Attached files
file | filename |
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EX-32.2 - EXHIBIT 32.2 - ALASKA PACIFIC BANCSHARES INC | ex32251310.htm |
EX-32.1 - EXHIBIT 32.1 - ALASKA PACIFIC BANCSHARES INC | ex32151310.htm |
EX-31.2 - EXHIBIT 31.2 - ALASKA PACIFIC BANCSHARES INC | ex31251310.htm |
EX-31.1 - EXHIBIT 31.1 - ALASKA PACIFIC BANCSHARES INC | ex31151310.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
X
|
Quarterly
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For the
quarterly period ended March 31, 2010
Transition
report pursuant to Section 13 or 15(d) of the Exchange Act of
1934
|
For the
transition period from _____________ to ___________
Commission
file number: 0-26003
ALASKA PACIFIC BANCSHARES, INC.
(Exact
name of registrant as specified in its charter)
Alaska
|
92-0167101 | |
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
2094 Jordan Avenue, Juneau, Alaska 99801
(Address
of Principal Executive Offices)
(907) 789-4844
(Registrant’s
telephone number, including area code)
NA
(Former
name, former address and former fiscal year,
if
changed since last report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes [_] 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 definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company’ in Rule 12b-2 of the
Exchange Act.
Large accelerated filer
_____ Accelerated
filer _____
Non-accelerated
filer _____ Smaller
reporting company X
(do not check if a smaller reporting
company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
No X
1
State the
number of shares outstanding of each of the issuer's classes of common equity as
of the latest practicable date:
654,486
shares outstanding on May 1, 2010
2
ALASKA
PACIFIC BANCSHARES, INC.
Juneau,
Alaska
INDEX
PART I. FINANCIAL
INFORMATION
|
|
Item
1. Financial Statements
|
|
Consolidated Balance Sheets |
4
|
Consolidated Statements of Operations
|
5
|
Consolidated Statements of Cash Flows
|
6
|
Selected
Notes to Condensed Consolidated Interim Financial
Statements
|
7
|
Item 2. Management's Discussion and
Analysis of
Financial Condition and Results of Operations
|
22
|
Item
3. Quantitative and Qualitative Disclosures About
Market Risk
|
34
|
Item
4. Controls and
Procedures
|
34
|
Item
4T. Controls and
Procedures
|
35
|
PART II. OTHER
INFORMATION
|
|
Item 1. Legal Proceedings |
35
|
Item
1A. Risk Factors
|
35
|
Item
2. Unregistered Sales of Equity Securities and Use
of Proceeds
|
38 |
Item
3. Defaults Upon Senior Securities
|
38
|
Item
4. [Removed and Reserved]
|
39 |
Item
5. Other Information
|
39 |
Item
6. Exhibits
|
39 |
Signatures | 42 |
3
PART
I. FINANCIAL INFORMATION
|
Item
1. Financial Statements
|
Consolidated
Balance Sheets
(dollars
in thousands except share data)
|
March
31,
2010
(Unaudited)
|
December
31,
2009
|
||
Assets
|
||||
Cash
and due from banks
|
$ 5,682
|
$ 6,273
|
||
Interest-earning
deposits in banks
|
533
|
669
|
||
Total
cash and cash equivalents
|
6,215
|
6,942
|
||
Investment
securities available for sale, at fair value (amortized cost:
March 31,
2010 - $2,425; December 31, 2009 - $2,536)
|
2,510
|
2,606
|
||
Federal
Home Loan Bank stock
|
1,784
|
1,784
|
||
Loans
held for sale
|
824
|
55
|
||
Loans
|
156,530
|
158,108
|
||
Less
allowance for loan losses
|
(2,204
|
) |
(1,786
|
) |
Loans,
net
|
154,326
|
156,322
|
||
Interest
receivable
|
734
|
698
|
||
Premises
and equipment, net
|
2,753
|
2,816
|
||
Other
real estate owned and repossessed assets
|
2,856
|
2,598
|
||
Other
assets
|
4,810
|
4,487
|
||
Total
Assets
|
$176,812
|
$178,308
|
Liabilities
and Shareholders’ Equity
|
||||
Deposits:
|
||||
Noninterest-bearing
demand
|
$ 26,427
|
$
27,416
|
||
Interest-bearing
demand
|
30,939
|
32,474
|
||
Money
market
|
26,675
|
28,982
|
||
Savings
|
18,581
|
19,170
|
||
Certificates
of deposit
|
40,243
|
40,175
|
||
Total
deposits
|
142,865
|
148,217
|
||
Federal
Home Loan Bank advances
|
12,900
|
9,834
|
||
Advances
from borrowers for taxes and insurance
|
1,298
|
751
|
||
Accounts
payable and accrued expenses
|
355
|
379
|
||
Interest
payable
|
328
|
307
|
||
Other
liabilities
|
406
|
140
|
||
Total
liabilities
|
158,152
|
159,628
|
||
Shareholders’
Equity:
|
||||
Preferred
stock ($0.01 par value; 1,000,000 shares authorized; Series A –
Liquidation preference $1,000 per share, 4,781 shares issued and
outstanding
at March 31, 2010 and at December 31, 2009)
|
4,513
|
4,497
|
||
Common
stock ($0.01 par value; 20,000,000 shares authorized; 655,415 shares
issued; 654,486 shares outstanding at March 31, 2010 and at
December 31,
2009)
|
7
|
7
|
||
Additional
paid-in capital
|
6,452
|
6,446
|
||
Treasury
stock
|
(11
|
) |
(11
|
) |
Retained
earnings
|
7,649
|
7,699
|
||
Accumulated
other comprehensive income
|
50
|
42
|
||
Total
shareholders’ equity
|
18,660
|
18,680
|
||
Total
Liabilities and Shareholders’ Equity
|
$176,812
|
$178,308
|
||
See
selected notes to condensed consolidated interim financial
statements.
|
4
Consolidated
Statements of Operations
(Unaudited)
Three
Months Ended
March
31,
|
||||||
(in
thousands, except per share data)
|
2010
|
2009
|
||||
Interest
Income
|
||||||
Loans
|
$2,370
|
$2,646
|
||||
Investment
securities
|
25
|
37
|
||||
Interest-earning
deposits with banks
|
-
|
2
|
||||
Total
interest income
|
2,395
|
2,685
|
||||
Interest
Expense
|
||||||
Deposits
|
242
|
400
|
||||
Federal
Home Loan Bank advances
|
79
|
153
|
||||
Total
interest expense
|
321
|
553
|
||||
Net
Interest Income
|
2,074
|
2,132
|
||||
Provision
for loan losses
|
721
|
60
|
||||
Net
interest income after provision for loan losses
|
1,353
|
2,072
|
||||
Noninterest
Income
|
||||||
Mortgage
servicing income
|
49
|
45
|
||||
Service
charges on deposit accounts
|
168
|
166
|
||||
Other
service charges and fees
|
50
|
55
|
||||
Mortgage
banking income
|
95
|
230
|
||||
Total
noninterest income
|
362
|
496
|
||||
Noninterest
Expense
|
||||||
Compensation
and benefits
|
1,185
|
1,242
|
||||
Occupancy
and equipment
|
338
|
363
|
||||
Data
processing
|
58
|
64
|
||||
Professional
and consulting fees
|
128
|
146
|
||||
Marketing
and public relations
|
57
|
57
|
||||
Repossessed
property
|
(1
|
) |
41
|
|||
FDIC
assessment
|
89
|
52
|
||||
Other
|
256
|
257
|
||||
Total
noninterest expense
|
2,110
|
2,222
|
||||
(Loss)
income before income tax
|
(395
|
) |
346
|
|||
Provision
for income taxes
|
-
|
137
|
||||
Net
(loss) income
|
(395
|
) |
$ 209
|
|||
Preferred
stock dividend and discount accretion
|
||||||
Preferred
stock dividend
|
60
|
37
|
||||
Preferred
stock discount accretion
|
15
|
9
|
||||
Net
(loss) income available to common shareholders
|
$ (470
|
) |
$ 163
|
|||
Income
(Loss) per common share:
|
||||||
Basic
|
$(0.72
|
) |
$0.25
|
|||
Diluted
|
(0.72
|
) |
0.25
|
|||
Common
stock cash dividends declared per share
|
-
|
-
|
||||
See
selected notes to condensed consolidated interim financial
statements.
|
5
Alaska
Pacific Bancshares, Inc. and Subsidiary
Consolidated
Statements of Cash Flows
(Unaudited)
Three
Months Ended
March
31,
|
||||
(in
thousands)
|
2010
|
2009
|
||
Operating
Activities
|
||||
Net
(loss) income
|
$ (395
|
) |
$ 209
|
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
||||
Provision
for loan losses
|
721
|
60
|
||
Depreciation
and amortization
|
77
|
85
|
||
Amortization
of fees, discounts, and premiums, net
|
(29
|
) |
(70
|
) |
Stock
compensation expense
|
6
|
5
|
||
Mortgage
banking income
|
(95
|
) |
(230
|
) |
Loans
originated for sale
|
(5,214
|
) |
(15,261
|
) |
Proceeds
from sale of loans originated for sale
|
4,540
|
17,140
|
||
Cash
provided by changes in operating assets and liabilities:
|
||||
Interest
receivable
|
(36
|
) |
22
|
|
Other
assets
|
92
|
(57
|
) | |
Advances
from borrowers for taxes and insurance
|
547
|
548
|
||
Interest
payable
|
21
|
39
|
||
Accounts
payable and accrued expenses
|
(24
|
) |
(81
|
) |
Other
liabilities
|
266
|
22
|
||
Net
cash provided by operating activities
|
477
|
2,431
|
||
Investing
Activities
|
||||
Maturities
and principal repayments of investment securities available for
sale
|
108
|
155
|
||
Loan
originations, net of principal repayments
|
951
|
1,075
|
||
Proceeeds
from sale of repossessed assets
|
97
|
-
|
||
Purchase
of premises and equipment
|
(14
|
) |
(10
|
) |
Net
cash provided by investing activities
|
1,142
|
1,220
|
||
Financing
Activities
|
||||
Proceeds
from issuance of preferred stock and common stock warrants
|
-
|
4,781
|
||
Stock
issuance costs paid
|
-
|
(52
|
) | |
Net
increase in Federal Home Loan Bank advances
|
3,066
|
12,028
|
||
Net
decrease in demand, savings, and money market deposits
|
(5,420
|
) |
(7,447
|
) |
Net
increase (decrease) in certificates of deposit
|
68
|
(15,352
|
) | |
Cash
dividends paid on preferred stock
|
(60
|
) |
-
|
|
Net
cash used in financing activities
|
(2,346
|
) |
(6,042
|
) |
Decrease
in cash and cash equivalents
|
(727
|
) |
(2,391
|
) |
Cash
and cash equivalents at beginning of period
|
6,942
|
9,402
|
||
Cash
and cash equivalents at end of period
|
$6,215
|
$7,011
|
||
Supplemental
information:
|
||||
Cash
paid for interest
|
$300
|
$514
|
||
Loans
foreclosed and transferred to repossessed assets
|
355
|
-
|
||
Net
change in fair value of securities available for sale, net of
tax
|
8
|
21
|
||
Cumulative
adjustment – change in accounting principle
|
421 | - | ||
Accrued
TARP dividends
|
31
|
37
|
||
See
selected notes to condensed consolidated interim financial
statements.
|
6
Selected
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
Note
1 - Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements include the
accounts of Alaska Pacific Bancshares, Inc. (the “Company”) and its wholly owned
subsidiary, Alaska Pacific Bank (the “Bank”), and have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information
and footnotes required by accounting principles generally accepted in the United
States (“GAAP”) for complete financial statements. They should be
read in conjunction with the audited consolidated financial statements included
in the Form 10-K for the year ended December 31, 2009. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for fair presentation have been included. The
results of operations for the interim periods ended March 31, 2010 and 2009, are
not necessarily indicative of the results which may be expected for an entire
year or any other period.
Certain
amounts in prior-period financial statements have been reclassified to conform
to the current-period presentation. These reclassifications had no
effect on net income (loss).
The
Company has evaluated events and transactions for potential recognition and
disclosure through the day the financial statements were issued.
Transfers
and servicing of financial assets:
The
Company generally retains the right to service mortgage loans sold to others.
Prior to January 1, 2010, the Company accounted for mortgage servicing rights
retained are recognized as a separate asset and, amortized the mortgage
servicing rights retained in proportion to and over the period of estimated net
servicing income.
Effective
January 1, 2010, the Company adopted ASC 860-50, Servicing Assets and
Liabilities, which provides the option of making an irrevocable decision
to subsequently measure a class of servicing assets at fair value at the
beginning of any fiscal year, which was elected by the Company. Accordingly, the
Company began reporting mortgage servicing rights under the fair value
measurement method, effective January 1, 2010, in accordance with ASC
860-50, Servicing Assets and
Liabilities. Under this new standard, servicing assets are
measured at fair value at each reporting date and the changes in fair value are
reported in earnings in the period during which the changes
occur. Mortgage servicing rights are periodically evaluated for
impairment based on the fair value of those rights. Fair values are estimated
using discounted cash flows based on current market rates of interest and
current expected future prepayment rates. For purposes of measuring impairment,
the rights must be stratified by one or more predominant risk characteristics of
the underlying loans. The Company stratifies its capitalized mortgage servicing
rights based on the type of loan, origination date, and term of the underlying
loans.
7
Note
2 – Mortgage Loan Servicing
Effective
January 1, 2010, the Company adopted ASC 860-50, Servicing Assets and
Liabilities, which provides the option of making an irrevocable decision
to subsequently measure a class of servicing assets at fair value at the
beginning of any fiscal year, which was elected by the Company in order to
improve consistency and comparability in financial
reporting. Subsequent changes in fair value will be reported in
earnings in the period in which the change occurs. Upon adoption,
management determined the carrying value of servicing assets was approximately
$421,000 lower than the fair value. The Company uses a model derived
valuation methodology to estimate the fair value of MSR obtained from an
independent broker on an annual basis. The model pools loans
into buckets of homogeneous characteristics and performs a present value
analysis of the future cash flows. The buckets are created by
individual loan characteristics such as note rate, product type, and the
remittance schedule. Current market rates are utilized for
discounting the future cash flows. Significant assumptions used in
the valuation of MSR include discount rates, projected prepayment speeds, escrow
calculations, ancillary income, delinquencies and option adjusted spreads. A
cumulative effect adjustment of $421,000 has been recorded to retained earnings
effective January 1, 2010 for this change in accounting
principle. Upon adoption, there was no impact to net income, earnings
per share, or any prior years retained earnings. During the year
ended December 31, 2009, the change in carrying value was reported in earnings,
and is included under the caption “Other service charges and fees” in the
accompanying Consolidated Statements of Operations.
Three
Months
Ended
March
31,
|
|||
(in
thousands)
|
|||
Balance
beginning of period
|
$813
|
||
Additions
to servicing assets
|
40
|
||
Disposals
of servicing assets
|
(42
|
) | |
Fair
value adjustment
|
421
|
||
Balance
end of period
|
$1,232
|
Note
3 - Fair Value Measurements
We have
elected to record certain assets and liabilities at fair value. Fair value is
defined as the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at the
measurement date. The GAAP standard (ASC 820) establishes a consistent framework
for measuring fair value and disclosure requirements about fair value
measurements. The standard defines fair value as the price that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The
standard requires the Company to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair
value. Observable inputs reflect market data obtained from
independent sources, while unobservable inputs reflect the
8
Company’s
market assumptions. These two types of inputs create the following
fair value hierarchy:
Level 1 -
Unadjusted quoted prices for identical instruments in active
markets;
Level 2 -
Quoted prices for similar instruments in active markets; quoted prices for
identical or similar instruments in markets that are not active; and
model-derived valuations whose inputs are observable or whose significant value
drivers are observable; and
Level 3 -
Instruments whose significant value drivers are unobservable.
An asset
or liability’s level within the fair value hierarchy is based on the lowest
level of input that is significant to the fair value measurement.
The
following table sets for the Company’s assets and liabilities by level within
the fair value hierarchy that were measured at fair value on a recurring and
non-recurring basis.
Fair
Value Measurements Using
|
|||||
Fair
Value
|
Quoted
Prices
in
Active
Markets
for
Identical
Assets
(Level
1)
|
Significant
Other
Observable
Inputs
(Level
2)
|
Significant
Observable
Inputs
(Level
3)
|
Gain
(Losses)
for
period
|
|
(in
thousands)
|
|||||
March
31, 2010:
|
|||||
Recurring:
|
|||||
Available
for sale securities:
|
|||||
Mortgage
backed securities
|
$ 2,420
|
$ -
|
$ 2,420
|
$ -
|
$ 84
|
U.S.
government agencies
|
90
|
-
|
90
|
-
|
1
|
Mortgage
servicing rights
|
1,232
|
-
|
-
|
1,232
|
-
|
Non-recurring:
|
|||||
Impaired
loans
|
1,590
|
-
|
-
|
1,590
|
-
|
Other
real estate owned and repossessed assets
|
2,856
|
-
|
|
2,856
|
-
|
December
31, 2009:
|
|||||
Recurring:
|
9
Available
for sale securities:
|
|||||
Mortgage
backed securities
|
$ 2,514
|
$ -
|
$ 2,514
|
$ -
|
$ 69
|
U.S.
government agencies
|
92
|
-
|
92
|
-
|
1
|
Mortgage
servicing rights
|
1,234
|
-
|
1,234
|
-
|
-
|
Non-recurring:
|
|||||
Impaired
loans
|
1,408
|
-
|
-
|
1,408
|
-
|
Other
real estate owned and repossessed assets
|
2,598
|
-
|
|
2,598
|
503
|
Securities
available-for-sale are recorded at fair value on a recurring
basis. Fair values are based on quoted market prices, where
available. If quoted market prices are not available, fair values are
estimated based on quoted market prices of comparable instruments with similar
characteristics or discounted cash flows. Changes in fair market
value are recorded in other comprehensive income, as the securities are
available for sale.
Mortgage
servicing rights (MSR) are measured at fair value on a recurring
basis. These assets are classified as Level 3 as quoted prices
are not available and the Company uses a model derived valuation methodology to
estimate the fair value of MSR obtained from an independent broker on an annual
basis. The model pools loans into buckets of homogeneous
characteristics and performs a present value analysis of the future cash
flows. The buckets are created by individual loan characteristics
such as note rate, product type, and the remittance schedule. Current
market rates are utilized for discounting the future cash
flows. Significant assumptions used in the valuation of MSR include
discount rates, projected prepayment speeds, escrow calculations, ancillary
income, delinquencies and option adjusted spreads. These assets are recorded at
fair value.
Impaired
loans are measured at fair value on a non-recurring basis. These
assets are classified as Level 3 where significant value drivers are
unobservable. The fair value of impaired loans are determined using
the fair value of each loan’s collateral for collateral-dependent loans as
determined, when possible, by an appraisal of the property, less estimated costs
related to liquidation of the collateral. The appraisal amount may
also be adjusted for current market conditions. Impaired loans that
had a reserve for specific impairment or partial charge off were $1.6 million at
March 31, 2010 with estimated reserves for impairment of $889,000.
The $2.9
million in other real estate owned and repossessed assets reflected in the table
above represents impaired real estate that has been adjusted to fair value.
Other real estate owned and repossessed assets primarily represents real estate
and other assets which the Bank has taken control of in partial or full
satisfaction of loans. At the time of foreclosure, other real estate owned and
repossessed assets are recorded at the lower of the carrying amount of the loan
or fair value less costs to sell, which becomes the property’s new basis. Any
write-downs based on the asset’s fair value at the date of acquisition are
charged to the allowance for loan and lease losses.
10
After
foreclosure, management periodically performs valuations when possible, by an
appraisal of the property, such that the real estate is carried at the lower of
its new cost basis or fair value, net of estimated costs to sell. Fair value
adjustments on other real estate owned and repossessed assets are recognized
within results of operations.
11
The
following information presents fair value disclosures as of March 31, 2010 and
December 31, 2009. The estimated fair value amounts have been
determined by the Company using available market information and appropriate
valuation methodologies. However, considerable judgment is
necessarily required to interpret market data to develop the estimates of fair
value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
(in
thousands)
|
March
31, 2010
|
December
31, 2009
|
||
Carrying
Amount
|
Estimated
Fair
Value
|
Carrying
Amount
|
Estimated
Fair
Value
|
|
Financial
Assets
|
||||
Cash
and cash equivalents
|
$ 6,215
|
$ 6,215
|
$ 6,942
|
$ 6,942
|
Federal
Home Loan Bank “FHLB” stock
|
1,784
|
1,784
|
1,784
|
1,784
|
Loans,
including held for sale
|
157,354
|
138,428
|
158,163
|
166,184
|
Interest
receivable
|
734
|
734
|
698
|
698
|
Financial
Liabilities
|
||||
Demand
and savings deposits
|
102,622
|
102,622
|
108,042
|
108,042
|
Certificates
of deposit
|
40,243
|
40,838
|
40,175
|
40,230
|
FHLB
Advances
|
12,900
|
12,900
|
9,834
|
10,082
|
Interest
payable
|
328
|
328
|
307
|
307
|
The
following methods and assumptions were used to estimate the fair value of each
class of financial instrument:
Cash and cash
equivalents: The fair value of cash and cash equivalents and
accrued interest receivable is estimated to be equal to the carrying value, due
to their short-term nature.
FHLB stock: The
fair value of FHLB stock is considered to be equal to its carrying value, since
it may be redeemed at that value.
Loans: The fair
value of loans is estimated using present value methods which discount the
estimated cash flows, including prepayments as well as contractual principal and
interest, using current interest rates appropriate for the type and maturity of
the loans.
Deposits: For
demand and savings deposits and accrued interest payable, fair value is
considered to be carrying value. The fair values of fixed-rate
certificates of deposit and FHLB advances are estimated using present value
methods and current offering rates for such deposits and advances.
12
Note
4 – Investment Securities Available for Sale
Amortized
cost and fair values of investment securities available for sale, including
mortgage-backed securities, are summarized as follows:
(in
thousands)
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair
Value
|
|
March
31, 2010:
|
|||||
Mortgage-backed
securities:
|
$2,336
|
$86
|
$(2
|
) |
$2,420
|
U.S.
government agencies
|
89
|
1
|
0
|
90
|
|
Total
|
$2,425
|
$87
|
$(2
|
) |
$2,510
|
December
31, 2009:
|
|||||
Mortgage-backed
securities:
|
$2,445
|
$81
|
$(12
|
) |
$2,514
|
U.S.
government agencies
|
91
|
1
|
-
|
92
|
|
Total
|
$2,536
|
$82
|
$(12
|
) |
$2,606
|
Impaired
investment securities (those with unrealized losses) at March 31, 2010 are
summarized as follows:
Impaired
less than
12
months
|
Impaired
12 months
or
more
|
Total
|
||||
(in
thousands)
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Mortgage-backed
securities
|
$447
|
$0
|
$334
|
$(2)
|
$781
|
$(2)
|
Total
|
$447
|
$0
|
$334
|
$(2)
|
$781
|
$(2)
|
Impaired
investment securities (those with unrealized losses) at December 31, 2009 are
summarized as follows:
Impaired
less than
12
months
|
Impaired
12 months
or
more
|
Total
|
||||
(in
thousands)
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Mortgage-backed
securities
|
$12
|
$(1)
|
$571
|
$(11)
|
$583
|
$(12)
|
Total
|
$12
|
$(1)
|
$571
|
$(11)
|
$583
|
$(12)
|
Seven
investment securities with unrealized losses at March 31, 2010 were
mortgage-backed or other securities issued by the U.S. government and agencies;
collectability of principal and interest is considered to be reasonably
assured. The fair values of individual investment securities
fluctuate significantly with interest rates and with market demand for
securities with specific structures and characteristics. Management
does not consider these unrealized losses to be other than
temporary.
13
No
investment securities were designated as held to maturity at March 31, 2010 or
December 31, 2009.
All
investment securities, with the exception of one, at March 31, 2010 have final
contractual maturities of more than five years. Actual maturities may
vary as a result of prepayment of the underlying loans.
At March
31, 2010, investment securities with an amortized cost of $2.4 million and a
market value of $2.4 million were pledged to secure public funds deposited with
the Bank.
There
were no sales of investment securities during 2010 or 2009. The Bank
does not have an investment securities trading portfolio or investment
securities held to maturity.
The
unrealized losses on investments in U.S. government agency securities were
caused by interest rate increases subsequent to the purchase of these
securities. The contractual terms of these investments do not permit the issuer
to settle the securities at a price less than par. Because the Bank does not
intend to sell the securities in this class and it is not likely that the Bank
will be required to sell these securities before recovery of their amortized
cost bases, which may include holding each security until contractual maturity,
the unrealized losses on these investments are not considered
other-than-temporarily impaired.
The
unrealized losses on obligations of states and municipalities were caused by
changes in market interest rates or the widening of market spreads subsequent to
the initial purchase of these securities. Management monitors published credit
ratings of these securities and no adverse ratings changes have occurred since
the date of purchase of obligations of political subdivisions which are in an
unrealized loss position as of March 31, 2010. Because the decline in fair value
is attributable to changes in interest rates or widening market spreads and not
credit quality, and because the Bank does not intend to sell the securities in
this class and it is not likely that Bank will be required to sell these
securities before recovery of their amortized cost bases, which may include
holding each security until maturity, the unrealized losses on these investments
are not considered other-than-temporarily impaired.
14
We
review investment securities on an ongoing basis for the presence of
other-than-temporary impairment (“OTTI”) or permanent impairment, taking into
consideration current market conditions, fair value in relationship to cost,
extent and nature of the change in fair value, issuer rating changes and trends,
whether we intend to sell a security or if it is likely that we will be required
to sell the security before recovery of the amortized cost basis of the
investment, which may be maturity, and other factors. For debt securities, if we
intend to sell the security or it is likely that we will be required to sell the
security before recovering its cost basis, the entire impairment loss would be
recognized in earnings as an OTTI. If we do not intend to sell the security and
it is not likely that we will be required to sell the security but we do not
expect to recover the entire amortized cost basis of the security, only the
portion of the impairment loss representing credit losses would be recognized in
earnings. The credit loss on a security is measured as the difference between
the amortized cost basis and the present value of the cash flows expected to be
collected. Projected cash flows are discounted by the original or current
effective interest rate depending on the nature of the security being measured
for potential OTTI. The remaining impairment related to all other factors, the
difference between the present value of the cash flows expected to be collected
and fair value, is recognized as a charge to other comprehensive income (“OCI”).
Impairment losses related to all other factors are presented as separate
categories within OCI. For investment securities held to maturity, this amount
is accreted over the remaining life of the debt security prospectively based on
the amount and timing of future estimated cash flows. The accretion of the OTTI
amount recorded in OCI will increase the carrying value of the investment, and
would not affect earnings. If there is an indication of additional credit losses
the security is reevaluated accordingly to the procedures described
above.
At
March 31, 2010, the Bank owned $1.8 million of stock of the Federal Home Loan
Bank of Seattle (“FHLB”). As a condition of membership in the FHLB, the Bank is
required to purchase and hold a certain amount of FHLB stock, which is based, in
part, upon the outstanding principal balance of advances from the FHLB and is
calculated in accordance with the Capital Plan of the FHLB. FHLB stock has a par
value of $100 per share, is carried at cost, and is subject to impairment
testing per ASC 320-10-35. The FHLB recently announced that it had a risk-based
capital deficiency under the regulations of the Federal Housing Finance Agency
(“FHFA”), its primary regulator, and that it would suspend future dividends and
the repurchase and redemption of outstanding capital stock. The FHLB has
communicated that it believes the calculation of riskbased capital under the
current rules of the FHFA significantly overstates the market risk of the FHLB’s
privatelabel mortgage-backed securities in the current market environment and
that it has enough capital to cover the risks reflected in the FHLB’s balance
sheet. As a result, an “other than temporary impairment” has not been recorded
for the Bank’s investment in FHLB stock. However, continued deterioration in the
FHLB’s financial position may result in impairment in the value of those
securities. Management will continue to monitor the financial condition of the
FHLB as it relates to, among other things, the recoverability of the Bank’s
investment.
15
Note
5 - Capital Compliance
At March
31, 2010, the Bank exceeded each of the three current minimum quantitative
regulatory capital requirements and was categorized as “well capitalized” under
the “prompt corrective action” regulatory framework. The following
table summarizes the Bank's regulatory capital position and minimum requirements
under the “prompt corrective action” regulatory framework at March 31,
2010:
(dollars
in thousands)
|
||
March
31, 2010:
|
||
Tangible
Capital:
|
||
Actual
|
$17,310
|
9.81%
|
Required
|
2,646
|
1.50
|
Excess
|
$14,664
|
8.31%
|
Core
Capital:
|
||
Actual
|
$17,310
|
9.81%
|
Required
|
7,055
|
4.00
|
Excess
|
$10,255
|
5.81%
|
Total
Risk-Based Capital:
|
||
Actual
|
$18,625
|
12.99%
|
Required
|
11,473
|
8.00
|
Excess
|
$ 7,152
|
4.99%
|
December
31, 2009:
|
||
Tangible
Capital:
|
||
Actual
|
$17,237
|
9.70%
|
Required
|
2,666
|
1.50
|
Excess
|
$14,571
|
8.20%
|
Core
Capital:
|
||
Actual
|
$17,237
|
9.70%
|
Required
|
7,110
|
4.00
|
Excess
|
$10,127
|
5.70%
|
Total
Risk-Based Capital:
|
||
Actual
|
$18,508
|
12.84%
|
Required
|
11,531
|
8.00
|
Excess
|
$ 6,977
|
4.84%
|
16
On
January 7, 2009 the Office of Thrift Supervision (“OTS”) finalized a supervisory
agreement (a memorandum of understanding or “MOU”) which was reviewed and
approved by the Board of Directors of Alaska Pacific Bank on December 19,
2008. The MOU specifically requires the Bank to submit a
business plan that sets forth a plan for maintaining Tier 1 (Core) Leverage
Ratio of 8% and a minimum Total Risk-Based Capital Ratio of 12%. As
of March 31, 2010, the Bank’s Tier-1 (Core) Leverage Ratio was 9.81% (1.81% over
the minimum required under the MOU) and its Risk-Based Capital Ratio was 12.99%,
(0.99% over the minimum required under the MOU). See Item 2.,
“Management's Discussion and Analysis of Financial Condition and Results of
Operations – Recent Developments” for additional information regarding the
MOU.
Note
6 – Earnings (Loss) Per Share
Basic
earnings (loss) per share (“EPS”) is computed by dividing net income (loss) by
the weighted-average number of common shares outstanding during the period less
treasury stock and unallocated and not yet committed to be released ESOP shares
(“unearned ESOP shares”). Diluted EPS is calculated by dividing net
income (loss) by the weighted-average number of common shares used to compute
basic EPS plus the incremental amount of potential common stock from stock
options, determined by the treasury stock method.
Three
Months Ended March 31,
|
||||
2010
|
2009
|
|||
Net
income (loss)
|
$ (395,000
|
) |
$ 209,000
|
|
Preferred
stock dividend accrual
|
(60,000
|
) |
(37,000
|
) |
Preferred
stock discount accretion
|
(15,000
|
) |
(9,000
|
) |
Net
income (loss) available to common shareholders
|
$ (470,000
|
) |
$ 163,000
|
|
Average
shares issued
|
655,415
|
655,415
|
||
Less
treasury stock
|
(929
|
) |
(929
|
) |
Basic
weighted average shares outstanding
|
654,486
|
654,486
|
||
Net
incremental shares
|
-
|
-
|
||
Weighted
incremental shares
|
654,486
|
654,486
|
||
(Loss)
earnings per common share
|
||||
Basic
|
$ (0.72
|
) |
$ 0.25
|
|
Diluted
|
$ (0.72
|
) |
$ 0.25
|
Options to purchase an additional
54,188 and shares of common stock were not included in the
17
computation
of diluted earnings per share as of March 31, 2010 and 2009 because their
exercise price resulted in them being anti-dilutive and consideration to options
was not given as the impact would be anti-dilutive. In addition, the
warrant issued to the U.S. Treasury to purchase up to 175,772 shares of common
stock was not included in the computation of diluted EPS as of March 31, 2010
and 2009 because the warrant’s exercise price was greater than the average
market price of the Company’s common shares during the quarter ended March 31,
2010 and 2009.
Note
7 – Comprehensive Income (Loss)
The
Company’s only item of “other comprehensive (loss) income” is net unrealized
gains or losses on investment securities available for
sale. Comprehensive (loss) income is calculated in the following
table:
Three
Months
Ended
March
31,
|
|||||
(in
thousands)
|
2010
|
2009
|
|||
Net
income (loss) available to
common shareholders
|
$(395
|
) |
$209
|
||
Other
comprehensive income
|
8
|
20
|
|||
Comprehensive income (loss)
|
$(387
|
) |
$229
|
Note
8 – Impaired Loans
Impaired
loans were $11.6 million and $5.3 million at March 31, 2010 and December 31,
2009, respectively. The $6.3 million increase in impaired loans consisted of
additional impaired loans offset with loans no longer classified as impaired or
charged off. The total number of impaired loans increased to 17 loans
as of March 31, 2010 from 15 loans as of December 31, 2009. Estimated
specific reserves for impairment of $889,000 and $514,000, respectively, were
recognized on impaired loans in assessing the adequacy of the allowance for loan
losses at March 31, 2010 and December 31, 2009.
Included
in impaired loans were certain loans that are troubled debt restructurings and
classified as impaired. At March 31, 2010 and December 31, 2009, the
Company had $3.0 million and $845,000, respectively, of loans that were modified
in troubled debt restructurings and considered impaired. In addition
to these amounts, the Company had no troubled debt restructurings as of March
31, 2010 and $538,000 as of December 31, 2009 that were performing in accordance
with their modified loan terms.
18
Note
9 – Preferred Stock
On
February 6, 2009, as part of the Troubled Asset Relief Program (“TARP”) Capital
Purchase Program, the Company entered into a Letter Agreement and Securities
Purchase Agreement (collectively, the “Purchase Agreement”) with the United
States Department of the Treasury (“Treasury”), pursuant to which the Company
sold (i) 4,781 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred
Stock, Series A (the “Series A Preferred Stock”) and (ii) a warrant (the
“Warrant”) to purchase 175,772 shares of the Company’s common stock, par value
$0.01 per share (the “Common Stock”), for an aggregate issuance price of $4.8
million in cash.
The
Series A Preferred Stock qualifies as Tier 1 capital and is entitled to
cumulative dividends at a rate of 5% per annum for the first five years, and 9%
per annum thereafter. The Series A Preferred Stock may be redeemed by the
Company after three years. Prior to the end of three years, the Series A
Preferred Stock may be redeemed by the Company only with proceeds from the sale
of qualifying equity securities of the Company (a “Qualified Equity Offering”).
The restrictions on redemption are set forth in the Certificate of Designation
attached to the Statement of Establishment and Designation of Series of
Preferred Stock, which amends the Company’s Articles of Incorporation (the
“Certificate of Designation”).
The
Warrant has a 10-year term and is immediately exercisable upon its issuance,
with an exercise price, subject to anti-dilution adjustments, equal to $4.08 per
share of the Common Stock. Treasury has agreed not to exercise voting
power with respect to any shares of Common Stock issued upon exercise of the
Warrant that it holds.
Pursuant
to the terms of the Purchase Agreement, the ability of the Company to declare or
pay dividends or distributions on, or purchase, redeem or otherwise acquire for
consideration, shares of its Junior Stock (as defined below) and Parity Stock
(as defined below) is be subject to restrictions, including a restriction
against increasing dividends from the last quarterly cash dividend per share
($0.10) declared on the Common Stock prior to February 6, 2009. The redemption,
purchase or other acquisition of trust preferred securities of the Company or
its affiliates also is restricted. These restrictions will terminate on the
earlier of (a) the third anniversary of the date of issuance of the Series A
Preferred Stock, (b) the date on which the Series A Preferred Stock has been
redeemed in whole, and (c) the date Treasury has transferred all of the Series A
Preferred Stock to third parties.
In
addition, pursuant to the Certificate of Designation, the ability of the Company
to declare or pay dividends or distributions on, or repurchase, redeem or
otherwise acquire for consideration, shares of its Junior Stock and Parity Stock
is subject to restrictions in the event that the Company fails to declare and
pay full dividends (or declare and set aside a sum sufficient for payment
thereof) on its Series A Preferred Stock.
19
“Junior
Stock” means the Common Stock and any other class or series of stock of the
Company the terms of which expressly provide that it ranks junior to the Series
A Preferred Stock as to dividend rights and/or rights on liquidation,
dissolution or winding up of the Company. “Parity Stock” means any class or
series of stock of the Company the terms of which do not expressly provide that
such class or series will rank senior or junior to the Series A Preferred Stock
as to dividend rights and/or rights on liquidation, dissolution or winding up of
the Company (in each case without regard to whether dividends accrue
cumulatively or non-cumulatively).
In
accordance with the relevant accounting pronouncements, the Company recorded the
Series A Preferred Stock and Warrants within Stockholders’ Equity on the
Consolidated Balance Sheets. The Series A Preferred Stock and Warrants were
initially recognized based on their relative fair values at the date of
issuance. As a result, the Series A Preferred Stock’s carrying value is at a
discount to the liquidation value or stated value. In accordance with the SEC’s
Staff Accounting Bulletin No. 68, Increasing Rate Preferred Stock, the discount
is considered an unstated dividend cost that is amortized over the period
preceding commencement of the perpetual dividend using the effective interest
method, by charging the imputed dividend cost against retained earnings and
increasing the carrying amount of the Series A Preferred Stock by a
corresponding amount. The discount is therefore being amortized over five years
using a 6.71% effective interest rate. The total stated dividends (whether or
not declared) and unstated dividend cost combined represents a period’s total
preferred stock dividend, which is deducted from net income (loss) to arrive at
net income (loss) available to common shareholders on the Consolidated
Statements of Operations.
In April
2010, the Company’s Board declared a quarterly dividend on the Series A
Preferred Stock, of $59,762 which is payable May 17, 2010.
The
Series A Preferred Stock and Warrants were initially recognized based on their
relative fair values at the date of issuance in accordance with Accounting
Principles Board (“APB”) Opinion No. 14, Accounting for Convertible Debt and
Debt Issued with Stock Purchase Warrants. As a result, the value allocated to
the Warrant is different than the estimated fair value of the Warrant as of the
grant date. The following assumptions were used to determine the fair value of
the Warrant as of the grant date:
Dividend
yield 1.50%
Expected
life (years) 10.0
Expected
volatility 37%
Risk-free
rate 3.05%
Fair
value per warrant at grant date $ 4.15
20
Note
10 – Commitments
Commitments
to extend credit, including lines of credit, totaled $9.6 million and $11.4
million at March 31, 2010 and December 31, 2009,
respectively. Commitments to extend credit are arrangements to lend
to a customer as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates (of
less than one year) or other termination clauses and may require payment of a
fee by the customer. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates
creditworthiness for commitments on an individual customer basis.
Undisbursed
loan proceeds, primarily for real estate construction loans, totaled $2.8
million and $3.6 million at March 31, 2010 and December 31, 2009,
respectively. These amounts are excluded from loan
balances.
21
Forward-Looking
Statements
22
This
discussion contains forward-looking statements which are based on assumptions
and describe future plans, strategies and expectations of the
Company. These forward-looking statements are generally identified by
use of the word “believe,” “expect,” “intend,” anticipate,” “estimate,”
“project,” or similar words. The Company’s ability to predict results
or the actual effect of future plans or strategies is
uncertain. These forward-looking statements relate to, among
other things, expectations of the business environment in which we operate,
projections of future performance, perceived opportunities in the market,
potential future credit experience, and statements regarding our mission and
vision. These forward-looking statements are based upon current management
expectations, and may, therefore, involve risks and uncertainties. Our actual
results, performance, or achievements may differ materially from those
suggested, expressed, or implied by forward-looking statements as a result of a
wide variety or range of factors including, but not limited to: the credit risks
of lending activities, including changes in the level and trend of loan
delinquencies and write-offs that may be impacted by deterioration in the
housing and commercial real estate markets and may lead to increased losses and
non-performing assets in our loan portfolio, result in our allowance for loan
losses not being adequate to cover actual losses, and require us to materially
increase our reserves; changes in general economic conditions, either nationally
or in our market areas; changes in the levels of general interest rates, and the
relative differences between short and long term interest rates, deposit
interest rates, our net interest margin and funding sources; deposit flows;
fluctuations in the demand for loans, the number of unsold homes and other
properties and fluctuations in real estate values in our market areas; adverse
changes in the securities markets; results of examinations by our banking
regulators including the possibility that any such regulatory authority may,
among other things, require us to increase our reserve for loan
losses, write-down assets; change our regulatory capital position or
affect our ability to borrow funds or maintain or increase deposits, which could
adversely affect our liquidity and earnings; the possibility that we will be
unable to comply with the conditions imposed upon us in the Memorandum of
Understanding entered into with the Office of Thrift Supervision, including but
not limited to our ability to reduce our non-performing assets, which could
result in the imposition of additional restrictions on our operations; our
ability to control operating costs and expenses; the use of estimates in
determining fair value of certain of our assets, which estimates may prove to be
incorrect and result in significant declines in valuation; difficulties in
reducing risk associated with the loans on our balance sheet; staffing
fluctuations in response to product demand or the implementation of corporate
strategies that affect our work force and potential associated charges; computer
systems on which we depend could fail or experience a security breach, or the
implementation of new technologies may not be successful; our ability to retain
key members of our senior management team; costs and effects of litigation,
including settlements and judgments; our ability to manage loan delinquency
rates; our ability to retain key members of our senior management team; costs
and effects of litigation, including settlements and judgments; increased
competitive pressures among financial services companies; changes in consumer
spending, borrowing and savings habits; legislative or regulatory changes that
adversely affect our business including changes in regulatory policies and
principles, including the interpretation of regulatory capital or other rules;
the availability of resources to address changes in laws, rules, or regulations
or to respond to regulatory actions; inability of key third-party providers to
perform their obligations to us; changes in accounting policies and practices,
as may be adopted by the
23
financial
institution regulatory agencies or the Financial Accounting Standards Board,
including additional guidance and interpretation on accounting issues and
details of the implementation of new accounting methods; the economic impact of
war or any terrorist activities; other economic, competitive, governmental,
regulatory, and technological factors affecting our operations; pricing,
products and services; time to lease excess space in Company-owned buildings;
future legislative changes in the United States Department of Treasury Troubled
Asset Relief Program Capital Purchase Program; and other risks detailed in our
reports filed with the Securities and Exchange Commission, including our Annual
Report on Form 10-K for the fiscal year ended December 31,
2009. Accordingly, these factors should be considered in evaluating
forward-looking statements, and undue reliance should not be placed on such
statements. We undertake no responsibility to update or revise any
forward-looking statements.
Recent
Developments
On
January 7, 2009 the OTS finalized a supervisory agreement (a memorandum of
understanding or “MOU”) which was reviewed and approved by the Board of
Directors of Alaska Pacific Bank on December 19, 2008. The MOU
specifically requires the Bank to: (a) submit a business plan that sets forth a
plan for maintaining Tier 1 (Core) Leverage Ratio of 8% and a minimum Total
Risk-Based Capital Ratio of 12% and provides a detailed financial forecast
including capital ratios, earnings and liquidity and containing
comprehensive business line goals and objectives; (b) remain in compliance with
the minimum capital ratios contained in the business plan; (c) provide notice to
and obtain a non-objection from the OTS prior to the Bank
declaring a dividend; (d) maintain an adequate Allowance for Loan and Lease
Losses (ALLL); (e) engage an independent consultant to conduct a loan review of
the Bank’s purchased loan participations current nonperforming loans
and any new loans that are in excess of $500,000 and that were
originated since the last review; and (f) develop a written
comprehensive plan, that is acceptable to the OTS, to reduce classified
assets.
Subsequent
to the MOU, in March 2009 the Company’s Board of Directors executed two
resolutions to assure the OTS that the Company was committed to supporting the
Bank should it be necessary, and that the Company would mirror the restrictions
in the Bank’s MOU. The first resolution was required by the OTS of
all OTS regulated holding companies. The resolution, referenced as
“Source of Strength”, ensures that the Company is prepared to contribute
additional capital to the Bank should it be necessary. The
second resolution specified that the Company would issue dividends only upon the
“nonobjection” of the OTS, would maintain sufficient cash and cash flow so that
holding company activities would not be paid for by the Bank, and that the
Company would not issue debt without the nonobjection from the OTS.
The Board
of Directors and management of the Bank do not believe that the MOU will
constrain the Bank’s business plans and that there has already been substantial
progress made in satisfying the requirements of the MOU. Management believes
that the primary reason that the OTS requested the Bank enter into an MOU with
the OTS was specific participation loans that give rise to the high level of
classified assets. An independent loan review was conducted by
the
24
Bank
mid-year 2008 and a follow-up review completed in March 2009. As of
March 31, 2010, the Bank’s Tier-1 (Core) Leverage Ratio was 9.81% (1.81% over
the new required minimum) and Risk-Based Capital Ratio was 12.99%, (0.99% over
the new required minimum). While we believe we are currently in compliance with
the terms of the MOU, if we fail to comply with these terms, the OTS could take
additional enforcement action against us, including the imposition of monetary
penalties or the issuance of a cease and desist order requiring further
corrective action.
Critical
Accounting Policies
The
discussion and analysis of the Company’s financial condition and results of
operations are based upon the Company’s condensed consolidated interim financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation
of these financial statements requires management to make estimates and
judgments that affect the reported amounts of assets and liabilities, revenues
and expenses, and related disclosures of contingent assets and liabilities at
the date of the financial statements. Actual results may differ from
these estimates under different assumptions or conditions.
Accounting
for the allowance for loan losses involves significant judgment and assumptions
by management, which has a material impact on the carrying value of net
loans. Management considers this accounting policy to be a critical
accounting policy. We maintain an allowance for loan losses consistent in all
material respects with the GAAP guidelines outlined in ASC 450,
Contingencies. The allowance has three components: (i) a formula
allowance for groups of homogeneous loans, (ii) a specific valuation allowance
for identified problem loans and (iii) an unallocated allowance. Each of these
components is based upon estimates that can change over time. The
formula allowance is based primarily on historical experience and as a result
can differ from actual losses incurred in the future. The history is
reviewed at least quarterly and adjustments are made as
needed. Various techniques are used to arrive at specific loss
estimates, including historical loss information, discounted cash flows and fair
market value of collateral. The use of these techniques is inherently
subjective and the actual losses could be greater or less than the
estimates. For further details, see “Results of Operations -
Provision for Loan Losses” included in this Form 10-Q.
The
allowance for loan losses represents management's best estimate of incurred
credit losses inherent in the Company's loan portfolio as of the balance sheet
date. The estimate of the allowance is based on a variety of factors, including
past loan loss experience, the current credit profile of borrowers, adverse
situations that have occurred that may affect a borrower's ability to meet his
financial obligations, the estimated value of underlying collateral, general
economic conditions, and the impact that changes in interest rates and
employment conditions have on a borrower's ability to repay adjustable-rate
loans.
The fair
value of impaired loans is determined using the fair value of each loan’s
collateral for
25
collateral-dependent
loans as determined, when possible, by an appraisal of the property, less
estimated costs related to liquidation of the collateral. The
appraisal amount may also be adjusted for current market
conditions. Adjustments to reflect the fair value of
collateral-dependent loans are a component in determining our best estimate of
the allowance for loan losses.
Other
real estate owned and repossessed assets primarily represents real estate and
other assets which the Bank has taken control of in partial or full satisfaction
of loans. At the time of foreclosure, other real estate owned and repossessed
assets are recorded at the lower of the carrying amount of the loan or fair
value less costs to sell, which becomes the property’s new basis. Any
write-downs based on the asset’s fair value at the date of acquisition are
charged to the allowance for loan and lease losses. After foreclosure,
management periodically performs valuations when possible, by an appraisal of
the property, such that the real estate is carried at the lower of its new cost
basis or fair value, net of estimated costs to sell. Fair value adjustments on
other real estate owned and repossessed assets are recognized within results of
operations.
Interest
is generally not accrued on any loan when its contractual payments are more than
90 days delinquent unless collection of interest is considered
probable. In addition, interest is not recognized on any loan where
management has determined that collection is not reasonably
assured. A nonaccrual loan may be restored to accrual status when
delinquent principal and interest payments are brought current and future
monthly principal and interest payments are expected to be
collected.
As of
March 31, 2010 and December 31, 2009, the Company had recorded net deferred
income tax assets (which are included in other assets in the accompanying
condensed Balance Sheets) of approximately $350,000 on both
dates. During the first quarter of 2010, the Company recorded an
additional valuation allowance of $141,000 for a total valuation allowance of
$1.1 million against its net deferred tax asset of $1.4 million due to
uncertainty about the Company’s ability to generate sufficient taxable income in
the near term. The realization of deferred income tax assets is assessed and a
valuation allowance is recorded if it is “more likely than not” that all or a
portion of the deferred tax asset will not be realized. “More likely
than not” is defined as greater than a 50% probability of
occurrence. All available evidence, both positive and negative, is
considered to determine whether, based on the weight of that evidence, a
valuation allowance is needed. Management’s assessment is primarily
dependent on historical taxable income and projections of future taxable income,
which are directly related to the Company’s core earnings capacity and its
prospects to generate core earnings in the future. In assessing the
need for a valuation allowance, we examine our historical cumulative trailing
three-year pre-tax income (loss) quarterly. If we have historical
cumulative income, we consider this to be strong positive
evidence. To the extent we do not have cumulative income, we examine
this to determine if there were any unusual or non-recurring items which would
not be indicative of our operating results or expected to occur in the
future. The Company will not be able to recognize the tax benefits on
future losses until it can show that it is more likely than not that it will
generate enough taxable income in future periods to realize the benefits of its
deferred tax asset and loss carryforwards. Management believes it is
more likely than not that these tax benefits will be
26
realized
which would result in a reversal of the deferred tax valuation
allowance.
Effective
January 1, 2010, the Company adopted ASC 860-50, Servicing Assets and
Liabilities, which provides the option of making an irrevocable decision
to subsequently measure a class of servicing assets at fair value at the
beginning of any fiscal year, which was elected by the Company. The
Company uses a model derived valuation methodology to estimate the fair value of
MSR obtained from an independent broker on an annual basis. The
model pools loans into buckets of homogeneous characteristics and performs a
present value analysis of the future cash flows. The buckets are
created by individual loan characteristics such as note rate, product type, and
the remittance schedule. Current market rates are utilized for
discounting the future cash flows. Significant assumptions used in
the valuation of MSR include discount rates, projected prepayment speeds, escrow
calculations, ancillary income, delinquencies and option adjusted
spreads.
However,
the Company can give no assurance that in the future its deferred tax asset will
not be impaired since such determination is based on projections of future
earnings, which are subject to uncertainty and estimates that may change given
uncertain economic outlook, banking industry conditions and other
factors.
Financial
Condition
Total
assets of the Company at March 31, 2010 were $176.8 million, a decrease of $1.5
million or 0.8%, from $178.3 million at December 31,
2009. The decrease is primarily the result of a decrease in interest
earning deposits in banks and loans.
Loans
(excluding loans held for sale) were $156.5 million at March 31, 2010, a
$1.6 million, or 1.0%, decrease from $158.1 million at December 31,
2009. The decline in the first quarter of fiscal 2010 was primarily
in commercial business ($1.0 million, or 5.2%) and home equity ($1.0
million, or 5.8%) offset with an increase in permanent commercial nonresidential
loans ($1.3 million, or 2.1%). The commercial non-residential balances increased
as a result of new loan originations and an increase in draws under previously
approved credits. The commercial business loans declined as a result
of payoffs and a lower demand for non-real estate business loans.
27
Loans are
summarized by category in the following table:
(in
thousands)
|
March
31,
2010
|
December
31,
2009
|
Real
estate:
|
||
Permanent:
|
||
One-to-four-family
|
$ 33,067
|
$ 33,787
|
Multifamily
|
1,725
|
1,736
|
Commercial
nonresidential
|
65,792
|
64,453
|
Land
|
10,018
|
9,697
|
Total
permanent real estate
|
110,602
|
109,673
|
Construction:
|
||
One-to-four-family
|
3,079
|
3,050
|
Commercial
nonresidential
|
2,634
|
2,637
|
Total
construction
|
5,713
|
5,687
|
Commercial
business
|
18,830
|
19,856
|
Consumer:
|
||
Home
equity
|
15,560
|
16,522
|
Boat
|
3,839
|
4,287
|
Automobile
|
1,196
|
1,269
|
Other
|
790
|
814
|
Total
consumer
|
21,385
|
22,892
|
Loans
|
$156,530
|
$158,108
|
Loans
held for sale
|
$824
|
$55
|
Deposits
decreased $5.4 million, or 3.6%, to $142.9 million at March 31, 2010, compared
with $148.2 million at December 31, 2009. The decline in
the first quarter of 2010 was primarily in money market accounts ($2.3 million,
or 8.0%) and interest bearing demand ($1.5 million, 4.7%).
The Bank
began using CDARS deposits in 2005 as an alternative source of funds in addition
to advances from the FHLB. These are insured time deposits obtained
through the nationwide Certificate of Deposit Account
Registry Service. They range in maturities from one month to
three years, and are generally priced higher than locally obtained deposits but
are generally less expensive than other brokered deposits. Included
in certificates of deposit were CDARS brokered deposits of $2.6 million at
March 31, 2010 and $1.7 million at December 31, 2009.
28
Results
of Operations
Net (Loss)
Income. Net loss excluding the preferred stock dividend and
discount accretion for the first quarter of 2010 was $395,000. After payment of
the preferred stock dividend and discount accretion of $60,000, net loss
available to common shareholders for the first quarter of 2010 was $470,000, or
$(0.72) per common share. Net income for the first quarter
ended March 31, 2009 was $163,000, or $0.25 per diluted share.
For
purposes of comparison, income can be separated into major components as
follows:
Three
Months Ended
March
31,
|
||||||||||
(in
thousands)
|
2010
|
2009
|
Income
Incr.
(Decr.)
|
|||||||
Net
interest income
|
$
2,074
|
$
2,132
|
$
(58
|
) | ||||||
Noninterest
income, excluding mortgage banking income
|
267
|
266
|
1
|
|||||||
Mortgage
banking income
|
95
|
230
|
(135
|
) | ||||||
Provision
for loan losses
|
(721
|
) |
(60
|
) |
(661
|
) | ||||
Noninterest
expense
|
(2,110
|
) |
(2,222
|
) |
112
|
|||||
(Loss)
Income before income tax
|
(395
|
) |
346
|
(741
|
) | |||||
Income
tax expense
|
-
|
(137
|
) |
137
|
||||||
Net
(loss) income
|
$
(395
|
) |
$
209
|
$
(604
|
) |
Net Interest
Income. Net interest income for the first quarter of 2010
decreased $58,000 (2.7%) compared with the first quarter of
2009. Average loans decreased $13.6 million (8.0%) to $157.0 million
for the first quarter of 2010 compared with $170.6 million for the first quarter
of 2009. At the same time, the yield on average interest earning
assets decreased 16 basis points (“bp”) for the first quarter of 2010 to 5.92%
compared with 6.08% for the first quarter of 2009. For loans, the
largest component of earning assets, the yield decreased 16 bp for the first
quarter of 2010 to 6.04% compared with 6.20% for the first quarter of
2009. Average interest bearing deposits decreased $12.0 million
(9.4%) to $114.5 million for the first quarter of 2010 compared with $126.5
million for the first quarter of 2009. The cost of average interest
bearing liabilities declined 42 bp to 0.85% for the first quarter of 2010
compared with 1.26% for the first quarter of 2009. The interest rate
spread, which is the difference between the yield on average interest-earning
assets and the average cost of interest-bearing liabilities, increased 39 bp to
4.91% for the first quarter 2010 compared to 4.52% for the first quarter of
2009.
29
Provision for Loan
Losses. The provisions for loan losses increased to $721,000
for the first quarter of 2010, compared with $60,000 for the first quarter of
2009. The provisions in both periods reflect management’s assessment
of asset quality, overall risk, and estimated loan impairments and were
considered appropriate in order to maintain the allowance for loan losses at a
level that represents management’s best estimate of the probable credit losses
inherent in the loan portfolio. Net loan charge offs were $302,000
for the first quarter of 2010, compared with $5,000 net loan recovery for the
first quarter of 2009.
Noninterest
Income. Noninterest income for the first quarter of 2010
decreased $134,000 (27.02%) to $362,000 compared with $496,000 for the first
quarter of 2009.
Mortgage
banking income decreased $135,000 to $95,000 for the first quarter of 2010
compared with $230,000 for the first quarter of 2009. The decrease is
associated with a decline in loans originated and sold due to market
conditions.
Noninterest
Expense. Noninterest expense for the first quarter of
2010 decreased $112,000 (5.0%) to $2.1 million compared to $2.2 million the
first quarter of 2009. The decrease is primarily related to a
decrease in compensation expense and other real estate owned and repossessed
asset expense.
Asset
Quality
Nonaccrual
loans were $3.0 million at March 31, 2010, compared with $2.9 million at
December 31, 2009.
Loans
with balances totaling $11.6 million at March 31, 2010 and $5.3 million at
December 31, 2009 were considered to be impaired. The $6.3
million increase in impaired loans consisted of additional impaired loans offset
with loans no longer classified as impaired or charged off. The total
number of impaired loans increased to 17 as of March 31, 2010 compared to 15 as
of December 31, 2009. Total estimated impairments of $889,000 and
$514,000, respectively, were recognized on impaired loans in evaluating the
adequacy of the allowance for loan losses at March 31, 2010 and December 31,
2009.
The
largest of the additional loans included in impaired loans at March 31, 2010 was
a commercial real estate loan for $2.1 million located in Idaho.
30
The
following table reflects loan balances considered to be impaired by asset type
at March 31, 2010 and December 31, 2009.
March
31,
|
December
31,
|
|
(in
thousands)
|
2010
|
2009
|
Residential
real estate
|
$
576
|
$
541
|
Commercial
real estate
|
6,638
|
909
|
Land
|
3,263
|
3,263
|
Construction -
residential
|
-
|
180
|
Construction
– commercial
|
747
|
209
|
Consumer
|
60
|
212
|
Commercial
business
|
339
|
28
|
Total
impaired loans
|
$11,623
|
$5,342
|
At March
31, 2010, 79% of impaired loans totaling $9.1 million included loans to eight
borrowers. Additional information regarding these eight borrowers, by market
area as of March 31, 2010 is provided in the following table:
Loan
Balance
March
31, 2010
|
|||
Loan
Type
|
Description
|
Market
Area
|
(in
thousands)
|
Land
|
Residential
land development project
|
Oregon
|
1,321
|
Land
|
Land
|
Alaska
|
1,942
|
Residential
real estate
|
Residential
real estate
|
California
|
576
|
Commercial
Real Estate
|
Commercial
Real Estate
|
Idaho
|
2,079
|
Commercial
Real Estate
|
Commercial
Real Estate
|
Alaska
|
843
|
Commercial
Real Estate
|
Commercial
Real Estate
|
Alaska
|
865
|
Commercial
Real Estate
|
Commercial
Real Estate
|
Idaho
|
538
|
Commercial
Real Estate
|
Commercial
Real Estate
|
Alaska
|
978
|
Total
– Impaired Loans of eight largest borrowers
|
$ 9,142
|
The Bank
had $2.9 million of other real estate owned and repossessed assets at March 31,
2010 and had $2.6 million of other real estate owned and repossessed assets at
December 31, 2009.
Liquidity
and Capital Resources
The
Company's primary sources of funds are deposits, borrowings, and principal and
interest payments on loans. While maturities and scheduled
amortization of loans are a predictable source of funds, deposit flows and loan
prepayments are greatly influenced by general interest rates, economic
conditions, and competition. The Company's primary investing activity
is loan originations. The Company maintains liquidity levels believed
to be adequate to fund loan commitments, investment opportunities, deposit
withdrawals and other financial commitments.
31
In
addition, the Bank has available from the FHLB a line of credit generally equal
to 25% of the Bank’s total assets, or approximately $44.2 million and $44.6
million at March 31, 2010 and December 31, 2009, respectively. The
line is secured by a blanket pledge of the Bank’s assets. At March
31, 2010 and December 31, 2009, there was $12.9 million and $9.8 million
outstanding on the line, respectively.
As
disclosed in our Consolidated Statements of Cash Flows in Item 1 of this report
on Form 10-Q, cash and cash equivalents decreased $727,000 to $6.2 million as of
March 31, 2010, from $6.9
million as of December 31, 2009. Net cash provided by operating
activities was $1.2 million for the first quarter of 2010. Net cash
of $371,000 provided by investing activities during the first quarter of 2010
consisted principally of a net decrease in loan originations, net of principal
pay downs. The $2.3 million of cash used in financing activities
during the first quarter of 2010 primarily consisted of a $5.4 million net
decrease in deposits, offset by $3.1 million proceeds from a net increase in
FHLB advances.
At March
31, 2010, management had no knowledge of any trends, events or uncertainties
that may have material effects on the liquidity, capital resources, or
operations of the Company.
The
Company is not subject to any regulatory capital requirements separate from its
banking subsidiary. The Bank exceeded all of its regulatory capital
requirements at March 31, 2010. See Note 3 of the Selected Notes to
Condensed Consolidated Interim Financial Statements contained herein for
information regarding the Bank's regulatory capital position at March 31,
2010.
Recent
Accounting Pronouncements
In
January 2010, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) 2010-01, Accounting for Distributions for
Shareholders with Components of Stock and Cash. The objective of this
Update is to address diversity in practice related to the accounting for a
distribution to shareholders that offers them the ability to elect to receive
their entire distribution in cash or shares of equivalent value with a potential
limitation on the total amount of cash that shareholders can elect to receive in
the aggregate. Historically, some entities have accounted for the stock portion
of the distribution as a new share issuance that is reflected in earnings per
share (EPS) prospectively. Other entities have accounted for the stock portion
of the distribution as a stock dividend by retroactively restating shares
outstanding and EPS for all periods presented. The amendments in this Update
clarify that the stock portion of a distribution to shareholders that allows
them to elect to receive cash or shares with a potential limitation on the total
amount of cash that all shareholders can elect to receive in the aggregate is
considered a share issuance that is reflected in EPS prospectively and is not a
stock dividend. The amendments in this Update are effective for interim and
annual periods ending on or after December 15, 2009, applied on a retrospective
basis. Adoption of this Update did not have a material impact on the Company’s
financial statements.
In
January 2010, the FASB issued ASU 2010-04, Accounting for Various Topics;
Technical Corrections to SEC Paragraphs. This Update represents technical
corrections to SEC paragraphs
32
In
January 2010, the FASB issued ASU 2010-05, Compensation – Stock Compensation;
Escrowed Share Arrangements and the Presumption of
Compensation. This Update codifies Emerging Issues Task Force (EITF)
Topic D-110, Escrowed Share
Arrangements and the Presumption of Compensation, and clarifies SEC Staff
views on overcoming the presumption that for
certain shareholders these arrangements represent compensation. Historically,
the SEC has expressed the view that an escrowed share arrangement involving the
release of shares to certain shareholders based on performance-related criteria
is presumed to be compensatory, equivalent to a reverse stock split followed by
the grant of a restricted stock award under a performance-based plan. However,
in some cases the presumption of compensation can be overcome, depending on the
substance of the arrangement, including whether the arrangement was entered into
for purposes unrelated to, and not contingent upon, continued employment. In
such cases, the arrangement should be recognized and measured according to its
nature, not necessarily as compensation expense. This Update was effective upon
issuance and did not have a material impact on the Company’s financial
statements.
In
February 2010, the FASB issued ASU 2010-08, Technical Corrections to Various
Topics. The Update clarifies the new codified guidance on accounting and
reporting in a number of areas. The amendments in this Update were effective for
the first reporting period (including interim periods) beginning after issuance
and had no impact on the Company’s financial statements.
In
February 2010, the FASB issued ASU 2010-09, Subsequent Events; Amendments to
Certain Recognition and Disclosure Requirements. In order to avoid
conflict with SEC requirements, this Update removes the requirement for an SEC filer to
disclose in the financial statements the date through which subsequent events
have been evaluated for
disclosure in the financial statements. This amendment was effective upon
issuance and had no impact on the Company’s
financial statements.
In
February 2010, the FASB issued ASU 2010-10, Consolidation; Amendments for
Certain Investment Funds. This Update changes the effective date of the
recent amendments to the consolidation requirements in Topic 810 for certain
entities until U.S. and international accounting standard-setting Boards can
develop consistent guidance on principal and agent relationships as part of the
joint consolidation project. This amendment was effective upon issuance and had
no impact on the Company’s financial statements.
In March
2010, the FASB issued ASU 2010-11, Derivatives and Hedging; Scope Exception
Related to Embedded Credit Derivatives. This Update provides clarification and
additional examples to resolve potential ambiguity about the breadth of the
embedded credit derivates scope exception in the original guidance. This
amendment was effective at the beginning of its first fiscal quarter beginning
after June 15, 2010. The adoption of this amendment will have no impact on the
Company’s financial statements.
33
Item
3. Quantitative
and Qualitative Disclosures About Market Risk
Not
Applicable
Item
4. Controls
and Procedures
(a) Evaluation of Disclosure
Controls and Procedures: An evaluation of the registrant’s
disclosure controls and procedures (as defined in Rule 13(a)-15(e) of the
Securities Exchange Act of 1934 (the “Act”)) was carried out under the
supervision and with the participation of the registrant’s Chief Executive
Officer, Chief Financial Officer and other members of the registrant’s senior
management. The registrant’s Chief Executive Officer and Chief
Financial Officer concluded that, as of March 31, 2010, the registrant’s
disclosure controls and procedures were effective in ensuring that the
information required to be disclosed by the registrant in the reports it files
or submits under the Act is (i) accumulated and communicated to the registrant’s
management (including the Chief Executive Officer and Chief Financial Officer)
in a timely manner, and (ii) recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms.
The
Company does not expect that its disclosure controls and procedures will prevent
all error and or fraud. A control procedure, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control procedure are met. Because of the inherent limitations
in all control procedures, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within the
Company have been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty, and that breakdowns can occur
because of a simple error or mistake. Additionally, controls can be circumvented
by the individual acts of some persons, by collusion of two or more people, or
by management override of the control. The design of any control procedure also
is based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions; over time, controls may
become inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control procedure, misstatements due to error or
fraud may occur and not be detected.
Section
404 of the Sarbanes-Oxley Act of 2002 requires that companies evaluate and
annually report on their systems of internal control over financial reporting.
Under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer, the
Company conducted an assessment of the effectiveness of the Company's internal
control over financial reporting based on the framework established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. As reported in the 10-K, based on this assessment,
management determined that the Company's internal control over financial
reporting as of March 31, 2010 is effective.
(b) Changes in Internal
Controls: In the quarter ended March 31, 2010, the Company did
not make any significant changes in, nor take any corrective actions regarding,
its internal controls or
34
other
factors that could significantly affect these controls.
Item
4(T).
|
Controls
and Procedures
|
Information
regarding internal control over financial reporting has been set forth in Item
4. This quarterly report does not include an attestation report of the Company’s
registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the Company’s
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the Company to provide only management’s
report in this quarterly report.
PART
II. OTHER
INFORMATION
From time
to time, the Company and its subsidiary may be a party to various legal
proceedings incident to its or their business. At March 31, 2010,
there were no legal proceedings to which the Company or any subsidiary was a
party, or to which any of their property was subject, which were expected by
management to result in a material loss.
Item 1A.
Risk
Factors
There
have been no material changes to the risk factors previously disclosed in Part
I, Item 1A of our Annual Report on Form 10-K for the year ended December 31,
2009, except that the following risk factors are added to those previously
contained in the Form 10-K:
Our
business may continue to be adversely affected by downturns in the national
economy and the states where our out of market area loans are
located.
Since the
latter half of 2007, depressed economic conditions have prevailed in portions of
the United States outside of our primary area of Southeast Alaska, but in areas
where the bank has participation loans, specifically Washington, Oregon, Idaho
and Colorado. We provide banking and financial services to customers
located in our primary market of Southeast Alaska, which up to this point in
time and based upon its geographic location and diverse resource-based economy
has not experienced the serious problems as those of markets in the lower-48
states. If there were to be a worsening of economic conditions in our
primary market, this could have an adverse effect on our business, financial
condition, results of operations and prospects.
A further
deterioration in economic conditions in the market areas we serve could result
in the following consequences, any of which could have a materially adverse
impact on our business, financial condition and results of
operations:
35
·
|
an
increase in loan delinquencies problem assets and
foreclosures;
|
·
|
the
slowing of sales of foreclosed
assets;
|
·
|
a
decline in demand for our products and
services;
|
·
|
a
continuing decline in the value of collateral for loans may in turn reduce
customers’ borrowing power, and the value of assets and collateral
associated with existing loans; and
|
·
|
a
decrease in the amount of our low cost or non-interest bearing
deposits.
|
We
may have continuing losses and continuing variation in our quarterly
results.
We have
recently reported net losses. These losses primarily resulted from
our high level of non-performing assets and the resultant increased provision
for loan losses. We may continue to suffer further losses as a result of these
factors. In addition, several factors affecting our business
can cause significant variations in our quarterly results of
operations. In particular, variations in the volume of our loan
originations and sales, the differences between our costs of funds and the
average interest rates of originated or purchased loans, changes in our
provision for loan losses and non-performing assets can result in significant
increases or decreases in our revenues from quarter to quarter.
Fluctuating
interest rates can adversely affect our profitability.
Our
profitability is dependent to a large extent upon net interest income, which is
the difference, or spread, between the interest earned on loans, securities and
other interest-earning assets and the interest paid on deposits, borrowings, and
other interest-bearing liabilities. Because of the differences in maturities and
repricing characteristics of our interest-earning assets and interest-bearing
liabilities, changes in interest rates do not produce equivalent changes in
interest income earned on interest-earning assets and interest paid on
interest-bearing liabilities. We principally manage interest rate
risk by managing our volume and mix of our earning assets and funding
liabilities. In a changing interest rate environment, we may not be able to
manage this risk effectively. Changes in interest rates also can
affect: (1) our ability to originate and/or sell loans; (2) the value of our
interest-earning assets, which would negatively impact stockholders’ equity, and
our ability to realize gains from the sale of such assets; (3) our ability to
obtain and retain deposits in competition with other available investment
alternatives; and (4) the ability of our borrowers to repay adjustable or
variable rate loans. Interest rates are highly sensitive to many
factors, including government monetary policies, domestic and international
economic and political conditions and other factors beyond our
control. If we are unable to manage interest rate risk effectively,
our business, financial condition and results of operations could be materially
harmed.
Increases
in deposit insurance premiums and special FDIC assessments will hurt
our earnings.
36
Beginning
in late 2008, the economic environment caused higher levels of bank failures,
which dramatically increased FDIC resolution costs and led to a significant
reduction in the Deposit Insurance Fund. As a result, the FDIC has significantly
increased the initial base assessment rates paid by financial institutions for
deposit insurance. The base assessment rate was increased by seven basis points
(seven cents for every $100 of deposits) for the first quarter of
2009. Effective April 1, 2009, initial base assessment rates
were changed to range from 12 basis points to 45 basis points across all risk
categories with possible adjustments to these rates based on certain
debt-related components. These increases in the base assessment rate have
increased our deposit insurance costs and negatively impacted our earnings. In
addition, in May 2009, the FDIC imposed a special assessment on all insured
institutions as a result of recent bank and savings association failures. The
emergency assessment amounts to five basis points on each institution’s assets
minus Tier 1 capital as of June 30, 2009, subject to a maximum equal to 10
basis points times the institution’s assessment base. Our FDIC deposit insurance
expense for the first quarter of 2010 was $89,000.
In
addition, the FDIC may impose additional emergency special assessments, of up to
five basis points per quarter on each institution’s assets minus Tier 1
capital if necessary to maintain public confidence in federal deposit
insurance or as a result of deterioration in the Deposit Insurance Fund reserve
ratio as a result of institution failures. The latest date possible for imposing
any such additional special assessment is December 31, 2009, with
collection on March 30, 2010. Any additional emergency special assessment
imposed by the FDIC will hurt our earnings. Additionally, as a
potential alternative to special assessments, in September 2009, the FDIC
proposed a rule that would require financial institutions to prepay its
estimated quarterly risk-based assessment for the fourth quarter of 2009 and for
all of 2010, 2011 and 2012. This proposal would not immediately
impact our earnings, as the payment would be expensed over time.
A
legislative proposal has been introduced that would eliminate the Office of
Thrift Supervision, Alaska Pacific Bank and Alaska Pacific Bancshares, Inc’s
primary federal regulator, which would require Alaska Pacific Bancshares, Inc.
to become a bank holding company.
Legislation
has been introduced in the United States Senate and House of Representatives
that would implement sweeping changes to the current bank regulatory
structure. The House Bill (H.R. 4173) would eliminate our
current primary federal regulator, the Office of Thrift Supervision, by merging
it into the Comptroller of the Currency (the primary federal regulator for
national banks). The proposed legislation would authorize the
Comptroller of the Currency to charter mutual and stock savings banks and mutual
holding companies, which would be under the supervision of the Division of
Thrift Supervision of the Comptroller of the Currency. The proposed
legislation would also establish a Financial Services Oversight Council and
grant the Board of Governors of the Federal Reserve System exclusive authority
to regulate all bank and thrift holding companies. As a result,
Alaska Pacific Bancshares, Inc. would become a holding company subject to
supervision by the Federal Reserve Board as opposed to the Office of Thrift
Supervision, and would become subject to the Federal Reserve’s regulations,
including holding
37
company
capital requirements, that Alaska Pacific Bancshares, Inc. is not currently
subject to as a savings and loan holding company. In addition,
compliance with new regulations and being supervised by one or more new
regulatory agencies could increase our expenses.
Our
investment in Federal Home Loan Bank stock may be impaired.
At March
31, 2010, we owned $1.8 million of stock of the Federal Home Loan Bank of
Seattle, or FHLB. As a condition of membership at the FHLB, we
are required to purchase and hold a certain amount of FHLB stock. Our stock
purchase requirement is based, in part, upon the outstanding principal balance
of advances from the FHLB and is calculated in accordance with the Capital Plan
of the FHLB. Our FHLB stock has a par value of $100, is carried at cost, and it
is subject to recoverability testing per SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. The FHLB recently announced that it had a
risk-based capital deficiency under the regulations of the Federal Housing
Finance Agency (the "FHFA"), its primary regulator, as of December 31, 2008, and
that it would suspend future dividends and the repurchase and redemption of
outstanding common stock. As a result, the FHLB has not paid a dividend since
the fourth quarter of 2008. The FHLB has communicated that it believes the
calculation of risk-based capital under the current rules of the FHFA
significantly overstates the market risk of the FHLB's private-label
mortgage-backed securities in the current market environment and that it has
enough capital to cover the risks reflected in its balance sheet. As
a result, we have not recorded an other-than-temporary impairment on our
investment in FHLB stock. However, continued deterioration in the FHLB's
financial position may result in impairment in the value of those securities. We
will continue to monitor the financial condition of the FHLB as it relates to,
among other things, the recoverability of our investment.
Continued
weak or worsening credit availability could limit our ability to replace
deposits and fund loan demand, which could adversely affect our earnings and
capital levels.
Continued
weak or worsening credit availability and the inability to obtain adequate
funding to replace deposits and fund continued loan growth may negatively affect
asset growth and, consequently, our earnings capability and capital levels. In
addition to any deposit growth, maturity of investment securities and loan
payments, we rely from time to time on advances from the FHLB to fund loans and
replace deposits. If the economy does not improve or continues to
deteriorate, this additional funding source could be negatively affected, which
could limit the funds available to us. Our liquidity position could be
significantly constrained if we are unable to access funds from the FHLB.
Item
2.
|
Unregistered Sales of
Equity Securities and Use of
Proceeds
|
None
None
38
None
None
3.1
|
Articles
of Incorporation of Alaska Pacific Bancshares, Inc.
(1)
|
3.2
|
Statement
of Establishment and Designations of Series of Preferred Stock for the
Series A Preferred Stock (2)
|
3.3
|
Bylaws
of Alaska Pacific Bancshares, Inc.
(3)
|
|
4.1
|
Warrant
For Purchase of shares of Common Stock
(2)
|
|
4.2
|
Letter
Agreement dated February 6, 2009 between Alaska Pacific Bancshares, Inc.
and United States Department of the Treasury, will respect to the issuance
and sale of the Series A Preferred Stock and the
Warrant(2)
|
10.1
|
Employment
Agreement with Craig E. Dahl (4)
|
10.2
|
Severance
Agreement with Julie M. Pierce (9)
|
10.3
|
Severance
Agreement with Thomas C. Sullivan
(4)
|
10.4
|
Severance
Agreement with Tammi L. Knight (4)
|
10.5
|
Severance
Agreement with John E. Robertson
(6)
|
10.6
|
Severance
Agreement with Leslie D. Dahl (9)
|
10.7
|
Severance
Agreement with Christopher P. Bourque
(98)
|
10.8
|
Alaska
Federal Savings Bank 401(k) Plan
(1)
|
10.9
|
Alaska
Pacific Bancshares, Inc. Employee Stock Ownership Plan
(4)
|
10.10
|
Alaska
Pacific Bancshares, Inc. Employee Severance Compensation Plan
(4)
|
10.11
|
Alaska
Pacific Bancshares, Inc. 2000 Stock Option Plan
(5)
|
10.12
|
Alaska
Pacific Bancshares, Inc. 2003 Stock Option Plan
(7)
|
10.13
|
Form
of Compensation Modification Agreement
(2)
|
14
|
Code
of Ethics (8)
|
21
|
Subsidiaries
of the Registrant
|
|
23
|
Consent
of Independent Registered Public Accounting
Firm
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
32.1
|
Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
32.2
|
Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
________________
(1)
|
Incorporated
by reference to the registrant’s Registration Statement on Form SB-2
(333-74827).
|
(2)
|
Incorporated
by reference to the registrant’s current report on Form 8-K filed on
February 6, 2009.
|
(3)
|
Incorporated
by reference to the registrant’s Registration Statement on Form SB-2
(333-74827), except for amended Article III, Section 2, which was
incorporated by reference to the registrant’s quarterly report on Form
10-QSB for the quarterly period ended March 31,
2004
|
40
(4)
|
Incorporated
by reference to the registrant’s Annual Report on Form 10-KSB for the year
ended December 31, 1999.
|
(5)
|
Incorporated
by reference to the registrant’s annual meeting proxy statement dated May
5, 2000.
|
(6)
|
Incorporated
by reference to the registrant’s quarterly report on Form 10-QSB for the
quarterly period ended March 31,
2004.
|
(7)
|
Incorporated
by reference to the registrant’s annual meeting proxy statement dated
April 10, 2004.
|
(8)
|
Incorporated
by reference to the registrant’s Annual Report on Form 10-KSB for the year
ended December 31, 2005
|
(9)
|
Incorporated
by reference to the registrant’s quarterly report on Form 10-QSB for the
quarterly period ended September 30,
2007.
|
41
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Alaska Pacific Bancshares, Inc | |||
May
17, 2010
|
/s/Craig
E. Dahl
|
||
Date
|
Craig
E. Dahl
|
||
President
and
Chief
Executive Officer
|
May
17, 2010
|
/s/Julie
M. Pierce
|
||
Date
|
Julie
M. Pierce
|
||
Senior
Vice President and
Chief
Financial Officer
|
42
EXHIBIT
INDEX
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
32.1
|
Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
32.2
|
Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
43 |