ATLANTIC SOUTHERN FINANCIAL GROUP, INC.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
For Each of the Three Months in the Period Ended
March 31, 2007 and 2006
The following discussion of financial condition as of March 31, 2007 compared to December 31, 2006, and the results of operations for the three months ended March 31, 2007 compared to the three months ended March 31, 2006 should be read in conjunction with the condensed financial statements and accompanying footnotes appearing in this report.
Advisory Note Regarding Forward-Looking Statements
The statements contained in this report on Form 10-Q that are not historical facts are forward-looking statements subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. We caution readers of this report that such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. Although we believe that our expectations of future performance is based on reasonable assumptions within the bounds of our knowledge of our business and operations, there can be no assurance that actual results will not differ materially from our expectations.
Factors which could cause actual results to differ from expectations include, among other things:
· the challenges, costs and complications associated with the continued development of our branches;
· the potential that loan charge-offs may exceed the allowance for loan losses or that such allowance will be increased as a result of factors beyond our control;
· our dependence on senior management;
· competition from existing financial institutions operating in our market areas as well as the entry into such areas of new competitors with greater resources, broader branch networks and more comprehensive services;
· adverse conditions in the stock market, the public debt market, and other capital markets (including changes in interest rate conditions);
· the effect of any mergers, acquisitions or other transactions to which we or our subsidiary may from time to time be a party, including, without limitation, our ability to successfully integrate any businesses that we acquire;
· changes in deposit rates, the net interest margin, and funding sources;
· inflation, interest rate, market, and monetary fluctuations;
· risks inherent in making loans including repayment risks and value of collateral;
· the strength of the United States economy in general and the strength of the local economies in which we conduct operations may be different than expected resulting in, among other things, a deterioration in credit quality or a reduced demand for credit, including the resultant effect on our loan portfolio and allowance for loan losses;
· fluctuations in consumer spending and saving habits;
· the demand for our products and services;
· technological changes;
· the challenges and uncertainties in the implementation of our expansion and development strategies;
· the ability to increase market share;
· the adequacy of expense projections and estimates of impairment loss;
· the impact of changes in accounting policies by the Securities and Exchange Commission;
· unanticipated regulatory or judicial proceedings;
· the potential negative effects of future legislation affecting financial institutions (including, without limitation, laws concerning taxes, banking, securities, and insurance);
· the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System;
· the timely development and acceptance of products and services, including products and services offered through alternative delivery channels such as the Internet;
· the impact on our business, as well as on the risks set forth above, of various domestic or international military or terrorist activities or conflicts;
· other factors described in this report and in other reports we have filed with the Securities and Exchange
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Commission; and
· Our success at managing the risks involved in the foregoing.
Forward-looking statements speak only as of the date on which they are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made to reflect the occurrence of unanticipated events.
Executive Summary and Recent Developments
The Company’s total assets at March 31, 2007, were approximately $781,078,000, which represented an increase of approximately $110,002,000 or 16% from December 31, 2006. Net earnings increased 78% for the three months ended March 31, 2007 to $1,833,258 or $0.44 per diluted share compared to $1,060,354 or $0.36 per diluted share for the three months ended March 31, 2006.
On December 15, 2006, we consummated an agreement to acquire all of the outstanding shares of Sapelo Bancshares, Inc. (“Sapelo”) for $15.4 million using a combination of stock and cash. Under the terms of the merger agreement, we issued, and shareholders of Sapelo were entitled to receive their pro rata portion of $6,239,972 and 305,695 shares of Atlantic Southern common stock. The cash proceeds were obtained from a public offering in 2006. Sapelo was a bank holding company with one subsidiary, Sapelo National Bank, based in Darien, Georgia. Sapelo operated four full service banking offices in the coastal Georgia cities of Darien, Brunswick and St. Simons Island. Sapelo had total assets of $77.7 million, including total loans of $52 million and total investments of $1.8 million. Additionally, Sapelo had $66.7 million in deposits. We accounted for the transaction using the purchase method and accordingly, the purchase price was allocated to assets and liabilities acquired based upon their fair values at the date of the acquisition. The excess of the purchase price over the fair value of the net assets acquired (goodwill) was approximately $8.5 million, none of which will be deductible for income tax purchases. Operations of Sapelo are included in the consolidated statements of earnings since its acquisition.
On January 31, 2007, the Company consummated an agreement to acquire all of the outstanding shares of First Community Bank for $18.6 million in Atlantic Southern common stock including certain acquisition costs totaling $235,034. Under the terms of the merger agreement, the Company issued, and shareholders of First Community Bank were entitled to receive their pro rata portion of 542,032 shares of Atlantic Southern common stock. First Community Bank was a community bank headquartered in Roberta, Georgia. First Community Bank operated three full service banking offices in Crawford, Bibb and Peach counties of Georgia. First Community Bank had total assets of $69.3 million, including total loans of $50 million and total investments of $11.9 million. Additionally, First Community Bank had $58.6 million in deposits. With the acquisition of First Community Bank, the Company was able to expand their presence in the middle Georgia area. The Company accounted for the transaction using the purchase method and accordingly, the purchase price was allocated to assets and liabilities acquired based upon their fair values at the date of the acquisition. The excess of the purchase price over the fair value of the net assets acquired (goodwill) was approximately $9.9 million, none of which will be deductible for income tax purposes. Operations of First Community Bank are included in the consolidated statements of earnings since its acquisition.
On April 16, 2007, the Company began trading on the NASDAQ Global Market under the symbol “ASFN.” Our Board of Directors and management believe that this will improve the liquidity of the stock.
Management has developed a strategy for asset growth and expansion of its financial services through branching into selective markets in the middle Georgia region, coastal Georgia region and in the south Georgia region. During January 2007, we opened a loan production office in Valdosta, Georgia to expand our presence in the south Georgia region and have two parcels of land placed under contract to construct full service branches in Lowndes County, Georgia. Also in January 2007, a new branch was opened in Savannah, Georgia to further strengthen the expansion to the coastal Georgia region. In April 2007, a de novo branch was opened in Bonaire, Georgia which continues to expand our presence in the middle Georgia region.
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Financial Condition
The composition of assets and liabilities for the Company is as follows:
| | March 31, | | December 31, | | | | | |
| | 2007 | | 2006 | | $ Change | | % Change | |
Assets: | | | | | | | | | |
Cash and due from banks | | $ | 15,362,275 | | $ | 13,130,014 | | $ | 2,232,261 | | 17.00 | % |
Federal funds sold | | 12,682,000 | | 29,522,000 | | (16,840,000 | ) | -57.04 | % |
Securities available for sale | | 68,759,289 | | 57,596,002 | | 11,163,287 | | 19.38 | % |
Loans, net of unearned income | | 628,079,510 | | 533,128,702 | | 94,950,808 | | 17.81 | % |
Cash surrender value of life insurance | | 4,305,328 | | 4,264,395 | | 40,933 | | 0.96 | % |
Goodwill and other intangible assets | | 21,984,842 | | 10,600,276 | | 11,384,566 | | 107.40 | % |
Total assets | | 781,077,893 | | 671,075,492 | | 110,002,401 | | 16.39 | % |
Liabilities: | | | | | | | | | |
Deposits | | $ | 648,884,200 | | $ | 556,994,607 | | $ | 91,889,593 | | 16.50 | % |
FHLB advances | | 33,700,000 | | 31,700,000 | | 2,000,000 | | 6.31 | % |
Accrued expenses and other liabilities | | 1,644,356 | | 6,636,790 | | (4,992,434 | ) | -75.22 | % |
| | | | | | | | | |
Loan to Deposit Ratio | | 96.79 | % | 95.72 | % | | | | |
The most significant change in the composition of assets was the increase in loans of $95.0 million due to continued growth of the Company. Growth in Atlantic Southern Bank’s loan portfolio was divided between internally generated growth of approximately $45.0 million and the addition of approximately $50.0 million from the merger with First Community Bank. We were able to generate loan growth by expanding into new markets with a loan production office in Lowndes County, opening new de novo branches in existing markets and increasing loan growth in the middle Georgia, coastal Georgia and Golden Isles regions. The most significant change in the composition of liabilities was the increase in deposits, especially time deposits, to fund loan growth. Time deposits, including wholesale and core deposits, are our principal source of funds for loans and investing in securities.
Because of the historically low interest rate environment in the last two years, we have chosen to obtain a portion of our deposits from outside our market. Our wholesale time deposits represented 39.2% of our deposits as of March 31, 2007 when compared to 47.4% of our deposits as of December 31, 2006. The Company’s Fund Management Policy allows for the ratio of wholesale deposits to total deposits to be 60%. The Company has been successful in replacing maturing brokered deposits and does not expect to experience significant disintermediation as the brokered deposits mature.
Asset Quality
Management considers asset quality to be of primary importance. Management has a credit administration and loan review process, which monitor, control and measure our credit risk, standardized credit analyses and our comprehensive credit policy. As a result, management believes they have a good understanding of the asset quality, have an established warning and early detection system regarding the loans and have a comprehensive analysis of the allowance for loan losses.
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The following table presents a summary of changes in the allowance for loan losses for the three-month periods ended March 31, 2007 and 2006.
Analysis of Changes in Allowance for Loan Losses
| | Three Months Ended March 31, | |
| | 2007 | | 2006 | |
| | (Amounts in Thousands) | |
Balance beginning of period | | $ | 7,258 | | $ | 4,150 | |
Loans charged-off | | (529 | ) | — | |
Recoveries | | 17 | | 13 | |
Net charge-offs | | (512 | ) | 13 | |
Provision for loan losses | | 444 | | 438 | |
Allowance from purchase acquisition | | 1,640 | | — | |
Balance end of period | | $ | 8,830 | | $ | 4,601 | |
| | | | | |
Total Loans: | | | | | |
At period end | | $ | 628,080 | | $ | 368,076 | |
Average | | 607,327 | | 351,320 | |
| | | | | |
As a percentage of average loans (annualized): | | | | | |
Net charge-offs | | 0.34 | % | -0.02 | % |
Provision for loan losses | | 0.29 | % | 0.50 | % |
Allowance as a percentage of period end loans | | 1.41 | % | 1.25 | % |
Allowance as a percentage of non-performing loans | | 259.47 | % | 2149.17 | % |
Management believes that the allowance for loan losses at March 31, 2007 is adequate to absorb losses inherent in the loan portfolio. This assessment involves uncertainty and judgment; therefore, the adequacy of the allowance for loan losses cannot be determined with precision and may be subject to change in future periods. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require adjustments to the provision for loan losses in future periods if, in their opinion, the results of their review warrant such additions.
Nonperforming assets consist of non-accrual loans, accruing loans 90 days past due and other real estate owned. The following summarizes non-performing assets:
| | March 31, | | December 31, | |
| | 2007 | | 2006 | |
Accruing loans 90 days past due | | $ | 81,190 | | $ | 30,621 | |
Non-accrual loans | | 3,322,044 | | 617,420 | |
Other real estate | | 722,337 | | — | |
Total non-performing assets | | $ | 4,125,571 | | $ | 648,041 | |
Nonperforming assets increased $3,477,530 or 536.6% from December 31, 2006 to March 31, 2007. On January 31, 2007, management placed one loan acquired from our acquisition of Sapelo National Bank with a balance of approximately $3.0 million on non-accrual that was secured by single-family residential real estate appraised at approximately $5.1 million. The borrower filed for bankruptcy protection on April 2, 2007. However, management is continuously monitoring this loan in order to minimize any losses.
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Other real estate consists of four properties totaling $722,337 at March 31, 2007. At March 31, 2007, the Company’s other real estate consisted of the following:
1-4 Family residential properties | | $ | 46,751 | |
Nonfarm nonresidential properties | | 675,586 | |
Total | | $ | 722,337 | |
We assumed one residential property for $10,000 on January 31, 2007 from our acquisition of First Community Bank. Other increases to our other real estate were the result of one foreclosure of a residential property with a value of $36,751 and one foreclosure on a nonresidential property with a value of $675,586. All properties are being actively marketed for sale and management is continuously monitoring these properties in order to minimize any losses.
Our policy is to place loans on non-accrual status when it appears that the collection of interest in accordance with the terms of the loan is doubtful. Any loan which becomes 90 days past due as to principal or interest is automatically placed on non-accrual. Exceptions are allowed for 90-day past due loans when such loans are well secured and in process of collection. Other Real Estate is defined as real estate acquired as salvage on uncollectible loans. At the time of foreclosure, an appraisal is obtained on the real estate. The amount charged to Other Real Estate will be the lower of appraised value of “recorded investment” in the loan satisfied. The recorded investment is the unpaid balance of the loan, increased by accrued and uncollected interest, unamortized premium, finance charges, and loan acquisition costs, if any, and decreased by previous direct write down and unamortized discount. Any excess of the recorded investment in the loan satisfied over the appraised value of the property must be charged to allowance for loan losses.
Results of Operations
General
The Company’s results of operations are determined by its ability to effectively manage interest income and expense, to minimize loan and investment losses, to generate noninterest income and to control noninterest expense. Since interest rates are determined by market forces and economic conditions beyond the control of the Company, the ability to generate interest income is dependent upon the Bank’s ability to obtain an adequate spread between the rate earned on earning assets and the rate paid on interest-bearing liabilities.
The following table shows the significant components of net earnings:
| | Three Months Ended | | | | | |
| | March 31, | | | | | |
| | 2007 | | 2006 | | $ Change | | % Change | |
Interest Income | | $ | 13,865,970 | | $ | 7,561,584 | | $ | 6,304,386 | | 83.37 | % |
Interest Expense | | 7,211,579 | | 3,585,490 | | 3,626,089 | | 101.13 | % |
Net Interest Income | | 6,654,391 | | 3,976,094 | | 2,678,297 | | 67.36 | % |
Provision for Loan Losses | | 444,000 | | 438,000 | | 6,000 | | 1.37 | % |
Net Earnings | | 1,883,258 | | 1,060,354 | | 822,904 | | 77.61 | % |
Net Earnings Per Diluted Share | | $ | 0.44 | | $ | 0.36 | | 0.08 | | 22.22 | % |
| | | | | | | | | | | | |
Net Interest Income
Our primary source of income is interest income from loans and investment securities. Our profitability depends largely on net interest income, which is the difference between the interest received on interest-earning assets and the interest paid on deposits, borrowings, and other interest-bearing liabilities. Net interest income increased $2,678,000 or 67% for the three months ended March 31, 2007 compared to March 31, 2006.
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Total interest and dividend income for the three months ended March 31, 2007 increased $6,304,000 or 83% when compared to the three months ended March 31, 2006 primarily due to increases in loan interest and fees on loans. This increase is partially the result of the average loan portfolio for the three months ended March 31, 2007 increasing approximately $256 million or 73% when compared to average loan portfolio for the three months ended March 31, 2006. Additionally, the average yield on loans increased during the three months ended March 31, 2007 to 8.45% compared to an average yield of 8.13 % for the three months ended March 31, 2006.
Total interest expense for the three months ended March 31, 2007 increased $3,626,000 or 101% when compared to the three months ended March 31, 2006. Two factors impact interest expense: average balances of deposit and borrowing portfolios and average rates paid on each. Average deposit balances increased approximately $267.3 million when comparing the three months ended March 31, 2007 to the three months ended March 31, 2006. The increase of $267.3 million includes approximately $22.3 million in non-interest bearing balances in regular demand deposit accounts. The average rate paid on the deposit portfolios for the three months ended March 31, 2007 increased to 4.57% from 3.87% when compared to the three months ended March 31, 2006. Average borrowing balances increased approximately $17.6 million when comparing the three months ended March 31, 2007 to the three months ended March 31, 2006. Average interest rates paid on borrowings were 5.23% for the three months ended March 31, 2007 compared to 5.09% for the three months ended March 31, 2006.
The banking industry uses two key ratios to measure relative profitability of net interest income, which are net interest spread and net interest margin. The interest rate spread measures the difference between the average yield on earning assets and the average rate paid on interest-bearing liabilities. The interest rate spread eliminates the impact of non-interest-bearing funding sources and gives a direct perspective on the effect of market interest rate movements. The net interest margin is an indication of the profitability of our investments, and is defined as net interest revenue as a percentage of total average earning assets which includes the positive impact of funding a portion of earning assets with customers’ non-interest-bearing deposits and with stockholders’ equity.
For the three months ended March 31, 2007 and 2006, our tax equivalent net interest spread was 3.35% and 3.72%, respectively, while the tax equivalent net interest margin was 3.85% and 4.06%, respectively. The decreases in net interest spread and net interest margin from first quarter 2006 to first quarter 2007 were due to the interest bearing liabilities repricing faster than our earning assets in an increasing interest rate environment. Also, our net interest margin has decreased due to our promotions of higher short-term yields on retail time deposits in order to reduce our dependency on wholesale time deposits to fund loan growth and to invest in investment securities.
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The following table shows the relationship between interest revenue and interest expense and the average balances of interest-earning assets and interest-earning liabilities.
Average Consolidated Balance Sheet and Net Interest Margin Analysis
| | For the Three Months Ended March 31, | |
| | 2007 | | 2006 | |
| | (Dollar amounts in thousands) | |
| | Average | | | | Average | | Average | | | | Average | |
| | Balance | | Interest | | Rate | | Balance | | Interest | | Rate | |
Earning Assets | | | | | | | | | | | | | |
Loans, net of unearned income (4) (5) (6) | | $ | 607,327 | | $ | 12,814 | | 8.45 | % | $ | 351,320 | | $ | 7,140 | | 8.13 | % |
Federal funds sold | | 19,134 | | 243 | | 5.08 | % | 4,161 | | 49 | | 4.71 | % |
Investment securities - taxable (7) | | 52,141 | | 563 | | 4.32 | % | 32,007 | | 305 | | 3.81 | % |
Investment securities - tax-exempt (6) (7) | | 18,304 | | 158 | | 5.23 | % | 5,204 | | 47 | | 5.47 | % |
Other interest and dividend income | | 3,941 | | 88 | | 8.93 | % | 1,688 | | 21 | | 4.98 | % |
Total Earning Assets | | 700,847 | | 13,866 | | 7.97 | % | 394,380 | | 7,562 | | 7.69 | % |
| | | | | | | | | | | | | |
Non-interest-earning assets | | | | | | | | | | | | | |
Allowance for loan losses | | -8,862 | | | | | | -4,384 | | | | | |
Cash and due from banks | | 13,074 | | | | | | 4,730 | | | | | |
Premises and equipment | | 20,919 | | | | | | 10,195 | | | | | |
Accrued interest receivable | | 5,967 | | | | | | 2,927 | | | | | |
Other assets | | 20,759 | | | | | | 5,732 | | | | | |
Total Assets | | $ | 752,704 | | | | | | $ | 413,580 | | | | | |
| | | | | | | | | | | | | |
Interest bearing liabilities | | | | | | | | | | | | | |
Interest bearing demand | | $ | 109,170 | | $ | 832 | | 3.05 | % | $ | 48,306 | | $ | 294 | | 2.43 | % |
Savings | | 8,357 | | 11 | | 0.53 | % | 1,440 | | 2 | | 0.56 | % |
Time deposits | | 460,184 | | 5,759 | | 5.01 | % | 282,964 | | 2,921 | | 4.13 | % |
Total interest bearing deposits | | 577,711 | | 6,602 | | 4.57 | % | 332,710 | | 3,217 | | 3.87 | % |
Federal Home Loan Bank advances | | 34,355 | | 394 | | 4.59 | % | 16,200 | | 172 | | 4.25 | % |
Other borrowings | | 1,957 | | 25 | | 5.11 | % | 2,480 | | 28 | | 4.52 | % |
Trust Preferred Securities | | 10,310 | | 191 | | 7.41 | % | 10,310 | | 169 | | 6.57 | % |
Total borrowed funds | | 46,622 | | 610 | | 5.23 | % | 28,990 | | 369 | | 5.09 | % |
Total interest-bearing liabilities | | 624,333 | | 7,212 | | 4.62 | % | 361,700 | | 3,586 | | 3.97 | % |
| | | | | | | | | | | | | |
Non-interest bearing deposits | | 45,737 | | | | | | 23,405 | | | | | |
Other liabilities | | 7,230 | | | | | | 2,490 | | | | | |
Stockholder’s equity | | 75,404 | | | | | | 25,985 | | | | | |
Total Liabilities and Stockholder’s Equity | | $ | 752,704 | | | | | | $ | 413,580 | | | | | |
Net interest revenue (1) | | | | $ | 6,654 | | | | | | $ | 3,976 | | | |
Net interest spread (2) | | | | | | 3.35 | % | | | | | 3.72 | % |
Net interest margin (3) | | | | | | 3.85 | % | | | | | 4.06 | % |
(1) Net interest revenue is computed by subtracting the expense from the average interest-bearing liabilities from the income from the average earning assets.
(2) Net interest spread is computed by subtracting the yield from the expense of the average interest-bearing liabilities from the yield from the average earning assets.
(3) Net interest margin is computed by dividing net interest revenue by average total earning assets.
(4) Average loans are shown net of unearned income. Included in the average balance of loans outstanding are loans where the accrual of interest has been discounted.
(5) Interest income includes loan fees as follows (in thousands): 2007 - $551; 2006 - $380
(6) Reflects taxable equivalent adjustments using a tax rate of 34 percent.
(7) Investment securities are stated at amortized or accreted cost.
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The following table provides a detailed analysis of the changes in interest income and interest expense due to changes in rate and volume for the three months ended March 31, 2007 compared to March 31, 2006.
Change in Interest Revenue and Expense on a Taxable Equivalent Basis
| | Three Months Ended March 31, 2007 | |
| | Compared to 2006 | |
| | Changes due to (a) | |
| | | | Yield/ | | Net | |
| | Volume | | Rate | | Change | |
| | (Amounts in thousands) | |
Interest earned on: | | | | | | | |
Loans | | $ | 5,380 | | $ | 294 | | $ | 5,674 | |
Investment securities: | | | | | | | |
Taxable investment securities | | 214 | | 44 | | 258 | |
Tax-exempt investment securities | | 115 | | (4 | ) | 111 | |
Interest earning deposits and fed funds sold | | 215 | | 46 | | 261 | |
Total interest income | | 5,924 | | 380 | | 6,304 | |
| | | | | | | |
Interest paid on: | | | | | | | |
Deposits: | | | | | | | |
Interest bearing demand deposits | | 449 | | 89 | | 538 | |
Savings | | 9 | | — | | 9 | |
Time deposits | | 2,094 | | 744 | | 2,838 | |
Other borrowings and FHLB advances | | 214 | | 5 | | 219 | |
Trust Preferred Securities | | — | | 22 | | 22 | |
Total interest expense | | 2,766 | | 860 | | 3,626 | |
| | | | | | | |
Increase in net interest revenue | | $ | 3,158 | | $ | (480 | ) | $ | 2,678 | |
(a) Volume and rate components are in proportion to the relationship of the absolute dollar amount of the change in each.
Provision for Loan Losses
The provision for loan losses for the three months ended March 31, 2007, was $444,000 compared to $438,000 for the same period of 2006. This is due to continued loan growth for the respective periods. Net charge-offs as an annualized percentage of average outstanding loans for the three months ended March 31, 2007 were 0.34%, as compared with -0.02% for the first quarter of 2006. Net loan charge-offs increased significantly this quarter as compared to this quarter in 2006 due to the Company charging off $300,000 for one participation purchased loan with the Company’s portion of the foreclosed property being recorded to other real estate at fair market value.
The provision for loan losses is based on management’s evaluation of inherent risks in the loan portfolio and the corresponding analysis of the allowance for loan losses. Additional discussion on loan quality and the allowance for loan losses are included in the Asset Quality section of this report.
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Non-interest Income
Composition of other noninterest income is as follows:
| | Three Months Ended | | | | | |
| | March 31, | | | | | |
| | 2007 | | 2006 | | $ Change | | % Change | |
Service charges on deposit accounts | | $ | 281,008 | | $ | 111,734 | | $ | 169,274 | | 151.50 | % |
Other service charges, commissions and fees | | 61,336 | | 23,343 | | 37,993 | | 162.76 | % |
Gain (loss) on sales / calls of investment securities | | 75 | | (9,753 | ) | 9,828 | | -100.77 | % |
Gain on sale of other assets | | 1,287 | | — | | 1,287 | | 100.00 | % |
Mortgage origination fees | | 206,120 | | 118,265 | | 87,855 | | 74.29 | % |
Other income | | 139,552 | | 121,183 | | 18,369 | | 15.16 | % |
Total noninterest income | | $ | 689,378 | | $ | 364,772 | | $ | 324,606 | | 88.99 | % |
Service charges on deposit accounts are evaluated against service charges from other banks in the local market and against the Bank’s own cost structure in providing the deposit services. This income should grow with the growth in the Bank’s demand deposit account base. Total service charges, including non-sufficient funds fees, were $281 thousand, or 41% of total noninterest income for the first quarter of 2007 compared with $112 thousand, or 31% for the first quarter of 2006. The year-over-year increase in service charges on deposit accounts is directly related to the increase in the number of our core transaction deposit accounts. The number of deposit accounts for the three months ended March 31, 2007 was 12,223 accounts when compared to the same period of 2006 with 3,426 accounts. The increase in the number of deposit accounts includes 3,549 transaction and savings accounts from the purchase of Sapelo National Bank on December 15, 2006 and 4,147 transaction and savings accounts from the purchase of First Community Bank on January 31, 2007. The increase in mortgage origination fees for the three months ended March 31, 2007 is primarily due to the mortgage loan brokerage activity which was started in late 2004 and the volume of mortgages originated for the three months ended March 31, 2007 was larger than the same period of 2006.
Non-interest Expense
Composition of other noninterest expense is as follows:
| | Three Months Ended | | | | | |
| | March 31, | | | | | |
| | 2007 | | 2006 | | $ Change | | % Change | |
Salaries | | $ | 1,679,271 | | $ | 799,760 | | $ | 879,511 | | 109.97 | % |
Employee benefits | | 554,920 | | 349,187 | | 205,733 | | 58.92 | % |
Occupancy expense | | 323,329 | | 189,293 | | 134,036 | | 70.81 | % |
Equipment rental and depreciation of equipment | | 174,141 | | 83,984 | | 90,157 | | 107.35 | % |
Other expenses | | 1,270,248 | | 798,220 | | 472,028 | | 59.14 | % |
Total noninterest expense | | $ | 4,001,909 | | $ | 2,220,444 | | $ | 1,781,465 | | 80.23 | % |
The increases in noninterest expenses are primarily due to the growth of the bank. The most significant increases in the first quarter of 2007 are increases in salaries and employee benefits. The increase in salaries and employees benefits represents normal increases in salaries and an increase in the number of employees. At March 31, 2007, the number of full-time equivalent employees was 151 compared to 70 at March 31, 2006. The increase in the number of full-time equivalent employees is directly related to the purchase of Sapelo National Bank, the purchase of First Community Bank, growth of the bank and the hiring for two new branches in Rincon and Bonaire and one loan production center in Valdosta. The bank operates from fifteen facilities as of March 31, 2007 compared to seven
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facilities as of March 31, 2006. The increases in other expenses are not attributable to any one particular item, but represent increases related to physical facility expansion.
Income Tax Expense
Income tax expense expressed as a percentage of earnings before income taxes was 35.01% and 36.97% for the three months ended March 31, 2007 and 2006, respectively. The fluctuation in the percentage can be attributed to the tax-free income versus the pretax income. For the three months ended March 31, 2007, the tax-free income expressed as a percentage of earnings before income taxes was 6.35% when compared to 2.78% for the three months ended March 31, 2007. The increase in tax-free income is due to an increase in the interest revenue on certain investment securities and loans that are exempt from income taxes.
Liquidity
Liquidity management involves the matching of the cash flow requirements of customers, either depositors withdrawing funds or borrowers needing loans, and the ability of the Company to meet those requirements.
The Company’s liquidity program is designed and intended to provide guidance in funding the credit and investment activities of the Company while at the same time ensuring that the deposit obligations of the Company are met on a timely basis. In order to permit active and timely management of assets and liabilities, these accounts are monitored regularly in regard to volume, mix, and maturity.
The Company’s liquidity position depends primarily upon the liquidity of its assets relative to its need to respond to short-term demand for funds caused by withdrawals from deposit accounts and loan funding commitments. Primary sources of liquidity are scheduled repayments on the Company’s loans and interest on and maturities of its investment securities. Sales of investment securities available for sale represent another source of liquidity to the Company. The Company may also utilize its cash and due from banks and federal funds sold to meet liquidity requirements as needed.
The Company also has the ability, on a short-term basis, to purchase federal funds from other financial institutions up to $21,400,000. At March 31, 2007, the Company had no federal funds purchased. The Company has a total available line of $34,483,000, subject to available collateral, from the Federal Home Loan Bank. The Company has $33.7 million in advances on this line at March 31, 2007.
The Bank’s liquidity policy requires that the ratio of cash and certain short-term investments to net withdrawable deposit accounts be at least 10%. The Bank’s liquidity ratios at March 31, 2007 and 2006 were 12.54% and 12.38%, respectively.
Capital Resources
We are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimal capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulations to ensure capital adequacy require us to maintain minimum amounts and ratios (set forth below in the table) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of March 31, 2007 and as of December 31, 2006, that the Company and the Bank met all capital adequacy requirements to which they are subject.
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As of March 31, 2007, the most recent notifications from both the Federal Deposit Insurance Corporation and the Federal Reserve Bank of Atlanta categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the Bank’s categories.
The Company’s and the Bank’s actual capital amounts and ratios as of March 31, 2007 and December 31, 2006 follow:
| | | | | | | | | | | | To Be Well Capitalized | |
| | | | | | For Capital | | Under Prompt Corrective | |
| | Actual | | Adequacy Purposes | | Action Provisions | |
| | Amount | | Ratio | | Amount | | | | Ratio | | Amount | | | | Ratio | |
March 31, 2007 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total Risk-Based Capital To Risk Weighted Assets: | | | | | | | | | | | | | | | | | |
Consolidated | | $ | 79,119,000 | | 12.08 | % | $ | 52,396,689 | | ³ | | 8.0 | % | N/A | | | | N/A | |
Bank | | 75,597,000 | | 11.57 | % | 52,271,046 | | ³ | | 8.0 | % | 65,338,807 | | ³ | | 10.0 | % |
| | | | | | | | | | | | | | | | | |
Tier I Capital To Risk Weighted Assets: | | | | | | | | | | | | | | | | | |
Consolidated | | $ | 70,926,000 | | 10.83 | % | $ | 26,196,122 | | ³ | | 4.0 | % | N/A | | | | N/A | |
Bank | | 68,203,000 | | 10.44 | % | 26,131,418 | | ³ | | 4.0 | % | 39,197,126 | | ³ | | 6.0 | % |
| | | | | | | | | | | | | | | | | |
Tier I Capital To Average Assets | | | | | | | | | | | | | | | | | |
Consolidated | | $ | 70,926,000 | | 9.43 | % | $ | 30,085,260 | | ³ | | 4.0 | % | N/A | | | | N/A | |
Bank | | 68,203,000 | | 9.32 | % | 29,271,674 | | ³ | | 4.0 | % | 36,589,592 | | ³ | | 5.0 | % |
| | | | | | | | | | | | | | | | | |
December 31, 2006 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total Risk-Based Capital To Risk Weighted Assets: | | | | | | | | | | | | | | | | | |
Consolidated | | $ | 69,138,000 | | 12.31 | % | $ | 44,931,275 | | ³ | | 8.0 | % | N/A | | | | N/A | |
Bank | | 66,183,000 | | 11.81 | % | 44,831,837 | | ³ | | 8.0 | % | 56,039,797 | | ³ | | 10.0 | % |
| | | | | | | | | | | | | | | | | |
Tier I Capital To Risk Weighted Assets: | | | | | | | | | | | | | | | | | |
Consolidated | | $ | 62,117,000 | | 11.06 | % | $ | 22,465,461 | | ³ | | 4.0 | % | N/A | | | | N/A | |
Bank | | 59,163,000 | | 10.55 | % | 22,431,469 | | ³ | | 4.0 | % | 33,647,204 | | ³ | | 6.0 | % |
| | | | | | | | | | | | | | | | | |
Tier I Capital To Average Assets | | | | | | | | | | | | | | | | | |
Consolidated | | $ | 62,117,000 | | 9.84 | % | $ | 25,250,813 | | ³ | | 4.0 | % | N/A | | | | N/A | |
Bank | | 59,163,000 | | 9.38 | % | 25,229,424 | | ³ | | 4.0 | % | 31,536,780 | | ³ | | 5.0 | % |
We have outstanding junior subordinated debentures commonly referred to as Trust Preferred Securities totaling $10.3 million at March 31, 2007. The Trust Preferred Securities qualify as a Tier I capital under risk-based capital guidelines provided that total Trust Preferred Securities do not exceed certain quantitative limits. At March 31, 2007, all of the Trust Preferred Securities qualify as a Tier I capital.
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ATLANTIC SOUTHERN FINANCIAL GROUP, INC.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
For the Three months Ended March 31, 2007
As of March 31, 2007, there were no substantial changes in the composition of the Company’s market-sensitive assets and liabilities or their related market values from that reported as of December 31, 2006. The foregoing disclosures related to the market risk of the Company should be read in conjunction with the Company’s audited consolidated financial statements, related notes and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2006 included in the Company’s 2006 Annual Report on Form 10-K.
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ATLANTIC SOUTHERN FINANCIAL GROUP, INC.
Item 4. Controls and Procedures
For the Three months Ended March 31, 2007
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, supervised and participated in an evaluation of the effectiveness of its disclosure controls and procedures (as defined in federal securities rules) as of the end of the period covered by this report. Based on, and as of the date of, that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective in accumulating and communicating information to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures of that information under the Securities and Exchange Commission’s rules and forms and that the Company’s disclosure controls and procedures are designed to ensure that the information required to be disclosed in reports that are filed or submitted by the Company under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
During the first quarter of 2007, there were no significant changes in the Company’s internal control over financial reporting or, to the Company’s knowledge, in other factors that could significantly affect those internal controls subsequent to the date the Company carried out its evaluation that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
As discussed in the Management’s Report on Internal Controls over Financial Reporting in the Annual Report on Form 10-K for the year ended December 31, 2006, the Company elected to exclude Sapelo from the scope of its assessment of internal control over financial reporting as of December 31, 2006. Sapelo was acquired by the Company on December 15, 2006, and was integrated into our existing internal controls over financial reporting via a data conversion. Based on internal audits performed during the first quarter of 2007, we are not aware of any facts that lead us to believe the data conversions of Sapelo or First Community Bank will constitute, individually or collectively, a material weakness to our internal control over financial reporting.
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ATLANTIC SOUTHERN FINANCIAL GROUP, INC.
Part II. Other Information
For the Three months Ended March 31, 2007
PART II: OTHER INFORMATION:
Item 1. Legal Proceedings
There are no material legal proceedings to which the Company is a party or of which their property is the subject.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and / or operation results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security-Holders
None
Item 5. Other Information
None
Item 6. Exhibits
(a) Exhibits:
31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as amended
31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as amended
32 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ATLANTIC SOUTHERN FINANCIAL GROUP, INC.
/s/ Mark A. Stevens | |
|
Mark A. Stevens |
President and Chief Executive Officer |
|
|
Date: May 9, 2007 |
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