UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
| (Mark | One) |
| x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended March 31, 2006 |
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO |
Commission file number: 000-22925
AmericasBank Corp.
(Exact name of small business issuer as specified in its charter)
| Maryland | 52-2090433 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
500 York Road, Towson, Maryland 21204
Address of principal executive offices
(410) 823-0500
Issuer’s telephone number
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:
At May 5, 2006, the issuer had 2,666,702 shares of Common Stock outstanding.
Transitional Small Business Disclosure Format (Check one): YES ¨ NO x
AmericasBank Corp. and Subsidiary
Consolidated Balance Sheets
| March 31, 2006 | December 31, 2005 | |||||||
| (Unaudited) | ||||||||
Assets | ||||||||
Cash and due from banks | $ | 1,651,206 | $ | 1,957,870 | ||||
Federal funds sold and Federal Home Loan Bank deposit | 18,607,933 | 18,440,881 | ||||||
Cash and cash equivalents | 20,259,139 | 20,398,751 | ||||||
Securities available for sale | 30,000 | 30,000 | ||||||
Federal Home Loan Bank and Federal Reserve Bank stock at cost | 303,700 | 238,500 | ||||||
Loans held for sale | 1,778,181 | 1,223,616 | ||||||
Loans and leases, less allowance of$419,507 and $366,910 | 54,863,173 | 48,989,605 | ||||||
Premises and equipment | 979,189 | 1,005,561 | ||||||
Accrued interest receivable | 278,873 | 263,039 | ||||||
Goodwill | 266,985 | 266,985 | ||||||
Intangible assets | 23,037 | 24,222 | ||||||
Other assets | 149,980 | 305,785 | ||||||
| $ | 78,932,257 | $ | 72,746,064 | |||||
Liabilities and Stockholders' Equity | ||||||||
Deposits | ||||||||
Noninterest-bearing | $ | 7,209,091 | $ | 7,998,387 | ||||
Interest-bearing | 55,243,027 | 59,177,095 | ||||||
Total deposits | 62,452,118 | 67,175,482 | ||||||
Other liabilities | 381,452 | 314,531 | ||||||
| 62,833,570 | 67,490,013 | |||||||
Stockholders' equity | ||||||||
Common stock, par value $.01 per share; 30,000,000 shares authorized, issued and outstanding 2,666,702 and 941,702, shares | 26,667 | 9,417 | ||||||
Preferred stock, par value $.01 per share; 5,000,000 shares authorized, issued | — | — | ||||||
Additional paid-in capital | 22,674,045 | 11,634,984 | ||||||
Accumulated deficit | (6,602,025 | ) | (6,388,350 | ) | ||||
Accumulated other comprehensive income | — | — | ||||||
| 16,098,687 | 5,256,051 | |||||||
| $ | 78,932,257 | $ | 72,746,064 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
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AmericasBank Corp. and Subsidiary
Consolidated Statements of Operations
(Unaudited)
| Three Months Ended | ||||||||
| March 31, 2006 | March 31, 2005 | |||||||
Interest revenue | ||||||||
Loans and leases, including fees | $ | 988,073 | $ | 574,909 | ||||
Federal funds sold and Federal Home Loan Bank deposit | 188,875 | 45,175 | ||||||
Loans held for sale | 20,973 | 14,572 | ||||||
Preferred trust securities | — | 7,417 | ||||||
Other | 3,880 | 2,793 | ||||||
Total interest revenue | 1,201,801 | 644,866 | ||||||
Interest expense | ||||||||
Deposits | 591,793 | 284,159 | ||||||
Net interest income | 610,008 | 360,707 | ||||||
Provision for loan and lease losses | 55,000 | — | ||||||
Net interest income after provision for loan and lease losses | 555,008 | 360,707 | ||||||
Noninterest revenue | ||||||||
Service charges on deposit accounts and other fees | 21,501 | 12,648 | ||||||
Mortgage banking gains and fees | 60,199 | 123,897 | ||||||
Total noninterest revenue | 81,700 | 136,545 | ||||||
Noninterest expenses | ||||||||
Salaries | 397,855 | 287,556 | ||||||
Employee benefits | 113,101 | 80,506 | ||||||
Occupancy | 56,572 | 46,366 | ||||||
Furniture and equipment | 28,685 | 30,501 | ||||||
Other | 254,170 | 204,830 | ||||||
Total noninterest expenses | 850,383 | 649,759 | ||||||
Loss before income taxes | (213,675 | ) | (152,507 | ) | ||||
Income taxes | — | — | ||||||
Net loss | $ | (213,675 | ) | $ | (152,507 | ) | ||
Loss per common share—basic and diluted | $ | 0.16 | $ | 0.16 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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AmericasBank Corp. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
| Common stock | Additional capital | Accumulated | Accumulated other comprehensive income | Comprehensive | ||||||||||||||||
| Shares | Par value | |||||||||||||||||||
Balance, December 31, 2004 | 941,702 | 9,417 | 11,449,191 | (6,080,564 | ) | 17,760 | ||||||||||||||
Net loss | — | — | — | (152,507 | ) | — | $ | (152,507 | ) | |||||||||||
Unrealized loss on investment securities available for sale, net | — | — | — | — | (17,760 | ) | (17,760 | ) | ||||||||||||
Comprehensive income | $ | (170,267 | ) | |||||||||||||||||
Stock-based compensation expense | — | — | 40,723 | — | — | |||||||||||||||
Cash paid for fractional shares resulting from reverse stock split | — | — | — | — | — | |||||||||||||||
Balance, March 31, 2005 | 941,702 | $ | 9,417 | $ | 11,489,914 | $ | (6,233,071 | ) | $ | — | ||||||||||
Balance, December 31, 2005 | 941,702 | $ | 9,417 | $ | 11,634,984 | $ | (6,388,350 | ) | $ | — | ||||||||||
Net loss | — | — | — | (213,675 | ) | — | $ | (213,675 | ) | |||||||||||
Unrealized loss on investment | ||||||||||||||||||||
securities available for sale, net | — | — | — | — | — | — | ||||||||||||||
Comprehensive income | $ | (213,675 | ) | |||||||||||||||||
| �� | ||||||||||||||||||||
Stock-based compensation expense | — | — | 44,833 | — | — | |||||||||||||||
Common stock issued, net | 1,725,000 | 17,250 | 10,994,228 | — | — | |||||||||||||||
Balance, March 31, 2006 | 2,666,702 | $ | 26,667 | $ | 22,674,045 | $ | (6,602,025 | ) | $ | — | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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AmericasBank Corp. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
| Three Months Ended | ||||||||
| March 31, 2006 | March 31, 2005 | |||||||
Cash flows from operating activities | ||||||||
Interest received | $ | 1,161,497 | $ | 625,463 | ||||
Fees and commissions received | 21,501 | 12,648 | ||||||
Interest paid | (594,771 | ) | (275,322 | ) | ||||
Proceeds from sales of loans held for sale | 6,882,000 | 7,597,584 | ||||||
Originations of loans held for sale | (7,376,366 | ) | (7,301,045 | ) | ||||
Cash paid to suppliers and employees | (552,526 | ) | (594,544 | ) | ||||
| (458,665 | ) | 64,784 | ||||||
Cash flows from investing activities | ||||||||
Proceeds from maturity and call of investment securities | ||||||||
Available for sale | — | 300,422 | ||||||
Purchase of Federal Home Loan Bank stock | (65,200 | ) | (105,950 | ) | ||||
Loans and leases made, net of principal collected | (5,904,098 | ) | (1,981,188 | ) | ||||
Purchase of premises, equipment and software | 237 | (1,539 | ) | |||||
| (5,969,061 | ) | (1,788,255 | ) | |||||
Cash flows from financing activities | ||||||||
Net (decrease) increase in time deposits | (4,319,869 | ) | 4,696,015 | |||||
Net (decrease) increase in other deposits | (403,495 | ) | 2,490,916 | |||||
Proceeds from issuance of common stock | 11,011,478 | — | ||||||
| 6,288,114 | 7,186,931 | |||||||
Net increase (decrease) in cash and cash equivalents | (139,612 | ) | 5,463,460 | |||||
Cash and cash equivalents at beginning of year | 20,398,751 | 5,223,547 | ||||||
Cash and cash equivalents at end of period | $ | 20,259,139 | $ | 10,687,007 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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AmericasBank Corp. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited) (Continued)
| Three Months Ended | ||||||||
| March 31, 2006 | March 31, 2005 | |||||||
Reconciliation of net loss to net cash provided by operating activities | ||||||||
Net loss | $ | (213,675 | ) | $ | (152,507 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities | ||||||||
Depreciation and amortization | 43,745 | 41,393 | ||||||
Provision for loan and lease losses | 55,000 | — | ||||||
Amortization of security premiums | — | — | ||||||
Stock-based compensation | 44,833 | 40,723 | ||||||
Gain on sale of foreclosed real estate | — | — | ||||||
Amortization of loan premium and other intangible assets | 1,815 | 166 | ||||||
Increase (decrease) in | ||||||||
Deferred loan fees and costs, net | (24,470 | ) | (12,522 | ) | ||||
Accrued interest payable | (2,978 | ) | 8,837 | |||||
Other liabilities | 69,899 | (48,683 | ) | |||||
Decrease (increase) in | ||||||||
Loans held for sale | (554,565 | ) | 178,256 | |||||
Accrued interest receivable | (15,834 | ) | (12,495 | ) | ||||
Other assets | 137,565 | 21,616 | ||||||
| $ | (458,665 | ) | $ | 64,784 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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AMERICASBANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the activity of AmericasBank Corp. and its wholly owned subsidiary, AmericasBank. All significant intercompany transactions and balances have been eliminated in consolidation.
The foregoing consolidated financial statements are unaudited; however, in the opinion of management, all adjustments (comprising only normal recurring accruals and adjustments) necessary for a fair presentation of the results of the interim period have been included. These statements should be read in conjunction with the financial statements and accompanying notes included in AmericasBank Corp.’s 2005 Annual Report on Form 10-KSB. There have been no significant changes to the Company’s Accounting Policies as disclosed in the 2005 Annual Report. The results shown in this interim report are not necessarily indicative of results to be expected for the full year 2006.
The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America.
Reclassifications
Certain reclassifications have been made to amounts previously reported to conform to the current presentation.
2. STOCK-BASED COMPENSATION
Effective January 1, 2005, AmericasBank Corp. began recognizing expense for stock-based compensation using the fair value based method of accounting described in Statement of Financial Accounting Standards (“SFAS”) No. 123,Accounting for Stock-Based Compensation, as amended. As a result, salaries and employee benefits expense for the three months ended March 31, 2006 and March 31, 2005 included $44,833 and $40,723, respectively, of stock-based compensation. We have chosen the retroactive restatement method described in SFAS No. 148,Accounting for Stock-Based Compensation — Transition and Disclosure, which amended SFAS No. 123. As a result, financial information for all prior periods presented have been restated to reflect the salaries and employee benefits expense that would have been recognized had the recognition provisions of SFAS No. 123 been applied to all awards granted to employees. The use of the retroactive restatement method resulted in the restatement of previously reported balances of additional paid-in capital and accumulated deficit. As of December 31, 2004, previously reported additional paid-in capital was increased by $286,910 and accumulated deficit was increased by the same amount.
3. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory—and possibly additional discretionary—actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. The Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios.
4. REVERSE STOCK SPLIT
Effective August 23, 2005, AmericasBank Corp. implemented a one-for-four reverse stock split of the Company’s outstanding common stock where every four shares of outstanding common stock were converted into one share. Fractional shares resulting from the split were converted to cash. The reverse stock split has been reflected
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retroactively in the consolidated financial statements and notes for all periods presented and all applicable references as to the number of common shares and per share information, stock option data and market prices have been restated.
5. LOSS PER SHARE
Loss per common share is determined by dividing net loss by the weighted average number of common shares outstanding during the period. The Company’s common stock equivalents were not considered in the computation of diluted earnings per share because the result would have been anti-dilutive. The weighted average common shares outstanding were 1,363,369 for the three months ended March 31, 2006, and 941,702 for the three months ended March 31, 2005.
6. SALE OF COMMON STOCK
On March 10, 2006, the Company sold 1,725,000 shares of its common stock for $7.00 per share. Net proceeds from the offering were approximately $11,011,478. The Company invested $10,500,000 of these funds into AmericasBank in March 2006. On March 13, 2006, the common stock of the Company began to be quoted for trading on the NASDAQ Capital Market.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Some of the matters discussed below include forward-looking statements. Forward-looking statements often use words such as “believe,” “expect,” “plan,” “may,” “will,” “should,” “project,” “contemplate,” “anticipate,” “forecast,” “intend” or other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts. Our actual results and the actual outcome of our expectations and strategies could be different from those anticipated or estimated for the reasons discussed below and the reasons under the heading “Information Regarding Forward Looking Statements.”
Because AmericasBank Corp. has no material operations and conducts no business on its own other than owning its subsidiary, AmericasBank, this discussion primarily concerns the business of AmericasBank. However, for ease of reading and because our financial statements are presented on a consolidated basis, unless the context requires otherwise, references to “we” or “our” refers to both AmericasBank Corp. and AmericasBank.
General
AmericasBank Corp. was incorporated as a Maryland corporation on June 4, 1996, to become a one-bank holding company by acquiring all of the capital stock of AmericasBank, a federal stock savings bank, upon its formation. AmericasBank commenced operations on December 1, 1997. On March 20, 1999, AmericasBank converted from a federal stock savings bank to a Maryland chartered trust company exercising the powers of a commercial bank.
Strategy
Our long-term strategy is to become a high-performing community bank that provides above-average investment returns to its stockholders while maintaining a low to moderate risk profile. The essence of our strategy is consistent with the traditional community bank model, under which we focus on promoting business entrepreneurship and home ownership by delivering value-added products and services to selected customers in the communities that we serve. Specifically, we will seek to obtain low cost, core deposits from small businesses in our market areas and then re-invest those funds primarily into in-market residential and commercial real estate loans and commercial loans, as we identify opportunities via our network of mortgage originators. Obtaining low cost, core deposits in lieu of depending upon high rate certificates of deposits will reduce our overall cost of funds, and ultimately improve our net interest margin.
To succeed in our community banking strategy, we must effectively differentiate ourselves from our competitors, including the larger financial service companies operating in our market area. We believe we can do this by selling the concept that we have established and published in our marketing material – we want to be known as: Creative, Responsive and Flexible. We have observed that by consistently providing customer service beyond what is expected, we attract the specific customers we seek and they, in turn, become our best advocates and referral sources. During 2004 and 2005 we realigned and expanded bank and loan operations with experienced staff and also invested in new banking products.
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We expect to use approximately $11 million in capital we raised in our recent offering to execute our expansion strategy (which consists of replicating in new markets the community bank business model that we have developed in the Towson market) in order to effectively leverage the resources of our bank and loan operations with only marginal additions. We believe this as an efficient way to enter a market and drive the operation to profitability relatively quickly. Our goal is to enter several new markets over the next few years.
We anticipate that over the short term, net income will be reduced as we incur capital expenditures and non-interest expense, including marketing expense, in opening and operating new banking centers — until the new banking centers become profitable. Further, because we will likely enter new markets by first building a mortgage lending presence, we anticipate that in each new market we will solicit higher cost deposits to fund loan growth. We also anticipate that our dependency on high costs deposits will diminish as we ramp up core deposit growth in the new market.
Summary of Recent Performance
We incurred a net loss of $213,675 or $(0.16) per basic and diluted common share for the three months ended March 31, 2006, an increase of $61,168 compared to our net loss of $152,507 or $(0.16) per basic and diluted common share for the three months ended March 31, 2005. The net loss in each reported period included a charge to salary expense for stock-based compensation as we voluntarily adopted SFAS No. 123,Accounting for Stock-Based Compensation, as amended (see Note 2 to the Notes to Financial Statements).
The increase in our net loss was primarily from an increase in noninterest expenses of $200,624 or 30.9% to $850,383 for the three months ending March 31, 2006, from $649,759 for the three months ending March 31, 2005. In addition, the provision for loan and lease losses was $55,000 in the first quarter of 2006 compared to no provision for the first three months of 2005. Also, noninterest revenue declined by $54,845 or 40.2% to $81,700 for the three months ended March 31, 2006, compared to $136,545 for the same period in 2005, primarily from a decline in our mortgage banking business. The increase in our net loss was partially offset by increased revenues from the growth in earning assets. This resulted in an increase in net interest income of $249,301 or 69.1%, to $610,008 for the three months ending March 31, 2006, from $360,707 for the three months ending March 31, 2005.
Total assets increased by $6,186,193 or 8.5%, to $78,932,257 at March 31, 2006, compared to $72,746,064 at December 31, 2005. Average interest earning assets for the three months ended March 31, 2006, were $70,506,691, an increase of $29,842,193, or 73.4% from the $40,664,498 in average interest earning assets for the first three months of 2005. Our net interest margin declined slightly for the three months ending March 31, 2006 to 3.51% from 3.60% for the three months ending March 31, 2005.
Loans and leases, net of allowance, at March 31, 2006 were $54,863,173, an increase of $5,873,568 or 12.0% above the $48,989,605 reported at December 31, 2005. The majority of this growth was in our real estate based products. Throughout 2006 we will continue to focus our efforts on real estate based products as we believe that this strategy improves our asset quality and is consistent with our risk management.
The production from our mortgage loan origination group was below the results from prior periods as we felt the effect of a slowdown in the real estate business. Mortgage banking fees and gains were $60,199 for the three months ended March 31, 2006, compared to $123,897 for the three months ended March 31, 2005, a decrease of $63,698 or 51.4%. We originate and sell loans as a correspondent lender and as a broker. This group also provided numerous loan opportunities for us to consider that resulted in our extending credit to borrowers for portfolio loans. We are continuously recruiting experienced individuals in the mortgage business and plan to add loan officers throughout 2006.
The allowance for loan and lease losses was $419,507 or 0.76% of loans at March 31, 2006, compared to $366,910 or 0.74% of loans at December 31, 2005. The increase in the allowance for loan and lease losses as a percent of loans and leases was the result of our risk assessment of the loan and lease portfolios, management’s judgment as to appropriate reserve percentages for various categories of loans, and the growth in residential real estate loans outstanding which generally carry a lower risk assessment. Our non-performing assets remained unchanged at $622,761at March 31, 2006 and December 31, 2005. Non-performing assets as a percent of total loans were 1.13% of loans at March 31, 2006, compared to 1.26% of loans at December 31, 2005.
Total deposits at March 31, 2006 were $62,452,118, down 7.0% from $67,175,482 at December 31, 2005. The decline in deposits is the primarily the result of maturities of premium rate certificates of deposit obtained through an
9
Internet-based service and through print advertising in local newspapers. Noninterest bearing deposits were $7,209,091 at March 31, 2006, compared to $7,998,387 at December 31, 2005, reflecting a decline in deposits from title companies as a result of the slow down in the real estate market.
Our net interest margin was 3.51% for the three months ended March 31, 2006, compared to 3.60% for the three months ended March 31, 2005. This decrease in our net interest margin is due primarily to the increase in the rate on interest bearing deposits to 4.09% for the first three months of 2006 compared to 3.29% for the same period in 2005. Contributing to the higher costs of interest bearing deposits was our successful marketing of certificates of deposit and money market products to retail customers, augmented by our use of a web-based service to sell higher cost certificates of deposit. Market interest rates increased between the comparable three month periods ended March 31, 2006 and March 31, 2005, resulting in an increase in our yield on our interest earning assets to 6.91% for the first three months of 2006 from 6.43% for the first three months of 2005.
Results of Operations
Net Interest Income
Net interest income is the difference between interest revenue on assets and the cost of funds supporting those assets. Earning assets are comprised primarily of loans, investments and federal funds sold; interest-bearing deposits make up the cost of funds. Noninterest bearing deposits and capital are also funding sources. Changes in the volume and mix of earning assets and funding sources along with changes in associated interest rates determine changes in net interest income.
Net interest income for the three months ended March 31, 2006, increased 69.1% to $610,008 from $360,707 for the three months ended March 31, 2005.
Total interest revenue increased for the three months ended March 31, 2006, to $1,201,801 , from $644,866 for the three months ended March 31, 2005. The increase is primarily attributable to an increase in interest revenue from loans and leases and from federal funds sold. Interest revenue from loans and leases increased for the three months ended March 31, 2006 by $413,164 or 71.9%. Interest revenue from federal funds sold and Federal Home Loan Bank deposits increased for the three months ended March 31, 2006 by $143,700 or 318.1%.
Increases in average balances of our earning assets and market interest rates were the primary factors contributing to the significant increases in interest revenue between the comparable periods. Average loans increased by $19,976,463 or 63.3% for the three months ended March 31, 2006, to $51,543,696 from $31,567,233 for the three months ended March 31, 2005. The yield on loans increased to 7.77% for the three months ended March 31, 2006, from 7.39% for three months ended March 31, 2005.
Average federal funds sold and Federal Home Loan Bank deposit increased by $10,008,661 or 136.8% for the three months ended March 31, 2006, to $17,326,910 from $7,318,249 for the three months ended March 31, 2005. The capital from our offering which closed on March 10, 2006 was invested into federal funds sold, accounting for part of the significant increase between periods. The yield on these funds increased to 4.42% for the three months ended March 31, 2006, from 2.50% for three months ended March 31, 2005.
The increase in yields on earning assets was due to an increase in market interest rates in response to actions by the Federal Reserve to increase the target for the federal funds rate to 4.75% as of March 31, 2006, from the target rate of 2.75% as of March 31, 2005.
Interest expense increased by $307,634 or 108.3% for the three months ended March 31, 2006, to $591,793 from $284,159 for the three months ended March 31, 2005. The increase in interest expense was due to our growth in average balances of our money market accounts and premium rate certificates of deposit, and an increase in the rates paid on deposits as a result of the rise in market interest rates.
Average interest bearing deposits increased by $23,710,304 or 67.7% for the three months ended March 31, 2006, compared to the same period in 2005. The rate on interest-bearing deposits increased to 4.09% for the three months ended March 31, 2006, from 3.29% for the three months ended March 31, 2005. The majority of the increase in average interest-bearing deposits was attributable to our growth in certificates of deposit and money market accounts resulting from our marketing efforts and the use of a web based service to offer certificates of deposit.
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Average noninterest-bearing deposits increased by $4,105,224 or 200.6% for the three months ended March 31, 2006, to $6,152,033 from $2,046,809 for the three months ended March 31, 2005.
The net margin on earning assets declined to 3.51% for the three months ended March 31, 2006, from 3.60% for the three months ended March 31, 2005. The increase in average interest-bearing deposits and the corresponding increase in rate contributed to the slight decrease in the net margin on earning assets.
The following table illustrates average balances of total interest earning assets and total interest bearing liabilities for the periods indicated, showing the average distribution of assets, liabilities, stockholders’ equity and related revenue, expense and corresponding weighted average yields and rates. The average balances used in this table and other statistical data were calculated using average daily balances.
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Average Balances, Interest, and Yields/Rates
| Three Months Ended March 31, | ||||||||||||||||||||
| 2006 | 2005 | |||||||||||||||||||
| Average | Yield/ | Average | Yield/ | |||||||||||||||||
| balance | Interest | Rate | balance | Interest | Rate | |||||||||||||||
Assets: | ||||||||||||||||||||
Federal Funds Sold and FHLB deposit | $ | 17,326,910 | $ | 188,875 | 4.42 | % | $ | 7,318,249 | $ | 45,175 | 2.50 | % | ||||||||
FHLB and FRB stock | 238,500 | 3,578 | 6.08 | % | 186,073 | 2,579 | 5.62 | % | ||||||||||||
Investment Securities | ||||||||||||||||||||
Preferred trust | — | — | — | 296,667 | 7,417 | 10.14 | % | |||||||||||||
Equity security | 30,000 | 302 | 4.08 | % | 30,000 | 214 | 2.89 | % | ||||||||||||
Total investment securities | 30,000 | 302 | 4.08 | % | 326,667 | 7,631 | 9.47 | % | ||||||||||||
Loans held for sale | 1,367,585 | 20,973 | 6.22 | % | 1,266,276 | 14,572 | 4.67 | % | ||||||||||||
Loans: | ||||||||||||||||||||
Residential real estate | 25,380,863 | 480,789 | 7.68 | % | 14,778,838 | 281,882 | 7.74 | % | ||||||||||||
Construction and land development | 7,958,895 | 151,960 | 7.74 | % | 4,084,375 | 52,350 | 5.20 | % | ||||||||||||
Commercial, including real estate | 9,019,590 | 175,988 | 7.91 | % | 6,214,138 | 136,192 | 8.89 | % | ||||||||||||
Commercial finance leases | 1,883,495 | 32,310 | 6.96 | % | 3,534,784 | 61,802 | 7.09 | % | ||||||||||||
Home equity | 6,918,417 | 140,509 | 8.24 | % | 2,633,916 | 37,570 | 5.78 | % | ||||||||||||
Installment | 382,436 | 6,517 | 6.91 | % | 321,182 | 5,113 | 6.46 | % | ||||||||||||
Total loans | 51,543,696 | 988,073 | 7.77 | % | 31,567,233 | 574,909 | 7.39 | % | ||||||||||||
Total interest earning assets | 70,506,691 | 1,201,801 | 6.91 | % | 40,664,498 | 644,866 | 6.43 | % | ||||||||||||
Allowance for loan and lease losses | (367,500 | ) | (315,152 | ) | ||||||||||||||||
Noninterest-bearing cash | 1,273,595 | 722,982 | ||||||||||||||||||
Premises and equipment | 996,986 | 954,270 | ||||||||||||||||||
Other assets | 564,766 | 581,711 | ||||||||||||||||||
Total assets | 72,974,538 | 42,608,309 | ||||||||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||||||
Interest-bearing Deposits | ||||||||||||||||||||
Savings | 4,802,299 | 34,784 | 2.94 | % | 5,741,918 | 25,826 | 1.82 | % | ||||||||||||
NOW money market and escrow | 13,472,178 | 145,600 | 4.38 | % | 2,346,764 | 10,281 | 1.78 | % | ||||||||||||
Certificates of deposit | 40,465,275 | 411,409 | 4.12 | % | 26,940,766 | 248,052 | 3.73 | % | ||||||||||||
Total interest-bearing deposits | 58,739,752 | 591,793 | 4.09 | % | 35,029,448 | 284,159 | 3.29 | % | ||||||||||||
Noninterest-bearing deposits | 6,152,033 | — | 2,046,809 | — | ||||||||||||||||
| 64,891,785 | 591,793 | 3.70 | % | 37,076,257 | 284,159 | 3.11 | % | |||||||||||||
Other liabilities | 322,855 | 143,384 | ||||||||||||||||||
Stockholders’ equity | 7,759,898 | 5,388,668 | ||||||||||||||||||
Total Liabilities and Stockholders’ Equity | $ | 72,974,538 | $ | 42,608,309 | ||||||||||||||||
Net interest spread | 3.21 | % | 3.32 | % | ||||||||||||||||
Net interest income | $ | 610,008 | $ | 360,707 | ||||||||||||||||
Net margin on earning assets | 3.51 | % | 3.60 | % | ||||||||||||||||
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Provision for Loan and Lease Losses and Analysis of Allowance for Loan and Lease Losses
Lending involves a risk that our loans and leases may not be repaid in full and a credit loss will result. Credit losses occur in varying amounts according to, among other factors, the type of loans being made, the credit-worthiness of the borrowers over the term of the loans, the quality of the collateral for the loan, if any, as well as general economic conditions. We maintain a reserve account for credit losses called the allowance for loan and lease losses, and charge all probable credit losses against this account in accordance with regulatory guidance, industry standards, and generally accepted accounting principles. We charge a provision for loan and lease losses to earnings to maintain our allowance for loan and lease losses at a level that we consider to represent our best estimate of the losses known and inherent in the portfolio that are both probable and reasonable to estimate, based on, among other factors, prior loss experience, volume and type of lending conducted, industry standards, economic conditions (particularly as such conditions relate to AmericasBank’s market area), regulatory guidance, the financial condition of the borrower, historical payment performance and the collateral securing the loans and leases. Recoveries on loans previously charged off are added back to the allowance.
The provision for loan and lease losses was $55,000 for the three months ended March 31, 2006, compared to no provision for the three months ended March 31, 2005. The provision for each period reflects our risk assessment of the portfolio and the growth in loan and leases balances outstanding. During the first three months of 2006, we had $2,403 in chargeoffs and no recoveries compared to nominal chargeoffs and no recoveries for the first three months of 2005.
We have developed a methodology for evaluating the adequacy of the allowance for loan and lease losses that distinguishes between credits evaluated as a group by either loan or risk rating category and those evaluated individually. We have predetermined allowance percentages based on credit types and for each risk rating category. All loans and leases are assigned a risk rating when they are made. This risk rating is reassessed by management periodically using the various evaluation factors mentioned above. Loans and leases that exhibit an acceptable level of risk per our internal risk grading system are grouped by category and assigned a standard reserve percentage when assessing the adequacy of the allowance for loan and lease losses. Loans and leases that are adversely risk-rated, or exhibit characteristics that suggest we have a heightened risk of default, are evaluated separately from non-adversely risk rated credits. Each adversely risk rated credit is assigned a standard reserve based on its risk rating or a special reserve based on an assessment of the specific risk factors related to that credit, which may be greater or lesser than the standard reserve for that risk rating.
The predetermined percentages that we use are based on management’s judgment as to appropriate reserve percentages for various categories of loans, and adjusting those values based on the following: historical losses in each category, historical and current delinquency in each category, underwriting standards in each category, comparison of our losses and delinquencies to peer group performance and an assessment of the likely impact of economic and other external conditions on the performance of each category.
A test of the adequacy of the allowance for loan and lease losses is performed and reported to the Board of Directors on a quarterly basis by our senior lending officer. Our senior lending officer will recommend an increase or decrease in the provision and the board will approve or disapprove the recommendation based on a discussion of the risk factors. We believe that we use the most reliable information available to us to make a determination with respect to the allowance for loan and lease losses, recognizing that the determination is inherently subjective and that future adjustments may be necessary depending upon, among other factors, a change in economic conditions of specific borrowers or generally in the economy, and new information that becomes available to us. However, there are no assurances that the allowance for loan and lease losses will be sufficient to absorb losses on nonperforming assets, or that the allowance will be sufficient to cover losses on nonperforming assets in the future.
The allowance for loan and lease losses was $419,507 or 0.76% of loans at March 31, 2006, compared to $366,910 or 0.74% of loans at December 31, 2005. The increase in the allowance for loan and lease losses as a percent of loans and leases was the result of our risk assessment of the loan and lease portfolios, management’s judgment as to appropriate reserve percentages for various categories of loans, and the growth in residential real estate loans outstanding which generally carry a lower risk assessment. AmericasBank has no exposure to foreign countries or foreign borrowers. Management believes that the current allowance for loan and lease losses is adequate.
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The changes in the allowance for loan and lease losses are presented in the following table:
| Three Months Ended | Year Ended | |||||||||||
| March 31, | December 31, | |||||||||||
| 2006 | 2005 | 2005 | ||||||||||
Balance, beginning of year | $ | 366,910 | $ | 315,127 | $ | 315,127 | ||||||
Provision charged to operations | 55,000 | — | 52,000 | |||||||||
Recoveries | — | — | — | |||||||||
| 421,910 | 315,127 | 367,127 | ||||||||||
Loans charged off | 2,403 | 45 | 217 | |||||||||
Balance, end of year | $ | 419,507 | $ | 315,082 | $ | 366,910 | ||||||
Allowance for loan and lease losses to total loans | 0.76 | % | 0.94 | % | 0.74 | % | ||||||
Noninterest Revenue
Noninterest revenue consisted primarily of mortgage banking gains and fees from the sale of mortgage loans, and service charges on deposit accounts, which includes debit card fees and ATM fees. Noninterest revenues decreased $54,845 for the three months ended March 31, 2006, to $81,700, from $136,545 for the three months ended March 31, 2005. The decrease for the three months ended March 31, 2006, was primarily from a $63,698 decrease in mortgage banking gains and fees to $60,199 for the three months ended March 31, 2006 from $123,897 for the three months ended March 31, 2005. We have expanded our mortgage business to originate and sell loans as either a correspondent or broker. The slow down in the real estate market has effected our loan origination in the first quarter of 2006. Service charges on deposit accounts and other fees increased to $21,501 for the three months ended March 31, 2006, from $12,648 for the three months ended March 31, 2005. The increase was primarily from fees on business accounts and ATM service charges.
Noninterest Expenses
Noninterest expenses for the three months ended March 31, 2006, were $850,383, compared to $649,759 for the same period in 2005. The increase for the three months ended March 31, 2006 was $200,624 or 30.9%. Salaries increased $110,299 to $397,855 for the three months ended March 31, 2006 compared to $287,556 for the three months ended March 31, 2005. The increase in expense was due to an increase in staff to thirty-two full time employee including seven loan originators at March 31, 2006 compared to twenty-four full time employee including five loan originators at March 31, 2005. We added experienced employees in both bank and loan operations to support our growth. Employee benefits increased $32,595 to $113,101 for the three months ended March 31, 2006 compared to $80,506 for the three months ended March 31, 2005. The increase was mainly in payroll taxes and health care benefits associated with the increase in staff. Occupancy increased $10,206 to $56,572 for the three months ended March 31, 2006 compared to $46,366 for the three months ended March 31, 2005. This increase is primarily from additional depreciation expense arising from the renovations to the bank building at our 500 York Road location, other building maintenance and an increase in utilities. Furniture and equipment decreased $1,816 to $28,685 for the three months ended March 31, 2006 compared to $30,501 for the three months ended March 31, 2005. Other expense increased $49,340 to $254,170 for the three months ended March 31, 2006 compared to $204,830 for the three months ended March 31, 2005. Increases in this expense category were associated with director fees, data processing fees, insurance premiums, and professional services. The increases in these categories were partially offset by a decline in advertising and marketing.
Analysis of Financial Condition
Investment Securities
AmericasBank’s portfolio has consisted primarily of U.S. government agency securities, mortgage-backed securities and certain equity securities. The portfolio provides a source of liquidity and a means of diversifying AmericasBank’s earning assets. While we generally intend to hold the investment portfolio assets until maturity, we classify the entire portfolio as available for sale. We account for securities so classified at fair value and report the
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unrealized appreciation and depreciation as a separate component of stockholders’ equity. AmericasBank invests in securities for the yield they produce and not to profit from trading the securities. There are no trading securities in the portfolio.
The investment portfolio at March 31, 2006 and December 31, 2005 consisted of a $30,000 equity security. The security is classified as available for sale.
Loan Portfolio
Loans and leases, net of allowance, unearned fees and origination costs increased $5,873,568 or 12.0% to $54,863,173 at March 31, 2006, from $48,989,605 at December 31, 2005. Compared to a year earlier, loans and leases, net of allowance, unearned fees and origination costs have increased by $21,624,301 or 65.1 % from $33,238,872 at March 31, 2005.
Residential real estate loans increased by $4,066,202 (17.2%), construction and land development loans decreased by $23,335 (0.3%), commercial loans including commercial real estate loans increased by $1,187,054 (13.6%), commercial finance leases increased by $96,744 (5.2%), home equity loans increased by $545,402 (8.4%), and installment loans increased by $29,628 (9.9%) from their respective balances at December 31, 2005. Going forward, we expect to continue to see wide changes in our loan categories as we experience scheduled payoffs and as we grow our loan portfolio.
Loans secured by real estate comprise the majority of the loan portfolio. AmericasBank’s loan customers are generally located in the greater Baltimore metropolitan area.
The following table summarizes the composition of the loan portfolio by dollar amount and percentages:
| Loan Portfolio | ||||||||||||||
| March 31 | December 31, | |||||||||||||
| 2006 | % | 2005 | % | |||||||||||
Residential real estate | $ | 27,715,879 | 50.07 | % | $ | 23,649,677 | 47.83 | % | ||||||
Construction and land development | 8,370,523 | 15.12 | % | 8,393,858 | 16.97 | % | ||||||||
Commercial, including real estate | 9,948,499 | 17.97 | % | 8,761,445 | 17.72 | % | ||||||||
Commercial finance leases | 1,961,236 | 3.54 | % | 1,864,492 | 3.77 | % | ||||||||
Home equity | 7,026,126 | 12.70 | % | 6,480,724 | 13.11 | % | ||||||||
Installment | 329,184 | 0.60 | % | 299,556 | 0.60 | % | ||||||||
| 55,351,447 | 100.00 | % | 49,449,752 | 100.00 | % | |||||||||
Deferred loan origination fees, net of cost | (68,767 | ) | (93,237 | ) | ||||||||||
Allowance for loan and lease losses | (419,507 | ) | (366,910 | ) | ||||||||||
| $ | 54,863,173 | $ | 48,989,605 | |||||||||||
We perform monthly reviews of all delinquent loans and leases and relationship officers are charged with working with customers to resolve potential credit issues and payment delinquency in a timely manner. We generally classify loans and leases as nonaccrual when collection of full principal and interest under the original terms of the credit is not expected or payment of principal or interest has become 90 days past due. Classifying a credit as nonaccrual results in us no longer accruing interest on such loan or lease and reversing any interest previously accrued but not collected. We will generally restore a nonaccrual loan or lease to accrual status when delinquent principal and interest payments are brought current and we expect to collect future monthly principal and interest payments in a timely manner and in accordance with the original repayment schedule. Generally, we credit all interest payments received on nonaccruing credits to the principal balance of the loan or lease to reduce our credit exposure. If we have collateral that mitigates our credit exposure, we may recognize interest as income when received.
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Information about non-performing loans is as follows:
| March 31, | December 31, | ||||||||
| 2006 | 2005 | 2005 | |||||||
Nonaccrual loans | $ | 622,761 | $ | 622,761 | $ | 622,761 | |||
Unrecorded interest on nonaccrual loans | 64,875 | 17,440 | 51,922 | ||||||
Loans past due 90 days or more and still accruing interest | — | — | — | ||||||
Specific reserve for nonaccrual loans included in the allowance for loan and lease losses | 29,388 | 44,388 | 29,388 | ||||||
A substantial amount of our nonaccrual loans is related to one loan in which we held an approximately 10% participation. Our loan balance to this borrower was $587,761 at March 31, 2006. This non-performing loan is a participation in a loan to a land developer for the purchase and development of raw land that was under contract for sale as developed lots to a national homebuilder. The project ran into delays during the permitting process related primarily to storm water management issues. As a result of the delays, the interest reserve was exhausted, causing the loan to go into interest payment default.
In early November 2005, the national homebuilder agreed to release the borrower from its original purchase agreement. On November 18, 2005, the participating banks negotiated a 90-day Forbearance Agreement with the borrower for the purpose of allowing the borrower to negotiate the sale of the property. On February 7, 2006, the borrower entered into a new agreement with the same national homebuilder to sell the property “as is.” The new agreement was contingent upon completion of a feasibility study within 45 days of its execution. The national homebuilder completed its feasibility study and, on March 27, 2006, approved the purchase of the property, subject to the county’s approval of road access plans. On April 12, 2006, the feasibility study was extended to May 14, 2006 to allow more time for the county’s approval of road access plans. It is anticipated that closing will occur by the end of May 2006, although there is no assurance that this will be the case.
The participating banks have agreed to extend the forbearance period through May 14, 2006 to accommodate the amendment to the agreement with the national homebuilder. We continue to believe that we will collect all of our outstanding principal balance, accrued interest and expenses, however it is possible that this will not be the case.
We apply the provisions of Statement of Financial Accounting Standards No. 114 (“SFAS No. 114”),Accounting by Creditors for Impairment of a Loan, as amended by Statement of Financial Accounting Standards No. 118 (“SFAS No. 118”),Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosure. SFAS No. 114 and SFAS No. 118 require that impaired loans, which consist of all modified loans and other loans for which collection of all contractual principal and interest is not probable, be measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. If the measure of the impaired loan is less than the recorded investment in the loan, an impairment is recognized through a valuation allowance and corresponding provision for loan and lease losses. We write off impaired loans when collection of the loan is doubtful. We generally classify nonaccrual loans and leases as impaired. As of March 31, 2006, and December 31, 2005, no credit had been identified as impaired other than the nonaccrual loans and leases described above.
We classify any property acquired as a result of foreclosure on a mortgage loan as foreclosed real estate and record it at the lower of the unpaid principal balance or fair value at the date of acquisition and subsequently carry the property at the lower of cost or net realizable value. We charge any required write-down of the loan to its net realizable value against the allowance for loan and lease losses at the time of foreclosure. We charge to expense any subsequent adjustments to net realizable value. Upon foreclosure, we generally require an appraisal of the property and, thereafter, appraisals of the property on at least an annual basis and external inspections on at least a quarterly basis. As of March 31, 2006, and December 31, 2005, we had no foreclosed real estate.
Deposits
We seek deposits within our market area by paying competitive interest rates and offering high quality customer service. In conjunction with our growth strategy, we offer premium rate certificates of deposit to support loan growth.
We use a web-based service to offer certain of our certificates of deposit. The interest rate offered on these certificates of deposit is higher than what we would typically pay within our market. We continue to employ this service
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as a strategy to support our loan growth plans and view it as a cost effective and efficient process to raise deposits for specific terms.
At March 31, 2006, our total deposits decreased by $4,723,364 or 7.0% to $62,452,118 from $67,175,482 at December 31, 2005. Interest-bearing deposits decreased $3,934,068 or 6.6% to $55,243,027 at March 31, 2006, from $59,177,095 at December 31, 2005. Noninterest bearing deposits decreased $789,296 or 9.9% to $7,209,091at March 31, 2006, from $7,998,387 at December 31, 2005.
A majority of the decrease in our interest bearing deposits was due to maturities of premium rate certificates of deposits that were not renewed. The additional capital raised in March 2006 provided us with sufficient liquidity to replace these high cost funds. As we grow our assets we will again utilize the web-based service and print advertising in local newspapers to offer certificates of deposit and other interest bearing core deposit products.
The decrease in noninterest bearing deposits was primarily from a decline in activity in our accounts held by title companies. While there has been a decline in mortgage business in our market, we feel it is important to continue to focus our marketing efforts toward these businesses. As we implement the strategy to expand the reach of our mortgage business we expect that it will provide us with new opportunities to sell our deposit services to more of these title companies.
Liquidity
Our overall asset/liability strategy takes into account our need to maintain adequate liquidity to fund asset growth and deposit runoff. We monitor our federal funds sold position on a daily basis in that this is our primary source of liquidity. From time to time we may sell or participate out loans to create additional liquidity as required. Additional liquidity is also available from our loans held for sale, which amounted to $1,778,181 at March 31, 2006. We have no other sources of liquidity, such as lines of credit or correspondent relationships with other financial institutions. When we sustain breakeven profitability, we hope to establish a line of credit with the Federal Home Loan Bank, but there can be no assurance that we will be successful in our efforts.
Our immediate sources of liquidity are cash and due from banks and short term investments. As of March 31, 2006, we had $1,651,206 in cash and due from banks, and $18,607,933 in federal funds sold and Federal Home Loan Bank deposit. Management has made a decision to maintain liquidity instead of investing in investment securities in order to ensure that funds are readily available to fund the growth of the loan portfolio. In addition, deposits from title companies represent a deposit that is subject to more volatility, thereby increasing our need to have funds available. We believe that our ability to manage the volatility of these deposits will improve as we add more of this type of account to our customer base.
We have sufficient liquidity to meet our loan commitments as well as fluctuations in deposits. We usually retain maturing certificates of deposit as we offer competitive rates on certificates of deposit. We are not aware of any demands, trends, commitments, or events that would result in our inability to meet anticipated or unexpected liquidity needs. Although we do not have a line of credit and are limited in our use of brokered certificates of deposit, because of our large relative amount of federal funds sold, we believe that we can adequately satisfy all of our commitments.
Capital
Our stockholders’ equity amounted to $16,098,687 at March 31, 2006, an increase of $10,842,636 from the $5,256,051 reported at December 31, 2005. The significant increase is due to capital raised in our public offering which closed on March 10, 2006.
The following table shows our regulatory capital ratios and the minimum capital ratios currently required by our banking regulator to be “well capitalized” and “adequately capitalized.” The table provides information for AmericasBank Corp.
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| Risk Based Capital Analysis | ||||||||||||||
| March 31, | December 31, | |||||||||||||
| 2006 | 2005 | |||||||||||||
(dollars in thousands) | ||||||||||||||
Tier 1 Capital: | ||||||||||||||
Common stock | $ | 27 | $ | 9 | ||||||||||
Capital surplus | 22,674 | 11,635 | ||||||||||||
Retained earnings | (6,602 | ) | (6,388 | ) | ||||||||||
Less: disallowed assets | (290 | ) | (291 | ) | ||||||||||
Total Tier 1 Capital | 15,809 | 4,965 | ||||||||||||
Tier 2 Capital: | ||||||||||||||
Allowance for loan and lease losses | 420 | 367 | ||||||||||||
Total Risk Based Capital | $ | 16,229 | $ | 5,332 | ||||||||||
Risk weighted assets | $ | 51,993 | $ | 47,122 | ||||||||||
| Regulatory Minimum to be | ||||||||||||||
| Well | Adequately | |||||||||||||
| Capitalized | Capitalized | |||||||||||||
Capital Ratios: | ||||||||||||||
Total risk based capital ratio | 31.21 | % | 11.32 | % | 10.00 | % | 8.00 | % | ||||||
Tier 1 risk based capital ratio | 30.41 | % | 10.54 | % | 6.00 | % | 4.00 | % | ||||||
Leverage ratio | 21.75 | % | 6.95 | % | 5.00 | % | 4.00 | % | ||||||
Application of Critical Accounting Policies
General
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and follow general practices within the industry in which we operate. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available.
The most significant accounting policies followed by AmericasBank are presented in Note 1 to the consolidated financial statements. These policies, along with the disclosures presented in the other financial statement notes and in this financial review, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for loan and lease losses as the accounting area that requires the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses represents management’s best estimate of losses known and inherent in the loan and lease portfolio that are both probable and reasonable to estimate, based on, among other factors, prior loss
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experience, volume and type of lending conducted, industry standards, economic conditions (particularly as such conditions relate to AmericasBank’s market area), regulatory guidance, the financial condition of the borrower, historical payment performance and the collateral securing the loans and leases. Determining the amount of the allowance for loan and lease losses is considered a critical accounting estimate because it requires significant estimates, assumptions and judgment. The loan and lease portfolio also represents the largest asset type on the balance sheets.
We have developed a methodology for evaluating the adequacy of the allowance for loan and lease losses that distinguishes between credits evaluated as a group by either loan or risk rating category and those evaluated individually. We have predetermined allowance percentages based on credit types and for each risk rating category. All loans and leases are assigned a risk rating when they are made. This risk rating is reassessed by management periodically using the various evaluation factors mentioned above. Loans and leases that exhibit an acceptable level of risk per our internal risk grading system are grouped by category and assigned a standard reserve percentage when assessing the adequacy of the allowance for loan and lease losses. Loans and leases that are adversely risk-rated, or exhibit characteristics that suggest we have a heightened risk of collection, are evaluated separately from non-adversely risk rated credits. Each adversely risk rated credit is assigned a standard reserve based on its risk rating or a special reserve based on an assessment of the specific risk factors related to that credit, which may be greater or lesser than the standard reserve for that risk rating.
Management has significant discretion in making the judgments inherent in the determination of the provision and allowance for loan and lease losses, including in connection with the valuation of collateral and the financial condition of the borrower, and in establishing allowance percentages and risk ratings. The establishment of allowance factors is a continuing exercise and allowance factors may change over time, resulting in an increase or decrease in the amount of the provision or allowance based upon the same volume and classification of loans.
Changes in allowance factors or in management’s interpretation of those factors will have a direct impact on the amount of the provision, and a corresponding effect on income and assets. Also, errors in management’s perception and assessment of the allowance factors could result in the allowance not being adequate to cover losses in the portfolio, and may result in additional provisions or charge-offs, which would adversely affect income and capital. For additional information regarding the allowance for loan and lease losses, see the “Provision for Loan and Lease Losses and Analysis of Allowance for Loan and Lease Losses” section of this financial review.
Fair Value Accounting for Stock Options
The Financial Accounting Standards Board encourages use of a fair value based method of accounting for stock options. In prior periods AmericasBank Corp. had elected to use the intrinsic value method to account for stock-based employee compensation plans in accordance with Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees. Under this method, compensation cost is recognized for awards of shares of common stock to employees only if the quoted market price of the stock at any measurement date is greater than the amount the employee must pay to acquire the stock. As permitted, AmericasBank Corp. elected to adopt the disclosure-only provisions of SFAS No. 123,Accounting for Stock-Based Compensation.
Effective January 1, 2005, AmericasBank Corp. began recognizing expense for stock-based compensation using the fair value based method of accounting described in Statement of Financial Accounting Standards (“SFAS”) No. 123,Accounting for Stock-Based Compensation, as amended. We have chosen the retroactive restatement method described in SFAS No. 148,Accounting for Stock-Based Compensation — Transition and Disclosure, which amended SFAS No. 123. As a result, financial information for all prior periods presented have been restated to reflect the salaries expense that would have been recognized had the recognition provisions of SFAS No. 123 been applied to all awards granted to employees. The use of the retroactive restatement method resulted in the restatement of previously reported balances of additional paid-in capital and accumulated deficit. As of December 31, 2004, previously reported additional paid-in capital was increased by $286,910 and accumulated deficit was increased by the same amount.
The value of the options was estimated using the Black-Scholes option pricing model with the option life estimated at 5-9 years. There were no modifications made to outstanding share options prior to the adoption of the fair value method. The compensation expense not yet recognized as of March 31, 2006, was approximately $427,551.
Net Deferred Tax Asset
AmericasBank Corp. has recorded a 100% valuation allowance against the net deferred tax asset since it is more likely than not that it will not be realized. At December 31, 2005 and 2004, AmericasBank Corp. has net operating loss
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carryforwards of approximately $5,631,845 and $5,232,241 available to offset future taxable income. The current carryforwards will expire beginning in 2017.
Goodwill
Goodwill represents the cost in excess of the fair value of net assets acquired (including identifiable intangibles) in transactions accounted for as purchases. SFAS No. 142, Goodwill and Other Intangible Assets, requires that goodwill no longer be amortized over an estimated useful life, but rather be tested at least annually for impairment. Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value. The implied fair value of goodwill is the amount determined by deducting the estimated fair value of all tangible and identifiable intangible net assets of the reporting unit to which goodwill has been allocated from the estimated fair value of the reporting unit. If the recorded value of goodwill exceeds its implied value, an impairment charge is recorded for the excess. Goodwill of $266,985 was recorded when we acquired certain assets and assumed certain liabilities of uvm Mortgage Marketing in October 2004. The goodwill is tested at least annually for impairment.
Estimate of Costs to Originate Loans
Effective January 2005, we reevaluated our estimate of the costs to originate or acquire loans and leases and loans held for sale. This analysis resulted in a higher amount of costs deferred per loan than in prior periods. The deferral of loan origination costs results in a reduction of salaries and other noninterest expense. The reduction to salaries and other noninterest expense was partially offset by a reduction in interest revenues on loans and leases due to the amortization of these costs. Also, mortgage banking gains and fees from the sale of loans held for sale were reduced by the recognition of the costs upon the sale of the loan. Deferred loan origination costs were $476,552 and $408,764 at March 31, 2006 and December 31, 2005 respectively, an increase of $67,788. This increase is a result of greater loan originations and our reevaluation of cost estimates. Deferred origination costs includes the unamortized balance of the origination costs described above, plus other direct costs such as closing costs paid by us in connection with the origination of certain loans, primarily home equity loans. Management evaluates its estimate of loan origination costs quarterly.
Off-Balance Sheet Arrangements
AmericasBank is a party to financial instruments with off-balance sheet risk in the normal course of business. These financial instruments primarily include loan commitments, lines of credit, including home-equity lines and commercial lines, and letters of credit. AmericasBank uses these financial instruments to meet the financing needs of its customers. These financial instruments involve, to varying degrees, elements of credit, interest rate, and liquidity risk. These do not represent unusual risks and management does not anticipate any accounting losses, which would have a material effect on AmericasBank.
Outstanding loan commitments and lines and letters of credit at March 31, 2006 and December 31, 2005 are as follows:
| March 31, | December 31, | |||||
| 2006 | 2005 | |||||
Loan commitments | $ | 12,226,718 | $ | 5,071,512 | ||
Unused lines of credit | $ | 7,195,530 | $ | 7,613,465 | ||
Letters of credit | $ | 1,500 | $ | 60,713 | ||
Loan commitments and held for sale loan commitments are agreements to lend to a customer as long as there is no violation of any condition established in the contract. AmericasBank generally requires collateral to support financial instruments with credit risk on the same basis as it does for on-balance sheet instruments. The collateral is based on management’s credit evaluation of the counter party. Loan commitments generally have interest rates at current market amounts, fixed expiration dates or other termination clauses and may require payment of a fee. Loan held for sale are usually sold to the investor within 30 days. Unused lines of credit represent the amount of credit available to the customer so long as there is no violation of any contractual condition. These lines generally have variable interest rates. Since many of the commitments are expected to expire without being drawn upon, and since it is unlikely that customers will draw upon their lines of credit in full at any time, the total commitment amount or line of credit amount does not necessarily represent future cash requirements. The Company is not aware of any loss it would incur by funding its commitments or lines of credit.
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Letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. AmericasBank’s exposure to credit loss in the event of nonperformance by the customer is the contract amount of the commitment. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
In general, loan commitments, credit lines and letters of credit are made on the same terms, including with respect to collateral, as outstanding loans. Each customer’s credit-worthiness and the collateral required are evaluated on a case-by-case basis.
Information Regarding Forward-Looking Statements
In addition to the historical information contained in Part I of this Quarterly Report on Form 10-QSB, the discussion in Part I of this Quarterly Report on Form 10-QSB contains certain forward-looking statements. The statements presented herein with respect to, among other things, AmericasBank Corp.’s plans, objectives, expectations and intentions, including statements regarding profitability, liquidity, allowance for loan and lease losses, interest rate sensitivity, market risk and financial and other goals are forward looking. These statements are based on AmericasBank Corp.’s beliefs, assumptions and on information available to AmericasBank Corp. as of the date of this filing, and involve risks and uncertainties. These risks and uncertainties include, among others, those discussed in this Quarterly Report on Form 10-QSB; the risk that AmericasBank Corp. may continue to incur losses; possible loss of key personnel; the inability to successfully implement strategic initiatives; risk of changes in interest rates, deposit flows and loan demand; risks associated with AmericasBank’s lending limit; risks associated with the lack of a credit facility; risk of an industry concentration with respect to deposits; risk of credit losses; risks associated with acting as a correspondent lender; risk associated with a slowdown in the housing market or high interest rates; the allowance for loan and lease losses may not be sufficient; operational and credit risks of the leasing companies to which AmericasBank has extended credit in connection with the lease portfolio; dependence on third party vendors; risk of insufficient capital; risk of possible future regulatory action as a result of past violations of the Real Estate Settlement Procedures Act; as well as changes in economic, competitive, governmental, regulatory, technological and other factors that may affect AmericasBank Corp. or AmericasBank specifically or the banking industry generally.
For a more complete discussion of some of these risks and uncertainties see the discussion under the caption “Factors Affecting Future Results” in AmericasBank Corp.’s Annual Report on Form 10-KSB.
AmericasBank Corp.’s actual results could differ materially from those discussed herein and you should not put undue reliance on any forward-looking statements. All forward-looking statements speak only as of the date of this filing, and AmericasBank Corp. undertakes no obligation to make any revisions to the forward-looking statements to reflect events or circumstances after the date of this filing or to reflect the occurrence of unanticipated events.
Item 3. Controls and Procedures
As of the end of the period covered by this quarterly report on Form 10-QSB, AmericasBank Corp.’s Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of AmericasBank Corp.’s disclosure controls and procedures. Based upon that evaluation, AmericasBank Corp.’s Chief Executive Officer and Chief Financial Officer concluded that AmericasBank Corp.’s disclosure controls and procedures are effective. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by AmericasBank Corp. in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
In addition, there were no changes in AmericasBank Corp.’s internal controls over financial reporting (as defined in Rule 13a-15 or Rule 15d-15 under the Securities Act of 1934, as amended) during the quarter ended March 31, 2006, that have materially affected, or are reasonably likely to materially affect, AmericasBank Corp.’s internal control over financial reporting.
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PART II—OTHER INFORMATION
| Item 1. | Legal Proceedings. |
None.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
(a) Not applicable.
(b) Not applicable.
(c) None.
| Item 3. | Defaults Upon Senior Securities. |
None.
| Item 4. | Submission of Matters to a Vote of Securities Holders. |
None.
| Item 5. | Other Information. |
None.
| Item 6. | Exhibits. |
| 10.14 | Employment Agreement for William J. Allen dated March 24, 2006. | |
| 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AmericasBank Corp.
| ||||
Date: May 11, 2006 | By: | /s/ Mark H. Anders | ||
Mark H. Anders, President and Chief Executive Officer | ||||
(Principal Executive Officer)
| ||||
Date: May 11, 2006 | By: | /s/ A. Gary Rever | ||
A. Gary Rever, Chief Financial Officer | ||||
(Principal Accounting and Financial Officer) | ||||
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