SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2008
Commission File Number 000-50557
MARCO COMMUNITY BANCORP, INC.
A Florida Corporation
IRS Employer Identification No. 84-1620092
1770 San Marco Road
Marco Island, Florida 34145
(239) 389-5200
Securities Registered Pursuant to Section 12(b) of the Securities Exchange Act of 1934: NONE
Securities Registered Pursuant to Section 12(g) of the Securities Exchange Act of 1934: Common Stock, $0.01 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(D) of the Exchange Act. Yes ¨ No x
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the exchange Act.
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained 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 x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a small reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
| Non-accelerated filer | ¨ | Smaller reporting company | x | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The aggregate market value of the Registrant’s common stock held by non-affiliates of the Registrant, based upon the closing price of $5.55, as quoted on the Over-the-Counter-Bulletin-Board, on June 30, 2008 was approximately $11,006,138. For the purposes of this response, directors and officers of the Registrant are considered the affiliates of the Registrant at that date.
The number of shares outstanding of the Registrant’s common stock, as of August 10, 2009: 3,222,608 shares of $0.01 par value common stock.
Portions of the Proxy Statement of the Registrant for the Annual Meeting of Shareholders held in May 2009 are incorporated by reference into Part III of this report.
EXPLANATORY NOTE
This Amendment on Form 10-K/A (the “Amendment”) amends our annual report for the fiscal year ended December 31, 2008, originally filed with the Securities and Exchange Commission (“SEC”) on March 30, 2009 (the “Original Report”). We are filing this Amendment to address comments received from the SEC’s staff subsequent to filing our Original Report. In response to such comments, we have amended the Original Report to include revised disclosures concerning our allowance for loan and lease losses (“ALLL”), the underwriting and tracking of our loans, and our deferred tax assets.
Specifically, the revised disclosures in the Amendment address how we used and incorporated data from the Federal Reserve Bank of Saint Louis in calculating our ALLL. This data was used in determining loss rate adjustments related to qualitative factors considered by management. The revisions also provide greater detail about our methodology to determine the ALLL and whether changes in the values of collateral have affected components of our ALLL. In addition, we revised the description of our underwriting process concerning loans with terms of less than two years and the description of the types of lending for each of our loan categories. We also clarified that we do not return loans to accrual status unless they have a sustained history of repayment. Another revised disclosure included in the Amendment provides more detail as to the positive and negative evidence we considered in determining our deferred tax assets did not require a valuation allowance.
Most of the revisions described above appear in the “Item 1. Description of the Business” section of the Amendment except for the revision on accrual status of loans which appears in the “Item 7. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations” section. No other information in the Original Report, other than the filing of the revised disclosures, is amended hereby. Therefore, only Item 1, Item 7 and Item 15 are contained in this Amendment. Except for the foregoing, the Amendment speaks as of the filing date of the Original Report and does not update or discuss any other Company developments after the date of the Original Report.
MARCO COMMUNITY BANCORP, INC. AND SUBSIDIARIES
Table of Contents
| Page | ||||
| PART I | ||||
Item 1. | Description of Business | 1 | ||
| PART II | ||||
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operation | 12 | ||
| PART IV | ||||
Item 15. | Exhibits and Financial Statement Schedules | 28 | ||
| Signatures | 29 | |||
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PART I
| ITEM 1. | DESCRIPTION OF BUSINESS |
Forward-Looking Statements
Some of the statements in this Form 10-K discuss future expectations. There may also be statements regarding projections of results of operations or financial condition or state other “forward-looking” information. Those statements are subject to known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from those contemplated by the statements. We based the forward-looking information on various factors and numerous assumptions, which may or may not turn out to be correct.
Important factors that may cause actual results to differ from those contemplated by forward-looking statements include, for example:
| • | The success or failure of our efforts to implement our business strategy; |
| • | The effect of changing economic conditions, both nationally and in our local community; |
| • | Changes in government regulations, tax and interest rates applicable to our business and similar matters; |
| • | Our ability to attract and retain quality employees; and |
| • | Other risks which may be described in our future filings with the SEC. |
We do not promise to update forward-looking information to reflect actual results or changes in assumptions or other factors that could affect those statements other than material changes to such information.
General
Marco Community Bancorp, Inc. (“MCBI”) was incorporated under the laws of the State of Florida on January 28, 2003, for the purpose of organizing Marco Community Bank (“Bank”) (MCBI and the Bank are collectively referred to as the “Company”) and purchasing 100% of the to-be-issued capital stock of the Bank. The Company was formed by a group of Marco Island business leaders, bank executives and community leaders who believed that there was a significant demand for a locally-owned community bank.
Under Federal Reserve Board regulations, MCBI is expected to be a source of financial strength to the Bank. Banking regulations require that the Bank maintain a minimum ratio of capital to assets. In the event that the Bank’s growth is such that this minimum ratio is not maintained, MCBI may borrow funds, subject to the capital adequacy guidelines of the Federal Reserve, and contribute them to the capital of the Bank and otherwise raise capital in a manner which is unavailable to the Bank under existing banking regulations.
The Bank commenced business operations on August 18, 2003 in a temporary facility located at 1770 San Marco Road, Marco Island, Florida 34145, Marco Island, Florida. Our permanent office condominium facility was completed at the same site and we commenced occupancy in the third quarter of 2004.
MCBI’s other wholly-owned subsidiary, Commercial Lending Capital Corp. (“CLCC”) (formerly MCB Commercial Lending Corp.) was incorporated on October 22, 2004, and commenced a commercial lending brokerage business on November 8, 2004. CLCC was incorporated to provide commercial loans to customers that would otherwise seek financing elsewhere because of credit limit constraints. Effective December 31, 2008 CLCC’s operations were suspended due to economic market conditions.
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The Company’s fiscal year ends December 31. This Form 10-K is also being used as the Bank’s Annual Disclosure Statement under Federal Deposit Insurance Corporation (“FDIC”) Regulations. This Form 10-K has not been reviewed or confirmed for accuracy or relevance by the FDIC.
Market Area and Competition
Marco Island is the primary residential and commercial center located in the southeast part of Collier County, Florida. Collier County maintains a steady tourist, industrial and agricultural base, which has been expanding in recent years. The largest employers in the County include: Collier County School Board; Naples Community Hospital, Inc.; Publix Supermarket, Inc.; Collier County Board of County Commissioners; Marriott Corporation; Winn-Dixie Stores, Inc.; and Ritz Carlton Hotel. Agricultural activities in the county center around the cattle, produce and saltwater fishing industries. Numerous resorts, hotels and other tourist facilities are located in Marco Island, as well as a number of winter residences mixed with a large number of permanent residences.
We offer a full range of interest bearing and non-interest bearing deposit accounts, including commercial and retail checking accounts, money market accounts, individual retirement and Keogh accounts, regular interest bearing savings accounts and certificates of deposit with fixed and variable rates and a range of maturity date options. The sources of deposits are residents, businesses and employees of businesses within our market area, obtained through the personal solicitation of our officers and directors, direct mail solicitation and advertisements published in the local media. We pay competitive interest rates on time and savings deposits. In addition, we have a service charge fee schedule competitive with other financial institutions in our market area covering such matters as maintenance fees on checking accounts, per item processing fees on checking accounts and returned check charges.
Over the past year to 24 months, economic conditions have deteriorated in our primary market area. We believe the challenging market conditions found in its market area are primarily attributable to a regional softening in demand for real estate assets, as well as an oversupply of residential and commercial properties, particularly in the Collier County Florida market. Residential inventories have increased, as has commercial space already in construction and now nearing completion. The decline in residential real estate prices and falling commercial lease rates, uncertainty as to the direction of interest rates, lack of availability of financing and an inability to sell currently owned properties all add to an air of economic uncertainty in the Southwest Florida region. In addition, global economic issues may also affect our market area. These economic factors have also contributed to the number and severity of problem assets within the Bank’s own portfolio as total classified loans as of December 31, 2008 totaled $17.4 million or 12.7% of total assets, compared to $19.1 million or 12.8% at December 31, 2007. The Bank has brought its reserves in line with its expected exposure to these problem assets.
Loan Portfolio
General - We consider the maintenance of a well-underwritten and diversified loan portfolio a prudent and profitable method of employing funds raised through deposits. The Bank’s objective is to maintain a high quality, diversified credit portfolio consisting of commercial, consumer and mortgage loans.
The Bank’s loan policy provides the Bank’s lenders with the discretion necessary to accomplish our lending objectives, while assuring compliance with banking regulations. The Bank Board’s Loan Committee is responsible for overseeing the soundness of the Bank’s credit policy, adherence to lending policies and compliance with applicable laws, rules and regulations. To fulfill these responsibilities, the Loan Committee reviews the adequacy of the Bank’s credit policy on at least a quarterly basis, reviews all large loans and monitors the performance of the loan portfolio on an ongoing basis. At December 31, 2008, net loans comprised 78% of our total assets.
Commercial Loans - We provide commercial loans to the business community to provide funds for such purposes as financing business equipment and commercial real estate. Our emphasis is on loans secured by commercial real estate, rather than riskier receivables or business inventory loans. Risks associated with these types of loans include the general business conditions found in the local economy and borrowers’ ability to conduct their businesses in a fashion which generates sufficient profits to repay their loans under agreed upon terms and conditions. Personal guarantees may be obtained from the principals of business borrowers and third parties to support the borrowers’ ability to service the debt and reduce the risk of non-payment.
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Commercial loans are either short term (one year or less) or intermediate term in nature and may be secured, unsecured or partially secured. Maturities are structured in relation to the economic purpose of the loan, conforming to the anticipated source of repayment. Interest rates are typically originated on a floating rate basis, tied to prime rate. The basis upon which we set rates over prime is based upon the risk of the credit facility. We attempt to place interest rate, floors and pre-payment penalties whenever possible. In addition, we attempt to originate fee income on each loan closed through the Bank.
Term loans are those having an anticipated final maturity of more than one year from the initial funding date. Generally, loans extending more than two years are made pursuant to more robust loan agreements between the borrower and the Bank. These more robust loan agreements typically include loan covenants and requirements of the borrower to provide financial and other information needed to monitor the loan relationship. Amortization schedules on term loans secured by collateral other than real estate typically reflect a complete payout within seven years of the funding date. Loans secured by commercial real estate are generally amortized over 20 years, with five to seven year maturities.
Demand notes are utilized in connection with certain secured commercial loan transactions where the nature of the transactions suggest that such structure is clearly preferable; however, time notes are utilized as a matter of routine.
The following types of credit are also considered by the Bank, subject to adequate available resources to monitor and service such credit:
| • | real estate development loans secured by a first lien on the property where the Bank is also providing construction and/or permanent financing; |
| • | term loans secured by machinery and equipment (terms of such loans will be consistent with the purpose, cash flow capacity, and economic life of collateral); and |
| • | credit lines for short-term working capital requirements. All credit lines are subject to review at least annually and will generally carry a requirement for a minimum 30 consecutive day annual out-of-debt period. |
Residential Real Estate and Home Equity Loans and Lines of Credit - Our consumer real estate lending includes loans secured by 1-4 family residential properties under revolving and open-end loans and lines of credit as well as closed-end loans secured by first and/or junior liens. Our residential real estate loans generally are repayable in monthly installments based on up to a 15-year or a 30-year amortization schedule. We do not actively engage in conventional 15 to 30-year fixed rate residential mortgage lending. Home equity loans and lines of credit may include monthly amortization of principal and interest, but are typically interest-only until maturity.
Residential real estate typically includes loans to finance the acquisition of single-family residences, vacant lots, or lines of credit on existing residences within our immediate market area of Marco Island. However, most of our loans secured by residential real estate are actually loans for a commercial purpose. Exclusive of home equity lines of credit, approximately 63% of our residential real estate loans fall into this category and the other 37% are loans for the acquisition of residential real estate. To the extent that these loans are for the acquisition of the real estate, these are first lien positions. Regarding home equity lines of credit, these may either be in first or junior lien positions depending upon the existence of any prior encumbrances on the collateral real estate. A typical portfolio mix within the classification of home equity lines of credit is approximately 38% first lien positions and 62% second lien positions, but these percentages will vary depending upon specific loan activity at each reporting date.
Consumer Loans - Consumer loans are being provided to individuals for household, family and personal expenditures. Consumer loans generally involve more risk than mortgage loans because the collateral for a defaulted loan may not provide an adequate source of repayment of the principal. This risk is due to the potential for damage to the collateral or other loss of value, and the fact that any remaining deficiency often does not warrant further collection efforts. In addition, consumer loan performance depends on the borrower’s continued financial stability and is, therefore, more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Generally, consumer loans have a maturity of not longer than six years. The primary type of consumer lending will be for the financing of boats and automobiles, home improvements and education.
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Loan Loss Allowance
As of December 31, 2008, approximately 27.9% of outstanding loans are in the commercial real estate loan category compared to 25.8% at December 31, 2007. At December 31, 2008, commercial loans represented 29.9% of our loan portfolio, compared to 33.0% at December 31, 2007. Commercial loans are generally considered by management as having greater risk than other categories of loans in our loan portfolio. We believe that the real estate collateral securing our commercial real estate loans reduces the risk of loss inherently present in commercial loans.
At December 31, 2008, our consumer loan portfolio consisted primarily of lines of credit and installment loans secured by automobiles, boats and other consumer goods. We believe that the risk associated with these types of loans has been adequately provided for in the loan loss allowance.
The Bank’s Board of Directors monitors the loan portfolio monthly in order to evaluate the adequacy of the allowance for loan losses. In addition to reviews by regulatory agencies, the Bank engages the services of outside consultants to assist in the evaluation of credit quality and loan administration. These professionals complement our internal system, which identifies potential problem credits as quickly as possible, categorizes the credit portfolio as to risk and includes a reporting process to monitor the progress of any troubled credits.
The allowance for loan losses is established through a provision for loan losses charged to expenses. Loans are charged off against the allowance when management believes the collectibility of principal is unlikely. The monthly provision for loan losses is based on management’s judgment, after considering known and inherent risks in the portfolio, our past loss experience, adverse situations that may affect a borrower’s ability to repay, assumed values of the underlying collateral securing the loans, the current and prospective financial condition of the borrower, and the prevailing and anticipated economic conditions within the local market.
As with other banks which have regional exposure to the real estate markets, Marco Community Bank has not been immune to the general downturn in the real estate markets and its generalized effects upon the regional economy. Subsequently, as the downturn has progressed, this has placed a strain upon asset quality.
This process of provision calculation has evolved as the Bank has responded to the change in its local and regional market conditions. This has necessitated a revision in the process of calculating such provisions so as to ensure that the Bank maintains an appropriate level of reserves in response to the changing market conditions within which the Bank operates.
The Bank has received and welcomed guidance from the appropriate regulatory agencies about the calculation of this provision and has worked with these agencies to ensure that the allowance for lease and loan losses meets appropriate regulatory standards. This has entailed changes in how the Bank has segmented loan categories, resulting in a more appropriate and detailed division of loan categories (that is, using loan categories tracked though our regulatory reporting to the federal agencies) and an improved assignment of risks specific to each category, which includes consideration of changes in historical losses resulting from trends in key qualitative factors discussed below. This re-segmentation and risk re-assessment has been conducted in compliance with Financial Accounting Standards Board pronouncements FAS 114,Accounting by Creditors for Impairment of a Loan, and FAS 5,Accounting for Contingencies.
As expected, the revision of this calculation process delineated the need to adjust our provisions and overall lease and loan loss allowance accordingly. In addition, we have responded to specific guidance provided by the appropriate regulatory agencies and have made specifically directed adjustments in the level of this allowance in order to conform to this guidance.
Specifically, our current methodology for determining our allowance for loan and lease losses includes:
| • | Evaluating classified loans for impairment under FAS 114, which may result in a specific reserve to the individual loan, if warranted. |
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| • | In addition to the specific reserves under FAS 114, management evaluates performing loans and loans individually reviewed for impairment but not considered individually impaired, by segmenting these loans by loan classification (or loan pools) to establish reserves under FAS 5. A summary of the FAS 5 methodology follows: |
| • | We determine our starting point for historical loss rate for each group of loans with similar risk characteristics based on our loss experience for that group. Historical net charge-off rates are generally used for the past two years but are weighted such that the previous five quarters account for 82% of the historical charge-off rate used for the loan classifications. We currently use fifteen loan pools, which generally follow the classifications used in our reporting to the federal regulators. |
| • | We consider qualitative or environmental factors likely to cause estimated credit losses to differ from historical loss experience. The most significant of the qualitative factors we consider include: |
| • | Changes in international, national, regional, and local economic and business conditions and developments that affect the collectibility of the portfolio, including the condition of various market segments. |
| • | Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans. |
| • | Changes in the value of underlying collateral for collateral-dependent loans. |
| • | The existence and effect of any concentrations of credit, and changes in the level of such concentrations. |
| • | We currently use Federal Reserve data to quantify the overall effect of qualitative factors on a loan group as an adjustment that increases or decreases group’s historical loss rate. We believe the Federal Reserve data provides a directional adjustment consistent with trends in our market, which is validated through our internal and external examinations of our loan policies and procedures and risk management. As our methodology is refined over time, our adjustment(s) for qualitative factors will be derived from our history and/or internal sources. |
While we have modified our allowance methodology and will continue to improve the process, changes in the allowance over the past few years has resulted more from changes in the economy, declining real estate collateral values, and losses from certain loan products – more so than from changing our methodology. The use of the single factor from the Federal Reserve data was used for all segments of loans because a substantial portion of our (and our peers’) loan portfolio is secured by real estate and was affected by the severe decline in real estate values, particularly in our market in Southwest Florida.
The provision for loan losses was $6.0 million for the year ended December 31, 2008, compared to $8.1 million for the year ended December 31, 2007. Non-accrual loans decreased $2.0 million or 16.1% from December 31, 2007. The ratio of non-performing loans to total loans was 9.1% at December 31, 2008, compared to 9.9% from December 31, 2007, and the ratio of non-performing assets to total assets was 9.8% and 10.1%, respectively, at these same dates. These factors lead to the Company’s decreased provision in 2008 as compared to 2007.
For the year ended December 31, 2008, $3.6 million was charged off against the allowance for loan losses. For the year ended December 31, 2007 $6.4 million was charged off against the allowance.
Other Real Estate owned
Other real estate owned (“OREO”) is comprised of real estate properties obtained in partial or total satisfaction of loan obligations. As of December 31, 2008 OREO totaled $3.2 million which was comprised of 13 residential real estate lots held for an average of 9.6 months and six residential properties held for an average of 13 months, all recorded at estimated fair value less estimated selling costs. Changes in value subsequent to transfer are recorded in non-interest expense along with direct operating expenses. Gains or losses not previously recognized which result from the sale of OREO is recognized in non-interest expense on the date of sale. During the year ended December 31, 2008 the Company wrote down $284,000, recorded $1.3 million in proceeds from the sale of four residential properties which resulted in a $257,000 loss. The Company also recorded $299,000 in expenses to refurbish or maintain the properties held.
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At the time of booking OREO, the Bank orders an appraisal and books OREO at a discounted amount based upon the current appraised market value. OREO is actively marketed by professional real estate individuals in an attempt to sell parcels at their current market value. The Company is exposed to the weakening real estate conditions in the Florida markets including Orlando, Naples, Fort Myers and Tampa. With the general economic downturn, the Company may not be able to sell its OREO property at the current market value, may experience an increase in OREO and may incur increased expenses related to carrying and maintaining OREO.
Deposit Generation
We compete aggressively for deposits in the Marco Island market. Among our product offerings are online business banking, checking accounts, cash management services, safe deposit boxes, travelers’ checks, direct deposit of payroll and social security checks, wire transfers, telephone banking and automatic drafts. We believe these accounts and products are profitable when considering the entire potential customer relationship, which may include other deposit accounts, loans, and sources of fee income.
We also offer certificate of deposit and savings account promotions designed to attract customers that we intend to cross-sell other services, including loan products. Our goal is to attract customers who will become long-term due to more responsive, more personalized, and faster service. We also seek to garner low cost deposits while continuing to focus on business deposits encompassing the utilization of our new state-of- the art software programs.
We offer a tiered money market/savings product whereby the Bank pays higher rates on higher deposit balances. We believe this deposit vehicle allows the Bank to compete with money market mutual funds.
Investments
We enter into Federal Funds transactions with our principal correspondent banks and primarily act as a net seller of such funds. The sale of Federal Funds amount to a short-term loan from us to another bank, usually overnight. At December 31, 2008, Federal Funds sold comprised 5.3% of our total assets, compared to 5.8% as of December 31, 2007. At December 31, 2008, the Company held $1.0 million in Federal Home Loan Bank bonds compared to $3.3 million for the year ended December 31, 2007. The Company held $7.1 million in Federal National Mortgage Association Mortgage-backed securities at December 31, 2008 and $3.2 million at December 31, 2007.
Asset/Liability Management
It is our objective to manage assets and liabilities to provide a satisfactory, consistent level of profitability within the framework of established cash management, loan, investment, borrowing and capital policies. Designated Bank officers are responsible for monitoring policies and procedures that are designed to ensure acceptable composition of the asset/liability mix, stability and leverage of all sources of funds while adhering to prudent banking practices. It is the overall philosophy of management to support asset growth primarily through growth of core deposits, which include deposits of all categories made by individuals, partnerships and corporations.
Our asset/liability mix is monitored on a daily basis with a monthly report reflecting interest-sensitive assets and interest-sensitive liabilities being prepared and presented to the Bank’s Board of Directors. The objective of this policy is to control interest-sensitive assets and liabilities so as to minimize the impact of substantial movements in interest rates on our earnings.
Monetary Policies
The results of our operations are affected by credit policies of monetary authorities, particularly the Federal Reserve Board. The instruments of monetary policy employed by the Federal Reserve include open market operations in U.S. Government securities, changes in the discount rate on member bank borrowings, changes in reserve requirements against member bank deposits and limitations on interest rates which member banks may pay on time and savings deposits. In the view of changing conditions in the national economy and in the money markets, as well as the effect of action by monetary and fiscal authorities, including the Federal Reserve, no accurate prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or our business and earnings.
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Employees
As of December 31, 2008, we employed 37 full-time persons, including seven executive officers. Employees are hired as needed to meet company-wide personnel demands.
Supervision and Regulation
The following is a brief summary of some of the statutes, rules and regulations which affect our operations. 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. Any change in applicable laws or regulations may have a material adverse effect on the business and prospects of MCBI and the Bank.
On August 14, 2007, the Bank entered into a Written Agreement with the Federal Reserve Bank of Atlanta (“FRB”) and the Florida Office of Financial Regulation (“OFR”). The purpose of the Written Agreement is for the Bank to address the FRB’s and OFR’s supervisory and regulatory concerns primarily related to the volume of certain loan pools which are described elsewhere in this Form 10-K, as well as other loan quality and administration issues. Pursuant to the Written Agreement, the Bank must take corrective actions within specified time frames, which may be extended with the consent of the FRB and the OFR. Failure to comply with the terms of the Written Agreement could result in the assessment of civil money penalties against the Bank and the members of its Board of Directors. The actions taken included an evaluation by the Bank’s Board of Directors of its current management and staffing to determine if any additional or replacement personnel are needed; the preparation and implementation of a strategic business plan and budget designed to improve the Bank’s financial condition and credit risk management; a review and adoption of any necessary revisions to the Bank’s loan policy and loan review/grading program; a reduction of the Bank’s volume of adversely classified assets; and the continual monitoring of the Bank’s allowance for loan and lease losses. In addition, the Bank may not make any loans to borrowers who previously had loans charged-off by the Bank (such provision is typically included in such written agreements as a proactive preventative measure); must prepare a plan to effectively manage the Bank’s capital relative to its volume of adversely classified assets, anticipated growth and risk profile; and may not pay any dividends without regulatory consent. As of December 31, 2008, the Bank has worked diligently to stay in compliance with the written agreement and considered itself to be in compliance with substantially all conditions of the Written Agreement.
Since entering into the Written Agreement, (i) the Board of Directors has realigned its operating committee structure to facilitate its involvement in the Bank; (ii) the Bank has added Richard Storm, Jr. as its President & Chief Executive Officer, and a new Chief Credit Officer, Chief Financial Officer, a new Senior Commercial Lender & Credit Officer and an Executive Vice President of Special Assets and City Executive; (iii) the Board has completed a full review of all officers, senior managers, and department heads; (iv) the Board, upon the recommendation of the Loan Committee, has approved new appropriate lending authorities, scopes and limits for all loan officers; (v) the Board has retained an independent third party which conducts a quarterly loan review; (vi) the Bank has commenced development and implementation of various plans to reduce the volume of classified loans; (vii) the Bank has charged off all assets classified as “loss” and established an allowance for loan losses that it has determined to be appropriate; (viii) the Bank has restricted transactions with the Company; and (ix) the Bank has prepared a formal business plan.
As a registered bank holding company, MCBI is subject to an extensive body of state and federal banking laws and regulations, which impose specific requirements and restrictions on virtually all aspects of our operations. We are also affected by government monetary policy and by regulatory measures affecting the banking industry in general.
Marco Community Bancorp, Inc.
We are a bank holding company within the meaning of the Bank Holding Company Act of 1956. As such, we file annual reports and other information with the Federal Reserve regarding our business operations and those of our subsidiaries. We are also subject to the supervision of, and to periodic inspections by, the Federal Reserve.
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The Bank Holding Company Act generally requires every bank holding company to obtain the prior approval of the Federal Reserve before:
| • | acquiring all or substantially all of the assets of a bank; |
| • | acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank or bank holding company; or |
| • | merging or consolidating with another bank holding company. |
The Bank Holding Company Act and the Federal Change in Bank Control Act, together with regulations of the Federal Reserve, require certain steps be taken before a person or company acquires control of a bank holding company. Depending on the particular circumstances, either the Federal Reserve’s approval must be obtained, or notice must be furnished to the Federal Reserve and not disapproved, before any person or company acquires control of a bank holding company, subject to certain exemptions. Control is conclusively presumed to exist when an individual or company acquires 25% or more of any class of voting securities of a bank holding company. Control is rebuttably presumed to exist if a person acquires 10% or more, but less than 25%, of any class of voting securities, and either: (i) the bank holding company has registered securities under Section 12 of the Securities Exchange Act of 1934; or (ii) no other person owns a greater percentage of that class of securities immediately after the transaction.
Except as authorized by the Bank Holding Company Act and Federal Reserve regulations or orders, a bank holding company is generally prohibited from engaging in, or acquiring direct or indirect control of more than 5% of the voting shares of any company engaged in any business other than the business of banking or managing and controlling banks. Some of the activities the Federal Reserve has determined by regulation to be proper incidents to the business of banking, and thus permissible for bank holding companies, include:
| • | making or servicing loans and certain types of leases; |
| • | engaging in certain insurance and discount brokerage activities; |
| • | performing certain data processing services; |
| • | acting in certain circumstances as a fiduciary or investment or financial advisor; |
| • | providing management consulting services; |
| • | owning savings associations; and |
| • | making investments in corporations or projects designed primarily to promote community welfare. |
In accordance with Federal Reserve policy, a bank holding company is expected to act as a source of financial strength to its subsidiary banks. In adhering to the Federal Reserve’s policy, MCBI may be required to provide financial support to the Bank when, absent such policy, we might not deem it advisable to provide such assistance.
Under the Bank Holding Company Act, the Federal Reserve may also require a bank holding company to terminate any activity, or relinquish control of a non-bank subsidiary (other than a non-bank subsidiary of a bank) upon the Federal Reserve’s determination that the activity or control constitutes a serious risk to the financial soundness or stability of any subsidiary bank of the bank holding company. Federal bank regulatory authorities also have the discretion to require a bank holding company to divest itself of any bank or non-bank subsidiary if an agency determines that divestiture may aid the depository institution’s financial condition.
The Sarbanes-Oxley Act of 2002 also imposes significant corporate governance standards on the Company. The primary areas of such regulation concern Board oversight of the auditing process, certification of periodic securities reporting and transactions between officers or directors and the Company.
Marco Community Bank
As a state-chartered Federal Reserve member bank, the Bank is subject to the supervision and regulation of the Florida Department of Financial Services (“Florida Department”) and the Federal Reserve. The Bank’s deposits are
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insured by the FDIC for a maximum of $250,000 per depositor. For this protection, the Bank may be required to pay a quarterly statutory assessment. The assessment, if any, levied for deposit insurance will vary, depending on the capital position of the Bank, and other supervisory factors. In 2008, the Bank was assessed and paid $304,000 for such insurance services.
Areas regulated and monitored by the bank regulatory authorities include:
| • | security devices and procedures; |
| • | adequacy of capitalization and loss reserves; |
| • | loans; |
| • | investments; |
| • | borrowings; |
| • | deposits; |
| • | mergers; |
| • | issuances of securities; |
| • | payment of dividends; |
| • | establishment of branches; |
| • | corporate reorganizations; |
| • | transactions with affiliates; |
| • | maintenance of books and records; and |
| • | adequacy of staff training to carry out safe lending and deposit gathering practices. |
Capital Adequacy Requirements
The Bank and MCBI are subject to regulatory capital requirements imposed by the Federal Reserve. Until a bank and its holding company’s consolidated assets reach $500 million, the capital adequacy guidelines issued by the Federal Reserve are applied to bank holding companies on a non-consolidated basis, unless the bank holding company is engaged in non-bank activities involving significant leverage, or it has a significant amount of outstanding debt held by the general public. The Federal Reserve’s risk-based capital guidelines apply directly to insured state banks, regardless of whether they are subsidiaries of a bank holding company. These requirements establish minimum capital ratios in relation to assets, both on an aggregate basis as adjusted for credit risks and off-balance sheet exposures. The risk weights assigned to assets are based primarily on credit risks. For example, securities with an unconditional guarantee by the United States government are assigned to the lowest risk category. The aggregate amount of assets assigned to each risk category is multiplied by the risk weight assigned to that category to determine the weighted values, which are added together to determine total risk-weighted assets.
Capital is then classified into two categories, Tier 1 and Tier 2. Tier 1 capital consists of common and qualifying preferred shareholders’ equity, less goodwill and other adjustments. Tier 2 capital consists of mandatory convertible, subordinated, and other qualifying term debt, preferred stock not qualifying for Tier 1 capital, and a limited amount of allowance for credit losses, up to a designated percentage of risk-weighted assets. Under the risk-based guidelines, banks must maintain a specified minimum ratio of “qualifying” capital to risk-weighted assets. At least 50% of a bank’s qualifying capital must be “core” or Tier 1 capital, and the balance may be “supplementary” or Tier 2 capital. In addition, the guidelines require banks to maintain a minimum leverage ratio standard of capital adequacy. The leverage standard requires top-rated institutions are required to maintain a Tier 1 leverage capital to assets ratio of 3%. All other institutions are required to maintain a Tier 1 leverage capital ratio of 4% or greater, based upon their particular circumstances and risk profiles.
Federal bank regulatory agencies have adopted regulations refining the risk-based capital guidelines to further ensure that the guidelines take adequate account of interest rate risk. Interest rate risk is the adverse effect that changes in market interest rates may have on a bank’s financial condition and is inherent to the business of banking. Under the regulations, when evaluating a bank’s capital adequacy, the revised capital standards now explicitly include a bank’s exposure to declines in the economic value of its capital due to changes in interest rates. The exposure of a bank’s economic value generally represents the change in the present value of its assets, less the change in the value of its liabilities, plus the change in the value of its interest rate off-balance sheet contracts.
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Federal bank regulatory agencies possess broad powers to take prompt corrective action as deemed appropriate for an insured depository institution and its holding company, based on the institution’s capital levels. The extent of these powers depends upon whether the bank in question is considered “well-capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized.” Generally, as a bank is deemed to be less than well-capitalized, the scope and severity of the agencies’ powers increase, ultimately permitting an agency to appoint a receiver for the bank. Business activities may also be influenced by a bank’s capital classification. For instance, only a “well-capitalized” bank may accept brokered deposits without prior regulatory approval, and can engage in various expansion activities with prior notice, rather than prior regulatory approval. However, rapid growth, poor loan portfolio performance or poor earnings performance, or a combination of these factors, could change the capital position of the bank in a relatively short period of time. Failure to meet these capital requirements could subject the bank to regulatory action, which may include filing with the appropriate bank regulatory authorities a plan describing the means and a schedule for achieving the minimum capital requirements. In addition, the Bank would not be able to receive regulatory approval of any application that required consideration of capital adequacy, such as a branch or merger application, unless we could demonstrate a reasonable plan to meet the capital requirement within an acceptable period of time.
Other Laws
State usury and credit laws limit the amount of interest and various other charges collected or contracted by a bank on loans. Our loans are also subject to federal laws applicable to credit transactions, such as the:
| • | Federal Truth-In-Lending Act, which governs disclosures of credit terms to consumer borrowers; |
| • | Community Reinvestment Act, which requires financial institutions to meet their obligations to provide for the total credit needs of the communities they serve, including investing their assets in loans to low- and moderate-income borrowers; |
| • | Home Mortgage Disclosure Act, which requires financial institutions to provide information to enable public officials to determine whether a financial institution is fulfilling its obligations to meet the housing needs of the community it serves; |
| • | Equal Credit Opportunity Act, which prohibits discrimination on the basis of race, creed or other prohibitive factors in extending credit; |
| • | Real Estate Settlement Procedures Act, which requires lenders to disclose certain information regarding the nature and cost of real estate settlements, and prohibits certain lending practices, as well as limits escrow account amounts in real estate transactions; |
| • | Fair Credit Reporting Act, which governs the manner in which consumer debts may be collected by collection agencies; and |
| • | Rules and regulations of various federal agencies charged with the responsibility of implementing such federal laws. |
Our operations are also subject to the:
| • | Privacy provisions of the Gramm-Leach-Bliley Act of 1999, which requires us to maintain privacy policies intended to safeguard consumer financial information, to disclose these policies to our customers, and allow customers to “opt out” of having their financial service providers disclose their confidential financial information to non-affiliated third parties, subject to certain exceptions; |
| • | Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial record; and |
| • | Electronic Funds Transfer Act and Regulation E, which govern automatic deposits to, and withdrawals from, deposit accounts and customers’ rights and liabilities arising from the use of debit cards, automated teller machines and other electronic banking services. |
Interstate Banking and Branching
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, eligible bank holding companies in
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any state are permitted, with Federal Reserve approval, to acquire banking organizations in any other state. The Interstate Banking and Branching Efficiency Act also removed substantially all of the prohibitions on interstate branching by banks. The authority of a bank to establish and operate branches within a state, however, continues to be subject to applicable state branching laws. Under current Florida law, the Bank is permitted to establish branch offices throughout Florida, with the prior approval of the Florida Department and the Federal Reserve. In addition, with prior regulatory approval, we are able to acquire existing banking operations in other states.
Financial Modernization
The Gramm-Leach-Bliley Act of 1999 sought to achieve significant modernization of the federal bank regulatory framework by allowing the consolidation of banking institutions with other types of financial services firms, subject to various restrictions and requirements. In general, the Gramm-Leach-Bliley Act repealed most of the federal statutory barriers which separated commercial banking firms from insurance and securities firms and authorized the consolidation of such firms in a “financial services holding company.”
Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141(R),Business Combinations (“SFAS 141(R)”). SFAS 141(R) is effective for the Bank’s financial statements for the year and interim periods within the year beginning January 1, 2009. SFAS 141(R) requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition date fair value as the measurement objective for all assets acquired and liabilities assumed’ and require the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. Acquisition related costs including finder’s fees, advisory, legal, accounting valuation and other professional and consulting fees are required to be expensed as incurred. Management is in the process of evaluating the impact of SFAS 141(R) and does not anticipate it will have a material impact on the Company’s financial condition or results of operations.
In December 2007, the FASB issued SFAS No.160,Noncontrolling Interests in Consolidated Financial Statements (‘SFAS 160”). SFAS 160 provides the Company to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective for the Company’s financial statements for the year and interim periods within the year beginning January 1, 2009. The adoption of SFAS 160 did not have a material impact on the Company.
In March 2008, the FASB issued SFAS No. 161,Disclosure about Derivative Instruments and Hedging Activities (“SFAS 161”). This standard requires enhanced disclosures regarding derivative instruments and hedging activities so as to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for the Company’s financial statements for the year and interim periods within the year beginning January 1, 2009. The adoption of SFAS 160 did not have a material impact on the Company.
In May 2008, the FASB issued SFAS No. 162,The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”). This statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statement of nongovernmental entities that are presented in conformity with generally accepted accounting principles “GAAP” in the United States. This Statement is effective 60 days following the SEC approval of the Public Company Accounting Oversight Board amendments to AU Section 411,The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.The adoption of SFAS 162 will not have a material impact on the Company.
On February 20, 2008 the FASB issued FSP No. FAS 140-3,Accounting for Transfers of Financial Assets and Repurchase Financing Transactions (“FSP140-3”). FSP 140-3 requires that an initial transfer of a financial asset and a repurchase financing that was entered into contemporaneously with, or in contemplation of, the initial transfer be evaluated together as a linked transaction under SFAS 140, unless certain criteria are met. FSP 140-3 is effective for the Company’s financial statements for the year and interim periods within the year beginning January 1, 2009. The adoption of FSP 140-3 did not have a material impact on the Company.
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| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
December 31, 2008 and 2007 and the Periods then Ended
General
Marco Community Bancorp, Inc., a Florida corporation (the “Holding Company”), was incorporated on January 28, 2003 for the purpose of operating as a one-bank holding company. The Holding Company currently owns 100% of the outstanding shares of Marco Community Bank (the “Bank”) and Commercial Lending Capital Corp. (“CLCC”) (formally known as MCB Commercial Lending Corp.) (collectively, the “Company”). The Holding Company’s only business is the ownership and operation of the Bank and CLCC. The Bank is a Florida-chartered commercial bank which opened for business on August 18, 2003. The Bank is a member of the Federal Reserve System and its deposits are insured by the Federal Deposit Insurance Corporation. The Bank provides community banking services to business and individuals from its banking office located in Marco Island, Florida. CLCC operated as a commercial loan brokerage business. Effective December 31, 2008, CLCC’s operations were suspended due to economic market conditions.
Critical Accounting Policies
Our financial condition and results of operations are sensitive to accounting measurements and estimates of matters that are inherently uncertain. When applying accounting policies in areas that are subjective in nature, we must use our best judgment to arrive at the carrying value of certain assets. The most critical accounting policy we apply relates to the valuation of the loan portfolio.
A variety of estimates impact carrying value of the loan portfolio including the calculation of the allowance for loan losses, valuation of underlying collateral, the timing of loan charge-offs and the amount and amortization of loan fees and deferred origination costs.
The allowance for loan losses is the most difficult and subjective judgment. The allowance is established and maintained at a level we believe is adequate to cover losses resulting from the inability of borrowers to make required payments on loans. Estimates for loan losses are arrived at by analyzing risks associated with specific loans and the loan portfolio, current trends in delinquencies and charge-offs, the views of our regulators, changes in the size and composition of the loan portfolio and peer comparisons. The analysis also requires consideration of the economic climate and direction, change in the interest rate environment, which may impact a borrower’s ability to pay, legislation impacting the banking industry and economic conditions specific to our service area. Because the calculation of the allowance for loan losses relies on estimates and judgments relating to inherently uncertain events, results may differ from our estimates.
The allowance for loan losses is also discussed as part of “Results of Operations” and in Note 1 to the consolidated financial statements.
Liquidity and Capital Resources
Our total assets at December 31, 2008 were $136.7 million and net loans were $106.6 million, while at December 31, 2007, total assets were $149.5 million and net loans were $ 119.9 million. Deposits totaled $116.1 million at December 31, 2008 and $123.7 million at December 31, 2007. The Company’s primary source of cash during the period ended December 31, 2008, was net proceeds from the net decrease in loans of $5.1 million and issuance of preferred stock of $1.1 million. Cash was used primarily to fund the net decrease in deposits of $7.6 million and to purchase securities for $6.0 million. In 2007, the primary source of cash was issuance of preferred stock of $4.9 million. In 2007, cash was used primarily to fund the net decrease in deposits of $18.6 million and to purchase securities for $4.9 million. At December 31, 2008, we had one outstanding letter of credit totaling $200,000,
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commitments to borrowers for available lines of credit and unfunded construction loans totaling $16.8 million and we had time deposits of $67.7 million maturing in the next twelve months. At December 31, 2007, we had no outstanding commitments to originate loans. Commitments to borrowers for available lines of credit and funded construction loans totaled $26.1 million and time deposits totaled $68.9 million maturing in the twelve months following December 31, 2007. We expect to fund our commitments from the sources described above and could adjust the interest-rates paid on deposits if necessary to attract or retain time deposit accounts.
Regulation and Legislation
As a state-chartered commercial bank and registered bank holding company, we are subject to extensive regulation by the Florida Department of Financial Services (“Florida DFS”) and the Federal Reserve Board of Governors (“FRB”). We file reports with the Florida DFS and the FRB concerning our activities and financial condition, in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with or acquisitions of other financial institutions. Periodic examinations are performed by the Florida DFS and the FRB to monitor our compliance with the various regulatory requirements. As described in “Description of Business.” The Bank currently is party to a written agreement with the Federal Reserve Bank and the Florida Office of Financial Regulation.
Credit Risk
Our primary business is making commercial, business, consumer, and real estate loans. That activity entails potential loan losses, the magnitudes of which depend on a variety of economic factors affecting borrowers which are beyond our control. While we have instituted underwriting guidelines and credit review procedures to protect the Company from avoidable credit losses, some losses will inevitably occur. At December 31, 2008, the Company had $10.2 million in non-accrual loans and no loans which were over 90 days past due and still accruing interest. At December 31, 2007, the Company had $12.2 million in non-accrual loans and no loans which were over 90 days past due and still accruing interest. During the year ended December 31, 2008 the Company charged off loan balances of $3.6 million. During the year ended December 31, 2007, the company charged off loan balances of $6.4 million.
We evaluate the allowance for loan losses on a regular basis. It is based upon our 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. We base the allowance for loan losses on a grading system.
The Company grants the majority of its loans to borrowers throughout Collier County, Florida. Although the Company has a diversified loan portfolio, a significant portion of its borrowers’ ability to honor their contracts is dependent upon the economy in Florida. The Company does have 10 loans with original terms of one year, aggregating $2.0 million at December 31, 2008, the primary source of repayment is the sale of the related collateral or the conversion of the existing debt into debt at another financial institution. The majority of these loans are located in Duval, Hillsborough and Pinellas Counties. With the uncertain real estate market in Florida, obtaining refinancing or sale of the collateral may be difficult or impossible. Management is closely monitoring these loans and believes the loan loss allowance at December 31, 2008 is adequate.
(This space intentionally left blank.)
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Summary of Loan Loss Experience
An analysis of the Bank’s allowance for loan losses is furnished in the following table ($ in thousands):
| For the period ending December 31, | 2008 | 2007 | ||||||
Total loans outstanding at the end of the period: | $ | 112,688 | $ | 123,587 | ||||
Allowance at beginning of period: | $ | 3,794 | $ | 2,047 | ||||
Loans charged-off during the period: | ||||||||
Loans secured by real estate | (3,599 | ) | (6,366 | ) | ||||
Recoveries of loans previously charged off: | 0 | 3 | ||||||
Provision charged to operations: | 5,959 | 8,110 | ||||||
Allowance at end of period: | $ | 6,154 | $ | 3,794 | ||||
Average loans outstanding during the period: | $ | 116,016 | $ | 131,524 | ||||
Ratio of net charge-offs to average loans outstanding: | 3.10 | % | 4.84 | % | ||||
Allowance as a percentage of total loans: | 5.46 | % | 3.07 | % | ||||
Allowance as a percentage of non accrual loans: | 60.12 | % | 31.1 | % | ||||
At December 31, 2008 and 2007 the allowance was allocated as follows ($ in thousands):
| Amount | % of Loans in Category to Total Loans | Amount | % of Loans in Category to Total Loans | |||||||||
| 2008 | 2007 | |||||||||||
Commercial real estate | $ | 2,198 | 26.1 | % | $ | 1,414 | 25.8 | % | ||||
Commercial | 591 | 11.1 | 1,324 | 33.0 | ||||||||
Residential real estate | 2,352 | 43.9 | 797 | 19.8 | ||||||||
Consumer | 468 | 8.7 | 13 | 0.9 | ||||||||
Home equity loans and lines of credit | 545 | 10.2 | 246 | 20.5 | ||||||||
Total | $ | 6,154 | 100.0 | % | $ | 3,794 | 100.0 | % | ||||
During the course of the fiscal year ending December 31, 2008, non-accrual loans decreased slightly as a percentage of the Bank’s loan portfolio from 9.9% to 9.1% while total past dues (those loans in excess of 30 days of delinquency) grew from 3.0% of the total loan portfolio to 4.2%. Correspondingly, this decrease in non-performing assets had the effect of increasing the ratio of the allowance to non-performing assets from 25.2% to 45.3%.
The process by which the Bank calculates the allowance for lease and loan losses has evolved to more closely track those portions of the loan portfolio where the Bank was incurring a heightened level of impairment to asset quality. This process of modification also allowed the Bank to more accurately define segment risks and to more adequately determine an appropriate overall reserve level. This modified process was first utilized in the calculation of the provision taken at March 31, 2008 in conjunction with guidance from the appropriate regulatory agencies as to the level of reserve that the agencies felt was appropriate for the Bank to maintain at that time.
Investment Activities
Investment activities serve to enhance overall yield on earning assets while supporting interest rate sensitivity and liquidity positions. Securities may be classified as either trading, held-to-maturity or available-for-sale. Trading
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securities are held principally for resale and recorded at their fair values. Unrealized gains and losses on trading securities are included immediately in operations. Held-to-maturity securities are those which the Company has the positive intent and ability to hold to maturity and are reported at amortized cost. Available-for-sale securities consist of securities not classified as trading securities or as held-to-maturity securities.
The securities have been classified according to management’s intent. Following are summaries of the securities (in thousands):
| Amortized Cost | Fair Value | |||||
Securities Held to Maturity: | ||||||
At December 31, 2008: | ||||||
U.S. Government and Federal Agencies | $ | 1,000 | $ | 1,011 | ||
Mortgage-backed securities of U.S government agencies | 7,147 | 7,245 | ||||
| $ | 8,147 | $ | 8,256 | |||
Securities Available for Sale: | ||||||
At December 31, 2007- | ||||||
U.S. Government and Federal Agencies | $ | 1,000 | 1,009 | |||
Securities Held to Maturity: | ||||||
At December 31, 2007: | ||||||
U.S. Government and Federal Agencies | 2,330 | 2,353 | ||||
Mortgage-backed securities of U.S government agencies | 3,231 | 3,253 | ||||
| $ | 5,561 | 5,606 | ||||
The following table indicates the respective maturity and weighted-average yield of the securities held at December 31, 2008 (dollars in thousands):
| After One Year to Five Years | After Five Years | Total | ||||||||||||||||
| Carrying Value | Average Yield | Carrying Value | Average Yield | Carrying Value | Average Yield | |||||||||||||
Securities held to maturity: | ||||||||||||||||||
U.S. Government agency | $ | 1,000 | 4.29 | % | — | — | $ | 1,000 | 4.29 | % | ||||||||
Mortgage-backed and related instruments | — | — | 7,147 | 3.55 | % | 7,147 | 3.55 | % | ||||||||||
Total | $ | 1,000 | 5.37 | % | $ | 7,147 | 3.64 | % | $ | 8,147 | 3.64 | % | ||||||
Loan Portfolio Composition
Commercial loans comprise the largest group of loans in our portfolio amounting to $33.7 million or 29.9% of the total loan portfolio at December 31, 2008. At December 31, 2007, commercial loans amounted to $40.8 million, or 33.0% of the total loan portfolio. At December 31, 2008, home equity loans and lines of credit were $25.2 million, loans secured by commercial real estate were $31.4 million, residential real estate loans amounted to $21.3 million
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and consumer loans totaled $1.1 million. At December 31, 2007, home equity loans and lines of credit were $25.3 million, loans secured by commercial real estate were $31.9 million, residential real estate loans amounted to $24.5 million and consumer loans totaled $1.1 million.
The following table sets forth the composition of the loan portfolio:
At December 31, 2008 ($ in thousands) | Amount | % of Total | |||||
Commercial real estate | $ | 31,404 | 27.9 | % | |||
Commercial | 33,714 | 29.9 | |||||
Residential real estate | 21,271 | 18.9 | |||||
Consumer | 1,099 | .9 | |||||
Home equity loans and lines of credit | 25,200 | 22.4 | |||||
Total loans | 112,688 | 100.0 | % | ||||
Add (subtract): | |||||||
Deferred loan costs, net | 20 | ||||||
Allowance for loan losses | (6,154 | ) | |||||
Loans, net | $ | 106,554 | |||||
At December 31, 2007 ($ in thousands) | Amount | % of Total | |||||
Commercial real estate | $ | 31,925 | 25.8 | % | |||
Commercial | 40,778 | 33.0 | |||||
Residential real estate | 24,503 | 19.8 | |||||
Consumer | 1,107 | 0.9 | |||||
Home equity loans and lines of credit | 25,274 | 20.5 | |||||
Total loans | $ | 123,587 | 100.0 | % | |||
Add (subtract): | |||||||
Deferred loan costs, net | 83 | ||||||
Allowance for loan losses | (3,794 | ) | |||||
Loans, net | $ | 119,876 | |||||
The following table sets forth the maturities of loans outstanding as of December 31, 2008 (in thousands):
| Due in 1 Year or Less | Due After 1 Year but Before 5 Years | Due After 5 Years but Before 10 Years | Due Over 10 Years | Total | |||||||||||
Commercial real estate | $ | 7,383 | $ | 20,230 | $ | 1,759 | $ | 2,032 | $ | 31,404 | |||||
Commercial | 9,136 | 16,857 | 7,721 | — | 33,714 | ||||||||||
Residential real estate | — | 12,175 | 3,095 | 6,001 | 21,271 | ||||||||||
Consumer | 49 | 670 | 380 | — | 1,099 | ||||||||||
Home equity loans and lines of credit | 280 | 1,277 | 23,643 | — | 25,200 | ||||||||||
Total | $ | 16,848 | $ | 51,209 | $ | 36,598 | $ | 8,033 | $ | 112,688 | |||||
Scheduled contractual principal payments of loans do not reflect the actual lives of loans. The average life of a loan is substantially less than its contractual term because of prepayments. The average life of a loan tends to increase; however, when the current market rates for that particular type of loan are substantially higher than rates on an existing loan and, conversely, tend to decrease when rates on an existing loan are substantially higher than the current market rate for that particular type of loan. Prepayment penalties attempt to lessen the income impact of borrowers prepaying their loans by imposing fees for any early prepayment of the loans.
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As of December 31, 2008, and 2007, no concentrations of loans exceeding 10% of total loans existed which were not disclosed as a separate category of loans.
Sensitivity of Loans to Changes in Interest Rates.
The following table as of December 31, 2008, sets forth the dollar amounts of loans due after one year which had predetermined interest rates and loans due after one year which had floating or adjustable interest rates (dollars in thousands).
| Fixed | Adjustable | Total | |||||||
Commercial real estate | $ | 18,834 | $ | 5,187 | $ | 24,021 | |||
Commercial | — | 24,578 | 24,578 | ||||||
Residential real estate | 2,141 | 19,130 | 21,271 | ||||||
Consumer | — | 1,050 | 1,050 | ||||||
Home equity loans and lines of credit | — | 24,920 | 24,920 | ||||||
Total | $ | 20,975 | $ | 74,865 | $ | 95,840 | |||
Non-performing Loans
Non-performing loans include non-accrual loans. Non-accrual loans represent loans on which interest accruals have been discontinued. It is our policy to discontinue interest accruals when principal or interest is due and has remained unpaid for 90 days or more unless the loan is both well secured and in the process of collection. When a loan is placed in non-accrual status, all unpaid interest is reversed. Payments on non-accrual loans are generally applied to either principal or interest or both, depending on management’s evaluation of collectibility. Non-accrual loans may not be restored to accrual status unless they have a sustained history of repayment, in addition to the payment of all delinquent principal and interest.
In 2008, non-accrual loans decreased by $2.0 million. $2.0 million of the current $10.2 million total represents the outstanding balances of the loan pools discussed in detail later in this report. $5.1 million non-accrual loans are the result of non-payments by borrowers on loans made for commercial real estate purposes.
Non-performing loans are closely monitored on an ongoing basis as part of our loan review and work-out process. The potential risk of loss on these loans is evaluated by comparing the loan balance to the fair value of any underlying collateral or the present value of projected future cash flows. Losses are recognized where appropriate.
The following is a summary of non-performing loans (dollars in thousands):
| At December 31, | 2008 | 2007 | ||||||
Non-accrual loans | $ | 10,236 | $ | 12,200 | ||||
Restructured loans | — | — | ||||||
Total | $ | 10,236 | $ | 12,200 | ||||
Non-performing loans as a percentage of total loans | 9.08 | % | 9.87 | % | ||||
All loans where information exists about possible credit problems that would cause us to have serious doubts about the borrower’s ability to comply with the current terms of the loan have been reflected within the table summarizing non-performing loans.
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The following is a table showing the amounts of contractual interest income and actual interest income recorded on non-accrual and restructured loans (in thousands):
| At December 31, | 2008 | 2007 | ||||
Gross interest income that would have been recorded if the loans had been current and in accordance with their original terms | $ | 2,378 | $ | 1,679 | ||
Interest income recorded during the year | 55 | 780 | ||||
At December 31, 2008 and 2007 the Company had no loans which were over 90 days past due and still accruing interest.
As of December 31, 2008, the Bank had $2.0 million in outstanding loans that were acquired in loan pool purchases. These short term loans were to borrowers with high credit scores and were used to finance the borrowers’ acquisition and renovation of residential real estate primarily in Duval and Hillsborough Counties, Florida. Due to liquidity and pricing weaknesses in those markets, as well as the financial deterioration of the loans’ servicer, we have concluded that the likelihood of full repayment of those loans is unlikely. In 2008, the Bank charged-off $775,000 related to these loans. The Bank is actively engaged in attempting to mitigate additional losses and is evaluating its options, including but not limited to, selling the loan pools or accepting assignment of individual loans and pursuing refinancing or foreclosures.
Off-Balance Sheet Arrangements
The Company is a party to 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, unfunded construction loans, unused lines of credit, and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amounts recognized in the consolidated balance sheet. The contract or notional amounts of these instruments reflect the extent the Company’s involvement in particular classes of financial instruments.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, unfunded construction loans, unused lines of credit and standby letters of credit is represented by the contractual amount of those instruments. To control the credit risk associated with entering into commitments and issuing letters of credit, the Company uses the same credit quality, collateral policies, and monitoring controls in making commitments and letters of credit as it does with its lending activities.
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 the payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total committed amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counter party.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party and to support public and private borrowing arrangements. Essentially all letters of credit issued 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. The Company generally holds collateral supporting those commitments.
Unused lines of credit, unfunded construction loans and commitments to extend credit typically result in loans with a market interest rate.
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The following table is a summary of the amounts of the financial instruments, with off-balance sheet risk, at December 31, 2008:
| Off-Balance Sheet Arrangements: | Contract Amount (in thousands) | ||
Commitments to extend credit | $ | — | |
Unfunded construction loans | 1,266 | ||
Unused lines of credit | 15,536 | ||
Standby letters of credit | 200 | ||
Liquidity
Liquidity represents the ability to provide steady sources of funds for loan commitments and investment activities, as well as to maintain sufficient funds to cover deposit withdrawals and payment of debt and operating obligations. The Bank’s liquidity position was initially established through the Holding Company’s purchase of $ 6.4 million of the common stock of the Bank. In 2008, the Holding Company contributed an additional $2.0 million to the Bank’s capital. In 2007, the Holding Company contributed an additional $4.5 million to the Bank’s capital. As the Bank grows, liquidity needs can be met either by converting assets to cash or by attracting new deposits. Bank deposits were $116.1 million at December 31, 2008 and $ 123.7 million at December 31, 2007. Below are the pertinent liquidity balances and ratios at December 31, 2008 and 2007 ($ in thousands).
| At December 31, | 2008 | 2007 | ||||||
Cash and cash equivalents | $ | 9,211 | $ | 11,174 | ||||
Time deposits over $100,000 to total deposits ratio | 26.6 | % | 27.5 | % | ||||
Loan to deposit ratio | 97.1 | % | 99.9 | % | ||||
Brokered deposits | $ | 25,172 | $ | 19,728 | ||||
Cash and cash equivalents are the primary source of liquidity. At December 31, 2008, cash and cash equivalents amounted to $9.2 million, representing 6.7% of total assets. At December 31, 2007, cash and cash equivalents amounted to $11.2 million, representing 7.5 % of total assets. At December 31, 2008 and December 31, 2007, large denomination certificates accounted for 26.6% and 27.5%, respectively, of total deposits. Large denomination time deposits generally are more volatile than other deposits. As a result, management continually monitors the competitiveness of the rates it pays on its large denomination time deposits and periodically adjusts the Bank’s rates in accordance with market demands. Significant withdrawals of large denomination time deposits may have a material adverse effect on the Bank’s liquidity. Management believes that since a majority of the above certificates were obtained from bank customers residing outside of Collier County, Florida, the volatility of such deposits is higher than if such deposits were obtained from depositors residing inside of Collier County, as outside depositors are generally more likely to be interest rate sensitive. Brokered deposits are deposit instruments, such as certificates of deposit, deposit notes, bank investment contracts and certain municipal investment contracts that are issued through brokers and dealers who then offer and/or sell these deposit instruments to one or more investors. As of December 31, 2008 and 2007, the Bank had $25.2 million and $19.7 million, respectively, in brokered deposits in its portfolio. Management knows of no trends, demands, commitments, events or uncertainties that should result in or are reasonably likely to result in the Bank’s liquidity increasing or decreasing in any material way in the foreseeable future.
Regulatory Capital Requirements
The Bank is subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective actions, the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
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Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2008, that the Bank met all capital adequacy requirements to which they are subject. As of December 31, 2008, the most recent notification from the regulatory authorities categorized the Bank as well capitalized. An institution must maintain certain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios. See Note 11 to the Consolidated Financial Statements for the actual capital amounts and ratios.
Deferred Tax Asset
The Company has recorded a deferred tax asset to recognize the future income tax benefit of operating losses incurred for tax years 2008 and 2007. Management believes that the tax benefits on the net operating loss carry forwards will be utilized when the Company returns to profitability. The net operating losses can be carried forward for up to 20 years and do not begin to expire until 2027. Management believes that based on its realistic forecast and five year budget, the Company will return to profitability beginning in 2010 and will utilize most of the deferred tax asset by the year 2013.
Management considered the cumulative losses in 2008 and 2007 and the anticipated net operating loss for 2009 when determining whether or not to perform a valuation allowance on the deferred tax asset. The economic conditions and the Company’s level of non-performing assets were taken into consideration as well.
However, management believed that the negative evidence was outweighed by certain positive evidence. The Company has a prior history of earnings outside of the recent losses and believes that changes have been made to allow the Company to return to an earnings position: payroll has been reduced; operating costs have been reduced for a substantial savings; and loan pools that were the direct cause of a substantial amount of the cumulative losses experienced over the last three years have been isolated and for the most part have been written off. Based on the above analysis, Management believes it is more likely than not that the Company would realize the deferred tax asset through future operating income.
Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates. We do not engage in trading or hedging activities and do not invest in interest-rate derivatives or enter into interest-rate swaps. Our market risk arises primarily from interest-rate risk inherent in our lending and deposit taking activities. To that end, we actively monitor and manage our interest-rate risk exposure. The measurement of market risk associated with financial instruments is meaningful only when all related and offsetting on- and off-balance-sheet transactions are aggregated, and the resulting net positions are identified. Disclosures about the fair value of financial instruments, which reflect changes in market prices and rates, can be found in Note 7 of Notes to Consolidated Financial Statements.
Our primary objective in managing interest-rate risk is to minimize 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 our asset-liability structure to control interest-rate risk. See the section below titled Asset-Liability Structure. However, a sudden and substantial increase in interest rates may 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.
We use modeling techniques to simulate changes in net interest income under various rate scenarios. Important elements of these techniques include the mix of floating versus fixed-rate assets and liabilities, and the scheduled, as well as expected, repricing and maturing volumes and rates of the existing balance sheet.
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Asset - Liability Structure
As part of our asset and liability structure we emphasize establishing and implementing internal asset-liability decision processes, as well as communications and control procedures to aid in managing our operations. We believe these processes and procedures provide us with better capital planning, asset mix and volume controls, loan-pricing guidelines, and deposit interest-rate guidelines which should result in tighter controls and less exposure to interest-rate risk.
The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest-rate sensitive” and by monitoring an institution’s interest rate sensitivity “gap.” An asset or liability is said to be interest-rate sensitive within a specific time period if it will mature or reprice within that time period. The interest-rate sensitivity gap is defined as the difference between interest-earning assets and interest-bearing liabilities maturing or repricing within a given time period. The gap ratio is computed as rate sensitive assets/rate sensitive liabilities. A gap ratio of 1.0 represents perfect matching. A gap is considered positive when the amount of interest-rate sensitive assets exceeds interest-rate sensitive liabilities. A gap is considered negative when the amount of interest-rate sensitive liabilities exceeds interest-rate sensitive assets. During a period of rising interest rates, a negative gap would adversely affect net interest income, while a positive gap would result in an increase in net interest income. During a period of falling interest rates, a negative gap would result in an increase in net interest income, while a positive gap would adversely affect net interest income.
In order to minimize the potential for adverse effects of material and prolonged increases in interest rates on the results of operations, we monitor asset and liability management policies to better match the maturities and repricing terms of our interest-earning assets and interest-bearing liabilities. Such policies have consisted primarily of: (i) emphasizing the origination of adjustable-rate loans; (ii) building a stable core deposit base; and (iii) maintaining a significant portion of liquid assets (cash and short-term securities).
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The following table sets forth certain information relating to our interest-earning assets and interest-bearing liabilities at December 31, 2008 that are estimated to mature or are scheduled to reprice within the period shown ($ in thousands):
| Three Months | More Than Three Months to One Year | More Than One Year To Five Years | More Than Five Years to Fifteen Years | Over Fifteen Years | Total | ||||||||||||||
Loans (1): | |||||||||||||||||||
Variable rate | $ | 8,557 | 3,493 | 9,696 | — | — | 21,746 | ||||||||||||
Fixed rate | 47,831 | 34,196 | 8,791 | 124 | — | 90,942 | |||||||||||||
Total loans | 56,388 | 37,689 | 18,487 | 124 | — | 112,688 | |||||||||||||
Federal funds sold | 7,237 | — | — | — | 7,237 | ||||||||||||||
Investment securities | — | 1,000 | 7,147 | — | — | | 8,147 | ||||||||||||
Interest Bearing due from Banks | 387 | — | 387 | ||||||||||||||||
Federal Reserve and FHLB stock | — | — | — | 714 | — | 714 | |||||||||||||
Total rate-sensitive assets | 64,012 | 38,689 | 25,634 | 838 | — | 129,173 | |||||||||||||
Deposit accounts: | |||||||||||||||||||
Savings, NOW and money market deposits (2) | 34,776 | — | — | — | — | 34,776 | |||||||||||||
Time deposits (2) | 15,411 | 52,241 | 9,319 | — | — | 76,971 | |||||||||||||
Repurchase Agreements | 931 | — | — | — | — | 931 | |||||||||||||
Total rate-sensitive liabilities | 51,118 | 52,241 | 9,319 | — | — | 112,678 | |||||||||||||
GAP repricing differences | $ | 12,894 | (13,552 | ) | 16,315 | 838 | — | 16,495 | |||||||||||
Cumulative GAP | $ | 12,894 | (658 | ) | (15,657 | ) | 16,495 | 16.495 | 16,495 | ||||||||||
Cumulative GAP/total assets | 9.4 | % | (0.5 | )% | (11.4 | )% | 12.1 | % | 12.1 | % | 12.4 | % | |||||||
| (1) | In preparing the table above, adjustable-rate loans are 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 are scheduled, including repayment, according to their maturities. |
| (2) | Money-market, NOW, and savings deposits are regarded as ready accessible withdrawable accounts. Time deposits are scheduled through the maturity dates. |
The following table reflects the contractual principal repayments by period of the loan portfolio at December 31, 2008 (in thousands):
Years Ending December 31, | Commercial Real Estate | Commercial | Residential Real Estate | Consumer | Home Equity and Lines of Credit | Total | ||||||||||||
2009 | $ | 12,103 | $ | 9,136 | $ | 9,341 | $ | 3 | $ | — | $ | 30,583 | ||||||
2010 - 2013 | 17,149 | 21,143 | 5,726 | 610 | 1,496 | 46,124 | ||||||||||||
2014 and beyond | 2,152 | 3,435 | 6,204 | 486 | 23,704 | 35,981 | ||||||||||||
Total | $ | 31,404 | $ | 33,714 | $ | 21,271 | $ | 1,099 | $ | 25,200 | $ | 112,688 | ||||||
Of the $82.1million of loans due after 2009, 78.4% of such loans have fixed-interest rates and 21.6% have adjustable interest rates.
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Scheduled contractual principal repayments of loans do not reflect the actual life of such assets. The average life of loans is substantially less than their average contractual terms due to prepayments. In addition, due-on-sale clauses on loans generally give us the right to declare a conventional loan immediately due and payable in the event, among other things, that the borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase, however, when current mortgage loan rates are substantially higher than rates on existing mortgage loans and, conversely, decrease when rates on existing mortgages are substantially higher than current mortgage loan rates.
Deposit and Other Source of Funds
General - In addition to deposits, the sources of funds available for lending and other business purposes include loan repayments. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows are influenced significantly by general interest rates and money-market conditions. Borrowings may be used on a short-term basis to compensate for reductions in other sources, such as deposits at less than projected levels.
Deposits - Deposits are attracted principally from our primary geographic market area in Marco Island , Florida. We offer a variety of deposit instruments including demand deposit accounts, NOW accounts, money- market accounts, regular savings accounts, term certificate accounts and retirement savings plans (such as IRA accounts). Certificate of deposit rates are set to encourage longer maturities as cost and market conditions will allow. Deposit account terms vary, with the primary differences being the minimum balance required, the time period the funds must remain on deposit and the interest rate. We set the deposit interest rates weekly based on a review of deposit flows for the previous week, a survey of rates among competitors and other financial institutions in Florida.
We have emphasized commercial banking relationships in an effort to increase demand deposits as a percentage of total deposits.
The following table shows the distribution of, and certain other information relating to, our deposit accounts by type (dollars in thousands):
| At December 31, | 2008 | 2007 | ||||||||||
| Amount | % of Deposits | Amount | % of Deposits | |||||||||
Non-interest-bearing deposits | $ | 4,353 | 3.8 | % | $ | 4,068 | 3.3 | % | ||||
Savings | 6,398 | 5.5 | 10,501 | 8.5 | ||||||||
NOW and money market deposits | 28,378 | 24.4 | 27,841 | 22.5 | ||||||||
Subtotal | 39,129 | 33.7 | 42,410 | 34.3 | ||||||||
Certificates of deposits: | ||||||||||||
0.00% - 2.99% | 8,391 | 7.2 | 3 | .0 | ||||||||
3.00% - 3.99% | 41,678 | 35.9 | 3,892 | 3.2 | ||||||||
4.00% - 4.99% | 22,600 | 19.5 | 28,279 | 22.8 | ||||||||
5.00% - 5.99% | 4,302 | 3.7 | 49,088 | 39.7 | ||||||||
6.00% - 6.49% | — | — | 41 | .0 | ||||||||
Total certificates of deposit | 76,971 | 66.3 | 81,303 | 65.7 | ||||||||
Total deposits | $ | 116,100 | 100.0 | % | $ | 123,713 | 100.0 | % | ||||
Jumbo certificates accounted for $30.9 million of our deposits at December 31, 2008 and $34.1 million of our deposits at December 31, 2007. The Company held $25.2 million in brokered deposits at December 31, 2008 and $19.7 million at December 31, 2007.
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Maturity terms, service fees, and withdrawal penalties are established by the Company on a periodic basis. The determination of rates and terms is predicated on funds acquisition and liquidity requirements, rates paid by competitors, growth goals and federal regulations.
Average Deposit Balance and Rates
The following table sets forth the average balance and weighted average rates for the period indicated (dollars in thousands).
| At December 31, | 2008 | 2007 | ||||||||||||||||
| Average Balance | Average Rate | % of Deposits | Average Balance | Average Rate | % of Deposit | |||||||||||||
Noninterest bearing demand deposits | $ | 5,995 | — | % | 5.0 | % | $ | 4,212 | — | % | 3.0 | % | ||||||
NOW accounts | 11,070 | 1.64 | 9.3 | 13,909 | 1.50 | 10.2 | ||||||||||||
Money market accounts | 13,327 | 2.78 | 11.1 | 11,839 | 4.09 | 8.7 | ||||||||||||
Regular savings | 8,678 | 1.98 | 7.3 | 13,904 | 2.45 | 10.2 | ||||||||||||
Time deposits | 80,429 | 4.37 | 67.3 | 92,983 | 5.10 | 67.9 | ||||||||||||
Total average deposits | $ | 119,499 | 3.55 | % | 100.0 | % | $ | 136,847 | 4.22 | % | 100.0 | % | ||||||
Jumbo certificates ($100,000 and over) mature as follows (in thousands):
At December 31, 2008 | |||
Due in three months or less | $ | 6,504 | |
Due in more than three to twelve months | 20,717 | ||
Due in more than one year to three years | 3,301 | ||
Due in more than three years | 346 | ||
Total | $ | 30,868 | |
Results of Operations
Our operating results depend primarily on our net interest income, which is the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities, consisting primarily of deposits. Net interest income is determined by the difference between yields earned on interest-earning assets and rates paid on interest-bearing liabilities (“interest-rate spread”) and the relative amounts of interest-earning assets and interest-bearing liabilities. Our interest-rate spread is affected by regulatory, economic, and competitive factors that influence interest rates, loan demand, and deposit flows. In addition, our net earnings are also affected by the level of nonperforming loans and foreclosed real estate, as well as the level of noninterest income, and noninterest expenses, such as salaries and employee benefits, occupancy and equipment costs and income taxes.
The table on the following page sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest and dividend income from interest-earning assets and the resultant average yield; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average costs; (iii) net interest/dividend income; (iv) interest rate spread; (v) net interest margin (in thousands).
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| 2008 | 2007 | |||||||||||||||||
| For the Year Ended December 31, | Average Balance | Interest and Dividends | Average Yield/ Cost | Average Balance | Interest and Dividends | Average Yield/ Cost | ||||||||||||
Interest-earning assets: | ||||||||||||||||||
Loans | $ | 116,016 | 7,125 | 6.14 | % | $ | 131,524 | 9,843 | 7.48 | % | ||||||||
Investment Securities | 8,706 | 436 | 5.01 | 5,688 | 300 | 5.27 | ||||||||||||
Other interest-earning assets (1) | 14,758 | 357 | 2.41 | 21,054 | 1,073 | 5.10 | ||||||||||||
Total interest-earning assets | 139,480 | 7,918 | 5.68 | 158,266 | 11,216 | 7.09 | ||||||||||||
Noninterest-earning assets | 7,977 | 6,988 | ||||||||||||||||
Total assets | $ | 147,457 | $ | 165,254 | ||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||
Savings | 8,678 | 172 | 1.98 | 13,904 | 340 | 2.45 | ||||||||||||
Money market and NOW deposits | 30,392 | 552 | 1.82 | 29,960 | 693 | 2.31 | ||||||||||||
Time deposits | 80,429 | 3,516 | 4.37 | 92,983 | 4,744 | 5.10 | ||||||||||||
Total interest-bearing deposits | 119,499 | 4,240 | 3.55 | 136,847 | 5,777 | 4.22 | ||||||||||||
Repurchase agreements | 1,212 | 36 | 2.97 | 298 | 12 | 4.03 | ||||||||||||
Total interest-bearing liabilities | 120,711 | 4,276 | 3.54 | 137,145 | 5,789 | 4.22 | ||||||||||||
Noninterest-bearing liabilities | 5,576 | 5,749 | ||||||||||||||||
Stockholders’ equity | 21,170 | 22,360 | ||||||||||||||||
Total liabilities and stockholders’ equity | $ | 147,457 | $ | 165,254 | ||||||||||||||
Net interest/dividend income | $ | 3,642 | $ | 5,427 | ||||||||||||||
Interest-rate spread (2) | 2.14 | % | 2.87 | % | ||||||||||||||
Net interest margin (3) | 2.61 | % | 3.43 | % | ||||||||||||||
Ratio of average interest-earning assets to average interest-bearing liabilities | 1.17 | 1.15 | ||||||||||||||||
| (1) | Includes interest-bearing deposits, federal funds sold, Federal Reserve Bank stock and Federal Home Loan Bank stock. |
| (2) | Interest-rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. |
| (3) | Net interest margin is net interest income dividend by average interest-earning assets. |
Rate/Volume Analysis
The table on the following page sets forth certain information regarding changes in interest income and interest expense for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (1) changes in rate (change in rate multiplied by prior volume); (2) changes in volume (change in volume multiplied by prior rate); and (3) changes in rate-volume (change in rate multiplied by change in volume).
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| Increase (Decrease) Due to | ||||||||||||||||
| Rate | Volume | Rate/Volume | Total | |||||||||||||
| (In thousands) | ||||||||||||||||
| Year Ended December 31, 2008 vs. 2007: | ||||||||||||||||
Interest-earning assets: | ||||||||||||||||
Loans | $ | (1,789 | ) | $ | (1,140 | ) | $ | 211 | $ | (2,718 | ) | |||||
Investment securities | (15 | ) | 159 | (8 | ) | 136 | ||||||||||
Other interest-earning assets | (566 | ) | (319 | ) | 169 | (716 | ) | |||||||||
Total | (2,370 | ) | (1,300 | ) | 372 | (3,298 | ) | |||||||||
Interest-bearing liabilities: | ||||||||||||||||
Deposits: | ||||||||||||||||
Savings, demand, money-market and NOW deposits | (225 | ) | (101 | ) | 24 | (302 | ) | |||||||||
Time deposits | (688 | ) | (640 | ) | 93 | (1,235 | ) | |||||||||
Repurchase agreements | (3 | ) | 37 | (10 | ) | 24 | ||||||||||
Total | (916 | ) | (704 | ) | 107 | (1,513 | ) | |||||||||
Net change in net interest income | $ | (1,454 | ) | $ | (596 | ) | $ | (265 | ) | $ | (1,785 | ) | ||||
Non-Interest Expense
Non-interest expense for the year ended December 31, 2008 was $5.9 million and $6.5 million at December 31, 2007. As a percent of total average assets, non-interest expense amounted to 4.0% at December 31, 2008 and 3.9% at December 31, 2007.
The components of non-interest expense for the periods indicated are set forth below (in thousands):
| 2008 | 2007 | |||||
Salaries and benefits | $ | 2,758 | $ | 3,007 | ||
Occupancy and equipment | 671 | 648 | ||||
Data processing | 270 | 251 | ||||
Advertising | 129 | 192 | ||||
Professional fees | 637 | 474 | ||||
Director Fees | — | 15 | ||||
Other Real Estate owned | 556 | 872 | ||||
General operating expenses | 936 | 994 | ||||
Total non-interest expense | $ | 5,957 | $ | 6,453 | ||
Comparison of the Years Ended December 31, 2008 and 2007
General. Net losses for the year ended December 31, 2008 were $5.1 million or a net loss of $1.67 per basic and diluted common share compared to net loss of $5.1 million or a net loss $1.61 per basic and diluted common share for 2007.
Interest Income. Interest income decreased to $7.9 million for the year ended December 31, 2008 from $11.2 million for the year ended December 31, 2007. Interest income decreased primarily due to lower yields in the portfolio and a decrease in the average loans outstanding. Interest on other interest-earning assets decreased from $1.1 million for the year ended December 31, 2007 to $357,000 for the year ended December 31, 2008 due to a decrease in the average yield and average balance in 2008.
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Interest Expense. Interest expense on deposits decreased to $4.3 million, for the year ended December 31, 2008 from $5.8 million in 2007. Interest expense decreased due to a decrease in the average balances in 2008.
Provision for Loan Losses. The provision for loan losses is charged against earnings to bring the total allowance to a level deemed appropriate by management and is based upon historical experience, the volume and type of lending we conduct, industry standards, the amount of nonperforming loans, general economic conditions, particularly as they relate to our market areas, and other factors related to the collectibility of our loan portfolio. The provision for loan losses was $6.0 million for the year ended December 31, 2008 compared to $8.1 million for 2007. The allowance for loan losses is $6.2 million at December 31, 2008. While management believes its allowance for loan losses is adequate as of December 31, 2008, future adjustments to our allowance for loan losses may be necessary if economic conditions differ substantially from the assumptions used in making the determination.
Non-interest Income. Non-interest income decreased from $1.0 million for the year ended December 31, 2007 to $207,000 for the year ended December 31, 2008. The decrease was mainly due to a decrease in loan brokerage fees from CLCC.
Non-interest Expense. Total non-interest expense decreased to $6.0 million for the year ended December 31, 2008 from $6.5 million for 2007. Non-interest expense decreased primarily due to a decrease in other real estate owned expenses in addition to salaries and expenses.
Income Taxes. The Company recorded an income tax benefit of $3.0 million for the year-end December 31, 2008 (an effective rate of 37.1%) compared to an income tax benefit of $3.0 million for the year ended December 31, 2007 (an effective rate of 37.2%).
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, which requires the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, substantially all of our assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on the Bank’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services, since such prices are affected by inflation to a larger extent than interest rates.
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| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
The following documents were filed with the Company’s Form 10-K filed on March 30, 2009
| • | Consolidated Financial Statements of Marco Community Bancorp, Inc. (including all required schedules): |
| 1. | Independent Auditor’s Report; |
| 2. | Consolidated Balance Sheets at December 31, 2008 and 2007; |
| 3. | Consolidated Statements of Operations, Stockholders’ Equity, Comprehensive Income (Loss), and Statements of Cash Flows for years ended December 31, 2008 and 2007. |
| 4. | Notes to Consolidated Financial Statements |
| • | Exhibits |
The exhibits denominated with (a) were filed with the Company’s Form SB-2, which was filed with the Securities and Exchange Commission on March 7, 2003; those denominated with (b) were filed with the Company’s Form 10-Q, which was filed with the Securities and Exchange Commission on August 14, 2007; those denominated with (c) were filed with the Company’s Form 10K, which was filed with the Securities and Exchange Commission on March 19, 2008; those denominated with (d) were field with the Company’s, Definitive Schedules 14-A which was filed with the Securities and Exchange Commission on March 21, 2007 and March 20, 2008, and those denominated with an (e) were filed with the Company’s Form 10-Q which was filed with the Securities and Exchange Commission on November 13, 2008.
Exhibit No. | Description of Exhibit | |
| (a) 3.1 | Articles of Incorporation of Marco Community Bancorp, Inc. as filed with the Florida Department of State | |
| (a) 3.2 | Bylaws of Marco Community Bancorp, Inc. | |
| (e) 3.3 | Articles of Amendment to the Articles of Incorporation | |
| (e) 3.4 | Articles of Amendment to the Articles of Incorporation | |
| (a) 4.1 | Specimen Common Stock Certificate | |
| (d) 10.1 | Employee’s Stock Option Plan | |
| (d) 10.2 | Directors’ Stock Option Plan | |
| (d) 10.3 | Advisory Directors’ Stock Option Plan | |
| (c) 10.5 | Employee Severance Agreement with Anthony Iannotta | |
| (b) 10.8 | Written Agreement with the Federal Reserve Bank of Atlanta and the Florida Office of Financial Regulation | |
| 31.1 | Certification of Chief Executive Officer required by Rule 13a-14(a)/15d-14(a) under the Exchange Act | |
| 31.2 | Certification of Chief Financial Officer required by Rule 13a-14(a)/15d-14(a) under the Exchange Act | |
| 32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002 | |
| 32.2 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002 | |
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Pursuant to the requirements of Section 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Marco Community Bancorp, Inc.
| Dated: August 11, 2009 | By: | /s/ Richard Storm, Jr. | ||
| Richard Storm, Jr. | ||||
| Chief Executive Officer | ||||
| Dated: August 11, 2009 | By: | /s/ Thomas J. Mitchusson | ||
| Thomas Mitchusson | ||||
| Principal Accounting Officer | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this Amendment Number 1 to Form 10-K has been signed by the following persons in the capacities and as of the dates indicated:
Signatures | Dates | |
|
| |
James B. Kauffman, Jr., Director | Date | |
/s/ Richard E. Storm | August 11, 2009 | |
Richard E. Storm, Director | Date | |
/s/ Robert A. Marks | August 11, 2009 | |
Robert A. Marks, Director | Date | |
/s/ Stephen A. McLaughlin | August 11, 2009 | |
Stephen A. McLaughlin, Director & CEO | Date | |
/s/ E. Terry Skone | August 11, 2009 | |
E. Terry Skone, Director | Date | |
/s/ Richard Storm, Jr. | August 11, 2009 | |
Richard Storm, Jr. Chairman | Date | |
|
| |
Timothy L. Truesdell, Director | Date | |
|
| |
Brooks C.B. Wood, Director | Date | |
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