10-Q 1 v357999_10q.htm FORM 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 September 30, 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
(I.R.S. Employer Identification No.)
incorporation or organization)
 
 
 
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 November 1, 2013
 
 
 

ATLANTIC COAST FINANCIAL CORPORATION

 
Form 10-Q Quarterly Report
 
Table of Contents
 

 

 

Page

 

 

 

 

PART I. FINANCIAL INFORMATION

 

 
 
 
Item 1.
Financial Statements
3
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
39
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
62
Item 4.
Controls and Procedures
64
 
 
 
 
PART II.  OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
65
Item 1A.
Risk Factors
65
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
83
Item 3.
Defaults upon Senior Securities
83
Item 4.
Mine Safety Disclosures
83
Item 5.
Other Information
83
Item 6.
Exhibits
84
 
 
 
Form 10-Q
Signature Page
85
 
 
 
PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
ATLANTIC COAST FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Share Information)
(unaudited)
 
 
 
September 30, 2013
 
December 31, 2012
 
ASSETS
 
 
 
 
 
 
 
Cash and due from financial institutions
 
$
2,657
 
$
7,490
 
Short-term interest-earning deposits
 
 
79,927
 
 
60,338
 
Total cash and cash equivalents
 
 
82,584
 
 
67,828
 
Investment securities:
 
 
 
 
 
 
 
Securities available-for-sale
 
 
158,070
 
 
159,745
 
Securities held-to-maturity
 
 
19,498
 
 
 
Total investment securities
 
 
177,568
 
 
159,745
 
Portfolio loans, net of allowance of $9,522 in 2013 and $10,889 in 2012
 
 
380,068
 
 
421,201
 
Other loans:
 
 
 
 
 
 
 
Held-for-sale
 
 
1,083
 
 
4,089
 
Warehouse
 
 
21,165
 
 
68,479
 
Total other loans
 
 
22,248
 
 
72,568
 
Federal Home Loan Bank stock, at cost
 
 
5,879
 
 
7,260
 
Land, premises and equipment, net
 
 
14,193
 
 
14,584
 
Bank owned life insurance
 
 
16,052
 
 
15,764
 
Other real estate owned
 
 
11,472
 
 
8,065
 
Accrued interest receivable
 
 
1,833
 
 
2,035
 
Other assets
 
 
2,217
 
 
3,569
 
Total assets
 
$
714,114
 
$
772,619
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
Noninterest-bearing demand
 
$
39,107
 
$
41,904
 
Interest-bearing demand
 
 
69,222
 
 
73,490
 
Savings and money market
 
 
170,946
 
 
181,708
 
Time
 
 
196,768
 
 
202,658
 
Total deposits
 
 
476,043
 
 
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
 
 
5,396
 
 
4,799
 
Total liabilities
 
 
684,239
 
 
732,359
 
 
 
 
 
 
 
 
 
Commitments and contingent liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stock: $0.01 par value; 25,000,000 shares authorized, none issued and
    outstanding at September 30, 2013 and December 31, 2012
 
 
 
 
 
Common stock: $0.01 par value; 100,000,000 shares authorized, 2,629,061 issued
    and outstanding at September 30, 2013 and December 31, 2012
 
 
26
 
 
26
 
Additional paid-in capital
 
 
56,074
 
 
56,132
 
Common stock held by:
 
 
 
 
 
 
 
Employee stock ownership plan shares of 82,634 at September 30, 2013 and
    86,227 at December 31, 2012
 
 
(1,795)
 
 
(1,873)
 
Benefit plans
 
 
(321)
 
 
(338)
 
Retained deficit
 
 
(18,895)
 
 
(14,373)
 
Accumulated other comprehensive income (loss)
 
 
(5,214)
 
 
686
 
Total stockholders’ equity
 
 
29,875
 
 
40,260
 
Total liabilities and stockholders’ equity
 
$
714,114
 
$
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
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
 
 
 
2013
 
2012
 
2013
 
2012
 
Interest and dividend income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans, including fees
 
$
6,287
 
$
7,402
 
$
19,960
 
$
23,005
 
Securities and interest-earning deposits
    in other financial institutions
 
 
728
 
 
811
 
 
1,976
 
 
2,581
 
Total interest and dividend income
 
 
7,015
 
 
8,213
 
 
21,936
 
 
25,586
 
Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
 
825
 
 
948
 
 
2,574
 
 
3,191
 
Federal Home Loan Bank advances
 
 
1,157
 
 
1,341
 
 
3,435
 
 
3,992
 
Securities sold under agreements
    to repurchase
 
 
1,209
 
 
1,208
 
 
3,587
 
 
3,600
 
Total interest expense
 
 
3,191
 
 
3,497
 
 
9,596
 
 
10,783
 
Net interest income
 
 
3,824
 
 
4,716
 
 
12,340
 
 
14,803
 
Provision for loan losses
 
 
1,286
 
 
3,529
 
 
3,739
 
 
10,745
 
Net interest income after provision for
    loan losses
 
 
2,538
 
 
1,187
 
 
8,601
 
 
4,058
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Service charges and fees
 
 
770
 
 
844
 
 
2,267
 
 
2,414
 
Gain on sale of loans held-for-sale
 
 
99
 
 
187
 
 
732
 
 
1,305
 
Gain on sale of securities available-for-sale (includes
    $1,048 accumulated other comprehensive income
    reclassifications for unrealized net gains for the three
    and nine months ended September 30, 2012)
 
 
 
 
1,048
 
 
 
 
1,048
 
Bank owned life insurance earnings
 
 
91
 
 
107
 
 
288
 
 
339
 
Interchange fees
 
 
384
 
 
386
 
 
1,183
 
 
1,198
 
Other
 
 
215
 
 
162
 
 
537
 
 
384
 
Total noninterest income
 
 
1,559
 
 
2,734
 
 
5,007
 
 
6,688
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
Compensation and benefits
 
 
1,927
 
 
2,271
 
 
6,330
 
 
6,895
 
Occupancy and equipment
 
 
484
 
 
498
 
 
1,449
 
 
1,531
 
FDIC insurance premiums
 
 
388
 
 
311
 
 
1,270
 
 
858
 
Foreclosed assets, net
 
 
126
 
 
(39)
 
 
(63)
 
 
(113)
 
Data processing
 
 
350
 
 
376
 
 
1,126
 
 
1,046
 
Outside professional services
 
 
311
 
 
520
 
 
2,269
 
 
1,988
 
Collection expense and repossessed
    asset losses
 
 
417
 
 
761
 
 
2,005
 
 
1,882
 
Other
 
 
1,023
 
 
892
 
 
3,744
 
 
2,883
 
Total noninterest expense
 
 
5,026
 
 
5,590
 
 
18,130
 
 
16,970
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss before income tax expense (benefit)
 
 
(929)
 
 
(1,669)
 
 
(4,522)
 
 
(6,224)
 
Income tax expense (benefit)
 
 
 
 
 
 
 
 
150
 
Net loss
 
$
(929)
 
$
(1,669)
 
$
(4,522)
 
$
(6,374)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss per common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
(0.38)
 
$
(0.66)
 
$
(1.81)
 
$
(2.55)
 
Diluted
 
$
(0.38)
 
$
(0.66)
 
$
(1.81)
 
$
(2.55)
 
 
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
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
 
 
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
$
(929)
 
$
(1,669)
 
$
(4,522)
 
$
(6,374)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
Change in securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during the
    period
 
 
(373)
 
 
1,792
 
 
(5,900)
 
 
4,160
 
Less reclassification adjustments for (gains) losses
    recognized in income
 
 
 
 
(1,048)
 
 
 
 
(1,048)
 
Net unrealized gains (losses)
 
 
(373)
 
 
744
 
 
(5,900)
 
 
3,112
 
Income tax effect
 
 
 
 
 
 
 
 
 
Net of tax effect
 
 
(373)
 
 
744
 
 
(5,900)
 
 
3,112
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total other comprehensive income (loss)
 
 
(373)
 
 
744
 
 
(5,900)
 
 
3,112
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive loss
 
$
(1,302)
 
$
(925)
 
$
(10,422)
 
$
(3,262)
 
 
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)
 
 
 
 
 
 
Additional
 
Employee Stock
 
 
 
 
 
 
 
Accumulated Other
 
Total
 
 
 
Common
 
Paid-In
 
Ownership
 
Benefit
 
Retained
 
Comprehensive
 
Stockholders’
 
 
 
Stock
 
Capital
 
Plan Shares
 
Plans
 
Deficit
 
Income (Loss)
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the nine months ended September 30, 2013:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December
     31, 2012
 
$
26
 
$
56,132
 
$
(1,873)
 
$
(338)
 
$
(14,373)
 
$
686
 
$
40,260
 
Employee stock
     ownership plan
     shares earned,
     3,593 shares
 
 
 
 
(63)
 
 
78
 
 
 
 
 
 
 
 
15
 
Management restricted
     stock expense
 
 
 
 
3
 
 
 
 
 
 
 
 
 
 
3
 
Stock options expense
 
 
 
 
19
 
 
 
 
 
 
 
 
 
 
19
 
Distribution from
     Rabbi Trust
 
 
 
 
(17)
 
 
 
 
17
 
 
 
 
 
 
 
Net loss
 
 
 
 
 
 
 
 
 
 
(4,522)
 
 
 
 
(4,522)
 
Other comprehensive
     loss
 
 
 
 
 
 
 
 
 
 
 
 
(5,900)
 
 
(5,900)
 
Balance at September
     30, 2013
 
$
26
 
$
56,074
 
$
(1,795)
 
$
(321)
 
$
(18,895)
 
$
(5,214)
 
$
29,875
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the nine months ended September 30, 2012:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December
     31, 2011
 
$
26
 
$
56,186
 
$
(1,977)
 
$
(351)
 
$
(7,706)
 
$
116
 
$
46,294
 
Employee stock
     ownership plan
     shares earned,
     3,593 shares
 
 
 
 
(70)
 
 
78
 
 
 
 
 
 
 
 
8
 
Management restricted
     stock expense
 
 
 
 
19
 
 
 
 
 
 
 
 
 
 
19
 
Stock options expense
 
 
 
 
28
 
 
 
 
 
 
 
 
 
 
28
 
Distribution from
     Rabbi Trust
 
 
 
 
83
 
 
 
 
(90)
 
 
 
 
 
 
(7)
 
Net loss
 
 
 
 
 
 
 
 
 
 
(6,374)
 
 
 
 
(6,374)
 
Other comprehensive
     income
 
 
 
 
 
 
 
 
 
 
 
 
3,112
 
 
3,112
 
Balance at September
     30, 2012
 
$
26
 
$
56,246
 
$
(1,899)
 
$
(441)
 
$
(14,080)
 
$
3,228
 
$
43,080
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
6

 
ATLANTIC COAST FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands, Except Share Information)
(unaudited)
 
 
 
Nine Months Ended September 30,
 
 
 
2013
 
2012
 
Cash flows from operating activities:
 
 
 
 
 
 
 
Net loss
 
$
(4,522)
 
$
(6,374)
 
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
 
 
 
 
Provision for loan losses
 
 
3,739
 
 
10,745
 
Gain on sale of loans held-for-sale
 
 
(732)
 
 
(1,305)
 
Originations of loans held-for-sale
 
 
(5,885)
 
 
(32,067)
 
Proceeds from sales of loans held-for-sale
 
 
9,623
 
 
34,753
 
Foreclosed assets, net
 
 
(63)
 
 
(113)
 
Gain on sale of securities available-for-sale
 
 
 
 
(1,048)
 
Loss on disposal of equipment
 
 
 
 
9
 
Employee stock ownership plan compensation expense
 
 
15
 
 
8
 
Share-based compensation expense
 
 
22
 
 
47
 
Amortization of premiums and deferred fees, net of accretion of discounts on
    securities and loans
 
 
1,099
 
 
488
 
Depreciation expense
 
 
485
 
 
613
 
Net change in accrued interest receivable
 
 
202
 
 
303
 
Net change in cash surrender value of bank owned life insurance
 
 
(288)
 
 
(339)
 
Net change in other assets
 
 
1,352
 
 
1,397
 
Net change in accrued expenses and other liabilities
 
 
597
 
 
(438)
 
Net cash provided by operating activities
 
 
5,644
 
 
6,679
 
 
 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
 
Proceeds from maturities and payments of investment securities
 
 
25,996
 
 
27,322
 
Proceeds from sales of securities available-for-sale
 
 
 
 
47,789
 
Purchase of securities available-for-sale
 
 
(31,592)
 
 
(100,512)
 
Purchase of securities held-to-maturity
 
 
(19,496)
 
 
 
Funding of warehouse loans
 
 
(734,358)
 
 
(645,940)
 
Proceeds from repayments of warehouse loans
 
 
781,672
 
 
631,865
 
Net change in portfolio loans
 
 
27,453
 
 
48,391
 
Expenditures on premises and equipment
 
 
(94)
 
 
(353)
 
Proceeds from sale of other real estate owned
 
 
6,867
 
 
5,754
 
Redemption of Federal Home Loan Bank stock
 
 
1,381
 
 
2,340
 
Net cash provided by investing activities
 
 
57,829
 
 
16,656
 
 
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
 
 
Net decrease in deposits
 
 
(23,717)
 
 
(505)
 
Repayment of Federal Home Loan Bank advances
 
 
(25,000)
 
 
 
Shares purchased for and distributions from Rabbi Trust
 
 
 
 
(7)
 
Net cash used in financing activities
 
 
(48,717)
 
 
(512)
 
 
 
 
 
 
 
 
 
Net increase in cash and cash equivalents
 
 
14,756
 
 
22,823
 
Cash and cash equivalents, beginning of period
 
 
67,828
 
 
41,017
 
Cash and cash equivalents, end of period
 
$
82,584
 
$
63,840
 
 
 
 
 
 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
 
 
 
 
Interest paid
 
$
9,613
 
$
10,792
 
Income taxes paid
 
$
 
$
 
 
 
 
 
 
 
 
 
Supplemental disclosures of non-cash information:
 
 
 
 
 
 
 
Loans transferred to other real estate
 
$
10,211
 
$
7,705
 
Loans transferred to held-for-sale
 
$
 
$
 
 
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
September 30, 2013
(unaudited)
 
NOTE 1. BASIS OF PRESENTATION
 
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 sheet as of December 31, 2012, which was derived from our audited financial statements, and the unaudited condensed consolidated financial statements as of September 30, 2013 and for the three and nine months ended September 30, 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 and nine months ended September 30, 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 (loss) to net income (loss). 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, resulting in additional disclosures within the statements of operations, related to reclassifications from accumulated other comprehensive income (loss) to net income (loss). There was no impact on the Company’s financial statements or results of operations.
 
 
8

 
ATLANTIC COAST FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2013
(unaudited)
 
NOTE 2. MATERIAL UNCERTAINTIES
 
The Company recorded an operating loss in the first nine months of 2013 of $4.5 million, resulting in a retained deficit of $19.0 million as of September 30, 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 September 30, 2013 the Bank has recorded provision for loan losses of $91.7 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 $30.3 million (see Note 11). The Company’s earnings capability is also impacted by the expense of its long term debt, which at September 30, 2013 had a weighted average rate of 4.56% with collective prepayment penalties to extinguish the debt of $22.7 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 Federal Home Loan Bank of Atlanta (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 $5.0 million as of September 30, 2013. The Bank had unpledged securities of $19.0 million as of September 30, 2013 acting as additional contingent liquidity in the event the Bank’s cash and cash equivalents, which totaled $82.6 million at the end of the third 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 Office of the Comptroller of the Currency (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. 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 September 30, 2013 these ratios were 10.30% and 4.88%, 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. Following the June 2013 rejection by stockholders of the proposed merger of the Company with Bond Street Holdings, Inc. (Note 3), the Company's newly restructured Board of Directors began evaluating alternatives to raise capital. As a result of that, the Company is planning to pursue an equity capital raise through a public offering or private placement.
 
 
9

 
ATLANTIC COAST FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2013
(unaudited)
   
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 was to be merged with and into Bond Street (the Merger) and the Bank was then to merge with and into Florida Community Bank.
 
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. 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 would have been converted into the right to receive $5.00 in cash at closing.
 
On June 11, 2013, the proposed merger was rejected by the stockholders of the Company. On June 24, 2013, the Company provided notice to Bond Street that it was terminating the Merger Agreement pursuant to provisions of the Merger Agreement that permitted either the Company or Bond Street to terminate the Merger Agreement if stockholders of the Company did not approve the Merger Agreement by June 21, 2013.
 
Current Litigation Relating to the Merger
 
As described in greater detail in the Proxy Statement of the Company filed with the Securities and Exchange Commission on May 13, 2013, two putative class action lawsuits related to the proposed merger were originally filed against the Company, the Bank, Bond Street and Florida Community Bank and certain directors of the Company. The two prior lawsuits were voluntarily dismissed and a new combined federal court action was filed on May 20, 2013.
 
On June 5, 2013, Plaintiff Jason Laugherty, individually and on behalf of a putative class of similarly situated stockholders, the Company, the Bank, Bond Street, Florida Community Bank, and individual defendants Forrest W. Sweat, Jr., Charles E. Martin, Jr., Thomas F. Beeckler, G. Thomas Frankland, John J. Linfante, W. Eric Palmer, and H. Dennis Woods, entered into a Memorandum of Understanding (the MOU) regarding the settlement in principle of a putative class action lawsuit filed in the United States District Court for the District of Maryland (the Action). The Action was filed in response to the Merger Agreement and alleged claims against the Company, the Bank, Bond Street, Florida Community Bank and certain directors of the Company for breaches of fiduciary duties, aiding and abetting breaches of fiduciary duties, and violations of federal proxy disclosure laws relating to the proposed merger.
 
Under the terms of the MOU, the Company, the Bank, Bond Street and Florida Community Bank, the other named individual director defendants, and the Plaintiff reached an agreement in principle to settle the class action lawsuit and to release the defendants from all claims in the Action and the prior lawsuits relating to the proposed merger, subject to the approval of the United States District Court for the District of Maryland and the consummation of the proposed merger. Under the terms of the MOU, Plaintiff’s counsel also reserved the right to seek an award of attorney’s fees and expenses if the proposed merger was not approved by the Company’s stockholders.
 
On June 7, 2013, the parties to the MOU submitted a joint motion to stay the Action and/or to extend case deadlines pending consummation of the proposed merger and the filing of a motion for a preliminary approval of settlement. The court granted the motion and stayed the Action pending consummation of the merger. Although the vote on the proposed merger transaction was unsuccessful, the Action remains pending. The Company continues to believe the lawsuit is meritless and intends to vigorously defend against any remaining claims.
 
The reasonably possible losses attributable to the lawsuit are not material to the financial statements, and, as a result, the Company has not accrued for any such losses.
 
 
10

 
ATLANTIC COAST FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2013
(unaudited)   
 
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 September 30, 2013 and December 31, 2012 are summarized below:
 
 
 
 
 
 
Fair Value Hierarchy
 
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
 
(Dollars in Thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
Securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government-sponsored enterprises
 
$
4,398
 
 
$
4,398
 
 
State and municipal
 
 
983
 
 
 
983
 
 
Mortgage-backed securities – residential
 
 
127,140
 
 
 
127,140
 
 
Collateralized mortgage obligations – U.S. Government
 
 
25,549
 
 
 
25,549
 
 
Total
 
$
158,070
 
 
$
158,070
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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)
September 30, 2013
(unaudited)
 
NOTE 4. FAIR VALUE (continued)
 
Assets and liabilities measured at fair value on a non-recurring basis as of September 30, 2013 and December 31, 2012 are summarized below:
 
 
 
 
 
Fair Value Hierarchy
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(Dollars in Thousands)
 
September 30, 2013
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Other real estate owned
$
11,472
 
 
 
$
11,472
 
Impaired loans – collateral dependent (reported
     on the Condensed Consolidated Balance
     Sheets in portfolio loans, net)
 
549
 
 
 
 
549
 
 
 
 
 
 
 
 
 
 
 
 
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 September 30, 2013 and December 31, 2012 is summarized below:
 
 
 
Fair Value
 
Valuation
 
 
 
Range (Weighted
 
 
 
Estimate
 
Techniques
 
Unobservable Input
 
Average) (1)
 
 
 
(Dollars in Thousands)
 
September 30, 2013
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Other real estate owned
 
$
11,472
 
Broker price opinions, appraisal of collateral (2) (3)
 
Appraisal adjustments (4)
 
0.0% to 45.9% (2.9%)
 
 
 
 
 
 
 
 
Liquidation expenses
 
8.0% to 10.0% (9.7%)
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans – collateral dependent
     (reported on the Condensed
     Consolidated Balance Sheets in
     portfolio loans, net)
 
 
549
 
Appraisal of collateral (2)
 
Appraisal adjustments (4)
 
0.0% to 30.0% (1.9%)
 
 
 
 
 
 
 
 
Liquidation expenses
 
10.0% (10.0%)
 
December 31, 2012
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Other real estate owned
 
$
8,065
 
Broker price opinions, appraisal of collateral (2) (3)
 
Appraisal adjustments (4)
 
0.0% to 44.0% (2.1%)
 
 
 
 
 
 
 
 
Liquidation expenses
 
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 (2)
 
Appraisal adjustments (4)
 
0.0% (0.0%)
 
 
 
 
 
 
 
 
Liquidation expenses
 
8.0% to 10.0% (8.9%)
 
 
 
 
 
(1)
The range and weighted average of other appraisal adjustments and liquidation expenses are presented as a percent of the appraised value.
 
(2)
Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level 3 inputs which are not identifiable.
 
(3)
Includes qualitative adjustments by management and estimated liquidation expenses.
 
(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)
September 30, 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 September 30, 2013 and 2012 were $11,000 and $280,000, respectively. Write-downs on OREO for the nine months ended September 30, 2013 and 2012 were $150,000 and $482,000, 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 September 30, 2013 and December 31, 2012 were as follows:
 
 
 
 
 
 
 
 
 
 
Fair Value Hierarchy
 
 
 
Carrying
 
Estimated
 
 
 
 
 
 
 
 
 
 
Amount
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
 
 
(Dollars in Thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and due from financial institutions
 
$
2,657
 
$
2,657
 
$
2,657
 
$
 
 
Short-term interest-earning deposits
 
 
79,927
 
 
79,927
 
 
79,927
 
 
 
 
Securities held-to-maturity
 
 
19,498
 
 
19,876
 
 
 
 
19,876
 
 
Portfolio loans, net
 
 
380,068
 
 
397,321
 
 
 
 
396,772
 
549
 
Loans held-for-sale
 
 
1,083
 
 
1,223
 
 
 
 
1,223
 
 
Warehouse loans
 
 
21,165
 
 
21,165
 
 
 
 
21,165
 
 
Federal Home Loan Bank stock, at cost
 
 
5,879
 
 
5,879
 
 
 
 
-
 
5,879
 
Accrued interest receivable
 
 
1,833
 
 
1,833
 
 
 
 
1,833
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
 
476,043
 
 
476,466
 
 
 
 
476,466
 
 
Securities sold under agreements to repurchase
 
 
92,800
 
 
104,029
 
 
 
 
104,029
 
 
Federal Home Loan Bank advances
 
 
110,000
 
 
121,489
 
 
 
 
121,489
 
 
Accrued interest payable (reported
    on the Condensed Consolidated
    Balance Sheets in accrued
    expenses and other
    liabilities)
 
 
1,115
 
 
1,115
 
 
 
 
1,115
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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)
September 30, 2013
(unaudited)
   
NOTE 5. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
 
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. Fair value of securities held-to-maturity is based on quoted market prices. 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 September 30, 2013. 

NOTE 6. INVESTMENT SECURITIES
 
The following table summarizes the amortized cost and fair value of the investment securities and the corresponding amounts of unrealized gains and losses therein as of September 30, 2013 and December 31, 2012:
 
 
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
Carrying
 
 
 
Cost
 
Gains
 
Losses
 
Value
 
Amount
 
 
 
(Dollars in Thousands)
 
September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government-sponsored enterprises
 
$
5,000
 
$
 
$
(602)
 
$
4,398
 
$
4,398
 
State and municipal
 
 
943
 
 
40
 
 
 
 
983
 
 
983
 
Mortgage-backed securities – residential
 
 
131,038
 
 
199
 
 
(4,097)
 
 
127,140
 
 
127,140
 
Collateralized mortgage
    obligations – U.S. Government
 
 
26,303
 
 
33
 
 
(787)
 
 
25,549
 
 
25,549
 
Total securities available-for-sale
 
 
163,284
 
 
272
 
 
(5,486)
 
 
158,070
 
 
158,070
 
Securities held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities –
    residential
 
 
19,498
 
 
378
 
 
 
 
19,876
 
 
19,498
 
Total securities held-to-
    maturity
 
 
19,498
 
 
378
 
 
 
 
19,876
 
 
19,498
 
Total investment securities
 
$
182,782
 
$
650
 
$
(5,486)
 
$
177,946
 
$
177,568
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State and municipal
 
$
943
 
$
42
 
$
(6)
 
$
979
 
$
979
 
Mortgage-backed securities –
    residential
 
 
118,970
 
 
847
 
 
(170)
 
 
119,647
 
 
119,647
 
Collateralized mortgage
    obligations – U.S. Government
 
 
39,146
 
 
127
 
 
(154)
 
 
39,119
 
 
39,119
 
Total securities available-for-
    sale
 
 
159,059
 
 
1,016
 
 
(330)
 
 
159,745
 
 
159,745
 
Total investment securities
 
$
159,059
 
$
1,016
 
$
(330)
 
$
159,745
 
$
159,745
 
 
 
14

 
ATLANTIC COAST FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2013
(unaudited)
 
NOTE 6. INVESTMENT SECURITIES (continued)
 
The amortized cost and fair value of investment securities, both available-for-sale and held-to-maturity, segregated by contractual maturity as of September 30, 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. Investment securities 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
 
 
983
 
Due after ten years
 
 
 
 
 
U.S. Government-sponsored enterprises
 
 
5,000
 
 
4,398
 
Mortgage-backed securities – residential
 
 
150,536
 
 
147,016
 
Collateralized mortgage obligations – U.S. Government
 
 
26,303
 
 
25,549
 
 
 
$
182,782
 
$
177,946
 
 
The following table summarizes the investment securities, both available-for-sale and held-to-maturity with unrealized losses as of September 30, 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
 
 
 
 
 
Unrealized
 
 
 
Unrealized
 
 
 
Unrealized
 
 
 
Fair Value
 
Losses
 
Fair Value
 
Losses
 
Fair Value
 
Losses
 
 
 
(Dollars in Thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government-sponsored
    enterprises
 
$
4,398
 
$
(602)
 
$
 
$
 
$
4,398
 
$
(602)
 
State and municipal
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities –
    residential
 
 
118,011
 
 
(4,097)
 
 
 
 
 
 
118,011