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ACFC > SEC Filings for ACFC > Form 10-Q on 14-Nov-2011All Recent SEC Filings




Quarterly Report


Forward-Looking Statements

This Form 10-Q contains forward-looking statements which are statements that are not historical or current facts. When used in this filing and in future filings by Atlantic Coast Financial Corporation with the Securities and Exchange Commission, in Atlantic Coast Financial Corporation's press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases, "anticipate," "would be," "will allow," "intends to," "will likely result," "are expected to," will continue," "is anticipated," "estimated," "projected," or similar expressions are intended to identify, "forward looking statements." Such statements are subject to risks and uncertainties, including but not limited to changes in economic conditions in Atlantic Coast Financial Corporation's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in Atlantic Coast Financial Corporation's market area, the availability of liquidity from deposits or borrowings to execute on loan and investing opportunities, changes in the position of banking regulators on the adequacy of the allowance for loan losses, and competition, all or some of which could cause actual results to differ materially from historical earnings and those presently anticipated or projected.

Atlantic Coast Financial Corporation wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and advise readers that various factors, including regional and national economic conditions, substantial changes in levels of market interest rates, credit and other risks of lending and investing activities, and competitive and regulatory factors, could affect Atlantic Coast Financial Corporation's financial performance and could cause Atlantic Coast Financial Corporation's actual results for future periods to differ materially from those anticipated or projected.

Atlantic Coast Financial Corporation does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

Recent Developments

Although the Bank remains well capitalized at September 30, 2011, the Bank was not in compliance with the IMCR agreed to by the Bank with the Office of Thrift Supervision on May 13, 2011 which required the Bank to achieve a Tier 1 leverage ratio of 7.0% as of September 30, 2011. The Bank's Tier 1 leverage ratio was 6.22% as of September 30, 2011. In February 2011, the Company filed an application with the United States Treasury (the "Treasury") for participation in the Small Business Lending Fund ("SBLF") including the preparation of a business plan submitted to the Office of Thrift Supervision ("OTS"). In June 2011, the Treasury requested that applicants with dividend restrictions request the deletion, or a waiver, of this restriction from their primary regulator by August 1, 2011 in order to continue to be considered an applicant for SBLF. Accordingly, on June 9, 2011, the Company requested a waiver from the OTS of the dividend restrictions placed on it when the Company entered into the Supervisory Agreement with the OTS in December 2010 (For a discussion on the Company's Supervisory Agreement see Item 1, Supervision and Regulation, Regulatory Agreements with the OTS in the Company's 2010 Annual Report on Form 10-K.) The Company did not receive a reply from the OTS prior to its merger into the Office of the Comptroller of the Currency on July 21, 2011. The Company has received notice from the Federal Reserve Bank of Atlanta, the successor to the OTS as the Company's primary regulator that its policy is not to approve dividend waiver requests for holding companies which are operating under a supervisory enforcement action. On September 6, 2011 the Company received notification from the Treasury advising the Company's application for participation in the SBLF could not be processed since no waiver of dividend restriction had been provided.

Based on discussions with the Office of the Comptroller of the Currency ("OCC") the Bank expects to receive notification that based on the non-compliance with the IMCR the Bank will be required to submit a capital plan, subject to the approval of the OCC, describing how and when the Bank will be in compliance with the IMCR.

Critical Accounting Policies

Certain accounting policies are important to the portrayal of the Company's financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances, including, but without limitation, changes in interest rates, performance of the economy, financial condition of borrowers and laws and regulations. Management believes that its critical accounting policies include determining the allowance for loan losses, determining the fair value of securities and accounting for deferred income taxes. These accounting policies are discussed in detail in Note 1 of the Notes to the Consolidated Financial Statements included in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission.

Allowance for Loan Losses

An allowance for loan losses ("allowance") is maintained to reflect probable incurred losses in the loan portfolio. The allowance is based on ongoing assessments of the estimated losses incurred in the loan portfolio and is established as these losses are recognized through a provision for loan losses charged to earnings. Generally, loan losses are charged against the allowance when management believes the uncollectibity of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Due to declining real estate values in our markets and the weak United States economy in general, it is increasingly likely that impairment allowances on non-performing collateral dependent loans, particularly one-to four-family residential loans, will not be recoverable and represent a confirmed loss. As a consequence the Company recognizes the charge-off of impairment reserves on non-performing one-to four family residential loans in the period the loan is classified as such. This process accelerates the recognition of charge-offs but has no impact on the impairment evaluation process.

The reasonableness of the allowance is reviewed and established by management, within the context of applicable accounting and regulatory guidelines, based upon its evaluation of then-existing economic and business conditions affecting the Bank's key lending areas. Senior credit officers monitor the conditions discussed above continuously and reviews are conducted quarterly with the Bank's senior management and Board of Directors.

Management's methodology for assessing the reasonableness of the allowance consists of several key elements, which include a general loss component by type of loan and specific allowances for identified problem loans. The allowance also incorporates the results of measuring impaired loans.

The general loss component is calculated by applying loss factors to outstanding loan balances based on the internal risk evaluation of the loans or pools of loans. Changes to the risk evaluations relative to both performing and non-performing loans affect the amount of this component. Loss factors are based on the Bank's recent loss experience, current market conditions that may impact real estate values within the Bank's primary lending areas, and on other significant factors that, in management's judgment, may affect the ability to collect loans in the portfolio as of the evaluation date. Other significant factors that exist as of the balance sheet date that may be considered in determining the adequacy of the allowance include credit quality trends (including trends in non-performing loans expected to result from existing conditions), collateral values, geographic foreclosure rates, new and existing home inventories, loan volumes and concentrations, specific industry conditions within portfolio segments and recent charge-off experience in particular segments of the portfolio. The impact of the general loss component on the allowance began increasing during 2008 and has continued to increase into 2011. The increase reflected the deterioration of market conditions, the extended time involved in the foreclosure process in Florida, and the increase in the recent loan loss experience that has resulted from management's proactive approach to charging off losses on impaired loans.

Management also evaluates the allowance for loan losses based on a review of certain large balance individual loans. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows management expects to receive on impaired loans that may be susceptible to significant change. For all specifically reviewed loans where it is probable the Bank will be unable to collect all amounts due according to the terms of the loan agreement, impairment is determined by computing a fair value based on either discounted cash flows using the loan's initial interest rate or the fair value of the collateral if the loan is collateral dependent. No specific allowance is recorded unless the fair value is less than the carrying value. Large groups of smaller balance homogeneous loans, such as individual consumer and residential loans are collectively evaluated for impairment and are excluded from the specific impairment evaluation; for these loans, the allowance for loan losses is calculated in accordance with the allowance for loan losses policy described above. Accordingly, individual consumer and residential loans are not separately identified for impairment disclosures, except for loans that have undergone a troubled debt restructuring.

Fair Value of Securities Available for Sale

Management evaluates securities for other-than-temporary impairment ("OTTI") at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. In determining OTTI, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

When OTTI is determined to have occurred, the amount of the OTTI recognized in earnings depends on whether we intend to sell the security or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If we intend to sell the security or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI recognized in earnings is equal to the entire difference between its amortized cost basis and its fair value at the balance sheet date. If we do not intend to sell the security and it is not more likely than not that we will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI is separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized as a charge to earnings. The amount of the OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment. The Company recorded OTTI of $0 and $186,000 for the three and nine months ended September 30, 2011, respectively.

The Company sold the remaining non-agency collateralized mortgage obligation securities during the quarter ended September 30, 2011. The Company had no non-agency collateralized mortgage obligation securities at September 30, 2011.

Deferred Income Taxes

After converting to a federally chartered savings association, Atlantic Coast Bank became a taxable organization. Income tax expense (benefit) is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary difference between carrying amounts and tax basis of assets and liabilities, computed using enacted tax rates and operating loss carryforwards. The Company's principal deferred tax assets result from the allowance for loan losses and operating loss carryforwards. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. The Internal Revenue Code and applicable regulations are subject to interpretation with respect to the determination of the tax basis of assets and liabilities for credit unions that convert charters and become a taxable organization. Since Atlantic Coast Bank's transition to a federally chartered thrift, the Company has recorded income tax expense based upon management's interpretation of the applicable tax regulations. Positions taken by the Company in preparing our federal and state tax returns are subject to the review of taxing authorities, and the review by taxing authorities of the positions taken by management could result in a material adjustment to the financial statements.

All available evidence, both positive and negative, is considered when determining whether or not a valuation allowance is necessary to reduce the carrying amount to a balance that is considered more likely than not to be realized. The determination of the realizability of deferred tax assets is highly subjective and dependent upon judgment concerning management's evaluation of such evidence. Positive evidence considered includes the probability of achieving forecasted taxable income and the ability to implement tax planning strategies to accelerate taxable income recognition. Negative evidence includes the Company's cumulative losses. Following the initial establishment of a valuation allowance, if the Company is unable to generate sufficient pre-tax income in future periods or otherwise fails to meet forecasted operating results, an additional valuation allowance may be required. Any valuation allowance is required to be recorded during the period identified. As of September 30, 2011, the Company had a valuation allowance of $23.6 million for the net deferred tax asset.

Comparison of Financial Condition at September 30, 2011 and December 31, 2010

General. Total assets decreased $35.0 million, or 4.2%, to $792.4 million at September 30, 2011 as compared to $827.4 million at December 31, 2010 as the Company continued to manage its balance sheet with its overall capital management strategy. The primary reason for the decrease in assets was a decrease in net loans of $32.8 million and securities available for sale of $19.0 million, partially offset by an increase in cash and cash equivalents of $6.8 million and loans held for sale of $15.0 million. Total deposits decreased $20.6 million, or 3.9%, to $507.9 million at September 30, 2011 from $528.5 million at December 31, 2010. Non-maturing deposits consisting of non-interest bearing and interest bearing demand accounts and savings and money market accounts grew by $17.0 million, while time deposits decreased by $37.5 million. Federal Home Loan Bank advances decreased by $15.0 million to $135.0 million at September 30, 2011,

Following is a summarized comparative balance sheet as of September 30, 2011 and December 31, 2010:

                                            September 30,       December 31,          Increase (decrease)
                                                2011                2010            Dollars        Percentage
                                                                 (Dollars in Thousands)
Cash and cash equivalents                  $        15,323     $        8,550     $     6,773             79.2 %
Securitites available for sale                     130,052            149,090         (19,038 )          -12.8 %
Loans                                              532,174            563,096         (30,922 )           -5.5 %
Allowance for loan losses                           15,188             13,344           1,844             13.8 %
Loans, net                                         516,986            549,752         (32,766 )           -6.0 %
Loans held for sale                                 64,280             49,318          14,962             30.3 %
Other assets                                        65,761             70,732          (4,971 )           -7.0 %
Total assets                               $       792,402     $      827,442     $   (35,040 )           -4.2 %

Liabilities and Stockholders' equity
Non-interest bearing demand                $        40,357     $       35,941     $     4,416             12.3 %
Interest bearing demand                             76,766             71,710           5,056              7.1 %
Savings and money market                           189,286            181,788           7,498              4.1 %
Time                                               201,529            239,058         (37,529 )          -15.7 %
Total deposits                                     507,938            528,497         (20,559 )           -3.9 %
Federal Home Loan Bank advances                    135,000            150,000         (15,000 )          -10.0 %
Securities sold under agreements to
repurchase                                          92,800             92,800               -              0.0 %
Other borrowings                                         -              5,000          (5,000 )         -100.0 %
Accrued expenses and other liabilities               5,967              6,354            (387 )           -6.1 %
Total liabilities                                  741,705            782,651         (40,946 )           -5.2 %
Stockholders' equity                                50,697             44,791           5,906             13.2 %
Total liabilities and stockholders'
equity                                     $       792,402     $      827,442     $   (35,040 )           -4.2 %

Securities available for sale. Securities available for sale were comprised primarily of debt securities of U.S. Government-sponsored enterprises and mortgage-backed securities (MBS). The investment portfolio decreased approximately $19.0 million to $130.1 million at September 30, 2011, from $149.1 million at December 31, 2010, as the Company sold $85.0 million of mortgage-backed securities to lock-in net gains of approximately $2.5 million on securities susceptible to a high risk of prepayment following a steep decline in mortgage rates. The Company purchased approximately $75.0 million of mortgage-backed securities to replace pledged collateral requirements related to the securities sold under agreements to repurchase. As of September 30, 2011, approximately $118.9 million of securities available for sale were pledged as collateral for the securities sold under agreements to repurchase. At September 30, 2011, approximately $129.1 million, or 99%, of the debt securities held by the Company were issued by U.S. government-sponsored entities and agencies, primarily Fannie Mae, Freddie Mac and Ginnie Mae, institutions which the government has affirmed its commitment to support.

The Company sold the four remaining private label securities in its investment portfolio during September 2011 and accordingly had no private label securities as of September 30, 2011.

Loans held for sale. Loans held for sale were comprised entirely of loans secured by one- to four-family residential homes originated internally or purchased from third-party originators. Loans held for sale increased $15.0 million, or approximately 30.3% to $64.3 million at September 30, 2011 as compared to $49.3 million at December 31, 2010 primarily due to an increase in loan production from our warehouse lending operations. As of September 30, 2011, the weighted average number of days outstanding of loans held for sale was 18 days.

During the nine months ended September 30, 2011, the Company originated a total of $521.7 million of loans held for sale, comprised of approximately $86.8 million of loans originated internally, and approximately $434.9 million of loans purchased from third parties. Approximately $508.0 million of the loans were sold, resulting in a gain of $1.3 million and interest earned of $1.4 million on outstanding balances which was recorded in interest income. The Company intends to continue to focus on opportunities to grow this line of business in the near future due to its favorable margins and efficient capital usage.

Loans. Below is a comparative composition of net loans as of September 30, 2011 and December 31, 2010, excluding loans held for sale:

                                            September 30,      % of total       December 31,      % of total
                                                2011              loans             2010             loans
                                                                 (Dollars in Thousands)
Real estate loans:
One-to-four family                         $       245,322            46.7 %   $      256,729            46.2 %
Commercial                                          74,582            14.2 %           72,048            13.0 %
Other ( land and multi-family)                      28,697             5.5 %           29,868             5.4 %
Total real estate loans                            348,601            66.3 %          358,645            64.6 %

Real estate construction loans:
One-to-four family                                   2,587             0.5 %            7,589             1.4 %
Commercial                                           4,343             0.8 %            5,825             1.0 %
Acquisition and development                              -             0.0 %            1,652             0.3 %
Total real estate construction loans                 6,930             1.3 %           15,066             2.7 %

Other loans:
Home equity                                         76,094            14.5 %           85,082            15.3 %
Consumer                                            69,933            13.3 %           75,745            13.6 %
Commercial                                          23,849             4.5 %           21,268             3.8 %
Total other loans                                  169,876            32.3 %          182,095            32.7 %

Total loans                                        525,407             100 %          555,806             100 %

Allowance for loan losses                          (15,188 )                          (13,344 )
Net deferred loan costs                              6,891                              7,407
Premiums (discounts) on purchased loans               (124 )                             (117 )

Loans, net                                 $       516,986                     $      549,752

Portfolio loans declined $32.8 million or approximately 6.0% to $517.0 million at September 30, 2011 as compared to $549.8 million at December 31, 2010 primarily due to reduced production of portfolio loans and payoffs of one- to four-family residential loans during the nine months ended September 30, 2011. Portfolio loan originations decreased $28.4 million to $24.6 million for the nine months ended September 30, 2011 from $53.0 million for the same period in 2010.

Small business loan originations, including SBA loans, were approximately $10.7 million during the nine months ended September 30, 2011.

SBA loan originations were $6.2 million during the nine months ended September 30, 2011. The Company intends to sell the guaranteed portion of SBA loans upon completion of loan funding. The Company plans to continue to expand this business channel going forward.

Until critical economic factors stabilize, such as unemployment and residential real estate values, management anticipates that portfolio loan balances will continue to decline as the Company emphasizes the sale of mortgages it originates in the secondary market rather than retaining them in its portfolio.

The composition of the Bank's loan portfolio is heavily weighted toward one- to four-family residential loans. As of September 30, 2011, first mortgages (including residential construction loans), second mortgages and home equity loans totaled $324.0 million, or 61.7% of total gross loans. Approximately $44.6 million, or 58.6% of loans recorded as home equity loans are in a first lien position. Accordingly, $292.5 million, or 90.2% of loans collateralized by one- to four-family residential loans were in a first lien position as of September 30, 2011.

                                 Florida      Georgia       Other States        Total
                                                (Dollars in Thousands)
1-4 Family First Mortgages      $ 162,793     $ 47,211     $       35,318     $ 245,322
1-4 Family Second Mortgages        37,849       37,233              1,012        76,094
1-4 Family Construction Loans       2,059          528                  -         2,587
                                $ 202,701     $ 84,972     $       36,330     $ 324,003

Allowance for loan losses. The allowance for loan losses was $15.2 million, or 2.85% of total loans compared to $13.3 million or 2.37% of total loans outstanding at September 30, 2011 and December 31, 2010, respectively.

The allowance for loan losses activity for the nine months ended September 30, 2011 and 2010 was as follows:

                                   September 30,       September 30,
                                       2011                2010

Balance at beginning of period    $        13,344     $        13,810

Real Estate Loans
One-to four-family                          4,965               7,906
Commercial                                    177               1,261
Other (Land & Multi-family)                   320               1,416
Real Estate Construction Loans
Construction One-to four family                 -                   -
Construction Commercial                         -               3,307
Acquistion & Development                        -                   -
Other Loans
Home equity                                 2,815               2,306
Consumer                                      657               1,346
Commercial                                     15                 698
Total charge-offs                           8,949              18,240

. . .
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