Item 1. Business
General
McIntosh Bancshares, Inc. (the “Company”), a registered bank holding company, was incorporated under the laws of Georgia in 1990 and acquired 100% of the outstanding shares of McIntosh State Bank (the “Bank”) on April 25, 1991. The Bank was incorporated under the laws of Georgia on February 14, 1964. In March 1998 the Company capitalized a wholly owned subsidiary, McIntosh Financial Services, Inc. (“MFS”), which was incorporated under the laws of Georgia on January 8, 1998.
Services
The Bank is a community oriented, full-service commercial bank, serving the Georgia counties of Butts, Jasper, and South Henry through offices in Jackson, Monticello, Locust Grove, McDonough and Lake Oconee. The Bank has six automated teller machines (ATMs). The Bank emphasizes autonomy for each office with decisions made locally. The Bank offers checking, savings, individual retirement, and time deposit accounts, safe deposit boxes, issues ATM and debit cards, conducts wire transfers, and offers internet banking and cash management services. The Bank offers lending services for purposes such as commercial, industrial, real estate, municipal, and leasehold financing as well as offers personal secured and unsecured credit. The Bank provides secondary market financing for conforming residential real estate loans through conventional, Veterans Administration, Federal Housing Administration, or Rural Development Authority programs. Neither the Company nor the Bank generates a material amount of revenue from foreign countries, nor does either have material long-lived assets, customer relationships, mortgages or servicing rights, deferred policy acquisition costs, or deferred tax assets in foreign countries. Thus, the Company has no significant risks attributable to foreign operations.
MFS offers mutual fund investments, fixed and variable annuities, life, health, and long term care insurance, estate planning, and investment management services. MFS has separate offices in the Bank’s Jackson, Monticello and McDonough offices.
Loans
The Bank grants both secured and unsecured loans to individuals and businesses. As of December 31, 2007, the Bank’s loan portfolio totaled $341,854,333.
Although the Bank has a diversified loan portfolio, a substantial portion is secured by improved and unimproved real estate which is dependent on the real estate market. As of December 31, 2007, the Bank had a concentration of loans to finance the acquisition, development, and construction (AD&C) of multifamily, commercial, and residential real estate. This AD&C
concentration, including associated unfunded commitments, totals $143,792,586 and represents 38% of gross loans and unfunded loan commitments. The Bank has established a maximum of 60% of gross loans plus unfunded commitments on the AD&C portion of the portfolio.
Lending Policy
Standards for extensions of credit are contained in the Bank’s loan policy. Loans are predominately from borrowers within the Bank’s delineated areas of Butts, Jasper, South Henry, Greene and Putnam counties. Loans are granted to individuals or businesses on either an unsecured or secured basis. Limits covering the maximum amount of indirect and direct debt to any one borrower, the maximum amount a loan officer may lend, the maximum amount of funds that may be advanced on certain collateral, and the maximum lending authority of the Bank’s loan committee and individual loan officers are contained in the loan policy. The loan policy is reviewed and approved annually by the Bank’s board of directors.
Loan Review and Non-Performing Assets
The Bank contracts with a third party for its loan review. The scope of loan review represented a cumulative total of 60% of the portfolio outstanding as of December 31, 2007, and included all commercial credits, all classified (Substandard and Doubtful) or Watch rated loans, and a sample of the consumer loan portfolio. Also included in the scope of loan review are loan administration matters such as potential violations of law, policy and documentation exceptions, and credit collection efforts. Loan review is conducted quarterly. The results are presented to the Company’s Audit Committee.
All loans are graded according to an initial risk assessment conducted by the originating loan officer. Thereafter, loan grades may change based on results of the external loan review process or an examination, at the direction of an office President, or if the loan becomes delinquent. The Bank’s practice is to charge-off loans when they become 120 days past due or are rated Loss. The Bank places loans on nonaccrual status once they become 90 days past due. Exceptions may apply if the loan is consumer installment debt or if the loan is secured by a 1-4 family residence and in the process of collection.
Investment Policy
The Bank’s investment policy establishes objectives for the investment portfolio and the guidelines for bank investments. Bank investments provide liquidity to accommodate deposit or loan fluctuations, secure public deposits, and supplement bank earnings consistent with liquidity, interest sensitivity, and credit quality considerations. Provisions of the investment policy address investment authority and oversight, permissible investments, accounting treatment, selection and monitoring of broker/dealers, and unsuitable investment practices. Portfolio composition and performance as well as individual transactions are regularly reviewed by the Bank’s Asset/Liability Committee (ALCO) and the board of directors. The investment policy is reviewed and approved by the Board of Directors annually.
Asset/Liability Management
The Bank’s interest rate risk and liquidity policy establishes an ALCO which is responsible for measuring, monitoring, and managing exposure to adverse interest rate movements. ALCO is composed of the Bank’s CEO, President, CFO, office Presidents, VP of Accounting, Chief Credit Officer and two outside directors. The Bank manages exposure to interest rate movements by modeling static gap, earnings at risk, and economic value of equity (EVE).
Bank management attempts to achieve consistent growth in net interest income (NII) while limiting volatility arising from changes in interest rates. Measuring the maturity and repricing characteristics of assets and liabilities or gap is one method Bank management utilizes to manage exposure to interest rates. The projected repricing and prepayment attributes of earning assets and interest bearing liabilities are based on the current interest rate environment and are subject to change as interest rates fluctuate. The Bank has established guidelines for this measure where cumulative gap must be within positive and negative 15% over select time periods. The following table outlines the Bank’s cumulative gap for the years ending December 31, 2007 and 2006, respectively.
Simulation, or earnings at risk, modeling is also utilized by the Bank to manage interest rate risk. The upcoming 12 month time period is simulated to determine a baseline NII forecast and the sensitivity of this forecast to changes in interest rates. The baseline earnings at risk measure incorporates management’s estimate of interest rates over the upcoming 12 months and applies those assumptions to earning assets and interest bearing liabilities. Projected rates and volumes for new and renewed loans and deposits are assumed based on experience and forecasts, but are significantly dependent on market conditions. Management measures the change to baseline NII via rate shocks of 100, 200, and 300 basis points (bps). The Bank has established a maximum of a 20% change in baseline NII as a result of the respective rate shocks. The following table outlines the effect of changes in projected NII over the next 12 months as of December 21, 2007 and 2006, respectively.
Bank management also utilizes EVE to monitor and manage the longer term impact of interest rate movements on the Bank’s capital. EVE attempts to measure the change in cash flows of earning assets and liabilities as rates change. Management measures the change to baseline EVE via rate shocks of 100, 200, and 300 bps. The Bank has established a maximum of a 20% change in baseline EVE as a result of the respective rate shocks. The following table outlines the effect of changes in projected EVE as of the years ending December 31, 2007 and 2006, respectively.
Liquidity is measured utilizing a calculation accepted by the Bank’s regulatory authorities. A liquidity ratio of 10% or greater and a loan to funding ratio of less than 85% have been approved by the board of directors as suitable measures of liquidity. As of December 31, 2007, the Bank’s liquidity and loan to funding ratios were 10.5% and 81.6%, respectively. As a secondary source of liquidity, the Bank has lines of credit with its correspondent banks and the Federal Home Loan Bank totaling $47.9 million. As of December 31, 2007, $12 million was outstanding under these lines.
Supervision and Regulation
The Company is a registered bank holding company subject to regulation by the Board of Governors of the Federal Reserve System (Federal Reserve) under the Bank Holding Company Act of 1956, as amended (the “Act”). The Company is required to file financial information with the Federal Reserve periodically and is subject to periodic examination by the Federal Reserve.
The Act requires every bank holding company to obtain the prior approval of the Federal Reserve before (i) it may acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank that it does not already control; (ii) it or any of its subsidiaries, other than a bank, may acquire all or substantially all of the assets of a bank; and (iii) it may merge or consolidate with any other bank holding company. In addition, a bank holding company is generally prohibited from engaging in, or acquiring, direct or indirect control of the voting shares of any company engaged in non-banking activities. This prohibition does not apply to activities found by the Federal Reserve, by order or regulation, to be closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the activities that the Federal Reserve has determined by regulation or order to be closely related to banking are: (i) making or servicing loans and certain types of leases; (ii) performing certain data processing services; (iii) acting as fiduciary or investment or financial advisor; (iv) providing discount brokerage services; (v) underwriting bank eligible securities; (vi) underwriting debt and equity securities; (vii) underwriting debt and equity securities on a limited basis through separately capitalized subsidiaries; and (viii) making investments in corporations or projects designed primarily to promote community welfare.
The Gramm-Leach-Bliley Act (GLBA) of 1999 permits eligible banks and bank holding companies to engage in activities and to affiliate with nonbank organizations engaged in activities that are financial in nature or incidental or complimentary to such financial activities. The Federal Reserve has the discretion to determine what activities are complementary to financial activities. The GLBA effectively repeals certain provisions of the Glass-Steagall Act of 1933 which separated banking, insurance, and securities underwriting activities.
Under GLBA, bank holding companies whose banking subsidiaries are well capitalized and well managed may also apply to become a financial holding company. Financial holding companies have the authority to engage in activities that are financial in nature that are not permitted for other bank holding companies. Some of the activities that the Act provides are financial in nature are: (a) lending, exchanging, transferring, investing for others, or safeguarding money or securities; (b) insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability, or death, or providing and issuing annuities, and acting as principal, agent, or broker with respect thereto; (c) providing financial, investment, or economic advisory services, including advising an investment company; (d) issuing or selling instruments representing interests in pools of assets permissible for a bank to hold directly; and (e) underwriting, dealing in, or making a market in securities. The Company has no immediate plans to register as a financial holding company.
The GBLA also imposed new requirements on financial institutions with respect to consumer privacy. The statute generally prohibits disclosure of consumer information to non-affiliated third parties unless the consumer has been given the opportunity to object and has not objected to such disclosure. Financial institutions are further required to disclose their privacy policies to consumers annually. Financial institutions, however, will be required to comply with state law if it is more protective consumer privacy than GBLA. The statute also directed federal regulators, including the Federal Reserve and FDIC, to prescribe standards for the security of consumer information. The Company and the Bank are subject to such standards, as well as standards for notifying consumers in the event of a security breach.
The Company must also register with the Georgia Department of Banking and Finance (DBF) and file periodic information with the DBF. As part of such registration, the DBF requires information with respect to the financial condition, operations, management, and inter-company relationships of the Company, the Bank, and MFS and related matters. The DBF may also require such other information as is necessary to keep itself informed as to whether the provisions of Georgia law and the regulations and orders issued thereunder by the DBF have been complied with, and the DBF may examine the Company.
The Company is an affiliate of the Bank under the Act, which imposes restrictions on (i) loans by the Bank to the Company; (ii) investments in the stock or securities of the Company by the Bank; (iii) the Bank taking the stock or securities of an affiliate as collateral for loans by the Bank to a borrower, and (iv) the purchase of assets from the Company by the Bank. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extensions of credit, lease or sale of property or furnishing of services.
The Bank is regularly examined by the FDIC. The Bank, as a state chartered bank under the laws of Georgia, is subject to the supervision of, and is regularly examined by, the DBF. Both the FDIC and DBF must grant prior approval of any merger, consolidation or other corporate reorganization involving the Bank. A bank can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with the default of a commonly controlled institution.
Activities of MFS are governed by the State of Georgia Insurance Department (Department) and the Financial Industry Regulatory Authority (FINRA). The Department and FINRA may examine the activities of MFS at any time. The Department and FINRA require MFS and its representatives to fulfill licensing and continuing education requirements. Customer complaints or compliance lapses deemed serious enough may be cause for licenses to be revoked and the business to cease operation. As of December 31, 2007, MFS is not aware of any matters pending before the Department or FINRA.
Payment of Dividends
The Company is a legal entity separate and distinct from the Bank. Most of the revenues of the Company result from dividends paid to it by the Bank. There are statutory and regulatory requirements applicable to the payment of dividends by the Bank to the Company, its shareholder. Under DBF regulations, the Bank may not declare and pay dividends out of retained earnings without first obtaining the written permission of the DBF unless such bank meets the following requirements: (i) total classified assets as of the most recent examination of the bank does not exceed 80% of equity capital (as defined by the regulation); (ii) the aggregate amount of dividends declared or anticipated to be declared in the calendar year does not exceed 50% of the net profits after taxes but before dividends for the previous calendar year; and (iii) the ratio of equity capital to adjusted assets is not less than 6%.
The payment of dividends by the Company and the Bank may also be affected or limited by other factors, such as the requirement to maintain adequate capital above regulatory guidelines. The Federal Reserve maintains that a bank holding company must serve as source of financial strength to its subsidiary banks. As a result, the Company may be required to provide financial support to the Bank at a time when, absent such Federal Reserve requirement, the Company may not deem it advisable to provide such assistance. Similarly, the FDIC maintains that insured banks should generally only pay dividends out of current operating earnings and dividends should only be declared and paid after consideration of the bank’s capital adequacy in relation to its assets, deposits, and such other items. The amount available by the Bank to pay the Company in dividends during 2008 is $1,301,000. During the year ending December 31, 2007, the Company declared and paid cash dividends totaling $1,011,771, or 39.1% of net earnings.
Capital Adequacy
The Federal Reserve and the FDIC have implemented substantially identical rules for assessing bank and bank holding company capital adequacy. These regulations establish minimum capital standards in relation to assets and off-balance sheet exposures for credit risk. Bank and bank holding companies are required to have (i) a minimum ratio of Total Capital (as defined) to risk-weighted assets of 8%; (ii) a minimum ratio of Tier One Capital (as defined) to risk-weighted assets of 4%; and (iii) a minimum ratio of stockholder’s equity to risk-weighted assets of 4%. The Federal Reserve and the FDIC also require a minimum leverage capital ratio of Tier One Capital to total assets of 3% for the most highly rated banks and bank holding companies. Tier One Capital generally consists of common equity, minority interests in equity accounts of consolidated subsidiaries, and noncumulative perpetual preferred stock and generally excludes unrealized gains or losses on investment securities, certain intangible assets, and certain deferred tax assets. The Federal Reserve or the FDIC will require a bank or bank holding company to maintain a leverage ratio greater than 3% if either is experiencing or anticipating significant growth, is operating with less than well-diversified risks, or is experiencing financial, operational, or managerial weaknesses.
In addition, the FDIC Improvement Act of 1991 provides for prompt corrective action (PCA) if a bank’s leverage capital ratio reaches 2%. PCA may call for the bank to be placed in receivership or sold to another depository institution. The FDIC has adopted regulations implementing PCA which place financial institutions in the following five categories based on capitalization ratios: (i) a well capitalized institution has a total risked-based capital ratio of at least 10%, a Tier One risked-based ratio of at least 6%, and leverage capital ratio of at least 5%; (ii) an adequately capitalized institution has a total risked-based capital ratio of at least 8%, a Tier One risked-based ratio of at least 4%, and leverage capital ratio of at least 4%; (iii) an undercapitalized institution has a total risked-based capital ratio under 8%, a Tier One risked-based ratio under 4%, and leverage capital ratio under 4%; and (iv) a critically undercapitalized institution has a leverage capital ratio under 2%. Institutions in any of the three undercapitalized categories would be prohibited from declaring and paying dividends or making capital distributions. The FDIC regulations also establish procedures for downgrading an institution to a lower capital category based on supervisory factors other than capital. As of December 31, 2007 the capital ratios for the Company and the Bank are as follows:
Community Reinvestment Act
The Company and the Bank are subject to the provisions of the Community Reinvestment Act of 1977, as amended (the “CRA”) and the federal banking agencies regulations issued
thereunder. Under the CRA, all banks and thrifts have a continuing and affirmative obligation, consistent with its safe and sound operation to help meet the credit needs for their entire communities, including low- and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA.
The CRA requires a depository institution’s primary federal regulator, in connection with its examination of the institution, to assess the institution’s record of assessing and meeting the credit needs of the community served by that institution, including low- and moderate-income neighborhoods. The regulatory agency’s assessment of the institution’s record is made available to the public. In the case of a bank holding company applying for approval to acquire a bank or other bank holding company, the Federal Reserve will assess the records of each subsidiary depository institution of the applicant bank holding company, and such records may be the basis for denying the application.
The evaluation system used to judge an institution’s CRA performance consists of three tests: (1) a lending test; (2) an investment test; and (3) a service test. Each of these tests will be applied by the institution’s primary federal regulator taking into account such factors as: (i) demographic data about the community; (ii) the institution’s capacity and constraints; (iii) the institution’s product offerings and business strategy; and (iv) data on the prior performance of the institution and similarly-situated lenders.
In addition, a financial institution will have the option of having its CRA performance evaluated based on a strategic plan of up to five years in length that it had developed in cooperation with local community groups. In order to be rated under a strategic plan, the institution will be required to obtain the prior approval of its federal regulator.
The interagency CRA regulations provide that an institution evaluated under a given test will receive one of five ratings for the test: (1) outstanding; (2) high satisfactory; (3) low satisfactory; (4) needs to improve; and (5) substantial noncompliance. An institution will receive a certain number of points for its rating on each test, and the points are combined to produce an overall composite rating. Evidence of discriminatory or other illegal credit practices would adversely affect an institution’s overall rating. McIntosh State Bank received a satisfactory rating as a result of its most recent CRA examination.
Anti-Terrorism Legislation
In the wake of the tragic events of September 11th, on October 26, 2001, the President signed the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (the “USA PATRIOT Act”) Act of 2001. Under the USA PATRIOT Act, financial institutions are subject to prohibitions against specified financial transactions and account relationships as well as enhanced due diligence and “know your customer” standards in their
dealings with foreign financial institutions and foreign customers. For example, the enhanced due diligence policies, procedures, and controls generally require financial institutions to take reasonable steps:
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to conduct enhanced scrutiny of account relationships to guard against money laundering and report any suspicious transaction;
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to ascertain the identity of the nominal and beneficial owners of, and the source of funds deposited into, each account as needed to guard against money laundering and report any suspicious transactions;
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to ascertain for any foreign bank, the shares of which are not publicly traded, the identity of the owners of the foreign bank, and the nature and extent of the ownership interest of each such owner; and
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to ascertain whether any foreign bank provides correspondent accounts to other foreign banks and, if so, the identity of those foreign banks and related due diligence information.
The USA PATRIOT Act requires financial institutions to establish anti-money laundering programs. The USA PATRIOT Act sets forth minimum standards for these programs, including:
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the development of internal policies, procedures, and controls;
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the designation of a compliance officer;
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an ongoing employee training program; and
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an independent audit function to test the programs.
In addition, the USA PATRIOT Act authorizes the Secretary of the Treasury to adopt rules increasing the cooperation and information sharing between financial institutions, regulators, and law enforcement authorities regarding individuals, entities and organizations engaged in, or reasonably suspected based on credible evidence of engaging in, terrorist acts or money laundering activities. Any financial institution complying with these rules will not be deemed to have violated the privacy provisions of the Gramm-Leach-Bliley Act, as discussed above.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) was enacted to increase corporate responsibility, provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies, and protect investors by improving the accuracy and reliability of disclosures pursuant to the securities laws. Sarbanes-Oxley includes important new requirements for public companies in the areas of financial disclosure, corporate governance, and the
independence, composition and responsibilities of audit committees. Among other things, Sarbanes-Oxley mandates chief executive and chief financial officer certifications of periodic financial reports, additional financial disclosures concerning off-balance sheet items, and speedier transaction reporting requirements for executive officers, directors and 10% shareholders. In addition, penalties for non-compliance with the Exchange Act were heightened. SEC rules promulgated pursuant to Sarbanes-Oxley impose obligations and restrictions on auditors and audit committees intended to enhance their independence from management, and include extensive additional disclosure, corporate governance and other related rules. Sarbanes-Oxley represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a Board of Directors and Management and between a Board of Directors and its committees.
We have not experienced any significant difficulties in complying with Sarbanes-Oxley. However, we have incurred, and expect to continue to incur, significant costs in connection with compliance with Section 404 of Sarbanes-Oxley, which requires Management to undertake an assessment of the adequacy and effectiveness of our internal controls over financial reporting and requires our auditors to attest to, and report on, Management’s assessment and the operating effectiveness of these controls.
Commercial Real Estate Lending and Concentrations
On December 2, 2006, the federal bank regulatory agencies released Guidance on Concentrations in Commercial Real Estate (“CRE”) Lending, Sound Risk Management Practices (the “Guidance”). The Guidance, which was issued in response to the agencies’ concern that rising CRE concentrations might expose institutions to unanticipated earnings and capital volatility in the event of adverse changes in the commercial real estate market, reinforces existing regulations and guidelines for real estate lending and loan portfolio management.
Highlights of the Guidance include the following:
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The agencies have observed that CRE concentrations have been rising over the past several years with small to mid-size institutions showing the most significant increase in CRE concentrations over the last decade. However, some institutions’ risk management practices are not evolving with their increasing CRE concentrations, and therefore, the Guidance reminds institutions that strong risk management practices and appropriate levels of capital are important elements of a sound CRE lending program.
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The Guidance applies to national banks and state chartered banks and is also broadly applicable to bank holding companies. For purposes of the Guidance, CRE loans include loans for land development and construction, other land loans and loans secured by multifamily and nonfarm residential properties. The definition also extends to loans to real estate investment trusts and unsecured loans to developers if their performance is closely linked to the performance of the general CRE market.
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The agencies recognize that banks serve a vital role in their communities by supplying credit for business and real estate development. Therefore, the Guidance is not intended to limit banks’ CRE lending. Instead, the Guidance encourages institutions to identify and monitor credit concentrations, establish internal concentration limits, and report all concentrations to management and the board of directors on a periodic basis.
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The agencies recognized that different types of CRE lending present different levels of risk, and therefore, institutions are encouraged to segment their CRE portfolios to acknowledge these distinctions. However, the CRE portfolio should not be divided into multiple sections simply to avoid the appearance of risk concentration.
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Institutions should address the following key elements in establishing a risk management framework for identifying, monitoring, and controlling CRE risk: (1) board of directors and management oversight; (2) portfolio management; (3) management information systems; (4) market analysis; (5) credit underwriting standards; (6) portfolio stress testing and sensitivity analysis; and (7) credit review function.
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As part of the ongoing supervisory monitoring processes, the agencies will use certain criteria to identify institutions that are potentially exposed to significant CRE concentration risk. An institution that has experienced rapid growth in CRE lending, has notable exposure to a specific type of CRE, or is approaching or exceeds specified supervisory criteria may be identified for further supervisory analysis.
Allowance for Loan and Lease Losses
On December 13, 2006, the federal bank regulatory agencies released Interagency Policy Statement on the Allowance for Loan and Lease Losses (“ALLL”), which revises and replaces the banking agencies’ 1993 policy statement on the ALLL. The revised statement was issued to ensure consistency with generally accepted accounting principles (GAAP) and more recent supervisory guidance. The revised statement extends the applicability of the policy to credit unions. Additionally, the agencies issued 16 FAQs to assist institutions in complying with both GAAP and ALLL supervisory guidance.
Highlights of the revised statement include the following:
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The revised statement emphasizes that the ALLL represents one of the most significant estimates in an institution’s financial statements and regulatory reports and that an assessment of the appropriateness of the ALLL is critical to an institution’s safety and soundness.
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Each institution has a responsibility to develop, maintain, and document a comprehensive, systematic, and consistently applied process for determining the amounts of the ALLL. An institution must maintain an ALLL that is sufficient to cover estimated credit losses on individual impaired loans as well as estimated credit losses inherent in the remainder of the portfolio.
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The revised statement updates the previous guidance on the following issues regarding ALLL: (1) responsibilities of the board of directors, management, and bank examiners; (2) factors to be considered in the estimation of ALLL; and (3) objectives and elements of an effective loan review system.
The Company and its board of directors have discussed the revised statement and believe that the Company’s ALLL methodology is comprehensive, systematic, and that it is consistently applied across the Company. The Company believes its management information systems, independent credit administration process, policies and procedures are sufficient to address the guidance.
Other Pending and Proposed Legislation
Other legislative and regulatory initiatives which could affect the Company, the Bank and the banking industry in general are pending, and additional initiatives may be proposed or introduced, before the U.S. Congress, the Georgia legislature and other governmental bodies in the future. Such proposals, if enacted, may further alter the structure, regulation and competitive relationship among financial institutions, and may subject the Bank to increased regulation, disclosure and reporting requirements. In addition, the various banking regulatory agencies often adopt new rules and regulations to implement and enforce existing legislation. It cannot be predicted whether, or in what form, any such legislation or regulations may be enacted or the extent to which the business of the Company or the Bank would be affected thereby.
Employees
At December 31, 2007 the Company had 147 full time equivalent employees. The Company is not a party to any collective bargaining agreement.
Item 2.
Item 2. Properties
The assets of the Company consists almost entirely of its ownership interest in the Bank and MFS. Both the holding company and MFS operate out of premises owned by the Bank. The Bank owns or leases the following properties:
(1) Main Office
210 South Oak Street
Jackson, Georgia 30233
Built in 1964, 11,000 square feet of heated space and five drive-thru lanes.
(2) McLaurin Building
134 South Oak Street
Jackson, Georgia 30233
Built in 1940 and remodeled in 2007, 6,100 square feet of heated space.
(3) Monticello Office
208 East Greene Street
Monticello, Georgia 31064
Built in 1966, 5,100 square feet of heated space, and four remote drive-thru lanes.
(4) Locust Grove Office
3796 Highway 42 South
Locust Grove, Georgia 30248
Built in 2000, 3,700 square feet of heated space, and three drive-thru lanes.
(5) McDonough Office
1100 and 1125 Keys Ferry Court
McDonough, Georgia 30253
Built in 1995, 7,600 square feet of heated space (leased).
(6) Operations Center
264 Alabama Boulevard
Jackson, Georgia 30233
Built in 1998, 17,100 square feet of heated space.
(7) Lake Oconee
1028 Founders Row
Greensboro, Georgia 30642
Built in 2005, 1,320 square feet of heated space (leased).
(8) Remote ATMs:
632 East Third Street, Jackson, Georgia
222 Clubhouse Drive, Monticello, Georgia 31064
The Bank owns the furniture, fixtures and equipment located at the above locations.
Item 3.
Item 3. Legal Proceedings
The Bank is from time to time involved in various legal actions arising from normal business activities. Management believes that the liability, if any, arising from such actions will not have a material adverse effect on the Company’ financial condition. Neither the Bank nor the Company is a party to any proceeding to which any director, officer or affiliate of the issuer, any owner of more than five percent (5%) of its voting securities is a party adverse to the Bank or the Company.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities
There is no established public trading market for the Company’s common stock. It is not traded on an exchange or in the over-the-counter market. There is no assurance that an active market will develop for the Company’s common stock in the future. Therefore, management of the Company is furnished with only limited information concerning trades of the Company’s common stock. The following table sets forth for each quarter during the most two recent fiscal years the number of shares traded and the high and low per share sales prices to the extent known to management, and has been adjusted for the 2 for 1 stock split effective June 1, 2007.
The Company pays dividends on a quarterly basis. Any declaration and payment of dividends will be based on the Company’s earnings, economic conditions, and the evaluation by the Board of Directors of other relevant factors. The Company’s ability to pay dividends is dependent on cash dividends paid to it by McIntosh State Bank, its wholly-owned subsidiary. The ability of the bank to pay dividends to the Company is restricted by applicable regulatory requirements. See “Supervision and Regulation.” The Company paid dividends of $0.30 per share in 2006 and $0.36 per share in 2007, on a split adjusted basis.
As of March 18, 2008 there were 2,810,976 shares of the Company’s common stock issued and outstanding held of record by approximately 667 persons (not including the number of persons or entities holding stock in nominee or street name through various brokerage houses).
In 1998 the Company adopted an incentive stock option plan (1998 Plan) which authorized the Company to issue to officers and other key employees of McIntosh State Bank options to purchase in the aggregate as many as 35,000 shares of the Company’s common stock. The number of shares so authorized was subject to increase in the event, among other matters, of a stock dividend. As a result of the stock dividends declared by the Company in 1999, 2000, 2001, 2005 and 2007, there are now 119,891 shares of its common stock for which such options may be granted. As of March 18, 2008, all options available under the plan have been granted. During 2007, exercised options resulted in 2,000 common shares issued.
In 2006 the Company adopted a compensation plan (2006 Plan) which authorizes the Company to issue to directors, officers and employees of the Company and its affiliates incentive stock options, nonqualified stock options, and/or restricted stock. The 2006 Plan permits up to 210,000 shares of the Company’s common stock to be issued; however, no more than 50,000 shares can be available for issuance as restricted stock. As of December 31, 2007, no restricted shares have been issued. As March 18, 2008, 80,000 incentive stock options have been granted; however, no options have been exercised.
Unregistered Sales of Equity Securities
None.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation
Management’s Discussion and Analysis of Financial Condition and Results of Operations for Years ended December 31, 2007 and December 31, 2006.
Financial Condition
The financial condition of the Company as of December 31, 2007 shows assets grew $941,433 or 0.2% compared to December 31, 2006. Gross loans increased $12,977,589 or 4% offset by a $9,761,609 or 11.4% decline in investment securities and a $5,361,000 or 39.8% decline in federal funds sold.
The increase from December 31, 2006 to 2007 in gross loans occurred entirely within the first six months of the year. During the last six months of 2007, loans declined $6,871,068 offset by a rise in other real estate owned. Other real estate owned increased $4,038,564 or 183% from December 31, 2006 to December 31, 2007. Loans transfered to other real estate during the twelve month period ending December 31, 2007 totaled $6,603,508.
Total deposits increased $7,746,275 or 2% from December 31, 2006 to 2007. The change from the prior year-end is principally attributable to a $18,776,864 or 8.3% increase in time deposits offset by a $7,412,246 or 6% decline in NOW and money market account balances and a $4,837,978 or 13.2% decline in demand deposit balances. Time deposits include $58,025,925 in brokered deposits which increased $17,173,836 or 42% from December 31, 2006. Brokered deposits include $31,100,037 in reciprocal deposits placed under the Certificate of Deposit Account Registry System (CDARS). These CDARS deposits represent stable local deposits, but are designated and reported as brokered deposits under regulatory requirements. The increase in brokered deposits from December 31, 2006 to 2007 is essentially the result of higher CDARS balances. Time deposits represent 60.5% and 57% of total deposits as of December 31, 2007 and 2006, respectively. The rise in reliance on time deposits for funding is the due to the increase in brokered deposits and declining interest rates which leads customers to lock in interest rates. See Liquidity and Interest Rate Risk comments for further discussion.
On December 13, 2006 federal bank regulatory agencies issued a new Policy Statement, Interagency Policy Statement on the Allowance for Loan and Lease Losses, which outlines how banks should approach determining the adequacy of their allowance for loan losses (“ALL”). Provisions of this new Policy Statement must be considered along with provisions of Policy Statements on ALL adequacy issued in 1993 and 2001. In 2007, management implemented the requirements of this latest Policy Statement which in combination with the current lending and market conditions has resulted in a generally higher ALL level.
The ALL rose $2,294,189 or 49.2% for the twelve months ending December 31, 2007. The increase results from $3,324,370 in provision expense and $1,030,181 in net charge-offs. As of December 31, 2007, the ALL as a percentage of gross loans (reserve ratio) is 2.03% versus 1.42% for the prior year-end.
The rise in the overall reserve ratio is due to: (a) a rise in the volume of loans outstanding with more than the normal risk of repayment (impaired loans); (b) a rise the overall level of reserves required to be held against impaired loans as required under the new Policy Statement; and (c) a rise in the qualitative factors utilized in the methodology used to determine ALL adequacy. Total impaired loans rose $15,940,637 or 2,647% which resulted in $1,500,641 more required reserve. The change in reserve methodology under the new Policy Statement called for a reserve ratio 580 basis points more on impaired loans. This additional impairment increased the ALL by $520,071 versus 2006. Given the declining market conditions for residential real estate that continued to develop during 2007, management adjusted its qualitative factors used in determining ALL adequacy in 2007. This change resulted in a required ALL that was $429,751 higher. Had these events not occurred in 2007, the reserve ratio would have been 1.32%.
The following table highlights the ALL by loan category:
The decrease in reserve ratio for the commercial, financial, and agricultural category is due to declines in the historical loss experience and impairment estimates. Had the loss experience remained unchanged from 2006, the ALL for the commercial, financial, and agricultural category would have been $44,000 higher. Had the estimate of impairment for this category remained unchanged from 2006, the reserve would have been $81,000 higher. The lower impairment estimate for 2007 is the result of $1.3 million less in loans considered impaired in the category. Had these events not occurred, the reserve ratio for the commercial, financial, and agricultural category would have been 1.24%
The decrease in the reserve ratio for the real estate mortgage category is due to a decline in the estimate for impaired loans partially offset by a rise in historical loss experience and higher qualitative factors. Had the loss experience remained unchanged from 2006, the ALL for the real estate mortgage category would have been $5,000 lower. Had the qualitative factors remained unchanged from 2006, the reserve would have been $65,000 lower. Had the estimate of impairment for this category remained unchanged from 2006, the reserve would have been $105,000 higher. The lower impairment estimate for 2007 is the result of $3.2 million less in loans considered impaired in the category. Had these events not occurred, the reserve ratio for the real estate-mortgage category would have been 1.40%.
The increase in reserve ratio for the real estate construction category from the prior year is due to increases in impairment estimates and qualitative factors partially offset by a lower historical loss experience. Had the loss experience remained unchanged from 2006, the ALL for the real estate construction category would have been $4,000 higher. Had the estimate of impairment for this category remained unchanged from 2006, the reserve would have been $2.2 million lower. The higher impairment estimate for 2007 is the result of $13.8 million more in loans considered impaired in the category. Had the qualitative factors remained unchanged from 2006, the reserve would have been $365,000 lower. The change in qualitative factors in 2007 reflects the decline in the construction real estate and development market. Had these events not occurred, the reserve ratio for the real estate mortgage category would have been 1.25%.
The decrease in reserve ratio for the consumer loan category from the prior year is due to lower impairment estimates partially offset by higher historical loss experience. Had the loss experience remained unchanged from 2006, the ALL for the consumer loan category would have been $10,000 lower. Had the estimate of impairment for this category remained unchanged from 2006, the reserve would have been $37,000 higher. The lower impairment estimate for 2007 is the result of $318,000 less in loans considered impaired in the category. Had these events not occurred, the reserve ratio for the consumer loan category would have been 1.80%.
The Bank’s delinquency ratio (loans past due 30 days or more and loans on nonaccrual as a percentage of gross loans) rose from 1.58% to 8.72% during the year. The higher delinquency ratio is principally due to $21 million more loans on nonaccural and $3.8 million more in loans delinquent 30 days or greater past due and not on nonaccrual. As of December 31, 2007, 27 relationships were on nonaccrual.
As of December 31, 2007, the Company continued to have a concentration in AD&C loans. Management has established a maximum limit where total AD&C loans may not exceed 60% of the Company’s loan portfolio including unfunded commitments. As of December 31, 2007, AD&C loans represented 38% of gross loans and commitments versus 43% as of the prior year-end. The primary risks of AD&C lending are:
(a) Loans are dependent upon continued strength in demand for residential real estate. Demand for residential real estate is dependent on favorable real estate mortgage rates and population growth from expanding industry and services in the metropolitan Atlanta area;
(b) Loans are concentrated to a limited number of borrowers; and
(c) Loans may be less predictable and more difficult to evaluate and monitor.
Since September 2006, management has noticed a slowdown in AD&C activity. That slowdown accelerated into 2007 with the demise of sub-prime lending. The Company is not exposed to sub-prime borrowers as it did not directly participate in lending to that segment. However, builders and developers who provided housing inventory were adversely impacted. Builders and developers are what comprise the AD&C concentration as well as the bulk of the Bank’s nonaccrual loans. Management believes AD&C conditions in the markets served by the Company remain under significant stress from the glut of lot inventory and slow housing turnover. Added pressure caused by tightening underwriting standards for residential mortgage financing and the credit markets caution and tepid appetite for mortgage-backed securities has exacerbated the matter. Bank management believes the effect of the severe downturn in residential real estate is further aggravated by the level of foreclosure activity for both lots and homes. The result has been, and will likely remain for at least the next 18 months, downward pressure on house and lot prices. The marked decline in residential real estate pricing experienced during the last 12 months has eroded or eliminated the collateral margins the Bank typically utilizes to protect itself against losses.
On December 12, 2006 the federal bank regulatory agencies released guidance on Concentration in Commercial Real Estate Lending. This guidance defines commercial real estate (CRE) loans as loans secured by raw land, land development and construction (including 1-4 family residential construction), multi-family property, and non-farm nonresidential property where the primary or a significant source of repayment is derived from rental income associated with the property (that is, loans for which 50% or more of the source of repayment comes from third party, non-affiliated, rental income) or the proceeds of the sale, refinancing, or permanent financing of the property. Loans for owner occupied CRE are generally excluded from the CRE guidance.
The CRE guidance is triggered where either:
(a) Total loans for construction, land development, and other land represent 100% or more of the Bank’s total risked based capital; or
(b) Total loans secured by multifamily and nonfarm nonresidential properties and loans for construction, land development, and other land represent 300% or more of the Bank’s total risked based capital.
Banks that are subject to the CRE guidance’s triggers will need to implement enhanced strategic planning, CRE underwriting policies, risk management and internal controls, portfolio stress testing, risk exposure limits, and other policies, including management compensation and incentives, to address the CRE risks. Higher allowances for loan losses and capital levels may also be appropriate.
The following table outlines the Bank’s CRE loans by category and CRE loans as percent of total risked based capital for years ending December 31, 2007 and 2006.
The following is recap of other real estate activity from December 31, 2006 to December 31, 2007:
For the twelve months ending December 31, 2007, the Company’s equity capital rose $2,071,582 or 5.8% from the prior period. The change in equity capital over the twelve month period resulted from $2,587,888 in net income, a $349,698 rise in net unrealized gains on securities available for sale, by a $27,958 decline in the after tax effect of recognizing the Company’s current unfunded pension liabilities (see footnotes 1 and 9 of the Company’s consolidated financials statements for further discussion), $23,800 due to exercised stock options, $94,009 in noncash compensatory stock option expense, and $1,011,771 in cash dividends paid.
Liquidity
The Bank must maintain, on a daily basis, sufficient funds to cover depositor withdrawals and to supply new borrowers with funds. To meet these obligations, the Bank keeps cash on hand, maintains account balances with its correspondent banks, and purchases and sells Federal funds and other short-term investments. Asset and liability maturities are monitored in order to avoid significant mismatches which could adversely impact liquidity. It is the policy of the Bank to monitor its liquidity to achieve earnings enhancements and meet regulatory requirements while funding its obligations.
Liquidity is monitored daily and formally measured on a monthly basis. As of December 31, 2007, the Bank’s liquidity ratio was 10.5% versus 13.2% as of the prior year-end. In 2007, the Bank’s brokered deposits rose $17,173,836 or 42% from December 31, 2006 to $58,025,925. Nine million of the increase in brokered deposits was used to repay advances from the Federal Home Loan Bank of Atlanta (FHLB) during the past twelve months. Management has established a noncore funding (wholesale, brokered, and out-of-territory deposits) guideline not to exceed 20% of Bank deposits, excluding noncore funding. For the years ended December 31, 2007 and 2006 the Bank’s noncore funding measure was 20.1% and 12.6%, respectively.
Excluding the FHLB, the Bank has $25.8 million in lines of credit with its correspondent banks to supplement short term liquidity. During the year, the Bank borrowed for 10 days under these commitments with average borrowing of $1.5 million and a high of $3.2 million in August 2007.
The Bank has a $2 million FHLB advance that may convert to 3 month LIBOR in December 2008. Management believes unless rates rise materially before then, the FHLB will not exercise its right to convert this advance.
Advances are drawn under a $47.9 million line of credit with the FHLB. The line of credit with FHLB is secured by a blanket lien on the Bank’s qualified commercial real estate mortgages, 1-4 family residential mortgages, home equity mortgages, and multifamily mortgages outstanding as well as the Bank’s holdings of FHLB stock. During the twelve months ending December 31, 2007, management repaid $9 million in FHLB advances. During the twelve months ending December 31, 2007, management utilized the daily revolving credit (DRC) facility as part of its FHLB credit line for 58 days with an average borrowing of $4.5 million and a high of $7 million in October 2007. See Table 8 for a recap of Bank borrowing.
Beginning in the second quarter of 2007, management began offering a retail repurchase agreement to certain Bank customers. The agreement allows the Bank to sell its investment securities overnight and repurchase those securities the following business day. The rate floats and is tied to the ninety day U. S. Treasury bond. As of December 31, 2007, the Bank has sold and is obligated to repurchase $304,555 in investment securities.
Beginning in the second quarter of 2007, the Bank began participating in a borrowing arrangement with the U. S. Treasury. The Bank, as an approved U. S. Treasury depository, historically accepts treasury, tax, and loan payments. Those payments were previously remitted to the U. S. Treasury on a daily basis; however, now those payments, up to an agreed upon maximum, can remain on deposit with the Bank. This obligation is repaid periodically as the U. S. Treasury requires and bears a variable rate of interest approximating the ninety day U. S. Treasury bond. As of December 31, 2007, the Bank had $156,823 in note obligations under this program.
Critical Accounting Policies
Critical accounting policies are dependent on estimates that are particularly susceptible to significant changes. Determination of the Bank’s ALL and income taxes have been identified as critical accounting policies.
The ALL is maintained at a level believed to be appropriate by management to provide for probable loan losses inherent in the portfolio as of each quarter-end. Management’s judgment as to the amount of the ALL, including the allocated and unallocated elements, is a result of ongoing review of lending relationships, the overall risk characteristics of the portfolio segments, changes in the character or size of the portfolio segments, the level of impaired or nonperforming loans, historical net charge-off experience, prevailing economic conditions and other relevant factors. Loans are charged off to the extent they are deemed to be uncollectible. The ALL level is highly dependent upon management’s estimates of variables affecting valuation, appraisals of collateral, evaluations of performance and status, and the timing of collecting nonperforming loans. Such estimates may be subject to frequent adjustments by management and reflected in the provision for loan losses in the periods in which they become known.
Income taxes are accounted for using the asset and liability method. Under this method, deferred tax assets or liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The determination of current and deferred taxes is based on complex analyses of many factors including interpretation of Federal and state income tax laws, the difference between tax and financial reporting basis of assets and liabilities (temporary differences), estimates of amounts due or owed such as the reversals of temporary differences, and current financial accounting standards. Actual results could differ significantly from the estimates and interpretations used in determining current and deferred taxes.
Off-Balance Sheet Arrangements
As described further in footnote 13 to the Company’s audited financial statements, the Bank’s lending activities regularly result in unfunded commitments to creditworthy customers requesting financing for working capital, construction and development activities, and home equity lines of credit. Commercial unfunded commitments are typically secured by collateral margined in accordance with the Bank’s lending policy. Commercial unfunded commitments, excluding construction and development, are generally for terms less than three years. Unfunded commitments for construction and development are typically for terms less than 18 months. Home equity lines of credit are generally secured by collateral margined in accordance with Bank’s lending policy and mature in ten years. Advances under all loan commitments occur in the normal course of the Bank’s operations. Management considers its unfunded commitments when assessing the Bank’s liquidity and monitoring concentrations of credit. Commitment fees generally represent 0.5% to 1.0% of the total commitment amount (funded and unfunded) and are recognized as origination fees. Origination fees for the years ending December 31, 2007, and 2006 were $1,301,657 and $1,228,701, respectively.
From time to time the Bank is asked by its creditworthy customers to issue standby or performance letters of credit. These letters of credit are generally issued for terms no longer than two years and are secured by collateral margined in accordance with the Bank’s lending policy. The Bank has not been asked to perform on any of its outstanding letters of credit during 2007 or 2006. Fees for issuing letters of credit totaled $13,463 and $12,503 for the years ending December 31, 2007 and 2006, respectively.
The following table represents outstanding contingent liabilities by category for the years ending December 31, 2007 and 2006, respectively.
Contractual Obligations
In the ordinary course of operations, the Company enters into certain contractual obligations. The following table summarizes the Company’s significant fixed and determinable contractual obligations, by payment date, as of December 31, 2007.
Results of Operations - Twelve Months Ended December 31, 2007 Compared to 2006
Net interest income for the twelve months ending December 31, 2007 decreased $594,502 or 3.2% from the year-ago period. The decrease in net interest income is attributable to the reversal of interest income on loans placed on nonaccrual totaling $946,763, holding of other real estate, $360,485 less in loan fee income, and net interest margin compression resulting from asset sensitivity as the prime lending rate fell 100 basis points during 2007 and intense competition for deposits resulting in higher funding costs.
The December 31, 2007 tax equivalent net interest margin of 4.13% fell 59 basis points from the year-ago period. Margin decline was attributable to a 45 basis point decrease in the net interest component of the net interest margin and a 13 basis point decline in the loan fee component of the net interest margin relative to the prior year. The 13 basis point decline in the fee component of the margin is due to the competitive pressures experienced in the South Henry and Lake Oconee markets. The decline in the interest component of the net interest margin is due to the significant levels of nonaccrual loans and other real estate and loans and other earning assets repricing faster downward than the decline in funding costs. The yield on earning assets declined 15 basis points from 2006 to 2007 while the cost of funds as a percentage of earning assets rose 44 basis points over the same period. The Bank’s average loan-to-funding ratio increased from 82.1% to 82.5%.
Total interest income for the twelve months ending December 31, 2007 rose $2,687,266 or 8.5% from the year-ago period. The increase in interest income was attributable to a rise in average earning assets.
Total average earning assets rose $41.8 million or 10.6% in 2007 compared to 2006. Seventy-four percent or $31 million of the increase in average earning assets related to growth in loans. The tax equivalent yield on earning assets as of December 31, 2007 was 7.91% and declined 16 basis points from the year-ago period. This decrease results from a 25 basis point fall in loan yield, a 34 basis point increase in investment portfolio yield, and a 1 basis point rise in yield on federal funds sold and interest bearing deposits. The overall decline in yield on earning assets from the year-ago period results from floating rate loans tied to the prime lending rate falling as the prime lending rate declined 100 basis points during the year.
Interest expense for the twelve months ending December 31, 2007 rose $3,281,768 or 24.9% from the year-ago period. The increase in interest expense is due to a rise in average interest bearing liabilities as well as higher costs associated with funding the balance sheet.
Total average interest bearing liabilities grew $35.4 million or 10.2% from the year-ago period. The cost of funds as of December 31, 2007 was 4.30% and rose 50 basis points from the year-ago period. The increase in cost of funds results from a 35 basis point rise in the cost of interest bearing demand deposit accounts, a 31 basis point rise in the cost of funds on savings accounts, a 52 basis point increase in cost of funds on time deposits, and a 3 basis point rise in borrowed money. The overall rise in the cost of funds from the year-ago period results from maturing time deposits repricing at higher rates versus rates when originated in prior years and competitive pressures that have elevated the overall cost of funds.
Provision for loan losses for the twelve months ending December 31, 2007 increased $2,546,123 or 327.2% from the year-ago period. The rise in provision expense versus the prior year-end was due to a 4% increase in loans outstanding, net charge-offs, and an increase in problem loans. Nonaccrual loans increased $21 million or 36 times the amount reported in 2006. Impaired loans grew $15.9 million or 27 times the amount reported in 2006. The level of impairment on impaired loans grew $2 million as the amount and severity of impaired loans increased. The Bank’s delinquency ratio (loans past due 30 days or more and loans on nonaccrual as a percentage of gross loans) rose from 1.58% to 8.72% during the year. Net charge offs for 2007 totaled $1,030,181. Refer to the discussion on ALL adequacy for further comment.
During 2007, other income, excluding investment securities, other real estate, and fixed asset gains or losses, rose $210,988 or 5.5% from the year-ago period. Income from secondary market financing activity declined $84,927 or 11% from the year-ago period due to tightened credit underwriting standards and lower volume resulting from the cessation of the sub-prime mortgage market. Mortgage originations for purchasing or refinancing residential real estate and sold into the secondary market fell 60 or 18% in number and 7% by dollar amount from 2006 to 2007. Overdraft fee income rose $80,991 or 4.9% due to greater overdraft activity. ATM service charge income rose $141,013 or 61.3% due to increased foreign ATM surcharge volume.
Investment securities gains represent the sale of the Company’s equity stake in Nexity Bank. The sale reflects management’s efforts to diversify and reduce its exposure to the financial sector.
During 2007, other noninterest expense increased $791,930 or 5.6% from the year-ago period. This increase is attributable to several factors, including: a $488,492 or 5.4% increase in salary and benefit expenses resulting from the addition of four full time equivalent employees due to centralizing loan administration and filling key support positions, employee raises, and 7% increase in health insurance costs; $60,903 or 10.8% higher computer and data processing costs due to technology improvements and greater processing volume; $50,114 or 20.2% increase in ATM expense due to higher transaction volume; $123,796 or 203.2% increase in other real estate and collection expenses resulting from the level of problem loans; $70,074 or 4.2% increase in occupancy expense due to expanding the Bank’s Jackson and McDonough offices; offset by and a $96,259 or 19.2% decline in professional fees as certain functions were brought in-house with new hires.
During 2007, income tax expense fell $1,350,326 or 54.7% from the year-ago period. The decrease from the year-ago period is attributable to 49.8% less net income before income tax and a fall in the effective tax rate. As of December 31, 2007, the effective income tax rate was 30.2% versus 33.4% from the year-ago period. The fall in the effective income tax rate results from nominal State income tax liability as the majority of the Company’s State tax obligation was satisfied by amounts paid when the Company paid its business, occupation, and license taxes due the State.
McIntosh Bancshares, Inc.
Table 1 - Average Balance Sheets, Interest and Rates
The table below shows the year-to-date average balance for each category of interest earning assets and interest-bearing liabilities for the indicated periods and the average rate of interest earned or paid thereon.
Non-accrual loans and the interest income which was recorded on these loans, if any, are included in the yield calculation for loans in all periods reported.
(TE) - Tax Equivalent. Loan fees of $1,634,948, $1,995,433 and $1,928,126 are included in the yields for 2007, 2006 and 2005 respectively.
McIntosh Bancshares, Inc.
Table 2 - Rate/Volume Variance Analysis
The following tables show a summary of the changes in interest income and interest expense resulting from changes in volume and changes in rates for each major category of interest-earning assets and interest-bearing liabilities for 2007 over 2006 and 2006 over 2005.
Note : Rate/volume variance were allocated between rate variances and volume variances using a weighted average allocation method.
McIntosh Bancshares, Inc.
Table 2 - Rate/Volume Variance Analysis (continued)
Note : Rate/volume variance were allocated between rate variances and volume variances using a weighted average allocation method.
McIntosh Bancshares, Inc.
Table 3 - Investment Portfolio
The following table presents the carrying value of investments by category at December 31, 2007, 2006, and 2005. Amounts in thousands.
McIntosh Bancshares, Inc.
Table 3 - Investment Portfolio (continued)
The following table presents the maturities of all investment securities at carrying value and the weighted average yields for each category of securities presented:
Mortgage backed securities are included in the maturities categories in which they are anticipated to be repaid based on scheduled maturities.
McIntosh Bancshares, Inc.
Table 4 - Loan Portfolio
The following table presents loans by type and the percentage of loans by type at the end of the last 5 years. Amounts in thousands.
At December 31, 2007, maturities of loans in the indicated classifications were as follows. Amounts in thousands.
As of December 31, 2007, the interest terms of loans in the indicated classifications for the indicated maturity ranges are as follows. Amounts in thousands.
McIntosh Bancshares, Inc.
Table 4 - Loan Portfolio (continued)
The following summarizes past-due and non-accrual loans, other real estate and repossessions and income that would have reported on non-accrual loans as of December 31, 2007, 2006, 2005, 2004, and 2003. Amounts in thousands.
A loan is placed on non-accrual status when, in management’s judgment, the collection of interest appears doubtful. As a result of management’s ongoing review of the loan portfolio, loans are classified as non-accrual generally when they are past due in principal and interest for more than 90 days or it is otherwise not reasonable to expect collection of principal and interest under the original terms. Exceptions are allowed for 90 day past due loans when such loans are well secured and in process of collection. Generally, payments received on non-accrual loans are applied directly to principal.
McIntosh Bancshares, Inc.
Table 5 - Analysis of the Allowance for Loan Losses
The following table summarizes information concerning the allowance for loan loss. Amounts in thousands.
The Company has a dedicated loan review function. Sixty percent of the portfolio was reviewed in 2007 and placed into loan grading categories, which assist in developing lists of potential problem loans. These loans are regularly monitored by the loan review function to ensure early identification of deterioration. The formal allowance for loan loss adequacy test is performed at each calendar quarter end. Specific amounts of loss are estimated on problem loans and historical loss percentages are applied to the balance of the portfolio using certain portfolio stratifications. Additionally, the evaluation takes into consideration such factors as changes in the nature and volume of the loan portfolio, current economic conditions, regulatory examination results, and the existence of loan concentrations.
McIntosh Bancshares, Inc.
Table 5 Con’t - Allocation of the Allowance for Loan Losses
The following table presents the allocation of allowance for loan losses by category and the percentage of loans in each category to total loans at end of the last 5 years. Amounts in thousands.
McIntosh Bancshares, Inc.
Table 6 - Deposits
The average balance of the deposits and the average rates paid on such deposits are summarized for the periods indicated in the following table.
Maturities of time certificates of deposit of $100,000 or more outstanding at December 31, 2007 summarized as follows. Amounts in thousands.
McIntosh Bancshares, Inc.
Table 7 - Selected Ratios
The following table sets out certain ratios of the Company for the years indicated. Amounts in thousands.
McIntosh Bancshares, Inc.
Table 8 - Analysis of Short-term and Long-term Borrowings
The following table sets out certain information regarding the Company’s borrowings.
McIntosh Bancshares, Inc.
Table 9 - Interest Rate Sensitivity Analysis
Item 8.
Item 8. Financial Statements
The following consolidated financial statements of the Registrant and its subsidiaries are included on Exhibit 13.1 of this Annual Report on Form 10-K:
Consolidated Balance Sheets - December 31, 2007 and 2006
Consolidated Statements of Earnings - December 31, 2007 and 2006
Consolidated Statements of Comprehensive Income - December 31, 2007 and 2006
Consolidated Statements of Changes in Stockholders’ Equity - December 31, 2007 and 2006
Consolidated Statements of Cash Flows - December 31, 2007 and 2006
Notes to Consolidated Financial Statements
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
The principal independent accountant of the Company and of the Bank has not resigned, declined to stand for re-election, or been dismissed during the two most recent fiscal years or any later interim period.
Item 9A.
Item 9A. Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and the Principal Financial and Accounting Officer, of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Principal Financial and Accounting Officer concluded that our disclosure controls and procedures are effective.
Management’s Report on Internal Control over Financial Reporting
The management of McIntosh Bancshares, Inc. and subsidiaries is responsible for establishing and maintaining adequate internal control over financial reporting. This internal control system has been designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of the Company’s published financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
The management of McIntosh Bancshares, Inc. and subsidiaries has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007. To make this assessment, we used the criteria for effective internal control over financial reporting described in Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment, we believe that, as of December 31, 2007, the Company’s internal control over financial reporting met those criteria and is effective.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Item 9B.
Item 9B. Other Information
None.
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
Code of Ethics
Upon written request, a copy of the McIntosh Bancshares, Inc. Code of Ethics shall be furnished to shareholders without charge. Please direct your written request to James P. Doyle, McIntosh Bancshares, Inc., 210 South Oak Street, Jackson, Georgia 30233.
The remaining information required by this Item is incorporated by reference to the Company’s definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Annual Report.
Item 11.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference to the Company’s definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Annual Report.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item is incorporated by reference to the Company’s definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Annual Report.
Item 13.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information required by this Item is incorporated by reference to the Company’s definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Annual Report.
Item 14.
Item 14. Principal Accounting Fees and Services
The information required by this Item is incorporated by reference to the Company’s definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Annual Report.
Item 15.
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of or incorporated by reference in this report:
(1) Financial Statements: The consolidated balance sheets of McIntosh Bancshares, Inc. and its subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of earnings, consolidated statements of comprehensive income, consolidated statements of changes in stockholders’ equity and consolidated statements of cash flows for each of the years then ended, together with the related notes and the report of Porter Keadle Moore, LLP, independent registered public accounting firm.
(2) Financial statement schedules: All schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes.
(3) Exhibits: A list of the Exhibits as required by Item 601 of Regulation S-K to be filed as part of this Annual Report is shown on the “Exhibit Index” filed herewith.
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints William K. Malone, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities indicated on March 26, 2008.
Signature
Title
/s/ William K. Malone
William K. Malone
Director, Chairman of the Board and CEO
/s/ J. Paul Holmes, Jr.
J. Paul Holmes, Jr.
Director
/s/ Dennis Keith Fortson
Dennis Keith Fortson
Director
/s/ John L. Carter
John L. Carter
Director
/s/ William T. Webb
William T. Webb
Director
/s/ George C. Barber
George C. Barber
Director
/s/ Thurman L. Willis
Thurman L. Willis
Director, President and Chief Operating Officer
/s/ James P. Doyle
James P. Doyle
Chief Financial and Accounting Officer
EXHIBIT INDEX