Attached files
file | filename |
---|---|
EX-31.1 - SECTION 302 CEO CERTIFICATION - Florida Bank Group, Inc. | d333786dex311.htm |
EX-31.2 - SECTION 302 CFO CERTIFICATION - Florida Bank Group, Inc. | d333786dex312.htm |
EX-32.2 - SECTION 906 CFO CERTIFICATION - Florida Bank Group, Inc. | d333786dex322.htm |
EX-32.1 - SECTION 906 CEO CERTIFICATION - Florida Bank Group, Inc. | d333786dex321.htm |
EXCEL - IDEA: XBRL DOCUMENT - Florida Bank Group, Inc. | Financial_Report.xls |
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, 2012
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 100, 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). x 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, $0.01 Par Value as of March 31, 2012:20,913,148.
Table of Contents
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2012
TABLE OF CONTENTS
Page | ||||||
Item 1. |
||||||
Condensed Consolidated Financial Statements |
||||||
Condensed Consolidated Balance Sheets March 31, 2012 (Unaudited) and December 31, 2011 |
1 | |||||
2 | ||||||
3 | ||||||
4 | ||||||
Notes to Condensed Consolidated Financial Statements (Unaudited) |
6 | |||||
23 | ||||||
24 | ||||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
25 | ||||
Item 3. |
41 | |||||
Item 4. |
41 | |||||
Item 1. |
41 | |||||
Item 1A. |
41 | |||||
Item 2. |
41 | |||||
Item 3. |
41 | |||||
Item 4. |
41 | |||||
Item 5. |
41 | |||||
Item 6. |
42 | |||||
43 | ||||||
Certifications |
i
Table of Contents
Item 1. | Financial Statements |
Condensed Consolidated Balance Sheets
($ in thousands, except share amounts)
March 31, 2012 |
December 31, 2011 |
|||||||
(unaudited) | ||||||||
Assets | ||||||||
Cash and due from banks |
$ | 7,338 | $ | 8,375 | ||||
Interest-bearing Deposits and Federal Funds Sold |
41,949 | 68,164 | ||||||
|
|
|
|
|||||
Cash and cash equivalents |
49,287 | 76,539 | ||||||
Securities available for sale |
160,569 | 149,226 | ||||||
Loans, net of allowance for loan losses of $17,856 in 2012 and $19,463 in 2011 |
442,426 | 460,422 | ||||||
Federal Reserve Bank stock, at cost |
1,429 | 1,429 | ||||||
Federal Home Loan Bank stock, at cost |
4,600 | 4,600 | ||||||
Accrued interest receivable |
1,732 | 1,831 | ||||||
Premises and equipment, net |
24,843 | 24,977 | ||||||
Foreclosed real estate |
7,249 | 6,770 | ||||||
Prepaid expenses and other assets |
3,342 | 3,597 | ||||||
|
|
|
|
|||||
Total assets |
$ | 695,477 | $ | 729,391 | ||||
|
|
|
|
|||||
Liabilities and Stockholders Equity | ||||||||
Liabilities: |
||||||||
Deposits: |
||||||||
Noninterest-bearing demand |
$ | 73,683 | $ | 75,157 | ||||
Interest-bearing demand |
56,024 | 53,926 | ||||||
Savings |
11,126 | 9,954 | ||||||
Money market |
179,285 | 165,776 | ||||||
Time |
257,029 | 305,496 | ||||||
|
|
|
|
|||||
Total deposits |
577,147 | 610,309 | ||||||
Official checks, accrued expenses and other liabilities |
4,020 | 4,346 | ||||||
Federal Home Loan Bank advances |
67,700 | 67,700 | ||||||
|
|
|
|
|||||
Total liabilities |
648,867 | 682,355 | ||||||
|
|
|
|
|||||
Stockholders equity: |
||||||||
Preferred Stock Series A, $.01 par value; $1,000 liquidation value; 20,471 shares outstanding in 2012 and 2011 |
20,471 | 20,471 | ||||||
Preferred Stock Series B, $.01 par value; $1,000 liquidation value; 1,024 shares outstanding in 2012 and 2011 |
1,024 | 1,024 | ||||||
Preferred Stock Series C, $.01 par value; $1,000 liquidation value; 5,257 shares outstanding in 2012 and 2011 |
5,257 | 5,257 | ||||||
Preferred Stock - Discount |
(474 | ) | (525 | ) | ||||
Common stock, $.01 par value, 250,000,000 shares authorized in 2012 and 2011, respectively, 20,913,148 and 18,279,398 shares issued in 2012 and 2011, respectively |
209 | 183 | ||||||
Additional paid-in capital |
152,099 | 152,099 | ||||||
Treasury stock (12,583 shares in 2012 and 2011), at cost |
(164 | ) | (164 | ) | ||||
Accumulated deficit |
(132,558 | ) | (132,493 | ) | ||||
Accumulated other comprehensive income |
746 | 1,184 | ||||||
|
|
|
|
|||||
Total stockholders equity |
46,610 | 47,036 | ||||||
|
|
|
|
|||||
$ | 695,477 | $ | 729,391 | |||||
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
Table of Contents
Condensed Consolidated Statements of Operations and Other Comprehensive Loss (Unaudited)
($ in thousands, except per share amounts)
Three Months Ended March 31, | ||||||||
2012 | 2011 | |||||||
Interest income: |
||||||||
Loans |
$ | 6,047 | $ | 7,509 | ||||
Securities available for sale |
746 | 1,101 | ||||||
Other interest-earning assets |
74 | 65 | ||||||
|
|
|
|
|||||
Total interest income |
6,867 | 8,675 | ||||||
|
|
|
|
|||||
Interest expense: |
||||||||
Deposits: |
||||||||
Demand |
50 | 99 | ||||||
Savings |
9 | 10 | ||||||
Money market |
359 | 476 | ||||||
Time |
1,241 | 2,001 | ||||||
Federal Home Loan Bank advances |
717 | 707 | ||||||
|
|
|
|
|||||
Total interest expense |
2,376 | 3,293 | ||||||
|
|
|
|
|||||
Net interest income before provision for loan losses |
4,491 | 5,382 | ||||||
(Credit) provision for loan losses |
(133 | ) | 7,754 | |||||
|
|
|
|
|||||
Net interest income (expense) after provision for loan losses |
4,624 | (2,372 | ) | |||||
|
|
|
|
|||||
Noninterest income: |
||||||||
Service charges on deposit accounts |
207 | 214 | ||||||
Other service charges and fees |
154 | 152 | ||||||
Gain on sale of securities available for sale |
690 | | ||||||
Gain on sale of SBA loans held for sale |
162 | | ||||||
Other |
214 | 191 | ||||||
|
|
|
|
|||||
Total noninterest income |
1,427 | 557 | ||||||
|
|
|
|
|||||
Noninterest expenses: |
||||||||
Salaries and employee benefits |
2,530 | 2,785 | ||||||
Occupancy |
1,131 | 1,174 | ||||||
Data processing |
399 | 330 | ||||||
Stationary, printing and supplies |
58 | 57 | ||||||
Business development |
38 | 40 | ||||||
Insurance, including deposit insurance premium |
499 | 733 | ||||||
Professional fees |
173 | 320 | ||||||
Marketing |
15 | 12 | ||||||
(Gain) loss on sale of foreclosed real estate |
(28 | ) | 39 | |||||
Write-down of foreclosed real estate |
474 | 287 | ||||||
Foreclosed real estate expense |
205 | 80 | ||||||
Other |
306 | 305 | ||||||
|
|
|
|
|||||
Total noninterest expense |
5,800 | 6,162 | ||||||
|
|
|
|
|||||
Income (loss) before income tax benefit |
251 | (7,977 | ) | |||||
Income tax expense |
265 | 25 | ||||||
|
|
|
|
|||||
Net loss |
(14 | ) | (8,002 | ) | ||||
Preferred stock dividend requirements and discount accretion |
(330 | ) | (330 | ) | ||||
|
|
|
|
|||||
Net loss available to common stockholders |
(344 | ) | (8,332 | ) | ||||
|
|
|
|
|||||
Loss per common share: |
||||||||
Basic and Diluted |
$ | (0.02 | ) | $ | (0.58 | ) | ||
|
|
|
|
|||||
Other comprehensive loss: |
||||||||
Net loss |
(14 | ) | (8,002 | ) | ||||
Change in unrealized holding (gains) losses on securities available for sale, net of tax |
(438 | ) | 723 | |||||
|
|
|
|
|||||
Comprehensive loss |
$ | (452 | ) | $ | (7,279 | ) | ||
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
Table of Contents
Condensed Consolidated Statements of Changes in Stockholders Equity (Unaudited)
For the Three Months Ended March 31, 2012 and 2011
($ in thousands, except share amounts)
Preferred Stock | Common Stock | Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Series A | Series B | Series C | Paid-in | Treasury | Accumulated | Comprehensive | Stockholders | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Discount | Shares | Amount | Discount | Shares | Amount | Capital | Stock | Deficit | Income (Loss) | Equity | ||||||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2011 |
20,471 | $ | 20,471 | 1,024 | $ | 1,024 | $ | (525 | ) | 5,257 | $ | 5,257 | $ | | 18,279,398 | $ | 183 | $ | 152,099 | $ | (164 | ) | $ | (132,493 | ) | $ | 1,184 | $ | 47,036 | |||||||||||||||||||||||||||||||
Net loss |
| | | | | | | | | | | | (14 | ) | | (14 | ) | |||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income attributable to change in unrealized gain on available for sale securities, net of income taxes |
| | | | | | | | | | | | | (438 | ) | (438 | ) | |||||||||||||||||||||||||||||||||||||||||||
Preferred stock warrants exercised |
| | | | | | | | 2,633,750 | 26 | | | | | 26 | |||||||||||||||||||||||||||||||||||||||||||||
Preferred stock discount accretion |
| | | | 51 | | | | | | | | (51 | ) | | | ||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
Balance, March 31, 2012 |
20,471 | $ | 20,471 | 1,024 | $ | 1,024 | $ | (474 | ) | 5,257 | $ | 5,257 | $ | | 20,913,148 | $ | 209 | $ | 152,099 | $ | (164 | ) | $ | (132,558 | ) | $ | 746 | $ | 46,610 | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
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 | ) | |||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income attributable to change in unrealized loss on available for sale securities, net of income taxes |
| | | | | | | | | | | | | 723 | 723 | |||||||||||||||||||||||||||||||||||||||||||||
Preferred stock dividend requirements and 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 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Table of Contents
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Three months ended March 31, | ||||||||
2012 | 2011 | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (14 | ) | $ | (8,002 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
319 | 348 | ||||||
Amortization of deferred loan fees, net |
(7 | ) | (33 | ) | ||||
Amortization of premium and discounts on securities, net |
498 | 400 | ||||||
(Credit) provision for loan losses |
(133 | ) | 7,754 | |||||
Deferred income taxes |
265 | | ||||||
Gain on sale of securities available for sale |
(690 | ) | | |||||
Gain on sale of SBA loans held for sale |
(162 | ) | | |||||
(Gain) loss on sale of foreclosed real estate |
(28 | ) | 39 | |||||
Write-down of foreclosed real estate |
474 | 287 | ||||||
Decrease in accrued interest receivable |
99 | 200 | ||||||
Decrease in prepaid expenses and other assets |
255 | 502 | ||||||
Decrease in accrued expenses and other liabilities |
(87 | ) | (295 | ) | ||||
Decrease in official checks |
(239 | ) | (203 | ) | ||||
|
|
|
|
|||||
Net cash provided by operating activities |
550 | 997 | ||||||
|
|
|
|
|||||
Cash flows from investing activities: |
||||||||
Net decrease in loans |
16,901 | 11,510 | ||||||
Proceeds from sales, maturities, calls and repayments of securities available for sale |
54,981 | 4,789 | ||||||
Purchase of securities available for sale |
(66,835 | ) | | |||||
Proceeds from sale of foreclosed real estate |
472 | 96 | ||||||
Redemption of Federal Reserve Bank stock |
| 1,174 | ||||||
Net acquisition of premises and equipment |
(185 | ) | (79 | ) | ||||
|
|
|
|
|||||
Net cash provided by investing activities |
5,334 | 17,490 | ||||||
|
|
|
|
|||||
Cash flows from financing activities: |
||||||||
Net decrease in deposits |
(33,162 | ) | (23,905 | ) | ||||
Net increase in Federal Home Loan Bank advances |
| 10,000 | ||||||
Proceeds from exercise of stock purchase warrants |
26 | | ||||||
|
|
|
|
|||||
Net cash used in financing activities |
(33,136 | ) | (13,905 | ) | ||||
|
|
|
|
|||||
Net (decrease) increase in cash and cash equivalents |
(27,252 | ) | 4,582 | |||||
Cash and cash equivalents at beginning of period |
76,539 | 40,301 | ||||||
|
|
|
|
|||||
Cash and cash equivalents at end of period |
$ | 49,287 | $ | 44,883 | ||||
|
|
|
|
(Continued)
4
Table of Contents
FLORIDA BANK GROUP, INC.
Condensed Consolidated Statements of Cash Flows (Unaudited), Continued
(In thousands)
Three months ended March 31, | ||||||||
2012 | 2011 | |||||||
Supplemental cash flow information: |
||||||||
Cash paid during the period for - Interest |
$ | 2,568 | $ | 3,507 | ||||
|
|
|
|
|||||
Noncash transactions: |
||||||||
Accumulated other comprehensive income, change in unrealized (gains) losses on securities available for sale, net of income taxes in 2012 |
$ | (438 | ) | $ | 723 | |||
|
|
|
|
|||||
Transfer of loans to foreclosed real estate |
$ | 1,397 | $ | | ||||
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Table of Contents
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 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, 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 2011 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, 2012 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.
Reclassification.
Certain amounts in the 2011 consolidated financial statements have been changed to reflect the 2012 presentation.
6
Table of Contents
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, 2012 |
||||||||||||||||
Mortgage-backed securities |
$ | 158,848 | $ | 1,770 | $ | (578 | ) | $ | 160,040 | |||||||
Mutual funds |
525 | 4 | | 529 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 159,373 | $ | 1,774 | $ | (578 | ) | $ | 160,569 | |||||||
|
|
|
|
|
|
|
|
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | |||||||||||||
At December 31, 2011 |
||||||||||||||||
Mortgage-backed securities |
$ | 146,806 | $ | 1,918 | $ | (24 | ) | $ | 148,700 | |||||||
Mutual funds |
521 | 5 | | 526 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 147,327 | $ | 1,923 | $ | (24 | ) | $ | 149,226 | |||||||
|
|
|
|
|
|
|
|
Gross proceeds from the sale of securities classified as available for sale were $48.9 million for the three months ended March 31, 2012 and resulted in gross gains of $0.7 million and no losses. There were no sales of securities classified as available for sale during the three months ended March 31, 2011.
The following tables classify those securities in an unrealized loss position at March 31, 2012 and December 31, 2011, 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, 2012 | ||||||||||||||||
Less Than Twelve Months | Over Twelve Months | |||||||||||||||
Gross Unrealized Losses |
Fair Value | Gross Unrealized Losses |
Fair Value | |||||||||||||
Mortgage-backed securities |
$ | 561 | $ | 42,395 | $ | 17 | $ | 7,505 | ||||||||
|
|
|
|
|
|
|
|
As of December 31, 2011 | ||||||||||||||||
Less Than Twelve Months | Over Twelve Months | |||||||||||||||
Gross Unrealized Losses |
Fair Value | Gross Unrealized Losses |
Fair Value | |||||||||||||
Mortgage-backed securities |
$ | 12 | $ | 1,398 | $ | 12 | $ | 7,050 | ||||||||
|
|
|
|
|
|
|
|
The unrealized losses on twenty investment securities available for sale were caused by market conditions. 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, 2012.
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.
7
Table of Contents
For investment securities that have been in a continuous unrealized loss position greater than 12 months, 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, 2012, relating to the Companys available for sale debt securities:
Balance at, January 1, 2012 |
$ | 540 | ||
Additions for credit losses on securities not previously impaired |
| |||
Reductions for securities sold during the period |
| |||
|
|
|||
Balance at, March 31, 2012 |
$ | 540 | ||
|
|
Note 3 Loans
The Company has divided the loan portfolio into four portfolio segments and classes, each with different risk characteristics and methodologies for assessing risk. The portfolio segments and classes identified by the Company are Commercial, Commercial Real estate, Residential Real Estate and Consumer Loans. The risk characteristics of each loan portfolio segment and class are as follows:
Commercial. Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable, inventory, or equipment, and may include a personal guarantee of the owners. Some short-term loans may be made on an unsecured basis.
Commercial Real Estate. Commercial real estate loans are underwritten based upon standards set forth in policies approved by the companys board of directors (the Board). These loans consist of loans to finance construction, real estate purchases, expansion and improvements to commercial properties. These loans are secured by first liens on office buildings, churches, warehouses, manufacturing facilities, retail and mixed use properties located within the market area. The Companys underwriting analysis includes credit verification, independent appraisals, a review of the borrowers financial condition, and an analysis of the borrowers underlying cash flows. Commercial real estate loans are usually larger than residential loans and involve greater credit risk. The Company monitors construction loans with third-party inspections and requires the receipt of lien waivers on funds advanced. The repayment of commercial real estate loans largely depends on the results of operations and management of these properties.
Residential Real Estate. Residential real estate loans are underwritten in accordance with policies set forth and approved by the Board, including repayment capacity and source, value of the underlying property, credit history and stability. Residential real estate loans include 1-4 family primary, secondary and investment properties, 1-4 family single family construction loans (owner occupied) and multi-family housing. These loans are approved based on an analysis of the borrower and guarantor, the viability of the project and on an acceptable percentage of the appraised value of the property. The Company monitors the construction loans with on-site third-party inspections and requires the receipt of lien waivers on funds advanced.
Consumer Loans. Consumer loans are those loans for personal, family, household purposes or personal investment purposes rather than business, commercial, or agriculture purposes. Consumer credits are to be evaluated on the basis of the borrowers job, stability, income, capital, and collateral. They include loans extended for various purposes, including automobile purchases, home improvements, lines of credit, personal loans, and home equity loans. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Loans to consumers are extended after a credit evaluation, including the creditworthiness of the borrower(s), the purpose of the credit, and the source of repayment. Consumer loans are made at fixed and variable interest rates. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.
8
Table of Contents
The portfolio segments of loans were as follows:
As of | ||||||||
March 31, 2012 |
December 31, 2011 |
|||||||
Commercial |
$ | 31,335 | $ | 33,643 | ||||
Commercial Real Estate |
268,773 | 278,053 | ||||||
Residential Real Estate |
153,902 | 160,870 | ||||||
Consumer Loans |
6,478 | 7,547 | ||||||
|
|
|
|
|||||
460,488 | 480,113 | |||||||
Less: |
||||||||
Net deferred fees |
(206 | ) | (228 | ) | ||||
Allowance for loan losses |
(17,856 | ) | (19,463 | ) | ||||
|
|
|
|
|||||
Loans, Net |
$ | 442,426 | $ | 460,422 | ||||
|
|
|
|
Allowance for Loan Losses.
The allowance for loan losses is a valuation allowance established and maintained at a level believed adequate by management 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 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.
The Company segregates its 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 non-impaired credits.
The following current environmental factors, among others, 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;
9
Table of Contents
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.
The following table sets forth the changes in the allowance and an allocation of the allowance by loan segment as of March 31, 2012 and 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.
10
Table of Contents
Three Months Ended March 31, 2012 | ||||||||||||||||||||
Commercial | Commercial Real Estate |
Residential Real Estate |
Consumer Loans |
Total | ||||||||||||||||
Allowance for credit losses: |
||||||||||||||||||||
Balance at beginning of period |
$ | 1,436 | $ | 11,686 | $ | 6,136 | $ | 205 | $ | 19,463 | ||||||||||
Charge-offs |
(59 | ) | (534 | ) | (1,250 | ) | (5 | ) | (1,848 | ) | ||||||||||
Recoveries |
289 | 53 | 30 | 2 | 374 | |||||||||||||||
Provision (credit) for loan losses |
58 | (1,024 | ) | 867 | (34 | ) | (133 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at end of period |
$ | 1,724 | $ | 10,181 | $ | 5,783 | $ | 168 | $ | 17,856 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance: individually evaluated for impairment |
$ | 863 | $ | 6,264 | $ | 2,520 | $ | 51 | $ | 9,698 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance: collectively evaluated for impairment |
$ | 861 | $ | 3,917 | $ | 3,263 | $ | 117 | $ | 8,158 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Loans: |
||||||||||||||||||||
Ending balance |
$ | 31,335 | $ | 268,773 | $ | 153,902 | $ | 6,478 | $ | 460,488 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance: individually evaluated for impairment |
$ | 1,767 | $ | 38,102 | $ | 16,462 | $ | 105 | $ | 56,436 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance: collectively evaluated for impairment |
$ | 29,568 | $ | 230,671 | $ | 137,440 | $ | 6,373 | $ | 404,052 | ||||||||||
|
|
|
|
|
|
|
|
|
|
11
Table of Contents
Three Months Ended 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 | ||||||||||
|
|
|
|
|
|
|
|
|
|
12
Table of Contents
Loan Impairment and Credit Losses.
The following is an analysis of impaired loans as of March 31, 2012 and 2011:
At March 31, 2012 | Three Months Ended March 31, 2012 | Three Months Ended March 31, 2011 | ||||||||||||||||||||||||||||||||||
Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
Average Recorded Investment |
Interest Income Recognized |
Interest Income Received |
Average Recorded Investment |
Interest Income Recognized |
Interest Income Received |
||||||||||||||||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||||||||||||||||||
Commercial |
$ | 533 | $ | 5,628 | $ | | $ | 536 | $ | (52 | ) | $ | 103 | $ | 1,214 | $ | 64 | $ | 5 | |||||||||||||||||
Commercial Real Estate |
13,019 | 16,933 | | 13,098 | 162 | 51 | 20,392 | 197 | 217 | |||||||||||||||||||||||||||
Residential Real Estate |
3,562 | 5,405 | | 3,584 | 50 | 21 | 10,975 | 127 | 43 | |||||||||||||||||||||||||||
Consumer Loans |
36 | 81 | | 36 | | 1 | 2,458 | 53 | | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total |
$ | 17,150 | $ | 28,047 | $ | | $ | 17,254 | $ | 160 | $ | 176 | $ | 35,039 | $ | 441 | $ | 265 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
With an allowance recorded: |
||||||||||||||||||||||||||||||||||||
Commercial |
$ | 1,234 | $ | 1,486 | $ | 863 | $ | 1,242 | $ | 8 | $ | 8 | $ | 970 | $ | 1 | $ | 9 | ||||||||||||||||||
Commercial Real Estate |
25,083 | 30,607 | 6,264 | 25,235 | 256 | 159 | 16,063 | 95 | 246 | |||||||||||||||||||||||||||
Residential Real Estate |
12,900 | 16,224 | 2,520 | 12,978 | 153 | 57 | 5,676 | 51 | 71 | |||||||||||||||||||||||||||
Consumer Loans |
69 | 76 | 51 | 69 | 1 | | 72 | | 1 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total |
$ | 39,286 | $ | 48,393 | $ | 9,698 | $ | 39,524 | $ | 418 | $ | 224 | $ | 22,781 | $ | 147 | $ | 327 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total |
$ | 56,436 | $ | 76,440 | $ | 9,698 | $ | 56,778 | $ | 578 | $ | 400 | $ | 57,820 | $ | 588 | $ | 592 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is an analysis of impaired loans as of December 31, 2011:
At December 31, 2011 | Full Year 2011 | |||||||||||||||||||||||
Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
Average Recorded Investment |
Interest Income Recognized |
Interest Income Received |
|||||||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||||||
Commercial |
$ | 700 | $ | 5,815 | $ | | $ | 674 | $ | 262 | $ | 8 | ||||||||||||
Commercial Real Estate |
12,009 | 16,818 | | 11,558 | 702 | 385 | ||||||||||||||||||
Residential Real Estate |
6,945 | 11,782 | | 6,684 | 343 | 257 | ||||||||||||||||||
Consumer Loans |
40 | 83 | | 38 | 1 | 5 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 19,694 | $ | 34,498 | $ | | $ | 18,954 | $ | 1,308 | $ | 655 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
With an allowance recorded: |
||||||||||||||||||||||||
Commercial |
$ | 1,637 | $ | 1,881 | $ | 775 | $ | 1,576 | $ | 41 | $ | 58 | ||||||||||||
Commercial Real Estate |
25,484 | 30,224 | 6,217 | 24,526 | 820 | 798 | ||||||||||||||||||
Residential Real Estate |
10,235 | 12,604 | 2,363 | 9,850 | 521 | 346 | ||||||||||||||||||
Consumer Loans |
72 | 79 | 53 | 69 | | 4 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 37,428 | $ | 44,788 | $ | 9,408 | $ | 36,021 | $ | 1,382 | $ | 1,206 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 57,122 | $ | 79,286 | $ | 9,408 | $ | 54,975 | $ | 2,690 | $ | 1,861 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
13
Table of Contents
The credit quality of the loan portfolio at March 31, 2012 based on internally assigned grades is as follows:
Risk Rating |
Commercial | Commercial Real Estate |
Residential Real Estate |
Consumer Loans |
Total | % of Total | ||||||||||||||||||
Pass |
$ | 24,333 | $ | 221,311 | $ | 124,667 | $ | 5,406 | $ | 375,717 | 81.6 | % | ||||||||||||
Special mention |
266 | 3,863 | 2,018 | | 6,147 | 1.3 | % | |||||||||||||||||
Substandard |
4,969 | 15,600 | 16,875 | 966 | 38,410 | 8.3 | % | |||||||||||||||||
Substandard Non-Accrual |
1,767 | 27,999 | 10,342 | 106 | 40,214 | 8.7 | % | |||||||||||||||||
Doubful/Loss |
| | | | | 0.0 | % | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 31,335 | $ | 268,773 | $ | 153,902 | $ | 6,478 | $ | 460,488 | 100.0 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The credit quality of the loan portfolio at December 31, 2011 based on internally assigned grades is as follows:
Risk Rating |
Commercial | Commercial Real Estate |
Residential Real Estate |
Consumer Loans |
Total | % of Total | ||||||||||||||||||
Pass |
$ | 26,148 | $ | 219,477 | $ | 131,364 | $ | 6,459 | $ | 383,448 | 79.9 | % | ||||||||||||
Special mention |
885 | 15,312 | 1,459 | 1 | 17,657 | 3.7 | % | |||||||||||||||||
Substandard |
4,771 | 15,990 | 17,297 | 975 | 39,033 | 8.1 | % | |||||||||||||||||
Substandard Non-Accrual |
1,839 | 27,274 | 10,750 | 112 | 39,975 | 8.3 | % | |||||||||||||||||
Doubful/Loss |
| | | | | 0.0 | % | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 33,643 | $ | 278,053 | $ | 160,870 | $ | 7,547 | $ | 480,113 | 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. |
| SubstandardNonaccrualLoan has all the characteristics of a substandard credit with payments having ceased or collection of payments in question. There is a 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 |
14
Table of Contents
Age analysis of past-due loans is as follows at March 31, 2012:
Accruing Loans | ||||||||||||||||||||||||||||
30-59 Days | 60-89 Days |
Greater Than 90 Days |
Total Past Due |
Current | Nonaccrual Loans |
Total Loans | ||||||||||||||||||||||
Commercial |
$ | 572 | $ | | $ | | $ | 572 | $ | 28,996 | $ | 1,767 | $ | 31,335 | ||||||||||||||
Commercial Real Estate |
122 | | | 122 | 240,652 | 27,999 | 268,773 | |||||||||||||||||||||
Residential Real Estate |
563 | | | 563 | 142,997 | 10,342 | 153,902 | |||||||||||||||||||||
Consumer Loans |
5 | | | 5 | 6,367 | 106 | 6,478 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 1,262 | $ | | $ | | $ | 1,262 | $ | 419,012 | $ | 40,214 | $ | 460,488 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Age analysis of past-due loans is as follows at December 31, 2011:
Accruing Loans | ||||||||||||||||||||||||||||
30-59 Days | 60-89 Days |
Greater Than 90 Days |
Total Past Due |
Current | Nonaccrual Loans |
Total Loans | ||||||||||||||||||||||
Commercial |
$ | 240 | $ | 499 | $ | | $ | 739 | $ | 31,065 | $ | 1,839 | $ | 33,643 | ||||||||||||||
Commercial Real Estate |
1,808 | | | 1,808 | 248,971 | 27,274 | 278,053 | |||||||||||||||||||||
Residential Real Estate |
20 | 20 | | 40 | 150,080 | 10,750 | 160,870 | |||||||||||||||||||||
Consumer Loans |
| | | | 7,435 | 112 | 7,547 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 2,068 | $ | 519 | $ | | $ | 2,587 | $ | 437,551 | $ | 39,975 | $ | 480,113 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Modifications
The Companys loan portfolio includes certain loans that have been modified in a troubled debt restructuring (TDR). A modification of a loan constitutes a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Company offers various types of concessions when modifying a loan, which could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. However, forgiveness of principal is granted on an infrequent basis (in 2011, forgiveness of principal was extended on two loans classified as TDRs totaling $0.4 million). All of the concessions granted by the Company during 2012 related to interest rate or payment extensions. Commercial and industrial loans modified in a TDR often involve temporary interest-only payments or term extensions. Additional collateral, a co-borrower, or a guarantor is often requested. Commercial mortgage and construction loans modified in a TDR often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk. Construction loans modified in a TDR may also involve extending the interest-only payment period. Residential mortgage loans modified in a TDR are primarily comprised of loans where monthly payments are lowered to accommodate the borrowers financial needs for a period of time. During that time, the borrowers entire monthly payment may be applied to principal. After the lowered monthly payment period ends, the borrower may revert back to paying principal and interest per the original terms with the maturity date adjusted accordingly if payment history is satisfactory.
Loans modified in a TDR may already be on non-accrual status and partial charge-offs have in some cases already been taken against the outstanding loan balance. As a result, loans modified in a TDR for the Company may have the financial effect of
15
Table of Contents
increasing the specific allowance associated with the loan. An allowance for impaired loans that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loans effective interest rate, the loans observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent.
The following presents by class, information related to loans modified in a TDR during the three months ended March 31, 2012:
Three Months Ended March 31, 2012 | ||||||||||||||||
Trouble Debt Restructuring (1) (Dollars in thousands) |
Number of Modifidcations Resulting in TDRs during the Period |
Recorded Investment in Loans Modified in a TDR during the Period |
Decrease to Allowance upon Modification |
Charge-offs Recognized upon Modification |
||||||||||||
Residential real estate (2) |
1 | 1,414 | $ | | $ | | ||||||||||
|
|
|
|
|
|
|
|
(1) | The period end balances are inclusive of all partial paydowns and charge-offs since the modification date. |
(2) | Modifications due to concessions related to interest rate reduction and payment extension. |
The following presents by class, loans modified in a TDR from April 1, 2011 through March 31, 2012 that subsequently defaulted (i.e., 30 days or more past due following a modification) during the three months ended March 31, 2012:
Trouble Debt Restructuring (1) (Dollars in thousands) |
Number of Defaults |
Recorded TDR Investment |
||||||
Commercial real estate |
1 | $ | 159 | |||||
Residential real estate |
1 | 504 | ||||||
|
|
|
|
|||||
Total |
2 | $ | 663 | |||||
|
|
|
|
(1) | The period end balances are inclusive of all paying paydowns and charge-offs since the modification date. |
As of March 31, 2012, we had $8.5 million of performing loans classified as TDRs.
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.
16
Table of Contents
A summary of the notional amounts of the Companys financial instruments at March 31, 2012, with off-balance-sheet risk was as follows:
Contract Amount |
||||
Unfunded loan commitments |
$ | 410 | ||
|
|
|||
Unused lines of credit |
$ | 45,056 | ||
|
|
|||
Standby letters of credit |
$ | 663 | ||
|
|
To help meet the funding needs noted above, as of March 31, 2012, the Company had $67.7 million of FHLB advances outstanding and $33.1 million of letters of credit used in lieu of pledging securities to the State of Florida. The Companys unused borrowing capacity as of March 31, 2012, was approximately $19.9 million.
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 granted, forfeited, or exercised during the three months ended March 31, 2012. At March 31, 2012, 1,065,803 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 and exercisable at December 31, 2011 |
460,250 | $ | 15.74 | |||||||||||||
Options granted (forfeited) |
| $ | | |||||||||||||
|
|
|||||||||||||||
Outstanding and exercisable at March 31, 2012 |
460,250 | $ | 15.74 | 4.78 | $ | | ||||||||||
|
|
|
|
|
|
|
|
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 Unregistered Sale of Equity Securities
On June 30, 2011 the Company closed a private placement offering resulting in the issuance of 5,107 shares of its Non-Cumulative Perpetual Series C Preferred Stock (Series C Preferred Stock) to accredited investors for an aggregate purchase price of $5.1 million in cash consideration, or $1,000 per share. In addition, during the three months ended September 30, 2011, the Company sold an additional 150 shares of its Series C preferred Stock to accredited investors for an aggregate purchase price of $150 in cash considerations.
The Series C Preferred Stock has a conversion feature which allows it to be converted into shares of Common Stock. However, the Series C Preferred Stock may not be converted into shares of Common Stock prior to July 1, 2012, unless the Company closes, prior to that date, a Qualified Private Offering. If the Company closes a Qualified Private Offering prior to July 1, 2012, then the holders of the Companys Series C Preferred Stock have agreed that they will convert at the closing of such offering all shares of Series C Preferred Stock owned by them into shares of Common Stock at a conversion price equal to the price per share at which the shares of Common Stock are sold in the Qualified Private Offering. If a Qualified Private Offering is not closed by the Company prior to July 1, 2012, then the conversion price and conversion rights for the shares of Series C Preferred Stock will remain as set forth in the Articles of Amendment to the Companys Restated Articles of Incorporation.
The purchasers of the shares of Series C Preferred Stock also received a non-transferable stock purchase warrant (the Warrant) that is immediately exercisable for 1,250 shares of Company common stock at $0.01 per share for each share of Series C Preferred Stock purchased. The Warrant must be exercised by March 31, 2012. As of March 31, 2012, all 5,257 of the warrants have been exercised resulting in the issuance of 6,571,250 shares of common stock to Series C Preferred Stock holders.
17
Table of Contents
Note 8 Fair Value of Financial Instruments
The estimated fair values of the Companys financial instruments were as follows:
At March 31, 2012 | At December 31, 2011 | |||||||||||||||
Carrying Amount |
Fair Value | Carrying Amount |
Fair Value | |||||||||||||
Financial assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 49,287 | $ | 49,287 | $ | 76,539 | $ | 76,539 | ||||||||
Available-for-sale securities |
160,569 | 160,569 | 149,226 | 149,226 | ||||||||||||
Loans, net |
442,426 | 454,722 | 460,422 | 473,546 | ||||||||||||
Federal Home Loan Bank Stock |
4,600 | 4,600 | 4,600 | 4,600 | ||||||||||||
Federal Reserve Bank Stock |
1,429 | 1,429 | 1,429 | 1,429 | ||||||||||||
Accrued interest receivable |
1,732 | 1,732 | 1,831 | 1,831 | ||||||||||||
Financial liabilities: |
||||||||||||||||
Deposits |
$ | 577,147 | $ | 580,659 | $ | 610,309 | $ | 615,716 | ||||||||
Federal Home Loan Bank Advances |
67,700 | 76,473 | 67,700 | 76,905 | ||||||||||||
Accrued interest payable |
505 | 505 | 697 | 697 | ||||||||||||
Off-balance sheet instruments |
| | | |
Financial assets subject to fair value measurements on a recurring basis are as follows:
Fair Value Measurements | ||||||||||||||||
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, 2012 - |
||||||||||||||||
Available for sale securities |
$ | 160,569 | | $ | 160,569 | | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
As of December 31, 2011 - |
||||||||||||||||
Available for sale securities |
$ | 149,226 | | $ | 149,226 | | ||||||||||
|
|
|
|
|
|
|
|
No securities were transferred in or out of level 1, 2, or 3 during the first three months of 2012 or during the year end 2011.
18
Table of Contents
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, 2012, 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, 2012 |
|||||||||||||||||||
As of March 31, 2012: |
||||||||||||||||||||||||
Impaired loans (1) |
||||||||||||||||||||||||
Commercial |
$ | 904 | $ | | $ | | $ | 904 | $ | 4,577 | $ | 222 | ||||||||||||
Commercial Real Estate |
27,603 | | | 27,603 | $ | 18,076 | 594 | |||||||||||||||||
Residential Real Estate |
13,884 | | | 13,884 | $ | 9,435 | 1,159 | |||||||||||||||||
Consumer Loans |
53 | | | 53 | $ | 119 | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 42,444 | $ | | $ | | $ | 42,444 | $ | 32,207 | $ | 1,975 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Foreclosed real estate |
$ | 7,249 | $ | | $ | | $ | 7,249 | $ | 2,556 | $ | 474 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Loans with a total carrying value of $4,294 were measured for impairment using Level 3 inputs and had fair values in excess of carrying values. |
Fair Value | Level 1 | Level 2 | Level 3 | Total Losses |
Losses Recorded in Operations For the Year Ended December 31, 2011 |
|||||||||||||||||||
As of December 31, 2011: |
||||||||||||||||||||||||
Impaired loans (2) |
||||||||||||||||||||||||
Commercial |
$ | 1,562 | $ | | $ | | $ | 1,562 | $ | 4,439 | $ | 948 | ||||||||||||
Commercial Real Estate |
27,020 | | | 27,020 | 18,132 | 5,770 | ||||||||||||||||||
Residential Real Estate |
13,055 | | | 13,055 | 8,773 | 6,330 | ||||||||||||||||||
Consumer Loans |
59 | | | 59 | 125 | 62 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 41,696 | $ | | $ | | $ | 41,696 | $ | 31,469 | $ | 13,110 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Foreclosed real estate |
$ | 6,770 | $ | | $ | | $ | 6,770 | $ | 2,697 | $ | 2,248 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(2) | Loans with a total carrying value of $6,017 million were measured for impairment using Level 3 inputs and had fair values in excess of carrying values. |
Note 9 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
19
Table of Contents
statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
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).
As of March 31, 2012, the most recent notification from the regulatory authorities categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized an institution must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage percentages as set forth in the table. There are no conditions or events since that notification that management believes have changed the Banks category. The Companys and the Banks actual capital amounts and percentages are also presented in the table ($ in thousands):
Actual | For Capital Adequacy Purposes |
For Well Capitalized Purposes |
||||||||||||||||||||||
As of March 31, 2012: | Amount | % | Amount | % | Amount | % | ||||||||||||||||||
Total Capital to Risk-Weighted Assets: |
||||||||||||||||||||||||
Consolidated |
$ | 51,746 | 11.28 | % | $ | 36,686 | 8.00 | % | N/A | N/A | ||||||||||||||
Bank |
51,555 | 11.25 | % | 36,671 | 8.00 | % | $ | 45,839 | 10.00 | % | ||||||||||||||
Tier One Capital to Risk-Weighted Assets |
||||||||||||||||||||||||
Consolidated |
$ | 40,607 | 8.86 | % | $ | 18,343 | 4.00 | % | N/A | N/A | ||||||||||||||
Bank |
45,675 | 9.96 | % | 18,336 | 4.00 | % | $ | 27,503 | 6.00 | % | ||||||||||||||
Tier One Capital to Average Assets |
||||||||||||||||||||||||
Consolidated |
$ | 40,607 | 5.68 | % | $ | 28,600 | 4.00 | % | N/A | N/A | ||||||||||||||
Bank |
45,675 | 6.39 | % | 28,589 | 4.00 | % | $ | 35,736 | 5.00 | % |
Actual | For Capital Adequacy Purposes |
For Well Capitalized Purposes |
||||||||||||||||||||||
As of December 31, 2011: | Amount | % | Amount | % | Amount | % | ||||||||||||||||||
Total Capital to Risk-Weighted Assets: |
||||||||||||||||||||||||
Consolidated |
$ | 52,011 | 10.85 | % | $ | 38,356 | 8.00 | % | N/A | N/A | ||||||||||||||
Bank |
51,735 | 10.79 | % | 38,341 | 8.00 | % | $ | 47,926 | 10.00 | % | ||||||||||||||
Tier One Capital to Risk-Weighted Assets |
||||||||||||||||||||||||
Consolidated |
$ | 40,595 | 8.47 | % | $ | 19,178 | 4.00 | % | N/A | N/A | ||||||||||||||
Bank |
45,578 | 9.51 | % | 19,170 | 4.00 | % | $ | 28,756 | 6.00 | % | ||||||||||||||
Tier One Capital to Average Assets |
||||||||||||||||||||||||
Consolidated |
$ | 40,595 | 5.53 | % | $ | 29,381 | 4.00 | % | N/A | N/A | ||||||||||||||
Bank |
45,578 | 6.21 | % | 29,375 | 4.00 | % | $ | 36,719 | 5.00 | % |
20
Table of Contents
Regulatory Memorandum
On January 26, 2012, the Board of Directors of the Bank approved a Memorandum of Understanding (the Memorandum) which represents an agreement between the Board and the Director of the Division of Financial Institutions, Florida Office of Financial Regulations (the OFR) whereby the Bank agreed that it will move in good faith to comply with the requirements of the Memorandum. Nearly all of the provisions of the Memorandum have requirements that are not materially different from those in a Written Agreement entered into by the Company and the Federal Reserve Bank of Atlanta (the FRB) in March 2011. However, the individual provisions in the Memorandum and in the Written Agreement, which address a capital plan, differ in that the provision in the Written Agreement requires the Bank to submit a plan to maintain sufficient capital and be in compliance with Capital Adequacy Guidelines for State Member Banks: Risk-Based Measure and Tier 1 Leverage Measures (but does not specify a specific Tier 1 Leverage or Total Risk Based Capital Ratio). The capital provision in the Memorandum requires the Bank to submit a capital plan to the OFR that provides for raising and maintaining a Tier 1 Leverage Capital ratio of not less than eight percent (8%) and a Total Risk Based Capital Ratio of not less than twelve percent (12%), or, submit a capital plan in accordance with the Written Agreement that is referenced above.
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 seven 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, 2012, the Company had $1.8 million in unpaid dividends owing on its preferred stock. Since the Company has deferred seven quarterly dividend payments, the U.S. Treasury has the right to appoint two directors and/or observers to the Companys Board of Directors until all accrued and unpaid dividends have been paid. As of March 31, 2012, no new directors or observers have been appointed by the U.S. Treasury.
Note 10 Loss Per Common Share
Basic and diluted loss per share of common stock has been computed based on the weighted-average number of shares of common stock outstanding as follows ($ thousands):
For the three months ended March 31, | ||||||||
2012 | 2011 | |||||||
Basic and Diluted | Basic and Diluted | |||||||
Numerator: |
||||||||
Net loss |
$ | (14 | ) | $ | (8,002 | ) | ||
Preferred stock dividend requirements and discount accretion |
(330 | ) | (330 | ) | ||||
|
|
|
|
|||||
$ | (344 | ) | $ | (8,332 | ) | |||
|
|
|
|
|||||
Denominator: |
||||||||
Weighted-average shares |
19,613,189 | 14,329,315 | ||||||
|
|
|
|
|||||
Per share amount |
$ | (0.02 | ) | $ | (0.58 | ) | ||
|
|
|
|
Basic and diluted loss per share is the same for these interim periods because of the Companys net loss position.
Note 11 Recent Accounting Standards Update
In December 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-11 Balance Sheet (Topic 210)Disclosures about Offsetting Assets and Liabilities. ASU 2011-11 requires an entity to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. Retrospective disclosure is required for all comparative periods presented. The Company does not expect ASU 2011-11 to have an impact on its financial statements and disclosures.
21
Table of Contents
In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-08, Intangibles Goodwill and Other (Topic 350) - Testing Goodwill for Impairment. ASU 2011-08 allows an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of the reporting unit. ASU 2011-08 was effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. As of March 31, 2012, ASU No. 2011-08 has not had any impact on the Companys financial statements or disclosures.
In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income, which eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Under ASU 2011-05, an entity can elect to present items of net income and other comprehensive income in one continuous statement referred to as the statement of comprehensive income or in two separate, but consecutive, statements. Each component of net income and each component of other comprehensive income, together with totals for comprehensive income and its two parts net income and other comprehensive income, would need to be displayed under either alternative. The statement(s) would need to be presented with equal prominence as the other primary financial statements. ASU 2011-05 was effective as of the beginning 2012. As of March 31, 2012, ASU No. 2011-05 has not had any impact on the Companys financial statements or disclosures.
In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, to substantially converge the guidance in U.S. GAAP and IFRS on fair value measurements and disclosures. The amended guidance changes several aspects of the fair value measurement guidance in FASB Accounting Standards Codification (ASC) 820, Fair Value Measurement, including the following provisions:
| Application of the concepts of highest and best use and valuation premise |
| Introduction of an option to measure groups of offsetting assets and liabilities on a net basis |
| Incorporation of certain premiums and discounts in fair value measurements |
| Measurement of the fair value of certain instruments classified in shareholders equity |
In addition, the amended guidance includes several new fair value disclosure requirements, including, among other things, information about valuation techniques and unobservable inputs used in Level 3 fair value measurements and a narrative description of Level 3 measurements sensitivity to changes in unobservable inputs. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011. As of March 31, 2012, ASU No. 2011-04 has not had any material impact on the Companys financial statements or disclosures.
In April 2011, the FASB issued 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. As of March 31, 2012, ASU No. 2011-03 has not had any material impact on the Companys financial statements or disclosures.
Note 12 Subsequent Event
On April 12, 2012, the Company filed a Form 15 terminating the registration of the Companys Common Stock under Section 12(g) of the Securities Exchange Act of 1934 (the Exchange Act). The Company is relying on Section 12(g)(4) of the Exchange Act, as amended by the Jumpstart Our Business Startups Act, to terminate its duty with respect to its class of shares of common stock. Accordingly, the Section 12(g) registration will be terminated 90 days after the filing of the Form 15, whereupon the Company will have no further reporting obligations under the Exchange Act. Until the date of termination, the Company is required to file all reports required by the Exchange Act Sections 13(a), 14 and 16.
22
Table of Contents
Florida Bank Group, Inc.
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, 2012, and for the three month periods ended March 31, 2012 and 2011 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.
23
Table of Contents
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, 2012 and the related condensed consolidated statements of operations and other comprehensive loss for the three month periods ended March 31, 2012 and 2011, and the related condensed consolidated statements of changes in stockholders equity and cash flows for the three month periods ended March 31, 2012 and 2011. 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, 2011, and the related consolidated statements of operations and other comprehensive loss, changes in stockholders equity and cash flows for the year then ended (not presented herein); and in our report dated March 22, 2012, 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, 2011, 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 3, 2012 |
24
Table of Contents
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, 2011 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 as we, us, or our.
Business Overview
Florida Bank Group, Inc. (the Holding Company) is a bank holding company under the Bank Holding Company Act of 1956, as amended, headquartered in Tampa, Florida and is the sole shareholder of Florida Bank (the Bank) (collectively, the Company). The Holding Company was incorporated on January 12, 2007, under the laws of the State of Florida. The Bank is a Florida chartered commercial bank which provides a wide range of business and consumer financial services in its target marketplace. The Bank currently operates 14 full service banking centers in the Florida counties of Hillsborough, Pinellas, Duval, Leon, Manatee and St. Johns. As of March 31, 2012, we had $695.5 million in total assets, including $442.4 million in net loans, and $577.1 million in total 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 premier 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.
During the upcoming year, our focus will continue to be centered on five major priorities which are intended to restore the financial condition and regulatory position of the Bank. These priorities are: 1) Preserve and strengthening our capital position, 2) Improving asset quality, 3) Generate core earnings, 4) Maintaining satisfactory regulatory relationships, 5) Stabilize our loan portfolio and 6) Consistently grow low cost deposits. For a further discussion of our business focus, see Quarterly Performance Overview and Highlights below.
25
Table of Contents
Organic strategies include taking advantage of customer dislocation in the market place created by other community banks operating limitations and large regional and money center banks customer dissatisfaction. We are continuing to place increased focus on our retail operations. We have retail strategies in place to drive more business through our branch infrastructure.
NON-GAAP FINANCIAL INFORMATION
This report contains financial information determined by methods other than in accordance with United States generally accepted accounting principles (GAAP). This report discusses both GAAP net loss and core earnings. Core earnings are a non-GAAP measure defined as, net loss, adjusted for certain noncore noninterest revenue, noncore noninterest expense, provision for loan losses and tax expense (benefit). Noncore noninterest revenues include: gain (loss) on the sale of securities available for sale and the other-than-temporary impairments (OTTI) on securities available for sale and foreclosed real estate revenues. Noncore noninterest expenses include FHLB prepayment penalty and gain (loss) on expenses related to foreclosed real estate. We believe that such non-GAAP measures are useful because they proved additional insights into the performance of the Company that we believe are helpful to investors and they also reflect how management analyzes certain Company performances and compares those performances against other companies. Non-GAAP measures have inherent limitations as analytic tools, are not required to be uniformly applied and are not audited. To mitigate these factors, we have procedures in place to ensure that these non-GAAP measures are determined using the appropriate GAAP components and that these measures are properly reflected to facilitate consistent period-to-period comparisons. Although we believe these non-GAAP measures enhance investors and managements ability to evaluate and compare our operating results from period-to-period, non-GAAP measures should not be considered in isolation or as an alternative to any measure of performance as promulgated under GAAP.
As summarized below, our core earnings for the three months ended March 31, 2012, which is a non-GAAP measure defined as, net loss adjusted for certain noninterest revenue, noninterest expense, provision for loan losses and tax expense (benefit), were positive for five consecutive quarters (a first in five years). These positive results are mostly due to our focus on our five major priorities as stated above.
Core earnings presented on quarterly basis are as follows:
($ in thousands) | For the Quarter Ended | |||||||||||||||||||
March 31, 2011 |
June 30, 2011 |
September 30, 2011 |
December 31, 2011 |
March 31, 2012 |
||||||||||||||||
Net loss as reported under GAAP |
$ | (8,002 | ) | $ | (5,603 | ) | $ | (3,521 | ) | $ | (25 | ) | $ | (14 | ) | |||||
Non-core revenue adjustments: |
||||||||||||||||||||
Gain on sale of securities available for sale |
| (43 | ) | (42 | ) | | (690 | ) | ||||||||||||
Gain (loss) on sale of other assets |
(3 | ) | 23 | (7 | ) | (5 | ) | 1 | ||||||||||||
Other-than-temporary impairment on securities available for sale |
| |||||||||||||||||||
Foreclosed real estate revenues |
(45 | ) | (62 | ) | (51 | ) | (80 | ) | (76 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
subtotal |
(48 | ) | (82 | ) | (100 | ) | (85 | ) | (765 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Non-core noninterest expense adjustments: |
||||||||||||||||||||
FHLB prepayment penalty |
| 2 | | | | |||||||||||||||
Foreclosed real estate related expenses |
406 | 215 | 1,970 | 776 | 651 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
subtotal |
406 | 217 | 1,970 | 776 | 651 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Less: Provision (credit) for loan losses |
7,754 | 5,740 | 2,157 | 311 | (133 | ) | ||||||||||||||
Less: Tax expense (benefit) |
25 | | | (715 | ) | 265 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Core Earnings |
$ | 135 | $ | 272 | $ | 506 | $ | 262 | $ | 4 | ||||||||||
|
|
|
|
|
|
|
|
|
|
26
Table of Contents
QUARTERLY PERFORMANCE OVERVIEW AND HIGHLIGHTS
| We have had core earnings for five consecutive quarters and we recorded pretax income of $251,000 for the three months ended March 31, 2012; |
| Our net interest income after (credit) provision for loan loss was up $7.0 million compared to the first quarter of 2011 and has been trending upwards for five consecutive quarters. These increases are mostly the result of a credit to loan loss and lower interest expenses; |
| We saw improvements in our asset quality as our net charge-offs for the three months ended March 31, 2012 decreased $1.7 million from the quarter ended December 31, 2011 and $5.8 million from the three month period ended March 31, 2011; our past due 30-89 days loans were down $1.3 million from December 31, 2011; and our (credit) provision for loan losses, at $(0.1) million for the three months ended March 31, 2012, was down $0.4 from the prior quarter ended December 31, 2011, down $2.3 million from the quarter ended September 30, 2011 and down $7.9 million compared to the three month period ended March 31, 2011. All positive signs of improving asset quality; |
| Our noninterest income for the first quarter of 2012 reflects a gain on the sale of securities available for sale of $0.7 million and a gain on the sale of SBA loans of $0.2 million. The sale of SBA loans represents a new revenue source compared to the same period in 2011; |
| Our noninterest expenses for the quarter ended March 31, 2012 were down $0.4 million compared to the same period in 2011, primarily due to lower salaries and employee benefits, lower insurance premiums and lower professional fees, offset in part by increases in foreclosed real estate expenses. This overall decrease is evidence of our continue efforts to right-size our expense base in light of our declining revenue base; |
| Our total deposits decreased $33.2 million during the three Months ended March 31, 2012, as higher interest bearing time deposits decreased $48.5 million and our noninterest-bearing demand deposits decreased $1.5 million. However, partially offsetting this decrease were net increases of $16.8 million of lower interest bearing deposits, which included money market, savings and demand; |
| We remain well-capitalized and have seen significant improvements in our risk based capital ratios and our leverage ratio as of March 31, 2012 versus December 31, 2011. |
RESULTS OF OPERATIONS
Summary of Results of Operation for the Three Months Ended March 31, 2012 and 2011
Following is a condensed operations summary for the three months ended March 31, 2012 and 2011 (in thousands, except per share amounts):
For the Three Months Ended March 31, | ||||||||||||||||
2012 | 2011 | 2012 vs. 2011 |
Change % | |||||||||||||
Interest Income |
$ | 6,867 | $ | 8,675 | $ | (1,808 | ) | -20.8 | % | |||||||
Interest Expense |
2,376 | 3,293 | (917 | ) | -27.8 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net Interest Income |
4,491 | 5,382 | (891 | ) | -16.6 | % | ||||||||||
(Credit) Provision for Loan Losses |
(133 | ) | 7,754 | (7,887 | ) | -101.7 | % | |||||||||
Noninterest income |
1,427 | 557 | 870 | 156.2 | % | |||||||||||
Noninterest expenses |
5,800 | 6,162 | (362 | ) | -5.9 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) before income tax benefit |
251 | (7,977 | ) | 8,228 | -103.1 | % | ||||||||||
Income tax expense |
265 | 25 | 240 | 960.0 | % | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net Loss |
(14 | ) | (8,002 | ) | 7,988 | -99.8 | % | |||||||||
Preferred stock dividend and discount accretion |
(330 | ) | (330 | ) | | 0.0 | % | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loss available to common stockholders |
$ | (344 | ) | $ | (8,332 | ) | $ | 7,988 | -95.9 | % | ||||||
|
|
|
|
|
|
|
|
|||||||||
Loss per common share - basic and diluted |
$ | (0.02 | ) | $ | (0.58 | ) | $ | 0.56 | -97.0 | % | ||||||
|
|
|
|
|
|
|
|
Net Loss
The factors affecting the $8.0 million increase in net loss are displayed in the table above. A more detailed discussion of each major component of our financial performance is provided below.
27
Table of Contents
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 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 at the FRB and in other banks and investment securities. Our interest-bearing liabilities include customer deposit and advances from the FHLB.
The decrease in interest income was mostly due to a decrease in interest on loans, primarily due loan payoffs and a decrease in loan demand, which ultimately resulted in a reduction in our average loan balances. Average loan balances were $471.6 million for the three months ended March 31, 2012, a decrease of $113.7 million from the average loan balance for the three months ended March 31, 2011.
Partially offsetting the decrease in interest income was a decrease in our interest expense, which was mostly the result of decreases in our average interest bearing deposit balances and related rates, for time deposits, interest bearing-demand deposits and money market instruments. Time deposits carry a fixed rate of interest to maturity and most of our borrowings provide for a fixed rate of interest until maturity. The average balance and interest rate paid on time deposits for the three months ended March 31, 2012, was $282.6 million and 1.76% respectively, compared to an average balance and interest paid of $348.8 million and 2.33%, respectively, for the three months ended March 31, 2011.
28
Table of Contents
The following table reflects the components of net interest income, setting forth for the three month periods presented, (1) average assets, liabilities and shareholders equity, (2) interest income earned on interest-earning assets and interest paid on interest-bearing liabilities, (3) average yields earned on interest-earning assets and average rates paid on interest-bearing liabilities, (4) our net interest spread (i.e., the average yield on interest-earning assets less the average rate on interest-bearing liabilities) and (5) our net interest margin (i.e., the net yield on interest earning assets):
($ in thousands) | ||||||||||||||||||||||||
March 31, 2012 | March 31, 2011 | |||||||||||||||||||||||
Balance | Interest | Rate | Balance | Interest | Rate | |||||||||||||||||||
ASSETS |
||||||||||||||||||||||||
Loans |
$ | 471,596 | $ | 6,047 | 5.14 | % | $ | 585,283 | $ | 7,509 | 5.20 | % | ||||||||||||
Securities available for sale |
150,579 | 746 | 1.99 | % | 175,019 | 1,101 | 2.55 | % | ||||||||||||||||
Other interest-earning assets |
53,818 | 74 | 0.55 | % | 30,176 | 65 | 0.87 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total Earning Assets |
675,993 | 6,867 | 4.07 | % | 790,478 | 8,675 | 4.45 | % | ||||||||||||||||
Cash & Due from Banks |
22,481 | 10,313 | ||||||||||||||||||||||
Allowance For Loan Losses |
(19,338 | ) | (20,118 | ) | ||||||||||||||||||||
Other Assets |
37,517 | 40,250 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total Assets |
$ | 716,653 | $ | 820,923 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
LIABILITIES |
||||||||||||||||||||||||
Demand |
$ | 53,864 | $ | 50 | 0.37 | % | $ | 65,428 | $ | 99 | 0.61 | % | ||||||||||||
Savings |
10,633 | 9 | 0.34 | % | 10,004 | 10 | 0.41 | % | ||||||||||||||||
Money Market |
177,344 | 359 | 0.81 | % | 186,951 | 476 | 1.03 | % | ||||||||||||||||
Time |
282,559 | 1,241 | 1.76 | % | 348,759 | 2,001 | 2.33 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total Interest Bearing Deposits |
524,400 | 1,659 | 1.27 | % | 611,142 | 2,586 | 1.72 | % | ||||||||||||||||
FHLB advances |
67,700 | 717 | 4.25 | % | 73,044 | 707 | 3.93 | % | ||||||||||||||||
Other borrowings |
| | 0.00 | % | | | 0.00 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total Interest Bearing Liabilities |
592,100 | 2,376 | 1.61 | % | 684,186 | 3,293 | 1.95 | % | ||||||||||||||||
Noninterest bearing Deposits |
74,315 | 79,823 | ||||||||||||||||||||||
Other Liabilities |
3,475 | 4,217 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total Liabilities |
669,890 | 768,226 | ||||||||||||||||||||||
Total Shareholders Equity |
46,763 | 52,697 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total Liabilities & Shareholders Equity |
$ | 716,653 | $ | 820,923 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Interest Rate Spread |
2.46 | % | 2.50 | % | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net Interest Income |
$ | 4,491 | $ | 5,382 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net Interest Margin |
2.66 | % | 2.76 | % | ||||||||||||||||||||
|
|
|
|
Provision for Loan Losses
For the quarter ended March 31, 2012, we had a credit for loan losses of $0.1 million compared to a provision of $8.0 million for the quarter ended March 31, 2011. Some of the provision decrease reflects the fact that the higher provision recorded during the 2011 period, was in response to effects of the significant contraction of commercial and residential real estate activity and the ripple
29
Table of Contents
effect on our local economies resulting in an increase in nonperforming loans, the significant reduction in the fair values of loan collateral and an increase in our net loan charge-off experience. As a result of the higher provisions being required and recorded in the 2011 period and a moderation in the decline in the fair values of collateral in the subsequent quarters, the amount of provision required for the current period has decreased significantly. Charge-offs, net of recoveries, in the first quarter of 2012 totaled $1.5 million compared to $7.3 million in the same period in 2011.
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 represents its best estimate as of the financial statement date.
While there is some recently published information on the state and local economies indicating a positive trend, we cannot be sure how long the positive trends 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 Income
The table below reflects the major components of noninterest income (in thousands):
Three Months ended March 31, | ||||||||||||||||
2012 | 2011 | change | % | |||||||||||||
Service charges on deposit accounts |
$ | 207 | $ | 214 | $ | (7 | ) | -3.3 | % | |||||||
Other service charges and fees |
154 | 152 | 2 | 1.3 | % | |||||||||||
Gain on sale of securities available for sale |
690 | | 690 | 0.0 | % | |||||||||||
Gain on sale of SBA loans held for sale |
162 | | 162 | 0.0 | % | |||||||||||
Other |
214 | 191 | 23 | 12.0 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Total noninterest income |
$ | 1,427 | $ | 557 | $ | 870 | 156.2 | % | ||||||||
|
|
|
|
|
|
The factors contributing to the $0.9 million, or 156.2%, increase in noninterest income for the three months ended March 31, 2012, compared to the same period in 2011 are noted in the table above. The $0.7 million gain on the sale of securities available for sale reflects managements efforts to continually monitor and manage its portfolios interest rate risk. No sales of securities were made during the 2011 period.
Noninterest Expense
The table below reflects the major components of noninterest expense (in thousands):
Three Months ended March 31, | ||||||||||||||||
2012 | 2011 | change | % | |||||||||||||
Salaries and employee benefits |
$ | 2,530 | $ | 2,785 | $ | (255 | ) | -9.2 | % | |||||||
Occupancy |
1,131 | 1,174 | (43 | ) | -3.7 | % | ||||||||||
Data processing |
399 | 330 | 69 | 20.9 | % | |||||||||||
Stationary, printing and supplies |
58 | 57 | 1 | 1.8 | % | |||||||||||
Business development |
38 | 40 | (2 | ) | -5.0 | % | ||||||||||
Insurance, including deposit insurance premium |
499 | 733 | (234 | ) | -31.9 | % | ||||||||||
Professional fees |
173 | 320 | (147 | ) | -45.9 | % | ||||||||||
Marketing |
15 | 12 | 3 | 25.0 | % | |||||||||||
(Gain) loss on sale of foreclosed real estate |
(28 | ) | 39 | (67 | ) | -171.8 | % | |||||||||
Write-down of foreclosed real estate |
474 | 287 | 187 | 65.2 | % | |||||||||||
Foreclosed real estate expense |
205 | 80 | 125 | 156.3 | % | |||||||||||
Other |
306 | 305 | 1 | 0.3 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Total noninterest expense |
$ | 5,800 | $ | 6,162 | $ | (362 | ) | -5.9 | % | |||||||
|
|
|
|
|
|
30
Table of Contents
The factors contributing to the $0.4 million, or 5.9%, decrease in noninterest expense for the three months ended March 31, 2012, compared to the same period in 2011 are noted in the table above. Explanations for significant changes are as follows: (a) a $0.3 million decrease in salaries and employee benefits, mostly resulting from a reduction in force which resulted in the elimination of approximately 9 employee positions and employee attrition (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 $0.6 million reduction in salary and benefit expenses on an annualized basis. Our total full-time employees were 121 at March 31, 2012, compared to 156 at March 31, 2011).; (b) the $0.2 million decrease in insurance premiums is mostly related to a decrease in customer deposits; and (c) a $0.2 in other reductions offset by a $0.3 million increase in expenses primarily related to foreclosed real estate.
Income Tax Expense
For the quarter ended March 31, 2012 we recorded a tax expense of $265,000, which was primarily related to the income tax effect of the change in unrealized gains on available for sale securities.
FINANCIAL CONDITION
The table below reflects certain select consolidated financial information:
Selected Financial Information
As of | ||||||||||||||||
($ in thousands) | March 31, 2012 | December 31, 2011 | Change | % | ||||||||||||
PERIOD-END BALANCES |
||||||||||||||||
Cash and cash equivalents |
$ | 49,287 | $ | 76,539 | $ | (27,252 | ) | -35.6 | % | |||||||
Securities available for sale |
160,659 | 149,226 | 11,433 | 7.7 | % | |||||||||||
Loans, net of allowance for loan losses |
442,426 | 460,422 | (17,996 | ) | -3.9 | % | ||||||||||
Total Assets |
695,477 | 729,391 | (33,914 | ) | -4.6 | % | ||||||||||
Total deposits |
577,147 | 610,309 | (33,162 | ) | -5.4 | % | ||||||||||
Total liabilities |
648,867 | 682,355 | (33,488 | ) | -4.9 | % | ||||||||||
Shareholders equity |
46,610 | 47,036 | (426 | ) | -0.9 | % |
See our discussion on liquidity and capital resources below for an explanation of the changes in our cash and cash equivalents. The $11.4 million increase in securities available for sale is the result of purchases of $66.8 million offset by sales of $48.9 million and net maturity, calls and principal payments of approximately $6.0 million. The decrease in net loans was primarily due to principal repayments.
The decrease in total liabilities was primarily due to a reduction in time deposits and the decrease in shareholders equity was mostly attributable to the change in unrealized gain on available-for-sale securities, net of taxes.
31
Table of Contents
Loans and Non-Performing Assets
Loan Portfolio.
Our loan portfolio consists principally of loans to individuals and small and medium-sized businesses within our primary market areas of greater Tampa Bay, Jacksonville and Tallahassee, Florida. The table below shows our loan portfolio composition for the periods presented:
($ in Thousands) | ||||||||
As of | ||||||||
March 31, 2012 | December 31, 2011 | |||||||
Commercial |
$ | 31,335 | $ | 33,643 | ||||
Commercial Real Estate (1) |
268,773 | 278,053 | ||||||
Residential Real Estate |
153,902 | 160,870 | ||||||
Consumer Loans |
6,478 | 7,547 | ||||||
|
|
|
|
|||||
460,488 | 480,113 | |||||||
Less: |
||||||||
Net deferred fees |
(206 | ) | (228 | ) | ||||
Allowance for loan losses |
(17,856 | ) | (19,463 | ) | ||||
|
|
|
|
|||||
Loans, Net |
$ | 442,426 | $ | 460,422 | ||||
|
|
|
|
(1) | Includes $109.0 million and $112.3 million of owner-occupied nonresidential properties at March 31, 2012 and December 31, 2011, 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 and maintained at a level believed adequate by management 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 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 non-impaired credits.
32
Table of Contents
The following current environmental factors, among others, 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.
As of March 31, 2012, we held an allowance for loan losses of $17.9 million or 3.88% of total loans compared to the allowance for loan losses of $19.5 million or 4.05% at December 31, 2011. Based on an analysis performed by management as of March 31, 2012, management considers the allowance for loan losses was 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.
33
Table of Contents
We recorded a credit for loan loss provision of $0.1 million for the three months ended March 31, 2012, a decrease of $7.9 million compared to the provision recorded for the three months ended March 31, 2011. The (credit) provision for loan losses is a charge to operations 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 lower provision for loan losses in 2012 reflects an overall decrease in classified and criticized loans during the first quarter of 2012, a decrease in nonperforming loans, as well as a reduction in overall charge-offs during 2012 compared to the same periods in 2011. We establish specific reserves for impaired loans and general reserves for the remainder of the portfolio as follows (in thousands):
Three Months Ended March 31, 2012 | ||||||||||||||||||||
Commercial | Commercial Real Estate |
Residential Real Estate |
Consumer Loans |
Total | ||||||||||||||||
Allowance for credit losses: |
||||||||||||||||||||
Balance at beginning of period |
$ | 1,436 | $ | 11,686 | $ | 6,136 | $ | 205 | $ | 19,463 | ||||||||||
Charge-offs |
(59 | ) | (534 | ) | (1,250 | ) | (5 | ) | (1,848 | ) | ||||||||||
Recoveries |
289 | 53 | 30 | 2 | 374 | |||||||||||||||
Provision (credit) for loan losses |
58 | (1,024 | ) | 867 | (34 | ) | (133 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at end of period |
$ | 1,724 | $ | 10,181 | $ | 5,783 | $ | 168 | $ | 17,856 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance: individually evaluated for impairment |
$ | 863 | $ | 6,264 | $ | 2,520 | $ | 51 | $ | 9,698 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance: collectively evaluated for impairment |
$ | 861 | $ | 3,917 | $ | 3,263 | $ | 117 | $ | 8,158 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Loans: |
||||||||||||||||||||
Ending balance |
$ | 31,335 | $ | 268,773 | $ | 153,902 | $ | 6,478 | $ | 460,488 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance: individually evaluated for impairment |
$ | 1,767 | $ | 38,102 | $ | 16,462 | $ | 105 | $ | 56,436 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance: collectively evaluated for impairment |
$ | 29,568 | $ | 230,671 | $ | 137,440 | $ | 6,373 | $ | 404,052 | ||||||||||
|
|
|
|
|
|
|
|
|
|
34
Table of Contents
Three Months Ended 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 | ||||||||||
|
|
|
|
|
|
|
|
|
|
35
Table of Contents
Impaired Loans
The following is an analysis of impaired loans:
(in Thousands) | ||||||||||||||||||||||||||||||||||||
At March 31, 2012 | Three Months Ended March 31, 2012 | Three Months Ended March 31, 2011 | ||||||||||||||||||||||||||||||||||
Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
Average Recorded Investment |
Interest Income Recognized |
Interest Income Received |
Average Recorded Investment |
Interest Income Recognized |
Interest Income Received |
||||||||||||||||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||||||||||||||||||
Commercial |
$ | 533 | $ | 5,628 | $ | | $ | 536 | $ | (52 | ) | $ | 103 | $ | 1,214 | $ | 64 | $ | 5 | |||||||||||||||||
Commercial Real Estate |
13,019 | 16,933 | | 13,098 | 162 | 51 | 20,392 | 197 | 217 | |||||||||||||||||||||||||||
Residential Real Estate |
3,562 | 5,405 | | 3,584 | 50 | 21 | 10,975 | 127 | 43 | |||||||||||||||||||||||||||
Consumer Loans |
36 | 81 | | 36 | | 1 | 2,458 | 53 | | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total |
$ | 17,150 | $ | 28,047 | $ | | $ | 17,254 | $ | 160 | $ | 176 | $ | 35,039 | $ | 441 | $ | 265 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
With an allowance recorded: |
||||||||||||||||||||||||||||||||||||
Commercial |
$ | 1,234 | $ | 1,486 | $ | 863 | $ | 1,242 | $ | 8 | $ | 8 | $ | 970 | $ | 1 | $ | 9 | ||||||||||||||||||
Commercial Real Estate |
25,083 | 30,607 | 6,264 | 25,235 | 256 | 159 | 16,063 | 95 | 246 | |||||||||||||||||||||||||||
Residential Real Estate |
12,900 | 16,224 | 2,520 | 12,978 | 153 | 57 | 5,676 | 51 | 71 | |||||||||||||||||||||||||||
Consumer Loans |
69 | 76 | 51 | 69 | 1 | | 72 | | 1 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total |
$ | 39,286 | $ | 48,393 | $ | 9,698 | $ | 39,524 | $ | 418 | $ | 224 | $ | 22,781 | $ | 147 | $ | 327 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total |
$ | 56,436 | $ | 76,440 | $ | 9,698 | $ | 56,778 | $ | 578 | $ | 400 | $ | 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 carried at the lower of its estimated fair value less selling costs or cost.
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.
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.
36
Table of Contents
As of | ||||||||||||
March 31, 2012 |
December 31, 2011 |
Percent Change |
||||||||||
Commercial |
$ | 1,767 | $ | 1,839 | -3.9 | % | ||||||
Commercial Real Estate |
27,999 | 27,274 | 2.7 | % | ||||||||
Residential Real Estate |
10,342 | 10,750 | -3.8 | % | ||||||||
Consumer Loans |
106 | 112 | -5.4 | % | ||||||||
|
|
|
|
|||||||||
Total |
40,214 | 39,975 | 0.6 | % | ||||||||
|
|
|
|
|
|
|||||||
Foreclosed Real Estate |
7,249 | 6,770 | 7.1 | % | ||||||||
|
|
|
|
|
|
|||||||
Total Non-Performing Assets |
$ | 47,463 | $ | 46,745 | 1.5 | % | ||||||
|
|
|
|
|
|
|||||||
Non-Performing Loans as a Percentage of Total Loans, net of Deferred Fees |
8.74 | % | 8.33 | % | ||||||||
|
|
|
|
|||||||||
Non- Performing Assets as a Percentage of Total Assets |
6.82 | % | 6.41 | % | ||||||||
|
|
|
|
As of March 31, 2012 and December 31, 2011, we had $9.4 million and $8.5 million, respectively, in restructured loans that are performing and 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.
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 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, our correspondent bank provides 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 $5.0 million from our correspondent banks. Further, the Bank has invested in FHLB stock for the purpose of establishing credit lines with the FHLB. The
37
Table of Contents
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, 2012, we had $67.7 million of FHLB advances outstanding and $33.1 million of letters of credit used in lieu of pledging securities to the State of Florida. Our unused borrowing capacity as of March 31, 2012, was approximately $19.9 million.
As of March 31, 2012, we had unfunded loan commitments of $0.4 million and unused lines and letters of credit totaling approximately $45.7 million. We believe the likelihood of these commitments either needing to be totally funded or funded at the 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, 2012, our gross loan to deposit ratio was 79.8% compared to 78.7% at December 31, 2011. 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 our 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, 2012 and 2011 (in thousands):
March 31, 2012 | March 31, 2011 | |||||||
Provided by operating activities |
$ | 550 | $ | 997 | ||||
Provided by investing activities |
5,334 | 17,490 | ||||||
Used in financing activities |
(33,136 | ) | (13,905 | ) | ||||
|
|
|
|
|||||
Net increase (decrease) in cash and cash equivalents |
$ | (27,252 | ) | $ | 4,582 | |||
|
|
|
|
Operating Activities
Net cash provided by operating activities of continuing operations for the three months ended March 31, 2012, decreased $0.4 million compared to the same period in 2011. The decrease is mostly attributable to net period to period changes in key operating activities as follows: a decrease of $0.3 million from net loss, adjusted for non-cash items, a $0.1 million decrease in accrued interest receivable, a $0.2 million decrease in prepaid expenses and other assets, offset in part by a $0.2 million increase in accrued expenses and other liabilities
Investment Activities
For the three months ending March 31, 2012, cash of $5.3 million was provided by investing activities compared to $17.4 million during the 2011 period. The $12.1 million change reflects the following: $66.8 million related to the purchase of securities available for sale during the first three months of 2012 not repeated in 2011, $1.2 million related to the redemption of federal reserve bank stock in 2011 not repeated in 2012, offset in part by a $50.2 million change in proceeds from repayments of securities available for sale and $5.4 million related to the change in the net decrease in loans.
Investment activities serve to enhance our liquidity position and interest rate sensitivity while also providing a yield on interest earning assets. All of our securities are categorized as securities available for sale and are recorded at fair value. Securities, like loans, are subject to similar interest rate and credit risk. In addition, by their nature, securities classified as available for sale are also subject to market value risks that could negatively affect the level of liquidity available to us, as well as stockholders equity.
38
Table of Contents
The following table sets forth the carrying amount of our investment portfolio, as of the periods indicated:
($ in Thousands) | ||||||||
Balance as of | ||||||||
March 31, 2012 |
December 31, 2011 |
|||||||
Fair value of investment in: |
||||||||
Mortgage backed securities |
$ | 160,040 | $ | 148,700 | ||||
Mutual Funds |
529 | 526 | ||||||
|
|
|
|
|||||
Total |
$ | 160,569 | $ | 149,226 | ||||
|
|
|
|
|||||
Federal Reserve Bank stock |
$ | 1,429 | $ | 1,429 | ||||
|
|
|
|
|||||
Federal Home Loan Bank stock |
$ | 4,600 | $ | 4,600 | ||||
|
|
|
|
Financing Activities
The Banks primary source of funds is deposits. Deposits are provided by businesses, municipalities, and individuals located within the markets served by the Bank. For the three months ended March 31, 2012, we had net cash used in financing activities of $33.1 million compared to $13.9 million during the 2011 period. The primary drivers for the $19.2 million change were: (a) $9.2 million related to a change in deposits as deposits decreased by $33.2 million during the three month period ended March 31, 2012 compared to a decrease of $23.9 million during the 2011 period and, (b) a $10.0 million change in FHLB advances as $10.0 million in advances were received during the three months ended March 31, 2011 and none during the current three month period.
See table in above subsection titled Net Interest Income for a distribution by type of our deposit accounts.
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.
As of March 31, 2012 and December 31, 2011, we exceeded the levels of capital required in order to be considered well capitalized by the regulatory authorities. The basic measures of capitalization applied by the regulatory authorities are provided below as of March 31, 2012 and December 31, 2011, for the Company and the Bank:
As of March 31, 2012 |
As of December 31, 2011 |
Minimum to be Well Capitalized |
||||||||||
Total Risk Based Capital Ratio - Consolidated |
11.28 | % | 10.85 | % | N/A | |||||||
Total Risk Based Capital Ratio - Bank |
11.25 | % | 10.79 | % | 10.00 | % | ||||||
Tier One Risk Based Capital Ratio - Consolidated |
8.86 | % | 8.47 | % | N/A | |||||||
Tier One Risk Based Capital Ratio - Bank |
9.96 | % | 9.51 | % | 6.00 | % | ||||||
Tier One Leverage Ratio - Consolidated |
5.68 | % | 5.53 | % | N/A | |||||||
Tier One Leverage Ratio - Bank |
6.39 | % | 6.21 | % | 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 FRB. We have not paid dividends on our preferred stock for the last seven 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, 2012, we had $1.8 million in unpaid dividends owing on our preferred stock. Since we have deferred seven quarterly dividend payments, the U.S. Treasury has the right to appoint two directors and/or observers to our Board of Directors until all accrued and unpaid dividends have been paid. As of March 31, 2012, no new directors or observers have been appointed by the U.S. Treasury.
Sale of Preferred Stock
During the second and third quarters of 2011 we issued a total of 5,257 shares of our Non-Cumulative Perpetual Series C Preferred Stock (Series C Preferred Stock) through a private placement offering, to accredited investors for an aggregate purchase
39
Table of Contents
price of $5.3 million in cash consideration, or $1,000 per share. Please see Note 7 to our March 31, 2012 Condensed Consolidated Financial Statements and PART II, Item 3 Unregistered Sales of Equity Securities and Use of Proceeds, below, for a detailed discussion of our sale of preferred stock.
In addition, we are in the process of pursuing a larger capital raise, and in this regard, we have retained the services of an investment advisor 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, 2012 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 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, 2012, 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, 2011, 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 operations 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 2012. Please refer to Note 11 in the Notes to our Condensed Consolidated Financial Statements for the period ended March 31, 2012.
40
Table of Contents
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, 2012, 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 |
There has not been any material change in the risk factor disclosure from that contained in the Companys Annual Report on Form 10-K for the year ended December 31 2011.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
During the second and third quarters of 2011 we issued a total of 5,257 shares of our Non-Cumulative Perpetual Series C Preferred Stock (Series C Preferred Stock) through a private placement offering, to accredited investors for an aggregate purchase price of $5.3 million in cash consideration, or $1,000 per share.
The Series C Preferred Stock has a conversion feature which allows it to be converted into shares of Common Stock. However, the Series C Preferred Stock may not be converted into shares of Common Stock prior to July 1, 2012, unless we close, prior to that date, a Qualified Private Offering. If we close a Qualified Private Offering prior to July 1, 2012, then the holders of our Series C Preferred Stock have agreed that they will convert at the closing of such offering all shares of Series C Preferred Stock owned by them into shares of Common Stock at a conversion price equal to the price per share at which the shares of Common Stock are sold in the Qualified Private Offering. If a Qualified Private Offering is not closed by us prior to July 1, 2012, then the conversion price and conversion rights for the shares of Series C Preferred Stock will remain as set forth in the Articles of Amendment to our Restated Articles of Incorporation.
The purchasers of the shares of Series C Preferred Stock also received a non-transferable stock purchase warrant (the Warrant) that is immediately exercisable for 1,250 shares of our common stock at $0.01 per share for each share of Series C Preferred Stock purchased. The Warrant must be exercised before March 31, 2012. As of March 31, 2012, all 5,257 of the warrants have been exercised resulting in the purchase of 6,571,250 shares of common stock
Item 3. | Defaults Upon Senior Securities. |
None
Item 4. | Mine Safety Disclosure |
None
Item 5. | Other Information. |
None
41
Table of Contents
Item 6. | Exhibits |
Exhibit No. |
Description | |
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. | |
101 | The following financial information from the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, is formatted in Extensible Business Reporting Language: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Other Comprehensive Income (Loss)(Unaudited), (iii) Condensed Consolidated Statements of Changes in Stockholders Equity (Unaudited), (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements. |
42
Table of Contents
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 3rd day of May, 2012.
FLORIDA BANK GROUP, INC. | ||||||
Date: May 3, 2012 | By: | /S/ Gary J. Ward | ||||
Gary J. Ward, Chief Financial Officer, Executive Vice President |
43