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EX-31.1 - FLORIDIAN FINANCIAL GROUP INC | i00351_ex31-1.htm |
EX-31.2 - FLORIDIAN FINANCIAL GROUP INC | i00351_ex31-2.htm |
EX-32.1 - FLORIDIAN FINANCIAL GROUP INC | i00351_ex32-1.htm |
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2012
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 000-53589
FLORIDIAN FINANCIAL GROUP, INC. | |
(Exact name of registrant as specified in its charter) | |
Florida | 20-4539279 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
175 Timacuan Boulevard, Lake Mary, Florida | 32746 |
(Address of principal executive office) | (Zip Code) |
(407) 321-3233 | |
(Registrant’s telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company x |
(Do not check if smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
At July 31, 2012, 6,180,332 shares of the Registrant’s Common Stock, $5.00 par value, were outstanding.
1 |
FLORIDIAN
FINANCIAL GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 2012
TABLE OF CONTENTS
2 |
INTRODUCTORY NOTE
Caution Concerning Forward-Looking Statements
The SEC encourages companies to disclose forward-looking information so investors can better understand a company’s future prospects and make informed investment decisions. This Quarterly Report on Form 10-Q 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.
Our ability to achieve our financial objectives could be adversely affected by the factors discussed in detail in Part I, Item 2., “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and Part II, Item 1A., “Risk Factors” in this Quarterly Report on Form 10-Q, the following sections of our Annual Report on Form 10-K for the year ended December 31, 2011 (the “Annual Report”): (a) “Introductory Note” in Part I, Item 1. “Business,” (b) “Risk Factors” in Part I, Item 1A. as updated in our subsequent quarterly reports on Form 10-Q; and (c) “Introduction” in Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in Part II, Item 7, as well as:
§ | our ability to lower our expenses; | |
§ | the effects of our decision to deregister our common stock from the Securities Exchange Act of 1934, as amended, and “go dark”; | |
§ | our ability to comply with the board resolutions and memorandum of understanding as required to be adopted by our regulators, including the heightened capital ratios; | |
§ | our need and our ability to incur additional debt or equity financing; | |
§ | the accuracy of our financial statement estimates and assumptions, including our allowance for loan losses; | |
§ | our ability to comply with increased capital requirements imposed by our regulators, including the effects of Basel III; | |
§ | the loss of our key personnel; | |
§ | the effects of our lack of a diversified loan portfolio, including the risk of geographic concentration; | |
§ | legislative or regulatory changes, including the Dodd-Frank Wall Street Reform and Consumer Protection Act; | |
§ | the strength of the United States economy in general and the strength of the local economies in which we conduct operations; | |
§ | the frequency and magnitude of foreclosure of our loans; | |
§ | our ability to successfully manage liquidity risk; | |
§ | the effects of the health and soundness of other financial institutions, including the FDIC’s need to increase Deposit Insurance Fund assessments; | |
§ | our ability to comply with the extensive laws and regulations to which we are subject; | |
§ | inflation, interest rate, market and monetary fluctuations; | |
§ | our customers’ willingness and ability to make timely payments on their loans; | |
§ | increased competition and its effect on pricing, including the effect of the repeal of the prohibition on paying interest on demand deposits, on our net interest margin; | |
§ | fluctuations in collateral values; | |
§ | effect of changes in the stock market and other capital markets; | |
§ | the effects of harsh weather conditions, including hurricanes; | |
§ | the effects of man-made disasters; | |
§ | our ability to support our overhead expenses; | |
§ | changes in the securities and real estate markets; | |
§ | technological changes; |
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§ | changes in monetary and fiscal policies of the U.S. Government; | |
§ | the effects of security breaches and computer viruses that may affect our computer systems; | |
§ | changes in consumer spending and saving habits; | |
§ | changes in accounting principles, policies, practices or guidelines; | |
§ | anti-takeover provisions under Federal and state law as well as our Articles of Incorporation and our bylaws; | |
§ | other risks described from time to time in our filings with the SEC; and | |
§ | our ability to manage the risks involved in the foregoing. |
However, other factors besides those listed above and in the section captioned “Risk Factors” or discussed elsewhere in this 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. These forward-looking statements are not guarantees of future performance, but reflect the present expectations of future events by our management and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Any forward-looking statements made by us 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.
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FINANCIAL INFORMATION
Item 1. | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) |
Floridian Financial Group, Inc., and Subsidiaries
Condensed Consolidated Balance Sheets
June 30, 2012 and December 31, 2011 (Unaudited)
(Dollars in Thousands)
June 30, 2012 | December 31, 2011 | |||||||
Assets | ||||||||
Cash and due from banks | $ | 6,800 | $ | 8,930 | ||||
Federal funds sold | 3,825 | 3,550 | ||||||
Interest bearing deposits | 12,673 | 20,367 | ||||||
Total cash and cash equivalents | 23,298 | 32,847 | ||||||
Securities available for sale | 72,245 | 73,136 | ||||||
Securities held to maturity (Fair value of $1,013 at December 31, 2011) | — | 1,002 | ||||||
Other investments | 100 | 100 | ||||||
Loans, net of allowance for loan losses of $7,678 and $6,566 at June 30, 2012 and December 31, 2011, respectively | 281,815 | 305,088 | ||||||
Property and equipment, net | 14,303 | 14,670 | ||||||
Bank owned life insurance | 11,572 | 11,411 | ||||||
Intangible assets, net | 1,105 | 1,201 | ||||||
Other real estate owned | 3,849 | 5,129 | ||||||
Other assets | 2,519 | 4,975 | ||||||
Total assets | $ | 410,806 | $ | 449,559 | ||||
Liabilities and Shareholders’ Equity | ||||||||
Liabilities | ||||||||
Deposits: | ||||||||
Noninterest bearing demand | $ | 93,319 | $ | 83,909 | ||||
Savings, NOW and money market | 144,920 | 149,945 | ||||||
Time deposits under $100 | 58,647 | 87,090 | ||||||
Time deposits of $100 or more | 58,492 | 72,782 | ||||||
Total deposits | 355,378 | 393,726 | ||||||
Other borrowings | 13,105 | 13,955 | ||||||
Other liabilities | 1,793 | 2,101 | ||||||
Total liabilities | 370,276 | 409,782 | ||||||
Shareholders’ Equity | ||||||||
Preferred stock, $5 par value, 1,000,000 shares authorized; none outstanding | — | — | ||||||
Common stock, $5 par value, 100,000,000 shares authorized; 6,180,332 and 6,179,240 shares issued and outstanding as of June 30, 2012 and December 31, 2011, respectively | 30,902 | 30,896 | ||||||
Additional paid-in capital | 38,490 | 38,397 | ||||||
Retained deficit | (28,923 | ) | (29,966 | ) | ||||
Accumulated other comprehensive income | 61 | 450 | ||||||
Total shareholders’ equity | 40,530 | 39,777 | ||||||
Total liabilities and shareholders’ equity | $ | 410,806 | $ | 449,559 |
See Notes to Unaudited Condensed Consolidated Financial Statements.
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Floridian Financial Group, Inc. and Subsidiaries
Consolidated Statements of Operations and Other Comprehensive
Income (Unaudited)
For the Three and Six Month Periods Ended June 30, 2012 and 2011
(Dollars in Thousands)
For
the three months ended June 30, | For
the six months ended June 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Interest income: | ||||||||||||||||
Interest and fees on loans | $ | 3,551 | $ | 3,867 | $ | 7,467 | $ | 7,754 | ||||||||
Interest on securities | 239 | 345 | 539 | 705 | ||||||||||||
Interest on federal funds sold | 2 | 3 | 4 | 4 | ||||||||||||
Other interest | 15 | 32 | 30 | 56 | ||||||||||||
Total interest income | 3,807 | 4,247 | 8,040 | 8,519 | ||||||||||||
Interest expense: | ||||||||||||||||
Interest on deposits | 637 | 1,002 | 1,343 | 2,003 | ||||||||||||
Other interest | 28 | 65 | 58 | 130 | ||||||||||||
Total interest expense | 665 | 1,067 | 1,401 | 2,133 | ||||||||||||
Net interest income | 3,142 | 3,180 | 6,639 | 6,386 | ||||||||||||
Provision for loan losses | 286 | 30 | 1,416 | 1,197 | ||||||||||||
Net interest income after provision for loan losses | 2,856 | 3,150 | 5,223 | 5,189 | ||||||||||||
Noninterest income: | ||||||||||||||||
Other noninterest income | 352 | 328 | 699 | 635 | ||||||||||||
Gain on sale of securities | 772 | — | 909 | — | ||||||||||||
Gain on sale of other assets | — | 42 | 17 | 51 | ||||||||||||
Total noninterest income | 1,124 | 370 | 1,625 | 686 | ||||||||||||
Noninterest expense: | ||||||||||||||||
Salaries and employee benefits | 1,276 | 1,654 | 2,230 | 3,328 | ||||||||||||
Occupancy and equipment expenses | 709 | 681 | 1,356 | 1,406 | ||||||||||||
FDIC insurance | 154 | 158 | 339 | 382 | ||||||||||||
Data processing | 397 | 359 | 785 | 734 | ||||||||||||
Other real estate expense | 152 | 177 | 336 | 217 | ||||||||||||
Professional fees | 214 | 253 | 439 | 495 | ||||||||||||
Credit and collection expense | 30 | 82 | 45 | 173 | ||||||||||||
Core deposit intangible amortization | 48 | 48 | 96 | 96 | ||||||||||||
Other operating expenses | 100 | 106 | 179 | 227 | ||||||||||||
Total noninterest expense | 3,080 | 3,518 | 5,805 | 7,058 | ||||||||||||
Income (loss) before income taxes | 900 | 2 | 1,043 | (1,183 | ) | |||||||||||
Income tax | — | 175 | — | 175 | ||||||||||||
Net income (loss) | $ | 900 | $ | (173 | ) | $ | 1,043 | $ | (1,358 | ) | ||||||
Basic and diluted net income (loss) per share | $ | 0.15 | $ | (0.03 | ) | $ | 0.17 | $ | (0.22 | ) | ||||||
Average basic and diluted shares outstanding | 6,179,638 | 6,201,256 | 6,179,699 | 6,201,782 | ||||||||||||
Other comprehensive income: | ||||||||||||||||
Net income (loss) | $ | 900 | $ | (173 | ) | $ | 1,043 | $ | (1,358 | ) | ||||||
Change in unrealized holding gains on securities available for sale, net of tax | (541 | ) | 1,276 | (389 | ) | 1,415 | ||||||||||
Comprehensive income | 359 | 1,103 | 654 | 57 |
See Notes to Unaudited Condensed Consolidated Financial Statements
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Floridian Financial Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Shareholders’ Equity
For the Six Months Ended June 30, 2012 and 2011 (Unaudited)
(Dollars in Thousands)
Common Stock Par Value | Additional Paid-in Capital | Retained Deficit | Accumulated
Other Comprehensive Income (Loss) | Total
Shareholders’ Equity | ||||||||||||||||
Balance at December 31, 2010 | $ | 30,999 | $ | 38,148 | $ | (27,839 | ) | $ | (1,205 | ) | $ | 40,103 | ||||||||
Net loss | — | — | (1,358 | ) | — | (1,358 | ) | |||||||||||||
Change in unrealized gains on securities available for sale, net of income tax | — | — | — | 1,415 | 1,415 | |||||||||||||||
Sale of 3,522 shares of common stock to employee benefit plan and 1,319 shares for employee stock purchase plan | 25 | 13 | — | — | 38 | |||||||||||||||
Issuance of 3,280 shares of common stock in lieu of director fees | 16 | 14 | — | — | 30 | |||||||||||||||
Retirement of 19,000 shares of common stock | (95 | ) | (9 | ) | — | — | (104 | ) | ||||||||||||
Share-based compensation | — | 140 | — | — | 140 | |||||||||||||||
Balance at June 30, 2011 | $ | 30,945 | $ | 38,304 | $ | (29,195 | ) | $ | 210 | $ | 40,264 | |||||||||
Balance at December 31, 2011 | $ | 30,896 | $ | 38,397 | $ | (29,966 | ) | $ | 450 | $ | 39,777 | |||||||||
Net income | — | — | 1,043 | — | 1,043 | |||||||||||||||
Change in unrealized gains on securities available for sale, net of income tax | — | — | — | (389 | ) | (389 | ) | |||||||||||||
Sale of a net 181 shares of common stock to employee benefit plan and 911 shares to employee stock purchase plan | 6 | 1 | — | — | 7 | |||||||||||||||
Share-based compensation | — | 92 | — | — | 92 | |||||||||||||||
Balance at June 30, 2012 | $ | 30,902 | $ | 38,490 | $ | (28,923 | ) | $ | 61 | $ | 40,530 |
See Notes to Unaudited Condensed Consolidated Financial Statements.
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Floridian Financial Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended June 30, 2012 and 2011
(Dollars in Thousands)
For the six months ended | ||||||||
June 30, 2012 | June 30, 2011 | |||||||
Cash Flows From Operating Activities | ||||||||
Net income (loss) | $ | 1,043 | $ | (1,358 | ) | |||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
Provision for loan losses | 1,416 | 1,197 | ||||||
Impairment of other real estate owned, net | 166 | 112 | ||||||
Depreciation expense | 439 | 520 | ||||||
Amortization expense | 96 | 96 | ||||||
Net accretion of securities | 592 | 82 | ||||||
Share-based compensation and director fees | 92 | 171 | ||||||
Realized gain on sales of available for sale securities | (909 | ) | — | |||||
Realized gain on sales of other assets | (17 | ) | (51 | ) | ||||
Increase in cash surrender value | (161 | ) | (170 | ) | ||||
Decrease in deferred tax assets | — | 175 | ||||||
Decrease in accrued interest receivable | 191 | 218 | ||||||
Increase (decrease) in accrued interest payable | (23 | ) | 33 | |||||
Decrease other | 1,983 | 478 | ||||||
Net cash provided by operating activities | 4,908 | 1,503 | ||||||
Cash Flows From Investing Activities | ||||||||
Purchases of securities available for sale | (43,327 | ) | (5,000 | ) | ||||
Sales, maturities and calls on securities available for sale | 44,146 | 6,865 | ||||||
Sales, maturities and calls on securities held to maturity | 1,002 | 4,000 | ||||||
Net decrease (increase) in loans | 21,739 | (581 | ) | |||||
Purchases of property and equipment, net | (72 | ) | (2,402 | ) | ||||
Proceeds from sale of other real estate owned | 1,246 | 451 | ||||||
Net cash provided by investing activities | 24,734 | 3,333 | ||||||
Cash Flows From Financing Activities | ||||||||
Net increase (decrease) in deposits | (38,348 | ) | 27,438 | |||||
Net increase (decrease) in borrowings | (850 | ) | 1,201 | |||||
Retirement of stock | — | (104 | ) | |||||
Proceeds from sale of stock | 7 | 38 | ||||||
Net cash provided by (used in) financing activities | (39,191 | ) | 28,573 | |||||
Net increase in cash and cash equivalents | (9,549 | ) | 33,409 | |||||
Cash and cash equivalents | ||||||||
Beginning of period | 32,847 | 61,872 | ||||||
End of period | $ | 23,298 | $ | 95,281 |
Supplemental Disclosures of Cash Flow Information and noncash transactions
For the six months ended | ||||||||
June 30, 2012 | June 30, 2011 | |||||||
Interest paid | $ | 1,424 | $ | 2,100 | ||||
Income taxes paid | $ | — | $ | — | ||||
Loans transferred to other real estate owned | $ | 132 | $ | 7,071 |
See Notes to Unaudited Condensed Consolidated Financial Statements.
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Floridian Financial Group, Inc. and Subsidiaries
Note 1. | Nature of Business and Summary of Significant Accounting Policies |
Nature of business: Floridian Financial Group, Inc. (the “Company”) is a registered bank holding company formed to organize and own 100% of its subsidiary banks, Floridian Bank and Orange Bank of Florida (collectively referred to as the “Banks”). The Company was incorporated in 2005, and became operational as a bank holding company once Floridian Bank opened. Floridian Bank is a state-chartered, federally-insured full-service commercial banking institution and presently conducts business from its headquarters in Daytona Beach and branch offices in Ormond Beach, Palm Coast and Port Orange, Florida. Orange Bank of Florida is a state-chartered, federally-insured full-service commercial banking institution with its headquarters in Orlando, Florida. The Company operates from its main office and branch offices in the Orange, Seminole, Lake and Citrus Counties, Florida.
Basis of Financial Statement Presentation: The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its Banks. Significant intercompany accounts and transactions have been eliminated in consolidation. The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America and general practices within the financial services industry. The accompanying interim period adjustments, which are necessary for a fair presentation of the consolidated financial statements, have been included. The results of operations for the six months ended June 30, 2012 are not necessarily indicative of the results which may be expected for the year as a whole or any interim period. The interim period consolidated financial statements and financial information included in this quarterly report on Form 10-Q should be read in conjunction with the notes to the consolidated financial statements included in the Company’s annual report on Form 10-K.
Use of estimates: In preparing the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, deferred tax assets and the fair value of financial instruments.
A summary of the Company’s significant accounting policies follows:
Comprehensive income (loss): Comprehensive income or loss is comprised of the net income or loss from the consolidated statement of operations and any items of “other comprehensive income.” The only item of other comprehensive income for the Banks is the unrealized gain or loss on the available for sale investment securities portfolio, net of tax.
Cash and cash equivalents: For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks (including cash items in process of clearing) and federal funds sold. Cash flows from loans originated by the Company and deposits are reported net. The Company maintains amounts due from banks, which at times may exceed federal deposit insurance limits. The Company has not experienced any losses in such accounts.
Securities: Certain securities which management has the positive intent and ability to hold until their maturity are classified as held to maturity. Such securities are carried at cost, adjusted for related amortization of premium and accretion of discounts through interest income from securities.
Securities available for sale which are used for asset/liability, liquidity and other funds management purposes have indefinite holding periods and are accounted for on a fair value basis with net unrealized gains and losses included in other comprehensive income net of tax. Declines in the fair value of securities available for sale that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer including an evaluation of credit ratings, (3) the impact of changes in market interest rates, (4) the intent of the Company to sell a security, and (5) whether it is more likely than not the Company will have to sell the security before recovery of its cost basis. If the Company intends to sell an impaired security, the Company records an other-than-temporary loss in the amount equal to the entire difference between the fair value and amortized cost. If a security is determined to be other-than-temporarily impaired, but the Company does not intend to sell the security, only the credit portion of the estimated loss is recognized in earnings, with the other portion of the loss recognized in other comprehensive income. Amortization and accretion of premiums and discounts are recognized as adjustments to interest income. Realized gains and losses are recognized using the specific identification method.
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Floridian Financial Group, Inc. and Subsidiaries
Note 1. | Nature of Business and Summary of Significant Accounting Policies (continued) |
Loans: Loans are stated at the amount of unpaid principal balances, reduced by an allowance for loan losses and unearned fees and costs. Interest on loans is calculated by using the simple interest method on daily balances of the principal amounts outstanding unless loans are classified as nonaccrual loans. The accrual of interest is discontinued when future collection of principal or interest in accordance with the contractual terms becomes doubtful. When interest accrual is discontinued, all unpaid accrued interest is reversed against interest income. Accrual of interest is generally resumed when the customer is current on all principal and interest payments and has been paying on a timely basis for at least six months.
Accounting standards require the presentation of certain disclosure information at the portfolio segment level, which represents the level at which the Company determines its allowance for credit losses. The Company has five reportable loan segments: Commercial, Commercial Real Estate, Residential Real Estate, Consumer, and Home Equity. Segments are determined based on the products and services provided and the type of customer served. See Note 4 for a breakdown of loans by segment.
Commercial Loans: All corporate and business purpose loans and lines of credit that are not real estate related are classified as commercial loans. These loans are generally secured by business assets including accounts receivable, inventory, and equipment and may incorporate a personal guarantee. Terms on commercial loans are generally for five years or less with most lines of credit written on an on-demand-basis. The majority of commercial loans have a floating interest rate tied to a published index. As of June 30, 2012, commercial loans represented 14.8% of the loan portfolio.
Commercial Real Estate Loans (“CRE”): CRE represents business purpose loans that are real estate related and secured by real estate. CRE loans are reviewed primarily as cash flow loans and secondarily as loans secured by real estate. CRE loans typically involve higher loan principal amounts and the repayment is generally largely dependent on the successful operations of the real property securing the loan or the business conducted on the property securing the loan. CRE loans may be adversely affected by conditions in the real estate markets or in the general economy than other loan types. As of June 30, 2012,77.2% of the loan portfolio was concentrated in CRE loans.
Residential Real Estate Loans (“RRE”): RRE represents all consumer purpose loans collateralized by one to four family dwellings. RRE loans generally have terms of less than five years and are written on a fixed rate basis. As of June 30, 2012,2.7% of the portfolio was classified as RRE.
Consumer Loans: All non-business purpose loans are considered consumer loans. Consumer loans consist of home equity lines of credit, automobile loans, overdraft loans, loans secured by deposits and securities, and unsecured personal loans. Home Equity represents all consumer open end lines of credit secured by one to four family lines of credit. Consumer loans represent any consumer purpose loans or lines of credit not secured by real estate. As of June 30, 2012, consumer loans represented 5.3% of the portfolio.
Within each segment, the Company monitors and assesses the credit risk in the following classes, based on the risk characteristic of each loan segment: Pass, Special Mention, Substandard, Doubtful, and Loss. Within the Commercial and CRE portfolio risk grades are assigned based on an assessment of conditions that affect the borrower’s ability to meet obligations as outlined in the loan agreement. This process includes an in-depth review prior to loan approval and throughout the life of the loan. The analysis of the borrower includes a review of financial information, credit documentation, public information, past experience with the borrower, and other information that may be available specific to each borrower. The review also includes debt service capabilities, actual and projected cash flows, and industry and economic risks. Underwriting of RRE, consumer, and home equity loans and lines of credit include an assessment of the borrower’s credit history and the ability to meet existing debt obligations, as well as payments of principal and interest on the proposed loan. Risk grades are reviewed annually on all large credit relationships or on any credit where management becomes aware of information that may affect the borrower’s ability to fulfill contractual obligations. See Note 4 for a breakdown of loans by class.
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Floridian Financial Group, Inc. and Subsidiaries
Note 1. | Nature of Business and Summary of Significant Accounting Policies (continued) |
Troubled Debt Restructuring: The Company considers a loan to be a Troubled Debt Restructuring (“TDR”) when the debtor experiences financial difficulties and a concession is provided such that the Company will not collect all principal or interest in accordance with the original terms of the loan agreement. Concessions can relate to the contractual interest rate, maturity date, or payment structure of the note. As part of our workout plan, the Company at times restructures loan terms to assist borrowers facing challenges in the current economic environment. Loans classified as TDRs include loans on nonaccrual, loans moving to nonaccrual, and loans on an accruing status. The Company evaluates each individual borrower’s financial condition and prospects for repayment under the modified terms prior to restructuring. The evaluation includes but is not limited to the borrower’s capacity and willingness to pay, past payment history, and any secondary sources of payment.
As of June 30, 2012, eight loans totaling $16.0 million were classified as TDRs with $6.6 million classified as nonperforming. As of December 31, 2011, ten loans totaling $17.5 million were classified as TDRs with $971 thousand classified as nonperforming.
Nonaccrual and Impaired loans: Borrowers who have not made scheduled payments within 30 days of their due date are considered past due. The Company has a formal review process for all past due loans which includes a review of previous performance, collateral and future cash flows. The Company’s policy is to place all loans where interest and principal has been delinquent for 90 days or more on nonaccrual status unless the loan is well secured and in the process of collection. Loans operating on a cash basis because of deterioration in financial condition of the debtor as well as loans where the full collection of recorded interest or principal is not expected are also placed on nonaccrual status regardless of delinquency status. When loans are placed on nonaccrual status, future interest accruals are discontinued and all unpaid accrued interest is reversed against interest income.
Cash collections on nonaccrual loans are credited to the loan receivable balance and no interest income is recognized on those loans until the principal balance is current. No accrual loans, after a reasonable period of sustained repayment performance (generally minimum of six months), are re-evaluated for possible return to an accrual status. See Note 4 for a breakdown of the Company’s loan portfolio based on aging.
Impaired loans are measured for impairment based on the present value of expected future cash flows discounted at the loan’s original effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral, net of selling costs, if the loan is collateral dependent. A loan is impaired when it is probable the creditor will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. On at least a quarterly basis, the Company reviews impaired loans for any changes in the borrower’s ability to repay the loan. Based on this review, the Company may consider making modifications to the original loan agreement.
Allowance for loan losses: The allowance for loan losses (“ALL”) is established through a provision for loan losses charged against operations. The allowance includes an unallocated component. The unallocated reserve represents the uncertainty in inherent factors that cannot be practically assigned to individual loan categories including the local economy and the uncertainty related to historical loss rates applied against loan risk-ratings. The Company believes the unallocated amount is warranted. All commercial loans risk rated substandard or doubtful are considered impaired and are reviewed on a quarterly basis to determine if a specific reserve needs to be allocated.
Loans are charged against the allowance for loan losses when management believes that the loss is confirmed. The allowance is an amount that management believes is adequate to absorb losses inherent in the loan portfolio, based on evaluations of the collectability of loans, industry historical loss experience, current economic conditions, portfolio mix, and other factors. During the quarter, the Company changed from a rolling twelve month to a rolling twenty-four month look back period to evaluate and allocate loan losses in regard to the provision.
While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions.
11 |
Floridian Financial Group, Inc. and Subsidiaries
Note 1. | Nature of Business and Summary of Significant Accounting Policies (continued) |
Loan Charge-Offs: All loan segments except Consumer are charged off within 30 days from the date the loan is deemed uncollectible. The recognition of the loss of loans or portions of loans occurs as soon as there is a reasonable probability of loss. When the amount of loss can be readily calculated, then the loss is recognized. In cases where an amount cannot be calculated, a specific allowance for loan losses is estimated and provided for.
Losses on consumer credit card loans are taken as soon as possible and no later than when the loan is 90 days delinquent. All other consumer loan losses are taken as soon as possible and no later than when delinquency exceeds 120 days.
As a policy, the bank reverses accrued interest on loans placed on nonaccrual. If the accrued interest being reversed was recorded in a previous calendar year and the amount is material, the accrued interest associated with the previous calendar year is charged off.
Credit related financial instruments: In the ordinary course of business, the Banks enter into off-balance-sheet financial instruments consisting of commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded.
Transfers of financial assets: Transfers of financial assets are accounted for as sales only when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been legally isolated from the Company and any of its affiliates, (2) the transferee has the ability to sell or pledge the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or maintain effective control through a third-party beneficial interest in the transferred assets, the ability to unilaterally cause the holder to return specific assets, or have an in-the-money option held by a transferor when probable that the transferor will repurchase the assets.
Other Real Estate Owned: Other real estate owned (“OREO”) consists of property acquired through, or in lieu of, loan foreclosures or other proceedings and is initially recorded at the fair value less estimated selling costs at the date of foreclosure, which establishes a new cost basis. Subsequent to foreclosure, the properties are held for sale and are carried at the lower of cost or fair value less estimated costs of disposal. Any write-down to fair value at the time of acquisition is charged to the allowance for loan losses. Properties are evaluated regularly to ensure the recorded amounts are supported by current fair values, and a charge to operations is recorded as necessary to reduce the carrying amount to fair value less estimated costs to dispose.
Income taxes: The Company accounts for income taxes according to the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the enacted tax rates applicable to taxable income for the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation reserves are established against certain deferred tax assets when it is more likely than not that the deferred tax assets will not be realized. Increases or decreases in the valuation reserve are charged or credited to the income tax provision.
The Company recognizes a benefit from its tax positions only if it is more-likely-than-not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information.
The periods subject to examination for the Company’s federal returns are the tax years subsequent to 2009. The periods subject to examination for the Company’s significant state return, which is Florida, are the tax years subsequent to 2008. The Company believes that its income tax filing positions and deductions will be sustained upon examination and does not anticipate any adjustments that will result in a material change in its financial statements. As a result, no reserve for uncertain income tax positions has been recorded.
The Company’s policy for recording interest and penalties related to uncertain tax positions is to record such items as part of its provision for federal and state income taxes.
12 |
Floridian Financial Group, Inc. and Subsidiaries
Note 1. | Nature of Business and Summary of Significant Accounting Policies (continued) |
Earnings per share: Basic earnings per share is calculated by dividing net income (loss) by the weighted average number of shares of common stock outstanding for each period presented. Options outstanding at June 30, 2012 and 2011, to purchase 502 thousand and 462 thousand common shares, respectively, were not included in the computation of diluted earnings per share for the three and six months ended June 30, 2012 and 2011, because they were antidilutive.
Share-based compensation: The Company has a stock option plan for its employees and for its directors, as more fully described in Note 14 of our Annual Report. The Company is required to recognize compensation cost relating to share-based payment transactions, based on the fair value of the equity or liability instruments issued, in its financial statements. Compensation cost has been measured using the fair value of an award on the grant dates and is recognized over the service period, which is usually the vesting period.
Reclassifications: Certain amounts in the 2011 financial statements have been reclassified for comparative purposes to conform with the presentation in the 2012 financial statements. The results of these classifications had no effect on net operations or shareholders’ equity.
Note 2. | Cash and Due From Banks |
The Banks are required to maintain vault cash and reserve balances with the Federal Reserve Bank based upon a percentage of deposits. These requirements were $1.1 million at June 30, 2012 and $2.5 million at December 31, 2011.
13 |
Note 3. | Securities |
The amortized cost and estimated fair value of securities with gross unrealized gains and losses follows:
As of June 30, 2012 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
(Dollars in Thousands) | Cost | Gains | Losses | Value | ||||||||||||
Securities Available for sale | ||||||||||||||||
Debt Securities: | ||||||||||||||||
U.S. Government and federal agencies | $ | 1,715 | $ | 13 | $ | — | $ | 1,728 | ||||||||
States & political subdivisions | 534 | — | 4 | 530 | ||||||||||||
U.S. Agency REMIC | 36,842 | 78 | 309 | 36,611 | ||||||||||||
U.S. Agency MBS | 33,093 | 316 | 33 | 33,376 | ||||||||||||
Total securities available for sale | $ | 72,184 | $ | 407 | $ | 346 | $ | 72,245 | ||||||||
Securities Held to Maturity | ||||||||||||||||
Debt Securities: | ||||||||||||||||
U.S. Government and federal agencies | $ | — | $ | — | $ | — | $ | — | ||||||||
Total securities held to maturity | $ | — | $ | — | $ | — | $ | — | ||||||||
As of December 31, 2011 | ||||||||||||||||
Securities Available for Sale | ||||||||||||||||
Debt Securities: | ||||||||||||||||
U.S. Government and federal agencies | $ | 13,385 | $ | 305 | $ | — | $ | 13,690 | ||||||||
States & political subdivisions | 1,701 | 94 | — | 1,795 | ||||||||||||
U.S. Agency REMIC | 38,917 | 338 | 217 | 39,038 | ||||||||||||
U.S. Agency MBS | 18,683 | 18 | 88 | 18,613 | ||||||||||||
Total securities available for sale | $ | 72,686 | $ | 755 | $ | 305 | $ | 73,136 | ||||||||
Securities Held to Maturity | ||||||||||||||||
Debt Securities: | ||||||||||||||||
U.S. Government and federal agencies | $ | 1,002 | $ | 11 | $ | — | $ | 1,013 | ||||||||
Total securities held to maturity | $ | 1,002 | $ | 11 | $ | — | $ | 1,013 |
At June 30, 2012 and December 31, 2011, government obligations with a carrying value of $20.0 million and $20.6 million, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. At June 30, 2012 and December 31, 2011, the carrying amount of securities pledged to secure repurchase agreements was $13.5 million and $12.6 million, respectively.
14 |
Floridian Financial Group, Inc. and Subsidiaries
Note 3. | Securities (continued) |
The carrying amount of debt securities by contractual maturity at June 30, 2012 follows:
After 1 | After 5 | |||||||||||||||||||
Within | year through | years Through | Over | |||||||||||||||||
(Dollars in Thousands) | 1 year | 5 years | 10 years | 10 years | Total | |||||||||||||||
Available for sale, at fair value | ||||||||||||||||||||
U.S. Government and federal agencies | $ | — | $ | — | $ | 1,728 | $ | — | $ | 1,728 | ||||||||||
States & political subdivisions | — | — | 530 | — | 530 | |||||||||||||||
U.S. Agency REMIC | — | — | 3,437 | 33,174 | 36,611 | |||||||||||||||
U.S. Agency MBS | — | — | 16,849 | 16,527 | 33,376 | |||||||||||||||
Total | $ | — | $ | — | $ | 22,544 | $ | 49,701 | $ | 72,245 | ||||||||||
Securities Held to Maturity, at cost | ||||||||||||||||||||
U.S. Government and federal agencies | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Total | $ | — | $ | — | $ | — | $ | — | $ | — |
For the three months ended June 30, 2012 and 2011, proceeds from sales, maturities, and calls of securities available for sale amounted to $34.6 million and $8.2 million, respectively. Gross realized gains amounted to $772 thousand and $0, respectively. There were no gross realized losses for the three months ended June 30, 2012 and 2011.
For the six months ended June 30, 2012 and 2011, proceeds from sales, maturities, and calls of securities amounted to $45.1 million and $10.9 million, respectively. Gross realized gains amounted to $909 thousand and $0, respectively. There were no gross realized losses for the six months ended June 30, 2012 and 2011.
Information pertaining to securities with gross unrealized losses at June 30, 2012 and December 31, 2011 aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:
June 30, 2012 | ||||||||||||||||||||
Less Than Twelve Months | Over Twelve Months | |||||||||||||||||||
Gross | Gross | Total | ||||||||||||||||||
Unrealized | Unrealized | Unrealized | ||||||||||||||||||
(Dollars in Thousands) | Losses | Fair Value | Losses | Fair Value | Losses | |||||||||||||||
Securities Available for sale | ||||||||||||||||||||
Debt Securities: | ||||||||||||||||||||
States & political subdivisions | $ | 4 | $ | 530 | $ | — | $ | — | $ | 4 | ||||||||||
U.S. Agency REMIC | 309 | 27,865 | — | — | 309 | |||||||||||||||
U.S. Agency MBS | 33 | 7,576 | — | — | 33 | |||||||||||||||
Total securities available for sale | $ | 346 | $ | 35,971 | $ | — | $ | — | $ | 346 |
15 |
Floridian Financial Group, Inc. and Subsidiaries
Note 3. | Securities (continued) |
December 31, 2011 | ||||||||||||||||||||
Less Than Twelve Months | Over Twelve Months | |||||||||||||||||||
Gross | Gross | Total | ||||||||||||||||||
Unrealized | Unrealized | Unrealized | ||||||||||||||||||
(Dollars in Thousands) | Losses | Fair Value | Losses | Fair Value | Losses | |||||||||||||||
Securities Available for sale | ||||||||||||||||||||
Debt Securities: | ||||||||||||||||||||
U.S. Agency REMIC | $ | 217 | $ | 23,460 | $ | — | $ | — | $ | 217 | ||||||||||
U.S. Agency MBS | 88 | 14,536 | — | — | 88 | |||||||||||||||
Total securities available for sale | $ | 305 | $ | 37,996 | $ | — | $ | — | $ | 305 |
As of June 30, 2012, the Company’s security portfolio consisted of 42 securities, 21 of which were in an unrealized loss position. Approximately $71.7 million, or 99%, of the debt securities held by the Company were issued by U.S. government-sponsored entities and agencies, primarily Fannie Mae, Freddie Mac and Ginnie Mae, institutions which the government has affirmed its commitment to support. Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these securities and it is likely it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2012.
Note 4. | Loans and Allowance for Loan Losses |
Loans were comprised of the following:
(Dollars in Thousands) | June 30, 2012 | December 31, 2011 | ||||||
Commercial | $ | 42,890 | $ | 44,833 | ||||
Commercial real estate | 223,620 | 241,648 | ||||||
Residential real estate | 7,736 | 8,542 | ||||||
Consumer loans | 15,374 | 16,745 | ||||||
Total loans | 289,620 | 311,768 | ||||||
Less: Allowance for loan losses | 7,678 | 6,566 | ||||||
Less: Unearned fees | 127 | 114 | ||||||
Net loans | $ | 281,815 | $ | 305,088 |
16 |
Floridian Financial Group, Inc. and Subsidiaries
Note 4. | Loans and Allowance for Loan Losses (continued) |
Activity in the allowance for loan losses is as follows:
For
the Three Months Ended June 30, | For
the Six Months Ended June 30, | |||||||||||||||
(Dollars in Thousands) | 2012 | 2011 | 2012 | 2011 | ||||||||||||
Beginning balance | $ | 7,221 | $ | 8,723 | $ | 6,566 | $ | 8,010 | ||||||||
Loan charge offs: | ||||||||||||||||
Commercial | — | 125 | — | 125 | ||||||||||||
Commercial real estate | 21 | 752 | 439 | 1,024 | ||||||||||||
Residential real estate | — | 250 | — | 391 | ||||||||||||
Consumer and home equity | — | 27 | 65 | 206 | ||||||||||||
Total charge-offs | 21 | 1,154 | 504 | 1,746 | ||||||||||||
Recoveries: | ||||||||||||||||
Commercial | 7 | 90 | 9 | 91 | ||||||||||||
Commercial real estate | 164 | 25 | 168 | 160 | ||||||||||||
Residential real estate | — | — | — | — | ||||||||||||
Consumer and home equity | 21 | 1 | 23 | 3 | ||||||||||||
Total recoveries | 192 | 116 | 200 | 254 | ||||||||||||
Provision for loan losses: | ||||||||||||||||
Commercial | (84 | ) | (420 | ) | 35 | — | ||||||||||
Commercial real estate | 416 | 141 | 1,604 | 491 | ||||||||||||
Residential real estate | (15 | ) | 396 | (22 | ) | 396 | ||||||||||
Consumer and home equity | (35 | ) | (97 | ) | 29 | 280 | ||||||||||
Unallocated | 4 | 10 | (230 | ) | 30 | |||||||||||
Total provision | 286 | 30 | 1,416 | 1,197 | ||||||||||||
Ending balance | $ | 7,678 | $ | 7,715 | $ | 7,678 | $ | 7,715 | ||||||||
Allowance / Total Loans | 2.7 | % | 2.5 | % | 2.7 | % | 2.5 | % | ||||||||
Net Charge-Offs / Average Loans | (0.1 | )% | 0.3 | % | 0.1 | % | 1.0 | % | ||||||||
Allowance / Nonperforming Loans | 76.0 | % | 87.5 | % | 76.0 | % | 87.5 | % |
17 |
Floridian Financial Group, Inc. and Subsidiaries
Note 4. | Loans and Allowance for Loan Losses (continued) |
The following presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and is based on impairment method as of June 30, 2012 and December 31, 2011:
As of June 30, 2012 | ||||||||||||||||||||||||||||
Commercial | Residential | |||||||||||||||||||||||||||
Real | Real | Home | ||||||||||||||||||||||||||
(Dollars in Thousands) | Commercial | Estate | Estate | Equity | Consumer | Unallocated | Total | |||||||||||||||||||||
Ending allowance for loan losses: | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | — | $ | 2,310 | $ | — | $ | — | $ | — | $ | — | $ | 2,310 | ||||||||||||||
Collectively evaluated for impairment | 787 | 4,174 | 113 | 270 | 20 | 4 | 5,368 | |||||||||||||||||||||
Total ending allowance balance | $ | 787 | $ | 6,484 | $ | 113 | $ | 270 | $ | 20 | $ | 4 | $ | 7,678 | ||||||||||||||
Loans: | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | — | $ | 21,176 | $ | — | $ | — | $ | — | $ | — | $ | 21,176 | ||||||||||||||
Collectively evaluated for impairment | 42,890 | 202,444 | 7,736 | 13,689 | 1,685 | — | 268,444 | |||||||||||||||||||||
Total ending loan balance | $ | 42,890 | $ | 223,620 | $ | 7,736 | $ | 13,689 | $ | 1,685 | $ | — | $ | 289,620 |
As of December 31, 2011 | ||||||||||||||||||||||||||||
Commercial | Residential | |||||||||||||||||||||||||||
Real | Real | Home | ||||||||||||||||||||||||||
(Dollars in Thousands) | Commercial | Estate | Estate | Equity | Consumer | Unallocated | Total | |||||||||||||||||||||
Ending allowance for loan losses: | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | — | $ | 255 | $ | — | $ | — | $ | — | $ | — | $ | 255 | ||||||||||||||
Collectively evaluated for impairment | 743 | 4,896 | 135 | 246 | 57 | 234 | 6,311 | |||||||||||||||||||||
Total ending allowance balance | $ | 743 | $ | 5,151 | $ | 135 | $ | 246 | $ | 57 | $ | 234 | $ | 6,566 | ||||||||||||||
Loans: | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | — | $ | 23,622 | $ | — | $ | 23 | $ | — | $ | — | $ | 23,645 | ||||||||||||||
Collectively evaluated for impairment | 44,833 | 218,026 | 8,542 | 14,210 | 2,512 | — | 288,123 | |||||||||||||||||||||
Total ending loan balance | $ | 4,833 | $ | 241,648 | $ | 8,542 | $ | 14,233 | $ | 2,512 | $ | — | $ | 311,768 |
18 |
Floridian Financial Group, Inc. and Subsidiaries
Note 4. | Loans and Allowance for Loan Losses (continued) |
The following presents loans individually evaluated for impairment by class of loans as of June 30, 2012 and December 31, 2011:
As of June 30, 2012 | ||||||||||||||||||||||||
Unpaid | Allowance for Loan | Average | Interest | Cash Basis Interest | ||||||||||||||||||||
Principal | Recorded | Losses | Recorded | Income | Income | |||||||||||||||||||
(Dollars in Thousands) | Balance | Investment | Allocated | Investment | Recognized | Recognized | ||||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||||||
Commercial | $ | — | $ | — | $ | — | $ | 289 | $ | — | $ | — | ||||||||||||
Commercial real estate | ||||||||||||||||||||||||
Construction and land | 6,527 | 3,008 | — | 3,080 | 52 | — | ||||||||||||||||||
Non-owner occupied | 3,614 | 1,260 | — | 1,206 | 20 | — | ||||||||||||||||||
Owner occupied | 3,255 | 2,091 | — | 2,039 | 30 | — | ||||||||||||||||||
Residential | — | — | — | — | — | — | ||||||||||||||||||
Home equity | — | — | — | — | — | — | ||||||||||||||||||
Consumer | — | — | — | — | — | — | ||||||||||||||||||
Total | 13,396 | 6,359 | — | 6,614 | 102 | — | ||||||||||||||||||
With an allowance recorded: | ||||||||||||||||||||||||
Commercial | — | — | — | — | — | — | ||||||||||||||||||
Commercial real estate | ||||||||||||||||||||||||
Construction and land | 940 | 412 | 53 | 381 | 5 | — | ||||||||||||||||||
Non-owner occupied | 7,545 | 7,545 | 1,939 | 7,592 | 102 | — | ||||||||||||||||||
Owner occupied | 6,860 | 6,860 | 318 | 6,854 | 64 | — | ||||||||||||||||||
Residential | — | — | — | — | — | — | ||||||||||||||||||
Home equity | — | — | — | — | — | — | ||||||||||||||||||
Consumer | — | — | — | — | — | — | ||||||||||||||||||
Total | 15,345 | 14,817 | 2,310 | 14,827 | 171 | — | ||||||||||||||||||
Total | $ | 28,741 | $ | 21,176 | $ | 2,310 | $ | 21,441 | $ | 273 | $ | — |
19 |
Floridian Financial Group, Inc. and Subsidiaries
Note 4. | Loans and Allowance for Loan Losses (continued) |
As of December 31, 2011 | ||||||||||||||||||||||||
Unpaid | Allowance for Loan | Average | Interest | Cash Basis Interest | ||||||||||||||||||||
Principal | Recorded | Losses | Recorded | Income | Income | |||||||||||||||||||
(Dollars in Thousands) | Balance | Investment | Allocated | Investment | Recognized | Recognized | ||||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||||||
Commercial | $ | — | $ | — | $ | — | $ | 239 | $ | — | $ | — | ||||||||||||
Commercial real estate | ||||||||||||||||||||||||
Construction and land | 9,825 | 4,776 | — | 9,640 | 40 | — | ||||||||||||||||||
Non-owner occupied | 10,026 | 8,391 | — | 9,956 | 199 | — | ||||||||||||||||||
Owner occupied | 3,295 | 2,079 | — | 3,265 | 61 | — | ||||||||||||||||||
Residential | — | — | — | — | — | — | ||||||||||||||||||
Home equity | 59 | 23 | — | 23 | — | — | ||||||||||||||||||
Consumer | — | — | — | — | — | — | ||||||||||||||||||
Total | 23,205 | 15,269 | — | 23,123 | 300 | — | ||||||||||||||||||
With an allowance recorded: | ||||||||||||||||||||||||
Commercial | — | — | — | — | — | — | ||||||||||||||||||
Commercial real estate | ||||||||||||||||||||||||
Construction and land | — | — | — | — | — | — | ||||||||||||||||||
Non-owner occupied | 2,177 | 1,500 | 10 | 2,177 | 158 | — | ||||||||||||||||||
Owner occupied | 6,876 | 6,876 | 245 | 6,860 | 49 | — | ||||||||||||||||||
Residential | — | — | — | — | — | — | ||||||||||||||||||
Home equity | — | — | — | — | — | — | ||||||||||||||||||
Consumer | — | — | — | — | — | — | ||||||||||||||||||
Total | 9,053 | 8,376 | 255 | 9,037 | 207 | — | ||||||||||||||||||
Total | $ | 32,258 | $ | 23,645 | $ | 255 | $ | 32,160 | $ | 507 | $ | — |
No additional funds are committed to be advanced in connection with impaired loans.
20 |
Floridian Financial Group, Inc. and Subsidiaries
Note 4. | Loans and Allowance for Loan Losses (continued) |
Impaired loans include TDRs of $16.0 million and $17.5 million at June 30, 2012 and December 31, 2011, respectively. As of June 30, 2012,there were three nonperforming TDRs with an outstanding balance of $6.6 million compared to December 31, 2011,when two loans totaling $971 thousand were classified as nonperforming TDRs.
During the three months ended June 30, 2012, no loans were classified by the Banks as TDRs. During the six months ended June 30, 2012, the Banks classified one CRE loan with an aggregate outstanding balance both before and after the modification, of $510 thousand as a TDR. The Bank reduced the interest rate on the loan and modified the payment to interest only. The Banks had no commitments to lend additional funds for loans classified as TDRs at June 30, 2012. No TDRs defaulted within 12 months of being restructured.
The following presents the recorded investment in nonaccrual loans and loans past due over 90 days and still accruing by class of loans as of June 30, 2012 and December 31, 2011:
June 30, 2012 | December 31, 2011 | |||||||||||||||
Loans Past | Loans Past | |||||||||||||||
Due Over 90 | Due Over 90 | |||||||||||||||
Days Still | Days Still | |||||||||||||||
(Dollars in Thousands) | Nonaccrual | Accruing | Nonaccrual | Accruing | ||||||||||||
Commercial | $ | — | $ | — | $ | — | $ | — | ||||||||
Commercial real estate | ||||||||||||||||
Construction and land | 1,885 | — | 4,777 | — | ||||||||||||
Non-owner occupied | 7,304 | — | 2,245 | 471 | ||||||||||||
Owner occupied | 868 | — | 842 | — | ||||||||||||
Residential | — | — | — | — | ||||||||||||
Home equity | 47 | — | 71 | — | ||||||||||||
Consumer | — | — | — | — | ||||||||||||
Total | $ | 10,104 | $ | — | $ | 7,935 | $ | 471 |
Nonaccruing loans totaled $10.1 million and $7.9 million at June 30, 2012 and December 31, 2011, respectively. Interest income on nonaccrual loans is recognized on a cash basis when the ultimate collectability is no longer considered doubtful. Cash collected on nonaccrual loans is applied against the principal balance or recognized as interest income based upon management’s expectations as to the ultimate collectability of principal and interest in full. If interest on nonaccruing loans had been recognized on a fully-accruing basis, interest income recorded would have been $148 thousand and $453 thousand higher for the quarter ended June 30, 2012 and the year ended December 31, 2011, respectively. As of June 30, 2012, there were no loans past due 90 days or more and still accruing interest income. The one loan past due 90 days or more as of December 31, 2011 represented a matured loan that was subsequently renewed.
21 |
Floridian Financial Group, Inc. and Subsidiaries
Note 4. | Loans and Allowance for Loan Losses (continued) |
The following presents the aging of the recorded investment in past due loans as of June 30, 2012 and December 31, 2011 by class of loans:
June 30, 2012 | ||||||||||||||||||||
30 – 59 | 60 – 89 | 90 Days | ||||||||||||||||||
Days | Days | or Greater | Total | Loans Not | ||||||||||||||||
(Dollars in Thousands) | Past Due | Past Due | Past Due | Past Due | Past Due | |||||||||||||||
Commercial | $ | 24 | $ | 100 | $ | — | $ | 124 | $ | 42,766 | ||||||||||
Commercial real estate | ||||||||||||||||||||
Construction and land | — | — | 1,879 | 1,879 | 36,318 | |||||||||||||||
Non-owner occupied | — | — | 1,260 | 1,260 | 90,136 | |||||||||||||||
Owner occupied | — | — | 368 | 368 | 93,659 | |||||||||||||||
Residential | — | — | — | — | 7,736 | |||||||||||||||
Home equity | — | 49 | — | 49 | 13,640 | |||||||||||||||
Consumer | 12 | — | — | 12 | 1,673 | |||||||||||||||
Total | $ | 36 | $ | 149 | $ | 3,507 | $ | 3,692 | $ | 285,928 |
December 31, 2011 | ||||||||||||||||||||
30 - 59 | 60 - 89 | 90 Days | ||||||||||||||||||
Days | Days | Or Greater | Total | Loans Not | ||||||||||||||||
(Dollars in Thousands) | Past Due | Past Due | Past Due | Past Due | Past Due | |||||||||||||||
Commercial | $ | 1,500 | $ | — | $ | — | $ | 1,500 | $ | 43,333 | ||||||||||
Commercial real estate | ||||||||||||||||||||
Construction and land | — | — | 3,283 | 3,283 | 39,156 | |||||||||||||||
Non-owner occupied | 399 | — | 2,716 | 3,115 | 96,185 | |||||||||||||||
Owner occupied | — | — | 842 | 842 | 99,067 | |||||||||||||||
Residential | — | 501 | — | 501 | 8,041 | |||||||||||||||
Home equity | — | — | 71 | 71 | 14,162 | |||||||||||||||
Consumer | 4 | 3 | — | 7 | 2,505 | |||||||||||||||
Total | $ | 1,903 | $ | 504 | $ | 6,912 | $ | 9,319 | $ | 302,449 |
The Company assigns a risk rating to all business purpose loans and periodically performs reviews to identify credit risks and to assess the overall collectability of the portfolio. During these internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans. These credit quality indicators are used to assign a risk rating to each individual loan. The risk ratings can be grouped into five major categories, defined as follows:
Pass – A pass loan is a strong credit with no existing or known potential weaknesses deserving of management’s close attention.
Special Mention – A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Company’s credit position at some future date. Special Mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.
22 |
Floridian Financial Group, Inc. and Subsidiaries
Note 4. | Loans and Allowance for Loan Losses (continued) |
Substandard – A substandard loan is not adequately protected by the current financial condition and paying capacity of the borrower or the value of the collateral pledged, if any. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Well-defined weaknesses include a project’s lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time or the project’s failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful – Loans classified doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable or improbable.
Loss – Loans classified as loss are considered uncollectible. Once a loan becomes delinquent and repayment becomes questionable, the Company will address collateral shortfalls with the borrower and attempt to obtain additional collateral. If this is not forthcoming and payment in full is unlikely, the Bank will estimate its probable loss and immediately charge-off some or all of the balance.
As of June 30, 2012 and December 31, 2011, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
June 30, 2012 | ||||||||||||||||||||||||
Special | Not | |||||||||||||||||||||||
(Dollars in Thousands) | Pass | Mention | Substandard | Doubtful | Loss | Rated | ||||||||||||||||||
Commercial | $ | 40,209 | $ | 2,480 | $ | 201 | $ | — | $ | — | $ | — | ||||||||||||
Commercial real estate | ||||||||||||||||||||||||
Construction and land | 34,777 | — | 3,420 | — | — | — | ||||||||||||||||||
Non-owner occupied | 84,091 | — | 7,305 | — | — | — | ||||||||||||||||||
Owner occupied | 80,824 | 5,065 | 8,138 | — | — | — | ||||||||||||||||||
Residential | 7,736 | — | — | — | — | — | ||||||||||||||||||
Home equity | 13,642 | — | 47 | — | — | — | ||||||||||||||||||
Consumer | 1,685 | — | — | — | — | — | ||||||||||||||||||
Total | $ | 262,964 | $ | 7,545 | $ | 19,111 | $ | — | $ | — | $ | — |
December 31, 2011 | ||||||||||||||||||||||||
Special | Not | |||||||||||||||||||||||
(Dollars in Thousands) | Pass | Mention | Substandard | Doubtful | Loss | Rated | ||||||||||||||||||
Commercial | $ | 44,628 | $ | — | $ | 205 | $ | — | $ | — | $ | — | ||||||||||||
Commercial real estate | ||||||||||||||||||||||||
Construction and land | 37,663 | — | 4,776 | — | ||||||||||||||||||||
Non-owner occupied | 90,909 | — | 8,391 | — | — | — | ||||||||||||||||||
Owner occupied | 86,663 | 5,115 | 8,131 | — | — | — | ||||||||||||||||||
Residential | 8,542 | — | — | — | — | — | ||||||||||||||||||
Home equity | 14,162 | — | 71 | — | — | — | ||||||||||||||||||
Consumer | 2,512 | — | — | — | — | — | ||||||||||||||||||
Total | $ | 285,079 | $ | 5,115 | $ | 21,574 | $ | — | $ | — | $ | — |
23 |
Floridian Financial Group, Inc. and Subsidiaries
Note 4. | Loans and Allowance for Loan Losses (continued) |
The following presents the recorded investment in residential and consumer loans based on payment activity as of June 30, 2012 and December 31, 2011:
June 30, 2012 | ||||||||||||
Home | ||||||||||||
(Dollars in Thousands) | Residential | Equity | Consumer | |||||||||
Performing | $ | 7,736 | $ | 13,642 | $ | 1,685 | ||||||
Nonperforming | — | 47 | — | |||||||||
Total | $ | 7,736 | $ | 13,689 | $ | 1,685 |
December 31, 2011 | ||||||||||||
Home | ||||||||||||
(Dollars in Thousands) | Residential | Equity | Consumer | |||||||||
Performing | $ | 8,542 | $ | 14,162 | $ | 2,512 | ||||||
Nonperforming | — | 71 | — | |||||||||
Total | $ | 8,542 | $ | 14,233 | $ | 2,512 |
Note 5. | Commitments and Contingencies |
Financial instruments with off-balance-sheet risk: The financial statements do not reflect various commitments and contingent liabilities that arise in the normal course of business to meet the financing needs of customers. These include commitments to extend credit and honor stand-by letters of credit. These instruments involve, to varying degrees, elements of credit, interest rate and liquidity risks in excess of amounts reflected in the balance sheets. The extent of the Banks’ involvement in these commitments or contingent liabilities is expressed by the contractual, or notional, amounts of the instruments. Commitments to extend credit, which amount to $50.8 million and $57.2 million at June 30, 2012 and December 31, 2011, respectively, represent agreements to lend to customers with fixed expiration dates or other termination clauses.
Since many commitments are expected to expire without being funded, committed amounts do not necessarily represent future liquidity requirements. The amount of collateral obtained, if any, is based on management’s credit evaluation in the same manner as though an immediate credit extension were to be granted.
Stand-by letters of credit are conditional commitments issued by the Banks guaranteeing the performance of a customer to a third party. The decision whether to guarantee such performance and the extent of collateral requirements are made considering the same factors as are considered in credit extensions. Stand-by letters of credit totaling $2.6 and $3.2 million were outstanding as of June 30, 2012 and December 31, 2011, respectively.
Lines of credit: At June 30, 2012 and December 31, 2011, the Banks had federal funds lines of credit available from their correspondent banks of $30.4 and $30.3 million, respectively. At these dates, there were no outstanding draws under these lines. The highest single day borrowing under these lines was $8.1 million during the six months ended June 30, 2012.
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 which, if determined adversely, would have a material adverse effect on our financial position, liquidity, or results of operations.
24 |
Floridian Financial Group, Inc. and Subsidiaries
Note 6. | Regulatory Capital Matters |
The Company’s Banks are subject to various regulatory capital requirements administered by the federal 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 adverse effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Banks must meet specific capital guidelines that involve quantitative measures of the Banks’ 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 Banks to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations), to risk-weighted assets (as defined), and Tier 1 capital (as defined), to average assets (as defined). As of June 30, 2012 and December 31, 2011, the Banks meet all capital adequacy requirements to be classified as “well capitalized” under prompt corrective action provisions and meet all capital adequacy requirements to which they are subject.
Actual | For Capital Adequacy Purposes |
To be Considered Well Capitalized by Prompt Corrective Action |
|||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio (1) | ||||||||||||||||||||
As of June 30, 2012 | |||||||||||||||||||||||||
Total capital (to risk-weighted assets) | |||||||||||||||||||||||||
Consolidated | $ | 43,505 | 13.3 | % | $ | 26,221 | 8 | % | $ | NA | NA | ||||||||||||||
Floridian Bank (2) | $ | 14,443 | 12.7 | % | $ | 9,105 | 8 | % | $ | 11,382 | 10 | % | |||||||||||||
Orange Bank of Florida | $ | 25,079 | 11.9 | % | $ | 16,847 | 8 | % | $ | 21,059 | 10 | % | |||||||||||||
Tier 1 capital (to risk-weighted assets) | |||||||||||||||||||||||||
Consolidated | $ | 39,364 | 12.0 | % | $ | 13,111 | 4 | % | $ | NA | NA | ||||||||||||||
Floridian Bank (2) | $ | 13,013 | 11.4 | % | $ | 4,552 | 4 | % | $ | 6,869 | 6 | % | |||||||||||||
Orange Bank of Florida | $ | 22,409 | 10.6 | % | $ | 8,424 | 4 | % | $ | 12,635 | 6 | % | |||||||||||||
Tier 1 capital (to average assets) | |||||||||||||||||||||||||
Consolidated | $ | 39,364 | 9.3 | % | $ | 16,876 | 4 | % | $ | NA | NA | ||||||||||||||
Floridian Bank (2) | $ | 13,013 | 9.0 | % | $ | 5,813 | 4 | % | $ | 7,266 | 5 | % | |||||||||||||
Orange Bank of Florida | $ | 22,409 | 8.2 | % | $ | 10,905 | 4 | % | $ | 13,631 | 5 | % |
(1) As discussed in Note 10 below, effective September 30, 2012, Orange Bank must meet enhanced Tier 1 Capital and Total Risk-Based Capital ratios. At June 30, 2012, Orange Bank had met its enhanced Tier 1 leverage ratio requirement (see Note 10). However, the Bank’s total risk based capital ratio of 11.9% was a tenth of a percent below the 12.0% requirement. At December 31, 2011, the Bank had a Tier 1 leverage ratio of 6.9% and a total risk based capital ratio of 10.7%.
(2) The Company recently received notice from its regulators that a previous capital contribution from the Company to Floridian Bank in the form of Bank Owned Life Insurance (“BOLI”) was being disallowed for regulatory capital purposes. The above ratios reflect this disallowance.
25 |
Floridian Financial Group, Inc. and Subsidiaries
Note 6. | Regulatory Capital Matters (continued) |
Actual | For Capital Adequacy Purposes | To be Considered Well Capitalized by Prompt Corrective Action | ||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||
As of December 31, 2011 | ||||||||||||||||||||||
Total capital (to risk-weighted assets) | ||||||||||||||||||||||
Consolidated | $ | 42,545 | 12.1 | % | $ | NA | NA | $ | NA | NA | ||||||||||||
Floridian Bank | $ | 14,991 | 12.5 | % | $ | 9,560 | 8 | % | $ | 11,950 | 10 | % | ||||||||||
Orange Bank of Florida | $ | 24,625 | 10.7 | % | $ | 18,355 | 8 | % | $ | 22,943 | 10 | % | ||||||||||
Tier 1 capital (to risk-weighted assets) | ||||||||||||||||||||||
Consolidated | $ | 38,126 | 10.9 | % | $ | NA | NA | $ | NA | NA | ||||||||||||
Floridian Bank | $ | 13,495 | 11.3 | % | $ | 4,780 | 4 | % | $ | 7,170 | 6 | % | ||||||||||
Orange Bank of Florida | $ | 21,732 | 9.5 | % | $ | 9,177 | 4 | % | $ | 13,766 | 6 | % | ||||||||||
Tier 1 capital (to average assets) | ||||||||||||||||||||||
Consolidated | $ | 38,126 | 8.1 | % | $ | NA | NA | $ | NA | NA | ||||||||||||
Floridian Bank | $ | 13,495 | 9.0 | % | $ | 6,032 | 4 | % | $ | 7,541 | 5 | % | ||||||||||
Orange Bank of Florida | $ | 21,732 | 6.9 | % | $ | 12,607 | 4 | % | $ | 16,007 | 5 | % |
Pursuant to Floridian Bank’s regulatory board resolutions (the “Bank Resolution”) and Orange Bank’s regulatory Memorandum of Understanding (the “MOU”), the Banks are required to maintain a minimum Tier 1 capital to average assets ratio of 8% and total capital to risk-weighted assets of 12%. As of June 30, 2012, Floridian Bank met the minimum capital requirement as required by the Bank Resolution. Orange Bank met the Tier 1 capital to average assets ratio but at 11.9% was slightly below the total capital to risk-weighted assets ratio requirement. Orange Bank is continuing to review alternatives to improve its capital position. Orange Bank has until September 30, 2012, to meet the enhanced requirements.
The payment of dividends by a Florida state bank is subject to various restrictions set forth in the Florida Financial Institutions Code. Such restrictions generally limit dividends to an amount not exceeding net income for the current and two preceding years, less any dividends paid during that period. Accordingly, management does not expect the payment of dividends at any time in the near future. Since the Company is dependent upon the Bank’s ability to pay dividends, the Company is, in effect, similarly restricted as to its ability to pay dividends. Further, the Boards of Directors of the Banks are restricted from paying the Company any dividends. See Note 10.
26 |
Floridian Financial Group, Inc. and Subsidiaries
Note 7. | Fair Values of Financial Instruments |
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.
Estimating fair value requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert expected future amounts, such as cash flows or earnings, to a single present value amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, the guidance establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.
The fair value hierarchy is as follows:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. Our valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
27 |
Floridian Financial Group, Inc. and Subsidiaries
Note 7. | Fair Values of Financial Instruments (continued) |
The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:
Cash and due from banks, interest bearing demand deposits in other banks, and federal funds sold: Due to the short-term nature of these instruments, fair values approximate their carrying amounts.
Investment Securities: The fair values of investment securities are determined by quoted prices in active markets, when available. If quoted market prices are not available, the fair value is determined by a matrix pricing, which is a mathematical technique, widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Other investments include FHLB stock which is estimated to approximate its historical cost because the stock’s value is determined by the ultimate recoverability of the par value.
Loans: For variable-rate loans that re-price frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for all other loans (for example, commercial, commercial real estate, residential real estate, and consumer loans) are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.
Impaired Loans: Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with the FASB guidance “Accounting by Creditors for Impairment of a Loan,” and the fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. In accordance with accounting literature, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. Collateral values are estimated using level 3 inputs based on customized discounting criteria.
Other Real Estate Owned: Other real estate owned consists of property acquired through, or in lieu of, loan foreclosures or other proceedings and is initially recorded at fair value less estimated selling costs at the date of foreclosure, which establishes a new cost basis. Subsequent to foreclosure, the properties are held for sale and are carried at lower of cost or the net fair value less disposal costs. Properties are evaluated regularly to ensure the recorded amounts are supported by current fair values, and a charge to operations is recorded as necessary to reduce the carrying amount to fair value less estimated costs to dispose.
Accrued interest receivable and accrued interest payable: The fair values of accrued interest receivable and accrued interest payable approximate their carrying amounts.
Deposits: The fair value of demand deposits, including non-interest bearing demand deposits, savings accounts, NOW accounts and money market demand accounts, is equal to their carrying value. Fixed rate term deposits are valued using discounted cash flows. The discount rate used is based on interest rates currently being offered on comparable deposits as to amount and term.
Other borrowings: The carrying amounts of borrowings under repurchase agreements amount of $12.3 million and a long-term note payable of $850 thousand approximate their fair values.
Off-balance-sheet instruments: Loan commitments and standby letters of credit are negotiated at current market rates and are relatively short-term in nature. Therefore, their estimated fair value approximates the fees charged and is nominal at June 30, 2012 and December 31, 2011.
28 |
Floridian Financial Group, Inc. and Subsidiaries
Note 7. | Fair Values of Financial Instruments (continued) |
Financial Instruments Recorded at Fair Value on a Recurring Basis
The following table sets forth the Company’s assets and liabilities which are carried at fair value on a recurring basis as of June 30, 2012 and December 31, 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
June 30, 2012 | ||||||||||||||||
(Dollars in Thousands) | Quoted
Prices in Active Markets for Identical Assets Level 1 | Significant
Other Observable Inputs Level 2 | Significant Unobservable Inputs Level 3 | Total
at Fair Value | ||||||||||||
Securities available for sale | ||||||||||||||||
Debt securities: | ||||||||||||||||
U.S. Government and federal agencies | $ | — | $ | 1,728 | $ | — | $ | 1,728 | ||||||||
States & political subdivisions | — | 530 | — | 530 | ||||||||||||
U.S. Agency REMIC | — | 36,611 | — | 36,611 | ||||||||||||
U.S. Agency MBS | — | 33,376 | — | 33,376 | ||||||||||||
Total securities available for sale | $ | — | $ | 72,245 | $ | — | $ | 72,245 |
December 31, 2011 | ||||||||||||||||
Quoted Prices in
Active Markets for Identical Assets Level 1 | Significant Other Observable Inputs Level 2 | Significant Unobservable Inputs Level 3 | Total at Fair Value | |||||||||||||
Securities available for sale | ||||||||||||||||
Debt securities: | ||||||||||||||||
U.S. Government and federal agencies | $ | — | $ | 13,690 | $ | — | $ | 13,690 | ||||||||
States & political subdivisions | — | 1,795 | — | 1,795 | ||||||||||||
U.S. Agency REMIC | — | 39,038 | — | 39,038 | ||||||||||||
U.S. Agency MBS | — | 18,613 | — | 18,613 | ||||||||||||
Total securities available for sale | $ | — | $ | 73,136 | $ | — | $ | 73,136 |
29 |
Floridian Financial Group, Inc. and Subsidiaries
Note 7. | Fair Values of Financial Instruments (continued) |
Financial Instruments Recorded at Fair Value on a Nonrecurring Basis
The Company may be required, from time to time, to measure certain financial assets and financial liabilities at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period.
The fair values of assets measured at fair value on a nonrecurring basis are as follows at June 30, 2012 and December 31, 2011:
June 30, 2012 | ||||||||||||
(Dollars in Thousands) | Quoted
Prices in Active Markets for Identical Assets Level 1 | Significant
Other Observable Inputs Level 2 | Significant Unobservable Inputs Level 3 | |||||||||
Impaired loans | $ | — | $ | — | $ | 3,860 | ||||||
Other real estate owned | $ | — | $ | — | $ | 3,849 | ||||||
December 31, 2011 | ||||||||||||
(Dollars in Thousands) | Quoted Prices
in Active Markets for Identical Assets Level 1 | Significant Other Observable Inputs Level 2 | Significant Unobservable Inputs Level 3 | |||||||||
Impaired loans | $ | — | $ | — | $ | 5,913 | ||||||
Other real estate owned | $ | — | $ | — | $ | 5,129 |
Provisions for loan losses of $2.3 million and $1.1 million were recorded on impaired loans during the six months ended June 30, 2012 and 2011, respectively.
Write-downs of $166 thousand and $641 thousand were recorded on other real estate owned during the six months ended June 30, 2012 and 2011, respectively.
30 |
Floridian Financial Group, Inc. and Subsidiaries
Note 7. | Fair Values of Financial Instruments (continued) |
Following is a summary of the carrying amounts and approximate fair values of the Company’s financial instruments at June 30, 2012 and December 31, 2011. The fair value estimates presented are based on pertinent information available to management as of June 30, 2012 and December 31, 2011. Although management is not aware of any factors that would significantly affect the estimated fair values, they have not been comprehensively revalued for purposes of these financial statements since the statement of financial condition date and therefore, current estimates of fair value may differ significantly from the amounts disclosed.
June
30, 2012 Fair Value Measurements Using: | ||||||||||||||||
(Dollars in Thousands) | Carrying Amount | Quoted
Price in Active Markets for Identical Assets (Level 1) | Significant
Other Observable Inputs (Level 2) | Significant
Unobservable Inputs (Level 3) | ||||||||||||
Financial assets: | ||||||||||||||||
Cash and due from banks | $ | 6,800 | $ | 6,800 | $ | — | $ | — | ||||||||
Federal funds sold and interest bearing deposits | 16,498 | 16,498 | — | — | ||||||||||||
Available for sale securities | 72,245 | — | 72,245 | — | ||||||||||||
Other investments | 100 | — | — | 100 | ||||||||||||
Loans, net | 281,815 | — | 279,871 | 3,860 | ||||||||||||
Accrued interest receivable | 989 | — | 989 | — | ||||||||||||
Financial liabilities: | ||||||||||||||||
Deposits | $ | 355,378 | $ | — | $ | 356,004 | $ | — | ||||||||
Other borrowings | 13,105 | 13,105 | — | — | ||||||||||||
Accrued interest payable | 64 | — | 64 | — | ||||||||||||
December 31, 2011 Fair Value Measurements Using: | ||||||||||||||||
(Dollars in Thousands) | Carrying Amount | Quoted Price in
Active Markets for Identical Assets (Level 1) | Significant Other
Observable Inputs (Level 2) | Significant Unobservable
Inputs (Level 3) | ||||||||||||
Financial assets: | ||||||||||||||||
Cash and due from banks | $ | 8,930 | $ | 8,930 | $ | — | $ | — | ||||||||
Federal funds sold and interest bearing deposits | 23,917 | 23,917 | — | — | ||||||||||||
Securities held to maturity | 1,002 | — | 1,013 | — | ||||||||||||
Available for sale securities | 73,136 | — | 73,136 | — | ||||||||||||
Other investments | 100 | — | — | 100 | ||||||||||||
Loans, net | 305,088 | — | 301,549 | 5,913 | ||||||||||||
Accrued interest receivable | 1,180 | — | 1,180 | — | ||||||||||||
Financial liabilities: | ||||||||||||||||
Deposits | $ | 393,726 | $ | — | $ | 394,940 | $ | — | ||||||||
Other borrowings | 13,955 | 13,955 | — | — | ||||||||||||
Accrued interest payable | 87 | — | 87 | — |
31 |
Floridian Financial Group, Inc. and Subsidiaries
Note 7. | Fair Values of Financial Instruments (continued) |
Assets measured at fair value on a recurring basis and for which the Company has utilized Level 3 inputs to determine fair value were immaterial at June 30, 2012.
The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company utilized Level 3 inputs to determine fair value:
June 30, 2012 Quantitative Information about Level 3 Fair Value Measurements | |||||||||
(Dollars in Thousands) | Fair Value Estimate | Valuation Techniques | Unobservable Input | Range (Weighted Average) | |||||
Impaired loans | $ | 3,860 | Appraisal of collateral (1) | Appraisal adjustments (2) Estimated selling costs (2) |
0% to -50% (-9.4%) 0% to -11% (-3.8%) | ||||
Other real estate owned and repossessed assets | $ | 3,849 | Appraisal of collateral (1), (3) | Appraisal adjustments (2) Estimated selling costs (2) |
0% to -49% (-14.9%) -10% to -11% (-10.1%) |
(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level 3 inputs which are not identifiable.
(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated selling costs. The range and weighted average of estimated selling costs and other appraisal adjustments are presented as a percent of the appraisal.
(3) Includes qualitative adjustments by management and estimated selling costs.
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Note 8. | New Accounting Pronouncements |
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.” The provisions of ASU No. 2011-04 result in a consistent definition of fair value and common requirements for the measurement of and disclosure about fair value between U.S. GAAP and International Financial Reporting Standards (“IFRS”). The pronouncement developed a single, converged guidance on how to measure fair value and what disclosures to provide concerning fair value measurements. The measurement and disclosure requirements are effective for reporting periods beginning after December 15, 2011 and are applied prospectively.
In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income: Presentation of Comprehensive Income”. This ASU amends existing guidance and eliminated the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity. The amendment requires that comprehensive income be presented in either a single continuous statement or in two separate consecutive statements. The guidance is effective for interim and annual period beginning on or after December 15, 2011. The Company adopted the single continuous statement method for its disclosure method.
In December 2011, the FASB issued ASU No. 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for the Amendments to the Presentation of Reclassifications of the Items Out of Accumulated Other Comprehensive Income in ASU No. 2011-05”. This guidance delays the effective date of the disclosures for only those changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments to allow the FASB time to reconsider whether to require presentation of such adjustments on the face of the financial statements to show the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income. ASU 2011-12 allows entities to continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU No. 2011-05. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12. ASU No. 2011-12 is effective for annual and interim periods beginning on or after December 15, 2011 and is not expected to have a significant impact on our financial statements.
Note 9. | Related Party |
On January 4, 2011, Orange Bank purchased the land, building, and furniture and fixtures associated with the Clermont Branch location from First Team Clermont OB, LLC, a Florida limited liability company (“First Team”). First Team is controlled by W. Warner Peacock, a former director of the Company. First Team holds a note on the land, building, and furniture and fixtures of $1.7 million. The note requires monthly interest payments at 6.5% per annum. The note required a principal reduction of $850 thousand on January 3, 2012 with all outstanding principal and interest due on January 3, 2013.
Note 10. | Regulatory Agreement |
On July 21, 2011, the board of directors of Floridian Bank agreed to approve the Bank Resolution in consultation with their banking regulators. On July 21, 2011 the board of directors of Orange Bank agreed to approve a Bank Resolution and subsequently on July 19, 2012, the board of directors of Orange Bank agreed to adopt a MOU issued by its bank regulator. From a regulatory perspective, a Bank Resolution and a MOU, are nonpublic agreements; however, in the interest of full disclosure, we are summarizing the main obligations of Floridian Bank’s Bank Resolution and Orange Bank’s MOU. The FDIC issues an MOU when it believes a Board Resolution would not adequately address its concerns.
For Floridian Bank, the Bank Resolution includes, among other things, (i) submitting annual comprehensive budget and earnings forecast; (ii) maintaining a Tier 1 leverage capital ratio and total risk-based capital ratio of at least 8% and 12%, respectively; (iii) submitting of a capital contingency plan; (iv) developing plans to reduce and improve certain lines of credit with adverse classification; (v) prohibiting extensions of credit to certain high-risk borrowers; (vi) implementing a plan to reduce exposure to commercial real estate lending; (vii) maintaining an adequate allowance and methodology for loan and lease losses; (viii) submitting certain internal bank policies and reviewing and revising certain internal policies and procedures; and (ix) providing quarterly reports to the Federal Deposit Insurance Company (“FDIC”) and the Florida Office of Financial Regulation (“OFR”) regarding the steps taken to address the foregoing. Additionally, Floridian Bank must receive approval from the FDIC and OFR prior to declaring or paying dividends.
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Floridian Financial Group, Inc. and Subsidiaries
Note 10. | Regulatory Agreement (continued) |
For Orange Bank, the MOU includes, among other things, (i) seeking approval from the FDIC and OFR prior to appointing new directors and executive officers; (ii) enhancing the board of director’s participation in the affairs of Orange Bank; (iii) developing plans to reduce and improve certain loan relationships with adverse classification; (iv) charging off remaining assets classified as “Loss”; (v) prohibiting extensions of credit to certain high-risk borrowers; (vi) submitting of a new business plan and annual budgets and earnings forecasts; (vii) achieving and maintaining, by September 30, 2012, a Tier 1 leverage capital ration and risk-based capital ratio of at least 8% and 12% respectively; and (viii) providing quarterly reports to the FDIC and OFR regarding the steps taken to address the foregoing. Orange Bank must also receive approval from the FDIC and OFR prior to declaring or paying dividends.
The Bank Resolution adopted by Floridian Bank and MOU adopted by Orange Bank and the restrictions imposed thereby on each bank will remain in effect unless modified or terminated by the Bank’s regulators. Since entering into the Bank Resolution and MOU, we have been actively pursuing the corrective actions. We intend to continue to take the actions necessary to comply with the requirements of the Bank Resolution and MOU and implement the submitted plans successfully, although we may be unable to do so. As of June 30, 2012, Floridian Bank’s Tier 1 leverage capital ratio and total risk-based capital ratio were approximately 9.0% and 12.7%, respectively; meeting all regulatory requirements. The Company recently received notice from its regulators that a previous capital contribution from the Company to Floridian Bank in the form of BOLI was being disallowed for regulatory capital purposes and, therefore, is not reflected in the calculation.
As of June 30, 2012, Orange Bank exceeded its Tier 1 leverage capital ratio requirement but was below the required total risk-based capital ratio. Orange Bank’s Tier 1 leverage capital ratio and total risk-based capital ratio at June 30, 2012 were approximately 8.2% and 11.9%, respectively. The Company is reviewing its alternatives for increasing the capital of Orange Bank to meet applicable regulatory requirements by September 30, 2012.
On October 20, 2011, the Company’s board of directors agreed to adopt certain board resolutions (the “FRB Resolutions”) in consultation with the Federal Reserve Bank of Atlanta (the “FRB”). The FRB Resolutions require, among other things, that the Company seek approval from the FRB prior to incurring any debt, declaring or paying any dividends, reducing its capital position (e.g., through the purchase of treasury shares), or making distributions on subordinated debentures or trust preferred securities. The FRB Resolutions approved by the Company and the restrictions imposed thereby on the Company will remain in effect until terminated by the FRB. We intend to take the actions necessary to comply with the requirements of the FRB Resolutions.
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Item 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following management’s discussion and analysis provides supplemental information, which sets forth the major factors that have affected our financial condition and results of operations during the periods included in the accompanying consolidated financial statements and should be read in conjunction with the Consolidated Financial Statements and related notes. The analysis is divided into subsections entitled “Business Overview,” “Results of Operations,” “Market Risk,” “Financial Condition,” “Liquidity,” “Capital Resources,” “Off-Balance Sheet Arrangements,” and “Critical Accounting Policies.” Throughout this section, Floridian Financial Group, Inc. and subsidiaries, collectively, are referred to as “Company,” “we,” “us,” or “our.”
CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including this management’s discussion and analysis 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 the Introductory Note and Item 1A. Risk Factors of our Annual Report on Form 10-K, as updated from time to time, and in our other filings made from time to time with the SEC after the date of this report.
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.
Business Overview
About Our Business
We are a multi-bank holding company headquartered in Lake Mary, Florida, a community situated between Orlando and Daytona Beach, Florida. We were incorporated on September 8, 2005 as the bank holding company of Floridian Bank, a Florida chartered commercial bank. We commenced operations, along with Floridian Bank, on March 20, 2006. From 2006 to 2008, we experienced periods of rapid growth. On June 30, 2008, we closed a merger transaction in which Orange Bank of Florida, a Florida chartered commercial bank, became our wholly-owned subsidiary. The transaction was treated as a merger of equals where each shareholder of Orange Bank received 1.04 shares of our common stock. At the time of the merger, Orange Bank had approximately $196 million in assets, including approximately $121 million in loans, and approximately $176 million in deposits. In 2009, we began a process of slowing our growth and preserving capital.
Both Floridian Bank and Orange Bank are full-service commercial banks, providing a wide range of business and consumer financial services in our target marketplace, which is comprised primarily of Orange, Seminole, Citrus, Lake, Flagler, and Volusia Counties in Florida. Floridian Bank is headquartered in Daytona Beach, Florida, with a primary service area in Flagler and Volusia Counties. Orange Bank is headquartered in Orlando, Florida, with a primary service area in Orange, Seminole, Lake and Citrus Counties. Collectively, our Banks operate 10 banking offices.
The Banks offer commercial and retail banking services with an emphasis on commercial and commercial real estate lending, particularly to the medical services industry. As of June 30, 2012, we had total assets of $410.8 million, deposits of $355.4 million, total gross loans of $289.6 million and total shareholders’ equity of $40.5 million.
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Our principal executive offices are located at 175 Timacuan Boulevard, Lake Mary, Florida 32746. The telephone number at that office is (407) 321-3233.
Regulatory Matters
As described in Note 10 to our consolidated financial statements, the Company and Floridian Bank have adopted the Bank Resolution and FRB Resolution, respectively and Orange Bank adopted the MOU in consultation with their regulators. Pursuant to these resolutions, we have agreed to preserve capital by agreeing to place restrictions on our ability to declare and pay dividends, issue debt, repurchase shares of stock, or make other distributions. The Banks, among other things, have agreed to maintain heightened capital ratios. Orange Bank has until September 30, 2012, to be in compliance with the heightened capital ratios. Our original plan to raise Orange Bank’s capital ratios was to merge the Banks; however, we have withdrawn our application to merge the Banks. We are now exploring other alternatives to meet the heightened capital ratios. At June 30, 2012, Orange Bank had a Tier 1 leverage ratio of 8.2% and a total risk based capital ratio of 11.9%. See Note 10 for a further discussion.
Results of Operations
CONDENSED SUMMARY OF EARNINGS | ||||||||||||||||
(Dollars in Thousands, | For
the three months ended June 30, | For
the six months ended June 30, | ||||||||||||||
except per share data) | 2012 | 2011 | 2012 | 2011 | ||||||||||||
Interest income | $ | 3,807 | $ | 4,247 | $ | 8,040 | $ | 8,519 | ||||||||
Interest expense | 665 | 1,067 | 1,401 | 2,133 | ||||||||||||
Net interest income | 3,142 | 3,180 | 6,639 | 6,386 | ||||||||||||
Provision for loan losses | 286 | 30 | 1,416 | 1,197 | ||||||||||||
Noninterest income | 1,124 | 370 | 1,625 | 686 | ||||||||||||
Noninterest expense | 3,080 | 3,518 | 5,805 | 7,058 | ||||||||||||
Income before income taxes | 900 | 2 | 1,043 | (1,183 | ) | |||||||||||
Income tax expense | — | 175 | — | 175 | ||||||||||||
Net profit (loss) | $ | 900 | $ | (173 | ) | $ | 1,043 | $ | (1,358 | ) | ||||||
Basic net profit (loss) per share | $ | 0.15 | $ | (0.03 | ) | $ | 0.17 | $ | (0.22 | ) | ||||||
Diluted net profit (loss) per share | $ | 0.15 | $ | (0.03 | ) | $ | 0.17 | $ | (0.22 | ) | ||||||
Selected operating ratios | ||||||||||||||||
Return on average assets | 0.86 | % | (0.15 | )% | 0.49 | % | (0.61 | )% | ||||||||
Return on average equity | 8.88 | % | (1.75 | )% | 5.16 | % | (6.87 | )% | ||||||||
Dividend payout ratio | N/A | N/A | N/A | N/A | ||||||||||||
Equity to assets ratio | 9.87 | % | 8.21 | % | 9.87 | % | 8.21 | % |
The net profit for the three months ended June 30, 2012 was $900 thousand compared to a $173 thousand net loss for the same period in 2011. The improvement was principally due to a $772 thousand gain on the sale of securities and a 12.5% decrease in noninterest expense.
For the six months ended June 30, 2012 net profit was $1.0 million compared to $1.4 million loss for the same period in 2011. The improvement was principally due a 34.4% decrease in salary expense from $2.8 million for the six months ended June 30, 2011, to $1.8 million for the six months ended June 30, 2012. The reduction in salary expense was a combination of the consolidation of senior executive positions in 2011 and a$369 thousand adjustment to deferred compensation related to the resignation of Charlie Brinkley, our former President and CEO, in September 2011. As of the resignation date, Mr. Brinkley was 30% vested in the accrued balance of his salary continuation agreement.
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Net Interest Income
Our profitability is dependent to a large extent on net interest income, which is the difference between the interest received on earning assets (such as loans and securities) and the interest paid on interest bearing liabilities (principally deposits and borrowings). Our principal interest earning assets are loans, investment securities, and federal funds sold. Interest bearing liabilities primarily consist of certificates of deposit, interest bearing checking accounts (“NOW accounts”), savings deposits, and money market accounts. Funds attracted by these interest bearing liabilities, as well as noninterest bearing deposits, are invested in interest-earning assets. Accordingly, net interest income depends upon the volume of average interest-earning assets and average interest bearing liabilities and the interest rates earned or paid on them.
Our net interest income is impacted by the market rates of interest as influenced by the Federal Reserve’s monetary policy. We have seen a narrowing of margins over the last several year and with the Federal Reserve’s announcement to keep short-term interest rates at near zero through 2013 we expect this trend to continue. We believe our service commitment to our customers, however, will enable us to continue to attract deposits and make loans at rates that will not significantly deteriorate our margins.
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The following table reflects the components of net interest income for the three month periods ended June 30, 2012 and 2011. It sets forth, (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):
AVERAGE BALANCES AND INTEREST RATES | ||||||||||||||||||||||||
Three months ended June 30, | ||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||
(Dollars in Thousands) | Average Balance | Interest | Rate | Average Balance | Interest | Rate | ||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
Loans, Net(1)(2) | $ | 292,171 | $ | 3,551 | 4.89 | % | $ | 307,451 | $ | 3,867 | 5.04 | % | ||||||||||||
Investment Securities | 73,394 | 239 | 1.30 | 51,916 | 345 | 2.66 | ||||||||||||||||||
Federal Funds Sold | 19,858 | 12 | 0.24 | 51,725 | 30 | 0.23 | ||||||||||||||||||
Deposits at interest with banks | 2,795 | 5 | 0.72 | 3,158 | 5 | 0.64 | ||||||||||||||||||
Total Earning Assets | 388,218 | 3,807 | 3.94 | % | 414,250 | 4,247 | 4.11 | % | ||||||||||||||||
Other Assets | 34,790 | 43,720 | ||||||||||||||||||||||
Total Assets | $ | 423,008 | $ | 457,970 | ||||||||||||||||||||
LIABILITIES | ||||||||||||||||||||||||
Savings, NOW and Money Market | $ | 148,821 | $ | 156 | 0.42 | % | $ | 159,423 | $ | 360 | 0.91 | % | ||||||||||||
Time Deposits | 127,502 | 481 | 1.52 | 149,568 | 642 | 1.72 | ||||||||||||||||||
Total Interest Bearing Deposits | 276,323 | 637 | 0.93 | 308,991 | 1,002 | 1.30 | ||||||||||||||||||
Other Borrowings | 13,680 | 28 | 0.82 | 7,956 | 65 | 3.28 | ||||||||||||||||||
Total Interest Bearing Liabilities | 290,003 | 665 | 0.92 | % | 316,947 | 1,067 | 1.35 | % | ||||||||||||||||
Noninterest Bearing Deposits | 90,563 | 98,914 | ||||||||||||||||||||||
Other Liabilities | 2,049 | 2,569 | ||||||||||||||||||||||
Total Liabilities | 382,615 | 418,430 | ||||||||||||||||||||||
Total Shareholders’ Equity | 40,393 | 39,540 | ||||||||||||||||||||||
Total Liabilities and Equity | $ | 423,008 | $ | 457,970 | ||||||||||||||||||||
Interest Rate Spread | 3.02 | % | 2.76 | % | ||||||||||||||||||||
Net Interest Income | $ | 3,142 | $ | 3,180 | ||||||||||||||||||||
Net Interest Margin | 3.26 | % | 3.08 | % |
(1) | Average balances include nonaccrual loans, and are net of unearned loan fees of $358 and $875 at June 30, 2012 and 2011, respectively. |
(2) | Interest income includes fees on loans of $9 and $13 for the three months ended June 30, 2012 and 2011, respectively. |
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The following table reflects the components of net interest income for the six month periods ended June 30 2012 and 2011:
AVERAGE BALANCES AND INTEREST RATES | ||||||||||||||||||||||||
Six months ended June 30, | ||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||
(Dollars in Thousands) | Average Balance | Interest | Rate | Average Balance | Interest | Rate | ||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
Loans, Net(1)(2) | $ | 298,888 | $ | 7,467 | 5.02 | % | $ | 310,875 | $ | 7,754 | 5.03 | % | ||||||||||||
Investment Securities | 73,137 | 539 | 1.47 | 52,903 | 705 | 2.67 | ||||||||||||||||||
Federal Funds Sold | 20,775 | 23 | 0.22 | 43,240 | 51 | 0.24 | ||||||||||||||||||
Deposits at interest with banks | 2,536 | 11 | 0.87 | 3,038 | 9 | 0.60 | ||||||||||||||||||
Total Earning Assets | 395,336 | 8,040 | 4.09 | % | 410,056 | 8,519 | 4.19 | % | ||||||||||||||||
Other Assets | 35,773 | 41,545 | ||||||||||||||||||||||
Total Assets | $ | 431,109 | $ | 451,601 | ||||||||||||||||||||
LIABILITIES | ||||||||||||||||||||||||
Savings, NOW and Money Market | $ | 151,168 | $ | 322 | 0.43 | % | $ | 163,467 | $ | 699 | 0.86 | % | ||||||||||||
Time Deposits | 135,596 | 1,021 | 1.51 | 143,019 | 1,304 | 1.84 | ||||||||||||||||||
Total Interest Bearing Deposits | 286,764 | 1,343 | 0.94 | 306,486 | 2,003 | 1.32 | ||||||||||||||||||
Other Borrowings | 13,399 | 58 | 0.87 | 8,122 | 130 | 3.23 | ||||||||||||||||||
Total Interest Bearing Liabilities | 300,163 | 1,401 | 0.94 | % | 314,608 | 2,133 | 1.37 | % | ||||||||||||||||
Noninterest Bearing Deposits | 88,349 | 94,561 | ||||||||||||||||||||||
Other Liabilities | 2,183 | 2,592 | ||||||||||||||||||||||
Total Liabilities | 390,695 | 411,761 | ||||||||||||||||||||||
Total Shareholders’ Equity | 40,414 | 39,840 | ||||||||||||||||||||||
Total Liabilities and Equity | $ | 431,109 | $ | 451,601 | ||||||||||||||||||||
Interest Rate Spread | 3.15 | % | 2.82 | % | ||||||||||||||||||||
Net Interest Income | $ | 6,639 | $ | 6,386 | ||||||||||||||||||||
Net Interest Margin | 3.38 | % | 3.14 | % |
(1) | Average balances include nonaccrual loans, and are net of unearned loan fees of $324 and $456 at June 30, 2012 and 2011, respectively. |
(2) | Interest income includes fees on loans of $23 and $26 for the six months ended June 30, 2012 and 2011, respectively. |
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Net interest income for the six months ended June 30, 2012 increased $253 thousand, or 4.0%, from $6.4 million in 2011 to $6.6 million in 2012. The increase was primarily due to a 33.0% decrease in interest paid on interest bearing deposits due to reduced balances and a reduction in rates coupled with a 55.4% reduction of interest paid on other borrowings. The average interest rate on other borrowings decreased from 3.23% to 0.87% as June 30, 2011 and 2012, respectively. Average noninterest bearing deposits decreased by 6.6% to $88.3 million at June 30, 2012 compared to $94.6 million at June 30, 2011.
The following table sets forth certain information regarding changes in our interest income and interest expense for the quarter ended June 30, 2012 compared to the quarter ended June 30, 2011. For each category of interest earning assets and interest bearing liabilities, information is provided on changes attributable to changes in interest rate and changes in the volume. Changes in both volume and rate have been allocated based on the proportionate absolute changes in each category.
RATE VOLUME ANALYSIS | ||||||||||||||||||||||||||||
Three months ended | Six months ended | |||||||||||||||||||||||||||
June 30, 2012 and 2011 | June 30, 2012 and 2011 | |||||||||||||||||||||||||||
Total | Due to average | Total | Due to average | |||||||||||||||||||||||||
(Dollars in Thousands) | Change | Volume | Rate | Change | Volume | Rate | Days | |||||||||||||||||||||
Interest earning assets | ||||||||||||||||||||||||||||
Loans, net | $ | (316 | ) | $ | (197 | ) | $ | (119 | ) | $ | (287 | ) | $ | (333 | ) | $ | 5 | $ | 41 | |||||||||
Investment securities | (106 | ) | 143 | (249 | ) | (166 | ) | 270 | (436 | ) | — | |||||||||||||||||
Federal funds sold | (18 | ) | (19 | ) | 1 | (28 | ) | (27 | ) | (1 | ) | — | ||||||||||||||||
Other | — | (1 | ) | 1 | 2 | (2 | ) | 4 | — | |||||||||||||||||||
Total | $ | (440 | ) | $ | (74 | ) | $ | (366 | ) | $ | (479 | ) | $ | (92 | ) | $ | (428 | ) | $ | 41 | ||||||||
Interest bearing liabilities | ||||||||||||||||||||||||||||
Savings, NOW, money market | $ | (204 | ) | $ | (24 | ) | $ | (180 | ) | $ | (377 | ) | $ | (53 | ) | $ | (326 | ) | $ | 2 | ||||||||
Certificates of deposit | (161 | ) | (95 | ) | (66 | ) | (283 | ) | (69 | ) | (220 | ) | 6 | |||||||||||||||
Short term borrowings | (37 | ) | 47 | (84 | ) | (72 | ) | 85 | (157 | ) | — | |||||||||||||||||
Total | $ | (402 | ) | $ | (72 | ) | $ | (330 | ) | $ | (732 | ) | $ | (37 | ) | $ | (703 | ) | 8 | |||||||||
Changes in net interest income | $ | (38 | ) | $ | (2 | ) | $ | (36 | ) | $ | 253 | $ | (55 | ) | $ | 275 | $ | 33 |
Provision for Loan Losses
The allowance for loan losses is a provision for loan losses charged against net interest income. Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely. The allowance is an amount that management believes is adequate to absorb losses inherent in the loan portfolio, based on evaluations of the collectability of loans, industry historical loss experience, current economic conditions, portfolio mix, and other factors. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions.
Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. A loan is impaired when it is probable the creditor will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement.
As a direct result of these factors and analyses, the loan loss provision was $286 thousand for the three months ended June 30, 2012 compared to $30 thousand for the same period in 2011. For the six months ended June 30, 2012 the loan loss provision was $1.4 million compared to $1.2 million for the same period in 2011. Past due loans decreased by 60.4% from $9.3 million at December 31, 2011 to $3.7 million at June 30, 2012. Our focus on restructuring our credit function and actively monitoring the loan portfolio resulted in loans 30 to 59 days past due decreasing to $36 thousand from $1.9 million and past due 60 days and over decreasing to $3.7 million at June 30, 2012 compared to$7.4 million at December 31, 2011. Past due loans, as a percentage of total loans, decreased to 1.3% at June 30, 2012, compared to 2.4% at December 31, 2011. Loans categorized as substandard decreased 11.4% to $19.1 million at June 30, 2012. As of June 30, 2012, 90.8% of the portfolio was categorized as pass compared to 87.8% at December 31, 2011.
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Noninterest Income
Following is a schedule of noninterest income:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
(Dollars in Thousands) | 2012 | 2011 | 2012 | 2011 | ||||||||||||
Loan fee income | $ | 12 | $ | 13 | $ | 23 | $ | 26 | ||||||||
Service charges on deposit accounts | 162 | 164 | 319 | 322 | ||||||||||||
Cash surrender value – life insurance | 75 | 84 | 160 | 169 | ||||||||||||
Other | 103 | 67 | 197 | 118 | ||||||||||||
Gain on sale of assets | — | 42 | 17 | 51 | ||||||||||||
Gain on sale of securities | 772 | — | 909 | — | ||||||||||||
Totals | $ | 1,124 | $ | 370 | $ | 1,625 | $ | 686 |
For the three months ended June 30, 2012, noninterest income increased to $1.1 million from $370 thousand for the same period in 2011. The increase was due to a $772 thousand gain on the sale of securities compared to a $42 gain on the sale of assets for the same period in 2011.
Total noninterest income of $1.6 million for the six months ended June 30, 2012, was an increase of $939 thousand or 136.9% from the same period in 2011. The increase was due to a $909 thousand gain on the sale of securities compared to $0 in 2011.
Noninterest Expense
Following is a schedule of noninterest expense:
Three
months ended June 30, | Six
months ended June 30, | |||||||||||||||
(Dollars in Thousands) | 2012 | 2011 | 2012 | 2011 | ||||||||||||
Salaries and employee benefits | $ | 1,276 | $ | 1,654 | $ | 2,230 | $ | 3,328 | ||||||||
Occupancy and equipment expense | 709 | 681 | 1,356 | 1,406 | ||||||||||||
FDIC insurance | 154 | 158 | 339 | 382 | ||||||||||||
Data processing, software and communications | 397 | 359 | 785 | 734 | ||||||||||||
Other real estate expense | 152 | 177 | 336 | 217 | ||||||||||||
Professional fees | 214 | 253 | 439 | 495 | ||||||||||||
Credit and collection expenses | 30 | 82 | 45 | 173 | ||||||||||||
Core deposit intangible amortization | 48 | 48 | 96 | 96 | ||||||||||||
Other operating expenses | 100 | 106 | 179 | 227 | ||||||||||||
Totals | $ | 3,080 | $ | 3,518 | $ | 5,805 | $ | 7,058 |
For the three months ended June 30, 2012, noninterest expense decreased 12.5% to $3.1 million compared to $3.5 million for the three months ended June 30, 2011. The decrease was due a $378 thousand decrease in salaries and benefits related to the deduction in staff during 2011 through both the closing of several branches and the elimination of positions.
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Total noninterest expense of $5.8 million for the six months ended June 30, 2012 decreased $1.3 million, or 17.8%, from the same period in 2011. The decrease was due to the elimination and combining of senior executive positions in 2011 and the reversal of deferred compensation expense, resulting in a 33.0% or $1.1 million reduction in salaries and benefits costs and the closing of two branches at the end of March 2011 resulting in a $50 thousand, or 3.6%, reduction in occupancy and equipment expense. FDIC insurance decreased $43 thousand, or 11.3%, due to a change in the way the premiums are calculated and expensed to the Banks coupled with lower deposit balances. Other real estate expense increased by $119 thousand primarily due to the write-down of properties held for sale.
Income Taxes
We file consolidated tax returns. Having incurred annual operating losses since our inception in 2006, we have accumulated a net tax benefit over the past four years. We have recorded a valuation allowance to offset the deferred tax assets associated with the net operating loss carry forwards generated by our net losses. Management determined no additional valuation allowance was required and based on their evaluation of the deferred tax benefit and losses incurred, elected to eliminate the carrying value of the deferred asset account. The Company, however, retains the tax benefit should it be needed in future periods. We did not recognize an income tax benefit or expense for the quarter ended June 30, 2012.
Market Risk
Market risk refers to potential losses arising from changes in interest rates, foreign exchange rates, equity prices and commodity prices. We are primarily exposed to interest rate risk inherent in our lending and deposit taking activities as a financial intermediary. To succeed in this capacity, we offer an extensive variety of financial products to meet the diverse needs of our customers. These products sometimes contribute to interest rate risk for us when product groups do not complement one another. For example, depositors may want short-term deposits while borrowers desire long-term loans. Changes in market interest rates may also result in changes in the fair value of our financial instruments, cash flows, and net interest income.
Interest rate risk is comprised of repricing risk, basis risk, yield curve risk, and options risk. Repricing risk arises from differences in the cash flow or repricing between asset and liability portfolios. Basis risk arises when asset and liability portfolios are related to different market rate indexes, which do not always change by the same amount. Yield curve risk arises when asset and liability portfolios are related to different maturities on a given yield curve; when the yield curve changes shape, the risk position is altered. Options risk arises from “embedded options” within asset and liability products because some borrowers have the option to prepay their loans when rates fall while some depositors can redeem their certificates of deposit early when rates rise.
We have established an Asset/Liability Committee (“ALCO”) for each Bank, which are responsible for each Bank’s interest rate risk management. We have implemented a sophisticated asset/liability model at both Banks to measure interest rate risk. Interest rate risk measures include earnings simulation, economic value of equity (“EVE”) and gap analysis. We do not use derivative financial instruments for market risk management purposes.
Gap analysis and EVE are static measures that do not incorporate assumptions regarding future business. Gap analysis, while a helpful diagnostic tool, displays cash flows for only a single rate environment. EVE’s long-term horizon helps identify changes in optionality and longer-term positions. However, EVE’s liquidation perspective does not translate into the earnings-based measures that are the focus of managing and valuing a going concern. Net interest income simulations explicitly measure the exposure to earnings from changes in market rates of interest. Our current financial position is combined with assumptions regarding future business to calculate net interest income under various hypothetical rate scenarios. The Banks’ ALCO review earnings simulations over the ensuing 12 months under various interest rate scenarios. Reviewing these various measures provides us with a reasonably comprehensive view of our interest rate risk profile.
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The following gap analysis compares the difference between the amount of interest earning assets (“IEA”) and interest bearing liabilities (“IBL”) subject to repricing over a period of time. A ratio of more than one indicates a higher level of repricing assets over repricing liabilities for the time period. Conversely, a ratio of less than one indicates a higher level of repricing liabilities over repricing assets for the time period. As indicated in our Gap Analysis table, our one-year cumulative gap at June 30, 2012, was a negative 14.41% compared to a negative 12.55% at December 31, 2011. The change in our one-year cumulative gap is primarily due to long-term time deposits maturing over the next 12 months.
GAP ANALYSIS | ||||||||||||||||
Within | 4 To 6 | 7 To 12 | Total | |||||||||||||
(Dollars in Thousands) | 3 Months | Months | Months | 1 Year | ||||||||||||
Interest Earning Assets (IEA) | ||||||||||||||||
Loans | $ | 142,170 | $ | 5,042 | $ | 16,282 | $ | 163,494 | ||||||||
Investment Securities | 2,054 | 1,973 | 3,723 | 7,750 | ||||||||||||
Federal funds sold | 3,825 | — | — | 3,825 | ||||||||||||
Other investments | 11,573 | — | — | 11,573 | ||||||||||||
Total | $ | 159,622 | $ | 7,015 | $ | 20,005 | $ | 186,642 | ||||||||
Interest Bearing Liabilities (IBL) | ||||||||||||||||
Savings, NOW, Money Market | $ | 144,920 | $ | — | $ | — | $ | 144,920 | ||||||||
Time deposits | 47,490 | 18,424 | 21,883 | 87,797 | ||||||||||||
Other borrowings | 12,255 | — | 850 | 13,105 | ||||||||||||
Total | $ | 204,665 | $ | 18,424 | $ | 22,733 | $ | 245,822 | ||||||||
Period Gap | $ | (45,043 | ) | $ | (11,409 | ) | $ | (2,728 | ) | $ | (59,180 | ) | ||||
Cumulative Gap | $ | (45,043 | ) | $ | (56,452 | ) | $ | (59,180 | ) | |||||||
Cumulative Gap / Total Assets | (10.96 | )% | (13.74 | )% | (14.41 | )% | ||||||||||
IEA / IBL (Cumulative) | 78 | % | 75 | % | 76 | % |
Financial Condition
Lending Activity
The loan portfolio consists principally of loans to individuals and small- and medium-sized businesses within our primary market area of Central Florida. The table below shows our loan portfolio composition:
(Dollars in Thousands) | June 30, 2012 | December 31, 2011 | ||||||
Commercial | $ | 42,890 | $ | 44,833 | ||||
Commercial real estate | 223,620 | 241,648 | ||||||
Residential real estate | 7,736 | 8,542 | ||||||
Consumer loans | 15,374 | 16,745 | ||||||
Total loans | 289,620 | 311,768 | ||||||
Less: Allowance for loan losses | 7,678 | 6,566 | ||||||
Less: Unearned fees | 127 | 114 | ||||||
Net loans | $ | 281,815 | $ | 305,088 |
Total loans decreased by $22.1 million during the first six months of 2012 due to the payoff of several large loans. During the quarter, $132 thousand was transferred to other real estate owned, write-downs totaled $54 thousand, and approximately $38.0 million in net pay downs and payoffs. These decreases were offset by new loans of $16.0 million. There were approximately $10.1 million in nonperforming loans at June 30, 2012.
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Real estate and related activities have slowed significantly in our market area, local unemployment rates remain above the national average, and real estate and other asset prices have declined appreciably. This has resulted in a weak loan demand in 2012 and 2011. Although the Company has seen an increase in loan demand in 2012, it has been offset by pay-downs in the portfolio.
Investment Activity
Investment activities serve to enhance the overall yield on interest earning assets while supporting interest rate sensitivity and liquidity positions. Securities purchased with the intent and ability to retain until maturity are categorized as securities held to maturity and carried at amortized cost. All other 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 shareholders’ equity. A change in the value of securities held to maturity could also negatively affect the level of shareholders’ equity if there was a decline in the underlying creditworthiness of the issuers and an other-than-temporary impairment is deemed or a change in our intent and ability to hold the securities to maturity.
As of June 30, 2012, securities totaling $72.2 million were classified as available for sale. During the six months ended June 30, 2012, securities available for sale decreased by $1.5 million as a result of lower deposit balances.
Deposits and Other Borrowings
As a bank holding company, our primary source of funds is deposits. Typically, deposits are provided by businesses, municipalities, and individuals located within the markets served by our subsidiaries. In addition, we accept a limited amount of brokered deposits.
Total deposits decreased $38.3 million to $355.4 million at June 30, 2012, compared to $393.7 million at December 31, 2011, due to a decision to reduce brokered deposits and pay lower interest rates on certificates of deposit. Core deposits, which exclude time deposit, increased $4.3 million to $238.2 million at June 30, 2012 from $233.9 million at December 31, 2011. Time deposits decreased to $117.1 million from $159.9 million. The decrease in time deposits is attributable to an $18.6 million reduction in brokered deposits with the remaining decrease attributable to customers moving time deposits to the Banks’ less restrictive core deposit accounts due to minimal differences in interest rates.
Other borrowings, made up of short- and long-term borrowings, decreased by $850 thousand to $13.1 million at June 30, 2012 compared to a balance of $14.0 million at December 31, 2011 due to a scheduled principal reduction on the Clermont branch loan. As of June 30, 2012, other borrowings were approximately 2.1% of our total shareholders’ equity.
Liquidity
Our goal in liquidity management is to satisfy the cash flow requirements of depositors and borrowers as well as our operating cash needs with cost-effective funding. Our Board of Directors has established an Asset/Liability Policy in order to achieve and maintain earnings performance consistent with long-term goals while maintaining acceptable levels of interest rate risk, a “well-capitalized” balance sheet, and adequate levels of liquidity. This policy designates each Bank’s ALCO as the body responsible for meeting these objectives. The ALCO, which includes members of executive management, reviews liquidity on a periodic basis and approves significant changes in strategies that affect balance sheet or cash flow positions.
The primary source of liquidity is deposits provided by commercial and retail customers. The Banks attract these deposits by offering an array of products designed to match customer needs and priced comparable to our competitors. Deposits can be very price sensitive; therefore, we believe that fluctuating deposit offering rates to the top of the market would generate a larger inflow of funds. In addition to local market deposits, the Banks have access to national brokered certificates of deposit markets as well as deposit subscription services. The Banks use these alternative sources of deposits to supplement deposits particularly when the rates are lower than the local market. These sources of deposit are limited by our policies to 25% of assets. Further, access to these brokered deposits is limited by regulation to banks that meet or exceed “well capitalized” definitions. In the event that the Company would fall below “well capitalized” levels, regulators will not permit any additional brokered deposits and would impose deposit rate restrictions not to exceed published national rates. Overall deposit levels are monitored on a constant basis as are liquidity policy levels, which must be maintained at a minimum of 14% of total deposits. Sources of these liquidity levels include cash and due from banks, short-term investments such as federal funds sold, and our investment portfolio, which can also be used as collateral for short-term borrowings. Alternative sources of funds include unsecured federal funds lines of credit through correspondent banks. The Banks have established contingency plans in the event of extraordinary fluctuations in cash resources.
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Operating Activities
Cash flows from operating activities primarily include net income (loss), adjusted for items that did not impact cash. Net cash provided by operating activities increased by $3.4 million to $4.9 million for the six months ended June 30, 2012 compared to $1.5 million for the six months ended June 30, 2011. The improvement was due to the Company achieving a $1.0 million profit for the six months ended June 30, 2012 compared to a loss of $1.4 million for the six months ended June 30, 2011.
Investing Activities
Cash used in investing activities reflects the impact of loans and investments acquired for our interest-earning asset portfolios, as well as cash flows from asset sales and the impact of acquisitions. For the six months ended June 30, 2012, we had net cash flows provided by investing activities of $24.7 million compared to $3.3 million for the same period in 2011. The change in cash flows from investing activities was due to a decrease in net loans of $21.7 million. The Company also had $1.2 million in proceeds from the sale of other real estate owned.
Financing Activities
Cash flows from financing activities include transactions and events whereby cash is obtained from depositors, creditors or investors. For the six months ended June 30, 2012, we had net cash flows used in financing activities of $39.2 million, compared to net cash flows provided by financing activities of $28.6 million for the six months ended June 30, 2011. The change in cash flows from financing activities was primarily due to a $38.3 million decrease in net deposit growth for the six months ended June 30, 2012 compared to a $27.4 million decrease in net deposit growth for the six months ended June 30, 2011. In 2011, the Company offered a special promotion to increase time deposit balances compared to being less competitive in 2012.
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 provide stability to current operations and to promote public confidence. As of June 30, 2012, the Banks exceeded the requirements contained in the applicable regulations, policies and directives pertaining to capital adequacy to be classified as “well capitalized” and are unaware of any material violation or alleged violation of these regulations, policies or directives; however, the poor loan portfolio performance and the related impact on earnings have deteriorated our capital position. Our intent is to strengthen our capital position, and both management and the Board of Directors have had exploratory discussions to determine the availability and cost of additional capital. As of June 30, 2012, Orange Bank’s Tier 1 leverage and total capital to risk weighted assets ratio did not meet the ratios as required by its MOU and has until September 30, 2012 to comply. Based on these discussions and the need to comply with the MOU, the Company may need to pursue another capital offering within the next 12 months.
Key to our efforts to maintain existing capital adequacy is the need for the Banks to become profitable by focusing on increasing core earnings and decreasing the levels of adversely classified and nonperforming assets. Management is continuing to pursue a number of strategic alternatives to improve the core earnings of the Banks and to reduce the level of classified assets such as consolidating the Banks’ charters and redefining our credit organization. While we have recently withdrawn our application to merge the Banks, we expect to submit a new application to merge the Banks when Orange Bank’s capital ratios exceed the heightened minimum ratios. Current market conditions for banking institutions, the overall uncertainty in financial markets and the Banks’ high level of nonperforming assets are impediments to the success of these strategies. If current adverse market factors continue for a prolonged period of time, new adverse market factors emerge, and/or the Banks are unable to successfully execute plans in a sufficient and timely manner, it could have a material adverse effect on the Banks’ business, results of operations and financial position, as well as result in further supervisory actions from our regulators.
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We offer a stock purchase plan to our employees and directors to purchase shares of our common stock at fair market value. In 2011, employees purchased 911 shares valued at $5.50 per share, which were issued in March 2012. In 2010, employees purchased 1,319 shares valued at $10.00 per share, which were issued in March 2011.
In 2012, we filed a Form 15 to deregister our common stock under the Securities Exchange Act of 1934 (the “Exchange Act”), as amended. We expect that our filing obligations under the Exchange Act will be automatically suspended once we file our annual report on Form 10-K for the current fiscal year. We would expect that “going dark” will not have a material impact on our ability to raise capital because our stock is not listed on an exchange and is relatively illiquid.
Holders of our common stock are entitled to receive dividends when, as and if declared by our Board of Directors out of funds legally available for that purpose. We have not paid any dividends to our holders of common stock in the past and we currently do not intend to pay dividends on our common stock in the near future. In the event that we decide to pay dividends, there are a number of restrictions on our ability to do so.
For a foreseeable period of time, our principal source of cash revenues will be dividends paid by the Banks to us with respect to their common stock. There are certain restrictions on the payment of these dividends imposed by federal banking laws, regulations and authorities. See the sections of our Annual Report on Form 10-K captioned “Item 1. Business-Regulatory Considerations – The Banks – Dividends”.
As described in Note 10, we have adopted certain board resolutions and a MOU in consultation with our regulators. Pursuant to these resolutions and MOU, we have agreed to preserve capital by agreeing to place restrictions on our ability to declare and pay dividends, issue debt, repurchase shares of stock, or make other distributions. See Note 10 for further discussion.
Off-Balance Sheet Arrangements
We do not currently engage in the use of derivative instruments to hedge interest rate risks. However, we are a party to financial instruments with off-balance sheet risks in the normal course of business to meet the financing needs of our customers.
At June 30, 2012, we had approximately $50.8 million in commitments to extend credit and $2.6 million in standby letters of credit. Commitments to extend credit are agreements to lend to a customer so 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 many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. We use the same credit policies in establishing commitments and issuing letters of credit as we do for on-balance sheet instruments.
If commitments arising from these financial instruments continue to require funding at historical levels, management does not anticipate that such funding will adversely impact our ability to meet on-going obligations. In the event these commitments require funding in excess of historical levels, management believes current liquidity, available lines of credit from the Federal Home Loan Bank, investment security maturities and our revolving credit facility provide a sufficient source of funds to meet these commitments.
Critical Accounting Policies
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off.
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The Banks began increasing its historical net charge off rate from a twelve to a twenty-four month look back period during the second quarter of 2012. Management determined, based on current market conditions, that a twenty-four month methodology would be a more appropriate indicator. The change, which represented a fifteen month historical look back period for the second quarter, had only a minimal impact on the overall allowance calculation for the second quarter since losses have been minimal, to date, in 2012.
The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors.
A loan is impaired when full payment under the loan terms is not expected. Commercial and commercial real estate loans are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans are collectively evaluated for impairment, and, accordingly, they are not separately identified for impairment disclosures.
Income Taxes
The Company accounts for income taxes according to the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the enacted tax rates applicable to taxable income for the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation reserves are established against certain deferred tax assets when it is more likely than not that the deferred tax assets will not be realized. Increases or decreases in the valuation reserve are charged or credited to the income tax provision.
The Company recognizes a benefit from its tax positions only if it is more-likely-than-not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information.
The periods subject to examination for the Company’s federal returns are the tax years subsequent to 2009. The periods subject to examination for the Company’s significant state return, which is Florida, are the tax years subsequent to 2008. The Company believes that its income tax filing positions and deductions will be sustained upon examination and does not anticipate any adjustments that will result in a material change in its financial statements. As a result, no reserve for uncertain income tax positions has been recorded.
The Company’s policy for recording interest and penalties related to uncertain tax positions is to record such items as part of its provision for federal and state income taxes.
Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
See Market Risk in Management’s Discussion and Analysis of Financial Condition and Results of Operations, above, which is incorporated herein by reference. Management has determined that no additional disclosures are necessary to assess changes in information about market risk that have occurred since December 31, 2011.
Item 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
As of June 30, 2012, the end of the period covered by this Form 10-Q, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer each concluded that as of June 30, 2012, the end of the period covered by this Form 10-Q, we maintained effective disclosure controls and procedures.
Changes in Internal Control
Our management, including the Chief Executive Officer and Chief Financial Officer, has reviewed our internal control. There have been no significant changes in our internal control during our most recently completed fiscal quarter that could significantly affect our internal control over financial reporting.
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PART II. | OTHER INFORMATION |
Item 1. | Legal Proceedings |
We are party to lawsuits arising out of the normal course of business. In management’s opinion, there is no known pending litigation, the outcome of which would, individually or in the aggregate, have a material effect on our consolidated results of operations, financial position, or cash flows.
Item 1A. | Risk Factors |
In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our 2011 Form 10-K, as updated in our subsequent quarterly reports. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
Item 2. | Purchase of Equity Securities by the Issuer and Affiliated Purchasers |
The following table contains information about all purchases made by or on behalf of us or any affiliated purchase (as defined in Rule 10b-18(a)(3) under the Exchange Act) of shares or other units of any class of our equity securities that is registered pursuant to Section 12 of the Exchange Act.
Period | Total
number of shares purchased | Average price paid per share | Total
number of shares purchased as part of our share 401(k) program | Maximum
Number of shares that may yet be purchased under our share purchase program | ||||||||||||
April 1, 2012 to April 30, 2012 | — | — | — | — | ||||||||||||
May 1, 2012 to May 31, 2012 | — | — | — | — | ||||||||||||
June 1, 2012 to June 30, 2012 | 710 | (1) | $ | 5.50 | 37,592 | 162,408 | ||||||||||
Total | 710 | $ | 5.50 | 37,592 | 162,408 |
(1) | The shares were purchased as part of the employee 401(k) plan. |
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Item 6. | Exhibits |
(A) | Exhibits |
31.1 | Certification of Thomas H. Dargan, Jr., Chairman and Chief Executive Officer of Floridian Financial Group, Inc., Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934. | |
31.2 | Certification of Jorge F. Sanchez, Executive Vice President and Chief Financial Officer of Floridian Financial Group, Inc., Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934. | |
32.1 | Certification pursuant to 18 U.S.C. Section 1350. | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned Chief Financial Officer hereunto duly authorized.
FLORIDIAN FINANCIAL GROUP, INC. | ||
(Registrant) | ||
By: | /s/ Jorge F. Sanchez | |
Jorge F. Sanchez | ||
Executive Vice President and Chief Financial Officer | ||
(Mr. Sanchez is the Principal Financial Officer and has been duly authorized to sign on behalf of the Registrant) | ||
Date: August 14, 2012 |
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Exhibit Index
31.1 | Certification of Thomas H. Dargan, Jr., Chief Executive Officer of Floridian Financial Group, Inc., Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934. |
31.2 | Certification of Jorge F. Sanchez, Executive Vice President and Chief Financial Officer of Floridian Financial Group, Inc., Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934. |
32.1 | Certification pursuant to 18 U.S.C. Section 1350. |
101.INS | XBRL Instance Document |
101.SCH | XBRL Taxonomy Extension Schema Document |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
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