PART I
Item 1.
Business
Unless otherwise indicated, all references to Atlantic
Southern, we, us, and our in this Annual Report on Form 10-K refer
to Atlantic Southern Financial Group, Inc. and our wholly-owned
subsidiary, Atlantic Southern Bank.
BUSINESS
Atlantic Southern
Financial Group, Inc.
We
are a bank holding company headquartered in Macon, Georgia and, through our
wholly-owned subsidiary, Atlantic Southern Bank, we operate nine banking
locations in the central Georgia markets of Macon, Warner Robins, Roberta,
Lizella, Bonaire and Byron, six in the coastal Georgia markets of Savannah, Darien,
Rincon, Brunswick and St. Simons Island, Georgia, a loan production office in
the South Georgia market of Valdosta, Georgia and one banking location in
Jacksonville, Florida. We serve the banking and financial needs of various
communities in central and coastal Georgia.
Our
business is focused upon serving the needs of small to medium-sized business
borrowers and individuals in the metropolitan areas we serve. Through Atlantic
Southern Bank, we specialize in commercial real estate and small business lending.
We offer a range of lending services, of which some are secured by single and
multi-family real estate, residential construction and owner-occupied
commercial buildings. Primarily, we make loans to small and medium-sized
businesses; however, we also make loans to consumers for a variety of purposes.
Our principal source of funds for loans and investing in securities is time
deposits, including out-of-market certificates of deposit, and core deposits.
We offer a wide range of deposit services, including checking, savings, money
market accounts and certificates of deposit. In addition to obtaining deposits
from our individual and commercial customers in our market areas, we also rely
on time deposits, including out-of-market certificates of deposit, as a source
of funds for loans and our other liquidity needs. We actively pursue business
relationships by utilizing the business contacts of our Board of Directors,
senior management and local bankers, thereby capitalizing on our knowledge of
the local marketplace.
At
the April 27, 2004 Annual Meeting of Shareholders, our shareholders
approved the proposal to reorganize into a bank holding company structure
through a share exchange whereby each share of Atlantic Southern Bank common
stock issued and outstanding was converted into and exchanged for the right to
receive one share of Atlantic Southern Financial Group common stock. We were
organized by Atlantic Southern Bank for the purpose of serving as its bank
holding company. The share exchange was consummated on January 3, 2005,
and Atlantic Southern Financial Group is now the holding company for Atlantic
Southern Bank. The banks common stock is our only significant asset.
On
June 12, 2006, Atlantic Southern closed its public offering of a total of
700,000 shares of common stock at a price of $30.00 per share. The Company received net proceeds of
approximately $20.8 million after deducting offering expenses. On December 15, 2006, Atlantic Southern
completed its acquisition of Sapelo Bancshares, Inc. (Sapelo) and Sapelos
wholly-owned subsidiary Sapelo National Bank. Sapelo National Bank had four
branches in McIntosh and Glynn Counties, Georgia. In the acquisition of Sapelo, shareholders
received their pro rata portion of the merger consideration, which includes
305,695 shares of Atlantic Southern common stock and approximately $6.24
million in cash.
On
January 31, 2007 Atlantic Southern completed its acquisition of First
Community Bank of Georgia (FCB), which had three branches in Bibb, Peach and
Crawford counties. In the acquisition,
FCB shareholders received approximately 0.742555 share of Atlantic Southern
common stock, for each share of First Community Bank common stock they held.
1
On November 30, 2007, Atlantic
Southern completed its acquisition of CenterState Banks of Florida, Inc.
and its subsidiary, CenterState Bank Mid Florida (CenterState). The main
purpose of our acquisition was to facilitate the establishment of a branch
office in Florida which, due to regulatory restrictions on branching, can only
occur in a limited number of ways. See Supervision
and Regulation Atlantic Southern Bank Branching, on page 10. We paid $1,098,878, including acquisition
costs, in connection with the CenterState merger, and no shares of Atlantic
Southern common stock were issued in connection with the transaction.
No
changes in our executive management or business strategy have occurred or will
occur as a result of the offering or acquisitions. As of December 31,
2007, we had total assets of approximately $852.5 million, total deposits of
approximately $705.2 million and shareholders equity of approximately $89.1
million.
Atlantic Southern Bank
Atlantic
Southern Bank began its banking operations on December 10, 2001, after
receiving final approval from the Georgia Department of Banking and Finance and
the FDIC to organize as a state-chartered commercial bank with federally
insured deposits.
The
bank is a full-service commercial bank specializing in meeting the financial
needs of individuals and small- to medium-sized businesses and professional
concerns in Bibb, Houston, Crawford, Peach, Effingham, McIntosh, Glynn, Lowndes
and Chatham Counties in Georgia and in Duval County in Florida. We focus on community
involvement and personal service while providing customers with sophisticated
financial products. We offer a broad array of competitively priced deposit
services, including interest-bearing and non-interest bearing checking
accounts, savings accounts, money market deposits, certificates of deposit and
individual retirement accounts. In addition we complement our lending and
deposit products by offering ATM and debit cards, official checks, credit
cards, direct deposit, automatic transfer, savings bonds, night depository,
stop payments, collections, wire transfers, overdraft protection, non-profit
accounts, telephone banking, and 24-hour Internet banking.
From
December 31, 2002 to December 31, 2007, our business model has
produced strong internal growth. Specifically, we have:
·
|
increased our total
consolidated assets from $79.6 million to $852.5 million;
|
|
|
·
|
increased our total
consolidated deposits from $70.7 million to $705.2 million;
|
|
|
·
|
increased our total
consolidated net loans from $67.5 million to $688.3 million; and
|
|
|
·
|
expanded our branch
network from one location in Bibb County to sixteen branches in Bibb, Houston
Crawford, Peach, Effingham, Chatham, McIntosh and Glynn counties in Georgia
and Duval County, Florida, and a loan production office in Lowndes County,
Georgia.
|
Our
deposits are insured by the FDIC. We operate sixteen full-service banking
offices in Macon, Warner Robins, Roberta, Lizella, Byron, Darien, St. Simons
Island, Rincon, Brunswick and Savannah, Georgia, and Jacksonville, Florida, and
operate a loan production office in Valdosta, Georgia. After the completion of
the Sapelo acquisition in December 2006, the branches in McIntosh and
Glynn Counties began to operate under the name Sapelo Southern Bank; however,
we continue to operate the remaining branches located in other counties under
the name Atlantic Southern Bank.
2
Business Strategy
We target small to medium-sized businesses and
consumers in our markets and have developed a decentralized strategy that
focuses on providing superior service through our employees who are
relationship-oriented and committed to their respective communities and the
needs of our customers. Through this strategy we intend to grow our business,
expand our customer base and improve profitability. The key elements of our
strategy are:
Deliver Superior Banking
Services at the Local Level.
We effectively compete with our
super-regional competitors by providing superior customer service with localized
decision-making capabilities. We designate regional bank presidents in our
markets so that we are positioned to react quickly to changes in those
communities while maintaining efficient and consistent centralized reporting
and policies.
We
offer personalized and flexible banking services to the communities in our
markets. While we set rates across the organization, we tailor these to the
competitive demands of the local market. For loan customers, this is usually
driven by their creditworthiness and the specifics of the transaction. Our
deposit rates are highly influenced by local market conditions.
Grow
Throughout Georgia.
We seek to increase our presence in our
primary markets of central and coastal Georgia, as well as extend along the
southern Georgian border through the opening of new branches in Lowndes County,
specifically in Valdosta, Georgia. We expect to continue to leverage our
existing bank branches and loan production office. We anticipate opening two
branches during 2008.
These
communities are primarily served by branches of large regional and national
financial institutions headquartered outside of the area that focus on retail
and big business. As a result, we believe these markets need, and are best
served by, a locally owned and operated financial institution managed by people
in and from the communities served. As we grow, we continue to maintain the
local flexibility created by local banks with seasoned bankers.
We
intend to continue our growth strategy through organic growth and strategic
acquisitions. We believe that many opportunities to expand remain in our market
areas, and we intend to be in a position to acquire additional market share,
whether via de novo branches or bank acquisitions with the right local
management.
Maintain
Profitability and Strong Asset Quality.
We consider asset quality to be of
primary importance and have taken measures to ensure that despite growth in our
loan portfolio we consistently maintain strong asset quality. We manage our
assets and liabilities to provide an optimum and stable net interest margin, a
profitable after-tax return on assets and return on equity, and adequate
liquidity. These management functions are conducted within the framework of our
written loan and investment policies. We attempt to maintain a balanced
position between rate sensitive assets and rate sensitive liabilities. We chart
assets and liabilities on a matrix by maturity, effective duration, and
interest adjustment period, and endeavor to manage any gaps in maturity ranges.
We intend to continue to monitor our earnings and
asset quality as we grow. We achieved
a 2007 annualized loan and deposit
growth of 31% and 27%, respectively, and returned 0.98% on average assets and
9.33% on average equity. In addition, we have taken measures to ensure that
despite our loan growth, we consistently maintain good asset quality through
our strong credit culture, extensive underwriting procedures and continuous
loan review. As of December 31, 2007, our nonperforming assets, including
accruing loans 90 days past due, as a percentage of total assets were 0.65% as
compared to 0.10% as December 31, 2006. Similarly, our allowance for loan
losses to total loans as of December 31, 2007 were 1.27%, compared
to 1.36% as of December 31, 2006.
Expand
Our Products and Services to Meet the Needs of the Communities in Which We
Operate.
We
continually seek to expand our financial products and services to meet the
needs of our customers and to increase our fee income; we are also focused upon
lowering our costs of funds. Our branching initiatives combined with strong
marketing of our deposit products have helped us grow our noninterest-bearing
deposits. To serve the growing population of small and medium-sized businesses
in our markets we focus on commercial real estate, and offer commercial real
estate development and construction loans. We also focus on small business
lending, and offer United States Small Business Administration (SBA) lending
services, and other similar programs designed for the
3
small and medium-sized
business owner. Through our business accounts we offer checking, savings and
CDs. We also offer mortgage loans
through our mortgage services division. We believe our strong relationship with
the small and medium-sized business community will also offer opportunities for
cross-selling of our retail services. In
an effort to diversify our portfolio, we look to increase our retail customer
base. We will do this by recruiting bank officers with retail experience and
opening branch locations in retail friendly locations.
Market
Area and Competition
We
draw most of our customer deposits and conduct most of our lending transactions
from and within our primary service areas, which encompass all of Bibb,
Houston, Crawford, Peach, Effingham, McIntosh, Glynn and Chatham Counties in
Georgia and Duval County, Florida. We also operate a loan production office in
Valdosta, Lowndes County, Georgia, but do not take deposits at this location. The greater Macon metropolitan area is the
focal point of our central Georgia service area, which consists of operations
in Bibb and Crawford counties within the Macon Metropolitan Statistical Area (MSA),
and in the adjacent counties of Houston and Peach. The City of Macon is immediately accessible
to traffic from all directions via Interstates 75 and 16, the most heavily
traveled interstate highway corridors in Georgia. Bibb and Houston Counties
have each experienced consistent, steady population growth for decades, the
ninth and thirteenth largest counties in Georgia, respectively as of the year
2000, according to data from the United States Census Bureau, with the entire
Macon MSA growing at a rate of 10.9% over the last decade. We expect its growth to continue.
We
increased our footprint across the coastal Georgia region with the opening of
our Savannah and Rincon branches and the recent acquisition of Sapelo National
Bank. The coastal Georgia counties in
which Atlantic Southern currently operates have continued to experience
consistent growth. Specifically, the
entire Savannah MSA grew 4.82% between 2000 and 2005, and this growth is
expected to continue. The Savannah MSA
includes Chatham County, which is the sixth largest county in Georgia. We are also currently expanding into the
southern Georgia region with the recent opening of our loan production office
in Valdosta.
With
our completion of the CenterState acquisition on November 30, 2007,
Atlantic Southern entered the Jacksonville, Florida banking market. The
Jacksonville market is the most populous market in which we currently operate,
and Jacksonville is the largest city in Florida. The Jacksonville MSA had a 2006 population of
approximately 1.27 million. Additionally, recent population growth in
Jacksonville has been rapid, with total growth of approximately 21.4% from 1990
to 2000, and is expected to continue to trend upward.
Our
Duval County, Florida banking office was not in operation as of June 30,
2007. If our Duval County banking office had been open, it would have competed
with 29 other institutions for approximately $24.64 billion in deposits, based
upon data available on the FDIC website as of June 30, 2007.
The
table below shows our deposit market share in Bibb, Chatham, Crawford,
Effingham, Glynn, Houston, McIntosh and Peach Counties, Georgia, markets, as of
June 30, 2007.
Market
|
|
Number of
Branches
|
|
Our
Market
Deposits
|
|
Total
Market
Deposits
|
|
Ranking
|
|
Market
Share
Percentage
(%)
|
|
|
|
(Dollar amounts in millions)
|
|
Bibb County(1)
|
|
4
|
|
$
|
494
|
|
$
|
2,994
|
|
3/11
|
|
16.5
|
%
|
Chatham County
|
|
1
|
|
5
|
|
4,589
|
|
19/20
|
|
0.1
|
|
Crawford County
|
|
1
|
|
23
|
|
44
|
|
1/2
|
|
51.3
|
|
Effingham County
|
|
1
|
|
14
|
|
397
|
|
6/7
|
|
3.5
|
|
Glynn County
|
|
3
|
|
23
|
|
1,759
|
|
11/15
|
|
1.3
|
|
Houston County
|
|
2
|
|
55
|
|
1,397
|
|
8/11
|
|
4.0
|
|
McIntosh County
|
|
1
|
|
29
|
|
99
|
|
2/3
|
|
29.2
|
|
Peach County
|
|
1
|
|
14
|
|
216
|
|
4/4
|
|
6.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Does
not reflect our branch located at 1701 Bass Road, Macon, Georgia 31210, which
opened after June 30, 2007.
4
The
table below shows the deposit market share in Duval County, Florida as of June 30, 2007.
Market
|
|
Total Number of
Financial
Institutions
|
|
Total
Market
Deposits
|
|
|
|
(Dollar amounts in millions)
|
|
Duval County
|
|
29
|
|
$
|
24,644
|
|
|
|
|
|
|
|
|
The
banking business is highly competitive. We compete with many other commercial
banks, federal savings banks and credit unions in our central and coastal
Georgia and Jacksonville, Florida service areas. As of June 30, 2007, 17
commercial banks served our central Georgia service area with a total of 93
branches. Of those branch offices, 48 represent large, national or regional
financial institutions. In our coastal
Georgia service area, 28 commercial banks with a total of 155 branches served
the community as of June 30, 2007. Our four largest competitors are
Security Bank, SunTrust Bank, Wachovia Bank and Bank of America, which
collectively control approximately 47.3% of our central and coastal Georgia
service areas deposits. These institutions, as well as our other competitors,
have greater resources, have broader geographic markets, have higher lending
limits, offer various services we do not offer and can better afford and make
broader use of media advertising, support services and electronic technology
than we do. To offset these competitive disadvantages, we depend on our
reputation as being an independent and locally-owned community bank with
greater personal service, and community involvement and, our ability to make
credit and other business decisions quickly and locally. We believe our local
ownership and management, as well as our focus on personalized service, helps
us compete with these institutions and attract deposits and loans in our market
area.
Lending Activities
Primarily we make loans
to small and medium-sized commercial businesses. In addition, we originate
loans secured by single and multi-family real estate, residential construction
and owner-occupied commercial buildings, as well as to consumers for a variety
of purposes.
Our
loan portfolio at December 31, 2007 was comprised as follows:
Type
|
|
Dollar
Amount
|
|
Percentage
of
Portfolio
|
|
|
|
(Amounts in thousands)
|
|
Secured by real estate:
|
|
|
|
|
|
Construction and land development
|
|
$
|
292,152
|
|
41.91
|
%
|
Farmland
|
|
23,489
|
|
3.37
|
%
|
Home equity lines of credit
|
|
7,945
|
|
1.14
|
%
|
Residential first liens
|
|
54,406
|
|
7.80
|
%
|
Residential jr. liens
|
|
5,548
|
|
0.80
|
%
|
Multi-family residential
|
|
13,254
|
|
1.90
|
%
|
Nonfarm and nonresidential
|
|
222,326
|
|
31.89
|
%
|
Total real estate
|
|
619,120
|
|
88.81
|
%
|
Other loans:
|
|
|
|
|
|
Commercial and industrial
|
|
69,079
|
|
9.91
|
%
|
Agricultural production
|
|
35
|
|
0.01
|
%
|
Credit cards and other revolving credit
|
|
209
|
|
0.03
|
%
|
Consumer installment loans
|
|
8,690
|
|
1.25
|
%
|
Obligations of state and political subdivisions in the U.S.
|
|
290
|
|
0.04
|
%
|
Otherunearned fees
|
|
-277
|
|
-0.04
|
%
|
Total other loans
|
|
78,026
|
|
11.19
|
%
|
Total loans
|
|
$
|
697,146
|
|
100.00
|
%
|
5
In addition, we have
entered into contractual obligations, via lines of credit and standby letters
of credit, to extend approximately $93.3 million in credit as of December 31,
2007. We use the same credit policies in making these commitments as we do for
our other loans. At December 31, 2007, our contractual obligations to
extend credit were comprised as follows:
Type
|
|
Dollar Amount
|
|
Percentage of
Contractual
Obligations
|
|
|
|
(Amounts in thousands)
|
|
Commercial
|
|
$
|
4,475
|
|
4.80
|
%
|
Commercial Real Estate
|
|
62,325
|
|
66.82
|
%
|
Consumer
|
|
4,351
|
|
4.67
|
%
|
Other
|
|
22,116
|
|
23.71
|
%
|
Total
|
|
$
|
93,267
|
|
100.00
|
%
|
Commercial.
We make loans to small to medium-sized businesses whose
demand for funds falls within our legal lending limits. This category of loans
includes loans made to individual, partnership or corporate borrowers, and are
obtained for a variety of business purposes. Risks associated with these loans
can be significant and include, but are not limited to, fraud, bankruptcy,
economic downturn, deteriorating or non-existing collateral and changes in
interest rates.
Construction Loans.
We make and hold real estate loans, consisting primarily of
single-family residential construction loans for one-to-four unit family
structures. We require a first lien position on the land associated with the
construction project and offer these loans to professional building contractors
and homeowners. Loan disbursements require on-site inspections by building
inspectors independent of the loan decision to assure the project is on budget
and that the loan proceeds are being used for the construction project and not
being diverted to another project. The loan-to-value ratio for these loans is
predominantly 80% of the lower of the as-built appraised value. Loans for
construction can present a high degree of risk to the lender, depending upon,
among other things, whether the builder can sell the home to a buyer, whether
the buyer can obtain permanent financing, and the nature of changing economic
conditions.
Commercial Real Estate.
The bank offers both owner-occupied and income-producing
commercial real estate loans. In addition, we offer land acquisition and
development loans for subdivision, office, and industrial projects. The bank
requires a first lien on the real estate associated with the commercial
projects. Additionally, the borrower is required to assign the leases and rents
on each project to the bank. The loan-to-value of these projects is
approximately 80% for improved property and approximately 75% for development
loans.
Consumer.
We make a variety of loans to individuals for personal,
family and household purposes, including secured and unsecured installment and
term loans, home equity loans and lines of credit. Consumer loan repayments
depend upon the borrowers financial stability and are more likely to be
adversely affected by divorce, job loss, illness and personal hardships.
Because depreciable assets such as boats, cars and trailers secure many
consumer loans, we amortize these loans over the useful life of the asset. To
minimize the risk that the borrower cannot afford the monthly payments, fixed
monthly obligations are limited to no more than 40% of the borrowers gross
monthly income. The borrower should also be employed for at least 12 months
prior to obtaining the loan. The loan officer reviews the borrowers past
credit history, past income level, debt history and, when applicable, cash
flows to determine the impact of all of these factors on the borrowers ability
to make future payments as agreed.
Credit Risks.
The fundamental economic risk associated with each category
of the loans we make is the creditworthiness of the borrower. General economic
conditions and the strength of the services and retail market segments are
factors that affect borrower creditworthiness. Risks associated with real
estate loans also include fluctuations in the value of real estate, new job
creation trends, tenant vacancy rates and, in the case of commercial borrowers,
the quality of the borrowers management team. In addition, a commercial
borrowers ability both to properly evaluate changes in the supply and demand
characteristics affecting its markets for products and services and to respond
effectively to these changes are significant factors in the creditworthiness of
a commercial borrower. General economic factors affecting a borrowers ability
to repay include interest, inflation and employment rates, as well as other
factors affecting a borrowers customers, suppliers and employees.
6
Lending Policies.
We seek credit-worthy borrowers within our primary service
area. Our primary lending function is to make loans to small- to medium-sized
businesses. In addition to commercial loans, we make installment loans, home
equity loans, real estate loans and second mortgage loans to individual
consumers.
Lending Approval and
Review.
Under our
loan approval process each lending officer is granted authority to extend loans
up to an amount assigned and approved by the Board of Directors. Loans that exceed an individual lending
officers authority must obtain approval by the senior credit officer, the
chief credit officer or the president, if the requested loan amount is within
the senior credit officer, the chief credit officer or the presidents respective
authority. If the requested loan amount is outside the senior credit officer,
the chief credit officer or the presidents authority, the Board of Directors
Loan Committee must meet to provide the necessary approval. The Board of
Directors Loan Committee meets weekly to consider any lending requests
exceeding the senior credit officer, the chief credit officer and presidents
assigned lending authority.
Each
Lending Officer is required to complete an annual review of the loans and the
relationships that exceed a specified dollar amount. The annual review analyzes all current
financial and company information to insure the continued repayment ability and
continued viability of the customer. Any negative change in the financial
status of the customer is reported to the Directors Loan Committee on a
quarterly basis.
Lending Limits.
Our legal lending limits are 15% of our
unimpaired capital and surplus for unsecured loans and 25% of our unimpaired
capital and surplus for loans secured by readily marketable collateral. As of December 31, 2007,
our legal lending limit for unsecured loans was approximately $9.3 million, and
our legal lending limit for secured loans was approximately $15.4 million.
While we generally employ more conservative lending limits, the Board of
Directors has discretion to lend up to its legal lending limits.
Deposits
Our
principal source of funds for loans and investing in securities is time
deposits. We utilize a comprehensive marketing plan, a broad product line and
competitive products and services to attract deposits. We offer a wide range of
deposit services, including checking, savings, money market accounts and
certificates of deposit. The primary sources of deposits are the residents of
the market areas we serve and local businesses and their employees. We believe
that the rates we offer for core deposits are competitive with those offered by
other financial institutions in our market areas. Secondary sources of funding
include advances from the Federal Home Loan Bank (FHLB), subordinated debt and
other borrowings. These secondary sources enable us to borrow funds at rates
and terms, which at times, are more beneficial to us. Because of our strong
loan demand, we have chosen to obtain a portion of our deposits from outside
our market. Our out-of-market, Internet or brokered, CDs represented 40.2% of
total deposits as of December 31, 2007.
Other
Banking Services
Given
customer demand for increased convenience and account access, we offer a range
of products and services, including 24-hour Internet banking, direct deposit,
safe deposit boxes, United States savings bonds and automatic account
transfers. We earn fees for most of these services. We also receive ATM fees
from transactions performed by our customers participating in a shared network
of automated teller machines and a debit card system that our customers can use
throughout the United States.
Investments
After
establishing necessary cash reserves and funding loans, we invest our remaining
liquid assets in securities allowed under banking laws and regulations. We
invest primarily in obligations of the United States or obligations guaranteed
as to principal and interest by the United States government, other taxable
securities and in certain obligations of states and municipalities. We also
invest excess funds in federal funds with our correspondent banks. The sale of
federal funds represents a short-term loan from us to another bank. Risks
associated with our investments include, but are not limited to, interest rate
fluctuation, maturity and concentration.
7
Seasonality
and Cycles
We
do not consider our commercial banking business to be seasonal.
Employees
On
December 31, 2007, we had 167 full-time employees. Our staff increased
largely as a result of our increased branching activities and strategic
acquisitions. We consider our employee relations to be good, and we have no
collective bargaining agreements with any employees.
Website
Address
Our
corporate website addresses are www.atlanticsouthernbank.com and
www.sapelosouthernbank.com. From either website, select the Investor
Information link followed by selecting SEC Filings. This is a direct link to
our filings with the Securities and Exchange Commission (SEC), including but
not limited to our quarterly reports on Form 10-Q, current reports on Form 8-K
and any amendments to these reports. These reports are accessible soon after we
file them with the SEC.
SUPERVISION AND REGULATION
We
are subject to extensive state and federal banking regulations that impose
restrictions on and provide for general regulatory oversight of our operations.
These laws generally are intended to protect depositors and not shareholders.
Legislation and regulations authorized by legislation influence, among other
things:
·
|
|
how,
when and where we may expand geographically;
|
|
|
|
·
|
|
into
what product or service market we may enter;
|
|
|
|
·
|
|
how
we must manage our assets; and
|
|
|
|
·
|
|
under
what circumstances money may or must flow between the parent bank holding
company and the subsidiary bank.
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Set
forth below is an explanation of the major pieces of legislation affecting our
industry and how that legislation affects our actions. The following
summary is qualified by reference to the statutory and regulatory provisions
discussed. Changes in applicable laws or
regulations may have a material effect on our business and prospects, and
legislative changes and the policies of various regulatory authorities may
significantly affect our operations. We
cannot predict the effect that fiscal or monetary policies, or new federal or
state legislation may have on our business and earnings in the future.
Atlantic
Southern Financial Group, Inc.
Because
we own all of the capital stock of Atlantic Southern Bank, we are a bank
holding company under the federal Bank Holding Company Act of 1956. As a
result, we are primarily subject to the supervision, examination and reporting
requirements of the Bank Holding Company Act and the regulations of the Federal
Reserve Board. As a bank holding company located in Georgia, the Georgia
Department of Banking and Finance (GDBF) also regulates and monitors all
significant aspects of our operations.
Acquisitions
of Banks.
The Bank
Holding Company Act requires every bank holding company to obtain the Federal
Reserve Boards prior approval before:
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acquiring direct or
indirect ownership or control of any voting shares of any bank if, after the
acquisition, the bank holding company will directly or indirectly own or
control more than 5% of the banks voting shares;
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acquiring all or
substantially all of the assets of any bank; or
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merging or
consolidating with any other bank holding company.
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8
Additionally,
the Bank Holding Company Act provides that the Federal Reserve Board may not approve
any of these transactions if it would result in or tend to create a monopoly,
substantially lessen competition or otherwise function as a restraint of trade,
unless the anticompetitive effects of the proposed transaction are clearly
outweighed by the public interest in meeting the convenience and needs of the
community to be served. The Federal Reserve Board is also required to consider
the financial and managerial resources and future prospects of the bank holding
companies and banks concerned and the convenience and needs of the community to
be served. The Federal Reserve Boards consideration of financial resources
generally focuses on capital adequacy, which is discussed below.
Under the Bank Holding Company Act, if we are
adequately capitalized and adequately managed, we or any other bank holding
company located in Georgia may purchase a bank located outside of Georgia. Conversely, an adequately capitalized and
adequately managed bank holding company located outside of Georgia may purchase
a bank located inside of Georgia. In
each case, however, restrictions may be placed on the acquisition of a bank
that has only been in existence for a limited amount of time or will result in
specified concentrations of deposits.
Currently, Georgia law prohibits acquisitions of banks that have been
chartered for less than three years.
Because the Bank has been chartered for more than three years, this
restriction would not limit our ability to sell.
Change
in Bank Control.
Subject to
various exceptions, the Bank Holding Company Act and the Change in Bank Control
Act, together with related regulations, require Federal Reserve Board approval
prior to any person or company acquiring control of the bank holding company.
Control is conclusively presumed to exist if an individual or company acquires
25% or more of any class of voting securities of the bank holding company.
Control is also presumed to exist, although rebuttable, if a person or company
acquires 10% or more, but less than 25%, of any class of voting securities and
either:
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the bank holding
company has registered securities under Section 12 of the Securities Act
of 1934; or
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no other person owns a
greater percentage of that class of voting securities immediately after the
transaction.
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Our
common stock is registered under Section 12 of the Securities Exchange Act
of 1934. The regulations provide a procedure for challenging rebuttable
presumptions of control.
Permitted
Activities.
The Bank
Holding Company Act has generally prohibited a bank holding company from
engaging in activities other than banking or managing or controlling banks or
other permissible subsidiaries and from acquiring or retaining direct or
indirect control of any company engaged in any activities other than those
determined by the Federal Reserve to be closely related to banking or managing
or controlling banks as to be a proper incident thereto. Provisions of
the Gramm-Leach-Bliley Act have expanded the permissible activities of a bank
holding company that qualifies as a financial holding company. Under the
regulations implementing the Gramm-Leach-Bliley Act, a financial holding
company may engage in additional activities that are financial in nature or
incidental or complementary to financial activity. Those activities include, among other
activities, certain insurance and securities activities.
To
qualify to become a financial holding company, the Bank and any other
depository institution subsidiary of the Company must be well capitalized and
well managed and must have a Community Reinvestment Act rating of at least satisfactory. Additionally, the Company must file an
election with the Federal Reserve to become a financial holding company and
must provide the Federal Reserve with 30 days written notice prior to engaging
in a permitted financial activity. While the Company meets the qualification
standards applicable to financial holding companies, we have not elected to
become a financial holding company at this time.
Support
of Subsidiary Institutions.
Under Federal Reserve Board policy, we
are expected to act as a source of financial strength and commit resources to
support Atlantic Southern Bank. This support may be required at times when,
without this Federal Reserve Board policy, we might not be inclined to provide
it. Accordingly, in connection with the formation of the bank holding company
we made a commitment to the Federal Reserve Board not to incur any debt without
its approval. In addition, any capital loans made by us to Atlantic Southern
Bank will be repaid only after its deposits and various other obligations are
repaid in full. In the unlikely event of our bankruptcy, any commitment we give
to a federal banking regulator to maintain the capital of Atlantic Southern
Bank will be assumed by the bankruptcy trustee and entitled to a priority of
payment.
9
Atlantic
Southern Bank
Since
Atlantic Southern Bank is a commercial bank chartered under the laws of the
State of Georgia, we are primarily subject to the supervision, examination and
reporting requirements of the FDIC and the GDBF. The FDIC and the GDBF
regularly examine the banks operations and have the authority to approve or
disapprove mergers, the establishment of branches and similar corporate
actions. Both regulatory agencies have the power to prevent the continuance or
development of unsafe or unsound banking practices or other violations of law.
Additionally, our deposits are insured by the FDIC to the maximum extent
provided by law. We are also subject to numerous state and federal statutes and
regulations that affect our business, activities and operations.
Branching.
Under current Georgia law, we may open branch offices
throughout Georgia with the prior approval of the GDBF. In addition, with prior
regulatory approval, we may acquire branches of existing banks located in
Georgia. Atlantic Southern Bank and any other national or state-chartered bank
generally may branch across state lines only if allowed by the applicable
states laws. Georgia law, with limited exceptions, currently permits branching
across state lines only through interstate mergers.
With our acquisition of
CenterState Banks Mid Florida and the opening of our Jacksonville branch
location, we obtained the right under Florida law to establish an additional
branch or additional branches in the State of Florida to the same extent that
any Florida bank may establish an additional branch or additional branches
within the State of Florida. Under current
Florida law, we may open branch offices throughout Florida with the prior
approval of the Division of Financial Institutions of the Florida Office of
Financial Regulation. In addition, with prior regulatory approval, we may
acquire branches of existing banks located in Florida.
Under
the Federal Deposit Insurance Act, states may opt-in and allow out-of-state
banks to branch into their state by establishing a new start-up branch in the
state. Currently, Georgia has not opted-in to this provision. Therefore,
interstate merger is the only method through which a bank located outside of
Georgia may branch into Georgia. This provides a limited barrier of entry into
the Georgia banking market, which protects us from an important segment of
potential competition. However, because Georgia has elected not to opt-in, our
ability to establish a new start-up branch in another state may be limited.
Many states that have elected to opt-in have done so on a reciprocal basis,
meaning that an out-of-state bank may establish a new start-up branch only if
their home state has also elected to opt-in. Consequently, until Georgia
changes its election, the only way we will be able to branch into states that
have elected to opt-in on a reciprocal basis will be through interstate merger.
Prompt Corrective Action
.
The Federal
Deposit Insurance Corporation Improvement Act of 1991 establishes a system of
prompt corrective action to resolve the problems of undercapitalized financial
institutions. Under this system, the
federal banking regulators have established five capital categories in which
all institutions are placed. The federal
banking regulators have also specified by regulation the relevant capital
levels for each category. As of December 31, 2007, the Bank qualified for
the well-capitalized category.
Federal
banking regulators are required to take various mandatory supervisory actions
and are authorized to take other discretionary actions with respect to
institutions in the three undercapitalized categories. The severity of the action depends upon the
capital category in which the institution is placed. Generally, subject to a narrow exception, the
banking regulator must appoint a receiver or conservator for an institution
that is critically undercapitalized.
FDIC Insurance
Assessments.
The FDIC
has adopted a risk-based assessment system for insured depository institutions
that takes into account the risks attributable to different categories and
concentrations of assets and liabilities. The
system assesses higher rates on those institutions that pose greater risks to
the Deposit Insurance Fund (the DIF).
The FDIC places each institution in one of four risk categories using a
two-step process based first on capital ratios (the capital group assignment)
and then on other relevant information (the supervisory group assignment). Within the lower risk category, Risk Category
I, rates will vary based on each institutions CAMELS component ratings,
certain financial ratios, and long-term debt issuer ratings.
Capital group
assignments are made quarterly and an institution is assigned to one of three
capital categories: (1) well
capitalized, (2) adequately capitalized and (3) undercapitalized.
These three categories are substantially similar to the prompt corrective
action categories described above, with the undercapitalized category
including
10
institutions that are
undercapitalized, significantly undercapitalized and critically
undercapitalized for prompt corrective action purposes. The FDIC also assigns
an institution to one of three supervisory subgroups based on a supervisory
evaluation that the institutions primary federal banking regulator provides to
the FDIC and information that the FDIC determines to be relevant to the
institutions financial condition and the risk posed to the deposit insurance
funds. Assessments range from 5 to 43 cents per $100 of deposits, depending on
the institutions capital group and supervisory subgroup. Institutions that are
well capitalized will be charged a rate between 5 and 7 cents per $100 of
deposits.
The
FDIC may terminate its insurance of deposits if it finds that the institution
has engaged in unsafe and unsound practices; is in an unsafe or unsound
condition to continue operations; or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC.
Community
Reinvestment Act.
The
Community Reinvestment Act requires that, in connection with examinations of
financial institutions within their respective jurisdictions, the federal
banking regulators shall evaluate the record of each financial institution in
meeting the credit needs of its local community, including low and
moderate-income neighborhoods. These
facts are also considered in evaluating mergers, acquisitions and applications
to open a branch or facility. Failure to
adequately meet these criteria could impose additional requirements and
limitations on Atlantic Southern Bank.
Additionally, we must publicly disclose the terms of various Community
Reinvestment Act-related agreements.
Allowance
for Loan and Lease Losses.
The
Allowance for Loan and Lease Losses (the ALLL) represents one of the most
significant estimates in Atlantic Southern Banks financial statements and
regulatory reports. Because of its
significance, Atlantic Southern Bank has developed a system by which it
develops, maintains and documents a comprehensive, systematic and consistently
applied process for determining the amounts of the ALLL and the provision for
loan and lease losses. The Interagency
Policy Statement on the Allowance for Loan and Lease Losses, issued on December 13,
2006, encourages all banks to ensure controls are in place to consistently
determine the ALLL in accordance with GAAP, the banks stated policies and
procedures, managements best judgment and relevant supervisory guidance. Consistent with supervisory guidance,
Atlantic Southern Bank maintains a prudent and conservative, but not excessive,
ALLL, that is at a level that is appropriate to cover estimated credit losses
on individually evaluated loans determined to be impaired as well as estimated
credit losses inherent in the remainder of the loan and lease portfolio. Atlantic Southern Banks estimate of credit
losses reflects consideration of all significant factors that affect the collectibility
of the portfolio as of the evaluation date.
See Managements Discussion and Analysis Critical Accounting
Policies.
Commercial Real Estate Lending
. Our lending operations may be
subject to enhanced scrutiny by federal banking regulators based on its
concentration of commercial real estate loans.
On December 6, 2006, the federal banking regulators issued
final guidance to remind financial institutions of the risk posed by commercial
real estate (CRE) lending concentrations.
CRE loans generally include land development, construction loans and
loans secured by multifamily property, and nonfarm, nonresidential real
property where the primary source of repayment is derived from rental income
associated with the property.
Other
Regulations.
Interest and
other charges collected or contracted for by the Bank are subject to state
usury laws and federal laws concerning interest rates. Our loan operations will
be subject to federal laws applicable to credit transactions, such as the:
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Federal
Truth-In-Lending Act, governing disclosures of credit terms to consumer
borrowers;
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Home Mortgage
Disclosure Act of 1975, requiring financial institutions to provide
information to enable the public and public officials to determine whether a
financial institution is fulfilling its obligation to help meet the housing
needs of the community it serves;
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Equal Credit
Opportunity Act, prohibiting discrimination on the basis of race, creed or
other prohibited factors in extending credit;
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Fair Credit Reporting
Act of 1978, as amended by the Fair and Accurate Credit Transactions Act,
governing the use and provision of information to credit reporting agencies,
certain identity theft protections, and certain credit and other disclosures;
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Fair Debt Collection
Act, governing the manner in which consumer debts may be collected by
collection agencies;
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Soldiers
and Sailors Civil Relief Act of 1940, as amended by the Servicemembers
Civil Relief Act, governing the repayment terms of, and property rights
underlying, secured obligations of persons currently on active duty with the
United States military;
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Talent
Amendment in the 2007 Defense Authorization Act, establishing a 36% annual
percentage rate ceiling, which includes a variety of charges including late
fees, for consumer loans to military service members and their dependents;
and
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rules and
regulations of the various federal banking regulators charged with the
responsibility of implementing these federal laws.
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Atlantic
Southern Banks deposit operations are subject to federal laws applicable to
depository accounts, such as the:
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Truth-In-Savings Act,
requiring certain disclosures of consumer deposit accounts:
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Right to Financial
Privacy Act, which imposes a duty to maintain confidentiality of consumer
financial records and prescribes procedures for complying with administrative
subpoenas of financial records;
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Electronic Funds
Transfer Act and Regulation E issued by the Federal Reserve Board to
implement that act, which govern automatic deposits to and withdrawals from
deposit accounts and customers rights and liabilities arising from the use
of automated teller machines and other electronic banking services; and
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rules and
regulations of the various federal banking regulators charged with the
responsibility of implementing these federal laws.
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Capital
Adequacy
We
are required to comply with the capital adequacy standards established by the
Federal Reserve Board, in the case of Atlantic Southern Financial Group, and
the FDIC, in the case of Atlantic Southern Bank. The Federal Reserve has
established a risk-based and a leverage measure of capital adequacy for bank
holding companies. The Bank is also
subject to risk-based and leverage capital requirements adopted by its primary
regulator, which are substantially similar to those adopted by the Federal
Reserve for bank holding companies.
The
risk-based capital standards are designed to make regulatory capital requirements
more sensitive to differences in risk profiles among banks and bank holding
companies, to account for off-balance-sheet exposure, and to minimize
disincentives for holding liquid assets. Assets and off-balance-sheet items,
such as letters of credit and unfunded loan commitments, are assigned to broad
risk categories, each with appropriate risk weights. The resulting capital
ratios represent capital as a percentage of total risk-weighted assets and
off-balance-sheet items.
The
minimum guideline for the ratio of total capital to risk-weighted assets is 8%.
Total capital consists of two components, Tier 1 Capital and Tier 2 Capital.
Tier 1 Capital generally consists of common stockholders equity, minority
interests in the equity accounts of consolidated subsidiaries, qualifying
noncumulative perpetual preferred stock and a limited amount of qualifying
cumulative perpetual preferred stock, less goodwill and other specified
intangible assets. Tier 1 Capital must equal at least 4% of risk-weighted assets.
Tier 2 Capital generally consists of subordinated debt, other preferred stock
and hybrid capital, and a limited amount of loan loss reserves. The total
amount of Tier 2 Capital is limited to 100% of Tier 1 Capital. At December 31
2007, our ratio of total capital to risk-weighted assets was 11.62% and our
ratio of Tier 1 Capital to risk-weighted assets was 10.40%.
In
addition, the Federal Reserve Board has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
ratio of Tier 1 Capital to average assets, less goodwill and other specified
intangible assets, of 3% for bank holding companies that meet specified
criteria, including having the highest regulatory rating and implementing the
Federal Reserve Boards risk-based capital measure for market risk. All other
bank holding companies generally are required to maintain a leverage ratio of
at least 4%.
At
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December 31, 2007,
our leverage ratio was 9.34%. The guidelines also provide that bank holding
companies experiencing internal growth or making acquisitions will be expected
to maintain strong capital positions substantially above the minimum
supervisory levels without reliance on intangible assets. The Federal Reserve
Board considers the leverage ratio and other indicators of capital strength in
evaluating proposals for expansion or new activities.
Failure
to meet capital guidelines could subject a bank and a bank holding company to a
variety of enforcement remedies, including issuance of a capital directive, the
termination of deposit insurance by the FDIC, a prohibition on accepting
brokered deposits and certain other restrictions on its business. As described
above, significant additional restrictions can be imposed on FDIC-insured
depository institutions that fail to meet applicable capital requirements.
Payment
of Dividends
We
are a legal entity separate and distinct from Atlantic Southern Bank. The
principal sources of our cash flow, including cash flow to pay dividends to its
shareholders, are dividends that we receive from Atlantic Southern Bank.
Statutory and regulatory limitations apply to the payment of dividends by a
subsidiary bank to its bank holding company.
The Bank is required to obtain prior approval of the
GDBF if the total of all dividends declared by the Bank in any year will exceed
50% of the Banks net income for the prior year.
These same limitations apply to a bank
holding companys payment of dividends to its shareholders. Our payment of
dividends may also be affected by other factors, such as the requirement to
maintain adequate capital above regulatory guidelines. At December 31, 2007, the Bank could pay
cash dividends of approximately $4.17 million without prior regulatory
approval.
If, in the opinion of the federal banking regulator,
Atlantic Southern Bank was engaged in or about to engage in unsafe or unsound
practice, the federal banking regulator could require
, after
notice and a hearing, that we stop or refrain from engaging in the practice it
considers unsafe or unsound. The federal
banking regulators have indicated that paying dividends that deplete a
depository institutions capital base to an inadequate level would be an unsafe
and unsound banking practice. Under the
Federal Deposit Insurance Corporation Improvement Act of 1991, a depository
institution may not pay any dividend if payment would cause it to become
undercapitalized or if it already is undercapitalized. Moreover, the federal banking regulators have
issued policy statements that provide that bank holding companies and insured
banks should generally only pay dividends out of current operating earnings.
We
declared no dividends in either 2006 or 2007, but declared our first dividend
of $0.03 per share on January 10, 2008.
Any future determination relating to dividend policy will be made at the
discretion of our Board of Directors and will depend on many of the statutory
and regulatory factors mentioned above.
Restrictions
on Transactions with Affiliates
Atlantic
Southern Financial Group and Atlantic Southern Bank are subject to the
provisions of Section 23A of the Federal Reserve Act. Section 23A
places limits on the amount of:
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a banks loans or
extensions of credit to affiliates;
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a banks investment in
affiliates;
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assets a bank may
purchase from affiliates, except for real and personal property exempted by
the Federal Reserve Board;
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loans or extensions of
credit to third parties collateralized by the securities or obligations of
affiliates; and
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a banks guarantee,
acceptance or letter of credit issued on behalf of an affiliate.
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The
total amount of the above transactions is limited in amount, as to any one
affiliate, to 10% of a banks capital and surplus and, as to all affiliates
combined, to 20% of a banks capital and surplus. In addition to the
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limitation on the amount
of these transactions, each of the above transactions must also meet specified
collateral requirements. We must also comply with other provisions designed to
avoid the taking of low-quality assets.
We
are subject to the provisions of Section 23B of the Federal Reserve Act
which, among other things, prohibit an institution from engaging in the above
transactions with affiliates unless the transactions are on terms substantially
the same, or at least as favorable to the institution or its subsidiaries, as
those prevailing at the time for comparable transactions with nonaffiliated
companies.
We
are subject to restrictions on extensions of credit to our executive officers,
directors, principal shareholders and their related interests. These extensions
of credit (1) must be made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with third parties and (2) must not involve more than the
normal risk of repayment or present other unfavorable features.
Proposed
Legislation and Regulatory Action
New
regulations and statutes are regularly proposed that contain wide-ranging
proposals for altering the structures, regulations and competitive
relationships of financial institutions operating and doing business in the
United States. We cannot predict whether
or in what form any proposed regulation or statute will be adopted or the
extent to which our business may be affected by any new regulation or statute.
Effect
of Governmental Monetary Policies
Our
earnings are affected by domestic economic conditions and the monetary and fiscal
policies of the United States government and its agencies. The Federal Reserve Boards monetary policies
have had, and are likely to continue to have, an important impact on the
operating results of commercial banks through its power to implement national
monetary policy in order, among other things, to curb inflation or combat a
recession. The monetary policies of the
Federal Reserve Board affect the levels of bank loans, investments and deposits
through its control over the issuance of United States government securities,
its regulation of the discount rate applicable to member banks and its
influence over reserve requirements to which member banks are subject. We cannot predict the nature or impact of
future changes in monetary and fiscal policies.
Item 1A. Risk
Factors
An investment in our common stock involves
risks. The risks described below, should be considered in conjunction with the other information,
including our consolidated financial statements and related notes. If any of
the following risks or other risks, which have not been identified or which we
may believe are immaterial or unlikely, actually occur, our business, financial
condition and results of operations could be harmed. In such a case, the
trading price of our common stock could decline, and shareholders may lose all
or part of their investment. The risks discussed below also include
forward-looking statements, and our actual results may differ substantially
from those discussed in these forward-looking statements.
Risks
Related to Our Business
We
could suffer loan losses from a decline in credit quality.
We
could sustain losses if borrowers, guarantors and related parties fail to
perform in accordance with the terms of their loans. We have adopted
underwriting and credit monitoring procedures and policies, including the
establishment and review of the allowance for credit losses that we believe are
appropriate to minimize this risk by assessing the likelihood of
nonperformance, tracking loan performance and diversifying our credit
portfolio. These policies and procedures, however, may not prevent unexpected
losses that could materially adversely affect our results of operations.
14
Our reliance on time deposits,
including out-of-market certificates of deposit, as a source of funds for loans
and our other liquidity needs could have an adverse effect on our results of
operations.
Among
other sources of funds, we rely heavily on deposits for funds to make loans and
to provide for our other liquidity needs. However, our loan demand has exceeded
the rate at which we have been able to build core deposits, so we have relied
heavily on time deposits, including out-of-market certificates of deposit, as a
source of funds. Out-of-market certificates of deposit as of December 31,
2007 represented 40.2% of our total deposits. Those deposits may not be as
stable as other types of deposits and, in the future, depositors may not renew
those time deposits when they mature, or we may have to pay a higher rate of
interest to attract, keep or to replace them with other deposits or with funds
from other sources. Not being able to attract time deposits, or to keep or
replace them as they mature, would adversely affect our liquidity. Paying
higher deposit rates to attract, keep or replace those deposits could have a
negative effect on our net interest margin and results of operations.
If
the value of real estate in our core market were to decline materially, a
significant portion of our loan portfolio could become under-collateralized,
which could have a material adverse effect on our business, financial condition
and results of operations.
With
most of our loans concentrated in central Georgia, a decline in local economic
conditions could adversely affect the values of our real estate collateral.
Consequently, a decline in local economic conditions may have a greater effect
on our earnings and capital than on the earnings and capital of larger
financial institutions whose real estate loan portfolios are geographically
diverse.
In
addition to considering the financial strength and cash flow characteristics of
borrowers, we often secure loans with real estate collateral. At December 31,
2007, approximately 88.8% of our loans had real estate as a primary or
secondary component of collateral. The real estate collateral in each case
provides an alternate source of repayment in the event of default by the
borrower and may deteriorate in value during the time the credit is extended.
If we are required to liquidate the collateral securing a loan to satisfy the
debt during a period of reduced real estate values, our earnings and capital
could be adversely affected.
Lack
of seasoning of our loan portfolio may increase the risk of credit defaults in
the future.
Due
to the rapid growth of the bank over the past several years and our short
operating history, a large portion of the loans in our loan portfolio and our
lending relationships are of relatively recent origin. In general, loans do not
begin to show signs of credit deterioration or default until they have been
outstanding for some period of time, a process we refer to as seasoning. As a
result, a portfolio of older loans will usually behave more predictably than a
newer loan portfolio. Because our loan portfolio is relatively new, the current
level of delinquencies and defaults may not be representative of the level that
will prevail when the portfolio becomes more seasoned, which may be higher than
current levels. If delinquencies and defaults increase, we may be required to
increase our provision for loan losses, which would adversely affect our
results of operations and financial condition.
An economic downturn, especially one affecting our market
areas, could adversely affect our financial condition, results of operations or
cash flows.
Our
success depends upon the growth in population, income levels, deposits and
housing starts in our primary market areas.
If the communities in which we operate do not grow, or if prevailing
economic conditions locally or nationally are unfavorable, our business may not
succeed. Unpredictable economic
conditions may have an adverse effect on the quality of our loan portfolio and
our financial performance. Economic
recession over a prolonged period or other economic problems in our market
areas could have a material adverse impact on the quality of the loan portfolio
and the demand for our products and services.
Future adverse changes in the economies in our market areas may have a
material adverse effect on our financial condition, results of operations or
cash flows. Further, the banking
industry in Georgia is affected by general economic conditions such as
inflation, recession, unemployment and other factors beyond our control. As a community bank, we are less able to
spread the risk of unfavorable local economic conditions than larger or more
regional banks. Moreover, we cannot give
any assurance that we will benefit from any market growth or favorable economic
conditions in our primary market areas even if they do occur.
15
Declines
in real estate values have adversely affected our credit quality and
profitability.
During 2007, confidence in the credit market for residential housing
finance eroded, which resulted in a reduction in financing available to buyers
of new homes and borrowers wishing to refinance existing financing terms. The tightening of credit for residential
housing led to lower demand for residential housing and more foreclosures, and
has reduced the absorption rate for new and existing properties. In turn, this has caused market prices to
fall as some property owners, including lenders who acquired property by
foreclosure, have accepted lower prices to reduce their exposure to these real
estate assets which has reduced the market values for comparable real estate.
The
declines in values and the increased level of marketing required to sell
properties has reduced or eliminated the potential profits to many of the
builders and developers of properties to whom we have extended loans. As a result, some of these borrowers have
been unable to repay their loans in accordance with their terms, which has led
to an increase in our past due and non-performing loans. If these housing trends continue or
exacerbate, the Company expects that it will continue to experience increased
delinquencies and credit losses.
Moreover, if a recession occurs that negatively impacts economic
conditions in the United States as a whole or in specific regions of the
country, the Company would experience significantly higher delinquencies and
credit losses. An increase in credit
losses would reduce earnings and adversely affect the Companys financial
condition. Furthermore, to the extent
that real estate collateral is obtained through foreclosure, the costs of
holding and marketing the real estate collateral, as well as the ultimate
values obtained from disposition, could reduce the Companys earnings and
adversely affect the Companys financial condition.
The
Companys business volume and growth is affected by the rate of growth and
demand for housing in specific geographic markets. Based on the activity discussed above, the
Company expects that its level of historical growth could be significantly
curtailed and its assets may in fact shrink, depending on the duration and
extent of the current disruption in the housing and mortgage markets. The current disruption may expand and
adversely impact the U.S. economy in general and the housing and mortgage
markets in particular. In addition, a
variety of legislative, regulatory and other proposals have been discussed or
may be introduced in an effort to address the disruption. Depending on the scope and nature of
legislative, regulatory or other initiatives, if any, that are adopted to
respond to this disruption and applied to the Company, its financial condition,
results of operations or liquidity could, directly or indirectly, benefit or be
adversely affected in a manner that could be material to its business.
Additional
growth may require us to raise additional capital in the future, but that capital
may not be available when it is needed, which could adversely affect our
financial condition and results of operations.
We
are required by federal and state regulatory authorities to maintain adequate
levels of capital to support our operations. We anticipate our capital
resources following this offering will satisfy our capital requirements for the
foreseeable future. We may at some point, however, need to raise additional
capital to support our continued growth.
Our
ability to raise additional capital, if needed, will depend on conditions in
the capital markets at that time, which are outside our control, and on our
financial performance. Accordingly, we cannot be assured of our ability to
raise additional capital, if needed, on terms acceptable to us. If we cannot
raise additional capital when needed, our ability to further expand our
operations could be materially impaired.
Competition
from other financial institutions may adversely affect our profitability.
The
banking business is highly competitive, and we experience strong competition
from many other financial institutions. We compete with commercial banks,
credit unions, savings and loan associations, mortgage banking firms, consumer
finance companies, securities brokerage firms, insurance companies, money
market funds and other financial institutions, which operate in our primary
market areas and elsewhere. Presently 17 banks serve our central Georgia
service area with a total of 93 branches, 28 banks serve our coastal Georgia
service area with a total of 155 branches, and 16 banks serve Lowndes County
with a total of 36 branches.
We
compete with these institutions both in attracting deposits and in making
loans. In addition, we have to attract our customer base from other existing
financial institutions and from new residents. Many of our competitors are
well-established and much larger financial institutions. While we believe we
can and do successfully compete with these other financial institutions in our
markets, we may face a competitive disadvantage as a result of our smaller size
and lack of geographic diversification.
16
Although
we compete by concentrating our marketing efforts in our primary market areas
with local advertisements, personal contacts and greater flexibility in working
with local customers, we can give no assurance that this strategy will be
successful.
Opening
new offices may not result in increased assets or revenues for us.
We
intend to establish two new offices over the next 12 months. The investment
necessary for these branch expansions may negatively impact our efficiency
ratio. There is a risk that we will be unable to manage our growth, as the
process of opening new branches may divert our time and resources. There is
also risk that we may fail to open any additional branches, and a risk that, if
we do open these branches, they may not be profitable which would negatively
impact our results of operations.
Our
plans for future expansion depend, in some instances, on factors beyond our
control, and an unsuccessful attempt to achieve growth could have a material
adverse effect on our business, financial condition, results of operations and
future prospects.
We
expect to continue to engage in new branch expansion in the future. We may also
seek to acquire other financial institutions, or parts of those institutions.
Expansion involves a number of risks, including:
·
the time and costs of evaluating new
markets, hiring experienced local management and opening new offices;
·
the time lags between these activities
and the generation of sufficient assets and deposits to support the costs of
the expansion;
·
we may not be able to finance an
acquisition without diluting the interests of our existing shareholders;
·
the diversion of our managements
attention to the negotiation of a transaction may detract from their business
productivity;
·
we may enter into new markets where we
lack experience; and
·
we may introduce new products and
services with which we have no prior experience into our business.
Our recent results may not be
indicative of our future results, and may not provide guidance to assess the
risk of an investment in our common stock.
We
may not be able to sustain our historical rate of growth or may not even be
able to grow our business at all. In addition, our recent and rapid growth may
distort some of our historical financial ratios and statistics. In the future,
we may not have the benefit of several recently favorable factors, such as a
generally increasing interest rate environment, a strong residential mortgage
market or the ability to find suitable expansion opportunities. Various
factors, such as economic conditions, regulatory and legislative considerations
and competition, may also impede or prohibit our ability to expand our market
presence. If we experience a significant decrease in our historical rate of
growth, our results of operations and financial condition may be adversely
affected due to a high percentage of our operating costs being fixed expenses.
If we fail to manage our past
growth effectively, our financial condition and results of operations could be
negatively affected.
We
experienced significant growth in 2007, with our assets
increasing
$181.4 million or 27%, from December 31, 2006. Our prospects must be considered in light of
the risks, expenses and difficulties frequently encountered by companies that
have experienced this type of growth.
Failure to manage our past growth effectively could have a material
adverse effect on our business, financial condition, results of operations, or
future prospects, and could adversely affect our ability to successfully
implement our business strategy.
17
Our business strategy
includes the continuation of growth plans, and our financial condition and
results of operations could be negatively affected if we fail to grow or fail
to manage our growth effectively.
We
intend to continue pursuing a growth strategy for our business. Our prospects
must be considered in light of the risks, expenses and difficulties frequently
encountered by companies in growth stages of development. We cannot assure you
we will be able to expand our market presence in our existing markets or
successfully enter new markets or that any such expansion will not adversely
affect our results of operations. Failure to manage our growth effectively
could have a material adverse effect on our business, financial condition,
results of operations, or future prospects, and could adversely affect our
ability to successfully implement our business strategy. Also, if our growth
occurs more slowly than anticipated or declines, our results of operations
could be materially adversely affected.
Our
ability to grow successfully will depend on a variety of factors including the
continued availability of desirable business opportunities, the competitive
responses from other financial institutions in our market areas and our ability
to manage our growth. While we believe we have the management resources and
internal systems in place to manage our future growth, there can be no
assurance that growth opportunities will be available or growth will be managed
successfully.
Our
access to additional short term funding to meet our liquidity needs is limited.
We must maintain, on a daily basis, sufficient funds to cover
withdrawals from depositors accounts and to supply new borrowers with funds.
We routinely monitor asset and liability maturities in an attempt to match
maturities to meet liquidity needs. To
meet our cash obligations, we rely on repayments as asset mature, keep cash on
hand, maintain account balances with correspondent banks, purchase and sell
federal funds, purchase brokered deposits and maintain a line of credit with
the Federal Home Loan Bank. If we are
unable to meet our liquidity needs through loan and other asset repayments and
our cash on hand, we may need to borrow additional funds. Currently, our access to additional borrowed
funds is limited and we may be required to pay above market rates for
additional borrowed funds, which may adversely our results of operations.
Holders of our junior subordinated debentures have rights
that are senior to those of our common stockholders.
We have supported our continued growth by
issuing trust preferred securities from a special purpose trust and
accompanying junior subordinated debentures.
At December 31, 2007, we had outstanding trust preferred securities
totaling $10.3 million. We
unconditionally guaranteed the payment of principal and interest on the trust
preferred securities. Also, the junior
debentures we issued to the special purpose trust that relate to those trust
preferred securities are senior to our common stock. As a result, we must make payments on the
junior subordinated debentures before we can pay any dividends on our common
stock. In the event of our bankruptcy,
dissolution or liquidation, holders of our junior subordinated debentures must
be satisfied before any distributions can be made on our common stock. We do have the right to defer distributions
on our junior subordinated debentures (and related trust preferred securities)
for up to five years, but during that time we would not be able to pay
dividends on our common stock.
Our allowance for loan
losses may not be adequate to cover actual loan losses, which may require us to
take a charge to our earnings and adversely impact our financial condition and
results of operations.
We
maintain an allowance for estimated loan losses that we believe is adequate for
absorbing any probable losses in our loan portfolio. Management determines the provision for loan
losses based upon an analysis of general market conditions, credit quality of
our loan portfolio, and performance of our customers relative to their
financial obligations with us. We employ
an outside vendor specializing in credit risk management to evaluate our loan
portfolio for risk grading, which can result in changes in our allowance for
estimated loan losses. The amount of
future losses is susceptible to changes in economic, operating, and other
conditions, including changes in interest rates, that may be beyond our
control, and such losses may exceed the allowance for estimated loan
losses. Although management believes
that the allowance for estimated loan losses is adequate to absorb any probable
losses on existing loans that may become uncollectible, there can be no
assurance that the allowance will prove sufficient to cover actual loan losses
in the future. 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. Additionally, federal
banking regulators, as an integral part of their supervisory function,
periodically
18
review the allowance for
estimated loan losses. If these
regulatory agencies require us to increase the allowance for estimated loan
losses, it would have a negative effect on our results of operations and
financial condition.
If
we fail to retain our key employees, our growth and profitability could be
adversely affected.
Our
success is, and is expected to remain highly dependent on our executive
management team, consisting of Mark A. Stevens,
Gary P. Hall, Carol Soto and Brandon L. Mercer. This
is particularly true because, as a community bank, we depend on our management
teams ties to the community to generate business for us. Our growth will
continue to place significant demands on our management, and the loss of any
such persons services may have an adverse effect upon our growth and
profitability.
Our
corporate culture has contributed to our success, and if we cannot maintain
this culture as we grow, we could lose the teamwork and increased productivity
fostered by our culture, which could harm our business.
We
believe that a critical contributor to our success has been our corporate culture,
which we believe fosters teamwork and increased productivity. As our
organization grows and we are required to implement more complex management
structures, we may find it increasingly difficult to maintain the beneficial
aspects of our corporate culture. This could negatively impact our future
success.
Our ability to pay dividends is limited and we may be unable
to pay future dividends. As a result,
capital appreciation, if any, of our common stock may be your sole opportunity
for gains on your investment for the foreseeable future.
We make no assurances that we will pay any
dividends in the future. Any future
determination relating to dividend policy will be made at the discretion of our
Board of Directors and will depend on a number of factors, including our future
earnings, capital requirements, financial condition, future prospects,
regulatory restrictions and other factors that our Board of Directors may deem
relevant. The holders of our common
stock are entitled to receive dividends when, and if declared by our Board of
Directors out of funds legally
available for that purpose. As part of
our consideration to pay cash dividends, we intend to retain adequate funds
from future earnings to support the development and growth of our
business. In addition, our ability to
pay dividends is restricted by federal policies and regulations. It is the policy of the Federal Reserve Board
that bank holding companies should pay cash dividends on common stock only out
of net income available over the past year and only if prospective earnings
retention is consistent with the organizations expected future needs and
financial condition. Further, our
principal source of funds to pay dividends is cash dividends that we receive
from the bank.
As
a community bank, we have different lending risks than larger banks.
We
provide services to our local communities. Our ability to diversify our
economic risks is limited by our own local markets and economies. We lend
primarily to small to medium-sized businesses, and, to a lesser extent,
individuals which may expose us to greater lending risks than those of banks
lending to larger, better-capitalized businesses with longer operating
histories.
We
manage our credit exposure through careful monitoring of loan applicants and
loan concentrations in particular industries, and through loan approval and
review procedures. We have established an evaluation process designed to
determine the adequacy of our allowance for loan losses. While this evaluation
process uses historical and other objective information, the classification of
loans and the establishment of loan losses is an estimate based on experience,
judgment and expectations regarding our borrowers, the economies in which we
and our borrowers operate, as well as the judgment of our regulators. We cannot
assure you that our loan loss reserves will be sufficient to absorb future loan
losses or prevent a material adverse effect on our business, financial
condition, or results of operations.
19
A significant portion of our
loans are located outside of our primary market area where our ability to
oversee such loans directly is limited.
Because
approximately 13.8% of our loans are located outside of our primary market
area, our senior managements ability to oversee these loans directly is
limited. We may also be unable to
properly understand local market conditions or promptly react to local market
pressures. Any failure on our part to
properly supervise these out-of-market loans could have a material adverse
effect on our business, financial condition and results of operations.
Hurricanes
or other adverse weather events could negatively affect our local economies or
disrupt our operations, which could have an adverse effect on our business or
results of operations.
The
economy of Georgias coastal region is affected, from time to time, by adverse
weather events, particularly hurricanes. Our Savannah market area consists
primarily of coastal communities, and we cannot predict whether, or to what
extent, damage caused by future hurricanes will affect our operations, our
customers or the economies in our banking markets. However, weather events
could cause a decline in loan originations, destruction or decline in the value
of properties securing our loans, or an increase in the risks of delinquencies,
foreclosures and loan losses.
If
we fail to maintain an effective system of internal controls over financial
reporting, we may not be able to accurately report our financial results or
prevent fraud, which could adversely affect our business and the trading price
of our stock.
We
are currently in the process of evaluating our internal controls system to
allow management to report on, and our independent auditors to audit, our
internal controls over financial reporting. We will be performing the system
and process evaluations and testing (and any necessary remediation) required to
comply with the management certification and auditor attestation requirements
of Section 404 of the Sarbanes-Oxley Act of 2002. These systems are
necessary to produce accurate financial reports and prevent fraudulent
activity. We are required to comply with Section 404 of the Sarbanes-Oxley
Act of 2002; however, we may identify control deficiencies of varying degrees
of severity under applicable SEC and Public Company Accounting Oversight Board rules and
regulations that remain unremediated. As a reporting company, we are required
to report, among other things, control deficiencies that constitute a material
weakness or changes in internal controls that, or are reasonably likely to,
materially affect internal controls over financial reporting. A material
weakness is a significant deficiency, or combination of significant
deficiencies that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be
prevented or detected. If we fail to implement the requirements of Section 404
in a timely manner, we may be subject to sanctions or investigation by
regulatory authorities such as the SEC. In addition, if any material weakness
or deficiency is identified or is not remedied, investors may lose confidence
in the accuracy of our reported financial information, and our stock price
could be significantly adversely affected as a result.
Risks
Related to Our Industry
Our
profitability is vulnerable to interest rate fluctuations.
Our
profitability depends substantially upon our net interest income. Net interest
income is the difference between the interest earned on assets, such as loans
and investment securities, and the interest paid for liabilities, such as
savings and time deposits and out-of-market certificates of deposit. Market
interest rates for loans, investments and deposits are highly sensitive to many
factors beyond our control. Recently, interest rate spreads have generally
narrowed due to changing market conditions, policies of various government and
regulatory authorities and competitive pricing pressures, and we cannot predict
whether these rate spreads will narrow even further. This narrowing of interest
rate spreads could adversely affect our financial condition and results of
operations. In addition, we cannot predict whether interest rates will continue
to remain at present levels. Changes in interest rates may cause significant
changes, up or down, in our net interest income. Depending on our portfolio of
loans and investments, our results of operations may be adversely affected by
changes in interest rates.
20
Current trends in the mortgage loan markets are adversely affecting our
credit quality and profitability.
Since the beginning of 2007, the market has seen several subprime
lenders and hedge funds that had invested in loans supported by real estate
collateral declare bankruptcy and discontinue operations, while other lenders
have continued to put in place more stringent underwriting criteria. Recent losses on mortgage-backed investment
securities recorded by some larger financial institutions have resulted in
reduced valuations, demand and liquidity for these securities.
These challenges have affected the mortgage loan marketplace by
increasing the borrowers cost of funds for loan supported by real estate. More stringent loan underwriting standards
continue to reduce the number of real estate borrowers who can find financing
in the marketplace, and this continues to reduce the number of properties sold
and refinanced. The number of residential
properties on the market has continued to increase, and in certain markets
including our own, there has been increasing downward pressure on the selling
prices of new and existing homes and also in the sales market values of
existing properties, which are utilized as comparisons in valuing real estate
collateral. This affects the ability of
some borrowers, particularly those in construction and development, to sell the
properties securing their loans, which in turn makes it difficult for them to
make the scheduled repayments on those loans.
The
impact of the described changes in the economy as a whole, and the real estate
marketplace specifically, has had a negative effect on our ability to grow our
loan levels and on the values of the collateral underlying our loans. These changes could limit growth in interest
income and could also cause an increase in expenses associated with collecting
on loans, foreclosing on real estate collateral, and selling properties that
have already been foreclosed. The potential
impact on the Company will depend on the duration and depth of the real estate
market downturn, which will also be affected by the financial markets response
to correcting the problems that have affected the market, including providing
accommodations to borrowers in default or who are experiencing financial
difficulty.
Continuing weakness in residential property values and mortgage loan
markets could adversely affect us.
Recent
weakness in the secondary market for residential lending could have an adverse
impact upon our profitability. Pricing
may change rapidly impacting the value of loans in our warehouse and our
portfolio. This has been most pronounced
in residential construction and development loans and in the subprime and Alt-A
lending. The turmoil in the mortgage
markets, combined with the ongoing correction in real estate markets, could
result in further price reductions in single family home prices and lack of
liquidity in refinancing markets. These
factors could adversely impact the quality of our residential construction and
residential mortgage portfolio in various ways, including creating
discrepancies in value between the original appraisal and the value at time of
sale, and by decreasing the value of the collateral for our mortgage loans. We also have a significant amount of loans on
one-to-four family residential properties, which are secured principally by
single-family residences. Loans of this
type are generally smaller in size and geographically dispersed throughout our
market area. Losses on the residential
loan portfolio depend to large degree, on the level of interest rates, the
unemployment rate, economic conditions and collateral values, and are therefore
difficult to predict.
Additionally,
we may be required to repurchase mortgage loans or indemnify mortgage loan
purchasers as a result of certain borrower defaults, which could harm our
liquidity, results of operations and financial condition. When we sell mortgage loans, whether as whole
loans or pursuant to a securitization, we are required to make customary
representations and warranties to the purchaser about the mortgage loans and
the manner in which they were originated.
Our whole loan sale agreements sometimes require us to repurchase or
substitute mortgage loans in the event we breach any of these representations
or warranties. In addition, we may be
required to repurchase mortgage loans in the event of early payment default of
the borrower on a mortgage loan. While
we have taken steps to enhance our underwriting policies and procedures, there
is no assurance that these steps will be effective nor impact risk associated
with loans sold in the past. If
repurchase demands increase, our liquidity, results of operations and financial
condition could be adversely affected.
21
An economic downturn,
especially one affecting our market areas, could adversely affect our financial
condition, results of operations or cash flows.
Our
success depends upon the growth in population, income levels, deposits and
housing starts in our primary market areas. If the communities in which we
operate do not grow, or if prevailing economic conditions locally or nationally
are unfavorable, our business may not succeed. Unpredictable economic
conditions may have an adverse effect on the quality of our loan portfolio and
our financial performance. Economic recession over a prolonged period or other
economic problems in our market areas could have a material adverse impact on
the quality of the loan portfolio and the demand for our products and services.
Future adverse changes in the economies in our market areas may have a material
adverse effect on our financial condition, results of operations or cash flows.
Further, the banking industry in Georgia is affected by general economic
conditions such as inflation, recession, unemployment and other factors beyond
our control. As a community bank, we are less able to spread the risk of
unfavorable local economic conditions than larger or more regional banks.
Moreover, we cannot give any assurance that we will benefit from any market
growth or favorable economic conditions in our primary market areas even if
they do occur.
Changes
in monetary policies may have an adverse effect on our business, financial
condition and results of operations.
Our
financial condition and results of operations are affected by credit policies
of monetary authorities, particularly the Federal Reserve Board. Actions by
monetary and fiscal authorities, including the Federal Reserve Board, could
have an adverse effect on our deposit levels, loan demand or business and
earnings.
We
are subject to extensive regulation that could limit or restrict our activities
and impose financial requirements or limitations on the conduct of our
business, which limitations or restrictions could adversely affect our
profitability.
As
a bank holding company, we are primarily regulated by the Board of Governors of
the Federal Reserve System (Federal Reserve Board). Atlantic Southern Bank is
primarily regulated by the Federal Deposit Insurance Corporation (the FDIC)
and the Georgia Department of Banking and Finance. Our compliance with Federal
Reserve Board, FDIC and Department of Banking and Finance regulations is costly
and may limit our growth and restrict certain of our activities, including
payment of dividends, mergers and acquisitions, investments, loans and interest
rates charged, interest rates paid on deposits and locations of offices. We are
also subject to capital requirements of our regulators.
The
laws and regulations applicable to the banking industry could change at any
time, and we cannot predict the effects of these changes on our business and
profitability. Because government regulation greatly affects the business and
financial results of all commercial banks and bank holding companies, our cost
of compliance could adversely affect our ability to operate profitably.
The
Sarbanes-Oxley Act, the related rules and regulations promulgated by the
SEC that currently apply to us and the related exchange rules and regulations,
have increased the scope, complexity and cost of corporate governance,
reporting and disclosure practices. As a result, we may experience greater
compliance costs.
We face intense
competition in all of our current and planned markets.
The
financial services industry, including commercial banking, mortgage banking,
consumer lending, and home equity lending, is highly competitive, and we
encounter strong competition for deposits, loans, and other financial services
in all of our market areas in each of our lines of business. Our principal competitors include other
commercial banks, savings banks, savings and loan associations, mutual funds,
money market funds, finance companies, trust companies, insurers, credit
unions, and mortgage companies. Many of
our non-bank competitors are not subject to the same degree of regulation as us
and have advantages over us in providing certain services. Many of our competitors are significantly
larger than us and have greater access to capital and other resources. Also, our ability to compete effectively in
our business is dependent on our ability to adapt successfully to regulatory
and technological changes within the banking and financial services industry
generally. If we are unable to compete
effectively, we will lose market share and our income from loans and other
products may diminish.
22
Our
ability to compete successfully depends on a number of factors, including,
among other things:
·
the ability to develop, maintain, and
build upon long-term customer relationships based on top quality service and
high ethical standards;
·
the scope, relevance, and pricing of
products and services offered to meet customer needs and demands;
·
the rate at which we introduce new
products and services relative to our competitors;
·
customer satisfaction with our level of
service; and
·
industry and general economic trends.
Failure
to perform in any of these areas could significantly weaken our competitive
position, which could adversely affect our growth and profitability, which, in
turn, could have a material adverse effect on our financial condition and
results of operations.
Environmental
liability associated with lending activities could result in losses.
In
the course of our business, we may foreclose on and take title to properties
securing our loans. If hazardous substances are discovered on any of these
properties, we may be liable to governmental entities or third parties for the
costs of remediation of the hazard, as well as for personal injury and property
damage. Many environmental laws can impose liability regardless of whether we
knew of, or were responsible for, the contamination. In addition, if we arrange
for the disposal of hazardous or toxic substances at another site, we may be
liable for the costs of cleaning up and removing those substances from the
site, even if we neither own nor operate the disposal site. Environmental laws
may require us to incur substantial expenses and may materially limit the use
of properties that we acquire through foreclosure, reduce their value or limit
our ability to sell them in the event of a default on the loans they secure. In
addition, future laws or more stringent interpretations or enforcement policies
with respect to existing laws may increase our exposure to environmental
liability.
Item 1B. Unresolved
Staff Comments
There are no written comments from the Commission staff regarding our
periodic or current reports under the Act which remain unresolved.
Item 2. Properties
Our
home office is located at 1701 Bass Road, Macon, Bibb County, Georgia. We own
this facility, which contains approximately 12,000 square feet of space, and
also serves as our corporate headquarters.
We began conducting operations out of this location on August 21,
2007.
23
The
following table summarizes pertinent details of our owned banking and loan
production offices, and our leased operations center.
Office Address
|
|
City,
State
|
|
Zip
Code
|
|
Date
Opened
|
1701 Bass Road
|
|
Macon, GA
|
|
31201
|
|
August 21, 2007
|
|
|
|
|
|
|
|
4077
Forsyth Road
|
|
Macon,
GA
|
|
31201
|
|
December 10,
2001
|
|
|
|
|
|
|
|
502 Mulberry Street
|
|
Macon, GA
|
|
31201
|
|
March 29, 2004
|
|
|
|
|
|
|
|
494 Monroe Street
|
|
Macon, GA
|
|
31201
|
|
February 7, 2005
|
|
|
|
|
|
|
|
252 Holt Avenue (Leased)
|
|
Macon, GA
|
|
31201
|
|
February 22, 2005
|
|
|
|
|
|
|
|
464 S. Houston Lake Drive
|
|
Warner Robins, GA
|
|
31088
|
|
April 7, 2005
|
|
|
|
|
|
|
|
7393
Hodgson Memorial Drive, Suite 201
|
|
Savannah,
GA
|
|
31406
|
|
December 19,
2005
|
|
|
|
|
|
|
|
597
S. Columbia Drive
|
|
Rincon,
GA
|
|
31326
|
|
April 10,
2006
|
|
|
|
|
|
|
|
1200
Northway
|
|
Darien,
GA
|
|
31305
|
|
December 15,
2006(1)
|
|
|
|
|
|
|
|
3420
Cypress Mill Road
|
|
Brunswick,
GA
|
|
31520
|
|
December 15,
2006(1)
|
|
|
|
|
|
|
|
2449
Perry Lane Road
|
|
Brunswick
, GA
|
|
31525
|
|
December 15,
2006(1)
|
|
|
|
|
|
|
|
1607
Frederica Road (Leased)
|
|
St.
Simons Island, GA
|
|
31522
|
|
December 15,
2006(1)
|
|
|
|
|
|
|
|
300
North Dugger Street
|
|
Roberta,
GA
|
|
31078
|
|
January 31,
2007(2)
|
|
|
|
|
|
|
|
8340
Eisenhower Pkwy
|
|
Lizella,
GA
|
|
31052
|
|
January 31,
2007(2)
|
|
|
|
|
|
|
|
202
West White Road
|
|
Byron,
GA
|
|
31008
|
|
January 31,
2007(2)
|
|
|
|
|
|
|
|
3338
A Ste. 1 Country Club Road (Leased)
|
|
Valdosta,
GA
|
|
31605
|
|
February 1,
2007(3)
|
|
|
|
|
|
|
|
135 Highway 96
|
|
Bonaire, GA
|
|
31005
|
|
April 2, 2007
|
|
|
|
|
|
|
|
13474
Atlantic Boulevard (Leased)
|
|
Jacksonville,
FL
|
|
32225
|
|
December 3,
2007(4)
|
(1) Atlantic
Southern obtained this property upon the completion of its acquisition of
Sapelo Bancshares, Inc. on December 15, 2006.
(2) Atlantic
Southern obtained this property upon the completion of its acquisition of First
Community Bank of Georgia on January 31, 2007.
(3) This
location operates as a loan production office and is not a full-service bank
branch.
(4) Atlantic
Southern obtained this property upon the completion of its acquisition of
CenterState Bank Mid Florida on November 30, 2007.
All
of the offices listed above are owned by the Bank unless otherwise indicated.
The Holt Avenue location has a lease term of three years. The Frederica Road
location has a verbal month-to-month lease.
We own the building for the Cypress Mill Road location, however there is
a long-term lease on the land. The term
of the long-term lease is renewed every ten years with the last year of the
lease being 2031. The Country Club Road
location has a verbal month-to-month lease.
The Atlantic Boulevard location has a lease term of five years. We believe that our banking offices are in
good condition, are suitable to our needs and, for the most part, are
relatively new. We are not aware of any environmental problems with the properties
that we own that would be material, either individually, or in the
24
aggregate, to our
operations or financial condition. We
also own parcels of land in Bibb County, Glynn County, and Chatham County,
Georgia for possible development as future branch locations.
Item 3. Legal Proceedings
There
are no material pending legal proceedings to which Atlantic Southern Financial
Group or Atlantic Southern Bank are a party, or to which any of their properties
are subject; nor are there material proceedings known to us or to be
contemplated by any governmental authority; nor are there material proceedings
known to us, pending or contemplated, in which any director, officer or
affiliate or any principal security holder of Atlantic Southern Financial Group
or any associate of any of the foregoing, is a party or has an interest adverse
to Atlantic Southern Financial Group.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted during the fourth
quarter of 2007 that required a vote of the security holders through
solicitation of proxies or otherwise.
PART II
Item 5.
Market
for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
In
February 2004, our stock began trading on the OTC Bulletin Board. Prior to
that time, our common stock was infrequently traded in private transactions.
Although our common stock is quoted on the OTC Bulletin Board, there has been
limited trading, at widely varying prices, and trading to date has not created
an active market for our common stock. Thus, the prices at which trades
occurred since being quoted on the OTC Bulletin Board may not be representative
of the actual value of our common stock.
On
June 12, 2006, Atlantic Southern closed its public offering of a total of
700,000 shares of common stock at a price of $30.00 per share. On December 15, 2006, Atlantic Southern
completed its acquisition of Sapelo Bancshares, Inc., whereby Sapelo
shareholders received their pro rata portion of the merger consideration, which
included 305,695 shares of Atlantic Southern common stock and approximately
$6.24 million in cash. Finally on January 31,
2007, Atlantic Southern completed its acquisition of First Community Bank of
Georgia, whereby First Community Bank shareholders received their pro rata
portion of 542,033 shares of Atlantic Southern common stock.
On
April 16, 2007, our stock began trading on the NASDAQ Global Markets
exchange under the symbol ASFN, where it is currently traded. The average daily volume for our stock,
beginning on April 16, 2007 and ending on December 31, 2007, was
2,314 shares.
As
of March 11, 2008, there were 4,151,780 shares issued and outstanding and
1,894 shareholders of record.
We
are aware of sporadic trades during 2006 with prices ranging from $24.50 to
$34.50, and sporadic trades during 2005 with prices ranging from $10.33 to
$24.50. During 2007, trades in our common stock occurred at prices ranging from
$18.85 to $36.49. The last reported sale price of our common stock on March 11,
2008 was $17.03.
25
The
following tables set forth for the periods indicated the high, low and closing
quarter sale prices for our common stock as reported by the NASDAQ during each
quarter of 2007, subsequent to our listing, and as reported by the OTC Bulletin
Board during each quarter of 2006 and for those quarters of 2007 prior to our
NASDAQ listing.
2007
|
|
High
|
|
Low
|
|
Close
|
|
First Quarter
|
|
$
|
35.75
|
|
$
|
31.75
|
|
$
|
33.29
|
|
Second Quarter
|
|
36.49
|
|
32.11
|
|
34.34
|
|
Third Quarter
|
|
34.83
|
|
24.58
|
|
24.91
|
|
Fourth Quarter
|
|
26.00
|
|
18.85
|
|
19.00
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
High
|
|
Low
|
|
Close
|
|
First Quarter
|
|
$
|
30.00
|
|
$
|
24.25
|
|
$
|
30.00
|
|
Second Quarter
|
|
40.00
|
|
30.00
|
|
30.75
|
|
Third Quarter
|
|
34.50
|
|
30.50
|
|
33.75
|
|
Fourth Quarter
|
|
33.94
|
|
31.35
|
|
33.50
|
|
|
|
|
|
|
|
|
|
|
|
|
Holders
of our common stock are entitled to receive dividends when, as and if declared
by our Board of Directors out of funds legally available for that purpose. We
declared no dividends in either 2006 or 2007, but declared our first dividend
of $0.03 per share on January 10, 2008.
Any future determination relating to dividend policy will be made at the
discretion of our Board of Directors and will depend on a number of factors,
including our future earnings, capital requirements, financial condition, future
prospects, regulatory restrictions and other factors that our Board of
Directors may deem relevant.
There
are a number of restrictions on our ability to pay cash dividends. It is the
policy of the Federal Reserve Board that bank holding companies should pay cash
dividends on common stock only out of net income available over the past year
and only if prospective earnings retention is consistent with the organizations
expected future needs and financial condition. The policy provides that bank
holding companies should not maintain a level of cash dividends that undermines
the bank holding companys ability to serve as a source of strength to its
banking subsidiaries. For a foreseeable period of time, our principal source of
cash will be dividends paid by the bank with respect to its capital stock.
There are certain restrictions on the payment of these dividends imposed by
banking laws, regulations and authorities. See Supervision and
RegulationPayment of Dividends on page 13.
During the fourth
quarter of 2007, we did not repurchase any of our securities or sell any of our
securities without registration under the Securities Act of 1933, as amended.
26
The
following performance graph compares the yearly percentage change in the
cumulative total shareholder return on Atlantic Southerns common stock to the
cumulative total return on the OTC Bulletin Board and the SNL NASDAQ Bank Stock
Index since December 31, 2001.
Where applicable, the performance graph reflects the stock split on September 8,
2005 and the reorganization into a holding company in January 2005.
|
|
Period Ending
|
|
Index
|
|
01/03/05
|
|
12/31/05
|
|
06/30/06
|
|
12/31/06
|
|
06/30/07
|
|
12/31/07
|
|
Atlantic Southern
Financial Group, Inc.
|
|
100.00
|
|
213.97
|
|
271.32
|
|
295.59
|
|
303.00
|
|
167.65
|
|
Russell 2000
|
|
100.00
|
|
106.37
|
|
115.10
|
|
125.90
|
|
134.02
|
|
123.93
|
|
SNL Bank and Thrift Index
|
|
100.00
|
|
102.15
|
|
107.47
|
|
119.35
|
|
114.34
|
|
91.02
|
|
27
Item 6. Selected
Financial Data
.
Our selected consolidated
financial data is presented below as of and for the years ended December 31,
2003 through 2007. The selected
consolidated financial data presented below as of December 31, 2007 and
2006, and for each of the years in the three-year period ended December 31,
2007, are derived from our audited financial statements and related notes
included in this 10-K and should be read in conjunction with the consolidated
financial statements and related notes, along with Managements Discussion and
Analysis of Financial Condition and Results of Operations beginning on page 30. The selected consolidated financials as of December 31,
2004 and 2003, and for the two years ended December 31, 2004, have been
derived from our audited financial statements that are not included in this
annual report on Form 10-K. The
shares outstanding and per share financial data presented below has been
adjusted to give effect to the 3-for-2 stock split in the form of a stock
dividend effected on September 30, 2005.
In January 2005,
shareholders of Atlantic Southern Bank exchanged their common stock in Atlantic
Southern Bank for common stock in the newly formed holding company, Atlantic
Southern Financial Group. The
transaction was accounted for on historical carrying amounts. The consolidated financial statements as of December 31,
2007, 2006 and 2005 include the accounts of Atlantic Southern Financial Group
and its wholly-owned subsidiary, Atlantic Southern Bank. Year-end data for 2004 and 2003 reflect
financial data for Atlantic Southern Bank.
|
|
As of and for the Years Ended
December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004(1)
|
|
2003(1)
|
|
|
|
(Amounts
in thousands, except share and per share amounts)
|
|
Income
Statement Data
:
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and dividend income
|
|
$
|
59,306
|
|
$
|
37,874
|
|
$
|
21,624
|
|
$
|
10,591
|
|
$
|
6,076
|
|
Total interest expense
|
|
31,513
|
|
18,973
|
|
8,957
|
|
3,369
|
|
2,149
|
|
Net interest income before provision for loan losses
|
|
27,793
|
|
18,901
|
|
12,667
|
|
7,222
|
|
3,927
|
|
Provision for loan losses
|
|
665
|
|
1,671
|
|
1,493
|
|
1,377
|
|
808
|
|
Net interest income after provision for loan losses
|
|
27,128
|
|
17,230
|
|
11,174
|
|
5,845
|
|
3,119
|
|
Noninterest income
|
|
3,356
|
|
1,684
|
|
1,186
|
|
387
|
|
212
|
|
Noninterest expense
|
|
18,593
|
|
10,100
|
|
6,364
|
|
3,632
|
|
2,438
|
|
Earnings before income taxes
|
|
11,891
|
|
8,814
|
|
5,996
|
|
2,600
|
|
893
|
|
Income tax provision (benefit)
|
|
4,147
|
|
2,850
|
|
2,111
|
|
938
|
|
(16
|
)
|
Net earnings
|
|
$
|
7,744
|
|
$
|
5,964
|
|
$
|
3,885
|
|
$
|
1,662
|
|
$
|
909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings basic
|
|
$
|
1.89
|
|
$
|
1.97
|
|
$
|
1.49
|
|
$
|
0.71
|
|
$
|
0.51
|
|
Net Earnings diluted (2)
|
|
1.75
|
|
1.77
|
|
1.33
|
|
0.67
|
|
0.49
|
|
Cash dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
Book value
|
|
21.46
|
|
17.24
|
|
9.75
|
|
8.44
|
|
7.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period End Balances:
|
|
|
|
|
|
|
|
|
|
|
|
Loans (net of unearned income and allowance for loan losses)
|
|
$
|
688,267
|
|
$
|
525,870
|
|
$
|
327,291
|
|
$
|
225,482
|
|
$
|
134,277
|
|
Earning assets (3)
|
|
791,730
|
|
628,630
|
|
374,129
|
|
251,250
|
|
4,152
|
|
Total assets
|
|
852,479
|
|
671,075
|
|
388,710
|
|
263,317
|
|
161,280
|
|
Deposits
|
|
705,232
|
|
556,995
|
|
334,575
|
|
221,248
|
|
140,220
|
|
Shareholders equity
|
|
89,083
|
|
62,232
|
|
25,386
|
|
21,966
|
|
14,403
|
|
Shares outstanding
|
|
4,151,780
|
|
3,609,747
|
|
2,604,052
|
|
2,604,052
|
|
2,032,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Balances:
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
664,544
|
|
$
|
414,272
|
|
$
|
285,238
|
|
$
|
176,609
|
|
$
|
103,107
|
|
Earning assets (3)
|
|
731,927
|
|
469,553
|
|
317,385
|
|
195,787
|
|
115,215
|
|
Total assets
|
|
793,036
|
|
492,880
|
|
330,137
|
|
203,677
|
|
121,053
|
|
Deposits
|
|
656,113
|
|
414,527
|
|
279,253
|
|
170,766
|
|
105,247
|
|
Shareholders equity
|
|
83,042
|
|
39,619
|
|
22,654
|
|
18,373
|
|
11,820
|
|
Shares outstanding basic
|
|
4,107,229
|
|
3,031,996
|
|
2,604,052
|
|
2,343,982
|
|
1,778,983
|
|
Shares outstanding diluted (2)
|
|
4,433,947
|
|
3,367,065
|
|
2,911,930
|
|
2,493,247
|
|
1,869,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets
|
|
0.98
|
%
|
1.21
|
%
|
1.18
|
%
|
0.82
|
%
|
0.75
|
%
|
Return on average equity
|
|
9.33
|
%
|
15.05
|
%
|
17.15
|
%
|
9.05
|
%
|
7.68
|
%
|
Net interest margin, taxable equivalent
|
|
3.85
|
%
|
4.05
|
%
|
4.01
|
%
|
3.70
|
%
|
3.41
|
%
|
Efficiency ratio (4)
|
|
59.69
|
%
|
49.06
|
%
|
45.93
|
%
|
47.73
|
%
|
58.90
|
%
|
Average loans to average deposits
|
|
98.24
|
%
|
99.94
|
%
|
102.14
|
%
|
103.42
|
%
|
97.97
|
%
|
Average equity to average assets
|
|
10.47
|
%
|
8.04
|
%
|
6.86
|
%
|
9.02
|
%
|
9.76
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
Dividend payout ratio
|
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
Tier I capital to risk adjusted assets
|
|
10.40
|
%
|
11.06
|
%
|
10.21
|
%
|
9.06
|
%
|
9.96
|
%
|
Total capital to risk adjusted assets
|
|
11.62
|
%
|
12.31
|
%
|
11.89
|
%
|
10.21
|
%
|
11.03
|
%
|
Tier I capital to average tangible assets
|
|
9.34
|
%
|
9.84
|
%
|
8.88
|
%
|
8.91
|
%
|
9.49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Quality Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming assets to total assets (5)
|
|
0.65
|
%
|
0.10
|
%
|
0.07
|
%
|
0.05
|
%
|
0.00
|
%
|
Loan loss allowance to nonperforming loans (5)
|
|
185.68
|
%
|
1,120.06
|
%
|
1,445.99
|
%
|
2,043.80
|
%
|
|
|
Net loans charged-off to
average loans
|
|
0.11
|
%
|
0.04
|
%
|
0.05
|
%
|
0.07
|
%
|
0.00
|
%
|
Provision for loan loss to
average loans
|
|
0.10
|
%
|
0.40
|
%
|
0.52
|
%
|
0.78
|
%
|
0.78
|
%
|
28
(1)
Atlantic Southern Bank
only. The holding company reorganization
was completed on January 3, 2005.
(2)
Shares outstanding diluted
are computed by taking the net income applicable to common stock divided by
average number of common shares outstanding with the effect of dilutive options
and warrants, etc.
(3)
Earning Assets are determined
by adding loans, mortgage loans held for sale, investment securities, Federal
Home Loan Bank stock, Silverton Bank stock, interest bearing deposits in other
banks, federal funds sold, and cash surrender value of life insurance.
(4)
Noninterest expense divided
by the sum of net interest income and noninterest income.
(5)
Nonperforming assets include
non-accrual loans and loans over 90 days past due. During the fiscal year 2003, Atlantic
Southern Bank did not have any nonperforming assets.
29
Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operation
The following discussion is
intended to provide insight into the financial condition and results of
operations of Atlantic Southern Financial Group, Inc. and its subsidiary
and should be read in conjunction with the consolidated financial statements
and accompanying notes.
Organization
The Bank began
operations on December 10, 2001 and operates as a state chartered bank in
nine banking locations in the middle Georgia markets of Macon and Warner
Robins, six locations in the coastal markets of Savannah, Darien, Brunswick and
St. Simons Island, Georgia, one location in the northeast Florida market of
Jacksonville, Florida and one loan production office in the south Georgia
market of Valdosta, Georgia. At the April 27,
2004 Annual Meeting of Shareholders, the shareholders approved the proposal to
reorganize the Bank into a holding company structure by virtue of a share
exchange whereby each share of Bank common stock issued and outstanding was to
be converted into and exchanged for the right to receive one share of the
Companys common stock. The Company was organized by the Bank for the purpose
of serving as its holding company. The share exchange was consummated on January 3,
2005.
The Bank is
focused on serving the needs of small to medium-sized business borrowers and
individuals in the metropolitan areas we serve.
Through Atlantic Southern Bank, the Company specializes in commercial
real estate and small business lending.
The Bank offers a range of lending services, of which some are secured
by single and multi-family real estate, residential construction and
owner-occupied commercial buildings.
Primarily, the Bank makes loans to small and medium-sized businesses; however,
the Bank also makes loans to consumers for a variety of purposes. The Banks principal source of funds for
loans and investing in securities is time deposits, including out-of-market
certificates of deposits and core deposits.
The Bank offers a wide range of deposit services including checking,
savings, money market accounts and certificates of deposit.
Executive Summary and Recent Developments
Net earnings for 2007 were $7,743,875, representing an increase of
29.84% from 2006. Diluted earnings per
share were $1.75, down $0.02 per share from 2006, and return on average equity
was 9.33% as compared to 15.05% for 2006.
Year-to-date net earnings were impacted by growth in the loan portfolio
of Atlantic Southern Bank. Return on
average equity decreased due to our issuance of common stock from our two
purchase acquisitions of Sapelo National Bank and First Community Bank and from
the Companys stock offering in June 2006.
On December 15,
2006, we consummated an agreement to acquire all of the outstanding shares of
Sapelo Bancshares, Inc. (Sapelo) for $15.3 million using a combination
of stock and cash. Under the terms of
the merger agreement, we issued, and shareholders of Sapelo were entitled to
receive their pro rata portion of $6,239,972 and 305,695 shares of Atlantic
Southern common stock. The cash proceeds
were obtained from a public offering in 2006.
Sapelo was a bank holding company with one subsidiary, Sapelo National
Bank, based in Darien, Georgia. Sapelo
operated four full service banking offices in the coastal Georgia cities of
Darien, Brunswick and St. Simons Island.
Sapelo had total assets of $77.7 million, including total loans of $52
million and total investments of $1.8 million.
Additionally, Sapelo had $66.7 million in deposits. We accounted for the transaction using the
purchase method and accordingly, the purchase price was allocated to assets and
liabilities acquired based upon their fair values at the date of the
acquisition. The excess of the purchase
price over the fair value of the net assets acquired (goodwill) was
approximately $8.5 million, none of which will be deductible for income tax
purchases. Operations of Sapelo are
included in the consolidated statements of earnings since its acquisition.
On January 31,
2007, the Company consummated an agreement to acquire all of the outstanding
shares of First Community Bank for $18.4 million in Atlantic Southern common
stock including certain acquisition costs totaling $235,034. Under the terms of the merger agreement, the
Company issued, and shareholders of First Community Bank were entitled to
receive their pro rata portion of 542,033 shares of Atlantic Southern common
stock. First Community Bank was a
community bank headquartered in Roberta, Georgia. First Community Bank operated three full
service banking offices in Crawford, Bibb and Peach counties of Georgia. First Community Bank had total
30
assets of $69.3
million, including total loans of $50 million and total investments of $11.9
million. Additionally, First Community
Bank had $58.6 million in deposits. With
the acquisition of First Community Bank, the Company was able to expand their
presence in the middle Georgia area. The
Company accounted for the transaction using the purchase method and
accordingly, the purchase price was allocated to assets and liabilities
acquired based upon their fair values at the date of the acquisition. The excess of the purchase price over the
fair value of the net assets acquired (goodwill) was approximately $9.9
million, none of which will be deductible for income tax purposes. Operations of First Community Bank are
included in the consolidated statements of earnings since its acquisition.
On April 16, 2007, the Company began trading on the NASDAQ Global
Market under the symbol ASFN. Our
Board of Directors and management believe that this will improve the liquidity
of the stock.
On November 30, 2007, the Company consummated an agreement with
CenterState Banks of Florida, Inc. (CSB) and its wholly owned subsidiary
CenterState Bank Mid Florida (Target) in which CenterState Bank West Florida,
National Association (West Florida) purchased all the assets and assumed the
liabilities of Target, except for Targets main office and a minimum amount of
capital and deposits required by banking laws. Target was then acquired
by the Company. Under the terms of the agreement, the Company paid CSB in
immediately available funds, an amount equal to the sum of $1,000,000, less the
$100,000 deposit CSB received from the Company when the agreement was executed,
plus an amount equal to the aggregate capital remaining at closing.
Immediately after consummation of the acquisition of Target by the Company, the
Company sold the Targets main office to West Florida. The transaction
facilitated the Companys expansion into Florida by opening a full-service
branch location in Jacksonville, Florida.
The total consideration given to acquire the Florida charter was
$1,093,878, including acquisition costs, and is included in goodwill and other
intangible assets on the balance sheet.
On January 10, 2008, the Company declared its first dividend of
$0.03 per share to all shareholders of record as of February 1, 2008. Any future determination relating to the
Company declaring dividends will be made at the discretion of our Board of
Directors and will be subject to statutory and regulatory limitations.
Management has developed a strategy for asset growth and expansion of
its financial services through branching into selective markets in the middle
Georgia region, in the coastal Georgia region and in the northeast Florida
region. In the middle Georgia region,
we opened our new branch in Bonaire in efforts to increase our presence in the
growing Houston County area. In August,
we opened our new corporate center, Northwinds, in north Bibb County which
serves as the home to our executive offices.
In the coastal Georgia region, our Rincon office moved to its permanent
location upon the completion of its building in May. Construction is now scheduled for our Pooler
branch, near Savannah, Georgia, during the first quarter of 2008. In the South Georgia region, we have plans to
expand our loan production office in Valdosta, Georgia into a full-service
branch during the first quarter of 2008.
Critical Accounting Estimates
Our
accounting and reporting policies are in accordance with accounting principles
generally accepted in the United States of America and conform to general
practices within the banking industry. Critical accounting policies include the
initial adoption of an accounting policy that has a material impact on our
financial presentation as well as accounting estimates reflected in our
financial statements that require us to make estimates and assumptions about
matters that were highly uncertain at the time. Disclosure about critical
estimates is required if different estimates that we reasonably could have used
in the current period would have a material impact on the presentation of our
financial condition, changes in financial condition or results of operations.
Accounting
policies related to the allowance for loan losses represent a critical
accounting estimate for us. The
allowance for loan losses is maintained at a level which, in managements
judgment, is adequate to absorb credit losses inherent in the loan
portfolio. The amount of the allowance
is based on managements evaluation of the collectibility of the portfolio,
including the nature of the portfolio, credit concentrations, trends in
historical loss experience, specific impaired loans, economic conditions and
other risks inherent in the portfolio. A
loan is considered impaired, based on current information and events, if it is
probable that we will be unable to collect the scheduled payments of principal
or interest when due according to the contractual terms of the loan agreement.
Uncollateralized loans are measured for impairment based on the present value
of expected future cash flows discounted at the historical effective interest
rate, while all collateral-dependent loans are measured for impairment
31
based on the fair value
of the collateral. The Bank uses several factors in determining if a loan is
impaired. Factors considered by
management in determining impairment include payment status, collateral value
and the probability of collecting scheduled principal and interest payments
when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not
classified as impaired. Management
determines the significance of payment delays and payment shortfalls on a
case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrowers prior payment record and the amount of
the shortfall in relation to the principal and interest owed. The internal asset classification procedures
include a thorough review of significant loans and lending relationships and
include the accumulation of related data. This data includes loan payment
status, borrowers financial data, and borrowers operating factors such as
cash flows, operating income or loss, etc.
The
allowance for loan losses is established through charges to earnings in the
form of a provision for loan losses. Increases and decreases in the allowance
due to changes in the measurement of the impaired loans are included in the
provision for loan losses. Loans continue to be classified as impaired unless
they are brought fully current and the collection of scheduled interest and
principal is considered probable. When a loan or portion of a loan is
determined to be uncollectible, the portion deemed uncollectible is charged
against the allowance and subsequent recoveries, if any, are credited to the
allowance.
Managements
monthly evaluation of the adequacy of the allowance also considers impaired
loans and takes into consideration the Banks past loan loss experience, known
and inherent risks in the portfolio, adverse situations that may affect the
borrowers ability to repay, estimated value of any underlying collateral, and
current economic conditions. While management believes that it has established
the allowance in accordance with generally accepted accounting principles and
has taken into account the views of its regulators and the current economic
environment, there can be no assurance that in the future the Banks regulators
or its economic environment will not require further increases in the
allowance.
Additional
discussions on loan quality and the allowance for loan losses are included in
the Asset Quality section of this report and in Note A to the Consolidated
Financial Statements.
Results of Operations
General
Our results of
operations are determined by our ability to effectively manage interest income
and expense, to minimize loan and investment losses, to generate noninterest
income and to control noninterest expense.
Since interest rates are determined by market forces and economic
conditions beyond the control of the Company, the ability to generate interest
income is dependent upon the Banks ability to obtain an adequate spread
between the rate earned on earning assets and the rate paid on interest-bearing
liabilities.
The following
table shows the significant components of net earnings for the past three
years.
|
|
For the Years Ended December 31,
|
|
|
|
|
|
Change
|
|
|
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
From Prior
|
|
Percent
|
|
|
|
From Prior
|
|
Percent
|
|
|
|
|
|
2007
|
|
Year
|
|
Change
|
|
2006
|
|
Year
|
|
Change
|
|
2005
|
|
|
|
(Dollar amounts in thousands)
|
|
Interest Income
|
|
$
|
59,306
|
|
$
|
21,432
|
|
56.59
|
%
|
$
|
37,874
|
|
$
|
16,250
|
|
75.15
|
%
|
$
|
21,624
|
|
Interest Expense
|
|
31,513
|
|
12,540
|
|
66.09
|
%
|
18,973
|
|
10,016
|
|
111.82
|
%
|
8,957
|
|
Net Interest Income
|
|
27,793
|
|
8,892
|
|
47.05
|
%
|
18,901
|
|
6,234
|
|
49.21
|
%
|
12,667
|
|
Provision for Loan Losses
|
|
665
|
|
(1,006
|
)
|
-60.20
|
%
|
1,671
|
|
178
|
|
11.92
|
%
|
1,493
|
|
Net Earnings
|
|
7,744
|
|
1,780
|
|
29.85
|
%
|
5,964
|
|
2,079
|
|
53.51
|
%
|
3,885
|
|
Net Earnings Per Diluted
Share
|
|
1.75
|
|
(0.02
|
)
|
-1.13
|
%
|
1.77
|
|
0.44
|
|
33.08
|
%
|
1.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
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 increased approximately
$8,892,000 or 47% for 2007 compared to 2006.
Net interest income increased approximately $6,234,000 or 49% for 2006
compared to 2005.
Total interest and dividend income for 2007 increased approximately
$21,432,000 or 57% when compared to 2006 and increased approximately
$16,250,000 or 75% when compared to 2005 which are primarily due to increases
in interest and fees on loans. The
increase in 2007 is partially the result of the average loan portfolio for 2007
increasing approximately $230 million or 56% when compared to average loan
portfolio for 2006. The increase in 2006
is partially the result of the average loan portfolio for 2006 increasing
approximately $129 million or 45% when compared to average loan portfolio for
2005. Additionally, the average yield on
loans decreased during 2007 to 8.57% compared to an average yield of 8.59% for
2006 and compared to an average yield of 7.18% for 2005.
Total interest expense for 2007 increased approximately $12,540,000 or
66% when compared to 2006 and increased approximately $10,016,000 or 112% when
compared to 2005. Two factors impact
interest expense: average balances of deposit and borrowing portfolios and
average rates paid on each. Average
deposit balances increased approximately $241.6 million when comparing 2007 to
2006. This increase includes
approximately $20.4 million in average non-interest bearing balances in regular
demand deposit accounts and approximately $221.1 million in interest bearing
deposits. The average deposit balances
increased approximately $135.3 million when comparing 2006 to 2005. During that period, the most significant increase
was due to approximately $5.1 million in average non-interest bearing balances
in regular demand deposit accounts and approximately $79.2 million in interest
bearing balances in average wholesale time deposits. The average rate paid on the deposit portfolios
for 2007 increased to 4.75% from 4.39% when compared to 2006 and compared to an
average rate of 3.07% in 2005. Average
borrowing balances increased approximately $11.9 million when comparing 2007 to
2006. When comparing 2006 to 2005, the
average borrowing balances increased approximately $8.9 million which was
primarily due to more advances from Federal Home Loan Bank in 2006. Average interest rates paid on borrowings
were 5.42% for 2007 compared to 5.58% for 2006 and 4.01% for 2005.
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 2007, 2006 and 2005, our tax equivalent net interest spread was
3.35%, 3.61% and 3.68%, respectively, while the tax equivalent net interest
margin was 3.85%, 4.05% and 4.01%, respectively. The decreases in net interest spread and net
interest margin in 2007 were due to our promotions of higher short-term yields
on retail time deposits in order to reduce our dependency on wholesale time
deposits to fund loan growth and to invest in investment securities and the
effect of the Federal Reserves action in lowering short-term rates in the
second half of 2007 on the Companys slightly asset-sensitive balance
sheet. In 2006, the net interest margin
increased due to the earning assets repricing faster than our interest bearing
liabilities when the interest rate environment was increasing and to the
changes in the mix of the earning assets (investing federal funds sold into
higher yielding assets such as loans and investment securities).
33
The following table shows the relationship between interest revenue and
interest expense and the average balances of interest-earning assets and
interest-earning liabilities.
Average
Consolidated Balance Sheet and Net Interest Margin Analysis
|
|
Year ended
December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
(Dollar
amounts in thousands)
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
Average
|
|
|
|
Average
|
|
Average
|
|
|
|
Average
|
|
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Earning Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net of
unearned income (4) (5)
|
|
$
|
644,544
|
|
$
|
55,254
|
|
8.57
|
%
|
$
|
414,272
|
|
$
|
35,575
|
|
8.59
|
%
|
$
|
285,238
|
|
$
|
20,490
|
|
7.18
|
%
|
Federal funds
sold
|
|
10,398
|
|
522
|
|
5.02
|
%
|
9,232
|
|
373
|
|
4.04
|
%
|
3,619
|
|
113
|
|
3.12
|
%
|
Investment
securities - taxable (7)
|
|
53,782
|
|
2,537
|
|
4.72
|
%
|
36,694
|
|
1,552
|
|
4.23
|
%
|
23,289
|
|
837
|
|
3.59
|
%
|
Investment
securities - tax-exempt (6) (7)
|
|
18,797
|
|
710
|
|
5.72
|
%
|
7,094
|
|
259
|
|
5.53
|
%
|
3,625
|
|
124
|
|
5.18
|
%
|
Other interest
and dividend income
|
|
4,406
|
|
283
|
|
6.42
|
%
|
2,261
|
|
115
|
|
5.09
|
%
|
1,614
|
|
60
|
|
3.72
|
%
|
Total Earning
Assets
|
|
731,927
|
|
59,306
|
|
8.15
|
%
|
469,553
|
|
37,874
|
|
8.09
|
%
|
317,385
|
|
21,624
|
|
6.83
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-earning
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
loan losses
|
|
-9,066
|
|
|
|
|
|
-5,173
|
|
|
|
|
|
-3,547
|
|
|
|
|
|
Cash and due from
banks
|
|
12,543
|
|
|
|
|
|
6,343
|
|
|
|
|
|
4,305
|
|
|
|
|
|
Premises and
equipment
|
|
24,523
|
|
|
|
|
|
11,488
|
|
|
|
|
|
6,025
|
|
|
|
|
|
Accrued interest
receivable
|
|
6,366
|
|
|
|
|
|
3,863
|
|
|
|
|
|
1,837
|
|
|
|
|
|
Other assets
|
|
26,743
|
|
|
|
|
|
6,806
|
|
|
|
|
|
4,132
|
|
|
|
|
|
Total Assets
|
|
$
|
793,036
|
|
|
|
|
|
$
|
492,880
|
|
|
|
|
|
$
|
330,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing
demand
|
|
$
|
112,277
|
|
$
|
3,444
|
|
3.07
|
%
|
$
|
61,376
|
|
$
|
1,864
|
|
3.04
|
%
|
$
|
39,748
|
|
$
|
693
|
|
1.74
|
%
|
Savings
|
|
8,309
|
|
46
|
|
0.55
|
%
|
2,156
|
|
8
|
|
0.37
|
%
|
1,422
|
|
8
|
|
0.56
|
%
|
Time deposits
|
|
489,143
|
|
25,496
|
|
5.21
|
%
|
325,014
|
|
15,167
|
|
4.67
|
%
|
217,238
|
|
7,223
|
|
3.32
|
%
|
Total interest
bearing deposits
|
|
609,729
|
|
28,986
|
|
4.75
|
%
|
388,546
|
|
17,039
|
|
4.39
|
%
|
258,408
|
|
7,924
|
|
3.07
|
%
|
Federal Home Loan
Bank advances
|
|
34,760
|
|
1,666
|
|
4.79
|
%
|
22,830
|
|
1,117
|
|
4.89
|
%
|
16,555
|
|
549
|
|
3.32
|
%
|
Other borrowings
|
|
1,524
|
|
79
|
|
5.18
|
%
|
1,521
|
|
73
|
|
4.80
|
%
|
1,968
|
|
84
|
|
4.27
|
%
|
Trust Preferred
Securities
|
|
10,310
|
|
782
|
|
7.58
|
%
|
10,310
|
|
744
|
|
7.22
|
%
|
7,223
|
|
400
|
|
5.54
|
%
|
Total borrowed
funds
|
|
46,594
|
|
2,527
|
|
5.42
|
%
|
34,661
|
|
1,934
|
|
5.58
|
%
|
25,746
|
|
1,033
|
|
4.01
|
%
|
Total
interest-bearing liabilities
|
|
656,323
|
|
31,513
|
|
4.80
|
%
|
423,207
|
|
18,973
|
|
4.48
|
%
|
284,154
|
|
8,957
|
|
3.15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
bearing deposits
|
|
46,384
|
|
|
|
|
|
25,981
|
|
|
|
|
|
20,845
|
|
|
|
|
|
Other liabilities
|
|
7,287
|
|
|
|
|
|
4,073
|
|
|
|
|
|
2,484
|
|
|
|
|
|
Stockholders
equity
|
|
83,042
|
|
|
|
|
|
39,619
|
|
|
|
|
|
22,654
|
|
|
|
|
|
Total Liabilities
and Stockholders Equity
|
|
$
|
793,036
|
|
|
|
|
|
$
|
492,880
|
|
|
|
|
|
$
|
330,137
|
|
|
|
|
|
Net interest
revenue (1)
|
|
|
|
$
|
27,793
|
|
|
|
|
|
$
|
18,901
|
|
|
|
|
|
$
|
12,667
|
|
|
|
Net interest
spread (2) (6)
|
|
|
|
|
|
3.35
|
%
|
|
|
|
|
3.61
|
%
|
|
|
|
|
3.68
|
%
|
Net interest
margin (3) (6)
|
|
|
|
|
|
3.85
|
%
|
|
|
|
|
4.05
|
%
|
|
|
|
|
4.01
|
%
|
(1) Net interest revenue is
computed by subtracting the expense from the average interest-bearing
liabilities 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. Nonaccrual loans are included but immaterial.
(5) Interest income includes loan
fees as follows (in thousands): 2007 - $1,952; 2006 - $1,698; 2005 - $1,191
(6) Reflects taxable equivalent
adjustments using a tax rate of 34 percent.
(7) Investment securities are
stated at amortized or accreted cost.
34
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
years 2007 compared to 2006 and for the year 2006 compared to 2005.
|
|
2007 Compared to 2006
|
|
2006 Compared to 2005
|
|
|
|
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
|
|
$
|
19,921
|
|
$
|
(242
|
)
|
$
|
19,679
|
|
$
|
10,161
|
|
$
|
4,924
|
|
$
|
15,085
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable investment securities
|
|
736
|
|
249
|
|
985
|
|
539
|
|
176
|
|
715
|
|
Tax-exempt investment securities
|
|
441
|
|
10
|
|
451
|
|
126
|
|
9
|
|
135
|
|
Interest earning deposits and fed funds sold
|
|
274
|
|
43
|
|
317
|
|
184
|
|
131
|
|
315
|
|
Total interest income
|
|
21,372
|
|
60
|
|
21,432
|
|
11,010
|
|
5,240
|
|
16,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand deposits
|
|
1,562
|
|
18
|
|
1,580
|
|
513
|
|
658
|
|
1,171
|
|
Savings
|
|
38
|
|
|
|
38
|
|
|
|
|
|
|
|
Time deposits
|
|
8,429
|
|
1,900
|
|
10,329
|
|
4,221
|
|
3,723
|
|
7,944
|
|
Other borrowings and FHLB advances
|
|
584
|
|
(29
|
)
|
555
|
|
230
|
|
327
|
|
557
|
|
Trust Preferred Securities
|
|
|
|
38
|
|
38
|
|
201
|
|
143
|
|
344
|
|
Total interest expense
|
|
10,613
|
|
1,927
|
|
12,540
|
|
5,165
|
|
4,851
|
|
10,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in net interest revenue
|
|
$
|
10,759
|
|
$
|
(1,867
|
)
|
$
|
8,892
|
|
$
|
5,845
|
|
$
|
389
|
|
$
|
6,234
|
|
(a) Volume and rate components
are in proportion to the relationship of the absolute dollar amount of the
change in each.
The following table shows the related results of operations ratios for
assets and equity:
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Return on Average Assets
|
|
0.98
|
%
|
1.21
|
%
|
1.18
|
%
|
Return on Average Equity
|
|
9.33
|
%
|
15.05
|
%
|
17.15
|
%
|
Average Equity to Average
Assets
|
|
10.47
|
%
|
8.04
|
%
|
6.86
|
%
|
Dividend Payout Ratio
|
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
Provision for Loan
Losses
The provision for loan losses was approximately $665 thousand in 2007,
compared with $1.7 million in 2006 and $1.5 million in 2005. The provision as a percentage of average
outstanding loans for 2007, 2006 and 2005 was 0.10%, 0.40% and 0.52%,
respectively. Net charge-offs as a
percentage of average outstanding loans were 0.11% in 2007, 0.04% in 2006, and
0.05% in 2005. Net loan charge-offs
increased significantly during 2007 as compared to 2006 and 2005 due to the
Company charging off $300,000 for one participation purchased loan from the
Companys portion of the foreclosed property being recorded to other real
estate at fair market value. Also, the
Company charged off approximately $344,000 for several impaired loans in the
fourth quarter of 2007.
35
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
discussions on loan quality and the allowance for loan losses are included in
the Asset Quality section of this report, Note A to the Consolidated Financial
Statements, and above in the Critical Accounting Estimates section of this
report.
Noninterest Income
Total noninterest income for 2007 was approximately $3.4 million
compared to approximately $1.7 million in 2006, and approximately $1.2 million
in 2005. The following table represents
the components of noninterest income for the years ended December 31,
2007, 2006 and 2005.
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
Service charges on deposit
accounts
|
|
$
|
1,415
|
|
186.32
|
%
|
$
|
494
|
|
23.03
|
%
|
$
|
402
|
|
Other service charges,
commissions and fees
|
|
370
|
|
254.19
|
%
|
104
|
|
37.23
|
%
|
76
|
|
Gain (loss) on sale of
other assets
|
|
97
|
|
1079.15
|
%
|
(10
|
)
|
-100.00
|
%
|
|
|
Loss on sales/calls of
investment securities
|
|
(43
|
)
|
-337.61
|
%
|
(10
|
)
|
-100.00
|
%
|
|
|
Mortgage origination
income
|
|
929
|
|
39.20
|
%
|
667
|
|
51.02
|
%
|
441
|
|
Other income
|
|
588
|
|
34.17
|
%
|
439
|
|
63.98
|
%
|
267
|
|
Total noninterest income
|
|
$
|
3,356
|
|
99.33
|
%
|
$
|
1,684
|
|
41.93
|
%
|
$
|
1,186
|
|
Service charges on deposit accounts are evaluated against service
charges from other banks in the local market and against the Banks own cost
structure in providing the deposit services.
This income should increase with the growth in the Banks demand deposit
account base. Total service charges,
including non-sufficient funds fees, were $1.4 million, or 42% of total
noninterest income for 2007, compared with $494 thousand, or 29% for 2006, and
$402 thousand or 34% for 2005. The
continued increase in service charges on deposit accounts is directly related
to the increase in the number of our core transaction deposit accounts. The number of deposit accounts for 2007 was
12,534 accounts (which includes 4,147 deposit accounts from the First Community
acquisition in January 2007) when compared to 2006 with 7,792 accounts
(which includes 3,549 transaction and savings accounts from the purchase of
Sapelo National Bank on December 15, 2006). The increase in mortgage origination income
for 2007 is primarily due to general growth in mortgage loan brokerage
activity. Mortgage loan closings were
approximately 276, 246, and 169 closings for 2007, 2006 and 2005,
respectively. The two most significant
changes in other income for 2007 were $125,504 of rental income from a portion
of two Bank owned facilities and $177,650 of income from the increase in cash
surrender value of life insurance on bank owned life insurance (BOLI)
policies purchased in the second quarter of 2005. During 2006, the most significant changes
were $135,243 from the rental income from a portion of two Bank owned
facilities and $163,732 of income from the increase in cash surrender value of
life insurance. The increase on the gain
on sale of other assets for 2007 is primarily due to the sale of two foreclosed
properties and the sale of one location during the second quarter.
36
Noninterest
Expense
Total noninterest expense for 2007 was approximately $18.6 million,
compared to approximately $10.1 million in 2006, and approximately $6.4 million
in 2005. The following table represents
the major components of noninterest expense for the years ended December 31,
2007, 2006 and 2005:
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
Salaries
|
|
$
|
7,436
|
|
90.13
|
%
|
$
|
3,911
|
|
55.76
|
%
|
$
|
2,511
|
|
Employee benefits
|
|
2,327
|
|
65.34
|
%
|
1,408
|
|
47.99
|
%
|
951
|
|
Occupancy expense
|
|
1,476
|
|
95.17
|
%
|
756
|
|
95.96
|
%
|
386
|
|
Equipment rental and depreciation of equipment
|
|
862
|
|
96.15
|
%
|
440
|
|
57.46
|
%
|
279
|
|
Data processing
|
|
769
|
|
171.47
|
%
|
283
|
|
21.97
|
%
|
232
|
|
Other expenses
|
|
5,723
|
|
73.30
|
%
|
3,302
|
|
64.68
|
%
|
2,005
|
|
Total noninterest expense
|
|
$
|
18,593
|
|
84.09
|
%
|
$
|
10,100
|
|
58.71
|
%
|
$
|
6,364
|
|
The increases in noninterest expenses are primarily due to the growth
of the Company. The most significant
increases in 2007 are increases in salaries and employee benefits, which
represents normal increases in salaries and an increase in the number of
employees. At December 31, 2007,
the number of full-time equivalent employees was 167 compared to 121 full-time
equivalent employees at December 31, 2006 and 66 full-time equivalent
employees at December 31, 2005. The
increase in the number of full-time equivalent employees is directly related to
the growth of the bank, hiring for new branches and a loan production center in
2007 and 2006 and from the acquisitions of Sapelo Bancshares and First
Community Bank in December 2006 and January 2007, respectively. The bank operates from eighteen facilities as
of December 31, 2007 compared to eleven facilities as of December 31,
2006 and five facilities as of December 31, 2005. The increases in other expenses are not
attributable to any one particular item, but represent increases related to
physical facility expansion.
Income Tax Expense
Income tax expense was $4.1 million in 2007 compared with $2.8 million
in 2006 and $2.1 million in 2005. Income
tax expense expressed as a percentage of earnings before income taxes
(effective tax rates) for 2007, 2006 and 2005 were 34.9%, 32.3% and 35.2%,
respectively. These effective tax rates
are lower than the statutory tax rate primarily due to the interest revenue on
certain investment securities that are exempt from income taxes and tax credits
received from affordable housing investments.
In 2007, pre-tax earnings increased from 2006, resulting in a higher
effective tax rate. In 2006, the
effective tax rate decreased as tax-exempt interest revenue from securities and
the tax credits from affordable housing investments increased as a percentage
of pre-tax earnings. Additional
information regarding income taxes can be found in Note L to the Consolidated
Financial Statements.
37
Financial Condition
The composition of assets and liabilities for the Company is as
follows:
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
$ Change
|
|
% Change
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
8,059,524
|
|
$
|
13,130,014
|
|
$
|
(5,070,490
|
)
|
-38.62
|
%
|
Federal funds sold
|
|
11,350,000
|
|
29,522,000
|
|
(18,172,000
|
)
|
-61.55
|
%
|
Securities available for sale
|
|
74,387,100
|
|
57,596,002
|
|
16,791,098
|
|
29.15
|
%
|
Loans, net of unearned income
|
|
697,145,715
|
|
533,128,702
|
|
164,017,013
|
|
30.76
|
%
|
Cash surrender value of life insurance
|
|
4,442,044
|
|
4,264,395
|
|
177,649
|
|
4.17
|
%
|
Goodwill and other intangible assets
|
|
22,806,983
|
|
10,600,276
|
|
12,206,707
|
|
115.15
|
%
|
Total assets
|
|
852,479,064
|
|
671,075,492
|
|
181,403,572
|
|
27.03
|
%
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
705,231,923
|
|
$
|
556,994,607
|
|
$
|
148,237,316
|
|
26.61
|
%
|
FHLB advances
|
|
40,500,000
|
|
31,700,000
|
|
8,800,000
|
|
27.76
|
%
|
Junior subordinated debentures
|
|
10,310,000
|
|
10,310,000
|
|
|
|
|
|
The most significant change in the composition of assets was the
increase in loans of $164.0 million due to continued growth of the
Company. Growth in Atlantic Southern
Banks loan portfolio was divided between internally generated growth of
approximately $114.0 million and the addition of approximately $50.0 million
from the merger with First Community Bank.
We were able to generate loan growth by expanding in new markets
including a loan production office in Valdosta, Georgia, which provided an
increase of $12.2 million; opening de novo branches in existing markets with a
branch in Bonaire, Georgia, full service branches in Savannah, Georgia and
Macon, Georgia; and increasing loan growth of $62.4 million in the Central
Georgia, $8.9 million in the Mid-South Georgia and $34.0 million in the Coastal
Georgia regions. The most significant
change in the composition of liabilities was the increase in deposits,
especially time deposits, to fund loan growth.
Time deposits, including wholesale and core deposits, are our principal
source of funds for loans and investing in securities.
Because of our strong loan demand, we have chosen to obtain a portion
of our deposits from outside our market.
Our wholesale time deposits represented 40.2% of our deposits as of December 31,
2007 when compared to 47.4% of our deposits as of December 31, 2006. Our Funds Management Policy allows 60% of our
deposits to be obtained from wholesale deposits. The Company has been successful in replacing
maturing brokered deposits and does not expect to experience significant
disintermediation as the brokered deposits mature.
Investment
Securities
Securities in our investment portfolio totaled $74.4 million at December 31,
2007, compared to $57.6 million at December 31, 2006. The growth in the securities portfolio
occurred as a result of our efforts to invest excess federal funds sold into
investments and to maintain a certain level of liquid assets in correlation to
our overall asset growth. At December 31,
2007, the securities portfolio had unrealized net gains of approximately $461
thousand.
38
The following table shows the carrying value of the
investment securities at December 31, 2007, 2006 and 2005.
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(Amounts in Thousands)
|
|
Securities available for
sale:
|
|
|
|
|
|
|
|
U. S. Treasury Securities
|
|
$
|
254
|
|
$
|
|
|
$
|
|
|
U. S. Government Sponsored Enterprises
|
|
27,493
|
|
25,240
|
|
18,537
|
|
State, County and Municipal
|
|
21,346
|
|
13,653
|
|
5,113
|
|
Mortgage-backed Securities
|
|
23,844
|
|
18,453
|
|
10,626
|
|
Other Investments
|
|
250
|
|
250
|
|
250
|
|
Equity Securities
|
|
1,200
|
|
|
|
|
|
Total
|
|
$
|
74,387
|
|
$
|
57,596
|
|
$
|
34,526
|
|
The following table sets forth the maturities of the
investment securities at carrying value at December 31, 2007 and the
related weighted yields.
|
|
MATURITY
|
|
|
|
One Year
|
|
One through
|
|
Five through
|
|
Over Ten
|
|
|
|
|
|
Or Less
|
|
Five Years
|
|
Ten Years
|
|
Years
|
|
|
|
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
Totals
|
|
|
|
(Dollars in Thousands)
|
|
Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Treasury Securities
|
|
$
|
|
|
0.00
|
%
|
$
|
254
|
|
4.86
|
%
|
$
|
|
|
0.00
|
%
|
$
|
|
|
0.00
|
%
|
$
|
254
|
|
U. S. Government Sponsored Enterprises
|
|
8,572
|
|
3.91
|
%
|
14,279
|
|
4.78
|
%
|
3,077
|
|
5.78
|
%
|
1,565
|
|
6.05
|
%
|
27,493
|
|
State, County and Municipal - Tax Exempt (1)
|
|
|
|
0.00
|
%
|
2,370
|
|
3.48
|
%
|
5,767
|
|
3.62
|
%
|
11,932
|
|
4.13
|
%
|
20,069
|
|
State, County and Municipal - Taxable
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
482
|
|
4.63
|
%
|
795
|
|
5.55
|
%
|
1,277
|
|
Mortgage-backed Securities
|
|
|
|
0.00
|
%
|
3,534
|
|
3.56
|
%
|
3,833
|
|
4.76
|
%
|
16,477
|
|
5.62
|
%
|
23,844
|
|
Other Investments
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
250
|
|
6.98
|
%
|
|
|
0.00
|
%
|
250
|
|
Total
|
|
$
|
8,572
|
|
3.91
|
%
|
$
|
20,437
|
|
4.42
|
%
|
$
|
13,409
|
|
4.54
|
%
|
$
|
30,769
|
|
5.06
|
%
|
$
|
73,187
|
|
(1) Yield
reflects taxable equivalent adjustments using a tax rate of 34 percent.
At December 31, 2007, we did not hold investment securities of any
single issuer, other than obligations of the U.S. Government Sponsored Enterprises,
whose aggregate book value exceeded ten percent of shareholders equity.
Loans
Our loan demand continues to be strong.
Total loans increased $164.0 million or 31% from year end 2006 to
2007. The increase in loans in 2007 is
attributable to $50.0 million in loans acquired from the acquisition of First
Community Bank in January and our branching efforts along with the lending
efforts of our senior management lending team.
The following table presents a summary of the loan portfolio by category.
39
Loans Outstanding
|
|
As of December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(Dollars in Thousands)
|
|
Commercial
|
|
$
|
69,079
|
|
$
|
54,898
|
|
$
|
40,194
|
|
$
|
38,165
|
|
$
|
41,588
|
|
Real estate - commercial
|
|
258,390
|
|
192,876
|
|
99,309
|
|
72,595
|
|
41,727
|
|
Real estate - construction
|
|
292,152
|
|
224,540
|
|
146,305
|
|
80,472
|
|
31,892
|
|
Real estate - mortgage
|
|
68,578
|
|
54,003
|
|
43,670
|
|
33,539
|
|
17,377
|
|
Obligations of political subdivisions
in the U.S.
|
|
290
|
|
1,728
|
|
|
|
|
|
|
|
Consumer
|
|
8,934
|
|
5,380
|
|
2,332
|
|
3,724
|
|
3,353
|
|
Total Loans
|
|
697,423
|
|
533,425
|
|
331,810
|
|
228,495
|
|
135,937
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
Unearned loan fees
|
|
(277
|
)
|
(297
|
)
|
(369
|
)
|
(213
|
)
|
(105
|
)
|
Allowance for loan losses
|
|
(8,879
|
)
|
(7,258
|
)
|
(4,150
|
)
|
(2,800
|
)
|
(1,555
|
)
|
Loans, net
|
|
$
|
688,267
|
|
$
|
525,870
|
|
$
|
327,291
|
|
$
|
225,482
|
|
$
|
134,277
|
|
The
following table sets forth the contractual maturity distribution of commercial,
construction loans and obligations of states and political subdivisions in the
US, including the interest rate sensitivity for loans maturing greater than one
year.
Loan Portfolio Maturity
As of December 31, 2007
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Rate Stucture for Loans
|
|
|
|
Maturity
|
|
Maturing Over One Year
|
|
|
|
One Year
|
|
One through
|
|
Over Five
|
|
|
|
Fixed
|
|
Floating
|
|
|
|
Or Less
|
|
Five Years
|
|
Years
|
|
Total
|
|
Rate
|
|
Rate
|
|
Commercial
|
|
$
|
41,776
|
|
$
|
25,754
|
|
$
|
1,549
|
|
$
|
69,079
|
|
$
|
21,786
|
|
$
|
5,517
|
|
Real estate - construction
|
|
232,414
|
|
57,767
|
|
1,971
|
|
292,152
|
|
39,045
|
|
20,693
|
|
Obligations of political subdivisions
in the U.S.
|
|
131
|
|
159
|
|
|
|
290
|
|
159
|
|
|
|
Total
|
|
$
|
274,321
|
|
$
|
83,680
|
|
$
|
3,520
|
|
$
|
361,521
|
|
$
|
60,990
|
|
$
|
26,210
|
|
Asset Quality
At year-end 2007, the loan portfolio was 81.8% of total assets. Management considers asset quality to be of
primary importance. Management has a
credit administration and loan review process, which monitors, controls and
measures our credit risk, standardized credit analyses and our comprehensive
credit policy. As a result, management
believes we have a thorough understanding of the asset quality, have an
established warning and early detection system regarding the loans and have a
comprehensive analysis of the allowance for loan losses.
40
The following table presents a summary of changes in the allowance for
loan losses for each of the past five years:
Analysis of Changes in Allowance for Loan Losses
|
|
For the Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(Amounts in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average loans outstanding
|
|
$
|
644,544
|
|
$
|
414,272
|
|
$
|
285,238
|
|
$
|
176,609
|
|
$
|
103,107
|
|
Total loans at year-end
|
|
697,423
|
|
533,425
|
|
331,810
|
|
228,495
|
|
135,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for possible
loan losses, beginning of period
|
|
7,258
|
|
4,150
|
|
2,800
|
|
1,555
|
|
750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
290
|
|
114
|
|
75
|
|
106
|
|
|
|
Real estate - construction
|
|
56
|
|
|
|
|
|
|
|
|
|
Real estate - commercial
|
|
300
|
|
40
|
|
|
|
|
|
|
|
Real estate - mortgage
|
|
309
|
|
107
|
|
75
|
|
|
|
|
|
Consumer loans
|
|
11
|
|
11
|
|
|
|
26
|
|
3
|
|
Total
|
|
966
|
|
272
|
|
150
|
|
132
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
74
|
|
29
|
|
|
|
|
|
|
|
Real estate - construction
|
|
1
|
|
|
|
|
|
|
|
|
|
Real estate - commercial
|
|
16
|
|
50
|
|
|
|
|
|
|
|
Real estate - mortgage
|
|
101
|
|
25
|
|
|
|
|
|
|
|
Consumer loans
|
|
90
|
|
5
|
|
7
|
|
|
|
|
|
Total
|
|
282
|
|
109
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
684
|
|
163
|
|
143
|
|
132
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
665
|
|
1,671
|
|
1,493
|
|
1,377
|
|
808
|
|
Allowance from purchase
acquisition
|
|
1,640
|
|
1,600
|
|
|
|
|
|
|
|
Allowance for possible
loan losses, end of period
|
|
$
|
8,879
|
|
$
|
7,258
|
|
$
|
4,150
|
|
$
|
2,800
|
|
$
|
1,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance as a percentage
of year-end loans
|
|
1.27
|
%
|
1.36
|
%
|
1.25
|
%
|
1.23
|
%
|
1.14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of average
loans:
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
0.11
|
%
|
0.04
|
%
|
0.05
|
%
|
0.07
|
%
|
0.00
|
%
|
The loan portfolio is
reviewed quarterly to evaluate outstanding loans and to measure the performance
of the portfolio and the adequacy of the allowance for loan losses. This analysis includes a review of
delinquency trends, actual losses, and internal credit ratings. Managements judgment as to the adequacy of
the allowance is based upon a number of assumptions about future events which
it believes to be reasonable. The
allowance for loan losses is maintained at a level which, in managements
judgment, is adequate to absorb credit losses inherent in the loan
portfolio. The amount of the allowance
is based on managements evaluation of the collectibility of the loan
portfolio, including the nature of the portfolio, credit concentrations, trends
in historical loss experience, specific impaired loans, economic conditions and
other risks inherent in the portfolio.
Allowances for impaired loans are generally determined based on
collateral values or the present value of estimated cash flows. While management uses available information
to recognize losses on loans, reductions in the carrying amounts of loans may
be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an
integral part of
41
their examination process,
periodically review the estimated losses on loans. Such agencies may require us to recognize
losses based on their judgments about information available to them at the time
of their examination. Because of these
factors, it is reasonably possible that the estimated losses on loans may
change materially in the near term.
However, the amount of the change that is reasonably possible cannot be
estimated.
The allowance is composed of general allocations and specific
allocations. General allocations are
determined by applying loss percentages to the portfolio that are based on
historical loss experience and managements evaluation and risk grading of
the commercial loan portfolio.
Additionally, the general economic and business conditions affecting key
lending areas, credit quality trends, collateral values, loan volumes and
concentrations, seasoning of the loan portfolio, the findings of internal
credit reviews and results from external bank regulatory examinations are
included in this evaluation. The need
for specific allocations is evaluated on commercial loans that are classified
in the Watch, Substandard or Doubtful risk grades, when necessary. The specific allocations are determined on a
loan-by-loan basis based on managements evaluation of the Companys exposure
for each credit, given the current payment status of the loan and the value of
any underlying collateral. Loans for
which specific allocations are provided are excluded from the calculation of
general allocations.
Management prepares a monthly analysis of the allowance for loan losses
and material deficiencies are adjusted by increasing the provision for loan
losses. Management uses an outsourced
independent loan review company on a quarterly basis to corroborate and
challenge the internal loan grading system and provide additional analysis in
determining the adequacy of the allowance for loan losses. Management rotates the loan review company on
a periodic basis to ensure objectivity in the loan review process.
In addition, an internal loan review process is conducted by a
committee comprised of members of senior management. All new loans are risk rated under loan
policy guidelines. The internal loan
review committee meets quarterly to evaluate the composite risk ratings. Risk ratings may be changed if it appears
that new loans were not assigned the proper initial grade, or, if on existing
loans, credit conditions have improved or worsened.
A
loan is considered impaired when, based on current information and events, it
is probable that a creditor will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by
management in determining impairment include payment status, collateral value
and the probability of collecting scheduled principal and interest payments
when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not
classified as impaired. Management
determines the significance of payment delays and payment shortfalls on a
case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrowers prior payment history and the amount of
the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan
basis by either the present value of expected future cash flows discounted at
the loans effective interest rate, the loans obtainable market price, or the
fair value of the collateral if the loan is collateral dependent.
Large
groups of smaller balance homogenous loans are collectively evaluated for
impairment. Accordingly, we do not
separately identify individual consumer loans for impairment disclosures.
Management
has allocated the allowance for loan losses within the categories of loans set
forth in the table below according to amounts deemed necessary to provide for
possible losses. In addition to the
allocation of the allowance for loan losses, the Bank has established an
unallocated portion of the allowance.
The unallocated portion of the allowance is maintained due to a number
of qualitative factors, such as concentrations of credit and bank acquisitions. The amount of the allowance applicable to
each category and the percentage of loans in each category to total loans are
presented below.
42
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
% of
|
|
|
|
% of
|
|
|
|
% of
|
|
|
|
% of
|
|
|
|
% of
|
|
|
|
|
|
Total
|
|
|
|
Total
|
|
|
|
Total
|
|
|
|
Total
|
|
|
|
Total
|
|
|
|
Allocation
|
|
Loans*
|
|
Allocation
|
|
Loans*
|
|
Allocation
|
|
Loans*
|
|
Allocation
|
|
Loans*
|
|
Allocation
|
|
Loans*
|
|
Commercial
|
|
$
|
770
|
|
9.90
|
%
|
$
|
649
|
|
10.29
|
%
|
$
|
470
|
|
12.11
|
%
|
$
|
435
|
|
16.70
|
%
|
$
|
445
|
|
30.59
|
%
|
Real estate - commercial
|
|
4,998
|
|
37.05
|
%
|
2,453
|
|
36.16
|
%
|
1,356
|
|
29.93
|
%
|
1,101
|
|
31.75
|
%
|
569
|
|
30.70
|
%
|
Real estate - construction
|
|
2,271
|
|
41.90
|
%
|
2,496
|
|
42.10
|
%
|
1,742
|
|
44.10
|
%
|
861
|
|
35.22
|
%
|
325
|
|
23.46
|
%
|
Real estate - mortgage
|
|
512
|
|
9.83
|
%
|
707
|
|
10.12
|
%
|
461
|
|
13.16
|
%
|
352
|
|
14.68
|
%
|
180
|
|
12.78
|
%
|
Obligations of political subdivisions in the U.S.
|
|
|
|
0.04
|
%
|
17
|
|
0.32
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Consumer
|
|
58
|
|
1.28
|
%
|
63
|
|
1.01
|
%
|
35
|
|
0.70
|
%
|
43
|
|
1.65
|
%
|
36
|
|
2.47
|
%
|
Unallocated
|
|
270
|
|
|
|
873
|
|
|
|
86
|
|
|
|
8
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,879
|
|
100.00
|
%
|
$
|
7,258
|
|
100.00
|
%
|
$
|
4,150
|
|
100.00
|
%
|
$
|
2,800
|
|
100.00
|
%
|
$
|
1,555
|
|
100.00
|
%
|
* Loan balance in each category, expressed
as a percentage of total loans.
Nonperforming Assets
Nonperforming assets, which includes non-accrual loans, accruing loans
past due over 90 days and other real estate owned, totaled approximately $5.5
million at year-end 2007, compared to $648 thousand at December 31,
2006. At December 31, 2007 and
2006, the ratio of nonperforming loans to total loans plus other real estate
owned was 0.79% and 0.12%, respectively.
On January 31, 2007, management placed one loan acquired from our
acquisition of Sapelo National Bank with a balance of approximately $2.9
million on non-accrual that was secured by single-family residential real
estate appraised at approximately $5.1 million.
The borrower filed for bankruptcy protection on April 2, 2007. Based on a recent court hearing, it appears
our collateral will be released from bankruptcy court no later than early in
the second quarter of 2008. However,
management is continuously monitoring this loan in order to minimize any
losses. On October 15, 2007,
management placed four loans from one customer relationship with a balance of
approximately $1.2 million on non-accrual.
The loans are secured by various commercial real estate and a
residential property with a total appraisal value of approximately $1.9
million. The customer sold the
collateral to pay off the loans which occurred during the first quarter of
2008. The Bank did not incur any losses
on these loans.
Our
policy is to place loans on non-accrual status when it appears that the
collection of principal and interest in accordance with the terms of the loan
is doubtful. Any loan which becomes 90
days past due as to principal or interest is automatically placed on
non-accrual. Exceptions are allowed for
90-day past due loans when such loans are well secured and in process of
collection. The accrual of interest is
discontinued when the loan is placed on non-accrual. Interest income that would have been recorded
on these non-accrual loans in accordance with their original terms totaled
$284,097, $142,526 and $29,994 in 2007, 2006, and 2005, respectively, compared
with interest income recognized of $38,809, $11,876 and $7,759, respectively.
Impaired loans totaled $4,780,760 and $648,041 at December 31,
2007 and 2006, respectively. Impaired
loans consist of loans on non-accrual status and loans that are 90 days or more
past due.
43
There are no
commitments to lend additional funds to customers with loans on non-accrual
status at December 31, 2007. The
table below summarizes our nonperforming assets at year-end for the last five
years.
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(Dollars in Thousands)
|
|
Nonperforming loans:
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual
|
|
$
|
4,277
|
|
$
|
617
|
|
$
|
274
|
|
$
|
137
|
|
$
|
|
|
Loans 90 days or more past due
|
|
505
|
|
31
|
|
13
|
|
|
|
|
|
Total nonperforming loans
|
|
$
|
4,782
|
|
$
|
648
|
|
$
|
287
|
|
$
|
137
|
|
$
|
|
|
Other real estate owned
|
|
759
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
5,541
|
|
$
|
648
|
|
$
|
287
|
|
$
|
137
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming assets to total loans plus other real estate owned
|
|
0.79
|
%
|
0.12
|
%
|
0.09
|
%
|
0.06
|
%
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming assets to
total assets
|
|
0.65
|
%
|
0.10
|
%
|
0.07
|
%
|
0.05
|
%
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
to nonperforming loans (a)
|
|
185.68
|
%
|
1120.06
|
%
|
1445.99
|
%
|
2043.80
|
%
|
0.00
|
%
|
(a) We had
no nonperforming loans at December 31, 2003.
Other real estate consists of five real estate construction properties
totaling $603,787 and two single-family residential real estate properties
totaling $155,000 as of December 31, 2007.
As of December 31, 2006, there were no other real estate properties
owned by the Company. All other real
estate properties are being actively marketed for sale and management is
continuously monitoring these properties in order to minimize any losses.
Deposits
and Other Borrowings
Average deposits increased approximately $241.6 million during 2007,
compared to an increase of approximately $135.3 million during 2006. Average time deposits were $489.1 million
during 2007 as compared to $325.0 million during 2006. The increase in time deposits can be attributed
to the issuance of wholesale time deposits (brokered and internet), the
management team drawing customers away from other financial institutions,
branching efforts and acquisition of First Community Bank
The following table sets forth the average amount of deposits and
average rate paid on such deposits for the years ended December 31, 2007,
2006 and 2005.
|
|
Year Ended December 31
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
Average
|
|
Average
|
|
Average
|
|
Average
|
|
Average
|
|
Average
|
|
|
|
Balance
|
|
Rate
|
|
Balance
|
|
Rate
|
|
Balance
|
|
Rate
|
|
|
|
(Dollars in Thousands)
|
|
Noninterest bearing
deposits
|
|
$
|
46,384
|
|
|
|
$
|
25,981
|
|
|
|
$
|
20,845
|
|
|
|
Interest bearing demand
deposits
|
|
112,277
|
|
3.07
|
%
|
61,376
|
|
3.04
|
%
|
39,748
|
|
1.74
|
%
|
Savings
|
|
8,309
|
|
0.55
|
%
|
2,156
|
|
0.37
|
%
|
1,422
|
|
0.56
|
%
|
Time deposits
|
|
489,143
|
|
5.21
|
%
|
325,014
|
|
4.67
|
%
|
217,238
|
|
3.32
|
%
|
Total average deposits
|
|
$
|
656,113
|
|
4.75
|
%
|
$
|
414,527
|
|
4.39
|
%
|
$
|
279,253
|
|
3.07
|
%
|
44
Time deposits
greater than $100,000 totaled $129.7 million at December 31, 2007,
compared to $81.2 million at December 31, 2006. We utilize wholesale time deposits (internet
and brokered) as an alternative source for cost-effective funding. We held approximately $283 million and $264
million in wholesale time deposits at December 31, 2007 and 2006,
respectively. The daily average balance
of these brokered deposits totaled $260 million in 2007 as compared to $216
million in 2006. The weighted average rates
paid during 2007 and 2006 were 5.24% and 4.46%, respectively. The weighted average interest rate on the
deposits at December 31, 2007 and 2006 was 4.90% and 4.91%, respectively.
The following
table set forth the scheduled maturities of time deposits greater than $100,000
and wholesale time deposits at December 31, 2007.
|
|
(Thousands)
|
|
$100,000 and greater:
|
|
|
|
3 months or less
|
|
$
|
35,033
|
|
over 3 through 6 months
|
|
31,206
|
|
over 6 months through 1 year
|
|
52,604
|
|
over 1 year
|
|
10,849
|
|
Total outstanding certificates of deposit of $100,000 or more
|
|
$
|
129,692
|
|
|
|
|
|
|
|
(Thousands)
|
|
Wholesale time deposits
(brokered and internet):
|
|
|
|
3 months or less
|
|
$
|
92,632
|
|
over 3 through 6 months
|
|
87,138
|
|
over 6 months through 1 year
|
|
85,355
|
|
over 1 year
|
|
18,178
|
|
Total wholesale time deposits
|
|
$
|
283,303
|
|
Total borrowings from Federal Home Loan Bank advances increased
approximately $8.8 million during 2007 compared to 2006 due to management
minimizing the interest rate risk and meeting liquidity needs. Total borrowings from Federal Home Loan Bank
advances increased approximately $15.5 million during 2006 compared to 2005 due
to management minimizing the interest rate risk and meeting liquidity
needs. Additional information regarding
Federal Home Loan Bank advances, including scheduled maturities, is provided in
Note J in the consolidated financial statements.
Capital Resources
We
maintain a strong level of capital as a margin of safety for our depositors and
stockholders, as well as to provide for future growth. On June 12, 2006, we closed a public offering with a total of
700,000 shares of common stock at a price of $30.00 per share. We received net proceeds of $20.8 million
after deducting offering expenses. On December 15,
2006, we issued 305,695 shares with a closing price of $32.71 to the
shareholders of Sapelo Bancshares, Inc. as part of the merger
agreement. As a result of the shares
issued in the merger with Sapelo, stockholders equity increased by
approximately $10.0 million. On January 31,
2007, we issued 542,033 shares with a closing price of $33.91 to the
shareholders of First Community Bank as part of the merger agreement. As a result of the shares issued in the
merger with First Community Bank, stockholders equity increased by
approximately $18.4 million. At December 31, 2007, stockholders
equity was $89.1 million versus $62.2 million at December 31, 2006. The
increase in stockholders equity was primarily the result of the additional
capital raised in the initial public offering, the stock issued from the two
mergers and retention of earnings. We have not paid any cash dividends.
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
45
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), and of Tier I capital (as defined) to
average assets (as defined). Management
believes, as of December 31, 2007 and 2006, that the Company and the Bank
met all capital adequacy requirements to which they are subject.
As of December 31, 2007, the Bank was categorized as
well-capitalized under the regulatory framework for prompt corrective
action. To be categorized as well
categorized, the Bank must maintain minimum total risk-based, Tier I risk-based
and Tier I leverage ratios as set forth in the following table. There are no conditions or events since that
notification that management believes have changed the Banks categories.
The Companys and the Banks actual capital amounts and ratios as of December 31,
2007 and 2006 follow:
|
|
|
|
|
|
To Be Well Capitalized
|
|
|
|
|
|
For Capital
|
|
Under Prompt Corrective
|
|
|
|
Actual
|
|
Adequacy Purposes
|
|
Action Provisions
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk-Based Capital To Risk Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
84,800,000
|
|
11.62
|
%
|
$
|
58,382,100
|
>
|
8.0
|
%
|
N/A
|
|
N/A
|
|
Bank
|
|
82,541,000
|
|
11.32
|
%
|
58,332,862
|
>
|
8.0
|
%
|
72,916,078
|
>
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital To Risk Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
75,921,000
|
|
10.40
|
%
|
$
|
29,200,385
|
>
|
4.0
|
%
|
N/A
|
|
N/A
|
|
Bank
|
|
73,662,000
|
|
10.11
|
%
|
29,144,214
|
>
|
4.0
|
%
|
43,716,320
|
>
|
6.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital To Average Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
75,921,000
|
|
9.34
|
%
|
$
|
32,514,347
|
>
|
4.0
|
%
|
N/A
|
|
N/A
|
|
Bank
|
|
73,662,000
|
|
9.08
|
%
|
32,450,220
|
>
|
4.0
|
%
|
40,562,775
|
>
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk-Based Capital To Risk Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
69,138,000
|
|
12.31
|
%
|
$
|
44,931,275
|
>
|
8.0
|
%
|
N/A
|
|
N/A
|
|
Bank
|
|
66,183,000
|
|
11.81
|
%
|
44,831,837
|
>
|
8.0
|
%
|
56,039,797
|
>
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital To Risk Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
62,117,000
|
|
11.06
|
%
|
$
|
22,465,461
|
>
|
4.0
|
%
|
N/A
|
|
N/A
|
|
Bank
|
|
59,163,000
|
|
10.55
|
%
|
22,431,469
|
>
|
4.0
|
%
|
33,647,204
|
>
|
6.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital To Average Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
62,117,000
|
|
9.84
|
%
|
$
|
25,250,813
|
>
|
4.0
|
%
|
N/A
|
|
N/A
|
|
Bank
|
|
59,163,000
|
|
9.38
|
%
|
25,229,424
|
>
|
4.0
|
%
|
31,536,780
|
>
|
5.0
|
%
|
46
We have outstanding junior subordinated debentures commonly referred to
as Trust Preferred Securities totaling $10.3 million at December 31,
2007. 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 December 31, 2007, all
of the Trust Preferred Securities qualifies as a Tier I capital. For further information on our Trust
Preferred Securities, see Note K in the consolidated financial statements.
Liquidity
We
engage in liquidity management to ensure adequate cash flow for deposit
withdrawals, credit commitments and repayments of borrowed funds. Funding needs are met through loan
repayments, net interest and fee income and through the acquisition of new
deposits and the renewal of maturing deposits.
Each week, management monitors the loan commitments and evaluates
funding options to retain and grow deposits. To the extent needed to fund loan
demand, traditional local deposit funding sources are supplemented by the use
of FHLB borrowings, brokered deposits and other wholesale deposit sources
outside the immediate market area.
We have been successful in replacing maturing brokered deposits and do
not expect to experience significant disintermediation as the brokered deposits
mature. To plan for contingent sources
of funding not satisfied by both local and out-of-market deposit balances, we
have established overnight borrowing for Federal Funds Purchased through
various correspondent banks, lines of credit through the membership of the
Federal Home Loan Bank program, and participatory relationships with
correspondent banks. Management believes the various funding sources are
adequate to meet our liquidity needs in the future without any material adverse
impact on operating results. Our liquid
assets consist of cash and due from accounts and federal funds sold.
Our liquid assets as a percentage of total deposits at December 31,
2007 and 2006 were 2.75% and 7.66%, respectively. The ratio of liquid assets as a percentage of
deposits decreased primarily due to the 54.5% decrease in cash and due from
banks accounts and federal funds sold shown above.
We have the ability, on a short-term basis, to purchase up to $25.0
million of federal funds from other financial institutions. At December 31, 2007, there were no
federal funds purchased from other financial institutions. We can borrow funds from the Federal Home
Loan Bank, subject to eligible collateral of loans. At December 31, 2007, our maximum
borrowing capacity from the Federal Home Loan Bank was approximately $42.3
million of which we had outstanding borrowings of $40.5 million leaving
available unused borrowing capacity of $1.8 million.
Off-Balance Sheet
Commitments
We are
party to credit-related financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of our
customers. These financial instruments include commitments to extend
credit, which are agreements to lend to customers. Commitments generally
have fixed expiration dates or other termination clauses and may require
payment of fees. Such commitments involve, to varying degrees, elements
of credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheets. Our
exposure to credit loss is represented by the contractual amount of these
commitments. We follow the same credit policies in making commitments as
we do for on-balance-sheet instruments.
At December 31, 2007, we had outstanding loan commitments of
approximately $88.8 million and standby letters of credit of approximately $4.5
million. Since many of the commitments
are expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. We evaluate each
customers credit worthiness on a case-by-case basis. The amount of
collateral, if any, we obtain on an extension of credit is based on our credit
evaluation of the customer. Collateral held varies but may include
accounts receivable, inventory, property and equipment and income-producing
commercial properties.
47
Contractual Obligations
The following table is a summary of our commitments to extend credit as
well as our contractual obligations, consisting of certificates of deposits and
FHLB advances by contractual maturity date.
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012 and After
|
|
|
|
(Dollar
amounts in thousands)
|
|
Certificates of deposit
(1)
|
|
$
|
509,099
|
|
$
|
21,416
|
|
$
|
6,057
|
|
$
|
761
|
|
$
|
2,986
|
|
FHLB borrowings
|
|
27,200
|
|
11,300
|
|
|
|
|
|
2,000
|
|
Commitments to extend
credit
|
|
88,792
|
|
|
|
|
|
|
|
|
|
Standby letters of credit
|
|
4,475
|
|
|
|
|
|
|
|
|
|
Total commitments and contractual obligations
|
|
$
|
629,566
|
|
$
|
32,716
|
|
$
|
6,057
|
|
$
|
761
|
|
$
|
4,986
|
|
(1) Certificates
of deposit give customers rights to early withdrawal. Early withdrawals may be subject to
penalties. The penalty amount depends on
the remaining time to maturity at the time of early withdrawal.
Although management regularly monitors the balance of outstanding
commitments to fund loans to ensure funding availability should the need arise,
management believes that the risk of all customers fully drawing on all these
lines of credit at the same time is remote.
Interest Rate Sensitivity
Our primary market risk is exposure to
interest rate movements. We have no foreign currency exchange rate risk,
commodity price risk, or any other material market risk. We have no
trading or held to maturity investments.
Our primary source of earnings, net interest
income, can fluctuate with significant interest rate movements. To lessen
the impact of these movements, we seek to maximize net interest income while
remaining within prudent ranges of risk by practicing sound interest rate
sensitivity management.
We attempt to accomplish this objective by structuring
the balance sheet so that repricing opportunities exist for both assets and
liabilities in roughly equivalent amounts at approximately the same time
intervals. Interest rate sensitivity refers to the responsiveness of earning assets
and interest-bearing liabilities to changes in market interest rates. Our
interest rate risk management is carried out by the Asset/Liability Management
Committee which operates under policies and guidelines established by the
Bank. The principal objective of asset/liability management is to manage
the levels of interest-sensitive assets and liabilities to minimize net
interest income fluctuations in times of fluctuating market interest
rates. To effectively measure and manage interest rate risk, we use
computer simulations that determine the impact on net interest income of
numerous interest rate scenarios, balance sheet trends and strategies.
These simulations cover the following financial instruments: short-term
financial instruments, investment securities, loans, deposits, and
borrowings. These simulations incorporate assumptions about balance sheet
dynamics, such as loan and deposit growth and pricing, changes in funding mix,
and asset and liability repricing and maturity characteristics.
Simulations are run under various interest rate scenarios to determine the
impact on net income and capital. From these computer simulations,
interest rate risk is quantified and appropriate strategies are developed and
implemented. We also maintain an investment portfolio that staggers
maturities and provides flexibility over time in managing exposure to changes
in interest rates. Any imbalances in the repricing opportunities at any
point in time constitute a financial institutions interest rate sensitivity. An indicator of interest rate sensitivity is
the difference between interest rate sensitive assets and interest rate
sensitive liabilities; this difference is known as the interest rate
sensitivity gap.
Intense
competition in our markets continues to pressure quality loan rates downward,
while conversely pressuring deposit rates upward. The following table
reflects our rate sensitive assets and liabilities by maturity as of December 31,
2007. Variable rate loans are shown in the category of due within three
months because they reprice with changes in the prime lending rate.
Fixed rate loans are presented
assuming the entire loan matures on the final due date, although payments are
actually made at regular intervals and are not reflected in this
schedule. Distribution of maturities for available for sale securities is
based on amortized cost. Additionally, distribution of maturities for
mortgage-backed securities is based on expected final maturities that may be
different from the
48
contractual terms. Additionally, demand deposits and savings
accounts have no stated maturity; however, it has been our experience that
these accounts are not totally rate sensitive, and accordingly the following
analysis assumes all interest bearing demand deposit accounts, money market
deposit accounts and savings accounts reprice within one year and the time
deposits reprice within one to five years.
The
interest rate sensitivity table presumes that all loans and securities will
perform according to their contractual maturities when, in many cases, actual
loan terms are much shorter than the original terms and securities are subject
to early redemption. In addition, the table does not necessarily indicate the
impact of general interest rate movements on net interest margin since the
repricing of various categories of assets and liabilities is subject to
competitive pressures and customer needs. We monitor and adjust our
exposure to interest rate risks within specific policy guidelines based on our
view of current and expected market conditions.
We
have established an asset/liability committee which monitors our interest rate
sensitivity and makes recommendations to the board of directors for actions
that need to be taken to maintain a targeted gap range. An analysis is made of
our current cumulative gap each month by management and presented to the board
quarterly for a detailed review.
The
following table shows interest sensitivity gaps for these different intervals
as of December 31, 2007:
|
|
1-3
|
|
4-6
|
|
7-12
|
|
Over 1 Year
|
|
Over
|
|
|
|
Months
|
|
Months
|
|
Months
|
|
thru 5 Years
|
|
5 Years
|
|
|
|
(Dollars in Thousands)
|
|
Interest Rate Sensitive Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
329,655
|
|
$
|
79,583
|
|
$
|
92,669
|
|
$
|
182,292
|
|
$
|
13,224
|
|
Securities
|
|
2,000
|
|
1,496
|
|
5,085
|
|
20,232
|
|
45,113
|
|
FHLB stock
|
|
|
|
|
|
|
|
|
|
3,153
|
|
Interest bearing deposits in other banks
|
|
415
|
|
|
|
100
|
|
|
|
|
|
Federal funds sold
|
|
11,350
|
|
|
|
|
|
|
|
|
|
Total Interest Rate Sensitive Assets
|
|
$
|
343,420
|
|
$
|
81,079
|
|
$
|
97,854
|
|
$
|
202,524
|
|
$
|
61,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Sensitive
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Money market and NOW accounts
|
|
$
|
111,029
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Savings
|
|
7,809
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
159,799
|
|
164,622
|
|
184,513
|
|
29,669
|
|
1,716
|
|
Other borrowings
|
|
17,200
|
|
4,000
|
|
6,000
|
|
11,300
|
|
12,310
|
|
Total Interest Rate Sensitive Liabilities
|
|
$
|
295,837
|
|
$
|
168,622
|
|
$
|
190,513
|
|
$
|
40,969
|
|
$
|
14,026
|
|
Interest Rate Sensitivity
GAP
|
|
$
|
47,583
|
|
$
|
(87,543
|
)
|
$
|
(92,659
|
)
|
$
|
161,555
|
|
$
|
47,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Interest Rate
Sensitivity GAP
|
|
$
|
47,583
|
|
$
|
(39,960
|
)
|
$
|
(132,619
|
)
|
$
|
28,936
|
|
$
|
76,400
|
|
Cumulative GAP as a % of
total assets
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
5.58
|
%
|
-4.69
|
%
|
-15.56
|
%
|
3.39
|
%
|
8.96
|
%
|
The
interest rate sensitivity at December 31, 2007 indicates an
asset-sensitive position in the three months or fewer periods and a
liability-sensitive position in the four months to six months period and the
seven months to twelve months period. On a cumulative basis through one year,
our rate sensitive liabilities exceed rate sensitive assets, resulting in a
liability-sensitive position of $132.6 million or 15.6% of total assets.
Generally, a liability-sensitive position indicates that declining interest
rates would have a positive impact on net interest income and rising interest
rates would adversely affect net interest income. Rising and declining interest
rates, respectively, would typically have the opposite effect on net interest
income in an asset-sensitive position. Other factors, including the speed at
which assets and liabilities reprice in response to changes in market rates and
competitive factors, can influence the ultimate impact on net interest income
resulting from changes in interest rates. Although management actively monitors
and reacts to a changing interest rate environment, it is not possible to fully
insulate
49
us against interest rate
risk. Given the current mix and maturity of our assets and liabilities, it is
possible that a rapid, significant and prolonged increase or decrease in
interest rates could have an adverse impact on our net interest margin.
Effects
of Inflation
Inflation
generally increases the cost of funds and operating overhead; and, to the
extent loans and other assets bear variable rates, the yields on such
assets. Unlike most industrial companies, virtually all of our assets and
liabilities are monetary in nature. As a result, interest rates generally
have a more significant impact on our performance than the effects of general
levels of inflation. Although interest rates do not necessarily move in
the same direction, or to the same extent, as the prices of goods and services,
increases in inflation generally have resulted in increased interest
rates. If the Federal Reserve Board believes that the rate of inflation
is likely to increase to undesired levels, its method of curbing inflation in
the past has been to increase the interest rate charged on short-term federal
borrowings.
In
addition, inflation results in an increased cost of goods and services
purchased, cost of salaries and benefits, occupancy expense and similar
items. Inflation and related increases in interest rates generally
decrease the market value of investments and loans held and may adversely
affect the liquidity and earnings of our commercial banking and mortgage
banking business and our shareholders equity. With respect to our
mortgage banking business, mortgage originations and refinancing tend to slow
as interest rates increase, and increased interest rates would likely reduce
our earnings from such activities and the income from the sale of residential
mortgage loans in the secondary market.
Item 7A. Quantitative and
Qualitative Disclosures About Market Risk
Market risk is the risk of loss from adverse changes in market prices
and interest rates. Our market risk
arises principally from interest rate risk inherent in our lending, deposit,
and borrowing activities. Although we
manage certain other risks, such as credit quality and liquidity risk, in the
normal course of business we consider interest rate risk to be our most
significant market risk and the risk that could potentially have the largest
material effect on our financial condition and results of operations. We do not maintain a trading portfolio or
deal in international instruments, and therefore, other types of market risks,
such as foreign currency risk and commodity price risk, do not arise in the
normal course of our business activities.
Interest rate risk represents
the sensitivity of earnings to changes in interest rates. As interest rates change, the interest income
and expense associated with our interest sensitive assets and liabilities
change, thereby impacting net interest income, the primary component of our
earnings. We utilize the results of both
a static and dynamic gap report to quantify the estimated exposure of net
interest income to a sustained change in interest rates. The gap analysis
projects net interest income based on both a rise and fall in interest rates of
200 basis points (i.e. 2.00%) shock.
The model is based on actual repricing dates of interest sensitive
assets and interest sensitive liabilities.
The model incorporates assumptions regarding the impact of changing
interest rates on the prepayment rates of certain assets.
We measure this exposure based
on an immediate change in interest rates of 200 basis points up or down. Given the scenario, we had, at year-end, an
exposure to falling rates and a benefit from rising rates. More specifically, the model forecasts a
decline in net interest income of $3.0 million, or 10.6%, as a result of a 200
basis point decline in rates. The model
also predicts a $3.4 million increase in net interest income, or 11.9%, as a
result of a 200 basis point increase in rates.
The forecasted results of the model are within the limits specified by
our guidelines. The following chart
reflects Atlantic Southerns sensitivity to changes in interest rates as of December 31,
2007. The model is based on a static
balance sheet and assumes that paydowns and maturities of both assets and
liabilities are reinvested in like instruments at current interest rates, rates
down 200 basis points, and rates up 200 basis points.
The following sensitivity
analysis is a modeling analysis, for which there is no input for growth or
change in asset mix. While assumptions
are developed based on the current economic and market conditions, management
cannot make any assurances as to the predictive nature of these assumptions,
including how customer preferences or competitor influences might change.
50
Interest Rate Risk: Income Sensitivity
Summary
|
|
Down 200 BP
|
|
Current
|
|
Up 200 BP
|
|
|
|
(Dollar amounts in thousands)
|
|
Net interest income
|
|
$
|
25,416
|
|
$
|
28,424
|
|
$
|
31,809
|
|
$ change net interest
income
|
|
(3,008
|
)
|
|
|
3,385
|
|
% change net interest
income
|
|
(10.60
|
)%
|
0.00
|
%
|
11.90
|
%
|
|
|
|
|
|
|
|
|
|
|
|
The Company has adopted
an asset/liability management program to monitor the Companys interest rate
sensitivity and to ensure that the Company is competitive in the loan and
deposit markets. Management seeks to
manage the relationship between interest-sensitive assets and liabilities in
order to protect against wide interest rate fluctuations, including those
resulting from inflation. Additionally,
refer to our interest rate sensitivity management and liquidity discussion in
Managements Discussion and Analysis.
51
Item 8. Financial
Statements and Supplementary Data
|
|
|
Thigpen, Jones, Seaton & Co., P.C.
|
CERTIFIED
PUBLIC ACCOUNTANTS
|
BUSINESS
CONSULTANTS
|
1004
Hillcrest Parkway
·
P.O. Box 400
·
Dublin,
Georgia 31040-0400
|
Tel
478-272-2030
·
Fax 478-272-3318
·
E-mail
tjs@tjscpa.com
|
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Atlantic Southern Financial Group, Inc.
Macon, Georgia
We have audited
the consolidated balance sheets of Atlantic Southern Financial Group, Inc.
as of December 31, 2005 and 2004, and the related consolidated statements
of income, changes in shareholders equity and cash flows for the three years
then ended. These consolidated financial statements are the responsibility of
the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted
our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Atlantic Southern Financial
Group, Inc. at December 31, 2005 and 2004, and the consolidated results
of its operations and its cash flows for the three years then ended, in
conformity with accounting principles generally accepted in the United States
of America.
/s/ THIGPEN, JONES, SEATON & CO., PC
January 10, 2006
Dublin, Georgia
52
Porter Keadle Moore, LLP
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders
Atlantic Southern Financial Group, Inc.
and subsidiaries
We have audited the
consolidated balance sheets of
Atlantic
Southern Financial Group, Inc.
and subsidiary as of December 31,
2007 and 2006 and the related consolidated statements of earnings,
comprehensive income, changes in shareholders equity, and cash flows for each
of the two years then ended. These financial statements are the responsibility
of the Companys management. Our responsibility is to express an opinion on
these financial statements based on our audits. The consolidated financial
statements of
Atlantic Southern Financial Group, Inc.
and subsidiary as of and for the year ended December 31, 2005, was audited
by other auditors whose report, dated January 10, 2006, expressed an
unqualified opinion on those statements.
We conducted our audits
in accordance
with the standards of the Public Company Accounting Oversight Board (United
States).
Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 2007
and 2006 consolidated financial statements referred to above present fairly, in
all material respects, the financial position of
Atlantic
Southern Financial Group, Inc.
and subsidiary as of December 31,
2007 and 2006, and the results of their operations and their cash flows for
each of the two years then ended in conformity with accounting principles
generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), Atlantic Southern Financial
Group, Inc. and subsidiarys internal control over financial reporting as
of December 31, 2007, based on criteria established in
Internal Control - Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
and our report dated March 11, 2008 expressed an unqualified opinion on
the effectiveness of Atlantic Southern Financial Group, Inc.s internal
control over financial reporting.
sPorter Keadle Moore, LLP
Atlanta, Georgia
March 11, 2008
53
ATLANTIC SOUTHERN FINANCIAL
GROUP, INC.
CONSOLIDATED BALANCE SHEETS
|
|
As of December 31,
|
|
|
|
2007
|
|
2006
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
8,059,524
|
|
$
|
13,130,014
|
|
Interest-bearing deposits in other banks
|
|
514,654
|
|
259,463
|
|
Federal funds sold
|
|
11,350,000
|
|
29,522,000
|
|
Total cash and cash equivalents
|
|
19,924,178
|
|
42,911,477
|
|
Securities available for sale, at fair value
|
|
74,387,100
|
|
57,596,002
|
|
Federal Home Loan Bank stock, restricted, at cost
|
|
3,153,000
|
|
2,327,600
|
|
Loans held for sale
|
|
679,427
|
|
1,532,093
|
|
Loans, net of unearned income
|
|
697,145,715
|
|
533,128,702
|
|
Less - allowance for loan losses
|
|
(8,878,795
|
)
|
(7,258,371
|
)
|
Loans, net
|
|
688,266,920
|
|
525,870,331
|
|
Bank premises and equipment, net
|
|
27,899,376
|
|
17,425,344
|
|
Accrued interest receivable
|
|
7,239,571
|
|
5,570,115
|
|
Cash surrender value of life insurance
|
|
4,442,044
|
|
4,264,395
|
|
Goodwill and other intangible assets, net of amortization
|
|
22,806,983
|
|
10,600,276
|
|
Other assets
|
|
3,680,465
|
|
2,977,859
|
|
Total Assets
|
|
$
|
852,479,064
|
|
$
|
671,075,492
|
|
|
|
|
|
|
|
Liabilities and Shareholders
Equity
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
Non-interest bearing
|
|
$
|
46,075,374
|
|
$
|
34,453,507
|
|
Money market and NOW accounts
|
|
111,029,210
|
|
94,942,442
|
|
Savings
|
|
7,808,443
|
|
4,200,929
|
|
Time deposits
|
|
540,318,896
|
|
423,397,729
|
|
Total deposits
|
|
705,231,923
|
|
556,994,607
|
|
Federal Home Loan Bank
advances
|
|
40,500,000
|
|
31,700,000
|
|
Junior subordinated
debentures
|
|
10,310,000
|
|
10,310,000
|
|
Accrued interest payable
|
|
5,446,473
|
|
3,202,163
|
|
Accrued expenses and other
liabilities
|
|
1,908,156
|
|
6,636,790
|
|
Total liabilities
|
|
763,396,552
|
|
608,843,560
|
|
Commitments
|
|
|
|
|
|
Shareholders Equity:
|
|
|
|
|
|
Preferred stock, authorized 2,000,000 shares, no shares outstanding
|
|
|
|
|
|
Common stock, $5 par value, authorized 10,000,000 shares, issued and
outstanding 4,151,780 in 2007 and 3,609,747 in 2006
|
|
20,758,900
|
|
18,048,735
|
|
Additional paid-in capital
|
|
53,413,202
|
|
37,806,852
|
|
Retained earnings
|
|
14,606,121
|
|
6,862,246
|
|
Accumulated other comprehensive income (loss)
|
|
304,289
|
|
(485,901
|
)
|
Total shareholders equity
|
|
89,082,512
|
|
62,231,932
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
852,479,064
|
|
$
|
671,075,492
|
|
See Accompanying Notes to
Consolidated Financial Statements
54
ATLANTIC SOUTHERN FINANCIAL
GROUP, INC.
CONSOLIDATED STATEMENTS OF
EARNINGS
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Interest and Dividend Income:
|
|
|
|
|
|
|
|
Interest and fees on loans
|
|
$
|
55,254,000
|
|
$
|
35,574,765
|
|
$
|
20,489,819
|
|
Interest on securities:
|
|
|
|
|
|
|
|
Taxable income
|
|
2,537,229
|
|
1,552,231
|
|
837,106
|
|
Non-taxable income
|
|
709,437
|
|
259,111
|
|
124,085
|
|
Income on federal funds sold
|
|
522,374
|
|
373,029
|
|
112,472
|
|
Other interest and dividend income
|
|
282,658
|
|
114,556
|
|
60,123
|
|
Total interest and dividend income
|
|
59,305,698
|
|
37,873,692
|
|
21,623,605
|
|
Interest Expense:
|
|
|
|
|
|
|
|
Deposits
|
|
28,986,170
|
|
17,038,874
|
|
7,924,007
|
|
FHLB borrowings and other interest expense
|
|
1,666,666
|
|
1,117,319
|
|
548,978
|
|
Federal funds purchased
|
|
78,773
|
|
72,321
|
|
83,799
|
|
Junior subordinated debentures
|
|
781,681
|
|
744,289
|
|
400,148
|
|
Total interest expense
|
|
31,513,290
|
|
18,972,803
|
|
8,956,932
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
27,792,408
|
|
18,900,889
|
|
12,666,673
|
|
Provision for loan losses
|
|
665,000
|
|
1,670,997
|
|
1,493,050
|
|
Net interest income after provision for loan losses
|
|
27,127,408
|
|
17,229,892
|
|
11,173,623
|
|
Noninterest Income:
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
1,414,764
|
|
494,116
|
|
401,616
|
|
Other service charges, commissions and fees
|
|
369,746
|
|
104,392
|
|
76,072
|
|
Gain (loss) on sale of other assets
|
|
97,004
|
|
(9,907
|
)
|
|
|
Loss on sales / calls of investment securities
|
|
(42,680
|
)
|
(9,753
|
)
|
|
|
Mortgage origination income
|
|
929,077
|
|
666,443
|
|
441,284
|
|
Other income
|
|
588,418
|
|
438,551
|
|
267,445
|
|
Total noninterest income
|
|
3,356,329
|
|
1,683,842
|
|
1,186,417
|
|
Noninterest Expense:
|
|
|
|
|
|
|
|
Salaries
|
|
7,436,041
|
|
3,911,117
|
|
2,511,046
|
|
Employee benefits
|
|
2,327,469
|
|
1,407,670
|
|
951,194
|
|
Occupancy expense
|
|
1,475,661
|
|
756,081
|
|
385,836
|
|
Equipment rental and depreciation of equipment
|
|
862,228
|
|
439,567
|
|
279,155
|
|
Data processing
|
|
769,109
|
|
283,312
|
|
231,282
|
|
Other expenses
|
|
5,722,672
|
|
3,302,138
|
|
2,005,220
|
|
Total noninterest expense
|
|
18,593,180
|
|
10,099,885
|
|
6,363,733
|
|
|
|
|
|
|
|
|
|
Earnings Before Income Taxes
|
|
11,890,557
|
|
8,813,849
|
|
5,996,307
|
|
Provision for income taxes
|
|
4,146,682
|
|
2,849,720
|
|
2,111,117
|
|
Net Earnings
|
|
$
|
7,743,875
|
|
$
|
5,964,129
|
|
$
|
3,885,190
|
|
Earnings per share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.89
|
|
$
|
1.97
|
|
$
|
1.49
|
|
Diluted
|
|
$
|
1.75
|
|
$
|
1.77
|
|
$
|
1.33
|
|
See Accompanying Notes to
Consolidated Financial Statements
55
ATLANTIC SOUTHERN FINANCIAL
GROUP, INC.
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
Other
|
|
|
|
|
|
Number
of
|
|
Common
|
|
Paid-in
|
|
Retained
|
|
Comprehensive
|
|
|
|
|
|
Shares
|
|
Stock
|
|
Capital
|
|
Earnings
|
|
Income
(Loss)
|
|
Total
|
|
Balance,
December 31, 2004
|
|
1,736,054
|
|
$
|
8,680,270
|
|
$
|
12,047,356
|
|
$
|
1,353,621
|
|
$
|
(115,499
|
)
|
$
|
21,965,748
|
|
Net earnings
|
|
|
|
|
|
|
|
3,885,190
|
|
|
|
3,885,190
|
|
Change in
unrealized loss on securities available for sale, net of tax effect
|
|
|
|
|
|
|
|
|
|
(422,575
|
)
|
(422,575
|
)
|
Change in fair
value of derivatives for cash flow hedges, net of tax effect
|
|
|
|
|
|
|
|
|
|
(41,360
|
)
|
(41,360
|
)
|
Three-for-two
stock split
|
|
867,998
|
|
4,339,990
|
|
|
|
(4,340,694
|
)
|
|
|
(704
|
)
|
Balance,
December 31, 2005
|
|
2,604,052
|
|
13,020,260
|
|
12,047,356
|
|
898,117
|
|
(579,434
|
)
|
25,386,299
|
|
Net earnings
|
|
|
|
|
|
|
|
5,964,129
|
|
|
|
5,964,129
|
|
Change in
unrealized loss on securities available for sale, net of tax effect
|
|
|
|
|
|
|
|
|
|
127,720
|
|
127,720
|
|
Change in fair
value of derivatives for cash flow hedges, net of tax effect
|
|
|
|
|
|
|
|
|
|
(34,187
|
)
|
(34,187
|
)
|
Issuance of
common stock for acquisition of Sapelo
|
|
305,695
|
|
1,528,475
|
|
8,470,808
|
|
|
|
|
|
9,999,283
|
|
Issuance of
common stock in connection with stock offering, net of issuance cost of
$211,312
|
|
700,000
|
|
3,500,000
|
|
17,288,688
|
|
|
|
|
|
20,788,688
|
|
Balance,
December 31, 2006
|
|
3,609,747
|
|
18,048,735
|
|
37,806,852
|
|
6,862,246
|
|
(485,901
|
)
|
62,231,932
|
|
Net earnings
|
|
|
|
|
|
|
|
7,743,875
|
|
|
|
7,743,875
|
|
Change in
unrealized loss on securities available for sale, net of tax effect
|
|
|
|
|
|
|
|
|
|
714,643
|
|
714,643
|
|
Change in fair
value of derivatives for cash flow hedges, net of tax effect
|
|
|
|
|
|
|
|
|
|
75,547
|
|
75,547
|
|
Issuance of
common stock for acquisition of First Community Bank, net of issuance cost of
$87,726
|
|
542,033
|
|
2,710,165
|
|
15,582,414
|
|
|
|
|
|
18,292,579
|
|
Stock-based
compensation
|
|
|
|
|
|
23,936
|
|
|
|
|
|
23,936
|
|
Balance,
December 31, 2007
|
|
4,151,780
|
|
$
|
20,758,900
|
|
$
|
53,413,202
|
|
$
|
14,606,121
|
|
$
|
304,289
|
|
$
|
89,082,512
|
|
See Accompanying Notes to
Consolidated Financial Statements
56
ATLANTIC SOUTHERN FINANCIAL
GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Net earnings
|
|
$
|
7,743,875
|
|
$
|
5,964,129
|
|
$
|
3,885,190
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) on investment securities available
for sale
|
|
1,040,112
|
|
183,762
|
|
(640,265
|
)
|
Unrealized holding gains (losses) on derivative financial instruments
classified as cash flow hedges
|
|
114,465
|
|
(51,798
|
)
|
(62,667
|
)
|
Reclassification adjustment for losses on investments available for
sale realized in net earnings
|
|
42,680
|
|
9,753
|
|
|
|
Total other comprehensive income (loss), before tax
|
|
1,197,257
|
|
141,717
|
|
(702,932
|
)
|
|
|
|
|
|
|
|
|
Income taxes related to
other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding (gains) losses on investment securities available
for sale
|
|
(353,638
|
)
|
(62,479
|
)
|
217,690
|
|
Unrealized holding (gains) losses on derivative financial instruments
classified as cash flow hedges
|
|
(38,918
|
)
|
17,611
|
|
21,307
|
|
Reclassification adjustment for losses on investments available for
sale realized in net earnings
|
|
(14,511
|
)
|
(3,316
|
)
|
|
|
Total income taxes related to other comprehensive income (loss)
|
|
(407,067
|
)
|
(48,184
|
)
|
238,997
|
|
Total other comprehensive income (loss), net of tax
|
|
790,190
|
|
93,533
|
|
(463,935
|
)
|
Total comprehensive income
|
|
$
|
8,534,065
|
|
$
|
6,057,662
|
|
$
|
3,421,255
|
|
See Accompanying Notes to
Consolidated Financial Statements
57
ATLANTIC SOUTHERN FINANCIAL
GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH
FLOWS
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Cash Flows from Operating
Activities:
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
7,743,875
|
|
$
|
5,964,129
|
|
$
|
3,885,190
|
|
Adjustments to reconcile net earnings to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
665,000
|
|
1,670,997
|
|
1,493,050
|
|
Depreciation
|
|
1,091,928
|
|
544,564
|
|
338,701
|
|
Stock based compensation
|
|
23,936
|
|
|
|
|
|
Amortization and (accretion), net
|
|
229,491
|
|
23,387
|
|
55,268
|
|
(Gain) loss on sale of other assets
|
|
(97,004
|
)
|
9,907
|
|
|
|
Loss on sales / calls of investment securities
|
|
42,680
|
|
9,753
|
|
|
|
Deferred income tax benefit
|
|
(171,916
|
)
|
(480,991
|
)
|
(519,146
|
)
|
Change in cash surrender value of life insurance
|
|
(177,649
|
)
|
(163,732
|
)
|
(100,663
|
)
|
Changes in assets and liabilities, net of effects of purchase
acquisitions in 2007 and 2006:
|
|
|
|
|
|
|
|
Loans held for sale
|
|
852,666
|
|
(305,740
|
)
|
(335,824
|
)
|
Changes in accrued income and other assets
|
|
176,058
|
|
(1,749,759
|
)
|
(2,996,666
|
)
|
Changes in accrued expenses and other liabilities
|
|
1,829,371
|
|
262,640
|
|
1,884,970
|
|
Net cash provided by operating activities
|
|
12,208,436
|
|
5,785,155
|
|
3,704,880
|
|
Cash Flows from Investing Activities, net of effects
of purchase acquisitions in 2007 and 2006:
|
|
|
|
|
|
|
|
Net change in loans to customers
|
|
(116,320,020
|
)
|
(149,829,754
|
)
|
(103,301,938
|
)
|
Purchase of available for sale securities
|
|
(16,128,075
|
)
|
(26,048,895
|
)
|
(18,371,526
|
)
|
Proceeds from sales, calls, maturities and paydowns of available for
sale securities
|
|
12,285,967
|
|
4,963,659
|
|
2,223,331
|
|
Proceeds from sales of other investments
|
|
|
|
145,550
|
|
|
|
Purchase of FHLB stock
|
|
(553,900
|
)
|
(790,000
|
)
|
(69,100
|
)
|
Cash received from Sapelo, net of cash paid of $406,828
|
|
|
|
20,400,914
|
|
|
|
Cash paid to Sapelo shareholders
|
|
(5,322,492
|
)
|
|
|
|
|
Cash received from First Community, net of cash paid of $235,034
|
|
5,546,200
|
|
|
|
|
|
Purchase of Florida Bank Charter
|
|
(1,093,878
|
)
|
|
|
|
|
Property and equipment expenditures
|
|
(9,373,440
|
)
|
(4,495,113
|
)
|
(4,870,490
|
)
|
Purchase of cash surrender value of life insurance
|
|
|
|
|
|
(4,000,000
|
)
|
Proceeds from sales of assets
|
|
331,205
|
|
11,760
|
|
|
|
Net cash used in investing activities
|
|
(130,628,433
|
)
|
(155,641,879
|
)
|
(128,389,723
|
)
|
Cash Flows from Financing Activities, net of effects
of purchase acquisitions in 2007 and 2006:
|
|
|
|
|
|
|
|
Net change in deposits
|
|
89,720,424
|
|
155,407,119
|
|
113,326,940
|
|
Change in federal funds purchased
|
|
|
|
(1,210,000
|
)
|
|
|
Advances on FHLB borrowings
|
|
45,700,000
|
|
21,180,000
|
|
(3,000,000
|
)
|
Payments on FHLB borrowings
|
|
(39,900,000
|
)
|
(9,180,000
|
)
|
|
|
Proceeds from junior subordinated debentures
|
|
|
|
|
|
10,310,000
|
|
Issuance costs of common stock
|
|
(87,726
|
)
|
|
|
|
|
Proceeds from issuance of common stock, net of issuance cost of
$211,312
|
|
|
|
20,788,688
|
|
|
|
Payment for fractional shares
|
|
|
|
|
|
(704
|
)
|
Net cash provided by financing activities
|
|
95,432,698
|
|
186,985,807
|
|
120,636,236
|
|
Net Increase (Decrease) in Cash
and Cash Equivalents
|
|
(22,987,299
|
)
|
37,129,083
|
|
(4,048,607
|
)
|
Cash and Cash Equivalents,
Beginning of Year
|
|
42,911,477
|
|
5,782,394
|
|
9,831,001
|
|
Cash and Cash Equivalents, End
of Year
|
|
$
|
19,924,178
|
|
$
|
42,911,477
|
|
$
|
5,782,394
|
|
See Accompanying Notes to
Consolidated Financial Statements
58
ATLANTIC SOUTHERN FINANCIAL
GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
YEAR ENDED DECEMBER 31, 2007
A.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
1.
Reporting
Entity
Atlantic Southern Bank (formerly known as New
Southern Bank) (the Bank) began operations on December 10, 2001 and
operates as a state chartered bank in
nine banking locations in
the middle Georgia markets of Macon and Warner Robins, six locations in the
coastal markets of Savannah, Darien, Brunswick and St. Simons Island, Georgia,
one location in the northeast Florida market of Jacksonville, Florida and one
loan production office in the south Georgia market of Valdosta, Georgia.
At the April 27, 2004
Annual Meeting of Shareholders, the shareholders approved the proposal to
reorganize the Bank into a holding company structure by virtue of a share
exchange whereby each share of Bank common stock issued and outstanding was to
be converted into and exchanged for the right to receive one share of Atlantic
Southern Financial Group, Inc.s (the Company) common stock. The Company
was organized by the Bank for the purpose of serving as its holding company.
The share exchange was consummated on January 3, 2005.
The consolidated
financial statements include the accounts of the Company and the Bank. All intercompany accounts and transactions
have been eliminated in consolidation.
The Bank is
focused upon serving the needs of small to medium-sized business borrowers and
individuals in the metropolitan areas the Bank serves. Through Atlantic Southern Bank, the Company
specializes in commercial real estate and small business lending. The Bank offers a range of lending services,
of which some are secured by single and multi-family real estate, residential
construction and owner-occupied commercial buildings. Primarily, the Bank makes loans to small and
medium-sized businesses; however, the Bank also makes loans to consumers for a
variety of purposes. The Banks
principal source of funds for loans and investing in securities is time
deposits, including out-of-market certificates of deposits and core deposits. The Bank offers a wide range of deposit
services including checking, savings, money market accounts and certificates of
deposit.
2.
Reclassifications
Certain 2006
and 2005 amounts have been reclassified to conform to the 2007
presentation. These reclassifications
had no effect on the operations, financial condition or cash flows of the
Company.
3.
Cash
and Cash Equivalents
For purposes of reporting
cash flows, cash and cash equivalents include cash on hand, amounts due from
banks, highly liquid debt instruments purchased with an original maturity of
three months or less and federal funds sold.
Generally, federal funds are purchased and sold for one-day
periods. Interest bearing deposits in
other companies with original maturities of less than three months are
included.
4.
Securities
- The
classification of securities is determined at the date of purchase. Gains or losses on the sale of securities are
recognized on a specific identification basis.
Securities available for
sale, primarily debt securities, are recorded at fair value with unrealized
gains or losses (net-of-tax effect) excluded from earnings and reported as a
component of shareholders equity.
Securities available for sale will be used as a part of the Banks
interest rate risk management strategy and may be sold in response to changes
in interest rates, changes in prepayment risk and other factors.
5.
Federal Home Loan Bank Stock
Federal Home Loan Bank Stock has no readily
determinable fair value and sales are restricted. These investments are carried at cost, which
approximates fair value.
6.
Derivative Instruments and
Hedging Activities
The Banks interest rate risk management strategy incorporates the limited use
of derivative instruments to minimize fluctuations in net earnings that are
caused by interest rate volatility. The Banks goal is to manage interest rate
sensitivity by modifying the repricing or maturity characteristics of certain
balance sheet assets and liabilities so that the net interest
59
ATLANTIC SOUTHERN FINANCIAL
GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
YEAR ENDED DECEMBER 31, 2007
margin is not, on a material
basis, adversely affected by movements in interest rates. The Bank views this
strategy as a prudent management of interest rate sensitivity, such that net
earnings is not exposed to undue risk presented by changes in interest rates.
In carrying out this part of
its interest rate risk management strategy, the Bank uses interest rate floors
as cash flow hedges. Interest rate floors generally protect the holder from
declines in short-term interest rates by making a payment to the holder when
the underlying interest rate (the index or reference interest rate) falls
below a specified strike rate (the floor rate). Floors are purchased at a premium and
typically have maturities between one and seven years. Cash flows related to floating-rate assets
and liabilities will fluctuate with changes in an underlying rate index. When effectively hedged, the increases or
decreases in cash flows related to the floating rate asset or liability will
generally be offset by changes in cash flows of the derivative instrument
designated as a hedge. This strategy is
referred to as a cash flow hedge.
By using derivative
instruments, the Bank is exposed to credit and market risk. If the counterparty
fails to perform, credit risk is equal to the extent of the fair-value gain in
a derivative. When the fair value of a derivative contract is positive, this
situation generally indicates that the counterparty is obligated to pay the
Bank, and, therefore, creates a repayment risk for the Bank. When the fair value of a derivative contract
is negative, the Bank is obligated to pay the counterparty and, therefore, it
has no repayment risk. The Bank
minimizes the credit risk in derivative instruments by entering into
transactions with high-quality counterparties that are reviewed periodically by
the Bank. From time to time, the Bank
may require the counterparties to pledge securities as collateral to cover the
net exposure.
The Banks derivative
activities are monitored by its asset/liability management committee as part of
that committees oversight of the asset/liability and treasury functions. The Companys asset/liability committee is
responsible for implementing various edging strategies that are developed
through its analysis of data from financial simulation models and other
internal and industry sources. The resulting hedging strategies are then incorporated
into the overall interest-rate risk management process.
The Company recognizes the
fair value of derivatives as assets or liabilities in the financial
statements. The accounting for the
changes in the fair value of a derivative depends on the intended use of the
derivative instrument at inception. The
change in fair value of instruments used as fair value hedges is accounted for
in the net earnings of the period simultaneous with accounting for the fair
value change of the item being hedged.
The change in fair value of the effective portion of cash flow hedges is
accounted for in other comprehensive income rather than net earnings. The change in fair value of derivative
instruments that are not intended as a hedge is accounted for in the net earnings
of the period of the change.
The Company did not have any
derivative instruments at December 31, 2007. At December 31, 2006, approximately 59%
of the Companys loans contained contractual floors, and the Company had cash
flow hedges with a notional amount of approximately $20 million for the
purpose of added protection to the Company in the event of declining interest
rates. The Company recorded a liability
of approximately $114 thousand for the fair value of these instruments at December 31,
2006. No hedge ineffectiveness from cash
flow hedges was recognized in the statement of earnings. All components of each derivatives gain or
loss are included in the assessment of hedge effectiveness.
7.
Loans
and Interest Income
- Loans are stated at the amount
of unpaid principal, reduced by net deferred loan fees, unearned discount and a
valuation allowance for possible loan losses.
Interest on simple interest installment loans and other loans is
calculated by using the simple interest method on daily balances of the
principal amount outstanding. The accrual of interest on impaired loans is
discontinued when, in managements opinion, the borrower may be unable to meet
payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized
only to the extent cash payments are received.
60
ATLANTIC SOUTHERN FINANCIAL
GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
YEAR ENDED DECEMBER 31, 2007
Loan
origination fees, net of direct loan origination costs, are deferred and
recognized as an adjustment of the yield over the life of the loans using a
method which approximates a level yield.
A loan is considered
impaired when, based on current information and events, it is probable that the
Bank will be unable to collect the scheduled payments of principal or interest
when due according to the contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value and the
probability of collecting scheduled principal and interest payments when
due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of
payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrowers
prior payment record and the amount of the shortfall in relation to the
principal and interest owed. Impairment
is measured on a loan by loan basis by either the present value of expected
future cash flows discounted at the loans effective interest rate, the loans
obtainable market price, or the fair value of the collateral if the loan is
collateral dependent.
Large groups of smaller
balance homogenous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately
identify individual consumer loans for impairment disclosures.
The Banks policy is to
place loans on non-accrual status when it appears that the collection of
principal and interest in accordance with the terms of the loan is
doubtful. Any loan which becomes 90 days
past due as to principal or interest is automatically placed on
non-accrual. Exceptions are allowed for
90-day past due loans when such loans are well secured and in process of
collection.
8.
Loans
Held For Sale
-
Loans originated and intended for sale in the secondary market are carried at
the lower of aggregate cost or fair value, as determined by aggregate
outstanding commitments from investors or current investor yield requirements.
Net unrealized losses are recognized through a valuation allowance by charges
to income. These loans are sold on a
non-recourse basis.
9.
Allowance
for Loan Losses
- The allowance for loan
losses is available to absorb losses inherent in the credit extension
process. The entire allowance is
available to absorb losses related to the loan portfolio and other extensions
of credit. Credit exposures deemed to be
uncollectible are charged against the allowance for loan losses. Recoveries of previously charged-off amounts
are credited to the allowance for loan losses.
Additions to the allowance for loan losses are made by charges to the
provision for loan losses.
The loan portfolio is
reviewed periodically to evaluate outstanding loans and to measure the
performance of the portfolio and the adequacy of the allowance for loan
losses. This analysis includes a review
of delinquency trends, actual losses, and internal credit ratings. Managements judgment as to the adequacy of
the allowance is based upon a number of assumptions about future events which
it believes to be reasonable. The
allowance for loan losses is maintained at a level which, in managements
judgment, is adequate to absorb credit losses inherent in the loan
portfolio. The amount of the allowance
is based on managements evaluation of the collectibility of the loan
portfolio, including the nature of the portfolio, credit concentrations, trends
in historical loss experience, specific impaired loans, economic conditions and
other risks inherent in the portfolio.
Allowances for impaired loans are generally determined based on
collateral values or the present value of estimated cash flows. While management uses available information
to recognize losses on loans, reductions in the carrying amounts of loans may
be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an
integral part of their examination process, periodically review the estimated
losses on loans. Such agencies may
require the Bank to recognize losses based on their judgments about information
available to them at the time of their examination. Because of these factors, it is reasonably
possible that the estimated losses on loans may change materially in the near
term. However, the amount of the change
that is reasonably possible cannot be estimated.
61
ATLANTIC SOUTHERN FINANCIAL
GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
YEAR ENDED
DECEMBER 31, 2007
The
allowance is composed of general allocations and specific allocations. General allocations are determined by
applying loss percentages to the portfolio that are based on historical loss
experience and managements evaluation and risk grading of the commercial
loan portfolio. Additionally, the
general economic and business conditions affecting key lending areas, credit
quality trends, collateral values, loan volumes and concentrations, seasoning
of the loan portfolio, the findings of internal credit reviews and results from
external bank regulatory examinations are included in this evaluation. The need for specific allocations is
evaluated on commercial loans that are classified in the Watch, Substandard or
Doubtful risk grades, when necessary.
The specific allocations are determined on a loan-by-loan basis based on
managements evaluation of the Companys exposure for each credit, given the
current payment status of the loan and the value of any underlying
collateral. Loans for which specific
allocations are provided are excluded from the calculation of general allocations.
Management
prepares a monthly analysis of the allowance for loan losses and material
deficiencies are adjusted by increasing the provision for loan losses. Management uses an outsourced independent
loan review company on a quarterly basis to corroborate and challenge the
internal loan grading system and provide additional analysis in determining the
adequacy of the allowance for loan losses.
Management rotates the loan review company on a periodic basis to ensure
objectivity in the loan review process.
In
addition, an internal loan review process is conducted by a committee comprised
of members of senior management. All new
loans are risk rated under loan policy guidelines. The internal loan review committee meets
quarterly to evaluate the composite risk ratings. Risk ratings may be changed if it appears
that new loans were not assigned the proper initial grade, or, if on existing
loans, credit conditions have improved or worsened.
10.
Other
Real Estate
- Other real
estate includes real estate acquired through foreclosure. Other real estate is carried at the lower of
its recorded amount at the date of foreclosure or estimated fair value less
costs to sell. Any excess of carrying
value of the related loan over the fair value of the real estate at date of
foreclosure is charged against the allowance for loan losses. Any expense incurred in connection with
holding such real estate or resulting from any writedowns subsequent to
foreclosure is included in other noninterest expense. At December 31, 2007, the amount of
other real estate was $758,787. The Bank
had no other real estate at December 31, 2006.
11.
Premises
and Equipment
- Premises and equipment are stated at cost,
less accumulated depreciation.
Depreciation is charged to operating expenses over the estimated useful
lives of the assets and is computed on the straight-line method. Costs of major additions and improvements,
including interest are capitalized.
Expenditures for maintenance and repairs are charged to operations as
incurred. Gains or losses from
disposition of property are reflected in operations and the asset account is
reduced.
12.
Goodwill
and Other Intangible Assets
Goodwill represents the
excess of the purchase price for bank acquisitions over the fair value of the
net assets acquired. Goodwill is tested
annually for impairment unless events or circumstances arise that would
indicate the need for more frequent testing.
The impairment tests are performed at the reporting level which in the
Banks case is effectively the entire entity.
There were no goodwill impairment losses in the financial statements.
Also in
connection with business combinations involving banks, the Company recorded a
core deposit intangible representing the value of the acquired core deposit
base. Core deposit intangibles are
amortized over the estimated useful life of the deposit base, generally on a
straight-line basis not exceeding ten years.
The remaining useful lives of core deposit intangibles are evaluated
periodically to determine whether events and circumstances warrant a revision
to the remaining period of amortization.
62
ATLANTIC SOUTHERN FINANCIAL
GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
YEAR ENDED DECEMBER 31, 2007
13.
Income Taxes
The Company
accounts for income taxes under Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, which requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
The Company adopted FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an Interpretation of FASB
Statement 109
(FIN 48), as of January 1, 2007. A tax position is recognized as a benefit
only if it is more likely than not that the tax position would be sustained
in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount
of tax benefit that is greater than 50 percent likely of being realized on
examination. For tax positions not
meeting the more likely than not test, no tax benefit is recorded. The adoption had no affect on the Companys
financial statements.
The Company recognizes interest and/or penalties related to income tax
matters in income tax expense.
14.
Use
of Estimates
- The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates.
The determination of the adequacy of the
allowance for loan losses is based on estimates that are particularly
susceptible to significant changes in the economic environment and market
conditions. In connection with the
determination of the estimated losses on loans, management obtains independent
appraisals for significant collateral.
The Companys loans are generally secured by specific items of
collateral including real property, consumer assets and business assets. Although the Company has a diversified loan
portfolio, a substantial portion of its debtors ability to honor their
contracts is dependent on local economic conditions.
15.
Share-Based
Payments
The Company sponsored a stock-based compensation
plan which is described more fully in Note M.
The Company adopted Statement
of Financial Accounting Standard (SFAS) No. 123 (R) on January 1,
2006. SFAS No. 123 (R),
Share-Based Payment
, requires all share-based payments,
including grants of employee stock options, to be recognized in the financial
statements based on their fair values.
Pro forma disclosure is no longer an alternative to financial statement
recognition. SFAS No. 123 (R) became effective for periods beginning
after December 15, 2005. The
Company will recognize compensation expense for all awards granted after the
effective date. The Company granted
8,000 options during 2007. For awards
before 2006, no future compensation expense will be recognized based on the
Companys selection of the Minimum Value method to measure the fair value of
the previous grants.
Prior to the adoption of SFAS
123 (R), the Company followed the provisions outlined in SFAS No. 123,
Accounting for Stock-Based Compensation
, which encouraged
all entities to adopt a fair value based method of accounting for employee stock
compensation plans, whereby compensation cost is measured at the grant date
based on the value of the award and is recognized over the service period,
which is usually the vesting period.
However, SFAS No. 123 also allowed an entity to continue to measure
compensation expense for those plans using the intrinsic value based method of
accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, whereby compensation cost is the excess, if
any, of the quoted market price of the stock at the grant date (or other
measurement date) over the amount an employee must pay to acquire the
stock. Stock options issued under the
Companys stock
63
ATLANTIC SOUTHERN FINANCIAL
GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
YEAR ENDED DECEMBER 31, 2007
option plan had no intrinsic
value at the grant date, and under Opinion No. 25 no compensation expense
was recognized.
The Company recognized $23,936 of stock-based
employee compensation expense during 2007 associated with its stock option
grants. The Company is recognizing the
compensation expense for stock option grants with graded vesting schedules on a
straight-line basis over the requisite service period of the award as required
by SFAS No. 123 (R). As of December 31,
2007, there was $95,744 of unrecognized compensation cost related to stock
option grants. The cost is expected to
be recognized over the vesting period of approximately five years.
The weighted average
grant-date fair value of each option granted during 2007 was $14.96. The fair value of each option is estimated on
the date of grant using the Black-Scholes Model. The following weighted average assumptions
were used for grants in 2007:
Dividend yield
|
|
0.00
|
%
|
Expected volatility
|
|
21.58
|
%
|
Risk-free interest rate
|
|
4.75
|
%
|
Expected term
|
|
7.5
years
|
|
16.
Earnings Per Common Share
Basic
earnings per share represents income allocable to common shareholders divided
by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share
reflect additional common shares that would have been outstanding if dilutive
potential common shares had been issued.
Potential common shares that may be issued by the Company relate solely
to outstanding stock options and warrants, and are determined using the
treasury stock method. Earnings per common share has been computed based on the
following:
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Weighted average number of
common shares outstanding
|
|
4,107,229
|
|
3,031,996
|
|
2,604,052
|
|
Effect of dilutive
options, warrants, etc.
|
|
326,718
|
|
335,069
|
|
307,878
|
|
Weighted average number of common shares outstanding used to
calculate diluted earnings per common share
|
|
4,433,947
|
|
3,367,065
|
|
2,911,930
|
|
17.
Comprehensive
Income
Other comprehensive income for the Company
consists of items recorded directly in equity under SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities
and the net of tax effect of changes in the fair value of cash flow hedges.
18.
Recent Accounting Pronouncements
-
In February 2007, the
Financial Accounting Standards Board (FASB) issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities
. SFAS No. 159 permits entities to choose
to measure many financial instruments and certain other items at fair
value. The objective is to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. The statement is expected to
expand the use of fair value measurement, which is consistent with FASBs
long-term measurement objectives for accounting for financial instruments.
The statement is effective for financial statements issued for fiscal
years beginning after November 15, 2007; however, it includes an early
adoption provision allowing entities to adopt within 120 days of their most
recent fiscal year-end. The Company does
not intend to implement the provisions of SFAS No. 159 upon the adoption
date.
64
ATLANTIC
SOUTHERN FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2007
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
. SFAS No. 157
does not require any new fair value measurements, but rather, it provides
enhanced guidance to other pronouncements that require or permit assets or
liabilities to be measured at fair value. However, the application of this
statement may change how fair value is determined. The statement is effective
for financial statements issued for fiscal years beginning after November 15,
2007 and interim periods within those fiscal years.
The Company does
not anticipate the new accounting principle to have a material effect on its
financial position or results of operation.
In September 2006,
the Emerging Issues Task Force (EITF) issued EITF Issue No. 06-4,
Accounting for Deferred Compensation and Postretirement Benefit Aspects
of Endorsement Split-Dollar Insurance Arrangements
. EITF 06-4
requires the accrual of the post-retirement benefit over the service period. EITF
06-4 is effective for fiscal years beginning after December 31, 2007. The
Company does not anticipate the new accounting principle to have a material
effect on its financial position or results of operation.
In December 2007,
FASB revised Statement No. 141 (revised 2007),
Business
Combinations
. Under SFAS No. 141, organizations utilized the
announcement date as the measurement date for the purchase price of the
acquired entity. SFAS No. 141(R) requires measurement at the date the
acquirer obtains control of the acquiree, generally referred to as the
acquisition date. SFAS No. 141(R) will have a significant impact on
the accounting for transaction costs, restructuring costs as well the initial
recognition of contingent assets and liabilities assumed during a business
combination. Under SFAS No. 141(R), adjustments to the acquired entitys
deferred tax assets and uncertain tax position balances occurring outside the
measurement period will be recorded as a component of the income tax expense,
rather than goodwill. SFAS No. 141(R) is effective for business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. Because
the provisions of SFAS No. 141(R) are applied prospectively, the
impact to the Company cannot be determined until the transactions occur.
B.
MERGERS AND ACQUISITIONS
On November 30, 2007,
the Company consummated an agreement with CenterState Banks of Florida, Inc.
(CSB) and its wholly owned subsidiary CenterState Bank Mid Florida (Target)
in which CenterState Bank West Florida, National Association (West Florida)
purchased all the assets and assumed the liabilities of Target, except for
Targets main office and a minimum amount of capital and deposits required by
banking laws. Target was then acquired by the Company. Under the
terms of the agreement, the Company paid CSB in immediately available funds, an
amount equal to the sum of $1,000,000, less the $100,000 deposit CSB received
from the Company when the agreement was executed, plus an amount equal to the
aggregate capital remaining at closing. Immediately after consummation of
the acquisition of Target by the Company, the Company sold the Targets main
office to West Florida. The transaction facilitated the Companys expansion
into Florida by opening a full-service branch location in Jacksonville,
Florida. The total consideration given to acquire the Florida charter was
$1,093,878, including acquisition costs, and is included in goodwill and other
intangible assets on the balance sheet.
On January 31, 2007, the Company consummated an agreement to
acquire all of the outstanding shares of First Community Bank for $18.4 million
in Atlantic Southern common stock including certain acquisition costs totaling
$235,034. Under the terms of the merger agreement, the Company issued, and
shareholders of First Community Bank were entitled to receive their pro rata
portion of 542,033 shares of Atlantic Southern common stock. First Community
Bank was a community bank headquartered in Roberta, Georgia. First Community
Bank had total assets of $69.3 million, including total loans of $50 million
and total investments of $11.9 million. Additionally, First Community Bank had
$58.6 million in deposits. With the acquisition of First Community Bank, the
Company was able to expand their presence in the middle Georgia area. First
Community Bank operated three full service banking offices in Crawford, Bibb
and Peach counties of Georgia. The Company accounted for the transaction using
the purchase method and accordingly, the purchase price was allocated to
65
ATLANTIC
SOUTHERN FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2007
assets and liabilities acquired based upon their fair values at the date
of the acquisition. The excess of the purchase price over the fair value of the
net assets acquired (goodwill) was approximately $9.9 million, none of which
will be deductible for income tax purposes. Operations of First Community Bank
are included in the consolidated statements of earnings since its acquisition.
In conjunction with the acquisition, assets were acquired and
liabilities were assumed as follows:
Fair value of assets
acquired
|
|
$
|
80,842,981
|
|
Fair value of liabilities
assumed
|
|
62,452,356
|
|
|
|
|
|
Cash and common stock
consideration to be given
|
|
18,390,625
|
|
Cash paid for fractional
shares
|
|
10,320
|
|
Stock issued to First Community
Bank shareholders
|
|
$
|
18,380,305
|
|
On December 15, 2006, the Company consummated an agreement to
acquire all of the outstanding shares of Sapelo Bancshares, Inc. (Sapelo)
for $15.3 million with a combination of stock and cash plus certain acquisition
costs totaling $406,828. Under the terms of the merger agreement, the Company
issued, and shareholders of Sapelo were entitled to receive their pro rata
portion of $6,239,972 and 305,695 shares of Atlantic Southern common stock. Sapelo
was a bank holding company with one subsidiary, Sapelo National Bank, based in
Darien, Georgia. Sapelo had total assets of $77.7 million, including total
loans of $52 million and total investments of $1.8 million. Additionally,
Sapelo had $66.7 million in deposits. The Company accounted for the transaction
using the purchase method and accordingly, the purchase price was allocated to
assets and liabilities acquired based upon their fair values at the date of the
acquisition. The excess of the purchase price over the fair value of the net
assets acquired (goodwill) was approximately $8.5 million, none of which will
be deductible for income tax purposes. Operations of Sapelo are included in the
consolidated statements of earnings since its acquisition.
In conjunction with the acquisition, assets were acquired and
liabilities were assumed as follows:
Fair value of assets acquired
|
|
$
|
89,482,043
|
|
Fair value of liabilities assumed
|
|
73,752,570
|
|
|
|
|
|
Cash and common stock consideration to be given
|
|
15,729,473
|
|
Acquisition cost paid
|
|
406,828
|
|
Cash and stock issued to Sapelo
Bancshares, Inc. shareholders
|
|
$
|
15,322,645
|
|
C.
RESERVE REQUIREMENTS
At December 31, 2007 and 2006, the Federal Reserve Bank required
that the Bank maintain reserve balances of $422,000 and $3,584,000,
respectively.
D.
INVESTMENT SECURITIES
Debt and equity securities have been classified in the balance sheet
according to managements intent. All investments as of December 31, 2007
and 2006 are classified as available for sale. The following table reflects the
amortized cost and estimated fair values of the investments:
66
ATLANTIC
SOUTHERN FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2007
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Estimated
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Fair Value
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
Non-mortgage backed debt
securities of :
|
|
|
|
|
|
|
|
|
|
U.S. Treasury obligations
|
|
$
|
249,072
|
|
$
|
4,600
|
|
$
|
|
|
$
|
253,672
|
|
U.S. government sponsored enterprises
|
|
27,106,152
|
|
400,155
|
|
(12,798
|
)
|
27,493,509
|
|
State and political subdivisions
|
|
21,442,952
|
|
109,076
|
|
(206,500
|
)
|
21,345,528
|
|
Other investments
|
|
250,000
|
|
|
|
|
|
250,000
|
|
Total non-mortgage backed debt securities
|
|
49,048,176
|
|
513,831
|
|
(219,298
|
)
|
49,342,709
|
|
Mortgage backed securities
|
|
23,627,871
|
|
293,012
|
|
(76,422
|
)
|
23,844,461
|
|
Equity Securities
|
|
1,250,009
|
|
17,520
|
|
(67,599
|
)
|
1,199,930
|
|
Total
|
|
$
|
73,926,056
|
|
$
|
824,363
|
|
$
|
(363,319
|
)
|
$
|
74,387,100
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
Non-mortgage backed debt
securities of :
|
|
|
|
|
|
|
|
|
|
U.S. government sponsored enterprises
|
|
$
|
25,476,094
|
|
$
|
37,409
|
|
$
|
(273,101
|
)
|
$
|
25,240,402
|
|
State and political subdivisions
|
|
13,792,240
|
|
49,745
|
|
(189,043
|
)
|
13,652,942
|
|
Other investments
|
|
250,000
|
|
|
|
|
|
250,000
|
|
Total non-mortgage backed debt securities
|
|
39,518,334
|
|
87,154
|
|
(462,144
|
)
|
39,143,344
|
|
Mortgage backed securities
|
|
18,699,413
|
|
74,708
|
|
(321,463
|
)
|
18,452,658
|
|
Total
|
|
$
|
58,217,747
|
|
$
|
161,862
|
|
$
|
(783,607
|
)
|
$
|
57,596,002
|
|
The amortized cost and fair values of pledged securities for public deposits
were as follows:
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
Amortized cost
|
|
$
|
14,486,587
|
|
$
|
6,024,278
|
|
Fair value
|
|
$
|
14,412,422
|
|
$
|
5,903,941
|
|
The amortized cost and estimated fair value of debt securities available
for sale at December 31, 2007, by contractual maturity, is shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or repay obligations with or without call or prepayment
penalties.
|
|
|
|
Estimated
|
|
|
|
Amortized Cost
|
|
Fair Value
|
|
Non-mortgage backed
securities:
|
|
|
|
|
|
Due in one year or less
|
|
$
|
8,581,279
|
|
$
|
8,572,748
|
|
Due after one year through five years
|
|
16,626,993
|
|
16,902,608
|
|
Due after five years through ten years
|
|
9,524,959
|
|
9,575,771
|
|
Due after ten years
|
|
14,314,945
|
|
14,291,582
|
|
Total non-mortgage backed securities
|
|
$
|
49,048,176
|
|
$
|
49,342,709
|
|
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.
67
ATLANTIC
SOUTHERN FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2007
Information
pertaining to securities with gross unrealized losses, aggregated by investment
category and length of time that individual securities have been in a
continuous loss position, follows:
|
|
December 31, 2007
|
|
|
|
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
|
|
$
|
|
|
$
|
|
|
$
|
(12,798
|
)
|
$
|
8,469,131
|
|
State and political subdivisions
|
|
(73,080
|
)
|
3,725,567
|
|
(133,420
|
)
|
6,339,712
|
|
Total non-mortgage backed debt securities
|
|
(73,080
|
)
|
3,725,567
|
|
(146,218
|
)
|
14,808,843
|
|
Mortgage backed securities
|
|
|
|
|
|
(76,422
|
)
|
3,907,189
|
|
Equity securities
|
|
(67,599
|
)
|
182,410
|
|
|
|
|
|
Total
|
|
$
|
(140,679
|
)
|
$
|
3,907,977
|
|
$
|
(222,640
|
)
|
$
|
18,716,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2006
|
|
|
|
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
|
|
$
|
(23,484
|
)
|
$
|
3,461,954
|
|
$
|
(249,617
|
)
|
$
|
16,202,764
|
|
State and political subdivisions
|
|
(98,913
|
)
|
6,504,829
|
|
(90,130
|
)
|
2,919,307
|
|
Total non-mortgage backed debt securities
|
|
(122,397
|
)
|
9,966,783
|
|
(339,747
|
)
|
19,122,071
|
|
Mortgage backed securities
|
|
(7,804
|
)
|
933,132
|
|
(313,659
|
)
|
8,814,608
|
|
Total
|
|
$
|
(130,201
|
)
|
$
|
10,899,915
|
|
$
|
(653,406
|
)
|
$
|
27,936,679
|
|
Management
evaluates securities for other-than-temporary impairment at least on a
quarterly basis, and more frequently when economic or market concerns warrant
such evaluation. Consideration is given to (1) the length of time and the
extent to which the fair value has been less than cost, (2) the financial
condition and near-term prospects of the issuer, and (3) the intent and
ability of the Company to retain its investment in the issuer for a period of
time sufficient to allow for any anticipated recovery in fair value.
At
December 31, 2007, forty-seven debt securities have unrealized losses with
aggregate depreciation of 0.5% 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 to hold debt securities until maturity,
or for the foreseeable future if classified as available for sale, no declines
are deemed to be other than temporary.
68
ATLANTIC
SOUTHERN FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2007
The
following summarizes securities sales activities for the years ended December 31,
2007, 2006 and 2005:
|
|
2007
|
|
2006
|
|
2005
|
|
Proceeds from sales
|
|
$
|
2,099,269
|
|
$
|
491,415
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Gross gains on sales
|
|
$
|
3,408
|
|
$
|
|
|
$
|
|
|
Gross losses on sales
|
|
(46,088
|
)
|
(9,753
|
)
|
|
|
|
|
|
|
|
|
|
|
Net losses on sales of securities
|
|
$
|
(42,680
|
)
|
$
|
(9,753
|
)
|
$
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
attributable to sales
|
|
$
|
(14,511
|
)
|
$
|
(3,316
|
)
|
$
|
|
|
E.
LOANS
The following is a summary of the loan portfolio by purpose code
categories:
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
Commercial
|
|
$
|
69,078,795
|
|
$
|
54,897,516
|
|
Real estate - commercial
|
|
259,069,607
|
|
192,875,634
|
|
Real estate - construction
|
|
292,151,616
|
|
224,539,546
|
|
Real estate - mortgage
|
|
67,898,171
|
|
54,003,595
|
|
Obligations of political
subdivisions in the U.S.
|
|
289,765
|
|
1,728,047
|
|
Consumer
|
|
8,934,920
|
|
5,381,646
|
|
Total Loans
|
|
697,422,874
|
|
533,425,984
|
|
Less:
|
|
|
|
|
|
Unearned loan fees
|
|
(277,159
|
)
|
(297,282
|
)
|
Allowance for loan losses
|
|
(8,878,795
|
)
|
(7,258,371
|
)
|
Loans, net
|
|
$
|
688,266,920
|
|
$
|
525,870,331
|
|
69
ATLANTIC
SOUTHERN FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2007
F.
ALLOWANCE
FOR LOAN LOSSES
A
summary of changes in the allowance for loan losses of the Bank is as follows:
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Beginning Balance
|
|
$
|
7,258,371
|
|
$
|
4,150,000
|
|
$
|
2,800,000
|
|
Add:
|
|
|
|
|
|
|
|
Provision for possible loan losses
|
|
665,000
|
|
1,670,997
|
|
1,493,050
|
|
Allowance from purchase acquisitions
|
|
1,640,142
|
|
1,600,583
|
|
|
|
Subtotal
|
|
9,563,513
|
|
7,421,580
|
|
4,293,050
|
|
Less:
|
|
|
|
|
|
|
|
Loans charged off
|
|
965,658
|
|
272,494
|
|
150,000
|
|
Recoveries on loans previously charged off
|
|
(280,940
|
)
|
(109,285
|
)
|
(6,950
|
)
|
Net loans charged off
|
|
684,718
|
|
163,209
|
|
143,050
|
|
Balance, end of year
|
|
$
|
8,878,795
|
|
$
|
7,258,371
|
|
$
|
4,150,000
|
|
G.
PREMISES AND EQUIPMENT
The following is a summary of asset classifications and depreciable
lives for the Bank:
|
|
December 31,
|
|
|
|
Useful Lives (Years)
|
|
2007
|
|
2006
|
|
Land
|
|
|
|
$7,231,700
|
|
$5,077,137
|
|
Banking house and
improvements
|
|
8-40
|
|
16,146,510
|
|
7,826,709
|
|
Furniture and fixtures
|
|
5-10
|
|
6,029,955
|
|
3,734,325
|
|
Construction in progress
|
|
|
|
699,900
|
|
1,955,349
|
|
Automobiles
|
|
5
|
|
135,956
|
|
128,556
|
|
Total
|
|
|
|
30,244,021
|
|
18,722,076
|
|
Less - accumulated
depreciation
|
|
|
|
(2,344,645
|
)
|
(1,296,732
|
)
|
Bank premises and equipment, net
|
|
|
|
$27,899,376
|
|
$17,425,344
|
|
Depreciation included in operating expenses amounted to $1,091,928,
$544,564 and $338,701 in 2007, 2006 and 2005, respectively.
70
ATLANTIC
SOUTHERN FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2007
H.
GOODWILL AND OTHER INTANGIBLE ASSETS
A summary of changes in goodwill for the years ended December 31,
2007 and 2006:
|
|
2007
|
|
2006
|
|
Beginning Balance
|
|
$
|
8,493,604
|
|
$
|
|
|
Purchase adjustments
|
|
882
|
|
|
|
Goodwill acquired from
First Community
|
|
9,945,137
|
|
|
|
Goodwill acquired from
Florida bank charter
|
|
1,093,878
|
|
|
|
Goodwill acquired from
Sapelo
|
|
|
|
8,493,604
|
|
Ending Balance
|
|
$
|
19,533,501
|
|
$
|
8,493,604
|
|
The Bank has finite-lived intangible assets capitalized on its balance
sheet in the form of core deposit intangibles.
These intangible assets are amortized over their estimated useful lives
of no more than ten years.
A summary of core deposit intangible assets as of December 31, 2007
and 2006:
|
|
2007
|
|
2006
|
|
Gross carrying amount
|
|
$
|
3,623,161
|
|
$
|
2,106,672
|
|
Less - accumulated
amortization
|
|
349,679
|
|
|
|
Net carrying amount
|
|
$
|
3,273,482
|
|
$
|
2,106,672
|
|
Amortization expense on finite-lived intangible assets was $349,679 in
2007. There was no amortization expense
for these intangibles in 2006. In 2005,
the Bank did not have any finite-lived intangible assets. Amortization expense for each of the years
2008 through 2012 is estimated below:
2008
|
|
$
|
362,316
|
|
2009
|
|
362,316
|
|
2010
|
|
362,316
|
|
2011
|
|
362,316
|
|
2012
|
|
362,316
|
|
I.
DEPOSITS
The
aggregate amount of time deposits exceeding $100,000 at December 31, 2007
and 2006 excluding wholesale time deposits (internet and brokered) was $129,691,632
and $81,211,488, respectively.
The
scheduled maturities of time deposits at December 31, 2007 are as follows:
71
ATLANTIC
SOUTHERN FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2007
2008
|
|
$
|
509,099,189
|
|
2009
|
|
21,415,973
|
|
2010
|
|
6,057,157
|
|
2011
|
|
761,027
|
|
2012
|
|
1,269,550
|
|
Thereafter
|
|
1,716,000
|
|
Total time deposits
|
|
$
|
540,318,896
|
|
The Bank held $283,303,481 and $264,126,830 in wholesale time deposits
(internet and brokered) at December 31, 2007 and 2006, respectively. The daily average balance of these wholesale
deposits totaled $260 million in 2007 as compared to $216 million in 2006. The weighted average rates paid during 2007
and 2006 were 5.24% and 4.46%, respectively.
The weighted average interest rate on the wholesale deposits at December 31,
2007 and 2006 was 4.90% and 4.91%, respectively. The deposits outstanding at December 31,
2007 mature as follows:
2008
|
|
$
|
265,125,702
|
|
2009
|
|
14,303,779
|
|
2010
|
|
2,158,000
|
|
2011
|
|
|
|
2012
|
|
|
|
Thereafter
|
|
1,716,000
|
|
Total wholesale time deposits (internet and brokered)
|
|
$
|
283,303,481
|
|
Brokerage fees that the Bank has paid related to the brokered time
deposits are capitalized and amortized to deposit interest expense over the
term of the deposits using the straight-line method which approximates the
effective yield method. The total amount
of brokerage fees amortized to the interest expense for deposits amounted to
$546,740, $521,002 and $329,343 in 2007, 2006 and 2005, respectively.
J.
BORROWINGS
From time to time, short-term borrowings in the form of Federal funds
purchased are used to meet liquidity needs.
The Banks available Federal fund lines of credit with correspondent
banks and advances outstanding were as follows:
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
Federal funds purchased
lines available
|
|
$
|
25,000,000
|
|
$
|
21,400,000
|
|
Federal funds purchased
outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Bank had advances from the Federal Home Loan
Bank (the FHLB) at December 31, 2007 as follows:
72
ATLANTIC
SOUTHERN FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2007
Interest Rate
|
|
Due Date
|
|
Outstanding
|
|
Three month Libor plus
fifty-two basis points, current rate 3.75%
|
|
July 7,
2008
|
|
$
|
6,000,000
|
|
Daily Rate, current rate
4.40%
|
|
June 30,
2008
|
|
1,000,000
|
|
Three month Libor, current
rate 4.93%
|
|
February 20,
2008
|
|
5,200,000
|
|
Three month Libor, current
rate 5.13%
|
|
January 23,
2008
|
|
6,000,000
|
|
Fixed Rate at 5.08%
|
|
March 3,
2008
|
|
6,000,000
|
|
Three month Libor, current
rate 5.32%
|
|
April 21,
2008
|
|
3,000,000
|
|
Fixed Rate at 4.05%
|
|
December 18,
2009
|
|
5,000,000
|
|
Fixed Rate at 4.00%
|
|
November 27,
2009
|
|
6,300,000
|
|
Fixed Rate at 5.68%
|
|
May 24,
2013
|
|
1,000,000
|
|
Fixed Rate at 5.69%
|
|
June 9,
2016
|
|
1,000,000
|
|
Total
|
|
|
|
$
|
40,500,000
|
|
The Bank had advances from the FHLB at December 31,
2006 as follows:
Interest Rate
|
|
Due Date
|
|
Outstanding
|
|
Three month Libor plus
fifty-two basis points, current rate 3.52%
|
|
July 7,
2008
|
|
$
|
6,000,000
|
|
Three month Libor plus
eight basis points, current rate 4.58%
|
|
June 18,
2007
|
|
5,000,000
|
|
Daily Rate, current rate
5.50%
|
|
May 18,
2007
|
|
5,200,000
|
|
Prime Based Advance,
current rate 5.45%
|
|
April 20,
2007
|
|
6,000,000
|
|
Fixed Rate at 5.37%
|
|
February 28,
2007
|
|
6,000,000
|
|
Three month Libor, current
rate 5.51%
|
|
February 1,
2007
|
|
1,000,000
|
|
Fixed Rate at 4.07%
|
|
October 18,
2007
|
|
500,000
|
|
Fixed Rate at 5.68%
|
|
May 24,
2013
|
|
1,000,000
|
|
Fixed Rate at 5.69%
|
|
June 9,
2016
|
|
1,000,000
|
|
Total
|
|
|
|
$
|
31,700,000
|
|
Stock in the FHLB with a carrying value of
$3,153,000 at December 31, 2007 and a blanket lien on residential,
multifamily and commercial loans with a carrying value of approximately
$72,750,000 collateralize the current advances. The Bank is required to
maintain a minimum investment in FHLB stock of the lesser of 0.2% of total
assets or $25,000,000, plus 4.5% of total advances while the advance agreement
is in effect.
K.
JUNIOR SUBORDINATED
DEBENTURES
On April 28, 2005, New Southern Statutory
Trust I (NST), a wholly owned subsidiary of the Company, closed a pooled
private offering of 10,000 Trust Preferred Securities with a liquidation amount
of $1,000 per security. The proceeds of the offering were loaned to the Company
in exchange for junior subordinated debentures with terms similar to the Trust
Preferred Securities. The sole assets of NST are the junior subordinated
debentures of the Company and payments thereunder. The junior subordinated
debentures and the back-up obligations, in the aggregate, constitute a full and
unconditional guarantee by the Company of the obligations of NST under the
Trust Preferred Securities. Distributions on the Trust Preferred Securities are
payable semi-annually at the annual rate of three month LIBOR plus 205 basis
points and are included in interest expense in the consolidated financial
statements. These securities are considered Tier 1 capital (with certain
limitations applicable) under current regulatory guidelines. As of December 31,
2007 and 2006, the outstanding principal balance of the junior subordinated
debentures was $10,310,000.
73
ATLANTIC
SOUTHERN FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2007
The junior subordinated debentures are subject to
mandatory redemption, in whole or in part, upon repayment of the Trust
Preferred Securities at maturity or their earlier redemption at the liquidation
amount. Subject to the Company having received prior approval of the Federal
Reserve, if then required, the Trust Preferred Securities are redeemable prior
to the maturity date of June 15, 2035 at the option of the Company on or
after March 2009 at par, on or after June, 2005 at a premium, or upon the
occurrence of specific events defined within the trust indenture. The Company
has the option to defer distributions on the Trust Preferred Securities from
time to time for a period not to exceed 20 consecutive quarterly periods.
In accordance with FASB Interpretation No. 46,
New Southern Statutory Trust I is not consolidated with the Company.
Accordingly, the Company does not report the securities issued by New Southern
Statutory Trust I as liabilities, and instead reports as liabilities the junior
subordinated debentures issued by the Company and held by New Southern
Statutory Trust I, as these are no longer eliminated in consolidation. The
Trust Preferred Securities are recorded as junior subordinated debentures on
the balance sheets, and subject to certain limitations qualify for Tier 1
capital for regulatory capital purposes.
L.
INCOME TAXES
The provision for income taxes consists of the following:
|
|
Years Ended December 31
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Current tax expense
|
|
$
|
4,318,598
|
|
$
|
3,330,711
|
|
$
|
2,630,263
|
|
Deferred tax benefit
|
|
(171,916
|
)
|
(480,991
|
)
|
(519,146
|
)
|
Provision for income taxes
|
|
$
|
4,146,682
|
|
$
|
2,849,720
|
|
$
|
2,111,117
|
|
The reasons for the difference between the actual tax expense and tax
computed at the federal income tax rate (35% in 2007, 34% in 2006 and 2005) are
as follows:
|
|
Years Ended December 31
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Tax on pretax income at
statutory rate
|
|
$
|
4,161,695
|
|
$
|
2,996,708
|
|
$
|
2,038,734
|
|
State income taxes, net of
federal benefit
|
|
327,750
|
|
277,850
|
|
210,156
|
|
Income tax credits
|
|
|
|
(160,799
|
)
|
|
|
Non-deductible expenses
|
|
60,285
|
|
52,809
|
|
24,933
|
|
Tax-exempt interest income
|
|
(254,433
|
)
|
(88,098
|
)
|
(50,581
|
)
|
Life insurance income
|
|
(65,164
|
)
|
(58,570
|
)
|
(35,918
|
)
|
Other
|
|
(83,451
|
)
|
(170,180
|
)
|
(76,207
|
)
|
Total
|
|
$
|
4,146,682
|
|
$
|
2,849,720
|
|
$
|
2,111,117
|
|
74
ATLANTIC
SOUTHERN FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2007
The sources and tax effects of temporary differences that give rise to
significant portions of deferred income tax assets (liabilities) are as
follows:
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Deferred Income Tax
Assets:
|
|
|
|
|
|
|
|
Unrealized losses on securities available for sale
|
|
$
|
|
|
$
|
250,311
|
|
$
|
298,496
|
|
Allowance for loan losses
|
|
3,289,991
|
|
2,692,919
|
|
1,462,592
|
|
Organizational costs
|
|
|
|
|
|
14,046
|
|
Deferred Compensation
|
|
254,099
|
|
107,937
|
|
|
|
Other
|
|
|
|
8,298
|
|
|
|
Total deferred tax assets
|
|
3,544,090
|
|
3,059,465
|
|
1,775,134
|
|
Deferred Income Tax
Liabilities:
|
|
|
|
|
|
|
|
Bank premises and equipment
|
|
(1,540,125
|
)
|
(1,270,874
|
)
|
(335,131
|
)
|
Core deposit intangible
|
|
(1,246,244
|
)
|
(800,535
|
)
|
|
|
Unrealized gains on securities available for sale
|
|
(157,366
|
)
|
|
|
|
|
Other
|
|
(26,750
|
)
|
|
|
|
|
Total deferred tax liabilities
|
|
(2,970,485
|
)
|
(2,071,409
|
)
|
(335,131
|
)
|
Net deferred tax asset
|
|
$
|
573,605
|
|
$
|
988,056
|
|
$
|
1,440,003
|
|
M.
EMPLOYEE BENEFIT PLANS
Defined
Contribution Plan
- The Bank has a 401(k)-plan covering substantially all of its
employees meeting age and length-of-service requirements. Matching contributions to the plan are at the
discretion of the Board of Directors.
The Companys matching contributions related to the plan totaled
approximately $151,000, $94,000 and $66,000 in 2007, 2006 and 2005,
respectively.
Officer and Organizer Stock Option Plan
The Company
has a stock incentive plan which provides incentive stock options of up to
180,000 shares to be made available to officers of the Company. Subject to vesting requirements, the stock
options are exercisable beginning December 10, 2001 and ending on the
tenth anniversary of the grant date, subject to continued employment of the
officers. No option granted under the
plan may be exercised more than ten years after the date on which the option is
granted.
In addition, the Company granted stock warrants to its organizers to
purchase an aggregate of 324,000 shares of the Companys common stock. The warrants were offered to the organizers
to encourage their substantial long-term investment in the Company. The
organizers rights under the warrants vest in annual one-third increments over
a period of three years, beginning on the first anniversary of the date the
Company first issued its common stock and will be exercisable after the vesting
date at an exercise price of $6.67 per share.
As of December 31, 2007, all of the warrants were fully
vested. The warrants will expire ten
years after they were issued. The
organizer warrants are not transferable.
75
ATLANTIC SOUTHERN
FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31,
2007
A
summary of the status of the Companys stock option plan is presented below:
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
Aggregate
|
|
|
|
Average
|
|
Aggregate
|
|
|
|
Average
|
|
Aggregate
|
|
|
|
|
|
Exercise
|
|
Intrinsic
|
|
|
|
Exercise
|
|
Intrinsic
|
|
|
|
Exercise
|
|
Intrinsic
|
|
|
|
Shares
|
|
Price
|
|
Value
|
|
Shares
|
|
Price
|
|
Value
|
|
Shares
|
|
Price
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of year
|
|
105,000
|
|
$
|
7.40
|
|
|
|
105,000
|
|
$
|
7.40
|
|
|
|
105,000
|
|
$
|
7.40
|
|
|
|
Granted
|
|
8,000
|
|
33.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
113,000
|
|
$
|
9.24
|
|
$
|
1,217,543
|
|
105,000
|
|
$
|
7.40
|
|
$
|
2,740,043
|
|
105,000
|
|
$
|
7.40
|
|
$
|
1,768,793
|
|
Options exercisable at year-end
|
|
100,170
|
|
$
|
7.37
|
|
$
|
1,165,185
|
|
89,286
|
|
$
|
7.30
|
|
$
|
2,339,615
|
|
69,252
|
|
$
|
7.28
|
|
$
|
1,175,504
|
|
Salary Continuation Plan
-
During the
fourth quarter of 2005, the Bank established a Salary Continuation Agreement
for its President and certain senior officers.
Each agreement with the senior officers has different requirements in
regards to service requirements and how the benefit payable is determined. Each senior officer, except the Chief Banking
Officer, will be entitled to annual benefits of 30% to 40% of the final annual
base salary that will be paid out in equal monthly installments upon reaching
the retirement age ranging from the age of 50 to 65. For the Chief Banking Officer, he will be
entitled to an annual benefit of $36,000 for twelve years upon his retirement
after reaching age 67. As of December 31,
2007, the present value of the accumulated benefit, using the Accounting
Principles Board No. 12 method and a 7% discount rate, is $438,739. Under this plan, the Bank expensed
approximately $234,484, $161,698 and $22,340 for 2007, 2006 and 2005,
respectively.
The Bank is the owner and beneficiary of life insurance policies
purchased during the second quarter of 2005 on the lives of the President and
certain key officers. The Bank intends
to use these policies to fund the Salary Continuation Plan described
above. The carrying value of the
policies was $4,442,044 at December 31, 2007 as compared to $4,264,395 at December 31,
2006. The Bank accrued income of $177,649, $163,732 and $100,663 for 2007, 2006
and 2005, respectively, for the increase in the cash surrender value of these
policies.
N.
LIMITATION
ON DIVIDENDS
The Board of Directors of any state-chartered bank in Georgia may
declare and pay cash dividends on its outstanding capital stock without any
request for approval from the Banks regulatory agency if the following
conditions are met:
·
Total classified
assets at the most recent examination of the Bank do not exceed eighty (80)
percent of equity capital.
·
The aggregate amount of dividends declared in
the calendar year does not exceed fifty (50) percent of the prior years net
earnings.
·
The ratio of
equity capital to adjusted total assets shall not be less than six (6) percent.
As of January 1, 2008, the amount available for payment of
dividends by the Bank to the Company without regulatory consent was
approximately $4,170,000, subject to maintaining the minimum capital
requirements by the Bank. As a result of
this restriction, at December 31, 2007, approximately $92,654,408 of the
Companys
76
ATLANTIC SOUTHERN
FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31,
2007
investment in the Bank is restricted as to dividend payments from the
Bank to the Company. Dividends from the
Bank are the primary source of funds for the Company.
O.
COMMITMENTS
The Bank is a party to financial instruments
with off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. Those instruments involve, to
varying degrees, elements of credit risk and interest rate risk in excess of
the amount recognized in the balance sheet.
The contract or notional amounts of those instruments reflect the extent
of involvement the Bank has in those particular financial instruments.
The Banks exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the
contractual notional
amount of those
instruments. The Bank uses the same
credit policies in making commitments and conditional obligations as it does
for on-balance-sheet instruments.
The Bank does require collateral or other security to support financial
instruments with credit risk.
|
|
2007
|
|
2006
|
|
Financial instruments
whose contract amounts represent credit risk:
|
|
|
|
|
|
Commitments to extend credit
|
|
$
|
88,792,000
|
|
$
|
83,927,000
|
|
Standby letters of credit
|
|
4,475,000
|
|
2,584,000
|
|
Total
|
|
$
|
93,267,000
|
|
$
|
86,511,000
|
|
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract. Commitments generally have fixed expiration
dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.
The Bank evaluates each customers creditworthiness on a case-by-case
basis. The amount of collateral obtained
if deemed necessary by the Bank upon extension of credit is based on managements
credit evaluation. Collateral held
varies but may include accounts receivable, inventory, property, plant and
equipment and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to
support public and private borrowing arrangements, including commercial paper,
bond financing and similar transactions.
All letters of credit are due within one year of the original commitment
date. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loan facilities to customers.
P.
RELATED PARTY
TRANSACTIONS
In
the ordinary course of business, the Bank has direct and indirect loans
outstanding to or for the benefit of certain executive officers and
directors. These loans were made on
substantially the same terms as those prevailing, at the time made, for
comparable loans to other persons and did not involve more than the normal risk
of collectibility or present other unfavorable features.
The
following is a summary of activity during 2007 with respect to such loans to
these individuals:
77
ATLANTIC SOUTHERN
FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31,
2007
Balances at Beginning of
Year
|
|
$
|
14,347,020
|
|
New loans
|
|
21,234,357
|
|
Repayments
|
|
(8,249,893
|
)
|
Balances at End of Year
|
|
$
|
27,331,484
|
|
The
Bank also had deposits from these related parties of approximately $8,252,000
at December 31, 2007 and approximately $5,544,000 at December 31,
2006.
One
of the directors of the Company owns a construction company that built one
branch and finished remodeling another branch in 2007. The Bank paid approximately $1.5 million and
$864 thousand in 2007 and 2006 respectively for both the construction of a new
branch and the remodeling of another branch.
The director was not a related party of the Company during 2005. In the opinion of management, all of the
transactions entered into by the Bank with related parties do not present
unfavorable features to the Company or its subsidiary.
Q.
DISCLOSURES
RELATING TO STATEMENTS OF CASH FLOWS
Interest and Income Taxes
Cash paid for
interest and income taxes were as follows:
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Interest on deposits and
borrowings
|
|
$
|
29,488,784
|
|
$
|
17,419,304
|
|
$
|
7,971,963
|
|
Income taxes, net
|
|
$
|
4,491,000
|
|
$
|
3,758,000
|
|
$
|
2,657,000
|
|
Other Non-Cash Transactions
Other non-cash
transactions relating to investing and financing activities were as follows:
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Changes in unrealized
gain/loss on investments, net of tax effect
|
|
$
|
714,643
|
|
$
|
127,720
|
|
$
|
(422,575
|
)
|
Changes in fair value of derivative for cash flow hedges, net of tax
effect
|
|
$
|
75,547
|
|
$
|
(34,187
|
)
|
$
|
(41,360
|
)
|
Transfer of loans to other
real estate and other assets
|
|
$
|
1,676,776
|
|
$
|
|
|
$
|
|
|
The non-cash investing activities associated with the acquisition of
Sapelo and First Community Bank are presented in Note B.
R.
CREDIT
RISK CONCENTRATION
The Bank grants residential and commercial real estate loans and
extensions of credit to individuals and a variety of businesses and
corporations primarily located in its general trade area and surrounding
counties of Bibb, Houston, Effingham, Chatham, Lowndes, McIntosh and Glynn
Counties, Georgia and in Jacksonville, Florida and surrounding counties. Although the Bank has a diversified loan
portfolio, a substantial portion of the loan portfolio is collateralized by
improved and unimproved real estate and is dependent upon the real estate
market.
The distribution of commitments to extend credit approximates the
distribution of loans outstanding.
Commercial and standby letters of credit were granted primarily to
commercial borrowers. The Bank, as a
matter of policy, does not extend credit in excess of the legal lending limit
to any single borrower or group of related borrowers. However, the Bank does have concentrations,
as defined by bank regulatory authorities, in construction and land development
lending. As of December 31, 2007,
the Banks two largest credit
78
ATLANTIC SOUTHERN
FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31,
2007
relationships consisted of loans and loan commitments with an aggregate
total credit exposure of $38.0 million, including $2.2 million in unfunded
commitments, and $35.8 million in balances outstanding. Both of these customers were underwritten in
accordance with the Banks credit quality standards and structured to minimize
potential exposure to loss.
The Bank maintains its cash balances in various financial
institutions. Accounts at each
institution are secured by the Federal Deposit Insurance Company up to
$100,000. Uninsured balances aggregate
to $114,654 at December 31, 2007.
S.
FAIR
VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107,
Disclosures about Fair
Value of Financial Instruments,
requires disclosure of fair value
information about financial instruments, whether or not recognized on the face
of the balance sheets, for which it is practicable to estimate that value. The assumptions used in the estimation of the
fair value of the Banks financial instruments are detailed below. Where quoted prices are not available, fair
values are based on estimates using discounted cash flows and other valuation
techniques. The use of discounted cash
flows can be significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. The following disclosures should not be
considered as representative of the liquidation value of the Company, but
rather a good-faith estimate of the increase or decrease in value of financial
instruments held by the Company since purchase, origination, or issuance.
Cash and Cash Equivalents
-
For cash, due
from banks, federal funds sold and interest-bearing deposits with other banks,
the carrying amount is a reasonable estimate of fair value.
Securities Available for Sale
- Fair values
for investment securities are based on quoted market prices.
Federal Home Loan Bank Stock
For Federal
Home Loan Bank Stock, the carrying value is a reasonable estimate of fair
value.
Loans and Mortgage Loans Held for Sale
- The fair
value of fixed rate loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with
similar credit ratings. For variable
rate loans, the carrying amount is a reasonable estimate of fair value.
Cash Surrender Value of Life Insurance
For cash
surrender value of life insurance, the carrying value is a reasonable estimate
of fair value.
Deposit Liabilities
- The fair
value of demand deposits, savings accounts and certain money market deposits is
the amount payable on demand at the reporting date. The fair value of fixed maturity time
deposits is estimated by discounting the future cash flows using the rates
currently offered for deposits of similar remaining maturities.
FHLB Advances
- The fair
value of the Banks fixed rate borrowings is estimated using discounted cash
flows, based on the Banks current incremental borrowing rates for similar
types of borrowing arrangements. For
variable rate borrowings, the carrying amount is a reasonable estimate of fair
value.
Junior Subordinated Debentures
For junior
subordinated debentures, the carrying value is a reasonable estimate of fair
value.
Interest Rate Contracts
The fair
value of interest rate contracts is obtained from dealer quotes. These values represent the amount the Company
would receive or pay to terminate the contracts or agreements, taking into
account current interest rates and, when appropriate, the current
creditworthiness of the counterparties.
79
ATLANTIC SOUTHERN
FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31,
2007
Commitments to Extend Credit and Standby Letters of
Credit
Because commitments to extend credit and standby
letters of credit are generally short-term and at variable rates, the contract
value and estimated fair value associated with these instruments are
immaterial.
Limitations
- Fair value estimates are
made at a specific point in time, based on relevant market information and
information about the financial instrument.
These estimates do not reflect any premium or discount that could result
from offering for sale at one time the Companys entire holdings of a
particular financial instrument. Because
no market exists for a significant portion of the Companys financial
instruments, fair value estimates are based on many judgments. 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
value of assets and liabilities that are not considered financial
instruments. Significant assets and
liabilities that are not considered financial instruments include the mortgage
banking operation, brokerage network, premises and equipment and goodwill and
other intangibles. The carrying amount and estimated fair values of the Companys
financial instruments are as follows:
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
Carrying
|
|
Estimated
|
|
Carrying
|
|
Estimated
|
|
|
|
Amount
|
|
Fair Value
|
|
Amount
|
|
Fair Value
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
19,924,178
|
|
$
|
19,924,178
|
|
$
|
42,911,477
|
|
$
|
42,911,477
|
|
Securities available for sale
|
|
74,387,100
|
|
74,387,100
|
|
57,596,002
|
|
57,596,002
|
|
Federal Home Loan Bank Stock
|
|
3,153,000
|
|
3,153,000
|
|
2,327,600
|
|
2,327,600
|
|
Loans held for sale
|
|
679,427
|
|
679,427
|
|
1,532,093
|
|
1,532,093
|
|
Loans, net of unearned income
|
|
697,145,715
|
|
698,667,634
|
|
533,128,702
|
|
531,628,623
|
|
Cash surrender value of life insurance
|
|
4,442,044
|
|
4,442,044
|
|
4,264,395
|
|
4,264,395
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
705,231,923
|
|
707,517,351
|
|
556,994,607
|
|
558,538,546
|
|
FHLB borrowings
|
|
40,500,000
|
|
40,704,777
|
|
31,700,000
|
|
31,760,774
|
|
Junior subordinated debentures
|
|
10,310,000
|
|
10,310,000
|
|
10,310,000
|
|
10,310,000
|
|
Interest rate contracts
|
|
|
|
|
|
114,465
|
|
114,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
T.
REGULATORY
MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Companys financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and the Bank must meet specific capital guidelines that
involve quantitative measures of their assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices. The Companys and the Banks capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weighting and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts and
ratios (set forth in the table below) of total risk-based and Tier I capital
(as defined in the regulations) to risk-weighted assets (as defined), and of
Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31,
2007 and 2006, the Company and the Bank met all
80
ATLANTIC SOUTHERN
FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31,
2007
capital adequacy requirements to which they are subject. As of December 31, 2007, the most recent
notification from the bank regulators categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the
Bank must maintain minimum total risk-based and Tier I leverage ratios as set
forth in the table. There are no
conditions or events since that notification that management believes have
changed the institutions category.
The
Companys and the Banks actual capital amounts and ratios are presented in the
following table:
|
|
|
|
|
|
To Be Well Capitalized
|
|
|
|
|
|
For Capital
|
|
Under Prompt Corrective
|
|
|
|
Actual
|
|
Adequacy Purposes
|
|
Action Provisions
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
December 31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk-Based Capital
To Risk Weighted Assets:
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
84,800,000
|
|
11.62
|
%
|
$
|
58,382,100
|
>
|
8.0
|
%
|
N/A
|
|
N/A
|
|
Bank
|
|
82,541,000
|
|
11.32
|
%
|
58,332,862
|
>
|
8.0
|
%
|
72,916,078
|
>
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital To Risk
Weighted Assets:
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
75,921,000
|
|
10.40
|
%
|
$
|
29,200,385
|
>
|
4.0
|
%
|
N/A
|
|
N/A
|
|
Bank
|
|
73,662,000
|
|
10.11
|
%
|
29,144,214
|
>
|
4.0
|
%
|
43,716,320
|
>
|
6.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital To Average
Assets
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
75,921,000
|
|
9.34
|
%
|
$
|
32,514,347
|
>
|
4.0
|
%
|
N/A
|
|
N/A
|
|
Bank
|
|
73,662,000
|
|
9.08
|
%
|
32,450,220
|
>
|
4.0
|
%
|
40,562,775
|
>
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk-Based Capital
To Risk Weighted Assets:
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
69,138,000
|
|
12.31
|
%
|
$
|
44,931,275
|
>
|
8.0
|
%
|
N/A
|
|
N/A
|
|
Bank
|
|
66,183,000
|
|
11.81
|
%
|
44,831,837
|
>
|
8.0
|
%
|
56,039,797
|
>
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital To Risk
Weighted Assets:
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
62,117,000
|
|
11.06
|
%
|
$
|
22,465,461
|
>
|
4.0
|
%
|
N/A
|
|
N/A
|
|
Bank
|
|
59,163,000
|
|
10.55
|
%
|
22,431,469
|
>
|
4.0
|
%
|
33,647,204
|
>
|
6.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital To Average
Assets
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
62,117,000
|
|
9.84
|
%
|
$
|
25,250,813
|
>
|
4.0
|
%
|
N/A
|
|
N/A
|
|
Bank
|
|
59,163,000
|
|
9.38
|
%
|
25,229,424
|
>
|
4.0
|
%
|
31,536,780
|
>
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
ATLANTIC SOUTHERN
FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31,
2007
U.
SEGMENT
REPORTING
Reportable segments are strategic business units that offer different
products and services. Reportable
segments are managed separately because each segment appeals to different
markets and, accordingly, require different technology and marketing
strategies.
The Company does not have any separately reportable operating
segments. The entire operations of the
Company are managed as one operation.
V.
UNAUDITED
QUARTERLY DATA
The supplemental quarterly financial data for the years ended December 31,
2007 and 2006 is summarized as follows:
Unaudited
Quarterly Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
Fourth
|
|
Third
|
|
Second
|
|
First
|
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend
income
|
|
$
|
15,333,359
|
|
$
|
15,300,208
|
|
$
|
14,806,161
|
|
$
|
13,865,970
|
|
Interest expense
|
|
(8,400,683
|
)
|
(8,159,415
|
)
|
(7,741,613
|
)
|
(7,211,579
|
)
|
Net interest income
|
|
6,932,676
|
|
7,140,793
|
|
7,064,548
|
|
6,654,391
|
|
Provision for loan losses
|
|
(25,000
|
)
|
(48,000
|
)
|
(148,000
|
)
|
(444,000
|
)
|
Net earnings
|
|
1,741,522
|
|
2,060,873
|
|
2,058,222
|
|
1,883,258
|
|
Net earnings per share -
basic
|
|
$
|
0.42
|
|
$
|
0.50
|
|
$
|
0.50
|
|
$
|
0.47
|
|
Net earnings per share -
diluted
|
|
$
|
0.39
|
|
$
|
0.46
|
|
$
|
0.46
|
|
$
|
0.44
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
Fourth
|
|
Third
|
|
Second
|
|
First
|
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend
income
|
|
$
|
11,286,337
|
|
$
|
10,187,722
|
|
$
|
8,838,049
|
|
$
|
7,561,584
|
|
Interest expense
|
|
(5,979,057
|
)
|
(5,114,726
|
)
|
(4,293,530
|
)
|
(3,585,490
|
)
|
Net interest income
|
|
5,307,280
|
|
5,072,996
|
|
4,544,519
|
|
3,976,094
|
|
Provision for loan losses
|
|
(281,997
|
)
|
(468,000
|
)
|
(483,000
|
)
|
(438,000
|
)
|
Net earnings
|
|
1,864,812
|
|
1,678,031
|
|
1,360,501
|
|
1,060,785
|
|
Net earnings per share -
basic
|
|
$
|
0.57
|
|
$
|
0.51
|
|
$
|
0.48
|
|
$
|
0.41
|
|
Net earnings per share -
diluted
|
|
$
|
0.52
|
|
$
|
0.46
|
|
$
|
0.43
|
|
$
|
0.36
|
|
W.
CONDENSED FINANCIAL STATEMENTS (PARENT COMPANY ONLY)
Condensed parent company financial information on Atlantic Southern
Financial Group, Inc. is as follows:
82
ATLANTIC SOUTHERN
FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31,
2007
CONDENSED BALANCE SHEETS
|
|
As of December 31,
|
|
|
|
2007
|
|
2006
|
|
Assets
|
|
|
|
|
|
Cash
|
|
$
|
1,834,031
|
|
$
|
71,456
|
|
Investment in subsidiary, at equity in underlying net assets
|
|
96,824,408
|
|
69,278,401
|
|
Other investments
|
|
423,363
|
|
454,719
|
|
Other assets
|
|
590,078
|
|
8,234,277
|
|
Total Assets
|
|
$
|
99,671,880
|
|
$
|
78,038,853
|
|
Liabilities
|
|
|
|
|
|
Junior subordinated debentures
|
|
$
|
10,310,000
|
|
$
|
10,310,000
|
|
Other accrued expenses and accrued liabilities
|
|
279,368
|
|
5,496,921
|
|
Total Liabilities
|
|
10,589,368
|
|
15,806,921
|
|
Shareholders Equity
|
|
|
|
|
|
Preferred stock,
authorized 2,000,000 shares, no outstanding shares
|
|
|
|
|
|
Common stock, $5 par value, authorized 10,000,000 shares, issued and
outstanding 4,151,780 in 2007 and 3,609,747 in 2006
|
|
20,758,900
|
|
18,048,735
|
|
Additional paid-in capital
|
|
53,413,202
|
|
37,806,852
|
|
Retained earnings
|
|
14,606,121
|
|
6,862,246
|
|
Accumulated other comprehensive income (loss)
|
|
304,289
|
|
(485,901
|
)
|
Total shareholders equity
|
|
89,082,512
|
|
62,231,932
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
99,671,880
|
|
$
|
78,038,853
|
|
83
ATLANTIC SOUTHERN
FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2007
CONDENSED STATEMENTS OF EARNINGS
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Revenues
|
|
|
|
|
|
|
|
Dividend Income
|
|
$
|
23,676
|
|
$
|
7,822,260
|
|
$
|
411,130
|
|
Operating Expenses
|
|
|
|
|
|
|
|
Interest Expense
|
|
781,681
|
|
744,289
|
|
400,148
|
|
Other
|
|
236,020
|
|
183,242
|
|
123,832
|
|
Total operating expenses
|
|
1,017,701
|
|
927,531
|
|
523,980
|
|
Earnings (loss) before taxes and equity in
undistributed earnings of subsidiary
|
|
(994,025
|
)
|
6,894,729
|
|
(112,850
|
)
|
Income tax benefit
|
|
396,965
|
|
512,620
|
|
193,528
|
|
Earnings (loss) before equity in undistributed
earnings of subsidiary
|
|
(597,060
|
)
|
7,407,349
|
|
80,678
|
|
Equity in undistributed earnings (Distributions in excess of
earnings) of subsidiary
|
|
8,340,935
|
|
(1,443,220
|
)
|
3,804,512
|
|
Net earnings
|
|
$
|
7,743,875
|
|
$
|
5,964,129
|
|
$
|
3,885,190
|
|
84
ATLANTIC SOUTHERN
FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2007
CONDENSED STATEMENT OF CASH FLOWS
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Cash flows from operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
7,743,875
|
|
$
|
5,964,129
|
|
$
|
3,885,190
|
|
Adjustments to reconcile net earnings to net cash provided by (used
in) operating activities:
|
|
|
|
|
|
|
|
Distributions in excess of earnings (equity in undistributed earnings)
of subsidiary
|
|
(8,340,935
|
)
|
1,443,220
|
|
(3,804,512
|
)
|
Amortization of other investments
|
|
31,356
|
|
|
|
|
|
Change in dividend receivable from subsidiary bank
|
|
7,500,000
|
|
(7,500,000
|
)
|
|
|
Changes in accrued income and other assets
|
|
143,878
|
|
(663,207
|
)
|
(381,070
|
)
|
Changes in accrued expenses and other liabilities
|
|
252,247
|
|
497,048
|
|
394,221
|
|
Net cash (used in) provided by operating activities
|
|
7,330,421
|
|
(258,810
|
)
|
93,829
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital injection to subsidiary
|
|
|
|
(20,000,000
|
)
|
(10,000,000
|
)
|
Cash paid for Sapelo
|
|
|
|
(406,828
|
)
|
|
|
Cash paid to Sapelo shareholders
|
|
(5,322,492
|
)
|
|
|
|
|
Cash paid for First Community Bank
|
|
(157,628
|
)
|
|
|
|
|
Purchase of other investments
|
|
|
|
(144,719
|
)
|
(310,000
|
)
|
Net cash used in investing activities
|
|
(5,480,120
|
)
|
(20,551,547
|
)
|
(10,310,000
|
)
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from junior subordinated debentures
|
|
|
|
|
|
10,310,000
|
|
Proceeds from issuance of common stock, net of issuance cost of
$211,312
|
|
|
|
20,788,688
|
|
|
|
Payment for issuance of common stock
|
|
(87,726
|
)
|
|
|
|
|
Payment for fractional shares
|
|
|
|
|
|
(704
|
)
|
Net cash (used in) provided by financing activities
|
|
(87,726
|
)
|
20,788,688
|
|
10,309,296
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
1,762,575
|
|
(21,669
|
)
|
93,125
|
|
Cash and cash equivalents at
beginning of year
|
|
71,456
|
|
93,125
|
|
|
|
Cash and cash equivalents at
end of year
|
|
$
|
1,834,031
|
|
$
|
71,456
|
|
$
|
93,125
|
|
85
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
Information regarding our Change in Accountants is set forth
in the Current Report filed by Atlantic Southern on Form 8-K on March 15,
2006, and is incorporated herein by reference.
Item 9A.
Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
As of the end of the
period covered by this Annual Report on Form 10-K, our principal executive
officer and principal financial officer have evaluated the effectiveness of our
disclosure controls and procedures (Disclosure Controls). Disclosure Controls, as defined in Rule 13a-15(e) of
the Securities Exchange Act of 1934, as amended (the Exchange Act), are
procedures that are designed with the objective of ensuring that information
required to be disclosed in our reports filed under the Exchange Act, such as
this Annual Report, is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commissions rules and
forms. Disclosure Controls are also
designed with the objective of ensuring that such information is accumulated
and communicated to our management, including the CEO and CFO, as appropriate
to allow timely decisions regarding required disclosure.
Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that such disclosure controls and procedures are effective to ensure that material
information relating to the Company, including its consolidated subsidiary,
that is required to be included in its periodic filings with the Securities
Exchange Commission, is timely made known to them.
Managements Report on Internal
Control Over Financial Reporting
Our management is
responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under
the Securities Exchange Act of 1934. Our
internal control over financial reporting is a process designed to provide
reasonable assurance that assets are safeguarded against loss from unauthorized
use or disposition, transactions are executed in accordance with appropriate
management authorization and accounting records are reliable for the
preparation of financial statements in accordance with generally accepted
accounting principals.
Because of its inherent
limitations, internal control over financial reporting may not prevent or
detect misstatements. Also projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control
over financial reporting as of December 31, 2007. Management based this assessment on criteria
for effective internal control over financial reporting described in
Internal Control Integrated Framework
issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Managements assessment included an
evaluation of the design of our internal control over financial reporting and
testing of the operational effectiveness of its internal control over financial
reporting. Management reviewed the
results of its assessment with the Audit Committee of our Board of Directors.
Based on this assessment, management believes that Atlantic
Southern Financial Group, Inc. maintained effective internal control over
financial reporting as of December 31, 2007.
Our independent auditors, Porter Keadle Moore, LLP, have
issued their auditors report on the Companys internal control over financial
reporting, which is included herein.
86
Report of Independent Registered Public Accounting Firm on Internal
Control over Financial Reporting
Porter Keadle Moore,
LLP
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Atlantic Southern
Financial Group, Inc.
Macon, Georgia
We have audited
Atlantic Southern Financial Group, Inc.s internal control over financial
reporting as of December 31, 2007, based on criteria established in
Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
.
(COSO).
Atlantic Southern Financial Group, Inc.s
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our
responsibility is to express an opinion on the companys internal control over
financial reporting based on our audit.
We conducted our
audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audits included obtaining an understanding
of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. We believe our
audit provides a reasonable basis for our opinion.
A companys
internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles.
A companys internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.
Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, Atlantic Southern Financial
Group, Inc. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2007, based on
criteria established in
Internal
ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
87
We have also
audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the 2007 and 2006 consolidated financial
statements of Atlantic Southern Financial Group, Inc. and our report dated
March 11, 2008, expressed an unqualified opinion on those consolidated
financial statements.
s
|
Porter Keadle
Moore, LLP
|
Atlanta, Georgia
March 11,
2008
Changes in Internal Controls
There were no significant
changes in internal controls subsequent to the date on which management carried
out its evaluation, and there has been no corrective action with respect to
significant deficiencies or material weaknesses.
Item 9B. Other Information
There is no information
required to be disclosed in a report on Form 8-K during the fourth quarter
of 2007 that has not been reported.
PART III
Item 10.
Directors, Executive Officers and
Corporate Governance
Information regarding our
directors and executive officers is set forth in the Definitive Proxy Statement
for the 2008 Annual Shareholders Meeting, under the captions Election of
Directors Information about the Board of Directors and its Committees and
Executive Officers, and is herein incorporated by reference.
Information regarding our Section 16(a) beneficial
ownership reporting compliance is set forth in the Definitive Proxy Statement
for the 2008 Annual Shareholders Meeting, under the caption Section 16(a) Beneficial
Ownership Reporting Compliance, and is herein incorporated by reference.
We have adopted a Code of
Business Conduct and Ethics (the Code) that applies to all of our principal
executive, financial and accounting officers.
We believe the Code is reasonably designed to deter wrongdoing and to
promote honest and ethical conduct, including: the ethical handling of
conflicts of interest; full, fair and accurate disclosure in filings and other
public communications made by us; compliance with applicable laws; prompt
internal reporting of violations of the Code; and accountability for adherence
to the Code. A copy may be found on our
website at www.atlanticsouthernbank.com, or a copy may be obtained, without
charge, upon written request addressed Atlantic Southern Financial Group, Inc.,
1701 Bass Road, Macon, Georgia 31210, Attention: Chief Financial Officer. The request may be delivered by letter to the
address set forth above or by fax to the attention of Atlantic Southern
Financial Groups Chief Financial Officer at (478) 476-2170.
Item 11.
Executive Compensation
Information regarding
executive compensation is set forth in the Definitive Proxy Statement for the
2008 Annual Shareholders Meeting, under the caption Executive Compensation,
and is herein incorporated by reference.
88
Item 12.
Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters
Information regarding
beneficial ownership is set forth in the Definitive Proxy Statement for the
2008 Annual Shareholders Meeting under the caption Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters, and
is herein incorporated by reference.
The following table sets
forth information regarding our equity compensation plans under which shares of
our common stock are authorized for issuance.
The only equity compensation plans maintained by us are the 2001 Stock
Incentive Plan and the Incentive Stock Option Award. All data is presented as of December 31,
2007, and does not include organizers warrants.
|
|
Number of securities to be
issued upon exercise of
outstanding options
|
|
Weighted-average
exercise price of
outstanding options
|
|
Number of shares remaining for
future issuance under the Plans
(excludes outstanding options)
|
|
Equity compensation plans approved by security holders
|
|
113,000
|
|
$ 9.24
|
|
67,000
|
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
Total
|
|
113,000
|
|
$ 9.24
|
|
67,000
|
|
Item 13. Certain Relationships and Related
Transactions and Director Independence
Information
regarding certain relationships and related transactions is set forth in the
Definitive Proxy Statement for the 2007 Annual Shareholders Meeting under the
caption Certain Relationships and Related Transactions and Director
Independence, and is herein incorporated by reference.
Item 14. Principal Accountant Fees and Services
Information
regarding principal accountant fees and services is set forth in the Definitive
Proxy Statement for the 2008 Annual Shareholders Meeting under the caption Principal
Accountant Fees and Services, and is incorporated herein by reference.
89
PART IV
Item 15.
Exhibits and Financial Statement
Schedules
(a)
(1)
The list of all
financial statements is included at Item 8.
(a)
(2)
The financial
statement schedules are either included in the financial statements or are not
applicable.
(a)
(3)
Exhibits
Required by Item 601. The following
exhibits are attached hereto or incorporated by reference herein (numbered to
correspond to Item 601(a) of Regulation S-K, as promulgated by the
Securities and Exchange Commission):
Exhibit Number
|
|
Description
|
2.1
|
|
Agreement and Plan of Reorganization by and among
Atlantic Southern Financial Group, Inc., Atlantic Southern Bank,
CenterState Banks of Florida, Inc., and CenterState Bank Mid Florida,
dated as of August 10, 2007. (1)
|
3.1
|
|
Articles of Incorporation. (2)
|
3.2
|
|
Bylaws. (2)
|
4.1
|
|
Indenture between the Registrant and Wilmington
Trust Company (the Trustee), dated as of April 28, 2005. (3)
|
4.2
|
|
Guarantee Agreement between the Registrant and the
Trustee, dated as of April 28, 2005. (3)
|
4.3
|
|
Amended and Restated Declaration of Trust among the
Registrant, the Trustee and certain Administrative Trustees, dated as of
April 28, 2005. (3)
|
10.1*
|
|
Employment Agreement dated October 6, 2005,
among Atlantic Southern Bank, Atlantic Southern Financial Group and Mark A.
Stevens. (2)
|
10.2*
|
|
Employment Agreement dated November 7, 2001,
among Atlantic Southern Bank, Atlantic Southern Financial Group and Gary P.
Hall. (2)
|
10.3*
|
|
Employment Agreement dated July 10, 2003, among
Atlantic Southern Bank, Atlantic Southern Financial Group and Carol Soto. (2)
|
10.4*
|
|
Executive Bonus Agreement dated January 1,
2005, among Atlantic Southern Bank, Atlantic Southern Financial Group and
Brandon L. Mercer. (2)
|
10.5*
|
|
2001 Stock Incentive Plan. (2)
|
10.6*
|
|
Form of Incentive Stock Option Award. (2)
|
10.7*
|
|
Form of Organizers Warrant Agreement. (2)
|
21.1
|
|
Subsidiaries of the Registrant. (2)
|
31.1
|
|
Certification of Chief Executive Officer pursuant to
Rule 13a-14(a) of the Securities and Exchange Act of 1934.
|
31.2
|
|
Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) of the Securities and Exchange Act of 1934.
|
32.1
|
|
Certification of Chief Executive Officer pursuant to
Rule 13a-14(b) under the Securities Exchange Act of 1934.
|
32.2
|
|
Certification of Chief Financial Officer pursuant to
Rule 13a-14(b) under the Securities Exchange Act of 1934.
|
90
(1)
Incorporated by reference to Atlantic
Southerns Current Report on Form 8-K dated November 30, 2007 File No. 001-33395.
(2)
Incorporated by reference to Atlantic
Southerns Registration Statement on Form S-1 dated January 19, 2006
File No. 333-130542.
(3)
Incorporated by reference to Atlantic
Southerns Current Report on Form 8-K dated April 28, 2005 File No. 000-51112.
*
The indicated
exhibit is a compensatory plan required to be filed as an exhibit to this Form 10-K
(b)
The Exhibits
not incorporated by reference herein are submitted as a separate part of this
report.
(c)
The financial
statement schedules are either included in the financial statements or are not
applicable.
91
SIGNATURES
Pursuant to the
requirements of Section 13 or 15(d) of the Securities and Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
|
ATLANTIC SOUTHERN FINANCIAL GROUP, INC.
|
|
|
|
|
BY:
|
/s/ Mark A. Stevens
|
|
|
Mark A. Stevens
|
|
|
President and Chief Executive Officer
|
|
|
|
|
DATE: March 14, 2008
|
Pursuant
to the requirements of the Securities and Exchange Act of 1934, the report has
been signed by the following persons on behalf of the registrant and in the
capacities indicated on March 14, 2008.
Signature
|
|
Title
|
|
|
|
/s/ Mark A. Stevens
|
|
President, Chief Executive Officer
|
Mark A. Stevens
|
|
and Director (Principal Executive Officer)
|
|
|
|
/s/ Carol W. Soto
|
|
Chief Financial Officer
|
Carol W. Soto
|
|
(Principal Financial and Accounting Officer)
|
|
|
|
/s/ William A. Fickling, III
|
|
|
William A. Fickling, III
|
|
Chairman of the Board
|
|
|
|
/s/ Raymond Odell Ballard, Jr.
|
|
|
Raymond Odell Ballard, Jr.
|
|
Director
|
|
|
|
|
|
|
Peter R. Cates
|
|
Director
|
|
|
|
/s/ Carolyn Crayton
|
|
|
Carolyn Crayton
|
|
Director
|
|
|
|
/s/ J. Douglas Dunwody
|
|
|
James Douglas Dunwody
|
|
Director
|
|
|
|
/s/ Michael C. Griffin
|
|
|
Michael C. Griffin
|
|
Director
|
|
|
|
/s/ Carl E. Hofstadter
|
|
|
Carl E. Hofstadter
|
|
Director
|
92
Signature
|
|
Title
|
|
|
|
/s/ Dr. Laudis H. Lanford
|
|
|
Dr. Laudis H. Lanford
|
|
Director
|
|
|
|
/s/ J. Russell Lipford Jr.
|
|
|
J. Russell Lipford, Jr.
|
|
Director
|
|
|
|
/s/ Thomas J. McMichael
|
|
|
Thomas J. McMichael
|
|
Director
|
|
|
|
|
|
|
Donald L. Moore
|
|
Director
|
|
|
|
/s/ Tyler Rauls, Jr.
|
|
|
Tyler Rauls, Jr.
|
|
Director
|
|
|
|
/s/ Dr. Hugh F. Smisson, III
|
|
|
Dr. Hugh F. Smisson, III
|
|
Director
|
|
|
|
/s/ George Waters, Jr.
|
|
|
George Waters, Jr.
|
|
Director
|
93
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