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AKPB > SEC Filings for AKPB > Form 10-Q on 14-May-2013All Recent SEC Filings

Show all filings for ALASKA PACIFIC BANCSHARES INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for ALASKA PACIFIC BANCSHARES INC


14-May-2013

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which are based on assumptions and describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the word "believe," "expect," "intend," anticipate," "estimate," "project," or similar words. The Company's ability to predict results or the actual effect of future plans or strategies is uncertain. These forward-looking statements relate to, among other things, expectations of the business environment in which we operate, projections of future performance, perceived opportunities in the market, potential future credit experience, and statements regarding our mission and vision. These forward-looking statements are based upon current management expectations, and may, therefore, involve risks and uncertainties. Our actual results, performance, or achievements may differ materially from those suggested, expressed, or implied by forward-looking statements as a result of a wide variety or range of factors including, but not limited to: the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs that may be impacted by deterioration in the housing and commercial real estate markets and may lead to increased losses and non-performing assets in our loan portfolio, result in our allowance for loan losses not being adequate to cover actual losses, and require us to materially increase our reserves; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources; deposit flows; fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real estate values in our market areas; adverse changes in the securities markets; results of examinations of by the Board of Governors of the Federal Reserve System ("FRB") or "Federal Reserve") and our bank subsidiary by the Office of the Comptroller of the Currency ("OCC") and the Federal Deposit Insurance Corporation ("FDIC"), or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings; computer systems on which we depend could fail or experience a security breach, or the implementation of new technologies may not be successful; our ability to retain key members of our senior management team; legislative or regulatory changes such as the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") and implementing regulations that adversely affect our business including changes in regulatory policies and principles, and the interpretation of regulatory capital or other rules including changes related to Basel III; the time it may take to lease excess space in Company-owned buildings; future legislative changes affecting the United States Department of Treasury TARP Capital Purchase Program; and other risks detailed in our reports filed with the SEC, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2012. Accordingly, these factors should be considered in evaluating forward-looking statements, and undue reliance should not be placed on such statements. We undertake no responsibility to update or revise any forward-looking statements.


Regulatory Matters

On September 28, 2010, the Company and the Bank each entered into an Order to Cease and Desist with the OTS (individually an "Order" and collectively the "Orders"). As a result of the elimination of the OTS on July 21, 2011, the FRB, the Company's new primary bank regulator, and the OCC, the Bank's new primary bank regulator continued to administer the Company's and Bank's Order, respectively. On August 14, 2012, the OCC terminated the Bank's Order and on February 1, 2013 the Federal Reserve terminated the Company's Order.

Critical Accounting Policies

The discussion and analysis of the Company's financial condition and results of operations are based upon the Company's condensed consolidated interim financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of the financial statements. The most significant estimates are the allowance for loan losses, valuation of real estate owned and repossessed assets, valuation of deferred tax assets and valuation of mortgage servicing rights. Actual results may differ from these estimates under different assumptions or conditions.

Accounting for the allowance for loan losses involves significant judgment and assumptions by management, which has a material impact on the carrying value of net loans. Management considers this accounting policy to be a critical accounting policy. We maintain an allowance for loan losses consistent, in all material respects, with the GAAP guidelines. The allowance has three components:
(i) a formula allowance for groups of homogeneous loans, (ii) a specific valuation allowance for identified problem loans and (iii) an unallocated allowance. Each of these components is based upon estimates that can change over time. The formula allowance is based primarily on historical experience and as a result can differ from actual losses incurred in the future. The history is reviewed at least quarterly and adjustments are made as needed. Various techniques are used to arrive at specific loss estimates, including historical loss information, discounted cash flows and fair market value of collateral. The use of these techniques is inherently subjective and the actual losses could be greater or less than the estimates. For further details, see "Results of Operations - Provision for Loan Losses" included in this Form 10-Q.

The allowance for loan losses represents management's best estimate of incurred credit losses inherent in the Company's loan portfolio as of the balance sheet date. The estimate of the allowance is based on a variety of factors, including past loan loss experience, the current credit profile of borrowers, adverse situations that have occurred that may affect a borrower's ability to meet their financial obligations, the estimated value of underlying collateral, general economic conditions, and the impact that changes in interest rates and employment conditions have on a borrower's ability to repay adjustable-rate loans.


The fair value of impaired loans is determined using a discounted cash flow basis or the fair value of each loan's collateral for collateral-dependent loans as determined, when possible, by an appraisal of the property, less estimated costs related to liquidation of the collateral. The appraisal amount may also be adjusted for current market conditions. Adjustments to reflect the fair value of collateral-dependent loans are a component in determining our best estimate of the allowance for loan losses.

Interest is generally not accrued on any loan when its contractual payments are more than 90 days delinquent unless collection of interest is considered probable. In addition, interest is not recognized on any loan where management has determined that collection is not reasonably assured. A nonaccrual loan may be restored to accrual status when delinquent principal and interest payments are brought current and future monthly principal and interest payments are expected to be collected.

Real estate owned and repossessed assets primarily represents real estate and other assets which the Bank has taken control of in partial or full satisfaction of loans. At the time of foreclosure, real estate owned and repossessed assets are recorded at the lower of the carrying amount of the loan or fair value less costs to sell, which becomes the property's new basis. Any write-downs based on the asset's fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, management periodically performs valuations when possible, by an appraisal of the property, such that the real estate is carried at the lower of its new cost basis or fair value, net of estimated costs to sell. Fair value adjustments on real estate owned and repossessed assets are recognized within results of operations.

As of March 31, 2013 and December 31, 2012, the Company had recorded a net deferred income tax asset (which is included in other assets in the accompanying Condensed Consolidated Balance Sheets) of $528,000 and $525,000, respectively. The realization of deferred income tax assets is assessed and a valuation allowance is recorded if it is "more likely than not" that all or a portion of the deferred tax asset will not be realized. "More likely than not" is defined as greater than a 50% probability of occurrence. All available evidence, both positive and negative, is considered to determine whether, based on the weight of that evidence, a valuation allowance is needed. Management's assessment is primarily dependent on historical taxable income and projections of future taxable income, which are directly related to the Company's core earnings capacity and its prospects to generate core earnings in the future. In assessing the need for a valuation allowance, we examine our historical cumulative trailing three-year pre-tax income (loss) quarterly. If we have historical cumulative income, we consider this to be strong positive evidence. To the extent we do not have cumulative income, we examine this to determine if there were any unusual or non-recurring items which would not be indicative of our operating results or expected to occur in the future. The Company will not be able to recognize the tax benefits on future losses until it can show that it is more likely than not that it will generate enough taxable income in future periods to realize the benefits of its deferred tax asset and loss carryforwards.

The Company, however, cannot give any assurance that in the future its deferred tax asset will


not be impaired since such determination is based on projections of future earnings, which are subject to uncertainty and estimates that may change given uncertain economic outlook, banking industry conditions and other factors.

The Company accounts for MSR in accordance with ASC 860-50, Servicing Assets and Liabilities, which provides that changes in fair value will be reported in earnings in the period in which the change occurs. See Note 2 of the Selected Notes to Condensed Consolidated Interim Financial Statements for information regarding the Company's methodology to estimate the fair value of MSR.

Recent Accounting Pronouncements

In October 2012, the FASB issued ASU No. 2012-06, Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution. ASU No. 2012-06 clarifies that when an entity recognizes an indemnification asset as a result of a government-assisted acquisition of a financial institution and subsequently, a change in the cash flows expected to be collected on the indemnification asset occurs, as a result of a change in cash flows expected to be collected on the assets subject to indemnification, the reporting entity should subsequently account for the change in the measurement of the indemnification asset on the same basis as the change in the assets subject to indemnification. Any amortization of changes in value should be limited to the contractual term of the indemnification agreement. The amendments are effective for annual and interim reporting periods beginning on or after December 15, 2012. The adoption of ASU No. 2012-06 did not have a material impact on the Company's consolidated financial statements.

In January 2013, the FASB issued ASU No. 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. ASU No. 2013-01 clarifies that ASU No. 2011-11 applies only to derivatives, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset or subject to an enforceable master netting arrangement or similar agreement. Entities with other types of financial assets and financial liabilities subject to a master netting arrangement or similar agreement are no longer subject to the disclosure requirements in ASU No. 2011-11. The amendments are effective for annual and interim reporting periods beginning on or after January 1, 2013. The adoption of ASU No. 2013-01 did not have a material impact on the Company's consolidated financial statements.

In February 2013, the Financial Accounting Standards Board ("FASB") issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This ASU requires an entity to provide information about the amounts of reclassified out of accumulated other comprehensive income by component and to present either on the face of the statement where net income is presented, or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. The ASU is effective for annual and interim reporting periods beginning on or after December 15, 2012. The adoption of ASU No. 2013-02 did not have a material impact on


the Company's consolidated financial statements.

Financial Condition

Total assets of the Company at March 31, 2013 were $175.0 million, a decrease of $7.1 million or 3.9%, from $182.1 million at December 31, 2012. The decrease is primarily the result of a decrease in loans held for sale and cash and cash equivalents.

Loans (excluding loans held for sale and the allowance for loan losses) were $148.4 million at both March 31, 2013 and at December 31, 2012. Commercial business loans increased $2.0 million, or 8.6%, to $25.2 million offset by a decline in permanent commercial non-residential loans of $1.9 million, or 2.6%. Loans held for sale were $748,000 at March 31, 2013, a $2.5 million decrease from $3.2 million at December 31, 2012.

Deposits decreased $4.1 million, or 2.6%, to $152.4 million at March 31, 2013, compared with $156.5 million at December 31, 2012. The decrease is primarily the result of a seasonal decrease in demand deposit accounts.

The Bank began using CDARS deposits in 2005 as an alternative source of funds in addition to advances from the FHLB. These are insured time deposits obtained through the nationwide Certificate of Deposit Account Registry Service. They range in maturities from one month to three years, and are generally priced higher than locally obtained deposits but are generally less expensive than other brokered deposits. Included in certificates of deposit were CDARS deposits of $1.0 million at March 31, 2013. There were no CDARS deposits included in certificates of deposit at December 31, 2012.

Total shareholders' equity increased by $52,000, or 0.3% and was $20.9 million at March 31, 2013 compared with $20.8 million at December 31, 2012. The change in shareholders' equity during the three months ended March 31, 2013 was primarily attributable to net income of $140,000 offset by preferred stock dividends of $60,000.

Results of Operations

Net Income. Net income excluding the preferred stock dividend and discount accretion for the first quarter of 2013 and 2012 was $140,000 and $174,000, respectively. After preferred stock dividend and discount accretion of $79,000 and $77,000, net income available to common shareholders for the first quarter of 2013 and 2012 was $61,000 and $97,000, or $0.08 and $0.13 per diluted share, respectively.


For purposes of comparison, income can be separated into major components as follows:

                                                    Three Months Ended
                                                         March 31,
                                                                       Income
(in thousands)                             2013         2012        Incr. (Decr.)

Net interest income                      $  1,890     $  1,943     $           (53 )
Noninterest income                            548          413                 135
Provision for loan losses                     (60 )        (90 )                30
Noninterest ex­pense                       (2,149 )     (1,979 )              (170 )
Income before provision for income tax        229          287                 (58 )
Provision for income tax                      (89 )       (113 )                24
Net income                               $    140     $    174     $           (34 )

Net Interest Income. Net interest income for the first quarter of 2013 decreased $53,000 compared with the first quarter of 2012. Average loans decreased $159,000, or 0.1%, to $148.8 million for the first quarter of 2013 compared to $149.0 million for the first quarter of 2012. At the same time, the average yield on loans decreased 18 basis points ("bp") for the first quarter of 2013 to 5.33% compared to 5.51% for the first quarter of 2012 as a result of a continued low interest rate environment and non-performing loans. Average interest bearing deposits increased $6.0 million, or 5.3%, to $118.8 million for the first quarter of 2013 compared to $112.8 million for the first quarter of 2013. The cost of average interest bearing liabilities declined six bp to 0.36% for the first quarter of 2013 compared to 0.42% for the first quarter of 2012. The interest rate spread, which is the difference between the yield on average interest-earning assets and the average cost of interest-bearing liabilities, decreased 40 bp to 4.30% for the first quarter 2013 compared to 4.70% for the first quarter of 2012.

Provision for Loan Losses. The provision for loan losses was $60,000 for the first quarter of 2013 compared to $90,000 for the first quarter of 2012. The provisions in these periods reflect management's assessment of asset quality, overall risk, and estimated loan impairments and were considered appropriate in order to maintain the allowance for loan losses at a level that represents management's best estimate of the probable credit losses inherent in the loan portfolio. There were no net loan charge-offs for the first quarter of 2013. Net loan charge-offs were $36,000 for the first quarter of 2012.

Noninterest Income. Noninterest income for the first quarter of 2013 increased $135,000, or 32.7%, to $548,000 compared with $413,000 for the first quarter of 2012. The increase in noninterest income during the first quarter was primarily attributable to an increase in mortgage banking income. Gain on sale of loans income increased $112,000 to $222,000 for the first quarter of 2013 compared with $110,000 for the first quarter of 2012, as a result of an increase in mortgage loans originated for sale.


Noninterest Expense. Noninterest expense for the first quarter of 2013 increased $170,000, or 8.6%, to $2.1 million compared to $2.0 million for the comparable period in 2012. The increase was primarily related to an increase of $119,000 in compensation and benefits expense and an increase of $50,000 in other expenses offset with a decrease of $48,000 in real estate owned and repossessed assets expense.

Provision for income taxes: Provision for income taxes was $78,000 for the first quarter of 2013, a decrease of $35,000 or 31.0%, compared to $113,000 for the first quarter of 2012.

Asset Quality

Nonaccrual loans were $4.2 million at March 31, 2013, a decrease of $1.5 million, or 25.7%, compared with $5.7 million at December 31, 2012. The decrease is due primarily to one commercial business loan for $1.4 million that was transferred to real estate owned and repossessed assets.

Loans with balances totaling $11.1 million at March 31, 2013 and $11.6 million at December 31, 2012 were considered to be impaired. At March 31, 2013 and December 31, 2012, there were 22 and 21 impaired loans, respectively. In evaluating the adequacy of the allowance for loan losses, total estimated impairments of $473,000 were specifically reserved on impaired loans at March 31, 2013 and December 31, 2012.

The following table reflects loan balances considered to be impaired by asset type at March 31, 2013 and December 31, 2012.

                                             March 31,       December 31,
            (in thousands)                     2013              2012
            Commercial non residential      $     8,368     $        7,363
            Permanent one- to four-family           286                291
            Land                                  2,020              2,021
            Consumer                                  8                  8
            Commercial business                     466              1,898
              Total impaired loans          $    11,148     $       11,581

At March 31, 2013, 89% of impaired loans totaling $9.9 million included loans to six borrowers. Additional information regarding these borrowers, by market area as of March 31, 2013 is provided in the following table:

                                                                            Loan Balance
                                                                           March 31, 2013
Loan Type                                              Market Area         (in thousands)
Land                                                   Alaska             $          2,020
Commercial real estate                                 Alaska                        1,328
Commercial real estate                                 Idaho                         2,378
Commercial real estate                                 Alaska                        2,295
Commercial real estate                                 Alaska                          801
Commercial real estate                                 Alaska                        1,040
  Total - Impaired loans of six largest credit
relationships                                                             $          9,862


The Bank had $1.8 million and $344,000 of real estate owned and repossessed assets at March 31, 2013 and December 31, 2012, respectively. The $1.4 million increase in 2013 is due to one commercial business loan secured by land, a floating vessel and investment securities for $1.4 million that was transferred to real estate owned and repossessed assets.

Liquidity and Capital Resources

The Company's primary sources of funds are deposits, borrowings, and principal and interest payments on loans. While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. The Company's primary investing activity is loan originations. The Company maintains liquidity levels it believes to be adequate to fund loan commitments, investment opportunities, deposit withdrawals and other financial commitments. In addition, the Bank has available a line of credit with the FHLB generally equal to the lower of 25% of the Bank's total assets, or pledged collateral of approximately $44.8 million at March 31, 2013, of which $42.8 million was unused. At March 31, 2013, $2.0 million of the borrowing line was committed to secure public deposits. There was $3.0 million outstanding on the borrowing line in addition to $2.0 million of the line committed to secure public deposits at December 31, 2012.

As disclosed in our Condensed Consolidated Statements of Cash Flows in Item 1 of this Quarterly Report on Form 10-Q, cash and cash equivalents decreased $7.1 million to $11.6 million as of March 31, 2013, from $18.8 million as of December 31, 2012. Net cash provided by operating activities was $3.2 million for the three months ended March 31, 2013. Net cash of $3.3 million was used in investing activities during the three months ended March 31, 2013 and consisted principally of loan originations, net of principal repayments and purchases of investment securities available for sale. The $7.1 million of cash used in financing activities during the three months ended March 31, 2013 primarily consisted of a $4.4 million net decrease in demand deposits and $3.0 million in repayments on FHLB advances.

At March 31, 2013, management had no knowledge of any trends, events or uncertainties that may have material effects on the liquidity, capital resources, or operations of the Company.

The Company and the Bank exceeded all of its regulatory capital requirements at March 31, 2013. See Note 6 of the Selected Notes to Condensed Consolidated Interim Financial Statements contained herein for information regarding the Bank's regulatory capital position at March 31, 2013.


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