Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
x
Quarterly report under Section 13 or 15
(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2010
o
Transition report under Section 13 or 15
(d) of the Exchange Act
For the transition period from to
Commission File Number 000-51112
ATLANTIC SOUTHERN FINANCIAL GROUP, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
GEORGIA
|
|
20-2118147
|
(State or Other Jurisdiction of
|
|
(I.R.S. Employer
|
Incorporation or Organization)
|
|
Identification No.)
|
1701 Bass
Road
Macon,
Georgia 31210
(Address of Principal Executive Offices)
(478) 476-2170
(Issuers Telephone Number, Including Area Code)
Not
Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since
Last Report)
Indicate
by check mark whether the registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
x
No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes
o
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer, and smaller reporting company (in Rule 12b-2
of the Exchange Act).
Large accelerated filer
o
|
|
Accelerated filer
o
|
|
|
|
Non-accelerated filer
o
|
|
Smaller reporting company
x
|
Indicate
by checkmark whether the registrant is a shell company (as defined by Rule 12b-2
of the Exchange Act). Yes
o
No
x
APPLICABLE ONLY TO CORPORATE ISSUERS
State
the number of shares outstanding of each of the issuers classes of common
equity, as of the latest practicable date: Common Stock, no par value,
4,280,745 shares outstanding at November 12,
2010
Table of
Contents
ATLANTIC SOUTHERN
FINANCIAL GROUP, INC.
Consolidated
Balance Sheets
September 30,
2010
(Unaudited) and
December 31,
2009
(Audited)
|
|
As of
|
|
|
|
September 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
7,522,162
|
|
$
|
4,990,374
|
|
Interest-bearing deposits in other banks
|
|
97,289,101
|
|
28,401,303
|
|
Total cash and cash equivalents
|
|
104,811,263
|
|
33,391,677
|
|
Securities available for sale, at fair value
|
|
40,722,089
|
|
126,939,601
|
|
Federal Home Loan Bank stock, restricted, at cost
|
|
4,007,400
|
|
4,316,800
|
|
Loans held for sale
|
|
285,026
|
|
1,089,108
|
|
Loans, net of unearned income
|
|
607,722,880
|
|
718,306,915
|
|
Less - allowance for loan losses
|
|
(18,652,884
|
)
|
(21,478,748
|
)
|
Loans, net
|
|
589,069,996
|
|
696,828,167
|
|
Bank premises and equipment, net
|
|
30,043,245
|
|
31,016,982
|
|
Accrued interest receivable
|
|
3,525,117
|
|
4,549,769
|
|
Cash surrender value of life insurance
|
|
13,409,122
|
|
13,011,018
|
|
Intangible assets, net of amortization
|
|
2,277,113
|
|
2,548,850
|
|
Other real estate owned
|
|
61,612,054
|
|
21,066,480
|
|
Income tax receivable
|
|
204,983
|
|
11,174,666
|
|
Other assets
|
|
2,613,627
|
|
2,446,748
|
|
Total Assets
|
|
$
|
852,581,035
|
|
$
|
948,379,866
|
|
|
|
|
|
|
|
Liabilities and Shareholders
Equity
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
Non-interest bearing
|
|
$
|
54,045,637
|
|
$
|
53,747,355
|
|
Money market and NOW accounts
|
|
107,131,121
|
|
132,469,652
|
|
Savings
|
|
12,820,004
|
|
8,890,713
|
|
Time deposits
|
|
612,306,024
|
|
666,049,168
|
|
Total deposits
|
|
786,302,786
|
|
861,156,888
|
|
Federal Home Loan Bank advances
|
|
29,000,000
|
|
39,000,000
|
|
Subordinated debentures
|
|
1,400,000
|
|
1,400,000
|
|
Junior subordinated debentures
|
|
10,310,000
|
|
10,310,000
|
|
Accrued interest payable
|
|
3,467,329
|
|
4,977,554
|
|
Accrued expenses and other liabilities
|
|
1,941,277
|
|
1,896,265
|
|
Total liabilities
|
|
832,421,392
|
|
918,740,707
|
|
Commitments and contingencies
|
|
|
|
|
|
Shareholders Equity:
|
|
|
|
|
|
Preferred stock, authorized 2,000,000 shares,
outstanding -0- shares
|
|
|
|
|
|
Common stock, no par value, authorized 110,000,000
shares, 4,280,745 issued and outstanding in 2010, no par value, authorized
10,000,000 shares, 4,211,780 issued and outstanding in 2009
|
|
74,748,685
|
|
74,630,831
|
|
Deferred compensation, 68,965 shares
|
|
(87,500
|
)
|
|
|
Accumulated deficit
|
|
(54,921,667
|
)
|
(45,592,212
|
)
|
Accumulated other comprehensive income
|
|
420,125
|
|
600,540
|
|
Total shareholders equity
|
|
20,159,643
|
|
29,639,159
|
|
Total Liabilities and
Shareholders Equity
|
|
$
|
852,581,035
|
|
$
|
948,379,866
|
|
See Accompanying Notes to
Consolidated Financial Statements (Unaudited).
2
Table of
Contents
ATLANTIC SOUTHERN
FINANCIAL GROUP, INC.
Consolidated
Statements of Operations
For the Three Months and
Nine Months Ended September 30, 2010 and 2009
(Unaudited)
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Interest and Dividend Income:
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans
|
|
$
|
8,111,829
|
|
$
|
10,424,193
|
|
$
|
25,596,967
|
|
$
|
32,555,605
|
|
Interest on securities:
|
|
|
|
|
|
|
|
|
|
Taxable income
|
|
288,544
|
|
614,751
|
|
1,170,671
|
|
2,400,476
|
|
Non-taxable income
|
|
140,299
|
|
146,952
|
|
430,255
|
|
470,204
|
|
Other interest and dividend income
|
|
52,125
|
|
68,928
|
|
124,823
|
|
77,409
|
|
Total interest and dividend income
|
|
8,592,797
|
|
11,254,824
|
|
27,322,716
|
|
35,503,694
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
4,291,024
|
|
6,704,732
|
|
14,166,545
|
|
20,052,429
|
|
Subordinated debentures
|
|
42,934
|
|
42,933
|
|
127,400
|
|
127,400
|
|
Junior subordinated debentures
|
|
67,041
|
|
69,176
|
|
187,761
|
|
255,423
|
|
FHLB borrowings and other interest expense
|
|
252,942
|
|
406,166
|
|
709,746
|
|
1,145,128
|
|
Total interest expense
|
|
4,653,941
|
|
7,223,007
|
|
15,191,452
|
|
21,580,380
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
3,938,856
|
|
4,031,817
|
|
12,131,264
|
|
13,923,314
|
|
Provision for loan losses
|
|
2,178,000
|
|
11,352,000
|
|
5,514,000
|
|
17,420,000
|
|
Net interest income (expense) after provision for
loan losses
|
|
1,760,856
|
|
(7,320,183
|
)
|
6,617,264
|
|
(3,496,686
|
)
|
Noninterest Income:
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
386,702
|
|
464,250
|
|
1,178,929
|
|
1,303,925
|
|
Other service charges, commissions and fees
|
|
151,385
|
|
135,817
|
|
442,897
|
|
373,944
|
|
Gain on sales, calls and impairment write-down of
investment securities
|
|
556,613
|
|
15,342
|
|
599,519
|
|
1,331,160
|
|
Mortgage origination income
|
|
68,330
|
|
249,162
|
|
218,343
|
|
642,749
|
|
Other income
|
|
238,177
|
|
267,493
|
|
727,370
|
|
823,569
|
|
Total noninterest income
|
|
1,401,207
|
|
1,132,064
|
|
3,167,058
|
|
4,475,347
|
|
Noninterest Expense:
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
2,045,953
|
|
2,423,366
|
|
6,596,418
|
|
7,838,818
|
|
Occupancy expense
|
|
442,535
|
|
463,275
|
|
1,325,878
|
|
1,355,029
|
|
Equipment rental and depreciation of equipment
|
|
300,476
|
|
333,301
|
|
895,250
|
|
964,804
|
|
(Gain) loss on sale of other assets
|
|
5,338
|
|
(105,760
|
)
|
6,113
|
|
(61,963
|
)
|
Loss on sale and impairment of other real estate
|
|
1,322,408
|
|
941,572
|
|
1,719,335
|
|
2,432,260
|
|
Other real estate expense
|
|
477,216
|
|
316,962
|
|
1,778,386
|
|
653,258
|
|
FDIC and state banking assessments
|
|
1,103,010
|
|
729,328
|
|
3,431,229
|
|
1,883,939
|
|
Goodwill impairment
|
|
|
|
|
|
|
|
19,533,501
|
|
Other expenses
|
|
1,123,674
|
|
1,392,846
|
|
3,361,168
|
|
4,444,466
|
|
Total noninterest expense
|
|
6,820,610
|
|
6,494,890
|
|
19,113,777
|
|
39,044,112
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
(3,658,547
|
)
|
(12,683,009
|
)
|
(9,329,455
|
)
|
(38,065,451
|
)
|
Income tax benefit
|
|
|
|
4,395,044
|
|
|
|
6,737,530
|
|
Net Loss
|
|
$
|
(3,658,547
|
)
|
$
|
(8,287,965
|
)
|
$
|
(9,329,455
|
)
|
$
|
(31,327,921
|
)
|
Net Loss per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.87
|
)
|
$
|
(1.97
|
)
|
$
|
(2.22
|
)
|
$
|
(7.44
|
)
|
Diluted
|
|
$
|
(0.87
|
)
|
$
|
(1.97
|
)
|
$
|
(2.22
|
)
|
$
|
(7.44
|
)
|
See Accompanying Notes to
Consolidated Financial Statements (Unaudited).
3
Table
of Contents
ATLANTIC SOUTHERN
FINANCIAL GROUP, INC.
Consolidated
Statements of Comprehensive Income (Loss)
For the Three Months and
Nine Months Ended September 30, 2010 and 2009
(Unaudited)
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Net loss
|
|
$
|
(3,658,547
|
)
|
$
|
(8,287,965
|
)
|
$
|
(9,329,455
|
)
|
$
|
(31,327,921
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains on investment securities
available for sale
|
|
9,406
|
|
1,349,409
|
|
326,164
|
|
1,200,506
|
|
Reclassification adjustment for gains on
investments available for sale realized in net loss
|
|
(556,613
|
)
|
(15,342
|
)
|
(599,519
|
)
|
(1,388,778
|
)
|
Total other comprehensive income (loss), before
tax
|
|
(547,207
|
)
|
1,334,067
|
|
(273,355
|
)
|
(188,272
|
)
|
Income taxes related to other comprehensive
(income) loss:
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains on investment securities
available for sale
|
|
(3,198
|
)
|
(458,799
|
)
|
(110,896
|
)
|
(408,172
|
)
|
Reclassification adjustment for gains on
investments available for sale realized in net loss
|
|
189,248
|
|
5,216
|
|
203,836
|
|
472,185
|
|
Total income taxes related to other comprehensive
(income) loss
|
|
186,050
|
|
(453,583
|
)
|
92,940
|
|
64,013
|
|
Total other comprehensive income (loss), net of
tax
|
|
(361,157
|
)
|
880,484
|
|
(180,415
|
)
|
(124,259
|
)
|
Total comprehensive income (loss)
|
|
$
|
(4,019,704
|
)
|
$
|
(7,407,481
|
)
|
$
|
(9,509,870
|
)
|
$
|
(31,452,180
|
)
|
See Accompanying Notes to
Consolidated Financial Statements (Unaudited).
4
Table of
Contents
ATLANTIC SOUTHERN
FINANCIAL GROUP, INC.
Consolidated
Statements of Cash Flows
For the Nine Months Ended September 30,
2010 and 2009
(Unaudited)
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
2009
|
|
Cash Flows from Operating
Activities:
|
|
|
|
|
|
Net loss
|
|
$
|
(9,329,455
|
)
|
$
|
(31,327,921
|
)
|
Adjustments to reconcile net loss to net cash
provided by operating activities:
|
|
|
|
|
|
Provision for loan losses
|
|
5,514,000
|
|
17,420,000
|
|
Depreciation
|
|
1,176,891
|
|
1,219,143
|
|
Stock based compensation
|
|
30,353
|
|
19,026
|
|
Goodwill impairment charge
|
|
|
|
19,533,501
|
|
Amortization and (accretion), net
|
|
621,282
|
|
536,481
|
|
Loss on sale and impairment of other real estate
|
|
1,719,335
|
|
2,432,260
|
|
(Gain) loss on sale of other assets
|
|
6,113
|
|
(61,963
|
)
|
Gain on sales, calls and impairment write-down of
investment securities
|
|
(599,519
|
)
|
(1,331,160
|
)
|
Earnings on cash surrender value of life insurance
|
|
(398,104
|
)
|
(401,540
|
)
|
Change in:
|
|
|
|
|
|
Loans held for sale
|
|
939,082
|
|
(280,588
|
)
|
Accrued income and other assets
|
|
12,617,274
|
|
(5,012,219
|
)
|
Accrued expenses and other liabilities
|
|
(1,465,213
|
)
|
(76,297
|
)
|
Net cash provided by operating activities
|
|
10,832,039
|
|
2,668,723
|
|
Cash Flows from Investing
Activities:
|
|
|
|
|
|
Net change in loans to customers
|
|
56,155,354
|
|
5,215,629
|
|
Purchase of available for sale securities
|
|
(7,467,125
|
)
|
(201,094,582
|
)
|
Proceeds from sales, calls, maturities and paydowns
of available for sale securities
|
|
93,716,246
|
|
122,479,947
|
|
Purchase of other investments
|
|
|
|
(880,600
|
)
|
Proceeds from sale of other investments
|
|
309,400
|
|
484,000
|
|
Property and equipment expenditures
|
|
(203,154
|
)
|
(1,492,611
|
)
|
Improvement of other real estate
|
|
(838,736
|
)
|
(25,048
|
)
|
Proceeds from sales of other real estate and other
assets
|
|
3,769,664
|
|
4,693,445
|
|
Net cash provided by (used in) investing
activities
|
|
145,441,649
|
|
(70,619,820
|
)
|
Cash Flows from Financing
Activities:
|
|
|
|
|
|
Net change in deposits
|
|
(74,854,102
|
)
|
120,708,633
|
|
Advances on FHLB borrowings
|
|
|
|
31,000,000
|
|
Payments on FHLB borrowings
|
|
(10,000,000
|
)
|
(28,200,000
|
)
|
Net cash (used in) provided by financing
activities
|
|
(84,854,102
|
)
|
123,508,633
|
|
Net Increase in Cash and Cash
Equivalents
|
|
71,419,586
|
|
55,557,536
|
|
Cash and Cash Equivalents,
Beginning of Year
|
|
33,391,677
|
|
15,130,136
|
|
Cash and Cash Equivalents, End of
Quarter
|
|
$
|
104,811,263
|
|
$
|
70,687,672
|
|
See Accompanying Notes to
Consolidated Financial Statements (Unaudited).
5
Table of
Contents
ATLANTIC SOUTHERN
FINANCIAL GROUP, INC.
Consolidated Statements of
Cash Flows, continued
For the Nine Months Ended September 30,
2010 and 2009
(Unaudited)
Supplemental Disclosure of Cash Flow Information
Noncash transactions:
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
2009
|
|
Changes in unrealized gain/loss on investments,
net of tax effect
|
|
$
|
(180,415
|
)
|
$
|
(124,259
|
)
|
Transfer of loans to other real estate and other
assets
|
|
$
|
47,520,667
|
|
$
|
16,758,579
|
|
Transfer of other real estate to loans and loans
held for sale
|
|
$
|
1,567,026
|
|
$
|
4,078,873
|
|
Interest on deposits and borrowings
|
|
$
|
16,701,677
|
|
$
|
21,918,066
|
|
Income tax refunds
|
|
$
|
(10,969,783
|
)
|
$
|
(848,760
|
)
|
See Accompanying Notes to
Consolidated Financial Statements (Unaudited).
6
Table of
Contents
ATLANTIC SOUTHERN
FINANCIAL GROUP, INC.
Notes to Consolidated Financial
Statements
(Unaudited)
(1) Basis
of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and therefore do
not include all information and footnotes necessary for a fair presentation of
financial position, results of operations, and changes in financial position in
conformity with generally accepted accounting principles. The interim financial statements furnished
reflect all adjustments, which are, in the opinion of management, necessary to
a fair statement of the results for the interim periods presented. The interim consolidated financial statements
should be read in conjunction with the Companys Annual Report on Form 10-K
for the year ended December 31, 2009.
(2) Regulatory Orders
On
September 11, 2009, Atlantic Southern Bank (the Bank), the wholly-owned
subsidiary bank of Atlantic Southern Financial Group, Inc., entered into a
Stipulation and Consent to the Issuance of an Order to Cease and Desist (the Consent
Agreement) with the Federal Deposit Insurance Corporation (the FDIC) and the
Georgia Department of Banking and Finance (the GDBF), whereby the Bank
consented to the issuance of an Order to Cease and Desist (the Order). Under the terms of the Order, the Bank cannot
declare dividends without the prior written approval of the FDIC and the GDBF.
Other material provisions of the order require the Bank to: (i) strengthen
its board of directors oversight of management and operations of the Bank,
(ii) establish a committee consisting of at least four members, three of
which must be independent, to oversee the Banks compliance with the Order,
(iii) maintain specified capital and liquidity ratios, (iv) improve
the Banks lending and collection policies and procedures, particularly with
respect to the origination and monitoring of commercial real estate and
acquisition, development and construction loans, (v) eliminate from its
books, by charge off or collection, all assets classified as loss and 50% of
all assets classified as doubtful, (vi) perform risk segmentation analysis
with respect to concentrations of credit, (vii) receive a brokered deposit
waiver from the FDIC prior to accepting, rolling over or renewing any brokered
deposits and submit a written plan for eliminating its reliance on brokered
deposits, (viii) adopt and implement a policy limiting the use of loan
interest reserves, (ix) formulate and fully implement a written plan and
comprehensive budget for all categories of income and expense, and
(x) prepare and submit progress reports to the FDIC and the GDBF. The FDIC
order will remain in effect until modified or terminated by the FDIC and the
GDBF.
The
Bank has continued to serve its customers in all areas including making loans,
establishing lines of credit, accepting deposits and processing banking
transactions. The Banks deposits remain
insured by the FDIC to the maximum limits allowed by law. The FDIC and GDBF did not impose or recommend
any monetary penalties.
As
of the date of this report, the Bank has made the following progress in
complying with the above stated provisions of the Order:
(i)
Since the Order
and throughout 2010, the board of directors participation in the affairs of
the Bank has continued to increase through greater communication with
management, an analysis of management reports to the board, as well as
increased committee activities.
(ii)
The Bank has
formed an oversight committee for the purpose of monitoring the Banks overall
compliance with the Order and this committee meets monthly and reports to the
full board of the Bank at each regularly scheduled board meeting. Although not specifically required by the
Order, the board engaged an independent management consulting firm to conduct
an assessment of Bank management.
(iii)
The Bank
developed a capital plan, which includes reducing expenses to improve earnings,
restructuring the balance sheet to reduce non-performing assets, seeking new
capital and limiting loan growth and will continue to revise the plan
quarterly. The Bank has also reviewed
its written liquidity, contingency funding, and funds management policies. Both the revised capital plan and the revised
liquidity policy have been submitted to the supervisory authorities for
review. The
7
Table of
Contents
ATLANTIC SOUTHERN
FINANCIAL GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
Banks Total Risk Based Capital ratio was 5.49% and the Tier 1 Leverage
Ratio was 3.14% at September 30, 2010.
The Banks liquidity ratio at September 30, 2010 was 17.94%.
(iv)
The Bank has
reviewed and revised lending policies to provide additional guidance and
control over the lending functions.
(v)
The Bank has
eliminated from its books all assets or portions of assets classified as Loss
and 50% of all assets or portions of assets classified as Doubtful.
(vi)
The Bank has
and will continue to perform a risk segmentation analysis with respect to
concentrations of credit. Management is
limiting credit availability especially for commercial real estate and
acquisition, development and construction loans and pursuing collection efforts
aggressively in an effort to reduce the Banks exposure to commercial real
estate and acquisition, development and construction, pursuant to the Order.
(vii)
The Bank has
submitted to the supervisory authorities a written plan for eliminating its
reliance on brokered deposits and will not accept, roll over or renew any
brokered deposits unless a waiver has been received from the FDIC. The Bank continues to significantly reduce
its exposure to brokered deposits. Since
June 30, 2008, the Bank has been proactive in reducing brokered deposits
by 59.1%, or $238.4 million, while increasing core deposits by $188.9 million
during the same period.
(viii)
The Bank has
adopted a policy limiting the use of interest reserves.
(ix)
A three-year
profit plan has been developed and is updated quarterly and reviewed by the
oversight committee.
(x)
The Bank has
submitted all required progress reports to the appropriate supervisory
authorities.
On
March 26, 2010, the Company entered into a written agreement (the Agreement)
with the Board of Governors of the Federal Reserve System (the Federal Reserve
Board) and the GDBF, pursuant to which the Company is prohibited from
declaring or paying dividends without prior written consent from the
regulators. In addition, pursuant to the
Agreement, without the prior written consent of regulators, the Company is
prohibited from taking dividends, or any other form of payment representing a
reduction of capital, from the Bank; paying interest, principal or other sums
on subordinated debentures and trust preferred securities; incurring,
increasing or guaranteeing any debt; redeeming any shares of the Companys
common stock; and increasing salaries or bonuses paid to executive
officers. All salaries, bonuses and
fees, excluding the reimbursement of expenses valued at less than $500 in the
aggregate per month per executive officer, must be preapproved by the board of
directors on a regular basis. In
appointing any new director or any executive officer, the Company is required
to notify regulatory authorities and comply with restrictions on
indemnification and severance. The
Company will also provide quarterly written progress reports to the Federal
Reserve Board.
Within
60 days of the Agreement, the Company was required to submit to the Federal
Reserve Board a written plan designed to maintain sufficient capital at the
Company, on a consolidated basis, and at the Bank. The Agreement does not contain specific
target capital ratios or specific timelines, but requires that the plan address
the Companys current and future capital requirements, the Banks current and
future capital requirements, the adequacy of the Banks capital taking into
account its risk profile, and the source and timing of additional funds
necessary to fulfill the Companys and the Banks future capital requirements.
(3) Going Concern
As
a result of the extraordinary effects of what may ultimately be the worst
economic downturn since the Great Depression, the Companys and the Banks
capital have been significantly depleted. The Company recorded a net loss of $59.2
million in 2009 and continued in the first nine months of 2010 in recording a
net loss of $9.3 million. These net
losses are primarily the result of significant increases in the provision for
loan losses in 2009,
8
Table of
Contents
ATLANTIC SOUTHERN
FINANCIAL GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
the
recognition of goodwill impairment in 2009, the establishment of a valuation
allowance against the Companys deferred tax asset in 2009, a decrease in the
Companys net interest margin due to the loss of interest on non-accrual loans
and from the purchase of low-yielding investment securities during 2009, a
significant increase in the FDIC quarterly assessment in 2009 and 2010 and
increases in other real estate expenses due to the increase in foreclosed
properties in 2009 and 2010. The impact
of the current financial crisis in the U.S. and abroad is having far-reaching
consequences and it is difficult to say at this point when the economy will
begin to recover. As a result, it cannot
be assured that the Company will be able to resume profitable operations in the
near future, if at all.
The
Company and the Bank are required by federal regulatory authorities to maintain
adequate levels of capital to support their operations. As part of the Order, the Bank is required to
increase its capital and maintain certain regulatory capital ratios. To comply with the Order, the Bank is
required to have Tier 1 capital in such an amount as to equal or exceed 8% of
the Banks total assets and total risk-based capital in an amount as to equal
or exceed 10% of the Banks risk-weighted assets. At September 30, 2010, the Banks total
capital to risk-weighted assets and ratio of Tier 1 capital to average assets
were 5.49% and 3.14%, respectively. The
Companys existing capital resources may not satisfy the requirements for the
foreseeable future and may not be sufficient to offset any additional problem
assets. Further, should erosion to the
Banks asset quality continue and require significant additional provision for
credit losses, resulting in consistent net operating losses at the Bank, the
Banks capital levels will decline and the Company will need to raise
additional capital to satisfy the Order.
The
Companys ability to raise additional capital will depend on conditions in the
capital markets at that time, which are outside its control, and on its
financial performance. Accordingly, the
Company cannot be certain of its ability to raise additional capital on terms
acceptable to them. The Companys
inability to raise capital or comply with the terms of the Order raises
substantial doubt about its ability to continue as a going concern.
The
Companys Board of Directors is seeking all strategic alternatives to enhance
the stability of the Company, including a capital investment. There can be no assurance, however, that the
Company will be able to comply with the regulatory requirements. In addition, a transaction involving equity
financing, would result in substantial dilution to current stockholders and
could adversely affect the price of the Companys common stock. As a result of the Banks financial
condition, the regulatory authorities are continually monitoring its liquidity
and capital adequacy. Based on their
assessment of the Banks ability to continue to operate in a safe and sound
manner, including its compliance with established capital requirements,
regulatory authorities may take other and further actions, including placing
the Bank into conservatorship or receivership, to protect the interests of
depositors.
The
accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the discharge
of liabilities in the normal course of business for the foreseeable future, and
do not include any adjustments to reflect the possible future effects on the
recoverability or classification of assets, and the amounts or classification
of liabilities that may result from the outcome of any regulatory action, which
would affect the Companys ability to continue as a going concern. The Companys independent public accountants
have expressed, in their opinion on the Companys consolidated financial
statements as of December 31, 2009, that a substantial doubt exists
regarding the Companys ability to continue as a going concern.
(4) Net Earnings (Loss) per Share
Basic earnings (loss) per share are
based on the weighted average number of common shares outstanding during the
period while the effects of potential shares outstanding during the period are
included in diluted earnings per share.
Approximately 381,000 shares of reserved for
issuance pursuant to options and warrants and 68,965 shares of restricted stock
were not included in the diluted loss per share computation for the three and
nine months ended September 30, 2010 and 2009 as they are anti-dilutive.
9
Table of
Contents
ATLANTIC SOUTHERN
FINANCIAL GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
The reconciliation of the amounts
used in the computation of both basic earnings (loss) per share and diluted
earnings (loss) per share for each period is presented as follows:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,658,547
|
)
|
$
|
(8,287,965
|
)
|
$
|
(9,329,455
|
)
|
$
|
(31,327,921
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
4,211,780
|
|
4,211,780
|
|
4,211,780
|
|
4,211,780
|
|
Shares issued from assumed exercise of common
stock equivalents
|
|
|
|
|
|
|
|
|
|
Weighted average number of common and common
equivalent shares outstanding
|
|
4,211,780
|
|
4,211,780
|
|
4,211,780
|
|
4,211,780
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.87
|
)
|
$
|
(1.97
|
)
|
$
|
(2.22
|
)
|
$
|
(7.44
|
)
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.87
|
)
|
$
|
(1.97
|
)
|
$
|
(2.22
|
)
|
$
|
(7.44
|
)
|
(5)
Investment
Securities
Debt and equity securities have been classified in the balance sheet
according to managements intent. All
investments as of September 30, 2010 and December 31, 2009 are
classified as available for sale. The following
table reflects the amortized cost and estimated fair values of the investments:
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Estimated
|
|
September 30, 2010
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Fair Value
|
|
Non-mortgage backed debt securities of :
|
|
|
|
|
|
|
|
|
|
U.S. Treasury obligations
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
U.S. Government sponsored enterprises
|
|
5,007,037
|
|
97,051
|
|
|
|
5,104,088
|
|
State and political subdivisions
|
|
15,206,929
|
|
440,816
|
|
(316,670
|
)
|
15,331,075
|
|
Other investments
|
|
250,000
|
|
|
|
(34,802
|
)
|
215,198
|
|
Total non-mortgage backed debt securities
|
|
20,463,966
|
|
537,867
|
|
(351,472
|
)
|
20,650,361
|
|
Mortgage backed securities
|
|
19,582,141
|
|
470,553
|
|
|
|
20,052,694
|
|
Equity securities
|
|
39,428
|
|
|
|
(20,394
|
)
|
19,034
|
|
Total
|
|
$
|
40,085,535
|
|
$
|
1,008,420
|
|
$
|
(371,866
|
)
|
$
|
40,722,089
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
Non-mortgage backed debt securities of :
|
|
|
|
|
|
|
|
|
|
U.S. Treasury obligations
|
|
$
|
57,114,838
|
|
$
|
42,027
|
|
$
|
|
|
$
|
57,156,865
|
|
U.S. Government sponsored enterprises
|
|
27,191,611
|
|
425,213
|
|
|
|
27,616,824
|
|
State and political subdivisions
|
|
15,404,985
|
|
234,535
|
|
(483,685
|
)
|
15,155,835
|
|
Other investments
|
|
250,000
|
|
9,208
|
|
|
|
259,208
|
|
Total non-mortgage backed debt securities
|
|
99,961,434
|
|
710,983
|
|
(483,685
|
)
|
100,188,732
|
|
Mortgage backed securities
|
|
26,028,829
|
|
733,712
|
|
(51,100
|
)
|
26,711,441
|
|
Equity securities
|
|
39,428
|
|
|
|
|
|
39,428
|
|
Total
|
|
$
|
126,029,691
|
|
$
|
1,444,695
|
|
$
|
(534,785
|
)
|
$
|
126,939,601
|
|
10
Table of Contents
ATLANTIC SOUTHERN
FINANCIAL GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
The
amortized cost and fair values of pledged securities for public deposits and
for federal funds lines of credit with correspondent banks were as follows:
|
|
September 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
Amortized cost
|
|
$
|
20,028,613
|
|
$
|
23,141,062
|
|
Fair value
|
|
$
|
20,636,370
|
|
$
|
23,003,692
|
|
The amortized cost and estimated fair value of
debt securities available for sale at September 30, 2010, by contractual
maturity, are shown below. Expected
maturities for mortgage-backed securities may differ from contractual
maturities because in certain cases borrowers can prepay obligations without
prepayment penalties. Therefore, these
securities are not included in the following maturity summary.
|
|
|
|
Estimated
|
|
|
|
Amortized Cost
|
|
Fair Value
|
|
Non-mortgage backed debt securities:
|
|
|
|
|
|
Due in one year or less
|
|
$
|
|
|
$
|
|
|
Due after one year through five years
|
|
3,622,236
|
|
3,663,800
|
|
Due after five years through ten years
|
|
6,584,773
|
|
6,803,072
|
|
Due after ten years
|
|
10,256,957
|
|
10,183,489
|
|
Total non-mortgage backed debt securities
|
|
$
|
20,463,966
|
|
$
|
20,650,361
|
|
The fair value is established by an independent pricing service as of
the approximate dates indicated. The
differences between the amortized cost and fair value reflect current interest
rates and represent the potential loss (or gain) had the portfolio been
liquidated on that date. Security losses
(or gains) are realized only in the event of dispositions prior to maturity.
Information
pertaining to securities with gross unrealized losses, aggregated by investment
category and length of time that individual securities have been in a
continuous unrealized loss position, follows:
|
|
September 30, 2010
|
|
|
|
Less Than Twelve Months
|
|
More Than Twelve Months
|
|
|
|
Unrealized
|
|
Estimated
|
|
Unrealized
|
|
Estimated
|
|
Securities Available for Sale
|
|
Losses
|
|
Fair Value
|
|
Losses
|
|
Fair Value
|
|
Non-mortgage backed debt securities of:
|
|
|
|
|
|
|
|
|
|
State and political subdivisions
|
|
$
|
(245,125
|
)
|
$
|
2,736,344
|
|
$
|
(71,545
|
)
|
$
|
1,290,454
|
|
Other investments
|
|
(34,802
|
)
|
215,198
|
|
|
|
|
|
Total non-mortgage backed debt securities
|
|
(279,927
|
)
|
2,951,542
|
|
(71,545
|
)
|
1,290,454
|
|
Mortgage backed securities
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
(20,394
|
)
|
19,034
|
|
|
|
|
|
Total
|
|
$
|
(300,321
|
)
|
$
|
2,970,576
|
|
$
|
(71,545
|
)
|
$
|
1,290,454
|
|
11
Table of Contents
ATLANTIC SOUTHERN
FINANCIAL GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
|
|
December 31, 2009
|
|
|
|
Less Than Twelve Months
|
|
More Than Twelve Months
|
|
|
|
Unrealized
|
|
Estimated
|
|
Unrealized
|
|
Estimated
|
|
Securities Available for Sale
|
|
Losses
|
|
Fair Value
|
|
Losses
|
|
Fair Value
|
|
Non-mortgage backed debt securities of:
|
|
|
|
|
|
|
|
|
|
State and political subdivisions
|
|
$
|
(6,966
|
)
|
$
|
2,466,046
|
|
$
|
(476,719
|
)
|
$
|
4,814,097
|
|
Other investments
|
|
|
|
|
|
|
|
|
|
Total non-mortgage backed debt securities
|
|
(6,966
|
)
|
2,466,046
|
|
(476,719
|
)
|
4,814,097
|
|
Mortgage backed securities
|
|
(51,100
|
)
|
7,799,758
|
|
|
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(58,066
|
)
|
$
|
10,265,804
|
|
$
|
(476,719
|
)
|
$
|
4,814,097
|
|
Management evaluates securities
for other-than-temporary impairment at least on a quarterly basis, and more
frequently when economic or market concerns warrant such evaluation.
Consideration is given to (1) the length of time and the extent to which
the fair value has been less than cost, (2) the financial condition and
near-term prospects of the issuer, and (3) the intent and ability of the
Company to retain its investment in the issuer for a period of time sufficient
to allow for any anticipated recovery in fair value.
At September 30, 2010,
twelve debt securities had unrealized losses with aggregate depreciation of
0.88% from the Companys amortized cost basis.
In analyzing an issuers financial condition, management considers
whether the securities are issued by the federal government or its agencies,
whether downgrades by bond rating agencies have occurred, and industry analysts
reports. As management has the ability and intent to hold debt securities until
maturity, or for the foreseeable future if classified as available for sale and
it is more likely than not that the Company will not be required to sell these
investments before recovery of their amortized cost basis, no declines are
deemed to be other than temporary.
The following table
summarizes securities disposal activities for the three month and nine month
periods ended September 30, 2010 and 2009:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Proceeds from sales
|
|
$
|
11,347,462
|
|
$
|
|
|
$
|
11,347,462
|
|
$
|
51,611,819
|
|
Proceeds from calls
|
|
2,545,000
|
|
5,040,000
|
|
18,635,000
|
|
5,220,000
|
|
Proceeds from maturities
|
|
20,500,000
|
|
27,347,247
|
|
57,000,000
|
|
56,080,247
|
|
Paydowns
|
|
2,208,266
|
|
1,329,364
|
|
6,733,784
|
|
9,567,881
|
|
Total
|
|
$
|
36,600,728
|
|
$
|
33,716,611
|
|
$
|
93,716,246
|
|
$
|
122,479,947
|
|
|
|
|
|
|
|
|
|
|
|
Gross gains
|
|
$
|
557,149
|
|
$
|
16,119
|
|
$
|
600,055
|
|
$
|
1,400,252
|
|
Gross losses
|
|
(536
|
)
|
(777
|
)
|
(536
|
)
|
(11,474
|
)
|
Impairment losses
|
|
|
|
|
|
|
|
(57,618
|
)
|
|
|
|
|
|
|
|
|
|
|
Net gains of securities
|
|
$
|
556,613
|
|
$
|
15,342
|
|
$
|
599,519
|
|
$
|
1,331,160
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
|
|
$
|
5,216
|
|
$
|
|
|
$
|
472,185
|
|
During the third quarter of
2010, the Bank sold approximately $11.3 million in U.S. agency and mortgage
backed securities to capture gains on securities prepaying at a high pace. During the second quarter of 2009, the Bank
restructured approximately $36 million in U.S. agency and mortgage backed
securities to capture gains on securities prepaying at a high pace, to offset
FDIC special assessment and to shorten the average maturity of the portfolio.
12
Table of Contents
ATLANTIC SOUTHERN
FINANCIAL GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
During the second quarter of
2009, the Company recognized an impairment loss of $57,618 on an equity
investment in Silverton Bank, a financial institution that failed during the
quarter. The impairment loss represents
the full amount of the Companys investment in Silverton.
(6) Loans
The following is a summary of the loan portfolio
by purpose code categories:
|
|
September 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
44,788,031
|
|
$
|
51,673,928
|
|
Real estate - commercial
|
|
273,745,608
|
|
304,468,535
|
|
Real estate - construction
|
|
190,463,314
|
|
263,270,892
|
|
Real estate - mortgage
|
|
93,154,714
|
|
92,012,553
|
|
Obligations of political subdivisions in the U.S.
|
|
204,792
|
|
294,779
|
|
Consumer
|
|
5,488,624
|
|
6,838,169
|
|
Total loans
|
|
607,845,083
|
|
718,558,856
|
|
Less:
|
|
|
|
|
|
Unearned loan fees
|
|
(122,203
|
)
|
(251,941
|
)
|
Allowance for loan losses
|
|
(18,652,884
|
)
|
(21,478,748
|
)
|
Loans, net
|
|
$
|
589,069,996
|
|
$
|
696,828,167
|
|
The Company considers a
loan to be impaired when it is probable that it will be unable to collect all
amounts due according to the original terms of the loan agreement. Impaired loans include loans which are not
accruing interest and restructured loans which are accruing interest. The Company measures impairment of a loan on
a loan-by-loan basis by either the present value of expected future cash flows
discounted at the loans effective interest rate, the loans obtainable market
price, or the fair value of the collateral if the loan is collateral
dependent. Non-accrual loans are loans
which collection of interest is not probable and all cash flows received are
recorded as reduction in principal.
Restructured loans have modified terms from the original contract that
give the debtor a more manageable arrangement for meeting financial obligations
under their current situation. Amounts
of impaired loans that are not probable of collection are charged off
immediately.
At September 30, 2010
and December 31, 2009, all impaired loans with a related allowance have
been evaluated based upon the fair value of the underlying collateral. Impaired loans without a related allowance
were previously written down to the net realizable value of the collateral or
the collateral was sufficient to ensure no principal loss. At September 30, 2010, the Company had
approximately $61.9 million in impaired loans without a related allowance with
the Company having previously partially charged off approximately $6.4 million
to date to write down the loans to their net realizable value. Impaired loans and related amounts included
in the allowance for loan losses at September 30, 2010 and December 31,
2009 are as follows:
|
|
September 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
Allowance
|
|
|
|
Allowance
|
|
|
|
Balance
|
|
Amount
|
|
Balance
|
|
Amount
|
|
Impaired loans with related allowance
|
|
$
|
26,694,726
|
|
$
|
5,267,864
|
|
$
|
3,261,723
|
|
$
|
1,024,001
|
|
Impaired loans without related allowance
|
|
61,866,212
|
|
|
|
112,031,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had $16.0 million and $12.8 million in loans that would be
defined as a troubled debt restructuring (TDR) at September 30, 2010 and
at December 31, 2009, respectively.
Of those amounts, $13.5 million and $1.6 million were accruing as of September 30,
2010 and December 31, 2009, respectively, as they were performing in
accordance with their restructured terms.
At September 30, 2010, there were approximately
13
Table of
Contents
ATLANTIC SOUTHERN
FINANCIAL GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
$2.0 million in TDR loans that had a related allowance of approximately
$501 thousand. At December 31,
2009, there were no TDR loans that had a related allowance.
(7) Allowance
for Loan Losses
Activity in the allowance for loan losses for the three and nine months
ended September 30, 2010 and 2009 is as follows:
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Beginning balance
|
|
$
|
19,323,225
|
|
$
|
14,910,792
|
|
$
|
21,478,748
|
|
$
|
11,671,534
|
|
Add:
|
|
|
|
|
|
|
|
|
|
Provision for possible loan losses
|
|
2,178,000
|
|
11,352,000
|
|
5,514,000
|
|
17,420,000
|
|
Subtotal
|
|
21,501,225
|
|
26,262,792
|
|
26,992,748
|
|
29,091,534
|
|
Less:
|
|
|
|
|
|
|
|
|
|
Loans charged off
|
|
3,089,252
|
|
11,797,795
|
|
8,810,288
|
|
14,708,798
|
|
Recoveries on loans previously charged off
|
|
(240,911
|
)
|
(137,757
|
)
|
(470,424
|
)
|
(220,018
|
)
|
Net loans charged off
|
|
2,848,341
|
|
11,660,038
|
|
8,339,864
|
|
14,488,780
|
|
Balance, end of period
|
|
$
|
18,652,884
|
|
$
|
14,602,754
|
|
$
|
18,652,884
|
|
$
|
14,602,754
|
|
(8) Nonperforming
Assets
Nonperforming assets
consist of non-accrual loans, accruing loans 90 days past due, repossessed
assets and other real estate owned. The following summarizes non-performing
assets:
|
|
September 30.
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
Accruing loans 90 days past due
|
|
$
|
|
|
$
|
644,920
|
|
Non-accrual loans
|
|
88,560,938
|
|
115,293,553
|
|
Repossessed assets
|
|
5,375
|
|
1,000
|
|
Other real estate
|
|
61,612,054
|
|
21,066,480
|
|
Total non-performing assets
|
|
$
|
150,178,367
|
|
$
|
137,005,953
|
|
Nonperforming
assets increased $13.2 million, or 9.61%, from December 31, 2009 to September 30,
2010. Non-accrual loans decreased
approximately $26.7 million from December 31, 2009 to September 30,
2010, largely due to approximately $47.5 million moving to other real estate
owned and other assets, $8.6 million in partial charge-offs on non-accrual
loans and approximately $8.6 million in pay downs. During the first nine months of 2010,
approximately $38.0 million in loans were moved to non-accrual. All non-accrual loans are adequately
collateralized based on managements judgment and supported by recent
collateral appraisals. Other real estate
owned increased $40.5 million from December 31, 2009 to September 30,
2010. This increase is largely due to
the addition of $46.7 million in foreclosed properties and $839 thousand in
capitalized improvements on several foreclosed properties being offset by the
sale of $5.3 million in foreclosed properties resulting in a loss of $225
thousand on these properties. The
Company has written down $1.5 million for several foreclosed properties based
upon updated appraisals.
The
Companys 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.
14
Table of Contents
ATLANTIC SOUTHERN
FINANCIAL GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
As
of September 30, 2010 and December 31, 2009, the Companys other real
estate owned consisted of the following:
|
|
As of September 30, 2010
|
|
As of December 31, 2009
|
|
|
|
Number of
Properties
|
|
Carrying
Amount
|
|
Number of
Properties
|
|
Carrying
Amount
|
|
1-4 Family residential properties
|
|
25
|
|
$
|
2,732,127
|
|
23
|
|
$
|
2,958,213
|
|
Multifamily residential properties
|
|
4
|
|
13,719,694
|
|
2
|
|
238,225
|
|
Nonfarm nonresidential properties
|
|
18
|
|
13,513,773
|
|
13
|
|
8,994,372
|
|
Farmland properties
|
|
3
|
|
1,252,104
|
|
|
|
|
|
Construction & land development
properties
|
|
52
|
|
30,394,356
|
|
35
|
|
8,875,670
|
|
Total
|
|
102
|
|
$
|
61,612,054
|
|
73
|
|
$
|
21,066,480
|
|
All
properties are being actively marketed for sale and management is continuously
monitoring these properties in order to minimize any losses.
Other
real estate owned is defined as real estate acquired through or in lieu of
foreclosure. At the time of foreclosure,
an appraisal is obtained on the real estate.
All other real estate owned properties are initially recorded at fair
value, less estimated cost to sell. If
the fair value less estimated costs to sell at the time of foreclosure is less
than the loan balance, the deficiency is charged against the allowance for loan
losses. An updated appraisal is ordered
on each anniversary if the property is owned for more than one year. If the fair value of the other real estate
owned, less estimated costs to sell at the time of foreclosure, decreases
during the holding period, the other real estate owned is written down with a
charge to noninterest expense. When the
other real estate owned is sold, a gain or loss is recognized on the sale for
the difference between the sales proceeds and the carrying amount of the other
real estate owned.
(9) Shareholders
Equity
On
June 11, 2010, the Company amended its Articles of Incorporation to
increase the total number of authorized shares of common stock from 10 million
shares to 110 million shares. The
amendment to the Companys Articles of Incorporation was approved by the board
of directors on March 18, 2010 and by shareholders of the Company at the
Annual Meeting of Shareholders on June 8, 2010, in accordance with
O.C.G.A. 14-2-1003.
The
Company granted 68,965 shares of restricted stock to Edward P. Loomis, Jr.,
President of the Bank. The stock will be
vested in installments over a period of four years. All shares of restricted stock will be held
by the Company until the conditions are satisfied. All shares are nonvested as of September 30,
2010. Compensation expense totaling
$12,500 was recognized as of September 30, 2010 in connection with
restricted stock.
(10)
Fair
Value Measurements and Disclosures
Fair
value measurements are determined based on the assumptions that market
participants would use in pricing the asset or liability. As a basis for considering market participant
assumptions in fair value measurements, generally accepted accounting
principles establish a fair value hierarchy that distinguishes between market
participant assumptions based on market data obtained from sources independent
of the reporting entity (observable inputs that are classified within Levels 1
and 2 of the hierarchy) and the reporting entitys own assumptions about market
participant assumptions (unobservable inputs classified within Level 3 of the
hierarchy).
Fair Value Hierarchy
Level
1 Valuation is based upon quoted prices (unadjusted) in active markets for
identical assets or liabilities that the Company has the ability to access.
Level 2 Valuation is based upon quoted prices for similar assets and
liabilities in active markets, as well as inputs that are observable for the
asset or liability (other than quoted prices), such as interest rates, foreign
exchange rates, and yield curves that are observable at commonly quoted
intervals.
15
Table of
Contents
ATLANTIC SOUTHERN
FINANCIAL GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
Level 3 Valuation is generated from model-based techniques that use
at least one significant assumption based on unobservable inputs for the asset
or liability, which are typically based on an entitys own assumptions, as
there is little, if any, related market activity. In instances where the determination of the
fair value measurement is based on inputs from different levels of the fair
value hierarchy, the level in the fair value hierarchy within which the entire
fair value measurement falls is based on the lowest level input that is
significant to the fair value measurement in its entirety. The Companys assessment of the significance
of a particular input to the fair value measurement in its entirety requires
judgment, and considers factors specific to the asset or liability.
Following
is a description of valuation methodologies used for assets and liabilities
recorded or disclosed at fair value:
Cash and Cash Equivalents
For disclosure
purposes for cash, due from banks, federal funds sold and interest-bearing
deposits with other banks, the carrying amount is a reasonable estimate of fair
value.
Securities Available for Sale
- Securities
available-for-sale consist of U.S. Treasury obligations, U.S. government
sponsored enterprises, state and political subdivisions, corporate bonds,
mortgage backed securities and equity securities. They are recorded at fair value on a recurring
basis. Where quoted market prices are
available in an active market, securities are classified within Level 1 of the
valuation hierarchy. If quoted prices
are not available, fair values are measured using independent pricing models or
other model-based valuation techniques such as the present value of future cash
flows, adjusted for the securitys credit rating, prepayment assumptions and
other factors such as credit loss assumptions.
·
U.S. Treasury obligations, U.S. government
sponsored enterprises, corporate bonds, mortgage backed securities and equity
securities are valued primarily using data from an independent third-party
pricing service for similar securities in an active market as applicable. Pricing from the independent third party
service is generally based on quoted prices of similar instruments (including
matrix pricing); these valuations are Level 2 measurements.
·
State and political subdivisions are
generally based on data from an independent third-party pricing service for
similar securities. Where such
comparable data is not available, the Company develops valuations based on
assumptions that are not readily observable in the market place; these
valuations are Level 3 measurements.
Federal Home Loan Bank Stock
For
disclosure purposes, for Federal Home Loan Bank Stock, the carrying value is a
reasonable estimate of fair value.
Loans Held for Sale
- For loans held for sale, the carrying value
is a reasonable estimate of fair value given the short-term nature of the loans
and similarity to what secondary markets are currently offering for portfolios
of loans with similar characteristics.
Therefore, the Company records the loans held for sale as nonrecurring
Level 2.
Loans
- The Company does not
record loans at fair value on a recurring basis. However, from time to time, a loan is
considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment
of interest and principal will not be made in accordance with the contractual
terms of the loan agreement are considered impaired. Once a loan is identified as individually
impaired, management measures impairment based on the present value of expected
future cash flows discounted at the loans effective interest rate, except that
as a practical expedient, a creditor may measure impairment based on a loans
observable market price, or the fair value of the collateral if repayment of
the loan is dependent upon the sale of the underlying collateral. Those impaired loans not requiring an
allowance represent loans for which the fair value of the expected repayments
or collateral exceed the recorded investments in such loans. At September 30, 2010 and December 31,
2009, substantially all of the total impaired loans were evaluated based on the
fair value of the collateral. Impaired
loans where an allowance is established based on the fair value of collateral
require classification in the fair value hierarchy. When the fair value of the collateral is
based on an observable market price or a current appraised value, the Company
records the impaired loan as nonrecurring Level 2. When an appraised value is not available or
management determines the fair value of the collateral is further impaired
below the appraised value and there is no observable market price, the Company
records the impaired loan as nonrecurring Level 3.
16
Table
of Contents
ATLANTIC SOUTHERN
FINANCIAL GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
For
disclosure purposes, the fair value of fixed rate loans which are not
considered impaired is estimated by discounting the future cash flows using the
current rates at which similar loans would be made to borrowers with similar
credit ratings. For unimpaired variable
rate loans, the carrying amount is a reasonable estimate of fair value for
disclosure purposes.
Cash Surrender Value of Life Insurance
For
disclosure purposes, for cash surrender value of life insurance, the carrying
value is a reasonable estimate of fair value.
Other Real Estate Owned
Other real
estate is adjusted to fair value upon transfer of the loans to other real
estate. Subsequently, other real estate
is carried at the lower of carrying value or fair value. Fair value is based upon independent market
prices, appraised values of the collateral or managements estimation of the
value of the collateral. When the fair
value of the collateral is based on an observable market price or a current
appraised value, the Company records the other real estate as nonrecurring
Level 2. When an appraised value is not
available or management determines the fair value of the collateral is further
impaired below the appraised value and there is no observable market prices,
the Company records the other real estate as nonrecurring Level 3.
Deposits
For disclosure purposes,
the fair value of demand deposits, savings accounts and certain money market
deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity time
deposits is estimated by discounting the future cash flows using the rates
currently offered for deposits of similar remaining maturities.
FHLB Advances
For
disclosure purposes, the fair value of the Companys fixed rate borrowings is
estimated using discounted cash flows, based on the Companys current incremental
borrowing rates for similar types of borrowing arrangements. For variable rate borrowings, the carrying
amount is a reasonable estimate of fair value.
Subordinated Debentures
For
disclosure purposes, for subordinated debentures, the carrying value is a
reasonable estimate of fair value.
Junior Subordinated Debentures
For
disclosure purposes, the fair value of the Companys junior subordinated
debentures is estimated using quoted market prices. If quoted market prices are not available,
fair values are estimated using discounted future cash flow analyses based on
current interest rates, liquidity and credit spreads.
Commitments to Extend Credit and Standby Letters of
Credit
Because commitments to extend credit and standby
letters of credit are generally short-term and at variable rates, the contract
value and estimated fair value associated with these instruments are
immaterial.
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The
table below presents the recorded amount of assets and liabilities measured at
fair value on a recurring basis at September 30, 2010 and December 31,
2009.
|
|
As of September 30,
|
|
|
|
2010
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Debt securities available-for-sale
|
|
|
|
|
|
|
|
|
|
U.S. Treasury obligations
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
U.S. government sponsored enterprises
|
|
5,104,088
|
|
|
|
5,104,088
|
|
|
|
State and political subdivisions
|
|
15,331,075
|
|
|
|
15,331,075
|
|
|
|
Other investments
|
|
215,198
|
|
|
|
215,198
|
|
|
|
Mortgage backed securities
|
|
20,052,694
|
|
2,520,312
|
|
17,532,382
|
|
|
|
Total debt securities available-for-sale
|
|
40,703,055
|
|
2,520,312
|
|
38,182,743
|
|
|
|
Equity securities available-for-sale
|
|
19,034
|
|
|
|
19,034
|
|
|
|
Total available-for-sale securities
|
|
$
|
40,722,089
|
|
$
|
2,520,312
|
|
$
|
38,201,777
|
|
$
|
|
|
17
Table of Contents
ATLANTIC SOUTHERN
FINANCIAL GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
|
|
As of December 31,
|
|
|
|
2009
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Debt securities available-for-sale
|
|
|
|
|
|
|
|
|
|
U.S. Treasury obligations
|
|
$
|
57,156,865
|
|
$
|
|
|
$
|
57,156,865
|
|
$
|
|
|
U.S. government sponsored enterprises
|
|
27,616,824
|
|
|
|
27,616,824
|
|
|
|
State and political subdivisions
|
|
15,155,835
|
|
|
|
15,155,835
|
|
|
|
Other investments
|
|
259,208
|
|
|
|
259,208
|
|
|
|
Mortgage backed securities
|
|
26,711,441
|
|
|
|
26,711,441
|
|
|
|
Total debt securities available-for-sale
|
|
126,900,173
|
|
|
|
126,900,173
|
|
|
|
Equity securities available-for-sale
|
|
39,428
|
|
|
|
39,428
|
|
|
|
Total available-for-sale securities
|
|
$
|
126,939,601
|
|
$
|
|
|
$
|
126,939,601
|
|
$
|
|
|
During
the third quarter of 2010, the Company changed its investment bond
accountants. Therefore, the level of
measurement techniques to evaluate some of the securities available-for-sale
changed to include at least one security in the Level 1 category while the
other securities remain in the Level 2 category since they are using different
pricing sources and different matrixes for the securities available-for-sale.
Assets Recorded at Fair Value on a Nonrecurring Basis
The
Company may be required, from time to time, to measure certain assets at fair
value on a nonrecurring basis in accordance with U.S. generally accepted
accounting principles. These include
assets that are measured at the lower of cost or market that were recognized at
fair value below cost at the end of the period.
Assets measured at fair value on a nonrecurring basis are included in
the table below at September 30, 2010 and December 31, 2009.
|
|
As of September 30,
|
|
|
|
2010
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
84,819,793
|
|
$
|
|
|
$
|
84,819,793
|
|
$
|
|
|
Loans held for sale
|
|
285,026
|
|
|
|
285,026
|
|
|
|
Other real estate owned
|
|
61,612,054
|
|
|
|
61,612,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
146,716,873
|
|
$
|
|
|
$
|
146,716,873
|
|
$
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
125,166,754
|
|
$
|
|
|
$
|
125,166,754
|
|
$
|
|
|
Loans held for sale
|
|
1,089,108
|
|
|
|
1,089,108
|
|
|
|
Other real estate owned
|
|
21,066,480
|
|
|
|
21,066,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
147,322,342
|
|
$
|
|
|
$
|
147,322,342
|
|
$
|
|
|
The carrying amount and estimated fair values of
the Companys assets and liabilities which are required to be either disclosed
or recorded at fair value at September 30, 2010 and December 31, 2009
are as follows:
18
Table of Contents
ATLANTIC SOUTHERN
FINANCIAL GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
|
|
September 30, 2010
|
|
December 31, 2009
|
|
|
|
Carrying
|
|
Estimated
|
|
Carrying
|
|
Estimated
|
|
|
|
Amount
|
|
Fair Value
|
|
Amount
|
|
Fair Value
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
104,811,263
|
|
$
|
104,811,263
|
|
$
|
33,391,677
|
|
$
|
33,391,677
|
|
Securities available for sale
|
|
40,722,089
|
|
40,722,089
|
|
126,939,601
|
|
126,939,601
|
|
Federal Home Loan Bank Stock
|
|
4,007,400
|
|
4,007,400
|
|
4,316,800
|
|
4,316,800
|
|
Loans held for sale
|
|
285,026
|
|
285,026
|
|
1,089,108
|
|
1,089,108
|
|
Loans, net
|
|
589,069,996
|
|
589,111,059
|
|
696,828,167
|
|
698,284,092
|
|
Cash surrender value of life insurance
|
|
13,409,122
|
|
13,409,122
|
|
13,011,018
|
|
13,011,018
|
|
Other real estate owned
|
|
61,612,054
|
|
61,612,054
|
|
21,066,480
|
|
21,066,480
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
786,302,786
|
|
791,303,628
|
|
861,156,888
|
|
866,219,696
|
|
FHLB borrowings
|
|
29,000,000
|
|
29,924,932
|
|
39,000,000
|
|
39,984,264
|
|
Subordinated debentures
|
|
1,400,000
|
|
1,400,000
|
|
1,400,000
|
|
1,400,000
|
|
Junior subordinated debentures
|
|
10,310,000
|
|
2,243,402
|
|
10,310,000
|
|
10,310,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limitations
- Fair value estimates are
made at a specific point in time, based on relevant market information and
information about the financial statement elements. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in
assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the fair value of assets and liabilities that are not
required to be recorded or disclosed at fair value like the mortgage banking
operation, brokerage network and premises and equipment.
(11)Regulatory
Matters
The
Company and the Bank 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 the consolidated financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Bank must meet specific capital guidelines that involve quantitative
measures of assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. The Companys and the
Banks capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other
factors.
In
addition, quantitative measures established by regulations to ensure capital
adequacy require the Bank 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 in the regulations), and of Tier I capital
(as defined in the regulations) to average assets (as defined in the
regulations). To comply with the Order, the Bank is required to have Tier
1 capital in such an amount as to equal or exceed 8% of the Banks total assets
and total risk-based capital as to equal or exceed 10% of the Banks
risk-weighted assets. As of September 30,
2010, the Banks ratio of total capital to risk-weighted assets and ratio of
Tier 1 Capital to risk-weighted assets were 5.49% and 4.02%, respectively. The Company and the Bank were considered significantly
undercapitalized by bank regulatory authorities as of September 30, 2010
and undercapitalized as of December 31, 2009. As a result, on March 26, 2010, the Bank
received a Notification of Prompt Corrective Action from the FDIC and, in
accordance with Section 325.104 of the FDIC Rules and Regulations,
the Bank was required, among other things, to file a written capital
restoration plan with the FDIC.
19
Table of Contents
ATLANTIC SOUTHERN
FINANCIAL GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
The
Companys and the Banks actual capital amounts and ratios as of September 30,
2010 and December 31, 2009 follow:
|
|
|
|
|
|
To Be Well Capitalized
|
|
|
|
|
|
For Capital
|
|
Under Prompt Corrective
|
|
|
|
Actual
|
|
Adequacy Purposes
|
|
Action Provisions
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
|
|
Ratio
|
|
Amount
|
|
|
|
Ratio
|
|
September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Risk-Based Capital To Risk Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
37,396,000
|
|
5.55
|
%
|
$
|
53,904,144
|
|
>
|
|
8.0
|
%
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
37,018,000
|
|
5.49
|
%
|
53,942,441
|
|
>
|
|
8.0
|
%
|
$
|
67,428,051
|
|
>
|
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
I Capital To Risk Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
24,018,000
|
|
3.56
|
%
|
$
|
26,986,517
|
|
>
|
|
4.0
|
%
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
27,069,000
|
|
4.02
|
%
|
26,934,328
|
|
>
|
|
4.0
|
%
|
$
|
40,401,493
|
|
>
|
|
6.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
I Capital To Average Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
24,018,000
|
|
2.79
|
%
|
$
|
34,434,409
|
|
>
|
|
4.0
|
%
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
27,069,000
|
|
3.14
|
%
|
34,482,803
|
|
>
|
|
4.0
|
%
|
$
|
43,103,503
|
|
>
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Risk-Based Capital To Risk Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
47,485,000
|
|
6.28
|
%
|
$
|
60,490,446
|
|
>
|
|
8.0
|
%
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
46,763,000
|
|
6.19
|
%
|
60,436,834
|
|
>
|
|
8.0
|
%
|
$
|
75,546,042
|
|
>
|
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
I Capital To Risk Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
36,490,000
|
|
4.83
|
%
|
$
|
30,219,462
|
|
>
|
|
4.0
|
%
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
35,771,000
|
|
4.73
|
%
|
30,250,317
|
|
>
|
|
4.0
|
%
|
$
|
45,375,476
|
|
>
|
|
6.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
I Capital To Average Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
36,490,000
|
|
3.44
|
%
|
$
|
42,430,233
|
|
>
|
|
4.0
|
%
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
35,771,000
|
|
3.37
|
%
|
42,458,160
|
|
>
|
|
4.0
|
%
|
$
|
53,072,700
|
|
>
|
|
5.0
|
%
|
20
Table of Contents
ATLANTIC SOUTHERN
FINANCIAL GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(12)Accounting
Standards Updates
In
January 2010, the FASB issued Accounting Standards Update No. 2010-01,
Accounting for Distributions to Shareholders with
Components of Stock and Cash
(ASU No. 2010-01). ASU No. 2010-01 provides guidance on the
accounting for distributions offering shareholders the choice of receiving cash
or stock. Under such guidance, the stock
portion of the distribution is not considered to be a stock dividend, and for
purposes of calculating earnings per share it is deemed a new share issuance
not requiring retroactive restatement.
This guidance is effective for the first reporting period, including
interim periods, ending after December 15, 2009. It is not expected to have a material impact
on the Companys results of operations, financial position or disclosures.
In
January 2010, the FASB issued Accounting Standards Update No. 2010-04,
Technical Corrections to SEC Paragraphs
(ASU No. 2010-04). It is not
expected to have an impact on the Company.
In
January 2010, the FASB issued Accounting Standards Update No. 2010-06,
Improving Disclosures about Fair Value Measurements
(ASU No. 2010-06). ASU No. 2010-06 amends FASB ASC Topic
820-10-50,
Fair Value Measurements and Disclosures
,
to require additional information to be disclosed principally regarding Level 3
measurements and transfers to and from Level 1 and 2. In addition, enhanced disclosure is required
concerning inputs and valuation techniques used to determine Level 2 and Level
3 measurements. This guidance is
generally effective for interim and annual reporting periods beginning after December 15,
2009; however, requirements to disclose separately purchases, sales, issuances,
and settlements in the Level 3 reconciliation are effective for fiscal years
beginning after December 15, 2010 (and for interim periods within such
years). ASU No. 2010-06 is not
expected to have a material impact on the Companys results of operations or
financial position, and will have a minimal impact on its disclosures.
In
February 2010, the FASB issued Accounting Standards Update No. 2010-09,
Amendments to Certain Recognition and Disclosure
Requirements
(ASU No. 2010-09). ASU No. 2010-09 amends FASB ASC Subtopic
855-10,
Subsequent Events
, to remove the
requirement for an SEC filer to disclose the date through which subsequent
events have been evaluated in both issued and revised financial
statements. This change alleviates
potential conflicts between ASC Subtopic 855-10 and the SECs
requirements. ASU No. 2010-09 is
not expected to have a material impact on the Company.
In
April 2010, the FASB issued Accounting Standards Update No. 2010-18,
Effect of a Loan Modification When the Loan Is Part of a Pool That
Is Accounted for as a Single Asset
(ASU No. 2010-18). ASU No. 2010-18 provides guidance on the
accounting for loan modifications when the loan is part of a pool of loans
accounted for as a single asset such as acquired loans that have evidence of
credit deterioration upon acquisition that are accounted for under the guidance
in ASC 310-30. ASU No. 2010-18 addresses
diversity in practice on whether a loan that is part of a pool of loans
accounted for as a single asset should be removed from that pool upon a
modification that would constitute a troubled debt restructuring or remain in
the pool after modification. ASU No. 2010-18
clarifies that modifications of loans that are accounted for within a pool
under ASC 310-30 do not result in the removal of those loans from the pool even
if the modification of those loans would otherwise be considered a troubled
debt restructuring. An entity will
continue to be required to consider whether the pool of assets in which the
loan is included is impaired if the expected cash flows for the pool
change. The amendments in this update do
not require any additional disclosures and are effective for modifications of
loans accounted for within pools under ASC 310-30 occurring in the first
interim or annual period ending on or after July 15, 2010. ASU 2010-18 is not expected to have a
material impact on the Companys results of operations, financial position or
disclosures.
In
July 2010, the FASB issued Accounting Standards Update No. 2010-20,
Disclosures about the Credit Quality of Financing Receivables and the
Allowance for Credit Losses
(ASU No. 2010-20). ASU No. 2010-20 requires disclosures
regarding loans and the allowance for loan losses that are disaggregated by
portfolio segment and class of financing receivable. Existing disclosures were amended to require
a rollforward of the allowance for loan losses by portfolio segment, with the
ending balance broken out by basis of impairment method, as well as the
recorded investment in the respective loans.
Nonaccrual and impaired loans by class must also be shown. ASU No. 2010-20 also requires
disclosures regarding: 1) credit quality indicators by class, 2) aging of past
due loans by class, 3) troubled debt restructuring (TDRs) by class and their
effect on the allowance for loan losses, 4) defaults on TDRs by class and their
effect on the allowance for loan losses, and 5) significant purchases and sales
of loans disaggregated by portfolio segment.
This guidance is effective for interim and annual reporting periods
ending on or after December 15, 2010, for end of period type
disclosures. Activity related
disclosures are effective for interim and annual reporting periods beginning on
or after December 15, 2010. ASU No. 2010-20
will have an impact on the Companys disclosures, but not its financial
position or results of operations.
21
Table
of Contents
ATLANTIC
SOUTHERN FINANCIAL GROUP, INC.
Item 2.
Managements
Discussion and Analysis of
Financial Condition and Results of Operations
For Each of the Three
Months and Nine Months in the Period Ended
September 30, 2010
and 2009
The following discussion of financial condition as
of September 30, 2010
compared to December 31, 2009,
and the results of operations for the three months and nine months ended September 30, 2010 compared to the three months
and nine months ended September 30, 2009 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:
·
Deterioration in the
condition of borrowers resulting in significant increase in loan losses and
provisions for those losses;
·
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 or the failure of
assumptions underlying the establishment of reserves for possible loan losses;
·
changes in loan
underwriting, credit review or loss reserve policies associated with economic
conditions, examination conclusions, or regulatory developments;
·
our dependence on senior
management;
·
competition from existing
financial institutions, including commercial banks, thrifts, mortgage banking
firms, consumer finance companies, credit unions, securities brokerage firms,
insurance companies, money market and other mutual funds, operating in our
market areas and elsewhere, including institutions operating regionally,
nationally and internationally, together with such competitors offering banking
products and services by mail, telephone and the Internet;
·
changes in political and
economic conditions, including the political and economic effects of the
current economic downturn and other major developments, including the ongoing
war on terrorism and potential adverse conditions in the stock market, the public
debt market, and other capital markets (including changes in interest rate
conditions);
·
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;
·
changes in financial market
conditions, either internationally, nationally or locally in areas in which the
Company conducts its operations, including, without limitation, reduced rates
of business formation and growth, commercial and residential real estate
development, and 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;
22
Table of Contents
·
future legislation affecting
financial institutions and changes to governmental monetary and fiscal policies
(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;
·
other factors described in
this report and in other reports we have filed with the Securities and Exchange
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 Companys total assets
at September 30, 2010, were approximately $852.6 million, which
represented a decrease of approximately $95.8 million, or 10.10%, from December 31,
2009. A net loss of $9.3 million, $2.22
per diluted share, was recorded for the nine months ended September 30,
2010 compared to a net loss of $31.3 million, or $7.44 per diluted share, for
the nine months ended September 30, 2009.
On
September 11, 2009, the Bank consented to the issuance of an Order to
Cease and Desist by the FDIC and the GDBF.
Under the terms of the Order, the Bank cannot declare dividends without
the prior written approval of the FDIC and the GDBF. Other material provisions of the Order
require the Bank to: (i) strengthen its board of directors oversight of
management and operations of the Bank, (ii) establish a committee
consisting of at least four members, three of which must be independent, to
oversee the Banks compliance with the Order, (iii) maintain specified liquidity
ratios, (iv) improve the Banks lending and collection policies and
procedures, particularly with respect to the origination and monitoring of
commercial real estate and acquisition, development and construction loans, (v) eliminate
from its books, by charge off or collection, all assets classified as loss
and 50% of all assets classified as doubtful, (vi) perform risk
segmentation analysis with respect to concentrations of credit, (vii) receive
a brokered deposit waiver from the FDIC prior to accepting, rolling over or
renewing any brokered deposits and submit a written plan for eliminating its
reliance on brokered deposits, (viii) adopt and implement a policy
limiting the use of loan interest reserves, (ix) formulate and fully
implement a written plan and comprehensive budget for all categories of income
and expense, and (x) prepare and submit progress reports to the FDIC and
the GDBF. In addition, pursuant to the
Order, the Bank is required to maintain Tier 1 capital equal to at least 8% of
the Banks total assets and total risk-based capital equal to at least 10% of
the Banks risk-weighted assets. The
FDIC order will remain in effect until modified or terminated by the FDIC and
the GDBF.
On
March 26, 2010, the Company entered into a written agreement with the
Federal Reserve Board and the GDBF, pursuant to which the Company will be
prohibited from declaring or paying dividends without prior written consent
from the regulators. In addition,
pursuant to the Agreement, without the prior written consent of regulators, the
Company is prohibited from taking dividends, or any other form of payment
representing a reduction of capital, from the Bank; paying interest, principal
or other sums on subordinated debentures and trust preferred securities; incurring,
increasing or guaranteeing any debt; redeeming any shares of the Companys
common stock; and increasing salaries or bonuses paid to executive
officers. All salaries, bonuses and
fees, excluding the reimbursement of expenses valued at less than $500 in the
aggregate per month per executive officer, must be preapproved by the Board of
Directors on a regular basis. In
appointing any new director or any executive officer, the Company is required
to notify regulatory authorities and comply with restrictions on
indemnification and severance. The
Company will also provide quarterly written progress reports to the Federal
Reserve Board.
As
required by the Agreement, the Company provided the Federal Reserve Board with
a written plan designed to maintain sufficient capital at the Company, on a
consolidated basis, and at the Bank.
Although the Agreement did not contain specific target capital ratios or
specific timelines the plan addressed the Companys current and future
23
Table of Contents
capital
requirements, the Banks current and future capital requirements, the adequacy
of the Banks capital taking into account its risk profile, and the source and
timing of additional funds necessary to fulfill the Companys and the Banks
future capital requirements, as required by the Agreement.
On
March 26, 2010, the Bank received Notification of Prompt Corrective Action
(the Notice), which, pursuant to Section 325.102 of the FDIC Rules and
Regulations, requires the Bank to submit a capital restoration plan within 45
days of receipt of the Notice. Because
the Bank is currently classified as significantly undercapitalized, in
addition to the requirements in the Order, the Bank is required to adhere to
the following restrictions, pursuant to which regulators may
·
Require sale of
securities, or, if grounds for conservatorship or receivership exist, direct
the Bank to merge or be acquired;
·
Restrict
affiliate transactions;
·
Restrict or
prohibit all activities that are determined to pose an excessive risk to the Bank;
·
Require the
institution to elect new directors, dismiss directors or senior executive
officers, or employ senior executive officers to improve management;
·
Prohibit the
acceptance of deposits from correspondent banks;
·
Require holding
company divestiture of the financial institution, bank divestiture of
subsidiaries and/or holding company divestiture of other affiliates; or
·
Require the
bank to take any other action the federal regulator determines will better
achieve prompt correction action.
In
addition, without prior regulatory approval, the Bank is required to restrict
the compensation paid to its senior executive officers.
On
February 17, 2010, Michael C. Griffin submitted his resignation as a
director of the Company and of the Bank, effective immediately. On April 14, 2010, Raymond O. Ballard, Jr.
and J. Russell Lipford, Jr. submitted their resignations as a director of
the Company and of the Bank effectively immediately. Messrs. Griffin, Ballard and Lipford
have advised the Company that their resignations were not due to any
disagreement with the Company.
On
April 30, 2010, Gary P. Hall retired as Executive Vice President and Chief
Credit Officer of the Company and of the Bank.
He has agreed to continue to serve the Company and the Bank in a
consulting capacity. Mr. Hall has
advised the Company that his retirement was not due to any disagreement with
the Company.
On
June 11, 2010, the Company amended its Articles of Incorporation to
increase the total number of shares of authorized common stock from 10 million
shares to 110 million shares. The
amendment to the Companys Articles of Incorporation was approved by the board
of directors on March 18, 2010 and by shareholders of the Company at the
Annual Meeting of Shareholders on June 8, 2010.
On
June 17, 2010, the Company appointed J. Randall Griffin as Senior Vice
President and Chief Credit Officer of the Bank.
The FDIC approved Mr. Griffins appointment on May 21,
2010. In his role as Chief Credit
Officer, he will maintain and develop all lending operations, manage the
Special Assets Division and credit function and develop loan policies and
procedures to ensure the overall quality of the Banks lending portfolio.
24
Table of Contents
Financial
Condition
The
composition of assets and liabilities for the Company is as follows:
|
|
September 30,
|
|
December 31,
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
$ Change
|
|
% Change
|
|
|
|
(Dollars in Thousands)
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
$
|
104,811
|
|
$
|
33,392
|
|
$
|
71,420
|
|
213.88
|
%
|
Securities available for sale
|
|
40,722
|
|
126,940
|
|
(86,218
|
)
|
-67.92
|
%
|
Loans, net of unearned income
|
|
607,723
|
|
718,307
|
|
(110,584
|
)
|
-15.40
|
%
|
Cash surrender value of life insurance
|
|
13,409
|
|
13,011
|
|
398
|
|
3.06
|
%
|
Intangible assets, net of amortization
|
|
2,277
|
|
2,549
|
|
(272
|
)
|
-10.67
|
%
|
Other real estate owned
|
|
61,612
|
|
21,066
|
|
40,546
|
|
192.47
|
%
|
Total assets
|
|
852,581
|
|
948,380
|
|
(95,799
|
)
|
-10.10
|
%
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
786,303
|
|
861,157
|
|
(74,854
|
)
|
-8.69
|
%
|
FHLB advances
|
|
29,000
|
|
39,000
|
|
(10,000
|
)
|
-25.64
|
%
|
Subordinated debentures
|
|
1,400
|
|
1,400
|
|
|
|
|
|
Junior subordinated debentures
|
|
10,310
|
|
10,310
|
|
|
|
|
|
Accrued expenses and other liabilities
|
|
1,941
|
|
1,896
|
|
45
|
|
2.37
|
%
|
Total liabilities
|
|
832,421
|
|
918,741
|
|
(86,320
|
)
|
-9.40
|
%
|
|
|
|
|
|
|
|
|
|
|
Loan to Deposit Ratio
|
|
77.29
|
%
|
83.41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant
changes in the composition of assets include the increase in total cash and
cash equivalents of $71.4 million which was primarily due to the sales,
maturities, calls and paydowns of securities of $93.7 million and to the
payoffs of loans from customers of approximately $56.2 million. The increase in total cash and cash
equivalents was reduced by the payout of $74.9 million of deposits, mostly
maturing wholesale time deposits, and by the $10.0 million pay off of maturing
Federal Home Loan Bank advances. The
Company invested approximately $7.5 million in securities as of September 30,
2010.
Other
significant changes in the composition of assets were the decrease in loans
followed by the increase in other real estate owned during the first nine
months of 2010. The Company had
approximately $8.8 million in loans charged off during the first nine months of
2010 along with approximately $47.5 million moving to other real estate owned
and to other assets.
The
most significant change in the composition of liabilities was the decrease in
deposits, which decreased approximately $74.8 million. Savings accounts and non-interest bearing
deposits had an increase of approximately $4.2 million while money market and
NOW accounts and time deposits decreased $79.0 million. Time deposits, including wholesale and core
deposits, are our principal source of funds for loans and investing in
securities. Local retail time deposits
at September 30, 2010, increased approximately $17.4 million since December 31,
2009 due to managements efforts to increase core deposits and to continue
reducing the Banks reliance on brokered deposits. The Company was able to decrease brokered
deposits at September 30, 2010 by approximately $71.1 million compared to December 31,
2009 primarily due to its ability to replace them with retail deposits obtained
both locally and through a national rate-listing service.
Due
to our strong loan demand in the past, we chose to obtain a portion of our
deposits from outside of our market. The deposits obtained outside of our
market area generally have lower rates than rates being offered for
certificates of deposits in our local market.
We have also utilized out-of-market deposits in certain instances to
obtain longer term deposits than are readily available in our local
market. Our brokered time deposits
represented 21.00% of our deposits as of September 30, 2010 when compared
to 27.43% of our deposits as of December 31, 2009.
25
Table of Contents
In
the past, the Bank has relied heavily on brokered deposits. Pursuant to the Order and FDIC regulations,
as a result of our significantly-undercapitalized status, we are unable to
accept, renew or roll over brokered deposits absent a waiver from the FDIC. Accordingly, management has instituted an
aggressive retail deposit marketing campaign both locally and through a
national rate-listing service to replace the brokered deposits as they mature.
Investment
Securities
Securities
in our portfolio totaled $40.7 million at September 30, 2010, compared to
$126.9 million at December 31, 2009.
The decrease in the securities portfolio has resulted from the sales of
approximately $11.3 million in U.S. government sponsored enterprises and
mortgage-backed securities, the calls of approximately $18.6 million in U.S.
government sponsored enterprises and state, county and municipal bonds, the
maturity of $57.0 million in U.S. Treasury securities and the paydowns of
approximately $6.7 million in mortgage-backed securities. The Company purchased approximately $7.5 million
in mortgage-backed securities during the first nine months of 2010. At September 30, 2010, the securities
portfolio had unrealized net gains of approximately $637 thousand.
The
following table shows the carrying value of the investment securities at September 30,
2010 and December 31, 2009.
|
|
September 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
(Dollars in Thousands)
|
|
Securities available for sale:
|
|
|
|
|
|
U. S. Treasury Securities
|
|
$
|
|
|
$
|
57,157
|
|
U. S. Government Sponsored Enterprises
|
|
5,104
|
|
27,617
|
|
State and political subdivisions
|
|
15,331
|
|
15,156
|
|
Mortgage-backed Securities
|
|
20,053
|
|
26,711
|
|
Other Investments
|
|
234
|
|
299
|
|
Total
|
|
$
|
40,722
|
|
$
|
126,940
|
|
The following table
summarizes securities disposal activities for the three and nine month periods
ended September 30, 2010 and 2009:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
(Dollars in Thousands)
|
|
(Dollars in Thousands)
|
|
Proceeds from sales
|
|
$
|
11,347
|
|
$
|
|
|
$
|
11,347
|
|
$
|
51,612
|
|
Proceeds from calls
|
|
2,545
|
|
5,040
|
|
18,635
|
|
5,220
|
|
Proceeds from maturities
|
|
20,500
|
|
27,347
|
|
57,000
|
|
56,080
|
|
Paydowns
|
|
2,208
|
|
1,329
|
|
6,734
|
|
9,568
|
|
Total
|
|
$
|
36,600
|
|
$
|
33,716
|
|
$
|
93,716
|
|
$
|
122,480
|
|
|
|
|
|
|
|
|
|
|
|
Gross gains
|
|
$
|
557
|
|
$
|
16
|
|
$
|
600
|
|
$
|
1,400
|
|
Gross losses
|
|
(1
|
)
|
(1
|
)
|
(1
|
)
|
(11
|
)
|
Impairment losses
|
|
|
|
|
|
|
|
(58
|
)
|
Net gains of securities
|
|
$
|
556
|
|
$
|
15
|
|
$
|
599
|
|
$
|
1,331
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
|
|
$
|
5
|
|
$
|
|
|
$
|
472
|
|
26
Table of Contents
Loans
Total
loans, net of unearned income decreased approximately $110.6 million, or
15.40%, at September 30, 2010, from December 31, 2009 as management
has made an effort to limit loan growth in order to preserve capital for the
Company. Also, total loans have
decreased due to approximately $8.8 million in loans being charged off and
approximately $47.5 million in loans being transferred to other real estate
owned and other assets during the first nine months of 2010. Management is limiting credit availability
especially for commercial real estate and acquisition, development and
construction loans and pursuing collection efforts aggressively in an effort to
reduce the Banks exposure to commercial real estate and acquisition,
development and construction, pursuant to the Order. The following table presents a summary of the
loan portfolio by category.
|
|
September 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
44,788
|
|
$
|
51,674
|
|
Real estate - commercial
|
|
273,746
|
|
304,468
|
|
Real estate - construction
|
|
190,463
|
|
263,271
|
|
Real estate - mortgage
|
|
93,155
|
|
92,013
|
|
Obligations of political subdivisions in the U.S.
|
|
205
|
|
295
|
|
Consumer
|
|
5,488
|
|
6,838
|
|
Total Loans
|
|
607,845
|
|
718,559
|
|
Less:
|
|
|
|
|
|
Unearned loan fees
|
|
(122
|
)
|
(252
|
)
|
Allowance for loan losses
|
|
(18,653
|
)
|
(21,479
|
)
|
Loans, net
|
|
$
|
589,070
|
|
$
|
696,828
|
|
At
September 30, 2010, the Company had seventeen loans with outstanding
balances totaling $56.3 million with loan-funded interest reserves. The amount of capitalized interest from
interest reserves for 2010 was $917 thousand.
Pursuant
to the Order, the Bank adopted and implemented a policy limiting the use of
loan interest reserves. This policy
confines the use of interest reserves to properly underwritten construction and
development loans for which development or building plans have specific
timetables that commence within a reasonable time of the loans approval and
that include realistic timetables.
With
respect to accounting for interest reserves on loans, interest that has been
added to the balance of a loan through the use of an interest reserve should
not be recognized as income if its collectability is not reasonably assured. The accrual of uncollected interest and its
capitalization into the loan balance will not be appropriate when the loan
becomes troubled and the full collection of contractual principal and interest
is no longer expected.
When
it is determined that the collectability of a loan with an interest reserve
component is not reasonably assured, the loan is placed on non-accruing status
and any unpaid accrued interest is reversed.
The
decision to establish a loan funded interest reserve upon origination of an
acquisition, development or construction loan is determined based on the
feasibility of the project, the creditworthiness of the borrower and
guarantors, and the protection provided by the real estate and other
collateral. The total cost of the
project, including the interest reserve, is considered when determining the
equity injection required from the borrower.
Interest
reserves are required on all construction and development loans unless it is
clearly established that the borrower has the capacity to pay the interest
during the initial stages of the development from alternative resources on the
proposed contractual basis of payment.
The reserve is included in the construction budget. Interest is collected from the interest
reserve on a monthly basis. The interest
is capitalized and added to the loan balance.
No
restructured loans include an interest reserve component.
27
Table of
Contents
Asset Quality
At September 30, 2010, gross loans were 71.3%
of total assets. Management considers
asset quality to be of primary importance.
Management has a credit administration and loan review process, which
monitors, controls and measures our credit risk, standardized credit analyses
and our comprehensive credit policy. Our
level of nonperforming assets has remained at a high level since 2009 as a
result of a slowing economy and the devaluation of real estate. Our non-performing assets have continued to
increase since the beginning of the economic downturn in 2007, when management
began to aggressively recognize impaired loans based on an ongoing process of
identifying early signs of stress in our loan portfolio. Any significant events that may occur
subsequent to any financial statement date are reviewed by management to
determine if any impact is material to the financial statements. If the event is deemed to be material, the
financial statements are adjusted to reflect the impact of the event.
The
following table presents a summary of changes in the allowance for loan losses
for the three and nine month periods ended September 30, 2010 and 2009.
Analysis of Changes in Allowance for Loan Losses
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Balance beginning of period
|
|
$
|
19,323
|
|
$
|
14,911
|
|
$
|
21,479
|
|
$
|
11,672
|
|
Loans charged-off
|
|
(3,089
|
)
|
(11,798
|
)
|
(8,810
|
)
|
(14,709
|
)
|
Recoveries
|
|
241
|
|
138
|
|
470
|
|
220
|
|
Net charge-offs
|
|
(2,848
|
)
|
(11,660
|
)
|
(8,340
|
)
|
(14,489
|
)
|
Provision for loan losses
|
|
2,178
|
|
11,352
|
|
5,514
|
|
17,420
|
|
Balance end of period
|
|
$
|
18,653
|
|
$
|
14,603
|
|
$
|
18,653
|
|
$
|
14,603
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans:
|
|
|
|
|
|
|
|
|
|
At period end
|
|
$
|
607,723
|
|
$
|
760,500
|
|
$
|
607,723
|
|
$
|
760,500
|
|
Average
|
|
640,979
|
|
782,622
|
|
678,932
|
|
789,869
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of average loans (annualized):
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
1.78
|
%
|
5.91
|
%
|
1.64
|
%
|
2.45
|
%
|
Provision for loan losses
|
|
1.36
|
%
|
5.80
|
%
|
1.08
|
%
|
2.95
|
%
|
Allowance as a percentage of period end loans
|
|
3.07
|
%
|
1.92
|
%
|
3.07
|
%
|
1.92
|
%
|
Allowance as a percentage of non-performing loans
|
|
21.06
|
%
|
20.89
|
%
|
21.06
|
%
|
20.89
|
%
|
The loan portfolio is reviewed periodically to
evaluate outstanding loans and to measure the performance of the portfolio and
the adequacy of the allowance for loan losses.
Management believes that the allowance for loan losses at September 30,
2010 is adequate to absorb losses inherent in the loan portfolio. This analysis includes a review of
delinquency trends, actual losses, and internal credit ratings. Managements judgment as to the adequacy of
the allowance is based upon a number of assumptions about future events which
it believes to be reasonable. The
allowance for loan losses is maintained at a level which, in managements
judgment, is adequate to absorb credit losses inherent in the loan
portfolio. The amount of the allowance
is based on managements evaluation of the collectability of the loan
portfolio, including the nature of the portfolio, credit concentrations, trends
in historical loss experience, specific impaired loans, economic conditions and
other risks inherent in the portfolio.
Allowances for impaired loans are generally determined based on
collateral values or the present value of estimated cash flows. While management uses available information
to recognize losses on loans, reductions in the carrying amounts of loans may
be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an
integral part of their examination process, periodically review the estimated
losses on loans. Such agencies may
require us to recognize losses based on their judgments about information
available to them at the time of their
28
Table of Contents
examination.
Because of these factors, it is reasonably possible that the estimated
losses on loans may change materially in the near term. However, the amount of the change cannot be
estimated.
The
allowance is composed of general allocations and specific allocations. General allocations are determined by
applying loss percentages to the portfolio that are based on historical loss
experience and managements evaluation and risk grading of the commercial
loan portfolio. Additionally, the
general economic and business conditions affecting key lending areas, credit
quality trends, collateral values, loan volumes and concentrations, seasoning
of the loan portfolio, the findings of internal credit reviews and results from
external bank regulatory examinations are included in this evaluation. The need for specific allocations is evaluated
on commercial loans that are classified in the Watch, Substandard or Doubtful
risk grades, when necessary. The
specific allocations are determined on a loan-by-loan basis based on managements
evaluation of the Companys exposure for each credit, given the current payment
status of the loan and the value of any underlying collateral. Loans for which specific allocations are
provided are excluded from the calculation of general allocations.
Management
prepares a monthly analysis of the allowance for loan losses and material
deficiencies are adjusted by increasing the provision for loan losses. Management uses an outsourced independent
loan review company on a quarterly basis to corroborate and challenge the
internal loan grading system and provide additional analysis in determining the
adequacy of the allowance for loan losses.
Management rotates the loan review company on a periodic basis to ensure
objectivity in the loan review process.
In addition, an internal loan review process is conducted by a committee
comprised of members of senior management.
All new loans are risk rated under loan policy guidelines. The internal loan review committee meets
quarterly to evaluate the composite risk ratings. Risk ratings may be changed if it appears that
new loans were not assigned the proper initial grade, or, if on existing loans,
credit conditions have improved or worsened.
A loan is considered impaired when, based on
current information and events, it is probable that a creditor will be unable
to collect the scheduled payments of principal or interest when due according
to the contractual terms of the loan agreement.
Factors considered by management in determining impairment include
payment status, collateral value and the probability of collecting scheduled
principal and interest payments when due.
Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines the significance of
payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrowers
prior payment history and the amount of the shortfall in relation to the
principal and interest owed. Impairment
is measured on a loan-by-loan basis by either the present value of expected
future cash flows discounted at the loans effective interest rate, the loans
obtainable market price, or the fair value of the collateral if the loan is
collateral dependent.
Large groups of smaller balance homogenous loans
are collectively evaluated for impairment.
Accordingly, we do not separately identify individual consumer loans for
impairment disclosures.
The Companys allowance as a percentage of
nonperforming loans has increased when comparing the three months and nine
months ended September 30, 2010 to the three months and nine months ended September 30,
2009. While the nonperforming loans have
increased when comparing the three months and nine months ended September 30,
2010 to the same period in the prior year, the Company has been able to
maintain a higher allowance for loan loss and have been able to have fewer
partial charge-offs on the nonperforming loans.
The Company recorded most of the nonperforming loans at the fair value
of the underlying collateral, which significantly increased charge-offs during
2009 followed by an increase to the provision for loan losses, based upon
managements analysis of the allowance for loan losses. When comparing the Companys allowance as a
percentage of nonperforming loans from December 31, 2009 to September 30,
2010, the percentage increased from 18.53% at December 31, 2009 to 21.06%
at September 30, 2010 due to a decrease in nonperforming loans at September 30,
2010.
29
Table of Contents
Nonperforming
assets consist of non-accrual loans, accruing loans 90 days past due,
repossessed assets and other real estate owned. The following summarizes
non-performing assets:
|
|
September 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
(Dollars in Thousands)
|
|
Accruing loans 90 days past due
|
|
$
|
|
|
$
|
645
|
|
Non-accrual loans
|
|
88,561
|
|
115,294
|
|
Repossessed assets
|
|
5
|
|
1
|
|
Other real estate owned
|
|
61,612
|
|
21,066
|
|
Total non-performing assets
|
|
$
|
150,178
|
|
$
|
137,006
|
|
Nonperforming
assets increased $13.2 million, or 9.61%, from December 31, 2009 to September 30,
2010. Non-accrual loans decreased
approximately $26.7 million from December 31, 2009 to September 30,
2010, largely due to approximately $47.5 million moving to other real estate
owned and other assets, $8.6 million in partial charge-offs on non-accrual
loans and approximately $8.6 million in pay downs. During the first nine months of 2010, there
was approximately $38.0 million in loans moved to non-accrual. All non-accrual loans are adequately
collateralized based on managements judgment and supported by recent
collateral appraisals. Other real estate
owned increased $40.5 million from December 31, 2009 to September 30,
2010. This increase is largely due to
the addition of $46.7 million in foreclosed properties and $839 thousand in
capitalized improvements on several foreclosed properties being offset by the
sale of $5.3 million in foreclosed properties resulting in a loss of $225
thousand on these properties. The
Company has written down $1.5 million for several foreclosed properties based
upon updated appraisals.
The
Company had $16.0 million and $12.8 million in loans that would be defined as
trouble debt restructurings (TDR) at September 30, 2010 and at December 31,
2009, respectively. Of those amounts,
$13.5 million and $1.6 million were accruing as of September 30, 2010 and December 31,
2009, respectively, as they were performing in accordance with their
restructured terms. At September 30,
2010, there were approximately $2.0 million in TDR loans that had a related
allowance of approximately $501 thousand.
At December 31, 2009, there were no TDR loans that had a related
allowance.
Our policy is to place loans on non-accrual status
when it appears that the collection of principal and 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.
Our
loan officers usually notify management first when they determine that a loan
relationship may be showing signs of distress or issues with collectability of
scheduled payments. Also, management is
constantly reviewing and discussing past due loans with loan officers in
efforts to identify further troubled loan relationships as soon as
possible. Quarterly rated loan reviews
are conducted by management to further monitor troubled loan relationships and
potential loss exposure. Also, all loan
relationships greater than $500 thousand are reviewed annually in the Officers
Annual Review Committee. Loan officers
are required to either validate the appraised values of collateral or order new
appraisals when it is determined that a material change in the value of the
property may have occurred.
At the time a loan is placed on non-accrual, an
impairment analysis is performed. If a
current appraisal is not on file, a new appraisal for the collateral is
obtained by an independent, third-party appraiser within thirty days of engagement. Once the new appraisal has been reviewed and
accepted by the senior vice president of credit administration, the impairment
calculation is completed to determine the net realizable value of the loan with
the appraised value being adjusted for certain costs including, but not limited
to, sales commissions, closing costs, costs to complete or make ready for sale,
property taxes, and, if necessary, an additional adjustment for market
conditions. If the loan is determined to
be collateral dependent, the loan balance in excess of the net realizable value
is charged off immediately. Generally,
the underlying collateral securing collateral-dependent nonperforming loans
consists of residential lots, residential dwellings, undeveloped land tracts,
timber tracts and developed land tracts.
If the loan is not determined to be collateral dependent, a specific
allocation within the allowance for loan loss is provided for the loan once the
impairment calculation is complete. Once
management determines that the loan is impaired and placed on non-accrual, the
loan is transferred to our Special Assets Division for close monitoring and
collection.
30
Table of Contents
There are no commitments to lend additional funds to customers with
loans on non-accrual status at September 30, 2010. Moreover, pursuant to the Order, the Bank is
prohibited from extending new credit to anyone who has caused a loss to the
Bank.
As
of September 30, 2010 and December 31, 2009, the Companys other real
estate owned consisted of the following:
|
|
As of September 30, 2010
|
|
As of December 31, 2009
|
|
|
|
Number of
Properties
|
|
Carrying
Amount
|
|
Number of
Properties
|
|
Carrying
Amount
|
|
|
|
(Dollars in Thousands)
|
|
1-4 Family residential properties
|
|
25
|
|
$
|
2,732
|
|
23
|
|
$
|
2,958
|
|
Multifamily residential properties
|
|
4
|
|
13,720
|
|
2
|
|
238
|
|
Nonfarm nonresidential properties
|
|
18
|
|
13,514
|
|
13
|
|
8,994
|
|
Farmland properties
|
|
3
|
|
1,252
|
|
|
|
|
|
Construction & land development properties
|
|
52
|
|
30,394
|
|
35
|
|
8,876
|
|
Total
|
|
102
|
|
$
|
61,612
|
|
73
|
|
$
|
21,066
|
|
All
properties are being actively marketed for sale and management is continuously
monitoring these properties in order to minimize any losses.
The
Companys other real estate owned policy and procedures provide that a
foreclosure appraisal be obtained. The
policy requires a certified appraiser conduct the appraisal for foreclosed
property to obtain a fair market value.
To qualify and be approved as an appraiser for the Bank, appraisers must
have met the Appraisal Qualifications Board requirements and have not had any
disciplinary actions. Additionally, an
appraiser must submit to the Bank their resume, license, education and
experience for review before being approved for appraisal work. Upon transfer into other real estate owned,
the property is listed with a realtor to begin sales efforts.
All
other real estate owned properties are initially recorded at fair value, less
estimated cost to sell. If the fair
value less estimated costs to sell at the time of foreclosure is less than the
loan balance, the deficiency is charged against the allowance for loan
losses. An updated appraisal is ordered
on each anniversary if the property is owned for more than one year. If the fair value of the other real estate
owned, less estimated costs to sell at the time of foreclosure, decreases
during the holding period, the other real estate owned is written down with a
charge to noninterest expense. When the
other real estate owned is sold, a gain or loss is recognized on the sale for
the difference between the sales proceeds and the carrying amount of the other
real estate owned.
Deposits
Total deposits at September 30, 2010 were
$786.3 million, a decrease of $74.9 million, or 8.69%, from December 31,
2009. Total interest bearing demand
(money market and NOW accounts), non-interest bearing demand accounts and
savings accounts of $174.0 million decreased $21.1 million, or 10.82% from December 31,
2009 resulting mainly from several customers moving their deposits to our
competitors, who have had more competitive rates during the first nine months
of 2010.
Total time deposits as of September 30, 2010
were $612.3 million, a decrease of $53.7 million, or 8.07%, from December 31,
2009. Total retail time deposits at September 30,
2010 increased approximately $17.4 million, or 2.84% of total time deposits,
from December 31, 2009 due to managements efforts to increase core
deposits with internet CDs and to continue reducing the Banks reliance on
brokered deposits. Pursuant to the Order
and FDIC regulations, as a result of our significantly-undercapitalized status,
the Bank is prohibited from accepting, renewing or rolling over brokered
deposits absent a waiver from the FDIC.
The weighted average rates paid for retail time deposits for the three
and nine months ended September 30, 2010 was 2.15% and 2.34%,
respectively, compared to 3.00% and 3.27% for the three and nine months ended September 30,
2009, respectively. Total brokered
deposits at September 30, 2010 decreased approximately $71.1 million, or
11.61% of total time deposits, from December 31, 2009, resulting mainly
from our ability to replace brokered deposits with retail deposits during the
first nine months of 2010. The weighted
average rates paid for brokered deposits for the three and nine months ended September 30,
31
Table of Contents
2010 were 3.88% and 3.66%, respectively, compared
to 3.41% and 3.59% for the three and nine months ended September 30, 2009,
respectively. Because we are currently
classified as less than well capitalized, we are prohibited from paying rates
in excess of 75 basis points above the local market average on deposits of
comparable maturity in our Georgia markets.
In our Jacksonville market, however, we are prohibited from paying in
excess of 75 basis points above the national average on deposits, as calculated
by the FDIC.
Results of Operations
General
The Companys 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 Banks 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 loss:
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
$ Change
|
|
% Change
|
|
|
|
(Dollars in Thousands)
|
|
|
|
Interest and Dividend Income
|
|
$
|
27,323
|
|
$
|
35,504
|
|
$
|
(8,181
|
)
|
-23.04
|
%
|
Interest Expense
|
|
15,191
|
|
21,580
|
|
(6,389
|
)
|
-29.61
|
%
|
Net Interest Income
|
|
12,131
|
|
13,923
|
|
(1,792
|
)
|
-12.87
|
%
|
Provision for Loan Losses
|
|
5,514
|
|
17,420
|
|
(11,906
|
)
|
-68.35
|
%
|
Noninterest Income
|
|
3,167
|
|
4,475
|
|
(1,308
|
)
|
-29.23
|
%
|
Noninterest Expense
|
|
19,114
|
|
39,044
|
|
(19,930
|
)
|
-51.05
|
%
|
Net Loss
|
|
(9,329
|
)
|
(31,328
|
)
|
21,999
|
|
70.22
|
%
|
Net Loss Per Diluted Share
|
|
(2.22
|
)
|
(7.44
|
)
|
5.22
|
|
70.16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
$ Change
|
|
% Change
|
|
|
|
(Dollars in Thousands)
|
|
|
|
Interest and Dividend Income
|
|
$
|
8,593
|
|
$
|
11,255
|
|
$
|
(2,662
|
)
|
-23.65
|
%
|
Interest Expense
|
|
4,654
|
|
7,223
|
|
(2,569
|
)
|
-35.57
|
%
|
Net Interest Income
|
|
3,939
|
|
4,032
|
|
(93
|
)
|
-2.31
|
%
|
Provision for Loan Losses
|
|
2,178
|
|
11,352
|
|
(9,174
|
)
|
-80.81
|
%
|
Noninterest Income
|
|
1,401
|
|
1,132
|
|
269
|
|
23.77
|
%
|
Noninterest Expense
|
|
6,821
|
|
6,495
|
|
326
|
|
5.02
|
%
|
Net Loss
|
|
(3,659
|
)
|
(8,288
|
)
|
4,629
|
|
55.86
|
%
|
Net Loss Per Diluted Share
|
|
(0.87
|
)
|
(1.97
|
)
|
1.10
|
|
55.84
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 decreased $1.8 million,
or 12.87%, for the nine months ended September 30, 2010 compared to the
nine months ended September 30, 2009.
Net interest income decreased $93 thousand, or 2.31%, for the three
months ended September 30, 2010 compared to the three months ended September 30,
2009.
32
Table of Contents
Total
interest and dividend income for the three and nine months ended September 30,
2010 decreased $2.7 million, or 23.65%, and $8.2 million, or 23.04%,
respectively, when compared to the three and nine months ended September 30,
2009. This decrease is primarily due to
decrease in the volume of loans due to payoffs from customers, an increase in
the volume of nonperforming loans on non-accrual status and/or moving to other
real estate owned and a decrease in interest on securities from the purchase of
low-yielding U.S. government sponsored enterprises securities purchased during
the second quarter of 2009 when the Bank restructured its investment portfolio
combined with the purchase of short-term U.S. treasury bills during 2009 which
are being used to meet liquidity needs.
Average
loans and loans held for sale portfolios for the three and nine months ended September 30,
2010 decreased $141.6 million, or 18.10%, and $110.9 million, or 14.04%,
respectively, when compared to average loans and loans held for sale portfolios
for the three and nine months ended September 30, 2009. The average yield on loans decreased for the
three and nine months ended September 30, 2010 to 5.02% and 5.04%,
respectively, compared to an average yield of 5.29% and 5.51% for the three and
nine months ended September 30, 2009.
While we have experienced a decrease in the volume of loans, the Company
has managed to increase the average rate paid on the remaining accruing loans
when comparing the three and nine months ended September 30, 2010 to the
same periods in 2009.
Total
interest expense for the three and nine months ended September 30, 2010
decreased $2.6 million, or 35.57%, and $6.4 million, or 29.61%, respectively,
when compared to the three and nine months ended September 30, 2009. Two factors impact interest expense: average
balances of deposit and borrowing portfolios and average rates paid on
each. Average deposit balances decreased
approximately $193.1 million and $88.9 million when comparing the three and
nine months ended September 30, 2010 to the three and nine months ended September 30,
2009, respectively. The average rate
paid on the deposit portfolios for the three and nine months ended September 30,
2010 decreased to 2.31% and 2.42%, respectively, from 2.87% and 3.09% when
compared to the three and nine months ended September 30, 2009. Average borrowing balances decreased
approximately $17.8 million and $16.1 million when comparing the three and nine
months ended September 30, 2010 to the three and nine months ended September 30,
2009, respectively. Average interest
rates paid on borrowings were 3.19% and 2.92% for the three and nine months
ended September 30, 2010, respectively, compared to 3.27% and 3.24% for
the three and nine months ended September 30, 2009, respectively.
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 September 30, 2010 and 2009, our tax equivalent net
interest spread was 2.11% and 1.39%, respectively, while the tax equivalent net
interest margin was 2.07% and 1.56%, respectively. For the nine months ended September 30,
2010 and 2009, our tax equivalent net interest spread was 2.01% and 1.86%,
respectively, while the tax equivalent net interest margin was 2.00% and 1.97%,
respectively. The increases in net
interest spread and net interest margin from the three and nine months ended September 30,
2009 to the three and nine months ended September 30, 2010, were due to
the decrease in the average rates paid on interest-bearing deposits caused by
the rate restrictions from being less than well capitalized. We are prohibited from paying rates in excess
of 75 basis points above the local market average on deposits of comparable
maturity in our Georgia markets. In our
Jacksonville market, however, we are prohibited from paying in excess of 75
basis points above the national average on deposits, as calculated by the FDIC.
33
Table of
Contents
The
following table shows the relationship between interest revenue and interest
expense and the average balances of interest-earning assets and
interest-bearing liabilities for the three months ended September 30, 2010
and 2009.
Average Consolidated Balance Sheet and Net Interest
Margin Analysis
|
|
For the Three Months Ended September 30,
|
|
|
|
2010
|
|
2009
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
Average
|
|
|
|
Average
|
|
Average
|
|
|
|
Average
|
|
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net of unearned income
(4) (5) (6)
|
|
$
|
640,979
|
|
$
|
8,112
|
|
5.02
|
%
|
$
|
782,622
|
|
$
|
10,424
|
|
5.29
|
%
|
Investment securities - taxable (7)
|
|
42,833
|
|
289
|
|
2.68
|
%
|
144,475
|
|
615
|
|
1.69
|
%
|
Investment securities - tax-exempt (6) (7)
|
|
13,907
|
|
140
|
|
6.05
|
%
|
14,342
|
|
147
|
|
6.16
|
%
|
Other interest and dividend income
|
|
71,717
|
|
52
|
|
0.29
|
%
|
106,522
|
|
69
|
|
0.26
|
%
|
Total earning assets
|
|
769,436
|
|
8,593
|
|
4.47
|
%
|
1,047,961
|
|
11,255
|
|
4.29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
-19,190
|
|
|
|
|
|
-15,049
|
|
|
|
|
|
Cash and due from banks
|
|
7,505
|
|
|
|
|
|
12,855
|
|
|
|
|
|
Premises and equipment
|
|
30,201
|
|
|
|
|
|
31,481
|
|
|
|
|
|
Accrued interest receivable
|
|
3,863
|
|
|
|
|
|
5,436
|
|
|
|
|
|
Other real estate owned
|
|
48,592
|
|
|
|
|
|
9,316
|
|
|
|
|
|
Other assets
|
|
22,784
|
|
|
|
|
|
22,477
|
|
|
|
|
|
Total assets
|
|
$
|
863,191
|
|
|
|
|
|
$
|
1,114,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand
|
|
$
|
108,482
|
|
$
|
188
|
|
0.69
|
%
|
$
|
165,538
|
|
$
|
655
|
|
1.57
|
%
|
Savings
|
|
9,183
|
|
8
|
|
0.35
|
%
|
9,456
|
|
11
|
|
0.46
|
%
|
Time deposits
|
|
618,971
|
|
4,095
|
|
2.62
|
%
|
751,271
|
|
6,039
|
|
3.19
|
%
|
Total interest bearing deposits
|
|
736,636
|
|
4,291
|
|
2.31
|
%
|
926,265
|
|
6,705
|
|
2.87
|
%
|
Federal Home Loan Bank advances
|
|
33,390
|
|
253
|
|
3.01
|
%
|
51,139
|
|
406
|
|
3.15
|
%
|
Other borrowings
|
|
1,400
|
|
43
|
|
12.17
|
%
|
1,483
|
|
43
|
|
11.50
|
%
|
Junior subordinated debentures
|
|
10,310
|
|
67
|
|
2.58
|
%
|
10,310
|
|
69
|
|
2.66
|
%
|
Total borrowed funds
|
|
45,100
|
|
363
|
|
3.19
|
%
|
62,932
|
|
518
|
|
3.27
|
%
|
Total interest-bearing liabilities
|
|
781,736
|
|
4,654
|
|
2.36
|
%
|
989,197
|
|
7,223
|
|
2.90
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits
|
|
52,503
|
|
|
|
|
|
56,016
|
|
|
|
|
|
Other liabilities
|
|
6,253
|
|
|
|
|
|
5,382
|
|
|
|
|
|
Shareholders equity
|
|
22,699
|
|
|
|
|
|
63,882
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
863,191
|
|
|
|
|
|
$
|
1,114,477
|
|
|
|
|
|
Net interest revenue (1)
|
|
|
|
$
|
3,939
|
|
|
|
|
|
$
|
4,032
|
|
|
|
Net interest spread (2)
|
|
|
|
|
|
2.11
|
%
|
|
|
|
|
1.39
|
%
|
Net interest margin (3) (6)
|
|
|
|
|
|
2.07
|
%
|
|
|
|
|
1.56
|
%
|
(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): 2010 - $210; 2009 - $276
(6) Average
rate reflects taxable equivalent adjustments using a tax rate of 34 percent.
(7) Investment
securities are stated at amortized or accreted cost.
34
Table of Contents
The
following table shows the relationship between interest revenue and interest
expense and the average balances of interest-earning assets and
interest-bearing liabilities for the nine months ended September 30, 2010
and 2009.
Average Consolidated Balance Sheet and Net Interest
Margin Analysis
|
|
For the Nine Months Ended September 30,
|
|
|
|
2010
|
|
2009
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
Average
|
|
|
|
Average
|
|
Average
|
|
|
|
Average
|
|
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net of unearned income
(4) (5) (6)
|
|
$
|
678,932
|
|
$
|
25,597
|
|
5.04
|
%
|
$
|
789,869
|
|
$
|
32,556
|
|
5.51
|
%
|
Investment securities - taxable (7)
|
|
74,601
|
|
1,171
|
|
2.10
|
%
|
112,795
|
|
2,400
|
|
2.84
|
%
|
Investment securities - tax-exempt (6) (7)
|
|
13,994
|
|
430
|
|
6.22
|
%
|
15,406
|
|
470
|
|
6.18
|
%
|
Other interest and dividend income
|
|
58,964
|
|
125
|
|
0.28
|
%
|
45,340
|
|
77
|
|
0.23
|
%
|
Total earning assets
|
|
826,491
|
|
27,323
|
|
4.46
|
%
|
963,410
|
|
35,503
|
|
4.96
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
-20,800
|
|
|
|
|
|
-12,952
|
|
|
|
|
|
Cash and due from banks
|
|
8,939
|
|
|
|
|
|
38,620
|
|
|
|
|
|
Premises and equipment
|
|
30,503
|
|
|
|
|
|
31,613
|
|
|
|
|
|
Accrued interest receivable
|
|
4,361
|
|
|
|
|
|
5,903
|
|
|
|
|
|
Other real estate owned
|
|
36,568
|
|
|
|
|
|
10,841
|
|
|
|
|
|
Other assets
|
|
27,674
|
|
|
|
|
|
36,305
|
|
|
|
|
|
Total assets
|
|
$
|
913,736
|
|
|
|
|
|
$
|
1,073,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand
|
|
$
|
116,481
|
|
$
|
650
|
|
0.75
|
%
|
$
|
153,345
|
|
$
|
1,859
|
|
1.62
|
%
|
Savings
|
|
9,146
|
|
23
|
|
0.34
|
%
|
8,741
|
|
26
|
|
0.40
|
%
|
Time deposits
|
|
655,558
|
|
13,494
|
|
2.75
|
%
|
706,897
|
|
18,167
|
|
3.44
|
%
|
Total interest bearing deposits
|
|
781,185
|
|
14,167
|
|
2.42
|
%
|
868,983
|
|
20,052
|
|
3.09
|
%
|
Federal Home Loan Bank advances
|
|
35,302
|
|
710
|
|
2.69
|
%
|
51,392
|
|
1,145
|
|
2.98
|
%
|
Other borrowings
|
|
1,400
|
|
127
|
|
12.13
|
%
|
1,442
|
|
128
|
|
11.87
|
%
|
Junior subordinated debentures
|
|
10,310
|
|
188
|
|
2.44
|
%
|
10,310
|
|
255
|
|
3.31
|
%
|
Total borrowed funds
|
|
47,012
|
|
1,025
|
|
2.92
|
%
|
63,144
|
|
1,528
|
|
3.24
|
%
|
Total interest-bearing liabilities
|
|
828,197
|
|
15,192
|
|
2.45
|
%
|
932,127
|
|
21,580
|
|
3.10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits
|
|
52,504
|
|
|
|
|
|
53,606
|
|
|
|
|
|
Other liabilities
|
|
6,892
|
|
|
|
|
|
6,949
|
|
|
|
|
|
Shareholders equity
|
|
26,143
|
|
|
|
|
|
81,058
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
913,736
|
|
|
|
|
|
$
|
1,073,740
|
|
|
|
|
|
Net interest revenue (1)
|
|
|
|
$
|
12,131
|
|
|
|
|
|
$
|
13,923
|
|
|
|
Net interest spread (2)
|
|
|
|
|
|
2.01
|
%
|
|
|
|
|
1.86
|
%
|
Net interest margin (3) (6)
|
|
|
|
|
|
2.00
|
%
|
|
|
|
|
1.97
|
%
|
(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): 2010 - $708; 2009 - $969
(6) Average
rate reflects taxable equivalent adjustments using a tax rate of 34 percent.
(7) Investment
securities are stated at amortized or accreted cost.
35
Table of Contents
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 and
nine months ended September 30, 2010 compared to September 30, 2009.
Change in Interest Revenue and Expense on a Taxable Equivalent
Basis
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2010 Compared to 2009
|
|
2010 Compared to 2009
|
|
|
|
Changes due to (a)
|
|
Changes due to (a)
|
|
|
|
|
|
Yield/
|
|
Net
|
|
|
|
Yield/
|
|
Net
|
|
|
|
Volume
|
|
Rate
|
|
Change
|
|
Volume
|
|
Rate
|
|
Change
|
|
|
|
(Amounts in thousands)
|
|
Interest earned on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
(2,643
|
)
|
$
|
331
|
|
$
|
(2,312
|
)
|
$
|
(7,801
|
)
|
$
|
842
|
|
$
|
(6,959
|
)
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable investment securities
|
|
(370
|
)
|
44
|
|
(326
|
)
|
(832
|
)
|
(397
|
)
|
(1,229
|
)
|
Tax-exempt investment securities
|
|
(5
|
)
|
(2
|
)
|
(7
|
)
|
(47
|
)
|
7
|
|
(40
|
)
|
Interest earning deposits
|
|
(24
|
)
|
7
|
|
(17
|
)
|
27
|
|
21
|
|
48
|
|
Total interest income
|
|
(3,042
|
)
|
380
|
|
(2,662
|
)
|
(8,653
|
)
|
473
|
|
(8,180
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand deposits
|
|
(174
|
)
|
(293
|
)
|
(467
|
)
|
(370
|
)
|
(839
|
)
|
(1,209
|
)
|
Savings
|
|
|
|
(3
|
)
|
(3
|
)
|
1
|
|
(4
|
)
|
(3
|
)
|
Time deposits
|
|
(1,462
|
)
|
(482
|
)
|
(1,944
|
)
|
(2,384
|
)
|
(2,289
|
)
|
(4,673
|
)
|
Other borrowings and FHLB advances
|
|
(136
|
)
|
(17
|
)
|
(153
|
)
|
(332
|
)
|
(104
|
)
|
(436
|
)
|
Junior subordinated debentures
|
|
|
|
(2
|
)
|
(2
|
)
|
|
|
(67
|
)
|
(67
|
)
|
Total interest expense
|
|
(1,772
|
)
|
(797
|
)
|
(2,569
|
)
|
(3,085
|
)
|
(3,303
|
)
|
(6,388
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in net interest revenue
|
|
$
|
(1,270
|
)
|
$
|
1,177
|
|
$
|
(93
|
)
|
$
|
(5,568
|
)
|
$
|
3,776
|
|
$
|
(1,792
|
)
|
(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 nine months ended September 30, 2010 was
$5.5 million compared to $17.4 million for the same period of 2009. The provision for loan losses for the third
quarter of 2010 was $2.2 million compared to $11.4 million for the same period
of 2009. While there is an increase in
nonperforming loans and a decrease in loan activity for the three and nine
months ended September 30, 2010 compared to the three and nine months
ended September 30, 2009, the Company decreased its provision for loan
losses based on managements analysis of the allowance for loan losses. Net charge-offs as an annualized percentage
of average outstanding loans for the three and nine months ended September 30,
2010 were 1.78% and 1.64%, respectively, as compared with 5.91% and 2.45% for
the three and nine months ended September 30, 2009, respectively. Net loan charge-offs decreased significantly
during the three and nine months ended September 30, 2010, as compared to
the three and nine months ended September 30, 2009, due mainly to the
Company writing down $11.8 million for several impaired loans during the third
quarter of 2009 to their net realizable value compared to $3.1 million in loans
being written down during the third quarter of 2010.
The
provision for loan losses is based on managements 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.
36
Table of Contents
Non-interest Income
Composition
of other noninterest income is as follows:
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
$ Change
|
|
% Change
|
|
|
|
(Dollars in Thousands)
|
|
|
|
Service charges on deposit accounts
|
|
$
|
1,179
|
|
$
|
1,304
|
|
$
|
(125
|
)
|
-9.59
|
%
|
Other service charges, commissions and fees
|
|
443
|
|
374
|
|
69
|
|
18.45
|
%
|
Gain on sales, calls and impairment write-down of
investment securities
|
|
600
|
|
1,331
|
|
(731
|
)
|
-54.92
|
%
|
Mortgage origination income
|
|
218
|
|
643
|
|
(425
|
)
|
-66.10
|
%
|
Other income
|
|
727
|
|
823
|
|
(96
|
)
|
-11.66
|
%
|
Total noninterest income
|
|
$
|
3,167
|
|
$
|
4,475
|
|
$
|
(1,308
|
)
|
-29.23
|
%
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
$ Change
|
|
% Change
|
|
|
|
(Dollars in Thousands)
|
|
|
|
Service charges on deposit accounts
|
|
$
|
387
|
|
$
|
464
|
|
$
|
(77
|
)
|
-16.59
|
%
|
Other service charges, commissions and fees
|
|
151
|
|
136
|
|
15
|
|
11.03
|
%
|
Gain on sales, calls and impairment write-down of
investment securities
|
|
557
|
|
15
|
|
542
|
|
3613.33
|
%
|
Mortgage origination income
|
|
68
|
|
249
|
|
(181
|
)
|
-72.69
|
%
|
Other income
|
|
238
|
|
268
|
|
(30
|
)
|
-11.19
|
%
|
Total noninterest income
|
|
$
|
1,401
|
|
$
|
1,132
|
|
$
|
269
|
|
23.76
|
%
|
Non-interest
income for the three months ended September 30, 2010 increased $269
thousand, or 23.76%, when compared to the three months ended September 30,
2009. Non-interest income for the nine
months ended September 30, 2010 decreased $1.3 million, or 29.23%, when
compared to the nine months ended September 30, 2009. Service charges on deposit accounts are
evaluated against service charges from other banks in our local markets and
against the Banks own cost structure in providing the deposit services. This income correlates with the Banks demand
deposit account base. During the first
nine months of 2010, the Bank experienced a decrease in the number of core
transaction deposit accounts. Total
service charges, including non-sufficient funds fees, decreased approximately
$77 thousand, or 16.59%, and $125 thousand, or 9.59%, for the three and nine
months ended September 30, 2010, respectively, compared with the same
periods in 2009.
The
decrease in the gain on sales/calls of investment securities for the nine
months ended September 30, 2010 compared to the nine months ended September 30,
2009 is primarily due to the Company recording $1.3 million in gains from the
sales of several mortgage-backed securities during the first nine months of
2009 as compared to $600 thousand in gains from the calls of state, county and
municipal bond and the sale of several U.S. government sponsored enterprises
securities and mortgagebacked securities during the first nine months of
2010. The increase in the gain on
sales/calls of investment securities for the three months ended September 30,
2010 compared to the same period in 2009 is primarily due to the Company
recording $557 thousand in gains from the sale of several U.S. government
sponsored enterprises securities and mortgage-backed securities.
The
decrease in mortgage origination income for the three and nine months ended September 30,
2010 is primarily due to the decrease in the number of mortgage loan
closings. Approximately 18 mortgage loan
closings occurred
37
Table of Contents
during
the third quarter of 2010 compared to 70 mortgage loan closings for the same
period in 2009. For the nine months
ended September 30, 2010, there were approximately 53 mortgage loan
closings that occurred compared to 205 mortgage loan closings for the nine
months ended September 30, 2009.
The
decrease in other income for the three and nine months ended September 30,
2010, compared to the same periods in 2009 is due to the decrease in commission
fees from our wealth management department.
Non-interest Expense
Composition
of other noninterest expense is as follows:
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
$ Change
|
|
% Change
|
|
|
|
(Dollars in Thousands)
|
|
|
|
Salaries and employee benefits
|
|
$
|
6,597
|
|
$
|
7,839
|
|
$
|
(1,242
|
)
|
-15.84
|
%
|
Occupancy expense
|
|
1,326
|
|
1,355
|
|
(29
|
)
|
-2.15
|
%
|
Equipment rental and depreciation of equipment
|
|
895
|
|
965
|
|
(70
|
)
|
-7.25
|
%
|
(Gain) loss on sale of other assets
|
|
6
|
|
(62
|
)
|
68
|
|
-109.68
|
%
|
Loss on sale and impairment of other real estate
|
|
1,719
|
|
2,432
|
|
(713
|
)
|
-29.32
|
%
|
Other real estate expense
|
|
1,779
|
|
653
|
|
1,126
|
|
172.43
|
%
|
FDIC and state banking assessments
|
|
3,431
|
|
1,884
|
|
1,547
|
|
82.11
|
%
|
Goodwill impairment
|
|
|
|
19,534
|
|
(19,534
|
)
|
-100.00
|
%
|
Other expenses
|
|
3,361
|
|
4,444
|
|
(1,083
|
)
|
-24.37
|
%
|
Total noninterest expense
|
|
$
|
19,114
|
|
$
|
39,044
|
|
$
|
(19,930
|
)
|
-51.04
|
%
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
$ Change
|
|
% Change
|
|
|
|
(Dollars in Thousands)
|
|
|
|
Salaries and employee benefits
|
|
$
|
2,046
|
|
$
|
2,424
|
|
$
|
(378
|
)
|
-15.59
|
%
|
Occupancy expense
|
|
443
|
|
463
|
|
(20
|
)
|
-4.32
|
%
|
Equipment rental and depreciation of equipment
|
|
300
|
|
333
|
|
(33
|
)
|
-9.91
|
%
|
(Gain) loss on sale of other assets
|
|
5
|
|
(106
|
)
|
111
|
|
-104.72
|
%
|
Loss on sale and impairment of other real estate
|
|
1,323
|
|
942
|
|
381
|
|
40.45
|
%
|
Other real estate expense
|
|
477
|
|
317
|
|
160
|
|
50.47
|
%
|
FDIC and state banking assessments
|
|
1,103
|
|
729
|
|
374
|
|
51.30
|
%
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
Other expenses
|
|
1,124
|
|
1,393
|
|
(269
|
)
|
-19.31
|
%
|
Total noninterest expense
|
|
$
|
6,821
|
|
$
|
6,495
|
|
$
|
326
|
|
5.02
|
%
|
Non-interest
expense for the three months ended September 30, 2010 increased $326
thousand, or 5.02%, when compared to the three months ended September 30,
2009. This increase is primarily due to
the loss on the sale and impairment of other real estate properties which
increased by $381 thousand and from an increase of $374 thousand in quarterly
FDIC assessments with an offset of a decrease of $378 thousand in salary and
employee benefits with the Company eliminating its accrual on the 401k match
for employees and from a reduction in staff.
Non-interest expense for the nine months ended September 30, 2010
decreased $19.9 million, or 51.04%, when compared to the nine months ended September 30,
2009. This decrease is primarily due to
the Company recording a $19.5 million charge for goodwill impairment during the
second quarter of 2009.
38
Table of
Contents
The
decrease in the loss on the sale and impairment of other real estate owned for
the nine months ended September 30, 2010 is primarily attributed to the
Company recording a loss on one particular foreclosed property totaling to $1.3
million during the second quarter of 2009.
The increase in the loss on the sale and impairment of other real estate
owned for the three months ended September 30, 2010 is attributed to the
impairment of $1.1 million of several other real estate owned properties based
upon updated appraisals. The increase in
other real estate expenses is attributed to the number of other real estate
properties that the Company owns. At September 30,
2010, the Company had a total of 102 other real estate owned properties
compared to 54 properties at September 30, 2009.
The
increase in the FDIC and state banking assessments for the three and nine
months ended September 30, 2010 is attributable to our risk classification
with the FDIC. Since entering into the
Order with the FDIC, the Company has had higher quarterly assessments due to
our risk classification.
The
decrease in salaries and employee benefits for the three and nine months ended September 30,
2010 compared to the same period in 2009 is primarily due to no accrual of
bonuses, a decrease in the expense relating to the salary continuation plan
based upon changes to the plan, the utilization of a bank officer one day per
quarter furlough, the elimination of the accrual on the Companys 401k match
for their employees and a small reduction in staff. At September 30, 2010, the number of
full-time equivalent employees was 158 employees compared to 165 employees at September 30,
2009.
The
decreases in equipment rental and depreciation of equipment, occupancy expense
and other expenses are not attributable to any one particular item, but
represent the Companys efforts to decrease controllable noninterest expense.
Income Tax Expense
The
Company recorded a valuation allowance for the balance of the recorded deferred
tax asset as of December 31, 2009 and for the three and nine months ended September 30,
2010 since it is presently more likely than not that the deferred tax asset
will not be realized. With respect to
the Companys cumulative losses as of September 30, 2010, we have
determined that it is more likely than not that any income tax benefit that
would have been recorded would not be realized.
For the three and nine months ended September 30, 2009, income tax
benefit of $4.4 million and $6.7 million was recognized with an effective tax
rate of 34.65% and 17.70%, respectively.
The effective tax rate for the nine months ended September 30, 2009
was lower than the statutory tax rates primarily due to the tax-free income
from certain investment securities and loans that are exempt from income taxes
and tax credits received from affordable housing investments and the goodwill
impairment charge. The majority of the
goodwill from the two acquisitions in 2006 and 2007 was treated as tax-free
exchanges, which was not recognized for tax reporting purposes and therefore no
tax deduction was allowed for the impairment charge. Likewise, no tax benefit for the goodwill was
recognized in the financial statements relating to the $19.5 million charge.
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
Companys 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
Companys 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 Companys 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 up to $11
million in federal funds from other financial institutions. At September 30,
2010, the Company had no federal funds purchased. At September 30, 2010,
39
Table of Contents
we
do not have any further borrowing capacity with the Federal Home Loan Bank with
$29.0 million in outstanding advances.
The Company has a total available line of $21.9 million, subject to
available collateral, from the Federal Reserve Bank (FRB). The Company had no advances on the FRB line
at September 30, 2010.
The
Banks liquidity policy requires that the ratio of cash and certain short-term
investments to net withdrawable deposit accounts be at least 10%. The Banks
liquidity ratios at September 30, 2010 and 2009 were 17.94% and 25.94%,
respectively.
In
the past, the Bank has relied heavily on brokered deposits. Pursuant to the Order and FDIC regulations as
a result of our significantly-undercapitalized status, we are unable to accept,
renew or roll over brokered deposits absent a waiver from the FDIC. Accordingly, management has instituted an
aggressive retail deposit marketing campaign both locally and through a
national rate-listing service to replace the brokered CDs as they mature. The increase in liquid assets is designed to
provide cash to payoff the brokered deposits as they mature.
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 in the regulations), and of Tier I capital (as defined in the
regulations) to average assets (as defined in the regulations). Pursuant to the Order, Tier 1 Capital must
equal or exceed 8.00% of the Banks total assets and the Banks Total
Risk-based Capital must equal or exceed 10.00% of the Banks total
risk-weighted assets, within 90 days of the effective date of the Order. At September 30, 2010, the Bank was not
in compliance with the Order, with Tier 1 capital to average assets at 3.14%
and total risk-based capital to risk-weighted assets at 5.49%. As a result of our regulatory capital ratios,
we are considered significantly undercapitalized by our bank regulatory
authorities as of September 30, 2010.
As a result of our significantly-undercapitalized status, on March 26,
2010, the Bank received a Notification of Prompt Corrective Action, which
notified the Bank that it is subject to greater regulatory monitoring and
certain additional discretionary safeguards may be imposed by regulatory
authorities, which may have a direct material effect on our financial
statements.
Since
the Bank consented to the Order, it has taken steps to address the provisions
of the Order. Management has taken an
active role in working with the FDIC and the GDBF to improve its financial
condition and is addressing the terms of the Order on a continuing basis. We are also in the process of developing a
short-term and a long-term capital plan to meet regulatory capital limits. Failure to adequately address the Order may
result in more severe actions by regulators, including the eventual appointment
of a receiver of the Banks asset.
40
Table of Contents
The
Companys and the Banks actual capital amounts and ratios as of September 30,
2010 and December 31, 2009 follow:
|
|
|
|
|
|
|
|
To Be Well Capitalized
|
|
|
|
|
|
|
|
For Capital
|
|
Under Prompt Corrective
|
|
|
|
Actual
|
|
Adequacy Purposes
|
|
Action Provisions
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
|
|
Ratio
|
|
Amount
|
|
|
|
Ratio
|
|
September 30,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk-Based Capital To Risk Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
37,396,000
|
|
5.55
|
%
|
$
|
53,904,144
|
|
>
|
|
8.0
|
%
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
37,018,000
|
|
5.49
|
%
|
53,942,441
|
|
>
|
|
8.0
|
%
|
$
|
67,428,051
|
|
>
|
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital To Risk Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
24,018,000
|
|
3.56
|
%
|
$
|
26,986,517
|
|
>
|
|
4.0
|
%
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
27,069,000
|
|
4.02
|
%
|
26,934,328
|
|
>
|
|
4.0
|
%
|
$
|
40,401,493
|
|
>
|
|
6.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital To Average Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
24,018,000
|
|
2.79
|
%
|
$
|
34,434,409
|
|
>
|
|
4.0
|
%
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
27,069,000
|
|
3.14
|
%
|
34,482,803
|
|
>
|
|
4.0
|
%
|
$
|
43,103,503
|
|
>
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk-Based Capital To Risk Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
47,485,000
|
|
6.28
|
%
|
$
|
60,490,446
|
|
>
|
|
8.0
|
%
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
46,763,000
|
|
6.19
|
%
|
60,436,834
|
|
>
|
|
8.0
|
%
|
$
|
75,546,042
|
|
>
|
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital To Risk Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
36,490,000
|
|
4.83
|
%
|
$
|
30,219,462
|
|
>
|
|
4.0
|
%
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
35,771,000
|
|
4.73
|
%
|
30,250,317
|
|
>
|
|
4.0
|
%
|
$
|
45,375,476
|
|
>
|
|
6.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital To Average Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
36,490,000
|
|
3.44
|
%
|
$
|
42,430,233
|
|
>
|
|
4.0
|
%
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
35,771,000
|
|
3.37
|
%
|
42,458,160
|
|
>
|
|
4.0
|
%
|
$
|
53,072,700
|
|
>
|
|
5.0
|
%
|
We had outstanding junior subordinated debentures commonly referred to
as Trust Preferred Securities totaling $10.3 million at September 30, 2010
and December 31, 2009. 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 September 30,
2010, $6.6 million of the Trust Preferred Securities qualified as Tier 1
capital and all of the Trust Preferred Securities qualified as a Tier I capital
at December 31, 2009. We had
outstanding subordinated debentures totaling $1.4 million at September 30,
2010 and December 31, 2009. The
subordinated debentures qualify as a Tier II capital under risk-based capital
guidelines. At September 30, 2010
and December 31, 2009, all of the subordinated debentures qualify as a
Tier II capital.
41
Table of Contents
ATLANTIC
SOUTHERN FINANCIAL GROUP, INC.
Item 3.
Quantitative and Qualitative
Disclosures
about Market Risk
For the Nine Months Ended September 30,
2010
Pursuant
to Item 305(e) of Regulation S-K, no disclosure under this item is
required.
42
Table of Contents
ATLANTIC
SOUTHERN FINANCIAL GROUP, INC.
Item
4T. Controls and
Procedures
For the Nine Months Ended September 30,
2010
The Companys 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 Companys Chief Executive Officer and Chief
Financial Officer have concluded that the Companys 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 Commissions rules and
forms. The Companys 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 pursuant to the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commissions rules and forms.
During the third quarter of
2010, there were no significant changes in the Companys internal control over
financial reporting or, to the Companys 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 Companys internal control over financial
reporting. However, the design of any
system of controls and procedures is based in part upon certain assumptions
about the likelihood of future events.
There can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions, regardless of how remote.
43
Table of Contents
ATLANTIC
SOUTHERN FINANCIAL GROUP, INC.
Part II. Other Information
For the Nine Months Ended
September 30, 2010
PART II: OTHER
INFORMATION:
Item 1. Legal Proceedings
Please refer to the material pending legal
proceedings discussed in Part I, Item 3. Legal Proceedings in our Annual
Report on form 10-K for the year ended December 31, 2009. There have been no material developments in
the matters discussed in our Annual Report and there are no further material
legal proceedings to which the Company or the Bank 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 below and in Part I, Item
1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31,
2009, which could materially affect our business, financial condition or future
results. The risks described below and in our Annual Report on Form 10-K
are not the only risks facing us. 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 operating
results.
Due to our current
noncompliance with the Order and risk of future noncompliance we may be subject
to certain additional operational and financial restrictions that will require
us to take specific actions.
The Bank is currently
categorized as significantly undercapitalized and, pursuant to the prompt
corrective action provisions of the Federal Deposit Insurance Act and the
prompt corrective action regulations of the FDIC promulgated thereunder
(collectively, the PCA Provisions), the Bank received Notification of Prompt Corrective
Action from the FDIC on March 26, 2010, which required that the Bank file
a capital restoration plan within 45 days of receiving the Notification. In addition, because of the Banks significantly-undercapitalized
status, the Bank is automatically subject to, among other things, restrictions
on dividends, management fees, and asset growth, and is prohibited from opening
new branches, making acquisitions or engaging in new lines of business without
the approval of the FDIC.
Significantly
undercapitalized depository institutions may also be subject to any of the
following requirements and restrictions, including: (i) selling sufficient
voting stock to become adequately capitalized; (ii) directing the Bank to
merge or be acquired: (iii) limiting certain affiliate transactions; (iv) restricting
interest rates paid on deposits; (v) restricting asset growth or reducing
total assets, (vi) altering or eliminating any activities that pose
excessive risk to the Bank; (vii) improving management through an election
of a new board of directors, dismissals, or the hiring of new executives, (viii) ceasing
the acceptance of deposits from correspondent banks, (ix) divesting the
holding company; and (x) performing any other appropriate action.
If the capital at the Bank
further deteriorates, and the Bank is categorized as critically
undercapitalized, subject to limited exceptions, it will be subject to the
appointment, by the appropriate federal banking agency, of a receiver or conservator
within 90 days of the date on which it becomes critically
undercapitalized. In addition,
critically-undercapitalized banks are prohibited from paying principal or
interest on subordinated debt without FDIC approval. FDIC approval is also required for a
critically- undercapitalized institution to engage in certain activities,
including, but not limited to, entering into any material transaction other
than in the usual course of business, extending credit for any highly leveraged
transaction, making any material change in accounting methods, amending its
articles or bylaws, engaging in any covered transaction with an affiliate (as
defined in section 23A of the Federal Reserve Act), paying excessive
compensation or bonuses, and paying interest on deposits in excess of the
prevailing rate in the institutions market area.
In addition, because the
Bank is not in compliance with the Order, it could also be subject to
enforcement actions by the FDIC and Georgia Department. The various enforcement
measures available to the FDIC and Georgia Department, include the imposition
of a conservator or receiver (which would likely result in a substantial
diminution or a total loss of the Companys investment in the Bank), the
judicial enforcement of the Order, the termination of insurance of deposits,
the imposition of civil money penalties, and the issuance of removal and
44
Table of Contents
prohibition orders against
institution-affiliated parties and the imposition of restrictions and sanctions
under the prompt corrective action provisions discussed above.
Further noncompliance with
the Order, the failure to comply with our capital restoration plan, or further
deterioration of our capital, could impact our ability to continue operations
and, in such a scenario, it is unlikely that our shareholders would realize any
value for their common stock.
We need to raise
additional capital that may not be available to us.
Regulatory authorities
require us to maintain adequate levels of capital to support our operations. As
described above, we are significantly-undercapitalized and have an immediate
need to raise capital. In addition, even if we succeed in raising this capital,
we may need to raise additional capital in the future due to additional losses
or regulatory mandates. The ability to raise additional capital, if needed,
will depend in part on conditions in the capital markets at that time, which
are outside our control, and on our financial performance. Accordingly,
additional capital may not be raised, if and when needed, on terms acceptable
to us, or at all. If we cannot raise additional capital when needed, our
ability to increase our capital ratios could be materially impaired and we
could face additional regulatory challenges. In addition, if we issue
additional equity capital, it may be at a lower price and in all cases our
existing shareholders interest would be diluted.
Compliance
with the recently enacted Dodd-Frank Reform Act may adversely impact our
earnings.
On
July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform
and Consumer Protection Act (the Dodd-Frank Reform Act) into law. The Dodd-Frank Reform Act represents a
significant overhaul of many aspects of the regulation of the
financial-services industry. Major
elements in the Dodd-Frank Reform Act include the following:
·
The establishment of the Financial Stability
Oversight Counsel, which will be responsible for identifying and monitoring
systemic risks posed by financial firms, activities, and practices.
·
Enhanced supervision of large bank holding
companies (i.e., those with over $50 billion in total consolidated assets),
with more stringent supervisory standards to be applied to them.
·
The creation of a special regime to allow for
the orderly liquidation of systemically important financial companies,
including the establishment of an orderly liquidation fund.
·
The development of regulations to address
derivatives markets, including clearing and exchange trading requirements and a
framework for regulating derivatives-market participants.
·
Enhanced supervision of credit-rating
agencies through the Office of Credit Ratings within the SEC.
·
Increased regulation of asset-backed
securities, including a requirement that issuers of asset-backed securities
retain at least 5% of the risk of the asset-backed securities.
·
The establishment of a Bureau of Consumer
Financial Protection, within the Federal Reserve, to serve as a dedicated
consumer-protection regulatory body.
·
Amendments to the Truth in Lending Act aimed
at improving consumer protections with respect to mortgage originations,
including originator compensation, minimum repayment standards, and prepayment
considerations.
The
majority of the provisions in the Dodd-Frank Reform Act are aimed at financial
institutions that are significantly larger than the Company or the Bank. Nonetheless, there are provisions with which
we will have to comply now that the Dodd-Frank Reform Bill is signed into
law. As rules and regulations are
promulgated by the federal agencies responsible for implementing and enforcing
the provisions in the Dodd-Frank Reform Act, we will have to work to apply
resources to ensure that we are in compliance with all applicable provisions,
which may adversely impact our earnings.
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
Not Applicable
45
Table of Contents
Item 4. Reserved
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: November 12, 2010
46
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