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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
Or
¨ | 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 000-53813
FLORIDA BANK GROUP, INC.
(Exact name of registrant as specified in its charter)
FLORIDA | 20-8732828 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
201 N. Franklin Street, Suite 2800, Tampa, Florida 33602
(Address of principal executive offices) (Zip Code)
(813) 367-5270
(Registrants telephone number, including area code)
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. x Yes ¨ No
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ¨ Yes ¨ No
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 accelerated filer, large accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ | 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 x No
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date: Number of shares of Common Stock, $0.01 Par Value as of April 30, 2011:14,329,315.
Table of Contents
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2011
TABLE OF CONTENTS
Page | ||||||
Item 1. |
Condensed Consolidated Financial Statements | |||||
Condensed Consolidated Balance Sheets March 31, 2011 (Unaudited) and December 31, 2010 |
1 | |||||
3 | ||||||
4 | ||||||
5 | ||||||
Notes to Condensed Consolidated Financial Statements (Unaudited) |
7 | |||||
20 | ||||||
21 | ||||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
22 | ||||
Item 3. |
38 | |||||
Item 4. |
Controls and Procedures | 38 | ||||
Item 1. | Legal Proceedings | 38 | ||||
Item 1A. | Risk Factors | 38 | ||||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 39 | ||||
Item 3. | Defaults Upon Senior Securities | 39 | ||||
Item 4. | (Removed and Reserved) | 39 | ||||
Item 5. | Other Information | 39 | ||||
Item 6. | Exhibits | 39 | ||||
Signatures | 40 | |||||
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Item 1. | Financial Statements |
Condensed Consolidated Balance Sheets
($ in thousands, except share amounts)
March 31, 2011 |
December 31, 2010 |
|||||||
(unaudited) | ||||||||
Assets | ||||||||
Cash and due from banks |
$ | 6,821 | $ | 4,618 | ||||
Interest-bearing Deposits and Federal Funds Sold |
38,062 | 35,683 | ||||||
Cash and cash equivalents |
44,883 | 40,301 | ||||||
Securities available for sale |
172,985 | 177,451 | ||||||
Loans, net of allowance for loan losses of $21,296 in 2011 and $20,830 in 2010 |
552,814 | 572,045 | ||||||
Federal Reserve Bank stock, at cost |
1,607 | 2,781 | ||||||
Federal Home Loan Bank stock, at cost |
5,032 | 5,032 | ||||||
Accrued interest receivable |
2,275 | 2,475 | ||||||
Premises and equipment, net |
25,546 | 25,815 | ||||||
Foreclosed real estate |
6,596 | 7,018 | ||||||
Prepaid expenses and other assets |
4,988 | 5,490 | ||||||
Total assets |
$ | 816,726 | $ | 838,408 | ||||
Liabilities and Stockholders Equity | ||||||||
Liabilities: |
||||||||
Deposits: |
||||||||
Noninterest-bearing demand |
$ | 75,608 | $ | 68,168 | ||||
Interest-bearing demand |
64,469 | 72,247 | ||||||
Savings |
9,602 | 10,043 | ||||||
Money market |
179,346 | 201,718 | ||||||
Time |
359,404 | 360,158 | ||||||
Total deposits |
688,429 | 712,334 | ||||||
Accrued expenses and other liabilities |
4,270 | 4,768 | ||||||
Federal Home Loan Bank advances |
77,700 | 67,700 | ||||||
Total liabilities |
770,399 | 784,802 | ||||||
Stockholders equity: |
||||||||
Preferred Stock Series A, $.01 par value; $1,000 liquidation value; 20,471 shares outstanding in 2011 and 2010 |
20,471 | 20,471 | ||||||
Preferred Stock Series B, $.01 par value; $1,000 liquidation value; 1,024 shares outstanding in 2011 and 2010 |
1,024 | 1,024 | ||||||
Preferred Stock - Discount |
(679 | ) | (730 | ) | ||||
Common stock, $.01 par value, 50,000,000 shares authorized, 14,341,898 shares inssued in 2011 and 2010 |
143 | 143 | ||||||
Additional paid-in capital |
150,817 | 150,817 | ||||||
Treasury stock (12,583 shares in 2011 and 2010), at cost |
(164 | ) | (164 | ) | ||||
Accumulated deficit |
(121,901 | ) | (113,848 | ) | ||||
Accumulated other comprehensive loss |
(3,384 | ) | (4,107 | ) | ||||
Total stockholders equity |
46,327 | 53,606 | ||||||
$ | 816,726 | $ | 838,408 | |||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
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Condensed Consolidated Statements of Operations and Other Comprehensive Income (Loss) (Unaudited)
($ in thousands, except per share amounts)
Three Months Ended March 31, |
||||||||
2011 | 2010 | |||||||
Interest income: |
||||||||
Loans |
$ | 7,509 | $ | 8,564 | ||||
Securities available for sale |
1,101 | 959 | ||||||
Other interest-earning assets |
65 | 60 | ||||||
Total interest income |
8,675 | 9,583 | ||||||
Interest expense: |
||||||||
Deposits: |
||||||||
Demand |
99 | 163 | ||||||
Savings |
10 | 19 | ||||||
Money market |
476 | 531 | ||||||
Time |
2,001 | 2,628 | ||||||
Federal Home Loan Bank advances |
707 | 831 | ||||||
Total interest expense |
3,293 | 4,172 | ||||||
Net interest income before provision for loan losses |
5,382 | 5,411 | ||||||
Provision for loan losses |
7,754 | 3,441 | ||||||
Net interest (expense) income after provision for loan losses |
(2,372 | ) | 1,970 | |||||
Noninterest income: |
||||||||
Service charges on deposit accounts |
214 | 220 | ||||||
Other service charges and fees |
152 | 122 | ||||||
Other |
191 | 242 | ||||||
Total noninterest income |
557 | 584 | ||||||
Noninterest expenses: |
||||||||
Salaries and employee benefits |
2,785 | 3,592 | ||||||
Occupancy |
1,174 | 1,351 | ||||||
Data processing |
330 | 289 | ||||||
Stationary, printing and supplies |
57 | 77 | ||||||
Business development |
40 | 93 | ||||||
Insurance, including deposit insurance premium |
733 | 491 | ||||||
Professional fees |
320 | 337 | ||||||
Marketing |
12 | 13 | ||||||
Federal Home Loan Bank advance prepayment penalties |
| 41 | ||||||
Loss on sale of foreclosed real estate |
39 | | ||||||
Write-down of foreclosed real estate |
287 | 42 | ||||||
Foreclosed real estate expense |
80 | 52 | ||||||
Other |
305 | 290 | ||||||
Total noninterest expense |
6,162 | 6,668 | ||||||
Loss before income taxes |
(7,977 | ) | (4,114 | ) | ||||
Income taxes |
25 | (1,548 | ) | |||||
Net loss |
(8,002 | ) | (2,566 | ) | ||||
Preferred stock dividend requirements and discount accretion |
(330 | ) | (330 | ) | ||||
Net loss available to common stockholders |
(8,332 | ) | (2,896 | ) | ||||
Other comprehensive income : |
||||||||
Change in unrealized holding gains on securities available for sale |
723 | 703 | ||||||
Comprehensive loss |
$ | (7,609 | ) | $ | (2,193 | ) | ||
Loss per common share - |
||||||||
Basic and Diluted |
$ | (0.58 | ) | $ | (0.20 | ) | ||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Condensed Consolidated Statements of Changes in Stockholders Equity (Unaudited)
For the Three Months Ended March 31, 2011 and 2010
($ in thousands, except share amounts)
Preferred Stock | Common Stock | Treasury Stock |
Accumulated Deficit |
Accumulated Other Comprehensive Income (Loss) |
Total Stockholders Equity |
|||||||||||||||||||||||||||||||||||||||||||
Series A | Series B | Additional Paid-in Capital |
||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Discount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2010 |
20,471 | $ | 20,471 | 1,024 | $ | 1,024 | $ | (730 | ) | 14,341,898 | $ | 143 | $ | 150,817 | $ | (164 | ) | $ | (113,848 | ) | $ | (4,107 | ) | $ | 53,606 | |||||||||||||||||||||||
Net loss |
| | | | | | | | | (8,002 | ) | | (8,002 | ) | ||||||||||||||||||||||||||||||||||
Net Change in Unrealized Loss On Available-for-Sale Securities |
| | | | | | | | | | 723 | 723 | ||||||||||||||||||||||||||||||||||||
Preferred stock discount accretion |
| | | | 51 | | | | | (51 | ) | | | |||||||||||||||||||||||||||||||||||
Balance, March 31, 2011 |
20,471 | $ | 20,471 | 1,024 | $ | 1,024 | $ | (679 | ) | 14,341,898 | $ | 143 | $ | 150,817 | $ | (164 | ) | $ | (121,901 | ) | $ | (3,384 | ) | $ | 46,327 | |||||||||||||||||||||||
Balance, December 31, 2009 |
20,471 | $ | 20,471 | 1,024 | $ | 1,024 | $ | (935 | ) | 14,341,898 | $ | 143 | $ | 150,817 | $ | (164 | ) | $ | (58,415 | ) | $ | 418 | $ | 113,359 | ||||||||||||||||||||||||
Net loss |
| | | | | | | | | (2,566 | ) | | (2,566 | ) | ||||||||||||||||||||||||||||||||||
Net Change in Unrealized Gain On Available-for-Sale Securities, net of income taxes |
| | | | | | | | | | 703 | 703 | ||||||||||||||||||||||||||||||||||||
Preferred stock dividend requirements and discount accretion |
| | | | 52 | | | | | (330 | ) | | (278 | ) | ||||||||||||||||||||||||||||||||||
Balance, March 31, 2010 |
20,471 | $ | 20,471 | 1,024 | $ | 1,024 | $ | (883 | ) | 14,341,898 | $ | 143 | $ | 150,817 | $ | (164 | ) | $ | (61,311 | ) | $ | 1,121 | $ | 111,218 | ||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Three months ended March 31, |
||||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (8,002 | ) | $ | (2,566 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
||||||||
Depreciation and amortization |
348 | 382 | ||||||
Amortization of deferred loan fees, net |
(33 | ) | (40 | ) | ||||
Amortization of premium and discounts on securities, net |
400 | 107 | ||||||
Provision for loan losses |
7,754 | 3,441 | ||||||
Deferred income taxes |
| (1,549 | ) | |||||
Loss on sale of foreclosed real estate |
39 | | ||||||
Write-down of foreclosed real estate |
287 | 42 | ||||||
Decrease (increase) in accrued interest receivable |
200 | (54 | ) | |||||
Decrease in prepaid expenses and other assets |
502 | 260 | ||||||
Decrease in accrued expenses and other liabilities |
(295 | ) | (703 | ) | ||||
Decrease in official checks |
(203 | ) | | |||||
Net cash provided by (used in) operating activities |
997 | (680 | ) | |||||
Cash flows from investing activities: |
||||||||
Net decrease in loans |
11,510 | 3,868 | ||||||
Proceeds from maturities, calls and repayments of securities available for sale |
4,789 | 5,654 | ||||||
Proceeds from sale of foreclosed real estate |
96 | 3,756 | ||||||
Redemption of Federal Reserve Bank stock |
1,174 | 359 | ||||||
Net acquisition of premises and equipment |
(79 | ) | (313 | ) | ||||
Net cash provided by investing activities |
17,490 | 13,324 | ||||||
Cash flows from financing activities: |
||||||||
Net (decrease) increase in deposits |
(23,905 | ) | 19,430 | |||||
Net increase (decrease) in Federal Home Loan Bank advances |
10,000 | (4,000 | ) | |||||
Preferred stock dividend requirements |
| (278 | ) | |||||
Net cash (used in) provided by financing activities |
(13,905 | ) | 15,152 | |||||
Net increase in cash and cash equivalents |
4,582 | 27,796 | ||||||
Cash and cash equivalents at beginning of period |
40,301 | 29,361 | ||||||
Cash and cash equivalents at end of period |
$ | 44,883 | $ | 57,157 | ||||
(Continued)
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FLORIDA BANK GROUP, INC.
Condensed Consolidated Statements of Cash Flows (Unaudited), Continued
(In thousands)
Three months ended March 31, |
||||||||
2011 | 2010 | |||||||
Supplemental cash flow information: |
||||||||
Cash paid during the period for - |
||||||||
Interest |
$ | 3,507 | $ | 4,446 | ||||
Noncash transactions: |
||||||||
Accumulated other comprehensive income, change in unrealized gains (losses) on securities available for sale, net of income taxes in 2010 |
$ | 723 | $ | 703 | ||||
Transfer of loans to foreclosed real estate |
$ | | $ | 1,854 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands except per share data)
Note 1 Significant Accounting Policies
Basis of Presentation
Florida Bank Group, Inc. (the Holding Company) owns 100% of the outstanding common stock of Florida Bank (the Bank), (collectively, the Company). The Holding Companys only significant business activity is the operation of the Bank. The Bank is a Florida state-chartered Federal Reserve member commercial bank. The Bank was acquired in January 2002.
The Bank offers a wide range of commercial and retail banking services to businesses and individuals. In addition to traditional products and services, the Bank offers other products and services, such as debit cards, internet banking, and electronic bill payment services. Consumer loan products offered by the Bank include residential loans, home equity lines of credit, second mortgages, new and used auto loans, new and used boat loans, overdraft protection, and unsecured personal credit lines. Commercial and small business loan products include SBA loans, commercial real estate construction and term loans; working capital loans and lines of credit; demand, term and time loans; and equipment, inventory and accounts receivable financing.
The unaudited condensed consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to such rules and regulations. Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. The Company follows GAAP and reporting practices applicable to the banking industry, which are described in Note 1 to the Consolidated Financial Statements included in the Companys 2010 Form 10-K.
In preparation of the condensed consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the condensed consolidated balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the value of foreclosed real estate and the value of the deferred tax asset.
In the opinion of management, the condensed consolidated financial statements contain all adjustments, which are those of a recurring nature, and disclosures necessary to present fairly the financial position of the Company as of March 31, 2011 and the results of operations and cash flows for the interim periods presented . The results of operations for the interim periods presented are not necessarily indicative of results that may be expected for the entire year or any other interim period.
Note 2 Securities Available for Sale.
The amortized cost and related market value of investment securities available-for-sale were as follows:
Amortized Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | |||||||||||||
At March 31, 2011 |
||||||||||||||||
Mortgage-backed securities |
$ | 175,860 | $ | 90 | $ | (3,459 | ) | $ | 172,491 | |||||||
Mutual funds |
509 | | (15 | ) | 494 | |||||||||||
Total |
$ | 176,369 | $ | 90 | $ | (3,474 | ) | $ | 172,985 | |||||||
Amortized Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | |||||||||||||
At December 31, 2010 |
||||||||||||||||
Mortgage-backed securities |
$ | 181,053 | $ | 134 | $ | (4,228 | ) | $ | 176,959 | |||||||
Mutual funds |
505 | | (13 | ) | 492 | |||||||||||
Total |
$ | 181,558 | $ | 134 | $ | (4,241 | ) | $ | 177,451 | |||||||
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There were no sales of securities classified as available for sale during the three months ended March 31, 2011 or 2010.
The following tables classify those securities in an unrealized loss position at March 31, 2011 and December 31, 2010, based upon length of time in a continuous loss position. The tables show the current fair value of the securities and the amount of unrealized loss for each category of investment:
As of March 31, 2011 | ||||||||||||||||
Less Than Twelve Months | Over Twelve Months | |||||||||||||||
Gross Unrealized Losses |
Fair Value | Gross Unrealized Losses |
Fair Value | |||||||||||||
Mortgage-backed securities |
$ | 3,459 | $ | 163,064 | $ | | $ | | ||||||||
Mutual funds |
15 | 494 | | | ||||||||||||
$ | 3,474 | $ | 163,558 | $ | | $ | | |||||||||
As of December 31, 2010 | ||||||||||||||||
Less Than Twelve Months | Over Twelve Months | |||||||||||||||
Gross Unrealized Losses |
Fair Value | Gross Unrealized Losses |
Fair Value | |||||||||||||
Mortgage-backed securities |
$ | 4,228 | $ | 167,130 | $ | | $ | | ||||||||
Mutual funds |
13 | 492 | | | ||||||||||||
$ | 4,241 | $ | 167,622 | $ | | $ | | |||||||||
The unrealized losses on investment securities available for sale were caused by market conditions. It is expected that the securities will not be settled at a price less than the par value of the investments. The Company plans to hold the securities for a period of time sufficient for the fair value of the securities to recover and it is not more likely than not that it will be required to sell the securities before recovery of their amortized cost basis. The losses are therefore not considered other-than-temporary at March 31, 2011.
Management evaluates securities for other-than-temporary impairment (OTTI) at least on 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 cost, (2) the financial condition and near-term prospects of the issuer, and (3) the Companys intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
Currently the Company has no investment securities with unrealized losses greater than 12 months. However, when such losses occurred in the past or should such losses occur in the future, management utilizes various resources, including input from independent third party firms to perform an analysis of expected future cash flows. Investment securities classified as available-for-sale or held-to-maturity are generally evaluated for OTTI under the provisions of ASC 320-10, Investments Debt and Equity Securities. In determining OTTI, management considers many factors, including: (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, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.
If a security has a decline in fair value that is other than temporary, the security will be written down to its fair value by recording an OTTI loss in the condensed consolidated statement of operations. For a debt security that the Company does not intend to sell and it is not more likely than not that the Company will be required to sell before recovery of its amortized cost, only the credit loss component of the impairment is recorded in the condensed consolidated statement of operations, while the impairment related to all other factors is recorded in other comprehensive income (loss).
The table below provides a cumulative roll forward of credit losses through the three months ended March 31, 2011, relating to the Companys available for sale debt securities:
Balance at, January 1, 2011 |
$ | 540 | ||
Additions for credit losses on securities not previously impaired |
| |||
Reduction for securities sold during the period |
| |||
Balance, at March 31, 2011 |
$ | 540 | ||
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Note 3 Loans
The components of loans were as follows:
As of | ||||||||
March 31, 2011 |
December 31, 2010 |
|||||||
Commercial |
$ | 44,831 | $ | 47,475 | ||||
Commercial Real Estate |
320,264 | 329,487 | ||||||
Residential Real Estate |
196,886 | 203,488 | ||||||
Consumer Loans |
12,524 | 12,879 | ||||||
574,505 | 593,329 | |||||||
Less: |
||||||||
Net deferred fees |
(395 | ) | (454 | ) | ||||
Allowance for loan losses |
(21,296 | ) | (20,830 | ) | ||||
Loans, Net |
$ | 552,814 | $ | 572,045 | ||||
Allowance for Loan Losses.
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to operations. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on at least a quarterly basis by management and is based upon managements periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrowers ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of specific and general components. The specific component relates to loans that are classified as impaired. For such loans that are collateral dependent, an allowance is established when the fair value of the loans collateral is less than the recorded value of the loan. For impaired loans that are not collateral dependent, an allowance is established when the discounted cash flows of such loans are lower than their carrying values. A loan is considered impaired when, based on current information and events, it is probable the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrowers prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loans effective interest rate, the loans obtainable market price, or the fair value of the collateral if the loan is collateral dependent. It should be noted that substantially all of our impaired loans are collateral dependent and thus impairment is usually measured by the fair value of the collateral method.
The general component covers all other loans and is based on historical loss experience adjusted for qualitative factors. These factors include: consideration of the reliability of the banks loan grading system, the volume of criticized loans, concentrations of credit, the current level of past due and non performing loans, past loan experience, evaluation of probable losses in the Banks loan portfolio, including adversely classified loans, and the impact of market conditions on loan and collateral valuations and collectability. Large groups of smaller homogeneous loans are collectively evaluated for impairment.
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An analysis of the changes in the allowance for loan losses for the three month periods ended March 31, 2011 and 2010 is as follows:
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Balance At Beginning Of Period |
$ | 20,830 | $ | 21,342 | ||||
Charge-Offs |
(7,590 | ) | (1,319 | ) | ||||
Recoveries |
302 | 27 | ||||||
Provision For Loan Losses |
7,754 | 3,441 | ||||||
Balance At End Of Period |
$ | 21,296 | $ | 23,491 | ||||
The following table sets forth the changes in the allowance and an allocation of the allowance by loan category as of March 31, 2011. The allocation of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in managements judgment, should be charged-off. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for current economic factors described above.
At March 31, 2011 | ||||||||||||||||||||
Commercial | Commercial Real Estate |
Residential Real Estate |
Consumer Loans |
Total | ||||||||||||||||
Allowance for credit losses: |
||||||||||||||||||||
Balance at beginning of period |
$ | 868 | $ | 15,518 | $ | 4,232 | $ | 212 | $ | 20,830 | ||||||||||
Charge-offs |
(515 | ) | (3,929 | ) | (2,955 | ) | (191 | ) | (7,590 | ) | ||||||||||
Recoveries |
105 | 113 | 77 | 7 | 302 | |||||||||||||||
Provision for loan losses |
744 | 3,113 | 3,665 | 232 | 7,754 | |||||||||||||||
Balance at end of period |
$ | 1,202 | $ | 14,815 | $ | 5,019 | $ | 260 | $ | 21,296 | ||||||||||
Ending balance: individually evaluated for impairment |
$ | 666 | $ | 8,172 | $ | 2,308 | $ | 56 | $ | 11,202 | ||||||||||
Ending balance: collectively evaluated for impairment |
$ | 536 | $ | 6,643 | $ | 2,711 | $ | 204 | $ | 10,094 | ||||||||||
Loans: |
||||||||||||||||||||
Ending balance |
$ | 44,831 | $ | 320,264 | $ | 196,886 | $ | 12,524 | $ | 574,505 | ||||||||||
Ending balance: individually evaluated for impairment |
$ | 2,620 | $ | 43,749 | $ | 19,982 | $ | 3,036 | $ | 69,387 | ||||||||||
Ending balance: collectively evaluated for impairment |
$ | 42,211 | $ | 276,515 | $ | 176,904 | $ | 9,488 | $ | 505,118 | ||||||||||
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Loan Impairment and Credit Losses.
The following is an analysis of impaired loans as of March 31, 2011 and December 31, 2010.
At March 31, 2011 | ||||||||||||||||||||||||
Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
Average Recorded Investment |
Interest Income Recognized |
Interest Income Received |
|||||||||||||||||||
With no related allowance recorded:(1) |
||||||||||||||||||||||||
Commercial |
$ | 1,457 | $ | 8,217 | $ | | $ | 1,214 | $ | 64 | $ | 5 | ||||||||||||
Commercial Real Estate |
24,472 | 40,216 | | 20,392 | 197 | 217 | ||||||||||||||||||
Residential Real Estate |
13,170 | 19,676 | | 10,975 | 127 | 43 | ||||||||||||||||||
Consumer Loans |
2,949 | 3,993 | | 2,458 | 53 | | ||||||||||||||||||
Total |
$ | 42,048 | $ | 72,102 | $ | | $ | 35,039 | $ | 441 | $ | 265 | ||||||||||||
With an allowance recorded: |
||||||||||||||||||||||||
Commercial |
$ | 1,163 | $ | 1,174 | $ | 666 | $ | 970 | $ | 1 | $ | 9 | ||||||||||||
Commercial Real Estate |
19,277 | 21,618 | 8,172 | 16,063 | 95 | 246 | ||||||||||||||||||
Residential Real Estate |
6,812 | 7,000 | 2,308 | 5,676 | 51 | 71 | ||||||||||||||||||
Consumer Loans |
87 | 88 | 56 | 72 | | 1 | ||||||||||||||||||
Total |
$ | 27,339 | $ | 29,880 | $ | 11,202 | $ | 22,781 | $ | 147 | $ | 327 | ||||||||||||
Total |
$ | 69,387 | $ | 101,982 | $ | 11,202 | $ | 57,820 | $ | 588 | $ | 592 | ||||||||||||
(1) | Includes loans with partial charge-offs of $24,109 with net carrying values of $34,233 at March 31, 2011. |
At December 31, 2010 | ||||||||||||||||
Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
Average Recorded Investment |
|||||||||||||
With no related allowance recorded:(2) |
||||||||||||||||
Commercial |
$ | 1,212 | $ | 5,068 | $ | | $ | 1,090 | ||||||||
Commercial Real Estate |
16,278 | 26,612 | | 14,650 | ||||||||||||
Residential Real Estate |
13,506 | 19,185 | | 12,155 | ||||||||||||
Consumer Loans |
3,032 | 4,032 | | 2,729 | ||||||||||||
Total |
$ | 34,028 | $ | 54,897 | $ | | $ | 30,624 | ||||||||
With an allowance recorded: |
||||||||||||||||
Commercial |
$ | 362 | $ | 368 | $ | 225 | $ | 326 | ||||||||
Commercial Real Estate |
20,190 | 23,502 | 7,870 | 18,171 | ||||||||||||
Residential Real Estate |
5,277 | 5,571 | 1,692 | 4,749 | ||||||||||||
Consumer Loans |
226 | 226 | 103 | 203 | ||||||||||||
Total |
$ | 26,055 | $ | 29,667 | $ | 9,890 | $ | 23,449 | ||||||||
Total |
$ | 60,083 | $ | 84,564 | $ | 9,890 | $ | 54,073 | ||||||||
(2) | Includes loans with partial charge-offs of $20,459 with net carrying values of $29,647 at December 31, 2010. |
All loans are considered collateral dependent as of March 31, 2011 and December 31, 2010.
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Nonaccrual Loans
The following is an analysis of nonaccrual loans as of March 31, 2011:
Recorded Investment Nonaccrual loans |
Unpaid Principal Balance Nonaccrual Loans |
|||||||
Commercial |
$ | 2,620 | $ | 9,391 | ||||
Commercial Real Estate |
37,423 | 55,509 | ||||||
Residential Real Estate |
15,210 | 21,903 | ||||||
Consumer Loans |
3,036 | 4,082 | ||||||
Total |
$ | 58,289 | $ | 90,885 | ||||
The following is an analysis of nonaccrual loans as of December 31, 2010:
Recorded Investment Nonaccrual loans |
Unpaid Principal Balance Nonaccrual Loans |
|||||||
Commercial |
$ | 1,573 | $ | 5,436 | ||||
Commercial Real Estate |
33,907 | 47,552 | ||||||
Residential Real Estate |
18,506 | 24,478 | ||||||
Consumer Loans |
3,071 | 4,071 | ||||||
Total |
$ | 57,057 | $ | 81,537 | ||||
The table below summarizes the payment status of loans in our total loan portfolio, including an aging of delinquent loans and loans 90 days or more past due. The delinquency aging includes all past due loans, both performing and nonperforming, as of March 31, 2011 and December 31, 2010.
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As of March 31, 2011
30-59 Days | 60-89 Days | Greater Than 90 Days |
Total Past Due | Current | Total Loans | Recorded Investment > 90 Days and Accruing |
||||||||||||||||||||||
Commercial |
$ | 99 | $ | 266 | $ | 2,620 | $ | 2,985 | $ | 41,846 | $ | 44,831 | $ | | ||||||||||||||
Commercial Real Estate |
2,881 | 3,824 | 37,423 | 44,128 | 276,136 | 320,264 | | |||||||||||||||||||||
Residential Real Estate |
1,592 | 113 | 15,210 | 16,915 | 179,971 | 196,886 | | |||||||||||||||||||||
Consumer Loans |
114 | 20 | 3,036 | 3,170 | 9,354 | 12,524 | | |||||||||||||||||||||
Total |
$ | 4,686 | $ | 4,223 | $ | 58,289 | $ | 67,198 | $ | 507,307 | $ | 574,505 | $ | | ||||||||||||||
As of December 31, 2010 | ||||||||||||||||||||||||||||
30-59 Days | 60-89 Days | Greater Than 90 Days |
Total Past Due | Current | Total Loans | Recorded Investment > 90 Days and Accruing |
||||||||||||||||||||||
Commercial |
$ | 907 | $ | 861 | $ | 1,573 | $ | 3,341 | $ | 44,134 | $ | 47,475 | $ | | ||||||||||||||
Commercial Real Estate |
7,156 | 2,205 | 33,907 | 43,268 | 286,219 | 329,487 | | |||||||||||||||||||||
Residential Real Estate |
3,294 | 662 | 18,506 | 22,462 | 181,026 | 203,488 | | |||||||||||||||||||||
Consumer Loans |
455 | 210 | 3,071 | 3,736 | 9,143 | 12,879 | | |||||||||||||||||||||
Total |
$ | 11,812 | $ | 3,938 | $ | 57,057 | $ | 72,807 | $ | 520,522 | $ | 593,329 | $ | | ||||||||||||||
The credit quality of the loan portfolio at March 31, 2011 based on internally assigned grades follows:
Risk Rating |
Commercial | Commercial Real Estate |
Residential Real Estate |
Consumer Loans |
Total | % of Total | ||||||||||||||||||
Pass |
$ | 35,803 | $ | 230,085 | $ | 156,019 | $ | 8,164 | $ | 430,071 | 74.9 | % | ||||||||||||
Special mention |
1,445 | 21,902 | 4,508 | 25 | 27,880 | 4.9 | % | |||||||||||||||||
Substandard |
4,963 | 30,854 | 21,149 | 1,299 | 58,265 | 10.1 | % | |||||||||||||||||
Substandard Non-Accrual |
2,620 | 37,423 | 15,186 | 3,036 | 58,265 | 10.1 | % | |||||||||||||||||
Doubful/Loss |
| | 24 | | 24 | 0.0 | % | |||||||||||||||||
Total |
$ | 44,831 | $ | 320,264 | $ | 196,886 | $ | 12,524 | $ | 574,505 | 100.0 | % | ||||||||||||
Internally assigned loan grades are defined as follows:
| PassLoans primary source of repayment is satisfactory, with secondary sources very likely to be realized if necessary. |
| Special MentionLoan has potential weaknesses which may, if not reversed or corrected, weaken the credit or inadequately protect our credit position. These loans are generally paying on a timely basis. The maximum period in this risk grade is generally limited to six months. |
| SubstandardLoan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged. Such loans have a well-defined weakness or weaknesses that jeopardize the full repayment of the loan. They are characterized by the distinct possibility that the Company will sustain some loss in the future if the deficiencies or weaknesses are not corrected. |
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| SubstandardNonaccrualLoan has all the characteristics of a substandard credit with payments having ceased or collection of payments in question. There is probability of loss. |
| DoubtfulLoan has all the weaknesses inherent in one classified substandard with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. |
| LossLoan is considered uncollectible and of such little value that continuance as an asset is not warranted. |
Note 4 Financial Instruments with Off-Balance-Sheet Risk
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include unfunded loan commitments, unused lines of credit and standby letters of credit and may involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the condensed consolidated balance sheets. The contract amounts of these instruments reflect the extent of involvement the Company has in these financial instruments.
The Companys exposure to credit loss in the event of nonperformance by the other party to the financial instruments for unfunded loan commitments, standby letters of credit and unused lines of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance-sheet instruments.
Unfunded loan commitments and unused lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customers credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, upon extension of credit is based on managements credit evaluation of the counterparty.
Standby letters-of-credit are conditional lending commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters-of-credit is essentially the same as that involved in extending loan facilities to customers. The Company generally holds collateral supporting these commitments.
A summary of the notional amounts of the Companys financial instruments at March 31, 2011, with off-balance-sheet risk was as follows:
Contract Amount | ||||
Unfunded loan commitments |
$ | 2,864 | ||
Unused lines of credit |
$ | 63,200 | ||
Standby letters of credit |
$ | 506 | ||
Note 5 Stock-Based Compensation Plan
Certain key employees and directors of the Company have options to purchase shares of the Companys common stock under its 2005 Stock Option Plan (the Plan) as amended. Under the plan, the total number of shares which may be issued shall not exceed 1,700,000. Stock options are issued at the fair value of the common stock on the date of grant and expire ten years from grant date. Stock options vest over a three year period. In 2008, the Company accelerated the vesting of all stock options and at December 31, 2008 all stock options became fully vested and no stock options have been granted since 2008. There were no options exercised during the three months ended March 31, 2011 and 2010. At March 31, 2011, 1,009,303 shares remain available for grant under the plan. A summary of stock option transactions follows:
Number of Options |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term |
Intrinsic Value | |||||||||||||
Outstanding at December 31, 2010 |
539,250 | $ | 15.57 | |||||||||||||
Options forfeited |
(22,500 | ) | 15.50 | |||||||||||||
Outstanding and exercisable at March 31, 2011 |
516,750 | $ | 15.57 | 5.69 years | | |||||||||||
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Note 6 Restricted Stock Plan
During 2010, the Company adopted a 2010 Restricted Stock Plan (the Plan). Under the Plan, the Company may issue a maximum 750,000 with a maximum of 75,000 that can be granted to independent directors and a maximum of 350,000 shares to be granted in any one calendar year. No shares have been issued under the Plan.
Note 7 Fair Values of Financial Instruments
The estimated fair values of the Companys financial instruments were as follows:
At March 31, 2011 | At December 31, 2010 | |||||||||||||||
Carrying Amount |
Fair Value | Carrying Amount |
Fair Value | |||||||||||||
Financial assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 44,883 | $ | 44,883 | $ | 40,301 | $ | 40,301 | ||||||||
Available-for-sale securities |
172,985 | 172,985 | 177,451 | 177,451 | ||||||||||||
Loans, net |
552,814 | 564,756 | 572,045 | 585,278 | ||||||||||||
Federal Home Loan Bank Stock |
5,032 | 5,032 | 5,032 | 5,032 | ||||||||||||
Federal Reserve Bank Stock |
1,607 | 1,607 | 2,781 | 2,781 | ||||||||||||
Accrued interest receivable |
2,275 | 2,275 | 2,475 | 2,475 | ||||||||||||
Financial liabilities: |
||||||||||||||||
Deposits |
$ | 688,429 | $ | 693,702 | $ | 712,334 | $ | 717,942 | ||||||||
Federal Home Loan Bank Advances |
77,700 | 84,290 | 67,700 | 75,782 | ||||||||||||
Accrued interest payable |
687 | 687 | 901 | 901 |
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Financial assets subject to fair value measurements on a recurring basis are as follows:
Fair Value Measurements at March 31, 2011 Using | ||||||||||||||||
Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
As of March 31, 2011: |
||||||||||||||||
Available for sale securities |
$ | 172,985 | $ | | $ | 172,985 | $ | | ||||||||
No securities were transferred in or out of level 1, 2, or 3 during the first quarter of 2011.
Impaired collateral-dependent loans are carried at fair value when the current collateral value is lower than the carrying value of the loan. Foreclosed real estate is carried at fair value less estimated selling costs. Those impaired collateral-dependent loans and foreclosed real estate at March 31, 2011, which are measured at fair value on a nonrecurring basis are as follows:
Fair Value | Level 1 | Level 2 | Level 3 | Total Losses |
Losses Recorded in Operations For the Three Months Ended March 31, 2011 |
|||||||||||||||||||
As of March 31, 2011: |
||||||||||||||||||||||||
Impaired loans (1) |
||||||||||||||||||||||||
Commercial |
$ | 1,342 | $ | | $ | | $ | 1,342 | $ | 4,635 | $ | 609 | ||||||||||||
Commercial Real Estate |
29,637 | | | 29,637 | 24,154 | 3,554 | ||||||||||||||||||
Residential Real Estate |
16,410 | | | 16,410 | 8,994 | 107 | ||||||||||||||||||
Consumer Loans |
2,981 | | | 2,981 | 1,057 | 2,893 | ||||||||||||||||||
Total |
$ | 50,370 | $ | | $ | | $ | 50,370 | $ | 38,840 | $ | 7,163 | ||||||||||||
Foreclosed real estate |
$ | 6,596 | $ | | $ | | $ | 6,596 | $ | 736 | $ | 287 | ||||||||||||
(1) | Loans with a total carrying value of $7.8 million were measured for impairment using Level 3 inputs and had fair values in excess of carrying values. |
Note 8 Regulatory Matters
Banking regulations place certain restrictions on dividends paid and loans or advances made by the Bank to the Holding Company. The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by regulatory banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Companys and the Banks financial statements. For additional information on restrictions on the Companys and Banks operations, see Note 11 below.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and percentages (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of March 31, 2011, that the Company and the Bank met all capital adequacy requirements to which they were subject.
The Companys and the Banks actual capital amounts and percentages are also presented in the following table:
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Actual | For Capital Adequacy Purposes |
For Well Capitalized Purposes |
||||||||||||||||||||||
As of March 31, 2011: |
Amount | % | Amount | % | Amount | % | ||||||||||||||||||
Total Capital to Risk-Weighted Assets: |
||||||||||||||||||||||||
Consolidated |
$ | 56,957 | 10.05 | % | $ | 45,349 | 8.00 | % | N/A | N/A | ||||||||||||||
Bank |
56,606 | 9.99 | % | 45,345 | 8.00 | % | $ | 56,681 | 10.00 | % | ||||||||||||||
Tier One Capital to Risk-Weighted Assets |
||||||||||||||||||||||||
Consolidated |
$ | 49,696 | 8.77 | % | $ | 22,674 | 4.00 | % | N/A | N/A | ||||||||||||||
Bank |
49,345 | 8.71 | % | 22,672 | 4.00 | % | $ | 34,009 | 6.00 | % | ||||||||||||||
Tier One Capital to Average Assets |
||||||||||||||||||||||||
Consolidated |
$ | 49,696 | 6.02 | % | $ | 32,999 | 4.00 | % | N/A | N/A | ||||||||||||||
Bank |
49,345 | 5.98 | % | 33,028 | 4.00 | % | $ | 41,286 | 5.00 | % | ||||||||||||||
Actual | For Capital Adequacy Purposes |
For Well Capitalized Purposes |
||||||||||||||||||||||
As of December 31, 2010: |
Amount | % | Amount | % | Amount | % | ||||||||||||||||||
Total Capital to Risk-Weighted Assets: |
||||||||||||||||||||||||
Consolidated |
$ | 65,242 | 11.06 | % | $ | 47,204 | 8.00 | % | N/A | N/A | ||||||||||||||
Bank |
64,854 | 10.98 | % | 47,265 | 8.00 | % | $ | 59,082 | 10.00 | % | ||||||||||||||
Tier One Capital to Risk-Weighted Assets |
||||||||||||||||||||||||
Consolidated |
$ | 57,700 | 9.78 | % | $ | 23,602 | 4.00 | % | N/A | N/A | ||||||||||||||
Bank |
57,303 | 9.70 | % | 23,633 | 4.00 | % | $ | 35,449 | 6.00 | % | ||||||||||||||
Tier One Capital to Average Assets |
||||||||||||||||||||||||
Consolidated |
$ | 57,700 | 6.46 | % | $ | 35,702 | 4.00 | % | N/A | N/A | ||||||||||||||
Bank |
57,303 | 6.48 | % | 35,387 | 4.00 | % | $ | 44,234 | 5.00 | % |
Note 9 Loss Per Common Share
Basic and diluted loss per share of common stock has been computed based on the weighted-average number of shares of common stock outstanding of 14,329,315 during the three months ended March 31, 2011 and 2010. Basic and diluted loss per share is the same for these interim periods because of the Companys net loss position.
Note 10 Recent Accounting Standards Update
In April 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-03, Reconsideration of Effective Control for Repurchase Agreements (ASU 2011-03), which revises the criteria for assessing effective control for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The determination of whether the transfer of a financial asset subject to a repurchase agreement is a sale is based, in part, on whether the entity maintains effective control over the financial asset. ASU 2011-03 removes from the assessment of effective control: the criterion requiring the transferor to have the ability to repurchase or redeem the financial asset on substantially the agreed terms, even in the event of default by the transferee, and the related requirement to demonstrate that the transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets. The amendments in ASU 2011-03 will be effective for interim and annual reporting periods beginning on or after December 15, 2011, early adoption is prohibited, and the amendments will be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. The Company is currently assessing the impact of ASU 2011-03 on its financial statements and disclosures.
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In April 2011, FASB issued ASU No. 2011-02 Receivables (Topic 310) A Creditors Determination of Whether a Restructuring is a Troubled Debt Restructuring. ASU 2011-02 clarifies whether loan modifications constitute troubled debt restructuring. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties. ASU 2011-02 is effective for the first interim and annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. The Company is currently assessing the impact of ASU 2011-03 on its financial statements and disclosures.
In December 2010, the FASB issued ASU No. 2010-29 Business Combinations (Topic 805)Disclosure of Supplementary Pro Forma Information for Business Combinations. If a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. ASU 2010-29 also expands the supplementary pro forma disclosures. ASU 2010-29 was effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. ASU 2010-29 will only affect the Company if there are future business combinations.
In December 2010, the FASB issued ASU No. 2010-28 IntangiblesGoodwill and Other (Topic 350)When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts . ASU 2010-28 affects all entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing Step 1 of the goodwill impairment test is zero or negative. ASU 2010-28 was effective for fiscal years and interim periods within those years, beginning after December 15, 2010. ASU 2010-28 did not have an impact on the Companys financial statements or disclosures.
In April 2010, the FASB issued ASU No 2010-13, Compensation Stock Compensation (Topic 718) Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. This update provides clarification that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entitys equity securities trade should not be considered to contain a condition that is not a market, performance or service condition. Therefore, the award would be classified as an equity award if it otherwise qualifies as equity. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The amendments in this Update should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings. The cumulative-effect adjustment should be calculated for all awards outstanding as of the beginning of the fiscal year in which the amendments are initially applied, as if the amendments had been applied consistently since the inception of the award. The cumulative-effect adjustment should be presented separately. Earlier application was permitted. The adoption of this guidance had no effect on the Companys financial statements or disclosures.
Note 11 Regulatory Agreement
In March 2011, as a result of a periodic examination of the Bank during 2010 by the Federal Reserve Bank of Atlanta (the FRB), the Company and the FRB entered into a Written Agreement (the Regulatory Agreement). The Regulatory Agreement, among other requirements, provides that the Companys Board of Directors will take steps to ensure that the Bank complies with the agreement and will strengthen its oversight of the management and operations of the Bank. In addition, the Regulatory Agreement provides that the Bank:
| Will within 60 days of the Regulatory Agreement, submit to the FRB a written plan to strengthen Board oversight and also credit risk management practices; |
| Will revise its lending and credit administration policies and procedures; |
| Will submit to the FRB an acceptable written program to ensure the accurate grading of loans and to ensure independent loan portfolio reviews; |
| Will not extend or renew credit to borrowers with criticized loans without the prior approval of the majority of the board of directors or a designated committee thereof; |
| Will submit a revised business plan for 2011 to improve its earnings and overall condition; |
| Will not declare or pay any dividends or take any other form of payment representing a reduction in capital from the Bank without prior regulatory approval; |
| Will not incur, increase or guarantee any debt or redeem any shares without prior regulatory approval; |
| Will not appoint any new directors or senior executive officers without prior regulatory approval; |
| Will review and revise its ALLL methodology consistent with relevant supervisory guidance, and |
| Will submit an acceptable enhanced written internal audit program that addresses a variety of internal risk assessment and audit program activities. |
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The Company and the Bank have agreed to submit an acceptable plan to maintain sufficient capital at the Bank as a separate legal entity on a stand-alone basis, not declare or pay any dividends without the prior approval of the Federal Reserve, comply with restrictions on indemnification and severance payments under applicable law, and seek the approval of the Federal Reserve before the appointment of any new director or executive officer. In addition, the Company has agreed that it:
| Will submit to the Federal Reserve an acceptable plan to maintain sufficient capital at the Company on a consolidated basis; and |
| Will not incur or increase any debt, or purchase or redeem any of its shares without the prior approval of the Federal Reserve. |
The Company is committed to taking all necessary actions to promptly address the requirements of the Regulatory Agreement.
Prior to the payment of dividends on the Companys preferred stock issued under the U.S. Treasury Departments Capital Purchase Program (CPP Dividends), it must request and be granted approval by the FRB. The Company has not paid dividends on its preferred stock for the last two quarters as a result of its agreement with the FRB that the Company will not pay any cash dividends without prior approval from the FRB. At March 31, 2011, the Company had $700 in unpaid dividends owing on its preferred stock. To date, the Company has deferred two quarterly dividend payments. If the Company misses six quarterly dividend payments, whether or not consecutive, the U.S. Treasury will have the right to appoint two directors and/or observers to the Companys Board of Directors until all accrued and unpaid dividends have been paid.
Note 12 Subsequent Event
At its annual meeting of shareholders, held on April 27, 2011, the Companys shareholders approved an amendment to its articles of incorporation to increase the number of authorized shares of the Companys common stock from 50,000,000 to 250,000,000 shares.
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Review by Independent Registered Public Accounting Firm
Hacker, Johnson & Smith PA, the Companys independent registered public accounting firm, has made a limited review of the financial data as of March 31, 2011, and for the three month periods ended March 31, 2011 and 2010 presented in this document, in accordance with standards established by the Public Company Accounting Oversight Board.
The report of Hacker, Johnson & Smith PA, furnished pursuant to Article 10 of Regulation S-X, is included on the following page herein.
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Florida Bank Group, Inc.
Tampa, Florida:
We have reviewed the accompanying condensed consolidated balance sheet of Florida Bank Group, Inc. (the Company) as of March 31, 2011 and the related condensed consolidated statements of operations and other comprehensive income (loss), changes in stockholders equity and cash flows for the three month periods ended March 31, 2011 and 2010. These interim condensed consolidated financial statements are the responsibility of the Companys management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board, the consolidated balance sheet of the Company as of December 31, 2010, and the related consolidated statements of operations and other comprehensive income (loss), changes in stockholders equity and cash flows for the year then ended (not presented herein); and in our report dated March 25, 2011, we, based on our audit expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2010, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ Hacker, Johnson & Smith PA
HACKER, JOHNSON & SMITH PA
Tampa, Florida
May 11, 2011
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations. |
The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q.
CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including this MD&A section, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among others, statements about our beliefs, plans, objectives, goals, expectations, estimates and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors, many of which are beyond our control. The words may, could, should, would, believe, anticipate, estimate, expect, intend, plan, target, goal, and similar expressions are intended to identify forward-looking statements.
All forward-looking statements, by their nature, are subject to risks and uncertainties. Our actual future results may differ materially from those set forth in our forward-looking statements. Please see Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2010 and in this Quarterly Report on Form 10-Q.
However, other factors besides those listed in our Quarterly Report or in our Annual Report also could adversely affect our results, and you should not consider any such list of factors to be a complete set of all potential risks or uncertainties. Any forward-looking statements made by us or on our behalf speak only as of the date they are made. We do not undertake to update any forward-looking statement, except as required by applicable law.
In this Quarterly Report on Form 10-Q, we may refer to Florida Bank Group, Inc. as the Holding Company, and to Florida Bank as the Bank. Collectively, we may refer to the Holding Company and the Bank and ACIC Properties, Inc. as we, us, or our.
Business Overview
We are a bank holding company under the Bank Holding Company Act of 1956, as amended, headquartered in Tampa, Florida. We were incorporated on January 12, 2007, under the laws of the State of Florida. We are the sole shareholder of Florida Bank, a Florida chartered commercial bank that provides a wide range of business and consumer financial services in its target marketplace. The Bank currently operates 14 banking offices located in Hillsborough, Pinellas, Duval, St. Johns, Manatee and Leon counties, Florida. As of March 31, 2011, we had $816.7 million in total assets, including $552.8 million in net loans, and $688.4 million in deposits.
Business Strategy
Our business strategy is to operate as a profitable banking organization, with an emphasis on relationship banking. Our lending strategy includes commercial business loans to small and medium-sized businesses, consumer lending, and select real estate loans. We emphasize comprehensive business products and responsiveness that reflect our knowledge of our local markets and customers. We offer a wide range of commercial and retail banking and financial services to businesses and individuals.
Our marketing strategy is targeted to:
| Capitalize on our personal relationship approach, which we believe differentiates us from our larger competitors; |
| Provide customers with access to our local executives who make key credit and other decisions; |
| Pursue commercial lending opportunities with small to mid-sized businesses that are underserved by our larger competitors; |
| Cross-sell our products and services to our existing customers to leverage our relationships, grow fee income and enhance profitability; and |
| Adhere to safe and sound credit standards. |
Our long-term business strategy is geared toward building a preeminent community bank in the state of Florida. The business strategy includes having a significant market share (as defined by deposits), among community banks, in each of the markets in which we currently operate.
We focus on increasing the number of customer relationships and, ultimately, deposits, loans and profitability. Organic strategies include taking advantage of customer dislocation in the market place created by other banks operating limitations and customer dissatisfaction. We also have retail strategies in place to drive more business through our branch infrastructure.
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QUARTERLY PERFORMANCE OVERVIEW
| Net interest income, at $5.4 million for the quarter ended March 31, 2011 was flat compared to the first quarter of 2010. |
| During the three months ended March 31, 2011, our noninterest expenses decreased $0.5 million, reflecting decreases in salaries and employee benefits and occupancy expenses, offset in part by increases in our deposit insurance premiums and our write-down of foreclosed real estate. See below for further discussion. |
| For the three months ended March 31, 2011, we recorded a net loss available to common stockholders (net loss) of $8.3 million, or $0.58 per basic and diluted share. These results compared with a net loss of $2.9 million, or $0.20 per basic and diluted share for the same period in 2010. The increase in net losses for the 2011 period as compared to the 2010 period was mostly driven by an increase in our provision for loan losses, and the absence of a tax benefit for the 2011 period compared to the 2010 period, which more than offset the decrease in noninterest expense. |
| The loan loss provisions were $7.8 million and $3.4 million for the quarters ended March 31, 2011 and 2010, respectively. The provision for the current quarter reflects required additions to reserves for newly impaired loans and to a lesser extent, for collateral devaluation on existing impaired loans. See below for discussion on loan loss reserves. |
| As of March 31, 2011, total assets were $816.7 million compared to $838.4 million at December 31, 2010, a decrease of $21.7 million or 2.6%. The decrease in assets reflects decreases of $19.2 million in net loans, $4.5 million in investment securities, $1.2 million in Federal Reserve Bank stock, $0.5 million in prepaid assets, $0.4 million in foreclosed real estate and $0.5 million in various other assets, offset in part by a $4.6 million increase in cash and cash equivalents. The reduction in the net loan balance reflects a combination of decreased loan demand, loan payoffs and loan charge offs and the decrease in investment securities is mostly attributable to repayments. |
| As of March 31, 2011, the allowance for loan losses was 3.7% of total loans and represented 36.5% of non-performing loans compared to 3.5% of total loans and representing 36.5% of non-performing at December 31, 2010. |
| As of March 31, 2011, total deposits were $688.4 million, down $23.9 million or 3.4% compared to December 31, 2010. This decrease was comprised of decreases in money market deposits of $22.4 million, interest-bearing demand and savings deposits of $8.2 million and time deposits of $0.8 million, offset in part, by a $7.4 million increase in non-interest bearing demand deposits. |
| Borrowed funds, consisting of Federal Home Loan Bank of Atlanta (FHLB) advances, totaled $77.7 million at March 31, 2011, compared to $67.7 million at December 31, 2010, an increase of $10.0 million or 14.8%. |
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RESULTS OF OPERATIONS
Summary of Results of Operation for the Three Months Ended March 31, 2011 and 2010
Following is a condensed operations summary for the three months ended March 31, 2011 and 2010 (in thousands, except per share amounts):
For the Three Months Ended | ||||||||||||||||
March 31, 2011 |
March 31, 2010 |
2011 vs. 2010 | Change % | |||||||||||||
Interest Income |
$ | 8,675 | $ | 9,583 | $ | (908 | ) | -9.5 | % | |||||||
Interest Expense |
3,293 | 4,172 | (879 | ) | -21.1 | % | ||||||||||
Net Interest Income before provision for loan losses |
5,382 | 5,411 | (29 | ) | -0.5 | % | ||||||||||
Provision for Loan Losses |
7,754 | 3,441 | 4,313 | 125.3 | % | |||||||||||
Noninterest income |
557 | 584 | (27 | ) | -4.6 | % | ||||||||||
Noninterest expenses |
6,162 | 6,668 | (506 | ) | -7.6 | % | ||||||||||
Loss before income taxes |
(7,977 | ) | (4,114 | ) | (3,863 | ) | 93.9 | % | ||||||||
Income tax expense (benefit) |
25 | (1,548 | ) | 1,573 | -101.6 | % | ||||||||||
Net Loss |
(8,002 | ) | (2,566 | ) | (5,436 | ) | 211.8 | % | ||||||||
Preferred stock dividend and discount accretion |
(330 | ) | (330 | ) | | 0.0 | % | |||||||||
Net loss available to common stockholders |
$ | (8,332 | ) | $ | (2,896 | ) | $ | (5,436 | ) | 187.7 | % | |||||
Loss per common share - basic and diluted |
$ | (0.58 | ) | $ | (0.20 | ) | $ | 0.38 | -188.7 | % | ||||||
Selected Operating Ratios: |
||||||||||||||||
Return on Average Assets |
-4.12 | % | -1.42 | % | ||||||||||||
Return on Average Equity |
-64.12 | % | -10.33 | % | ||||||||||||
Equity to Assets Ratio |
5.67 | % | 13.19 | % |
Net Loss
Net loss available to common stockholders totaled $8.3 million ($0.58 per basic and diluted share) for the three months ended March 31, 2011 compared to a net loss available to common stockholders of $2.9 million ($0.20 per diluted share) for the three months ended March 31, 2010. The factors affecting the $5.4 million loss increase are displayed in the table above. A more detailed discussion of each major component of our financial performance is provided below.
Net Interest Income
Net interest income represents our single largest source of earnings and is the amount by which interest income on interest-earning assets exceeds interest expense incurred on interest-bearing liabilities. Net interest income is the largest component of our income, and is affected by the interest rate environment and the volume and the composition of interest-earning assets and interest-bearing liabilities. Our interest-earning assets include loans, federal funds sold, interest-bearing deposits in other banks and investment securities. Our interest-bearing liabilities include deposit and advances from the FHLB.
Our net interest income was relatively flat for the first quarter of both 2011 and 2010, as the decrease in interest income was essentially offset by an equal decrease in interest expense. The decrease in interest expense is mostly the result of decreases in our deposit rates, primarily related to time deposits, as our time deposits maturing towards the end of 2010 and the first quarter of 2011 were generally re-priced into a much lower interest rate environment. Time deposits carry a fixed rate of interest to maturity and most of our borrowings provide for a fixed rate of interest until maturity or conversion date. The average balance and interest rate paid on time deposits for the three month period ended March 31, 2011, was $348.8 million and 2.33% respectively, compared to an average balance and interest paid of $349.6 million and 3.05%, respectively, for the same period in 2010. In addition, we reduced our interest expense on borrowings through the early retirement and restructuring of certain higher cost advances from the FHLB.
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The decrease in interest on loans was primarily the result a reduction in our average loan balances and an increase in the non recognition of interest income which results from an increase in non-accruing loans. The balance in non accruing loans was $58.3 million at March 31, 2011, an increase of $11.5 million from the balance at March 31, 2010. Average loan balances were $585.3 million at March 31, 2011, a decrease of $59.6 million from the average loan balance at March 31, 2010.
Interest income on securities available for sale was $1.1 million for the quarter ended March 31, 2011, up $0.1million from the same period in 2010.
The following table reflects the components of net interest income, setting forth for the three month periods presented, (1) average assets, liabilities and shareholders equity, (2) interest income earned on interest-earning assets and interest paid on interest-bearing liabilities, (3) average yields earned on interest-earning assets and average rates paid on interest-bearing liabilities, (4) our net interest spread (i.e., the average yield on interest-earning assets less the average rate on interest-bearing liabilities) and (5) our net interest margin (i.e., the net yield on interest earning assets):
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($ in thousands)
March 31, 2011 | March 31, 2010 | |||||||||||||||||||||||
Balance | Interest | Rate | Balance | Interest | Rate | |||||||||||||||||||
ASSETS |
||||||||||||||||||||||||
Loans |
$ | 585,283 | $ | 7,509 | 5.20 | % | $ | 644,872 | $ | 8,564 | 5.39 | % | ||||||||||||
Securities available for sale |
175,019 | 1,101 | 2.55 | % | 97,771 | 959 | 3.98 | % | ||||||||||||||||
Other interest-earning assets |
30,176 | 65 | 0.87 | % | 26,805 | 60 | 0.91 | % | ||||||||||||||||
Total Earning Assets |
790,478 | 8,675 | 4.45 | % | 769,448 | 9,583 | 5.05 | % | ||||||||||||||||
Cash & Due from Banks |
10,313 | 8,922 | ||||||||||||||||||||||
Allowance For Loan Losses |
(20,118 | ) | (21,214 | ) | ||||||||||||||||||||
Other Assets |
40,250 | 71,293 | ||||||||||||||||||||||
Total Assets |
$ | 820,923 | $ | 828,449 | ||||||||||||||||||||
LIABILITIES |
||||||||||||||||||||||||
Demand |
$ | 65,428 | $ | 99 | 0.61 | % | $ | 63,343 | $ | 163 | 1.04 | % | ||||||||||||
Savings |
10,004 | 10 | 0.41 | % | 11,779 | 19 | 0.65 | % | ||||||||||||||||
Money Market |
186,951 | 476 | 1.03 | % | 145,599 | 531 | 1.48 | % | ||||||||||||||||
Time |
348,759 | 2,001 | 2.33 | % | 349,644 | 2,628 | 3.05 | % | ||||||||||||||||
Total Interest Bearing Deposits |
611,142 | 2,586 | 1.72 | % | 570,365 | 3,341 | 2.38 | % | ||||||||||||||||
FHLB advances |
73,044 | 707 | 3.93 | % | 81,578 | 831 | 4.13 | % | ||||||||||||||||
Other borrowings |
| | 0.00 | % | 61 | | 0.00 | % | ||||||||||||||||
Total Interest Bearing Liabilities |
684,186 | 3,293 | 1.95 | % | 652,004 | 4,172 | 2.60 | % | ||||||||||||||||
Noninterest bearing Deposits |
79,823 | 58,619 | ||||||||||||||||||||||
Other Liabilities |
4,217 | 4,176 | ||||||||||||||||||||||
Total Liabilities |
768,226 | 714,799 | ||||||||||||||||||||||
Total Shareholders Equity |
52,697 | 113,650 | ||||||||||||||||||||||
Total Liabilities & Shareholders Equity |
$ | 820,923 | $ | 828,449 | ||||||||||||||||||||
Interest Rate Spread |
2.50 | % | 2.45 | % | ||||||||||||||||||||
Net Interest Income |
$ | 5,382 | $ | 5,411 | ||||||||||||||||||||
Net Interest Margin |
2.76 | % | 2.85 | % | ||||||||||||||||||||
Going forward, we expect short-term market interest rates to remain low for a period of time. We expect deposit costs to continue to decline but they may decrease more slowly or to a lesser extent than loan and investment yields. If there is strong demand in the financial markets and banking system for liquidity, then this may lead to elevated pricing competition for deposits, thereby, limiting any net interest margin expansion.
Provision for Loan Losses
The provision for loan losses for the quarter ended March 31, 2011, was $7.8 million compared to $3.4 million for the quarter ended March 31, 2010. The increase in the provision for loan losses reflects a continued contraction of commercial and residential real estate activity and the ripple effect on our local economies resulting in an increase in nonperforming loans, a reduction in the fair
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values of loan collateral and an increase in our net loan charge-off experience compared to the same period in 2010. Our nonperforming loans were $58.3 million as of March 31, 2011, compared to $46.8 million as of March 31, 2010. Net charge-offs in the first quarter of 2011 totaled $7.3 million compared to $1.3 million in the same period in 2010. At March 31, 2011, the allowance for loan losses, at $21.3 million, was 3.71% of outstanding loans (net of overdrafts) and provided coverage of 36.5% of nonperforming loans. At March 31, 2010, the allowance for loan losses was $23.5 million, representing 3.67% of outstanding loans (net of overdrafts) and provided coverage of 50.2% of nonperforming loans.
The continued local economic contraction is evidenced by continued high unemployment levels in the markets in which we operate. Foreclosures and distressed sales continue to negatively impact the value of local real estate. As a consequence of the economic slowdown discussed above, both individual and business customers have continued to exhibit difficulty in timely payment of their loan obligations. Management performs regular internal loan reviews and regularly engages the services of third party loan review firms to obtain an independent review of our loans. In addition, various regulatory agencies, as an integral part of their examination process, review our allowance for loan losses. Management considers the results of each of these reviews in establishing its estimated allowance for loan losses. We will continue to monitor the credit quality of the loan portfolio in order for management to record the provision which it believes is necessary to maintain the allowance for loan losses at an appropriate level.
While there are some indications that the trend of local economic contractions may be nearing an end, we cannot be sure how long the economic contraction will continue. Consequently, we may experience higher levels of delinquent and nonperforming loans, which may require higher provisions for loan losses, higher charge-offs and higher collection related expenses in future periods.
Noninterest Expense
The table below reflects the major components of noninterest expense (in thousands):
Three Months Ended March 31, |
||||||||
2011 | 2010 | |||||||
Salaries and employee benefits |
$ | 2,785 | $ | 3,592 | ||||
Occupancy |
1,174 | 1,351 | ||||||
Data Processing |
330 | 289 | ||||||
Stationary, printing and supplies |
57 | 77 | ||||||
Business development |
40 | 93 | ||||||
Insurance , including deposit insurance premium |
733 | 491 | ||||||
Professional fees |
320 | 337 | ||||||
Marketing |
12 | 13 | ||||||
FHLB advance prepayment penalties |
| 41 | ||||||
Loss on sale of foreclosed real estate |
39 | | ||||||
Write-down of foreclosed real estate |
287 | 42 | ||||||
Foreclosed real estate expense |
80 | 52 | ||||||
Other |
305 | 290 | ||||||
Total noninterest expenses |
$ | 6,162 | $ | 6,668 | ||||
The $0.5 million, or 7.6%, decrease in noninterest expense for the three months ended March 31, 2011, compared to the same period in 2010 was mostly due to a $0.8 million decrease in salary and employee benefits and a $0.2 million decrease in occupancy cost, offset in part by $0.2 million increases in both insurance cost and the writedown of foreclosed real estate and a $0.1 million net increase in other miscellaneous expenses. The reduction in salary and benefits expenses mostly results from a third quarter of 2010, reduction in force which resulted in the elimination of 19 employee positions. The purpose of the reduction in force was to more closely align our expense structure with our related revenues. Under our current operating structure, this specific action could result in a $2.0 million reduction in salary and benefit expenses on an annualized basis. In addition, the decrease in occupancy related expenses primarily results from the closure of two branch locations during 2010 and the sublease of excess office space in our downtown Jacksonville and Tampa, Florida locations.
Preferred Stock Dividend Requirements
On July 24, 2009, the Holding Company issued 20,471 shares of Series A preferred stock and warrants to purchase 1,024 shares of Series B preferred stock to the U.S. Treasury for proceeds of $20.5 million under the U.S. Treasurys Capital Purchase Program.
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The warrants were immediately exercised by the U.S. Treasury on July 24, 2009 for shares of Series B preferred stock. The terms of the Series A preferred stock require quarterly dividend payments of 5% per annum of the outstanding principal during the first five years the issue is outstanding after which the dividend rate increases to 9% per annum. The terms of the Series B preferred stock require quarterly dividend payments of 9% per annum of the outstanding principal. Preferred stock dividend requirements and discount accretion for the quarter ended March 31, 2011 totaled $330,000, however, no dividends were paid or declared during this period. See discussion below regarding preferred stock dividend payments under the section titled Capital Resources,
FINANCIAL CONDITION
Total assets at March 31, 2011 were $816.7 million, a decrease of $21.7 million or 2.6%, from total assets at December 31, 2010. Total cash and cash equivalents at March 31, 2011 were $44.9 million, up $4.6 million, or 11.4%, from cash and cash equivalents at December 31, 2010. Investment securities available for sale decreased $4.5 million, or 2.5%, to $173.0 million at March 31, 2011 from $177.5 million at December 31, 2010. See our discussion on liquidity and capital resources below for an explanation of the changes in our cash and cash equivalents. Our net loans decreased $19.2 million, or 3.4%, to $552.8 million at March 31, 2011 from $572.0 million at December 31, 2010. The decrease in net loans was primarily due to principal repayments. Foreclosed real estate decreased $0.5 million or 9.1% at March 31, 2011, compared to December 31, 2010, primarily as a result of sales of certain foreclosed properties and write-downs.
Total liabilities at March 31, 2011 decreased $14.4 million to $770.4 million from $784.8 million at December 31, 2010. The change primarily reflects a decrease in total deposits of $23.9 million and a decrease in accrued expenses and other liabilities of $0.5 million, offset in part by a $10.0 million increase in FHLB advances.
Total stockholders equity decreased $7.3 million to $46.3 million at March 31, 2011 from $53.6 million at December 31, 2010. The decrease reflects a net loss of $8.0 million, offset in part by a $0.7 million change in unrealized holding loss on available-for-sale securities.
Loans and Non-Performing Assets
Loan Portfolio.
Our loan portfolio consists principally of loans to individuals and small and medium-sized businesses within our primary market areas of greater Tampa Bay, Jacksonville and Tallahassee, Florida. The table below shows our loan portfolio composition for the periods presented:
($ in Thousands)
As of | ||||||||
March 31, 2010 |
December 31, 2010 |
|||||||
Commercial |
$ | 44,831 | $ | 47,475 | ||||
Commercial Real Estate (1) |
320,264 | 329,487 | ||||||
Residential Real Estate |
196,886 | 203,488 | ||||||
Consumer Loans |
12,524 | 12,879 | ||||||
574,505 | 593,329 | |||||||
Less: |
||||||||
Net deferred fees |
(395 | ) | (454 | ) | ||||
Allowance for loan losses |
(21,296 | ) | (20,830 | ) | ||||
Loans, Net |
$ | 552,814 | $ | 572,045 | ||||
(1) | Includes $123.4 million and $127.2 million of owner-occupied nonresidential properties at March 31, 2011 and December 31, 2010, respectively. |
The overall decrease in gross loans was primarily the result of loan payoffs by customers.
Allowance and Provision for Loan Losses.
The allowance for loan losses is a valuation allowance established to absorb probable incurred credit losses associated with loans in the loan portfolio. The allowance is recorded through a provision for loan losses charged to operations. Loan losses are
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charged against the allowance when in managements judgment, the loans lack of collectability is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon managements periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrowers ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of specific and general components. The specific component relates to loans that are classified as impaired. For such loans, an allowance is established when the discounted cash flows or collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers all other loans and is based on historical loss experience adjusted for qualitative factors.
For quantitative loss factors, management has determined the historical loss rate for each group of loans with similar risk characteristics and has then considered the current qualitative or environmental factors that are likely to cause estimated credit losses as of the evaluation date to differ from the groups historical loss experience. The overall effect of these factors on each loan group has been reflected as an adjustment that, as appropriate, increases or decreases the historical loss rate applied to each loan group.
We segregate our portfolio of loans not deemed to be impaired by call report category for the purposes of calculating and applying historical loss factors, adjustment factors and total loss factors. Considerable judgment is necessary to establish adjustment factors.
The adjustment factors described below are deemed to be applied to pass credits. Through our reserve methodology, these factors are scaled higher if applied to weak pass, special mention or substandard credits.
The following current environmental factors have been taken into consideration in determining the adequacy of the Allowance for Loan and Lease Losses (ALLL):
a. | Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses; |
b. | Changes in international, national, regional and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments; |
c. | Changes in the nature and volume of the portfolio and in the terms of loans; |
d. | Changes in the experience, ability, and depth of the lending management and other relevant staff; |
e. | Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans; |
f. | Changes in the quality of our loan review system; |
g. | Changes in the value of underlying collateral for collateral-dependent loans; |
h. | The existence and effect of any concentrations of credit, and changes in the level of such concentrations; and |
i. | The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institutions existing portfolio. |
The specific component of the allowance relates to loans that are impaired. A loan is considered impaired when, based on current information and events, it is probable the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrowers prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loans effective interest rate, the loans obtainable market price, or the fair value of the collateral if the loan is collateral dependent. It should be noted that substantially all of our impaired loans are collateral dependent and thus impairment is usually measured by the fair value of the collateral method.
Large groups of smaller homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures.
As of March 31, 2011, we held an allowance for loan losses of $21.3 million or 3.71% of total loans compared to the allowance for loan losses of $20.8 million or 3.51% at December 31, 2010. Based on an analysis performed by management as of March 31,
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2011, management considers the allowance for loan losses to be adequate to cover probable incurred credit losses in the portfolio as of that date. Although we believe we use the best information available to make determinations with respect to the allowance for loan losses, future adjustments to the allowance may be necessary if facts and circumstances differ from those previously assumed in the determination of the allowance. For example, a continued downturn in real estate values and economic conditions could have an adverse impact on our asset quality and may result in an increase in future loan charge-offs and loan loss provisions, and may also result in the decrease in the estimated value of real estate we acquired through foreclosure. Additionally, our regulators, as an integral part of their examination process, periodically review the allowance for loan losses and the estimated values of real estate acquired through foreclosure. Accordingly, we may be required to take certain charge offs and/or recognize additions to the allowance for loan losses, or record write downs on the carrying values of foreclosed real estate based on the regulators judgment concerning information available to them during their examination as well as other factors they utilize for all banks.
As a direct result of these factors and analyses in conjunction with the sustained weakness in asset values, particularly real estate, we recorded a loan loss provision of $7.8 million for the three months ended March 31, 2011, an increase of $4.3 million compared to the provision recorded for the three months ended March 31, 2010. We establish specific reserves for impaired loans and general reserves for the remainder of the portfolio as follows (in thousands):
March 31, 2011 |
December 31, 2010 |
|||||||
Specific Reserves : |
||||||||
Impaired loans with no specific reserves |
$ | 42,048 | $ | 34,028 | ||||
Impaired loans with specific reserves |
27,339 | 26,055 | ||||||
Total impaired loans |
$ | 69,387 | $ | 60,083 | ||||
Reserve |
$ | 11,202 | $ | 9,890 | ||||
Reserve % of impaired loans |
16.14 | % | 16.46 | % | ||||
General Reserves |
||||||||
Loans subject to general reserve |
$ | 505,118 | $ | 533,246 | ||||
Reserve |
$ | 10,094 | $ | 10,940 | ||||
Reserve % of loans |
2.00 | % | 2.05 | % |
Our reserves for loans with specific reserves were $11.2 million as of March 31, 2011 and $9.9 million as of December 31, 2010. Total impaired loans increased $9.3 million from December 31, 2010 to March 31, 2011 mostly as a result of additional loans meeting the criteria for impaired loans. See discussion below.
Our general reserve for unimpaired loans was 2.00% of subject loans as of March 31, 2011 and 2.05% of subject loans as of December 31, 2010. For the quarter ended March 31, 2011, the loan portfolio subject to the general reserve decreased approximately $28.1 million as a result of impairment and/or payoffs. Management evaluates the reserves on a regular basis to determine its adequacy.
The provision for loan losses is a charge to income in the current period to replenish the allowance and maintain it at a level that management has determined to be adequate to absorb probable incurred credit losses in the loan portfolio. The higher provisions for loan losses for the first quarter of 2011 are primarily attributable to the continued contraction of residential real estate activity and the resultant effect on our local economies as well as the increase in our nonperforming loans, delinquencies and charge-offs compared to the same period in 2010. The continued local economic contraction is evidenced by increased unemployment levels in the markets in which we operate and additionally, the impact of foreclosures and distressed sales is negatively impacting the value of real estate.
As noted above, management continuously monitors and actively manages the credit quality of the loan portfolio and will continue to recognize the provision required to maintain the allowance for loan losses at an appropriate level. Due to the economic slowdown discussed above, some of our customers are exhibiting increasing difficulty in timely payment of their loan obligations. We cannot be certain how long the economic slowdown in our market will continue. Consequently, we may experience higher levels of delinquent and nonperforming loans, which may require higher provisions for loan losses, higher charge-offs and higher collection related expenses in future periods. The allowance is also subject to examination testing by regulatory agencies, which may consider such factors as the methodology used to determine adequacy and the size of the allowance relative to that of peer institutions, and other adequacy tests. In addition, such regulatory agencies could require us to adjust the allowance based on information available to us at the time of their examination.
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During the first quarter ended March 31, 2011 and 2010, the activity in our loan loss allowance was as follows:
($ in Thousands)
Three Months Ended March 31, |
||||||||
2011 | 2010 | |||||||
Balance At Beginning Of Period |
$ | 20,830 | $ | 21,342 | ||||
Charge-Offs |
(7,590 | ) | (1,319 | ) | ||||
Recoveries |
302 | 27 | ||||||
Provision For Loan Losses |
7,754 | 3,441 | ||||||
Balance At End Of Period |
$ | 21,296 | $ | 23,491 | ||||
Three Months Ended March 31, |
||||||||
2011 | 2010 | |||||||
Charge-Offs: |
||||||||
Commercial |
$ | (515 | ) | $ | (17 | ) | ||
Commercial Real Estate |
(3,929 | ) | (1,085 | ) | ||||
Residential Real Estate |
(2,955 | ) | (195 | ) | ||||
Consumer Loans |
(191 | ) | (22 | ) | ||||
$ | (7,590 | ) | $ | (1,319 | ) | |||
Three Months Ended March 31, |
||||||||
2011 | 2010 | |||||||
Recoveries: |
||||||||
Commercial |
$ | 105 | $ | 11 | ||||
Commercial Real Estate |
113 | | ||||||
Residential Real Estate |
77 | 16 | ||||||
Consumer Loans |
7 | | ||||||
$ | 302 | $ | 27 | |||||
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The following table reflects the allowance allocation per loan category and percent of dollar value of loans in each category to total dollar value of loans for the periods indicated (in thousands):
March 31, 2011 | December 31, 2010 | |||||||||||||||
Amount | % | Amount | % | |||||||||||||
Commercial |
$ | 1,202 | 7.80 | % | $ | 868 | 8.00 | % | ||||||||
Commercial Real Estate |
14,815 | 55.75 | % | 15,518 | 55.53 | % | ||||||||||
Residential Real Estate |
5,019 | 34.27 | % | 4,232 | 34.30 | % | ||||||||||
Consumer and Other Loans |
260 | 2.18 | % | 212 | 2.17 | % | ||||||||||
Total allowance |
$ | 21,296 | 100 | % | $ | 20,830 | 100 | % | ||||||||
Impaired Loans
Under generally accepted account principles, a loan is impaired when, based upon current information and events, it is probable that the loan will not be repaid according to its contractual terms, including both principal and interest. Management performs individual assessments of impaired loans to determine the existence of loss exposure as described above.
The following is an analysis of impaired loans as of March 31, 2011:
($ in Thousands)
At March 31, 2011 | ||||||||||||||||||||||||
Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
Average Recorded Investment |
Interest Income Recognized |
Interest Income Received |
|||||||||||||||||||
With no related allowance recorded:(1) |
||||||||||||||||||||||||
Commercial |
$ | 1,457 | $ | 8,217 | $ | | $ | 1,214 | $ | 64 | $ | 5 | ||||||||||||
Commercial Real Estate |
24,472 | 40,216 | | 20,392 | 197 | 217 | ||||||||||||||||||
Residential Real Estate |
13,170 | 19,676 | | 10,975 | 127 | 43 | ||||||||||||||||||
Consumer Loans |
2,949 | 3,993 | | 2,458 | 53 | | ||||||||||||||||||
Total |
$ | 42,048 | $ | 72,102 | $ | | $ | 35,039 | $ | 441 | $ | 265 | ||||||||||||
With an allowance recorded: |
||||||||||||||||||||||||
Commercial |
$ | 1,163 | $ | 1,174 | $ | 666 | $ | 970 | $ | 1 | $ | 9 | ||||||||||||
Commercial Real Estate |
19,277 | 21,618 | 8,172 | 16,063 | 95 | 246 | ||||||||||||||||||
Residential Real Estate |
6,812 | 7,000 | 2,308 | 5,676 | 51 | 71 | ||||||||||||||||||
Consumer Loans |
87 | 88 | 56 | 72 | | 1 | ||||||||||||||||||
Total |
$ | 27,339 | $ | 29,880 | $ | 11,202 | $ | 22,781 | $ | 147 | $ | 327 | ||||||||||||
Total |
$ | 69,387 | $ | 101,982 | $ | 11,202 | $ | 57,820 | $ | 588 | $ | 592 | ||||||||||||
Non-Performing Assets
Non-performing assets include non-accrual loans and foreclosed real estate. Non-accrual loans represent loans on which interest accruals have been discontinued. Foreclosed real estate is comprised principally of real estate properties obtained in partial or total loan satisfactions and is included in other assets at its estimated fair value less selling costs.
We place loans on nonaccrual status when principal or interest becomes 90 days or more past due unless the loan is well secured and in the process of collection. In addition, all previously accrued and uncollected interest and late charges are reversed through a charge to interest income. While loans are on nonaccrual status, interest income is normally recognized only to the extent cash is received until a return to accrual status is warranted. Non-accrual loans may not be restored to accrual status until all delinquent principal and interest have been paid.
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Non-performing loans, or non-accrual loans, are closely monitored on an ongoing basis as part of our loan review and work-out process. In addition, these loans are evaluated by comparing the recorded loan amount to the fair value of any underlying collateral or the present value of projected future cash flows. The results of this evaluation are used as part of the determination of the appropriate allowance and provision for loan losses and charge-offs, when appropriate.
NON-PERFORMING ASSETS
($ in Thousands)
Balance as of | ||||||||
March 31, 2011 |
December 31, 2010 |
|||||||
Non-Accrual |
$ | 58,289 | $ | 57,057 | ||||
Total Non-Performing Loans |
58,289 | 57,057 | ||||||
Foreclosed Real Estate |
6,596 | 7,018 | ||||||
Repossesed assets |
108 | | ||||||
Total Non-Performing Assets |
$ | 64,993 | $ | 64,075 | ||||
Non-Performing Loans as a Percentage of Total Loans |
10.15 | % | 9.62 | % | ||||
Non- Performing Assets as a Percentage of Total Assets |
7.96 | % | 6.81 | % | ||||
As of March 31, 2011 and December 31, 2010, we had $3.8 million and $1.5 million, respectively, in restructured loans that are in compliance with their modified terms. The criteria for a restructured loan to be considered performing is as follows: (1) none of its principal and interest is due and unpaid, and we expect repayment of the remaining contractual principal and interest, or (2) when the loan otherwise becomes well secured and in the process of collection. Since these loans have met these criteria, management does not consider these loans to be non-performing and has not included them in the table above.
An analysis of the increase in non-performing loans by segment is as follows (in thousands):
Non Performing Loans
As of | ||||||||||||
March 31, 2011 |
December 31, 2010 |
Percent Change |
||||||||||
Commercial |
$ | 2,620 | $ | 1,573 | 66.6 | % | ||||||
Commercial Real Estate |
37,423 | 33,907 | 10.4 | % | ||||||||
Residential Real Estate |
15,210 | 18,506 | -17.8 | % | ||||||||
Consumer Loans |
3,036 | 3,071 | -1.1 | % | ||||||||
Total |
$ | 58,289 | $ | 57,057 | 2.2 | % | ||||||
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Management believes the primary contributor to the increase in nonaccrual loans is the downturn in the economy, which has had a disproportionately negative impact on certain of our borrowers in our markets, and the decrease in commercial real estate values. The immediate effect of this downturn has been the reduction in discretionary consumer spending, as it relates to our lending on income producing properties, such as the hotel/motel portfolio and commercial retail properties. In addition, declines in household income and a rise in unemployment have caused deterioration in the owner occupied single family residential portfolio, while the decline in real estate activity has negatively impacted our speculative residential and construction and land development loans.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Liquidity is the ability to provide for the cash flow requirements of deposit withdrawals, funding requirements of our borrowers, debt maturities, operating cash flows and off balance sheet obligations such as customer lines of credit. Our objective in managing our liquidity is to maintain our ability to meet all our cash flow requirements without an adverse impact on our current or future earnings. Our liquidity strategy is guided by policies that are formulated and monitored by our Asset Liability Committee (ALCO) and senior management, and which take into account the marketability of assets, the sources and stability of funding and the level of unfunded commitments. We regularly evaluate all of our various funding sources with an emphasis on accessibility, stability, reliability and cost-effectiveness.
Our primary sources of liquidity are deposits provided by commercial and retail customers. The Bank attracts these deposits by offering an array of products designed to match customer needs at rates acceptable to the Bank. Deposits can be very price sensitive; we therefore monitor the Banks offering rates relative to our competition and adjust our offering rates accordingly to generate larger or smaller flows of deposit funds, depending on our cash-flow requirements and other factors we may consider.
In addition to local market deposits, the Bank has access to national brokered certificates of deposit markets as well as deposit subscription services. The Bank uses these alternative sources of deposits to supplement deposits particularly when these sources of deposits are less costly than the local market or in order to obtain specific funding amounts and terms that might not otherwise be available locally. These sources of deposits tend to be more price and credit sensitive and therefore the Bank has established policies to limit the amount of these types of funding sources.
As a result of the Banks regulatory capital position declining from well-capitalized to adequately capitalized at March 31, 2011, we are not allowed by law to accept, renew or roll over brokered deposits (including deposits through the CDARs program) unless we are granted a waiver by the FDIC. We have applied for a waiver. Reciprocal CDARs deposits are from local customers and are not originated by deposit brokers but are considered brokered deposits by the FDIC. Additionally, we are limited in the rates we may pay on deposits.
As of March 31, 2011, we had $88.0 million of brokered deposits including $6.3 million of reciprocal CDARs deposits. Brokered deposits represented 12.77% of our total deposits as of March 31, 2011, and approximately $1.8 million of CDARs deposits and $7.6 million of brokered deposits mature within the next three months. A prolonged inability to roll over or raise funds through CDARs deposits or brokered deposits could have a material adverse impact on our liquidity.
As a member of the FHLB, the Bank has access to a secured borrowing facility. Loans meeting certain criteria may be pledged as collateral and are subject to advance rates established by the FHLB. Alternatively, FHLB borrowings may be secured by marketable securities, which are generally afforded higher advance rates relative to the value of the pledged collateral. FHLB advances are a useful source of funding as they offer a broad variety of terms allowing the Bank to position its funding with greater flexibility. FHLB funding is also credit sensitive and therefore the Bank has established policies to limit the amount of its utilization of this funding source.
Other sources of liquidity include balances of cash and due from banks, short-term investments such as federal funds sold, and our investment portfolio, which can either be liquidated or used as collateral for borrowings. Additionally, some of our correspondent banks provide unsecured federal funds lines of credit, which may be used to access short term funds. All of these funding sources are part of the Banks contingency plans in the event of extraordinary fluctuations in cash resources.
The Bank has unsecured overnight federal funds purchased accommodation up to a maximum of $1.0 million from our correspondent banks. Further, the Bank has invested in FHLB stock for the purpose of establishing credit lines with the FHLB. The credit availability to the Bank on these credit lines is based on the amount of collateral pledged and limited by a percentage of the Banks total assets as reported on its most recent quarterly financial information submitted to the regulators. As of March 31, 2011 we had $77.7 million of FHLB advances outstanding and $32.6 million of letters of credit used in lieu of pledging securities to the State of Florida. Our unused borrowing capacity as of March 31, 2011, was approximately $25.5 million.
As of March 31, 2011, we had unfunded loan commitments of $2.9 million and unused lines and letters of credit totaling approximately $63.7 million. We believe the likelihood of these commitments either needing to be totally funded or funded at the
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same time is low. However, should significant funding requirements occur, the Bank has available borrowing capacity from various sources as discussed above.
As of March 31, 2011, our gross loan to deposit ratio was 83.5% compared to 90.7% at December 31, 2010. Management monitors and assesses the adequacy of our liquidity position on a daily and monthly basis to ensure that sufficient sources of liquidity are maintained and available. We believe that based on current forecasts operating cash flows and available sources of liquidity will be sufficient to meet all operating needs, including planned capital expenditures for the next 12 to 18 months.
Major sources of increases and decreases in cash and cash equivalents were as follows for the three months ending March 31, 2011 and 2010:
(Dollars in thousands) |
March 31, 2011 |
March 31, 2010 |
||||||
Provided by (used in) operating activities |
$ | 997 | $ | (680 | ) | |||
Provided by investing activities |
17,490 | 13,324 | ||||||
(Used in) provided by financing activities |
(13,905 | ) | 15,152 | |||||
Net increase in cash and cash equivalents |
$ | 4,582 | $ | 27,796 | ||||
Operating Activities
Net cash provided by operating activities of continuing operations was $1.0 million for the three months ended March 31, 2011, compared to cash used by operating activities of $0.7 million for the same period in 2010. The $1.7 million improvement is mostly attributable to decreases of $1.2 million in net loss, adjusted for non-cash items, $0.4 million from a decrease in accrued expenses and other liabilities, $0.3 million from an increase in accrued interest receivable, and a $0.2 million increase in prepaid and other expenses, offset in part, by a $0.2 million decrease in official checks.
Investment Activities
The $4.2 million change in cash used in investing activities reflects the following: $7.6 million related to a decrease in loans, $0.8 million related to an increase in the redemption of Federal Reserve Bank stock and $0.2 related to the change in the net acquisition of premises equipment, offset in part by $3.7 million related to the decrease in proceeds from the sale of foreclosed real estate and $0.9 million related to the change in proceeds from repayments of securities available for sale.
Investment activities serve to enhance our liquidity position and interest rate sensitivity, while also providing a yield on interest earning assets. All of our securities are categorized as securities available for sale and are recorded at fair value. Securities, like loans, are subject to similar interest rate and credit risk. In addition, by their nature, securities classified as available for sale are also subject to market value risks that could negatively affect the level of liquidity available to us, as well as stockholders equity. A change in the value of securities held to maturity could also negatively affect the level of stockholders equity if there was a decline in the underlying creditworthiness of the issuers, other-than-temporary impairment is deemed, or there is a change in our intent and ability to hold the securities to maturity.
As of March 31, 2011, our securities portfolio totaled $173.0 million compared to $177.5 million as of December 31, 2010, reflecting a decrease of $4.5 million. For both periods, all of our securities were classified as available for sale. The decrease in the investment portfolio during the first three months of 2011 is primarily due to repayments. We do not actively trade securities and do not expect to do so in the future.
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The following table sets forth the carrying amount of our investment portfolio, as of the periods indicated:
($ in Thousands)
Balance as of | ||||||||
March 31, 2011 |
December 31, 2010 |
|||||||
Fair value of investment in: |
||||||||
Mortgage backed securities |
$ | 172,491 | $ | 176,959 | ||||
Mutual Funds |
494 | 492 | ||||||
Total |
$ | 172,985 | $ | 177,451 | ||||
Federal Reserve Bank stock |
$ | 1,607 | $ | 2,781 | ||||
Federal Home Loan Bank stock |
$ | 5,032 | $ | 5,032 | ||||
Financing Activities
The Banks primary source of funds is deposits. Those deposits are provided by businesses, municipalities, and individuals located within the markets served by the Bank. For the three months ended March 31, 2011, total deposits decreased $23.9 million to $688.4 million compared to $712.3 million as of December 31, 2010.
For the three months ended March 31, 2011 and 2010 the distribution by type of our deposit accounts was as follows (in thousands):
As of March 31, 2011 | As of March 31, 2010 | |||||||||||||||||||||||
Average Balance |
Interest | Average Rate |
Average Balance |
Interest | Average Rate |
|||||||||||||||||||
Noninterest bearing accounts |
$ | 79,823 | $ | | 0.00 | % | $ | 58,619 | 0 | 0.00 | % | |||||||||||||
Interest bearing accounts: |
||||||||||||||||||||||||
Savings, Now and MMKT |
262,383 | 585 | 0.90 | % | 220,721 | 713 | 1.31 | % | ||||||||||||||||
CDs |
348,759 | 2,001 | 2.33 | % | 349,644 | 2,628 | 3.05 | % | ||||||||||||||||
Total Interest Bearing Deposits |
611,142 | 2,586 | 1.72 | % | 570,365 | 3,341 | 2.38 | % | ||||||||||||||||
Average Total Deposits |
$ | 690,965 | $ | 2,586 | 1.52 | % | $ | 628,984 | $ | 3,341 | 2.15 | % | ||||||||||||
Brokered deposits included in total deposits |
$ | 94,182 | $ | 71,773 | ||||||||||||||||||||
Brokered deposits as a percentage of total deposits |
13.63 | % | 11.41 | % | ||||||||||||||||||||
Capital Resources
The assessment of capital adequacy depends on a number of factors such as asset quality, liquidity, earnings performance, changing competitive conditions and economic forces. We seek to maintain a strong capital base to support our business activities, to provide stability to current operations and to promote public confidence.
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The basic measures of capitalization applied by the regulatory authorities are provided below as of March 31, 2011 and December 31, 2010 for the Company and the Bank:
As of March 31, 2011 |
As of December 31, 2010 |
Minimum to be Well Capitalized |
||||||||||
Total Risk Based Capital Ratio - Consolidated |
10.05 | % | 11.06 | % | N/A | |||||||
Total Risk Based Capital Ratio - Bank |
9.99 | % | 10.98 | % | 10.00 | % | ||||||
Tier One Risk Based Capital Ratio - Consolidated |
8.77 | % | 9.78 | % | N/A | |||||||
Tier One Risk Based Capital Ratio - Bank |
8.71 | % | 9.70 | % | 6.00 | % | ||||||
Tier One Leverage Ratio - Consolidated |
6.02 | % | 6.46 | % | N/A | |||||||
Tier One Leverage Ratio - Bank |
5.98 | % | 6.48 | % | 5.00 | % |
Prior to the payment of dividends on our preferred stock issued under the U.S. Treasury Departments Capital Purchase Program (CPP Dividends), we must request and be granted approval by the Federal Reserve Bank of Atlanta (the FRB). We have not paid dividends on our preferred stock for the last two quarters as a result of our agreement with the FRB that we will not pay any cash dividends without prior approval from the FRB. At March 31, 2011, we had $700 in unpaid dividends owing on our preferred stock. To date, we have deferred two quarterly dividend payments. If we miss six quarterly dividend payments, whether or not consecutive, the U.S. Treasury will have the right to appoint two directors and/or observers to our Board of Directors until all accrued and unpaid dividends have been paid.
We continue to pursue efforts to increase our capital, and in this regard, have retained the services of an investment banker to assist us in these efforts.
Inflation.
The impact of inflation on the banking industry differs significantly from that of other industries in which a large portion of total resources are invested in fixed assets such as property, plant and equipment.
Assets and liabilities of financial institutions are virtually all monetary in nature, and therefore are primarily impacted by interest rates rather than changing prices. While the general level of inflation underlies most interest rates, interest rates react more to changes in the expected rate of inflation and to changes in monetary and fiscal policy. Net interest income and the interest rate spread are good measures of our ability to react to changing interest rates and are discussed in further detail above.
Off-Balance Sheet Arrangements.
We do not currently have any off-balance sheet arrangements, other than approved and unfunded loans and letters of credit to our customers in the ordinary course of business. Please see Note 4 to our March 31, 2011 Condensed Consolidated Financial Statements for further discussion
Critical Accounting Estimates.
Allowance for Loan Losses.
See above for a discussion of this item.
Income Taxes.
Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred income taxes result from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to managements judgment.
Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. The realization of deferred tax assets associated with the net operating loss carry forward, which expires in the years 2027, 2028, and 2029, as well as other deductible temporary differences is
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dependent upon generating sufficient future taxable income. In 2010, we determined that significant negative evidence existed that led us to conclude that it was more likely than not that we would not realize any portion of the deferred tax asset, and therefore placed a full valuation allowance on the deferred taxes. As of March 31, 2011, we have not changed our position and have a net deferred asset of zero. Please see Critical Accounting Policies of our Annual Report on Form 10-K for the year ended December 31, 2010, for a more detailed discussion of this item.
Other Than Temporary Impairment
Impairment of investment securities results in a write-down that must be reflected in net income when a market decline below cost is other-than-temporary. We regularly review each investment security for impairment based on criteria that include the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer(s) and our ability and intention with regard to holding the security to maturity. Please refer to Note 2 of our Condensed Consolidated Financial Statements for a more detailed discussion.
Recent Accounting Pronouncements.
The Financial Accounting Standards Board, the SEC, and other regulatory bodies have enacted new accounting pronouncements and standards that either have impacted our results in prior years presented, or may likely impact our results in 2011. Please refer to Note 10 in the Notes to our Condensed Consolidated Financial Statements for the period ended March 31, 2010.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
Not presented as the Company qualifies as a smaller reporting company as defined by Regulation S-K, Item 10 (f) of the Securities Act.
Item 4. | Controls and Procedures. |
Under the supervision and with the participation of our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial officer), we have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report, and, based on this evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that these disclosure controls and procedures are effective.
There have been no changes in our internal controls over financial reporting during the quarter ended March 31, 2011, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Item 1. | Legal Proceedings. |
We are periodically a party to or otherwise involved in legal proceedings arising in the normal course of business, such as claims to enforce liens, claims involving the making and servicing of real property loans, and other issues incident to our business. Management does not believe that there is any pending or threatened proceeding against us that, if determined adversely, would have a material adverse effect on our financial position, liquidity, or results of operations.
Item 1a. | Risk Factors |
In addition to the risk factors contained in the Companys 2010 Annual report on Form 10-K for the year ended December 31, 2010, the following is provided.
Limitations on our ability to accept or roll over brokered deposits (including CDARs) could have a material adverse effect on our liquidity and operations and a lack of liquidity could jeopardize our financial condition.
As a result of the Banks regulatory capital position declining from well-capitalized to adequately capitalized at March 31, 2011, we are not allowed by law to accept, renew or roll over brokered deposits (including deposits through the CDARs program) unless we are granted a waiver by the FDIC. We have applied for a waiver. Reciprocal CDARs deposits are from local customers and are not originated by deposit brokers but are considered brokered deposits by the FDIC. Additionally, we are limited in the rates we may pay on deposits.
As of March 31, 2011, we had $88.0 million of brokered deposits including $6.3 million of reciprocal CDARs deposits. Brokered deposits represented 12.77% of our total deposits as of March 31, 2011, and approximately $1.8 million of CDARs deposits and $7.6 million of brokered deposits mature within the next three months. A prolonged inability to roll over or raise funds through CDARs deposits or brokered deposits could have a material adverse impact on our liquidity.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
None.
Item 3. | Defaults Upon Senior Securities. |
None
Item 4. | (Removed and Reserved) |
Item 5. | Other Information. |
None
Item 6. | Exhibits |
Exhibit No. |
Description | |
3.1 | Articles of Amendment to Articles of Incorporation of the Registrant dated April 29, 2011. | |
31.1 | Certification of Chief Executive Officer pursuant to Securities and Exchange Act Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Chief Financial Officer pursuant to Securities and Exchange Act Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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Pursuant to the requirements of 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 on the 11th day of May 2011.
FLORIDA BANK GROUP, INC. | ||||
Date: May 11, 2011 | By: | /S/ JOHN R. GARTHWAITE | ||
John R. Garthwaite, Chief Financial Officer, Executive Vice President |
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