| SECURITY BANK CORP Item 1A RISK FACTORS Our business is subject to the success of the local economies where we operate |
| Our success significantly depends upon the growth in population, income levels, deposits and housing starts in our primary and secondary markets |
| 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 |
| Adverse economic conditions in our specific market area, including the loss of certain significant employers, such as Brown & Williamson Tobacco Corporation, which will cease operations in March 2006 and Robins Air Force Base, the operations of which may be affected by recent legislation, could reduce our growth rate, affect the ability of our customers to repay their loans to us and generally affect our financial condition and results of operations |
| We are less able than a larger institution to spread the risks of unfavorable local economic conditions across a large number of diversified economies |
| Moreover, we cannot give any assurance that we will benefit from any market growth or favorable economic conditions in our primary market areas if they do occur |
| Any adverse market or economic conditions in the State of Georgia may disproportionately increase the risk that our borrowers are unable to make their loan payments |
| In addition, the market value of the real estate securing loans as collateral could be adversely affected by unfavorable changes in market and economic conditions |
| As of December 31, 2005, approximately 87dtta8prca of our loans held for investment were secured by real estate |
| Of the commercial real estate loans in our portfolio, approximately 26prca represents properties owned and occupied by businesses to which we have extended loans |
| Any sustained period of increased payment delinquencies, foreclosures or losses caused by adverse market or economic conditions in the State of Georgia could adversely affect the value of our assets, our revenues, results of operations and financial condition |
| Commercial banks and other financial institutions are affected by economic and political conditions, both domestic and international, and by governmental monetary policies |
| Conditions such as inflation, recession, unemployment, high interest rates, short money supply, scarce natural resources, international disorders, terrorism and other factors beyond the Company’s control may adversely affect profitability |
| In addition, a significant portion of the Company’s primary business area is located near Robins Air Force Base, one of the largest employers in Georgia, and many of the Company’s customers are financially dependent, directly and indirectly, on the continued operation of Robins Air Force Base |
| Military installations, such as Robins Air Force Base, are subject to annual review and potential closing by the United States Congress |
| The closing of Robins Air Force Base, or a significant reduction in the operations conducted there may result in, among other things, deterioration in the Company’s credit quality or a reduced demand for credit and may harm the financial stability of the Company’s customers |
| Due to the Company’s limited market area, these negative conditions may have a more noticeable effect on the Company than would be experienced by an institution with a larger, more diverse market area |
| We may face risks with respect to future expansion and acquisitions or mergers |
| We continuously seek to acquire other financial institutions or parts of those institutions and may engage in de novo branch expansion in the future |
| We may also consider and enter into new lines of business or offer new products or services |
| We also may receive future inquiries and have discussions with potential acquirers of us |
| Acquisitions and mergers involve a number of risks, including: • the time and costs associated with identifying and evaluating potential acquisitions and merger partners; • the estimates and judgments used to evaluate credit, operations, management and market risks with respect to the target institution may not be accurate; • the time and costs of evaluating new markets, hiring experienced local management and opening new offices, and the time lags between these activities and the generation of sufficient assets and deposits to support the costs of the expansion; • our ability to finance an acquisition and possible dilution to our existing shareholders; • the diversion of our management’s attention to the negotiation of a transaction, and the integration of the operations and personnel of the combining businesses; 20 ______________________________________________________________________ [42]Table of Contents • entry into new markets where we lack experience; • the introduction of new products and services into our business; • the incurrence and possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on our results of operations; and • the risk of loss of key employees and customers |
| We may incur substantial costs to expand, and we can give no assurance that such expansion will result in the levels of profits we seek |
| There can be no assurance that, integration efforts for any future mergers or acquisitions will be successful |
| Also, we may issue equity securities, including common stock and securities convertible into shares of our common stock in connection with future acquisitions, which could cause ownership and economic dilution to our current shareholders |
| There is no assurance that, following any future mergers or acquisition, our integration efforts will be successful or that our company, after giving effect to the acquisition, will achieve profits comparable to or better than our historical experience |
| Combining acquired companies may be more difficult, costly, or time-consuming than we expect |
| The Company has executed a definitive agreement to acquire Neighbors Bancshares, Inc |
| (“Neighbors”), the parent of Neighbors Bank |
| The Company and Neighbors have operated, and, until completion of the merger, will continue to operate, independently |
| In addition, in May 2005, the Company acquired SouthBank in Woodstock, Georgia, which now operates as Security Bank of North Metro, and on December 31, 2005, completed the acquisition of Rivoli BanCorp, Inc and its subsidiary, Rivoli Bank & Trust, which operates in Macon, Georgia |
| It is possible that the integration process for these acquisitions could result in the loss of key employees or disruption of each company’s ongoing business or inconsistencies in standards, procedures and policies that would adversely affect the Company’s ability to maintain relationships with clients and employees or to achieve the anticipated benefits of the merger |
| If the Company has difficulties with the integration process, it might not achieve the economic benefits expected to result from the acquisition |
| As with any merger of banking institutions, there also may be business disruptions that cause the Company to lose customers or cause customers to remove their deposits or loans from the Company’s banks and move their business to competing financial institutions |
| Our recent operating results may not be indicative of our future operating results |
| 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, including our growth through acquisitions, may distort some of our historical financial ratios and statistics |
| For example, our earnings grew by more than 365prca from 2000 to 2005 |
| Our strong performance during this time period was, in part, the result of an extremely favorable residential mortgage refinancing market, our successful acquisitions of Security Bank of Jones County and Security Bank of North Metro and our de novo entry into Glynn County |
| In the future, we may not have the benefit of a favorable interest rate environment, a strong residential mortgage market, or the ability to find suitable candidates for acquisition |
| 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 |
| Our continued pace of growth may require us to raise additional capital in the future, but that capital may not be available when it is needed |
| We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations |
| We anticipate that our capital resources will satisfy our capital requirements for the foreseeable future |
| We may at some point, however, need to raise additional capital to support our continued growth |
| Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance |
| Accordingly, we cannot assure you of our 21 ______________________________________________________________________ [43]Table of Contents ability to raise additional capital if needed on terms acceptable to us |
| If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth and acquisitions could be materially impaired |
| Changes in interest rates may negatively affect our earnings and the value of our assets |
| Changes in interest rates may affect our level of interest income, the primary component of our gross revenue, as well as the level of our interest expense, our largest recurring expenditure |
| In a period of rising interest rates, our interest expense could increase in different amounts and at different rates while the interest that we earn on our assets may not change in the same amounts or at the same rates |
| Accordingly, increases in interest rates could decrease our net interest income |
| Residential mortgage originations generated dlra4dtta5 million, or 4dtta8prca, of our gross revenue in 2005 |
| We expect to originate fewer residential real estate loans |
| Accordingly, a period of rising interest rates would negatively affect our residential mortgage origination business |
| Changes in the level of interest rates also may negatively affect our ability to originate real estate loans, the value of our assets and our ability to realize gains from the sale of our assets, all of which ultimately affect our earnings |
| A decline in the market value of our assets may limit our ability to borrow additional funds or result in our lenders requiring additional collateral from us under our loan agreements |
| As a result, we could be required to sell some of our loans and investments under adverse market conditions, upon terms that are not favorable to us, in order to maintain our liquidity |
| If those sales are made at prices lower than the amortized costs of the investments, we will incur losses |
| Our loan portfolio includes a substantial amount of commercial and industrial loans which include risks that may be greater than the risks related to residential loans |
| Our commercial and industrial loan portfolio was dlra106dtta3 million at December 31, 2005, comprising 8dtta3prca of total loans |
| Commercial and industrial loans generally carry larger loan balances and involve a greater degree of financial and credit risks than home equity loans or residential mortgage loans |
| Any significant failure to pay on time by our customers would hurt our earnings |
| The increased financial and credit risk associated with these types of loans is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the size of loan balances, the effects of general economic conditions on income-producing properties and the increased difficulty of evaluating and monitoring these types of loans |
| In addition, when underwriting a commercial or industrial loan, we may take a security interest in commercial real estate and, in some instances upon a default by the borrower, we may foreclose on and take title to the property, which may lead to potential financial risk for us under applicable environmental laws |
| If hazardous substances were 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 |
| Furthermore, the repayment of loans secured by commercial real estate is typically dependent upon the successful operation of the related real estate or commercial project |
| This cash flow shortage may result in the failure to make loan payments |
| In addition, the nature of these loans is such that they are generally less predictable and more difficult to evaluate and monitor |
| As a result, repayment of these loans may, to a greater extent than residential loans, be subject to adverse conditions in the real estate market or economy |
| We face regulatory risks related to our commercial real estate loan concentrations |
| Commercial real estate or “CRE” is cyclical and poses risks of possible loss due to concentration levels and similar risks of the asset, especially since 71dtta4prca of our loan portfolio consisted of CRE loans at December 31, 2005 |
| The banking regulators have begun giving CRE lending greater scrutiny, and may require banks with 22 ______________________________________________________________________ [44]Table of Contents higher levels of CRE loans to implement improved underwriting, internal controls, risk management policies and portfolio stress testing, as well as possibly requiring higher levels of allowances for possible loan losses and capital levels as a result of CRE lending growth and exposures |
| See “Supervision and Regulation—Commercial Real Estate Lending and Concentrations |
| ” If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease |
| Our loan customers may not repay their loans according to the terms of these loans, and the collateral securing the payment of these loans may be insufficient to assure repayment |
| We may experience significant loan losses, which could have a material adverse effect on our operating results |
| Management makes various assumptions and judgments about the collectibility of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans |
| We maintain an allowance for loan losses in an attempt to cover any loan losses, which may occur |
| In determining the size of the allowance, we rely on an analysis of our loan portfolio based on historical loss experience, volume and types of loans, trends in classification, volume and trends in delinquencies and non-accruals, national and local economic conditions and other pertinent information |
| As we expand into new markets, our determination of the size of the allowance could be understated due to our lack of familiarity with market-specific factors |
| If our assumptions are wrong, our current allowance may not be sufficient to cover future loan losses, and adjustments may be necessary to allow for different economic conditions or adverse developments in our loan portfolio |
| Material additions to our allowance would materially decrease our net income |
| Our allowance for loan losses was dlra16dtta1 million, dlra10dtta9 million and dlra9dtta4 million as of December 31, 2005, 2004 and 2003, respectively |
| In addition, federal and state regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs, based on judgments different than those of our management |
| Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory agencies could have a negative effect on our operating results |
| We can offer no assurance that we can maintain or increase our market share of deposits in our highly competitive service area |
| If we are unable to do so, we may be forced to accept increased amounts of out of market or brokered deposits |
| As of December 31, 2005, we had approximately dlra330dtta8 million in out of market deposits, including brokered deposits, which represented approximately 25dtta6prca of our total deposits |
| Typically, the cost of out of market and brokered deposits exceeds the cost of deposits in our local market |
| In addition, the cost of out of market and brokered deposits can be volatile, and if we are unable to access these markets or if our costs related to out of market and brokered deposits increases, our liquidity and ability to support demand for loans could be adversely affected |
| Competition from financial institutions and other financial service providers may adversely affect our profitability |
| The banking business is highly competitive and we experience competition in each of our markets 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 mutual funds, as well as other super-regional, national and international financial institutions that operate offices in our primary market areas and elsewhere |
| 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, larger financial institutions |
| While we believe we can and do successfully 23 ______________________________________________________________________ [45]Table of Contents compete with these other financial institutions in our primary markets, we may face a competitive disadvantage as a result of our smaller size, lack of geographic diversification and inability to spread our marketing costs across a broader market |
| Although we compete by concentrating our marketing efforts in our primary markets with local advertisements, personal contacts, and greater flexibility and responsiveness in working with local customers, we can give no assurance that this strategy will be successful |
| We are subject to extensive regulation that could limit or restrict our activities |
| We operate in a highly regulated industry and are subject to examination, supervision, and comprehensive regulation by various federal and state agencies |
| Our compliance with these regulations is costly and restricts 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 capitalization guidelines established by our regulators, which require us to maintain adequate capital to support our growth |
| 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, and the related rules and regulations promulgated by the Securities and Exchange Commission and Nasdaq that are now applicable to us, have increased the scope, complexity and cost of corporate governance, reporting and disclosure practices |
| In order to comply with the Sarbanes-Oxley Act, we no longer use our independent auditors for internal audit and internal controls functions |
| As a result, we have experienced greater compliance costs and we can give no assurances that the effectiveness of our internal audit and internal controls functions will remain the same as when those functions were performed by our independent auditors |
| Our directors and executive officers own a significant portion of our common stock |
| Our directors and executive officers, as a group, beneficially owned approximately 16dtta6prca of our outstanding common stock as of February 20, 2006 |
| As a result of their ownership, the directors and executive officers will have the ability, by voting their shares in concert, to significantly influence the outcome of all matters submitted to our shareholders for approval, including the election of directors |
| Additionally, the directors of Security Bank of Jones County have agreed that as long as they serve as directors on our board or one of the boards of our subsidiaries that they will vote all of the shares of our common stock owned by them in accordance with the recommendation of our board of directors through our annual meeting in 2007 |
| In April 2000, we also entered into an agreement with Group Financial Southeast to buy specific assets of Group Financial, which we generally refer to in this document as our Fairfield Financial acquisition |
| Director John W Ramsey owned 100prca of the outstanding stock of Group Financial at the time of the acquisition and continues to own those shares |
| Under our purchase agreement with Group Financial, Group Financial is entitled to receive additional shares of our common stock based on the future financial performance of Fairfield Financial |
| Any common stock issued as part of the additional purchase price paid under this purchase agreement must be voted in favor of the written recommendations of our board of directors, and if it is not, Group Financial will forfeit any future contingent payments under the purchase agreement |
| As of December 31, 2005, the total number of shares of our common stock that were subject to voting agreements was 1cmam487cmam619 shares or 10dtta3prca of our outstanding stock at that time |
| Risks Related to an Investment in Our Common Stock Our ability to pay dividends is limited and we may be unable to pay future dividends |
| Our ability to pay dividends is limited by regulatory restrictions and the need to maintain sufficient consolidated capital |
| The ability of our five bank subsidiaries to pay dividends to us is limited by their 24 ______________________________________________________________________ [46]Table of Contents obligations to maintain sufficient capital and by other general restrictions on their dividends that are applicable to Georgia banks and banks that are regulated by the FDIC If we do not satisfy these regulatory requirements, we will be unable to pay dividends on our common stock |
| We may issue additional shares of our common stock in the future, which would dilute your ownership if you did not, or were not permitted to, invest in the additional issuances |
| Our articles of incorporation authorize our board of directors, without shareholder approval, to, among other things: • issue additional common stock or issue preferred stock in connection with future equity offerings and acquisitions of securities or assets of other companies; and From time to time, we expect to issue additional equity securities to raise additional equity to support our portfolio |
| The issuance of any additional shares of common stock could be substantially dilutive to our common shareholders if they elect not to invest in future offerings |
| Moreover, to the extent that we issue restricted stock units, stock appreciation rights, options or warrants to purchase our common stock in the future and those stock appreciation rights, options or warrants are exercised or as the restricted stock units vest, our shareholders may experience further dilution |
| Holders of our shares of common stock have no preemptive rights that entitle holders to purchase their pro rata share of any offering of shares of any class or series and, therefore, our shareholders may not be permitted to invest in future issuances of our common stock |
| We may issue debt and equity securities, which are senior to our common stock as to distributions and in liquidation, which could negatively affect the value of our common stock |
| In the future, we may attempt to increase our capital resources by entering into debt or debt-like financing that is unsecured or secured by all or up to all of our assets, or issuing debt or equity securities, which could include issuances of secured or unsecured commercial paper, medium-term notes, senior notes, subordinated notes, preferred stock or common stock |
| In the event of our liquidation, our lenders and holders of our debt securities would receive a distribution of our available assets before distributions to the holders of our common stock |
| Because our decision to incur debt and issue securities in our future offerings will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings and debt financings |
| Further, market conditions could require us to accept less favorable terms for the issuance of our securities in the future |
| Thus, you will bear the risk of our future offerings reducing the value of your shares of common stock and diluting your interest in us |