ITEM 1.
DESCRIPTION OF BUSINESS
Cautionary Notice Regarding Forward Looking Statements
Some of the statements in this Report, including, without limitation, matters discussed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” of SouthCrest Financial Group, Inc. are “forward-looking statements” within the meaning of the federal securities laws. Forward-looking statements include statements about the competitiveness of the banking industry, potential regulatory obligations, our entrance and expansion into other markets, integration of recently acquired banks, pending or proposed acquisitions, our other business strategies, our expectations with respect to our allowance for loan losses and impaired loans, anticipated capital expenditures for our operations center, and other statements that are not historical facts. When we use words like “anticipate”, “believe”, “intend”, “expect”, “estimate”, “could”, “should”, “will”, and similar expressions, you should consider them as identifying forward-looking statements, although we may use other phrasing. These forward-looking statements involve risks and uncertainties and are based on our beliefs and assumptions, and on the information available to us at the time that these disclosures were prepared. Factors that may cause actual results to differ materially from those expressed or implied by such forward-looking statements include, among others, the following possibilities: (1) competitive pressures among depository and other financial institutions may increase significantly; (2) changes in the interest rate environment may reduce margins; (3) general economic conditions may be less favorable than expected, resulting in, among other things, a deterioration in credit quality and/or a reduction in demand for credit; (4) legislative or regulatory changes, including changes in accounting standards, may adversely affect the businesses in which we are engaged; (5) costs or difficulties related to the integration of our businesses, may be greater than expected; (6) deposit attrition, customer loss or revenue loss following acquisitions may be greater than expected; (7) competitors may have greater financial resources and develop products that enable such competitors to compete more successfully than us; and (8) adverse changes may occur in the equity markets.
Many of such factors are beyond our ability to control or predict, and readers are cautioned not to put undue reliance on such forward-looking statements. We disclaim any obligation to update or revise any forward-looking statements contained in this Report, whether as a result of new information, future events or otherwise.
Information About SouthCrest Financial Group, Inc.
Description of Business
SouthCrest Financial Group, Inc. (“the Company” or “SouthCrest”) is a bank holding company headquartered in Fayetteville, Georgia. SouthCrest was incorporated under the laws of the State of Georgia on August 15, 1996 as Upson Bankshares, Inc. and is registered under the Bank Holding Company Act of 1956, as amended, and under the bank holding company laws of the State of Georgia. SouthCrest conducts its operations through its wholly owned subsidiaries (collectively the “Banks”), Bank of Upson (“Upson”), First National Bank of Polk County (“FNB Polk”) and Peachtree (“Peachtree”). The Company was created on September 30, 2004 when Upson Bankshares, Inc. and First Polk Bankshares, Inc. merged with the surviving entity changing its name to SouthCrest.
Bank of Upson / Meriwether Bank and Trust / SouthCrest Bank
Bank of Upson was incorporated under the laws of the State of Georgia in 1951 as a state-chartered bank. Upson is headquartered in Thomaston, Upson County, Georgia and operates a total of six full-service banking locations and sixteen 24-hour ATM sites in Meriwether, Spalding, Fayette and Upson Counties in western Georgia. In 1999, Bank of Upson purchased two bank branches, which it now operates in Manchester, Georgia and Warm Springs, Georgia under the trade name “Meriwether Bank & Trust.” Bank of Upson also purchased a bank branch in Luthersville, Georgia in December of 2002, which is also operated under the trade name Meriwether Bank & Trust. In November 2004 Upson opened a full-service de-novo branch in Fayetteville, Georgia operating under the trade name “SouthCrest Bank.”
Bank of Upson is a full service commercial bank focusing on meeting the banking needs of individuals and small- to medium-sized businesses. Upson offers a broad line of banking and financial products and services customary for full service banks of similar size and character. These services include consumer loans, real estate loans, and commercial loans as well as maintaining deposit accounts such as checking accounts, money market accounts, and a variety of certificates of deposit. Bank of Upson attracts most of its deposits and conducts most of its lending transactions from and within its primary service area encompassing Upson, Fayette, and Meriwether Counties Georgia.
First National Bank of Polk County
The First National Bank of Polk County was established in 1920 to provide community-banking services to the individuals and businesses in Polk County in northwest Georgia. FNB Polk operates out of its main office in Cedartown, Polk County, Georgia. In addition to its main office, FNB Polk operates a branch office in Cedartown and another in the Rockmart, also in Polk County. FNB Polk also operates three ATM machines at each of the branches.
FNB Polk performs banking services customary for full service banks of similar size and character. Such services include making real estate, commercial and consumer loans, providing other banking services such as traveler’s checks, and maintaining deposit accounts such as checking, money market, consumer certificate of deposit and IRA accounts.
Peachtree Bank
Peachtree Bank was chartered in 1919 under the laws of the State of Alabama. On October 31, 2006, Peachtree became a wholly-owned subsidiary of the Company as a result of the merger of Maplesville Bancorp, Peachtree’s holding company, with SouthCrest. Peachtree maintains its main office in Maplesville, Alabama and operates a branch office in Clanton, Alabama. Peachtree is a full-service community bank providing banking services in its primary trade area of Chilton County, Alabama. Such services include making real estate, commercial and consumer loans, as well as providing deposit accounts such as checking, money market, consumer certificate of deposit and IRA accounts.
Business Activities of the Company
Deposit Services. Deposits are a key component of the Company’s business, serving as a source of funding for lending as well as for increasing customer account relationships. The Banks offer a variety of deposit services, including non-interest bearing checking accounts, interest bearing checking accounts, money market accounts, savings accounts, and time deposits of maturities ranging from three months to five years. The primary sources of deposits for the Banks are businesses and individuals in their primary market areas.
Lending Services. The Banks’ lending business consists primarily of making consumer loans to individuals, commercial loans to small and medium-sized businesses and professional organizations, and secured real estate loans, including residential and commercial construction loans, and first and second mortgage loans for the acquisition and improvement of personal residences.
Investment Services. The Company provides investment services through its partnership with a full-service brokerage firm, and offering its customers brokerage services for stocks, bonds, mutual funds, IRA’s, 529 plans, retirement plans, certificates of deposit, and insurance products. The customer base for this service consists of individual investors, small businesses, and non-profit organizations. This service is offered at the Bank of Upson through its division operating under the trade name “Hometown Investments” which was created in 1999 and has been in full service since 2001. In 2005 FNB Polk began offering this service to its customers under the trade name “SouthCrest Investment Services.”
Trust Services. SouthCrest also operates a full-service personal trust department through Bank of Upson. The trust department provides estate analysis, consultation, estate and agency accounts, as well as non-profit agency services. All trust-related record-keeping, back-office, and securities servicing is provided through a third-party.
Asset and Liability Management. The Banks manage their assets and liabilities to provide adequate liquidity, and at the same time, to achieve the maximum net interest rate margin. These management functions are conducted within the framework of written loan and investment policies. The banks attempt to maintain a balanced position between rate sensitive assets and rate sensitive liabilities.
Market Area and Competition. The Company operates in a highly competitive environment. The Banks compete for deposits and loans with commercial banks, savings and loan associations, credit unions, finance companies, mutual funds, insurance companies and other financial entities operating locally and elsewhere. In addition, because the Gramm-Leach-Bliley Act now permits banks, securities firms, and insurance companies to affiliate, a number of larger financial institutions and other corporations offering a wider variety of financial services than the Banks currently offer could enter our area and aggressively compete in the markets that the Banks serve. Many of these competitors have substantially greater resources and lending limits than the Banks and may offer certain services that they do not or cannot provide.
We currently conduct business principally through the Banks’ eleven branches in their market areas of Fayette, Meriwether, Polk and Upson Counties, Georgia and Chilton County, Alabama. Based upon data available on the FDIC website as of June 30, 2006, SouthCrest’s total deposits ranked 1st among financial institutions in our market area, representing approximately 14.3% of the total deposits in our market area. The table below shows our deposit market share collectively and by Bank in the counties we serve according to data from the FDIC website as of June 30, 2006.
Employees. As of December 31, 2006, the Company and the Banks had a total of 187 full-time equivalent employees. Certain executive officers of the Banks also serve as officers of SouthCrest Financial Group, Inc. We consider our employee relations to be good, and we have no collective bargaining agreements with any employees.
SUPERVISION AND REGULATION
Both the Company and the Banks are subject to extensive state and federal banking regulations that impose restrictions on and provide for general regulatory oversight of their operations. These laws are generally intended to protect depositors and not shareholders. The following discussion describes the material elements of the regulatory framework that applies to us.
SouthCrest Financial Group, Inc.
Since the Company owns all of the capital stock of Upson, FNB Polk and Peachtree, it is a bank holding company under the federal Bank Holding Company Act of 1956. As a result, we are primarily subject to the supervision, examination and reporting requirements of the Bank Holding Company Act and the regulations of the Federal Reserve. As a bank holding company located in Georgia, the Georgia Department of Banking and Finance also regulates and monitors all significant aspects of our operations.
Acquisitions of Banks. The Bank Holding Company Act requires every bank holding company to obtain the Federal Reserve’s prior approval before:
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acquiring direct or indirect ownership or control of any voting shares of any bank if, after the acquisition, the bank holding company will directly or indirectly own or control more than 5% of the bank’s voting shares;
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acquiring all or substantially all of the assets of any bank; or
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merging or consolidating with any other bank holding company.
Additionally, the Bank Holding Company Act provides that the Federal Reserve may not approve any of these transactions if it would result in or tend to create a monopoly, substantially lessen competition or otherwise function as a restraint of trade, unless the anticompetitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the community to be served. The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks concerned. The Federal Reserve’s consideration of financial resources generally focuses on capital adequacy, which is discussed below.
Under the Bank Holding Company Act, if we are adequately capitalized and adequately managed, we or any other bank holding company located in Georgia may purchase a bank located outside of Georgia. Conversely, an adequately capitalized and adequately managed bank holding company located outside of Georgia may purchase a bank located inside of Georgia. In each case, however, restrictions may be placed on the acquisition of a bank that has only been in existence for a limited amount of time or will result in specified concentrations of deposits. Currently, Georgia law prohibits acquisitions of banks that have been chartered for less than three years. Because Upson and FNB Polk have been chartered more than three years, this limitation under Georgia would not affect SouthCrest’s ability to sell Upson or FNB Polk. Similarly, Alabama law prohibits the acquisition of Alabama state banks that have been chartered for less than five years. However, since Peachtree has been chartered for more than five years, this law does not apply to sales of Peachtree.
Change in Bank Control. Subject to various exceptions, the Bank Holding Company Act and the Change in Bank Control Act, together with related regulations, require Federal Reserve approval prior to any person or company acquiring “control” of a bank holding company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the bank holding company. Control is rebuttably presumed to exist if a person or company acquires 10% or more, but less than 25%, of any class of voting securities and either:
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the bank holding company has registered securities under Section 12 of the Securities Act of 1934; or
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no other person owns a greater percentage of that class of voting securities immediately after the transaction.
Our common stock is currently registered under Section 12 of the Securities Exchange Act of 1934. The regulations also provide a procedure for challenging any rebuttable presumption of control.
Permitted Activities. A bank holding company is generally permitted under the Bank Holding Company Act, to engage in, or acquire direct or indirect control of more than 5% of the voting shares of any company engaged in, the following activities:
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banking or managing or controlling banks; and
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any activity that the Federal Reserve determines to be so closely related to banking as to be a proper incident to the business of banking.
Activities that the Federal Reserve has found to be so closely related to banking as to be a proper incident to the business of banking include:
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factoring accounts receivable;
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making, acquiring, brokering or servicing loans and usual related activities;
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leasing personal or real property;
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operating a non-bank depository institution, such as a savings association;
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trust company functions;
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financial and investment advisory activities;
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conducting discount securities brokerage activities;
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underwriting and dealing in government obligations and money market instruments;
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providing specified management consulting and counseling activities;
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performing selected data processing services and support services;
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acting as agent or broker in selling credit life insurance and other types of insurance in connection with credit transactions; and
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performing selected insurance underwriting activities.
Despite prior approval, the Federal Reserve may order a bank holding company or its subsidiaries to terminate any of these activities or to terminate its ownership or control of any subsidiary when it has reasonable cause to believe that the bank holding company’s continued ownership, activity or control constitutes a serious risk to the financial safety, soundness or stability of it or any of its bank subsidiaries.
In addition to the permissible bank holding company activities listed above, the Financial Services Modernization Act of 1999, or the Gramm-Leach-Bliley Act, revised and expanded the provisions of the Bank Holding Company Act by permitting a bank holding company to qualify and elect to become a financial holding company. Under the regulations implementing the Gramm-Leach-Bliley Act, a financial holding company may engage in additional activities that are financial in nature or incidental or complementary to financial activity. The following activities are considered financial in nature:
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lending, trust and other banking activities;
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insuring, guaranteeing or indemnifying against loss or harm, or providing and issuing annuities and acting as principal, agent or broker for these purposes, in any state;
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providing financial, investment or advisory services;
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issuing or selling instruments representing interests in pools of assets permissible for a bank to hold directly;
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underwriting, dealing in or making a market in securities;
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other activities that the Federal Reserve may determine to be so closely related to banking or managing or controlling banks as to be a proper incident to managing or controlling banks;
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foreign activities permitted outside of the United States if the Federal Reserve has determined them to be usual in connection with banking operations abroad;
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merchant banking through securities or insurance affiliates; and
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insurance company portfolio investments.
On December 18, 2006, the SEC and the Federal Reserve issued joint proposed rules, which would implement the “broker” exception for banks under Section 3(a)(4) of the Exchange Act of 1934 and would be adopted as part of the Gramm-Leach-Bliley Act. The proposed rules would implement the statutory exceptions that allow a bank, subject to certain conditions, to continue to conduct securities transactions for the Banks’ customers as part of its trust and fiduciary, custodial and deposit “sweep” functions, and to refer customers to a securities broker-dealer pursuant to a networking arrangement with the broker-dealer.
To qualify to become a financial holding company, the Bank and any other depository institution subsidiary of the Company must be well capitalized and well managed and must have a Community Reinvestment Act rating of at least “satisfactory.” Additionally, the Company must file an election with the Federal Reserve to become a financial holding company and must provide the Federal Reserve with days’ written notice prior to engaging in a permitted financial activity. While the Company meets the qualification standards applicable to financial holding companies, we have not elected to become a financial holding company at this time.
Support of Subsidiary Institutions. Under Federal Reserve policy, we are expected to act as a source of financial strength for the Banks and to commit resources to support the Banks. This support may be required at times when, without this Federal Reserve policy, we might not be inclined to provide it. In addition, any capital loans made by us to the Bank will be repaid only after its deposits and various other obligations are repaid in full. In the unlikely event of our bankruptcy, any commitment by it to a federal banking regulator to maintain the capital of the Banks will be assumed by the bankruptcy trustee and entitled to a priority of payment.
The Banks
General. The Banks are subject to extensive state and federal banking regulations that impose restrictions on and provide for general regulatory oversight of our operations. These laws are generally intended to protect depositors and not shareholders. The following discussion describes the material elements of the regulatory framework that applies to us.
Since Upson is a commercial bank chartered under the laws of the State of Georgia, it is primarily subject to the supervision, examination and reporting requirements of the FDIC and the Georgia Department of Banking and Finance. The FDIC and Georgia Department of Banking and Finance regularly examine Upson’s operations and have the authority to approve or disapprove mergers, the establishment of branches and similar corporate actions. Both regulatory agencies have the power to prevent the continuance or development of unsafe or unsound banking practices or other violations of law.
Since FNB Polk is chartered as a national bank, it is primarily subject to the supervision, examination and reporting requirements of the National Bank Act and the regulations of the Office of the Comptroller of the Currency. The Office of the Comptroller of the Currency regularly examines FNB Polk’s operations and has the authority to approve or disapprove mergers, the establishment of branches and similar corporate actions. The Office of the Comptroller of the Currency also has the power to prevent the continuance or development of unsafe or unsound banking practices or other violations of law.
Since Peachtree is a commercial bank chartered under the laws of the State of Alabama, it is primarily subject to the supervision, examination and reporting requirements of the FDIC and the Superintendent of Banking of the Alabama State Banking Department (the “Alabama State Banking Department”). The FDIC and the Superintendent regularly examine Peachtree’s operations and have the authority to approve or disapprove mergers, the establishment of branches and similar corporate actions. Both regulatory agencies also have the power to prevent the continuance or development of unsafe or unsound banking practices or other violations of law.
Because the Banks’ deposits are insured by the FDIC to the maximum extent provided by law, they are also subject to certain FDIC regulations. The Banks are also subject to numerous state and federal statutes and regulations that affect their business, activities and operations.
Branching. Under current Georgia law, Upson may open branch offices throughout Georgia with the prior approval of the Georgia Department of Banking and Finance. In addition, with prior regulatory approval, Upson may acquire branches of existing banks located in Georgia. National Banks are required by the National Bank Act to adhere to branching laws applicable to state banks in the states in which they are located. Therefore, FNB Polk may open branch offices or acquire branches of existing banks located in Georgia with the approval of the Office of the Comptroller of the Currency. Similarly, under current Alabama law, Peachtree may open branch offices throughout Alabama, or acquire branches of existing banks located in Alabama, with the prior approval of the Alabama State Banking Department. The Banks and any other national or state-chartered bank generally may branch across state lines by merging with banks in other states if allowed by the applicable states’ laws. Both Georgia and Alabama law, with limited exceptions, currently permit branching across state lines through interstate mergers.
Under the Federal Deposit Insurance Act, states may “opt-in” and allow out-of-state banks to branch into their state by establishing a new start-up branch in the state. Currently, neither Georgia nor Alabama has opted-in to this provision. Therefore, interstate merger is the only method through which a bank located outside of either Georgia or Alabama may branch into Georgia or Alabama, respectively. This provides a limited barrier of entry into the Georgia and Alabama banking markets, which protects us from an important segment of potential competition. However, because Georgia and Alabama have elected not to opt-in, our ability to establish a new start-up branch in another state may be limited. Many states that have elected to opt-in have done so on a reciprocal basis, meaning that an out-of-state bank may establish a new start-up branch only if their home state has also elected to opt-in. Consequently, until either Georgia or Alabama changes its election, the only way we will be able to branch into states that have elected to opt-in on a reciprocal basis will be through interstate merger.
Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement Act of 1991 establishes a system of prompt corrective action to resolve the problems of undercapitalized financial institutions. Under this system, the federal banking regulators have established five capital categories (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) in which all institutions are placed. The federal banking agencies have also specified by regulation the relevant capital levels for each of the other categories. At December 31, 2006, the Banks qualified for the well-capitalized category.
Federal banking regulators are required to take various mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the capital category in which the institution is placed. Generally, subject to a narrow exception, the banking regulator must appoint a receiver or conservator for an institution that is critically undercapitalized.
An institution that is assigned to any of the “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized” categories is required to submit an acceptable capital restoration plan to its appropriate federal banking regulators. A bank holding company must guarantee that a subsidiary depository institution meets its capital restoration plan, subject to various limitations. The controlling holding company’s obligation to fund a capital restoration plan is limited to the lesser of 5% of an undercapitalized subsidiary’s assets at the time it became undercapitalized or the amount required to meet regulatory capital requirements. An undercapitalized institution is also generally prohibited from increasing its average total assets, making acquisitions, establishing any branches or engaging in any new line of business, except under an accepted capital restoration plan or with FDIC approval. The regulations also establish procedures for downgrading an institution to a lower capital category based on supervisory factors other than capital.
FDIC Insurance Assessments. The FDIC has adopted a risk-based assessment system for insured depository institutions that takes into account the risks attributable to different categories and concentrations of assets and liabilities. The system assesses higher rates on those institutions that pose greater risks to the Deposit Insurance Fund (the “DIF”). The FDIC places each institution in one of four risk categories using a two-step process based first on capital ratios (the capital group assignment) and then on other relevant information (the supervisory group assignment). Within the lower risk category, Risk Category I, rates will vary based on each institution’s CAMELS component ratings, certain financial ratios, and long-term debt issuer ratings.
Capital group assignments are made quarterly and an institution is assigned to one of three capital categories: (1) well capitalized; (2) adequately capitalized; and (3) undercapitalized. These three categories are substantially similar to the prompt corrective action categories described above, with the “undercapitalized” category including institutions that are undercapitalized, significantly undercapitalized and critically undercapitalized for prompt corrective action purposes. The FDIC also assigns an institution to one of three supervisory subgroups based on a supervisory evaluation that the institution’s primary federal banking regulator provides to the FDIC and information that the FDIC determines to be relevant to the institution’s financial condition and the risk posed to the deposit insurance funds. Assessments range from 5 to 43 cents per $100 of deposits, depending on the institution’s capital group and supervisory subgroup. Institutions that are well capitalized will be charged a rate between 5 and 7 cents per $100 of deposits.
In addition, the FDIC imposes assessments to help pay off the $780 million in annual interest payments on the $8 billion Financing Corporation bonds issued in the late 1980s as part of the government rescue of the thrift industry. This assessment rate is adjusted quarterly and is set at 1.22 cents per $100 of deposits for the first quarter of 2007.
The FDIC may terminate its insurance of deposits if it finds that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.
Community Reinvestment Act. The Community Reinvestment Act requires that, in connection with examinations of financial institutions within their respective jurisdictions, the federal bank regulators shall evaluate the record of each financial institution in meeting the credit needs of its local community, including low and moderate-income neighborhoods. These facts are also considered in evaluating mergers, acquisitions and applications to open a branch or facility. Failure to adequately meet these criteria could impose additional requirements and limitations on the Banks. Additionally, the Banks must publicly disclose the terms of various Community Reinvestment Act-related agreements.
Allowance for Loan and Lease Losses. The Allowance for Loan and Lease Losses (the “ALLL”) represents one of the most significant estimates in the Bank’s financial statements and regulatory reports. Because of its significance, the Banks have developed systems by which they develop, maintain and document comprehensive, systematic and consistently applied processes for determining the amounts of the ALLL and the provision for loan and lease losses. The Interagency Policy Statement on the Allowance for Loan and Lease Losses, issued on December 13, 2006, encourages all banks to ensure controls are in place to consistently determine the ALLL in accordance with GAAP, the bank’s stated policies and procedures, management’s best judgment and relevant supervisory guidance. Consistent with supervisory guidance, the Banks maintain a prudent and conservative, but not excessive, ALLL, that is at a level appropriate to cover estimated credit losses on individually evaluated loans determined to be impaired as well as estimated credit losses inherent in the remainder of the loan and lease portfolio. The Banks’ estimates of credit losses reflect consideration of all significant factors that affect the collectibility of the portfolio as of the evaluation date. See “Management’s Discussion and Analysis - Critical Accounting Policies.”
Commercial Real Estate Lending. The Banks’ lending operations may be subject to enhanced scrutiny by federal banking regulators based on their concentrations of commercial real estate loans. On December 6, 2006, the federal banking regulators issued final guidance to remind financial institutions of the risk posed by commercial real estate (“CRE”) lending concentrations. CRE loans generally include land development, construction loans and loans secured by multifamily property, and nonfarm, nonresidential real property where the primary source of repayment is derived from rental income associated with the property. The guidance prescribes the following guidelines for its examiners to help identify institutions that are potentially exposed to significant CRE risk and may warrant greater supervisory scrutiny:
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total reported loans for construction, land development and other land represent 100% or more of the institutions total capital, or
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total commercial real estate loans represent 300% or more of the institution’s total capital, and the outstanding balance of the institution’s commercial real estate loan portfolio has increased by 50% or more during the prior 36 months.
Other Regulations. Interest and other charges collected or contracted for by the Banks are subject to state usury laws and federal laws concerning interest rates. The Banks’ loan operations are also subject to federal laws applicable to credit transactions, such as the:
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Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
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Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
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Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
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Fair Credit Reporting Act of 1978, as amended by the Fair and Accurate Credit Transactions Act, governing the use and provision of information to credit reporting agencies, certain identity theft protections, and certain credit and other disclosures;
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Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;
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Soldiers’ and Sailors’ Civil Relief Act of 1940, as amended by the Servicemembers’ Civil Relief Act, governing the repayment terms of, and property rights underlying, secured obligations of persons currently on active duty with the United States military;
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Talent Amendment in the 2007 Defense Authorization Act, establishing a 36% annual percentage rate ceiling, which includes a variety of charges including late fees, for consumer loans to military service members and their dependents; and
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rules and regulations of the various federal banking regulators charged with the responsibility of implementing these federal laws.
The Banks’ deposit operations are subject to federal laws applicable to depository accounts, such as the:
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Truth-In-Savings Act, requiring certain disclosures for consumer deposit accounts;
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Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;
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Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve to implement that act, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; and
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rules and regulations of the various federal banking regulators charged with the responsibility of implementing these federal laws.
Capital Adequacy
The Company and the Banks are required to comply with the capital adequacy standards established by the Federal Reserve, in the case of the Company, the FDIC, in the case of Upson and Peachtree, and the Office of the Comptroller of the Currency, in the case of FNB Polk. The Federal Reserve has established a risk-based and a leverage measure of capital adequacy for bank holding companies. The Banks are also subject to risk-based and leverage capital requirements adopted by their respective federal agency, both of which are substantially similar to those adopted by the Federal Reserve for bank holding companies.
The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance-sheet exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance-sheet items, such as letters of credit and unfunded loan commitments, are assigned to broad risk categories, each with appropriate risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance-sheet items.
The minimum guideline for the ratio of total capital to risk-weighted assets is 8%. Total capital consists of two components; Tier 1 Capital and Tier 2 Capital. Tier 1 Capital generally consists of common stockholders’ equity, minority interests in the equity accounts of consolidated subsidiaries, qualifying noncumulative perpetual preferred stock, and a limited amount of qualifying cumulative perpetual preferred stock, less goodwill and other specified intangible assets. Tier 1 Capital must equal at least 4% of risk-weighted assets. Tier 2 Capital generally consists of subordinated debt, other preferred stock and hybrid capital, and a limited amount of loan loss reserves. The total amount of Tier 2 Capital is limited to 100% of Tier 1 Capital.
In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum ratio of Tier 1 Capital to average assets, less goodwill and other specified intangible assets, of 3% for bank holding companies that meet specified criteria, including having the highest regulatory rating and implementing the Federal Reserve’s risk-based capital measure for market risk. All other bank holding companies generally are required to maintain a leverage ratio of at least 4%. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without reliance on intangible assets. The Federal Reserve considers the leverage ratio and other indicators of capital strength in evaluating proposals for expansion or new activities.
Failure to meet capital guidelines could subject a bank or bank holding company to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting brokered deposits and certain other restrictions on its business. As described above, significant additional restrictions can be imposed on FDIC-insured depository institutions that fail to meet applicable capital requirements. See “The Banks - Prompt Corrective Action” above.
See Note 14 in the “Notes to Consolidated Financial Statements” for the capital ratios of SouthCrest, Upson, FNB Polk and Peachtree.
Payment of Dividends
The Company is a legal entity separate and distinct from the Banks. The principal sources of the Company’s cash flow, including cash flow to pay dividends to its shareholders, are dividends that the Banks pay to their sole shareholder, the Company. Statutory and regulatory limitations apply to the Banks’ payment of dividends. If, in the opinion of the federal banking regulator, any of our Banks were engaged in or about to engage in an unsafe or unsound practice, the federal banking regulator could require, after notice and a hearing, that it stop or refrain from engaging in the questioned practice. The federal banking agencies have indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe and unsound banking practice. Under the Federal Deposit Insurance Corporation Improvement Act of 1991, a depository institution may not pay any dividend if payment would cause it to become undercapitalized or if it already is undercapitalized. Moreover, the federal agencies have issued policy statements that provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings. See “The Banks-Prompt Corrective Action.”
The Georgia Department of Banking and Finance also regulates Upson’s dividend payments and must approve dividend payments that would exceed 50% of Upson’s net income for the prior year. Our payment of dividends may also be affected or limited by other factors, such as the requirement to maintain adequate capital above regulatory guidelines.
The Alabama State Banking Department also regulates Peachtree’s dividend payments and must approve dividend payments that would exceed 50% of Peachtree’s net income for the prior year. Our payment of dividends may also be affected or limited by other factors, such as the requirement to maintain adequate capital above regulatory guidelines. Under Alabama law, a bank may not pay a dividend in excess of 90% of its net earnings until the bank’s surplus is equal to at least 20% of its capital. Peachtree is also required by Alabama law to obtain the prior approval of the Alabama State Banking Department for its payment of dividends if the total of all dividends declared by Peachtree in any calendar year will exceed the total of (1) Peachtree’s net earnings (as defined by statute) for that year, plus (2) its retained net earnings for the proceeding two years, less any required transfers to surplus. In addition, no dividends may be paid from Peachtree’s surplus without prior written approval of the Superintendent, and Peachtree may not pay any dividend that would cause its Tier 1 Capital ratio to fall below 8%.
FNB Polk is required by federal law to obtain prior approval of the OCC for payments of dividends if the total of all dividends declared by the Bank in any year will exceed (1) the total of the FNB Polk’s net profits for that year, plus (2) the FNB Polk’s retained net profits of the preceding two years, less any required transfers to surplus.
The payment of dividends by the Company and the Bank may also be affected by other factors, such as the requirement to maintain adequate capital above regulatory guidelines. At December 31, 2006, the Banks could each pay cash dividends without prior regulatory approval, subject to the limitations described herein.
Restrictions on Transactions with Affiliates
The Company and the Banks are subject to the provisions of Section 23A of the Federal Reserve Act. Section 23A places limits on the amount of:
·
a bank’s loans or extensions of credit to affiliates;
·
a bank’s investment in affiliates;
·
assets a bank may purchase from affiliates, except for real and personal property exempted by the Federal Reserve;
·
loans or extensions of credit made by a bank to third parties collateralized by the securities or obligations of affiliates; and
·
a bank’s guarantee, acceptance or letter of credit issued on behalf of an affiliate.
The total amount of the above transactions is limited in amount, as to any one affiliate, to 10% of a bank’s capital and surplus and, as to all affiliates combined, to 20% of a bank’s capital and surplus. In addition to the limitation on the amount of these transactions, each of the above transactions must also meet specified collateral requirements. The Banks must also comply with other provisions designed to avoid the taking of low-quality assets.
The Company and the Banks are also subject to the provisions of Section 23B of the Federal Reserve Act which, among other things, prohibit an institution from engaging in the above transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to the institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.
The Banks are also subject to restrictions on extensions of credit to its executive officers, directors, principal shareholders and their related interests. These extensions of credit (1) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties, and (2) must not involve more than the normal risk of repayment or present other unfavorable features.
Privacy
Financial institutions are required to disclose their policies for collecting and protecting confidential information. Customers generally may prevent financial institutions from sharing nonpublic personal financial information with nonaffiliated third parties except under narrow circumstances, such as the processing of transactions requested by the consumer or when the financial institution is jointly sponsoring a product or service with a nonaffiliated third party. Additionally, financial institutions generally may not disclose consumer account numbers to any nonaffiliated third party for use in telemarketing, direct mail marketing or other marketing to consumers.
Anti-Terrorism and Money Laundering Legislation
The Banks are subject to the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”), the Bank Secrecy Act, and rules and regulations of the Office of Foreign Assets Control. These statutes and related rules and regulations impose requirements and limitations on specified financial transactions and account relationships, intended to guard against money laundering and terrorism financing. The Banks have established a customer identification program pursuant to Section 326 of the USA PATRIOT Act and the Bank Secrecy Act, and otherwise have implemented policies and procedures to comply with the foregoing rules.
Federal Deposit Insurance Reform
On February 8, 2006, President Bush signed the Federal Deposit Insurance Reform Act of 2005 (the “FDIRA”). Among other things, FDIRA changes the federal deposit insurance system by:
·
raising the coverage level for qualifying retirement accounts to $250,000, subject to future indexing;
·
the FDIC and the National Credit Union Administration are authorized to index deposit insurance coverage for inflation, for standard accounts and qualifying retirement accounts, every five years beginning April 1, 2007;
·
prohibiting undercapitalized financial institutions from accepting employee benefit plan deposits;
·
merging the Bank Insurance Fund and Savings Association Insurance Fund into a new Deposit Insurance Fund (the DIF); and
·
providing credits to financial institutions that capitalized the FDIC prior to 1996 to offset future assessment premiums.
FDIRA also authorizes the FDIC to revise the current risk-based assessment system, subject to notice and comment and caps the amount of the DIF at 1.50% of domestic deposits. The FDIC must issue cash dividends, awarded on a historical basis, for the amount of the DIF over the 1.50% ratio. Additionally, if the DIF exceeds 1.35% of domestic deposits at year-end, the FDIC must issue cash dividends, awarded on a historical basis, for half of the amount of the excess.
Financial Services Regulatory Relief Act
President Bush signed the Financial Services Regulatory Relief Act of 2006 (“Regulatory Relief Act”) into law on October 13, 2006. The Regulatory Relief Act repeals certain reporting requirements regarding loans to bank executive officers and principal shareholders. These changes have eliminated the statutory requirements for (1) the report to the Board of Directors when an executive officer becomes indebted to another institution in an aggregate amount that is greater than the officer would receive from his or her own institution; (2) the report filed by the institution that listed all credits made to executive officers since the previous report of condition; and (3) the report to the Board of Directors that is required when an executive officer or a principal shareholder become indebted to a correspondent bank.
The Regulatory Relief Act increased the size of a bank eligible for 18-month (rather than annual) examinations from $250 million to $500 million. The Regulatory Relief Act amends the privacy rules of Gramm-Leach-Bliley to clarify that CPA’s are not required to notify their customers of privacy and disclosure policies as long as they are subject to state law restraints on disclosure of non-public personal information without customer approval. Finally, the Regulatory Relief Act requires that the federal banking regulators develop model privacy notice forms, and banks adopting the model forms will be afforded a regulatory safe harbor under the disclosure requirements of Gramm-Leach-Bliley.
Proposed Legislation and Regulatory Action
New regulations and statutes are regularly proposed that contain wide-ranging changes to the structures, regulations and competitive relationships of financial institutions operating or doing business in the United States. We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our business may be affected by any new regulation or statute.
Effect of Governmental Monetary Policies
Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve affect the levels of bank loans, investments and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to member banks and its influence over reserve requirements to which member banks are subject. We cannot predict the nature or impact of future changes in monetary and fiscal policies.
ITEM 1A.
ITEM 1A.
RISK FACTORS
An investment in our common stock involves risks. If any of the following risks or other risks, which have not been identified or which we may believe are immaterial or unlikely, actually occur, our business, financial condition and results of operations could be harmed. In such a case, the trading price of our common stock could decline, and you may lose all or part of your investment. The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements.
Risks Related to Our Business.
We could suffer loan losses from a decline in credit quality.
We could sustain losses if borrowers, guarantors and related parties fail to perform in accordance with the terms of their loans. We have adopted underwriting and credit monitoring procedures and policies, including the establishment and review of the allowance for credit losses that we believe are appropriate to minimize this risk by assessing the likelihood of nonperformance, tracking loan performance and diversifying our credit portfolio. These policies and procedures, however, may not prevent unexpected losses that could materially adversely affect our results of operations.
Our profitability is vulnerable to interest rate fluctuations.
Our profitability depends substantially upon our net interest income. Net interest income is the difference between the interest earned on assets, such as loans and investment securities, and the interest paid for liabilities, such as savings and time deposits and out-of-market certificates of deposit. Market interest rates for loans, investments and deposits are highly sensitive to many factors beyond our control. Recently, interest rates have generally increased due to changing market conditions, policies of various government and regulatory authorities and competitive pricing pressures. While our interest rate spreads have generally increased over the past few years, we cannot predict whether we will be able to maintain these rate spreads or whether they will narrow in the future. A narrowing of interest rate spreads, if significant, could adversely affect our financial condition and results of operations. In addition, we cannot predict whether interest rates will continue to remain at present levels. Changes in interest rates may cause significant changes, up or down, in our net interest income. Depending on our portfolio of loans and investments, our results of operations may be adversely affected by changes in interest rates.
Opening new offices may not result in increased assets or revenues for us.
The investment necessary for branch expansion may negatively impact our efficiency ratio. There is a risk that we will be unable to manage our growth, as the process of opening new branches may divert our time and resources. There is also risk that we may fail to open any additional branches, and a risk that, if we do open these branches, they may not be profitable which would negatively impact our results of operations.
Our business strategy includes the continuation of growth plans, and our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively.
We intend to continue pursuing a growth strategy for our business. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in growth stages of development. We cannot assure you we will be able to expand our market presence in our existing markets or successfully enter new markets or that any such expansion will not adversely affect our results of operations. Failure to manage our growth effectively could have a material adverse effect on our business, financial condition, results of operations, or future prospects, and could adversely affect our ability to successfully implement our business strategy. Also, if our growth occurs more slowly than anticipated or declines, our results of operations could be materially adversely affected.
Our ability to grow successfully will depend on a variety of factors including the continued availability of desirable business opportunities, the competitive responses from other financial institutions in our market areas and our ability to manage our growth. While we believe we have the management resources and internal systems in place to manage our future growth, there can be no assurance that growth opportunities will be available or growth will be managed successfully.
Our plans for future expansion depend, in some instances, on factors beyond our control, and an unsuccessful attempt to achieve growth could have a material adverse effect on our business, financial condition, results of operations and future prospects.
We expect to continue to engage in new branch expansion in the future. We may also seek to acquire other financial institutions, or parts of those institutions. Expansion involves a number of risks, including:
·
the time and costs of evaluating new markets, hiring experienced local management and opening new offices;
·
the time lags between these activities and the generation of sufficient assets and deposits to support the costs of the expansion;
·
we may not be able to finance an acquisition without diluting the interests of our existing shareholders;
·
in the event of an acquisition, costs or difficulties related to the integration of our businesses may be greater than expected, and we may experience deposit attrition, customer loss or revenue loss that is greater than expected
·
the diversion of our management’s attention to the negotiation of a transaction may detract from their business productivity;
·
we may enter into new markets where we lack experience; and
·
we may introduce new products and services with which we have no prior experience into our business.
If we fail to retain our key employees, our growth and profitability could be adversely affected.
Our success is, and is expected to remain, highly dependent on our Chairman, Daniel Brinks, and President and CEO, Larry Kuglar. This is particularly true because, as a community bank, we depend on our management team’s ties to the community to generate business for us. Our growth will continue to place significant demands on our management, and the loss of any such person’s services may have an adverse effect upon our growth and profitability.
An economic downturn, especially one affecting our market areas, could adversely affect our financial condition, results of operations or cash flows.
Our success depends upon the growth in population, income levels, deposits and housing starts in our primary market areas. If the communities in which we operate do not grow, or if prevailing economic conditions locally or nationally are unfavorable, our business may not succeed. Unpredictable economic conditions may have an adverse effect on the quality of our loan portfolio and our financial performance. Economic recession over a prolonged period or other economic problems in our market areas could have a material adverse impact on the quality of the loan portfolio and the demand for our products and services. Future adverse changes in the economies in our market areas may have a material adverse effect on our financial condition, results of operations or cash flows. Further, the banking industry in Georgia is affected by general economic conditions such as inflation, recession, unemployment and other factors beyond our control. As a community bank, we are less able to spread the risk of unfavorable local economic conditions than larger or more regional banks. Moreover, we cannot give any assurance that we will benefit from any market growth or favorable economic conditions in our primary market areas even if they do occur.
If the value of real estate in our core market were to decline materially, a significant portion of our loan portfolio could become under-collateralized, which could have a material adverse effect on our business, financial condition and results of operations.
With most of our loans concentrated in our market area, a decline in local economic conditions could adversely affect the values of our real estate collateral. Consequently, 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 geographically diverse.
In addition to considering the financial strength and cash flow characteristics of borrowers, we often secure loans with real estate collateral. At December 31, 2006, approximately 80% of our loans had real estate as a primary or secondary component of collateral. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. If we are required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, our earnings and capital could be adversely affected.
Our recent results may not be indicative of our future results, and may not provide guidance to assess the risk of an investment in our common stock.
We may not be able to sustain our historical rate of growth or may not even be able to grow our business at all. In addition, our recent and rapid growth may distort some of our historical financial ratios and statistics. In the future, we may not have the benefit of several recently favorable factors, such as a generally increasing interest rate environment, a strong residential and commercial mortgage market or the ability to find suitable expansion opportunities. Various factors, such as economic conditions, regulatory and legislative considerations and competition, may also impede or prohibit our ability to expand our market presence. If we experience a significant decrease in our historical rate of growth, our results of operations and financial condition may be adversely affected due to a high percentage of our operating costs being fixed expenses.
Competition from other financial institutions may adversely affect our profitability.
The banking business is highly competitive, and we experience strong competition from many other financial institutions. We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds and other financial institutions, which operate in our primary market areas and elsewhere. Presently 28 banks serve our market area with a total of 84 branches.
We compete with these institutions both in attracting deposits and in making loans. In addition, we have to attract our customer base from other existing financial institutions and from new residents. Many of our competitors are well-established and much larger financial institutions. While we believe we can and do successfully compete with these other financial institutions in our markets, we may face a competitive disadvantage as a result of our smaller size and lack of geographic diversification.
Although we compete by concentrating our marketing efforts in our primary market area with local advertisements, personal contacts and greater flexibility in working with local customers, we can give no assurance that this strategy will be successful.
As a community bank, we have different lending risks than larger banks.
We provide services to our local communities. Our ability to diversify our economic risks is limited by our own local markets and economies. We lend primarily to small to medium-sized businesses, and, to a lesser extent, individuals which may expose us to greater lending risks than those of banks lending to larger, better-capitalized businesses with longer operating histories.
We manage our credit exposure through careful monitoring of loan applicants and loan concentrations in particular industries, and through loan approval and review procedures. We have established an evaluation process designed to determine the adequacy of our allowance for loan losses. While this evaluation process uses historical and other objective information, the classification of loans and the establishment of loan losses is an estimate based on experience, judgment and expectations regarding our borrowers, the economies in which we and our borrowers operate, as well as the judgment of our regulators. We cannot assure you that our loan loss reserves will be sufficient to absorb future loan losses or prevent a material adverse effect on our business, financial condition, or results of operations.
Our directors and executive officers own a significant portion of our common stock and can influence stockholder decisions.
Our directors and executive officers, as a group, beneficially owned approximately 18% of our fully diluted outstanding common stock as of December 31, 2006. As a result of their ownership, the directors and executive officers have the ability, if they voted their shares in concert, to influence the outcome of all matters submitted to our stockholders for approval, including the election of directors.
Risks Related to our Industry
Our ability to pay dividends is limited and we may be unable to pay future dividends. As a result, capital appreciation, if any, of our common stock may be your sole opportunity for gains on your investment for the foreseeable future.
We cannot make assurances that we will have the ability to continuously pay dividends in the future. Any future determination relating to dividend policy will be made at the discretion of our Board of Directors and will depend on a number of factors, including our future earnings, capital requirements, financial condition, future prospects, regulatory restrictions and other factors that our Board of Directors may deem relevant. The holders of our common stock are entitled to receive dividends when, and if declared by our Board of Directors out of funds legally available for that purpose. As part of our consideration to pay cash dividends, we intend to retain adequate funds from future earnings to support the development and growth of our business. In addition, our ability to pay dividends is restricted by federal policies and regulations. It is the policy of the Federal Reserve that bank holding companies should pay cash dividends on common stock only out of net income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. Further, our principal source of funds to pay dividends is cash dividends that we receive from our subsidiary banks.
Environmental liability associated with lending activities could result in losses.
In the course of our business, we may foreclose on and take title to properties securing our loans. If hazardous substances are discovered on any of these properties, we may be liable to governmental entities or third parties for the costs of remediation of the hazard, as well as for personal injury and property damage. Many environmental laws can impose liability regardless of whether we knew of, or were responsible for, the contamination. In addition, if we arrange for the disposal of hazardous or toxic substances at another site, we may be liable for the costs of cleaning up and removing those substances from the site, even if we neither own nor operate the disposal site. Environmental laws may require us to incur substantial expenses and may materially limit the use of properties that we acquire through foreclosure, reduce their value or limit our ability to sell them in the event of a default on the loans they secure. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability.
We are subject to extensive regulation that could limit or restrict our activities and impose financial requirements or limitations on the conduct of our business, which limitations or restrictions could adversely affect our profitability.
As a bank holding company, we are primarily regulated by the Federal Reserve. Our subsidiary banks are regulated by the FDIC, the Georgia Department of Banking and Finance, the Alabama State Banking Department and the OCC. Our compliance with these regulations is costly and may limit our growth and restrict certain of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits and locations of offices. We are also subject to capital requirements of our regulators.
The laws and regulations applicable to the banking industry could change at any time, and we cannot predict the effects of these changes on our business and profitability. Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies, our cost of compliance could adversely affect our ability to operate profitably.
The Sarbanes-Oxley Act of 2002, the related rules and regulations promulgated by the SEC that currently apply to us and the related exchange rules and regulations, have increased the scope, complexity and cost of corporate governance, reporting and disclosure practices. As a result, we may experience greater compliance costs.
Changes in monetary policies may have an adverse effect on our business, financial condition and results of operations.
Our financial condition and results of operations are affected by credit policies of monetary authorities, particularly the Federal Reserve. Actions by monetary and fiscal authorities, including the Federal Reserve, could have an adverse effect on our deposit levels, loan demand or business and earnings.
ITEM 1B.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
Not Applicable.
ITEM 2.
ITEM 2.
DESCRIPTION OF PROPERTIES
SouthCrest maintains its executive offices in leased office space at 600 North Glynn Street, Suite B, Fayetteville, Georgia.
Bank of Upson’s main banking office is located at 108 South Church Street, Thomaston, Georgia 30286. In 2005, Upson began rebuilding this facility, enlarging it from approximately 16,000 square feet to 26,000 square feet. The cost of the project, including the cost of furnishings, is estimated to be between $5.4 million and $5.6 million. The first phase was completed in the third quarter of 2006 at a cost of approximately $3.7 million. The second phase is expected to be completed in the first quarter of 2007. Bank of Upson’s operations center is located at 210A West Main Street, Thomaston, Georgia 30286. Bank of Upson also owns banking offices at the following locations: (i) 943 North Church Street, Thomaston, Georgia 30286, (ii) 406 West Main Street, Manchester, Georgia 31816, (iii) 121 Broad Street, Warm Springs, Georgia 31830, and (iv) 14 North Main Street, Luthersville, Georgia 30251. Bank of Upson leases a branch at 600 North Glynn Street, Suite B, Fayetteville, Georgia 30214. Bank of Upson’s offices in Manchester, Warm Springs, and Luthersville, Georgia are located within Meriwether County, Georgia and do business as Meriwether Bank & Trust. The office in Fayetteville, Georgia is located in Fayette County and does business as SouthCrest Bank. Bank of Upson owns 16 ATMs, which are located within Upson, Fayette, and Meriwether Counties.
The First National Bank of Polk County’s main office is at 967 North Main Street, Cedartown, Georgia. The main office was built in 1991 and occupies 26,500 square feet. FNB Polk also owns and operates a full-service downtown branch at 117 West Avenue, Cedartown, Georgia. The branch occupies 10,000 square feet. In 1973, FNB Polk opened a full-service Rockmart branch at 131 West Elm Street, Rockmart, Georgia. The branch has been enlarged from 4,200 square feet to approximately 9,200 square feet in project completed in 2005 at a cost of $895,000.
Peachtree Bank’s main office is at 9411 Highway 22, Maplesville, Alabama. The main office was built in 1961 and occupies 4,200 square feet. Peachtree also owns and operates a full service branch located at 1501 North 17th Street in Clanton, Alabama. This branch was built in 1994 and occupies 3,500 square feet.
ITEM 3.
ITEM 3.
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a party or of which any of its properties are subject, nor are there material proceedings known to the Company to be contemplated by any governmental authority. Additionally, the Company is unaware of any material proceedings, pending or contemplated, in which any existing or proposed director, officer or affiliate, or any principal security holder of the Company or any associate of any of the foregoing, is a party or has an interest adverse to the Company.
ITEM 4.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year ended December 31, 2006 to a vote of shareholders of SouthCrest Financial Group, Inc., through the solicitation of proxies or otherwise.
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Prior to the merger between Upson Bancshares, Inc. and First Polk Bankshares, Inc., there were occasional transactions in Upson common stock as a result of repurchases by Upson and/or privately negotiated sales by third parties. With respect to third-party sales, SouthCrest has not maintained a complete written record of the sale prices of trades of their respective common stock.
In December, 2004 our common stock began trading in the over-the-counter market under the symbol “SCSG.” The development of an active secondary market requires the existence of an adequate number of willing buyers and sellers. Historically, the reported trading volume would indicate a lack of activity in the secondary market for the Company’s common stock. The lack of activity in the secondary market for the Company’s common stock may materially impact a shareholder’s ability to promptly sell Company common stock at a price acceptable to the selling shareholder.
The following table sets forth the high and low bid information for transactions in our common stock for the previous two years on the Nasdaq Over-the-Counter Bulletin Board. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
On March 1, 2007, the Company had approximately 630 shareholders of record of our common stock.
The Company generally declares a dividend on the first business day of each quarter, to be paid on the last business day of that month, with the record date normally being two weeks prior to the payment date. The table below shows the quarterly dividends paid during 2006 and 2005.
The principal source of the Company’s cash flow, including cash flow to pay dividends to its shareholders, is dividends that the Bank pays to the Company as its sole shareholder. Statutory and regulatory limitations apply to the Banks’ payment of dividends to the Company, as well as to the Company’s payment of dividends to its shareholders. For a complete discussion of restrictions on dividends, see “Part I-Item 1. Description of Business-Supervision and Regulation-Payment of Dividends.”
ITEM 6.
ITEM 6.
SELECTED FINANCIAL DATA
The response to this item is included in the section of the same title contained in the Company’s 2006 Annual Report to Shareholders and is incorporated herein by reference. See Exhibit 13.1.
ITEM 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS
The response to this item is included in the section of the same title contained in the Company’s 2006 Annual Report to Shareholders and is incorporated herein by reference. See Exhibit 13.1.
ITEM 7A.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The response to this item is included in the section titled “Management’s Discussion and Analysis - Financial Condition - Liquidity and Interest Rate Sensitivity” contained in the Company’s 2006 Annual Report to Shareholders and is incorporated herein by reference. See Exhibit 13.1.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS
The response to this item is included in the section of the same title contained in the Company’s 2006 Annual Report to Shareholders and is incorporated herein by reference. See Exhibit 13.2.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
SouthCrest Financial Group, Inc.
Thomaston, Georgia
We have audited the accompanying consolidated balance sheets of SouthCrest Financial Group, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SouthCrest Financial Group, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Atlanta, Georgia
February 18, 2005
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES
As of the end of the period covered by this Annual Report on Form 10-K, our principal executive officer and principal financial officer have evaluated the effectiveness of our “disclosure controls and procedures” (“Disclosure Controls”). Disclosure Controls, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this Annual Report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure Controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Our management, including the CEO and CFO, does not expect that our Disclosure Controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Based upon their controls evaluation, our CEO and CFO have concluded that our Disclosure Controls are effective at a reasonable assurance level.
There have been no changes in our internal controls over financial reporting during our fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B.
OTHER INFORMATION
Not Applicable.
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The response to this Item is partially included in the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held May 10, 2007 under the headings “Proposal One: Election of Directors,” “Executive Officers,” and “Section 16(a) Beneficial Ownership Reporting Compliance” and is incorporated herein by reference.
The Company has adopted a code of ethics that applies to its principal executive, financial and accounting officers. A copy of the code of ethics may be obtained, without charge, upon written request addressed to SouthCrest Financial Group, Inc., 600 North Glynn Street, Suite B, Fayetteville, Georgia 30214, Attention: Chief Financial Officer. The request may be delivered by letter to the address set forth above or by fax to the attention of the Company’s Chief Financial Officer at (770) 461-2701.
ITEM 11.
ITEM 11.
EXECUTIVE COMPENSATION
The response to this Item is included in the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held May 10, 2007 under the headings “Proposal One: Election of Directors - Director Compensation” and “Executive Compensation” and is incorporated herein by reference.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The response to this Item is partially included in the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held May 10, 2007 under the heading “Management Stock Ownership” and is incorporated herein by reference.
The table below sets forth information regarding shares of the Company’s common stock authorized for issuance under the 2005 Stock Incentive Plan as of December 31, 2006. The 2005 Stock Incentive Plan was approved by the Shareholders on May 12, 2005.
Number of securities to be issued upon exercise of outstanding options
Weighted-average exercise price of
outstanding options
Number of shares remaining available for future issuance under the Plan (excludes
outstanding options)
Equity compensation plans approved by security holders
191,400
$23.44
357,600
Equity compensation plans not approved by security holders
-
-
-
Total
191,400
$23.44
357,600
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The response to this Item is included in the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held May 10, 2007 under the headings “Proposal One: Election of Directors - Director Independence” and “Related Party Transactions” and is incorporated herein by reference.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The response to this Item is included in the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held May 10, 2007 under the heading “Audit Committee Matters” and is incorporated herein by reference.
PART IV
ITEM 15.
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Number*
Exhibit
3.1
Articles of Incorporation1
3.2
Amended and Restated Bylaws9
3.3
Amendment to Bylaws2
4.1
See Exhibits 3.1, and 3.2 for provisions of the Articles of Incorporation and Bylaws defining rights of holders of the Common Stock
10.1
Lease Contract, dated September 14, 1993, between Truitt A. Mallory and Bank of Upson9
10.2
Agreement and Plan of Merger with Maplesville Bancorp3
10.3
Agreement and Plan of Share Exchange with Bank of Chickamauga4
10.4*
Employment Agreement with Daniel W. Brinks5
10.5*
Salary Continuation Agreement with Daniel W. Brinks
10.6*
Joint Beneficiary Designation Agreement with Daniel W. Brinks
10.7*
Employment Agreement with Larry T. Kuglar13
10.8*
Salary Continuation Agreement with Larry T. Kuglar
10.9*
Joint Beneficiary Designation Agreement with Larry T. Kuglar
10.10*
Employment Agreement with Douglas J. Hertha6
10.11*
Salary Continuation Agreement with Douglas J. Hertha
10.12*
Joint Beneficiary Designation Agreement with Douglas J. Hertha
10.13*
Employment Agreement with Harvey N. Clapp7
10.14*
Executive Salary Continuation Agreement with Harvey N. Clapp15
*
Indicates a compensatory plan or contract.
Incorporated by reference to the Registration Statement on Form S-4 (Registration No. 333-112845), as filed with the SEC on February 13, 2004.
Incorporated by reference to the Current Report on Form 8-K dated October 31, 2006.
Incorporated by reference to the Current Report on Form 8-K dated August 11, 2006.
Incorporated by reference to the Current Report on Form 8-K dated February 23, 2007.
Incorporated by reference to the Current Report on Form 8-K dated September 30, 2004.
Incorporated by reference to the Current Report on Form 8-K dated February 15, 2005.
Incorporated by reference to the Current Report on Form 8-K dated October 31, 2006.
Number*
Exhibit
10.15*
SouthCrest Financial Group, Inc. 2005 Stock Incentive Plan8
10.16*
Form of Incentive Stock Option under the SouthCrest Financial Group, Inc. Stock Incentive Plan
10.17*
Form of Nonqualified Stock Option under the SouthCrest Financial Group, Inc. 2005 Stock Incentive Plan
13.1
Excerpts from the SouthCrest Financial Group, Inc. 2006 Annual Report to Shareholders - Management’s Discussion and Analysis
13.2
Excerpts from the SouthCrest Financial Group, Inc. 2006 Annual Report to Shareholders - Consolidated Financial Statements
21.1
Subsidiaries of the Registrant
23.1
Consent of Dixon Hughes PLLC
23.2
Consent of Mauldin & Jenkins, LLC
24.1
Power of Attorney (appears on the signature pages to the Annual Report on Form 10-K)
31.1
Certification of Principal Executive Officer pursuant to Rule 15d-14(a) of the Exchange Act
31.2
Certification of Principal Financial Officer pursuant to Rule 15d-14(a) of the Exchange Act
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
Incorporated by reference to the Annual Report on Form 10-KSB for the year ended December 31, 2004.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears on the signature page to this Report constitutes and appoints Daniel W. Brinks and Larry T. Kuglar, his true and lawful attorneys-in-fact and agents, 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 Report, and to file the same, with all exhibits hereto, and other documents in connection herewith with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as they might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or their 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 below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Daniel W. Brinks
Daniel W. Brinks
Chairman and Chief Operating Officer
April 2, 2007
/s/ Larry T. Kuglar
Larry T. Kuglar
Director, President and Chief Executive Officer
(Principal Executive Officer)
April 2, 2007
/s/ Douglas J. Hertha
Douglas J. Hertha
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
April 2, 2007
Signature
Title
Date
/s/ Richard T. Bridges
Richard T. Bridges
Director
April 2, 2007
/s/ Harvey N. Clapp
Harvey N. Clapp
Director
April 2, 2007
/s/ Joan B. Cravey
Joan B. Cravey
Director
April 2, 2007
/s/ Zack D. Cravey, Jr.
Zack D. Cravey, Jr.
Director
April 2, 2007
/s/ Dr. Warren Patrick
Dr. Warren Patrick
Director
April 2, 2007
/s/ Michael D. McRae
Michael D. McRae
Director
April 2, 2007
/s/ Harold W. Wyatt, Jr.
Harold W. Wyatt, Jr.
Director
April 2, 2007
EXHIBIT INDEX
Number*
Exhibit
3.1
Articles of Incorporation1
3.2
Amended and Restated Bylaws1
3.3
Amendment to Bylaws2
4.1
See Exhibits 3.1, and 3.2 for provisions of the Articles of Incorporation and Bylaws defining rights of holders of the Common Stock
10.1
Lease Contract, dated September 14, 1993, between Truitt A. Mallory and Bank of Upson1
10.2
Agreement and Plan of Merger with Maplesville Bancorp3
10.3
Agreement and Plan of Share Exchange with Bank of Chickamauga4
10.4*
Employment Agreement with Daniel W. Brinks5
10.5*
Salary Continuation Agreement with Daniel W. Brinks
10.6*
Joint Beneficiary Designation Agreement with Daniel W. Brinks
10.7*
Employment Agreement with Larry T. Kuglar5
10.8*
Salary Continuation Agreement with Larry T. Kuglar
10.9*
Joint Beneficiary Designation Agreement with Larry T. Kuglar
10.10*
Employment Agreement with Douglas J. Hertha6
10.11*
Salary Continuation Agreement with Douglas J. Hertha
10.12*
Joint Beneficiary Designation Agreement with Douglas J. Hertha
10.13*
Employment Agreement with Harvey N. Clapp7
10.14*
Executive Salary Continuation Agreement with Harvey N. Clapp7
10.15*
SouthCrest Financial Group, Inc. 2005 Stock Incentive Plan8
10.16*
Form of Incentive Stock Option under the SouthCrest Financial Group, Inc. Stock Incentive Plan
10.17*
Form of Nonqualified Stock Option under the SouthCrest Financial Group, Inc. 2005 Stock Incentive Plan
13.1
Excerpts from the SouthCrest Financial Group, Inc. 2006 Annual Report to Shareholders - Management’s Discussion and Analysis
13.2
Excerpts from the SouthCrest Financial Group, Inc. 2006 Annual Report to Shareholders - Consolidated Financial Statements
21.1
Subsidiaries of the Registrant
*
Indicates a compensatory plan or contract.
Incorporated by reference to the Registration Statement on Form S-4 (Registration No. 333-112845), as filed with the SEC on February 13, 2004.
Incorporated by reference to the Current Report on Form 8-K dated October 31, 2006.
Incorporated by reference to the Current Report on Form 8-K dated August 11, 2006.
Incorporated by reference to the Current Report on Form 8-K dated February 23, 2007.
Incorporated by reference to the Current Report on Form 8-K dated September 30, 2004.
Incorporated by reference to the Current Report on Form 8-K dated February 15, 2005.
Incorporated by reference to the Current Report on Form 8-K dated October 31, 2006.
Incorporated by reference to the Annual Report on Form 10-KSB for the year ended December 31, 2004.
Number*
Exhibit
23.1
Consent of Dixon Hughes PLLC
23.2
Consent of Mauldin & Jenkins, LLC
24.1
Power of Attorney (appears on the signature pages to the Annual Report on Form 10-K)
31.1
Certification of Principal Executive Officer pursuant to Rule 15d-14(a) of the Exchange Act
31.2
Certification of Principal Financial Officer pursuant to Rule 15d-14(a) of the Exchange Act
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of