutions. The downturn and resulting capital erosion have been especially
pronounced in the Southeast, which has experienced especially sharp declines in real estate value
and has been uniquely affected by the substantial oil leak resulting from the explosion of the
Deepwater Horizon drilling rig in April 2010 (the Gulf Oil Spill) and its aftermath.
Efforts
to Deleverage and Add Capital. In response to the financial crisis, as previously reported,
we have taken affirmative steps to repair capital erosion and address the pressures of
our holding Companys indebtedness and the OTS scrutiny of
declining capital at Superior Bank. During the third quarter of 2009, we sold
approximately 1.5 million shares of our common stock to approximately 20 accredited investors
raising approximately $3.3 million. In November 2009, our shareholders approved an increase in
authorized shares from 20 million to 200 million to facilitate potential offerings, at the
recommendation of management. In December 2009, we issued
approximately $69 million in aggregate
principal amount of trust preferred securities and a like amount of related junior subordinated
debentures through a wholly-owned unconsolidated subsidiary trust to the U.S. Treasury Department.
The trust preferred securities were issued in exchange for 69,000 shares of our Fixed Rate
Cumulative Perpetual Preferred Stock, Series A, having a liquidation amount of $1,000 per share,
which the Treasury Department had purchased in December 2008 under the Troubled Assets Relief
Programs Capital Purchase Program (TARP). In January 2010, we entered into agreements with each
of Cambridge Savings Bank and KBW, Inc. pursuant to which we would exchange common stock for an
aggregate of $7.5 million in trust preferred securities. In May 2010, we completed the exchange of $3.5 million in trust preferred securities held by Cambridge
Savings Bank. We have not completed the exchange with KBW, Inc. In May and June of 2010, we issued $11.1 million of Series B Cumulative Preferred Stock
for cash consideration equal to $11.1 million and $300,000 of Series C Cumulative Convertible
Preferred Stock for cash consideration of $300,000. This preferred stock is mandatorily convertible
upon the earlier of December 15, 2010 or our completion of additional capital financing but is not voluntarily convertible by the holder prior to
such time subject to NASDAQ requirements.
Concurrently, with the capital raising efforts described above, in October 2009, we retained Keefe
Bruyette & Woods, Inc. (KBW), a leading advisor in the financial services sector, to explore
strategic alternatives including potential avenues to effectuate a broad recapitalization. We,
together with KBW, explored a variety of internal options,
including conversion of preferred stock to trust preferred securities, conversion of trust
preferred securities to common stock, investment portfolio trading to lower risk ratings on
investment securities, securitization of residential mortgage loans, wholesale loan sales, transfer
of assets to a newly created entity and a public equity offering. In addition, KBW, with our
support, also has explored external investment alternatives. KBW contacted 39 institutions,
including various investment funds and several funds holding shelf charters, exploring various
capital-raising and restructuring alternatives. Many of those institutions attended meetings with our management and performed due
diligence reviews. In the summer of 2010, several private equity firms and shelf charter funds
conducted extensive due
diligence on proposals related to a new equity investment, but none
were completed due to the constraints of our existing capital structure. We continue, with KBWs assistance, to explore various restructuring alternatives that would enable
us to satisfy the OTS current directives discussed below. (See
Recent Developments below in this Item 2.)
34
Events Specific to the Third Quarter of 2010. In the third quarter of 2010 our
results worsened as the Gulf Oil Spill proved to have a far more adverse economic effect on the Gulf region than had been anticipated, and
we became subject to increasing regulatory scrutiny as a result of the U.S. governments and banking regulatory agencies responses to the crisis. Because the Gulf Oil Spill stalled much of the fishing, tourism and drilling in the region, it has resulted in dramatically decreased real
estate appraisals in the region and these declines in real estate values and general economic activity have adversely affected Superior
Banks loan portfolio. Of the $549 million in loans identified as being directly or indirectly impacted by the oil spill, specific reserves
of $56.0 million have been allocated as of September 30, 2010, up from $26.2 million as of June 30, 2010. The extent to which the region
will continue to experience depressed real estate values cannot be predicted with any certainty. Additionally, we are submitting a claim to the
Gulf Coast Claims Facility and have received an assigned claim number. The amount, if any, of a recovery from the Fund is speculative at
this time.
Finally,
partially as the result of the regulatory restrictions and the need
to have Superior Bancorp
conserve capital to address the consequences of the Gulf Oil Spill,
we have enacted liquidity
constraints for our holding company and have deferred payments on our financings and indebtedness. In August 2010, we
deferred regularly scheduled interest payments on all issues of our junior subordinated debentures
relating to our five different issues of trust preferred securities aggregating $118.2 million
in principal amount, as we are permitted to do under the terms of the debentures and related trust
preferred securities (subject to various limitations and exceptions) for a period of up to five
years. The terms provide that so long as interest is deferred, interest will continue to accrue.
Furthermore, the terms of the debentures and related trust preferred securities provide that upon
the expiration or termination of deferrals, all accrued and unpaid interest will be due and payable
on the debentures, and a corresponding amount of distributions will be payable on the related trust
preferred securities. During the deferral period, we may not, among other things and with limited
exceptions, pay cash dividends or repurchase our common stock or preferred stock nor make any
payment on outstanding debt obligations that rank equally with or
junior to the debentures. We estimate that the deferral of interest
on our debentures preserves approximately $7 million per year in cash flow
comprising interest on the debentures and dividends on the related trust preferred securities.
Need
for Additional Capital. We have been unable to
refinance or repay our existing credit facility with BB&T which matured on November 3, 2010, after
extensions. The existing credit facility is secured by all of our stock in Superior Bank. We have
not had regulatory approval or sufficient cash to satisfy our obligations under the existing credit
facility, we lack unencumbered collateral with which to acquire
adequate secured financing, and we are
prohibited from making payments on securities that rank equally with or junior to the debentures.
In addition, any debt we incur, or material agreements we enter into, must be first approved by the
OTS. Thus, we are in default under the existing credit facility and lack the ability to repay or
refinance that indebtedness, either of which would require regulatory approvals, that would
require, among other things, that the OTS be satisfied with the sufficiency of capital available to
Superior Bank and with the capital available to us to support the Bank. Absent substantial
new capital for us and Superior Bank, these are likely to result in adverse regulatory action and
which may take various forms. We are continuing to consider and
explore various restructuring alternatives that would enable us to
satisfy the OTS current directives discussed below under
Recent Developments in this Item 2.
35
Recent Developments
On November 2, 2010 (the Effective Date), we and Superior Bank each entered into a Stipulation
and Consent with the OTS, whereby we and the Bank each consented to the issuance of an Order to Cease
and Desist issued by the OTS, without admitting or denying that that any grounds existed for
issuance of the Orders to Cease and Desist.
The summaries that follow do not purport to be complete and are qualified by reference to the full
text of the Stipulations and the Orders to Cease and Desist that are included as Exhibits to our Form
8-K filed with the SEC on November 4, 2010.
The Order to Cease and Desist issued to Superior Bank provides, among other things, that:
|
|
|
Superior Bank shall cease and desist from any action
for or toward causing, bringing about, participating
in, counseling, or aiding and abetting unsafe or
unsound banking practices, which resulted in certain
occurrences that are specified in the Superior Bank Order. |
|
|
|
|
No later than March 31, 2011, Superior Bank shall achieve, and
maintain thereafter, a Tier 1 (Core) Capital Ratio of at least
10.0% and a Total Risk-Based Capital Ratio of at least 14.0% after
funding an adequate allowance for loan losses. |
|
|
|
|
Within 60 days of the Effective Date, Superior Bank
shall adopt and submit to the OTS a written capital
plan to achieve and maintain the foregoing capital
levels specifying target dates to reach certain
capital levels. If Superior Bank fails to achieve the
required capital levels in the prescribed time frame
or otherwise fails to meet its capital plan, then
within 15 days Superior Bank shall prepare a contingency
plan, which shall detail further actions to be taken
to achieve (i) merger with, or acquisition by another federally
insured depository institution, or (ii) voluntary dissolution. |
|
|
|
|
Beginning on the Effective Date, Superior Bank (i)
will not originate or purchase or commit to originate
or purchase, any new construction, multifamily,
non-residential, land or commercial mortgage loans
(Covered Loans), nor may Superior Bank renew or modify
an existing Covered Loans without meeting specified
conditions; and (ii) will not, without the prior
written approval of the OTS, increase its total
assets during any quarter in excess of an amount
equal to net interest credited on deposit liabilities
during the prior quarter. |
|
|
|
|
Within 60 days of the Effective Date, Superior Bank
(i) shall submit to the OTS a business plan through
2012 for achieving profitability and a business plan
to reduce Superior Banks level of problem assets, (ii)
shall revise its policies, procedures and methodology
relating to the timely establishment and maintenance of an adequate
allowance for loan losses; (iii) shall revise its written
internal asset review and classification program to
address all corrective action set forth in the OTSs
2010 Examination, which, among other things, will
provide for the appointment of a qualified,
experienced and independent third party to conduct
annual reviews of Superior Banks loan portfolio and
assessments of the Banks internal asset review
process; (iv) shall revise its program for
controlling risks associated with concentrations of
credit; (v) shall revise its Enterprise Risk
Management Plan; and (vi) within 90 days of the
Effective Date, Superior Bank shall submit to the OTS an
assessment of Superior Banks board and management
prepared by an independent third party. |
|
|
|
|
Superior Bank is to implement a liquidity funding plan that is to
include the designation of specific actions that will be taken to
reduce Superior Banks dependency on volatile funding sources and a
detailed cash flow analysis. |
|
|
|
|
Beginning on the Effective Date, Superior Bank (i)
shall not make any golden parachute payments or
prohibited indemnification payment unless Superior Bank
has complied with 12. C.F.R. Part 359 and 12 C.F.R
Section 545.121; (ii) shall comply with the OTS prior
notification requirements for changes in directors
and senior executive officers set forth in 12 C.F.R.
Part 563, Subpart H; (iii) shall not enter into,
extend or revise any contractual arrangement relating
to compensation or benefits with any senior executive
officer or director; and (iv) shall not enter into
any arrangement or contract with a third party
service provider that is significant or outside Superior
Banks normal course of business without obtaining
written non-objection from the OTS. |
The
Superior Bank Order to Cease and Desist will remain in effect until terminated, modified or
suspended by the OTS.
36
The
Superior Bancorp Order to Cease and Desist issued to us by the OTS provides, among other things, that:
We shall cease and desist from any action for or toward causing, bringing about, participating in
counseling, or aiding and abetting unsafe or unsound banking practices, which resulted in certain
occurrences that are specified in the Order.
|
|
|
Within 60 days of the Effective Date, we shall
submit to the OTS (i) a plan to maintain and enhance
our capital and Superior Banks capital and ensure that
Superior Bank complies with the requirements imposed on it
in the Superior Bank Order to Cease and Desist summarized above; and (ii) a
business plan through calendar year 2012 for
achieving profitability. |
|
|
|
|
We (i) shall not accept from Superior Bank or declare or pay any
dividends or capital distributions; (ii) shall not incur or
increase any debt without the prior written non-objection of the
OTS; (iii) shall not make any golden parachute payment or any
prohibited indemnification payment unless the Company complies
with 12 C.F.R. Part 359; (iv) shall comply with the OTSs prior
notification requirements for changes in directors and senior
executive officers set forth in 12 C.F.R. Part 563, Subpart H; (v) shall not enter into, renew or extend any contractual
arrangements related to compensation or benefits with any of our
directors or senior executive officers without first providing
prior written notice to the OTS; and (vi) not enter into any
arrangement or contract with a third party service provider that is
significant or outside the normal course of business without
obtaining written non-objection from the OTS. |
The Order to Cease and Desist issued to us will remain in effect until terminated, modified or
suspended by the OTS.
Failure by Superior Bank or us to comply with the provisions of the Cease and
Desist Order issued to each of us by the OTS, could result in further
enforcement actions by the OTS, which could ultimately lead to our
common stock losing all its value. While we and Superior Bank intend
to take such actions as may be necessary to comply with the requirements of the Orders, there can
be no assurance that we or Superior Bank will be able to comply fully with the Orders, or that efforts
to comply with the Orders will not have adverse effects on the operations and financial conditions
of Superior Bank or us.
Customer deposits and performing, non-classified loans are
unaffected by the Stipulations or the Orders to Cease and Desist. Deposits remain fully covered by FDIC insurance to
at least $250,000 per depositor. In addition, non-interest bearing transaction accounts and qualified NOW checking
accounts are fully guaranteed by the FDIC for an unlimited amount of coverage.
Liquidity and Capital
Short-term liquid assets (cash and due from banks, interest-bearing deposits in other banks and
federal funds sold) increased $164.3 million to $264.1 million as of September 30, 2010 from $99.8
million as of December 31, 2009. As of September 30, 2010, short-term liquid assets were 8.3% 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 Risk Factors Risks Relating to Our Business elsewhere
in this report.)
Superior Bank is operating at capital levels that are well below those established by regulation to
be considered adequately capitalized, with a total risk-based capital ratio of 5.04%, a Tier I
core capital ratio of 2.63% and a Tier I risk-based capital ratio of 3.38% as of September 30,
2010. (See Recent Developments above in this Item 2 for a discussion of a recent requirement imposed by the OTS
that the Tier 1 core capital ratio be raised to 10%, and that the Tier 1 risk-based capital ratio
be raised to 14%, both by March 31, 2011.) We are currently pursuing a variety of initiatives aimed
at increasing our capital and returning to well
capitalized status. (See Certain Factors
Contributing to Our Recent Results and Our Response to Those
Factors above in this Item 2 for a discussion of those initiatives.)
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.
Results of Operations
For the three months ended September 30, 2010, we reported a net loss of $135.9 million, primarily
as a result of increases in the provision for loan losses of $96.9 million, foreclosure losses of
$4.9 million, salaries and benefits of $1.8 million
For the nine months ended September 30, 2010, we reported a net loss of $195.4 million, primarily
as a result of increases in the provision for loan losses of $147.0 million, foreclosure losses of
$8.5 million, and salaries and benefits of $5.1 million.
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:
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the |
|
For the |
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
|
(Dollars in thousands, except per share data) |
Net (loss) income |
|
$ |
(135,893 |
) |
|
$ |
880 |
|
|
$ |
(195,355 |
) |
|
$ |
(8,390 |
) |
Net loss applicable to common shareholders |
|
|
(137,780 |
) |
|
|
(287 |
) |
|
|
(198,141 |
) |
|
|
(11,867 |
) |
Net loss per common share (diluted) |
|
|
(11.00 |
) |
|
|
(0.03 |
) |
|
|
(16.29 |
) |
|
|
(1.14 |
) |
Net interest margin |
|
|
2.77 |
% |
|
|
3.36 |
% |
|
|
2.99 |
% |
|
|
3.23 |
% |
Net interest spread |
|
|
2.65 |
|
|
|
3.17 |
|
|
|
2.86 |
|
|
|
3.04 |
|
Return on average assets |
|
|
(16.25 |
) |
|
|
0.11 |
|
|
|
(7.88 |
) |
|
|
(0.36 |
) |
Return on average stockholders equity |
|
|
(379.45 |
) |
|
|
1.44 |
|
|
|
(149.31 |
) |
|
|
(4.54 |
) |
Common book value per share |
|
$ |
(.55 |
) |
|
$ |
14.82 |
|
|
$ |
(.55 |
) |
|
$ |
14.82 |
|
38
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 September 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) |
|
$ |
2,519,036 |
|
|
$ |
34,108 |
|
|
|
5.37 |
% |
|
$ |
2,487,262 |
|
|
$ |
36,783 |
|
|
|
5.87 |
% |
Investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
236,996 |
|
|
|
2,299 |
|
|
|
3.85 |
|
|
|
256,194 |
|
|
|
3,362 |
|
|
|
5.21 |
|
Tax-exempt (2) |
|
|
29,341 |
|
|
|
458 |
|
|
|
6.19 |
|
|
|
41,384 |
|
|
|
655 |
|
|
|
6.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
|
266,337 |
|
|
|
2,757 |
|
|
|
4.11 |
|
|
|
297,578 |
|
|
|
4,017 |
|
|
|
5.36 |
|
Federal funds sold |
|
|
1,579 |
|
|
|
1 |
|
|
|
0.25 |
|
|
|
1,849 |
|
|
|
1 |
|
|
|
0.21 |
|
Other investments |
|
|
256,520 |
|
|
|
542 |
|
|
|
0.84 |
|
|
|
66,766 |
|
|
|
471 |
|
|
|
2.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
3,043,472 |
|
|
|
37,408 |
|
|
|
4.88 |
|
|
|
2,853,455 |
|
|
|
41,272 |
|
|
|
5.74 |
|
Noninterest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
66,015 |
|
|
|
|
|
|
|
|
|
|
|
61,211 |
|
|
|
|
|
|
|
|
|
Premises and equipment |
|
|
102,534 |
|
|
|
|
|
|
|
|
|
|
|
105,327 |
|
|
|
|
|
|
|
|
|
Accrued interest and other assets |
|
|
188,257 |
|
|
|
|
|
|
|
|
|
|
|
171,092 |
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
|
(81,635 |
) |
|
|
|
|
|
|
|
|
|
|
(33,780 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
3,318,643 |
|
|
|
|
|
|
|
|
|
|
$ |
3,157,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
$ |
600,576 |
|
|
$ |
1,538 |
|
|
|
1.02 |
% |
|
$ |
649,622 |
|
|
$ |
2,129 |
|
|
|
1.30 |
% |
Savings deposits |
|
|
360,376 |
|
|
|
896 |
|
|
|
0.99 |
|
|
|
257,163 |
|
|
|
872 |
|
|
|
1.35 |
|
Time deposits |
|
|
1,565,726 |
|
|
|
8,409 |
|
|
|
2.13 |
|
|
|
1,400,972 |
|
|
|
10,312 |
|
|
|
2.92 |
|
Other borrowings |
|
|
265,775 |
|
|
|
2,505 |
|
|
|
3.74 |
|
|
|
279,528 |
|
|
|
2,619 |
|
|
|
3.72 |
|
Subordinated debentures (2) |
|
|
81,296 |
|
|
|
2,828 |
|
|
|
13.80 |
|
|
|
60,743 |
|
|
|
1,204 |
|
|
|
7.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
2,873,749 |
|
|
|
16,176 |
|
|
|
2.23 |
|
|
|
2,648,028 |
|
|
|
17,136 |
|
|
|
2.57 |
|
Noninterest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
277,453 |
|
|
|
|
|
|
|
|
|
|
|
251,696 |
|
|
|
|
|
|
|
|
|
Accrued interest and other liabilities |
|
|
25,367 |
|
|
|
|
|
|
|
|
|
|
|
14,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
3,176,569 |
|
|
|
|
|
|
|
|
|
|
|
2,914,115 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
142,074 |
|
|
|
|
|
|
|
|
|
|
|
243,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity |
|
$ |
3,318,643 |
|
|
|
|
|
|
|
|
|
|
$ |
3,157,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/net interest spread |
|
|
|
|
|
|
21,232 |
|
|
|
2.65 |
% |
|
|
|
|
|
|
24,136 |
|
|
|
3.17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net yield on earning assets |
|
|
|
|
|
|
|
|
|
|
2.77 |
% |
|
|
|
|
|
|
|
|
|
|
3.36 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable equivalent adjustment (2): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities |
|
|
|
|
|
|
(156 |
) |
|
|
|
|
|
|
|
|
|
|
(223 |
) |
|
|
|
|
Interest expense on subordinated debentures |
|
|
|
|
|
|
444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
21,520 |
|
|
|
|
|
|
|
|
|
|
$ |
23,913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 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) |
|
$ |
2,541,124 |
|
|
$ |
106,662 |
|
|
|
5.61 |
% |
|
$ |
2,446,491 |
|
|
$ |
107,693 |
|
|
|
5.89 |
% |
Investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
249,816 |
|
|
|
7,835 |
|
|
|
4.19 |
|
|
|
282,666 |
|
|
|
11,148 |
|
|
|
5.27 |
|
Tax-exempt (2) |
|
|
29,793 |
|
|
|
1,406 |
|
|
|
6.31 |
|
|
|
41,062 |
|
|
|
1,962 |
|
|
|
6.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
|
279,609 |
|
|
|
9,241 |
|
|
|
4.42 |
|
|
|
323,728 |
|
|
|
13,110 |
|
|
|
5.41 |
|
Federal funds sold |
|
|
2,158 |
|
|
|
4 |
|
|
|
0.25 |
|
|
|
4,176 |
|
|
|
8 |
|
|
|
0.26 |
|
Other investments |
|
|
189,288 |
|
|
|
1,307 |
|
|
|
0.92 |
|
|
|
65,422 |
|
|
|
1,289 |
|
|
|
2.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
3,012,179 |
|
|
|
117,214 |
|
|
|
5.20 |
|
|
|
2,839,817 |
|
|
|
122,100 |
|
|
|
5.75 |
|
Noninterest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
69,712 |
|
|
|
|
|
|
|
|
|
|
|
71,085 |
|
|
|
|
|
|
|
|
|
Premises and equipment |
|
|
102,548 |
|
|
|
|
|
|
|
|
|
|
|
105,309 |
|
|
|
|
|
|
|
|
|
Accrued interest and other assets |
|
|
186,716 |
|
|
|
|
|
|
|
|
|
|
|
161,194 |
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
|
(55,864 |
) |
|
|
|
|
|
|
|
|
|
|
(30,948 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
3,315,291 |
|
|
|
|
|
|
|
|
|
|
$ |
3,146,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
$ |
640,799 |
|
|
$ |
5,653 |
|
|
|
1.18 |
% |
|
$ |
654,703 |
|
|
$ |
6,495 |
|
|
|
1.33 |
% |
Savings deposits |
|
|
334,368 |
|
|
|
2,986 |
|
|
|
1.19 |
|
|
|
230,969 |
|
|
|
2,697 |
|
|
|
1.56 |
|
Time deposits |
|
|
1,523,135 |
|
|
|
25,183 |
|
|
|
2.21 |
|
|
|
1,387,712 |
|
|
|
33,125 |
|
|
|
3.19 |
|
Other borrowings |
|
|
267,517 |
|
|
|
7,568 |
|
|
|
3.78 |
|
|
|
301,595 |
|
|
|
7,558 |
|
|
|
3.35 |
|
Subordinated debentures (2) |
|
|
83,335 |
|
|
|
8,502 |
|
|
|
13.64 |
|
|
|
60,796 |
|
|
|
3,602 |
|
|
|
7.92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
$ |
2,849,154 |
|
|
|
49,892 |
|
|
|
2.34 |
|
|
$ |
2,635,775 |
|
|
|
53,477 |
|
|
|
2.71 |
|
Noninterest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
269,618 |
|
|
|
|
|
|
|
|
|
|
|
243,094 |
|
|
|
|
|
|
|
|
|
Accrued interest and other liabilities |
|
|
21,913 |
|
|
|
|
|
|
|
|
|
|
|
18,715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
3,140,685 |
|
|
|
|
|
|
|
|
|
|
|
2,897,584 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
174,606 |
|
|
|
|
|
|
|
|
|
|
|
248,873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
3,315,291 |
|
|
|
|
|
|
|
|
|
|
$ |
3,146,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/net interest spread |
|
|
|
|
|
|
67,322 |
|
|
|
2.86 |
% |
|
|
|
|
|
|
68,623 |
|
|
|
3.04 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net yield on earning assets |
|
|
|
|
|
|
|
|
|
|
2.99 |
% |
|
|
|
|
|
|
|
|
|
|
3.23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable equivalent adjustment (2): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities |
|
|
|
|
|
|
(477 |
) |
|
|
|
|
|
|
|
|
|
|
(667 |
) |
|
|
|
|
Interest expense on subordinated debentures |
|
|
|
|
|
|
1,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
68,178 |
|
|
|
|
|
|
|
|
|
|
$ |
67,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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%. |
40
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 September 30, |
|
|
Nine Months Ended September 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 |
|
$ |
31,774 |
|
|
$ |
(2,675 |
) |
|
|
(0.50 |
)% |
|
$ |
94,633 |
|
|
$ |
(1,031 |
) |
|
|
(0.28 |
)% |
Investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
(19,198 |
) |
|
|
(1,063 |
) |
|
|
(1.36 |
) |
|
|
(32,850 |
) |
|
|
(3,313 |
) |
|
|
(1.08 |
) |
Tax-exempt |
|
|
(12,043 |
) |
|
|
(197 |
) |
|
|
(0.09 |
) |
|
|
(11,269 |
) |
|
|
(556 |
) |
|
|
(0.08 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
|
(31,241 |
) |
|
|
(1,260 |
) |
|
|
(1.25 |
) |
|
|
(44,119 |
) |
|
|
(3,869 |
) |
|
|
(0.99 |
) |
Federal funds sold |
|
|
(270 |
) |
|
|
|
|
|
|
0.04 |
|
|
|
(2,018 |
) |
|
|
(4 |
) |
|
|
(0.01 |
) |
Other investments |
|
|
189,754 |
|
|
|
71 |
|
|
|
(1.96 |
) |
|
|
123,866 |
|
|
|
18 |
|
|
|
(1.71 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
$ |
190,017 |
|
|
|
(3,864 |
) |
|
|
(0.86 |
) |
|
$ |
172,362 |
|
|
|
(4,886 |
) |
|
|
(0.55 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
$ |
(49,046 |
) |
|
$ |
(591 |
) |
|
|
(0.28 |
)% |
|
$ |
(13,904 |
) |
|
$ |
(842 |
) |
|
|
(0.15 |
)% |
Savings deposits |
|
|
103,213 |
|
|
|
24 |
|
|
|
(0.36 |
) |
|
|
103,399 |
|
|
|
289 |
|
|
|
(0.37 |
) |
Time deposits |
|
|
164,754 |
|
|
|
(1,903 |
) |
|
|
(0.79 |
) |
|
|
135,423 |
|
|
|
(7,942 |
) |
|
|
(0.98 |
) |
Other borrowings |
|
|
(13,753 |
) |
|
|
(114 |
) |
|
|
0.02 |
|
|
|
(34,078 |
) |
|
|
10 |
|
|
|
0.43 |
|
Subordinated debentures |
|
|
20,553 |
|
|
|
1,624 |
|
|
|
5.94 |
|
|
|
22,539 |
|
|
|
4,900 |
|
|
|
5.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
$ |
225,721 |
|
|
|
(960 |
) |
|
|
(0.34 |
) |
|
$ |
213,379 |
|
|
|
(3,585 |
) |
|
|
(0.37 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/net interest spread |
|
|
|
|
|
|
(2,904 |
) |
|
|
(0.52 |
)% |
|
|
|
|
|
|
(1,301 |
) |
|
|
(0.18 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net yield on earning assets |
|
|
|
|
|
|
|
|
|
|
(0.59 |
)% |
|
|
|
|
|
|
|
|
|
|
(0.24 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable equivalent adjustment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities |
|
|
|
|
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
190 |
|
|
|
|
|
Interest expense on subordinated debentures |
|
|
|
|
|
|
444 |
|
|
|
|
|
|
|
|
|
|
|
1,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
(2,393 |
) |
|
|
|
|
|
|
|
|
|
$ |
222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
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 September 30, |
|
|
Nine Months Ended September 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 |
|
$ |
(2,675 |
) |
|
$ |
(3,144 |
) |
|
$ |
469 |
|
|
$ |
(1,031 |
) |
|
$ |
(5,166 |
) |
|
$ |
4,135 |
|
Interest on securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
(1,063 |
) |
|
|
(826 |
) |
|
|
(237 |
) |
|
|
(3,313 |
) |
|
|
(2,114 |
) |
|
|
(1,199 |
) |
Tax-exempt |
|
|
(197 |
) |
|
|
(9 |
) |
|
|
(188 |
) |
|
|
(556 |
) |
|
|
(24 |
) |
|
|
(532 |
) |
Interest on federal funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
(4 |
) |
Interest on other investments |
|
|
71 |
|
|
|
(515 |
) |
|
|
586 |
|
|
|
18 |
|
|
|
(1,241 |
) |
|
|
1,259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
(3,864 |
) |
|
|
(4,494 |
) |
|
|
630 |
|
|
|
(4,886 |
) |
|
|
(8,545 |
) |
|
|
3,659 |
|
Expense from interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on demand deposits |
|
|
(591 |
) |
|
|
(438 |
) |
|
|
(153 |
) |
|
|
(842 |
) |
|
|
(709 |
) |
|
|
(133 |
) |
Interest on savings deposits |
|
|
24 |
|
|
|
(271 |
) |
|
|
295 |
|
|
|
289 |
|
|
|
(736 |
) |
|
|
1,025 |
|
Interest on time deposits |
|
|
(1,903 |
) |
|
|
(3,017 |
) |
|
|
1,114 |
|
|
|
(7,942 |
) |
|
|
(10,932 |
) |
|
|
2,990 |
|
Interest on other borrowings |
|
|
(114 |
) |
|
|
14 |
|
|
|
(128 |
) |
|
|
10 |
|
|
|
914 |
|
|
|
(904 |
) |
Interest on subordinated debentures |
|
|
1,624 |
|
|
|
1,121 |
|
|
|
503 |
|
|
|
4,900 |
|
|
|
3,238 |
|
|
|
1,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
(960 |
) |
|
|
(2,591 |
) |
|
|
1,631 |
|
|
|
(3,585 |
) |
|
|
(8,225 |
) |
|
|
4,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
(2,904 |
) |
|
$ |
(1,903 |
) |
|
$ |
(1,001 |
) |
|
$ |
(1,301 |
) |
|
$ |
(320 |
) |
|
$ |
(981 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
42
Noninterest income
Noninterest income decreased $0.7 million and increased $13.5 million to $7.8 million and $22.5
million for the three and nine months ended September 30, 2010, respectively, compared to $8.5
million and $9.1 million for the three and nine months ended September 30, 2009, respectively. The
decrease for the quarter was primarily due to a loss on the sale of securities and a change in the
fair value of derivatives. The increase for the year was primarily due to an increase in mortgage
banking income. See Financial Condition Investment Securities for additional discussion. The
components of noninterest income for the periods indicated consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
Service charges and fees on deposits |
|
$ |
2,268 |
|
|
$ |
2,595 |
|
|
|
(12.60 |
)% |
Mortgage banking income |
|
|
6,198 |
|
|
|
1,506 |
|
|
|
311.55 |
|
Investment securities gains (losses) |
|
|
(306 |
) |
|
|
2,121 |
|
|
NCM |
|
Change in fair value of derivatives |
|
|
(1,481 |
) |
|
|
435 |
|
|
|
(440.46 |
) |
Increase in cash surrender value of life insurance |
|
|
576 |
|
|
|
568 |
|
|
|
1.41 |
|
Gain on exchange of subordinated debt for common stock |
|
|
|
|
|
|
|
|
|
NCM |
|
Other noninterest income |
|
|
552 |
|
|
|
1,254 |
|
|
|
(55.98 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
7,807 |
|
|
$ |
8,479 |
|
|
NCM |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
Service charges and fees on deposits |
|
$ |
6,819 |
|
|
$ |
7,506 |
|
|
|
(9.15 |
)% |
Mortgage banking income |
|
|
10,875 |
|
|
|
5,468 |
|
|
|
98.88 |
|
Investment securities gains (losses) |
|
|
852 |
|
|
|
(9,506 |
) |
|
NCM |
Change in fair value of derivatives |
|
|
(1,510 |
) |
|
|
170 |
|
|
NCM |
|
Increase in cash surrender value of life insurance |
|
|
1,702 |
|
|
|
1,623 |
|
|
|
4.87 |
|
Gain on exchange of subordinated debt for common stock |
|
|
507 |
|
|
|
|
|
|
NCM |
|
Other noninterest income |
|
|
3,302 |
|
|
|
3,811 |
|
|
|
(13.36 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
22,547 |
|
|
$ |
9,072 |
|
|
NCM |
% |
|
|
|
|
|
|
|
|
|
|
NCM not considered meaningful.
43
Noninterest expenses
Noninterest expenses increased $10.5 million, or 40.9%, and $20.0 million, or 25.8%, to $36.1
million and $97.5 million for the three and nine months ended September 30, 2010, respectively,
from $25.6 million and $77.5 million for the three and nine months ended September 30, 2009,
respectively. These increases were primarily due to increased foreclosure losses, salaries and
employee benefits, FDIC assessments 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. Our
professional fees have increased as a result of certain capital raising activities and collection
activities. These cost are expected to remain at these levels for the near future. Noninterest
expenses included the following for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
|
(Dollars in thousands) |
|
Noninterest Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
$ |
14,062 |
|
|
$ |
12,234 |
|
|
|
14.94 |
% |
Occupancy, furniture and equipment expense |
|
|
5,012 |
|
|
|
4,478 |
|
|
|
11.92 |
|
Amortization of core deposit intangibles |
|
|
870 |
|
|
|
985 |
|
|
|
(11.68 |
) |
FDIC assessments |
|
|
2,613 |
|
|
|
921 |
|
|
|
183.71 |
|
Foreclosure losses |
|
|
6,187 |
|
|
|
1,337 |
|
|
|
362.75 |
|
Professional fees |
|
|
2,545 |
|
|
|
815 |
|
|
|
212.27 |
|
Insurance expense |
|
|
908 |
|
|
|
682 |
|
|
|
33.14 |
|
Postage, stationery and supplies |
|
|
671 |
|
|
|
777 |
|
|
|
(13.64 |
) |
Communications expense |
|
|
752 |
|
|
|
760 |
|
|
|
(1.05 |
) |
Advertising expense |
|
|
588 |
|
|
|
615 |
|
|
|
(4.39 |
) |
Other operating expense |
|
|
1,934 |
|
|
|
2,038 |
|
|
|
(5.10 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
36,142 |
|
|
$ |
25,642 |
|
|
|
40.95 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
|
(Dollars in thousands) |
|
Noninterest Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
$ |
42,102 |
|
|
$ |
36,976 |
|
|
|
13.86 |
% |
Occupancy, furniture and equipment expense |
|
|
14,625 |
|
|
|
13,397 |
|
|
|
9.17 |
|
Amortization of core deposit intangibles |
|
|
2,609 |
|
|
|
2,956 |
|
|
|
(11.74 |
) |
FDIC assessment |
|
|
5,846 |
|
|
|
3,310 |
|
|
|
76.62 |
|
Foreclosure losses |
|
|
12,122 |
|
|
|
3,656 |
|
|
|
231.56 |
|
Professional fees |
|
|
5,363 |
|
|
|
2,607 |
|
|
|
105.72 |
|
Insurance expense |
|
|
2,435 |
|
|
|
1,903 |
|
|
|
27.96 |
|
Postage, stationery and supplies |
|
|
2,135 |
|
|
|
2,264 |
|
|
|
(5.70 |
) |
Communications expense |
|
|
2,187 |
|
|
|
2,322 |
|
|
|
(5.81 |
) |
Advertising expense |
|
|
1,885 |
|
|
|
1,952 |
|
|
|
(3.43 |
) |
Other operating expense |
|
|
6,175 |
|
|
|
6,159 |
|
|
|
0.26 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
97,484 |
|
|
$ |
77,502 |
|
|
|
25.78 |
% |
|
|
|
|
|
|
|
|
|
|
44
Income tax
We recognized income tax expense of $27.0 million for the three and nine months ended September 30, 2010,
respectively, compared to income tax expense (benefit) of $0.7 million and $(6.7) million for the three and
nine months ended September 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 $66.9 million and $88.9 million valuation allowance against our deferred tax assets (DTAs)
during the three and nine months ended September 30,2010, respectively. Our total valuation allowance was $90.1
million at September 30, 2010 which has reduced the net DTA to $0.0. 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. Risks Factors Risks 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 and third quarters,
management has revised its assessment of the realizablity of the DTAs as of September 30, 2010 and recorded
a $90.1 million valuation allowance. As a result, beginning in the third quarter of 2010, we no
longer consider future taxable income in determining the realizability of its DTA. Our estimate
of the realization of its DTA is solely based on future reversals of existing taxable temporary differences and
currently available tax planning strategies. 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 $102.1 million for the three months ended September 30, 2010,
compared to $50.4 million for the three months ended June 30, 2010 and $5.2 million for the three
months ended September 30, 2009. During the three months ended September 30, 2010, we had net
charged-off loans totaling $30.2 million, compared to net charged-off loans of $14.1 million and
$4.3 million for the three months ended June 30, 2010 and September 30, 2009, respectively. The
annualized ratio of net charged-off loans to average loans was 4.95% for the three months ended
September 30, 2010, compared to 2.26% and 0.71% for the three months ended June 30, 2010 and
September 30, 2009, respectively. The allowance for loan losses was $151.4 million, or 6.27% of
loans, net of unearned income, as of September 30, 2010, compared to $79.4 million, or 3.20%, and
$34.3 million, or 1.41%, as of June 30, 2010 and September 30, 2009, respectively.
45
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 |
|
|
|
September 30, |
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2010 |
|
|
2009 |
|
|
2009 |
|
|
|
(Dollars in thousands) |
|
Beginning allowance for loan losses |
|
$ |
79,425 |
|
|
$ |
43,190 |
|
|
$ |
33,504 |
|
|
$ |
34,336 |
|
Provision for loan losses |
|
|
102,106 |
|
|
|
50,363 |
|
|
|
5,169 |
|
|
|
13,947 |
|
Total charge-offs |
|
|
30,422 |
|
|
|
14,633 |
|
|
|
4,546 |
|
|
|
6,793 |
|
Total recoveries |
|
|
(253 |
) |
|
|
(505 |
) |
|
|
(209 |
) |
|
|
(394 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
30,169 |
|
|
|
14,128 |
|
|
|
4,337 |
|
|
|
6,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance for loan losses |
|
$ |
151,362 |
|
|
$ |
79,425 |
|
|
$ |
34,336 |
|
|
$ |
41,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, net of unearned income |
|
$ |
2,415,862 |
|
|
$ |
2,482,560 |
|
|
$ |
2,434,534 |
|
|
$ |
2,472,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to total loans, net of unearned income |
|
|
6.27 |
% |
|
|
3.20 |
% |
|
|
1.41 |
% |
|
|
1.69 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Nine Months Ended |
|
|
Year Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2009 |
|
|
|
(Dollars in thousands) |
|
Beginning allowance for loan losses |
|
$ |
41,884 |
|
|
$ |
28,850 |
|
|
$ |
28,850 |
|
Provision for loan losses |
|
|
161,596 |
|
|
|
14,602 |
|
|
|
28,550 |
|
Total charge-offs |
|
|
52,837 |
|
|
|
9,868 |
|
|
|
16,661 |
|
Total recoveries |
|
|
(719 |
) |
|
|
(752 |
) |
|
|
(1,145 |
) |
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
52,118 |
|
|
|
9,116 |
|
|
|
15,516 |
|
|
|
|
|
|
|
|
|
|
|
Ending allowance for loan losses |
|
$ |
151,362 |
|
|
$ |
34,336 |
|
|
$ |
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 |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(Dollars in thousands) |
|
Alabama region |
|
$ |
(2,512 |
) |
|
$ |
1,976 |
|
|
$ |
371 |
|
|
$ |
2,783 |
|
Florida region |
|
|
(36,156 |
) |
|
|
864 |
|
|
|
(45,971 |
) |
|
|
5,828 |
|
Administrative and other |
|
|
(70,253 |
) |
|
|
(1,259 |
) |
|
|
(122,755 |
) |
|
|
(23,687 |
) |
Income tax expense (benefit) |
|
|
26,972 |
|
|
|
701 |
|
|
|
27,000 |
|
|
|
(6,686 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net (loss) benefit |
|
$ |
(135,893 |
) |
|
$ |
880 |
|
|
$ |
(195,355 |
) |
|
$ |
(8,390 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
46
Alabama Region
Operating income (loss) was ($2.5) million and $0.4 million for the three and nine months ended
September 30, 2010, respectively, compared to $2.0 million and $2.8 million for the three and nine
months ended September 30, 2009, respectively, primarily due to an increase in the provision for
loan losses.
Net interest income for the three and nine months ended September 30, 2010 increased $0.4 million
and $3.5 million, or 4.1% and 13.1%, 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 nine months ended September 30, 2010 increased $3.8
million and $3.6 million, or 269..0% and 80.9%, 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 nine months ended September 30, 2010 decreased $0.2 million
and $0.5 million, or 8.9% and 7.7%, 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 nine months ended September 30, 2010 increased $0.9 million
and $1.8 million, or 10.7% and 7.0%, respectively, compared to the same periods in the prior year.
This was primarily the result of an increase in the costs of foreclosed assets. 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 $36.2 million and $46.0 million for the three
and nine months ended September 30, 2010, respectively, compared to operating income of $0.9
million and $5.8 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 nine months ended September 30, 2010 decreased $0.8 million
and increased $2.4 million, or 7.7% and 8.6%, respectively, compared to the same periods in the
prior year. The decrease was primarily a result of a decline in loan yield resulting from an
increase in nonperforming loans. 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 nine months ended September 30, 2010 increased
$32.9 million and $48.9 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 nine months ended September 30, 2010 decreased $0.1 million
and $0.2 million, or 11.6% and 12.9%, 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 nine months ended September 30, 2010 increased $3.3 million
and $5.2 million, or 56.6% and 29.7%, 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.
47
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 September 30, 2010 and December 31, 2009, we had $267.9 million, or 46.1%, and $213.8
million, or 38.2%, 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 $13.0 million and $13.3 million, as of
September 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 September 30, 2010, the
fair values of five private-label MBS totaling $6.1 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 $254.9 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 $3.166 billion as of September 30, 2010, a decrease of $55.4 million, or 1.72%,
from $3.222 billion as of December 31, 2009. Average total assets for the three months ended
September 30, 2010 were $3.319 billion, and were funded by average total liabilities of $3.177
billion and average total stockholders equity of $142.1 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 $164.3 million to $264.1 million as of September 30, 2010 from $99.8
million as of December 31, 2009. As of September 30, 2010, short-term liquid assets were 8.3% 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 below in this Item 2 for additional discussion.)
48
Investment Securities
Total investment securities decreased $25.3 million, or 8.8%, to $261.0 million as of September 30,
2010, from $286.3 million as of December 31, 2009. Average investment securities were $266.3
million and $279.6 million for the three and nine months ended September 30, 2010, respectively,
compared to $297.6 million and $320.5 million for the same periods in the prior year. Investment
securities were 8.8% of interest-earning assets as of September 30, 2010 compared to 9.9% as of
December 31, 2009. The investment portfolio produced an average taxable equivalent yield of 4.11%
and 4.42% for the three and nine months ended September 30, 2010, respectively, compared to 5.36%
and 5.41% for the three and nine months ended September 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 |
|
|
|
September 30, |
|
|
December 31, |
|
|
Percent |
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
|
(Dollars in thousands) |
|
Investment securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agency securities |
|
$ |
18,596 |
|
|
$ |
53,681 |
|
|
|
(65.4 |
)% |
MBS |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Agency pass-through |
|
|
105,698 |
|
|
|
163,724 |
|
|
|
(35.4 |
) |
U.S. Agency collateralized mortgage obligation (CMO) |
|
|
83,779 |
|
|
|
12,759 |
|
|
NCM |
|
Private-label CMO |
|
|
13,269 |
|
|
|
16,191 |
|
|
|
(18.0 |
) |
|
|
|
|
|
|
|
|
|
|
Total MBS |
|
|
202,746 |
|
|
|
192,674 |
|
|
|
5.2 |
|
State, county and municipal securities |
|
|
30,167 |
|
|
|
31,462 |
|
|
|
(4.1 |
) |
Corporate obligations |
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt |
|
|
4,000 |
|
|
|
4,000 |
|
|
|
|
|
Pooled trust preferred securities |
|
|
3,579 |
|
|
|
3,203 |
|
|
|
11.7 |
|
Single issue trust preferred securities |
|
|
1,775 |
|
|
|
977 |
|
|
|
81.7 |
|
|
|
|
|
|
|
|
|
|
|
Total corporate obligations |
|
|
9,354 |
|
|
|
8,180 |
|
|
|
14.4 |
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
139 |
|
|
|
313 |
|
|
|
(55.6 |
) |
|
|
|
|
|
|
|
|
|
|
Total investment securities available-for-sale |
|
$ |
261,002 |
|
|
$ |
286,310 |
|
|
|
(8.8 |
)% |
|
|
|
|
|
|
|
|
|
|
49
The following table summarizes the investment securities with unrealized losses as of
September 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MBS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Agency pass-through |
|
$ |
74 |
|
|
$ |
|
|
|
$ |
239 |
|
|
$ |
7 |
|
|
$ |
313 |
|
|
$ |
7 |
|
U.S. Agency CMO |
|
|
38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38 |
|
|
|
|
|
Private-label CMO |
|
|
|
|
|
|
|
|
|
|
5,903 |
|
|
|
850 |
|
|
|
5,903 |
|
|
|
850 |
|
|
|
|
|
|
|
|
Total MBS |
|
|
112 |
|
|
|
|
|
|
|
6,142 |
|
|
|
857 |
|
|
|
6,254 |
|
|
|
857 |
|
State, county and municipal securities |
|
|
1,585 |
|
|
|
79 |
|
|
|
970 |
|
|
|
129 |
|
|
|
2,555 |
|
|
|
208 |
|
Corporate obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt |
|
|
|
|
|
|
|
|
|
|
4,000 |
|
|
|
82 |
|
|
|
4,000 |
|
|
|
82 |
|
Single issue trust preferred securities |
|
|
|
|
|
|
|
|
|
|
1,775 |
|
|
|
3,225 |
|
|
|
1,775 |
|
|
|
3,225 |
|
|
|
|
|
|
|
|
Total corporate obligations |
|
|
|
|
|
|
|
|
|
|
5,775 |
|
|
|
3,307 |
|
|
|
5,775 |
|
|
|
3,307 |
|
|
|
|
|
|
|
|
Total temporarily impaired securities |
|
|
1,697 |
|
|
|
79 |
|
|
|
12,887 |
|
|
|
4,293 |
|
|
|
14,584 |
|
|
|
4,372 |
|
Other-than-temporarily Impaired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MBS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private-label CMO |
|
|
|
|
|
|
|
|
|
|
3,094 |
|
|
|
1,384 |
|
|
|
3,094 |
|
|
|
1,384 |
|
Corporate obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pooled trust preferred securities |
|
|
|
|
|
|
|
|
|
|
3,579 |
|
|
|
4,501 |
|
|
|
3,579 |
|
|
|
4,501 |
|
|
|
|
|
|
|
|
Total OTTI securities |
|
|
|
|
|
|
|
|
|
|
6,673 |
|
|
|
5,885 |
|
|
|
6,673 |
|
|
|
5,885 |
|
|
|
|
|
|
|
|
Total temporarily and
other-than-temporarily impaired |
|
$ |
1,697 |
|
|
$ |
79 |
|
|
$ |
19,560 |
|
|
$ |
10,178 |
|
|
$ |
21,257 |
|
|
$ |
10,257 |
|
|
|
|
|
|
|
|
|
|
|
(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
availablefor-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
50
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 September 30, 2010, our securities portfolio consisted of 198 securities, 27 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 September 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
$13.3 million, which had net unrealized losses of approximately $2.0 million as of September 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 |
|
|
|
2.61 |
|
|
$ |
(162 |
) |
Aaa/NR |
|
|
1 |
|
|
|
4.73 |
|
|
|
|
|
NR/AAA |
|
|
1 |
|
|
|
3.08 |
|
|
|
111 |
|
NR/AA |
|
|
1 |
|
|
|
3.26 |
|
|
|
(143 |
) |
B2/AA |
|
|
1 |
|
|
|
N/A |
|
|
|
(452 |
) |
B2/NR |
|
|
1 |
|
|
|
3.99 |
|
|
|
(56 |
) |
NR/BBB |
|
|
1 |
|
|
|
2.17 |
|
|
|
(37 |
) |
Caa2/CCC (2) |
|
|
1 |
|
|
|
0.75 |
|
|
|
(1,384 |
) |
NR/C (2) |
|
|
2 |
|
|
|
0.00-0.25 |
|
|
|
128 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
10 |
|
|
|
|
|
|
$ |
(1,995 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 and third quarters of 2010, we recognized immaterial amounts of OTTI on two 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 September
30, 2010, the fair values of the three private-label CMO securities with OTTI totaled $3.7 million
and 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 September
30, 2010 (dollars in thousands):
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
10.76 |
|
|
|
1756 |
|
|
|
18% |
|
|
|
55.09% |
|
|
|
50% |
|
|
|
16.27% |
|
|
$ |
(54 |
) |
|
$ |
(85 |
) |
|
$ |
(139 |
) |
CMO 2 |
|
|
17.57 |
|
|
|
1629 |
|
|
|
17% |
|
|
|
49.04% |
|
|
|
45% |
|
|
|
27.72% |
|
|
|
|
|
|
|
|
|
|
|
|
|
CMO 4 |
|
|
63.01 |
|
|
|
1440 |
|
|
|
16% |
|
|
|
29.38% |
|
|
|
45% |
|
|
|
16.67% |
|
|
|
(97 |
) |
|
|
74 |
|
|
|
(23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(151 |
) |
|
$ |
(11 |
) |
|
$ |
(162 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 2010, management did not intend to sell these securities nor 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.
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 September
30, 2010. We believe that all contractual cash flows will be received on this portfolio.
As of September 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; |
|
|
|
|
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, 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, assigned 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
52
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.
The following tables provide various information and fair value model assumptions regarding our
CDOs as of September 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 |
|
$ |
2,135 |
|
|
$ |
896 |
|
|
$ |
(1,239 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
MM Community Funding Ltd |
|
Pooled |
|
B |
|
|
1,957 |
|
|
|
789 |
|
|
|
(1,168 |
) |
|
|
(20 |
) |
|
|
(117 |
) |
|
|
(137 |
) |
Preferred Term Securities V |
|
Pooled |
|
MEZ |
|
|
1,145 |
|
|
|
808 |
|
|
|
(337 |
) |
|
|
(61 |
) |
|
|
37 |
|
|
|
(24 |
) |
Tpref Funding III Ltd |
|
Pooled |
|
B-2 |
|
|
2,843 |
|
|
|
1,086 |
|
|
|
(1,757 |
) |
|
|
(174 |
) |
|
|
43 |
|
|
|
(131 |
) |
Emigrant Capital Trust (1) |
|
Single |
|
Sole |
|
|
5,000 |
|
|
|
1,775 |
|
|
|
(3,225 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
13,080 |
|
|
$ |
5,354 |
|
|
$ |
(7,726 |
) |
|
$ |
(255 |
) |
|
$ |
(37 |
) |
|
$ |
(292 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
C |
|
21 |
|
|
21 |
% |
|
|
18 |
% |
|
|
0 |
% |
MM Community Funding Ltd |
|
C |
|
7 |
|
|
25 |
% |
|
|
29 |
% |
|
|
0 |
% |
Preferred Term Securities V |
|
CCC |
|
2 |
|
|
5 |
% |
|
|
36 |
% |
|
|
0 |
% |
Tpref Funding III Ltd |
|
C |
|
22 |
|
|
28 |
% |
|
|
20 |
% |
|
|
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 |
|
$ |
44.79 |
|
|
Swap + 1800 |
|
9.48% Fixed |
MM Community Funding Ltd |
|
|
15.77 |
|
|
LIBOR + 1500 |
|
LIBOR + 310 |
Preferred Term Securities V |
|
|
58.85 |
|
|
LIBOR + 1600 |
|
LIBOR + 210 |
Tpref Funding III Ltd |
|
|
27.16 |
|
|
LIBOR + 1200 |
|
LIBOR + 190 |
Emigrant Capital Trust (1) |
|
|
35.50 |
|
|
LIBOR + 1162 |
|
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 1162 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 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.
53
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 September 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 Nine |
|
|
|
Months Ended |
|
|
Months Ended |
|
|
|
September 30, 2010 |
|
|
September 30, 2010 |
|
|
|
(Dollars in thousands) |
|
Balance at beginning of period |
|
$ |
8,924 |
|
|
$ |
8,869 |
|
Amounts related to credit losses for which an OTTI was not previously recognized |
|
|
|
|
|
|
154 |
|
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 |
|
|
309 |
|
|
|
405 |
|
Reductions for securities where there is an intent to sell or requirement to sell |
|
|
|
|
|
|
(154 |
) |
Reductions for securities that are in total default |
|
|
(1,434 |
) |
|
|
(1,434 |
) |
Reductions for increases in cash flows expected to be collected |
|
|
(447 |
) |
|
|
(488 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
7,352 |
|
|
$ |
7,352 |
|
|
|
|
|
|
|
|
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.
Loans
Composition of Loan Portfolio, Yield Changes and Diversification
Our loans, net of unearned income, were $2.416 billion as of September 30, 2010, a decrease of
$57.0 million from $2.473 billion as of December 31, 2009. Mortgage loans held for sale were $63.9
million as of September 30, 2010, a decrease of 11.1%, or $8.0 million, from $71.9 million as of
December 31, 2009. Average loans, including mortgage loans held for sale, for the three months
ended September 30, 2010 were $2.519 billion compared to $2.463 billion for the year ended December
31, 2009. Loans, net of unearned income, comprised 81.2% of interest-earning assets as of September
30, 2010, compared to 85.4% as of December 31, 2009. Mortgage loans held for sale comprised 2.2% of
interest-earning assets as of September 30, 2010, compared to 2.5% as of December 31, 2009. The
average yield of the loan portfolio was 5.37%, 5.66% and 5.84% for the three months ended September
30, 2010, June 30, 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.
54
The following table details the distribution of our loan portfolio by category for the periods
presented:
Distribution of Loans by Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
December 31, 2009 |
|
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
Percent of |
|
|
|
Amount |
|
|
Total |
|
|
Amount |
|
|
Total |
|
|
|
(Dollars in thousands) |
|
Commercial and industrial |
|
$ |
177,905 |
|
|
|
7.36 |
% |
|
$ |
213,329 |
|
|
|
8.62 |
% |
Real estate construction and land development |
|
|
632,792 |
|
|
|
26.16 |
|
|
|
680,445 |
|
|
|
27.48 |
|
Real estate mortgages |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family |
|
|
699,428 |
|
|
|
28.92 |
|
|
|
691,364 |
|
|
|
27.93 |
|
Commercial |
|
|
820,483 |
|
|
|
33.92 |
|
|
|
801,813 |
|
|
|
32.39 |
|
Other |
|
|
31,242 |
|
|
|
1.29 |
|
|
|
28,885 |
|
|
|
1.17 |
|
Consumer |
|
|
56,160 |
|
|
|
2.32 |
|
|
|
58,785 |
|
|
|
2.37 |
|
Other |
|
|
817 |
|
|
|
0.03 |
|
|
|
969 |
|
|
|
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
2,418,827 |
|
|
|
100.00 |
% |
|
|
2,475,590 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned income |
|
|
(2,965 |
) |
|
|
|
|
|
|
(2,893 |
) |
|
|
|
|
Allowance for loan losses |
|
|
(151,362 |
) |
|
|
|
|
|
|
(41,884 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans |
|
$ |
2,264,500 |
|
|
|
|
|
|
$ |
2,430,813 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows the amount of total loans, net of unearned income, by segment and
the percent change for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
Percent |
|
|
2010 |
|
2009 |
|
Change |
|
|
(Dollars in thousands) |
Total loans, net of unearned income |
|
$ |
2,415,862 |
|
|
$ |
2,472,697 |
|
|
|
(2.3 |
)% |
Alabama segment |
|
|
969,673 |
|
|
|
996,545 |
|
|
|
(2.7 |
) |
Florida segment |
|
|
1,176,382 |
|
|
|
1,213,202 |
|
|
|
(3.0 |
) |
Other |
|
|
269,807 |
|
|
|
262,950 |
|
|
|
2.6 |
|
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:
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
Commercial |
|
|
|
|
|
|
Development |
|
|
Development |
|
|
Total |
|
|
|
(Dollars in thousands) |
|
Real estate construction and land development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
Alabama segment |
|
$ |
153,994 |
|
|
$ |
74,520 |
|
|
$ |
228,514 |
|
Florida segment |
|
|
109,471 |
|
|
|
264,379 |
|
|
|
373,850 |
|
Other |
|
|
6,171 |
|
|
|
24,257 |
|
|
|
30,428 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
269,636 |
|
|
$ |
363,156 |
|
|
$ |
632,792 |
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 2010 |
|
|
|
|
|
|
|
|
Alabama segment |
|
$ |
425,650 |
|
|
$ |
307,787 |
|
Florida segment |
|
|
225,971 |
|
|
|
467,987 |
|
Other |
|
|
47,807 |
|
|
|
44,709 |
|
|
|
|
|
|
|
|
Total |
|
$ |
699,428 |
|
|
$ |
820,483 |
|
|
|
|
|
|
|
|
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.
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:
|
|
|
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 condition; and |
|
|
|
|
mergers and acquisitions. |
56
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 section 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.
57
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 |
|
|
Nine Months Ended |
|
|
Year Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2009 |
|
|
|
(Dollars in thousands) |
|
Allowance for loan losses at beginning of period |
|
$ |
79,425 |
|
|
$ |
33,504 |
|
|
$ |
41,884 |
|
|
$ |
28,850 |
|
|
$ |
28,850 |
|
Charge-offs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
2,085 |
|
|
|
299 |
|
|
|
5,020 |
|
|
|
496 |
|
|
|
1,390 |
|
Real estate construction and land development |
|
|
22,076 |
|
|
|
1,751 |
|
|
|
35,171 |
|
|
|
2,806 |
|
|
|
4,870 |
|
Real estate mortgage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family |
|
|
4,198 |
|
|
|
1,396 |
|
|
|
8,001 |
|
|
|
2,764 |
|
|
|
5,372 |
|
Commercial |
|
|
1,003 |
|
|
|
85 |
|
|
|
1,952 |
|
|
|
933 |
|
|
|
1,094 |
|
Other |
|
|
57 |
|
|
|
|
|
|
|
57 |
|
|
|
186 |
|
|
|
210 |
|
Consumer |
|
|
964 |
|
|
|
966 |
|
|
|
2,404 |
|
|
|
2,368 |
|
|
|
3,346 |
|
Other |
|
|
39 |
|
|
|
49 |
|
|
|
232 |
|
|
|
315 |
|
|
|
379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs |
|
|
30,422 |
|
|
|
4,546 |
|
|
|
52,837 |
|
|
|
9,868 |
|
|
|
16,661 |
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
11 |
|
|
|
36 |
|
|
|
70 |
|
|
|
144 |
|
|
|
161 |
|
Real estate construction and land development |
|
|
42 |
|
|
|
9 |
|
|
|
62 |
|
|
|
35 |
|
|
|
68 |
|
Real estate mortgage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family |
|
|
55 |
|
|
|
27 |
|
|
|
146 |
|
|
|
59 |
|
|
|
71 |
|
Commercial |
|
|
1 |
|
|
|
35 |
|
|
|
31 |
|
|
|
40 |
|
|
|
277 |
|
Other |
|
|
13 |
|
|
|
13 |
|
|
|
74 |
|
|
|
230 |
|
|
|
251 |
|
Consumer |
|
|
91 |
|
|
|
51 |
|
|
|
225 |
|
|
|
134 |
|
|
|
186 |
|
Other |
|
|
40 |
|
|
|
38 |
|
|
|
111 |
|
|
|
110 |
|
|
|
131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries |
|
|
253 |
|
|
|
209 |
|
|
|
719 |
|
|
|
752 |
|
|
|
1,145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
30,169 |
|
|
|
4,337 |
|
|
|
52,118 |
|
|
|
9,116 |
|
|
|
15,516 |
|
Provision for loan losses |
|
|
102,106 |
|
|
|
5,169 |
|
|
|
161,596 |
|
|
|
14,602 |
|
|
|
28,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses at end of period |
|
$ |
151,362 |
|
|
$ |
34,336 |
|
|
$ |
151,362 |
|
|
$ |
34,336 |
|
|
$ |
41,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans at end of period, net of unearned income |
|
$ |
2,415,862 |
|
|
$ |
2,434,534 |
|
|
$ |
2,415,862 |
|
|
$ |
2,434,534 |
|
|
$ |
2,472,697 |
|
Average loans, net of unearned income |
|
|
2,467,685 |
|
|
|
2,422,871 |
|
|
|
2,490,827 |
|
|
|
2,384,287 |
|
|
|
2,401,805 |
|
Ratio of ending allowance to ending loans |
|
|
6.27 |
% |
|
|
1.41 |
% |
|
|
6.27 |
% |
|
|
1.41 |
% |
|
|
1.69 |
% |
Ratio of net charge-offs to average loans (1) |
|
|
4.85 |
|
|
|
0.71 |
|
|
|
2.79 |
|
|
|
0.51 |
|
|
|
0.65 |
|
Net charge-offs as a percentage of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
29.55 |
|
|
|
83.90 |
|
|
|
32.25 |
|
|
|
62.43 |
|
|
|
54.35 |
|
Allowance for loan losses (1) |
|
|
79.08 |
|
|
|
50.10 |
|
|
|
45.87 |
|
|
|
35.36 |
|
|
|
37.04 |
|
Allowance for loan losses as a percentage of nonperforming loans |
|
|
65.40 |
|
|
|
22.50 |
|
|
|
65.40 |
|
|
|
22.50 |
|
|
|
26.25 |
|
58
The allowance as a percentage of loans, net of unearned income, as of September 30, 2010 was 6.27%,
compared to 3.20% and 1.69% as of June 30, 2010 and December 31, 2009, respectively.
The allowance for loan losses as a percentage of nonperforming loans, excluding TDRs, increased to
65.4% as of September 30, 2010 from 34.32% as of June 30, 2010 and 26.25% as of December 31, 2009.
Approximately $74.7 million of the allowance for loan losses was specifically allocated to
nonperforming loans as of September 30, 2010. As of September 30, 2010, nonperforming loans were
$277.5 million, of which $273.0 million, or 98.4%, were loans secured by real estate compared to
$231.4 million, or 98.2%, as of June 30, 2010. See Nonperforming Assets.
Three Months Ended September 30, 2010 compared to Three Months Ended June 30, 2010
Net charge-offs increased $13.1 million to $30.2 million for the three months ended September 30,
2010 from $14.1 million during the three months ended June 30, 2010. Of the $30.2 million, $21.1
million, or 69.5%, was related to a six large real estate construction relationships with
original outstanding balances totaling approximately $47.8 million. Overall, net charge-offs for
real estate loans increased $16.6 million to $27.2 million. Net charge-offs of commercial loans
decreased by $0.7 million to $2.1 million. Net charge-offs of consumer loans increased by $0.2
million to $0.9 million. Net charge-offs as a percentage of the allowance for loan losses were
79.08% for the three months ended September 30, 2010, up from 71.34% for the three months ended
June 30, 2010 and up from 50.10% for three months ended September 30, 2009.
Net
charge-offs related to construction and land development real estate loans increased $14.5
million to $22.0 million during the three months ended September 30, 2010, from $7.5 million for
the three months ended June 30, 2010. Residential construction and land development net charge-offs
accounted for $13.8 million, or 62.4%, of the total losses from this portfolio, with $8.3 million,
or 37.6%, coming from commercial real estate construction and land development. Within the
residential construction losses, $10.0 million or 72.2% was secured by undeveloped or partially
developed land; the remainder was secured by single family residences under construction.
Geographically, $7.6 million, or 55% of residential construction losses was located in Florida; the
remaining $6.3 million located in Alabama or other states. Within the commercial construction
losses, $7.8 million, or 93.5%, were secured by undeveloped or partially developed land.
Geographically, $7.7 million, or 91.9%, was located in Alabama with the remainder in Florida.
Nine Months Ended September 30, 2010 compared to the Nine Months Ended September 30, 2009
Net charge-offs increased $43.0 million to $52.1 million for the nine months ended September 30,
2010 from $9.1 million during the nine months ended September 30, 2009. Net charge-offs of real
estate loans increased $38.5 million to $44.9 million. Net charge-offs of commercial loans
increased by $4.6 million to $5.0 million. Net charge-offs of consumer loans decreased $0.1 million
to $2.3 million. Net charge-offs as a percentage of the allowance for loan losses were 45.87% for
the nine months ended September 30, 2010, up from 35.36% for the nine months ended September 30,
2009.
Net charge-offs related to construction and land development real estate loans increased $32.3
million to $35.1 million during the nine months ended September 30, 2010, from $2.8 million for the
nine months ended September 30, 2009. Residential construction and land development net charge-offs
accounted for $24.9 million, or 70.8%, of the total losses from this portfolio, with $10.2 million,
or 29.2%, coming from commercial real estate residential construction and land development. Within
the residential construction losses, $20.2 million, or 80.8%, were secured by undeveloped or
partially developed land; the remainder was secured by single family residences under construction.
Geographically, $18.1 million, or 72.6%, of residential construction losses were located in
Florida; the remaining $6.8 million, or 27.4%, were located in Alabama or other states. Within the
commercial construction losses, $9.5 million, or 93.1%, were secured by undeveloped or partially
developed land. Geographically, $7.7 million, or 75.2%, was located in Alabama with the remainder
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
59
Enterprise Risk Management Committee of the Board of Directors. Credit Administration relies upon
the independent work of loan review in risk rating and 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.
Allocation of the Allowance for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
June 30, 2010 |
|
|
December 31, 2009 |
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
|
of Loans |
|
|
|
|
|
|
of Loans |
|
|
|
|
|
|
of Loans |
|
|
|
|
|
|
|
in Each |
|
|
|
|
|
|
in Each |
|
|
|
|
|
|
in Each |
|
|
|
|
|
|
|
Category |
|
|
|
|
|
|
Category |
|
|
|
|
|
|
Category |
|
|
|
|
|
|
|
to Total |
|
|
|
|
|
|
to Total |
|
|
|
|
|
|
to Total |
|
|
|
Amount |
|
|
Loans |
|
|
Amount |
|
|
Loans |
|
|
Amount |
|
|
Loans |
|
|
|
(Dollars in thousands) |
|
Commercial and industrial |
|
$ |
7,278 |
|
|
|
7.4 |
% |
|
$ |
5,975 |
|
|
|
7.5 |
% |
|
$ |
2,356 |
|
|
|
8.6 |
% |
Real estate construction and land development |
|
|
83,651 |
|
|
|
26.2 |
|
|
|
43,392 |
|
|
|
27.4 |
|
|
|
17,971 |
|
|
|
27.5 |
|
Real estate mortgages |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family |
|
|
23,602 |
|
|
|
28.9 |
|
|
|
16,860 |
|
|
|
28.2 |
|
|
|
12,342 |
|
|
|
27.9 |
|
Commercial |
|
|
34,337 |
|
|
|
33.9 |
|
|
|
11,142 |
|
|
|
33.3 |
|
|
|
7,019 |
|
|
|
32.4 |
|
Other |
|
|
696 |
|
|
|
1.3 |
|
|
|
209 |
|
|
|
1.3 |
|
|
|
371 |
|
|
|
1.2 |
|
Consumer |
|
|
1,798 |
|
|
|
2.3 |
|
|
|
1,847 |
|
|
|
2.3 |
|
|
|
1,825 |
|
|
|
2.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
151,362 |
|
|
|
100.0 |
% |
|
$ |
79,425 |
|
|
|
100.0 |
% |
|
$ |
41,884 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the second quarter of 2010, management decided to increase the various qualitative risk
factors applied to the historical loss calculations to address the increased levels of inherent
risks associated with the impact of the Gulf Oil Spill. (See
Certain Factors Contributing to Our Recent Results and Our
Response to Those Factors above in this Item 2 for a discussion
of the Gulf Oil Spill.) 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 located
along the Alabama and Northwest Florida coastal regions. Within this group, $149 million, or 27%,
could be categorized as beach-front 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, 1-4 Family Mortgage Loans, Commercial Real Estate Mortgage loans, and
Commercial, Financial, and Industrial (C & I) loans.
As demonstrated in the table above, the overall levels of required allowance increased
significantly over the course of 2010 with the largest impact occurring in the third quarter of
2010. Specific reserve levels and historical loss ratios were the drivers of this increase with
the level of specific allocation required relative to impaired loans being the most significant.
(See Impaired Loans section below for more detail). In comparison to the second quarter of 2010,
historical loss ratios continued to increase as the bank realized losses in all major loan
categories with the majority of loss experience in construction loans secured by undeveloped or
partially-developed land. Because of this, management decided to further delineate losses for
certain loan categories in the third quarter of 2010. In particular, management analyzed real
estate construction loan losses and decided to further segment the historical loss calculation for
real estate construction loans secured by developed and undeveloped land to better account for the
inherent risks associated with this class of loan. Management believes that this segmentation is
useful and necessary in that it provides a better accounting of construction losses and further
isolates the overall inherent risks associated with this loan
portfolio, In light of these
factors, management believes that the increased level of allowance
for loan losses is adequate. (See
Risk Factors Risks Relating to Our Business elsewhere
herein.)
During the nine months ended September 30, 2010, we increased the allowance for loan losses related
to construction and land development real estate loans by $65.6 million, from $18.0 million as of
December 31, 2009 to $83.7 million as of September 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. As mentioned previously, management
decided to further delineate loan losses relative to construction and land development loans by
segregating loans secured by undeveloped or partially developed land. This segment accounted for
$64.7 million, or 77.4%, of the total allowance for loan losses for this category; the remainder
was related to loans secured by improved properties.
60
Our allocation of the allowance for loan losses related to single-family mortgage loans increased
to $23.6 million as of September 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 September 30, 2010, only 4.9% 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.
Nonperforming Assets
Nonperforming assets increased $59.7 million, or 21.3%, to $336.6 million as of September 30, 2010
from $276.9 million as of June 30, 2010. As a percentage of net loans plus nonperforming assets,
nonperforming assets increased to 13.60% as of September 30, 2010 from 10.95% as of June 30, 2010.
(See Certain Factors Contributing to Recent Results and Our
Response to Those Factors
in Part I, Item 2 of this Report.) The overall increase in nonperforming assets was primarily related to our real estate construction
loan and commercial mortgage loan portfolios. In the third quarter of 2010, the bank added $69.8
million in new non-performing real estate construction loans. Of these new loans, sixteen large
($1.0 million and over) credits, totaling $55.4 million, accounted for over 79% of this increase;
geographically, nine credits ($35.6 million of the total) were located in Florida with seven
credits ($19.8 million of the total) located in Alabama and Kentucky. Also during the third
quarter of 2010, the bank experienced reductions of non-performing real estate construction loans
totaling $35.1 million due to payment/payoff activity, charge-offs, or through movement to OREO via
foreclosure. Of this reduction, two large credits, totaling $4.8 million, accounted for 13.7% of
the total; both of these credits were located outside of Florida. The total effect of all of
these changes resulted in a net increase in non-performing real estate construction loans totaling
$34.7 million for the third quarter of 2010. The commercial real estate increase was the result of
eight commercial real estate credits, totaling $14.2 million, primarily in the office category.
All of these credits 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. Nonetheless, recently
imposed regulatory constraints on the modification of multifamily, non-residential, land or
commercial mortgage loans is in some instances, impeding these
mitigation efforts. (See Recent Developments
above in this Item 2 for a discussion of the regulatory constraints.) The following table shows our
nonperforming assets for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(Dollars in thousands) |
|
Nonaccrual |
|
$ |
272,028 |
|
|
$ |
155,631 |
|
Accruing loans 90 days or more delinquent |
|
|
5,425 |
|
|
|
3,920 |
|
|
|
|
|
|
|
|
Total nonperforming loans |
|
|
277,453 |
|
|
|
159,551 |
|
Other real estate owned assets |
|
|
58,766 |
|
|
|
41,618 |
|
Repossessed assets |
|
|
394 |
|
|
|
380 |
|
|
|
|
|
|
|
|
Total nonperforming assets |
|
$ |
336,613 |
|
|
$ |
201,549 |
|
|
|
|
|
|
|
|
Restructured and performing under restructured terms, net of specific allowance |
|
$ |
117,650 |
|
|
$ |
110,777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans as a percentage of loans |
|
|
11.48 |
% |
|
|
6.45 |
% |
|
|
|
|
|
|
|
Nonperforming assets as a percentage of loans plus nonperforming assets |
|
|
13.60 |
% |
|
|
8.01 |
% |
|
|
|
|
|
|
|
Nonperforming assets as a percentage of total assets |
|
|
10.63 |
% |
|
|
6.26 |
% |
|
|
|
|
|
|
|
61
The following is a summary of nonperforming loans by category for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(Dollars in thousands) |
|
Commercial and industrial |
|
$ |
3,434 |
|
|
$ |
1,797 |
|
Real estate construction and land development |
|
|
|
|
|
|
|
|
Residential |
|
|
116,582 |
|
|
|
23,818 |
|
Commercial |
|
|
51,939 |
|
|
|
49,240 |
|
Real estate mortgages |
|
|
|
|
|
|
|
|
Single-family |
|
|
51,172 |
|
|
|
52,323 |
|
Commercial |
|
|
53,002 |
|
|
|
30,343 |
|
Other |
|
|
200 |
|
|
|
436 |
|
Consumer |
|
|
1,124 |
|
|
|
734 |
|
Other |
|
|
|
|
|
|
860 |
|
|
|
|
|
|
|
|
Total nonperforming loans |
|
$ |
277,453 |
|
|
$ |
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 September 30, 2010, single-family residential mortgages accounted for $51.2 million, or
18.3%, of total nonperforming loans, down $2.6 million from $53.8 million as of June 30, 2010.
Foreclosure activity during the three months ended September 30, 2010 resulted in $24.3 million of
net new foreclosures, with residential construction properties accounting for $4.6 million, or
18.8%, commercial construction properties accounting for $8.0, or 33.0%; single family residential
properties accounting for $9.2 million, or 37.8%, and CRE properties accounting for another $2.5
million, or 10.4%. Approximately 63% of foreclosures originated in Alabama and the remaining 37%
originated in Florida. Our OREO acquired through foreclosure was $58.8 million as of September 30,
2010 a increase of $13.6 million from $45.2 million as of June 30, 2010, which resulted from
increased foreclosure activity.
The following is a summary of OREO by category for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(Dollars in thousands) |
|
Acreage |
|
$ |
4,860 |
|
|
$ |
2,251 |
|
Commercial buildings |
|
|
14,542 |
|
|
|
5,226 |
|
Residential condominiums |
|
|
1,340 |
|
|
|
2,730 |
|
Residential single-family homes |
|
|
21,981 |
|
|
|
15,696 |
|
Residential lots |
|
|
11,090 |
|
|
|
14,613 |
|
Other |
|
|
4,953 |
|
|
|
1,102 |
|
|
|
|
|
|
|
|
Other real estate owned |
|
$ |
58,766 |
|
|
$ |
41,618 |
|
|
|
|
|
|
|
|
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.
62
Impaired Loans
As of September 30, 2010, our recorded investment in impaired loans, under ASC 310-35 was $413.5
million, an increase of $13.8 million from $399.7 million
as of June 30, 2010. (See Certain Factors Contributing to
Our Recent Results and Our Response to Those Factors
above in this Item 2.) During the third
quarter of 2010, approximately $150.1 million in loans experienced reduced impairment levels due to
charge-off/write down activity (OREO), updated property valuations and/or lower cash-flow
impairments due to performance/amortization by the borrower yielding lower impairments; resulting
in the release of approximately $17.2 million in specific reserve levels. Also during the third
quarter of 2010, we added approximately $65 million new impairments, primarily non-accrual loans.
The related collateral valuation analyses resulted in new required specific reserve levels of $16.8
million. Approximately $117.0 million in existing impaired loans, or 28% of total impaired loans,
received updated appraised valuations resulting in higher specific reserve levels of $35.8 million.
The remaining $99.8 million required additional reserve levels primarily due to lower estimated
property valuations and/or increased cash flow impairments relative to concessions made during
troubled-debt-restructurings (TDRs); resulting in additional specific reserve levels of $20.5
million. At the individual credit level, over 54% of the overall increase in specific reserve
could be attributed to thirteen (13) credits over $1.0 million which accounted for $30.2 million of
the total increase. Management does expect that impaired loans will continue to be a significant
factor in the overall determination of appropriate reserve levels. See Part II, Item 1A. Risk
Factors Risks Relating to Our Business.
Of our total impaired loans, approximately $298.1 million were located in the Florida Region,
$105.9 million were located in the Alabama Region, and $9.5 million were located in other areas.
Approximately $103.0 million of the allowance for loan losses was specifically allocated to these
loans, providing 24.9% coverage. Additionally, $411.1 million, or 99.4%, of the $413.5 million in
impaired loans are 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
December 31, 2009 |
|
|
|
Oustanding |
|
|
Specific |
|
|
Oustanding |
|
|
Specific |
|
|
|
Balance |
|
|
Allowance |
|
|
Balance |
|
|
Allowance |
|
|
|
(Dollars in thousands) |
|
Commercial and industrial |
|
$ |
2,433 |
|
|
$ |
1,272 |
|
|
$ |
3,032 |
|
|
$ |
1,053 |
|
Real estate construction and land development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
90,477 |
|
|
|
28,926 |
|
|
|
31,912 |
|
|
|
3,044 |
|
Commercial, including raw land |
|
|
119,800 |
|
|
|
30,009 |
|
|
|
82,356 |
|
|
|
3,675 |
|
Real estate mortgages |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family |
|
|
61,620 |
|
|
|
12,318 |
|
|
|
53,229 |
|
|
|
5,005 |
|
Commercial |
|
|
137,081 |
|
|
|
29,925 |
|
|
|
109,222 |
|
|
|
1,686 |
|
Other |
|
|
2,135 |
|
|
|
596 |
|
|
|
500 |
|
|
|
62 |
|
Consumer |
|
|
|
|
|
|
|
|
|
|
97 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
413,546 |
|
|
$ |
103,046 |
|
|
$ |
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, 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. 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.
63
The following is a summary of our TDRs as of September 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 |
|
|
474 |
|
|
|
89 |
|
|
|
801 |
|
|
|
188 |
|
Real estate mortgages |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family |
|
|
11,599 |
|
|
|
1,444 |
|
|
|
3,799 |
|
|
|
826 |
|
Commercial |
|
|
7,044 |
|
|
|
1,024 |
|
|
|
|
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
19,117 |
|
|
$ |
2,557 |
|
|
$ |
4,600 |
|
|
$ |
1,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Florida |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
393 |
|
|
$ |
393 |
|
|
$ |
|
|
|
$ |
|
|
Real estate construction and land development |
|
|
31,185 |
|
|
|
4,152 |
|
|
|
14,984 |
|
|
|
8,789 |
|
Real estate mortgages |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family |
|
|
13,184 |
|
|
|
1,526 |
|
|
|
1,940 |
|
|
|
571 |
|
Commercial |
|
|
82,062 |
|
|
|
19,663 |
|
|
|
16,181 |
|
|
|
3,279 |
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
126,824 |
|
|
$ |
25,734 |
|
|
$ |
33,105 |
|
|
$ |
12,639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
393 |
|
|
$ |
393 |
|
|
$ |
|
|
|
$ |
|
|
Real estate construction and land development |
|
|
31,659 |
|
|
|
4,241 |
|
|
|
15,785 |
|
|
|
8,977 |
|
Real estate mortgages |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family |
|
|
24,783 |
|
|
|
2,970 |
|
|
|
5,739 |
|
|
|
1,397 |
|
Commercial |
|
|
89,106 |
|
|
|
20,687 |
|
|
|
16,181 |
|
|
|
3,279 |
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
145,941 |
|
|
$ |
28,291 |
|
|
$ |
37,705 |
|
|
$ |
13,653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential Problem Loans
In addition to nonperforming loans, management has identified $38.3 million in potential problem
loans as of September 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 94.1% of total potential
problem loans. Real estate construction loans account for 26.2% of the total and single family
residential loans and commercial real estate loans accounted for 28.4% and 39.5%, respectively.
Geographically, 67.5% 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 seven relationships exceeding $1.0 million that total
$16.8 million. The remaining $21.5 million all represent relationships of less than $1.0 million.
64
Deposits
Noninterest-bearing deposits were $276.5 million as of September 30, 2010, an increase of 7.3%, or
$18.7 million, from $257.7 million as of December 31, 2009. Noninterest-bearing deposits were 10.0%
and 9.7% of total deposits as of September 30, 2010 and December 31, 2009.
Interest-bearing deposits were $2.500 billion as of September 30, 2010, an increase of 4.2%, or
$101.5 million, from $2.399 billion as of December 31, 2009. Interest-bearing deposits averaged
$2.498 billion for the nine months ended September 30, 2010 compared to $2.273 billion for the nine
months ended September 30, 2009. The average rate paid on all interest-bearing deposits during the
nine months ended September 30, 2010 and 2009, was 1.81% and 2.48%, 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 $575.6 million as of September 30, 2010. Of this growth, $35.9 million
occurred in the nine months ended September 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
Percent |
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Noninterest-bearing demand |
|
$ |
276,473 |
|
|
$ |
257,744 |
|
|
|
7.3 |
% |
Alabama segment |
|
|
147,189 |
|
|
|
137,160 |
|
|
|
7.3 |
|
Florida segment |
|
|
116,177 |
|
|
|
103,621 |
|
|
|
12.1 |
|
Other |
|
|
13,107 |
|
|
|
16,963 |
|
|
|
(22.7 |
) |
Interest-bearing demand |
|
|
583,409 |
|
|
|
690,677 |
|
|
|
(15.5 |
) |
Alabama segment |
|
|
354,640 |
|
|
|
385,246 |
|
|
|
(7.9 |
) |
Florida segment |
|
|
227,016 |
|
|
|
233,740 |
|
|
|
(2.9 |
) |
Other |
|
|
1,753 |
|
|
|
71,691 |
|
|
|
(97.6 |
) |
Savings |
|
|
342,451 |
|
|
|
284,430 |
|
|
|
20.4 |
|
Alabama segment |
|
|
173,499 |
|
|
|
151,263 |
|
|
|
14.7 |
|
Florida segment |
|
|
166,674 |
|
|
|
131,185 |
|
|
|
27.1 |
|
Other |
|
|
2,278 |
|
|
|
1,982 |
|
|
|
14.9 |
|
Time deposits |
|
|
1,574,497 |
|
|
|
1,423,722 |
|
|
|
10.6 |
|
Alabama segment |
|
|
762,631 |
|
|
|
663,510 |
|
|
|
14.9 |
|
Florida segment |
|
|
658,766 |
|
|
|
555,262 |
|
|
|
18.6 |
|
Other |
|
|
153,100 |
|
|
|
204,950 |
|
|
|
(25.3 |
) |
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
2,776,830 |
|
|
$ |
2,656,573 |
|
|
|
4.5 |
% |
|
|
|
|
|
|
|
|
|
|
Alabama segment |
|
$ |
1,437,959 |
|
|
$ |
1,337,179 |
|
|
|
7.5 |
% |
|
|
|
|
|
|
|
|
|
|
Florida segment |
|
$ |
1,168,633 |
|
|
$ |
1,023,808 |
|
|
|
14.1 |
% |
|
|
|
|
|
|
|
|
|
|
Other |
|
$ |
170,238 |
|
|
$ |
295,586 |
|
|
|
(42.4 |
)% |
|
|
|
|
|
|
|
|
|
|
Borrowings
During the nine months ended September 30, 2010, average borrowed funds decreased $26.5 million, or
9.0%, to $267.5 million, from $294.0 million for the year ended December 31, 2009. The average rate
paid on borrowed funds during the nine months ended September 30, 2010 and 2009 was 3.78%, and
3.35%, respectively. The existence and stability of these funding sources are important to our
maintenance of short-term and long-term liquidity.
As of September 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 3.44% as of September 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
65
with a carrying value of approximately $940.0 million as of September 30, 2010. We had
approximately $170.4 million available in unused advances under the blanket lien subject to the
availability of qualifying collateral.
On September 3, 2010, we entered into a second modification and limited waiver agreement (the
Agreement) related to the $5.9 million outstanding on its line of credit with a regional bank.
The Agreement extended the maturity date to November 3, 2010 and provides a limited waiver of
certain rights and covenants under the original loan agreement.
(See Certain Factors Contributing to Our Recent Results and Our
Response to Those Factors
above in this Item 2 for a
discussion of the current status of this loan and the necessity to restructure it.)
In addition, we have deferred regularly scheduled interest payments on all issues of our junior
subordinated debentures relating to our five different issues of trust preferred securities
aggregating approximately $118 million in principal amount currently outstanding. During the
deferral period, the respective trusts will likewise suspend the declaration and payment of
dividends on the trust preferred securities. The terms of the junior subordinated debentures and
the related documents governing the respective issues of trust preferred securities contemplate the
possibility of such deferrals and allow us to defer payments without default or penalty. The
deferrals are for up to five years.
So long as interest is deferred on the junior subordinated debentures and corresponding
distributions are deferred on the trust preferred securities, interest will continue to accrue on
the junior subordinated notes, and that deferred interest will also accrue interest. We may
terminate the deferrals and resume payments at any time. Upon the termination or expiration of the
deferrals, all accrued and unpaid interest will be due and payable on the junior subordinated
debentures, and a corresponding amount of distributions will be payable on the trust preferred
securities. (See Certain Factors Contributing to Our Recent Results and Our
Response to those Factors above in this Item 2 for a discussion of
the deferrals.)
We have agreed to seek OTS approval before incurring any new debt or renewing any existing debt.
See Note 14 to the condensed consolidated financial statements.
Stockholders Equity
Overview
Our
stockholders equity was $15.4 million as of September 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 amount of equal cash consideration. 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:
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-Tax |
|
|
Income Tax |
|
|
Net of |
|
|
|
Amount |
|
|
Expense |
|
|
Income Tax |
|
|
|
(Dollars in thousands) |
|
Three Months Ended September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on available-for-sale securities |
|
$ |
2,406 |
|
|
$ |
(890 |
) |
|
$ |
1,516 |
|
Reclassification adjustment for losses realized in net loss |
|
|
306 |
|
|
|
(113 |
) |
|
|
193 |
|
Unrealized loss on derivatives |
|
|
(75 |
) |
|
|
28 |
|
|
|
(47 |
) |
Reclassification adjustment for losses realized in net loss |
|
|
975 |
|
|
|
(361 |
) |
|
|
614 |
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain |
|
$ |
3,612 |
|
|
$ |
(1,336 |
) |
|
$ |
2,276 |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on available-for-sale securities |
|
$ |
3,119 |
|
|
$ |
(1,154 |
) |
|
$ |
1,965 |
|
Reclassification adjustment for gains realized in net loss |
|
|
(2,121 |
) |
|
|
785 |
|
|
|
(1,336 |
) |
Unrealized loss on derivatives |
|
|
(219 |
) |
|
|
81 |
|
|
|
(138 |
) |
|
|
|
|
|
|
|
|
|
|
Net unrealized gain |
|
$ |
779 |
|
|
$ |
(288 |
) |
|
$ |
491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on available-for-sale securities |
|
$ |
7,977 |
|
|
$ |
(2,951 |
) |
|
$ |
5,026 |
|
Reclassification adjustment for gains realized in net loss |
|
|
(852 |
) |
|
|
315 |
|
|
|
(537 |
) |
Unrealized loss on derivatives |
|
|
(363 |
) |
|
|
135 |
|
|
|
(228 |
) |
Reclassification adjustment for losses realized in net loss |
|
|
1,129 |
|
|
|
(418 |
) |
|
|
711 |
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain |
|
$ |
7,891 |
|
|
$ |
(2,919 |
) |
|
$ |
4,972 |
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on available-for-sale securities |
|
$ |
(8,936 |
) |
|
$ |
3,306 |
|
|
$ |
(5,630 |
) |
Reclassification adjustment for losses realized in net loss |
|
|
9,506 |
|
|
|
(3,517 |
) |
|
|
5,989 |
|
Unrealized gain on derivatives |
|
|
106 |
|
|
|
(39 |
) |
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain |
|
$ |
676 |
|
|
$ |
(250 |
) |
|
$ |
426 |
|
|
|
|
|
|
|
|
|
|
|
Please refer to the Financial Condition Investment Securities section for additional
discussion regarding the realized/unrealized gains and losses on the investment securities
portfolio.
67
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Core Capital (to Adjusted Total Assets) |
|
$ |
82,988 |
|
|
|
2.63 |
% |
|
$ |
126,090 |
|
|
|
4.00 |
% |
|
$ |
157,613 |
|
|
|
5.00 |
% |
Total Capital (to Risk Weighted Assets) |
|
|
123,933 |
|
|
|
5.04 |
|
|
|
196,661 |
|
|
|
8.00 |
|
|
|
245,827 |
|
|
|
10.00 |
|
Tier 1 Capital (to Risk Weighted Assets) |
|
|
82,988 |
|
|
|
3.38 |
|
|
NA |
|
NA |
|
|
147,496 |
|
|
|
6.00 |
|
Tangible Capital (to Adjusted Total Assets) |
|
|
82,988 |
|
|
|
2.63 |
|
|
|
47,284 |
|
|
|
1.50 |
|
|
NA |
|
NA |
As described in Note 14 to the condensed consolidated financial statements we entered into an
agreement with the OTS which stipulates that by no later than March 31, 2011, the Bank shall
achieve, and maintain thereafter, a Tier 1 (Core) Capital Ratio of at least 10.0% and a Total
Risk-Based Capital Ratio of at least 14.0% after funding an adequate allowance for loan losses. See
Part II, Item 1A. Risk Factors Risks Relating to Our Business.
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 internally
generated sources of liquidity we have access to external sources of liquidity, including the
Federal Reserve Discount Window and the Federal Home Loan Bank of Atlanta Advance Program (FHLB).
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. While we believe that these sources are
currently adequate, there can be no assurance these sources will be sufficient to meet future
liquidity demands. See Part II, Item 1A. Risk Factors Risks Relating to Our Business.
As shown in the Condensed Consolidated Statement of Cash Flows, operating activities provided $26.1
million and used $25.5 million for the nine months ended September 30, 2010 and 2009, respectively.
Investing activities provided funds of $9.7 million for the nine months ended September 30, 2010
primarily as a result of sales and maturities of investment securities and the sale of foreclosed
real estate offset by an increase in loans and the purchase of investment securities. For the nine
months ended September 30, 2009, investing activities used funds of $105.2 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.
Financing activities provided $128.5 million and $171.6 million in funds for the nine months ended
September 30, 2010 and 2009, respectively, primarily as a result of an increase in customer
deposits. In addition, during the nine months ended September 30, 2010 funds were provided by the
issuance of preferred stock. During the nine months ended September 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.
68
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 net present value (NPV) ratio 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.
69
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 NPV 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.
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 0.85%, or approximately $792,000, 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 |
|
September 30, 2010 |
|
December 31, 2009 |
(12-Month Projection) |
|
Amount |
|
Percent |
|
Amount |
|
Percent |
|
|
(Dollars in thousands) |
+ 200 BP (1) |
|
$ |
792 |
|
|
|
0.85 |
% |
|
$ |
2,200 |
|
|
|
2.30 |
% |
- 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. |
NPV is defined a the present value of expected net cash flows from existing assets minus the
present value of expected net cash flows from existing liabilities plus the present value of net
expected cash inflows from existing financial derivatives and off-balance sheet contracts. NPV is
in essence a discounted cash flow valuation of the firms equity. The NPV ratio is the NPV divided
by the present value of existing assets. The NPV ratio is in essence a leverage ratio expressed in
present value terms. To measure long-term exposures to changing interest rates we have set minimum
NPV ratios for a range of hypothetical determinate interest rate scenarios. We have chosen to
measure NPV ratio rather than Economic Value of Equity (EVE) sensitivities to better align its
methodologies with those of its primary regulator. Superior Banks NPV model projects that its
NPV ratio will be 7.22% and 7.78% 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, NPV is projected to be 6.46% (although such a decline is unlikely given the
present low level of interest rates). The NPV shifts produced by these scenarios are within the
limits of our asset and liability management policy. The following table sets forth Superior Banks
NPV ratio limits as of September 30, 2010:
|
|
|
|
|
Change (in Basis Points) in Interest Rates |
|
NPV Ratio |
+ 200 BP |
|
|
7.78 |
% |
+ 100 BP |
|
|
7.22 |
|
0 BP |
|
|
6.44 |
|
- 100 BP |
|
|
6.46 |
|
Both the net interest income and NPV 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.
70
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 September 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 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.
See Note 14 to Condensed Consolidated Financial
Statements herein and Managements Discussion and Analysis of
Financial Condition and Results of Operations Recent
Developments for a discussion of Orders to Cease and Desist recently issued to Superior Bank and us by the OTS.
ITEM 1A. RISK FACTORS
Risks Relating To Our Business
We are currently subject to Orders to Cease and Desist which may adversely affect our business. On
November 2, 2010 (the Effective Date), Superior Bancorp and Superior Bank each entered into a Stipulation and Consent to
Issuance of Order to Cease and Desist with the OTS, our and Superior Banks
primary federal regulator, whereby we and Superior Bank each consented to the issuance by the OTS of an
Order to Cease and Desist, without admitting or denying that any grounds exist for the issuance of such
Orders.
The Order to Cease and Desist issued to Superior Bank provides, among other things, that:
|
|
|
Superior Bank must cease and desist from any action for or toward
causing, bringing about, participating in, counseling, or aiding and
abetting unsafe or unsound banking practices that resulted in certain
occurrences specified in the Superior Bank Order. |
71
|
|
|
No later than March 31, 2011, Superior Bank must achieve, and maintain
thereafter, a Tier 1 (Core) Capital Ratio of at least 10.0% and a
Total Risk-Based Capital Ratio of at least 14.0% after funding an
adequate allowance for loan losses. |
|
|
|
|
Within 60 days of the Effective Date, Superior Bank must adopt and
submit to the OTS a written capital plan to achieve and maintain the
foregoing capital levels specifying target dates to reach certain
capital levels. If Superior Bank fails to achieve the required
capital levels in the prescribed time frame or otherwise fails to meet
its capital plan, then within 15 days Superior Bank shall prepare a
contingency plan, which shall detail actions to be taken to achieve
(i) merger or acquisition by another federally insured depository institution or (ii) voluntary dissolution. |
|
|
|
|
Beginning with the Effective Date, Superior Bank (i) will not
originate or purchase or commit to originate or purchase any new
construction, multifamily, non-residential, land or commercial
mortgage loans (Covered Loans), nor may Superior Bank renew or
modify an existing Covered Loans without meeting specified conditions;
and (ii) will not without the prior written approval of the OTS
increase its total assets during any quarter in excess of an amount
equal to net interest credited on deposit liabilities during the prior
quarter. |
|
|
|
|
Within 60 days of the Effective Date, Superior Bank must (i) submit to
the OTS a business plan through 2012 for achieving profitability and a
business plan to reduce Superior Banks level of problem assets, (ii)
revise its policies, procedures and methodology relating to the timely
establishment and maintenance of an adequate allowance for loan losses; (iii) revise its
written internal asset review and classification program to address
all corrective action set forth in the 2010 OTS Examination, which,
among other things, will provide for the appointment of a qualified,
experienced and independent third party to conduct annual reviews of
Superior Banks loan portfolio and assessments of Superior Banks
internal asset review process; (iv) revise its program for controlling
risks associated with concentrations of credit; (v) revise its
Enterprise Risk Management Plan; and (vi) within 90 days of the
Effective Date, Superior Bank shall submit to the OTS an assessment of
Superior Banks board and management prepared by an independent third
party. |
|
|
|
|
Superior Bank must implement a liquidity funding plan that is to
include the designation of specific actions that will be taken to
reduce Superior Banks dependency on volatile funding sources and a
detailed cash flow analysis. |
|
|
|
|
Beginning with the Effective Date, Superior Bank (i) will not make any
golden parachute payments or prohibited indemnification payment
unless the Bank has complied with 12. C.F.R. Part 359 and 12 C.F.R
Section 545.121; (ii) will comply with the OTS prior notification
requirements for changes in directors and senior executive officers;
(iii) will not enter into, extend or revise any contractual
arrangement relating to compensation or benefits with any senior
executive officer or director; and (iv) will not enter into any
arrangement or contract with a third party service provider that is
significant or outside Superior Banks normal course of business without
obtaining written non-objection from the OTS. |
The Order issued to the Corporation provides, among other things, that:
|
|
|
We must cease and desist from any action for or toward causing,
bringing about, participating in counseling, or aiding and abetting
unsafe or unsound banking practices that resulted in certain
occurrences specified in the Order issued to us. |
|
|
|
|
Within 60 days of the Effective Date, we must submit to the OTS (i) a
plan to maintain and enhance our capital and Superior Banks capital
and ensure that Superior Bank complies with the requirement imposed on
it in the Superior Bank Order; and (ii) a business plan through calendar year
2012 for achieving profitability. |
|
|
|
|
We must (i) not accept from Superior Bank or declare or pay any
dividends or capital distributions; (ii) not incur or increase any
debt without the prior written non-objection of the OTS; (iii) not
make any golden parachute payment or any prohibited indemnification
payment unless we comply with 12 C.F.R. Part 359; (iv)
comply with the OTSs prior notification requirements for changes in
directors and senior executive officers; (v) not enter into, renew
or extend any contractual arrangements related to compensation or
benefits with any director or senior executive officer without first
providing prior written notice to the OTS; and (vi) not enter
into any arrangement or contract with a third party service provider
that is significant or outside our normal course of business without
obtaining written non-objection from the OTS. |
The Orders will remain in effect until terminated, modified or suspended by the OTS.
While we intend to take such actions as may be necessary to comply with the requirements of the
Orders, there can be no assurance that we will be able to comply fully with the Orders, or that
efforts to comply with the Orders will not have adverse effects on the operations and financial
condition of us or the Bank. Failure by us or Superior Bank to comply with the
provisions of the respective
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Orders, could result in further enforcement actions by the OTS, which could ultimately lead to
our common stock losing all its value.
We have deferred interest on our outstanding subordinated debentures (and the related trust
preferred securities) and anticipate that we will continue to defer this interest for the
foreseeable future. We deferred interest on our $118.2 million of subordinated debentures as of
August 24, 2010, which resulted in the deferral and accrual of
$2.4 million of regularly scheduled
interest payments that otherwise would have been paid during the third quarter. The terms of the
subordinated debentures allow us to defer interest payments for up to
5 years, and we presently anticipate
that we will continue to do so. If we defer interest payments for the full 5 years, we would owe
approximately $44.3 million in
deferred interest including the compounding effect of interest on deferred interest.
At the end of the deferral period, we will be required to pay all of
the deferred interest. As a result of the deferral, we are prohibited
from declaring or paying any dividends on our common stock, from repurchasing or otherwise
acquiring such common stock, from making any liquidation payments
with respect to our capital stock and from making any payment of principal
of or interest on, or repaying, repurchasing or redeeming any of our affiliates
securities that rank pari passu with the subordinated debentures or junior to the subordinated debentures.
We depend on cash dividends from Superior Bank to meet our obligations but the Orders prohibit such
dividends without prior approval of the OTS. Our primary source of income is dividends from
Superior Bank. The Orders provide that we cannot receive cash dividends from Superior Bank without
the prior approval of the OTS. We do not know when or if we will receive approval for Superior
Bank to pay dividends to us. If we do not receive OTS approval for Superior Bank to pay dividends
to us for an extended period of time, we may not be able to service
our debt, including our credit facility with BB&T or pay our obligations
as they become due.
We may fail to raise additional capital to meet regulatory requirements. We are required by
federal regulatory authorities to maintain adequate levels of capital to support our operations.
Further under the Orders we are required to submit a written capital plan and improve our capital
levels to a Tier I (Core) Capital Ratio of at least 10.0% and a Total Risk-Based Capital Ratio of at
least 14.0% both by March 31, 2011. In addition, we may need additional capital in the future to
support growth. Our ability to raise additional capital 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, as needed, on favorable economic
terms, or other terms acceptable to us. Our current efforts to raise capital may not be successful.
We can give no assurance that any capital raise we under-take would not be substantially dilutive to, or result in the elimination of prevent equity interests. Because of the amount of capital needed to meet the capital levels
imposed by the Orders to Cease and Desist, if we cannot raise additional capital when needed, our ability to operate without additional
regulatory or other restrictions, and our operating results, could be materially adversely affected
and could ultimately lead to our common stock losing all its value.
(See Risks Related to an Investment in Our Common Stock
below in this Item 1A.)
We incurred a net loss in our last fiscal year and for the first nine 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 $195.4 million for the nine months
ended September 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 nine months ended September 30, 2010 was primarily due to increases in
the provision for loan losses and foreclosure losses. 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.
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:
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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. |
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Market developments may affect consumer confidence levels and may
cause adverse changes in payment patterns, causing increases in
delinquencies and default rates on loans and other credit facilities. |
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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. |
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The value of our securities portfolio may decline. |
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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. |
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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. (See Managements Discussion and Analysis of Financial
Condition and Results of Operations Certain
Factors Contributing to Our Recent Results and Our Response to Those
Factors elsewhere herein.) |
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 losses could continue to
increase. 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:
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trends in volume; |
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effects of changes in credit concentrations; |
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levels of and trends in delinquencies, classified loans and non-performing assets; |
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levels of and trends in charge-offs and recoveries; |
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changes in lending policies and underwriting guidelines; |
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national and local economic trends and conditions; and |
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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. As a result of the economic downturn and continued adverse effects of the Gulf Oil Spill, we have
increased our allowance for loan losses. 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. (See Managements Discussion
and Analysis of Financial Condition and Results of Operations Certain
Factors Contributing to Our Recent Results and Our Response to Those
Factors elsewhere herein.) 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:
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loan delinquencies may increase; |
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problem assets and foreclosures may increase; |
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demand for our products and services may decline; and |
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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. |
See Events in our geographic markets could adversely affect us below.
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 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 to these internally generated sources of
liquidity we have access to external sources of liquidity, including, the Federal Reserve Discount
Window and the Federal Home Loan Bank of Atlanta Advance Program (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 of Superior Bank and we are subject to restrictions on the acceptance or extension of brokered deposits.
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. Further,
restrictions that have been imposed by the OTC on our ability to modify certain categories of
loans is impeding our ability to successfully structure workouts. 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.
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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 September 30, 2010, approximately
90.3% of our loans were secured by real estate mortgages.
Approximately 55.7% of these loans are
secured by real estate mortgages in Florida. 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.
(See Managements Discussion and Analysis of Financial
Condition and Results of Operations Certain
Factors Contributing to Our Recent Results and Our Response to Those
Factors elsewhere herein.)
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.
(See Managements Discussion and Analysis of Financial
Condition and Results of Operations Certain
Factors Contributing to Our Recent Results and Our Response to Those
Factors elsewhere herein.)
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 and Superior Bank are currently subject to the Orders from the OTS
and have agreed to regulatory actions in the Consent Orders that include, among others, the
submission of a capital plan with more stringent capital
requirements. (See Managements Discussion and Analysis of
Financial Condition and Results of Operations Recent
Developments elsewhere herein.)
We may incur substantial costs in complying with such regulations and the Orders. The OTS could
take additional actions against us if we fail to comply with the Consent Orders including
penalties or additional regulatory enforcement actions, which
could lead to our common stock losing all its value. The terms of the additional Consent Orders and any
enforcement actions could have a material adverse effect on our business, financial condition or
results of operations and the value of our common stock.
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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, currently expected to take place on July 22,
2011. 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 are those imposing leverage and risk-based capital levels for thrift holding companies.
These regulations may call for higher levels of capital than current regulations. Generally,
newly-issued 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. Noninterest-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.
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 additional operating
and compliance costs that could have a material adverse effect on our business, financial condition
and results of operations.
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 tax deductions for executive
compensation 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.
We may become subject to more stringent capital requirements. In addition to the increased capital
requirements we are subject to as a result of the Orders, which are described above, the Dodd-Frank
Act would require the federal banking agencies to establish stricter risk-based capital
requirements and leverage limits to apply to thrift holding companies. In addition, the Basel
III standards recently announced by the Basel Committee on Banking Supervision, if adopted, could
lead to significantly higher capital requirements, higher capital charges and more restrictive
leverage and liquidity ratios. The standards would, among other things, impose more restrictive
eligibility requirements for Tier 1 and Tier 2 capital; increase the minimum Tier 1 common equity
ratio to 4.5 percent, net of regulatory deductions, and introduce a capital conservation buffer of
an additional 2.5 percent of common equity to risk-weighted assets, raising the target minimum
common equity ratio to 7 percent; increase the minimum Tier 1 capital ratio to 8.5 percent
inclusive of the capital conservation buffer; increase the minimum total capital ratio to 10.5
percent inclusive of the capital buffer; and introduce a countercyclical capital buffer of up to
2.5 percent of common equity or other fully loss absorbing capital for periods of excess credit
growth. Basel III also introduces a non-risk adjusted Tier 1 leverage ratio of 3 percent, based on
a measure of total exposure rather than total assets, and new liquidity standards.
The new Basel III capital standards will be phased in from January 1, 2013 until January 1, 2019,
and it is not yet known how these standards will be implemented by U.S. regulators generally or how
they will be applied to financial institutions of our size. There can be no assurance that
implementation of these standards, or any other new regulations, will not adversely affect our
ability to pay dividends, or require us to reduce business levels or raise capital, including in
ways that may adversely affect our results of operations or financial condition.
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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.
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.
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 additional valuation allowance against our deferred tax
assets (DTA). We evaluate quarterly the
realizability of our net DTA and, if necessary, adjust our valuation allowance accordingly. 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 2010, 2009 and 2008,
we are in a three-year-cumulative loss position and there are no taxes
paid in prior years that are
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available for the carryback period. A cumulative loss position is
considered significant negative evidence in assessing the realizability of a DTA. (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 September 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).
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.
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.
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.
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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, deposit, loan and other systems, resulting in a material adverse effect
on our business, financial condition and results of operations.
Risks Related To an Investment in Our Common Stock
Certain regulatory enforcement actions or certain restructuring transactions
could result in our currently outstanding stock being cancelled or otherwise losing all its value. If we cannot meet the additional capital requirements imposed on us by
the OTS in the Orders to Cease and Desist (see Note 14 to Condensed Consolidated Financial Information,
Managements Discussion and Analysis of Results of
Operations Recent Developments, elsewhere herein and
Risks Relating to Our Business immediately above), the OTS could take further enforcement
action against us that could lead to our common stock losing all its
value. We can give no assurance that any capital raise we under-take would not be substantially dilutive to, or result in the elimination of prevent equity interests.
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 September 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 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. The most recent closing bid price for our common stock was 88 cents per share.
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.
Our common stock could be delisted if we do not comply with listing standards. Under NASDAQ rules,
a listed company will be considered out of compliance with its listing standards if the minimum bid
price is less than $1.00 per share over a 30-trading day period. If we receive notice from NASDAQ
of noncompliance and cannot cure such noncompliance for any reason within the applicable time
frame, our common stock may be delisted.
Our ability to pay dividends and to repurchase shares of common stock is restricted. We do not
currently pay dividends on our common stock. Under the Orders to
Cease and Desist, our board of directors must
obtain the written consent of the OTS prior to the declaration or
payment of any dividends. (See Note 14 to Condensed Consolidated Financial Information, Managements Discussion and Analysis of Results of
Operations Recent Developments elsewhere herein and Risks Relating to Our Business immediately above).
This restriction will remain in effect until such time as the OTS
modifies, terminates, or otherwise suspends the restriction.
Our
ability to pay dividends is limited by regulatory requirements, the
Orders to Cease and Desist 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
to us by Superior Bank. 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. Under its
Order to Cease and Desist, Superior Bank is
also prohibited from paying dividends to us without the prior approval of the OTS. In the event
Superior Bank is unable to pay dividends to us, we will not be able
to service our debt or pay our obligations as they become due.
At September 30, 2010, we had $118.2 million in
liquidation value amount of outstanding
subordinated debentures (and the related trust preferred securities).
In August 2010, we deferred the
interest payments on all of our subordinated debentures and related
trust preferred
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securities. As a result, we cannot pay dividends, repurchase shares of our common stock or make
any payments to the holders of our common stock in the event of our liquidation.
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.
No assurance can be given that our common stock currently outstanding
will not (i) be cancelled in a plan of
reorganization or (ii) or otherwise lose all its value, as the result of a liquidation, should it occur, of our wholly-owned subsidiary.
(See Certain Regulatory
enforcement actions or certain restructuring transactions
could result in our currently outstanding stock being cancelled or
otherwise losing all its value above in these Risks
Related to an Investment in 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 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 to comply with the
Orders to Cease and Desist and regulatory requirements and to develop our business. Any issuance of additional
shares of common stock or equity derivative securities or the exercise of existing 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.
No assurance can be given that our common stock currently outstanding
will not (i) be cancelled in a plan of
reorganization or (ii) or otherwise lose all its value, as the result of a liquidation, should it occur, of our wholly-owned subsidiary.
(See Certain Regulatory
enforcement actions or certain restructuring transactions
could result in our stock being cancelled or otherwise losing all its
value above in these Risks
Related to an Investment in Our Common Stock.)
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
We have not paid dividends on our Series B and Series C Cumulative Convertible Preferred Stock
which were payable as of September 15, 2010. As of November 12, 2010, the total amount of such
dividends was approximately $686,000.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
(a) Exhibit:
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: November 15, 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: November 15, 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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