10-Q 1 v343265_10q.htm 10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2013

 

Commission file number: 001-35072

 

ATLANTIC COAST FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

Maryland 65-1310069

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer Identification No.)

10151 Deerwood Park Blvd

Building 200, Suite 100

Jacksonville, Florida

 

 

32256

(Address of principal executive offices)

 

(Zip Code)

 

(800) 342-2824

(Registrant's telephone number, including area code)

 

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

YES x NO ¨.

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).

 

YES x NO ¨.

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer ¨ Accelerated Filer ¨ Non-Accelerated Filer ¨ Smaller Reporting Company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

YES ¨ NO x.

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

 

2,629,061 shares of common stock, $0.01 par value, outstanding as of May 8, 2013

 

 
 

 

ATLANTIC COAST FINANCIAL CORPORATION

 

Form 10-Q Quarterly Report

 

Table of Contents

 

PART I. FINANCIAL INFORMATION

 

    Page
     
Item 1. Financial Statements 3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 35
Item 3. Quantitative and Qualitative Disclosures about Market Risk 52
Item 4. Controls and Procedures 54
     
  PART II.  OTHER INFORMATION  
     
Item 1. Legal Proceedings 55
Item 1A. Risk Factors 55
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 55
Item 3. Defaults upon Senior Securities 56
Item 4. Mine Safety Disclosures 56
Item 5. Other Information 56
Item 6. Exhibits 56
     
Form 10-Q Signature Page 57

 

2
 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

ATLANTIC COAST FINANCIAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands, Except Share Information)

(unaudited)

 

   March 31, 2013   December 31, 2012 
ASSETS          
Cash and due from financial institutions  $3,900   $7,490 
Short-term interest-earning deposits   73,586    60,338 
Total cash and cash equivalents   77,486    67,828 
Securities available-for-sale   154,371    159,745 
Portfolio loans, net of allowance of $10,466 in 2013 and $10,889 in 2012   407,473    421,201 
Other loans:          
Held-for-sale   2,770    4,089 
Warehouse   54,055    68,479 
Total other loans   56,825    72,568 
Federal Home Loan Bank stock, at cost   5,879    7,260 
Land, premises and equipment, net   14,436    14,584 
Bank owned life insurance   15,863    15,764 
Other real estate owned   10,139    8,065 
Accrued interest receivable   1,949    2,035 
Other assets   3,157    3,569 
Total assets  $747,578   $772,619 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Deposits:          
Noninterest-bearing demand  $46,249   $41,904 
Interest-bearing demand   74,495    73,490 
Savings and money market   174,692    181,708 
Time   206,918    202,658 
Total deposits   502,354    499,760 
Securities sold under agreements to repurchase   92,800    92,800 
Federal Home Loan Bank advances   110,000    135,000 
Accrued expenses and other liabilities   

5,077

    4,799 
Total liabilities   

710,231

    732,359 
           
Commitments and contingent liabilities          
           
Preferred stock: $0.01 par value; 25,000,000 shares authorized, none issued and outstanding at March 31, 2013 and December 31, 2012   -    - 
Common stock: $0.01 par value; 100,000,000 shares authorized, 2,629,061 issued and outstanding at March 31, 2013 and December 31, 2012   26    26 
Additional paid-in capital   56,111    56,132 
Common stock held by:          
Employee stock ownership plan shares of 85,030 at March 31, 2013 and 86,227 at December 31, 2012   (1,847)   (1,873)
Benefit plans   (331)   (338)

Retained deficit

   (16,412)   (14,373)

Accumulated other comprehensive income (loss)

   (200)   686 
Total stockholders’ equity   

37,347

    40,260 
Total liabilities and stockholders’ equity  $747,578   $772,619 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3
 

  

ATLANTIC COAST FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands, Except Share Information)

(unaudited)

 

   Three Months Ended March 31, 
   2013   2012 
         
Interest and dividend income:          
Loans, including fees  $6,961   $7,873 
Securities and interest-earning deposits in other financial institutions   574    876 
Total interest and dividend income   7,535    8,749 
Interest expense:          
Deposits   882    1,245 
Federal Home Loan Bank advances   1,134    1,325 
Securities sold under agreements to repurchase   1,182    1,196 
Total interest expense   3,198    3,766 
Net interest income   4,337    4,983 
Provision for loan losses   1,234    3,475 
Net interest income after provision for loan losses   3,103    1,508 
           
Noninterest income:          
Service charges and fees   747    784 
Gain on sale of loans held-for-sale   334    610 
Bank owned life insurance earnings   99    116 
Interchange fees   395    403 
Other   140    242 
Total noninterest income   1,715    2,155 
           
Noninterest expense:          
Compensation and benefits   2,276    2,190 
Occupancy and equipment   483    516 
FDIC insurance premiums   440    275 
Foreclosed assets, net   (18)   (153)
Data processing   330    330 
Outside professional services   888    775 
Collection expense and repossessed asset losses   912    486 
Other   1,546    953 
Total noninterest expense   6,857    5,372 
           
Loss before income tax expense (benefit)   (2,039)   (1,709)
Income tax expense (benefit)   -    - 
Net loss  $(2,039)  $(1,709)
           
Loss per common share:          
Basic  $(0.81)  $(0.69)
Diluted  $(0.81)  $(0.69)
           
Dividends declared per common share  $-   $- 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

4
 

 

ATLANTIC COAST FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Dollars in Thousands, Except Share Information)

(unaudited)

  

   Three Months Ended March 31, 
   2013   2012 
         
Net loss  $(2,039)  $(1,709)
           
Other comprehensive income (loss):          
Change in securities available-for-sale:          
Unrealized holding gains (losses) arising during the period   (886)   721 
Less reclassification adjustments for (gains) losses recognized in income   -    - 
Net unrealized gains (losses)   (886)   721 
Income tax effect   -    - 
Net of tax effect   (886)   721 
           
Total other comprehensive income (loss)   (886)   721 
           
Comprehensive loss  $(2,925)  $(988)

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

5
 

  

ATLANTIC COAST FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Dollars in Thousands, Except Share Information)

(unaudited)

 

   Common
Stock
   Additional
Paid-In
Capital
   Employee Stock
Ownership
Plan Shares
   Benefit
Plans
   Retained
Earnings
(Deficit)
   Accumulated Other
Comprehensive
Income (Loss)
   Total
Stockholders’
Equity
 
                             
For the three months ended March 31, 2013:                        
                             
Balance at December 31, 2012  $26   $56,132   $(1,873)  $(338)  $(14,373)  $686   $40,260 
Employee stock ownership plan shares earned, 1,197 shares   -    (22)   26    -    -    -    4 
Management restricted stock expense   -    1    -    -    -    -    1 
Stock options expense   -    7    -    -    -    -    7 
Distribution from Rabbi Trust   -    (7)   -    7    -    -    - 
Net loss   -    -    -    -    (2,039)   -    (2,039)
Other comprehensive loss   -    -    -    -    -    (886)   (886)
Balance at March 31, 2013  $26   $56,111   $(1,847)  $(331)  $(16,412)  $(200)  $37,347 
                                    
For the three months ended March 31, 2012:                                      
                                    
Balance at December 31, 2011  $26   $56,186   $(1,977)  $(351)  $(7,706)  $116   $46,294 
Employee stock ownership plan shares earned, 1,197 shares   -    (23)   26    -    -    -    3 
Management restricted stock expense   -    9    -    -    -    -    9 
Stock options expense   -    10    -    -    -    -    10 
Distribution from Rabbi Trust   -    188    -    (201)   -    -    (13)
Net loss   -    -    -    -    (1,709)   -    (1,709)
Other comprehensive income   -    -    -    -    -    721    721 
Balance at March 31, 2012  $26   $56,370   $(1,951)  $(552)  $(9,415)  $837   $45,315 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

6
 

 

ATLANTIC COAST FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Dollars in Thousands, Except Share Information)

(unaudited)

 

   Three Months Ended March 31, 
   2013   2012 
Cash flows from operating activities:          
Net loss  $(2,039)  $(1,709)

Adjustments to reconcile net loss to net cash provided by operating activities:

          
Provision for loan losses   1,234    3,475 
Gain on sale of loans held-for-sale   (334)   (610)
Originations of loans held-for-sale   (2,390)   (13,704)
Proceeds from sales of loans held-for-sale   4,042    13,886 
Foreclosed assets, net   (18)   (153)
Loss on disposal of equipment   -    6 
Employee stock ownership plan compensation expense   4    3 
Share-based compensation expense   8    19 
Amortization of premiums and deferred fees, net of accretion of discounts on securities and loans   445    117 
Depreciation expense   163    194 
Net change in accrued interest receivable   86    228 
Net change in cash surrender value of bank owned life insurance   (99)   (116)
Net change in other assets   412    (89)
Net change in accrued expenses and other liabilities   278    (755)

Net cash provided by operating activities

   1,792    792 
           
Cash flows from investing activities:          
Proceeds from maturities and payments of securities available-for-sale   9,102    7,756 
Purchase of securities available-for-sale   (5,113)   (12,419)
Funding of warehouse loans   (277,085)   (175,394)
Proceeds from repayments of warehouse loans   291,509    178,042 
Net change in portfolio loans   8,268    16,187 
Expenditures on premises and equipment   (15)   (56)
Proceeds from sale of other real estate owned   2,225    1,607 
Redemption of Federal Home Loan Bank stock   1,381    - 

Net cash provided by investing activities

   30,272    15,723 
           
Cash flows from financing activities:          
Net increase (decrease) in deposits   2,594    (10,401)
Repayment of Federal Home Loan Bank advances   (25,000)   - 
Shares purchased for and distributions from Rabbi Trust   -    (14)
Net cash used in financing activities   (22,406)   

(10,415

)
           
Net  increase in cash and cash equivalents   9,658    6,100 
Cash and cash equivalents, beginning of period   67,828    41,017 
Cash and cash equivalents, end of period  $77,486   $47,117 
           
Supplemental disclosures of cash flow information:          
Interest paid  $3,233   $3,788 
Income taxes paid  $-   $- 
           
Supplemental disclosures of non-cash information:          
Loans transferred to other real estate  $4,281   $818 
Loans transferred to held-for-sale  $-   $866 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

7
 

ATLANTIC COAST FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

(unaudited)

 

NOTE 1. BASIS OF PRESENTATION

 

It should be noted the accompanying unaudited condensed consolidated financial statements include Atlantic Coast Financial Corporation (the Company) and its wholly owned subsidiary, Atlantic Coast Bank (the Bank). The consolidated financials also include First Community Financial Services, Inc. (FCFS), an inactive wholly owned subsidiary of Atlantic Coast Bank. All significant inter-company balances and transactions have been eliminated in consolidation. The principal activity of the Company is the ownership of the Bank’s common stock, as such, the terms “Company” and “Bank” are used interchangeably throughout this Quarterly Report on Form 10-Q.

 

The accompanying condensed consolidated balance sheets as of December 31, 2012, which was derived from our audited financial statements, and the unaudited condensed consolidated financial statements as of March 31, 2013 and for the three months ended March 31, 2013 and 2012 have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statement presentation. In the opinion of management, all adjustments (all of which are normal and recurring in nature) considered necessary for (i) a fair presentation and (ii) to make such statements not misleading, have been included. Operating results for the three months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. The 2012 Atlantic Coast Financial Corporation consolidated financial statements, as presented in the Company’s Annual Report on Form 10-K, should be read in conjunction with these statements.

 

Certain items in the prior period financial statements have been reclassified to conform to the current presentation. The reclassifications have no effect on net loss or stockholders’ equity as previously reported.

 

Going Concern

 

The unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The unaudited condensed consolidated financial statements do not include any adjustment that might be necessary if the Company is unable to continue as a going concern.

 

Use of Estimates

 

To prepare unaudited condensed consolidated financial statements in conformity with U.S. GAAP management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. Estimates associated with the allowance for loan losses, realization of deferred tax assets, and the fair values of securities and other financial instruments are particularly susceptible to material change in the near term.

 

Impact of Certain Accounting Pronouncements

 

In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2013-02, Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income (ASU 2013-02). ASU 2013-02 requires new footnote disclosures of items reclassified from accumulated other comprehensive income to net income. The new guidance is effective for interim and annual periods beginning after December 15, 2012. The Company adopted the guidance for the first quarter of 2013, there was no impact on the Company’s financial statements or results of operations but future filings may include additional disclosures related to reclassifications from accumulated other comprehensive income to net income.

 

8
 

 

ATLANTIC COAST FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2013

(unaudited)

 

NOTE 2. MATERIAL UNCERTAINTIES

 

The Company recorded an operating loss in the first quarter of 2013 of $2.0 million, resulting in a retained deficit of $16.4 million as of March 31, 2013. Prior to 2013, the Company had recorded five consecutive years of operating losses aggregating $63.3 million. During the period from January 1, 2008 until March 31, 2013 the Bank has recorded provision for loan losses of $89.2 million, goodwill impairment of $2.8 million, other than temporary impairment of investment securities of $5.1 million and has a full valuation reserve for deferred tax assets totaling $29.3 million. The Company’s earnings capability is also impacted by the expense of its long term debt, which at March 31, 2013 had a weighted average rate of 4.56% with collective prepayment penalties to extinguish the debt of $27.7 million. The uncertainty about future provision for loan losses and other credit costs, and the impact on net interest income of the expense of the long term debt combined with continued decline in yields on interest-earning assets creates uncertainty about the Company’s ability to attain profitability.

 

During 2012 the Bank’s contingent sources of liquidity to meet loan demand or other liquidity needs became limited due to reductions in approved borrowing limits with the Federal Reserve Bank of Atlanta (the FRB) and the FHLB. In July 2012 the FRB notified the Bank that it was not eligible to participate in its Primary Borrowing program but may be eligible to borrow under its Secondary Borrowing program under limited circumstances. Due to declining credit ratings and reduced collateral values, the Bank’s borrowing capacity at the FHLB was $0.6 million as of March 31, 2013. The Bank had unpledged securities of $21.1 million as of March 31, 2013 acting as additional contingent liquidity in the event the Bank’s cash and cash equivalents, which totaled $77.5 million at the end of the first quarter of 2013, was not sufficient to meet liquidity demand. Under the Consent Order (the Order) the Bank is prohibited from renewing or increasing Broker Deposits without the prior approval of the OCC. The Bank’s holding company does not have meaningful liquid resources and therefore is not an immediate source of liquidity support for the Bank. In the event of a sudden decline in deposits, or a reduction in deposits over time, the Bank’s liquidity resources may not be sufficient to meet demands.

 

The Bank’s long-term debt which is comprised of $92.8 million of structured notes in connection with a reverse repurchase agreement and $110.0 million of FHLB debt are collateralized by investment securities and portfolio loans. Under the terms of the debt, the Bank must maintain collateral requirements as defined by the counterparties. Failure to maintain the required collateral would constitute a default under the debt agreements that would result in the counterparties having the option to call the debt including prepayment fees which were $27.7 million as of quarter-end. In the event the debt were called and depending on the exact amount of these penalties at the time of repayment, the Bank may be deemed to be less than adequately capitalized which could result in additional restrictions and directives from its regulators.

 

The Board of Directors of the Bank entered into the Order with the OCC on August 10, 2012, that among other matters, required that the Bank achieve and maintain a total risk based capital ratio of 13.00% of risk weighted assets and a Tier 1 capital ratio of 9.00% of adjusted total assets. As of December 31, 2012 these ratios were 9.79% and 5.13%, respectively. Under applicable banking regulations for undercapitalized banks such a determination could result in additional restrictions and directives from the OCC and the FDIC that could include sale, liquidation, or federal conservatorship or receivership of the Bank. Any such action would have a material adverse effect on the Company’s business, results of operations and financial position.

 

In November 2011 the Company’s Board of Directors began a review of the strategic alternatives available to it to address its capital needs.

 

NOTE 3. MERGER AGREEMENT WITH BOND STREET HOLDINGS, INC.

 

On February 25, 2013, the Company and the Bank entered into an Agreement and Plan of Merger (the Merger Agreement) with Bond Street Holdings, Inc. (Bond Street) and its bank subsidiary, Florida Community Bank, N.A. (Florida Community Bank). Pursuant to the Merger Agreement, the Company will be merged with and into Bond Street (the Merger) and the Bank will then merge with and into Florida Community Bank.

 

9
 

 

ATLANTIC COAST FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2013

(unaudited)

 

NOTE 3. MERGER AGREEMENT WITH BOND STREET HOLDINGS, INC. (continued)

 

Under the terms of the Merger Agreement, each share of the Company’s common stock issued and outstanding immediately prior to the completion of the Merger will be converted into the right to receive $5.00 in cash. Of this amount, (i) $3.00 per share in cash will be payable to stockholders following the closing of the Merger; (ii) $2.00 per share in cash will be held in an escrow account and will be available to cover losses from stockholder claims, net of payments received under insurance policies covering such losses, for one year following the closing of the Merger or until the final resolution of such claims, if later. Any remaining cash will be payable to stockholders of the Company.

 

On April 22, 2013, the Company and the Bank entered into Amendment Number 1 to the Merger Agreement (the Amended Merger Agreement) with Bond Street and Florida Community Bank. The Amended Merger Agreement eliminated the transaction’s $2.00 per share contingency consideration. Under the terms of the Amended Merger Agreement, each share of the Company’s common stock issued and outstanding immediately prior to the completion of the merger will be converted into the right to receive $5.00 in cash at closing.

 

The Merger Agreement and the transactions contemplated thereby remain subject to the approval of the stockholders of the Company, regulatory approvals and other customary closing conditions. On May 10, 2013, Bond Street received approval from the FRB for application to acquire the Company and the Bank. Closing of the Merger is expected to occur by the end of the second quarter of 2013.

 

Current Litigation Relating to the Merger

 

On March 7, 2013, Lucas Lindsey filed a stockholder class action lawsuit in the Circuit Court of Baltimore City, Maryland against the Company, the Bank, the directors of the Company, Bond Street and Florida Community Bank. The lawsuit purports to be brought directly on behalf of all of the Company’s public stockholders and derivatively on behalf of the Company. The complaint alleges that the directors of the Company breached their fiduciary duties to the stockholders by failing to take steps necessary to obtain a fair, adequate and maximum price for the common stock, and that Bond Street and Florida Community Bank aided and abetted the Company’s directors’ alleged breaches of fiduciary duty. The lawsuit seeks to enjoin the proposed merger from proceeding and seeks unspecified compensatory damages on behalf of the Company’s stockholders and/or rescission of the proposed merger transaction.

 

On April 4, 2013, Lucas Lindsey filed an amended complaint adding new factual allegations and dropping the Company’s directors Jay Sidhu and Bhanu Choudhrie as defendants. In particular, the amended complaint alleges that the disclosures provided to the Company’s stockholders, as set forth in the preliminary proxy statement filed with the SEC on March 27, 2013, failed to provide required material information necessary for the Company’s stockholders to make a fully informed decision concerning the merger. The amended complaint also includes additional allegations that the proposed common stock purchase price is inadequate and unfair.

 

On April 15, 2013, the Lindsey lawsuit was removed from the Circuit Court of Baltimore City to the Federal Court in the District of Maryland.

 

On March 18, 2013, Jason Laugherty filed a stockholder class action lawsuit in the Circuit Court of Baltimore City, Maryland against the Company, the directors of the Company and Bond Street. The lawsuit purports to be brought directly on behalf of all of the Company’s public stockholders and alleges that the directors of the Company breached their fiduciary duties to the stockholders as a result of their attempt to sell the Company by means of an unfair process and for an unfair price. In addition, the lawsuit alleges that Bond Street aided and abetted the Company’s directors’ alleged breaches of fiduciary duty. The lawsuit seeks to enjoin the proposed merger from proceeding and seeks unspecified compensatory damages on behalf of Atlantic Coast Financial stockholders and/or rescission of the proposed merger transaction.

 

10
 

 

ATLANTIC COAST FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2013

(unaudited)

 

NOTE 3. MERGER AGREEMENT WITH BOND STREET HOLDINGS, INC. (continued)

 

Both the Company and Bond Street believe that both lawsuits are meritless and intend to vigorously defend themselves against the allegations.

 

NOTE 4. FAIR VALUE

 

Asset and liability fair value measurements (in this note and Note 5) have been categorized based upon the fair value hierarchy described below:

 

·Level 1 – Valuation is based upon quoted market prices for identical instruments in active markets.

 

·Level 2 – Valuation is based upon quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

 

·Level 3 – Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates or assumptions that market participants would use in pricing the assets or liabilities. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

 

Assets and liabilities measured at fair value on a recurring basis as of March 31, 2013 and December 31, 2012 are summarized below:

 

       Fair Value Hierarchy 
   Total   Level 1   Level 2   Level 3 
   (Dollars in Thousands) 
March 31, 2013                
Assets:                    
Securities available-for-sale:                    
State and municipal  $1,020    -   $1,020    - 
Mortgage-backed securities – residential   119,113    -    119,113    - 
Collateralized mortgage obligations – U.S. Government   34,238    -    34,238    - 
Total  $154,371    -   $154,371    - 
                     
December 31, 2012                    
Assets:                    
Securities available-for-sale:                    
State and municipal  $979    -   $979    - 
Mortgage-backed securities – residential   119,647    -    119,647    - 
Collateralized mortgage obligations – U.S. Government   39,119    -    39,119    - 
Total  $159,745    -   $159,745    - 

 

The fair values of securities available-for-sale are determined by quoted market prices, if available (Level 1). For securities available-for-sale where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities available-for-sale where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality. During times when trading is less liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.

 

11
 

 

ATLANTIC COAST FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2013

(unaudited)

NOTE 4. FAIR VALUE (continued)

 

Assets and liabilities measured at fair value on a non-recurring basis as of March 31, 2013 and December 31, 2012 are summarized below:

 

       Fair Value Hierarchy 
   Total   Level 1   Level 2   Level 3 
   (Dollars in Thousands) 
March 31, 2013                
Assets:                    
Other real estate owned  $10,139    -    -   $10,139 
Impaired loans – collateral dependent (reported on the Condensed Consolidated Balance Sheets in portfolio loans, net)   8,207    -    -    8,207 
                     
December 31, 2012                    
Assets:                    
Other real estate owned  $8,065    -    -   $8,065 
Impaired loans – collateral dependent (reported on the Condensed Consolidated Balance Sheets in portfolio loans, net)   9,784    -    -    9,784 

 

Quantitative information about Level 3 fair value measurements as of March 31, 2013 and December 31, 2012 is summarized below:

 

   Fair Value
Estimate
   Valuation
Techniques
  Unobservable
Input
  Range
(Weighted
Average)
   (Dollars in Thousands)

March 31, 2013

             
Assets:              
Other real estate owned  $10,139   Broker price opinions, appraisal of collateral (1) (2)  Appraisal adjustments (3) (4) 

0.0% to 44.0% (6.9%)

           Liquidation expenses (3)  8.0% to 10.0% (9.1%)
Impaired loans – collateral dependent (reported on the Condensed Consolidated Balance Sheets in portfolio loans, net)   8,207   Appraisal of collateral (1)  Appraisal adjustments (3) (4)  0.0% to 27.5% (2.4%)
           Liquidation expenses (3)  8.0% to 10.0% (8.8%)
December 31, 2012              
     Other real estate owned  $8,065   Broker price opinions, appraisal of collateral (1) (2)  Appraisal adjustments (3) (4)
Liquidation expenses (3)
  0.0% to 44.0% (2.1%)
 
8.0% to 10.0% (8.8%)
     Impaired loans – collateral dependent (reported on the Condensed Consolidated Balance Sheets in portfolio loans, net)   9,784   Appraisal of collateral (1)  Appraisal adjustments (3) (4)
 
Liquidation expenses (3)
  0.0%
(0.0%)
 
8.0% to 10.0% (8.9%)

 

____________

(1)Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level 3 inputs which are not identifiable.
(2)Includes qualitative adjustments by management and estimated liquidation expenses.
(3)The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraised value.
(4)Appraisals may be adjusted by management for qualitative factors such as economic conditions and liquidation expenses.

 

12
 

 

ATLANTIC COAST FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2013

(unaudited)

NOTE 4. FAIR VALUE (continued)

 

The fair values of other real estate owned (OREO) is determined using inputs which include current and prior appraisals and estimated costs to sell (Level 3). Assets acquired through or in lieu of loan foreclosure are initially recorded at fair value based on appraisals, as adjusted, less estimated selling costs at the date of foreclosure, establishing a new cost basis. At the initial time of transfer to OREO, an impairment loss is recognized through the allowance in cases where the carrying amount exceeds the new cost basis. Subsequent declines in fair value are recorded directly as an adjustment to current earnings through noninterest expense. Costs relating to improvement of property may be capitalized, whereas costs relating to the holding of property are expensed.

 

Write-downs on OREO for the three months ended March 31, 2013 and 2012 were $27,000 and $86,000, respectively.

 

The fair values of impaired loans that are collateral dependent are based on a valuation model which incorporates the most current real estate appraisals available, as well as assumptions used to estimate the fair value of all non-real estate collateral as defined in the Bank’s internal loan policy (Level 3).

 

NOTE 5. FAIR VALUE OF FINANCIAL INSTRUMENTS

 

Carrying amount and estimated fair value of financial instruments, not previously presented, as of March 31, 2013 and December 31, 2012 were as follows:

 

           Fair Value Hierarchy 
   Carrying
Amount
   Estimated
Fair Value
   Level 1   Level 2   Level 3 
   (Dollars in Thousands) 
March 31, 2013                    
Assets:                         
Cash and due from financial institutions  $3,900   $3,900   $3,900   $-    - 
Short-term interest-earning deposits   73,586    73,586    73,586    -    - 
Portfolio loans, net   407,473    424,359    -    416,152    8,207 
Loans held-for-sale   2,770    3,144    -    3,144    - 
Warehouse loans   54,055    54,055    -    54,055    - 
Federal Home Loan Bank stock, at cost   5,879    5,879    -    -    5,879 
Accrued interest receivable   1,949    1,949    -    1,949    - 
Liabilities:                         
Deposits   502,354    502,973    -    502,973    - 
Securities sold under agreements to repurchase   92,800    106,195    -    106,195    - 
Federal Home Loan Bank advances   110,000    124,274    -    124,274    - 
Accrued interest payable (reported on the Condensed Consolidated Balance Sheets in accrued expenses and other liabilities)   1,085    1,085    -    1,085    - 
                          
December 31, 2012                         
Assets:                         
Cash and due from financial institutions  $7,490   $7,490   $7,490   $-    - 
Short-term interest-earning deposits   60,338    60,338    60,338    -    - 
Portfolio loans, net   421,201    435,040    -    425,256    9,784 
Loans held-for-sale   4,089    4,527    -    4,527    - 
Warehouse loans   68,479    68,479    -    68,479    - 
Federal Home Loan Bank stock, at cost   7,260    7,260    -    -    7,260 
Accrued interest receivable   2,035    2,035    -    2,035    - 
Liabilities:                         
Deposits   499,760    500,469    -    500,469    - 
Securities sold under agreements to repurchase   92,800    107,034    -    107,034    - 
Federal Home Loan Bank advances   135,000    150,707    -    150,707    - 
Accrued interest payable (reported on the Condensed Consolidated Balance Sheets in accrued expenses and other liabilities)   1,120    1,120    -    1,120    - 

  

13
 

ATLANTIC COAST FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2013

(unaudited)

 

NOTE 5. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

 

The methods and assumptions used to estimate fair value are described below.

 

Carrying amount is the estimated fair value for cash and cash equivalents, accrued interest, demand and savings deposits and variable rate loans or deposits that re-price frequently and fully. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent re-pricing or re-pricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life without considering the need for adjustments for market illiquidity or credit risk. Fair value of loans held-for-sale is based on quoted market prices, where available, or is determined based on discounted cash flows using current market rates applied to the estimated life and credit risk. Carrying amount is the estimated fair value for warehouse loans, due to the rapid repayment of the loans which generally have an average duration of less than 30 days. Fair value of the FHLB advances and securities sold under agreements to repurchase is based on current rates for similar financing. It was not practicable to determine the fair value of the FHLB stock due to restrictions placed on its transferability. The estimated fair value of other financial instruments and off-balance-sheet commitments approximate cost and are not considered significant to this presentation.

 

The Bank is a member of the FHLB of Atlanta and as such, is required to maintain a minimum investment in stock of the FHLB that varies with the level of advances outstanding with the FHLB. The stock is bought from and sold to the FHLB based upon its $100.00 par value. The stock does not have a readily determinable fair value and as such is classified as restricted stock, carried at cost and evaluated for impairment. Accordingly, the stock’s value is determined by the ultimate recoverability of the par value rather than by recognizing temporary declines. The determination of whether the par value will ultimately be recovered is influenced by criteria such as the following: (a) the significance of the decline in net assets of the FHLB as compared to the capital stock amount and the length of time this situation has persisted, (b) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance (c) the impact of legislative and regulatory changes on the customer base of the FHLB and (d) the liquidity position of the FHLB. The Company did not consider the FHLB stock to be impaired as of March 31, 2013.

 

NOTE 6. SECURITIES AVAILABLE-FOR-SALE

 

The amortized cost and fair value of securities available-for-sale segregated by contractual maturity as of March 31, 2013, is shown below. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities available-for-sale not due at a single maturity date, include mortgage-backed securities and collateralized mortgage obligations, are shown separately.

 

   Amortized
Cost
   Unrealized
Gains
   Unrealized
Losses
   Fair Value 
   (Dollars in Thousands) 
                 
March 31, 2013                    
State and municipal  $943   $77   $-   $1,020 
Mortgage-backed securities – residential   119,345    604    (836)   119,113 
Collateralized mortgage obligations – U.S. Government   34,283    107    (152)   34,238 
   $154,571   $788   $(988)  $154,371 
                     
December 31, 2012                    
State and municipal  $943   $42   $(6)  $979 
Mortgage-backed securities – residential   118,970    847    (170)   119,647 
Collateralized mortgage obligations – U.S. Government   39,146    127    (154)   39,119 
   $159,059   $1,016   $(330)  $159,745 

 

 

14
 

 

ATLANTIC COAST FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2013

(unaudited)

 

NOTE 6. SECURITIES AVAILABLE-FOR-SALE (continued)

 

The amortized cost and fair value of securities available-for-sale segregated by contractual maturity as of March 31, 2013, is shown below. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities available-for-sale not due at a single maturity date, include mortgage-backed securities and collateralized mortgage obligations, are shown separately.

 

   Amortized Cost   Fair Value 
   (Dollars in Thousands) 
         
Due in one year or less  $-   $- 
Due from more than one to five years   -    - 
Due from more than five to ten years   943    1,020 
Due after ten years   -    - 
Mortgage-backed securities – residential   119,345    119,113 
Collateralized mortgage obligations – U.S. Government   34,283    34,238 
   $154,571   $154,371 

 

The following table summarizes the securities available-for-sale with unrealized losses as of March 31, 2013 and December 31, 2012, aggregated by investment category and length of time in a continuous unrealized loss position:

 

   Less Than 12 Months   12 Months or More   Total 
   Fair 
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair 
Value
   Unrealized
Losses
 
   (Dollars in Thousands) 
                         
March 31, 2013                              
State and municipal  $-   $-   $-   $-   $-   $- 
Mortgage-backed securities – residential   68,649    (836)   -    -    68,649    (836)
Collateralized mortgage obligations – U.S. Government   10,669    (98)   3,960    (54)   14,629    (152)
   $79,318   $(934)  $3,960   $(54)  $83,278   $(988)
                               
                               
December 31, 2012                              
State and municipal  $-   $-   $454   $(6)  $454   $(6)
Mortgage-backed securities – residential   61,172    (170)   -    -    61,172    (170)
Collateralized mortgage obligations – U.S. Government   13,207    (78)   5,054    (76)   18,261    (154)
   $74,379   $(248)  $5,508   $(82)  $79,887   $(330)

 

Other-Than-Temporary Impairment

 

Management evaluates securities available-for-sale for OTTI at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.

 

15
 

 

ATLANTIC COAST FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2013

(unaudited)

 

NOTE 6. SECURITIES AVAILABLE-FOR-SALE (continued)

 

As of March 31, 2013 the Company’s security portfolio consisted of 38 securities available-for-sale, 18 of which were in an unrealized loss position. Nearly all unrealized losses were related to debt securities whose underlying collateral is residential mortgages. However, all of these debt securities were issued by government sponsored organizations as discussed below.

 

As of March 31, 2013, $153.4 million, or approximately 99.3% of the debt securities held by the Company were issued by U.S. government-sponsored entities and agencies, primarily Fannie Mae, Freddie Mac and Ginnie Mae, institutions which the government has affirmed its commitment to support. The decline in fair value was attributable to changes in interest rates and illiquidity, and not credit quality. The Company does not have the intent to sell these securities and it is not likely it will be required to sell the securities before their anticipated recovery. Therefore, the Company does not consider these debt securities to be other-than-temporarily impaired as of March 31, 2013. During the three months ended March 31, 2013 and 2012, the Company did not record OTTI related to non-agency collateralized mortgage-backed securities or collateralized mortgage obligations.

 

Proceeds from Securities Available-for-Sale

 

Proceeds from sales, payments, maturities and calls of securities available-for-sale were $9.1 million and $7.8 million for the three months ended March 31, 2013 and 2012, respectively. No gross gains and no gross losses were realized during the three months ended March 31, 2013 and 2012, respectively. Gains and losses on sales of securities are recorded on the settlement date, which is not materially different from the trade date, and determined using the specific identification method.

   

NOTE 7. PORTFOLIO LOANS

 

Following is a comparative composition of net portfolio loans as of March 31, 2013 and December 31, 2012:

 

   2013   % of
Total Loans
   2012   % of
Total Loans
 
   (Dollars in Thousands) 
                 
Real estate loans:                    
One- to four-family  $183,753    44.6%  $193,057    45.3%
Commercial   

58,064

    14.1%   58,193    13.7%
Other (land and multi-family)   18,959    4.6%   19,908    4.7%
Total real estate loans   

260,776

    63.3%   271,158    63.7%
                     
Real estate construction loans:                    
One- to four-family   -    0.0%   -    0.0%
Commercial   7,012    1.7%   5,049    1.2%
Acquisition and development   -    0.0%   -    0.0%
Total real estate construction loans   7,012    1.7%   5,049    1.2%
                     
Other loans:                    
Home equity   59,850    14.5%   63,867    15.0%
Consumer   59,221    14.4%   61,558    14.4%
Commercial   

25,132

    6.1%   24,308    5.7%
Total other loans   

144,203

    35.0%   149,733    35.1%
                     
Total portfolio loans   411,991    100.0%   425,940    100.0%
Allowance for portfolio loan losses   (10,466)        (10,889)     
Net deferred loan costs   5,948         

6,150

      
Portfolio loans, net  $407,473        $421,201      

 

 

16
 

 

ATLANTIC COAST FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2013

(unaudited)

 

NOTE 7. PORTFOLIO LOANS (continued)

 

The following table presents the contractual aging of the recorded investment in past due loans by class of loans as of March 31, 2013 and December 31, 2012:

 

   Current   30 – 59 Days
Past Due
   60 – 89 Days
Past Due
   > 90 Days
Past Due
   Total
Past Due
   Total 
   (Dollars in Thousands) 
                         
March 31, 2013                              
Real estate loans:                              
One- to four-family  $173,443   $2,919   $392   $6,999   $10,310   $183,753 
Commercial   50,424    268    -    7,371    7,639    58,063 
Other (land and multi-family)   18,092    351    -    516    867    18,959 
Total real estate loans   241,959    3,538    392    14,886    18,816    260,775 
                               
Real estate construction loans:                              
One- to four-family   -    -    -    -    -    - 
Commercial   6,273    -    -    739    739    7,012 
Acquisition and development   -    -    -    -    -    - 
Total real estate construction loans   6,273    -    -    739    739    7,012 
                               
Other loans:                              
Home equity   57,633    884    67    1,266    2,217    59,850 
Consumer   57,289    836    324    772    1,932    59,221 
Commercial   24,264    -    -    869    869    25,133 
Total other loans   139,186    1,720    391    2,907    5,018    144,204 
                               
Total portfolio loans  $387,418   $5,258   $783   $18,532   $24,573   $411,991 
                               
December 31, 2012                              
Real estate loans:                              
One- to four-family  $179,242   $3,598   $1,658   $8,559   $13,815   $193,057 
Commercial   49,922    101    -    8,170    8,271    58,193 
Other (land and multi-family)   19,289    24    -    595    619    19,908 
Total real estate loans   248,453    3,723    1,658    17,324    22,705    271,158 
                               
Real estate construction loans:                              
One- to four-family   -    -    -    -    -    - 
Commercial   4,310    -    -    739    739    5,049 
Acquisition and development   -    -    -    -    -    - 
Total real estate construction loans   4,310    -    -    739    739    5,049 
                               
Other loans:                              
Home equity   60,342    1,008    305    2,212    3,525    63,867 
Consumer   59,451    987    418    702    2,107    61,558 
Commercial   22,937    200    -    1,171    1,371    24,308 
Total other loans   142,730    2,195    723    4,085    7,003    149,733 
                               
Total portfolio loans  $395,493   $5,918   $2,381   $22,148   $30,447   $425,940 

 

17
 

 

ATLANTIC COAST FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2013

(unaudited)

NOTE 7. PORTFOLIO LOANS (continued)

 

Non-performing portfolio loans, including non-accrual portfolio loans, as of March 31, 2013 and December 31, 2012 were $19.2 million and $24.9 million, respectively. There were no portfolio loans over 90 days past-due and still accruing interest as of March 31, 2013 or December 31, 2012. Non-performing portfolio loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and larger individually evaluated loans classified as impaired loans.

 

The following table presents performing and non-performing portfolio loans by class of loans as of March 31, 2013 and December 31, 2012:

 

   Performing   Non-performing   Total 
   (Dollars in Thousands) 
             
March 31, 2013               
Real estate loans:               
One- to four-family  $176,307   $7,446   $183,753 
Commercial   50,692    7,371    58,063 
Other (land and multi-family)   18,443    516    18,959 
Total real estate loans   245,442    15,333    260,775 
                
Real estate construction loans:               
One- to four-family   -    -    - 
Commercial   6,273    739    7,012 
Acquisition and development   -    -    - 
Total real estate construction loans   6,273    739    7,012 
                
Other loans:               
Home equity   58,560    1,290    59,850 
Consumer   58,292    929    59,221 
Commercial   24,264    869    25,133 
Total other loans   141,116    3,088    144,204 
                
Total portfolio loans  $392,831   $19,160   $411,991 
                
December 31, 2012               
Real estate loans:               
One- to four-family  $182,502   $10,555   $193,057 
Commercial   49,550    8,643    58,193 
Other (land and multi-family)   19,313    595    19,908 
Total real estate loans   251,365    19,793    271,158 
                
Real estate construction loans:               
One- to four-family   -    -    - 
Commercial   4,310    739    5,049 
Acquisition and development   -    -    - 
Total real estate construction loans   4,310    739    5,049 
                
Other loans:               
Home equity   61,655    2,212    63,867 
Consumer   60,589    969    61,558 
Commercial   23,137    1,171    24,308 
Total other loans   145,381    4,352    149,733 
                
Total portfolio loans  $401,056   $24,884   $425,940 

 

 

18
 

ATLANTIC COAST FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2013

(unaudited)

 

NOTE 7. PORTFOLIO LOANS (continued)

 

The Company utilizes an internal asset classification system for portfolio loans other than consumer and residential loans as a means of reporting problem and potential problem loans. Under the risk rating system, the Company classifies problem and potential problem loans as “Special Mention”, “Substandard”, and “Doubtful” which correspond to risk ratings five, six and seven, respectively. Substandard portfolio loans, or risk rated six, include those characterized by the distinct possibility the Company may sustain some loss if the deficiencies are not corrected. Portfolio loans classified as Doubtful, or risk rated seven, have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Portfolio loans that do not currently expose the Company to sufficient risk to warrant classification in one of the aforementioned categories, but possess weaknesses that deserve management’s close attention are deemed to be Special Mention, or risk rated five. Risk ratings are updated any time the facts and circumstances warrant.

 

The Company evaluates consumer and residential loans based on whether the loans are performing or non-performing as well as other factors. One- to four-family residential loan balances are charged down by the expected loss amount at the time they become non-performing, which is generally 90 days past due. Consumer loans including automobile, manufactured housing, unsecured, and other secured loans are charged-off, net of expected recovery when the loan becomes significantly past due over a range of up to 180 days, depending on the type of loan.

 

The following table presents the risk category of those portfolio loans evaluated by internal asset classification as of March 31, 2013 and December 31, 2012:

 

   Pass   Special
Mention
   Substandard   Doubtful   Total 
   (Dollars in Thousands) 
                     
March 31, 2013                         
Real estate loans:                         
Commercial  $44,513   $2,283   $11,267   $-   $58,063 
Other (land and multi-family)   12,108    408    6,443    -    18,959 
Total real estate loans   56,621    2,691    17,710    -    77,022 
                          
Real estate construction loans:                         
Commercial   6,273    -    739    -    7,012 
Total real estate construction loans   6,273    -    739    -    7,012 
                          
Other loans:                         
Commercial   23,551    101    1,481    -    25,133 
Total other loans   23,551    101    1,481    -    25,133 
                          
Total portfolio loans  $86,445   $2,792   $19,930   $-   $109,167 
                          
December 31, 2012                         
Real estate loans:                         
Commercial  $43,542   $2,308   $12,343   $-   $58,193 
Other (land and multi-family)   13,004    413    6,491    -    19,908 
Total real estate loans   56,546    2,721    18,834    -    78,101 
                          
Real estate construction loans:                         
Commercial   4,310    -    739    -    5,049 
Total real estate construction loans   4,310    -    739    -    5,049 
                          
Other loans:                         
Commercial   22,342    104    1,862    -    24,308 
Total other loans   22,342    104    1,862    -    24,308 
                          
Total portfolio loans  $83,198   $2,825   $21,435   $-   $107,458 

 

 

19
 

ATLANTIC COAST FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2013

(unaudited)

 

NOTE 7. PORTFOLIO LOANS (continued)

 

When establishing the allowance for portfolio loan losses, management categorizes loans into risk categories generally based on the nature of the collateral and the basis of repayment. These risk categories and the relevant risk characteristics are as follows:

 

Real Estate Loans

 

·One- to four-family residential loans have historically had less risk than other loan types as they tend to be smaller balance loans without concentrations to a single borrower or group of borrowers. Repayment depends on the individual borrower’s capacity. Given the rapid deterioration in the market value of residential real estate over the last several years, there is now a greater risk of loss if actions such as foreclosure or short sale become necessary to collect the loan and private mortgage insurance was not purchased. In addition, depending on the state in which the collateral is located, the risk of loss may increase, due to the time required to complete the foreclosure process on a property.

 

·Commercial real estate loans generally have greater credit risks compared to one- to four-family residential real estate loans, as they usually involve larger loan balances secured by non-homogeneous or specific use properties. Repayment of these loans typically relies on the successful operation of a business or the generation of lease income by the property and is therefore more sensitive to adverse conditions in the economy and real estate market.

 

·Other real estate loans include loans secured by multi-family residential real estate and land. Generally these loans involve a greater degree of credit risk than residential real estate loans, but are normally smaller individual loan balances than commercial real estate loans; land loans due to the lack of cash flow and reliance on borrower’s capacity and multi-family due the reliance on the successful operation the project. Both loan types are also more sensitive to adverse economic conditions.

 

Real Estate Construction Loans

 

·Real estate construction loans, including one- to four-family, commercial and acquisition and development loans, generally have greater credit risk than traditional one- to four-family residential real estate loans. The repayment of these loans can be dependent on the sale of the property to third parties or the successful completion of the improvements by the builder for the end user. In the event a loan is made on property that is not yet approved for the planned development, there is the risk that approvals will not be granted or will be delayed. Construction loans also run the risk that improvements will not be completed on time or accordance with specifications and projected costs. Included in construction loans are SBA construction loans, which generally have less credit risk than traditional construction loans due to a portion of the balance being guaranteed upon completion of the construction.

 

Other Loans

 

·Home equity loans and home equity lines are similar to one- to four-family residential loans and generally carry less risk than other loan types as they tend to be smaller balance loans without concentrations to a single borrower or group or borrowers. However, similar to one- to four-family residential loans, risk of loss has increased over the last several years due to deterioration of the real estate market.

 

·Consumer loans often are secured by depreciating collateral, including cars and mobile homes, or are unsecured and may carry more risk than real estate secured loans. Consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.

 

 

20
 

ATLANTIC COAST FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2013

(unaudited)

 

NOTE 7. PORTFOLIO LOANS (continued)

 

·Commercial loans are secured by business assets or may be unsecured and repayment is directly dependent on the successful operation of the borrower’s business and the borrower’s ability to convert the assets to operating revenue and possess greater risk than most other types of loans should the repayment capacity of the borrower not be adequate.

 

Activity in the allowance for portfolio loan losses for the three months ended March 31, 2013 and 2012 was as follows:

 

   Beginning
Balance
   Charge-Offs   Recoveries   Provisions   Ending
Balance
 
   (Dollars in Thousands) 
                     
March 31, 2013                         
Real estate loans:                         
One- to four-family  $4,166   $(966)  $371   $555   $4,126 
Commercial   958    (122)   -    168    1,004 
Other (land and multi-family)   986    (102)   15    80    979 
Total real estate loans   6,110    (1,190)   386    803    6,109 
                          
Real estate construction loans:                         
One- to four-family   -    -    -    -    - 
Commercial   50    -    -    223    273 
Acquisition and development   -    -    -    -    - 
Total real estate construction loans   50    -    -    223    273 
                          
Other loans:                         
Home equity   2,636    (773)   147    132    2,142 
Consumer   1,448    (267)   63    28    1,272 
Commercial   645    (33)   10    48    670 
Total other loans   4,729    (1,073)   220    208    4,084 
                          
Total portfolio loans  $10,889   $(2,263)  $606   $1,234   $10,466 
                          
March 31, 2012                         
Real estate loans:                         
One- to four-family  $6,030   $(1,114)  $256   $558   $5,730 
Commercial   3,143    (2,138)   2    1,059    2,066 
Other (land and multi-family)   1,538    (900)   -    172    810 
Total real estate loans   10,711    (4,152)   258    1,789    8,606 
                          
Real estate construction loans:                         
One- to four-family   120    -    -    (118)   2 
Commercial   -    -    -    -    - 
Acquisition and development   -    -    -    -    - 
Total real estate construction loans   120    -    -    (118)   2 
                          
Other loans:                         
Home equity   3,125    (1,132)   13    1,126    3,132 
Consumer   885    (483)   80    567    1,049 
Commercial   685    (71)   2    111    727 
Total other loans   4,695    (1,686)   95    1,804    4,908 
                          
Total portfolio loans  $15,526   $(5,838)  $353   $3,475   $13,516 

 

21
 

 

  

ATLANTIC COAST FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2013

(unaudited)

 

NOTE 7. PORTFOLIO LOANS (continued)

 

The following table presents ending balances for the allowance for portfolio loan losses and portfolio loans based on the impairment method as of March 31, 2013:

 

   Individually
Evaluated for
Impairment
   Collectively
Evaluated for
Impairment
   Total Ending
Balance
 
   (Dollars in Thousands) 
             
Allowance for portfolio loan losses:               
Real estate loans:               
One- to four-family  $1,139   $2,987   $4,126 
Commercial   178    826    1,004 
Other (land and multi-family)   165    814    979 
Total real estate loans   1,482    4,627    6,109 
                
Real estate construction loans:               
One- to four-family   -    -    - 
Commercial   203    70    273 
Acquisition and development   -    -    - 
Total real estate construction loans   203    70    273 
                
Other loans:               
Home equity   352    1,790    2,142 
Consumer   45    1,227    1,272 
Commercial   296    374    670 
Total other loans   693    3,391    4,084 
                
Total ending allowance balance  $2,378   $8,088   $10,466 
                
Portfolio loans:               
Real estate loans:               
One- to four-family  $7,004   $176,749   $183,753 
Commercial   13,938    44,125    58,063 
Other (land and multi-family)   8,125    10,834    18,959 
Total real estate loans   29,067    231,708    260,775 
                
Real estate construction loans:               
One- to four-family   -    -    - 
Commercial   739    6,273    7,012 
Acquisition and development   -    -    - 
Total real estate construction loans   739    6,273    7,012 
                
Other loans:               
Home equity   2,399    57,451    59,850 
Consumer   366    58,855    59,221 
Commercial   1,620    23,513    25,133 
Total other loans   4,385    139,819    144,204 
                
Total ending portfolio loans balance  $34,191   $377,800   $411,991 

 

22
 

 

ATLANTIC COAST FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2013

(unaudited)

 

NOTE 7. PORTFOLIO LOANS (continued)

 

The following table presents ending balances for the allowance for portfolio loan losses and portfolio loans based on the impairment method as of December 31, 2012:

 

   Individually
Evaluated for
Impairment
   Collectively
Evaluated for
Impairment
   Total Ending
Balance
 
   (Dollars in Thousands) 
             
Allowance for portfolio loan losses:               
Real estate loans:               
One- to four-family  $1,116   $3,050   $4,166 
Commercial   165    793    958 
Other (land and multi-family)   156    830    986 
Total real estate loans   1,437    4,673    6,110 
                
Real estate construction loans:               
One- to four-family   -    -    - 
Commercial   -    50    50 
Acquisition and development   -    -    - 
Total real estate construction loans   -    50    50 
                
Other loans:               
Home equity   384    2,252    2,636 
Consumer   59    1,389    1,448 
Commercial   308    337    645 
Total other loans   751    3,978    4,729 
                
Total ending allowance balance  $2,188   $8,701   $10,889 
                
Portfolio loans:               
Real estate loans:               
One- to four-family  $7,966   $185,091   $193,057 
Commercial   15,034    43,159    58,193 
Other (land and multi-family)   8,507    11,401    19,908 
Total real estate loans   31,507    239,651    271,158 
                
Real estate construction loans:               
One- to four-family   -    -    - 
Commercial   739    4,310    5,049 
Acquisition and development   -    -    - 
Total real estate construction loans   739    4,310    5,049 
                
Other loans:               
Home equity   2,957    60,910    63,867 
Consumer   467    61,091    61,558 
Commercial   2,006    22,302    24,308 
Total other loans   5,430    144,303    149,733 
                
Total ending portfolio loans balance  $37,676   $388,264   $425,940 

 

 

23
 

ATLANTIC COAST FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2013

(unaudited)

 

NOTE 7. PORTFOLIO LOANS (continued)

 

Portfolio loans for which the concessions have been granted as a result of the borrower’s financial difficulties are considered a troubled debt restructuring (TDR). These concessions, which in general are applied to all categories of portfolio loans, may include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, or a combination of these or other actions intended to maximize collection.

 

For homogeneous loan categories, such as one- to four-family residential loans and home equity loans, the amount of impairment resulting from the modification of the loan terms is calculated in aggregate by category of portfolio loan. The resulting impairment is included in specific reserves. If an individual homogeneous loan defaults under terms of the TDR and becomes non-performing, the Bank follows its usual practice of charging the loan down to its estimated fair value and the charge-off is considered as a factor in determining the amount of the general component of the allowance for loan losses.

 

For larger non-homogeneous loans, each loan that is modified is evaluated individually for impairment based on either discounted cash flow or, for collateral dependent loans, the appraised value of the collateral less selling costs. If the loan is not collateral dependent, the amount of the impairment, if any, is recorded as a specific reserve in the allowance for loan loss reserve. If the loan is collateral dependent, the amount of the impairment is charged off. There was an allocated allowance for loan losses for loans individually evaluated for impairment of approximately $2.4 million and $2.2 million at March 31, 2013 and December 31, 2012, respectively.

 

Portfolio loans modified as TDRs with market rates of interest are classified as impaired loans in the year of restructure and until the loan has performed for 12 months in accordance with the modified terms. The resulting impairment is included in specific reserves. TDRs classified as impaired loans as of March 31, 2013 and December 31, 2012 were as follows:

 

   March 31, 2013   December 31, 2012 
   (Dollars in Thousands) 
         
Real estate loans:          
One- to four-family  $7,004   $7,966 
Commercial   6,555    7,635 
Other (land and multi-family)   1,682    2,053 
Total real estate loans   15,241    17,654 
           
Real estate construction loans:          
One- to four-family   -    - 
Commercial   -    - 
Acquisition and development   -    - 
Total real estate construction loans   -    - 
           
Other loans:          
Home equity   2,399    2,957 
Consumer   366    467 
Commercial   943    1,329 
Total other loans   3,708    4,753 
           
Total TDRs classified as impaired loans  $18,949   $22,407 

 

There were no commitments to lend additional amounts on TDRs as of March 31, 2013 and December 31, 2012.

 

24
 

 

ATLANTIC COAST FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2013

(unaudited)

 

NOTE 7. PORTFOLIO LOANS (continued)

 

The Company is proactive in modifying residential and home equity loans in early stage delinquency because we believe modifying the loan prior to it becoming non-performing results in the least cost to the Bank. The Bank also modifies larger commercial and commercial real estate loans as TDRs rather than pursuing other means of collection when it believes the borrower is committed to the successful repayment of the loan and the business operations are likely to support the modified loan terms.

 

The following tables present information on troubled debt restructurings and subsequent defaults during the three months ended March 31, 2013:

 

   Number of Contracts   Pre-Modification
Outstanding Recorded
Investments
   Post-Modification
Outstanding Recorded
Investments
 
   (Dollars in Thousands) 
Troubled debt restructuring:               
Real estate loans:               
One- to four-family   4   $613   $613 
Other (land and multi-family)   1    171    171 
Total real estate loans   5    784    784 
                
Other loans:               
Home equity   3    115    115 
Commercial   1    150    150 
Total other loans   4    265    265 
                
Total troubled debt restructurings   9   $1,049   $1,049 

 

There were no subsequent defaults on portfolio loans that were restructured as troubled debt restructurings during the three months ended March 31, 2013.

 

The following tables present information on troubled debt restructurings and subsequent defaults during the three months ended March 31, 2012:

 

   Number of Contracts   Pre-Modification
Outstanding Recorded
Investments
   Post-Modification
Outstanding Recorded
Investments
 
   (Dollars in Thousands) 
Troubled debt restructuring:               
Real estate loans:               
One- to four-family   6   $586   $563 
Commercial   3    544    544 
Other (land and multi-family)   3    668    668 
Total real estate loans   12    1,798    1,775 
                
Other loans:               
Home equity   4    649    649 
Consumer   3    218    218 
Commercial   1    43    43 
Total other loans   8    910    910 
                
Total troubled debt restructurings   20   $2,708   $2,685 

 

There were no subsequent defaults on portfolio loans that were restructured as troubled debt restructurings during the three months ended March 31, 2012.

 

25
 

 

ATLANTIC COAST FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2013

(unaudited)

 

NOTE 7. PORTFOLIO LOANS (continued)

 

The following table presents information about impaired portfolio loans as of March 31, 2013:

 

   Recorded
Investment
   Unpaid
Principal Balance
   Related
Allowance
 
   (Dollars in Thousands) 
             
With no related allowance recorded:               
Real estate loans:               
One- to four-family  $-   $-   $- 
Commercial   10,999    11,081    - 
Other (land and multi-family)   6,443    6,443    - 
Total real estate loans   17,442    17,524    - 
                
Real estate construction loans:               
One- to four-family   -    -    - 
Commercial   -    -    - 
Acquisition and development   -    -    - 
Total real estate construction loans   -    -    - 
                
Other loans:               
Home equity   -    -    - 
Consumer   -    -    - 
Commercial   747    2,445    - 
Total other loans   747    2,445    - 
                
Total with no related allowance recorded  $18,189   $19,969   $- 
                
With an allowance recorded:               
Real estate loans:               
One- to four-family  $7,004   $7,087   $1,139 
Commercial   2,939    2,939    178 
Other (land and multi-family)   1,682    1,879    166 
Total real estate loans   11,625    11,905    1,483 
                
Real estate construction loans:               
One- to four-family   -    -    - 
Commercial   739    4,988    203 
Acquisition and development   -    -    - 
Total real estate construction loans   739    4,988    203 
                
Other loans:               
Home equity   2,399    2,602    352 
Consumer   366    367    44 
Commercial   873    873    296 
Total other loans   3,638    3,842    692 
                
Total with an allowance recorded  $16,002   $20,735   $2,378 

 

 

26
 

ATLANTIC COAST FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2013

(unaudited)

 

NOTE 7. PORTFOLIO LOANS (continued)

 

The following table presents information about impaired portfolio loans as of December 31, 2012:

 

   Recorded
Investment
   Unpaid
Principal Balance
   Related
Allowance
 
   (Dollars in Thousands) 
             
With no related allowance recorded:               
Real estate loans:               
One- to four-family  $-   $-   $- 
Commercial   12,073    12,758    - 
Other (land and multi-family)   6,490    6,493    - 
Total real estate loans   18,563    19,251    - 
                
Real estate construction loans:               
One- to four-family   -    -    - 
Commercial   739    4,988    - 
Acquisition and development   -    -    - 
Total real estate construction loans   739    4,988    - 
                
Other loans:               
Home equity   -    -    - 
Consumer   -    -    - 
Commercial   1,117    2,814    - 
Total other loans   1,117    2,814    - 
                
Total with no related allowance recorded  $20,419   $27,053   $- 
                
With an allowance recorded:               
Real estate loans:               
One- to four-family  $7,966   $8,071   $1,116 
Commercial   2,961    2,961    165 
Other (land and multi-family)   2,017    2,195    156 
Total real estate loans   12,944    13,227    1,437 
                
Real estate construction loans:               
One- to four-family   -    -    - 
Commercial   -    -    - 
Acquisition and development   -    -    - 
Total real estate construction loans   -    -    - 
                
Other loans:               
Home equity   2,957    3,160    384 
Consumer   467    467    59 
Commercial   889    889    308 
Total other loans   4,313    4,516    751 
                
Total with an allowance recorded  $17,257   $17,743   $2,188 

 

 

27
 

ATLANTIC COAST FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2013

(unaudited)

 

NOTE 7. PORTFOLIO LOANS (continued)

 

The following table presents interest income on impaired portfolio loans by class of portfolio loans for the three months ended March 31, 2013 and 2012:

 

   Average Balance   Interest Income
Recognized
   Cash Basis
Interest Income
Recognized
 
   (Dollars in Thousands) 
             
March 31, 2013               
Real estate loans:               
One- to four-family  $7,485   $93   $- 
Commercial   14,486    93    - 
Other (land and multi-family)   8,317    72    - 
Total real estate loans   30,288    258    - 
                
Real estate construction loans:               
One- to four-family   -    -    - 
Commercial   740    -    - 
Acquisition and development   -    -    - 
Total real estate construction loans   740    -    - 
                
Other loans:               
Home equity   2,678    28    - 
Consumer   417    5    - 
Commercial   1,813    11    - 
Total other loans   4,908    44    - 
                
Total portfolio loans  $35,936   $302   $- 
                
March 31, 2012               
Real estate loans:               
One- to four-family  $11,392   $78   $- 
Commercial   17,144    61    - 
Other (land and multi-family)   6,439    31    - 
Total real estate loans   34,975    170    - 
                
Real estate construction loans:               
One- to four-family   228    -    - 
Commercial   2,362    -    - 
Acquisition and development   -    -    - 
Total real estate construction loans   2,590    -    - 
                
Other loans:               
Home equity   2,234    28    - 
Consumer   374    6    - 
Commercial   3,945    7    - 
Total other loans   6,553    41    - 
                
Total portfolio loans  $44,118   $211   $- 

 

 

28
 

ATLANTIC COAST FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2013

(unaudited)

 

NOTE 7. PORTFOLIO LOANS (continued)

 

The Company has originated portfolio loans with directors and executive officers and their associates. These loans totaled approximately $1.5 million and $1.6 million as of March 31, 2013 and December 31, 2012, respectively. The activity on these loans during the three months ended March 31, 2013 and the year ended December 31, 2012 was as follows:

 

   March 31, 2013   December 31, 2012 
   (Dollars in Thousands) 
         
Beginning balance  $1,563   $1,587 
New portfolio loans   -    2 
Effect of changes in related parties   -    71 
Repayments   (38)   (97)
Ending balance  $1,525   $1,563 

 

NOTE 8. OTHER LOANS

 

Other loans was comprised of loans secured by one- to four-family residential homes originated internally and held-for-sale (mortgage loans held-for-sale), small business loans originated internally and held-for-sale (SBA loans held-for-sale), and loans secured by one- to four-family residential homes originated under purchase and assumption agreements by third-party originators (warehouse loans). The Company originates mortgage loans held-for-sale with the intent to sell the loans and the servicing rights to investors. The Company originates SBA loans held-for-sale with the intent to sell the guaranteed portion of the loans to investors, while maintaining the servicing rights. The Company originates warehouse loans and permits the third-party originator to sell the loans and servicing rights to investors in order to repay the warehouse balance outstanding. Due to the generally short duration of time the Company holds these loans, management has determined that no allowance for loan losses is necessary.

 

The Company did not internally originate any mortgage loans held-for-sale during the three months ended March 31, 2013. The Company internally originated approximately $11.1 million of mortgage loans held-for-sale during the three months ended March 31, 2012. The gain recorded on sale of mortgage loans held-for-sale during the three months ended March 31, 2012 was $0.4 million.

 

During the three months ended March 31, 2013 and 2012 the Company internally originated approximately $2.4 million and $2.6 million, respectively, of SBA loans held-for-sale. The gain recorded on sales of SBA loans held-for-sale during the three months ended March 31, 2013 and 2012 was $0.3 million and $0.2 million, respectively. Additionally, during the three months ended March 31, 2013 and 2012 the Company recognized a gain of $0.1 million and $0.1 million, respectively, on the servicing of these loans.

 

During the three months ended March 31, 2013 the Company originated approximately $277.1 million of warehouse loans from third parties. During the three months ended March 31, 2012 the Company originated approximately $175.4 million of warehouse loans from third parties. For the three months ended March 31, 2013 and 2012, the weighted average number of days outstanding of warehouse loans was 22 days and 27 days, respectively.

 

NOTE 9. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

 

The Company has securities sold under agreements to repurchase with a carrying amount of $92.8 million as of March 31, 2013 and December 31, 2012. Under the terms of the agreements the collateral is subject to a haircut determined by the counterparty and must be pledged in amounts equal to the debt plus the fair market value of the debt that is in excess of the principal amount of the debt. As a result, the Company had $115.6 million and $116.9 million in securities posted as collateral for these instruments as of March 31, 2013 and December 31, 2012, respectively. The Company will be required to post additional collateral if the gap between the market value of the liability and the contractual amount of the liability increases. In the event the Bank pre-pays the agreements prior to maturity, it must do so at its fair value, which as of March 31, 2013 exceeded the book value of the individual agreements by $13.4 million.

 

 

29
 

ATLANTIC COAST FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2013

(unaudited)

 

NOTE 9. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (continued)

 

Information concerning securities sold under agreements to repurchase as of March 31, 2013 and December 31, 2012 is summarized as follows:

 

   March 31, 2013   December 31, 2012 
   (Dollars in Thousands) 
         
Average daily balance  $92,800   $92,800 
Weighted average coupon interest rate during the period   5.10%   5.10%
Maximum month-end balance during the period  $92,800   $92,800 
Weighted average coupon interest rate at end of period   5.10%   5.10%
Weighted average maturity (months)   39    42 

 

The securities sold under agreements to repurchase as of March 31, 2013 mature as follows:

 

   Amount Maturing 
   (Dollars in Thousands) 
      
2013  $- 
2014   26,500 
2015   10,000 
2016   5,000 
2017   25,000 
Thereafter   26,300 
Total  $92,800 

 

Beginning in January 2009, the lender has the option to terminate individual advances in whole the following quarter; there is no termination penalty if terminated by the lender. There have been no early terminations.

 

Under the terms of the agreement with the counterparty on $77.8 million of the $92.8 million the Bank is required to pledge additional collateral if its capital ratios decrease below the Prompt Corrective Action (PCA) defined levels of well-capitalized or adequately capitalized. Due to the decline in capital ratios below the PCA defined levels at December 31, 2012, the Company was required to increase pledged collateral by $4.0 million. Failure to maintain required collateral levels is in violation of the default provision under the terms of the agreement and could result in a termination penalty. At March 31, 2013, the fair value of $77.8 million of the debt exceeded the carrying value by approximately $10.7 million, which approximates the termination penalty.

 

NOTE 10. FEDERAL HOME LOAN BANK ADVANCES

 

FHLB borrowings at March 31, 2013 and December 31, 2012 were $110.0 million and $135.0 million, respectively. During the quarter ended March 31, 2013, the Company prepaid advances scheduled for maturity in the third and fourth quarter of 2013 totaling $25.0 million, resulting in a prepayment penalty of $0.5 million. The FHLB advances had a weighted-average maturity of 47 months and a weighted-average rate of 4.11% at March 31, 2013.

 

The Bank’s borrowing capacity with the FHLB is $0.6 million at March 31, 2013. The minimal borrowing capacity is due to the declining balance of outstanding loans used as collateral as a result of normal loan payments and payoffs. In addition, due to the Bank’s financial condition the FHLB has increased the amount of discount applied to determine the collateral value of the loans. The Bank intends to supplement its loan collateral with investment securities as needed to secure the FHLB borrowings or pre-pay advances to reduce the amount of collateral required to secure the debt. Unpledged securities available for collateral amounted to $21.1 million as of March 31, 2013. In the event the Bank pre-pays additional advances prior to maturity, it must do so at its fair value, which as of March 31, 2013 exceeded the book value of the individual advances by $14.3 million.

 

30
 

 

ATLANTIC COAST FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2013

(unaudited)

 

NOTE 10. FEDERAL HOME LOAN BANK ADVANCES (continued)

 

Effective August 31, 2012, the FHLB required that the Bank collateralize the excess of the fair value of the FHLB advances over the book value with cash and securities. As of March 31, 2013 the amount of the collateral pledged for the excess of fair value over the book value totaled $16.9 million, including $2.5 million of cash (reported on the Condensed Consolidated Balance Sheets in short-term interest-earning deposits) and $14.4 million of investment securities.

 

NOTE 11. INCOME TAXES

 

The Company considers at each reporting period all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed to reduce its deferred tax asset to an amount that is more likely than not to be realized. A determination of the need for a valuation allowance for the deferred tax assets is dependent upon management’s evaluation of both positive and negative evidence. Positive evidence includes the probability of achieving forecasted future taxable income, applicable tax strategies and assessments of the current and future economic and business conditions. Negative evidence includes the Company’s cumulative losses and expiring tax credit carryforwards. As of March 31, 2013, the Company evaluated the expected realization of its federal and state deferred tax assets which, prior to a valuation allowance, totaled $29.3 million and was primarily comprised of future tax benefits associated with the allowance for loan losses and net operating loss carryforward. Based on this evaluation it was concluded that a valuation allowance continues to be required for the federal deferred tax asset. The realization of the deferred tax asset is dependent upon generating taxable income. The Company also continues to maintain a valuation allowance for the state deferred tax asset. If the valuation allowance is reduced or eliminated, future tax benefits will be recognized as a reduction to income tax expense which will have a positive non-cash impact on our net income and stockholders’ equity.

 

Income tax expense (benefit) for the three months ending March 31, 2013 and 2012 was as follows:

 

   2013   2012 
   (Dollars in Thousands) 
Loss before income tax expense  $(2,039)  $(1,709)
Effective tax rate   39.4%   40.4%
Income tax benefit   (803)   (690)
Increase in valuation allowance – federal   725    619 
Increase in valuation allowance – state   78    71 
Income tax expense  $-   $- 

 

NOTE 12. LOSS PER COMMON SHARE

 

The basic weighted average common shares and common stock equivalents are computed using the treasury stock method. The basic weighted average common shares outstanding for the period is adjusted for average unallocated employee stock ownership plan shares, average director’s deferred compensation shares, and average unearned restricted stock awards. Stock options and stock awards for shares of common stock were not considered in computing diluted weighted average common shares outstanding for the three months ended March 31, 2013 and 2012, respectively. Due to reported losses in each period there was no dilutive effect.

 

 

31
 

ATLANTIC COAST FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2013

(unaudited)

 

NOTE 12. LOSS PER COMMON SHARE (continued)

 

The following table summarizes the basic and diluted loss per common share computation for the three months ended March 31, 2013 and 2012:

 

   2013   2012 
   (Dollars in Thousands, Except Share Information) 
Basic:          
Net Loss  $(2,039)  $(1,709)
Weighted average common shares outstanding   2,628,969    2,628,969 
Less: average unallocated employee stock ownership plan shares   (86,227)   (91,017)
Less: average director’s deferred compensation shares   (38,142)   (42,205)
Less: average unvested restricted stock awards   (822)   (1,393)
Weighted average common shares outstanding, as adjusted   2,503,778    2,494,354 
Basic loss per common share  $(0.81)  $(0.69)
           
Diluted:          
Net Loss  $(2,039)  $(1,709)
Weighted average common shares outstanding, as adjusted (from above)   2,503,778    2,494,354 
Add: dilutive effects of assumed exercise of stock options   -    - 
Add: dilutive effects of full vesting of stock awards   -    - 
Weighted average dilutive shares outstanding   2,503,778    2,494,354 
Diluted loss per common share  $(0.81)  $(0.69)

 

NOTE 13. REGULATORY SUPERVISION

 

On August 10, 2012 the Board of Directors of the Bank agreed to the Order with its primary regulator, the OCC. The Order does not affect Atlantic Coast Bank’s ability to continue to conduct its banking business with customers in a normal fashion. Banking products and services, hours of operation, internet banking, ATM usage, and FDIC deposit insurance coverage will all be unaffected. Customer deposits remain protected and insured by the FDIC up to $250,000 per depositor. The Order provided that:

 

·the Order replaces and therefore terminates the Supervisory Agreement entered into between the Bank and the Office of Thrift Supervision on December 10, 2010;

 

·within 10 days of the date of the Order, the Board had to establish a compliance committee that will be responsible for monitoring and coordinating the Bank’s adherence to the provisions of the Order;

 

·within 90 days of the date of the Order, the Board had to develop and submit to the OCC for receipt of supervisory non-objection of at least a two-year strategic plan to achieve objectives for the Bank’s risk profile, earnings performance, growth, balance sheet mix, off-balance sheet activities, liability structure, capital and liquidity adequacy and updating such plan each year by January 31 beginning on January 31, 2014;

 

·until such time as the OCC provides written supervisory non-objection of the Bank’s strategic plan, the Bank will not significantly deviate from products, services, asset composition and size, funding sources, structures, operations, policies, procedures and markets of the Bank that existed prior to the Order without receipt of prior non-objection from the OCC;

 

 

32
 

ATLANTIC COAST FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2013

(unaudited)

 

NOTE 13. REGULATORY SUPERVISION (continued)

 

·by December 31, 2012, the Bank needed to achieve and maintain a total risk based capital ratio of 13.00% of risk weighted assets and Tier 1 capital ratio of 9.00% of adjusted total assets;

 

·within 60 days of the date of the Order, the Board needed to develop and implement an effective internal capital planning process to assess the Bank’s capital adequacy in relation to its overall risks and to ensure maintenance of appropriate capital levels, which should be no less than total risk based capital ratio of 13.00% of risk weighted assets and Tier 1 capital ratio of 9.00% of adjusted total assets;

 

·the Bank may not accept, renew or roll over any brokered deposit unless it has applied for and been granted a waiver of this prohibition by the Federal Deposit Insurance Corporation (the FDIC);

 

·within 90 days of the date of the Order, the Board had to forward to the OCC for receipt of written supervisory non-objection a written capital plan for the Bank covering at least a two year period that achieves and maintains total risk based capital ratio of 13.00% of risk weighted assets and Tier 1 capital ratio of 9.00% of adjusted total assets in addition to certain other requirements;

 

·the Bank may declare or pay a dividend or make a capital distribution only when it is in compliance with its approved capital plan and would remain in compliance with its approved capital plan after payment of such dividends or capital distribution and receives prior written approval of the OCC;

 

·following receipt of written no supervisory objection of its capital plan, the Board will monitor the Bank’s performance against the capital plan and shall review and update the plan annually no later than January 31 of each year, beginning with January 31, 2014;

 

·if the Bank fails to achieve and maintain the required capital ratios by December 31, 2012, fails to submit a capital plan within 90 days of the date of the Order or fails to implement a written capital plan for which the OCC has provided a written determination of no supervisory objection, then, at the sole discretion of the OCC, the Bank may be deemed undercapitalized for purposes of the Order;

 

·within 30 days of the date of the Order, the Board had to revise and maintain a comprehensive liquidity risk management program which assesses on an ongoing basis, the Bank’s current and projected funding needs, and that ensures that sufficient funds or access to funds exist to meet those needs;

 

·within 60 days of the date of the Order, the Board had to revise its problem asset reduction plan (PARP) the design of which will be to eliminate the basis of criticism of those assets criticized as “doubtful”, “substandard” or “special mention” during the OCC’s most recent report of examination as well as any subsequent examination or review by the OCC and any other internal or external loan reviews;

 

·within 60 days of the date of the Order, the Board had to revise its written concentration management program for identifying, monitoring, and controlling risks associated with asset and liability concentrations, including off-balance sheet concentrations;

 

·the Bank’s concentration management program will include a contingency plan to reduce or mitigate concentrations deemed imprudent for the Bank’s earnings, capital, or in the event of adverse market conditions, including strategies to reduce the current concentrations to Board established limits and a restriction on purchasing bank owned life insurance (BOLI) until such time as the BOLI exposure has been reduced below regulatory guidelines of 25.00% of total capital; and

 

·the Board will immediately take all necessary steps to ensure that the Bank management corrects each violation of law, rule or regulation cited in the OCC’s most recent report of examination and within 60 days of the date of the Order, the Board shall adopt, implement, and thereafter ensure Bank adherence to specific procedures to prevent future violations and the Bank’s adherence to general procedures addressing compliance management of internal controls and employee education regarding laws, rules and regulations.

 

 

33
 

ATLANTIC COAST FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2013

(unaudited)

 

NOTE 13. REGULATORY SUPERVISION (continued)

 

The Bank believes it has satisfied all requirements under the Order to date, excluding achieving a total risk based capital ratio of 13.00% of risk weighted assets and Tier 1 capital ratio of 9.00% of adjusted total assets. Atlantic Coast Bank’s actual and required capital levels and ratios were as follows:

 

   Actual   Required for Capital
Adequacy Purposes
   Required Capital Levels
Under the Consent Order
 
   Amount   Ratio   Amount   Ratio   Amount   Ratio 
   (Dollars in Millions) 
March 31, 2013                              
Total capital (to risk weighted assets)  $43.3    9.81%  $35.3    8.00%  $57.4    13.00%
Tier 1 (core) capital (to risk weighted assets)   37.7    8.54%   17.6    4.00%   n/a    n/a 
Tier 1 (core) capital (to adjusted total assets)   37.7    5.03%   30.0    4.00%   67.4    9.00%
                               
December 31, 2012                              
Total capital (to risk weighted assets)  $45.6    9.78%  $37.3    8.00%  $60.6    13.00%
Tier 1 (core) capital (to risk weighted assets)   39.7    8.52%   18.6    4.00%   n/a    n/a 
Tier 1 (core) capital (to adjusted total assets)   39.7    5.13%   30.9    4.00%   69.6    9.00%

 

 

 

The Bank’s capital classification as of March 31, 2013, was adequately capitalized.

 

The Company remains subject to the Supervisory Agreement with the Federal Reserve Bank of Atlanta which was entered into on December 10, 2010 and provides, among other things, that: (1) the Company must comply with regulatory prior notification requirements with respect to changes in directors and senior executive officers; (2) the Company cannot declare or pay dividends or make any other capital distributions without prior written Federal Reserve approval; (3) the Company will not be permitted to enter into, renew, extend or revise any contractual arrangement relating to compensation or benefits for any senior executive officers or directors, unless it provides 30 days prior written notice of the proposed transaction to the Federal Reserve Board; (4) the Company may not make any golden parachute payment or prohibited indemnification payment without FRB prior written approval; (5) the Company may not incur, issue, renew or rollover any debt or debt securities, increase any current lines of credit, guarantee the debt of any entity, or otherwise incur any additional debt without the prior written non-objection of the Federal Reserve Board.

 

 

34
 

ATLANTIC COAST FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2013

(unaudited)

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with Item 1. Financial Statements and the notes thereto included elsewhere in this report. The discussion below contains forward-looking statements within the meaning of the federal securities laws. Statements in this filing that are not strictly historical are forward-looking and are based upon current expectations that may differ materially from actual results. These forward-looking statements, identified by words such as "will," "expected," "believe," and "prospects," involve risks and uncertainties that could cause actual results to differ materially from those anticipated by the statements made herein. These risks and uncertainties involve general economic trends and changes in interest rates, increased competition, changes in consumer demand for financial services, the possibility of unforeseen events affecting the industry generally, the uncertainties associated with newly developed or acquired operations, market disruptions and other effects of terrorist activities, and the possibility that the aforementioned merger with Bond Street does not close when expected or at all because required regulatory, stockholder or other approvals and other conditions to closing are not received or satisfied on a timely basis or at all.

 

Atlantic Coast Financial Corporation wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and advise readers that various factors could affect Atlantic Coast Financial Corporation’s financial performance and could cause Atlantic Coast Financial Corporation’s actual results for future periods to differ materially from those anticipated or projected. Atlantic Coast Financial Corporation undertakes no obligation to publicly release revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unforeseen events, except as required to be reported under the rules and regulations of the Securities and Exchange Commission.

 

General Description of Business

 

The principal business of Atlantic Coast Financial Corporation (the Company) and Atlantic Coast Bank (The Bank) consists of attracting retail deposits from the general public and investing those funds primarily in loans secured by one- to four-family residences originated under purchase and assumption agreements by third party originators (warehouse loans), and, to a lesser extent, first mortgages on owner occupied, one- to four-family residences, home equity loans and automobile and other consumer loans originated for retention in our loan portfolio. In addition we have been increasing our focus on small business lending through our Small Business Administration (SBA) lending programs, as well as commercial business and owner occupied commercial real estate loans to small businesses. Loans are obtained principally through retail staff and, brokers. The Company sells the guaranteed portion of loans originated through small business lending, rather than hold the loans in portfolio. We also originate multi-family residential loans and commercial construction and residential construction loans, but no longer emphasize the origination of such loans unless they are connected with SBA lending. We also invest in investment securities, primarily those issued by U.S. government-sponsored agencies or entities, including Fannie Mae, Freddie Mac and Ginnie Mae.

 

Revenues are derived principally from interest on loans and other interest-earning assets, such as investment securities. To a lesser extent, revenue is generated from service charges, gains on the sale of loans and other income.

 

The Company offers a variety of deposit accounts having a wide range of interest rates and terms, which generally include savings accounts, money market accounts, demand deposit accounts and time deposit accounts with terms ranging from 90 days to five years. In accordance with the Consent Order (the Order) entered into with the Office of the Comptroller of Currency (the OCC) on August 10, 2012, interest rates paid on deposit are limited and subject to national rates published weekly by the Federal Deposit Insurance Corporation. Deposits are primarily solicited in the Bank’s market area of southeastern Georgia and the Jacksonville metropolitan area when necessary to fund loan demand.

 

35
 

 

Recent Events

 

On February 25, 2013, the Company and the Bank entered into an Agreement and Plan of Merger (the Merger Agreement) with Bond Street Holdings, Inc. (Bond Street) and its bank subsidiary, Florida Community Bank, N.A. (Florida Community Bank). Pursuant to the Merger Agreement, the Company will be merged with and into Bond Street (the Merger) and the Bank will then merge with and into Florida Community Bank.

 

Under the terms of the Merger Agreement, each share of the Company’s common stock issued and outstanding immediately prior to the completion of the Merger will be converted into the right to receive $5.00 in cash. Of this amount, (i) $3.00 per share in cash will be payable to stockholders following the closing of the Merger; (ii) $2.00 per share in cash will be held in an escrow account and will be available to cover losses from stockholder claims, net of payments received under insurance policies covering such losses, for one year following the closing of the Merger or until the final resolution of such claims, if later. Any remaining cash will be payable to stockholders of the Company.

 

On April 22, 2013, the Company and the Bank entered into Amendment Number 1 to the Merger Agreement (the Amended Merger Agreement) with Bond Street and Florida Community Bank. The Amended Merger Agreement eliminated the transaction’s $2.00 per share contingency consideration. Under the terms of the Amended Merger Agreement, each share of the Company’s common stock issued and outstanding immediately prior to the completion of the merger will be converted into the right to receive $5.00 in cash at closing.

 

The Merger Agreement and the transactions contemplated thereby remain subject to the approval of the stockholders of the Company, regulatory approvals and other customary closing conditions. Closing of the Merger is expected to occur by the end of the second quarter of 2013.

 

Critical Accounting Policies

 

Certain accounting policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances, including, but without limitation, changes in interest rates, performance of the economy, financial condition of borrowers and laws and regulations. Management believes that its critical accounting policies include determining the allowance for loan losses, determining fair value of securities available-for-sale, other real estate owned and accounting for deferred income taxes. These accounting policies are discussed in detail in Note 1 of the Notes to the Consolidated Financial Statements included in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the Securities and Exchange Commission on April 1, 2013.

 

Allowance for Loan Losses

 

An allowance for loan losses (allowance) is maintained to reflect probable incurred losses in the loan portfolio. The allowance is based on ongoing assessments of the estimated losses incurred in the loan portfolio and is established as these losses are recognized through a provision for loan losses charged to earnings. Generally, loan losses are charged against the allowance when management believes the uncollectibity of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Due to the decline in real estate values in our markets since 2008 and the weak United States economy in general, we believe it is likely that collateral for non-performing one- to four-family residential and home equity loans, will not be sufficient to fully repay such loans. Therefore the Company charges one- to four-family residential and home equity loans down by the expected loss amount at the time they become non-performing, which is generally 90 days past due. This process accelerates the recognition of charge-offs on one- to four-family residential and home equity loans but has no impact on the impairment evaluation process.

 

36
 

The reasonableness of the allowance is reviewed and established by management, within the context of applicable accounting and regulatory guidelines, based upon its evaluation of then-existing economic and business conditions affecting the Bank’s key lending areas. Senior credit officers monitor the conditions discussed above continuously and reviews are conducted monthly with the Bank’s senior management and Board of Directors.

 

Management’s methodology for assessing the reasonableness of the allowance consists of several key elements, which include a general loss component for unimpaired loans by type of loan and specific allowances for identified impaired loans.

 

The general loss component is calculated by applying loss factors, adjusted for other qualitative factors to outstanding unimpaired loan balances. Loss factors are based on the Bank’s recent loss experience. Qualitative factors consider current market conditions that may impact real estate values within the Bank’s primary lending areas, and on other significant factors that, in management’s judgment, may affect the ability to collect loans in the portfolio as of the evaluation date. Other significant qualitative factors that exist as of the balance sheet date that are considered in determining the adequacy of the allowance include the following: (1) Current delinquency levels and trends; (2) Non-performing asset levels and trends and related charge-off history; (3) Economic trends – local and national; (4) Changes in loan policy; (5) Expertise of management and staff of the Bank; (6) Volumes and terms of loans; and (7) Concentrations of credit.

 

The impact of the general loss component on the allowance began increasing during 2008 and has remained at an elevated level through the end of the first quarter of 2013. The increase reflected the deterioration of market conditions since 2008, and the increase in the recent loan loss experience that has resulted from management’s proactive approach to charging off losses on impaired one- to four-family and home equity loans in the period the impairment is identified.

 

Management also evaluates the allowance for loan losses based on a review of certain large balance individual loans. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows management expects to receive on impaired loans that may be susceptible to significant change and risks. For all specifically reviewed loans where it is probable that the Bank will be unable to collect all amounts due according to the terms of the loan agreement, impairment is determined by computing a fair value based on either discounted cash flows using the loan’s initial interest rate or the fair value of the collateral if the loan is collateral dependent. No specific allowance is recorded unless fair value is less than carrying value. Large groups of smaller balance homogeneous loans, such as individual consumer and residential loans are collectively evaluated for impairment and are excluded from the specific impairment evaluation; for these loans, the allowance for loan losses is calculated in accordance with the general allowance for loan losses policy described above. Accordingly, individual consumer and residential loans are not separately identified for impairment disclosures, unless the loan has been modified as a troubled debt restructuring as discussed below.

 

Loans for which the terms have been modified as a result of the borrower’s financial difficulties are classified as troubled debt restructurings (TDR). TDRs are measured for impairment based upon the present value of estimated future cash flows using the loan’s interest rate at inception of the loan or the appraised value of the collateral if the loan is collateral dependent. Impairment of homogeneous loans, such as one- to four-family residential loans, that have been modified as TDRs is calculated in the aggregate based on the present value of estimated future cash flows. Loans modified as TDRs with market rates of interest are classified as impaired loans in the year of restructure and until the loan has performed for 12 months in accordance with the modified terms.

 

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Fair Value of Securities Available-for-Sale

 

Securities available-for-sale are carried at fair value, with unrealized holding gains and losses reported separately in other comprehensive income (loss), net of tax. The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).

 

Management evaluates securities for other-than-temporary impairment (OTTI) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. In determining OTTI, management considers many factors, including: (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, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at the determination date.

 

When OTTI is determined to have occurred, the amount of the OTTI recognized in earnings depends on whether we intend to sell the security or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If we intend to sell the security or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI recognized in earnings is equal to the entire difference between its amortized cost basis and its fair value at the balance sheet date. If we do not intend to sell the security and it is not more likely than not that we will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI is separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized as a charge to earnings. The amount of the OTTI related to other factors is recognized in other comprehensive income (loss), net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment. The Company recorded no OTTI for the three months ended March 31, 2013.

 

Other Real Estate Owned

 

Assets acquired through or in lieu of loan foreclosure are initially recorded at fair value, less estimated selling costs, at the date of foreclosure, establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Costs relating to improvement of property are capitalized, whereas costs relating to the holding of property are expensed.

 

Deferred Income Taxes

 

After converting to a federally chartered savings association, the Bank became a taxable organization. Income tax expense, or benefit, is the total of the current year income tax due, or refundable, and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary difference between carrying amounts and tax basis of assets and liabilities, computed using enacted tax rates and operating loss carryforwards. The Company’s principal deferred tax assets result from the allowance for loan losses and operating loss carry forwards. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. The Internal Revenue Code and applicable regulations are subject to interpretation with respect to the determination of the tax basis of assets and liabilities for credit unions that convert charters and become a taxable organization. Since the Bank’s transition to a federally chartered savings bank, the Company has recorded income tax expense based upon management’s interpretation of the applicable tax regulations. Positions taken by the Company in preparing our federal and state tax returns are subject to the review of taxing authorities, and the review by taxing authorities of the positions taken by management could result in a material adjustment to the financial statements.

 

 

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All available evidence, both positive and negative, is considered when determining whether or not a valuation allowance is necessary to reduce the carrying amount to a balance that is considered more likely than not to be realized. The determination of the realizability of deferred tax assets is highly subjective and dependent upon judgment concerning management’s evaluation of such evidence. Positive evidence considered includes the probability of achieving forecasted taxable income and the ability to implement tax planning strategies to accelerate taxable income recognition. Negative evidence includes the Company’s cumulative losses. Following the initial establishment of a valuation allowance, if the Company is unable to generate sufficient pre-tax income in future periods or otherwise fails to meet forecasted operating results, an additional valuation allowance may be required. Any valuation allowance is required to be recorded during the period identified. As of March 31, 2013, the Company had a valuation allowance of $29.3 million for the net deferred tax asset.

 

Comparison of Financial Condition at March 31, 2013 and December 31, 2012

 

General

 

Total assets decreased $25.0 million, or 3.2%, to $747.6 million at March 31, 2013 as compared to $772.6 million at December 31, 2012. The decrease in assets was primarily due to lower held-for-sale and warehouse loans which decreased $15.8 million, a decrease in net portfolio loans of $13.7 million, and a decrease in securities available-for-sale of $5.3 million, partially offset by an increase in cash and cash equivalents of $9.7 million. The Company continued to manage its balance sheet consistent with its capital preservation strategy and in order to increase the Company’s liquidity position. Total deposits increased $2.6 million, or 0.5%, to $502.4 million at March 31, 2013 from $499.8 million at December 31, 2012. Collectively, noninterest-bearing and interest-bearing demand accounts, and time deposits grew by a total of $9.6 million while savings and money market accounts decreased by $7.0 million during the three months ended March 31, 2013. Total borrowings decreased by $25.0 million to $202.8 million at March 31, 2013 from $227.8 million at December 31, 2012 due to the repayment of $25.0 million of Federal Home Loan Bank (FHLB) advances. Stockholders’ equity decreased by $2.9 million to $37.4 million at March 31, 2013 from $40.3 million at December 31, 2012 due to the net loss of $2.0 million and a decrease in other comprehensive income of $0.9 million for the three months ended March 31, 2013.

 

Following is a summarized comparative balance sheet as of March 31, 2013 and December 31, 2012:

 

   March 31,   December 31,   Increase / (Decrease) 
   2013   2012   Amount   % 
   (Dollars in Thousands) 
Assets:                    
Cash and cash equivalents  $77,486   $67,828   $9,658    14.2%
Securities available-for-sale   154,371