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AKPB > SEC Filings for AKPB > Form 10-K on 26-Mar-2014All Recent SEC Filings

Show all filings for ALASKA PACIFIC BANCSHARES INC

Form 10-K for ALASKA PACIFIC BANCSHARES INC


26-Mar-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

General

The following discussion is intended to assist in understanding the consolidated financial condition and results of operations of the Company. The Company is not engaged in any significant business activity other than holding the stock of the Bank. Accordingly, the information in this discussion applies primarily to the Bank. The information contained in this section should be read in conjunction with the consolidated financial statements and the accompanying notes included in Item 8 of this annual report. In the following discussion, except as otherwise noted, references to "2013" or "2012" indicate the year ended December 31, 2013 or 2012, respectively.

Our results of operations depend primarily on its net interest income, which is the difference between the income earned on its interest-earning assets, consisting of loans and investments, and the cost of its interest-bearing liabilities, consisting of deposits and FHLB borrowings. Our profitability is also affected by our provision for loan losses, the level of noninterest income and expenses and income tax provisions. Noninterest income includes service charges and fees and gain on sale of loans and investments. Noninterest expenses primarily include compensation and benefits, occupancy and equipment expenses, deposit insurance premiums and data processing expenses. General economic and competitive conditions, particularly changes in market interest rates, government legislation and policies concerning monetary and fiscal affairs, housing and financial institutions and the attendant actions of the regulatory authorities also significantly affect our results of operations.

In the fourth quarter of 2013, the Company decided to discontinue its mortgage loan origination operations and shut down the operation by the end of December 2013. No significant proceeds are expected from the sale of any related assets, since most of the assets will be absorbed into other operations of the Company. In the past, income derived from mortgage loan originations consisted of interest income from loans, gain on sale of loans and related loan fees.

Operating Strategy

Our strategy is to operate a community-oriented financial institution devoted to serving the needs of its customers. Our business consists primarily of attracting retail deposits from the general public and using those funds to originate residential real estate loans, land, construction, commercial non-residential real estate loans, commercial business loans, and a variety of consumer loans.

Financial Condition

Total assets were $176.7 million at December 31, 2013, compared with $182.1 million at December 31, 2012. The $5.4 million, or 3.0%, decrease was primarily the result of a decrease in total deposits of $2.0 million and a decrease in FHLB advances of $3.0 million.

Net loans decreased $1.9 million, or 1.3%, to $144.6 million at December 31, 2013 from $146.5 million at December 31, 2012. The decrease was largely attributable to a decrease in one-to-four-family mortgage loans and commercial non-residential real estate loans partially offset by an increase in construction and commercial business loans.

Total commercial non-residential real estate loans decreased 3.6% to $70.8 million, or 48.3% of the portfolio at December 31, 2013, from $73.4 million, or 49.5% of the portfolio at December 31, 2012. Land loans increased 1.9% to $8.3 million, or 5.6% of the portfolio at December 31, 2013, from $8.1 million, or 5.5% of the portfolio at December 31, 2012. Total commercial business loans increased 7.4% to $25.0 million, or 17.0% of the portfolio at December 31, 2013, from $23.2 million, or 15.7% of the portfolio at December 31, 2012.

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Production of one-to-four-family mortgage loans decreased in 2013. Originations totaled $33.6 million in 2013, a 9.7% decrease compared to the $37.2 million originated in 2012. Most of these loans were sold in the secondary market and, as a result, total one-to-four-family mortgages declined to 12.4% of the loan portfolio at December 31, 2013, compared with 14.5% of the loan portfolio at December 31, 2012.

Cash and cash equivalents decreased $200,000 to $18.6 million at December 31, 2013, compared to $18.8 million at December 31, 2012.

Available-for-sale securities increased $1.3 million to $5.6 million at December 31, 2013, compared to $4.3 million at December 31, 2012. The increase was the result of investments purchased net of normal principal reductions on mortgage-backed securities.

Premises and equipment decreased $200,000 to $3.0 million at December 31, 2013, from $3.2 million at December 31, 2012. The decrease in net book value was attributable to depreciation and amortization.

Total deposits decreased $2.0 million to $154.5 million at December 31, 2013 from $156.5 million at December 31, 2012. Money market accounts decreased a total of $400,000 to $32.5 million at December 31, 2013 compared to $32.9 million a year ago. During the same period, interest bearing demand deposits increased $2.2 million to $36.5 million and non-interest bearing demand deposits decreased $3.4 million to $33.3 million. Certificates of deposit decreased $800,000 to $28.0 million at December 31, 2013 from $28.8 million at December 31, 2012 as we managed this reduction by competing less aggressively for these deposits to reduce our cost of funds.

At December 31, 2013, $1.0 million of the certificates of deposit were brokered certificates of deposit obtained through the Certificate of Deposit Account Registry Service ("CDARS") CDARS. These deposits carry interest rates that are generally higher than locally obtained certificates of deposit, but which are generally lower than FHLB advances. There were no certificates of deposit that were brokered certificates of deposit obtained through CDARS at December 31, 2012.

There were no FHLB advances at December 31, 2013. FHLB advances were $3.0 million at December 31, 2012.

Results of Operations

Net Income. For the year ended December 31, 2013, the Company reported net income available to common shareholders of $13,000, or $0.02 per diluted share, after recording $180,000 provision for loan losses and $552,000 provision for income tax. This compares to a net income available to common shareholders of $166,000, or $0.22 per diluted share at December 31, 2012, after recording $300,000 provision for loan losses and $152,000 provision for income tax. The net income in 2013 was primarily attributable to an increase in noninterest income and decrease in noninterest expense offset by an increase in provision for income tax. For purposes of comparison, net income available to common shareholders may be separated into major components as follows:

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                                                                                 Income Increase
(in thousands) Year ended December 31,                 2013          2012           (Decrease)
Net interest income                                  $   7,815     $   7,892     $            (77 )
Gain on sale of loans                                      570           570                    -
Other noninterest income                                 1,487         1,226                  261
Net revenues                                             9,872         9,688                  184
Noninterest expense                                     (8,811 )      (8,757 )                (54 )
Subtotal                                                 1,061           931                  130
Provision for loan losses                                 (180 )        (300 )                120
Income before income tax                                   881           631                  250
Income tax provision                                      (552 )        (152 )               (400 )
Net Income                                                 329           479                 (150 )
Preferred stock dividend and discount accretion           (316 )        (313 )                 (3 )
Net income available to common shareholders          $      13     $     166     $           (153 )

Net Interest Income. Net interest income decreased $77,000 and was $7.8 million in 2013 compared to $7.9 million in 2012. The decrease was due to a combination of factors, including a decrease in interest income offset with a decrease in interest expense. See the tables in "--Average Balances, Interest and Average Yields/Cost" and in "--Rate/Volume Analysis" elsewhere in this discussion. The net interest margin on average earning assets was 4.59% for 2013 compared with 4.72% in 2012 reflecting a decrease in yield on interest earning assets partially offset with a decline in cost of funds. Nonaccrual loans were $5.8 million and $5.7 million at December 31, 2013 and 2012, respectively. As of December 31, 2013 and 2012, approximately $168,000 and $234,000, respectively, of interest would have been recorded if these loans had been current according to their original terms.

Average loans (including nonperforming loans and loans held for sale) decreased $1.7 million, or 1.1%, to $149.2 million in 2013 from $150.9 million in 2012.

Noninterest Income. The gain on sale of loans was $570,000 in both 2013 and 2012.

Excluding gain on sale of loans, noninterest income increased $261,000, or 21.3%, to $1.5 million in 2013 compared with $1.2 million in 2012. The increase was primarily in mortgage servicing income due to the fair value adjustment to mortgage servicing rights net of originations and disposals of $271,000 in 2013 compared with $(35,000) in 2012.

Noninterest Expense. Noninterest expense was $8.8 million in both 2013 and 2012. Professional and consulting fees were higher in 2013 compared to 2012, offset with lower real estate owned and repossessed asset expense, FDIC assessment and other expenses.

Income Tax. During the third quarter of 2013, the Company increased its provision for income taxes by $208,000 and deferred income tax assets were reduced for amounts determined not to be realizable in future periods. There was no valuation allowance for deferred tax assets at December 31, 2013 or 2012. Provision for income tax was $552,000 in 2013 compared with $152,000 in 2012.

Provision and Allowance for Loan Losses

Provisions for loan losses are charges to earnings to bring the total allowance for loan losses to a level considered by management to be adequate to provide for known and inherent risks in the loan portfolio, including management's continuing analysis of factors underlying the quality of the loan portfolio.

The provision for loan losses decreased $120,000 to $180,000 for 2013 from $300,000 for 2012. The provision for both years was considered appropriate in order for the allowance for loan losses to reflect management's best estimate of losses inherent in the loan portfolio. The allowance for loan losses was $1.9 million at both December 31, 2013 and

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December 31, 2012. The provision and the resulting allowance are reflective of numerous factors, including the following:

Loan losses. Net loan charge offs were $146,000 (0.10% of total loans) in 2013 compared with $289,000 (0.19% of total loans) in 2012.

Growth and composition of the portfolio. Total loans decreased $1.9 million to $146.5 million at December 31, 2013 compared with $148.4 million at December 31, 2012. The decrease reflects gradual changes in the loan portfolio composition away from single-family mortgages and home equity loans, moving to a greater proportion of commercial business and construction loans. Management considered the higher relative risk of these loans in assessing the adequacy of the allowance.

Management analysis of loans. As part of an assessment of the adequacy of the allowance, management performed a detailed review of individual loans for which full collectability may not be assured. Loans judged to be impaired amounted to $10.1 million (6.9% of total loans) at December 31, 2013, compared with $11.6 million (7.8% of total loans) at December 31, 2012. An allowance for loan loss at both December 31, 2013 and 2012 for estimated impairments of $473,000 was established for these loans.

Past-due Loans. At December 31, 2013, $1.9 million, or 1.3% of total loan balances were past due 30 days or more, compared with $5.0 million, or 3.3% at December 31, 2012.

Nonperforming and classified loans. Nonaccrual loans were $5.8 million (3.9% of total loans) at December 31, 2013, compared with $5.7 million (3.8% of total loans) at December 31, 2012. Loans, less guaranteed amounts, classified as "substandard" or "doubtful" were $6.8 million (4.7% of total loans) at December 31, 2013 compared with $7.2 million (4.8% of total loans) at December 31, 2012.

Economic conditions. Management considered known economic conditions in each of the geographic areas in which the Bank makes loans. For the last several years, Southeast Alaska's economy has been relatively "flat" but stable, and management knows of no current economic conditions that warrant expectations of significant decline in the Bank's markets. However, uncertainties in both the national and local economies have been considered in assessing the allowance.

Our evaluation of the adequacy of the allowance for loan losses is one of its most critical management processes and is also the most subjective. While management believes that it uses the best information available to determine the allowance for loan losses, unforeseen market conditions and other events might result in adjustment to the allowance if circumstances differ substantially from the assumptions used in making the final determination. One or more of these events could have a significant effect on net income, and the effect could be both material and adverse.

For further information on our accounting for the allowance for loan losses as well as how loan impairment is determined, see Note 1 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.

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Average Balances, Interest and Average Yields/Cost

Our earnings depend largely on the spread between the yield on interest-earning assets, which consist primarily of loans and investments, and the cost of interest-bearing liabilities, which consist primarily of deposit accounts and borrowings, as well as the relative size of our interest-earning assets and interest-bearing liabilities.

The following table sets forth, for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread, net interest margin, and ratio of average interest-earning assets to average interest-bearing liabilities. Average balances are generally daily averages for the period.

 (dollars in
thousands)
Year ended December
31,                                       2013                                        2012
                                                       Average                                     Average
                          Average                       Yield/        Average                       Yield/
                          Balance       Interest         Cost         Balance       Interest         Cost
Interest-earning
assets:
Loans (1)                $ 149,219     $    8,082           5.42 %   $ 150,930     $    8,309           5.51 %
Investment securities
(1)                          7,352            116           1.58         7,257            131           1.81
Interest-earning
deposits in banks           13,843             35           0.25         8,868             19           0.21
Total interest-earning
assets                     170,414          8,233           4.83       167,055          8,459           5.06
Allowance for loan
losses                      (1,947 )                                    (1,901 )
Cash and due from
banks                        1,682                                       1,854
Other assets                 6,932                                       6,790
Total assets             $ 177,081                                   $ 173,798

Interest-bearing
liabilities:
Deposits:
Interest-bearing
demand                   $  34,536     $       14           0.04 %   $  32,508     $       13           0.04 %
Money market                33,404             71           0.21        30,939             72           0.23
Savings                     23,729             16           0.07        21,613             21           0.10
Certificates of
deposit                     27,652            292           1.06        30,863            348           1.13
Total interest-bearing
deposits                   119,321            393           0.33       115,923            454           0.39
Borrowings                     686             25           3.64         3,133            113           3.61
Total interest-bearing
liabilities                120,007            418           0.35       119,056            567           0.48
Noninterest-bearing
demand deposits             34,146                                      32,606
Mortgage escrows               985                                       1,024
Other liabilities            1,126                                         504
Shareholders' equity        20,817                                      20,608
Total liabilities and
shareholders' equity     $ 177,081                                   $ 173,798

Net interest income                    $    7,815                                  $    7,892

Interest rate spread                                        4.48 %                                      4.58 %

Net interest margin:
On average
interest-earning
assets                                                      4.59 %                                      4.72 %
On average total
assets                                                      4.41                                        4.54

Ratio of average
interest-earning
assets to average
interest-bearing
liabilities                 142.00 %                                    140.32 %

(1) Average loans include nonperforming loans and loans held for sale. Interest income does not include interest on nonaccrual loans. Average investment securities includes FHLB stock.

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Rate/Volume Analysis

The following table sets forth the effects of changing rates and volumes on our
net interest income. Information is provided with respect to effects on interest
income attributable to changes in volume, which are changes in volume multiplied
by prior rate; effects on interest income attributable to changes in rate, which
are changes in rate multiplied by prior volume; and changes in rate/volume,
which is a change in rate multiplied by change in volume.

(in thousands)
Year ended December 31, 2013 compared                                     Rate/
with year ended 2012                         Rate          Volume         Volume         Total
Interest-earning assets:
Loans                                      $    (134 )   $      (94 )   $        1     $    (227 )
Investment securities                            (16 )            2             (1 )         (15 )
Interest-earning deposits in banks                 3             11              2            16
Total net change in interest income             (147 )          (81 )            2          (226 )

Interest-bearing liabilities:
Interest-bearing demand accounts                   -              1              -             1
Money market accounts                             (6 )            6             (1 )          (1 )
Savings accounts                                  (6 )            2             (1 )          (5 )
Certificates of deposit                          (22 )          (36 )            2           (56 )
Borrowings                                         1            (88 )           (1 )         (88 )
Total net change in interest expense             (33 )         (115 )           (1 )        (149 )

Net change in net interest income          $    (114 )   $       34     $        3     $     (77 )

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Yields Earned and Rates Paid

The following table sets forth, at the date and for the periods indicated, the
weighted average yields earned on our assets and the weighted average interest
rates paid on our liabilities, together with the net yield on interest-earning
assets.

                                                           At
                                                      December 31,          For the Year Ended December 31,
                                                          2013               2013                    2012

Weighted average yield on:
Loans                                                          5.41 %              5.42 %                  5.51 %
Investment securities                                          1.44                1.58                    1.81
Interest-earning deposits in banks                             0.21                0.25                    0.21
Total interest-earning assets                                  4.72                4.83                    5.06

Weighted average rate paid on:
Interest-bearing demand accounts                               0.03                0.04                    0.04
Money market accounts                                          0.18                0.21                    0.23
Savings accounts                                               0.05                0.07                    0.10
Certificates of deposit                                        0.93                1.06                    1.13
Total interest-bearing deposits                                0.29                0.33                    0.39
Borrowings                                                        -                3.64                    3.61
Total interest-bearing liabilities                             0.23                0.35                    0.48

Interest rate spread                                           4.43                4.48                    4.58

Net interest margin on:
Average interest-earning assets                                  --                4.59                    4.72
Average total assets                                             --                4.41                    4.54

Liquidity and Capital Resources

Our primary sources of funds are deposits, proceeds from principal and interest payments on loans and mortgage-backed securities, and FHLB advances. While maturities and scheduled amortization of loans and mortgage-backed securities are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

The Bank's primary investing activity has been the origination of loans, including one-to-four-family mortgages, commercial non-residential real estate loans, commercial business loans, and consumer loans, deposits, FHLB borrowings, and principal repayments on loans and mortgage-backed securities were the primary means for funding these activities.

We must maintain an adequate level of liquidity to ensure the availability of sufficient funds to support loan growth and deposit withdrawals, to satisfy financial commitments and to take advantage of investment opportunities. As disclosed in our Consolidated Statements of Cash Flows in Item 8 of this Annual Report on Form 10-K, cash and cash equivalents decreased $200,000 to $18.6 million at December 31, 2013, from $18.8 million at December 31, 2012. Our sources of funds include deposits, principal and interest payments from loans and investments, and FHLB advances. During 2013 and 2012, we used our sources of funds primarily to fund new loans and to pay maturing certificates and other deposit withdrawals. At December 31, 2013, we had loan commitments including unused portions of lines of credit and undisbursed construction loans, of $16.1 million.

At December 31, 2013, we had $24,000 of net unrealized losses on investment securities classified as available for sale, which represented 0.4% of the amortized cost ($5.6 million) of the securities. This represented a decrease of

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$205,000 compared with $181,000 of net unrealized gains at December 31, 2012, primarily as a result of changes in market demand and movements in market interest rates will continue to affect the unrealized gains and losses in these securities. However, assuming that the securities are held to their individual dates of maturity, even in periods of increasing market interest rates, as the securities approach their dates of maturity, any unrealized gains or losses will begin to decrease and will eventually be eliminated.

At December 31, 2013, certificates of deposit amounted to $28.0 million, or 18.1% of our total deposits, including $18.9 million scheduled to mature by December 31, 2014. Historically, we have been able to retain a significant amount of its deposits as they mature. Management believes it has adequate resources to fund all loan commitments with deposits and, as needed, FHLB advances and sale of mortgage loans and that it can adjust the offering rates of certificates of deposits to retain deposits in changing interest rate environments. 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 $45.5 million at December 31, 2013, of which $41.7 million was unused. At December 31, 2013, there was $2.0 million outstanding on the line.

Given these sources of liquidity and our expectations for cash needs, we believe our sources of liquidity to be sufficient in the foreseeable future. However, continued deterioration in the FHLB of Seattle's financial position may result in impairment in the value of our FHLB stock, the requirement that we contribute additional funds to recapitalize the FHLB of Seattle, or a reduction in the Bank's ability to borrow funds from the FHLB of Seattle, impairing our ability to meet liquidity demands.

Recent Accounting Pronouncements

See "Item 8. Financial Statements and Supplementary Data -- Notes to Consolidated Financial Statements -- Note 1 Recent Accounting Pronouncements."

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