SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended MARCH 31, 2007
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________________ to ___________________
Commission file number ___________________________
AMERICAN BANK INCORPORATED
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
PA 01-0593266
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer ID No.)
incorporation or organization)
4029 W. TILGHMAN STREET, ALLENTOWN, PA 18104
- -------------------------------------------------------------------------------
(Address of principal executive offices)
(610) 366-1800
- -------------------------------------------------------------------------------
(Registrant's telephone number including area code)
N/A
- -------------------------------------------------------------------------------
(Former name, address, and fiscal year, if changed since last report)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act of 1934 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.
[X] Yes [ ] No
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
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 May 8, 2007.
6,003,866 Shares of common stock Par Value $.10 /share
1
TABLE OF CONTENTS
PAGE
----
PART I FINANCIAL INFORMATION
Item 1 Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Changes in Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3 Quantitative and Qualitative Disclosures About Market Risk 22
Item 4 Controls and Procedures 22
PART II OTHER INFORMATION
Item 1 Legal Proceedings 23
Item 1A Risk Factors 23
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 3 Defaults Upon Senior Securities 23
Item 4 Submission of Matters to a Vote of Security Holders 23
Item 5 Other Information 23
Item 6 Exhibits 24
Signatures 24
Exhibit 31.1 Certification of Chief Executive Officer Pursuant to Section
302 of Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of Chief Financial Officer Pursuant to Section
302 of Sarbanes-Oxley Act of 2002
Exhibit 32 Certification Pursuant to Section 906 of Sarbanes-Oxley Act of
2002
2
AMERICAN BANK INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(Unaudited)
MARCH 31, DECEMBER 31,
2007 2006
--------- ------------
Assets
Cash and due from banks $ 4,350 $ 3,047
Interest bearing deposits with banks 11,373 256
--------- ------------
Cash and cash equivalents 15,723 3,303
Investment securities available for sale at fair value 147,405 149,636
Investment securities held to maturity, fair value of $10,949 and $12,070 10,624 11,709
Loans, net of allowance for loan losses of $3,734 and $3,734 311,313 319,969
Restricted investment in correspondent bank stock 4,520 5,067
Bank owned life insurance 9,294 9,208
Premises and equipment, net 971 893
Accrued interest receivable 2,778 2,750
Other assets 1,740 2,060
--------- ------------
Total assets $ 504,368 $ 504,595
========= ============
Liabilities and Stockholders' Equity
Liabilities
Deposits
Non-interest bearing deposits $ 14,321 $ 15,854
Interest bearing deposits 370,230 353,141
--------- ------------
Total deposits 384,551 368,995
Short-term debt 11,440 27,616
Long-term debt 61,705 61,734
Junior subordinated debentures 10,503 10,503
Accrued interest payable 882 871
Other liabilities 704 657
--------- ------------
Total liabilities 469,785 470,376
--------- ------------
Stockholders' Equity
Preferred stock, par value $0.10 per share: authorized 5,000,000 shares;
issued and outstanding -0- shares -- --
Common stock, par value $0.10 per share: authorized 15,000,000 shares;
issued 7,704,479 shares in 2007 and 7,687,928 shares in 2006; outstanding
5,989,691 shares in 2007 and 6,020,026 shares in 2006 770 769
Additional paid-in capital 36,372 36,239
Unallocated ESOP shares, (22,523 shares in 2007 and 2006), at cost (178) (178)
Allocated but unvested SERP shares, (19,011 shares in 2007, 12,713 shares in
2006), at cost (161) (109)
Retained earnings 11,440 10,980
Accumulated other comprehensive income 1,476 1,266
Treasury stock, (1,714,788 shares in 2007, 1,667,902 shares in 2006), at cost (15,136) (14,748)
--------- ------------
Total stockholders' equity 34,583 34,219
--------- ------------
Total liabilities and stockholders' equity $ 504,368 $ 504,595
========= ============
See notes to unaudited financial statements.
- --------------------------------------------------------------------------------
3
AMERICAN BANK INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
------------------
2007 2006
------- -------
Interest Income
Loans receivable, including fees $ 4,999 $ 4,685
Investment securities 2,025 2,105
Other 29 12
------- -------
Total interest income 7,053 6,802
------- -------
Interest Expense
Deposits 3,636 2,904
Short-term debt 167 126
Long-term debt 763 1,006
Junior subordinated debentures 153 153
------- -------
Total interest expense 4,719 4,189
------- -------
Net interest income 2,334 2,613
Provision for loan losses -- 128
------- -------
Net interest income after provision for loan losses 2,334 2,485
------- -------
Non-interest Income
Service charges on deposit accounts 48 51
Net realized gains on sale of residential mortgage loans 16 10
Net gains (losses) on securities available for sale 194 (90)
Earnings from bank owned life insurance 86 87
Other income 63 59
------- -------
Total non-interest income 407 117
------- -------
Non-interest Expense
Salaries and employee benefits 712 651
Occupancy and equipment 210 207
Professional fees 144 106
Marketing and business development 27 29
Product management 104 103
Data processing 125 165
Other operating 327 278
------- -------
Total non-interest expense 1,649 1,539
------- -------
Income before provision for income taxes 1,092 1,063
Provision for income taxes 333 325
------- -------
Net income $ 759 $ 738
======= =======
Earnings per share:
Basic $ 0.13 $ 0.11
======= =======
Diluted $ 0.12 $ 0.10
======= =======
Cash dividends declared per share $ 0.05 $ 0.12
======= =======
See notes to unaudited financial statements.
- --------------------------------------------------------------------------------
4
AMERICAN BANK INCORPORATED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars In Thousands)
(Unaudited)
ACCUMULATED
SHARES OF TREASURY, OTHER
COMMON STOCK COMMON PAID-IN RETAINED ESOP AND SERP COMPREHENSIVE
OUTSTANDING STOCK CAPITAL EARNINGS SHARES INCOME TOTAL
-------------------------------------------------------------------------------------
Balances, December 31, 2006 6,020,026 $ 769 $36,239 $ 10,980 $(15,035) $ 1,266 $ 34,219
Comprehensive income for
the three months ended
March 31, 2007:
Net income 759 759
Net change in unrealized
gains on securities
available for sale, net of
reclassification adjustment
and tax effect 210 210
--------
Total comprehensive income 969
Dividends declared (299) (299)
Dividends reinvested 16,550 1 126 127
Purchase of treasury and
SERP shares (46,885) (440) (440)
Option expense recognized in
current period 7 7
--------- ------ ------- -------- -------- --------- --------
Balances, March 31, 2007 5,989,691 $ 770 $36,372 $ 11,440 $(15,475) $ 1,476 $ 34,583
========= ====== ======= ======== ======== ========= ========
See notes to unaudited financial statements.
- --------------------------------------------------------------------------------
5
AMERICAN BANK INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
--------------------
2007 2006
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 759 $ 738
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses -- 128
Depreciation and amortization 61 128
Deferred income tax expense (108) (148)
Income tax benefit on stock options exercised 7 14
Proceeds from sale of residential mortgage loans held for sale 3,063 2,794
Net realized gain on sale of loans (16) (10)
Origination of residential mortgage loans held for sale (3,047) (2,784)
Net amortization of securities premiums and discounts 223 350
Net (gains) losses on available for sale securities (194) 90
Earnings from bank owned life insurance (86) (87)
Increase in accrued interest receivable (28) (128)
Decrease in other assets 320 1,085
Increase (decrease) in accrued interest payable 11 (8)
Increase in other liabilities 47 292
-------- --------
Net cash provided by operating activities 1,012 2,454
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available for sale:
Purchases (6,623) (762)
Maturities and principal repayments 8,752 10,986
Sales 438 425
Securities held to maturity:
Maturities and principal repayments 1,035 123
Net (increase) decrease in loans receivable 8,659 (7,143)
Purchase of premises and equipment (139) (67)
Purchase of restricted investment in bank stock (617) (885)
Redemption of restricted investment in bank stock 1,164 1,032
-------- --------
Net cash provided by investing activities 12,669 3,709
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand and savings deposits (4,992) 7,166
Net increase in time deposits 20,548 6,874
Net increase (decrease) in short-term debt (16,176) 14,999
Proceeds from long-term debt -- 4,000
Repayments on long-term debt (29) (25,028)
Cash dividends paid (299) (1,139)
Acquisition of treasury, ESOP and SERP shares (440) (13,164)
Issuance of common stock 127 745
-------- --------
Net cash used in financing activities (1,261) (5,547)
-------- --------
Increase in cash and cash equivalents 12,420 616
Cash and cash equivalents at beginning of year 3,303 3,782
-------- --------
Cash and cash equivalents at end of period $ 15,723 $ 4,398
======== ========
Supplementary disclosures:
Interest paid on deposits and borrowings $ 4,708 $ 4,197
======== ========
Income taxes paid $ 550 $ 354
======== ========
See notes to unaudited financial statements.
- --------------------------------------------------------------------------------
6
AMERICAN BANK INCORPORATED
Notes to Consolidated Financial Statements
(Unaudited)
1. Organization and Basis of Presentation
American Bank Incorporated (the "Company") was organized in August 2001 to
serve as the bank holding company of American Bank (the "Bank"). On
January 2, 2002, the Company acquired all of the issued and outstanding
common stock of American Bank. At that time, each share of American Bank's
common stock was automatically converted into one share of our common
stock, par value $0.10 per share.
The Company prepares its financial statements on the accrual basis and in
conformity with U. S. generally accepted accounting principles. The
unaudited information furnished herein reflects all adjustments
(consisting of normal recurring accruals) which are, in the opinion of
management, necessary to a fair statement of the results for the interim
periods presented. They do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. Operating results for the three months
ended March 31, 2007 (unaudited) are not necessarily indicative of the
results that may be expected for the year ending December 31, 2007.
The balance sheet at December 31, 2006 has been derived from the audited
consolidated financial statements at that date but does not include all of
the information and footnotes required by U. S. generally accepted
accounting principles for complete financial statements.
2. Contingent Liabilities and Guarantees
In the normal course of business, there are various outstanding
commitments and contingent liabilities, such as commitments to extend
credit and standby letters of credit that are not reflected in the
accompanying financial statements. No material losses are anticipated as a
result of those transactions on either a completed or uncompleted basis.
The Company does not issue any guarantees that would require liability
recognition or disclosure, other than its standby letters of credit.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party.
Generally, all letters of credit, when issued, have expiration dates
within one year. The credit risk involved in issuing letters of credit is
essentially the same as those that are involved in extending loan
facilities to customers. The Company generally holds collateral and/or
personal guarantees supporting those commitments. The Company had $6.3
million of standby letters of credit outstanding as of March 31, 2007.
Management believes that the proceeds obtained through a liquidation of
collateral and the enforcement of guarantees would be sufficient to cover
the potential amount of future payment required under the corresponding
guarantees. The current amount of the liability as of March 31, 2007 for
guarantees under standby letters of credit issued is not material.
3. Earnings Per Share
Basic earnings per share represents income available to common
stockholders divided by the weighted-average number of shares outstanding
during the period. Diluted earnings per share reflects additional common
shares that would have been outstanding if dilutive potential common
shares had been issued, as well as any adjustment to income that would
result from the assumed issuance. Potential common shares that may be
issued by the Company relate to outstanding stock options and are
determined using the "treasury stock" method. Options to purchase 128,588
shares of common stock at prices from $8.44 to $9.42 that were outstanding
for the three months ended March 31, 2007 were not included in the
computation of diluted earnings per share because to do so would have been
anti-dilutive. Options to purchase 128,588 shares of common stock at
prices from $8.44 to $9.42 that were outstanding for the three ended March
31, 2006 were not included in the computation of diluted earnings per
share because to do so would have been anti-dilutive. Potential common
shares also include the junior subordinated debentures determined using
the "if converted" method. Per share amounts are based on the weighted
average number of shares outstanding during each period as follows:
7
THREE MONTHS ENDED
MARCH 31,
----------------------
2007 2006
--------- ---------
(In Thousands, Except
Per Share Data)
Numerator-basic earnings per share, net income $ 759 $ 738
Interest paid on junior subordinated
debentures, net of tax effect 101 101
--------- ---------
Numerator-diluted earnings per share $ 860 $ 839
========= =========
Denominator:
Average basic shares outstanding 5,977 6,839
Average dilutive option effect 34 36
Average dilutive junior subordinated
debenture effect 1,198 1,198
---------- ---------
Average diluted shares outstanding 7,209 8,073
========= =========
Earnings per common share:
Basic $ 0.13 $ 0.11
========= =========
Diluted $ 0.12 $ 0.10
========= =========
4. Comprehensive Income
Comprehensive income for the Company consists of net income and unrealized
gains and losses on available for sale securities. Comprehensive income
for the three-month periods ended March 31, 2007 and 2006 were as follows:
THREE MONTHS ENDED
MARCH 31,
----------------------
2007 2006
--------- ---------
(In Thousands)
Net income $ 759 $ 738
Other comprehensive income:
Unrealized holding gains on
available for sale securities 512 345
Reclassification adjustment for net (gains)
losses realized in net income (194) 90
--------- ---------
Other comprehensive income before
taxes 318 435
Income tax expense related to other
comprehensive income (108) (150)
--------- ---------
Other comprehensive income 210 285
--------- ---------
Total comprehensive income $ 969 $ 1,023
========= =========
5. Stock Based Compensation
The Company has a Non-Qualified Stock Option Plan (the "Plan") that
provides for grants of stock options to officers. Options granted under
the Plan have an option price at least equal to the fair market value of
the common stock on the date of the grant. The options expire not more
than ten years after the date of the grant. Exercise and vesting dates and
terms may vary and are specified at the date of the grant.
The Plan authorizes the issuance of options to purchase 391,302 shares of
common stock at March 31, 2007. At that date 148,964 options were
available for future grants.
8
The fair value of the options granted during the three months ended March
31, 2007 and 2006 was calculated using the Black-Scholes option pricing
model with the following assumptions:
THREE MONTHS ENDED MARCH 31,
----------------------------
2007 2006
--------- ---------
Expected dividend rate 2.50% 1.50%
Stock price volatility 23.37% 26.24%
Risk free interest rate 4.81% 4.33%
Expected life 9.0 yrs 9.0 yrs
For the three months ended March 31, 2007 and 2006, stock option
compensation expense of $10,700 and $14,200, respectively, was recognized
in connection with the Plan. A deferred tax benefit of $3,600 and $-0-,
respectively, was recognized relative to stock options during the three
months ended March 31, 2007 and 2006. At March 31, 2007, compensation
expense related to non-vested stock option grants aggregated to $118,000
and will be recognized in income over the expected life of the options.
6. Other Than Temporary Impairment of Securities
Declines in the fair value of held-to-maturity and available-for-sale
securities below their cost that are deemed to be other than temporary are
reflected in earnings as realized losses. In estimating other than
temporary impairment losses, management considers (1) the length of time
and the extent to which the fair value has been less than cost, (2) the
financial condition and near term prospects of the issuer and (3) the
intent and ability of the Company to hold the security until its
anticipated recovery in fair value.
7. Dividend Reinvestment Plan
In January 2004, the Company established a dividend reinvestment and stock
purchase plan to provide the stockholders of the Company with a convenient
and economic method of investing cash dividends and optional cash payments
in additional shares of common stock of the Company. The plan was amended
in February 2006 to discontinue the optional cash purchase provisions of
the plan. The Company registered 2,127,275 shares of its common stock for
sale under the plan.
8. Senior Executive Retirement Plan
In January 2003, the Company established a Senior Executive Retirement
Plan ("SERP") as a means to attract and retain talented management. The
SERP is a non-contributory defined contribution plan providing for
contributions at the discretion of the Board of Directors on an annual
basis. Contributions to the plan vest ratably over ten years. Participants
in the SERP may elect to have their plan benefits held in stock of the
Company through a trust. At March 31, 2007, the trust holds 19,011 shares
of Company common stock for the benefit of plan participants. Contribution
expense included in income for the three months ended March 31, 2007 and
2006, totaled $6,000 each.
9. Repurchase of Common Shares From Related Parties
On February 16, 2006, the Company entered into an agreement to purchase,
and did purchase, 1,444,444 shares of the Company's common stock at a
price per share of $8.94 and an aggregate price of $12,913,330. The
sellers were (i) the brother and the mother of the Company's Chief
Executive Officer, both directors of the Company at the time of sale, and
(ii) certain other family members of the Chief Executive Officer.
In connection with the purchase of the shares, the Company borrowed $4.0
million from an unrelated bank. The loan term is for two years with
interest floating monthly at one month LIBOR plus 50 basis points for year
one and one month LIBOR plus 100 basis points for year two. The remainder
of the money to fund the purchase came from the Company. The shares are
being held as treasury shares. Please refer to the Form 8-K filed on
February 21, 2006 for more information regarding this transaction.
10. New Accounting Standards
In September 2006, the FASB issued FAS No. 157, FAIR VALUE MEASUREMENTS,
which provides enhanced guidance for using fair value to measure assets
and liabilities. The standard applies whenever other standards require or
permit assets or liabilities to be measured at fair value. The Standard
does not expand the use of fair value in any new circumstances. FAS No.
157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal
years. Early adoption is permitted. The adoption of this standard is not
expected to have a material effect on the Company's results of operations
or financial position.
9
In February 2007, the FASB issued FAS No. 159, THE FAIR VALUE OPTION FOR
FINANCIAL ASSETS AND FINANCIAL LIABILITIES - INCLUDING AN AMENDMENT OF
FASB STATEMENT NO. 115, which provides all entities with an option to
report selected financial assets and liabilities at fair value. The
objective of the FAS No. 159 is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in earnings
caused by measuring related assets and liabilities differently without
having to apply the complex provisions of hedge accounting. FAS No. 159 is
effective as of the beginning of an entity's first fiscal year beginning
after November 15, 2007. Early adoption is permitted as of the beginning
of a fiscal year that begins on or before November 15, 2007 provided the
entity also elects to apply the provisions of FAS No. 157, FAIR VALUE
MEASUREMENTS. The adoption of this standard is not expected to have a
material effect on the Company's results of operations or financial
position.
In June 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"),
ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES. FIN 48 is an interpretation of
FAS No. 109, ACCOUNTING FOR INCOME TAXES, and it seeks to reduce the
diversity in practice associated with certain aspects of measurement and
recognition in accounting for income taxes. In addition, FIN No. 48
requires expanded disclosure with respect to the uncertainty in income
taxes and is effective for fiscal years beginning after December 15, 2006.
The adoption of this standard did not have a material effect on the
Company's financial position.
In September 2006, the FASB reached consensus on the guidance provided by
Emerging Issues Task Force Issue 06-4 ("EITF 06-4"), ACCOUNTING FOR
DEFERRED COMPENSATION AND POSTRETIREMENT BENEFIT ASPECTS OF ENDORSEMENT
SPLIT-DOLLAR LIFE INSURANCE ARRANGEMENTS. The guidance is applicable to
endorsement split-dollar life insurance arrangements, whereby the employer
owns and controls the insurance policy, that are associated with a
postretirement benefit. EITF 06-4 requires that for a split-dollar life
insurance arrangement within the scope of the Issue, an employer should
recognize a liability for future benefits in accordance with FAS No. 106
(if, in substance, a postretirement benefit plan exists) or Accounting
Principles Board Opinion No. 12 (if the arrangement is, in substance, an
individual deferred compensation contract) based on the substantive
agreement with the employee. EITF 06-4 is effective for fiscal years
beginning after December 15, 2007. The Company is currently evaluating the
impact the adoption of the EITF will have on the Company's results of
operations or financial condition.
In September 2006, the FASB reached consensus on the guidance provided by
Emerging Issues Task Force Issue 06-5("EITF 06-5"), ACCOUNTING FOR
PURCHASES OF LIFE INSURANCE--DETERMINING THE AMOUNT THAT COULD BE REALIZED
IN ACCORDANCE WITH FASB TECHNICAL BULLETIN NO. 85-4, ACCOUNTING FOR
PURCHASES OF LIFE INSURANCE. EITF 06-5 states that a policyholder should
consider any additional amounts included in the contractual terms of the
insurance policy other than the cash surrender value in determining the
amount that could be realized under the insurance contract. EITF 06-5 also
states that a policyholder should determine the amount that could be
realized under the life insurance contract assuming the surrender of an
individual-life by individual-life policy (or certificate by certificate
in a group policy). EITF 06-5 is effective for fiscal years beginning
after December 15, 2006. The adoption of this standard did not have a
material effect on the Company's financial position.
In March 2007, the FASB ratified Emerging Issues Task Force Issue No.
06-10 ("EITF 06-10"), ACCOUNTING FOR COLLATERAL ASSIGNMENT SPLIT-DOLLAR
LIFE INSURANCE AGREEMENTS. EITF 06-10 provides guidance for determining a
liability for the postretirement benefit obligation as well as recognition
and measurement of the associated asset on the basis of the terms of the
collateral assignment agreement. EITF 06-10 is effective for fiscal years
beginning after December 15, 2007. The Company is currently evaluating the
impact the adoption of the EITF will have on the Company's results of
operations or financial condition.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis, the significant accounting policies, and
other financial statement disclosures identify and address key variables and
other qualitative and quantitative factors that are necessary for an
understanding and evaluation of American Bank Incorporated and its results of
operations.
CRITICAL ACCOUNTING POLICIES
Disclosure of the Company's significant accounting policies is included in Note
2 to the consolidated financial statements included in the Company's Annual
Report on Form 10-KSB for the year ended December 31, 2006. Certain of these
policies are particularly sensitive requiring significant estimates and
assumptions to be made by management. Senior management has discussed the
development of such estimates and the related Management's Discussion and
Analysis disclosure with the Audit Committee of the Company's Board of
Directors. The following accounting policies are identified by management as
being critical to the results of operations:
10
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is the estimated
amount considered necessary to absorb credit losses inherent in the loan
portfolio at the balance sheet date. The allowance is established through
provisions for loan losses, which are charged against income. In
determining the allowance for loan losses, management makes significant
estimates and has identified this policy as one of the most critical for
the Company.
Management performs a monthly evaluation of the adequacy of the allowance
for loan losses. Consideration is given to a variety of factors in
establishing this estimate including, but not limited to, current economic
conditions, delinquency statistics, geographic and industry
concentrations, the adequacy of the underlying collateral, the financial
strength of the borrower, results of internal loan reviews, the present
value of future cash flows and other relevant factors. This evaluation is
inherently subjective as it requires material estimates that may be
susceptible to significant change.
The allowance consists of specific and general components. Specific
allocations are made for loans that are determined to be impaired.
Impairment is measured by determining the present value of expected future
cash flows or, for collateral-dependent loans, the fair value of the
collateral adjusted for market conditions and selling expenses. The
general allocation is determined by segregating the remaining loans by
type of loan, risk weighting (if applicable) and payment history. We also
analyze historical loss experience (we currently review peer group data
when considering this factor), delinquency trends, general economic
conditions and geographic and industry concentrations. This analysis
establishes factors that are applied to the loan groups to determine the
amount of the general reserve. A component is maintained to cover
uncertainties that could affect management's estimate of probable losses.
This component of the allowance reflects the imprecision inherent in the
underlying assumptions used in the methodologies for estimating specific
and general losses in the portfolio. Actual loan losses may be
significantly more than the reserves we have established which could have
a material negative effect on the financial results.
STOCK-BASED COMPENSATION. The Company has a non-qualified stock option
plan for which we follow the requirements of FAS Statement No. 123(R),
"Accounting for Stock-Based Compensation." Accordingly, we have included
in compensation expense the amount of $10,700 and $14,200 for the three
months ended March 31, 2007 and 2006, respectively. We adopted FAS
Statement No. 123(R) on January 1, 2006.
The Company calculates the compensation cost of the options using a
Black-Scholes model to determine the fair value of the options granted. In
calculating the fair value of the options, management makes assumptions
regarding the risk-free rate of return, the expected volatility of the
Company's common stock and the expected life of the options.
OTHER-THAN-TEMPORARY IMPAIRMENT OF INVESTMENT SECURITIES. Management
evaluates the individual securities in the investment portfolio for
other-than-temporary impairment on at least a quarterly basis. The
evaluation considers the length of time and the extent to which the fair
value has been less than cost, the financial condition and near-term
prospects of the issuer, the current interest rate cycle and the expected
direction of interest rates in the near term horizon and the intent and
ability of the Company to retain its investment in the issue for a period
of time sufficient to allow for any anticipated recovery in fair value.
Securities that are determined to be other than temporarily impaired are
recorded at the then-current fair value and the loss is recorded in
current income. Subsequent recoveries in fair value are not recorded in
the carry value of the investment and gain is not recognized until the
security is sold.
At March 31, 2006, management determined that Fannie Mae Preferred Stock
Series-F was other-than-temporarily impaired. Management recorded a charge
to current earnings, in the amount of $145,000, to reduce the amortized
cost of this security to fair market value at that date.
In management's opinion, the unrealized losses at March 31, 2007 reflect
changes in interest rates subsequent to the acquisition of specific
securities. The Company has the intent and ability to hold these
securities until maturity or market price recovery. Management believes
that the unrealized losses represent temporary impairment of these
securities.
RESULTS OF OPERATIONS
The following discussion provides information about the results of operations
and financial condition, liquidity, and capital resources of the Company and
should be read in conjunction with our consolidated financial statements and
footnotes thereto for the year ended December 31, 2006.
11
OVERVIEW
For the three months ended March 31, 2007, the Company reported net income of
$759,000, or $0.12 per diluted share, for an annualized return on average assets
of 0.60% and an annualized return on average equity of 8.80%. This is an
increase of $21,000, or 2.8%, from net income for the same three-month period in
2006 of $738,000, or $0.10 per diluted share. The increase in net income was
primarily the result of gains realized on the sale of available for sale
securities of $194,000 and a reduction in the provision for loan losses of
$128,000 compared to the 2006 period. The increase in net income was negatively
impacted by a decrease in net interest income of $279,000 and an increase of
$110,000 in non-interest expense.
NET INTEREST INCOME
Net interest income, which is the sum of interest and certain fees generated by
interest-earning assets minus interest paid on deposits and other funding
sources, is the principal source of our earnings. Net interest income decreased
by $279,000, or 10.7%, to $2,334,000 for the three months ended March 31, 2007
compared to $2,613,000 for the same period in 2006. Average interest-earning
assets declined to $484.6 million for the three months ended March 31, 2007, a
decrease of $23.4 million, or 4.6%, as compared to the average of $508.0 million
for the three months ended March 31, 2006. Average interest-bearing liabilities
declined to $453.0 million for the three months ended March 31, 2007, a decrease
of $16.4 million, or 3.5%, compared to the average of $469.4 million for the
three months ended March 31, 2006. The yield on average interest-earning assets
was 5.82% for the three months ended March 31, 2007, an increase of 46 basis
points from the yield of 5.36% for the three months ended March 31, 2006. The
cost of funds was 4.17% for the three months ended March 31, 2007, an increase
of 60 basis points from the cost of 3.57% for the three months ended March 31,
2006. The net interest margin (net interest income as a percentage of average
interest-earning assets) was 1.93% for the three months ended March 31, 2007, as
compared to 2.06% for the same period in 2006, a decrease of 13 basis points.
The decrease in the net interest margin resulted from the flat and subsequently
inverted Treasury yield curve. Most community banks, including American Bank,
price many loans off the five- and ten-year Treasury note and price deposits off
the three-month to two-year Treasury note. The flat yield curve decreases the
spread between the yield on assets and the cost of deposits. Partially
offsetting the decrease in the net interest margin was a change in the mix of
the balance sheet with a greater percentage of assets being in loans and a
smaller percentage being in securities than at March 31, 2006. Loans generally
have higher interest rates than securities and accordingly generate more
interest income. Also impacting the net interest margin was a change in the mix
of our funding as we paid down borrowings and replaced them with deposits.
Borrowed money generally costs more the deposits.
ANALYSIS OF NET INTEREST INCOME
Average balances and rates for each major category of interest-earning assets
and interest-bearing liabilities for the three months ended March 31, 2007 and
2006 are presented on a comparative basis in the following table:
12
FOR THE THREE MONTHS ENDED MARCH 31,
---------------------------------------------------------------------
2007 2006
--------------------------------- ---------------------------------
INTEREST INTEREST
AVERAGE INCOME / AVERAGE AVERAGE INCOME / AVERAGE
BALANCES EXPENSE RATES(1) BALANCES EXPENSE RATES(1)
--------- ---------- -------- ----------- -------- --------
(Dollars In Thousands)
Interest-earning assets
Interest-earning bank balances and
securities purchased under
agreements to resell $ 2,246 $ 29 5.16% $ 826 $ 12 5.81%
Loans, net 316,338 4,999 6.32 303,187 4,685 6.18
Investment securities 106,019 1,327 5.01 111,380 1,273 4.57
Mortgage backed securities 55,137 615 4.46 86,556 774 3.58
Restricted investments in
correspondent bank stock 4,817 83 6.89 6,083 58 3.81
--------- ---------- -------- ----------- -------- --------
Total interest-earnings assets 484,557 7,053 5.82 508,032 6,802 5.36
--------- ---------- -------- ----------- -------- --------
Interest-bearing liabilities
Checking 76,365 492 2.58 87,542 512 2.34
Savings 75,582 614 3.25 114,178 845 2.96
Certificates of deposit 211,747 2,530 4.78 157,110 1,547 3.94
Borrowings 89,280 1,083 4.85 110,553 1,285 4.65
--------- ---------- -------- ----------- -------- --------
Total interest-bearing
liabilities 452,974 4,719 4.17 469,383 4,189 3.57
--------- ---------- -------- ----------- -------- --------
Net earning assets $ 31,583 $ 38,649
========= ===========
Net interest income $ 2,334 $ 2,613
========== ========
Net interest spread 1.65% 1.79%
======== ========
Net interest margin 1.93% 2.06%
======== ========
Ratio of interest-earning assets to
Interest-bearing liabilities 107.0% 108.2%
========= ===========
- ----------
(1) Annualized
RATE/VOLUME ANALYSIS
The following table presents the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes related to
outstanding balances and those due to changes in interest rates. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (a) changes in volume (I.E.,
changes in volume multiplied by old rate) and (b) changes in rate (I.E., changes
in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been
allocated proportionately to the change due to volume and the change due to
rate.
13
FOR THE THREE MONTHS ENDED MARCH 31,
2007 VS. 2006
-------------------------------------------
INCREASE/(DECREASE) DUE TO TOTAL
-------------------------- INCREASE/
VOLUME RATE (DECREASE)
---------- ------------- -------------
(In Thousands)
INTEREST-EARNING ASSETS:
Interest-earning bank balances
and securities purchased
under agreements to resell $ 21 $ (4) $ 17
Loans, net 203 111 314
Investment securities (61) 115 54
Mortgage backed securities (281) 122 (159)
Restricted investment in
correspondent bank stock (12) 37 25
---------- ------------- -------------
Total interest-earning assets (130) 381 251
---------- ------------- -------------
INTEREST-BEARING LIABILITIES:
Checking (65) 45 (20)
Savings (286) 55 (231)
Certificates of deposit 538 445 983
Borrowings (247) 45 (202)
---------- ------------- -------------
Total interest-bearing liabilities (60) 590 530
---------- ------------- -------------
Net interest income $ (70) $ (209) $ (279)
========== ============= =============
PROVISION FOR LOAN LOSSES
Management records a provision for loan losses in amounts that result in an
allowance for loan losses, which is the estimated amount necessary to cover
credit losses inherent in the loan portfolio at the balance sheet date.
Management's evaluation includes such factors as the overall size of the
portfolio, past loan loss experience, economic conditions, delinquency
statistics and re-evaluation of the credit quality of the loans in the
portfolio. As a result of these evaluations, we did not record any provision for
the three months ended March 31, 2007 compared to $128,000 for the three months
ended March 31, 2006.
We had no charge-offs and no recoveries during the three months ended March 31,
2007 and 2006.
NON-INTEREST INCOME
Total non-interest income for three months ended March 31, 2007 was $407,000, an
increase of $290,000, or 247.9%, compared to $117,000 for the three months ended
March 31, 2007. We realized a gain on sale of available for sale securities of
$194,000 during the three months ended March 31, 2007 compared to a loss of
$90,000 during the same period in the prior year quarter. The Company recorded
an impairment charge on an available for sale security in the amount of $145,000
during the three months ended March 31, 2006. This resulted in a net loss on
securities available for sale of $90,000 for the three months ended March 31,
2006. Management determined that Fannie Mae Preferred Stock Series F was
other-than-temporarily impaired at March 31, 2006 and wrote down the book value
of the security to market value at that date.
NON-INTEREST EXPENSE
Total non-interest expense for the three months ended March 31, 2007 increased
$110,000, or 7.1%, to $1,649,000 from $1,539,000 for the three months ended
March 31, 2006. Salaries and benefits for the 2007 period totaled $712,000, an
increase of $61,000, or 9.4%, compared to the same three months in 2006, due to
merit pay increases and higher benefit costs. Occupancy and equipment expense
increased $3,000, or 1.4%, from the same three-month period in 2006, due to
increases in utilities and taxes paid for our premises. Professional fees
increased by $38,000, or 35.8%, to $144,000, for the three months ended March
31, 2007, compared to $106,000 for the three months ended March 31, 2006. The
increase resulted, in part, from legal and other fees associated with the
Company's proposed deregistration of its securities from Securities and Exchange
Commission filings. Marketing and business development expense decreased $2,000,
to $27,000, for the current three months due to a decrease in advertising. Data
processing expense decreased $40,000 in the 2007 period compared to the same
period in 2006 due to decreases in the amount of amortization and depreciation
expense regognized on computer software and hardware, respectively. Other
operating expense increased $49,000 to $327,000 for the three months ended March
31, 2007,
14
from $278,000 for the three months ended March 31, 2006, due primarily
to the Federal Deposit Insurance Corporation re-imposing deposit insurance
premiums on insured depositories beginning in 2007.
INCOME TAX EXPENSE
Income tax expense for the three months ended March 31, 2007 amounted to
$333,000, an increase of $8,000 from the $325,000 incurred for the three months
ended March 31, 2006, due primarily to the increase in pre-tax income. Our
effective tax rate for the three months ended March 31, 2007 was 30.5%, compared
to 30.6% for the three months ended March 31, 2006.
FINANCIAL CONDITION
OVERVIEW
Total assets decreased to $504.4 million at March 31, 2007, from $504.6 million
at December 31, 2006, a decrease of $227,000. Investment securities decreased by
$3.3 million, or 2.0%, to $158.0 million at March 31, 2007, compared to $161.3
million at December 31, 2006. Net loans outstanding decreased by $8.7 million,
or 2.7%, to $311.3 million at March 31, 2007, compared to $320.0 million at
December 31, 2006. Cash and overnight investments increased by $12.4 million, or
375.8%, to $15.7 million at March 31, 2007 from $3.3 million at December 31,
2006.
Deposits increased by $15.6 million, or 4.2%, to $384.6 million at March 31,
2007, from $369.0 million at December 31, 2006. Borrowed funds decreased $16.2
million, or 18.1%, to $73.1 million at March 31, 2007 from $89.3 million at
December 31, 2006. The increase in deposits was used to repay short-term
borrowed money during the quarter.
LOANS
Loans receivable, net of allowance for loan losses and deferred origination fees
and costs, at March 31, 2007 were $311.3 million, a decrease of $8.7 million, or
2.7%, compared to the December 31, 2006 balance of $320.0 million. Loans
receivable, net, represented 61.7% of total assets at March 31, 2007, compared
to 63.4% of total assets at December 31, 2006. The decrease in commercial
business loans resulted from the pay-off of several business loans during the
quarter. With the slowdown we are experiencing in new business loan activity in
our region, we have not able to replace those loans to date. The decrease in the
residential real estate loans reflects the slowdown in refinancing activity that
resulted from increasing interest rates and the slowdown in the housing market
in the Lehigh Valley during the current quarter.
The following table summarizes the loan portfolio of the Bank by loan category
and amount at March 31 2007, compared to December 31, 2006:
AT MARCH 31, 2007 AT DECEMBER 31, 2006
------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT
------------------------------------------
(Dollars In Thousands)
------------------------------------------
REAL ESTATE LOANS:
Commercial (1) $ 156,195 49.7% $ 155,870 48.3%
Residential (2) 87,525 27.8 90,213 27.9
--------- ------- --------- --------
Total real estate loans 243,720 77.5 246,083 76.2
--------- ------- --------- --------
OTHER LOANS:
Consumer 17,219 5.5 17,207 5.3
Commercial 53,436 17.0 59,707 18.5
--------- ------- --------- --------
Total other loans 70,655 22.5 76,914 23.8
--------- ------- --------- --------
Total loans receivable 314,375 100.0% 322,997 100.0%
--------- ======= --------- ========
Deferred costs 672 706
Allowance for loan losses (3,734) (3,734)
--------- ---------
Total loans receivable, net $ 311,313 $ 319,969
========= =========
- ----------
(1) Commercial real estate loans include multi-family residential real estate
loans.
(2) Residential real estate loans include one-to four-family real estate loans
and residential construction loans.
ALLOWANCE FOR LOAN LOSSES
We have established a systematic methodology for the determination of the
allowance for loan losses. The methodology is set forth in a formal policy and
takes into consideration the need for an overall general valuation allowance as
well as specific allowances that are tied to individual loans.
15
In originating loans, we recognize that losses will occur and that the risk of
loss will vary with, among other things, the type of loan being made, the
creditworthiness of the borrower over the term of the loan, general economic
conditions and, in the case of a secured loan, the quality of the collateral for
the loan.
The general valuation allowance is maintained at a level that management
believes to be necessary to cover credit losses inherent in the loan portfolio
at the balance sheet date. Management's periodic evaluation of the adequacy of
the allowance is based on known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, the estimated value
of any underlying collateral and current economic conditions, as such factors
may be applicable. Specific valuation allowances are established to absorb
losses on loans for which full collectibility cannot be reasonably assured.
Our evaluation of the adequacy of the allowance for loan losses includes a
review of all loans on at least a monthly basis. For residential mortgage loans
and consumer loans, the primary factors used to determine the adequacy of the
allowance are delinquency, collateral value, general economic conditions and,
where applicable, individual borrower information that is known to us. For
commercial loans and commercial real estate loans, the review includes financial
performance of the borrower, payment history, collateral value, general economic
conditions and more specific economic conditions affecting specific industries
or business activities of the borrowers within the portfolio segments.
The amount of the general portion of the allowance for loan losses is determined
by applying loss factors to the outstanding loans in the portfolio. The amount
of the factor applied to the loans is dependent upon the type of loan and
management's assessment of the relative risk associated with that loan type. The
factors may change from time to time if conditions or events warrant such
change. American Bank commenced operations in 1997, and as of March 31, 2007,
had recorded charge-offs on eight loans. In addition, we have had very limited
amounts of loan delinquencies. As a result, we consider the past experience and
knowledge of management and the loss experience of our peer group, as a basis
for determining our loss factors.
At March 31, 2007 and December 31, 2006, we had an allowance for loan losses of
approximately $3,734,000. Management believes that the allowance for loan losses
at March 31, 2007 is adequate to absorb losses inherent in the portfolio at that
date. Although management believes that it uses the best information available
to make such determinations, future adjustments to the allowance for loan losses
may be necessary, and the results of operations could be significantly and
adversely affected if circumstances differ substantially from the assumptions
used in making the determinations. Furthermore, while we believe we have
established our existing allowance for loan losses in accordance with accounting
principles generally accepted in the United States of America, there can be no
assurance that the Pennsylvania Department of Banking or the Board of Governors
of the Federal Reserve System, in reviewing our loan portfolio, will not request
us to increase our allowance for loan losses. In addition, because future events
affecting borrowers and collateral cannot be predicted with certainty, there can
be no assurance that the existing allowance for loan losses is adequate or that
material increases will not be necessary should the quality of any loans
deteriorate as a result of the factors discussed above. Any material increase in
the allowance for loan losses may adversely affect the Company's financial
condition and results of operations.
The following table summarizes the allocation of the allowance for loan losses
at March 31, 2007:
PERCENT OF
LOANS IN
LOAN EACH
AMOUNT OF AMOUNTS CATEGORY TO
ALLOWANCE BY CATEGORY TOTAL LOANS
-------------------------------------
(Dollars In Thousands)
Commercial $ 816 $ 53,436 17.0%
Commercial mortgage 2,131 156,195 49.7
Residential mortgage 450 87,525 27.8
Consumer 125 17,219 5.5
Unallocated 212 -- --
--------- ----------- -----------
Total $ 3,734 $ 314,375 100.0%
========= =========== ===========
16
The following table summarizes the allocation of the allowance for loan losses
at December 31, 2006:
PERCENT OF
LOANS IN
LOAN EACH
AMOUNT OF AMOUNTS CATEGORY TO
ALLOWANCE BY CATEGORY TOTAL LOANS
-------------------------------------
(Dollars in Thousands)
Commercial $ 816 $ 59,707 18.5%
Commercial mortgage 2,131 155,870 48.3
Residential mortgage 450 90,213 27.9
Consumer 125 17,207 5.3
Unallocated 212 -- --
--------- ----------- -----------
Total $ 3,734 $ 322,997 100.0%
========= =========== ===========
The following table summarizes the transactions in the allowance for loan losses
for the three months ended March 31, 2007 and 2006:
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2007 2006
-------- ---------
(Dollars In Thousands)
Balance at beginning of period $ 3,743 $ 3,393
Provision for loan losses -- 128
Recoveries -- --
Charge-offs -- --
-------- ---------
Balance at end of period $ 3,743 $ 3,521
======== =========
Percent of net recoveries to average total loans n/a n/a
Percent of allowance to non-performing loans 5,485.6% 8,739.6%
INVESTMENT SECURITIES
Total investment securities decreased by $3.3 million, or 2.0%, to $158.0
million at March 31, 2007 from $161.3 million at December 31, 2006. Investment
securities classified as available for sale decreased by $2.2 million, or 1.5%,
to $147.4 million, while investment securities classified as held to maturity
increased by $1.1 million, or 9.4%, to $10.6 million.
The following table presents the amortized cost and the fair values at March 31,
2007 and December 31, 2006, respectively, for each major category of the
Company's investment portfolio:
17
AT MARCH 31, 2007
-----------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED COST GAINS LOSSES FAIR VALUE
-------------- ---------- ---------- ----------
(In Thousands)
AVAILABLE FOR SALE SECURITIES:
U.S. Government agencies $ 59,490 $ -- $ (376) $ 59,114
Mortgage backed securities 50,994 254 (175) 51,073
U.S. Government agency
preferred stock 2,156 174 (1) 2,329
Common stock 5,512 2,457 (114) 7,855
Trust preferred obligations 26,430 164 (99) 26,495
Other 550 -- (11) 539
-------------- ---------- ---------- ----------
Total $ 145,132 $ 2,948 $ (1,032) $ 147,405
============== ========== ========== ==========
HELD TO MATURITY:
Trust preferred obligations $ 9,604 $ 318 $ (2) $ 9,920
Mortgage backed securities 1,020 9 -- 1,029
-------------- ---------- ---------- ----------
Total $ 10,624 $ 327 $ (2) $ 10,949
============== ========== ========== ==========
AT DECEMBER 31, 2006
-----------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED COST GAINS LOSSES FAIR VALUE
-------------- ---------- ---------- ----------
(In Thousands)
AVAILABLE FOR SALE SECURITIES:
U.S. Government agencies $ 59,490 $ -- $ (567) $ 58,923
Mortgage backed securities 56,685 195 (264) 56,616
U.S. Government agency
preferred stock 2,161 74 (45) 2,190
Common stock 5,735 2,545 (59) 8,221
Trust preferred obligations 23,099 134 (86) 23,147
Other 550 -- (11) 539
-------------- ---------- ---------- ----------
Total $ 147,720 $ 1,236 $ (2,057) $ 149,636
============== ========== ========== ==========
HELD TO MATURITY:
Trust preferred obligations $ 10,539 $ 375 $ (23) $ 10,891
Mortgage backed securities 1,170 9 -- 1,179
-------------- ---------- ---------- ----------
Total $ 11,709 $ 384 $ (23) $ 12,070
============== ========== ========== ==========
Management evaluates securities for other-than-temporary impairment on at least
a quarterly basis and more frequently when economic or market concerns warrant
such evaluation. Consideration is given to (1) the length of time and the extent
to which the fair value has been less than the cost, (2) the financial condition
and near-term prospects of the issuer, and (3) the intent and ability of the
Company to retain its investment in the issuer for a period of time sufficient
to allow for any anticipated recovery in fair value.
At March 31, 2007, management believes that the unrealized losses on investment
securities reflect changes in interest rates subsequent to the acquisition of
specific securities and are temporary in nature. Management believes that the
Company has the intent and ability to hold these securities until the market
value recovers or maturity.
At March 31, 2006, management determined that Fannie Mae Series F preferred
stock was other than temporarily impaired. The dividend rate on this security
reset on March 31, 2006 to a rate equal to the two-year Treasury note minus 16
basis points. The security does not have a maturity date. The recovery of market
value did not occur as expected. Management recorded a charge to earnings in the
amount of $145,000 to record the carry value of the security to market value at
March 31, 2006.
DEPOSITS
Total deposits increased by $15.6 million, or 4.2%, to $384.6 million at March
31, 2007 from the December 31, 2006 balance of $369.0 million. Demand deposits
decreased $1.5 million, or 9.7%, to $14.3 million at March 31, 2007, from $15.9
million at December 31, 2006. Interest-bearing checking accounts decreased $2.8
million, or 3.6%, to $74.4 million, compared to $77.2 million at December 31,
2006. Savings accounts, including money market accounts, decreased $624,000, or
0.9%, to $72.6 million from the balance of $73.2 million at December 31, 2006.
Total
18
certificates of deposit increased by $20.5 million, or 10.1%, to $223.3 million
from the December 31, 2006 balance of $202.7 million.
The following table sets forth the dollar amount of deposits in the various
types of deposit programs offered by the Bank as of the dates indicated.
MARCH 31, 2007 DECEMBER 31, 2006
--------------------------- ----------------------------
AMOUNT PERCENT RATE AMOUNT PERCENT RATE
-------- ------- ------ --------- ------- ------
(Dollars In Thousands)
Demand, non-interest-bearing $ 14,321 3.7% --% $ 15,854 4.3% --%
Demand, interest-bearing 74,400 19.4 2.40 77,235 20.9 2.50
Savings, including money market accounts 72,565 18.9 3.32 73,189 19.8 3.13
Certificates of deposit 223,265 58.0 4.90 202,717 55.0 4.32
-------- ------- ------ --------- ------- ------
Total deposits $384,551 100.0% 4.17% $ 368,995 100.0% 3.42%
======== ======= ====== ========= ======= ======
BORROWED MONEY
Borrowed money consists of short-term overnight borrowings in the form of
securities sold under agreements to repurchase, federal funds purchased,
overnight funds from the Federal Home Loan Bank of Pittsburgh ("FHLB").
Long-term debt consists of borrowings from the FHLB and a term note from a
third-party bank.
Securities sold under agreements to repurchase totaled $11.4 million at March
31, 2007, a decrease of $600,000, or 5.3%, from the total of $12.0 million at
December 31, 2006. These transactions generally mature in one day and are
secured by U S Government agency securities. This account is typically used by
commercial business customers as a way to generate interest income on funds that
would otherwise sit idle in non-interest bearing demand accounts. At December
31, 2006 short-term borrowings also consisted of federal funds purchased of
$15.0 million and overnight funds from the FHLB of $616,000.
At March 31, 2007, long-term debt consisted of; i) a $205,000 fixed-rate
advance, with a rate of 5.24% that amortizes on a monthly basis and fully
amortizes by September 2008; ii) a loan from a third-party bank in the amount of
$4.0 million, with interest payable monthly at 30-day LIBOR plus 100 basis
points through December 31, 2007; and iii) $57.5 million of convertible advances
from the FHLB that have fixed maturity dates from September 2007 through
November 2015 and have initial rate lock periods that expire beginning in
November 2001 through March 2006. When the initial rate lock period on these
advances expire the FHLB may, at its option, elect to convert the advance to a
variable rate of interest that resets quarterly at a spread of 11 to 16 basis
points over the 3-month LIBOR. Should the FHLB elect to convert the advance to a
variable rate, we have the right to repay the advance without penalty. Interest
rates on these advances range between 2.74% and 6.07% with a weighted average
rate of 4.83%. During the three-month period ended March 31 2007, the FHLB did
not elect to convert any of these advances.
The Bank is subject to maximum borrowing limitations with the FHLB, based in
part on the amount of qualifying assets the Bank holds in the form of
residential mortgage loans and U. S. Government agency securities, including
mortgage backed securities. As of March 31 2007, the Bank's maximum borrowing
capacity was $288.0 million.
JUNIOR SUBORDINATED DEBENTURES
On April 26, 2002, the Company issued $10.2 million principal amount of 6.00%
junior subordinated debentures due March 31, 2032 to American Capital Trust I
(the "Trust"). The Company owns all of the common equity of the Trust. The
debentures are the sole asset of the Trust. The Trust issued $10.2 million of
6.00% cumulative convertible trust preferred securities to investors. The trust
preferred securities are callable by the Company after March 31, 2007, or
earlier under certain conditions. The trust preferred securities must be
redeemed at the maturity of the debentures on March 31, 2032. Holders of the
trust preferred securities may elect to convert the preferred securities into
common stock of the Company at any time, at a conversion ratio of one share of
common stock for each preferred security. The Company's obligations under the
debentures and related documents, taken together, constitute a full and
unconditional guarantee by the Company of the Trust's obligations under the
preferred securities.
The Trust and the underlying securities are subject to Financial Accounting
Standards Board Interpretation No. 46, as revised, (FIN 46R) which provides
guidance for the consolidation of variable interest entities (VIEs). In
accordance with the provisions of FIN 46R, the Trust and the underlying
securities are not consolidated with the Company's financial statements. Please
refer to Note 10 to the Consolidated Financial Statements for the year ended
December 31, 2006 included in the Annual Report on Form 10-KSB for the year
ended December 31, 2006 for additional discussion of FIN 46R.
19
The debentures qualify as Tier 1, or core capital of the Company, subject to a
25% of capital limitation under risk-based capital guidelines developed by the
Federal Reserve Board. Under the regulatory capital guidelines, the portion that
exceeds the 25% of capital limitation qualifies as Tier 2, or supplementary
capital of the Company. At March 31, 2007, all $10.5 million of the debentures
qualified as Tier 1 capital of the Company.
STOCKHOLDERS' EQUITY
Stockholders' equity at March 31, 2007 was $34.6 million, an increase of
$364,000, or 1.1%, from the December 31, 2006 balance of $34.2 million. The
increase resulted primarily from net income of $759,000, reinvestment of
dividends of $127,000 and an increase in unrealized gain on available for sale
securities of $210,000, net of tax. Stockholders' equity was reduced by the
repurchase of Company common stock in the amount of $440,000 and the payment of
dividends of $299,000.
ASSET QUALITY
DELINQUENT LOANS AND NON-PERFORMING ASSETS
Our collection procedures provide that when a loan is 16 days past due, a
computer generated late charge notice is sent to the borrower requesting payment
of the amount due under the loan, plus a late charge. If such delinquency
continues, on the first day of the next month, a delinquent notice is mailed
advising the borrower of the violation of the terms of the loan. We attempt to
contact borrowers whose loans are more than 30 days past due. If such attempts
are unsuccessful, we will engage counsel to facilitate the collection process. A
delinquent loan report is presented to the board of directors on a monthly basis
for their review.
Loans are reviewed on a monthly basis. A loan is placed in a non-accrual status
at the time when ultimate repayment of principal or interest, wholly or
partially, is in doubt. Non-performing loans are those loans which were
contractually past due 90 days or more as to interest or principal payments but
are well secured and in the process of collection. Non-performing loans are
charged off when it appears no longer reasonable or probable that the loan will
be collected. Interest accrued and unpaid at the time a loan is placed on
non-accrual status is charged against interest income. Real estate acquired by
us as a result of foreclosure or by deed in lieu of foreclosure is deemed
"foreclosed real estate" until such time as it is sold. When foreclosed real
estate is acquired, it is recorded at the lower of the unpaid principal balance
of the related loan or its estimated fair value, less estimated selling
expenses. Valuations are periodically performed or obtained by management and
any subsequent decline in fair market value is charged to operations.
At March 31, 2007, we had two loans delinquent more than 30 days and still
accruing interest. The balance on those loans was $4,400. At December 31, 2006,
we had four loans that were delinquent more than 30 days and still accruing
interest. The balance on those loans was $249,000. At March 31, 2007 and
December 31, 2006, we had three loans with an unpaid balance of $68,000 that
were classified as non-performing and in the process of collection or
foreclosure.
During the three-month periods ended March 31, 2007 and 2006 we did not charge
off any loans.
During the three-month periods ended March 31, 2007 and 2006 we had no
recoveries of charged-off loans.
CLASSIFICATION OF ASSETS
Federal regulations provide for the classification of delinquent or
non-homogeneous loans and other assets such as debt and equity securities as
"substandard," "doubtful," or "loss" assets. In analyzing potential loans for
purchase as well as for purposes of our loan classification, we have placed
increased emphasis on the payment history of the obligor. Assets that do not
expose us to risk sufficient to warrant classification in one of the
aforementioned categories, but which possess some weaknesses, are required to be
designated "special mention" by management. Loans designated as special mention
are generally loans that, while current in required payment, have exhibited some
potential weaknesses that, if not corrected, could increase the level of risk in
the future. An asset is considered substandard if it is inadequately protected
by the current net worth and paying capacity of the obligor. Substandard assets
include those characterized by the distinct possibility that we will sustain
some loss if the deficiencies are not corrected. Assets classified as doubtful
have all of the weaknesses inherent in those classified substandard, with the
added characteristic that the weaknesses make collection or liquidation in full,
on the basis of currently existing facts, conditions and values, highly
questionable and improbable. Assets classified as loss are those considered
uncollectible and of such little value that their continuance as assets is not
warranted and are charged against the loan loss reserve. Pursuant to internal
procedures, loans with a history of 60 to 89 day delinquencies will generally be
classified either special mention or substandard. However, all loans 90 days or
more delinquent are classified either substandard, doubtful or loss. At March
31, 2007, we had four loans totaling $1,026,000 classified as Special Mention,
four loans totaling $190,000 classified as Substandard, no loans classified as
Doubtful and no loans classified as Loss.
20
COMMITMENTS AND OFF-BALANCE SHEET TRANSACTIONS
The Company's financial statements do not reflect various commitments that are
made in the normal course of business, which may involve some liquidity risk.
These commitments consist mainly of unfunded loans and letters of credit made
under the same standards as on-balance sheet instruments. Unused commitments at
March 31, 2007 totaled $60.4 million. This consisted of $14.8 million in
commitments to fund commercial business, commercial real estate, residential
real estate and commercial and residential construction loans, $39.3 million
under lines of credit, including $5.1 million in home equity lines of credit and
$6.3 million in standby letters of credit. Because these commitments have a
fixed maturity date and because we expect that many of them will expire without
being drawn upon, we believe that they do not generally present any significant
liquidity risk to the Company.
Management believes that any amounts actually drawn upon can be funded in the
normal course of operations. The Company has no investment in or financial
relationship with any unconsolidated entities that are reasonably likely to have
a material effect on liquidity or the availability of capital resources.
The Company is not aware of any other known trends or any known demands,
commitments, events or uncertainties which would result in any material increase
or decrease in liquidity.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
The Company's liquidity management objectives are to ensure the availability of
sufficient cash flows to meet all financial commitments and to capitalize on
opportunities for expansion. Liquidity management addresses the ability to meet
deposit withdrawals on demand or at contractual maturity, to repay borrowings as
they mature and to fund new loans and investments as opportunities arise. The
Company's primary sources of internally generated funds are principal and
interest payments on loans receivable, cash flows generated from operations and
cash flows generated by investments. External sources of funds include increases
in deposits and advances from the FHLB.
The Company monitors its liquidity position on an ongoing basis and reports
regularly to the Board of Directors the level of liquidity as compared to
minimum levels established by Board policy. As of March 31, 2007 and December
31, 2006, the Company's level of liquidity was in excess of the minimum
established by Board policy.
REGULATORY CAPITAL
The greater the capital resources, the more likely the Company and the Bank will
be able to meet their cash obligations and unforeseen expenses. The Company and
the Bank have strong capital positions.
The following table presents the capital position of the Company and the Bank
relative to the various minimum statutory and regulatory capital requirements at
March 31, 2007 and December 31, 2006. The Bank continues to be considered "well
capitalized" and exceeds the regulatory guidelines.
21
REQUIRED TO BE
REQUIRED FOR CAPITAL CONSIDERED
ACTUAL ADEQUACY PURPOSES "WELL CAPITALIZED"
--------------------- --------------------- ---------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
-------- ---------- -------- ---------- -------- ----------
(Dollars In Thousands)
March 31, 2007:
- ---------------------------------------
Total Capital to Risk Weighted Assets:
Company $ 48,084 12.87% $ 29,681 8.00% n/a n/a
Bank 46,807 12.92 28,540 8.00 $ 35,675 10.00%
Tier1Capital to Risk Weighted Assets:
Company 43,296 11.59 14,841 4.00 n/a n/a
Bank 42,353 11.87 14,270 4.00 21,405 6.00
Leverage Ratio:
Company 43,296 8.60 21,103 4.00 n/a n/a
Bank 42,353 8.55 19,820 4.00 24,775 5.00
December 31, 2006:
- ---------------------------------------
Total Capital to Risk Weighted Assets:
Company $ 48,022 12.91% $ 29,768 8.00% n/a n/a
Bank 45,270 12.37 28,271 8.00 $ 36,589 10.00%
Tier 1 Capital to Risk Weighted Assets:
Company 43,140 11.59 14,884 4.00 n/a n/a
Bank 41,503 11.34 14,635 4.00 21,953 6.00
Leverage Ratio:
Company 43,140 8.44 20,437 4.00 n/a n/a
Bank 41,503 8.22 20,189 4.00 25,236 5.00
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Through the Company's Asset/Liability Committee, sensitivity of the net interest
income and the economic value of equity to changes in interest rates are
considered through analyses of the interest sensitivity positions of major asset
and liability categories. The Company manages its interest rate risk sensitivity
through the use of a simulation model that projects the impact of changing rates
on net interest income and economic value of equity, compared to a base case
scenario over a forward time horizon of one year. The rate shock simulation
projects the dollar change in the net interest margin and the economic value of
equity should the yield curve instantaneously shift 200 basis points up or down
relative to its beginning position. This simulation provides a test for embedded
interest rate risk estimates. Actual results may differ from the simulated
results due to various factors including time, magnitude and frequency of rate
changes, the relationship or spread between various rates, changes in asset and
liability mix strategies and Management's decision to grow or shrink the size of
the balance sheet. The results are compared to risk tolerance limits set by
corporate policy. Based on the Company's most recent interest rate sensitivity
analysis as of March 31, 2007, an increase of 200 basis points in rates is
estimated to result in a decrease of 11.4% in net interest income, while a
decrease of 200 basis points is estimated to result in an increase of 1.8% in
net interest income. These estimated changes are within Board established limits
of a decline of 15.0% in net interest income for rising or declining rate
environments.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management,
including our Principal Executive Officer and Principal Financial
Officer, we evaluated the effectiveness of the design and operation
of our disclosure controls and procedures (as defined in Rule
13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the
period covered by this quarterly report. Based upon that evaluation,
the Principal Executive Officer and Principal Financial Officer
concluded that, as of the end of the period covered by this
quarterly report, our disclosure controls and procedures were
effective to ensure that information required to be disclosed in the
reports that the Company files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and
forms.
22
(b) Changes in internal controls.
There were no changes made to our internal controls over financial
reporting during the period covered by this report that has
materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
PART II
Item 1 - Legal Proceedings
None
Item 1A - Risk Factors
There are no material changes to the risk factors disclosed in the
Annual Report on Form 10-KSB filed for the fiscal year ended
December 31, 2006.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
The following table discloses information regarding the purchases of
Company common stock made by the Company during the quarter ended
March 31, 2007:
Total number of Maximum number
shares purchased as of shares yet
part of a publicly to be purchased
Number of shares Average price announced repurchase under the plan
Month purchased paid per share plan (1) (1)
-------------------------------------------------------------------------------------
January -- $ -- -- 151,542
February 46,886 8.27 46,886 104,656
March -- -- -- 104,656
---------------- -------------- --------------------
46,886 $ 8.27 46,886
================ ====================
(1) On March 15, 2005, the Company announced a program to
repurchase up to 375,000 shares of its outstanding common
stock. This program does not have an expiration date.
Item 3 - Defaults Upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None
23
Item 6 - Exhibits
Exhibit-31.1, Certification of Chief Executive Officer Pursuant to
Section 302 of Sarbanes-Oxley Act of 2002
Exhibit-31.2, Certification of Chief Financial Officer Pursuant to
Section 302 of Sarbanes-Oxley Act of 2002
Exhibit -32, Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of
2002
SIGNATURES
In accordance with section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN BANK INCORPORATED
Registrant
May 14, 2007 By: /s/ Mark W. Jaindl
Date: ---------------------------------
Mark W. Jaindl,
President and Chief Executive Officer
(Principal Executive Officer)
May 14, 2007 By: /s/ Harry C. Birkhimer
Date: ---------------------------------
Harry C. Birkhimer,
Senior Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
24