UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2009
OR
o 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 000-50771
AMERICAN PATRIOT FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
| Tennessee | | 20-0307691 |
| (State or other jurisdiction of | | (I.R.S. Employer Identification No.) |
| incorporation or organization) | | |
| | | |
3095 East Andrew Johnson Highway Greeneville, Tennessee | | 37745 |
| (Address of principal executive offices) | | (Zip Code) |
| | | |
Registrant’s telephone number, including area code: (423) 636-1555 |
| | | |
| Not Applicable |
(Former name, former address and former fiscal year, if changed since last report) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES o NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer," "accelerated filer” and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ | Accelerated filer ¨ |
| | |
Non-accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) YES o NOx
As of August 1, 2009, there were 2,389,391 shares of common stock, $0.333 par value, issued and outstanding.
EXPLANATORY NOTE
American Patriot Financial Group, Inc., a Tennessee corporation (the “Company”), is filing this Amendment No. 1 (the “Amendment No. 1”) to its Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, as filed with the Securities and Exchange Commission on August 14, 2009 (the “Original Form 10-Q”), to reflect revised regulatory capital ratios as of the quarter ended June 30, 2009. Subsequent to filing the Original Form 10-Q, the Federal Deposit Insurance Corporation (the “FDIC”) advised American Patriot Bank, the wholly-owned subsidiary of the Company, (the “Bank”), that it believed that the Bank should restate its June 30, 2009 Consolidated Report of Condition and Income (the “Call Report”) to reduce the Bank’s capital by the full amount of the Company’s deferred tax asset at June 30, 2009. On October 13, 2009, the Bank submitted a revised Call Report to the FDIC reflecting a reduction in the Bank’s capital levels at June 30, 2009 as a result of the FDIC’s request. Except as identified above, no other amendments or changes to the Original Form 10-Q are included in this Amendment No. 1 and the remainder of the Original Form 10-Q shall remain in effect as of the date of the filing of the Original Form 10-Q. Additionally, this Amendment No. 1 does not purport to provide an update or discussion of any other developments subsequent to the filing of the Original Form 10-Q.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Impact of Inflation
The consolidated financial statements and related financial data presented herein have been prepared in accordance with accounting principles generally accepted in the United States and practices within the banking industry that require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation.
Critical Accounting Estimates
The Company follows generally accepted accounting principles that are recognized in the United States, along with general practices within the banking industry. In connection with the application of those principles and practices, we have made judgments and estimates which, in the case of our allowance for loan and lease losses (ALLL), are material to the determination of our financial position and results of operation. Other estimates relate to the valuation of assets acquired in connection with foreclosures or in satisfaction of loans, and realization of deferred tax assets.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS” 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 will be applied prospectively and is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. SFAS 157 did not have a material impact on the Company’s consolidated financial statements.
In September 2006, the Financial Accounting Standards Board ratified a consensus opinion reached by the Emerging Issues Task Force on Issue 06-04, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements , (“EITF 06-04”) which requires employers that enter into endorsement split-dollar life insurance arrangements that provide an employee with a postretirement benefit to recognize a liability for the future benefits promised based on the substantive agreement made with the employer. Whether the accrual is based on a death benefit or on the future cost of maintaining the insurance would depend on what the employer has effectively agreed to provide during the employee’s retirement. The purchase of an endorsement-type life insurance policy does not qualify as a settlement of the liability. The consensus in EITF 06-4 is effective for fiscal years beginning after December 15, 2007. The Company adopted EITF 06-4 effective January 1, 2008 and its adoption did not have a material impact on the Company.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, (“SFAS 159”). This statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective of this standard is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is effective as of the beginning of fiscal years beginning after November 15, 2007, with early adoption permitted under certain circumstances. The Company did not choose to early adopt this standard and implementation of SFAS 159 did not have a material impact on its financial position or results of operations.
In March 2007, the EITF reached a final consensus on Issue No. 06-10, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Collateral Assignment Split-Dollar Life Insurance Arrangements, (“EITF 06-10”). EITF 06-10 requires employers to recognize a liability for the post-retirement benefit related to collateral assignment split-dollar life insurance arrangements in accordance with SFAS No. 106 or APB Opinion No. 12. EITF 06-10 also requires employers to recognize and measure an asset based on the nature and substance of the collateral assignment split-dollar life insurance arrangement. The provisions of EITF 06-10 are effective for the Company on January 1, 2008, with earlier application permitted, and are to be applied as a change in accounting principle either through a cumulative-effect adjustment to retained earnings or other components of equity or net assets in the statement of financial position as of the beginning of the year of adoption; or as a change in accounting principle through retrospective application to all prior periods. Adoption of EITF 06-10 did not have a significant impact on its consolidated financial statements, results of operations or liquidity.
In October 2008, the FASB issued FSP No. FAS 157-3 Determining the Fair Value of a Financial Asset When The Market for That Asset Is Not Active. This FSP clarifies the application of SFAS No. 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. This FSP was effective for the Company upon issuance, including prior periods for which financial statements have not been issued; and, therefore was effective for the Company's financial statements as of and for the year ended December 31, 2008. Adoption of FSP No. 157-3 had no impact on the Company's consolidated financial statements.
In December 2008, the FASB issued FASB Staff Position No. FAS 140-4 and FIN 46(R)-8, Disclosures about Transfers of Financial Assets and Interests in Variable Interest Entities (“FSP 140-4 and 46(R)-8”). This FSP requires additional disclosures by public entities with continuing involvement in transfers of financial assets to special purpose entities and with variable interests in VIEs, including sponsors that have a variable interest in a VIE. Additionally, this FSP requires certain disclosures to be provided by a public entity that is (1) a sponsor of a qualifying special-purpose entity (SPE) that holds a variable interest in the qualifying SPE but was not the transferor (nontransferor) of financial assets to the qualifying SPE, and (2) a servicer of a qualifying SPE that holds a significant variable interest in the qualifying SPE but was not the transferor (nontransferor) of financial assets to the qualifying SPE. This FSP is effective for the first reporting period (interim or annual) that ends after December 15, 2008. The Company adopted FSP 140-4 and 46(R)-8 as of December 31, 2008, and its adoption did not have a significant impact on the Company's consolidated financial statements.
Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”), Statement of Financial Accounting Standards (“SFAS”) No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly was issued April 9, 2009. FSP SFAS 157-4 affirms that the objective of fair value when the market for an asset is not active is the price that would be received to sell the asset in an orderly transaction, and clarifies and includes additional factors for determining whether there has been a significant decrease in market activity for an asset when the market for that asset is not active. FSP SFAS 157-4 requires an entity to base its conclusion about whether a transaction was not orderly on the weight of the evidence. FSP SFAS 157-4 also amended SFAS 157, “Fair Value Measurements,” to expand certain disclosure requirements. FSP SFAS 157-4 is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. FSP SFAS 157-4 became effective for the Company on June 15, 2009 and did not have a significant impact on the Company’s financial statements.
FSP SFAS 107-1 and Accounting Principles Board (“APB”) 28-1, Interim Disclosures about Fair Value of Financial Instruments were issued April 9, 2009. FSP SFAS 107-1 and APB 28-1 amends SFAS 107, Disclosures about Fair Value of Financial Instruments, to require an entity to provide disclosures about fair value of financial instruments in interim financial information and amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. Under FSP SFAS 107-1 and APB 28-1, a publicly traded company shall include disclosures about the fair value of its financial instruments whenever it issues summarized financial information for interim reporting periods. In addition, entities must disclose, in the body or in the accompanying notes of its summarized financial information for interim reporting periods and in its financial statements for annual reporting periods, the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position, as required by SFAS 107. The new interim disclosures required by FSP SFAS 107-1 and APB 28-1 are included in the Company’s interim financial statements for the second quarter, June 30, 2009.
On May 28, 2009, the FASB issued SFAS No. 165, Subsequent Events. Under SFAS 165, companies are required to evaluate events and transactions that occur after the balance sheet date but before the date the financial statements are issued, or available to be issued in the case of non-public entities. SFAS 165 requires entities to recognize in the financial statements the effect of all events or transactions that provide additional evidence of conditions that existed at the balance sheet date, including the estimates inherent in the financial preparation process. Entities shall not recognize the impact of events or transactions that provide evidence about conditions that did not exist at the balance sheet date but arose after that date. SFAS 165 also requires entities to disclose the date through which subsequent events have been evaluated. SFAS 165 was effective for interim and annual reporting periods ending after June 15, 2009. The Company adopted the provisions of SFAS 165 for the quarter ended June 30, 2009, as required, and adoption did not have a material impact on the financial statements taken as a whole.
The company has determined that all other recently issued accounting pronouncements will not have a material impact on its consolidated financial statements or do not apply to its operations.
Forward-Looking Statements
Management’s discussion of the Company and management’s analysis of the Company’s operations and prospects, and other matters, may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other provisions of federal and state securities laws. Although the Company believes that the assumptions underlying such forward-looking statements contained in this Report are reasonable, any of the assumptions could be inaccurate and, accordingly, there can be no assurance that the forward-looking statements included herein will prove to be accurate. The use of such words as “expect,” “anticipate,” “forecast,” and comparable terms should be understood by the reader to indicate that the statement is “forward-looking” and thus subject to change in a manner that can be unpredictable. Factors that could cause actual results to differ from the results anticipated, but not guaranteed, in this Report, include (without limitation) economic and social conditions, competition for loans, mortgages, and other financial services and products, changes in interest rates, unforeseen changes in liquidity, results of operations, and financial conditions affecting the Company’s customers, and other risks that cannot be accurately quantified or completely identified. Many factors affecting the Company’s financial condition and profitability, including changes in economic conditions, the volatility of interest rates, political events and competition from other providers of financial services simply cannot be predicted. Because these factors are unpredictable and beyond the Company’s control, earnings may fluctuate from period to period. The purpose of this type of information is to provide readers with information relevant to understanding and assessing the financial condition and results of operations of the Company, and not to predict the future or to guarantee results. The Company is unable to predict the types of circumstances, conditions and factors that can cause anticipated results to change. The Company undertakes no obligation to publish revised forward-looking statements to reflect the occurrence of changed or unanticipated events, circumstances or results.
General
On January 23, 2004, American Patriot Financial Group, Inc. (formerly known as BG Financial Group, Inc.) (“Company”), a bank holding company, acquired all of the outstanding shares of American Patriot Bank (formerly known as Bank of Greeneville) (“Bank”) in a one for one stock exchange. The Bank is a Tennessee-chartered, FDIC-insured, non-Member commercial bank offering a wide range of banking services, including checking, savings, and money market deposit accounts, certificates of deposit and loans for consumers, commercial and real estate purposes, and is the principal business of the Company. The main office of the Corporation is located at 3095 East Andrew Johnson Highway, Greeneville, Greene County, Tennessee, which is also the main office of the Bank. This location is a 2.66 acre lot, on which there is a fully operational modular bank unit. Other full service branch banking offices of the Bank are located at 506 Asheville Highway and 208 West Summer Street, Greeneville, Greene County, Tennessee. During 2007 the Bank purchased property in Maryville, Tennessee at 710 South Foothills Plaza Drive. This location is a 1.17 acre lot, on which there is a 3,272 square foot fully operational brick bank building with drive through facilities that was opened for business on July 9, 2007. These locations are centrally located and in high traffic/exposure areas. Automatic teller machines and overnight "deposit drops" are positioned to serve the Bank's clients. Additional branches may be established as market opportunities surface or existing branch locations may be sold or closed if in the opinion of the Company such closure or sale is appropriate.
Liquidity
At June 30, 2009, the Company had liquid assets of approximately $18.3 million in the form of cash and federal funds sold compared to approximately $6.4 million on December 31, 2008. Management believes that the liquid assets are adequate at June 30, 2009. Additional liquidity should be provided by the growth in deposit accounts and loan repayments. The Company also has the ability to purchase federal funds and is a member of the Federal Home Loan Bank of Cincinnati that will provide a credit line if necessary. Management is not aware of any trends, events or uncertainties that are reasonably likely to have a material impact on the Company’s short term or long term liquidity and has taken a pro-active approach to develop a larger local deposit base to help minimize any risk.
Results of Operations
The Company had a net loss of $(925,157) or $(.39) per share for the quarter ended June 30, 2009 compared to net income of $82,502 or $.04 per share for the quarter ended June 30, 2008. The Company had a net loss for the six months ended June 30, 2009 of $(1,499,192) as compared to net income of $216,067 for the same period in 2008. A significant increase to the provision for loan losses was the primary cause of the net loss in 2009. During the quarter ended June 30, 2009, the Company recorded a provision for loan losses of $1,168,339, while recording a benefit from loan losses of $(45,470) for the same period in 2008. For the six months ended June 30, 2009, the provision for loan losses was $2,024,995 compared to a benefit of ($137,599) for the comparable period in 2008.
Net Interest Income/Margin
Net interest income represents the amount by which interest earned on various assets exceeds interest paid on deposits and other interest-bearing liabilities and is the most significant component of the Company's earnings. Interest income for the quarter ended June 30, 2009 was $1,504,104 compared to $1,771,168 for the same period in 2008, and total interest expense was $812,761 in 2009 compared to $813,958 in 2008 for the same period. Interest income for the six months ended June 30, 2009 was $3,177,302, compared to $3,746,753 for the same period in 2008, and total interest expense was $1,623,884 in 2009 compared to $1,797,730 in 2008 for the same period. The Company pursues local deposits aggressively with attractive interest rates, which has contributed to compression of net interest margin. Also, the Federal Reserve Bank’s interest rate cuts beginning in latter 2007 and continuing through out all of 2008 have contributed to this compression as our loan yields have repriced faster than our deposit yields. Based on the Company’s mix of interest earning assets and interest bearing liabilities, management believes that net interest margin should begin to stabilize for the remainder of the year. Many economists now believe we are at or near the end of interest rate cuts with likely increases later in 2009. If interest rates remain stable or begin to increase, net interest margin could increase.
Provision for / Benefit from Loan Losses
The provision for (benefit from) loan losses represents a charge (or recovery) to operations necessary to establish an allowance for possible loan losses, which in management's evaluation, is adequate to provide coverage for estimated losses on outstanding loans and to provide for uncertainties in the economy. The provision for loan losses for the three month and six month period ended June 30, 2009 was $1,168,339 and $2,024,995, respectively, as compared to a benefit of $(45,470) and $(137,599) for the same three month and six month period ended June 30, 2008. During the three and six months ended June 30, 2009, loan charge-offs were $713,997 and $1,444,654 respectively. The recoveries for the three and six month periods ended June 30, 2009 were $16,125 and $72,739, respectively. The allowance for loan losses was $3,026,728 at June 30, 2009 as compared to $2,373,648 at December 31, 2008, an increase of 27.5%. The allowance was 2.9% of loans at June 30, 2009. Identification of additional impaired loans in conjunction with other economic declines (primarily increased unemployment rates in our primary lending areas) resulted in significant provision for loan losses during the three and six month periods ended June 30, 2009.
Management believes that the allowance for loan losses is adequate at June 30, 2009. However, there can be no assurance that additional provisions for loan losses will not be required in the future, including as a result of possible changes in the economic assumptions underlying management’s estimates and judgments, adverse developments in the economy, and the residential real estate market in particular, or changes in the circumstances of particular borrowers. Management intends to pursue more aggressive strategies for problem loan resolution, and is committed to bolster loan loss reserves to levels sufficient to absorb losses recognized in the pursuit of this strategy.
Provision (Benefit) for/from Income Taxes
The Company's benefit from income tax expense for the three and six months ended June 30, 2009 was $(576,933) and $(930,340), respectively when compared to a provision of $28,123 and $101,770 for the same periods in 2008. Management believes the provision (benefit) for income taxes for the period ended June 30, 2009 to be adequate.
Noninterest Income
The Company's noninterest income consists of service charges on deposit accounts and other fees and commissions. Total noninterest income for three and six months ended June 30, 2009 was $147,723 and $296,796, respectively when compared to $170,017 and $347,387 for the same periods in 2008. Service charges on deposit accounts decreased $29,367 and $56,687 for the three and six months ended June 30, 2009 respectively, when compared to the same periods in 2008. The primary cause of the decline in service charges was related to declines in NSF and overdraft fees. These fees are primarily activity driven and relate to transaction based checking accounts. The bank noted a significant decline in checking account balances when comparing the first six months of 2009 to the first six months of 2008, and a corresponding decrease in NSF and overdraft transactions during the first six months of 2009, as compared to the first six months of 2008. Fees from origination of mortgage loans sold increased for the three and six months ended June 30, 2009 by $4,826 and $9,003 when compared to the same period in 2008. Favorable interest rates spurred an increase in mortgage loan originations during the first half of 2009. Investment sale commissions decreased $4,256 and $9,734 for the three and six months ended June 30, 2009, as compared to the same periods in 2008. The reason for decreases in the investment sale commissions is the discontinuance of that service by the bank due to the high overhead expense and lack of sufficient revenues. Management projects that other fees and commissions and service charges will improve during the remainder of 2009.
Noninterest Expense
Noninterest expenses totaled $1,172,817 and $2,254,751 for the three and six months ended June 30, 2009, as compared to $1,062,072 and $2,116,172 for the same periods in 2008. Salaries and benefits decreased $84,055 and $151,550 for the three and six months ended June 30, 2009, as compared to the same periods in 2008. The decrease in salaries and benefits for the three and six months ended June 30, 2009 is due to reductions in senior level management positions. Legal and professional fees increased $120,777 and $150,426 for the three and six months ended June 30, 2009, as compared to the same periods in 2008. Management continues to incur additional expenses to meet the demands of regulatory requirements, especially relating to SOX 404 compliance, in addition to strategic plan development. The Company has also incurred significant noninterest expense increases in other operating expenses primarily as a result of increased collection expenses, ATM expenses FDIC insurance and state banking assessments. Combined, operating expenses relating to all other expenses increased $90,990 and $158,020 for the three and six months ended June 30, 2009, when compared to the same periods in 2008.
Financial Condition
Total assets at June 30, 2009, were $131,984,880, an increase of $12,392,054 or 10.4% compared to 2008 year-end assets of $119,592,826. Deposits increased to $117,588,567 at June 30, 2009, an increase of $13,849,390 or 13.4% from $103,739,177 at December 31, 2008. Most of the change in total assets and total deposits can be attributed to the Company taking measures to increase liquidity by offering attractive rates to customers. The majority of our increased liquidity at June 30, 2009 has been placed in Federal funds sold. Premises and equipment decreased to $5,163,917 at June 30, 2009 a decrease of $153,768 or 2.9% from $5,317,685 at December 31, 2008, primarily as a result of minimal fixed asset purchases coupled with normal depreciation charges. Other significant additions noted as of June 30, 2009 when compared to December 31, 2008 relate to foreclosed assets. During the first two quarters of 2009, management foreclosed on one significant loan relationship totaling approximately $1,012,000 in addition to several other smaller loan foreclosures.
The Company places an emphasis on an integrated approach to its balance sheet management. Significant balance sheet components of loans and sources of funds are managed in an integrated manner with the management of interest rate risk, liquidity, and capital. These components are discussed below
Loans
Net loans outstanding totaled $100,628,824 at June 30, 2009 compared to $103,327,562 at December 31, 2008. $2.3 million of the $2.7 million shrinkage relates to real estate loans and reflects management's strategy of reducing the concentration in these loan types based on the current economic climate's impact on the real estate industry. Management is monitoring this portfolio closely. In the event that a loan is 90 days or more past due the accrual of income is generally discontinued when the full collection of principal or interest is in doubt unless the obligations are both well secured and in the process of collection. At June 30, 2009, there were no loans 90 days or more past due and still accruing interest, while total loans 90 days or more past due and in non-accrual status were $6,197,002. At December 31, 2008, there we no loans 90 days or more past due and still accruing interest, while total loans 90 days or more past due and in non-accrual status were $599,667.
The following is a summary of information pertaining to impaired loans:
| | | June 30, | | | December 31, | |
| | | 2009 | | | 2008 | |
| | | | | | | |
| Impaired loans with a specific | | | | | | |
| valuation allowance | | $ | 11,098,399 | | | $ | 6,414,683 | |
| Total specifically evaluated | | | | | | | | |
| impaired loans | | $ | 11,098,399 | | | $ | 6,414,683 | |
| Specific valuation allowance | | | | | | | | |
| related to impaired loans | | $ | 2,051,930 | | | $ | 1,512,511 | |
In addition to the specifically evaluated impaired loans above, the Bank collectively evaluates large groups of smaller balance homogeneous loans for impairment. Loans collectively evaluated for impairment, risk rates special mention, substandard and doubtful, as of June 30, 2009 and December 31, 2008 were $2,904,962 and $739,517, respectively. The Bank has reserved $86,926 and $29,149 related to these loans as of June 30, 2009 and December 31, 2008, respectively.
In connection with impaired loans, additional funds are committed to one borrower in an amount not to exceed $78,825 subject to compliance with provisions of the applicable loan agreement which includes a lending base formula.
As of June 30, 2009, the Company has identified loans aggregating $11,098,399 as being impaired, of which $6,197,002 are non-performing as it relates to payment of interest. The aforementioned total is approximately $5,598,000 more than reported at December 31, 2008. The increase is primarily related to identified problem assets centered in the Blount County Market.
Restricted Equity Investments
Federal Home Loan Bank (FHLB) stock at June 30, 2009 had an amortized cost and market value of $296,500 as compared to an amortized cost and a market value of $291,200 at December 31, 2008. As a member of the FHLB, the Company is required to maintain stock in an amount equal to .15% of total assets. Federal Home Loan Bank stock is carried at cost. Federal Home Loan Bank stock is maintained by the Company at par value of one hundred dollars per share.
Deposits
Total deposits, which are the principal source of funds for the Company, were $117,588,567 at June 30, 2009, compared to $103,739,177 at December 31, 2008, representing an increase of 13.4%. The Company has targeted local consumers, professional and commercial businesses as its central clientele; therefore, deposit instruments in the form of demand deposits, savings accounts, money market demand accounts, NOW accounts, certificates of deposit and individual retirement accounts are offered to customers. The Company established a line of credit with the Federal Home Loan Bank secured by a blanket-pledge of 1-4 family residential mortgage loans. At June 30, 2009 the Company had outstanding advances of $5,389,423 at the Federal Home Loan Bank compared with $5,506,805 at December 31, 2008. At June 30, 2009 and December 31, 2008, the Company also had $1,000,000 in short-term borrowings from Jefferson Federal Bank which is due on demand.
Capital
Equity capital at June 30, 2009 was $6,849,057, a decrease of $1,499,192 from $8,348,249 at December 31, 2008, due to a net loss of $1,499,192 for the first six months of 2009.
At June 30, 2009, the Bank’s capital ratios were as follows:
| | | Required Minimum Ratio | | | To be Well Capitalized | | | Requirements Under the Order | | | Bank | |
| Tier 1 Leverage ratio | | | 4.00 | % | | | 5.00 | % | | | 8.00 | % | | | 5.59 | % |
| Tier 1 risk-based capital ratio | | | 4.00 | % | | | 6.00 | % | | | 10.00 | % | | | 6.05 | % |
| Total risk-based capital ratio | | | 8.00 | % | | | 10.00 | % | | | 11.00 | % | | | 7.30 | % |
In June 2009, the Bank’s Board of Directors consented to the issuance of an Order to Cease and Desist (Order) by the FDIC. The Order requires the Bank to cease and desist from the unsafe and unsound banking practices and violations of law and or regulations as discussed in the Order. The Order also includes minimum capital ratios to maintain and prohibits payment of dividends without approval by the FDIC, among other issues.
As a result of the Bank’s total risk-based capital ratio falling below 8% at June 30, 2009, the Bank will be considered undercapitalized and will become subject to the provisions of Section 38 of the Federal Deposit Insurance Act, which among things: (i) restricts payment of capital distributions and management fees; (ii) requires that the FDIC monitor the condition of the Bank; (iii) requires submission of a capital restoration plan within 45 days; (iv) restricts the growth of the Bank's assets; and (v) requires prior approval of certain expansion proposals, many of which restrictions or obligations, including the requirement to submit a capital restoration plan, the Bank was already subject to as a result of the Order, which required the Bank to develop and implement a capital plan that increases the Bank’s Tier 1 capital ratio, Tier 1 risk-based capital ratio and Total risk-based capital ratio to 8%, 10% and 11%, respectively,
Liability and Asset Management
The Company’s Asset/Liability Committee (“ALCO”) actively measures and manages interest rate risk using a process developed by the Company. The ALCO is also responsible for implementing the Company’s asset/liability management policies, overseeing the formulation and implementation of strategies to improve balance sheet positioning and earnings, and reviewing the Company’s interest rate sensitivity position.
The primary tool that management uses to measure short-term interest rate risk is a net interest income simulation model prepared by an independent correspondent institution. These simulations estimate the impact that various changes in the overall level of interest rates over one- and two-year time horizons would have on net interest income. The results help the Company develop strategies for managing exposures to interest rate risk.
Like any forecasting technique, interest rate simulation modeling is based on a large number of assumptions. In this case, the assumptions relate primarily to loan and deposit growth, asset and liability prepayments, interest rates and balance sheet management strategies. Management believes that both individually and in the aggregate the assumptions are reasonable. Nevertheless, the simulation modeling process produces only a sophisticated estimate, not a precise calculation of exposure.
At June 30, 2009, approximately 69% of the Company’s gross loans had adjustable rates. Based on the asset/liability modeling, management believes that these loans reprice at a faster pace than liabilities held by the Company. Because the majority of the Company’s liabilities are 12 months and under and the gap in repricing is asset sensitive, management believes that a rising rate environment would have a positive impact on the Company’s net interest margin. Floors in the majority of the Company’s adjustable rate assets also mitigate interest rate sensitivity in a decreasing rate environment. However, there is increasing pressure to adjust the floor rates downward in the adjustable rate portfolio as customers become more cost conscious and competition becomes more aggressive.
Off-Balance Sheet Arrangements
The Company, at June 30, 2009, had outstanding unused lines of credit and standby letters of credit that totaled approximately $11,451,000. These commitments have fixed maturity dates and many will mature without being drawn upon, meaning that the total commitment does not necessarily represent the future cash requirements. The Company has the ability to liquidate Federal funds sold or, on a short-term basis, to purchase Federal funds from another bank and to borrow from the Federal Home Loan Bank. At June 30, 2009, the Company had established with a correspondent bank the ability to purchase Federal funds if needed.
PART II - OTHER INFORMATION
Item 6. EXHIBITS.
Index to Exhibits.
| Exhibit No. | | Description |
| 3.1* | | Charter of American Patriot Financial Group, Inc. |
| 3.2* | | Bylaws of American Patriot Financial Group, Inc. |
| 10.1** | | Stipulation and Consent to the Issuance of an Order to Cease and Desist dated May 29, 2009 |
| 10.2** | | Order to Cease and Desist between American Patriot Bank and the Federal Deposit Insurance Corporation dated June 3, 2009 |
| 31.1*** | | Certification pursuant to Rule 13a-14a/15d-14(a) |
| 31.2*** | | Certification pursuant to Rule 13a-14a/15d-14(a) |
| 31.3 | | Certification pursuant to Rule 13a-14a/15d-14(a) |
| 31.4 | | Certification pursuant to Rule 13a-14a/15d-14(a) |
| 32.1*** | | Certification pursuant to Rule 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32.2*** | | Certification pursuant to Rule 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | * Previously filed as an exhibit to a Current Report on Form 8-K filed by American Patriot Financial Group, Inc. (f/k/a BG Financial Group, Inc.) with the Commission on May 21, 2004. |
| | ** Previously filed as an exhibit to a Current Report on Form 8-K filed by American Patriot Financial Group, Inc. with the Commission on June 9, 2009. |
| | *** Previously filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, as filed with Commission on August 14, 2009. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 to Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.
AMERICAN PATRIOT FINANCIAL GROUP, INC. |
| (Registrant) |
DATE: October 16, 2009 | | /s/ T. Don Waddell |
| | | T. Don Waddell |
| | | Chief Financial Officer |
