John M.
Mendez, President and Chief Executive Officer –
While the
fourth quarter results were good in contrast with the broader financial services
industry, our GAAP earnings were constrained by two events which we will discuss
later in the call this morning. For these reasons, we did not achieve
all that we hoped for the quarter; however, we did further our positioning for
the coming year. We made further progress in the areas of overall
credit quality and portfolio management and we continue to make great progress
in terms of capital build, particularly our Bank-level Tier I Tangible
Capital.
Perhaps
the most encouraging result in the fourth quarter was the volume and content of
our loan portfolio charge-offs. While net charge-offs were up from
the preceding quarter, it was driven by a single charge on a large exposure that
progressed toward final resolution near year-end. The single largest
loan within our portfolio; with exposure of $8mm was substantially reduced with
a $4 million payment and $1.6 million partial charge-off to reduce the retained
portion of the loan to estimated net realizable value of $2.4
million.
We also
reduced a second large exposure on a $13 land loan to $9 million early in the
fourth quarter leaving a well secured loan which is under contract to close and
completely liquidate the loan, hopefully in the first quarter of this
year. With these two events we have substantially reduced key
exposures in land and C&I.
The $1.6
million charge-off referenced earlier certainly drove our totals higher for the
quarter and the year but it does represent a somewhat unique and isolated risk
that we feel will not be replicated. So excluding that particular
charge-off our broad portfolio charge-offs declined for the third consecutive
quarter to $2 million or 14 basis points on average loans. This is a
very good trend in net charge-offs and changes our thinking on provisioning, now
with reserves at a record level and net charge-offs on the homogenous portfolio
declining for the third consecutive quarter. This very definitely
changes our thinking on Provision/Charge-off Coverage and paves the way for
declining provisions in coming quarters.
I would
also note that we declared our first quarter dividend
yesterday. While we feel we have the capacity to increase the
dividend today, we chose to retain the $0.10 per share rate for the quarter as
we continue to focus on capital build in support of our growth
plan. At $0.10 per share we are yielding about 2.8% on yesterday’s
closing price. We will continue to evaluate the dividend in light of
our strategic plan, economic conditions, credit results and our progression of
earnings normalization.
David D.
Brown, Chief Financial Officer –
We
reported net income for the fourth quarter of $4.89 million, or $1.23 per
share. We saw margin dip a little from last quarter as it came in at
3.78%. Loan yields fell 13 basis points to
5.94%. Investment yields dropped 17 basis points as cash flow has
rolled in that portfolio and repriced lower and we continued to maintain some
pretty substantial liquidity through the quarter, which weighed on
margin.
The
funding side saw an 8 basis point decrease in overall cost. The CD
portfolio declined another 8 basis points from last quarter, and turned in the
first sub-2% quarter that any of us can remember. The money market
accounts again led the savings line down by 19 basis points this
quarter.
We made a
$3.69 million provision for loan losses during the fourth quarter, which covered
charge-offs by 102% and built the allowance to 1.91% of
loans. Approximately $270 thousand of the $3.69 million in provision
set aside specifically to cover modifications and restructurings we added this
quarter.
Wealth
revenues increased $113 thousand on a linked basis due to increases at trust and
investment advisory services. Linked-quarter, deposit account service
charges decreased slightly on lower NSF incidents. Other service
charges and fees were up slightly on better interchange
income. Insurance revenues down were $125 thousand, linked-quarter,
on lower sales volumes. We realized net securities gains of $4.25
million during the quarter, $4.50 million of which came from recoveries on 4 of
the last 5 trust preferred CDO’s, which were charged down through impairments in
2009. Also in other non-interest income, we had a negative $210
thousand adjustment to record the mark-to-market adjustment on secondary market
loans and commitments.
Debit
card interchange revenue has certainly been a hot topic lately, and I want to
give you a little insight in this area. We had $3.81 million of
interchange revenue in 2010, which was up $776 thousand from
2009. While there is certainly a risk to the revenue stream from the
Durbin amendment, we are optimistic that those rules will be altered by the time
it is all done. That said, we are developing our plan to combat the
potentially lower revenues and are going to pursue that plan until and unless
there are significant changes to the regulation.
In the
area of non-interest expense, fourth quarter efficiency ratio was
64.8%. Salaries and benefits were up $566 thousand from the third
quarter. The increase included new officer level staffing in
Marketing and staff level incentive compensation. In furtherance of
our strategic plan, we added significant capacity in both the front lines and
support areas of the Company in the third quarter. We certainly
expect 2011 to be a much better year in general and want to be
prepared. Additionally, we have used significant resources in the
diligence efforts on which we have been working. The Credit team has
been very busy on special projects in the last two years and we felt the need to
add capacity in that area. That said, we are beginning some new
efficiency initiatives to wring out savings in our more labor intensive
functions. Total FTE at quarter-end was 679.
We
recognized a goodwill impairment of $1.04 million in the insurance agency
subsidiary. This was not unexpected given the recessionary conditions
which have brought premium revenue under pressure. As the economy
improves and the market begins to harden, we would expect to see recovery in
those revenues. Additionally, we have seen the marketplace multiples
dropping, which some of our recent purchases and discussions have
indicated. All that led to the impairment when we did the annual
analysis.
Other
operating expenses were $5.95 million, which was an increase of $746 thousand on
a linked-quarter basis. Most notably in that increase were travel
costs that were up $98 thousand, ORE expenses and loss provisions that were up
$312 thousand, and other losses were up $263 thousand.
I will
say that we have been building up corporate and centralized functions in
anticipation of coming organic growth and M&A activity. Obviously
the organic growth did not swing back as quickly as we once hoped and M&A
activity has taken a little longer to begin percolating. That said,
we are seeing a number of assisted and unassisted opportunities and believe we
have the capacity and capability to strip out significant amounts of costs in
available transactions.
At the
end of the period, total assets decreased by about $53 million which was largely
a function of decreasing deposits and retail repos. On an average
basis, most items were relatively flat. We allowed the CD portfolio
to shrink $18 million between period ends as well as on average, as well as
improved the pricing. These rates have continued to drop with the
market and we find less and less need for this funding in today’s
market.
The one
disappointing item was that we lost ground in tangible book. We
finished the year at $10.06, which was a decline of 23 cents from last
quarter. Without the increase in AOCI, tangible book would have built
to roughly $10.47. Consolidated total risk-based capital is expected
to be approximately 15.4%. The Company and the Bank continue to be
very well-capitalized, with the Bank’s leverage ratio building to approximately
8.6%.
Gary R.
Mills, Chief Credit Officer –
The total
loan portfolio measured $1.386 billion at year-end. While this
represents an approximate $12 million decline for the quarter, for the year, the
portfolio was little changed from the December 31, 2009, balance of $1.393
billion; which was consistent with our expectations for 2009 portfolio
activity. During the quarter, the bank received principal
curtailments totaling approximately $13.2 million on four loans, which
contributed to the quarterly decline. The curtailments, in large
part, are indicative of the loans performing as they had been
structured.
Asset
quality metrics continue to compare well to peer. Loans 30-89 days
delinquent were $17.01 million, or 1.22% of total loans, as compared to $7.9
million, or .57%, as of the 3rd quarter and $14.9 million, or 1.07% as of
December 31, 2009.
Approximately
three quarters of the increase can be attributed to the Residential 1-4 loan
segment, principally driven by the North Carolina Market. As we
evaluate the quarterly increase in the 30-89 day category, we believe there is
an element of seasonality in the performance. Non-accrual loans
measured $19.4 million, or 1.40% of total loans, as compared to $16.6 million,
or 1.19%, at September 30 and $17.5 million, or 1.25%, at
year-end. The increase in non-accrual loans can be primarily
attributed to one loan relationship within the C&I segment, which had been
previously identified by the bank and was being monitored on its watch
list. The bank made significant strides toward resolution during the
quarter and believes potential loss is properly accounted for within the
allowance. Total delinquency at year-end was 2.62%, as compared to
1.76% and 2.32% as of 3rd quarter-end 2010 and year-end 2009. There
was some improvement in OREO balances during the quarter as OREO declined
approximately $600,000 to $4.9 million. Non-performing assets as a
percentage of total assets were little changed during the quarter measuring
1.32% versus 1.31% the previous quarter-end.
Net
charge-offs measured $3.6 million for the quarter. Approximately 44%
of the net charge-offs were related to the previously mentioned non-accrual
C&I loan relationship. Absent the impact of that loan
relationship, the bank would have experienced a 3rd consecutive quarterly
decline in net charge-offs. While we believe there will continue to
be a challenging credit environment in 2011, we are cautiously optimistic that
net charge-offs will be coming off previous highs. The provision for
the quarter of $3.68 million essentially laid off against net charge-offs,
resulting in an ALLL of $26.482 million. We believe the bank has
established a strong reserve as the allowance as a percentage of loans measures
1.91% and provides a coverage ratio to non-accrual loans of 136%.