Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, DC 20549
FORM 10-Q
x
Quarterly report under Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For
the quarterly period ended September 30, 2009
o
Transition report under Section 13
or 15 (d) of the Exchange Act
For
the transition period from to
Commission
File Number 000-51112
ATLANTIC SOUTHERN FINANCIAL GROUP, INC.
(Exact Name of Small
Business Issuer as Specified in Its Charter)
GEORGIA
|
|
20-2118147
|
(State or Other Jurisdiction of
Incorporation or Organization)
|
|
(I.R.S. Employer
Identification No.)
|
1701 Bass Road
Macon, Georgia 31210
(Address of Principal
Executive Offices)
(478)
476-2170
(Issuers
Telephone Number, Including Area Code)
Not
Applicable
(Former Name, Former
Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark
whether the registrant: (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes
x
No
o
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files). Yes
o
No
o
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer, and smaller reporting company (in Rule 12b-2
of the Exchange Act).
Large accelerated filer
o
|
|
Accelerated filer
o
|
|
|
|
Non-accelerated filer
o
|
|
Smaller reporting company
x
|
Indicate by checkmark
whether the registrant is a shell company (as defined by Rule 12b-2 of the
Exchange Act). Yes
o
No
x
Table of Contents
APPLICABLE ONLY TO CORPORATE
ISSUERS
State the number of
shares outstanding of each of the issuers classes of common equity, as of the
latest practicable date:
Common Stock, no par value, 4,211,780 shares
outstanding at November 10, 2009
Table of Contents
ATLANTIC SOUTHERN FINANCIAL GROUP, INC.
Consolidated Balance Sheets
September 30, 2009
(Unaudited) and
December 31, 2008
(Audited)
|
|
As of
|
|
|
|
September 30,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
Assets
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
8,330,095
|
|
$
|
14,010,580
|
|
Interest-bearing deposits in other banks
|
|
62,357,577
|
|
1,119,556
|
|
Total cash and cash equivalents
|
|
70,687,672
|
|
15,130,136
|
|
Securities available for sale, at fair value
|
|
180,169,835
|
|
100,619,437
|
|
Federal Home Loan Bank stock, restricted, at cost
|
|
4,316,800
|
|
3,670,200
|
|
Loans held for sale
|
|
1,571,940
|
|
1,291,352
|
|
Loans, net of unearned income
|
|
760,499,549
|
|
792,883,664
|
|
Less - allowance for loan losses
|
|
(14,602,754
|
)
|
(11,671,534
|
)
|
Loans, net
|
|
745,896,795
|
|
781,212,130
|
|
Bank premises and equipment, net
|
|
31,322,862
|
|
31,049,394
|
|
Accrued interest receivable
|
|
5,363,330
|
|
6,342,138
|
|
Cash surrender value of life insurance
|
|
12,866,768
|
|
12,465,228
|
|
Goodwill and other intangible assets, net of
amortization
|
|
2,639,429
|
|
22,444,667
|
|
Other real estate owned
|
|
15,775,214
|
|
10,196,165
|
|
Other assets
|
|
13,066,115
|
|
7,320,743
|
|
Total Assets
|
|
$
|
1,083,676,760
|
|
$
|
991,741,590
|
|
|
|
|
|
|
|
Liabilities and Shareholders
Equity
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
Non-interest bearing
|
|
$
|
54,608,848
|
|
$
|
48,482,128
|
|
Money market and NOW accounts
|
|
154,820,863
|
|
141,224,574
|
|
Savings
|
|
9,268,996
|
|
7,972,230
|
|
Time deposits
|
|
738,461,369
|
|
638,772,511
|
|
Total deposits
|
|
957,160,076
|
|
836,451,443
|
|
Federal Home Loan Bank advances
|
|
50,300,000
|
|
47,500,000
|
|
Subordinated debentures
|
|
1,400,000
|
|
1,400,000
|
|
Junior subordinated debentures
|
|
10,310,000
|
|
10,310,000
|
|
Accrued interest payable
|
|
5,149,813
|
|
5,487,499
|
|
Accrued expenses and other liabilities
|
|
1,827,457
|
|
1,630,080
|
|
Total liabilities
|
|
1,026,147,346
|
|
902,779,022
|
|
Commitments
|
|
|
|
|
|
Shareholders Equity:
|
|
|
|
|
|
Preferred stock, authorized 2,000,000 shares,
outstanding -0- shares
|
|
|
|
|
|
Common stock, no par value, authorized 10,000,000
shares, 4,211,780 issued and outstanding in 2009, $5 par value, authorized
10,000,000 shares, 4,211,780 issued and outstanding in 2008
|
|
74,624,881
|
|
21,058,900
|
|
Paid-in capital surplus
|
|
|
|
53,546,955
|
|
Retained earnings (accumulated deficit)
|
|
(17,738,955
|
)
|
13,588,966
|
|
Accumulated other comprehensive income
|
|
643,488
|
|
767,747
|
|
Total shareholders equity
|
|
57,529,414
|
|
88,962,568
|
|
Total Liabilities and
Shareholders Equity
|
|
$
|
1,083,676,760
|
|
$
|
991,741,590
|
|
See Accompanying Notes to
Consolidated Financial Statements (Unaudited).
2
Table of
Contents
ATLANTIC SOUTHERN FINANCIAL GROUP, INC.
Consolidated Statements of Operations
For
the Three Months and Nine Months Ended September 30, 2009 and 2008
(Unaudited)
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Interest and Dividend Income:
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans
|
|
$
|
10,424,193
|
|
$
|
12,591,813
|
|
$
|
32,555,605
|
|
$
|
38,457,367
|
|
Interest on securities:
|
|
|
|
|
|
|
|
|
|
Taxable income
|
|
614,751
|
|
824,416
|
|
2,400,476
|
|
2,167,990
|
|
Non-taxable income
|
|
146,952
|
|
227,177
|
|
470,204
|
|
652,614
|
|
Income on federal funds sold
|
|
|
|
35,594
|
|
|
|
148,977
|
|
Other interest and dividend income
|
|
68,928
|
|
48,652
|
|
77,409
|
|
204,398
|
|
Total interest and dividend income
|
|
11,254,824
|
|
13,727,652
|
|
35,503,694
|
|
41,631,346
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
6,704,732
|
|
7,310,723
|
|
20,052,429
|
|
21,889,215
|
|
Junior subordinated debentures
|
|
69,176
|
|
125,961
|
|
255,423
|
|
428,351
|
|
Federal funds purchased
|
|
112
|
|
8,037
|
|
209
|
|
52,797
|
|
FHLB borrowings and other interest expense
|
|
448,987
|
|
261,671
|
|
1,272,319
|
|
996,515
|
|
Total interest expense
|
|
7,223,007
|
|
7,706,392
|
|
21,580,380
|
|
23,366,878
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
4,031,817
|
|
6,021,260
|
|
13,923,314
|
|
18,264,468
|
|
Provision for loan losses
|
|
11,352,000
|
|
907,000
|
|
17,420,000
|
|
2,255,000
|
|
Net interest income (expense) after provision for
loan losses
|
|
(7,320,183
|
)
|
5,114,260
|
|
(3,496,686
|
)
|
16,009,468
|
|
Noninterest Income:
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
464,250
|
|
455,318
|
|
1,303,925
|
|
1,312,536
|
|
Other service charges, commissions and fees
|
|
135,817
|
|
128,818
|
|
373,944
|
|
357,549
|
|
Gain (loss) on sales, calls and impairment write-down
of investment securities
|
|
15,342
|
|
(1,160,895
|
)
|
1,331,160
|
|
(1,120,650
|
)
|
Mortgage origination income
|
|
249,162
|
|
210,794
|
|
642,749
|
|
640,826
|
|
Other income
|
|
267,493
|
|
245,851
|
|
823,569
|
|
923,082
|
|
Total noninterest income
|
|
1,132,064
|
|
(120,114
|
)
|
4,475,347
|
|
2,113,343
|
|
Noninterest Expense:
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
2,423,366
|
|
3,027,999
|
|
7,838,818
|
|
8,715,614
|
|
Occupancy expense
|
|
463,275
|
|
482,284
|
|
1,355,029
|
|
1,393,955
|
|
Equipment rental and depreciation of equipment
|
|
333,301
|
|
318,108
|
|
964,804
|
|
862,418
|
|
Loss on sale of other assets
|
|
464,847
|
|
23,951
|
|
1,988,532
|
|
37,436
|
|
Goodwill impairment
|
|
|
|
|
|
19,533,501
|
|
|
|
Other expenses
|
|
2,810,101
|
|
1,889,478
|
|
7,363,428
|
|
5,252,736
|
|
Total noninterest expense
|
|
6,494,890
|
|
5,741,820
|
|
39,044,112
|
|
16,262,159
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) Before Income
Taxes
|
|
(12,683,009
|
)
|
(747,674
|
)
|
(38,065,451
|
)
|
1,860,652
|
|
Income tax benefit (expense)
|
|
4,395,044
|
|
400,799
|
|
6,737,530
|
|
(309,535
|
)
|
Net Earnings (Loss)
|
|
$
|
(8,287,965
|
)
|
$
|
(346,875
|
)
|
$
|
(31,327,921
|
)
|
$
|
1,551,117
|
|
Net Earnings (Loss) per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.97
|
)
|
$
|
(0.08
|
)
|
$
|
(7.44
|
)
|
$
|
0.37
|
|
Diluted
|
|
$
|
(1.97
|
)
|
$
|
(0.08
|
)
|
$
|
(7.44
|
)
|
$
|
0.35
|
|
Dividends declared per share:
|
|
$
|
|
|
$
|
0.03
|
|
$
|
|
|
$
|
0.09
|
|
See Accompanying Notes to Consolidated Financial Statements
(Unaudited).
3
Table of
Contents
ATLANTIC SOUTHERN FINANCIAL GROUP, INC.
Consolidated Statements of Comprehensive Income
(Loss)
For
the Three Months and Nine Months Ended September 30, 2009 and 2008
(Unaudited)
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Net earnings (loss)
|
|
$
|
(8,287,965
|
)
|
$
|
(346,875
|
)
|
$
|
(31,327,921
|
)
|
$
|
1,551,117
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
Unrealized holding gain (losses) on investment securities
available for sale
|
|
1,349,409
|
|
(463,367
|
)
|
1,200,506
|
|
(1,462,738
|
)
|
Reclassification adjustment for (gains) losses
realized in net earnings
|
|
(15,342
|
)
|
1,160,895
|
|
(1,388,778
|
)
|
1,120,650
|
|
Total other comprehensive income (loss), before tax
|
|
1,334,067
|
|
697,528
|
|
(188,272
|
)
|
(342,088
|
)
|
Income taxes related to other comprehensive
(income) loss:
|
|
|
|
|
|
|
|
|
|
Unrealized holding (gains) losses on investment securities
available for sale
|
|
(458,799
|
)
|
157,545
|
|
(408,172
|
)
|
497,331
|
|
Reclassification adjustment for gains (losses)
realized in net earnings
|
|
5,216
|
|
(394,704
|
)
|
472,185
|
|
(381,020
|
)
|
Total income taxes related to other comprehensive
(income) loss
|
|
(453,583
|
)
|
(237,159
|
)
|
64,013
|
|
116,311
|
|
Total other comprehensive income (loss), net of tax
|
|
880,484
|
|
460,369
|
|
(124,259
|
)
|
(225,777
|
)
|
Total comprehensive income (loss)
|
|
$
|
(7,407,481
|
)
|
$
|
113,494
|
|
$
|
(31,452,180
|
)
|
$
|
1,325,340
|
|
See Accompanying Notes to Consolidated Financial Statements
(Unaudited).
4
Table of
Contents
ATLANTIC SOUTHERN FINANCIAL GROUP, INC.
Consolidated Statements of Cash Flows
For
the Nine Months Ended September 30, 2009 and 2008
(Unaudited)
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
2008
|
|
Cash Flows from Operating
Activities:
|
|
|
|
|
|
Net earnings (loss)
|
|
$
|
(31,327,921
|
)
|
$
|
1,551,117
|
|
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
|
|
|
|
|
|
Provision for loan losses
|
|
17,420,000
|
|
2,255,000
|
|
Depreciation
|
|
1,219,143
|
|
1,072,085
|
|
Stock based compensation
|
|
19,026
|
|
41,202
|
|
Goodwill impairment charge
|
|
19,533,501
|
|
|
|
Amortization and (accretion), net
|
|
536,481
|
|
233,401
|
|
Loss on sales and impairment of other assets
|
|
2,370,298
|
|
119,505
|
|
(Gain) loss on sales, calls and impairment write-down
of investment securities
|
|
(1,331,160
|
)
|
1,120,650
|
|
Earnings on cash surrender value of life insurance
|
|
(401,540
|
)
|
(388,449
|
)
|
Change in:
|
|
|
|
|
|
Loans held for sale
|
|
(280,588
|
)
|
(13,488
|
)
|
Accrued income and other assets
|
|
(5,012,220
|
)
|
(1,188,802
|
)
|
Accrued expenses and other liabilities
|
|
(76,297
|
)
|
801,407
|
|
Net cash provided by operating activities
|
|
2,668,723
|
|
5,603,628
|
|
Cash Flows from Investing
Activities:
|
|
|
|
|
|
Net change in loans to customers
|
|
5,215,629
|
|
(101,892,953
|
)
|
Purchase of available for sale securities
|
|
(201,094,582
|
)
|
(51,214,050
|
)
|
Proceeds from sales, calls, maturities and paydowns
of available for sale securities
|
|
122,479,947
|
|
22,778,346
|
|
Purchase of other investments
|
|
(880,600
|
)
|
(686,200
|
)
|
Proceeds from sale of other investments
|
|
484,000
|
|
684,000
|
|
Purchase of cash surrender value of life insurance
|
|
|
|
(7,500,000
|
)
|
Property and equipment expenditures
|
|
(1,492,611
|
)
|
(2,578,378
|
)
|
Cash paid for improvements of other real estate
|
|
(25,048
|
)
|
(117,259
|
)
|
Proceeds from sales of assets
|
|
4,693,445
|
|
578,351
|
|
Net cash used in investing activities
|
|
(70,619,820
|
)
|
(139,948,143
|
)
|
Cash Flows from Financing
Activities:
|
|
|
|
|
|
Net change in deposits
|
|
120,708,633
|
|
141,219,268
|
|
Net increase in federal funds purchased
|
|
|
|
191,000
|
|
Advances on FHLB borrowings
|
|
31,000,000
|
|
20,200,000
|
|
Payments on FHLB borrowings
|
|
(28,200,000
|
)
|
(30,200,000
|
)
|
Proceeds from subordinated debentures
|
|
|
|
950,000
|
|
Dividends paid
|
|
|
|
(373,661
|
)
|
Net cash provided by financing activities
|
|
123,508,633
|
|
131,986,607
|
|
Net Increase (Decrease) in Cash
and Cash Equivalents
|
|
55,557,536
|
|
(2,357,908
|
)
|
Cash and Cash Equivalents,
Beginning of Year
|
|
15,130,136
|
|
19,924,178
|
|
Cash and Cash Equivalents, End of Quarter
|
|
$
|
70,687,672
|
|
$
|
17,566,270
|
|
See Accompanying Notes to Consolidated Financial Statements
(Unaudited).
5
Table of
Contents
ATLANTIC SOUTHERN FINANCIAL GROUP, INC.
Consolidated
Statements of Cash Flows
For
the Nine Months Ended September 30, 2009 and 2008
(Unaudited)
Supplemental Disclosure of Cash Flow Information
Noncash transactions:
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
2008
|
|
Changes in unrealized gain/loss on investments, net
of tax effect
|
|
$
|
(124,259
|
)
|
$
|
(225,777
|
)
|
Transfer of loans to other real estate and other
assets
|
|
$
|
16,758,579
|
|
$
|
1,676,776
|
|
Transfer of other real estate to loans
|
|
$
|
4,078,873
|
|
$
|
|
|
See Accompanying Notes to Consolidated Financial Statements
(Unaudited).
6
Table
of Contents
ATLANTIC SOUTHERN FINANCIAL
GROUP, INC.
Notes to
Consolidated Financial Statements
(Unaudited)
(1) Basis of Presentation
The
accompanying unaudited consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and therefore do not include
all information and footnotes necessary for a fair presentation of financial
position, results of operations, and changes in financial position in
conformity with generally accepted accounting principles. The interim financial statements furnished
reflect all adjustments, which are, in the opinion of management, necessary to
a fair statement of the results for the interim periods presented. The interim consolidated financial statements
should be read in conjunction with the Companys Annual Report on Form 10-K
for the year ended December 31, 2008.
(2) Subsequent Events
The Company performed an evaluation
of
subsequent
events through November 10, 2009, the date upon which the Companys
quarterly report on Form 10-Q was filed with the Securities and Exchange
Commission. No subsequent events were
identified that would have required a change to the financial statements or
disclosure in the notes to the financial statements.
(3) Managements Plan of Action
for Cease and Desist Order
On September 11,
2009, Atlantic Southern Bank (the Bank), the wholly-owned subsidiary bank of
Atlantic Southern Financial Group, Inc., entered into a Stipulation and
Consent to the Issuance of an Order to Cease and Desist (the Consent Agreement)
with the Federal Deposit Insurance Corporation (the FDIC) and the Georgia
Department of Banking and Finance (the GDBF), whereby the Bank consented to
the issuance of an Order to Cease and Desist (the Order). Under the terms of the Order, the Bank cannot
declare dividends without the prior written approval of the FDIC and the GDBF.
Other material provisions of the order require the Bank to: (i) strengthen
its board of directors oversight of management and operations of the Bank, (ii) establish
a committee consisting of at least four members, three of which must be
independent, to oversee the Banks compliance with the Order, (iii) maintain
specified capital and liquidity ratios, (iv) improve the Banks lending
and collection policies and procedures, particularly with respect to the
origination and monitoring of commercial real estate and acquisition,
development and construction loans, (v) eliminate from its books, by
charge off or collection, all assets classified as loss and 50% of all assets
classified as doubtful, (vi) perform risk segmentation analysis with
respect to concentrations of credit, (vii) receive a brokered deposit
waiver from the FDIC prior to accepting, rolling over or renewing any brokered
deposits and submit a written plan for eliminating its reliance on brokered
deposits, (viii) adopt and implement a policy limiting the use of loan
interest reserves, (ix) formulate and fully implement a written plan and
comprehensive budget for all categories of income and expense, and (x) prepare
and submit progress reports to the FDIC and the GDBF. The FDIC order will
remain in effect until modified or terminated by the FDIC and the GDBF.
The
Bank expects to continue to serve its customers in all areas including making
loans, establishing lines of credit, accepting deposits and processing banking
transactions. The Banks deposits will
remain insured by the FDIC to the maximum limits allowed by law. The FDIC and GDBF did not impose or recommend
any monetary penalties.
The following
is an update as to the actions taken by the Bank in response to the Order. As of the date of this report, the Bank has
made the following progress in complying with the above stated provisions:
(i)
Since the Order and throughout 2009, the
board of directors participation in the affairs of the Bank has increased
through greater communication with management, an analysis of management
reports to the board, as well as increased committee activities.
(ii)
The Bank has formed an oversight
committee for the purpose of monitoring the Banks overall compliance with the
Order and this committee has been meeting bi-weekly and reporting to the full
board of the Bank at each regularly scheduled board meeting. Although not specifically required by the
Order, the board engaged an independent management consulting firm to conduct
an assessment of Bank management.
7
Table
of Contents
ATLANTIC SOUTHERN FINANCIAL
GROUP, INC.
Notes to
Consolidated Financial Statements
(Unaudited)
(iii)
The Bank has developed a capital plan,
which includes expense reductions to improve earnings, restructuring the
balance sheet to reduce non-performing assets, seeking new capital and limiting
loan growth. The Bank is currently
updating the plan and will continue to revise the plan quarterly. The Bank has also reviewed its written
liquidity, contingency funding, and funds management policies and has made
appropriate revisions. Both the revised
capital plan and the revised liquidity policy have been submitted to the
supervisory authorities for review. The
Banks Total Risk Based Capital ratio was 9.34% and the Tier 1 Leverage Ratio
was 5.69% at September 30, 2009.
The Banks liquidity ratio at September 30, 2009 was 25.94%.
(iv)
The Bank has reviewed and revised lending
policies to provide additional guidance and control over the lending functions.
(v)
The Bank has eliminated from its books
all assets or portions of assets classified as Loss and 50% of all assets or
portions of assets classified as Doubtful.
(vi)
The Bank has performed a risk
segmentation analysis with respect to concentrations of credit and is
developing a plan to reduce the concentrations of credit. Upon completion, we will submit the plan to
the supervisory authorities.
(vii)
The Bank submitted to the supervisory
authorities a written plan for eliminating its reliance on brokered deposits
and will not accept, roll over or renew any brokered deposits unless a waiver
has been received from the FDIC. The
Bank has significantly reduced its exposure to brokered deposits. Since June 30, 2008, the Bank reduced
brokered deposits by 19.3%, or $78 million, while increasing core deposits by
$199 million during the same period.
(viii)
The Bank has adopted a policy limiting
the use of interest reserves.
(ix)
A three-year profit plan has been
developed and is currently under review by the oversight committee.
(x)
The Bank has submitted the required
progress report to the appropriate supervisory authorities.
(4) Net Earnings (Loss) per
Share
Basic earnings (loss) per share are
based
on
the weighted average number of common shares outstanding during the
period while the effects of potential shares outstanding during the period are
included in diluted earnings per share.
Options and
warrants were not included in the diluted (loss) per share computations for the
three and nine months ended September 30, 2009 and for the three months
ended September 30, 2008 as they were all antidilutive.
The reconciliation of the amounts
used in the computation of both basic earnings (loss) per share and diluted
earnings (loss) per share for each period is presented as follows:
8
Table
of Contents
ATLANTIC SOUTHERN FINANCIAL
GROUP, INC.
Notes to
Consolidated Financial Statements
(Unaudited)
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$
|
(8,287,965
|
)
|
$
|
(346,875
|
)
|
$
|
(31,327,921
|
)
|
$
|
1,551,117
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common
shares outstanding
|
|
4,211,780
|
|
4,151,780
|
|
4,211,780
|
|
4,151,780
|
|
Shares issued from assumed
exercise of common stock equivalents
|
|
|
|
|
|
|
|
227,819
|
|
Weighted average number of
common and common equivalent shares outstanding
|
|
4,211,780
|
|
4,151,780
|
|
4,211,780
|
|
4,379,599
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.97
|
)
|
$
|
(0.08
|
)
|
$
|
(7.44
|
)
|
$
|
0.37
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(1.97
|
)
|
$
|
(0.08
|
)
|
$
|
(7.44
|
)
|
$
|
0.35
|
|
(5)
Investment Securities
Debt and equity securities have been classified in
the balance sheet according to managements intent. All investments as of September 30, 2009
and December 31, 2008 are classified as available for sale. The following table reflects the amortized
cost and estimated fair values of the investments:
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Estimated
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Fair Value
|
|
September 30, 2009
|
|
|
|
|
|
|
|
|
|
Non-mortgage backed debt
securities of :
|
|
|
|
|
|
|
|
|
|
U.S. Treasury obligations
|
|
$
|
100,163,158
|
|
$
|
43,013
|
|
$
|
(675
|
)
|
$
|
100,205,496
|
|
U.S. government sponsored
enterprises
|
|
37,318,791
|
|
471,536
|
|
(12,050
|
)
|
37,778,277
|
|
State and political
subdivisions
|
|
15,429,117
|
|
266,257
|
|
(456,632
|
)
|
15,238,742
|
|
Other investments
|
|
250,000
|
|
11,560
|
|
|
|
261,560
|
|
Total non-mortgage backed
debt securities
|
|
153,161,066
|
|
792,366
|
|
(469,357
|
)
|
153,484,075
|
|
Mortgage backed securities
|
|
25,949,062
|
|
702,546
|
|
(50,870
|
)
|
26,600,738
|
|
Equity securities
|
|
84,725
|
|
5,097
|
|
(4,800
|
)
|
85,022
|
|
Total
|
|
$
|
179,194,853
|
|
$
|
1,500,009
|
|
$
|
(525,027
|
)
|
$
|
180,169,835
|
|
December 31,
2008
|
|
|
|
|
|
|
|
|
|
Non-mortgage backed debt
securities of :
|
|
|
|
|
|
|
|
|
|
U.S. Treasury obligations
|
|
$
|
249,892
|
|
$
|
1,701
|
|
$
|
|
|
$
|
251,593
|
|
U.S. government sponsored
enterprises
|
|
17,051,518
|
|
709,477
|
|
|
|
17,760,995
|
|
State and political
subdivisions
|
|
21,241,661
|
|
119,635
|
|
(1,063,228
|
)
|
20,298,068
|
|
Other investments
|
|
250,000
|
|
|
|
|
|
250,000
|
|
Total non-mortgage backed
debt securities
|
|
38,793,071
|
|
830,813
|
|
(1,063,228
|
)
|
38,560,656
|
|
Mortgage backed securities
|
|
60,578,388
|
|
1,470,122
|
|
(12,465
|
)
|
62,036,045
|
|
Equity securities
|
|
84,725
|
|
|
|
(61,989
|
)
|
22,736
|
|
Total
|
|
$
|
99,456,184
|
|
$
|
2,300,935
|
|
$
|
(1,137,682
|
)
|
$
|
100,619,437
|
|
The amortized cost and fair values of pledged
securities for public deposits were as follows:
|
|
September 30,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
Amortized cost
|
|
$
|
5,839,067
|
|
$
|
12,098,353
|
|
Fair value
|
|
$
|
5,644,967
|
|
$
|
12,106,428
|
|
9
Table
of Contents
ATLANTIC SOUTHERN
FINANCIAL GROUP, INC.
Notes to
Consolidated Financial Statements
(Unaudited)
The amortized cost and estimated fair value of debt
securities available for sale at September 30, 2009, by contractual maturity,
is shown below. Expected maturities for
mortgage-backed securities may differ from contractual maturities because in
certain cases borrowers can prepay obligations without prepayment
penalties. Therefore, these securities
are not included in the following maturity summary.
|
|
|
|
Estimated
|
|
|
|
Amortized Cost
|
|
Fair Value
|
|
Non-mortgage backed debt
securities:
|
|
|
|
|
|
Due in one year or less
|
|
$
|
101,162,232
|
|
$
|
101,210,806
|
|
Due after one year through
five years
|
|
27,678,402
|
|
27,882,131
|
|
Due after five years
through ten years
|
|
11,652,303
|
|
11,847,718
|
|
Due after ten years
|
|
12,668,129
|
|
12,543,420
|
|
Total non-mortgage backed
debt securities
|
|
$
|
153,161,066
|
|
$
|
153,484,075
|
|
The fair value is established by an independent
pricing service as of the approximate dates indicated. The differences between the amortized cost
and fair value reflect current interest rates and represent the potential loss
(or gain) had the portfolio been liquidated on that date. Security losses (or gains) are realized only
in the event of dispositions prior to maturity.
Information pertaining to securities with gross
unrealized losses, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position,
follows:
|
|
September 30, 2009
|
|
|
|
Less Than Twelve Months
|
|
More Than Twelve Months
|
|
|
|
Unrealized
|
|
Estimated
|
|
Unrealized
|
|
Estimated
|
|
Securities
Available for Sale
|
|
Losses
|
|
Fair Value
|
|
Losses
|
|
Fair Value
|
|
Non-mortgage backed debt
securities of:
|
|
|
|
|
|
|
|
|
|
U.S. Treasury obligations
|
|
$
|
(675
|
)
|
$
|
2,991,900
|
|
$
|
|
|
$
|
|
|
U.S. government sponsored
enterprises
|
|
(12,050
|
)
|
2,487,950
|
|
|
|
|
|
State and political
subdivisions
|
|
(16,619
|
)
|
1,496,265
|
|
(440,013
|
)
|
4,051,759
|
|
Total non-mortgage backed
debt securities
|
|
(29,344
|
)
|
6,976,115
|
|
(440,013
|
)
|
4,051,759
|
|
Mortgage backed securities
|
|
(50,870
|
)
|
2,470,308
|
|
|
|
|
|
Equity securities
|
|
|
|
|
|
(4,800
|
)
|
70,000
|
|
Total
|
|
$
|
(80,214
|
)
|
$
|
9,446,423
|
|
$
|
(444,813
|
)
|
$
|
4,121,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Less Than Twelve Months
|
|
More Than Twelve Months
|
|
|
|
Unrealized
|
|
Estimated
|
|
Unrealized
|
|
Estimated
|
|
Securities
Available for Sale
|
|
Losses
|
|
Fair Value
|
|
Losses
|
|
Fair Value
|
|
Non-mortgage backed debt
securities of:
|
|
|
|
|
|
|
|
|
|
U.S. government sponsored
enterprises
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
State and political
subdivisions
|
|
(1,038,539
|
)
|
12,911,929
|
|
(24,689
|
)
|
390,310
|
|
Total non-mortgage backed
debt securities
|
|
(1,038,539
|
)
|
12,911,929
|
|
(24,689
|
)
|
390,310
|
|
Mortgage backed securities
|
|
(12,465
|
)
|
2,644,664
|
|
|
|
|
|
Equity securities
|
|
(61,989
|
)
|
22,736
|
|
|
|
|
|
Total
|
|
$
|
(1,112,993
|
)
|
$
|
15,579,329
|
|
$
|
(24,689
|
)
|
$
|
390,310
|
|
Management evaluates securities for
other-than-temporary impairment at least on a quarterly basis, and more
frequently when economic or market concerns warrant such evaluation.
Consideration is given to (1) the length of time and the extent to which
the fair value has been less than cost, (2) the financial condition and
near-term prospects of the issuer, and (3) the intent and ability of the
Company to retain its investment in the issuer for a period of time sufficient
to allow for any anticipated recovery in fair value.
10
Table of Contents
ATLANTIC SOUTHERN
FINANCIAL GROUP, INC.
Notes to
Consolidated Financial Statements
(Unaudited)
At
September 30, 2009, nineteen debt securities had unrealized losses with
aggregate depreciation of 0.29% from the Companys amortized cost basis. In analyzing an issuers financial condition,
management considers whether the securities are issued by the federal
government or its agencies, whether downgrades by bond rating agencies have
occurred, and industry analysts reports. As management has the ability and
intent to hold debt securities until maturity, or for the foreseeable future if
classified as available for sale and it is more likely than not that the
Company will not be required to sell these investments before recovery of their
amortized cost basis, no declines are deemed to be other than temporary.
The
following table summarizes securities sales activity for the three month and
nine month periods ended September 30, 2009 and 2008:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Proceeds from sales
|
|
$
|
|
|
$
|
6,628,958
|
|
$
|
51,611,819
|
|
$
|
6,628,958
|
|
Proceeds from calls
|
|
5,040,000
|
|
440,000
|
|
5,220,000
|
|
8,255,000
|
|
Proceeds from maturities
|
|
27,340,247
|
|
3,750,000
|
|
56,080,247
|
|
4,750,000
|
|
Total
|
|
$
|
32,380,247
|
|
$
|
10,818,958
|
|
$
|
112,912,066
|
|
$
|
19,633,958
|
|
|
|
|
|
|
|
|
|
|
|
Gross gains
|
|
$
|
16,119
|
|
$
|
26,030
|
|
$
|
1,400,252
|
|
$
|
66,275
|
|
Gross losses
|
|
(777
|
)
|
(21,641
|
)
|
(11,474
|
)
|
(21,641
|
)
|
Impairment losses
|
|
|
|
(1,165,284
|
)
|
(57,618
|
)
|
(1,165,284
|
)
|
|
|
|
|
|
|
|
|
|
|
Net gains (losses) of
securities
|
|
$
|
15,342
|
|
$
|
(1,160,895
|
)
|
$
|
1,331,160
|
|
$
|
(1,120,650
|
)
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
(benefit)
|
|
$
|
5,216
|
|
$
|
(394,704
|
)
|
$
|
472,185
|
|
$
|
(381,020
|
)
|
During
the second quarter of 2009, the Company recognized an impairment loss of
$57,618 on an equity investment in Silverton Bank, a financial institution that
failed during the quarter. The
impairment loss represents the full amount of the Companys investment in
Silverton.
During
the second quarter of 2009, the Bank restructured approximately $36 million in
U.S. agency and mortgage backed securities to capture gains on securities
prepaying at high speeds, to offset the FDIC special assessment and to shorten
the average maturity of the portfolio.
During the third quarter of 2009, the Bank recognized
approximately $16 thousand from the calls of $5.0 million in U.S government
sponsored enterprises securities. Other
proceeds are from the maturities of $1.8 million in U.S. government sponsored
enterprises, $25.0 million in U.S. Treasury obligations and $605 thousand in
state and political subdivisions securities.
11
Table of Contents
ATLANTIC SOUTHERN FINANCIAL
GROUP, INC.
Notes to
Consolidated Financial Statements
(Unaudited)
(6) Allowance for Loan
Losses
Activity in the allowance for loan losses for the nine months ended September 30,
2009 and for the year ended December 31, 2008 is as follows:
|
|
September 30,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
Beginning Balance
|
|
$
|
11,671,534
|
|
$
|
8,878,795
|
|
Add:
|
|
|
|
|
|
Provision for possible loan
losses
|
|
17,420,000
|
|
7,443,000
|
|
Subtotal
|
|
29,091,534
|
|
16,321,795
|
|
Less:
|
|
|
|
|
|
Loans charged off
|
|
14,708,798
|
|
4,843,627
|
|
Recoveries on loans
previously charged off
|
|
(220,018
|
)
|
(193,366
|
)
|
Net loans charged off
|
|
14,488,780
|
|
4,650,261
|
|
Balance, end of period
|
|
$
|
14,602,754
|
|
$
|
11,671,534
|
|
(7) Nonperforming Assets
Nonperforming assets consist of non-accrual loans,
accruing loans 90 days past due, repossessed assets and other real estate
owned. The following summarizes non-performing assets:
|
|
September 30.
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
Accruing loans 90 days past
due
|
|
$
|
|
|
$
|
|
|
Non-accrual loans
|
|
69,900,631
|
|
21,103,468
|
|
Repossessed assets
|
|
40,500
|
|
34,783
|
|
Other real estate
|
|
15,775,214
|
|
10,196,165
|
|
Total non-performing assets
|
|
$
|
85,716,345
|
|
$
|
31,334,416
|
|
Nonperforming
assets increased $54.4 million, or 173.6%, from December 31, 2008 to September 30,
2009. This increase is largely due to
several large relationships that are secured by commercial and residential real
estate construction and land development real estate being placed on
non-accrual during the three quarters of 2009.
All non-accrual loans are adequately collateralized based on managements
judgment and supported by recent collateral appraisals. Other real estate increased $5.6 million from
December 31, 2008 to September 30, 2009. This increase is largely due to the addition
of $16.8 million in foreclosed properties being offset by the sale of $8.8
million in foreclosed properties resulting in $2.0 million loss on these
properties. During the third quarter of
2009, the Company added approximately $12.1 million in 29 other real estate
properties.
As of September 30,
2009 and December 31, 2008, the Companys other real estate consisted of
the following:
|
|
As of September 30, 2009
|
|
As of December 31, 2008
|
|
1-4 Family residential
properties
|
|
21
|
|
$
|
3,203,001
|
|
8
|
|
$
|
3,574,090
|
|
Nonfarm nonresidential
properties
|
|
9
|
|
6,085,070
|
|
5
|
|
520,101
|
|
Multifamily residential
properties
|
|
1
|
|
31,675
|
|
|
|
|
|
Construction &
land development properties
|
|
23
|
|
6,455,468
|
|
15
|
|
6,101,974
|
|
Total
|
|
54
|
|
$
|
15,775,214
|
|
28
|
|
$
|
10,196,165
|
|
All
properties are being actively marketed for sale and management is continuously
monitoring these properties in order to minimize any losses.
12
Table of Contents
ATLANTIC SOUTHERN
FINANCIAL GROUP, INC.
Notes to
Consolidated Financial Statements
(Unaudited)
On November 3,
2009, the Bank foreclosed on approximately $7.4 million in various commercial,
construction and land development and 1-4 family residential real estate
properties. These properties were being
held as collateral against several non-accrual loans at September 30,
2009. Management is currently evaluating
any additional losses on these properties.
The
Companys policy is to place loans on non-accrual status when it appears that
the collection of interest in accordance with the terms of the loan is
doubtful. Any loan which becomes 90 days
past due as to principal or interest is automatically placed on non-accrual. Exceptions are allowed for 90-day past due
loans when such loans are well secured and in process of collection. Other real estate is defined as real estate
acquired through or in lieu of foreclosure.
At the time of foreclosure, an appraisal is obtained on the real
estate. The amount charged to other real
estate will be the estimated fair value less costs to sell. The recorded investment is the unpaid balance
of the loan, increased by accrued and uncollected interest, unamortized
premium, finance charges, and loan acquisition costs, if any, and decreased by
previous direct write down and unamortized discount. Any excess of the recorded investment in the
loan satisfied over the appraised value of the property must be charged to
allowance for loan losses.
(8)
Goodwill
A summary of the changes in goodwill as of September 30,
2009 and December 31, 2008 is presented below.
|
|
September 30,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
Beginning Balance
|
|
$
|
19,533,501
|
|
$
|
19,533,501
|
|
Impairment
|
|
(19,533,501
|
)
|
|
|
Ending Balance
|
|
$
|
|
|
$
|
19,533,501
|
|
During the second quarter of 2009, the Company
updated its goodwill impairment assessment based upon the current economic
environment. The current economic
environment factors have resulted in lower earnings with higher credit costs
being reflected in the statement of operations as well as valuation adjustments
to the loan balances through increases in the level of the allowance for loan
losses. As a result of the updated
assessment, goodwill was found to be impaired and was written down to its
estimated fair value. The impairment
charge of $19.5 million was recognized as an expense in the second quarter
consolidated statement of operations.
(9)
Shareholders
Equity
On May 27, 2009, the Company amended its
Articles of Incorporation to eliminate par value per share with respect to its
common stock from the previous $5.00 par value per share of its common
stock. Therefore, the paid-in capital
surplus for the Company as of that date was included with the Companys common
stock.
(10)
Fair
Value Measurements and Disclosures
Assets and Liabilities Recorded at Fair Value on a
Recurring Basis
The table below presents the recorded amount of
assets and liabilities measured at fair value on a recurring basis.
|
|
As
of September 30,
|
|
|
|
2009
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale
|
|
$
|
180,169,835
|
|
$
|
|
|
$
|
180,169,835
|
|
$
|
|
|
Total
assets at fair value
|
|
$
|
180,169,835
|
|
$
|
|
|
$
|
180,169,835
|
|
$
|
|
|
During the first quarter of 2009, the Company changed
its investment bond accountants.
Therefore, the level of measurement techniques to evaluate some of the
securities available-for-sale changed to include all in the Level
13
Table of Contents
ATLANTIC SOUTHERN FINANCIAL
GROUP, INC.
Notes to
Consolidated Financial Statements
(Unaudited)
2 category since they are using different pricing
sources and different matrixes for the securities available-for-sale.
Assets Recorded at Fair Value on a Nonrecurring Basis
The Company may be required, from time to time, to
measure certain assets at fair value on a nonrecurring basis in accordance with
U.S. generally accepted accounting principles.
These include assets that are measured at the lower of cost or market
that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a
nonrecurring basis are included in the table below.
|
|
As
of September 30,
|
|
|
|
2009
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
79,668,971
|
|
$
|
|
|
$
|
79,668,971
|
|
$
|
|
|
Loans held for sale
|
|
1,571,940
|
|
|
|
1,571,940
|
|
|
|
Other real estate owned
|
|
15,775,214
|
|
|
|
15,775,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets at fair value
|
|
$
|
97,016,125
|
|
$
|
|
|
$
|
97,016,125
|
|
$
|
|
|
The
carrying amount and estimated fair values of the Companys assets and
liabilities which are required to be either disclosed or recorded at fair value
at September 30, 2009 and December 31, 2008 are as follows:
|
|
September 30, 2009
|
|
December 31, 2008
|
|
|
|
Carrying
|
|
Estimated
|
|
Carrying
|
|
Estimated
|
|
|
|
Amount
|
|
Fair Value
|
|
Amount
|
|
Fair Value
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
70,687,672
|
|
$
|
70,687,672
|
|
$
|
15,130,136
|
|
$
|
15,130,136
|
|
Securities available for
sale
|
|
180,169,835
|
|
180,169,835
|
|
100,619,437
|
|
100,619,437
|
|
Federal Home Loan Bank
Stock
|
|
4,316,800
|
|
4,316,800
|
|
3,670,200
|
|
3,670,200
|
|
Loans held for sale
|
|
1,571,940
|
|
1,571,940
|
|
1,291,352
|
|
1,291,352
|
|
Loans, net
|
|
745,896,795
|
|
747,117,534
|
|
781,212,130
|
|
783,884,588
|
|
Other real estate owned
|
|
15,775,214
|
|
15,775,214
|
|
10,196,165
|
|
10,196,165
|
|
Cash surrender value of
life insurance
|
|
12,866,768
|
|
12,866,768
|
|
12,465,228
|
|
12,465,228
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
957,160,076
|
|
963,849,714
|
|
836,451,443
|
|
838,965,232
|
|
FHLB borrowings
|
|
50,300,000
|
|
51,268,959
|
|
47,500,000
|
|
48,403,420
|
|
Subordinated debentures
|
|
1,400,000
|
|
1,400,000
|
|
1,400,000
|
|
1,400,000
|
|
Junior subordinated
debentures
|
|
10,310,000
|
|
10,310,000
|
|
10,310,000
|
|
10,310,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limitations
- Fair value
estimates are made at a specific point in time, based on relevant market
information and information about the financial statement elements. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in
assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and
off-balance sheet financial instruments without attempting to estimate the
value of anticipated future business and the fair value of assets and
liabilities that are not required to be recorded or disclosed at fair value
like the mortgage banking operation, brokerage network and premises and
equipment.
14
Table of Contents
ATLANTIC SOUTHERN FINANCIAL
GROUP, INC.
Notes to
Consolidated Financial Statements
(Unaudited)
(11) Accounting
Standards Updates
In
June 2009, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update No. 2009-01 (ASU 2009-01),
Topic 105 Generally Accepted Accounting Principles
amendments based on Statement of Financial Accounting Standards No. 168
The FASB Accounting Standards Codification
TM
and the Hierarchy of Generally Accepted
Accounting Principles
. ASU 2009-01 amends the FASB Accounting
Standards Codification for the issuance of FASB Statement No. 168 (SFAS
168),
The FASB Accounting Standards
Codification
TM
and the Hierarchy of Generally Accepted
Accounting Principles
. ASU 2009-1 includes SFAS 168 in its
entirety, including the accounting standards update instructions contained in
Appendix B of the Statement. The FASB Accounting Standards Codification
TM
(Codification) became the source of
authoritative U.S. generally accepted accounting principles (GAAP) recognized
by the FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the Securities and Exchange Commission (SEC) under
authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants. On the effective date of this Statement, the Codification will
supersede all then-existing non-SEC accounting and reporting standards. All
other non-grandfathered non-SEC accounting literature not included in the
Codification will become non-authoritative. This Statement is effective for
financial statements issued for interim and annual periods ending after September 15,
2009.
Following
this Statement, the FASB will not issue new standards in the form of
Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts.
Instead, it will issue Accounting Standards Updates. The FASB does not consider
Accounting Standards Updates as authoritative in their own right. Accounting
Standards Updates serve only to update the Codification, provide background
information about the guidance, and provide the bases for conclusions on the
change(s) in the Codification. FASB Statement No. 162,
The Hierarchy of Generally Accepted Accounting
Principles
, which became effective on November 13, 2008,
identified the sources of accounting principles and the framework for selecting
the principles used in preparing the financial statements of nongovernmental
entities that are presented in conformity with GAAP. Statement 162 arranged
these sources of GAAP in a hierarchy for users to apply accordingly. Upon
becoming effective, all of the content of the Codification carries the same
level of authority, effectively superseding Statement 162. In other words, the
GAAP hierarchy has been modified to include only two levels of GAAP:
authoritative and non-authoritative. As a result, this Statement replaces
Statement 162 to indicate this change to the GAAP hierarchy. The adoption of
the Codification and ASU 2009-01 did not have any effect on the Companys
consolidated financial condition or results of operations.
In
June 2009, the FASB issued Accounting Standards Update No. 2009-02 (ASU
2009-02),
Omnibus Update Amendments to
Various Topics for Technical Corrections
. The adoption of ASU
2009-02 did not have a material effect on the Companys consolidated financial
condition or results of operations.
In
August 2009, the FASB issued Accounting Standards Update No. 2009-03
(ASU 2009-03),
SEC Update Amendments to
Various Topics Containing SEC Staff Accounting Bulletins
. ASU
2009-03 represents technical corrections to various topics containing SEC Staff
Accounting Bulletins to update cross-references to Codification text. ASU
2009-03 did not have a material effect on the Companys consolidated financial
condition or results of operations.
In
August 2009, the FASB issued Accounting Standards Update No. 2009-05
(ASU 2009-05),
Fair Value Measurements and
Disclosures (Topic 820) Measuring Liabilities at Fair Value
. ASU
2009-05 applies to all entities that measure liabilities at fair value within
the scope of ASC Topic 820. ASU 2009-05 provides clarification that in
circumstances in which a quoted price in an active market for the identical
liability is not available, a reporting entity is required to measure fair
value using one or more of the following techniques:
1.)
A valuation technique that
uses:
a.
The quoted price of the identical liability
when traded as an asset.
b.
Quoted prices for similar liabilities or similar
liabilities when traded as assets.
2.)
Another valuation technique
that is consistent with the principles of ASC Topic 820. Two examples would be
an income approach, such as a technique that is based on the amount at the
measurement date that the reporting entity would pay to transfer the identical
liability or would receive to enter into the identical liability.
15
Table
of Contents
ATLANTIC SOUTHERN FINANCIAL
GROUP, INC.
Notes to
Consolidated Financial Statements
(Unaudited)
The
amendments in ASU 2009-5 also clarify that when estimating the fair value of a
liability, a reporting entity is not required to include a separate input or
adjustment to other inputs relating to the existence of a restriction that
prevents the transfer of the liability. It also clarifies that both a quoted
price in an active market for the identical liability at the measurement date
and the quoted price for the identical liability when traded as an asset in an
active market when no adjustments to the quoted price of the asset are required
are Level 1 fair value measurements. The guidance provided in ASU 2009-5 is
effective for the first reporting period beginning after issuance. The adoption
of ASU 2009-5 will not have a material effect on the Companys consolidated
financial condition or results of operations.
In
September 2009, the FASB issued Accounting Standards Update No. 2009-07
(ASU 2009-07),
Accounting for Various
Topics
. ASU 2009-07 represents technical corrections to various
topics containing SEC guidance based on external comments received. The
adoption of this guidance did not have a material effect on the Companys
consolidated financial condition or results of operations.
In
September 2009, the FASB issued Accounting Standards Update No. 2009-12
(ASU 2009-12),
Fair Value Measurements and
Disclosures (Topic 820), Investments in Certain Entities that Calculate Net
Asset Value per Share (or Its Equivalent).
ASU 2009-12 provides
amendments to Subtopic 820-10,
Fair Value
Measurements and Disclosures Overall,
for the fair value
measurement of investments in certain entities that calculate net asset value
per share. This ASU also requires disclosures by major category of investment
about the attributes of investments within the scope of the amendments in this
Update. The amendments in this Update are effective for interim and annual
periods after December 15, 2009. The adoption of this guidance will not
have a material effect on the Companys consolidated financial condition or
results of operations.
16
Table of Contents
ATLANTIC SOUTHERN
FINANCIAL GROUP, INC.
Item 2. Managements Discussion
and Analysis of Financial Condition and Results of Operations
For Each of the Three Months and Nine Months in
the Period Ended
September 30, 2009 and 2008
The
following discussion of financial condition as of September 30, 2009 compared to December 31, 2008, and the results of operations for the
three months and nine months ended September 30,
2009 compared to the three months and nine months ended September 30,
2008 should be read in conjunction with the condensed financial statements and
accompanying footnotes appearing in this report.
Advisory Note Regarding Forward-Looking Statements
The statements contained in this report on Form 10-Q that
are not historical facts are forward-looking statements subject to the safe
harbor created by the Private Securities Litigation Reform Act of 1995. We caution readers of this report that such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements
to be materially different from those expressed or implied by such
forward-looking statements. Although we
believe that our expectations of future performance is based on reasonable
assumptions within the bounds of our knowledge of our business and operations,
there can be no assurance that actual results will not differ materially from
our expectations.
Factors which could cause actual results to differ from
expectations include, among other things:
·
the
challenges, costs and complications associated with the continued development
of our branches;
·
the
potential that loan charge-offs may exceed the allowance for loan losses or
that such allowance will be increased as a result of factors beyond our
control;
·
our
dependence on senior management;
·
competition
from existing financial institutions operating in our market areas as well as
the entry into such areas of new competitors with greater resources, broader
branch networks and more comprehensive services;
·
adverse
conditions in the stock market, the public debt market, and other capital
markets (including changes in interest rate conditions);
·
the
effect of any mergers, acquisitions or other transactions to which we or our
subsidiary may from time to time be a party, including, without limitation, our
ability to successfully integrate any businesses that we acquire;
·
changes
in deposit rates, the net interest margin, and funding sources;
·
inflation,
interest rate, market, and monetary fluctuations;
·
risks
inherent in making loans including repayment risks and value of collateral;
·
the
strength of the United States economy in general and the strength of the local
economies in which we conduct operations may be different than expected
resulting in, among other things, a deterioration in credit quality or a
reduced demand for credit, including the resultant effect on our loan portfolio
and allowance for loan losses;
·
fluctuations
in consumer spending and saving habits;
·
the
demand for our products and services;
·
technological
changes;
·
the
challenges and uncertainties in the implementation of our expansion and
development strategies;
·
the
ability to increase market share;
·
the
adequacy of expense projections and estimates of impairment loss;
·
the
impact of changes in accounting policies by the Securities and Exchange
Commission, as well as the Public Company Accounting Oversight Board, the
Financial Accounting Standards Board and others that set accounting standards;
·
unanticipated
regulatory or judicial proceedings;
·
the
potential negative effects of future legislation affecting financial
institutions (including, without limitation, laws concerning taxes, banking,
securities, and insurance);
·
the
effects of, and changes in, trade, monetary and fiscal policies and laws,
including interest rate policies of the Board of Governors of the Federal
Reserve System;
·
the
timely development and acceptance of products and services, including products
and services offered through alternative delivery channels such as the
Internet;
·
the
impact on our business, as well as on the risks set forth above, of various
domestic or international military or terrorist activities or conflicts;
·
the
possibility that we will be unable to comply with the conditions imposed upon
us in the Order to Cease and Desist, which could result in the imposition of
further restrictions on our operations or penalties;
17
Table of Contents
·
other
factors described in this report and in other reports we have filed with the
Securities and Exchange Commission; and
·
Our success at
managing the risks involved in the foregoing.
Forward-looking
statements speak only as of the date on which they are made. We undertake no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which the statement is made to reflect the occurrence of unanticipated events.
Executive
Summary and Recent Developments
The Companys total assets at September 30,
2009, were approximately $1.1 billion, which represented an increase of
approximately $91.9 million, or 9.27%, from December 31, 2008. Net earnings (loss) decreased $32.9 million,
or 2119.70%, for the nine months ended September 30, 2009 to a loss of
$31.3 million, or $7.44 per diluted share, compared to earnings of $1.6
million, or $0.35 per diluted share, for the nine months ended September 30,
2008.
During the second quarter
of 2009, the Company recognized a $19.5 million goodwill impairment charge to
earnings. The Company completed its
annual goodwill impairment assessment during the fourth quarter of 2008. At the time of the annual assessment, there
was no impairment of goodwill. Since
year-end, the Company has continuously updated its goodwill impairment assessment
and found an impairment of goodwill during the second quarter of 2009. Because goodwill is an intangible asset that
cannot be sold separately or otherwise disposed of, it is not recognized in
determining capital adequacy for regulatory purposes. Therefore, the goodwill impairment charge had
no effect on the Companys regulatory capital ratios.
On May 27, 2009, the
Company amended its Articles of Incorporation to eliminate par value per share
with respect to its common stock from the previous $5.00 par value per share of
its common stock. Therefore, the paid-in
capital surplus for the Company as of that date was included with the Companys
common stock.
During the second quarter
of 2009, the Company created a Special Assets Division to address problem
credits and to assist in the collection efforts from problem loans and charged-off
loans. Senior Vice President Randy
Griffin will manage this department of three people and will report directly to
Edward P. Loomis, President and Chief Executive Officer of the Bank.
On July 31, 2009,
the Board of Directors promoted Edward P. Loomis, Jr. to the role of
President and Chief Executive Officer of Atlantic Southern Bank. Mark Stevens will continue as President and
Chief Executive Officer of the holding company, Atlantic Southern Financial
Group, Inc.
18
Table
of Contents
Financial Condition
The composition of assets
and liabilities for the Company is as follows:
|
|
September 30,
|
|
December 31,
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
$ Change
|
|
% Change
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
$
|
70,687,672
|
|
$
|
15,130,136
|
|
$
|
55,557,536
|
|
367.20
|
%
|
Securities available for sale
|
|
180,169,835
|
|
100,619,437
|
|
79,550,398
|
|
79.06
|
%
|
Loans, net of unearned income
|
|
760,499,549
|
|
792,883,664
|
|
(32,384,115
|
)
|
-4.08
|
%
|
Cash surrender value of life insurance
|
|
12,866,768
|
|
12,465,228
|
|
401,540
|
|
3.22
|
%
|
Goodwill and other intangible assets
|
|
2,639,429
|
|
22,444,667
|
|
(19,805,238
|
)
|
-88.24
|
%
|
Total assets
|
|
1,083,676,760
|
|
991,741,590
|
|
91,935,170
|
|
9.27
|
%
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
957,160,076
|
|
836,451,443
|
|
120,708,633
|
|
14.43
|
%
|
FHLB advances
|
|
50,300,000
|
|
47,500,000
|
|
2,800,000
|
|
5.89
|
%
|
Subordinated debentures
|
|
1,400,000
|
|
1,400,000
|
|
|
|
|
|
Junior subordinated debentures
|
|
10,310,000
|
|
10,310,000
|
|
|
|
|
|
Accrued expenses and other liabilities
|
|
1,827,457
|
|
1,630,080
|
|
197,377
|
|
12.11
|
%
|
|
|
|
|
|
|
|
|
|
|
Loan to Deposit Ratio
|
|
79.45
|
%
|
94.79
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The most significant
change in the composition of assets was the increase in cash and due from banks
due to the growth of deposits of the Company.
The most significant change in the composition of liabilities was the
increase in deposits, especially time deposits.
Time deposits, including brokered and core deposits, are our principal
source of funds for loans and investing in securities. Local retail time deposits at September 30,
2009, increased approximately $158.2 million since December 31, 2008 due
to managements aggressive efforts to increase core deposits and reduce the
Banks reliance on brokered deposits.
The Company was able to decrease brokered deposits since December 31,
2008 by approximately $58.5 million at September 30, 2009 primarily due to
its ability to replace them with retail deposits. Other core deposits (non-interest bearing,
interest bearing and saving accounts) increased approximately $21.0 million at September 30,
2009 compared to December 31, 2008.
Due to our strong loan
demand in the past, we chose to obtain a portion of our deposits from outside
of our market. The deposits obtained outside of our market area generally
have lower rates than rates being offered for certificates of deposits in our
local market. We have also utilized
out-of-market deposits in certain instances to obtain longer term deposits than
are readily available in our local market.
Our brokered time deposits represented 34.05% of our deposits as of September 30,
2009 when compared to 46.2% of our deposits as of December 31, 2008. Pursuant to the Order, the Bank is prohibited
from accepting, rolling over, or renewing any brokered deposits without first
receiving a brokered deposit waiver from the FDIC.
In the past, the Bank has
relied heavily on brokered deposits. As
a result of the Order, this source of funding is limited and management has instituted
an aggressive retail deposit marketing campaign to replace a portion of the
brokered CDs as they mature.
Investment Securities
Securities
in our portfolio totaled $180.2 million at September 30, 2009, compared to
$100.6 million at December 31, 2008.
The most significant increase in the securities portfolio has resulted
from the purchase of $150.1 million in U.S. Treasury securities and $38.4 million
of U.S Government Sponsored Enterprises securities, which were offset by the
sale of $5.1 million in state, county and municipal bonds, the maturity of
$50.2 million in U.S. Treasury securities and the sales and/or paydowns of
$47.8 million in mortgage-backed securities.
At September 30, 2009, the securities portfolio had unrealized net
gains of approximately $975 thousand.
The following table shows the carrying value
of the investment securities at September 30, 2009 and December 31,
2008.
19
Table
of Contents
|
|
September 30,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
(Amounts in Thousands)
|
|
Securities available for sale:
|
|
|
|
|
|
U. S. Government Sponsored Enterprises
|
|
$
|
37,778
|
|
$
|
17,761
|
|
U. S. Treasury Securities
|
|
100,205
|
|
251
|
|
State, County and Municipal
|
|
15,239
|
|
20,298
|
|
Mortgage-backed Securities
|
|
26,601
|
|
62,036
|
|
Other Investments
|
|
347
|
|
273
|
|
Total
|
|
$
|
180,170
|
|
$
|
100,619
|
|
The following table
summarizes securities sales activity for the three month and nine month periods
ended September 30, 2009 and 2008:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Proceeds from sales
|
|
$
|
|
|
$
|
6,628,958
|
|
$
|
51,611,819
|
|
$
|
6,628,958
|
|
Proceeds from calls
|
|
5,040,000
|
|
440,000
|
|
5,220,000
|
|
8,255,000
|
|
Proceeds from maturities
|
|
27,340,247
|
|
3,750,000
|
|
56,080,247
|
|
4,750,000
|
|
Total
|
|
$
|
32,380,247
|
|
$
|
10,818,958
|
|
$
|
112,912,066
|
|
$
|
19,633,958
|
|
|
|
|
|
|
|
|
|
|
|
Gross gains
|
|
$
|
16,119
|
|
$
|
26,030
|
|
$
|
1,400,252
|
|
$
|
66,275
|
|
Gross losses
|
|
(777
|
)
|
(21,641
|
)
|
(11,474
|
)
|
(21,641
|
)
|
Impairment losses
|
|
|
|
(1,165,284
|
)
|
(57,618
|
)
|
(1,165,284
|
)
|
|
|
|
|
|
|
|
|
|
|
Net gains (losses) of securities
|
|
$
|
15,342
|
|
$
|
(1,160,895
|
)
|
$
|
1,331,160
|
|
$
|
(1,120,650
|
)
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
$
|
5,216
|
|
$
|
(394,704
|
)
|
$
|
472,185
|
|
$
|
(381,020
|
)
|
During the second quarter of
2009, the Company recognized an impairment loss of $57,618 on an equity
investment in Silverton Bank, a financial institution that failed during the
quarter. The impairment loss represents
the full amount of the Companys investment in Silverton.
During the second quarter of
2009, the Bank restructured approximately $36 million in U.S. agency and
mortgage backed securities to capture gains on securities prepaying at high
speeds, to offset FDIC special assessment and to shorten the average maturity
of the portfolio.
During the third quarter of
2009, the Bank recognized approximately $16 thousand from the calls of $5.0
million in U.S government sponsored enterprises securities. Other proceeds are from the maturities of
$1.8 million in U.S. government sponsored enterprises, $25.0 million in U.S.
Treasury obligations and $605 thousand in state and political subdivisions
securities.
Loans
Total
loans, net of unearned income, decreased approximately $32.4 million, or 4.08%,
at September 30, 2009, from December 31, 2008 as management has made
an effort to limit loan growth in order to preserve capital for the
Company. Management is limiting credit
availability especially for acquisitions, development and construction loans
and pursuing collection efforts aggressively.
The following table presents a summary of the loan portfolio by
category.
20
Table
of Contents
|
|
September 30,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
(Amounts in Thousands)
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
57,476
|
|
$
|
70,187
|
|
Real estate - commercial
|
|
317,230
|
|
310,459
|
|
Real estate - construction
|
|
285,356
|
|
314,405
|
|
Real estate - mortgage
|
|
92,357
|
|
89,102
|
|
Obligations of political subdivisions in the U.S.
|
|
324
|
|
347
|
|
Consumer
|
|
8,072
|
|
8,905
|
|
Total Loans
|
|
760,815
|
|
793,405
|
|
Less:
|
|
|
|
|
|
Unearned loan fees
|
|
(315
|
)
|
(521
|
)
|
Allowance for loan losses
|
|
(14,603
|
)
|
(11,672
|
)
|
Loans, net
|
|
$
|
745,897
|
|
$
|
781,212
|
|
Asset Quality
Management considers asset quality to be of primary
importance. Management has a credit
administration and loan review process, which monitors, controls and measures
our credit risk, standardized credit analyses and our comprehensive credit
policy. Management has an established
warning and early detection system regarding the loans and a comprehensive
analysis of the allowance for loan losses.
The
following table presents a summary of changes in the allowance for loan losses
for the three and nine-month periods ended September 30, 2009 and 2008.
Analysis
of Changes in Allowance for Loan Losses
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
(Amounts in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Balance
beginning of period
|
|
$
|
14,911
|
|
$
|
9,734
|
|
$
|
11,672
|
|
$
|
8,879
|
|
Loans
charged-off
|
|
(11,798
|
)
|
(349
|
)
|
(14,709
|
)
|
(934
|
)
|
Recoveries
|
|
138
|
|
20
|
|
220
|
|
112
|
|
Net
charge-offs
|
|
(11,660
|
)
|
(329
|
)
|
(14,489
|
)
|
(822
|
)
|
Provision
for loan losses
|
|
11,352
|
|
907
|
|
17,420
|
|
2,255
|
|
Balance
end of period
|
|
$
|
14,603
|
|
$
|
10,312
|
|
$
|
14,603
|
|
$
|
10,312
|
|
|
|
|
|
|
|
|
|
|
|
Total
Loans:
|
|
|
|
|
|
|
|
|
|
At
period end
|
|
$
|
760,500
|
|
$
|
794,377
|
|
$
|
760,500
|
|
$
|
794,377
|
|
Average
|
|
782,622
|
|
804,406
|
|
789,869
|
|
755,685
|
|
|
|
|
|
|
|
|
|
|
|
As a
percentage of average loans (annualized):
|
|
|
|
|
|
|
|
|
|
Net
charge-offs
|
|
5.91
|
%
|
0.16
|
%
|
2.45
|
%
|
0.15
|
%
|
Provision
for loan losses
|
|
5.80
|
%
|
0.45
|
%
|
2.95
|
%
|
0.40
|
%
|
Allowance
as a percentage of period end loans
|
|
1.92
|
%
|
1.30
|
%
|
1.92
|
%
|
1.30
|
%
|
Allowance
as a percentage of non-performing loans
|
|
20.89
|
%
|
118.27
|
%
|
20.89
|
%
|
118.27
|
%
|
Management believes that the allowance for loan
losses at September 30, 2009 is adequate to absorb losses inherent in the
loan portfolio. This assessment involves
uncertainty and judgment; therefore, the adequacy of the allowance
21
Table
of Contents
for loan losses cannot be determined with precision
and may be subject to change in future periods.
Significant increases to the provision for loan losses may be necessary
if material adverse changes in general economic conditions occur or the
performance of our loan portfolio deteriorates.
In addition, bank regulatory authorities, as part of their periodic
examination of the Bank, may require adjustments to the provision for loan
losses in future periods if, in their opinion, the results of their review
warrant such additions. Because of these
factors, it is reasonably possible that the estimated losses on loans may
change materially in the near term.
However, the amount of the change cannot be estimated.
Nonperforming assets consist of non-accrual loans,
accruing loans 90 days past due, repossessed assets and other real estate
owned. The following summarizes non-performing assets:
|
|
September 30.
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
Accruing loans 90 days past due
|
|
$
|
|
|
$
|
|
|
Non-accrual loans
|
|
69,900,631
|
|
21,103,468
|
|
Repossessed assets
|
|
40,500
|
|
34,783
|
|
Other real estate
|
|
15,775,214
|
|
10,196,165
|
|
Total non-performing assets
|
|
$
|
85,716,345
|
|
$
|
31,334,416
|
|
Nonperforming assets
increased $54.4 million, or 173.6%, from December 31, 2008 to September 30,
2009. This increase is largely due to
several large relationships that are secured by commercial and residential real
estate construction and land development real estate being placed on
non-accrual during the three quarters of 2009.
All non-accrual loans are adequately collateralized based on managements
judgment and supported by recent collateral appraisals. Other real estate increased $5.6 million from
December 31, 2008 to September 30, 2009. This increase is largely due to the addition
of $16.8 million in foreclosed properties being offset by the sale of $8.8
million in foreclosed properties resulting in $2.0 million loss on these
properties. During the third quarter of
2009, the Company added approximately $12.1 million in 29 other real estate
properties.
As of September 30,
2009 and December 31, 2008, the Companys other real estate consisted of
the following:
|
|
As of September 30, 2009
|
|
As of December 31, 2008
|
|
1-4 Family residential properties
|
|
21
|
|
$
|
3,203,001
|
|
8
|
|
$
|
3,574,090
|
|
Nonfarm nonresidential properties
|
|
9
|
|
6,085,070
|
|
5
|
|
520,101
|
|
Multifamily residential properties
|
|
1
|
|
31,675
|
|
|
|
|
|
Construction & land development properties
|
|
23
|
|
6,455,468
|
|
15
|
|
6,101,974
|
|
Total
|
|
54
|
|
$
|
15,775,214
|
|
28
|
|
$
|
10,196,165
|
|
All properties are being
actively marketed for sale and management is continuously monitoring these
properties in order to minimize any losses.
On November 3, 2009,
the Bank foreclosed on approximately $7.4 million in various commercial,
construction and land development and 1-4 family residential real estate
properties. These properties were being
held as collateral against several non-accrual loans at September 30,
2009. Management is currently evaluating
any additional losses on these properties.
The
Companys policy is to place loans on non-accrual status when it appears that
the collection of interest in accordance with the terms of the loan is
doubtful. Any loan which becomes 90 days
past due as to principal or interest is automatically placed on non-accrual. Exceptions are allowed for 90-day past due
loans when such loans are well secured and in process of collection. Other real estate is defined as real estate
acquired as salvage on uncollectible loans.
At the time of foreclosure, an appraisal is obtained on the real
estate. The amount charged to other real
estate will be the lower of appraised value or recorded investment in the loan
satisfied. The recorded investment is
the unpaid balance of the loan, increased by accrued and uncollected interest,
unamortized premium,
22
Table
of Contents
finance
charges, and loan acquisition costs, if any, and decreased by previous direct
write down and unamortized discount. Any
excess of the recorded investment in the loan satisfied over the appraised
value of the property must be charged to allowance for loan losses.
Goodwill
The
Company reviews its goodwill for impairment annually, or more frequently if
circumstances indicate that goodwill has been impaired. The Company completed its annual goodwill
impairment assessment as of December 31, 2008. In completing the annual assessment, the
Company engaged an independent business valuation firm to assist with the
valuation. The Companys year-end
goodwill impairment assessment indicated that there was no goodwill impairment.
Since
year-end, however, the Companys stock price continues to trade below its
per-share book value which management believes reflects uncertainty about the
economic cycle. The current economic
environment has also resulted in lower earnings with higher credit costs. Higher credit costs are reflected in the
income statement as well as valuation adjustments to the loan balances, through
increases to the level of the allowance for loan losses. With these factors in place, management
believed that goodwill should be re-assessed for impairment. The Company engaged the same business
valuation firm to update their year-end valuation analysis, which included a
discounted cash flow analysis. The
conclusion from the updated impairment analysis was that impairment was present
and a $19.5 million charge to earnings was taken during the second quarter of
2009.
Because
goodwill is an intangible asset that cannot be sold separately or otherwise
disposed of, it is not recognized in determining capital adequacy for
regulatory purposes. Therefore, the
non-cash goodwill impairment charge had no effect on the Companys regulatory
capital ratios or cash flows of the Company.
Deposits
Total
deposits at September 30, 2009 were $957.2 million, an increase of $120.7
million, or 14.4%, from December 31, 2008.
Total interest bearing demand and savings accounts of $164.1 million
increased $14.9 million, or 10.0%, resulting mainly from our branching efforts
and our emphasis on increasing core deposits.
Total
time deposits as of September 30, 2009 were $738.5 million, an increase of
$99.7 million, or 15.6%, from December 31, 2008. Total retail time deposits at September 30,
2009 increased approximately $158.2 million, or 21.4% of total time deposits,
from December 31, 2008 due to managements aggressive efforts to increase
core deposits and reduce reliance on brokered deposits
.
The weighted average rates paid for retail time deposits for the three
and nine months ended September 30, 2009 were 3.00% and 3.27%,
respectively, compared to 4.07% and 4.55% for the three and nine months ended September 30,
2008, respectively. Total brokered
deposits at September 30, 2009 decreased approximately $58.5 million, or
7.9% of total time deposits, from December 31, 2008, resulting mainly from
our ability to replace brokered deposits with retail deposits during the three
quarters of 2009. The weighted average
rates paid for brokered deposits for the three and nine months ended September 30,
2009 were 3.41% and 3.59%, respectively, compared to 3.96% and 4.33% for the
three and nine months ended September 30, 2008.
Results of Operations
General
The Companys
results of operations are determined by its ability to effectively manage
interest income and expense, to minimize loan and investment losses, to
generate noninterest income and to control noninterest expense. Since interest rates are determined by market
forces and economic conditions beyond the control of the Company, the ability
to generate interest income is dependent upon the Banks ability to obtain an
adequate spread between the rate earned on earning assets and the rate paid on
interest-bearing liabilities.
23
Table
of Contents
The
following table shows the significant components of net earnings (loss):
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
$ Change
|
|
% Change
|
|
Interest and Dividend Income
|
|
$
|
35,503,694
|
|
$
|
41,631,346
|
|
$
|
(6,127,652
|
)
|
-14.72
|
%
|
Interest Expense
|
|
21,580,380
|
|
23,366,878
|
|
(1,786,498
|
)
|
-7.65
|
%
|
Net Interest Income
|
|
13,923,314
|
|
18,264,468
|
|
(4,341,154
|
)
|
-23.77
|
%
|
Provision for Loan Losses
|
|
17,420,000
|
|
2,255,000
|
|
15,165,000
|
|
672.51
|
%
|
Net Earnings (Loss)
|
|
(31,327,921
|
)
|
1,551,117
|
|
(32,879,038
|
)
|
-2119.70
|
%
|
Net Earnings (Loss) Per Diluted Share
|
|
$
|
(7.44
|
)
|
$
|
0.35
|
|
(7.79
|
)
|
-2225.71
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
$ Change
|
|
% Change
|
|
Interest and Dividend Income
|
|
$
|
11,254,824
|
|
$
|
13,727,652
|
|
$
|
(2,472,828
|
)
|
-18.01
|
%
|
Interest Expense
|
|
7,223,007
|
|
7,706,392
|
|
(483,385
|
)
|
-6.27
|
%
|
Net Interest Income
|
|
4,031,817
|
|
6,021,260
|
|
(1,989,443
|
)
|
-33.04
|
%
|
Provision for Loan Losses
|
|
11,352,000
|
|
907,000
|
|
10,445,000
|
|
1151.60
|
%
|
Net Loss
|
|
(8,287,965
|
)
|
(346,875
|
)
|
(7,941,090
|
)
|
-2289.32
|
%
|
Net Loss Per Diluted Share
|
|
$
|
(1.97
|
)
|
$
|
(0.08
|
)
|
(1.89
|
)
|
-2362.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
Our primary source of
income is interest income from loans and investment securities. Our profitability depends largely on net
interest income, which is the difference between the interest received on
interest-earning assets and the interest paid on deposits, borrowings, and
other interest-bearing liabilities. Net
interest income decreased $4.3 million, or 23.8%, for the nine months ended September 30,
2009 compared to the nine months ended September 30, 2008. Net interest income decreased $2.0 million,
or 33.0%, for the third quarter of 2009 compared to the same period in 2008.
Total interest and
dividend income for the three and nine months ended September 30, 2009
decreased $2.5 million, or 18.0%, and $6.1 million, or 14.7%, respectively,
when compared to the three and nine months ended September 30, 2008. This decrease is primarily due to the effect
of the Federal Reserve decreasing the federal funds rate, which affects a
majority of the interest rates for our loans and due to the reversal of
interest income from loans going on non-accrual status. Interest income was reduced by $540 thousand
and $1.5 million, respectively, for the three and nine months ended September 30,
2009. The average loan and loan held for
sale portfolio for the three months ended September 30, 2009 decreased
approximately $21.8 million, or 2.7%, when compared to average loan and loan
held for sale portfolios for the three months ended September 30,
2008. The average loan and loan held for
sale portfolio for the nine months ended September 30, 2009 increased
approximately $34.2 million, or 4.5%, when compared to average loan and loan
held for sale portfolios for the nine months ended September 30,
2008. The average yield on loans,
however, decreased during the three and nine months ended September 30,
2009 to 5.29% and 5.51%, respectively, compared to an average yield of 6.21%
and 6.81% for the three and nine months ended September 30, 2008,
respectively.
Total interest expense
for the three and nine months ended September 30, 2009 decreased $483
thousand, or 6.3%, and $1.8 million, or 7.7%, respectively, when compared to
the three and nine months ended September 30, 2008. Two factors impact interest expense: average
balances of deposit and borrowing portfolios and average rates paid on
each. Average deposit balances increased
approximately $141.9 million and $147.5 million when comparing the three and
nine months ended September 30, 2009 to the three and nine months ended September 30,
2008. The average rate paid on the
deposit portfolios for the three and nine months ended September 30, 2009
decreased to 2.87% and 3.09%, respectively, from 3.67% and 4.03% when compared
to the three and nine months ended
24
Table
of Contents
September 30, 2008,
respectively. Average borrowing balances
increased approximately $20.3 million and $12.9 million when comparing the
three and nine months ended September 30, 2009 to the three and nine
months ended September 30, 2008, respectively. Average interest rates paid on borrowings
were 3.27% and 3.24% for the three and nine months ended September 30,
2009, respectively, compared to 3.68% and 3.93% for the three and nine months
ended September 30, 2008, respectively.
The banking industry uses
two key ratios to measure relative profitability of net interest income, which
are net interest spread and net interest margin. The interest rate spread measures the
difference between the average yield on earning assets and the average rate
paid on interest-bearing liabilities.
The interest rate spread eliminates the impact of non-interest-bearing
funding sources and gives a direct perspective on the effect of market interest
rate movements. The net interest margin
is an indication of the profitability of our investments, and is defined as net
interest revenue as a percentage of total average earning assets which includes
the positive impact of funding a portion of earning assets with customers
non-interest-bearing deposits and with stockholders equity.
For the three months
ended September 30, 2009 and 2008, our tax equivalent net interest spread
was 1.39% and 2.41%, respectively, while the tax equivalent net interest margin
was 1.56% and 2.70%, respectively. For
the nine months ended September 30, 2009 and 2008, our tax equivalent net
interest spread was 1.86% and 2.60%, respectively, while the tax equivalent net
interest margin was 1.97% and 2.94%, respectively. The decreases in net interest spread and net
interest margin from the three and nine months ended September 30, 2008 to
the three and nine months ended September 30, 2009, were due to our
promotion of higher short-term yields on retail time deposits, which reduced
our dependence on brokered time
deposits, purchase of investment securities and the reduction of the short-term
rates by the Federal Reserve, starting in the second quarter of 2007 and
continuing through the fourth quarter of 2008, and its effect on the Companys
slightly asset-sensitive balance sheet.
25
Table
of Contents
The following table shows
the relationship between interest revenue and interest expense and the average
balances of interest-earning assets and interest-earning liabilities for the
three months ended September 30, 2009 and 2008.
Average Consolidated Balance Sheet and Net Interest
Margin Analysis
|
|
For the Three Months Ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
Average
|
|
|
|
Average
|
|
Average
|
|
|
|
Average
|
|
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Earning Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net of unearned income (4) (5) (6)
|
|
$
|
782,622
|
|
$
|
10,424
|
|
5.29
|
%
|
$
|
804,406
|
|
$
|
12,592
|
|
6.21
|
%
|
Federal funds sold
|
|
0
|
|
0
|
|
0.00
|
%
|
6,774
|
|
36
|
|
2.08
|
%
|
Investment securities - taxable (7)
|
|
144,475
|
|
615
|
|
1.69
|
%
|
63,684
|
|
824
|
|
5.13
|
%
|
Investment securities - tax-exempt (6) (7)
|
|
14,342
|
|
147
|
|
6.16
|
%
|
22,998
|
|
227
|
|
5.93
|
%
|
Other interest and dividend income
|
|
106,522
|
|
69
|
|
0.26
|
%
|
5,351
|
|
49
|
|
3.63
|
%
|
Total Earning Assets
|
|
1,047,961
|
|
11,255
|
|
4.29
|
%
|
903,213
|
|
13,728
|
|
6.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
(15,049
|
)
|
|
|
|
|
(9,985
|
)
|
|
|
|
|
Cash and due from banks
|
|
12,855
|
|
|
|
|
|
10,149
|
|
|
|
|
|
Premises and equipment
|
|
31,481
|
|
|
|
|
|
29,086
|
|
|
|
|
|
Accrued interest receivable
|
|
5,436
|
|
|
|
|
|
6,805
|
|
|
|
|
|
Other assets
|
|
31,793
|
|
|
|
|
|
41,842
|
|
|
|
|
|
Total Assets
|
|
$
|
1,114,477
|
|
|
|
|
|
$
|
981,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand
|
|
$
|
165,538
|
|
$
|
655
|
|
1.57
|
%
|
$
|
122,957
|
|
$
|
646
|
|
2.08
|
%
|
Savings
|
|
9,456
|
|
11
|
|
0.46
|
%
|
8,294
|
|
12
|
|
0.57
|
%
|
Time deposits
|
|
751,271
|
|
6,039
|
|
3.19
|
%
|
659,375
|
|
6,653
|
|
4.00
|
%
|
Total interest bearing deposits
|
|
926,265
|
|
6,705
|
|
2.87
|
%
|
790,626
|
|
7,311
|
|
3.67
|
%
|
Federal Home Loan Bank advances
|
|
51,139
|
|
406
|
|
3.15
|
%
|
30,952
|
|
262
|
|
3.36
|
%
|
Other borrowings
|
|
1,483
|
|
43
|
|
11.50
|
%
|
1,408
|
|
8
|
|
2.25
|
%
|
Junior subordinated debentures
|
|
10,310
|
|
69
|
|
2.66
|
%
|
10,310
|
|
126
|
|
4.85
|
%
|
Total borrowed funds
|
|
62,932
|
|
518
|
|
3.27
|
%
|
42,670
|
|
396
|
|
3.68
|
%
|
Total interest-bearing liabilities
|
|
989,197
|
|
7,223
|
|
2.90
|
%
|
833,296
|
|
7,707
|
|
3.67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits
|
|
56,016
|
|
|
|
|
|
49,770
|
|
|
|
|
|
Other liabilities
|
|
5,382
|
|
|
|
|
|
7,871
|
|
|
|
|
|
Shareholders equity
|
|
63,882
|
|
|
|
|
|
90,173
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
1,114,477
|
|
|
|
|
|
$
|
981,110
|
|
|
|
|
|
Net interest revenue (1)
|
|
|
|
$
|
4,032
|
|
|
|
|
|
$
|
6,021
|
|
|
|
Net interest spread (2)
|
|
|
|
|
|
1.39
|
%
|
|
|
|
|
2.41
|
%
|
Net interest margin (3) (6)
|
|
|
|
|
|
1.56
|
%
|
|
|
|
|
2.70
|
%
|
(1) Net
interest revenue is computed by subtracting the expense from the average
interest-bearing liabilities from the income from the average earning assets.
(2) Net
interest spread is computed by subtracting the yield from the expense of the
average interest-bearing liabilities from the yield from the average earning
assets.
(3) Net
interest margin is computed by dividing net interest revenue by average total
earning assets.
(4) Average
loans are shown net of unearned income.
Included in the average balance of loans outstanding are loans where the
accrual of interest has been discounted.
(5) Interest
income includes loan fees as follows (in thousands): 2009 - $276; 2008 - $432
(6) Average
rate reflects taxable equivalent adjustments using a tax rate of 34 percent.
(7) Investment
securities are stated at amortized or accreted cost.
26
Table
of Contents
The following table shows
the relationship between interest revenue and interest expense and the average
balances of interest-earning assets and interest-earning liabilities for the
nine months ended September 30, 2009 and 2008.
Average Consolidated Balance Sheet and Net Interest
Margin Analysis
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
Average
|
|
|
|
Average
|
|
Average
|
|
|
|
Average
|
|
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Earning Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net of unearned income (4) (5) (6)
|
|
$
|
789,869
|
|
$
|
32,556
|
|
5.51
|
%
|
$
|
755,685
|
|
$
|
38,457
|
|
6.81
|
%
|
Federal funds sold
|
|
0
|
|
0
|
|
0.00
|
%
|
7,986
|
|
149
|
|
2.49
|
%
|
Investment securities - taxable (7)
|
|
112,795
|
|
2,400
|
|
2.84
|
%
|
56,663
|
|
2,168
|
|
5.12
|
%
|
Investment securities - tax-exempt (6) (7)
|
|
15,406
|
|
470
|
|
6.18
|
%
|
21,969
|
|
653
|
|
6.02
|
%
|
Other interest and dividend income
|
|
45,340
|
|
77
|
|
0.23
|
%
|
5,254
|
|
204
|
|
5.19
|
%
|
Total Earning Assets
|
|
963,410
|
|
35,503
|
|
4.96
|
%
|
847,557
|
|
41,631
|
|
6.62
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
(12,952
|
)
|
|
|
|
|
(9,465
|
)
|
|
|
|
|
Cash and due from banks
|
|
38,620
|
|
|
|
|
|
9,506
|
|
|
|
|
|
Premises and equipment
|
|
31,613
|
|
|
|
|
|
28,537
|
|
|
|
|
|
Accrued interest receivable
|
|
5,903
|
|
|
|
|
|
6,992
|
|
|
|
|
|
Other assets
|
|
47,146
|
|
|
|
|
|
40,414
|
|
|
|
|
|
Total Assets
|
|
$
|
1,073,740
|
|
|
|
|
|
$
|
923,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand
|
|
$
|
153,345
|
|
$
|
1,859
|
|
1.62
|
%
|
$
|
115,746
|
|
$
|
1,852
|
|
2.14
|
%
|
Savings
|
|
8,741
|
|
26
|
|
0.40
|
%
|
8,080
|
|
34
|
|
0.56
|
%
|
Time deposits
|
|
706,897
|
|
18,167
|
|
3.44
|
%
|
602,788
|
|
20,003
|
|
4.44
|
%
|
Total interest bearing deposits
|
|
868,983
|
|
20,052
|
|
3.09
|
%
|
726,614
|
|
21,889
|
|
4.03
|
%
|
Federal Home Loan Bank advances
|
|
51,392
|
|
1,145
|
|
2.98
|
%
|
37,282
|
|
997
|
|
3.58
|
%
|
Other borrowings
|
|
1,442
|
|
128
|
|
11.87
|
%
|
2,661
|
|
53
|
|
2.66
|
%
|
Junior subordinated debentures
|
|
10,310
|
|
255
|
|
3.31
|
%
|
10,310
|
|
428
|
|
5.46
|
%
|
Total borrowed funds
|
|
63,144
|
|
1,528
|
|
3.24
|
%
|
50,253
|
|
1,478
|
|
3.93
|
%
|
Total interest-bearing liabilities
|
|
932,127
|
|
21,580
|
|
3.10
|
%
|
776,867
|
|
23,367
|
|
4.02
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits
|
|
53,606
|
|
|
|
|
|
48,471
|
|
|
|
|
|
Other liabilities
|
|
6,949
|
|
|
|
|
|
7,908
|
|
|
|
|
|
Shareholders equity
|
|
81,058
|
|
|
|
|
|
90,295
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
1,073,740
|
|
|
|
|
|
$
|
923,541
|
|
|
|
|
|
Net interest revenue (1)
|
|
|
|
$
|
13,923
|
|
|
|
|
|
$
|
18,264
|
|
|
|
Net interest spread (2)
|
|
|
|
|
|
1.86
|
%
|
|
|
|
|
2.60
|
%
|
Net interest margin (3) (6)
|
|
|
|
|
|
1.97
|
%
|
|
|
|
|
2.94
|
%
|
(1) Net
interest revenue is computed by subtracting the expense from the average
interest-bearing liabilities from the income from the average earning assets.
(2) Net
interest spread is computed by subtracting the yield from the expense of the average
interest-bearing liabilities from the yield from the average earning assets.
(3) Net
interest margin is computed by dividing net interest revenue by average total
earning assets.
(4) Average
loans are shown net of unearned income.
Included in the average balance of loans outstanding are loans where the
accrual of interest has been discounted.
(5) Interest
income includes loan fees as follows (in thousands): 2009 - $969; 2008 - $1,363
(6) Average
rate reflects taxable equivalent adjustments using a tax rate of 34 percent.
(7) Investment
securities are stated at amortized or accreted cost.
27
Table
of Contents
The following table
provides a detailed analysis of the changes in interest income and interest
expense due to changes in rate and volume for the three months and nine months
ended September 30, 2009 compared to September 30, 2008.
Change in Interest Revenue and
Expense on a Taxable Equivalent Basis
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2009 Compared to 2008
|
|
2009 Compared to 2008
|
|
|
|
Changes due to (a)
|
|
Changes due to (a)
|
|
|
|
|
|
Yield/
|
|
Net
|
|
|
|
Yield/
|
|
Net
|
|
|
|
Volume
|
|
Rate
|
|
Change
|
|
Volume
|
|
Rate
|
|
Change
|
|
|
|
(Amounts in thousands)
|
|
Interest earned on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
(1,177
|
)
|
$
|
(991
|
)
|
$
|
(2,168
|
)
|
$
|
130
|
|
$
|
(6,031
|
)
|
$
|
(5,901
|
)
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable investment
securities
|
|
5
|
|
(214
|
)
|
(209
|
)
|
603
|
|
(371
|
)
|
232
|
|
Tax-exempt investment
securities
|
|
(96
|
)
|
16
|
|
(80
|
)
|
(218
|
)
|
35
|
|
(183
|
)
|
Interest earning deposits
and fed funds sold
|
|
70
|
|
(86
|
)
|
(16
|
)
|
89
|
|
(365
|
)
|
(276
|
)
|
Total interest income
|
|
(1,198
|
)
|
(1,275
|
)
|
(2,473
|
)
|
604
|
|
(6,732
|
)
|
(6,128
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand
deposits
|
|
193
|
|
(184
|
)
|
9
|
|
521
|
|
(514
|
)
|
7
|
|
Savings
|
|
2
|
|
(3
|
)
|
(1
|
)
|
3
|
|
(11
|
)
|
(8
|
)
|
Time deposits
|
|
810
|
|
(1,424
|
)
|
(614
|
)
|
3,276
|
|
(5,112
|
)
|
(1,836
|
)
|
Other borrowings and FHLB
advances
|
|
156
|
|
23
|
|
179
|
|
303
|
|
(80
|
)
|
223
|
|
Junior subordinated
debentures
|
|
|
|
(57
|
)
|
(57
|
)
|
|
|
(173
|
)
|
(173
|
)
|
Total interest expense
|
|
1,161
|
|
(1,645
|
)
|
(484
|
)
|
4,103
|
|
(5,890
|
)
|
(1,787
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in net interest
revenue
|
|
$
|
(2,359
|
)
|
$
|
370
|
|
$
|
(1,989
|
)
|
$
|
(3,499
|
)
|
$
|
(842
|
)
|
$
|
(4,341
|
)
|
(a) Volume and rate
components are in proportion to the relationship of the absolute dollar amount
of the change in each.
Provision
for Loan Losses
The provision for loan
losses for the nine months ended September 30, 2009 was $17.4 million
compared to $2.3 million for the same period of 2008. The provision for loan losses for the third
quarter of 2009 was $11.4 million compared to $907 thousand for the same period
of 2008. The increase in the provision
for loan losses is directly related to the increase in nonperforming assets
during the second and third quarters of 2009.
Net charge-offs as an annualized percentage of average outstanding loans
for the nine months ended September 30, 2009 were 2.45%, as compared with
0.15% for the same period of 2008. Net
charge-offs as an annualized percentage of average outstanding loans for the
third quarter of 2009 were 5.91%, as compared to 0.16% for the same period of
2008. Net loan charge-offs increased
significantly during the three months and nine months ended September 30,
2009, as compared to the three months and nine months ended September 30,
2008, due mainly to the Company writing down $14.7 million for several impaired
loans during the three quarters of 2009.
The provision for loan
losses is based on managements evaluation of inherent risks in the loan
portfolio and the corresponding analysis of the allowance for loan losses. Additional discussion on loan quality and the
allowance for loan losses are included in the Asset Quality section of this
report.
28
Table
of Contents
Non-interest
Income
Composition of other
noninterest income is as follows:
|
|
Nine Months
Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
$ Change
|
|
% Change
|
|
Service charges on deposit
accounts
|
|
$
|
1,303,925
|
|
$
|
1,312,536
|
|
$
|
(8,611
|
)
|
-0.66
|
%
|
Other service charges,
commissions and fees
|
|
373,944
|
|
357,549
|
|
16,395
|
|
4.59
|
%
|
Gain (loss) on sales, calls
and impairment write-down of investment securities
|
|
1,331,160
|
|
(1,120,650
|
)
|
2,451,810
|
|
218.78
|
%
|
Mortgage origination income
|
|
642,749
|
|
640,826
|
|
1,923
|
|
0.30
|
%
|
Other income
|
|
823,569
|
|
923,082
|
|
(99,513
|
)
|
-10.78
|
%
|
Total noninterest income
|
|
$
|
4,475,347
|
|
$
|
2,113,343
|
|
$
|
2,362,004
|
|
111.77
|
%
|
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
$ Change
|
|
% Change
|
|
Service charges on deposit
accounts
|
|
$
|
464,250
|
|
$
|
455,318
|
|
$
|
8,932
|
|
1.96
|
%
|
Other service charges,
commissions and fees
|
|
135,817
|
|
128,818
|
|
6,999
|
|
5.43
|
%
|
Gain (loss) on sales, calls
and impairment write-down of investment securities
|
|
15,342
|
|
(1,160,895
|
)
|
1,176,237
|
|
101.32
|
%
|
Mortgage origination income
|
|
249,162
|
|
210,794
|
|
38,368
|
|
18.20
|
%
|
Other income
|
|
267,493
|
|
245,851
|
|
21,642
|
|
8.80
|
%
|
Total noninterest income
|
|
$
|
1,132,064
|
|
$
|
(120,114
|
)
|
$
|
1,252,178
|
|
1042.49
|
%
|
Non-interest
income for the three and nine months ended September 30, 2009 increased
$1.3 million, or 1,042.5%, and $2.4 million, or 111.8%, respectively, when
compared to the three and nine months ended September 30, 2008. The increase is primarily due to the gains on
the sales of several mortgage-backed securities during the second quarter of
2009. Also, during the third quarter of
2008, the Company took an other than temporary impairment loss of $1,165,284 on
the Companys investments in the Freddie Mac series F preferred stock and the
Fannie Mae series R preferred stock. The
decrease in other income for the nine months ended September 30, 2009,
compared to the same period in 2008 is due to the Bank recognizing $171
thousand from the fair value adjustments to an interest rate swap during the
second quarter of 2008 and to the decrease in commission fees from our wealth
management department.
29
Table
of Contents
Non-interest Expense
Composition of other
noninterest expense is as follows:
|
|
Nine Months Ended
September 30,
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
$ Change
|
|
%
Change
|
|
Salaries and employee benefits
|
|
$
|
7,838,818
|
|
$
|
8,715,614
|
|
$
|
(876,796
|
)
|
-10.06
|
%
|
Occupancy expense
|
|
1,355,029
|
|
1,393,955
|
|
(38,926
|
)
|
-2.79
|
%
|
Equipment rental and depreciation of equipment
|
|
964,804
|
|
862,418
|
|
102,386
|
|
11.87
|
%
|
Loss on sale of other assets
|
|
1,988,532
|
|
37,436
|
|
1,951,096
|
|
5211.82
|
%
|
Goodwill impairment
|
|
19,533,501
|
|
|
|
19,533,501
|
|
100.00
|
%
|
FDIC and state assessments
|
|
1,883,939
|
|
436,887
|
|
1,447,052
|
|
331.22
|
%
|
Other real estate expense and writedowns
|
|
1,035,023
|
|
160,277
|
|
874,746
|
|
545.77
|
%
|
Other expenses
|
|
4,444,466
|
|
4,655,572
|
|
(211,106
|
)
|
-4.53
|
%
|
Total noninterest expense
|
|
$
|
39,044,112
|
|
$
|
16,262,159
|
|
$
|
22,781,953
|
|
140.09
|
%
|
|
|
Three Months Ended
September 30,
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
$ Change
|
|
% Change
|
|
Salaries and employee benefits
|
|
$
|
2,423,366
|
|
$
|
3,027,999
|
|
$
|
(604,633
|
)
|
-19.97
|
%
|
Occupancy expense
|
|
463,275
|
|
482,284
|
|
(19,009
|
)
|
-3.94
|
%
|
Equipment rental and depreciation of equipment
|
|
333,301
|
|
318,108
|
|
15,193
|
|
4.78
|
%
|
Loss on sale of other assets
|
|
464,847
|
|
23,951
|
|
440,896
|
|
1840.83
|
%
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
FDIC and state assessments
|
|
729,328
|
|
169,029
|
|
560,299
|
|
331.48
|
%
|
Other real estate expense and writedowns
|
|
687,927
|
|
141,692
|
|
546,235
|
|
385.51
|
%
|
Other expenses
|
|
1,392,846
|
|
1,578,757
|
|
(185,911
|
)
|
-11.78
|
%
|
Total noninterest expense
|
|
$
|
6,494,890
|
|
$
|
5,741,820
|
|
$
|
753,070
|
|
13.12
|
%
|
For the three and nine
months ended September 30, 2009, total non-interest expense was $6.5
million and $39.0 million, respectively.
This includes a $19.5 million charge for goodwill impairment taken
during the second quarter of 2009.
Excluding this non-recurring charge, total non-interest expense for the
nine months ended September 30, 2009 was $19.5 million. When compared to the same periods of 2008,
excluding the goodwill impairment charge from the second quarter of 2009, total
non-interest expense for the three and nine months increased $753 thousand, or
13.1%, and $3.2 million, or 20.0%, respectively. This increase is attributable to the loss on
the sales of other real estate properties with two particular property losses
totaling to $1.9 million from the second and third quarter of 2009, the
recognition of other real estate expenses from several foreclosed properties
acquired since the fourth quarter of 2008, the increase of $566 thousand in
quarterly FDIC assessments, and the accrual of $527 thousand for the special
one-time FDIC assessment payable on September 30, 2009. The decrease in salaries and employee
benefits pertains to a reduction in the accrual of bonuses, the utilization of
a bank officer one day per quarter furlough day, and a small reduction in
staff. The increases in equipment rental
and depreciation of equipment and other expenses are not attributable to any
one particular item, but represent increases related to physical facility
expansion. The decreases in occupancy
expense are attributable to the Company closing of the St. Simons Island branch
on December 31, 2008. Since the
fourth quarter of 2008, the Company continues to take measures to decrease
controllable noninterest expense.
Income Tax Expense
Income tax benefit for
the three and nine months ended September 30, 2009 was $4.4 million and
$6.7 million, respectively, compared to the income tax benefit of $401 thousand
and to the income tax expense of $310 thousand for the three and nine months ended
September 30, 2008, respectively.
The effective tax rate for the three and nine
30
Table
of Contents
months ended September 30,
2009 were 34.65% and 17.70%, respectively, compared to 53.61% and 16.64% for
the three and nine months ended September 30, 2008, respectively. The effective tax rates were lower than the
statutory tax rates primarily due to the tax-free income from certain
investment securities and loans that are exempt from income taxes, tax credits
received from affordable housing investments and the goodwill impairment
charge. The majority of the goodwill
from the two acquisitions was treated as tax-free exchanges, which was not
recognized for tax reporting purposes and therefore no tax deduction was
allowed for the impairment charge.
Likewise, no tax benefit for the goodwill was recognized in the
financial statements relating to the $19.5 million charge.
Liquidity
Liquidity management
involves the matching of the cash flow requirements of customers, either
depositors withdrawing funds or borrowers needing loans, and the ability of the
Company to meet those requirements.
The Companys liquidity
program is designed and intended to provide guidance in funding the credit and
investment activities of the Company, while at the same time ensuring that the
deposit obligations of the Company are met on a timely basis. In order to
permit active and timely management of assets and liabilities, these accounts
are monitored regularly in regard to volume, mix and maturity.
The Companys liquidity
position depends primarily upon the liquidity of its assets relative to its
need to respond to short-term demand for funds caused by withdrawals from
deposit accounts and loan funding commitments. Primary sources of liquidity are
scheduled repayments on the Companys loans and interest on, and maturities of,
its investment securities. Sales of investment securities available for sale
represent another source of liquidity to the Company. The Company may also
utilize its cash and due from banks and federal funds sold to meet liquidity
requirements as needed.
The Company also has the
ability, on a short-term basis, to purchase up to $16 million in federal funds
from other financial institutions. At September 30, 2009, the Company had
no federal funds purchased. The Company had a total available line of $55.1
million, subject to available collateral, from the Federal Home Loan Bank. The Company
has $50.3 million in FHLB advances on this line at September 30,
2009. The Company has a total available
line of $33.7 million, subject to available collateral, from the Federal
Reserve Bank (FRB). The Company had no
advances on the FRB line at September 30, 2009.
The Banks liquidity
policy requires that the ratio of cash and certain short-term investments to
net withdrawable deposit accounts be at least 10%. The Banks liquidity ratios
at September 30, 2009 and 2008 were 25.94% and 13.29%, respectively.
The Bank has relied
heavily on brokered deposits in the past.
As a result of the Order, this source of funding is limited and requires
the Bank to obtain a waiver from the FDIC prior to accepting, rolling over, or
renewing any brokered deposit. Management has instituted an aggressive retail
deposit marketing campaign to replace a portion of the brokered CDs as they
mature. The increase in liquid assets is
designed to provide cash to payoff a portion of the brokered deposits as they
mature.
Capital Resources
We are subject to various
regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimal
capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on our financial statements.
Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, we must meet specific capital guidelines that involve
quantitative measures of our assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. Our capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures
established by regulations to ensure capital adequacy require us to maintain
minimum amounts and ratios (set forth below in the table) of total and Tier I
capital (as defined in the regulations) to risk-weighted assets (as defined in
the regulations), and of Tier I capital (as defined in the regulations) to
average assets
31
Table
of Contents
(as defined in the
regulations). Pursuant to the Order, we
are in the process of developing a short-term and a long-term capital plan to
meet regulatory capital limits. Pursuant
to the Order, Tier 1 Capital must equal or exceed 8.00% of the Banks total
assets and the Banks Total Risk-based Capital must equal or exceed 10.00% of
the Banks total risk-weighted assets, within 90 days of September 11, 2009, the
effective date of the Order.
As of September 30,
2009, the Bank was categorized as adequately capitalized under the regulatory
framework for prompt corrective action.
The Companys and the Banks actual capital amounts and ratios as of September 30,
2009 and December 31, 2008 are as follows:
|
|
Actual
|
|
For Capital
Adequacy Purposes
|
|
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
September 30,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk-Based Capital To Risk Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
75,692,000
|
|
9.47
|
%
|
$
|
63,942,555
|
>
|
8.0
|
%
|
N/A
|
|
N/A
|
|
Bank
|
|
74,603,000
|
|
9.34
|
%
|
63,899,786
|
>
|
8.0
|
%
|
79,874,732
|
>
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital To Risk Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
64,247,000
|
|
8.04
|
%
|
$
|
31,963,682
|
>
|
4.0
|
%
|
N/A
|
|
N/A
|
|
Bank
|
|
63,163,000
|
|
7.91
|
%
|
31,940,834
|
>
|
4.0
|
%
|
47,911,252
|
>
|
6.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital To Average Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
64,247,000
|
|
5.78
|
%
|
$
|
44,461,592
|
>
|
4.0
|
%
|
N/A
|
|
N/A
|
|
Bank
|
|
63,163,000
|
|
5.69
|
%
|
44,402,812
|
>
|
4.0
|
%
|
55,503,515
|
>
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk-Based Capital To Risk Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
87,583,000
|
|
10.47
|
%
|
$
|
66,921,108
|
>
|
8.0
|
%
|
N/A
|
|
N/A
|
|
Bank
|
|
86,181,000
|
|
10.33
|
%
|
66,742,304
|
>
|
8.0
|
%
|
83,427,880
|
>
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital To Risk Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
75,709,000
|
|
9.05
|
%
|
$
|
33,462,541
|
>
|
4.0
|
%
|
N/A
|
|
N/A
|
|
Bank
|
|
74,332,000
|
|
8.91
|
%
|
33,370,146
|
>
|
4.0
|
%
|
50,055,219
|
>
|
6.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital To Average Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
75,709,000
|
|
7.84
|
%
|
$
|
38,627,041
|
>
|
4.0
|
%
|
N/A
|
|
N/A
|
|
Bank
|
|
74,332,000
|
|
7.71
|
%
|
38,563,943
|
>
|
4.0
|
%
|
48,204,929
|
>
|
5.0
|
%
|
We had outstanding
junior subordinated debentures commonly referred to as Trust Preferred
Securities totaling $10.3 million at September 30, 2009 and December 31,
2008. The Trust Preferred Securities
qualify as a Tier I capital under risk-based capital guidelines provided that
total Trust Preferred Securities do not exceed certain quantitative limits. At September 30, 2009 and December 31, 2008,
all of the Trust Preferred Securities qualify as a Tier I capital. We had outstanding subordinated debentures
totaling $1.4 million at September 30, 2009 and December 31,
2008. The subordinated debentures
qualify as a Tier II capital under risk-based capital guidelines. At September 30, 2009 and December 31,
2008, all of the subordinated debentures qualify as a Tier II capital.
32
Table of Contents
ATLANTIC
SOUTHERN FINANCIAL GROUP, INC.
Item 3. Quantitative and Qualitative Disclosures
About Market Risk
For the Nine
Months Ended September 30, 2009
Pursuant to Item 305(e) of
Regulation S-K, no disclosure under this item is required.
33
Table of
Contents
ATLANTIC
SOUTHERN FINANCIAL GROUP, INC.
Item 4T. Controls and Procedures
For the Nine
Months Ended September 30, 2009
The Companys management, including the Chief Executive Officer and Chief
Financial Officer, supervised and participated in an evaluation of the
effectiveness of its disclosure controls and procedures (as defined in federal
securities rules) as of the end of the period covered by this report. Based on, and as of the date of, that
evaluation, the Companys Chief Executive Officer and Chief Financial Officer
have concluded that the Companys disclosure controls and procedures were
effective in accumulating and communicating information to management,
including the Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosures of that
information under the Securities and Exchange Commissions rules and
forms. The Companys disclosure controls
and procedures are designed to ensure that the information required to be
disclosed in reports that are filed or submitted by the Company pursuant to the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commissions rules and forms.
During the third quarter of 2009, there were no significant
changes in the Companys internal control over financial reporting or, to the
Companys knowledge, in other factors that could significantly affect those
internal controls subsequent to the date the Company carried out its evaluation
that have materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting. However, the design of any system of controls
and procedures is based in part upon certain assumptions about the likelihood
of future events. There can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions, regardless of how remote.
34
Table
of Contents
ATLANTIC
SOUTHERN FINANCIAL GROUP, INC.
Part II Other Information
For the Nine
Months Ended September 30, 2009
PART II: OTHER INFORMATION:
Item
1. Legal Proceedings
Please
refer to the material pending legal proceedings discussed in Part I, Item
3. Legal Proceedings in our Annual Report on form 10-K for the year ended December 31,
2008. There have been no material
developments in the matters discussed in our Annual Report and there are no
further material legal proceedings to which the Company or the Bank is a party or
of which their property is the subject.
Item
1A. Risk Factors
There have been no
material changes from the factors discussed in Part I, Item 1A. Risk
Factors in our Annual Report on Form 10-K for the year ended December 31,
2008 and Part II, Item 1A, Risk Factors in our Quarterly Report on Form 10-Q
for the quarter ended June 30, 2009. You should carefully consider the
factors discussed below and in our Annual Report on Form 10-K, and our
Quarterly Report on Form 10-Q for the quarter ended June 30, 2009,
which could materially affect our business, financial condition or future
results. The risks described below and in our Annual Report on Form 10-K
and our Quarterly Report on Form 10-Q for the quarter ended June 30,
2009 are not the only risks facing us. Additional risks and uncertainties not
currently known to us or that we currently deem to be immaterial also may
materially adversely affect our business, financial condition and/or operating
results.
We are operating under a regulatory order with the FDIC and
the Georgia Department of Banking and Finance to address asset quality and
related issues.
We have entered into a Cease and Desist Order
(the Order) with the FDIC and the Georgia Department of Banking and Finance (GDBF)
to address asset quality and related issues.
Under the Order, we are required, among other items, to reduce
classified assets, perform internal loan reviews on at least a quarterly basis,
maintain an appropriate allowance for loan and lease losses and maintain
prescribed capital ratios. Additionally,
the Bank may not accept, renew or roll over brokered deposits or pay cash
dividends without prior regulatory approval.
We are addressing these items, but there is no assurance that we will be
able to comply fully with the Order. We
expect that our compliance with the Order will require the Bank to devote
significant management attention and time on an ongoing basis to the issues
raised in the Order. If we are unable to
comply, we could be subject to other regulatory sanctions.
Current and future restrictions on the conduct of our
business could adversely impact our ability to attract deposits.
Because we are no
longer considered well capitalized by our banking regulators, we are, among
other restrictions, prohibited from paying rates in excess of 75 basis points
above the local market average on deposits of comparable maturity. Effective January 1,
2010, financial institutions that are not well capitalized will be prohibited
from paying yields for deposits in excess of 75 basis points above a new
national average rate for deposits of comparable maturity, as calculated by the
FDIC, except in very limited circumstances where the FDIC permits use of a
higher local market rate. This national rate may be lower than the prevailing
rates in our local market, and we may be unable to secure the permission of the
FDIC to use a local market rate. If restrictions on the rates we are able to
pay on deposit accounts negatively impacts our ability to compete for deposits
in our market area, we may be unable to attract or maintain core deposits, and
our liquidity and ability to support demand for loans could be adversely
affected.
Oversupply of assets and declining real estate values in our markets
has led, and may continue to lead, to a reduction of asset values resulting in
significant write downs that may negatively affect our capital.
Many banks in our core markets are addressing capital and earnings
issues by reducing significantly their asset bases. The resulting oversupply of
assets, coupled with declining real estate and asset values based on general
economic conditions, has resulted and may continue to result in steeply
discounted market prices. Because these prices are then used as a reference in
appraisals, the appraised values of the assets we hold, and therefore the value
we must reflect in preparing our financial statements, is required to be
written down to reflect these prices. This in turn reduces our asset and
capital levels. If this oversupply continues and market conditions deteriorate or
do not improve, our capital levels could decrease to a level that would materially
impair our financial condition.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item
3. Defaults Upon Senior Securities
Not
Applicable
35
Table of Contents
Item
4. Submission of Matters to a Vote of Security-Holders
None
Item
5. Other Information
None
Item
6. Exhibits
(a)
|
|
Exhibits:
|
|
|
|
10.1
|
|
Stipulation and Consent
to the Issuance of an Order to Cease and Desist
|
|
|
|
10.2
|
|
Order to Cease and
Desist
|
|
|
|
31.1
|
|
Certification
of Chief Executive Officer Pursuant to Rule 13a-14 under the Securities
Exchange Act of 1934, as amended
|
|
|
|
31.2
|
|
Certification
of Chief Financial Officer Pursuant to Rule 13a-14 under the Securities
Exchange Act of 1934, as amended
|
|
|
|
32
|
|
Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
36
Table of Contents
SIGNATURES
In
accordance with the requirements of the Securities Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
ATLANTIC SOUTHERN FINANCIAL GROUP, INC.
/s/ Mark A. Stevens
|
|
|
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Mark A. Stevens
|
|
President and Chief
Executive Officer
|
|
|
|
|
|
Date: November 10, 2009
|
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37
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