|• ALASKA PACIFIC BANCSHARES, INC. FORM 10-Q • EXHIBIT 31.1 • EXHIBIT 31.2 • EXHIBIT 32.1 • EXHIBIT 32.2|
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the quarterly period ended June 30, 2012
For the transition period from _____________ to ___________
Commission file number: 0-26003
ALASKA PACIFIC BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
2094 Jordan Avenue, Juneau, Alaska 99801
(Address of Principal Executive Offices)
(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. Yes X No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company’ in Rule 12b-2 of the Exchange Act.
Large accelerated filer _____ Accelerated filer _____
Non-accelerated filer _____ Smaller reporting company __X___
(do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X
State the number of shares outstanding of each of the issuer's classes of common equity as of the latest practicable date: 654,486 shares outstanding on August 1, 2012
ALASKA PACIFIC BANCSHARES, INC.
Condensed Consolidated Balance Sheets
Alaska Pacific Bancshares, Inc. and Subsidiary
Condensed Consolidated Statements of Operations
Alaska Pacific Bancshares, Inc. and Subsidiary
Condensed Consolidated Statements of Comprehensive Income (Loss)
Alaska Pacific Bancshares, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows
Selected Notes to Condensed Consolidated Interim Financial Statements
Note 1 – Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Alaska Pacific Bancshares, Inc. (the “Company”) and its wholly owned subsidiary, Alaska Pacific Bank (the “Bank”), and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and to general practices within the financial institutions industry, where applicable. All significant intercompany balances have been eliminated in the consolidation. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. They should be read in conjunction with the audited consolidated financial statements included in the Form 10-K for the year ended December 31, 2011. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included pursuant to the requirements of the Securities and Exchange Commission (“SEC”) for interim reporting. The results of operations for the interim periods ended June 30, 2012, are not necessarily indicative of the results which may be expected for an entire year or any other period. In preparing these financial statements, the Company has evaluated events and transactions subsequent to June 30, 2012 for potential recognition and disclosure.
Certain amounts in prior-period consolidated financial statements have been reclassified to conform to the current-period presentation. These reclassifications had no effect on net (loss) income or shareholders’ equity.
Note 2 – Mortgage Loan Servicing
The Company generally retains the right to service mortgage loans sold to others. Loans serviced for others at June 30, 2012 and December 31, 2011 were $137.8 million and $138.5 million, respectively. The Company accounts for mortgage servicing rights (“MSR”) in accordance with Accounting Standards Codification (“ASC”) 860-50, Servicing Assets and Liabilities, which provides an election to record changes in fair value to be reported in earnings in the period in which the change occurs. The Company uses a model derived valuation methodology to update the estimate of fair value of the MSR obtained from an independent financial advisor on an annual basis. The annual valuation is reviewed on a quarterly basis for significant changes in assumptions and current market rates. The model pools loans into tranches of homogeneous characteristics and performs a present value analysis of the expected future cash flows. The tranches are created by individual loan characteristics such as note rate, product type, and the remittance schedule. Current market rates are utilized for discounting the future cash flows. Significant assumptions used in the annual valuation of the MSR include discount rates, projected repayment speeds, escrow calculations, ancillary income, delinquencies and option adjusted spreads.
Key assumptions used in measuring the fair value of the MSR as of June 30, 2012 and 2011 were as follows:
The change in the balance of mortgage servicing assets is included in the following table:
Note 3 – Fair Value Measurements
We have elected to record certain assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The GAAP standard (ASC 820, Fair Value Measurements and Disclosures) establishes a consistent framework for measuring fair value and disclosure requirements about fair value measurements. The standard requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs create the following fair value hierarchy:
Level 1 - Unadjusted quoted prices for identical instruments in active markets;
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable; and
Level 3 - Instruments whose significant value drivers are unobservable.
An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The following table sets forth the Company’s assets and liabilities by level within the fair value hierarchy that were measured at fair value on a recurring and non-recurring basis at June 30, 2012 and December 31, 2011.
For three months ended June 30, 2012, the changes in Level 3 assets and liabilities measured at fair value on a recurring and non-recurring basis were as follows:
For six months ended June 30, 2012, the changes in Level 3 assets and liabilities measured at fair value on a recurring and non-recurring basis were as follows:
The following table presents the total losses resulting from nonrecurring fair value adjustments for the periods presented:
*Amounts include specific reserves on impaired loans at June 30, 2011.
For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of June 30, 2012, the significant unobservable inputs used in the fair value measurements were as follows:
The following table sets forth the estimated fair values of the Company’s financial instruments at June 30, 2012 and December 31, 2011:
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Cash, cash equivalents, and accrued interest: The fair value of cash and cash equivalents and accrued interest is estimated to be equal to the carrying value, due to their short-term nature.
Investment Securities: Securities available-for-sale are recorded at fair value on a recurring basis. Fair values are based on quoted market prices, where available. If quoted market prices are not available, fair values are estimated based on quoted market prices of comparable instruments with similar characteristics. Changes in fair market value are recorded in other comprehensive income.
Mortgage servicing rights: MSR are measured at fair value on a recurring basis. These assets are classified as Level 3 as quoted prices are not available and the Company uses a model derived valuation methodology to estimate the fair value of MSR obtained from an independent financial advisor on an annual basis. The annual valuation is reviewed on a quarterly basis for significant changes in assumptions and current market rates. The model pools loans into tranches of homogeneous characteristics and performs a present value analysis of the expected future cash flows. The tranches are created by individual loan characteristics such as note rate, product type, and the remittance schedule. Current market rate assumptions are utilized for discounting the future cash flows.
Impaired loans: Impaired loans are measured at fair value on a non-recurring basis and included in the table are impaired loans with a current specific valuation allowance. These assets are classified as Level 3 where significant value drivers are unobservable. The fair value of impaired
loans are determined using a discounted cash flow basis or the fair value of each loan’s collateral for collateral-dependent loans as determined by an appraisal of the property, less estimated costs related to liquidation of the collateral. The appraisal amount may also be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and the client’s business. Impaired loans with a specific valuation allowance were $2.5 million at both June 30, 2012 and December 31, 2011 with estimated reserves for impairment of $473,000 on both dates.
Real estate owned and repossessed assets: The $258,000 in real estate owned and repossessed assets at June 30, 2012, represents impaired real estate and repossessed assets that have been adjusted to fair value. 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, real estate is carried at the lower of its new cost basis or fair value, net of estimated costs to sell. The fair value of real estate owned is determined by appraisal of the property, less estimated costs related to liquidation of the asset. The appraisal amount may also be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the asset. Fair value adjustments on real estate owned and repossessed assets are recognized in noninterest expense.
Federal Home Loan Bank (“FHLB”) stock: The fair value of FHLB stock is considered to be equal to its carrying value, since it may be redeemed at that value.
Loans including held for sale, net: The fair value of loans net of allowance for loan losses is estimated using present value methods which discount the estimated cash flows, including prepayments as well as contractual principal and interest, using current interest rates appropriate for the type and maturity of the loans.
Deposits and other liabilities: The fair value disclosed for demand deposits, savings, and money market accounts are, by definition, equal to the amount payable on demand at the reporting date. For accrued interest payable, fair value is considered to be carrying value.
Certificates of deposit: The fair values of fixed-rate certificates of deposit are estimated using present value methods and current offering rates for such deposits.
FHLB advances: The estimated fair value approximates carrying value for short-term borrowings. The fair value of long-term fixed-rate borrowings is estimated by discounting future cash flows using current interest rates for similar financial instruments.
Note 4 – Investment Securities Available for Sale
Amortized cost and fair values of investment securities available for sale, including mortgage-backed securities, are summarized as follows:
There are no available for sale securities that have been in a continuous unrealized loss position at June 30, 2012.
Available for sale securities at December 31, 2011 that have been in a continuous unrealized loss position are as follows:
There were no securities with unrealized losses at June 30, 2012 and one security at December 31, 2011 which were agency securities issued by the U.S. government and state government agencies; collectability of principal and interest of these securities is considered to be reasonably assured. The fair values of individual securities fluctuate significantly with interest rates and with market demand for securities with specific structures and characteristics. Management does not consider these unrealized losses to be other than temporary because the Company does not intend to sell them and the Company will likely not be required to sell them.
No securities were designated as trading or held to maturity at June 30, 2012 or December 31, 2011.
The fair value and amortized cost of investment securities at June 30, 2012 is presented below by contractual maturity. Actual maturities may vary as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
The amortized cost and market value of investment securities pledged to secure public funds deposited with the Bank at June 30, 2012 was $5.5 million and $5.7 million, respectively. The amortized cost and market value of investment securities pledged to secure public funds deposited with the Bank at December 31, 2011 were $5.5 million and $5.7 million, respectively.
There were no sales of securities during the six months ended June 30, 2012 or 2011.
At June 30, 2012 the Bank owned $1.8 million of stock of the FHLB of Seattle. As a condition of membership in the FHLB, the Bank is required to purchase and hold a certain amount of FHLB stock, which is based, in part, upon the outstanding principal balance of advances from the FHLB and is calculated in accordance with the Capital Plan of the FHLB. FHLB stock has a par value of $100 per share, is carried at cost, and is subject to impairment testing per ASC 320-10-35. The FHLB announced that it had a risk-based capital deficiency under the regulations of the Federal Housing Finance Agency (“FHFA”), its primary regulator, and that it would suspend future dividends and the repurchase and redemption of outstanding capital stock. In October 2010, the FHLB entered into a Stipulation and Consent to the Issuance of a Consent Order with the Federal Housing Finance Agency (Finance Agency). The Stipulation and Consent provides that the FHLB of Seattle agrees to a Consent Order issued by the Finance Agency, which requires the bank to take certain specified actions related to its business and operations. The FHLB has communicated that it believes the calculation of risk-based capital under the current rules of the FHFA significantly overstates the market risk of the FHLB’s private label mortgage-backed securities in the current market environment and that it has enough capital to cover the risks reflected in the FHLB’s balance sheet. As a result, an “other than temporary impairment” has not been recorded for the Bank’s investment in FHLB stock. However, continued deterioration in the FHLB’s financial position may result in impairment in the value of those securities. Management will continue to monitor the financial condition of the FHLB as it relates to, among other things, the recoverability of the Bank’s investment.
Note 5 – Loans
Loans are summarized as follows:
Impaired Loans. Loans are deemed to be impaired when management determines that it is probable that all amounts due under the contractual terms of the loan agreements will not be collectible in accordance with the original loan agreement. All problem-graded loans are evaluated for impairment. Impairment is measured by comparing the fair value of the collateral or discounted cash flows to the recorded investment in the loan. Impaired loans include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.
Impaired loans are set forth in the following table as of June 30, 2012.
Impaired loans are set forth in the following table as of December 31, 2011.
The following table presents interest income recognized and average recorded investment of impaired loans for the period ended:
Nonaccrual loans at June 30, 2012 and December 31, 2011, were as follows:
Troubled Debt Restructurings. Troubled debt restructured loans are loans for which the Company, for economic or legal reasons related to the borrower’s financial condition, has granted a significant concession to the borrower that it would otherwise not consider. The Company accounts for troubled debt restructurings in accordance with ASU No. 2011-02. Troubled debt restructurings of certain receivables identified are deemed impaired under the guidance of Section 310-10-35 of ASU No. 2011-02. As of June 30, 2012 and December 31,
2011, the recorded investment in receivables that have been modified in a troubled debt restructuring and that are impaired was $9.3 million and $9.6 million, respectively. Included in these amounts, the Company had $5.0 million and $9.6 million of troubled debt restructurings as of June 30, 2012 and December 31, 2011, respectively, which were performing in accordance with their modified loan terms. The Company has not committed any additional amounts to lend to borrowers with loans considered to be troubled debt restructurings.
Modification Categories: The Bank considers a variety of modifications to borrowers. The types of modifications considered can generally be described in the following categories:
The following tables present troubled debt restructurings by concession (terms modified) as of June 30, 2012:
The following table presents the accrual status of troubled debt restructurings as of December 31, 2011:
There were no newly restructured loans that occurred during the three months ended June 30, 2012.
The following tables present newly restructured loans that occurred during the six months ended June 30, 2012:
There was one commercial business loan for $1.4 million, three commercial non-residential loan for $2.7 million, and two land loans for $186,000 modified as troubled debt restructuring within the previous 12 months for which there was a payment default.
The Bank’s policy is that loans placed in nonaccrual 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. In general, the Bank’s policy refers to six months of payment performance as sufficient to warrant a return to accrual status.
An age analysis of past due loans, segregated by class of loans, as of June 30, 2012 were as follows: