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 June 30, 2007
| ¨ | 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 August 3, 2007, the issuer had 2,654,202 shares of Common Stock outstanding.
Transitional Small Business Disclosure Format (Check one): YES ¨ NO x
Part I - FINANCIAL INFORMATION
| Item 1. | Financial Statements |
AmericasBank Corp. and Subsidiary
Consolidated Balance Sheets
June 30, 2007 | December 31, 2006 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
Cash and due from banks | $ | 3,682,727 | $ | 3,960,807 | ||||
Federal funds sold and Federal Home Loan Bank deposit | 25,603,683 | 14,586,886 | ||||||
Cash and cash equivalents | 29,286,410 | 18,547,693 | ||||||
Securities available for sale | 30,000 | 30,000 | ||||||
Federal Home Loan Bank and Federal Reserve Bank stock at cost | 658,450 | 609,250 | ||||||
Loans held for sale | 3,204,408 | 2,267,250 | ||||||
Loans and leases, less allowance of$1,112,658 and $1,025,821 | 106,335,050 | 84,586,933 | ||||||
Foreclosed real estate | 440,000 | — | ||||||
Premises and equipment | 1,379,394 | 1,129,354 | ||||||
Accrued interest receivable | 556,096 | 564,057 | ||||||
Goodwill | 202,235 | 202,235 | ||||||
Intangible assets | 15,032 | 17,850 | ||||||
Other assets | 286,496 | 203,476 | ||||||
| $ | 142,393,571 | $ | 108,158,098 | |||||
| Liabilities and Stockholders’ Equity | ||||||||
Deposits | ||||||||
Noninterest-bearing | $ | 8,136,980 | $ | 9,074,405 | ||||
Interest-bearing | 117,082,251 | 82,510,132 | ||||||
Total deposits | 125,219,231 | 91,584,537 | ||||||
Other liabilities | 861,775 | 581,165 | ||||||
| 126,081,006 | 92,165,702 | |||||||
Stockholders’ equity | ||||||||
Common stock, par value $.01 per share; 30,000,000 shares authorized, issued and outstanding2,654,202 and 2,654,202, shares | 26,542 | 26,542 | ||||||
Preferred stock, par value $.01 per share; 5,000,000 shares authorized, issued and outstanding 0 shares | — | — | ||||||
Additional paid-in capital | 22,862,800 | 22,785,038 | ||||||
Accumulated deficit | (6,576,777 | ) | (6,819,184 | ) | ||||
| 16,312,565 | 15,992,396 | |||||||
| $ | 142,393,571 | $ | 108,158,098 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
2
AmericasBank Corp. and Subsidiary
Consolidated Statements of Operations
(Unaudited)
| Three Months Ended | Six Months Ended | ||||||||||||
June 30, 2007 | June 30, 2006 | June 30, 2007 | June 30, 2006 | ||||||||||
| Interest revenue | |||||||||||||
Loans and leases, including fees | $ | 2,255,184 | $ | 1,167,684 | $ | 4,230,812 | $ | 2,155,757 | |||||
Federal funds sold and Federal Home Loan Bank deposit | 169,977 | 199,354 | 327,109 | 388,229 | |||||||||
Loans held for sale | 46,946 | 39,052 | 72,012 | 60,025 | |||||||||
Other | 9,664 | 4,981 | 19,395 | 8,861 | |||||||||
Total interest revenue | 2,481,771 | 1,411,071 | 4,649,328 | 2,612,872 | |||||||||
| Interest expense | |||||||||||||
Deposits | 1,235,241 | 605,671 | 2,279,312 | 1,197,464 | |||||||||
Net interest income | 1,246,530 | 805,400 | 2,370,016 | 1,415,408 | |||||||||
| Provision for loan and lease losses | 59,415 | 34,000 | 217,415 | 89,000 | |||||||||
Net interest income after provision for loan and lease losses | 1,187,115 | 771,400 | 2,152,601 | 1,326,408 | |||||||||
| Noninterest revenue | |||||||||||||
Service charges on deposit accounts and other fees | 27,540 | 25,297 | 52,558 | 46,798 | |||||||||
Mortgage banking gains and fees | 111,559 | 110,072 | 178,429 | 170,271 | |||||||||
Total noninterest revenue | 139,099 | 135,369 | 230,987 | 217,069 | |||||||||
| Noninterest expenses | |||||||||||||
Salaries | 609,959 | 404,010 | 1,031,460 | 801,865 | |||||||||
Employee benefits | 139,020 | 128,823 | 280,296 | 241,924 | |||||||||
Occupancy | 83,569 | 40,262 | 151,539 | 96,834 | |||||||||
Furniture and equipment | 43,897 | 29,463 | 81,127 | 58,148 | |||||||||
Other | 326,723 | 295,259 | 596,759 | 549,429 | |||||||||
Total noninterest expenses | 1,203,168 | 897,817 | 2,141,181 | 1,748,200 | |||||||||
Income (loss) before income taxes | 123,046 | 8,952 | 242,407 | (204,723 | ) | ||||||||
Income taxes | — | — | — | — | |||||||||
| Net income (loss) | $ | 123,046 | $ | 8,952 | $ | 242,407 | $ | (204,723 | ) | ||||
Income (loss) per common share - basic and diluted | $ | 0.05 | $ | — | $ | 0.09 | $ | (0.10 | ) | ||||
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)
Additional paid-in capital | |||||||||||||||||||
| Common stock | Accumulated deficit | Comprehensive income | |||||||||||||||||
| Shares | Par value | ||||||||||||||||||
Balance, December 31, 2005 | 941,702 | $ | 9,417 | $ | 11,634,984 | $ | (6,388,350 | ) | |||||||||||
Net loss | — | — | — | (204,723 | ) | $ | (204,723 | ) | |||||||||||
Comprehensive income | $ | (204,723 | ) | ||||||||||||||||
Stock-based compensation expense | — | — | 71,879 | — | |||||||||||||||
Common stock surrendered | (12,500 | ) | (125 | ) | (64,625 | ) | |||||||||||||
Common stock issued, net | 1,725,000 | 17,250 | 11,030,189 | — | |||||||||||||||
Balance, June 30, 2006 | 2,654,202 | $ | 26,542 | $ | 22,672,427 | $ | (6,593,073 | ) | |||||||||||
Balance, December 31, 2006 | 2,654,202 | 26,542 | 22,785,038 | (6,819,184 | ) | ||||||||||||||
Net income | — | — | — | 242,407 | $ | 242,407 | |||||||||||||
Comprehensive income | $ | 242,407 | |||||||||||||||||
Stock-based compensation expense | — | — | 77,762 | — | |||||||||||||||
Balance, June 30, 2007 | 2,654,202 | $ | 26,542 | $ | 22,862,800 | $ | (6,576,777 | ) | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
AmericasBank Corp. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
| Six Months Ended | ||||||||
June 30, 2007 | June 30, 2006 | |||||||
| Cash flows from operating activities | ||||||||
Interest received | $ | 4,699,172 | $ | 2,532,778 | ||||
Fees and commissions received | 52,558 | 46,798 | ||||||
Interest paid | (2,281,976 | ) | (1,202,217 | ) | ||||
Proceeds from sales of loans held for sale | 26,759,440 | 18,513,051 | ||||||
Originations of loans held for sale | (27,518,169 | ) | (18,657,580 | ) | ||||
Cash paid to suppliers and employees | (1,751,599 | ) | (1,471,835 | ) | ||||
| (40,574 | ) | (239,005 | ) | |||||
| Cash flows from investing activities | ||||||||
Purchase of Federal Home Loan Bank and Federal Reserve stock | (49,200 | ) | (370,750 | ) | ||||
Loans and leases made, net of principal collected | (22,447,415 | ) | (14,209,337 | ) | ||||
Purchase of premises, equipment and software | (358,788 | ) | (10,894 | ) | ||||
| (22,855,403 | ) | (14,590,981 | ) | |||||
| Cash flows from financing activities | ||||||||
Net increase (decrease) in time deposits | 30,674,891 | (4,548,152 | ) | |||||
Net increase in other deposits | 2,959,803 | 2,905,099 | ||||||
Common stock surrendered | — | (64,750 | ) | |||||
Proceeds from issuance of common stock, net | — | 11,047,439 | ||||||
| 33,634,694 | 9,339,636 | |||||||
| Net increase (decrease) in cash and cash equivalents | 10,738,717 | (5,490,350 | ) | |||||
Cash and cash equivalents at beginning of year | 18,547,693 | 20,398,751 | ||||||
Cash and cash equivalents at end of period | $ | 29,286,410 | $ | 14,908,401 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
5
AmericasBank Corp. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited) (Continued)
| Six Months Ended | ||||||||
June 30, 2007 | June 30, 2006 | |||||||
| Reconciliation of net income (loss) to net cash provided by operating activities | ||||||||
Net income (loss) | $ | 242,407 | $ | (204,723 | ) | |||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities | ||||||||
Depreciation and amortization | 109,745 | 87,955 | ||||||
Provision for loan and lease losses | 217,415 | 89,000 | ||||||
Stock-based compensation | 77,762 | 71,879 | ||||||
Amortization of loan premium and other intangible assets | 2,818 | 2,741 | ||||||
Increase (decrease) in | ||||||||
Deferred loan fees and costs, net | 41,883 | (36,089 | ) | |||||
Accrued interest payable | (2,664 | ) | (4,753 | ) | ||||
Other liabilities | 283,274 | (91,412 | ) | |||||
Decrease (increase) in | ||||||||
Loans held for sale | (937,158 | ) | (314,800 | ) | ||||
Accrued interest receivable | 7,961 | (44,005 | ) | |||||
Other assets | (84,017 | ) | 205,202 | |||||
| $ | (40,574 | ) | $ | (239,005 | ) | |||
| Noncash investing activity | ||||||||
Transfer of loans to foreclosed real estate | $ | 440,000 | $ | — | ||||
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. (the “Company”) and its wholly owned subsidiary, AmericasBank (the “Bank”). 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 2006 Annual Report on Form 10-KSB. There have been no significant changes to the Company’s Accounting Policies as disclosed in the 2006 Annual Report. The results shown in this interim report are not necessarily indicative of results to be expected for the full year 2007.
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. | 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.
| 3. | INCOME/LOSS PER SHARE |
Income/loss per common share is determined by dividing net income/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 income/loss per share because the result would have been anti-dilutive. The weighted average common shares outstanding were 2,654,202 for the three and six months ended June 30, 2007, and 2,662,581 and 2,016,654 for the three and six months ended June 30, 2006, respectively.
| 4. | 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 $11,047,439. 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 under the symbol AMAB.
7
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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 family of high-performing community banking centers, each organized to look, act, and feel like an independent local bank with its own separate identity. Each of the community banking centers in this family will operate as a division of AmericasBank, and all of the centers will share centralized services including operating systems and processing, funds transfer, loan administration and credit policy oversight, compliance and risk management, and human resources administration. Each banking center will be staffed by a President and team of business development officers, including a residential and commercial mortgage lending group.
We believe that small, independently-operated community banking centers like ours can be highly successful by providing the personal service and common sense solutions not offered by big banks. Our high-access service model will be personified by our individual bank presidents, each of whom will be a respected and long-standing member of the community in which their bank operates. Customers will have direct access to the president of the banking centers and the other decision makers on the banking center’s team. A marketing campaign will inform the local community of the benefits of banking locally, stressing the advantages of dealing directly with our president and other top management staff — a team of capable, professional, and seasoned bankers who have the authority to bring the power of their institution to bear on the customer’s unique needs.
Our strategy is more business-oriented than retail-oriented, with the exception of our residential mortgage business. We will 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 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 and community bankers. Obtaining low-cost core deposits in lieu of depending on high rate certificates of deposit will reduce our overall cost of funds and ultimately improve our net interest margin.
To succeed with our strategy, we must effectively differentiate ourselves from our competitors, including the larger financial service companies operating in our markets. We believe we can do this by being more creative, flexible and responsive to the needs of our customers through our intimate familiarity with our market and the particular circumstances of our customers. 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. Since 2004, we have realigned and expanded bank and loan operations with experienced staff and also invested in new banking products.
We are using the $11 million in capital that we raised in our 2006 offering to execute this expansion strategy, which allows us to effectively leverage our investment in bank and loan operations with only incremental additions to staff. We believe that independent banking centers are an efficient way to enter a market and drive the operation to profitability relatively quickly. In addition to the banking centers we have already organized in the Towson and Annapolis markets, we are seeking to identify and enter as many as three additional markets in Central Maryland by 2012. County seats of government are centers of influence and affluence and will be the prime targets for our new banking centers as we expand.
8
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 dependence on high-cost deposits will diminish as we increase core deposit growth in the new market.
Recent Actions toward achieving our strategy:
In the third quarter of 2007, our location in Towson, Maryland will become Towson Community Bank, and our new banking center in Annapolis, Maryland will open as Annapolis Community Bank.
In May 2007, we announced the hiring of Ellen R. Fish as President of Towson Community Bank, an operating division of AmericasBank. Most recently, Ms. Fish served as Senior Vice-President, Commercial Banking, at Provident Bank of Maryland, a post she held from 1997. She is a past Chairman of the Board and current Board Member of the Baltimore County Chamber of Commerce. Ms. Fish was named one of Maryland’s Top 100 Women byThe Daily Record in 2005.
In May 2007, we also announced the hiring of Eric W. Edstrom as President of Annapolis Community Bank, an operating division of AmericasBank. Mr. Edstrom has over 35 years experience in banking and finance, primarily in Annapolis and on Maryland’s Eastern Shore. Most recently, Mr. Edstrom served as chief operating officer and chief financial officer for The Whitmore Group in Annapolis, since 2004. He is past president of the Annapolis Rotary Club.
Both Ms. Fish and Mr. Edstrom have worked previously with Mark H. Anders, President and Chief Executive Officer of AmericasBank and AmericasBank Corp.
In addition to filling the key leadership roles in the Towson and Annapolis markets, we have been assembling strong support teams for expansion and growth in these markets. Other new hires include a commercial mortgage loan officer and two business development officers for Towson, and a residential and commercial mortgage manager and banking center manager for Annapolis.
Summary of Recent Performance
We reported net income of $123,046 or $0.05 per basic and diluted common share for the three months ended June 30, 2007, an increase of $114,094 from our net income of $8,952 or breakeven per basic and diluted common share for the three months ended June 30, 2006. Our net income for the six months ended June 30, 2007 was $242,407 or $0.09 per basic and diluted common share, an increase of $447,130 from our net loss of $204,723 or $0.10 per basic and diluted common share for the six months ended June 30, 2006.
During the three months ended June 30, 2007, we reported 77.5% growth in average loans and 75.9% growth in total interest revenue compared to the three months ended June 30, 2006. This resulted in $441,130 or 54.8% growth in net interest income between the comparative quarters, and a constant net interest margin of 4.22% for the three months ended June 30, 2007, and June 30, 2006.
The provision for loan and lease losses was $59,415 for the three months ended June 30, 2007, compared to $34,000 for the three months ended June 30, 2006. The increase in the provision was attributable to our risk assessment of the loan portfolio at June 30, 2007, and to the $10,218,517 in loan growth in the second quarter of 2007, compared to loan growth of $8,282,858 in the second quarter of 2006.
Mortgage loans originated for sale in the secondary market approximated our levels from a year ago in both the three and six month periods ended June 30, 2007. Mortgage banking gains and fees were $111,559 and $178,429 for the three and six months ended June 30, 2007, compared to $110,072 and $170,271 for the three and six months ended June 30, 2006. We operate under a business model whereby our mortgage loan officers are expected to originate loans for sale in the secondary market and refer loan business to the Bank for our loan portfolio. This sales group has maintained a steady referral of loan business to the Bank and their efforts have contributed to the growth in loans. These loans, while principally secured by real estate, tend to be for commercial and investment purposes such as builder construction, owner occupied businesses, and investors who are rehabbing either one or several 1 to 4 family residential properties. It has been and will continue to be our strategy to leverage our mortgage loan originators as a source for building our portfolio loans. We believe that our strategy of building a loan portfolio based on real estate based products will allow us to continue to maintain good asset quality and is consistent with our risk management policies.
9
Noninterest expenses increased $305,351 or 34.0%, to $1,203,168 for the three months ended June 30, 2007, from $897,817 for the three months ended June 30, 2006. We experienced an increase in all major expense categories in the second quarter of 2007 compared to 2006, which is mostly attributable to the costs associated with our growth and expansion activities in the Towson and Annapolis markets. We expect more significant increases for the remainder of 2007 with the opening of the Annapolis Community Bank in September 2007, and the added expense to support branding and media campaigns for the newly named Towson Community Bank. Both community banks will operate as divisions of AmericasBank.
Total assets increased by $34,235,473 or 31.7%, to $142,393,571 at June 30, 2007, from $108,158,098 at December 31, 2006. Average interest earning assets for the three months ended June 30, 2007, were $118,386,346, an increase of $41,750,346, or 54.5% from the $76,635,999 in average interest earning assets for the second three months of 2006.
Total deposits at June 30, 2007, were $125,219,231, an increase of 36.7% from $91,584,537 at December 31, 2006. The increase in deposits is primarily the result of growth in money market accounts and premium rate certificates of deposit obtained through an Internet-based service and retail broker channels. Noninterest bearing deposits were $8,136,980 at June 30, 2007, compared to $9,074,405 at December 31, 2006, reflecting a decrease in deposits from title companies. Daily deposit balances from title companies can increase and decrease significantly throughout the month due to the nature of their business and the variability of the real estate market.
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 and six months ended June 30, 2007, increased 54.8% and 67.4%, respectively, to $1,246,530 from $805,400 for the three months ended June 31, 2006, and to $2,370,016 from $1,415,408 for the six months ended June 30, 2006.
Total interest revenue increased for the three months ended June 30, 2007, to $2,481,771, from $1,411,071 for the three months ended June 30, 2006, and to $4,649,328 for the six months ended June 30, 2007, from $2,612,872 for the six months ended June 30, 2006. The increase is primarily attributable to an increase in interest revenue from loans and leases. Interest revenue from loans and leases increased for the three and six months ended June 30, 2007, by $1,087,500 or 93.1% and $2,075,055 or 96.3%, respectively. This increase was partially offset by a decrease in interest revenue from federal funds sold and Federal Home Loan Bank deposits of $29,377 or 14.7% and $61,120 or 15.7% for the three and six months ended June 30, 2007, as we deployed excess liquidity into loans.
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 $44,447,969 or 77.5% for the three months ended June 30, 2007, to $101,824,244 from $57,376,276 for the three months ended June 30, 2006. The yield on loans increased to 8.88% for the three months ended June 30, 2007, from 8.16% for the three months ended June 30, 2006. Average loans increased by $42,177,769 or 77.4% for the six months ended June 30, 2007, to $96,653,867 from $54,476,098 for the six months ended June 30, 2006. The yield on loans increased to 8.83% for the six months ended June 30, 2007, from 7.98% for the six months ended June 30, 2006.
Average federal funds sold and Federal Home Loan Bank deposit decreased by $3,365,431, or 20.7% for the three months ended June 30, 2007, to $12,858,485 from $16,223,916 for the three months ended June 30, 2006. The yield on these funds increased to 5.30% for the three months ended June 30, 2007, from 4.93% for the three months ended June 30, 2006. Average federal funds sold and Federal Home Loan Bank deposit decreased by $4,325,703, or 25.8% for the six months ended June 30, 2007, to $12,446,663 from $16,772,366 for the six months ended June 30, 2006. The yield on these funds increased to 5.30% for the six months ended June 30, 2007, from 4.67% for the six months ended June 30, 2006.
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The increase in yields on earning assets was influenced by the increase in market interest rates in response to actions by the Federal Reserve. The federal funds target rate ranged from 4.25% to 5.25% during the first six months of 2006, compared to a constant target rate of 5.25% for the six months ended June 30, 2007.
Interest expense increased by $629,570 or 103.9% for the three months ended June 30, 2007, to $1,235,241 from $605,671 for the three months ended June 30, 2006, and by $1,081,848 or 90.3% for the six months ended June 30, 2007, to $2,279,312 from $1,197,464 for the six months ended June 30, 2006. The increase in interest expense was due to the 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 $40,608,301 or 72.0% for the three months ended June 30, 2007, to $97,031,652 from $56,423,352 for the three months ended June 30, 2006. The rate on interest-bearing deposits increased to 5.11% for the three months ended June 30, 2007, from 4.31% for the three months ended June 30, 2006. Average interest bearing deposits increased by $33,172,470 or 57.6% for the six months ended June 30, 2007, to $90,747,623 from $57,575,153 for the six months ended June 30, 2006. The rate on interest-bearing deposits increased to 5.07% for the six months ended June 30, 2007, from 4.19% for the six months ended June 30, 2006. 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 an Internet-based service and retail broker channels to offer certificates of deposit.
Average noninterest-bearing deposits increased by $647,252 or 10.5% for the three months ended June 30, 2007, to $6,830,309 from $6,183,058 for the three months ended June 30, 2006. Average noninterest-bearing deposits increased by $786,198 or 12.7% for the six months ended June 30, 2007, to $6,953,829 from $6,167,631 for the six months ended June 30, 2006. Noninterest-bearing deposits are mainly comprised of deposits from title companies and the balances held in these accounts are subject to the variability of the real estate market.
The net margin on earning assets was constant at 4.22% for the three months ended June 30, 2007 and June 30, 2006. The net margin on earning assets increased to 4.26% for the six months ended June 30, 2007, from 3.88% for the six months ended June 30, 2006. The increase in average interest earning assets, our new capital, and the increases in market interest rates contributed to the increase in the net margin on earning assets.
The following tables 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 these tables and other statistical data were calculated using average daily balances.
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Average Balances, Interest, and Yields/Rates
| Three Months Ended June 30, | ||||||||||||||||||||
| 2007 | 2006 | |||||||||||||||||||
| Average | Yield/ | Average | Yield/ | |||||||||||||||||
| balance | Interest | Rate | balance | Interest | Rate | |||||||||||||||
Assets: | ||||||||||||||||||||
Federal Funds Sold and FHLB deposit | $ | 12,858,485 | $ | 169,977 | 5.30 | % | $ | 16,223,916 | $ | 199,354 | 4.93 | % | ||||||||
FHLB and FRB stock | 658,451 | 9,466 | 5.77 | % | 390,818 | 4,783 | 4.91 | % | ||||||||||||
Investment Securities | ||||||||||||||||||||
Equity security | 30,000 | 198 | 2.65 | % | 30,000 | 198 | 2.65 | % | ||||||||||||
Total investment securities | 30,000 | 198 | 2.65 | % | 30,000 | 198 | 2.65 | % | ||||||||||||
Loans held for sale | 3,015,165 | 46,946 | 6.25 | % | 2,614,989 | 39,052 | 5.99 | % | ||||||||||||
Loans: | ||||||||||||||||||||
Residential real estate | 28,438,763 | 612,624 | 8.64 | % | 28,698,167 | 576,909 | 8.06 | % | ||||||||||||
Construction and land development | 44,304,600 | 1,003,889 | 9.09 | % | 8,688,562 | 181,711 | 8.39 | % | ||||||||||||
Commercial, including real estate | 17,270,616 | 371,248 | 8.62 | % | 10,178,871 | 211,695 | 8.34 | % | ||||||||||||
Commercial finance leases | 728,504 | 13,310 | 7.33 | % | 1,751,966 | 31,187 | 7.14 | % | ||||||||||||
Home equity | 10,848,013 | 249,705 | 9.23 | % | 7,729,315 | 160,223 | 8.31 | % | ||||||||||||
Installment | 233,747 | 4,408 | 7.56 | % | 329,395 | 5,959 | 7.26 | % | ||||||||||||
Total loans | 101,824,244 | 2,255,184 | 8.88 | % | 57,376,276 | 1,167,684 | 8.16 | % | ||||||||||||
Total interest earning assets | 118,386,346 | 2,481,771 | 8.41 | % | 76,635,999 | 1,411,071 | 7.39 | % | ||||||||||||
Allowance for loan and lease losses | (1,215,039 | ) | (435,210 | ) | ||||||||||||||||
Noninterest-bearing cash | 1,923,818 | 1,773,891 | ||||||||||||||||||
Premises and equipment | 1,280,654 | 971,551 | ||||||||||||||||||
Other assets | 850,199 | 695,567 | ||||||||||||||||||
Total assets | 121,225,978 | 79,641,798 | ||||||||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||||||
Interest-bearing Deposits | ||||||||||||||||||||
Savings | 4,571,862 | 35,981 | 3.16 | % | 4,795,958 | 38,946 | 3.26 | % | ||||||||||||
NOW money market and escrow | 18,847,451 | 250,692 | 5.34 | % | 14,663,880 | 173,392 | 4.74 | % | ||||||||||||
Certificates of deposit | 73,612,339 | 948,568 | 5.17 | % | 36,963,514 | 393,333 | 4.27 | % | ||||||||||||
Total interest-bearing deposits | 97,031,652 | 1,235,241 | 5.11 | % | 56,423,352 | 605,671 | 4.31 | % | ||||||||||||
Noninterest-bearing deposits | 6,830,309 | — | 6,183,058 | — | ||||||||||||||||
| 103,861,962 | 1,235,241 | 4.77 | % | 62,606,409 | 605,671 | 3.88 | % | |||||||||||||
Other liabilities | 618,108 | 188,096 | ||||||||||||||||||
Stockholders’ equity | 16,745,908 | 16,847,293 | ||||||||||||||||||
Total Liabilities and Stockholders’ Equity | $ | 121,225,978 | $ | 79,641,798 | ||||||||||||||||
Net interest spread | 3.64 | % | 3.51 | % | ||||||||||||||||
Net interest income | $ | 1,246,530 | $ | 805,400 | ||||||||||||||||
Net margin on earning assets | 4.22 | % | 4.22 | % | ||||||||||||||||
12
Average Balances, Interest, and Yields/Rates
| Six Months Ended June 30, | ||||||||||||||||||||
| 2007 | 2006 | |||||||||||||||||||
| Average | Yield/ | Average | Yield/ | |||||||||||||||||
| balance | Interest | Rate | balance | Interest | Rate | |||||||||||||||
Assets: | ||||||||||||||||||||
Federal Funds Sold and FHLB deposit | $ | 12,446,663 | $ | 327,109 | 5.30 | % | $ | 16,772,366 | $ | 388,229 | 4.67 | % | ||||||||
FHLB and FRB stock | 634,530 | 18,951 | 6.02 | % | 315,080 | 8,361 | 5.35 | % | ||||||||||||
Investment Securities | ||||||||||||||||||||
Equity security | 30,000 | 444 | 2.98 | % | 30,000 | 500 | 3.36 | % | ||||||||||||
Total investment securities | 30,000 | 444 | 2.98 | % | 30,000 | 500 | 3.36 | % | ||||||||||||
Loans held for sale | 2,375,785 | 72,012 | 6.11 | % | 1,994,733 | 60,025 | 6.07 | % | ||||||||||||
Loans: | ||||||||||||||||||||
Residential real estate | 29,632,631 | 1,269,560 | 8.64 | % | 27,048,679 | 1,060,692 | 7.91 | % | ||||||||||||
Construction and land development | 38,172,844 | 1,718,957 | 9.08 | % | 8,325,744 | 334,617 | 8.10 | % | ||||||||||||
Commercial, including real estate | 16,933,057 | 722,662 | 8.61 | % | 9,602,433 | 388,778 | 8.16 | % | ||||||||||||
Commercial finance leases | 744,314 | 27,149 | 7.36 | % | 1,817,367 | 63,497 | 7.05 | % | ||||||||||||
Home equity | 10,933,018 | 483,551 | 8.92 | % | 7,326,106 | 295,697 | 8.14 | % | ||||||||||||
Installment | 238,003 | 8,933 | 7.57 | % | 355,769 | 12,476 | 7.07 | % | ||||||||||||
Total loans | 96,653,867 | 4,230,812 | 8.83 | % | 54,476,098 | 2,155,757 | 7.98 | % | ||||||||||||
Total interest earning assets | 112,140,845 | 4,649,328 | 8.36 | % | 73,588,277 | 2,612,872 | 7.16 | % | ||||||||||||
Allowance for loan and lease losses | (1,159,251 | ) | (401,542 | ) | ||||||||||||||||
Noninterest-bearing cash | 1,801,572 | 1,525,125 | ||||||||||||||||||
Premises and equipment | 1,212,299 | 984,198 | ||||||||||||||||||
Other assets | 853,741 | 630,528 | ||||||||||||||||||
Total assets | 114,849,206 | 76,326,586 | ||||||||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||||||
Interest-bearing Deposits | ||||||||||||||||||||
Savings | 4,629,201 | 73,866 | 3.22 | % | 4,799,111 | 73,730 | 3.10 | % | ||||||||||||
NOW money market and escrow | 18,004,790 | 472,621 | 5.29 | % | 14,071,321 | 318,992 | 4.57 | % | ||||||||||||
Certificates of deposit | 68,113,632 | 1,732,825 | 5.13 | % | 38,704,721 | 804,742 | 4.19 | % | ||||||||||||
Total interest-bearing deposits | 90,747,623 | 2,279,312 | 5.07 | % | 57,575,153 | 1,197,464 | 4.19 | % | ||||||||||||
Noninterest-bearing deposits | 6,953,829 | — | 6,167,631 | — | ||||||||||||||||
| 97,701,452 | 2,279,312 | 4.70 | % | 63,742,784 | 1,197,464 | 3.79 | % | |||||||||||||
Other liabilities | 591,093 | 255,103 | ||||||||||||||||||
Stockholders’ equity | 16,556,661 | 12,328,699 | ||||||||||||||||||
Total Liabilities and Stockholders’ Equity | $ | 114,849,206 | $ | 76,326,586 | ||||||||||||||||
| — | ||||||||||||||||||||
Net interest spread | 3.66 | % | 3.37 | % | ||||||||||||||||
Net interest income | $ | 2,370,016 | $ | 1,415,408 | ||||||||||||||||
Net margin on earning assets | 4.26 | % | 3.88 | % | ||||||||||||||||
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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 $59,415 and $217,415 for the three and six months ended June 30, 2007, compared to $34,000 and $89,000 for the three and six months ended June 30, 2006, respectively. The provision for each period reflects our risk assessment of the portfolio and the growth in loan and lease balances outstanding. During the first six months of 2007, we had $149,127 in loans charged off and $18,549 in recoveries compared to $2,415 in loans charged off and $12 in recoveries for the first six months of 2006. The charge off in 2007 occurred in the second quarter and was recorded in conjunction with a foreclosure on a land development loan.
We have 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 $1,112,658 or 1.03% of loans at June 30, 2007, compared to $1,025,821 or 1.20% of loans at December 31, 2006. The decrease 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 loans outstanding. Also, the allowance declined from the loan charge off associated with the foreclosure of a land development loan in the second quarter of 2007. Specific reserves allocated to this loan were depleted upon foreclosure and the subsequent reclassification of the debt obligation from loans to foreclosed real estate. 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:
| Six Months Ended | Year Ended | |||||||||||
| June 30, | December 31, | |||||||||||
| 2007 | 2006 | 2006 | ||||||||||
Balance, beginning of year | $ | 1,025,821 | $ | 366,910 | $ | 366,910 | ||||||
Provision charged to operations | 217,415 | 89,000 | 656,500 | |||||||||
Recoveries | 18,549 | 12 | 9,641 | |||||||||
| 1,261,785 | 455,922 | 1,033,051 | ||||||||||
Loans charged off | 149,127 | 2,415 | 7,230 | |||||||||
Balance, end of period | $ | 1,112,658 | $ | 453,507 | $ | 1,025,821 | ||||||
Allowance for loan and lease losses to total loans | 1.03 | % | 0.71 | % | 1.20 | % | ||||||
Loans past due 90 days or more and still accruing interest | $ | — | $ | — | $ | — | ||||||
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 increased $3,730 and $13,918 for the three and six months ended June 30, 2007, to $139,099 and $230,987, from $135,369 and $217,069 for the three and six months ended June 30, 2006, respectively. Revenue from mortgage banking gains and fees was relatively flat, reflecting the slowdown in the real estate market. Mortgage banking gains and fees increased just slightly by $1,487 or 1.4%, to $111,559 for the three months ended June 30, 2007, from $110,072 for the three months ended June 30, 2006, and by $8,158 or 4.8% to $178,429 for the six months ended June 30, 2007, from $170,271 for the six months ended June 30, 2006.
Service charges on deposit accounts and other fees increased to $27,540 and $52,558 for the three and six months ended June 30, 2007, from $25,297 and $46,798 for the three and six months ended June 30, 2006. The increase was primarily from fees on business accounts and ATM service charges.
Noninterest Expenses
Noninterest expenses increased $305,351 or 34.0% for the three months ended June 30, 2007, to $1,203,168 from $897,817 for the three months ended June 30, 2006. Noninterest expenses increased $392,981 or 22.5% for the six months ended June 30, 2007, to $2,141,181 from $1,748,200 for the six months ended June 30, 2006. As we will discuss below, most of the increase in noninterest expense is associated with our expansion strategy. While the growth in our earning asset base was able to support the 34.0% and 22.5% increases for the three and six months of 2007, future increases to expenses associated with our expansion efforts will continue to place pressure on earnings.
Salaries increased 51.0% and 28.6% for the three and six months ended June 30, 2007, to $609,959 and $1,031,460 from $404,010 and $801,865 for the three and six months ended June 30, 2006, respectively. The increase in salaries is mostly attributed to expansion efforts. We had forty-two full-time equivalent employees at June 30, 2007, compared to thirty-seven full-time equivalent employees at June 30, 2006. For our Towson banking center, we added a banking center executive, a commercial relationship manager, and a business and community development officer. These three veteran bankers are charged with transforming our Towson location into the banking center model described above under “Strategy.” In Annapolis, Maryland, we added a banking center executive, a senior mortgage loan officer, and a senior mortgage loan administrator. This forms the nucleus of the group that will take us into the Annapolis market. We also added a commercial mortgage lending officer and administrative staff in Towson to support loan growth. In all, we have added approximately $700,000 in annual salaries related to our expansion. The expense associated with these new hires mostly impacted the second quarter of 2007, accounting for the 51.0% increase in salaries noted above. We expect that salaries will continue to increase as we plan to staff and open the Annapolis banking center in September 2007. The increase in salaries in the first six months of 2007 was partially offset by an increase in the amount of salary expense deferred as a direct cost of loan origination. We deferred $63,980 more in salary costs in the first six months of 2007, compared to the first six months of 2006, due to our increased loan origination activity.
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Employee benefits increased 7.9% and 15.9% for the three and six months ended June 30, 2007, to $139,020 and $280,296 from $128,823 and $241,924 for the three and six months ended June 30, 2006. The increase in employee benefits was related to increases in payroll taxes, 401(k) benefits, and employee training. Our service payments to Administaff also increased due to the increase in the number of employees. For competitive reasons, we expanded our employee benefit package and human resource function in 2006 by engaging the services of Administaff, a professional employer organization. The increase in employee benefits in the first six months of 2007 was partially offset by an increase in the amount of benefit expense deferred as a direct cost of loan origination.
Occupancy expense increased 107.6% and 56.5% for the three and six months ended June 30, 2007, to $83,569 and $151,539, from $40,262 and $96,834 for the three and six months ended June 30, 2006. The increase in the three month and six periods is primarily from additional rent and depreciation of leasehold improvements from the expansion of our mortgage business in Frederick, Maryland, the relocation of our Towson mortgage operation group from our headquarters building to leased space, and executive office space secured for our new hires in Annapolis. In May 2007, we executed a five year lease for 2,481 square feet to house our Annapolis banking center. The space is currently undergoing renovation and we have a target opening date of September 2007.
Furniture and equipment expense increased 49.0% and 39.5% for the three and six months ended June 30, 2007, to $43,897 and $81,127, from $29,463 and $58,148 for the three and six months ended June 30, 2006. The increase was mostly in depreciation expense arising from an increase in furniture and equipment purchased to support our expansion and business unit relocation activities.
Other expenses increased 10.7% and 8.6% for the three and six months ended June 30, 2007, to $326,723 and $596,759, from $295,259 and $549,429 for the three and six months ended June 30, 2006. The increase in other expenses is related to increases in marketing expense, loan collection expenses, and costs associated with being a listed public company. We have engaged the services of a marketing firm to assist in the branding of our banking center locations and with a program to promote company awareness in our markets.
Analysis of Financial Condition
Investment Securities
AmericasBank’s investment 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 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 June 30, 2007, and December 31, 2006, 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 $21,748,117 or 25.7% to $106,335,050 at June 30, 2007, from $84,586,933 at December 31, 2006. Compared to a year earlier, loans and leases, net of allowance, unearned fees and origination costs have increased by $43,189,019 or 68.4 % from $63,146,031 at June 30, 2006.
Residential real estate loans decreased by $7,670,656 (21.1%), construction and land development loans increased by $26,781,163 (123.0%), commercial loans including commercial real estate loans increased by $2,824,264 (17.8%), commercial finance leases decreased by $490,851 (44.2%), home equity loans increased by $450,536 (4.3%), and installment loans decreased by $17,619 (7.1%) from their respective balances at December 31, 2006. Going forward, we expect to continue to see wide changes in the percentage of loans in our various loan categories as we experience scheduled payoffs and as we grow our loan portfolio. Also, in the first quarter of 2007 we reevaluated and expanded our internal classification of loans. This improvement did result in some loan shifting between previously reported loan categories. This shift occurred primarily between residential real estate loans and construction and land development accounting for a portion of the unusually large variance between June 30, 2007, and December 31, 2006.
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We believe this change was necessary to allow for more precise reporting of loans in future periods as we expand and grow our loan portfolio. An estimate of the impact of this action is described in note 2 to the loan portfolio table below.
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 | ||||||||||||||
| June 30 | December 31, | |||||||||||||
| 2007 | % | 2006 | % | |||||||||||
Residential real estate | $ | 28,736,068 | 26.70 | % | $ | 36,406,724 | 42.45 | % | ||||||
Construction, land development and land | 48,561,939 | 45.11 | % | 21,780,776 | 25.40 | % | ||||||||
Commercial, including real estate | 18,655,446 | 17.33 | % | 15,831,182 | 18.46 | % | ||||||||
Commercial finance leases | 618,874 | 0.57 | % | 1,109,725 | 1.29 | % | ||||||||
Home equity | 10,838,982 | 10.07 | % | 10,388,446 | 12.11 | % | ||||||||
Installment | 231,976 | 0.22 | % | 249,595 | 0.29 | % | ||||||||
| 107,643,285 | 100.00 | % | 85,766,448 | 100.00 | % | |||||||||
Deferred loan origination fees, net of cost | (195,577 | ) | (153,694 | ) | ||||||||||
Allowance for loan and lease losses | (1,112,658 | ) | (1,025,821 | ) | ||||||||||
| $ | 106,335,050 | $ | 84,586,933 | |||||||||||
| (1) | Our loan portfolio includes owner occupied residential mortgages and one-to-four family and multi-family mortgages to investors. At June 30, 2007, $11,933,277 of residential real estate loans, $29,283,231 of construction and land development loans, and $3,738,573 of commercial loans, including real estate loans, were to investors. At December 31, 2006, $23,475,679 of residential real estate loans and $6,244,244 of commercial loans, including real estate loans, were to investors. |
| (2) | The variance in these loan categories between June 30, 2007 and December 31, 2006, was also effected by the re-evaluation and expansion our internal classifications that we implemented in the first quarter of 2007. As a result of this improvement, approximately $10 million in Residential real estate loans and $6 million in Commercial, including real estate loans were reclassified into the Construction and land development loan category. |
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.
Information about nonaccrual loans is as follows:
| June 30, | December 31, | ||||||||
| 2007 | 2006 | 2006 | |||||||
Nonaccrual loans | $ | 345,603 | $ | 622,761 | $ | 624,127 | |||
Unrecorded interest on nonaccrual loans | 17,756 | 64,875 | 107,569 | ||||||
Specific reserve for nonaccrual loans included in the allowance for loan and lease losses | — | 29,388 | 198,106 | ||||||
The reduction in nonaccrual loans at June 30, 2007, compared to the end of 2006 was from a foreclosure action taken on one loan in which we held an approximately 10% participation. Our portion of the loan balance was $589,127
17
at December 31, 2006. This former non-performing loan was 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 bank participant group purchased the property at the foreclosure auction during the second quarter of 2007. We reduced the carrying value of this nonperforming loan from $589,127 to $440,000, and reclassified the asset to foreclosed real estate at June 30, 2007.
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 June 30, 2007, and December 31, 2006, 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 June 30, 2007, we had $440,000 in foreclosed real estate, and as of December 31, 2006, 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.
Total deposits increased by $33,634,694 or 36.7% to $125,219,231 at June 30, 2007, from $91,584,537 at December 31, 2006. Interest-bearing deposits increased $34,572,119 or 41.9% to $117,082,251 at June 30, 2007, from $82,510,132 at December 31, 2006. Noninterest bearing deposits decreased $937,425 or 10.3% to $8,136,980 at June 30, 2007, from $9,074,405 at December 31, 2006.
A majority of the increase in our interest bearing deposits at June 30, 2007, was due to growth in money market accounts and premium rate certificates of deposits that were issued with maturities of one year or less. While the interest rates for certificates of deposit offered through retail broker channels and the Internet-based services are higher than what we would typically pay within our market, we view these sources as efficient processes to raise deposits expeditiously and for specific terms. The decrease in noninterest bearing deposits was primarily from a decrease in activity in our accounts held by title companies which is consistent with the slowdown in the real estate market.
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 $3,204,408 at June 30, 2007.
The Federal Home Loan Bank of Atlanta initiated a credit review of AmericasBank and in January 2007, we were informed that credit availability was re-established for AmericasBank at 10% of total assets. All advances and other credit products requested under the credit availability must be fully secured with eligible collateral. We also have a $1.0 million secured line of credit from a correspondent financial institution secured by eligible investment securities. There were no outstanding balances on these lines at June 30, 2007, or December 31, 2006.
Our immediate sources of liquidity are cash and due from banks and short term investments. As of June 30, 2007, we had $3,682,727 in cash and due from banks, and $25,603,683 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. Deposits from title companies
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represent a deposit that is subject to more volatility, thereby increasing our need to have funds available. We believe that our risks of volatility associated with these deposits will lessen as we add more of this type of account to our customer base. We also need to maintain adequate liquidity for maturing premium rate certificates of deposit offered through the Internet and retail broker channels. At June 30, 2007, our liquidity included funds reserved to cover approximately $13,800,000 in premium certificates of deposit that were maturing in July, 2007.
We have sufficient liquidity to meet our loan commitments as well as fluctuations in deposits. We are not aware of any demands, trends, commitments, or events that would result in our inability to meet anticipated or unexpected liquidity needs.
Capital
Our stockholders’ equity was $16,312,565 at June 30, 2007, an increase of $320,169 from the $15,992,396 reported at December 31, 2006.
Under the regulations of the Board of Governors of the Federal Reserve System (the “Federal Reserve”), regulatory capital guidelines apply on a consolidated basis to bank holding companies with consolidated assets below $500 million or more only where the holding company (i) is engaged in significant nonbanking activities, (ii) conducts significant off-balance sheet activities, or (iii) has a material amount of debt or equity securities outstanding that are registered with the Securities and Exchange Commission. The Federal Reserve also may apply consolidated regulatory capital requirements at its discretion to any bank holding company, regardless of asset size, if it deems such action warranted for supervisory purposes. The Company has less than $500 million of assets and none of the above listed factors exist, and the Company has not otherwise been notified by the Federal Reserve that consolidated regulatory capital requirements apply to the Company.
The Bank, however, is subject to regulatory capital requirements. The following summarizes the Bank’s regulatory capital position at June 30, 2007.
| AmericasBank | Minimum | To be well | ||||||||||||||||
| ($ in thousands) | Actual | capital adequacy | capitalized | |||||||||||||||
June 30, 2007 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||
Total capital (to risk-weighted assets) | $ | 16,564 | 14.58 | % | $ | 9,090 | 8.00 | % | $ | 11,363 | 10.00 | % | ||||||
Tier 1 capital (to risk-weighted assets) | $ | 15,418 | 13.57 | % | $ | 4,545 | 4.00 | % | $ | 6,818 | 6.00 | % | ||||||
Tier 1 capital (to average assets) | $ | 15,418 | 12.74 | % | $ | 4,840 | 4.00 | % | $ | 6,050 | 5.00 | % | ||||||
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
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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 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 sheet.
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.
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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. Salaries and other expense (director’s fees) included stock-based compensation of $35,167 and $77,762 for the three and six months ended June 30, 2007, and $27,046 and $71,879 for the three and six months ended June 30, 2006. The compensation expense not yet recognized as of June 30, 2007, was approximately $291,025.
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, 2006 and 2005, AmericasBank Corp. has net operating loss carryforwards of approximately $5,473,747 and $5,631,845 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. In June 2006, we agreed to separate our business relationship with the head of our Towson mortgage loan production office who was the former owner of uvm Mortgage Marketing. Among the terms of the separation agreement, the employee surrendered 12,500 shares of AmericasBank Corp common stock. These shares were unvested and expired under the terms of the purchase agreement dated October 4, 2004. Goodwill and stockholders’ equity were reduced by $64,750 to record the financial result of this transaction.
Goodwill is tested at least annually for impairment.
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 June 30, 2007, and December 31, 2006, are as follows:
June 30, 2007 | December 31, 2006 | |||||
Unused lines of credit | ||||||
Residential real estate | $ | 7,859,019 | $ | 15,538,907 | ||
Commercial, including real estate | 2,836,258 | 1,097,157 | ||||
Home-equity lines | 7,245,940 | 5,519,348 | ||||
| $ | 17,941,217 | $ | 22,155,412 | |||
Construction and land development loan commitments | $ | 22,406,622 | $ | 17,800,417 | ||
Letters of Credit | $ | 38,970 | $ | 48,970 | ||
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. Loans held for sale are
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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.
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; 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 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 control 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 June 30, 2007, identified in connection with the evaluation required by paragraph (d) of Securities and Exchange Commission Rule 13a-15 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. |
(a) AmericasBank Corp. held its annual meeting of stockholders on May 23, 2007.
(b) At the annual meeting, Savas J. Karas, Kenneth D. Pezzulla, Graylin E. Smith., John C. Weiss, III, and William L. Wilcox, Jr. were elected to serve a three-year term expiring upon the date of AmericasBank Corp.’s 2010 Annual Meeting. The term of office of the following directors continued after the meeting: Mark H. Anders, Nicholas J. Belitsos, M.D., Richard C. Faint, Jr., Allen S. Lloyd, Jr., Mark D. Noar, M.D., A. Gary Rever, Ramon F. Roig, Jr., M.D., and Lee W. Warner.
(c) 1. The following individuals were nominees for the Board of Directors for a term to expire at the 2010 annual meeting of stockholders. The number of votes for or withheld for each nominee is as follows:
| For | Withheld | Total | ||||
Savas J. Karas | 1,840,041 | 624,752 | 2,464,793 | |||
Kenneth D. Pezzulla | 1,838,959 | 625,834 | 2,464,793 | |||
Graylin E. Smith | 1,840,116 | 624,677 | 2,464,793 | |||
John C. Weiss, III | 1,840,116 | 624,677 | 2,464,793 | |||
William L. Wilcox, Jr. | 1,840,116 | 624,677 | 2,464,793 |
There were no broker non-votes in the election of directors.
2. The ratification of the appointment of Rowles & Company, LLP as independent public accountants to audit the financial statements of AmericasBank Corp. for 2007:
For | Against | Abstain | Broker Non-Votes | Total | ||||
2,007,209 | 453,202 | 4,382 | — | 2,464,793 |
| Item 5. | Other Information. |
None.
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| Item 6. | Exhibits. |
| 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: August 13, 2007 | By: | /s/ Mark H. Anders | ||
| Mark H. Anders, President and Chief Executive Officer | ||||
| (Principal Executive Officer) | ||||
| Date: August 13, 2007 | By: | /s/ A. Gary Rever | ||
| A. Gary Rever, Chief Financial Officer | ||||
| (Principal Accounting and Financial Officer) | ||||
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