The accompanying notes are an integral part of
these condensed consolidated financial statements.
The accompanying notes are an integral part of
these condensed consolidated financial statements.
ATLANTIC
BANCGROUP, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED F
I
NANCIAL STATEMENTS (UNAUDITED)
JUNE
30, 2008
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
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 state-chartered commercial bank,
which opened July 21, 1997. Oceanside’s deposits are insured by the
Federal Deposit Insurance Corporation. Oceanside owns 100% of the
outstanding stock of S. Pt. Properties, Inc. (the “Subsidiary”), which was
formed in February 2008 to hold title to real estate owned acquired by the
Subsidiary through foreclosure. The Holding Company’s primary
business activity is 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 the
Subsidiary throughout these condensed consolidated financial statements are made
using the first-person notations of “we,” “our,” and “us.”
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 six months ended
June 30, 2008 and 2007, 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, 2007, and are incorporated herein by reference.
Oceanside
provides a wide range of banking services to individual and corporate customers
primarily in Duval County and St. Johns County, 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.
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 and valuation of foreclosed 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
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
BANCGROUP, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE
30, 2008
Fair
Value of Financial Instruments
- Financial instruments consist of cash,
due from banks, federal funds sold, investment securities, loans receivable,
accrued interest receivable, deposits, other borrowings, accrued interest
payable, and off-balance sheet commitments such as commitments to extend credit
and standby letters of credit. On an interim basis, we consider the
cost of providing estimated fair values by each class of financial instrument to
exceed the benefits derived.
Reclassifications
- Certain amounts in the prior periods have been reclassified to conform to the
presentation for the current period.
Recent
Accounting Pronouncements
- In February 2007, the FASB issued Statement
of Financial Accounting Standards No. 159,
The Fair Value Option for Financial
Assets and Financial Liabilities - including an amendment of FASB Statement No.
115
(“SFAS 159”). SFAS 159 allows an entity the irrevocable option
to elect fair value for the initial and subsequent measurement for certain
financial assets and liabilities on a contract-by-contract
basis. Subsequent changes in fair value of these financial assets and
liabilities would be recognized in earnings when they occur. SFAS 159 became
effective beginning January 1, 2008. Atlantic elected not to measure
any eligible items using the fair value option in accordance with SFAS 159 and
therefore, SFAS 159 did not have an impact on Atlantic’s financial position,
results of operations, or cash flows.
In March
2007, the EITF reached a final consensus on Issue 06-10,
Accounting for Collateral Assignment
Split-Dollar Life Insurance Arrangements
(“EITF 06-10”). EITF
06-10 stipulates that a liability should be recognized for a postretirement
benefit obligation associated with a collateral assignment arrangement if, on
the basis of the substantive agreement with the employee, the employer has
agreed to maintain a life insurance policy during the postretirement period or
provide a death benefit. The employer also must recognize and measure
the associated asset on the basis of the terms of the collateral assignment
arrangement. The consensus is effective for fiscal years beginning
after December 15, 2007. Entities will have the option of applying
the provisions of EITF 06-10 as a cumulative effect adjustment to the opening
balance of retained earnings or retrospectively to all prior
periods. EITF 06-10 did not have a material impact on Atlantic’s
financial position, results of operations, or liquidity. As of
January 1, 2008, Atlantic recorded $81,000 (net of income taxes) as an
adjustment to beginning retained earnings as permitted by EITF 06-10, which
decreased stockholders’ equity from December 31, 2007, by less than
0.5%. Any additional adjustments, if any, related to implementation
of EITF 06-10 are expected to be immaterial (see
Note 9
).
In March
2008, the FASB issued SFAS No. 161,
Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No.
133
(“SFAS 161”). SFAS 161 requires enhanced disclosures about
derivatives and hedging activities. It is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008. Atlantic is currently assessing the extent, if any, of any
additional required disclosures.
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.
ATLANTIC
BANCGROUP, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE
30, 2008
NOTE
2 - COMPUTATION OF PER SHARE EARNINGS (LOSS)
Basic
earnings (loss) per share (“EPS”) amounts are computed by dividing net
earnings (loss) by the weighted average number of common shares outstanding for
the three and six months ended June 30, 2008 and 2007. Diluted EPS
are computed by dividing net earnings (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 2008 or
2007. The following information was used in the computation of EPS on
both a basic and diluted basis for the three and six months ended June 30, 2008
and 2007 (dollars and number of shares in thousands):
|
|
|
Three
Months Ended June 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Basic
and diluted EPS computation:
|
|
|
|
|
|
|
|
Numerator
- Net income (loss)
|
|
$
|
(202
|
)
|
|
$
|
471
|
|
|
Denominator
- Weighted average shares outstanding (rounded)
|
|
|
1,248
|
|
|
|
1,248
|
|
|
Basic
and diluted earnings (loss) per share
|
|
$
|
(0.16
|
)
|
|
$
|
0.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Basic
and diluted EPS computation:
|
|
|
|
|
|
|
|
|
|
Numerator
- Net income (loss)
|
|
$
|
(155
|
)
|
|
$
|
931
|
|
|
Denominator
- Weighted average shares outstanding (rounded)
|
|
|
1,248
|
|
|
|
1,248
|
|
|
Basic
and diluted earnings (loss) per share
|
|
$
|
(0.12
|
)
|
|
$
|
0.75
|
|
NOTE
3 - INVESTMENT SECURITIES
The
amortized cost and estimated fair value of instruments in debt and equity
securities are as follows (dollars in thousands):
|
|
|
June 30, 2008
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
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
|
|
$
|
2,983
|
|
|
$
|
30
|
|
|
$
|
-
|
|
|
$
|
3,013
|
|
|
$
|
2,983
|
|
|
$
|
36
|
|
|
$
|
-
|
|
|
$
|
3,019
|
|
|
Mortgage-backed
securities
|
|
|
17,500
|
|
|
|
15
|
|
|
|
(190
|
)
|
|
|
17,325
|
|
|
|
22,691
|
|
|
|
46
|
|
|
|
(218
|
)
|
|
|
22,519
|
|
|
|
|
|
20,483
|
|
|
|
45
|
|
|
|
(190
|
)
|
|
|
20,338
|
|
|
|
25,674
|
|
|
|
82
|
|
|
|
(218
|
)
|
|
|
25,538
|
|
|
Held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State,
county and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
municipal
bonds
|
|
|
15,539
|
|
|
|
104
|
|
|
|
(697
|
)
|
|
|
14,946
|
|
|
|
15,762
|
|
|
|
131
|
|
|
|
(371
|
)
|
|
|
15,522
|
|
|
Total
investment securities
|
|
$
|
36,022
|
|
|
$
|
149
|
|
|
$
|
(887
|
)
|
|
$
|
35,284
|
|
|
$
|
41,436
|
|
|
$
|
213
|
|
|
$
|
(589
|
)
|
|
$
|
41,060
|
|
Management
evaluates securities for other-than-temporary impairment at least on a quarterly
basis, and more frequently when economic or market concerns warrant such
evaluation. Consideration is given to (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.
The unrealized gains on
investment securities available-for-sale were caused by interest rate
changes. Temporary
net decreases in fair value of securities
available-for-sale at June 30, 2008, of $145,000 (less deferred income taxes of
$54,000) are regarded as an adjustment to stockholders' equity totaling
$91,000. The estimated fair value of securities is determined on the
basis of market quotations.
At June
30, 2008, securities with an amortized cost of $866,000 and fair value of
$895,000 were pledged to secure deposits of public funds from the State of
Florida and treasury tax and loan deposits with the Federal
Reserve.
ATLANTIC
BANCGROUP, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE
30, 2008
NOTE 3 - INVESTMENT SECURITIES
(Continued)
At June
30, 2008, securities were sold under an agreement to repurchase with a fair
value of $19.2 million, which effectively collateralizes overnight customer
repurchase agreements totaling $19.2 million.
There
were no securities of a single issuer, which are non-governmental or
non-government sponsored, that exceeded 10% of stockholders’ equity at June 30,
2008.
NOTE
4 - LOANS
Loans
consisted of (dollars in thousands):
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Real
estate loans:
|
|
|
|
|
|
|
|
Construction,
land development, and other land
|
|
$
|
48,898
|
|
|
$
|
53,197
|
|
|
1-4
family residential
|
|
|
49,074
|
|
|
|
45,708
|
|
|
Multifamily
residential
|
|
|
1,257
|
|
|
|
1,784
|
|
|
Commercial
|
|
|
87,423
|
|
|
|
86,785
|
|
|
|
|
|
186,652
|
|
|
|
187,474
|
|
|
Commercial
loans
|
|
|
12,620
|
|
|
|
11,485
|
|
|
Consumer
and other loans
|
|
|
4,444
|
|
|
|
5,138
|
|
|
Total
loan portfolio
|
|
|
203,716
|
|
|
|
204,097
|
|
|
Less,
deferred fees
|
|
|
(35
|
)
|
|
|
(37
|
)
|
|
Less,
allowance for loan losses
|
|
|
(2,123
|
)
|
|
|
(2,169
|
)
|
|
Loans,
net
|
|
$
|
201,558
|
|
|
$
|
201,891
|
|
A summary
of the activity in Other Real Estate Owned (
foreclosed assets
) for 2008
follows:
|
|
|
For
the Three
|
|
|
For
the Six
|
|
|
|
|
Months
Ended
|
|
|
Months
Ended
|
|
|
|
|
June 30, 2008
|
|
|
June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of period
|
|
$
|
4,569,000
|
|
|
$
|
-
|
|
|
Loans
transferred to Other Real Estate Owned
|
|
|
|
|
|
|
|
|
|
(net
of charge-offs and participations)
|
|
|
350,000
|
|
|
|
5,539,000
|
|
|
Sale
of foreclosed assets
|
|
|
(770,000
|
)
|
|
|
(1,390,000
|
)
|
|
Ending
balance
|
|
$
|
4,149,000
|
|
|
$
|
4,149,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
charged to operating expenses for
|
|
|
|
|
|
|
|
|
|
foreclosed
assets, net
|
|
$
|
45,000
|
|
|
$
|
137,000
|
|
|
Closing
costs on disposal of foreclosed assets, net
|
|
|
32,000
|
|
|
|
32,000
|
|
|
Total
direct costs of foreclosed assets
|
|
$
|
77,000
|
|
|
$
|
169,000
|
|
ATLANTIC
BANCGROUP, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE
30, 2008
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 Six
|
|
|
For
the Twelve
|
|
|
|
|
Months
Ended
|
|
|
Months
Ended
|
|
|
|
|
June 30, 2008
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of period
|
|
$
|
2,169
|
|
|
$
|
1,599
|
|
|
Provisions
charged to operating expenses
|
|
|
885
|
|
|
|
629
|
|
|
Loans,
charged-off
|
|
|
(951
|
)
|
|
|
(75
|
)
|
|
Recoveries
|
|
|
20
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
end of period
|
|
$
|
2,123
|
|
|
$
|
2,169
|
|
We had
two loans totaling $334,000 at June 30, 2008, categorized as nonaccrual, and
eight loans totaling $6,222,000 categorized as nonaccrual at December 31, 2007.
We had four loans totaling $2,230,000 past due 90 days or more and still
accruing interest at June 30, 2008, compared with one loan totaling $164,000 at
December 31, 2007. 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 - OTHER BORROWINGS
A summary
of other borrowings follows (dollars in thousands):
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Customer
repurchase agreements
|
|
$
|
19,180
|
|
|
$
|
13,816
|
|
|
Federal
funds purchased
|
|
|
-
|
|
|
|
4,372
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
short-term borrowings
|
|
$
|
19,180
|
|
|
$
|
18,188
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
of Atlanta advances
|
|
$
|
2,300
|
|
|
$
|
2,300
|
|
|
Junior
subordinated debentures
|
|
|
3,093
|
|
|
|
3,093
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
long-term borrowings
|
|
$
|
5,393
|
|
|
$
|
5,393
|
|
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 June 30, 2008, consisted of
commitments to extend credit approximating $24.3 million and standby letters of
credit of $2.1 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.
ATLANTIC
BANCGROUP, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE
30, 2008
NOTE
8 - REGULATORY CAPITAL
Oceanside
is required to maintain certain minimum regulatory capital
requirements. The following is a summary at June 30, 2008, of the
regulatory capital requirements and actual capital on a percentage basis for
Oceanside:
|
|
|
|
|
|
Regulatory
|
|
|
|
|
Actual
|
|
|
Requirement
|
|
|
|
|
|
|
|
|
|
|
Total
capital ratio to risk-weighted assets
|
|
|
10.52
|
%
|
|
|
8.00
|
%
|
|
Tier
1 capital ratio to risk-weighted assets
|
|
|
9.58
|
%
|
|
|
4.00
|
%
|
|
Tier
1 capital to average assets
|
|
|
8.45
|
%
|
|
|
4.00
|
%
|
|
|
|
|
|
|
|
|
|
|
Effective
March 30, 2006, the Federal Reserve raised the threshold for reporting
risk-based capital ratios for a Small Bank Holding Company from $150 million to
$500 million. Accordingly, we do not calculate or report risk-based
capital ratios for the Holding Company.
NOTE
9 - RETAINED EARNINGS
Effective
January 1, 2008, Atlantic recognized a postretirement benefit obligation
associated with a collateral assignment arrangement. Atlantic has
substantive agreements with certain participants of its indexed retirement plan
to maintain bank-owned life insurance policies during the postretirement period
to provide a death benefit. Under EITF 06-10, Atlantic also must
recognize and measure the associated asset on the basis of the terms of the
collateral assignment arrangement.
Accordingly,
Atlantic increased its liability under the indexed retirement plan by $130,000
as of January 1, 2008. Atlantic also recorded $81,000 (net of
deferred income taxes of $49,000) as an adjustment to beginning retained
earnings. Under EITF 06-10, Atlantic elected to apply the provisions
of this consensus as a cumulative effect adjustment to the opening balance
of retained earnings as of January 1, 2008.
NOTE
10 - FAIR VALUE MEASUREMENTS
On
January 1, 2008, Atlantic adopted Statement of Financial Accounting Standards
No. 157,
Fair Value
Measurements
(“SFAS 157”). SFAS 157 defines fair value,
establishes a framework for measuring fair value, and expands disclosures about
fair value measurements. SFAS 157 applies to reported balances that
are required or permitted to be measured at fair value under existing accounting
pronouncements; accordingly, the standard does not require any new fair value
measurements of reported balances.
SFAS 157
emphasizes that fair value is market-based measurement, not an entity-specific
measurement. Therefore, a fair value measurement should be determined
based on the assumptions that market participants would use in pricing the asset
or liability. As a basis for considering market participant
assumptions in fair value measurements, SFAS 157 establishes a fair value
hierarchy that distinguishes between market participant assumptions based on
market data obtained from sources independent of the reporting entity
(observable inputs that are classified within Level 1 and 2 of the hierarchy)
and the reporting entity’s own assumptions about market participant assumptions
(unobservable inputs classified within Level 3 of the hierarchy).
Level 1
inputs utilize quoted prices (unadjusted) in active markets for identical assets
or liabilities that the Company has the ability to access. Level 2
inputs are inputs other than quoted prices included in Level 1 that are
observable
for the
asset or liability, either directly or indirectly. Level 2 inputs may
include quoted prices for similar assets and liabilities in active markets, as
well as inputs that are observable for the asset or liability (other than quoted
prices), such as interest rates, foreign exchange rates and yield curves that
are observable at commonly quoted intervals. Level 3 inputs are
unobservable inputs for the asset or liabilities, which are typically based on
an entity’s own assumptions, as there is little, if any, related market
activity. In instances where more than one level of input exists for
assets or liabilities, the lowest level of input that is significant to the fair
value measurement in its entirety will be
ATLANTIC
BANCGROUP, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE
30, 2008
NOTE 10 - FAIR VALUE MEASUREMENTS
(Continued)
used in
determining the fair value hierarchy. Atlantic’s assessment of the
significance of a particular input to the fair value measurement in its entirety
requires judgment, and considers factors specific to the asset or
liability.
The table
below presents the Atlantic’s assets and liabilities measured at fair value on a
recurring basis as of June 30, 2008, 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
|
|
$
|
-
|
|
|
$
|
20,338
|
|
|
$
|
-
|
|
|
$
|
20,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets at fair value
|
|
$
|
-
|
|
|
$
|
20,338
|
|
|
$
|
-
|
|
|
$
|
20,338
|
|
|
ITEM
2.
|
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-QSB, the words or phrases “will likely result,” “are expected
to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar
expressions are intended to identify “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties including changes in
economic conditions in 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 2008 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 2007 Annual
Report on Form 10-KSB.
Results
of Operations
Our net
loss for the six months ended June 30, 2008, was $155,000, as compared with net
income of $931,000, reported in the same period of 2007. Average
earning assets increased 5.3% for the first six months of 2008 over the same
period of 2007. For the three months ended June 30, 2008, the rate of
growth in average interest earning assets slowed to 1.7% over the same period of
2007. An overview of the more significant matters affecting our
results of operations follows:
|
·
|
Average
loans grew at a pace of $19.1 million, or 10.5%, for the six months ended
June 30, 2008, over the same period of 2007. With the growth in
average certificates of deposit of $24.7 million or 20.0%, we were able to
fund the increased loan demand.
|
|
·
|
Net
interest income (before provision for loan losses) decreased $553,000, or
13.9%, for the six months ended June 30, 2008, over the same period in
2007. This decrease is due primarily to lower yields on loans,
while interest expense on deposits decreased at a slower
pace.
|
|
·
|
Our
results for 2008 included additional reserves set aside to offset loan
charge-offs and real estate foreclosures during 2008. The
provision for loan losses for the first six months of 2008 totaled
$885,000, rising 1327.4% over 2007
levels.
|
|
·
|
Total
noninterest expenses increased $434,000, or 13.8%, for the six months
ended June 30, 2008, over the same period in 2007. This
compares with the growth in earning assets of 5.3% for the same
period. The cost to manage the loan portfolio and carry
foreclosed assets increased with direct expenses and losses for foreclosed
assets charged to operations of $169,000 for the six months ended June 30,
2008. Other related costs such as collection, legal, and audit
expenses also rose at a faster pace.
Pension
expense reported in noninterest expenses increased $77,000 for the first
six months of 2008 as compared with 2007, which was essentially offset by
an increase in noninterest income of $54,000 from bank-owned life
insurance used to fund the pension
obligations.
|
Financial
Condition
The
following table shows selected ratios for the periods ended or at the dates
indicated (annualized for the three and six months ended June 30,
2008):
|
|
|
Three
Months
|
|
|
Six
Months
|
|
|
Year
Ended
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
December
31,
|
|
|
|
|
June 30, 2008
|
|
|
June 30, 2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on average assets
|
|
|
-0.32
|
%
|
|
|
-0.12
|
%
|
|
|
0.57
|
%
|
|
Return
on average equity
|
|
|
-4.28
|
%
|
|
|
-1.64
|
%
|
|
|
7.77
|
%
|
|
Interest-rate
spread
|
|
|
2.50
|
%
|
|
|
2.48
|
%
|
|
|
2.78
|
%
|
|
Net
interest margin
|
|
|
3.00
|
%
|
|
|
3.01
|
%
|
|
|
3.49
|
%
|
|
Noninterest
expenses to average assets
|
|
|
2.77
|
%
|
|
|
2.79
|
%
|
|
|
2.59
|
%
|
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 $9.6 million at June 30,
2008;
|
|
·
|
The
repayment of loans, which include loans with a remaining maturity of one
year or less (excluding those in nonaccrual status) totaling $43.5
million;
|
|
·
|
Proceeds
of unpledged securities available-for-sale and principal repayments from
mortgage-backed securities;
|
|
·
|
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 and interest-bearing deposits, were $5.3 million at June 30, 2008, as
compared to $-0- at December 31, 2007. These funds are a primary
source of our liquidity and are generally invested in an earning capacity on an
overnight basis. 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.
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
$170.7 million at June 30, 2008, and $159.7 million at December 31, 2007, an
increase of 6.9%. 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 are generally
expensive and are unreliable as long-term funding sources. Brokered
certificates of deposit issued by us totaled $28.9 million at June 30, 2008, and
$17.9 million at December 31, 2007, an increase of 61.4%.
We use
our resources principally to fund existing and continuing loan commitments and
to purchase investment securities. At June 30, 2008, we had
commitments to originate loans totaling $24.3 million, and had issued, but
unused, standby letters of credit of $2.1 million for the same
period. In addition, scheduled maturities of certificates of deposit
during the twelve months following June 30, 2008, total $105.4
million. We believe that adequate resources exist to fund all our
anticipated commitments, and, if so desired, that we can adjust the rates and
terms on certificates of deposit and other deposit accounts to retain deposits
in a changing interest rate environment.
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). Management believes, as of
June 30, 2008, that we met all minimum capital adequacy requirements to which we
are subject.
As of the
most recent reporting period for the quarter ended June 30, 2008, Oceanside’s
ratios exceeded the minimum levels for the well-capitalized
category. 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 June 30, 2008, 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
|
|
$
|
23,808
|
|
|
|
10.52
|
%
|
|
$
|
18,112
|
|
|
|
8.00
|
%
|
|
$
|
22,640
|
|
|
|
10.00
|
%
|
|
Tier
1 capital to risk-weighted assets
|
|
$
|
21,686
|
|
|
|
9.58
|
%
|
|
$
|
9,056
|
|
|
|
4.00
|
%
|
|
$
|
13,584
|
|
|
|
6.00
|
%
|
|
Tier
1 capital to average assets
|
|
$
|
21,686
|
|
|
|
8.45
|
%
|
|
$
|
10,266
|
|
|
|
4.00
|
%
|
|
$
|
12,832
|
|
|
|
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.
|
There are
no conditions or events since June 30, 2008, that management believes have
changed Oceanside’s category.
Asset
Quality
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. There are three
classifications for problem assets: substandard, doubtful, and loss. Substandard
assets have one or more defined weaknesses and are characterized by the distinct
possibility that the insured institution will sustain some loss if the
deficiencies are not corrected. Doubtful assets have the weaknesses
of substandard assets with the additional characteristic that the weaknesses
make collection or liquidation in full on the basis of currently existing facts,
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.
At June
30, 2008, we had 30 loans totaling approximately $18.5 million classified as
substandard and 6 loans totaling approximately $0.7 million classified as
doubtful. We had no loans classified as loss at June 30,
2008. At June 30, 2008, management had provided specific reserves
totaling $0.9 million for loans risk-rated substandard or lower.
The sharp
increase in loans classified substandard or lower from December 31, 2007, levels
of $8.0 million reflect the general economic downturn in real estate activities
in our trade area. Substantially all of the net increase of $11.2
million is related to four loans totaling $11.3 million. Three of the
loans totaling $7.9 million are secured principally by residential condominiums
or land for real estate development. The remaining loan for $3.4
million is secured by a primary residence and surrounding acreage of
approximately 17.8 acres. Management believes that three of these
loans totaling $6.9 million are well secured with specific reserves of
$74,000. The other loan of $4.4 million has specific reserves of
$435,000 based on the estimated values of the collateral.
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 Six
|
|
|
For
the Twelve
|
|
|
|
|
Months
Ended
|
|
|
Months
Ended
|
|
|
|
|
June 30, 2008
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
End
of period loans (net of deferred fees)
|
|
$
|
203,681
|
|
|
$
|
204,060
|
|
|
End
of period allowance for loan losses
|
|
$
|
2,123
|
|
|
$
|
2,169
|
|
|
%
of allowance for loan losses to total loans
|
|
|
1.04
|
%
|
|
|
1.06
|
%
|
|
Average
loans for the period
|
|
$
|
200,264
|
|
|
$
|
187,544
|
|
|
Net
charge-offs as a percentage of average loans
|
|
|
|
|
|
|
|
|
|
for
the period (annualized for 2008)
|
|
|
.93
|
%
|
|
|
0.03
|
%
|
|
Nonperforming
assets:
|
|
|
|
|
|
|
|
|
|
Nonaccrual
loans
|
|
$
|
334
|
|
|
$
|
6,222
|
|
|
Loans
past due 90 days or more and still accruing (*)
|
|
|
2,230
|
|
|
|
164
|
|
|
Foreclosed
real estate
|
|
|
4,149
|
|
|
|
-
|
|
|
Other
repossessed assets
|
|
|
68
|
|
|
|
-
|
|
|
|
|
$
|
6,781
|
|
|
$
|
6,386
|
|
|
Nonperforming
loans to period end loans
|
|
|
1.26
|
%
|
|
|
3.13
|
%
|
|
Nonperforming
assets to period end total assets
|
|
|
2.57
|
%
|
|
|
2.44
|
%
|
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, 2007.
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 June 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
Average
|
|
|
and
|
|
|
Yield/
|
|
|
Average
|
|
|
and
|
|
|
Yield/
|
|
|
|
|
Balance
|
|
|
Dividends
|
|
|
Rate
|
|
|
Balance
|
|
|
Dividends
|
|
|
Rate
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
198,878
|
|
|
$
|
3,328
|
|
|
|
6.73
|
%
|
|
$
|
181,389
|
|
|
$
|
3,748
|
|
|
|
8.29
|
%
|
|
Investment
securities and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest-bearing
deposits
(1)
|
|
|
38,161
|
|
|
|
426
|
|
|
|
5.56
|
%
|
|
|
42,297
|
|
|
|
478
|
|
|
|
5.37
|
%
|
|
Other
interest-earning assets
|
|
|
2,159
|
|
|
|
12
|
|
|
|
2.24
|
%
|
|
|
11,567
|
|
|
|
155
|
|
|
|
5.37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-earning assets
(1)
|
|
|
239,198
|
|
|
|
3,766
|
|
|
|
6.50
|
%
|
|
|
235,253
|
|
|
|
4,381
|
|
|
|
7.62
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning
assets
|
|
|
17,491
|
|
|
|
|
|
|
|
|
|
|
|
13,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
256,689
|
|
|
|
|
|
|
|
|
|
|
$
|
248,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand,
money market
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
NOW deposits
|
|
$
|
40,078
|
|
|
|
233
|
|
|
|
2.34
|
%
|
|
$
|
43,046
|
|
|
|
430
|
|
|
|
4.01
|
%
|
|
Savings
|
|
|
3,144
|
|
|
|
8
|
|
|
|
1.02
|
%
|
|
|
3,932
|
|
|
|
14
|
|
|
|
1.43
|
%
|
|
Certificates
of deposit
|
|
|
147,833
|
|
|
|
1,712
|
|
|
|
4.66
|
%
|
|
|
130,902
|
|
|
|
1,703
|
|
|
|
5.22
|
%
|
|
Other
borrowings
|
|
|
18,484
|
|
|
|
133
|
|
|
|
2.89
|
%
|
|
|
21,719
|
|
|
|
276
|
|
|
|
5.10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-bearing liabilities
|
|
|
209,539
|
|
|
|
2,086
|
|
|
|
4.00
|
%
|
|
|
199,599
|
|
|
|
2,423
|
|
|
|
4.87
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
liabilities
|
|
|
28,177
|
|
|
|
|
|
|
|
|
|
|
|
31,275
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
18,973
|
|
|
|
|
|
|
|
|
|
|
|
17,886
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stockholders’
equity
|
|
$
|
256,689
|
|
|
|
|
|
|
|
|
|
|
$
|
248,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
provision
for loan losses
|
|
|
|
|
|
$
|
1,680
|
|
|
|
|
|
|
|
|
|
|
$
|
1,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-rate
spread
|
|
|
|
|
|
|
|
|
|
|
2.50
|
%
|
|
|
|
|
|
|
|
|
|
|
2.75
|
%
|
|
Net
interest margin
(1)
|
|
|
|
|
|
|
|
|
|
|
3.00
|
%
|
|
|
|
|
|
|
|
|
|
|
3.49
|
%
|
|
Ratio
of average interest-earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
average interest-bearing liabilities
|
|
|
114.15
|
%
|
|
|
|
|
|
|
|
|
|
|
117.86
|
%
|
|
|
|
|
|
|
|
|
|
(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 Six Months Ended June 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
Average
|
|
|
and
|
|
|
Yield/
|
|
|
Average
|
|
|
and
|
|
|
Yield/
|
|
|
|
|
Balance
|
|
|
Dividends
|
|
|
Rate
|
|
|
Balance
|
|
|
Dividends
|
|
|
Rate
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
200,264
|
|
|
$
|
6,958
|
|
|
|
6.99
|
%
|
|
$
|
181,182
|
|
|
$
|
7,509
|
|
|
|
8.36
|
%
|
|
Investment
securities and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest-bearing
deposits
(1)
|
|
|
39,478
|
|
|
|
884
|
|
|
|
5.54
|
%
|
|
|
40,717
|
|
|
|
920
|
|
|
|
5.32
|
%
|
|
Other
interest-earning assets
|
|
|
1,542
|
|
|
|
20
|
|
|
|
2.61
|
%
|
|
|
7,215
|
|
|
|
194
|
|
|
|
5.42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-earning assets
(1)
|
|
|
241,284
|
|
|
|
7,862
|
|
|
|
6.72
|
%
|
|
|
229,114
|
|
|
|
8,623
|
|
|
|
7.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning
assets
|
|
|
16,943
|
|
|
|
|
|
|
|
|
|
|
|
14,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
258,227
|
|
|
|
|
|
|
|
|
|
|
$
|
243,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand,
money market
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
NOW deposits
|
|
$
|
40,483
|
|
|
|
536
|
|
|
|
2.66
|
%
|
|
$
|
44,411
|
|
|
|
889
|
|
|
|
4.04
|
%
|
|
Savings
|
|
|
3,041
|
|
|
|
18
|
|
|
|
1.19
|
%
|
|
|
4,359
|
|
|
|
32
|
|
|
|
1.48
|
%
|
|
Certificates
of deposit
|
|
|
148,260
|
|
|
|
3,572
|
|
|
|
4.85
|
%
|
|
|
123,514
|
|
|
|
3,189
|
|
|
|
5.21
|
%
|
|
Other
borrowings
|
|
|
19,189
|
|
|
|
324
|
|
|
|
3.40
|
%
|
|
|
21,686
|
|
|
|
548
|
|
|
|
5.10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-bearing liabilities
|
|
|
210,973
|
|
|
|
4,450
|
|
|
|
4.24
|
%
|
|
|
193,970
|
|
|
|
4,658
|
|
|
|
4.84
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
liabilities
|
|
|
28,247
|
|
|
|
|
|
|
|
|
|
|
|
31,514
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
19,007
|
|
|
|
|
|
|
|
|
|
|
|
17,653
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stockholders’
equity
|
|
$
|
258,227
|
|
|
|
|
|
|
|
|
|
|
$
|
243,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
provision
for loan losses
|
|
|
|
|
|
$
|
3,412
|
|
|
|
|
|
|
|
|
|
|
$
|
3,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-rate
spread
|
|
|
|
|
|
|
|
|
|
|
2.48
|
%
|
|
|
|
|
|
|
|
|
|
|
2.89
|
%
|
|
Net
interest margin
(1)
|
|
|
|
|
|
|
|
|
|
|
3.01
|
%
|
|
|
|
|
|
|
|
|
|
|
3.63
|
%
|
|
Ratio
of average interest-earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
average interest-bearing liabilities
|
|
|
114.37
|
%
|
|
|
|
|
|
|
|
|
|
|
118.12
|
%
|
|
|
|
|
|
|
|
|
|
(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 six months periods ended June 30, 2008, compared to the same period in
2007. 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 June 30, 2008
|
|
|
|
|
2008
vs. 2007
|
|
|
|
|
Increase (Decrease) Due to
|
|
|
|
|
|
|
|
|
|
|
Rate/
|
|
|
|
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Volume
|
|
|
Total
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
(704
|
)
|
|
$
|
360
|
|
|
$
|
(76
|
)
|
|
$
|
(420
|
)
|
|
Investment
securities and interest-bearing deposits
|
|
|
20
|
|
|
|
(55
|
)
|
|
|
(17
|
)
|
|
|
(52
|
)
|
|
Other
interest-earning assets
|
|
|
(90
|
)
|
|
|
(126
|
)
|
|
|
73
|
|
|
|
(143
|
)
|
|
Total
interest-earning assets
|
|
|
(774
|
)
|
|
|
179
|
|
|
|
(20
|
)
|
|
|
(615
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand,
money market and NOW deposits
|
|
|
(179
|
)
|
|
|
(30
|
)
|
|
|
12
|
|
|
|
(197
|
)
|
|
Savings
|
|
|
(4
|
)
|
|
|
(3
|
)
|
|
|
1
|
|
|
|
(6
|
)
|
|
Certificates
of deposit
|
|
|
(182
|
)
|
|
|
220
|
|
|
|
(29
|
)
|
|
|
9
|
|
|
Other
borrowings
|
|
|
(119
|
)
|
|
|
(41
|
)
|
|
|
17
|
|
|
|
(143
|
)
|
|
Total
interest-bearing liabilities
|
|
|
(484
|
)
|
|
|
146
|
|
|
|
1
|
|
|
|
(337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$
|
(290
|
)
|
|
$
|
33
|
|
|
$
|
(21
|
)
|
|
$
|
(278
|
)
|
|
|
|
Six
Months Ended June 30, 2008
|
|
|
|
|
2008
vs. 2007
|
|
|
|
|
Increase (Decrease) Due to
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate/
|
|
|
|
|
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Volume
|
|
|
Total
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
(1,231
|
)
|
|
$
|
791
|
|
|
$
|
(111
|
)
|
|
$
|
(551
|
)
|
|
Investment
securities and interest-bearing deposits
|
|
|
44
|
|
|
|
(33
|
)
|
|
|
(47
|
)
|
|
|
(36
|
)
|
|
Other
interest-earning assets
|
|
|
(101
|
)
|
|
|
(152
|
)
|
|
|
79
|
|
|
|
(174
|
)
|
|
Total
interest-earning assets
|
|
|
(1,288
|
)
|
|
|
606
|
|
|
|
(79
|
)
|
|
|
(761
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand,
money market and NOW deposits
|
|
|
(304
|
)
|
|
|
(79
|
)
|
|
|
30
|
|
|
|
(353
|
)
|
|
Savings
|
|
|
(6
|
)
|
|
|
(10
|
)
|
|
|
2
|
|
|
|
(14
|
)
|
|
Certificates
of deposit
|
|
|
(220
|
)
|
|
|
639
|
|
|
|
(36
|
)
|
|
|
383
|
|
|
Other
borrowings
|
|
|
(183
|
)
|
|
|
(63
|
)
|
|
|
22
|
|
|
|
(224
|
)
|
|
Total
interest-bearing liabilities
|
|
|
(713
|
)
|
|
|
487
|
|
|
|
18
|
|
|
|
(208
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$
|
(575
|
)
|
|
$
|
119
|
|
|
$
|
(97
|
)
|
|
$
|
(553
|
)
|
Comparison
of Three Months Ended June 30, 2008 and 2007
Interest
Income and Expense
Interest
Income
. Interest income was $3,766,000 and $4,381,000 for the
three months ended June 30, 2008 and 2007, respectively. A decrease
in yields on average interest-earning assets of 112 basis points, or 14.7%, was
minimally offset by a favorable growth in average interest-earning assets of
$3.9 million, or 1.7%, resulting in an overall decrease in interest income of
$615,000, or 14.0%. The decrease in yields was the result of the
declining interest rate environment in which we operated during the first half
of 2008 along with competitive factors. Recent trends in community
banking show declines in net interest margins below historical
levels. Average loans, as a percentage of average interest-earning
assets, increased to 83.1% in the second quarter of 2008 as compared with 77.1%
in 2007.
We saw a
shift in the percentage of average investment securities to total
interest-earning assets decrease to 16.0% in 2008 from 18.0% in 2007, while the
percentage of average other interest-earning assets to total average
interest-earning assets shifted from 4.9% in 2007 to 0.9% in 2008.
Interest
Expense.
Interest expense was $2,086,000 and $2,423,000 for
the three months ended June 30, 2008 and 2007, respectively. While
most average interest-bearing deposits and other borrowings declined, average
certificates of deposit rose 12.9% in the quarter ended June 30, 2008, over the
same period in 2007. This resulted in an overall increase in average
interest-bearing liabilities of $9.9 million, or 5.0%. Our average cost of funds
(interest-bearing liabilities) decreased to 4.00% in 2008 compared with 4.87%
over the same period in 2007, a decline of 17.9%. 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
4.66% in 2008 and 5.22% in 2007, represented 70.6% of our total interest-bearing
liabilities in 2008 as compared with 65.6% in 2007. We also
experienced declines in the rates we paid on other lower costing deposits and
borrowed funds, which outpaced the decline in our cost of funds on certificates
of deposit of 10.7%. The shift from lower costing deposits to higher costing
deposits can be attributed, in part, to the current interest rate environment as
customers seek higher returns on their deposits.
Net Interest Income before Provision
for Loan Losses
. Net interest income before provision for loan
losses was $1,680,000 and $1,958,000 for the three months ended June 30, 2008
and 2007, respectively. The net interest margin for the second
quarter of 2008 was 3.00% as compared with the net interest margin in 2007 of
3.49%, a decrease of 49 basis points, or 14.0%, which mirrors the overall
declines in our yields and cost of funds of 14.7% and 17.9%,
respectively.
Provision
for Loan Losses
We
recorded provisions for loan losses totaling $661,000 and $-0- for the three
months ended June 30, 2008 and 2007, respectively, which management considered
appropriate after its assessment of the overall quality of the loan portfolio
and the recent downturn in the real estate market that has increased the number
of classified and other loans we monitor.
Noninterest
Income and Expenses
Noninterest
Income.
Total noninterest income decreased by $24,000, or 7.9%
for the three months ended June 30, 2008, to $281,000 compared with $305,000 for
the same period in June 30, 2007. Fees and service charges on deposit
accounts decreased by $14,000, or 8.1%, in 2008 versus the same period in 2007,
which is consistent with the overall declines in demand deposit balances of
7.9%. Other fee income for banking services decreased $12,000, or
24.0%, due to decreases in usage and per item charges assessed by us for other
banking services, principally for ATM and debit card usage. Mortgage
banking fees decreased $19,000, or 67.9%, during this period reflecting a
downturn in the residential lending market. These decreases were offset by an
increase in income from bank-owned life insurance of $28,000, or
100.0%.
Noninterest
Expenses.
Salaries and employee benefits increased $17,000, or
2.2%, in the second quarter of 2008 over 2007. Expenses of bank
premises and fixed assets decreased $20,000, or 6.9%. Other operating
expenses increased $167,000, or 30.5%. The more significant increases
were:
|
·
|
higher
data processing and settlement fees of
$40,000;
|
|
·
|
increases
in audit, legal, and professional fees of
$21,000;
|
|
·
|
increases
in software and telephone expense of $20,000;
and
|
|
·
|
expenses
related to other real estate owned, which were $77,000 in 2008 versus $-0-
in 2007.
|
These
increases are consistent with trends in our account and activity growth,
additional costs to manage the loan portfolio and carry foreclosed assets,
compliance with SOX 404, and inflationary increases in the overall cost of goods
and services.
Pension
expense increased $43,000 for the three months ended June 30, 2008, as compared
with the same period in 2007. Our noninterest income from bank-owned
life insurance used to fund the pension obligations rose by
$28,000. Recent changes in the accounting for pension obligations
funded with bank-owned life insurance also contributed to the overall cost of
$9,000 (net of the income tax benefit of $6,000).
Provision
(Benefit) for Income Taxes
An income
tax summary follows (dollars in thousands):
|
|
|
Three
Months Ended June 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Book
income (loss)
|
|
$
|
(467
|
)
|
|
$
|
660
|
|
|
Nontaxable
interest income, net
|
|
|
(169
|
)
|
|
|
(146
|
)
|
|
Other,
net
|
|
|
(68
|
)
|
|
|
(12
|
)
|
|
Taxable
income (loss)
|
|
$
|
(704
|
)
|
|
$
|
502
|
|
|
Tax
rate
|
|
|
37.6
|
%
|
|
|
37.6
|
%
|
|
Tax
provision (benefit)
|
|
$
|
(265
|
)
|
|
$
|
189
|
|
|
Effective
tax rate
|
|
|
56.7
|
%
|
|
|
28.6
|
%
|
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 $169,000 for the second quarter of 2008 as compared with $146,000 in 2007,
an increase of 15.8%.
Comparison
of Six Months Ended June 30, 2008 and 2007
Interest
Income and Expense
Interest
Income
. Interest income was $7,862,000 and $8,623,000 for the
six months ended June 30, 2008 and 2007, respectively. A decrease in
yields on average interest-earning assets of 101 basis points, or 13.1%, was
partially offset by a favorable growth in average interest-earning assets of
$12.2 million, or 5.3%, resulting in an overall decrease in interest income of
$761,000, or 8.8%. The decrease in yields was the result of the
declining interest rate environment in which we operated during the first half
of 2008 along with competitive factors. Recent trends in community
banking show declines in net interest margins below historical
levels. Average loans, as a percentage of average interest-earning
assets, increased to 83.0% in 2008 as compared with 79.1% in 2007.
We saw a
shift in the percentage of average investment securities to total
interest-earning assets decrease to 16.4% in 2008 from 17.8% in 2007, while the
percentage of average other interest-earning assets to total average
interest-earning assets shifted from 3.1% in 2007 to 0.6% in 2008.
Interest
Expense.
Interest expense was $4,450,000 and $4,658,000 for
the six months ended June 30, 2008 and 2007, respectively. While most
average interest-bearing deposits and other borrowings declined, average
certificates of deposit rose 20.0% for the six months ended June 30, 2008, over
the same period of 2007. This resulted in an overall increase in
average interest-bearing liabilities of $17.0 million, or
8.8%. During the first half of 2008, the interest rates on
certificates of deposit declined 36 basis points, or 6.9%, which is not as rapid
a decrease as we experienced on our interest-earning assets. Our
average cost of funds (interest-bearing liabilities) decreased to 4.24% in 2008
compared with 4.84% over the same period in 2007. 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
4.85% in 2008 and 5.21% in 2007, represented 70.3% of our total interest-bearing
liabilities in 2008 as compared with 63.7% in 2007. We also
experienced declines in the rates we paid on other lower costing deposits and
borrowed funds, which outpaced the decline in our cost of funds on certificates
of deposit. The shift from lower costing deposits to higher costing
deposits can be attributed, in part, to the current interest rate environment as
customers seek higher returns on their deposits.
Net Interest Income before Provision
for Loan Losses
. Net interest income before provision for loan
losses was $3,412,000 and $3,965,000 for the six months ended June 30, 2008 and
2007, respectively. The net interest margin for the first six months
of 2008 was 3.01% as compared with the net interest margin in 2007 of 3.63%, a
decrease of 62 basis points, or 17.1%. Given our composition of
interest-bearing liabilities, we experienced a slightly less rapid decrease in
our cost of funds of 60 basis points (12.4%), while the rates we earned on our
earning assets decreased by 101 basis points (13.1%) in the first six months of
2008 over the same period of 2007. Our growth in interest-bearing
liabilities of 8.8% outpaced the growth in interest earning assets of 5.3%,
which impacts our net interest margin.
Provision
for Loan Losses
We
recorded provisions for loan losses totaling $885,000 and $62,000 for the six
months ended June 30, 2008 and 2007, respectively, which management considered
appropriate after its assessment of the overall quality of the loan portfolio
and the recent downturn in the real estate market that has increased the number
of classified and other loans we monitor.
Noninterest
Income and Expenses
Noninterest
Income.
Total noninterest income decreased by $8,000, or 1.4%,
for the six months ended June 30, 2008, to $557,000 compared with $565,000 for
the same period in June 30, 2007. Fees and service charges on deposit
accounts increased $3,000, or 0.9%, in 2008 versus the same period in
2007. Other fee income for banking services decreased $29,000, or
28.2%, due to decreases in usage and per item charges assessed by us for other
banking services, principally for ATM and debit card usage. Mortgage
banking fees decreased $29,000, or 72.5%, during this period reflecting a
downturn in the residential lending market. These decreases were offset by an
increase in income from bank-owned life insurance of $54,000, or
98.2%.
Noninterest
Expenses.
Salaries and employee benefits increased $36,000, or
2.3%, in the first six months of 2008 over 2007. Group insurance
costs rose $48,000 while employee compensation, other benefits, and payroll tax
costs declined $12,000. Expenses of bank premises and fixed assets
decreased $23,000, or 4.1%. Other operating expenses increased
$421,000, or 40.6%. The more significant increases were:
|
·
|
higher
data processing and settlement fees of
$70,000;
|
|
·
|
increases
in audit, legal, and professional fees of
$81,000;
|
|
·
|
increases
in regulatory assessments of
$35,000;
|
|
·
|
increases
in software and telephone expense of $51,000;
and
|
|
·
|
expenses
related to other real estate owned, which were $169,000 in 2008 versus
$-0- in 2007.
|
These
increases are consistent with trends in our account and activity growth,
additional costs to manage the loan portfolio and carry foreclosed assets,
compliance with SOX 404, and inflationary increases in the overall cost of goods
and services.
Pension
expense increased $77,000 for the six months ended June 30, 2008, as compared
with the same period in 2007. Our noninterest income from bank-owned
life insurance used to fund the pension obligations rose by
$54,000. Recent changes in the accounting for pension obligations
funded with bank-owned life insurance also contributed to the overall cost of
$14,000 (net of the income tax benefit of $9,000).
Provision
(Benefit) for Income Taxes
An income
tax summary follows (dollars in thousands):
|
|
|
Six
Months Ended June 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Book
income (loss)
|
|
$
|
(495
|
)
|
|
$
|
1,323
|
|
|
Nontaxable
interest income, net
|
|
|
(339
|
)
|
|
|
(256
|
)
|
|
Other,
net
|
|
|
(70
|
)
|
|
|
(24
|
)
|
|
Taxable
income (loss)
|
|
$
|
(904
|
)
|
|
$
|
1,043
|
|
|
Tax
rate
|
|
|
37.6
|
%
|
|
|
37.6
|
%
|
|
Tax
provision (benefit)
|
|
$
|
(340
|
)
|
|
$
|
392
|
|
|
Effective
tax rate
|
|
|
68.7
|
%
|
|
|
29.6
|
%
|
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 $339,000 for the first six months of 2008 as compared with $256,000 in 2007,
an increase of 32.4%.
ITEM
3. CONTROLS AND P
R
OCEDURES
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.
ATLANTIC
BANCGROUP, INC. AND SUBSIDIARY
|
|
Item
1.
|
Legal
Proceedings.
|
Periodically,
we are parties to or otherwise involved in legal proceedings arising in the
normal course of business, such as claims to enforce liens, claims involving the
making and servicing of real property loans, and other issues incident to our
operations. We do not believe that there are any pending or
threatened proceedings against us, which, if determined adversely, would have a
material effect on our consolidated financial position.
|
|
Item
4.
|
Submission
of Matters to a Vote of Security
Holders.
|
An Annual
Meeting of Shareholders was held on April 24, 2008. At that meeting,
a majority of the shareholders of record voted to elect a total of two Class I
directors with terms to expire in 2011 (Proposal I); to ratify the Directors’
appointment of Mauldin, Jenkins, Certified Public Accountants, LLC, as the
independent registered public accounting firm for Atlantic BancGroup, Inc., for
the fiscal year ending December 31, 2008 (Proposal II); to approve the
adjournment of the Annual Meeting to solicit additional proxies in the event
that there were not sufficient votes to approve any one or more of the proposals
at the 2008 Annual Meeting (Proposal III).
Proposal
I
|
Class
I Directors with Terms Expiring in 2011
|
|
Director
|
Votes
For
|
Votes
Against or
Withheld
|
Votes
Abstained
|
|
Frank
J. Cervone
|
957,816
|
21,115
|
-
|
|
Barry
W. Chandler
|
956,856
|
22,075
|
-
|
Proposal
II
|
Votes
For
|
Votes
Against or
Withheld
|
Votes
Abstained
|
|
957,276
|
20,695
|
960
|
Proposal
III
|
Votes
For
|
Votes
Against or
Withheld
|
Votes
Abstained
|
|
940,479
|
36,733
|
1,719
|
|
|
Exhibit
No
.
|
Description of
Exhibit
|
|
|
(a)
|
Incorporated
by reference on Atlantic’s Form 10-KSB for year ended December 31,
1999
|
|
|
(b)
|
Incorporated
by reference on Atlantic’s Form 10-KSB for year ended December 31,
2000
|
|
|
(c)
|
Incorporated
by reference on Atlantic’s Form 10-KSB for year ended December 31,
2002
|
|
|
(d)
|
Incorporated
by reference on Atlantic’s Form 10-KSB for year ended December 31,
2003
|
|
|
(e)
|
Incorporated
by reference on Atlantic’s Form 10-QSB for quarter ended September 30,
2006
|
|
Exhibit
No
.
|
Description of
Exhibit
|
|
|
|
|
3.1
|
Articles
of Incorporation (a)
|
|
3.2
|
Bylaws
(a)
|
|
4.1
|
Specimen
Stock Certificate (a)
|
|
10.1
|
Software
License Agreement dated as of October 6, 1997, between Oceanside and File
Solutions, Inc. (a)
|
|
10.2
|
File
Solutions Software Maintenance Agreement dated as of July 15, 1997,
between Oceanside and SPARAK Financial Systems, Inc.
(a)
|
|
10.3
|
Remote
Data Processing Agreement dated as of March 3, 1997, between Oceanside and
Bankers Data Services, Inc. (a)
|
|
10.4
|
Lease
dated September 27, 2000, between MANT EQUITIES, LLC and Oceanside.
(b)
|
|
10.5
|
Lease
dated August 22, 2002, between PROPERTY MANAGEMENT SUPPORT, INC., and
Oceanside. (c)
|
|
10.6
|
Change
in Control Agreement for Barry W. Chandler. (e)
|
|
10.7
|
Change
in Control Agreement for David L. Young. (e)
|
|
10.8
|
Change
in Control Agreement for Grady R. Kearsey. (e)
|
|
14
|
Code
of Ethics for Senior Officers Policy. (d)
|
|
31.1
|
Certifications
of Principal Executive Officer required by Rule 13a-14(a)/15d-14(a) under
the Exchange Act
|
|
31.2
|
Certifications
of Principal Financial Officer required by Rule 13a-14(a)/15d-14(a) under
the Exchange Act
|
|
32.1
|
Certifications
of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of Sarbanes-Oxley Act of
2002
|
|
32.2
|
Certifications
of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of Sarbanes-Oxley Act of
2002
|