News Column

Atlantic Coast Financial Posts 4Q and Full Year 2013 Results

February 8, 2014

Atlantic Coast Financial Corp., the holding company for Atlantic Coast Bank, reported capital levels and asset quality at Dec. 31, 2013.

In a release on Jan. 29, John Stephens, President and Chief Executive Officer, said, "We are very pleased with the position of the Bank at Dec. 31, 2013. We recently raised more than $45 million in a public offering that was very well received by investors. During the fourth quarter, we also disposed of most of our non- performing assets. We anticipate completing the sale of two additional other real estate owned assets in the first quarter; with those dispositions, on which we do not expect to take additional losses, non-performing assets will represent less than 1 percent of total assets. Our capital ratios are now very strong, exceeding those of almost all community banks in our market area. These actions, coupled with recent additions to staff in new business development roles, have left us well positioned to move the Company forward, serve our customers, and create value for our stockholders."

Developments in the fourth quarter included:

-On Dec. 3, 2013, the Company completed an underwritten offering of its common stock. The Company raised $48.3 million in gross proceeds ($45.0 million in net proceeds) by issuing 12.9 million shares of its common stock, including the underwriter's over- allotment option in full, at a price to the public of $3.75 per share. As a result of the capital raise, Tier 1 capital ratio was 9.73 percent of adjusted total assets and total risk-based capital ratio was 20.47 percent of risk-weighted assets.

-On Dec. 27, 2013, the Company disposed of $13.2 million non- performing assets through a bulk sale transaction. As a result, the Company recognized a loss of $6.3 million, $2.4 million of which was charged off against reserves for non-performing loans.

-Non-performing assets decreased 74 percent to $8.6 million or 1.17 percent of total assets at Dec. 31, 2013, from $33.0 million or 4.26 percent of total assets at Dec. 31, 2012, and decreased 65 percent from $25.1 million or 3.51 percent of total assets at Sept. 30, 2013.

-Total assets were $733.6 million at Dec. 31, 2013, compared with $772.6 million at Dec. 31, 2012, as the Company managed asset size prior to the successful completion of its capital raise on Dec. 3, 2013.

For the fourth quarter of 2013, the Company reported a net loss of $6.9 million or $1.05 per diluted share compared with a net loss of $0.3 million or $0.12 per diluted share in the year-earlier quarter and a net loss of $0.9 million or $0.38 per diluted share in the third quarter of 2013. For the full year 2013, the net loss totaled $11.4 million or $3.23 per diluted share compared with a net loss for 2012 of $6.7 million or $2.67 per diluted share.

The Company's results through Dec. 31, 2013 included costs associated with the previously announced merger with Bond Street Holdings, Inc., which stockholders rejected at a special meeting in June 2013.

In order to more clearly assess the fundamental operations of the Company, management believes it is appropriate to adjust the reported net losses for the fourth quarter and full year 2013 to exclude these merger-related costs, incremental provision and losses related to the sale of non-performing loans. On this basis, the adjusted net loss was $0.8 million or $0.12 per diluted share for the three months ended Dec. 31, 2013, compared to $0.3 million or $0.12 per diluted share for the three months ended Dec. 31, 2012, and $4.0 million or $1.13 per diluted share for the year ended Dec. 31, 2013, compared to $6.7 million or $2.67 per diluted share for the year ended Dec. 31, 2012.

James Hogan, Executive Vice President and Chief Financial Officer, said, "With strong capital ratios and a clean balance sheet, we believe we are well positioned to return to profitability. In the first quarter of 2014, our long-term debt will begin to mature, which will help reduce our cost of funds. We also should generate significant savings in expenses from having a very low level of non-performing assets. As a result, we expect that the Bank will return to profitability in 2014."

The increase in the key capital measures as of Dec. 31, 2013, was primarily due to the successful completion of the Company's capital raise on Dec. 3, 2013.

Effective Aug. 10, 2012, the Bank's Board of Directors agreed to the issuance of a Consent Order by the Office of the Comptroller of the Currency. Among other things, the Order called for the Bank to achieve and maintain a Tier 1 capital ratio of 9 percent of adjusted total assets and a total risk-based capital ratio of 13 percent of risk-weighted assets by Dec. 31, 2012. The Bank was in compliance with the capital levels required by the Order as of Dec. 31, 2013.

Overall, the Company has continued to see improving credit quality during the past year as the pace of loans being reclassified to non-performing has slowed, particularly in categories such as one- to four-family residential and home equity loans, and through sales of other real estate owned. The significant decline in non- performing loans and OREO in the fourth quarter of 2013 reflected the aforementioned bulk sale of non-performing assets on Dec. 27, 2013, which substantially strengthened the ratios of non-performing loans and assets to total portfolio loans and total assets. The number of troubled debt restructurings also declined during 2013, primarily due to the bulk sale, which included the sale of certain TDR loans.

The provision for loan losses in the fourth quarter of 2013 reflects the December 2013 bulk sale of non-performing assets. The decline in the adjusted provision for loan losses from prior-year periods reflected reduced non-performing loans and a decline in early-stage delinquencies of one- to four-family residential and home equity loans.

The reduced level in the allowance for loan losses reflects the improved credit quality in the remaining loan portfolio and should be adequate to absorb losses in the portfolio at Dec. 31, 2013. The decline in the allowance for loan losses during the fourth quarter of 2013 and the increase in net charge-offs for the quarter primarily reflected total charge-offs of $4.7 million related to the bulk sale of non-performing loans in the fourth quarter of 2013, $2.4 million of which was charged off against reserves for non- performing loans.

The decline in net interest margin over the course of 2013 primarily reflected a reduction in portfolio and other loans outstanding, as the Company continued to preserve capital. It also reflected the impact of lower interest rates on funds reinvested in investment securities, partially offset by reductions in the cost of deposits and lower interest expense for Federal Home Loan Bank debt. Because of its successful capital raise and with the proceeds of its bulk sale of non-performing assets in the fourth quarter of 2013, the Company expects to repay a portion of its outstanding debt during 2014. The Company also will be able to redeploy excess liquidity maintained over the past several years and build its loan portfolio to produce higher yields, both of which should have positive effect on future net interest margin.

The decrease in non-interest income for 2013 compared with that for 2012 primarily reflected a decrease in gains on the sale of securities, as well as a decrease in gains on the sale of held-for- sale loans from mortgage origination activity following a reorganization of this business in the second half of 2012 in order to reduce non-interest expense. The increase in non-interest expense for the fourth quarter of 2013 compared with the linked quarter, and for 2013 versus 2012, primarily reflected a $1.6 million loss on OREO included in the aforementioned bulk sale of non-performing assets, as well as a write-down of $2.2 million on OREO the Company anticipates selling in the first quarter of 2014. Because of the Company's strengthened capital position at the end of 2013, the Company expects to reduce its risk-related operating expenses, like FDIC insurance costs, accounting costs, foreclosed asset collection expenses and D&O insurance costs, in 2014, with the effect of reducing total non-interest expense to approximately $4.6 million per quarter by the first quarter of 2015.

Stephens said, "I am very proud of our employees and customers who have remained loyal to the Bank through some very difficult times. With continued support, we believe we will move forward toward becoming one of the premiere community banks in our market."

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