NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
General
- Atlantic BancGroup, Inc. (the “Holding Company”) is a bank holding company registered with the Federal Reserve and owns 100% of the outstanding stock of Oceanside Bank (“Oceanside”). Oceanside
is a Florida state-chartered commercial bank, which opened July 21, 1997. Oceanside’s deposits are insured by the Federal Deposit Insurance Corporation. The Holding Company’s primary business activities are the operation of Oceanside, and it operates in only one reportable industry segment, banking. Collectively, the entities are referred to as “Atlantic.” References to Atlantic, Oceanside, and subsidiaries throughout these condensed consolidated
financial statements are made using the first-person notations of “we,” “our,” and “us.” Oceanside has formed subsidiaries for the sole purpose of holding and managing real estate properties acquired through foreclosure.
The accompanying condensed consolidated financial statements include the accounts of the Holding Company, its wholly-owned subsidiary, Oceanside, and the Subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation. The accounting and reporting policies of Atlantic conform with accounting
principles generally accepted in the United States of America and to general practices within the banking industry.
Our condensed consolidated financial statements for the three and nine months ended September 30, 2009 and 2008, have not been audited and do not include information or footnotes necessary for a complete presentation of consolidated financial condition, results of operations, and cash flows in conformity with accounting principles generally
accepted in the United States of America. In management’s opinion, the accompanying condensed consolidated financial statements contain all adjustments, which are of a normal recurring nature, necessary for a fair presentation. Our results of operations for the interim periods are not necessarily indicative of the results that may be expected for an entire year. The accounting policies followed by us are set forth in the consolidated financial statements for the year ended
December 31, 2008, and are incorporated herein by reference.
Oceanside, through four banking offices, provides a wide range of banking services to individual and corporate customers primarily in East Duval and Northeast St. Johns counties of Florida. We are subject to regulations of certain federal and state regulatory agencies and, accordingly, we are examined by those agencies. As
a consequence of the extensive regulation of commercial banking activities, our business is particularly susceptible to being affected by federal and state legislation and regulations.
Enforcement Action
. On October 26, 2009, the FDIC instituted a Notice of Charges and of Hearing (“Notice”) against the Bank. The Notice alleges that the Bank has engaged in unsafe and unsound banking practices and seeks the imposition of an Order to
Cease and Desist (“Order”) against the Bank. The Bank disputes many of the Notice’s allegations and intends to vigorously defend itself against the entry of an Order. The Bank is also currently engaged in discussions with the FDIC, with the goal of seeking entry of an alternative formal enforcement action with terms acceptable to the Bank. We can offer no assurances as to the success of these negotiations or of the Bank’s defense.
We believe that the Bank, as compared to those Florida and Georgia-based institutions which are currently operating under Orders to Cease and Desist, does not warrant the imposition of the Order. If the Bank can not reach an acceptable compromise with the FDIC, the Bank will vigorously defend itself against the allegations contained
in the Notice and expects that a hearing as to those allegations and an adjudication as to whether the Order will be entered will not occur until mid-2010. For a more detailed discussion, see
Part II - Other Information, Item 1, Legal Proceedings
.
Additionally, we have been informed by the Federal Reserve Bank of Atlanta (“Federal Reserve”) that it intends to also seek a formal enforcement action against the Company, but we have not been advised as to the form or ultimate substance of the action. We would expect any such action to seek restrictions against us
decreasing our capital through dividends, stock repurchases or otherwise. Not knowing what the proposed formal action will entail, we have not been able to determine if we will stipulate to the action or exercise our right to a hearing.
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2009
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
(Continued)
Imposition of enforcement action would increase our costs to comply with the action, restrict or prohibit certain activities by Atlantic or Oceanside, require Atlantic and Oceanside to submit a plan for restoring Oceanside to an acceptable capital category, restrict the use of brokered deposits and the rates we may pay for deposits, and restrict
the payment of dividends.
In light of the current economic environment, management is pursuing a number of sources for raising additional capital. However, current market conditions for banking institutions, the overall uncertainty in financial markets, and Atlantic’s depressed stock price are significant barriers to obtaining non-dilutive capital.
Liquidity
. Atlantic actively manages liquidity. Cash and cash equivalents and interest-bearing deposits at September 30, 2009, totaled $48.0 million. In addition to cash and cash equivalents, interest-bearing deposits, and unpledged investment securities,
Atlantic has the following sources of available liquidity at September 30, 2009: lines of credit to purchase federal funds ($10.0 million) and Federal Home Loan Bank of Atlanta ($8.3 million). Subject to prior approval, additional sources of liquidity include Federal Reserve discount window ($3.1 million). Based on current and expected liquidity needs and sources, management expects Atlantic to be able to meet its obligations.
Use of Estimates
- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, valuation of other real estate owned (or foreclosed assets), and the realization of deferred tax assets.
The determination of the adequacy of the allowance for loan losses and the valuation of foreclosed assets is based on estimates that may be affected by significant changes in the economic environment and market conditions. In connection with the determination of the estimated losses on loans and the valuation of foreclosed assets,
management obtains independent appraisals for significant collateral.
Our loans are generally secured by specific items of collateral including real property, consumer assets, and business assets. Although we have a diversified loan portfolio, a substantial portion of our debtors’ ability to honor their contracts is dependent on local, state, and national economic conditions that may affect
the value of the underlying collateral or the income of the debtor.
While management uses available information to recognize losses on loans and to value foreclosed assets, further reductions in the carrying amounts of loans and foreclosed assets may be necessary based on changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically
review the estimated losses on loans and carrying value of foreclosed assets. Such agencies may require us to recognize additional losses based on their judgments about information available to them at the time of their examination.
Atlantic has recorded a deferred tax asset to recognize the future income tax benefit of operating losses incurred for tax year 2008. Management believes that the tax benefits on the net operating loss carry forwards will be utilized when Atlantic returns to profitability. Generally, the net operating losses can be carried
forward for up to 20 years and do not begin to expire until 2028. On November 6, 2009, the “Worker, Homeownership, and Business Assistance Act of 2009” was signed into law. In addition to extending the first-time homebuyer credit that has been instrumental in increasing residential real estate sales, this law relaxes the net operating loss carryback rules. We are currently analyzing the impact on Atlantic’s deferred tax asset, but we anticipate that refunds for
net operating losses will range from $0.8 million to $1.0 million. The fourth quarter of 2009 will reflect the impact of this new law.
Management considered the cumulative losses in 2008 and the anticipated net operating loss for 2009 when determining whether or not to perform a valuation allowance on the deferred tax asset. The economic conditions and Atlantic’s level of non-performing assets were taken into consideration as well.
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2009
However, management believed that the negative evidence was outweighed by certain positive evidence. Atlantic has a prior history of earnings outside of the recent losses and believes that changes have been made to allow Atlantic to return to an earnings position, including reductions in payroll and other operating costs. Based
on the above analysis, management believes it is more likely than not that Atlantic would realize the deferred tax asset through future operating income. Accordingly, no deferred tax valuation allowance has been recorded.
Reclassifications
- Certain amounts in the prior periods have been reclassified to conform to the presentation for the current period.
New Accounting Guidance
- In November 2008, the SEC released a proposed roadmap regarding the potential use by U.S. insurers of financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”). IFRS
is a comprehensive series of accounting standards published by the International Accounting Standards Board. Under the proposed roadmap, Atlantic may be required to prepare financial statements in accordance with IFRS as early as 2014. The SEC will make a determination in 2011 regarding the mandatory adoption of IFRS. Atlantic is currently assessing the impact that this potential change would have on its consolidated financial statements, and it will continue to monitor the development
of the potential implementation of IFRS.
In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC 105”)
Generally Accepted Accounting Principles
. The Accounting Standards Codification (“ASC”) is the official source of authoritative
United States Generally Accepted Accounting Principles (“GAAP”) superseding existing FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force, and related literature. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting literature is considered non-authoritative. The switch
to the ASC affects the way companies refer to GAAP in financial statements and accounting policies. ASC 105 became effective during the third quarter of 2009 and did not have a significant impact on Atlantic’s financial statements.
Business Combinations
: On January 1, 2009, new authoritative accounting guidance under ASC 805
Business Combinations
became applicable to Atlantic’s accounting for business combinations
closing on or after January 1, 2009. ASC 805 requires the acquiring entity in a business combination to recognize the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. Assets
acquired and liabilities assumed in a business combination that arise from contingencies should be recognized at fair value on the acquisition date if fair value can be determined during the measurement period. If fair value cannot be determined, companies should typically account for the acquired contingencies using existing accounting guidance. ASC 805 will apply to future acquisitions by Atlantic subsequent to January 1, 2009.
Fair Value Measurement and Disclosures
: ASC 820
Fair Value Measurement and Disclosures
affirms that the fair value measurement objective when a market is not active is the price that would
be received by the holder of the financial asset in an orderly transaction (an exit price notion) that is not a forced liquidation or distressed sale at the measurement date. Additionally, in determining fair value for a financial asset, the use of a reporting entity’s own assumptions about future cash flows and appropriately risk-adjusted discount rates is acceptable when relevant observable inputs are not available. Broker (or pricing service) quotes may be an appropriate input when
measuring fair value, but they are not necessarily determinative if an active market does not exist for the financial asset. ASC 820 provides additional guidance when the volume and level of activity for the asset or liability have significantly decreased and includes guidance on identifying circumstances that indicate a transaction is not orderly. Atlantic adopted ASC 820 during the quarter ended June 30, 2009. ASC 820 did not have a significant impact on Atlantic’s financial
condition and results of operations.
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2009
Investments – Debt and Equity Securities
: ASC 320
Investments – Debt and Equity Securities
amends the other-than-temporary impairment guidance in GAAP for debt securities to make
the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. ASC 320 requires an entity to recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the noncredit component in other comprehensive income when the entity does not intend to sell the security and it is more likely than not that the entity will not be required to sell the security prior
to recovery. ASC 320 became effective for interim and annual reporting periods ending after June 15, 2009. Atlantic adopted ASC 320 during the quarter ended June 30, 2009.
Financial Instruments
: ASC 825
Financial Instruments
requires expanded disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well
as in annual financial statements.
Subsequent Events
: ASC 855
Subsequent Events
addresses events which occur after the balance sheet date but before the issuance of financial statements. Under ASC 855, an entity
must record the effects of subsequent events that provide evidence about conditions that existed at the balance sheet date and must disclose but not record the effects of subsequent events which provide evidence about conditions that did not exist at the balance sheet date. Atlantic adopted ASC 855 for the quarter ended June 30, 2009.
Transfers and Servicing
: ASC 860
Transfers and Servicing
improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its
financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. ASC 860 shall be effective for annual reporting periods that begin after November 15, 2009, for interim periods within the first annual reporting period and for interim and annual reporting periods thereafter, with early adoption prohibited. ASC 860 must
be applied to transfers occurring on or after the effective date. Management has not completed its evaluation of ASC 860; however, Atlantic does not expect it to be material to its financial statements.
Consolidation
: ASC 810
Consolidation
improves financial reporting by enterprises involved with variable interest entities and any significant changes in risk exposure due to that involvement
as well as its affect on the entity’s financial statements. ASC 810 shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within the first annual reporting period, and for interim and annual reporting periods thereafter, with earlier adoption prohibited. Management has not completed its evaluation of ASC 810; however, Atlantic does not expect it to be material to its financial statements.
Other
: A variety of proposed or otherwise potential accounting standards are currently under study by standard-setting organizations and various regulatory agencies. Because of the tentative and preliminary nature of these proposed standards,
management has not determined whether implementation of such proposed standards would be material to Atlantic’s consolidated financial statements.
Subsequent Events
- Atlantic’s date for evaluating the existence of subsequent events that would affect the financial statement for the quarter ended September 30, 2009, was November 23, 2009, which was the date the financial statements
were issued.
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2009
NOTE 2 - COMPUTATION OF PER SHARE EARNINGS (LOSSES)
Basic earnings (losses) per share (“EPS”) amounts are computed by dividing net income (loss) by the weighted average number of common shares outstanding for the three and nine months ended September 30, 2009 and 2008. Diluted EPS is computed by dividing net income (loss) by the weighted average number of shares and all
dilutive potential shares outstanding during the period. We have no dilutive potential shares outstanding for 2009 or 2008. The following information was used in the computation of EPS on both a basic and diluted basis for the three and nine months ended September 30, 2009 and 2008 (dollars and number of shares in thousands):
|
|
|
Three Months Ended September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Basic and diluted EPS computation:
|
|
|
|
|
|
|
|
Numerator - Net loss
|
|
$
|
(2,214
|
)
|
|
$
|
(839
|
)
|
|
Denominator - Weighted average shares outstanding (rounded)
|
|
|
1,248
|
|
|
|
1,248
|
|
|
Basic and diluted losses per share
|
|
$
|
(1.77
|
)
|
|
$
|
(0.68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Basic and diluted EPS computation:
|
|
|
|
|
|
|
|
|
|
Numerator - Net loss
|
|
$
|
(2,217
|
)
|
|
$
|
(994
|
)
|
|
Denominator - Weighted average shares outstanding (rounded)
|
|
|
1,248
|
|
|
|
1,248
|
|
|
Basic and diluted losses per share
|
|
$
|
(1.78
|
)
|
|
$
|
(0.80
|
)
|
NOTE 3 - INVESTMENT SECURITIES
The amortized cost and estimated fair value of instruments in debt and equity securities are as follows (dollars in thousands):
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government-sponsored
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
agency securities
|
|
$
|
148
|
|
|
$
|
4
|
|
|
$
|
-
|
|
|
$
|
152
|
|
|
$
|
2,700
|
|
|
$
|
5
|
|
|
$
|
(6
|
)
|
|
$
|
2,699
|
|
|
Mortgage-backed securities
|
|
|
45,241
|
|
|
|
130
|
|
|
|
(109
|
)
|
|
|
45,262
|
|
|
|
12,171
|
|
|
|
40
|
|
|
|
(40
|
)
|
|
|
12,171
|
|
|
|
|
|
45,389
|
|
|
|
134
|
|
|
|
(109
|
)
|
|
|
45,414
|
|
|
|
14,871
|
|
|
|
45
|
|
|
|
(46
|
)
|
|
|
14,870
|
|
|
Held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State, county and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
municipal bonds
|
|
|
15,320
|
|
|
|
408
|
|
|
|
(37
|
)
|
|
|
15,691
|
|
|
|
15,536
|
|
|
|
133
|
|
|
|
(771
|
)
|
|
|
14,898
|
|
|
Total investment securities
|
|
$
|
60,709
|
|
|
$
|
542
|
|
|
$
|
(146
|
)
|
|
$
|
61,105
|
|
|
$
|
30,407
|
|
|
$
|
178
|
|
|
$
|
(817
|
)
|
|
$
|
29,768
|
|
Information pertaining to securities with gross unrealized losses at September 30, 2009, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows (dollars in thousands):
|
|
|
Less Than Twelve Months
|
|
|
Over Twelve Months
|
|
|
Total
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Available-for-Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government-sponsored agency
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Mortgage-backed securities
|
|
|
(109
|
)
|
|
|
30,353
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(109
|
)
|
|
|
30,353
|
|
|
|
|
$
|
(109
|
)
|
|
$
|
30,353
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(109
|
)
|
|
$
|
30,353
|
|
|
Held-to-Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State, county, and municipal bonds
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(37
|
)
|
|
$
|
3,061
|
|
|
$
|
(37
|
)
|
|
$
|
3,061
|
|
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2009
NOTE 3 - INVESTMENT SECURITIES
(Continued)
Management evaluates securities for other-than-temporary impairment at least on a monthly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term
prospects of the issuer, and (iii) the intent and ability of Atlantic to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. At September 30, 2009 and December 31, 2008, Atlantic did not have any investment securities deemed other-than-temporarily-impaired debt securities.
The unrealized losses on investment securities were caused by interest rate changes. Temporary
net decreases in fair value of securities available-for-sale at September 30, 2009, are regarded as an adjustment to stockholders' equity. The estimated fair
value of investment securities is determined on the basis of market quotations. The following is a summary of the effects on the
Condensed Consolidated Statement of Stockholders’ Equity
at September 30, 2009 and December 31, 2008 (dollars in thousands):
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on investment securities available-for-sale
|
|
$
|
25
|
|
|
$
|
(1
|
)
|
|
Deferred tax expense on unrealized gains
|
|
|
(9
|
)
|
|
|
-
|
|
|
Balance
|
|
$
|
16
|
|
|
$
|
(1
|
)
|
The following presents the net change in unrealized gains or losses on investment securities available-for-sale that are shown as a component of stockholders’ equity and comprehensive income (loss) for the three and nine months ended September 30, 2009 and 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains on investment securities arising during period
|
|
$
|
238
|
|
|
$
|
136
|
|
|
Less: reclassification adjustment for gains included in net loss
|
|
|
-
|
|
|
|
-
|
|
|
Other comprehensive income, before income tax expense
|
|
|
238
|
|
|
|
136
|
|
|
Income tax expense related to items of other comprehensive income
|
|
|
(89
|
)
|
|
|
(51
|
)
|
|
Other comprehensive income, net of income tax expense
|
|
$
|
149
|
|
|
$
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains on investment securities arising during period
|
|
$
|
83
|
|
|
$
|
125
|
|
|
Less: reclassification adjustment for gains included in net loss
|
|
|
(56
|
)
|
|
|
-
|
|
|
Other comprehensive income, before income tax expense
|
|
|
27
|
|
|
|
125
|
|
|
Income tax expense related to items of other comprehensive income
|
|
|
(10
|
)
|
|
|
(47
|
)
|
|
Other comprehensive income, net of income tax expense
|
|
$
|
17
|
|
|
$
|
78
|
|
Gross gains and losses on sales of investment securities for the three and nine months ended September 30, 2009, totaled $-0- and $56,000, respectively. There were no sales of investment securities during the same periods of 2008.
At September 30, 2009, held-to-maturity investment securities with an amortized cost of $1.50 million and fair value of $1.50 million were pledged to secure deposits of public funds from the State of Florida and treasury tax and loan deposits with the Federal Reserve. At September 30, 2009, held-to-maturity investment securities
with an amortized cost of $4.2 million and a fair value of $4.2 million were pledged for other borrowings.
There were no securities of a single issuer, which are non-governmental or non-government sponsored, that exceeded 10% of stockholders’ equity at September 30, 2009 or 2008.
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2009
NOTE 3 - INVESTMENT SECURITIES
(Continued)
The cost and estimated fair value of debt and equity securities at September 30, 2009, by contractual maturities, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (dollars in thousands).
|
|
|
Securities Available-for-Sale
|
|
|
Securities Held-to-Maturity
|
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
4,157
|
|
|
$
|
4,162
|
|
|
$
|
155
|
|
|
$
|
156
|
|
|
Due after one through five years
|
|
|
2,285
|
|
|
|
2,288
|
|
|
|
271
|
|
|
|
289
|
|
|
Due after five through fifteen years
|
|
|
13,188
|
|
|
|
13,185
|
|
|
|
4,145
|
|
|
|
4,246
|
|
|
Due after fifteen years
|
|
|
25,759
|
|
|
|
25,779
|
|
|
|
10,749
|
|
|
|
11,000
|
|
|
|
|
$
|
45,389
|
|
|
$
|
45,414
|
|
|
$
|
15,320
|
|
|
$
|
15,691
|
|
NOTE 4 - LOANS
Loans consisted of (dollars in thousands):
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
Construction, land development, and other land
|
|
$
|
32,495
|
|
|
$
|
39,135
|
|
|
1-4 family residential
|
|
|
57,016
|
|
|
|
57,814
|
|
|
Multifamily residential
|
|
|
2,917
|
|
|
|
4,481
|
|
|
Commercial
|
|
|
95,856
|
|
|
|
88,762
|
|
|
|
|
|
188,284
|
|
|
|
190,192
|
|
|
Commercial loans
|
|
|
11,984
|
|
|
|
13,314
|
|
|
Consumer and other loans
|
|
|
3,091
|
|
|
|
3,548
|
|
|
Total loan portfolio
|
|
|
203,359
|
|
|
|
207,054
|
|
|
Less, deferred fees
|
|
|
(14
|
)
|
|
|
(25
|
)
|
|
Less, allowance for loan losses
|
|
|
(4,074
|
)
|
|
|
(3,999
|
)
|
|
Loans, net
|
|
$
|
199,271
|
|
|
$
|
203,030
|
|
A summary of the activity in Other Real Estate Owned follows (dollars in thousands):
|
|
|
For the Three
|
|
|
For the Nine
|
|
|
For the Twelve
|
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
|
September 30, 2009
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
2,290
|
|
|
$
|
3,421
|
|
|
$
|
-
|
|
|
Transfers to OREO
|
|
|
175
|
|
|
|
499
|
|
|
|
6,034
|
|
|
Disposals
|
|
|
-
|
|
|
|
(1,407
|
)
|
|
|
(2,298
|
)
|
|
Write-downs
|
|
|
(286
|
)
|
|
|
(334
|
)
|
|
|
(315
|
)
|
|
Balance, end of period
|
|
$
|
2,179
|
|
|
$
|
2,179
|
|
|
$
|
3,421
|
|
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2009
NOTE 5 - ALLOWANCE FOR LOAN LOSSES
Our Board of Directors monitors the loan portfolio quarterly in order to enable it to evaluate the adequacy of the allowance for loan losses. We maintain the allowance for loan losses at a level that we believe to be sufficient to absorb probable losses inherent in the loan portfolio. Activity in the allowance for loan
losses follows (dollars in thousands):
|
|
|
For the Three
|
|
|
For the Nine
|
|
|
For the Twelve
|
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
|
September 30, 2009
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
4,155
|
|
|
$
|
3,999
|
|
|
$
|
2,169
|
|
|
Provisions charged to operating expenses
|
|
|
3,312
|
|
|
|
3,679
|
|
|
|
4,424
|
|
|
Loans charged-off
|
|
|
(3,413
|
)
|
|
|
(3,628
|
)
|
|
|
(2,615
|
)
|
|
Recoveries
|
|
|
20
|
|
|
|
24
|
|
|
|
21
|
|
|
Balance, end of period
|
|
$
|
4,074
|
|
|
$
|
4,074
|
|
|
$
|
3,999
|
|
We had eleven loans totaling $6,465,000 at September 30, 2009, categorized as nonaccrual, and nine loans totaling $5,459,000 categorized as nonaccrual at December 31, 2008. We had specific allowances for losses on nonaccrual loans of $334,000 and $385,000 at September 30, 2009 and December 31, 2008, respectively. During
the third quarter of 2009, we charged-down or transferred to other real estate owned nonaccrual loan balances totaling $3,496,000, in addition to specific allowances of $334,000.
We had loans past due 90 days or more and still accruing interest totaling $514,000 and $1,656,000 at September 30, 2009 and December 31, 2008, respectively. Loans over 90 days past due that are well secured and in process of collection remain on accrual status in accordance with regulatory guidelines.
NOTE 6 - LONG-TERM BORROWINGS
A summary of long-term borrowings follows (dollars in thousands):
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
FHLB of Atlanta advances
|
|
$
|
12,300
|
|
|
$
|
6,300
|
|
|
Junior subordinated debentures
|
|
|
3,093
|
|
|
|
3,093
|
|
|
Total long-term borrowings
|
|
$
|
15,393
|
|
|
$
|
9,393
|
|
A summary of the FHLB of Atlanta advances follows (dollars in thousands):
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
Maturity Date
|
|
Interest Rate
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible fixed rate debt
|
11/17/2010
|
|
|
4.45
|
%
|
|
$
|
2,300
|
|
|
$
|
2,300
|
|
|
Fixed rate advances
|
12/20/2010
|
|
|
1.91
|
%
|
|
|
2,000
|
|
|
|
4,000
|
|
|
Fixed rate advance
|
01/09/2012
|
|
|
2.30
|
%
|
|
|
8,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
$
|
12,300
|
|
|
$
|
6,300
|
|
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2009
NOTE 7 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
We are a party to credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit, standby letters of credit, and commercial letters of credit. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the statements of financial condition. Our exposure to credit loss is represented by the contractual amount of these commitments. We follow the same credit policies in making commitments as we do for on-balance sheet instruments. Financial instruments at September 30, 2009, consisted of commitments to extend credit approximating $10.4 million and standby letters of credit of $1.4
million.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity lines of credit may expire without
being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by us, is based on our credit evaluation of the customer.
NOTE 8 - REGULATORY CAPITAL
Oceanside is required to maintain certain minimum regulatory capital requirements. The following is a summary at September 30, 2009, of the regulatory capital requirements and actual capital on a percentage basis for Oceanside:
|
|
|
|
|
|
Regulatory Requirement
|
|
|
|
|
|
|
|
|
|
|
For Well-
|
|
|
|
|
Actual
|
|
|
Adequacy
|
|
|
Capitalized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital ratio to risk-weighted assets
|
|
|
8.49
|
%
|
|
|
8.00
|
%
|
|
|
10.00
|
%
|
|
Tier 1 capital ratio to risk-weighted assets
|
|
|
7.24
|
%
|
|
|
4.00
|
%
|
|
|
6.00
|
%
|
|
Tier 1 capital to average assets
|
|
|
4.75
|
%
|
|
|
4.00
|
%
|
|
|
5.00
|
%
|
At September 30, 2009, Oceanside was adequately capitalized; however, the proposed enforcement action mentioned in
Note 1
will likely require significantly higher capital levels.
NOTE 9 - FAIR VALUE MEASUREMENTS
Fair Value Measurements and Disclosure Topic of the ASC
defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. This standard also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair values:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in market that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2009
NOTE 9 - FAIR VALUE MEASUREMENTS
(Continued)
Atlantic used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:
The table below presents the Atlantic’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2009, aggregated by the level in the fair value hierarchy within which those measurements fall.
|
|
|
Quoted Prices
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
|
(
Level 1
)
|
|
|
(
Level 2
)
|
|
|
(
Level 3
)
|
|
|
Total
|
|
|
Assets (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities, available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government-sponsored
|
|
|
|
|
|
|
|
|
|
|
|
|
|
agency securities
|
|
$
|
-
|
|
|
$
|
152
|
|
|
$
|
-
|
|
|
$
|
152
|
|
|
Mortgage-backed securities
|
|
|
-
|
|
|
|
45,262
|
|
|
|
-
|
|
|
|
45,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
-
|
|
|
$
|
45,414
|
|
|
$
|
-
|
|
|
$
|
45,414
|
|
Securities available-for-sale – The fair value of securities available for sale equals quoted market prices, if available. If quoted market prices are not available, fair value is determined using quoted market prices for similar securities. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange. Level
2 securities include mortgage-backed securities, other pass-through securities and collateralized mortgage obligations of government sponsored entities (GSE’s) and private issuers and obligations of states and political subdivisions.
Certain other assets are measured at fair value on a nonrecurring basis. These adjustments to fair value usually result from application of lower of cost or fair value accounting or write-downs of individual assets due to impairment. For assets measured at fair value on a nonrecurring basis, the following table provides
the level of valuation assumptions used to determine each adjustment and the carrying value of the related individual assets at September 30, 2009.
|
|
|
Quoted Prices
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
|
(
Level 1
)
|
|
|
(
Level 2
)
|
|
|
(
Level 3
)
|
|
|
Total
|
|
|
Assets (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans, net of direct write-off and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
specific valuation allowances
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,131
|
|
|
$
|
6,131
|
|
|
Foreclosed assets
|
|
|
-
|
|
|
|
-
|
|
|
|
2,179
|
|
|
|
2,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,310
|
|
|
$
|
8,310
|
|
Loans – Nonrecurring fair value adjustments to loans reflect full or partial write-downs that are based on the loan’s observable market price or current appraised value of the collateral in accordance with loan impairment accounting guidance. Since the market for impaired loans is not active, loans subjected to nonrecurring
fair value adjustments based on the loan’s observable market price are generally classified as Level 2. Loans subjected to nonrecurring fair value adjustments based on the current appraised value of the collateral may be classified as Level 2 or Level 3 depending on the type of asset and the inputs to the valuation. When appraisals are used to determine impairment and these appraisals are based on a market approach incorporating a dollar-per-square-foot multiple, the related loans are classified
as Level 2. If the appraisals require significant adjustments to market-based valuation inputs or apply an income approach based on unobservable cash flows to measure fair value, the related loans subjected to nonrecurring fair value adjustments are typically classified as Level 3 due to the fact that Level 3 inputs are significant to the fair value measurement.
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2009
NOTE 9 - FAIR VALUE MEASUREMENTS
(Continued)
Foreclosed assets – These assets are reported at the lower of the loan carrying amount at foreclosure (or repossession) or fair value written down by estimated selling costs. Fair value is based on third party appraisals for other real estate owned and other independent sources for repossessed assets, considering the assumptions
in the valuation, and are considered Level 2 or Level 3 inputs.
The following is a summary of activity of assets and liabilities measured at fair value on a nonrecurring basis (dollars in thousands):
|
|
|
Impaired
|
|
|
Foreclosed
|
|
|
|
|
|
|
|
Loans
|
|
|
Assets
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
$
|
5,074
|
|
|
$
|
3,496
|
|
|
$
|
8,570
|
|
|
Gains for the year
|
|
|
-
|
|
|
|
54
|
|
|
|
54
|
|
|
Losses for the year
|
|
|
-
|
|
|
|
(147
|
)
|
|
|
(147
|
)
|
|
Write-downs
|
|
|
(3,321
|
)
|
|
|
(334
|
)
|
|
|
(3,655
|
)
|
|
Net transfers in/out Level 3
|
|
|
4,378
|
|
|
|
(890
|
)
|
|
|
3,488
|
|
|
Balance, end of period
|
|
$
|
6,131
|
|
|
$
|
2,179
|
|
|
$
|
8,310
|
|
NOTE 10 - FAIR VALUE DISCLOSURES
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and Due from Banks, Federal Funds Sold, and Interest-Bearing Deposits
- For those short-term instruments, the carrying amount is a reasonable estimate of fair value.
Investment Securities
- For securities held as investments, fair value equals quoted market price, if available.
If a quoted market price is not available, fair value is estimated using quoted market prices for similar
securities.
Restricted Stock
- Fair value of Atlantic’s investment in Federal Home Loan Bank and correspondent banks’ stock is its cost.
Loans Receivable
- For loans subject to repricing and loans intended for sale within nine months, fair value is estimated at the carrying amount plus accrued interest. The fair value of other types of loans is estimated by discounting the future cash flows using the current
rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
Deposit Liabilities
- The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of long-term fixed maturity certificates of deposit is estimated using the rates currently offered
for deposits of similar remaining maturities.
Other Borrowings
- For short-term debt, including accounts and demand notes payable, the carrying amount is a reasonable estimate of fair value. The fair value of customer repurchase agreements is the amount payable on demand at the reporting date. For long-term
debt, the fair value is estimated using discounted cash flow analyses based on current incremental borrowing rates for similar types of borrowing arrangements.
Off-Balance Sheet Instruments
- Fair values for off-balance sheet lending commitments are based on rates currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.
ATLANTIC BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2009
NOTE 10 - FAIR VALUE DISCLOSURES
(Continued)
Other
- Accrued interest receivable on investment securities and loans and accrued interest payable on deposits and other borrowings are included in investment securities, loans, deposits, and other borrowings, accordingly. The carrying amount is a reasonable estimate
of fair value.
The estimated fair values of Atlantic's financial instruments at September 30, 2009, follow (dollars in thousands):
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
|
Amount
|
|
|
Value
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
Cash and due from banks, federal funds sold, and
|
|
|
|
|
|
|
|
interest-bearing deposits
|
|
$
|
48,034
|
|
|
$
|
48,034
|
|
|
Investment securities and accrued interest receivable
|
|
|
61,130
|
|
|
|
61,501
|
|
|
Restricted stock
|
|
|
1,151
|
|
|
|
1,151
|
|
|
Loans and accrued interest receivable, net of
|
|
|
|
|
|
|
|
|
|
allowance for loan losses
|
|
|
200,065
|
|
|
|
199,150
|
|
|
Total assets valued
|
|
$
|
310,380
|
|
|
$
|
309,836
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
Deposits and accrued interest payable
|
|
$
|
293,571
|
|
|
$
|
294,618
|
|
|
Other borrowings and accrued interest payable
|
|
|
15,675
|
|
|
|
15,675
|
|
|
Total liabilities valued
|
|
$
|
309,246
|
|
|
$
|
310,293
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet Commitments
|
|
$
|
11,797
|
|
|
$
|
11,797
|
|
We are required to report under fair value measurement disclosures that there have been no changes since December 31, 2008, in the valuation techniques and related inputs noted herein.
|
|
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
Overview
Commercial Banking Operations.
Atlantic, through its wholly-owned subsidiary, Oceanside, conducts commercial banking business consisting of attracting deposits and applying those funds to the origination of commercial, consumer, and real estate loans (including commercial
loans collateralized by real estate) and purchases of investments. Our profitability depends primarily on net interest income, which is the difference between interest income generated from interest-earning assets (principally loans, investments, and federal funds sold), less the interest expense incurred on interest-bearing liabilities (customer deposits and borrowed funds). Net interest income is affected by the relative amounts of interest-earning assets and interest-bearing liabilities,
and the interest rate earned and paid on these balances. Net interest income is dependent upon Oceanside’s interest-rate spread, which is the difference between the average yield earned on its interest-earning assets and the average rate paid on its interest-bearing liabilities. When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income. The interest rate spread is impacted by interest
rates, deposit flows, and loan demand. Additionally, and to a lesser extent, our profitability is affected by such factors as the level of noninterest income and expenses, the provision for loan losses, and the effective income tax rate. Noninterest income consists primarily of service fees on deposit accounts and mortgage banking fees. Noninterest expense consists of compensation and employee benefits, occupancy and equipment expenses, deposit insurance premiums paid to the FDIC, and other operating expenses.
Our corporate offices are located at 1315 South Third Street, Jacksonville Beach, Florida. This location is also our main banking office for Oceanside, which opened July 21, 1997, as a state-chartered banking organization. We also operate branch offices located at 560 Atlantic Boulevard, Neptune Beach, Florida, 13799
Beach Boulevard, and 1790 Kernan Boulevard South, Jacksonville, Florida.
Forward-looking Statements
When used in this Form 10-Q, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties including changes in economic conditions in our market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in our market area and competition, that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. We caution readers not to place undue reliance on any such forward-looking statements,
which speak only as to the date made. We advise readers that the factors listed above, as well as others, could affect our financial performance and could cause our actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. We do not undertake, and specifically disclaim any obligation, to publicly release the result of any revisions, which may be made to any forward-looking statements to reflect events or
circumstances after the date of such statements, or to reflect the occurrence of anticipated or unanticipated events.
Future Accounting Requirements
There are currently no pronouncements issued or that are scheduled for implementation during 2009 that are expected to have any significant impact on our accounting policies.
Impact of Inflation
The consolidated financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurements of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due
to inflation. Unlike most industrial companies, substantially all of our assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services, since such prices are affected by inflation to a larger extent than interest rates. As discussed previously,
we seek to manage the relationships between interest-sensitive assets and liabilities in order to protect against wide interest rate fluctuations, including those resulting from inflation.
Critical Accounting Policies
Our accounting and reporting policies are in accordance with U.S. generally accepted accounting principles (“GAAP”), and they conform to general practices within the banking industry. We use a significant amount of judgment and estimates based on assumptions for which the actual results are uncertain when we make the
estimations. We have identified our policy covering the allowance for loan losses as being particularly sensitive in terms of judgments and the extent to which significant estimates are used. For more information on this critical accounting policy, please refer to our 2008 Annual Report on Form 10-K.
Results of Operations
We reported consolidated net losses of $2,214,000 for the three months ended September 30, 2009. During the third quarter of 2009, we reduced the carrying value of two of our nonperforming assets with direct write-downs to the loan balances totaling $3.2 million. We also expensed FDIC assessments of $403,000 in the quarter
ended September 30, 2009, as compared with $45,000 in the same period of 2008. Without these costs, we would have likely posted a small loss reflecting continued adverse economic trends in our market area such as high levels of unemployment and real estate foreclosures.
N
oteworthy improvements since the end of 2008 included reductions in foreclosed assets (other real estate owned and repossessed assets) from $3.5 million at December 31, 2008, to $2.2 million at September 30, 2009, a decrease of 38%. Total nonperforming, classified,
and foreclosed assets decreased $3.8 million, or 12%, to $28.2 million as compared with $32.0 million at December 31, 2008. During this period, we raised our allowance for loan and lease losses from 1.93% to 2.0% of total loans outstanding. Our total exposure to construction, land development, and other land loans declined from $39.1 million to $32.5 million, a decrease of 17%.
Our net loss for the nine months ended September 30, 2009, was $2,217,000, as compared with a net loss of $994,000 in the same period of 2008. In addition to the items discussed above for the third quarter of 2009, we continued to improve our liquidity with total cash and cash equivalents and interest-bearing deposits reaching $48.0
million at September 30, 2009, as compared with $17.2 million at December 31, 2008. While we plan to use these funds to pay additional FDIC assessments and to settle higher costing deposits, this build-up in liquidity throughout 2009 has lowered our net interest margin.
Other significant items affecting 2009 results of operations include:
|
·
|
Higher provisions for loan losses, which totaled $3,679,000 for the nine months ended September 30, 2009, as compared with $2,620,000 for the same period of 2008.
|
|
·
|
Total FDIC assessments of $700,000 in 2009 versus $89,000 in 2008.
|
|
·
|
During the first quarter of 2009, Oceanside Bank reported a write-down of $179,000 on its investment in a correspondent bank, Silverton Bank, National Association. Silverton Bank was closed by federal regulators on May 1, 2009.
|
|
·
|
For the nine months ended September 30, 2009, we also recorded net losses on the sale of foreclosed assets totaling $93,000, which was partially offset by $56,000 in gains on sale of investment securities. No gains or losses were reported during the same period of 2008.
|
|
·
|
Other real estate owned expenses totaled $420,000 for the first nine months of 2009 as compared with $239,000 in 2008.
|
Financial Condition
The following table shows selected ratios for the periods ended or at the dates indicated (annualized for the three and nine months ended September 30, 2009):
|
|
|
Three Months
|
|
Nine Months
|
|
Year Ended
|
|
|
|
Ended
|
|
Ended
|
|
December 31,
|
|
|
|
September 30, 2009
|
|
September 30, 2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets
|
|
|
-2.74
|
%
|
|
|
-1.01
|
%
|
|
|
-0.74
|
%
|
|
Return on average equity
|
|
|
-52.14
|
%
|
|
|
-17.56
|
%
|
|
|
-10.37
|
%
|
|
Interest-rate spread
|
|
|
2.00
|
%
|
|
|
2.33
|
%
|
|
|
2.55
|
%
|
|
Net interest margin
|
|
|
2.29
|
%
|
|
|
2.66
|
%
|
|
|
3.03
|
%
|
|
Noninterest expenses to average assets
|
|
|
2.77
|
%
|
|
|
2.72
|
%
|
|
|
2.94
|
%
|
Liquidity and Capital Resources
Liquidity Management
. Liquidity management involves monitoring the sources and uses of funds in order to meet our day-to-day cash flow requirements while maximizing profits. Liquidity represents the ability of a company to convert assets into cash or cash equivalents
without significant loss and to raise additional funds by increasing liabilities. Liquidity management is made more complicated because different statements of financial condition components are subject to varying degrees of management control. For example, the timing of maturities of the investment portfolio is very predictable and subject to a high degree of control at the time investment decisions are made. However, net deposit inflows and outflows are far less predictable
and are not subject to the same degree of control. Asset liquidity is provided by cash and assets that are readily marketable, which can be pledged, or which will mature in the near future. Liability liquidity is provided by access to core funding sources, principally the ability to generate customer deposits in our market area. In addition, liability liquidity is provided through the ability to borrow against approved lines of credit (federal funds purchased) from correspondent banks and
to borrow on a secured basis through securities sold under agreements to repurchase.
We expect to meet our liquidity needs with:
|
·
|
Available cash, including both interest and noninterest-bearing balances, and federal funds sold, which totaled $48.0 million at September 30, 2009;
|
|
·
|
The repayment of loans, which include loans with a remaining maturity of one year or less (excluding those in nonaccrual status) totaling $46.8 million;
|
|
·
|
Proceeds of unpledged securities available-for-sale and principal repayments from mortgage-backed securities;
|
|
·
|
Retention of and growth in deposits; and,
|
|
·
|
If necessary, borrowing against approved lines of credit and other alternative funding strategies.
|
Short-Term Investments.
Short-term investments (which consist of federal funds sold, interest-bearing deposits, and investment securities maturing in three months or less) were $48.1 million at September 30, 2009, as compared to $254,000 at December 31, 2008. We
regularly review our liquidity position and have implemented internal policies that establish guidelines for sources of asset-based liquidity and limit the total amount of purchased funds used to support the statement of financial condition and funding from non-core sources. To further enhance our liquidity, we have developed alternative funding strategies that have been approved by our Board of Directors. Alternate funding strategies include (dollars in thousands):
|
Lines of credit to purchase federal funds:
|
|
|
|
|
Secured
|
|
$
|
8,000
|
|
|
Unsecured
(1)
|
|
|
2,000
|
|
|
Federal Reserve discount window
(1)
|
|
|
3,131
|
|
|
Federal Home Loan Bank of Atlanta
|
|
|
8,283
|
|
|
|
|
$
|
21,414
|
|
|
(1)
Subject to prior approval
|
|
|
|
|
Emergency Economic Stabilization Act of 2008
. In October 2008, the Emergency Economic Stabilization Act of 2008 (“EESA”) was signed into law. The EESA temporarily revises the federal deposit insurance laws by increasing the basic deposit insurance coverage
from $100,000 to $250,000 per depositor. This revision is currently effective through December 31, 2013. The EESA also authorized the United States Department of the Treasury to implement programs to provide financial assistance and/or support to financial institutions. We have not participated in any such programs.
Deposits and Other Sources of Funds
. In addition to deposits, the sources of funds available for lending and other business purposes include loan repayments, loan sales, securities sold under agreements to repurchase, and advances under approved borrowings from the Federal
Home Loan Bank of Atlanta. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows are influenced significantly by general interest rates and money market conditions. Borrowings may be used on a short-term basis to compensate for reductions in other sources, such as deposits at less than projected levels.
Core Deposits
. Core deposits, which exclude certificates of deposit of $100,000 or more, provide a relatively stable funding source for our loan portfolio and other earning assets. We had core deposits totaling $247.0 million at September 30, 2009, and $188.1 million
at December 31, 2008, an increase of 31.3%. We anticipate that a stable base of deposits will be our primary source of funding to meet both short-term and long-term liquidity needs in the future.
Customers with large certificates of deposit tend to be extremely sensitive to interest rate levels, making these deposits less reliable sources of funding for liquidity planning purposes than core deposits. Some financial institutions acquire funds in part through large certificates of deposit obtained through brokers. These
brokered deposits have been historically expensive and unreliable as long-term funding sources. More recently, the brokered funds have become less expensive than local deposits. Brokered certificates of deposit issued by us totaled $23.1 million at September 30, 2009, and $26.3 million at December 31, 2008, a decrease of 12.2%.
We use our resources principally to fund existing and continuing loan commitments and to purchase investment securities. At September 30, 2009, we had commitments to extend credit totaling $10.4 million, and had issued, but unused, standby letters of credit of $1.4 million for the same period. In addition, scheduled maturities
of certificates of deposit during the twelve months following September 30, 2009, total $108.0 million. We believe that adequate resources exist to fund all our anticipated commitments.
Capital
. We are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that,
if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective actions, 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. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and
other factors. FDIC’s Prompt Corrective Action regulations are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets (as defined in the regulations).
As of the most recent reporting period for the quarter ended September 30, 2009, Oceanside’s ratios exceeded the minimum levels. An institution must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following tables. At September 30, 2009, Oceanside’s actual
capital amounts and percentages are presented in the following table (dollars in thousands):
|
|
|
Actual
|
|
|
Minimum
(1)
|
|
|
Well-Capitalized
(2)
|
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk-weighted assets
|
|
$
|
17,716
|
|
|
|
8.49
|
%
|
|
$
|
16,685
|
|
|
|
8.00
|
%
|
|
$
|
20,856
|
|
|
|
10.00
|
%
|
|
Tier 1 capital to risk-weighted assets
|
|
$
|
15,091
|
|
|
|
7.24
|
%
|
|
$
|
8,343
|
|
|
|
4.00
|
%
|
|
$
|
12,514
|
|
|
|
6.00
|
%
|
|
Tier 1 capital to average assets
|
|
$
|
15,091
|
|
|
|
4.75
|
%
|
|
$
|
12,712
|
|
|
|
4.00
|
%
|
|
$
|
15,891
|
|
|
|
5.00
|
%
|
|
(1)
|
The minimum required for adequately capitalized purposes.
|
|
(2)
|
To be "well-capitalized" under the FDIC's Prompt Corrective Action regulations for banks.
|
Notes 1
and
8
to
Condensed Consolidated Financial Statements
discuss events that may affect Oceanside’s required level of capital to maintain in the future.
We have developed policies and procedures for evaluating the overall quality of our credit portfolio and the timely identification of potential problem loans. Our judgment as to the adequacy of the allowance is based upon a number of assumptions about future events that we believe to be reasonable, but which may or may not be valid. Thus,
there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the loan loss allowance will not be required.
Asset Classification.
Commercial banks are required to review and, when appropriate, classify their assets on a regular basis. The State of Florida and the FDIC have the authority to identify problem assets and, if appropriate, require them to be classified or require
a harsher classification than management has assessed. There are three classifications for problem (or classified) assets: substandard, doubtful, and loss. Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection
or liquidation in full on the basis of currently existing facts, conditions, and values questionable, and there is a high possibility of loss. An asset classified as loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. If an asset or portion thereof is classified as loss, the insured institution establishes a specific reserve for the full amount of the portion of the asset classified as loss. All or a portion
of general loss allowances established to cover possible losses related to assets classified as substandard or doubtful may be included in determining an institution's regulatory capital, while specific valuation allowances for loan losses generally do not qualify as regulatory capital.
Assets that do not warrant classification in the aforementioned categories, but possess weaknesses, are classified by us as special mention and monitored. We also monitor other loans based on a variety of factors and internally designate these loans as watch list loans.
Management monitors our loan portfolio throughout the month for classification changes. Each quarter, we perform a detailed internal review to determine an appropriate level of reserves to set aside for probable losses in our loan portfolio. We supplement our internal reviews with semiannual external loan review performed
by an independent public accounting firm. The regulatory agencies also have the authority to require additional levels of reserves if they deem necessary despite management’s best efforts to establish an appropriate level of reserves consistent with generally accepted accounting principles. Sometimes our collective assessments from internal and loan reviews may differ from the regulatory assessment.
Allowance for Loan Losses
. The allowance for loan losses is established through a provision for loan losses charged against income. Loans are charged against the allowance when we believe that the collectibility of principal is unlikely. The provision
is an estimated amount that we believe will be adequate to absorb probable losses inherent in the loan portfolio based on evaluations of its collectibility. The evaluations take into consideration such factors as changes in the nature and volume of the portfolio, overall portfolio quality, specific problem loans and commitments, and current anticipated economic conditions that may affect the borrower's ability to pay. While we use the best information available to recognize losses on loans,
future additions to the provision may be necessary based on changes in economic conditions. A summary of balances in the allowance for loan losses and key ratios follows (dollars in thousands):
|
|
|
For the Nine
|
|
|
For the Twelve
|
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
End of period loans (net of deferred fees)
|
|
$
|
203,345
|
|
|
$
|
207,029
|
|
|
End of period allowance for loan losses
|
|
$
|
4,074
|
|
|
$
|
3,999
|
|
|
% of allowance for loan losses to total loans
|
|
|
2.00
|
%
|
|
|
1.93
|
%
|
|
Average loans for the period
|
|
$
|
207,569
|
|
|
$
|
203,675
|
|
|
Net charge-offs as a percentage of average loans
|
|
|
|
|
|
|
|
|
|
for the period (annualized for 2009)
|
|
|
2.32
|
%
|
|
|
1.27
|
%
|
|
Nonperforming assets:
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans
|
|
$
|
6,465
|
|
|
$
|
5,459
|
|
|
Loans past due 90 days or more and still accruing
|
|
|
1,028
|
|
|
|
1,656
|
|
|
Foreclosed real estate
|
|
|
2,179
|
|
|
|
3,421
|
|
|
Other repossessed assets
|
|
|
-
|
|
|
|
75
|
|
|
|
|
$
|
9,672
|
|
|
$
|
10,611
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans to period end net loans
|
|
|
3.18
|
%
|
|
|
2.64
|
%
|
|
Nonperforming assets to period end total assets
|
|
|
2.96
|
%
|
|
|
3.96
|
%
|
At September 30, 2009, we had 46 loans totaling approximately $26.0 million classified as substandard or doubtful. We had no loans classified as loss at September 30, 2009. At September 30, 2009, management had provided specific reserves totaling $1.6 million for loans risk-rated substandard or worse.
Our internally-classified loans declined $2.5 million to $26.0 million from December 31, 2008, levels of $28.5 million, our nonperforming assets declined, which included a reduction in other real estate owned and foreclosed assets of $1.2 million, or 36.3%, due principally to sales of other real estate.
Included in our total classified loans of $26.0 million, we internally monitor classified loans that we believe continue to meet the regulatory definition of performing loans. While we may experience losses, many of these loans are believed to be well-secured. On October 30, 2009, the federal regulatory agencies issued
a policy statement on prudent CRE loan workouts that may result in a removal of certain CRE loans currently classified as substandard with potential collateral shortfalls but with documented capacity of the borrower to service the current principal and interest payments. Accordingly, during the fourth quarter of 2009, management will implement this policy statement.
Additional Disclosures - Higher Risk Loans.
Certain types of loans, such as option ARM products, junior lien mortgages, high loan-to-value ratio mortgages, interest only loans (which are generally associated with construction and development loans), subprime loans, and loans
with initial teaser rates, can have a greater risk of non-collection than other loans. We have not engaged in the practice of lending in the subprime market or offering loans with initial teaser rates and option ARM products. A summary of our loan portfolio by loan type follows:
|
|
|
As of September 30, 2009
|
|
|
As of December 31, 2008
|
|
|
|
|
|
|
|
% of
|
|
|
% of
|
|
|
|
|
|
|
|
Amount
|
|
|
Total
|
|
|
Amount
|
|
|
Total
|
|
|
Commercial real estate (including multifamily)
|
|
$
|
98,759
|
|
|
|
48
|
%
|
|
$
|
93,228
|
|
|
|
45
|
%
|
|
Commercial and industrial
|
|
|
11,984
|
|
|
|
6
|
%
|
|
|
13,314
|
|
|
|
6
|
%
|
|
Residential real estate, secured by first liens
|
|
|
33,068
|
|
|
|
16
|
%
|
|
|
33,836
|
|
|
|
16
|
%
|
|
Residential real estate, secured by junior liens
|
|
|
7,973
|
|
|
|
4
|
%
|
|
|
5,732
|
|
|
|
3
|
%
|
|
Consumer
|
|
|
3,091
|
|
|
|
2
|
%
|
|
|
3,548
|
|
|
|
2
|
%
|
|
Construction and development
|
|
|
32,495
|
|
|
|
16
|
%
|
|
|
39,135
|
|
|
|
19
|
%
|
|
Home equity
|
|
|
15,975
|
|
|
|
8
|
%
|
|
|
18,236
|
|
|
|
9
|
%
|
|
Total loans
|
|
|
203,345
|
|
|
|
100
|
%
|
|
|
207,029
|
|
|
|
100
|
%
|
|
Allowance for loan losses
|
|
|
(4,074
|
)
|
|
|
|
|
|
|
(3,999
|
)
|
|
|
|
|
|
Loans, net
|
|
$
|
199,271
|
|
|
|
|
|
|
$
|
203,030
|
|
|
|
|
|
Substantially all our loans are in our trade area and have been affected by economic and real estate trends in North Florida. Our increases in past due loans, nonperforming assets, charge-offs, and allowance for loan losses over historical levels are directly related to declines in real estate activity, collateral values, and other
negative economic trends such as rising unemployment. We monitor a number of key ratios to identify risks and focus management efforts to mitigate our exposure. We monitor loans in excess of federal supervisory loan-to-value limits. Such loans totaled $11.5 million and $12.9 at September 30, 2009 and December 31, 2008, respectively. Delinquency statistics and charge-off data by loan type follow:
|
As of September 30, 2009
|
|
Past Due
30-89
Days and
Still
Accruing
|
|
|
% of
Total
Loans
|
|
|
Past Due 90
or More
Days and
Still
Accruing
|
|
|
% of
Total
Loans
|
|
|
Non-
accrual
Loans
|
|
|
% of
Total
Loans
|
|
|
Total
Past Due
Loans
|
|
|
% of
Total
Loans
|
|
|
Commercial real estate (including multifamily)
|
|
$
|
34
|
|
|
|
0.03
|
%
|
|
$
|
-
|
|
|
|
0.00
|
%
|
|
$
|
1,746
|
|
|
|
1.77
|
%
|
|
$
|
1,780
|
|
|
|
1.80
|
%
|
|
Commercial and industrial
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
Residential real estate, secured by first liens
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
465
|
|
|
|
1.41
|
%
|
|
|
2,700
|
|
|
|
8.16
|
%
|
|
|
3,165
|
|
|
|
9.57
|
%
|
|
Residential real estate, secured by junior liens
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
Consumer
|
|
|
31
|
|
|
|
1.00
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
31
|
|
|
|
1.00
|
%
|
|
Construction and development
|
|
|
8
|
|
|
|
0.02
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
2,019
|
|
|
|
6.21
|
%
|
|
|
2,027
|
|
|
|
6.24
|
%
|
|
Home equity
|
|
|
51
|
|
|
|
0.32
|
%
|
|
|
49
|
|
|
|
0.31
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
100
|
|
|
|
0.63
|
%
|
|
Total loans
|
|
$
|
124
|
|
|
|
0.06
|
%
|
|
$
|
514
|
|
|
|
0.25
|
%
|
|
$
|
6,465
|
|
|
|
3.18
|
%
|
|
$
|
7,103
|
|
|
|
3.49
|
%
|
|
As of December 31, 2008
|
|
Past Due
30-89
Days and
Still
Accruing
|
|
|
% of
Total
Loans
|
|
|
Past Due 90
or More
Days and
Still
Accruing
|
|
|
% of
Total
Loans
|
|
|
Non-
accrual
Loans
|
|
|
% of
Total
Loans
|
|
|
Total
Past Due
Loans
|
|
|
% of
Total
Loans
|
|
|
Commercial real estate (including multifamily)
|
|
$
|
1,740
|
|
|
|
1.87
|
%
|
|
$
|
205
|
|
|
|
0.22
|
%
|
|
$
|
-
|
|
|
|
0.00
|
%
|
|
$
|
1,945
|
|
|
|
2.09
|
%
|
|
Commercial and industrial
|
|
|
242
|
|
|
|
1.82
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
242
|
|
|
|
1.82
|
%
|
|
Residential real estate, secured by first liens
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
1,462
|
|
|
|
4.32
|
%
|
|
|
1,462
|
|
|
|
4.32
|
%
|
|
Residential real estate, secured by junior liens
|
|
|
95
|
|
|
|
1.66
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
95
|
|
|
|
1.66
|
%
|
|
Consumer
|
|
|
25
|
|
|
|
0.70
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
28
|
|
|
|
0.79
|
%
|
|
|
53
|
|
|
|
1.49
|
%
|
|
Construction and development
|
|
|
1,103
|
|
|
|
2.82
|
%
|
|
|
1,451
|
|
|
|
3.71
|
%
|
|
|
3,793
|
|
|
|
9.69
|
%
|
|
|
6,347
|
|
|
|
16.22
|
%
|
|
Home equity
|
|
|
135
|
|
|
|
0.74
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
176
|
|
|
|
0.97
|
%
|
|
|
311
|
|
|
|
1.71
|
%
|
|
Total loans
|
|
$
|
3,340
|
|
|
|
1.61
|
%
|
|
$
|
1,656
|
|
|
|
0.80
|
%
|
|
$
|
5,459
|
|
|
|
2.64
|
%
|
|
$
|
10,455
|
|
|
|
5.05
|
%
|
The following shows the increases (decreases) in delinquent loans at September 30, 2009, as compared with December 31, 2008. While we cannot predict future trends in delinquencies, we have noted improvements in most categories and the reduction in loans past due 30-89 days will likely improve charge-offs over time.
|
Increases (Decreases)
|
|
Past Due
30-89 Days
and Still
Accruing
|
|
|
Past Due
90 or More
Days and
Still
Accruing
|
|
|
Nonaccrual
Loans
|
|
|
Total Past
Due Loans
|
|
|
Commercial real estate (including multifamily)
|
|
$
|
(1,706
|
)
|
|
$
|
(205
|
)
|
|
$
|
1,746
|
|
|
$
|
(165
|
)
|
|
Commercial and industrial
|
|
|
(242
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(242
|
)
|
|
Residential real estate, secured by first liens
|
|
|
-
|
|
|
|
465
|
|
|
|
1,238
|
|
|
|
1,703
|
|
|
Residential real estate, secured by junior liens
|
|
|
(95
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(95
|
)
|
|
Consumer
|
|
|
6
|
|
|
|
-
|
|
|
|
(28
|
)
|
|
|
(22
|
)
|
|
Construction and development
|
|
|
(1,095
|
)
|
|
|
(1,451
|
)
|
|
|
(1,774
|
)
|
|
|
(4,320
|
)
|
|
Home equity
|
|
|
(84
|
)
|
|
|
49
|
|
|
|
(176
|
)
|
|
|
(211
|
)
|
|
Total loans
|
|
$
|
(3,216
|
)
|
|
$
|
(1,142
|
)
|
|
$
|
1,006
|
|
|
$
|
(3,352
|
)
|
Loans restructured and in compliance with modified terms are commonly referred to as “troubled debt restructurings.” A restructuring of debt constitutes a Troubled Debt Restructuring (“TDR”) if a creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession
to the debtor it would not otherwise consider. A summary of loans we classified TDR follows (dollars in thousands):
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Loans restructured and in compliance with modified terms
|
|
$
|
4,735
|
|
|
$
|
3,566
|
|
|
Loans restructured and past due 30-89 days
|
|
|
-
|
|
|
|
53
|
|
|
Loans restructured and in nonaccrual status
|
|
|
1,889
|
|
|
|
4,386
|
|
|
|
|
$
|
6,624
|
|
|
$
|
8,005
|
|
We have been consistent in our practice of determining our allowance for loan losses with only minor refinements in establishing reserves for our performing loans. We consider the following in establishing reserves on loans other than impaired loans, which are assigned a specific reserve and/or charged-down to estimated fair value
less costs to liquidate:
|
·
|
Recent historical loss data over the past five quarters is used as a starting point for estimating current losses;
|
|
·
|
We consider various economic and other qualitative factors affecting loan quality including changes in:
|
|
·
|
the volume (and trends) of delinquent and monitored loans,
|
|
·
|
underlying collateral values,
|
|
·
|
concentrations in risk and levels of concentration risks,
|
|
·
|
quality of internal and external loan reviews, which includes risk-rating our loans according to federal regulatory guidelines,
|
|
·
|
competition and regulatory factors,
|
|
·
|
lending staff experience,
|
|
·
|
business and economic conditions, and
|
|
·
|
In developing loss factors, we consider both internal historical data and external data such as changes in leading economic indicators, consumer price index, delinquencies, employment data, cap rates, occupancy levels, rental rates, and single-family homes and condominium sales prices and sales activity.
|
We maintain formal policies that we believe are consistent with federal regulatory guidance for identifying and quantifying risks related to loan quality and other related matters including but not limited to:
|
·
|
the frequency of internal and external loan reviews,
|
|
·
|
obtaining appraisals or evaluations for monitored loans,
|
|
·
|
classifying loans from accrual to nonaccrual status (which is typically done when a loan reaches 90 days past due unless well-secured and in process of collection),
|
|
·
|
recognizing loan charge-offs on impaired loans, and
|
|
·
|
exercising judgment in determining the allowance for loan losses consistent with generally accepted accounting principles.
|
Interest Rate Risk
Our asset base is exposed to risk including the risk resulting from changes in interest rates and changes in the timing of cash flows. We monitor the effect of such risks by considering the mismatch of the maturities of our assets and liabilities in the current interest rate environment and the sensitivity of assets and liabilities
to changes in interest rates. We have considered the effect of significant increases and decreases in interest rates and believe such changes, if they occurred, would be manageable, and would not affect our ability to hold our assets as planned. However, we would be exposed to significant market risk in the event of significant and prolonged interest rate changes.
Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises primarily from interest rate risk inherent in our lending and deposit-taking activities. We have little or no risk related to trading accounts, commodities or foreign exchange.
We do not engage in trading or hedging activities and do not invest in interest-rate derivatives or enter into interest- rate swaps. We actively monitor and manage interest-rate risk exposure. The primary objective in managing interest-rate risk is to limit, within established guidelines, the adverse impact of changes
in interest rates on our net interest income and capital, while adjusting our asset-liability structure to obtain the maximum yield-cost spread on that structure. We rely primarily on the asset-liability structure to control interest-rate risk. However, a sudden and substantial change in interest rates could adversely impact our earnings, to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent, or on the same basis. There
have been no significant changes in our market risk exposure since December 31, 2008.
Average Balances, Income and Expenses, and Rates
The following table depicts, for the periods indicated, certain information related to our average statements of financial condition and our average yields on assets and average costs of liabilities. Such yields are derived by dividing income or expense by the average balance of the corresponding assets or liabilities. Average
balances have generally been derived from daily averages (dollars in thousands):
|
|
|
For the Three Months Ended September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
|
|
|
Average
|
|
|
and
|
|
|
Yield/
|
|
|
Average
|
|
|
and
|
|
|
Yield/
|
|
|
|
|
Balance
|
|
|
Dividends
|
|
|
Rate
|
|
|
Balance
|
|
|
Dividends
|
|
|
Rate
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
207,468
|
|
|
$
|
3,083
|
|
|
|
5.90
|
%
|
|
$
|
206,206
|
|
|
$
|
3,345
|
|
|
|
6.45
|
%
|
|
Investment securities and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest-bearing deposits
(1)
|
|
|
92,206
|
|
|
|
340
|
|
|
|
1.89
|
%
|
|
|
35,169
|
|
|
|
399
|
|
|
|
5.66
|
%
|
|
Other interest-earning assets
|
|
|
-
|
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
1,161
|
|
|
|
8
|
|
|
|
2.74
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
(1)
|
|
|
299,674
|
|
|
|
3,423
|
|
|
|
4.66
|
%
|
|
|
242,536
|
|
|
|
3,752
|
|
|
|
6.32
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning assets
|
|
|
20,966
|
|
|
|
|
|
|
|
|
|
|
|
17,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
320,640
|
|
|
|
|
|
|
|
|
|
|
$
|
259,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand, money market
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and NOW deposits
|
|
$
|
108,525
|
|
|
|
522
|
|
|
|
1.91
|
%
|
|
$
|
39,124
|
|
|
|
233
|
|
|
|
2.37
|
%
|
|
Savings
|
|
|
2,951
|
|
|
|
8
|
|
|
|
1.08
|
%
|
|
|
2,959
|
|
|
|
7
|
|
|
|
0.94
|
%
|
|
Certificates of deposit
|
|
|
140,739
|
|
|
|
1,127
|
|
|
|
3.18
|
%
|
|
|
143,961
|
|
|
|
1,614
|
|
|
|
4.46
|
%
|
|
Other borrowings
|
|
|
15,401
|
|
|
|
136
|
|
|
|
3.50
|
%
|
|
|
26,620
|
|
|
|
168
|
|
|
|
2.51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
267,616
|
|
|
|
1,793
|
|
|
|
2.66
|
%
|
|
|
212,664
|
|
|
|
2,022
|
|
|
|
3.78
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities
|
|
|
36,178
|
|
|
|
|
|
|
|
|
|
|
|
28,631
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
16,846
|
|
|
|
|
|
|
|
|
|
|
|
18,506
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stockholders’ equity
|
|
$
|
320,640
|
|
|
|
|
|
|
|
|
|
|
$
|
259,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
provision for loan losses
|
|
|
|
|
|
$
|
1,630
|
|
|
|
|
|
|
|
|
|
|
$
|
1,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-rate spread
|
|
|
|
|
|
|
|
|
|
|
2.00
|
%
|
|
|
|
|
|
|
|
|
|
|
2.54
|
%
|
|
Net interest margin
(1)
|
|
|
|
|
|
|
|
|
|
|
2.29
|
%
|
|
|
|
|
|
|
|
|
|
|
3.00
|
%
|
|
Ratio of average interest-earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to average interest-bearing liabilities
|
|
|
111.98
|
%
|
|
|
|
|
|
|
|
|
|
|
114.05
|
%
|
|
|
|
|
|
|
|
|
(1)
Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental rate of 37.6% for purposes of computing the average yield/rate.
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
Average
|
|
|
and
|
|
|
Yield/
|
|
|
Average
|
|
|
and
|
|
|
Yield/
|
|
|
|
|
Balance
|
|
|
Dividends
|
|
|
Rate
|
|
|
Balance
|
|
|
Dividends
|
|
|
Rate
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
207,569
|
|
|
$
|
9,335
|
|
|
|
6.01
|
%
|
|
$
|
202,258
|
|
|
$
|
10,303
|
|
|
|
6.80
|
%
|
|
Investment securities and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest-bearing deposits
(1)
|
|
|
62,232
|
|
|
|
988
|
|
|
|
2.77
|
%
|
|
|
38,031
|
|
|
|
1,283
|
|
|
|
5.58
|
%
|
|
Other interest-earning assets
|
|
|
735
|
|
|
|
1
|
|
|
|
0.18
|
%
|
|
|
1,414
|
|
|
|
28
|
|
|
|
2.65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
(1)
|
|
|
270,536
|
|
|
|
10,324
|
|
|
|
5.25
|
%
|
|
|
241,703
|
|
|
|
11,614
|
|
|
|
6.59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning assets
|
|
|
22,758
|
|
|
|
|
|
|
|
|
|
|
|
17,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
293,294
|
|
|
|
|
|
|
|
|
|
|
$
|
258,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand, money market
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and NOW deposits
|
|
$
|
79,837
|
|
|
|
1,080
|
|
|
|
1.81
|
%
|
|
$
|
40,026
|
|
|
|
769
|
|
|
|
2.57
|
%
|
|
Savings
|
|
|
2,912
|
|
|
|
22
|
|
|
|
1.01
|
%
|
|
|
3,013
|
|
|
|
25
|
|
|
|
1.11
|
%
|
|
Certificates of deposit
|
|
|
141,023
|
|
|
|
3,737
|
|
|
|
3.54
|
%
|
|
|
146,818
|
|
|
|
5,186
|
|
|
|
4.72
|
%
|
|
Other borrowings
|
|
|
15,982
|
|
|
|
397
|
|
|
|
3.32
|
%
|
|
|
21,683
|
|
|
|
492
|
|
|
|
3.03
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
239,754
|
|
|
|
5,236
|
|
|
|
2.92
|
%
|
|
|
211,540
|
|
|
|
6,472
|
|
|
|
4.09
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities
|
|
|
36,662
|
|
|
|
|
|
|
|
|
|
|
|
28,380
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
16,878
|
|
|
|
|
|
|
|
|
|
|
|
18,846
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stockholders’ equity
|
|
$
|
293,294
|
|
|
|
|
|
|
|
|
|
|
$
|
258,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
provision for loan losses
|
|
|
|
|
|
$
|
5,088
|
|
|
|
|
|
|
|
|
|
|
$
|
5,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-rate spread
|
|
|
|
|
|
|
|
|
|
|
2.33
|
%
|
|
|
|
|
|
|
|
|
|
|
2.50
|
%
|
|
Net interest margin
(1)
|
|
|
|
|
|
|
|
|
|
|
2.66
|
%
|
|
|
|
|
|
|
|
|
|
|
3.01
|
%
|
|
Ratio of average interest-earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to average interest-bearing liabilities
|
|
|
112.84
|
%
|
|
|
|
|
|
|
|
|
|
|
114.26
|
%
|
|
|
|
|
|
|
|
|
(1)
Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental rate of 37.6% for purposes of computing the average yield/rate.
Analysis of Changes in Net Interest Income
The following table sets forth, on a taxable equivalent basis, the effect which varying levels of interest-earning assets and interest-bearing liabilities and the applicable interest rates had on changes in net interest income for the three and nine months periods ended September 30, 2009, compared to the same periods in 2008. For
purposes of this table, changes which are not solely attributable to volume or rate are allocated to volume and rate on a pro rata basis (dollars in thousands):
|
|
|
Three Months Ended September 30,
|
|
|
|
|
2009 vs. 2008
|
|
|
|
|
Increase (Decrease) Due to
|
|
|
|
|
|
|
|
|
|
|
Rate/
|
|
|
|
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Volume
|
|
|
Total
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
(286
|
)
|
|
$
|
21
|
|
|
$
|
3
|
|
|
$
|
(262
|
)
|
|
Investment securities and interest-bearing deposits
|
|
|
(334
|
)
|
|
|
814
|
|
|
|
(539
|
)
|
|
|
(59
|
)
|
|
Other interest-earning assets
|
|
|
(8
|
)
|
|
|
(8
|
)
|
|
|
8
|
|
|
|
(8
|
)
|
|
Total interest-earning assets
|
|
|
(628
|
)
|
|
|
827
|
|
|
|
(528
|
)
|
|
|
(329
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand, money market and NOW deposits
|
|
|
(45
|
)
|
|
|
415
|
|
|
|
(81
|
)
|
|
|
289
|
|
|
Savings
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
Certificates of deposit
|
|
|
(464
|
)
|
|
|
(36
|
)
|
|
|
13
|
|
|
|
(487
|
)
|
|
Other borrowings
|
|
|
66
|
|
|
|
(71
|
)
|
|
|
(27
|
)
|
|
|
(32
|
)
|
|
Total interest-bearing liabilities
|
|
|
(442
|
)
|
|
|
308
|
|
|
|
(95
|
)
|
|
|
(229
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
(186
|
)
|
|
$
|
519
|
|
|
$
|
(433
|
)
|
|
$
|
(100
|
)
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2009 vs. 2008
|
|
|
|
|
Increase (Decrease) Due to
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate/
|
|
|
|
|
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Volume
|
|
|
Total
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
(1,196
|
)
|
|
$
|
270
|
|
|
$
|
(42
|
)
|
|
$
|
(968
|
)
|
|
Investment securities and interest-bearing deposits
|
|
|
(800
|
)
|
|
|
1,011
|
|
|
|
(506
|
)
|
|
|
(295
|
)
|
|
Other interest-earning assets
|
|
|
(26
|
)
|
|
|
(13
|
)
|
|
|
12
|
|
|
|
(27
|
)
|
|
Total interest-earning assets
|
|
|
(2,022
|
)
|
|
|
1,268
|
|
|
|
(536
|
)
|
|
|
(1,290
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand, money market and NOW deposits
|
|
|
(228
|
)
|
|
|
766
|
|
|
|
(227
|
)
|
|
|
311
|
|
|
Savings
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
(3
|
)
|
|
Certificates of deposit
|
|
|
(1,297
|
)
|
|
|
(205
|
)
|
|
|
53
|
|
|
|
(1,449
|
)
|
|
Other borrowings
|
|
|
47
|
|
|
|
(129
|
)
|
|
|
(13
|
)
|
|
|
(95
|
)
|
|
Total interest-bearing liabilities
|
|
|
(1,480
|
)
|
|
|
431
|
|
|
|
(187
|
)
|
|
|
(1,236
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
(542
|
)
|
|
$
|
837
|
|
|
$
|
(349
|
)
|
|
$
|
(54
|
)
|
Comparison of Three Months Ended September 30, 2009 and 2008
Interest Income and Expense
Interest Income
. Interest income was $3,423,000 and $3,752,000 for the three months ended September 30, 2009 and 2008, respectively, a decline of $329,000, or 8.8%. A decrease in yields on average interest-earning assets of 166 basis points was not offset by the
increase in average earning assets of $57.1 million, or 23.6%. Substantially all of the increase was due to higher levels of interest-bearing deposits that contributed to the steep decline in yields for investment securities and interest-bearing deposits of 377 basis points. Average loans grew $1.3 million over 2008, or 0.6%. The declining interest rate environment and the effect of increased nonaccrual loans, restructured loans, and other real estate owned contributed to lower
yields on average loans of 5.90% versus 6.45%, a decline of 55 basis points. Average loans, as a percentage of average interest-earning assets, decreased to 69.2% in the third quarter of 2009 as compared with 85.0% in 2008. The percentage of average investment securities and interest-bearing deposits to total interest-earning assets rose to 30.8% in 2009 from 14.5% in 2008.
Interest Expense.
Interest expense was $1,793,000 and $2,022,000 for the three months ended September 30, 2009 and 2008, respectively. Our average cost of funds for interest-bearing liabilities decreased to 2.66% in 2009 compared with 3.78% over the same period
in 2008, an overall decline of 112 basis points. A shift in the mix of our interest-bearing deposits, along with decreases in the overall interest rates in our market area, contributed to the decrease in our cost of funds. Certificates of deposit, with an average cost of funds of 3.18% in 2009 and 4.46% in 2008, represented 52.6% of our total interest-bearing liabilities in 2009 as compared with 67.7% in 2008. The decline in average certificates of deposit and other interest-bearing
liabilities were more than offset by increases in our interest-bearing demand deposits, with an average cost of funds of 1.91% in 2009 and 2.37% in 2008, representing 40.6% of our total interest-bearing liabilities in 2009 as compared with 18.4% in 2008.
With the recent changes in FDIC-insured levels for certain deposits, we have seen a shift from customer repurchase agreements (short-term other borrowings) into interest-bearing demand deposits. For the third quarter of 2009, we had no customer repurchase agreements versus $11.1 million in the same period of 2008. At
September 30, 2009, we had $200,000 in federal funds purchased versus none at September 30, 2008.
Net Interest Income before Provision for Loan Losses
. Net interest income before provision for loan losses was $1,630,000 and $1,730,000 for the three months ended September 30, 2009 and 2008, respectively. The net interest margin for the third quarter of 2009 was
2.29% versus 3.00% in 2008, which reflected our decision to invest the additional core deposits obtained in 2009 into lower-yielding interest-bearing deposits. We temporarily invested these funds in interest-bearing deposits to improve our overall liquidity position, as mentioned earlier.
Provision for Loan Losses
We recorded provisions for loan losses totaling $3,312,000 and $1,735,000 for the three months ended September 30, 2009 and 2008, respectively, which management considered appropriate after its assessment of the overall quality of the loan portfolio. During the third quarter of 2009, we replenished our reserves to 2.00% of outstanding
loans after recognizing net charge-offs of $3.4 million. Two loans accounted for 94% of the charge-offs in the quarter, with costs to repair construction-related damage in one multi-family real estate project estimated at $1.2 million. We will aggressively pursue claims against the builder and the insurance company; however, we cannot predict the extent of any recoveries. Therefore, we charged-down the loan for those estimated costs.
Noninterest Income and Expenses
Noninterest Income.
Total noninterest income decreased by $69,000, or 23.3% for the three months ended September 30, 2009, to $227,000 compared with $296,000 for the same period in 2008. The third quarter of 2009 versus 2008 included reduction in other fee income
of $31,000, or 86.1%, lower dividends of $9,000, and losses on sale of other real estate owned of $20,000.
Noninterest Expenses.
Management has taken steps to reduce noninterest expenses in areas in which it can without significantly affecting the safety and soundness of our banking operations. Salaries and employee benefits decreased $79,000, or 10.1%, in the third
quarter of 2009 over 2008. Expenses of bank premises and fixed assets decreased $19,000, or 6.8%. Director fees have been eliminated and advertising reduced. Other components of noninterest expenses increased $528,000, or 70.9%. The more significant increases were:
|
·
|
Higher legal and audit expenses of $35,000;
|
|
·
|
Increases in other real estate owned expenses of $174,000; and
|
|
·
|
Increases in FDIC assessments of $358,000.
|
Benefit for Income Taxes
. The effective tax rates differ from the federal and state statutory rates of 37.6% principally due to nontaxable investment income. Tax-exempt income was $165,000 for the third quarter of 2009 as compared with $167,000 in 2008.
An income tax summary follows (dollars in thousands):
|
|
|
Three Months Ended September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Book loss before income tax benefit
|
|
$
|
(3,696
|
)
|
|
$
|
(1,520
|
)
|
|
Nontaxable interest income, net
|
|
|
(165
|
)
|
|
|
(167
|
)
|
|
Realization of net operating losses and other, net
|
|
|
(80
|
)
|
|
|
(123
|
)
|
|
Taxable loss
|
|
|
(3,941
|
)
|
|
|
(1,810
|
)
|
|
Tax rate
|
|
|
37.6
|
%
|
|
|
37.6
|
%
|
|
Benefit for income taxes
|
|
$
|
(1,482
|
)
|
|
$
|
(681
|
)
|
|
Effective rate
|
|
|
40.1
|
%
|
|
|
44.8
|
%
|
|
|
|
|
|
|
|
|
|
|
Comparison of Nine Months Ended September 30, 2009 and 2008
Interest Income and Expense
Interest Income
. Interest income was $10,324,000 and $11,614,000 for the nine months ended September 30, 2009 and 2008, respectively, a decline of $1,290,000, or 11.1%. A decrease in yields on average interest-earning assets of 134 basis points was not offset by
the increase in average earning assets of $28.8 million, or 11.9%. Substantially all of the increase was due to higher levels of interest-bearing deposits that contributed to the steep decline in yields for investment securities and interest-bearing deposits of 281 basis points. Average loans grew by $5.3 million over 2008, or 2.6%. The declining interest rate environment and the effect of increased nonaccrual loans, restructured loans, and other real estate owned contributed
to lower yields on average loans of 6.01% versus 6.80%, a decline of 79 basis points. Average loans, as a percentage of average interest-earning assets, decreased to 76.7% in the first nine months of 2009 as compared with 83.7% in 2008.
We saw a shift in the percentage of average investment securities and interest-bearing deposits to total interest-earning assets to 23.0% in 2009 from 15.7% in 2008.
Interest Expense.
Interest expense was $5,236,000 and $6,472,000 for the nine months ended September 30, 2009 and 2008, respectively. Our average cost of funds for interest-bearing liabilities decreased to 2.92% in 2009 compared with 4.09% over the same period in
2008, an overall decline of 117 basis points. A shift in the mix of our interest-bearing deposits, along with decreases in the overall interest rates in our market area, contributed to the decrease in our cost of funds. Certificates of deposit, with an average cost of funds of 3.54% in 2009 and 4.72% in 2008, represented 58.8% of our total interest-bearing liabilities in 2009 as compared with 69.4% in 2008. The decline in average certificates of deposit and other interest-bearing
liabilities were more than offset by increases in our interest-bearing demand deposits, with an average cost of funds of 1.81% in 2009 and 2.57% in 2008, representing 33.3% of our total interest-bearing liabilities in 2009 as compared with 18.9% in 2008.
With the recent changes in FDIC-insured levels for certain deposits, we have seen a shift from customer repurchase agreements (short-term other borrowings) into interest-bearing demand deposits. For 2009, we had no customer repurchase agreements versus $11.6 million in 2008. At September 30, 2009, we had $200,000 in federal
funds purchased versus none at September 30, 2008.
Net Interest Income before Provision for Loan Losses
. Net interest income before provision for loan losses was $5,088,000 and $5,142,000 for the nine months ended September 30, 2009 and 2008, respectively. The net interest margin for the first nine months of 2009
was 2.66% versus 3.01% in 2008, which reflected our decision to invest the additional core deposits obtained in 2009 into lower yielding interest-bearing deposits. We temporarily invested these funds in interest-bearing deposits to improve our overall liquidity position, as mentioned above.
Provision for Loan Losses
We recorded provisions for loan losses totaling $3,679,000 and $2,620,000 for the nine months ended September 30, 2009 and 2008, respectively, which management considered appropriate after its assessment of the overall quality of the loan portfolio. As mentioned earlier, we recorded charge-offs in the third quarter of 2009 related
to two loans. Prior to that, our provision for loan losses was beginning to stabilize. We currently are maintaining our reserves at 2.00% of outstanding loans based on our assessment of risks in our loan portfolio.
Noninterest Income and Expenses
Noninterest Income.
Total noninterest income decreased by $297,000, or 34.8% for the nine months ended September 30, 2009, to $556,000 compared with $853,000 for the same period in 2008. During the first nine months of 2009, gains on securities of $56,000 were offset
by net losses of $81,000 on the sale of other real estate owned and $12,000 on repossessed assets. Also, we reported a write-down of $179,000 of our investment in Silverton Bank following the bank closure by federal regulators on May 1, 2009. The nine months ended September 30, 2009, versus the same period in 2008, also included reductions in other fee income of $46,000, or 38.0%, and lower dividends of $26,000.
Noninterest Expenses.
Management has taken steps to reduce noninterest expenses in areas in which it can without significantly affecting the safety and soundness of our banking operations. Salaries and employee benefits decreased $212,000, or 9.0%, in the first
nine months of 2009 over 2008. Expenses of bank premises and fixed assets decreased $46,000, or 5.6%, and we eliminated director fees and reduced advertising. Other components of noninterest expenses increased $840,000, or 38.1%. The more significant increases were:
|
·
|
Higher legal and audit expenses of $39,000;
|
|
·
|
Increases in pension expense of $14,000;
|
|
·
|
Increases in other real estate owned expenses of $181,000; and
|
|
·
|
Increases in FDIC assessments of $611,000.
|
Benefit for Income Taxes
. The effective tax rates differ from the federal and state statutory rates of 37.6% principally due to nontaxable investment income. Tax-exempt income was $501,000 for the first nine months of 2009 as compared with $506,000 in 2008.
An income tax summary follows (dollars in thousands):
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Book loss before income tax benefit
|
|
$
|
(4,007
|
)
|
|
$
|
(2,015
|
)
|
|
Nontaxable interest income, net
|
|
|
(501
|
)
|
|
|
(506
|
)
|
|
Realization of net operating losses and other, net
|
|
|
(253
|
)
|
|
|
(194
|
)
|
|
Taxable loss
|
|
|
(4,761
|
)
|
|
|
(2,715
|
)
|
|
Tax rate
|
|
|
37.6
|
%
|
|
|
37.6
|
%
|
|
Benefit for income taxes
|
|
$
|
(1,790
|
)
|
|
$
|
(1,021
|
)
|
|
Effective rate
|
|
|
44.7
|
%
|
|
|
50.7
|
%
|
ITEM 4. CONT
R
OLS AND PROCEDURES
Background of Internal Controls and Internal Audits.
Oceanside is the sole financial subsidiary of Atlantic. Oceanside has extensive policies and operating procedures in place for loans, operations, accounting, and compliance. All audits, whether internal
or external, are reported directly to the joint Audit Committee of Oceanside and Atlantic and subsequently to the Boards of Directors of Oceanside and Atlantic.
The joint Audit Committee of Oceanside and Atlantic maintains an audit calendar prepared by the internal auditor for planning purposes. This audit calendar is submitted to the Boards of Oceanside and Atlantic for approval.
Atlantic engages an external certified public accounting firm registered with the Public Company Accounting Oversight Board (“PCAOB”) to annually perform an independent audit, conducted in accordance with generally accepted auditing standards adopted by the PCAOB.
Periodically, Oceanside and Atlantic undergo regulatory examinations that include tests of the policies and operating procedures for loans, operations, accounting, and compliance. The results of these examinations are presented by the regulators to the Boards of Oceanside and Atlantic.
Evaluation of Disclosure Controls and Procedures.
Atlantic's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of Atlantic's disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”)) as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”). Based on that evaluation, such officers have concluded that, as of the Evaluation Date, Atlantic's disclosure controls and procedures are effective in bringing to their attention, on a timely basis, material information relating to Atlantic (including its consolidated subsidiary) required to be included in Atlantic's periodic
filings under the Exchange Act.
Changes in Internal Controls.
Since the Evaluation Date, there have not been any significant changes in Atlantic's internal controls or in other factors that could significantly affect those controls.