10-K 1 v369099_10k.htm FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 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)
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of class
Name of each exchange on which registered
Common Stock, $0.01 par value
The NASDAQ Stock Market, LLC
 
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ¨ NO x.
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ¨ NO x.
 
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 twelve 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 twelve months (or for such shorter period that the Registrant was required to submit and post such files). YES x NO ¨.
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10K or any amendment to this Form 10-K. ¨
 
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.
 
As of March 3, 2014, there were outstanding 15,509,061 shares of the Registrant’s common stock, par value $0.01 per share. The aggregate market value of common stock outstanding held by non-affiliates of the Registrant as of June 30, 2013 was $11,164,193.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the registrant’s definitive proxy statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be held May 19, 2014 are incorporated by reference into Part III of this Annual Report on Form 10-K.
 
 
 

ATLANTIC COAST FINANCIAL CORPORATION

ANNUAL REPORT ON FORM 10-K
Table of Contents
 
 
 
Page

 

 

 

PART I.

 

 

 

Item 1.
Business
4
 
General
4
 
Recent Events
6
 
Market Area
6
 
Competition
8
 
Lending Activities
8
 
Non-Performing and Problem Assets
17
 
Investment Activities
23
 
Sources of Funds
25
 
Subsidiary and Other Activities
28
 
Employees
28
 
Supervision and Regulation
28
 
Federal Taxation
39
 
State Taxation
39
 
Available Information
40
Item 1A.
Risk Factors
40
Item 1B.
Unresolved Staff Comments
57
Item 2.
Properties
57
Item 3.
Legal Proceedings
59
Item 4.
Mine Safety Disclosures
59
 
 
 
PART II.
 
 
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities
60
Item 6.
Selected Financial Data
61
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
63
 
General Description of Business
63
 
Business Strategy
63
 
Critical Accounting Policies
66
 
Comparison of Financial Condition
69
 
Comparison of Results of Operations
77
 
Liquidity
86
 
Contractual Obligations and Commitments
88
 
Capital Resources
88
 
Inflation
89
 
Off-Balance Sheet Arrangements
89
 
Future Accounting Pronouncements
89
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
89
Item 8.
Financial Statements and Supplementary Data
92
 
Report of Independent Registered Public Accounting Firm
92
 
Financial Statements
93
 
Notes to Financial Statements
98
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
148
Item 9A.
Controls and Procedures
148
Item 9B.
Other Information
148
 
 
2

 

ATLANTIC COAST FINANCIAL CORPORATION

ANNUAL REPORT ON FORM 10-K
Table of Contents, continued
 
PART III.
 
 
 
Item 10.
Directors, Executive Officers and Corporate Governance
149
Item 11.
Executive Compensation
149
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
149
Item 13.
Certain Relationships and Related Transactions, and Director Independence
149
Item 14.
Principal Accountant Fees and Services
149
 
 
 
PART IV.
 
 
 
Item 15.
Exhibits and Financial Statement Schedules
150
Form 10-K
Signature Page
152
 
 
3

 
PART I.
 
ITEM 1. BUSINESS
 
General
 
This Form 10-K contains forward-looking statements within the meaning of the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. 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 "expects," "anticipates," "believes," "estimates," "targets," "intends," "plans," "goal" and other similar expressions or future or conditional verbs such as "will," "may," "might," "should," "would" and "could," 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 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 demand for financial services, the state of the banking industry generally, the uncertainties associated with newly developed or acquired operations, and market disruptions.
 
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 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.
 
Atlantic Coast Financial Corporation
 
Atlantic Coast Financial Corporation (the Company), a thrift holding company headquartered in Jacksonville, Florida, is a Maryland corporation. Through our principal subsidiary Atlantic Coast Bank (the Bank), a federally chartered thrift supervised by the Office of the Comptroller of the Currency, we serve the northeastern Florida and southeastern Georgia markets.
 
On February 3, 2011, the Company completed a conversion from the mutual holding company structure and a related public offering. As a result of the conversion, Atlantic Coast Federal, MHC (the MHC) and Atlantic Coast Federal Corporation, the former holding companies of the Bank, were merged into the Company. The Bank is 100% owned by the Company and the Company is 100% owned by public stockholders. The Company sold a total of 1,710,857 shares of common stock, par value $0.01 per share, in the subscription and community offerings, including 68,434 shares to Atlantic Coast Financial Corporation’s employee stock ownership plan (ESOP). All shares were sold at a price of $10.00 per share, raising $17.1 million in gross proceeds. Conversion related expenses of $2.7 million were offset against the gross proceeds, resulting in $14.4 million of net proceeds, which included $0.7 million loaned by the Company to a trust for the ESOP. Concurrent with the completion of the offering, shares of Atlantic Coast Federal Corporation common stock owned by public stockholders were exchanged for 0.1960 of a share of the Company’s common stock.
 
On December 3, 2013, the Company raised $48.3 million in gross proceeds by issuing 12,880,000 shares of its common stock in a public offering, which included the issuance of an additional 1,680,000 shares as a result of the exercise of the underwriters’ over-allotment option, at a price to the public of $3.75 per share. Net proceeds from the public offering were $44.9 million after underwriting discounts and offering expenses of $3.4 million. The Company contributed $44.0 million of the net proceeds of the offering to the Bank.
 
The Company does not maintain offices separate from those of the Bank or utilize personnel other than certain of the Bank’s officers. Any officer that serves as a director of the Company is not separately compensated for his service as a director.
 
 
4

 
Atlantic Coast Bank
 
Atlantic Coast Bank was established in 1939 as a credit union to serve the employees of the Atlantic Coast Line Railroad. On November 1, 2000, after receiving the necessary regulatory and membership approvals, Atlantic Coast Federal Credit Union converted to a federal mutual savings bank (and subsequently a stock savings bank) known as Atlantic Coast Bank. The conversion has allowed Atlantic Coast Bank to diversify its customer base by marketing products and services to individuals and businesses in its market area. Unlike a credit union, Atlantic Coast Bank may make loans to customers who do not have a deposit relationship with Atlantic Coast Bank. Following the conversion, management of Atlantic Coast Bank continued its emphasis on residential mortgage lending and commercial real estate lending.
 
Effective August 10, 2012, the Bank's Board of Directors consented to the issuance of a Consent Order (the Order) by the Office of the Comptroller of the Currency (the OCC). Among other things, the Order calls for the Bank to achieve and maintain certain capital levels. See Note 19 in Item 8. Financial Statements and Supplementary Data (Notes to Financial Statements) contained in this report for further description of the provisions contained in the Order. The Bank was in compliance with the Order at December 31, 2013. As of that date, Tier 1 leverage ratio, Tier 1 risk-based capital ratio and Total risk-based capital ratio were 9.73%, 19.22%, and 20.47%, respectively.
 
The Bank has traditionally focused on attracting retail deposits from the general public and investing those funds primarily in warehouse lines of credit secured by one- to four-family residential loans originated under purchase and assumption agreements by third party originators (warehouse loans held-for-investment), 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. The Company typically sells the guaranteed portion of loans originated through SBA lending, rather than hold the loans in portfolio. Loans are currently obtained principally through retail staff, business development officers and brokers. The Company originates multi-family residential loans and commercial construction and residential construction loans in its market area. The Company also invests 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 Bank 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 (see Recent Events) interest rates paid on deposits are limited and subject to national rates published weekly by the Federal Deposit Insurance Corporation (FDIC). Deposits are primarily solicited in the Bank’s market area of the Jacksonville metropolitan statistical area (MSA) and southeastern Georgia to fund loan demand, or other liquidity needs.
 
The Bank’s address is 10151 Deerwood Park Boulevard, Building 200 – Suite 100, Jacksonville, Florida, 32256 and its telephone number is (800) 342-2824. Its internet website is www.atlanticcoastbank.net. The Bank’s website is not a part of this Annual Report.
 
 
5

 
Recent Events
 
Changes in the Company’s Executive Management Team and Board of Directors
 
On September 10, 2013, the Company announced its decision to name John K. Stephens, Jr. as President and Chief Executive Officer, and a director of the Company and the Bank. On September 13, 2013, Thomas B. Wagers, Sr. informed the Company that he was resigning from his positions as Interim President, Chief Executive Officer and Chief Financial Officer of the Company and the Bank, effective October 21, 2013. On September 23, 2013, the Board of Directors appointed James D. Hogan as the Company’s interim Chief Financial Officer, and as a director of the Company and the Bank. On February 11, 2014 the Board of Directors named John C. Lent as the Company’s Chief Financial Officer, contingent upon receipt of regulatory non-objection from the OCC and the FRB. Mr. Lent will succeed Mr. Hogan who will retire as interim Chief Financial Officer of the Company and the Bank, effective upon Mr. Lent’s receipt of regulatory non-objection.
 
Additionally, three members of the Board of Directors decided not to stand for re-election, and the Company’s stockholders elected three new directors at the Company’s annual meeting on August 16, 2013.
 
Capital Raise
 
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., the Company's newly restructured Board of Directors began evaluating alternatives to raise capital. As a result of that, the Company completed an equity capital raise through a public offering on December 3, 2013. The Company raised $48.3 million in gross proceeds by issuing 12,880,000 shares of its common stock in a public offering, which included the issuance of an additional 1,680,000 shares as a result of the exercise of the underwriters’ over-allotment option, at a price to the public of $3.75 per share. Net proceeds from the public offering were $44.9 million after underwriting discounts and offering expenses of $3.4 million. The Company contributed $44.0 million of the net proceeds of the offering to the Bank to maintain capital ratios at required levels and to support growth in the Bank's loan and investment portfolios. The Company also intends to use the remaining net proceeds of the offering for general corporate purposes.
 
Bulk Sale of Non-Performing Assets
 
On December 27, 2013, the Company completed the sale of approximately $13.2 million of its non-performing assets to real estate investment firms. The sale included non-accrual loans with a carrying value of $10.6 million and other real estate owned (OREO) with a carrying value of $2.6 million, for a combined purchase price of $6.9 million.
 
Market Area
 
The Bank operates seven branches and one administrative office in the greater Jacksonville, Florida market and four branches in the southeastern Georgia market. The Bank branches are located in Jacksonville Beach, Orange Park, Neptune Beach, Westside, Southside and Julington Creek in the Jacksonville MSA as well as in Waycross (2), Douglas and Garden City (Savannah area), Georgia. The Bank’s primary lending area is in the Jacksonville MSA with our deposit customers residing in both the Jacksonville MSA and southeastern Georgia markets. In addition, we have SBA lending offices in St. Augustine and Orlando, Florida, which make small business loans in northeastern and central Florida, southeastern Georgia, South Carolina and North Carolina.
 
 
6

 
Florida Market Area
 
The city of Jacksonville ranks as the 11th largest city in the United States in terms of population with more than 825,000 residents. When including the three beach cities of Atlantic Beach, Neptune Beach and Jacksonville Beach and Clay, Baker, Nassau and St. Johns counties, the Jacksonville MSA has more than 1.3 million residents. From 2000 to 2010, the Jacksonville MSA population grew approximately 11% and is estimated to continue growing at a similar rate. The annual median household income for the city of Jacksonville is $44,800, which is slightly higher than the median household income for the state of Florida. The Jacksonville MSA’s cost of living index is 6.2% less than the Florida average and 8.3% less than the national average, and residents have a median age of approximately 36 years. The Jacksonville MSA, with deposits of $48 billion as of June 30, 2013, is the third largest market in Florida by deposits, with an above average compounded annual deposit growth rate of 7.6% from 2008 to 2013 compared to 3.2% for the state of Florida.
 
Jacksonville has a diversified industry base with manufacturing, aerospace, information technology and life sciences as major industries. It is generally less dependent on tourism and lower-skill retail industries, and hence more resilient, than other areas in Florida. Jacksonville has the third largest military presence in the United States as the MSA is home to four major military facilities, further stabilizing the area’s population and economy. Further, the Port of Jacksonville is the third largest port in Florida and the 17th largest port in the United States, and is being deepened to accommodate substantial planned growth. The port also benefits from Jacksonville’s location at the crossroads of three major railroads; CSX Transportation, Norfolk Southern Railway, and Florida East Coast Railway. The Jacksonville area also receives national and regional exposure as a result of being the host city for numerous professional and college sporting events such as The Players Championship, the annual Florida-Georgia NCAA football game, and the NCAA basketball tournament.
 
Due to the Jacksonville MSA’s improving economy, the unemployment rate has declined from 11.4% at its peak in January 2010 to 5.6% at December 31, 2013. The northeast Florida economy is trending up with single family home sales increasing from 12,586 in 2008, to 17,718 in 2012 and 21,884 in 2013. Average median home prices have followed this upward trend increasing from $125,000 in December 2011 to $135,000 in December 2012 and $170,600 in December 2013. In addition, auto sales for the region have increased during 2013 by 7.5%.
 
Georgia Market Area
 
Atlantic Coast Bank was established in Waycross, the county seat of Ware County, Georgia. Waycross has a population of 14,725 with a median household income of $23,399. The unemployment rate has improved from 11.9% in January 2013 to 9.4% in December 2013. One of the largest employers in Waycross is the Satilla Regional Medical Center, with over 1,000 employees and 100 physicians. Satilla Regional Medical Center became part of the Mayo Clinic Health System in 2012. The Okefenokee National Wildlife Refuge is located in Waycross, and is the largest, intact, un-fragmented, freshwater and black water wilderness attraction in North America. Waycross began as a crossroads for southeastern travel and became a hub for rail traffic in the mid-1800s. Today, it’s home to the largest CSX Transportation rail yard on the East Coast. Atlantic Coast Bank began as a credit union in Waycross for the Atlantic Coast Line Railroad and then the Seaboard System Railroad, which became part of CSX Transportation in 1986.
 
Garden City, Georgia has a population of 8,800 with an annual median household income of $37,600 and is part of the Savannah MSA. The unemployment rate was 6.7% at December 31, 2013. The city is home to the Port of Savannah, as well as most of the heavy industry in Chatham County, Georgia. The Port of Savannah boasts the largest concentration of import distribution centers on the East Coast and has the largest single container terminal in North America. The terminal is the fourth busiest container port in the United States, with two railroads on terminal; CSX Transportation and Norfolk Southern Railway.
 
Douglas, Georgia has a population of 11,600 with an annual median household income of $28,000 and is a city in Coffee County. The unemployment rate was 10.4% at December 31, 2013. Wal-Mart is the biggest employer in the area, with a retail store in Douglas and a distribution center which employs over 1,600 people. Agriculture plays a major role in the area with products that include peanuts, corn, tobacco, and cotton. Poultry is also a major part of the economy with a processing plant, operated by Pilgrim’s, in the area.
 
 
7

 
Competition
 
The Bank is competitive in attracting deposits but faces strong competition as it relates to originating real estate and other loans. Historically, most of our direct competition for deposits has come from credit unions, community banks, large commercial banks and thrift institutions within our primary market areas. There are more than 157 FDIC Insured Banks with 667 offices and branches operating in Atlantic Coast Bank’s markets. The majority of these competitors are in the Jacksonville MSA market (Duval, Clay, and St. Johns Counties), with 168 offices and branches in the Georgia markets. Duval County had the largest number of institutions and branches within the Bank’s markets. In recent years, competition also has come from institutions that largely deliver their services over the internet. Electronic banking such as this has the competitive advantage of lower infrastructure costs. Particularly during times of extremely low or extremely high interest rates, we have faced significant competition for investors’ funds from short-term money market securities and other corporate and government securities. During periods of increasing volatility in interest rates, competition for interest-bearing deposits increases as customers, particularly time-deposit customers, tend to move their accounts between competing businesses to obtain the highest rates in the market. The Bank competes for these deposits by offering convenient locations, superior service, competitive rates and attractive deposit products. An arrangement that gives all of our customers’ access to over 900 ATMs at no charge, and our “High Tide” deposit account, which gives customers the ability to obtain refunds for ATM surcharges, continue to provide the Bank with a positive competitive advantage. As of June 30, 2013 (the most recent date for which market share peer data is available), Atlantic Coast Bank was ranked number 11 in Duval county market share, holding $236 million, or less than 1% of total deposits in the county. In Ware County, Georgia, Atlantic Coast Bank is ranked number one with 25% of deposit market share. The Bank holds approximately 3% of total deposit market share in Clay County, Florida and Coffee County, Georgia and holds less than 1% of total deposit market share in St. John’s County, Florida and Chatham County, Georgia.
 
Competition within our geographic markets also affects our ability to obtain loans through origination or purchase as well as originating loans at rates that provide an attractive yield. Competition for loans comes principally from mortgage bankers, commercial banks, other thrift institutions, nationally based homebuilders and credit unions. Internet based lenders also have become a greater competitive factor in recent years. Such competition for the origination and purchase of loans may limit future growth and earnings prospects.
 
Atlantic Coast Bank’s website enables customers to open accounts online, which should help the Bank’s competitiveness in the electronic banking arena.
 
Lending Activities
 
General
 
Historically, the Bank has originated portfolio one- to four-family residential first and second mortgage loans, home-equity loans and commercial real estate loans, and to a lesser extent commercial and residential construction loans, multi-family real estate loans, commercial business loans, automobile and other consumer loans. We have not originated any land loans since 2008. We have not and currently do not originate or purchase sub-prime loans, low or no documentation loans (Alt-A), or offer teaser rate (low, temporary introductory rate) loans. Our current strategy has been to expand our warehouse lending, small business lending, primarily through the SBA, and to emphasize originating commercial business and owner occupied commercial real estate loans to small businesses.
 
 
8

 
The Bank originates commercial loans through the SBA’s 7(a) and 504 Programs. 7(a) loans are guaranteed by the SBA up to 75% of the loan amount up to a maximum guaranty cap of $3,750,000. The Bank typically, but not always, sells the guaranteed portion of the 7(a) loan into the secondary market at a premium. The Bank earns a 1% servicing fee on the 75% of the loan amount sold. These loans are non-recourse, other than for an allegation of fraud or misrepresentation on the part of the lender. The Bank generally retains the unguaranteed portion of SBA 7(a) loans. At December 31, 2013, SBA 7(a) loans totaled $10.8 million, or 2.9%, of gross portfolio loans.
 
In the 504 program, the Bank and the SBA are in different lien positions. The typical structure of a 504 loan is that the Bank is in a first lien position at a 50% loan-to-value (LTV), and the SBA is in a second lien position at a 40% LTV. The remaining 10% is an equity investment from the borrower. At December 31, 2013, SBA 504 loans totaled $13.4 million, or 3.5%, of gross portfolio loans.
 
The Bank also originates warehouse loans held-for-investment with mortgage banking companies which permit the mortgage banker to originate one- to four-family residential mortgage loans for sale in the secondary market. The third-party originator sells the loans and servicing rights to investors in order to repay the warehouse balance outstanding. The Bank earns interest until the loan is sold and typically earns fee income as well. Loans originated within the warehouse lending program generally have commitments to purchase from investors, are sold with no recourse, and are sold with servicing released to the investor. The weighted average number of days outstanding of warehouse loans held-for-investment was 19 days during 2013.
 
At December 31, 2013, the net loan portfolio totaled $372.0 million, which constituted 50.7% of total assets. Loans carry either a fixed or adjustable rate of interest. Mortgage loans have a longer-term amortization, with maturities generally up to 30 years, with principal and interest due each month. Consumer loans are generally shorter in term and amortize monthly or have interest payable monthly. Warehouse loans are underwritten and funded on an individual loan basis. A percentage of loans are randomly selected for advanced quality control or a third-party fraud-risk analysis report in addition to the standard underwriting process. SBA loans are underwritten in accordance with SBA guidelines and the Bank’s commercial credit policy. Commercial real estate, commercial business, multi-family and nonresidential construction loans have generally larger loan balances and involve a greater degree of credit risk than one- to four-family residential mortgage loans.
 
At December 31, 2013, the maximum amount we could have loaned to any one borrower and related entities under applicable regulations was approximately $11.9 million. At December 31, 2013, there were no portfolio loans or group of portfolio loans to related borrowers with outstanding balances in excess of this amount.
 
 
9

 
The following table presents the composition of Atlantic Coast Bank’s net portfolio loans, and other loans (held-for-sale and warehouse), in dollar amounts and in percentages at the dates indicated:
 
 
 
At December 31,
 
 
2013
 
2012
 
2011
 
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
 
(Dollars in Thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family
 
$
167,455
 
44.9
%
$
193,057
 
45.3
%
$
238,464
 
46.3
%
Commercial
 
 
48,356
 
12.9
%
 
58,193
 
13.7
%
 
72,683
 
14.1
%
Other (land and multi-family)
 
 
15,790
 
4.2
%
 
19,908
 
4.7
%
 
29,134
 
5.7
%
Total real estate loans
 
 
231,601
 
62.0
%
 
271,158
 
63.7
%
 
340,281
 
66.1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate construction loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family
 
 
 
0.0
%
 
 
0.0
%
 
2,044
 
0.4
%
Commercial
 
 
2,582
 
0.7
%
 
5,049
 
1.2
%
 
4,083
 
0.8
%
Acquisition and development
 
 
 
0.0
%
 
 
0.0
%
 
 
0.0
%
Total real estate construction
  loans
 
 
2,582
 
0.7
%
 
5,049
 
1.2
%
 
6,127
 
1.2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other portfolio loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
 
 
52,767
 
14.1
%
 
63,867
 
15.0
%
 
74,199
 
14.4
%
Consumer
 
 
53,290
 
14.3
%
 
61,558
 
14.4
%
 
70,838
 
13.8
%
Commercial
 
 
33,029
 
8.9
%
 
24,308
 
5.7
%
 
23,182
 
4.5
%
Total other portfolio loans
 
 
139,086
 
37.3
%
 
149,733
 
35.1
%
 
168,219
 
32.7
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total portfolio loans
 
$
373,269
 
100.0
%
$
425,940
 
100.0
%
$
514,627
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Less:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for portfolio loan
  losses
 
$
(6,946)
 
 
 
$
(10,889)
 
 
 
$
(15,526)
 
 
 
Net deferred portfolio loan costs
 
 
5,633
 
 
 
 
6,150
 
 
 
 
6,606
 
 
 
Total portfolio loans, net
 
$
371,956
 
 
 
$
421,201
 
 
 
$
505,707
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total other loans (held-for-sale
  and warehouse)
 
$
22,179
 
 
 
$
72,568
 
 
 
$
61,619
 
 
 
 
 
 
At December 31,
 
 
2010
 
2009
 
 
Amount
 
Percent
 
Amount
 
Percent
 
 
(Dollars in Thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
One- to four-family
 
$
256,729
 
46.2
%
$
306,968
 
49.3
%
Commercial
 
 
72,048
 
13.0
%
 
77,403
 
12.4
%
Other (land and multi-family)
 
 
29,868
 
5.4
%
 
37,591
 
6.0
%
Total real estate loans
 
 
358,645
 
64.6
%
 
421,962
 
67.7
%
 
 
 
 
 
 
 
 
 
 
 
 
Real estate construction loans:
 
 
 
 
 
 
 
 
 
 
 
One- to four-family
 
 
7,589
 
1.4
%
 
4,189
 
0.7
%
Commercial
 
 
5,825
 
1.0
%
 
8,022
 
1.3
%
Acquisition and development
 
 
1,652
 
0.3
%
 
3,148
 
0.5
%
Total real estate construction loans
 
 
15,066
 
2.7
%
 
15,359
 
2.5
%
 
 
 
 
 
 
 
 
 
 
 
 
Other portfolio loans:
 
 
 
 
 
 
 
 
 
 
 
Home equity
 
 
85,082
 
15.3
%
 
93,929
 
15.1
%
Consumer
 
 
75,745
 
13.6
%
 
73,870
 
11.9
%
Commercial
 
 
21,268
 
3.8
%
 
17,848
 
2.8
%
Total other portfolio loans
 
 
182,095
 
32.7
%
 
185,647
 
29.8
%
 
 
 
 
 
 
 
 
 
 
 
 
Total portfolio loans
 
$
555,806
 
100.0
%
$
622,968
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Less:
 
 
 
 
 
 
 
 
 
 
 
Allowance for portfolio loan losses
 
$
(13,344)
 
 
 
$
(13,810)
 
 
 
Net deferred portfolio loan costs
 
 
7,290
 
 
 
 
5,213
 
 
 
Total portfolio loans, net
 
$
549,752
 
 
 
$
614,371
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total other loans (held-for-sale and warehouse)
 
$
49,318
 
 
 
$
8,990
 
 
 
 
 
10

 
Portfolio Loans Maturities and Yields
 
The following table summarizes the scheduled repayments of our portfolio loans at December 31, 2013:
 
 
 
One- to Four-family
 
 
Commercial Real Estate
 
 
Other Real Estate (1)
 
 
 
 
 
 
Weighted
 
 
 
 
 
Weighted
 
 
 
 
 
Weighted
 
 
 
Amount
 
Average Rate (%)
 
 
Amount
 
Average Rate (%)
 
 
Amount
 
Average Rate (%)
 
 
 
(Dollars in Thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1 year or less (3)
 
$
18
 
6.63
%
 
$
3,043
 
5.84
%
 
$
415
 
7.50
%
Greater than 1 to 3 years
 
 
941
 
7.87
 
 
 
4,449
 
6.29
 
 
 
8,080
 
8.50
 
Greater than 3 to 5 years
 
 
1,627
 
5.43
 
 
 
9,829
 
6.41
 
 
 
1,040
 
8.99
 
Greater than 5 to 10 years
 
 
4,398
 
6.22
 
 
 
16,465
 
5.67
 
 
 
1,393
 
4.00
 
Greater than 10 to 20 years
 
 
19,623
 
5.70
 
 
 
11,483
 
5.61
 
 
 
2,695
 
8.75
 
More than 20 years
 
 
140,848
 
5.31
 
 
 
3,087
 
5.72
 
 
 
2,167
 
3.00
 
Total portfolio loans
 
$
167,455
 
 
 
 
$
48,356
 
 
 
 
$
15,790
 
 
 
 
 
 
One– to Four–family
 Construction (2)
 
 
Commercial Construction (2)
 
 
Acquisition and Development
 
 
 
 
 
Weighted
 
 
 
 
 
Weighted
 
 
 
 
 
Weighted
 
 
 
Amount
 
Average Rate (%)
 
 
Amount
 
Average Rate (%)
 
 
Amount
 
Average Rate (%)
 
 
 
(Dollars in Thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1 year or less (3)
 
$
 
%
 
$
 
%
 
$
 
%
Greater than 1 to 3 years
 
 
 
 
 
 
 
 
 
 
 
 
Greater than 3 to 5 years
 
 
 
 
 
 
 
 
 
 
 
 
Greater than 5 to 10 years
 
 
 
 
 
 
1,150
 
5.92
 
 
 
 
 
Greater than 10 to 20 years
 
 
 
 
 
 
748
 
4.33
 
 
 
 
 
More than 20 years
 
 
 
 
 
 
684
 
5.75
 
 
 
 
 
Total portfolio loans
 
$
 
 
 
 
$
2,582
 
 
 
 
$
 
 
 
 
 
 
Home Equity
 
 
Consumer
 
 
Commercial
 
 
 
 
 
Weighted
 
 
 
 
 
Weighted
 
 
 
 
 
Weighted
 
 
 
Amount
 
Average Rate (%)
 
 
Amount
 
Average Rate (%)
 
 
Amount
 
Average Rate (%)
 
 
 
(Dollars in Thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1 year or less (3)
 
$
338
 
5.65
%
 
$
953
 
6.54
%
 
$
9,615
 
5.27
%
Greater than 1 to 3 years
 
 
675
 
7.40
 
 
 
3,640
 
10.60
 
 
 
1,016
 
6.65
 
Greater than 3 to 5 years
 
 
1,883
 
6.73
 
 
 
5,925
 
8.58
 
 
 
2,933
 
6.48
 
Greater than 5 to 10 years
 
 
7,448
 
6.90
 
 
 
5,763
 
8.81
 
 
 
10,160
 
5.99
 
Greater than 10 to 20 years
 
 
12,416
 
6.31
 
 
 
25,723
 
8.29
 
 
 
1,092
 
5.35
 
More than 20 years
 
 
30,007
 
5.09
 
 
 
11,286
 
12.28
 
 
 
8,213
 
6.20
 
Total portfolio loans
 
$
52,767
 
 
 
 
$
53,290
 
 
 
 
$
33,029
 
 
 
 
 
 
Total
 
 
 
 
 
 
Weighted
 
 
 
Amount
 
Average Rate (%)
 
 
 
(Dollars in Thousands)
 
 
 
 
 
 
 
1 year or less (3)
 
$
14,382
 
5.55
%
Greater than 1 to 3 years
 
 
18,801
 
8.21
 
Greater than 3 to 5 years
 
 
23,237
 
7.05
 
Greater than 5 to 10 years
 
 
46,777
 
6.33
 
Greater than 10 to 20 years
 
 
73,780
 
6.79
 
More than 20 years
 
 
196,292
 
5.69
 
Total portfolio loans
 
$
373,269
 
 
 
____________
(1) Land and multi-family.
(2) Construction loans include notes that cover both the construction period and the end permanent financing, and therefore, the schedule shows maturities for periods greater than one year
(3) Demand loans, loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less.
 
 
11

 
The following table sets forth the scheduled repayments of fixed- and adjustable-rate portfolio loans at December 31, 2013 that are contractually due after December 31, 2014:
 
 
 
Due After December 31, 2014
 
 
 
Fixed Rate
 
Adjustable Rate
 
Total
 
 
 
(Dollars in Thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
One- to four-family
 
$
91,684
 
$
75,753
 
$
167,437
 
Commercial
 
 
28,295
 
 
17,018
 
 
45,313
 
Other (land and multi-family)
 
 
11,202
 
 
4,173
 
 
15,375
 
Total real estate loans
 
 
131,181
 
 
96,944
 
 
228,125
 
 
 
 
 
 
 
 
 
 
 
 
Real estate construction loans:
 
 
 
 
 
 
 
 
 
 
One- to four-family
 
 
 
 
 
 
 
Commercial
 
 
530
 
 
2,052
 
 
2,582
 
Acquisition and development
 
 
 
 
 
 
 
Total real estate construction loans
 
 
530
 
 
2,052
 
 
2,582
 
 
 
 
 
 
 
 
 
 
 
 
Other portfolio loans:
 
 
 
 
 
 
 
 
 
 
Home equity
 
 
16,112
 
 
36,317
 
 
52,429
 
Consumer
 
 
51,119
 
 
1,218
 
 
52,337
 
Commercial
 
 
9,550
 
 
13,864
 
 
23,414
 
Total other portfolio loans
 
 
76,781
 
 
51,399
 
 
128,180
 
 
 
 
 
 
 
 
 
 
 
 
Total portfolio loans
 
$
208,492
 
$
150,395
 
$
358,887
 
 
One- to Four-Family Real Estate Portfolio Lending
 
At December 31, 2013, one- to four-family residential mortgage loans totaled $167.4 million, or 44.9%, of gross portfolio loans. Generally, one- to four-family residential loans are underwritten based on the applicant’s employment, income, credit history and the appraised value of the subject property. The Bank underwrites all loans on a fully indexed, fully amortizing basis. The Bank will generally lend up to 80% of the lesser of the appraised value or purchase price for one- to four-family residential loans. Should a loan be granted with a loan-to-value ratio in excess of 80%, private mortgage insurance would be required to reduce overall exposure to below 80%. Historically, such collateral requirements protected the Bank from loss in the event of foreclosure. However, given the low market value of residential real estate over the last three 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.
 
The Bank added $16.1 million and $1.5 million of one- to four-family residential home loans to its portfolio during 2013 and 2012, respectively.
 
Properties securing one- to four-family residential mortgage loans are generally appraised by independent fee appraisers. Borrowers are required to obtain title and hazard insurance, and flood insurance, if necessary, in an amount not less than the value of the property improvements. Historically, the Bank originated one- to four-family mortgage loans on both a fixed-rate and adjustable-rate basis, however, more recently the majority of originated loans were fixed rate due to the low interest rate environment. Management’s pricing strategy for one- to four-family mortgage loans includes setting interest rates that are competitive with other local financial institutions and consistent with the Bank’s internal needs. Adjustable-rate loans are tied to a variety of indices including rates based on U.S. Treasury securities. The majority of adjustable-rate loans carry an initial fixed rate of interest for either three or five years which then converts to an interest rate that is adjusted based upon the applicable index and in accordance with the note. As of December 31, 2013, the total amount of one- to four-family residential mortgage loans allowing for interest only payments totaled $26.8 million, or 7.2% of the total portfolio loans, and 16.0% of the total one- to four-family mortgage loan portfolio. We do not currently originate or purchase interest-only one- to four-family residential mortgage loans and discontinued such activity in December 2007.
 
 
12

 
The Bank’s home mortgages are structured with a five to 35 year maturity, with amortizations up to 35 years. Substantially all of the one- to four-family mortgage loans originated are secured by properties located in southeastern Georgia and the metropolitan Jacksonville area. During 2008 and continuing into 2013, the Bank implemented stricter underwriting guidelines that limited the origination of one- to four-family residential mortgage loans secured by investment property due to the continued weak real estate values and credit quality in our market area.
 
All of the residential real estate loans contain a “due on sale” clause allowing the Bank to declare the unpaid principal balance due and payable upon the sale of the security property, subject to certain laws. Loans originated or purchased are generally underwritten and documented pursuant to Freddie Mac or Fannie Mae guidelines.
 
Prior to 2008, we originated investor loans for one- to four-family properties on a limited basis, but since that time the majority of our lending activity has focused on owner-occupied property. We have not in the past, nor do we currently, originate sub-prime loans, option-arms, Alt-A loans, or similar loans.
 
Commercial Real Estate Lending
 
The Bank offers commercial real estate loans for both permanent financing and construction. Our current strategy has been to focus primarily on permanent financing to owner occupied businesses. These loans are typically secured by small retail establishments, office buildings, or income producing properties located in the Bank’s primary market area. At December 31, 2013, permanent commercial real estate loans totaled $48.4 million, or 12.9%, of gross portfolio loans.
 
The Bank originates both fixed-rate and adjustable-rate commercial real estate loans. The interest rate on adjustable-rate loans is tied to a variety of indices, including rates based on the prime rate and U.S. Treasury securities. The majority of the Bank’s adjustable-rate loans carry an initial fixed-rate of interest, for either three or five years, and then convert to an interest rate that is adjusted annually based upon the index. Loan-to-value ratios on commercial real estate loans generally do not exceed 80% of the appraised value of the property securing the loan. These loans require monthly payments, amortize up to 25 years, and generally have maturities of up to 10 years and may carry pre-payment penalties.
 
Loans secured by commercial real estate are underwritten based on the cash flow of the borrower or income producing potential of the property and the financial strength of the borrower and guarantors. Loan guarantees are generally obtained from financially capable parties based on a review of personal financial statements. The Bank requires commercial real estate borrowers with aggregate balances in excess of $500,000 to submit financial statements, including rent rolls if applicable, annually. The net operating income, which is the income derived from the operation of the property less all operating expenses, must be sufficient to cover the payments related to the outstanding debt. The Bank generally requires an income-to-debt service ratio of 1.2 times debt. Rent or lease assignments are required in order for us to be assured the cash flow from the project will be used to repay the debt. Appraisals on properties securing commercial real estate loans are performed by independent state-licensed fee appraisers approved by the Board of Directors. The majority of the properties securing commercial real estate loans are located in the Bank’s market area.
 
Loans secured by commercial real estate properties are generally larger and involve a greater degree of credit risk than one- to four-family residential mortgage loans. Because payments on loans secured by commercial real estate properties are often dependent on the successful operation and management of the owner’s business or successful management of the property, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. If the cash flow from the project is reduced, or if leases are not obtained or renewed, the borrower’s ability to repay the loan may be impaired.
 
 
13

 
Other Real Estate Loans
 
As of December 31, 2013, other real estate secured loans totaled $15.8 million, or 4.2%, of gross portfolio loans and consisted mainly of land loans, but also included loans secured by multi-family property. In an effort to prevent potential exposure to additional credit risk due to the weak real estate values and credit quality in our market area, the Bank no longer originates new land loans. Loans to commercial and individual borrowers secured by land totaled $12.6 million, or 3.4% of gross portfolio loans as of December 31, 2013. Generally, these loans carry a higher rate of interest than do residential permanent loans. The Bank generally underwrote land loans based on the borrower’s ability to repay, credit history and the appraised value of the subject property.
 
The Bank also offers loans secured by multi-family residential real estate. These loans are secured by real estate located in the Bank’s primary market area. At December 31, 2013, multi-family residential loans totaled $3.2 million, or 0.8% of gross portfolio loans. Multi-family residential loans are generally originated with adjustable interest rates based on the prime rate or U.S. Treasury securities. Loan-to-value ratios on multi-family residential loans do not exceed 75% of the appraised value of the property securing the loan. These loans require monthly payments and amortize over a period of up to 30 years. Loans secured by multi-family residential real estate are underwritten based on the income producing potential of the property and the financial strength of the borrower. The net operating income must be sufficient to cover the payments related to the outstanding debt. Rent or lease assignments are required in order for us to be assured the cash flow from the project will be used to repay the debt. Appraisals on properties securing multi-family residential loans are performed by independent state licensed fee appraisers approved by the Board of Directors.
 
Loans secured by land and multi-family real estate properties generally involve a greater degree of credit risk than one- to four-family residential mortgage loans. Because payments on loans secured by multi-family real estate properties are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. If the cash flow from the project is reduced, or if leases are not obtained or renewed, the borrower’s ability to repay the loan may be impaired.
 
Real Estate Construction Lending
 
As of December 31, 2013, real estate construction loans totaled $2.6 million, or 0.7% of gross portfolio loans. The real estate construction portfolio consists of both residential and commercial construction loans. Residential construction loans are generally made for the construction of pre-sold builder homes to individual borrowers. As of December 31, 2013, the Bank had no residential construction loans. Residential construction only loans are underwritten according to the terms available for permanent financing on the secondary market. Generally, construction loans are limited to a loan to value ratio not to exceed 80% based on the lesser of construction costs or the appraised value of the property upon completion. The Bank also offers construction-to-permanent loans.
 
Construction only loans to builders generally have a term of 12 months with a variable interest rate tied to the prime rate as published in The Wall Street Journal plus a margin ranging from 0.5% to 1.5% and a floor of 6.0%, with a loan-to-value ratio of no more than 80% of the cost of the construction or appraised value of the property, whichever is less. As of December 31, 2013, we had loans to three builders for the construction of pre-sold or speculative one- to four-family residential property and lot inventory that totaled $0.5 million. The Bank has not originated construction only loans since 2007.
 
 
14

 
Home-Equity Lending
 
The Bank generally originates fixed-term fully amortizing home equity loans. At December 31, 2013, the portfolio totaled $52.8 million, or 14.1%, of gross portfolio loans. Historically the Bank originated open-ended, interest only home equity lines of credit. Due to the decline of both real estate values in our market area and the increased risk inherent with second lien real estate financing, the Bank ceased originating home equity lines of credit in January 2009. The Bank generally underwrites one- to four-family home equity loans based on the applicant’s employment and credit history and the appraised value of the subject property. Presently, the Bank will lend up to 80% of the appraised value less any prior liens. In limited circumstances, the Bank may lend up to 90% of the appraised value less any prior liens. This ratio may be reduced in accordance with internal guidelines given the risk and credit profile of the borrower. Properties securing one- to four-family mortgage loans are generally appraised by independent fee appraisers. The Bank requires a title search and hazard insurance, and flood insurance, if necessary, in an amount not less than the value of the property improvements. Currently, home equity loans are retained in our loan portfolio.
 
The Bank’s home equity lines of credit carry an adjustable interest rate based upon the prime rate of interest and generally have an interest rate floor. As of December 31, 2013, interest only lines of credit totaled $32.1 million, or 60.8% of the total home equity loan portfolio, and 14.6% of total loans collateralized by one- to four-family residential property. All home equity lines have a maximum draw period of 10 years with a repayment period of up to 20 years following such draw period depending on the outstanding balance.
 
Consumer Loans
 
The Bank currently offers a variety of consumer loans, primarily manufactured home loans and automobile loans. At December 31, 2013, consumer loans totaled $53.3 million, or 14.3% of gross portfolio loans.
 
The most significant component of the Bank’s consumer loan portfolio consists of manufactured home loans originated primarily through an on-site financing broker after being underwritten by Atlantic Coast Bank. Loans secured by manufactured homes totaled $35.8 million, or 9.6% of gross portfolio loans as of December 31, 2013. Manufactured home loans have a fixed rate of interest and may carry terms up to 25 years. Down payments are required, and the amounts are based on several factors, including the borrower’s credit history. The Bank has not originated manufactured home loans since early in 2011, and does not intend to originate such loans in the future.
 
The second most significant component of our consumer loan portfolio consists of automobile loans. The loans are originated primarily through our branch network and are underwritten by Atlantic Coast Bank. Loans secured by automobiles totaled $7.8 million, or 2.1% of gross portfolio loans as of December 31, 2013. Automobile loans have a fixed rate of interest and may carry terms up to six years. Down payments are required, and the amounts are based on several factors, including the borrower’s credit history.
 
Consumer loans, except for those secured by manufactured homes, have shorter terms to maturity and are principally fixed rate, thereby reducing exposure to changes in interest rates, and carry higher rates of interest than one- to four-family residential mortgage loans. Consumer loans have an inherently greater risk of loss because they are predominantly secured by rapidly depreciable assets, such as automobiles or manufactured homes. In these cases, repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. As a result, 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.
 
 
15

 
Commercial Business Lending
 
The Bank also offers commercial business loans which may be secured by assets other than real estate. At December 31, 2013, commercial business loans totaled $33.0 million, or 8.9% of gross portfolio loans. The purpose of these loans is to provide working capital, inventory financing, or equipment financing. Generally, working capital and inventory loans carry a floating rate of interest based on the prime rate plus a margin and mature annually. Loans to finance equipment generally carry a fixed rate of interest and terms of up to seven years. The collateral securing these types of loans is other business assets such as inventory, accounts receivable, and equipment. Once a loan is in the portfolio, the credit department monitors based on size, risk rating and payment status. Relationships with aggregate exposure of $500,000 or greater and lines of credit (regardless of amount) are required to submit financial statements annually. The Bank reviews the performance of these companies and affirms or changes their risk rating accordingly. Loans with risk ratings of monitor or special mention are reviewed and documented quarterly and loans rated substandard are reviewed monthly. Loans that become past due 30 days or more are monitored daily and risk ratings adjusted accordingly. Commercial business loans generally have higher interest rates than residential mortgage loans of like duration because they have a higher risk of default since their repayment generally depends on the successful operation of the borrower’s business and the sufficiency of any collateral. In addition, the Bank originates commercial loans through the 7(a) Program and the 504 Program of the SBA.
 
Loan Originations, Purchases, and Sales
 
The Bank originates portfolio loans through its branch network, the internet and its call center. Referrals from current customers, advertisements, real estate brokers, mortgage loan brokers and builders are also important sources of loan originations. While the Bank originates both adjustable-rate loans and fixed-rate loans, origination volume is dependent upon customer loan demand within the Bank’s market area. Demand is affected by local competition, the real estate market and the interest rate environment.
 
The Bank shut down its internal mortgage origination division in 2012, and moved to a referral model to originate mortgages. However, with the success of the Company’s capital raise in December 2013, the Bank reentered the business of originating one- to four-family residential loans for investment, and intends to continue originating such loans internally.
 
Prior to 2008 the Bank occasionally purchased pools of residential loans originated by other banks when organic growth was not sufficient. These loan purchases were made following the Bank’s underwriting standards, such as loan-to-value ratios and borrower credit scores. During 2013, the Bank reentered the business of purchasing pools of residential loans originated by other banks, and intends to continue purchasing such loans to supplement organic growth. The Bank purchased $16.3 million of these pooled loans during the year ended December 31, 2013. Similarly, prior to 2008 the Bank also participated in commercial real estate loans originated by other banks. These participation loans were subject to the Bank’s usual underwriting standards as described above applicable to this type of loan. The Bank has not participated in a commercial real estate loan originated by another bank since May 2007.
 
From time-to-time the Bank may sell residential loans from our portfolio to enhance liquidity or to appropriately manage interest rate risk. The Bank has also utilized the services of a national loan sale advisor to sell non-performing residential mortgage loans. The Bank sold $10.6 million of these non-performing loans during the year ended December 31, 2013.
 
 
16

 
Loans Held-for-Sale
 
Beginning in 2008 and continuing into 2012, the Bank began to regularly sell originated, conforming one- to four-family residential loans, both fixed rate and adjustable rate, including the related servicing, to other financial institutions in the secondary market for favorable fees. The Bank has not originated residential loans to be held-for-sale since 2012, but intends to originate such loans again beginning early in 2014.
 
Beginning in 2010, the Bank began to sell the guaranteed portion of the internally originated SBA loans to investors, while maintaining the servicing rights. The Bank intends to continue originating such loans for the foreseeable future.
 
Warehouse Loans Held-for-Investment
 
Beginning in 2010, the Bank began to originate warehouse loans held-for-investment and permit third-party originators to sell the loans and servicing rights to investors in order to repay the warehouse balance outstanding. The Bank intends to continue originating such loans for the foreseeable future.
 
Loan Approval Procedures and Authority
 
Individual loan authority ranges from $100,000 to $750,000 with lending authority based on the individual lender’s lending and loan underwriting experience. Loans which exceed an individual lender’s authority may be approved using combined authority with another officer on loan amounts up to and including $1.0 million. Loans exceeding $1.0 million and up to and including $5.0 million must be approved by our management loan committee. Loans exceeding $5.0 million must be approved by the Board of Directors.
 
Non-Performing and Problem Assets
 
General
 
When a borrower fails to make a timely payment on a loan, contact is made initially in the form of a reminder letter sent at either 10 or 15 days depending on the terms of the loan agreement. If a response is not received within a reasonable period of time, contact by telephone is made in an attempt to determine the reason for the delinquency and to request payment of the delinquent amount in full or to establish an acceptable repayment plan to bring the loan current.
 
Modifications are considered at the request of the borrower or upon the Bank’s determination that a modification of terms may be beneficial to the Bank. Generally, the borrower and any guarantors must provide current financial information and communicate to the Bank the underlying cause of their financial hardship and expectations for the near future. The Bank must then verify the hardship and structure a modification that addresses the situation accordingly.
 
If the borrower is unable to make or keep payment arrangements, additional collection action is taken in the form of repossession of collateral for secured, non-real estate loans and small claims or legal action for unsecured loans. If the loan is secured by real estate, a letter of intent to foreclose is sent to the borrower when an agreement for an acceptable repayment plan cannot be established or agreed upon. The letter of intent to foreclose allows the borrower up to 30 days to bring the account current. Once the loan becomes delinquent and an acceptable repayment plan has not been established, foreclosure action is initiated on the loan.
 
Delinquent Loans
 
Total portfolio loans past due 60 days or more totaled $4.8 million, or 1.3% of total portfolio loans at December 31, 2013. Real estate loans 60 days or more past due totaled $3.8 million, or 1.0% of total loans at December 31, 2013. There were no construction loans 60 days or more past due at December 31, 2013. Other portfolio loans (consisting of home equity, consumer, and commercial non-real estate) 60 days or more past due totaled $0.9 million, or 0.3% of total loans at December 31, 2013.
 
 
17

 
Non-Performing Assets
 
Non-performing assets consist of non-performing portfolio loans, accruing portfolio loans past due 90 days and more, and foreclosed assets. Loans to a customer whose financial condition has deteriorated are considered for non-performing status whether or not the loan is 90 days and over past due. Generally, all loans past due 90 days and over are classified as non-performing. For portfolio loans classified as non-performing, interest income is not recognized until actually collected. At the time the loan is placed on non-performing status, interest previously accrued but not collected is reversed and charged against current income.
 
The following table sets forth the amounts and categories of the Bank’s non-performing assets:
 
 
 
At December 31,
 
 
 
2013
 
 
2012
 
 
2011
 
 
2010
 
 
2009
 
 
 
(Dollars in Thousands)
 
Non-performing portfolio loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family
 
$
2,677
 
 
$
10,555
 
 
$
16,108
 
 
$
10,184
 
 
$
12,343
 
Commercial
 
 
 
 
 
8,643
 
 
 
14,238
 
 
 
7,228
 
 
 
3,895
 
Other (land and multi-family)
 
 
75
 
 
 
595
 
 
 
5,153
 
 
 
3,748
 
 
 
9,638
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate construction loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
739
 
 
 
2,362
 
 
 
1,682
 
 
 
4,988
 
Acquisition and development
 
 
 
 
 
 
 
 
 
 
 
 
 
 
404
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other portfolio loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
 
 
400
 
 
 
2,212
 
 
 
4,091
 
 
 
2,403
 
 
 
2,973
 
Consumer
 
 
229
 
 
 
969
 
 
 
983
 
 
 
679
 
 
 
909
 
Commercial
 
 
 
 
 
1,171
 
 
 
3,680
 
 
 
2,201
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total non-performing portfolio
    loans
 
 
3,381
 
 
 
24,884
 
 
 
46,615
 
 
 
28,125
 
 
 
35,150
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate owned
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family
 
 
191
 
 
 
1,592
 
 
 
886
 
 
 
1,532
 
 
 
1,000
 
Commercial
 
 
3,251
 
 
 
1,868
 
 
 
1,346
 
 
 
3,921
 
 
 
2,403
 
Other (land and multi-family)
 
 
1,783
 
 
 
4,441
 
 
 
2,917
 
 
 
4,192
 
 
 
1,562
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate construction loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family
 
 
 
 
 
 
 
 
 
 
 
 
 
 
63
 
Commercial
 
 
 
 
 
164
 
 
 
395
 
 
 
 
 
 
 
Acquisition and development
 
 
 
 
 
 
 
 
295
 
 
 
295
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other portfolio loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total real estate owned
 
 
5,225
 
 
 
8,065
 
 
 
5,839
 
 
 
9,940
 
 
 
5,028
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total non-performing assets
 
 
8,606
 
 
 
32,949
 
 
 
52,454
 
 
 
38,065
 
 
 
40,178
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Troubled debt restructurings classified
    as impaired portfolio loans
 
$
21,909
 
 
$
22,407
 
 
$
19,337
 
 
$
26,295
 
 
$
20,148
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ratios
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-performing portfolio loans to total
    portfolio loans
 
 
0.9
%
 
 
5.8
%
 
 
8.9
%
 
 
5.0
%
 
 
5.6
%
Non-performing portfolio loans to total assets
 
 
0.5
%
 
 
3.2
%
 
 
5.9
%
 
 
3.4
%
 
 
3.9
%
Non-performing assets to total assets
 
 
1.2
%
 
 
4.3
%
 
 
6.7
%
 
 
4.6
%
 
 
4.4
%
 
 
18

 
At December 31, 2013, the Bank had $3.4 million in non-performing portfolio loans, or 0.9% of total portfolio loans. Our largest concentration of non-performing portfolio loans at December 31, 2013 was $2.7 million in non-performing one- to four-family residential real estate loans. At December 31, 2013, one of the non-performing one- to four-family residential real estate loans was a jumbo loan (loan amount exceeds $417,000) totaling $0.4 million.
 
Real estate acquired as a result of foreclosure is classified as OREO. At the time of foreclosure or repossession, the property is recorded at estimated fair value less selling costs, with any write-down charged against the allowance for portfolio loan losses. As of December 31, 2013, the Bank had real estate owned of $5.2 million, a decrease of $2.9 million from December 31, 2012.
 
Portfolio loans for which the terms have been modified as a result of the borrower's financial difficulties are considered troubled debt restructurings (TDR). Portfolio loans modified as TDRs with market rates of interest are classified as impaired portfolio loans in the year of restructure and until the loan has performed for 12 months in accordance with the modified terms. TDRs which do not perform in accordance with modified terms are reported as non-performing portfolio loans. As of December 31, 2013 and 2012 such portfolio loans totaled $0.1 million and $3.1 million, respectively.
 
Classified Assets
 
Banking regulations provide for the classification of portfolio loans and other assets, such as other real estate owned, debt and equity securities considered by the Bank and regulators to be of lesser quality, as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of 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.” Assets classified as “loss” are those considered not collectable and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.
 
When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances for portfolio loan losses in an amount deemed prudent by management and reviewed by the Board of Directors. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as “loss,” it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge off such amount. Our determination as to the classification of our assets and the amount of its valuation allowances is subject to review by the OCC and the FDIC, which may order the establishment of additional general or specific loss allowances.
 
In connection with the filing of the Bank’s regulatory reports with the OCC and in accordance with its classification of assets policy, management regularly reviews the problem assets in the portfolio to determine whether any assets require classification in accordance with applicable regulations. The total amount of classified assets (consisting primarily of portfolio loans and real estate owned) represented 30.5% of the Bank‘s equity capital and 2.7% of the Bank’s total assets at December 31, 2013.
 
 
19

 
There were no portfolio loans considered doubtful or loss at December 31, 2013 and 2012. Assets considered substandard were $20.0 million, down from $45.5 million at year end 2012. The Bank also designates certain portfolio loans as special mention when it is determined a loan relationship should be monitored more closely. Portfolio loans are considered as special mention for a variety of reasons including changes in recent borrower financial condition, changes in borrower operations, changes in value of available collateral, concerns regarding changes in economic conditions in a borrower’s industry, and other matters. A portfolio loan considered as special mention in many instances may be performing in accordance with the loan terms. Special mention portfolio loans were $3.1 million and $2.8 million at December 31, 2013 and 2012, respectively. As of December 31, 2013 $3.4 million of classified portfolio loans were on non-performing status, as compared to $24.9 million at year end 2012.
 
Allowance for Portfolio Loan Losses
 
An allowance for portfolio loan losses (the 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 portfolio loan losses (provision expense) charged to earnings. Generally, portfolio loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
 
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 those conditions continuously and reviews are conducted quarterly with the Bank’s senior management and the Board of Directors.
 
Management’s methodology for assessing the reasonableness of the allowance consists of several key elements, which include a general loss component by type of portfolio loan and specific allowances for identified problem portfolio loans. The allowance also incorporates the results of measuring impaired portfolio loans.
 
At December 31, 2013, the allowance was $6.9 million or 1.8% of total portfolio loans and 205.4% of total non-performing portfolio loans.
 
 
20

 
The following table sets forth activity in the Company’s allowance for the years indicated:
 
 
 
At December 31,
 
 
 
2013
 
 
2012
 
 
2011
 
 
2010
 
 
2009
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in Thousands)
 
Balance at beginning of year
 
$
10,889
 
 
$
15,526
 
 
$
13,344
 
 
$
13,810
 
 
$
10,598
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Charge-offs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family
 
 
(4,485)
 
 
 
(6,347)
 
 
 
(6,005)
 
 
 
(10,235)
 
 
 
(8,350)
 
Commercial
 
 
(2,452)
 
 
 
(2,756)
 
 
 
(2,274)
 
 
 
(1,314)
 
 
 
(3,822)
 
Other (land and multi-family)
 
 
(790)
 
 
 
(1,906)
 
 
 
(729)
 
 
 
(2,735)
 
 
 
(3,605)
 
Real estate construction loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(50)
 
Commercial
 
 
 
 
 
(1,145)
 
 
 
 
 
 
(3,342)
 
 
 
 
Acquisition and development
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other portfolio loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
 
 
(2,017)
 
 
 
(3,215)
 
 
 
(3,404)
 
 
 
(2,000)
 
 
 
(4,715)
 
Consumer
 
 
(2,131)
 
 
 
(1,567)
 
 
 
(1,471)
 
 
 
(1,773)
 
 
 
(1,408)
 
Commercial
 
 
(880)
 
 
 
(1,769)
 
 
 
(242)
 
 
 
(697)
 
 
 
(590)
 
Total charge-offs
 
 
(12,755)
 
 
 
(18,705)
 
 
 
(14,125)
 
 
 
(22,897)
 
 
 
(22,540)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recoveries:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family
 
 
961
 
 
 
1,036
 
 
 
483
 
 
 
687
 
 
 
252
 
Commercial
 
 
 
 
 
3
 
 
 
21
 
 
 
3
 
 
 
 
Other (land and multi-family)
 
 
63
 
 
 
8
 
 
 
36
 
 
 
124
 
 
 
18
 
Real estate construction loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition and development
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other portfolio loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
 
 
395
 
 
 
223
 
 
 
119
 
 
 
102
 
 
 
240
 
Consumer
 
 
289
 
 
 
305
 
 
 
262
 
 
 
276
 
 
 
351
 
Commercial
 
 
78
 
 
 
2
 
 
 
3
 
 
 
9
 
 
 
18
 
Total recoveries
 
 
1,786
 
 
 
1,577
 
 
 
924
 
 
 
1,201
 
 
 
879
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net charge-offs
 
 
(10,969)
 
 
 
(17,128)
 
 
 
(13,201)
 
 
 
(21,696)
 
 
 
(21,661)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for portfolio loan losses
 
 
7,026
 
 
 
12,491