U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ATLANTIC BANCGROUP, INC.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.
Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained in herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
The aggregate market value of the registrant’s common stock held by non-affiliates at June 30, 2009: $5,268,979.
The number of shares outstanding of the registrant’s common stock as of March 31, 2010: 1,247,516.
Certain exhibits as noted in Part IV, Item 15, of the Annual Report on Form 10-K are incorporated by reference.
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
FORWARD-LOOKING STATEMENTS
Atlantic BancGroup, Inc., and our wholly-owned banking subsidiary, Oceanside Bank, may from time to time make written or oral statements, including statements contained in this report that may constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). The words “expect,” “anticipate,” “intend,” “consider,” “plan,” “believe,” “seek,” “should,” “estimate,” and similar expressions are intended to identify such forward-looking statements, but other statements may constitute forward-looking statements. These statements should be considered subject to various risks and uncertainties. Such forward-looking statements are made based upon management’s belief as well as assumptions made by, and information currently available to, management pursuant to “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Our actual results may differ materially from the results anticipated in forward-looking statements due to a variety of factors. Such factors are described below and include, without limitation:
| · | Losses in our loan portfolio are greater than estimated or expected; |
| · | Unanticipated deterioration in the financial condition of borrowers may result in significant increases in loan losses and provisions for those losses; |
| · | If real estate values in our target markets continue to decline, our loan portfolio could become impaired and losses from loan defaults may exceed our allowance for loan and lease losses established for that purpose; |
| · | Economic conditions affecting real estate values and transactions in Atlantic’s market and/or general economic conditions, either nationally or regionally, that are less favorable or take longer to recover than expected; |
| · | An inability to raise additional capital on terms and conditions that are satisfactory; |
| · | The impact of current economic conditions and the impact of our results of operations on our ability to borrow additional funds to meet our liquidity needs; |
| · | Changes in the interest rate environment which expand or reduce margins or adversely affect critical estimates as applied and projected returns on investments and fair values of assets; |
| · | Deposit attrition, customer loss or revenue loss in the ordinary course of business; |
| · | Increased competition with other financial institutions may affect our results of operations and liquidity; |
| · | If our securities portfolio fails to perform, our securities may lose value; |
| · | Changes in the legislative and regulatory environment may increase the cost of operations or limit our growth; |
| · | Our common stock is not an insured bank deposit and is subject to market risk; |
| · | Although publicly traded, our common stock has substantially less liquidity than the average trading market for a stock quoted on the NASDAQ Capital Market, and our stock price can be volatile; |
| · | The inability of Atlantic to realize elements of its strategic and operating plans for 2010 and beyond; |
| · | Natural disasters in Atlantic’s primary market areas result in prolonged business disruption or materially impair the value of collateral securing loans; |
| · | Management’s assumptions and estimates underlying critical accounting policies prove to be inadequate or materially incorrect or are not borne out by subsequent events; |
| · | The impact of recent and future federal and state regulatory changes; |
| · | Current or future litigation, regulatory investigations, proceedings or inquiries; |
| · | Strategies to manage interest rate risk may yield results other than those anticipated; |
| · | A significant rate of inflation (deflation); |
| · | Unanticipated litigation or claims; |
| · | Changes in the securities markets; |
| · | Acts of terrorism or war; and |
| · | Details of the Emergency Economic Stabilization Act of 2008; the American Recovery and Reinvestment Act of 2009; the Hiring Incentives to Restore Employment Act; the Worker, Homeownership, and Business Assistance Act of 2009; and other recent tax acts; and various announced and unannounced programs and regulations from Congress, the U.S. Treasury Department, and bank regulators to address capital and liquidity concerns in the banking system, are still being implemented or finalized and may have a significant effect on the financial services industry and Atlantic. |
Many of such factors are beyond our ability to control or predict. Readers should not place undue reliance on any such forward-looking statements, which speak only as to the date made. Readers are advised that the factors listed above 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 that 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.
Unless this Form 10-K indicates otherwise or the context otherwise requires, the terms “we,” “our,” “us,” “Atlantic,” “Holding Company,” or “Oceanside” as used herein refer collectively to Atlantic BancGroup, Inc. and our subsidiary Oceanside Bank, which we sometimes refer to as “Oceanside,” “our bank subsidiary,” or “our bank.” References herein to the fiscal years 2007, 2008, and 2009 mean our fiscal years ended December 31, 2007, 2008, and 2009, respectively.
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General
Atlantic BancGroup, Inc. On October 23, 1998, Atlantic BancGroup, Inc. (“Atlantic” or “Holding Company”) was incorporated in the State of Florida. On April 3, 1999, the shareholders of Oceanside Bank (“Oceanside” or “Bank”) approved the Agreement and Plan of Reorganization (“Reorganization”) whereby Oceanside became a wholly-owned subsidiary of the Holding Company. The Reorganization was completed on May 5, 1999. The Holding Company is a registered bank holding company under the Bank Holding Company Act of 1956, as amended (the “BHC Act”), and now owns all of the voting shares of Oceanside. Our corporate offices are located at 1315 South Third Street, Jacksonville Beach, Florida. Atlantic presently has no significant operations other than the operations of Oceanside.
Oceanside Bank. Oceanside opened July 21, 1997, and operates as a Florida state-chartered community bank within our assessment area. Oceanside provides general commercial banking services to businesses and individuals. The principal business of Oceanside is to receive demand and time deposits from the public and to make loans and other investments. Oceanside operates from a main office located at 1315 South Third Street, Jacksonville Beach, Florida, and three branch offices that are located at 560 Atlantic Boulevard, Neptune Beach, Florida; 13799 Beach Boulevard, Jacksonville, Florida; and 1790 Kernan Boulevard South, Jacksonville, Florida. In 2008, Oceanside formed and began operating a subsidiary, S. Pt. Properties, Inc., for the sole purpose of managing a single real estate property acquired through foreclosure. In 2009, Oceanside formed and began operating two subsidiaries, Parman Place, Inc. and East Arlington, Inc., for the sole purpose of each managing a single real estate property acquired through foreclosure.
The accompanying 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, 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.
Our Board of Directors is actively considering strategic alternatives, including a capital infusion. We can give no assurance that we will identify an alternative that allows our stockholders to realize an increase in the value of Atlantic’s stock. We also can give no assurance that a transaction or other strategic alternative, once identified, evaluated and consummated, will provide greater value to our stockholders than that reflected in the current stock price. In addition, a transaction, which would likely involve equity financing, would result in substantial dilution to our current stockholders and could adversely affect the price of our common stock. If we are 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.
Although the proceeds from any capital infusion is expected to provide sufficient support for our continued operation as a going concern, such capital may prove to be insufficient due to the possible continued decline of the loan portfolio or other losses.
As is the case with banking institutions generally, our operations are materially and significantly influenced by general economic conditions and by related monetary and fiscal policies of financial institution regulatory agencies, including the Federal Reserve, the Federal Deposit Insurance Corporation, and the State of Florida Department of Financial Services. Deposit flows and costs of funds are influenced by interest rates on competing investments and general market rates of interest. Lending activities are affected by the demand for financing of real estate and other types of loans, which in turn is affected by the interest rates at which such financing may be offered and other factors affecting local demand, the availability of funds, and our ability to collect outstanding loans. We face strong competition in attracting deposits (our primary source for funding loans) and significant challenges with realizing the full value of our loan portfolio.
Oceanside has defined its assessment (or trade) area based on various factors, including its size, banking offices, geographic boundaries, lending expertise, management, and competition. Oceanside draws most of our customer deposits and conducts a significant portion of our lending transactions from and within our assessment area. The assessment area is bounded to the West by SR 9A and East of the southern portion of US 1 in Duval County; to the South by the Duval County Line and North of Palm Valley Road in St. Johns County; to the North by the St. Johns River in Duval County; and to the East by the Atlantic Ocean. Duval and St. Johns Counties enjoy an abundant and educated work force, an attractive business environment, favorable cost-of-living comparisons to other metropolitan areas in the United States, and a good relationship between the private and public sectors.
In general, commercial real estate in the assessment area consists of small shopping centers and office buildings. The type of residential real estate within our assessment area varies, with a number of condominiums, townhouses, and single-family housing developments dispersed throughout the area. New residential growth consists primarily of working professionals with families.
We believe that our assessment area has been a desirable market in which to operate an independent, locally-owned bank. Furthermore, since we have a large base of local shareholders and communicate frequently with our shareholders, additional opportunities exist for marketing that might not be found with other financial institutions in our assessment area. Our broad base of shareholders from the Beaches and surrounding areas of Jacksonville, and the historically favorable economic environment of our assessment area, should provide us with the opportunity to gain market share.
As a locally-owned and operated institution, we emphasize providing prompt, efficient, and personalized service to individuals, small and medium-sized businesses, professionals and other local organizations. Generally, customers have one account officer to serve all of their banking needs and have ready access to senior management when necessary. In addition, our Board of Directors is responsible for maintaining a visible profile for, and providing business to, Oceanside within our local community.
Our principal strategy is to:
| · | expand our commercial and small business customer base within our assessment area, |
| · | make commercial and consumer loans within our assessment area, as well as throughout Duval County and the surrounding counties, and |
| · | expand our consumer loan base within our assessment area. |
Our belief is that the most profitable deposit relationships are characterized by high deposit balances, low frequency of transactions, and low distribution requirements. Being a community bank with local management, we are well-positioned to establish these relationships with smaller commercial customers and households.
Our sources of funds for loans and other investments include demand, time, savings, and other deposits, amortization and repayment of loans, sales to other lenders or institutions of loans or participations in loans, and other borrowings. Our principal sources of income are interest and fees collected on loans, and to a lesser extent, interest and dividends collected on other investments. Our principal expenses are interest paid on savings and other deposits, interest paid on other borrowings, employee compensation, office expenses, and other overhead and operational expenses. We offer several deposit accounts, including demand deposit accounts, negotiable order of withdrawal accounts (“NOW” accounts), money market accounts, savings accounts, certificates of deposit, and various retirement accounts. During 2007 and 2008, we also obtained funds from customer repurchase agreements that have been classified as other borrowings and brokered deposits that have been classified as other time deposits. After the implementation of regulatory programs in 2008, we discontinued offering customer repurchase agreements in 2009.
We have automated teller machines (the “ATMs”) located at each of our offices, and we are a member of an electronic banking network so that our customers may use the ATMs of other financial institutions. We also operate drive-in tellers and 24-hour depositories at each of our offices. As part of the strategy to offer innovative services to our customers, we provide on-line banking (“Internet Banking”), Dial-a-Bank (“Telephone Banking”), remote deposit capture, ACH origination, and lock-box cash management.
Our efforts are focused on filling the void created by the increasing number of locally-owned community banks that have been acquired by large regional holding companies, negatively impacting the personal nature of the delivery, quality, and availability of banking services in our assessment area and surrounding areas.
Competition
The banking industry, in general, and our market, in particular, is characterized by significant competition for both deposits and lending opportunities. In our market area, we compete with other commercial banks, savings and loan associations, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking firms, and various other nonbank competitors. Competition for deposits may have the effect of increasing the rates of interest we will pay on deposits, which would increase our cost of money and possibly reduce our net earnings. Competition for loans may have the effect of lowering the rate of interest we will receive on our loans, which would lower our return on invested assets and possibly reduce our net earnings. Many of our competitors have been in existence for a significantly longer period of time than us, are larger and have greater financial and other resources and lending limits than us, and may offer certain services that we do not provide at this time. However, we feel the market is rich with opportunity to provide tailor-made custom banking products and services that cannot be provided by the large institutions that offer many banking products and services on an impersonal basis. As larger financial institutions have in recent years acquired community banks, we are able to cater to those customers looking for more personalized service.
Our profitability depends upon our ability to compete in this market area. At the present time, we are unable to predict to what degree competition may adversely affect our financial condition and operating results.
Our response to this highly competitive environment dictates that we:
| · | review and act upon loan requests quickly with a locally-based loan committee, |
| · | maintain flexible, but prudent lending policies, |
| · | personalize service with emphasis on establishing long-term banking relationships with our customers, and |
| · | maintain a strong ratio of employees to customers to enhance the level of service. |
Overview. We offer a wide range of loans to individuals and small businesses and other organizations that are located, or conduct a substantial portion of their business, in our assessment area. At December 31, 2009, our consolidated total loans were $194.2 million, or 65.3%, of our total consolidated assets. The interest rates charged on loans vary with the degree of risk, maturity, and amount of the loan, and are further subject to competitive pressures, money market rates, availability of funds, and government regulations. We have no foreign loans or loans for highly-leveraged transactions.
Our loan portfolio is concentrated in three major areas: real estate loans, commercial loans, and consumer and other loans. A majority of our loans are made on a secured basis. As of December 31, 2009, approximately 93% of our total loan portfolio consisted of loans secured by mortgages on real estate. Of the total loans secured by mortgages on real estate, approximately 50% are secured by nonfarm nonresidential properties (commercial real estate) and 17% are construction, land development, and other land loans, secured by real estate. The remaining 33% are secured by 1-4 family and multifamily residential properties. Commercial loans not secured by real estate amounted to approximately 5% of our total loan portfolio as of December 31, 2009. Consumer and other loans represent approximately 2% of our total loan portfolio at December 31, 2009.
During 2008 and 2007, we brokered loans totaling $11.6 million and $7.6 million, respectively, which were closed by the correspondent mortgage lenders. We recorded brokering fees of $17,000 and $69,000 in 2008 and 2007, respectively. During 2009, we did not broker any mortgage loans or record any brokering fees for such activities. Our ability to solicit, process, and broker residential mortgage loans is highly dependent on the general economy and interest rate environment, the health of the residential real estate market, and competition from other local and national mortgage bankers and brokers.
General. We originate loans primarily for investment purposes. Significant segments of our loan portfolio are one- to four- family residential real estate loans, commercial real estate loans, including nonresidential real estate, construction and development loans, and commercial and industrial loans.
The following summarizes our general policies and procedures; however, each loan is underwritten separately following lending standards consistent with community banking practices. In cases where we make exceptions to our policies and procedures (or regulatory guidance), we notate such exceptions in our underwriting documentation for consideration in the approval process or, if required by regulations, we monitor and report to our directors. Also, when making references to rates, terms, and other ratios, some loans may differ; however, we believe those differences are immaterial.
One- to Four-Family Residential Real Estate Loans. We offer mortgage loans to enable borrowers to purchase or refinance existing homes, most of which serve as the primary residence of the borrower. We offer fixed-rate and adjustable-rate loans with terms up to 30 years. Borrower demand for adjustable-rate loans versus fixed-rate loans is a function of the level of interest rates, the expectations of changes in the level of interest rates, and the difference between the interest rates and loan fees offered for fixed-rate mortgage loans and the initial period interest rates and loan fees for adjustable-rate loans. The relative amount of fixed-rate mortgage loans and adjustable-rate mortgage loans that can be originated at any time is largely determined by the demand for each in a competitive environment. The loan fees, interest rates, and other provisions of mortgage loans are determined by us on the basis of our own pricing criteria, competitive market conditions, and regulatory constraints. Most of our loan originations result from relationships with existing or past customers, members of our local community and referrals from realtors, attorneys, and builders.
While one- to four-family residential real estate loans are normally originated with up to 30-year terms, such loans typically remain outstanding for substantially shorter periods because borrowers often prepay their loans in full upon sale of the property pledged as security or upon refinancing the original loan. Therefore, average loan maturity is a function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing interest rates, and the interest rates payable on outstanding loans. Additionally, our current practice is to hold in our portfolio fixed-rate home equity lines of credit and home equity loans with 10-year terms or less and adjustable-rate loans.
Interest rates and payments on our adjustable-rate mortgage loans generally adjust annually after an initial fixed period that ranges from 3 to 5 years. Interest rates and payments on these adjustable-rate loans are based on published indices such as the one-year constant maturity Treasury index as published by the Federal Reserve in Statistical Release H.15. The maximum amount by which the interest rate may be increased is two percentage points per adjustment period and the lifetime interest rate cap is six percentage points over the initial interest rate of the loan. Our adjustable-rate residential mortgage loans provide for a decrease in the rate paid below the initial contract rate.
Our policy is to not originate conventional loans with loan-to-value ratios exceeding 90%. All purchase money loans secured by one-to-four family residential property require a formal appraisal by a Board-approved licensed appraiser. We obtain title insurance on all first mortgage loans. Borrowers must obtain hazard insurance, windstorm insurance, and flood insurance for loans on properties located in a flood zone, before closing the loan.
Nonresidential Real Estate and Land Loans. We offer adjustable-rate mortgage loans secured by nonresidential real estate such as commercial buildings. These loans are typically repaid or the term is extended before maturity, in which case a new rate is negotiated to meet market conditions and an extension of the loan is executed for a new term with a new amortization schedule. We originate adjustable-rate nonresidential real estate loans with terms up to 25 years. Interest rates and payments on most of these loans typically adjust annually after an initial fixed term of three to seven years. Interest rates and payments on these loans are based on published indices such as the prime interest rate. Loans are secured by first mortgages that do not exceed 80% of the property’s appraised value (65% for vacant land loans and 75% for horizontally-developed land loans), the maximum amount of which is limited by our in-house loans to one borrower limit. When the borrower is a corporation, partnership or other entity, our policy is that significant equity holders serve as co-borrowers or as personal guarantors of the loan.
We also originate loans secured by unimproved property, including lots for single family homes and for mobile homes, raw land, and vacant commercial property. The terms and rates of our land loans are the same as our nonresidential and multi-family real estate loans. Loans secured by undeveloped land or improved lots typically involve greater risks than residential mortgage lending because land loans are more difficult to evaluate. If the estimate of value proves to be inaccurate, in the event of default and foreclosure, we may be confronted with a property the value of which is insufficient to assure full repayment. Loan amounts generally do not exceed 65% of the lesser of the appraised value or purchase price for raw land and 75% for land development and vacant horizontally developed land.
Construction Loans. We originate fixed-rate and adjustable-rate loans to individuals and, to a lesser extent, builders to finance the construction of residential dwellings. We also make construction loans for commercial development projects, including apartment buildings, restaurants, shopping centers, and owner-occupied properties used for businesses. Our construction loans provide for the payment of interest only during the construction phase, which is usually 9-12 months for residential properties and 12-18 months for commercial properties. At the end of the construction phase, the loan converts to a permanent mortgage loan. Loans can be made with a maximum as built loan to value ratio of 85% on residential construction and 80% on commercial construction at the time the loan is originated. Before making a commitment to fund a construction loan, we require an as built appraisal of the property by an independent licensed appraiser. We also will require an independent inspection of the property before disbursement of funds during the term of the construction loan.
Commercial Loans. We occasionally make commercial business loans to professionals, sole proprietorships, and small businesses in our market area. We extend commercial business loans on an unsecured basis and secured basis, the maximum amount of which is limited by our in-house loans to one borrower limit.
We originate secured and unsecured commercial lines of credit to finance the working capital needs of businesses to be repaid by seasonal cash flows. Commercial lines of credit secured by nonresidential real estate are adjustable-rate loans whose rates are based on the prime interest rate and adjust daily. Commercial lines of credit secured by nonresidential real estate have terms no greater than 1-2 years and a maximum loan-to-value ratio of 85% of the pledged collateral when the collateral is commercial real estate. We also originate commercial lines of credit secured by marketable securities and business assets and unsecured lines of credit. These lines of credit, as well as certain commercial lines of credit secured by nonresidential real estate, require that only interest be paid on a monthly or quarterly basis and have a maximum term of no greater than 1-2 years.
We also originate secured and unsecured commercial loans. Secured commercial loans are collateralized by nonresidential real estate, marketable securities, accounts receivable, inventory, industrial/commercial machinery and equipment and furniture and fixtures. We originate both fixed-rate and adjustable-rate commercial loans with terms up to 25 years for secured loans and up to three years for unsecured loans. Adjustable-rate loans are based on prime and adjust annually. Where the borrower is a corporation, partnership or other entity, our policy is to require significant equity holders to be co-borrowers, and in cases where they are not co-borrowers, we require personal guarantees.
When making commercial business loans, we consider the financial statements and/or tax returns of the borrower, the borrower’s payment history of both corporate and personal debt, the debt service capabilities of the borrower, the projected cash flows of the business, the viability of the industry in which the customer operates, and the value of the collateral.
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 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.
Loan Underwriting Risks
Oceanside Bank lending policies reflect the level of risk acceptable to our Board of Directors and management, and provide clear and measurable underwriting standards that enable our lending staff to evaluate all relevant credit factors. To ensure that policies and standards remain safe and sound, we consider both internal and external factors, such as its market position, historical experience, present and prospective trade area, probable future loan and funding trends, staff capabilities, and technological resources. Consistent with bank regulatory real estate lending guidelines, our CRE (or commercial real estate) lending policies address the following underwriting standards:
| · | Maximum loan amount by type of property |
| · | Loan-to-value (LTV) limits by property types |
| · | Requirements for sensitivity analysis or stress testing |
| · | Minimum requirements for initial investment and maintenance of hard equity by the borrower |
| · | Minimum standards for borrower net worth, property cash flow and debt service coverage for the property |
Residential Single-Family Adjustable-Rate Loans. While we anticipate that adjustable-rate loans will better offset the adverse effects of an increase in interest rates as compared to fixed-rate mortgages, the increased mortgage payments required of adjustable-rate loan borrowers in a rising interest rate environment could cause an increase in delinquencies and defaults. The marketability of the underlying property also may be adversely affected in a high interest rate environment. In addition, although adjustable-rate mortgage loans help make our loan portfolio more responsive to changes in interest rates, the extent of this interest sensitivity is limited by the annual and lifetime interest rate adjustment limits. We underwrite adjustable-rate mortgages at fully indexed rates.
Multi-Family and Nonresidential Real Estate (including Land Loans). Loans secured by multi-family and nonresidential real estate generally have larger balances and involve a greater degree of risk than one- to four-family residential mortgage loans. Of primary concern in multi-family and nonresidential real estate lending is the borrower’s creditworthiness and the feasibility and cash flow potential of the project. Payments on loans secured by income properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject to a greater extent than residential real estate loans to adverse conditions in the real estate market or the economy. To monitor cash flows on income properties securing loans over $500,000, we require borrowers and significant loan guarantors of loan relationships to provide annual financial statements and/or tax returns. In reaching a decision on whether to make a multi-family and nonresidential real estate loan, we consider the net operating income of the property, the borrower’s expertise, credit history, and profitability and the value of the underlying property. Our underwriting guidelines state that the properties securing these real estate loans should have debt service coverage ratios (the ratio of earnings before debt service to debt service) of at least 1.20x. Environmental surveys and inspections are obtained when circumstances suggest the possibility of the presence of hazardous materials, and are required for loans of $750,000 or more.
To monitor cash flows on loan participations, we require the lead lender to provide us with annual financial statements from the borrower. We also conduct an annual internal loan review for loan participations.
Construction Loans. Construction financing is considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property’s value at completion of construction and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the building. If the estimate of value proves to be inaccurate, we may be confronted, at or before the maturity of the loan, with a building having a value which is insufficient to assure full repayment. If we are forced to foreclose on a building before or at completion due to a default, there can be no assurance that we will be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs.
Commercial Loans. Unlike residential mortgage loans, which typically are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property the value of which tends to be more easily ascertainable, commercial loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial loans may depend substantially on the success of the business itself. Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value.
Loan Originations, Purchases, and Sales. Loan originations come from a number of sources. The primary sources of loan originations can be attributed to direct solicitation from our lending officers, existing customers, walk-in traffic, advertising, and referrals from customers and brokers. We occasionally purchase participation interests in loans to supplement our origination efforts.
Loan Approval Procedures and Authority. Our lending activities follow written, non-discriminatory underwriting standards and loan origination procedures established by our Board of Directors and management. In addition to establishing lending limits and loan authorities, our policies establish loan-to-value limits. For example, real estate mortgage loans are subject to regulatory loan-to-value limits as follows:
| REGULATORY LOAN-TO-VALUE LIMITS |
| LOAN CATEGORIES | LTV LIMIT |
Raw Land Land development and vacant horizontally developed land Construction: Commercial, multifamily, and other nonresidential One-to-four family residential Improved property Owner-occupied one-to-four family and home equity | 65% 75% 80% 85% 85% 89.9% |
We may approve a loan that exceeds the stated loan to value limits. Any such loan will be treated on a case-by-case basis. The aggregate amount of all loans in excess of the loan to value ratios will not exceed 100 percent of total capital. Additionally, within the aggregate limit, the total loans for all commercial, multifamily, and other properties that are not one-to-four family residential properties should not exceed 30 percent of total capital.
Underwriting Documentation. Our policies provide specific guidance covering the various types of loans and include documenting the borrower’s (and/or guarantor’s) experience, character, liquidity, competition, local market/economic trends, past performance, and projected cash flow to repay the debt. Our validation requirements for documenting a borrower’s income and assets include obtaining tax returns, personal or business financial statements, and credit bureau reports. If appropriate, we verify employment status and employment income. We also make inquiries and perform cash flow analyses in our underwriting.
When prudent, we physically inspect the borrower’s business or property. In addition, we obtain third party appraisals, internal valuations, environmental assessments, project economics, analysis of leases, and annual financial data.
Appraisal Policy. We have a detailed policy covering the real estate appraisal process, including the selection of qualified appraisers, review of appraisal reports upon receipt, and complying with the federal regulatory standards that govern the minimum requirements for obtaining appraisals or evaluations. When we renew a loan secured by real estate that is covered by the federal regulatory appraisal guidelines, we obtain a current evaluation or, if market conditions warrant, or if we advance new monies in excess of reasonable closing costs, an updated appraisal.
When we evaluate a collateral-dependent loan for impairment, we obtain updated appraisals or evaluations depending on the age of the last appraisal, volatility of the local market, and other factors. If we can support the existing appraisal with a current comparable sales evaluation and tax assessment value, then we may continue to use the existing appraisal. In developing an evaluation, we use discounts derived from our observation of market trends including declines in real estate values and increases in marketing time as well as conversations with local appraisers and real estate brokers.
Unless we are permitted by regulatory guidance to substitute an acceptable evaluation (with appropriate discounts considered) for a new or updated appraisal, our practice is to not use outdated appraisals in either the loan origination, loan renewal, or determination of the level of our allowance for loan losses.
Loan maturities. As previously mentioned, we must consider both the risk of early repayment of loans and the timing of contractual loan maturities, which is the risk that we would be unable to reinvest the proceeds from loan repayment at favorable rates (or net interest margin).
A significant portion of our loans matures within one year. Many of the commercial, construction, and real estate development loans we originate are for 1-year to 3-year terms (and are historically renewed). Since a substantial portion of loans are typically renewed at maturity, we expect the historical trend to continue. In the event of an unusually high pay-off rate, we believe we have the ability to adjust our deposit rates to shrink our balance sheet if prudent. Furthermore, as we seek to increase our risk-based capital ratios, one strategy that we intend to implement calls for reducing the total assets of Oceanside Bank. To the extent certain loans maturing within the next 12 months do not renew, this will assist in achieving our goal of improving our risk-based capital ratios.
Junior liens and home equity lines of credit of $16.1 million were included in the total of $30.6 million of 1-4 family residential loans maturing in one year or less. These loans are typically written for shorter terms (or renew annually). Also, we have shown $19.6 million of 1-4 family residential loans that reprice during 2010 and may refinance in the current rate environment and $3.1 million of nonaccrual loans.
We have $18.7 million in construction, land development, and other land loans that mature during 2010. Despite the current market conditions, we believe that we have the ability to renew these loans in accordance with regulatory guidelines.
For those loans that we expect construction will be completed during 2010, we either have a take-out commitment to permanently finance from another lender, or we have approved the loan to hold in our portfolio. For development loans where the project has stalled or is expected to continue past the current maturity date of the loan, we plan to renew the loan and whenever possible begin amortizing the loan. This approach is generally permitted by regulatory guidelines and considered by our Board of Directors as a prudent strategy to recover our investment without forcing the borrower (or us) to liquidate the collateral in this unfavorable real estate environment.
Deposit Activities
Deposits are our major source of funds for loans and other investment activities. At December 31, 2009, our regular savings, demand, NOW, and money market deposit accounts comprised approximately 52% of our consolidated total deposits. Approximately 31% of our consolidated deposits at December 31, 2009, were certificates of deposit (or time deposits) of less than $100,000. Time deposits of $100,000 and over made up approximately 17% of our consolidated total deposits at December 31, 2009. Generally, our goal is to maintain the rates paid on our deposits at a competitive level. Brokered deposits of $19.1 million, or approximately 7%, of consolidated total deposits at December 31, 2009, are included in time deposits of $100,000 or less.
Oceanside, following the filing of its December 31, 2009 call report, is not able to accept, renew, or roll over brokered deposits, or pay interest rates more than 75 basis points above prevailing market rates in our local markets or national rates released by the FDIC. Oceanside no longer accepts new brokered deposits. As a result of the rate restrictions, it is possible that we could experience a decrease in new deposits, and our existing customers may transfer their deposits to other institutions that are able to offer a higher interest rate, which could have a material adverse effect on our ability to continue as a going concern. For a detail discussion of restrictions on rates and types of deposits placed on Oceanside in gathering and retaining deposits, see the following section, Supervision and Regulation.
Investment Activities
We are permitted to invest a portion of our assets in U.S. Government agency, state, county, and municipal obligations, certificates of deposit, collateralized mortgage obligations (“CMOs”), and federal funds sold. Our investments are managed in relation to loan demand and deposit growth, and are generally used to provide for the investment of excess funds at minimal risks while providing liquidity to fund increases in loan demand or to offset fluctuations in deposits.
Our total investment portfolio may be invested in U.S. Treasury and general obligations of its agencies and state, county, and municipal obligations because such securities generally represent a minimal investment risk. Occasionally, we purchase certificates of deposits of national and state banks. Under our policy, investments in certificates of deposits may not exceed $250,000 in any one institution (the current limit of FDIC insurance for deposit accounts). CMOs are secured with Federal National Mortgage Association (“FNMA”) and General National Mortgage Association (“GNMA”) Residential mortgage pass-through securities and generally have a shorter life than the stated maturity. We invest excess cash in an interest-bearing account at the Federal Reserve Bank of Atlanta. Federal funds sold through approved correspondent banks are used as an alternative source for overnight investment of excess cash.
We monitor changes in financial markets that may affect our portfolio investments. We also monitor our daily cash position to ensure that all available funds earn interest at the earliest possible date.
A portion of our investment account is designated as primary reserves and invested in liquid securities that can be readily converted to cash with minimum risk of market loss. These investments usually consist of U.S. Treasury obligations, U.S. government agencies, and federal funds. The remainder of our investment account (or secondary reserves) may be placed in investment securities of different types and longer maturities. The maturities of our securities are staggered whenever possible so as to produce a steady cash flow in the event we need cash, or economic conditions change to a more favorable rate environment.
Correspondent Banking
Correspondent banking involves one bank providing services to another bank that cannot provide those services for itself from an economic, regulatory, or practical standpoint. We purchase correspondent services offered by larger banks, including check collections, purchase of federal funds, security safekeeping, investment services, coin and currency supplies, overline and liquidity loan participations, and sales of loans to, or participation with, correspondent banks. We have ongoing banking relationships with several correspondent banks. We also sell loan participations to correspondent banks with respect to loans that would exceed our lending limit.
Interest and Usury
Like other commercial banks, we are subject to state and federal statutes that affect the interest rates that may be charged on loans. These laws do not, under present market conditions, deter us from continuing the process of originating loans.
Supervision and Regulation
Both the Holding Company and Oceanside are subject to comprehensive regulation, examination, and supervision by the Federal Reserve, the Florida Department of Financial Services (“Department”) and the Federal Deposit Insurance Corporation (“FDIC”) and are subject to other laws and regulations applicable to bank holding companies and banks. Such regulations include limitations on loans to any single borrower and to our directors, officers, and employees; restrictions on the opening and closing of branch offices; the maintenance of required capital and liquidity ratios; the granting of credit under equal and fair conditions; disclosure of the costs and terms of such credit; and restrictions as to permissible investments. The Holding Company is examined periodically by the Federal Reserve, and the Bank is regularly examined by the Department and the FDIC. Both the Bank and the Holding Company submit periodic reports regarding their financial condition and other matters to their respective regulators. These agencies have a broad range of powers to enforce regulations under their respective jurisdictions, and to take discretionary actions determined to be for the protection of the safety and soundness of the Holding Company and Oceanside.
The following is a brief summary of certain statutes, rules, and regulations affecting us and our subsidiary bank. This summary is qualified in its entirety by reference to the particular statutory and regulatory provisions referred to below, and is not intended to be an exhaustive description of the statutes or regulations applicable to our business and subsidiary bank. Supervision, regulation, and examination of banks by regulatory agencies are intended primarily for the protection of depositors, rather than shareholders.
Bank Holding Company Regulation. Atlantic is a bank holding company, registered with the Federal Reserve under the BHC Act. As such, Atlantic is subject to the supervision, examination and reporting requirements of the BHC Act and the regulations of the Federal Reserve. The BHC Act requires that a bank holding company obtain the prior approval of the Federal Reserve before (i) acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank or bank holding company, (ii) acquiring all or substantially all of the assets of a bank, or (iii) merging or consolidating with any other bank holding company.
The BHC Act further provides that the Federal Reserve may not approve any transaction that would result in a monopoly or would be in furtherance of any combination or conspiracy to monopolize or attempt to monopolize the business of banking in any section of the United States, or the effect of which may be to substantially lessen competition or to tend to create a monopoly in any section of the country, or that in any other manner would be in restraint of trade, unless the anticompetitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the community to be served. The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks concerned and the convenience, and needs of the community to be served. Consideration of financial resources generally focuses on capital adequacy and consideration of convenience and needs issues includes the parties’ performance under the Community Reinvestment Act (“CRA”).
Except as authorized by the Gramm-Leach-Bliley Act of 1999, the BHC Act generally prohibits a bank holding company from engaging in activities other than banking, or managing or controlling banks or other permissible subsidiaries, and from acquiring or retaining direct or indirect control of any company engaged in any activities other than those activities determined by the Federal Reserve to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In determining whether a particular activity is permissible, the Federal Reserve must consider whether the performance of such an activity can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency that outweigh
possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices. For example, factoring accounts receivable, acquiring or servicing loans, leasing personal property, conducting securities brokerage activities, performing certain data processing services, acting as agent or broker in selling credit life insurance and certain other types of insurance in connection with credit transactions, and certain insurance underwriting activities have all been determined by regulations of the Federal Reserve to be permissible activities of bank holding companies. Despite prior approval, the Federal Reserve has the power to order a holding company or its subsidiaries to terminate any activity or terminate its ownership or control of any subsidiary, when it has reasonable cause to believe that continuation of such activity or such ownership or control constitutes a serious risk to the financial safety, soundness, or stability of any bank subsidiary of that bank holding company.
Under federal law, federally insured banks are subject, with some exceptions, to certain restrictions on any extension of credit to their parent holding companies or other affiliates, on investment in the stock or other securities of affiliates, and on the taking of such stock or securities as collateral from any borrower. In addition, banks are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or the providing of any property or service.
Gramm-Leach-Bliley Act. Enacted in 1999, the Gramm-Leach-Bliley Act reforms and modernizes certain areas of financial services regulation. The law permits the creation of financial services holding companies that can offer a full range of financial products under a regulatory structure based on the principle of functional regulation. The legislation eliminates the legal barriers to affiliations among banks and securities firms, insurance companies, and other financial services companies. The law also provides financial organizations with the opportunity to structure these new financial affiliations through a holding company structure or a financial subsidiary. The law reserves the role of the Federal Reserve Board as the supervisor for bank holding companies. At the same time, the law also provides a system of functional regulation which is designed to utilize the various existing federal and state regulatory bodies. The law also sets up a process for coordination between the Federal Reserve Board and the Secretary of the Treasury regarding the approval of new financial activities for both bank holding companies and national bank financial subsidiaries.
The law also includes a minimum federal standard of financial privacy. Financial institutions are required to have written privacy policies that must be disclosed to customers. The disclosure of a financial institution’s privacy policy must take place at the time a customer relationship is established and not less than annually during the continuation of the relationship. The act also provides for the functional regulation of bank securities activities. The law repeals the exemption that banks were afforded from the definition of “broker,” and replaces it with a set of limited exemptions that allow the continuation of some historical activities performed by banks. In addition, the act amends the securities laws to include banks within the general definition of dealer. Regarding new bank products, the law provides a procedure for handling products sold by banks that have securities elements. In the area of CRA activities, the law generally requires that financial institutions address the credit needs of low-to-moderate income individuals and neighborhoods in the communities in which they operate. Bank regulators are required to take the CRA ratings of a bank or of the bank subsidiaries of a holding company into account when acting upon certain branch and bank merger and acquisition applications filed by the institution. Under the law, financial holding companies and banks that desire to engage in new financial activities are required to have satisfactory or better CRA ratings when they commence the new activity.
FDIC and Other Banking Regulations. Our deposit accounts are insured by the Bank Insurance Fund (“BIF”) of the FDIC up to a maximum of $250,000 per insured depositor. In addition, Oceanside is participating in the FDIC’s Transaction Account Guarantee Program (“TAGP”). Under that program, all noninterest-bearing transaction accounts are fully guaranteed by the FDIC for the entire amount in the account through at least December 31, 2010. Coverage under the TAGP is in addition to and separate from the coverage available under the FDIC’s general deposit insurance rules. The FDIC issues regulations, conducts periodic examinations, requires the filing of reports, and generally supervises the operations of its insured banks. The approval of the FDIC is required prior to a merger or consolidation or the establishment or relocation of an office facility. This supervision and regulation is intended primarily for protection of depositors and not stockholders.
The Federal Reserve and bank regulatory agencies require bank holding companies and financial institutions to maintain capital at adequate levels based on a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%. Under the risk-based standard, capital is classified into two tiers. Tier 1 capital consists of common shareholders’ equity, excluding the unrealized gain (loss) on available-for-sale securities, minus certain intangible assets. Tier 2 capital consists of the general allowance for loan losses except for certain limitations. An institution’s qualifying capital base for purposes of its risk-based capital ratio consists of the sum of
its Tier 1 and Tier 2 capital. The regulatory minimum requirements set forth by the Consent Order discussed below were raised to 8% for the leverage ratio and 11% for the total risk-based capital ratio. At December 31, 2009, Oceanside’s Tier 1 and total risk-based capital ratios were 6.40% and 7.68%, respectively. Oceanside’s total risk-based capital ratio of 7.68% was 3.32% below the minimum required under the Consent Order and 0.32% under the threshold for adequately capitalized institutions. Under current regulations, bank holding companies with consolidated assets under $500 million are not required to calculate and report risk-based capital ratios.
Bank holding companies and banks are also required to maintain capital at a minimum level based on average total assets, which is known as the leverage ratio. The minimum requirement for the leverage ratio is 3%; however, all but the highest rated institutions are required to maintain ratios 100 to 200 basis points above the minimum. As noted above, the Consent Order requires a minimum leverage ratio of 8%. At December 31, 2009, Oceanside’s leverage ratio was 4.06%, which was 3.94% less than its required 8.0% under the Consent Order.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) contains “prompt corrective action” provisions pursuant to which banks are to be classified into one of five categories based upon capital adequacy, ranging from “well-capitalized” to “critically undercapitalized” and which require (subject to certain exceptions) the appropriate federal banking agency to take prompt corrective action with respect to an institution that becomes “significantly undercapitalized” or “critically undercapitalized.”
The FDIC has issued regulations to implement the “prompt corrective action” provisions of FDICIA. In general, the regulations define the five capital categories as follows:
| · | an institution is “well-capitalized” if it has a total risk-based capital ratio of 10% or greater, has a Tier 1 risk-based capital ratio of 6% or greater, has a leverage ratio of 5% or greater and is not subject to any written capital order or directive to meet and maintain a specific capital level for any capital measures; |
| · | an institution is “adequately capitalized” if it has a total risk-based capital ratio of 8% or greater, has a Tier 1 risk-based capital ratio of 4% or greater, and has a leverage ratio of 4% or greater; |
| · | an institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8%, has a Tier 1 risk-based capital ratio that is less than 4% or has a leverage ratio that is less than 4%; |
| · | an institution is “significantly undercapitalized” if it has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than 3% or a leverage ratio that is less than 3%; and |
| · | an institution is “critically undercapitalized” if its “tangible equity” is equal to or less than 2% of its total assets. |
After an opportunity for a hearing, the FDIC has the authority to downgrade an institution from “well-capitalized” to “adequately capitalized” or to subject an “adequately capitalized” or “undercapitalized” institution to the supervisory actions applicable to the next lower category for supervisory concerns.
The “prompt corrective action” provisions of FDICIA also provide that, in general, no institution may make a capital distribution if it would cause the institution to become “undercapitalized.” Capital distributions include cash (but not stock) dividends, stock purchases, redemptions, and other distributions of capital to the owners of an institution.
FDICIA also contains a number of consumer banking provisions, including disclosure requirements and substantive contractual limitations with respect to deposit accounts.
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”). 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.
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 is in the process of developing a management plan and evaluating 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 December 31, 2009, Oceanside’s Tier 1 Leverage Capital Ratio was 4.06% and its Total Risk Based Capital Ratio was 7.68%. We did not meet the April 7, 2010, deadline to raise additional capital as required by the Consent Order. However, we are exploring strategic alternatives intended to result in attaining such capital ratios during 2010.
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 OFR as determined at subsequent examinations and/or visitations. Oceanside has always endeavored to maintain a fully funded, adequate 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 attitudes of future examination or visitation staff. As of the date of the Consent Order, Oceanside believes its ALLL is adequate.
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 adequate models for managing liquidity; and, calculate monthly the liquidity and dependency ratios. 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 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 is on schedule to meet the first and second targeted goals. Oceanside anticipates needing to increase its Tier 1 capital or successfully work out an appropriate amount of “Substandard” assets to meet the third and fourth targeted ratios. Oceanside’s management is actively trying to reduce the amount of “Substandard” assets and Atlantic is exploring strategic alternatives intended to result in increasing Oceanside’s Tier 1 capital.
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 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. The results of its 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 adequate 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 adequate 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 the 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. Oceanside is in the process of performing this analysis. Based on the level of attention Oceanside has paid to its CRE lending program, including the cessation of CRE lending in January 2009, this analysis is not expected to have any impact on Oceanside’s operations. It may, however, result in positive or negative changes to certain loan classifications.
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 will prepare and submit such reports. This is expected to have minimal impact on Oceanside’s operations and financial results.
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 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. |
Maximum Legal Interest Rates. Like the laws of many states, Florida law contains provisions on interest rates that may be charged by banks and other lenders on certain types of loans. Numerous exceptions exist to the general interest limitations imposed by Florida law. The relative importance of these interest limitation laws to the financial operations of Oceanside will vary from time to time, depending on a number of factors, including conditions in the money markets, the costs and availability of funds, and prevailing interest rates.
Bank Branching. Banks in Florida are permitted to branch state-wide. Such branch banking, however, is subject to prior approval by the Department and the FDIC. Any such approval would take into consideration several factors, including the bank’s level of capital, the prospects and economics of the proposed branch office, and other conditions deemed relevant by the Department and the FDIC for purposes of determining whether approval should be granted to open a branch office.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, provides for nationwide interstate banking and branching. Under the law, interstate acquisitions of banks or bank holding companies in any state by bank holding companies in any other state are permissible. Interstate branching and consolidation of existing bank subsidiaries in different states is permissible. Florida has a law that allows out-of-state bank holding companies (located in states that allow Florida bank holding companies to acquire banks and bank holding companies in that state) to acquire Florida banks and Florida bank holding companies. The law essentially provides for out-of-state entry by acquisition only (and not by interstate branching) and requires the acquired Florida bank to have been in existence for at least three years.
Dividend Restrictions. In addition to dividend restrictions placed on Oceanside by the FDIC based on Oceanside’s minimum capital requirements, the Florida Financial Institutions Code prohibits the declaration of dividends in certain circumstances. Section 658.37, Florida Statutes, prohibits the declaration of any dividend until a bank has charged off bad debts, depreciation, and other worthless assets, and has made provision for reasonably-anticipated future losses on loans and other assets. Such a dividend is limited to the aggregate of the net profits of the dividend period combined with a bank’s retained net profits of the preceding two years. A bank may declare a dividend from retained net profits accruing prior to the preceding two years with the approval of the Department. However, a bank will be required, prior to the declaration of a dividend on its common stock, to carry 20% of its net profits for such preceding period as is covered by the dividend to its surplus fund, until the surplus fund equals at least the amount of the bank’s common and preferred stock then issued and outstanding. In no event may a bank declare a dividend at any time in which its net income from the current year, combined with the retained net income from the preceding two years is a loss or which would cause the capital accounts of the bank to fall below the minimum amount required by law, regulation, order, or any written agreement with the Department or the FDIC. We currently do not intend to pay a cash dividend. Instead, we will use our earnings to increase our capital.
Change of Control. Federal law restricts the amount of voting stock of a bank holding company and a bank that a person may acquire without the prior approval of banking regulators. The overall effect of such laws is to make it more difficult to acquire a bank or bank holding company by tender offer or similar means than another type of
corporation. Consequently, shareholders of Atlantic may be less likely to benefit from the rapid increases in stock prices that may result from tender offers or similar efforts to acquire control of other companies. Federal law also imposes restrictions on acquisitions of stock in a bank holding company and a state bank. Under the federal Change in Bank Control Act and the regulations thereunder, a person or group must give advance notice to the Federal Reserve before acquiring control of any bank holding company and the FDIC before acquiring control of any state bank (such as Oceanside). Upon receipt of such notice, the FDIC may approve or disapprove the acquisition. The Change in Bank Control Act creates a rebuttable presumption of control if a member or group acquires 10% or more of a bank holding company’s or state bank’s voting stock, and if one or more other control factors set forth in the Act are present.
Enforcement Powers. Congress has provided the federal bank regulatory agencies with an array of powers to enforce laws, rules, regulations and orders. Among other things, the agencies may require that institutions cease and desist from certain activities, may preclude persons from participating in the affairs of insured depository institutions, may suspend or remove deposit insurance, and may impose civil money penalties against institution-affiliated parties for certain violations.
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. This revision is currently effective through December 31, 2013. 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.
Temporary Liquidity Guarantee Program. In order to promote financial stability in the economy, the FDIC adopted the Temporary Liquidity Guarantee Program (“TLGP”) on October 13, 2008. Participation in the program is voluntary. However, once participation is elected, it can not be revoked. We have chosen to participate in the Transaction Account Guarantee Program component of the TLGP. Under the Transaction Account Guarantee Program, the FDIC will fully insure funds held in noninterest-bearing transaction accounts. Noninterest-bearing transaction accounts are ones that do not accrue or pay interest and for which the institution does not require an advance notice of withdrawal. Also covered are interest on lawyers’ trust accounts and negotiable order of withdrawal (NOW) accounts with interest rates lower than 50 basis points. These revisions are effective through at least December 31, 2010.
Effect of Governmental Policies. Our business and earnings are affected by the policies of various regulatory authorities of the United States, especially the Federal Reserve. The Federal Reserve, among other things, regulates the supply of credit and deals with general economic conditions within the United States. The instruments of monetary policy employed by the Federal Reserve for those purposes influence in various ways the overall level of investments, loans, other extensions of credit, and deposits, and the interest rates paid on liabilities and received on assets.
Corporate Governance. The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act” or “SOX”), which became law on July 30, 2002, added new legal requirements for public companies affecting corporate governance, accounting and corporate reporting. Some of the principal provisions of the Act include:
| · | the creation of an independent accounting oversight board to oversee the audit of public companies and auditors who perform such audits; |
| · | auditor independence provisions which restrict non-audit services that independent accountants may provide to their audit clients; |
| · | additional corporate governance and responsibility measures which (a) require the chief executive officer and chief financial officer to certify financial statements and internal controls and to forfeit salary and bonuses in certain situations, and (b) protect whistleblowers and informants; |
| · | expansion of the authority and responsibilities of the company’s audit, nominating and compensation committees; |
| · | mandatory disclosure by analysts of potential conflicts of interest; and |
| · | enhanced penalties for fraud and other violations. |
Community Reinvestment Act. The Community Reinvestment Act of 1977 requires federal banking regulators to evaluate the record of financial institutions in meeting the credit needs of their local communities, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of those institutions. These factors are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility. To the best knowledge of management, Oceanside is meeting its obligations under this act.
Loans to Insiders. The Federal Reserve Act and related regulations impose specific restrictions on loans to directors, executive officers, and principal shareholder of banks. Under Section 22(h) of the Federal Reserve Act, any loan to a director, executive officer or principal shareholder of a bank, or to entities controlled by any of the foregoing, may not exceed, together with all outstanding loans to such persons or entities controlled by such person, the bank’s loan to one borrower limit. Loans in the aggregate to insiders and their related interests as a class may not exceed two times the bank’s unimpaired capital and unimpaired surplus until the bank’s total assets equal or exceed $100 million, at which time the aggregate is limited to the bank’s unimpaired capital and unimpaired surplus. Section 22(h) also prohibits loans above amounts prescribed by the appropriate federal banking agency to directors, executive officers, and principal shareholders of a bank or bank holding company, and to entities controlled by such persons, unless such loans are approved in advance by a majority of the Board of Directors of the bank with any “interested” director not participating in the voting. Our loan amount, which includes all other outstanding loans to such persons, as to which such prior board of director approval is required, must be the greater of $25,000 or 5% of capital and surplus (up to $500,000). Section 22(h) requires that loans to directors, executive officers, and principal shareholders be made in terms and underwriting standards substantially the same as offered in comparable transactions to other persons.
USA Patriot Act. As part of the USA Patriot Act, signed into law on October 26, 2001, Congress adopted the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (the “Act”). The Act authorizes the Secretary of the Treasury, in consultation with the heads of other government agencies, to adopt special measures applicable to financial institutions such as banks, bank holding companies, broker-dealers and insurance companies. Among its other provisions, the Act requires each financial institution: (i) to establish an anti-money laundering program; (ii) to establish due diligence policies, procedures and controls that are reasonably designed to detect and report instances of money laundering in United States private banking accounts and correspondent accounts maintained for non-United States persons or their representatives; and (iii) to avoid establishing, maintaining, administering, or managing correspondent accounts in the United States for, or on behalf of, a foreign shell bank that does not have a physical presence in any country. In addition, the Act expands the circumstances under which funds in a bank account may be forfeited and requires covered financial institutions to respond under certain circumstances to requests for information from federal banking agencies within 120 hours.
Treasury regulations implementing the due diligence requirements were issued in 2002. These regulations required minimum standards to verify customer identity, encouraged cooperation among financial institutions, federal banking agencies, and law enforcement authorities regarding possible money laundering or terrorist activities, prohibited the anonymous use of “concentration accounts,” and required all covered financial institutions to have in place an anti-money laundering compliance program.
The Act also amended the Bank Holding Company Act and the Bank Merger Act to require the federal banking agencies to consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing an application under these acts. In the past few years, both state and federal banking regulators have significantly increased enforcement of the Act and other anti-money laundering laws and regulations, including levying civil money penalties and seeking cease and desist orders.
Other Regulation. Oceanside is subject to a variety of other regulations. State and federal laws restrict interest rates on loans, potentially affecting our income. The Truth in Lending Act and the Home Mortgage Disclosure Act impose information requirements on us in making loans. The Equal Credit Opportunity Act prohibits discrimination in lending on the basis of race, creed, or other prohibited factors. The Fair Credit Reporting Act governs the use and release of information to credit reporting agencies. The Truth in Savings Act requires disclosure of yields and costs of deposits and deposit accounts. Other acts govern confidentiality of consumer financial records, automatic deposits and withdrawals, check settlement, endorsement and presentment, and reporting of cash transactions as required by the Internal Revenue Service.
Future Legislative Developments
Various legislative acts, including proposals to modify the bank regulatory system, expand the powers of banking institutions and financial holding companies and limit the investments that a depository institution may make with insured funds, are from time to time introduced in Congress and the Florida legislature. Such legislation may change banking statutes and the environment in which we and our banking subsidiary operate in substantial and unpredictable ways. We cannot determine the ultimate effect that potential legislation, if enacted, or implementing regulations with respect thereto, would have upon our financial condition or results of operations or that of our banking subsidiary.
Common Stock
We have 10,000,000 shares of our $0.01 par value common stock authorized. As of March 31, 2010, there were 1,247,516 shares outstanding. Holders of our common stock are entitled to one vote for each share held of record on all matters to be voted on by stockholders. Upon liquidation, dissolution, or winding-up, holders of our common stock are entitled to receive pro rata all assets remaining legally available for distribution to shareholders. The holders of common stock have no right to cumulate their votes in the election of directors. The common stock has no preemptive or other subscription rights, and there are no conversion rights or redemption or sinking fund provisions with respect to such shares. All of the outstanding shares of common stock are fully paid and non-assessable.
Preferred Stock
In addition to the 10,000,000 shares of authorized common stock, our Articles of Incorporation authorize up to 2,000,000 shares of preferred stock. The Board of Directors is further authorized to establish designations, powers, preferences, rights, and other terms for preferred stock by resolution. No shares of preferred stock have been issued.
Indemnification of Directors and Officers
Our Bylaws afford indemnification rights to our officers and directors to the fullest extent permitted or required by the Florida Business Corporation Act.
Under Section 607.0850 of the Florida Business Corporation Act, officers and directors of a Florida corporation may be entitled to indemnification by the corporation against liability incurred in connection with any threatened, pending, or completed action, suit, or other type of proceeding, whether civil, criminal, administrative, or investigative and whether formal or informal; provided, however, that such officer or director acted in good faith and in a manner reasonably believed to be in, or not opposed to, the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe such conduct was unlawful. Such indemnification includes obligations to pay a judgment, settlement, penalty, fine, and expenses actually and reasonably incurred with respect to a proceeding. In addition, Florida law provides that officers and directors shall be indemnified by a Florida corporation against expenses actually and reasonably incurred by such officer or director, to the extent that such officer or director has been successful on the merits or otherwise in defense of any proceeding (as defined in Section 607.0850) or in defense of any claim, issue, or matter therein.
In addition, Section 607.0831 of the Florida Business Corporation Act provides that a director is not personally liable for monetary damages to a corporation or any other person for any statement, vote, decision, or failure to act, regarding corporate management or policy, by a director, unless such director breached or failed to perform such duties as a director and such breach or failure to perform constitutes:
| · | a violation of the criminal law, unless the director had reasonable cause to believe the conduct was lawful or had no reasonable cause to believe the conduct was unlawful; |
| · | a transaction from which the director derived an improper personal benefit, either directly or indirectly; |
| · | a circumstance involving a director’s liability for unlawful distributions under the Florida Business Corporation Act; |
| · | in proceedings by or in the right of the corporation to procure a judgment or by or in the right of a shareholder, conscious disregard for the best interest of the corporation, or willful misconduct; or |
| · | in a proceeding by or in the right of someone other than the corporation or a shareholder, recklessness or an act or omission which was committed in bad faith or with malicious purpose or in a manner exhibiting wanton and willful disregard of human rights, safety, or property. |
Employees
At December 31, 2009, we had approximately 44 full-time employees and 3 part-time employees for a full-time employee equivalent of 45. No significant changes in the number of our full-time employees are currently anticipated. Because we believe that one of the primary deficiencies of large regional banks is the constant turnover of personnel and therefore the lack of continuing personal relationships with local customers, our goal is to maintain a competently trained staff of local bankers who have settled in the community on a permanent basis. To maintain a skilled and knowledgeable staff, we allocate funds for continuing on-the-job and educational training, and employees are encouraged to enroll in various banking courses and other seminars to improve their overall knowledge of the banking business.
The employees are not represented by a collective bargaining unit. We consider relations with employees to be good.
Website Availability of Reports Filed with the Securities and Exchange Commission
We maintain an Internet website located at www.oceansidebank.com on which, among other things, we make available, free of charge, various reports that we file with, or furnish to, the SEC, including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports. These reports are made available as soon as reasonably practicable after these reports are filed with, or furnished to, the SEC.
Not applicable.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.
On October 29, 1996, Oceanside purchased from an unaffiliated entity the two-story, 3,100 square-foot building at 1315 South Third Street, Jacksonville Beach, Florida, as our main office (“Main Office”). The Main Office includes three inside teller stations, four drive-up teller windows, an automated teller machine, and on-site parking. The Main Office is a former Barnett Bank branch office. Oceanside purchased the real property for $850,000 and used a portion of the proceeds of the initial offering of Atlantic’s common stock to add 2,200 square feet to the facility. Oceanside originally acquired the Main Office with funds drawn on a line of credit with Columbus Bank and Trust Company, which was repaid out of the proceeds of Atlantic’s initial offering. Improvements totaling approximately $483,000, net of disposals, have been made through December 31, 2009.
On June 3, 1998, Oceanside purchased from SouthTrust Bank, N.A., a 1,968 square-foot building and real estate located at 560 Atlantic Boulevard, Neptune Beach, Florida. This facility was formerly a branch office of SouthTrust Bank, N.A. Oceanside purchased this building for $427,000 and, subsequently spent $105,000 on renovations and upgrades, net of disposals. This facility includes two offices, three inside teller windows, general lobby space, three drive-up teller windows, an ATM, and on-site parking. There is no outstanding mortgage loan on this property.
On September 27, 2000, Oceanside executed a lease for our third banking location, which opened in the third quarter of 2001. This branch is located at 13799 Beach Boulevard, Jacksonville, Florida. The lease, which commenced upon execution, covers approximately 9,000 square feet. In addition to the branch, other operations of Atlantic and Oceanside were relocated to this facility. Rent commenced in May 2002, which was one year from the date of completion of the landlord’s work, and expires ten years thereafter, with two five-year renewal options. No rent was paid in the first year after completion of the landlord’s work. Oceanside acquired an additional 2,200 square feet of rental space during 2004 adjacent to the operations area for its loan operations department. Scheduled annual rent payments for 2010 through 2011 for the branch and loan operations are: 2010 - $248,000; and 2011 - $84,000. Building improvements, net of disposals, totaled $952,000.
On August 22, 2002, Oceanside executed a lease for our newest branch location, which opened December 15, 2003. This branch is located at the intersection of Kernan and Atlantic Boulevards, at 1790 Kernan Boulevard South, Jacksonville, Florida. The land lease covers approximately 42,000 square feet. The Bank constructed the branch building totaling approximately 3,200 square feet at a cost of approximately $1,388,000. Rent commenced in September 2003. The lease is for twenty years with two ten-year renewal options. Scheduled annual rent payments are: 2010-2012 - $84,000; 2013 - $88,000; 2014-2017 - $94,000; 2018 - $100,000; 2019-2022 - $103,000; and 2023 - $68,000.
We believe all of our facilities are in good condition and well-maintained.
ITEM 3. LEGAL PROCEEDINGS.
We are periodically 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.
ITEM 4. (RESERVED AND REMOVED).
| ITEM 5. | MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. |
Prior to October 28, 1999, the shares of Atlantic common stock were not actively traded, and such trading activity, as it occurred, took place in privately negotiated transactions. On October 28, 1999, Atlantic’s common stock was approved for quotation on the Over-the-Counter Bulletin Board, and on August 29, 2003, Atlantic common stock commenced its listing on the NASDAQ Capital Market under the symbol “ATBC.” During 2009 and 2008 the reported periodic high and low quotes during each quarter follow:
| | | 2009 | | | 2008 | |
| | | 4th Qtr | | | 3rd Qtr | | | 2nd Qtr | | | 1st Qtr | | | 4th Qtr | | | 3rd Qtr | | | 2nd Qtr | | | 1st Qtr | |
| High | | $ | 6.90 | | | $ | 6.10 | | | $ | 6.14 | | | $ | 6.26 | | | $ | 10.00 | | | $ | 13.75 | | | $ | 16.44 | | | $ | 17.80 | |
| Low | | $ | 3.14 | | | $ | 4.05 | | | $ | 3.71 | | | $ | 4.00 | | | $ | 5.75 | | | $ | 5.09 | | | $ | 12.57 | | | $ | 14.29 | |
Please note that the information above represents offers made to buy our stock and may not represent actual transactions or sales. The source of data used to prepare the above chart was taken from historical prices provided by Commodity Systems, Inc.
At December 31, 2009, there were 556 shareholders of record with shares held by individuals and in nominee names.
At March 31, 2010, the initial bid quoted price for the common stock of Atlantic was $3.50. We have never paid a cash dividend on our common stock. We anticipate that for the foreseeable future, any earnings will be retained for capital. Accordingly, we do not anticipate paying cash dividends on our common stock in the foreseeable future. The payment of future dividends will be at the sole discretion of the Board of Directors and will depend on, among other things, future earnings, capital requirements, and our general financial and business condition.
Furthermore, the ability to pay dividends to our stockholders depends primarily on dividends received from our banking subsidiary, Oceanside, and is further restricted by the Written Agreement with the Reserve Bank. Oceanside’s ability to pay dividends is limited by federal and state banking regulations based upon Oceanside’s profitability and other factors and the Consent Order. At December 31, 2009, no retained earnings were available to pay dividends to the Holding Company.
ITEM 6. SELECTED FINANCIAL DATA (dollars and shares in thousands, except per share data)
| | | At or for the | |
| | | Period Ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
| Statements of Operations Data: | | | | | | | | | | | | | | | |
| Total interest income | | $ | 13,895 | | | $ | 15,335 | | | $ | 17,368 | | | $ | 15,502 | | | $ | 11,259 | |
| Total interest expense | | | 6,800 | | | | 8,390 | | | | 9,591 | | | | 7,584 | | | | 4,358 | |
| Net interest income before provision for loan losses | | | 7,095 | | | | 6,945 | | | | 7,777 | | | | 7,918 | | | | 6,901 | |
| Provision for loan losses | | | 6,268 | | | | 4,424 | | | | 629 | | | | 194 | | | | 334 | |
| Net interest income after provision for loan losses | | | 827 | | | | 2,521 | | | | 7,148 | | | | 7,724 | | | | 6,567 | |
| Noninterest income | | | 751 | | | | 1,509 | | | | 1,119 | | | | 1,078 | | | | 839 | |
| Noninterest expense | | | 8,491 | | | | 7,649 | | | | 6,413 | | | | 5,981 | | | | 5,283 | |
| Income tax provision (benefit) | | | 327 | | | | (1,692 | ) | | | 448 | | | | 903 | | | | 645 | |
| Net income (loss) | | | (7,240 | ) | | | (1,927 | ) | | | 1,406 | | | | 1,918 | | | | 1,478 | |
| | | | | | | | | | | | | | | | | | | | | |
| Selected End of Period Balances: | | | | | | | | | | | | | | | | | | | | |
| Total assets | | $ | 297,366 | | | $ | 267,973 | | | $ | 261,406 | | | $ | 243,497 | | | $ | 213,880 | |
| Interest-earning assets | | | 285,784 | | | | 237,689 | | | | 245,373 | | | | 228,686 | | | | 196,931 | |
| Investment securities | | | 57,531 | | | | 30,406 | | | | 41,300 | | | | 39,837 | | | | 38,290 | |
| Loans, net of deferred fees | | | 200,718 | | | | 207,029 | | | | 204,060 | | | | 177,708 | | | | 152,803 | |
| Allowance for loan losses | | | 6,531 | | | | 3,999 | | | | 2,169 | | | | 1,599 | | | | 1,552 | |
| Deposit accounts | | | 269,984 | | | | 239,844 | | | | 217,491 | | | | 192,704 | | | | 168,480 | |
| Other borrowings | | | 15,393 | | | | 9,393 | | | | 23,581 | | | | 32,314 | | | | 29,138 | |
| Stockholders’ equity | | | 9,680 | | | | 16,932 | | | | 18,856 | | | | 17,251 | | | | 15,232 | |
| | | | | | | | | | | | | | | | | | | | | |
| Selected Average Balances for the Period: | | | | | | | | | | | | | | | | | | | | |
| Total assets | | $ | 298,078 | | | $ | 260,029 | | | $ | 247,674 | | | $ | 225,591 | | | $ | 193,249 | |
| Interest-earning assets | | | 251,752 | | | | 242,648 | | | | 233,339 | | | | 211,081 | | | | 179,001 | |
| Securities and interest-earning deposits | | | 45,015 | | | | 36,995 | | | | 41,696 | | | | 37,278 | | | | 34,202 | |
| Loans, net | | | 206,188 | | | | 203,675 | | | | 187,544 | | | | 167,883 | | | | 141,587 | |
| Interest-bearing deposit accounts | | | 230,393 | | | | 191,691 | | | | 175,922 | | | | 150,762 | | | | 123,694 | |
| Other borrowings | | | 15,833 | | | | 21,046 | | | | 22,888 | | | | 24,186 | | | | 22,450 | |
| Stockholders’ equity | | | 15,841 | | | | 18,574 | | | | 18,086 | | | | 16,042 | | | | 14,596 | |
| | | | | | | | | | | | | | | | | | | | | |
| Share Data: | | | | | | | | | | | | | | | | | | | | |
| Earnings (loss) per share | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | (5.80 | ) | | $ | (1.54 | ) | | $ | 1.13 | | | $ | 1.54 | | | $ | 1.18 | |
| Fully diluted | | $ | (5.80 | ) | | $ | (1.54 | ) | | $ | 1.13 | | | $ | 1.54 | | | $ | 1.18 | |
| Book value per share (period end) | | $ | 7.76 | | | $ | 13.57 | | | $ | 15.11 | | | $ | 13.83 | | | $ | 12.21 | |
| Common shares outstanding (period end) | | | 1,248 | | | | 1,248 | | | | 1,248 | | | | 1,248 | | | | 1,248 | |
| Weighted average shares outstanding | | | | | | | | | | | | | | | | | | | | |
| Basic | | | 1,248 | | | | 1,248 | | | | 1,248 | | | | 1,248 | | | | 1,248 | |
| Fully diluted | | | 1,248 | | | | 1,248 | | | | 1,248 | | | | 1,248 | | | | 1,248 | |
| | | | | | | | | | | | | | | | | | | | | |
| Performance Ratios: | | | | | | | | | | | | | | | | | | | | |
| Return on average assets | | | -2.43 | % | | | -0.74 | % | | | 0.57 | % | | | 0.85 | % | | | 0.76 | % |
| Return on average equity | | | -45.70 | | | | -10.37 | | | | 7.77 | | | | 11.96 | | | | 10.13 | |
| Interest-rate spread during the period | | | 2.92 | | | | 2.55 | | | | 2.78 | | | | 3.10 | | | | 3.40 | |
| Net interest margin | | | 2.98 | | | | 3.03 | | | | 3.49 | | | | 3.84 | | | | 3.95 | |
| Noninterest expenses to average assets | | | 2.85 | | | | 2.94 | | | | 2.59 | | | | 2.65 | | | | 2.73 | |
| | | | | | | | | | | | | | | | | | | | | |
| Asset Quality Ratios: | | | | | | | | | | | | | | | | | | | | |
| Allowance for loan losses to period end loans | | | 3.25 | % | | | 1.93 | % | | | 1.06 | % | | | 0.90 | % | | | 1.02 | % |
| Net charge-offs to average loans | | | 1.81 | | | | 1.27 | | | | 0.03 | | | | 0.09 | | | | 0.06 | |
| Nonperforming loans to period end loans | | | 3.35 | | | | 3.44 | | | | 3.13 | | | | 0.04 | | | | 0.13 | |
| Nonperforming assets to period end total assets | | | 2.84 | | | | 3.96 | | | | 2.45 | | | | 0.03 | | | | 0.09 | |
| | | | | | | | | | | | | | | | | | | | | |
| Capital and Liquidity Ratios: | | | | | | | | | | | | | | | | | | | | |
| Average equity to average assets (Consolidated) | | | 5.31 | % | | | 7.14 | % | | | 7.30 | % | | | 7.11 | % | | | 7.55 | % |
| Leverage (Oceanside) | | | 4.06 | | | | 7.25 | | | | 8.53 | | | | 8.75 | | | | 8.93 | |
| Risk-based capital (Oceanside): | | | | | | | | | | | | | | | | | | | | |
| Tier 1 | | | 6.40 | | | | 8.99 | | | | 9.33 | | | | 10.16 | | | | 10.62 | |
| Total | | | 7.68 | | | | 10.25 | | | | 10.26 | | | | 10.95 | | | | 11.52 | |
| Average loans to average deposits (Consolidated) | | | 89.49 | | | | 92.92 | | | | 91.37 | | | | 91.27 | | | | 91.18 | |
| | | | | | | | | | | | | | | | | | | | | |
| Full-time Employee Equivalents (End of Period) | | | 45 | | | | 49 | | | | 53 | | | | 51 | | | | 50 | |
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
Management’s discussion and analysis is included to provide the shareholders with an expanded narrative of our results of operations, changes in financial condition, liquidity, and capital adequacy. This narrative should be reviewed in conjunction with the audited consolidated financial statements and notes included in this report. Since our primary asset is our wholly-owned subsidiary, Oceanside Bank, most of the discussion and analysis relates to Oceanside.
Overview
How We Earn Income. As stated elsewhere herein, our results of operations are primarily dependent upon the results of operations of Oceanside. Oceanside conducts commercial banking business consisting of attracting deposits from the general public and applying those funds to the origination of commercial, consumer, and real estate loans (including commercial loans collateralized by real estate). Profitability depends primarily on net interest income, which is the difference between interest income generated from interest-earning assets (i.e., loans and investments) less the interest expense incurred on interest-bearing liabilities (i.e., customer deposits and borrowed funds). Net interest income is affected by the relative amounts of interest-earning assets and interest-bearing liabilities, and is dependent upon Oceanside’s interest-rate spread, which is the difference between the average yield earned on our interest-earning assets and the average rate paid on our interest-bearing liabilities. When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income. The factors that influence net interest income include changes in interest rates and changes in the volume and mix of assets and liability balances. The interest rate spread is impacted by interest rates, deposit flows, and loan demand. Additionally, and to a lesser extent, Oceanside’s profitability is affected by such factors as the level of noninterest income and expenses, the provision for loan losses, and the effective tax rate. Noninterest income consists primarily of service fees on deposit accounts, other fee income for banking services, and income from bank-owned life insurance. Noninterest expense consists of compensation and employee benefits, occupancy and equipment expenses, regulatory assessments, data processing costs, and other operating expenses.
Critical Accounting Policies and Use of Significant Estimates. Our consolidated financial statements include the accounts of the Holding Company, the Bank, and the Bank’s wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The accounting and reporting policies conform with accounting principles generally accepted in the United States of America and to general practices within the banking industry. Our significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements. The majority of these accounting policies do not require our management to make difficult, subjective, or complex judgments. However, we believe the allowance for loan losses, the valuation of foreclosed assets, the realization of deferred tax assets, other-than-temporary impairments of securities, and the fair value of financial instruments are critical estimates.
Allowance for Loan Losses. The allowance for loan losses is a valuation allowance for probable or incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed (that is, a confirmed loss exists). Subsequent recoveries, if any, are credited to the allowance.
Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged-off.
The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful (impaired). The general component covers non-classified loans and is based on historical loss experience adjusted for current trends.
Loans are individually evaluated for impairment, if significant. A loan is impaired when full payment under the loan terms is not expected. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral and accrual of interest is discontinued.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. There is no precise method of predicting specific loan losses or amounts that ultimately may be charged-off. Also, this evaluation is inherently subjective as it requires estimates
that are susceptible to significant revision as more information becomes available. The determination that a loan may be uncollectible, in whole or in part, is a matter of judgment. Similarly, the adequacy of the allowance for loan losses can be determined only on a judgmental basis, after full review, including, consideration of economic conditions and their effect on particular industries and specific borrowers; a review of borrowers' financial data, together with industry data, their competitive situation, the borrowers' management capabilities and other factors; a continuing evaluation of the loan portfolio, including monitoring any loans that are identified as being of less than acceptable quality; a detailed analysis, on a quarterly basis, of all impaired loans; and an evaluation of the underlying collateral for secured lending.
We maintain a formalized loan review process supported by a credit analysis and control system. We intend to maintain the allowance for loan losses at a level sufficient to absorb estimated uncollectible loans and, expect to make periodic additions to the allowance for loan losses, when warranted.
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, the valuation of foreclosed assets, the realization of deferred tax assets, other-than-temporary impairments of securities, and the fair value of financial instruments.
The determination of the adequacy of the allowance for loan losses 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 to support the carrying value of foreclosed assets, we obtain 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 we use available information to recognize losses on loans, further reductions in the carrying amounts of loans or 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 the 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. 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 an estimated tax refund of $1.035 million.
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 December 31, 2009 and 2008.
For the year ended 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 reported and believes that changes have been made to allow Atlantic to return to a taxable earnings position, including reductions in payroll and other operating costs. Within the next 2-5 years, internal projections indicate that 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 $1.3 million. |
| · | Management and the Board of Directors have discussed a tax strategy that would generate taxable income of approximately $1.2 from the liquidation of bank-owned life insurance policies. |
| · | 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 $0.7 million at December 31, 2009 (net of a valuation allowance of $2.8 million) through future operating income and implementation of certain tax strategies.
For the year ended December 31, 2008:
Management considered the cumulative losses in 2008 and the anticipated net operating loss for 2009 when determining whether or not to provide a valuation allowance on the deferred tax asset. The economic conditions and Atlantic’s level of non-performing assets were taken into consideration as well, which at December 31, 2009, had stabilized.
At December 31, 2008, management believed that the negative evidence was outweighed by certain positive evidence. Atlantic had a prior history of earnings outside of the recent losses and believed that changes have been made to allow Atlantic to return to an earnings position, including reductions in payroll and other operating costs. At that time, management believed it was more likely than not that Atlantic would realize the deferred tax asset through future operating income. Accordingly, no deferred tax valuation allowance was recorded at December 31, 2008.
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. Management monitors 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 assets as planned. However, we are exposed to significant market risk in the event of significant and prolonged interest rate changes.
Regulatory Environment. We are subject to regulations of certain federal and state agencies and, accordingly, are periodically examined by those regulatory authorities. 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.
During 2010, we entered into a formal agreement with the FDIC, the OFR, and the Federal Reserve Bank of Atlanta, as discussed in Note 1 of the Notes to Consolidated Financial Statements.
COMPARISON OF YEARS ENDED DECEMBER 31, 2009 AND 2008
Highlights. As of December 31, 2009, we had approximately $297.4 million in total assets, with $200.7 million in total loans, $270.0 million in deposits, and $9.7 million in stockholders’ equity.
The net loss in 2009 was $7,240,000 versus a net loss of $1,927,000 in 2008. The primary reasons for the change of $5,313,000 in 2009 over 2008 were as follows:
| · | Our income from average interest-earning assets decreased 9.4%. |
| · | Our provision for loan losses increased $1,844,000, or 41.7%, over 2008. |
| · | Noninterest income declined $758,000, or 50.2% in 2009 over 2008. |
| · | Noninterest expenses grew $842,000, or 11.0%. |
| · | The establishment of a deferred tax valuation allowance of $2,768,000 in 2009 caused the income tax provision to increase by $2,019,000. |
Interest Income. Interest income was $13,895,000 and $15,335,000 in 2009 and 2008, respectively. The decrease of $1.4 million resulted from a decrease in the yield on interest-earning assets in 2009, which was partially offset by growth in our most significant interest-earning asset, loans, which grew 1.2% from average levels in 2008 to 2009. Average loans accounted for 81.9% of our average interest-earning assets in 2009 versus 83.9% in 2008. Our overall yield on interest-earning assets of 5.68% was down from the 2008 level of 6.49% due to a lower interest rate environment throughout 2009. Our overall yield on interest-earning assets in 2009 would have been 21 basis points higher, or 5.89%, if not for approximately $533,000 in income earned but not collected on nonaccrual loans.
Interest Expense. Interest expense was $6,800,000 and $8,390,000 in 2009 and 2008, respectively. As a result of the lower interest rate environment during 2009 which was partially offset by our growth in average interest-bearing liabilities of $33.5 million, or 15.7%, during this period, interest expense decreased 19.0%. Our cost of funds dropped to 2.76% in 2009 compared with 3.94% in 2008. Substantially all of the decrease in interest expense was attributable to a decrease in rates, which was partially offset by an increase in average demand deposits of $46.6 million, or 110.8%. A decrease in average certificates of deposit of $7.8 million, or 5.3%, and in average other borrowings of $5.2 million, or 24.8%, also contributed to the decrease in interest expense.
Net Interest Income. Net interest income (before provision for loan losses) was $7,095,000 and $6,945,000 for 2009 and 2008, respectively, an increase of 2.2% from 2008 to 2009. The average balances, interest income and expense, and the average rates earned and paid for assets and liabilities are found in the tables that follow.
Our net interest margin was lower (2.98% in 2009 compared with 3.03% in 2008), which reflects our growth in deposits, net of a decrease in other borrowings, of $33.5 million, or 15.7%, versus a slower rate of growth for interest-earning assets of $9.1 million, or 3.8%. The increase in net interest income of $150,000 was impacted by the significant increase in lower earning demand deposits and decreased by the declining rates.
Provision for Loan Losses. A provision for loan losses of $6,268,000 was recorded in 2009, reflecting our assessment of the needed level of the allowance for loan losses. This assessment is based on management’s evaluation of probable loan losses and considers the overall quality of the loan portfolio. The increase in the provision for loan losses in 2009 versus the 2008 level of $4,424,000 was due to unfavorable trends in most measures of loan portfolio quality, including the growth in impaired, nonaccrual, and other restructured loans. Net charge-offs in 2009 were $3,736,000 as compared with $2,594,000 in 2008, an increase of $1,142,000.
Noninterest Income. Noninterest income decreased $758,000, or 50.2%, to $751,000 in 2009 from $1,509,000 in 2008 primarily as a result of:
| · | A decrease in gains on the sale of securities from $346,000 to $56,000; |
| · | Losses on the sale of foreclosed assets of $142,000 in 2009 versus a gain of $4,000 in 2008; and |
| · | A loss of $179,000 on restricted stock issued by a correspondent bank that was taken over by the FDIC in 2009. |
Noninterest Expenses. Total noninterest expenses increased to $8,491,000 in 2009 compared to $7,649,000 for 2008, an increase of $842,000, or 11.0%. The more significant increases during 2009 over 2008 follow:
| · | The cost of deposit insurance assessments soared from $229,000 in 2008 to $1,014,000 in 2009, an increase of $785,000, or 342.8%, as a result of increased assessments from the FDIC. |
| · | Processing and settlement fees increased from $773,000 in 2008 to $836,000 in 2009, an increase of $63,000, or 8.2%. Through 2008, statements were rendered in-house and the expense was recorded as postage, stationary, and supplies. At the beginning of 2009, the statement rendering process was outsourced and all related costs were recorded as processing and settlement fees. As a result, there was a reduction in postage, stationary, and supplies in 2009. |
| · | The Company expensed $177,000 in 2009 for costs to raise capital to meet regulatory requirements versus $-0- in 2008. |
| · | The write-down of other real estate owned totaled $586,000 in 2009 versus $315,000 in 2008, as a result of the continued decline in real estate values in 2009. |
| · | Professional, legal, and accounting fees were $589,000 in 2009 versus $459,000 in 2008, an increase of $130,000, or 28.3%, as a result of increased costs of corporate governance, regulatory compliance, and addressing regulatory enforcement actions. |
As a result of cost-cutting measures to improve profitability, the following costs decreased during 2009:
| · | Salaries and employee benefits decreased by $282,000, or 9.0%. |
| · | Expenses of bank premises and fixed assets decreased by $63,000, or 5.8%. |
| · | Directors fees were eliminated, decreasing costs by $78,000. |
| · | Advertising and business development decreased by $50,000, or 34.5%. Stationery, printing, and supplies decreased by $36,000, or 33.6%. |
Provision for Income Taxes. The income tax provision was $327,000 for 2009, an effective rate of (4.7)%. This compares with an effective rate of 46.8% for 2008. The effective tax rate for 2009 differs from the federal and state statutory rates principally due to the establishment of a valuation allowance for the deferred tax asset of $2,768,000. The effective tax rate in 2008 differs from the federal and state statutory rates principally due to nontaxable investment income.
COMPARISON OF YEARS ENDED DECEMBER 31, 2008 AND 2007
Highlights. As of December 31, 2008, we had grown to approximately $268.0 million in total assets, with $207.1 million in total loans, $239.8 million in deposits, and $16.9 million in stockholders’ equity.
The net loss in 2008 was $1,927,000 versus net income of $1,406,000 in 2007. The primary reasons for the change of $3,333,000 in 2008 over 2007 were as follows:
| · | Interest and fees on loans totaled $13,637,000 in 2008 compared with $15,255,000 in 2007, a decrease of $1,618,000, or 10.6%. Other interest income also declined $415,000 in 2008 over 2007, or 19.6%. |
| · | Our income from average interest-earning assets decreased 11.7%. |
| · | Our total interest expense decreased $1,201,000, or 12.5%. |
| · | Net interest income declined by $832,000 in 2008 from 2007. |
| · | Noninterest income grew $390,000, or 34.9% in 2008 over 2007. |
| · | Noninterest expenses grew $1,236,000, or 19.3%. |
Interest Income. Interest income was $15,335,000 and $17,368,000 in 2008 and 2007, respectively. The decrease of $2.0 million resulted from a decrease in the yield on interest-earning assets in 2008, which was partially offset by growth in our most significant interest-earning asset, loans, which grew 8.6% from average levels in 2007 to 2008. Average loans accounted for 83.9% of our average interest-earning assets in 2008 versus 80.4% in 2007. Our overall yield on interest-earning assets of 6.49% was down from the 2007 level of 7.60% due to a lower interest rate environment throughout 2008. Our overall yield on interest-earning assets in 2008 would have been 7 basis points higher, or 6.56%, if not for approximately $176,000 in income earned but not collected on nonaccrual loans.
Interest Expense. Interest expense was $8,390,000 and $9,591,000 in 2008 and 2007, respectively. As a result of the lower interest rate environment during 2008 which was partially offset by our growth in average interest-bearing liabilities of $13.9 million, or 7.0%, during this period, interest expense decreased 12.5%. Our cost of funds dropped to 3.94% in 2008 compared with 4.82% in 2007. Substantially all of the decrease in interest expense was attributable to a decrease in rates, which was partially offset by an increase in average certificates of deposit of $17.3 million, or 13.4%.
Net Interest Income. Net interest income (before provision for loan losses) was $6,945,000 and $7,777,000 for 2008 and 2007, respectively, a decrease of 10.7% from 2007 to 2008. The average balances, interest income and expense, and the average rates earned and paid for assets and liabilities are found in the tables that follow.
Our net interest margin was lower (3.03% in 2008 compared with 3.49% in 2007), which reflects the smaller decrease in our cost of funds (88 basis points) versus the decrease in our yield on interest-earning assets (111 basis points). The decrease in net interest income of $832,000 was impacted by the declining rate environment, while the net interest margin was most impacted by the increase in certificates of deposit of 13.4%. Certificates of deposit account for 76.5% of all interest-bearing deposits in 2008 as compared with 73.5% in 2007.
Provision for Loan Losses. A provision for loan losses of $4,424,000 was recorded in 2008, reflecting our assessment of the needed level of the allowance for loan losses. This assessment is based on management’s evaluation of probable loan losses and considers the overall quality of the loan portfolio. The increase in the provision for loan losses in 2008 versus the 2007 level of $629,000 was due to unfavorable trends in most measures of loan portfolio quality, including the growth in impaired and nonaccrual loans and other nonperforming assets, which increased $4.2 million in 2008, or 65.9%. Other real estate owned of $3.4 million at December 31, 2008, accounted for 81.1% of the increase. Included in other real estate owned is a condominium development at Jacksonville Beach with 9 units remaining at December 31, 2008. Of the original 14 units acquired in foreclosure in the first quarter of 2008, 5 units sold in the remainder of 2008, leaving a carrying value of $2.0 million at December 31, 2008. In the first quarter of 2009, 2 additional units have sold for net proceeds in excess of the individual carrying value of the units sold. Net charge-offs in 2008 were $2,594,000 as compared with $59,000 in 2007, an increase of $2,535,000.
Noninterest Income. Noninterest income increased $390,000, or 34.9%, to $1,509,000 in 2008 from $1,119,000 in 2007 primarily as a result of gains on the sale of securities of $346,000 in the fourth quarter of 2008.
Noninterest Expenses. Total noninterest expenses increased to $7,649,000 in 2008 compared to $6,413,000 for 2007, an increase of $1,236,000, or 19.3%. The more significant increases during 2008 over 2007 follow:
| · | Expenses related to other real estate owned totaled $807,000 in 2008 versus $-0- in 2007, as a result of losses and ongoing expenses on properties that Oceanside obtained title in 2008. |
| · | Professional, legal, and audit fees were $459,000 in 2008 versus $264,000 in 2007, an increase of $195,000, or 73.9%, as a result of increased costs of corporate governance and regulatory compliance matters. |
| · | Pension expense totaled $294,000 in 2008, an increase of 63.3% from 2007. This increase of $114,000 was more than offset by the net increase in the cash surrender value of the life insurance policies, which totaled $206,000. |
| · | Regulatory assessments increased by $60,000, or 35.5%, from 2007 to 2008 due to increased cost of maintaining the FDIC insurance fund. |
Provision for Income Taxes. The income tax benefit was $1,692,000 for 2008, an effective rate of 46.8%. This compares with an effective rate of 24.2% for 2007. The effective tax rates in 2008 and 2007 differ from the federal and state statutory rates principally due to nontaxable investment income. The growth of tax-exempt income in 2008 over 2007 of 13.1%, compared with the overall decline in taxable interest, which contributed to the swing in the effective tax rate.
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Rate/Volume Analysis (dollars in thousands):
| | | Years Ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | | | | | | | Average | | | | | | | | | Average | | | | | | | | | Average | |
| | | Average | | | | | | Yield/ | | | Average | | | | | | Yield/ | | | Average | | | | | | Yield/ | |
| | | Balance | | | Interest | | | Rate | | | Balance | | | Interest | | | Rate | | | Balance | | | Interest | | | Rate | |
| Interest-earning assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans (1) | | $ | 206,188 | | | $ | 12,354 | | | | 5.99 | % | | $ | 203,675 | | | $ | 13,637 | | | | 6.70 | % | | $ | 187,544 | | | $ | 15,255 | | | | 8.13 | % |
Securities and deposits (2) | | | 45,015 | | | | 1,540 | | | | 4.31 | | | | 36,995 | | | | 1,663 | | | | 5.59 | | | | 41,696 | | | | 1,886 | | | | 5.38 | |
Other interest-earning assets (3) | | | 549 | | | | 1 | | | | 0.18 | | | | 1,978 | | | | 35 | | | | 1.77 | | | | 4,099 | | | | 227 | | | | 5.54 | |
| Total interest-earning | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
assets (2) | | | 251,752 | | | | 13,895 | | | | 5.68 | % | | | 242,648 | | | | 15,335 | | | | 6.49 | % | | | 233,339 | | | | 17,368 | | | | 7.60 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Noninterest-earning assets | | | 46,326 | | | | | | | | | | | | 17,381 | | | | | | | | | | | | 14,335 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total assets | | $ | 298,078 | | | | | | | | | | | $ | 260,029 | | | | | | | | | | | $ | 247,674 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Demand deposits | | $ | 88,744 | | | | 1,530 | | | | 1.72 | % | | $ | 42,108 | | | | 996 | | | | 2.37 | % | | $ | 42,858 | | | | 1,683 | | | | 3.93 | % |
| Savings | | | 2,858 | | | | 28 | | | | 0.99 | | | | 2,988 | | | | 33 | | | | 1.10 | | | | 3,751 | | | | 56 | | | | 1.49 | |
| Certificates of deposit | | | 138,791 | | | | 4,710 | | | | 3.39 | | | | 146,595 | | | | 6,741 | | | | 4.60 | | | | 129,313 | | | | 6,726 | | | | 5.20 | |
| Other borrowings | | | 15,833 | | | | 532 | | | | 3.36 | | | | 21,046 | | | | 620 | | | | 2.95 | | | | 22,888 | | | | 1,126 | | | | 4.92 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total interest-bearing | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| liabilities | | | 246,226 | | | | 6,800 | | | | 2.76 | % | | | 212,737 | | | | 8,390 | | | | 3.94 | % | | | 198,810 | | | | 9,591 | | | | 4.82 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Noninterest-bearing liabilities | | | 36,011 | | | | | | | | | | | | 28,718 | | | | | | | | | | | | 30,778 | | | | | | | | | |
| Stockholders’ equity | | | 15,841 | | | | | | | | | | | | 18,574 | | | | | | | | | | | | 18,086 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total liabilities and | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| stockholders’ equity | | $ | 298,078 | | | | | | | | | | | $ | 260,029 | | | | | | | | | | | $ | 247,674 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income (before | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| provision for loan losses) | | | | | | $ | 7,095 | | | | | | | | | | | $ | 6,945 | | | | | | | | | | | $ | 7,777 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-rate spread (4) | | | | | | | | | | | 2.92 | % | | | | | | | | | | | 2.55 | % | | | | | | | | | | | 2.78 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest margin (2) (5) | | | | | | | | | | | 2.98 | % | | | | | | | | | | | 3.03 | % | | | | | | | | | | | 3.49 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ratio of average interest-earning | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| assets to average | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| interest-bearing | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| liabilities | | | 102.24 | % | | | | | | | | | | | 114.06 | % | | | | | | | | | | | 117.37 | % | | | | | | | | |
| (1) | Average loan balances include nonaccrual loans, which averaged (in thousands) $7,031, $5,130, and $5,853 in 2009, 2008, and 2007, respectively. Average loans are net of deferred fees. Loan fees (in thousands) were $206, $416, and $536 in 2009, 2008, and 2007, respectively. Loan yields have been reported in total since a substantial portion of loans are secured by real estate. |
| (2) | Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental rate of 37.6%. Includes interest-earning deposits. |
| (3) | Includes federal funds sold. |
| (4) | Interest-rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. |
| (5) | Net interest margin is net interest income divided by average interest-earning assets. |
Rate/Volume Analysis (dollars in thousands):
| | | Year Ended December 31, | |
| | | 2009 vs. 2008 | |
| | | Increase (Decrease) Due to | |
| | | | | | | | | Rate/ | | | | |
| | | Rate | | | Volume | | | Volume | | | Total | |
| Interest-earning assets: | | | | | | | | | | | | |
Loans (1) | | $ | (1,433 | ) | | $ | 168 | | | $ | (18 | ) | | $ | (1,283 | ) |
| Securities and other deposits | | | (398 | ) | | | 360 | | | | (85 | ) | | | (123 | ) |
Other interest-earning assets (2) | | | (31 | ) | | | (25 | ) | | | 22 | | | | (34 | ) |
| Total interest-earning assets | | | (1,862 | ) | | | 503 | | | | (81 | ) | | | (1,440 | ) |
| | | | | | | | | | | | | | | | | |
| Interest-bearing liabilities: | | | | | | | | | | | | | | | | |
| Demand deposits | | | (270 | ) | | | 1,103 | | | | (300 | ) | | | 533 | |
| Savings | | | (3 | ) | | | (1 | ) | | | - | | | | (4 | ) |
| Certificates of deposit | | | (1,766 | ) | | | (359 | ) | | | 94 | | | | (2,031 | ) |
| Other borrowings | | | 87 | | | | (154 | ) | | | (21 | ) | | | (88 | ) |
| Total interest-bearing liabilities | | | (1,952 | ) | | | 589 | | | | (227 | ) | | | (1,590 | ) |
| | | | | | | | | | | | | | | | | |
| Net interest income | | $ | 90 | | | $ | (86 | ) | | $ | 146 | | | $ | 150 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2008 vs. 2007 | |
| | | Increase (Decrease) Due to | |
| | | | | | | | | Rate/ | | | | |
| | | Rate | | | Volume | | | Volume | | | Total | |
| Interest-earning assets: | | | | | | | | | | | | |
Loans (1) | | $ | (2,698 | ) | | $ | 1,312 | | | $ | (232 | ) | | $ | (1,618 | ) |
| Securities and other deposits | | | (12 | ) | | | (213 | ) | | | 2 | | | | (223 | ) |
Other interest-earning assets (2) | | | (154 | ) | | | (117 | ) | | | 79 | | | | (192 | ) |
| Total interest-earning assets | | | (2,864 | ) | | | 982 | | | | (151 | ) | | | (2,033 | ) |
| | | | | | | | | | | | | | | | | |
| Interest-bearing liabilities: | | | | | | | | | | | | | | | | |
| Demand deposits | | | (669 | ) | | | (29 | ) | | | 11 | | | | (687 | ) |
| Savings | | | (15 | ) | | | (11 | ) | | | 3 | | | | (23 | ) |
| Certificates of deposit | | | (780 | ) | | | 899 | | | | (104 | ) | | | 15 | |
| Other borrowings | | | (452 | ) | | | (91 | ) | | | 37 | | | | (506 | ) |
| Total interest-bearing liabilities | | | (1,916 | ) | | | 768 | | | | (53 | ) | | | (1,201 | ) |
| | | | | | | | | | | | | | | | | |
| Net interest income | | $ | (948 | ) | | $ | 214 | | | $ | (98 | ) | | $ | (832 | ) |
| (1) | Average loan balances include nonaccrual loans. |
| (2) | Includes federal funds sold. |
Weighted Average Yield or Rate:
| | | For the Years Ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| Interest-earning assets: | | | | | | | | | |
| Loans, net | | | 5.99 | % | | | 6.70 | % | | | 8.13 | % |
| Investment securities | | | 4.31 | | | | 5.59 | | | | 5.38 | |
| Other interest-earning assets | | | 0.18 | | | | 1.77 | | | | 5.54 | |
| All interest-earning assets | | | 5.68 | | | | 6.49 | | | | 7.60 | |
| Interest-bearing liabilities: | | | | | | | | | | | | |
| NOW deposits | | | 0.27 | | | | 0.70 | | | | 1.31 | |
| Money market deposits | | | 2.23 | | | | 2.77 | | | | 4.22 | |
| Savings | | | 0.99 | | | | 1.10 | | | | 1.49 | |
| Certificates of deposit | | | 3.39 | | | | 4.60 | | | | 5.20 | |
| Other borrowings | | | 3.36 | | | | 2.95 | | | | 4.92 | |
| All interest-bearing liabilities | | | 2.76 | | | | 3.94 | | | | 4.82 | |
| Interest-rate spread | | | 2.92 | | | | 2.55 | | | | 2.78 | |
| Net interest margin | | | 2.98 | | | | 3.03 | | | | 3.49 | |
Change in Mix of Interest-Earning Assets and Interest-Bearing Deposits and Other Borrowings (dollars in thousands):
| | | At December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | | | | Percent | | | | | | Percent | | | | | | Percent | |
| | | Average | | | to | | | Average | | | to | | | Average | | | to | |
| | | Balance | | | Total | | | Balance | | | Total | | | Balance | | | Total | |
| Interest-earning assets: | | | | | | | | | | | | | | | | | | |
| Loans, net | | $ | 206,188 | | | | 81.9 | % | | $ | 203,675 | | | | 83.9 | % | | $ | 187,544 | | | | 80.4 | % |
| Investment securities | | | 45,015 | | | | 17.9 | % | | | 36,995 | | | | 15.3 | % | | | 41,696 | | | | 17.9 | % |
| Other | | | 549 | | | | 0.2 | % | | �� | 1,978 | | | | 0.8 | % | | | 4,099 | | | | 1.7 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total interest-earning assets | | $ | 251,752 | | | | 100.0 | % | | $ | 242,648 | | | | 100.0 | % | | $ | 233,339 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing deposits: | | | | | | | | | | | | | | | | | | | | | | | | |
| Demand deposits | | $ | 88,744 | | | | 31.6 | % | | $ | 42,108 | | | | 17.5 | % | | $ | 42,858 | | | | 18.8 | % |
| Savings | | | 2,858 | | | | 1.0 | % | | | 2,988 | | | | 1.2 | % | | | 3,751 | | | | 1.7 | % |
| Certificates of deposit | | | 138,791 | | | | 49.5 | % | | | 146,595 | | | | 61.0 | % | | | 129,313 | | | | 56.7 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total interest-bearing deposits | | | 230,393 | | | | 82.1 | % | | | 191,691 | | | | 79.7 | % | | | 175,922 | | | | 77.2 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Noninterest-bearing deposits | | | 34,438 | | | | 12.3 | % | | | 27,504 | | | | 11.5 | % | | | 29,335 | | | | 12.9 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total deposits | | | 264,831 | | | | 94.4 | % | | | 219,195 | | | | 91.2 | % | | | 205,257 | | | | 90.1 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Other borrowings | | | 15,833 | | | | 5.6 | % | | | 21,046 | | | | 8.8 | % | | | 22,888 | | | | 9.9 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total deposits and | | | | | | | | | | | | | | | | | | | | | | | | |
| other borrowings | | $ | 280,664 | | | | 100.0 | % | | $ | 240,241 | | | | 100.0 | % | | $ | 228,145 | | | | 100.0 | % |
Average loans receivable were $206,188,000 for the year 2009 as compared to $203,675,000 for 2008, an increase of 1.2%. The year-to-year average increase in 2008 over 2007 was 8.6%. Management believes the growth in loans was directly attributable to the growth in our branch network, community acceptance, and the reputations of our lending team despite a significant downturn in economic conditions in our market area during 2009 and 2008. The following provides an analysis of our loan distribution at the end of 2005 - 2009. Loans that are secured by real estate include residential and nonresidential mortgages and home equity loans to individuals.
Loan Portfolio (dollars in thousands):
| | | At December 31, | |
| | | 2009 | | | % | | | 2008 | | | % | | | 2007 | | | % | | | 2006 | | | % | | | 2005 | | | % | |
| Real estate | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Construction, land | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| development, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| and other land | | $ | 32,455 | | | | 16 | % | | $ | 39,135 | | | | 19 | % | | $ | 53,197 | | | | 25 | % | | $ | 51,598 | | | | 29 | % | | $ | 37,905 | | | | 25 | % |
| 1-4 family residential | | | 56,900 | | | | 28 | % | | | 57,814 | | | | 28 | % | | | 45,708 | | | | 23 | % | | | 38,018 | | | | 22 | % | | | 31,997 | | | | 21 | % |
| Multifamily residential | | | 2,902 | | | | 1 | % | | | 4,481 | | | | 2 | % | | | 1,784 | | | | 1 | % | | | 2,489 | | | | 1 | % | | | 3,051 | | | | 2 | % |
| Commercial | | | 93,455 | | | | 47 | % | | | 88,762 | | | | 43 | % | | | 86,785 | | | | 42 | % | | | 68,588 | | | | 39 | % | | | 62,612 | | | | 41 | % |
| Total real estate | | | 185,712 | | | | 92 | % | | | 190,192 | | | | 92 | % | | | 187,474 | | | | 91 | % | | | 160,693 | | | | 91 | % | | | 135,565 | | | | 89 | % |
| Commercial | | | 11,703 | | | | 6 | % | | | 13,314 | | | | 6 | % | | | 11,485 | | | | 6 | % | | | 11,214 | | | | 6 | % | | | 11,901 | | | | 8 | % |
| Consumer and other loans | | | 3,315 | | | | 2 | % | | | 3,548 | | | | 2 | % | | | 5,138 | | | | 3 | % | | | 5,828 | | | | 3 | % | | | 5,400 | | | | 3 | % |
| Total loans | | | 200,730 | | | | 100 | % | | | 207,054 | | | | 100 | % | | | 204,097 | | | | 100 | % | | | 177,735 | | | | 100 | % | | | 152,866 | | | | 100 | % |
| Less: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less, deferred fees | | | (12 | ) | | | | | | | (25 | ) | | | | | | | (37 | ) | | | | | | | (27 | ) | | | | | | | (63 | ) | | | | |
| Less, allowance for | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| loan losses | | | (6,531 | ) | | | | | | | (3,999 | ) | | | | | | | (2,169 | ) | | | | | | | (1,599 | ) | | | | | | | (1,552 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | $ | 194,187 | | | | | | | $ | 203,030 | | | | | | | $ | 201,891 | | | | | | | $ | 176,109 | | | | | | | $ | 151,251 | | | | | |
The following tables show the maturity data for loans receivable.
| Contractual Loan Maturities at December 31, 2009 (dollars in thousands): | |
| | | | | | | | | | | | | |
| | | 1 Year | | | 1 Through | | | After | | | | |
| | | or Less | | | 5 Years | | | 5 Years | | | Total | |
| Real estate | | | | | | | | | | | | |
| Construction, land development, | | | | | | | | | | | | |
| and other land | | $ | 18,734 | | | $ | 12,256 | | | $ | 1,465 | | | $ | 32,455 | |
| 1-4 family residential | | | 30,616 | | | | 14,523 | | | | 11,761 | | | | 56,900 | |
| Multifamily residential | | | 1,349 | | | | 360 | | | | 1,193 | | | | 2,902 | |
| Commercial | | | 21,231 | | | | 42,801 | | | | 29,423 | | | | 93,455 | |
| Total real estate | | | 71,930 | | | | 69,940 | | | | 43,842 | | | | 185,712 | |
| Commercial | | | 4,486 | | | | 6,021 | | | | 1,196 | | | | 11,703 | |
| Consumer and other loans | | | 695 | | | | 2,380 | | | | 240 | | | | 3,315 | |
| | | | | | | | | | | | | | | | | |
| Total loan portfolio | | $ | 77,111 | | | $ | 78,341 | | | $ | 45,278 | | | $ | 200,730 | |
| | | | | | | | | | | | | | | | | |
| Loans with maturities over one year: | | | | | | | | | | | | | | | | |
| Fixed rate | | | | | | | | | | | | | | $ | 78,478 | |
| Variable rate | | | | | | | | | | | | | | | 45,141 | |
| | | | | | | | | | | | | | | | | |
| Total maturities greater than one year | | | | | | | | | | | | | | $ | 123,619 | |
| | | | | | | | | | | | | | | | | |
| Loan Maturities or Next Repricing Date at December 31, 2009, excluding nonaccrual loans (dollars in thousands): | |
| | | | | | | | | | | | | | | | | |
| Three months or less | | | | | | | | | | | | | | $ | 57,519 | |
| Over three months through twelve months | | | | | | | | | | | | | | | 23,128 | |
| Over one year through three years | | | | | | | | | | | | | | | 68,955 | |
| Over three through five years | | | | | | | | | | | | | | | 28,418 | |
| Over five years | | | | | | | | | | | | | | | 15,995 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | $ | 194,015 | |
| Loans Originated and Repaid (dollars in thousands): | |
| | | Years Ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
| Originations: | | | | | | | | | | | | | | | |
| Real estate loans | | | | | | | | | | | | | | | |
| Construction, land development, and other land | | $ | 743 | | | $ | 8,052 | | | $ | 19,007 | | | $ | 39,551 | | | $ | 33,561 | |
| 1-4 family residential | | | 1,537 | | | | 14,563 | | | | 13,262 | | | | 15,744 | | | | 12,518 | |
| Multifamily residential | | | - | | | | - | | | | - | | | | - | | | | - | |
| Commercial | | | 4,763 | | | | 2,946 | | | | 18,632 | | | | 17,548 | | | | 13,180 | |
| | | | 7,043 | | | | 25,561 | | | | 50,901 | | | | 72,843 | | | | 59,259 | |
| Commercial | | | 1,846 | | | | 2,971 | | | | 2,678 | | | | 4,452 | | | | 4,364 | |
| Consumer and other loans | | | 1,160 | | | | 835 | | | | 2,047 | | | | 2,807 | | | | 2,263 | |
| Total | | | 10,049 | | | | 29,367 | | | | 55,626 | | | | 80,102 | | | | 65,886 | |
Principal reductions, net (1) | | | (16,373 | ) | | | (26,410 | ) | | | (29,264 | ) | | | (55,233 | ) | | | (42,895 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Increase (decrease) in total loans | | $ | (6,324 | ) | | $ | 2,957 | | | $ | 26,362 | | | $ | 24,869 | | | $ | 22,991 | |
| | | | | | | | | | | | | | | | | | | | | |
| (1) | Includes charge-offs, loans transferred to other real estate owned, and advances and repayments on revolving lines of credit. |
Generally, interest on loans accrues and is credited to income based upon the principal balance outstanding. Management’s policy is to discontinue the accrual of interest income and classify a loan as nonaccrual when principal or interest is past due 90 days or more and the loan is not adequately collateralized, or when in the opinion of management, principal or interest is not likely to be paid in accordance with the terms of the obligation. Interest accrued and unpaid at the time a loan is placed on nonaccrual status is charged against interest income. Subsequent payments received are applied to the outstanding principal balance. Consumer installment loans are generally charged-off after 90 days of delinquency unless adequately collateralized and in the process of collection. Loans are not returned to accrual status until principal and interest payments are brought current and future payments appear reasonably certain.
Real estate acquired as a result of foreclosure, or by deed in lieu of foreclosure, is classified as other real estate owned. Other real estate owned is recorded at the lower of cost or fair value less estimated selling costs, and the estimated loss, if any, is charged to the allowance for loan losses at the time the loan is transferred to other real estate owned. Further allowances for losses in other real estate owned are recorded at the time management believes additional deterioration in value has occurred. Gains or losses on the sale of other real estate owned are recognized in the period closed. However, gains on the sale of units in a real estate development project may be deferred until management is reasonably certain that its investment in the remaining units will not result in losses. For example, regulatory guidelines require that we value real estate development projects of 5 or more units at its appraised bulk sale value. Since the units may not be identical in size, location, or amenities, any allocation of the total bulk sale value to individual units is arbitrary. Furthermore, if we have taken over a real estate development, we may have ongoing expenditures that benefit sold and remaining units. Accordingly, we may view the real estate development as one project and only record gains when we are assured that no significant losses are inherent in the remaining units.
During the first quarter of 2008, we foreclosed on a 17-unit condominium project in Jacksonville Beach, Florida. At the time of foreclosure, 14 units remained unsold. Subsequent to our acquisition of this OREO, we sold 2 units in the first quarter of 2008 ($69,000 estimated gain), 1 unit in the second quarter of 2008 ($18,000 estimated gain), and 2 units in the fourth quarter of 2008 ($3,000 estimated gain). The estimated potential gains of approximately $90,000 were based on an arbitrary allocation of total carrying value divided by square footage. However, because we were not reasonably certain that our remaining investment would be recovered from sales of the remaining 9 units; no gain was recorded on the sale of the 5 units during 2008. Furthermore, in the fourth quarter of 2008, due to ongoing expenditures in the project and continued deterioration in the local real estate market, we recorded a charge to earnings of $315,000, leaving a carrying value of $2,022,000 at December 31, 2008. This carrying value was based on management’s estimate of the fair value less costs to sell the remaining 9 units. Accordingly, no deferred gain existed at December 31, 2008. We did not believe it prudent to record gains on the sale of the 5 units while posting a write-down on the remaining 9 units within the same calendar year given the uncertainty over the carrying value of this OREO in this economic environment.
In the first half of 2009, 2 additional units were sold ($97,000 estimated gain), leaving 7 remaining units at December 31, 2009, with a current carrying value of $1,273,000 (net of write-downs totaling $300,000 in December 2009).
Accounting Standards Codification (“ASC”) 310-10-35, Receivables, considers a loan to be impaired if it is probable that all amounts due under the contractual terms of the loan agreement will not be collected. If a loan is considered impaired, its value generally should be measured based on the present value of expected cash flows discounted at the loan’s effective interest rate. As a practical expedient, however, the loan’s value may be based on:
| · | the loan’s market price; or |
| · | the discounted fair value of the loan’s collateral, less estimated costs to sell, if the collateral is expected to be the sole source of repayment. |
If the value of the loan is less than the recorded investment in the loan, a loss should be recognized by recording a valuation allowance and a corresponding increase to the provision for loan losses.
Situations may occur where:
| · | we receive physical possession of a debtor’s assets regardless of whether formal foreclosure proceedings have been initiated or completed; or |
| · | the debtor has effectively surrendered control of the underlying collateral in contemplation of foreclosure. |
These situations are referred to as “in-substance foreclosures.” Generally accepted accounting principles (“GAAP”) recognizes the practical problems of accounting for the operation of an asset the creditor does not possess, and states that a loan for which foreclosure is probable should continue to be accounted for as a loan.
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 with risk grades reflective of our estimated level of risk.
Management monitors our loan portfolio throughout the month for classification changes. Each quarter, 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 semiannual external loan review performed by an independent public accounting 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 loan reviews may differ from the regulatory assessment.
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 be adequate to 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.
Management maintains a list of monitored loans risk-rated substandard or lower (referred to as “classified loans”). At December 31, 2009, management had fifty-seven classified loans totaling approximately $30.8 million, as compared with fifty classified loans totaling $28,5 million at December 31, 2008, twenty-eight classified loans totaling $8.0 million at December 31, 2007, and fifteen classified loans totaling $4.5 million at December 31, 2006.
Many of the loans risk-rated substandard are currently performing with no expectation that we will suffer any loss; however, we monitor these loans because some of them are collateral-dependent and the current status of the borrower’s liquidity and cash flow have not been confirmed. Because some of these loans exhibit well-defined credit weaknesses, we may incur losses if the underlying collateral declines in value beyond our expectations or the borrower’s financial condition deteriorates and payments are not made as agreed.
Included in our total classified loans of $30.8 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 with no measured impairment loss. Such loans totaled $14.8 million at December 31, 2009. On October 30, 2009, the federal regulatory agencies issued a policy statement on prudent CRE loan workouts that may result in a removal of certain CRE loans currently classified as substandard with potential collateral shortfalls but with documented capacity of the borrower to service the current principal and interest payments.
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.
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. 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 $9.2 million and $12.9 at December 31, 2009 and 2008, respectively. Delinquency amounts and delinquency amounts expressed as a percentage of total loans for each loan classification are as follows:
| As of December 31, 2009 | | Past Due 30-89 Days and Still Accruing | | | % of Total Loans | | | Past Due 90 or More Days and Still Accruing | | | % of Total Loans | | | Non- accrual Loans | | | % of Total Loans | | | Total Past Due Loans | | | % of Total Loans | |
| 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 | | | 724 | | | | 1.27 | % | | | - | | | | 0.00 | % | | | 3,133 | | | | 5.51 | % | | | 3,857 | | | | 6.78 | % |
| 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 | % |
| As of December 31, 2008 | | Past Due 30-89 Days and Still Accruing | | | % of Total Loans | | | Past Due 90 or More Days and Still Accruing | | | % of Total Loans | | | Non- accrual Loans | | | % of Total Loans | | | Total Past Due Loans | | | % of Total Loans | |
| Real estate: | | | | | | | | | | | | | | | | | | | | | | | | |
Construction, land
development and
other land | $ | 1,103 | | | | 2.82 | % | | $ | 1,451 | | | | 3.71 | % | | $ | 3,793 | | | | 9.69 | % | | $ | 6,347 | | | | 16.22 | % |
| 1-4 family residential | | | 230 | | | | 0.40 | % | | | - | | | | 0.00 | % | | | 1,638 | | | | 2.83 | % | | | 1,868 | | | | 3.23 | % |
| Multifamily residential | | | - | | | | 0.00 | % | | | - | | | | 0.00 | % | | | - | | | | 0.00 | % | | | - | | | | 0.00 | % |
| Commercial | | | 1,740 | | | | 1.96 | % | | | 205 | | | | 0.23 | % | | | - | | | | 0.00 | % | | | 1,945 | | | | 2.19 | % |
Total real estate | | | 3,073 | | | | 1.62 | % | | | 1,656 | | | | 0.87 | % | | | 5,431 | | | | 2.86 | % | | | 10,160 | | | | 5.35 | % |
| Commercial | | | 242 | | | | 1.82 | % | | | - | | | | 0.00 | % | | | - | | | | 0.00 | % | | | 242 | | | | 1.82 | % |
Consumer and other
loans | | | 25 | | | | 0.70 | % | | | - | | | | 0.00 | % | | | 28 | | | | 0.79 | % | | | 53 | | | | 1.49 | % |
Total loans | | $ | 3,340 | | | | 1.61 | % | | $ | 1,656 | | | | 0.80 | % | | $ | 5,459 | | | | 2.64 | % | | $ | 10,455 | | | | 5.05 | % |
The following shows the increases (decreases) in delinquent loans at December 31, 2009, as compared with December 31, 2008. While we cannot predict future trends in delinquencies, we have noted improvements in commercial real estate loans and the overall reduction in loans past due 30-89 days will likely improve charge-offs over time.
| Increase (Decreases) | | Past Due 30-89 Days and Still Accruing | | | Past Due 90 or More Days and Still Accruing | | | Non- accrual Loans | | | Total Past Due Loans | |
| Real estate: | | | | | | | | | | | | |
Construction, land development and other land | $ | (1,014 | ) | | $ | (1,444 | ) | | $ | (1,774 | ) | | $ | (4,232 | ) |
| 1-4 family residential | | | 494 | | | | - | | | | 1,495 | | | | 1,989 | |
| Multifamily residential | | | - | | | | - | | | | 1,350 | | | | 1,350 | |
| Commercial | | | (1,197 | ) | | | (205 | ) | | | 213 | | | | (1,189 | ) |
Total real estate | | | (1,717 | ) | | | (1,649 | ) | | | 1,284 | | | | (2,082 | ) |
| Commercial | | | (102 | ) | | | - | | | | - | | | | (102 | ) |
Consumer and other
loans | | | 33 | | | | 1 | | | | (28 | ) | | | 6 | |
Total loans | | $ | (1,786 | ) | | $ | (1,648 | ) | | $ | 1,256 | | | $ | (2,178 | ) |
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. We consider the following in establishing reserves on loans other than impaired loans, which are assigned a specific reserve and/or charged-down to estimated fair value less costs to liquidate:
| · | 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: |
| | o | the volume (and trends) of delinquent and monitored loans, |
| | o | underlying collateral values, |
| | o | concentrations in risk and levels of concentration risks, |
| | o | quality of internal and external loan reviews, which includes risk-rating our loans according to federal regulatory guidelines, |
| | o | competition and regulatory factors, |
| | o | lending staff experience, |
| | o | 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, consumer price indices, 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. |
Our methodology for determining the SFAS 114 and SFAS 5 components of the ALLL tracks our four major loan pools. Our Board of Directors has approved this methodology and we have undergone recent regulatory examinations that have agreed with the use of the four loan pools shown in the accompanying tables. Accordingly, we believe to further refine our methodology (and obtain historical data) would not meaningfully enhance our disclosures and would increase our costs to monitor our ALLL without any significant benefits.
Highly leveraged transactions generally include loans and commitments made in connection with recapitalizations, acquisitions, and leveraged buyouts, and result in the borrower’s debt-to-total assets ratio exceeding 75%. At December 31, 2005-2009, there were no loans qualified as highly leveraged transactions.
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.
[Remainder of page left intentionally blank.]
| Analysis of Nonperforming Assets (dollars in thousands): | |
| | | December 31, | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
| Nonaccrual loans | | | | | | | | | | | | | | | |
| Construction, land development, and other land | | $ | 2,019 | | | $ | 3,793 | | | $ | 4,008 | | | $ | - | | | $ | - | |
| 1-4 family residential | | | 3,133 | | | | 1,638 | | | | 1,919 | | | | - | | | | - | |
| Multifamily residential | | | 1,350 | | | | - | | | | - | | | | - | | | | - | |
| Commercial | | | 213 | | | | - | | | | - | | | | - | | | | - | |
| Total real estate | | | 6,715 | | | | 5,431 | | | | 5,927 | | | | - | | | | - | |
| Commercial | | | - | | | | - | | | | 295 | | | | 53 | | | | 202 | |
| Consumer and other loans | | | - | | | | 28 | | | | - | | | | - | | | | - | |
| Total | | $ | 6,715 | | | $ | 5,459 | | | $ | 6,222 | | | $ | 53 | | | $ | 202 | |
| | | | | | | | | | | | | | | | | | | | | |
| Loans 90 days or more past due and still on accrual status | | | | | | | | | | | | | | | | | | | | |
| Construction, land development, and other land | | $ | - | | | $ | 1,451 | | | $ | - | | | $ | - | | | $ | - | |
| 1-4 family residential | | | 7 | | | | - | | | | - | | | | - | | | | - | |
| Multifamily residential | | | - | | | | - | | | | - | | | | - | | | | - | |
| Commercial | | | - | | | | 205 | | | | 164 | | | | - | | | | - | |
| Total real estate | | | 7 | | | | 1,656 | | | | 164 | | | | - | | | | - | |
| Commercial | | | - | | | | - | | | | - | | | | - | | | | - | |
| Consumer and other loans | | | 1 | | | | - | | | | - | | | | - | | | | - | |
| Total | | $ | 8 | | | $ | 1,656 | | | $ | 164 | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | |
| Total nonperforming loans | | $ | 6,723 | | | $ | 7,115 | | | $ | 6,386 | | | $ | 53 | | | $ | 202 | |
| Foreclosed real estate | | | 1,727 | | | | 3,421 | | | | - | | | | - | | | | - | |
| Repossessed assets | | | - | | | | 75 | | | | 9 | | | | 13 | | | | - | |
| Total nonperforming assets | | $ | 8,450 | | | $ | 10,611 | | | $ | 6,395 | | | $ | 66 | | | $ | 202 | |
| | | | | | | | | | | | | | | | | | | | | |
| Restructured loans | | | | | | | | | | | | | | | | | | | | |
| 1 to 4 family | | $ | 5,968 | | | $ | 692 | | | $ | | * | | $ | | * | | $ | | * |
| All other | | | 11,404 | | | | 2,874 | | | | 4,491 | | | | * | | | | * | |
| Total restructured loans | | $ | 17,372 | | | $ | 3,566 | | | $ | | * | | $ | | * | | $ | | * |
| | | | | | | | | | | | | | | | | | | | | |
| Total nonperforming assets | | | | | | | | | | | | | | | | | | | | |
| and restructured loans | | $ | 25,822 | | | $ | 14,177 | | | $ | 10,886 | | | $ | 66 | | | $ | 202 | |
| | | | | | | | | | | | | | | | | | | | | |
| Restructured loans included in nonaccrual loans | | | | | | | | | | | | | | | | | | | | |
| above that are considered troubled debt | | | | | | | | | | | | | | | | | | | | |
| restructurings | | $ | 1,842 | | | $ | 4,386 | | | $ | 782 | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | |
| Ratios | | | | | | | | | | | | | | | | | | | | |
| Total loans | | $ | 200,718 | | | $ | 207,029 | | | $ | 204,060 | | | $ | 177,708 | | | $ | 152,803 | |
| Total assets | | $ | 297,366 | | | $ | 267,973 | | | $ | 261,406 | | | $ | 243,497 | | | $ | 213,880 | |
| Total nonperforming loans to total loans | | | 3.35 | % | | | 3.44 | % | | | 3.13 | % | | | 0.04 | % | | | 0.13 | % |
| Total nonperforming assets to total assets | | | 2.84 | % | | | 3.96 | % | | | 2.45 | % | | | 0.03 | % | | | 0.09 | % |
| Total nonperforming assets and | | | | | | | | | | | | | | | | | | | | |
| restructured loans to total assets | | | 8.68 | % | | | 5.29 | % | | | 4.16 | % | | | 0.03 | % | | | 0.09 | % |
* Data not reported in 2006-2007 - not material
ALLOWANCE FOR LOAN LOSSES
The amount charged to operations and the related balance in the allowance for loan losses is based upon periodic evaluations of the loan portfolio by management. These evaluations consider several factors including but not limited to, current economic conditions, loan portfolio composition, prior credit loss experience, trends in portfolio volume, and management’s estimation of future potential losses. Management believes that the allowance for loan losses is adequate. The following is an analysis of the allowance for loan losses for 2005 - 2009 (dollars in thousands).
| | | December 31, | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
| | | | | | | | | | | | | | | | |
| Allowance for loan losses at beginning of year | | $ | 3,999 | | | $ | 2,169 | | | $ | 1,599 | | | $ | 1,552 | | | $ | 1,296 | |
| | | | | | | | | | | | | | | | | | | | | |
| Charge-offs for the year-to-date | | | | | | | | | | | | | | | | | | | | |
| Construction, land development, and other land | | | (135 | ) | | | (190 | ) | | | - | | | | - | | | | - | |
| 1-4 family residential | | | (1,317 | ) | | | (679 | ) | | | - | | | | - | | | | (36 | ) |
| Multifamily residential | | | (2,040 | ) | | | (1,110 | ) | | | - | | | | - | | | | - | |
| Commercial | | | (156 | ) | | | - | | | | - | | | | - | | | | - | |
| Total real estate | | | (3,648 | ) | | | (1,979 | ) | | | - | | | | - | | | | (36 | ) |
| Commercial | | | (39 | ) | | | (501 | ) | | | (49 | ) | | | (169 | ) | | | - | |
| Consumer and other loans | | | (74 | ) | | | (135 | ) | | | (26 | ) | | | (12 | ) | | | (50 | ) |
| Total charge-offs | | | (3,761 | ) | | | (2,615 | ) | | | (75 | ) | | | (181 | ) | | | (86 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Recoveries for the year-to-date | | | | | | | | | | | | | | | | | | | | |
| Construction, land development, and other land | | | - | | | | - | | | | - | | | | - | | | | - | |
| 1-4 family residential | | | 1 | | | | - | | | | - | | | | - | | | | 1 | |
| Multifamily residential | | | - | | | | - | | | | - | | | | - | | | | - | |
| Commercial | | | - | | | | - | | | | - | | | | - | | | | - | |
| Total real estate | | | 1 | | | | - | | | | - | | | | - | | | | 1 | |
| Commercial | | | 11 | | | | 19 | | | | 11 | | | | 31 | | | | - | |
| Consumer and other loans | | | 13 | | | | 2 | | | | 5 | | | | 3 | | | | 7 | |
| Total recoveries | | | 25 | | | | 21 | | | | 16 | | | | 34 | | | | 8 | |
| Net charge-offs for the year-to-date | | | (3,736 | ) | | | (2,594 | ) | | | (59 | ) | | | (147 | ) | | | (78 | ) |
| Provision for loan losses for the year-to-date | | | 6,268 | | | | 4,424 | | | | 629 | | | | 194 | | | | 334 | |
| Allowance for loan losses at end of year | | $ | 6,531 | | | $ | 3,999 | | | $ | 2,169 | | | $ | 1,599 | | | $ | 1,552 | |
| | | | | | | | | | | | | | | | | | | | | |
| Ratios | | | | | | | | | | | | | | | | | | | | |
| Total loans | | $ | 200,718 | | | $ | 207,029 | | | $ | 204,060 | | | $ | 177,708 | | | $ | 152,803 | |
| Average loans | | $ | 206,188 | | | $ | 203,675 | | | $ | 187,544 | | | $ | 167,883 | | | $ | 141,587 | |
| Nonperforming loans | | $ | 6,723 | | | $ | 7,155 | | | $ | 6,386 | | | $ | 53 | | | $ | 201 | |
| Total assets | | $ | 297,366 | | | $ | 267,973 | | | $ | 261,406 | | | $ | 243,497 | | | $ | 213,880 | |
| Ratio of net charge-offs to average loans outstanding | | | 1.81 | % | | | 1.27 | % | | | 0.03 | % | | | 0.09 | % | | | 0.06 | % |
| Ratio of allowance for loan losses to period end loans | | | 3.25 | % | | | 1.93 | % | | | 1.06 | % | | | 0.90 | % | | | 1.02 | % |
| Ratio of allowance for loan losses | | | | | | | | | | | | | | | | | | | | |
| to nonperforming loans | | | 97.14 | % | | | 55.89 | % | | | 33.96 | % | | NM | | | NM | |
| | | | | | | | | | | | | | | | | | | | | |
The specific allocations of the allowance for loan losses are based on management’s evaluation of the risks inherent in the specific portfolios for the dates indicated. Amounts in a particular category may be used to absorb losses if another category allocation proves to be inadequate.
Allocation of Allowance for Loan Losses (dollars in thousands):
| FAS 114 | | At December 31, | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
| | | | | | % of | | | | | | % of | | | | | | % of | | | | | | % of | | | | | | % of | |
| | | | | | Loans to | | | | | | Loans to | | | | | | Loans to | | | | | | Loans to | | | | | | Loans to | |
| | | | | | Total | | | | | | Total | | | | | | Total | | | | | | Total | | | | | | Total | |
| | | Amount | | | Loans | | | Amount | | | Loans | | | Amount | | | Loans | | | Amount | | | Loans | | | Amount | | | Loans | |
| Commercial real estate | | $ | 3,547 | | | | 63 | % | | $ | 1,114 | | | | 62 | % | | $ | 124 | | | | 68 | % | | $ | 8 | | | | 68 | % | | $ | 22 | | | | 66 | % |
| Residential real estate | | | 831 | | | | 29 | | | | 140 | | | | 30 | | | | 366 | | | | 23 | | | | 8 | | | | 23 | | | | 112 | | | | 23 | |
| Total real estate | | | 4,378 | | | | 92 | | | | 1,254 | | | | 92 | | | | 490 | | | | 91 | | | | 16 | | | | 91 | | | | 134 | | | | 89 | |
| Commercial | | | - | | | | 6 | | | | 435 | | | | 6 | | | | 226 | | | | 6 | | | | 119 | | | | 6 | | | | 219 | | | | 8 | |
| Consumer and other loans | | | 2 | | | | 2 | | | | 28 | | | | 2 | | | | 12 | | | | 3 | | | | 23 | | | | 3 | | | | 37 | | | | 3 | |
| Unallocated | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Totals | | $ | 4,380 | | | | 100 | % | | $ | 1,717 | | | | 100 | % | | $ | 728 | | | | 100 | % | | $ | 158 | | | | 100 | % | | $ | 390 | | | | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| FAS 5 | | At December 31, | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
| | | | | | % of | | | | | | % of | | | | | | % of | | | | | | % of | | | | | | % of | |
| | | | | | Loans to | | | | | | Loans to | | | | | | Loans to | | | | | | Loans to | | | | | | Loans to | |
| | | | | | Total | | | | | | Total | | | | | | Total | | | | | | Total | | | | | | Total | |
| | | Amount | | | Loans | | | Amount | | | Loans | | | Amount | | | Loans | | | Amount | | | Loans | | | Amount | | | Loans | |
| Commercial real estate | | $ | 504 | | | | 63 | % | | $ | 993 | | | | 62 | % | | $ | 1,078 | | | | 67 | % | | $ | 971 | | | | 68 | % | | $ | 767 | | | | 66 | % |
| Residential real estate | | | 1,392 | | | | 29 | | | | 819 | | | | 30 | | | | 60 | | | | 24 | | | | 49 | | | | 23 | | | | 267 | | | | 23 | |
| Total real estate | | | 1,896 | | | | 92 | | | | 1,812 | | | | 92 | | | | 1,138 | | | | 91 | | | | 1,020 | | | | 91 | | | | 1,034 | | | | 89 | |
| Commercial | | | 194 | | | | 6 | | | | 383 | | | | 6 | | | | 193 | | | | 6 | | | | 242 | | | | 6 | | | | 93 | | | | 8 | |
| Consumer and other loans | | | 61 | | | | 2 | | | | 87 | | | | 2 | | | | 88 | | | | 3 | | | | 44 | | | | 3 | | | | 35 | | | | 3 | |
| Unallocated | | | - | | | | - | | | | - | | | | - | | | | 22 | | | | - | | | | 135 | | | | - | | | | - | | | | - | |
| Totals | | $ | 2,151 | | | | 100 | % | | $ | 2,282 | | | | 100 | % | | $ | 1,441 | | | | 100 | % | | $ | 1,441 | | | | 100 | % | | $ | 1,162 | | | | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total ALLL | | At December 31, | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
| | | | | | % of | | | | | | % of | | | | | | % of | | | | | | % of | | | | | | % of | |
| | | | | | Loans to | | | | | | Loans to | | | | | | Loans to | | | | | | Loans to | | | | | | Loans to | |
| | | | | | Total | | | | | | Total | | | | | | Total | | | | | | Total | | | | | | Total | |
| | | Amount | | | Loans | | | Amount | | | Loans | | | Amount | | | Loans | | | Amount | | | Loans | | | Amount | | | Loans | |
| Commercial real estate | | $ | 4,051 | | | | 63 | % | | $ | 2,107 | | | | 62 | % | | $ | 1,202 | | | | 67 | % | | $ | 979 | | | | 68 | % | | $ | 789 | | | | 66 | % |
| Residential real estate | | | 2,223 | | | | 29 | | | | 959 | | | | 30 | | | | 426 | | | | 24 | | | | 57 | | | | 23 | | | | 379 | | | | 23 | |
| Total real estate | | | 6,274 | | | | 92 | | | | 3,066 | | | | 92 | | | | 1,628 | | | | 91 | | | | 1,036 | | | | 91 | | | | 1,168 | | | | 89 | |
| Commercial | | | 194 | | | | 6 | | | | 818 | | | | 6 | | | | 419 | | | | 6 | | | | 361 | | | | 6 | | | | 312 | | | | 8 | |
| Consumer and other loans | | | 63 | | | | 2 | | | | 115 | | | | 2 | | | | 100 | | | | 3 | | | | 67 | | | | 3 | | | | 72 | | | | 3 | |
| Unallocated | | | - | | | | - | | | | - | | | | - | | | | 22 | | | | - | | | | 135 | | | | - | | | | - | | | | - | |
| Totals | | $ | 6,531 | | | | 100 | % | | $ | 3,999 | | | | 100 | % | | $ | 2,169 | | | | 100 | % | | $ | 1,599 | | | | 100 | % | | $ | 1,552 | | | | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
SECURITIES
Financial institutions classify their investment securities as either “held-to-maturity” or “available-for-sale.” Securities classified as held-to-maturity are carried at amortized or accreted cost and include those securities that a bank has the intent and ability to hold to maturity. Securities classified as available-for-sale, which are those securities that a bank intends to hold for an indefinite amount of time, but not necessarily to maturity, are carried at fair value with the unrealized holding gains or losses, net of taxes, reported as a component of the stockholders’ equity on a bank’s balance sheet. Our investment securities 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 following tables set forth the carrying amount of securities at the dates indicated.
| Carrying Value of Investment Securities (dollars in thousands): | | | | | | | | | |
| | | At December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| Securities available-for-sale: | | | | | | | | | |
| REMICs | | $ | 137 | | | $ | 2,699 | | | $ | 3,019 | |
| MBS | | | 42,405 | | | | 12,171 | | | | 22,519 | |
| | | | 42,542 | | | | 14,870 | | | | 25,538 | |
| Securities held-to-maturity: | | | | | | | | | | | | |
| Tax-exempt state, county, and municipal bonds | | | 14,989 | | | | 15,536 | | | | 15,762 | |
| Balance, end of year | | $ | 57,531 | | | $ | 30,406 | | | $ | 41,300 | |
| | | | | | | | | | | | | |
| Investment Securities at Amortized Cost (dollars in thousands): | | | | | | | | | |
| | | At December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| Securities available-for-sale: | | | | | | | | | |
| REMICs | | $ | 134 | | | $ | 2,700 | | | $ | 2,983 | |
| MBS | | | 42,428 | | | | 12,171 | | | | 22,691 | |
| | | | 42,562 | | | | 14,871 | | | | 25,674 | |
| Securities held-to-maturity: | | | | | | | | | | | | |
| Tax-exempt state, county, and municipal bonds | | | 14,989 | | | | 15,536 | | | | 15,762 | |
| Balance, end of year | | $ | 57,551 | | | $ | 30,407 | | | $ | 41,436 | |
The following tables set forth the maturities (excluding principal paydowns on MBS) and the weighted average yields of securities by contractual maturities at December 31, 2009, 2008, and 2007.
Analysis of Investment Securities Available-for-Sale (dollars in thousands and average yield on a tax-equivalent basis): | |
| | | Due in one | | | Due in One | | | Due in Five | | | Due in Ten | | | | | | | |
| | | year or less | | | to Five Years | | | to Ten Years | | | Years or More | | | Total | |
| | | | | | Average | | | | | | Average | | | | | | Average | | | | | | Average | | | | | | Average | |
| | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | |
At December 31, 2009: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| REMICs | | $ | - | | | | - | % | | $ | 137 | | | | 3.67 | % | | $ | - | | | | - | % | | $ | - | | | | - | % | | $ | 137 | | | | 3.67 | % |
| MBS | | | 3,104 | | | | 2.94 | % | | | 4,949 | | | | 4.36 | % | | | 20,595 | | | | 3.83 | % | | | 13,757 | | | | 3.92 | % | | | 42,405 | | | | 3.85 | % |
| | | $ | 3,104 | | | | 2.94 | % | | $ | 5,086 | | | | 4.34 | % | | $ | 20,595 | | | | 3.83 | % | | $ | 13,757 | | | | 3.92 | % | | $ | 42,542 | | | | 3.85 | % |
At December 31, 2008: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| REMICs | | $ | - | | | | - | % | | $ | - | | | | - | % | | $ | 2,123 | | | | 4.01 | % | | $ | 576 | | | | 4.26 | % | | $ | 2,699 | | | | 4.06 | % |
| MBS | | | 639 | | | | 3.77 | % | | | 1,075 | | | | 3.79 | % | | | 973 | | | | 4.93 | % | | | 9,484 | | | | 4.37 | % | | | 12,171 | | | | 4.33 | % |
| | | $ | 639 | | | | 3.77 | % | | $ | 1,075 | | | | 3.79 | % | | $ | 3,096 | | | | 4.93 | % | | $ | 10,060 | | | | 4.37 | % | | $ | 14,870 | | | | 4.42 | % |
At December 31, 2007: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| REMICs | | $ | - | | | | - | % | | $ | - | | | | - | % | | $ | - | | | | - | % | | $ | 3,019 | | | | 5.64 | % | | $ | 3,019 | | | | 5.64 | % |
| MBS | | | 2,803 | | | | 4.08 | % | | | 2,356 | | | | 3.85 | % | | | 10,594 | | | | 4.53 | % | | | 6,766 | | | | 4.90 | % | | | 22,519 | | | | 4.52 | % |
| | | $ | 2,803 | | | | 4.08 | % | | $ | 2,356 | | | | 3.85 | % | | $ | 10,594 | | | | 4.53 | % | | $ | 9,785 | | | | 4.90 | % | | $ | 25,538 | | | | 4.56 | % |
| Analysis of Investment Securities Held-to-Maturity (dollars in thousands and average yield on a tax-equivalent basis): | |
| | | Due in one | | | Due in One | | | Due in Five | | | Due in Ten | | | | | | | |
| | | year or less | | | to Five Years | | | to Ten Years | | | Years or More | | | Total | |
| | | | | | Average | | | | | | Average | | | | | | Average | | | | | | Average | | | | | | Average | |
| | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | |
At December 31, 2009: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Tax-exempt state, county, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| and municipal bonds | | $ | - | | | | - | % | | $ | 271 | | | | 4.70 | % | | $ | 1,163 | | | | 4.84 | % | | $ | 13,555 | | | | 4.22 | % | | $ | 14,989 | | | | 4.28 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At December 31, 2008: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Tax-exempt state, county, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| and municipal bonds | | $ | - | | | | - | % | | $ | - | | | | - | % | | $ | 1,010 | | | | 4.86 | % | | $ | 14,526 | | | | 4.27 | % | | $ | 15,536 | | | | 4.31 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At December 31, 2007: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Tax-exempt state, county, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| and municipal bonds | | $ | - | | | | - | % | | $ | - | | | | - | % | | $ | 1,057 | | | | 4.77 | % | | $ | 14,705 | | | | 3.97 | % | | $ | 15,762 | | | | 4.02 | % |
| At December 31, the weighted average life in years was as follows: | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
| Securities available-for-sale: | | | | | | | | | |
| REMICs | | | 1.7 | | | | 2.6 | | | | 14.0 | |
| MBS | | | 9.6 | | | | 21.0 | | | | 9.5 | |
| Total | | | 9.6 | | | | 17.7 | | | | 14.1 | |
| Securities held-to-maturity: | | | | | | | | | | | | |
| Tax-exempt state, county, and municipal bonds | | | 17.0 | | | | 18.4 | | | | 17.6 | |
DEPOSITS
Deposits are the major source of our funds for lending and other investment purposes. Deposits are attracted principally from within our assessment area through the offering of a broad variety of deposit instruments including checking accounts, money market accounts, regular savings accounts, term certificate accounts (including “jumbo” certificates in denominations of $100,000 or more), and retirement savings plans.
Maturity terms, service charges, and withdrawal penalties are established by management on a periodic basis. The determination of rates and terms is predicated on loan funding and liquidity requirements, rates paid by competitors, growth goals, and federal regulations.
The FDIC regulations limit the ability of certain insured depository institutions to accept, renew, or rollover deposits by offering rates of interest that are significantly higher than the prevailing rates of interest on deposits offered by other insured depository institutions having the same type of charter in such depository institutions’ normal market area. Under these regulations, “well-capitalized” depository institutions may accept, renew, or rollover deposits at such rates without restriction, “adequately capitalized” depository institutions may accept, renew or rollover deposits at such rates with a waiver from the FDIC (subject to certain restrictions on payments and rates), and “undercapitalized” depository institutions may not accept, renew or rollover deposits at such rates. The regulations contemplate that the definitions of “well-capitalized,” “adequately capitalized” and “undercapitalized” will be the same as the definitions adopted by the agencies to implement the prompt corrective action provisions of applicable law. See “Description of Business/Supervision and Regulation.” As of December 31, 2008, Oceanside met the definition of a “well-capitalized” depository institution. However, as of December 31, 2009, Oceanside no longer met the “well-capitalized” classification, and under the Consent Order is restricted on rates and types of deposits we can accept, renew, or rollover. For this reason, we have increased our liquid assets to repay certain deposits as they mature.
Our primary source of funds is deposit accounts that include both interest- and noninterest-bearing demand, savings, and time deposits under $100,000 (referred to as “core deposits”). At December 31, 2009, 2008, and 2007, these core deposits accounted for approximately 83%, 78%, and 73%, respectively, of all deposits. At December 31, 2009, time deposits under $100,000 accounted for approximately 37% of these core deposits as compared with money market deposits at 41% and noninterest-bearing demand deposits at 16%. This compares with 2008 levels of 50%, 15%, and 23%, respectively, and with 2007 levels of 55%, 23%, and 17%, respectively. At December 31, 2009, 2008, and 2007, jumbo certificates of deposit (time deposits $100,000 and greater) represented approximately 17%, 22%, and 27%, respectively, of total deposits. At December 31, 2009, 2008, and 2007, time deposits outstanding in an individual amount of $100,000 or more totaled $46,665,000, $51,771,000, and $57,785,000, respectively.
Interest-bearing demand accounts, consisting of NOW and money market accounts, averaged $88,744,000 for the year ended 2009, $42,108,000 for the year ended 2008, and $42,858,000 for the year ended 2007, or approximately 34%, 19%, and 21% of average total deposits in 2009, 2008, and 2007, respectively.
Distribution of Deposit Accounts by Type (dollars in thousands):
| | | At December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | | | | % of | | | | | | % of | | | | | | % of | |
| | | Amount | | | Deposits | | | Amount | | | Deposits | | | Amount | | | Deposits | |
| | | | | | | | | | | | | | | | | | | |
| Demand deposits | | $ | 35,409 | | | | 13.1 | % | | $ | 43,017 | | | | 17.9 | % | | $ | 27,278 | | | | 12.5 | % |
| NOW deposits | | | 11,455 | | | | 4.2 | | | | 20,208 | | | | 8.4 | | | | 4,440 | | | | 2.1 | |
| Money market deposits | | | 90,573 | | | | 33.6 | | | | 27,981 | | | | 11.7 | | | | 36,835 | | | | 16.9 | |
| Savings deposits | | | 2,702 | | | | 1.0 | | | | 2,892 | | | | 1.2 | | | | 2,800 | | | | 1.3 | |
| Subtotal | | | 140,139 | | | | 51.9 | | | | 94,098 | | | | 39.2 | | | | 71,353 | | | | 32.8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Certificates of deposit: | | | | | | | | | | | | | | | | | | | | | | | | |
| 0.00% - 0.99% | | | 236 | | | | 0.1 | | | | - | | | | 0.0 | | | | - | | | | 0.0 | |
| 1.00% - 1.99% | | | 27,485 | | | | 10.2 | | | | - | | | | 0.0 | | | | - | | | | 0.0 | |
| 2.00% - 2.99% | | | 60,956 | | | | 22.6 | | | | 6,250 | | | | 2.6 | | | | - | | | | 0.0 | |
| 3.00% - 3.99% | | | 21,895 | | | | 8.1 | | | | 69,932 | | | | 29.2 | | | | 950 | | | | 0.4 | |
| 4.00% - 4.99% | | | 8,887 | | | | 3.3 | | | | 42,947 | | | | 17.9 | | | | 40,953 | | | | 18.8 | |
| 5.00% - 5.99% | | | 10,428 | | | | 3.8 | | | | 26,669 | | | | 11.1 | | | | 104,275 | | | | 48.0 | |
| Less fees on brokered deposits | | | (42 | ) | | | 0.0 | | | | (52 | ) | | | 0.0 | | | | (40 | ) | | | 0.0 | |
Total certificates of deposit (1) | | | 129,845 | | | | 48.1 | | | | 145,746 | | | | 60.8 | | | | 146,138 | | | | 67.2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total deposits | | $ | 269,984 | | | | 100.0 | % | | $ | 239,844 | | | | 100.0 | % | | $ | 217,491 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| (1) | Includes retirement accounts (in thousands) totaling $4,924, $4,047, and $5,281, in 2009, 2008, and 2007, respectively, all of which were in the form of certificates of deposit. |
| Average Deposits and Average Rates (dollars in thousands): | |
| | | | | | | | | | | | | | | | | | | |
| | | At December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | Average | | | Average | | | Average | | | Average | | | Average | | | Average | |
| | | Balance | | | Rate | | | Balance | | | Rate | | | Balance | | | Rate | |
| Demand, money market | | | | | | | | | | | | | | | | | | |
| and NOW deposits | | $ | 123,182 | | | | 1.24 | % | | $ | 69,612 | | | | 1.43 | % | | $ | 72,193 | | | | 2.33 | % |
| Savings deposits | | | 2,858 | | | | 0.99 | | | | 2,988 | | | | 1.10 | | | | 3,751 | | | | 1.49 | |
| Certificates of deposit | | | 138,791 | | | | 3.39 | | | | 146,595 | | | | 4.60 | | | | 129,313 | | | | 5.20 | |
| Total deposits | | $ | 264,831 | | | | 2.37 | % | | $ | 219,195 | | | | 3.54 | % | | $ | 205,257 | | | | 4.12 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Time Deposits of $100,000 or more with remaining maturities of (dollars in thousands):
| | | December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | | | | | | | | |
| Due in three months or less | | $ | 12,167 | | | $ | 21,648 | | | $ | 20,720 | |
| Over three through twelve months | | | 27,274 | | | | 21,122 | | | | 22,686 | |
| Over twelve months through three years | | | 5,871 | | | | 8,501 | | | | 11,561 | |
| Over three years | | | 1,353 | | | | 500 | | | | 2,818 | |
| | | $ | 46,665 | | | $ | 51,771 | | | $ | 57,785 | |
Certificates of Deposits by Rate and Maturity Date (dollars in thousands):
| | | Year Ending December 31, | |
| | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014+ | | | Total | |
| At December 31, 2009: | | | | | | | | | | | | | | | | | | | |
| 0.00% - 0.99% | | $ | 236 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 236 | |
| 1.00% - 1.99% | | | 26,860 | | | | 625 | | | | - | | | | - | | | | - | | | | 27,485 | |
| 2.00% - 2.99% | | | 43,385 | | | | 11,425 | | | | 5,068 | | | | - | | | | 1,078 | | | | 60,956 | |
| 3.00% - 3.99% | | | 20,934 | | | | 629 | | | | 5 | | | | 230 | | | | 97 | | | | 21,895 | |
| 4.00% - 4.99% | | | 7,770 | | | | 768 | | | | 60 | | | | 289 | | | | - | | | | 8,887 | |
| 5.00% - 5.99% | | | 6,229 | | | | 3,796 | | | | 403 | | | | - | | | | - | | | | 10,428 | |
| Less fees on brokered deposits | | | (42 | ) | | | - | | | | - | | | | - | | | | - | | | | (42 | ) |
| Total certificates of deposit | | $ | 105,372 | | | $ | 17,243 | | | $ | 5,536 | | | $ | 519 | | | $ | 1,175 | | | $ | 129,845 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ending December 31, | |
| | | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013+ | | | Total | |
| At December 31, 2008: | | | | | | | | | | | | | | | | | | | |
| 1.00% - 1.99% | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| 2.00% - 2.99% | | | 6,036 | | | | 213 | | | | 1 | | | | - | | | | - | | | | 6,250 | |
| 3.00% - 3.99% | | | 51,461 | | | | 17,772 | | | | 476 | | | | - | | | | 223 | | | | 69,932 | |
| 4.00% - 4.99% | | | 34,078 | | | | 7,765 | | | | 761 | | | | 57 | | | | 286 | | | | 42,947 | |
| 5.00% - 5.99% | | | 16,316 | | | | 6,192 | | | | 3,749 | | | | 412 | | | | - | | | | 26,669 | |
| Less fees on brokered deposits | | | (52 | ) | | | - | | | | - | | | | - | | | | - | | | | (52 | ) |
| Total certificates of deposit | | $ | 107,839 | | | $ | 31,942 | | | $ | 4,987 | | | $ | 469 | | | $ | 509 | | | $ | 145,746 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ending December 31, | |
| | | 2008 | | | 2009 | | | 2010 | | | 2011 | | | 2012+ | | | Total | |
| At December 31, 2007: | | | | | | | | | | | | | | | | | | | |
| 1.00% - 1.99% | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| 2.00% - 2.99% | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| 3.00% - 3.99% | | | 446 | | | | 504 | | | | - | | | | - | | | | - | | | | 950 | |
| 4.00% - 4.99% | | | 30,952 | | | | 8,762 | | | | 1,172 | | | | 11 | | | | 56 | | | | 40,953 | |
| 5.00% - 5.99% | | | 77,138 | | | | 15,690 | | | | 6,662 | | | | 4,377 | | | | 408 | | | | 104,275 | |
| Less fees on brokered deposits | | | (23 | ) | | | (17 | ) | | | - | | | | - | | | | - | | | | (40 | ) |
| Total certificates of deposit | | $ | 108,513 | | | $ | 24,939 | | | $ | 7,834 | | | $ | 4,388 | | | $ | 464 | | | $ | 146,138 | |
SHORT-TERM AND LONG-TERM DEBT
| Other Borrowings (dollars in thousands): | | | | | | | | | |
| | | December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | | | | | | | | |
| Customer repurchase agreements | | $ | - | | | $ | - | | | $ | 13,816 | |
| Federal funds purchased | | | - | | | | - | | | | 4,372 | |
| FHLB of Atlanta advances | | | 12,300 | | | | 6,300 | | | | 2,300 | |
| Junior subordinated debentures | | | 3,093 | | | | 3,093 | | | | 3,093 | |
| | | | | | | | | | | | | |
| | | $ | 15,393 | | | $ | 9,393 | | | $ | 23,581 | |
Customer Repurchase Agreements. Oceanside has sold securities under an agreement to repurchase, which effectively collateralizes overnight borrowings. At December 31, 2009, no borrowings were outstanding and no securities were sold under agreements to repurchase.
FHLB of Atlanta Advances. Oceanside has obtained advances from FHLB totaling $12,300,000 collateralized by Oceanside’s FHLB capital stock in the amount of $1,126,000 and a blanket lien on eligible qualifying real estate mortgage loans totaling approximately $43.3 million. $4.3 million of the advances mature in 2010, and $8.0 million mature in 2012. The advances have fixed interest rates ranging from 1.91% to 4.45%.
Junior Subordinated Debentures. On September 15, 2005, Atlantic issued $3,093,000 of fixed-rate junior subordinated debentures (the “debt securities”) to Atlantic BancGroup Statutory Trust I, a statutory trust created under the laws of the State of Delaware. These debt securities are subordinated to effectively all borrowings of Atlantic and are due and payable in thirty years.
Other Short-term Borrowings. Oceanside purchases federal funds for liquidity needs during the year. At December 31, 2009, 2008, and 2007, federal fund purchases were $-0-, $-0-, and $4,372,000, respectively.
| Selected Data for Other Borrowings (dollars in thousands): | |
| | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
| Interest rate at end of period | | | | | | | | | |
| Customer repurchase agreements (federal funds rate less | | | | | | | | | |
| 25 basis points) | | | - | % | | | - | % | | | 4.000 | % |
| FHLB of Atlanta advances (fixed rate convertible debt) | | | 4.450 | % | | | 4.450 | % | | | 4.450 | % |
| FHLB of Atlanta advances (fixed rate fixed debt) | | | 1.910 | % | | | 1.990 | % | | | - | % |
| FHLB of Atlanta advances (fixed rate fixed debt) | | | 2.300 | % | | | - | % | | | - | % |
| Junior subordinated debentures (fixed rate for five years) | | | 5.886 | % | | | 5.886 | % | | | 5.886 | % |
| Other short-term borrowings (federal funds purchased) | | | - | % | | | - | % | | | 4.600 | % |
| | | | | | | | | | | | | |
| Average balances during the period | | | | | | | | | | | | |
| Customer repurchase agreements | | $ | - | | | $ | 10,960 | | | $ | 15,054 | |
| FHLB of Atlanta advances | | $ | 12,738 | | | $ | 4,545 | | | $ | 2,300 | |
| Junior subordinated debentures | | $ | 3,093 | | | $ | 3,093 | | | $ | 3,093 | |
| Other short-term borrowings (federal funds purchased) | | $ | 2 | | | $ | 2,445 | | | $ | 2,441 | |
| | | | | | | | | | | | | |
| Weighted average interest rate | | | | | | | | | | | | |
| Customer repurchase agreements | | | - | % | | | 1.88 | % | | | 4.81 | % |
| FHLB of Atlanta advances | | | 2.74 | % | | | 3.30 | % | | | 4.45 | % |
| Junior subordinated debentures | | | 5.89 | % | | | 5.89 | % | | | 5.89 | % |
| Other short-term borrowings (federal funds purchased) | | | - | % | | | 3.27 | % | | | 4.64 | % |
| | | | | | | | | | | | | |
| Short-term borrowings (customer repurchase agreements | | | | | | | | | | | | |
| and federal funds purchased) | | | | | | | | | | | | |
| Balance at end of period | | $ | - | | | $ | - | | | $ | 18,188 | |
| Weighted average interest rate at end of period | | | - | % | | | - | % | | | 4.00 | % |
| Maximum amount outstanding at month end during the period | | $ | 200 | | | $ | 22,159 | | | $ | 26,184 | |
| Average amount outstanding during the period | | $ | 2 | | | $ | 13,405 | | | $ | 17,495 | |
| Weighted average interest rate during the period | | | - | % | | | 2.13 | % | | | 4.78 | % |
| Interest Expense for Other Borrowings (dollars in thousands): | |
| | | | | | | | | | |
| | | December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| Customer repurchase agreements | | $ | - | | | $ | 206 | | | $ | 724 | |
| FHLB of Atlanta advances | | | 349 | | | | 149 | | | | 104 | |
| Junior subordinated debentures | | | 183 | | | | 185 | | | | 185 | |
| Other short-term borrowings (federal funds purchased) | | | - | | | | 80 | | | | 113 | |
| | | | | | | | | | | | | |
| | | $ | 532 | | | $ | 620 | | | $ | 1,126 | |
| | | | | | | | | | | | | |
LIQUIDITY
Our principal source of funds comes from Oceanside’s operations, including net increases in deposits, principal and interest payments on loans, and proceeds from sales and maturities of investment securities. We use our capital resources principally to fund existing and continuing loan commitments, purchase investment securities, and meet other contractual obligations.
Liquidity management involves meeting the funds flow requirements of customers who may either be depositors wanting to withdraw funds, or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Liquid assets consist of vault cash, securities, and principal paydowns of other interest-earning assets. Our principal sources of asset liquidity are federal funds sold and the securities portfolio, including principal paydowns
from Residential mortgage pass-through securities. In 2009, 2008, and 2007, principal paydowns from Residential mortgage pass-through securities totaled $6,778,000, $7,163,000, and $6,601,000, respectively.
Other sources of funds are principal paydowns and maturities in the loan portfolio. The contractual loan maturity table herein illustrates the maturities of loans receivable at December 31, 2009.
We also have sources of liability liquidity that include core deposits as previously discussed and access to borrowed funds including overnight federal funds and customer repurchase agreements. At December 31, 2009, we had approximately $10.0 million available from these sources. As mentioned elsewhere, increased competition for all funding sources has reduced our liquidity.
At December 31, 2009, 2008, and 2007, our liquidity ratio of liquid assets to transaction deposit accounts was 25.2%, 20.5%, and 10.9%, respectively. Management believes that our liquidity is sufficient to meet our anticipated needs. At December 31, 2009, brokered deposits totaled $19,098,000, which represented 7.1% of total deposits.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
| Contractual Commitments (dollars in thousands) | | | | | | | | | |
| | | December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| Commitments to originate loans | | | | | | | | | |
| Residential real estate | | $ | 3,630 | | | $ | 4,983 | | | $ | 8,796 | |
| Commercial real estate, construction, and land | | | | | | | | | | | | |
| development secured by real estate | | | 1,186 | | | | 2,186 | | | | 12,099 | |
| Other unused commitments | | | 4,548 | | | | 3,311 | | | | 7,462 | |
| Total commitments to originate loans | | | 9,364 | | | | 10,480 | | | | 28,357 | |
| Financial standby letters of credit | | | 1,174 | | | | 1,701 | | | | 2,084 | |
| | | | | | | | | | | | | |
| Total contractual commitments | | $ | 10,538 | | | $ | 12,181 | | | $ | 30,441 | |
| | | | | | | | | | | | | |
| Contractual Obligations (dollars in thousands) | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | 1 Year | | | Years 2 | | | Years 4 | | | After | | | | |
| | | or Less | | | and 3 | | | and 5 | | | 5 Years | | | Total | |
| | | | | | | | | | | | | | | | |
| Deposits without a stated maturity | | $ | 140,139 | | | $ | - | | | $ | - | | | $ | - | | | $ | 140,139 | |
| Certificates of deposit and | | | | | | | | | | | | | | | | | | | | |
| other time deposits | | | 105,372 | | | | 22,779 | | | | 1,694 | | | | - | | | | 129,845 | |
| Federal Home Loan Bank advances | | | 4,300 | | | | 8,000 | | | | - | | | | - | | | | 12,300 | |
| Junior subordinated debentures | | | - | | | | - | | | | - | | | | 3,093 | | | | 3,093 | |
| Operating leases | | | 332 | | | | 252 | | | | 182 | | | | 862 | | | | 1,628 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total contractual obligations | | $ | 250,143 | | | $ | 31,031 | | | $ | 1,876 | | | $ | 3,955 | | | $ | 287,005 | |
Management believes that we have adequate resources to fund all our commitments and contractual obligations. If so desired, we can adjust the rates and terms on certificates of deposit and other deposit accounts to attract deposits and fund additional commitments (subject to Consent Order restrictions). Other alternative funding sources include additional overnight purchases of federal funds and customer repurchase agreements, if necessary. We also maintain investments that could be liquidated if needed.
CAPITAL RESOURCES
Historically, we have placed a significant emphasis on maintaining a strong capital base. The capital resources consist of two major components of regulatory capital, stockholders’ equity and the allowance for loan losses. Current capital guidelines issued by federal regulatory authorities require a company to meet minimum risk-based capital ratios in an effort to make regulatory capital more responsive to the risk exposure related to a company’s on- and off-balance sheet items.
Risk-based capital guidelines re-define the components of capital, categorize assets into risk classes, and include certain off-balance sheet items in the calculation of capital requirements. The components of risk-based capital are segregated as Tier 1 and total risk-based capital. Tier 1 capital is composed of total stockholders’ equity reduced by goodwill, other intangible assets, and certain limitations on the levels of ALLL and deferred tax assets. Total risk-based capital includes Tier 1 capital plus the allowable portion of the allowance for loan losses and any qualifying debt obligations. Regulators also have adopted minimum requirements of 4% of Tier 1 capital and 8% of risk-adjusted assets in total capital. However, under the Consent Order we must maintain a ratio of 11% of risk-adjusted assets to total capital.
We are also subject to leverage capital requirements. This requirement compares capital (using the definition of Tier 1 capital) to balance sheet assets and is intended to supplement the risk-based capital ratio in measuring capital adequacy. The guidelines set a minimum leverage ratio of 3% for depository institutions that are highly rated in terms of safety and soundness, and which are not experiencing or anticipating any significant growth. Other depository institutions are expected to maintain capital levels of at least 1% or 2% above the minimum. However, under the Consent Order, we must maintain an 8% Tier 1 leverage ratio. Our actual capital amounts, capital ratios, and leverage ratios at December 31, 2009, 2008, and 2007 (Bank Only), are reflected in the table below.
| Capital Ratios (dollars in thousands): | | | | | | | | | |
| | | Bank Only | |
| | | At December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| Tier 1 capital | | | | | | | | | |
| Stockholder’s equity | | $ | 12,797 | | | $ | 19,899 | | | $ | 21,831 | |
| Plus, qualifying trust preferred securities | | | - | | | | - | | | | - | |
| Plus, unrealized losses on AFS securities | | | 13 | | | | 1 | | | | 84 | |
| Less disallowed deferred taxes for risk-based capital only | | | - | | | | (845 | ) | | | - | |
| Less intangible assets | | | - | | | | - | | | | - | |
| | | | 12,810 | | | | 19,055 | | | | 21,915 | |
| Tier 2 capital | | | | | | | | | | | | |
| Allowable portion of allowance for loan losses and | | | | | | | | | | | | |
| off-balance sheet commitments | | | 2,551 | | | | 2,665 | | | | 2,200 | |
| | | | | | | | | | | | | |
| Total risk-based capital | | $ | 15,361 | | | $ | 21,720 | | | $ | 24,115 | |
| | | | | | | | | | | | | |
| Total risk-weighted assets | | $ | 200,062 | | | $ | 211,883 | | | $ | 234,940 | |
| | | | | | | | | | | | | |
| Tier 1 risk-based capital ratio | | | 6.40 | % | | | 8.99 | % | | | 9.33 | % |
| | | | | | | | | | | | | |
| Total risk-based capital ratio | | | 7.68 | % | | | 10.25 | % | | | 10.26 | % |
| | | | | | | | | | | | | |
| Average total assets for leverage capital purposes | | $ | 315,347 | | | $ | 262,982 | | | $ | 257,067 | |
| | | | | | | | | | | | | |
| Tier 1 leverage ratio | | | 4.06 | % | | | 7.25 | % | | | 8.53 | % |
Accordingly, at December 31, 2009, we did not meet the capital ratios required in the Consent Order of total risk-based capital of 11% and Tier 1 leverage ratio of 8%.
Trust Preferred Securities. On September 15, 2005, Atlantic entered into a transaction commonly referred to as trust preferred securities. Subject to percentage limitations, the proceeds from the issuance of trust preferred securities are considered Tier 1 capital for regulatory purposes, which totaled $3.0 million (net of Atlantic’s investment in the unconsolidated subsidiary). However, as a result of the issuance of FIN 46 and FIN 46R, the trust subsidiary is not consolidated in these financial statements, and therefore the proceeds received by Atlantic from the trust subsidiary is reported as junior subordinated debentures. In 2005, the Federal Reserve Board ruled that, notwithstanding the deconsolidation of such trusts, junior subordinated debentures, such as those issued by Atlantic, may continue to constitute up to 25% of a bank holding company's Tier 1 capital. During the second quarter of 2009, Atlantic discontinued paying the interest on the junior subordinated debentures and owed $109,000 at December 31, 2009.
| Capital Analysis: | | | | | | | | | |
| | | For the Year Ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| Average equity as a percentage of average assets | | | 5.31 | % | | | 7.14 | % | | | 7.30 | % |
| Equity to total assets at end of year | | | 3.26 | | | | 6.32 | | | | 7.21 | |
| Return on average equity | | | -45.70 | | | | -10.37 | | | | 7.77 | |
| Return on average assets | | | -2.43 | | | | -0.74 | | | | 0.57 | |
| Noninterest expenses to average assets | | | 2.85 | | | | 2.94 | | | | 2.59 | |
Stockholders’ equity is adjusted for the effect of unrealized appreciation or depreciation, net of tax, on securities classified as available-for-sale. Stockholders’ equity decreased $7,252,000 and $1,924,000 in 2009 and 2008, respectively, and increased $1,605,000 in 2007, as follows (dollars in thousands):
| | | 2009 | | | 2008 | | | 2007 | |
| | | | | | | | | �� | |
| Net income (loss) | | $ | (7,240 | ) | | $ | (1,927 | ) | | $ | 1,406 | |
| Change in unrealized gains (losses) on | | | | | | | | | | | | |
| available-for-sale securities | | | (12 | ) | | | 83 | | | | 199 | |
| Implementation of EITF 06-4 for | | | | | | | | | | | | |
| indexed retirement plan | | | - | | | | (80 | ) | | | - | |
| | | $ | (7,252 | ) | | $ | (1,924 | ) | | $ | 1,605 | |
| | | | | | | | | | | | | |
| Return on average equity | | | -45.70 | % | | | -10.37 | % | | | 7.77 | % |
The decrease in return on average equity in 2009 and 2008 is the result of lower earnings for each year due to a decrease in net interest income resulting from increased competition for deposits and lower yields on interest-earning assets and the increased allowances for loan losses to reflect higher nonperforming loans and lower collateral values particularly in the real estate market in which we operate. For 2009, earnings were further depressed by the establishment of a deferred tax asset valuation allowance totaling $2.8 million.
RELATED PARTY TRANSACTIONS
We have entered into transactions with our directors, executive officers, significant stockholders, and their affiliates (insiders). Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features. The following table summarizes the significant end of period insider transactions (dollars in millions):
| | | 2009 | | | 2008 | | | 2007 | |
| Loans | | $ | 7.9 | | | $ | 6.6 | | | $ | 6.2 | |
| Unfunded loan commitments | | $ | 0.2 | | | $ | 0.6 | | | $ | 1.9 | |
| Deposits and customer repurchase agreements | | $ | 1.7 | | | $ | 10.1 | | | $ | 24.2 | |
INTEREST RATE SENSITIVITY
Our operations are subject to risk resulting from interest rate fluctuations to the extent that there is a difference between the amount of interest-earning assets and the amount of interest-bearing liabilities that are prepaid/withdrawn, mature, or reprice in specified periods.
The principal objective of asset/liability management activities is to provide consistently higher levels of net interest income while maintaining acceptable levels of interest rate and liquidity risk and facilitating our funding needs. We utilize an interest rate sensitivity model as the primary quantitative tool in measuring the amount of interest rate risk that is present. The traditional maturity “gap” analysis, which reflects the volume difference between interest rate sensitive assets and liabilities during a given time period, is reviewed regularly by management. A positive gap occurs when the amount of interest-sensitive assets exceeds interest-sensitive liabilities. This position would contribute positively to net income in a rising interest rate environment. Conversely, if the balance sheet has more liabilities repricing than assets, the balance sheet is liability sensitive or negatively gapped. We continue to monitor sensitivity in order to avoid overexposure to changing interest rates.
Our operations do not subject us to foreign currency exchange or commodity price risk. Also, we do not use interest rate swaps, caps, or other hedging transactions. Our overall sensitivity to interest rate risk is low due to our non-complex balance sheet. We have implemented several strategies to manage interest rate risk that include increasing the volume of variable rate commercial loans, requiring interest rate calls on commercial loans, and maintaining a short repricing maturity for a significant portion of our investment portfolio.
The following table provides information about our financial instruments that are sensitive to changes in interest rates. For securities, loans, and deposits, the table presents principal cash flows and related weighted average interest rates by maturity dates or repricing frequency. We have no market risk sensitive instruments entered into for trading purposes.
Interest Rate Sensitivity at December 31, 2009 (dollars in thousands):
| | | Under | | | 3 to 12 | | | Over | | | | | | | |
| | | 3 Months | | | Months | | | 1 - 5 Years | | | 5 Years | | | Total | |
| | | | | | | | | | | | | | | | |
| Federal funds sold | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| Interest-bearing deposits | | | 27,535 | | | | - | | | | - | | | | - | | | | 27,535 | |
Loans(1) | | | 57,519 | | | | 23,128 | | | | 97,373 | | | | 15,995 | | | | 194,015 | |
Securities(2) | | | 4,119 | | | | 32 | | | | 2,541 | | | | 50,839 | | | | 57,531 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total rate-sensitive assets | | $ | 89,173 | | | $ | 23,160 | | | $ | 99,914 | | | $ | 66,834 | | | $ | 279,081 | |
| | | | | | | | | | | | | | | | | | | | | |
Money market and NOW accounts(2) | | $ | 90,573 | | | $ | - | | | $ | - | | | $ | 11,455 | | | $ | 102,028 | |
Savings accounts (2) | | | - | | | | - | | | | - | | | | 2,702 | | | | 2,702 | |
Certificates of deposit (2) | | | 35,917 | | | | 69,455 | | | | 24,473 | | | | - | | | | 129,845 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total rate-sensitive liabilities | | $ | 126,490 | | | $ | 69,455 | | | $ | 24,473 | | | $ | 14,157 | | | $ | 234,575 | |
| | | | | | | | | | | | | | | | | | | | | |
| Gap (repricing differences) | | $ | (37,317 | ) | | $ | (46,295 | ) | | $ | 75,441 | | | $ | 52,677 | | | $ | 44,506 | |
| | | | | | | | | | | | | | | | | | | | | |
| Cumulative Gap | | $ | (37,317 | ) | | $ | (83,612 | ) | | $ | (8,171 | ) | | $ | 44,506 | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Cumulative Gap/total assets | | | -12.55 | % | | | -28.12 | % | | | -2.75 | % | | | 14.971 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Total assets | | | | | | | | | | | | | | | | | | $ | 297,366 | |
| (1) | In preparing the table above, adjustable-rate loans were included in the period in which the interest rates are next scheduled to adjust rather than in the period in which the loans mature. Fixed-rate loans were scheduled according to their contractual maturities. Nonaccrual loans of $6,715 were excluded (dollars in thousands). |
| (2) | Excludes noninterest-bearing deposit accounts. Money market deposits were regarded as maturing immediately, and other core deposits were assumed to mature in the “Over 5 Years” category. All other time deposits were scheduled through the maturity or repricing dates. Investments were scheduled through their contractual, repricing, or expected principal payment dates. Certain mortgage-backed investments with varying maturities of three years or less were included in the “1-5 Years” category. |
RECENT ACCOUNTING PRONOUNCEMENTS IMPACTING FUTURE PERIODS
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. For a discussion of recent accounting pronouncements, see the accompanying Notes to Consolidated Financial Statements shown in Item 8.
IMPACT OF INFLATION
The 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 the assets and liabilities of Atlantic 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 with 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, management seeks to manage the relationships between interest-sensitive assets and liabilities in order to protect against wide interest rate fluctuations, including those resulting from inflation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Oceanside’s earnings are dependent, to a large degree, on its net interest income, which is the difference between interest income earned on all interest-earning assets, primarily loans and securities, and interest paid on all interest-bearing liabilities, primarily deposits. Market risk is the risk of loss from adverse changes in market prices and interest rates. Oceanside’s market risk arises primarily from inherent interest rate risk in its lending, investing, and deposit gathering activities. Oceanside seeks to reduce its exposure to market risk through actively monitoring and managing its interest rate risk. Management relies upon static “gap” analysis to determine the degree of mismatch in the maturity and repricing distribution of interest-earning assets and interest-bearing liabilities which quantifies, to a large extent, the degree of market risk inherent in Oceanside’s balance sheet. Gap analysis is further augmented by simulation analysis to evaluate the impact of varying levels of prevailing interest rates and the sensitivity of specific interest-earning assets and interest-bearing liabilities to changes in those prevailing rates. Simulation analysis consists of evaluating the impact on net interest income given changes from 100 - 400 basis points below the current prevailing rates to 100 - 400 basis points above the current prevailing rates. Management makes certain assumptions as to the effect varying levels of interest rates have on certain interest-earning assets and interest-bearing liabilities, which consider both historical experience and consensus estimates of outside sources.
With respect to the primary interest-earning assets, loans and securities, certain features of individual types of loans and specific securities introduce uncertainty as to their expected performance at varying levels of interest rates. In some cases, prepayment options exist whereby the borrower may elect to repay the obligation at any time prior to maturity. These prepayment options make anticipating the performance of those instruments difficult given changes in prevailing interest rates. Management believes that assumptions used in its simulation analysis about the performance of financial instruments with such prepayment options are appropriate. However, the actual performance of these financial instruments may differ from management’s estimates due to several factors, including the diversity and financial sophistication of the customer base, the general level of prevailing interest rates and the relationship to their historical levels, and general economic conditions. The difference between those assumptions and actual results, if significant, could cause the actual results to differ from those indicated by the simulation analysis.
Deposits are the primary funding source for interest-earning assets and the associated market risk is considered by management in its simulation analysis. Generally, it is anticipated that deposits will be sufficient to support funding requirements. However, the rates paid for deposits at varying levels of prevailing interest rates have a significant impact on net interest income.
The following table illustrates the results of the latest simulation analysis used by Oceanside to determine the extent to which market risk would affect net interest margin for the next twelve and twenty-four months if prevailing interest rates increased or decreased the specified amounts from current prevailing rates. As noted above, this model uses estimates and assumptions in both balance sheet growth and asset and liability account rate reactions to changes in prevailing interest rates. Because of the inherent risk of using these estimates and assumptions in the simulation model used to derive this market risk information, the actual results of the future impact of market risk on Oceanside’s net interest margin may differ from that found in the table.
| Change in Prevailing Interest Rates | Change in Net Interest Margin (Basis Points) |
| | | Next 12 months | | Next 24 months |
| | | | | |
| | + 400 basis points | -60 | | -63 |
| | + 300 basis points | -44 | | -47 |
| | + 200 basis points | -30 | | -32 |
| | + 100 basis points | -12 | | -11 |
| | Prevailing rates | - | | - |
| | - 100 basis points | +10 | | +7 |
| | - 200 basis points | +12 | | +0 |
| | - 300 basis points | +12 | | -12 |
| | - 400 basis points | +7 | | -27 |
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 our 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.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Atlantic BancGroup, Inc.
and Subsidiaries
Jacksonville Beach, Florida
We have audited the consolidated balance sheets of Atlantic BancGroup, Inc. and Subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations and comprehensive loss, stockholders' equity and cash flows for each of the two years in the period ended December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Atlantic BancGroup, Inc. and Subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered significant losses from operations and capital has been significantly depleted due to the economic downturn. This raises substantial doubt about the Company’s ability to continue as a going concern. Management plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Albany, Georgia
April 15, 2010
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
| | | December 31, | |
| | | 2009 | | | 2008 | |
| | (Dollars in Thousands, Except Per Share Data) |
| ASSETS | | | | | | |
| Cash and due from banks | | $ | 3,548 | | | $ | 16,923 | |
| Interest-bearing deposits | | | 27,535 | | | | 154 | |
| Federal funds sold | | | - | | | | 100 | |
| Total cash and cash equivalents | | | 31,083 | | | | 17,177 | |
| | | | | | | | | |
| Investment securities, available-for-sale | | | 42,542 | | | | 14,870 | |
| Investment securities, held-to-maturity (market value of $14,748 in 2009 | | | | | | | | |
| and $14,898 in 2008) | | | 14,989 | | | | 15,536 | |
| Restricted stock, at cost | | | 1,151 | | | | 955 | |
| Loans, net | | | 194,187 | | | | 203,030 | |
| Bank premises and equipment | | | 3,366 | | | | 3,583 | |
| Other real estate owned | | | 1,727 | | | | 3,421 | |
| Accrued interest receivable | | | 1,089 | | | | 1,051 | |
| Deferred income taxes | | | 708 | | | | 2,003 | |
| Investment in unconsolidated subsidiary | | | 93 | | | | 93 | |
| Cash surrender value of bank-owned life insurance | | | 5,097 | | | | 4,886 | |
| Other assets | | | 1,334 | | | | 1,368 | |
| | | | | | | | | |
| Total assets | | $ | 297,366 | | | $ | 267,973 | |
| | | | | | | | | |
| LIABILITIES | | | | | | | | |
| Deposits: | | | | | | | | |
| Noninterest-bearing | | $ | 35,409 | | | $ | 43,017 | |
| Interest-bearing | | | 234,575 | | | | 196,827 | |
| Total deposits | | | 269,984 | | | | 239,844 | |
| | | | | | | | | |
| Other borrowings: | | | | | | | | |
| Long-term debt | | | 15,393 | | | | 9,393 | |
| Total other borrowings | | | 15,393 | | | | 9,393 | |
| Accrued interest payable | | | 299 | | | | 321 | |
| Other liabilities | | | 2,010 | | | | 1,483 | |
| Total liabilities | | | 287,686 | | | | 251,041 | |
| | | | | | | | | |
| Commitments and contingencies | | | - | | | | - | |
| | | | | | | | | |
| STOCKHOLDERS’ EQUITY | | | | | | | | |
| Preferred stock, authorized 2,000,000 shares, none issued and outstanding | | | - | | | | - | |
| Common stock, $0.01 par value, authorized 10,000,000 shares, issued | | | | | | | | |
| and outstanding 1,247,516 shares in 2009 and 2008 | | | 12 | | | | 12 | |
| Additional paid-in capital | | | 11,788 | | | | 11,788 | |
| Retained earnings (deficit) | | | (2,107 | ) | | | 5,133 | |
| Accumulated other comprehensive loss: | | | | | | | | |
| Net unrealized holding losses on securities | | | (13 | ) | | | (1 | ) |
| Total stockholders’ equity | | | 9,680 | | | | 16,932 | |
| | | | | | | | | |
| Total liabilities and stockholders’ equity | | $ | 297,366 | | | $ | 267,973 | |
| | | | | | | | | |
| Book value per common share | | $ | 7.76 | | | $ | 13.57 | |
| | | | | | | | | |
| Common shares outstanding | | | 1,247,516 | | | | 1,247,516 | |
| | | | | | | | | |
See accompanying notes to consolidated financial statements.
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
| | | Year ended December 31, | |
| | | 2009 | | | 2008 | |
| | (Dollars in Thousands, Except Per Share Data) |
| INTEREST INCOME | | | | | | |
| Interest and fees on loans | | $ | 12,354 | | | $ | 13,637 | |
| Taxable interest income on investment securities and | | | | | | | | |
| interest bearing deposits in banks | | | 875 | | | | 989 | |
| Tax-exempt interest income on investment securities | | | 665 | | | | 674 | |
| Interest on federal funds sold | | | 1 | | | | 35 | |
| Total interest income | | | 13,895 | | | | 15,335 | |
| | | | | | | | | |
| INTEREST EXPENSE | | | | | | | | |
| Interest on deposits | | | 6,268 | | | | 7,770 | |
| Short-term borrowings | | | - | | | | 286 | |
| Long-term borrowings | | | 532 | | | | 334 | |
| Total interest expense | | | 6,800 | | | | 8,390 | |
| | | | | | | | | |
| NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES | | | 7,095 | | | | 6,945 | |
| | | | | | | | | |
| PROVISION FOR LOAN LOSSES | | | 6,268 | | | | 4,424 | |
| | | | | | | | | |
| NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | | | 827 | | | | 2,521 | |
| | | | | | | | | |
| NONINTEREST INCOME | | | | | | | | |
| Fees and service charges on deposit accounts | | | 611 | | | | 688 | |
| Other fee income for banking services | | | 146 | | | | 162 | |
| Mortgage banking fees | | | - | | | | 17 | |
| Income from bank-owned life insurance | | | 229 | | | | 221 | |
| Dividends on restricted stock and trust-preferred securities | | | 7 | | | | 37 | |
| Gain (loss) on sale of foreclosed assets | | | (142 | ) | | | 4 | |
| Realized gain on securities | | | 56 | | | | 346 | |
| Loss on restricted stock | | | (179 | ) | | | - | |
| Other income | | | 23 | | | | 34 | |
| Total noninterest income | | | 751 | | | | 1,509 | |
| | | | | | | | | |
| NONINTEREST EXPENSES | | | | | | | | |
| Salaries and employee benefits | | | 2,846 | | | | 3,128 | |
| Expenses of bank premises and fixed assets | | | 1,029 | | | | 1,092 | |
| Other operating expenses | | | 4,616 | | | | 3,429 | |
| Total noninterest expenses | | | 8,491 | | | | 7,649 | |
| | | | | | | | | |
| LOSS BEFORE PROVISION (BENEFIT) FOR INCOME TAXES | | | (6,913 | ) | | | (3,619 | ) |
| | | | | | | | | |
| PROVISION (BENEFIT) FOR INCOME TAXES | | | 327 | | | | (1,692 | ) |
| | | | | | | | | |
| NET LOSS | | | (7,240 | ) | | | (1,927 | ) |
| | | | | | | | | |
| OTHER COMPREHENSIVE INCOME (LOSS) | | | | | | | | |
| Unrealized holding gains (losses) on securities arising during period, net of | | | | | | | | |
income tax benefit (expense) of $7 in 2009 and $(51) in 2008 (see Note 3) | | | (12 | ) | | | 83 | |
| | | | | | | | | |
| COMPREHENSIVE LOSS | | $ | (7,252 | ) | | $ | (1,844 | ) |
| | | | | | | | | |
| | | | | | | | | |
| AVERAGE COMMON SHARES OUTSTANDING | | | | | | | | |
| Basic and fully diluted | | | 1,247,516 | | | | 1,247,516 | |
| | | | | | | | | |
| LOSS PER SHARE | | | | | | | | |
| Basic and fully diluted | | $ | (5.80 | ) | | $ | (1.54 | ) |
See accompanying notes to consolidated financial statements.
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| | | | | | | | | | | | | | | Accumulated | | | | |
| | | | | | | | | Additional | | | Retained | | | Other | | | Total | |
| | | Common Stock | | | Paid-in | | | | | | Comprehensive | | | Stockholders’ | |
| | | Shares | | | Amount | | | Capital | | | (Deficit) | | | Loss | | | Equity | |
| | | (Dollars in Thousands) | |
| | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2007 | | | 1,247,516 | | | $ | 12 | | | $ | 11,788 | | | $ | 7,140 | | | $ | (84 | ) | | $ | 18,856 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative effect adjustment recorded | | | | | | | | | | | | | | | | | | | | | | | | |
| as of January 1, 2008, for | | | | | | | | | | | | | | | | | | | | | | | | |
| implementation of EITF 06-4 | | | | | | | | | | | | | | | | | | | | | | | | |
(See Notes 1 and 9) | | | - | | | | - | | | | - | | | | (80 | ) | | | - | | | | (80 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | - | | | | - | | | | - | | | | (1,927 | ) | | | | | | | | |
| Change in net unrealized | | | | | | | | | | | | | | | | | | | | | | | | |
| holding gains on securities | | | - | | | | - | | | | - | | | | - | | | | 83 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1,844 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2008 | | | 1,247,516 | | | | 12 | | | | 11,788 | | | | 5,133 | | | | (1 | ) | | | 16,932 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | - | | | | - | | | | - | | | | (7,240 | ) | | | | | | | | |
| Change in net unrealized | | | | | | | | | | | | | | | | | | | | | | | | |
| holding losses on securities | | | - | | | | - | | | | - | | | | - | | | | (12 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | (7,252 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2009 | | | 1,247,516 | | | $ | 12 | | | $ | 11,788 | | | $ | (2,107 | ) | | $ | (13 | ) | | $ | 9,680 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | Year ended December 31, | |
| | | 2009 | | | 2008 | |
| | | (Dollars in Thousands) | |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | |
| Net loss | | $ | (7,240 | ) | | $ | (1,927 | ) |
| Adjustments to reconcile net loss to net cash | | | | | | | | |
| provided by operating activities: | | | | | | | | |
| Provision for loan losses | | | 6,268 | | | | 4,424 | |
| Depreciation and amortization | | | 252 | | | | 313 | |
| Net premium amortization and discount accretion | | | 385 | | | | (24 | ) |
| Gain on sale of investment securities | | | (56 | ) | | | (346 | ) |
| (Gain) loss on sale of foreclosed assets | | | 142 | | | | (4 | ) |
| Deferred income taxes | | | 1,295 | | | | (1,007 | ) |
| Policy income from bank-owned life insurance | | | (211 | ) | | | (206 | ) |
| Pension expense from director and management benefit plans | | | 275 | | | | 295 | |
| Write-down of other real estate owned | | | 586 | | | | 315 | |
| Loss on restricted stock | | | 179 | | | | - | |
| Decrease in accrued interest receivable and other assets | | | 225 | | | | 526 | |
| Increase (decrease) in accrued interest payable and other liabilities | | | 230 | | | | (99 | ) |
| Net cash provided by operating activities | | | 2,330 | | | | 2,260 | |
| | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | |
| Securities available-for-sale: | | | | | | | | |
| Purchases | | | (43,567 | ) | | | (9,346 | ) |
| Proceeds from sales | | | 8,383 | | | | 12,751 | |
| Calls and maturities | | | 389 | | | | 610 | |
| Principal repayments on mortgage-backed investment securities | | | 6,778 | | | | 7,163 | |
| Securities held-to-maturity: | | | | | | | | |
| Calls | | | 544 | | | | 220 | |
| Purchases of restricted stock | | | (375 | ) | | | (209 | ) |
| Increase in loans | | | 1,840 | | | | (11,282 | ) |
| Proceeds from sale of other real estate owned | | | 1,479 | | | | 2,302 | |
| Purchases of bank premises and equipment | | | (35 | ) | | | (113 | ) |
| Net cash provided by (used in) investing activities | | | (24,564 | ) | | | 2,096 | |
| | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
| Increase (decrease) in deposits: | | | | | | | | |
| Noninterest-bearing | | | (7,608 | ) | | | 15,739 | |
| Interest-bearing | | | 37,748 | | | | 6,614 | |
| Proceeds from other borrowings, net of repayments | | | 6,000 | | | | (14,188 | ) |
| Net cash provided by financing activities | | | 36,140 | | | | 8,165 | |
| | | | | | | | | |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | | 13,906 | | | | 12,521 | |
| | | | | | | | | |
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | | | 17,177 | | | | 4,656 | |
| | | | | | | | | |
| CASH AND CASH EQUIVALENTS, END OF PERIOD | | $ | 31,083 | | | $ | 17,177 | |
| | | | | | | | | |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | | | | | | | | |
| Cash received during the year for interest and dividends | | $ | 13,864 | | | $ | 15,859 | |
| Cash paid during the year for interest | | $ | 6,822 | | | $ | 8,453 | |
| Cash paid (received) during the year for income taxes | | $ | (693 | ) | | $ | 46 | |
| | | | | | | | | |
| NONCASH TRANSACTIONS | | | | | | | | |
| Loans transferred to foreclosed real estate during the year | | $ | 513 | | | $ | 5,719 | |
| Increase in cash surrender value of bank-owned life insurance | | $ | 229 | | | $ | 220 | |
| Increase in deferred compensation arrangements | | $ | 275 | | | $ | 295 | |
| Net change in unrealized holding gains (losses) on securities | | | | | | | | |
| available-for-sale, net of income taxes | | $ | (12 | ) | | $ | 83 | |
See accompanying notes to consolidated financial statements.
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
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 activities are the operations of Oceanside, and it operates in only one reportable industry segment: banking. Collectively, the entities are referred to as “Atlantic.” In 2008, Oceanside formed and began operating a subsidiary, S. Pt. Properties, Inc., for the sole purpose of managing a single real estate property acquired through foreclosure. In 2009, Oceanside formed and began operating two subsidiaries, Parman Place, Inc. and East Arlington, Inc., for the sole purpose of each managing a single real estate property acquired through foreclosure.
Regulatory Action - Effective January 7, 2010, Oceanside 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”). 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.
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. A summary of the Consent Order follows:
| · | Oceanside’s Board of Directors is required to increase its participation, approve a management plan for the purpose of providing qualified management for Oceanside, and provide more detailed management reports. |
| · | 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. |
| · | 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. |
| · | 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. |
| · | 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 adequate models for managing liquidity; and, calculate monthly the liquidity and dependency ratios |
| · | 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. |
| · | 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. |
| · | 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. |
| · | 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. |
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
NOTE 1 - - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (Continued)
| · | 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 is on schedule to meet the first and second targeted goals. Oceanside anticipates needing to increase its Tier 1 capital or successfully work out an appropriate amount of “Substandard” assets to meet the third and fourth targeted ratios. |
| · | 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. |
| · | 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. |
| · | 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 adequate 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. |
| · | Within 60 days from the effective date of the Consent Order, Oceanside shall perform a risk segmentation analysis with respect to the 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. |
| · | 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. |
| · | 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 is in the process of evaluating and developing responses, 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, the Holding Company is exploring strategic alternatives intended to result in attaining such capital ratios during 2010.
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 Holding Company and the Reserve Bank agree as follows:
| · | The Holding Company 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"). |
| · | The Holding Company 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 BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (Continued)
| · | The Holding Company 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. |
| · | The Holding Company 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 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. |
| · | The Holding Company 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, the Holding Company 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.). |
| · | The Holding Company 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. |
Competition - - Oceanside, through four banking offices, provides a variety of banking services to individuals and businesses located primarily in East Duval and Northeast St. Johns counties of Florida. Atlantic funds its loans primarily by offering time, savings and money market, and demand deposit accounts to both commercial enterprises and individuals. Atlantic competes with other banking and financial institutions in its primary markets including Internet-based institutions. Commercial banks, savings banks, savings and loan associations, mortgage bankers and brokers, credit unions, and money market funds actively compete for deposits and loans. Such institutions, as well as consumer finance, mutual funds, insurance companies, and brokerage and investment banking firms, may be considered competitors of Atlantic with respect to one or more of the services it renders.
Basis of Presentation - The accompanying consolidated financial statements include the accounts of the Holding Company and its wholly-owned subsidiary, Oceanside. All significant intercompany accounts and transactions have been eliminated in consolidation. The accounting and reporting policies of Atlantic conform with U.S. generally accepted accounting principles and to general practices within the banking industry.
Regulatory Environment - Atlantic is subject to regulations of certain federal and state agencies and, accordingly, it is periodically examined by those regulatory authorities. As a consequence of the extensive regulation of commercial banking activities, Atlantic's business is particularly susceptible to being affected by federal legislation and regulations.
Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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, the valuation of foreclosed assets, the realization of deferred tax assets, other-than-temporary impairments of securities, and the fair value of financial instruments.
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (Continued)
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.
Atlantic’s loans are generally secured by specific items of collateral including real property, consumer assets, and business assets. Although Atlantic has a diversified loan portfolio, a substantial portion of its 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 the carrying value of foreclosed assets. Such agencies may require Atlantic 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. 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 an estimated tax refund of $1.035 million.
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 December 31, 2009 and 2008.
For the year ended 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 reported and believes that changes have been made to allow Atlantic to return to a taxable earnings position, including reductions in payroll and other operating costs. Within the next 2-5 years, internal projections indicate that 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 $1.3 million. |
| · | Management and the Board of Directors have discussed a tax strategy that would generate taxable income of approximately $1.2 from the liquidation of bank-owned life insurance policies. |
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (Continued)
| · | 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 $0.7 million at December 31, 2009 (net of a valuation allowance of $2.8 million) through future operating income and implementation of certain tax strategies.
For the year ended December 31, 2008:
Management considered the cumulative losses in 2008 and the anticipated net operating loss for 2009 when determining whether or not to provide a valuation allowance on the deferred tax asset. The economic conditions and Atlantic’s level of non-performing assets were taken into consideration as well, which at December 31, 2009, had stabilized.
At December 31, 2008, management believed that the negative evidence was outweighed by certain positive evidence. Atlantic had a prior history of earnings outside of the recent losses and believed that changes had been made to allow Atlantic to return to an earnings position, including reductions in payroll and other operating costs. At that time, management believed it was more likely than not that Atlantic would realize the deferred tax asset through future operating income. Accordingly, no deferred tax valuation allowance was recorded at December 31, 2008.
Accounting Hierarchy - In June 2009, the Financial Accounting Standards Board (“FASB”) issued guidance that restructured generally accepted accounting principles (“GAAP”) and simplified access to all authoritative literature by providing a single source of authoritative nongovernmental GAAP. The guidance is presented in a topically organized structure referred to as the FASB Accounting Standards Codification (“ASC”). The new structure is effective for interim and annual periods ending after September 15, 2009. All existing standards have been superseded and all other accounting literature not included is considered nonauthoritative. Rules and interpretive releases of the SEC under federal securities laws are also sources of authoritative GAAP for SEC registrants. The adoption of this standard did not have a material impact on Atlantic’s results of operations or financial position.
Cash and Cash Equivalents - For purposes of the Consolidated Statements of Cash Flows, cash and cash equivalents include cash and due from banks, interest-bearing deposits, and federal funds sold, all of which mature within ninety days. At December 31, 2009 and 2008, interest-bearing deposits includes $438,000 and $154,000, respectively, of deposits in the Federal Home Loan Bank.
Oceanside is required by law or regulation to maintain cash reserves on hand or with the Federal Reserve Bank of Atlanta. The minimum reserve balances were approximately $1,834,000 and $1,664,000 at December 31, 2009 and 2008, respectively.
Investment Securities - Debt securities are classified as held-to-maturity when Atlantic has the positive intent and ability to hold the securities to maturity. Securities held-to-maturity are carried at amortized cost. The amortization of premiums and accretion of discounts are recognized in interest income using methods approximating the interest method over the period to maturity.
Debt securities not classified as held-to-maturity are classified as available-for-sale. Securities available-for-sale are carried at fair value with unrealized gains and losses reported in other comprehensive income (loss). Realized gains (losses) on securities available-for-sale are included in noninterest income and, when applicable, are reported as a reclassification adjustment, net of tax, in other comprehensive income (loss). Gains and losses on sales of securities are determined by the specific-identification method.
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (Continued)
Equity securities held principally for resale in the near term are classified as trading securities and recorded at their fair values. Unrealized gains and losses on trading securities are included in noninterest income. During 2009 and 2008, Atlantic did not engage in trading securities.
The FASB recently issued accounting guidance related to the recognition and presentation of other-than-temporary impairment (FASB ASC 320-10). See the Recent Accounting Pronouncements section for additional information.
Prior to the adoption of the recent accounting guidance on April 1, 2009, management considered, in determining whether other-than-temporary impairment exists, (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
Declines in the fair value of individual securities below their cost that are other than temporary result in write-downs of the individual securities to their fair value. The related write-downs are included in earnings as realized losses. As of December 31, 2009, no securities were determined to have other than a temporary decline in fair value below cost.
Atlantic does not purchase, sell, or utilize off-balance sheet derivative financial instruments or derivative commodity instruments for hedging purposes.
Securities Purchased Under Agreements to Resell And Securities Sold Under Agreements to Repurchase - Securities purchased under agreements to resell and securities sold under agreements to repurchase are generally accounted for as collateralized financing transactions and are recorded at the amounts at which the securities were acquired or sold plus accrued interest. Securities, generally U.S. government and Federal agency securities, pledged as collateral under these financing arrangements cannot be sold or repledged by the secured party. The fair value of collateral either received from or provided to a third party is continually monitored, and additional collateral is obtained or requested to be returned as appropriate.
Restricted Stock - At December 31, 2009 and 2008, Oceanside owned Federal Home Loan Bank stock, carried at cost, totaling $1,126,000 and $751,000, respectively. The stock is considered restricted, and the amount is required to be maintained based on a percentage of Oceanside’s total assets. Oceanside also maintained stock, carried at cost, as a condition of its correspondent banking relationship with one bank (two banks at December 31, 2008) totaling $25,000 and $204,000 at December 31, 2009 and 2008, respectively. During 2009, Oceanside recognized a $179,000 loss on restricted stock owned at December 31, 2008, issued by one of the correspondent banks that was taken over by the FDIC during 2009.
Loans Held-for-Sale - Residential loans held-for-sale are valued at the lower of cost or market as determined by outstanding commitments from investors or current investor yield requirements. Gains and losses resulting from sales of residential mortgage loans are recognized when Atlantic funds the loan and has a commitment from the purchaser. Atlantic had no significant loans held-for-sale as of December 31, 2009 or 2008. Loans originated for sale in 2008 totaled $11.6 million. The income from mortgage banking operations totaled $17,000 for 2008. There were no loans originated or income from mortgage banking operations in 2009.
Oceanside originates loans with a guaranty from the Small Business Administration (“SBA”). Oceanside does not classify SBA loans (or the SBA-guaranteed portion) as held-for-sale, as the intent is to generally hold SBA loans to maturity in Oceanside’s held-for-investment portfolio. There were no sales of SBA loans in 2009 or 2008. Typically, if an SBA loan is sold, no loan servicing is retained by Oceanside.
Loans Held-for-Investment - Loans originated with the intent and ability to hold for the foreseeable future or until maturity or payoff are categorized as loans held-for-investment. These loans are reported at their outstanding principal adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or capitalized costs.
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (Continued)
Loan origination fees are capitalized and certain direct origination costs are deferred. Both are recognized as an adjustment of the yield of the related loan over the estimated life of the loan.
The accrual of interest on loans is discontinued at the time the loan is ninety days delinquent unless the loan is well collateralized and in process of collection. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans placed on nonaccrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Allowance for Loan Losses and Impaired Loans - The allowance for loan losses is established as probable losses are estimated through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
A loan is considered impaired when, based on current information and events, it is probable that Atlantic will be unable to collect the scheduled payments of principal or interest when due. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
Interest Rate Risk - Atlantic’s asset base is exposed to risk including the risk resulting from changes in interest rates and changes in the timing of cash flows. Atlantic monitors the effect of such risks by considering the mismatch of the maturities of its assets and liabilities in the current interest rate environment and the sensitivity of assets and liabilities to changes in interest rates. Atlantic’s management has considered the effect of significant increases and decreases in interest rates and believes such changes, if they occurred, would be manageable and would not affect the ability of Atlantic to hold its assets as planned. However, Atlantic is exposed to significant market risk in the event of significant and prolonged interest rate changes.
Facilities - - Facilities are stated at cost, less accumulated depreciation and amortization. Charges to income for depreciation and amortization are computed on the straight-line method over the estimated useful lives of assets. When properties are sold or otherwise disposed of, the gain or loss resulting from the disposition is credited or charged to income. Expenditures for maintenance and repairs are charged against income, and renewals and betterments are capitalized.
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (Continued)
Long-Lived Assets - Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable. When required, impairment losses on assets to be held and used are recognized based on the fair value of the asset. Certain long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell.
Foreclosed Assets (Including Other Real Estate Owned) - Assets acquired through, or in lieu of, loan foreclosure are initially recorded at fair value at the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the foreclosed asset is carried at the lower of carrying amount or fair value less cost to sell. Subsequent changes in value are reported as adjustments to the carrying amount, not to exceed the initial carrying value of the foreclosed assets at the time of the transfer. Revenue and expenses from operations and changes in the valuation allowance are included in other operating expenses. At December 31, 2009 and 2008, foreclosed assets including repossessed vehicles and other assets totaled $-0- and $75,000, respectively, and other real estate owned of $1,727,000 and $3,421,000, respectively.
Off-Balance Sheet Instruments - In the ordinary course of business, Atlantic has entered into off-balance sheet financial instruments consisting of commitments to extend credit, which may include standby letters of credit. Such financial instruments are recorded in the consolidated financial statements when they become payable.
Transfers of Financial Assets - Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (i) the assets have been isolated from Atlantic, (ii) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (iii) Atlantic does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Benefit Plans - Costs associated with the savings incentive plan (see Note 9) are charged to salaries and employee benefits expense when accrued. The accounting for income and costs associated with the director and management benefit plans is more fully described at Note 9.
Income Taxes - Deferred income tax assets and liabilities are recorded to reflect the tax consequences on future years of temporary differences between revenues and expenses reported for financial statement purposes and those reported for income tax purposes. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. Valuation allowances are provided against assets that are not likely to be realized.
Comprehensive Income - ASC 220, Comprehensive Income, establishes standards for reporting and presentation of comprehensive income and its components in a full set of general-purpose financial statements. ASC 220 was issued to address concerns over the practice of reporting elements of comprehensive income directly in equity. In accordance with the provisions of ASC 220, Atlantic has included in the accompanying consolidated financial statements comprehensive income resulting from such activities. Comprehensive income (loss) consists of the net income (loss) and net unrealized gains (losses) on investment securities available-for-sale.
These amounts are reported net of the income tax benefit (expense) less any related allowance for realization. Also, accumulated other comprehensive income (loss) is included as a separate disclosure within the Consolidated Statements of Stockholders’ Equity in the accompanying consolidated financial statements.
Computation of Per Share Earnings - Basic earnings (losses) per share (“EPS”) amounts are computed by dividing net earnings (losses) by the weighted average number of common shares outstanding for the years ended December 31, 2009 and 2008. Diluted EPS are computed by dividing net earnings (losses) by the weighted average number of shares and all dilutive potential shares outstanding during the period. Atlantic has no dilutive potential shares outstanding for 2009 or 2008. The following information was used in the computation of EPS on both a basic and diluted basis for the years ended December 31, 2009 and 2008 (dollars in thousands except per share data):
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (Continued)
| | | For the Years Ended December 31, | |
| | | 2009 | | | 2008 | |
| Basic EPS computation: | | | | | | |
| Numerator - Net income (loss) | | $ | (7,240 | ) | | $ | (1,927 | ) |
| Denominator - Weighted average shares outstanding (rounded) | | | 1,248 | | | | 1,248 | |
| Basic EPS | | $ | (5,80 | ) | | $ | (1.54 | ) |
| | | | | | | | | |
| Diluted EPS computation: | | | | | | | | |
| Numerator - Net income (loss) | | $ | (7,240 | ) | | $ | (1,927 | ) |
| Denominator - Weighted average shares outstanding (rounded) | | | 1,248 | | | | 1,248 | |
| Diluted EPS | | $ | (5.80 | ) | | $ | (1.54 | ) |
Advertising and Business Development - Atlantic expenses advertising and business development costs as incurred. Advertising and business development costs for 2009 and 2008 as included in other operating expenses were $95,000 and $145,000, respectively.
Guarantees - - ASC 460, Guarantees, requires certain guarantees to be recorded at fair value. In general, ASC 460 applies to contracts or indemnification agreements that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying obligation that is related to an asset, liability, or an equity security of the guaranteed party. Atlantic has not begun recording a liability and an offsetting asset for the fair value of any standby letters of credit because Interpretation 45 was not material to the financial condition or results of operations of Atlantic. Interpretation 45 also requires certain disclosures, even when the likelihood of making any payments under the guarantee is remote. These disclosures are included in Note 9.
Recent Accounting Pronouncements - In June 2009, the FASB issued new authoritative accounting guidance under ASC Topic 810, Consolidation , which amends prior guidance to change 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 activities of the entity that most significantly impact the entity’s economic performance. The new authoritative accounting guidance requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity’s financial statements. The new authoritative accounting guidance under ASC Topic 810 will be effective January 1, 2010 and is not expected to have a significant impact on Atlantic’s financial statements.
In April 2009, the FASB issued new guidance impacting ASC Topic 820, Fair Value Measurements and Disclosures. This ASC provides additional guidance in determining fair values when there is no active market or where the price inputs being used represent distressed sales. It reaffirms the need to use judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive. The adoption of this new guidance did not have a material effect on Atlantic’s results of operations or financial position.
In April 2009, the FASB issued new guidance impacting ASC 825-10-50, Financial Instruments, which relates to fair value disclosures for any financial instruments that are not currently reflected on the balance sheet of companies at fair value. This guidance amended existing GAAP to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This guidance is effective for interim and annual periods ending after June 15, 2009. Atlantic has presented the necessary disclosures in Note 14 herein.
In April 2009, the FASB issued new guidance impacting ASC 320-10, Investments - Debt and Equity Securities , which provides additional guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on securities. This guidance is effective for interim and annual periods ending after June 15, 2009. Atlantic has presented the necessary disclosures in Note 14 herein.
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (Continued)
In August 2009, the FASB issued ASU No. 2009-05, Fair Value Measurements and Disclosures (Topic 820) - Measuring Liabilities at Fair Value. This ASU provides amendments for fair value measurements of liabilities. It provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more techniques. ASU 2009-05 also clarifies that when estimating a fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. ASU 2009-05 is effective for the first reporting period (including interim periods) beginning after issuance or fourth quarter 2009. Atlantic is currently evaluating the impact of this standard on Atlantic’s financial condition, results of operations, and disclosures.
The FASB issued new authoritative accounting guidance under ASC Topic 855, Subsequent Events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. ASC Topic 855 defines (i) the period after the balance sheet date during which a reporting entity’s management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and (iii) the disclosures an entity should make about events or transactions that occurred after the balance sheet date. The new authoritative accounting guidance under ASC Topic 855 is effective for periods ending after June 15, 2009. The required disclosures are provided in Note 1 below.
Emerging Issues Task Force (EITF) Issue No. 06-4, “Accounting for Deferred Compensation and Post-retirement Benefit Aspects of Endorsement Split Dollar Life Insurance Arrangements.” EITF 06-4 requires the recognition of a liability and related compensation expense for endorsement split-dollar life insurance policies that provide a benefit to an employee that extends to post-retirement periods. Under EITF 06-4, life insurance policies purchased for the purpose of providing such benefits do not effectively settle an entity’s obligation to the employee. Accordingly, the entity must recognize a liability and related compensation expense during the employee’s active service period based on the future cost of insurance to be incurred during the employee’s retirement. If the entity has agreed to provide the employee with a death benefit, then the liability for the future death benefit should be recognized by following the guidance in SFAS 106, “Employer’s Accounting for Post-retirement Benefits Other Than Pensions.” Atlantic adopted EITF 06-4 on January 1, 2008, as a change in accounting principle through a cumulative-effect adjustment to retained earnings totaling $80,979.
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.
Subsequent Events - During 2009, Atlantic adopted ASC 855, Subsequent Events, that addresses events which occur after the balance sheet date but before the issuance of financial statements. Under ASC 855, an entity must record the effects of subsequent events that provide evidence about conditions that existed at the balance sheet date and must disclose but not record the effects of subsequent events which provide evidence about conditions that did not exist at the balance sheet date.
Reclassification of Comparative Amounts - Certain comparative amounts for prior years have been reclassified to conform to current-year presentations. Such reclassifications did not affect net income or retained earnings.
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
NOTE 2 - REGULATORY OVERSIGHT, CAPITAL ADEQUACY, OPERATING LOSSES, AND MANAGEMENT’S PLANS
As a result of the extraordinary effects of what may ultimately be the worst economic downturn since the Great Depression, the capital of Atlantic and Oceanside have been significantly depleted. The combined losses in 2009 and 2008 of $9.2 million recorded by Atlantic were attributable to significant increases in the provision for credit losses, write-downs on nonperforming assets, the establishment of a valuation reserve against Atlantic’s deferred tax asset, and the reduced loan interest and fee income and higher costs associated with nonperforming loans and other real estate owned. 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. Atlantic’s Board of Directors has formed a strategic planning committee. The committee has hired an investment banking firm to seek all strategic alternatives to enhance the stability of Atlantic including a capital investment, sale, strategic merger, or some form of restructuring. We are exploring other options to restructure our balance sheet to generate income and capital. There can be no assurance that Atlantic will succeed in these efforts and be able to comply with the new regulatory requirements. In addition, a transaction, which would likely involve equity financing, would result in substantial dilution to our current stockholders and could adversely affect the price of our common stock. If Atlantic does not comply with mandated capital requirements, the regulators could take additional enforcement action against the Holding Company and Oceanside.
The accompanying 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.
Based upon the financial condition of Oceanside, and subsequent correspondence and discussions with the FDIC, we have entered into a Consent Order that has been described in detail at Note 1. Based on our budget approved in our most recent strategic planning session of the Board of Directors, we need approximately $1-2 million in capital to achieve and maintain the adequately capitalized status during 2010. To achieve the capital levels mandated by the Consent Order, we must increase our capital $13-$15 million, which may come from a combination of raising new capital and/or restructuring our balance sheet. Besides our efforts to raise additional capital, we have identified up to $4 million in other changes that may improve our capital ratios 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.
Atlantic’s short term capital plan is to improve our risk-based capital ratios to keep Oceanside adequately capitalized during 2010, based on Tier 1 leverage ratio requirements. This may be achieved by raising additional capital or successfully executing other strategies. While capital has been difficult to raise, community banks in our local market have successfully raised capital in 2009 and 2010.
Our losses in 2009 and 2008 were largely due to the rapid deterioration in the credit quality of a few of our loans secured by real estate. While we cannot predict the timing of any recovery in our local market and unemployment remains at high levels, some improvements have been noted as follows:
| · | Our level of past due loans at year-end 2009 have improved from year-end 2008, with an overall reduction of $2.2 million of which $1.8 million is attributable to the 30-89 days past due category - possibly a lending indicator of a reduction in future charge-offs. |
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
NOTE 2 - REGULATORY OVERSIGHT, CAPITAL ADEQUACY, OPERATING LOSSES, AND MANAGEMENT’S PLANS (Continued)
| · | A significant portion of our 2009 and 2008 charge-offs and expenses related to two projects and one single family residence. Approximately 68% of the total charge-offs of $6.4 million in 2009 and 2008 were attributable to one multifamily project and a single family residence. Specifically identified expenses related to the multifamily project and other real estate owned reduced earning by $1.2 million in 2009 and $0.8 million in 2008. |
| · | Despite recording net charge-offs of $6.3 million during 2009 and 2008, we increased our allowance for loan losses to 3.25% of total loans. The allowance for loan losses covers over 97% of our nonperforming loans at December 31, 2009. If the economy improves, the level of future additions to these reserves may subside, which will likely improve our capital ratios as the overall credit risks decline. |
| · | In 2009, we took a noncash charge to earnings of $2.8 million to establish a valuation allowance for our deferred tax assets. While Atlantic has a history of earnings prior to 2008, accounting practices limit our continued recognition of the deferred tax assets in 2009. We expect to be able to utilize some or all of these benefits once the current economic cycle improves and we return to our historical profit levels. |
| · | Beginning in the fourth quarter of 2009 and continuing into 2010, we have been reducing Oceanside’s total assets. Our unaudited and preliminary results at March 31, 2010, show Oceanside’s total bank-only assets at $286.1 million, a reduction of $11.3 million from December 31, 2009. This contributed to an increase in our Tier 1 leverage ratio from 4.06% to 4.32%. |
| · | Atlantic is exposed to the weakened real estate conditions in the Florida markets of Duval and St. Johns Counties. Atlantic believes the challenging market conditions are primarily attributable to a regional softening in demand for real estate assets as well as an oversupply of residential and commercial properties, particularly within Atlantic’s local markets. However, existing home sales by area realtors have increased substantially and this decrement in existing real estate inventories, if sustained, may drive improvement in the regional economy during the coming year. For comparison, 2009 single-family, existing homes and condominiums increased 21% and 38% over 2008 levels. While some trends have stabilized or have begun to show improvement, we remain susceptible to rising unemployment rates for the region that are expected to remain relatively high through 2010. |
Although no assurances can be given that we will successfully implement our plans, that economic conditions will improve, and/or losses will return to pre-2008 levels, we are confident that certain actions that we can control will improve our capital ratios in 2010.
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ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
NOTE 3 - INVESTMENT SECURITIES
Our investment securities 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 at December 31, 2009 and 2008, follow (dollars in thousands):
| | | December 31, 2009 | | | December 31, 2008 | |
| | | | | | Gross | | | Gross | | | | | | | | | Gross | | | Gross | | | | |
| | | Amortized | | | Unrealized | | | Unrealized | | | Fair | | | Amortized | | | Unrealized | | | Unrealized | | | Fair | |
| | | Cost | | | Gains | | | Losses | | | Value | | | Cost | | | Gains | | | Losses | | | Value | |
| Available-for-sale | | | | | | | | | | | | | | | | | | | | | | | | |
| REMICs | | $ | 134 | | | $ | 3 | | | $ | - | | | $ | 137 | | | $ | 2,700 | | | $ | 5 | | | $ | (6 | ) | | $ | 2,699 | |
| MBS | | | 42,428 | | | | 217 | | | | (240 | ) | | | 42,405 | | | | 12,171 | | | | 40 | | | | (40 | ) | | | 12,171 | |
| | | | 42,562 | | | | 220 | | | | (240 | ) | | | 42,542 | | | | 14,871 | | | | 45 | | | | (46 | ) | | | 14,870 | |
| Held-to-maturity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| State, county and | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| municipal bonds | | | 14,989 | | | | 154 | | | | (395 | ) | | | 14,748 | | | | 15,536 | | | | 133 | | | | (771 | ) | | | 14,898 | |
Total investment
securities | | $ | 57,551 | | | $ | 374 | | | $ | (635 | ) | | $ | 57,290 | | | $ | 30,407 | | | $ | 178 | | | $ | (817 | ) | | $ | 29,768 | |
Information pertaining to securities with gross unrealized losses at December 31, 2009 and 2008, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:
| | | Less Than Twelve Months | | | Over Twelve Months | | | Total | |
| | | Gross | | | | | | Gross | | | | | | Gross | | | | |
| | | Unrealized | | | Fair | | | Unrealized | | | Fair | | | Unrealized | | | Fair | |
| | | Losses | | | Value | | | Losses | | | Value | | | Losses | | | Value | |
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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2008: | | | | | | | | | | | | | | | | | | | | | | | | |
| Available-for-Sale | | | | | | | | | | | | | | | | | | | | | | | | |
| REMICs | | $ | (6 | ) | | $ | 927 | | | $ | - | | | $ | - | | | $ | (6 | ) | | $ | 927 | |
| MBS | | | (40 | ) | | | 10,881 | | | | - | | | | - | | | | (40 | ) | | | 10,881 | |
| | | $ | (46 | ) | | $ | 11,808 | | | $ | - | | | $ | | | | $ | (46 | ) | | $ | 11,808 | |
| Held-to-Maturity | | | | | | | | | | | | | | | | | | | | | | | | |
| State, county, and municipal bonds | | $ | (393 | ) | | $ | 6,590 | | | $ | (378 | ) | | $ | 3,868 | | | $ | (771 | ) | | $ | 10,458 | |
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.
The unrealized losses on investment securities were caused by interest rate changes. It is expected that the securities would not be settled at a price less than the par value of the investments. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because Atlantic has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired. The estimated fair value of securities is determined on the basis of market quotations.
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
NOTE 3 - INVESTMENT SECURITIES (Continued)
The following is a summary of the effects on the Consolidated Statements of Stockholders’ Equity at December 31, 2009 and 2008 (dollars in thousands):
| | | 2009 | | | 2008 | |
| | | | | | | |
| Gross unrealized losses on investment securities available-for-sale | | $ | (20 | ) | | $ | (1 | ) |
| Deferred tax benefit on unrealized losses | | | 7 | | | | - | |
| Balance, December 31 | | $ | (13 | ) | | $ | (1 | ) |
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 years ended December 31, 2009 and 2008 (dollars in thousands):
| | | 2009 | | | 2008 | |
| | | | | | | |
| Unrealized holding gains on investment securities arising during period | | $ | 37 | | | $ | 480 | |
| Less: reclassification adjustment for gains included in net loss | | | (56 | ) | | | (346 | ) |
| Other comprehensive income (loss), before tax | | | (19 | ) | | | 134 | |
| Income tax benefit (expense) related to items of other comprehensive income (loss) | | | 7 | | | | (51 | ) |
| Other comprehensive income (loss), net of tax | | $ | (12 | ) | | $ | 83 | |
Gross gains and losses on sales of investment securities in 2009 totaled $56,000 and $-0-, respectively. Gross gains and losses on sales of investment securities in 2008 totaled $346,000 and $-0-, respectively.
At December 31, 2009, securities with a carrying value of $1,497,000 and fair value of $1,443,000 were pledged to secure deposits of public funds from the state of Florida and treasury tax and loan deposits with the Federal Reserve. Securities were pledged as collateral for Federal Reserve Borrowings and to secure public funds from the State of Florida, Federal Reserve discount window, and treasury tax and loan deposits in 2009 and 2008. The amortized cost of these securities was $5,656,000 and $5,023,000, respectively, and the fair values of these pledged securities were $5,461,000 and $4,711,000 respectively, as of December 31, 2009 and 2008.
There were no securities of a single issuer (which were non-governmental or non-government sponsored) that exceeded 10% of stockholders’ equity at December 31, 2009 or 2008.
The cost and estimated fair value of debt and equity securities at December 31, 2009 and 2008, 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 | |
| December 31, 2009: | | | | | | | | | | | | |
| Due in one year or less | | $ | 3,045 | | | $ | 3,104 | | | $ | - | | | $ | - | |
| Due after one through five years | | | 4,973 | | | | 5,086 | | | | 271 | | | | 286 | |
| Due after five through ten years | | | 20,746 | | | | 20,595 | | | | 1,163 | | | | 1,218 | |
| Due after ten years | | | 13,798 | | | | 13,757 | | | | 13,555 | | | | 13,244 | |
| | | $ | 42,562 | | | $ | 42,542 | | | $ | 14,989 | | | $ | 14,748 | |
| | | | | | | | | | | | | | | | | |
| December 31, 2008: | | | | | | | | | | | | | | | | |
| Due in one year or less | | $ | 639 | | | $ | 639 | | | $ | - | | | $ | - | |
| Due after one through five years | | | 1,074 | | | | 1,075 | | | | - | | | | - | |
| Due after five through ten years | | | 3,067 | | | | 3,096 | | | | 1,010 | | | | 1,044 | |
| Due after ten years | | | 10,091 | | | | 10,060 | | | | 14,526 | | | | 13,854 | |
| | | $ | 14,871 | | | $ | 14,870 | | | $ | 15,536 | | | $ | 14,898 | |
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
NOTE 4 - LOANS AND FORECLOSED ASSETS
The loan portfolio at December 31, 2009 and 2008, is composed of the following (dollars in thousands):
| | | 2009 | | | 2008 | |
| Real estate loans | | | | | | |
| Construction, land development, and other land | | $ | 32,455 | | | $ | 39,135 | |
| 1-4 family residential | | | 56,900 | | | | 57,814 | |
| Multifamily residential | | | 2,902 | | | | 4,481 | |
| Commercial | | | 93,455 | | | | 88,762 | |
| Total real estate loans | | | 185,712 | | | | 190,192 | |
| Commercial loans | | | 11,703 | | | | 13,314 | |
| Consumer and other loans | | | 3,315 | | | | 3,548 | |
| Total loan portfolio | | | 200,730 | | | | 207,054 | |
| Less, deferred fees and other | | | (12 | ) | | | (25 | ) |
| Less, allowance for loan losses | | | (6,531 | ) | | | (3,999 | ) |
| Loans, net | | $ | 194,187 | | | $ | 203,030 | |
At December 31, 2009 and 2008, fixed-rate loans (excluding nonaccrual loans) with maturities (or repricing) over one year totaled approximately $78.5 million and $33.3 million, respectively.
The following is a summary of the transactions in the allowance for loan losses (dollars in thousands):
| | | 2009 | | | 2008 | |
| | | | | | | |
| Balance, beginning of period | | $ | 3,999 | | | $ | 2,169 | |
| Provisions charged to operating expenses | | | 6,268 | | | | 4,424 | |
| Loans charged-off | | | (3,761 | ) | | | (2,615 | ) |
| Recoveries | | | 25 | | | | 21 | |
| Balance, end of period | | $ | 6,531 | | | $ | 3,999 | |
The following is a summary of information pertaining to impaired, nonaccrual, past due, and restructured loans (dollars in thousands):
| | | December 31, | |
| | | 2009 | | | 2008 | |
| | | | | | | |
| Loans evaluated for impairment with a measured impairment | | $ | 16,061 | | | $ | 13,050 | |
| Loans evaluated for impairment without a measured impairment | | | 14,788 | | | | 15,433 | |
| Total impaired loans | | $ | 30,849 | | | $ | 28,483 | |
| Valuation allowance related to impaired loans | | $ | 4,380 | | | $ | 1,717 | |
| Nonaccrual loans included above in impaired loan totals | | $ | 6,715 | | | $ | 5,459 | |
| Total loans past due ninety days or more and still accruing | | | 8 | | | | 1,656 | |
| Total nonperforming loans (“NPL”) | | | 6,723 | | | | 7,115 | |
| Restructured loans | | | 17,372 | | | | 3,566 | |
| Total NPL and restructured loans | | $ | 24,095 | | | $ | 10,681 | |
| Restructured loans included in nonaccrual loans above that are | | | | | | | | |
| considered troubled debt restructurings | | $ | 1,842 | | | $ | 4,386 | |
| Average nonaccrual loans during the year | | $ | 7,031 | | | $ | 5,130 | |
At December 31, 2009 and 2008, interest income accrued and recorded on nonaccrual loans totaled $40,000 and $4,000, respectively, and interest earned but not recorded on nonaccrual loans at December 31, 2009 and 2008, was $533,000 and $176,000, respectively. No additional funds are committed to be advanced in connection with nonaccrual loans.
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
NOTE 4 - LOANS AND FORECLOSED ASSETS (Continued)
A summary of the activity in Other Real Estate Owned follows for the years ended December 31, 2009 and 2008 (dollars in thousands):
| | | December 31, | |
| | | 2009 | | | 2008 | |
| | | | | | | |
| Balance, beginning of period | | $ | 3,421 | | | $ | - | |
| Transfers to OREO | | | 513 | | | | 6,034 | |
| Disposals | | | (1,621 | ) | | | (2,298 | ) |
| Write-downs | | | (586 | ) | | | (315 | ) |
| Balance, end of period | | $ | 1,727 | | | $ | 3,421 | |
At December 31, 2009 and 2008, repossessed assets totaled $-0- and $75,000, respectively. During 2009 and 2008, $27,000 and $75,000, respectively, of assets were repossessed with disposals of $102,000 and $-0-, respectively.
NOTE 5 - FACILITIES
Facilities. A summary follows (dollars in thousands): | | | | | | | | | | |
| | | | | | Accumulated | | | | | Estimated |
| | | | | | Depreciation and | | | Net Book | | Useful |
| | | Cost | | | Amortization | | | Value | | Lives |
| December 31, 2009: | | | | | | | | | | |
| Land and land improvements | | $ | 750 | | | $ | - | | | $ | 750 | | |
| Bank building and improvements | | | 3,455 | | | | 992 | | | | 2,463 | | 5 - 40 years |
| Furniture, fixtures, and equipment | | | 2,271 | | | | 2,118 | | | | 153 | | 3 - 10 years |
| | | $ | 6,476 | | | $ | 3,110 | | | $ | 3,366 | | |
| | | | | | | | | | | | | | |
| December 31, 2008: | | | | | | | | | | | | | |
| Land and land improvements | | $ | 750 | | | $ | - | | | $ | 750 | | |
| Bank building and improvements | | | 3,443 | | | | 875 | | | | 2,568 | | 5 - 40 years |
| Furniture, fixtures, and equipment | | | 2,248 | | | | 1,983 | | | | 265 | | 3 - 10 years |
| | | $ | 6,441 | | | $ | 2,858 | | | $ | 3,583 | | |
Depreciation and amortization of facilities totaled $252,000 and $313,000 in 2009 and 2008, respectively.
Operating Leases. Atlantic leases property for a branch location and its operations center at 13799 Beach Boulevard, Jacksonville, Florida, under a noncancelable operating lease dated September 27, 2000, that expires in 2011, subject to two five-year renewal options. On August 22, 2002, Atlantic entered into a 20-year noncancelable operating lease agreement for a new branch at the corner of Kernan Boulevard South and Atlantic Boulevard, Jacksonville, Florida. Lease payments commenced in September 2003, and the branch opened December 15, 2003.
All other operating leases, consisting principally of computer, furniture, fixtures, and equipment, are not material.
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
NOTE 5 - FACILITIES (Continued)
Total branch rent expense for 2009 and 2008 was $387,000 and $392,000, respectively. The future annual rental payments for the branch leases are due as follows (dollars in thousands):
| Years Ending | | | |
December 31, | | Amount | |
| | | | |
| 2010 | | $ | 332 | |
| 2011 | | | 168 | |
| 2012 | | | 84 | |
| 2013 | | | 88 | |
| 2014 | | | 94 | |
| Thereafter | | | 862 | |
| | | $ | 1,628 | |
NOTE 6 - TIME DEPOSITS
Time deposits at December 31, 2009 and 2008, totaled $129,845,000 and $145,746,000, respectively. The scheduled maturities of time deposits were as follows (dollars in thousands):
| | | December 31, 2009 | | | December 31, 2008 | |
| | | Time, $100,000 | | | Other Time | | | Time, $100,000 | | | Other Time | |
| | | And Over | | | Deposits | | | And Over | | | Deposits | |
| | | | | | | | | | | | | |
| Three months or less | | $ | 12,167 | | | $ | 23,750 | | | $ | 21,648 | | | $ | 22,373 | |
| Over three through twelve months | | | 27,274 | | | | 42,181 | | | | 21,122 | | | | 42,696 | |
| Over twelve months through three years | | | 5,871 | | | | 16,908 | | | | 8,501 | | | | 28,428 | |
| Over three years | | | 1,353 | | | | 341 | | | | 500 | | | | 478 | |
| | | $ | 46,665 | | | $ | 83,180 | | | $ | 51,771 | | | $ | 93,975 | |
Time deposits of less than $100,000 with a remaining maturity of one year or less totaled $65,931,000 at December 31, 2009. Time deposits of $100,000 or more with a remaining maturity of one year or less totaled $39,441,000 at December 31, 2009.
Interest expense on certificates of deposit of $100,000 or more totaled $1,548,000 and $2,378,000 for 2009 and 2008, respectively. Interest expense on other time deposits totaled $3,167,000 and $4,371,000 for 2009 and 2008, respectively. Early withdrawal penalties on certificates of deposit totaled $4,000 and $8,000 for 2009 and 2008, respectively, and have been netted against interest expense.
At December 31, 2009, Oceanside had $19,098,000 of brokered deposits, which are reflected in other time deposits. Interest expense on brokered deposits totaled $818,000 for 2009. At December 31, 2008, Oceanside had $26,343,000 of brokered deposits, which are reflected in other time deposits. Interest expense on brokered deposits totaled $1,174,000 for 2008.
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
NOTE 7 - OTHER BORROWINGS
Short-Term Debt, Customer Repurchase Agreements. Atlantic has sold securities under agreements to repurchase, which effectively collateralize overnight borrowings. As of December 31, 2009, no borrowings were outstanding and no securities were sold under agreements to repurchase. The average balance of customer repurchase agreements for 2008 was $10,960,000, at a weighted average interest rate of 1.88%. Interest of $206,000 was recorded in 2008. The average balance of customer repurchase agreements and related interest expense was $-0- for 2009.
Other Short-term Borrowings. Atlantic purchases federal funds for liquidity needs during the year. At December 31, 2009 and 2008, there were no federal funds purchased. The average federal funds purchased during 2008, was $2,445,000, at a weighted average interest rate of 3.27%. Interest of $80,000 was recorded in 2008. The average balance of federal funds purchased and related interest expense was immaterial for 2009.
Long-Term Debt. A summary of long-term debt follows (dollars in thousands):
| | | December 31, | |
| | | 2009 | | | 2008 | |
| FHLB of Atlanta advances | | | | | | |
| Convertible debt | | $ | 2,300 | | | $ | 2,300 | |
| Fixed debt | | | 10,000 | | | | 4,000 | |
| | | | 12,300 | | | | 6,300 | |
| Junior subordinated debentures | | | 3,093 | | | | 3,093 | |
| | | $ | 15,393 | | | $ | 9,393 | |
FHLB of Atlanta Advances. At December 31, 2009 and 2008, Atlantic had obtained advances from FHLB of $12,300,000 and $6,300,000, respectively. At December 31, 2009 and 2008, the advances were collateralized by Atlantic’s FHLB capital stock in the amount of $1,126,000 and $751,000, respectively, and a blanket lien on eligible wholly-owned residential (1-4 units) loans, commercial first mortgage loans, and home equity loans with a carrying value of $43.3 million and $41.4 million, respectively. A summary follows (dollars in thousands):
| | | | | | | Balance of Advances | | | | | | | |
| | Maturity | | | | | at December 31, | | | Interest Expense | |
| | Date | | Interest Rate | | | 2009 | | | 2008 | | | 2009 | | | 2008 | |
| | | | | | | | | | | | | | | | | |
| Convertible fixed rate debt | 11/17/2010 | | | 4.45 | % | | $ | 2,300 | | | $ | 2,300 | | | $ | 104 | | | $ | 104 | |
| Fixed rate advances | 12/20/2010 | | | 1.91 | % | | | 2,000 | | | | 4,000 | | | | 64 | | | | 45 | |
| Fixed rate advances | 01/09/2012 | | | 2.30 | % | | | 8,000 | | | | - | | | | 181 | | | | - | |
| | | | | | | | $ | 12,300 | | | $ | 6,300 | | | $ | 349 | | | $ | 149 | |
The weighted average rate for FHLB advances was 2.74% in 2009 and 3.27% in 2008. At December 31, 2009, the FHLB had determined that of the $43.3 million of pledged collateral, $21.6 million was the lendable collateral value.
Junior Subordinated Debentures. On September 15, 2005, Atlantic participated in a pooled offering of trust preferred securities. Atlantic formed Atlantic BancGroup Statutory Trust I (the "Trust"), a wholly-owned statutory trust subsidiary for the purpose of issuing the trust preferred securities. The Trust used the proceeds from the issuance of $3,000,000 in trust preferred securities to acquire fixed/floating rate junior subordinated deferrable interest debentures of Atlantic in the amount of $3,093,000. The trust preferred securities essentially mirror the debt securities, carrying a cumulative preferred dividend at a fixed rate of 5.886% equal to the interest rate on the debt securities, both payable quarterly for five years. Beginning September 15, 2010, the quarterly rates vary based on the three month LIBOR plus 150 basis points. The debt securities and the trust preferred securities each have 30-year lives. The trust preferred securities and the debt securities are callable by Atlantic or the Trust, at their respective option after five years, and at varying premiums and sooner in specific events, subject to prior approval by the Federal Reserve Board, if then required. Atlantic has treated the trust preferred securities as Tier 1 capital up
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
NOTE 7 - - OTHER BORROWINGS (Continued)
to the maximum amount allowed, and the remainder, if any, as Tier 2 capital for federal regulatory purposes. There are no required principal payments on the junior subordinated debentures over the next five years. Interest expense on the junior subordinated debentures totaled $183,000 in 2009 and $185,000 in 2008.
Under ASC 810, Consolidations, the Trust is not consolidated with Atlantic. Accordingly, Atlantic does not report the securities issued by the Trust as liabilities, and instead reports as liabilities the junior subordinated debentures issued by Atlantic and held by the Trust. At December 31, 2009 and 2008, Atlantic’s investment in the statutory trust of $93,000 has been included in Other Assets in the Consolidated Balance Sheets as an investment in an unconsolidated subsidiary.
NOTE 8 - INCOME TAXES
The provision (benefit) for income taxes on income is summarized as follows (dollars in thousands):
| | | Year Ended December 31, | |
| | | 2009 | | | 2008 | |
| Current: | | | | | | |
| Federal | | $ | 1,536 | | | $ | (585 | ) |
| State | | | 263 | | | | (100 | ) |
| | | | 1,799 | | | | (685 | ) |
| Deferred: | | | | | | | | |
| Federal | | | (1,257 | ) | | | (860 | ) |
| State | | | (215 | ) | | | (147 | ) |
| | | | (1,472 | ) | | | (1,007 | ) |
| Total income tax provision (benefit) | | $ | 327 | | | $ | (1,692 | ) |
A reconciliation of the income tax provision (benefit) computed at the federal statutory rate of 34% and the income tax provision (benefit) shown on the Consolidated Statements of Operations and Comprehensive Income, follows (dollars in thousands):
| | | 2009 | | | 2008 | |
| | | | | | % of | | | | | | % of | |
| | | Amount | | | Pretax | | | Amount | | | Pretax | |
| | | | | | | | | | | | | |
| Tax computed at statutory rate | | $ | (2,350 | ) | | | 34.0 | % | | $ | (1,230 | ) | | | 34.0 | % |
| Increase (decrease) resulting from: | | | | | | | | | | | | | | | | |
| State income taxes | | | (268 | ) | | | 3.9 | | | | (88 | ) | | | 2.4 | |
| Utilization of net operating losses | | | 3,232 | | | | (46.8 | ) | | | | | | | | |
| Indexed retirement plan | | | (91 | ) | | | 1.3 | | | | (78 | ) | | | 2.2 | |
| Nontaxable interest income, net | | | (226 | ) | | | 3.3 | | | | (217 | ) | | | 6.0 | |
| Other | | | 30 | | | | (0.4 | ) | | | (79 | ) | | | 2.2 | |
| Income tax provision (benefit) | | $ | 327 | | | | (4.7 | )% | | $ | (1,692 | ) | | | 46.8 | % |
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
NOTE 8 - INCOME TAXES (Continued)
The components of the net deferred income tax assets are as follows (dollars in thousands):
| | | December 31, | |
| | | 2009 | | | 2008 | |
| Deferred tax asset: | | | | | | |
| Federal | | $ | 3,083 | | | $ | 1,815 | |
| State | | | 528 | | | | 311 | |
| | | | 3,611 | | | | 2,126 | |
| Deferred tax liability: | | | | | | | | |
| Federal | | | (115 | ) | | | (105 | ) |
| State | | | (20 | ) | | | (18 | ) |
| | | | (135 | ) | | | (123 | ) |
| Net deferred tax asset | | | 3,476 | | | | 2,003 | |
| Valuation allowance | | | (2,768 | ) | | | - | |
| | | $ | 708 | | | $ | 2,003 | |
The tax effects of each type of significant item that gave rise to deferred taxes are (dollars in thousands):
| | | December 31, | |
| | | 2009 | | | 2008 | |
| | | | | | | |
| Allowance for loan losses | | $ | 1,978 | | | $ | 1,250 | |
| Director and management benefit plans | | | 617 | | | | 514 | |
| Net unrealized holding losses on securities | | | 7 | | | | - | |
| Other real estate owned write-downs | | | 402 | | | | 181 | |
| State income tax net operating loss carryforward | | | 322 | | | | 88 | |
| Nonaccrual interest | | | 267 | | | | 66 | |
| Depreciation | | | (135 | ) | | | (123 | ) |
| Other, net | | | 18 | | | | 27 | |
| Net deferred tax asset | | | 3,476 | | | | 2,003 | |
| Valuation allowance | | | (2,768 | ) | | | - | |
| | | $ | 708 | | | $ | 2,003 | |
Income tax (benefit) expense of $(7,000) and $51,000 for 2009 and 2008, respectively, have been netted in the caption “Unrealized holding gains (losses) on securities arising during period” found in the Consolidated Statements of Operations and Comprehensive Income (Loss).
ASC 740, Income Taxes (see Note 1), specifies that deferred income tax assets are to be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred income tax asset will not be realized. At December 31, 2009, a valuation allowance of $2,768,000 was established related to the continued net operating losses in 2009. Realization of the remaining $708,000 of deferred tax assets is dependent on generating sufficient taxable income in the future (or implementing tax strategies) prior to expiration of the loss carryforwards. Although realization is not assured, management believes it is more likely than not that $708,000 of the deferred tax asset will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.
As discussed in Note 1, based on management’s expectations of future earnings and tax strategies at December 31, 2008, no valuation allowance was established.
During 2009, Atlantic carried back all of its federal net operating losses and recorded a refund receivable estimated at $1,035,000. Atlantic has state net operating loss carryforwards of approximately $5.8 million, which are available to offset state income taxes in future years. These state net operating loss carryforwards do not expire.
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
NOTE 8 - INCOME TAXES (Continued)
ASC 740 requires the presentation of a reconciliation of any unrecognized tax benefits as of the beginning and end of the year. During the period and as of December 31, 2009, there are no unrecognized tax benefits. Accordingly, no analysis of unrecognized tax benefits is included herein.
Interest and penalties associated with income tax filing requirements are recognized as a component of income tax expense, if material. As of December 31, 2009 and 2008, there is no material amount of penalties and interest related to tax return filings of Atlantic.
Atlantic’s consolidated income tax returns have not been audited since its inception. Atlantic's management believes that the years ended December 31, 2007, 2008, and 2009 are considered open, and would be subject to examination by the Internal Revenue Service if selected for audit.
NOTE 9 - BENEFIT PLANS
SIMPLE Plan. Atlantic sponsors a savings incentive plan (“SIMPLE Plan”) that covers substantially all employees. Atlantic matches each participant’s contribution, subject to a maximum of 3% through July 15, 2009, and thereafter, 1% of the participant's salary. The SIMPLE Plan is a prototype plan and has been approved by the Internal Revenue Service. The amount included in salaries and employee benefits as pension expense totaled $39,000 and $64,000 for 2009 and 2008, respectively.
Director and Management Benefit Plans. Atlantic has adopted retirement benefit plans for Atlantic’s seven directors (including one director emeritus) and four of its current and former officers. The purpose of these plans is to retain qualified directors and members of management by offering a retirement benefit. Benefits under the plans began vesting over a five-year period, with service beginning in 1997. Upon his resignation from Atlantic, a former officer and director was 60% vested. All of the directors and the three current officers are fully vested at December 31, 2009.
Atlantic has purchased a pool of life insurance policies totaling $4,050,000 with funds that had previously been invested in overnight federal funds sold. The policies have cash surrender values that can progressively grow, based on a fluctuating index of life insurance securities, resulting in an earnings stream to Atlantic. At December 31, 2009 and 2008, the cash surrender values of these life insurance policies totaled $5,097,000 and $4,886,000 respectively. For 2009, the average yield on these life insurance policies was estimated at 4.45% (or a taxable equivalent yield of 7.12%).
Under the plans, as amended, eight of the current participants will begin receiving benefit payments for fifteen years following retirement. In addition, the beneficiaries of these eight participants will each receive death benefits of the lesser of (i) $100,000 or (ii) net investment at risk in the underlying insurance policies (cash value), with any remaining policy cash value payable to Atlantic. The remaining three participants will receive benefit payments over a twenty-year period following retirement. Following a participant’s death, any unpaid benefits will continue to the beneficiary (or beneficiaries) over the remaining term.
A summary of the activity for the director and management benefit plans follows (dollars in thousands):
| | | December 31, | |
| | | 2009 | | | 2008 | |
| | | | | | | |
| Policy income included in other income | | $ | 229 | | | $ | 220 | |
Plan expense included in other operating expenses | | | (275 | ) | | | (294 | ) |
| Life insurance expense included in other operating expenses | | | (17 | ) | | | (14 | ) |
| Deferred income tax benefit | | | 103 | | | | 110 | |
| Net after income tax benefit | | $ | 40 | | | $ | 22 | |
| | | | | | | | | |
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
NOTE 9 - BENEFIT PLANS (Continued)
In late-2008, director fees were discontinued and no director fees were paid in 2009. Beginning in 2010, the benefit expense accrual for the director and management plans was also discontinued.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Credit-Related Financial Instruments. Atlantic is a party to credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, and commercial letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. Atlantic’s exposure to credit loss is represented by the contractual amount of these commitments. Atlantic follows the same credit policies in making commitments as it does for on-balance sheet instruments.
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 Atlantic, is based on management’s credit evaluation of the customer.
Unfunded commitments under commercial lines-of-credit, revolving credit lines, and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines-of-credit may not be fully collateralized but generally contain a specified maturity date. Certain conditions may exist that would prevent the customer from drawing upon the total amount to which Atlantic is committed.
Commercial and standby letters-of-credit are conditional commitments issued by Atlantic to guarantee the performance of a customer to a third party. Those letters-of-credit are primarily issued to support public and private borrowing arrangements. All letters of credit issued and outstanding at December 31, 2009, totaling $1,174,000, have expiration dates within one year. The credit risk involved in issuing letters-of-credit is essentially the same as that involved in extending loan facilities to customers. Atlantic generally holds collateral supporting those commitments if deemed necessary.
At December 31, 2009 and 2008, the following financial instruments were outstanding whose contract amounts represent credit risk for Atlantic (dollars in thousands):
| | | 2009 | | | 2008 | |
| Commitments to extend credit (including unused lines of credit): | | | | | | |
| Revolving, open-end lines secured by 1-4 family residential properties | | | | | | |
| (home equity lines) | | $ | 3,630 | | | $ | 4,983 | |
| Commercial real estate, construction, and land development secured by real estate | | | 1,186 | | | | 2,186 | |
| Other | | | 4,548 | | | | 3,311 | |
| | | | 9,364 | | | | 10,480 | |
| Standby letters of credit | | | 1,174 | | | | 1,701 | |
| | | $ | 10,538 | | | $ | 12,181 | |
Derivative Loan Commitments. At December 31, 2009, Atlantic did not have any material amounts of commitments to originate residential mortgage loans that will be sold to investors at a specified time in the future.
Collateral Requirements. To reduce credit risk related to the use of credit-related financial instruments, Atlantic might deem it necessary to obtain collateral. The amount and nature of the collateral obtained is based on Atlantic’s credit evaluation of the customer. Collateral held varies but may include cash, securities, accounts receivable, inventory, property, plant and equipment, and real estate. Access to the collateral is generally achieved by either (i) maintaining possession of the collateral, (ii) placing a recorded lien in the appropriate jurisdiction, or (iii) other means such as an assignment.
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
NOTE 10 - COMMITMENTS AND CONTINGENCIES (Continued)
If the counterparty does not have the right and ability to redeem the collateral or Atlantic is permitted to sell or repledge the collateral on short notice, Atlantic records the collateral on its consolidated balance sheet at fair value with a corresponding obligation to return it.
Exposure to Transactions with Correspondent Banks and Related Limitations on Interbank Liabilities. In the ordinary course of business, Oceanside may incur a loss if a correspondent bank defaults upon an obligation, which may include overnight federal funds, loan participations, and other interbank transactions. Management monitors its risks with these correspondents and places certain limitations upon the exposure.
Litigation. Atlantic may periodically be a party 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 Atlantic’s operations. Management, after consultation with legal counsel, does not believe that there are any pending or threatened proceedings against Atlantic which, if determined adversely, would have a material effect on Atlantic’s consolidated financial position.
Change of Control Agreements. Atlantic has entered into agreements with its three executive officers that would provide certain benefits in the event of a change of control (as defined in the agreement) and, within three years of the change in control, the executive officer is terminated (without cause) or resigns. The change of control benefits include cash payments equal to 2.99 times the executive officer’s base annual compensation (as defined in the agreement) and continuation of health benefits for six months.
Other. At December 31, 2009 and 2008, Oceanside had $10.0 million and $19.5 million, respectively, of unsecured and secured lines of credit from other banks for the purchase of overnight federal funds. At December 31, 2009 and 2008, Atlantic had outstanding purchases in overnight federal funds of $-0- and $-0-, respectively, leaving $10.0 million and $19.5 million, respectively, available under these lines.
At December 31, 2009, securities with an amortized cost of $4.2 million and fair value of $4.0 were pledged to secure available advances of $3.1 million at the Federal Reserve Discount Window. Amounts available to be drawn at the Federal Reserve Discount Window are only allowed as overnight secondary credit and require prior approval from the Federal Reserve.
NOTE 11 - CONCENTRATIONS OF CREDIT
Substantially all of Atlantic's loans, commitments, and standby letters of credit have been granted to customers in northeast Florida, including Duval and St. Johns counties. Atlantic’s loans are generally secured by specific items of collateral including real property, consumer assets, and business assets. Although Atlantic has a diversified loan portfolio, a substantial portion of its debtors’ ability to honor their contracts is dependent on local, state, and national economic conditions, which can be affected by a number of events domestically and internationally.
The concentrations of credit by type of loan are set forth in Note 3. The distribution of commitments to extend credit approximates the distribution of loans outstanding. Standby letters of credit were granted primarily to commercial borrowers. Atlantic, as a matter of policy, does not extend credit to any single borrower or group of related borrowers in excess of its legal lending limit. As a state-chartered bank, Oceanside’s 15% legal lending limit was approximately $2.9 million at December 31, 2009 ($4.8 million for loans qualifying for the 25% limit). Atlantic does not have any significant concentrations in any one industry or customer.
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
NOTE 12 - RELATED PARTIES
Atlantic has entered into transactions with its directors, executive officers, significant stockholders, and their affiliates (insiders). Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features.
A summary of activity for 2009 and 2008 for such loans follows (dollars in thousands):
| | | 2009 | | | 2008 | |
| | | | | | | |
| Beginning of year balance | | $ | 6,570 | | | $ | 6,164 | |
| Additions | | | 1,597 | | | | 1,040 | |
| Reductions | | | (268 | ) | | | (634 | ) |
| End of year balance | | $ | 7,899 | | | $ | 6,570 | |
Unfunded commitments to the same parties totaled $230,000 and $579,000 at December 31, 2009 and 2008, respectively. At December 31, 2009 and 2008, deposits and customer repurchase agreements with insiders totaled approximately $1.7 million and $10.1 million, respectively.
NOTE 13 - STOCKHOLDERS' EQUITY
Preferred Stock. In addition to the 10,000,000 shares of authorized common stock, Atlantic’s articles of incorporation authorize up to 2,000,000 shares of preferred stock. The Board of Directors is further authorized to establish designations, powers, preferences, rights, and other terms for preferred stock by resolution. No shares of preferred stock have been issued.
Dividends. The ability of Atlantic to pay dividends to stockholders depends primarily on dividends received by Atlantic from its subsidiary, Oceanside. Oceanside’s ability to pay dividends is limited by federal and state banking regulations based upon Oceanside’s profitability and other factors. State banking statutes further require (i) prior approval, (ii) that at least 20% of the prior year’s earnings be transferred to additional paid-in capital (surplus) annually until surplus equals or exceeds Oceanside’s common stock, and (iii) that certain minimum capital levels are maintained. There were no retained earnings available at December 31, 2009, to pay cash dividends. Furthermore, the Consent Order discussed in Note 1 prohibits Oceanside from paying dividends to Atlantic. Atlantic’s dividend policy is to retain accumulated earnings to support its growth and maintain its capital levels.
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ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
NOTE 14 - OTHER OPERATING EXPENSES
| Other operating expenses follow (dollars in thousands): | | | | | | |
| | | 2009 | | | 2008 | |
| | | | | | | |
| Deposit insurance assessments | | $ | 1,014 | | | $ | 229 | |
| Processing and settlement fees | | | 836 | | | | 773 | |
| OREO and other loan collection expenses | | | 520 | | | | 544 | |
| Professional, legal, and audit fees | | | 589 | | | | 459 | |
| Write-down of other real estate owned | | | 586 | | | | 315 | |
| Pension expense | | | 275 | | | | 295 | |
| Expensed costs to raise capital | | | 177 | | | | - | |
| Telephone | | | 132 | | | | 134 | |
| Advertising and business development | | | 95 | | | | 145 | |
| Stationery, printing, and supplies | | | 71 | | | | 107 | |
| Postage, freight, and courier | | | 63 | | | | 80 | |
| Director fees | | | - | | | | 78 | |
| Insurance (excluding group insurance) | | | 49 | | | | 46 | |
| Dues and subscriptions | | | 39 | | | | 27 | |
| Other miscellaneous expenses | | | 170 | | | | 197 | |
| | | $ | 4,616 | | | $ | 3,429 | |
NOTE 15 - 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 Due from Banks, Federal Funds Sold and Interest-Bearing Deposits - 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. The fair value of customer repurchase agreements is the amount payable on demand at the reporting date. 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.
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
NOTE 15 - FAIR VALUE DISCLOSURES (Continued)
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 December 31, 2009 and 2008, follow (dollars in thousands):
| | | Carrying | | | Fair | |
| | | Amount | | | Value | |
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 | |
| | | | | | | | | |
December 31, 2008: | | | | | | | | |
| Financial Assets | | | | | | | | |
| Cash and cash equivalents | | $ | 17,177 | | | $ | 17,177 | |
| Investment securities and accrued interest receivable | | | 30,615 | | | | 29,977 | |
| Restricted stock | | | 955 | | | | 955 | |
| Loans and accrued interest receivable | | | 203,872 | | | | 205,897 | |
| Total assets valued | | $ | 252,619 | | | $ | 254,006 | |
| | | | | | | | | |
| Financial Liabilities | | | | | | | | |
| Deposits and accrued interest payable | | $ | 240,134 | | | $ | 261,720 | |
| Other borrowings and accrued interest payable | | | 9,424 | | | | 9,424 | |
| Total liabilities valued | | $ | 249,558 | | | $ | 271,144 | |
| | | | | | | | | |
| Off-Balance Sheet Commitments | | $ | 12,181 | | | $ | 12,181 | |
While these estimates of fair value are based on management’s judgment of the most appropriate factors, there is no assurance that, were Atlantic to have disposed of such items at December 31, 2009, the estimated fair values would necessarily have been achieved at that date, since market values may differ depending on various circumstances. The estimated fair values at December 31, 2009, should not necessarily be considered to apply at subsequent dates.
Atlantic has adopted ASC 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”). ASC 820-10, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820-10 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances.
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
NOTE 15 - FAIR VALUE DISCLOSURES (Continued)
ASC 820-10 emphasizes that fair value is market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC 820-10 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Level 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liabilities, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where more than one level of input exists for assets or liabilities, the lowest level of input that is significant to the fair value measurement in its entirety will be used in determining the fair value hierarchy. Atlantic’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
The table below presents Atlantic’s assets and liabilities measured at fair value on a recurring basis aggregated by the level in the fair value hierarchy within which those measurements fall.
| (dollars in thousands) | | Quoted Prices | | | Significant | | | | | | | |
| | | in Active | | | Other | | | Significant | | | | |
| | | Markets for | | | Observable | | | Unobservable | | | | |
| | | Identical Assets | | | Inputs | | | Inputs | | | | |
| December 31, 2009 | | (Level 1) | | | (Level 2) | | | (Level 3) | | | Total | |
| Assets: | | | | | | | | | | | | |
| Investment securities, available-for-sale | | $ | - | | | $ | 42,542 | | | $ | - | | | $ | 42,542 | |
| Total assets at fair value | | $ | - | | | $ | 42,542 | | | $ | - | | | $ | 42,542 | |
| | | | | | | | | | | | | | | | | |
| December 31, 2008 | | | | | | | | | | | | | | | | |
| Assets: | | | | | | | | | | | | | | | | |
| Investment securities, available-for-sale | | $ | - | | | $ | 14,870 | | | $ | - | | | $ | 14,870 | |
| Total assets at fair value | | $ | - | | | $ | 14,870 | | | $ | - | | | $ | 14,870 | |
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 subdivision.
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.
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
NOTE 15 - FAIR VALUE DISCLOSURES (Continued)
| (dollars in thousands) | | Quoted Prices | | | Significant | | | | | | | | | | |
| | | in Active | | | Other | | | Significant | | | | | | | |
| | | Markets for | | | Observable | | | Unobservable | | | | | | Net | |
| | | Identical Assets | | | Inputs | | | Inputs | | | | | | Gains | |
| December 31, 2009 | | (Level 1) | | | (Level 2) | | | (Level 3) | | | Total | | | (Losses) (1) | |
| 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 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| December 31, 2008 | | | | | | | | | | | | | | | | | | | | |
| Assets: | | | | | | | | | | | | | | | | | | | | |
| Impaired loans, net of | | | | | | | | | | | | | | | | | | | | |
| direct write-offs | | $ | - | | | $ | - | | | $ | 13,050 | | | $ | 13,050 | | | | | |
| Specific valuation allowances | | | - | | | | - | | | | (1,717 | ) | | | (1,717 | ) | | | | |
| Impaired loans, net | | | - | | | | - | | | | 11,333 | | | | 11,333 | | | $ | (1,110 | ) |
| Foreclosed assets | | | - | | | | - | | | | 3,496 | | | | 3,496 | | | | (311 | ) |
| Total assets at fair value | | $ | - | | | $ | - | | | $ | 14,829 | | | $ | 14,829 | | | $ | (1,421 | ) |
(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 the implementation guidance in ASC 310-10, Receivables. 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 repossessions) or fair value written down by estimated cost to sale. 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:
| | | Impaired | | | Foreclosed | | | | |
| | | Loans | | | Assets | | | 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, end of period | | $ | 11,681 | | | $ | 1,727 | | | $ | 13,408 | |
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
NOTE 16 - REGULATORY CAPITAL MATTERS
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 December 31, 2009, Oceanside had not reached the capital levels specified in the Consent Order. There are no conditions or events, since the most recent notification, that management believes have changed the prompt corrective action category.
| | | | | | | | | | | | | | | To Be Well- | |
| | | | | | | | | | | | | | | Capitalized | |
| | | | | | | | | | | | | | | Under Prompt | |
| | | | | | | | | For Capital | | | Corrective Action | |
| | | Actual | | | Adequacy Purposes | | | Provisions | |
| | | Amount | | | Ratio | | | > Amount | | | > Ratio | | | > Amount | | | > Ratio | |
| | | (dollars in thousands) | |
As of December 31, 2009: | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Total capital to risk-weighted assets | | $ | 15,361 | | | | 7.68 | % | | | NM | | | | NM | | | $ | 22,007 | | | | 11.00 | % (1) |
| Tier 1 capital to risk-weighted assets | | $ | 12,810 | | | | 6.40 | % | | | NM | | | | NM | | | NM | | | NM | |
| Tier 1 capital to average assets | | $ | 12,810 | | | | 4.06 | % | | | NM | | | | NM | | | $ | 25,228 | | | | 8.00 | % (1) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
As of December 31, 2008: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total capital to risk-weighted assets | | $ | 21,720 | | | | 10.25 | % | | $ | 16,951 | | | | 8.00 | % | | $ | 21,188 | | | | 10.00 | % |
| Tier 1 capital to risk-weighted assets | | $ | 19,055 | | | | 8.99 | % | | $ | 8,475 | | | | 4.00 | % | | $ | 12,713 | | | | 6.00 | % |
| Tier 1 capital to average assets | | $ | 19,055 | | | | 7.25 | % | | $ | 10,519 | | | | 4.00 | % | | $ | 13,149 | | | | 5.00 | % |
| (1) | Ratios required under the Consent Order. |
| NM | Not meaningful - the Consent Order does not specify. |
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
NOTE 17 - PARENT COMPANY FINANCIAL INFORMATION
Presented below are condensed financial statements for Atlantic BancGroup, Inc. (parent only):
| Condensed Balance Sheets as of December 31: | | 2009 | | | 2008 | |
| | | (Dollars in Thousands) | |
| Assets | | | | | | |
| Cash and cash equivalents | | $ | 1 | | | $ | 13 | |
| Investment in and advances to subsidiary bank | | | 12,798 | | | | 19,899 | |
| Other assets | | | 356 | | | | 178 | |
| Total | | $ | 13,155 | | | $ | 20,090 | |
| | | | | | | | | |
| Liabilities and Stockholders' Equity | | | | | | | | |
| Liabilities: | | | | | | | | |
| Other long-term borrowings | | $ | 3,093 | | | $ | 3,093 | |
| Due to subsidiary bank | | | 223 | | | | - | |
| Accrued expenses and other | | | 159 | | | | 65 | |
| | | | 3,475 | | | | 3,158 | |
| Stockholders' equity | | | 9,680 | | | | 16,932 | |
| Total | | $ | 13,155 | | | $ | 20,090 | |
| | | | | | | | | |
| Condensed Statements of Operations and Stockholders' Equity | | | | | | |
| Years Ended December 31: | | 2009 | | | 2008 | |
| | | (Dollars in Thousands) | |
| | | | | | | |
| Equity in net loss of subsidiary bank | | $ | (6,895 | ) | | $ | (1,685 | ) |
| Other income | | | 5 | | | | 5 | |
| Interest expense | | | (185 | ) | | | (185 | ) |
| Other expenses (net of income tax benefit) | | | (165 | ) | | | (62 | ) |
| Net loss | | | (7,240 | ) | | | (1,927 | ) |
| Stockholders' Equity: | | | | | | | | |
| Beginning of year | | | 16,932 | | | | 18,856 | |
| Net change in unrealized holding gains (losses) | | | | | | | | |
| on securities in subsidiary bank | | | (12 | ) | | | 83 | |
| Cumulative effect adjustment - | | | | | | | | |
| Implementation of EITF 06-4 | | | - | | | | (80 | ) |
| End of year | | $ | 9,680 | | | $ | 16,932 | |
| | | | | | | |
| Condensed Statements of Cash Flows | | | | | | |
| Years Ended December 31: | | 2009 | | | 2008 | |
| | | (Dollars in Thousands) | |
| Operating Activities | | | | | | |
| Net loss | | $ | (7,240 | ) | | $ | (1,927 | ) |
| Adjustment to reconcile net loss to net cash | | | | | | | | |
| provided by (used in) operating activities: | | | | | | | | |
| Equity in undistributed losses of subsidiary bank | | | 6,895 | | | | 1,685 | |
| Other | | | 333 | | | | 247 | |
| Net Cash Provided By (Used In) Operating Activities | | | (12 | ) | | | 5 | |
| Increase (Decrease) in Cash and Cash Equivalents | | | (12 | ) | | | 5 | |
| Cash and Cash Equivalents: | | | | | | | | |
| Beginning of year | | | 13 | | | | 8 | |
| End of year | | $ | 1 | | | $ | 13 | |
| CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Background of Internal Controls and Internal Audits. Oceanside is the sole financial subsidiary of Atlantic. Oceanside has in place extensive policies and operating procedures 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 the minutes of the Audit Committee meetings are subsequently reported 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. Annually, Atlantic engages an external Certified Public Accounting firm to perform an independent audit conducted in accordance with generally accepted auditing standards.
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 maintains controls and procedures designed to ensure that information required to be disclosed in the reports that Atlantic files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon management’s evaluation of those controls and procedures performed within the 90 days preceding the filing of this Report, the Chief Executive Officer and Chief Financial Officer of Atlantic concluded that, subject to the limitations noted below, Atlantic’s disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934) are effective to ensure that the information required to be disclosed by Atlantic in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms.
Management’s Report on Internal Control Over Financial Reporting. The management of Atlantic is responsible for the preparation, integrity, and fair presentation of the consolidated financial statements included in this Annual Report. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and reflect management’s judgments and estimates concerning the effects of events and transactions that are accounted for or disclosed.
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Such internal controls over financial reporting were designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Management assessed the effectiveness of Atlantic’s internal control over financial reporting as of December 31, 2009. In making this assessment, Atlantic used the criteria set forth in Internal Control Over Financial Reporting – Guidance for Smaller Public Companies (2006) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and Sarbanes-Oxley Section 404 – A Guide for Small Business, published by the U.S. Securities and Exchange Commission.
Based upon management’s evaluation under the framework in Internal Control Over Financial Reporting – Guidance for Smaller Public Companies (2006) and Sarbanes-Oxley Section 404 – A Guide for Small Business, management concluded that Atlantic’s internal control over financial reporting was effective as of December 31, 2009. The results of management’s assessment has been reviewed with the Audit Committee.
This annual report does not include an attestation report of Atlantic’s registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by Atlantic's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit Atlantic to provide only management’s report in this annual report.
Changes in Internal Controls. Atlantic has made no significant changes in its internal controls over financial reporting during the quarter ended December 31, 2009, which have materially affected or are reasonably likely to materially affect their internal control over financial reporting.
Limitations on the Effectiveness of Controls. Management, including the Chief Executive Officer and Chief Financial Officer, does not expect that disclosure controls and internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Atlantic have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.
The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
ITEM 9B. OTHER INFORMATION.
There is no information required to be disclosed in a report on Form 8-K during the fourth quarter of 2009 that was not reported.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Information relating to the business experience and age of each director is set forth below. We have also included the same information for our non-director Executive Officers.
CLASS II DIRECTORS
Terms to Expire in 2010
| | Director | | Age | | Business Experience | | Director Since |
| | | | | | | | | | |
| Donald F. Glisson, Jr. | 50 | | Mr. Glisson is the Chairman of the Board of Atlantic. He has been a director of the Bank since 1996. Mr. Glisson serves as Chairman and Chief Executive Officer of Triad Financial Services, Inc., the second largest consumer finance company in the United States. Headquartered in Jacksonville, Florida, Triad Financial has 125-plus employees with five offices across the country, including branch offices in Chicago, Illinois and Houston, Texas. Mr. Glisson graduated from Florida State University with a Bachelor’s degree in finance. The Board has concluded that Mr. Glisson’s over ten years experience on Atlantic’s and the Bank’s Boards, as well as his experience as the Chairman and Chief Executive Officer of an established finance company, gives him the relevant experience to be an effective member of our Board of Directors. | | 1998 |
| Robin H. Scheiderman | 53 | | Ms. Scheiderman is a director of Atlantic and the Chairman of the Board of the Bank where she has been a director since 1997. Since 1992, Ms. Scheiderman has been self-employed as a certified public accountant. Prior to that she served as the Chief Financial Officer for the California College for Health Sciences. In addition, Ms. Scheiderman served as Director of Taxes for Florida Rock Industries, Inc. in Jacksonville, Florida. She earned a Bachelor’s degree and a Master’s degree from the University of North Florida. Ms. Scheiderman is a licensed Certified Public Accountant and Certified Financial Planner. The Board has determined that Ms. Scheiderman’s over ten years experience on our and the Bank’s Boards, as well as her extensive financial experience as a Certified Public Accountant makes her service on our Board invaluable. | | 1998 |
| | Director | | Age | | Business Experience | | Director Since |
| | | | | | |
| Gordon K. Watson | 60 | | Mr. Watson is a director of Atlantic. He has also been a director of the Bank since December 1996. Mr. Watson is the sole owner of Keith Watson Title Services, Inc. and is a founding member, senior partner, and a shareholder of the law firm of Watson, Dykes & Schloth, P.A. in Jacksonville, Florida. His law firm focuses on real estate, probate, estate planning and business law. Mr. Watson is a resident of Ponte Vedra Beach. He received a Bachelor’s degree in marketing and management from Jacksonville University and his Juris Doctorate degree from the University of Florida. Mr. Watson is a Trustee of Jacksonville University. The Board has determined, after considering Mr. Watson’s over ten years experience on our and the Bank’s Boards, as well as his legal expertise in the real estate area, that he has the requisite background and experience necessary to be a member of our Board. | | 1998 |
CLASS I DIRECTORS
| Director | | Age | | Business Experience | | Director Since |
| | | | | | | | |
| Dr. Frank J. Cervone | 57 | | Dr. Cervone is a director of Atlantic. He has been a director of the Bank since December 1996. Dr. Cervone is an endodontist and has been practicing in Jacksonville Beach since 1990. Dr. Cervone holds a Bachelor’s degree in biology from the University of Pittsburgh, a Doctor of Dental Medicine degree from the University of Pittsburgh, School of Dental Medicine, and has a specialty designation in Endodontics from the University of Pennsylvania. Dr. Cervone’s service on our and the Bank’s Boards for over ten years, as well as his endodontic practice in our market area, gives him the relevant experience and diversity to serve on our Board. | | 1998 |
| Barry W. Chandler | 59 | | Mr. Chandler is a director of Atlantic and has served as Chief Executive Officer and President of Atlantic since April 2000, President of the Bank since 1996, and Chief Executive Officer of the Bank since April 2000. Prior to joining the Bank, Mr. Chandler was with Ponte Vedra National Bank from 1990 to 1996. He is a graduate of the Graduate School of Retail Bank Management at the University of Virginia. The Board has determined that Mr. Chandler’s extensive executive officer banking experience, as well as his over ten years of service at Atlantic and the Bank, gives him substantial experience and skills to serve on our Board. | | 1998 |
| | Nominee | | Age | | Business Experience | | Director Since |
| | | | | | |
| Dr. Conrad L. Williams | 80 | | Dr. Williams is a director of Atlantic and has been a director of the Bank since 1996. Dr. Williams is a retired veterinarian who has been a resident of the Jacksonville Beaches community since 1959. Dr. Williams holds two undergraduate degrees, one from Louisiana Tech University and one from the University of Florida. Dr. Williams received his Doctor of Veterinary Medicine degree from the University of Georgia, College of Veterinary Medicine. The Board has determined that Dr. Williams’ over ten years of service as a director of both Atlantic and the Bank, as well as his extended residence and work experience in our Jacksonville market, make his service on our Board invaluable. | | 1998 |
| Dennis M. Wolfson | 68 | | Mr. Wolfson is a director of Atlantic. He has been a director of the Bank since 1996. Mr. Wolfson is a lifelong resident of Jacksonville. Mr. Wolfson is self-employed as a licensed real estate broker primarily handling commercial net leased properties. Mr. Wolfson serves on the Board of Wolfson Children’s Hospital in Jacksonville. Mr. Wolfson attended Bentley College and Boston University. He received his Bachelor’s degree in finance from the University of Georgia. The Board has determined that Mr. Wolfson’s over ten years of experience as a director of Atlantic and the Bank, as well as his lifelong residency and real estate experience in the Jacksonville area, give him the requisite background and experience to serve on our Board. | | 1998 |
DIRECTOR EMERITUS
Director | | Age | | Business Experience | | Director Emeritus Since |
| | | | | | | | | |
| Jimmy D. Dubberly | 68 | | Mr. Dubberly became the first Director Emeritus of Atlantic and the Bank in December 2007. Prior to that, he was a founding director of Atlantic and the Bank. Mr. Dubberly is also the Chairman and Chief Executive Officer of the South Georgia Bank, Glennville, Georgia, positions he has held since 1986. Mr. Dubberly is a graduate of the School of Banking of the South at Louisiana State University and the Georgia Banking School at the University of Georgia. | | 2007 |
NON-DIRECTOR EXECUTIVE OFFICERS
Officer | | Age | | Business Experience |
| | | | | | |
| David L. Young | 64 | | Mr. Young is an Executive Vice President, the Chief Financial Officer, and the Corporate Secretary of Atlantic, and also an Executive Vice President and the Chief Financial Officer of the Bank. Mr. Young joined the Bank in May 1997. Prior to joining the Bank, Mr. Young was the Finance Manager for the Loan and Investment Operation Division of Barnett Bank in Jacksonville from 1995 to 1997. He is a graduate of Jacksonville University and the Graduate School of Retail Bank Management at the University of Virginia. |
Officer | | Age | | Business Experience |
| | | | | | |
| Grady R. Kearsey | 65 | | Mr. Kearsey is an Executive Vice President and the Senior Loan Officer of the Bank. Mr. Kearsey joined the Bank in July 1997 and served as Vice President - Lender until January 2001, when he was promoted to his current position. Prior to joining the Bank, Mr. Kearsey served as Vice President - Market Manager of SunTrust Bank from 1996 to July 1997. Prior to serving with SunTrust, Mr. Kearsey was with Ponte Vedra National Bank. Mr. Kearsey has a Bachelor’s degree from Jacksonville University. |
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires our officers, directors, and any person who beneficially owns more than 10% of our common stock to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Executive officers, directors, and more than 10% shareholders are required by regulation to furnish us with copies of all Section 16(a) forms which they file. During 2009, none of our directors and executive officers who own our stock filed any reports with the Securities and Exchange Commission; therefore, to the best of our knowledge, during 2009 there were no untimely filings by our executive officers and directors. We have no record of any person having beneficial ownership of 10% or more of Atlantic common stock.
CODE OF ETHICS
In 2003, Atlantic adopted a Code of Ethics policy that applies to its principal executive and financial officers (Incorporated by reference to Exhibit 14 to Atlantic’s Form 10-KSB for year ended December 31, 2003). This code is posted on our website at www.oceansidebank.com and a copy will be provided free of charge, upon request to Katie Dively, Compliance Director, 1315 South Third Street, Jacksonville, Florida, (904) 247-9494.
FINANCIAL EXPERT
Atlantic has designated Robin Scheiderman, a Certified Public Accountant, as an “audit committee financial expert” as defined by Securities and Exchange Commission Rules, believing she has the requisite financial expertise based on her extensive auditing experience. Ms. Scheiderman is also an “independent director” as that term is defined in the “Director Independence” section below.
CORPORATE GOVERNANCE
Board Leadership Structure and Risk Oversight
Atlantic has a separate Chairman of the Board and Chief Executive Officer. Donald F. Glisson, Jr. serves as the Chairman of the Board and Barry W. Chandler serves as the Chief Executive Officer and President. We believe that having these positions held by separate persons is beneficial to Atlantic in that it enhances the Board’s risk management and oversight and provides greater checks and balances by not instilling too much authority or power in one individual. In addition, Mr. Glisson is an independent director and thus not a part of Atlantic’s executive management, which allows him to provide oversight and direction from an outside perspective.
Atlantic’s Board of Directors provides oversight of management’s role in managing the material risks of the Holding Company. Oceanside is the sole financial subsidiary of Atlantic. Oceanside has in place extensive policies and operating procedures 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 the minutes of the Audit Committee meetings are subsequently reported to the Boards of Directors of Oceanside and Atlantic.
Annually, Atlantic engages an external Certified Public Accounting firm to perform an independent audit conducted in accordance with generally accepted auditing standards. 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.
Oceanside’s Board meets monthly and reviews management reports in detail concerning credit risk, liquidity risk and operational risk. Oceanside Bank has a Risk Management Committee which consists of all senior management. This committee meets twice monthly, as needed, and the minutes and action plan of the Risk Management Committee meetings are subsequently reported to the Boards of Directors of Oceanside and Atlantic.
Director Independence
The Board of Directors has determined that except for Barry W. Chandler, each member of the Board is an “independent director” within the meaning of the Nasdaq Marketplace Rule 4200(a)(15). The determination that Mr. Chandler is not independent was based upon the fact that he serves as an executive officer of Atlantic.
Committees of the Board of Directors
In 2009, Atlantic had three standing committees, the Audit Committee, the Nominating Committee, and the Compensation Committee. The Audit Committee has adopted a formal charter, a copy of which was included with Atlantic’s 2009 Proxy Statement as Exhibit A. The Report of the Audit Committee is provided in the next section.
The Nominating Committee meets to evaluate director candidates for Atlantic’s Board of Directors. This Committee has not yet adopted a charter and does not have written procedures or a policy on the selection of nominees and does not have a specific policy on the diversity of the directors in the identification of director nominees or for the evaluation of shareholder recommendations. Until a charter and nominating procedures are put in place, the Nominating Committee will make all nomination decisions on a case-by-case basis, in which it may consider the nominee’s business background, involvement in the community, prior banking experience, and customer relationship with Oceanside Bank.
The Nominating Committee annually reviews the composition of the Board, as a whole, to consider if there is an appropriate balance of knowledge, experience, skills, expertise, and diversity in the Board, and whether there is at least a minimum number of independent directors as required by applicable rules and regulations. The Nominating Committee considers if the Board’s composition accurately reflects Atlantic’s needs, and will, if necessary, propose the addition or resignation of members in order to obtain an appropriate balance and skill level.
Our directors are required to commit a requisite amount of time for preparation and attendance at regularly scheduled Board and Committee meetings, as well as be able to participate in other matters necessary to ensure Atlantic is appropriately governed. In evaluating our directors for nomination, the Nominating Committee considers what is in the best interest of Atlantic and its shareholders, including such things as the knowledge, experience, integrity, and judgment of each individual; the past and/or potential contributions of each individual; an individual’s ability to devote sufficient time and effort to the duties required as Board member; independence and willingness to consider all strategic proposals; core competencies or other technical experience. In addition, the directors are assessed on their integrity, judgment, knowledge, experience, skills, and expertise and their ability to oversee and direct the affairs of Atlantic.
Based on Atlantic’s size and marketing area, the Board believes these policies are appropriate for Atlantic. The Nominating Committee is composed of Chairman Donald F. Glisson, Jr., Frank J. Cervone, and Gordon K. Watson, all of whom the Board determined are independent under Nasdaq Marketplace Rule 4200(a)(15). The Nominating Committee met one time in 2009, and all members attended that meeting.
The Compensation Committee serves with regard to compensation and personnel policies, programs, and plans, including management development and succession, and to approve employee compensation and benefit programs. The Compensation Committee does not have a charter. The Compensation Committee met one time in 2009 and all members attended that meeting. The Board has determined that each member of the Committee is independent as defined by Nasdaq Marketplace Rule 4200(a)(15). The Compensation Committee is composed of Chairman Donald F. Glisson, Jr., Frank J. Cervone, and Gordon K. Watson.
Report of the Audit Committee
The functions of the Audit Committee are focused on three areas:
1. The adequacy of internal controls and financial reporting process and the reliability of Atlantic’s and the Bank’s financial statements;
2. The performance of Atlantic’s and the Bank’s internal accountants and the independence and performance of Atlantic’s and the Bank’s independent accountants; and
3. Atlantic’s and the Bank’s compliance with legal and regulatory requirements.
The Audit Committee met with management periodically to consider the adequacy of Atlantic’s and the Bank’s internal controls and the objectivity of their financial reporting. These matters were discussed with Atlantic’s and the Bank’s independent accountants.
The Audit Committee also met with the independent accountants without management present. The independent accountants have unrestricted access to the members of the Audit Committee. The Audit Committee also recommends to the Board the appointment of the independent accountants and periodically reviews their performance, fees, and independence from management.
The Board of Directors believes that the members of the Audit Committee are all “independent directors” as defined by Nasdaq Marketplace Rules 4200(a)(15) and 4350(d)(2)(A). In addition, the Board has made a determination that none of the Audit Committee members have any relationships or have served in any capacity which would impair their abilities to objectively and impartially execute their duties.
Management has primary responsibility for Atlantic’s and the Bank’s financial statements and the overall reporting process, including the system of internal controls. The independent accountants audit the annual financial statements prepared by management and express an opinion as to whether those financial statements fairly present the financial position, the results of operations, and cash flows of Atlantic and the Bank, in conformity with accounting principles generally accepted in the United States of America, and discuss with the Audit Committee any issues they believe should be raised or addressed. The Audit Committee monitors these processes, relying without independent verification, on the information provided to the Audit Committee, and on the representations made by management and the independent accountants.
This year, the Audit Committee reviewed Atlantic’s and the Bank’s audited financial statements as of, and for, the fiscal year ended December 31, 2009, and met with both management and the independent accountants of Atlantic and the Bank to discuss those financial statements. Management has represented to the Audit Committee that the financial statements were prepared in accordance with accounting principles generally accepted in the United States of America. The Audit Committee has also met with the independent accountants, without management present to confirm there were no disagreements between management and the independent accountants.
The Audit Committee has received from, and discussed with, Mauldin & Jenkins, Certified Public Accountants, LLC, the written disclosure and all communications required by standards of the Public Company Accounting Oversight Board (United States), including the matters required to be discussed by PCAOB AU 380, Communication with Audit Committees, and Rule 2-07, Communication with Audit Committees, of Regulation S-X, and, both with and without management present, discussed and reviewed the results of the Mauldin & Jenkins’ examination of the financial statements. These items relate to the accounting firm’s independence from Atlantic and the Bank. The Audit Committee also discussed with Mauldin & Jenkins, Certified Public Accountants, LLC any matters required to be discussed by the Statement on Auditing Standards No. 61 (Communication with Audit Committees). The Audit Committee also discussed the results of the internal audit examinations.
Based on these reviews and discussions, the Audit Committee recommended to the Board of Directors that Atlantic’s audited financial statements be included in Atlantic’s and the Bank’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009. Atlantic’s and the Bank’s Audit Committee each met five times in 2009.
Respectfully submitted:
Robin H. Scheiderman, Chairman
Donald F. Glisson, Jr.
Dr. Conrad L. Williams
ITEM 11. EXECUTIVE COMPENSATION.
The current financial downturn in Florida has been primarily driven by the deflation in real estate values, which has had a continued negative impact on Atlantic’s and the Bank’s 2009 results of operations and the price of Atlantic’s common stock. Due to this downturn and its negative impact, the named executive officers, Barry W. Chandler, Chief Executive Officer and President of Atlantic and Chief Executive Officer and President; Grady R. Kearsey, Executive Vice President and Senior Loan Officer of the Bank; and David L. Young, Executive Vice President and Chief Financial Officer of Atlantic and the Bank did not receive an increase in base salary in 2008 and in 2009 each voluntarily agreed to reducing their base salaries by $20,000, $15,000, and $12,000, respectively. In addition, management voluntarily waived other compensation traditionally received including the elimination of referral fees, incentives, split dollar life insurance premiums, and vacation buy-back.
The following Summary Compensation Table shows compensation information regarding the three named executive officers (no other executive officer received compensation at a level required to be reported herein by Securities and Exchange Commission regulations).
2010 SUMMARY COMPENSATION TABLE
Name and Principal Position | | Year | | Salary | | | Bonus | | | Change in Pension Value and Non- Qualified Deferred Compensation Earnings | | | All Other Compensation | | | Total(7) | |
| | | | | | | | | | | | | | | | | | |
| Barry W. Chandler | | 2009 | | $ | 185,000 | | | | - | | | $ | 64,900 | | | $ | 3,699 | (1) | | $ | 253,599 | |
| Director, Chief Executive | | 2008 | | $ | 205,000 | | | | - | | | $ | 48,265 | | | $ | 15,343 | (2) | | $ | 268,608 | |
| Officer & President | | 2007 | | $ | 205,000 | | | | - | | | $ | 31,351 | | | $ | 27,731 | (2) | | $ | 264,082 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Grady R. Kearsey | | 2009 | | $ | 135,000 | | | | - | | | $ | 206,076 | | | $ | 2,700 | (3) | | $ | 343,776 | |
| Executive Vice President | | 2008 | | $ | 150,000 | | | | - | | | $ | 131,055 | | | $ | 6,769 | (4) | | $ | 287,824 | |
| & Senior Loan Officer | | 2007 | | $ | 150,000 | | | | - | | | $ | 80,968 | | | $ | 11,571 | (4) | | $ | 242,539 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| David L. Young | | 2009 | | $ | 110,000 | | | | - | | | $ | 84,758 | | | $ | 2,200 | (5) | | $ | 196,958 | |
| Executive Vice President | | 2008 | | $ | 122,000 | | | | - | | | $ | 60,886 | | | $ | 6,492 | (6) | | $ | 189,378 | |
| & Chief Financial Officer | | 2007 | | $ | 122,000 | | | | - | | | $ | 39,091 | | | $ | 10,965 | (6) | | $ | 172,056 | |
_________________________
| | (1) | Includes Simple IRA contribution (reduced to 1%). |
| | (2) | Includes Simple IRA contribution, Indexed Retirement Plan accruals, directors’ fees (voluntarily waived beginning in August 2008), referral fees, incentives, vacation buy-back, and Kiwanis Club dues. |
| | (3) | Includes Simple IRA contribution (reduced to 1%). |
| | (4) | Includes Simple IRA contribution, Indexed Retirement Plan accrual, referral fees, incentives, vacation buy-back, and Exchange Club dues. |
| | (5) | Includes Simple IRA contribution (reduced to 1%). |
| | (6) | Includes Board Secretary fees (voluntarily waived beginning in August 2008), Simple IRA contribution, Indexed Retirement Plan accruals, referral fees, incentives, and vacation buy-backs. |
| | (7) | Executives do not receive country club dues, a company automobile, or an automobile allowance. Any use by the executives of their own vehicles for company business is reimbursed for mileage at the rate authorized by the Internal Revenue Code of 1986, as amended. |
2010 DIRECTOR COMPENSATION TABLE
Due to the economic conditions during 2009, the directors voluntarily waived their fees paid in cash for the year. The following table reflects non-qualified deferred compensation paid to our outside directors in 2009.
| Name | | Fees Earned or Paid in Cash | | | Non-Qualified Deferred Compensation Earnings | | | Total | |
| Dr. Frank J. Cervone | | - | | | $ | 8,687 | | | $ | 8,687 | |
| Donald F. Glisson, Jr. | | - | | | $ | 5,749 | | | $ | 5,749 | |
| Robin H. Scheiderman | | - | | | $ | 6,374 | | | $ | 6,374 | |
| Gordon K. Watson | | - | | | $ | 17,410 | | | $ | 17,410 | |
| Dr. Conrad L. Williams | | - | | | | - | | | | - | |
| Dennis M. Wolfson | | - | | | $ | 28,907 | | | $ | 28,907 | |
We are not accruing benefits for directors as of January 1, 2010.
Benefits
Officers of the Bank are provided hospitalization, major medical, short and long-term disability insurance, dental insurance, and term life insurance under group plans with generally the same terms as are offered to all other full-time employees.
Employment Related Agreements
Neither Atlantic, nor the Bank, has employment agreements with any of its employees. The three named executive officers, however, have Change in Control Agreements that will provide them with cash payments of 2.99 times their annual compensation, if they are terminated or resign following a change in control, as defined in the Change in Control Agreements.
| SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. |
The following table contains information regarding the beneficial ownership of Atlantic common stock of each director nominee, continuing director, and non-director executive officer. Based upon a February 29, 2008 filing with the Securities and Exchange Commission, other than Mr. Watson there is one other beneficial owner of more than 5% of Atlantic’s common stock: Apex Investment Management, Inc., 200 Westpark Drive, Suite 270, Peachtree City, Georgia 30269 owns 123,576 shares, or 9.91% of the outstanding stock.
| Name | | Number of Shares Owned (*) | | | % of Beneficial Ownership | |
| | | | | | | |
| Dr. Frank J. Cervone | | | 14,640 | | | | 1.17 | % |
| Barry W. Chandler | | | 16,000 | | | | 1.28 | |
| Donald F. Glisson, Jr. | | | 51,931 | | | | 4.16 | |
| Grady R. Kearsey | | | 4,070 | | | | 0.33 | |
| Robin H. Scheiderman | | | 51,000 | | | | 4.09 | |
| Gordon K. Watson | | | 80,000 | | | | 6.41 | |
| Dr. Conrad L. Williams | | | 6,120 | | | | 0.49 | |
| Dennis M. Wolfson | | | 13,000 | | | | 1.04 | |
| David L. Young | | | 7,520 | | | | 0.60 | |
All directors and executive officers as a group (9 individuals) | | | 244,281 | | | | 19.58 | % |
| | * Includes shares for which the named person: |
| | · has sole voting and investment power; |
| | · has shared voting and investment power with a spouse; or |
| | · holds in an IRA or other retirement plan program, unless otherwise indicated in these footnotes. |
| CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. |
Review of Related Person Transactions
The Board reviews any transactions with related persons in detail on a case-by-case basis, but has not adopted a written policy on the issue. Management of the Bank determines whether a transaction meets the requirements of a related person transaction requiring review by the Board. Transactions that fall within this definition are referred to the Board for approval or other action. Based on its consideration of all of the relevant facts and circumstances, the Board decides whether or not to approve such a transaction and will approve only those transactions that are in the best interests of the Bank. If the Bank becomes aware of an existing transaction with a related person which has not been approved, the matter will be referred to the Board who will evaluate all options available, including ratification, revision or termination of such transaction. For purposes of this review, the term “related person” has the meaning ascribed to it in SEC Regulation S-K 404(a) “Transactions with related persons, promoters and certain control persons.”
Transactions
Certain directors, executive officers, and principal shareholders (defined as individuals owning 5% or more of Atlantic common stock) of Atlantic are customers of, and have banking relations with, the Bank. Loans made to these individuals are governed under the provisions of Section 22(h) of the Federal Reserve Act. Section 22(h) requires that any loans made by the Bank to such individuals, or to any related interest of such individuals, must: (i) be on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with non-affiliated parties and; (ii) not involve more than the normal risk of repayment or present other unfavorable features. These restrictions do not affect preferential loans to full-time employees who are not directors or executive officers of Atlantic or the Bank. Atlantic has no loans outstanding to its directors or officers that are not performing according to the terms of such loans. As of December 31, 2009, the Bank’s aggregate outstanding balances on loans to directors and executive officers of Atlantic and the Bank were $7.87 million, with $232,000 in committed but undisbursed loans. There were no loans made to individuals that would be considered principal shareholders.
Watson, Dykes & Schloth, P.A., of which Atlantic’s director Gordon K. Watson is a shareholder, is a law firm that handles some of the Bank’s mortgage closings. The fees received by this firm for such services are paid by the borrowers and are the same fees charged to borrowers from other unaffiliated banks.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees: The aggregate fees billed for professional services by Mauldin, Jenkins, in connection with the audit of the annual financial statements and the reviews of the financial statements included in Atlantic’s quarterly filings with the Securities and Exchange Commission for the fiscal years ended December 31, 2009 and 2008 were $69,500 and $60,000, respectively.
Audit-Related Fees: In 2008, Mauldin, Jenkins also billed Atlantic $12,000 for fees reasonably related to the performance of its audit and reviews of financial statements, (principally consumer compliance and Bank Secrecy Act services and accounting research), which included courier costs and postage for confirmations. In 2009, Mauldin, Jenkins performed similar services to 2008 in addition to services related to merger and acquisition discussions, capital raising initiatives and regulatory issues, representing $31,500 in fees.
Tax Fees: Mauldin, Jenkins did not charge any tax-related fees in 2009 or 2008.
All Other Fees: Mauldin, Jenkins did not charge any other additional fees in 2009 or 2008, other than as described above.
In all instances, Mauldin, Jenkins’ performance of its services was pre-approved by Atlantic’s Audit Committee, pursuant to its internal policies.
The following exhibits are filed with or incorporated by reference into this report (see legend below).
| (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 |
Exhibit No. | Description of Exhibit |
| | |
| 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) |
| 11 | The computation of per share earnings is shown in the consolidated financial statements of Atlantic BancGroup, Inc. and Subsidiaries for December 31, 2008 and 2007, contained in Item 8, on Page 49 of the Notes to Consolidated Financial Statements |
| 14 | Code of Ethics for Senior Officers Policy. (d) |
| 21.1 | Subsidiaries of the Registrant |
| 31.1 | Certifications of Principal Executive Officer required by Rule 13a-14(a)/15d-14(a) under the Exchange Act |
| 31.2 | Certifications of Principal Financial Officer required by Rule 13a-14(a)/15d-14(a) under the Exchange Act |
| 32.1 | 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 |
| 32.2 | 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 |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be duly signed on its behalf by the undersigned, thereunto duly authorized, in the City of Jacksonville Beach, State of Florida, on the fifteenth day of April, 2010.
| | ATLANTIC BANCGROUP, INC. |
| | |
| | /s/ Barry W. Chandler |
| | Barry W. Chandler |
| | Principal Executive Officer |
| | |
| | /s/ David L. Young |
| | David L. Young |
| | Principal Financial Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the fifteenth day of April, 2010:
| Signature | | Title |
| | | | |
| /s/ | Donald F. Glisson, Jr. | | Chairman of the Board |
| | Donald F. Glisson, Jr. | | |
| | | | |
| /s/ | Barry W. Chandler | | President, Chief Executive Officer, and Director |
| | Barry W. Chandler | | |
| | | | |
| /s/ | David L. Young | | Executive Vice President, Chief Financial Officer, |
| | David L. Young | | and Corporate Secretary |
| | | | |
| /s/ | Frank J. Cervone | | Director |
| | Frank J. Cervone | | |
| | | | |
| /s/ | Robin H. Scheiderman | | Director |
| | Robin H. Scheiderman | | |
| | | | |
| /s/ | G. Keith Watson | | Director |
| | G. Keith Watson | | |
| | | | |
| /s/ | Conrad L. Williams | | Director |
| | Conrad L. Williams | | |
| | | | |
| /s/ | Dennis M. Wolfson | | Director |
| | Dennis M. Wolfson | | |
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
Form 10-K
For Fiscal Year Ended December 31, 2009
| Exhibit | | |
| No. | | Exhibit |
| | | |
| | Subsidiaries of the Registrant |
| | | |
| | 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 |
| | | |
-98-
