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American Bank Holdings Inc (1213219) SEC Filing 10-Q Quarterly report for the period ending Friday, September 30, 2005

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, 2005.

 

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

 

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

incorporation or organization)

 

 

 

 

 

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

o  Yes   ý  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)

 

2,201,688

Class

 

Outstanding at November 10, 2005

 

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,
2005

 

December 31,
2004

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

8,126

 

$

2,370

 

Interest-bearing deposits in other banks

 

9,112

 

284

 

Total cash and cash equivalents

 

17,238

 

2,654

 

 

 

 

 

 

 

Investment securities available for sale

 

33,982

 

25,824

 

Investment securities held-to-maturity

 

14,567

 

14,585

 

Loans held for sale

 

22,463

 

21,586

 

 

 

 

 

 

 

Loans

 

204,355

 

178,701

 

Allowance for loan losses

 

1,924

 

1,940

 

Net loans

 

202,431

 

176,761

 

 

 

 

 

 

 

Foreclosed real estate, net

 

 

123

 

Premises and equipment, net

 

1,626

 

1,670

 

Federal Home Loan Bank of Atlanta Stock, at cost

 

2,458

 

1,936

 

Cash surrender value of life insurance

 

2,622

 

2,564

 

Accrued interest receivable and other assets

 

4,555

 

3,320

 

Total assets

 

$

301,942

 

$

251,023

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

229,985

 

$

196,533

 

Advances from the Federal Home Loan Bank

 

43,500

 

32,500

 

Advance payments by borrowers for taxes and insurance

 

249

 

248

 

Junior subordinated obligations

 

3,093

 

3,093

 

Accrued expenses and other liabilities

 

3,665

 

1,577

 

Total liabilities

 

280,492

 

233,951

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

Preferred stock, par value $0.001 per share, authorized 10,000,000 shares, no shares issued and outstanding in 2005 and 2004

 

 

 

Common stock $0.001 par value per share, 10,000,000 shares authorized with 2,201,688 and 1,941,489 shares issued and outstanding at September 30, 2005 and December 31, 2004, respectively.

 

2

 

2

 

Additional paid-in capital

 

12,318

 

10,073

 

Retained earnings

 

9,530

 

7,272

 

Accumulated other comprehensive loss

 

(400

)

(275

)

Total stockholders’ equity

 

21,450

 

17,072

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

301,942

 

$

251,023

 

 

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

 

 

 

2005

 

2004

 

2005

 

2004

 

Interest Income

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

10,887

 

$

8,650

 

$

4,091

 

$

3,159

 

Interest and dividends on investments

 

1,731

 

1,459

 

596

 

492

 

Other interest income

 

72

 

25

 

38

 

11

 

Total interest income

 

12,690

 

10,134

 

4,725

 

3,662

 

 

 

 

 

 

 

 

 

 

 

Interest Expense

 

 

 

 

 

 

 

 

 

Interest on deposits

 

3,857

 

2,343

 

1,441

 

895

 

Interest on borrowings

 

1,705

 

1,502

 

663

 

515

 

Total interest expense

 

5,562

 

3,845

 

2,104

 

1,410

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

7,128

 

6,289

 

2,621

 

2,252

 

Provision for loan losses

 

103

 

541

 

68

 

221

 

Net interest income after provision for loan losses

 

7,025

 

5,748

 

2,553

 

2,031

 

 

 

 

 

 

 

 

 

 

 

Other Income

 

 

 

 

 

 

 

 

 

Loan service charges and late fees

 

320

 

193

 

93

 

72

 

Gain on sale of loans

 

3,528

 

4,233

 

1,352

 

1,560

 

Deposit service charges

 

190

 

176

 

77

 

68

 

Gain on sale of securities

 

 

36

 

 

 

Other income

 

61

 

88

 

23

 

30

 

Total other income

 

4,099

 

4,726

 

1,545

 

1,730

 

 

 

 

 

 

 

 

 

 

 

Non-Interest Expenses

 

 

 

 

 

 

 

 

 

Salaries and related expenses

 

5,116

 

4,821

 

1,769

 

1,800

 

Occupancy expense, net

 

764

 

654

 

254

 

229

 

Deposit insurance premiums

 

72

 

63

 

24

 

20

 

Legal and professional expenses

 

232

 

337

 

75

 

99

 

Data processing

 

506

 

516

 

179

 

192

 

Net cost of operations of foreclosed assets

 

(14

)

302

 

(8

)

82

 

Other expenses

 

828

 

964

 

301

 

298

 

Total non-interest expense

 

7,504

 

7,657

 

2,594

 

2,720

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

3,620

 

2,817

 

1,504

 

1,041

 

Provision for income taxes

 

1,362

 

1,097

 

570

 

404

 

Net income

 

$

2,258

 

$

1,720

 

$

934

 

$

637

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Common Share

 

$

1.13

 

$

0.89

 

$

0.45

 

$

0.33

 

Diluted Earnings Per Common Share

 

$

1.08

 

$

0.86

 

$

0.43

 

$

0.32

 

 

The accompanying notes 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, 2005 and 2004

(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 January 1, 2004

 

$

2

 

$

9,787

 

$

4,791

 

$

(269

)

$

14,311

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net income for nine months ended September 30, 2004

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2004

 

$

2

 

$

10,073

 

$

7,272

 

$

(275

)

$

17,072

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net income for nine months ended September 30, 2005

 

 

 

 

 

2,258

 

 

 

2,258

 

Net change in unrealized gains (losses) on available-for-sale securities, net of taxes
of $79

 

 

 

 

 

 

 

(125

)

(125

)

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

2,133

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of stock (237,150 shares)

 

 

 

2,134

 

 

 

 

 

2,134

 

Exercise of stock options (23,049 shares)

 

 

 

111

 

 

 

 

 

111

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2005

 

$

2

 

$

12,318

 

$

9,530

 

$

(400

)

$

21,450

 

 

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)

 

2005

 

2004

 

Operating activities

 

 

 

 

 

Net income

 

$

2,258

 

$

1,720

 

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

 

 

 

 

 

Depreciation and amortization

 

245

 

243

 

Net accretion of discounts and amortization of premiums

 

(7

)

22

 

Securities gains, net

 

 

(36

)

Provision for loan losses

 

103

 

541

 

Provision for loss on foreclosed assets

 

 

239

 

Net (gain) loss on sale of foreclosed assets

 

(3

)

10

 

Amortization of deferred loan fees

 

(381

)

(219

)

Loans originated for resale

 

(153,617

)

(166,944

)

Proceeds from sales of loan originated for resale

 

156,268

 

175,851

 

Gain on sale of loans

 

(3,528

)

(4,233

)

Earnings on life insurance policies

 

(58

)

(86

)

(Increase) decrease in interest receivable and other assets

 

(1,235

)

21

 

Increase (decrease) in other liabilities

 

2,088

 

(141

)

Net cash used in operating activities

 

2,474

 

6,988

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

Proceeds from sales of investment securities available for sale

 

 

1,455

 

Proceeds from maturities of investment securities available for sale

 

 

5,000

 

Purchase of investment securities available for sale

 

(14,059

)

(1,754

)

Proceeds from maturities of investment securities held to maturity

 

 

1,000

 

Purchase of investment securities held to maturity

 

 

(3,740

)

Principal collected on mortgage-backed securities

 

5,926

 

1,540

 

Principal collected on loans

 

38,300

 

54,283

 

Loans originated or acquired

 

(63,817

)

(84,370

)

Proceeds from sale of foreclosed assets

 

126

 

285

 

Purchases of premises and equipment

 

(216

)

(365

)

Disposal of premises and equipment

 

15

 

 

Purchase of stock in the Federal Home Loan Bank

 

(3,762

)

(1,050

)

Proceeds from redemption of stock in the Federal Home Loan Bank

 

3,240

 

1,479

 

Net cash used in investing activities

 

(34,247

)

(26,237

)

 

 

 

 

 

 

Financing activities

 

 

 

 

 

Net increase in deposits and escrow accounts

 

33,453

 

36,184

 

Proceeds from borrowings

 

96,500

 

25,500

 

Repayment of borrowings

 

(85,500

)

(42,575

)

Issuance of shares of common stock

 

2,134

 

 

Proceeds from exercise of stock options

 

111

 

194

 

Net cash provided by financing activities

 

46,698

 

19,303

 

 

 

 

 

 

 

Increase in cash and cash equivalents

 

14,584

 

54

 

Cash and cash equivalents as of January 1

 

2,654

 

4,398

 

Cash and cash equivalents as of September 30

 

$

17,238

 

$

4,452

 

 

 

 

 

 

 

Other Cash Flow Information

 

 

 

 

 

Interest paid

 

$

5,434

 

$

3,771

 

Income taxes paid

 

$

1,715

 

$

1,175

 

 

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, 2005 and 2004

 

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 and parent of American Bank Holdings Statutory Trust I.  The consolidated financial statements include the accounts of the Company and the Bank.  All intercompany accounts and transactions have been eliminated in the accompanying financial statements.

 

The consolidated financial statements as of September 30, 2005 and for the three and nine months ended September 30, 2005 and 2004 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 310(b) of Regulation S-B, 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, 2005 and the results of consolidated operations for the three and nine months ended September 30, 2005 and 2004 and consolidated cash flows for the nine months ended September 30, 2005 and 2004.  The consolidated statement of financial condition of December 31, 2004 is derived from the Company’s audited consolidated financial statements.

 

The results of the consolidated operations for the nine months ended September 30, 2005 are not necessarily indicative of results that may be expected for the entire year ending December 31, 2005.  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 consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the 2004 annual report of American Bank Holdings, Inc. 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, 2005 was determined by dividing net income by 2,098,579 and 2,004,962, 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, 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.  Diluted earnings per share for the three and nine months ended September 30, 2005 was determined by dividing net income by 2,185,444 and 2,085,101, 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, 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.  Common stock equivalents consist of outstanding stock options, if such options are dilutive.

 

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

 

5



 

compensation cost is the excess, if any, of the quoted market price of the stock at the 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,

 

 

 

2005

 

2004

 

2005

 

2004

 

Net income, as reported

 

$

2,258

 

$

1,720

 

$

934

 

$

637

 

 

 

 

 

 

 

 

 

 

 

Deduct: Total stock-based compensation expense determined under fair value method for all awards, net of tax

 

(4

)

(16

)

(1

)

(5

)

 

 

 

 

 

 

 

 

 

 

Net income, as adjusted

 

$

2,254

 

$

1,704

 

$

933

 

$

632

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share - As reported

 

1.13

 

0.89

 

0.45

 

0.33

 

- Pro forma

 

1.12

 

0.89

 

0.45

 

0.33

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share - As reported

 

1.08

 

0.86

 

0.43

 

0.32

 

- Pro forma

 

1.08

 

0.86

 

0.43

 

0.31

 

 

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 I issued at par $3.0 million of adjustable rate mandatorily redeemable preferred securities (trust capital securities) to third-party investors and loaned the proceeds to the Company.  The preferred securities are non-voting, mandatorily redeemable in 2033, and guaranteed by the Company.  The Company’s guarantee, together with its other obligations under the relevant agreements, constitutes a full, irrevocable, and unconditional guarantee by the Company of the securities issued by the Trust.  The entire net proceeds to the Trust from the offering were invested in junior subordinated obligations of the Company, which are the sole assets of the Trust.  American Bank Holdings Statutory Trust I issued mandatorily redeemable preferred securities (trust capital securities) to third-party investors and loaned the proceeds to 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.

 

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 are written conditional commitments issued by the Company to guarantee the performance of a customer to 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 $1,303,000 of standby letters of credit as of September 30, 2005.  Management believes that the proceeds obtained through a liquidation of collateral would be sufficient to cover the potential amount of future payments required under the corresponding guarantees.  The current amount of the liability as of September 30, 2005 for guarantees under standby letters of credit issued is not material.

 

6



 

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, 2004.  The Company evaluates performance based on profit and loss from operations before income taxes not including nonrecurring gains and losses.  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, 2005

 

Bank

 

Mortgage
Banking

 

Eliminations

 

Consolidated
Totals

 

Interest and dividend income

 

$

12,569

 

$

1,147

 

$

(1,026

)

$

12,690

 

Interest expense

 

5,562

 

1,026

 

(1,026

)

5,562

 

Net interest income

 

7,007

 

121

 

 

7,128

 

Provision for loan losses

 

103

 

 

 

103

 

Net interest income after provision for loan losses

 

6,904

 

121

 

 

7,025

 

Other income

 

571

 

3,528

 

 

4,099

 

Non-interest expenses

 

5,037

 

2,467

 

 

7,504

 

Income before income taxes

 

2,438

 

1,182

 

 

3,620

 

Provision for income taxes

 

907

 

455

 

 

1,362

 

Net income

 

$

1,531

 

$

727

 

$

 

$

2,258

 

 

 

 

 

 

 

 

 

 

 

At September 30, 2005

 

 

 

 

 

 

 

 

 

Segment assets

 

$

279,479

 

$

22,463

 

$

 

$

301,942

 

Segment equity

 

19,302

 

3,010

 

 

22,312

 

 

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

 

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 equity

 

14,405

 

1,895

 

 

16,300

 

 

7



 

Three months ended September, 2005

 

Bank

 

Mortgage
Banking

 

Eliminations

 

Consolidated
Totals

 

Interest and dividend income

 

$

4,662

 

$

505

 

$

(442

)

$

4,725

 

Interest expense

 

2,104

 

442

 

(442

)

2,104

 

Net interest income

 

2,558

 

63

 

 

2,621

 

Provision for loan losses

 

68

 

 

 

68

 

Net interest income after provision for loan losses

 

2,490

 

63

 

 

2,553

 

Other income

 

193

 

1,352

 

 

1,545

 

Non-interest expenses

 

1,666

 

928

 

 

2,594

 

Income before income taxes

 

1,017

 

487

 

 

1,504

 

Provision for income taxes

 

383

 

187

 

 

570

 

Net income

 

$

634

 

$

300

 

$

 

$

934

 

 

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

 

Income before income taxes

 

471

 

570

 

 

1,041

 

Provision for income taxes

 

184

 

220

 

 

404

 

Net income

 

$

287

 

$

350

 

$

 

$

637

 

 

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)              Recent Accounting Pronouncements

 

In January 2003, the FASB’s Emerging Issues Task Force (EITF) issued EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investors” (“EITF 03-1”), and in March 2004, the EITF issued an update. EITF 03-1 addresses the meaning of other-than-temporary impairment and its application to certain debt and equity securities. EITF 03-1 aids in the determination of impairment of an investment and gives guidance as to the measurement of impairment loss and the recognition and disclosures of other-than-temporary investments. EITF 03-1 also provides a model to determine other-than-temporary impairment using evidence-based judgment about the recovery of the fair value up to the cost of the investment by considering the severity and duration of the impairment in relation to the forecasted recovery of the fair value. In July 2005, FASB adopted the recommendation of its staff to nullify key parts of EITF 03-1. The staff’s recommendations were to nullify the guidance on the determination of whether an investment is impaired as set forth in paragraphs 10-18 of Issue 03-1 and not to provide additional guidance on the meaning of other-than-temporary impairment. Instead, the staff recommends entities recognize other-than-temporary impairments by applying existing accounting literature such as paragraph 16 of SFAS 115.

 

In July 2005, the FASB issued a proposed interpretation of FAS 109, “Accounting for Income Taxes”, to clarify certain aspects of accounting for uncertain tax positions, including issues related to the recognition and measurement of those tax positions. If adopted as proposed, the interpretation would be effective in the fourth quarter of 2005, and any adjustments required to be recorded as a result of adopting the interpretation would be reflected as a cumulative effect from a change in accounting principle. We are currently in the process of determining the impact of adoption of the interpretation as proposed on our financial position or results of operations.

 

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123(R), “Share-Based Payment.”  Statement No. 123(R) revised Statement No. 123, “Accounting for Stock-Based

 

8



 

Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related implementation guidance.  Statement No. 123(R) will require compensation costs related to share-based payment transactions to be recognized in the financial statements (with limited exceptions).  The amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued.  Compensation cost will be recognized over the period that an employee provides service in exchange for the award.

 

On April 14, 2005, the Securities and Exchange Commission (“SEC”) adopted a new rule that amends the compliance dates for Statement No. 123 (R). Under the new rule, the Company is required to adopt SFAS No. 123(R) on July 1, 2006. The Company has not yet determined the method of adoption or the effect of adopting SFAS No. 123(R), and it has not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS No. 123.

 

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 through the Bank, which is American Bank, a federally chartered savings bank with six branch offices.  The Bank’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 and a loan production/leasing office in Charlotte, North Carolina.  Deposits in the Bank are insured to applicable limits by the Federal Deposit Insurance Corporation.  As of September 30, 2005, the Bank had 71 employees, 63 of whom work full time.

 

The Company recorded net income of $934,000, or $0.43 per diluted share, for the quarter ended September 30, 2005 as compared to net income of $637,000, or $0.32 per diluted share, for the quarter ended September 30, 2004.  Net income for the first nine months of 2005 was $2,258,000, or $1.08 per diluted share, as compared to $1,720,000, or $0.86 per diluted share, for the first nine months of 2004.  The increase in net income for both the three and nine months ended September 30, 2005 was attributable primarily to the increase in net interest income.

 

CRITICAL ACCOUNTING POLICIES

 

The Company’s significant accounting policies are set forth in note 1 of the consolidated financial statements as of December 31, 2004 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

 

9



 

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, 2005 compared to December 31, 2004)

 

Total assets increased by $50.9 million, or 20.3%, to $301.9 million at September 30, 2005 compared to December 31, 2004.  Total loans outstanding increased by $26.6 million from $198.3 million at December 31, 2004 to $224.9 million at September 30, 2005.  The Company originated $217.8 million of loans during the nine months ended September 30, 2005 as compared to $251.6 million during the same period in 2004.  Investment securities available-for-sale increased by $8.2 million from year-end 2004 to September 30, 2005.  Cash and cash equivalents increased by $14.6 million during the nine months ended September 30, 2005.  The increase in cash and cash equivalents is primarily due to the timing of incoming deposits and the funding of mortgage loans sold to investors.

 

A summary of loans receivable at September 30, 2005 and December 31, 2004 follows (dollars in thousands):

 

 

 

September
2005

 

December
2004

 

Real Estate Mortgage Loans

 

 

 

 

 

One to four family residential mortgage loans

 

$

29,567

 

$

18,002

 

Multi-family residential mortgage loans

 

1,648

 

1,806

 

Commercial real estate loans

 

26,970

 

24,553

 

Construction loans

 

77,922

 

71,921

 

Second mortgage loans

 

164

 

364

 

Land loans

 

27,188

 

20,821

 

Corporate Loans

 

 

 

 

 

Secured corporate loans

 

40,618

 

35,809

 

Secured commercial leases

 

18,917

 

17,161

 

Unsecured corporate loans

 

1,735

 

1,048

 

Consumer Loans

 

 

 

 

 

Marine loans

 

24,447

 

20,442

 

Home equity lines of credit

 

14,434

 

14,574

 

 

 

 

 

 

 

Other consumer loans

 

897

 

1,892

 

 

 

264,507

 

228,393

 

Undisbursed portion of loans in process

 

(60,168

)

(49,667

)

Deferred loan origination (fees) and costs

 

16

 

(25

)

 

 

 

 

 

 

Allowance for loan losses

 

(1,924

)

(1,940

)

 

 

 

 

 

 

Net loans receivable

 

$

202,431

 

$

176,761

 

 

Net loans increased by $25.7 million to $202.4 million at September 30, 2005 compared to $176.8 million at December 31, 2004.  The increase in loans resulted primarily from an increase in residential mortgage loans, commercial real estate loans, construction loans, secured corporate loans, secured corporate leases and marine loans.

 

Nonperforming assets, net (including nonaccrual loans, foreclosed real estate and repossessed assets) decreased by $371,000 to $630,000 at September 30, 2005 compared to $1.0 million at December 31, 2004.  The decrease in non-performing assets resulted primarily from a sale of nine non-performing loans during the first quarter of 2005 and the sale of foreclosed real estate during the second quarter of 2005.  The non-performing loans had $135,000 of reserves which were specifically allocated to them and were subsequently sold for a $123,000 loss.  Thus approximately $12,000 of reserves were allocated to the remaining loan portfolio during the first quarter of 2005.  Total nonperforming assets, net, as a percentage of total assets were 0.2% at September 30, 2005 and 0.4% at December 31, 2004.

 

10



 

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

 

 

 

September 30,
2005

 

December 31,
2004

 

Non-accrual loans:

 

 

 

 

 

 

 

 

 

 

 

One to four family residential mortgage loans

 

$

317

 

$

530

 

 

 

 

 

 

 

Commercial real estate loans

 

37

 

43

 

 

 

 

 

 

 

Commercial

 

263

 

280

 

 

 

 

 

 

 

Consumer loans

 

13

 

6

 

 

 

 

 

 

 

Total non-accrual loans

 

$

630

 

$

859

 

 

 

 

 

 

 

Foreclosed real estate, net

 

 

123

 

 

 

 

 

 

 

Repossessed assets, net

 

 

19

 

 

 

 

 

 

 

Total nonperforming assets

 

$

630

 

$

1,001

 

 

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.  These changes, however, 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 twelve loans, amounting to $630,000, as of September 30, 2005, which are classified as substandard assets.  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.  In addition to the non-accrual loans we have identified through normal internal credit review, four loans totaling $724,000 that warrant increased attention at September 30, 2005 compared with eight loans totaling $1.3 million at December 31, 2004.  These loans are classified as “watch” as they exhibit certain risk factors which have the potential to cause them to become non-performing.  Accordingly, these credits are reviewed on at least a quarterly basis and were considered in our evaluation of the allowance for loan losses at September 30, 2005.  None of these loans were considered impaired and as such, no specific impairment allowance was established for these loans.  The Company had an allowance for loan losses of $1.9 million, or 0.85% of the total loans outstanding, at September 30, 2005, and $1.9 million, or 0.97% of total loans outstanding, at December 31, 2004.  Management believes the allowance is adequate based on the review of the underlying collateral securing the non-accrual loans.

 

11



 

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 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, 2005 and at December 31, 2004.  The Company had an allowance for other repossessed assets of $160,000 and $173,000 at September 30, 2005 and at December 31, 2004.  At September 30, 2005 the repossessed assets net balance was zero, due to the assets being fully reserved for losses.

 

The Company had unrealized gains of $21,000 and unrealized losses of $673,000, on its investment securities available-for-sale portfolio at September 30, 2005.  The amortized cost of this portfolio was $34.6 million at that date.  There were unrealized gains of $2,000 and unrealized losses of $201,000 on its investment securities held-to-maturity portfolio at September 30, 2005, 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 increased by $8.2 million from December 31, 2004 to September 30, 2005 due to the purchase of investment securities available-for-sale offset by the repayment of principal on mortgage-backed securities.  The Company’s investment securities held-to-maturity portfolio remained constant.  The unrealized losses are considered temporary as they reflect fair values at September 30, 2005 and are subject to change daily as interest rates fluctuate.  Factors considered in determining whether a loss is temporary include the length of time and extent to which fair value had been below cost; the financial condition and near term prospects of the issuer; and the company’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery.

 

Deposits increased by $33.5 million during the nine months ended September 30, 2005.  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 $42.7 million while certificates of deposit decreased by $9.2 million during the first nine months of 2005.  The deposits at September 30, 2005 had an average interest rate of 2.74%.  Advances from the Federal Home Loan Bank increased by $11.0 million during the first nine months of 2005.  The advances from the Federal Home Loan Bank at September 30, 2005 had an average interest rate of 4.54%.

 

The Company’s stockholders’ equity increased by $4.4 million, to $21.5 million at September 30, 2005 compared to $17.1 million at December 31, 2004.  The increase was due primarily to current period earnings, proceeds received from the issuance of stock offset by an increase in net unrealized holding losses on investments available for sale.  At September 30, 2005, the Bank was 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) 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, 2005

 

9 Months Ended September 30, 2004

 

 

 

Average
Balance

 

Interest

 

Interest
Rate

 

Average
Balance

 

Interest

 

Interest
Rate

 

Interest-bearing assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

215,332

 

$

10,887

 

6.74

%

$

193,746

 

$

8,650

 

5.95

%

Investment securities

 

49,417

 

1,731

 

4.67

%

45,199

 

1,459

 

4.30

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

3,598

 

72

 

2.67

%

3,322

 

25

 

1.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing assets

 

$

268,347

 

$

12,690

 

6.31

%

$

242,267

 

$

10,134

 

5.58

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

199,422

 

$

3,857

 

2.58

%

$

165,942

 

$

2,343

 

1.88

%

FHLB advances & Other Borrowings

 

54,404

 

1,705

 

4.18

%

61,801

 

1,502

 

3.24

%

Total interest-bearing liabilities

 

$

253,826

 

$

5,562

 

2.92

%

$

227,743

 

$

3,845

 

2.25

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average interest rate spread

 

 

 

 

 

3.39

%

 

 

 

 

3.33

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income/margin

 

 

 

$

7,128

 

3.55

%

 

 

$

6,289

 

3.47

%

 

 

 

3 Months Ended September 30, 2005

 

3 Months Ended September 30, 2004

 

 

 

Average
Balance

 

Interest

 

Interest
Rate

 

Average
Balance

 

Interest

 

Interest
Rate

 

Interest-bearing assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

230,684

 

$

4,091

 

7.09

%

$

208,941

 

$

3,159

 

6.05

%

Investment securities

 

52,401

 

596

 

4.55

%

44,471

 

492

 

4.43

%

Other

 

4,076

 

38

 

3.73

%

3,712

 

11

 

1.19

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing assets

 

$

287,161

 

$

4,725

 

6.58

%

$

257,124

 

$

3,662

 

5.70

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

209,009

 

$

1,441

 

2.76

%

$

179,002

 

$

895

 

2.00

%

FHLB advances & Other Borrowings

 

61,409

 

663

 

4.32

%

63,043

 

515

 

3.27

%

Total interest-bearing liabilities

 

$

270,418

 

$

2,104

 

3.11

%

$

242,045

 

$

1,410

 

2.33

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average interest rate spread

 

 

 

 

 

3.47

%

 

 

 

 

3.37

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income/margin

 

 

 

$

2,621

 

3.62

%

 

 

$

2,252

 

3.48

%

 

13



 

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 AND SEPTEMBER 30, 2004

 

General.  The Company recorded net income of $934,000, or $0.43 per diluted share, for the three months ended September 30, 2005 as compared to net income of $637,000, or $0.32 per diluted share, for the three months ended September 30, 2004.  The increase in net income for the three month period was attributable primarily to the increase in net interest income and a decrease in the provision for loan losses.

 

Net interest income, after provision for loan losses, increased by $522,000 for the three months ended September 30, 2005 when compared to the same period in 2004.  Other income decreased by $185,000 and non-interest expense decreased by $126,000 during the three months ended September 30, 2005 compared to the same period in 2004.  The decrease in operating expense was primarily due to a reduction in legal expenses and costs of operations of foreclosed real estate.

 

Net Interest Income.  The Company’s net interest income increased by $369,000 during the three months ended September 30, 2005 as compared to the same period in 2004.  The increase was primarily due to the increase in average volume of interest-earning assets.

 

Provision for Loan Losses.  The Company’s provision for loan losses decreased by $153,000 to $68,000 during the three months ended September 30, 2005 compared to the same period in 2004.  The decrease was due to the Company providing less in the current quarter based on the periodic reviews of the underlying collateral securing loans held in portfolio.  The Company had an allowance for loan losses of $1.9 million, or 0.85% of the total loans outstanding, at September 30, 2005, and $1.9 million, or 0.97% of total loans outstanding, at December 31, 2004.

 

Other Income.  The Company’s other income decreased by $185,000 to $1.5 million during the three months ended September 30, 2005 compared to the same period in 2004.  The decrease was due to less 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 sold decreased by $1.9 million during the three months ended September 30, 2005 as compared to the same period in 2004 and the average gain percentage on the sale of loans decreased.  Any future increase in interest rates may further 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 that tend to be less sensitive to changes in interest rates.  The change in product mix primarily focuses on originating more 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 Three Months
Ended
September 30,

 

 

 

 

 

 

 

2005

 

2004

 

$ Change

 

% Change

 

Salaries and related expenses

 

$

1,769

 

$

1,800

 

$

(31

)

(1.7

)%

Occupancy expense, net

 

254

 

229

 

25

 

10.9

 

Deposit insurance premiums

 

24

 

20

 

4

 

20.0

 

Legal and professional expenses

 

75

 

99

 

(24

)

(24.2

)

Data processing

 

179

 

192

 

(13

)

(6.8

)

Net cost of operations of foreclosed assets

 

(8

)

82

 

(90

)

(109.8

)

Advertising

 

23

 

29

 

(6

)

(20.7

)

Loan fees and expenses

 

82

 

77

 

5

 

6.5

 

Other expenses

 

196

 

192

 

4

 

2.1

 

 

 

$

2,594

 

$

2,720

 

$

(126

)

(4.6

)%

 

14



 

The Company’s non-interest expense decreased by $126,000 to $2.6 million during the three months ended September 30, 2005 compared to the same period in 2004.  The decrease in non-interest expense was primarily due to the decrease in compensation and employee benefit expense, cost of operations of foreclosed assets and legal expenses.  The decrease in compensation and employee benefit expenses was primarily due to the issuance of a severance package to an executive officer in 2004, while this expense did not occur in 2005.  The increase in occupancy costs is due to the opening of the new branch during the third quarter of 2004.  The cost of operations of foreclosed assets decreased due to the provision for losses totaling $259,000 on foreclosed real estate in the third quarter of 2004.  The decrease in legal and professional expenses is due to less legal work being performed related to substandard loans and the Littell case in the current year as compared to the same period in 2004.

 

Income Taxes.  Income tax expense for the three months ended September 30, 2005, totaled $570,000, resulting in an effective tax rate of 37.9%, as compared to tax expense of $404,000, resulting in an effective tax rate of 38.8% for the same period in 2004.  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, 2005 AND SEPTEMBER 30, 2004

 

General.  The Company recorded net income of $2.3 million, or $1.08 per diluted share, for the nine months ended September 30, 2005 as compared to net income of $1.7 million, or $0.86 per diluted share, for the nine months ended September 30, 2004.  The increase in net income for the nine month period was attributable primarily to the increase in net interest income and a decrease in the provision for loan losses.

 

Net interest income, after provision for loan losses, increased by $1.3 million for the nine months ended September 30, 2005 when compared to the same period in 2004.  Other income decreased by $627,000 and non-interest expense decreased by $153,000 during the nine months ended September30, 2005 compared to the same period in 2004.  The decrease in operating expense was primarily due to additional compensation and employee benefit expenses, and occupancy expenses, offset by a decrease in cost of operations of foreclosed assets and legal expenses.

 

Net Interest Income.  The Company’s net interest income increased by $839,000 during the nine months ended September 30, 2005 as compared to the same period in 2004.  The increase was primarily due to the increase in average volume of interest-earning assets.

 

Provision for Loan Losses.  The Company’s provision for loan losses decreased by $438,000 to $103,000 during the nine months ended September 30, 2005 compared to the same period in 2004.  The decrease was due to the Company providing less in the current quarter based on the periodic reviews of the underlying collateral securing loans held in portfolio.  The Company had an allowance for loan losses of $1.9 million, or 0.85% of the total loans outstanding, at September 30, 2005, and $1.9 million, or 0.97% of total loans outstanding, at December 31, 2004.

 

Other Income.  The Company’s other income decreased by $627,000 to $4.1 million during the nine months ended September 30, 2005 compared to the same period in 2004.  The decrease was due to less 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 sold decreased by $19.6 million during the nine months ended September 30, 2005 as compared to the same period in 2004 and the average gain percentage on the sale of loans decreased.  Any future increase in interest rates may further 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 that tend to be less sensitive to changes in interest rates.  The change in product mix primarily focuses on originating more 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.

 

15



 

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

 

 

 

For the Nine Months Ended
September 30,

 

 

 

 

 

 

 

2005

 

2004

 

$ Change

 

% Change

 

Salaries and related expenses

 

$

5,116

 

$

4,821

 

$

295

 

6.1

%

Occupancy expense, net

 

764

 

654

 

110

 

16.8

 

Deposit insurance premiums

 

72

 

63

 

9

 

14.3

 

Legal and professional expenses

 

232

 

337

 

(105

)

(31.2

)

Data processing

 

506

 

516

 

(10

)

(1.9

)

Net cost of operations of foreclosed assets

 

(14

)

302

 

(316

)

(104.6

)

Advertising

 

77

 

111

 

(34

)

(30.6

)

Loan fees and expenses

 

203

 

248

 

(45

)

(18.1

)

Other expenses

 

548

 

605

 

(57

)

(9.4

)

 

 

$

7,504

 

$

7,657

 

$

(153

)

(2.0

)%

 

The Company’s non-interest expense decreased by $153,000 to $7.5 million during the nine months ended September 30, 2005 compared to the same period in 2004.  The decrease in non-interest expense was primarily due to the increase in compensation and occupancy costs offset by a decrease in cost of operations of foreclosed assets and legal expenses. The increase in compensation and employee benefit expenses was primarily due to additional staff hired in the branch network and the ongoing payments to a former executive officer under a non compete agreement.  The increase in occupancy costs is due to the opening of the new branch during the third quarter of 2004.  The cost of operations of foreclosed assets decreased due to the provision for losses totaling $259,000 on foreclosed real estate in the third quarter of 2004.  The decrease in legal and professional expenses is due to less legal work being performed related to substandard loans and the Littell case in the current year as compared to the same period in 2004.

 

Income Taxes.  Income tax expense for the nine months ended September 30, 2005, totaled $1.4 million, resulting in an effective tax rate of 37.6%, as compared to tax expense of $1.1 million, resulting in an effective tax rate of 38.9% for the same period in 2004.  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.

 

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.

 

The Company enters into rate lock commitments to extend credit to borrowers for generally a 15-day to 60-day period for the origination of loans. Unfunded loans for which commitments have been entered into are called “pipeline loans.” Some of these rate lock commitments will ultimately expire without being completed. To the extent that a loan is ultimately granted and the borrower ultimately accepts the terms of the loan, these rate lock commitments expose the Company to variability in their fair value due to changes in interest rates. If interest rates

 

16



 

increase, the value of these rate lock commitments decreases. Conversely, if interest rates decrease, the value of these rate lock commitments increases.

 

To mitigate the effect of interest rate risk, the Company usually enters into offsetting derivative contracts, primarily in the form of loan sale commitments. The loan sale commitments lock in an interest rate and price for the sale of loans similar to the specific rate lock offered to the borrower on the loan. The Company utilizes two types of loan sale commitments: a best efforts contract or a mandatory contract. Best efforts contracts are usually entered into prior to the loan being originated and have an expiration date between 30 and 60 days from the date of the contract. Under these contracts, to the extent that a loan is ultimately granted, the Company would sell the loan to the investor within the guidelines of the loan sale commitment. Since there is no net settlement or penalty with the investor if these loans are not ultimately sold to the investor, these contracts are not considered to be derivatives. Mandatory contracts are entered into only after a loan is closed and pre-approval of the loan is received from the investor. These contracts typically have an expiration date between 15 and 45 days from the date of the contract. Under these contracts, the Company is obligated to sell the loan to the investor and deliver the loan to the investor by the expiration date. The mandatory contracts do meet the definition of a derivative and are to be recorded on the balance sheet at fair value. The risk on these contracts is mitigated by the fact that these contracts are only entered into on closed loans which are pre-approved by the investor and have very short expiration dates. However, there may be occasions where the Company originates a mortgage loan held for sale and the subsequent sale of the loan is not completed, which typically occurs only on the best efforts contracts. In these cases, generally the commitment would have expired and the Company would evaluate each loan on a case-by-case basis to decide whether to continue to classify the loan as held for sale. At September 30, 2005, the aggregate fair value of these loan sale commitments (based on the cash flows expected from the sale of the loans) was $314,000 on the $13.9 million of the particular loans to be sold under these commitments. Of the $13.9 million of notional loan sale commitments, $10.7 million of these contracts were mandatory and $3.2 million of these contracts were best efforts. For the periods ended September 30, 2005 and December 31, 2004, the fair value of the derivative associated with the mandatory contracts was not material. The Company had $8.5 million of loans classified as held for sale that did not have loan sale commitments as of September 30, 2005, of which $1.9 million of these loans previously had loan sale commitments which had expired. The Company continues to have the intent and ability to sell these loans during the life of the loan even though no commitment to sell the loan exists at this time.

 

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

 

 

 

September 30, 2005

 

December 31, 2004

 

Commitments to originate new loans

 

$

6,016

 

$

4,200

 

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

 

7,173

 

5,619

 

Commercial letters of credit

 

1,303

 

492

 

Notional commitments to sell loans held for sale

 

13,908

 

15,792

 

Rate lock commitments

 

5,822

 

4,853

 

 

Rate lock commitments related to the origination of mortgage loans that will be held for sale must be accounted for as derivative instruments. Such commitments, along with any related fees received from potential borrowers, are recorded at fair value on the balance sheet, with changes in fair value recorded in the net gain or loss on sale of mortgage loans. Fair value is based on fees currently charged to enter into similar agreements, and for fixed-rate commitments, also considers the difference between current levels of interest rates and the committed rates. For the periods ended September 30, 2005 and December 31, 2004, the fair value of the derivative was not material.

 

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.  The Company’s main use of liquidity is 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.

 

17



 

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.  The Bank’s 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, 2005, we had $43.5 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.

 

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.

 

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, 2005, the Bank meets all capital adequacy requirements to which it is subject.

 

As of September 30, 2005, the most recent notification from the regulatory 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

 

$

23,581

 

7.83

%

$

12,046

 

4.0

%

$

11,535

 

Tangible

 

23,581

 

7.83

 

4,517

 

1.5

 

19,064

 

Risk-based

 

25,505

 

11.78

 

17,319

 

8.0

 

8,186

 

 

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, 2005, which are expected to mature or reprice in each of the time periods shown.

 

American Bank Holdings, Inc.

Repricing Schedule as of September 30, 2005

(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

 

$

102,473

 

$

53,740

 

$

8,338

 

$

37,880

 

$

202,431

 

Investment securities

 

952

 

1,009

 

9,629

 

36,959

 

48,549

 

Other interest-earning assets

 

11,570

 

 

 

 

11,570

 

Total interest-earning assets

 

$

114,995

 

$

54,749

 

$

17,967

 

$

74,839

 

$

262,550

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of Deposit

 

$

104,458

 

$

9,417

 

$

99

 

$

 

$

113,974

 

Money market deposits

 

23,023

 

39,258

 

11,224

 

 

73,505

 

NOW & Statement accounts

 

7,273

 

18,557

 

16,676

 

 

42,506

 

Borrowings & Junior subordinated obligations

 

3,093

 

25,000

 

18,500

 

 

46,593

 

Total interest-bearing liabilities

 

$

137,847

 

$

92,232

 

$

46,499

 

$

 

$

276,578

 

GAP

 

(22,852

)

(37,483

)

(28,532

)

74,839

 

 

 

Cumulative GAP

 

$

(22,852

)

$

(60,335

)

$

(88,867

)

$

(14,028

)

 

 

Cum. GAP/total assets

 

(8.70

)%

(22.98

)%

(33.85

)%

(5.34

)%

 

 

 

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, 2005, 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 8.7%.  The Company has emphasized shorter-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

 

19



 

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, 2005 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) or 15(d)-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period 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 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