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American Bank Holdings Inc (1213219) SEC Filing 10-Q Quarterly report for the period ending Thursday, September 30, 2004

American Bank Holdings Inc

CIK: 1213219

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-QSB

 

ý

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 

 

 

 

For the quarterly period ended September 30, 2004.

 

 

 

 

 

or

 

 

 

o

 

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 

 

 

 

For the transition period from                                    to                 .

 

 

 

 

 

Commission File Number: 0-23513

 

AMERICAN BANK HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

06-1478208

(State or other jurisdiction of
incorporation or organization)

 

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

 

 

 

1211 Plum Orchard Drive, Suite 300, Silver Spring, MD

 

20904

(Address of principal executive offices)

 

(Zip Code)

 

(301) 572-3740

(Registrant’s telephone number, including area code)

 

 

(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.

ý  Yes            o No

 

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

 

Common Stock (par value $.001)

 

1,941,489

Class

 

Outstanding at November 12, 2004

 

Transitional Small Business Disclosure Format (check one):            o Yes       ý No

 

 



 

PART I – FINANCIAL INFORMATION

Item 1.

 

American Bank Holdings, Inc.

Silver Spring, Maryland

 

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(dollars in thousands, except per share data)

 

 

 

September 30,
2004

 

December 31,
2003

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

4,163

 

$

2,109

 

Interest-bearing deposits in other banks

 

289

 

2,289

 

Total cash and cash equivalents

 

4,452

 

4,398

 

 

 

 

 

 

 

Investment securities available for sale

 

26,429

 

32,656

 

Investment securities held-to-maturity

 

14,592

 

11,889

 

Loans held for sale

 

31,512

 

36,186

 

 

 

 

 

 

 

Loans

 

172,357

 

142,362

 

Allowance for loan losses

 

(1,834

)

(1,398

)

Net loans

 

170,523

 

140,964

 

 

 

 

 

 

 

Foreclosed real estate, net

 

130

 

348

 

Premises and equipment, net

 

1,673

 

1,551

 

Federal Home Loan Bank of Atlanta Stock, at cost

 

2,625

 

3,054

 

Cash surrender value of life insurance

 

2,544

 

2,458

 

Accrued interest receivable and other assets

 

3,363

 

3,383

 

Total assets

 

$

257,843

 

$

236,887

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

192,726

 

$

156,506

 

Advances from the Federal Home Loan Bank

 

44,000

 

61,075

 

Advance payments by borrowers for taxes and insurance

 

301

 

338

 

Junior subordinated obligations

 

3,093

 

3,093

 

Other liabilities

 

1,423

 

1,564

 

Total liabilities

 

241,543

 

222,576

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

Preferred stock, par value $0.001 per share, authorized 10,000,000 shares, no shares issued and outstanding

 

 

 

Common stock $0.001 par value per share, 10,000,000 shares authorized with 1,941,489 and 1,883,574 shares issued and outstanding at September 30, 2004 and December 31, 2003, respectively.

 

2

 

2

 

Additional paid-in capital

 

9,981

 

9,787

 

Retained earnings

 

6,511

 

4,791

 

Accumulated other comprehensive loss

 

(194

)

(269

)

Total stockholders’ equity

 

16,300

 

14,311

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

257,843

 

$

236,887

 

 

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

 

1



 

 

American Bank Holdings, Inc.

Silver Spring, Maryland

 

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands, except per share data)

 

 

 

For the Nine Months
Ended September 30,

 

For the Three Months
Ended September 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

Interest Income

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

8,650

 

$

6,517

 

$

3,159

 

$

2,266

 

Interest and dividends on investments

 

1,459

 

1,106

 

492

 

415

 

Other interest income

 

25

 

136

 

11

 

20

 

Total interest income

 

10,134

 

7,759

 

3,662

 

2,701

 

 

 

 

 

 

 

 

 

 

 

Interest Expense

 

 

 

 

 

 

 

 

 

Interest on deposits

 

2,343

 

2,467

 

895

 

754

 

Interest on FHLB advances

 

1,394

 

1,199

 

476

 

457

 

Interest on junior subordinated obligations

 

108

 

162

 

39

 

49

 

Total interest expense

 

3,845

 

3,828

 

1,410

 

1,260

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

6,289

 

3,931

 

2,252

 

1,441

 

Provision for loan losses

 

541

 

275

 

221

 

100

 

Net interest income after provision for loan losses

 

5,748

 

3,656

 

2,031

 

1,341

 

 

 

 

 

 

 

 

 

 

 

Non-Interest Income

 

 

 

 

 

 

 

 

 

Loan service charges and fees

 

193

 

142

 

72

 

45

 

Gain on sale of loans

 

4,233

 

2,812

 

1,560

 

1,049

 

Deposit service charges

 

176

 

168

 

68

 

60

 

Gain on sale of securities

 

36

 

114

 

 

34

 

Other income

 

88

 

77

 

30

 

24

 

Total non-interest income

 

4,726

 

3,313

 

1,730

 

1,212

 

 

 

 

 

 

 

 

 

 

 

Non-Interest Expenses

 

 

 

 

 

 

 

 

 

Salaries and benefits

 

4,821

 

3,547

 

1,800

 

1,279

 

Net occupancy expense

 

654

 

604

 

229

 

205

 

Deposit insurance premiums

 

63

 

54

 

20

 

18

 

Legal and professional expenses

 

337

 

208

 

99

 

76

 

Data processing

 

516

 

417

 

192

 

140

 

Net cost of operations of foreclosed assets

 

302

 

24

 

82

 

17

 

(Gain) loss contingency on insurance claim

 

(50

)

245

 

(50

)

245

 

Other expenses

 

1,014

 

698

 

348

 

242

 

Total non-interest expense

 

7,657

 

5,797

 

2,720

 

2,222

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

2,817

 

1,172

 

1,041

 

331

 

Provision for income taxes

 

1,097

 

436

 

404

 

123

 

Net income

 

$

1,720

 

$

736

 

$

637

 

$

208

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Common Share

 

$

0.89

 

$

0.38

 

$

0.33

 

$

0.11

 

Diluted Earnings Per Common Share

 

$

0.86

 

$

0.36

 

$

0.32

 

$

0.11

 

 

The accompanying notes to Consolidated Financial Statements are an integral part of these statements.

 

2



 

American Bank Holdings, Inc.

Silver Spring, Maryland

 

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

for the nine months ended September 30, 2004 and 2003

(dollars in thousands, except per share data)

 

 

 

Common
Stock

 

Additional
Paid-In
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Total
Stockholders’
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2002

 

$

213

 

$

10,892

 

$

3,859

 

$

28

 

$

14,992

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

736

 

 

 

736

 

Net change in unrealized gains (losses) on available-for-sale securities, net of taxes of $38

 

 

 

 

 

 

 

60

 

60

 

Less reclassification of gains recognized, net of taxes of $44

 

 

 

 

 

 

 

(70

)

(70

)

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

726

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase and retirement dissenters’ Shares

 

(211

)

(1,147

)

 

 

 

 

(1,358

)

Cash dividend declared ($.06 per share)

 

 

 

 

 

(126

)

 

 

(126

)

Balance at September 30, 2003

 

$

2

 

$

9,745

 

$

4,469

 

$

18

 

$

14,234

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2003

 

$

2

 

$

9,787

 

$

4,791

 

$

(269

)

$

14,311

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

1,720

 

 

 

1,720

 

Net change in unrealized gains (losses) on available-for-sale securities, net of taxes of $61

 

 

 

 

 

 

 

97

 

97

 

Less reclassification of gains recognized, net of taxes of $14

 

 

 

 

 

 

 

(22

)

(22

)

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

1,795

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options (57,915 shares)

 

 

 

194

 

 

 

 

 

194

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2004

 

$

2

 

$

9,981

 

$

6,511

 

$

(194

)

$

16,300

 

 

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

 

3



 

American Bank Holdings, Inc.

Silver Spring, Maryland

 

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

For the Nine Months Ended
September 30,

 

(Dollars in thousands)

 

2004

 

2003

 

Cash flows from operating activities

 

 

 

 

 

Net income

 

$

1,720

 

$

736

 

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

 

 

 

 

 

Depreciation and amortization

 

243

 

242

 

Net accretion of discounts and amortization of premiums

 

22

 

49

 

Securities gains, net

 

(36

)

(114

)

Provision for loan losses

 

541

 

275

 

Provision for loss on foreclosed assets

 

239

 

 

Net loss on sale of foreclosed assets

 

10

 

 

Loan fees deferred

 

320

 

91

 

Amortization of deferred loan fees

 

(219

)

(269

)

Loans originated for sale

 

(166,944

)

(160,911

)

Proceeds from sale of loans

 

175,851

 

154,485

 

Gain on sale of loans

 

(4,233

)

(2,812

)

Increase in cash surrender value of life insurance

 

(86

)

(77

)

Decrease (increase) in interest receivable and other assets

 

21

 

(275

)

Increase (decrease) in other liabilities

 

(141

)

576

 

Net cash provided by (used in) operating activities

 

7,308

 

(8,004

)

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Proceeds from sales of investment securities available for sale

 

1,455

 

6,375

 

Proceeds from maturities of investment securities available for sale

 

5,000

 

1,000

 

Purchase of investment securities available for sale

 

(1,754

)

(39,502

)

Proceeds from maturities of investment securities held to maturity

 

1,000

 

2,000

 

Purchase of investment securities held to maturity

 

(3,740

)

(18,856

)

Principal collected on mortgage-backed securities

 

1,540

 

21,028

 

Principal collected on loans

 

54,283

 

59,219

 

Loans originated or acquired

 

(84,690

)

(78,780

)

Funds advanced on foreclosed assets

 

 

(14

)

Proceeds from the sale of foreclosed assets

 

285

 

191

 

Purchases of premises and equipment

 

(365

)

(166

)

Purchase of stock in the Federal Home Loan Bank

 

(1,050

)

(800

)

Proceeds from redemption of stock in the Federal Home Loan Bank

 

1,479

 

375

 

Net cash used in investing activities

 

(26,557

)

(47,930

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Net increase in deposits and escrow accounts

 

36,184

 

18,997

 

Proceeds from borrowings

 

25,500

 

29,000

 

Repayment of borrowings

 

(42,575

)

(9,500

)

Repurchase shares of common stock

 

 

(1,358

)

Proceeds from junior subordinated obligations

 

 

2,894

 

Proceeds from exercise of stock options

 

194

 

 

Cash dividends paid

 

 

(126

)

Net cash provided by financing activities

 

19,303

 

39,907

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

54

 

(16,027

)

Cash and cash equivalents as of January 1

 

4,398

 

22,810

 

Cash and cash equivalents as of September 30

 

$

4,452

 

$

6,783

 

 

 

 

 

 

 

Other Cash Flow Information

 

 

 

 

 

 

 

 

 

 

 

Interest paid

 

$

3,771

 

$

4,219

 

 

 

 

 

 

 

Income taxes paid

 

$

1,175

 

$

414

 

 

The accompanying notes are an integral part of these statements.

 

4



 

AMERICAN BANK HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

As of and for the Nine Months Ended September 30, 2004 and 2003

 

1)              Basis of Presentation

 

American Bank Holdings, Inc. (the “Company”) is a corporation formed under the laws of Delaware to serve as the savings and loan holding company of American Bank (the “Bank”), a federally chartered stock savings bank.  The Bank’s stockholders approved reorganization into a holding company structure at a meeting held on March 17, 2003.  As a result of the reorganization, completed on March 25, 2003, stockholders of the Bank are now stockholders of American Bank Holdings, Inc. and the Bank is a direct subsidiary of the Company.  Each outstanding share of American Bank common stock (other than dissenting shares) has been converted into one share of the Company’s common stock.  The consolidated financial statements include the accounts of the Company and the Bank.  The Company also organized American Bank Holdings Statutory Trust I.  All intercompany accounts and transactions have been eliminated in the accompanying financial statements.

 

The consolidated financial statements as of September 30, 2004 and for the three and nine months ended September 30, 2004 and 2003 are unaudited and have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-QSB and Rule 10-01 of Regulation S-X, but, in the opinion of management of the Company, contain all adjustments, consisting solely of normal recurring entries, necessary to present fairly the consolidated financial condition as of September 30, 2004 and the results of consolidated operations for the three and nine months ended September 30, 2004 and 2003 and consolidated cash flows for the nine months ended September 30, 2004 and 2003.  The consolidated statement of financial condition of December 31, 2003 is derived from the Company’s audited financial statements.

 

The results of the consolidated operations for the nine months ended September 30, 2004 are not necessarily indicative of results that may be expected for the entire year ending December 31, 2004.  Moreover, in preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheets and income statements for the period.  Actual results could differ significantly from the estimates.  Material estimates that are particularly susceptible to significant change in the near term include the determination of the allowance for loan losses and the valuation of foreclosed real estate.  These condensed financial statements should be read in conjunction with the audited financial statements and notes included in the 2003 annual report of American Bank on Form 10-KSB as filed with the Securities and Exchange Commission.

 

2)              Earnings Per Share

 

Basic earnings per share for the three and nine months ended September 30, 2004 was determined by dividing net income by 1,941,489 and 1,924,177, respectively, the weighted average number of shares of common stock outstanding during the respective periods.  Basic earnings per share for the three and nine months ended September 30, 2003 was determined by dividing net income by 1,873,478 and 1,959,219, respectively, the weighted average number of shares of common stock outstanding during the respective periods.  Diluted earnings per share for the three and nine months ended September 30, 2004 was determined by dividing net income by 2,007,246 and 1,989,272, respectively, the weighted average number of shares of common stock and common stock equivalents outstanding during the respective periods.  Diluted earnings per share for the three and nine months ended September 30, 2003 was determined by dividing net income by 1,958,257 and 2,041,369, respectively, the weighted average number of shares of common stock and common stock equivalents outstanding during the respective periods.  Common stock equivalents consist of outstanding stock options, if such options are dilutive.

 

5



 

3)              Stock Based Compensation

 

Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, encourages all entities to adopt a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period.  However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, whereby compensation cost is the excess, if any, of the quoted market price of the stock grant date (or other measurement date) over the amount an employee must pay to acquire the stock.  The Company has elected to continue with the accounting methodology in Opinion No. 25.  Stock options issued under the Company’s stock option plan have no intrinsic value at the grant date, and under Opinion No. 25 no compensation cost is recognized for them.

 

Had compensation cost for the Company’s stock option plan been determined based on the fair value at the grant dates for awards under the plan consistent with the method prescribed by SFAS No. 123, the Company’s net income and earnings per share would have been adjusted to the pro forma amounts indicated below (in thousands, except per share data):

 

 

 

For the Nine Months
Ended September 30,

 

For the Three Months
Ended September 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

Net income, as reported

 

$

1,720

 

$

736

 

$

637

 

$

208

 

 

 

 

 

 

 

 

 

 

 

Additional expense had the Company
Adopted SFAS No. 123

 

(25

)

(24

)

(8

)

(8

)

Related tax benefit

 

9

 

9

 

3

 

3

 

 

 

 

 

 

 

 

 

 

 

Net income, as reported

 

$

1,704

 

$

721

 

$

632

 

$

203

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

As reported

 

0.89

 

0.38

 

0.33

 

0.11

 

 

Pro forma

 

0.89

 

0.36

 

0.33

 

0.11

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

As reported

 

0.86

 

0.36

 

0.32

 

0.11

 

 

Pro forma

 

0.86

 

0.35

 

0.31

 

0.10

 

 

4)              Junior Subordinated Obligations

 

In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” which was revised in December 2003.  This interpretation provides guidance for the consolidation of variable interest entities (VIEs).  American Bank Holdings Statutory Trust I, a wholly-owned trust subsidiary of American Bank Holdings, Inc., qualifies as a variable interest entity under FIN 46.  American Bank Holdings Statutory Trust issued mandatorily redeemable preferred securities (trust capital securities) to third-party investors and loaned the proceeds to the Company.  American Bank Holdings Statutory Trust I holds, as its sole asset, subordinated debentures issued by the Company.

 

In accordance with the guidance provided by FIN 46, the Company does not consolidate the accounts of American Bank Holdings Statutory Trust I.  The impact of not consolidating is to report the total outstanding

 

6



 

junior subordinated debentures of $3,093,000 as an outstanding liability and to include the Company’s $93,000 equity interest in the trust subsidiary as an “other asset” on the balance sheet.  For regulatory reporting purposes, the Federal Reserve Board has indicated that the trust capital securities will continue to qualify as Tier 1 Capital subject to previously specified limitations, until further notice. If regulators make a determination that trust capital securities can no longer be considered in regulatory capital, the securities become callable and the Company may redeem them.  The adoption of FIN 46 did not have an impact on the Company’s results of operations or liquidity.

 

5)              Guarantees

 

The Company does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit.  Standby letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer in a third party.  Generally, all letters of credit, when issued have expiration dates within one year.  The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers.  The Company generally holds collateral supporting these commitments.  The Company had $439,000 of standby letters of credit as of September 30, 2004.  Management believes that the proceeds obtained through a liquidation of collateral would be sufficient to cover the potential amount of future payment required under the corresponding guarantees.  The current amount of the liability as on September 30, 2004 for guarantees under standby letters of credit issued is not material.

 

6)              Segments

 

The Company has two reportable segments: banking and mortgage banking.  The leasing segment is included in the banking segment and not reported as a separate segment since its assets and revenues are less than 10% of the Company’s totals.  The banking segment provides traditional banking services offered through the Bank.  The mortgage-banking segment operates out of the Bank’s headquarters in Maryland and originates and sells residential mortgages of various credit quality levels.  Most loans originated by the mortgage division are originated for sale, however, on a case-by-case basis, some loans are originated for the Bank’s portfolio.  The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1 to the consolidated financial statements for the year ended December 31, 2003.  The Company evaluates performance based on profit and loss from operations before income taxes.  The Company accounts for intersegment revenues and expenses as if the revenue/expense transactions were to third parties, that is, at current market prices.  The Company’s reportable segments are strategic business units that offer different products and services.  Although both segments offer financial products and services, they are managed separately because each segment has different types and levels of credit and interest rate risk.  The results of the two reportable segments are included in the following table:

 

Nine months ended September 30, 2004

 

Bank

 

Mortgage
Banking

 

Eliminations

 

Consolidated
Totals

 

Interest and dividend income

 

$

10,010

 

$

1,594

 

$

(1,470

)

$

10,134

 

Interest expense

 

3,845

 

1,470

 

(1,470

)

3,845

 

Net interest income

 

6,165

 

124

 

 

6,289

 

Provision for loan losses

 

436

 

105

 

 

541

 

Net interest income after provision for loan losses

 

5,729

 

19

 

 

5,748

 

Other income

 

493

 

4,233

 

 

4,726

 

Non-interest expenses

 

4,837

 

2,820

 

 

7,657

 

Net income before income taxes

 

1,385

 

1,432

 

 

2,817

 

Provision for income taxes

 

551

 

546

 

 

1,097

 

Net income

 

$

834

 

$

886

 

$

 

$

1,720

 

 

 

 

 

 

 

 

 

 

 

At September 30, 2004

 

 

 

 

 

 

 

 

 

Segment assets

 

$

226,331

 

$

31,512

 

$

 

$

257,843

 

Segment capital

 

14,405

 

1,895

 

 

16,300

 

 

7



 

Nine months ended September 30, 2003

 

Bank

 

Mortgage
Banking

 

Eliminations

 

Consolidated
Totals

 

Interest and dividend income

 

$

7,686

 

$

1,043

 

$

(970

)

$

7,759

 

Interest expense

 

3,828

 

970

 

(970

)

3,828

 

Net interest income

 

3,858

 

73

 

 

3,931

 

Provision for loan losses

 

105

 

170

 

 

275

 

Net interest income (loss) after provision for loan losses

 

3,753

 

(97

)

 

3,656

 

Other income

 

501

 

2,812

 

 

3,313

 

Non-interest expenses

 

3,624

 

2,173

 

 

5,797

 

Net income before income taxes

 

630

 

542

 

 

1,172

 

Provision for income taxes

 

229

 

207

 

 

436

 

Net income

 

$

401

 

$

335

 

$

 

$

736

 

 

 

 

 

 

 

 

 

 

 

At September 30, 2003

 

 

 

 

 

 

 

 

 

Segment assets

 

$

191,753

 

$

29,199

 

$

 

$

220,952

 

Segment capital

 

13,255

 

979

 

 

14,234

 

 

Three months ended September 30, 2004

 

Bank

 

Mortgage
Banking

 

Eliminations

 

Consolidated
Totals

 

Interest and dividend income

 

$

3,588

 

$

613

 

$

(539

)

$

3,662

 

Interest expense

 

1,410

 

539

 

(539

)

1,410

 

Net interest income

 

2,178

 

74

 

 

2,252

 

Provision for loan losses

 

191

 

30

 

 

221

 

Net interest income after provision for loan losses

 

1,987

 

44

 

 

2,031

 

Other income

 

170

 

1,560

 

 

1,730

 

Non-interest expenses

 

1,686

 

1,034

 

 

2,720

 

Net income before income taxes

 

471

 

570

 

 

1,041

 

Provision for income taxes

 

184

 

220

 

 

404

 

Net income

 

$

287

 

$

350

 

$

 

$

637

 

 

Three months ended September 30, 2003

 

Bank

 

Mortgage
Banking

 

Eliminations

 

Consolidated
Totals

 

Interest and dividend income

 

$

2,647

 

$

782

 

$

(728

)

$

2,701

 

Interest expense

 

1,260

 

728

 

(728

)

1,260

 

Net interest income

 

1,387

 

54

 

 

1,441

 

Provision for loan losses

 

60

 

40

 

 

100

 

Net interest income after provision for loan losses

 

1,327

 

14

 

 

1,341

 

Other income

 

163

 

1,049

 

 

1,212

 

Non-interest expenses

 

1,397

 

825

 

 

2,222

 

Net income before income taxes

 

93

 

238

 

 

331

 

Provision for income taxes

 

31

 

92

 

 

123

 

Net income

 

$

62

 

$

146

 

$

 

$

208

 

 

8



 

The amounts presented as “Eliminations” consist of imputed interest charges on the mortgage loans originated for sale before they are actually sold to investors.

 

7)              Reclassifications

 

Certain items in the 2003 financial statements have been reclassified to conform to the 2004 financial statement presentation.  Such reclassifications had no effect on net income.

 

8)              Recent Accounting Developments

 

In March 2004, the Emerging Issues Task Force (EITF) reached consensus on Issue 03-01.  “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.”  EITF No. 03-01 includes new guidance for evaluating and recording impairment losses on debt and equity investments, as well as new disclosure requirements for investments that are deemed to be temporarily impaired.  The accounting guidance of EITF No. 03-01 is effective for fiscal years beginning after June 15, 2004, while the disclosure requirements are effective for fiscal years ending after June 15, 2004.  The Company has not yet determined the impact that adoption will have on its financial position or results of operations as the impact is heavily dependent on the interest rate environment at the date of adoption and pending implementation guidance from the Financial Accounting Standards Board.

 

Item 2.

 

AMERICAN BANK HOLDINGS, INC. AND SUBSIDIARIES

 

Management’s Discussion and Analysis of Financial Condition and

Results of Operations

 

This discussion and analysis includes a description of material changes that have affected the Company’s consolidated financial condition and consolidated results of operations during the periods included in the unaudited consolidated financial statements.

 

General

 

American Bank Holdings, Inc. is a corporation formed under the laws of Delaware to serve as the holding company for American Bank.  The business of the Company is conducted principally through the Bank, a federally chartered savings bank.  The Company’s corporate headquarters is located in Silver Spring, Maryland and the Bank has five full-service offices located at 1700 Rockville Pike, Rockville, Maryland, 5600 Connecticut Avenue, Washington D.C., 4801-A Montgomery Lane, Bethesda, Maryland, in the SuperFresh market at 12028 Cherry Hill Road, Silver Spring, Maryland and in the SuperFresh market at 3301 North Ridge Road, Ellicott City, Maryland.  The Bank also operates a loan production/leasing office in Charlotte, North Carolina.  Deposits in the Bank are insured to applicable limits by the Federal Deposit Insurance Corporation.  All references to the Company prior to March 25, 2003, except where otherwise indicated, are to the Bank.  As of September 30, 2004, the Company had 74 employees, 65 of whom work full time.

 

The Company recorded net income of $637,000, or $0.32 per diluted share, for the quarter ended September 30, 2004 as compared to net income of $208,000, or $0.11 per diluted share, for the quarter ended September 30, 2003.  Net income for the first nine months of 2004 was $1,720,000, or $0.86 per diluted share, as compared to $736,000, or  $0.36 per diluted share, for the first nine months of 2003.  The increase in net income for the nine months ended September 30, 2004 was attributable primarily to the increase in net interest income and gains recognized on the sale of mortgage loans originated for sale by the mortgage division offset by the increase in non-interest expense.

 

9



 

CRITICAL ACCOUNTING POLICIES

 

The Company’s significant accounting policies are set forth in note 1 of the consolidated financial statements as of December 31, 2003 which was filed on Form 10-KSB with the SEC.  Of these significant accounting policies, the Company considers its policy regarding the allowance for loan losses to be its most critical accounting policy, because it requires management’s most subjective and complex judgments.  In addition, changes in economic conditions can have a significant impact on the allowance for loan losses and therefore the provision for loan losses and results of operations.  The Company has developed appropriate policies and procedures for assessing the adequacy of the allowance for loan losses, recognizing that this process requires a number of assumptions and estimates with respect to its loan portfolio.  The Company’s assessments may be impacted in future periods by changes in economic conditions, the impact of regulatory examinations and the discovery of information with respect to borrowers that is not known to management at the time of the issuance of the consolidated financial statements.

 

Financial Condition (September 30, 2004 compared to December 31, 2003)

 

Total assets increased by $21.0 million, or 8.8%, to $257.8 million at September 30, 2004 compared to December 31, 2003.  Total loans outstanding increased by $24.8 million from $177.2 million at December 31, 2003 to $202.0 million at September 30, 2004.  The Company originated $251.6 million of loans during the nine months ended September 30, 2004 as compared to $239.7 million during the same period in 2003.  The increase in loan production was primarily due to the increase in mortgage loans originated and subsequently sold by the mortgage division, and an increase in commercial related loans.  Investment securities held-to-maturity increased by $2.7 million and investment securities available-for-sale decreased by $6.2 million from year-end 2003 to September 30, 2004.

 

Nonperforming assets, net (including nonaccrual loans, foreclosed real estate and repossessed assets) decreased by $685,000 to $1.5 million at September 30, 2004 compared to $2.2 million at December 31, 2003.  The decrease in non-performing assets resulted primarily from a decrease in non-performing loans and decrease in foreclosed real estate and repossessed assets.  At September 30, 2004, the book balance for repossessed assets was $30,000 and was classified as other assets on the balance sheet.  Total nonperforming assets, net, as a percentage of total assets were 0.6% at September 30, 2004 and 0.9% at December 31, 2003.

 

10



 

The following table sets forth the composition of the Company’s nonperforming assets at the dates indicated (in thousands).

 

 

 

September 30,
2004

 

December 31,
2003

 

Non-accrual loans:

 

 

 

 

 

 

 

 

 

 

 

One to four family residential mortgage loans

 

$

534

 

$

1,285

 

 

 

 

 

 

 

Commercial real estate loans

 

226

 

243

 

 

 

 

 

 

 

Commercial

 

544

 

 

 

 

 

 

 

 

Consumer loans

 

13

 

16

 

 

 

 

 

 

 

Total non-accrual loans

 

$

1,317

 

$

1,544

 

 

 

 

 

 

 

Foreclosed real estate, net

 

130

 

348

 

 

 

 

 

 

 

Repossessed assets, net

 

30

 

270

 

 

 

 

 

 

 

Total nonperforming assets

 

$

1,477

 

$

2,162

 

 

The allowance for losses on loans is established through a provision for loan losses based upon management’s evaluation of the risk inherent in the loan portfolio and changes in the nature and volume of loan activity.  Management considers, among other factors, the estimated fair value of the underlying collateral, current economic conditions and historical loan loss experience.  Management reviews the allowance for loan losses on a periodic basis, at least quarterly, and these reviews take into consideration the change in portfolio mix, change in nonperforming loans, actual charge-offs net of any recoveries, and estimations used in calculating the adequacy of the loan loss allowance.  The nonperforming loans are reviewed on an individual basis and all other loans are reviewed in major categories.  Management has made adjustments to the estimation methods for the major categories due to historical losses and delinquencies, however these changes have not had a material effect on the overall allowance.  While management uses available information in establishing the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluations.  A significant decline in the credit quality of the Company’s loan portfolio could have a material adverse effect on the Company’s estimates and, as a result, could have a material adverse effect on the Company’s financial condition and results of operations.  Additions to the allowance are charged to operations; realized losses, net of recoveries, are charged to the allowance.  In addition, various regulatory agencies, as part of their examination process, periodically review the Company’s allowance for loan losses.  Management will continue to monitor and modify the allowance for loan losses as conditions dictate.  Although management maintains allowances at levels that it considers adequate to provide for potential losses, there can be no assurances that such losses will not exceed the estimated amounts or that higher provisions will not be necessary in the future.

 

The Company had twenty-three loans, amounting to $1.3 million, as of September 30, 2004, which are considered to be potential problem loans.  All of these loans are classified as non-accrual loans because the borrowers are over 90 days delinquent and management believes it may have difficulty in collecting the principal balance on these loans.  The Company had an allowance for loan losses of $1.8 million, or 0.91% of the total loans outstanding, at September 30, 2004, and $1.4 million, or 0.79% of total loans outstanding, at December 31, 2003.  The increase in the allowance was due to the change in portfolio mix and the risk factors inherent in the overall portfolio mix.  Management believes the allowance is adequate based on the review of the underlying collateral securing the loans.

 

The Company also establishes allowance for losses on foreclosed real estate and other repossessed assets based upon its fair value less the cost of disposal. The valuations of foreclosed real estate properties are reviewed at least quarterly and updated as necessary based on the Company’s expectations of holding periods, sales activity and other changes in market conditions.  Based on available information, management believes

 

11



 

that current loss reserves are adequate at this time to cover potential losses in the portfolio.  There can be no assurance, however, that additional loss provisions will not be necessary in the future if market conditions deteriorate.  The Company did not have any allowance for losses on foreclosed real estate, at September 30, 2004 and $29,000 or 8.2% of foreclosed real estate, at December 31, 2003.  The Company had an allowance for losses on repossessed assets of $172,000 at September 30, 2004.

 

The Company had unrealized losses of $316,000, on its investment securities available-for-sale portfolio at September 30, 2004.  The amortized cost of this portfolio was $26.7 million at that date.  There were net unrealized losses of $55,000 on its investment securities held-to-maturity portfolio at September 30, 2004, with an amortized cost of $14.6 million.  The Company’s investment securities portfolio includes agency obligations, mortgage-backed securities and collateralized mortgage obligations.  The Company’s investment securities available-for-sale portfolio decreased by $6.2 million from year end 2003 to September 30, 2004 due to the sale of investment securities available-for-sale and by the repayment of principal on mortgage-backed securities.  The Company’s investment securities held-to-maturity portfolio increased by $2.7 million due to the purchase of mortgage-backed securities offset by the repayment of principal on mortgage-backed securities.  There were a total of five investments with an unrealized loss position for 12 months or greater with an aggregate market value of $11.3 million. None of these securities was deemed to have any fundamental issues that would lead the Company to believe that they were other than temporarily impaired. The unrealized losses are considered temporary as they reflect fair values at September 30, 2004, are subject to change daily as interest rates fluctuate and the Company has the intent and ability to hold these securities for a period of time sufficient to allow for any anticipated recovery in fair value.

 

Deposits increased by $36.2 million during the nine months ended September 30, 2004.  The Company continued to focus its efforts in reducing its cost of deposits and trying to attract additional core deposits.  Core deposits (money market, checking and statement savings accounts) increased by $10.3 million while certificates of deposit increased by $25.9 million during the first nine months of 2004.  The deposits at September 30, 2004 had an average interest rate of 1.99%.  Advances from the Federal Home Loan Bank decreased by $17.1 million during the first nine months of 2004.  The advances from the Federal Home Loan Bank at September 30, 2004 had an average interest rate of 3.88%.

 

The Company’s stockholders’ equity increased by $2.0 million, to $16.3 million at September 30, 2004 compared to $14.3 million at December 31, 2003.  The increase was due principally to current period earnings, proceeds received from the exercise of stock options and a decrease in net unrealized holding losses on investments available for sale.  At September 30, 2004, the Company and the Bank were considered “well capitalized” under regulatory definitions.

 

RESULTS OF OPERATIONS

 

The Company’s operating results depend primarily on its net interest income, which is the difference between interest income on interest-earning assets (primarily loans and investment securities) and interest expense on interest-bearing liabilities (primarily deposits and borrowings).  The Company’s operating results are also affected by its other income (primarily gain on sale of loans, collection of late fees and service charges) and its non-interest expense (primarily salaries and administrative costs).

 

The following table sets forth certain information relating to the Company’s average interest-bearing assets and interest-bearing liabilities and reflects the average yield on assets and the average cost of liabilities for the periods indicated.  During the periods indicated, non-accrual loans are included in the loans category.

 

12



 

AMERICAN BANK HOLDINGS, INC.

RATE SPREAD ANALYSIS

(dollars in thousands)

 

 

 

9 Months Ended September 30, 2004

 

9 Months Ended September 30, 2003

 

 

 

Average
Balance

 

Interest

 

Interest
Rate

 

Average
Balance

 

Interest

 

Interest
Rate

 

Interest-bearing assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

193,746

 

$

8,650

 

5.97

%

$

139,443

 

$

6,517

 

6.23

%

Investment securities

 

45,199

 

1,459

 

4.31

 

37,846

 

1,106

 

3.89

 

Other

 

3,322

 

25

 

0.95

 

16,248

 

136

 

1.12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing assets

 

242,267

 

10,134

 

5.59

 

193,537

 

7,759

 

5.34

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

165,942

 

2,343

 

1.89

 

135,674

 

2,467

 

2.42

 

FHLB advances & Other Borrowings

 

61,801

 

1,502

 

3.23

 

40,208

 

1,361

 

4.51

 

Total interest-bearing liabilities

 

$

227,743

 

$

3,845

 

2.25

 

$

175,882

 

$

3,828

 

2.90

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average interest rate spread

 

 

 

 

 

3.34

 

 

 

 

 

2.44

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin

 

 

 

$

6,289

 

3.47

%

 

 

$

3,931

 

2.70

%

 

 

 

3 Months Ended September 30, 2004

 

3 Months Ended September 30, 2003

 

 

 

Average
Balance

 

Interest

 

Interest
Rate

 

Average
Balance

 

Interest

 

Interest
Rate

 

Interest-bearing assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

208,941

 

$

3,159

 

5.99

%

$

154,710

 

$

2,266

 

5.86

%

Investment securities

 

44,471

 

492

 

4.39

 

47,186

 

415

 

3.52

 

Other

 

3,712

 

11

 

1.25

 

7,255

 

20

 

1.10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing assets

 

257,124

 

3,662

 

5.64

 

209,151

 

2,701

 

5.17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

179,002

 

895

 

1.98

 

141,616

 

754

 

2.13

 

FHLB advances & Other Borrowings

 

63,043

 

515

 

3.18

 

48,888

 

506

 

4.14

 

Total interest-bearing liabilities

 

$

242,045

 

$

1,410

 

2.29

 

$

190,504

 

$

1,260

 

2.65

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average interest rate spread

 

 

 

 

 

3.35

 

 

 

 

 

2.52

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin

 

 

 

$

2,252

 

3.48

%

 

 

$

1,441

 

2.76

%

 

13



 

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND SEPTEMBER 30, 2003

 

General.  The Company recorded net income of $637,000, or $0.32 per diluted share, for the three months ended September 30, 2004 as compared to net income of $208,000, or $0.11 per diluted share, for the three months ended September 30, 2003.  The increase in net income for the three month period was attributable primarily to the increase in net interest income and gains recognized on the sale of loans offset by an increase in non-interest expense.

 

Net interest income, after provision for loan losses, increased by $690,000 for the three months ended September 30, 2004 when compared to the same period in 2003.  Non-interest income increased by $518,000 and non-interest expense increased by $498,000 during the three months ended September 30, 2004 compared to the same period in 2003.  The increase in operating expense was primarily due to additional compensation and employee benefit expenses, occupancy expenses, and data processing expenses offset by the difference in the loss contingency on an insurance claim.

 

Net Interest Income.  The Company’s net interest income increased by $811,000 during the three months ended September 30, 2004 as compared to the same period in 2003.  The increase was primarily due to the increase in average volume of interest-earning assets.  The Company was able to decrease the cost of funds by 36 basis points.  The decrease in cost of funds was due to the increase in core deposits coupled with maturing certificates of deposits and borrowings repricing downward.

 

Provision for Loan Losses.  The Company’s provision for loan losses increased by $121,000 to $221,000 during the three months ended September 30, 2004 compared to the same period in 2003.  The increase was due to the Company providing more reserves in the current quarter based on the periodic reviews of the underlying collateral securing loans held in portfolio.  More reserves were needed due to the change in mix, and the growth of loans that have a higher inherent risk.  The Company had an allowance for loan losses of $1.8 million, or 0.91% of the total loans outstanding, at September 30, 2004, and $1.4 million, or 0.79% of total loans outstanding, at December 31, 2003.

 

Non-interest Income.  The Company’s non-interest income increased by $518,000 to $1.7 million during the three months ended September 30, 2004 compared to the same period in 2003.  The increase was due to additional loan service charges and gains recognized on the sale of loans from the mortgage division.  The origination and subsequent sale of loans is the primary function of the mortgage division.  Loans originated for sale decreased by $8.1 million during the three months ended September 30, 2004 as compared to the same period in 2003.  However, the average gain percentage on the sale of loans increased due to a higher percentage of alt-A loans being sold.  The mortgage division was able to increase the volume of loan production and subsequent sales, which are all sold with servicing released, due to the increased volume of alt-A loans.  Any future increase in interest rates may affect the volume of loan production.  However management believes that future gains on sale of loans generated by the mortgage division will not be materially impacted since the Company has the ability to alter its product mix to focus on products and tend to be less sensitive to changes in interest rates.  The change in product mix primarily focuses on alt-A loans whereby the borrower has Fannie Mae/Freddie Mac credit quality but produces a lower level of documentation to obtain the loan.  These loans typically have more credit risk.  However the risk to the Bank is somewhat mitigated because these loans are sold to investors that also underwrite the loans prior to loan closing.

 

Non-interest Expense.  The following table summarizes changes in the major components of operating expense (in thousands):

 

 

 

For the Three Months Ended
September 30,

 

 

 

 

 

2004

 

2003

 

$ Change

 

% Change

 

Salaries and related expenses

 

$

1,800

 

$

1,279

 

$

521

 

40.7

%

Occupancy expense, net

 

229

 

205

 

24

 

11.7

 

Deposit insurance premiums

 

20

 

18

 

2

 

11.1

 

Legal and professional expenses

 

99

 

76

 

23

 

30.3

 

Data processing

 

192

 

140

 

52

 

37.1

 

Net cost of operations of foreclosed assets

 

82

 

17

 

65

 

382.4

 

Advertising

 

29

 

36

 

(7

)

(19.4

)

Loan fees and expenses

 

77

 

75

 

2

 

2.7

 

Loss contingency on insurance claim

 

(50

)

245

 

(295

)

(120.4

)

Other expenses

 

242

 

131

 

111

 

84.7

 

 

 

$

2,720

 

$

2,222

 

$

498

 

22.4

%

 

14



 

The Company’s non-interest expense increased by $498,000 to $2.7 million during the three months ended September 30, 2004 compared to the same period in 2003.  The increase in non-interest expense was primarily due to the increase in compensation and employee benefit expense, legal expenses, data processing, cost of operations of foreclosed assets, and loan fees and expenses offset by decreased advertising costs and a recovery of an accrual of a loss contingency on an insurance claim during the third quarter of 2003. The increase in compensation and employee benefit expenses was primarily due to additional staff hired in the lending area and branch network as well as more commissions paid to loan officers in the mortgage division, which correlates to the increase in gains from the sale of loans.  The increase in legal and professional expenses is primarily due to the Little lawsuit (see PART II, Item 1) and legal costs associated with the collection efforts on non-accrual assets. The increase in cost of operations in foreclosed assets is due to a $72,000 provision charged on repossessed automobiles.   During the third quarter of 2003, a loss contingency was set up for $245,000 on an insurance claim resulting form Hurricane Isabel.  The matter was settled during the third quarter of 2004 for $195,000 resulting in a recovery of $50,000.

 

Income Taxes.   Income tax expense for the three months ended September 30, 2004, totaled $404,000, resulting in an effective tax rate of 38.8%, as compared to tax expense of $123,000, resulting in an effective tax rate of 37.2% for the same period in 2003.  The relative mix of state tax exempt income and income from bank owned life insurance influences the effective income tax rate and remains the primary reason for the difference between the effective tax rate and the statutory federal and state tax rates for corporations.

 

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND SEPTEMBER 30, 2003

 

General.  The Company recorded net income of $1,720,000, or $0.86 per diluted share, for the nine months ended September 30, 2004 as compared to net income of $736,000, or $0.36 per diluted share, for the nine months ended September 30, 2003.  The increase in net income for the nine month period was attributable primarily to the increase in net interest income and gains recognized on the sale of loans offset by an increase in non-interest expense.

 

Net interest income, after provision for loan losses, increased by $2.1 million for the nine months ended September 30, 2004 when compared to the same period in 2003.  Non-interest income increased by $1.4 million and non-interest expense increased by $1.9 million during the nine months ended September 30, 2004 compared to the same period in 2003.  The increase in non-interest expense was primarily due to additional compensation and employee benefit expenses, costs associated with foreclosed assets, and data processing expenses.

 

Net Interest Income.  The Company’s net interest income increased by $2.4 million during the nine months ended September 30, 2004 as compared to the same period in 2003.  The increase was primarily due to the increase in average volume of interest-earning assets and the average interest rate spread increasing by 90 basis points.  The Company was able to increase the yield earned on interest-bearing assets by 25 basis points while decreasing the cost of funds by 65 basis points.  The decrease in cost of funds was due to the increase in core deposits coupled with maturing certificates of deposits and borrowings repricing downward.

 

Provision for Loan Losses.  The Company’s provision for loan losses increased by $266,000 to $541,000 during the nine months ended September 30, 2004 compared to the same period in 2003.  The increase was due to the Company providing more reserves in the current quarter based on the periodic reviews of the underlying collateral securing loans held in portfolio.  More reserves were needed due to the change in mix, and the growth of loans that have a higher inherent risk.  The Company had an allowance for loan losses of $1.8 million, or 0.91% of the total loans outstanding, at September 30, 2004, and $1.4 million, or 0.79% of total loans outstanding, at December 31, 2003.

 

15



 

Non-interest Income.  The Company’s non-interest income increased by $1.4 million to $4.7 million during the nine months ended September 30, 2004 compared to the same period in 2003.  The increase was due to additional loan service charges and gains recognized on the sale of loans available-for-sale from the mortgage division.  The origination and subsequent sale of loans is the primary function of the mortgage division.  Loans originated for sale increased by $6.0 million during the nine months ended September 30, 2004 as compared to the same period in 2003 and the average gain percentage on the sale of loans increased due to a higher percentage of alt-A loans being sold.  The mortgage division was able to increase the volume of loan production and subsequent sales, which are all sold with servicing released, due to the increase volume of alt-A loans.  Any future increase in interest rates may affect the volume of loan production.  However management believes that future gains on sale of loans generated by the mortgage division will not be materially impacted since the Company has the ability to alter its product mix to focus on products and tend to be less sensitive to changes in interest rates.  The change in product mix primarily focuses on alt-A loans whereby the borrower has Fannie Mae/Freddie Mac credit quality but produces a lower level of documentation to obtain the loan.  These loans typically have more credit risk.  However the risk to the Bank is mitigated because these loans are sold to investors that also underwrite the loans prior to loan closing.

 

Non-interest Expense.  The following table summarizes changes in the major components of operating expense (in thousands):

 

 

 

For the Nine Months Ended
September 30,

 

 

 

 

 

 

 

2004

 

2003

 

$ Change

 

% Change

 

Salaries and related expenses

 

$

4,821

 

$

3,547

 

$

1,274

 

35.9

%

Occupancy expense, net

 

654

 

604

 

50

 

8.3

 

Deposit insurance premiums

 

63

 

54

 

9

 

16.7

 

Legal and professional expenses

 

337

 

208

 

129

 

62.0

 

Data processing

 

516

 

417

 

99

 

23.7

 

Net cost of operations of foreclosed assets

 

302

 

24

 

278

 

1,158.3

 

Advertising

 

111

 

81

 

30

 

37.0

 

Loan fees and expenses

 

248

 

193

 

55

 

28.5

 

Loss contingency on insurance claim

 

(50

)

245

 

(295

)

(120.4

)

Other expenses

 

655

 

424

 

231

 

54.5

 

 

 

$

7,657

 

$

5,797

 

$

1,860

 

32.1

%

 

The Company’s non-interest expense increased by $1.9 million to $7.7 million during the nine months ended September 30, 2004 compared to the same period in 2003.  The increase in non-interest expense was primarily due to the increase in compensation and employee benefit expense, legal expenses, data processing, cost of operations of foreclosed assets, advertising, and loan fees and expenses.  The increase in compensation and employee benefit expenses was primarily due to additional staff hired in the lending area and branch network as well as more commissions paid to loan officers in the mortgage division, which correlates to the increase in gains from the sale of loans.  The increase in legal and professional expenses is primarily due to the Little lawsuit (see PART II, Item 1) and legal costs associated with the collection efforts on non-accrual assets. The increase in cost of operations in foreclosed assets is due to $182,000 provision charged on repossessed automobiles and $77,000 provision charged on foreclosed residential real estate property.  The original loan related to the repossessed automobiles was originated in April 2001 and secured by the assignment of twenty-eight automobile leases to individuals.  During the third quarter of 2002, the loan was past due less than 90 days when the borrower filed for Chapter 11 Bankruptcy protection.  As of September 30, 2004, repossessed assets had a gross balance of $202,000 (excluding the specific reserves of $172,000) which consists of the assignment of eight leases to individuals, all but two of which are currently performing under the terms of the lease.

 

Income Taxes.   Income tax expense for the nine months ended September 30, 2004, totaled $1,097,000, resulting in an effective tax rate of 38.9%, as compared to tax expense of $436,000, resulting in an effective tax rate of 37.2% for the same period in  2003.  The relative mix of state tax exempt income and income from bank owned life insurance influences the effective income tax rate and remains the primary reason for the difference between the effective tax rate and the statutory federal and state tax rates for corporations

 

16



 

OFF-BALANCE SHEET ARRANGEMENTS

 

The Company is party to financial instruments with off-balance sheet risk including commitments to extend credit under existing lines of credit and commitments to sell loans.  These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.

 

Commitments to originate new loans or extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Loan commitments generally expire within 30 to 45 days.  Most equity line commitments for the unfunded portion of equity lines are for a term of 10 years, and commercial lines of credit are generally renewable on an annual basis.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  The Company evaluates each customer’s creditworthiness on a case-by-case basis.  The amounts of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower.

 

Commitments to sell loans held for sale are agreements to sell loans to a third party at an agreed upon price.  At September 30, 2004, the aggregate fair value of these commitments exceeded the book value of the loans to be sold.

 

Off-balance sheet financial instruments whose contract amounts represent credit and interest rate risk are summarized as follows (dollars in thousands):

 

 

 

September 30,
2004

 

December 31, 2003

 

Commitments to originate new loans

 

$

6,119

 

$

3,077

 

Unfunded commitments to extend credit under existing equity line and commercial lines of credit

 

5,053

 

5,612

 

Commercial letters of credit

 

439

 

175

 

Commitments to sell loans held for sale

 

29,240

 

34,666

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company’s main sources of liquidity, as a holding company, are dividends from the Bank, investment income and net proceeds from borrowings and capital securities offerings.  As a new organization, the Company expects its main uses of liquidity initially will be the payment of interest to the issuer of trust preferred securities.  The ability of the Bank to pay dividends is subject to various regulatory limitations.  As part of the reorganization of the Company, the Company received a capital contribution of $400,000 from the Bank.

 

Liquidity describes our ability to meet the financial obligations that arise during the ordinary course of business.  Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures.  Our primary sources of funds are deposits, scheduled amortization and prepayments of loan principal and mortgage-backed securities, maturities and calls of securities and funds provided by our operations.  Our ability to maintain and expand our deposit base and borrowing capabilities is an important source of liquidity.  In addition to core deposits, we regularly utilize wholesale funding sources such as brokered deposits and FHLB advances.  At September 30, 2004, we had $44.0 million in outstanding borrowings.

 

We closely monitor and maintain appropriate levels of interest earning assets and interest bearing liabilities so that maturities of assets are such that adequate funds are provided to meet customer withdrawals and loan demand.  In addition, we continue to explore various capital management strategies such as share repurchases and the issuance of trust preferred securities.

 

During the quarter ended September 30, 2003, the Bank purchased 210,876 shares of American Bank common stock from dissenters to the reorganization for an aggregate of $1,358,000.

 

17



 

The Bank is required to maintain sufficient liquidity to ensure its safe and sound operation.  As required by recent legislation, the OTS recently deleted its requirement that federal savings associations maintain a certain minimum level of liquid assets.  Instead, adequate liquidity is assessed by the OTS on a case-by-case basis by reviewing such factors as the institution’s overall asset/liability structure, market conditions, competition and the nature of the institution’s activities.  The OTS considers both an institution’s liquidity ratio as well as safety and soundness issues in assessing whether an institution has sufficient liquidity.  The Bank has ample liquidity to meet its outstanding loan commitments.  At September 30, 2004, the Bank had outstanding loan commitments totaling $6,119,000 and other commitments under lines of credit totaling $28,129,000.

 

Quantitative measures established by bank regulations to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) and risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined).  As of September 30, 2004, the Bank meets all capital adequacy requirements to which it is subject.

 

As of September 30, 2004, the most recent notification from the OTS categorized the Bank as “well capitalized”.  To be categorized as “well capitalized” the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table.  There have been no conditions or events since that notification that management believes that would have changed the Bank’s capital classification.  The Bank’s actual capital amounts and ratios are as follows (in thousands):

 

 

 

ACTUAL

 

ACTUAL%

 

REQUIRED

 

REQ’D%

 

EXCESS

 

Core

 

$

18,750

 

7.29

%

$

10,285

 

4.0

%

$

8,465

 

Tangible

 

18,750

 

7.29

 

3,857

 

1.5

 

14,893

 

Risk-based

 

20,321

 

10.95

 

14,840

 

8.0

 

5,481

 

 

18



 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at September 30, 2004, which are expected to mature or reprice in each of the time periods shown.

 

American Bank Holdings, Inc.

Repricing Schedule as of September 30, 2004

(in thousands)

 

 

 

Less than
One Year

 

One Year to
Five Years

 

Five Years to Ten
Years

 

More than Ten
Years

 

Totals

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

90,727

 

$

39,351

 

$

6,121

 

$

34,324

 

$

170,523

 

Other interest-earning assets

 

7,077

 

 

 

 

7,077

 

Investment securities

 

3,964

 

1,037

 

9,649

 

26,371

 

41,021

 

Total interest-earning assets

 

101,768

 

40,388

 

15,770

 

60,695

 

218,621

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of Deposit

 

84,026

 

50,787

 

 

 

134,813

 

Money market deposits

 

9,486

 

16,175

 

4,624

 

 

30,285

 

NOW and Statement accounts

 

4,727

 

12,062

 

10,839

 

 

27,628

 

Borrowings

 

32,093

 

15,000

 

 

 

47,093

 

Total interest-bearing liabilities

 

130,332

 

94,024

 

15,463

 

 

239,819

 

GAP

 

(28,564

)

(53,636

)

307

 

60,695

 

 

 

Cumulative GAP

 

(28,564

)

(82,200

)

(81,893

)

(21,198

)

 

 

Cum. GAP/total assets

 

-13.1

%

-37.6

%

-37.5

%

-9.7

%

 

 

 

The following assumptions were used by the Company’s management in order to prepare the Company’s GAP (repricing schedule) table set forth above.  Loans are shown based on contractual maturity and schedule repricing for fixed-rate and adjustable-rate mortgages, respectively.  The mortgage-backed securities and collateralized mortgage obligations portion of the investment securities portfolio are shown based on contractual maturity as scheduled repricing for fixed-rate and adjustable-rate securities, respectively.  Agency securities are shown in the period in which they contractually mature.  No prepayment assumptions or call assumptions are reflected for any interest-earning assets.  Deposits without contractual maturities are shown based on OTS decay rates.

 

The interest rate sensitivity of the Company’s assets and liabilities could vary substantially if different assumptions are used.  Moreover, certain shortcomings are inherent in the methods of analysis presented in the above GAP table.  Although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates.  The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, whereas interest rates on other types of assets and liabilities may lag behind changes in market interest rates.  Certain assets, such as adjustable-rate mortgages have features that restrict changes in interest rates on a short-term basis and over the life of the assets.  In the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table.  The ability of many borrowers to service their debt may decrease in the event of an interest rate increase.

 

The Company’s results of operations depend to a large extent on the level of the Company’s net interest income.  If interest rate fluctuations cause the Company’s cost of funds to increase faster than the yield of its interest-bearing assets, then its net interest income will be reduced.  At September 30, 2004, the Company’s one-year interest sensitivity “gap” (the percentage by which its interest sensitive assets in a given period exceed its interest sensitive liabilities for the same period) was negative 13.1%.   The Company has emphasized shorter-

 

19



 

term deposits, which tend to reprice on a basis more consistent with the short-term duration of the Company’s typical loan products.  In addition, the Company’s management classifies certain securities as available-for-sale to provide flexibility for liquidity purposes.  If the need to sell an asset for liquidity or other purposes arises, management believes that there are adequate securities classified as available-for-sale with a positive mark-to-market and that such sale would not have a material impact on results of operations.

 

The Company’s management believes that the Company’s interest rate risk position at September 30, 2004 represents a reasonable amount of interest rate risk.

 

FORWARD-LOOKING STATEMENTS

 

Certain statements in Management’s Discussion and Analysis are forward-looking statements within the meaning of the Securities Act of 1934, as amended.  Actual results, performance or developments may differ materially from those expressed or implied by such forward-looking statements as a result of market uncertainties and other factors related to the Company’s business.  The financial services market generally, and the market for the Company’s products and services specifically, is characterized by a high degree of competition and rapidly changing local, national and global market, financial and economic conditions, and interest rate fluctuations/market conditions.  Such developments, as well as unforeseen developments in the financial services industry, could have an adverse impact on the Company’s financial position and results of operations.

 

Item 3.  CONTROLS AND PROCEDURES

 

The Company’s management, including the Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the periods covered by this report.  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms.

 

There were no significant changes in the Company’s internal controls over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

Except as described below, other than ordinary and routine litigation incidental to the business of the Company, the Company or its subsidiaries is not a party to, nor is its property the subject of any material pending legal proceedings.

 

Howard Little, Robin Brandt, Gary Brandt, and David Goldstein have filed an action against the Bank and other defendants, including the United States of America, in the United States District Court for the Middle District of Florida.  This action was commenced on August 31, 2000.  The claim arises out of statements allegedly made by former Bank personnel to federal investigators in 1994.  Plaintiffs allege that as a result of these statements and others, the plaintiffs were wrongly indicted by a federal grand jury and were ultimately acquitted of the charges.  The Bank filed a motion to dismiss the plaintiffs’ claims which was denied by the court in September 2001.  The initial scheduling conference has occurred and discovery has begun.  In November 2003, we filed a motion for summary judgment on the plaintiffs’ claims.  During the third quarter of 2004, the court denied the motion for summary judgment.  Accordingly, the court has scheduled the case for trial.  The Company has tendered this case to its insurance carrier and they have agreed to defend the claim.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

Not applicable.

 

20



 

Item 3.  Defaults Upon Senior Securities

 

Not applicable.

 

Item 4.  Submission of Matters to a Vote of Security Holders

 

Not applicable.

 

Item 5.  Other Information

 

Not applicable.

 

Item 6.   Exhibits

 

3.1                                 Restated Certificate of Incorporation of the Company (incorporated by reference to exhibit 3.1 to Amendment No. 1 to the Company’s Registration Statement on Form S-4, Registration No. 333-102410, filed with SEC on January 28, 2003).

 

3.2                                 Amended and Restated Bylaws of the Company (incorporated by reference to exhibit 3.2 to Amendment No. 1 to the Company’s Registration Statement on Form S-4, Registration No. 333-102410, filed with SEC on January 28, 2003).

 

31.1                           302 Certification of Chief Executive Officer

 

31.2                           302 Certification of Chief Financial Officer

 

32.1                           906 Certifications of Chief Executive Officer

 

32.2                           906 Certifications of Chief Financial Officer

 

21



 

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, there unto duly authorized.

 

 

 

AMERICAN BANK HOLDINGS, INC.

 

(Registrant)

 

 

 

 

 

Date: November 12, 2004

 

 

 

 

 

/s/ Phillip C. Bowman

 

 

Phillip C. Bowman

 

President and Chief Executive Officer

 

 

 

 

 

/s/ John M. Wright

 

 

John M. Wright