ATLANTIC
BANCGROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE
30, 2010
|
NOTE
1 -
|
SUMMARY
OF SIGNIFICANT ACCOUNTING AND REPORTING
POLICIES
|
General
- Atlantic BancGroup, Inc. (the “Holding Company”) is a bank holding company
registered with the Federal Reserve and owns 100% of the outstanding stock of
Oceanside Bank (“Oceanside”). Oceanside is a Florida state-chartered
commercial bank, which opened July 21, 1997. Oceanside’s deposits are
insured by the Federal Deposit Insurance Corporation. The Holding
Company’s primary business activity is the operation of Oceanside, and it
operates in only one reportable industry segment,
banking. Collectively, the entities are referred to as
“Atlantic.” References to Atlantic, Oceanside, and subsidiaries
throughout these condensed consolidated financial statements are made using the
first-person notations of “we,” “our,” and “us.” Oceanside has formed
subsidiaries (“Subsidiaries”) for the sole purpose of holding and managing real
estate properties acquired through foreclosure.
The
accompanying condensed consolidated financial statements include the accounts of
the Holding Company, its wholly-owned subsidiary, Oceanside, and the
Subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation. The accounting and reporting policies of
Atlantic conform with accounting principles generally accepted in the United
States of America and to general practices within the banking
industry.
Our
condensed consolidated financial statements for the three and six months ended
June 30, 2010 and 2009, have not been audited and do not include information or
footnotes necessary for a complete presentation of consolidated financial
condition, results of operations, and cash flows in conformity with accounting
principles generally accepted in the United States of America. In
management’s opinion, the accompanying condensed consolidated financial
statements contain all adjustments, which are of a normal recurring nature,
necessary for a fair presentation. Our results of operations for the
interim periods are not necessarily indicative of the results that may be
expected for an entire year. The accounting policies followed by us
are set forth in the consolidated financial statements for the year ended
December 31, 2009, and are incorporated herein by reference.
Oceanside,
through four banking offices, provides a wide range of banking services to
individual and corporate customers primarily in East Duval and Northeast St.
Johns Counties of Florida. We are subject to regulations of certain
federal and state regulatory agencies and, accordingly, we are examined by those
agencies. As a consequence of the extensive regulation of commercial
banking activities, our business is particularly susceptible to being affected
by federal and state legislation and regulations.
Regulatory
Action
. Effective January 7, 2010, Oceanside entered into a
Stipulation to the Issuance of a Consent Order with the Federal Deposit
Insurance Corporation (the “FDIC”) and the Florida Office of Financial
Regulation (the “OFR”) (“Stipulation”). Pursuant to the Stipulation,
Oceanside has consented, without admitting or denying any charges of unsafe or
unsound banking practices or violations of law or regulation, to the issuance of
a Consent Order by the FDIC and the OFR, also effective as of January 7, 2010
(“Consent Order”).
The
Consent Order represents an agreement among Oceanside, the FDIC, and the OFR as
to areas of Oceanside’s operations that warrant improvement and presents a plan
for making those improvements. The Consent Order imposes no fines or
penalties on Oceanside.
Oceanside
has evaluated and is responding with enhanced policies, procedures, analyses,
and training to address matters enumerated in the Consent Order. In
management’s opinion, many of the cited criticisms have been addressed or
Oceanside is no longer engaged in the activity.
Oceanside
did not meet the April 7, 2010, deadline to raise additional capital as required
by the Consent Order. However, on May 10, 2010, Atlantic entered into
an agreement to merge into Jacksonville Bancorp, Inc. See
Note 12 - Merger
for further
information regarding the proposed merger.
ATLANTIC
BANCGROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE
30, 2010
|
NOTE 1 -
|
SUMMARY OF SIGNIFICANT
ACCOUNTING AND REPORTING POLICIES
(Continued)
|
On March
26, 2010, the Holding Company entered into a mutual agreement (“Written
Agreement”) with the Federal Reserve Bank of Atlanta (the "Reserve Bank") to
maintain the financial soundness of the Holding Company so that the Holding
Company may serve as a source of strength to Oceanside. The Written
Agreement provides for restrictions on dividends declared or paid by the Holding
Company, the receipt of dividends or other payments from the Bank, the
distribution of interest, principal, or other sums on trust-preferred
securities, the guarantee of any debt by the Holding Company and the
Subsidiaries, the redemption of stock by the Holding Company, and certain other
operating restrictions and reporting requirements.
Liquidity
. Atlantic
actively manages liquidity. Cash and cash equivalents, which include
interest-bearing deposits, totaled $33.1 million at June 30, 2010. In
addition to cash and cash equivalents and unpledged investment securities,
Atlantic has the following sources of available liquidity at June 30,
2010: lines of credit to purchase federal funds ($9.0 million) and,
borrowings at the Federal Reserve discount window ($3.1 million), subject to
prior approval and limited to overnight secondary credit. Based on
current and expected liquidity needs and sources, management expects Atlantic to
be able to meet its obligations.
Use
of Estimates
- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue 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, valuation of other real estate owned (or foreclosed assets),
the realization of deferred tax assets, other-than-temporary impairment of
securities, and the fair value of financial instruments.
The
determination of the adequacy of the allowance for loan losses and the valuation
of foreclosed assets is based on estimates that may be affected by 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 assets, management obtains independent appraisals for
significant collateral.
Our loans
are generally secured by specific items of collateral including real property,
consumer assets, and business assets. Although we have a diversified
loan portfolio, a substantial portion of our debtors’ ability to honor their
contracts is dependent on local, state, and national economic conditions that
may affect the value of the underlying collateral or the income of the
debtor.
While
management uses available information to recognize losses on loans and to value
foreclosed assets, further reductions in the carrying amounts of loans and
foreclosed assets may be necessary based on changes in economic
conditions. In addition, regulatory agencies, as an integral part of
their examination process, periodically review the estimated losses on loans and
carrying value of foreclosed assets. Such agencies may require us to
recognize additional losses based on their judgments about information available
to them at the time of their examination.
Management’s
determination of the realization of deferred tax assets is based upon
management’s judgment of various future events and uncertainties, including the
timing, nature, and amount of future income earned by certain subsidiaries and
the implementation of various plans to maximize realization of deferred tax
assets.
Atlantic
has recorded a deferred tax asset (net of valuation allowances) to recognize the
future income tax benefit of operating losses incurred for tax years 2009 and
2008, and for the three and six months ended June 30,
2010. Management believes that the tax benefits on the net operating
loss carry forwards will be utilized when Atlantic returns to
profitability. Generally, the net operating losses can be carried
forward for up to 20 years.
On
November 6, 2009, the
“Worker,
Homeownership, and Business Assistance Act of 2009”
was signed into law,
which relaxed the net operating loss carryback rules. As a result of
this law, Atlantic was able to carryback net operating losses to obtain a tax
refund of $1.024 million, which was received in April 2010.
ATLANTIC
BANCGROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE
30, 2010
|
NOTE 1 -
|
SUMMARY OF SIGNIFICANT
ACCOUNTING AND REPORTING POLICIES
(Continued)
|
In
estimating the carrying value of deferred tax assets, management considered the
cumulative loss position, projected taxable income, and available tax strategies
in developing the analysis of any required deferred income tax asset valuation
as of June 30, 2010 and December 31, 2009.
At June
30, 2010 and December 31, 2009, cumulative losses in recent quarters suggested
the need for a valuation allowance. However, management believed that
this negative evidence was partially offset by the following positive evidence,
which mitigated the need for reducing the carrying value (net of valuation
allowances) to zero.
|
·
|
Atlantic
has a prior history of taxable earnings prior to losses that began in
2008. Since inception in 1997, Atlantic has reported taxable
income in 10 of 12 years through 2008, with cumulative taxable income of
nearly $9.0 million through 2008.
|
|
·
|
Atlantic
has taken steps to improve its net interest margin and reduce operating
costs such as payroll, which Atlantic believes will improve its core
earnings. Although we cannot assure that these efforts will return us to
consistent profitability, internal projections indicate, within the next
2-5 years, our book and taxable income are more likely than not to return
to levels approaching those prior to
2008.
|
|
·
|
Management
has received and considered offers to purchase two of its branch locations
and relocate to leased space (or lease-back its existing
facilities). While the sale-leaseback would not likely generate
significant book income immediately, the taxable income was projected to
exceed $1.0 million.
|
|
·
|
Management
and the Board of Directors have implemented a tax strategy that has
generated taxable income of approximately $1.1 million from the
liquidation of bank-owned life insurance policies. In the
second quarter of 2010, Atlantic received proceeds from the liquidation of
the policies of $5.1 million.
|
|
·
|
Converting
tax-exempt investment income to taxable investment income, which could
increase taxable income by almost $1.0 million and book income by $0.4
million.
|
|
·
|
Repurchase
of junior subordinated debentures at a
discount.
|
|
·
|
Termination
of all or a portion of the Bank’s deferred compensation plan, which would
generate up to $1.6 million in book taxable income and reduce the deferred
tax asset by $0.6 million.
|
Based on
the above analysis, management believes it is more likely than not that Atlantic
will realize the deferred tax asset of
$0.5 million and $0.7 million
(net of a valuation allowance of $2.3 million and $2.8 million) at June 30, 2010
and December 31, 2009, respectively, through future operating income and
im
plementation of certain tax strategies.
Reclassifications
- Certain amounts in the prior periods have been reclassified to conform to the
presentation for the current period.
New
Accounting Guidance
- In December 2009, the Financial Accounting
Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2009-16,
Transfer and Servicing
(“Topic 860”) -
Accounting for
Transfers of Financial Assets
(“ASU 09-16”) which amends ASC 860-10,
Transfers and
Servicing-Overall
(“ASC 860-10”) and adds transition paragraphs
860-10-65-3 of ASC 860-10
.
ASC 860-10
requires more information about transfers of financial assets, including
securitization transactions, and where companies have continuing exposure to the
risks related to transferred financial assets. It eliminates the
concept of a “qualifying special-purpose entity,” changes the requirements for
derecognizing financial assets, and requires additional
disclosures. ASC 860-10 is effective at the start of a company’s
first fiscal year beginning after November 15, 2009. The adoption of
ASC 860-10 did not have a material impact on Atlantic’s financial position,
results of operations, or cash flows.
In
December 2009, the FASB issued ASU 2009-17,
Consolidation
(“Topic 810”) -
Improvements to Financial
Reporting by Enterprises Involved with Variable Interest Entities
(“ASU
09-17”) which amends ASC 810-10,
Consolidations-Overall
(“ASC
810-10”) and adds transition paragraphs 810-10-65-2 of ASC
810-10. ASC 810-10 changes how a company determines when an entity
that is insufficiently capitalized or is not controlled through voting (or
similar rights) should be consolidated. The determination of whether
a company is required to consolidate an entity is based on, among other things,
an entity’s purpose and design and a company’s ability to direct
the
ATLANTIC
BANCGROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE
30, 2010
|
NOTE 1 -
|
SUMMARY OF SIGNIFICANT
ACCOUNTING AND REPORTING POLICIES
(Continued)
|
activities
of the entity that most significantly impact the entity’s economic
performance. ASC 810-10 is effective at the start of a company’s
first fiscal year beginning after November 15, 2009. The adoption of
ASC 810-10 did not have a material impact on Atlantic’s financial position,
results of operations, or cash flows.
In
January 2010, the FASB issued the FASB issued ASU 2010-06,
Fair Value Measurements and
Disclosures
(“Topic 820”)
: Improving Disclosures about Fair
Value Measurements
, to improve disclosure requirements related to fair
value measurements and disclosures. The guidance requires that a
reporting entity should disclose separately the amounts of significant transfers
in and out of Level 1 and Level 2 fair value measurements and describe the
reasons for the transfers and that activity in Level 3 should be presented on a
gross basis rather than one net number for information about purchases,
issuances, and settlements. The guidance also requires that a
reporting entity should provide fair value measurement disclosures for each
class of assets and liabilities and about the valuation techniques and inputs
used to measure fair value for both recurring and nonrecurring fair value
measurements. This guidance is effective for interim and annual
reporting periods beginning after December 31, 2009, except for the roll forward
of activity in Level 3, which is effective for interim and annual reporting
periods beginning after December 31, 2010. Adopting this
pronouncement did not have a material effect on the results of operations or
financial condition of Atlantic.
In
February 2010, the FASB issued ASU 2010-09,
Subsequent Events
(“Topic
855”):
Amendments to Certain
Recognition and Disclosure Requirements
. The amendments remove
the requirement for an SEC registrant to disclose the date through which
subsequent events were evaluated as this requirement would have potentially
conflicted with SEC reporting requirements. This ASU became effective
upon issuance. Removal of the disclosure requirement did not affect
the nature or timing of subsequent events evaluations performed by
Atlantic.
In July
2010, the FASB issued ASU 2010-20,
Receivables
(“Topic 310”) -
Disclosures about the Credit
Quality of Financing Receivables and the Allowance for Credit Losses
(“
ASU 10-20
”).
ASU 10-20 requires a
company to disaggregate new and existing disclosures based on how it develops
its allowance for credit losses and how it manages credit
exposures. Short-term accounts receivable, receivables measured at
fair value or lower of cost or fair value, and debt securities are exempt from
the ASU 10-20. For public companies, the amendments that require
disclosures as of the end of a reporting period are effective for periods ending
on or after December 15, 2010. The amendments that require
disclosures about activity that occurs during a reporting period are effective
for periods beginning on or after December 15, 2010. Management does
not believe that the adoption of this ASU will have a material impact on
Atlantic’s financial position, results of operation, or cash flows.
Other
: A
variety of proposed or otherwise potential accounting standards are currently
under study by standard-setting organizations and various regulatory
agencies. Because of the tentative and preliminary nature of these
proposed standards, management has not determined whether implementation of such
proposed standards would be material to Atlantic’s consolidated financial
statements.
|
NOTE
2 -
|
REGULATORY
OVERSIGHT, CAPITAL ADEQUACY, OPERATING LOSSES, AND MANAGEMENT’S
PLANS
|
As a
result of the extraordinary effects of the worst economic downturn since the
Great Depression, the capital of Atlantic and Oceanside have been significantly
depleted. The impact of the current financial crisis in the U.S. and
abroad is having far-reaching consequences and it is difficult to say at this
point when the economy will begin to recover. As a result, we cannot
assure you that we will be able to resume profitable operations in the near
future, or at all. We have determined that significant additional
sources of capital or the implementation of strategies to enhance existing
capital will be required for us to resume profitable operations beyond
2010. We continue to explore other options to restructure our balance
sheet to generate income and capital.
ATLANTIC
BANCGROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE
30, 2010
|
NOTE 2 -
|
REGULATORY OVERSIGHT, CAPITAL
ADEQUACY, OPERATING LOSSES, AND MANAGEMENT’S PLANS
(Continued)
|
On May
10, 2010, Jacksonville Bancorp, Inc., the bank holding company for The
Jacksonville Bank, and Atlantic announced the signing of a definitive merger
agreement providing for the merger of Atlantic into Jacksonville Bancorp,
Inc. The completion of this merger would resolve the regulatory and
capital challenges that Atlantic faces since Jacksonville Bancorp, Inc. would be
the surviving entity. See
Note 12 -
Merger
.
In the
event that the merger is not completed, we will continue our efforts to raise
additional capital and have identified transactions to increase our capital by
approximately $4 million, including eliminating our bank owned life insurance,
reducing or eliminating certain retirement benefits, and the potential sale of
assets. In order to improve our Tier 1 leverage ratio, we may also
shrink our total assets.
The
accompanying condensed consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
discharge of liabilities in the normal course of business for the foreseeable
future, and do not include any adjustments to reflect the possible future
effects on the recoverability or classification of assets, and the amounts or
classification of liabilities that may result from the outcome of any regulatory
action, which would affect our ability to continue as a going
concern.
In its
report dated April 15, 2010, covering our audited consolidated financial
statements for the year ended December 31, 2009, our independent registered
public accounting firm stated that our net losses raise substantial doubts about
our ability to continue as a going concern. In that firm’s opinion,
our ability to continue as a going concern is in doubt as a result of the
continued deterioration of our loan portfolio and is subject to our ability to
service our existing loans in a manner that will return Atlantic to
profitability or to identify and consummate a strategic transaction, including
the potential sale of Atlantic. If we are not able to successfully
accomplish such actions, it is possible that our subsidiary bank may fail and be
placed into receivership with the FDIC.
Although
the contemplated merger with Jacksonville Bancorp, Inc. (see
Note 12 – Merger
) is expected
to result in our continued operation as a part of Jacksonville Bancorp, Inc. and
The Jacksonville Bank, such transaction may prove to be insufficient due to the
possible continued decline of the loan portfolio or other losses. If
we are, or the surviving entity in the merger is, unable to return to
profitability, and if we are unable to identify and execute a viable strategic
alternative, we may be unable to continue as a going concern.
|
NOTE
3 -
|
COMPUTATION
OF PER SHARE INCOME (LOSSES)
|
Basic
income (loss) per share amounts are computed by dividing net income (loss) by
the weighted average number of common shares outstanding for the three and six
months ended June 30, 2010 and 2009. Diluted income (loss) per share
is computed by dividing net income (loss) by the weighted average number of
shares and all dilutive potential shares outstanding during the
period. We have no dilutive potential shares outstanding for 2010 or
2009. The following information was used in the computation of income
(loss) per share on both a basic and diluted basis for the three and six months
ended June 30, 2010 and 2009 (dollars and number of shares in
thousands):
|
|
|
Three
months ended
June
30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Basic
and diluted EPS computation:
|
|
|
|
|
|
|
|
Numerator
- Net income (loss)
|
|
$
|
282
|
|
|
$
|
65
|
|
|
Denominator
- Weighted average shares outstanding (rounded)
|
|
|
1,248
|
|
|
|
1,248
|
|
|
Basic
and diluted income (loss) per share
|
|
$
|
0.23
|
|
|
$
|
0.05
|
|
ATLANTIC
BANCGROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE
30, 2010
|
NOTE 3 -
|
COMPUTATION OF PER SHARE INCOME
(LOSSES)
(Continued)
|
|
|
|
Six
months ended
June
30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Basic
and diluted EPS computation:
|
|
|
|
|
|
|
|
Numerator
- Net income (loss)
|
|
$
|
(265
|
)
|
|
$
|
(3
|
)
|
|
Denominator
- Weighted average shares outstanding (rounded)
|
|
|
1,248
|
|
|
|
1,248
|
|
|
Basic
and diluted income (loss) per share
|
|
$
|
(0.21
|
)
|
|
$
|
-
|
|
|
NOTE
4 -
|
INVESTMENT
SECURITIES
|
Our
investment securities, available-for-sale, consist of residential real estate
mortgage investment conduits (“REMICs”) and residential mortgage pass-through
securities (“MBS”) all of which are issued or guaranteed by U.S. Capital
Government agencies such as FNMA, FHLMC, and GNMA. The amortized cost
and estimated fair value of instruments in debt and equity securities are as
follows (dollars in thousands):
|
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REMICs
|
|
$
|
100
|
|
|
$
|
3
|
|
|
$
|
-
|
|
|
$
|
103
|
|
|
$
|
134
|
|
|
$
|
3
|
|
|
$
|
-
|
|
|
$
|
137
|
|
|
MBS
|
|
|
30,024
|
|
|
|
874
|
|
|
|
-
|
|
|
|
30,898
|
|
|
|
42,428
|
|
|
|
217
|
|
|
|
(240
|
)
|
|
|
42,405
|
|
|
|
|
|
30,124
|
|
|
|
877
|
|
|
|
-
|
|
|
|
31,001
|
|
|
|
42,562
|
|
|
|
220
|
|
|
|
(240
|
)
|
|
|
42,542
|
|
|
Held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State,
county and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
municipal
bonds
|
|
|
14,986
|
|
|
|
107
|
|
|
|
(372
|
)
|
|
|
14,721
|
|
|
|
14,989
|
|
|
|
154
|
|
|
|
(395
|
)
|
|
|
14,748
|
|
|
Total
investment securities
|
|
$
|
45,110
|
|
|
$
|
984
|
|
|
$
|
(372
|
)
|
|
$
|
45,722
|
|
|
$
|
57,551
|
|
|
$
|
374
|
|
|
$
|
(635
|
)
|
|
$
|
57,290
|
|
Information
pertaining to securities with gross unrealized losses at June 30, 2010 and
December 31, 2009, aggregated by investment category and length of time that
individual securities have been in a continuous loss position, follows (dollars
in thousands):
|
|
|
Less Than Twelve Months
|
|
|
Over Twelve Months
|
|
|
Total
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
June
30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REMICs
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
MBS
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Held-to-Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State,
county, and municipal bonds
|
|
$
|
(157
|
)
|
|
$
|
5,786
|
|
|
$
|
(215
|
)
|
|
$
|
2,882
|
|
|
$
|
(372
|
)
|
|
$
|
8,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2009
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REMICs
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
MBS
|
|
|
(240
|
)
|
|
|
23,020
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(240
|
)
|
|
|
23,020
|
|
|
|
|
$
|
(240
|
)
|
|
$
|
23,020
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(240
|
)
|
|
$
|
23,020
|
|
|
Held-to-Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State,
county, and municipal bonds
|
|
$
|
(165
|
)
|
|
$
|
4,763
|
|
|
$
|
(230
|
)
|
|
$
|
2,867
|
|
|
$
|
(395
|
)
|
|
$
|
7,630
|
|
ATLANTIC
BANCGROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE
30, 2010
|
NOTE 4 -
|
INVESTMENT
SECURITIES
(Continued)
|
Management
evaluates securities for other-than-temporary impairment at least on a monthly
basis, and more frequently when economic or market concerns warrant such
evaluation. Consideration is given to (i) the length of time and the
extent to which the fair value has been less than cost, (ii) the financial
condition and near-term prospects of the issuer, and (iii) the intent and
ability of Atlantic to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value. At
June 30, 2010, Atlantic did not have any investment securities deemed
other-than-temporarily-impaired debt securities.
The unrealized losses on
investment securities were caused by interest rate changes. Temporary
net decreases in fair value of securities available-for-sale at June 30,
2010, are regarded as an adjustment to stockholders' equity. The
estimated fair value of investment securities is determined on the basis of
market quotations. The following is a summary of the effects on
stockholders’ equity (dollars in thousands):
|
|
|
June
30,
|
|
|
December 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Gross
unrealized gains (losses) on investment securities
available-for-sale
|
|
$
|
877
|
|
|
$
|
(20
|
)
|
|
Deferred
tax benefit (expense) on unrealized gains (losses)
|
|
|
(331
|
)
|
|
|
7
|
|
|
|
|
$
|
546
|
|
|
$
|
(13
|
)
|
The
following presents the net change in unrealized gains or losses on investment
securities available-for-sale that are shown as a component of stockholders’
equity and comprehensive income (loss) for the three and six months ended June
30, 2010 and 2009 (dollars in thousands):
|
|
|
Three
months ended
June
30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding gains (losses) on investment securities arising during
period
|
|
$
|
669
|
|
|
$
|
(156
|
)
|
|
Less:
reclassification adjustment for gains included in net income
(loss)
|
|
|
-
|
|
|
|
(11
|
)
|
|
Other
comprehensive income (loss), before income tax expense
(benefit)
|
|
|
669
|
|
|
|
(167
|
)
|
|
Income
tax benefit (expense) related to items of other comprehensive income
(loss)
|
|
|
(250
|
)
|
|
|
63
|
|
|
Other
comprehensive income (loss), net of income tax expense
(benefit)
|
|
$
|
419
|
|
|
$
|
(104
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
months ended
June
30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding gains (losses) on investment securities arising during
period
|
|
$
|
896
|
|
|
$
|
(157
|
)
|
|
Less:
reclassification adjustment for gains included in net income
(loss)
|
|
|
(21
|
)
|
|
|
(56
|
)
|
|
Other
comprehensive income (loss), before income tax expense
(benefit)
|
|
|
875
|
|
|
|
(213
|
)
|
|
Income
tax benefit (expense) related to items of other comprehensive income
(loss)
|
|
|
(316
|
)
|
|
|
81
|
|
|
Other
comprehensive income (loss), net of income tax expense
(benefit)
|
|
$
|
559
|
|
|
$
|
(132
|
)
|
Gross
gains and losses on sales of investment securities for the three and six months
ended June 30, 2010, totaled
$-0- and
$21,000, respectively. Gross gains and losses on sales of investment
securities for the three and six months ended June 30, 2009, totaled $11,000 and
$56,000, respectively.
At June
30, 2010, investment securities with an amortized cost of $1.5 million and fair
value of $1.4 million were pledged to secure deposits of public funds from the
State of Florida and treasury tax and loan deposits with the Federal
Reserve. At June 30, 2010, investment securities with an amortized
cost of $4.2 million and a fair value of $4.0 million were pledged for the
Federal Reserve discount window, investment securities with an amortized cost of
$13.6 million and a fair value of $13.9 million were pledged to secure FHLB of
Atlanta advances, and investment securities with an amortized cost and a fair
value of $3.6 million were pledged to secure a line of credit to purchase
federal funds (see
Note
7
).
ATLANTIC
BANCGROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE
30, 2010
|
NOTE 4 -
|
INVESTMENT
SECURITIES
(Continued)
|
There
were no securities of a single issuer, which are non-governmental or
non-government sponsored, that exceeded 10% of stockholders’ equity at June 30,
2010.
The cost
and estimated fair value of debt and equity securities at June 30, 2010, by
contractual maturities, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties (dollars in
thousands).
|
|
|
Securities
Available-for-Sale
|
|
|
Securities Held-to-Maturity
|
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
in one year or less
|
|
$
|
36
|
|
|
$
|
37
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Due
after one through five years
|
|
|
5,580
|
|
|
|
5,908
|
|
|
|
271
|
|
|
|
281
|
|
|
Due
after five through fifteen years
|
|
|
17,105
|
|
|
|
17,470
|
|
|
|
2,918
|
|
|
|
2,916
|
|
|
Due
after fifteen years
|
|
|
7,403
|
|
|
|
7,586
|
|
|
|
11,797
|
|
|
|
11,524
|
|
|
|
|
$
|
30,124
|
|
|
$
|
31,001
|
|
|
$
|
14,986
|
|
|
$
|
14,721
|
|
Loans
consisted of (dollars in thousands):
|
|
|
June
30,
|
|
|
December 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Real
estate loans:
|
|
|
|
|
|
|
|
Construction,
land development, and other land
|
|
$
|
29,694
|
|
|
$
|
32,455
|
|
|
1-4
family residential:
|
|
|
|
|
|
|
|
|
|
Secured
by first liens
|
|
|
33,557
|
|
|
|
33,281
|
|
|
Home
equity lines of credit and junior liens
|
|
|
21,130
|
|
|
|
23,619
|
|
|
Multifamily
residential
|
|
|
1,525
|
|
|
|
2,902
|
|
|
Commercial
|
|
|
90,830
|
|
|
|
93,455
|
|
|
|
|
|
176,736
|
|
|
|
185,712
|
|
|
Commercial
loans
|
|
|
11,162
|
|
|
|
11,703
|
|
|
Consumer
and other loans
|
|
|
2,995
|
|
|
|
3,315
|
|
|
Total
loan portfolio
|
|
|
190,893
|
|
|
|
200,730
|
|
|
Less,
deferred fees
|
|
|
(9
|
)
|
|
|
(12
|
)
|
|
Less,
allowance for loan losses
|
|
|
(4,996
|
)
|
|
|
(6,531
|
)
|
|
Loans,
net
|
|
$
|
185,888
|
|
|
$
|
194,187
|
|
A summary
of the activity of loans transferred to Other Real Estate Owned follows (dollars
in thousands):
|
|
|
For
the Three
|
|
|
For
the Six
|
|
|
For
the Twelve
|
|
|
|
|
Months
Ended
|
|
|
Months
Ended
|
|
|
Months
Ended
|
|
|
|
|
June 30, 2010
|
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of period
|
|
$
|
2,305
|
|
|
$
|
1,727
|
|
|
$
|
3,421
|
|
|
Transfers
to OREO
|
|
|
929
|
|
|
|
1,881
|
|
|
|
513
|
|
|
Disposals
|
|
|
(737
|
)
|
|
|
(1,081
|
)
|
|
|
(1,621
|
)
|
|
Write-downs
|
|
|
-
|
|
|
|
(30
|
)
|
|
|
(586
|
)
|
|
Balance,
end of period
|
|
$
|
2,497
|
|
|
$
|
2,497
|
|
|
$
|
1,727
|
|
ATLANTIC
BANCGROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE
30, 2010
|
NOTE
6 -
|
ALLOWANCE
FOR LOAN LOSSES
|
Our Board
of Directors monitors the loan portfolio monthly in order to enable it to
evaluate the adequacy of the allowance for loan losses. We maintain
the allowance for loan losses at a level that we believe to be sufficient to
absorb probable losses inherent in the loan portfolio. Activity in
the allowance for loan losses follows (dollars in thousands):
|
|
|
For
the Three
|
|
|
For
the Six
|
|
|
For
the Twelve
|
|
|
|
|
Months
Ended
|
|
|
Months
Ended
|
|
|
Months
Ended
|
|
|
|
|
June 30, 2010
|
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of period
|
|
$
|
6,651
|
|
|
$
|
6,531
|
|
|
$
|
3,999
|
|
|
Provisions
charged to operating expenses
|
|
|
90
|
|
|
|
962
|
|
|
|
6,268
|
|
|
Loans
charged-off
|
|
|
(1,747
|
)
|
|
|
(2,501
|
)
|
|
|
(3,761
|
)
|
|
Recoveries
|
|
|
2
|
|
|
|
4
|
|
|
|
25
|
|
|
Balance,
end of period
|
|
$
|
4,996
|
|
|
$
|
4,996
|
|
|
$
|
6,531
|
|
The
following is a summary of information pertaining to impaired, nonaccrual, past
due, and restructured loans (dollars in thousands):
|
|
|
June
30,
|
|
|
December 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Loans
evaluated for impairment with a measured impairment
|
|
$
|
15,644
|
|
|
$
|
16,061
|
|
|
Loans
evaluated for impairment without a measured impairment
|
|
|
12,909
|
|
|
|
14,788
|
|
|
Total
impaired loans
|
|
$
|
28,553
|
|
|
$
|
30,849
|
|
|
Valuation
allowance related to impaired loans
|
|
$
|
3,421
|
|
|
$
|
4,380
|
|
|
Nonaccrual
loans included above in impaired loan totals
|
|
$
|
3,814
|
|
|
$
|
6,715
|
|
|
Total
loans past due ninety days or more and still accruing
|
|
|
2,029
|
|
|
|
8
|
|
|
Total
nonperforming loans (“NPL”)
|
|
|
5,843
|
|
|
|
6,723
|
|
|
Restructured
loans
(1)
|
|
|
19,462
|
|
|
|
17,372
|
|
|
Total
NPL and restructured loans
|
|
$
|
25,305
|
|
|
$
|
24,095
|
|
|
Restructured
loans included in nonaccrual loans
above
that are
|
|
|
|
|
|
|
|
|
considered
troubled debt restructurings
|
|
$
|
1,652
|
|
|
$
|
1,842
|
|
|
Average
nonaccrual loans during the period
|
|
$
|
5,690
|
|
|
$
|
7,031
|
|
|
(1)
|
Restructured
loans shown here are performing in compliance with modified terms and are
not included in the definition of nonperforming
loans.
|
At June
30, 2010 and December 31, 2009, interest income accrued and recorded on
nonaccrual loans totaled $-0- and $40,000, respectively, and interest earned but
not recorded on nonaccrual loans at June 30, 2010 and December 31, 2009, was
$291,000 and $533,000, respectively. No additional funds are
committed to be advanced in connection with nonaccrual loans.
|
NOTE
7 -
|
OTHER
BORROWINGS
|
A summary
of other borrowings follows (dollars in thousands):
|
|
|
June
30,
|
|
|
December 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Long-term
borrowings:
|
|
|
|
|
|
|
|
FHLB
of Atlanta advances
|
|
|
|
|
|
|
|
Convertible
debt
|
|
$
|
2,300
|
|
|
$
|
2,300
|
|
|
Fixed
debt
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
|
|
12,300
|
|
|
|
12,300
|
|
|
Junior
subordinated debentures
|
|
|
3,093
|
|
|
|
3,093
|
|
|
|
|
$
|
15,393
|
|
|
$
|
15,393
|
|
ATLANTIC
BANCGROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE
30, 2010
|
NOTE 7 -
|
OTHER BORROWINGS
(Continued)
|
A summary
of the FHLB of Atlanta advances follows (dollars in thousands):
|
|
Maturity Date
|
|
Interest Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
fixed rate debt
|
11/17/2010
|
|
|
4.45
|
%
|
|
$
|
2,300
|
|
|
$
|
2,300
|
|
|
Fixed
rate advances
|
12/20/2010
|
|
|
1.91
|
%
|
|
|
2,000
|
|
|
|
2,000
|
|
|
Fixed
rate advance
|
01/09/2012
|
|
|
2.30
|
%
|
|
|
8,000
|
|
|
|
8,000
|
|
|
|
|
|
|
|
|
|
$
|
12,300
|
|
|
$
|
12,300
|
|
|
NOTE
8 -
|
FINANCIAL
INSTRUMENTS WITH OFF-BALANCE SHEET
RISK
|
We are a
party to credit-related financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of our
customers. These financial instruments include commitments to extend
credit, standby letters of credit, and commercial letters of
credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amounts recognized in the
statements of financial condition. Our exposure to credit loss is
represented by the contractual amount of these c
ommitments. We
follow the same credit policies in making commitments as we do for on-balance
sheet instruments. Financial instruments at June 30, 2010, consisted
of commitments to extend credit approximating $8.8 million and standby letters
of credit of $1.2 million.
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. The commitments for equity lines of credit
may expire without being drawn upon. Therefore, the total commitment
amounts do not necessarily represent future cash requirements. The
amount of collateral obtained, if it is deemed necessary by us, is based on our
credit evaluation of the customer.
|
NOTE
9 -
|
REGULATORY
CAPITAL
|
The
Federal Reserve Board and other bank regulatory agencies have adopted risk-based
capital guidelines for all banks and for bank holding companies whose
consolidated assets are over $500 million. The main objectives of the
risk-based capital framework are to provide a more consistent system for
comparing capital positions of banking organizations and to take into account
the different risks among banking organizations' assets, liabilities, and
off-balance sheet items. Bank regulatory agencies have supplemented
the risk-based capital standard with a leverage ratio for Tier 1 capital to
total reported assets. Failure to meet the capital adequacy
guidelines and the framework for prompt corrective actions could initiate
actions by the regulatory agencies, which could have a material effect on the
consolidated financial statements.
As of
June 30, 2010, Oceanside had not reached the capital levels specified in the
Consent Order. As of June 30, 2010, there are no conditions or
events, since the most recent notification, that management believes have
changed the prompt corrective action category.
|
|
|
Actual
|
|
Required
by
Consent Order
|
|
|
|
|
|
|
|
|
|
Total
capital ratio to risk-weighted assets
|
|
|
8.20
|
%
|
|
|
11.00
|
%
|
|
Tier
1 capital ratio to risk-weighted assets
|
|
|
6.93
|
%
|
|
|
-
|
|
|
Tier
1 capital to average assets
|
|
|
4.64
|
%
|
|
|
8.00
|
%
|
ATLANTIC
BANCGROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE
30, 2010
|
NOTE
10 -
|
FAIR
VALUE MEASUREMENTS
|
Fair Value Measurements and
Disclosure Topic of the ASC
defines fair value as the exchange price that
would be received for an asset or paid to transfer a liability (exit price) in
the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement
date. This standard also establishes a fair value hierarchy that
requires an entity to maximize the use of observable inputs and minimize the use
of unobservable inputs when measuring fair value. The standard
describes three levels of inputs that may be used to measure fair
values:
Level
1: Quoted prices (unadjusted) for identical assets or liabilities in
active markets that the entity has the ability to access as of the measurement
date.
Level
2: Significant other observable inputs other than Level 1 prices such
as quoted prices for similar assets or liabilities; quoted prices in market that
are not active; or other inputs that are observable or can be corroborated by
observable market data.
Level
3: Significant unobservable inputs that reflect a company’s own
estimates of the assumptions that market participants would use in pricing an
asset or liability.
The table
below presents the Atlantic’s assets and liabilities measured at fair value on a
recurring basis as of June 30, 2010 and December 31, 2009, aggregated by the
level in the fair value hierarchy within which those measurements fall (dollars
in thousands).
|
|
|
Quoted
Prices
in Active
Markets for
Identical
Assets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
|
|
|
June 30, 2010
|
|
(
Level 1
)
|
|
|
(
Level 2
)
|
|
|
(
Level 3
)
|
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities, available-for-sale
|
|
$
|
-
|
|
|
$
|
31,001
|
|
|
$
|
-
|
|
|
$
|
31,001
|
|
|
Total
assets at fair value
|
|
$
|
-
|
|
|
$
|
31,001
|
|
|
$
|
-
|
|
|
$
|
31,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities, available-for-sale
|
|
$
|
-
|
|
|
$
|
42,542
|
|
|
$
|
-
|
|
|
$
|
42,542
|
|
|
Total
assets at fair value
|
|
$
|
-
|
|
|
$
|
42,542
|
|
|
$
|
-
|
|
|
$
|
42,542
|
|
Securities
available-for-sale – The fair value of securities available for sale equals
quoted market prices, if available. If quoted market prices are not available,
fair value is determined using quoted market prices for similar securities.
Level 1 securities include those traded on an active exchange, such as the New
York Stock Exchange. Level 2 securities include mortgage-backed
securities, other pass-through securities and collateralized mortgage
obligations of government sponsored entities (GSE’s) and private issuers and
obligations of states and political subdivisions.
Certain
other assets are measured at fair value on a nonrecurring
basis. These adjustments to fair value usually result from
application of lower of cost or fair value accounting or write-downs of
individual assets due to impairment. For assets measured at fair
value on a nonrecurring basis, the following table provides the level of
valuation assumptions used to determine each adjustment and the carrying value
of the related individual assets at June 30, 2010 and December 31, 2009 (dollars
in thousands).
ATLANTIC
BANCGROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE
30, 2010
|
NOTE 10 -
|
FAIR VALUE MEASUREMENTS
(Continued)
|
|
|
|
Quoted
Prices
in Active
Markets for
Identical
Assets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
(
Level 1
)
|
|
|
(
Level 2
)
|
|
|
(
Level 3
)
|
|
|
Total
|
|
|
(
Losses
)
(1)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
direct
write-offs
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
15,644
|
|
|
$
|
15,644
|
|
|
|
|
|
Specific
valuation allowances
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,421
|
)
|
|
|
(3,421
|
)
|
|
|
|
|
Impaired
loans, net
|
|
|
-
|
|
|
|
-
|
|
|
|
12,223
|
|
|
|
12,223
|
|
|
$
|
(11
|
)
|
|
Foreclosed
assets
|
|
|
-
|
|
|
|
-
|
|
|
|
2,497
|
|
|
|
2,497
|
|
|
|
(80
|
)
|
|
Total
assets at fair value
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
14,720
|
|
|
$
|
14,720
|
|
|
$
|
(91
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
direct
write-offs
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
16,061
|
|
|
$
|
16,061
|
|
|
|
|
|
|
Specific
valuation allowances
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,380
|
)
|
|
|
(4,380
|
)
|
|
|
|
|
|
Impaired
loans, net
|
|
|
-
|
|
|
|
-
|
|
|
|
11,681
|
|
|
|
11,681
|
|
|
$
|
(3,509
|
)
|
|
Foreclosed
assets
|
|
|
-
|
|
|
|
-
|
|
|
|
1,727
|
|
|
|
1,727
|
|
|
|
(728
|
)
|
|
Total
assets at fair value
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
13,408
|
|
|
$
|
13,408
|
|
|
$
|
(4,237
|
)
|
(1)
Gains and
losses include write-offs
Loans –
Nonrecurring fair value adjustments to loans reflect full or partial write-downs
that are based on the loan’s observable market price or current appraised value
of the collateral in accordance with loan impairment accounting
guidance. Since the market for impaired loans is not active, loans
subjected to nonrecurring fair value adjustments based on the loan’s observable
market price are generally classified as Level 2. Loans subjected to
nonrecurring fair value adjustments based on the current appraised value of the
collateral may be classified as Level 2 or Level 3 depending on the type of
asset and the inputs to the valuation. When appraisals are used to
determine impairment and these appraisals are based on a market approach
incorporating a dollar-per-square-foot multiple, the related loans are
classified as Level 2. If the appraisals require significant
adjustments to market-based valuation inputs or apply an income approach based
on unobservable cash flows to measure fair value, the related loans subjected to
nonrecurring fair value adjustments are typically classified as Level 3 due to
the fact that Level 3 inputs are significant to the fair value
measurement.
Foreclosed
assets – These assets are reported at the lower of the loan carrying amount at
foreclosure (or repossession) or fair value written down by estimated selling
costs. Fair value is based on third party appraisals for other real
estate owned and other independent sources for repossessed assets, considering
the assumptions in the valuation, and are considered Level 2 or Level 3
inputs.
The
following is a summary of activity of assets and liabilities measured at fair
value on a nonrecurring basis (dollars in thousands):
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2008
|
|
$
|
11,333
|
|
|
$
|
3,496
|
|
|
$
|
14,829
|
|
|
Write-downs
|
|
|
(3,509
|
)
|
|
|
(586
|
)
|
|
|
(4,095
|
)
|
|
Net
transfers in/out Level 3
|
|
|
3,857
|
|
|
|
(1,183
|
)
|
|
|
2,674
|
|
|
Balance,
December 31, 2009
|
|
|
11,681
|
|
|
|
1,727
|
|
|
|
13,408
|
|
|
Write-downs
|
|
|
(11
|
)
|
|
|
(30
|
)
|
|
|
(41
|
)
|
|
Net
transfers in/out Level 3
|
|
|
553
|
|
|
|
800
|
|
|
|
1,353
|
|
|
Balance,
June 30, 2010
|
|
$
|
12,223
|
|
|
$
|
2,497
|
|
|
$
|
14,720
|
|
ATLANTIC
BANCGROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE
30, 2010
|
NOTE
11 -
|
FAIR
VALUE DISCLOSURES
|
The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments for which it is practicable to estimate that
value:
Cash and Cash Equivalents
-
For those short-term instruments, the carrying amount is a reasonable estimate
of fair value.
Investment Securities
- For
securities held as investments, fair value equals quoted market price, if
available.
If a
quoted market price is not available, fair value is estimated using quoted
market prices for similar securities.
Restricted Stock
- Fair value
of Atlantic’s investment in Federal Home Loan Bank and correspondent banks’
stock is its cost.
Loans Receivable
- For loans
subject to repricing and loans intended for sale within six months, fair value
is estimated at the carrying amount plus accrued interest. The fair
value of other types of loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
Deposit Liabilities
- The
fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the reporting date. The
fair value of long-term fixed maturity certificates of deposit is estimated
using the rates currently offered for deposits of similar remaining
maturities.
Other Borrowings
- For
short-term debt, including accounts and demand notes payable, the carrying
amount is a reasonable estimate of fair value. For long-term debt, the fair
value is estimated using discounted cash flow analyses based on current
incremental borrowing rates for similar types of borrowing
arrangements.
Off-Balance Sheet Instruments
- Fair values for off-balance sheet lending commitments are based on rates
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties’ credit
standing.
Other
- Accrued interest
receivable on investment securities and loans and accrued interest payable on
deposits and other borrowings are included in investment securities, loans,
deposits, and other borrowings, accordingly. The carrying amount is a
reasonable estimate of fair value.
The
estimated fair values of Atlantic's financial instruments at June 30, 2010 and
December 31, 2009, follow (dollars in thousands):
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
|
|
|
|
|
|
Financial
Assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
33,131
|
|
|
$
|
33,131
|
|
|
Investment
securities and accrued interest receivable
|
|
|
46,255
|
|
|
|
45,990
|
|
|
Restricted
stock
|
|
|
1,151
|
|
|
|
1,151
|
|
|
Loans
and accrued interest receivable
|
|
|
186,641
|
|
|
|
181,343
|
|
|
Total
assets valued
|
|
$
|
267,178
|
|
|
$
|
261,615
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Liabilities
|
|
|
|
|
|
|
|
|
|
Deposits
and accrued interest payable
|
|
$
|
246,202
|
|
|
$
|
244,233
|
|
|
Other
borrowings and accrued interest payable
|
|
|
15,609
|
|
|
|
15,609
|
|
|
Total
liabilities valued
|
|
$
|
261,811
|
|
|
$
|
259,842
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance
Sheet Commitments
|
|
$
|
9,976
|
|
|
$
|
9,976
|
|
ATLANTIC
BANCGROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE
30, 2010
|
NOTE 11 -
|
FAIR VALUE DISCLOSURES
(Continued)
|
|
December 31,
2009
|
|
|
|
|
|
|
|
Financial
Assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
31,083
|
|
|
$
|
31,083
|
|
|
Investment
securities and accrued interest receivable
|
|
|
57,844
|
|
|
|
57,603
|
|
|
Restricted
stock
|
|
|
1,151
|
|
|
|
1,151
|
|
|
Loans
and accrued interest receivable
|
|
|
194,963
|
|
|
|
189,436
|
|
|
Total
assets valued
|
|
$
|
285,041
|
|
|
$
|
279,273
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Liabilities
|
|
|
|
|
|
|
|
|
|
Deposits
and accrued interest payable
|
|
$
|
270,156
|
|
|
$
|
267,996
|
|
|
Other
borrowings and accrued interest payable
|
|
|
15,520
|
|
|
|
15,520
|
|
|
Total
liabilities valued
|
|
$
|
285,676
|
|
|
$
|
283,516
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance
Sheet Commitments
|
|
$
|
10,538
|
|
|
$
|
10,538
|
|
There
have been no changes since December 31, 2009, in the valuation techniques and
related inputs noted herein.
On May
10, 2010, Jacksonville Bancorp, Inc. ("JBI"), the bank holding company for The
Jacksonville Bank, and Atlantic announced the signing of a definitive merger
agreement providing for the merger of Atlantic into JBI. The merger
agreement also contemplates the consolidation of Oceanside into The Jacksonville
Bank. Additionally, JBI announced the signing of a stock purchase
agreement with four private investors led by CapGen Capital Group IV LP
("CapGen") providing for $30 million in new capital through the sale of newly
issued shares of JBI common stock subject to completion of the
mergers. The transactions have been approved by the Boards of
Directors of each company and are subject to regulatory approval, shareholders'
approvals, and other customary conditions. JBI and Atlantic expect to
close the transaction in the fourth quarter of 2010.
Under the
terms of the merger agreement, Atlantic’s shareholders will receive 0.2 shares
of JBI common stock for each share of Atlantic’s common stock. A
total of approximately 250,000 shares of JBI common stock is expected to be
issued to Atlantic’s shareholders.
Under the
merger agreement, if Oceanside sold certain assets prior to the effective time
of the merger of Atlantic and JBI, the proceeds from such sale are to be
distributed on a pro rata basis to Atlantic’s shareholders as part of the merger
consideration. On June 30, 2010, Oceanside Bank sold such assets to
an unaffiliated third party in exchange for $700,000 in cash. Based
on 1,247,516 shares of Atlantic common stock presently outstanding, Atlantic
estimates the per share distribution from the sale will be
$0.56112.
|
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Overview
Commercial Banking
Operations.
Atlantic, through its wholly-owned subsidiary,
Oceanside, conducts commercial banking business consisting of attracting
deposits and applying those funds to the origination of commercial, consumer,
and real estate loans (including commercial loans collateralized by real estate)
and purchases of investments. Our profitability depends primarily on
net interest income, which is the difference between interest income generated
from interest-earning assets (principally loans, investments, and federal funds
sold), less the interest expense incurred on interest-bearing liabilities
(customer deposits and borrowed funds). Net interest income is
affected by the relative amounts of interest-earning assets and interest-bearing
liabilities, and the interest rate earned and paid on these
balances. Net interest income is dependent upon Oceanside’s
interest-rate spread, which is the difference between the average yield earned
on its interest-earning assets and the average rate paid on its interest-bearing
liabilities. When interest-earning assets approximate or exceed
interest-bearing liabilities, any positive interest rate spread will generate
net interest income. The interest rate spread is impacted by interest
rates, deposit flows, and loan demand. Additionally, and to a lesser extent, our
profitability is affected by such factors as the level of noninterest income and
expenses, the provision for loan losses, and the effective income tax rate.
Noninterest income consists primarily of service fees on deposit accounts and
mortgage banking fees. Noninterest expense consists of compensation and employee
benefits, occupancy and equipment expenses, deposit insurance premiums paid to
the FDIC, and other operating expenses.
Our
corporate offices are located at 1315 South Third Street, Jacksonville
Beach, Florida. This location is also our main banking office for
Oceanside, which opened July 21, 1997, as a Florida state-chartered banking
organization. We also operate branch offices located at 560 Atlantic
Boulevard, Neptune Beach, Florida, 13799 Beach Boulevard, Jacksonville,
Florida, and 1790 Kernan Boulevard South, Jacksonville,
Florida.
Forward-looking
Statements
When used
in this Form 10-Q, the words or phrases “will likely result,” “are expected to,”
“will continue,” “is anticipated,” “estimate,” “project,” or similar expressions
are intended to identify “forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are
subject to certain risks and uncertainties including changes in economic
conditions in our market area, changes in policies by regulatory agencies,
fluctuations in interest rates, demand for loans in our market area and
competition, that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. We caution
readers not to place undue reliance on any such forward-looking statements,
which speak only as to the date made. We advise readers that the
factors listed above, as well as others, could affect our financial performance
and could cause our actual results for future periods to differ materially from
any opinions or statements expressed with respect to future periods in any
current statements. We do not undertake, and specifically disclaim any
obligation, to publicly release the result of any revisions, which may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements, or to reflect the occurrence of anticipated or
unanticipated events.
Future
Accounting Requirements
There are
currently no pronouncements issued or that are scheduled for implementation
during 2010 that are expected to have any significant impact on our accounting
policies.
Impact
of Inflation
The
consolidated financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles, which
require the measurements of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation. Unlike most industrial
companies, substantially all of our assets and liabilities are monetary in
nature. As a result, interest rates have a more significant impact on
our performance than the effects of general levels of
inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services, since
such prices are affected by inflation to a larger extent than interest
rates. As discussed previously, we seek to manage the relationships
between interest-sensitive assets and liabilities in order to protect against
wide interest rate fluctuations, including those resulting from
inflation.
Critical
Accounting Policies
Our
accounting and reporting policies are in accordance with U.S. generally accepted
accounting principles (“GAAP”), and they conform to general practices within the
banking industry. We use a significant amount of judgment and
estimates based on assumptions for which the actual results are uncertain when
we make the estimations. We have identified our policy covering the
allowance for loan losses as being particularly sensitive in terms of judgments
and the extent to which significant estimates are used. For more
information on this critical accounting policy, please refer to our 2009 Annual
Report on Form 10-K.
Results
of Operations
We reported consolidated net
income of $282,000 for the three months ended June 30, 2010, after three
consecutive quarters of losses stemming from the depressed real estate market
and the effects of local, state, and national economic trends. We
also experienced increased net interest margins in 2010 compared with
2009. Consolidated net income for the three months ended June 30,
2009 was $65,000. During the second quarter of 2010, net interest
income was $2,053,000 versus $1,561,000 second quarter of 2009, reflecting a
lower cost of funds of 1.02% and a decreased provision for loan
losses. We also expensed deposit insurance assessments of $419,000 in
the quarter ended June 30, 2010, as compared with $239,000 in the same period of
2009.
Our net loss for the six
months ended June 30, 2010, was $265,000, as compared with a net loss of $3,000
in the same period of 2009. In addition to the items discussed above
for the first half of 2010, we continued to improve our liquidity with total
cash and cash equivalents, which include interest-bearing deposits, reaching
$33.1 million at June 30, 2010, as compared with $31.1 million at December 31,
2009.
Other significant items
affecting 2010 results of operations include:
|
·
|
A decrease in net loan
exposure from $194.2 million to $185.9 million, a decrease of
4.3%.
|
|
·
|
Noninterest expenses,
excluding deposit insurance assessments, decreased from $3,403,000 to
$3,310,000 for the six months ended June 30, 2009 and 2010,
respectively.
|
|
·
|
Net interest income
before provision for loan losses increased from $3,458,000 in 2009 to
$4,198,000 in 2010, an increase of $740,000, or 21.4%, as a result of an
increase in our net interest margin from 2.89% in 2009 to 3.29% in
2010.
|
|
·
|
Higher provisions for
loan losses, which totaled $962,000 for the six months ended June 30,
2010, as compared with $367,000 for the same period of
2009.
|
|
·
|
During the first
quarter of 2009, Oceanside reported a write-down of $179,000 on its
investment in a correspondent bank, Silverton Bank, National
Association. Silverton Bank was closed by federal regulators on
May 1, 2009. There was no such loss in
2010.
|
Financial
Condition
The
following table shows selected ratios for the periods ended or at the dates
indicated (annualized for the three and six months ended June 30,
2010):
|
|
|
Three
Months
Ended
June 30, 2010
|
|
Six
Months Ended
June 30, 2010
|
|
Year
Ended
December 31,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on average assets
|
|
|
0.41
|
%
|
|
|
-0.19
|
%
|
|
|
-2.43
|
%
|
|
Return
on average equity
|
|
|
11.88
|
%
|
|
|
-5.60
|
%
|
|
|
-45.70
|
%
|
|
Interest-rate
spread
|
|
|
3.15
|
%
|
|
|
3.05
|
%
|
|
|
2.92
|
%
|
|
Net
interest margin
|
|
|
3.40
|
%
|
|
|
3.29
|
%
|
|
|
2.98
|
%
|
|
Noninterest
expenses to average assets
|
|
|
3.05
|
%
|
|
|
2.89
|
%
|
|
|
2.85
|
%
|
Liquidity
and Capital Resources
Liquidity
Management
. Liquidity management involves monitoring the
sources and uses of funds in order to meet our day-to-day cash flow requirements
while maximizing profits. Liquidity represents the ability of a
company to convert assets into cash or cash equivalents without significant loss
and to raise additional funds by increasing liabilities. Liquidity
management is made more complicated because different statements of financial
condition components are subject to varying degrees of management
control. For example, the timing of maturities of the investment
portfolio is very predictable and subject to a high degree of control at the
time investment decisions are made. However, net deposit inflows and
outflows are far less predictable and are not subject to the same degree
of
control.
Asset liquidity is provided by cash and assets that are readily marketable,
which can be pledged, or which will mature in the near
future. Liability liquidity is provided by access to core funding
sources, principally the ability to generate customer deposits in our market
area. In addition, liability liquidity is provided through the
ability to borrow against approved lines of credit (federal funds purchased)
from correspondent banks and to borrow on a secured basis through securities
sold under agreements to repurchase.
We expect
to meet our liquidity needs with:
|
·
|
Available
cash, including both interest and noninterest-bearing balances, which
totaled $33.1 million at June 30,
2010;
|
|
·
|
The
repayment of loans, which include loans with a remaining maturity or
repricing of one year or less (excluding those in nonaccrual status)
totaling $73.3 million;
|
|
·
|
Proceeds
of unpledged securities available-for-sale and principal repayments from
mortgage-backed securities;
|
|
·
|
Retention
of and growth in deposits; and,
|
|
·
|
If
necessary, borrowing against approved lines of credit and other
alternative funding
strategies.
|
Short-Term
Investments.
Short-term investments (which consist of federal
funds sold, interest-bearing deposits, and investment securities maturing in six
months or less) were
$24.8 million at June 30,
2010,
as compared to $31.7 at December 31, 2009. We regularly
review our liquidity position and have implemented internal policies that
establish guidelines for sources of asset-based liquidity and limit the total
amount of purchased funds used to support the statement of financial condition
and funding from non-core sources. To further enhance our liquidity,
we have developed alternative funding strategies that have been approved by our
Board of Directors. At June 30, 2010, alternate funding strategies
included (dollars in thousands):
|
Lines
of credit to purchase federal funds:
|
|
|
|
|
Secured
|
|
$
|
8,000
|
|
|
Unsecured
|
|
|
1,000
|
|
|
Federal
Reserve discount window
(1)
|
|
|
3,131
|
|
|
|
|
$
|
12,131
|
|
(1)
Subject
to prior approval
Emergency Economic Stabilization Act
of 2008
. In October 2008, the Emergency Economic Stabilization
Act of 2008 (“EESA”) was signed into law. The EESA temporarily
revises the federal deposit insurance laws by increasing the basic deposit
insurance coverage from $100,000 to $250,000 per depositor. With the
passage of the Wall Street Reform and Consumer Protection Act on July 21, 2010,
the FDIC insurance limit of $250,000 per depositor per insured bank has been
made permanent. The EESA also authorized the United States Department
of the Treasury to implement programs to provide financial assistance and/or
support to financial institutions. We have not participated in any
such programs.
Deposits and Other Sources of
Funds
. In addition to deposits, the sources of funds available
for lending and other business purposes include loan repayments, loan sales,
securities sold under agreements to repurchase, and advances under lines of
credit to purchase federal funds. Loan repayments are a relatively
stable source of funds, while deposit inflows and outflows are influenced
significantly by general interest rates and money market
conditions. Borrowings may be used on a short-term basis to
compensate for reductions in other sources, such as deposits at less than
projected levels.
Core
Deposits
. Core deposits, which exclude certificates of deposit
of $100,000 or more, provide a relatively stable funding source for our loan
portfolio and other earning assets. We had core deposits totaling
$173.3 million at June 30, 2010, and $223.3 million at December 31, 20
09, a decrease of
22.4%. This decrease in core deposits was attributed
to:
|
·
|
Our
liquidity targets were met without renewing higher-priced deposits as they
matured and were settled;
|
|
·
|
A shift of core
deposits (money market and NOW accounts) to higher-priced time deposits,
$100,000 and over; and
|
|
·
|
The overall reduction
in total assets of $23.2
million.
|
We anticipate that a stable
base of deposits will be our primary source of funding to meet both short-term
and long-term liquidity needs in the future.
Customers with large
certificates of deposit tend to be extremely sensitive to interest rate levels,
making these deposits less reliable sources of funding for liquidity planning
purposes than core deposits. Some financial institutions acquire
funds in part through large certificates of deposit obtained through
brokers. These brokered deposits have been historically expensive and
unreliable as long-term funding sources. Pursuant to the Consent
Order, we are prohibited, throughout the life of the Consent Order, from
accepting, renewing, or rolling over any brokered deposits, and must comply with
the restrictions on the effective yields on deposits exceeding national
averages. Brokered certificates of deposit issued by us totaled $13.2
million at June 30, 2010, and $19.1 million at December 31, 2009, a decrease of
30.9%.
We use
our resources principally to fund existing and continuing loan commitments and
to purchase investment securities. At June 30, 2010, we had
commitments to extend credit total
ing $8.8 million, and had
issued, but unused, standby letters of credit of $1.2 million for the same
period. In addition, scheduled maturities of certificates of deposit
during the twelve months following June 30, 2010, total $111.0 million.
We believe that resources exist to fund all our anticipated
commitments.
Capital
. We are
subject to various regulatory capital requirements administered by the federal
and state banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on our financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective actions, we must meet
specific capital guidelines that involve quantitative measures of our assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors. FDIC’s Prompt Corrective Action
regulations are not applicable to bank holding companies.
Quantitative
measures established by regulation to ensure capital adequacy require us to
maintain minimum amounts and ratios (set forth in the following table) of total
and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average
assets (as defined in the regulations). At June 30, 2010, Oceanside’s
actual capital amounts and percentages are presented in the following table
(dollars in thousands):
|
|
|
Actual
|
|
Required
by Consent Order
|
|
|
|
Amount
|
|
|
%
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital to risk-weighted assets
|
|
$
|
15,110
|
|
|
|
8.20
|
%
|
|
$
|
20,274
|
|
|
|
11.00
|
%
|
|
Tier
1 capital to risk-weighted assets
|
|
$
|
12,773
|
|
|
|
6.93
|
%
|
|
|
-
|
|
|
|
-
|
|
|
Tier
1 capital to average assets
|
|
$
|
12,773
|
|
|
|
4.64
|
%
|
|
$
|
22,021
|
|
|
|
8.00
|
%
|
At June
30, 2010, Oceanside did not meet the required ratios under the Consent
Order.
Notes 1
and
9
to
Condensed Consolidated Financial
Statements
discuss events that may affect Oceanside’s required level of
capital to maintain in the future.
We have
developed policies and procedures for evaluating the overall quality of our
credit portfolio and the timely identification of potential problem
loans. Our judgment as to the adequacy of the allowance is based upon
a number of assumptions about future events that we believe to be reasonable,
but which may or may not be valid. Thus, there can be no assurance
that charge-offs in future periods will not exceed the allowance for loan losses
or that additional increases in the loan loss allowance will not be
required.
Asset
Classification.
Commercial banks are required to review and,
when appropriate, classify their assets on a regular basis. The State
of Florida and the FDIC have the authority to identify problem assets and, if
appropriate, require them to be classified or require a harsher classification
than management has assessed. There are three classifications for
problem (or classified) assets: substandard, doubtful, and
loss. Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful
assets have the weaknesses of substandard assets with the additional
characteristic that the weaknesses make collection or liquidation in full on the
basis of currently existing facts, conditions, and values questionable, and
there is a high possibility of loss. An asset classified as loss is
considered uncollectible and of such little value that continuance as an asset
of the institution is not warranted. If an
asset or
portion thereof is classified as loss, the insured institution establishes a
specific reserve for the full amount of the portion of the asset classified as
loss. All or a portion of general loss allowances established to
cover possible losses related to assets classified as substandard or doubtful
may be included in determining an institution's regulatory capital, while
specific valuation allowances for loan losses generally do not qualify as
regulatory capital.
Assets
that do not warrant classification in the aforementioned categories, but possess
weaknesses, are classified by us as special mention and monitored. We
also monitor other loans based on a variety of factors and internally designate
these loans as watch list loans.
Management
monitors our loan portfolio throughout the month for classification
changes. Each month, we perform a detailed internal review to
determine an appropriate level of reserves to set aside for probable losses in
our loan portfolio. We supplement our internal reviews with external
loan reviews performed by an independent loan review firm. The
regulatory agencies also have the authority to require additional levels of
reserves if they deem necessary despite management’s best efforts to establish
an appropriate level of reserves consistent with generally accepted accounting
principles. Sometimes our collective assessments from internal and
external loan reviews may differ from the regulatory assessment.
For
regulatory and internal reporting purposes, including our ALLL methodology, we
track the following loan pools or loan types: commercial real estate,
residential real estate, commercial, and consumer and other
loans. For regulatory and ALLL purposes, the following summarizes our
classified loans at December 31, 2009 and June 30, 2010 (dollars in
thousands)
|
December 31, 2009
|
|
Classified Loans
|
|
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Loss
|
|
|
Total
|
|
|
Commercial
real estate
|
|
$
|
24,552
|
|
|
$
|
1,350
|
|
|
$
|
-
|
|
|
$
|
25,902
|
|
|
Residential
real estate
|
|
|
4,369
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,369
|
|
|
Total
real estate
|
|
|
28,921
|
|
|
|
1,350
|
|
|
|
-
|
|
|
|
30,271
|
|
|
Commercial
|
|
|
494
|
|
|
|
-
|
|
|
|
-
|
|
|
|
494
|
|
|
Consumer
and other loans
|
|
|
83
|
|
|
|
-
|
|
|
|
-
|
|
|
|
83
|
|
|
Total
|
|
$
|
29,498
|
|
|
$
|
1,350
|
|
|
$
|
-
|
|
|
$
|
30,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate
|
|
$
|
23,486
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
23,486
|
|
|
Residential
real estate
|
|
|
4,484
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,484
|
|
|
Total
real estate
|
|
|
27,970
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27,970
|
|
|
Commercial
|
|
|
520
|
|
|
|
-
|
|
|
|
-
|
|
|
|
520
|
|
|
Consumer
and other loans
|
|
|
64
|
|
|
|
-
|
|
|
|
-
|
|
|
|
64
|
|
|
Total
|
|
$
|
28,554
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
28,554
|
|
Other
classified assets include other real estate owned and foreclosed assets are
considered classified assets, which totaled $1,727,000 and
$2,497,000
at December
31, 2009 and June 30, 2010, respectively.
Allowance for Loan
Losses
. The allowance for loan losses is established through a
provision for loan losses charged against income. Loans are charged
against the allowance when we believe that the collectibility of principal is
unlikely. The provision is an estimated amount that we believe will
absorb probable losses inherent in the loan portfolio based on evaluations of
its collectibility. The evaluations take into consideration such
factors as changes in the nature and volume of the portfolio, overall portfolio
quality, specific problem loans and commitments, and current anticipated
economic conditions that may affect the borrower's ability to
pay. While we use the best information available to recognize losses
on loans, future additions to the provision may be necessary based on changes in
economic conditions. A summary of balances in the allowance for loan
losses and key ratios follows (dollars in thousands):
|
|
|
For
the Six Months Ended
June 30,
2010
|
|
|
For
the Twelve Months Ended
December 31,
2009
|
|
|
|
|
|
|
|
|
|
|
End
of period loans (net of deferred fees)
|
|
$
|
190,884
|
|
|
$
|
200,718
|
|
|
End
of period allowance for loan losses
|
|
$
|
4,996
|
|
|
$
|
6,531
|
|
|
%
of allowance for loan losses to total loans
|
|
|
2.62
|
%
|
|
|
3.25
|
%
|
|
Average
loans for the period
|
|
$
|
197,115
|
|
|
$
|
206,188
|
|
|
Net
charge-offs as a percentage of average loans
|
|
|
|
|
|
|
|
|
|
for
the period (annualized for 2010)
|
|
|
2.55
|
%
|
|
|
1.81
|
%
|
|
Nonperforming
assets:
|
|
|
|
|
|
|
|
|
|
Nonaccrual
loans
|
|
$
|
3,814
|
|
|
$
|
6,715
|
|
|
Loans
past due 90 days or more and still accruing
|
|
|
2,029
|
|
|
|
8
|
|
|
Nonperforming
loans
|
|
|
5,843
|
|
|
|
6,723
|
|
|
Foreclosed
real estate
|
|
|
2,497
|
|
|
|
1,727
|
|
|
|
|
$
|
8,340
|
|
|
$
|
8,450
|
|
|
Nonperforming
loans to end of period loans
|
|
|
3.06
|
%
|
|
|
3.35
|
%
|
|
Nonperforming
assets to period end total assets
|
|
|
3.04
|
%
|
|
|
2.84
|
%
|
At June 30, 2010, we had 67
loans totaling approximately $28.6 million classified as substandard, doubtful,
or loss. At June 30, 2010, management had provided specific reserves
totaling $3.4 million for loans risk-rated substandard or
worse.
Our internally-classified
loans decreased 7.4% from December 31, 2009, levels of $30.8
million. Our nonperforming assets also decreased 1.3%, which included
an increase in other real estate owned and foreclosed assets of $0.8 million, or
44.6%, and a decrease in nonperforming loans of $0.9 million, or 13.1%,
principally due to four loans transferred to other real estate
owned.
Included
in our
total classified
loans of $28.6 million
, we internally monitor classified loans that we
believe continue to meet the regulatory definition of performing
loans. While we may experience losses, many of these loans are
believed to be well-secured and making payments.
The
following summarizes our classified loans by loan pools and the amounts reserved
as of December 31, 2009 and June 30, 2010 (dollars in thousands):
|
|
|
Classified Loans
|
|
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Loss
|
|
|
Total
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Balances by Loan Pools
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate
|
|
$
|
24,552
|
|
|
$
|
1,350
|
|
|
$
|
-
|
|
|
$
|
25,902
|
|
|
Residential
real estate
|
|
|
4,369
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,369
|
|
|
Total
real estate
|
|
|
28,921
|
|
|
|
1,350
|
|
|
|
-
|
|
|
|
30,271
|
|
|
Commercial
|
|
|
494
|
|
|
|
-
|
|
|
|
-
|
|
|
|
494
|
|
|
Consumer
and other loans
|
|
|
83
|
|
|
|
-
|
|
|
|
-
|
|
|
|
83
|
|
|
Total
loan balances
|
|
$
|
29,498
|
|
|
$
|
1,350
|
|
|
$
|
-
|
|
|
$
|
30,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALLL - Reserves by Loan
Pools
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate
|
|
$
|
3,621
|
|
|
$
|
430
|
|
|
$
|
-
|
|
|
$
|
4,051
|
|
|
Residential
real estate
|
|
|
2,223
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,223
|
|
|
Total
real estate
|
|
|
5,844
|
|
|
|
430
|
|
|
|
-
|
|
|
|
6,274
|
|
|
Commercial
|
|
|
194
|
|
|
|
-
|
|
|
|
-
|
|
|
|
194
|
|
|
Consumer
and other loans
|
|
|
63
|
|
|
|
-
|
|
|
|
-
|
|
|
|
63
|
|
|
Total
reserves by loan pools
|
|
$
|
6,101
|
|
|
$
|
430
|
|
|
$
|
-
|
|
|
|
6,531
|
|
|
Unallocated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
Total
ALLL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,531
|
|
|
|
|
Classified Loans
|
|
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Loss
|
|
|
Total
|
|
|
June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Balances by Loan Pools
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate
|
|
$
|
23,486
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
23,486
|
|
|
Residential
real estate
|
|
|
4,484
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,484
|
|
|
Total
real estate
|
|
|
27,970
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27,970
|
|
|
Commercial
|
|
|
520
|
|
|
|
-
|
|
|
|
-
|
|
|
|
520
|
|
|
Consumer
and other loans
|
|
|
64
|
|
|
|
-
|
|
|
|
-
|
|
|
|
64
|
|
|
Total
loan balances
|
|
$
|
28,554
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
28,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALLL - Reserves by Loan
Pools
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate
|
|
$
|
2,715
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,715
|
|
|
Residential
real estate
|
|
|
2,073
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,073
|
|
|
Total
real estate
|
|
|
4,788
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,788
|
|
|
Commercial
|
|
|
66
|
|
|
|
-
|
|
|
|
-
|
|
|
|
66
|
|
|
Consumer
and other loans
|
|
|
117
|
|
|
|
-
|
|
|
|
-
|
|
|
|
117
|
|
|
Total
reserves by loan pools
|
|
$
|
4,971
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
4,971
|
|
|
Unallocated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
Total
ALLL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,996
|
|
Consent Order.
The
following summarizes the classified loans and assets identified by the FDIC in
November 2008 and the timing of the anticipated reductions as required under the
Consent Order executed January 7, 2010 (dollars in thousands):
|
|
|
Asset Classifications
|
|
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Loss
|
|
|
Total
|
|
|
Loans
identified by FDIC in
November
2008 Exam
|
|
$
|
23,547
|
|
|
$
|
-
|
|
|
$
|
1,217
|
|
|
$
|
24,764
|
|
|
Classified
OREO and other
assets
identified by FDIC in
November
2008 Exam
|
|
|
3,042
|
|
|
|
-
|
|
|
|
781
|
|
|
|
3,823
|
|
|
Total
classified assets identified
by
FDIC in November 2008
Exam
|
|
$
|
26,589
|
|
|
$
|
-
|
|
|
$
|
1,998
|
|
|
$
|
28,587
|
|
|
Classified
assets to be eliminated
from
books within 30 days
from
receipt of report
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,998
|
|
|
$
|
1,998
|
|
|
|
|
Number
of Days from Date of Consent Order
|
|
|
|
|
(January 7, 2010)
|
|
|
|
|
90 Days
(March 31, 2010)
|
|
|
180 Days
(June 30, 2010)
|
|
|
270 Days
|
|
|
360 Days
|
|
|
Allowable
% of classified assets
from
November 2008 Exam to
Tier
1 Capital plus ALLL
|
|
|
100
|
%
|
|
|
85
|
%
|
|
|
60
|
%
|
|
|
50
|
%
|
|
Tier
1 capital plus ALLL at
end
of quarter
|
|
$
|
19,050
|
|
|
$
|
17,769
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Target
for remaining balance of
classified
assets under
Consent
Order
based on
June 30, 2010
(1)
|
|
$
|
19,050
|
|
|
$
|
15,104
|
|
|
$
|
10,661
|
|
|
$
|
8,885
|
|
|
Remaining
balance of classified
assets
at end of quarter
|
|
$
|
16,221
|
|
|
$
|
14,105
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Percentage
|
|
|
85.1
|
%
|
|
|
79.4
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Target
has been met
|
|
Yes
|
|
|
Yes
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
(1)
|
Tier 1 capital plus ALLL
calculated at end of
period
|
The
following shows the composition of the assets classified by the FDIC in its
November 2008 Exam (dollars in thousands):
|
|
|
Asset Classifications
|
|
|
Assets Classified by FDIC
in November 2008 Exam
|
|
Substandard
|
|
|
Doubtful
|
|
|
Loss
|
|
|
Total
|
|
|
Commercial
real estate
|
|
$
|
19,422
|
|
|
$
|
-
|
|
|
$
|
1,110
|
|
|
$
|
20,532
|
|
|
Residential
real estate
|
|
|
1,472
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,472
|
|
|
Total
real estate
|
|
|
20,894
|
|
|
|
-
|
|
|
|
1,110
|
|
|
|
22,004
|
|
|
Commercial
|
|
|
2,584
|
|
|
|
-
|
|
|
|
93
|
|
|
|
2,677
|
|
|
Consumer
and other loans
|
|
|
69
|
|
|
|
-
|
|
|
|
14
|
|
|
|
83
|
|
|
Total
|
|
|
23,547
|
|
|
|
-
|
|
|
|
1,217
|
|
|
|
24,764
|
|
|
Other
real estate owned
|
|
|
2,967
|
|
|
|
-
|
|
|
|
781
|
|
|
|
3,748
|
|
|
Other
foreclosed assets
|
|
|
75
|
|
|
|
-
|
|
|
|
-
|
|
|
|
75
|
|
|
|
|
$
|
26,589
|
|
|
$
|
-
|
|
|
$
|
1,998
|
|
|
$
|
28,587
|
|
Twelve
loan relationships accounted for 95% of the classified loans and 2 foreclosed
real estate properties accounted for 85% of the other classified
assets. The composition of these loan relationships and other real
estate owned (each in excess of $500,000) follows (dollars in
thousands):
|
|
|
Classified
Loans
|
|
|
OREO
|
|
|
Commercial
real estate
|
|
$
|
19,989
|
|
|
|
85
|
%
|
|
$
|
2,444
|
|
|
|
76
|
%
|
|
Residential
real estate
|
|
|
880
|
|
|
|
4
|
%
|
|
|
790
|
|
|
|
24
|
%
|
|
Commercial
|
|
|
2,557
|
|
|
|
11
|
%
|
|
|
-
|
|
|
|
0
|
%
|
|
Consumer
and other loans
|
|
|
-
|
|
|
|
0
|
%
|
|
|
-
|
|
|
|
0
|
%
|
|
|
|
$
|
23,426
|
|
|
|
100
|
%
|
|
$
|
3,234
|
|
|
|
100
|
%
|
Twelve of
the classified loans were on nonaccrual status, which amounted to 30% of the
classified loans, and six other loans were past due, or 11% of the classified
loans. The issues identified by the FDIC that gave rise to the loan
classifications included:
|
·
|
Weakening
economic conditions in Oceanside’s real estate
market,
|
|
·
|
Inappropriate
concentrations of commercial real estate, which was slightly over the
regulatory guidelines at the time of the FDIC November 2008
Exam,
|
|
·
|
The
likelihood of continued asset
deterioration,
|
|
·
|
Loans
with little or no principal reductions (including interest-only
loans),
|
|
·
|
Loans
originated to renovate or develop real estate where the project had
stalled because of the significant downturn in Oceanside’s trade
area,
|
|
·
|
Slow
or stalled sales of real estate
collateral,
|
|
·
|
Marginal
or insufficient collateral coverage,
and
|
|
·
|
Strained
borrower and/or guarantor cash flow and liquidity due to the recent
downturn in the economy, the falling stock market, and rising
unemployment.
|
Since the
identification of classified assets by the FDIC in its November 2008 Exam, we
have disposed of approximately 58% of the original balances (see
below). Of this net reduction, approximately 43% was related to
improved performance and risk-rating of the formerly classified loan and
approximately 38% was attributable to charge-offs or write-downs taken on the
classified assets. Of the $5.5 million of charge-offs and
write-downs, 2 loans accounted for $4.2 million and 1 foreclosed real estate
project totaled $1.1 million. The largest OREO classified asset,
which started out at $2.4 million, has two remaining units under contract for
sale at the end of the second quarter of 2010 with no additional losses
anticipated. Subsequent to June 30, 2010, one of the two units under contract
was sold and closed.
Based on
our ongoing monitoring of the classified assets identified by the FDIC, we do
not anticipate significant additional losses in excess of the specific reserves
at June 30, 2010 (dollars in thousands):
|
|
|
Amount
|
|
|
%
of Write-
downs/Reserves
to
Total
Remaining
Balances
|
|
Remaining
balances of loans identified by FDIC in November 2008 Exam
|
|
$
|
11,794
|
|
|
|
|
|
Direct
write-downs
|
|
|
-
|
|
|
|
-
|
%
|
|
Subtotal
|
|
|
11,794
|
|
|
|
|
|
|
Specific
reserves
|
|
|
(898
|
)
|
|
|
8
|
%
|
|
Net
|
|
$
|
10,896
|
|
|
|
|
|
We are
also ahead of the
FDIC target of reducing
these classified assets to below 85% of Tier 1 capital plus ALLL by reaching
79.4% in less than 180 days from the date of the Consent Order. While
we cannot predict whether we will continue to meet these targets, the
further reduction in our
largest classified OREO project in the third quarter of 2010 should help meet
the next target of 60% within 270 days of the Consent Order.
In
developing the level of ALLL at each quarter end, we evaluated the substandard
loans classified by the FDIC for impairment in the same manner as discussed
elsewhere in this filing. Specifically, we obtain updated appraisals
or evaluations periodically and assess each quarter any needed reserves as
required under
ASC
310-10-35
(formerly SFAS No. 114,
Accounting by Creditors
for Impairment of a Loan
)
. Throughout the quarter, our special
assets officer monitors and updates values as needed. Since 6 loan
relationships comprise 98% of the remaining classified loan balances of $11.8
million at June 30, 2010, we are able to give substantial attention and
consideration of these specific loans in developing our ALLL
calculation. Also, because, the balance in these loans classified by
the FDIC declined more rapidly than scheduled in the Consent Order, these
classified loans represent approximately 41% of the loans evaluated for
impairment at June 30, 2010, and the level of specific reserves allocated to
these loans of $898,000 was approximately 18% of the total ALLL at June 30,
2010.
|
Disposition
of classified assets identified by FDIC
in
November 2008 Exam (through June 30, 2010)
|
|
Amount
|
|
|
%
Composition of
Reductions
|
|
%
of Remaining to
Original
Loan
Balances
|
|
Loans
upgraded to non-classified status based on payment performance or other
reduction(s) in credit weaknesses giving rise to initial classification by
FDIC
|
|
$
|
6,296
|
|
|
|
43
|
%
|
|
|
26
|
%
|
|
Charged-off
or write-downs
|
|
|
5,457
|
|
|
|
38
|
%
|
|
|
21
|
%
|
|
Sales
of other real estate owned and other foreclosed assets, net of
write-downs
|
|
|
3,201
|
|
|
|
22
|
%
|
|
|
13
|
%
|
|
Advances,
net of repayments
|
|
|
(472
|
)
|
|
|
-3
|
%
|
|
|
-2
|
%
|
|
Net
reductions
|
|
$
|
14,482
|
|
|
|
100
|
%
|
|
|
58
|
%
|
Additional Disclosures - Higher Risk
Loans.
Certain types of loans, such as option ARM products,
junior lien mortgages, high loan-to-value ratio mortgages, interest only loans
(which are generally associated with construction and development loans),
subprime loans, and loans with initial teaser rates, can have a greater risk of
non-collection than other loans. We have not engaged in the practice
of lending in the subprime market or offering loans with initial teaser rates
and option ARM products. A summary of our loan portfolio by loan type
follows:
|
|
|
As of
June 30, 2010
|
|
|
As of
December 31, 2009
|
|
|
|
|
Amount
|
|
|
% of Total
|
|
|
Amount
|
|
|
% of Total
|
|
|
Real
estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction,
land development, and other land
|
|
$
|
29,694
|
|
|
|
16
|
%
|
|
$
|
32,455
|
|
|
|
16
|
%
|
|
1-4
family residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured
by second liens
|
|
|
33,557
|
|
|
|
18
|
%
|
|
|
33,281
|
|
|
|
16
|
%
|
|
Home
equity lines of credit and junior liens
|
|
|
21,130
|
|
|
|
11
|
%
|
|
|
23,619
|
|
|
|
12
|
%
|
|
Multifamily
residential
|
|
|
1,525
|
|
|
|
1
|
%
|
|
|
2,902
|
|
|
|
1
|
%
|
|
Commercial
|
|
|
90,830
|
|
|
|
47
|
%
|
|
|
93,455
|
|
|
|
47
|
%
|
|
|
|
|
176,736
|
|
|
|
93
|
%
|
|
|
185,712
|
|
|
|
92
|
%
|
|
Commercial
loans
|
|
|
11,162
|
|
|
|
5
|
%
|
|
|
11,703
|
|
|
|
6
|
%
|
|
Consumer
and other loans
|
|
|
2,995
|
|
|
|
2
|
%
|
|
|
3,315
|
|
|
|
2
|
%
|
|
Total
loan portfolio
|
|
|
190,893
|
|
|
|
100
|
%
|
|
|
200,730
|
|
|
|
100
|
%
|
|
Less,
deferred fees
|
|
|
(9
|
)
|
|
|
|
|
|
|
(12
|
)
|
|
|
|
|
|
Less,
allowance for loan losses
|
|
|
(4,996
|
)
|
|
|
|
|
|
|
(6,531
|
)
|
|
|
|
|
|
Loans,
net
|
|
$
|
185,888
|
|
|
|
|
|
|
$
|
194,187
|
|
|
|
|
|
Substantially
all our loans are in our trade area and have been affected by economic and real
estate trends in North Florida. Our increases in past due loans,
nonperforming assets, charge-offs, and allowance for loan losses over historical
levels are directly related to declines in real estate activity, collateral
values, and other negative economic trends such as rising unemployment and the
high level of real estate foreclosures. We monitor a number of key
ratios to identify risks and focus management efforts to mitigate our
exposure. We monitor loans in excess of federal supervisory
loan-to-value limits. Such loans totaled
$7.3 million
and $9.2
million at June 30, 2010 and December 31, 2009,
respectively. Delinquency amounts and delinquency amounts expressed
as a percentage of total loan classification are as follows:
|
As of June 30, 2010
|
|
Past
Due 30-89 Days and Still
Accruing
|
|
|
%
of Total
Loans
|
|
|
Past
Due 90 or More Days and Still
Accruing
|
|
|
%
of Total
Loans
|
|
|
Nonaccrual
Loans
|
|
|
%
of Total
Loans
|
|
|
Total
Past Due
Loans
|
|
|
%
of Total
Loans
|
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction,
land
development
and other
land
|
|
$
|
-
|
|
|
|
0.00
|
%
|
|
$
|
178
|
|
|
|
0.60
|
%
|
|
$
|
61
|
|
|
|
0.21
|
%
|
|
$
|
239
|
|
|
|
0.81
|
%
|
|
1-4
family residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured
by first liens
|
|
|
287
|
|
|
|
0.86
|
%
|
|
|
271
|
|
|
|
0.81
|
%
|
|
|
2,319
|
|
|
|
6.91
|
%
|
|
|
2,877
|
|
|
|
8.58
|
%
|
|
Home
equity lines of
credit
and junior liens
|
|
|
227
|
|
|
|
1.07
|
%
|
|
|
566
|
|
|
|
2.68
|
%
|
|
|
777
|
|
|
|
3.68
|
%
|
|
|
1,570
|
|
|
|
7.43
|
%
|
|
Multifamily
residential
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
Commercial
|
|
|
1,871
|
|
|
|
2.06
|
%
|
|
|
922
|
|
|
|
1.02
|
%
|
|
|
657
|
|
|
|
0.72
|
%
|
|
|
3,450
|
|
|
|
3.80
|
%
|
|
Total
real estate
|
|
|
2,385
|
|
|
|
1.35
|
%
|
|
|
1,937
|
|
|
|
1.10
|
%
|
|
|
3,814
|
|
|
|
2.16
|
%
|
|
|
8,136
|
|
|
|
4.61
|
%
|
|
Commercial
|
|
|
117
|
|
|
|
1.05
|
%
|
|
|
82
|
|
|
|
0.73
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
199
|
|
|
|
1.78
|
%
|
|
Consumer
and other loans
|
|
|
33
|
|
|
|
1.10
|
%
|
|
|
10
|
|
|
|
0.33
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
43
|
|
|
|
1.43
|
%
|
|
Total
loans
|
|
$
|
2,535
|
|
|
|
1.33
|
%
|
|
$
|
2,029
|
|
|
|
1.06
|
%
|
|
$
|
3,814
|
|
|
|
2.00
|
%
|
|
$
|
8,378
|
|
|
|
4.39
|
%
|
|
As of December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction,
land
development
and other
land
|
|
$
|
89
|
|
|
|
0.27
|
%
|
|
$
|
7
|
|
|
|
0.02
|
%
|
|
$
|
2,019
|
|
|
|
6.22
|
%
|
|
$
|
2,115
|
|
|
|
6.51
|
%
|
|
1-4
family residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured
by first liens
|
|
|
154
|
|
|
|
0.46
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
2,603
|
|
|
|
7.82
|
%
|
|
|
2,757
|
|
|
|
8.28
|
%
|
|
Home
equity lines of
credit
and junior liens
|
|
|
570
|
|
|
|
2.41
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
530
|
|
|
|
2.24
|
%
|
|
|
1,100
|
|
|
|
4.65
|
%
|
|
Multifamily
residential
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
1,350
|
|
|
|
46.52
|
%
|
|
|
1,350
|
|
|
|
46.52
|
%
|
|
Commercial
|
|
|
543
|
|
|
|
0.58
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
213
|
|
|
|
0.23
|
%
|
|
|
756
|
|
|
|
0.81
|
%
|
|
Total
real estate
|
|
|
1,356
|
|
|
|
0.73
|
%
|
|
|
7
|
|
|
|
0.00
|
%
|
|
|
6,715
|
|
|
|
3.62
|
%
|
|
|
8,078
|
|
|
|
4.35
|
%
|
|
Commercial
|
|
|
140
|
|
|
|
1.20
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
140
|
|
|
|
1.20
|
%
|
|
Consumer
and other loans
|
|
|
58
|
|
|
|
1.75
|
%
|
|
|
1
|
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
59
|
|
|
|
1.75
|
%
|
|
Total
loans
|
|
$
|
1,554
|
|
|
|
0.77
|
%
|
|
$
|
8
|
|
|
|
0.00
|
%
|
|
$
|
6,715
|
|
|
|
3.35
|
%
|
|
$
|
8,277
|
|
|
|
4.12
|
%
|
The
following shows the increases (decreases) in delinquent loans at June 30, 2010,
as compared with December 31, 2009.
|
Increase (Decreases)
|
|
Past
Due 30-89 Days and Still
Accruing
|
|
|
Past
Due 90 or More Days and
Still
Accruing
|
|
|
Nonaccrual
Loans
|
|
|
Total
Past Due
Loans
|
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction,
land development
and
other land
|
|
$
|
(89
|
)
|
|
$
|
171
|
|
|
$
|
(1,958
|
)
|
|
$
|
(1,876
|
)
|
|
1-4
family residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured
by first liens
|
|
|
133
|
|
|
|
271
|
|
|
|
(284
|
)
|
|
|
120
|
|
|
Home
equity lines of
credit
and junior liens
|
|
|
(343
|
)
|
|
|
566
|
|
|
|
247
|
|
|
|
470
|
|
|
Multifamily
residential
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,350
|
)
|
|
|
(1,350
|
)
|
|
Commercial
|
|
|
1,328
|
|
|
|
922
|
|
|
|
444
|
|
|
|
2,694
|
|
|
Total
real estate
|
|
|
1,029
|
|
|
|
1,930
|
|
|
|
(2,901
|
)
|
|
|
58
|
|
|
Commercial
|
|
|
(23
|
)
|
|
|
82
|
|
|
|
-
|
|
|
|
59
|
|
|
Consumer
and other loans
|
|
|
(25
|
)
|
|
|
9
|
|
|
|
-
|
|
|
|
(16
|
)
|
|
Total
loans
|
|
$
|
981
|
|
|
$
|
2,021
|
|
|
$
|
(2,901
|
)
|
|
$
|
101
|
|
Loans
restructured and in compliance with modified terms are commonly referred to as
“debt restructurings.” A restructuring of debt constitutes a Troubled
Debt Restructuring (“TDR”) if a creditor for economic or legal reasons related
to the debtor’s financial difficulties grants a concession to the debtor it
would not otherwise consider. A summary of nonperforming assets and
restructured loans follows (dollars in thousands):
Analysis
of Nonperforming Assets (dollars in thousands):
|
|
|
June
30,
|
|
|
December 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Nonaccrual loans
|
|
|
|
|
|
|
|
Construction,
land development, and other land
|
|
$
|
61
|
|
|
$
|
2,019
|
|
|
1-4
family residential:
|
|
|
|
|
|
|
|
|
|
Secured
by first liens
|
|
|
2,319
|
|
|
|
2,603
|
|
|
Home
equity lines of credit and junior liens
|
|
|
777
|
|
|
|
530
|
|
|
Multifamily
residential
|
|
|
-
|
|
|
|
1,350
|
|
|
Commercial
|
|
|
657
|
|
|
|
213
|
|
|
Total
real estate
|
|
|
3,814
|
|
|
|
6,715
|
|
|
Commercial
|
|
|
-
|
|
|
|
-
|
|
|
Consumer
and other loans
|
|
|
-
|
|
|
|
-
|
|
|
Total
|
|
$
|
3,814
|
|
|
$
|
6,715
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans 90 days or more past due and still on
accrual status
|
|
|
|
|
|
|
|
|
|
Construction,
land development, and other land
|
|
$
|
178
|
|
|
$
|
7
|
|
|
1-4
family residential:
|
|
|
|
|
|
|
|
|
|
Secured
by first liens
|
|
|
271
|
|
|
|
-
|
|
|
Home
equity lines of credit and junior liens
|
|
|
566
|
|
|
|
-
|
|
|
Multifamily
residential
|
|
|
-
|
|
|
|
-
|
|
|
Commercial
|
|
|
922
|
|
|
|
-
|
|
|
Total
real estate
|
|
|
1,937
|
|
|
|
7
|
|
|
Commercial
|
|
|
82
|
|
|
|
-
|
|
|
Consumer
and other loans
|
|
|
10
|
|
|
|
1
|
|
|
Total
|
|
$
|
2,029
|
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
nonperforming loans
|
|
$
|
5,843
|
|
|
$
|
6,723
|
|
|
Foreclosed
real estate
|
|
|
2,497
|
|
|
|
1,727
|
|
|
Total
nonperforming assets
|
|
$
|
8,340
|
|
|
$
|
8,450
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured
loans
|
|
|
|
|
|
|
|
|
|
1
to 4 family
|
|
$
|
6,358
|
|
|
$
|
5,968
|
|
|
All
other
|
|
|
13,104
|
|
|
|
11,404
|
|
|
Total
restructured loans
|
|
$
|
19,462
|
|
|
$
|
17,372
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
nonperforming assets and restructured loans
|
|
$
|
27,802
|
|
|
$
|
25,822
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured
loans included in nonaccrual loans above that are
considered
troubled debt restructurings
|
|
$
|
1,652
|
|
|
$
|
1,842
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios
|
|
|
|
|
|
|
|
|
|
Total
loans
|
|
$
|
190,884
|
|
|
$
|
200,718
|
|
|
Total
assets
|
|
$
|
274,151
|
|
|
$
|
297,366
|
|
|
Total
nonperforming loans to total loans
|
|
|
3.06
|
%
|
|
|
3.35
|
%
|
|
Total
nonperforming assets to total assets
|
|
|
3.04
|
%
|
|
|
2.84
|
%
|
|
Total
nonperforming assets and restructured loans to total
assets
|
|
|
10.14
|
%
|
|
|
8.68
|
%
|
We have
been consistent in our practice of determining our allowance for loan losses
with only minor refinements in establishing reserves for our performing
loans. Impaired loans may be assigned a specific reserve and/or
charged-down to estimated fair value less costs to liquidate. We
consider the following in establishing reserves on loans other than impaired
loans:
|
·
|
Recent
historical loss data over the past five quarters is used as a starting
point for estimating current
losses;
|
|
·
|
We
consider various economic and other qualitative factors affecting loan
quality including changes in:
|
|
|
·
|
the
volume (and trends) of delinquent and monitored
loans,
|
|
|
·
|
underlying
collateral values,
|
|
|
·
|
concentrations
in risk and levels of concentration
risks,
|
|
|
·
|
quality
of internal and external loan reviews, which includes risk-rating our
loans according to federal regulatory
guidelines,
|
|
|
·
|
competition
and regulatory factors,
|
|
|
·
|
lending
staff experience,
|
|
|
·
|
business
and economic conditions, and
|
|
·
|
In
developing loss factors, we consider both internal historical data and
external data such as changes in leading economic indicators, the consumer
price index, delinquencies, employment data, cap rates, occupancy levels,
rental rates, and single-family homes and condominium sales prices and
sales activity.
|
We
maintain formal policies that we believe are consistent with federal regulatory
guidance for identifying and quantifying risks related to loan quality and other
related matters including but not limited to:
|
·
|
the
frequency of internal and external loan
reviews,
|
|
·
|
obtaining
appraisals or evaluations for monitored
loans,
|
|
·
|
classifying
loans from accrual to nonaccrual status (which is typically done when a
loan reaches 90 days past due unless well-secured and in process of
collection),
|
|
·
|
recognizing
loan charge-offs on impaired loans,
and
|
|
·
|
exercising
judgment in determining the allowance for loan losses consistent with
generally accepted accounting
principles.
|
The
following is a summary of the activity in the ALLL for the periods presented
below (dollars in thousands):
|
|
|
For
the Three Months Ended
|
|
|
For
the Six Months Ended
|
|
|
For
the Twelve Months Ended
|
|
|
|
|
June 30, 2010
|
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses at beginning of period
|
|
$
|
6,651
|
|
|
$
|
6,531
|
|
|
$
|
3,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction,
land development, and other land
|
|
|
(28
|
)
|
|
|
(589
|
)
|
|
|
(135
|
)
|
|
1-4
family residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured
by first liens
|
|
|
(371
|
)
|
|
|
(525
|
)
|
|
|
(1,207
|
)
|
|
Home
equity lines of credit and junior liens
|
|
|
(685
|
)
|
|
|
(685
|
)
|
|
|
(110
|
)
|
|
Multifamily
residential
|
|
|
(650
|
)
|
|
|
(650
|
)
|
|
|
(2,040
|
)
|
|
Commercial
|
|
|
-
|
|
|
|
-
|
|
|
|
(156
|
)
|
|
Total
real estate
|
|
|
(1,734
|
)
|
|
|
(2,449
|
)
|
|
|
(3,648
|
)
|
|
Commercial
|
|
|
-
|
|
|
|
-
|
|
|
|
(39
|
)
|
|
Consumer
and other loans
|
|
|
(13
|
)
|
|
|
(52
|
)
|
|
|
(74
|
)
|
|
Total
charge-offs
|
|
|
(1,747
|
)
|
|
|
(2,501
|
)
|
|
|
(3,761
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction,
land development, and other land
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
1-4
family residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured
by first liens
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
Home
equity lines of credit and junior liens
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Multifamily
residential
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Commercial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total
real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
Commercial
|
|
|
-
|
|
|
|
-
|
|
|
|
11
|
|
|
Consumer
and other loans
|
|
|
2
|
|
|
|
4
|
|
|
|
13
|
|
|
Total
recoveries
|
|
|
2
|
|
|
|
4
|
|
|
|
25
|
|
|
Net
charge-offs for the period
|
|
|
(1,745
|
)
|
|
|
(2,497
|
)
|
|
|
(3,736
|
)
|
|
Provision
for loan losses for the period
|
|
|
90
|
|
|
|
962
|
|
|
|
6,268
|
|
|
Allowance
for loan losses at end of period
|
|
$
|
4,996
|
|
|
$
|
4,996
|
|
|
$
|
6,531
|
|
The
following is the allocation of the ALLL for the periods presented (dollars in
thousands):
|
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
|
Reserves for Impaired Loans
(1)
|
|
|
Reserves for Loss Contingencies
(2)
|
|
|
Total
|
|
|
Reserves for Impaired Loans
(1)
|
|
|
Reserves for Loss Contingencies
(2)
|
|
|
Total
|
|
|
Commercial
real estate
|
|
$
|
2,498
|
|
|
$
|
217
|
|
|
$
|
2,715
|
|
|
$
|
3,547
|
|
|
$
|
504
|
|
|
$
|
4,051
|
|
|
Residential
real estate
|
|
|
838
|
|
|
|
1,235
|
|
|
|
2,073
|
|
|
|
831
|
|
|
|
1,392
|
|
|
|
2,223
|
|
|
Total
real estate
|
|
|
3,336
|
|
|
|
1,452
|
|
|
|
4,788
|
|
|
|
4,378
|
|
|
|
1,896
|
|
|
|
6,274
|
|
|
Commercial
|
|
|
10
|
|
|
|
56
|
|
|
|
66
|
|
|
|
-
|
|
|
|
194
|
|
|
|
194
|
|
|
Consumer
and other loans
|
|
|
75
|
|
|
|
42
|
|
|
|
117
|
|
|
|
2
|
|
|
|
61
|
|
|
|
63
|
|
|
Unallocated
|
|
|
-
|
|
|
|
25
|
|
|
|
25
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Totals
|
|
$
|
3,421
|
|
|
$
|
1,575
|
|
|
$
|
4,996
|
|
|
$
|
4,380
|
|
|
$
|
2,151
|
|
|
$
|
6,531
|
|
|
(1)
|
Reserves
for impaired loans determined under ASC 310-10-35 (formerly SFAS No. 114,
Accounting for Creditors
for Impairment of a Loan
)
|
|
(2)
|
Reserves
for loss contingencies determined under ASB 450-20 (formerly SFAS No. 5,
Accounting for
Contingencies
)
|
Interest
Rate Risk
Our asset
base is exposed to risk including the risk resulting from changes in interest
rates and changes in the timing of cash flows. We monitor the effect
of such risks by considering the mismatch of the maturities of our assets and
liabilities in the current interest rate environment and the sensitivity of
assets and liabilities to changes in interest rates. We have
considered the effect of significant increases and decreases in interest rates
and believe such changes, if they occurred, would be manageable, and would not
affect our ability to hold our assets as planned. However, we would
be exposed to significant market risk in the event of significant and prolonged
interest rate changes.
Quantitative
and Qualitative Disclosures about Market Risk
Market
risk is the risk of loss from adverse changes in market prices and
rates. Our market risk arises primarily from interest rate risk
inherent in our lending and deposit-taking activities. We have little
or no risk related to trading accounts, commodities or foreign
exchange.
We do not
engage in trading or hedging activities and do not invest in interest-rate
derivatives or enter into interest- rate swaps. We actively monitor
and manage interest-rate risk exposure. The primary objective in
managing interest-rate risk is to limit, within established guidelines, the
adverse impact of changes in interest rates on our net interest income and
capital, while adjusting our asset-liability structure to obtain the maximum
yield-cost spread on that structure. We rely primarily on the
asset-liability structure to control interest-rate risk. However, a
sudden and substantial change in interest rates could adversely impact our
earnings, to the extent that the interest rates borne by assets and liabilities
do not change at the same speed, to the same extent, or on the same
basis. There have been no significant changes in our market risk
exposure since December 31, 2009.
[Remainder
of page left blank intentionally.]
Average
Balances, Income and Expenses, and Rates
The
following table depicts, for the periods indicated, certain information related
to our average statements of financial condition and our average yields on
assets and average costs of liabilities. Such yields are derived by
dividing income or expense by the average balance of the corresponding assets or
liabilities. Average balances have generally been derived from daily
averages (dollars in thousands):
|
|
|
For
the Three Months Ended June 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
Average
|
|
|
and
|
|
|
Yield/
|
|
|
Average
|
|
|
and
|
|
|
Yield/
|
|
|
|
|
Balance
|
|
|
Dividends
|
|
|
Rate
|
|
|
Balance
|
|
|
Dividends
|
|
|
Rate
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
194,499
|
|
|
$
|
2,749
|
|
|
|
5.67
|
%
|
|
$
|
207,954
|
|
|
$
|
3,098
|
|
|
|
5.98
|
%
|
|
Investment
securities and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest-bearing
deposits
(1)
|
|
|
69,652
|
|
|
|
480
|
|
|
|
3.32
|
%
|
|
|
60,052
|
|
|
|
305
|
|
|
|
2.71
|
%
|
|
Other
interest-earning assets
|
|
|
-
|
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-earning assets
(1)
|
|
|
264,151
|
|
|
|
3,229
|
|
|
|
5.05
|
%
|
|
|
268,006
|
|
|
|
3,403
|
|
|
|
5.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning
assets
|
|
|
11,659
|
|
|
|
|
|
|
|
|
|
|
|
21,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
275,810
|
|
|
|
|
|
|
|
|
|
|
$
|
289,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand,
money market
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
NOW deposits
|
|
$
|
70,826
|
|
|
|
186
|
|
|
|
1.05
|
%
|
|
$
|
76,494
|
|
|
|
348
|
|
|
|
1.82
|
%
|
|
Savings
|
|
|
3,281
|
|
|
|
6
|
|
|
|
0.73
|
%
|
|
|
2,844
|
|
|
|
7
|
|
|
|
0.99
|
%
|
|
Certificates
of deposit
|
|
|
139,939
|
|
|
|
765
|
|
|
|
2.19
|
%
|
|
|
139,870
|
|
|
|
1,211
|
|
|
|
3.47
|
%
|
|
Other
borrowings
|
|
|
15,394
|
|
|
|
129
|
|
|
|
3.36
|
%
|
|
|
15,701
|
|
|
|
143
|
|
|
|
3.65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-bearing liabilities
|
|
|
229,440
|
|
|
|
1,086
|
|
|
|
1.90
|
%
|
|
|
234,909
|
|
|
|
1,709
|
|
|
|
2.92
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
liabilities
|
|
|
36,849
|
|
|
|
|
|
|
|
|
|
|
|
37,450
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
9,521
|
|
|
|
|
|
|
|
|
|
|
|
16,886
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stockholders’
equity
|
|
$
|
275,810
|
|
|
|
|
|
|
|
|
|
|
$
|
289,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
provision
for loan losses
|
|
|
|
|
|
$
|
2,143
|
|
|
|
|
|
|
|
|
|
|
$
|
1,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-rate
spread
|
|
|
|
|
|
|
|
|
|
|
3.15
|
%
|
|
|
|
|
|
|
|
|
|
|
2.32
|
%
|
|
Net
interest margin
(1)
|
|
|
|
|
|
|
|
|
|
|
3.40
|
%
|
|
|
|
|
|
|
|
|
|
|
2.69
|
%
|
|
Ratio
of average interest-earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
average interest-bearing liabilities
|
|
|
115.13
|
%
|
|
|
|
|
|
|
|
|
|
|
114.09
|
%
|
|
|
|
|
|
|
|
|
|
(1)
|
Tax-exempt
income has been adjusted to a tax-equivalent basis using an incremental
rate of 37.6% for purposes of computing the average
yield/rate.
|
|
|
|
For
the Six Months Ended June 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
Average
|
|
|
and
|
|
|
Yield/
|
|
|
Average
|
|
|
and
|
|
|
Yield/
|
|
|
|
|
Balance
|
|
|
Dividends
|
|
|
Rate
|
|
|
Balance
|
|
|
Dividends
|
|
|
Rate
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
197,115
|
|
|
$
|
5,574
|
|
|
|
5.70
|
%
|
|
$
|
207,619
|
|
|
$
|
6,252
|
|
|
|
6.07
|
%
|
|
Investment
securities and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest-bearing
deposits
(1)
|
|
|
72,131
|
|
|
|
971
|
|
|
|
3.25
|
%
|
|
|
46,997
|
|
|
|
648
|
|
|
|
3.65
|
%
|
|
Other
interest-earning assets
|
|
|
-
|
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
1,108
|
|
|
|
1
|
|
|
|
0.18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-earning assets
(1)
|
|
|
269,246
|
|
|
|
6,545
|
|
|
|
5.05
|
%
|
|
|
255,724
|
|
|
|
6,901
|
|
|
|
5.60
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning
assets
|
|
|
11,872
|
|
|
|
|
|
|
|
|
|
|
|
23,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
281,118
|
|
|
|
|
|
|
|
|
|
|
$
|
279,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand,
money market
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
NOW deposits
|
|
$
|
80,419
|
|
|
|
461
|
|
|
|
1.16
|
%
|
|
$
|
65,257
|
|
|
|
558
|
|
|
|
1.72
|
%
|
|
Savings
|
|
|
3,080
|
|
|
|
11
|
|
|
|
0.72
|
%
|
|
|
2,893
|
|
|
|
14
|
|
|
|
0.98
|
%
|
|
Certificates
of deposit
|
|
|
137,300
|
|
|
|
1,619
|
|
|
|
2.38
|
%
|
|
|
141,168
|
|
|
|
2,610
|
|
|
|
3.73
|
%
|
|
Other
borrowings
|
|
|
15,394
|
|
|
|
256
|
|
|
|
3.35
|
%
|
|
|
16,277
|
|
|
|
261
|
|
|
|
3.23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-bearing liabilities
|
|
|
236,193
|
|
|
|
2,347
|
|
|
|
2.00
|
%
|
|
|
225,595
|
|
|
|
3,443
|
|
|
|
3.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
liabilities
|
|
|
35,387
|
|
|
|
|
|
|
|
|
|
|
|
36,903
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
9,538
|
|
|
|
|
|
|
|
|
|
|
|
16,884
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stockholders’
equity
|
|
$
|
281,118
|
|
|
|
|
|
|
|
|
|
|
$
|
279,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
provision
for loan losses
|
|
|
|
|
|
$
|
4,198
|
|
|
|
|
|
|
|
|
|
|
$
|
3,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-rate
spread
|
|
|
|
|
|
|
|
|
|
|
3.05
|
%
|
|
|
|
|
|
|
|
|
|
|
2.52
|
%
|
|
Net
interest margin
(1)
|
|
|
|
|
|
|
|
|
|
|
3.29
|
%
|
|
|
|
|
|
|
|
|
|
|
2.89
|
%
|
|
Ratio
of average interest-earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
average interest-bearing liabilities
|
|
|
113.99
|
%
|
|
|
|
|
|
|
|
|
|
|
113.36
|
%
|
|
|
|
|
|
|
|
|
|
(1)
|
Tax-exempt
income has been adjusted to a tax-equivalent basis using an incremental
rate of 37.6% for purposes of computing the average
yield/rate.
|
Analysis
of Changes in Net Interest Income
The
following table sets forth, on a taxable equivalent basis, the effect which
varying levels of interest-earning assets and interest-bearing liabilities and
the applicable interest rates had on changes in net interest income for the
three and six months period ended June 30, 2010, compared to the same period in
2009. For purposes of this table, changes which are not solely
attributable to volume or rate are allocated to volume and rate on a pro rata
basis (dollars in thousands):
|
|
|
Three
Months Ended June 30,
|
|
|
|
|
2010
vs. 2009
|
|
|
|
|
Increase (Decrease) Due to
|
|
|
|
|
|
|
|
|
|
|
Rate/
|
|
|
|
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Volume
|
|
|
Total
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
(161
|
)
|
|
$
|
(201
|
)
|
|
$
|
13
|
|
|
$
|
(349
|
)
|
|
Investment
securities and interest-bearing deposits
|
|
|
91
|
|
|
|
65
|
|
|
|
19
|
|
|
|
175
|
|
|
Other
interest-earning assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total
interest-earning assets
|
|
|
(70
|
)
|
|
|
(136
|
)
|
|
|
32
|
|
|
|
(174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand,
money market and NOW deposits
|
|
|
(147
|
)
|
|
|
(26
|
)
|
|
|
11
|
|
|
|
(162
|
)
|
|
Savings
|
|
|
(2
|
)
|
|
|
1
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
Certificates
of deposit
|
|
|
(446
|
)
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
(446
|
)
|
|
Other
borrowings
|
|
|
(11
|
)
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
(14
|
)
|
|
Total
interest-bearing liabilities
|
|
|
(606
|
)
|
|
|
(27
|
)
|
|
|
10
|
|
|
|
(623
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$
|
536
|
|
|
$
|
(109
|
)
|
|
$
|
22
|
|
|
$
|
449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30,
|
|
|
|
|
2010
vs. 2009
|
|
|
|
|
Increase (Decrease) Due to
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate/
|
|
|
|
|
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Volume
|
|
|
Total
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
(382
|
)
|
|
$
|
(317
|
)
|
|
$
|
21
|
|
|
$
|
(678
|
)
|
|
Investment
securities and interest-bearing deposits
|
|
|
(93
|
)
|
|
|
456
|
|
|
|
(40
|
)
|
|
|
323
|
|
|
Other
interest-earning assets
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
(1
|
)
|
|
Total
interest-earning assets
|
|
|
(476
|
)
|
|
|
138
|
|
|
|
(18
|
)
|
|
|
(356
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand,
money market and NOW deposits
|
|
|
(182
|
)
|
|
|
130
|
|
|
|
(45
|
)
|
|
|
(97
|
)
|
|
Savings
|
|
|
(4
|
)
|
|
|
1
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
Certificates
of deposit
|
|
|
(948
|
)
|
|
|
(72
|
)
|
|
|
29
|
|
|
|
(991
|
)
|
|
Other
borrowings
|
|
|
10
|
|
|
|
(14
|
)
|
|
|
(1
|
)
|
|
|
(5
|
)
|
|
Total
interest-bearing liabilities
|
|
|
(1,124
|
)
|
|
|
45
|
|
|
|
(17
|
)
|
|
|
(1,096
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$
|
648
|
|
|
$
|
93
|
|
|
$
|
(1
|
)
|
|
$
|
740
|
|
Comparison
of Three Months Ended June 30, 2010 and 2009
Interest
Income and Expense
Interest
Income
. Interest income
was $3,229,000 and $3,403,000 for the three months ended June 30, 2010 and 2009,
respectively, a decline of $174,000, or 5.1%. The decrease resulted
principally from a decrease in yields on average interest-earning assets of 19
basis points and a decrease in average earning assets of $3.9 million, or
1.4%. The declining interest rate environment and the effect of
increased nonaccrual loans, restructured loans, and other real estate owned
contributed to lower yields on average loans of 5.67% versus 5.98%, a decline of
31 basis points. Average loans, as a percentage of average
interest-earning assets, decreased to 73.6% in the second quarter of 2010 as
compared with 77.6% in 2009. Active management of our investments and
excess funds resulted in an increase in the yield from 2.71% to 3.32%, an
increase of 61 basis points, or 22.5%. The percentage of higher
yielding average investment securities and interest-bearing deposits to total
interest-earning assets rose to 26.4% in 2010 from 22.4% in
2009.
Interest
Expense.
Interest expense
was $1,086,000 and $1,709,000 for the three months ended June 30, 2010 and 2009,
respectively. Our average cost of funds for interest-bearing
liabilities decreased to 1.90% in 2010 compared with 2.92% over the same period
in 2009, an overall decline of 102 basis points. A decrease in
average interest-bearing liabilities of $5.5 million, or 2.3%, and decreases in
the overall interest rates in our market area, contributed to the decrease in
our cost of funds. Certificates of deposit, with an average cost of
funds of 2.19% in 2010 and 3.47% in 2009, represented 61.0% of our total
interest-bearing liabilities in 2010 as compared with 59.5% in
2009. Interest-bearing demand deposits, with an average cost of funds
of 1.05% in 2010 and 1.82% in 2009, represented 30.9% of our total
interest-bearing liabilities in 2010 as compared with 32.6% in
2009.
Net Interest Income before Provision
for Loan Losses
. Net interest income before provision for loan
losses was
$2,143,000
and $1,694,000 for the three months ended June 30, 2010 and 2009,
respectively. The net interest margin for the second quarter of 2010
was 3.40% versus 2.69% in 2009, which reflected a more effective management of
our interest-bearing assets and liabilities while maintaining an acceptable
liquidity position.
Provision
for Loan Losses
We recorded provisions for
loan losses totaling $90,000 and $133,000 for the three months ended June 30,
2010 and 2009, respectively, which management considered appropriate after its
assessment of the overall quality of the loan portfolio. At June 30,
2010, our reserves were 2.62% of outstanding loans versus 3.25% at June 30,
2009, reflecting net charge-offs of $1.7 million for the
quarter. Four loans accounted for 90% of the charge-offs in the
quarter. Three loans were transferred to other real estate owned
during the quarter.
Noninterest
Income and Expenses
Noninterest
Income.
Total noninterest income
decreased by $69,000, or
25.2% for the three months ended June 30, 2010, to $205,000 compared with
$274,000 for the same period in 2009. The second quarter of 2010
versus 2009 included a reduction in fees and service charges on deposit accounts
of $51,000, or 32.3%, and of other fee income for banking services of $19,000,
or 32.2%
Noninterest
Expenses.
Management has
taken steps to reduce noninterest expenses in areas in which it can, while
maintaining the safety and soundness of our banking
operations. Salaries and employee benefits decreased $70,000, or
9.9%, in the second quarter of 2010 over 2009. Advertising and
business development expenses have been reduced, resulting in a decrease in
noninterest expenses of $24,000. Pension expense was eliminated as a
result of freezing the benefits in anticipation of the merger, resulting in a
decrease of $85,000.
Other components of noninterest expenses
increased $391,000. The more significant increases
were:
|
·
|
Increases
of $25,000 for processing and settlement
fees;
|
|
·
|
Higher
professional, legal, and audit expenses of $137,000, most of which is
attributable to merger-related
expenses;
|
|
·
|
Increases
in OREO and other loan collection expenses of $49,000, net of a $20,000
decrease in the write-down of other real estate owned;
and
|
|
·
|
Increases
in deposit insurance assessments of
$180,000.
|
Benefit for Income Taxes
.
The effective tax rates
differ from the federal and state statutory rates of 37.6% principally due to
nontaxable investment income for 2010 and 2009 and changes in the deferred tax
valuation allowance. During the second quarter of 2010, we recognized
deferred tax assets of $118,000 as a result of the level of deferred tax asset
valuation allowance we considered necessary at June 30,
2010.
Tax-exempt income was
$160,000
for the
second quarter of 2010 as compared with $168,000 in 2009.
An income
tax summary follows (dollars in thousands):
|
|
|
Three
Months Ended June 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Book
income (loss) before income tax benefit
|
|
$
|
164
|
|
|
$
|
(93
|
)
|
|
Nontaxable
interest income, net
|
|
|
(160
|
)
|
|
|
(168
|
)
|
|
Estimated
taxable gain on bank-owned life insurance
|
|
|
900
|
|
|
|
-
|
|
|
Taxable
income (loss)
|
|
|
904
|
|
|
|
(261
|
)
|
|
Tax
rate
|
|
|
37.6
|
%
|
|
|
37.6
|
%
|
|
Income
tax (benefit)
|
|
|
340
|
|
|
|
(98
|
)
|
|
Estimated
penalty tax on bank-owned life insurance
|
|
|
90
|
|
|
|
-
|
|
|
Changes
in deferred tax valuation allowance and other, net
|
|
|
(548
|
)
|
|
|
(60
|
)
|
|
Benefit
for income taxes
|
|
$
|
(118
|
)
|
|
$
|
(158
|
)
|
|
Effective
rate
|
|
|
-72.0
|
%
|
|
|
169.9
|
%
|
Comparison
of Six Months Ended June 30, 2010 and 2009
Interest
Income and Expense
Interest
Income
. Interest income
was $6,545,000 and $6,901,000 for the six months ended June 30, 2010 and 2009,
respectively, a decline of $356,000, or 5.2%. A decrease in yields on
average interest-earning assets of 55 basis points more than offset the increase
in average earning assets of $13.5 million, or 5.3%. A substantial
portion of the increase was due to higher levels of interest-bearing deposits
that contributed to the steep decline in yields for investment securities and
interest-bearing deposits of 40 basis points. Average loans decreased
$10.5 million over 2009, or 5.1%. The declining interest rate
environment and the effect of increased nonaccrual loans, restructured loans,
and other real estate owned contributed to lower yields on average loans of
5.70% versus 6.07%, a decline of 37 basis points. Average loans, as a
percentage of average interest-earning assets, decreased to 73.2% in the first
half of 2010 as compared with 81.2% in 2009. The percentage of lower
yielding average investment securities and interest-bearing deposits to total
interest-earning assets rose to 26.8% in 2010 from 18.4% in
2009.
Interest
Expense.
Interest expense
was $2,347,000 and $3,443,000 for the six months ended June 30, 2010 and 2009,
respectively. Our average cost of funds for interest-bearing
liabilities decreased to 2.00% in 2010 compared with 3.08% over the same period
in 2009, an overall decline of 108 basis points. A shift in the mix
of our interest-bearing deposits, along with decreases in the overall interest
rates in our market area, contributed to the decrease in our cost of
funds. Certificates of deposit, with an average cost of funds of
2.38% in 2010 and 3.73% in 2009, represented 58.1% of our total interest-bearing
liabilities in 2010 as compared with 62.6% in 2009. The decline in
average certificates of deposit and other interest-bearing liabilities was
offset by increases in our interest-bearing demand deposits, with an average
cost of funds of 1.16% in 2010 and 1.72% in 2009, representing 34.0% of our
total interest-bearing liabilities in 2010 as compared with 28.9% in
2009.
Net
Interest Income before Provision for Loan Losses
. Net interest
income before provision for loan losses was $4,198,000 and $3,458,000 for the
six months ended June 30, 2010 and 2009, respectively. The net
interest margin for the first six months of 2010 was 3.29% versus 2.89% in 2009,
which reflected a more effective management of our interest-bearing assets and
liabilities while maintaining an acceptable liquidity
position.
Provision
for Loan Losses
We recorded provisions for
loan losses totaling $962,000 and $367,000 for the six months ended June 30,
2010 and 2009, respectively, which management considered appropriate after its
assessment of the overall quality of the loan portfolio. At June 30,
2010, our reserves were 2.62% of outstanding loans reflecting net charge-offs of
$2.5 million. Six loans accounted for 90% of the charge-offs and four loans were
transferred to other real estate owned during the six months ended June 30,
2010.
Noninterest
Income and Expenses
Noninterest
Income.
Total noninterest
income increased by $77,000, or 23.4% for the six months ended June 30, 2010, to
$406,000 compared with $329,000 for the same period in 2009. The
first half of 2010 versus 2009 included a reduction in fees and service charges
on deposit accounts of $94,000, or 28.8%, and lower realized gain on the sale of
securities of $35,000. These decreases were more than offset by a
$179,000 loss on restricted stock in 2009 versus no such loss in
2010.
Noninterest
Expenses.
Management has taken steps to reduce noninterest
expenses in areas in which it can while maintaining the safety and soundness of
our banking operations.
Salaries and employee
benefits decreased $100,000, or 6.9%, in the first half of 2010 over
2009. Expenses of bank premises and fixed assets decreased $19,000,
or 3.7%. Advertising and business development and pension expenses
have been reduced, resulting in a decrease in noninterest expenses of
$218,000. Other components of noninterest expenses increased
$679,000.
The more significant increases were:
|
·
|
Increases
of $22,000 for processing and settlement
fees;
|
|
·
|
Higher
professional, legal, and audit expenses of $195,000, most of which is
attributable to merger-related
expenses;
|
|
·
|
Increases
in OREO and other loan collection expense and the write-down of other real
estate owned of $75,000; and
|
|
·
|
Increases
in deposit insurance assessments of
$387,000.
|
Benefit for Income
Taxes
. The effective tax rates differ from the federal and
state statutory rates of 37.6% principally due to nontaxable investment income
for 2010 and 2009
and
changes in the deferred tax valuation allowance. During the second
quarter of 2010, we recognized deferred tax assets of $118,000 as a result of
the level of deferred tax asset valuation allowance we considered necessary at
June 30, 2010.
Tax-exempt income wa
s $320,000
for the
first six months of 2010 as compared with $336,000 in 2009.
An income
tax summary follows (dollars in thousands):
|
|
|
Six
Months Ended June 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Book
loss before income tax benefit
|
|
$
|
(383
|
)
|
|
$
|
(311
|
)
|
|
Nontaxable
interest income, net
|
|
|
(320
|
)
|
|
|
(336
|
)
|
|
Estimated
taxable gain on bank-owned life insurance
|
|
|
900
|
|
|
|
-
|
|
|
Taxable
income (loss)
|
|
|
197
|
|
|
|
(647
|
)
|
|
Tax
rate
|
|
|
37.6
|
%
|
|
|
37.6
|
%
|
|
Income
tax (benefit)
|
|
|
74
|
|
|
|
(243
|
)
|
|
Estimated
penalty tax on bank-owned life insurance
|
|
|
90
|
|
|
|
-
|
|
|
Changes
in deferred tax valuation allowance and other, net
|
|
|
(282
|
)
|
|
|
(65
|
)
|
|
Benefit
for income taxes
|
|
$
|
(118
|
)
|
|
$
|
(308
|
)
|
|
Effective
rate
|
|
|
30.8
|
%
|
|
|
99.0
|
%
|
ITEM
4. CONTROLS AND PROCEDURES
Background of Internal Controls and
Internal Audits.
Oceanside is the sole financial subsidiary of
Atlantic. Oceanside has extensive policies and operating procedures
in place for loans, operations, accounting, and compliance. All
audits, whether internal or external, are reported directly to the joint Audit
Committee of Oceanside and Atlantic and subsequently to the Boards of Directors
of Oceanside and Atlantic.
The joint
Audit Committee of Oceanside and Atlantic maintains an audit calendar prepared
by the internal auditor for planning purposes. This audit calendar is
submitted to the Boards of Oceanside and Atlantic for approval.
Atlantic
engages an external certified public accounting firm registered with the Public
Company Accounting Oversight Board (“PCAOB”) to annually perform an independent
audit, conducted in accordance with generally accepted auditing standards
adopted by the PCAOB.
Periodically,
Oceanside and Atlantic undergo regulatory examinations that include tests of the
policies and operating procedures for loans, operations, accounting, and
compliance. The results of these examinations are presented by the
regulators to the Boards of Oceanside and Atlantic.
Evaluation of Disclosure Controls
and Procedures.
Atlantic's Chief Executive Officer and Chief
Financial Officer have evaluated the effectiveness of Atlantic's disclosure
controls and procedures (as such term is defined in Rules 13a-14(c) and
15d-14(c) under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”)) as of a date within 90 days prior to the filing date of this quarterly
report (the “Evaluation Date”). Based on that evaluation, such
officers have concluded that, as of the Evaluation Date, Atlantic's disclosure
controls and procedures are effective in bringing to their attention, on a
timely basis, material information relating to Atlantic (including its
consolidated subsidiaries) required to be included in Atlantic's periodic
filings under the Exchange Act.
Changes in Internal
Controls.
Since the Evaluation Date, there have not been any
significant changes in Atlantic's internal controls or in other factors that
could significantly affect those controls.
ATLANTIC
BANCGROUP, INC. AND SUBSIDIARIES
|
Item
1.
|
Legal
Proceedings.
|
Periodically,
we are parties to or otherwise involved in legal proceedings arising in the
normal course of business, such as claims to enforce liens, claims involving the
making and servicing of real property loans, and other issues incident to our
operations. We do not believe that there are any pending or
threatened proceedings against us, which, if determined adversely, would have a
material effect on our consolidated financial position, except as noted
below.
Consent Order
- Effective
January 7, 2010, Oceanside, a wholly-owned subsidiary of Atlantic, entered into
a Stipulation to the Issuance of a Consent Order (“Stipulation”) with the
Federal Deposit Insurance Corporation (the “FDIC”) and the Florida Office of
Financial Regulation (the “OFR”) (“Stipulation”). Pursuant to the
Stipulation, Oceanside has consented, without admitting or denying any charges
of unsafe or unsound banking practices or violations of law or regulation, to
the issuance of a Consent Order by the FDIC and the OFR, also effective as of
January 7, 2010 (“Consent Order”).
The
Consent Order represents an agreement among Oceanside, the FDIC, and the OFR as
to areas of Oceanside’s operations that warrant improvement and presents a plan
for making those improvements. The Consent Order imposes no fines or
penalties on Oceanside.
Pursuant
to the Consent Order, Oceanside’s Board of Directors is required to increase its
participation in the affairs of Oceanside. This participation shall
include comprehensive, documented meetings to be held no less frequently than
monthly. Oceanside must also develop, submit for comment to the FDIC
and the OFR, and approve a management plan for the purpose of providing
qualified management for Oceanside. Prior to the entry of the Consent
Order, the Board conducted such meetings, but will now require more detailed
management reports. The Board has developed a management plan and
evaluated the structure and composition of Oceanside’s current
management. The Board has also developed an education plan for
itself.
During
the life of the Consent Order, Oceanside shall not add any individual to
Oceanside’s Board of Directors or employ any individual as a senior executive
officer without the prior non-objection of the FDIC and the
OFR. Oceanside has been subject to this requirement since 2008;
therefore, this requirement will have no affect on Oceanside’s
operations.
Within 90
days of the effective date of the Consent Order and, thereafter, during the life
of the Consent Order, Oceanside shall achieve and maintain a Tier 1 Leverage
Capital Ratio of not less than 8% and a Total Risk Based Capital Ratio of not
less than 11%. In the event such ratios fall below such levels,
Oceanside shall notify the FDIC and the OFR and shall increase capital in an
amount sufficient to reach the required ratios within 90 days of such
notice. At March 31 and June 30, 2010, Oceanside’s Tier 1 Leverage
Capital Ratio was 4.32% and 4.64%, respectively, and its Total Risk Based
Capital Ratio was 7.74% and 8.20%, respectively. We did not meet the
April 7, 2010, deadline to raise additional capital as required by the Consent
Order. However, our contemplated merger with Jacksonville Bancorp,
Inc. (see
Note 12 -
Merger
) is expected to result in our being part of a larger bank, with
significantly higher capital ratios. If that merger is not
consummated, we will explore other strategic alternatives intended to improve
our capital ratios.
Oceanside
shall also be required to maintain a fully funded Allowance for Loan and Lease
Losses (“ALLL”), the adequacy of which shall be satisfactory to the FDIC and the
OFR. The Board of Directors shall review the adequacy of the ALLL and
establish a comprehensive policy for determining the adequacy of the ALLL
consistent with regulatory policies. A deficiency in the ALLL shall
be remedied in the calendar quarter it is discovered. Oceanside’s
policy for determining the adequacy of Oceanside’s ALLL and its implementation
shall be satisfactory to the FDIC and the OFR as determined at subsequent
examinations and/or visitations. Oceanside has always endeavored to
maintain a fully funded ALLL. Regulatory review of the ALLL has not
always been consistent from examination/visitation to examination/visitation and
has not always seemed to be in accordance with generally accepted accounting
principles or written regulatory guidance or regulations, so Oceanside
anticipates possibly being requested to make further adjustments to the ALLL
depending on the affiliation (FDIC or OFR), identity, or
ATLANTIC
BANCGROUP, INC. AND SUBSIDIARIES
attitudes
of future examination or visitation staff. As of the date of the
Consent Order, Oceanside believes its ALLL was compliant with regulatory
guidance and consistent with generally accepted accounting
principles.
Pursuant
to the Consent Order, Oceanside must review, revise, and adopt its written
liquidity, contingency funding, and funds management policy to provide effective
guidance and control over Oceanside’s funds management
activities. Oceanside must also implement effective models for
managing liquidity and calculating the liquidity and dependency ratios with
monthly reporting to the Board of Directors. Oceanside has revised
such policies and is refining its practices and procedures in these
areas. Oceanside expects that these actions will improve Oceanside’s
liquidity, contingency funding, and funds management practices.
Throughout
the life of the Consent Order, Oceanside shall not accept, renew, or rollover
any brokered deposit, and comply with the restrictions on the effective yields
on deposits exceeding national averages. Oceanside has not accepted,
renewed, or rolled over any brokered deposits since July 2009; therefore, that
restriction is not expected to alter Oceanside’s current deposit gathering
activities. With respect to the yield limitations, it is possible
that Oceanside could experience a decrease in deposit inflows, or the migration
of current deposits to competitor institutions, if other institutions offer
higher interest rates than those permitted to be offered by
Oceanside.
While the
Consent Order is in effect, Oceanside shall notify the FDIC and the OFR, at
least, 60 days prior to undertaking asset growth in excess of 10% or more per
annum or initiating material changes in asset or liability
composition. Oceanside anticipates no such changes.
While the
Consent Order is in effect, Oceanside shall not declare or pay dividends,
interest payments on subordinated debentures or any other form of payment
representing a reduction in capital without the prior written approval of the
FDIC and the OFR. Oceanside has not paid a dividend to Atlantic since
April 2009, and Atlantic has not made any payments on its subordinated debt
since June 2009. Therefore, this restriction is not expected to
affect Oceanside’s operations.
While the
Consent Order remains in effect, Oceanside shall, within 30 days of the receipt
of any official Report of Examination, eliminate from its books any remaining
balance of any assets classified “Loss” and 50% percent of those classified
“Doubtful”, unless otherwise approved in writing by the FDIC and the
OFR. Within 60 days from the effective date of the Consent Order,
Oceanside shall formulate a plan, subject to approval by the FDIC and the OFR,
to reduce Oceanside’s risk exposure in each asset, or relationship in excess of
$500,000 classified “Substandard” by the FDIC in November
2008. Oceanside had made such adjustments prior to entry of the
Consent Order and has been attempting to reduce its risk exposure in all
“Substandard” assets. Therefore, these requirements are not expected
to affect Oceanside’s operations.
Oceanside
shall also reduce the aggregate balance of assets classified “Substandard” by
the FDIC in November 2008, in accordance with the following schedule: (i) within
90 days to not more than 100% of Tier 1 capital plus the ALLL; (ii) within 180
days to not more than 85% of Tier 1 capital plus the ALLL; (iii) within 270 days
to not more than 60% of Tier 1 capital plus the ALLL; and (iv) within 360 days
to not more than 50% of Tier 1 capital plus the ALLL. Oceanside did
meet the first target goal (April 7, 2010) as the classified assets cited by the
FDIC were $16.2 million at March 31, 2010, or 85.15% of Tier 1 capital plus the
ALLL ($19.1 million) and also met the second target goal (July 6, 2010) with
classified assets cited by the FDIC of $14.1 million at June 30, 2010, or 79.4%
of Tier 1 capital plus the ALLL ($17.8 million). Oceanside
anticipates needing to increase its Tier 1 capital or successfully work out an
appropriate amount of “Substandard” assets to meet the remaining targeted
ratios. Oceanside’s management is actively trying to reduce the
amount of “Substandard” assets and the contemplated merger with Jacksonville
Bancorp, Inc., is expected to resolve our capital issues.
Beginning
with the effective date of the Consent Order, Oceanside shall not extend any
credit to, or for the benefit of, any borrower who has a loan that has been
charged off or classified “Loss” or “Doubtful” and is
uncollected. Additionally, during the life of the Consent Order,
Oceanside shall not extend, directly or indirectly, any additional credit to, or
for the benefit of, any borrower who has a loan or other extension of credit
from Oceanside that has been classified “Substandard”, and is uncollected,
unless Oceanside documents that such extension of credit is in Oceanside’s best
interest. Prior to, and following, the entry of the Consent Order,
Oceanside had, and has, no
ATLANTIC
BANCGROUP, INC. AND SUBSIDIARIES
intention
of extending credit to such borrowers in violation of these
requirement. Accordingly, such requirement will not affect
Oceanside’s operations.
Within 30
days from the effective date of the Consent Order, Oceanside will engage a loan
review analyst who shall review all loans exceeding
$500,000. Oceanside has engaged an outside loan review analyst that
is expected to complete its work in 2010. In addition, Oceanside has
received input as to the quality of individual loans and its loan portfolio in
connection with the due diligence process for the proposed merger with
Jacksonville Bancorp,Inc. (see
Note 12 -
Merger
). The results of the due diligence review and the
planned outside loan review are expected to assist Oceanside in working out
classified assets and may result in positive or negative changes to certain loan
classifications.
Within 60
days from the effective date of the Consent Order, Oceanside shall revise,
adopt, and implement a written lending, underwriting, and collection policy to
provide effective guidance and control over Oceanside’s lending
function. In addition, Oceanside shall obtain complete and current
documentation for all loans in Oceanside’s loan portfolio. Within 30
days from the effective date of the Consent Order, the Board shall adopt and
implement a policy limiting the use of loan interest reserves to certain types
of loans. Oceanside has consistently obtained complete and current
documentation for its loans. Oceanside has developed the required
policies, which are expected to assist management in improving the management of
the relevant aspects of Oceanside’s operations.
Within 60
days from the effective date of the Consent Order, Oceanside shall perform a
risk segmentation analysis with respect to any other concentration deemed
important by Oceanside. The plan shall establish appropriate
commercial real estate (“CRE”) lending risk limits and monitor concentrations of
risk in relation to capital. In February 2009, the Board of Directors
approved a revised CRE policy that called for a quarterly analysis of CRE and
other concentrations. The first report was completed as of March 31,
2010, and presented to the Board of Directors at its April 2010
meeting. In addition to enhanced CRE tracking, this report measured
concentrations of credit by zip code, risk ratings by zip code, loans by NAICS
codes for industry concentrations, payment methods (amortizing, interest only,
and other), and home equity lines of credit and home equity
loans. This analysis and the cessation of CRE lending in January 2009
did not have any impact on Oceanside’s operations.
Within 30
days from the effective date of the Consent Order, Oceanside shall formulate and
fully implement a written plan and a comprehensive budget. Within 60
days from the effective date of the Consent Order, Oceanside shall prepare and
submit to the FDIC and the OFR for comment a business strategic plan covering
the overall operation of Oceanside. The Bank has prepared a strategic
plan and budget and submitted them as required. Since Oceanside has
prepared a strategic plan and budget each year since opening, this requirement
is not expected to change the nature of Oceanside’s operations.
Within 30
days of the end of each calendar quarter following the effective date of the
Consent Order, Oceanside shall furnish written progress reports to the FDIC and
the OFR detailing the form, manner, and results of any actions taken to secure
compliance. Oceanside has begun preparing and submitting such
reports. This is expected to have minimal impact on Oceanside’s
operations and financial results.
Written Agreement
- On March
26, 2010, Atlantic entered into a mutual agreement (“Written Agreement”) with
the Federal Reserve Bank of Atlanta (the "Reserve Bank") to maintain the
financial soundness of Atlantic so that Atlantic may serve as a source of
strength to Oceanside. Atlantic and the Reserve Bank agree as
follows:
|
·
|
Atlantic
shall not declare or pay any dividends without the prior written approval
of the Reserve Bank and the Director of the Division of Banking
Supervision and Regulation (the "Director") of the Board of Governors of
the Federal Reserve System (the "Board of
Governors").
|
|
·
|
Atlantic
shall not directly or indirectly take dividends or any other form of
payment representing a reduction in capital from the Bank without the
prior written approval of the Reserve
Bank.
|
|
·
|
Atlantic
and its nonbank subsidiary shall not make any distributions of interest,
principal, or other sums on subordinated debentures or trust preferred
securities without the prior written approval of the Reserve Bank and the
Director.
|
|
·
|
Atlantic
and any nonbank subsidiary shall not, directly or indirectly, incur,
increase, or guarantee any debt without the prior written approval of the
Reserve Bank. All requests for prior written approval shall contain,
but
|
ATLANTIC
BANCGROUP, INC. AND SUBSIDIARIES
not be
limited to, a statement regarding the purpose of the debt, the terms of the
debt, and the planned source(s) for debt repayment, and an analysis of the cash
flow resources available to meet such debt repayment.
|
·
|
Atlantic
shall not, directly or indirectly, purchase or redeem any shares of its
stock without the prior written approval of the Reserve
Bank.
|
|
·
|
In
appointing any new director or senior executive officer, or changing the
responsibilities of any senior executive officer so that the officer would
assume a different senior executive officer position, Atlantic shall
comply with the notice provisions of section 32 of the FDI Act (12 U.S.C.
§ 1831i) and Subpart H of Regulation Y of the Board of Governors (12
C.F.R. §§ 225.71 et seq.).
|
|
·
|
Atlantic
shall comply with the restrictions on indemnification and severance
payments of section 18(k) of the FDI Act (12 U.S.C. § 1828(k)) and Part
359 of the Federal Deposit Insurance Corporation's regulations (12 C.F.R.
Part 359).
|
|
·
|
Within
30 days after the end of each calendar quarter following the date of this
Written Agreement, the board of directors shall submit to the Reserve Bank
written progress reports detailing the form and manner of all actions
taken to secure compliance with the provisions of this Written Agreement
and the results thereof, and a parent company only balance sheet, income
statement, and, as applicable, report of changes in stockholders'
equity.
|
In
connection with the contemplated merger between Atlantic and Jacksonville
Bancorp, Inc., the following risk factors should be considered, including the
risk of:
|
|
·
|
unexpected
transaction costs, including the costs of integrating
operations;
|
|
|
·
|
that
the businesses will not be integrated successfully or that such
integration may be more difficult, time-consuming or costly than
expected;
|
|
|
·
|
potential
failure to fully or timely realize expected revenues and revenue
synergies, including as the result of revenues following the merger being
lower than expected;
|
|
|
·
|
deposit
and customer attrition;
|
|
|
·
|
changes
in deposit mix;
|
|
|
·
|
unexpected
operating and other costs, which may differ or change from
expectations;
|
|
|
·
|
customer
and employee loss and business disruption, including, without limitation,
as the result of difficulties in maintaining relationships with
employees;
|
|
|
·
|
increased
competitive pressures and solicitations of customers by
competitors;
|
|
|
·
|
changes
in the interest rate environment reducing interest
margins;
|
|
|
·
|
legislation
or regulatory changes that adversely affect the business in which the
combined company would be engaged;
and
|
|
|
·
|
the
difficulties and risks inherent with entering new
markets.
|
|
|
Exhibit
No
.
|
Description of
Exhibit
|
|
|
(a)
|
Incorporated
by reference on Atlantic’s Form 10-KSB for year ended December 31,
1999
|
|
|
(b)
|
Incorporated
by reference on Atlantic’s Form 10-KSB for year ended December 31,
2000
|
|
|
(c)
|
Incorporated
by reference on Atlantic’s Form 10-KSB for year ended December 31,
2002
|
|
|
(d)
|
Incorporated
by reference on Atlantic’s Form 10-KSB for year ended December 31,
2003
|
|
|
(e)
|
Incorporated
by reference on Atlantic’s Form 10-QSB for quarter ended September 30,
2006
|
|
|
(f)
|
Incorporated
by reference on Atlantic’s Form 8-K filed January 13,
2010
|
|
|
(g)
|
Incorporated
by reference on Atlantic’s Form 8-K filed March 31,
2010
|
|
|
(h)
|
Incorporated
by reference on Atlantic’s Form 8-K filed May 14,
2010
|
ATLANTIC
BANCGROUP, INC. AND SUBSIDIARIES
|
Exhibit
No
.
|
|
Description of
Exhibit
|
|
|
|
|
|
2.1
|
|
Agreement
and Plan of Merger by and between Atlantic and Jacksonville Bancorp, Inc.,
dated May 10, 2010 (h)
|
|
3.1
|
|
Articles
of Incorporation (a)
|
|
3.2
|
|
Bylaws
(a)
|
|
4.1
|
|
Specimen
Stock Certificate (a)
|
|
10.1
|
|
Software
License Agreement dated as of October 6, 1997, between Oceanside and File
Solutions, Inc. (a)
|
|
10.2
|
|
File
Solutions Software Maintenance Agreement dated as of July 15, 1997,
between Oceanside and SPARAK Financial Systems, Inc.
(a)
|
|
10.3
|
|
Remote
Data Processing Agreement dated as of March 3, 1997, between Oceanside and
Bankers Data Services, Inc. (a)
|
|
10.4
|
|
Lease
dated September 27, 2000, between MANT EQUITIES, LLC and Oceanside
(b)
|
|
10.5
|
|
Lease
dated August 22, 2002, between PROPERTY MANAGEMENT SUPPORT, INC., and
Oceanside (c)
|
|
10.6
|
|
Change
in Control Agreement for Barry W. Chandler (e)
|
|
10.7
|
|
Change
in Control Agreement for David L. Young (e)
|
|
10.8
|
|
Change
in Control Agreement for Grady R. Kearsey (e)
|
|
10.9
|
|
Stipulation
to the Issuance of a Consent Order (f)
|
|
10.10
|
|
Written
Agreement by and between Atlantic and the Federal Reserve Bank of Atlanta
(g)
|
|
10.11
|
|
Shareholders
Agreement by and among Atlantic, Jacksonville Bancorp, Inc., and certain
Atlantic shareholders, dated May 10, 2010 (h)
|
|
14
|
|
Code
of Ethics for Senior Officers Policy (d)
|
|
|
|
Certifications
of Principal Executive Officer required by Rule 13a-14(a)/15d-14(a) under
the Exchange Act
|
|
|
|
Certifications
of Principal Financial Officer required by Rule 13a-14(a)/15d-14(a) under
the Exchange Act
|
|
|
|
Certifications
of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of Sarbanes-Oxley Act of
2002
|
|
|
|
Certifications
of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of Sarbanes-Oxley Act of
2002
|
In
accordance with the requirements of the Securities Exchange Act of 1934, the
issuer has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
Atlantic BancGroup, Inc.
|
|
|
|
|
|
|
|
Date:
August 16,
2010
|
/s/ Barry W. Chandler
|
|
|
Barry
W. Chandler
|
|
|
President
and Principal Executive Officer
|
|
|
|
|
|
|
|
|
|
|
Date:
August 16,
2010
|
/s/ David L. Young
|
|
|
David
L. Young
|
|
|
Executive
Vice President,
|
|
|
Principal
Financial Officer, and
|
|
|
Corporate
Secretary
|
- 46 -