UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR
15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended September 30, 1999
Commission File Number 001-15061
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ATLANTIC BANCGROUP, INC.
------------------------
(Exact Name of small business issuer as specified in its charter)
Florida 59-3543956
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1315 S. Third Street
Jacksonville Beach, Florida 32250
- --------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
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(904) 247-9494
(Issuer's telephone number including area code)
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Check whether the issuer (1) filed all reports required by Section 13
or 15 (d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the issuer was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes X No
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date:
Class Outstanding as of November 5, 1999
----- ----------------------------------
Common Stock Common Stock - 595,350
Par Value $0.10 per share
Warrants to purchase Common Stock Warrants - 593,510
at $10.00 per share
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
FORM 10-QSB - FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
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PAGE
NUMBER
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements:
Consolidated Balance Sheets as of September 30, 1999 (Unaudited)
and December 31, 1998 1
Consolidated Statements of Operations and Comprehensive Income
for the Three and Nine Months Ended September 30, 1999 and 1998 (Unaudited) 2
Consolidated Condensed Statements of Cash Flows for the Three and Nine
Months Ended September 30, 1999 and 1998 (Unaudited) 3
Consolidated Statement of Changes in Stockholders' Equity (Unaudited) 4
Notes to Consolidated Financial Statements (Unaudited) 5
Item 2: Management's Discussion and Analysis of Financial Condition,
Plan of Operations, and Results of Operations 9
PART II: OTHER INFORMATION 17
Signatures 18
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands Except Per Share Data)
September 30,
1999 December 31,
(Unaudited) 1998
------------------ ------------
ASSETS
Cash and due from banks $ 3,448 $ 4,862
Federal funds sold 1,230 4,915
--------- ---------
Total cash and cash equivalents 4,678 9,777
Interest-bearing deposits in other banks 206 206
Investment securities, available-for-sale at fair value 6,375 7,858
Loans less allowance for credit losses 36,958 25,478
Facilities 2,410 1,860
Other assets 474 392
--------- ---------
TOTAL $ 51,101 $ 45,571
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 12,436 $ 7,168
NOW accounts 6,648 12,193
Money market accounts 11,503 6,542
Savings accounts 1,235 737
Time, $100,000 and over 4,537 4,704
Other time deposits 8,762 9,030
--------- ---------
Total deposits 45,121 40,374
Other borrowings 652 --
Other accrued expenses and liabilities 178 147
--------- ---------
Total liabilities 45,951 40,521
--------- ---------
Commitments and contingencies -- --
--------- ---------
Stockholders' equity:
Preferred stock -- --
Common stock 6 2,974
Additional paid-in capital 4,217 1,243
Retained earnings 1,178 880
Accumulated other comprehensive income:
Net unrealized holding losses on securities (251) (47)
--------- ---------
Total stockholders' equity 5,150 5,050
--------- ---------
TOTAL $ 51,101 $ 45,571
========= =========
Book value per common share $ 8.65 $ 8.49
========= =========
Common shares outstanding 595,350 594,750
========= =========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated financial statements.
-1-
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
(Dollars in Thousands Except Per Share Data)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
Interest and fees on loans $ 820 $ 501 $ 2,240 $ 1,210
Investment income on investment securities
and interest-bearing deposits in other banks 78 109 315 227
Federal funds sold 74 33 107 151
------- ------- ------- -------
Total interest income 972 643 2,662 1,588
------- ------- ------- -------
Interest on deposits 320 241 866 582
Other borrowings and federal funds purchased -- -- 2 --
------- ------- ------- -------
Total interest expense 320 241 868 582
------- ------- ------- -------
Net interest income before
provision for credit losses 652 402 1,794 1,006
Provision for credit losses 66 74 189 249
------- ------- ------- -------
Net interest income 586 328 1,605 757
------- ------- ------- -------
Fees and service charges 96 48 253 122
Other income 4 4 15 9
------- ------- ------- -------
Total other income 100 52 268 131
------- ------- ------- -------
Other expenses:
Salaries and employee benefits 235 172 693 479
Expenses of bank premises and fixed assets 57 71 159 171
Other operating expenses 260 126 700 343
------- ------- ------- -------
Total other expenses 552 369 1,552 993
------- ------- ------- -------
Income (loss) before provision for income taxes 134 11 321 (105)
Cumulative effect of a change in accounting principle -- -- (95) --
Provision for income taxes (72) -- (72) --
------- ------- ------- -------
Net income (loss) 206 11 298 (105)
Other comprehensive income (loss), net of income taxes:
Unrealized holding losses arising during period 9 (9) (204) (41)
------- ------- ------- -------
Comprehensive income (loss) $ 215 $ 2 $ 94 $ (146)
======= ======= ======= =======
Weighted average common shares outstanding 594,904 594,730 594,972 594,730
======= ======= ======= =======
Earnings per common share $ 0.35 $ 0.02 $ 0.50 $ (0.18)
======= ======= ======= =======
The accompanying notes to consolidated financial statements
are an integral part of these consolidated financial statements.
-2-
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in Thousands)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
Net cash provided by operating activities $ 173 $ 165 $ 567 $ 162
-------- -------- -------- --------
Cash flows from investing activities:
Net (increase) decrease in:
Investment securities 357 (649) 1,251 (4,351)
Interest-bearing deposits in other banks -- -- -- (100)
Loans (4,890) (3,701) (11,672) (12,651)
Purchases of bank premises and equipment, net (584) (263) (644) (738)
-------- -------- -------- --------
Net cash used by investing activities (5,117) (4,613) (11,065) (17,840)
-------- -------- -------- --------
Cash flows from financing activities:
Net increase in deposits 1,055 3,114 4,747 19,399
Proceeds from other borrowings 602 -- 652 --
-------- -------- -------- --------
Net cash provided by financing activities 1,657 3,114 5,399 19,399
-------- -------- -------- --------
Increase (decrease) in cash and cash equivalents (3,287) (1,334) (5,099) 1,721
Cash and cash equivalents at beginning of period 5,347 8,652 9,777 5,597
-------- -------- -------- --------
Cash and cash equivalents at end of period $ 2,060 $ 7,318 $ 4,678 $ 7,318
======== ======== ======== ========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated financial statements.
-3-
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
Net
Unrealized
Additional Holding Total
Common Stock Paid-in Retained Losses on Stockholders'
Shares Amount Capital Earnings Securities Equity
------ ------ ------- -------- ---------- ------
(Dollars In Thousands)
Balance, December 31, 1998 594,750 $ 2,974 $ 1,243 $ 880 $ (47) $ 5,050
Reorganization of Oceanside Bank -- (2,968) 2,968 -- -- --
Warrants exercised 600 -- 6 -- -- 6
Comprehensive income (loss):
Net income -- -- -- 298 --
Net change in unrealized
holding losses on securities -- -- -- -- (204)
Total comprehensive income (loss) -- -- -- -- -- 94
------- ------- ------- ------- ------- -------
Balance, September 30, 1999 595,350 $ 6 $ 4,217 $ 1,178 $ (251) $ 5,150
======= ======= ======= ======= ======= =======
The accompanying notes to consolidated financial statements
are an integral part of these consolidated financial statements.
-4-
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
NOTE 1 - ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Atlantic
BancGroup, Inc. ("Atlantic") and its wholly-owned subsidiaries, Oceanside Bank
("Oceanside") and Oceanside Mortgage Group, Inc. ("Oceanside Mortgage"). The
consolidated financial statements for the three and nine months ended September
30, 1999 and 1998, have not been audited and do not include information or
footnotes necessary for a complete presentation of consolidated financial
condition, results of operations and cash flows in conformity with generally
accepted accounting principles. However, in the opinion of management, the
accompanying consolidated financial statements contain all adjustments, which
are of a normal recurring nature, necessary for a fair presentation. The results
of operations for the interim periods are not necessarily indicative of the
results which may be expected for an entire year. The accounting policies
followed by Atlantic and Oceanside are set forth in Oceanside's financial
statements for the year ended December 31, 1998, and are incorporated herein by
reference.
Oceanside opened July 21, 1997, as a state-chartered banking organization.
Oceanside provides a wide range of banking services to individual and corporate
customers primarily in Duval County and St. Johns County, Florida.
On April 3, 1999, the shareholders of Oceanside approved the Agreement and Plan
of Reorganization ("Reorganization") whereby Oceanside became a wholly-owned
subsidiary of Atlantic. Each shareholder of Oceanside owns an equal number of
shares of common stock and warrants of Atlantic. The Reorganization was
completed on May 5, 1999, and was reported under the pooling-of-interests method
of accounting.
On July 20, 1999, Oceanside Mortgage was incorporated as a wholly-owned
subsidiary of Atlantic for the purpose of conducting mortgage banking
operations. The operations of Oceanside Mortgage have been included in the
consolidated financial statements; however, such amounts are immaterial since
inception.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for credit losses on loans. In
connection with the determination of the allowance for credit losses on loans,
management obtains independent appraisals for significant properties.
While management uses available information to recognize losses on loans, future
additions to the allowances may be necessary based on changes in local economic
conditions. In addition, regulatory agencies, as an integral part of their
examination process, periodically review Atlantic's allowances for credit losses
on loans. Such agencies may require Atlantic to recognize additions to the
allowances based on their judgments about information available to them at the
time of their examination.
Fair Value of Financial Instruments
- -----------------------------------
Financial instruments of Atlantic consist of cash, due from banks, federal funds
sold, investment securities, loans receivable, accrued interest receivable,
deposits, accrued interest payable, and off-balance sheet commitments such as
commitments to extend credit and standby letters of credit. On an interim basis,
management considers the cost of providing estimated fair values by each class
of financial instrument to exceed the benefits derived. In management's opinion,
the carrying amount of financial instruments approximates fair value.
- 5 -
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
NOTE 2 - INVESTMENT SECURITIES
The amortized cost and estimated fair value of instruments in debt and equity
securities are as follows (dollars in thousands):
September 30, 1999 December 31, 1998
-------------------------------- ----------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
Securities available-for-sale:
Mortgage-backed securities $ 6,481 $ 6,230 $ 7,850 $ 7,803
Other 145 145 55 55
--------- --------- ---------- ----------
$ 6,626 $ 6,375 $ 7,905 $ 7,858
======= ======= ======= =======
NOTE 3 - COMPUTATION OF PER SHARE EARNINGS
Basic earnings per share amounts are computed by dividing net earnings by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share are computed by dividing net earnings by the weighted average
number of shares and all dilutive potential shares outstanding during the
period. At September 30, 1999 and 1998, the outstanding warrants totaled 593,510
and 594,130, respectively; however, the warrants were not dilutive. The
following information was used in the computation of earnings per share on both
a basic and diluted basis for the three and nine ended September 30, 1999 and
1998 (in thousands except per share data):
Three Months Ended September 30,
1999 1998
---- ----
Basic EPS computation:
Numerator - Net income (loss) $ 206 $ 11
Denominator - Weighted average shares outstanding 595 595
------- -------
Basic EPS $ 0.35 $ 0.02
====== ======
Nine Months Ended September 30,
1999 1998
---- ----
Basic EPS computation:
Numerator - Net income (loss) $ 298 $ ( 105)
Denominator - Weighted average shares outstanding 595 595
------- ---------
Basic EPS $ 0.50 $ (0.18)
====== =======
- 6 -
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
NOTE 4 - LOANS
Loans consisted of (dollars in thousands):
September 30, December 31,
1999 1998
---- ----
Real estate $ 21,382 $ 16,853
Commercial and agricultural 11,446 6,039
Installment and other loans 4,933 3,194
---------- ----------
Total loans 37,761 26,086
Unearned income (97) (88)
Allowance for credit losses (706) (520)
--------- -----------
Net loans $ 36,958 $ 25,478
======== ========
NOTE 5 - ALLOWANCE FOR CREDIT LOSSES
Atlantic's Board of Directors monitors the loan portfolio quarterly in order to
enable it to evaluate the adequacy of the allowance for credit losses. Atlantic
maintains the allowance for credit losses at a level sufficient to absorb all
estimated losses inherent in the loan portfolio. Activity in the allowance for
credit losses follows (dollars in thousands):
For the Nine For the Twelve
Months Ended Months Ended
September 30, 1999 December 31, 1998
------------------ -----------------
Balance, beginning of period $ 520 $ 186
Recoveries 2 -
Chargeoffs (5) -
Provision charged to expense 189 334
------- ------
Balance, end of period $ 706 $ 520
===== =====
NOTE 6 - LONG-TERM DEBT
On February 11, 1999, Atlantic obtained a revolving line of credit in the amount
of $50,100 from Columbus Bank and Trust Company ("Columbus"). On August 11,
1999, Atlantic obtained two revolving lines of credit from Columbus totaling
$1.0 million, and repaid existing advances under the line of credit dated
February 11, 1999. For the remaining two lines of credit, principal and interest
at 0.50% below prime are due on August 11, 2000. The proceeds from the lines of
credit are to be used to acquire real estate, fund start-up costs for the
mortgage banking operations, and provide additional working capital for
Atlantic. At September 30, 1999, $652,000 had been advanced to Atlantic under
the lines of credit, which are secured by the common stock of Atlantic's
wholly-owned banking subsidiary, Oceanside Bank.
- 7 -
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
NOTE 7 - STOCKHOLDERS' EQUITY
During the third quarter of 1999, two hundred warrants were exercised at $10.00
per share. For the nine months ended September 30, 1999, a total of six hundred
warrants have been exercised at $10.00 per share, leaving 593,510 warrants
outstanding at September 30, 1999.
NOTE 8 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Atlantic 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. Those instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amounts recognized in the balance sheet. Financial instruments at
September 30, 1999, consisted of commitments to extend credit approximating
$8.95 million and letters of credit of $502,000.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
NOTE 9 - CHANGE IN ACCOUNTING PRINCIPLE
Atlantic has adopted Statement of Position 98-5, "Reporting on the Costs of
Start-Up Activities" ("SOP 98-5"). As a result of adopting SOP 98-5, Atlantic
expensed the unamortized balance of its organizational costs as of January 1,
1999, which totaled $95,000. This charge to earnings has been reported as a
cumulative effect of a change in accounting principle on the consolidated
statement of operations and comprehensive income for the nine months ended
September 30, 1999.
- 8 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION, PLAN OF OPERATIONS, AND RESULTS OF OPERATIONS
Overview
Atlantic BancGroup, Inc. (Atlantic"), through its wholly-owned
subsidiary, Oceanside Bank ("Oceanside"), conducts commercial banking business
consisting of attracting deposits from the general public and applying those
funds to the origination of commercial, consumer, and real estate loans
(including commercial loans collateralized by real estate). Atlantic's
profitability depends primarily on net interest income, which is the difference
between interest income generated from interest-earning assets (i.e., loans and
investments) less the interest expense incurred on interest-bearing liabilities
(i.e., customer deposits and borrowed funds). Net interest income is affected by
the relative amounts of interest-earning assets and interest-bearing
liabilities, and the interest rate earned and paid on these balances. Net
interest income is dependent upon Atlantic's interest-rate spread which is the
difference between the average yield earned on its interest-earning assets and
the average rate paid on its interest-bearing liabilities. When interest-earning
assets approximate or exceed interest-bearing liabilities, any positive interest
rate spread will generate net interest income. The interest rate spread is
impacted by interest rates, deposit flows, and loan demand. Additionally, and to
a lesser extent, Atlantic's profitability is affected by such factors as the
level of noninterest income and expenses, the provision for credit losses, and
the effective tax rate. Noninterest income consists primarily of service fees on
deposit accounts. Noninterest expense consists of compensation and employee
benefits, occupancy and equipment expenses, deposit insurance premiums paid to
the FDIC, and other operating expenses.
Oceanside commenced business operations on July 21, 1997, in a
permanent facility located at 1315 South Third Street, Jacksonville Beach,
Florida. Oceanside opened a branch office at 560 Atlantic Boulevard, Neptune
Beach, Florida, which commenced operations on September 1, 1998. On April 3,
1999, the shareholders of Oceanside approved the Agreement and Plan of
Reorganization ("Reorganization") whereby Oceanside became a wholly-owned
subsidiary of Atlantic. The Reorganization was completed on May 5, 1999.
On July 20, 1999, Oceanside Mortgage Group, Inc. (a wholly-owned
subsidiary of Atlantic) began mortgage banking operations. On August 13, 1999,
Atlantic purchased a building at 710 North Third Street, Jacksonville Beach,
Florida, for renovation as its holding company headquarters and operations
center. The mortgage banking operations and certain back-office functions of
Oceanside Bank will also be relocated to this building in mid-November 1999.
Atlantic purchased the facility for $540,000. Approximately $60,000 is
anticipated to be incurred to renovate the facility. The purchase price and
renovations will be financed under the existing lines of credit.
Forward-looking Statements
When used in this Form 10-QSB, the words or phrases "will likely
result," "are expected to," "will continue," "is anticipated," "estimate,"
"project," or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties
including changes in economic conditions in Atlantic's market area, changes in
policies by regulatory agencies, fluctuations in interest rates, demand for
loans in Atlantic's market area and competition, that could cause actual results
to differ materially from historical earnings and those presently anticipated or
projected. Atlantic wishes to caution readers not to place undue reliance on any
such forward-looking statements, which speak only as to the date made. Atlantic
wishes to advise readers that the factors listed above, as well as others, could
affect Atlantic's financial performance and could cause Atlantic's actual
results for future periods to differ materially from any opinions or statements
expressed with respect to future periods in any current statements. Atlantic
does not undertake, and specifically disclaims any obligation, to publicly
release the result of any revisions which may be made to any forward-looking
statements to reflect events or circumstances after the date of such statements
or to reflect the occurrence of anticipated or unanticipated events.
- 9 -
Year 2000
Management is aware of the issue associated with the programming code
in existing computer systems as the millennium (Year 2000) approaches. The issue
is whether computer systems will properly recognize date sensitive information
when the year changes to 2000. Primary systems that do not properly recognize
such information could generate erroneous data or cause a system to fail.
Atlantic is utilizing both internal and external resources to identify, correct,
and test their systems for the Year 2000 compliance. Substantially all of the
necessary modifications and testing were completed by December 31, 1998. To
date, confirmations have been received from Atlantic's primary processing
vendors that their software is now Year 2000 compliant. Management has not yet
completed their assessment of the compliance expense for the Year 2000 and
related potential effect on Atlantic's earnings; however, presently Management
anticipates to spend approximately $40,000 during 1999. It is recognized that
any Year 2000 compliance failures could result in additional expense to
Atlantic.
Time lines were established for testing all ancillary systems, such as
telephone systems and security devices, and the testing was completed in 1998.
There can be no assurances that all hardware and software that Atlantic uses
will be Year 2000 compliant, and Atlantic cannot predict with any certainty the
costs it will incur to respond to any Year 2000 issues. Factors which may affect
the amount of these costs include Atlantic's inability to control third party
modification plans, Atlantic's ability to identify and correct all relevant
computer codes, the availability and cost of engaging personnel trained in
solving Year 2000 issues, and other similar uncertainties.
Further, the business of many of Atlantic's customers may be negatively
affected by the Year 2000 issue, and any financial difficulties incurred by
customers in solving Year 2000 issues could negatively affect those customers'
ability to repay any loans which Atlantic may have extended. Therefore, even if
Atlantic does not incur significant direct costs in connection with responding
to the Year 2000 issue, there can be no assurance that the failure or delay of
customers or other third parties in addressing the Year 2000 issue or the costs
involved in such process will not have a material adverse effect on Atlantic's
business, financial condition, or results of operations.
Future Accounting Requirements
In September 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which addresses the accounting
for derivative instruments and provides for matching the timing of gain or loss
recognition on the hedging instrument. Guidance on identifying derivative
instruments is also provided as well as additional disclosures. SFAS 133 becomes
effective for all fiscal quarters of all fiscal years beginning after June 15,
1999. Earlier application is permitted with certain exceptions. Management does
not anticipate that adoption of SFAS 133 will have a material impact on the
financial condition or results of operations of Atlantic.
Impact of Inflation
The consolidated financial statements and related data presented herein
have been prepared in accordance with generally accepted accounting principles,
which require the measurements of financial position and operating results in
terms of historical dollars, without considering changes in the relative
purchasing power of money over time due to inflation. Unlike most industrial
companies, substantially all of the assets and liabilities of Atlantic are
monetary in nature. As a result, interest rates have a more significant impact
on Atlantic'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. As discussed previously,
management seeks to manage the relationships between interest-sensitive assets
and liabilities in order to protect against wide interest rate fluctuations,
including those resulting from inflation.
- 10 -
Plan of Operations
Atlantic anticipates that it will have sufficient capital to meet its
obligations for the upcoming twelve months. At September 30, 1999, Atlantic had
stockholders' equity of $5.2 million, which exceeds the regulatory requirements,
and provides an adequate cushion to absorb any unexpected losses in 1999. During
the second quarter of 1999, the reorganization of Oceanside and the resulting
one-bank holding company, Atlantic, was completed. This reorganization is
expected to provide increased flexibility in obtaining additional capital, if
needed, and to provide opportunities to expand Atlantic's services and products.
Atlantic received permission from the Federal Reserve Bank of Atlanta
to incur up to $1.0 million in debt. Atlantic borrowed funds to acquire a
building for use in its holding company and mortgage banking operations, and to
relocate certain existing Oceanside operations. Approximately $600,000 of the
proceeds have been allocated for the purchase of the building and related
renovations. The remaining proceeds will be used to fund start-up costs of the
mortgage banking operations and for general corporate purposes of the holding
company. The primary source of repayment of this proposed debt will come from
Oceanside rent payments, income from the mortgage banking business, and
allowable dividends from Oceanside to Atlantic.
Results of Operations
General
Net losses of $263,000 have been recorded from inception (July 21,
1997) to September 30, 1999. Organizational costs, the provision for credit
losses, and other overhead and start-up costs associated with a new banking
operation contributed to these cumulative losses. A summary of the trends for
the last five quarterly periods follows (dollars in thousands):
At or for the Quarter Ended
-----------------------------------------------------------------------------------------
September 30, 1998 December 31, 1998 March 31, 1999 June 30, 1999 September 30, 1999
------------------ ----------------- -------------- ------------- ------------------
Loans before allowance
for credit losses $21,920 $25,998 $30,642 $32,774 $37,664
Earning assets 31,453 38,977 38,247 44,627 44,769
Total assets 37,646 45,571 45,239 49,243 51,101
Interest-bearing deposits 26,730 33,206 30,725 32,711 32,685
Total deposits 32,419 40,374 39,924 44,066 45,121
Net interest income before
provision for credit losses 402 414 547 595 652
Provision for credit losses 74 85 80 43 66
Other income 52 65 76 92 100
Other expenses (2) 369 457 541 554 552
Net income (loss) (1) 11 (63) 2 90 206
Loans as a percent of
earning assets 70% 67% 80% 73% 84%
(1) The period from July 21, 1997, to June 30, 1998, resulted in a net loss
of $509,000.
(2) March 31, 1999, includes $95,000 of organizational costs expensed
pursuant to the adoption of SOP 98-5.
Net Income (Loss)
Atlantic's net income for the three and nine months ended September 30,
1999, was $206,000 and $298,000, respectively, which compares to net income
(loss) of $11,000 and $(105,000), respectively, for the three and nine months
ended September 30, 1998.
- 11 -
Average Balances, Income and Expenses, and Rates. The following table
depicts, for the periods indicated, certain information related to Atlantic's
average balance sheet and its average yields on assets and average costs of
liabilities. Such yields are derived by dividing income or expense by the
average balance of the corresponding assets or liabilities. Average balances
have been derived from daily averages (dollars in thousands).
For the Nine Months Ended September 30,
1999 1998
----------------------------------- --------------------------------
Interest Average Interest Average
Average and Yield/ Average and Yield/
Balance Dividends Rate Balance Dividends Rate
------- --------- ---- ------- --------- ----
Interest-earning assets:
Loans $31,208 $ 2,240 9.60% $15,634 $ 1,210 10.35%
Investment and mortgage-
backed securities 7,117 315 5.92% 4,674 227 6.49%
Other interest-earning assets 2,170 107 6.59% 3,820 151 5.28%
--------- --------- --------- ---------
Total interest-earning assets 40,495 2,662 8.79% 24,128 1,588 8.80%
------- -------
Noninterest-earning assets 4,847 3,599
--------- ---------
Total assets $45,342 $27,727
======= =======
Interest-bearing liabilities:
Demand, money market
and NOW deposits $16,130 336 2.79% $ 8,309 164 2.64%
Savings 1,087 18 2.21% 284 4 1.88%
Certificates of deposit 12,872 512 5.32% 9,338 414 5.93%
Other 58 2 4.61% - - 0.00%
----------- ---------- ------------ ----------
Total interest-bearing liabilities 30,147 868 3.85% 17,931 582 4.34%
-------- -------
Noninterest-bearing liabilities 10,126 4,636
Stockholders' equity 5,069 5,158
-------- ---------
Total liabilities and
stockholders' equity $45,342 $27,727
======= =======
Net interest income before provision
for credit losses $ 1,794 $ 1,006
======= =======
Interest-rate spread 4.94% 4.46%
===== =====
Net interest margin 5.92% 5.57%
===== =====
Ratio of average interest-earning assets to
average interest-bearing liabilities 134.33% 134.56%
======= =======
- 12 -
Comparison of Three Months Ended September 30, 1999 and 1998
Interest Income and Expense
Interest Income. Interest income was $972,000 and $643,000 for the
three months ended September 30, 1999 and 1998, respectively. The increase in
interest income of $329,000 in the third quarter of 1999 over the same period of
1998 is due to higher levels of earning assets and the change in mix of assets
resulting from the growth in loans shown herein.
Interest Expense. Interest expense was $320,000 and $241,000 for the
three months ended September 30, 1999 and 1998, respectively. The increase in
interest expense of $79,000 in the third quarter of 1999 over the same period of
1998 is due to the growth in deposits shown herein.
Net interest Income. Net interest income before provision for credit
losses was $652,000 and $402,000 for the three months ended September 30, 1999
and 1998, respectively. The average loan-to-deposit ratio for the three months
ended September 30, 1999, increased to approximately 78% from 65% at December
31, 1998. The average net interest margin for the third quarter of 1999 was
5.86% as compared with the average net interest margin in 1998 of 5.31%, an
increase of 55 basis points. Improvements in the loan-to-deposit ratio and the
shift in the mix from lower yielding assets to higher yielding loans contributed
to the higher net interest margin. Loans represented approximately 65% of
interest-earning assets in 1998 as compared with 77% in 1999.
Provision and Allowance for Loan Losses
Atlantic has developed policies and procedures for evaluating the
overall quality of its credit portfolio and the timely identification of
potential problem loans. Management's judgment as to the adequacy of the
allowance is based upon a number of assumptions about future events that it
believes to be reasonable, but which may or may not be valid. Thus, there can be
no assurance that charge-offs in future periods will not exceed the allowance
for credit losses or that additional increases in the credit loss allowance will
not be required.
Asset Classification. Commercial banks are required to review and, when
appropriate, classify their assets on a regular basis. The State of Florida and
the FDIC have the authority to identify problem assets and, if appropriate,
require them to be classified. There are three classifications for problem
assets: substandard, doubtful and loss. Substandard assets have one or more
defined weaknesses and are characterized by the distinct possibility that the
insured institution will sustain some loss if the deficiencies are not
corrected. Doubtful assets have the weaknesses of substandard assets with the
additional characteristic that the weaknesses make collection or liquidation in
full on the basis of currently existing facts, condition, and values
questionable, and there is a high possibility of loss. An asset classified as
loss is considered uncollectible and of such little value that continuance as an
asset of the institution is not warranted. If an asset or portion thereof is
classified as loss, the insured institution establishes a specific reserve for
the full amount of the portion of the asset classified as loss. All or a portion
of general credit loss allowances established to cover possible losses related
to assets classified as substandard or doubtful may be included in determining
an institution's regulatory capital, while specific valuation allowances for
credit losses generally do not qualify as regulatory capital. Assets that do not
warrant classification in the aforementioned categories, but possess weaknesses,
are classified as special mention and are monitored by Atlantic.
At September 30, 1999, Atlantic had 3 loans totaling $32,000 classified
as substandard and no loans classified as doubtful or loss. All of the
substandard loans were performing and there were no impaired loans as of
September 30, 1999.
Allowance for Credit Losses. The allowance for credit losses is
established through a provision for credit losses charged against income. Loans
are charged against the provision when management believes that the
collectibility of the principal is unlikely. The provision is an estimated
amount that management believes will be adequate to absorb losses inherent in
the loan portfolio based on evaluations of its collectibility. The evaluations
take into consideration such factors as changes in the nature and volume of the
portfolio, overall portfolio quality, specific problem loans and commitments,
and current anticipated economic conditions that may affect the borrower's
ability to pay. While management uses the best information available to
recognize losses on loans, future additions to the provision may be necessary
based on changes in economic conditions.
- 13 -
Activity in the allowance for credit losses follows (dollars in
thousand):
For the Nine For the Twelve
Months Ended Months Ended
September 30, 1999 December 31, 1998
------------------ ------------------
Balance, beginning of period $ 520 $ 186
Recoveries 2 -
Chargeoffs (5) -
Provision charged to expense 189 334
------- ------
Balance, end of period $ 706 $ 520
===== =====
At September 30, 1999, the allowance for credit losses amounted to
$706,000, or 1.87% of outstanding loans. At December 31, 1998, the allowance for
credit losses amounted to $520,000, or 2.00% of outstanding loans. Atlantic's
provision for credit losses was $66,000 and $74,000 for the three months ended
September 30, 1999 and 1998, respectively. During the third quarter of 1999,
management added to the allowance for credit losses an amount equal to
approximately 0.77% of average loans for the quarter.
Noninterest Income and Expense
Noninterest Income. Total other income increased to $100,000 for the
three months ended September 30, 1999, compared to $52,000 for the three months
ended September 30, 1998. This favorable trend was primarily due to an increase
in service fees on deposit accounts associated with the growth in the number of
deposit accounts subject to service fees.
Noninterest Expense. Total other expenses increased to $552,000 for the
three months ended September 30, 1999, compared to $369,000 for the three months
ended September 30, 1998, primarily due to the overall growth of Atlantic,
including expenses of bank premises and fixed assets associated with the
expansion of banking services into a new branch, which opened September 1, 1998.
Also, the third quarter of 1999 includes expenses associated with the
reorganization of Oceanside and the formation of the one-bank holding company,
Atlantic, and the start-up of Oceanside Mortgage. These expenses, primarily
licenses and legal fees, totaled $40,000.
Comparison of Nine Months Ended September 30, 1999 and 1998
Interest Income and Expense
Interest Income. Interest income was $2,662,000 and $1,588,000 for the
nine months ended September 30, 1999 and 1998, respectively. The increase in
interest income of $1,074,000 in the first nine months of 1999 over the same
period of 1998 is due to higher levels of earning assets and the change in mix
of assets resulting from the growth in loans shown herein.
Interest Expense. Interest expense was $868,000 and $582,000 for the
nine months ended September 30, 1999 and 1998, respectively. The increase in
interest expense of $286,000 in the first nine months of 1999 over the same
period of 1998 is due to the growth in deposits.
Net Interest Income. Net interest income before provision for credit
losses was $1,794,000 and $1,006,000 for the nine months ended September 30,
1999 and 1998, respectively. The average loan-to-deposit ratio for the nine
months ended September 30, 1999, increased to approximately 77% from 65% at
December 31, 1998. The average net interest margin for the first nine months of
1999 was 5.92% as compared with the average net interest margin in 1998 of
5.31%, an increase of 61 basis points. Improvements in the loan-to-deposit ratio
and the shift in the mix from lower yielding assets to higher yielding loans
contributed to the higher net interest margin. Loans represented approximately
65% of interest-earning assets in 1998 as compared with 77% in 1999.
Allowance for Credit Losses. Atlantic's provision for credit losses was
$189,000 and $249,000 for the nine months ended September 30, 1999 and 1998,
respectively. During the first nine months of 1999, management added to the
allowance for credit losses an amount equal to approximately 0.81% of average
loans.
- 14 -
Noninterest Income and Expense
Noninterest Income. Total other income increased to $268,000 for the
nine months ended September 30, 1999, compared to $131,000 for the nine months
ended September 30, 1998, due to an increase in service fees on deposit accounts
associated with the increase in the number of deposit accounts subject to
service fees.
Noninterest Expense. Total other expenses increased to $1,552,000 for
the nine months ended September 30, 1999, compared to $993,000 for the nine
months ended September 30, 1998, primarily due to the overall growth of
Atlantic, including expenses of bank premises and fixed assets associated with
the expansion of banking services into a new branch, the reorganization of
Oceanside and the formation of the one-bank holding company, Atlantic, and the
start-up of Oceanside Mortgage, as previously discussed herein.
Financial Condition
The following table shows selected ratios for the periods ended or at
the dates indicated (annualized for the nine months ended September 30, 1999):
Nine Months Ended Year Ended
September 30, December 31,
1999 1998
------------------- ---------
Return on average assets 0.88% (0.55)%
Return on average equity 7.86% (3.27)%
Interest-rate spread during the period 4.94% 4.31%
Net interest margin 5.92% 5.31%
Allowance for credit losses to period end loans 1.87% 2.00%
Net charge-offs to average loans 0.01% - %
Nonperforming assets to period end loans and foreclosed property - % - %
Nonperforming assets to period end total assets - % - %
Liquidity and Capital Resources
Liquidity Management. Liquidity management involves monitoring
Atlantic's sources and uses of funds in order to meet its day-to-day cash flow
requirements while maximizing profits. Liquidity represents the ability of a
company to convert assets into cash or cash equivalents without significant loss
and to raise additional funds by increasing liabilities. Liquidity management is
made more complicated because different balance sheet components are subject to
varying degrees of management control. For example, the timing of maturities of
the investment portfolio is very predictable and subject to a high degree of
control at the time investment decisions are made. However, net deposit inflows
and outflows are far less predictable and are not subject to the same degree of
control. Asset liquidity is provided by cash and assets which are readily
marketable, which can be pledged, or which will mature in the near future.
Liability liquidity is provided by access to core funding sources, principally
the ability to generate customer deposits in Atlantic's market area. In
addition, liability liquidity is provided through the ability to borrow against
approved lines of credit (federal funds purchased) from correspondent banks and
to borrow on a secured basis through securities sold under agreements to
repurchase.
Management expects to meet its liquidity needs with:
o available cash and federal funds sold, including both interest
and noninterest-bearing balances, which totaled $4.9 million
at September 30, 1999;
o maturities of investment securities totaling $1.9 million in
the 12 months following September 30, 1999;
o the repayment of loans;
o growth in deposits; and,
o if necessary, borrowing against approved lines of credit.
Short-Term Investments. Short-term investments, which consist of
federal funds sold and interest-bearing deposits, were $1.4 million at September
30, 1999, as compared to $5.1 million at December 31, 1998. These funds are a
primary source of Atlantic's liquidity and are generally invested in an earning
capacity on an overnight basis.
- 15 -
Management regularly reviews the liquidity position of Atlantic and has
implemented internal policies that establish guidelines for sources of
asset-based liquidity and limit the total amount of purchased funds used to
support the balance sheet and funding from non-core sources.
Deposits and Other Sources of Funds. In addition to deposits, the
sources of funds available for lending and other business purposes include loan
repayments, loan sales, and securities sold under agreements to repurchase. 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 and
are also used to fund the origination of mortgage loans designated to be sold in
the secondary markets.
Core Deposits. Core deposits, which exclude certificates of deposit of
$100,000 or more, provide a relatively stable funding source for Atlantic's loan
portfolio and other earning assets. Atlantic's core deposits were $40.6 million
at September 30, 1999, and $35.7 million at December 31, 1998. Management
anticipates that a stable base of deposits will be Atlantic's primary source of
funding to meet both its short-term and long-term liquidity needs in the future.
Since December 31, 1998, Atlantic has experienced a decline in NOW accounts of
approximately $5.5 million. While some of the decline can be attributed to a
shift in the deposit mix with noninterest-bearing and money market accounts
increasing by $5.3 million and $5.0 million, respectively, management has
observed a general decline in escrow accounts maintained by attorneys
specializing in real estate matters. These escrow accounts are maintained as NOW
accounts, and the outstanding balances are tied directly to the cyclical nature
of the real estate market.
Customers with large certificates of deposit tend to be extremely
sensitive to interest rate levels, making these deposits less reliable sources
of funding for liquidity planning purposes than core deposits. Some financial
institutions fund their balance sheets in part through large certificates of
deposit obtained through brokers. These brokered deposits are generally
expensive and are unreliable as long-term funding sources. Accordingly, Atlantic
generally does not accept brokered deposits.
Atlantic uses its resources principally to fund existing and
continuing loan commitments and to purchase investment securities. At September
30, 1999, Atlantic had commitments to originate loans totaling $8.95 million,
and had issued, but unused, letters of credit of $502,000 for the same period.
In addition, scheduled maturities of certificates of deposit during the 12
months following September 30, 1999, total $12.7 million. Management believes
that Atlantic has adequate resources to fund all its commitments, that
substantially all of its existing commitments will be funded within 12 months
and, if so desired, that Atlantic can adjust the rates and terms on certificates
of deposit and other deposit accounts to retain deposits in a changing interest
rate environment.
Capital. The bank regulatory agencies require financial institutions to
maintain capital at adequate levels based on a percentage of assets and
off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%.
Under the risk-based standard, capital is classified into two tiers. Tier 1
capital consists of common stockholders' equity, excluding the unrealized gain
(loss) on available-for-sale securities, minus certain intangible assets. Tier 2
capital consists of the general allowance for credit losses subject to certain
limitations. An institution's qualifying capital base for purposes of its
risk-based capital ratio consists of the sum of its Tier 1 and Tier 2 capital.
The regulatory minimum requirements are 4% for Tier 1 and 8% for total
risk-based capital.
Banks are also required to maintain capital at a minimum level based on
total assets, which is known as the leverage ratio. The minimum requirement for
the leverage ratio is 3%, but all but the highest rated institutions are
required to maintain ratios 100 to 200 basis points above the minimum. Oceanside
exceeded its minimum regulatory capital ratios as of September 30, 1999, as
reflected in the following table, which sets forth Oceanside's regulatory
capital position (dollars in thousands):
Actual Minimum(1) Well-Capitalized(2)
Amount % Amount % Amount %
------ - ------ - ------ -
Total Capital (to Risk-Weighted Assets) $ 5,933 15.31% $ 3,099 8.00% $ 3,874 10.00%
Tier I Capital (to Risk-Weighted Assets) $ 5,446 14.06% $ 1,550 4.00% $ 2,324 6.00%
Tier I Capital (to Average Assets) $ 5,446 11.12% $ 1,960 4.00% $ 2,450 5.00%
(1) The minimum required for adequately capitalized purposes.
(2) To be "well-capitalized" under the FDIC's Prompt Corrective Action
regulations.
- 16 -
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
The following sales of shares of Atlantic
BancGroup, Inc., common stock, par value $0.01
per share ("Atlantic"), were not registered
pursuant to the Securities Act of 1933, as
amended (the "Securities Act"), but were issued
pursuant to the exemptions indicated below:
During the nine months ended September 30, 1999,
600 shares of Atlantic common stock were
purchased pursuant to the exercise of 600
warrants for an aggregate price of $6,000. This
transaction was made in reliance on the exemption
set forth in Section 4(2) of the Securities Act.
Proceeds from the sale of the above securities
were used for general corporate purpose.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security
Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
a) None.
b) Reports on Form 8-K.
None.
- 17 -
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
issuer has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Atlantic BancGroup, Inc.
Date: November 5, 1999 /s/ M. Michael Witherspoon
------------------------ --------------------------
M. Michael Witherspoon
Chief Executive Officer
Date: November 5, 1999 /s/ David L. Young
------------------------ ------------------
David L. Young
Senior Vice President and
Chief Financial Officer
- 18 -