Community Capital Bancshares 10-Q 2007
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Commission File Number: 000-25345
Community Capital Bancshares, Inc.
(Exact name of registrant as specified in its charter)
P.O. Drawer 71269, Albany, Georgia 31708
(Address of principal executive offices)
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act (check one).
Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of August 8, 2007: 3,057,279 shares
Community Capital Bancshares, Inc.
Consolidated Balance Sheets
(Dollars in thousands)
Community Capital Bancshares, Inc.
Consolidated Statements of Income (unaudited)
For the three and six months ended June 30, 2007 and 2006
(Dollars in thousands, except per share data)
Community Capital Bancshares, Inc.
Consolidated Statements of Comprehensive Income (unaudited)
Three and six months ended June 30, 2007 and 2006
(Dollars in thousands)
Community Capital Bancshares, Inc.
Consolidated Statements of Cash Flows (unaudited)
Six Months ended June 30, 2007 and 2006
(Dollars in thousands)
Community Capital Bancshares, Inc.
Notes to Financial Statements
Note 1. Organization and Summary of Significant Accounting Policies
Nature of Business
Community Capital Bancshares, Inc. (the “Company”) is a multi-bank holding company whose principal activity is the ownership and management of its wholly-owned bank subsidiaries, Albany Bank and Trust, N.A, and AB & T National Bank, N. A., collectively referred to as “the Banks.” Albany Bank and Trust’s main office is located in Albany, Dougherty County, Georgia, with one additional full service branch in Albany and one full service branch in Leesburg, Georgia. AB&T National Bank’s main office is located in Dothan, Houston County, Alabama and has a full service branch located in Auburn, Alabama. The Banks provide a full range of banking services to individual and corporate customers in their primary market areas.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany transactions and balances have been eliminated in consolidation.
In preparing the consolidated financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses, the valuation of foreclosed real estate, goodwill, intangible assets, deferred tax assets and contingent assets and liabilities. The determination of the adequacy of the allowance for loan losses is based on estimates that are susceptible to significant changes in the economic environment and market conditions. In connection with the determination of the estimated losses on loans and the valuation of foreclosed real estate, management obtains independent appraisals for significant collateral. Intangible assets, primarily goodwill and core deposit premiums, are evaluated annually for impairment.
The interim financial statements included herein are unaudited but reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the interim period presented. All such adjustments are of a normal recurring nature. The results of operations for the periods ended June 30, 2007 and 2006 are not necessarily indicative of the results of a full year’s operations, and should be read in conjunction with the Company’s annual report for the year ended December 31, 2006 as filed on Form 10-K.
The accounting principles followed by the Company and the methods of applying these principles conform with accounting principles generally accepted in the United States of America (GAAP) and with general practices within the banking industry.
Deferred income tax assets and liabilities are determined using the balance sheet method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax basis of the various balance sheet assets and liabilities and gives current recognition to changes in the tax rates and laws.
The Company and its subsidiaries file a consolidated income tax return. Each entity provides for income taxes based on its contribution to the income taxes (benefits) of the consolidated group.
Stock Compensation Plans
At June 30, 2007, the Company had two fixed stock option plans under which it had granted options to its employees and directors to purchase common stock at the fair market price on the date of the grant. Both plans provide for “incentive stock options” and “non-qualified stock options”. The incentive stock options are intended to qualify under Section 442 of the Internal Revenue Code for favorable tax treatment.
On March 11, 1999, the Company’s shareholders approved the 1998 Stock Incentive Plan under which options to purchase 303,574 shares of its common stock may be granted to directors, officers and employees. Both incentive stock options and nonqualified stock options may be granted under the plan. At June 30, 2007, there were 103,647 shares available under the plan.
On April 24, 2000, the Board of Directors adopted the 2000 Outside Directors Stock Option Plan under which nonqualified stock options to purchase up to 21,429 shares of the Company’s common stock may be granted to directors who are not employees of the Company or any of its affiliates and to the Chairman of the Board of Directors, regardless of whether he is an employee of the Company. The plan provides for an annual grant of a nonqualified stock option to purchase 142 shares of the Company’s common stock to each existing non-employee director and a nonqualified stock option to purchase 285 shares of the Company’s common stock to the Chairman of the Board of Directors as of the date of each annual shareholders’ meeting. Options granted pursuant to this plan are generally nontransferable except by will or the laws of descent and distribution unless otherwise permitted by the Board of Directors. These options are fully vested and exercisable immediately, subject to any restriction imposed by the primary federal regulator of the Company. The exercise price of these options must be equal to the fair market value of the common stock on the date the option is granted. The term of the options may not exceed ten years from the date of grant. At June 30, 2007 there were 4,381 shares available for issuance under this plan.
The Company has issued non-qualified stock options to its Chairman and members of senior management in previous years totaling 71,428 shares. Additionally 302,420 warrants were issued to founding directors of the Company. These options and warrants are described in more detail in the Annual Report on Form 10-K for the year ended December 31, 2006.
As of June 30, 2007 there was $214,000 in unrecognized compensation expense which will be recognized over 2.5 years.
In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS 157, Fair Value Measurements. The standard provides guidance for using fair value to measure assets and liabilities. It defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and expands disclosures about fair value measurement. Under the standard, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. It clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, the standard establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. Statement 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact the adoption of this statement could have on its financial condition, results of operations and cash flows.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion is intended to assist in an understanding of the Company's financial condition and results of operations. This analysis should be read in conjunction with the financial statements and related notes appearing in Item 1 of this Form 10-Q and Management's Discussion and Analysis of Financial Condition and Results of Operations appearing in the Company's Form 10-K for the year ended December 31, 2006.
As of June 30, 2007 the Company’s total assets were $266,504,000 representing a decrease of $30,432,000, or 10.25%, from December 31, 2006. Earning assets consist of federal funds sold, investment securities and loans. These assets provide the majority of the Company’s earnings.
Federal funds sold represent an overnight investment of funds and can be converted immediately to cash. At June 30, 2007, the Company had $25,507,000 in federal funds sold. At December 31, 2006, the Company had federal funds sold of $6,400,000. The $19,107,000 increase in federal funds sold during the first two quarters was a result of the payoff of loans in the Company’s former loan production office in Charleston, South Carolina. Loans originated by the former Charleston office decreased $28,103,000 during the first six months of 2007 and have not yet been replaced by other loans. The majority of these payoffs occurred during the second quarter of 2007.
Investment securities consist of U.S. Government and Agency securities and municipal bonds. These investments are used to provide fixed maturities and as collateral for advances and large public fund deposits. From December 31, 2006 to June 30, 2007, investment securities increased by $4,289,000. This increase was due to the increased liquidity available from the loan reductions late in the second quarter of 2007. All securities are classified as available for sale, and are carried at current market values.
The loan portfolio is the largest earning asset and is the primary source of earnings for the Company. At June 30, 2007 net loans were $170,571,000. The loan portfolio decreased $49,552,000 or 22.51% since December 31, 2006. This decrease is primarily the result of repayments from the loans originated in the Charleston market. At June 30, 2007, the allowance for loan losses was $5,821,000 or 3.30% of total loans. Management believes this is an adequate but not excessive amount based upon the composition of the current loan portfolio and current economic conditions. The relationship of the allowance to total loans will vary over time based upon management’s evaluation of the loan portfolio. Management evaluates the adequacy of the allowance on a quarterly basis and adjusts it accordingly by a periodic charge to earnings using the provision for loan losses. During the first two quarters of 2007, the provision for potential loan losses was $684,000 as compared to the 2006 amount of $812,000. The reserve was based upon management’s estimate to provide for potential loan losses in the current portfolio and to replenish the reserve for $370,000 of net charge offs during the first two quarters. During its regular review of loans during the quarter, management identified a single large construction loan on which funds were advanced disproportionably to its estimated completion. Based upon this review and the potential loss on this loan, an additional $300,000 was required to be added to the allowance for loan losses.
Non-earning assets consist of premises and equipment, and other assets. Premises and equipment decreased during the year as a result of the Company’s separation from the Charleston office and depreciation expense during the first two quarters. Other assets consist primarily of bank-owned life insurance, other real estate owned, and accrued interest receivable. Bank-owned life insurance and other real estate owned increased $118,000 and $780,000 respectively over the year end amount. Accrued interest receivable decreased $567,000 over the previous year end amount as a result of a smaller loan portfolio upon which to accrue interest.
The Company funds its assets primarily through deposits from customers. Additionally, it borrows funds from other sources to provide longer term fixed rate funding for its assets. The Company must pay interest on the majority of these funds and attempts to price these funds competitively in the market place but at a level at which it can safely re-invest the funds profitably. At June 30, 2007, total deposits were $206,620,000 as compared to the year-end amount of $237,553,000. This is a decrease of $30,933,000 or 13.02%. The decreased deposits were primarily a result of maturing wholesale certificates of deposit of $19,261,000 and maturing brokered deposits of $9,938,000 during the first two quarters of 2007.
Interest bearing deposits are comprised of the following categories:
Other borrowings consist of Federal Home Loan Bank advances and are secured by investment securities and loans of Albany Bank & Trust. There was no activity in other borrowings during the quarter.
The following table presents the Company’s regulatory capital position as of June 30, 2007.
The Company’s ratios are well above the required regulatory minimums under capital adequacy guidelines and provide a sufficient basis to support future growth of the Company. The Banks remain above the required regulatory capital minimums and the Company has the ability to support the Banks’ capital levels should the need arise.
Results of operations
For the quarter end compared to prior year quarter end
Net income for the three months ended June 30, 2007 was $71,000 as compared to $612,000 for the same period in 2006.
Total interest income decreased $1,178,000 or 19.6% for the three months ended June 30 2007 compared to the same period in the previous year. This was the result of decreased interest income on loans, due primarily to the smaller loan portfolio in the current year.
Interest expense for the three months ended June 30, 2007 was $2,511,000, which is a decrease of $413,000 or 14.12% over the same period in the previous year. This decrease is primarily indicative of the smaller deposit base in the current year.
Net interest income after the provision for loan losses was $1,771,000 for the three months ended June 30, 2007 as compared to the 2006 amount of $2,644,000. This is a decrease of $873,000, or 33.02%. This decrease is the combined result of the decreased level of earning assets and interest bearing liabilities.
Other noninterest income decreased $152,000 to $602,000 for the three months ended June 30, 2007 as compared to the same period in 2006. Service charges on deposit accounts decreased $110,000, or 32.07%, due to the smaller number of deposit accounts. Mortgage origination fees decreased $197,000 to $36,000 when compared to the same period in 2006. This decrease is the result of the separation from the Charleston loan production office.
Non-interest expense decreased $197,000 to $2,303,000 for the three months ended June 30, 2007 as compared to the same period in 2006. This is a decrease of 7.88%. The largest area of decrease was in the other operating expense category. Other operating expense amounted to $109,000 for the three months ended June 30, 2007 as compared to the 2006 amount of $193,000. This decrease of $84,000 or 43.52% was primarily the result of expenses no longer incurred due to the separation from the Charleston loan production office, which included travel, airplane costs and meals and entertainment expense.
Legal and professional fees decreased $32,000, or 21.48%, for the three months ended June 30, 2007 from the same period in 2006. These fees were higher during the second quarter of 2006 due to the legal fees incurred in connection with the response to the Agreements between each of the Banks and the OCC (collectively, the “OCC Agreements”) and the Company’s separation from the Charleston loan production office.
Diluted earnings per share for the three months ended June 30, 2007 were $0.02 and decreased $0.18 or 90.00% as compared to the second quarter of the previous year.
For the year to date comparison to prior year
Net income for the six months ended June 30, 2007 was $482,000 as compared to $771,000 for the same period in 2006.
Total interest income decreased $1,414,000 for the six months ended June 30 2007 or 12.42% from the same period in the previous year. This was the result of decreased interest income on loans, which decreased $1,353,000 over the same period in the previous year. The decrease in interest income was primarily the result of the smaller loan portfolio in the current year.
Interest expense for the six months ended June 30, 2007 was $5,232,000, which is a decrease of $350,000 over the same period in the previous year. This decrease is indicative of the smaller deposit base in the current year.
Net interest income after the provision for loan losses was $4,055,000 for the six months ended June 30, 2007 as compared to the 2006 amount of $4,991,000. This is a decrease of $936,000 or 18.75%. This decrease is the combined result of the decreased level of earning assets, offset by the decrease in cost of funds during the current year. The largest area of loan runoff during the past year has been loans originated by the Charleston loan production office which has decreased by over $28,000,000 since December 31, 2006. In addition, the other branches of Albany Bank and Trust reduced loans by over $15,000,000 and AB&T National Bank, reduced loans by nearly $6,000,000 compared to the prior year end amount in order to comply with the requirements of the OCC Agreements.
Other noninterest income decreased $353,000 to $1,053,000 for the six months ended June 30, 2007 as compared to the same period in 2006. Service charges on deposit accounts decreased $189,000, or 28.85%, due to the smaller number of deposit accounts. Mortgage origination fees decreased $361,000 to $69,000 during the year due to the separation from the Charleston loan production office. These decreases were offset by the gain on sale of fixed assets of $221,000 in conjunction with the sale in June 2007 of the building that housed the Charleston loan production office.
Non-interest expense decreased $833,000 to $4,434,000 for the six months ended June 30, 2007 as compared to the same period in 2006. This is a decrease of 15.82%. The largest dollar decrease was in the salary and employee benefits category. Salaries and benefits amounted to $2,374,000 for the six months ended June 30, 2007 as compared to the 2006 amount of $2,718,000. This decrease of $344,000, or 12.66%, was due primarily to the separation from the Charleston loan production office.
Administrative expenses decreased $208,000 or 34.49% for the six months ended June 30, 2007 from the same period in 2006. The decrease is a result of reduced consultant fees of $302,000 as compared to the prior year amount. The 2006 expenditure was paid for in conjunction with a study to improve non-interest income. This decrease is offset by an increase in OCC exam fees of $44,000 as compared to the prior year amount.
Diluted earnings per share for the six months ended June 30, 2007 were $0.16 and decreased $0.10, or 38.46%, as compared to the first six months of the previous year.
Off-Balance Sheet Arrangements
Our financial statements do not reflect various commitments and contingent liabilities that arise in the normal course of business. These off-balance sheet financial instruments include commitments to extend credit and standby letters of credit. Such financial instruments are included in the financial statements when funds are distributed or when the instruments become payable. Our exposure to credit loss in the event of nonperformance by the other party to a financial instrument for commitments to extend credit, and standby letters of credit is represented by the contractual amount of those instruments. We use the same credit policies in making commitments as we do for on-balance sheet instruments. Although these amounts do not necessarily
represent future cash requirements, a summary of our commitments as of June 30, 2007 and December 31, 2006 are as follows:
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is an important factor in our financial condition and affects our ability to meet the borrowing needs and deposit withdrawal requirements of our customers. Assets, consisting primarily of loans and investment securities, are funded by customer deposits, borrowed funds, and retained earnings. Maturities in the investment and loan portfolios also provide a steady flow of funds for reinvestment. In addition, our liquidity continues to be enhanced by a relatively stable core deposit base and the availability of additional funding sources. Management monitors its future liquidity needs based upon quarterly projections of loan and deposit growth. Management feels that it has sufficient capital and liquidity resources to support its future growth.
On July 27, 2006, each of the Banks entered into the Agreements with the OCC. The Agreements were described in the Form 8-K filed on August 2, 2006. In order to comply with the Agreements, the Company has decreased its total assets in order to reach specified capital levels. Future growth in assets will be dependent upon the Banks having adequate capital to fund the growth.
This document contains statements that constitute “forward-looking statements” within the meaning of Sections 27A of the Securities Act of 1933, as amended, and Sections 21E of the Securities Exchange Act of 1934, as amended. The words “believe”, “estimate”, “expect”, “intend”, “anticipate” and similar expressions and variations thereof identify certain of such forward-looking statements, which speak only as of the dates that they were made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Users are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties that the actual results may differ materially from those indicated in the forward-looking statements as a result of various factors. For a discussion of the factors, risks and uncertainties that could cause our actual results to differ materially from estimates and projections contained in these forward-looking statements, please read the “Risk Factors” section of our report on Form 10-K for the year ended December 31, 2006. Users are cautioned not to place undue reliance on these forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is a risk of loss arising from adverse changes in market prices and rates. The Company's market risk is composed primarily of interest rate risk created by its lending and deposit taking activities. The primary purpose of managing interest rate risk is to reduce the effects of interest rate volatility on our financial condition and results of operations. As interest rates change, the interest income and expense associated with the Company’s interest sensitive assets and liabilities also change, thereby impacting net interest income, the primary component of the Company’s earnings. Management addresses this risk through an active asset/liability management process and through management of maturities and repricing of interest-earning assets and interest-bearing liabilities. The Company's market risk and strategies for market risk management are more fully described in Annual report of Form 10-K for the year ended December 31, 2006. There have been no changes in the assumptions used in monitoring interest rate risk as of June 30, 2007. Through June 30, 2007, management has not utilized derivatives as a part of this process.
The Company’s income simulation analysis projected net interest income based on both an immediate rise and fall in interest rates of 100 and 200 basis points (i.e. 2.00%) over a twelve-month period. Given this scenario, the Company had, as of June 30, 2007, a benefit to rising rates and an exposure from falling rates. The forecasted results of the model are within the limits specified by the Company’s asset/liability management program. The following table reflects the Company’s sensitivity to changes in interest rates as of June 30, 2007, showing the percentage change in net interest income given the change in interest rates.
Interest Rate Risk: Income Sensitivity Summary
As market conditions vary from those assumed in the sensitivity analysis, actual results will differ. Also, the sensitivity analysis does not reflect actions that the Company might take in responding to or anticipating changes in interest rates.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this Quarterly Report on Form 10-Q, 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 Quarterly 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 our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Our management, including our principal executive officer and principal financial officer, 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 principal executive officer and principal financial officer 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 first six months of the fiscal year that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
You should carefully consider the risk factors discussed in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2006, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
On May 21, 2007, the Company held its annual meeting of shareholders at which the following director nominees were elected to a three-year term expiring in 2010 by the votes indicated:
The following directors whose three year terms expire in 2008 continued on the Board: Glenn A. Dowling, Mary Helen Dykes, Mark M. Shoemaker, and Lawrence B. Willson. The following directors whose three year terms expire in 2009, continued on the Board: Keith G. Beckham, Charles M. Jones, III, Van Cise Knowles, William F. McAfee, and John H. Monk, Jr.
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Community Capital Bancshares, Inc.